[Federal Register Volume 64, Number 135 (Thursday, July 15, 1999)]
[Proposed Rules]
[Pages 38272-38282]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-18109]



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Part IV

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Department of Education





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34 CFR Parts 600 and 668



Institutional Eligibility Under the Higher Education Act of 1965, as 
Amended and Student Assistance General Provisions; Proposed Rule

  Federal Register / Vol. 64, No. 135 / Thursday, July 15, 1999 / 
Proposed Rules  

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DEPARTMENT OF EDUCATION

34 CFR Parts 600 and 668

RIN 1840-AC75


Institutional Eligibility Under the Higher Education Act of l965, 
as Amended and Student Assistance General Provisions

AGENCY: Department of Education.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The proposed regulations amend the regulations that govern 
institutional eligibility for and participation in 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 Educational 
Opportunity Grant (FSEOG) Programs), the William D. Ford Federal Direct 
Loan (Direct Loan) Program, the Federal Family Education Loan (FFEL) 
programs, the Federal Pell Grant Program, and the Leveraging 
Educational Assistance Partnership (LEAP) Program (formerly known as 
the State Student Incentive Grant (SSIG) Program). These proposed 
regulations implement statutory changes made to the Higher Education 
Act of 1965, as amended (HEA), by the Higher Education Amendments of 
1998 (1998 Amendments). Many of the proposed regulatory changes merely 
conform current regulatory provisions to the statutory changes.

DATES: We must receive your comments on or before September 13, 1999.

ADDRESSES: Address all comments about these proposed regulations to 
Cheryl Leibovitz, U.S. Department of Education, P.O. Box 23272, 
Washington, DC 20026-3272. If you prefer to send your comments through 
the Internet, use the following address:
[email protected]
    If you want to comment on the information collection requirements 
you must send your comments to the Office of Management and Budget at 
the address listed in the Paperwork Reduction Act section of this 
preamble. You may also send a copy of these comments to the Department 
representative named in this section.

FOR FURTHER INFORMATION CONTACT: Cheryl Leibovitz. Telephone: (202) 
708-9900. If you use a telecommunications device for the deaf (TDD), 
you may call the Federal information Relay Service (FIRS) at 1-800-877-
8339.
    Individuals with disabilities may obtain this document in an 
alternative format (e.g., Braille, large print, audiotape, or computer 
diskette) on request to the contact person listed in the preceding 
paragraph.

SUPPLEMENTARY INFORMATION:

Invitation To Comment

    We invite you to submit comments regarding these proposed 
regulations. To ensure that your comments have maximum effect in 
developing the final regulations, we urge you to identify clearly the 
specific section or sections of the proposed regulations that each of 
your comments addresses and to arrange your comments in the same order 
as the proposed regulations.
    We invite you to assist us in complying with the specific 
requirements of Executive Order 12866 and its overall requirement of 
reducing regulatory burden that might result from these proposed 
regulations. Please let us know of any further opportunities we should 
take to reduce potential costs or increase potential benefits while 
preserving the effective and efficient administration of the programs.
    During and after the comment period, you may inspect all public 
comments about these proposed regulations in Room 3045, Regional Office 
Building 3, 7th and D Streets, SW., Washington, DC, between the hours 
of 8:30 a.m. and 4:00 p.m., Eastern time, Monday through Friday of each 
week except Federal holidays.

Assistance to Individuals With Disabilities in Reviewing the Rulemaking 
Record

    On request, we will supply an appropriate aid, such as a reader or 
print magnifier, to an individual with a disability who needs 
assistance to review the comments or other documents in the public 
rulemaking record for these proposed regulations. If you want to 
schedule an appointment for this type of aid, you may call (202) 205-
8113 or (202) 260-9895. If you use a TDD, you may call the Federal 
Information Relay Service at 1-800-877-8339.

General

    The proposed regulations revise the current Institutional 
Eligibility regulations, 34 CFR part 600, and the Student Assistance 
General Provisions regulations, 34 CFR part 668, which govern 
institutional eligibility for, and participation in, the title IV, HEA 
programs. The revisions implement the 1998 Amendments, Pub. L. 105-244, 
enacted October 7, 1998.

Negotiated Rulemaking Process

    Section 492 of the HEA requires that, before publishing any 
proposed regulations to implement programs under title IV of the Act, 
the Secretary obtain public involvement in the development of the 
proposed regulations. After obtaining advice and recommendations, the 
Secretary must conduct a negotiated rulemaking process to develop the 
proposed regulations. All published proposed regulations must conform 
to agreements resulting from the negotiated rulemaking process unless 
the Secretary reopens the negotiated rulemaking process or provides a 
written explanation to the participants in that process of why the 
Secretary has decided to depart from the agreements.
    To obtain public involvement in the development of the proposed 
regulations, we published a notice in the Federal Register (63 FR 
59922, November 6, 1998) requesting advice and recommendations from 
interested parties concerning what regulations were necessary to 
implement title IV of the HEA. We also invited advice and 
recommendations concerning which regulated issues should be subjected 
to a negotiated rulemaking process. We further requested advice and 
recommendations concerning ways to prioritize the numerous issues in 
title IV, in order to meet statutory deadlines. Additionally, we 
requested advice and recommendations concerning how to conduct the 
negotiated rulemaking process, given the time available and the number 
of regulations that needed to be developed.
    In addition to soliciting written comments, we held three public 
hearings and several informal meetings to give interested parties an 
opportunity to share advice and recommendations with the Department. 
The hearings were held in Washington, DC, Chicago, and Los Angeles, and 
we posted transcripts of those hearings to the Department's Information 
for Financial Aid Professionals website (http://ifap.ed.gov).
    We then published a second notice in the Federal Register (63 FR 
71206, December 23, 1998) to announce the Department's intention to 
establish four negotiated rulemaking committees to draft proposed 
regulations implementing title IV of the HEA. The notice announced the 
organizations or groups believed to represent the interests that should 
participate in the negotiated rulemaking process and announced that the 
Department would select participants for the process from nominees of 
those organizations or

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groups. We requested nominations for additional participants from 
anyone who believed that the organizations or groups listed did not 
adequately represent the list of interests outlined in section 492 of 
the HEA. Once the four committees were established, they met to develop 
proposed regulations over the course of several months beginning in 
January. Except as noted elsewhere in this preamble, the proposed 
regulations contained in this notice of proposed rulemaking (NPRM) 
reflect the final consensus of Committee IV on the issues addressed in 
this notice of proposed rulemaking (NPRM). Committee IV was made up of 
the following members:

American Association of Collegiate Registrars and Admissions 
Officers
American Association of Community Colleges
American Association of Cosmetology Schools
American Association of State Colleges and Universities
American Council on Education
Association of American Universities
Association of Jesuit Colleges and Universities
Career College Association
Council for Higher Education Accreditation
Council of Recognized National Accrediting Agencies
Council for Regional Accrediting Commissions
Education Finance Council
Legal Services Counsel (a coalition)
National Association of College and University Business Officers
National Association for Equal Opportunity in Higher Education
National Association of Independent Colleges and Universities
National Association of State Student Grant and Aid Programs/
National Council of Higher Education Loan Programs (a coalition)
National Association of State Universities and Land-Grant Colleges
National Association of Student Financial Aid Administrators
National Direct Student Loan Coalition
National Women's Law Center
State Higher Education Executive Officers Association
The College Board
The College Fund/United Negro College Fund
United States Department of Education
United States Student Association
U.S. Public Interest Research Group

    As stated in the committee protocols, consensus means that there 
must be no dissent by any member in order for the committee to be 
considered to have reached agreement. Consensus was reached on all the 
proposed regulations contained in this NPRM except for the regulations 
governing the implementation of the ``90/10 rule,'' which is part of 
the definition of an eligible ``proprietary institution of higher 
education'' that can be found in Sec. 600.5.
    Discussion of the proposed regulations will first cover those areas 
on which the negotiators reached a consensus, and will then cover the 
proposed regulations implementing the 90/10 rule.

Section 600.2  Definitions

    Prior to the 1998 Amendments, a State was defined to include the 
``Trust Territory of the Pacific Islands.'' Now, instead of that term, 
a State includes the ``Freely Associated States.'' The Freely 
Associated States include the Republic of the Marshall Islands, the 
Federated States of Micronesia, and the Republic of Palau. The proposed 
regulations would amend the definition of the term ``State'' to reflect 
those changes.

Section 600.4  Institution of Higher Education; Sec. 600.5 
Proprietary Institution of Higher Education; and Sec. 600.6 
Postsecondary Vocational Institution

    Each of these sections has a provision that states that the 
Secretary does not currently recognize the accreditation of an 
institution unless the institution agrees to submit any dispute 
involving the final denial, withdrawal, or termination of accreditation 
to ``binding'' arbitration. The proposed regulations would change these 
provisions to require an institution to agree to submit any such 
dispute to ``initial'' arbitration to conform them to the literal 
language of the statute imposing that requirement (section 496(e) of 
the HEA).

Section 600.7  Conditions of Institutional Ineligibility

    The proposed regulations would amend Sec. 600.7(a) to make 
technical changes to Sec. 600.7(a)(1) (iii) and (iv) to more accurately 
reflect the statute (section 102(a)(3) (C) and (D) of the HEA). Section 
600.7(a)(1)(iii) currently provides that an educational institution 
does not qualify as an eligible institution if twenty-five percent or 
more of the institution's regular enrolled students were incarcerated. 
Section 600.7(a)(1)(iv) provides that an educational institution does 
not qualify as an eligible institution if fifty-percent or more of its 
regularly enrolled students had neither a high school diploma nor the 
recognized equivalent of a high school diploma. The proposed 
regulations would change these provisions to read ``more than twenty-
five percent'' and ``more than fifty percent,'' respectively, to 
reflect the wording of the statute (sections 102(a)(3)(C) and (D) of 
the HEA).
    The proposed regulations would amend Sec. 600.7(c) to reflect a 
change made by the 1998 Amendments that expands the waiver provision 
for institutions whose enrollment of incarcerated students exceeds 25 
percent. Prior to the 1998 Amendments, a public or nonprofit private 
institution could obtain a waiver of this limitation only if it 
provided a two- or four-year program for which it awarded an associate 
degree or bachelor's degree. As amended, the institution could also 
obtain a waiver if it provides a two- or four-year program for which it 
awards a ``postsecondary diploma.''

Section 600.8  Treatment of a Branch Campus

    The proposed regulations would amend this section to reflect a 
change made by the 1998 Amendments that clarifies that a branch campus 
must exist as a branch campus for at least two years after the 
Secretary certifies it as a branch campus before seeking to be 
certified as a main or free-standing campus. The proposed regulations 
would also conform changes in Sec. 600.5(b)(3)(i) and 
Sec. 600.6(b)(3)(iii).

Section 600.31  Change in Ownership Resulting in a Change of 
Control

    As amended by the 1998 Amendments, section 498(i)(4) of the HEA 
authorizes the Secretary to permit an institution undergoing a change 
in ownership that results in a change in control to continue to 
participate in the title IV, HEA programs on a provisional basis if the 
institution meets certain requirements. Those requirements include 
submitting a materially complete application that is received by the 
Department within 10 business days of the date on which the change of 
ownership takes place.
    The proposed regulations would amend Sec. 600.31 by deleting 
Sec. 600.31(f), which prohibits an institution from submitting a 
materially complete application before the change of ownership takes 
place. Because section 498(i)(4) of the HEA supersedes the limitation 
in Sec. 600.31(f), the revised regulations would permit institutions to 
submit applications before a change in ownership takes place.

Section 600.55  Additional Criteria for Determining Whether a 
Foreign Medical School is Eligible To Apply To Participate in the 
FFEL Programs

    Section 600.55(a)(5)(i)(A) is amended to reflect the amendment to 
section 484(a)(5) of the HEA made by the 1998 Amendments. Section 
484(a)(5) contains

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citizenship and residency requirements that the Secretary is required 
to reference under section 102(a)(2)(A)(i)(I) of the HEA in fashioning 
criteria to determine the comparability of foreign graduate medical 
schools to domestic graduate medical schools.

Section 600.56  Additional Criteria for Determining Whether a 
Foreign Veterinary School is Eligible To Apply To Participate in 
the FFEL Programs

    The 1998 Amendments added special eligibility provisions for 
foreign veterinary schools. Those schools are now subject to many, but 
not all, of the same special eligibility requirements that the statute 
previously applied to foreign medical schools. Most notably, a foreign 
veterinary school is now ineligible to apply to participate in the FFEL 
Program unless either its clinical training program has been approved 
by a State continuously since 1992, or its students complete clinical 
training at an approved veterinary school located in the United States. 
The proposed regulation follows the amendments, treating foreign 
veterinary schools and foreign medical schools identically for 
eligibility purposes to the extent indicated by the statute.

Section 668.12  Application Procedures

    As previously noted with regard to Sec. 600.31, amended section 
498(i)(4) of the HEA authorizes the Secretary to permit an institution 
seeking approval of a change in ownership to continue to participate in 
the title IV, HEA programs on a provisional basis if the institution 
meets certain requirements. One of those requirements is the submission 
of a materially complete application that is received by the Department 
within 10 business days of the date on which the change of ownership 
takes place.
    If an institution submits a materially complete application in a 
timely manner, the institution may continue to participate in the title 
IV, HEA programs on a provisional basis until the earlier of (1) the 
date the Secretary approves or disapproves the application, or (2) the 
end of the month following the month in which the change in ownership 
occurred. However, if the Secretary has not issued a decision on the 
application within that period, the institution may continue to 
participate provisionally on a month-to-month basis until the Secretary 
issues a decision on the institution's application, provided the 
institution submits any additional documentation requested by the 
Department promptly.
    The proposed regulations would implement these provisions in 
Sec. 668.12(f) and (g). In particular, proposed Sec. 668.12(f) 
specifies the documents that must be submitted to be considered a 
``materially complete application.'' Proposed Sec. 668.12(g) contains 
the terms and conditions under which the institution may continue to 
participate in the title IV, HEA programs while its application is 
being reviewed. This paragraph also includes the additional documents 
that must be submitted before the Secretary will issue a decision on 
the application or extend the institution's participation on a month-
to-month basis. The Secretary wishes to clarify that all institutions 
that undergo a change of ownership must submit a ``same day'' balance 
sheet showing the financial position of the institution, as of the date 
of the ownership change, in order to continue participation in the 
Title IV, HEA programs.

Section 668.13  Certification Procedures

    The proposed regulation would change the maximum period of time 
that an institution may be certified to participate in the Title IV, 
HEA programs from four years to six years. This change implements a 
statutory change in the HEA made by the 1998 Amendments.

Section 668.14  Program Participation Agreement

    As a result of a statutory change to the HEA by the 1998 
Amendments, an institution that has undergone a change in ownership 
that results in a change in control does not have to use a Default 
Management Plan during the first two years of its participation in the 
FFEL or Direct Loan Programs if certain conditions are met. These 
conditions are (1) that the institution, including any branch campus, 
does not have a cohort default rate in excess of 10 percent, and (2) 
that the institution's owners do not own and have not owned an 
institution with a cohort default rate in excess of 10 percent. The 
proposed regulations would amend Sec. 668.14 to reflect that change.
    The proposed regulations would combine the provisions requiring 
Default Management Plans currently included in Sec. 668.14(b)(15) and 
(b)(16) into a single paragraph, Sec. 668.14(b)(15), and remove and 
reserve Sec. 668.14(b)(16).
    The proposed regulations would revise Sec. 668.14(b)(20) to require 
that a co-educational institution that has an intercollegiate athletic 
program agree to comply with the provisions of Sec. 668.48. This change 
conforms the regulations to changes made to the HEA by the l998 
Amendments.
    The proposed regulations would simplify the regulations by removing 
Sec. 668.14(d) and (e), which govern collection and reporting of 
information concerning athletically-related aid, because those 
requirements also are contained in Sec. 668.48. In a separate NPRM, the 
proposed amendments to Sec. 668.48 would implement statutory changes 
made to the HEA by the l998 Amendments on that issue.
    The proposed regulations would amend Sec. 668.14(b)(24) to clarify 
that the institution is agreeing to comply with the requirements of 
Sec. 668.22, currently titled ``Institutional Refunds and Repayments.'' 
Another NPRM proposes to incorporate into Sec. 668.22 the new statutory 
requirements for the return of Title IV, HEA program funds.
    The proposed regulations would add a new Sec. 668.14(d) to reflect 
the addition of section 487(a)(23) to the HEA. That new section 
requires an institution to make a good faith effort to distribute mail 
voter registration forms to its students. The 1998 Amendments, however, 
prohibit any officer of the Executive Branch from instructing an 
institution in the manner in which this provision is carried out. 
Therefore, the proposed regulations incorporates the provisions of 
section 487(a)(23) verbatim into Sec. 668.14(d) with minor changes to 
incorporate plain language requirements.
    The amended HEA provides that section 487(a)(23) applies only to 
institutions that are located in States to which section 4(b) of the 
National Voter Registration Act, 42 U.S.C. 1973gg-2(b) does not apply.
    If an institution must comply with Sec. 668.14(d), it must make a 
good faith effort to distribute mail voter registration forms to its 
students for elections for governor and for elections defined in 
section 301(1) of the Federal Election Campaign Act of 1971, 2 U.S.C. 
431(1). That section defines the term ``election'' to be ``(A) a 
general, special, primary, or runoff election; (B) a convention or 
caucus of a political party which has authority to nominate a 
candidate; (C) a primary election held for the selection of delegates 
to a national nominating convention of a political party; and (D) a 
primary election held for the expression of a preference for the 
nomination of individuals for election to the office of President.''

Section 668.27  Waiver of Annual Audit Submission Requirement

    As amended by the 1998 Amendments, the HEA authorizes the waiver of 
the requirement that an institution submit on an annual basis a

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compliance audit of its administration of the Title IV, HEA programs 
and audited financial statements. If the waiver is granted, the waiver 
may extend for up to three fiscal years.
    The proposed regulations would add Sec. 668.27 to implement the 
following waiver requirement. The 1998 Amendments provide that in order 
to receive a waiver, the institution must have delivered less than 
$200,000 of Title IV, HEA program funds in each of the two award years 
preceding the waiver period. The 1998 Amendments further provide that 
the institution must also post a letter of credit in an amount equal to 
50 percent of the institution's ``annual potential liability.''
    What is being proposed to be waived under this provision is the 
annual audit submission requirement for compliance audits. The 
institution is still required to have its administration of the Title 
IV, HEA programs audited for the waiver period. Therefore, if an 
institution is granted a waiver for three years, when the waiver period 
expires and the institution must submit its next compliance audit, that 
audit must cover the institution's administration of the Title IV, HEA 
programs since the end of the period covered by its last submitted 
compliance audit.
    For example, an institution's fiscal year coincides with an award 
year. It submits a compliance audit for its fiscal year that ends on 
June 30, 2000, and then receives a waiver so that its next compliance 
audit is due six months after the end of its 2002-2003 fiscal year. 
When it submits that audit, the audit must cover its administration of 
the Title IV, HEA programs for the 2000-2001 and 2001-2002 fiscal years 
as well as the 2002-2003 fiscal year.
    With regard to the audited financial statement, an institution will 
need to submit an audit only of its latest fiscal year.
    However, the auditor who conducts its compliance audit or prepares 
its audited financial statement must determine that the institution 
satisfied the conditions of institutional eligibility set forth in 
Sec. 600.7 (dealing with, for example, correspondence courses and 
students, and incarcerated students) for each year covered by the 
waiver. Similarly, if the institution is a proprietary institution of 
higher education, the auditor must audit the institution's 
determination that it satisfied the 90/10 rule for each year covered by 
the waiver.
    In implementing this provision, the committee recognized that for 
this provision to have any practical value, an institution's cost of 
obtaining a letter of credit in an amount equal to 50 percent of 
``annual potential liability'' must be less than the cost of performing 
the required audits. The committee concluded that a letter of credit in 
an amount equal to 10 percent of an institution's Title IV, HEA 
programs disbursements for an award year was the appropriate amount to 
satisfy that purpose. However, such a low amount is reasonable only for 
a low-risk institution that is strong financially and has a history of 
proper administration of the Title IV, HEA programs. Accordingly, the 
committee agreed to permit waivers only for institutions that met the 
criteria in Sec. 668.27(c).

Section 668.92  Fines

    The 1998 Amendments revised the HEA to provide that an individual 
who exercises substantial control over an institution and willfully 
fails to pay refund obligations on student loans must pay those 
refunds, and is subject to the penalty established under section 
6672(a) of the Internal Revenue Code of l986 with respect to nonpayment 
of taxes. The committee determined that this provision applies to both 
individuals who fail to pay refunds under the terms of Sec. 668.22 when 
that section refers to refund obligations, i.e., up to and including 
June 30, 2000, and to individuals who fail to return Title IV, HEA 
program funds when that section refers to the return of Title IV, HEA 
program funds, i.e., on or after July 1, 2000.

Section 668.95  Reimbursements, Refunds and Offsets; Section 
668.113 Request for Review

    The proposed regulations would add paragraph (d) to Sec. 668.95 to 
implement the statutory change to the HEA made by the l998 Amendments 
that allows institutions to correct or cure an error that results from 
administrative, accounting, or recordkeeping error, if that error was 
not part of a pattern of error and there is no evidence of fraud or 
misconduct related to the error. Section 668.92(d) provides that the 
Secretary will not limit, suspend, terminate, or fine the institution 
if such an error is cured.
    A similar addition has been made to Sec. 668.113(d). That paragraph 
provides that the Secretary will permit an institution to correct or 
cure an error and will not impose a liability if the institution 
eliminates the basis of the liability by curing or correcting the 
error.

90/10  Rule

Section 600.5  Proprietary Institution of Higher Education

    Prior to the 1998 Amendments, an eligible proprietary institution 
had to derive at least 15 percent of its revenues from non-title IV, 
HEA sources. The 1998 Amendments reduced that percent to 10 percent. 
The proposed regulations would amend Sec. 600.5(a)(8) to reflect that 
change.
Cash Basis of Accounting. Treatment of Institutional Scholarships and 
Loans
    The Committee IV negotiators did not reach consensus on how to 
implement the statutory provision that requires a proprietary 
institution of higher education to derive a portion of its revenue from 
sources outside of the Title IV, HEA programs.
    The Higher Education Amendments of 1992 changed the statutory 
definition of a proprietary institution of higher education to require 
that such an institution derive at least 15 percent of its revenue from 
non-Title IV, HEA program funds. The Secretary implemented that 
provision with the so-called 85/15 rule that is contained primarily in 
Sec. 600.5(d).
    In the notice of proposed rulemaking for the 85/15 rule that was 
published in the Federal Register of February 10, 1994 (59 FR 6446-
64675), the Secretary proposed that, in calculating their compliance 
with the 85/15 rule, institutions could report the amount of Title IV, 
HEA program funds in the numerator of the 85/15 rule fraction (Title IV 
revenue over total revenue) using the cash basis of accounting, and 
total revenue generated in the denominator using the accrual basis of 
accounting. The Secretary received overwhelming negative comments on 
that proposal. The commenters pointed out that it did not make sense to 
calculate the numerator and denominator under different bases of 
accounting.
    The Secretary agreed, and in the final rule required that 
institutions use the cash basis of accounting to report Title IV 
revenue in the numerator and total revenue in the denominator. The 
Secretary chose that method because institutions report and account for 
their Title IV, HEA program expenditures under that basis of 
accounting.
    After Sec. 600.5(d), which set forth the 85/15 rule, was published 
as a final regulation in the Federal Register of April 29, 1994 (59 FR 
22324, 22328), questions arose with regard to the treatment of 
institutional scholarships and loans under the cash basis of 
accounting.

[[Page 38276]]

    Therefore, to remove any apparent or perceived ambiguities that may 
exist with regard to the current regulations, the Secretary is 
proposing a number of clarifications regarding compliance with the 
``85/15 rule'', including its application to institutional scholarships 
and loans. These revisions are in addition to those needed to reflect 
the new statutory minimum percentage of income that such an institution 
must derive from non-Title IV HEA program funds.
    In these proposed regulations, the Secretary makes explicit in 
Sec. 600.5(d)(2) that an institution must use the cash basis of 
accounting in reporting Title IV, HEA program funds in the numerator 
and revenues generated in the denominator of the fraction in 
Sec. 600.5(d)(1). Further, in Sec. 600.5(d)(3), the Secretary describes 
the circumstances under which institutional scholarships and loans may 
be considered as revenue generated by the institution in the 
denominator of the fraction.
    During the course of the regulatory negotiations, some negotiators 
expressed the view that the circumstances under which the proposed 
regulations permit institutional scholarships to be included as revenue 
were too narrow. The Department's negotiator, as well as others 
disagreed. The Department's position on this matter is based on the 
following.
    It is the Secretary's understanding that, in general, as an 
accounting matter, revenue is an inflow or other enhancement of assets 
to an entity, or a reduction of its liabilities, resulting from the 
delivery or production of goods or services. Under the cash basis of 
accounting, revenue is recognized by an entity when that entity 
receives cash, i.e., when there is an inflow of cash to the entity. In 
contrast, under the accrual basis of accounting, an entity recognizes 
revenue when it earns that revenue, regardless of whether there is any 
inflow of cash at the point revenue is recognized.
    As a result, in order for an institution to recognize revenue under 
the cash basis of accounting, that revenue must represent cash received 
from a source outside the institution. With regard to institutional 
loans, when an institution makes a loan to a student, it does not 
receive cash from an outside source; in fact, it does not receive any 
cash. Accordingly, cash revenue from institutional loans are recognized 
only when those loans are repaid, because that is when there is an 
inflow of cash from an outside source.
    Similarly, institutional grants and scholarships awarded to 
students do not generally result in revenue for the institution. In 
fact, the American Institute of Certified Public Accountants (AICPA) 
and the National Association of College and University Business 
Officers (NACUBO) instruct institutions to treat institutional 
scholarships as a reduction in revenue or as an expense. However, the 
Secretary proposes to allow institutional grants or scholarships that 
represent funds that originated from a source outside of the 
institution, to be considered to be income to the institution. For 
example, if an alumnus of the institution donated funds to the 
institution and expressly provided that the funds were to be used for 
institutional scholarships, scholarships from an account designated for 
scholarships and made up solely of those funds (and earnings on those 
funds) would be considered to represent income to the institution.
    Institutional grants in the form of tuition waivers do not count as 
revenue because no new revenue is generated. Similarly, internal 
transfers of cash among accounts are generally not considered revenue 
to the institution because they do not represent an inflow of cash to 
the institution. An exception to this general rule would be a case, 
like the one noted previously, in which the account in question that is 
the source of a scholarship is a scholarship account made up of funds 
that originated from outside of the institution that represent income 
(and of interest on those funds). The proposed rule would allow an 
institution to include institutional grants and scholarships in the 
calculation of compliance with the rule if the institution can 
demonstrate that those funds represent an increase in cash to the 
institution that would be counted as income. Examples of cash that does 
not represent income include borrowing money and using the proceeds 
from the borrowing to make institutional scholarships or the sale of 
stock where the institution uses the proceeds to make institutional 
scholarships.
Treatment of FWS, LEAP and Matching Funds
    In proposed Sec. 600.5(e)(1), the Secretary clarifies that, in 
calculating compliance with the rule, an institution does not count, in 
the numerator or denominator, funds it receives under the Federal Work 
Study or LEAP (formerly SSIG) Program, and does not include in the 
denominator any funds it uses to satisfy a required match in a Title 
IV, HEA program.
Presumption That Title IV, HEA Program Funds Are Used To Pay 
Institutional Charges
    Some negotiators objected to the current rule contained in 
Sec. 600.5(d)(v) that provides that Title IV, HEA programs funds 
disbursed to students must be presumed to be used to pay the students' 
tuition, fees and other institutional charges so that those funds are 
included in the numerator of the fraction. These negotiators proposed 
exceptions to this rule over and above those already included in 
Sec. 600.5(d)(2)(v)(A) and (B). (In this NPRM, Sec. 600.5(d)(2)(v) is 
redesignated as Sec. 600.5(e)(2), and Sec. 600.5(d)(2)(v)(A) and (B) is 
redesignated as Sec. 600.5(e)(3)(i) and (ii)).
    The Secretary has agreed to include one additional exception, 
prepaid State tuition plans, and has included that exception in 
proposed Sec. 600.5(e)(3)(iii). The rationale for including this 
exception is that funds from this type of plan are generally 
transmitted directly from the State to the institution for 
institutional charges. The Secretary did not agree to include other 
potential sources of payment of institutional charges because funds 
from those other sources, such as Education IRAs, are either no 
different from other types of family investments, or the tracking of 
those funds would be extremely problematic.
    Several other changes have been made to this section that simply 
remove references that dealt with periods of time that are no longer 
relevant.

Executive Order 12866

1. Potential Costs and Benefits

    Under Executive Order 12866, we have 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 we have 
determined as necessary for administering this program effectively and 
efficiently.
    In assessing the potential costs and benefits of this regulatory 
action--both quantitative and qualitative--we have determined that the 
benefits would justify the costs.
    We have also determined that this regulatory action would not 
unduly interfere with State, local, and tribal governments in the 
exercise of their governmental functions.
    We note that, as these proposed regulations were subject to 
negotiated rulemaking, the costs and benefits of the various 
requirements were discussed thoroughly by negotiators. The resultant 
consensus reached on a particular

[[Page 38277]]

requirement generally reflected agreement on the best possible approach 
to that requirement in terms of cost and benefit.
    To assist the Department in complying with the specific 
requirements of Executive Order 12866, the Secretary invites comments 
on whether there may be further opportunities to reduce any potential 
costs or to increase any potential benefits resulting from these 
proposed regulations without impeding the effective and efficient 
administration of the title IV, HEA programs.
Summary of Potential Costs and Benefits
    Elsewhere in this preamble we discuss the potential costs and 
benefits of these proposed regulations under the following headings: 
Regulatory Flexibility Act Certification and Paperwork Reduction Act of 
1995.

2. Clarity of the Regulations

    Executive Order 12866 and the President's Memorandum of June 1, 
1998 on ``Plain Language in Government Writing'' require 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:
     Are the requirements in the proposed regulations clearly 
stated?
     Do the proposed regulations contain technical terms or 
other wording that interferes with their clarity?
     Does the format of the proposed regulations (grouping and 
order of sections, use of headings, paragraphing, etc.) aid or reduce 
their clarity?
     Would the proposed regulations be easier to understand if 
we divided them into more (but shorter) sections? (A ``section'' is 
preceded by the symbol ``Sec. '' and a numbered heading; for example, 
Sec. 600.5 Proprietary institution of higher education.)
     Could the description of the proposed regulations in the 
SUPPLEMENTARY INFORMATION section of this preamble be more helpful in 
making the proposed regulations easier to understand? If so, how?
     What else could we do to make the proposed regulations 
easier to understand?
    Send any comments that concern how the Department could make these 
proposed regulations easier to understand to the person listed in the 
ADDRESSES section of the preamble.

Regulatory Flexibility Act Certification

    The Secretary certifies that these proposed regulations would not 
have a significant economic impact on a substantial number of small 
entities.
    Entities affected by these proposed regulations are institutions of 
higher education that participate in the Title IV, HEA programs. These 
institutions are defined as small entities, according to the U.S. Small 
Business Administration, if they are: for-profit or nonprofit entities 
with total revenue of $5,000,000 or less; or entities controlled by 
governmental entities with populations of 50,000 or less. These 
proposed regulations would not impose a significant economic impact on 
a substantial number of small entities. These proposed regulations 
would ease administrative and regulatory burden, without requiring 
significant changes to current institutional system operations, by: 
reducing the required percentage of revenue that a proprietary 
institution must derive from non-Title IV sources; expanding 
institutional eligibility for the FFEL program to include foreign 
veterinary schools with clinical training programs that have been 
approved by a State since January 1, 1992; simplifying application and 
certification procedures; expanding the timeframe for institutional 
certification to six years; and providing for a waiver of the annual 
audit submission requirement.
    The Secretary invites comments from small institutions as to 
whether the proposed changes would have a significant economic impact 
on them.

Paperwork Reduction Act of 1995

    Section 600.7 contains an information collection requirement. Under 
the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)), the Department 
of Education has submitted a copy of this section to the Office of 
Management and Budget (OMB) for its review.

Collection of Information: Conditions of Institutional Eligibility

    Institutions of higher education must maintain certain conditions 
and requirements to remain eligible to participate in Title IV, HEA 
programs. Moreover, an institution may become ineligible if it fails to 
meet, or exceeds certain thresholds as prescribed in the HEA. This 
regulation monitors the composition of regular student enrollment in 
the following areas: telecommunications courses, correspondence 
courses, ability-to-benefit students and incarcerated students, and 
also enhances the waiver provisions for institutions whose enrollment 
of incarcerated students exceeds twenty-five percent. The Department 
needs and uses this information to gauge continuing eligibility.
    Every six years, the institution must collect and report this 
information to the Department. The questions asked to determine 
compliance are now affirmatively structured, so that an institution 
will report to the Department if it does exceed any of the prescribed 
thresholds. There are approximately 5,800 respondents that we 
anticipate will be reviewed over the six-year period. We estimate the 
annual reporting and recordkeeping burden for this collection of 
information to average two hours per respondent for approximately 1,500 
respondents in a given year. This measure includes the time for 
reviewing instructions, searching existing data sources, gathering and 
maintaining the data needed, and completing and reviewing the 
collection of information. Thus, we estimate the total annual reporting 
and recordkeeping burden for this collection to be 3,000 hours.
    If you want to comment on the information collection requirements, 
please send your comments to the Office of Information and Regulatory 
Affairs, OMB, room 10235, New Executive Office Building, Washington, DC 
20503; Attention: Desk Officer for U.S. Department of Education. You 
may also send a copy of these comments to the Department representative 
named in the ADDRESSES section of this preamble.
    We consider your comments on this proposed collection of 
information in--
     Deciding whether the proposed collection is necessary for 
the proper performance of our functions, including whether the 
information will have practical use;
     Evaluating the accuracy of our estimate of the burden of 
the proposed collection, including the validity of our methodology and 
assumptions;
     Enhancing the quality, usefulness, and clarity of the 
information we collect; and
     Minimizing the burden on those who must respond. This 
includes exploring 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 collection of 
information contained in these proposed regulations between 30 and 60 
days after publication of this document in the Federal Register. 
Therefore, to ensure that OMB gives your comments full consideration, 
it is important that OMB receives the comments within 30 days of 
publication. This does not affect the deadline for your comments to us 
on the proposed regulations.

[[Page 38278]]

Intergovernmental Review

    The campus-based programs (Federal Perkins Loan, Federal Work-Study 
(FWS), and Federal Supplemental Opportunity Grant (FSEOG) programs), 
the William D. Ford Federal Direct Loan (Direct Loan) Program, the 
Federal Family Education Loan (FFEL) programs, the Federal Pell Grant 
Program, and the LEAP Program are not subject to Executive Order 12372 
and the regulations in 34 CFR part 79.

Assessment of Educational Impact

    The Secretary particularly requests comments on whether these 
proposed regulations would require transmission of information that any 
other agency or authority of the United States gathers or makes 
available.

Electronic Access to This Document

    You may view this document in text or Adobe Portable Document 
Format (PDF) on the Internet at the following sites:

http://ocfo.ed.gov/fedreg.htm
http://ifap.ed.gov/csb__htm/fedlreg.htm
http://www.ed.gov/legislation/HEA/rulemaking/

To use the PDF, you must have the Adobe Acrobat Reader Program with 
Search, which is available free at the first of the previous sites. If 
you have questions about using the PDF, call the U.S. Government 
Printing Office, toll free, at 1-888-293-6498; or in the Washington, DC 
area, at (202) 512-1530.

    Note: The official version of this document is the document 
published in the Federal Register. Free Internet access to the 
official edition of the Federal Register and the Code of Federal 
Regulations is available on GPO Access at:

http://www.access.gpo.gov/nara/index.html

(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 LEAP; 84.268 
William D. Ford Federal Direct Loan Programs; and 84.272 National 
Early Intervention Scholarship and Partnership Program.)

List of Subjects in

34 CFR Part 600

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

34 CFR Part 668

    Administrative practice and procedure, Aliens, Colleges and 
universities, Consumer protection, Grant programs--education, Reporting 
and recordkeeping requirements, Selective Service System, Student aid, 
Vocational education.

    Dated: July 9, 1999.
Richard W. Riley,
Secretary of Education.
    For the reasons discussed in the preamble, the Secretary proposes 
to amend parts 600 and 668 of title 34 of the Code of Federal 
Regulations as follows:

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

    1. The authority citation for part 600 is amended to read as 
follows:

    Authority: 20 U.S.C. 1001, 1002, 1003, 1088, 1091, 1094, 1099b, 
and 1099(c), unless otherwise noted.

    2. In Sec. 600.2, the definition of the term ``State'' is revised 
to read as follows:


Sec. 600.2  Definitions.

* * * * *
    State: A State of the Union, American Samoa, the Commonwealth of 
Puerto Rico, the District of Columbia, Guam, the Virgin Islands, the 
Commonwealth of the Northern Mariana Islands, the Republic of the 
Marshall Islands, the Federated States of Micronesia, and the Republic 
of Palau. The latter three are also know as the Freely Associated 
States.
* * * * *
    3. In Sec. 600.4, paragraph (c) is revised to read as follows:


Sec. 600.4  Institution of higher education.

* * * * *
    (c) The Secretary does not recognize the accreditation of an 
institution unless the institution agrees to submit any dispute 
involving the final denial, withdrawal, or termination of accreditation 
to initial arbitration before initiating any other legal action.
* * * * *
    4. In Sec. 600.5, paragraph (h) is removed; paragraph (i) is 
redesignated as paragraph (h); and paragraphs (a)(8), (b)(3)(i), (d), 
(e), (f), (g), and redesignated paragraph (h) are revised to read as 
follows:


Sec. 600.5  Proprietary institution of higher education.

    (a) * * *
    (8) Has no more than 90 percent of its revenues derived from title 
IV, HEA program funds, as determined under paragraph (d) of this 
section.
    (b) * * *
    (3) * * *
    (i) Counts any period during which the applicant institution has 
been certified as a branch campus; and
* * * * *
    (d)(1) An institution satisfies the requirement contained in 
paragraph (a)(8) of this section by examining its revenues under the 
following formula for its latest complete fiscal year:

    Title IV, HEA program funds the institution used to satisfy its 
students' tuition, fees, and other institutional charges to 
students.
-----------------------------------------------------------------------

DEPARTMENT OF EDUCATION
    The sum of revenues including title IV, HEA program funds 
generated by the institution from: tuition, fees, and other 
institutional charges for students enrolled in eligible programs as 
defined in 34 CFR 668.8; and activities conducted by the 
institution, to the extent not included in tuition, fees, and other 
institutional charges, that are necessary for the education or 
training of its students who are enrolled in those eligible 
programs.

    (2) An institution must use the cash basis of accounting when 
calculating the amount of title IV, HEA program funds in the numerator 
and the total amount of revenue generated by the institution in the 
denominator of the fraction contained in paragraph (d)(1) of this 
section.
    (3) Under the cash basis of accounting--
    (i) In calculating the amount of revenue generated by the 
institution from institutional loans, the institution must include only 
the amount of loan repayments received by the institution during the 
fiscal year; and
    (ii) In calculating the amount of revenue generated by the 
institution from institutional scholarships, the institution must 
include only the amount of funds it disbursed during the fiscal year 
from an established restricted account and only to the extent that the 
funds in that account represent designated funds from an outside source 
or interest accrued on those funds.
    (e) With regard to the formula contained in paragraph(d)(1) of this 
section--
    (1) The institution may not include as title IV, HEA program funds 
in the numerator nor as revenue generated by the institution in the 
denominator--
    (i) The amount of funds it received under the Leveraging 
Educational Assistance Partnership (LEAP) or Federal Work-Study (FWS) 
programs. (The LEAP Program was formerly called the State Student 
Incentive Grant or SSIG Program.);
    (ii) The amount of institutional funds it used to match title IV, 
HEA program funds;

[[Page 38279]]

    (iii) The amount of title IV, HEA program funds that must be 
refunded or returned under Sec. 668.22; or
    (iv) The amount charged for books, supplies, and equipment unless 
the institution includes that amount as tuition, fees, or other 
institutional charges.
    (2) In determining the amount of title IV, HEA program funds 
received by the institution under the cash basis of accounting, except 
as provided in paragraph (e)(3) of this section, the institution must 
presume that any title IV, HEA program funds disbursed or delivered to 
or on behalf of a student will be used to pay the student's tuition, 
fees, or other institutional charges, regardless of whether the 
institution credits those funds to the student's account or pays those 
funds directly to the student, and therefore must include those funds 
in the numerator and denominator.
    (3) In paragraph (e)(2) of this section, the institution may not 
presume that title IV, HEA program funds were used to pay tuition, 
fees, and other institutional charges to the extent that those charges 
were satisfied by--
    (i) Grant funds provided by non-Federal public agencies, or private 
sources independent of the institution;
    (ii) Funds provided under a contractual arrangement described in 
Sec. 600.7(d), or
    (iii) Funds provided by State prepaid tuition plans.
    (4) With regard to the denominator, revenue generated by the 
institution from activities it conducts, that are necessary for its 
students' education or training, includes only revenue from those 
activities that--
    (i) Are conducted on campus or at a facility under the control of 
the institution;
    (ii) Are performed under the supervision of a member of the 
institution's faculty; and
    (iii) Are required to be performed by all students in a specific 
educational program at the institution.
    (f) An institution must notify the Secretary within 90 days 
following the end of the fiscal year used in paragraph (d)(1) of this 
section if it fails to satisfy the requirement contained in paragraph 
(a)(8) of this section.
    (g) If an institution loses its eligibility because it failed to 
satisfy the requirement contained in paragraph (a)(8) of this section, 
to regain its eligibility it must demonstrate compliance with all 
eligibility requirements for at least the fiscal year following the 
fiscal year used in paragraph (d)(1) of this section.
    (h) The Secretary does not recognize the accreditation of an 
institution unless the institution agrees to submit any dispute 
involving the final denial, withdrawal, or termination of accreditation 
to initial arbitration before initiating any other legal action.
* * * * *
    5. In Sec. 600.6, paragraphs (b)(3)(iii) and (c) are revised to 
read as follows:


Sec. 600.6  Postsecondary vocational institution.

* * * * *
    (b) * * *
    (3) * * *
    (iii) Counts any period during which the applicant institution has 
been certified as a branch campus; and
* * * * *
    (c) The Secretary does not recognize the accreditation of an 
institution unless the institution agrees to submit any dispute 
involving the final denial, withdrawal, or termination of accreditation 
to initial arbitration before initiating any other legal action.
* * * * *
    6-7. In Sec. 600.7, paragraphs (a)(1)(iii), (a)(1)(iv), and (c) are 
revised to read as follows:


Sec. 600.7  Conditions of institutional ineligibility.

    (a) * * *
    (1) * * *
    (iii) More than twenty-five percent of the institution's regular 
enrolled students were incarcerated;
    (iv) More than fifty percent of its regular enrolled students had 
neither a high school diploma nor the recognized equivalent of a high 
school diploma, and the institution does not provide a four-year or 
two-year educational program for which it awards a bachelor's degree or 
an associate degree, respectively;
* * * * *
    (c) Special provisions regarding incarcerated students--(1) 
Exception. The Secretary may waive the prohibition contained in 
paragraph (a)(1)(iii) of this section, upon the application of an 
institution, if the institution is a nonprofit institution that 
provides four-year or two-year educational programs for which it awards 
a bachelor's degree, an associate degree, or a postsecondary diploma.
    (2) Waiver for entire institution. If the nonprofit institution 
that applies for a waiver consists solely of four-year or two-year 
educational programs for which it awards a bachelor's degree, an 
associate degree, or a postsecondary diploma, the Secretary waives the 
prohibition contained in paragraph (a)(1)(iii) of this section for the 
entire institution.
    (3) Other waivers. If the nonprofit institution that applies for a 
waiver does not consist solely of four-year or two-year educational 
programs for which it awards a bachelor's degree, an associate degree, 
or a postsecondary diploma, the Secretary waives the prohibition 
contained in paragraph (a)(1)(iii) of this section--
    (i) For the four-year and two-year programs for which it awards a 
bachelor's degree, an associate degree or a postsecondary diploma; and
    (ii) For the other programs the institution provides, if the 
incarcerated regular students enrolled in those other programs have a 
completion rate of 50 percent or greater.
* * * * *
    8. Section 600.8 is revised to read as follows:


Sec. 600.8  Treatment of a branch campus.

    A branch campus of an eligible institution must be in existence for 
at least two years as a branch campus after the branch is certified as 
a branch campus before seeking to be designated as a main campus or a 
free-standing institution.

(Authority: 20 U.S.C. 1099c)

    9. In Sec. 600.31, paragraph (f) is removed.
    10. In Sec. 600.55, paragraph (a)(5)(i)(A) is revised to read as 
follows:


Sec. 600.55  Additional criteria for determining whether a foreign 
graduate medical school is eligible to apply to participate in the FFEL 
programs.

    (a) * * *
    (5) * * *
    (i) * * *
    (A) During the academic year preceding the year for which any of 
the school's students seeks an FFEL program loan, at least 60 percent 
of those enrolled as full-time regular students in the school and at 
least 60 percent of the school's most recent graduating class were 
persons who did not meet the citizenship and residency criteria 
contained in section 484(a)(5) of the HEA, 20 U.S.C. 1091(a)(5); and
* * * * *
    11. Section 600.56 is redesignated as Sec. 600.57.
    12. A new Sec. 600.56 is added to read as follows--


Sec. 600.56  Additional criteria for determining whether a foreign 
veterinary school is eligible to apply to participate in the FFEL 
programs.

    (a) The Secretary considers a foreign veterinary school to be 
eligible to apply to participate in the FFEL programs if,

[[Page 38280]]

in addition to satisfying the criteria in Sec. 600.54 (except the 
criterion that the institution be public or private nonprofit), the 
school satisfies all of the following criteria:
    (1) The school provides, and in the normal course requires its 
students to complete, a program of clinical and classroom veterinary 
instruction that is supervised closely by members of the school's 
faculty, and that is provided either--
    (i) Outside the United States, in facilities adequately equipped 
and staffed to afford students comprehensive clinical and classroom 
veterinary instruction; or
    (ii) In the United States, through a training program for foreign 
veterinary students that has been approved by all veterinary licensing 
boards and evaluating bodies whose views are considered relevant by the 
Secretary.
    (2) The school has graduated classes during each of the two twelve-
month periods immediately preceding the date the Secretary receives the 
school's request for an eligibility determination.
    (3) The school employs for the program described in paragraph 
(a)(1) of this section only those faculty members whose academic 
credentials are the equivalent of credentials required of faculty 
members teaching the same or similar courses at veterinary schools in 
the United States.
    (4) Either--
    (i) The veterinary school's clinical training program was approved 
by a State as of January 1, 1992, and is currently approved by that 
State; or
    (ii) The veterinary school's students complete their clinical 
training at an approved veterinary school located in the United States.

(Authority: 20 U.S.C. 1082 and 1088)

PART 668--STUDENT ASSISTANCE GENERAL PROVISIONS

    13. The authority citation for part 668 is amended to read as 
follows:

    Authority: 20 U.S.C. 1001, 1002, 1003, 1085, 1088, 1091, 1092, 
1094, 1099c, and 1099c-1, unless otherwise noted.

    14. In Sec. 668.12, paragraphs (f) and (g) are added and the 
authority citation is revised to read as follows:


Sec. 668.12  Application procedures.

* * * * *
    (f)(1) Application for provisional extension of certification. If 
an institution participating in the title IV, HEA programs undergoes a 
change in ownership that results in a change of control as described in 
Sec. 600.31, the Secretary may continue the institution's participation 
in those programs on a provisional basis, if the institution under the 
new ownership submits a ``materially complete application'' that is 
received by the Secretary no later than 10 business days after the 
change occurs.
    (2) For purposes of this section, an institution submits a 
materially complete application if it submits a fully completed 
application form designated by the Secretary supported by--
    (i) A copy of the institution's State license or equivalent 
document that--as of the day before the change in ownership--authorized 
or will authorize the institution to provide a program of postsecondary 
education in the State in which it is physically located;
    (ii) A copy of the document from the institution's accrediting 
association that--as of the day before the change in ownership--granted 
or will grant the institution accreditation status, including approval 
of the non-degree programs it offers;
    (iii) Audited financial statements of the institution's two most 
recently completed fiscal years that are prepared and audited in 
accordance with the requirements of Sec. 668.23; and
    (iv) Audited financial statements of the institution's new owner's 
two most recently completed fiscal years that are prepared and audited 
in accordance with the requirements of Sec. 668.23, or equivalent 
information for that owner that is acceptable to the Secretary.
    (g) Terms of the extension. (1) If the Secretary approves the 
institution's materially complete application, the Secretary provides 
the institution with a provisional Program Participation Agreement 
(PPA). The provisional PPA extends the terms and conditions of the 
program participation agreement that were in effect for the institution 
before its change of ownership.
    (2) The provisional PPA expires on the earlier of--
    (i) The date on which the Secretary signs a new program 
participation agreement;
    (ii) The date on which the Secretary notifies the institution that 
its application is denied; or
    (iii) The last day of the month following the month in which the 
change of ownership occurred, unless the provisions of paragraph (f)(3) 
of this section apply.
    (3) If the provisional PPA will expire under the provisions of 
paragraph (f)(2)(iii) of this section, the Secretary extends the 
provisional PPA on a month-to-month basis after the expiration date 
described in paragraph (f)(2)(iii) of this section if, prior to that 
expiration date, the institution provides the Secretary with--
    (i) A ``same day'' balance sheet showing the financial position of 
the institution, as of the date of the ownership change, that is 
prepared in accordance with ``GAAP'' (Generally Accepted Accounting 
Principles published by the Financial Accounting Standards Board) and 
audited in accordance with ``GAGAS'' (Generally Accepted Government 
Auditing Standards published by the U.S. General Accounting Office);
    (ii) If not already provided, approval of the change of ownership 
from the State in which the institution is located by the agency that 
authorizes the institution to legally provide postsecondary education 
in that State;
    (iii) If not already provided, approval of the change of ownership 
from the institution's accrediting agency; and
    (iv) A default management plan unless the institution is exempt 
from providing that plan under 34 CFR 668.14(b)(15).
* * * * *
(Authority: 20 U.S.C. 1001, 1002, 1088, and 1099c)

    15. In Sec. 668.13, paragraph (b)(1) is amended by removing ``four 
years'' in the second sentence, and adding, in its place, ``six 
years''.
    16. Section 668.14 is amended by removing paragraphs (d) and (e); 
by redesignating paragraphs (f), (g), (h), and (i) as paragraphs (e), 
(f), (g), and (h), respectively; by removing and reserving paragraph 
(b)(16); by revising paragraphs (b)(15), (b)(20), and (b)(24); and by 
adding a new paragraph (d), to read as follows:


Sec. 668.14  Program participation agreement.

* * * * *
    (b) * * *
    (15)(i) Except as provided under paragraph (b)(15)(ii) of this 
section, the institution will use a default management plan approved by 
the Secretary with regard to its administration of the FFEL or Direct 
Loan programs, or both for at least the first two years of its 
participation in those programs, if the institution--
    (A) Is participating in the FFEL or Direct Loan programs for the 
first time; or
    (B) Is an institution that has undergone a change of ownership that 
results in a change in control and is participating in the FFEL or 
Direct Loan programs.
    (ii) The institution does not have to use an approved default 
management plan if--
    (A) The institution, including its main campus and any branch 
campus, does

[[Page 38281]]

not have a cohort default rate in excess of 10 percent; and
    (B) The owner of the institution does not, and has not, owned any 
other institution with a cohort default rate in excess of 10 percent.
    (iii) The Secretary approves any default management plan that 
incorporates the default reduction measures described in appendix D to 
this part;
* * * * *
    (20) In the case of an institution that is co-educational and has 
an intercollegiate athletic program, it will comply with the provisions 
of Sec. 668.48;
* * * * *
    (24) It will comply with the requirements of Sec. 668.22;
* * * * *
    (d)(1) The institution, if located in a State to which section 4(b) 
of the National Voter Registration Act (42 U.S.C. 1973gg-2(b)) does not 
apply, will make a good faith effort to distribute a mail voter 
registration form, requested and received from the State, to each 
student enrolled in a degree or certificate program and physically in 
attendance at the institution, and to make those forms widely available 
to students at the institution.
    (2) The institution must request the forms from the State 120 days 
prior to the deadline for registering to vote within the State. If an 
institution has not received a sufficient quantity of forms to fulfill 
this section from the State within 60 days prior to the deadline for 
registering to vote in the State, the institution is not liable for not 
meeting the requirements of this section during that election year.
    (3) This paragraph applies to elections as defined in section 
301(1) of the Federal Election Campaign Act of 1971 (2 U.S.C. 431(1)), 
and includes the election for Governor or other chief executive within 
such State.
* * * * *
    17. A new Sec. 668.27 is added to read as follows:


Sec. 668.27  Waiver of annual audit submission requirement.

    (a) General. (1) At the request of an institution, the Secretary 
may waive the annual audit submission requirement for the period of 
time contained in paragraph (b) of this section if the institution 
satisfies the requirements contained in paragraph (c) of this section 
and posts a letter of credit in the amount determined in paragraph (d) 
of this section.
    (2) An institution requesting a waiver must submit an application 
to the Secretary at such time and in such manner as the Secretary 
prescribes.
    (b) Waiver period. (1) If the Secretary grants the waiver, the 
institution need not submit its next annual compliance or audited 
financial statement until six months after--
    (i) The end of the third fiscal year following the fiscal year for 
which the institution last submitted a compliance audit and audited 
financial statement; or
    (ii) The end of the second fiscal year following the fiscal year 
for which the institution last submitted compliance and financial 
statement audits if the award year in which the institution will apply 
for recertification is part of the third fiscal year.
    (2) The Secretary does not grant a waiver if the award year in 
which the institution will apply for recertification is part of the 
second fiscal year following the fiscal year for which the institution 
last submitted compliance and financial statement audits.
    (3) When an institution must submit its next compliance and 
financial statement audits under paragraph (b)(1) of this section--
    (i) The institution must submit a compliance audit that covers the 
institution's administration of the title IV, HEA programs for the 
period from the last waiver, and an audited financial statement for its 
last fiscal year; and
    (ii) The auditor who conducts the audit must audit the 
institution's annual determinations for the period subject to the 
waiver that it satisfied the 90/10 rule in Sec. 600.5(d) and (e) and 
the other conditions of institutional eligibility in Sec. 600.7, and 
disclose the results of the audit of the 90/10 rule for each year in 
accordance with Sec. 668.23(d)(4).
    (c) Criteria for granting the waiver. The Secretary grants a waiver 
of the annual audit requirement to an institution if the institution--
    (1) Is not a foreign institution;
    (2) Did not disburse $200,000 or more of title IV, HEA program 
funds during each of the two completed award years preceding the 
institution's waiver request;
    (3) Agrees to keep records relating to each award year in the 
unaudited period for two years after the end of the record retention 
period in Sec. 668.24(e) for that award year;
    (4) Has participated in the title IV, HEA programs under the same 
ownership for at least three award years preceding the institution's 
waiver request;
    (5) Is financially responsible under Sec. 668.171, and does not 
rely on the alternative standards of Sec. 668.175 to participate in the 
title IV, HEA programs;
    (6) Is not on the reimbursement or cash monitoring system of 
payment;
    (7) Has not been the subject of a limitation, suspension, fine, or 
termination proceeding, or emergency action initiated by the Department 
or a guarantee agency in the three years preceding the institution's 
waiver request;
    (8) Has submitted its compliance audits and audited financial 
statements for the previous two fiscal years in accordance with and 
subject to Sec. 668.23, and no individual audit disclosed liabilities 
in excess of $10,000; and
    (9) Submits a letter of credit in the amount determined in 
paragraph (d) of this section, which must remain in effect until the 
Secretary has resolved the audit covering the award years subject to 
the waiver.
    (d) Letter of credit amount. For purposes of this section, the 
letter of credit amount equals 10 percent of the amount of title IV, 
HEA program funds the institution disbursed to or on behalf of its 
students during the award year preceding the institution's waiver 
request.
    (e) Rescission of the waiver. The Secretary rescinds the waiver if 
the institution--
    (1) Disburses more than $200,000 of title IV, HEA program funds for 
an award year;
    (2) Undergoes a change in ownership that results in a change of 
control; or
    (3) Becomes the subject of an emergency action or a limitation, 
suspension, fine, or termination action initiated by the Department or 
a guarantee agency.
    (f) Renewal. An institution may request a renewal of its waiver 
when it submits its audits under paragraph (b) of this section. The 
Secretary grants the waiver if the audits and other information 
available to the Secretary show that the institution continues to 
satisfy the criteria for receiving that waiver.

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

    18. In Sec. 668.92, a new paragraph (d) is added and the authority 
citation is revised to read as follows:


Sec. 668.92  Fines.

* * * * *
    (d)(1) Notwithstanding any other provision of statute or 
regulation, any individual described in paragraph (d)(2) of this 
section, in addition to other penalties provided by law, is liable to 
the Secretary for amounts that should have been refunded or returned 
under Sec. 668.22 of the title IV program funds not returned, to the 
same extent with respect to those funds that such an

[[Page 38282]]

individual would be liable as a responsible person for a penalty under 
section 6672(a) of Internal Revenue Code of 1986 with respect to the 
nonpayment of taxes.
    (2) The individual subject to the penalty described in paragraph 
(d)(1) is any individual who--
    (i) The Secretary determines, in accordance with Sec. 668.174(c), 
exercises substantial control over an institution participating in, or 
seeking to participate in, a program under this title;
    (ii) Is required under Sec. 668.22 to return title IV program funds 
to a lender or to the Secretary on behalf of a student or borrower, or 
was required under Sec. 668.22 in effect on June 30, 2000 to return 
title IV program funds to a lender or to the Secretary on behalf of a 
student or borrower; and
    (iii) Willfully fails to return those funds or willfully attempts 
in any manner to evade that payment.

(Authority: 20 U.S.C. 1094 and 1099c)

    19. In Sec. 668.95, a new paragraph (d) is added and the authority 
citation is revised to read as follows:


Sec. 668.95  Reimbursements, refunds and offsets.

* * * * *
    (d) If an institution's violation in paragraph (a) of this section 
results from an administrative, accounting, or recordkeeping error, and 
that error was not part of a pattern of error, and there is no evidence 
of fraud or misconduct related to the error, the Secretary permits the 
institution to correct or cure the error. If the institution corrects 
or cures the error, the Secretary does not limit, suspend, terminate, 
or fine the institution for that error.

(Authority: 20 U.S.C. 1094 and 1099c-1)

    20. In Sec. 668.113, a new paragraph (d) is added and the authority 
citation is revised to read as follows:


Sec. 668.113  Request for review.

* * * * *
    (d)(1) If an institution's violation that resulted in the final 
audit determination or final program review determination in paragraph 
(a) of this section results from an administrative, accounting, or 
recordkeeping error, and that error was not part of a pattern of error, 
and there is no evidence of fraud or misconduct related to the error, 
the Secretary permits the institution to correct or cure the error.
    (2) If the institution is charged with a liability as a result of 
an error described in paragraph (d)(1) of this section, the institution 
cures or corrects that error with regard to that liability if the cure 
or correction eliminates the basis for the liability.
* * * * *
(Authority: 20 U.S.C. 1094 and 1099c-1)

[FR Doc. 99-18109 Filed 7-14-99; 8:45 am]
BILLING CODE 4000-01-P