[Federal Register Volume 67, Number 153 (Thursday, August 8, 2002)]
[Proposed Rules]
[Pages 51718-51741]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-20058]



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Part V





Department of Education





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34 CFR Part 600 et al.



Postsecondary Education; Federal Perkins Loan Program, et al.; Proposed 
Rule

  Federal Register / Vol. 67, No. 153 / Thursday, August 8, 2002 / 
Proposed Rules  

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DEPARTMENT OF EDUCATION

34 CFR Parts 600, 668, 673, 675, 682, 685, 690, and 694

RIN 1845-AA24


Institutional Eligibility Under the Higher Education Act of 1965, 
as Amended; Student Assistance General Provisions; General Provisions 
for the Federal Perkins Loan Program, Federal Work-Study Program, and 
Federal Supplemental Educational Opportunity Grant Program; Federal 
Work-Study Programs; Federal Family Education Loan Program; William D. 
Ford Federal Direct Loan Program; Federal Pell Grant Program; and 
Gaining Early Awareness and Readiness for Undergraduate Programs

AGENCY: Office of Postsecondary Education, Department of Education.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Secretary proposes to amend the Institutional Eligibility 
Under the Higher Education Act of 1965, as Amended; Student Assistance 
General Provisions; General Provisions for the Federal Perkins Loan 
(Perkins Loan) Program, Federal Work-Study Program, and Federal 
Supplemental Educational Opportunity Grant (FSEOG) Program; Federal 
Work-Study (FWS) Programs; Federal Family Education Loan (FFEL) 
Program; William D. Ford Federal Direct Loan (Direct Loan) Program; 
Federal Pell Grant (Pell Grant) Program; and Gaining Early Awareness 
and Readiness for Undergraduate Programs (GEAR UP) regulations. The 
Secretary is amending these regulations to reduce administrative burden 
for program participants, to provide benefits to students and 
borrowers, and to protect taxpayers' interests.

DATES: We must receive your comments on or before October 7, 2002.

ADDRESSES: Address all comments about these proposed regulations to 
Wendy Macias, U.S. Department of Education, P.O. Box 33076, Washington, 
DC 20033-3076. We encourage commenters to use e-mail because paper mail 
to the Washington area may be subject to delay, but please use one 
method only to provide your comments. If you comment via e-mail, we 
will send a return e-mail acknowledging our receipt of your comments. 
If you choose to send your comments through the Internet, use the 
following address: [email protected].
    You must include the term ``Team II Program Issues'' in the subject 
line of your electronic message.
    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: Ms. Wendy Macias Telephone: (202) 502-
7526 or via the Internet: [email protected].
    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 under FOR FURTHER 
INFORMATION CONTACT.

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 they are discussed in the Significant Proposed Regulations section 
of this document.
    Section 482(c)(1) of the Higher Education Act of 1965, as amended 
(HEA) provides that in order for a regulatory change to be effective 
for the start of an award year on July 1, it must have been published 
in final form in the Federal Register no later than the preceding 
November 1. The Secretary's intent is to publish final rules resulting 
from this Notice of Proposed Rulemaking (NPRM) by November 1, 2002, 
making the new rules effective on July 1, 2003. However, section 
482(c)(2) of the HEA allows the Secretary to designate regulatory 
provisions that an entity subject to the provision may, at its option, 
choose to implement earlier. Therefore, we are seeking suggestions on 
which of the proposed regulatory provisions in this NPRM, if finalized, 
should be so designated.
    Section 482 of the HEA does not apply to regulations governing 
programs other than the Federal student aid programs. Therefore, if the 
proposed regulations on GEAR UP included in this NPRM are finalized, 
they would be effective upon the date that the final regulations are 
published in the Federal Register.
    We also 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 at 1990 K Street, NW., (8th 
Floor) Washington, DC, between the hours of 8:30 a.m. and 4 p.m., 
Eastern time, Monday through Friday of each week except Federal 
holidays. If you want to schedule an appointment to inspect the public 
comments, please contact the person listed under FOR FURTHER 
INFORMATION CONTACT.

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, please contact the person 
listed under FOR FURTHER INFORMATION CONTACT.

Negotiated Rulemaking

    Section 492 of the HEA requires the Secretary, before publishing 
any proposed regulations for programs authorized by Title IV of the 
HEA, to obtain public involvement in the development of the proposed 
regulations. After obtaining advice and recommendations from 
individuals and representatives of groups involved in the Federal 
student financial assistance programs, the Secretary must subject all 
proposed regulations to a negotiated rulemaking process. All proposed 
regulations that the Department publishes must conform to agreements 
resulting from that process unless the Secretary reopens the process or 
provides a written explanation to the participants in that process 
stating why the Secretary has decided to depart from the agreements.
    We developed a list of proposed regulatory changes from advice and 
recommendations submitted by individuals and organizations in response 
to a May 24, 2001, request for recommendations on improving the Title 
IV student assistance programs from Representative Howard P. ``Buck''

[[Page 51719]]

McKeon and Representative Patsy Mink, the Chairman and Ranking Member, 
respectively, of the Subcommittee on 21st Century Competitiveness of 
the Education and the Workforce Committee of the U.S. House of 
Representatives.
    On December 5, 2001, we published a notice in the Federal Register 
(66 FR 63203) announcing our intent to establish two negotiated 
rulemaking committees to develop proposed regulations. One committee 
(Committee I) would address issues related to the Title IV student loan 
programs. The other committee (Committee II) would address all other 
Title IV student aid issues. The notice requested nominations of 
individuals for membership on the committees who represented key 
stakeholder constituencies that are involved in the student financial 
assistance programs, with preference given to individuals who are 
actively involved in administering the Federal student financial 
assistance programs or whose interests are significantly affected by 
the regulations. In the notice, we identified the constituencies with 
interests that are significantly affected by the subject matter of the 
negotiated rulemaking and announced that we expected that 
representatives of each of those constituencies would likely be 
selected as members of one, or both, committees. This NPRM is the 
result of the deliberations of Committee II.
    The members of Committee II were:
     Jo'ie Taylor and Ellynne Bannon (alternate) representing 
students; including the United States Student Association and State 
PIRGs (Public Interest Research Groups) Higher Education Project;
     Alan White and Elena Ackel (alternate), representing legal 
assistance organizations that represent students; including Community 
Legal Services and the National Consumer Law Center;
     Rachael Lohman and Marty Guthrie (alternate), representing 
financial aid administrators at institutions of higher education; 
including the National Association of Student Financial Aid 
Administrators
     Laurie Quarles and Alisa Abadinsky (alternate), 
representing business officers and bursars at institutions of higher 
education, and institutional servicers; including the Coalition of 
Higher Education Assistance Organizations and the National Association 
of College and University Business Officers;
     Reginald T. Cureton and William ``Buddy'' Blakey 
(alternate), representing the American Indian Higher Education 
Consortium, the United Negro College Fund and the National Association 
for Equal Opportunity in Higher Education;
     Claire M. Roemer and Patricia Hurley (alternate), 
representing two-year public colleges and universities; including the 
American Association of Community Colleges;
     Dawn Mosisa and Jo Ann Yoshida (alternate), representing 
four-year public colleges and universities; including the National 
Association of System Heads, the American Association of State Colleges 
and Universities, and the University Continuing Education Association;
     Lydia MacMillan, Ryan Craig Williams (alternate), and 
Maureen Budetti (2nd alternate), representing private, not-for-profit 
colleges and universities; including the National Association of 
Independent Colleges and Universities, and the Association of Jesuit 
Colleges and Universities;
     Robert Collins and Nancy Broff (alternate), representing 
for-profit postsecondary institutions; including the American 
Association of Cosmetology Schools and the Career College Association;
     Charles Cook and Diane Rogers (alternate), representing 
accrediting agencies; including the Council for Higher Education 
Accreditation (12-hour rule only);
     Neal Combs and Carl Buck (alternate), representing 
guaranty agencies and loan servicers; including the National Council of 
Higher Education Loan Programs (NCHELP), the CEO caucus of NCHELP, and 
the National Association of Student Loan Administrators;
     Francine Andrea and Wanda Hall (alternate), representing 
lenders, secondary markets, and loan servicers; including the Consumer 
Bankers Association, the Education Finance Council, the Student Loan 
Servicing Alliance, and the National Council of Higher Education Loan 
Programs;
     Carney McCullough, representing the U.S. Department of 
Education.
    At its first meeting, Committee II reached agreement on its 
protocols and agenda. During later meetings, the Committee reviewed and 
discussed drafts of proposed regulations. The Committee met over the 
course of several months, beginning in January 2002.
    In addition to the proposed regulations discussed under the section 
of this document called SIGNIFICANT PROPOSED REGULATIONS, Committee II 
discussed other issues related to the administration of the Title IV 
student assistance programs. Those issues, which are more 
comprehensively discussed on the 2002 Negotiated Rulemaking Web site 
for Team Two at: http://www.ed.gov/offices/OPE/rulemaking/index2002.html, include the following--
     Use of electronics in the administration of the Title IV 
programs,
     Use of electronic signatures on timesheets in the FWS 
Program,
     The fifty percent grant overpayment protection in the 
Return of Title IV aid regulations,
     ``90-10'' computations,
     Equity in Athletics Disclosure Act (EADA) reporting 
requirements,
     FWS community service waiver requirements,
     Inclusion of a computer in a student's cost of attendance,
     Regaining student eligibility,
     Overaward tolerances for the Title IV programs,
     Effect of enrollment of certain home-schooled students on 
institutional eligibility, and
     The fifty percent requirements for telecommunications and 
correspondence courses in institutional eligibility.
    No regulatory proposals are included in this NPRM for these issues 
either because the committee concluded that the proposed changes could 
not be made without statutory amendments or because the committee 
ultimately agreed to remove the item from the agenda and not to pursue 
a regulatory change at this time. Instead, we decided to address a 
number of these issues in a non-regulatory way, such as providing 
clarifying policy language in the Federal Student Financial Aid 
Handbook.
    Tentative agreement was reached by the committee on all but three 
of the agenda items. The entire committee did not reach consensus on 
the proposed changes to Secs. 668.2, 668.3, 668.4, 668.8, and 690.75, 
all of which are related to the proposal to replace the 12-hour rule 
with the one-day rule, because three of the 13 negotiators objected to 
the change. The committee also did not reach consensus on the proposed 
changes to Sec. 668.14, which would have modified the section of the 
program participation agreement that relates to incentive payment 
restrictions, because two of the 13 negotiators opposed the proposed 
changes. Finally, the committee reached conceptual agreement on the 
issue of timely refunds (Sec. 668.173), but did not review or agree to 
the actual text of the regulatory language. Detailed discussions of 
these issues are provided in the body of this document.
    The negotiated rulemaking protocols provide that, unless agreed to 
otherwise, consensus on all of the amendments in

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the proposed regulations must be achieved in order for consensus to be 
reached on the entire NPRM.

Significant Proposed Regulations

    We discuss substantive issues under the sections of the proposed 
regulations to which they pertain. Generally, we do not address 
proposed regulatory provisions that are technical or otherwise minor in 
effect.

Branch Campuses (Section 600.8)

    Current Regulations: Section 600.8 implements the statutory 
requirement that a branch campus may request certification as a main 
campus or as a free-standing institution only after it has been 
certified by the Secretary for at least two years. However, the 
regulation does not reflect the statutory distinction that the two-year 
certification requirement applies only to a branch of a proprietary 
institution of higher education or of a postsecondary vocational 
institution.
    Suggested Change: We recommended that the regulation clarify that 
the ``two-year rule'' in Sec. 600.8 applies only to an eligible branch 
campus of either a proprietary institution of higher education or a 
postsecondary vocational institution.
    Proposed Regulations: The proposed regulation would specifically 
refer to a branch campus of either an eligible proprietary institution 
of higher education or an eligible postsecondary vocational institution 
as the only types of institutions whose branches are covered by the 
two-year certification requirement.
    Reason: Under sections 102(b) and (c) of the HEA, the ``two-year 
rule'' is applicable only to an eligible branch campus of either a 
proprietary institution of higher education or a postsecondary 
vocational institution and is not applicable to an institution of 
higher education as defined in Sec. 600.4 of the regulations.
    However, it should be noted that a single public or non-profit 
institution can be both an institution of higher education and a 
postsecondary vocational institution depending upon the programs it 
offers. In such a case, the ``two year rule'' would apply if the 
institution wanted a branch campus that offered vocational programs of 
less than one year to become a free-standing institution.

Change of Ownership (Sections 600.21, 600.31 and 668.174)

    Current Regulations: Sections 600.21(f) and 668.174(c)(4) define 
who is considered a family member for purposes of transfer of 
institutional ownership and control under the institutional eligibility 
and financial responsibility regulations.
    Section 600.31 provides for the treatment of changes of ownership 
and establishes that an institution that undergoes a change in 
ownership resulting in a change of control ceases to qualify as an 
eligible institution until it establishes that it meets eligibility and 
certification requirements. Section 600.31(e) provides that a transfer 
of ownership and control due to the retirement or death of the 
institution's owner to a member of the owner's family or to an 
individual with an ownership interest in the institution who has been 
involved in the management of the institution for two years prior to 
the transfer is not considered a change of ownership and control for 
purposes of institutional eligibility.
    Suggested Change: A group of institutions suggested that the 
definition of ``family member'' in the regulations be expanded to 
include other persons in the owner's family including people who become 
part of the owner's family as a result of remarriage. They also 
suggested broadening the list of transactions that are not considered 
changes in ownership to include situations where an owner who was 
retiring from operating an institution and transferring ownership to 
another family member would still perform some duties at the 
institution.
    Proposed Regulations: The proposed changes to Secs. 600.21(f) and 
668.174(c)(4) would expand the definition of a member of the family to 
include grandchildren, a spouse's children and grandchildren, and 
family members as a result of remarriage.
    The proposed change to Sec. 600.31(e) would expand the conditions 
under which transfers of ownership and control to family members are 
not considered a change of ownership for institutional eligibility 
purposes. We are proposing to expand the current exception in the 
regulations to allow an owner to transfer his or her interest in an 
institution to a member of his or her family, provided that the 
ownership transfer is reported to the Department under 
Sec. 600.21(a)(6). The proposed regulations would clarify that the 
excluded transfer would be only to persons that have held an ownership 
interest and a management role at the institution for at least two 
years.
    Finally, the proposed regulations would also clarify that the 
entity covered by the change of ownership requirements and that signs 
the Program Participation Agreement (PPA) may be the institution 
signing as a corporation or as a sole proprietorship, the institution's 
parent corporation, or other entity such as a partnership. The excluded 
transfer would apply to the owner's equity interest or partnership 
interest in that entity.
    Reason: We agree that the scope of family members in the current 
exemption for transfers within a family is too narrowly defined, and 
also agree that the current restriction that transfers of ownership and 
control of an institution within a family may only be excluded from the 
change of ownership regulations when made in connection with the death 
or retirement of the owner is overly restrictive. The proposed 
regulations would require that the transfer to an owner's family member 
be reported under Sec. 600.21. The reporting of that transfer is 
required to keep our records up-to-date.

Definition of Academic Year--``12-Hour Rule'' (Sections 668.2, 668.3, 
and 668.8)

    Current Regulations: The definition of an academic year appears in 
Sec. 668.2. Section 481(a)(2) of the HEA provides that an academic 
year, for Title IV, HEA student financial assistance purposes, must 
contain at least 30 weeks of instructional time. For undergraduate 
programs, the law requires that over the 30 weeks of instructional time 
a full-time undergraduate student must be expected to complete at least 
24 semester or trimester hours, 36 quarter hours, or 900 clock hours. 
Section 481(b) of the HEA sets forth minimum lengths of time for 
certain eligible programs in terms of weeks of instructional time.
    Section 668.2 currently defines a week of instructional time for 
educational programs that measure academic progress using credit hours 
and standard terms (semesters, trimesters, or quarters) or clock hours, 
as any week in which one day of regularly scheduled instruction, 
examination, or preparation for examination is offered--the one-day 
rule. For educational programs that measure academic progress using 
credit hours and are either nonterm or nonstandard term programs, the 
regulations define a week of instructional time as any week in which at 
least 12 hours of instruction, examination, or preparation for 
examination is offered. This regulatory requirement for programs using 
credit hours in non-standard terms or without terms is commonly 
referred to as ``the 12-hour rule''.
    Eligible program requirements are codified in Sec. 668.8 and 
include the same definitions of a week of instructional

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time as used in the academic year definition discussed above.
    Suggested Change: A large number of institutions and groups, 
including the bipartisan Web-based Education Commission chartered by 
the Higher Education Amendments of 1998, suggested that the 12-hour 
rule be eliminated. Many suggested that the one-day rule be adopted as 
the definition of a week of instructional time for all types of 
educational programs, not just those measuring academic progress using 
standard terms or clock hours.
    Proposed Regulation: These proposed regulations would eliminate the 
12-hour rule for nonstandard and nonterm educational programs that 
measure progress in credit hours, and adopt a single regulatory 
standard for all types of educational programs.
    Under the proposed regulation, the current definition that has 
applied for several years to credit hour, standard term programs would 
also apply to credit hour nonstandard term and credit hour nonterm 
programs. Under this longstanding definition, a week of instructional 
time is a week in which there is at least one day of regularly 
scheduled instruction or examinations, or after the last day of 
classes, at least one day of study in preparation for final 
examinations. Similar changes would be made to Sec. 668.8--Eligible 
program.
    Finally, the proposed regulation would move the definition of 
academic year from Sec. 668.2, and place the revised definition in a 
new Sec. 668.3.
    Reason: Many institutions are now offering programs in shorter time 
periods which may also have overlapping terms and rolling starting 
dates. For many of the new nonstandard or nonterm educational programs, 
compliance with the 12-hour rule has become increasingly difficult and 
at odds with the educational advantages such flexible program formats 
provide for students, especially non-traditional students. The 12-hour 
rule also results in significant disparities in the amount of Title IV, 
HEA funding that students receive for the same amount of academic 
credit, based solely on whether the program that they are enrolled in 
uses standard academic terms or not.
    We, and most of the negotiators, are concerned that a number of the 
statutory and regulatory provisions that govern the Title IV student 
assistance programs, including the 12-hour rule, are stifling 
innovation and creating inequities in the amount of Federal student 
financial assistance that students receive. During negotiated 
rulemaking, the proposal to eliminate the 12-hour rule was discussed at 
length. Nearly all of the negotiators were supportive of the 
elimination of the 12-hour rule and the adoption of the one-day rule as 
the definition of a week of instructional time for all types of 
educational programs.
    One negotiator, while recognizing the need for change in this area, 
felt that we should wait until the reauthorization of the HEA and then 
address, in a more comprehensive manner, all issues related to 
providing student financial assistance to students enrolled in 
nontraditional educational programs. Every negotiator, including those 
who voiced opposition to the elimination of the 12-hour rule, agreed 
that the current rule was problematic, limited educational 
opportunities, and needed to be changed. However, those negotiators who 
voiced opposition did not propose any alternatives to the one-day rule.
    While nearly all of the negotiators agreed with the proposal to 
replace the 12-hour rule with the one-day rule, the committee was 
unable to reach complete consensus on the proposal. However, we agree 
with the vast majority of the negotiators and the constituents whose 
interests they represent that the 12-hour rule is an unnecessary 
barrier to flexible and innovative educational programs, and that a 
week of instructional time should be defined in the same way for all 
educational programs. We have not experienced any problem with the one-
day rule as it has been applied to standard term-based and clock hour 
programs and believe that it is the appropriate measure to adopt for 
all programs. In addition, we believe that the clock hour/credit hour 
conversion regulations (34 CFR 668.8(k) and (l)), provide adequate 
safeguards. Moreover, the proposed changes to the definition of payment 
periods provide additional assurance that Title IV program funds will 
be properly disbursed.
    Finally, we note that accrediting agencies are aware of these new 
educational program formats, and have taken steps to ensure the quality 
of education offered in these new formats.

Payment Periods (Sections 668.4, 682.603, 685.301, and 690.75)

    Current Regulations: Current regulations provide a definition of a 
payment period for the Title IV student financial assistance programs. 
In general, the amount of a student's Title IV award and the frequency 
and timing of its disbursement are determined on a payment period basis 
(with special rules for disbursements of FFEL and Direct Loans). The 
regulations provide a separate payment period definition for each of 
the three types of academic programs: (a) Programs that measure 
progress in credit hours and have academic terms, (b) programs that 
measure progress in credit hours and do not have academic terms, and 
(c) programs that measure progress in clock hours.
    In all three types of programs, the main point of having payment 
periods is to ensure that a student's award is paid in approximately 
equal increments over the course of the student's program of study, 
with those payments usually being made at least twice during an 
academic year. The current regulations do not specifically address how 
to determine the beginning and end of a payment period when a student 
who was paid for a payment period withdraws before completing that 
payment period and returns to the same institution or transfers to 
another institution. The ambiguity on how the regulations are to be 
applied in such instances may have resulted in an uneven application of 
the regulations for these students.
    Suggested Change: With the proposed replacement of the 12-hour rule 
with the one-day rule for determining when an institution is considered 
to have provided a week of instructional time, we suggested that there 
should be additional disbursement safeguards for credit hour programs 
without terms.
    Specifically, we suggested that the definition of a payment period 
for credit hour programs without terms require that, in addition to 
completing one-half of the academic coursework of the period (e.g., 
academic year, program, or remainder of the program), the student 
complete one-half of the required weeks of instruction in that period.
    Additionally, for the past several years institutions that offer 
programs in clock hours and credit hours without terms requested that 
we clarify how to determine the beginning and end of a payment period 
when a student who was paid for a payment period withdraws before 
completing that payment period and returns to the same institution or 
transfers to another institution.
    Proposed Regulations: The proposed regulations would amend the 
definition of a payment period in Sec. 668.4(b) to require a student to 
complete the requisite number (usually half) of weeks in that academic 
year or program, in addition to the clock hours or credit hours.
    The proposed regulations would also clarify the definition of a 
payment period to specifically address the situation when a student 
withdraws

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from a clock hour program or a credit hour nonterm program during a 
payment period, but then returns to school. The proposed regulations 
provide that, if the student returns to the same program at the same 
institution within 180 days of the original withdrawal, the student is 
considered to be in the same payment period he or she was in at the 
time of the withdrawal. Such a student would retain his or her original 
eligibility for that payment period. Once the student completes the 
payment period for which he or she had been paid, he or she becomes 
eligible for a subsequent Title IV student aid payment.
    Additionally, under the proposed regulations, a student who 
withdraws from a program during a payment period and then returns to 
that program after 180 days, or transfers, within any time frame, into 
another program either at the same institution or at another 
institution would start new payment periods. The institution would 
calculate these new payment periods using the regular rules in the 
appropriate part of the definition of a payment period, except that it 
would consider the length of the program to be equal to the remainder 
of the program that the student has to complete upon return to the 
original program or transfer to another one. However, if the remainder 
of a student's program is one-half of an academic year or less, that 
remaining period would constitute one payment period.
    Reason: We believe that an additional safeguard is needed to 
prevent institutions from structuring educational programs in such a 
way as to allow the second payment of Title IV aid for an academic year 
to be made before half of the academic year (as measured in weeks) 
actually occurs. This could happen, for example, if a 24 credit hour, 
nonterm program was offered over a 30 week period, but was structured 
so that the first 12 credits were earned in the first 10 weeks, with 
the remaining 12 credits being earned in the last 20 weeks. Under the 
current payment period definition, an institution would be able to pay 
a student the second half of a Pell Grant long before the half-way 
point of the academic year, which under the HEA must be a minimum of 30 
weeks long.
    Because of this concern, we are proposing to modify the payment 
period definition for credit hour programs without terms to require 
that a payment period cover half of the number of weeks of an academic 
year (or of a program), in addition to covering half the number of 
credits earned in that period. For example, in the situation discussed 
above if a student completes the first 12 credits in 10 weeks, the 
first payment period would not be considered to be completed and the 
second disbursement could not be made until 15 weeks of instructional 
time had elapsed in addition to the completion of 12 credit hours.
    This addition of ``half of the number of weeks'' in the academic 
year (or in the program) to the payment period definition is not 
necessary for term-based, credit hour programs or for clock hour 
programs. Standard academic terms currently result in payment periods 
of relatively equal length. Likewise, in clock hour programs, the 
student's payment periods are based on the completion of actual hours 
of instruction completed by the student, and not on the scheduled hours 
offered in the program.
    We have proposed two other changes to the definition of a payment 
period for clock hour programs and for credit hour programs without 
terms to address situations in which a student withdraws from a program 
before the completion of the payment period for which he or she was 
paid and then either returns to the same institution or transfers to 
another institution.
    When a student withdraws from a program during a payment period and 
returns to the same program at the same institution within 180 days, 
the student is considered to be in the same payment period he or she 
was in at the time of the withdrawal. This proposed change is similar 
to a leave of absence, and the proposed regulation is consistent with 
the current regulations for students who are granted leaves of absence. 
The 180-day measure is consistent with the maximum 180 days allowed for 
an approved leave of absence in the Return of Title IV Aid regulations. 
The difference, of course, is that with an unauthorized leave of 
absence the institution would not know that the student would be 
returning and would have treated the student as a withdrawal. Based 
upon that withdrawal, the institution would have completed the Return 
of Title IV Aid calculation, which may have required it and the student 
to return funds to the Title IV programs. If the student returns within 
180 days to his or her original program, the student would have to 
complete the remaining clock or credit hours before starting a new 
payment period and receiving Title IV aid for that new payment period. 
However, the institution would re-disburse any funds that it had 
previously returned to the Title IV, HEA programs, including any 
overpayment it had collected from the student as a result of the 
earlier withdrawal.
    If a student withdraws during a payment period and either returns 
to the same program at the same institution after 180 days, or 
transfers into another program, we believe that treating the student as 
if he or she was still in the same payment period would be cumbersome 
for institutions to administer and for students to understand. 
Therefore, we have proposed that for such a student the institution 
start a new series of payment periods.
    We believe that it is reasonable to differentiate between 
situations in which, on the one hand, the student returns to the same 
program at the same institution within a short period of time (180 
days), and, on the other hand, the student either returns to the same 
program after a longer period of time or transfers into another program 
(either at the same institution or at another). Because of the 
continuity in the student's attendance and similarity to a leave of 
absence in the first situation, we believe it appropriate, and 
administratively convenient to keep such a student in the same payment 
period upon his or her return to school. Conversely, because continuity 
is not present in situations in which a considerable time period (more 
that 180 days) has passed, or in which the student transfers into a new 
program, we believe it appropriate to start that student over in terms 
of the calculation of his or her payment periods.

Program Participation Agreement (Section 668.14)

    Current Regulations: Section 668.14(b)(22) of the current 
regulations implements the statutory restrictions on incentive payments 
for success in securing enrollment or financial aid. Section 487(a)(20) 
of the HEA provides that, as part of its program participation 
agreement, an institution will not provide any commission, bonus, or 
other incentive payment based directly or indirectly on success in 
securing enrollments or financial aid. The only significant addition to 
the statutory requirements in the current regulations is a provision 
that exempts from the incentive payment restrictions token gifts of 
less than $25.
    Suggested Change: Many higher education institutions have made a 
number of recommendations regarding activities that should be 
specifically exempt from the current restrictions on incentive 
payments. These restrictions and our interpretation of the statutory 
requirements were identified by the Web-based Education Commission as a

[[Page 51723]]

barrier to students enrolling in distance education and on-line 
courses.
    Institutions and many others requested that the regulations be 
amended to explicitly identify certain types of payments and 
compensation plans that do not violate the current statutory 
restrictions. Another more specific suggestion from institutions and 
the Web-Based Education Commission was that the regulations should 
clearly permit an institution to contract with an outside entity that 
offers enrollment and information services through the World Wide Web 
and allow the institution to pay for those services based on the number 
of prospective students visiting the site who ultimately apply to, or 
enroll at, the institution. Such services are currently not considered 
to be a violation if they are done through an institution's own Web 
site.
    Another suggestion was that the regulations clarify that the 
incentive payment restrictions do not extend to revenue-sharing 
agreements between institutions and third-party service providers as 
long as the third-party servicers have no decision-making authority for 
admissions decisions or financial aid awards.
    Proposed Regulations: The proposed regulations begin, in 
Sec. 668.14(b)(22)(i), by re-stating the statutory prohibition against 
incentive payments.
    Paragraph (b)(22)(ii) of the proposed regulations lists 12 types of 
activities and payment arrangements that an institution may carry out 
without violating the incentive payment restrictions provision. We 
believe that these ``safe harbors'' will allow institutions to maintain 
payment and compensation plans that are in compliance with the HEA and 
the regulations.
    The list of ``safe harbor'' activities is derived from compensation 
and payment plans that the majority of the negotiators agreed should be 
included. They provide institutions with specific, concrete examples of 
payments they can make that do not violate the statutory provision. We 
have not, however, included in the regulations a complementary listing 
of payment or compensation plans that are impermissible.
    The specific types of payments or compensation plans included in 
the listing in paragraph (b)(22)(ii) cover the following subjects, 
which are further discussed below:
     Adjustments to employee compensation
     Enrollments in programs that are not eligible for Title 
IV, HEA assistance
     Contracts with employers
     Profit-sharing or bonus payments
     Compensation based upon completion of program
     Pre-enrollment activities
     Managerial and supervisory employees
     Token gifts
     Profit distributions
     Internet-based activities
     Payments to third parties for non-recruitment activities
     Payments to third parties for recruitment activities
    Reason: As indicated above, section 487(a)(20) of the HEA prohibits 
an institution that participates in programs authorized under Title IV 
of the HEA from providing any commission, bonus, or other incentive 
payment based directly or indirectly on success in securing enrollments 
or financial aid. This provision was enacted as part of the Higher 
Education Amendments of 1992. While the statutory language noting 
``directly or indirectly'' is broad, the conference committee report on 
the legislation included the following statement to clarify the 
legislative intent and limits of these restrictions:
    ``The conferees wish to clarify, however, that the use of the term 
`indirectly' does not imply that institutions cannot base employee 
salaries on merit. It does imply that such compensation cannot solely 
be a function of the number of students recruited, admitted, enrolled, 
or awarded financial aid.''
    Consistent with this clarification of legislative intent, the 
proposed regulations are based on a purposive reading of section 
487(a)(20) of the HEA.
    The list of specifically permitted activities provides a reasonable 
and workable framework that institutions can use to determine if a 
payment is a violation of the incentive payment restrictions. Most non-
Federal negotiators were supportive of this type of regulatory 
structure.
    What follows is a brief discussion of each of the payment types 
included in the proposed regulations.
A. Adjustments to Employee Compensation
    The inclusion of compensation adjustments under this provision of 
the proposed regulations recognizes the balance between the need of an 
institution to base its employees' salaries or wages on merit, and 
concern that such adjustments do not make the statutory prohibition 
against the payment of commissions, bonuses and other incentive 
payments meaningless.
    During the deliberations some of the non-Federal negotiators stated 
that institutions commonly adjust a new employee's salary after a 
probationary period and then again after the employee completes the 
first year. In light of this common business practice and using the 
conference report language as a guide, we believe, as did a majority of 
the negotiators, that two salary adjustments within a twelve month 
period is the appropriate balance. As a result, the proposed 
regulations provide that an institution that makes up to two 
adjustments (upward or downward) to a covered employee's (one who is 
involved in recruitment, admissions, enrollment, or financial aid 
activities) annual salary or fixed hourly wage rate within any twelve 
month period is not in violation of the restrictions on incentive 
payments. However, consistent with the conference language the basis 
for any adjustment may not be solely the number of students recruited, 
admitted, enrolled, or awarded financial aid.
    The proposed regulations also provide that one upward adjustment 
resulting from a cost of living increase within a twelve month period 
that is paid to all or substantially all of the institution's employees 
will not be considered an ``adjustment'' for the purpose of this 
regulation.
    We believe the proposed regulations for compensation adjustments 
address the concern that such adjustments are not formulated in a way 
that circumvents the statutory prohibition against incentive payments.
B. Enrollments in Programs That Are Not Eligible for Title IV, HEA 
Assistance
    The program participation agreement established under section 487 
of the HEA applies only to programs eligible for Title IV HEA program 
assistance. Therefore, the proposed regulations do not consider 
payments to recruiters and others based upon the enrollment of students 
in programs that are not eligible for Title IV funding to be a 
violation of the incentive payment restrictions.
C. Contracts With Employers
    Many institutions suggested that the development of contractual 
agreements for training or instruction between an institution and an 
employer is another area where the incentive payment restrictions 
should not be applied. They argued that the restrictions on incentive 
payments should not apply in situations where an individual is paid for 
successfully obtaining a contract for the institution to provide 
education and training to a business's employees. We agree that as long 
as there is no direct contact by the institution's representative with 
students and because the employer is paying a

[[Page 51724]]

significant portion (at least 50 percent) of the training costs, such 
activities are not considered to be ``recruitment'' or the ``securing 
of enrollments'' under the provisions of section 487(a)(20) of the HEA. 
Therefore, the proposed regulations provide that incentive payments may 
be paid to individuals for arranging contracts under which the 
institution provides education and training to employees provided that 
the employer pays 50 percent or more of the tuition and fees charged 
for the training and the payments provided to the individual are not 
based upon either the number of employees who enroll or on the amount 
of revenue generated by those employees. The employer may pay the 
tuition and fees either directly to the institution or by reimbursement 
to the employee. The institution's representative may not have any 
contact with the employees.
    During the discussion on this issue in the negotiated rulemaking 
committee much attention was given to how much, if any, of the 
institutional charges should be paid by the employer for the 
institution not be in violation of the incentive payment restrictions. 
Some negotiators suggested that the amount or percentage paid by the 
employer was irrelevant. Others thought that the payment by the 
employer of a significant portion of the costs of the training was 
critical in determining whether the program was a contract training 
program with the employer rather than simply enrollment of individual 
employees. They also argued that to the extent the employer pays a 
significant share of the tuition and fees of the employees' education 
and training, there would be less likelihood that unqualified students 
would be enrolled.
D. Profit-Sharing or Bonus Payments
    Generally, profit-sharing and bonus payments are not payments based 
on success in securing enrollments or awarding financial aid unless 
they are made only to employees who are involved in recruitment, 
admissions, enrollment, or financial aid. Therefore, the proposed 
regulations provide that such payments made by an institution are not 
prohibited as long as those payments are made to all or substantially 
all of the institution's full-time professional and administrative 
employees and are substantially the same amount or are based upon the 
same percentage of salary. During the discussion on this issue several 
negotiators asked that such payments also be in compliance even if they 
were not made to all of an institution's employees but to only those at 
the same organizational level. We agreed with this proposal after 
restating that such an organizational level could not consist 
predominantly of recruiters, admissions staff, or financial aid staff.
E. Compensation Based Upon Completion of Program
    Completion of an academic program is not ``enrollment'' under the 
provisions of section 487(a)(20) of the HEA. We believe that one of the 
reasons for the prohibition against incentive payments for success in 
recruitment, admissions, enrollment, or securing financial aid, is to 
prevent institutions from enrolling students into a program without 
regard to their qualifications or likelihood of completing the program. 
Most of the negotiators believed that the completion of the program or, 
in the case of students enrolled in a program longer than one academic 
year, the completion of the first academic year is a reliable indicator 
that the student was qualified for the program. Therefore, the proposed 
regulations allow payments made to an institution's employees based 
upon students' successful completion of their educational program, or 
one academic year for a longer program, not to be a violation of the 
incentive payment restrictions.
F. Pre-Enrollment Activities
    Generally, pre-enrollment activities are not considered 
recruitment. The proposed regulations recognize the ancillary nature of 
various supportive activities that, while part of the overall 
recruitment or financial aid process, are somewhat removed from the 
actual recruitment and admissions of students or the awarding of 
financial aid. Therefore, individuals whose responsibilities are 
limited to ``pre-enrollment'' activities that are clerical in nature 
are outside the scope of the incentive payment restrictions. It is not 
a violation of the incentive payment restrictions for employees engaged 
in pre-enrollment activities to be compensated based upon such pre-
enrollment activities as long as the number of people who actually 
enroll is not a factor in determining the compensation. However, 
soliciting students for interviews is recruitment and not a pre-
enrollment activity.
G. Managerial and Supervisory Employees
    We believe the incentive payment restrictions apply only to those 
individuals who perform activities related to recruitment, admissions, 
enrollment, or the financial aid awarding process and their immediate 
supervisors. We believe that direct supervisors should be covered 
because their actions generally have a direct, immediate, and dramatic 
impact on the individuals who carry out these covered activities. The 
incentive payment restrictions do not extend to supervisors who do not 
directly manage or supervise employees who are directly involved in 
those activities. They also do not apply when an employee, manager or 
otherwise, occasionally has direct contact with a prospective student. 
For example, there would be no problem if the president of an 
institution, who was compensated at least partially on the 
profitability of the institution, happened, on a very occasional basis, 
to offer a tour of the institution to a prospective student.
H. Token Gifts
    The negotiators indicated support for an increase of the current 
$25 limit that is allowable for a single gift to a student or an 
alumnus of the institution. We realize that the cost of a token gift 
has risen since the inception of the current regulation and therefore 
propose to increase the maximum cost of a token, non-cash gift that may 
be provided to an alumnus or student to not more than $100. Moreover, 
the proposed regulations would also expand the limitation of a single 
gift provided to a student or alumnus by the institution, to not more 
than one gift annually.
    The cost basis of a token non-cash gift is what the institution 
paid for it. The value is the fair market value of the item. Some of 
the negotiators wanted to use ``value'' rather than ``cost'' because 
they were concerned that an outside source would donate something of 
great value to an institution, and the institution would give it to a 
student or alumnus as an incentive to recruit students. One negotiator 
argued that if a car were donated to the institution, the cost to the 
institution would be zero, and therefore permitted to be a token gift 
under the proposed regulations. In addition to pointing out the 
unlikelihood of that scenario, we noted that the proposed (and current) 
regulations specifically use the term ``token gift'' and anything of 
great value, such as a car, would certainly not be considered ``token'' 
as that term is reasonably understood to mean.
I. Profit Distributions
    Profit distributions to owners are not payments based on success in 
securing enrollments or awarding financial aid. Therefore, the proposed 
regulations specifically acknowledge that any owner, whether an 
employee or not, is entitled to a share of the organization's profits. 
However, any profit

[[Page 51725]]

distributions under this paragraph are permitted only to the extent 
they represent a proportionate distribution based upon the employee's 
ownership interest.
J. Internet-Based Activities
    Institutions have indicated their need to utilize and expand the 
most accessible and cost-effective means possible for recruitment and 
admission activities. The report of the Web-based Education Commission 
found that, ``Although not the original intent, the language [of the 
incentive payment restriction] effectively bars higher education 
institutions that participate in Title IV from using third-party Web 
portals to provide prospective students with access to information 
about many institutions or provide the same services as institutions 
offer on their own Web sites * * *''. The Commission suggested that the 
regulations permit an institution to contract, without violating the 
incentive payment restrictions, with an outside entity that offers 
services through the World Wide Web.
    Moreover, we believe that for purposes of these regulations, the 
Internet is simply a communications medium, much like the U.S. mail, 
and direct mail solicitations and advertisements have generally not 
been considered within the scope of the incentive payment restrictions. 
Therefore, the proposed regulations do not preclude an institution from 
compensating a service provider for Internet-based recruitment and 
admission services.
K. Payments to Third Parties for Non-Recruitment Activities
    Section 487(a)(20) applies only to recruiting, admissions, 
enrollment, or financial aid. Therefore, these proposed regulations 
would not consider payments to third parties for services to the 
institution other than recruiting, admissions, enrollment, or financial 
aid services, to be in violation of the incentive payment restrictions. 
Under such arrangements, the third party might provide services such as 
instruction, curricula, and course materials. This provision would 
clearly establish that payments to third parties, including tuition 
sharing arrangements, that are not for recruitment, admissions, 
enrollment, or financial aid services, would not be in violation of the 
incentive payment restrictions.
L. Payments to Third Parties for Recruitment Activities
    Section 487(a)(20) applies both to individuals who work for the 
institution and to entities outside the institution. We believe that 
Congress included these outside entities because it did not want an 
institution to avoid the limitations in that section merely by using an 
outside entity. On the other hand, we believe that Congress did not 
intend to limit an institution's ability to contract with outside 
entities for recruitment, admissions, enrollment, or financial aid 
services if the outside entity adheres to the same limitations that 
apply to institutions. Payments made by an institution to a third party 
would not violate the incentive payment restrictions as long as the 
individuals performing any activities related to recruitment, 
admissions, enrollment, or financial aid were compensated in a way that 
would otherwise be permissible under the standards in this section for 
covered employees of the institution.
    At the conclusion of the discussion on the issue of incentive 
payment restrictions, all the negotiators agreed that clarification was 
needed in the area of the incentive payment restrictions and that the 
issuance of specific guidance in the regulations was preferable to our 
earlier use of private letter guidance in response to individual 
inquiries. However, because universal agreement could not be reached on 
some of the specific proposals presented, the committee was not able to 
reach consensus on the proposed regulatory language related to the 
incentive payment restrictions.

Institutions Required to Take Attendance (Section 668.22)

    Current Regulations: Section 668.22(b)(3) defines, for purposes of 
the Return of Title IV Aid calculations, an institution that is 
``required to take attendance'' as one that is required to take 
attendance by an entity outside of the institution, such as the 
institution's accrediting agency or a State agency.
    Suggested Change: Some institutions and the non-Federal negotiators 
suggested that we provide greater specificity in the definition of when 
an institution is considered to be one that is required to take 
attendance. In particular, they wanted the regulations to clearly state 
that an institution is one that is ``required to take attendance'' only 
if the outside entity has determined that it requires the institution 
to take attendance.
    Proposed Regulations: Under the proposed regulations in 
Sec. 668.22(b)(3)(i), for the purposes of determining the withdrawal 
date of a student, an institution would be considered to be one that is 
``required to take attendance'' only when an outside entity determines 
that it requires that the institution take attendance for some or all 
of its students. Absent a determination by an outside entity that the 
institution is required to take attendance, the institution would be 
considered to be one that is not required to take attendance.
    Reason: Several of the negotiators expressed concern with our 
current interpretation of the definition of an institution that is 
required to take attendance. We have previously stated that if we 
determine that the only way that an institution can comply with a 
requirement of an outside entity is to take attendance, the institution 
is considered to be ``required to take attendance'' even if the outside 
entity states that it does not require the institution to take 
attendance (Dear Colleague Letter GEN-00-24).
    Several of the negotiators felt that we should defer to the outside 
entity to determine when requirements of that entity mean that an 
institution is required to take attendance. The negotiators believed 
that the outside entity was in the better position to make that 
determination, not the Department.
    The committee agreed to modify the regulations to make clear that 
an institution is considered to be ``required to take attendance'' only 
when an outside entity has determined that the institution must, even 
for a limited period of time, take attendance for some or all of its 
students.
    Institutions should note that we have not changed the existing 
regulatory requirement in Sec. 668.22(b)(3)(ii), which provides that if 
an outside entity specifically requires an institution to take 
attendance for only a portion of its students, the institution is 
required to use the attendance records for those students only. The 
institution would not be required to take attendance for any of its 
other students unless it is required to take attendance for those 
students by another entity.
    If an outside entity has a requirement, as determined by that 
entity, for the institution to consistently take attendance for a 
limited period of time (e.g., up to a census date), the institution 
meets the definition of an institution required to take attendance for 
that limited period of time only. If a student ceased enrollment during 
that limited period, the institution must use its attendance records to 
determine the student's withdrawal date. However, if an outside entity 
has a requirement, as determined by the entity, to take attendance for 
a single day such as attendance for census purposes, that single event 
would not cause the institution to meet the definition of an

[[Page 51726]]

institution that is required to take attendance.
    Also, as we have previously indicated, when an institution 
administratively withdraws a student from all of his or her classes the 
student is considered to have officially withdrawn as of the date of 
that administrative withdrawal. This guidance applies regardless of 
whether or not the institution is required to take attendance.
    Consistent with that guidance, when, through a census on a certain 
date or similar process, all of a student's instructors indicate that 
the student is no longer in attendance, the student is considered to 
have officially withdrawn as of the census date.

Leaves of Absence (Section 668.22)

    Current Regulations: Section 668.22(d)(1)(vi) of the Return of 
Title IV Aid regulations provides that generally, only one leave of 
absence that meets certain requirements and does not exceed 180 days in 
a 12-month period may be granted to a student. However, additional 
leaves of absence may be granted under exceptions provided in 
Sec. 668.22(d)(2). One of those exceptions allows an institution to 
grant an additional leave of absence if the subsequent leave of absence 
does not exceed 30 days and it is due to unforeseen circumstances. 
Additionally, other leaves of absence may be granted if the institution 
documents that the leaves are for jury duty, military reasons, or 
circumstances covered under the Family and Medical Leave Act of 1993.
    Current regulations also provide that a leave of absence for Return 
of Title IV Aid purposes must have been granted by the institution 
under its formal leave of absence policy. An institution's leave of 
absence policy is a formal policy if it is in writing and publicized to 
students, and it requires students to provide a written request for a 
leave of absence.
    Suggested Change: Some institutions and the non-Federal negotiators 
recommended that the protection provided by the 180-day maximum 
timeframe within a 12-month period for an approved leave of absence is 
sufficient to prevent abuse and that tracking the reasons for requests 
for subsequent leaves and evaluating them against certain limited 
exceptions is administratively burdensome. They stated that 
institutions should have broad flexibility to make the best 
determination for each student based upon his or her unique needs and 
situation rather than being limited by the number and type of leaves of 
absence that they can approve.
    Proposed Regulations: The proposed regulations would simplify the 
approved leave of absence definition by allowing multiple leaves of 
absence at the discretion of the institution, as long as the total 
number of days for all leaves does not exceed 180 days within a 12-
month period. As a result, we propose to remove the current language 
that describes the exceptions to the single leave of absence rule.
    The requirement that an institution's leave of absence policy 
require a student to submit a written request would be modified to 
require that the request must include a reason.
    Reason: Some of the non-Federal negotiators indicated that the 
range of reasons that cause students to need multiple leaves of absence 
can be outside the scope of the current regulations, but nonetheless 
important for the students and their families. Also, the restriction in 
the current regulations that the first subsequent leave of absence, 
although it may be granted for any unforeseen circumstance, be limited 
to no more than 30 days, is arbitrary in practice and results in unfair 
treatment, while not providing any additional protection for either the 
student or the programs. For example, if a student had taken a leave of 
absence for 61 days and subsequently needed an additional leave of 
absence of 31 days for unforeseen circumstances, under the current 
regulations the second leave could not be an approved leave of absence. 
The total of 92 days for leaves of absence is significantly less than 
the maximum of 180 days allowable, but because the second leave of 
absence for unforeseen circumstances is for more than 30 days, it 
cannot meet the current definition in Sec. 668.22(d)(2)(i).
    We agree that if there is a reasonable expectation that a student 
will return from a leave of absence, it is better to keep the student 
enrolled than to have the student withdraw.
    The current regulations already provide that an institution must 
determine, before it grants a leave of absence, that there is a 
reasonable expectation that the student will return from the leave. In 
order for the institution to make such a determination, it must know 
the student's reason for requesting the leave. For this reason, the 
proposed language would require the institution's formal leave of 
absence policy to include the requirement that the student provide the 
reason for the requested leave of absence.
    We have been asked to clarify the requirements that an institution 
must comply with when students return from a leave of absence but, 
instead of resuming their academic program at the point they began the 
leave of absence, they repeat prior coursework in preparation for 
continuing in the original program of study.
    One element of an approved leave of absence is that the institution 
may not impose additional charges when the approved leave of absence 
ends and the student resumes his or her program of study. The same 
requirement holds when a student returns for the purpose of repeating 
prior coursework to enhance his or her skills and knowledge in order to 
resume the program. That is, a student may return and repeat prior 
coursework as long as the student does not incur additional 
institutional charges. As a result, the student would also not be 
eligible for any additional Title IV program assistance for this 
preparatory phase, even if the student were to start again at the 
beginning of the module or course from which he or she took the leave 
of absence.
    Until a student described above has resumed the academic program at 
the point he or she began the leave of absence, the student is 
considered to still be on the approved leave of absence, including 
during the time the prior coursework is being repeated. Since such a 
student is considered to be on a leave of absence while repeating prior 
coursework, if the student fails to begin attendance at the point in 
the academic program where he or she left off at the beginning of the 
leave of absence, the regulatory requirement that a student who fails 
to return from an approved leave of absence must be treated as a 
withdrawal back to the start of the leave of absence applies. The date 
of the student's withdrawal that must be used in the Return of Title IV 
Aid calculation is the date that he or she began the leave of absence 
and not the date the student ceased participation in the repeated 
courses.

Overpayments (Sections 668.35, 673.5, and 690.79)

    Current Regulations: Section 668.35(c) provides that a student who 
receives a Federal Perkins loan or Title IV grant overpayment of any 
amount is eligible to receive further Title IV aid only if the student 
repays the overpayment in full or makes arrangements, satisfactory to 
the holder of the debt, to repay the overpayment.
    Sections 673.5(f) and 690.79 establish student and institutional 
liability for Perkins loan, FSEOG, and Federal Pell Grant overpayments 
and specify the repayment and collection of such, as well as the 
conditions for the referral of

[[Page 51727]]

FSEOG and Pell Grant overpayments to the Secretary.
    For all three programs, the regulations provide that the student is 
liable for any overpayment made to the student regardless of the 
amount. They also provide that the institution is liable for any 
overpayment that was the result of its failure to comply with the 
appropriate regulatory requirements. In addition, the regulations 
provide that, for any overpayment for which it is not liable, the 
institution must assist the Secretary in recovering that overpayment.
    For Perkins and FSEOG overpayments only, the regulations also 
provide that the institution must promptly send the student a written 
notice requesting repayment of the overpayment. In contrast, however, 
the regulations for the Pell Grant program require the institution to 
make a reasonable effort to contact the student and recover the 
overpayment.
    Also, the Perkins and FSEOG regulations require the institution to 
consider any objection made by the student that the overpayment 
determination is erroneous and to determine whether the objection is 
warranted. The Pell Grant regulations do not specify this step.
    For the Perkins program, the institution is responsible for 
attempting to collect any overpayment and cannot refer the overpayment 
to the Secretary. Any amount collected must be returned to the 
institution's Federal Perkins Loan fund. If an FSEOG overpayment is not 
resolved, the institution must refer it to the Secretary if it is $25 
or more. An unresolved Pell Grant overpayment must also be referred to 
the Secretary, but the regulations are silent on a minimum amount.
    Suggested Change: At various conferences and meetings, institutions 
have suggested that the regulations on the treatment of overpayments be 
applied consistently to all of the Title IV programs. Further, they 
suggested that the treatment of overpayments incorporate the de minimis 
amount concept that currently applies to a grant overpayment under the 
Return of Title IV Aid requirements. That is, they suggested that a 
student not lose eligibility for Title IV funds nor be required to 
repay an overpayment if the original overpayment amount is less than 
$25. This request was repeated by some of the non-Federal negotiators.
    Proposed Regulations: The proposed regulations would revise 
Sec. 668.35(c) to allow a student to remain eligible to receive 
additional Title IV aid if the amount of the Perkins Loan or Title IV 
grant overpayment is less than $25 and is neither a remaining balance 
nor a result of applying the overaward threshold for the campus-based 
programs allowed under Sec. 673.5(d).
    The proposed regulations would revise Secs. 673.5(f) and 690.79 to 
specify that a student is not liable for a Perkins loan, FSEOG, or Pell 
Grant overpayment that is less than $25 and is not a remaining balance 
and, for a Perkins loan or FSEOG overpayment, is not the result of 
applying the $300 campus-based overaward threshold. The proposed 
regulations also would specify, for all three programs, that a student 
is not liable for an overpayment if the institution is liable for it.
    The proposed regulations would provide that for purposes of FSEOG 
overpayments, the provisions apply only to the Federal share of FSEOG 
awards if the institution meets its matching share by the individual 
recipient method or the aggregate method. When an FSEOG award is 
matched under the fund specific method, the entire amount of the award 
would be subject to the provisions of Sec. 673.5(f).
    The proposed regulations would make the collection and referral 
requirements for a Pell Grant overpayment consistent with current 
requirements for FSEOG overpayments. They would specify that when 
attempting to collect a Federal Pell Grant overpayment, the institution 
must provide written notice of the overpayment to the student, and if a 
student objects to an overpayment determination on the grounds that it 
is erroneous, the institution must determine whether the objection is 
warranted.
    For student overpayments that meet the conditions of the proposed 
de minimis standard, an institution would not be required to attempt 
recovery of the overpayment, report it to NSLDS, or refer it to the 
Secretary.
    Reason: Institutions have questioned the complexity created by 
making students ineligible for further Title IV funding due to small 
overpayments and the cost effectiveness of collecting such small 
amounts. They thought that the current grant overpayment policies under 
the Return of Title IV Aid requirements allowed more flexibility and 
should be adopted for other types of overpayments. They further noted 
an inconsistency in the treatment of different types of overpayments. 
The negotiators agreed with the reasons provided by the institutions. 
The regulatory changes of applying a $25 de minimis standard to other 
overpayments are proposed for consistency, simplicity, and cost 
effectiveness.
    It is important to note that for all programs the de minimis $25 
amount must not be the result of a remaining balance. A remaining 
balance less than $25 occurs when the overpayment amount for which the 
student was responsible was originally $25 or more, but is now less 
than $25 because of payments made. In such cases, even though the 
balance of the overpayment now owed is less than $25, the de minimis 
standard would not apply, and the student would still be responsible 
for fully repaying that remaining balance. The student would also not 
be eligible for additional Title IV aid until the overpayment is fully 
paid or satisfactory arrangements to repay are made.
    Federal Perkins Loan and FSEOG overpayments that result from the 
application of the $300 campus-based overaward threshold also would not 
be subject to the de minimis standard. For example, if an institution 
discovers that a student with campus-based funds subsequently received 
additional sources of aid such that the student is now overawarded by 
$314, the student would have a campus-based overpayment of $14 after 
the $300 overaward threshold is applied. In this instance, the student 
would still be responsible for the $14 overpayment and would not be 
eligible for additional Title IV student aid until the overpayment is 
resolved.
    In order to provide consistent treatment among the programs, the 
proposed change to the Pell Grant regulations would provide that an 
institution must promptly send a written notice to the student 
requesting repayment of an overpayment. (Note that unless specifically 
indicated otherwise, any written notice requirement can be delivered by 
electronic means, as well as via paper methods.)
    To provide students with the opportunity to object to any 
overpayment determination that they believe is in error, we are 
proposing the same requirement for the Pell Grant program that 
currently exists for the Perkins and FSEOG programs. That is, 
institutions would be required to allow students to object to a Pell 
Grant overpayment determination on the grounds that it is erroneous. 
The institution would be required to consider any information provided 
by the student and determine whether the objection is warranted.
    The proposed regulations would not modify the responsibilities of 
an institution when it is liable for an overpayment. If the institution 
is liable for an overpayment of any amount, it

[[Page 51728]]

must immediately return the amount of the overpayment to the 
appropriate Title IV student aid account or otherwise return the funds 
to the Secretary as appropriate. These regulations would not prevent an 
institution from billing or otherwise holding the student responsible 
for the amount of the overpayment that the institution returned. 
However, such a debt is, by definition, not a Title IV debt and cannot 
be considered as such.
    Further, these proposed regulations would not change the current 
rule that an institution is not required to refer to the Secretary a 
Federal Perkins loan overpayment, because all payments must be returned 
to the institution's revolving loan fund.
    Finally, the proposed regulations would not change the fact that 
under the Return of Title IV Aid calculations in Sec. 668.22, Federal 
Perkins loans are not treated as an overpayment. Rather, unearned 
Federal Perkins funds for which the student is responsible are repaid 
according to the terms of the loan.

Expiration of Ability to Benefit Tests (Sections 668.32 and 668.151)

    Current Regulations: As provided in Sec. 668.32(e), an otherwise 
eligible student who does not have a high school diploma or its 
recognized equivalent and who does not meet the home-schooled standards 
of the regulation is eligible to receive Title IV, HEA program 
assistance only if the student has obtained a passing score, as 
specified by the Secretary, on an approved ability-to-benefit (ATB) 
test within 12 months before the date the student initially receives 
Title IV program assistance.
    Section 668.151(a)(2) requires an institution to use the results of 
an approved test to determine a student's eligibility for Title IV 
assistance if the approved test was independently and properly 
administered.
    Suggested Change: Institutions suggested that the 12-month 
limitation on the acceptability of an ATB test passing score was not 
necessary and should be removed from the regulations. They pointed out 
that one of the alternatives to a passing score on an approved ATB test 
is either a high school diploma or its equivalent, but neither the 
diploma nor its equivalent expires after a certain period of time.
    During the negotiated rulemaking discussion on ATB testing, we 
suggested that the regulations should be modified to make it clear that 
an institution must obtain the results of an approved ATB test directly 
from either the test publisher or from the assessment center that 
administered the test.
    Proposed Regulations: The proposed regulations would revise 
Sec. 668.32(e) by eliminating the provision that limits the duration of 
a passing score on an approved ATB test to 12 months before a student 
initially receives Title IV, HEA program assistance.
    The proposed regulations would make it clear that an institution 
must obtain the results of an approved ATB test directly from either 
the test publisher or the assessment center that administered the test.
    Reason: We agreed with the non-Federal negotiators that an ATB test 
score should be valid for as long as the test publisher or the 
assessment center that administered the test is able to provide the 
institution with an official report of the original passing score. In 
other words, an institution may not accept as a valid passing test 
score a report it received from the student or from another institution 
(unless it came from a test assessment center at another institution in 
accordance with the regulations).

Late Disbursements (Section 668.164)

    Current Regulations: Section 668.164(g) sets forth the conditions 
that must be satisfied before an institution may make a late 
disbursement to an otherwise eligible student (or the student's parent 
in the case of a PLUS loan) who has become ineligible either because 
the student is no longer enrolled at the institution or, for FFEL and 
Direct Loan purposes, is no longer enrolled on at least a half-time 
basis. One of the conditions is that the institution must have received 
a SAR or ISIR for the student before the student became ineligible. If 
all of the conditions are met, an institution has 90 days from the date 
the student became ineligible to make the late disbursement.
    Suggested Change: Institutions suggested that the regulations be 
modified to reflect our private letter guidance that allows, under 
limited circumstances, a late disbursement to be made after the 90-day 
regulatory deadline. Under this guidance, a guaranty agency, or the 
Department for a Direct Loan, may permit an institution to make a late 
disbursement of the loan if the reason the disbursement was not made 
within 90 days was not the fault of the student.
    They also suggested that we clarify the circumstances in which an 
institution must make a late disbursement and those in which it has the 
option to do so. In particular, the institutions pointed to the Return 
of Title IV Aid regulations under which an institution must make a late 
disbursement (referred to as a ``post-withdrawal disbursement'') and a 
provision of the late disbursement regulations under which an 
institution appears to have the choice of whether to make the late 
disbursement.
    The third and fourth suggestions deal with the requirement that, as 
a condition for making a late disbursement an institution must have 
received a SAR or ISIR with an official EFC before the date a student 
became ineligible. The non-Federal negotiators suggested that this 
requirement should not apply to a late disbursement of a PLUS loan 
because the EFC is not needed by an institution to certify or originate 
the loan. Moreover, they believed that it was unfair that some students 
do not qualify for a late disbursement solely because institutions may 
not be aware (or cannot document) that they received an ISIR before the 
date the student became ineligible. To make it fair for all students, 
the non-Federal negotiators suggested that the date the SAR or ISIR was 
received by the institution be replaced by the date the Secretary 
processed a SAR or ISIR with an official EFC for the student.
    Proposed Regulations: The proposed regulations would increase the 
timeframe within which an institution may make a late disbursement from 
90 to 120 days. In addition, the proposed regulations would provide 
that, for those cases in which the student is not at fault, we may 
approve an institution's request to make a late disbursement after 120 
days.
    With respect to when an institution must make a late disbursement 
in cases in which a student withdraws and is eligible for a post-
withdrawal disbursement, the proposed regulations incorporate directly, 
rather than by cross reference, the requirement that an institution 
must make or offer the disbursement, as appropriate. The proposed 
regulations would also require an institution to offer or make the late 
disbursement to the student (or the student's parent for a PLUS loan) 
for a student who completed the payment period or period of enrollment.
    These proposed regulations would adopt the suggestions made by the 
non-Federal negotiators to eliminate the SAR/ISIR requirement for a 
late disbursement of a PLUS loan.
    The proposed regulations would change the requirement that the 
institution must have received a SAR or ISIR before the student became 
ineligible to a requirement that a SAR or ISIR, with an official EFC, 
must have been processed by the Secretary before the student became 
ineligible.

[[Page 51729]]

    Finally, the proposed regulations would eliminate the requirement, 
that in order for an institution to make a late disbursement of a 
Federal Pell Grant, it must have received a ``valid'' SAR or ISIR 
before the student became ineligible. Instead, a student's eligibility 
for a late Pell Grant disbursement would be based upon the rule that 
the Secretary must have processed a SAR/ISIR with an official EFC while 
the student was still eligible. Of course, the institution must receive 
the SAR or ISIR before the actual disbursement can be made.
    Reason: We agree with the non-Federal negotiators that the 
Department's informal guidance allowing institutions to make late 
disbursements after the established timeframe in limited cases should 
be made part of the regulations. Doing so would inform all institutions 
and guaranty agencies (as opposed to only those that received private-
letter guidance) that this procedure is available. However, the 
proposed regulations differ from the current regulations and guidance 
in two ways. First, we believe that increasing the timeframe from 90 to 
120 days would benefit students and institutions by providing 
sufficient time, in most cases, for a late disbursement to be made 
without our approval and without regard to the reason for the late 
disbursement.
    Second, for the limited cases in which it is not the fault of the 
student that a late disbursement was not made within the 120-day 
period, an institution would seek our approval (not that of the 
guaranty agency, as provided under current guidance) to make that 
disbursement. During the discussion on this point, the negotiators 
representing guaranty agencies, supported by others, suggested that, 
for FFEL loans, guaranty agencies continue to be allowed to approve a 
late disbursement based upon receiving information that the reason for 
the delay was not the fault of the student. For program integrity 
reasons, we believe it is more appropriate that we determine whether to 
approve a late disbursement after the established deadline. We offered 
assurances that, if this proposed rule is made final, we will implement 
an expedited process for approving late disbursement requests. While 
details have not been finalized, we expect that we will establish a 
single point of contact for requests for late disbursements beyond the 
proposed 120-day limit. An institution would make its request and 
provide sufficient information showing that the reason for the delay 
was not the fault of the student or parent.
    It was noted during the discussion that there may be situations 
where, because of administrative constraints, a late disbursement may 
not be possible even if the request is made within the applicable 
timeframes. Examples of these constraints include the closing of an 
award year's disbursement processing for the Pell Grant and campus-
based programs or the termination of an FFEL lender's processing for a 
year. During the negotiations, we were asked to consider what 
interventions we could take in our processing to minimize the instances 
in which a student who was otherwise eligible for a late disbursement 
could not receive the funds because of these administrative 
limitations. We will provide additional guidance on this issue at a 
later time.
    In the discussions pertaining to late disbursements for students 
that withdraw from an institution, the non-Federal negotiators pointed 
to what they viewed as an apparent conflict in the regulations. Under 
the provisions of Sec. 668.22, an institution may be required to make a 
late disbursement (post-withdrawal disbursement) to a student who 
withdraws during a payment period or period of enrollment. However, 
under the cash management provisions in Sec. 668.164(g)(3)(i), an 
institution has the option of making a late disbursement to pay for 
educational costs that a student incurred for the period in which the 
student was enrolled and eligible. However, it would be contrary to the 
primary tenet in Sec. 668.22--that a withdrawn student has earned Title 
IV loan or grant assistance equal to the percent of the payment period 
or period of enrollment the student completed--for an institution to 
deny that student a late disbursement. The current late disbursement 
regulations at Sec. 668.164(g)(1)(ii) specifically require institutions 
to follow the provisions in Sec. 668.22 for a student who withdraws 
from the institution. Although, we are not proposing any change to this 
requirement, we are proposing to redraft the requirement in order to 
eliminate any confusion regarding this issue.
    Along the same lines, the proposed rule would require an 
institution to pay or offer a late disbursement to a student who 
completes the payment period or period of enrollment. Under the 
requirements of Sec. 668.22, a student who completes more than 60 
percent of the payment period or period of enrollment has earned 100 
percent of his or her Title IV aid and the institution must make or 
offer, as appropriate, a post-withdrawal disbursement of any of those 
funds that were not received. A student who completes 100 percent of 
the payment period or period of enrollment has the same entitlement to 
all of his or her Title IV funds for the period. Under the proposed 
regulations, the institution would be permitted to credit the student's 
account to pay for current and allowable charges in accordance with the 
current cash management regulations. For example, an institution would 
have to provide notice to a student, or parent in the case of a PLUS 
loan, when the institution credits the student's account with Direct 
Loan, FFEL, or Federal Perkins Loan Program funds in order to give the 
student or parent an opportunity to cancel all or a portion of the loan 
disbursement.
    The proposed change that allows a student to be considered for a 
late disbursement when the Secretary has processed a SAR/ISIR with an 
official EFC rather than when the institution receives the SAR or ISIR, 
provides the institution with an easy way to document the student's 
eligibility since each ISIR record includes the date that the Secretary 
processed the application and created the SAR/ISIR. More importantly, 
this proposed change would provide equity to students in the 
consideration of a late disbursement, since eligibility would be based 
upon the student's action in submitting an application (FAFSA) or 
correction to the Secretary and not on when an institution happens to 
draw its ISIRs from its electronic mailbox.
    We agree with the reasons noted by the non-Federal negotiators for 
proposing changes to the regulations regarding the relevance of the 
institution receiving a SAR/ISIR for a PLUS loan, and the proposed 
regulations would not require the institution to rely upon a SAR/ISIR 
for determining if a parent is eligible for a late disbursement of a 
PLUS loan. However, we wish to make clear that in cases in which an 
institution does not have a SAR/ISIR, it may not certify or originate a 
PLUS loan until it documents that the student for whom the loan is 
intended meets all the applicable eligibility requirements described in 
Sec. 668.32 (the student is not in default, does not owe an 
overpayment, is a citizen or eligible non-citizen, etc.).
    Finally, while these proposed regulations would eliminate the 
requirement that for purposes of a Pell Grant an institution must have 
received a valid SAR or ISIR before the student withdrew, a valid SAR 
or ISIR would still be required before an institution could actually 
make the late disbursement of a Pell Grant.

[[Page 51730]]

Notices and Authorizations (Section 668.165)

    Current Regulations: Whenever an institution credits a student's 
account with Title IV, HEA loan funds, it must notify the student (or 
the student's parent in case of a PLUS loan) of his or her right to 
cancel all or part of the loan. The notice may be provided in writing 
or sent electronically. If it is sent electronically, the institution 
must confirm that the notice was received by the student or parent.
    Suggested Change: Institutions suggested that the requirement that 
an institution confirm the receipt of a notice sent electronically be 
eliminated.
    Proposed Regulations: The proposed regulations would adopt the 
suggested change.
    Reason: We no longer believe this requirement is necessary in view 
of continuing advances in, and more widespread use of, technologies for 
conducting electronic transactions. Nevertheless, we expect 
institutions to take seriously the student's right to reconsider his or 
her loan obligation (the notice may be the student's last chance to 
cancel the loan) by taking steps that reasonably ensure that the 
student receives the notice.
    Also, the proposed rule would eliminate the apparent distinction 
between providing the notice in writing or electronically. In keeping 
with prior guidance on this matter, we wish to emphasize there is 
generally no difference in the regulations between the terms ``in 
writing'' and ``electronically.'' Unless a particular regulation 
requires otherwise, an institution may comply with a requirement that 
an activity be conducted ``in writing'' by conducting that activity 
electronically.

Timely Return of Funds (Sections 668.171 and 668.173)

    Current Regulations: Under the provisions of Subpart L of the 
General Provisions regulations, one of the standards that an 
institution must satisfy to be financially responsible, as provided in 
Section 498(c)(6)(A) of the HEA, is that it must have sufficient cash 
reserves to make required refunds. An institution is considered to have 
sufficient cash reserves if it is a public institution or it is covered 
by a State's tuition recovery fund. Otherwise, we consider that an 
institution has sufficient cash reserves if, for its two most recently 
completed fiscal years, it makes required refunds in a timely manner, 
as required in Sec. 668.22(j). On the other hand, an institution is not 
considered to have sufficient cash reserves if an audit or review 
finding shows that the institution did not make required refunds in a 
timely manner for 5 percent or more of the students sampled during the 
audit or review. In this case, an institution must demonstrate that it 
has sufficient cash reserves by submitting a letter of credit payable 
to the Secretary. [Note to readers: The financial responsibility 
regulations in Subpart L were not fully revised when the Department 
published the regulations under Sec. 668.22 for returning Title IV, HEA 
program funds. The regulations for returning funds replaced the 
previous ``refund'' requirements. To avoid confusion over the terms 
used in the current regulations, from this point forward we will use 
the phrase ``returning funds.'']
    Suggested Change: The non-Federal negotiators suggested that we 
clarify the timeframe that an institution has to return unearned Title 
IV funds that it is responsible for returning. The non-Federal 
negotiators pointed to Sec. 668.22(j), which provides that an 
institution must return unearned Title IV, HEA program funds no later 
than 30 days after the date of the institution's determination that a 
student withdrew. However, the Department's audit guide is more 
specific, stating that if the funds are returned by check, the check 
used must clear the institution's bank within the 30-day period. The 
non-Federal negotiators believed it was unfair to hold an institution 
responsible for a check clearance process that is beyond its control. 
They suggested that we clarify that an institution has 30 days to issue 
a check. They felt this was important since, in the context of the 
financial responsibility regulations, any ambiguity in the rules could 
inadvertently result in an institution having to submit a letter of 
credit.
    During the negotiated rulemaking sessions the non-Federal 
negotiators made several suggestions regarding the letter of credit 
requirement. They suggested that the regulations provide that an 
institution that would otherwise be required to submit a letter of 
credit not have to do so if the reason that funds were not returned in 
a timely manner was not the institution's fault or was beyond the 
institution's control.
    They also noted that there may be cases where the initial 
determination that an institution exceeded the 5 percent threshold was 
in error. Therefore, they wanted the letter of credit to be required 
only after a preliminary finding, made during a Department or guaranty 
agency review, is verified or resolved, as noted in the final review 
report, rather than at an earlier point in the process such as when the 
draft report was issued. They pointed out that, as a practical matter, 
it is not worthwhile to require a letter of credit for a small amount 
of money. The non-Federal negotiators also suggested changes to the 5 
percent threshold and the timeframes for submitting the letter of 
credit.
    Finally, they asserted that an audit or review finding citing an 
institution for not returning funds in a timely manner may prompt an 
administrative or compliance arm of the institution to require a 
comprehensive review of, and changes to, its practices and procedures. 
The non-Federal negotiators believed that the comprehensive review 
should not be prompted unnecessarily in cases where the finding is for 
a de minimis number of untimely returns.
    Proposed Regulations: Under the proposal, unearned funds must be 
returned no later than 30 days after the date of the institution's 
determination that the student withdrew. The proposed regulations would 
define specifically when we consider the institution to have returned 
funds depending upon the method it uses to return the funds. 
Specifically, the regulations would provide that an institution returns 
funds when it: (1) Deposits or transfers the funds into the bank 
account it maintains for Federal funds, (2) initiates an EFT to 
transfer the funds, (3) initiates an electronic transaction that 
instructs an FFEL lender to adjust a borrower's loan for the amount of 
the ``returned funds'', or (4) issues a check. However, if a check is 
used to return unearned funds, the proposed regulations would also 
require that the check must be received by an FFEL Program lender or 
the Secretary no later than 45 days after the institution determined 
the student withdrew.
    In response to suggestions made during the negotiating sessions, 
these proposed regulations would make several other changes. First, in 
cases in which there are exceptional circumstances beyond an 
institution's control or when the institution believes that an auditor 
or reviewer made an error, the regulations would provide that the 
institution may request the Secretary to reconsider a finding that it 
failed to return unearned funds in a timely manner. In its request, the 
institution would need to submit documents showing that it would not 
have exceeded the 5 percent threshold had it not been for the 
exceptional circumstance or error. An institution that submits the 
request would not be required to submit a letter of credit unless the 
Secretary notifies the institution that its request is denied.

[[Page 51731]]

    Second, the proposed regulations would establish timeframes for 
submitting a letter of credit depending on whether the finding 
triggering the letter of credit was made in a compliance audit, in a 
program review conducted by the Department or guaranty agency, or an 
audit conducted by the Department's Office of the Inspector General 
(OIG).
    Third, the proposed regulations would provide that an institution 
would not be required to submit a letter of credit of less than $5,000. 
However, to meet the statutory reserve requirement, such an institution 
would need to demonstrate that it has available at all times cash 
reserves of at least $5,000 to make required returns.
    Finally, in response to general concerns over the threshold 
requirement and the consequences of a finding that an institution did 
not return funds in a timely manner, we propose that the Secretary will 
consider an institution that makes one or two untimely returns to be in 
compliance with the reserve standard.
    Reason: We agree that the regulations should clearly establish the 
date by which an institution is required to return unearned funds for 
which it is responsible. We also would like to stress that one of the 
reasons for the requirement that funds be returned promptly is so that 
the student's Title IV loan debt can be promptly and properly reduced.
    The proposed provision that an institution initiates an electronic 
transaction for returning unearned funds (as opposed to initiating an 
electronic transfer of funds) is intended to accommodate the ``hold and 
release'' process used by some FFEL Program participants. Under this 
process, an institution and a lender agree that adjustments to FFEL 
Program loans, including the return of unearned funds, are made when 
the institution initiates an electronic transaction notifying the 
lender of the adjustment or return. The lender then makes the 
adjustment by crediting or otherwise adjusting the borrower's loan 
account for the amount returned.
    Although we adopted most of the approach suggested by the non-
Federal negotiators for returning unearned funds by check, we could not 
incorporate in the regulations their suggestion to separate the 
requirement that the check must be issued within 30 days from the 
requirement that it must be received by an FFEL Program lender or the 
Secretary within 45 days. Doing so would create a conflict in the 
regulations. For example, under one section of the regulations an 
institution would comply with the reserve standard by issuing the check 
within 30 days. However, in another section of the regulations the 
institution would not comply with the same reserve standard if the 
check was not received within 45 days. Consequently, the two-part 
criteria for determining whether an institution satisfies the reserve 
standard when it uses a check to return unearned funds are contained in 
one section of the regulations.
    We also agreed that changes should be made to the current 
regulations to account for errors, or unusual circumstances beyond an 
institution's control, and to otherwise make more certain that an 
institution has exceeded the 5 percent threshold before it would be 
required to submit a letter of credit. In this regard, an institution 
would be required to submit a letter of credit no later than 30 days 
after the Department, OIG, or guaranty agency issues a preliminary 
report that the institution did not return unearned funds in a timely 
manner for 10 percent or more of the sampled students.
    If the finding in the preliminary report is less than 10 percent, 
an institution would not generally be required to submit the letter of 
credit unless the final report shows that the institution did not 
return unearned funds in a timely manner for 5 percent or more of its 
students. If the letter of credit is required, the institution would 
have to submit it no later than 30 days after the final report is 
issued
    Finally, if the Secretary believes it is necessary, the Secretary 
could at any time send a notice to the institution requesting the 
letter of credit.

Federal Work Study at For-Profit Institutions (Sections 675.2 and 
675.21)

    Current Regulations: The current FWS Program regulations reflect 
the limitations placed by the HEA on proprietary institutions with 
regard to the types of non-community service jobs that FWS students may 
hold when they are employed by the institution itself. The specific 
statutory restrictions are provided in section 443(b)(8)(A) of the HEA.
    The HEA requires, among other things, that FWS jobs for students 
who are employed in non-community service jobs by a proprietary 
institution itself must furnish student services that are directly 
related to the FWS student's education. The HEA specifies that the 
definition of ``student services'' is to be determined by the Secretary 
according to regulations. ``Student services'' are defined in 
Sec. 675.2(b) of the FWS Program regulations as ``Services that are 
offered to students that are directly related to the work-study 
student's training or education and that may include, but are not 
limited to, financial aid, library, peer guidance counseling, and 
social, health, and tutorial services.''
    The statutory requirements for FWS jobs at a proprietary 
institution are reflected in Sec. 675.21(b) of the regulations. 
Specifically Sec. 675.21(b)(2) states that if the FWS jobs are not 
community service jobs they must be on campus, provide student 
services, complement the student's educational program or vocational 
goals to the maximum extent possible, and not involve soliciting 
potential students to enroll at the institution. Section 675.21(b)(2) 
provides a reference to the definition of ``student services'' in 
Sec. 675.2 for the previously discussed requirement that the services 
must be directly related to the FWS student's education.
    Suggested Change: Proprietary institutions have suggested at 
conferences, meetings, and in letters that the current FWS Program 
regulations in Sec. 675.2(b) that define ``student services'' and our 
guidance on employment at these institutions be changed to expand 
employment opportunities for FWS students employed in non-community 
service jobs by the proprietary institution itself. The proprietary 
institutions especially urged us to allow FWS students to assist 
instructors in curriculum-related activities that are prohibited under 
current policies.
    These institutions also suggested that we modify past guidance and 
state in the regulations that, in furnishing student services, FWS 
students are not required to provide direct or personal services. The 
proprietary institutions further suggested that we provide in the 
regulations examples of FWS jobs that would never be considered student 
services. In addition, these institutions suggested that the statutory 
requirement that the non-community service FWS jobs must furnish 
student services that are directly related to the student's training or 
education be removed from the definition of ``student services'' and be 
placed in the same section of the FWS Program regulations 
(Sec. 675.21(b)) in which the other requirements for employment at a 
proprietary institution are located.
    Proposed Regulations: The proposed regulations would amend the 
definition of ``student services'' in Sec. 675.2(b) first by, adding 
more examples of jobs in which a proprietary institution may employ 
students on campus to work for the institution itself. The examples 
that would be added to the definition of

[[Page 51732]]

student services are job placement, assisting instructors in 
curriculum-related activities, and security. Second, the proposed 
changes to the definition of ``student services'' would modify past 
guidance and indicate that there is no expectation that the FWS job 
involve direct or personal services. Third, the proposed changes to the 
definition of ``student services'' would specify that some jobs, such 
as facility maintenance, cleaning, purchasing, and public relations, 
are never considered student services. Finally, the statutory 
requirement that the non-community service job must provide student 
services that are directly related to the FWS student's training or 
education would be removed from the definition of ``student services'' 
in Sec. 675.2 and placed in Sec. 675.21(b)(2) of the FWS regulations.
    Reason: Many proprietary institutions informed us that the current 
definition of ``student services'' in the FWS Program regulations and 
our current guidance on that definition do not support or address the 
needs of the student population at most proprietary institutions that 
offer short-term training in a specific skill. A number of proprietary 
institutions have also expressed the concern that our current 
definition and guidance result in students being denied valuable on-
the-job experience in their chosen fields of study. The proprietary 
institutions have asked for more flexibility in establishing FWS jobs 
on campus to enable students to find FWS work that fits into their 
academic schedules and to earn money to pay their educational costs. 
These institutions further stated that some of the types of jobs 
currently excluded actually do provide a service to students at 
proprietary institutions, although some jobs provide this more directly 
than others. The negotiators agreed with the reasons provided by the 
proprietary institutions.
    We agree that many proprietary institutions can offer FWS jobs that 
provide essential services to students and that the regulations can 
provide greater flexibility in this area. Therefore, these proposed 
regulations would expand the definition of ``student services'' in 
Sec. 675.2(b) of the FWS regulations to broaden the scope of FWS job 
opportunities for students who attend proprietary institutions. The 
negotiators welcomed the proposed expansion of the definition of 
student services and the proposed increase of FWS job opportunities for 
students attending proprietary institutions.
    The proposed change would expand the definition of ``student 
services'' by adding further examples of acceptable work areas. The new 
examples are job placement, assisting instructors in curriculum-related 
activities, and security. For example, an FWS student would be able to 
work in a proprietary institution's placement office helping students 
find jobs. Under the proposed regulations, an FWS student would be able 
to assist an instructor in the lab or in other work related to the 
instructor's official academic duties at the institution and have such 
work considered a student service. Also, an FWS student would be able 
to perform security functions such as being a night watchman or being 
an institution security officer. These security roles have taken on 
increased importance and are now considered an essential student 
service for the protection of students and their property. The list of 
areas in which FWS employment is authorized is not meant to be 
exhaustive. However, we believe that they are excellent examples of 
employment that provide student services.
    The proposed regulations would modify guidance issued in the past 
that stated that the FWS student had to provide direct and personal 
services to other students. A service would be considered a ``student 
service'' if the service provides a benefit either directly or 
indirectly to students. Proprietary institutions would be given more 
flexibility in establishing what types of jobs performed by FWS 
students at their institutions provide a direct or indirect benefit to 
other students. Further, the fact that a job has some operational 
functions does not preclude it from being an acceptable FWS job as long 
as it furnishes student services.
    Work that does not serve students will still not be permissible. 
Thus, because facility maintenance, cleaning, purchasing, and public 
relations jobs primarily benefit the institution, the proposed changes 
would specify that such jobs are not considered student services under 
the FWS Program. There are, of course, other jobs that also would not 
be considered student services.
    The proposed regulations would remove from the definition of 
``student services'' in Sec. 675.2(b) the requirement that the non-
community service job provide student services that are directly 
related to the FWS student's training or education. This requirement 
would be made clearer by being moved to Sec. 675.21(b), where the other 
requirements for employment at a proprietary institution are located. 
The negotiators agreed with this proposed regulation change for clarity 
of this requirement.
    Even with the expanded opportunities for student services, 
proprietary institutions should note that the statute and the proposed 
regulations in Sec. 675.21(b)(2) still require that student services 
must be directly related to the FWS student's education when the FWS 
student is employed in a non-community service job by the institution 
itself. For example, a job that involves working in job placement would 
be considered directly related to an FWS student's education or 
training for a student enrolled in the area of human resources, 
management, or business. In a second example, a job that involves 
assisting an instructor in academic-related activities of the program 
in which the student was enrolled would be considered as being directly 
related to an FWS student's education or training. In a final example, 
work in security, for an FWS student enrolled in the field of law 
enforcement or a related field, would also be considered directly 
related to the student's education.
    Institutions are also reminded that the proposed regulations would 
not change other requirements of the regulations. Students who are 
employed by the proprietary institution itself may be employed in FWS 
non-community service jobs only when those jobs are on campus and when 
they complement and reinforce the education programs and vocational 
goals of the FWS student to the maximum extent practicable. Finally, 
work in the admissions or recruitment area of an institution would 
continue to be prohibited, as this employment is considered to involve 
soliciting potential students to enroll at the institution.

GEAR UP Program (Section 694.10)

    Current Regulations: Section 694.10(e) of the regulations 
interprets sections 404E(c) and 404C(b)(1)(C) of the HEA to require 
that GEAR UP scholarship funds not supplant other gift aid that the 
student would otherwise have been eligible to receive. Specifically, 
Sec. 694.10(e) requires that a student eligible for a GEAR UP 
scholarship be awarded financial aid in the following order: Federal 
Pell Grant; any other public or private grants, scholarships, or 
tuition discounts; the GEAR UP scholarship; and other financial 
assistance, such as loans or work-study. An exception to this required 
awarding order is allowed if the institution documents that there are 
exceptional circumstances related to the GEAR UP student's aid package 
that are unique to that GEAR UP student.
    Suggested Change: Members of the institutional community suggested 
that the requirement that an institution award student financial 
assistance in an

[[Page 51733]]

established order for GEAR UP scholarship recipients be eliminated.
    Proposed Regulations: These proposed regulations would remove the 
requirement that an institution award student financial assistance in 
an established order for students who are eligible for a GEAR UP 
scholarship. The proposed regulations would only specify the statutory 
requirement in section 404E(c) of the HEA that GEAR UP scholarships not 
be considered in awarding Title IV grant assistance. As a result, under 
this proposal, an institution would treat GEAR UP scholarships as they 
relate to other gift aid (e.g., grants and scholarships) as the 
institution sees fit, except in the case of Title IV grant assistance, 
which must be awarded without regard to a student's eligibility for a 
GEAR UP scholarship.
    The requirement of section 404(b)(1)(C) of the HEA, although no 
longer applicable to individual student aid packages, would continue to 
apply to States and Partnerships at the program level, meaning that 
States and Partnerships must include as a part of their participation 
plan an assurance that GEAR UP funds will supplement and not supplant 
other funds expended by the States and Partnerships for existing 
programs.
    Section 694.10(c) of the regulations, which implements the portion 
of section 404E(c) of the HEA that provides that a GEAR UP scholarship, 
in combination with any Title IV assistance or other grant or 
scholarship assistance, may not exceed the student's cost of 
attendance, would remain unchanged.
    Reason: Several negotiators expressed concern with the current 
requirement that an institution award aid to a student eligible for a 
GEAR UP scholarship in a particular order. These negotiators felt that 
it was highly inappropriate for the regulations to dictate a packaging 
policy for institutions. They maintained that institutions are in the 
best position to determine the financial aid package that will best 
meet the student's needs.
    One negotiator expressed support for the current packaging 
requirement, noting that the intent in implementing it was to insure 
that a student who is eligible to receive a GEAR UP scholarship would 
benefit from as significant a reduction in his or her postsecondary 
expenses as intended by the statute. The negotiator was concerned that 
in the absence of the institutional packaging requirement, GEAR UP 
students might not get the full benefit of their GEAR UP grant. Several 
of the negotiators opposed to the current requirement argued that the 
opposite is true. They contended that because institutions are not in a 
position of ensuring a reduction in gift aid provided by outside 
entities, GEAR UP scholarship students would have to forego benefiting 
from additional sources of aid that are required to be used as ``last 
dollar'' assistance. In addition, those opposed to the current 
provision believed that because of the concerns that they cited, some 
institutions would choose not to participate in the GEAR UP scholarship 
program.
    The committee reached tentative agreement to remove the 
institutional packaging requirements from the regulations. The 
committee believed that the goal of assuring a significant level of 
assistance to GEAR UP scholarship recipients could be achieved without 
mandating a Federal financial aid packaging order. The negotiator who 
had expressed concern with the removal of the packaging requirements 
stated a hope that if this change to the regulation is made, 
institutions would be eager to participate in the GEAR UP program.
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 to be necessary for administering these programs effectively 
and efficiently.
    Elsewhere in this SUPPLEMENTARY INFORMATION section we identify and 
explain burdens specifically associated with information collection 
requirements. See the heading Paperwork Reduction Act of 1995.
    In assessing the potential costs and benefits--both quantitative 
and qualitative--of this regulatory action, 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.

Summary of Potential Costs and Benefits

    The Secretary is amending these regulations to reduce 
administrative burden for program participants, provide benefits to 
students and borrowers, and to protect the taxpayers' interests. The 
proposed regulations are fully described elsewhere in this preamble. 
The Department of Education has estimated that the proposed regulations 
would have no effect on Federal costs over FY 2002-2006.

2. Clarity of the Regulations

    Executive Order 12866 and the Presidential Memorandum 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. 668.35 Student Debts under the HEA and to the U.S.
     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. These proposed regulations would affect institutions of 
higher education, lenders, and guaranty agencies that participate in 
Title IV, HEA programs, and individual students and loan borrowers. The 
U.S. Small Business Administration (SBA) Size Standards define for-
profit or nonprofit institutions with total annual revenue below 
$5,000,000 or institutions controlled by governmental entities with 
populations below 50,000, and lenders with total assets under $100 
million, as ``small entities.'' Guaranty agencies are State and private 
nonprofit entities that act as agents of the Federal government, and as 
such are not considered ``small entities'' under the Regulatory 
Flexibility Act. Individuals

[[Page 51734]]

are also not defined as ``small entities'' under the Regulatory 
Flexibility Act.
    A significant percentage of the over 4,000 lenders participating in 
the FFEL Program meets the definition of ``small entities.'' While 
these lenders and a number of institutions fall within the SBA size 
guidelines, the proposed regulations do not impose significant new 
costs on these entities.
    The Secretary invites comments from small institutions and lenders 
as to whether they believe the proposed changes would have a 
significant economic impact on them and if so, requests evidence to 
support that belief.

Paperwork Reduction Act of 1995

    Proposed Secs. 600.31, 668.22, 668.165, 668.173, and 673.5 contain 
information collection requirements. Under the Paperwork Reduction Act 
of 1995 (44 U.S.C. 3507(d)), the Department of Education has submitted 
a copy of these sections to the Office of Management and Budget (OMB) 
for its review.
    Collection of Information: Institutional Eligibility under the 
Higher Education Act of 1965, as amended--

Section 600.31--Change in Ownership Resulting in a Change in Control 
for Private Nonprofit, Private For-Profit and Public Institutions

    The proposed regulations expand the conditions under which a change 
in the ownership of an institution is not considered a change of 
ownership for institutional eligibility purposes when the transfer is 
to a family member. The proposed regulations also exclude a transfer of 
ownership upon the death or retirement of an owner to a member of 
management who has had an ownership interest during the preceding two 
years. We expect the decrease in burden to be insignificant because of 
the small number of institutions who annually report under this 
regulation and of that number the few instances where a change in 
ownership would meet the expanded exemption and therefore would not be 
required to file.

Student Assistance General Provisions--Section 668.22--Treatment of 
Title IV Funds When a Student Withdraws

    The proposed regulations would clarify the definition of ``an 
institution that is required to attendance''. Also, under the proposed 
regulations, an institution would only be required to insure that the 
sum of all leaves of absence that a Title IV aid recipient takes does 
not exceed 180 days within a 12-month period (as opposed to the current 
rule where an institution must determine whether subsequent leaves of 
absence meet certain special terms). There would be no significant 
impact upon burden associated with this requirement.

Section 668.165--Notices and Authorizations

    The proposed regulation would reduce burden under this section by 
eliminating the ``confirm receipt'' requirement for a notice sent 
electronically to a student or parent (the notice informs the student 
or parent of his or her right to cancel a loan or loan disbursement). 
The proposed changes do not change the burden hours associated with 
this section of the regulations because there is no burden currently 
associated with this provision.

Section 668.173--Refund Reserve Standard

    The proposed regulations would provide greater flexibility to an 
institution that is cited in an audit or review report for failing to 
return unearned Title IV program funds in a timely manner. Under the 
current regulations, an institution that is cited for this reason must 
automatically submit a letter of credit to the Secretary. Under this 
proposal, the institution would be able to demonstrate that 
circumstances beyond its control inappropriately triggered the audit or 
review finding or that the finding was erroneously made. If the 
Secretary determines that the finding was inappropriately or 
erroneously made, the institution would not have to submit a letter of 
credit. The proposed regulations would also provide that the Secretary 
or guaranty agency may delay requiring a letter of credit from the 
institution until the final audit or review report is issued. In 
addition, the proposed regulations would not require the institution to 
submit the letter of credit if the amount of the letter of credit is 
less than $5,000.
    The proposed regulations could marginally increase the burden on 
some institutions because while institutions that are cited may submit 
documentation showing that the finding was inappropriately or 
erroneously made, they would not be required to submit a letter of 
credit.

General Provisions for the Federal Perkins Loan, FWS, and FSEOG 
Programs--Section 673.5--Overaward

    The proposed regulations would modify the process for referring 
overpayments by specifying that a student is not liable for certain 
overpayments less than $25. The proposed regulations would clarify and 
simplify the current process by providing that an institution only has 
to refer the Federal portion of certain FSEOG overpayments, and by 
making consistent the process for reporting overpayments for all the 
relevant programs. There are no new information collection requirements 
as a result of changing this section.
    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 these proposed collections of 
information in--
     Deciding whether the proposed collections are 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 collections, 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 collections 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.
    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 these proposed collections of 
information in--
     Deciding whether the proposed collections are necessary 
for the proper performance of our functions, including

[[Page 51735]]

whether the information will have practical use;
     Evaluating the accuracy of our estimate of the burden of 
the proposed collections, 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 collections 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.

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, as well as all other Department of 
Education documents published in the Federal Register, in text or Adobe 
Portable Document Format (PDF) on the Internet at the following site: 
www.ed.gov/legislation/FedRegister.
    To use PDF you must have Adobe Acrobat Reader, which is available 
free at this site. If you have questions about using PDF, call the U.S. 
Government Printing Office (GPO), toll free, at 1-888-293-6498; or in 
the Washington, DC, area at (202) 512-1530.
    You may also view this document in PDF format at the following 
site: ifap.ed.gov.

    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 Federal 
Family Education Loan Program; 84.033 Federal Work-Study Program; 
84.038 Federal Perkins Loan Program; 84.063 Federal Pell Grant 
Program; 84.268 William D. Ford Federal Direct Loan Program)

List of Subjects

34 CFR Parts 600 and 668

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

34 CFR Parts 673 and 675

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

34 CFR Parts 682 and 685

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

34 CFR Part 690

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

34 CFR Part 694

    Colleges and universities, Elementary and secondary education, 
Grant programs--education, Reporting and recordkeeping requirements, 
Student aid.

    Dated: August 5, 2002.
Rod Paige,
Secretary of Education.
    For the reasons discussed in the preamble, the Secretary proposes 
to amend parts 600, 668, 673, 675, 682, 685, 690, and 694 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 1099c, unless otherwise noted.


Sec. 600.8  [Amended]

    2. Section 600.8 is amended by adding ``proprietary institution of 
higher education or a postsecondary vocational'' after ``eligible''.
    3. Section 600.21 is amended by revising paragraph (f) to read as 
follows:


Sec. 600.21  Updating application information.

* * * * *
    (f) Definition. A family member includes a person's--
    (1) Parent or stepparent, sibling or step-sibling, spouse, child or 
stepchild, or grandchild or step-grandchild;
    (2) Spouse's parent or stepparent, sibling or step-sibling, child 
or stepchild, or grandchild or step-grandchild;
    (3) Child's spouse; and
    (4) Sibling's spouse.
    4. Section 600.31 is amended by revising paragraph (e) to read as 
follows:


Sec. 600.31  Change in ownership resulting in a change in control for 
private nonprofit, private for-profit and public institutions.

* * * * *
    (e) Excluded transactions. A change in ownership and control 
reported under Sec. 600.21 and otherwise subject to this section does 
not include a transfer of ownership and control of all or part of an 
owner's equity or partnership interest in an institution, the 
institution's parent corporation, or other legal entity that has signed 
the institution's Program Participation Agreement--
    (1) From an owner to a ``family member'' of that owner as defined 
in Sec. 600.21(f); or
    (2) Upon the retirement or death of the owner, to a person with an 
ownership interest in the institution who has been involved in 
management of the institution for at least two years preceding the 
transfer and who established and retained the ownership interest for at 
least two years prior to the transfer.

PART 668--STUDENT ASSISTANCE GENERAL PROVISIONS

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

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


Sec. 668.2  [Amended]

    6. Section 668.2(b) is amended by removing the definition of 
``Academic year''.
    7. Section 668.3 is revised to read as follows:


Sec. 668.3  Academic year.

    (a) General. Except as provided in paragraph (c) of this section, 
an academic year is a period that begins on the first day of classes 
and ends on the last day of classes or examinations during which--
    (1) An institution provides a minimum of 30 weeks of instructional 
time; and

[[Page 51736]]

    (2) For an undergraduate educational program, a full-time student 
is expected to complete at least--
    (i) Twenty-four semester or trimester credit hours or 36 quarter 
credit hours for a program measured in credit hours; or
    (ii) 900 clock hours for a program measured in clock hours.
    (b) Definitions. For purposes of paragraph (a) of this section--
    (1) A week is a consecutive seven-day period;
    (2) A week of instructional time is any week in which at least one 
day of regularly scheduled instruction or examinations occurs or, after 
the last scheduled day of classes for a term or payment period, at 
least one day of study for final examinations occurs; and
    (3) Instructional time does not include any vacation periods, 
homework, or periods of orientation or counseling.
    (c) Reduction in the length of an academic year.
    (1) Upon the written request of an institution, the Secretary may 
approve, for good cause, an academic year of between 26 and 29 weeks of 
instructional time for educational programs offered by the institution 
if the institution offers a two-year program leading to an associate 
degree or a four-year program leading to a baccalaureate degree.
    (2) An institution's written request must--
    (i) Identify each educational program for which the institution 
requests a reduction, and the requested number of weeks of 
instructional time for that program;
    (ii) Demonstrate good cause for the requested reductions; and
    (iii) Include any other information that the Secretary may require 
to determine whether to grant the request.
    (3)(i) The Secretary approves the request of an eligible 
institution for a reduction in the length of its academic year if the 
institution has demonstrated good cause for granting the request and 
the institution's accrediting agency and State licensing agency have 
approved the request.
    (ii) If the Secretary approves the request, the approval terminates 
when the institution's program participation agreement expires. The 
institution may request an extension of that approval as part of the 
recertification process.

(Approved by the Office of Management and Budget under control 
number 1840-0537)

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

    8. Section 668.4 is revised to read as follows:


Sec. 668.4  Payment period.

    (a) Payment periods for an eligible program that measures progress 
in credit hours and has academic terms. For a student enrolled in an 
eligible program that is offered in terms and measures progress in 
credit hours, the payment period is the academic term.
    (b) Payment periods for an eligible program that measures progress 
in credit hours and does not have academic terms--(1) For a student 
enrolled in an eligible program that is one academic year or less in 
length--
    (i) The first payment period is the period of time in which the 
student completes half the number of credit hours in the program and 
half the number of weeks in the program; and
    (ii) The second payment period is the period of time in which the 
student completes the program.
    (2) For a student enrolled in an eligible program that is more than 
one academic year in length--
    (i) For the first academic year and any subsequent full academic 
year--
    (A) The first payment period is the period of time in which the 
student completes half the number of credit hours in the academic year 
and half the number of weeks in the academic year; and
    (B) The second payment period is the period of time in which the 
student completes the academic year.
    (ii) For any remaining portion of an eligible program that is more 
than one-half an academic year but less than a full academic year in 
length--
    (A) The first payment period is the period of time in which the 
student completes half the number of credit hours in the remaining 
portion of the program and half the number of weeks remaining in the 
program; and
    (B) The second payment period is the period of time in which the 
student completes the remainder of the program.
    (iii) For any remaining portion of an eligible program that is not 
more than half an academic year, the payment period is the remainder of 
the program.
    (3) For purposes of paragraphs (b)(1) and (b)(2) of this section, 
if an institution is unable to determine when a student has completed 
half of the credit hours in a program, academic year, or the remainder 
of a program; the student is considered to begin the second payment 
period of the program, academic year, or remainder of a program at the 
later of--
    (i) When, as determined by the institution, the student has 
completed half of the academic coursework in the program, academic 
year, or the remainder of the program; or
    (ii) The calendar midpoint between the first and last scheduled 
days of class of the program, academic year, or the remainder of the 
program.
    (c) Payment periods for an eligible program that measures progress 
in clock hours. (1) For a student enrolled in an eligible program that 
is one academic year or less in length--
    (i) The first payment period is the period of time in which the 
student completes half the number of clock hours in the program; and
    (ii) The second payment period is the period of time in which the 
student completes the program.
    (2) For a student enrolled in an eligible program that is more than 
one academic year in length--
    (i) For the first academic year and any subsequent full academic 
year--
    (A) The first payment period is the period of time in which the 
student completes half the number of clock hours in the academic year; 
and
    (B) The second payment period is the period of time in which the 
student completes the remaining number of clock hours in the academic 
year.
    (ii) For any remaining portion of an eligible program that is more 
than one-half an academic year but less than a full academic year in 
length--
    (A) The first payment period is the period of time in which the 
student completes half the number of clock hours in the remaining 
portion of the program; and
    (B) The second payment period is the period of time in which the 
student completes the remainder of the program.
    (iii) For any remaining portion of an eligible program that is not 
more than one half of an academic year, the payment period is the 
remainder of the program.
    (d) Number of payment periods. Notwithstanding paragraphs (b) and 
(c) of this section, an institution may choose to have more than two 
payment periods. If an institution so chooses, the regulations in 
paragraphs (b) and (c) of this section are modified to reflect the 
increased number of payment periods. For example, if an institution 
chooses to have three payment periods in an academic year in a program 
that measures progress in credit hours but does not have academic 
terms, each payment period must correspond to one-third of the academic 
year measured in both credit hours and weeks of instruction.
    (e) Re-entry within 180 days. If a student withdraws from a program 
described in paragraph (b) or (c) of this section during a payment 
period and then reenters that program within 180 days, the student 
remains in that same

[[Page 51737]]

payment period when he or she returns and, subject to conditions 
established by the Secretary or by the FFEL lender or guaranty agency, 
is eligible to receive any title IV student assistance funds for which 
he or she was eligible prior to withdrawal, including funds that were 
returned by the institution or student under the provisions of 
Sec. 668.22.
    (f) Re-entry after 180 days or transfer. (1) Subject to the 
conditions of paragraph (f)(2) of this section, an institution 
calculates new payment periods for the remainder of the student's 
program based on paragraphs (b) through (d) of this section, for a 
student who withdraws from a program described in paragraphs (b) or (c) 
of this section, and--
    (i) Reenters that program after 180 days,
    (ii) Transfers into another program at the same institution within 
any time period, or
    (iii) Transfers into a program at another institution within any 
time period.
    (2) For a student described in paragraph (f)(1) of this section--
    (i) For the purpose of calculating payment periods only, the length 
of the program is the number of credit hours and the number of weeks, 
or the number of clock hours, that the student has remaining in the 
program he or she enters or reenters, and
    (ii) If the remaining hours, and weeks, if applicable constitute 
one-half of an academic year or less, the remaining hours constitute 
one payment period.

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

    9. Section 668.8 is amended by:
    A. Revising paragraph (b)(3).
    B. Removing paragraph (b)(4).
    The revision reads as follows:


Sec. 668.8  Eligible program.

* * * * *
    (b) * * *
    (3)(i) The Secretary considers that an institution provides one 
week of instructional time in an academic program during any week the 
institution provides at least one day of regularly scheduled 
instruction or examinations, or, after the last scheduled day of 
classes for a term or a payment period, at least one day of study for 
final examinations.
    (ii) Instructional time does not include any vacation periods, 
homework, or periods of orientation or counseling.
* * * * *
    10. Section 668.14(b)(22) is revised to read as follows:


Sec. 668.14  Program participation agreement.

* * * * *
    (b) * * *
    (22)(i) It will not provide any commission, bonus, or other 
incentive payment based directly or indirectly upon success in securing 
enrollments or financial aid to any person or entity engaged in any 
student recruiting or admission activities or in making decisions 
regarding the awarding of title IV, HEA program funds, except that this 
limitation does not apply to the recruitment of foreign students 
residing in foreign countries who are not eligible to receive title IV, 
HEA program funds.
    (ii) Activities and arrangements that an institution may carry out 
without violating the provisions of paragraph (b)(22)(i) of this 
section include, but are not limited to:
    (A) The payment of fixed compensation, such as a fixed annual 
salary or a fixed hourly wage, as long as that compensation is not 
adjusted up or down more than twice during any twelve month period, and 
any adjustment is not based solely on the number of students recruited, 
admitted, enrolled, or awarded financial aid. For this purpose, an 
increase in fixed compensation resulting from a cost of living increase 
that is paid to all or substantially all employees is not considered an 
adjustment.
    (B) Compensation to recruiters based upon their recruitment of 
students who enroll only in programs that are not eligible title IV, 
HEA programs.
    (C) Compensation to recruiters who arrange contracts between the 
institution and an employer under which the employer's employees enroll 
in the institution, and the employer pays, directly or by 
reimbursement, 50 percent or more of the tuition and fees charged to 
its employees; provided that the compensation is not based upon the 
number of employees who enroll in the institution, or the revenue they 
generate, and the recruiters have no contact with the employees.
    (D) Compensation paid as part of a profit-sharing or bonus plan, as 
long as those payments are made to all or substantially all of the 
institution's full-time professional and administrative staff. Such 
payments can be limited to all, or substantially all of the full-time 
employees at one or more organizational level at the institution, 
except that an organizational level may not consist predominantly of 
recruiters, admissions staff, or financial aid staff.
    (E) Compensation that is based upon students successfully 
completing their educational programs, or one academic year of their 
educational programs, whichever is shorter. For this purpose, 
successful completion of an academic year means that the student has 
earned at least 24 semester or trimester credit hours or 36 quarter 
credit hours, or has successfully completed at least 900 clock hours of 
instruction.
    (F) Compensation paid to employees who perform ``pre-enrollment'' 
activities, such as answering telephone calls, referring inquiries, or 
distributing institutional materials, as long as the compensation is 
not based on the number of people actually enrolled.
    (G) Compensation to managerial or supervisory employees who do not 
directly manage or supervise employees who are directly involved in 
recruiting or admissions activities, or the awarding of title IV, HEA 
program funds.
    (H) The awarding of token gifts to the institution's students or 
alumni, provided that the gifts are not in the form of money, no more 
than one gift is provided annually to an individual, and the cost of 
the gift is not more than $100.
    (I) Profit distributions proportionately based upon an individual's 
ownership interest in the institution.
    (J) Compensation paid for Internet-based recruitment and admission 
activities that provide information about the institution to 
prospective students, or permit them to apply for admission on-line.
    (K) Payments to third parties, including tuition sharing 
arrangements, that deliver various services to the institution provided 
that none of the services involve recruiting or admission activities, 
or the awarding of title IV, HEA program funds.
    (L) Payments to third parties, including tuition sharing 
arrangements, that deliver various services to the institution, even if 
one of the services involve recruiting or admission activities or the 
awarding of title IV, HEA program funds, provided that the individuals 
performing the recruitment or admission activities, or the awarding of 
title IV, HEA program funds, are not compensated in a manner that would 
be impermissible under paragraph (b)(22) of this section.
* * * * *
    11. Section 668.22 is amended by:
    A. Revising paragraph (b)(3)(i).
    B. Revising paragraph (d)(1)(vi).
    C. Removing paragraph (d)(1)(vii).
    D. Redesignating paragraphs (d)(1)(viii) and (d)(1)(ix) as 
(d)(1)(vii) and (d)(1)(viii), respectively.
    E. Removing paragraph (d)(2).
    F. Redesignating paragraphs (d)(3) and (d)(4) as (d)(2) and (d)(3), 
respectively.
    G. Removing ``on'' and adding in its place ``at'' in newly 
redesignated paragraph (d)(2).

[[Page 51738]]

    H. Removing ``are'' and adding in its place ``is'' in newly 
redesignated paragraph (d)(3)(i).
    I. Adding ``, that includes the reason for the request,'' after 
``request'' in newly redesignated paragraph (d)(3)(iii)(B).
    J. Adding ``The timeframe for returning funds is further described 
in Sec. 668.173(b) and (c)(3).'' at the end of paragraph (j)(1).
    The revisions read as follows:


Sec. 668.22  Treatment of title IV funds when a student withdraws.

* * * * *
    (b) * * *
    (3)(i) An institution is required to take attendance if an outside 
entity (such as the institution's accrediting agency or a State agency) 
has a requirement, as determined by the entity, that the institution 
take attendance.
* * * * *
    (d) * * *
    (1) * * *
    (vi) The number of days in the approved leave of absence, when 
added to the number of days in all other approved leaves of absence, 
does not exceed 180 days in any 12-month period;
* * * * *


Sec. 668.32  [Amended]

    12. Section 668.32(e)(2) is amended by removing ``within 12 months 
before the date the student initially receives title IV, HEA program 
assistance,''.
    13. Section 668.35(c) is revised to read as follows:


Sec. 668.35  Student debts under the HEA and to the U.S.

* * * * *
    (c) A student who receives an overpayment under the Federal Perkins 
Loan Program, or under a title IV, HEA grant program may nevertheless 
be eligible to receive title IV, HEA program assistance if--
    (1) The student pays the overpayment in full;
    (2) The student makes arrangements satisfactory to the holder of 
the overpayment debt to pay the overpayment; or
    (3) The overpayment amount is less than $25 and is neither a 
remaining balance nor a result of the application of the overaward 
threshold in 34 CFR 673.5(d).
* * * * *


Sec. 668.151  [Amended]

    14. Section 668.151(a)(2) is amended by adding the words ``it 
received from an approved test publisher or assessment center'' after 
``an approved test'.
    15. Section 668.164(g) is revised to read as follows:


Sec. 668.164  Disbursing funds.

* * * * *
    (g) Late disbursements-- (1) Ineligible student. For purposes of 
this paragraph, an otherwise eligible student becomes ineligible to 
receive title IV, HEA program funds on the date that--
    (i) For a loan under the FFEL and Direct Loan programs, the student 
is no longer enrolled at the institution as at least a half-time 
student for the loan period; or
    (ii) For an award under the Federal Pell Grant, FSEOG, and Federal 
Perkins Loan programs, the student is no longer enrolled at the 
institution for the award year.
    (2) Conditions for a late disbursement. Except as limited under 
paragraph (g)(4) of this section, a student who becomes ineligible (or 
the student's parent in the case of a PLUS loan) qualifies for a late 
disbursement if, before the date the student became ineligible--
    (i) Except in the case of a PLUS loan, the Secretary processed a 
SAR or ISIR with an official expected family contribution; and
    (ii)(A) For a loan under the FFEL or Direct Loan programs, the 
institution certified or originated the loan; or
    (B) For an award under the Federal Perkins Loan or FSEOG programs, 
the institution made that award to the student.
    (3) Making a late disbursement. Provided that the conditions 
described in paragraph (g)(2) of this section are satisfied--
    (i) If the student withdrew from the institution during a payment 
period or period of enrollment, the institution must make any post-
withdrawal disbursement required under Sec. 668.22(a)(3) in accordance 
with the provisions of Sec. 668.22(a)(4);
    (ii) If the student successfully completed the payment period or 
period of enrollment, the institution must provide the student (or 
parent) the opportunity to receive the amount of title IV, HEA program 
funds that the student (or parent) was eligible to receive while the 
student was enrolled at the institution. For a late disbursement in 
this circumstance, the institution may credit the student's account to 
pay for current and allowable charges as described in paragraph (d) of 
this section, but must pay or offer any remaining amount to the student 
or parent; or
    (iii) If the student did not withdraw but ceased to be enrolled as 
at least a half-time student, the institution may make the late 
disbursement of a loan under the FFEL or Direct Loan programs to pay 
for educational costs that the institution determines the student 
incurred for the period in which the student was eligible.
    (4) Limitations. (i) Generally, an institution may not make a late 
disbursement later than 120 days after the date of the institution's 
determination that the student withdrew, as provided under Sec. 668.22, 
or, for a student who did not withdraw, 120 days after the date the 
student otherwise became ineligible. On an exception basis, and with 
the approval of the Secretary, an institution may make a late 
disbursement after the applicable 120-day period, if the reason the 
late disbursement was not made was not the fault of the student.
    (ii) An institution may not make a second or subsequent late 
disbursement of a loan under the FFEL or Direct Loan programs unless 
the student successfully completed the period of enrollment for which 
the loan was intended.
    (iii) An institution may not make a late disbursement of a loan 
under the FFEL or Direct Loan programs if the student was a first-year, 
first-time borrower unless the student completed the first 30 days of 
his or her program of study. This limitation does not apply if the 
institution is exempt from the 30-day delayed disbursement requirements 
under Sec. 682.604(c)(5)(i), (ii), or (iii) or 
Sec. 685.303(b)(4)(i)(A), (B), or (C).
    16. Section 668.165(a)(3) is revised to read as follows:


Sec. 668.165  Notices and authorizations.

    (a) * * *
    (3) The institution must send the notice described in paragraph 
(a)(2) of this section in writing no earlier than 30 days before, and 
no later than 30 days after, crediting the student's account at the 
institution.
* * * * *


Sec. 668.171  [Amended]

    17. Section 668.171(b) is amended by:
    A. Removing ``refunds'' and adding, in its place ``returns of 
unearned title IV HEA program funds'' in paragraph (b)(2).
    B. Removing ``and the payment of post-withdrawal disbursements 
under Sec. 668.22'' in paragraph (b)(4)(i).
    18. Section 668.173 is amended by:
    A. Revising paragraphs (a) through (c).
    B. Redesignating paragraph (d) as (f).
    C. Adding new paragraphs (d) and (e).
    The revisions and additions read as follows:


Sec. 668.173  Refund reserve standards.

    (a) General. The Secretary considers that an institution has 
sufficient cash

[[Page 51739]]

reserves, as required under Sec. 668.171(b)(2), if the institution--
    (1) Satisfies the requirements for a public institution under 
Sec. 668.171(c)(1);
    (2) Is located in a State that has a tuition recovery fund approved 
by the Secretary and the institution contributes to that fund; or
    (3) Returns, in a timely manner as described in paragraph (b) of 
this section, unearned title IV, HEA program funds that it is 
responsible for returning under the provisions of Sec. 668.22 for a 
student that withdrew from the institution.
    (b) Timely return of title IV, HEA program funds. In accordance 
with procedures established by the Secretary or FFEL Program lender, an 
institution returns unearned title IV, HEA funds timely if--
    (1) The institution deposits or transfers the funds into the bank 
account it maintains under Sec. 668.163 no later than 30 days after the 
date it determines that the student withdrew;
    (2) The institution initiates an electronic funds transfer (EFT) no 
later than 30 days after the date it determines that the student 
withdrew;
    (3) The institution initiates an electronic transaction, no later 
than 30 days after the date it determines that the student withdrew, 
that informs an FFEL lender to adjust the borrower's loan account for 
the amount returned; or
    (4) The institution issues a check no later than 30 days after the 
date it determines that the student withdrew. However, the Secretary 
considers that the institution did not satisfy this requirement if--
    (i) The institution's records show that the check was issued more 
than 30 days after the date the institution determined that the student 
withdrew; or
    (ii) The date on the cancelled check shows that the Secretary or 
FFEL Program lender received that check more than 45 days after the 
date the institution determined that the student withdrew.
    (c) Compliance thresholds. (1) An institution does not comply with 
the reserve standard under Sec. 668.173(a)(3) if, in a compliance audit 
conducted under Sec. 668.23, an audit conducted by the Office of the 
Inspector General, or a program review conducted by the Department or 
guaranty agency, the auditor or reviewer finds--
    (i) In the sample of student records audited or reviewed that the 
institution did not return unearned title IV, HEA program funds within 
the timeframes described in paragraph (b) of this section for 5% or 
more of the students in the sample (For purposes of determining this 
percentage, the sample includes only students for whom the institution 
was required to return unearned funds during its most recently 
completed fiscal year.); or
    (ii) A material weakness or reportable condition in the 
institution's report on internal controls relating to the return of 
unearned title IV, HEA program funds.
    (2) The Secretary does not consider an institution to be out of 
compliance with the reserve standard under Sec. 668.173(a)(3) if the 
institution is cited in any audit or review report because it did not 
return unearned funds in timely manner for one or two students, or for 
less the 5% of the students in the sample referred to in paragraph 
(c)(1)(i) of this section.
    (d) Letter of credit. (1) Except as provided under paragraph (e)(1) 
of this section, an institution that can satisfy the reserve standard 
only under paragraph (a)(3) of this section, must submit an irrevocable 
letter of credit acceptable and payable to the Secretary if a finding 
in an audit or review shows that the institution exceeded the 
compliance thresholds in paragraph (c) of this section (i.e., the 
institution did not return unearned funds for 5% or more of its 
students) for either of its two most recently completed fiscal years.
    (2) The amount of the letter of credit required under paragraph 
(d)(1) of this section is 25 percent of the total amount of unearned 
title IV, HEA program funds that the institution was required to return 
under Sec. 668.22 during the institution's most recently completed 
fiscal year.
    (3) An institution that is subject to paragraph (d)(1) of this 
section must submit to the Secretary a letter of credit no later than 
30 days after the earlier of the date that--
    (i) The institution is required to submit its compliance audit;
    (ii) The Office of the Inspector General, issues a final audit 
report;
    (iii) The designated department official issues a final program 
review determination;
    (iv) The Department, through a program review report or draft audit 
report, or a guaranty agency issues a preliminary report showing that 
the institution did not return unearned funds for 10% or more of the 
sampled students; or
    (v) The Secretary sends a written notice to the institution 
requesting the letter of credit that explains why the institution has 
failed to return unearned funds in a timely manner.
    (e) Exceptions. With regard to the letter of credit described in 
paragraph (d) of this section--
    (1) An institution does not have to submit the letter of credit if 
the amount calculated under paragraph (d)(2) of this section is less 
than $5,000 and the institution can demonstrate that it has cash 
reserves of at least $5,000 available at all times.
    (2) An institution may delay submitting the letter of credit and 
request the Secretary to reconsider a finding made in its most recent 
audit or review report that it failed to return unearned title IV, HEA 
program funds in a timely manner if--
    (i)(A) The institution submits documents showing that the unearned 
title IV, HEA program funds were not returned in a timely manner solely 
because of exceptional circumstances beyond the institution's control 
and that the institution would not have exceeded the compliance 
thresholds under paragraph (c)(1) of this section had it not been for 
these exceptional circumstances; or
    (B) The institution submits documents showing that it did not fail 
to make timely refunds as provided under paragraphs (b) and (c) of this 
section;
    (ii) The institution's request, along with the documents described 
in paragraph (e)(2)(i) of this section, are submitted to the Secretary 
no later than the date it would otherwise be required to submit a 
letter of credit under paragraph (d)(3).
    (3) If the Secretary denies the institution's request under 
paragraph (e)(2) of this section, the Secretary notifies the 
institution of the date it must submit the letter of credit.
* * * * *
    19. Section 668.174(c)(4) is revised to read as follows:


Sec. 668.174  Past performance.

* * * * *
    (c) * * *
    (4) ``Family member'' is defined in Sec. 600.21(f).

PART 673--GENERAL PROVISIONS FOR THE FEDERAL PERKINS LOAN PROGRAM, 
FEDERAL WORK-STUDY PROGRAM, AND FEDERAL SUPPLEMENTAL EDUCATIONAL 
OPPORTUNITY GRANT PROGRAM

    20. The authority citation for part 673 continues to read as 
follows:

    Authority: 20 U.S.C. 421-429, 1070b-1070b-3, and 1087aa-1087ii; 
42 U.S.C. 2751-2756b, unless otherwise noted.

    21. Section 673.5(f) is revised to read as follows:


Sec. 673.5  Overaward.

* * * * *
    (f) Liability for and recovery of Federal Perkins loans and FSEOG

[[Page 51740]]

overpayments. (1) Except as provided in paragraphs (f)(2) and (f)(3) of 
this section, a student is liable for any Federal Perkins loan or FSEOG 
overpayment made to him or her. An FSEOG overpayment for purposes of 
this paragraph (f) does not include the non-Federal share of an FSEOG 
award if an institution meets its FSEOG matching share by the 
individual recipient method or the aggregate method.
    (2) The institution is liable for a Federal Perkins loan or FSEOG 
overpayment if the overpayment occurred because the institution failed 
to follow the procedures in this part or 34 CFR parts 668, 674, or 676. 
The institution shall restore an amount equal to the overpayment and 
any administrative cost allowance claimed on that amount to its loan 
fund for a Federal Perkins loan overpayment or to its FSEOG account for 
an FSEOG overpayment.
    (3) A student is not liable for, and the institution is not 
required to attempt recovery of, a Federal Perkins loan or FSEOG 
overpayment, nor is the institution required to refer an FSEOG 
overpayment to the Secretary, if the overpayment--
    (i) Is less than $25, and
    (ii) Is neither a remaining balance nor a result of the application 
of the overaward threshold in paragraph (d) of this section.
    (4)(i) Except as provided in paragraph (f)(3) of this section, if 
an institution makes a Federal Perkins loan or FSEOG overpayment for 
which it is not liable, it shall promptly send a written notice to the 
student requesting repayment of the overpayment amount. The notice must 
state that failure to make that repayment, or to make arrangements 
satisfactory to the holder of the overpayment debt to pay the 
overpayment, makes the student ineligible for further title IV aid 
until final resolution of the overpayment.
    (ii) If a student objects to the institution's Federal Perkins loan 
or FSEOG overpayment determination on the grounds that it is erroneous, 
the institution shall consider any information provided by the student 
and determine whether the objection is warranted.
    (5) Except as provided in paragraph (f)(3) of this section, if a 
student fails to repay an FSEOG overpayment, or make arrangements 
satisfactory to the holder of the overpayment debt to repay the FSEOG 
overpayment, after the institution has taken the action required by 
paragraph (f)(4) of this section, the institution must refer the FSEOG 
overpayment to the Secretary for collection purposes, in accordance 
with procedures required by the Secretary. After referring the FSEOG 
overpayment to the Secretary under this section, the institution need 
make no further effort to recover the overpayment.

PART 675--FEDERAL WORK-STUDY PROGRAMS

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

    Authority: 42 U.S.C. 2751-2756b, unless otherwise noted.

    23. Section 675.2(b) is amended by revising the definition of 
``Student services'' to read as follows:


Sec. 675.2  Definitions.

* * * * *
    (b) * * *
    Student services: Services that are offered to students that may 
include, but are not limited to, financial aid, library, peer guidance 
counseling, job placement, assisting an instructor with curriculum-
related activities, security, and social, health, and tutorial 
services. Student services do not have to be direct or involve personal 
interaction with students. For purposes of this definition, facility 
maintenance, cleaning, purchasing, and public relations are never 
considered student services.
* * * * *
    24. Section 675.21(b)(2)(i) is revised to read as follows:


Sec. 675.21  Institutional employment.

* * * * *
    (b) * * *
    (2) * * *
    (i) Involve the provision of student services as defined in 
Sec. 675.2(b) that are directly related to the work-study student's 
training or education;
* * * * *

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

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

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


Sec. 682.204  [Amended]

    26. Section 682.204(l) is revised by changing ``34 CFR 668.2'' to 
``34 CFR 668.3''.


Sec. 682.603  [Amended]

    27. Sections 682.603(f)(1)(ii)(B) and (f)(2)(i) are amended by 
removing ``34 CFR 668.2'' and adding, in its place ``34 CFR 668.3''.

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

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

    Authority: 20 U.S.C. 1087a et seq., unless otherwise noted.


Sec. 685.203  [Amended]

    29. Section 685.203(h) is amended by adding ``, as defined in 34 
CFR 668.3'' after ``year''.


Sec. 685.301  [Amended]

    30. Sections 685.301(a)(9)(i)(B)(2) and (a)(9)(ii)(A) are amended 
by removing ``34 CFR 668.2'' and adding, in its place ``34 CFR 668.3''.

PART 690--FEDERAL PELL GRANT PROGRAM

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

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

    32. Section 690.75(a) is revised to read as follows:


Sec. 690.75  Determination of eligibility for payment.

    (a) For each payment period, an institution may pay a Federal Pell 
Grant to an eligible student only after it determines that the student-
-
    (1) Qualifies as an eligible student under 34 CFR part 668, subpart 
C;
    (2) Is enrolled in an eligible program as an undergraduate student; 
and
    (3) If enrolled in a credit hour program without terms or a clock 
hour program, has completed the payment period as defined in Sec. 668.4 
for which he or she has been paid a Federal Pell Grant.
* * * * *
    33. Section 690.79 is revised to read as follows:


Sec. 690.79  Liability for and recovery of Federal Pell Grant 
overpayments.

    (a)(1) Except as provided in paragraphs (a)(2) and (a)(3) of this 
section, a student is liable for any Federal Pell Grant overpayment 
made to him or her.
    (2) The institution is liable for a Federal Pell Grant overpayment 
if the overpayment occurred because the institution failed to follow 
the procedures set forth in this part or 34 CFR Part 668. The 
institution must restore an amount equal to the overpayment to its 
Federal Pell Grant account.
    (3) A student is not liable for, and the institution is not 
required to attempt recovery of or refer to the Secretary, a Federal 
Pell Grant overpayment if the

[[Page 51741]]

amount of the overpayment is less than $25 and is not a remaining 
balance.
    (b)(1) Except as provided in paragraph (a)(3) of this section, if 
an institution makes a Federal Pell Grant overpayment for which it is 
not liable, it must promptly send a written notice to the student 
requesting repayment of the overpayment amount. The notice must state 
that failure to make that repayment, or to make arrangements 
satisfactory to the holder of the overpayment debt to repay the 
overpayment, makes the student ineligible for further title IV aid 
until final resolution of the Federal Pell Grant overpayment.
    (2) If a student objects to the institution's Federal Pell Grant 
overpayment determination on the grounds that it is erroneous, the 
institution must consider any information provided by the student and 
determine whether the objection is warranted.
    (c) Except as provided in paragraph (a)(3) of this section, if the 
student fails to repay a Federal Pell Grant overpayment, or make 
arrangements satisfactory to the holder of the overpayment debt to 
repay the Federal Pell Grant overpayment, after the institution has 
taken the action required by paragraph (b) of this section, the 
institution must refer the overpayment to the Secretary for collection 
purposes, in accordance with procedures required by the Secretary. 
After referring the Federal Pell Grant overpayment to the Secretary 
under this section, the institution need make no further efforts to 
recover the overpayment.

(Authority: 20 U.S.C. 1070a)

PART 694--GAINING EARLY AWARENESS AND READINESS FOR UNDERGRADUATE 
PROGRAMS (GEAR UP)

    34. The authority citation for part 694 continues to read as 
follows:

    Authority: 20 U.S.C. 1070a-21 to 1070a-28.

    35. Section 694.10(e) is revised to read as follows:


Sec. 694.10  What are the requirements for awards under the program's 
scholarship component under section 404E of the HEA?

* * * * *
    (e) Other grant assistance. A GEAR UP scholarship may not be 
considered in the determination of a student's eligibility for other 
grant assistance provided under title IV of the HEA.

[FR Doc. 02-20058 Filed 8-7-02; 8:45 am]
BILLING CODE 4000-01-P