[Federal Register Volume 64, Number 209 (Friday, October 29, 1999)]
[Rules and Regulations]
[Pages 58608-58619]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-28171]



[[Page 58607]]

_______________________________________________________________________

Part IV





Department of Education





_______________________________________________________________________



34 CFR Parts 600 and 668



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

  Federal Register / Vol. 64, No. 209 / Friday, October 29, 1999 / 
Rules and Regulations  

[[Page 58608]]


-----------------------------------------------------------------------

DEPARTMENT OF EDUCATION

34 CFR Parts 600 and 668

RIN 1845-AA08


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

AGENCY: Department of Education.

ACTION: Final regulations.

-----------------------------------------------------------------------

SUMMARY: We 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 Federal 
Pell Grant Program, 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, and the Leveraging Educational Assistance Partnership (LEAP) 
Program (formerly known as the State Student Incentive Grant (SSIG) 
Program).
    These final 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 final regulatory 
changes merely conform current regulatory provisions to the statutory 
changes.

DATES: Effective Date: These final regulations are effective July 1, 
2000.
    Implementation Date: The Secretary has determined, in accordance 
with section 482(c)(2)(A) of the HEA (20 U.S.C. 1089(c)(2)(A)), at 
their discretion institutions can choose to implement the provisions of 
certain sections of these regulations on or after October 29, 1999. For 
further information see ``Implementation Date of These Regulations'' 
under the SUPPLEMENTARY INFORMATION section of this preamble.

FOR FURTHER INFORMATION CONTACT: Cheryl Leibovitz, U.S. Department of 
Education, 400 Maryland Avenue, SW., ROB-3, room 3045, Washington, DC 
20202-5344. 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:

Background

    On July 15, 1999, we published a notice of proposed rulemaking 
(NPRM) in the Federal Register (64 FR 38272-38282) proposing to amend 
the regulations governing institutional eligibility for and 
participation in the Title IV, HEA Programs. In the preamble to the 
NPRM, we discussed the following proposed changes:
     Amending Sec. 600.2, the definition of ``State'' to 
include the ``Freely Associated States,'' which are the Republic of the 
Marshall Islands, the Federated States of Micronesia, and the Republic 
of Palau.
     Amending Secs. 600.4(c), 600.5(h), and 600.6(d) to require 
an institution to agree to submit any dispute involving the final 
denial, withdrawal, or termination of accreditation to ``initial'' 
rather than ``binding'' arbitration.
     Amending Sec. 600.5(a)(8) to conform the provisions 
previously referred to as the ``85/15 rule'' to the new ``90/10 rule''.
     Amending Sec. 600.5(d) to make explicit that institutions 
must use the cash basis of accounting in determining whether they 
satisfy the 90/10 rule, and by clarifying how institutional loans and 
scholarships must be treated under the cash basis of accounting.
     Amending Sec. 600.5(e) to provide that an institution 
could presume that a student's institutional charges were not paid with 
Title IV, HEA program funds if they were paid with funds received from 
a prepaid State tuition plan.
     Amending Sec. 600.7(c) to expand the waiver provision for 
an institution whose enrollment of incarcerated students exceeds 25 
percent to include a nonprofit institution that provides a two- or 
four-year program for which it awards a ``postsecondary diploma.''
    Amending Sec. 600.8, as well as Secs. 600.5(b)(3)(i) and 
600.6(b)(3)(iii) to clarify 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.
     Amending Secs. 600.31 and 668.12 to allow 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.
     Amending Sec. 600.55(a)(5)(i)(A) to provide criteria for 
determining the comparability of foreign graduate medical schools to 
domestic graduate medical schools.
     Amending Sec. 600.56 to subject foreign veterinary schools 
to many, but not all, of the special eligibility requirements that the 
statute previously applied to foreign medical schools.
     Amending Sec. 668.13 to expand 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.
     Amending Sec. 668.14 to exempt an institution that has 
undergone a change in ownership/control from the requirement that it 
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.
     Amending Sec. 668.14 by removing Secs. 668.14(d) and (e), 
which govern collection and reporting of information concerning 
athletically-related aid, because those requirements will be revised 
and incorporated in Sec. 668.47.
     Amending Sec. 668.14(b)(24) to clarify that an institution 
agrees to comply with the requirements of Sec. 668.22, which relates to 
refunds and the return of Title IV, HEA program funds.
     Amending Sec. 668.14(d) to require that an institution 
make a good faith effort to distribute mail voter registration forms to 
its students. (The 1998 Amendments included this requirement but 
prohibited any officer of the Executive Branch from instructing an 
institution in the manner in which this provision is to be carried out. 
Therefore, proposed Sec. 668.14(d) incorporated the provisions of 
section 487(a)(23) of the HEA verbatim into Sec. 668.14(d) with minor 
changes to incorporate plain language requirements.)
     Amending Sec. 668.27 to allow for a waiver for up to three 
years of the requirement that an institution submit annually, a 
compliance audit and audited financial statement if certain conditions 
are met.
     Amending Sec. 668.92 to reflect that an individual who 
exercises substantial control over an institution and willfully fails 
to pay refunds on student loans is subject to the penalty established 
under section 6672(a) of the Internal Revenue Code of l986 with respect 
to nonpayment of taxes.
     Amending Secs. 668.95 and 668.113 to allow an institution 
to correct or cure an error that results from an administrative, 
accounting, or recordkeeping error, if that error was not part of a 
pattern of errors and there is no evidence of fraud or misconduct 
related to the error, and to clarify that the Secretary will not

[[Page 58609]]

limit, suspend, terminate, or fine the institution if such an error is 
cured.
    There are no significant differences between the NPRM and these 
final regulations.

Implementation Date of These Regulations

    Section 482(c) of the HEA, 20 U.S.C. 1089(c), provides that if we 
publish these regulations before November 1, 1999, the regulations will 
become effective on July 1, 2000. However, that section also permits us 
to designate any of these regulations as one that an entity subject to 
the regulation may choose to implement earlier. If we designate a 
regulation for early implementation, we may specify when and under what 
conditions the entity may implement it. Under this authority, we have 
designated the following regulations for early implementation:
    Upon publication, institutions have the discretion to implement 
Secs. 600.4(c), 600.5(h), 600.6(d), 600.55, and Sec. 600.56.
    Upon publication, institutions have the discretion to implement the 
provisions of Secs. 600.5(d) and (e). However, if an institution 
chooses to implement any of the provisions in those sections, it must 
implement all of them.
    Upon publication, institutions have the discretion to implement the 
provisions dealing with a change of ownership that results in a change 
in control in Secs. 600.20, 600.31, and 668.12.

    Note: The changes to Secs. 600.2, 600.5(a), 600.5(b)(3)(i), 
600.6(b)(3)(iii), 600.7(a)(1)(iii) and (iv), 600.7(c), 600.8, 
668.13, 668.14(b)(24), 668.14(d), and 668.92 reflect statutory 
provisions that already are in effect. Institutions may use these 
regulations prior to July 1, 2000 as guidance in complying with 
those statutory provisions.

    The changes to Secs. 668.95 and 668.13 merely clarify our current 
practices with regard to initiating compliance actions and assessing 
liabilities.
    Section 668.27 will not become effective until July 1, 2000. 
However, we will begin to accept applications for waivers from 
institutions as of January 3, 2000 so that we can begin to grant 
waivers on July 1, 2000.

Discussion of Student Financial Assistance Regulations Development 
Process

    The regulations in this document were developed through the use of 
negotiated rulemaking. Section 492 of the HEA requires that, before 
publishing any proposed regulations to implement programs under Title 
IV of the HEA, 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 proposed regulations 
must conform to agreements resulting from the negotiated rulemaking 
process unless the Secretary reopens that process or explains any 
departure from the agreements to the negotiated rulemaking 
participants.
    These regulations were published in proposed form on July 15, 1999. 
With the exception of provisions relating to the ``90/10 rule'' in the 
definition of ``proprietary institution of higher education'' at 
Sec. 600.5, the proposed regulations reflected the consensus of the 
negotiated rulemaking committee. Under the committee's protocols, 
consensus meant that no member of the committee dissented from the 
agreed-upon language. The Secretary invited comments on the proposed 
regulations by September 13, 1999 and approximately 60 comments were 
received. An analysis of the comments and of the changes in the 
proposed regulations follows.
    We discuss substantive issues under the sections of the regulations 
to which they pertain. Generally, we do not address technical and other 
minor changes in the proposed regulations, and we do not respond to 
comments suggesting changes that the Secretary is not authorized by law 
to make.

Analysis of Comments and Changes

Part 600--Institutional Eligibility Under the Higher Education Act of 
1965, as amended

Section 600.5  Proprietary Institution of Higher Education

    Comments: A number of commenters registered support of the 
Secretary's proposals for implementing the 90/10 rule as reasonable and 
compliant with the HEA.
    Discussion: We appreciate the support for these changes.
    Changes: None.
    Comments: Several commenters disagreed with the requirement 
contained in proposed Sec. 600.5(d)(2) that a proprietary institution 
of higher education must use the cash basis of accounting in 
determining whether it satisfies the 90/10 rule. These commenters 
believed that all revenue should be recognized when earned (accrual 
basis of accounting), and not when received (cash basis of accounting.)
    Discussion: We set forth in the preamble to the proposed 
regulations at 64 FR 38272, 38275 the history and rationale for the 
decision to use the cash basis of accounting in reporting revenue for 
the purpose of the 85/15 and now 90/10 rule. In summary an institution 
must report and account for its expenditure of Title IV, HEA program 
funds on the cash basis of accounting, and therefore, it must report 
all its revenues on that basis in order to make a meaningful 
determination of compliance with the 90/10 requirement.
    Changes: None.
    Comments: Two commenters requested clarification on the treatment 
of institutional loans in proposed Sec. 600.5(d)(3)(i). That section 
provided that under the cash basis of accounting, when calculating the 
amount of revenue generated by the institution from institutional 
loans, an institution may include only loan repayments received during 
the relevant fiscal year.
    Discussion: An institution may not count in the denominator of the 
fraction in Sec. 600.5(d)(1) the loan proceeds from institutional loans 
that were disbursed to students; it may include only loan repayments it 
received during the relevant fiscal year for previously disbursed 
institutional loans.
    Changes: None.
    Comments: A number of commenters objected to the treatment of 
``institutional scholarships'' as proposed in Sec. 600.5(d)(3)(ii). 
That section provided that under the cash basis of accounting, when 
calculating the amount of revenue generated by the institution from 
institutional scholarships, an institution may 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 the 
account represent designated funds from an outside source or from fund 
earnings.
    Commenters who objected to our treatment of institutional 
scholarships indicated that contributions to proprietary institutions 
are not tax deductible, and therefore proprietary institutions 
generally do not receive funds from outside sources for scholarship 
funds. Other commenters indicated that the tax laws preclude a 
proprietary institution from setting up a tax exempt entity for that 
purpose. Thus, the commenters noted that scholarship endowments are 
virtually non-existent in the proprietary sector.
    The commenters noted that it would take years to amass the 
principal necessary to create a substantial endowment program. They 
also believed it would take even longer to earn enough interest to make 
tangible scholarship distributions to students. In addition, the 
commenters said that as a result of this proposed requirement, many 
institutions would have no choice

[[Page 58610]]

but to limit or forgo making scholarships to deserving students.
    On the other hand, several other commenters supported our treatment 
of institutional scholarship funds under the cash basis of accounting.
    Discussion: We understand that the tax laws preclude individuals 
and entities from making tax deductible contributions to proprietary 
institutions, and therefore it would be unlikely that these 
institutions would have restricted funds to make scholarship awards. 
However, this result is consistent with our view, as expressed in the 
NPRM preamble, that institutional scholarships are not revenue 
generated by the institution but are expenses of the institution, and 
should not be included, except in unusual circumstances, in the 
denominator of the fraction in Sec. 600.5(d)(1).
    We specified in the initial NPRM on this topic in 1994 (59 FR 6446, 
February 10, 1994) that we wished to encourage proprietary institutions 
to obtain support from sources outside of and independent of the 
institution. Accordingly, funds donated to the institution by related 
parties may not count for purposes of the 90/10 calculation. An 
institution could, however, use such donations to create restricted 
accounts for institutional scholarships. Those scholarships would count 
in the 90/10 calculation, but only to the extent of earnings on the 
restricted account.
    We disagree with the commenter's assertion that proprietary 
institutions will reduce the funding of institutional scholarships to 
their students. We believe that institutions award these scholarships 
to benefit their students, not as an artifice to avoid the consequences 
of the 90/10 rule.
    Changes: None.
    Comments: Some commenters stated that Federal Work-Study (FWS) 
program funds that an institution uses to pay institutional charges 
should be included in the 90/10 formula.
    Discussion: Prior the 1998 Amendments, we did not include FWS funds 
in the 90/10 formula because the institution was required to pay those 
funds directly to the student; the institution was not permitted to use 
those funds to pay the student's institutional charges. The 1998 
Amendments now allow an institution to credit FWS funds against a 
student's institutional charges if the student gives his or her 
permission. As a result, we believe that FWS funds must now be included 
in the 90/10 formula to the extent that a student takes advantage of 
this new authority and authorizes FWS funds to be used to pay his or 
her institutional charges.
    Changes: Section 600.5(e)(1)(i) is revised to include FWS funds 
that an institution uses to pay a student's tuition, fees, and other 
institutional charges.
    Comments: Several commenters requested that we address how credit 
balances should be treated with regard to the 90/10 rule.
    Discussion: In general, funds held as credit balances in 
institutional accounts do not get counted in the 90/10 formula in 
Sec. 600.5(d)(1). However, once funds held as credit balances are used 
to satisfy institutional charges, they would be counted in both the 
numerator and denominator of the formula. For example, an institution's 
fiscal year is a calendar year. On December 30, 1999, the institution 
disburses $100,000 of Title IV, HEA program funds to students on their 
accounts, and credit balances occur because the institution has not yet 
charged those accounts with related tuition and fees. On January 3, 
2000, the institution charges tuition and fees to the students' 
accounts, and uses all of those previously disbursed funds to pay the 
students' tuition and fee charges.
    For purposes of the 90/10 formula in Sec. 600.5(d)(1), none of the 
$100,000 would be included in the institution's 90/10 calculation for 
its 1999 fiscal year because none of the funds had been used for 
tuition, fees, and other institutional charges; all of the $100,000 
would be included in the institution's 90/10 calculation for its 2000 
fiscal year calculation, when the funds were used to satisfy tuition, 
fees, and other institutional charges.
    A similar result would apply if the institution drew down $100,000 
of Title IV, HEA program funds from the Department on December 30, 1999 
but did not pay those funds to students for institutional charges until 
January 3, 2000.
    We note that under an extremely literal interpretation of the 
principles underlying the cash basis of accounting, it would be 
possible to determine that none of the $100,000 in the above example 
would be included in the numerator or denominator for any year because 
the regulation applies to cash received used to satisfy tuition, fees 
and other institutional charges. Under this interpretation, an 
institution would count only the funds it received in a particular 
fiscal year used to satisfy institutional charges for that fiscal 
year's determination of the 90/10 rule. In the above example, the 
$100,000 was received by the institution in fiscal year 1999. 
Therefore, when the institution used those funds to pay institutional 
charges in fiscal year 2000, it did not use any funds it received in 
fiscal year 2000 to pay institutional charges in that fiscal year.
    We believe that this extremely literal interpretation is an 
impermissible interpretation of the principles governing the cash basis 
of accounting because it ignores the context of the 90/10 rule and 
produces an absurd result where the funds would never be counted.
    Changes: None.
    Comments: One commenter asked how the Secretary would treat the 
sale of institutional loans for the purpose of the 90/10 calculation.
    Discussion: Revenue generated from the sale of non-recourse 
institutional loans to unrelated parties would be counted as revenue in 
the denominator of the 90/10 calculation to the extent of actual 
proceeds.
    The sale of institutional loan receivables is distinguishable from 
the sale of an institution's other assets because the receivables from 
institutional loans were produced by a transaction that generates 
tuition revenue. Tuition revenue represents income from the major 
service provided by an institution. That would not be true in the case 
of the sale of other institutional assets.
    An institution may use the proceeds from the sale of other assets 
in the creation of a restricted account and awarding of institutional 
scholarships. However, for 90/10 purposes, only the portion of proceeds 
that represents a gain on the sale of the asset counts as institutional 
scholarships. An institution may use the amount of the proceeds that 
equal the historical cost of the asset to establish the restricted 
account.
    Changes: None.
    Comments: Several commenters expressed concern at the provision 
contained in proposed Sec. 600.5(e)(2) that presumes that all Title IV, 
HEA program funds disbursed or delivered to students are used to pay 
tuition, fees, or other institutional charges, regardless of whether 
those funds are paid directly to students or credited to their 
institutional accounts. These commenters believed that this presumption 
ignored the cash contributions made by students and their families 
toward the student's educational costs. These commenters further 
indicated that the exceptions to the presumption in proposed 
Sec. 600.5(e)(3) should be expanded to include certain savings 
vehicles, such as educational IRAs.
    Discussion: From the very first attempts to develop regulations to

[[Page 58611]]

implement the 85/15 rule in 1993 and 1994, we and the regulation 
negotiators recognized the necessity of this presumption, in order, as 
stated by the Secretary in the preamble to the NPRM that was issued for 
the 85/15 rule, ``[t]o avoid inappropriate manipulation of information 
under the 85 percent rule.'' 59 FR 6446, 6449 (Feb. 10, 1994). For 
example, without the presumption, an institution could disburse Title 
IV, HEA programs funds directly to students and then have the students 
write checks to the institution for tuition, fees, and other 
institutional charges. Under this approach, an institution could 
contend that none of the Title IV, HEA program funds were used to pay 
institutional charges.
    On the other hand, we agree with the commenters that in certain 
instances, the presumption would not take into account cash 
contributions made by students and their parents toward the student's 
educational costs. However, we believe that these instances are 
ameliorated by the fact that an institution can obtain up to 90 percent 
of its tuition and fee revenue from Title IV, HEA program funds, and by 
the exceptions provided in Sec. 600.5(e)(3).
    When we created the presumption, we also created exceptions. Thus, 
in the original 85/15 rule, we provided that the presumption should not 
apply to the extent that a student's tuition and fee charges were paid 
with grant funds provided by third parties, or to the extent that those 
charges were paid under contracts with governmental agencies. In the 
proposed rule for these final regulations, the Secretary added another 
exemption--tuition and fee charges that were paid from a State prepaid 
tuition plan.
    These three exceptions are consistent in that funds come to the 
institution directly from an outside third party source and are easily 
accounted for. The commenter's suggestions for additional exceptions 
would satisfy neither condition, because the suggested additions would 
not come from an outside third party source, and an institution would 
not be able to document that a payment came from such a source. In 
addition, the proposed additional sources of funds, including education 
IRA funds, can be used to pay non-institutional charges as well as an 
institutional charges.
    Changes: None.

Section 600.7  Conditions of Institutional Ineligibility

    Comments: Several commenters requested that the Secretary define 
the term ``postsecondary diploma'' in proposed Sec. 600.7(c)(1). That 
section provides that an institution whose enrollment of incarcerated 
students exceeds 25 percent will not become ineligible for that reason 
if the institution offers a two or four-year program of study for which 
it awards a * * * ``postsecondary diploma.''
    Discussion: This change reflects a statutory change to the HEA that 
was enacted at the behest of institutions in the State of Louisiana. 
The term ``postsecondary diploma'' has a specific meaning in that State 
for those institutions, and as a result, we do not believe that it is 
useful to define that term for purposes of this section. Consequently, 
we recognize that if a nonprofit institution in another State offer a 
two or four year program that leads to a credential specifically called 
a ``postsecondary diploma,'' that institution may be eligible for a 
waiver of the incarcerated student limitation.
    Changes: None.

Section 600.30  Institutional Notification Requirements

    Comments: One commenter asks that we change the 10 day notice 
requirement in Sec. 600.30(a) to 10 business days because 
Sec. 668.12(f) gives an institution undergoing a change in ownership/
control 10 business days after the sale date to submit a ``materially 
complete application.''
    Discussion: The 10 business day deadline date for submitting a 
``materially complete application is required by statute. The notice 
requirements in Sec. 600.30 refer to calendar days and we see no need 
to change them merely because of the special statutory rule for the 
change of ownership situation.
    For institutions undergoing a change in ownership/control that wish 
to continue participating in the Title IV, HEA programs, the critical 
deadline is, of course, the one requiring the submission of the 
materially complete application under Sec. 668.12(f). The deadline in 
Sec. 600.30 would be relevant only if the institution did not wish to 
continue participating in those programs.
    Changes: None.

Section 668.12  Application Procedures

    Comments: Several commenters asked whether the documents which are 
required as part of an institution's ``materially complete 
application'' must be submitted ``promptly'' (as indicated in the 
preamble to the NPRM) or prior to the expiration date of the 
provisional PPA as reflected in the proposed regulatory language.
    Discussion: The commenters have confused our statement in the 
preamble and the proposed regulations. As indicated in 
Sec. 668.12(f)(1) in both its proposed and final form, documents that 
must be submitted as part of a ``materially complete application'' must 
be submitted to the Department no later than 10 business days after the 
change in ownership/control takes place. These documents are described 
in Sec. 668.12(f)(2).
    The preamble reference to ``promptly'' refers to the documents that 
are described in Sec. 668.12(g)(3), which are, for example, ``same 
day'' balance sheets, that an institution must submit to have its 
provisional Program Participation Agreement (PPA) extended and its 
change of ownership/control application fully approved.
    Changes: None.
    Comments: Several commenters asked if a ``materially complete 
application'' has to be submitted before or after the change of 
ownership takes place.
    Discussion: With the deletion of Sec. 600.31(f), institutions now 
have the option of submitting materially complete applications before 
the date of sale. If an institution submits a materially complete 
application before the date of sale, the institution must then notify 
the Department of the date the sale actually took place. We need that 
date because, if the institution's materially complete application is 
approved, the sale date is used in determining the expiration date of 
the provisional PPA.
    We will also allow an institution to submit an application for a 
change in ownership/control before the change occurs without the 
documents required to make the application an official ``materially 
complete application.'' We will review these applications if they are 
submitted no later than 45 days before the expected sale date. We 
consider our review of this application to be a ``preacquisition 
review''.
    As part of our preacquisition review, we will determine whether the 
institution has answered all the questions on the application 
completely and accurately, and will notify the institution of the 
results of that review. In this way, if some questions have not been 
answered or have not been adequately answered, the institution would 
have an opportunity to correct its application before the actual date 
of the change in ownership/control. Thus, our response in a 
preacquisition review will not be an official approval or denial of the 
application; it will notify the institution that its application is 
approvable, or it will alert the institution of any problems that need 
to be addressed before the application can be approvable.

[[Page 58612]]

    Changes: None.
    Comments: One commenter asked if all institutions undergoing a 
change of ownership/control must provide a same-day balance sheet to 
the Secretary, either to ``continue'' uninterrupted participation in 
Title IV, HEA programs by satisfying the requirements of 
Secs. 668.12(f) and (g), or to ``resume'' participation in Title IV 
programs after a loss of eligibility resulting from the ownership 
change.
    Discussion: Yes, it must.
    Changes: None.
    Comments: Several commenters asked exactly which audited financial 
statements would a new owner be required to provide. The commenters 
also asked for clarification as to what constitutes ``equivalent 
information'' for a new owner as a substitute for the audited financial 
statements. The commenters asked whether the new owner has the option 
of providing ``equivalent information'' or if that determination is up 
to the Department.
    Discussion: One of the conditions that we have to evaluate when 
deciding whether to approve a materially complete application is 
whether the institution under its new ownership will be financially 
responsible. To make that determination, it is necessary to evaluate 
the financial condition of the purchaser.
    Corporate purchasers will submit audited financial statements of 
their two most recently completed fiscal years. Similarly, if the new 
owner is a partnership or a single individual, the partnership and 
individual must submit those audited financial statements.
    However, we realize that there may be situations where a new owner 
does not have two years of audited financial statements. For example, 
the new corporate owner may not have been in business for two years or 
a single individual or partnership may not have had these audits 
performed. Under these circumstances, we require the new ownership to 
provide equivalent documentation that would allow us to evaluate the 
new owners' financial strength.
    This equivalent documentation could take the form of an audited 
personal financial status report that would show the new owners' net 
worth. It could include letters of reference or personal guarantees. In 
many instances, we will request the new owners to suggest the 
equivalent documentation.
    Finally, as noted above, it is not the new owner's option to 
provide equivalent documentation. That option is available only if the 
two required audited financial statements are not available. Moreover, 
we make the final determination as to whether equivalent documentation 
proposed by an owner is acceptable.
    Changes: None.
    Comments: One commenter suggested that we make conforming changes 
to Secs. 600.20 and 600.31 to reflect the continued eligibility of an 
institution that changed ownership/control to participate in the Title 
IV, HEA programs.
    Discussion: We concur with the commenters' suggestions.
    Changes: We added Sec. 600.20(c)(8) and amended Sec. 600.31(a).
    Comments: One commenter questioned if the Secretary considered the 
potential impact of the new institutional waiver provisions regarding 
annual audit submission requirements on the change of ownership 
provisional certification requirements.
    Discussion: The audit waiver provisions in Sec. 668.27 generally do 
not have an impact on the change of ownership/control certification 
requirements in Sec. 668.12(f). Under the regulatory scheme of 
Sec. 668.27, an institution may not receive a waiver if it has 
undergone a change in ownership/control within three years of its 
application for a waiver. Moreover, if an institution received a 
waiver, that waiver is rescinded if the institution undergoes that 
ownership/control change.
    There is, however, a facial conflict between Secs. 668.12(f) and 
668.27 involving the submission of audited financial statements. Under 
the former provision, an applicant institution for a change of 
ownership must submit audited financial statements for its two most 
recently completed fiscal years even though the latter provision may 
have provided the institution with a waiver of that submission 
requirement. However, if the institution changes ownership/control and 
wants to keep participating in the Title IV, HEA programs, it must 
follow the requirements of Sec. 668.12(f). Consequently, if an 
institution received a waiver and is then sold, and the new owners wish 
to continue the institution's participation in the Title IV, HEA 
programs, the new owners must submit audited financial statements of 
the institution's last two completed fiscal years as part of a 
``materially complete application,'' even though the institution may 
not have had to submit those audited financial statements under 
Sec. 668.27.
    We believe that this requirement is consistent with normal business 
practice, because we believe that an institution's potential purchaser 
would require the seller to provide such audits, as well as compliance 
audits of the institution's administration of the Title IV, HEA 
programs, before buying the institution.
    Changes: None.

Section 668.14  Program Participation Agreement.

    Comments: One commenter noted that an institution that has 
undergone a change in ownership/control does not have to implement an 
approved default management plan if ``The owner of the institution does 
not, and has not, owned any other institution with a cohort default 
rate in excess of 10 percent.'' The commenter wanted to know when the 
Secretary makes this determination, which cohort default rate will be 
used for the institution that the owner just purchased and which will 
be used for any of the other institutions the owner owns or owned.
    Discussion: For the institution being purchased, we will use the 
latest published cohort default rate. For any other institution that 
the new owner owns or owned, we will use all published cohort default 
rates for the period that coincides with the period that the 
institution was owned by that individual.
    Changes: None.
    Comments: Some institutions with cohort default rates under the 
FFEL or Direct Loan programs that exceed 25 percent are not subject to 
the default management plan requirements provided in appendix D of Part 
668, but are subject to a separate set of the default management plans 
that will be contained in Sec. 668.17(k). One commenter suggested that 
this section be expanded to reflect that fact.
    Discussion: Section 668.14 generally includes all the provisions 
that section 487(a) of the HEA requires to be included in a program 
participation agreement, and does not include other requirements 
outside of section 487(a) that an institution may have to undertake.
    Changes: None.
    Comments: Several commenters opposed the requirement in proposed 
Sec. 668.14(d) that institutions make a good faith effort to distribute 
mail voter registration forms to its students. These commenters 
indicated that this requirement would place a tremendous burden on 
institutions. Commenters also suggested that the Secretary provide 
guidance on acceptable methods for distributing the voter registration 
materials.
    Discussion: The language provided in this section is copied from 
the statute. Moreover, the statute (section 487(b)(2)

[[Page 58613]]

of the HEA) specifically prohibits the Secretary from instructing 
institutions in the manner in which this provision is carried out.
    Changes: None.

Section 668.27  Waiver of Annual Audit Submission Requirement.

    Comments: Commenters generally supported our proposed rules dealing 
with waivers of the annual audit submission requirement. Some 
commenters indicated there was some confusion regarding the timelines 
involved in these procedures, particularly with regard to the fiscal 
years that may be included in a waiver.
    Discussion: We recognize that the proposed regulation did not 
specifically identify which fiscal year could be included in a waiver 
request. We are rectifying that omission by providing that an 
institution's waiver request may include the fiscal year in which that 
request is made, plus the next two fiscal years. That request may not 
include an already completed fiscal year.
    For example, if an institution's fiscal year is based upon an award 
year (July 1-June 30), and the institution requests a waiver on May 1, 
2000, that waiver request may include its 1999-2000 fiscal year (July 
1, 1999 through June 30, 2000) plus its 2000-2001 and 2001-2002 fiscal 
years. If that institution's fiscal year was a calendar year, the 
institution's waiver request could include its calendar 2000 fiscal 
year plus its 2001 and 2002 fiscal years. In the latter example, the 
waiver would not include the institution's 1999 fiscal year, and 
therefore, it would be required to submit its compliance audit and 
audited financial statement to the Department by June 30, 2000.
    Changes: Section 668.27(a)(3) is added to provide that the first 
fiscal year that may be included in a waiver request is the fiscal year 
in which the institution submits that waiver.
    Comments: One commenter asked about liabilities that might accrue 
to an institution for a fiscal year if that fiscal year was one of the 
fiscal years included in a waiver.
    Discussion: An institution is liable to repay title IV, HEA program 
funds because it improperly expends those funds. A compliance audit is 
the vehicle for discovering that improper expenditure.
    These regulations do not waive the requirement that an institution 
audit its administration of the title IV, HEA programs; they waive the 
requirement that these audits be performed and submitted on an annual 
basis. Thus, the institution will pay that liability when the 
institution eventually submits a compliance audit for the fiscal year 
in which it made an improper expenditure, we resolve that audit, and 
request that payment.
    Changes: None.
    Comments: One commenter requested clarification of the reporting 
requirements for institutions granted a waiver of the requirement that 
an institution submit annually, a compliance audit and audited 
financial statement with regard to the 90/10 rule and the institutional 
ineligibility requirements of Sec. 600.7.
    Discussion: Under the 90/10 rule and Sec. 600.7, at the end of each 
fiscal year, an institution must report to the Department if it fails 
to satisfy the 90/10 rule or if it fails one of the ineligibility 
provisions in Sec. 600.7 for that year. An institution is still 
required to make these annual determinations even if it is not required 
to submit audits annually. This also means, of course, that if an 
institution fails to comply with the 90/10 rule or one of the 
ineligibility provisions in Sec. 600.7 it immediately loses its 
eligibility. The institution would be liable for any funds it disbursed 
subsequent to the end of the fiscal year in which it failed to meet one 
of these requirements.
    If an institution determines that it satisfies those requirements, 
its auditor is required to indicate agreement with that determination 
and report that agreement when the auditor submits that fiscal year's 
audited financial statement. The auditor may also indicate agreement 
with the institution's determination of eligibility under Sec. 600.7 
with the institution's compliance audit.
    If an institution receives a waiver, it need not submit a statement 
from its auditor regarding its compliance with the 90/10 rule or the 
provisions of Sec. 600.7 until its audited financial statement and 
compliance audit are submitted. When those audits are submitted, the 
auditor must note his or her agreement with the institution's 
determinations of eligibility for each of the fiscal years covered by 
the audits. For example, if the institution received a waiver and did 
not have to submit an audit for the 2000-2001 and 2001-2002 fiscal 
years, when the next audits are submitted on December 31, 2003, the 
auditor must indicate agreement with the institution's eligibility 
determinations for the 2000-2001 fiscal year, the 2001-2002 fiscal 
year, and the 2002-2003 fiscal year.
    The auditor must indicate agreement with the institution's 90/10 
determination for each of those three years even though the auditor 
need only submit an audited financial statement for the 2002-2003 
fiscal year.
    Changes: None.
    Comment: One commenter wondered whether the criteria for a waiver 
renewal were the same as the criteria for the initial waiver.
    Discussion: The criteria we use to grant waivers applies equally to 
requests for initial and renewal waivers.
    Changes: None.
    Comments: Several commenters wanted clarification on whether the 
Secretary would base an action to grant or rescind a waiver on a 
limitation, suspension, fine, or termination action that had only been 
initiated and was not final.
    Discussion: We will not grant a waiver and we will rescind a waiver 
based upon the initiation of a limitation, suspension, fine, or 
termination action. We initiate one of those actions because we receive 
information that the subject institution has not been properly 
administering the Title IV, HEA programs. We believe that an 
institution under those circumstances should not have its audit 
requirements waived. Moreover, under the procedures available to an 
institution, a final decision in such an action may take a long period 
of time, and a hearing official or the Secretary may decide not impose 
the sanction requested even though the institution has been improperly 
administering the Title IV, HEA programs.
    Changes: None.
    Comments: Two commenters noted a difference in wording on the 
monetary threshold for granting a waiver. At Sec. 668.27(c)(2) the 
regulation states the institution ``did not disburse $200,000 or more 
of Title IV.'' At Sec. 668.27(e)(1), the criteria for rescinding the 
waiver, the regulation states the institution ``disburses more than 
$200,000.'' The commenters recommended that the two sections be made 
parallel.
    Discussion: We agree.
    Changes: Section 668.27(e)(1) is changed to read ``Disburses 
$200,000 or more of Title IV, HEA program funds for an award year.''
    Comments: One commenter wanted to know if two waivers for three 
years each were granted one after the other whether this meant that the 
institution would only need one audit for the six-year period.
    Discussion: No, the institution would need two sets of audits to 
cover the six-year period. However, since the institution has up to six 
months after the last fiscal year to be covered to submit the second 
set of audits, the second set of audits would not have to be received 
by the Department until six

[[Page 58614]]

months after the expiration of the six year period.
    Changes: None.
    Comments: One commenter wanted to know whether the requirement that 
``no individual audit disclosed liabilities in excess of $10,000'' 
referred to the final audit liability. The commenter based his comment 
on the new statutory provision that allows an institution to cure 
administrative, accounting, and recordkeeping errors, and the proposed 
regulations in Sec. 668.113, that provides that the Department will not 
charge an institution a liability for such an error if it cures the 
error and the cure eliminates the basis of the liability.
    Discussion: We will use the best information available to us when 
making a decision on whether to grant a waiver. Therefore, if the 
latest information is the audit report submitted by the institution's 
auditor, we will use that report in our waiver determination. However, 
if an institution requests a waiver and its request is denied because 
of audit findings that show a liability in excess of $10,000, and those 
findings are subsequently revised to show liabilities of $10,000 or 
less for any reason, including a cure of the error, the institution can 
reapply for the waiver.
    Changes: None.
    Comments: One commenter asked whether the commenter was correct in 
assuming that the Secretary was not going to consider an institution's 
administrative capability in determining whether to grant an audit 
waiver.
    Discussion: We believe that the criteria we proposed for granting 
waivers is a proxy for administrative capability.
    Changes: None.
    Discussion: In the course of responding to the commenter's 
question, we realized that we did not provide any rules in the proposed 
regulations that address the situation when an institution's waiver is 
rescinded, vis a vis when the institution must submit audits, and what 
years must be covered by the audits. Accordingly, we have revised 
Sec. 668.27 to provide that if an institution has its waiver rescinded 
in a fiscal year, the effective date of the rescission is the last day 
of that fiscal year.
    Under this approach, the institution must submit compliance audits 
for the fiscal year(s) that were completed and unaudited, and an 
audited financial statement of the last completed fiscal year. The 
institution must submit these audits no later than six months after the 
end of the fiscal year in which its waiver was rescinded. We chose this 
approach to save the institution money, because the institution will 
not have to enter into more than one engagement agreement with an 
auditor to perform all the required audit work.
    To illustrate this new provision, we use the example given in the 
preamble of the NPRM for Sec. 668.12(f). An institution's fiscal year 
coincides with an award year (July 1-June 30). It submits its 
compliance and financial statement audit for the 1999-2000 award year, 
applies for a waiver, and receives that waiver so that its next 
compliance audit and audited financial statement must be submitted six 
months after the end of its 2002-2003 fiscal year.
    If the institution's waiver is rescinded during the 2000-2001 
fiscal year, the first fiscal year of its waiver period, it has not 
completed any fiscal year for which the audit requirement was waived. 
Therefore, it must submit its compliance audit and audited financial 
statement for that fiscal year in the regular course, i.e., no later 
than six months after the end of that fiscal year, December 31, 2001.
    If the institution's waiver was rescinded during the 2001-2002 
fiscal year, the waiver applied to its submission of audits for the 
2000-2001 fiscal year. Therefore, it must submit a compliance audit for 
the 2000-2001 and 2001-2002 fiscal years, and must submit an audited 
financial statement only for the 2001-2002 fiscal year. These audits 
must be submitted no later than December 31, 2002, six months after the 
end of its 2001-2002 fiscal year.
    If the institution's waiver was rescinded during the 2002-2003 
fiscal year, the waiver applied to its submission of audits for the 
2000-2001 and 2001-2002 fiscal years. Therefore, it must submit a 
compliance audit for the 2000-2001, 2001-2002, and 2002-2003 fiscal 
years, and an audited financial statement only for the 2002-2003 fiscal 
year. These audits must be submitted no later than December 31, 2003, 
six months after the end of its 2002-2003 fiscal year.
    Changes: As indicated above, we have revised Sec. 668.27 to provide 
that if an institution has its waiver rescinded in a fiscal year, the 
effective date of the rescission is the last day of that fiscal year.

Executive Order 12866

    We have reviewed these final regulations in accordance with 
Executive Order 12866. Under the terms of this order, we have assessed 
the potential costs and benefits of this regulatory action.
    The potential costs associated with the final regulations are those 
resulting from statutory requirements and those we have determined as 
necessary for administering this program effectively and efficiently.
    In assessing the potential costs and benefits--both quantitative 
and qualitative--of these final regulations, we have determined that 
the benefits of the regulations 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 summarized the potential costs and benefits of these final 
regulations in the preamble to the NPRM at 64 FR 38276-38277.

Paperwork Reduction Act of 1995

    These regulations do not contain any information collection 
requirements.

Assessment of Educational Impact

    In the NPRM, we requested comments on whether the proposed 
regulations would require transmission of information that any other 
agency or authority of the United States gathers or makes available.
    Based on the response to the NPRM and on our review, we have 
determined that these final regulations do not 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;

[[Page 58615]]

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

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 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: October 21, 1999.
Richard W. Riley,
Secretary of Education.
    For the reasons discussed in the preamble, the Secretary amends 
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 revised 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 known 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 or 
preaccreditation 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); paragraph (e) is added; and paragraphs 
(a)(8), (b)(3)(i), (d), (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
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 income earned 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 Federal Work-Study 
(FWS) Program, unless the institution used those funds to pay a 
student's institutional charges in which case the FWS program funds 
used to pay those charges would be included in the numerator and 
denominator.
    (ii) The amount of funds it received under the Leveraging 
Educational Assistance Partnership (LEAP) Program. (The LEAP Program 
was formerly called the State Student Incentive Grant or SSIG 
Program.);
    (iii) The amount of institutional funds it used to match title IV, 
HEA program funds;
    (iv) The amount of title IV, HEA program funds that must be 
refunded or returned under Sec. 668.22; or
    (v) 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

[[Page 58616]]

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 (d) 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
* * * * *
    (d) The Secretary does not recognize the accreditation or 
preaccreditation 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. 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.
* * * * *
    7. 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)

    8. Section 600.20 is amended by adding a new paragraph (c)(8) to 
read as follows:


Sec. 600.20  Application procedures.

* * * * *
    (c) * * *
    (8) Continue to be eligible following a change in ownership that 
results in a change in control according to the provisions of 
Sec. 668.12(f).
* * * * *
    9. In Sec. 600.31, paragraph (a)(1) is revised to read as follows:


Sec. 600.31  Change of ownership resulting in a change in control.

    (a)(1) Except as provided in Sec. 668.12(f), an institution that 
undergoes a change in ownership that results in a change of control 
ceases to qualify as an eligible institution upon the change in 
ownership and control. A change in ownership that results in a change 
in control includes any change by which a person who has or thereby 
acquires an ownership interest in the entity that owns this institution 
or the parent corporation of that entity, acquires or loses the ability 
to control the institution.
* * * * *


Sec. 600.31  [Amended]

    10. In Sec. 600.31, paragraph (f) is removed.
    11. 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
* * * * *


Sec. 600.56  [Redesignated as Sec. 600.57]

    12. Section 600.56 is redesignated as Sec. 600.57.
    13. 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, 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:

[[Page 58617]]

    (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.
    (b) [Reserved]

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

PART 668--STUDENT ASSISTANCE GENERAL PROVISIONS

    14. The authority citation for part 668 is revised to read as 
follows:

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

    15. 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 day 
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)


Sec. 668.13  [Amended]

    16. In Sec. 668.13, paragraph (b)(1) is amended by removing ``four 
years'' in the second sentence, and adding, in its place, ``six 
years''.
    17. 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 not have a cohort default rate in excess of 10 percent; 
and

[[Page 58618]]

    (B) The owner of the institution does not own and has not owned any 
other institution that had a cohort default rate in excess of 10 
percent while that owner owned the institution.
    (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.
* * * * *
    18. A new Sec. 668.27 is added to subpart B 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.
    (3) The first fiscal year for which an institution may request a 
waiver is the fiscal year in which it submits its waiver request to the 
Secretary.
    (b) Waiver period. (1) If the Secretary grants the waiver, the 
institution need not submit its 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 for each fiscal year for which an audit did not have to be 
submitted as a result of the 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 and the other 
conditions of institutional eligibility in Sec. 600.7 and 
Sec. 668.8(e)(2), 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 
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. (1) The Secretary rescinds the waiver 
if the institution--
    (i) Disburses $200,000 or more of title IV, HEA program funds for 
an award year;
    (ii) Undergoes a change in ownership that results in a change of 
control; or
    (iii) Becomes the subject of an emergency action or a limitation, 
suspension, fine, or termination action initiated by the Department or 
a guarantee agency.
    (2) If the Secretary rescinds a waiver, the rescission is effective 
on the last day of the fiscal year in which the rescission takes place.
    (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)

    19. 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

[[Page 58619]]

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 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)

    20. 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)

    21. 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. 99-28171 Filed 10-28-99; 8:45 am]
BILLING CODE 4000-01-P