[Federal Register Volume 61, Number 185 (Monday, September 23, 1996)]
[Proposed Rules]
[Pages 49874-49891]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-24217]



[[Page 49873]]


_______________________________________________________________________

Part IV





Department of Education





_______________________________________________________________________



34 CFR Part 668, et al.



Postsecondary Education: Student Assistance, General Provisions; 
Proposed Rule

  Federal Register / Vol. 61, No. 185 / Monday, September 23, 1996 / 
Proposed Rules  

[[Page 49874]]



DEPARTMENT OF EDUCATION

34 CFR Parts 668, 674, 675, 676, 682, 685, and 690

RIN 1840-AC37


Student Assistance General Provisions, Federal Perkins Loan 
Program, Federal Work-Study Program, Federal Supplemental Educational 
Opportunity Grant Program, Federal Family Education Loan Programs, 
William D. Ford Federal Direct Loan Program, and Federal Pell Grant 
Program

AGENCY: Department of Education.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Secretary proposes to amend the regulations governing the 
student financial assistance programs authorized under title IV of the 
Higher Education Act of 1965, as amended (title IV, HEA programs). 
These programs include the campus-based programs (Federal Perkins Loan, 
Federal Work-Study (FWS), and Federal Supplemental Opportunity Grant 
(FSEOG) programs), the Federal Family Education Loan (FFEL) Programs, 
the William D. Ford Federal Direct Loan (Direct Loan) Program, the 
Federal Pell Grant Program, the State Student Incentive Grant (SSIG) 
Program, and the National Early Intervention Scholarship and 
Partnership (NEISP) Program. These proposed regulations further the 
implementation of Department of Education (Department) initiatives to 
reduce burden and improve program accountability. These proposed 
regulations clarify and consolidate current policies and requirements, 
make needed changes in the regulatory requirements for the Secretary to 
improve the delivery of title IV, HEA program funds to students and 
institutions, and further protect students and the Federal interest.

DATES: Comments on the proposed regulations must be received on or 
before November 4, 1996.

ADDRESSES: All comments concerning these proposed regulations should be 
addressed to: John Kolotos, U.S. Department of Education, P.O. Box 
23272, Washington, D.C. 20026-3272. Comments may also be sent to 
[email protected] through the Internet.
    To ensure that public comments have maximum effect in developing 
the final regulations, the Department urges that each comment clearly 
identify the specific section or sections of the regulations that the 
comment addresses and that comments to those sections be in the same 
order as the proposed regulations.
    Comments that concern information collection requirements must be 
sent to the Office of Management and Budget at the address listed in 
the Paperwork Reduction Act of 1995 section of the preamble. A copy of 
those comments may also be sent to the Department representative named 
above.

FOR FURTHER INFORMATION CONTACT:
    1. For Project EASI (Easy Access for Students and Institutions): 
Fred Sellers, U.S. Department of Education, 600 Independence Avenue, 
S.W., Regional Office Building 3, Room 3045, Washington, D.C. 20202. 
Telephone: (202) 708-4607.
    2. For the Student Assistance General Provisions: John Kolotos or 
Rachael Sternberg, U.S. Department of Education, 600 Independence 
Avenue, S.W., Regional Office Building 3, Room 3053, Washington, D.C. 
20202. Telephone: (202) 708-7888.
    3. For the Federal Perkins Loan Program: Sylvia Ross, U.S. 
Department of Education, 600 Independence Avenue, S.W., Regional Office 
Building 3, Room 3053, Washington, D.C. 20202. Telephone: (202) 708-
8242.
    4. For the Federal Pell Grant, FWS, and FSEOG programs: Kathy 
Gause, U.S. Department of Education, 600 Independence Avenue, S.W., 
Regional Office Building 3, Room 3053, Washington, D.C. 20202. 
Telephone: (202) 708-4690.
    5. For the FFEL Programs: Patsy Beavan, U.S. Department of 
Education, 600 Independence Avenue, S.W., Regional Office Building 3, 
Room 3053, Washington, D.C. 20202. Telephone: (202) 708-8242.
    6. For the Direct Loan Program: Rachel Edelstein, U.S. Department 
of Education, 600 Independence Avenue, S.W., Regional Office Building 
3, Room 3053, Washington, D.C. 20202. Telephone: (202) 708-9406.
    Individuals who use a telecommunications device for the deaf (TDD) 
may call the Federal information Relay Service (FIRS) at 1-800-877-8339 
between 8 a.m. and 8 p.m., Eastern standard time, Monday through 
Friday.

SUPPLEMENTARY INFORMATION:

Background

    The Secretary is proposing to amend the Student Assistance General 
Provisions regulations which apply to all of the title IV, HEA programs 
and the regulations for the Federal Pell Grant, Federal Perkins Loan, 
FWS, FSEOG, FFEL, and Direct Loan programs. The Secretary is proposing 
to amend these regulations to further the implementation of several 
major initiatives within the U.S. Department of Education (Department). 
These initiatives include: (1) Project EASI; (2) the President's 
Regulatory Reform Initiative; and (3) improved program accountability 
to protect students and the Federal interest. In most instances the 
proposed changes support more than one of these initiatives.

Project EASI

    Project EASI is an initiative of the Secretary to pursue a 
collaborative effort among a diverse group of government, business, and 
educational leaders to reengineer the postsecondary student aid 
delivery system to meet the needs of its primary customers, the 
students and their families. The reengineered delivery system will meet 
these needs by providing an integrated system to facilitate the ability 
of students and their families to plan for postsecondary education, 
choose among postsecondary educational programs and institutions, and 
finance their choices. This integrated system will be available for all 
users of the delivery system including not only students and their 
families but also institutions, State agencies, and others. Project 
EASI will also reduce delivery system costs to all participants, reduce 
burden including regulatory burden, reduce fraud and system 
vulnerability, and enhance management capabilities of the Department 
and other users of the system including institutions and States.
    The following key elements will be part of a reengineered student 
aid delivery system:
     Each student will have his or her individual student 
account. The individual student account will contain all the student's 
data in the system, and all activity in the system concerning the 
student would be processed through his or her individual student 
account. Individual student accounts, thus, will be the basis for 
integrating the delivery system.
     A student will be able to provide current information to, 
and receive current information from, all system users through his or 
her individual account.
     The data in the individual student accounts will reflect 
standardized data definitions for all system users, and data reported 
using common reporting records.
     The delivery system will not be program-specific; it could 
be used to deliver funding under any student assistance program.
     To the extent practicable, the delivery system will use 
advanced technology to automate data processing and will be a paperless 
system.

[[Page 49875]]

      Strict security, such as encryption and controlled access 
to the data, will be designed as part of the system.
    Additional information, including a more detailed description of 
Project EASI, can be found at http://easi.ed.gov on the Project EASI 
World Wide Web home page.

Regulatory Reform Initiative

    These proposed regulations also include provisions to implement 
further the President's March 4, 1995 directive to every Federal agency 
to reduce regulatory and paperwork burden and to eliminate or revise 
those regulations that are outdated or otherwise in need of reform.

Improved Program Accountability

    The Secretary is also proposing provisions in these regulations to 
improve program accountability. The Secretary believes that the 
financial aid community can build on recent improvements in program 
management to assure the best use of Federal funds provided under the 
title IV, HEA programs.

Major Changes Supporting Departmental Initiatives

    In most instances the proposed regulations support more than one of 
the three Departmental initiatives, i.e., Project EASI, regulatory 
reform, and improved accountability. The major proposed changes and the 
initiative or initiatives that each change supports include the 
following:
      The adoption of a uniform definition of payment period 
for all the title IV, HEA programs as proposed in Sec. 668.4. (Project 
EASI, regulatory reform)
      The provision that an institution use electronic services 
that the Secretary provides on a substantially free basis as a new 
standard of administrative capability as proposed in Sec. 668.16(o). 
(Project EASI, improved accountability)
      The restructuring and clarification of the provisions 
under subpart K, Cash Management, of the Student Assistance General 
Provisions regulations. (regulatory reform)
      The inclusion of a just-in-time payment method as 
proposed in Sec. 668.162(c). (Project EASI, improved accountability)
      The elimination of the requirement under Sec. 682.207(b) 
of the current FFEL Program regulations that an institution maintain a 
separate bank account for FFEL Program funds as proposed in 
Sec. 668.163(a). (regulatory reform)
      The requirement that title IV, HEA program funds be 
disbursed on a payment period basis as proposed in Sec. 668.164(c). 
(Project EASI, improved accountability)
      The consolidation of the individual title IV, HEA program 
requirements regarding late disbursements as proposed in 
Sec. 668.164(h). (Project EASI, regulatory reform)
      The revised student notification requirements as proposed 
under Sec. 668.165. (Project EASI, regulatory reform, improved 
accountability)
      The exemption from the current excess cash requirements 
for an institution that receives funds under the just-in-time payment 
method as provided in Sec. 668.166(a)(2). (Project EASI, regulatory 
reform)
      The requirement that an institution disburse FFEL Program 
funds within a timeframe comparable to that permitted for disbursing 
funds under the other title IV, HEA programs as proposed in 
Sec. 668.167(a). (Project EASI, improved accountability)
      The requirement that an institution return FFEL Program 
funds to a lender if the institution does not disburse those funds 
within specified timeframes as proposed in Sec. 668.167(b). (Project 
EASI, improved accountability)
      The procedures under which the Secretary would monitor 
more carefully an institution's administration of the FFEL Programs as 
proposed under Sec. 668.167(d) and (e). (improved accountability)

Conforming Changes

    The Secretary intends to publish these proposed regulations as 
final regulations on or before December 1, 1996. At that time the 
Secretary will also amend the appropriate sections of each of the title 
IV, HEA program regulations to eliminate any conflicting requirements 
between the final regulations and current program regulations and to 
otherwise harmonize the requirements in the final regulations with 
other title IV, HEA program requirements. As an example of the 
necessary conforming changes, the Secretary includes in these proposed 
regulations conforming amendments to the campus-based, FFEL, Direct 
Loan, and Federal Pell Grant programs that would result from adopting a 
uniform definition of the term ``payment period'' for all the title IV, 
HEA programs.

Summary of Proposed Changes

Student Assistance General Provisions

    The Student Assistance General Provisions regulations, 34 CFR part 
668, implement requirements that are common to the title IV, HEA 
programs.

Subpart A--General

Section 668.4 Payment Period

    For the purpose of simplifying the administration of the title IV, 
HEA programs, the Secretary is proposing to simplify the definition of 
the term ``payment period'' and apply that definition to all title IV, 
HEA programs except the FWS Program. Based upon the simplified common 
definition, the Secretary is proposing in Sec. 668.164 that all title 
IV, HEA program funds, other than FWS Program funds, be disbursed to 
students on a payment period basis. (For the purpose of this 
discussion, ``disburse'' includes the delivery of loan proceeds to 
students under the FFEL Programs.) This change, in effect, conforms the 
regulations to the actual disbursement practices of most institutions.
    The Secretary is proposing to base the simplified definition of the 
term ``payment period'' on the Federal Pell Grant Program definition 
currently in 34 CFR 690.3 of the Federal Pell Grant Program regulations 
with modifications.

A. Programs Using Credit Hours With Terms

    If a student is enrolled in an eligible program that uses academic 
terms and measures progress in credit hours, the payment period is the 
academic term. For example, if a program uses semesters, the semester 
will be the payment period; if it uses quarters, the quarter will be 
the payment period.

B. Programs Using Credit Hours Without Terms and Clock-Hour Programs

    The Secretary is modifying the Federal Pell Grant Program 
definition by proposing one definition for students enrolled in (1) 
eligible programs that measure progress in credit hours but do not use 
academic terms; and (2) eligible programs that measure progress in 
clock hours regardless of whether they use academic terms. That 
definition will be the one currently in effect for programs offered 
without terms. Under the current Federal Pell Grant Program definition, 
there is a separate definition for clock-hour programs that are offered 
in terms, and the Secretary is proposing to eliminate that definition.
Programs that are less than an academic year
    For an eligible program using credit hours without terms or clock 
hours that is less than a full academic year, the first payment period 
will be the period of time needed to complete the first half of that 
program as measured in clock or credit hours, and the second payment 
period will be the period of time needed

[[Page 49876]]

to complete the remainder of the program. For example, if a program is 
800 clock hours, the first payment period would be the period of time 
needed for the student to complete 400 clock hours. The second payment 
period would begin when the student has completed 400 clock hours.
Programs Equal to an Academic Year or a Multiple of an Academic Year
    For an eligible program using credit hours without terms or clock 
hours that is a full academic year or a multiple of a full academic 
year, for each academic year, the first payment period will be the 
period of time needed to complete the first half of the academic year 
as measured in clock or credit hours, and the second payment period 
will be the period of time needed to complete the remainder of that 
academic year. Thus, if the eligible program was 900 clock hours, and 
so was its definition of an academic year for the hours component, the 
second payment period would begin when the student completed 450 clock 
hours.
Programs Greater Than an Academic Year and Remainder is One Half or 
Less of an Academic Year
    For an eligible program using credit hours without terms or clock 
hours that is more than a complete academic year but has a remainder 
that is less than another complete academic year, if the remaining 
portion of the program is one-half of an academic year or less, the 
payment period, after the last complete academic year, will be the 
remaining portion of the program. For example, if a program is 1,200 
clock hours and its definition of an academic year for the hours 
component was 900 clock hours, the program would consist of three 
payment periods. The first two payment periods would each be 450 clock 
hours and would cover the first academic year of 900 clock hours. The 
third payment period will be the remaining portion of the program, 300 
clock hours, and would begin when the student completed clock hour 900.
Programs Greater Than an Academic Year and Remainder is Less Than an 
Academic Year but Greater Than One Half an Academic Year
    If the remaining portion of an eligible program using credit hours 
without terms or clock hours is less than a complete academic year but 
more than one-half an academic year, there would be two payment periods 
for the remaining portion of the program. The first payment period 
would be the period of time it would take a student to complete half of 
the clock or credit hours in the remaining portion of the program while 
the second payment period would be the period of time needed to 
complete the program. For example, if a program is 1,500 clock hours 
and its definition of an academic year for the hours component is 900 
clock hours, the program would consist of four payment periods. The 
first two payment periods would each be 450 clock hours and would cover 
the first academic year of 900 clock hours. The remaining portion of 
the program would consist of 600 clock hours (1500-900=600), and each 
payment period in the remaining portion would consist of 300 clock 
hours (clock hours 901 to 1,200 and 1,201 to 1,500). The second payment 
period of the second academic year would not begin until the student 
completed 300 clock hours of the remaining portion of the program. In 
contrast, under the current Federal Pell Grant Program definition, the 
first payment period of the second academic year would be 450 clock 
hours, half the academic year, (clock hours 901 to 1,350), and the 
second payment period would be the period needed to complete the 
program, 150 clock hours (clock hours 1,351 to 1,500).
    The Secretary is proposing this approach because the Secretary 
believes that it is important that institutions be allowed to make all 
Title IV, HEA program disbursements at the same time and because this 
approach accommodates the current disbursement rules of the FFEL and 
Direct Loan programs. Currently, under the FFEL and Direct Loan 
programs the second disbursement for the remaining portion of a program 
in the example of a 1500 clock-hour program is at clock hour 1,201 
while under the Federal Pell Grant Program it is at clock hour 1,351. 
Under the proposed approach, all second disbursements will be made 
earlier than under the current Federal Pell Grant Program approach. 
However, as a consequence, because Federal Pell Grant Program awards 
are calculated on a payment period basis, this proposal means that the 
student's Federal Pell Grant award will be reduced for the third 
payment period of the program and increased for the fourth payment 
period of the program to reflect that both payment periods in the 
second academic year of the program will consist of 300 clock hours 
instead of 450 and 150 clock hours.
    The Secretary considered continuing to use the current Federal Pell 
Grant Program approach for all the title IV, HEA programs. Thus, for 
the FFEL and Direct Loan programs the second disbursement of the loan 
would be made at clock hour 1351 instead of at clock hour 1201 even 
though the two disbursements would be equal unlike the prorated amounts 
for the Federal Pell Grant Program. The Secretary requests specific 
comments on whether he should adopt the approach in these proposed 
regulations or the current Federal Pell Grant Program approach. A more 
detailed discussion of the disbursement rules is set forth in the 
discussion of proposed Sec. 668.164.

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

Section 668.16  Standards of Administrative Capability Electronic 
Services

    In order to be considered administratively capable to participate 
in the title IV, HEA programs, the Secretary proposes that an 
institution participate in the electronic services that the Secretary 
provides at no substantial charge to the institution. The Secretary 
proposes to identify these electronic services in a notice published in 
the Federal Register. The Secretary would consider an institution that 
fails to participate in these electronic services not to have the 
administrative capability to administer the title IV, HEA programs, 
and, thus, that institution's participation in the title IV, HEA 
programs may be subject to sanctions such as fines, limitations, and 
termination.
    The use of electronic services by institutions is essential to 
achieving the Project EASI goal of an integrated student aid delivery 
system for students and institutions. The Secretary believes that using 
electronic services is essential to reducing burden on students and 
institutions, simplifying program administration, and improving program 
accountability.
    The Secretary believes that the savings and benefits that would 
result from improved business processes made possible by using 
electronic services would more than offset any necessary initial 
investments by both the Department and institutions. To achieve these 
savings and benefits, it is essential that electronic processes replace 
paper processes at both the Department and institutions, wherever 
possible. As is currently the case for institutions already using 
electronic services provided by the Secretary, an institution would be 
able to use software provided by the Secretary or software developed by 
the institution, or its vendor, in accordance with specifications 
provided by the Secretary. The Secretary also believes that most 
institutions already have the necessary equipment to use these 
services, and those institutions

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that do not have the equipment would be making an investment that would 
improve institutional services at minimal cost. The Secretary 
recognizes that using the electronic services provided by the 
Department would potentially change many aspects of the business 
process at institutions and welcomes specific comment on any and all 
aspects of institutions moving into an electronic business process.
    Under the proposed rule, the Secretary would determine the 
electronic services in which an institution must participate for a 
processing year. If this determination adds or otherwise revises the 
electronic services in which an institution must participate to be 
considered administratively capable, the Secretary would notify 
institutions of that determination in the Federal Register. The 
Secretary would provide timely notice to institutions in order for them 
to make adequate preparations to use these services. Under this process 
the Secretary would continue to provide the software, or provide the 
specifications for software to be developed by an institution or its 
vendor, for an institution to use these electronic services.
    The Secretary expects to determine the services that an institution 
would use for the 1997-98 award year based, in part, on the funds 
available to provide those services to institutions at substantially no 
cost. Currently, the Secretary is considering, for the 1997-98 award 
year, requiring institutions to participate in the Title IV Wide Area 
Network by which student data is transmitted between the Department and 
institutions, electronic Institutional Student Information Reports 
(ISIRs), the National Student Loan Data System, and the Student 
Financial Assistance Bulletin Board System. The Secretary believes that 
using these basic services provides institutions with the experiences 
necessary to begin developing an expertise in using the electronic 
services that the Department provides. This expertise is essential to 
the implementation of additional electronic services that the Secretary 
expects to use in administering the title IV, HEA programs, such as the 
World Wide Web or Internet-based communications. To assist institutions 
in acquiring this expertise, the Secretary will be offering basic 
training on using the Department's electronic services. Training 
sessions are scheduled for October through December 1996, and 
additional training sessions may be offered if demand warrants offering 
them.
    More detailed, readily available information on the Department's 
electronic services may be found in the Action Letters on the delivery 
system that the Department provides all institutions each award year.

Subpart K--Cash Management

Section 668.161  Scope and Purpose

    The Secretary proposes to clarify that for purposes of subpart K, 
the term ``parent'' means a parent borrower under the PLUS programs, 
and the term ``disburse'' has the same meaning as ``deliver'' loan 
proceeds under the FFEL Program regulations.

Section 668.162  Requesting Funds

    The Secretary proposes to redesignate Sec. 668.163 of the current 
regulations as Sec. 668.162 and to remove Sec. 668.162 of the current 
regulations. The Secretary believes that some of the terms defined 
under Sec. 668.162 of current regulations should be more fully 
explained in the provisions of the proposed regulations where those 
terms are used. Accordingly, the Secretary proposes to move to proposed 
Sec. 668.164 the concepts of ``disburse'' and ``issue checks,'' 
relocate under proposed Sec. 668.161 the qualifying definition of 
``day,'' and eliminate the remaining definitions.
    In proposed Sec. 668.162(a) the Secretary emphasizes that the 
Secretary has the sole discretion to determine the method under which 
title IV, HEA program funds are provided to an institution.
    Under proposed Sec. 668.162(b), the Secretary clarifies that the 
Secretary does not automatically accept a request for funds from an 
institution under the advance payment method. For example, the 
Secretary may reject a request for funds if the amount of the request 
exceeds the amount of funds the institution is authorized to draw down 
under a title IV, HEA program.
    The Secretary proposes under Sec. 668.162(c) the requirements for a 
``just-in-time'' payment method. Under the just-in-time payment method, 
for each student that an institution determines is eligible for title 
IV, HEA program funds, the institution transmits electronically to the 
Secretary, within a timeframe established by the Secretary, records 
that contain program award information for that student. As part of 
those records, the institution would report the date and amount of the 
disbursements that it will make to that student or that student's 
parent. The timeframe would establish the earliest date on which the 
Secretary would accept student records to ensure that the Secretary can 
provide title IV, HEA program funds to the institution by the date 
reported by the institution for that disbursement. The just-in-time 
payment method, thus, provides for reporting information that is no 
different than current student-level data that an institution is 
reporting; however, it does require an institution to report that 
information earlier.
    For each record the Secretary accepts for a student or parent, the 
Secretary would provide by EFT the corresponding disbursement amount to 
the institution on or before the date reported by the institution for 
that disbursement. When the institution receives the funds for each 
record accepted by the Secretary, the institution would disburse those 
funds based on its determination at the time the institution 
transmitted that record to the Secretary that the student is eligible 
for that disbursement. However, if a student is subsequently not 
eligible for the funds that an institution disburses to the student, 
the institution must report the adjustment in the funds for which the 
student is eligible as is currently required.
    As an example of a just-in-time payment, an institution determines 
that it expects to credit a student's account with program funds 
September 4. For this example, the Secretary establishes a timeframe of 
8 days as the time necessary for the Secretary to process a student's 
record and to provide to the institution the disbursement amount for 
the student no later than the disbursement date. Therefore, on August 
27, the institution determines that the student is eligible and 
transmits electronically the student's record with the payment 
information and expected disbursement date. The Secretary processes and 
accepts the student's record, and, not later than September 4, the 
Secretary provides by EFT the corresponding disbursement amount for the 
student.
    The Secretary notes that an institution may make a disbursement to 
a student or parent before submitting a record of that disbursement to 
the Secretary. If the Secretary accepts that record, the Secretary 
would provide by EFT the corresponding disbursement amount to the 
institution shortly after receiving that record from the institution.
    The institution would be required to report any adjustment to a 
previously accepted record within the timeframe established by the 
Secretary in a notice published in the Federal Register. The Secretary 
expects to require institutions to report adjustments within 30 days of 
the date that an institution becomes aware of a change. This timeframe 
is similar to the 30-day timeframes

[[Page 49878]]

currently required under the Federal Pell Grant and Direct Loan 
programs.
    The Secretary believes that the just-in-time payment method is 
essential to realizing the benefits of the Project EASI goal of an 
integrated delivery system. The just-in-time payment method would 
provide the payment information on or very near the actual time of 
disbursement. The payment information forms the core of the individual 
student account that is the basis for the Project EASI integrated 
delivery system. Using the just-in-time payment method, would enable 
the delivery system to provide the necessary current information to 
students and other participants while reducing burden related to the 
reconciliation of payment data. In addition, because the Secretary 
would be providing funds based on current student-level data, the 
Secretary's ability to monitor the integrity of the programs would be 
substantially enhanced. The Secretary expects the advantages of the 
just-in-time payment method for students, institutions, and the 
Department to increase as further reengineering of the delivery system 
is accomplished, additional technological improvements are implemented, 
and skills in using these improvements increase.
    The Secretary expects to provide Direct Loan Program funds to 
institutions that participate in the Direct Loan Program under School 
Origination Option 1 and Standard Origination using a just-in-time 
payment method beginning in the 1997-98 award year. The Secretary is 
also considering providing Federal Pell Grant Program funds using a 
just-in-time payment method in the 1998-99 award year. The Secretary 
specifically requests comments on this plan.

Section 668.163  Maintaining and Accounting for Funds

    The Secretary proposes to redesignate Sec. 668.164 of the current 
regulations as Sec. 668.163.
    The Secretary proposes under Sec. 668.163(c)(3)(iii) that an 
institution not have to maintain in an interest-bearing or investment 
account title IV, HEA program funds that the institution receives from 
the Secretary under a just-in-time payment method. The Secretary 
believes that, because a just-in-time payment method would ensure the 
expeditious accounting and disbursement of program funds, little or no 
interest would be earned on funds provided to the institution under 
that payment method; therefore, there would be no harm to the Federal 
fiscal interest as a result. However, the Secretary wishes to make 
clear that, regardless of whether an institution receives funds under 
the just-in-time payment method, an institution that chooses to 
maintain Federal Pell Grant, Direct Loan, FSEOG and FWS program funds 
in interest-bearing or investment accounts must remit to the Secretary 
any earnings on those funds that exceed $250.
    Also, the Secretary proposes to eliminate the provision now in 
Sec. 668.164(c)(1)(ii) under which an institution that drew down $3 
million or more in title IV, HEA program funds in the prior year does 
not have to continue to maintain those funds in an interest-bearing or 
investment account if the institution earned $250 or less on those 
program funds in that year. The Secretary believes that an institution 
must demonstrate that it will not earn $250 in the current year in 
order to qualify for the remaining exemption to the interest-bearing 
account requirement under this section. However, an institution can 
qualify for this exemption by indicating that it did not earn $250 in 
interest in the prior award year and by demonstrating that it will 
disburse the funds it receives in the current award year in the same 
manner as it disbursed funds in the prior award year.
    Finally, the Secretary proposes to eliminate the requirement 
currently under Sec. 668.164(a) and 34 CFR 682.207(b) that an 
institution must maintain a separate bank account for FFEL Program 
funds the institution receives from a lender by electronic funds 
transfer. The Secretary believes this requirement is no longer needed, 
provided that an institution maintains and accounts for those funds in 
the same manner required for other funds the institution receives under 
the title IV, HEA programs. Accordingly, the Secretary proposes to 
restructure the requirements under this section to make clear that for 
FFEL Program funds, an institution would be required to comply with the 
bank account notification requirements under Sec. 668.163(a), and the 
accounting and financial record requirements under Sec. 668.163(d). 
However, the Secretary may require a separate account for FFEL Program 
funds and for any other title IV, HEA program funds as provided under 
Sec. 668.163(b).
    Aside from these proposed provisions, the proposed revisions to 
Sec. 668.163 are merely intended to clarify current rules.

Section 668.164  Disbursing Funds

    The Secretary proposes to redesignate Sec. 668.165 of the current 
regulations as Sec. 668.164.
    The Secretary proposes to amend this section by restructuring and 
clarifying the current provisions, moving into this section the 
definition of the term ``disburse'' (currently in Sec. 668.162) and 
expanding the scope of that definition, adding a requirement that an 
institution disburse all program funds on a payment-period basis, and 
consolidating in this section the late disbursement requirements that 
are currently in the individual program regulations.
    Under proposed Sec. 668.164(a), the Secretary provides that an 
institution makes a disbursement of title IV, HEA program funds on the 
date the institution credits a student's account at the institution, or 
pays the student or parent directly, with (1) Funds received from the 
Secretary or a lender or (2) institutional funds used in advance of 
receiving title IV, HEA program funds.
    The Secretary did not previously include in these rules the 
provision that an institution may use its own funds to make program 
disbursements but now proposes to include this provision to clarify 
that a disbursement occurs when an institution makes the benefits of 
title IV, HEA funds constructively available to students. Accordingly, 
the Secretary does not consider that a disbursement is made if, solely 
for the purpose of preparing a bill for a student, an institution must 
credit the student's account at the institution by making a general 
ledger entry.
    The Secretary is proposing that all title IV, HEA program funds be 
disbursed by payment period. As a practical matter, this process should 
differ little from the practice of most institutions. However, there 
will be some minor changes. Under the current regulations, institutions 
that use quarters as academic terms can disburse FFEL or Direct Loan 
Program loans to students in two disbursements: half the loan at the 
beginning of the first quarter, and the other half at the beginning of 
the second quarter. Under the proposed change, such institutions will 
have to make three equal disbursements, one for each quarter. Thus, the 
disbursement schedule for the loan programs will match the schedule for 
the Federal Pell Grant and campus-based programs.
    Under the existing disbursement rules applicable to the FFEL, 
Direct Loan, and campus-based programs, an institution that measures 
progress in clock hours or credit hours without terms has to make at 
least two disbursements during an award year or loan period, with the 
second disbursement coming after the student completes half the award 
year or loan period. However, institutions could determine that a 
student reached half an award year or loan period when

[[Page 49879]]

half the number of days in that year or period have elapsed even though 
the student did not actually complete half the clock hours or credit 
hours in the award year or loan period at that time. The proposed 
change will require a student to actually complete the number of clock 
or credit hours in that payment period before a second disbursement can 
be made. This change makes the disbursement rules more consistent with 
the purpose of multiple disbursements.
    The following example illustrates this change. A student enrolls in 
a 900 clock-hour program that is scheduled to begin on September 1, 
1996 and end on April 30, 1997. The student receives grants under the 
Federal Pell Grant and FSEOG programs and a loan under the Direct 
Subsidized Loan Program. The student may receive a second disbursement 
under each program only when the student actually completes 450 clock 
hours; the student may not receive a second disbursement on January 1, 
1997, the calendar midpoint, unless he or she has completed 450 clock 
hours by that date.
    In connection with determining whether a student completes the 
number of clock hours in a payment period, the Secretary notes that an 
institution using clock hours may use ``excused absences'' only under 
limited circumstances. For this purpose, ``an excused absence'' is one 
that a student does not have to make up. In order to count excused 
absences when determining whether a student has completed a payment 
period, an institution using clock hours must have a formal written 
policy allowing excused absences. Moreover, the maximum number of hours 
of excused absences that it may use for that purpose is 10 percent of 
the clock hours in that payment period, or a lower number if required 
by its State licensing or accrediting agency. Except where an 
accrediting agency or State licensing agency sets a more rigorous 
standard, the Secretary believes that excused absences of more than 10 
percent of the clock hours in a payment period would impair the 
educational attainment of a student and, thus, would not make the best 
use of Federal funds. For example, if a payment period is 450 clock 
hours, unless the institution's State licensing or accrediting agency 
requires a lower number, 45 is the maximum number of hours of excused 
absences that may be included in determining whether the student 
completed that payment period.
    The Secretary is proposing to amend the loan disbursement rules to 
take into account the statutory requirement that institutions must make 
at least two disbursements for a loan period even if the loan period is 
only one payment period. Accordingly, the Secretary is proposing to 
amend 34 CFR 685.301(b) of the Direct Loan Program regulations and 34 
CFR 682.603 and 604 of the FFEL Program regulations to provide 
different disbursement rules for loan periods that are one payment 
period or less and loan periods that are more than one payment period. 
For the former type loan period, an institution will be required to 
make two disbursements during the loan period. For loan periods that 
are more than one payment period, the institution must disburse loan 
proceeds at least once each payment period and each disbursement must 
be substantially equal.
    Finally, the Secretary notes that an institution can make a second 
or subsequent disbursement of loan proceeds to a student if the 
institution makes the first loan disbursement to that student on or 
after the point in time when it is allowed to make the subsequent 
disbursement. For example, a student attends an institution that uses 
quarters and applies for a loan during the winter term. The student's 
loan period includes the preceding fall quarter as well as the winter 
and spring quarters. In such a case, the institution can make one 
disbursement in the winter that includes loan proceeds for both the 
fall and winter terms. It then can make the final disbursement at the 
beginning of the spring quarter.
    Under proposed Sec. 668.164 paragraphs (c), (d), and (e), the 
Secretary clarifies the current requirements under which an institution 
disburses title IV, HEA program funds to a student or parent directly, 
the charges for which an institution may credit a student's account at 
the institution, and the provisions regarding credit balances.
    Section 668.164(e) clarifies that the earliest an institution may 
disburse title IV, HEA program funds is the later of 10 days before the 
first day of classes of the payment period or the date the student 
completed the previous payment period for which he or she received 
title IV, HEA program funds. However, a second or subsequent 
disbursement of FFEL or Direct Loan funds may not be made until the 
later of the date the student completed the previous payment period or 
the calendar midpoint of the loan period.
    The Secretary proposes to consolidate under Sec. 668.164(g) the 
requirements regarding late disbursements that are currently in the 
individual program regulations (see 34 CFR 674.16(g), 676.16(e), 
682.604(e), 685.303(d), and 690.75(b)). The current regulations allow 
an institution to make a disbursement to a student after the student 
becomes ineligible because he or she ceases to be enrolled at the 
institution or, for purposes of the Direct Loan and FFEL programs, 
ceases to be enrolled at least half-time. In addition, the regulations 
require that an institution obtain, or the student submit, 
documentation establishing the student's eligibility before the student 
became ineligible. If an institution obtains the required 
documentation, the institution may make a late disbursement.
    Under all the title IV, HEA programs, a late disbursement may be 
made only if those program funds are used to pay for documented 
educational costs that were incurred before the student became 
ineligible. This qualification does not mean that the institution must 
obtain specific and detailed expenditure documentation from the 
student. The institution may develop a policy that it applies to such 
cases; for example, all expenses for books and supplies may be 
considered to have been incurred by a student who withdraws after the 
first two weeks of a term. That policy may also provide that a student 
incurs costs related to meals and housing and transportation prorated 
to the point in time when he or she leaves school.
    The proposed late disbursement rules simplify and make uniform the 
regulations by eliminating redundant provisions in the program 
regulations but otherwise differ from the current regulations in only 
one substantive way. The Secretary proposes that if an institution 
chooses to make a late disbursement, it must make that disbursement no 
later than 90 days after the student becomes ineligible. The Secretary 
believes that 90 days is a reasonable amount of time for an institution 
to correct any problems that delayed that disbursement from being made 
while the student was eligible.

Section 668.165  Notices and Authorizations

    As part of the restructuring of this subpart, the Secretary 
proposes to incorporate in this section the student notification 
requirements currently under Sec. 668.165(a)(1) and the student 
authorization requirements and related provisions currently under 
Sec. 668.165 paragraphs (a)(2), (b)(3)(iv), (b)(4), (d), and (e).
    Under proposed Sec. 668.165(a)(1), the Secretary would revise in 
two ways the existing requirement that an institution notify a student 
or, in the case of a PLUS loan, the student's parent, of the amount of 
funds that the student or parent can expect to receive and how and when 
those funds will be paid.

[[Page 49880]]

First, an institution must provide the notice only to the student but 
must include in that notice any PLUS funds that the student's parent 
will receive. Second, the notice must indicate for any loans under the 
Direct Loan or FFEL Programs whether those loans are subsidized or 
unsubsidized.
    The Secretary proposes under Sec. 668.165(a)(2) to revise the 
requirement that an institution notify expeditiously a student or 
parent borrower that the institution has credited the student's account 
with Direct Loan, FFEL, or Federal Perkins Loan program funds. Under 
the proposed revision, as part of that notice an institution would also 
notify the student or parent of the right to cancel that loan or loan 
disbursement and the date by which that cancellation request must be 
made. The Secretary would allow an institution to provide that notice 
in writing or electronically. The Secretary proposes that an 
institution would be required to provide the notice (1) No earlier than 
10 days before and no later than 10 days after the institution credits 
the student's account at the institution with Direct Loan or Federal 
Perkins Loan Program funds, or with FFEL Program funds the institution 
receives from a lender via EFT or master check, or (2) no earlier than 
10 days before and no later than 10 days after the institution 
disburses those funds by initiating an electronic funds transfer to the 
student's or parent's bank account if the institution subsequently 
withdraws funds from that bank account to pay for tuition and fees and 
other authorized charges. If, within 14 days after the date the 
institution sends that notice, the institution receives a request from 
the student or parent to cancel the loan or loan disbursement, the 
institution would have to comply with that request and return any loan 
funds in accordance with applicable program requirements. If the 
institution receives a cancellation request after this 14-day period, 
the institution may honor that request. In addition, the institution 
would need to inform the student or parent of the outcome of the 
request.
    The Secretary wishes to make clear that an institution would not 
have to provide the proposed notice affording a student or, in the case 
of a PLUS loan, the student's parent, the opportunity to refuse the 
loan if the institution disburses that loan directly to the student or 
parent by issuing a check or releasing a check provided by a lender 
under the FFEL Programs. For loan funds disbursed in this manner, 
students or parents already have the opportunity to refuse the funds at 
the time those loan funds are being disbursed simply by not endorsing 
the check or returning the check to the institution or to the lender. 
However, for loan funds provided to an institution by the Secretary, or 
by a lender via EFT or master check, a student or parent does not have 
a similar opportunity to refuse the loans funds if the institution 
chooses to disburse those loan funds by crediting the student's 
account.
    In making this proposal, the Secretary believes that a student or 
parent should have the opportunity to refuse loan funds at the time 
those funds are being disbursed, regardless of the manner in which loan 
funds are provided to an institution, and regardless of the way the 
institution chooses to disburse those funds. A student or parent does 
not have this opportunity to refuse loan funds under an arrangement 
where the institution disburses loan funds by initiating an EFT to the 
student's or parent's bank account and subsequently withdraws funds 
from that account to pay for tuition and fees or other authorized 
charges. The disbursement of loan funds under this arrangement is 
analogous to the disbursement of loan funds made by crediting the 
student's account at the institution. Therefore, an institution would 
be required to provide the proposed notice to a student or parent if 
the institution disburses any title IV, HEA program loan funds under 
this type of arrangement.
    Moreover, the Secretary notes that a student or parent does not 
give up his or her right to refuse a loan disbursement at the time that 
loan disbursement is made simply because the student or parent 
authorized a lender to provide loan funds to an institution via EFT or 
authorized the institution to disburse via EFT those loan funds to the 
student's or parent's bank account. These authorizations merely enable 
the lender or the institution to provide loan funds via an EFT method.
    The Secretary proposes to consolidate under Sec. 668.165(b) the 
student and parent authorizations now in Sec. 668.165(d). Under the 
current rules, if an institution obtains the appropriate authorization, 
the institution may use a student's or parent's title IV, HEA program 
funds to pay for educational costs incurred by the student (i.e., costs 
other than tuition and fees and room and board), hold title IV, HEA 
program funds in excess of educational costs, and transfer those funds 
electronically to the student's or parent's bank account. The Secretary 
does not propose to change any of these activities. Rather, the 
Secretary proposes to simplify the process of obtaining an 
authorization, and to codify current policy regarding the use of title 
IV, HEA program funds under these authorizations.
    First, the Secretary proposes to eliminate the requirement 
currently in Sec. 668.165(d)(3) under which an institution must notify 
annually a student or parent of the provisions contained in an 
authorization previously provided to the institution. Under proposed 
Sec. 668.165(b)(3), a student or parent may authorize the institution 
to perform any of the described activities for the entire period during 
which the student is enrolled at the institution. The Secretary 
believes that annual notifications are not necessary since a student or 
parent may modify or cancel a previously granted authorization at any 
time.
    Second, with regard to modifying an authorization, the Secretary 
clarifies that the modification takes effect on the date the 
institution receives a request from a student or parent changing the 
current authorization.
    Third, with regard to canceling an authorization allowing the 
institution to use a student's or parent's title IV, HEA program funds 
to pay for incurred educational costs, the Secretary clarifies that the 
cancellation is not retroactive; the institution may use title IV, HEA 
program funds to pay for previously authorized charges that were 
incurred by the student before the institution received a request from 
the student or parent canceling that authorization.
    Finally, with regard to an authorization allowing the institution 
to hold title IV, HEA program funds, the Secretary clarifies that an 
institution must pay any remaining balance of those funds to a student 
by the end of the loan period for which those funds were intended or by 
the end of the last payment period in the award year for which those 
funds were awarded.

Section 668.166  Excess Cash

    In Sec. 668.166(a)(2), the Secretary proposes to exempt from the 
requirements under this section institutions that receive title IV, HEA 
program funds from the Secretary under the just-in-time payment method. 
The Secretary wishes to make clear that this exemption would apply only 
to the title IV, HEA program funds that an institution receives under 
the just-in-time payment method. As discussed previously under proposed 
Sec. 668.162, an institution that participates under this funding 
method would provide to the Secretary student-level payment information 
on or very near the actual date of disbursement, substantially 
increasing the Secretary's ability to monitor the institution's use of 
title IV, HEA program funds. Moreover, unlike

[[Page 49881]]

the manner in which some institutions determine their immediate cash 
needs under the advance payment method, an institution under the just-
in-time payment method would be required to make an eligibility 
determination for each student before receiving title IV, HEA program 
funds for that student. Accordingly, the Secretary is more assured that 
the institution will not have excess cash. To the extent that such an 
institution has excess cash, the Secretary believes that it would be a 
nominal amount caused by minor award adjustments. For these reasons and 
the provision that the Secretary would provide new funds only after 
deducting any adjustments reported by the institution, the Secretary 
believes that excess cash would not be a problem for institutions 
participating under the just-in-time payment method.

Section 668.167  FFEL Program Funds

    The Secretary proposes to relocate under proposed Sec. 668.167 the 
loan certification provision now in Sec. 668.163(b), amend that 
provision, and propose new requirements regarding FFEL Program funds 
for institutions that are placed on the reimbursement payment method.
    Under Sec. 668.167(a), the Secretary proposes to modify the current 
requirement that an institution may not request loan funds that a 
lender will provide by EFT or master check earlier than 13 days before 
the first day of a student's loan period by referencing the student's 
payment period instead of the loan period. The Secretary proposes this 
modification to correct the omission in the current rules that the 13-
day requirement should apply not only to the first loan disbursement, 
but to all subsequent loan disbursements. Thus, in certifying a loan 
application, an institution could not request a lender to provide loan 
funds earlier than 13 days before each payment period. In addition, the 
Secretary clarifies that for first-time, first-year borrowers, an 
institution could not request loan funds earlier than 27 days after the 
first day of classes of the borrower's first payment period.
    In Sec. 668.167(b), the Secretary proposes new timeframes under 
which an institution would return FFEL Program funds to a lender. 
Currently, an institution has 45 days from the date it receives FFEL 
Program funds not only to disburse those funds to eligible students, 
but also to pay those students any loan proceeds that remain in their 
accounts after those proceeds are disbursed (see 34 CFR 682.604(c)). 
This rule was established at a time when lenders provided most FFEL 
Program funds by a check payable to the borrower or copayable to the 
borrower and the institution and the Secretary believed that 45 days 
was a reasonable amount of time for an institution to obtain a 
borrower's endorsement on the loan check and to otherwise process that 
loan check.
    Under the proposed timeframes, an institution would return to a 
lender any loan funds that the institution does not disburse to 
eligible students within 3 business days after the institution receives 
the funds, if those funds are provided by the lender via EFT or master 
check. If a lender provides loan funds by a check payable to the 
borrower or copayable to the borrower and the institution, and the 
institution does not disburse the funds within 30 days after the date 
it receives the funds, the institution would need to return these funds 
to the lender immediately.
    The Secretary proposes these timeframes for several reasons. First, 
the Secretary believes there is no reason why an institution that 
receives loan funds from a lender via EFT or master check should hold 
those funds for up to 45 days and derive any benefits from holding the 
funds when the costs of the funds are either subsidized by taxpayers or 
paid by student and parent borrowers. Moreover, since EFT and master 
check loan funds are immediately negotiable by the institution (unlike 
checks, which require the endorsement of the borrower), the Secretary 
believes that these loan funds can and should be disbursed within 3 
business days, just like any other title IV, HEA program funds. For 
loan funds an institution continues to receive from a lender by check, 
the Secretary notes that, in total, the proposed 30-day requirement to 
disburse those funds, together with the 14-day requirement to pay any 
credit balance of those funds, provides essentially the same time (44 
days) as the current 45-day rule. The Secretary believes that 30 days 
is more than enough time for an institution to provide a student the 
loan proceeds, particularly when the borrower is in need of those funds 
to pay his or her educational costs.
    Second, the Secretary wishes to eliminate the separate timeframes 
within which an institution must disburse FFEL Program funds and pay 
the student any remaining balance (credit balance) of those funds. As 
noted earlier, under the FFEL Program regulations an institution has 45 
days to disburse and otherwise pay a student his or her loan funds. 
However, the cash management regulations require that once a loan 
disbursement is made, the institution must pay any credit balance of 
those funds to the student within 14 days. Thus, an institution needs 
to monitor its FFEL Program disbursements and payments of credit 
balances to ensure that it makes those disbursements and payments 
within the earlier of these two different time frames. Under the 
proposed rule, an institution would follow the same disbursement and 
credit balance time frames for FFEL Program funds that it does for all 
other title IV, HEA program funds.
    In making this proposal the Secretary realizes that there may be 
instances where an institution is unable to make a second or subsequent 
disbursement of FFEL Program funds within these timeframes because the 
student is very close to completing, but has not yet completed, the 
required number of clock or credit hours in a preceding payment period. 
For this reason, the Secretary proposes that an institution may delay 
returning loan funds to the lender if the institution determines that 
the student can complete the required hours within 10 days after the 
date that the institution would normally be required to return those 
funds. An institution may also delay returning funds to a lender for 30 
days after the date the institution would normally be required to 
return those funds if the institution is placed on the reimbursement 
payment method under proposed Sec. 668.167 (d) or (e).
    The Secretary proposes under Sec. 668.167(d) rules and procedures 
regarding the disbursement of FFEL Program funds and the certification 
of FFEL Program loan applications that are comparable to the rules and 
procedures currently in effect for institutions that are placed under 
the reimbursement payment method for the other title IV, HEA programs.
    In proposed Sec. 668.167(d), an institution that is placed on the 
reimbursement payment method may not disburse any FFEL Program funds to 
a borrower until the Secretary approves a request from the institution 
to make that disbursement to that borrower. The Secretary may also 
prohibit the institution from certifying a borrower's loan application 
until the Secretary approves a request from the institution to make 
that certification for that borrower.
    In order for the Secretary to approve a disbursement or 
certification request for a borrower, the institution would be required 
to submit documentation to the Secretary, or an entity approved by the 
Secretary, that shows that the borrower is eligible to receive that 
disbursement or certification. The entity approved by

[[Page 49882]]

the Secretary may be a certified public accountant or financial aid 
consultant that an institution uses to review its disbursement or 
certification requests before those requests are forwarded to the 
Secretary. In addition, pending the Secretary's approval of a 
disbursement or certification request, the Secretary may take one or 
more of the following actions: (1) Prohibit the institution from 
endorsing a master check or obtaining a borrower's endorsement of any 
loan check, (2) require the institution to maintain loan funds that it 
receives from a lender via EFT in a separate bank account that contains 
no other funds, and (3) prohibit the institution from certifying a 
borrower's loan application.
    The Secretary proposes that these rules and procedures apply to an 
institution that participates in the FFEL Programs for the same reasons 
that the Secretary places an institution on the reimbursement payment 
method for the other title IV, HEA programs--to protect students and 
the Federal interest in those instances where the Secretary determines 
there is a need to strictly monitor an institution's participation in 
those programs. Accordingly, where the Secretary determines there is a 
need to strictly monitor an institution's participation, but that 
institution participates only in the FFEL Programs, precluding the 
Secretary from placing the institution under the reimbursement payment 
method, the Secretary proposes under Sec. 668.167(e) to apply the rules 
and procedures of paragraph (d) of this section to that institution.
    The Secretary believes that the proposed approach is the least 
complicated and burdensome for all of the parties involved in 
administering the FFEL Programs. However, since this proposed approach 
is the first time that the Secretary would impose limitations on the 
disbursement of FFEL Program funds, or on the certification of FFEL 
Program loan applications, the Secretary invites comments on alternate 
approaches.

Campus-Based Programs, Federal Family Education Loan Programs, William 
D. Ford Federal Direct Loan Program, and Federal Pell Grant Program

Sections 674.2, 675.2, 676.2, 682.200, 685.102, and 690.2  Definitions

    The Secretary proposes to amend Secs. 674.2(a), 676.2(a), 
682.200(a)(1), 685.102(a)(1), and 690.2(a) of the Federal Perkins Loan, 
FSEOG, FFEL, Direct Loan, and Federal Pell Grant program regulations, 
respectively, to add a cross-reference to the ``payment period'' 
definition in Sec. 668.4 discussed below. In the definitions of terms 
defined in subpart A of 34 CFR part 668, the Secretary proposes to 
include the uniform definition of a payment period in Sec. 668.4 of 
these proposed regulations. The Secretary, therefore, proposes to 
delete the duplicative definition of a payment period in 
Secs. 674.2(b), 676.2(b), and 690.3. The Secretary also proposes to 
delete the definition of a payment period in Sec. 675.2(b) as it is not 
used in part 675.

Federal Family Education Loan Program and William D. Ford Federal 
Direct Loan Program

Sections 682.207, 682.604, and 685.301  Disbursements

    The Secretary is proposing to amend the disbursement rules of the 
FFEL and Direct Loan programs. The proposed change takes into account 
that section 428G of the HEA requires an institution to make at least 
two disbursements in a loan period even if the loan period consists of 
only one term, e.g., one semester. Accordingly, the Secretary is 
proposing to amend 34 CFR part 682.207(c), 682.603(a), and 682.604(c) 
of the FFEL Program regulations and 34 CFR part 685.301(b) of the 
Direct Loan Program regulations to provide different disbursement rules 
for loan periods that consist of one payment period and loan periods 
that include more than one payment period. For the former type loan 
period, an institution or lender is required to make two disbursements 
during the loan period. For loan periods that include more than one 
payment period, the institution or lender must disburse loan proceeds 
at least once in each payment period. Under each approach, each 
disbursement in a loan period must be substantially equal.

Executive Order 12866

1. Assessment of Costs and Benefits

    These proposed regulations have been reviewed in accordance with 
Executive Order 12866. Under the terms of the order the Secretary has 
assessed the potential costs and benefits of this regulatory action.
    The potential costs associated with the proposed regulations are 
those resulting from statutory requirements and those determined by the 
Secretary to be necessary for administering these 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 1995.
    In assessing the potential costs and benefits--both quantitative 
and qualitative--of these proposed regulations, the Secretary has 
determined that the benefits of the proposed regulations justify the 
costs.
    The Secretary has also determined that this regulatory action does 
not unduly interfere with State, local, and tribal governments in the 
exercise of their governmental functions.
    To assist the Department in complying with the specific 
requirements of Executive Order 12866, the Secretary invites comment on 
whether there may be further opportunities to reduce any potential 
costs or increase potential benefits resulting from these regulations 
without impeding the effective and efficient administration of the 
programs.

Summary of Potential Costs and Benefits

    Potential costs and benefits of these proposed regulations are 
discussed elsewhere in this preamble under the following heading: 
Initial Regulatory Flexibility Analysis, and in the information stated 
previously under Supplementary Information.

2. Clarity of the Regulations

    Executive Order 12866 requires each agency to write regulations 
that are easy to understand.
    The Secretary invites comments on how to make these proposed 
regulations easier to understand, including answers to questions such 
as the following: (1) Are the requirements in the proposed regulations 
clearly stated? (2) Do the regulations contain technical terms or other 
wording that interferes with their clarity? (3) Does the format of the 
regulations (groupings and order of sections, use of headings, 
paragraphing, etc.) aid or reduce their clarity? Would the regulations 
be easier to understand if they were divided into more (but shorter) 
sections? (A ``section'' is preceded by the symbol ``Sec. '' and a 
numbered heading, for example, Sec. 668.4 Payment period.) (4) Is the 
description of the regulations in the ``Supplementary Information'' 
section of the preamble helpful in understanding the regulations? How 
could this description be more helpful in making the regulations easier 
to understand? (5) What else could the Department do to make the 
regulations easier to understand?
    A copy of any comments that concern how the Department could make 
these proposed regulations easier to understand should be sent to 
Stanley M. Cohen, Regulations Quality Officer, U.S. Department of 
Education, 600 Independence Avenue, S.W., (Room

[[Page 49883]]

5121, FB-10), Washington, D.C. 20202-2241.

3. Initial Regulatory Flexibility Analysis

    The Secretary has determined that some small entities are likely to 
experience economic impacts from these proposed regulations, 
specifically with respect to the proposal to require institutions that 
participate in the FFEL Program and that are on the reimbursement 
payment method for the Federal Pell Grant, Federal Perkins Loan, FSEOG, 
or Direct Loan program, or for which the Secretary determines there is 
a need to strictly monitor FFEL funds, to submit documentation from 
existing sources to the Secretary or approved entity, that supports the 
certification of FFEL applications or supports intended disbursements 
of FFEL program funds to eligible borrowers. A more detailed 
explanation of these proposed changes in Sec. 668.167 can be found 
elsewhere in this preamble under the heading Summary of Proposed 
Changes. In accordance with the Regulatory Flexibility Act (RFA), an 
Initial Regulatory Flexibility Analysis (IRFA) of the economic impact 
on small entities has been performed. A summary of the IRFA appears 
below.

Description of the Objectives of, and Legal Basis for, the Proposed 
Rule

    The Secretary proposes that these rules and procedures apply to an 
institution that participates in the FFEL Programs for the same reasons 
that the Secretary places an institution on the reimbursement payment 
method for the other title IV, HEA programs: to protect students and 
the Federal interest in the title IV, HEA programs in those instances 
where the Secretary determines there is a need to strictly monitor an 
institution's participation in those programs. These rules would also 
apply to those institutions that participate in only the FFEL Programs. 
The Secretary has a responsibility in managing the title IV, HEA 
programs to ensure that only eligible students, and parents in the case 
of PLUS funds, receive title IV, HEA program funds, and that they 
receive those funds in the amounts they are eligible for.

Definition and Identification of Small Entities

    The Secretary has adopted the U.S. Small Business Administration 
(SBA) Size Standards for this analysis. The RFA directs that small 
entities are the sole focus of the Regulatory Flexibility Analysis. 
There are three types of small entities that are analyzed here. They 
are: for-profit entities with total revenue below $5,000,000; nonprofit 
entities with total revenue below $5,000,000; and entities controlled 
by governmental entities with populations below 50,000. The total 
number of institutions (large and small) participating in the title IV, 
HEA programs during the 1995-96 award year was 6,576. As of July 31, 
1996 there were 307 institutions on the reimbursement payment method: 
estimated at 257 for-profit entities, 36 nonprofit entities, and 14 
governmental entities. Of the 307 institutions, 175 participate in the 
FFEL Programs and had loan activity during the 1995 fiscal year. The 
data regarding the number of institutions on the reimbursement payment 
method, the number of those institutions that participate in the FFEL 
Programs and the volume of loan funds was obtained through Department 
of Education databases, such as the National Student Loan Data System. 
Where exact data were not available to estimate the cost to small 
entities, data elements were chosen that would have overestimated 
rather than underestimated the cost. For example, information is not 
available on the proportion of these institutions that are small versus 
the number that are large. For this analysis, in order to prevent an 
underestimate, all 175 institutions were assumed to be small although 8 
had a loan volume greater than $5,000,000 under the FFEL Programs. The 
Secretary particularly invites comments on the definition of small 
entity and the estimate of the number of small entities that would be 
covered by the proposed rule.
    The component of the proposed rule that could potentially cause a 
small entity to be adversely affected is the proposal to require 
institutions that participate in the FFEL Programs and that are on the 
reimbursement payment method for other title IV, HEA programs, or for 
which the Secretary determines there is a need to strictly monitor FFEL 
Program funds, to submit documentation from existing sources to the 
Secretary or an approved entity, that supports the certification of 
FFEL Program applications or supports intended disbursements of FFEL 
Program funds. The FFEL Program disbursements at an institution could 
be delayed for an estimated average of 18-20 days until approval for 
those certifications or disbursements was received by the institution, 
costing the institution interest expenses and paperwork expenses for 
the submission of supporting documentation.

Compliance Costs of Proposed Rule

    Some small (and large) entities will experience economic impacts 
from this proposed rule. These entities are those that would have to 
borrow funds in order to operate during the 18-20 days prior to 
receiving approval from the Secretary to certify loan applications, or 
to disburse FFEL Program funds. The economic impact on these entities 
are those costs associated with obtaining a short-term loan and those 
costs associated with unearned interest revenue (on institutional funds 
used in lieu of FFEL Program funds) that could have been earned through 
an interest-bearing or investment account during the 18-20 day delay. 
An estimate of the calculable costs of obtaining a short-term loan, and 
of the loss of interest revenue during the delay, was calculated for 
small entities.
    More than 60 percent of the 175 institutions that could be affected 
by these proposed regulations had an FFEL Program loan volume of less 
than $900,000 during the 1995 fiscal year. Therefore, for most 
institutions, based upon an interest rate equal to the prime rate plus 
4 percent (8.25%+4%=12.25%) for two short-term loans, one for each 
disbursement for a period of 30 days, the cost per institution would be 
an estimated $9,062 in interest expenses. The potential loss of 
interest earnings that could have accrued for the delayed FFEL Program 
funds during that time is estimated at 3 percent equaling an estimated 
$2,219. Less than 15 percent of the 175 institutions identified had a 
loan volume of $3,300,000 or greater. For an institution in this 
category, the interest expenses for the total amount of loan 
commitments under the same conditions above, would equal an estimated 
$33,226. The potential loss of interest earnings on those funds equals 
an estimated $8,137 per institution.
    In addition to the interest expenses, there would be an estimated 
cost of $230 per institution for increased paperwork burden as a result 
of submitting to the Secretary or approved entity documentation in 
support of the certification of loan applications or the disbursement 
of FFEL Program funds to eligible borrowers. The cost is a result of an 
estimated increase of 10 hours of paperwork burden performed by an 
employee at $20 per hour, and $3.00 in postage for an average of 10 
mailings.
    The total potential cost in interest expenses and increased 
paperwork burden for most small entities with low FFEL Program loan 
volume is estimated at $11,511. For the approximately 15 percent of 
small entities with a high FFEL Program loan volume, as noted above, 
the total potential cost per institution is estimated at $41,593. These 
costs are estimates and the costs experienced by actual institutions 
will

[[Page 49884]]

undoubtedly be different. These estimates are provided to satisfy the 
RFA requirement that costs of compliance be described and should be 
used as illustrative examples only. The Secretary particularly invites 
comments on these estimates of each of these alternatives for small 
entities.

Discussion of Economic Impacts

    This analysis has determined that an estimated 138 small for-profit 
entities, an estimated 28 small nonprofit entities, and an estimated 9 
small governmental entities will experience adverse economic impacts 
from these proposed regulations. The adverse economic impacts 
experienced by some small (and large) entities is balanced by the 
positive economic impacts accruing to the U.S. taxpayer. These positive 
impacts arise (1) From the ability of the Secretary to ensure that 
eligible students receive title IV, HEA program funds in the amounts 
for which they are eligible in cases where there is a need to strictly 
monitor title IV, HEA program funds at an institution and (2) from the 
protection of students and the Federal interest in the title IV, HEA 
programs.
    The use of the proposed requirement will enable the Secretary to 
better discharge the responsibilities of managing the title IV, HEA 
program funds, to promote parallel requirements across the title IV, 
HEA programs, and to better safeguard the Federal fiscal interest and 
the interests of students.

Identification of Relevant Federal Rules Which May Duplicate, Overlap 
or Conflict With the Proposed Rule

    The Secretary has not found any other Federal rules which 
duplicate, overlap, or conflict with the proposed rule. The Secretary 
particularly invites comments on other Federal rules that meet these 
criteria.

Significant Alternatives That Would Satisfy the Same Legal and Policy 
Objectives While Minimizing the Economic Impact on Small Entities

    The Secretary has identified no other significant alternatives that 
would satisfy the same legal and policy objectives while minimizing the 
economic impact on small entities. The Secretary believes that the 
proposed approach is the least complicated and burdensome for small 
(and large) entities involved in the administration of the title IV, 
HEA programs while still allowing for the proper protection of the 
Federal fiscal interests and the interests of students and their 
parents. The Secretary particularly invites comments on this 
determination.

Conclusion

    The Secretary concludes that a substantial number of small entities 
are likely to experience significant economic impacts from the proposed 
rule. However, as discussed in the section referring to the cost-
benefit assessment of this proposed rule pursuant to Executive Order 
12866, the Secretary has concluded that the costs are outweighed by the 
benefits. In this case, the benefits are better protection of the 
Federal fiscal interest as well as improved service to students 
participating in the title IV, HEA programs.
    The Secretary invites comments on any aspect of this analysis, 
particularly comments on the definition of small entity, the estimated 
number of institutions that are expected to experience economic 
impacts, the estimated costs, and any significant alternatives that 
would satisfy the same legal and policy objectives while minimizing the 
economic impact on small entities.

Paperwork Reduction Act of 1995

    Proposed Secs. 668.16, 668.162, 668.165, and 668.167 contain 
information collection requirements. As required by the Paperwork 
Reduction Act of 1995 (44 U.S.C. 3507(d)), the Department of Education 
has submitted a copy of these regulations to the Office of Management 
and Budget (OMB) for its review. Collection of information: Student 
Assistance General Provisions--Section 668.16--Standards of 
Administrative Capability--The Department currently has this section 
approved under OMB control number 1840-0537. To be considered 
administratively capable to participate in the title IV, HEA programs, 
the Secretary proposes that an institution participate in the 
electronic services that the Secretary provides at no substantial 
charge to the institution. This requirement does not change the 
information that an institution reports or receives but does change the 
way that the institution reports or receives the information.
    Section 668.162--Requesting funds--The Secretary proposes under 
Sec. 668.162(c) the requirements for a ``just-in-time'' payment method. 
Under the just-in-time payment method, for each student that an 
institution determines is eligible for title IV, HEA program funds, the 
institution transmits electronically to the Secretary, within a 
timeframe established by the Secretary, records that contain program 
award information for that student. The just-in-time payment method 
provides for reporting information that is no different than current 
student-level data that an institution is reporting; however, it does 
require an institution to report that information earlier.
    Section 668.165--Notices and authorizations--Institutions are 
required to provide a notice once each award year of the amount of 
title IV, HEA program funds a student can expect to receive, how and 
when those funds will be paid, and whether any title IV, HEA program 
loans are subsidized or unsubsidized. Annual recordkeeping and 
reporting burden contained in this collection of information as 
proposed in these regulations are estimated to average 78.9 hours 
annually per respondent. There are 6,576 respondents and the burden 
hours total 518,846.4 hours including the time for reviewing 
instructions, searching existing data sources, gathering and 
maintaining the data needed, and completing and reviewing the 
collection of information. Institutions are also required to provide a 
notice to a student or parent in the case of PLUS funds, of (1) 
Disbursements of title IV, HEA loan funds credited to the student's 
account at the institution or the student's or parent's bank account, 
and (2) the student- or parent-borrower's right to cancel a loan or 
loan disbursement, and when that cancellation request must be made. 
Annual recordkeeping and reporting burden contained in this collection 
of information as proposed in these regulations are estimated to 
average 116.7 hours annually per respondent. There are a 5,944 
respondents and the burden hours total 693,644.8 hours including the 
time for reviewing instructions, searching existing data sources, 
gathering and maintaining the data needed, and completing and reviewing 
the collection of information. The total annual recordkeeping and 
reporting burden hours for Sec. 668.165 equals 1,212,491 hours. The 
Secretary understands that respondents are already providing this 
notice and the actual increase in burden would be much less than this 
estimate.
    Section 668.167--FFEL Program funds--Institutions that participate 
in the FFEL program that are on the reimbursement payment method for 
other title IV, HEA programs or for which the Secretary determines 
there is a need to strictly monitor FFEL program funds must submit 
documentation to the Secretary or an approved entity in support of 
disbursements of FFEL program funds to eligible students and parents. 
The information to be collected includes: specific information from the 
institution's files regarding eligibility and documentary evidence. The

[[Page 49885]]

Secretary needs and uses the information to approve disbursements of 
FFEL program funds.
    All information is to be collected on a case-by-case basis. Annual 
recordkeeping and reporting burden contained in the collection of 
information proposed in these regulations are estimated to average 1 
hour for an average of 10 submissions for 175 respondents, including 
the time for reviewing instructions, searching existing data sources, 
gathering and maintaining the data needed, and completing and reviewing 
the collection of information. The total annual recordkeeping and 
reporting burden hours equals 1750 hours.
    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 10235, New Executive 
Office Building, Washington, D.C. 20503; Attention: Desk Officer for 
the U.S. Department of Education.
    The Department considers comments by the public on these proposed 
collections of information in--
     Evaluating whether the proposed collections of information 
are necessary for the proper performance of the functions of the 
Department, including whether the information will have a practical 
use;
     Evaluating the accuracy of the Department's estimate of 
the burden of the proposed collections of information, including the 
validity of the methodology and assumptions used;
     Enhancing the quality, usefulness, and clarity of the 
information to be collected; and
     Minimizing the burden of collection of information on 
those who are to respond, including through the use of appropriate 
automated, electronic, mechanical, or other technological collection 
techniques, or other forms of information technology; e.g., permitting 
electronic submission of responses.
    OMB is required to make a decision concerning the collections of 
information contained in these proposed regulations between 30 and 60 
days after publication of this document in the Federal Register. 
Therefore, a comment to OMB is best assured of having its full effect 
if OMB receives it within 30 days of publication. This does not affect 
the deadline for the public to comment to the Department on the 
proposed regulations.

Invitation to Comment

    Interested persons are invited to submit comments and 
recommendations regarding these proposed regulations.
    All comments submitted in response to these proposed regulations 
will be available for public inspection, during and after the comment 
period, in Room 3053, ROB-3, 7th and D Streets, S.W., Washington, D.C., 
between the hours of 8:30 a.m. and 4 p.m., Eastern standard time Monday 
through Friday of each week except Federal holidays.

Assessment of Educational Impact

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

List of Subjects

34 CFR Part 668

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

34 CFR Parts 674, 675, and 676

    Loan programs--education, Student aid, Reporting and recordkeeping 
requirements.

34 CFR Part 682

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

34 CFR Part 685

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

34 CFR Part 690

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

    Dated: September 12, 1996.
Richard W. Riley,
Secretary of Education.

(Catalog of Federal Domestic Assistance Numbers: 84.007 Federal 
Supplemental Educational Opportunity Grant Program; 84.032 
Consolidation Program; 84.032 Federal Stafford Loan Program; 84.032 
Federal PLUS Program; 84.032 Federal Supplemental Loans for Students 
Program; 84.033 Federal Work-Study Program; 84.038 Federal Perkins 
Loan Program; 84.063 Federal Pell Grant Program; 84.069 Federal 
State Student Incentive Grant Program; 84.268 William D. Ford 
Federal Direct Loan Programs; and 84.272 National Early Intervention 
Scholarship and Partnership Program)

    The Secretary proposes to amend parts 668, 674, 675, 676, 682, 685, 
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, and 1141, 
unless otherwise noted.

Subpart A--General

    2. Section 668.4 is added to read as follows:


Sec. 668.4   Payment period.

    (a) Payment period for an eligible program that has academic terms 
and measures progress in credit hours. For a student enrolled in an 
eligible program that uses semesters, trimesters, quarters, or other 
academic terms and measures progress in credit hours, the payment 
period is the semester, trimester, quarter, or other academic term.
    (b) Payment periods for an eligible program that measures progress 
in credit hours and does not have academic terms or measures progress 
in clock hours. (1) For a student enrolled in an eligible program that 
is one academic year or less in length--
    (i) The first payment period is the period of time in which the 
student completes the first half of the program as measured in credit 
or clock hours; and
    (ii) The second payment period is the period of time in which the 
student completes the second half of the program as measured in credit 
or clock hours.
    (2) For a student enrolled in an eligible program that is more than 
one academic year in length--
    (i) For the first academic year and any subsequent full academic 
year as measured in credit or clock hours--
    (A) The first payment period is the period of time in which the 
student completes the first half of the academic year as measured in 
credit or clock hours; and
    (B) The second payment period is the period of time in which the 
student completes the second half of that academic year;
    (ii) For any remaining portion of an eligible program that is more 
than one-half an academic year but less than a complete academic year--
    (A) The first payment period is the period of time in which a 
student completes the first half of the remaining portion of the 
eligible program as measured in credit or clock hours; and

[[Page 49886]]

    (B) The second payment period is the period of time in which the 
student completes the remainder of the eligible program; and
    (iii) For any remaining portion of an eligible program that is not 
more than half an academic year as measured in credit or clock hours, 
the payment period is the remainder of that eligible program.
    (3) For purposes of paragraphs (b)(1) and (b)(2) of this section, 
if a student cannot earn half the credit hours in the program under 
paragraph (b)(1) of this section or half of the remaining portion of 
the eligible program under paragraph (b)(2)(i) and (b)(2)(ii) of this 
section until after the calendar midpoint between the first and last 
scheduled days of class, the second payment period begins on the later 
of--
    (i) The calendar midpoint between the first and last scheduled days 
of class of the program or academic year; or
    (ii) The date, as determined by the institution, that the student 
has completed half of the academic coursework.
    (4) If an institution chooses to have more than two payment periods 
in an academic year, in a program of less than an academic year, or in 
the remaining portion of an eligible program under paragraph (b)(2) of 
this section, the rules in paragraphs (b)(1) through (b)(3) of this 
section are modified to reflect the increased number of payment 
periods. For example, if an institution chooses to have three payment 
periods in an academic year, each payment period must correspond to 
one-third of the academic year.

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

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

    3. Section 668.16 is amended by removing ``and'' at the end of 
paragraph (m)(2)(ii), removing the period at the end of paragraph (n), 
and inserting ``; and'', and adding a new paragraph (o) to read as 
follows:


Sec. 668.16   Standards of administrative capability.

* * * * *
    (o) Participates in the electronic services that the Secretary--
    (1) Provides at no substantial charge to the institution; and
    (2) Identifies through a notice published in the Federal Register.
* * * * *
(Authority: 20 U.S.C. 1082, 1085, 1094, 1099c)

    4. Subpart K is amended by revising Secs. 668.161 through 668.165 
and Sec. 668.166(a) and by adding a new Sec. 668.167 to read as 
follows:

Subpart K--Cash Management


Sec. 668.161   Scope and purpose.

    (a) General. (1) This subpart establishes the rules and procedures 
under which a participating institution requests, maintains, disburses, 
and otherwise manages title IV, HEA program funds. This subpart is 
intended 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 the costs that accrue to a student under a title IV, 
HEA loan program.
    (2) The rules and procedures that apply to an institution under 
this subpart also apply to a third-party servicer.
    (3) As used in this subpart--
    (i) The title IV, HEA programs include only the Federal Pell Grant, 
FSEOG, Federal Perkins Loan, FWS, Direct Loan, and FFEL programs;
    (ii) The term ``parent'' means a parent borrower under the PLUS 
programs;
    (iii) With regard to the FFEL Programs, the term ``disburse'' means 
the same as deliver loan proceeds under 34 CFR Part 682 of the FFEL 
Program regulations; and
    (iv) A day is a calendar day unless otherwise specified.
    (4) FWS Program. An institution must follow the disbursement 
procedures in 34 CFR 675.16 for paying a student his or her wages under 
the FWS Program instead of the disbursement procedures and requirements 
under this subpart.
    (b) Federal interest in title IV, HEA program funds. Except for 
funds received by an institution for administrative expenses and for 
funds used for the Job Location and Development Program under the FWS 
Programs, 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   Requesting funds.

    (a) General. The Secretary has sole discretion to determine the 
method under which the Secretary provides title IV, HEA program funds 
to an institution. In accordance with procedures established by the 
Secretary, the Secretary may provide funds to an institution in advance 
of the institution's need for those funds (advance payment method), by 
the date the institution needs those funds (just-in-time payment 
method), or by reimbursing an institution for disbursements already 
made to eligible students and parents (reimbursement payment method).
    (b) Advance payment method. Under the advance payment method--
    (1) An institution submits a request for funds to the Secretary. 
The institution's request for funds may not exceed the amount of funds 
the institution needs immediately for disbursements the institution has 
made or will make to eligible students and parents;
    (2) If the Secretary accepts that request, the Secretary initiates 
an electronic funds transfer (EFT) of that amount to a bank account 
designated by the institution; and
    (3) The institution must disburse the funds requested as soon as 
administratively feasible but no later than 3 business days following 
the date the institution received those funds.
    (c) Just-in-time payment method. Under the just-in-time payment 
method--
    (1) For each student that an institution determines is eligible for 
title IV, HEA program funds, the institution transmits electronically 
to the Secretary, within a timeframe established by the Secretary, 
records that contain program award information for that student. As 
part of those records, the institution reports the date and amount of 
the disbursements that it will make or has made to that student or that 
student's parent;
    (2) For each record the Secretary accepts for a student or parent, 
the Secretary provides by EFT the corresponding disbursement amount to 
the institution on or before the date reported by the institution for 
that disbursement;
    (3) When the institution receives the funds for each record 
accepted by the Secretary, the institution may disburse those funds 
based on its determination at the time the institution transmitted that 
record to the Secretary that the student is eligible for that 
disbursement; and
    (4) The institution must report any adjustment to a previously 
accepted record within the time established by the Secretary in a 
notice published in the Federal Register.

[[Page 49887]]

    (d) Reimbursement payment method. Under the reimbursement payment 
method--
    (1) An institution must first make disbursements to students and 
parents for the amount of funds those students and parents are eligible 
to receive under the Federal Pell Grant, Direct Loan, and campus-based 
programs before the institution may seek reimbursement from the 
Secretary for those disbursements. The Secretary considers an 
institution to have made a disbursement if the institution has either 
credited a student's account or paid a student or parent directly with 
its own funds;
    (2) An institution seeks reimbursement by submitting to the 
Secretary a request for funds that does not exceed the amount of the 
actual disbursements the institution has made to students and parents 
included in that request;
    (3) As part of the institution's reimbursement request, the 
Secretary requires the institution to--
    (i) Identify the students for whom reimbursement is sought; and
    (ii) Submit to the Secretary or entity approved by the Secretary 
documentation that shows that each student and parent included in the 
request was eligible to receive and has received the title IV, HEA 
program funds for which reimbursement is sought; and
    (4) The Secretary approves the amount of the institution's 
reimbursement request for a student or parent and pays the institution 
that amount, if the Secretary determines with regard to that student or 
parent that the institution--
    (i) Accurately determined the student's eligibility for title IV, 
HEA program funds;
    (ii) Accurately determined the amount of title IV, HEA program 
funds paid to the student or parent; and
    (iii) Submitted the documentation required under paragraph (d)(3) 
of this section.

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


Sec. 668.163  Maintaining and accounting for funds.

    (a) (1) Bank or investment account. An institution must maintain 
title IV, HEA program funds in a bank or investment account that is 
Federally insured or secured by collateral of value reasonably 
equivalent to the amount of those funds.
    (2) For each bank or investment account that includes title IV, HEA 
program funds, an institution must clearly identify that title IV, HEA 
program funds are maintained in that account by--
    (i) Including in the name of each account the phrase ``Federal 
Funds''; or
    (ii)(A) Notifying the bank or investment company of the accounts 
that contain title IV, HEA program funds and retaining a record of that 
notice; and
    (B) Except for a public institution, filing with the appropriate 
State or municipal government entity a UCC-1 statement disclosing that 
the account contains Federal funds and maintaining a copy of that 
statement.
    (b) Separate bank account. The Secretary may require an institution 
to maintain title IV, HEA program funds in a separate bank or 
investment account that contains no other funds if the Secretary 
determines that the institution failed to comply with--
    (1) The requirements in this subpart;
    (2) The recordkeeping and reporting requirements in subpart B of 
this part; or
    (3) Applicable program regulations.
    (c) Interest-bearing or investment account. (1) An institution must 
maintain the Fund described in Sec. 674.8(a) of the Federal Perkins 
Loan Program regulations in an interest-bearing bank account or 
investment account consisting predominately of low-risk, income-
producing securities, such as obligations issued or guaranteed by the 
United States. Interest or income earned on Fund proceeds are retained 
by the institution as part of the Fund.
    (2) Except as provided in paragraph (c)(3) of this section, an 
institution must maintain Direct Loan, Federal Pell Grant, FSEOG, and 
FWS program funds in an interest-bearing bank account or an investment 
account as described in paragraph (c)(1) of this section.
    (3) An institution does not have to maintain Direct Loan, Federal 
Pell Grant, FSEOG, and FWS program funds in an interest-bearing bank 
account or an investment account for an award year if--
    (i) The institution drew down less than a total of $3 million of 
those funds in the prior award year and anticipates that it will not 
draw down more than that amount in the current award year;
    (ii) The institution demonstrates by its cash management practices 
that it will not earn over $250 on those funds during the award year; 
or
    (iii) The institution requests those funds from the Secretary under 
the just-in-time payment method.
    (4) If an institution maintains Direct Loan, Federal Pell Grant, 
FSEOG, and FWS program funds in an interest-bearing or investment 
account, the institution may keep the initial $250 it earns on those 
funds during an award year. By June 30 of that award year, the 
institution must remit to the Secretary any earnings over $250.
    (d) Accounting and internal control systems and financial records. 
(1) An institution must maintain accounting and internal control 
systems that--
    (i) Identify the cash balance of the funds of each title IV, HEA 
program that are included in the institution's bank or investment 
account as readily as if those program funds were maintained in a 
separate account; and
    (ii) Identify the earnings on title IV, HEA program funds 
maintained in the institution's bank or investment account.
    (2) An institution must maintain its financial records in 
accordance with the provisions under 34 CFR 668.24.
    (e) Standard of conduct. An institution must exercise the level of 
care and diligence required of a fiduciary with regard to maintaining 
and investing title IV, HEA program funds.

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


Sec. 668.164  Disbursing funds.

    (a) Disbursement. An institution makes a disbursement of title IV, 
HEA program funds on the date that the institution credits a student's 
account at the institution or pays the student or parent directly 
with--
    (1) Funds received from the Secretary;
    (2) Funds received from a lender under the FFEL Programs; or
    (3) Institutional funds used in advance of receiving title IV, HEA 
program funds.
    (b) Disbursements by payment period. (1) Except as provided in 
paragraph (b)(2) of this section, an institution must disburse title 
IV, HEA program funds on a payment period basis. Except as provided in 
paragraph (g) of this section, an institution may disburse title IV, 
HEA program funds to a student or parent for a payment period only if 
the student is enrolled for classes for that payment period and is 
eligible to receive those funds.
    (2) The provisions of paragraph (b)(1) of this section do not apply 
to the disbursement of FWS Program funds.
    (3) For a student enrolled in an eligible program at an institution 
that measures academic progress in clock hours, in determining whether 
the student completes the clock hours in a payment period, an 
institution may include clock hours for which the student has an 
excused absence if--
    (i) The institution has a written policy that permits excused 
absences; and
    (ii) The number of excused absences under the written policy for 
purposes of

[[Page 49888]]

this paragraph does not exceed the lesser of--
    (A) The policy on excused absences of the institution's accrediting 
agency or, if the institution has more than one accrediting agency, the 
agency designated under 34 CFR part 600.11(b);
    (B) The policy on excused absences of any State agency that 
licenses the institution or otherwise legally authorizes the 
institution to operate in the State; or
    (C) Ten percent of the clock hours in the payment period.
    (4) For purposes of paragraph (b)(3) of this section, an ``excused 
absence'' is an absence that a student does not have to make up.
    (c) Direct payments. An institution pays a student or parent 
directly by--
    (1) Releasing to the student or parent a check provided by a lender 
to the institution under an FFEL Program;
    (2) Issuing a check or other instrument payable to and requiring 
the endorsement or certification of the student or parent. An 
institution issues a check by--
    (i) Releasing or mailing the check to a student or parent; or
    (ii) Notifying the student or parent that the check is available 
for immediate pickup;
    (3) Initiating an electronic funds transfer (EFT) to a bank account 
designated by the student or parent; or
    (4) Dispensing cash for which an institution obtains a signed 
receipt from the student or parent.
    (d) Crediting a student's account at the institution.
    (1) Without obtaining the student's or parent's authorization under 
Sec. 668.165, an institution may use title IV, HEA program funds to 
credit a student's account at the institution to satisfy current 
charges for--
    (i) Tuition and fees;
    (ii) Board, if the student contracts with the institution for 
board; and
    (iii) Room, if the student contracts with the institution for room.
    (2) After obtaining the appropriate authorization from a student or 
parent under Sec. 668.165, the institution may use title IV, HEA 
program funds to credit a student's account at the institution to 
satisfy--
    (i) Current charges that are in addition to the charges described 
in paragraph (d)(1) of this section that were incurred by the student 
at the institution for educationally related activities; and
    (ii) Minor prior award year charges if these charges are less than 
$100 or if the payment of these charges does not, and will not, prevent 
the student from paying his or her current educational costs.
    (3) If an institution disburses Direct Loan Program funds by 
crediting a student's account at the institution, the institution must 
first credit the student's account with those funds to pay for 
outstanding current and authorized charges.
    (4) For purposes of this paragraph, current charges refers to 
charges assessed the student by the institution for--
    (i) The current award year; or
    (ii) The loan period for which an institution certified or 
originated a loan under the FFEL or Direct Loan programs.
    (e) Credit balances. Whenever an institution disburses title IV, 
HEA program funds by crediting a student's account and the total amount 
of all title IV, HEA program funds credited exceeds the amount of 
tuition and fees, room and board, and other authorized charges the 
institution assessed the student, the institution must pay the 
resulting credit balance directly to the student or parent as soon as 
possible but--
    (1) No later than 14 days after the balance occurred if the credit 
balance occurred after the first day of class of a payment period; or
    (2) No later than 14 days after the first day of class of a payment 
period if the credit balance occurred on or before the first day of 
class of that payment period.
    (f) Early disbursements. (1) Except as provided under paragraph 
(f)(2) of this section, the earliest an institution may disburse title 
IV, HEA program funds to a student or parent for any payment period is 
the later of--
    (i) Ten days before the first day of classes of the payment period; 
or
    (ii) The date the student completed the previous payment period for 
which he or she received title IV, HEA program funds, except that this 
provision does not apply to the payment of Direct Loan or FFEL program 
funds under the conditions described in 34 CFR 685.301 paragraphs 
(b)(3)(ii), (b)(5), and (b)(6) and 34 CFR 682.604 paragraphs 
(c)(6)(ii), (c)(7), and (c)(8), respectively.
    (2) The earliest an institution may disburse the initial 
installment of a loan under the Direct Loan or FFEL programs to a 
first-year, first-time borrower as described in 34 CFR 682.604(c) and 
685.303(b)(4) is 30 days after the first day of the student's program 
of study.
    (g) Late disbursements. (1) Ineligible students who may receive a 
late disbursement. An institution may make a late disbursement to an 
ineligible student under paragraph (g)(2) of this section if the 
student became ineligible solely because--
    (i) For purposes of the Direct Loan and FFEL programs, the student 
is no longer enrolled at the institution as at least a half-time 
student for the loan period; and
    (ii) For purposes of the Federal Pell Grant, FSEOG, and Federal 
Perkins Loan programs, the student is no longer enrolled at the 
institution for the award year.
    (2) Conditions for late disbursements. An institution may disburse 
funds under a title IV, HEA program to an ineligible student described 
in paragraph (g)(1) of this section if, before the date the student 
became ineligible--
    (i) The institution received a SAR from the student or an ISIR from 
the Secretary; and
    (ii) (A) For a Direct Loan Program loan, the institution created 
the electronic origination record for that loan. An institution may not 
make a late second or subsequent disbursement of a Direct Subsidized or 
Direct Unsubsidized loan unless the student has graduated or 
successfully completed the period of enrollment for which the loan was 
intended;
    (B) For an FFEL Program loan, the institution certified an 
application for that loan. An institution may not make a late second or 
subsequent disbursement of a Stafford loan unless the student has 
graduated or successfully completed the period of enrollment for which 
the loan was intended;
    (C) For a Direct Loan or FFEL Program loan, the student completed 
the first 30 days of his or her program of study if the student was a 
first-year, first-time borrower as described in 34 CFR 682.604(c)(5) or 
685.303(b)(4);
    (D) For a Federal Pell Grant Program award, the institution 
received a valid SAR from the student or a valid ISIR from the 
Secretary; and
    (E) For a Federal Perkins Loan Program loan or an FSEOG Program 
award, the institution received from the student an acceptance of that 
loan or award.
    (3) Making a late disbursement. If a student qualifies for a late 
disbursement under paragraphs (g) (1) and (2) of this section--
    (i) The institution may make that late disbursement of title IV, 
HEA program funds only if the funds are used to pay for educational 
costs that the institution determines the student incurred for the 
period in which the student was enrolled and eligible; and
    (ii) If the institution chooses to make a late disbursement, it 
must make that late disbursement no later than 90 days after the date 
the student becomes

[[Page 49889]]

ineligible under paragraph (h)(1) of this section.

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


Sec. 668.165  Notices and authorizations.

    (a) Notices. (1) Before an institution disburses title IV, HEA 
program funds for any award year, the institution must notify a student 
of the amount of funds that the student or his or her parent can expect 
to receive under each title IV, HEA program, and how and when those 
funds will be disbursed. If those funds include FFEL or Direct Loan 
Program funds, the notice provided by the institution must indicate 
which funds are from subsidized loans and which are from unsubsidized 
loans.
    (2) If an institution credits a student's account at the 
institution with Direct Loan, FFEL, or Perkins Loan Program funds, or 
initiates an EFT of those funds to the student's or parent's bank 
account and subsequently withdraws funds from that bank account to pay 
for tuition and fees or other authorized charges, the institution must 
notify the student, and parent if PLUS Loan funds are being disbursed, 
of--
    (i) The date and amount of the disbursement;
    (ii) The student's right, or in the case of a PLUS loan the 
parent's right, to cancel that loan or loan disbursement and have the 
loan proceeds returned to the holder of that loan. However, the 
institution does not have to provide this information with regard to 
FFEL Program funds unless the institution received the loan funds from 
a lender through an EFT payment or master check; and
    (iii) The procedures and the time by which the student or parent 
must notify the institution that he or she wishes to cancel the loan or 
loan disbursement.
    (3) The institution must send the notice described in paragraph 
(a)(2) of this section--
    (i) No earlier than 10 days before and no later than 10 days after 
either crediting the student's account at the institution or crediting 
the student's or parent's bank account; and
    (ii) Either in writing or electronically. If the institution sends 
the notice electronically, it must require the recipient of the notice 
to confirm receipt of the notice and must maintain a copy of that 
confirmation.
    (4)(i) If a student or parent wishes to cancel a loan or loan 
disbursement, the student or parent must submit that cancellation 
request to the institution.
    (ii) If the institution receives the cancellation request within 14 
days after the date the institution sent the notice described in 
paragraph (a)(2) of this section, the institution must return the loan 
proceeds, cancel the loan, or do both, in accordance with applicable 
program regulations.
    (iii) If a student or parent submits a cancellation request after 
the period set forth in paragraph (a)(4)(ii) of this section, the 
institution may return the loan proceeds, cancel the loan, or do both, 
in accordance with applicable program regulations.
    (5) An institution must inform a student or parent in writing or 
electronically regarding the outcome of any cancellation request.
    (b) Student or parent authorizations. (1) If an institution obtains 
written authorization from a student or parent, as applicable, the 
institution may--
    (i) Disburse title IV, HEA program funds to a bank account 
designated by the student or parent;
    (ii) Use the student's or parent's title IV, HEA program funds to 
pay for charges described in Sec. 668.164(d)(2) that are included in 
that authorization; and
    (iii) Hold on behalf of the student or parent any title IV, HEA 
program funds that would otherwise be paid directly to the student or 
parent under Sec. 668.164(f).
    (2) In obtaining the student's or parent's authorization to perform 
an activity described in paragraph (b)(1) of this section, an 
institution--
    (i) May not require or coerce the student or parent to provide that 
authorization;
    (ii) Must allow the student or parent to cancel or modify that 
authorization at any time; and
    (iii) Must clearly explain how it will carry out that activity.
    (3) A student or parent may authorize an institution to carry out 
the activities described in paragraph (b)(1) of this section for the 
period during which the student is enrolled at the institution.
    (4)(i) If a student or parent modifies an authorization, the 
modification takes effect on the date the institution receives the 
modification notice.
    (ii) If a student or parent cancels an authorization to use title 
IV, HEA program funds to pay for authorized charges under 
Sec. 668.164(d)(2), the institution may use title IV, HEA program funds 
to pay only those authorized charges incurred by the student before the 
institution received the notice.
    (iii) If a student or parent cancels an authorization to hold title 
IV, HEA program funds under paragraph (b)(1)(iii) of this section, the 
institution must pay those funds directly to the student or parent as 
soon as possible but no later than 14 days after the institution 
receives that notice.
    (5) If an institution holds excess student funds under paragraph 
(b)(1)(iii) of this section, the institution must--
    (i) Identify the amount of funds the institution holds for each 
student or parent in a subsidiary ledger account designed for that 
purpose;
    (ii) Maintain, at all times, cash in its bank account in an amount 
at least equal to the amount of funds the institution holds for the 
student; and
    (iii) Notwithstanding any authorization obtained by the institution 
under this paragraph, pay any remaining balance on loan funds by the 
end of the loan period and any remaining other title IV, HEA program 
funds by the end of the last payment period in the award year for which 
they were awarded.

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


Sec. 668.166   Excess cash.

    (a) General. (1) The Secretary considers excess cash to be any 
amount of title IV, HEA 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 from the Secretary. 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 or 
accounts.
    (2) The provisions in this section do not apply to the title IV, 
HEA program funds that an institution receives from the Secretary under 
the just-in-time payment method.
* * * * *


Sec. 668.167   FFEL Program funds.

    (a) Requesting FFEL Program funds. In certifying a loan application 
for a borrower under Sec. 682.603--
    (1) An institution may not request a lender to provide loan funds 
by EFT or master check--
    (i) Earlier than 27 days after the first day of classes of the 
first payment period for a first-year, first-time Federal Stafford Loan 
Program borrower as defined in Sec. 682.604(c)(5); or
    (ii) Earlier than 13 days before the first day of classes for any 
subsequent payment period for a first-year, first-time Federal Stafford 
Loan Program borrower or for any payment period for all other Federal 
Stafford Loan Program borrowers; and
    (2) An institution may not request a lender to provide loan funds 
by check requiring the endorsement of the borrower--
    (i) Earlier than the first day of classes of the first payment 
period for a first-year, first-time Federal Stafford Loan Program 
borrower as defined in Sec. 682.604(c)(5); or

[[Page 49890]]

    (ii) Earlier than 30 days before the first day of classes for any 
subsequent payment period for a first-year, first-time Federal Stafford 
Loan Program borrower or for any payment period for all other Federal 
Stafford borrowers; and
    (3) (i) An institution may not request a lender to provide loan 
funds by EFT or master check for any Federal PLUS Program loan earlier 
than provided in paragraph (a)(1) of this section.
    (ii) An institution may not request a lender to provide loan funds 
by check requiring the endorsement of the borrower for any Federal PLUS 
Program loan earlier than provided in paragraph (a)(2) of this section.
    (b) Returning funds to a lender. Except as provided in paragraph 
(c) of this section, an institution must return FFEL Program funds to a 
lender if the institution does not disburse those funds to a student or 
parent for a payment period within--
    (1) (i) Three business days following the date the institution 
receives the funds if a lender provides those funds via EFT or by 
master check; or
    (ii) Thirty days after the institution receives the funds if a 
lender provides those funds by a check payable to the borrower or 
copayable to the borrower and the institution.
    (c) Delay in returning funds to a lender. An institution may delay 
returning FFEL program funds to a lender for--
    (1) Ten days after the date set forth in paragraph (b) of this 
section if the institution--
    (i) Does not disburse FFEL Program funds to a borrower because the 
student did not complete the required number of clock or credit hours 
in a preceding payment period; and
    (ii) Determines that the student will complete the required hours 
within this 10-day period; or
    (2) Thirty days after the date set forth in paragraph (b) of this 
section if the Secretary places the institution on the reimbursement 
payment method under paragraph (d) or (e) of this section.
    (d) An institution placed under the reimbursement payment method. 
(1) If the Secretary places an institution under the reimbursement 
payment method for the Federal Pell Grant, Direct Loan and campus-based 
programs, the institution--
    (i) May not disburse FFEL Program funds to a borrower until the 
Secretary approves a request from the institution to make that 
disbursement for that borrower; and
    (ii) If prohibited by the Secretary, may not certify a borrower's 
loan application until the Secretary approves a request from the 
institution to make that certification for that borrower.
    (2) In order for the Secretary to approve a disbursement or 
certification request from the institution, the institution must submit 
documentation to the Secretary or entity approved by the Secretary that 
shows that each borrower included in that request whose loan has not 
been disbursed or certified is eligible to receive that disbursement or 
certification.
    (3) Pending the Secretary's approval of a disbursement or 
certification request, the Secretary may--
    (i) Prohibit the institution from endorsing a master check or 
obtaining a borrower's endorsement of any loan check the institution 
receives from a lender;
    (ii) Require the institution to maintain loan funds that it 
receives from a lender via EFT in a separate bank account that meets 
the requirements under Sec. 668.164; and
    (iii) Prohibit the institution from certifying a borrower's loan 
application.
    (e) An institution participating solely in the FFEL Programs. If 
the FFEL Programs are the only title IV, HEA programs in which an 
institution participates and the Secretary determines that there is a 
need to strictly monitor the institution's participation in those 
programs, the Secretary may subject the institution to the conditions 
and limitations contained in paragraph (d) of this section.

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

PART 674--FEDERAL PERKINS LOAN PROGRAM

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

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

    6. Section 674.2(a) is amended by adding the term ``Payment 
period'' in alphabetical order and revising the introductory clause to 
read as follows:


Sec. 674.2   Definitions.

    (a) The definitions of the following terms used in this part are 
set forth in subpart A of the Student Assistance General Provisions, 34 
CFR part 668:.
 * * * * *
    7. Section 674.2(b) is amended by removing the definition of the 
term ``*Payment period''.

PART 675--FEDERAL WORK-STUDY PROGRAMS

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

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

    9. Section 675.2(b) is amended by removing the definition of the 
term ``*Payment period''.

PART 676--FEDERAL SUPPLEMENTAL EDUCATIONAL OPPORTUNITY GRANT 
PROGRAM

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

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

    11. Section 676.2(a) is amended by adding the term ``Payment 
period'' in alphabetical order and revising the introductory clause to 
read as follows:


Sec. 676.2   Definitions.

    (a) The definitions of the following terms used in this part are 
set forth in subpart A of the Student Assistance General Provisions, 34 
CFR part 668:
 * * * * *
    12. Section 676.2(b) is amended by removing the definition of the 
term ``*Payment period''.

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

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

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

    14. Section 682.200(a)(1) is amended by adding the term ``Payment 
period'' in alphabetical order and revising the introductory clause to 
read as follows:


Sec. 682.200   Definitions.

    (a)(1) The definitions of the following terms used in this part are 
set forth in subpart A of the Student Assistance General Provisions, 34 
CFR part 668:
 * * * * *
    15. Section 682.207 is amended by adding paragraphs (c) (5) and (6) 
to read as follows:


Sec. 682.207   Due diligence in disbursing a loan.

* * * * *
    (c) * * *
    (5) If one or more payment periods have elapsed before a lender 
makes a disbursement, the lender may include in the disbursement loan 
proceeds for completed payment periods.
    (6) A lender is not required to make more than one disbursement if 
a school is not in a State.
* * * * *
    16. Section 682.603 is amended by revising paragraph (a)(5) to read 
as follows:

[[Page 49891]]

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

    (a) * * *
    (5) The schedule for disbursement of the loan proceeds, which must 
reflect the delivery of the loan proceeds as set forth in 
Sec. 682.604(c); and
* * * * *
    17. Section 682.604 is amended by adding paragraphs (c) (6) through 
(9) read as follows:


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

* * * * *
    (c) * * *
    (6) Notwithstanding any other provision of this section, unless 
Sec. 682.207(c) (5) or (6) applies--
    (i) If a loan period is more than one payment period, the school 
shall deliver loan proceeds at least once in each payment period; and
    (ii) If a loan period is one payment period, the school shall make 
at least two deliveries of loan proceeds during that payment period. 
The school may not make the second delivery until the calendar midpoint 
between the first and last scheduled days of class of the loan period.
    (7) If an educational program measures academic progress in credit 
hours and does not use semesters, trimesters, or quarters, the school 
may not make a second disbursement until the later of--
    (i) The calendar midpoint between the first and last scheduled days 
of class of the loan period; or
    (ii) The date, as determined by the institution, that the student 
has completed half of the academic coursework in the loan period.
    (8) If an educational program measures academic progress in clock 
hours, the school may not make a second disbursement until the later 
of--
    (i) The calendar midpoint between the first and last scheduled days 
of class of the loan period; or
    (ii) The date, as determined by the institution, that the student 
has completed half of the clock hours in the loan period.
    (9) The school must deliver loan proceeds in substantially equal 
installments, and no installment may exceed one-half of the loan.
* * * * *

PART 685--WILLIAM D. FORD FEDERAL DIRECT LOAN PROGRAM

    18. The authority citation for part 685 continues to read as 
follows:

    Authority: 20 U.S.C. 1078a et seq., unless otherwise noted.

    19. Section 685.102(a)(1) is amended by adding the term ``Payment 
period'' in alphabetical order and revising the introductory clause to 
read as follows:


Sec. 685.102  Definitions

    The (a)(1) definitions of the following terms used in this part are 
set forth in subpart A of the Student Assistance General Provisions, 34 
CFR part 668:.
* * * * *
    20. Section 685.301 is amended by revising paragraph (b) to read as 
follows:


Sec. 685.301  Origination of a loan by a Direct Loan Program school.

* * * * *
    (b) Determining disbursement dates and amounts. (1) Before 
disbursing a loan, a school that originates loans shall determine that 
all information required by the loan application and promissory note 
has been provided by the borrower and, if applicable, the student.
    (2) Unless paragraph (b) (5), (6), or (7) of this section applies, 
an institution shall disburse the loan proceeds on a payment period 
basis in accordance with 34 CFR 668.164(b).
    (3) Unless paragraph (b) (4), (5), or (6) of this section applies--
    (i) If a loan period is more than one payment period, the school 
shall disburse loan proceeds at least once in each payment period; and
    (ii) If a loan period is one payment period, the school shall make 
at least two disbursements during that payment period. The school may 
not make the second disbursement until the calendar midpoint between 
the first and last scheduled days of class of the loan period.
    (4)(i) If one or more payment periods have elapsed before a school 
makes a disbursement, the school may include in the disbursement loan 
proceeds for completed payment periods; or
    (ii) If the loan period is equal to one payment period and more 
than one-half of it has elapsed, the school may include in the 
disbursement loan proceeds for the entire payment period.
    (5) If an educational program measures academic progress in credit 
hours and does not use semesters, trimesters, or quarters, the school 
may not make a second disbursement until the later of--
    (i) The calendar midpoint between the first and last scheduled days 
of class of the loan period; or
    (ii) The date, as determined by the institution, that the student 
has completed half of the academic coursework in the loan period.
    (6) If an educational program measures academic progress in clock 
hours, the school may not make a second disbursement until the later 
of--
    (i) The calendar midpoint between the first and last scheduled days 
of class of the loan period; or
    (ii) The date, as determined by the institution, that the student 
has completed half of the clock hours in the loan period.
    (7) The school must disburse loan proceeds in substantially equal 
installments, and no installment may exceed one-half of the loan.
    (8) A school not in a State is not required to make more than one 
disbursement.
* * * * *

PART 690--FEDERAL PELL GRANT PROGRAM

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

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

    22. Section 690.2(a) is amended by adding the term ``Payment 
period'' in alphabetical order and revising the heading and 
introductory clause to read as follows:


Sec. 690.2  Definitions.

    (a) The definitions of the following terms used in this part are 
set forth in subpart A of the Student Assistance General Provisions, 34 
CFR part 668:
* * * * *


Sec. 690.3  [Removed and reserved]

    23. Section 690.3 is removed and reserved.
[FR Doc. 96-24217 Filed 9-20-96; 8:45 am]
BILLING CODE 4000-01-P