[Federal Register Volume 80, Number 95 (Monday, May 18, 2015)]
[Proposed Rules]
[Pages 28484-28536]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-11917]



[[Page 28483]]

Vol. 80

Monday,

No. 95

May 18, 2015

Part III





Department of Education





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34 CFR Part 668





Program Integrity and Improvement; Proposed Rule

  Federal Register / Vol. 80 , No. 95 / Monday, May 18, 2015 / Proposed 
Rules  

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DEPARTMENT OF EDUCATION

34 CFR Part 668

[Docket ID ED-2015-OPE-0020]
RIN 1840-AD14


Program Integrity and Improvement

AGENCY: Office of Postsecondary Education, Department of Education.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Secretary proposes to amend the cash management 
regulations under subpart K and other sections of the Student 
Assistance General Provisions regulations issued under the Higher 
Education Act of 1965, as amended (HEA). These proposed regulations are 
intended to ensure that students have convenient access to their title 
IV, HEA program funds, do not incur unreasonable and uncommon financial 
account fees on their title IV funds, and are not led to believe they 
must open a particular financial account to receive their Federal 
student aid. In addition, these proposed regulations update other 
provisions in the cash management regulations under subpart K and 
otherwise amend the Student Assistance General Provisions. We also 
propose to clarify how previously passed coursework is treated for 
title IV eligibility purposes and streamline the requirements for 
converting clock hours to credit hours.

DATES: We must receive your comments on or before July 2, 2015.

ADDRESSES: Submit your comments through the Federal eRulemaking Portal 
or via postal mail, commercial delivery, or hand delivery. We will not 
accept comments submitted by fax or by email or those submitted after 
the comment period. To ensure that we do not receive duplicate copies, 
please submit your comments only once. In addition, please include the 
Docket ID at the top of your comments.
    If you are submitting comments electronically, we strongly 
encourage you to submit any comments or attachments in Microsoft Word 
format. If you must submit a comment in Adobe Portable Document Format 
(PDF), we strongly encourage you to convert the PDF to print-to-PDF 
format or to use some other commonly used searchable text format. 
Please do not submit the PDF in a scanned format. Using a print-to-PDF 
format allows the Department to electronically search and copy certain 
portions of your submissions.
     Federal eRulemaking Portal: Go to www.regulations.gov to 
submit your comments electronically. Information on using 
Regulations.gov, including instructions for accessing agency documents, 
submitting comments, and viewing the docket, is available on the site 
under ``Are you new to the site?''
     Postal Mail, Commercial Delivery, or Hand Delivery: The 
Department strongly encourages commenters to submit their comments 
electronically. However, if you mail or deliver your comments about the 
proposed regulations, address them to Jean-Didier Gaina, U.S. 
Department of Education, 1990 K Street NW., Room 8055, Washington, DC 
20006.
    Privacy Note: The Department's policy is to make all comments 
received from members of the public available for public viewing in 
their entirety on the Federal eRulemaking Portal at 
www.regulations.gov. Therefore, commenters should be careful to include 
in their comments only information that they wish to make publicly 
available.

FOR FURTHER INFORMATION CONTACT: For clock-to-credit-hour conversion: 
Amy Wilson, U.S. Department of Education, 1990 K Street NW., Room 8027, 
Washington, DC 20006-8502. Telephone: (202) 502-7689 or by email at: 
[email protected].
    For repeat coursework: Vanessa Freeman, U.S. Department of 
Education, 1990 K Street NW., Room 8040, Washington, DC 20006-8502. 
Telephone: (202) 502-7523 or by email at: [email protected] or 
Aaron Washington, U.S. Department of Education, 1990 K Street NW., Room 
8033, Washington, DC 20006-8502. Telephone: (202) 502-7478 or by email 
at: [email protected].
    For cash management: Ashley Higgins, U.S. Department of Education, 
1990 K Street NW., Room 8037, Washington, DC 20006-8502. Telephone: 
(202) 219-7061 or by email at: [email protected] or Tony Gargano, 
U.S. Department of Education, 1990 K Street NW., Room 8020, Washington, 
DC 20006-8502. Telephone: (202) 502-7519 or by email at: 
[email protected].
    If you use a telecommunications device for the deaf (TDD) or a text 
telephone (TTY), call the Federal Relay Service (FRS), toll free, at 1-
800-877-8339.

SUPPLEMENTARY INFORMATION: Throughout this preamble, we refer to title 
IV, HEA program funds using naming conventions common to the student 
aid community, including ``title IV student aid'' and similar phrasing.

Executive Summary

    Purpose of This Regulatory Action:
    Over the past decade, the student financial products marketplace 
has shifted and the budgets of postsecondary institutions have become 
increasingly strained, in part due to declining State funding. These 
changes have coincided with a proliferation of agreements between 
postsecondary institutions and financial account providers. Cards 
offered pursuant to these arrangements, usually in the form of debit or 
prepaid cards and sometimes cobranded with the institution's logo or 
combined with student IDs, are marketed as a way for students to 
receive their title IV credit balances via a more convenient electronic 
means. However, as we describe in more detail elsewhere in this 
preamble, a number of reports from government and consumer groups 
document troubling practices employed by some financial account 
providers. Legal actions, especially those initiated by the Federal 
Reserve and Federal Deposit Insurance Corporation (FDIC), against the 
sector's largest provider reinforce some of these concerns.
    According to these reports, many of the following practices were 
found:
     Providers prioritizing disbursements to their own 
affiliated accounts over aid recipients' preexisting bank accounts;
     Providers and schools strongly implying to students that 
signing up for the college card account was required to receive Federal 
student aid;
     Private student information unrelated to the financial aid 
process being given to providers before aid recipients consented to 
opening accounts;
     Access to the funds on the college card was not always 
convenient; and
     Aid recipients being charged onerous, confusing, or 
unavoidable fees in order to access their student aid funds or to 
otherwise use the account.
    As discussed in further detail under the heading ``Fee provisions 
for T1 accounts,'' these practices indicate that many institutions have 
shifted costs of administering the title IV, student aid programs from 
institutions to students. Given that approximately nine million 
students attend schools with these agreements, that approximately $25 
billion dollars in Pell Grant and Direct Loan program funds are 
disbursed to undergraduates at these institutions, that students are a 
captive audience subject to marketing from their institution, that the 
college card market is expanding, and given the concerns raised by 
existing practices, we believe regulatory action governing the 
disbursement of title IV, student aid is warranted.
    In addition, we include in the proposed regulations a number of 
minor

[[Page 28485]]

changes that reflect updated Office of Management and Budget (OMB) 
guidance for Federal awards, clarify some provisions to further 
safeguard title IV funds, and remove references to programs that are no 
longer authorized.
    Finally, we address in the proposed regulations two issues 
unrelated to cash management--repeat coursework and clock-to-credit-
hour conversion--that were identified by the higher education community 
as requiring review. We believe these proposed regulatory changes would 
result in more equitable treatment of student aid recipients.
    Summary of the Major Provisions of This Regulatory Action:
    The proposed regulations would--
     Explicitly reserve the right for the Secretary to 
establish a method for directly paying credit balances to student aid 
recipients;
     Establish two different types of arrangements between 
institutions and financial account providers, ``tier one (T1) 
arrangement'' and ``tier two (T2) arrangement,'' respectively;
     Define a ``T1 arrangement'' as an arrangement between an 
institution and a third-party servicer that performs one or more of the 
functions associated with processing direct payments of title IV funds 
on behalf of the institution and that offers one or more financial 
accounts to students and parents;
     Define a ``T2 arrangement'' as an arrangement between an 
institution and a financial institution or entity that offers financial 
accounts through a financial institution under which financial accounts 
are offered and marketed directly to students or their parents, with 
the regulatory consequences of T2 status to apply absent documentation 
from the institution that students or parents do not have credit 
balances at the institution;
     Require institutions that have T1 or T2 arrangements to 
establish a student choice process that: Prohibits an institution from 
requiring students or parents to open an account into which their 
credit balances must be deposited; requires an institution to provide a 
list of account options that a student may choose from to receive 
credit balance funds, where each option is presented in a neutral 
manner and the student's preexisting bank account is listed as the 
first, most prominent, and default option; and ensures electronic 
payments made to a student's preexisting account are as timely as, and 
no more onerous, as payments deposited to an account made available 
pursuant to a T1 or T2 arrangement;
     Require that the institution obtain consent from the 
student or parent to open an account under a T1 or T2 arrangement (1) 
before the institution shares personal information about that student 
or parent with the financial account provider, and (2) before the 
institution or account provider sends an access device to the student 
or parent or links the student's ID card with a financial account;
     Mitigate fees incurred by student aid recipients by 
requiring reasonable access to surcharge-free automated teller machines 
(ATMs), and, for accounts offered under a T1 arrangement, both 
prohibiting point-of-sale fees and overdraft fees charged to student 
and parent account holders, and providing students and parents with 30 
days following a disbursement of title IV funds to access those funds 
without any fees;
     Require that contracts governing T1 or T2 arrangements and 
cost information related to those contracts are publicly disclosed; and
     Require that institutions that have T1 or T2 arrangements 
establish and evaluate the contracts governing those arrangements in 
light of the best financial interests of students.
    The proposed regulations would also--
     Allow an institution offering term-based programs to 
count, for enrollment purposes, courses a student is retaking that the 
student previously passed, up to one repetition per course, including 
when a student is retaking a previously passed course due to the 
student failing other coursework; and
     Streamline the requirements governing clock-to-credit-hour 
conversion by removing the provisions under which a State or Federal 
approval or licensure action could cause a program to be measured in 
clock hours.
    Please refer to the Significant Proposed Regulations section of 
this preamble for a detailed discussion of the major provisions 
contained in the proposed regulations.
    Costs and Benefits: The benefits of these proposed regulations 
include providing information that will allow students and parents to 
make informed and beneficial decisions regarding the handling and 
distribution of their title IV funds. These disclosures will also help 
prevent students from being misled into believing that they are 
required to use a financial account or access device that has the 
apparent endorsement of their school.
    These proposed regulations would also benefit students by 
guaranteeing the right to receive their title IV credit balances at a 
financial institution and through an access device of their choice. 
Students who decide to choose accounts with lower fees, and who would 
have otherwise been steered toward a higher-cost account, will save 
money and be able to use more of their title IV aid for educational 
expenses. Students who open accounts covered by these regulations would 
benefit from having more surcharge-free ATMs from which to access their 
title IV credit balances. The proposed regulations also would help 
protect both students and parents from deceptive marketing practices 
aimed at encouraging them to do business with a particular financial 
institution in order to access title IV funds.
    There would be costs incurred by postsecondary and financial 
institutions under these proposed regulations. Some postsecondary 
institutions and financial institutions that do not choose to price 
their products competitively or that do not justify higher prices 
(with, for example, superior customer service, better account features, 
free banking services, the elimination of certain fees) could lose 
future customers as students or parents decide to use lower-cost 
accounts as a result of fee disclosures. The T1 arrangement fee 
provisions will also have cost implications for affected financial 
institutions and for institutions that currently receive free- or 
reduced-price title IV administrative services (or other remuneration), 
and will likely lower the revenue for schools when financial account 
providers' ability to pass costs on to title IV recipients is limited 
under these regulations. Some of these costs will include performing 
due diligence reviews to ensure that contracts are made in the best 
interests of students, the costs of providing surcharge-free ATM 
network access, and the costs of presenting credit balance recipients 
with a list of neutral account options. Other costs would depend upon 
aid recipient behavior, and the Department expects that many financial 
account providers may earn less from their student accounts under the 
proposed regulations. The provisions regarding convenient access 
benefit students and could also have cost implications for some 
financial account providers and institutions. Financial account 
providers could have to deploy additional ATMs or pay fees to ATM 
network providers to comply with these proposed requirements.
    Some institutions with T1 or T2 arrangements could incur costs when 
establishing a student choice process that would allow students to 
select among a list of available accounts into which title IV credit 
balances would be disbursed. Institutions would also likely incur some 
paperwork burden related to

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making fee disclosures, and students would incur an additional 
paperwork burden when selecting an option for how to receive their 
credit balance from a list of options.
    Invitation to Comment: We invite you to submit comments regarding 
the proposed regulations. In particular, we request comment on:
     Whether proposed methods for prorating institutional 
charges under Sec.  668.164(c)(5) are appropriate;
     How an institution should disclose the costs of books and 
supplies that are included as part of tuition and fees under Sec.  
668.164(c)(2) and frequency of those disclosures;
     Whether the option to receive a check should continue to 
be affirmatively offered to students as provided under proposed Sec.  
668.164(d)(4)(i)(B)(4);
     Whether there is a need to establish a minimum number of 
credit balance recipients at an institution before the institution must 
comply with the provisions of proposed Sec.  668.164(f)(4);
     Whether the personal information that an institution may 
provide before a student or parent consents to open a financial 
account, as provided under Sec.  668.164(e)(2)(i)(A) and (f)(4)(i)(A), 
is sufficient to meet the needs of a servicer or financial institution;
     Whether the Department should take more proscriptive 
action than the one proposed in this NPRM to prevent abusive marketing 
practices with respect to institutional devices such as student IDs and 
associated financial accounts;
     Whether 30 days following a disbursement is an appropriate 
timeframe to allow a title IV aid recipient an opportunity to 
reasonably access aid dollars free of charge as provided under proposed 
Sec.  668.164(e)(2)(iii)(B)(4);
     Whether, as proposed in Sec.  668.164(e)(2)(vii) and 
(f)(4)(vii), it would be in the best financial interests of students to 
require institutions that have a T1 or T2 arrangement to periodically 
conduct reasonable due diligence reviews to ascertain whether the fees 
imposed under the arrangement are excessive; and
     Whether the proposed regulations would require 
transmission of information that any other agency or authority of the 
United States gathers or makes available.
    Please refer to the relevant portions of the Significant Proposed 
Regulations section of this preamble for more detail on each of the 
issues for which we specifically request comment.
    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 provide relevant information and data, as well as other 
supporting materials in the request for comment, even when there is no 
specific solicitation of data. We also urge you to arrange your 
comments in the same order as the proposed regulations. Please do not 
submit comments outside the scope of the specific proposals and 
proposed regulations in this notice of proposed rulemaking, as we are 
not required to respond to comments that are outside of the scope of 
the proposed rule. See ADDRESSES for instructions on how to submit 
comments.
    We invite you to assist us in complying with the specific 
requirements of Executive Orders 12866 and 13563 and their overall 
requirement of reducing regulatory burden that might result from the 
proposed regulations. Please let us know of any further ways we could 
reduce potential costs or increase potential benefits while preserving 
the effective and efficient administration of the Department's programs 
and activities.
    During and after the comment period, you may inspect all public 
comments about the proposed regulations by accessing Regulations.gov. 
You may also inspect the comments in person in room 8055, 1990 K Street 
NW., Washington, DC, between 8:30 a.m. and 4 p.m., Washington, DC time, 
Monday through Friday of each week except Federal holidays. If you want 
to schedule time to inspect 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 provide an appropriate 
accommodation or auxiliary aid to an individual with a disability who 
needs assistance to review the comments or other documents in the 
public rulemaking record for the proposed regulations. If you want to 
schedule an appointment for this type of accommodation or auxiliary 
aid, please contact the person listed under FOR FURTHER INFORMATION 
CONTACT.

Public Participation

    On May 1, 2012, we published a notice in the Federal Register (77 
FR 25658) announcing our intent to establish a negotiated rulemaking 
committee under section 492 of the HEA to develop proposed regulations 
designed to prevent fraud and otherwise ensure proper use of title IV 
Federal Student Aid program funds, especially within the context of 
current technologies. In particular, we announced our intent to propose 
regulations to address the use of debit cards and other banking 
products for disbursing title IV Federal Student Aid program funds, and 
to improve and streamline the campus-based Federal Student Aid 
programs. On April 16, 2013, we published a notice in the Federal 
Register (78 FR 2247), which we corrected on April 30, 2013 (78 FR 
25235), announcing additional topics for consideration for action by a 
negotiated rulemaking committee. The following topics for consideration 
were identified: Cash management of funds provided under the title IV 
Federal Student Aid programs; State authorization for programs offered 
through distance education or correspondence education; State 
authorization for foreign locations of institutions located in a State; 
clock-to-credit-hour conversion; gainful employment; changes to the 
campus safety and security reporting requirements in the Clery Act made 
by the Violence Against Women Act; and the definition of ``adverse 
credit'' for borrowers in the Federal Direct PLUS Loan program.
    In that notice, we announced three public hearings at which 
interested parties could comment on the topics suggested by the 
Department and could suggest additional topics for consideration for 
action by a negotiated rulemaking committee. We also invited parties 
unable to attend a public hearing to submit written comments on the 
additional topics and to submit other topics for consideration. On May 
13, 2013, we announced in the Federal Register (78 FR 27880) the 
addition of a fourth hearing. The hearings were held on May 21, 2013, 
in Washington, DC; May 23, 2013, in Minneapolis, Minnesota; May 30, 
2013, in San Francisco, California; and June 4, 2013, in Atlanta, 
Georgia. Transcripts from the public hearings are available at http://www2.ed.gov/policy/highered/reg/hearulemaking/2012/index.html. Written 
comments submitted in response to the April 16, 2013, notice may be 
viewed through the Federal eRulemaking Portal at www.regulations.gov, 
within docket ID ED-2012-OPE-0008. You can link to the ED-2012-OPE-0008 
docket as a related docket inside the ED-2013-OPE-0124 docket 
associated with this notice of proposed rulemaking. Alternatively, 
individuals can enter docket ID ED-2012-OPE-0008 in the search box to 
locate the appropriate docket. Instructions for finding

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comments are also available on the site under ``How to Use 
Regulations.gov'' in the Help section.

Negotiated Rulemaking

    Section 492 of the HEA, 20 U.S.C. 1098a, requires the Secretary to 
obtain public involvement in the development of proposed regulations 
affecting programs authorized by title IV of the HEA. After obtaining 
advice and recommendations from the public, including individuals and 
representatives of groups involved in the title IV, HEA programs, in 
most cases the Secretary must subject the proposed regulations to a 
negotiated rulemaking process. If negotiators reach consensus on the 
proposed regulations, the Department agrees to publish without 
alteration a defined group of regulations on which the negotiators 
reached consensus unless the Secretary reopens the process or provides 
a written explanation to the participants stating why the Secretary has 
decided to depart from the agreement reached during negotiations. 
Further information on the negotiated rulemaking process can be found 
at: http://www2.ed.gov/policy/highered/reg/hearulemaking/hea08/neg-reg-faq.html.
    On November 20, 2013, we published a notice in the Federal Register 
(78 FR 69612) announcing our intent to establish a negotiated 
rulemaking committee to prepare proposed regulations to address program 
integrity and improvement issues for the Federal Student Aid programs 
authorized under title IV of the HEA. That notice set forth a schedule 
for the committee meetings and requested nominations for individual 
negotiators to serve on the negotiating committee.
    The Department sought negotiators to represent the following 
groups: Students; legal assistance organizations that represent 
students; consumer advocacy organizations; State higher education 
executive officers; State attorneys general and other appropriate State 
officials; business and industry; institutions of higher education 
eligible to receive Federal assistance under title III, parts A, B, and 
F and title V of the HEA, which include Historically Black Colleges and 
Universities (HBCUs), Hispanic-Serving Institutions, American Indian 
Tribally Controlled Colleges and Universities, Alaska Native and Native 
Hawaiian-Serving Institutions, Predominantly Black Institutions, and 
other institutions with a substantial enrollment of needy students as 
defined in title III of the HEA; two-year public institutions of higher 
education; four-year public institutions of higher education; private, 
non-profit institutions of higher education; private, for-profit 
institutions of higher education; regional accrediting agencies; 
national accrediting agencies; specialized accrediting agencies; 
financial aid administrators at postsecondary institutions; business 
officers and bursars at postsecondary institutions; admissions officers 
at postsecondary institutions; institutional third-party servicers who 
perform functions related to the title IV Federal Student Aid programs 
(including collection agencies); State approval agencies; and lenders, 
community banks, and credit unions. The Department considered the 
nominations submitted by the public and chose negotiators who would 
represent the various constituencies.
    The negotiating committee included the following members:

    Chris Lindstrom, U.S. Public Interest Research Group, and 
Maxwell John Love (alternate), United States Student Association, 
representing students.
    Whitney Barkley, Mississippi Center for Justice, and Toby 
Merrill (alternate), Project on Predatory Student Lending, The Legal 
Services Center, Harvard Law School, representing legal assistance 
organizations that represent students.
    Suzanne Martindale, Consumers Union, representing consumer 
advocacy organizations.
    Carolyn Fast, Consumer Frauds and Protection Bureau, New York 
Attorney General's Office, and Jenny Wojewoda (alternate), 
Massachusetts Attorney General's Office, representing State 
attorneys general and other appropriate State officials.
    David Sheridan, School of International & Public Affairs, 
Columbia University in the City of New York, and Paula Luff 
(alternate), DePaul University, representing financial aid 
administrators.
    Gloria Kobus, Youngstown State University, and Joan Piscitello 
(alternate), Iowa State University, representing business officers 
and bursars at postsecondary institutions.
    David Swinton, Benedict College, and George French (alternate), 
Miles College, representing minority serving institutions.
    Brad Hardison, Santa Barbara City College, and Melissa Gregory 
(alternate), Montgomery College, representing two-year public 
institutions.
    Chuck Knepfle, Clemson University, and J. Goodlett McDaniel 
(alternate), George Mason University, representing four-year public 
institutions.
    Elizabeth Hicks, Massachusetts Institute of Technology, and Joe 
Weglarz (alternate), Marist College, representing private, non-
profit institutions.
    Deborah Bushway, Capella University, and Valerie Mendelsohn 
(alternate), American Career College, representing private, for-
profit institutions.
    Casey McGuane, Higher One, and Bill Norwood (alternate), 
Heartland Payment Systems, representing institutional third-party 
servicers.
    Russ Poulin, WICHE Cooperative for Educational Technologies, and 
Marshall Hill (alternate), National Council for State Authorization 
Reciprocity Agreements, representing distance education providers.
    Dan Toughey, TouchNet, and Michael Gradisher (alternate), 
Pearson Embanet, representing business and industry.
    Paul Kundert, University of Wisconsin Credit Union, and Tom 
Levandowski (alternate), Wells Fargo Bank Law Department, Consumer 
Lending & Corporate Regulatory Division, representing lenders, 
community banks, and credit unions.
    Leah Matthews, Distance Education and Training Council, and 
Elizabeth Sibolski (alternate), Middle States Commission on Higher 
Education, representing accrediting agencies.
    Carney McCullough, U.S. Department of Education, representing 
the Department.
    Pamela Moran, U.S. Department of Education, representing the 
Department.

    The negotiated rulemaking committee met to develop proposed 
regulations on February 19-21, 2014, March 26-28, 2014, and April 23-
25, 2014. During the March session, the Department proposed adding a 
negotiated rulemaking session to the schedule to give the negotiators 
more time to consider the issues and reach consensus on proposed 
regulatory language. The negotiators agreed to add a fourth and final 
session. On April 11, 2014, we published in the Federal Register (79 FR 
20139) a notice announcing the addition of a fourth session. That final 
session was held on May 19-20, 2014.
    At its first meeting, the negotiating committee reached agreement 
on its protocols and proposed agenda. These protocols provided, among 
other things, that the committee would operate by consensus. Consensus 
means that there must be no dissent by any member in order for the 
committee to have reached agreement. Under the protocols, if the 
committee reached a final consensus on all issues, the Department would 
use the consensus-based language in its proposed regulations. 
Furthermore, the Department would not alter the consensus-based 
language of its proposed regulations unless the Department reopened the 
negotiated rulemaking process or provided a written explanation to the 
committee members regarding why it decided to depart from that 
language.
    During the first meeting, the negotiating committee agreed to 
negotiate an agenda of six issues related to student financial aid. 
These six issues were: Clock-to-credit-hour conversion; State 
authorization of distance education; State authorization of foreign 
locations of domestic institutions; cash management; retaking 
coursework; and PLUS loan adverse credit history. Under the protocols, 
a final consensus would

[[Page 28488]]

have to include consensus on all six issues.
    During the meeting, the Department explained that it planned to 
include the proposed regulations that would be published after 
completion of the negotiated rulemaking process in two separate notices 
of proposed rulemaking (NPRMs). One NPRM would contain the proposed 
regulations regarding the definition of adverse credit history for PLUS 
loans. The second NPRM would contain the remaining topics. The 
Department has already published an NPRM and final regulations 
regarding the PLUS loan issues. This NPRM addresses the remaining 
issues, except for State authorization of distance education and State 
authorization of foreign locations of domestic institutions. While the 
Department continues to examine these two issues and work with the 
higher education community to explore how to address these important 
topics, we do not want those deliberations to delay the publication of 
regulations necessary to address cash management, clock-to-credit-hour 
conversion, and retaking coursework. For more information on the 
negotiated rulemaking sessions, please visit: http://www2.ed.gov/policy/highered/reg/hearulemaking/2012/programintegrity.html#info.

Summary of Proposed Changes

    The proposed regulations would--
     Establish and modify the definitions of key terms 
applicable to subpart K;
     Remove outdated references to programs no longer 
authorized, especially with respect to the Federal Family Education 
Loan (FFEL) program;
     Require that an institution exercise the level of care and 
diligence required of a fiduciary with regard to managing title IV, HEA 
program funds;
     Remove the reference to the just-in-time payment method, 
and rename the ``cash monitoring payment method'' as the ``heightened 
cash monitoring payment method'';
     Require institutions placed on the reimbursement or 
heightened cash monitoring payment methods to credit a student ledger 
account for the amount of title IV funds the student is eligible to 
receive, and pay any credit balance due to that student before seeking 
reimbursement from the Department;
     Require institutions to maintain title IV funds in an 
insured depository account consistent with guidance issued by OMB on 
December 26, 2013, codified at 2 CFR chapter I, 200, et al., Uniform 
Administrative Requirements, Cost Principles, and Audit Requirements 
for Federal Awards;
     Provide that, with limited exceptions, an institution must 
disburse during a payment period the amount of title IV funds that a 
student or parent is eligible to receive for that payment period;
     Provide that an institution may credit a student's ledger 
account to pay for allowable charges associated with a payment period;
     Provide that an institution may include the cost of books 
and supplies as part of tuition and fees;
     Reserve the Secretary's right to establish a method for 
directly paying credit balances to student aid recipients;
     Establish two different types of arrangements between 
institutions and financial account providers, ``tier one (T1) 
arrangements'' and ``tier two (T2) arrangements,'' respectively;
     Define a ``T1 arrangement'' as an arrangement between an 
institution and a third-party servicer that performs one or more of the 
functions associated with processing direct payments of title IV funds 
on behalf of the institution and that offers one or more financial 
accounts to students and parents;
     Define a ``T2 arrangement'' as an arrangement between an 
institution and a financial institution or entity that offers financial 
accounts through a financial institution, under which financial 
accounts are offered and marketed directly to students or their 
parents, with the regulatory consequences of T2 status to apply absent 
documentation from the institution that students or parents do not have 
credit balances at the institution;
     Require institutions that have T1 or T2 arrangements to 
establish a student choice process that: Prohibits an institution from 
requiring students or parents to open a certain account into which 
their credit balances are deposited; requires an institution to provide 
a list of account options that a student may choose from to receive 
credit balance funds, where each option is presented in a neutral 
manner and the student's preexisting bank account is listed as the 
first, most prominent, and default option; and ensures electronic 
payments made to a student's preexisting account are as timely as, and 
no more onerous to the student than, payments deposited to an account 
made available pursuant to a T1 or T2 arrangement;
     Require that the institution obtain consent from the 
student or parent to open an account under a T1 or T2 arrangement (1) 
before the institution shares personal information about that student 
or parent with the financial account provider, and (2) before the 
institution or provider sends an access device to the student or parent 
or links the student's ID card with a financial account;
     Mitigate fees incurred by student aid recipients by 
requiring reasonable access to surcharge-free ATMs, and, for accounts 
offered under a T1 arrangement, both prohibiting point-of-sale fees and 
overdraft fees charged to students and parents, and providing students 
and parents with 30 days following a disbursement of title IV funds to 
access those funds without any fees;
     Require that contracts governing T1 or T2 arrangements and 
cost information related to those contracts are publicly disclosed;
     Require that institutions that have T1 or T2 arrangements 
establish and evaluate the contracts governing those arrangements in 
light of the best financial interests of students; and
     Prohibit an institution under the reimbursement or 
heightened cash monitoring payment methods from holding credit balance 
funds on behalf of a student or parent. The proposed regulations would 
also--
     Allow an institution offering term-based programs to 
count, for enrollment purposes, courses a student is retaking that the 
student previously passed, up to one repetition per course; and
     Streamline the requirements governing clock-to-credit-hour 
conversion by removing the provisions under which a State or Federal 
approval or licensure action could cause a program to be measured in 
clock hours.

Significant Proposed Regulations

Background

    Over the past several years, a confluence of factors has 
significantly altered the landscape of financial products offered to 
students on college campuses.
    In 2009, due largely to concerns raised by consumer advocates and 
students related to the marketing practices and financial incentives 
contained in contractual relationships between institutions and credit 
card providers,\1\ Congress passed, and the President signed, the 
Credit Card Accountability Responsibility and Disclosure Act of 2009 
(CARD Act).\2\ The CARD Act made a number of significant changes to the 
consumer protections available to college students

[[Page 28489]]

by authorizing new rules to curtail overzealous credit card marketing 
practices on campus, impose transparency requirements (the contract 
must be annually sent to the Consumer Financial Protection Bureau 
(CFPB)), ban ``free'' gifts for signing up for an account, and require 
consumers under the age of 21 to show ability to pay or get a co-signer 
in order to get a credit card.\3\
---------------------------------------------------------------------------

    \1\ USPIRG. ``The Campus Debit Card Trap.'' [Pages 4-5] (2012), 
available at www.uspirg.org/sites/pirg/files/reports/thecampusdebitcardtrap_may2012_uspef.pdf. With subsequent references 
``USPIRG at [page number].''
    \2\ Public Law 111-24.
    \3\ United States Government Accountability Office. ``College 
Debit Cards: Actions Needed to Address ATM Access, Student Choice, 
and Transparency.'' [Page 32] (2014), available at www.gao.gov/assets/670/660919.pdf. With subsequent references ``GAO at [page 
number].''
---------------------------------------------------------------------------

    A second product widely offered to students was a recommended or 
``preferred'' student loan. In 2007, then-Attorney General for New York 
Andrew Cuomo led an investigation into financial incentives provided to 
colleges for steering students into certain types of student loans. As 
a result, Congress, as a part of the Higher Education Opportunity Act 
of 2008, banned gifts and revenue sharing as part of the so-called 
``preferred lender list'' reforms. In 2010, Congress passed the 
President's student loan reform, moving to a 100 percent Direct Loan 
program for Federal student loans.
    Finally, over the past several years, States have made significant 
cuts to higher education funding, resulting in budget shortfalls that 
have fostered an environment of tuition increases and other measures 
shifting costs to students which has coincided with the proliferation 
of college debit and prepaid card agreements between institutions and 
financial account providers.\4\
---------------------------------------------------------------------------

    \4\ Center on Budget and Policy Priorities. ``Recent Deep State 
Higher Education Cuts May Harm Students and the Economy for Years to 
Come.'' [Page 13](2013), available at: www.cbpp.org/files/3-19-13sfp.pdf.
---------------------------------------------------------------------------

    The combination of funding cuts and limitations on cost-shifting to 
students through the CARD Act and preferred lender list reforms has 
created an environment where some colleges are increasingly searching 
for revenue-increasing strategies, especially those that can be borne 
by students. This has led to what the United States Public Interest 
Research Group (USPIRG) referred to as ``the next financial frontier 
for banks and financial firms'' that affects students, especially those 
receiving aid--the proliferation of marketing of campus debit and 
prepaid cards to students in exchange for monetary benefits to schools, 
often in the form of significant remuneration or the low- or no-cost 
administration of financial aid disbursement services.\5\ Consumers 
Union stated ``as regulations around the marketing of private student 
loans and school-branded credit cards have tightened in recent years, 
financial firms have increasingly marketed campus banking products to 
colleges, universities, and their students.'' \6\ CFPB has recognized 
this market transformation as well, stating that, ``financial product 
marketing partnerships have shifted from credit cards and student loans 
to student checking, debit, and prepaid card products.'' \7\ Schools 
officials have admitted that ``outsourcing eliminated a school process 
that consumed significant resources, which has been especially 
important in recent years as schools have faced difficult fiscal 
conditions and staffing reductions.'' \8\
---------------------------------------------------------------------------

    \5\ USPIRG at 5.
    \6\ Consumers Union. ``Campus Banking Products: College Students 
Face Hurdles to Accessing Clear Information and Accounts that Meet 
Their Needs.'' [Page 1](2014), available at: consumersunion.org/wp-content/uploads/2014/08/Campus_banking_products_report.pdf. With 
subsequent references ``Consumers Union at [page number].''
    \7\ Consumer Financial Protection Bureau presentation. 
``Perspectives on Financial Products Marketed to College Students.'' 
[Page 5] (2014), available at: www2.ed.gov/policy/highered/reg/hearulemaking/2014/pii2-cfpb-presentation.pdf. With subsequent 
references ``CFPB Presentation at [Page number].''
    \8\ Office of the Inspector General. ``Third-Party Servicer Use 
of Debit Cards to Deliver Title IV Funds.'' [Page 3] (2014), 
available at www2.ed.gov/about/offices/list/oig/auditreports/fy2014/x09n0003.pdf. With subsequent references ``OIG at [Page number].''
---------------------------------------------------------------------------

Credit Balances

    As the House report on the Higher Education Opportunity Act of 2008 
stated, ``[t]he nation's financial aid system exists for a single 
purpose: To serve students and their families.'' \9\ The title IV, HEA 
programs, most prominently Pell Grants and Direct Loans, are designed 
to help students pay for the costs of attending college.
---------------------------------------------------------------------------

    \9\ Committee on Education and Labor. ``House Report 
Accompanying HR 4137, the College Opportunity and Affordability Act 
of 2007.'' [Page 240] (2007), available at https://www.congress.gov/110/crpt/hrpt500/CRPT-110hrpt500.pdf.
---------------------------------------------------------------------------

    The amount of Federal financial aid awarded to students and parents 
is determined, in part, on the basis of an enrolled student's cost of 
attendance. This includes charges typically paid directly to the school 
(such as tuition, fees, and on-campus room and board), as well as other 
costs such as books and supplies, housing, transportation, and 
dependent care. Typically, an institution applies the total amount of a 
student's aid against institutional charges, then releases a ``credit 
balance'' to the student in cases where the amount of aid exceeds the 
amount of charges.
    When we refer to a credit balance in this document, we are 
referring to the remaining amount of title IV aid after all allowable 
charges, including tuition and fees, have been paid to the institution. 
At lower cost institutions, like community colleges, that enroll lower-
income and historically underrepresented students, a higher percentage 
of students receive credit balances.\10\
---------------------------------------------------------------------------

    \10\ GAO at 12.
---------------------------------------------------------------------------

The College Banking Market

    In the past several years, especially in light of tightening 
budgets and fewer revenue-generating credit card partnerships and 
student loans, ``a growing number of schools have begun offering 
banking products to their students in the form of debit and prepaid 
cards issued through agreements with financial services providers.'' 
\11\ The Government Accountability Office (GAO) found that about 11 
percent of colleges and universities participating in the Federal 
Student Aid programs had agreements with financial account 
providers.\12\ While this percentage is relatively low, the size of the 
institutions that have such agreements are generally large; 
specifically, about 40 percent of all postsecondary students are 
enrolled in institutions with these agreements, although not all 
students at such institutions use the cards.13 14
---------------------------------------------------------------------------

    \11\ GAO at 1.
    \12\ Ibid. at 8.
    \13\ Ibid.
    \14\ USPIRG at 11.
---------------------------------------------------------------------------

    The agreements are more typical at public institutions--29 percent 
of public schools had such agreements, compared to 6.5 percent of 
nonprofit not-for-profit schools and 3.5 percent of for-profit 
schools.\15\ Almost half of all schools that use college-affiliated 
debit or prepaid cards to disburse financial aid and other payments to 
students are community colleges.\16\ According to a USPIRG analysis, 
``32 of the 50 largest public 4-year universities and 26 of the 
[largest] 50 community colleges'' had a campus debit or prepaid card 
contract with a bank or financial firm.\17\
---------------------------------------------------------------------------

    \15\ GAO at 10.
    \16\ GAO at 12.
    \17\ USPIRG at 6.
---------------------------------------------------------------------------

    As these agreements have begun to proliferate, one provider in 
particular has become the predominant actor in the market. ``As of July 
2013, one provider, Higher One Holdings, Inc., held about a 57 percent 
share of the college card market, as measured by number of agreements 
between schools and card providers, as well as number of students at 
schools with agreements,''

[[Page 28490]]

according to a GAO analysis.\18\ This represents more than 800 campuses 
that use its services to disburse aid dollars.\19\ The balance of the 
market is comprised mainly of seven other bank and nonbank providers, 
including U.S. Bank, Citibank, PNC, and Wells Fargo.20 21
---------------------------------------------------------------------------

    \18\ GAO at 13.
    \19\ Consumers Union at 4.
    \20\ GAO at 13.
    \21\ Consumers Union at 10.
---------------------------------------------------------------------------

    According to a National Association of College and University 
Business Officers (NACUBO) survey polling roughly 400 institutional 
respondents, ``19 [percent] of surveyed institutions offer a credit 
balance on a stored value or debit card, 58 [percent] offer an 
[electronic funds transfer (EFT)] to a student's preexisting bank 
account, and 10 [percent] offer an EFT to a bank account at a school-
selected bank or vendor.'' \22\ The survey found that ``26 [percent] 
[of institutions] reported that they contract with a third-party vendor 
to process credit balance refunds; a third of those that do not are 
considering doing so in the future.'' \23\
---------------------------------------------------------------------------

    \22\ National Association of College and University Business 
Officers. ``Student Refunds and Personal Banking at Colleges and 
Universities.'' [Page 1] (2014), available at www.nacubo.org/Documents/BusinessPolicyAreas/NACUBOSURVEY.pdf. With subsequent 
references ``NACUBO at [Page number].''
    \23\ NACUBO at 2.
---------------------------------------------------------------------------

Troubling Practices

    The proliferation of these agreements has coincided with a number 
of troubling practices that were first reported by USPIRG and 
reiterated and expanded upon in reports from GAO, the Department's 
Office of Inspector General (OIG), Consumers Union, and in inquiries 
from members of Congress. These practices have also resulted in adverse 
legal actions, especially against the largest financial account 
provider, Higher One. Each practice is discussed in detail in the 
relevant section of the preamble.
    These reports made several recommendations, which include: Ensuring 
timely delivery of credit balances to students regardless of account 
sponsorship; providing a meaningful choice of how to receive title IV 
dollars, especially when a student has a preexisting bank or prepaid 
account; clarifying the nature of implied institutional endorsement of 
certain accounts; ensuring that private student information is not 
released prior to receiving students' consent to do so; providing 
neutral account disclosures to enable students to make informed choices 
about account selection; and giving aid recipients the ability to 
access their student aid balances conveniently and without onerous, 
confusing, or unavoidable fees.
    In view of the reports from consumer groups and government 
organizations, the feedback we received from the public through 
hearings and negotiated rulemaking, and after meeting with staff from 
the FDIC, Office of the Comptroller of the Currency and Bureau of the 
Fiscal Service at the U.S. Department of the Treasury (Treasury), and 
CFPB, we believe it is critical to address the troubling practices 
arising from college card agreements. Moreover, given the number of 
students affected by these agreements, the amount of taxpayer-funded 
title IV aid at stake, and the expanding breadth of the college card 
market, we believe this regulatory action is necessary. The provisions 
in this NPRM regulate institutions and third-party servicers that 
administer the title IV, HEA programs, and do not regulate banking 
entities. To the extent that these regulations have a material impact 
on financial account providers, they do so indirectly and only for 
those providers that choose to engage with institutions that disburse 
title IV credit balances electronically.

Other Provisions

    We are proposing a number of more minor changes in subpart K 
related to the management of title IV, HEA program funds generally. In 
addition, we have also removed outdated cross references and references 
to programs that are no longer authorized, the most prominent of which 
is the FFEL program.
    There are two additional issues that were raised as part of the 
program integrity and improvement negotiated rulemaking that are 
addressed in the proposed regulations: (1) Retaking coursework and (2) 
clock-to-credit-hour conversion rules. These issues, which are distinct 
from the cash management topics that comprise the majority of the 
proposed regulations, are discussed in the final portion of this 
preamble.
    We discuss substantive issues under the sections of the regulations 
to which they pertain. Generally, we do not address regulatory 
provisions that are technical or otherwise minor in effect.

PART 668--STUDENT ASSISTANCE GENERAL PROVISIONS

Statutory Authority \24\
---------------------------------------------------------------------------

    \24\ The statutory authority cited in the following paragraphs 
is relevant to all of the current regulations and proposed 
regulations described in this preamble except where otherwise noted.
---------------------------------------------------------------------------

    Section 401(e) of the HEA, regarding Pell Grants, provides that 
``[p]ayments under this section shall be made in accordance with 
regulations promulgated by the Secretary for such purpose, in such 
manner as will best accomplish the purpose of this section.'' It adds 
that ``[a]ny disbursement allowed to be made by crediting the student's 
account shall be limited to tuition and fees and, in the case of 
institutionally owned housing, room and board. . . .''
    Section 401(a)(1) of the HEA provides that the Secretary shall pay 
``to each institution such sums as may be necessary to pay each 
eligible student . . . a Pell Grant.'' It also provides for the 
Department to pay institutions the necessary sums prior to the start of 
each payment period; but, in addition, authorizes the Secretary to 
``determine[ ] and publish in the Federal Register with an opportunity 
for comment, an alternative payment system that provides payments to 
institutions in an accurate and timely manner, except that this 
sentence shall not be construed to limit the authority of the Secretary 
to place an institution on a reimbursement system of payment.''
    Section 452(c) of the HEA, regarding Direct Loans, states that loan 
funds ``shall be paid and delivered to an institution by the Secretary 
prior to the beginning of the payment period established by the 
Secretary in a manner that is consistent with payment and delivery of 
Federal Pell Grants. . . .''
    Section 487 of the HEA requires, as a prerequisite to title IV 
participation, that an otherwise eligible institution enter into a 
program participation agreement with the Secretary conditioning its 
initial and continuing participation upon compliance with requirements 
that, among other things, the institution ``use funds received by it 
for any program under this title and any interest or other earnings 
thereon solely for the purpose specified in and in accordance with the 
provision of that program,'' and it ``not charge any student a fee for 
processing or handing any application, form, or data required to 
determine the student's eligibility for assistance under this title or 
the amount of such assistance.''
    The HEA also contains numerous provisions to ensure that students 
receive the title IV awards for which they are eligible for under the 
statute. For example, section 401(f)(1) of the HEA provides that ``Each 
student financial aid administrator [at each institution] shall . . . 
(C) make the award to the student in the correct amount.'' Under 
section 454(j) of the HEA, ``proceeds of loans to students under [the 
Direct Loan program] shall be applied to the student's account for

[[Page 28491]]

tuition and fees, and, in the case of institutionally owned housing, to 
room and board. Loan proceeds that remain after the application of the 
previous sentence shall be delivered to the borrower by check or other 
means that is payable to and requires the endorsement or other 
certification by such borrower.'' Section 454(a)(3) of the HEA requires 
Direct Loan program participation agreements to provide that the 
institution ``accepts responsibility and financial liability stemming 
from its failure to perform its functions pursuant to the agreement.'' 
Section 454(a)(5) of the HEA provides that the Direct Loan program 
participation agreement shall ``provide that the institution will not 
charge fees of any kind, however described, to student or parent 
borrowers for origination activities or the provision of any 
information necessary for a student or parent to receive a loan under 
this part, or any benefits associated with such loan.''
    Under section 455(a)(1) of the HEA, the Secretary may prescribe 
such regulations as may be necessary to carry out the purposes of the 
Direct Loan program, including regulations applicable to third-party 
servicers and for the assessment against such servicers of liabilities 
for program violations of the program regulations against such 
servicers, to establish minimum standards with respect to sound 
management and accountability of those the Direct Loan programs.
    More broadly, section 487(c)(1)(B) of the HEA provides that the 
Secretary ``shall prescribe such regulations as may be necessary to 
provide for'' reasonable standards of financial responsibility, and 
appropriate institutional administrative capability to administer the 
title IV programs, in matters not governed by specific program 
provisions, ``including any matter the Secretary deems necessary to the 
sound administration of the financial aid programs.'' Third-party 
servicers are likewise by statute subject to the Department's 
oversight, including under HEA sections 481(c) and 487(c)(1)(C), (H), 
and (I) of the HEA.
    The Department has consistently interpreted the HEA as authorizing 
regulation of the matters addressed in the proposed regulations,\25\ 
including the 2007 cash management regulations \26\ prohibiting account 
opening fees, requiring reasonable free ATM access, and requiring prior 
consent from a student before opening a financial account, and the 1994 
regulations relating to third-party servicers.\27\
---------------------------------------------------------------------------

    \25\ 61 FR 60603 (November 29, 1996).
    \26\ 72 FR 62028 (November 1, 2007).
    \27\ 59 FR 22441 (April 29, 1994).
---------------------------------------------------------------------------

Definitions (Sec.  668.161(a))

PART 668--STUDENT ASSISTANCE GENERAL PROVISIONS

Definitions (Sec.  668.161(a))

    Current Regulations: Section 668.161(a) provides definitions for 
key terms used in subpart K of the General Provisions Regulations. It 
does not currently include definitions for the terms ``access device,'' 
``depository account,'' ``electronic funds transfer,'' ``financial 
account,'' ``financial institution,'' ``or a ``student ledger 
account.''

Access Device

    Proposed Regulations: We propose to add the term ``access device'' 
to Sec.  668.161(a) and define an access device as ``a card, code, or 
other means of access to a financial account, or any combination 
thereof, that may be used by the student or parent to initiate 
electronic fund transfers.''
    Reasons: The proposed definition of ``access device'' borrows from 
the definition of the term in Consumer Financial Protection Bureau 
regulations at 12 CFR 1005.2(a)(1), except that we propose to 
substitute ``financial account'' for ``consumer account,'' and 
``student or parent'' for ``consumer.'' The inclusion of ``financial 
account,'' which would be a defined term under these proposed 
regulations, not only tailors the definition of ``access device'' to 
the current context, but, like the definition of ``financial account,'' 
is inclusive, and therefore, unlike current CFPB rules, includes all 
prepaid card accounts.\28\ Our intent is to capture all types of access 
devices to all types of accounts into which a student or parent may 
wish to deposit his or her title IV credit balance.
---------------------------------------------------------------------------

    \28\ As discussed elsewhere, the CFPB has proposed amending its 
definition of ``access device'' at 12 CFR 1005.2 to include prepaid 
accounts, but a final rule has not yet been issued.
---------------------------------------------------------------------------

    Furthermore, the proposed definition of ``access device'' has the 
advantage of providing a concise way of referring to the different 
types of current and future tools students could use to access their 
financial accounts. During negotiated rulemaking, negotiators expressed 
concerns that our current terminology might not include new 
technologies students could use to access their funds. Since technology 
in this field is advancing rapidly, we were also concerned that the 
terminology could become outdated unless it referred to financial tools 
broadly. To address these concerns, the proposals that we circulated 
during negotiated rulemaking referred to ``access devices'' in 
conjunction with a prepaid card or debit card. However, to simplify the 
regulations, we simply define and use the term access device to mean 
both prepaid cards and debit cards. It is our intent to include new 
technologies in this definition, such as digital wallets and other 
technological advances that may emerge, so that we do not need to amend 
the regulations by listing the specific types of tools students may use 
to access their accounts.

Depository Account

    Proposed Regulations: We propose to add the term ``depository 
account'' and to define it as ``an account at a depository institution 
described in 12 U.S.C. 461(b)(1)(A),\29\ or an account maintained by a 
foreign institution at a comparable depository institution that meets 
the requirements of Sec.  668.163(a)(1).''
---------------------------------------------------------------------------

    \29\ Section 19(b)(1)(A) of the Federal Reserve Act.
---------------------------------------------------------------------------

    Reasons: If used alone in these proposed regulations, the term 
``account'' could refer to a student's or parent's account at a 
financial institution, a student's account at an institution of higher 
education, or an institutional bank account into which the Secretary 
transfers title IV funds. For clarity, we qualify the term to 
differentiate these uses. The term ``depository account'' refers to an 
account maintained by the institution into which the Secretary deposits 
title IV funds requested by the school. During the second session of 
negotiations, some of the non-Federal negotiators suggested including 
the term ``depository account'' to clarify that an account does not 
need to be held at an institution organized as a ``bank.'' \30\ We 
agreed with these negotiators, and added this definition to clarify 
that we are referring accounts held at banks, credit unions, and other 
institutions that meet the statutory definition of a ``depository 
institution.'' The proposal in these regulations contains the same 
definition that was presented during the fourth session of 
negotiations.
---------------------------------------------------------------------------

    \30\ Kundert and Levandowski. Memo to Negotiated Rulemaking 
Committee. [Page 2] (2014), available at www2.ed.gov/policy/highered/reg/hearulemaking/2014/pii2-kl4-draftlanguagechgs.pdf.
---------------------------------------------------------------------------

EFT (Electronic Funds Transfer (EFT))

    Proposed Regulations: We propose to add the term ``EFT'' and to 
define it as ``a transaction initiated electronically instructing the 
crediting or debiting of a financial account, or an institution's 
depository account. For purposes of

[[Page 28492]]

transactions initiated by the Secretary, the term ``EFT'' includes all 
transactions covered by 31 CFR 208.2(f). For purposes of transactions 
initiated by or on behalf of an institution, the term ``EFT'' includes, 
from among the transactions covered by 31 CFR 208.2(f), only Automated 
Clearinghouse transactions.''
    Reasons: In general, the Department is required to make payments by 
EFT. See 31 CFR 208.1. For purposes of that requirement, the definition 
of EFT is ``any transfer of funds, other than a transaction originated 
by cash, check, or similar paper instrument, that is initiated through 
an electronic terminal, telephone, computer, or magnetic tape, for the 
purpose of ordering, instructing, or authorizing a financial 
institution to debit or credit an account,'' and it provides a non-
exhaustive list of the types of transactions covered, including, but 
not limited to, Automated Clearing House transactions. See 31 CFR 
208.2(f). The proposed definition adopts 31 CFR 208.2(f) for purposes 
of transactions initiated by the Secretary, but in order to facilitate 
compliance with other applicable Treasury regulations, including 31 CFR 
210.5,\31\ authorizes only Automated Clearing House transactions for 
payments initiated by or on behalf of institutions.
---------------------------------------------------------------------------

    \31\ 31 CFR 210.5 includes requirements for accounts into which 
Federal payments are made and includes provisions relating to 
account insurance and compliance with the Electronic Funds Transfer 
Act, among other requirements.
---------------------------------------------------------------------------

Financial Account

    Proposed Regulations: We propose to add the term ``financial 
account'' and to define a financial account as ``a student's or 
parent's checking or savings account, prepaid card account, or other 
consumer asset account held directly or indirectly by a financial 
institution.''
    Reasons: Instead of delineating all of the different account types 
of accounts that a student or parent may open to receive title IV, HEA 
program funds, we believe that using a single term simplifies the 
regulations.

Financial Institution

    Proposed Regulations: We propose to add the term ``financial 
institution'' and to define it as ``a bank, savings association, credit 
union, or any other person or entity that directly or indirectly holds 
a financial account belonging to a student or parent that issues an 
access device associated with a financial account and agrees with a 
student or parent to provide EFT services.''
    Reasons: By defining this term, we will clarify that when we refer 
to a ``financial institution,'' we mean the entity or entities that 
directly or indirectly hold, offer or manage the student's or parent's 
Title IV funds. The term is used in proposed Sec.  668.164(d), (e) and 
(f) to refer to the entity or entities that enter into card agreements 
with postsecondary institutions and hold the title IV funds of students 
and parents who open accounts offered under T1 or T2 arrangements.

Student Ledger Account

    Proposed Regulations: We propose to add the term ``student ledger 
account'' and to define a student ledger account as ``a bookkeeping 
account maintained by an institution to record the financial 
transactions pertaining to a student's enrollment at the institution.''
    Reasons: As discussed previously, we qualify the term ``account'' 
to refer to its intended use. For this definition we refer to student 
accounts maintained on the institution's books reflecting the 
institution's charges and the students' payments. We note that 
crediting the student's ledger account marks the date on which a 
disbursement is made and in cases where the ledger account is credited 
on or after the first day of class, marks the beginning of the 14-day 
period for paying credit balances specified in Sec.  668.164(h)(2).

Federal Interest in Title IV, HEA Program Funds and Standard of Conduct 
(Sec.  668.161(b)-(c))

    Current Regulations: Current Sec.  668.161(b) provides that title 
IV, HEA program funds received by an institution are held in trust for 
the intended student beneficiaries, the Secretary, or lender or 
guaranty agency under the FFEL programs. The institution, as a trustee 
of Federal funds, may not use or hypothecate title IV, HEA program 
funds for any other purpose.
    Under current Sec.  668.163(e), an institution must exercise the 
level of care and diligence required of a fiduciary with regard to 
maintaining and investing title IV, HEA program funds.
    Proposed Regulations: Proposed Sec.  668.161(b) removes the 
reference to a lender or guaranty agency under the FFEL programs and 
provides that an institution may not engage in any practice that risks 
the loss of title IV, HEA program funds.
    We relocate the current standard of conduct provisions in Sec.  
668.163(e) to proposed Sec.  668.161(c), and revise Sec.  668.161(b) of 
these regulations to specify that an institution must exercise the 
level of care and diligence required of a fiduciary with regard to 
managing title IV, HEA program funds.
    Reasons: Currently, institutions that seek to maximize the earnings 
on funds that would otherwise remain idle in one or more of their 
operating or depository accounts enter into arrangements where all or 
part of the funds in those accounts are swept overnight into savings 
accounts, money market mutual funds, or other securities. While it is 
outside of the scope of these regulations to limit how an institution 
chooses to invest or manage its own funds, we do not believe that an 
institution should sweep title IV, HEA program funds.\32\ So, to the 
extent that an institution's operating or depository accounts contain 
title IV, HEA program funds, the institution must ensure that those 
funds are not swept or otherwise placed at risk of financial loss. By 
removing the provision for investing title IV funds, and prohibiting 
practices that risk loss of those funds, the Department intends to 
preclude risky management practices, including sweeps containing title 
IV funds.
---------------------------------------------------------------------------

    \32\ The term ``sweep'' as customarily used in the financial 
services sector refers to the practice of automatically transferring 
funds in excess of a preset amount into an account or other 
investment vehicle with the potential to earn a higher rate of 
return. This practice is designed to earn higher returns on 
otherwise idle funds, but may subject those funds to a higher risk 
of investment loss.
---------------------------------------------------------------------------

    We acknowledge that some sweep accounts are relatively risk free; 
however, other sweep accounts or investment vehicles may subject funds 
to losses, liens, or other attachments. Although we could attempt to 
differentiate between the two or define a safe investment account, we 
see no reason to do so. Under the current Sec.  668.163(c)(4) that 
governs interest-bearing accounts, an institution must return to the 
Secretary any interest earnings over $250. Under proposed Sec.  
668.163(c), an institution must return any interest earnings over $500. 
Therefore, unlike the situation where an institution invests its own 
funds, there is no incentive to maximize earnings because the amount of 
earnings that an institution may retain is insignificant. As a trustee 
of Federal funds, the institution must ensure that all of the title IV, 
HEA program funds it receives from the Secretary remain unencumbered 
and delivered timely to students and parents that qualify for those 
funds.
    We believe that relocating the standard of conduct provisions to 
the scope and institutional responsibility section of the proposed 
regulations is appropriate because an institution must exercise the 
level of care and diligence

[[Page 28493]]

required of a fiduciary in managing title IV, HEA program funds under 
these proposed regulations.

Payment Methods Generally (Sec.  668.162)

    Current Regulations: Current Sec.  668.162(a) specifies that the 
Secretary may provide title IV, HEA program funds to an institution 
under one of the following payment methods: Advance, reimbursement, 
just-in-time, or cash monitoring. Section 668.162(c) describes the 
just-in-time payment method.
    Under Sec.  668.166(a)(2), the provisions governing excess cash do 
not apply to an institution that receives title IV, HEA program funds 
under the just-in-time payment method.
    Proposed Regulations: Proposed Sec.  668.162(a) removes the 
reference to the just-in-time payment method, and changes the name of 
the cash monitoring payment method to the ``heightened cash monitoring 
payment method.'' We are also proposing to remove current Sec.  
668.162(c), which describes the just-in-time payment method. In 
addition, we propose to make a corresponding change to the excess cash 
regulations in Sec.  668.166(a) by removing the reference to the just-
in-time payment method.
    Reasons: Other than a few institutions that last piloted the just-
in-time payment method in 2010, the Department does not use this 
payment method, and does not intend to do so because the advance 
payment method, as currently implemented, is sufficient to meet 
institutional and Department needs.

Reimbursement and Cash Monitoring Payment Methods (Sec.  668.162(c)-
(d))

    Current Regulations: Current Sec.  668.162(d)(1) specifies that 
under the reimbursement payment method an institution must first make 
disbursements to students and parents for the amount those students and 
parents are eligible to receive under the Federal Pell Grant, TEACH 
Grant, Direct Loan, and campus-based programs before the institution 
may seek reimbursement from the Secretary for those disbursements. The 
Secretary considers an institution to have made a disbursement once it 
has credited the student's account or paid the student or parent 
directly with its own funds. Paragraphs (d)(2) through (d)(4) of this 
section describe the procedures an institution must follow and the 
documentation the institution must provide in submitting a 
reimbursement request, as well as the conditions the documentation must 
satisfy to support the request.
    Similarly, the current provisions governing the cash monitoring 
payment method under Sec.  668.162(e) specify that an institution must 
first make disbursements to students and parents for the amount of 
title IV, HEA program funds those students and parents are eligible to 
receive before the institution seeks reimbursement from the Secretary 
for those funds. Under paragraph (e)(2) of this section, an institution 
seeks reimbursement by following the procedures under the reimbursement 
payment method, except that the Secretary may modify the documentation 
requirements and review procedures used to approve the reimbursement 
request.
    Current Sec.  668.164(e) requires that whenever the amount of title 
IV, HEA program funds credited to a student's account exceeds the 
amount of tuition and fees, room and board, and other authorized 
charges assessed the student, the institution must pay the resulting 
credit balance directly to the student or parent within a 14-day 
timeframe.
    Proposed Regulations: Proposed Sec.  668.162(c) specifies that an 
institution must first credit a student's ledger account for the amount 
of title IV, HEA program funds the student or parent is eligible to 
receive, and pay the amount of any credit balance due under proposed 
Sec.  668.164(h), before the institution seeks reimbursement from the 
Secretary for those funds. In addition, proposed Sec.  668.164(c)(3) 
requires an institution to submit, with its request for reimbursement, 
documentation that the institution paid directly to students or parents 
any credit balances that were due under proposed Sec.  668.164(h).
    Similarly, under the heightened cash monitoring payment method in 
proposed Sec.  668.162(d), an institution must first credit a student's 
ledger account for the amount of title IV, HEA program funds the 
student or parent is eligible to receive, and pay any credit balance 
due under proposed Sec.  668.164(h), before the institution seeks 
reimbursement from the Secretary for those funds.
    Reasons: The credit balance provisions in the current regulations 
and these proposed regulations specify a 14-day timeframe within which 
an institution must pay a credit balance directly to a student or 
parent. The 14-day timeframe applies regardless of the payment method 
under which the Secretary provides title IV, HEA program funds to an 
institution. However, under the reimbursement and heightened cash 
monitoring payment methods, an institution must first pay title IV, HEA 
program funds for the amount that a student or parent is eligible to 
receive before the institution seeks reimbursement from the Department 
for those funds. Therefore, the institution may not include in its 
reimbursement request any student or parent for whom a credit balance 
was due but not yet paid. In the context of a program review, audit, or 
other enforcement action, the issue of whether the institution complied 
with the 14-day timeframe depends on the date the institution credits 
the student's ledger account with title IV, HEA program funds and the 
date it pays the credit balance; however, for seeking reimbursement, it 
does not matter when the credit balance was paid, only that it was 
paid.
    The current provisions under which the Department determines 
whether to approve a reimbursement request do not specify that an 
institution must submit documentation showing that it paid the credit 
balances that are due to students and parents. These proposed 
regulations make explicit that an institution placed on the 
reimbursement payment method or heightened cash monitoring payment 
method under Sec.  668.162(d)(2) must demonstrate in accordance with 
procedures established by the Secretary that it paid directly to 
students and parents the credit balances that are included in its 
request for reimbursement before the Department will consider that 
request. For an institution placed on the heightened cash monitoring 
payment method under Sec.  668.162(b)(1), the institution must maintain 
documentation showing that it paid any required credit balances 
directly to students and parents before it initiates a request for 
funds that includes those students and parents.

Maintaining Title IV, HEA Program Funds in an Institutional Depository 
Account (Sec.  668.163(a))

    Current Regulations: Current Sec.  668.163(a)(1) specifies that an 
institution must maintain title IV, HEA program funds in a bank or 
investment account that is Federally insured or secured by collateral 
of value reasonably equivalent to the amount of those funds.
    Proposed Regulations: Proposed Sec.  668.163(a)(1) requires an 
institution to maintain title IV, HEA program funds in a depository 
account. For an institution located in a State, the depository account 
must be insured by the FDIC or National Credit Union Administration 
(NCUA). For a foreign institution, the depository account may be 
insured by the FDIC or NCUA, or by an equivalent agency of the 
government of the country in which the institution is located. If there 
is no equivalent agency, the

[[Page 28494]]

Secretary may approve a depository account designated by the foreign 
institution.
    Reasons: We do not see any value in continuing to allow 
institutions located in a State to maintain title IV, HEA program funds 
in non-insured accounts. As discussed more fully under the heading 
``Interest-bearing accounts'' this proposal is consistent with OMB 
guidance in 2 CFR 200.305(b)(7)(ii), which provides that ``advance 
payments of Federal funds must be deposited and maintained in insured 
accounts whenever possible.'' In view of the rigorous regulatory 
requirements that financial institutions must satisfy before their 
depository accounts are insured by the FDIC or NCUA, and the FDIC and 
NCUA oversight over those financial institutions, we believe this 
requirement will help ensure that Federal funds are not put at undue 
risk of loss.
    In addition, because the current regulations do not address the 
accounts into which foreign institutions must maintain Direct Loan 
program funds, we propose to apply the same requirements, to the extent 
possible, to those institutions--a depository account that is insured 
by the FDIC, NCUA, or by an equivalent agency of the government where 
the institution is located. We recognize, however, that there may be 
instances where there is no equivalent agency, so these proposed 
regulations would permit the Secretary to approve a bank account 
designated by the foreign institution.

Interest-Bearing Bank Account (Sec.  668.163(c))

    Current Regulations: Current Sec.  668.163(c)(1) requires an 
institution to maintain the fund described in Sec.  674.8(a) of the 
Federal Perkins Loan program regulations (the Fund) in an interest-
bearing bank account or investment account consisting predominately of 
low-risk, income-producing securities, such as obligations issued or 
guaranteed by the United States.\33\ Any interest or income earned on 
Federal Perkins Loan funds are retained by the institution as part of 
the Fund. Under paragraph (c)(3) of this section, an institution does 
not have to maintain other title IV, HEA program funds in an interest-
bearing account if (1) the institution drew down less than $3 million 
in the prior award year and anticipates that it will not draw down more 
than that amount in the current award year, (2) the institution 
demonstrates by its cash management practices that it will not earn 
over $250 on those funds during the award year, or (3) the institution 
requests funds under the just-in-time payment method. In addition, 
except for interest earned on Federal Perkins Loan funds and retained 
in the Fund, an institution may keep up to $250 in interest earnings, 
but must remit to the Secretary by June 30 of the award year any 
interest earnings over $250.
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    \33\ We note that under section 461(b)(1) of the HEA, the 
authority for schools to make a Federal Perkins Loan ended on 
September 30, 2014, with an automatic one-year extension pursuant to 
section 422(a) of the General Education Provisions Act. Absent 
congressional action, the program will be wound down, and the 
Department will provide instructions to institutions currently 
participating in the program as to, for example, the disposition of 
Perkins Loan Program revolving funds.
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    Proposed Regulations: Proposed Sec.  668.163(c) adopts by reference 
the guidance in 2 CFR part 200, issued by OMB on December 26, 2013, 
entitled Uniform Administrative Requirements, Cost Principles, and 
Audit Requirements for Federal Awards. Section 200.305(b)(8) states:
    (8) The non-Federal entity must maintain advance payments of 
Federal awards in interest-bearing accounts, unless the following 
apply.
    (i) The non-Federal entity receives less than $120,000 in Federal 
awards per year.
    (ii) The best reasonably available interest-bearing account would 
not be expected to earn interest in excess of $500 per year on Federal 
cash balances.
    (iii) The depository would require an average or minimum balance so 
high that it would not be feasible within the expected Federal and non-
Federal cash resources.
    (iv) A foreign government or banking system prohibits or precludes 
interest-bearing accounts.
    Section 200.305(b)(9) states:
    (9) Interest earned on Federal advance payments deposited in 
interest-bearing accounts must be remitted annually to the Department 
of Health and Human Services, Payment Management System, Rockville, MD 
20852. Interest amounts up to $500 per year may be retained by the non-
Federal entity for administrative expenses.
    Reasons: The current interest-bearing account provisions were 
largely based on OMB guidance in effect at the time we published the 
initial cash management regulations in November 1996. These proposed 
regulations are consistent with updated OMB guidance.

Disbursements by Payment Period (Sec.  668.164(b))

    Current Regulations: In general, current Sec.  668.164(b)(1) and 
(2) provide that, except for paying a student under the Federal Work 
Study (FWS) program, an institution must disburse title IV, HEA program 
funds on a payment-period basis. More specifically, unless any of the 
disbursement provisions governing the Direct Loan program now found 
under 34 CFR 685.303(d) apply, or the institution chooses to make more 
than one disbursement in a payment period for Federal Perkins Loan, 
Federal Pell Grant, the institution must disburse the title IV, HEA 
program funds that a student or parent is eligible to receive at least 
once each payment period.
    Current Sec.  668.164(b)(3) provides that except for late 
disbursements, an institution may disburse title IV, HEA program funds 
to a student or parent for a payment period only if the student is 
enrolled for classes for that payment period and is eligible to receive 
those funds.
    Under Sec.  668.2, a third-party servicer is defined as an 
organization, person, or State that enters into a contract with an 
eligible institution to administer any aspect of the institution's 
participation in any title IV, HEA program. This includes performing 
any function required by statute or regulation, or any arrangement, 
agreement, or limitation entered into under the authority of statutes 
applicable to title IV of the HEA, such as, but not limited to, e.g., 
receiving, disbursing, or delivering title IV, HEA program funds, 
preparing and certifying requests for funds under the advance or 
reimbursement payment methods, determining student eligibility and 
related activities, preparing applications, and other functions noted 
in paragraph (i) of the definition.
    Current Sec.  668.25 provides, in part, that in a contract with an 
institution, a third-party servicer must (1) comply with all statutory 
provisions of or applicable to title IV of the HEA, and all regulatory 
provisions prescribed under that statutory authority; (2) report to the 
OIG for investigation any information indicating there is a reasonable 
cause to believe that the institution may have engaged in fraud or 
other criminal misconduct in connection with administering the title 
IV, HEA programs, (3) be jointly and severally liable with the 
institution to the Secretary for any violation by the servicer of any 
statutory or regulatory provision of or applicable to title IV of the 
HEA, and (4) if the servicer disburses title IV, HEA program funds to a 
student, confirm the eligibility of the student before making that 
disbursement, where the confirmation must include but is not limited to 
any applicable information contained in the records required under 
Sec.  668.24.
    Proposed Regulations: Proposed Sec.  668.164(b)(1) and (2) specify 
that, except for paying a student under the FWS program, for making 
prior-year,

[[Page 28495]]

late, or retroactive disbursements, or unless any of the disbursement 
provisions governing the Direct Loan program now found under 34 CFR 
685.303(d) apply, an institution must disburse during a payment period 
the amount of title IV, HEA program funds that an enrolled student, or 
the student's parent, is eligible to receive for that payment period.
    Proposed Sec.  668.164(b)(3) provides that at the time that a 
disbursement is made for a payment period, the institution, along with 
the third-party servicer engaged by the institution to draw down title 
IV, HEA program funds or otherwise perform activities leading to or 
supporting that disbursement, must confirm that the student is enrolled 
at the institution, and that the student, or the student's parent, is 
eligible for that disbursement.
    Reasons: We wish to clarify the current requirement that, except 
for the cited circumstances, an institution must disburse title IV, HEA 
program funds on a payment-period basis by specifying that the 
institution must disburse during a payment period all of the funds that 
a student or parent is eligible to receive for that payment period. 
This requirement, along with the proposed provisions under Sec.  
668.164(c) and (h) that require an institution to credit a student's 
ledger account to pay only for charges associated with a payment 
period, helps ensure that students and parents receive their credit 
balance funds on a timely basis.
    In program reviews of several institutions and third-party 
servicers, the Department found that neither the institution nor the 
servicer confirmed that students were eligible to receive title IV, HEA 
program funds before disbursements were made to those students. Under 
the contracts between these institutions and servicers, the servicers 
would perform a wide range of activities on behalf of the institutions 
including packaging aid awards, drawing down or requesting title IV 
funds, accounting for funds, and submitting data or reports to the 
Department. However, the contracts used the phrases ``make arrangements 
for disbursements,'' ``intercept disbursement requests,'' and ``process 
awards including [the] preparation of disbursement journals'' to 
apparently refer to a process where the servicer would provide the 
institution a list of the students and the amounts of their aid awards, 
and the institution would then credit the students' ledger accounts for 
those amounts, presumably after confirming the eligibility of those 
students. But those confirmations were either not performed or not 
performed adequately, in part, because the procedures under which the 
institution was expected to confirm the eligibility of its students 
were lacking or not documented. Nevertheless, the servicers accepted at 
face value that the institution confirmed eligibility when it disbursed 
title IV, HEA program funds by crediting the students' ledger accounts, 
and reported those disbursements to the Department as valid payments 
made to those students.
    The Department finds it incongruous that a servicer who essentially 
controls the entire process for making awards to students would carve 
out in its contract with an institution the most fundamental aspect of 
the administering the title IV aid programs--that disbursements are 
made only to eligible students. Nevertheless, because the third-party 
servicer is bound by the same provisions that apply to an institution, 
the servicer must carry out its contracted activities in a manner 
keeping with a fiduciary under the title IV, HEA programs. In this 
regard, the servicer cannot feign ignorance over what the institution 
did or did not do in confirming eligibility. To the extent that the 
servicer relies on information provided by the institution that leads 
to or supports a disbursement, is used in determining the amount of 
funds to draw down for eligible students, or subsequently used for 
reporting valid disbursements to the Department, the servicer, along 
with the institution, is responsible for the veracity of that 
information. In the program reviews, the findings could have been 
ameliorated if the parties established and agreed to a documented 
process under which the institution would confirm eligibility and the 
servicer would verify periodically that the confirmations were made in 
accordance with that process.
    We wish to emphasize that our proposed language holding an 
institution and its third-party servicer responsible for confirming a 
student's eligibility is not new policy or a change in policy--it 
merely emphasizes current requirements and reiterates institutional and 
servicer responsibilities.

Crediting a Student's Ledger Account (Sec.  668.164(c), (h))

    Current Regulations: Under current Sec.  668.164(d), an institution 
may, without obtaining the student's or parent's authorization, use 
title IV, HEA program funds to credit a student's account at the 
institution to satisfy (1) current year charges for tuition and fees 
and, if the student contracts with the institution for those services, 
for room and board, and (2) prior year charges for tuition, fees, room, 
or board. In addition, if the institution obtains the student's or 
parent's authorization, it may credit the student's account with title 
IV, HEA program funds to satisfy other current year and prior-year 
educational charges incurred by the student at the institution. 
However, Sec.  668.164(d)(2) limits the amount of current year title 
IV, HEA program funds that may be used to satisfy prior-year charges to 
$200.
    Current Sec.  668.164(e) provides that whenever an institution 
disburses title IV, HEA program funds by crediting a student's account 
and the total amount of those funds exceeds the amount of tuition and 
fees, room and board, and other authorized charges the institution 
assessed the student, the institution must pay the resulting credit 
balance directly to the student or parent as soon as possible but no 
later than (1) 14 days after the balance occurred, if the credit 
balance occurred after the first day of class of a payment period, or 
(2) 14 days after the first day of class of a payment period, if the 
credit balance occurred on or before the first day of class of that 
payment period.
    Proposed Regulations: Proposed Sec.  668.164(c)(1) specifies that 
an institution may credit a student's ledger account with title IV, HEA 
program funds to pay for allowable charges associated with the current 
payment period. Allowable charges are (1) the amount of tuition, fees, 
and institutionally-provided room and board charges assessed the 
student for the payment period, or the prorated amount of those charges 
if the institution debits the student's ledger account for more than 
charges associated with the payment period, and (2) the costs incurred 
by the student for the payment period for purchasing book, supplies, 
and other educationally-related goods and services provided by the 
institution for which the institution obtains the student's or parent's 
authorization.
    Proposed Sec.  668.164(c)(2) provides that, if an institution 
includes the cost of books and supplies as part of the amount it 
charges for tuition and fees, the institution must disclose those costs 
separately and explain why including them is in the student's best 
financial interests.
    Proposed Sec.  668.164(c)(3) specifies that an institution may 
include, in a payment period for the current year, prior-year charges 
of not more than $200 for (1) tuition, fees, and institutionally-
provided room and board without obtaining a student's or parent's 
authorization, and (2) educationally related goods and services 
provided by the institution for which the institution obtains the 
student's or parent's

[[Page 28496]]

authorization. The ``current year'' is defined as the current loan 
period for a student or parent who receives a Direct Loan, or the 
current award year for a student who does not receive a Direct Loan. A 
``prior year'' is defined as any loan period or award year prior to the 
current loan period or award year, as applicable.
    Under proposed Sec.  668.164(c)(4), an institution may include in 
the current payment period allowable charges stemming from any previous 
payment period in the current year for which the student is eligible, 
if the student was not already paid for that previous payment period.
    If an institution debits a student's ledger account for the entire 
cost of a program or otherwise debits the ledger account for more than 
the charges associated with the payment period, proposed Sec.  
668.164(c)(5) requires the institution to determine the prorated amount 
of charges for the payment period by (1) for a program that has 
substantially equal payment periods, dividing the total amount of 
institutional charges for the program by the number of payment periods 
in the program, or (2) for any other program, dividing the number of 
credit or clock hours the student enrolls in or is expected to complete 
in the current payment period by the total number of credit or clock 
hours in the program and multiplying that result by the total 
institutional charges for the program.
    Under proposed Sec.  668.164(h)(1), a title IV, HEA program credit 
balance occurs whenever the amount of title IV, HEA program funds 
credited to a student's ledger account for a payment period exceeds the 
amount of allowable charges associated with that payment period. 
Proposed Sec.  668.164(h)(2) maintains the same 14-day credit balance 
payment timeframes as the current regulations.
    Reasons: By prorating institutional charges to the amount 
associated with a payment period, and specifying that a credit balance 
occurs whenever the amount of title IV, HEA program funds exceeds the 
prorated amount of charges, the Department aims to correct a situation 
where credit balance funds that would be used to pay for living 
expenses and other education-related costs are not paid to the student 
or parent until after the first payment period. For example, a student 
who attends an institution that charges $8,000 for a year-long program 
(which includes two payment periods) receives $5,000 of title IV, HEA 
program funds per payment period, or $10,000 per year. Currently the 
institution may debit the student's ledger account for $8,000 in the 
first payment period, the full cost of the program, and then credit the 
account for only $5,000, the amount of title IV, HEA program funds the 
student is eligible to receive for the first payment period. The 
student would not receive a credit balance until several months later 
when the institution credits the student's ledger account during the 
second payment period with another $5,000, because only at that point 
the total amount of title IV, HEA program funds exceed institutional 
charges (by $2,000). Under this proposal, the institution would only be 
able to charge a prorated amount of $4,000 during each payment period, 
so the student or parent would receive a credit balance of $1,000 
during the first payment period and another $1,000 during the second 
payment period. In this example, the prorated amount of institutional 
charges associated with a payment period is $4,000 (the total amount of 
institutional charges of $8,000 is divided by two, the number of 
payment periods in the program). We note that the vast majority of 
institutions, particularly those that are term-based, already charge on 
a term or payment period basis, so this proposed change in the 
regulations will have no impact on those institutions. The Department 
seeks comment on whether the proposed methods for prorating 
institutional charges under Sec.  668.164(c)(5) are appropriate.
    With regard to the definitions in proposed Sec.  668.164(c)(3), we 
seek to codify in regulations the meaning of the terms ``current year'' 
and ``prior year'' that were previously used in guidance issued on 
September 8, 2009, in Dear Colleague Letter GEN-09-11.
    In cases where institutions include the costs of required books and 
supplies as part of the total amount of tuition and fee charges, 
relevant information about those materials and the cost charged by 
institutions for those materials is not frequently provided to 
students. This practice effectively prevents students from purchasing 
required materials elsewhere for a lower price. For this reason, and 
based on findings by State attorneys general that some institutions 
required students to purchase books and supplies directly from them at 
grossly inflated prices, we proposed during negotiated rulemaking to 
prohibit institutions from including books and supplies as part of 
tuition and fees. However, some of the non-Federal negotiators noted 
that institutions are increasingly developing course-specific or 
course-embedded materials for pedagogical or safety reasons.\34\ The 
negotiators argued that because these materials are part and parcel of 
the course, they would typically not be available as separate items in 
the public domain. For this reason, the non-Federal negotiators 
believed the Department's proposal would dampen innovative or safety-
related efforts by institutions.
---------------------------------------------------------------------------

    \34\ During negotiations, non-Federal negotiators cited various 
examples of these types of materials, especially in cases where 
uniformity was required for learning or safety and health reasons, 
such as the type of instruments used in a cosmetology or culinary 
program.
---------------------------------------------------------------------------

    The Department is persuaded there are valid reasons for including 
some books and supplies as part of tuition and fees. While we 
acknowledge that course-embedded materials blur the distinction between 
tuition and fees and books and supplies, we continue to believe that 
where required books and supplies are separate items available for 
purchase in the marketplace, those books and supplies should generally 
not be included as part of tuition and fees. Indeed, section 472 of the 
HEA, regarding ``costs of attendance,'' treats books and supplies as 
separate from tuition and fees; and under other provisions (e.g., 
section 401(e) of the HEA), payments made by crediting the student's 
account are limited to tuition and fees and room and board, absent 
student consent. However, under the proposed regulations, an 
institution may include the costs of books and supplies as part of 
tuition and fees only if it separately discloses the costs of those 
items and explains why including them is in the student's best 
financial interest; that is, the institution is providing the books and 
supplies at or below market costs, or providing materials not otherwise 
generally available for purchase by the public. To the extent that an 
institution includes course-embedded materials as part of tuition and 
fees, the institution must separately disclose the cost of accessing 
those materials and explain why it is in the student's best financial 
interest to do so. For example, an institution may disclose that it 
charges students a $100 fee for accessing course material that replaces 
a book that typically sells for $400. We specifically invite comment on 
how and when an institution should make these disclosures.

Payments by the Secretary (Sec.  668.164(d)(3))

    Current Regulations: Under current Sec.  668.164(a)(1), an 
institution is responsible for disbursing title IV, HEA program funds 
to a student or parent,

[[Page 28497]]

including paying a credit balance directly to the student or parent.
    Proposed Regulations: Proposed Sec.  668.164(d)(3) specifies that 
the Secretary may pay directly to students and parents any credit 
balances due under Sec.  668.164(h), and the disbursement of title IV 
funds (up to the credit balance amount) for books and supplies under 
Sec.  668.164(m), using an alternative method established or authorized 
by the Secretary and published in the Federal Register. Alternative 
methods include making direct payments to prepaid or debit cards 
sponsored by the Department or another Federal agency.
    Reasons: We recognize the growing popularity of electronic banking 
as evidenced by the increasing numbers of students and their parents 
who receive their title IV, HEA credit balances via direct deposit to 
their financial accounts. We are also aware that a number of government 
benefits are distributed to recipients via prepaid government debit 
cards. For example, Treasury's Direct Express[supreg] prepaid debit 
card program is used to distribute Social Security and other Federal 
benefits to over 5 million beneficiaries. At this time, the Department 
is not establishing a debit or prepaid card for direct payments of 
title IV, HEA funds; however, we will continue to explore whether such 
a card would be beneficial to students and parents. If the use of a 
government-issued debit or prepaid card shows the potential of savings 
in costs and other efficiencies for students, their parents, and the 
government, the Secretary may wish to establish such a card and make it 
available for the direct payments of title IV, HEA credit balances.

Designation as a Tier One (T1) Arrangement or a Tier Two (T2) 
Arrangement (Sec.  668.164(e)(1) and Sec.  668.164(f)(1)-(3)) \35\
---------------------------------------------------------------------------

    \35\ These sections appear in the proposed regulations after 
Sec.  668.164(d)(4), which primarily discusses direct payments made 
pursuant to a student choice process established for institutions 
with T1 or T2 arrangements. We have elected to discuss Sec.  
668.164(e)(1) and Sec.  668.164(f)(1)-(3) first, to detail what T1 
and T2 arrangements are and our reasons for designating them as 
such. We believe ordering the preamble in this way will make the 
discussion of Sec.  668.164(d)(4) easier to understand.
---------------------------------------------------------------------------

    Current Regulations: Current Sec.  668.164(c)(3) states that an 
institution may establish a policy requiring its students to provide 
bank account information or open an account at a bank of their choosing 
as long as this policy does not delay disbursement of title IV, HEA 
program funds to students. If the institution opens a bank account on 
behalf of a student or parent, establishes a process the student or 
parent follows to open a bank account, or similarly assists the student 
or parent in opening a bank account, the institution must comply with 
the bank account provisions specified in Sec.  668.164(c)(2)(i) through 
(vii).
    Proposed Regulations: The provisions of Sec.  668.164(d)(4), (e), 
and (f) apply to arrangements between an institution and a third-party 
servicer, and between an institution and a financial institution.
    Proposed Sec.  668.164(e)(1) specifies that in a T1 arrangement, an 
institution has a contract with a third-party servicer under which the 
servicer performs one or more of the functions associated with 
processing direct payments of title IV, HEA program funds on behalf of 
the institution to one or more financial accounts that are offered 
under the contract or by the third-party servicer, or by an entity 
contracting with or affiliated with the third party servicer to 
students and their parents.
    Proposed Sec.  668.164(f)(1) specifies that in a T2 arrangement, an 
institution has a contract with a financial institution or entity that 
offers financial accounts through a financial institution, under which 
financial accounts are offered and marketed directly to students or 
their parents.
    Proposed Sec.  668.164(f)(2) provides that the Secretary presumes 
that title IV, HEA program funds are deposited or transferred into the 
financial accounts offered and marketed under Sec.  668.164(f)(1). 
However, the institution does not have to comply with the requirements 
described in Sec.  668.164(f)(4) if it documents that, for the most 
recently completed award year, no student or parent received a credit 
balance.
    Proposed Sec.  668.164(f)(3) explains that a financial account is 
``directly marketed to students and their parents'' in three 
situations: (1) The institution communicates information directly to 
its students or their parents about the financial account and how it 
may be opened; (2) the financial account or access device is co-branded 
with the institution's name, logo, mascot, or other affiliation; and 
(3) a card or tool that is provided to the student or parent for 
institutional purposes, such as a student ID card, is linked with the 
financial account or access device.
    Reasons: Over the past several years, institutions of higher 
education have entered into arrangements with financial institutions 
and nonbank entities to offer students a variety of debit and prepaid 
cards to receive title IV credit balance disbursements. Institutions 
have also begun to rely on third-party servicers to handle the 
administrative operations of their aid disbursement processes. In many 
cases, these third-party servicers provide both student financial and 
institutional administrative services. The institution benefits from 
these arrangements, either in the form of remuneration, receiving 
reduced-price or free administrative services, or in reduced 
institutional costs.
    As the incidence of these types of agreements has increased, so too 
has the scrutiny of the practices associated with them. In the past few 
years, USPIRG, Consumers Union, GAO, and OIG have conducted reviews 
into the college card marketplace and released reports detailing their 
findings and recommendations. A number of the findings in these reports 
are troubling, and the reports lay out recommendations for Department 
action that are explained in more fully in each of the relevant 
sections of this preamble, along with explanations of the provisions 
designed to address these findings. This section discusses a threshold 
issue--the types of arrangements that are subject to the proposed 
regulations.
    During negotiated rulemaking, the committee spent a significant 
amount of time trying to identify which financial accounts would be 
considered ``sponsored,'' or endorsed by the institution. After 
multiple negotiating sessions, the Department's final proposal in the 
negotiations included the term ``sponsored account,'' which was defined 
as an account, access device, card (including student ID), or other 
tool that:
    (1) Is specified or included in a contract between the institution 
and an entity,
    (2) Is offered to a student (or parent) enrolled at the 
institution, and
    (3) May be used by the student (or parent) to receive title IV 
funds.
    This definition encompasses a variety of possible accounts. While 
the student advocates supported this definition, banking sector 
representatives opposed the definition, arguing that it was (1) overly 
broad and applicable to accounts that are outside the scope of the 
Department's interest in regulating the delivery of title IV aid, and 
(2) too vague as to what which accounts would fall under the 
definition. We acknowledge the concerns raised by banking industry 
representatives, so have tailored the proposed rules based on the 
circumstances in which the troubling practices have occurred.
    In describing the questionable practices of the college card 
market, a consensus emerged from the consumer

[[Page 28498]]

and government reports: Not all arrangements resulted in equivalent 
levels of troubling behavior, largely because the financial entities 
and third-party servicers with which institutions contract face 
divergent monetary incentives.
    Banks and credit unions have an incentive to create long-term 
relationships with college students--a potentially lucrative future 
cohort--at the time when those students have not yet established a 
relationship with a bank.\36\ Banks may not necessarily rely on short-
term fee income when providing products to students, because banks may 
be seeking to establish a customer base that will be profitable over 
the long term when those students secure mortgages, auto loans, or 
other types of consumer credit.
---------------------------------------------------------------------------

    \36\ Consumers Union at 5.
---------------------------------------------------------------------------

    Other financial institutions, including, but not necessarily 
limited to, non-bank firms (such as third-party servicers), ``may have 
different incentives for pursuing relationships with students.'' \37\ 
These entities have a different type of business model, and are more 
likely to ``seek to partner with schools to provide fee-based services 
to both the institution and the student.'' \38\ This is primarily a 
relationship with the student that ends once the student is no longer 
enrolled, and ``the nature of this short-term interaction creates an 
incentive to increase fee revenue over what traditional banks might 
charge.'' \39\ As a result, there has been a proliferation of uncommon, 
difficult to understand, and oftentimes unreasonable fees assessed by 
such providers against accounts with credit balances. Moreover, by 
their nature as servicers handling the duties of the institutions, they 
``can take over all aspects of the disbursement process from schools.'' 
\40\ As a result, these third-party servicers can determine the way 
that the college card is portrayed to students, establish different 
timeframes for electronic delivery of credit balances based on how the 
student electronically receives funds, and access personal student 
information for targeted marketing purposes.
---------------------------------------------------------------------------

    \37\ Ibid.
    \38\ USPIRG at 13.
    \39\ Ibid.
    \40\ USPIRG at 13.
---------------------------------------------------------------------------

    Ordinarily, an institution's incentive to agree to assessing high 
fees against students might be offset by its interest in protecting its 
students from the loss of significant financial assistance. However, 
colleges also have strong incentives to establish arrangements that 
provide for fee revenue (which ultimately benefits the institution in 
the form of remuneration or reduced-cost services from the third-party 
servicer). ``Schools are searching for ways to make their services more 
cost effective and increase revenues,'' and one increasingly common way 
of reducing costs is by hiring a third-party servicer to handle the 
administration of the student aid disbursement process.\41\ 
Institutions have stated that employing a third-party servicer provides 
a more efficient credit balance delivery method than delivering checks; 
they have also acknowledged that, ``during difficult budget times, this 
option was cost effective.'' \42\ By valuing agreements that are more 
likely to prioritize short-term fee-based revenue, many institutions 
have created a situation where the best financial interests of students 
may not be the primary consideration.
---------------------------------------------------------------------------

    \41\ Ibid.
    \42\ NACUBO at 2.
---------------------------------------------------------------------------

    These incentive structures have led to a number of troubling 
practices. OIG found that schools relinquished ``significant control'' 
over the title IV aid disbursement process and relied on servicer 
compliance to meet title IV regulations. ``However, the schools did not 
appear to routinely monitor all servicer activities related to this 
contracted function, including compliance with all title IV regulations 
and student complaints.'' \43\ OIG also determined that, after student 
identifiers and credit balance disbursement figures were provided to 
servicers, ``the schools did not adequately oversee the servicers' 
activities to ensure that policies were followed, continued to be in 
the best interests of students, and complied with program 
requirements.'' \44\ OIG determined that ``the Department should take 
action to better ensure that student interests are served when schools 
use servicers to deliver credit balances.'' \45\
---------------------------------------------------------------------------

    \43\ OIG at 5.
    \44\ Ibid. at 7.
    \45\ Ibid. at 5.
---------------------------------------------------------------------------

    Third-party servicers' practices have also led to legal action. In 
August 2012, FDIC announced settlements with Higher One and one of its 
former bank partners, Bancorp Bank, after alleging ``unfair and 
deceptive practices'' relating to the manner in which it charged fees 
and other practices. Specifically, the FDIC alleged that the two firms 
violated the Federal Trade Commission Act by ``charging student account 
holders multiple insufficient funds fees from a single transaction; 
allowing accounts to remain in overdrawn status for long periods and 
allowing these insufficient funds fees to continue accruing; and 
collecting the fees from subsequent deposits to the students' accounts, 
typically funds for tuition and other college expenses.'' 
46 47 Furthermore, in November 2013, Higher One announced it 
had agreed in principle to settle a class action lawsuit for $15 
million. In that action, student plaintiffs claimed that Higher One 
misled them ``by marketing its debit card as schools' preferred method 
for making financial aid and other payments, improperly steered them 
into depositing funds into Higher One accounts, and charged excessive 
and inadequately disclosed ATM and PIN fees.'' Higher One and its 
banking partners (Bancorp Bank and Wright Express Financial Services 
Corporation) that were named as co-defendants disclaimed 
wrongdoing.\48\
---------------------------------------------------------------------------

    \46\ GAO at 24.
    \47\ FDIC. ``FDIC Announces Settlements With Higher One, Inc., 
New Haven, Connecticut, and the Bancorp Bank, Wilmington, Delaware 
for Unfair and Deceptive Practices.'' [Page 1] (2012), available at 
www.fdic.gov/news/news/press/2012/pr12092.html. With subsequent 
references ``FDIC at [page number].''
    \48\ GAO at 25.
---------------------------------------------------------------------------

    We believe that absent targeted provisions addressing specific 
concerns, and especially because students are a captive audience to 
institutional marketing, students will continue to be subject to the 
troubling practices identified by government agencies and consumer 
groups. For these reasons, we propose to designate as ``tier 1'' those 
arrangements between an institution and a third-party servicer under 
which the servicer performs one or more of the functions associated 
with processing direct payments of title IV, HEA program funds for the 
institution, and offers accounts to students and parents. Institutions 
entering into such arrangements would be responsible for ensuring that 
accounts offered by third-party servicers comply with both the fee 
requirements and disclosure requirements of the regulations.
    As explained above, in contrast to third-party servicers, 
traditional financial institutions and entities that offer financial 
accounts through a financial institution that do not engage in third-
party servicing functions have stronger incentives to provide student-
friendly accounts and convince students to become long-term 
customers.\49\ Many such providers of student bank accounts or campus 
cards do not charge fees ``higher than those associated with other 
banking products available to students.'' \50\ While financial 
institutions not employed in a third-

[[Page 28499]]

party servicer role were cited in some instances, practices by those 
firms are generally not as troubling, the agreements generally impose 
fewer fees on students, and, in some cases, students actually receive 
better-than-market rates on such accounts. Based on these findings, in 
the proposed regulations, the fee-related provisions for T1 
arrangements do not extend to arrangements not involving a third-party 
servicer.
---------------------------------------------------------------------------

    \49\ Consumers Union at 5.
    \50\ GAO at 15.
---------------------------------------------------------------------------

    However, arrangements between institutions and financial 
institutions that are not third-party servicers are not without the 
potential for harm to students. The biggest concern involving these 
accounts is that the apparent institutional endorsement of a particular 
financial account has the potential to lead aid recipients to believe 
that the account in question is required for aid receipt, has been 
competitively bid and negotiated by the school, or, at a minimum, 
represents a good deal because it has been endorsed by the institution.
    There are multiple ways institutions convey this impression to 
students.
    The most obvious way this occurs is with student IDs. In one-third 
of schools surveyed by GAO, student IDs, which are distributed to all 
students, have the capacity to be activated as either a debit or 
prepaid card.\51\ While activating the financial functions of the card 
is not required, the card itself typically is. In the most troubling 
circumstances, students are led to believe that activating the 
financial functions is required.\52\ Even in cases where this does not 
occur, students still must carry a student ID that is effectively an 
institutionally-sponsored advertisement for the financial provider and 
may misunderstand which functions are required.\53\
---------------------------------------------------------------------------

    \51\ GAO at 9.
    \52\ OIG at 11.
    \53\ USPIRG at 21.
---------------------------------------------------------------------------

    More general co-branding can cause similar confusion. ``Schools can 
appear to implicitly or explicitly endorse their college cards, by 
virtue of the relationship with the provider and co-branding of the 
card. Many students trust their schools and, as a result, may view co-
branding as an endorsement and an indication their school has 
negotiated the best terms for them.'' \54\ USPIRG echoed this concern, 
stating that, ``Many students trust their schools and often think of 
co-branding as an endorsement. This causes many students to drop their 
guard, expecting their school has negotiated the best deal for them.'' 
\55\
---------------------------------------------------------------------------

    \54\ GAO at 26.
    \55\ USPIRG at 21.
---------------------------------------------------------------------------

    Finally, when schools convey the information about a contracted-for 
financial account directly to students, students listen. ``Card 
providers and schools market college cards directly to students through 
various methods, including mailings, on-campus presentations, and co-
branded Web sites. Some card providers offer marketing assistance or 
materials to schools. For example, one provider told us it prefers 
assisting the school in developing messages, because students pay more 
attention to the information if it comes from the schools.'' \56\
---------------------------------------------------------------------------

    \56\ GAO at 27.
---------------------------------------------------------------------------

    These direct marketing methods appear to be especially effective. 
As Rohit Chopra, Student Loan Ombudsman at the CFPB, stated in his 
presentation to the negotiated rulemaking committee, ``If a certain 
financial product where the school has a financial interest is chosen 
as the `default' choice or implies endorsement of the school, this can 
lead to mismatched incentives . . . [and] school incentives may impact 
financial product adoption rates.'' \57\
---------------------------------------------------------------------------

    \57\ CFPB presentation at 14-15.
---------------------------------------------------------------------------

    As GAO has recognized, there are no comprehensive data on the 
number of students who elect to receive their credit balances on a 
college card. However, ``the largest provider reported that overall, 43 
percent of students receiving financial aid payments at its client 
schools opened debit accounts.'' \58\ Furthermore, GAO found that take-
up rates ranged from 20 to 75 percent of participating students at 
schools that were examined.\59\ CFPB, in its request for information 
relating to college cards, similarly found that adoption rates in such 
circumstances were high.\60\ For many card providers, adoption rates 
were close to 50 percent of students; some providers' rates exceeded 80 
percent.\61\ At a minimum, these adoption rates demonstrate that the 
method of direct marketing employed by institutions, their associated 
financial institutions, and third-party servicers is particularly 
effective, but also suggest that students may misunderstand that 
receiving their financial aid this way is optional. Because 
institutions are currently not explicitly required to put student and 
parent interests first in negotiating their marketing agreements, the 
financial accounts marketed may not have particularly favorable terms 
or be particularly convenient for students and parents.
---------------------------------------------------------------------------

    \58\ GAO at 12.
    \59\ Ibid.
    \60\ Consumer Financial Protection Bureau, Request for 
Information Regarding Financial Products to Students Enrolled in 
Institutions of Higher Education (Feb. 2013). With subsequent 
references ``CFPB RFI.''
    \61\ Ibid.
---------------------------------------------------------------------------

    On the other hand, direct marketing by financial institutions in 
itself does not always establish that these accounts impact title IV 
aid. For example, a financial institution may contract with an 
institution to offer financial accounts to students in circumstances 
where no credit balances exist (typically at high-cost institutions), 
and students are therefore not receiving credit balances into the 
offered financial accounts. Where such circumstances exist, the 
integrity of the title IV programs is not at issue.
    For this reason, we are limiting our oversight of T2 arrangements 
to institutions at which students and parents subject to these direct 
marketing tactics are expected to receive credit balances. Under this 
approach, if an institution documents that none of its students or 
parents received a credit balance in the most recently completed award 
year, it does not have to comply with the restrictions in Sec.  
668.164(f) that otherwise apply to financial accounts offered under a 
T2 arrangement. This approach is appropriate because it allows for the 
identification of arrangements where no credit balances are expected, 
while at the same recognizing the remarkable effectiveness of the 
marketing campaigns in general and the immediate need of students and 
parents for a place in which to have title IV credit balances 
deposited.\62\
---------------------------------------------------------------------------

    \62\ This approach reserves an opportunity for an institution 
having a financial aid history at odds with the presumption to avoid 
applicability of the restrictions that would otherwise apply under 
Sec.  668.164(f)(4). The institution would need to maintain its 
documentation for use in the event of an audit or program review.
---------------------------------------------------------------------------

    We invite comment on whether there is a need to establish a minimum 
threshold of credit balance recipients at an institution before that 
institution's arrangement would implicate the T2 provisions. We are 
seeking feedback to determine whether a threshold would be needed to 
balance burden on institutions and financial institutions against the 
benefits to students of proposed Sec.  668.164. If a threshold is 
recommended, we are requesting data and analysis supporting the number 
chosen.
    For the reasons discussed in the preceding paragraphs, we propose 
to limit the definition of ``T2 arrangements'' to arrangements where 
students receive credit balances and are

[[Page 28500]]

subject to direct marketing, either in the form of marketing from the 
school,\63\ or through the implied or direct endorsement of the product 
via a co-branding of a card or the ability to link an account to a 
student ID. We emphasize that these proposed regulations govern 
postsecondary institutions and their arrangements with financial 
institutions; these limitations narrow the scope of the regulatory 
requirements to these specific arrangements. As discussed previously, 
the concerns related to these accounts are not as significant as those 
involving third-party servicers. Instead, the proposed requirements 
relating to T2 arrangements are designed to improve the information 
available to students and parents so they understand their options. The 
proposed requirements include contractual disclosures and information 
related to average account holder costs; and for any account listed on 
the institution's list of credit balance receipt options, disclosure of 
the accounts fees and terms in an easily understandable format.\64\ We 
believe these disclosure requirements will enable financial providers 
and institutions with the best financial interests of students in mind 
to continue offering accounts that are student-friendly and will not 
result in the loss to aid recipients of critical Federal student aid 
dollars.
---------------------------------------------------------------------------

    \63\ Examples of this include: A recommendation of a particular 
account offering to students or mailing, emailing, or otherwise 
directly conveying information about an account to students pursuant 
to the contract between the institution and financial institution.
    \64\ To the extent that T2 arrangements permit students to open 
the accounts outside of the institution's student choice process, 
our conversations with banking regulators have convinced us that, in 
view of the lesser degree of access to student information these T2 
providers have, existing banking regulations should suffice in 
providing adequate disclosure of account terms to parents and 
students opening financial accounts in the traditional manner. For 
students that do so, they would elect to receive the disbursement to 
their newly-existing account. For students that do not open an 
account in this more traditional manner and instead select the 
account from the student choice menu, these disclosures would be 
required to be given to students as part of the student choice menu.
---------------------------------------------------------------------------

    For purposes of clarifying what types of contracts fall under the 
purview of these proposed regulations, we are also providing the 
following examples of circumstances which are neither T1 nor T2 
arrangements and therefore would not be subject to these proposed 
regulations if finalized as proposed in this NPRM:
     General marketing of a financial institution that does not 
specify the kind of account or how it may be opened (i.e., not direct 
marketing described under Sec.  668.164(f)(3));
     Sponsorship of on-campus facilities with financial 
institution branding that does not promote particular accounts;
     A lease permitting the operation of an on-campus branch or 
on-campus ATMs; or
     A list of area financial institutions recommended 
generally to students for informational purposes rather than being 
provided pursuant to a contract with the institution.
    Finally, many agreements between institutions and financial account 
providers, including those agreements with monetary benefits for the 
school, are not clearly disclosed to the consumer or the public. We 
believe that requiring the disclosure of information relating to the 
costs to students and benefits provided to schools will encourage 
market competition.
    In sum, we believe that the troubling practices described in 
various reports and manifested in legal actions demands a regulatory 
response ensuring student aid recipients are afforded sufficient 
protections and taxpayer dollars are not put at risk of loss to 
unreasonable fee-based charges. We believe the most prudent approach is 
to establish a set of regulatory requirements based on the level of 
risk to students and taxpayers represented by the type of arrangement 
between an institution and a third-party servicer or financial 
institution. Due to the numerous findings and recommendations of 
consumer and government reports, legal action taken against the 
predominant third-party servicer in the industry, and because third-
party servicers have significant control over the disbursement process, 
we have determined a higher level of regulatory scrutiny over third-
party servicer arrangements is appropriate.
    Because student financial accounts offered by financial 
institutions (and entities that offer financial accounts through a 
financial institution) that are not third-party servicers do not 
present as much of a risk to students, we do not believe the same level 
of scrutiny is necessary for the arrangements between institutions and 
such entities (based in part on the work Consumers Union did to 
evaluate student financial account offerings \65\). However, 
arrangements with these financial institutions that directly market 
their products to students are not without risk to students and title 
IV, HEA program funds. By bearing the imprimatur of the school, these 
providers can circumvent the normal channels of informed consumer 
choice and have special access to potential customers that distorts the 
market. Consequently, where the financial account is endorsed or 
otherwise directly marketed by the institution, the institution must 
inform students of the fees in a clear, easy-to-understand disclosure 
format. We believe that ensuring students receive clear information 
about the financial account will enable them to make a better choice 
based on the costs and benefits of the individual account, rather than 
the appearance of an institutional endorsement or a misapprehension 
about whether the account is a prerequisite for receiving Federal 
student aid.
---------------------------------------------------------------------------

    \65\ Consumers Union at 11-12.
---------------------------------------------------------------------------

    We believe this regulatory framework will provide a measured and 
effective level of consumer protection for those accounts that present 
the greatest risk to title IV recipients. We also believe the 
disclosure requirements will provide incentives for institutions and 
financial institutions to ensure that the financial products marketed 
are fair to aid recipients. Finally, the recommended delineations 
between types of arrangements are likely to improve clarity relative to 
the proposed definitions advanced during negotiations, while ensuring 
the regulatory requirements are tailored to address the problems 
identified by consumer groups and government agencies.

Student or parent choice (Sec.  668.164(d)(4))

    Current Regulations: Current Sec.  668.164(c)(1) permits an 
institution to pay title IV, HEA program funds directly to a student or 
parent by (1) releasing a check, (2) issuing a check via mail or in-
person pickup, (3) initiating an EFT, or (4) dispensing cash. These 
methods of payment may be used in situations when an institution pays a 
student (or parent) his or her entire disbursement directly, or, more 
often, when a credit balance occurs after the institution credits the 
student's account to cover the cost of tuition and fees, room and 
board, and other authorized educationally-related institutional 
charges.
    Current Sec.  668.164(c)(3) permits an institution to establish a 
policy requiring its students to provide bank account information or 
open an account at a bank of their choosing, but requires the 
institution to disburse funds via check or cash if the student does not 
provide this information in a timely manner.
    Current Sec.  668.164(c)(3) also requires that, if the institution 
opens a bank account on behalf of a student or parent

[[Page 28501]]

or assists the student or parent in opening a bank account, the 
institution must obtain in writing affirmative consent from the student 
or parent to open that account and inform the student or parent of the 
terms and conditions associated with accepting and using the account 
before it is opened.
    Proposed Regulations: We propose to modify the regulations 
governing direct payments in two ways. Under proposed Sec.  
668.164(d)(4)(i), an institution that enters into an arrangement 
described in Sec.  668.164(e) or Sec.  668.164(f) (i.e., uses an 
account offered pursuant to a T1 or T2 arrangement), must establish a 
selection process under which the student or parent chooses one of 
several options for receiving those payments. Alternatively, an 
institution that does not use an account offered pursuant to a T1 or T2 
arrangement may make direct payments to an existing account designated 
by the student or parent, issue a check, or disburse cash to the 
student or parent without establishing a selection process.
    For institutions required to establish a student choice process, 
the proposed regulations would establish four requirements under 
proposed Sec.  668.164(d)(4)(i)(A) that must be met in implementing the 
process.
    First, the institution must inform the student or parent in writing 
that he or she is not required to open or obtain a specific financial 
account or activate an access device offered by a specific financial 
institution in order to receive title IV funds. Second, the institution 
must ensure that the options listed are presented in a clear, fact-
based, and neutral manner, except for listing a student or parent's 
preexisting account as the first, most prominent, and default option. 
Third, the institution must ensure that initiating direct payments 
electronically to an existing account is treated equivalently to 
initiating direct payments to an account offered pursuant to a T1 or T2 
arrangement. Fourth, the institution must allow the student or parent 
the option to change his or her account preference with reasonable 
written notice.
    In addition, the proposed regulations in Sec.  668.164(d)(4)(i)(B) 
would provide four provisions governing the description of account 
options under the student choice process. First, the institution must 
present, prominently and as the first and default option, the ability 
to receive funds in the student's or parent's existing account. Second, 
the institution must list and identify the major features and commonly 
assessed fees associated with all accounts offered pursuant to a T1 or 
T2 arrangement. (Using a format published by the Secretary in the 
Federal Register following consultation with CFPB would constitute 
compliance with this provision under the proposed regulations.\66\) 
Third, the institution may, at its discretion, provide information 
about other available financial accounts (that are not offered pursuant 
to a T1 or T2 arrangement) that are insured by the FDIC or NCUA. 
Finally, the institution must list issuing a check as an option for a 
student or parent to receive payments.
---------------------------------------------------------------------------

    \66\ The Department intends to separately seek public comment on 
the manner and substance of these disclosures when publishing them 
in the Federal Register.
---------------------------------------------------------------------------

    Reasons: Throughout the course of public hearings and negotiated 
rulemaking, and in the recommendations from consumer advocates and in 
government reports, there was near universal agreement that students 
and parents must be given the opportunity to make an informed choice 
regarding how they will receive their title IV funds. Negotiators 
representing students, State attorneys general, consumer advocates, 
institutions, and the banking sector agreed that (1) students should be 
given clear and neutral advice on the account terms prior to opening an 
account; (2) students must not be compelled to open a particular 
account; and (3) institutions should not favor one particular account 
to the detriment of others. As stated in the GAO report, ``financial 
markets function best when consumers are fully informed about financial 
products and how to choose among them, and NACUBO has recommended that 
schools present students with information about their college cards in 
a neutral fashion.'' \67\ It is with these principles in mind that we 
propose to revise Sec.  668.164(d)(4) to ensure that students and 
parents have the opportunity to make an informed choice regarding the 
account that best meets their needs.
---------------------------------------------------------------------------

    \67\ GAO at 34.
---------------------------------------------------------------------------

    We believe students and parents should be able to choose the 
account in which they receive their funds, and that, if students and 
parents are presented with options, those options should be presented 
in a clear and fact-based manner. This was a recommendation echoed by 
every group that has closely examined college card arrangements. GAO 
recommended that we develop regulations requiring that ``objective and 
neutral information'' be provided to students and parents regarding 
options for receiving Federal student aid payments.\68\ USPIRG, in its 
report on college cards, included a similar recommendation, stating 
that ``students should have an unbiased choice of where to bank,'' and 
should be ``clearly informed of their ability to use their own existing 
bank account.'' \69\ OIG recommended that we ``develop regulations that 
require servicers to provide objective and neutral information to 
students on the available delivery options.'' \70\ Consumers Union 
recommended that we ``require schools to present financial aid 
disbursement options in a clear and neutral manner, so that students 
can easily set up an electronic fund transfer to an existing account to 
receive their funds'' \71\ and that ``when a student is making a 
disbursement selection, she can easily and conveniently select direct 
deposit to an existing account in order to receive funds.'' \72\ We 
agree with these recommendations, and the overarching purpose of the 
requirements enumerated in proposed Sec.  668.164(d)(4) is to ensure 
that these recommendations are carried out.
---------------------------------------------------------------------------

    \68\ GAO at 35.
    \69\ USPIRG at 25.
    \70\ OIG at 12.
    \71\ Consumers Union at 2.
    \72\ Ibid. at 20.
---------------------------------------------------------------------------

    We also believe that signing up for a financial account promoted or 
offered by the school should not be a prerequisite of receiving title 
IV aid. For those students with a preexisting bank account, we think it 
should be easy and straightforward to select their existing account for 
receipt of title IV funds. The fact that students or parents have an 
existing account implies that they have already exercised some measure 
of informed consumer choice; and our requirement that such an option be 
listed first, most prominently, and as the default choice, will ensure 
that students are not misled to believe that choosing an existing 
account is discouraged or will result in delays.
    CFPB has recommended that, as a general matter, students receive 
their financial aid via direct deposit to an existing bank account.\73\ 
Many school officials interviewed by GAO also acknowledge that college 
cards may not be the best option for many students, especially those 
who need more comprehensive products or who already have an existing 
account. In fact, students attempting to maintain both a college card 
and an existing account may ``find it costly or inconvenient to

[[Page 28502]]

manage both accounts concurrently.'' \74\ Furthermore, the argument 
advanced by some financial account providers, that many students are 
unable to qualify for a bank account, is inconsistent with statements 
made by the CFPB, which has stated that ``very few students are unable 
to obtain a bank account.'' \75\ For these reasons, our proposed 
regulations allow students and parents to select an existing account 
easily.
---------------------------------------------------------------------------

    \73\ CFPB. ''Reminder: Accessing your scholarships and student 
loan funds.'' [Page 1](2013), available at www.consumerfinance.gov/blog/reminder-accessing-your-scholarships-and-student-loan-funds/.
    \74\ GAO at 25.
    \75\ CFPB Presentation at 8.
---------------------------------------------------------------------------

    More disturbing are the practices employed by some financial 
account providers that seem to eliminate, or at best hamper, the 
ability of students to choose a product that is best for them. The 
reports produced by GAO, OIG, CFPB, Consumers Union, and USPIRG all 
describe troubling practices and the lack of legitimate choice in the 
student financial products marketplace. These reports describe 
situations where these providers did not give students any choice as to 
how they receive credit balances, or where the choice was 
deceptive.\76\ The Federal Reserve Board in 2014 issued a consent order 
to cease and desist and a civil money penalty assessment against Cole 
Taylor Bank for deceptive practices engaged in by the bank and its 
agent Higher One that violated section 5 of the Federal Trade 
Commission Act.\77\ These practices were consistent with the findings 
in the reports discussed throughout this preamble.
---------------------------------------------------------------------------

    \76\ USPIRG at 20.
    \77\ Board of Governors Of The Federal Reserve System, ``Order 
to Cease and Desist and Order of Assessment of a Civil Money Penalty 
Issued Upon Consent Pursuant To the Federal Deposit Insurance Act 
and the Illinois Banking Act, As Amended.'' July 1, 2014, available 
at: www.federalreserve.gov/newsevents/press/enforcement/enf20140701b1.pdf.
---------------------------------------------------------------------------

    In another case, GAO found a school that was not only recommending 
its card over direct deposit to students' existing accounts, but also 
providing guidance to its students on how to switch from their existing 
accounts to the card option.\78\ This finding was further reinforced in 
public comments received by CFPB, in which students stated that they 
``felt pressured to sign up for college cards and that this pressure 
could convince uninformed students that `the provider was the only 
choice.' '' \79\
---------------------------------------------------------------------------

    \78\ GAO at 28.
    \79\ Ibid.
---------------------------------------------------------------------------

    Some financial institutions and third-party service providers 
apparently work to create the impression that their product is required 
or a preferred option for receiving student aid funds. In many cases, 
financial institutions use access to private student information to 
send university-branded mailings or a financial access device before 
students have made a disbursement selection, or even arrived on campus, 
which may lead the students to believe that the account has already 
been established on their behalf.\80\ For example, OIG found that 
Higher One typically sends a debit card with the student's name on it, 
along with instructions to sign up using a Higher One Web site, which 
allowed Higher One to attempt to persuade students that signing up with 
that account was the easiest method for receiving credit balances 
throughout the selection process.\81\ FDIC staff told the GAO that 
existing practices give students the impression that selecting the 
college card is a ``requirement to receive their funds.'' \82\ USPIRG 
reports that, in the worst cases, some schools simply mandate that all 
funds be disbursed into an account preselected by the institution.\83\
---------------------------------------------------------------------------

    \80\ USPIRG at 21.
    \81\ OIG at 9.
    \82\ GAO at 28.
    \83\ USPIRG at 22.
---------------------------------------------------------------------------

    A school implying that specific accounts are preferred or required 
is not the only way student choice is limited. Some providers create an 
environment where the provider's preferred account offering is a de 
facto requirement because of the way funds are disbursed. One example 
of this is to create circumstances (or at least the appearance of such 
circumstances) where receiving disbursement via a non-preferred 
electronic method will require additional steps or time. Some providers 
allow students to select the preferred account immediately, but 
selecting the student's own account requires additional steps, 
instructions, or documentation.\84\ Others allow students to select the 
preferred account offering online, but require students selecting a 
different option to fax hand-written forms.\85\ One provider claimed 
that these additional steps are ``an antifraud measure,'' but GAO was 
told by the industry organization that oversees payment processing that 
such measures are unnecessary and the account selection process can be 
achieved equally well online.\86\
---------------------------------------------------------------------------

    \84\ GAO at 27.
    \85\ USPIRG at 22-23.
    \86\ GAO at 28.
---------------------------------------------------------------------------

    Even if additional steps are not required, some providers set up 
barriers by informing students that a deposit to an existing account 
will take additional time, and that selecting the preferred account 
will get students their money the fastest.\87\ For students who depend 
on the timely delivery of their credit balances to pay for off-campus 
housing, books, or dependent care, this additional time can often be 
enough to force students to select the provider's account. For example, 
one student told USPIRG that he was effectively forced to select a 
preferred account ``even though he wanted to use his own account 
because he cannot wait the extra [three] to [four] days for a wire to 
his own bank account.'' \88\
---------------------------------------------------------------------------

    \87\ USPIRG at 22.
    \88\ Ibid. at 17.
---------------------------------------------------------------------------

    Finally, providers that are third-party servicers have frequently 
used their advantaged access to student information to market and 
persuade students to select their debit card over other delivery 
options.\89\ These practices have included collection of student data 
incidental to the delivery of credit balances.\90\ Furthermore, student 
data have often been provided to these servicers before a student has 
selected an account, regardless of whether the student ever ultimately 
received financial aid.\91\
---------------------------------------------------------------------------

    \89\ OIG at 9.
    \90\ Ibid. at 5.
    \91\ Ibid. at 19.
---------------------------------------------------------------------------

    Due to these troubling and widespread practices, we believe 
institutions should clearly inform students and parents of their 
options for receiving their title IV credit balance funds. Further, we 
believe these findings demonstrate that there is no reasonable 
explanation for delaying direct deposit to a student's existing account 
or requiring additional documentation or verification and forces 
students to choose the provider's preferred accounts to get timely 
access to student aid. Finally, we believe that after an aid recipient 
has selected a particular financial account--and has had experience 
with that account, he or she should be afforded the opportunity by the 
school to change that selection with reasonable written notice and that 
initial selection of an account should not force a student to use it 
indefinitely.
    In addition, we are also concerned about the type of information 
students receive about their choices. While some schools present 
students with unbiased options for receiving their credit balances, GAO 
found instances where options for receiving payments ``were not 
presented to students in a clear or neutral fashion,'' and in fact 
encouraged students to choose the college card over other options.\92\ 
Many schools rely on the materials provided by financial account 
providers in describing account options, which present providers'

[[Page 28503]]

accounts in a complimentary way.\93\ As a result, the site students use 
to select their method of payment often states that a particular 
account is the ``preferred choice,'' rather than neutrally.\94\
---------------------------------------------------------------------------

    \92\ GAO at 27.
    \93\ USPIRG at 20.
    \94\ Ibid.
---------------------------------------------------------------------------

    FDIC staff told GAO that ``requiring a clear and conspicuous 
affirmative statement that students have a choice could enhance student 
awareness of options.'' \95\ NACUBO, the organization that represents 
school business officers, recommends that schools provide ``a fair 
explanation of services [without] misleading, biased, or aggressive 
marketing schemes.'' \96\ GAO also recommended that we require that 
``schools and financial account providers present students with 
objective and neutral information on their options for receiving 
federal student aid payments.'' \97\ We agree with these 
recommendations, and believe that our requirements will help ensure 
that students receive unbiased information.
---------------------------------------------------------------------------

    \95\ GAO at 29.
    \96\ Ibid.
    \97\ Ibid. at 35.
---------------------------------------------------------------------------

    USPIRG argued that if students are not informed of the account 
terms in a clear and easily-understandable manner, they will be unable 
to make an informed choice as to the account that best meets their 
needs.\98\ OIG agreed on this point, recommending that schools help 
students understand the fees that they are subject to if they select 
the servicer's debit card.\99\ We believe that our requirements for 
neutral and objective disclosures address these recommendations.
---------------------------------------------------------------------------

    \98\ USPIRG at 21.
    \99\ OIG at 13.
---------------------------------------------------------------------------

    The importance of objective, neutral, and easily understandable 
disclosures is highlighted by the concerns of consumer advocates 
regarding fee disclosures. For example, a common complaint among 
consumer advocates is that students or parents may be surprised when 
they are charged fees that they may not have expected, such as the 50 
cent PIN fee charged by some servicers. According to USPIRG, 
``[s]tudent consumers may have built in assumptions about the product 
and its fee structures and costs. . . . [T]hey are likely to think that 
a debit card is a debit card and won't discern the key differences.'' 
\100\ Furthermore, USPIRG advises students that ``[b]anks may insert 
additional or surprising fees into the small print that could cost 
[students], such as a fee for not using [an] account.'' \101\ To 
address this problem, GAO recommended that the Secretary should ``[i]n 
consultation with CFPB, develop requirements that schools and college 
card providers present students with objective and neutral information 
on their options for receiving federal student aid payments.'' \102\
---------------------------------------------------------------------------

    \100\ USPIRG at 21.
    \101\ Ibid. at 28.
    \102\ GAO at 35.
---------------------------------------------------------------------------

    Since the release of the USPIRG and GAO reports, CFPB has issued an 
NPRM that proposes to create short form disclosures for prepaid 
accounts. These short form disclosures would highlight ``key fees that 
[CFPB] believes are most important for consumers to know about. . . .'' 
\103\ CFPB further noted that the ``short form's design . . . will 
prominently present key fees, and create a visual hierarchy of 
information that will more effectively draw [a] consumer's attention to 
a prepaid account product's key terms'' \104\ and that the design of 
the short form ``will increase the likelihood that consumers will 
engage with the disclosure.'' \105\
---------------------------------------------------------------------------

    \103\ CFPB. ``Prepaid Accounts Under the Electronic Fund 
Transfer Act (Regulation E) and the Truth in Lending Act (Regulation 
Z).'' [Page 2] (2014), available at www.gpo.gov/fdsys/pkg/FR-2014-12-23/pdf/2014-27286.pdf. With subsequent references ``CFPB NPRM at 
[page number].''
    \104\ CFPB NPRM 49.
    \105\ Ibid.
---------------------------------------------------------------------------

    To help students and parents obtain objective, neutral, and easily 
understandable information about their options, we propose to work with 
CFPB to ensure that students and parents receive fee information prior 
to acquiring an account by adding these disclosures to the selection 
process in a format similar to the disclosures CFPB has proposed. We 
agree with CFPB that receiving disclosures prior to the acquisition of 
an account would ``ensure that the features of the prepaid accounts are 
fully, accurately, and effectively disclosed to consumers in a manner 
that permits consumers to understand the costs, benefits, and risks 
associated with the account,'' \106\ and we have chosen to adopt the 
same disclosure timeline for accounts offered under T1 and T2 
arrangements.
---------------------------------------------------------------------------

    \106\ Ibid. at 68.
---------------------------------------------------------------------------

    Because the proposed disclosures in CFPB's NPRM are designed for 
prepaid accounts, and the financial accounts under T1 and T2 
arrangements may be either prepaid accounts or traditional checking 
accounts, and because the model forms address certain fees not 
permitted under this NPRM to be assessed against students or parents 
opening financial accounts offered under a T1 arrangement, we will 
likely be unable to use the exact format of the short form disclosure 
proposed in CFPB's NPRM. In addition, CFPB may alter the requirements 
for its short form disclosures while we are in the process of 
developing final cash management regulations. For these reasons, 
instead of adopting the short form disclosures described in the CFPB 
NPRM at this time, we plan to develop consumer-friendly disclosures in 
close consultation with CFPB and to release the format for those 
disclosures in a Federal Register notice following the publication of 
our final regulations.
    Finally, in our proposed regulations, we allow schools to provide 
information to students about other accounts not offered pursuant to a 
T1 or T2 arrangement because we do not want the student choice 
provisions to prevent schools from making good faith attempts to inform 
students of convenient banking options. The proposed regulations also 
allow students to continue to receive funds via a check because many 
institutions believe that a disbursement option via non-electronic 
means best serves their students. We invite comment as to whether the 
option to receive a check should continue to be affirmatively offered 
to students, although we note here that offering a check will continue 
to be allowed in the event students fail to make a choice on how to 
receive their credit balance.
    One of the most critical aspects of this rulemaking is ensuring 
that students are truly able to easily receive their title IV funds in 
an account of their choosing. We believe that the requirements of 
proposed Sec.  668.164(d)(4) would address the numerous problems with 
the existing account selection process and provide students the 
opportunity to choose their account, while still allowing institutions 
the opportunity to offer students a variety of options.

Consent Prior To Disclosing a Student's or Parent's Information, 
Sending an Access Device, or Associating or Opening an Account (Sec.  
668.164(e)(2)(i) and (f)(4)(i))

    Current Regulations: Current Sec.  668.164(c)(3)(i) states that in 
cases where the institution opens a bank account on behalf of a student 
or parent, establishes a process the student or parent follows to open 
a bank account, or similarly assists the student or parent in opening a 
bank account, the institution must obtain in writing affirmative 
consent from the student or parent to open that account.
    Proposed Regulations: Proposed Sec.  668.164(e)(2)(i)(A) and 
(f)(4)(i)(A) require that an institution obtain consent to open an 
account under a T1

[[Page 28504]]

or T2 arrangement from the student or parent before sharing any 
information about the student or parent, other than name, address, and 
email address, with the third-party servicer or financial institution 
marketing or offering the financial account.
    Proposed Sec.  668.164(e)(2)(i)(B) and (f)(4)(i)(B) require that an 
institution obtain a student's or parent's consent to open a financial 
account before an access device, or any representation of an access 
device, is sent to the student or parent.
    Proposed Sec.  668.164(e)(2)(i)(C) and (f)(4)(i)(C) require that an 
institution obtain consent from the student or parent before a card or 
tool provided to the student or parent for institutional purposes, such 
as a student ID card, is linked with a financial account.
    Reasons:

Disclosing a Student's or Parent's Information

    In its report, USPIRG raised concerns regarding third-party 
servicers and financial institutions using their access to personal 
information to market financial accounts to students.\107\ OIG stated 
that the information provided by institutions to financial account 
providers was often extensive and could include a student's photo, full 
name, physical address, birthdate, student ID number, phone number, 
email address, and gender.\108\ OIG further stated that, in some cases, 
the information being provided was ``optional . . . and therefore not 
needed to complete the credit balance delivery'' and that ``[a]s 
optional information, it did not serve a legitimate educational purpose 
. . . .'' \109\ In response to these findings, and in an effort to 
prevent marketing abuses, we initially proposed to the negotiating 
committee regulations that banned institutions from sharing any 
information about the student or parent with a financial institution or 
a third-party servicer until a student or parent affirmatively 
consented to open an account.
---------------------------------------------------------------------------

    \107\ USPIRG at 21.
    \108\ OIG at 19.
    \109\ Ibid.
---------------------------------------------------------------------------

    While some negotiators also had concerns regarding the use of a 
student or parent's personally identifiable information in marketing or 
opening financial accounts, others expressed concerns that third-party 
servicers would be unable to perform their duties without data provided 
by institutions. In response, we revised our proposal to state that an 
institution may not share with the entity (e.g., a third-party 
servicer, financial institution, or other person) any information about 
the student or parent until the student or parent makes a selection 
regarding how they choose to receive direct payments.
    Prior to the final session, negotiators representing third-party 
servicers and financial institutions continued to express concerns that 
this draft language would prohibit third-party servicers from 
performing their duties and stated that, at minimum, servicers would 
require a student or parent's permanent address, delivery address (if 
different), date of birth, partial Social Security number or tax ID 
number, student ID number, cryptographic information, unique 
identifier(s), phone number, email address, secure alternatives to 
email messaging, gender, photos, password or other unique item only 
known by the student, and confirmation that the student is to receive a 
title IV credit balance disbursement and the amount of such 
disbursement.\110\ We were not presented with evidence that all of 
these items were needed, so we proposed a draft that prohibited 
institutions from sharing any information with third-party servicers or 
financial institutions other than the student's or parent's name, 
address, and email address until the student or parent selected an 
option for receiving direct payments of financial aid.
---------------------------------------------------------------------------

    \110\ Kundert, Levandowski, McGuane, and Norwood. Memo to 
Negotiated Rulemaking Committee. [Page 12] (2014), available at 
www2.ed.gov/policy/highered/reg/hearulemaking/2014/pii4-cashmgmt-klmn-050114.pdf. With subsequent reference ``Kundert, Levandowski, 
McGuane, and Norwood May 1, 2014 Memo [page number].''
---------------------------------------------------------------------------

    In this proposal, we maintain our position that the only 
information that an institution may initially share with a third-party 
servicer or financial institution is the student's or parent's name, 
address, and email address. This limitation on sharing personal 
information applies to both T1 and T2 arrangements. While we appreciate 
the concerns of the negotiators for third-party servicers and financial 
institutions, we disagree that extensive personal information is 
necessary for a third-party servicer or financial institution before a 
student or parent gives consent to open an account. However, the 
institution may provide additional information after the student or 
parent consents to open the account.
    To clarify our position, we have also amended the language to 
require that in order to share more than this basic contact information 
with a servicer or financial institution, a student or parent must 
provide consent to actually open an account, rather than simply select 
an option for receiving direct payments of financial aid.
    We believe that the proposed language strikes a balance between the 
need for a third-party servicer to be able to perform its duties, a 
financial institution to make its financial accounts available to 
students and parents, and the privacy of an individual's personal 
information. We invite comment on whether the personal information that 
an institution may provide before a student or parent consents to open 
a financial account in our proposed regulations is sufficient to meet 
the needs of a servicer or financial institution.

Sending an Access Device

    USPIRG stated that ``[o]ften, the disbursement card is mailed to 
the student before he or she has made a disbursement selection'' \111\ 
and that, in conjunction with other aggressive marketing tactics, this 
can ``set the expectation that the school has already set up the bank 
account for the student and that they don't have a choice.'' \112\
---------------------------------------------------------------------------

    \111\ USPIRG at 21.
    \112\ Ibid.
---------------------------------------------------------------------------

    We share the concerns regarding manipulation and potentially 
deceptive marketing practices detailed by USPIRG. As a result of those 
concerns and in response to the suggestions of negotiators at the first 
session of negotiated rulemaking, we originally proposed provisions 
that would allow an institution to send a debit card, prepaid card, or 
access device associated with the account to a student or parent only 
if the student or parent specifically requests it after providing 
consent to open an account. While some negotiators supported our 
position that a student or parent should have to request a card, others 
expressed concerns that ``[p]rohibiting [an] institution from sending 
an unactivated debit or similar card to a student interferes with the 
student's access to [t]itle IV funds . . . .'' \113\
---------------------------------------------------------------------------

    \113\ McGuane. Memo to Negotiated Rulemaking Committee. [Page 5] 
(2014), available at www2.ed.gov/policy/highered/reg/hearulemaking/2014/pii3-caseymcguane-cashmgmt-040214.pdf.
---------------------------------------------------------------------------

    In this NPRM, we have modified the approach we initially took in 
the negotiations by removing the requirement for the student or parent 
to specifically request the card, while retaining a requirement that 
the student or parent consent to opening the account before the card is 
sent by an institution, third party servicer, or an associated 
financial institution. Though we understand that the requirement to 
obtain consent to open a financial account before sending an access 
device

[[Page 28505]]

to a student or parent may slow the speed with which a student or 
parent could access his or her credit balance, we believe that 
requiring that consent be obtained initially helps to dispel the 
implication that the access device and its associated financial account 
are required by the institution. We also believe it reinforces the 
notion that choosing to use the access device and its associated 
account is, in fact, a choice. This provision does not apply to cards 
or devices distributed for institutional purposes that can also serve 
as access devices if activated, such as student identification cards; 
those institutional cards or devices are addressed next.

Associating a Card or Device With a Financial Account

    According to the GAO's report, in cases where student IDs can also 
be electronically linked with financial accounts, ``either the school 
or the card provider issues student ID cards to all students. Students 
then can choose whether to have their ID card also serve as a debit or 
prepaid card.'' \114\
---------------------------------------------------------------------------

    \114\ GAO at 9.
---------------------------------------------------------------------------

    In our initial draft of the proposed regulations presented at the 
second session of negotiations, we proposed banning access devices from 
bearing the institution's logo or mascot, or otherwise implying an 
affiliation with the institution. According to negotiators, this would 
have prevented student IDs or similar institutional devices from being 
electronically linked to financial accounts that are controlled by 
outside entities. In response to those concerns, subsequent drafts 
contained provisions requiring consent to open an account that are very 
similar to the provisions contained in these proposed regulations.
    We note that if an institution chooses to allow this functionality 
on products used for institutional purposes, the institution, third-
party servicer, or financial institution is required to obtain consent 
from the student or parent to open the financial account. The proposed 
language in Sec.  668.164(e)(2)(i)(C) and (f)(4)(i)(C) does not 
prohibit an institution or third-party servicer from distributing a 
student ID that is fully functional for institutional purposes and that 
contains an inactive device or other inactive means of using the card 
to access a linkable financial account. However, before activating this 
financial capability, electronically linking, or otherwise associating 
the ID card with the financial account, the institution must first 
secure consent to open the financial account from the student or 
parent. We believe this is a balanced approach that will not constrain 
institutional functions for which these cards may be necessary, but 
will ensure that students or parents make an affirmative decision 
before an account is effectively activated on their behalf.
    While we believe that this provision allows students the option to 
obtain a multipurpose device while also improving consumer protections 
around student IDs and similar products, we have concerns about 
allowing devices distributed for institutional purposes to become 
associated with financial accounts. Because of these concerns, we are 
open to further suggestions from the public on how to prevent coercive 
marketing practices with respect to institutional devices such as 
student IDs and associated financial accounts.

Disclosure of Account Information ((Sec.  668.164(e)(2)(ii) and Sec.  
668.164(f)(4)(ii))

    Current Regulations: Under current Sec.  668.164(c)(3)(ii), in 
cases where the institution opens a bank account on behalf of a student 
or parent, establishes a process the student or parent follows to open 
a bank account, or similarly assists the student or parent in opening a 
bank account, the institution must, before the account is opened, 
inform the student or parent of the terms and conditions associated 
with accepting and using the account.
    Proposed Regulations: Under proposed Sec.  668.164(e)(2)(ii) and 
(f)(4)(ii), institutions must inform the student or parent of the terms 
and conditions of the financial account, as required under Sec.  
668.164(d)(4)(i)(B)(2), before the financial account is opened.
    Reasons: For clarity and to ensure that the regulatory requirements 
for institutions that have a T1 or T2 arrangement are comprehensively 
listed in the relevant section of the proposed regulations, we have 
cross-referenced the requirements of Sec.  668.164(d)(4)(i)(B)(2) in 
Sec.  668.164(e)(2)(ii) and (f)(4)(ii), respectively. Section 
668.164(d)(4)(i)(B)(2) requires that institutions list and identify the 
major features and commonly assessed fees associated with all accounts 
described in Sec.  668.164(e) and (f), as well as a Universal Resource 
Locator (URL) for the terms and conditions of those accounts. For each 
account, if an institution follows the format and content requirements 
specified by the Secretary in a notice published in the Federal 
Register following consultation with the CFPB, it will be in compliance 
with this requirement with respect to the major features and assessed 
fees associated with the account. For discussion of this issue, please 
refer to the ``Clear and neutral information'' section of Sec.  
668.164(d) of the preamble.

Fee Provisions for T1 Accounts (Sec.  668.164(e)(2)(iii)-(iv))

    Current Regulations: Current Sec.  668.164(c)(3)(iv) states that, 
if an institution opens, establishes a process the student or parent 
follows to open, or similarly assists a student or parent in opening a 
bank account, the institution must ensure that the student or parent 
does not incur any cost in opening the account or initially receiving 
any type of debit card, stored-value card, other type of ATM card, or 
similar transaction device that is used to access the funds in that 
account.
    Current Sec.  668.164(c)(3)(v) states that institutions must ensure 
that the student has convenient access to a branch office of the bank 
or an ATM of the bank in which the account was opened (or an ATM of 
another bank), so that the student does not incur any cost in making 
cash withdrawals from that office or these ATMs. This branch office or 
these ATMs must be located on the institution's campus, in 
institutionally owned or operated facilities, or, consistent with the 
meaning of the term ``public property'' as defined in Sec.  668.46(a), 
immediately adjacent to and accessible from the campus.
    Current Sec.  668.164(c)(3)(vi) requires that institutions ensure 
that the debit card, stored-value card, ATM card, or other device can 
be widely used. For example, the institution may not limit the use of 
the card or device to particular vendors.
    Finally, current Sec.  668.164(c)(3)(vii) requires that 
institutions not market or portray the account, card, or device as a 
credit card or credit instrument, or subsequently convert the account, 
card, or device to a credit card or credit instrument.
    Proposed Regulations: Proposed Sec.  668.164(e)(2)(iii)(A) 
maintains the existing requirement that institutions ensure students 
have ``convenient access'' to accounts offered pursuant to a T1 
arrangement but specifies that convenient access includes access 
through a regional or national ATM network with ATMs located on or near 
each location of the institution.\115\ We propose that convenient 
access also includes access to a sufficient number of

[[Page 28506]]

ATMs that are located and maintained in a manner such that funds are 
reasonably available from them, including at the times the institution 
or its third-party servicer makes direct payments into the student and 
parent financial accounts. Proposed Sec.  668.164(e)(2)(iii)(B)(3) 
requires that the institution ensure that students and parents do not 
incur any cost for conducting any transaction at such an ATM.
---------------------------------------------------------------------------

    \115\ The intent of the proposed regulations is that the 
requirement for an ATM to be located on or near each location 
applies to each location or branch approved as part of the 
institution's application for eligibility under 34 CFR 600.10, or 
required to be reported to or approved by the Department under 34 
CFR 600.20(c)(1), 600.20(c)(3), 600.21(a)(2), or 600.21(a)(3).
---------------------------------------------------------------------------

    Proposed Sec.  668.164(e)(2)(iii)(B)(1) maintains, for accounts 
offered pursuant to a T1 arrangement, the current requirement that an 
institution must ensure that students and parents incur no cost for 
opening the account or initially receiving an access device.
    Proposed Sec.  668.164(e)(2)(iii)(B)(2) specifies that an 
institution must ensure that a student or parent who opens a financial 
account offered pursuant to a T1 arrangement does not incur a cost 
assessed by the institution, third-party servicer, or third-party 
servicer's associated financial institution when the student or parent 
conducts a point-of-sale transaction.
    Proposed Sec.  668.164(e)(2)(iii)(B)(4) requires that an 
institution ensure that a student or parent does not incur a cost 
initiated by the institution, its third-party servicer, or the third-
party servicer's associated financial institution for at least 30 days 
following the date that title IV funds are deposited or transferred 
into the financial account offered pursuant to a T1 arrangement.
    Proposed Sec.  668.164(e)(2)(iv) maintains the current requirement 
that an institution ensure that the financial account or access device 
is not marketed or portrayed as a credit card, and would further 
specify that the card not be converted to a credit instrument and that 
no fee is charged to the student or parent for any transaction that 
exceeds the balance on the card, regardless of whether the full amount 
of the transaction is established at the time the transaction is 
authorized by the financial institution.
    Reasons: Over the past several years, a growing group of consumer 
advocates, higher education stakeholders, government agencies, and 
Members of Congress have raised concerns about the incidence, type, and 
frequency of fees assessed on cards offered to students under 
agreements with third parties to receive their title IV credit 
balances.\116\ The majority of funds paid to students are credit 
balance disbursements of title IV student aid, which is ``intended to 
help students pay for nonschool items related to their education.'' 
\117\ As USPIRG has stated, the amount of fees assessed to student aid 
recipients under these agreements is especially critical because not 
only are these funds taxpayer-provided, but ``students receiving grant 
aid, such as the Pell grant, are mostly low-income students with a high 
level of need. Students taking out federal loans are primarily from low 
and moderate income backgrounds, paying interest on those funds.'' 
\118\
---------------------------------------------------------------------------

    \116\ GAO at 1.
    \117\ Ibid. at 4.
    \118\ USPIRG at 15.
---------------------------------------------------------------------------

    As noted previously, due to a number of factors, including changes 
made by the CARD Act and decreasing State support for higher education, 
to mitigate the cost and burden of disbursing title IV funds schools 
have increasingly opted to contract with third-party servicers. While 
institutions have saved money by outsourcing administrative functions, 
those savings may have been transferred as costs to students through 
fees that reduce their title IV aid balances. Indeed, Higher One has 
stated that about 50 percent of its $180 million in revenues for the 
year that ended December 31, 2011, came from account activity fees 
associated with one of its account offerings.\119\
---------------------------------------------------------------------------

    \119\ OIG at 4.
---------------------------------------------------------------------------

    There is also evidence that some students are incurring 
unreasonably high fees associated with these account offerings. Public 
comment the Department received in anticipation of the negotiated 
rulemaking sessions indicated that fees were unnecessarily high and 
reduced student aid intended to address costs of attendance. Staff from 
the FDIC have reported that some students have ``complained of paying 
aggregate fees ranging from hundreds of dollars to more than $1,000,'' 
\120\ and even isolated cases of high levels of fees can completely 
compromise the balance of funds intended to cover educationally related 
expenses. These and similar reports, including the legal actions 
resulting from third-party servicer behavior, have led groups like 
Consumers Union and USPIRG to recommend the total elimination of fees 
for campus cards.\121\
---------------------------------------------------------------------------

    \120\ GAO at 23-24.
    \121\ USPIRG at 3.
---------------------------------------------------------------------------

    During negotiated rulemaking, the Department's proposals on the 
subject of allowable fees in particular generated significant 
disagreement among negotiators. Student representatives voiced support 
for the Department's approach prohibiting most fees, and asked that 
debit card ``swipe'' fees also be prohibited from being charged under 
institutional agreements with outside parties. Other negotiators 
disagreed with prohibitions on fees--particularly the provision 
requiring unlimited reimbursement to students for ATM surcharges. These 
negotiators stated that prohibiting institutions from allowing fees to 
be charged to students would ultimately be counterproductive because it 
would prevent providers from recovering their costs and drive them from 
the market. Consequently, institutions would be forced to adopt less 
efficient, more costly processes for making payments to students and 
these less efficient processes would affect students through tuition 
increases that would be more onerous to students than paying account 
fees set at fair market rates.
    In sum, most negotiators expressed a preference for a framework 
that would: (1) Allow a reasonable fee structure to remain in place, 
(2) not favor direct deposit to the point of preventing a student from 
selecting a more favorable sponsored account, and (3) present a clear 
set of options to allow students to make an informed choice.
    The Department is sympathetic to the position advocated by consumer 
advocates and students. The intent of title IV student aid is to give 
students the financial assistance necessary to help pay for their 
postsecondary education. The greater the number and amount of fees, the 
less money students will have to pay for educationally related expenses 
such as housing, books, supplies, and childcare. Title IV grant 
recipients are typically low-income individuals and these fees will 
disproportionately impact low-income students.
    However, even financial accounts available to the general public 
are not truly free, and fees can often be difficult to avoid entirely. 
As OIG stated, ``students who choose to receive their title IV funds by 
check or direct deposit to an existing account might incur fees or 
other costs to access and spend the funds once they have been 
delivered. Students who have their funds transferred to an existing 
bank account are subject to the fees charged by their financial 
institution based on account activity, whereas students who choose to 
receive their funds by check may incur check-cashing fees.'' \122\ 
Furthermore, many of the providers of campus cards do not charge fees 
``higher than those associated with other banking products available to 
students,'' \123\ though as explained previously, certain providers are 
more

[[Page 28507]]

likely to do so, and have shown evidence of doing so, resulting in our 
differing treatment of T1 and T2 arrangements.
---------------------------------------------------------------------------

    \122\ OIG at 14.
    \123\ GAO at 15.
---------------------------------------------------------------------------

    Perhaps the most disturbing aspects about fees charged to students 
are the complexity, obscurity, and confusing nature of certain fees 
that are charged. We believe that certain practices employed by 
institutional third party servicers are inconsistent with normal 
banking practices, or have damaging consequences to Federal student aid 
recipients, or both. We believe that absent targeted provisions 
addressing specific fee-related issues, students and parents that are 
offered financial accounts under T1 arrangements will continue to be 
subject to the alarming practices identified by government agencies and 
consumer groups that led to this rulemaking effort.
    Under this approach, the Department is not prohibiting a financial 
institution from charging any particular fee; only that the contract 
negotiated by the institution and the servicer prohibit certain fees 
from being passed on or assessed to recipients of title IV aid who open 
accounts under a T1 arrangement. The institution and servicer would, as 
a part of normal contractual negotiations, bargain between themselves 
for services provided in full appreciation of the true costs being 
borne by all parties, including the costs to the servicer and its 
associated financial institutions of complying with these regulatory 
provisions. Under title IV, the cost of paying students is a 
responsibility incident to the administration of the programs which the 
HEA entrusts to institutions. We believe this is an appropriate remedy 
for the acknowledged cost-shifting from institutions to students of 
title IV disbursement services.

ATM Access

    Current regulations require institutions to ensure that students 
have ``convenient access'' to their title IV funds through ATMs. GAO, 
OIG, USPIRG, and Consumers Union (among others) have recommended that 
the Department more clearly define convenient access, so that students 
``have meaningful ways to access their financial aid at no cost.'' 
124 125 Most financial institutions associate 
their debit or prepaid card to a regional or national ATM network, 
providing a level of convenience attributable largely to the total 
number of ATMs; for transactions on that network, there are no 
surcharges.\126\
---------------------------------------------------------------------------

    \124\ Consumers Union at 1.
    \125\ GAO at 35.
    \126\ Ibid. at 21.
---------------------------------------------------------------------------

    However, the same level of access is not typically provided by 
third-party servicers, or their associated financial institutions. For 
example, according to USPIRG, Higher One is responsible for disbursing 
title IV funds for about 520 schools, but with 700 ATMs in 
service,\127\ the number of ATMs at a given location may be 
insufficient for students to have a reasonable opportunity to access 
their funds at the surcharge-free ATM. According to USPIRG and GAO, 
this can cause a ``run'' on surcharge-free ATMs, especially during 
periods when funds are generally disbursed to students, that can result 
in these ATMs running out of cash,\128\ or causing dozens of students 
to line up to withdraw their money.\129\ Aside from the security 
concerns associated with large groups of students withdrawing hundreds 
of dollars in cash at a single location, the lack of available 
surcharge-free ATMs can lead to unnecessary fees charged to students. 
When lines are long or ATMs run out of money, students are forced to 
incur out-of-network ATM fees, often at $5 per withdrawal.\130\ These 
fees can quickly add up, especially for students who make multiple 
smaller withdrawals to carefully manage their funds on a tight 
budget.\131\
---------------------------------------------------------------------------

    \127\ USPIRG at 16.
    \128\ Ibid. at 17.
    \129\ GAO at 22.
    \130\ USPIRG 17.
    \131\ GAO at 21.
---------------------------------------------------------------------------

    As noted previously, the common approach in the financial products 
market is to provide a network, either regional or national, of 
surcharge-free ATMs. Even third-party servicers who otherwise restrict 
surcharge-free access to a single ATM provide broader network coverage 
for a flat monthly fee,\132\ indicating that such an approach is 
workable given existing market conditions. To help ensure reasonable 
access, ATMs located on campus must be sufficient in number and 
reasonably accessible, as determined and documented by the institution. 
Negotiators representing both servicers and the banking industry agreed 
that access to a surcharge-free network of ATMs was a common feature of 
most banking products, and a feasible approach to providing convenient 
access to funds. For these reasons, the proposed regulations require 
that accounts offered pursuant to a T1 arrangement provide access to 
such a network, enabling students and parents exercising ordinary care 
to have reasonable access to their student aid dollars.
---------------------------------------------------------------------------

    \132\ Ibid. at 22.
---------------------------------------------------------------------------

Point-of-Sale Transaction Fees

    One of the more troubling fees assessed to students by third party 
servicers is what is known as a ``point-of-sale swipe'' fee or ``PIN 
debit'' fee (hereafter referred to as a PoS fee). This fee is distinct 
from the interchange fee charged to merchants on a per-sale basis as a 
charge for the service of fulfilling the credit card or debit card 
payment request. Instead, the PoS fee is charged to students by the 
institution's financial account provider as a surcharge for selecting 
the ``debit'' function and entering a PIN to complete a purchase, and 
charges no such surcharge for selecting the ``credit'' function and 
signing for their transaction. Each PoS fee is typically small--usually 
about $0.50 \133\--but is objectionable for three reasons.
---------------------------------------------------------------------------

    \133\ Ibid. at 20.
---------------------------------------------------------------------------

    First, because most student cards are marketed or portrayed as a 
debit card or having functionality similar to a debit card, students 
are likely to believe that selecting the ``debit'' option is required 
to complete the transaction.134 135 They are unlikely to 
recognize that while the ``debit'' option results in a charge, the 
``credit'' function does not.
---------------------------------------------------------------------------

    \134\ OIG at 13.
    \135\ GAO at 20.
---------------------------------------------------------------------------

    Second, the PoS fee is excessive. The fee is assessed each time the 
student uses the card. Since one-third of all such transactions are for 
less than $15, the PoS fees are high relative to the cost of the 
purchase and can add up quickly with repeated charges.\136\ Public 
comments to CFPB on financial products offered to students specifically 
reiterated these concerns.\137\
---------------------------------------------------------------------------

    \136\ Ibid.
    \137\ CFPB RFI.
---------------------------------------------------------------------------

    Third, PoS fees are uncommon outside of the third-party servicer 
realm. GAO found that ``no basic or student account that we reviewed 
for comparison purposes charged a transaction fee for using the 
account's debit card.'' \138\ Consumers Union, in a review of the 
banking products made available to students, found that PoS fees were 
atypical in the market--only two of the 16 products surveyed employed 
such a fee.\139\ This makes such a fee unexpected and difficult for 
students to both anticipate and estimate when comparing prospective 
account options. It also suggests that some third-party servicers, by 
imposing onerous

[[Page 28508]]

account terms, seek to take advantage of the unique position they 
occupy in administering title IV programs to put onerous terms in 
place, especially at the expense of often young and inexperienced 
students.
---------------------------------------------------------------------------

    \138\ GAO at 20.
    \139\ Consumers Union at 11.
---------------------------------------------------------------------------

    Third-party servicers and institutional officials told GAO, and 
reiterated during negotiations, that adjustment of student behavior can 
limit these charges: ``students can avoid fees in some cases by 
choosing to authorize debit transactions using a signature rather than 
a PIN. . . .'' \140\ However, it appears that the purpose of these 
charges is to encourage students to utilize the ``credit'' function 
when charging a transaction because the financial provider realizes a 
higher interchange fee when a debit card transaction is processed with 
a signature.\141\ Again, however, regular accounts provided in the 
general banking market do not assess this fee.\142\
---------------------------------------------------------------------------

    \140\ GAO at 24.
    \141\ USPIRG at 33.
    \142\ Ibid. at 27.
---------------------------------------------------------------------------

    PoS fees have been actively identified as harmful to students in 
multiple reports because they are atypical, opaque, difficult for 
students to anticipate and compare with other account offerings, and 
are often disproportionate to the amount of the underlying financial 
transaction. Most importantly, it is feasible for schools and their 
third-party servicers to negotiate the terms of a contract such that 
any cost is not passed on to account holders. Indeed, that is precisely 
what was accomplished at one institution when students became aware of 
the charge and relayed their complaints to the institution's 
administration.\143\
---------------------------------------------------------------------------

    \143\ OIG at 14.
---------------------------------------------------------------------------

Overdraft Fees

    Overdraft fees are more common in the general banking market. 
Overdraft fees (sometimes also referred to as overdraft protection, 
transaction denial fees, or insufficient funds charges, among other 
designations) are assessed when an account holder attempts to charge a 
purchase on a card or other access device in excess of the outstanding 
balance of the account.
    Historically, such fees were ``ad hoc courtesies banks would 
occasionally provide customers; they were never intended to become a 
routinely administered, extremely high-cost credit product.'' \144\ 
However, as these charges have become somewhat more common, more banks 
are allowing overdrafts and charging a fee, rather than denying the 
charge at the moment of attempted transaction.\145\
---------------------------------------------------------------------------

    \144\ Center for Responsible Lending, ``State of Lending: High-
Cost Overdraft Practices.'' [Page 2] (2013), available at 
www.responsiblelending.org/state-of-lending/reports/8-Overdrafts.pdf. With subsequent references ``Center for Responsible 
Lending at [page number].''
    \145\ Center for Responsible Lending at 3.
---------------------------------------------------------------------------

    Nevertheless, these fees are not widely imposed across all sectors. 
CFPB's study of the prepaid card market indicated that of all prepaid 
card agreements surveyed, more than 95 percent did not extend overdraft 
service to their cards, indicating that not only is it possible to 
remove such ``protection'' from a device or account, but it is already 
a widespread practice in this market segment.\146\ And the imposition 
of these fees by some providers does not imply a lack of harm to the 
account holder: CFPB has found that the imposition of these fees by 
some providers has the ``capacity to inflict serious economic harm.'' 
\147\ CFPB has also determined that many consumers incur a significant 
amount of overdraft fees and that even those with ``moderate'' 
overdraft usage may pay hundreds of dollars annually.\148\ 
Specifically, those who ``frequently'' overdraft and whose debit cards 
lost such functionality saved more than $450 annually compared to those 
who continued to receive overdraft services,\149\ an amount that on its 
own would exhaust many students' entire credit balances. Communities of 
color, seniors, young adults, and military families may also be 
particularly susceptible to overdraft fees.\150\
---------------------------------------------------------------------------

    \146\ Consumer Financial Protection Bureau. ``Study of Prepaid 
Account Agreements.'' [Page 25] (2014), available at 
files.consumerfinance.gov/f/201411_cfpb_study-of-prepaid-account-agreements.pdf.
    \147\ CFPB. ``Prepared Remarks, CFPB Roundtable on Overdraft 
Practices.'' (2012), available at www.consumerfinance.gov/speeches/prepared-remarks-by-richard-cordray-at-the-cfpb-roundtable-on-overdraft-practices/).
    \148\ CFPB. ``CFPB Student of Overdraft Programs: A White Paper 
of Initial Findings.'' [Page 61] (2013), available at 
files.consumerfinance.gov/f/201306_cfpb_whitepaper_overdraft-practices.pdf. With subsequent references ``CFPB White Paper at 
[page number].''
    \149\ CFPB White Paper at 38.
    \150\ Center for Responsible Lending at 13.
---------------------------------------------------------------------------

    The Federal Reserve has adjusted the overdraft fee to an ``opt-in'' 
service; however, consumers are likely to misunderstand information 
given to them on such processes and whether these ``protections'' are 
in their best interests.151 152 Furthermore, ``a large 
majority of consumers'' prefer that banks decline debit card overdrafts 
rather than approve them in exchange for the typical 
fee.153 154
---------------------------------------------------------------------------

    \151\ USPIRG at 32.
    \152\ Center for Responsible Lending. ``Banks Collect Overdraft 
Opt-ins through Misleading Marketing.'' [Page 2] (2011), available 
at www.responsiblelending.org/overdraft-loans/policy-legislation/regulators/banks-misleading-marketing.html).
    \153\ Center for Responsible Lending. ``Consumers Want Informed 
Choice on Overdraft Fees and Banking Options.''[Page 1] (2008), 
available at www.responsiblelending.org/overdraft-loans/research-analysis/final-caravan-survey-4-16-08.pdf.
    \154\ The Pew Center on the States, Safe Checking in the 
Electronic Age. (2012). Overdraft America: Confusion and Concern 
about Bank Practices. [Page 2] (2012), available at 
www.pewtrusts.org/~/media/legacy/uploadedfiles/pcs_assets/2012/
SCIBOverdraft20America1pdf.pdf.
---------------------------------------------------------------------------

    A number of practices around overdrafts are troubling and are 
likely to result in students incurring excessive fees to access their 
financial aid funds. Typically, the cost of the overdraft fee itself is 
as much as twice the underlying charge. The reasons for this are 
difficult to discern, especially because the banking provider can deny 
the transaction at no cost, rather than extending credit to the account 
holder.\155\ In addition to the overdraft fee itself, some banks charge 
for negative account balances--so the fee is initially incurred at the 
time of the charge and then additional fees are charged for days or 
weeks thereafter.\156\ One particularly troubling practice is the 
purposeful reordering of transactions to prioritize the charges that 
will place a customer's account in overdraft status. Then, each 
subsequent (and typically smaller) transaction incurs results in 
additional charges.\157\
---------------------------------------------------------------------------

    \155\ Center for Responsible Lending at 3.
    \156\ USPIRG at 33.
    \157\ Center for Responsible Lending at 7.
---------------------------------------------------------------------------

    Additionally, in 2012, Higher One settled a lawsuit with the FDIC, 
agreeing to return more than $10 million to students for account 
overcharges, including charging students multiple nonsufficient funds 
(NSF) fees for the same transaction.158 159
---------------------------------------------------------------------------

    \158\ OIG at 13.
    \159\ FDIC at 1.
---------------------------------------------------------------------------

    As detailed above, the overdraft fees present the potential for 
significant costs and harm to students, especially because students are 
often among those most vulnerable to incurring such charges. However, 
in most cases, the remedy for such harm is simple and is already 
practiced by the vast majority of prepaid card providers. The financial 
institution has the opportunity to refuse the charge sought to be 
authorized.160 161 We understand that in limited 
circumstances there is a potential for a card issuer to be faced with, 
for example, a gratuity that exceeds the balance on the card even 
though the account contained sufficient funds to pay the initial charge 
when authorized,

[[Page 28509]]

but the draft regulations would not create any exception to the ban on 
overdraft fees to address such situations. Instead, the proposed 
regulations would leave the card issuer responsible for placing such 
limits on its authorization process that it may believe necessary, if 
any, to address these situations, rather than permitting imposition of 
insufficient funds fees that deplete students' and parents' title IV 
credit balances. We believe deficiencies in the authorization process 
should not trigger a fee assessed to a student, though we acknowledge 
that the student is responsible for paying any balance due.
---------------------------------------------------------------------------

    \160\ USPIRG at 26.
    \161\ Center for Responsible Lending at 11.
---------------------------------------------------------------------------

30 Days Free Access to Funds

    As explained above, we recognize that, generally, institutions will 
charge account holders some fees, either on a regular basis or in 
response to specific behaviors. We have sought to address the three 
specific types of fees based on the impediments they pose for students 
seeking access to the title IV aid to which the students are entitled. 
We believe that these three types of fees are particularly onerous, 
difficult to understand and anticipate, or uncommon. The unifying 
characteristic of the proposed regulations addressing these specific 
fees is to give students a reasonable opportunity to access their full 
title IV credit balance refund--which is statutorily determined as the 
amount intended to provide the means by which to pay for the costs of 
attending the institution. The proposed regulation barring servicers or 
their associated financial institutions from assessing a fee for 30 
days following the receipt of title IV funds is also consistent with 
our objective of affording students and parents a reasonable 
opportunity to access their full title IV credit balance.
    As recommended by USPIRG, we believe aid recipients should 
particularly be able to access their title IV funds during the period 
immediately following disbursement, when they are most likely to need 
funds to cover educationally related expenses, without charge.\162\ We 
emphasize that this is not a blanket prohibition on fees of any kind 
being assessed to the account. For example, if a student uses an out-
of-network ATM, a servicer or its associated financial institution may 
not have control over a fee assessed by the owner of that ATM. Instead, 
this provision only prevents a student from incurring a cost initiated 
by the servicer or its associated financial institution. During 
negotiations, many non-Federal negotiators agreed that a fixed period 
of time following the disbursement of funds was an acceptable 
compromise, giving students a reasonable opportunity to receive their 
title IV funds; the use of the account after that period would then be 
subject to fees as a cost of using the account. We specifically invite 
comment on whether 30 days following a disbursement is an appropriate 
timeframe to allow a title IV aid recipient an opportunity to 
reasonably access aid dollars free of charge.
---------------------------------------------------------------------------

    \162\ USPIRG at 25.
---------------------------------------------------------------------------

    Finally, we emphasize that we do not intend these fee provisions to 
discourage institutions from negotiating even more favorable 
arrangements that provide students and parents with better account 
terms. We believe that institutions should use their considerable 
negotiating leverage to get the most favorable offerings on behalf of 
those they serve.

Disclosure of Contracts for T1 and T2 Arrangements ((Sec.  
668.164(e)(2)(v) and (Sec.  668.164(f)(4)(iii))

    Current Regulations: None.
    Proposed Regulations: In both Sec.  668.164(e)(2)(v)(A) and Sec.  
668.164(f)(4)(iii)(A), we propose to amend our regulations to state 
that, under both T1 and T2 arrangements, no later than 60 days after 
the most recently completed award year, an institution must provide to 
the Secretary and disclose conspicuously on the institution's Web site 
the contract between the institution and financial institution (or, 
with respect to paragraph (e)(2)(v)(A), its third-party servicer) in 
its entirety, except for any portions that, if disclosed, would 
compromise personal privacy, proprietary information technology, or the 
security of information technology or of physical facilities.
    Reasons: Throughout the process of developing these proposed 
regulations, outside parties informed us that a major problem with 
studying the impact of college financial agreements is the lack of 
transparency surrounding those agreements. As a result, USPIRG, GAO, 
Consumers Union, and NACUBO have all recommended that these agreements 
or contracts be made available to the public.
    During negotiated rulemaking, several negotiators urged the 
Department to ``issue regulations that require schools to publically 
disclose the terms of such arrangements, as well as the method and 
criteria used by the school in selecting the partner financial services 
company.'' \163\ Because we agreed, we presented draft language to the 
negotiators containing provisions requiring an institution to post the 
contract on its Web site.
---------------------------------------------------------------------------

    \163\ Fast and Wojewoda. Memo to Negotiated Rulemaking 
Committee. [Page 3] (2014), available at www2.ed.gov/policy/highered/reg/hearulemaking/2014/pii2-fast1-cashmgmt.pdf.
---------------------------------------------------------------------------

    However, not all negotiators agreed with the Department's position 
that the full contract should be available on the institution's Web 
site. Negotiators representing financial institutions and third-party 
servicers argued that ``disclosure of [the] contract documents would 
potentially damage competition by making public critical proprietary 
information, and would create security concerns where, as is often the 
case, a servicer's technical system specifications and processes were 
appended to or otherwise included in the contract document.'' \164\ 
These negotiators also reasoned that a summary of the terms would be 
sufficient to achieve the transparency that negotiators representing 
students, consumer advocates, and State attorneys general desired.
---------------------------------------------------------------------------

    \164\ Kundert, Levandowski, McGuane, and Norwood May 1,2014 Memo 
at 11.
---------------------------------------------------------------------------

    While we are sensitive to the concerns raised by third-party 
servicers and financial institutions, there is evidence that releasing 
the complete contract would not result in the negative outcomes cited. 
In a 2012 NACUBO survey, 55 percent of the responding institutions that 
contracted with a third-party vendor indicated that their agreements 
are publically available, and that these agreements are most likely 
accessible through public records requests (39 percent) or by written 
request to a specific office on campus (33 percent).\165\ As for 
institutions with banking agreements, ``[t]he details of agreements 
between banks and institutions are publicly available at 69 percent of 
participating institutions, with contract documents accessible through 
written request to a specified campus department or office (46 percent) 
or through an official public records request (26 percent).'' \166\
---------------------------------------------------------------------------

    \165\ NACUBO at 3.
    \166\ Ibid. at 4.
---------------------------------------------------------------------------

    Although this survey was only sent to 2,036 institutions with 412 
responding, we believe it makes the important point that institutions 
are already releasing contracts without damaging consequences. Given 
that third-party servicers and financial institutions continue to 
contract with institutions that make their agreements available to the 
public in various ways, we believe that disclosing those agreements is 
not harmful and is likely to enhance rather than inhibit competition.

[[Page 28510]]

    However, to address the concerns raised by third-party servicers 
and financial institutions, our proposed regulations, like the final 
proposal distributed during negotiated rulemaking, would create an 
exemption for any provision of the contract that would compromise 
personal privacy, proprietary information technology, or the security 
of information technology or of physical facilities and would permit 
the parties to the contract to redact such information. We believe that 
exempting these provisions from public disclosure will safeguard 
proprietary and security-related information while also creating the 
transparency that many advocates have called for.

Disclosure of Contract Summaries for T1 and T2 Arrangements (Sec.  
668.164(e)(2)(v)(B), (e)(2)(v)(C), (f)(4)(iii)(B), and (f)(4)(iii)(C))

    Current Regulations: None.
    Proposed Regulations: In Sec.  668.164(e)(2)(v)(B), Sec.  
668.164(e)(2)(v)(C), Sec.  668.164(f)(4)(iii)(B), and Sec.  
668.164(f)(4)(iii)(C), we propose to amend our regulations to state 
that, under a T1 or T2 arrangement, no later than 60 days after the 
most recently completed award year, an institution must provide to the 
Secretary and disclose conspicuously on its Web site the total 
consideration for the most recently completed award year, monetary and 
non-monetary, paid or received by the parties under the terms of the 
contract, the number of students and parents who had financial accounts 
under the contract at any time during the most recently completed award 
year, and the mean and median of the actual costs incurred by those 
account holders.
    Reasons: Complicating the issue of the lack of transparency 
regarding agreements between third-party servicers or financial 
institutions and institutions is the fact that, as referenced in the 
GAO report, ``. . . little information is available on the frequency 
with which students incur ATM, PIN, and other fees, and the total 
amount of college card fees paid by students is unknown.'' \167\ 
Additionally, in an August 2014 report, Consumers Union stated that 
``[s]ummaries of key contract provisions, including fees and revenue-
sharing agreements, should be prominently and publicly disclosed on 
school Web sites.'' \168\ Furthermore, OIG recommended that the 
Department ``[d]evelop regulations that require schools to compute the 
average cost incurred by students who establish an account with the 
servicer and at least annually disclose this fee information to 
students.'' \169\
---------------------------------------------------------------------------

    \167\ GAO at 23.
    \168\ Consumers Union at 20.
    \169\ OIG at 15.
---------------------------------------------------------------------------

    During negotiations, non-Federal negotiators representing students 
and State attorneys general also encouraged the Department to add a 
provision requiring the release of a summary of the contract and 
``include in the summary form the fees imposed on sponsored accounts, 
the actual payments made in connection with the agreement, and the 
value of in-kind services provided to schools by third-party 
providers.'' \170\ Many negotiators also argued that, in many cases, a 
summary of the terms of the contract and the fees that a student or 
parent incurred could be more useful to individual consumers than the 
release of the full contract, and there was little contention over the 
idea that a summary of the contract could be released.
---------------------------------------------------------------------------

    \170\ Lindstrom and Martindale. ``Memo to Negotiated Rulemaking 
Committee.'' [Page 2] (2014), available at http://www2.ed.gov/policy/highered/reg/hearulemaking/2014/pii3-lind-mart-cashmgmt-040214.pdf. With subsequent references ``Lindstrom and Martindale 
April 2 Memo at [page number].''
---------------------------------------------------------------------------

    As a result of these discussions, the final draft of the 
Department's proposal circulated at the fourth session contained a 
provision that would have required the disclosure of a contract 
summary. This latter draft would have required institutions to disclose 
the name of the financial institution offering the account and the 
third-party servicer or other parties involved in opening or enabling 
the account; whether the contract or arrangement provided for revenue 
sharing or royalty payments, and, if so, the nature and amount of that 
compensation; whether the account was a checking account, prepaid debit 
card, or other type of account; any fees or charges associated with the 
account; the number of allowable out-of-network surcharge-free ATM 
transactions; the network of surcharge-free ATMs available, indicating 
all the names associated with the network, the approximate number of 
available ATMs in that network both nationally and locally, and the 
number and location of surcharge-free ATMs on campus (if any) and their 
hours of accessibility, and a publicly accessible online ATM locator to 
search for in-network ATMs; and the total number of students and 
parents with an account and the average amount of fees paid by students 
and parents who had the account during the most recently completed 
award year or twelve-month period.
    However, to reduce burden on institutions, we propose in these 
regulations that an institution must only provide to the Secretary, 
with respect to a contract summary provided under a T1 or T2 
arrangement:
     The total consideration for the most recently completed 
award year, monetary and non-monetary, paid or received by the parties 
under the terms of the contract;
     The number of students and parents who had financial 
accounts under the contract at any time during the most recently 
completed award year; and
     The mean and median of the actual costs incurred by those 
account holders.
    We believe that these proposed disclosures address the transparency 
issues raised by GAO, OIG, and others since the key information most 
commonly called for by advocates will now be available to the public, 
as well as the full contract, except for the redactions allowed, none 
of which concern consumer information.

Publication of Contracts and Contract Summaries in a Centralized 
Database

    Current Regulations: None.
    Proposed Regulations: Proposed Sec.  664.164(e)(2)(vi) and Sec.  
664.164(f)(4)(iv) require institutions to submit the URL of the Web 
page where the contracts and contract summaries are posted to the 
Secretary. The Secretary will then make those URLs publicly available.
    Reasons: During negotiated rulemaking, non-Federal negotiators 
argued that ``transparency through centrally collecting the contracts 
is necessary to ensure compliance issues, to empower colleges to 
negotiate even better deals for students over time, and to track trends 
that may elude the individual consumer.'' \171\ Consumers Union has 
also called for the submission of ``full campus banking contracts and 
the accompanying summaries to the Department for collection in a 
publicly-accessible central database,'' \172\ and USPIRG has stated 
that contracts with third-party servicers ``should always be publically 
available in an easily accessible database.'' \173\ We agree with the 
non-Federal negotiators, Consumers Union, and USPIRG regarding the 
importance of a centralized database containing each institution's URL 
where contracts and their summaries are posted, and we have added this 
provision to the proposed regulations.
---------------------------------------------------------------------------

    \171\ Lindstrom. Memo to Negotiated Rulemaking Committee. [Page 
2] (2014), available at www2.ed.gov/policy/highered/reg/hearulemaking/2012/programintegrity.html. With subsequent references 
``Lindstrom April 22, 2014 Memo [page number].''
    \172\ Consumers Union at 20.
    \173\ USPIRG at 30.

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

[[Page 28511]]

Best Financial Interests of Account Holders (Sec.  668.164(e)(2)(vi)-
(vii) and Sec.  668.164(f)(4)(vi)-(vii))

    Current Regulations: Current Sec.  668.82(a) states that a 
participating institution or a third-party servicer that contracts with 
that institution acts in the nature of a fiduciary in the 
administration of the title IV, HEA programs. To participate in any 
title IV, HEA program, the institution or its servicer must at all 
times act with the competency and integrity necessary to qualify as a 
fiduciary.
    Current Sec.  668.14(b)(4) requires that a school establish and 
maintain such administrative and fiscal procedures and records as may 
be necessary to ensure proper and efficient administration of funds 
received from the Secretary or from students under the title IV, HEA 
programs.
    Proposed Regulations: Proposed Sec.  668.164(e)(2)(vi) and Sec.  
668.164(f)(4)(vi) would require institutions that have a T1 or T2 
arrangement to ensure that the terms of accounts offered under such 
arrangements are not inconsistent with the best financial interests of 
the students and parents opening them. To comply with this provision, 
an institution would be required to meet three requirements: (1) It 
must document that it periodically conducts reasonable due diligence 
reviews to ascertain whether the fees imposed under the arrangement 
are, considered as a whole, not excessive in light of prevailing market 
rates; (2) it must ensure that all contracts for the marketing or 
offering of accounts to the institution's students or parents, pursuant 
to a T1 or T2 arrangement, provide that the institution may terminate 
the arrangement based on complaints received or a determination that 
the fees imposed under the arrangement are excessive; and (3) it must 
take affirmative steps, including contractual arrangements if 
necessary, to ensure the requirements of proposed Sec.  668.164 are 
met.
    Reasons: The preceding sections of the preamble discussion have 
documented a wide range of troubling practices by some institutions and 
their associated financial entities. However, the practices themselves 
are not the only disturbing aspect of the proliferation of campus card 
agreements--so too are the motivations that have led to the agreements, 
especially given the role of institutions as the conduits for payment 
of Federal funds awarded to students.
    The GAO stated that it remains concerned that benefits to 
institutions, especially in the form of contractual remuneration, may 
``motivate schools to encourage the use of college cards or potentially 
choose the arrangement that provides the schools the most revenue 
rather than one that provides students the best terms.'' \174\ We 
believe that a school entering into such arrangements should not be 
prohibited from realizing benefits; however, the pursuit of any such 
benefits must be subordinate to serving the best financial interests of 
the students and parents opening the accounts. Absent a requirement for 
schools to negotiate with the best interests of students in mind, we 
believe that agreements between institutions and servicers pose 
potential conflicts of interest that could encourage institutions to 
prioritize revenue or other benefits ``at the expense of student 
interests.'' \175\
---------------------------------------------------------------------------

    \174\ GAO at 29.
    \175\ OIG at 5.
---------------------------------------------------------------------------

    The failure on the part of some institutions to negotiate 
arrangements that serve the best financial interests of the students 
opening the accounts is troubling. At the institutions it reviewed, OIG 
found that officials did not even attempt to negotiate better terms on 
behalf of their students and instead accepted the preexisting fee 
schedules offered by the financial account providers. In justifying 
this approach, officials stated that they felt a student's relationship 
with a financial institution was separate from the relationship with 
the institution.\176\ Considering the practices identified in the 
student and parent choice section of the preamble and given the fact 
that many students assume that the co-branding of an access device 
implies an institutional endorsement, we think this ``separate 
relationship'' presumption is incorrect. Choosing not to negotiate on 
behalf of students while enjoying the remuneration from financial 
account providers takes advantage of the institution's position as a 
conduit for Federal payments to the benefit of the institution and the 
financial institution, and at the expense of inexperienced students' 
and contrary to the institution's fiduciary role.
---------------------------------------------------------------------------

    \176\ Ibid. at 14.
---------------------------------------------------------------------------

    We are confident that postsecondary institutions can negotiate 
appropriate terms on behalf of their students, especially for products 
intended to be marketed to title IV recipients. Indeed, one of the 
institutions reviewed by OIG that initially declined to negotiate 
better terms on behalf of its students later did so after receiving 
numerous student complaints about PoS fees; after negotiations, the 
school was able to successfully eliminate PoS fees for students.\177\
---------------------------------------------------------------------------

    \177\ Ibid.
---------------------------------------------------------------------------

    This institution's experience helps to substantiate USPIRG's 
argument that colleges have an advantageous negotiating position 
because they control access to a lucrative student market--and they 
therefore have the ability to negotiate on behalf of their 
students.\178\ In a NACUBO survey released following the USPIRG report, 
about 77 percent of institutions said they do consider fees when 
selecting their vendor and about 60 percent said they use a competitive 
bidding process.\179\ While this is not a universal practice (and 
indeed, its absence on some campuses may explain the different fees 
students at various institutions face), the relatively high proportion 
of institutions that engage in a competitive bidding process would 
indicate that this is a practice all institutions could engage in with 
little additional burden.
---------------------------------------------------------------------------

    \178\ USPIRG at 24.
    \179\ NACUBO at 2.
---------------------------------------------------------------------------

    Finally, in an effort to address this problem during negotiated 
rulemaking, negotiators representing State attorneys general submitted 
a proposal to require ``institutions to base decisions to enter into 
such arrangements solely on consideration of the best interest of 
students,'' \180\ believing that this ``would help to address possible 
unforeseen changes in the industry by ensuring that no matter what 
financial services or products are offered, schools place students' 
best interests above the schools' interests.'' \181\ We agree, but we 
also believe that institutions need and deserve guidance as to what is 
expected of them under such a standard. In that regard, the proposed 
regulations would require institutions to conduct, at reasonable 
intervals, a due diligence review of the fees assessed at reasonable 
intervals, while leaving flexibility as to the particular types and 
amounts of charges entailed as long as the account is competitive in 
its financial terms overall. The proposed regulations are also designed 
to remove contractual impediments to ensure that arrangements serve the 
best financial interests of student account holders. Specifically, they 
would ensure an opportunity for early termination of an arrangement 
where the financial institution has failed to provide a

[[Page 28512]]

competitive fee structure or has otherwise provoked substantial 
complaints from student and parent account holders. The proposed 
regulations are also designed to prevent the wholesale delegation of 
institutional responsibilities to contractors, so that institutions 
remain accountable. We believe that regulations requiring institutions 
to consider the best financial interests of students when evaluating 
their T1 and T2 arrangements can serve as a useful tool in eliminating 
many troubling practices. We invite comment on the methods proposed to 
evaluate whether a T1 or T2 arrangement is or remains in the best 
financial interests of students and invite comment on alternative 
methods that accomplish this objective.
---------------------------------------------------------------------------

    \180\ Fast and Wojewoda.'' Memo to Negotiated Rulemaking 
Committee.'' [Page 1] (2014), available at www2.ed.gov/policy/highered/reg/hearulemaking/2014/pii3-fast-cashmgmt-04022014.pdf. 
With subsequent references ``Fast and Wojewoda April 2 Memo [page 
number].''
    \181\ Ibid.
---------------------------------------------------------------------------

Ownership of Student or Parent Financial Accounts ((Sec.  668.164(g))

    Current Regulations: None.
    Proposed Regulations: The proposed regulations would require 
institutions that offer financial accounts offered pursuant to T1 or T2 
arrangements to ensure that those financial accounts meet the 
requirements of either 31 CFR 210.5(a) or (b)(5), as applicable.
    Reasons: The cross-referenced Treasury regulations require that an 
Automated Clearing House ``federal payment,'' defined in such a way as 
to include payment by EFT of title IV funds to parents and students, be 
deposited in a deposit account that is either in the name of the 
recipient, or, if the recipient accesses the funds by prepaid card, 
meets the following requirements:
    (A) The account is held at an insured financial institution;
    (B) The account is set up to meet the requirements for deposit 
insurance under 12 CFR part 330, or share insurance in accordance with 
12 CFR part 745, such that the funds accessible through the card are 
insured for the benefit of the parent or student by the Federal Deposit 
Insurance Corporation or the National Credit Union Share Insurance 
Fund;
    (C) The account is not attached to a line of credit or loan 
agreement under which repayment from the account is triggered upon 
delivery of the Federal payments; and
    (D) The issuer of the card complies with all of the requirements, 
and provides the holder of the card with all of the consumer 
protections, that apply to a payroll card account under the rules 
implementing the Electronic Fund Transfer Act, as amended.
    While the requirements under 31 CFR 210.5 pertain specifically to 
federal payments made through the Automated Clearing House network, we 
believe that to ensure such protections are extended to students, they 
should apply to all financial accounts an institution includes in its 
student choice process under proposed paragraph Sec.  668.164(d).

Retroactive Payments (Sec.  668.164(k))

    Current Regulations: None.
    Proposed Regulations: Proposed Sec.  668.164(k) provides that if an 
institution did not make a disbursement to a student who was enrolled 
and eligible for a payment period the student completed in the current 
year or loan period (for example, because of an administrative delay or 
a delay in processing or receiving the student's ISIR), the institution 
may make the disbursement to the student for a payment period in the 
current year or loan period.
    Reasons: A student should receive all the title IV, HEA program 
funds he or she is eligible to receive for the current year or loan 
period, despite any delays in disbursing those funds to the student. 
These provisions codify in regulations existing Department and 
institutional practices.

Student or Parent Authorizations (Sec.  668.165)

    Current Regulations: Current Sec.  668.165(b)(1)(ii) provides that 
the Secretary may prohibit an institution from obtaining a student's or 
parent's authorization to hold credit balance funds if the institution 
receives title IV, HEA program funds under the reimbursement or cash 
monitoring payment methods. With the student's or parent's written 
authorization, an institution that is not prohibited from holding 
credit balance funds may issue a stored-value card or other similar 
device that allows the student or parent to access those funds at his 
or her discretion to pay for educationally related expenses.
    Proposed Regulations: Proposed Sec.  668.165(b)(1)(ii) specifies 
that when the Secretary provides title IV, HEA program funds to an 
institution placed on the reimbursement payment method or the 
heightened cash monitoring payment method described in Sec.  
668.162(c)(2) or Sec.  668.162(d)(2), respectively, the institution may 
not hold credit balance funds.
    Reasons: As discussed more fully under the heading ``Reimbursement 
and cash monitoring payment methods,'' an institution that receives 
title IV, HEA program funds under the reimbursement or heightened cash 
monitoring payment method must show that it paid any credit balances 
due to students and parents before the Department approves the 
institution's request for reimbursement. Because the Department 
typically places an institution on reimbursement or heightened cash 
monitoring for material financial or compliance issues, we do not 
believe it is appropriate to allow that institution to circumvent the 
requirement that it directly pay credit balances to students and 
parents by obtaining authorizations to hold those credit balance funds. 
We note that this is prohibition would apply uniformly to all affected 
institutions, rather than only those institutions notified by the 
Secretary.

Severability (Sec.  668.167)

    Current Regulations: None.
    Proposed Regulations: Proposed Sec.  668.167 would make clear that, 
if any part of the proposed regulations is held invalid by a court, the 
remainder would still be in effect.
    Reasons: We believe that each of the proposed provisions discussed 
in this preamble serves one or more important, related, but distinct, 
purposes. Each of the requirements provides value to students, 
prospective students, and their families, to the public, taxpayers, and 
the Government, and to institutions separate from, and in addition to, 
the value provided by the other requirements. To best serve these 
purposes, we would include this administrative provision in the 
regulations to make clear that the regulations are designed to operate 
independently of each other and to convey the Department's intent that 
the potential invalidity of one provision should not affect the 
remainder of the provisions.

Retaking Coursework (Sec.  668.2)

    Current Regulations: The definition of ``full-time student'' in 
current Sec.  668.2 allows repeated coursework to count towards a 
student's enrollment status in a term-based program, but does not allow 
an institution to include either more than one repetition of a 
previously passed course or any repetition of previously passed 
coursework due to a student's failure of other coursework.
    Proposed Regulations: Proposed Sec.  668.2 would eliminate the 
provision in the current regulations that prohibits an institution from 
counting for enrollment purposes any courses that a student previously 
passed if the student retakes those courses in the same term in which 
the student repeats a failed course. The proposed regulation would 
apply to undergraduate, graduate, and professional students.
    Reasons: On October 29, 2010, we published in the Federal Register 
final regulations (75 FR 66832), which

[[Page 28513]]

included the definition of ``full-time student'' described above. After 
we published these regulations, institutions with medical, dental, and 
other similar graduate or professional programs asked whether the 
limitations on repeated coursework applied to programs above the 
undergraduate level, noting that students enrolled in these program 
were often required to repeat the coursework for an entire term if they 
failed just one course in that term. They also pointed out that 
students in these programs are only eligible for unsubsidized loans and 
that denying Federal aid to these students while they were repeating 
all coursework in the term would result in students relying on less 
desirable private education loans or withdrawing from these programs.
    During the negotiated rulemaking process, some non-Federal 
negotiators recommended the Department clarify existing regulations for 
repeating coursework and supported limiting the applicability of the 
regulations to undergraduate students only. However, other non-Federal 
negotiators were concerned that, due to the high standards some 
graduate schools impose on their students, the limitations on retaking 
coursework should apply to graduate students as well. Based upon these 
discussions and the recommendations of some of the non-Federal 
negotiators, the Department proposed to allow an institution to count 
all of the coursework for a student, at all program levels, who is 
enrolled in a program using an integrated curriculum that requires a 
student who failed one course to retake both the failed course and all 
previously passed coursework to academically progress in the program. 
The current prohibition against counting more than one repetition of a 
previously passed course would remain.
    The Department also clarified that the revised regulation would 
apply to undergraduate, graduate, and professional students.
    The Department received tentative agreement from all members of the 
negotiating committee on the proposed changes to the regulations.

Clock-to-Credit Hour Conversion (Sec.  668.8(k))

    Current Regulations: Under Sec.  668.8(k)(1), certain undergraduate 
educational institutions are required to use a specified clock-to-
credit hour formula to determine the number of credit hours in a 
program. However, even if a program is offered in credit hours and the 
number of credit hours in the program is determined in accordance with 
the conversion formula in Sec.  668.8(l), the program must still be 
treated as a clock hour program for title IV, HEA purposes under Sec.  
668.8(k)(2) if (1) it is required to measure student progress in clock 
hours to receive State or Federal approval or licensure to offer the 
program, or for graduates to apply for licensure or the authorization 
to practice the occupation that the student is intending to pursue, (2) 
the credit hours in the program do not comply with the definition of a 
``credit hour'' in 34 CFR 600.2, or (3) the institution does not offer 
all the underlying clock hours that are the basis for the credit hours 
and generally requires attendance in the clock hours that are the basis 
for the credit hours awarded.
    Under Sec.  668.8(k)(3), the Federal and State approval provisions 
in Sec.  668.8(k)(2)(i) that make a program a clock hour program do not 
apply if the program has a State or Federal approval or licensure 
requirement that a limited component of the program must include a 
practicum, internship, or clinical experience that is required to be 
measured in clock hours.
    Proposed Regulations: We are proposing to eliminate Sec. Sec.  
668.8(k)(2) and (k)(3), and to make a conforming change in Sec.  
668.8(l), to streamline the requirements governing clock-to-credit hour 
conversions, mitigate confusion about whether a program is a clock or 
credit hour program for title IV, HEA program purposes, and remove the 
provisions under which a State or Federal approval or licensure action 
could cause the program to be measured in clock hours.
    Reasons: The Department has received many questions regarding the 
clock/credit hour regulations, particularly as they relate to State 
requirements. We do not wish or intend to interfere with State 
requirements relating to program delivery or the number of credit or 
clock hours a State recognizes or requires for its purposes. For title 
IV, HEA program purposes, we believe that the conversion formula alone 
is sufficient to ensure that clock hours are appropriately converted to 
credit hours without regard to any State requirement or role in 
approving or licensing a program. In addition, eliminating these 
provisions simplifies the regulations. The negotiators reached 
tentative agreement on the regulatory language in Sec.  668.8(k), as 
well as on the conforming change in proposed Sec.  668.8(l).

Executive Orders 12866 and 13563

Regulatory Impact Analysis

Introduction
    As more colleges and universities enter into agreements with 
financial institutions and third-party servicers to assist in the 
disbursement of financial aid to students, we believe it is necessary 
to address the troubling practices discussed more fully in the 
preamble. Concerns regarding the marketing strategies, lack of 
transparency, and financial incentives contained in contractual 
relationships between colleges and universities and financial 
institutions have arisen as colleges adopt new strategies to save 
costs. We propose to amend the current cash management regulations to 
address this changing marketplace. By doing so, the Department believes 
that these current arrangements, along with future arrangements, will 
be more beneficial and transparent to students and other parties.
    Under Executive Order 12866, the Secretary must determine whether 
this regulatory action is ``significant'' and, therefore, subject to 
the requirements of the Executive order and subject to review by OMB. 
Section 3(f) of Executive Order 12866 defines a ``significant 
regulatory action'' as an action likely to result in a rule that may--
    (1) Have an annual effect on the economy of $100 million or more, 
or adversely affect a sector of the economy, productivity, competition, 
jobs, the environment, public health or safety, or State, local, or 
tribal governments or communities in a material way (also referred to 
as an ``economically significant'' rule);
    (2) Create serious inconsistency or otherwise interfere with an 
action taken or planned by another agency;
    (3) Materially alter the budgetary impacts of entitlement grants, 
user fees, or loan programs or the rights and obligations of recipients 
thereof; or
    (4) Raise novel legal or policy issues arising out of legal 
mandates, the President's priorities, or the principles stated in the 
Executive order.
    This proposed regulatory action is a significant regulatory action 
subject to review by OMB under section 3(f) of Executive Order 12866.
    We have also reviewed these regulations under Executive Order 
13563, which supplements and explicitly reaffirms the principles, 
structures, and definitions governing regulatory review established in 
Executive Order 12866. To the extent permitted by law, Executive Order 
13563 requires that an agency--

[[Page 28514]]

    (1) Propose or adopt regulations only upon a reasoned determination 
that their benefits justify their costs (recognizing that some benefits 
and costs are difficult to quantify);
    (2) Tailor its regulations to impose the least burden on society, 
consistent with obtaining regulatory objectives and taking into 
account--among other things and to the extent practicable--the costs of 
cumulative regulations;
    (3) In choosing among alternative regulatory approaches, select 
those approaches that maximize net benefits (including potential 
economic, environmental, public health and safety, and other 
advantages; distributive impacts; and equity);
    (4) To the extent feasible, specify performance objectives, rather 
than the behavior or manner of compliance a regulated entity must 
adopt; and
    (5) Identify and assess available alternatives to direct 
regulation, including economic incentives--such as user fees or 
marketable permits--to encourage the desired behavior, or provide 
information that enables the public to make choices.
    Executive Order 13563 also requires an agency ``to use the best 
available techniques to quantify anticipated present and future 
benefits and costs as accurately as possible.'' The Office of 
Information and Regulatory Affairs of OMB has emphasized that these 
techniques may include ``identifying changing future compliance costs 
that might result from technological innovation or anticipated 
behavioral changes.''
    We are issuing these proposed regulations only on a reasoned 
determination that their benefits would justify their costs. In 
choosing among alternative regulatory approaches, we selected those 
approaches that maximize net benefits. Based on the analysis that 
follows, the Department believes that these proposed regulations are 
consistent with the principles in Executive Order 13563.
    In accordance with both Executive orders, the Department has 
assessed the potential costs and benefits, both quantitative and 
qualitative, of this regulatory action. The potential costs associated 
with this regulatory action are those resulting from statutory 
requirements and those we have determined as necessary for 
administering the Department's programs and activities.
    This Regulatory Impact Analysis is divided into six sections. The 
``Need for Regulatory Action'' section discusses why amending the 
current regulations is necessary.
    The ``Summary of Proposed Regulations'' briefly describes the 
amended changes the Department is proposing in these regulations. The 
proposed regulations amend the cash management regulations, along with 
two issues unrelated to cash management: Retaking coursework and clock-
to-credit-hour conversion.
    The ``Discussion of Costs, Benefits, and Transfers'' section 
considers the cost and benefit implications of the proposed regulations 
for students, parents, financial institutions, and postsecondary 
institutions. Specifically, we considered the costs and benefits of 
interest-bearing bank accounts, accounts offered under T1 and T2 
arrangements, retaking coursework, and clock-to-credit-hour conversion.
    Under ``Net Budget Impacts,'' the Department presents its estimate 
that the proposed regulations would not have a significant net budget 
impact on the Federal government.
    In ``Alternatives Considered,'' we describe other approaches the 
Department considered for key provisions of the proposed regulations, 
including prohibiting an institution from including books and supplies 
as part of tuition and fees; requiring an institution to obtain consent 
to open an account before sharing the student's or parent's information 
with a servicer; allowing an institution to send a debit card, prepaid 
card, or access device associated with the account to a student or 
parent only after the student or parent specifically requests it after 
providing consent to open an account; and additional disclosures 
relating to contracts between postsecondary institutions and financial 
institutions.
    Finally, the ``Initial Regulatory Flexibility Analysis'' considers 
the effect of the proposed regulations on small entities.

Need for Regulatory Action

    Executive Order 12866 emphasizes that ``Federal agencies should 
promulgate only such regulations as are required by law, are necessary 
to interpret the law, or are made necessary by compelling public need, 
such as material failures of private markets to protect or improve the 
health and safety of the public, the environment, or the well-being of 
the American people.'' In this case, there is indeed a compelling 
public need for regulation. The Department's main goal in promulgating 
the proposed regulations is to address major concerns regarding the 
rapidly changing financial aid marketplace wherein financial products 
are offered to students who receive title IV, HEA credit balances.
    Several changes in the student financial aid marketplace make the 
proposed regulations necessary. The number of institutions entering 
into these agreements continues to increase. For institutions, these 
agreements save money on administrative costs that they would otherwise 
incur in disbursing title IV credit balances to students. While a 
convenient option, we are concerned about some of the practices 
employed by financial institutions and third-party servicers in 
connection with these agreements. Some of these practices include 
requiring or giving preference to college card accounts over 
preexisting accounts, implying that the only way to receive Federal 
student aid is through college card accounts, allowing private student 
information to be made available to card providers without student 
consent, and imposing uncommon and confusing fees on aid recipients 
accessing their funds. These practices, along with others discussed in 
the preamble, reduce the amount of title IV aid available for 
educational expenses.
    These practices are particularly disturbing because of the number 
of students impacted. While data on credit card agreements and credit 
balances is scarce, a GAO report from July 2013 identified 852 
postsecondary institutions (11 percent of all schools that participate 
in the title IV programs) that had college card agreements in place. 
While 11 percent is a small percentage of total title IV participating 
schools, these schools had large enrollments, making up about 39 
percent of all students at schools participating in title IV 
programs.\182\
---------------------------------------------------------------------------

    \182\ GAO at 9.

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

[[Page 28515]]

[GRAPHIC] [TIFF OMITTED] TP18MY15.005

    The GAO report also found that college card agreements were most 
common at public postsecondary institutions, where 29 percent of public 
schools had card agreements compared to not-for-profit schools with 6.5 
percent and for-profit schools with 3.5 percent (see table [1]). 
Comprehensive data do not currently exist for the number of students 
who choose to enroll in a college card. However, the GAO report found 
that public two-year institutions represented almost half of all 
schools that used college cards to make financial aid payments.\184\ 
Public two-year institutions' students are most likely to receive a 
financial aid payment (credit balance) due to the low tuition and fees 
deducted from total aid received.
---------------------------------------------------------------------------

    \183\ Ibid. at 10.
    \184\ Ibid.

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

[[Page 28516]]

[GRAPHIC] [TIFF OMITTED] TP18MY15.006

    Given the number of students affected by college card agreements, 
according to the data available, the questionable practices of the 
providers, and the amount of Federal funds at stake, we believe 
amending the regulations governing title IV student aid disbursement is 
warranted. We welcome public comments on comprehensive data sources or 
data sources on financial institutions and third-party servicers that 
may be available for further analysis.
---------------------------------------------------------------------------

    \185\ Ibid. at 11.
---------------------------------------------------------------------------

Summary of Proposed Regulations

    The Department proposes to amend the cash management regulations 
under subpart K and other sections of the Student Assistance General 
Provisions regulations issued under the HEA. The proposed regulations 
are intended to ensure students have convenient access to their title 
IV, HEA program funds, do not incur unreasonable and uncommon financial 
account fees for accessing their title IV funds, and are not led to 
believe they must open a particular financial account to receive their 
Federal student aid. In addition, the proposed regulations update other 
provisions in the cash management regulations under subpart K and 
otherwise amend the Student Assistance General Provisions. We also 
propose to clarify how previously passed coursework is treated for 
title IV eligibility purposes and streamline the requirements for 
converting clock hours to credit hours. The table below briefly 
summarizes the major provisions of the proposed regulations.

----------------------------------------------------------------------------------------------------------------
                                                                            Description of provision
              Provision                      Reg section       -------------------------------------------------
                                                                           T1                       T2
----------------------------------------------------------------------------------------------------------------
Defines T1 and T2 arrangements         Sec.   668.164(e)......  Arrangement between an   Arrangement between an
 between institutions and financial    Sec.   668.164(f)......   institution and a        institution and a
 account providers.                                              third-party servicer     financial institution
                                                                 that performs one or     or an entity allied
                                                                 more of the functions    with a financial
                                                                 associated with          institution under
                                                                 processing direct        which financial
                                                                 payments of title IV     accounts are offered
                                                                 funds on behalf of the   and marketed directly
                                                                 institution and that     to students or their
                                                                 offers one or more       parents.
                                                                 financial accounts to
                                                                 students and parents.
Fee mitigation.......................  Sec.                     Prohibits point-of-sale  Not Applicable.
                                        668.164(e)(2)(iii)(B)(   and overdraft fees.
                                        2).
                                       Sec.
                                        668.164(e)(2)(iv).
----------------------------------------------------------------------------------------------------------------


[[Page 28517]]


 
                                                       Applicable to
                                                    Entities with T1 or
                                                      T2 Arrangements
------------------------------------------------------------------------
Reasonable access to funds....  Sec.               Requires reasonable
                                 668.164(c)(3).     access to surcharge-
                                Sec.                free ATMs or a
                                 668.164(e)(2)(ii   surcharge-free ATM
                                 i)(A).             network.
Student choice process........  Sec.               Requires institutions
                                 668.164(d)(4)(i).  to establish a
                                                    student choice
                                                    process that:
                                                       Prohibits
                                                       institution from
                                                       requiring
                                                       students or
                                                       parents to open a
                                                       specific
                                                       financial account
                                                       to receive credit
                                                       balances.
                                                       Provides
                                                       the student a
                                                       list of options
                                                       for receiving
                                                       credit balance
                                                       funds with each
                                                       option presented
                                                       in a neutral
                                                       manner.
                                                       Lists pre-
                                                       existing accounts
                                                       as the first,
                                                       most prominent,
                                                       and default
                                                       option.
                                                      
                                                       Establishes that
                                                       an aid recipient
                                                       has the right to
                                                       receive funds to
                                                       pre-existing
                                                       accounts.
                                                       Specifies
                                                       that electronic
                                                       payments made to
                                                       pre-existing
                                                       accounts are as
                                                       timely as and no
                                                       more onerous than
                                                       payments made to
                                                       another account
                                                       on the list of
                                                       options.
Consent to open account.......  Sec.               Student or parental
                                 668.164(e)(2)(i)   consent required to
                                 and (f)(4)(i).     open account and
                                                    before:
                                                       Providing
                                                       information about
                                                       student or parent
                                                       to financial
                                                       account provider.
                                                       Sending
                                                       access device to
                                                       student or
                                                       parent.
                                                      
                                                       Associating
                                                       student ID with a
                                                       financial
                                                       account.
Contract disclosure...........  Sec.               Public disclosure of
                                 668.164(e)(2)(V)   contracts governing
                                 (A).               arrangements and
                                Sec.                related cost
                                 668.164(f)(4)(ii   information.
                                 i)(A).
Contract interpretation.......  .................  Requires institutions
                                                    to establish and
                                                    evaluate T1 and T2
                                                    arrangements in
                                                    light of the best
                                                    interests of
                                                    students.
------------------------------------------------------------------------
                                                   Additional Provisions
------------------------------------------------------------------------
Secretary's reservation of      .................  Confirms that the
 right.                                             Secretary reserves
                                                    the right to
                                                    establish a method
                                                    for directly paying
                                                    credit balances to
                                                    student aid
                                                    recipients.
Retention of interest on        Sec.   668.163...  Increases from $250
 accounts holding title IV                          to $500 the amount
 funds.                                             of interest accrued
                                                    in accounts holding
                                                    title IV funds non-
                                                    Federal entities are
                                                    allowed to retain
                                                    annually.
Retaking coursework...........  Sec.   668.2.....  Eliminates, for all
                                                    program levels, the
                                                    prohibition on
                                                    counting towards
                                                    enrollment repeated
                                                    courses taken in the
                                                    same term in which
                                                    the student repeats
                                                    a failed course. The
                                                    current prohibition
                                                    against counting
                                                    more than one
                                                    repetition of a
                                                    previously passed
                                                    course would remain.
Clock-to-credit-hour            Sec.   668.8(k)..  Eliminates Sec.
 conversion.                                        668.8(k)(2) and
                                                    (k)(3) and makes a
                                                    conforming change in
                                                    Sec.   668.8(l), to
                                                    streamline the
                                                    requirements
                                                    governing clock-to-
                                                    credit-hour
                                                    conversions,
                                                    mitigate confusion
                                                    about whether a
                                                    program is a clock-
                                                    or credit-hour
                                                    program for title
                                                    IV, HEA program
                                                    purposes, and remove
                                                    the provisions under
                                                    which a State or
                                                    Federal approval or
                                                    licensure action
                                                    could cause the
                                                    program to be
                                                    measured in clock
                                                    hours.
------------------------------------------------------------------------

Discussion of Costs, Benefits, and Transfers

    We expect the effects of the proposed regulations would include 
improved information to facilitate consumer choice of financial 
accounts for receiving title IV credit balance funds, reasonable access 
to title IV funds without fees, a transfer of some types of fee income 
among students, institutions, and financial institutions, updated cash 
management rules to reflect current practices, streamlined rules for 
clock-to-credit-hour conversion, and the ability of students to receive 
title IV funds for repeat coursework in certain term programs. 
Students, institutions, and third-party servicers and the financial 
institutions that have contractual relationships described as T1 and T2 
arrangements would be most affected by the proposed regulations.

Data and Methodology

    In an attempt to quantify some of the costs and to reduce the 
burden associated with the proposed regulations, the Department 
analyzed its own data to estimate the prevalence of credit balances. 
While there may be instances where financial institutions have an 
agreement with a postsecondary institution to offer college card 
accounts to students who do not receive credit balances, the proposed 
regulations focus on accounts offered under T1 or T2 arrangements where 
students have a credit balance.
    While comprehensive data on the number of students who receive 
credit balances on a college card do not currently exist, we attempted 
to calculate the incidence and distribution of credit balance 
recipients. We analyzed the data maintained by the Department to 
estimate the number of students who would potentially be affected by 
the proposed regulations and to evaluate whether, in order to reduce 
burden, we could establish a de minimis threshold below which an 
institution would not be subject to the T2 requirements by analyzing 
the percentage of students with a credit balance at various 
institutions.
    The numbers of students who received title IV aid in the 2013-2014 
school year (from the National Student Loan Data System (NSLDS) of the 
Department's Office of Federal Student Aid (FSA)) were matched by 
institution to data from the Integrated Postsecondary Education Data 
System (IPEDS) for tuition, fees, and room and board. The credit 
balance calculation established an institutional cost that included an 
estimated average tuition, fees, and room and board amount (which took 
into account the percentage of students who lived in-district, in-
state, and out of state for tuition and fees expense, and the 
percentage of students who lived on-campus for room and board charges). 
Aid recipients were grouped by the amount of aid received (rounded into 
$500 ranges). For each institution, the students in the aid ranges 
above the estimated institutional cost were considered to have a credit 
balance. We then used the number of

[[Page 28518]]

those students to obtain a percentage of students who received a credit 
balance at each institution. For example, if the institutional cost was 
determined to be $12,456 and 50 of 150 title IV aid recipients were in 
the buckets from $12,500 and above, approximately 33 percent of aid 
recipients at that institution were considered to have a credit 
balance.
    We looked only at title IV participating institutions and aid 
recipients. From the data obtained, 3,400 institutions had both tuition 
estimates and aid recipient information. Unsurprisingly, there is an 
inverse relationship between an institution's tuition and fees and the 
percentage of students receiving a title IV credit balance. Our 
findings were consistent with findings from GAO and USPIRG. Based on 
our data, we estimated that 2,816,104 students at these 3,400 
institutions were receiving a credit balance. The Department's data 
showed 70 percent of total students receiving a credit balance were at 
public two-year institutions (1,972,035 students). While we estimated 
that that there was a significant number of students who received a 
credit balance at all of the four-year institutions, the students at 
four-year institutions combined (819,062) still did not equal half the 
total number of students who received a credit balance at public two-
year institutions (Table [2]). The number of students who received a 
credit balance was lowest at the less-than two-year institutions, which 
represented approximately 1.8 percent of institutions and under 1 
percent of students who received a credit balance from the 3,400 
institutions with both tuition and fee and financial aid data.

   Table 2--Number of Institutions and Students With a Credit Balance
------------------------------------------------------------------------
                                        Number of       Students with a
              Sector                   institutions      credit balance
------------------------------------------------------------------------
Public, 2-year....................                912          1,972,035
Public, 4-year or above...........                625            540,461
Private for-profit, 4-year or                     195            181,530
 above............................
Private not-for-profit, 4-year or               1,297             97,071
 above............................
Private for-profit, 2-year........                212             19,436
Private not-for-profit, 2-year....                 97              3,699
Public, less-than 2-year..........                 20                877
Private for-profit, less-than 2-                   32                863
 year.............................
Private not-for-profit, less-than                  10                132
 2-year...........................
                                   -------------------------------------
    Total.........................              3,400          2,816,104
------------------------------------------------------------------------

    As several provisions of the proposed regulations apply to 
institutions with T1 or T2 arrangements, utilizing publically available 
sources and working with CFPB, we identified a listing of institutions 
that were known to have card agreements with financial institutions and 
applied the same methodology described above to this subset of 
institutions.\186\ Of these known 914 institutions with card 
agreements, 672 institutions had both tuition and fees and aid 
recipient data in the Department's dataset. A total of 1,322,615 
students at the 672 institutions from this dataset were estimated to 
have a credit balance. The results from this subset were similar to the 
larger dataset. The public two-year institutions had the largest 
numbers of students with a credit balance, and the four-year 
institutions also had significant numbers (See Table [3]). The less-
than two-year institutions had inconclusive data. Again, this subset 
provided no additional information on a clear de minimis amount.
---------------------------------------------------------------------------

    \186\ Based on information available at financial institution 
Web sites including:
    http://www.higheronecard.com/landing/start.jsp
    https://www.pnc.com/en/personal-banking/banking/student-banking.html
    https://www.usbank.com/student-banking/campus-partners/index.html
    http://na.enroll.citiprepaid.com/login/logindisplay.do
    http://www.siue.edu/bursar/CitiFeeSched.shtml
    http://www.broward.edu/financialaid/Pages/Refund-Information.aspx
    http://www.citibank.com/transactionservices/home/public_sector/higher_edu/docs/maricopa_case_study.pdf
    http://fsucard.fsu.edu/suntrust-banking
    http://www.southwestgatech.edu/Content/Default/6/1700/0/financial-aid/swgtc-preloaded-financial-aid-debit-card.html
    http://www.tcfbank.com/account_campus-banking_disclosure.aspx.

  Table 3--Students With a Credit Balance at Institutions Known To Have
                             Card Agreements
------------------------------------------------------------------------
                                        Number of       Students with a
              Sector                   institutions      credit balance
------------------------------------------------------------------------
Public, 2-year....................                304            996,107
Public, 4-year or above...........                200            280,467
Private for-profit, 4-year or                      38             29,593
 above............................
Private not-for-profit, 4-year or                 113             10,001
 above............................
Private for-profit, 2-year........                 17              6,447
Private not-for-profit, 2-year....                N/A                N/A
Public, less-than 2-year..........                N/A                N/A
Private for-profit, less-than 2-                  N/A                N/A
 year.............................
Private not-for-profit, less-than                 N/A                N/A
 2-year...........................
                                   -------------------------------------
    Total.........................                672          1,322,615
------------------------------------------------------------------------


[[Page 28519]]

    In a final attempt to analyze the data, the Department took the 
subset and identified only those institutions that had a T2 
arrangement. This narrowed down the data to 191,242 students at 160 
institutions. The identified institutional data was further analyzed by 
sector with data available for public two-year, public four-year or 
above, and private not-for-profit, four-year or above institutions. The 
data was similar to the larger datasets (see Table [4]) and produced 
inconclusive results on a threshold to reduce burden.

Table 4--Students With a Credit Balance at Institutions Known To Have T2
                              Arrangements
------------------------------------------------------------------------
                                        Number of       Students with a
              Sector                   institutions      credit balance
------------------------------------------------------------------------
Public, 2-year....................                 36            135,108
Public, 4-year or above...........                 70             56,066
Private not-for-profit, 4-year or                  54                 68
 above............................
                                   -------------------------------------
    Total.........................                160            191,242
------------------------------------------------------------------------

    As described in the Data and Methodology section, we analyzed the 
available data to determine if we could identify a clear percentage 
threshold or minimum number of students who had a credit balance before 
the proposed regulations relating to T2 arrangements would apply. We 
believed that applying a threshold amount would reduce the burden on 
institutions where small percentages of students received a credit 
balance. However, we could not conclusively identify a clear cut-off 
amount as the data was evenly distributed in each of the datasets and 
subsets we analyzed. We request comment on whether we should establish 
a de minimis amount and, if so, what that amount should be, supporting 
data, and how this amount should be established.
    We also reviewed reports related to campus card use for information 
on affected students and their account usage patterns. The GAO, USPIRG, 
and Consumers Union, among others, have analyzed the issue of student 
accounts and the use of college cards. Results from those reports that 
were used in the Department's calculations are noted in the discussion 
of specific provisions throughout this section.

Fee-Related Provisions Applicable to Institutions With T1 Arrangements

    Institutions with T1 arrangements are required to mitigate fees 
incurred by student aid recipients by prohibiting PoS and overdraft 
fees charged to students and parents. Additionally, these institutions 
must ensure that students have surcharge-free access to a national or 
regional ATM network that has ATMs on or near each campus of the 
institution. Little information is currently available on the total 
amount of college card fees paid by students. Most financial account 
providers are unwilling or unable to provide information on fees to the 
Department. The GAO report reviewed fee schedules from eight financial 
institutions and found that while college cards do not have monthly 
maintenance fees, fees for out-of-network ATM use, wire transfers, and 
overdraft fees were similar to the financial products marketed to non-
students. Credit unions' fees were typically lower than those charged 
by college cards (see Table [5]). However, college card fees were lower 
than alternative financial products, such as check-cashing 
services.\187\
---------------------------------------------------------------------------

    \187\ Ibid. at 18.

                                   Table 5--Account Fees by Provider Type 188
----------------------------------------------------------------------------------------------------------------
                                                                Large banks, general checking
                    Fee                        College cards               accounts              Credit unions
----------------------------------------------------------------------------------------------------------------
Monthly Maintenance........................                 $0  standard account: $6-$12.....                 $0
                                                                student account: $0-$5.......
Out-of-network ATM Transaction.............              $2-$3  $2-$2.50.....................                  1
PIN........................................           $0-$0.50  $0...........................                  0
Overdraft..................................            $29-$36  $34-$36......................                 25
Outgoing Wire Transfer.....................            $25-$30  $24-$30......................                 15
----------------------------------------------------------------------------------------------------------------

    While we do not know the total amount of college card fees paid by 
students annually, we do know the amounts are substantial. A review of 
the annual SEC filings by one market participant, Higher One, indicates 
that account revenue from a variety of fees totaled $135.8 million in 
FY 2013, which represented 64.3 percent of total revenues for FY 
2013.\189\ Not all of those fees would be subject to the provisions of 
the proposed regulations, but the amount of student account revenue 
across the industry affected by the proposed changes would be 
significant.
---------------------------------------------------------------------------

    \188\ Ibid. at 19.
    \189\ Higher One Holdings, Inc. ``SEC Form 10-K.'' [Pages 41-42] 
(2014), available at www.sec.gov/Archives/edgar/data/1486800/000148680014000018/one10k.htm.
---------------------------------------------------------------------------

    In addition to the uncertainty regarding the total amount of 
college card fees paid by students, consumer behavior is unpredictable, 
and the responses of students and parents to the proposed disclosures 
about account options and costs will significantly contribute to the 
effect of the proposed regulations. While it is assumed that consumers 
with appropriate information will make rational decisions, such as 
avoiding fees imposed on withdrawals from out-of-network ATMs or debit 
transactions that require a PIN rather than a signature, some students 
may not make the optimal choices in managing their accounts. We do not 
have data on the distribution of students in accounts with specific fee 
arrangements, student usage patterns, or the responsiveness of students 
to the information that would be provided under the proposed 
regulations, and therefore it is difficult to estimate the exact 
transfers that would occur if certain fees on student accounts were 
prohibited. However, there is some third-party analysis of account 
usage that can be used to establish a range of possible effects of the 
proposed regulations. In its August

[[Page 28520]]

2014 report, Consumers Union developed minimal, moderate, and heavy 
usage profiles and determined that the accounts it analyzed would cost 
minimal users from $0 to $59.40, moderate users from $10.20 to $95.00, 
and heavy users from $59.40 to $520.00 on an annual basis.\190\ This 
range of outcomes demonstrates how the distribution of students in 
accounts and the student response to account information disclosed 
under the proposed regulations would affect the fee revenue transfers 
under the proposed regulations.
---------------------------------------------------------------------------

    \190\ Consumers Union at 16.
---------------------------------------------------------------------------

    An additional analysis by U.S. PIRG included data on overdraft 
behavior by age range with adults in the 18-25 age range having the 
highest incidence of paying overdraft fees with 53.6% paying zero, 21.5 
percent paying 1 to 4, 10.3 percent paying 5-9, 7.9 percent paying 10 
to 19, and 6.8 percent paying 20 or more overdraft fees.\191\ While not 
all students will fall within this age range, given the high percentage 
of adults in this age range that pays at least one overdraft fee and 
the amount of overdraft fees ranging from $25 to $38 when applied, the 
revenue affected by the overdraft fee prohibition is significant. 
Further analysis recently released by the Center for Responsible 
Lending analyzed similar data on overdrafts for adults in three 
categories and found average annual costs in overdraft fees of $67 for 
the 15 percent of young adults with two overdrafts per year, $264 for 
the 13 percent of adults with seven overdrafts per year, and $710 for 
the 11 percent of adults that overdraw about 19 times per year.\192\
---------------------------------------------------------------------------

    \191\ Ibid.
    \192\ Center for Responsible Lending, ``Overdraft U.: Student 
Bank Accounts Often Loaded with High Overdraft Fees'', March 30, 
2015.
---------------------------------------------------------------------------

    Another element that complicates the analysis of the effects of the 
proposed regulations is the response of financial institutions and 
institutions. The proposed fee limitations relating to T1 arrangements 
would have cost implications for affected servicers. One purpose of the 
proposed regulations is to allow students to access financial aid funds 
without burden from fees or other costs; however we acknowledge that 
many third-party servicers in T1 arrangements could restructure their 
accounts to earn some of those funds through fees that would not be 
affected by the proposed regulations. Over time, as contracts are 
renewed or entered into, financial institutions could also increase the 
revenue they receive from institutions, but the split between the 
revenue that can be recaptured and that which might be lost to 
financial institutions is not estimated in this analysis.

Disclosure Provisions and Student Choice

    As noted in the Summary of Proposed Regulations section, under the 
proposed regulations, institutions with T1 and T2 arrangements would be 
subject to several provisions designed to increase the disclosure of 
information related to student accounts and emphasize the availability 
of options for students to receive credit balances. We believe this 
access to account disclosures and other critical information would 
allow students and parents to make informed decisions regarding the 
handling and distribution of their title IV funds. The fee and contract 
disclosures would help students and parents determine whether the 
financial products marketed by financial institutions with 
relationships to their school are the best option for them. These 
disclosures would also help prevent students from being misled into 
believing that they must use those financial products.
    Furthermore, the proposed regulations would require institutions to 
disclose the prices of books and other materials that they include as 
part of tuition and fees. We believe this will encourage schools to 
make one of two student-friendly changes: For schools that cannot 
justify including the price of books and supplies in tuition charges 
because it is not in students' best financial interest, students and 
parents will be able to compare prices to determine if there are other, 
more economically viable options available and buy materials available 
in the marketplace. Alternatively, students benefit from the buying 
power of the school in cases where the school can source the materials 
for lower-than-market costs.
    The proposed regulations would also help protect both students and 
parents from deceptive marketing practices aimed at encouraging them to 
do business with a particular financial institution without presenting 
options. When students are not presented with clear choices or 
information, they may be pushed into using financial accounts with 
higher fees or less access than other options available to them. By 
requiring clear and neutral disclosures to students and parents, the 
student choice provisions would aid students and parents in identifying 
accounts with lower fees. Students who select accounts with lower fees 
would save money and be able to use all or more of their title IV aid 
for expenses critical to their educational needs.

Reasonable Access to Funds

    As noted in the discussion of fee provisions related to T1 
arrangements, under the proposed regulations, a third-party servicer 
with a T1 arrangement would have additional obligations with respect to 
the requirement that it provide students with convenient access to 
surcharge free regional or national ATM network. As under the current 
regulations, financial institutions must provide students convenient 
access to in-network ATMs. The proposed regulations would clarify that 
``convenient access'' means ATMs are sufficient in number at each of 
the institution's locations such that funds are reasonably available 
from them. The provisions specifying what constitutes ``convenient 
access'' are designed for the benefit of students and could have cost 
implications for some third-party servicers and financial institutions. 
These servicers/financial institutions could have to deploy new ATMs or 
pay to be associated with a surcharge-free ATM network to meet these 
requirements. Students who open accounts under a T1 or T2 arrangement 
would benefit from having more surcharge-free ATMs from which to access 
their title IV credit balances.

T2 Arrangements

    The direct marketing methods employed by financial institutions, 
third-party servicers, and postsecondary institutions have proven to be 
fairly effective. As mentioned earlier in the Need for Regulatory 
Action section, 10 million students (Chart 1) are at title IV 
participating schools where card agreements are prevalent. While some 
information is available about these agreements, it is insufficient to 
support a comprehensive analysis on the costs of the proposed 
regulations. We do not have data on the total number of institutions 
with card agreements with financial institutions or the details of 
those agreements. There is also a lack of data on the total number of 
students who receive credit balances and in what form those students 
receive that aid.
    Beyond the data limitations, forecasting the future behavior of 
students under the proposed regulations also presents another challenge 
in estimating costs. Students have a variety of choices on how to 
receive their aid. Based on data from the National Postsecondary 
Student Aid Study (NPSAS) conducted by the National Center for 
Education Statistics, we know that a majority of students receive a 
refund by depositing a refund directly to a bank account (37.2 percent) 
or by cashing or depositing a refund check at

[[Page 28521]]

a bank themselves (38.5 percent). The remaining 24.3 percent of 
students receive refunds by cashing the check somewhere other than a 
bank, receive refunds on a prepaid debit card, receive a refund through 
student ID cards, or do something else not listed.\193\ While direct 
marketing affects the choices a student might make, we lack data on 
predicting whether students would move away from those marketed 
accounts if all options were clearly presented to them. Consequently, 
quantifying the costs of the proposed regulations is difficult.
---------------------------------------------------------------------------

    \193\ U.S. Department of Education, National Center for 
Education Statistics, 2011-12 National Postsecondary Student Aid 
Study (NPSAS:12).
---------------------------------------------------------------------------

Cash Management Provisions

    Interest earned on Federal advance payments deposited in interest-
bearing accounts must be remitted annually. The proposed regulations 
would increase the amount allowed to be retained by non-Federal 
entities for administrative expenses from $250 to $500. By doing so, 
some institutions would see a minor benefit from being able to keep the 
first $500 in interest accrued on accounts holding title IV funds. 
Other updates to subpart K reflect technological changes and current 
practices in managing title IV funds.

Retaking Coursework

    The proposed regulations would eliminate provisions that prevent 
institutions from counting previously passed courses towards enrollment 
where the repetition is due to the student failing other coursework. 
This change would benefit a limited number of undergraduate, graduate, 
and professional students. Students in these circumstances would no 
longer be denied title IV aid and therefore would be less likely to 
drop out or need less desirable private education loans to continue 
their coursework. Institutions and students would benefit as students 
would be able to continue paying for educational costs with title IV 
aid.

Clock-to-Credit-Hour Conversion

    By streamlining the clock-to-credit-hour conversion provisions, 
institutions would benefit from the simplification of regulations 
affecting institutional determinations relating to title IV 
eligibility.

Net Budget Impacts

    We estimate that the proposed regulations would not have a 
significant net budget impact. Consistent with the requirements of the 
Credit Reform Act of 1990, budget cost estimates for the student loan 
programs reflect the estimated net present value of all future non-
administrative Federal costs associated with a cohort of loans. A 
cohort reflects all loans originated in a given fiscal year.
    The proposed regulations would require institutions to disclose 
agreements with financial services providers through which students may 
opt to receive title IV credit balances, and restrict the fees students 
could be charged for accounts offered pursuant to T1 arrangements. 
Additionally, the proposed regulations would make technical changes to 
subpart K cash management rules to reflect technological advances and 
improved disbursement practices. The proposed regulations also would 
simplify the clock-to-credit-hour conversion for title IV purposes by 
eliminating the reference to any State requirement or role in approving 
or licensing a program. Finally, the proposed regulations would 
eliminate the provision that prevents institutions from counting 
previously passed courses towards enrollment where the repetition is 
due to the student failing other coursework.
    Although the proposed regulations would affect the arrangements 
among institutions, students, and financial service providers, they are 
not expected to affect the volume of title IV aid disbursed or the 
repayment patterns of students, and therefore, no significant budget 
impact on title IV programs is estimated.
    We welcome comments on the estimates provided and will consider 
them in developing the RIA for the final regulations.

Accounting Statement

    As required by OMB Circular A-4 (available at www.whitehouse.gov/sites/default/files/omb/assets/omb/circulars/a004/a-4.pdf), in Table 
[6], we have prepared an accounting statement showing the 
classification of the expenditures associated with the provisions of 
these proposed regulations.

      Table [6]--Accounting Statement: Classification of Estimated
                              Expenditures
                              [In millions]
------------------------------------------------------------------------
                Category                             Benefits
------------------------------------------------------------------------
Greater disclosure of arrangements               Not Quantified.
 between institutions and financial
 service providers and clearer
 disclosure of fees and conditions of
 student accounts.
------------------------------------------------------------------------


 
                                                     Costs
              Category               -----------------------------------
                                      7% discount rate  3% discount rate
------------------------------------------------------------------------
Costs of compliance with paperwork               $21.0            $21.2.
 requirements.......................
------------------------------------------------------------------------
              Category                             Transfers
------------------------------------------------------------------------

Alternatives Considered

    As part of the development of the proposed regulations, the 
Department reviewed and considered various internal proposals, as well 
as proposals from non-Federal negotiators. In the following paragraphs 
we summarize the major proposals that we considered but ultimately 
declined to incorporate in the proposed regulations.
    The Department initially considered prohibiting institutions from 
including books and supplies as part of tuition and fees. However, some 
of the non-Federal negotiators argued that institutions, for 
pedagogical or safety reasons, are increasingly developing course-
specific or course-embedded materials that students must access and 
purchase from the school and that those materials should be included in 
tuition

[[Page 28522]]

and fees. After a thorough discussion, the Department decided against a 
total prohibition on including books and supplies as part of tuition 
and fees, and agreed to a compromise position that would still benefit 
students, allow institutional flexibility when materials are integral 
to the course, and hold institutions accountable through cost 
transparency.
    The Department initially proposed to the negotiated rulemaking 
committee regulations that would have prevented institutions from 
sharing with a servicer any information about a student or parent until 
the student or parent affirmatively consented to open an account. 
Because the proposals considered during negotiated rulemaking did not 
separate T1 and T2 arrangements, the ban on information sharing would 
have affected both third-party servicers and financial institutions.
    After multiple negotiation sessions and working with non-Federal 
negotiators representing third-party servicers, we elected to permit 
the sharing of only limited information--name, address, and email 
address--prior to receiving student or parent consent to open an 
account. We have also decided to apply the limitation to both T1 and T2 
arrangements, under definitions more focused than those proposed to the 
negotiated rulemaking committee.
    To clarify our position, we have also altered our phrasing to 
require that a student or parent must provide consent to actually open 
an account, rather than simply select an option for receiving direct 
payments of financial aid before more than this basic contact 
information with a third-party servicer or financial institution.
    After the first negotiated rulemaking session, we proposed 
provisions that would allow an institution to send a debit card, 
prepaid card, or access device associated with the account to a student 
or parent only after the student or parent specifically requests it 
after providing consent to open an account. We modified this initial 
approach by removing the requirement for the student or parent to 
specifically request the card while retaining a requirement that the 
student or parent consent to opening the account before the card is 
sent. While we understand that the requirement to obtain consent to 
open a financial account before sending an access device to a student 
or parent may slow the speed with which a student or parent could 
access his or her credit balance, we believe that requiring student or 
parent consent to an account first helps to dispel the implication that 
the access device and its associated financial account are required by 
the institution. We also believe it reinforces the notion that use of 
the access device and its associated account is, in fact, a choice.
    We also considered several proposals regarding the disclosure of 
the contracts between institutions of higher education and financial 
institutions, along with contract summaries, as described in other 
parts of the preamble. However, to reduce burden on institutions, we 
propose that an institution must only provide to the Secretary, with 
respect to a contract for a T1 or T2 arrangement, the following 
information: The total consideration for the most recently completed 
award year, monetary and non-monetary, paid or received by the parties 
under the terms of the contract; the number of students and parents who 
had financial accounts under the contract at any time during the most 
recently completed award year; and the mean and median of the actual 
costs incurred by those account holders.

Initial Regulatory Flexibility Act Analysis

    The proposed regulations will affect institutions that participate 
in the title IV, HEA programs, financial institutions, and individual 
borrowers. The U.S. Small Business Administration (SBA) Size Standards 
define ``for-profit institutions'' as ``small businesses'' if they are 
independently owned and operated and not dominant in their field of 
operation with total annual revenue below $7,000,000. The SBA Size 
Standards define ``not-for-profit institutions'' as ``small 
organizations'' if they are independently owned and operated and not 
dominant in their field of operation, or as ``small entities'' if they 
are institutions controlled by governmental entities with populations 
below 50,000. The revenues involved in the sector that would be 
affected by the proposed regulations, and the concentration of 
ownership of institutions by private owners or public systems, means 
that the number of title IV, HEA eligible institutions that are small 
entities would be limited but for the fact that the not-for-profit 
entities fit within the definition of a ``small organization'' 
regardless of revenue. Given the definitions above, several of the 
entities that would be subject to the proposed regulations are small, 
leading to the preparation of the following Initial Regulatory 
Flexibility Analysis.

Description of the Reasons That Action by the Agency Is Being 
Considered

    Over the past several years, a number of changes have occurred in 
the student financial products marketplace and in budgets of 
postsecondary institutions that have led to a proliferation of 
agreements between postsecondary institutions and ``college card'' 
providers. These cards, usually in the form of debit or prepaid cards 
and sometimes cobranded with the institution's logo or combined with 
student IDs, are marketed to students as a way to receive their title 
IV credit balances via more convenient electronic means. However, a 
number of government and consumer group reports have documented 
troubling practices employed by some of the providers of these college 
cards. Legal actions against the sector's largest provider further 
substantiate these reports' findings.
    The Secretary proposes to amend the cash management regulations 
under subpart K and other sections of the Student Assistance General 
Provisions regulations issued under the HEA, to address the findings in 
multiple government and consumer group reports that students are not 
able to conveniently access their title IV, HEA program funds without 
onerous paper submissions and unnecessary waiting periods, unreasonable 
and uncommon financial account fees, or receiving misleading 
information indicating that a particular financial account is required 
to receive student aid. The proposed regulations also make a number of 
changes to update subpart K consistent with contemporary disbursement 
practices. Finally, the proposed regulations update two additional, 
unrelated provisions: Revising the way previously passed coursework is 
treated for title IV eligibility purposes so students remain in 
programs and do not have to find alternatives to title IV funding; and 
streamlining the requirements for converting clock hours to credit 
hours.

Succinct Statement of the Objectives of, and Legal Basis for, the 
Regulations

    Given the number of students affected by these agreements, the 
amount of taxpayer-funded title IV aid at stake, and the troubling 
practices and expanding breadth of the college card market, we believe 
regulatory action governing the manner in which title IV student aid is 
disbursed is warranted.
    In addition, it has been 20 years since subpart K was 
comprehensively updated, and in that time a number of technological 
improvements and changes in authorized title IV programs have occurred. 
We have therefore proposed a number of more minor changes throughout 
subpart K.

[[Page 28523]]

Description of and, Where Feasible, an Estimate of the Number of Small 
Entities to Which the Proposed Regulations Would Apply

    The proposed regulations would affect institutions, financial 
services providers, and students. Students are not considered small 
entities for the purpose of this analysis and the Department does not 
expect the financial institutions to meet the applicable definition of 
a small entity. However, a significant portion of institutions of 
higher education are considered to meet the applicable definition of a 
small entity, and therefore, this analysis focuses on those 
institutions. As discussed above, private non-profit institutions that 
do not dominate in their field are defined as small entities and some 
other institutions that participate in title IV, HEA programs do not 
have revenues above $7 million and are also categorized as small 
entities. Table [7] summarizes the distribution of small entities 
affected by the proposed regulation by sector.

                               Table [7]--Distribution of Small Entities by Sector
----------------------------------------------------------------------------------------------------------------
                                                            Small entity          Total                %
----------------------------------------------------------------------------------------------------------------
Public 4-year..........................................                  0                749                  0
Private NFP 4-year.....................................              1,648              1,648                100
Private For-Profit 4-year..............................                278                827                 34
Public 2-year..........................................                  0              1,074                  0
Private NFP 2-year.....................................                162                162                100
Private For-Profit 2-year..............................                667              1,035                 64
Public less than 2-year................................                  0                262                  0
Private NFP less than 2-year...........................                 87                 87                100
Private For-Profit less than 2-year....................              1,411              1,695                 83
                                                        --------------------------------------------------------
    Total..............................................              4,253              7,539                 56
----------------------------------------------------------------------------------------------------------------

    The Secretary invites comments from small entities 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.

Description of the Projected Reporting, Recordkeeping, and Other 
Compliance Requirements of the Regulations, Including an Estimate of 
the Classes of Small Entities That Will Be Subject to the Requirement 
and the Type of Professional Skills Necessary for Preparation of the 
Report or Record

    The various provisions in the proposed regulations require 
disclosures by institutions as discussed in the Paperwork Reduction Act 
section of this preamble. Table [8] summarizes the estimated burden on 
small entities from the paperwork requirements associated with the 
proposed regulations.

                         Table [8]--Summary of Paperwork Requirements for Small Entities
----------------------------------------------------------------------------------------------------------------
                                                                    OMB control
                    Provision                       Reg section         No.            Hours           Costs
----------------------------------------------------------------------------------------------------------------
Require institutions to establish an account       668.164(d)(4)       1845-0106           3,920         143,276
 selection process..............................
Compliance with T1 requirements: Provide the            668.164e       1845-0106           6,710         245,251
 terms and conditions of the financial accounts,
 provide convenient access to ATMs, cannot be
 converted to a credit instrument, must disclose
 the contract, must disclose the mean and median
 costs incurred over the prior year as well as
 the number of students and parents with these
 financial accounts.............................
Compliance with T2 requirements: Must obtain          668.164(f)       1845-0106           3,330         121,712
 consent to open an account, provide terms and
 conditions, disclose the contract, the number
 of students and parents participating, the mean
 and median actual costs for the prior year.....
                                                                                 -------------------------------
    Total.......................................                                          13,960         510,238
----------------------------------------------------------------------------------------------------------------

Identification, to the Extent Practicable, of All Relevant Federal 
Regulations That May Duplicate, Overlap, or Conflict With the Proposed 
Regulations

    The proposed regulations are unlikely to conflict with or duplicate 
existing Federal regulations. We consulted Federal banking regulators 
at FDIC, OCC and the Bureau of the Fiscal Service at the Treasury 
Department, and CFPB, for help in understanding Federal banking 
regulations and the Federal bank regulatory framework. We believe we 
have crafted these regulations in a way that will complement, rather 
than conflict with, existing banking regulations. The most significant 
risk of potential conflict is with respect to account disclosure 
requirements, described in more detail in the ``Disclosure of account 
information'' section of this preamble.

Alternatives Considered

    As described above, the Department participated in negotiated 
rulemaking when developing the proposed regulations, and considered a 
number of options for some of the provisions. No alternatives were 
aimed specifically at small entities.

Paperwork Reduction Act of 1995

    As part of its continuing effort to reduce paperwork and respondent

[[Page 28524]]

burden, the Department provides the general public and Federal agencies 
with an opportunity to comment on proposed and continuing collections 
of information in accordance with the Paperwork Reduction Act of 1995 
(PRA) (44 U.S.C. 3506(c)(2)(A)). This helps ensure that: The public 
understands the Department's collection instructions, respondents can 
provide the requested data in the desired format, reporting burden 
(time and financial resources) is minimized, collection instruments are 
clearly understood, and the Department can properly assess the impact 
of collection requirements on respondents. The table at the end of this 
section summarizes the estimated burden on small entities, primarily 
institutions and applicants, arising from the paperwork associated with 
the proposed regulations.
    Section 668.164 contains information collections requirements. 
Under the PRA, the Department has submitted a copy of this section, and 
an Information Collections Request (ICR) to OMB for its review.
    A Federal agency may not conduct or sponsor a collection of 
information unless OMB approves the collection under the PRA and the 
corresponding information collection instrument displays a currently 
valid OMB control number. Notwithstanding any other provision of law, 
no person is required to comply with, or is subject to penalty for 
failure to comply with, a collection of information if the collection 
instrument does not display a currently valid OMB control number.
    In the final regulations, we will display the control numbers 
assigned by OMB to any information collection requirements proposed in 
this NPRM and adopted in the final regulations.

Discussion

Section 668.164 Disbursing Funds

    Requirements: Student and parent choice.
    Under proposed Sec.  668.164(d)(4)(i), an institution that makes 
direct payments to a student or parent by EFT and that chooses to enter 
into an arrangement described in Sec.  668.164(e) or Sec.  668.164(f), 
must establish a selection process under which the student or parent 
chooses one of several options for receiving those payments. 
Alternatively, an institution that does not offer accounts under a Tier 
1 (T1) or Tier 2 (T2) arrangement is not required to establish a 
student choice process and instead, may make direct payments to an 
existing account designated by the student or parent, issue a check, or 
disburse cash to the student or parent.
    For institutions required to establish a student choice process 
under proposed Sec.  668.164(d)(4)(i), the proposed regulations would 
establish requirements that must be met in implementing the process.
    The institution must inform the student or parent in writing that 
he or she is not required to open or obtain a specific financial 
account or access device in order to receive title IV funds. The 
institution must ensure that the options listed are presented in a 
clear, fact-based, and neutral manner (except that a pre-existing 
account must be listed as the first, most prominent, and default 
option). The institution must ensure that initiating direct payments 
electronically to an existing account is as timely as, and no more 
onerous than initiating direct payments to an account offered pursuant 
to a T1 or T2 arrangement. The institution must allow the student or 
parent the option to change his or her account preference with 
reasonable written notice.
    In addition to these requirements for establishing a student choice 
process, the proposed regulations under Sec.  668.164(d)(4)(i)(B) 
contain the following provisions governing the description of account 
options under the student choice process.
    The institution must present, prominently and as the first and 
default option, the ability to receive funds in a student's or parent's 
pre-existing financial account or pre-existing access device. The 
institution must list and identify the major features and commonly 
assessed fees associated with all accounts offered pursuant to a T1 or 
T2 arrangement (using a format published by the Secretary in the 
Federal Register which would constitute compliance with this provision 
under the proposed regulations), as well as a Universal Resource 
Locator (URL) linked to the terms and conditions of these accounts. 
Finally, the institution must list issuing a check as an option for a 
student or parent to receive payments.
    Burden Calculation: The Department calculated the incidence and 
distribution of credit balance recipients. The numbers of students who 
received title IV aid in the 2013-2014 cohort (from FSA) were matched 
by institution to the IPEDS tuition, fees, and room and board data. The 
credit balance calculation established an institutional cost that 
included an estimated average tuition, fees, and room and board amount 
(which took into account the percentage of students who lived in-
district, in-state, and out of state for tuition and fees expense, and 
the percentage of students who lived on-campus for room and board 
charges). Aid recipients were grouped by the amount of aid received 
(rounded into $500 ranges). To determine the number of students at each 
institution who received a credit balance, we looked at the number of 
students who fell within the aid ranges above the estimated 
institutional cost.
    We looked only at title IV participating institutions and aid 
recipients. From the data obtained, 3,400 institutions (out of the 
total 7,539 participating in title IV, HEA programs) had both tuition 
estimates and aid recipient information. Unsurprisingly, there was an 
inverse relationship between an institution's tuition and fees and the 
percentage of students receiving a title IV credit balance. The 
Department's findings were consistent with findings from GAO and 
USPIRG. In an effort to thoroughly analyze all of the available data, 
we also applied the same methodology described above to a subset of 
institutions. Utilizing publically available sources and working with 
the CFPB the Department identified a listing of institutions that were 
known to have card agreements with financial institutions from CFPB. If 
commenters have other sources for the number of institutions with these 
financial agreements, we invite them to provide those sources for our 
examination. The Department's NSLDS data, when combined with the IPED's 
data and the CFPB data the list of institutions that were known to have 
agreements (NSLDS-IPEDS-CFPB) had tuition and fees and aid recipient 
data for 672 of the 914 institutions identified by CFPB. From the data 
for 672 institutions, we projected the number of students with a title 
IV credit balance at the 914 institutions proportionately. As a result, 
there were a total of 1,798,756 students at the 914 institutions from 
this dataset who received a credit balance.
    Of the 914 institutions with arrangements, the NSLDS-IPEDS-CFPB 
data show that 685 institutions would be public institutions. On 
average, we estimate the burden associated with developing and 
implementing the proposed student and parent choice options would 
increase by 20 hours per institution and therefore total burden of 
13,700 hours (685 institutions times 20 hours per institution) under 
OMB Control Number 1845-0106.
    Of the 914 institutions with financial arrangements, the NSLDS-
IPEDS-CFPB data show that 154 institutions would be private not-for-
profit institutions. On average, we estimate the burden associated with 
developing and implementing the student and parent choice options would 
increase by 20

[[Page 28525]]

hours per institution and therefore total burden of 3,080 hours (154 
institutions times 20 hours per institution) under OMB Control Number 
1845-0106.
    Of the 914 institutions with arrangements, the NSLDS-IPEDS-CFPB 
data show that 75 would be private for-profit institutions. On average, 
we estimate the burden associated with developing and implementing the 
student and parent choice options would increase by 20 hours per 
institution and therefore total burden of 1,500 hours (75 institutions 
times 20 hours per institution) under OMB Control Number 1845-0106.
    Overall, burden to institutions would increase by 18,280 hours (the 
sum of 13,700 hours, 3,080 hours, and 1,500 hours).
    The NSLDS-IPEDS-CFPB data indicates that 1,798,756 title IV 
recipients with credit balances for the 2013-14 award year would be 
impacted by this proposed regulation. We estimate that each of the 
affected title IV recipients would take, on average, 20 minutes (.33 
hours) to review the options presented by the institution or their 
third-party servicer and to make their selection.
    Of the total number of title IV recipients with a credit balance, 
the data show that 1,736,141 recipients were enrolled in public 
institutions. On average, each recipient would take 20 minutes (.33 
hours) to read the materials and make their selection, increasing 
burden by 572,927 hours (1,736,141 times .33 hours) under OMB Control 
Number 1845-0106.
    Of the total number of title IV recipients with a credit balance, 
the data show that 13,601 recipients were enrolled in private not-for-
profit institutions. On average each recipient would take 20 minutes 
(.33 hours) to read the materials and make their selection, increasing 
burden by 4,488 hours (13,601 recipients times .33 hours) under OMB 
Control Number 1845-0106.
    Of the total number of title IV recipients with a credit balance, 
the data show that 49,014 recipients were enrolled in private for-
profit institutions. On average each recipient would take 20 minutes 
(.33 hours) to read the materials and make their selection, increasing 
burden by 16,175 hours (49,014 recipients times .33 hours) under OMB 
Control Number 1845-0106.
    Overall, burden to title IV recipients would increase by 593,590 
hours (the sum of 572,927 hours, 4,488 hours, and 16,175 hours).
Requirements: T1 Arrangements
    Under the proposed regulations in Sec.  668.164(e), when an 
institution enters into a contract with a third-party servicer under 
which the servicer performs the functions of processing direct payments 
of title IV, HEA program funds on behalf of the institution to one or 
more financial accounts that are offered under the contract or by the 
third-party servicer, or by an entity contracting with or affiliated 
with the third party servicer to students and their parents, this would 
be considered a T1 arrangement between the institution and the third-
party servicer.
    Under a T1 arrangement the institution must comply with the 
following requirements:
    1. The institution must obtain the student's or parent's consent to 
open the financial account before the institution provides any 
information about the student or parent, except for name, address, and 
email address, to the third-party servicer, the financial institution 
at which the financial account's funds would be deposited, or the 
agents of either an access device, or and before any representation of 
an access device, is sent to the student or parent; and before a card 
or tool provided to the student or parent for institutional purposes, 
such as a student ID card, is associated with the financial account;
    2. The institution must inform the student or parent of the terms 
and conditions of the financial account, in a manner consistent with 
disclosure requirements specified by the Secretary in a notice 
published in the Federal Register following consultation with the CFPB, 
before the financial account is opened;
    3. The institution must ensure that the student or parent has 
convenient access to the financial account through surcharge-free 
national or regional ATM network that has ATMs located on or near each 
location of the institution, and that those ATMs are sufficient in 
number and housed and serviced such that the funds are reasonably 
available from them, including at the times the institution or its 
third-party servicer makes direct payments into them. The institution 
must also ensure that students and parents do not incur any cost for 
opening the financial account or initially receiving an access device, 
assessed by the institution, third-party servicer, or associated 
financial institution on behalf of the third-party servicer, when the 
student or parent conducts point-of-sale transactions; or for 
conducting any transaction on an ATM that belongs to the regional or 
national network;
    4. The institution must ensure that students and parents do not 
incur a charge initiated by the institution, third-party servicer, or 
associated financial institution on behalf of the third-party servicer 
for at least 30 days following the date that title IV, HEA program 
funds are deposited or transferred to the financial account;
    5. The institution must ensure that the financial account or access 
device is not marketed or portrayed as, or converted into a credit 
card; that the financial account or access device is not marketed or 
portrayed as, or converted into a credit instrument, that no credit may 
be extended or associated with the account, and that any transaction 
exceeding the balance on the card must be denied without charging the 
student or parent any fee for such denial;
    6. No later than 60 days after the most recently completed award 
year, the institution must provide to the Secretary and disclose 
conspicuously on the institution's Web site, the contract between the 
institution and financial institution in its entirety, except for any 
portions that, if disclosed, would compromise personal privacy, 
proprietary information technology, or the security of information 
technology or of physical facilities; the total consideration, monetary 
and non-monetary, paid or received by the parties under the terms of 
the contract, as well as the number of students and parents who had 
financial accounts under the contract at any time during the most 
recently completed award year, and the mean and median of the actual 
costs incurred by those account holders; and to annually provide a URL 
linking from the institution's Web site to the agreement and provide 
basic information about the agreement;
    7. The institution must ensure that the terms of the T1 financial 
accounts are not inconsistent with the best financial interests of the 
students and parents opening them. The Secretary considers this 
requirement to be met if the institution documents that it periodically 
conducts reasonable due diligence reviews to ascertain whether the fees 
imposed under the T1 arrangement are, considered as a whole, excessive, 
in light of prevailing market rates; and all contracts for the 
marketing or offering of T1 accounts to the institution's students or 
parents provide for termination of the arrangement at the discretion of 
the institution based on complaints received from students or parents 
or a determination by the institution that the fees assessed under the 
T1 account are excessive;

[[Page 28526]]

    8. The institution must take affirmative steps, by way of 
contractual arrangements with the third-party servicer as necessary, to 
ensure that these requirements are met with respect to all T1 financial 
accounts offered.
    Burden Calculation: Based upon our examination of the 2013-14 NSLDS 
and IPEDS data that was further refined by examining the CFPB listing 
of 914 institutions known to have arrangements that would be considered 
either T1 and T2 arrangements under the proposed regulations, the data 
indicate that there were 541 public institutions with a T1 arrangement. 
We expect that these institutions would have to modify their systems or 
procedures to ensure compliance with these proposed regulations 
including, but not limited to, establish a consent process; provide 
account terms and conditions disclosures; ensure compliance with the 
30-day prohibition for charges made to an account following the date 
that title IV, HEA program funds are deposited or transferred into the 
account; provide the proposed disclosures, contract disclosures, and 
use and cost data within 60 days after the end of the award year. In 
addition, it is likely that institutions would make other changes in 
order to conduct their proposed periodic due diligence and updating of 
third-party servicer contracts to allow for termination of the contract 
based upon student complaints or the institution's assessment that 
third-party servicer fees have become excessive. We estimate that the 
changes required by the proposed regulations would add an additional 55 
hours of burden per institution, increasing burden by 29,755 hours (541 
institutions times 55 hours per institution) under OMB Control Number 
1845-0106.
    Based upon our examination of the 2013-14 NSLDS and IPEDS data that 
was further refined by examining the CFPB listing of 914 institutions 
known to have arrangements that would be considered either T1 and T2 
arrangements under the proposed regulations, the data indicate that 
there were 80 private not-for-profit institutions with a T1 
arrangement. We expect that these institutions would have to modify 
their systems or procedures to ensure compliance with these proposed 
regulations. Specifically, we expect that modifications would be 
required including, but not limited to: The establishment of a consent 
process; provide account terms and conditions disclosures; ensure 
compliance with the 30-day prohibition on charges made to an account 
following the date that title IV, HEA program funds are deposited or 
transferred into the account; and provide the proposed disclosures, 
contract disclosures, and use and cost data within 60 days after the 
end of the award year. In addition, other modifications would likely be 
needed with regard to how the institutions plan to conduct their 
proposed periodic due diligence and updating of third-party servicer 
contracts to allow for termination of the contract based upon student 
complaints or the institution's assessment that third-party servicer 
fees have become excessive. We estimate that the changes required by 
the proposed regulations would add an additional 55 hours of burden per 
institution, increasing burden by 4,400 hours (80 institutions times 55 
hours per institution) under OMB Control Number 1845-0106.
    Based upon our examination of the 2013-14 NSLDS and IPEDS data that 
was further refined by examining the CFPB listing of 914 institutions 
known to have arrangements that would be considered either T1 and T2 
arrangements under the proposed regulations, the data indicate that 
there were 75 private for-profit institutions with a T1 arrangement. We 
expect that institutions would have to modify their systems or 
procedures to ensure compliance with these proposed regulations. 
Specifically, we expect that modifications would be required including, 
but not limited to: The establishment of a consent process; provide 
account terms and condition disclosures; ensure compliance with the 30-
day prohibition for charges made to an account following the date that 
title IV, HEA program funds are deposited or transferred into the 
account; and provide the proposed disclosures, contract disclosures, 
and use and cost data within 60 days after the end of the award year. 
In addition, it is likely that institutions would make other changes 
regarding how they will conduct their proposed periodic due diligence 
and updating of third-party contracts to allow for termination of the 
contract based upon student complaints or the institution's assessment 
that third-party fees have become excessive. We estimate that the 
changes required by the proposed regulations would add an additional 55 
hours of burden per institution, increasing burden by 4,125 hours (75 
institutions times 55 hours per institution) under OMB Control Number 
1845-0106.
    Overall, burden to title IV institutions would increase by 38,280 
(the sum of 29,755 hours, 4,400 hours, and 4,125 hours).
    The NSLDS-IPEDS-CFPB data showed that there were 1,538,667 title IV 
recipients at the with credit balances at institutions with a T1 
arrangement in the 2013-14 award year. Of that number of recipients, 
the data showed that 1,476,144 were enrolled at public institutions. We 
estimate that, on average, each recipient would take 15 minutes (.25 
hours) to read the about the major features and fees associated with 
the financial account, information about the monetary and non-monetary 
remuneration received by the institution for entering into the T1 
arrangement, along with the number of students and parents who had 
financial accounts under the T1 arrangement for the most recent 
completed year, the mean and median costs incurred by account holders, 
and whether to provide their consent to the institution. Therefore, the 
additional burden on title IV recipients would increase by 369,036 
hours (1,476,144 times .25 hours) under OMB Control Number 1845-0106.
    The data showed that 13,509 title IV recipients with credit 
balances were enrolled at private not-for-profit institutions. We 
estimate that, on average, each recipient would take 15 minutes (.25 
hours) to read the about the major features and fees associated with 
the financial account, information about the monetary and non-monetary 
remuneration received by the institution for entering into the T1 
arrangement, along with the number of students and parents who had 
financial accounts under the T1 arrangement for the most recent 
completed year, the mean and median costs incurred by account holders, 
and whether to provide their consent to the institution. Therefore, the 
additional burden on title IV recipients would increase by 3,377 hours 
(13,509 times .25 hours) under OMB Control Number 1845-0106.
    The data showed that 49,014 title IV recipients with credit 
balances were enrolled at private for-profit institutions. We estimate 
that, on average, each recipient would take 15 minutes (.25 hours) to 
read the about the major features and fees associated with the 
financial account, information about the monetary and non-monetary 
remuneration received by the institution for entering into the T1 
arrangement, along with the number of students and parents who had 
financial accounts under the T1 arrangement for the most recent 
completed year, the mean and median costs incurred by account holders, 
and whether to provide their consent to the institution. Therefore, the 
additional burden on title IV recipients would increase by 12,254 hours 
under OMB Control Number 1845-0106.
    Overall, burden to recipients would increase by 384,667 hours (the 
sum of

[[Page 28527]]

369,036 hours, 3,377 hours, and 12,254 hours).
Requirements: T2 Arrangements
    Under the proposed regulations in Sec.  668.164(f), when an 
institution enters into a contract with a financial institution under 
which financial accounts, into which title IV, HEA program funds will 
be transferred or deposited, are offered and marketed directly to 
students or their parents, the agreement would be considered a T2 
arrangement. The Secretary considers that title IV, HEA program funds 
would be transferred or deposited into financial accounts that are 
offered under a contract between an institution and a financial 
institution if students or parents that receive credit balance funds 
are subject to the direct marketing. The Secretary considers that a 
financial account is marketed directly if the institution communicates 
information directly to its students or their parents about the 
financial account and how it may be opened; the financial account or 
access device is co-branded with the institution's name, logo, mascot, 
or other affiliation; or a card or tool that is provided to the student 
or parent for institutional purposes, such as a student ID card, is 
linked with the financial account or access device.
    Under a T2 arrangement, the institution must comply with the 
following requirements:
    1. The institution must obtain the student's or parent's consent to 
open the financial account before the institution provides, or permits 
a third-party servicer to provide, any information about the student or 
parent, except for name, address, and email address, to the financial 
institution or its agents; and before an institution provides any 
access device, or any representation of an access device, is sent to 
the student or parent; and before a card or tool provided to the 
student or parent for institutional purposes, such as a student ID 
card, is linked to the financial account;
    2. The institution must inform the student or parent of the terms 
and conditions of the financial account, in a manner consistent with 
the disclosure requirements specified by the Secretary in a notice 
published in the Federal Register following consultation with the CFPB, 
before the financial account is opened if the institution includes the 
financial account in its student choice process under proposed 
paragraph (d);
    3. No later than 60 days after the most recently completed award 
year, the institution must provide to the Secretary and disclose 
conspicuously on the institution's Web site the contract between the 
institution and financial institution in its entirety, except for any 
portions that, if disclosed, would compromise personal privacy, 
proprietary information technology, or the security of information 
technology or of physical facilities; as well as, the total 
consideration, monetary and non-monetary, paid or received by the 
parties under the terms of the contract; and the number of students and 
parents who had financial accounts under the contract at any time 
during the most recently completed award year, and the mean and median 
of the actual costs incurred by those account holders;
    4. The institution must ensure that the funds deposited in the 
financial accounts are accessible through surcharge free in-network 
ATMs convenient to each of the institution's locations, and that those 
ATMs are sufficient in number and housed and serviced such that the 
funds are reasonably available from them, including at the times the 
institution or its third-party servicer makes direct payments into 
them;
    5. The institution must ensure that the financial accounts are not 
marketed or portrayed as or converted into credit cards.
    6. The institution must ensure that the terms of the T2 financial 
accounts are not inconsistent with the best financial interests of the 
students and parents opening them. The Secretary considers this 
requirement to be met if the institution documents that it periodically 
conducts reasonable due diligence reviews to ascertain whether the fees 
imposed under the T2 financial account are, considered as a whole, 
excessive, in light of prevailing market rates; and all contracts for 
the marketing or offering of T2 accounts to the institution's students 
or parents provide for termination of the arrangement at the discretion 
of the institution based on complaints received from students or 
parents or a determination by the institution under (B) that the fees 
assessed under the T2 account are excessive;
    7. The institution must take affirmative steps, by way of 
contractual arrangements with the financial institution as necessary, 
to ensure that these requirements are met with respect to all T2 
financial accounts offered.
    Burden calculation: Based upon our examination of the 2013-14 NSLDS 
and IPEDS data on title IV recipients there were 7,539 institutions of 
higher education participating in title IV, HEA programs.
    Of the total number of 7,539 institutions in the 2013-14 award 
year, the NSLDS-IPEDS-CFPB data showed that there would be 144 public 
institutions with T2 arrangements. Under these proposed regulations, we 
estimate that an institutions would have to modify its systems or 
procedures to ensure compliance with these proposed regulation 
regulations by, among other things, including, but not limited to, 
establish a consent process; provide account terms and conditions 
disclosures; ensure compliance with the 30-day prohibition for charges 
made to an account following the date that title IV, HEA program funds 
are deposited or transferred into the account; as well as provide the 
proposed disclosures, contract disclosures, and use and cost data 
within 60 days after the end of the award year. In addition, other 
changes regarding how the institution will to conduct its proposed 
periodic due diligence and updating of third-party servicer contracts 
to allow for termination of the contract based upon student complaints 
or the institution's assessment that third-party servicer fees have 
become excessive. We estimate that the changes required by the proposed 
regulations would add an additional 45 hours of burden per institution, 
increasing burden by 6,480 hours under OMB Control Number 1845-0106.
    Of the total number of 7,539 institutions, the NSLDS-IPEDS-CFPB 
data showed that there would be 74 private not-for-profit institutions 
that had a T2 arrangement. We estimate that an institutions would have 
to modify its systems or procedures to ensure compliance with these 
proposed regulation including, but not limited to, establish a consent 
process; provide account terms and condition disclosures; ensure 
compliance with the 30-day prohibition for charges made to an account 
following the date that title IV, HEA program funds are deposited or 
transferred into the account; as well as provide the proposed 
disclosures, contract disclosures, and use and cost data within 60 days 
after the end of the award year. In addition, other changes regarding 
how the institution will conduct its proposed periodic due diligence 
and updating of third-party servicer contracts to allow for termination 
of the contract based upon student complaints or the institution's 
assessment that third-party servicer fees have become excessive. We 
estimate that the changes required by the proposed regulations would 
add an additional 45 hours of burden per institution, increasing burden 
by 3,330 hours under OMB Control Number 1845-0106.
    Of the total number of 7,539 institutions, the NSLDS-IPEDS-CFPB

[[Page 28528]]

data showed that there would be 0 private for-profit institutions where 
title IV recipients had credit balances had a T2 arrangement.
    Overall, burden to institutions would increase by 9,810 hours (the 
sum of 6,480 hours and 3,330 hours).
    From the NSLDS-IPEDS-CFPB data, we projected that there were 
260,089 title IV recipients with credit balances at institutions with 
T2 arrangements. Of that number of recipients, the data showed that 
259,997 were enrolled at public institutions. We estimate that, on 
average, each recipient would take 15 minutes (.25 hours) to read the 
institution's consent information and decide whether to provide it or 
not. Therefore, the additional burden on title IV recipients would 
increase by 64,999 hours under OMB Control Number 1845-0106.
    Of the total 260,089 title IV recipients with credit balances at 
institutions that had a T2 arrangement, we estimated that 92 were 
enrolled at private not-for-profit institutions. We estimate that, on 
average, each recipient would take 15 minutes (.25 hours) to read the 
institution's consent information and decide whether to provide it or 
not. Therefore, the additional burden on title IV recipients would 
increase by 23 hours under OMB Control Number 1845-0106.
    Of the total 260,089 title IV recipients with credit balances at 
institutions with T2 arrangements, the data showed that zero were 
enrolled at private for-profit institutions.
    Overall, burden to institutions would increase by 65,022 hours (the 
sum of 64,999 hours and 23 hours).
    Collectively, the total increase in burden for Sec.  668.164 would 
be 1,109,649 hours under OMB Control Number 1845-0106.
    Consistent with the discussion above, the following chart describes 
the sections of the proposed regulations involving information 
collections, the information being collected, and the collections that 
the Department will submit to OMB for approval and public comment under 
the PRA, and the estimated costs associated with the information 
collections. The monetized net costs of the increased burden on 
institutions and borrowers, using wage data developed using BLS data, 
available at www.bls.gov/ncs/ect/sp/ecsuphst.pdf, is $19,431,272 as 
shown in the chart below. This cost was based on an hourly rate of 
$36.55 for institutions and $16.30 for students.

                                            Collection of Information
----------------------------------------------------------------------------------------------------------------
                                                                           OMB control No. and
          Regulatory section                Information collection      estimated burden (change     Estimated
                                                                               in burden)              costs
----------------------------------------------------------------------------------------------------------------
668.164-Disbursing Funds..............  The proposed regulations would  OMB 1845-0106; This          $19,431,272
                                         require institutions to         would be a revised
                                         establish a account selection   collection. We estimate
                                         process if the institution      that the burden would
                                         prefers to send EFT payments    increase by 1,109,649
                                         to an account described in      hours.
                                         proposed Sec.  Sec.
                                         668.164(e) and (f).
                                        Under proposed Sec.
                                         668.164(e), when an
                                         institution enters into a
                                         contract with a third-party
                                         servicer to make direct
                                         payments of title IV, HEA
                                         program funds as a T1
                                         arrangement, the institution
                                         must meet certain
                                         requirements that include,
                                         but are not limited to,
                                         provide the terms and
                                         conditions of the financial
                                         accounts, provide convenient
                                         access to ATMs, cannot be
                                         converted to a credit
                                         instrument, must disclose the
                                         details of the contract with
                                         the public via the
                                         institution's Web site by
                                         providing a URL to a link
                                         showing the contract,
                                         including the mean and median
                                         costs incurred over the prior
                                         year as well as the number of
                                         students and parents with
                                         these financial accounts.
                                        Under proposed Sec.
                                         668.164(f), when an
                                         institution enters into a
                                         contract or marketing
                                         agreement with a financial
                                         institution under which title
                                         IV, HEA program funds would
                                         be transferred or deposited
                                         and are directly offered or
                                         marketed to students and
                                         their parents as a T2
                                         arrangement, the institution
                                         must meet certain
                                         requirements that include but
                                         are not limited to, obtaining
                                         consent to open an financial
                                         account or access device that
                                         is co-branded with the
                                         institution's name, logo,
                                         mascot, or other affiliation,
                                         or a card or tool that is
                                         provided to the student or
                                         parent for institutional
                                         purposes such as a student ID
                                         card that is linked to the
                                         financial account, provide
                                         the terms and conditions of
                                         the account, disclose the
                                         contract between the
                                         institution and the financial
                                         institution.
----------------------------------------------------------------------------------------------------------------

    The total burden hours and change in burden hours associated with 
each OMB Control number affected by the proposed regulations follows:

------------------------------------------------------------------------
                                                             Proposed
             Control number               Total proposed     change in
                                           burden hours    burden hours
------------------------------------------------------------------------
1845-0106...............................       4,282,188     + 3,599,340
  Total.................................       4,282,188     = 3,599,340
------------------------------------------------------------------------

    We have prepared an Information Collection Request (ICR) for these 
information collection requirements. If you want to review and comment 
on the ICR, please follow the instructions in the ADDRESSES section of 
this notice.

    Note: The Office of Information and Regulatory Affairs in the 
Office of Management and Budget (OMB), and the Department of 
Education review all comments posted at www.regulations.gov.

    In preparing your comments, you may want to review the ICR in by 
using the

[[Page 28529]]

Docket ID number specified in this notice. This proposed collection is 
identified as proposed collection OMB 1845-0106.
    We consider your comments on this proposed collection of 
information in--
     Deciding whether the proposed collection is necessary for 
the proper performance of our functions, including whether the 
information will have practical use;
     Evaluating the accuracy of our estimate of the burden of 
the proposed collection, including the validity of our methodology and 
assumptions;
     Enhancing the quality, usefulness, and clarity of the 
information we collect; and
     Minimizing the burden on those who must respond. This 
includes exploring the use of appropriate automated, electronic, 
mechanical, or other technological collection techniques.
    Between 30 and 60 days after publication of this document in the 
Federal Register, OMB is required to make a decision concerning the 
collection of information contained in these proposed regulations. 
Therefore, to ensure that OMB gives your comments full consideration, 
it is important that OMB receives your comments by June 17, 2015. This 
does not affect the deadline for your comments to us on the proposed 
regulations.
    If your comments relate to the ICR for these proposed regulations, 
please specify the Docket ID number and indicate ``Information 
Collection Comments'' on the top of your comments.

Intergovernmental Review

    These programs are not subject to Executive Order 12372 and the 
regulations in 34 CFR part 79.

Assessment of Educational Impact

    In accordance with section 411 of the General Education Provisions 
Act, 20 U.S.C. 1221e-4, the Secretary particularly requests comments on 
whether the proposed regulations would require transmission of 
information that any other agency or authority of the United States 
gathers or makes available.
    Accessible Format: Individuals with disabilities can obtain this 
document in an accessible format (e.g., braille, large print, 
audiotape, or compact disc) on request to the person listed under FOR 
FURTHER INFORMATION CONTACT.
    Electronic Access to This Document: 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 via the Federal Digital System 
at: www.gpo.gov/fdsys. At this site you can view this document, as well 
as all other documents of this Department published in the Federal 
Register, in text or Adobe Portable Document Format (PDF). To use PDF 
you must have Adobe Acrobat Reader, which is available free at the 
site.
    You may also access documents of the Department published in the 
Federal Register by using the article search feature at: 
www.federalregister.gov. Specifically, through the advanced search 
feature at this site, you can limit your search to documents published 
by the Department.

List of Subjects in 34 CFR Part 668

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

    Dated: May 13, 2015.
Arne Duncan,
Secretary of Education.
    For the reasons discussed in the preamble, the Secretary of 
Education proposes to amend part 668 of title 34 of the Code of Federal 
Regulations as follows:

PART 668--STUDENT ASSISTANCE GENERAL PROVISIONS

0
1. The authority citation for part 668 continues to read as follows:

    Authority:  20 U.S.C. 1070g, 1091, and 1094, unless otherwise 
noted.

0
2. Section 668.2 is amended by revising the definition of full-time 
student in paragraph (b) to read as follows:


Sec.  668.2  General definitions.

* * * * *
    (b) * * *
    Full-time student: An enrolled student who is carrying a full-time 
academic workload, as determined by the institution, under a standard 
applicable to all students enrolled in a particular educational 
program. The student's workload may include any combination of courses, 
work, research, or special studies that the institution considers 
sufficient to classify the student as a full-time student. For a term-
based program, the student's workload may include repeating any 
coursework previously taken in the program but may not include more 
than one repetition of a previously passed course. However, for an 
undergraduate student, an institution's minimum standard must equal or 
exceed one of the following minimum requirements:
    (1) For a program that measures progress in credit hours and uses 
standard terms (semesters, trimesters, or quarters), 12 semester hours 
or 12 quarter hours per academic term.
    (2) For a program that measures progress in credit hours and does 
not use terms, 24 semester hours or 36 quarter hours over the weeks of 
instructional time in the academic year, or the prorated equivalent if 
the program is less than one academic year.
    (3) For a program that measures progress in credit hours and uses 
nonstandard terms (terms other than semesters, trimesters or quarters) 
the number of credits determined by--
    (i) Dividing the number of weeks of instructional time in the term 
by the number of weeks of instructional time in the program's academic 
year; and
    (ii) Multiplying the fraction determined under paragraph (3)(i) of 
this definition by the number of credit hours in the program's academic 
year.
    (4) For a program that measures progress in clock hours, 24 clock 
hours per week.
    (5) A series of courses or seminars that equals 12 semester hours 
or 12 quarter hours in a maximum of 18 weeks.
    (6) The work portion of a cooperative education program in which 
the amount of work performed is equivalent to the academic workload of 
a full-time student.
    (7) For correspondence coursework, a full-time course load must 
be--
    (i) Commensurate with the full-time definitions listed in 
paragraphs (1) through (6) of this definition; and
    (ii) At least one-half of the coursework must be made up of non-
correspondence coursework that meets one-half of the institution's 
requirement for full-time students.
0
3. In Sec.  668.8, paragraphs (k) and (l) are revised to read as 
follows:


Sec.  668.8  Eligible program.

* * * * *
    (k) Undergraduate educational program in credit hours. If an 
institution offers an undergraduate educational program in credit 
hours, the institution must use the formula contained in paragraph (l) 
of this section to determine whether that program satisfies the 
requirements contained in paragraph (c)(3) or (d) of this section, and 
the number of credit hours in that educational program for purposes of 
the title IV, HEA programs, unless--

[[Page 28530]]

    (1) The program is at least two academic years in length and 
provides an associate degree, a bachelor's degree, a professional 
degree, or an equivalent degree as determined by the Secretary; or
    (2) Each course within the program is acceptable for full credit 
toward that institution's associate degree, bachelor's degree, 
professional degree, or equivalent degree as determined by the 
Secretary provided that--
    (i) The institution's degree requires at least two academic years 
of study; and
    (ii) The institution demonstrates that students enroll in, and 
graduate from, the degree program.
    (l) Formula. (1) Except as provided in paragraph (l)(2) of this 
section, for purposes of determining whether a program described in 
paragraph (k) of this section satisfies the requirements contained in 
paragraph (c)(3) or (d) of this section, and of determining the number 
of credit hours in that educational program with regard to the title 
IV, HEA programs--
    (i) A semester hour must include at least 37.5 clock hours of 
instruction;
    (ii) A trimester hour must include at least 37.5 clock hours of 
instruction; and
    (iii) A quarter hour must include at least 25 clock hours of 
instruction.
    (2) The institution's conversions to establish a minimum number of 
clock hours of instruction per credit may be less than those specified 
in paragraph (l)(1) of this section if the institution's designated 
accrediting agency, or recognized State agency for the approval of 
public postsecondary vocational institutions, for participation in the 
title IV, HEA programs has not identified any deficiencies with the 
institution's policies and procedures, or their implementation, for 
determining the credit hours that the institution awards for programs 
and courses, in accordance with 34 CFR 602.24(f), or, if applicable, 34 
CFR 603.24(c), so long as--
    (i) The institution's student work outside of class combined with 
the clock hours of instruction meet or exceed the numeric requirements 
in paragraph (l)(1) of this section; and
    (ii)(A) A semester hour must include at least 30 clock hours of 
instruction;
    (B) A trimester hour must include at least 30 clock hours of 
instruction; and
    (C) A quarter hour must include at least 20 hours of instruction.
* * * * *
0
4. Subpart K is revised to read as follows:
Subpart K--Cash Management
Sec.
668.161 Scope and institutional responsibility.
668.162 Requesting funds.
668.163 Maintaining and accounting for funds.
668.164 Disbursing funds.
668.165 Notices and authorizations.
668.166 Excess cash.
668.167 Severability.

Sec.  668.161  Scope and institutional responsibility.

    (a) General. (1) This subpart establishes the rules under which a 
participating institution requests, maintains, disburses, and otherwise 
manages title IV, HEA program funds.
    (2) As used in this subpart--
    (i) Access device means a card, code, or other means of access to a 
financial account, or any combination thereof, that may be used by the 
student or parent to initiate electronic fund transfers.
    (ii) Day means a calendar day, unless otherwise specified;
    (iii) Depository account means an account at a depository 
institution described in 12 U.S.C. 461(b)(1)(A), or an account 
maintained by a foreign institution at a comparable depository 
institution that meets the requirements of Sec.  668.163(a)(1);
    (iv) EFT (Electronic Funds Transfer) means a transaction initiated 
electronically instructing the crediting or debiting of a financial 
account, or an institution's depository account. For purposes of 
transactions initiated by the Secretary, the term ``EFT'' includes all 
transactions covered by 31 CFR 208.2(f). For purposes of transactions 
initiated by or on behalf of an institution, the term ``EFT'' includes, 
from among the transactions covered by 31 CFR 208.2(f), only Automated 
Clearinghouse transactions;
    (v) Financial account means a student's or parent's checking or 
savings account, prepaid card account, or other consumer asset account 
held directly or indirectly by a financial institution;
    (vi) Financial institution means a bank, savings association, 
credit union, or any other person or entity that directly or indirectly 
holds a financial account belonging to a student or parent that issues 
an access device associated with a financial account and agrees with a 
student or parent to provide EFT services;
    (vii) Parent means the parent borrower of a Direct PLUS Loan;
    (viii) Student ledger account means a bookkeeping account 
maintained by an institution to record the financial transactions 
pertaining to a student's enrollment at the institution;
    (ix) Title IV, HEA programs include the Federal Pell Grant, Iraq-
Afghanistan Service Grant, TEACH Grant, FSEOG, Federal Perkins Loan, 
FWS, and Direct Loan programs, and any other program designated by the 
Secretary.
    (b) Federal interest in title IV, HEA program funds. Except for 
funds provided by the Secretary for administrative expenses, and for 
funds used for the Job Location and Development Program under subpart B 
of the FWS regulations, funds received by an institution under the 
title IV, HEA programs are held in trust for the intended beneficiaries 
or the Secretary. The institution, as a trustee of those funds, may not 
use or hypothecate (i.e., use as collateral) the funds for any other 
purpose or otherwise engage in any practice that risks the loss of 
those funds.
    (c) Standard of conduct. An institution must exercise the level of 
care and diligence required of a fiduciary with regard to managing 
title IV, HEA program funds under this subpart.


Sec.  668.162  Requesting funds.

    (a) General. The Secretary has sole discretion to determine the 
method under which the Secretary provides title IV, HEA program funds 
to an institution. In accordance with procedures established by the 
Secretary, the Secretary may provide funds to an institution under the 
advance payment method, reimbursement payment method, or cash 
monitoring payment method.
    (b) Advance payment method. (1) Under the advance payment method, 
an institution submits a request for funds to the Secretary. The 
institution's request may not exceed the amount of funds the 
institution needs immediately for disbursements the institution has 
made or will make to eligible students and parents.
    (2) If the Secretary accepts that request, the Secretary initiates 
an EFT of that amount to the depository account designated by the 
institution.
    (3) The institution must disburse the funds requested as soon as 
administratively feasible but no later than three business days 
following the date the institution received those funds.
    (c) Reimbursement payment method. (1) Under the reimbursement 
payment method, an institution must credit a student's ledger account 
for the amount of title IV, HEA program funds that the student or 
parent is eligible to receive, and pay the amount of any credit balance 
due under Sec.  668.164(h), before the institution seeks reimbursement 
from the Secretary for those disbursements.

[[Page 28531]]

    (2) An institution seeks reimbursement by submitting to the 
Secretary a request for funds that does not exceed the amount of the 
disbursements the institution made to students or parents included in 
that request.
    (3) As part of its reimbursement request, the institution must--
    (i) Identify the students or parents for whom reimbursement is 
sought; and
    (ii) Submit to the Secretary, or an entity approved by the 
Secretary, documentation that shows that each student or parent 
included in the request was--
    (A) Eligible to receive and has received the title IV, HEA program 
funds for which reimbursement is sought; and
    (B) Paid directly any credit balance due under Sec.  668.164(h).
    (4) The Secretary will not approve the amount of the institution's 
reimbursement request for a student or parent and will not initiate an 
EFT of that amount to the depository account designated by the 
institution, if the Secretary determines with regard to that student or 
parent, and in the judgment of the Secretary, that the institution has 
not--
    (i) Accurately determined the student's or parent's eligibility for 
title IV, HEA program funds;
    (ii) Accurately determined the amount of title IV, HEA program 
funds disbursed, including the amount paid directly to the student or 
parent; and
    (iii) Submitted the documentation required under paragraph (c)(3) 
of this section.
    (d) Heightened cash monitoring payment method. Under the heightened 
cash monitoring payment method, an institution must credit a student's 
ledger account for the amount of title IV, HEA program funds that the 
student or parent is eligible to receive, and pay the amount of any 
credit balance due under Sec.  668.164(h), before the institution--
    (1) Submits a request for funds under the provisions of the advance 
payment method described in paragraph (b)(1) and (2) of this section, 
except that the institution's request may not exceed the amount of the 
disbursements the institution made to the students included in that 
request; or
    (2) Seeks reimbursement for those disbursements under the 
provisions of the reimbursement payment method described in paragraph 
(c) of this section, except that the Secretary may modify the 
documentation requirements and review procedures used to approve the 
reimbursement request.


Sec.  668.163  Maintaining and accounting for funds.

    (a)(1) Institutional depository account. An institution must 
maintain title IV, HEA program funds in a depository account. For an 
institution located in a State, the depository account must be insured 
by the FDIC or NCUA. For a foreign institution, the depository account 
may be insured by the FDIC or NCUA, or by an equivalent agency of the 
government of the country in which the institution is located. If there 
is no equivalent agency, the Secretary may approve a depository account 
designated by the foreign institution.
    (2) For each depository account that includes title IV, HEA program 
funds, an institution must clearly identify that title IV, HEA program 
funds are maintained in that account by--
    (i) Including in the name of each depository account the phrase 
``Federal Funds''; or
    (ii)(A) Notifying the depository institution that the depository 
account contains title IV, HEA program funds that are held in trust and 
retaining a record of that notice; and
    (B) Except for a public institution located in a State or a foreign 
institution, filing with the appropriate State or municipal government 
entity a UCC-1 statement disclosing that the depository account 
contains Federal funds and maintaining a copy of that statement.
    (b) Separate depository account. The Secretary may require an 
institution to maintain title IV, HEA program funds in a separate 
depository account that contains no other funds if the Secretary 
determines that the institution failed to comply with--
    (1) The requirements in this subpart;
    (2) The recordkeeping and reporting requirements in subpart B of 
this part; or
    (3) Applicable program regulations.
    (c) Interest-bearing depository account. (1) An institution is 
required to maintain its title IV, HEA program funds in an interest-
bearing depository account, except as provided in 2 CFR 200.305(b)(8).
    (2) Any interest earned on Federal Perkins Loan program funds is 
retained by the institution as provided under 34 CFR 674.8(a).
    (3) An institution may keep the initial $500 in interest it earns 
during the award year on other title IV, HEA program funds it maintains 
in accordance with paragraph (c)(1) of this section. By June 30 of that 
award year, the institution must remit to the Department of Health and 
Human Services, Payment Management System, Rockville, MD 20852 any 
interest over $500.
    (d) Accounting and fiscal records. An institution must--
    (1) Maintain accounting and internal control systems that identify 
the cash balance of the funds of each title IV, HEA program that are 
included in the institution's depository account or accounts as readily 
as if those funds were maintained in a separate depository account;
    (2) Identify the earnings on title IV, HEA program funds maintained 
in the institution's depository account or accounts; and
    (3) Maintain its fiscal records in accordance with the provisions 
in Sec.  668.24.


Sec.  668.164  Disbursing funds.

    (a) Disbursement. (1) Except as provided under paragraph (a)(2) of 
this section, a disbursement of title IV, HEA program funds occurs on 
the date that the institution credits the student's ledger account or 
pays the student or parent directly with--
    (i) Funds received from the Secretary; or
    (ii) Institutional funds used in advance of receiving title IV, HEA 
program funds.
    (2)(i) For a Direct Loan for which the student is subject to the 
delayed disbursement requirements under 34 CFR 685.303(b)(4), if an 
institution credits a student's ledger account with institutional funds 
earlier than 30 days after the beginning of a payment period, the 
Secretary considers that the institution makes that disbursement on the 
30th day after the beginning of the payment period; or
    (ii) If an institution credits a student's ledger account with 
institutional funds earlier than 10 days before the first day of 
classes of a payment period, the Secretary considers that the 
institution makes that disbursement on the 10th day before the first 
day of classes of a payment period.
    (b) Disbursements by payment period. (1) Except for paying a 
student under the FWS program or unless 34 CFR 685.303 applies, an 
institution must disburse during the current payment period the amount 
of title IV, HEA program funds that a student enrolled at the 
institution, or the student's parent, is eligible to receive for that 
payment period.
    (2) An institution may make a prior year, late, or retroactive 
disbursement, as provided under paragraph (c)(3), (j), or (k) of this 
section, respectively, during the current payment period as long as the 
student was enrolled and eligible during the payment period

[[Page 28532]]

covered by that prior year, late, or retroactive disbursement.
    (3) At the time that a disbursement is made for a payment period, 
the institution, along with the third-party servicer engaged by the 
institution to draw down title IV, HEA program funds or otherwise 
perform activities leading to or supporting that disbursement, must 
confirm that the student is enrolled at the institution, and that the 
student, or the student's parent, is eligible for that disbursement.
    (c) Crediting a student's ledger account. (1) An institution may 
credit a student's ledger account with title IV, HEA program funds to 
pay for allowable charges associated with the current payment period. 
Allowable charges are--
    (i) The amount of tuition, fees, and institutionally provided room 
and board assessed the student for the payment period or, as provided 
in paragraph (c)(5) of this section, the prorated amount of those 
charges if the institution debits the student's ledger account for more 
than the charges associated with the payment period; and
    (ii) The amount incurred by the student for the payment period for 
purchasing books, supplies, and other educationally related goods and 
services provided by the institution for which the institution obtains 
the student's or parent's authorization under Sec.  668.165(b).
    (2) If an institution includes the cost of books and supplies as 
part of tuition and fees under paragraph (c)(1)(i) of this section, it 
must separately disclose those costs and explain why including them is 
in the best financial interests of students.
    (3)(i) An institution may include in one payment period for the 
current year, prior year charges of not more than $200 for--
    (A) Tuition, fees, and institutionally provided room and board, as 
provided under paragraph (c)(1)(i) of this section, without obtaining 
the student's or parent's authorization; and
    (B) Educationally related goods and services provided by the 
institution, as described in paragraph (c)(1)(ii) of this section, if 
the institution obtains the student's or parent's authorization under 
Sec.  668.165(b).
    (ii) For purposes of this section--
    (A) The current year is the current loan period for any student or 
parent who received a Direct Loan, or the current award year for any 
student who did not receive a Direct Loan; and
    (B) A prior year is any loan period or award year prior to the 
current loan period or award year, as applicable.
    (4) An institution may include in the current payment period 
allowable charges stemming from any previous payment period in the 
current award year or loan period for which the student was eligible, 
if the student was not already paid for such previous payment period.
    (5) For purposes of this section, an institution determines the 
prorated amount of charges associated with the current payment period 
by--
    (i) For a program with substantially equal payment periods, 
dividing the total institutional charges for the program by the number 
of payment periods in the program; or
    (ii) For other programs, dividing the number of credit or clock 
hours the student enrolls in, or is expected to complete, in the 
current payment period, by the total number of credit or clock hours in 
the program and multiplying that result by the total institutional 
charges for the program.
    (d)(1) Direct payments. Except as provided under paragraph (d)(3) 
of this section, an institution makes a direct payment--
    (i) To a student, for the amount of the title IV, HEA program funds 
that a student is eligible to receive, including Direct PLUS Loan funds 
that the student's parent authorized the student to receive, by--
    (A) Initiating an EFT of that amount to the student's financial 
account;
    (B) Issuing a check for that amount payable to, and requiring the 
endorsement of, the student; or
    (C) Dispensing cash for which the institution obtains a receipt 
signed by the student;
    (ii) To a parent, for the amount of the Direct PLUS Loan funds that 
a parent does not authorize the student to receive, by--
    (A) Initiating an EFT of that amount to the parent's financial 
account;
    (B) Issuing a check for that amount payable to and requiring the 
endorsement of the parent; or
    (C) Dispensing cash for which the institution obtains a receipt 
signed by the parent.
    (2) Issuing a check. An institution issues a check on the date that 
it--
    (i) Mails the check to the student or parent; or
    (ii) Notifies the student or parent that the check is available for 
immediate pick-up at a specified location at the institution. The 
institution may hold the check for no longer than 21 days after the 
date it notifies the student or parent. If the student or parent does 
not pick up the check, the institution must immediately mail the check 
to the student or parent, pay the student or parent directly by other 
means, or return the funds to the appropriate title IV, HEA program.
    (3) Payments by the Secretary. The Secretary may pay title IV, HEA 
credit balances under paragraphs (h) and (m) of this section directly 
to a student or parent using a method established or authorized by the 
Secretary and published in the Federal Register.
    (4) Student or parent choice. (i) An institution that makes direct 
payments to a student or parent by EFT and that chooses to enter into 
an arrangement described in paragraph (e) or (f) of this section, 
including an institution that uses a third-party servicer to make those 
payments, must establish a selection process under which the student or 
parent chooses one of several options for receiving those payments.
    (A) In implementing its selection process, the institution must--
    (1) Inform the student or parent in writing that he or she is not 
required to open or obtain a financial account or access device offered 
by or through a specific financial institution;
    (2) Ensure that the student's or parent's options for receiving 
direct payments are described and presented in a clear, fact-based, 
and, except as provided in paragraph (d)(4)(i)(B)(1) of this section, 
neutral manner;
    (3) Ensure that initiating direct payments electronically to a 
financial account or access device associated with an existing student 
or parent financial account is as timely and no more onerous to the 
student or parent as initiating direct payments to an account described 
in paragraph (e) or (f) of this section; and
    (4) Allow the student or parent the option to change, at any time, 
his or her choice as to how direct payments are made, as long as the 
student or parent provides the institution with written notice of the 
change within a reasonable time.
    (B) In describing the options under its selection process, the 
institution--
    (1) Must present prominently as the first and default option, the 
financial account or access device associated with an existing 
financial account belonging to the student or parent;
    (2) Must list and identify the major features and commonly assessed 
fees associated with all financial accounts described in paragraphs (e) 
and (f) of this section, as well as a Universal Resource Locator (URL) 
for the terms and conditions of those accounts. For each account, if an 
institution follows the format and content requirements specified by 
the Secretary in a notice published in the Federal Register following 
consultation with the CFPB, it

[[Page 28533]]

will be in compliance with this requirement with respect to the major 
features and assessed fees associated with the account;
    (3) May provide information about available financial accounts 
other than those described in paragraphs (e) and (f) of this section 
that have deposit insurance under 12 CFR part 330, or share insurance 
in accordance with 12 CFR part 745, for the benefit of the student or 
parent; and
    (4) Must include issuing a check as an option for a student or 
parent to receive payments.
    (ii) An institution that does not offer or use any financial 
accounts described in paragraphs (e) or (f) of this section may make 
direct payments to a student's or parent's existing financial account, 
or issue a check or disburse cash to the student or parent without 
establishing the selection process described in paragraph (d)(4)(i) of 
this section.
    (e) Tier one arrangement. (1) In a Tier one (T1) arrangement, an 
institution has a contract with a third-party servicer under which the 
servicer performs one or more of the functions associated with 
processing direct payments of title IV, HEA program funds on behalf of 
the institution to one or more financial accounts that are offered 
under the contract or by the third-party servicer, or by an entity 
contracting with or affiliated with the third party servicer to 
students and their parents.
    (2) Under a T1 arrangement, the institution must--
    (i) Obtain the student's or parent's consent to open the financial 
account before--
    (A) The institution provides any information about the student or 
parent, except for name, address, and email address, to the third-party 
servicer, to the financial institution at which the financial account's 
funds would be deposited, or the agents of either;
    (B) An access device, or any representation of an access device, is 
sent to the student or parent; or
    (C) A card or tool provided to the student or parent for 
institutional purposes, such as a student ID card, is linked to the 
financial account;
    (ii) Inform the student or parent of the terms and conditions of 
the financial account, as required under Sec.  668.164(d)(4)(i)(B)(2), 
before the financial account is opened;
    (iii) Ensure that the student or parent--
    (A) Has convenient access to the financial account through a 
surcharge-free national or regional ATM network that has ATMs located 
on or near each location of the institution, and that those ATMs are 
sufficient in number and housed and serviced such that the funds are 
reasonably available from them, including at the times the institution 
or its third-party servicer makes direct payments into the student or 
parent financial accounts;
    (B) Does not incur any cost--
    (1) For opening the financial account or initially receiving an 
access device;
    (2) Assessed by the institution, third-party servicer, or third-
party servicer's associated financial institution when the student or 
parent conducts point-of-sale transactions;
    (3) For conducting any transaction on an ATM that belongs to the 
surcharge free regional or national network; and
    (4) For a charge initiated by the institution, third-party 
servicer, or third-party servicer's associated financial institution 
for at least 30 days following the date that title IV, HEA program 
funds are deposited or transferred to the financial account;
    (iv) Ensure that--
    (A) The financial account or access device is not marketed or 
portrayed as or converted into a credit card; and
    (B) No credit may be extended or associated with the financial 
account, and that no fee is charged to the student or parent for any 
transaction that exceeds the balance on the card, regardless of whether 
the full amount of the transaction is established at the time the 
transaction is authorized by the financial institution;
    (v) No later than 60 days after the most recently completed award 
year disclose conspicuously on the institution's Web site--
    (A) The contract(s) establishing the T1 arrangement between the 
institution and third-party servicer and financial institution acting 
on behalf of the third-party servicer, as applicable, except for any 
portions that, if disclosed, would compromise personal privacy, 
proprietary information technology, or the security of information 
technology or of physical facilities;
    (B) The total consideration for the most recently completed award 
year, monetary and non-monetary, paid or received by the parties under 
the terms of the contract; and
    (C) The number of students and parents who had financial accounts 
under the contract at any time during the most recently completed award 
year, and the mean and median of the actual costs incurred by those 
account holders;
    (vi) Annually provide to the Secretary the URL for the items under 
paragraph (e)(2)(v) of this section for publication in a centralized 
database;
    (vii) Ensure that the terms of the accounts offered pursuant to a 
T1 arrangement are not inconsistent with the best financial interests 
of the students and parents opening them. The Secretary considers this 
requirement to be met if--
    (A) The institution documents that it periodically conducts 
reasonable due diligence reviews to ascertain whether the fees imposed 
under the T1 arrangement are, considered as a whole, not excessive in 
light of prevailing market rates; and
    (B) All contracts for the marketing or offering of accounts 
pursuant to T1 arrangements to the institution's students or parents 
make provision for termination of the arrangement by the institution 
based on complaints received from students or parents or a 
determination by the institution under paragraph (e)(2)(vi)(A) of this 
section that the fees assessed under the T1 arrangement are excessive; 
and
    (viii) Take affirmative steps, by way of contractual arrangements 
with the third-party servicer as necessary, to ensure that requirements 
of this section are met with respect to all accounts offered pursuant 
to T1 arrangements.
    (f) Tier two arrangement. (1) In a Tier two (T2) arrangement, an 
institution has a contract with a financial institution or entity that 
offers financial accounts through a financial institution, under which 
financial accounts are offered and marketed directly to students or 
their parents.
    (2) The Secretary presumes that title IV, HEA program funds are 
deposited or transferred into the financial accounts offered and 
marketed under paragraph (f)(1) of this section. However, the 
institution does not have to comply with the requirements described in 
paragraph (f)(4) of this section if it documents that, for the most 
recently completed award year no student or parent received a credit 
balance.
    (3) The Secretary considers that a financial account is marketed 
directly if--
    (i) The institution communicates information directly to its 
students or their parents about the financial account and how it may be 
opened;
    (ii) The financial account or access device is co-branded with the 
institution's name, logo, mascot, or other affiliation; or
    (iii) A card or tool that is provided to the student or parent for 
institutional purposes, such as a student ID card, is linked with the 
financial account or access device.
    (4) Under a T2 arrangement, the institution must--
    (i) Obtain the student's or parent's consent to open the financial 
account before--

[[Page 28534]]

    (A) The institution provides, or permits a third-party servicer to 
provide, any information about the student or parent, except for name, 
address, and email address, to the financial institution or its agents;
    (B) An access device, or any representation of an access device, is 
sent to the student or parent; or
    (C) A card or tool provided to the student or parent for 
institutional purposes, such as a student ID card, is linked to the 
financial account;
    (ii) Inform the student or parent of the terms and conditions of 
the financial account as required under Sec.  668.164(d)(4)(i)(B)(2), 
before the financial account is opened;
    (iii) No later than 60 days after the most recently completed award 
year, provide to the Secretary and disclose conspicuously on the 
institution's Web site--
    (A) The contract(s) establishing the T2 arrangement between the 
institution and financial institution in its entirety, except for any 
portions that, if disclosed, would compromise personal privacy, 
proprietary information technology, or the security of information 
technology or of physical facilities;
    (B) The total consideration for the most recently completed award 
year, monetary and non-monetary, paid or received by the parties under 
the terms of the contract; and
    (C) The number of students and parents who had financial accounts 
under the contract at any time during the most recently completed award 
year, and the mean and median of the actual costs incurred by those 
account holders;
    (iv) Annually provide to the Secretary the URL for the items under 
paragraph (f)(4)(iii) of this section for publication in a centralized 
database;
    (v) Ensure that the funds deposited in the financial accounts are 
accessible through surcharge free in-network ATMs convenient to each of 
the institution's locations, and that those ATMs are sufficient in 
number and housed and serviced such that the funds are reasonably 
available from them, including at the times the institution or its 
third-party servicer makes direct payments into them; and
    (vi) Ensure that the financial accounts are not marketed or 
portrayed as or converted into credit cards;
    (vii) Ensure that the terms of the accounts offered pursuant to a 
T2 arrangement are not inconsistent with the best financial interests 
of the students and parents opening them. The Secretary considers this 
requirement to be met if--
    (A) The institution documents that it periodically conducts 
reasonable due diligence reviews to ascertain whether the fees imposed 
under the T2 arrangement are, considered as a whole, not excessive in 
light of prevailing market rates; and
    (B) All contracts for the marketing or offering of accounts 
pursuant to T2 arrangements to the institution's students or parents 
make provision for termination of the arrangement by the institution 
based on complaints received from students or parents or a 
determination by the institution under paragraph (f)(4)(vi)(A) of this 
section that the fees assessed under the T2 arrangement are excessive;
    (viii) Take affirmative steps, by way of contractual arrangements 
with the financial institution as necessary, to ensure that 
requirements of this section are met with respect to all accounts 
offered pursuant to T2 arrangements; and
    (ix) Ensure students and parents incur no cost for opening the 
account or initially receiving an access device.
    (g) Ownership of financial accounts opened through outreach to an 
institution's parents or students. Any financial account offered 
pursuant to an arrangement described in paragraphs (e) or (f) of this 
section must meet the requirements of either 31 CFR 210.5(a) or (b)(5), 
as applicable.
    (h) Title IV, HEA credit balances. (1) A title IV, HEA credit 
balance occurs whenever the amount of title IV, HEA program funds 
credited to a student's account for a payment period exceeds the amount 
assessed the student for allowable charges associated with that payment 
period as provided under paragraph (c) of this section.
    (2) A title IV, HEA credit balance must be paid directly to the 
student or parent as soon as possible, but no later than--
    (i) 14 days after the balance occurred if the credit balance 
occurred after the first day of class of a payment period; or
    (ii) 14 days after the first day of class of a payment period if 
the credit balance occurred on or before the first day of class of that 
payment period.
    (i) Early disbursements. (1) Except as provided in paragraph (i)(2) 
of this section for a first-year, first-time borrower or a student 
employed under the FWS program, the earliest an institution may 
disburse title IV, HEA funds to an eligible student or parent is--
    (i) If the student is enrolled in a credit-hour program offered in 
terms that are substantially equal in length, 10 days before the first 
day of classes of a payment period; or
    (ii) If the student is enrolled in a credit-hour program offered in 
terms that are not substantially equal in length, a non-term credit-
hour program, or a clock-hour program, the later of--
    (A) Ten days before the first day of classes of a payment period; 
or
    (B) The date the student completed the previous payment period for 
which he or she received title IV, HEA program funds.
    (2) An institution may not--
    (i) Make an early disbursement of a Direct Loan to a first-year, 
first-time borrower who is subject to the 30-day delayed disbursement 
requirements in 34 CFR 685.303(b)(4). This restriction does not apply 
if the institution is exempt from the 30-day delayed disbursement 
requirements under 34 CFR 685.303(b)(4)(i)(A) or (B); or
    (ii) Compensate a student employed under the FWS program until the 
student earns that compensation by performing work, as provided in 34 
CFR 675.16(a)(5).
    (j) 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 Direct Loan, the student is no longer enrolled at the 
institution as at least a half-time student for the period of 
enrollment for which the loan was intended; or
    (ii) For an award under the Federal Pell Grant, FSEOG, Federal 
Perkins Loan, Iraq-Afghanistan Service Grant, and TEACH Grant 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 (i)(4) of this section, a student who becomes ineligible, as 
described in paragraph (i)(1) of this section, qualifies for a late 
disbursement (and the parent qualifies for a parent Direct PLUS Loan 
disbursement) if, before the date the student became ineligible--
    (i) The Secretary processed a SAR or ISIR with an official expected 
family contribution for the student for the relevant award year; and
    (ii)(A) For a loan made under the Direct Loan program or for an 
award made under the TEACH Grant program, the institution originated 
the loan or award; 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

[[Page 28535]]

in paragraph (i)(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)(4) in accordance 
with the provisions of Sec.  668.22(a)(5);
    (ii) If the student completed the payment period or period of 
enrollment, the institution must provide the student or parent the 
choice 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 ledger account 
as provided in paragraph (c) 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 Direct Loan program to pay for 
educational costs that the institution determines the student incurred 
for the period in which the student or parent was eligible.
    (4) Limitations. (i) An institution may not make a late 
disbursement later than 180 days after the date the institution 
determines that the student withdrew, as provided in Sec.  668.22, or 
for a student who did not withdraw, 180 days after the date the student 
otherwise became ineligible, pursuant to paragraph (i)(1) of this 
section.
    (ii) An institution may not make a late second or subsequent 
disbursement of a loan under the Direct Loan program 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 Direct 
Loan if the student was a first-year, first-time borrower as described 
in 34 CFR 685.303(b)(4) 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 34 CFR 685.303(b)(4).
    (iv) An institution may not make a late disbursement of any title 
IV, HEA program assistance unless it received a valid SAR or a valid 
ISIR for the student by the deadline date established by the Secretary 
in a notice published in the Federal Register.
    (k) Retroactive payments. If an institution did not make a 
disbursement to an enrolled student for a payment period the student 
completed (for example, because of an administrative delay or because 
the student's ISIR was not available until a subsequent payment 
period), the institution may pay the student for all prior payment 
periods in the current award year or loan period for which the student 
was eligible.
    (l) Returning funds. (1) Notwithstanding any State law (such as a 
law that allows funds to escheat to the State), an institution must 
return to the Secretary any title IV, HEA program funds, except FWS 
program funds, that it attempts to disburse directly to a student or 
parent that are not received by the student or parent. For FWS program 
funds, the institution is required to return only the Federal portion 
of the payroll disbursement.
    (2) If an EFT to a student's or parent's financial account is 
rejected, or a check to a student or parent is returned, the 
institution may make additional attempts to disburse the funds, 
provided that those attempts are made not later than 45 days after the 
EFT was rejected or the check returned. In cases where the institution 
does not make another attempt, the funds must be returned to the 
Secretary before the end of this 45-day period.
    (3) If a check sent to a student or parent is not returned but is 
not cashed, the institution must return the funds to the Secretary no 
later than 240 days after the date it issued the check.
    (m) Provisions for books and supplies. (1) An institution must 
provide a way for a student who is eligible for title IV, HEA program 
funds to obtain or purchase, by the seventh day of a payment period, 
the books and supplies applicable to the payment period if, 10 days 
before the beginning of the payment period--
    (i) The institution could disburse the title IV, HEA program funds 
for which the student is eligible; and
    (ii) Presuming the funds were disbursed, the student would have a 
credit balance under paragraph (h) of this section.
    (2) The amount the institution provides to the student to obtain or 
purchase books and supplies is the lesser of the presumed credit 
balance under this paragraph or the amount needed by the student, as 
determined by the institution.
    (3) The institution must have a policy under which the student may 
opt out of the way the institution provides for the student to obtain 
or purchase books and supplies under this paragraph.
    (4) If a student uses the method provided by the institution to 
obtain or purchase books and supplies under this paragraph, the student 
is considered to have authorized the use of title IV, HEA funds and the 
institution does not need to obtain a written authorization under 
paragraph (c) of this section and Sec.  668.165(b) for this purpose.


Sec.  668.165  Notices and authorizations.

    (a) Notices. (1) Before an institution disburses title IV, HEA 
program funds for any award year, the institution must notify a student 
of the amount of funds that the student or his or her parent can expect 
to receive under each title IV, HEA program, and how and when those 
funds will be disbursed. If those funds include Direct Loan program 
funds, the notice must indicate which funds are from subsidized loans 
and which are from unsubsidized loans.
    (2) Except in the case of a post-withdrawal disbursement made in 
accordance with Sec.  668.22(a)(5), if an institution credits a 
student's account at the institution with Direct Loan, Federal Perkins 
Loan, or TEACH Grant program funds, the institution must notify the 
student or parent of--
    (i) The anticipated date and amount of the disbursement;
    (ii) The student's or parent's right to cancel all or a portion of 
that loan, loan disbursement, TEACH Grant, or TEACH Grant disbursement 
and have the loan proceeds and TEACH Grant proceeds returned to the 
Secretary; and
    (iii) The procedures and time by which the student or parent must 
notify the institution that he or she wishes to cancel the loan, loan 
disbursement, TEACH Grant, or TEACH Grant disbursement.
    (3) The institution must provide the notice described in paragraph 
(a)(2) of this section in writing--
    (i) No earlier than 30 days before, and no later than 30 days 
after, crediting the student's ledger account at the institution, if 
the institution obtains affirmative confirmation from the student under 
paragraph (a)(6)(i) of this section; or
    (ii) No earlier than 30 days before, and no later than seven days 
after, crediting the student's ledger account at the institution, if 
the institution does not obtain affirmative confirmation from the 
student under paragraph (a)(6)(i) of this section.
    (4)(i) A student or parent must inform the institution if he or she 
wishes to cancel all or a portion of a loan, loan disbursement, TEACH 
Grant, or TEACH Grant disbursement.
    (ii) The institution must return the loan or TEACH Grant proceeds, 
cancel the loan or TEACH Grant, or do both, in accordance with program 
regulations provided that the institution receives a

[[Page 28536]]

loan or TEACH Grant cancellation request--
    (A) By the later of the first day of a payment period or 14 days 
after the date it notifies the student or parent of his or her right to 
cancel all or a portion of a loan or TEACH Grant, if the institution 
obtains affirmative confirmation from the student under paragraph 
(a)(6)(i) of this section; or
    (B) Within 30 days of the date the institution notifies the student 
or parent of his or her right to cancel all or a portion of a loan, if 
the institution does not obtain affirmative confirmation from the 
student under paragraph (a)(6)(i) of this section.
    (iii) If a student or parent requests a loan cancellation after the 
period set forth in paragraph (a)(4)(ii) of this section, the 
institution may return the loan or TEACH Grant proceeds, cancel the 
loan or TEACH Grant, or do both, in accordance with program 
regulations.
    (5) An institution must inform the student or parent in writing 
regarding the outcome of any cancellation request.
    (6) For purposes of this section--
    (i) Affirmative confirmation is a process under which an 
institution obtains written confirmation of the types and amounts of 
title IV, HEA program loans that a student wants for the period of 
enrollment before the institution credits the student's account with 
those loan funds. The process under which the TEACH Grant program is 
administered is considered to be an affirmative confirmation process; 
and
    (ii) An institution is not required to return any loan or TEACH 
Grant proceeds that it disbursed directly to a student or parent.
    (b) Student or parent authorizations. (1) If an institution obtains 
written authorization from a student or parent, as applicable, the 
institution may--
    (i) Use the student's or parent's title IV, HEA program funds to 
pay for charges described in Sec.  668.164(c)(1)(ii) or (c)(3)(i)(B) 
that are included in that authorization; and
    (ii) Unless the Secretary provides funds to the institution under 
the reimbursement payment method or the heightened cash monitoring 
payment method described in Sec.  668.162(c)(2) or (d)(2), 
respectively, hold on behalf of the student or parent any title IV, HEA 
program, funds that would otherwise be paid directly to the student or 
parent as credit balance under Sec.  668.164(h).
    (2) In obtaining the student's or parent's authorization to perform 
an activity described in paragraph (b)(1) of this section, an 
institution--
    (i) May not require or coerce the student or parent to provide that 
authorization;
    (ii) Must allow the student or parent to cancel or modify that 
authorization at any time; and
    (iii) Must clearly explain how it will carry out that activity.
    (3) A student or parent may authorize an institution to carry out 
the activities described in paragraph (b)(1) of this section for the 
period during which the student is enrolled at the institution.
    (4)(i) If a student or parent modifies an authorization, the 
modification takes effect on the date the institution receives the 
modification notice.
    (ii) If a student or parent cancels an authorization to use title 
IV, HEA program funds to pay for authorized charges under paragraph 
(a)(4) of this section, the institution may use title IV, HEA program 
funds to pay only those authorized charges incurred by the student 
before the institution received the notice.
    (iii) If a student or parent cancels an authorization to hold title 
IV, HEA program funds under paragraph (b)(1)(ii) of this section, the 
institution must pay those funds directly to the student or parent as 
soon as possible but no later than 14 days after the institution 
receives that notice.
    (5) If an institution holds excess student funds under paragraph 
(b)(1)(ii) of this section, the institution must--(i) Identify the 
amount of funds the institution holds for each student or parent in a 
subsidiary ledger account designed for that purpose;
    (ii) Maintain, at all times, cash in its depository account in an 
amount at least equal to the amount of funds the institution holds for 
the student; and
    (iii) Notwithstanding any authorization obtained by the institution 
under this paragraph, pay any remaining balance on loan funds by the 
end of the loan period and any remaining other title IV, HEA program 
funds by the end of the last payment period in the award year for which 
they were awarded.


Sec.  668.166  Excess cash.

    (a) General. The Secretary considers excess cash to be any amount 
of title IV, HEA program funds, other than Federal Perkins Loan program 
funds, that an institution does not disburse to students by the end of 
the third business day following the date the institution--
    (1) Received those funds from the Secretary; or
    (2) Deposited or transferred to its Federal account previously 
disbursed title IV, HEA program funds, such as those resulting from 
award adjustments, recoveries, or cancellations.
    (b) Excess cash tolerance. An institution may maintain for up to 
seven days an amount of excess cash that does not exceed one percent of 
the total amount of funds the institution drew down in the prior award 
year. The institution must return immediately to the Secretary any 
amount of excess cash over the one-percent tolerance and any amount of 
excess cash remaining in its account after the seven-day tolerance 
period.
    (c) Consequences for maintaining excess cash. Upon a finding that 
an institution maintained excess cash for any amount or time over that 
allowed in the tolerance provisions in paragraph (b) of this section, 
the actions the Secretary may take include, but are not limited to--
    (1) Requiring the institution to reimburse the Secretary for the 
costs the Federal government incurred in providing that excess cash to 
the institution; and
    (2) Providing funds to the institution under the reimbursement 
payment method or heightened cash monitoring payment method described 
in Sec.  668.162(c) and (d), respectively.


Sec.  668.167  Severability.

    If any provision of this subpart or its application to any person, 
act, or practice is held invalid, the remainder of the section or the 
application of its provisions to any person, act, or practice shall not 
be affected thereby.

[FR Doc. 2015-11917 Filed 5-15-15; 8:45 am]
 BILLING CODE 4000-01-P