[Federal Register Volume 80, Number 210 (Friday, October 30, 2015)]
[Rules and Regulations]
[Pages 67126-67201]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-27145]
[[Page 67125]]
Vol. 80
Friday,
No. 210
October 30, 2015
Part V
Department of Education
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34 CFR Part 668
Program Integrity and Improvement; Final Rule
Federal Register / Vol. 80 , No. 210 / Friday, October 30, 2015 /
Rules and Regulations
[[Page 67126]]
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DEPARTMENT OF EDUCATION
34 CFR Part 668
RIN 1840-AD14
[Docket ID ED-2015-OPE-0020]
Program Integrity and Improvement
AGENCY: Office of Postsecondary Education, Department of Education.
ACTION: Final regulations.
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SUMMARY: The Secretary amends the cash management regulations and other
sections of the Student Assistance General Provisions regulations
issued under the Higher Education Act of 1965, as amended (HEA). These
final 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, the final regulations
update other provisions in the cash management regulations and
otherwise amend the Student Assistance General Provisions. The final
regulations also clarify how previously passed coursework is treated
for title IV eligibility purposes and streamline the requirements for
converting clock hours to credit hours.
DATES: Effective date: These regulations are effective July 1, 2016.
Compliance dates: Compliance with the regulations in Sec.
668.164(e)(2)(vi) and (f)(4)(iii) is required by September 1, 2016;
Sec. 668.164(d)(4)(i)(B)(2) by July 1, 2017; and Sec.
668.164(e)(2)(vii) and (f)(4)(iv) by September 1, 2017.
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 Nathan Arnold,
U.S. Department of Education, 1990 K Street NW., Room 8081, Washington,
DC 20006-8502. Telephone: (202) 219-7134 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:
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 \1\ credit balances via a more convenient
electronic means. However, as we describe in more detail elsewhere in
this preamble and in the preamble to the notice of proposed rulemaking
published in the Federal Register on May 18, 2015 (NPRM),\2\ 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.
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\1\ 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.
\2\ 80 FR 28484, 28488-28490. The NPRM is available at http://www.gpo.gov/fdsys/pkg/FR-2015-05-18/pdf/2015-11917.pdf. We cite to
the NRPM in subsequent references as 80 FR at [page].
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According to these reports, the following practices were found:
Providers were prioritizing disbursements to their own
affiliated accounts over aid recipients' preexisting bank accounts;
Providers and schools were 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 was 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 were charged onerous, confusing, or
unavoidable fees in order to access their student aid funds or to
otherwise use the account.
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 every year, that students are a
captive audience subject to marketing from their institutions, that the
college card market is expanding, and because there have been numerous
concerns raised by existing practices, we believe regulatory action
governing the disbursement of title IV, student aid is warranted.
In addition, we include in these regulations a number of minor
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 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 regulatory changes will result in more equitable
treatment of student aid recipients and simplify title IV requirements
in these areas.
The NPRM contained background information and our reasons for
proposing the particular regulations. The final regulations contain
changes from the NPRM, which are fully explained in the Analysis of
Comments and Changes section of this document.
Summary of the Major Provisions of This Regulatory Action:
The regulations--
Explicitly 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'';
Define a ``T1 arrangement'' as an arrangement between an
institution and a third-party servicer, under which the servicer (1)
performs one or more of the functions associated with processing direct
payments of title IV funds on behalf of the institution, and (2) offers
one or more financial accounts under
[[Page 67127]]
the arrangement, or that directly markets the account to students
itself or through an intermediary;
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. However, if an
institution documents that, in one or more of the three recently
completed award years, no students received credit balances at the
institution, the requirements associated with T2 arrangements do not
apply. If, for the three most recently completed award years, the
institution documents that on average fewer than 500 students and less
than five percent of its enrollment received credit balances then only
certain requirements associated with T2 arrangements apply;
Require institutions that have T1 or T2 arrangements to
establish a student choice process that: prohibits an institution from
requiring students to open an account into which their credit balances
must be deposited; requires an institution to provide a list of account
options from which a student may choose to receive credit balance funds
electronically, where each option is presented in a neutral manner and
the student's preexisting bank account is listed as the first and most
prominent option with no account preselected; and ensures electronic
payments made to a student's preexisting account are initiated in a
manner as timely as, and no more onerous than, payments made to an
account made available pursuant to a T1 or T2 arrangement;
Require that any personally identifiable information
shared with a financial account provider as a result of a T1
arrangement before a student makes a selection of that provider (1)
does not include information about the student other than directory
information under 34 CFR 99.3 that is disclosed pursuant to 34 CFR
99.31(a)(11) and 99.37, with the exception of a unique student
identifier generated by the institution (that does not include a Social
Security number, in whole or in part), the disbursement amount, a
password, PIN code, or other shared secret provided by the institution
that is used to identify the student, and any additional items
specified by the Secretary in a Federal Register notice; (2) is used
solely for processing direct payments of title IV, HEA program funds,
and (3) is not shared with any other affiliate or entity for any other
purpose;
Require that the institution obtain the student's consent
to open an account under a T1 arrangement before the institution or
account provider sends an access device to the student or validates an
access device that is also used for institutional purposes, enabling
the student to use the device to access a financial account;
Require that the institution or financial account provider
obtain consent from the student to open an account under a T2
arrangement before (1) the institution or third-party servicer provides
any personally identifiable information about that student to the
financial account provider or its agents, other than directory
information under 34 CFR 99.3 that is disclosed pursuant to 34 CFR
99.31(a)(11) and 99.37 and (2) the institution or account provider
sends an access device to the student or validates an access device
that is also used for institutional purposes, enabling the student to
use the device to access 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, by
prohibiting both point-of-sale (POS) fees and overdraft fees charged to
student account holders, and by providing students with the ability to
conveniently access title IV, HEA program funds via domestic
withdrawals and transfers in part and in full up to the account
balance, without charge, at any time following the date that such title
IV, HEA program funds are deposited or transferred to the financial
account;
Require that contracts governing T1 and T2 arrangements
are conspicuously and publicly disclosed;
Require that cost information related to T1 arrangements
is conspicuously and publicly disclosed;
Require that cost information related to T2 arrangements
is conspicuously and publicly disclosed when on average over three
years five percent or more of the total number of students enrolled at
the institution received a title IV credit balance or the average
number of credit balance recipients for the three most recently
completed award years is 500 or more;
Require that institutions that have T1 arrangements
establish and evaluate the contracts governing those arrangements in
light of the best financial interests of students; and
Require that where a T2 arrangement exists and where
either on average over three years five percent or more of the total
number of students enrolled at the institution received a title IV
credit balance, or the average number of credit balance recipients for
the three most recently completed award years is 500 or more, the
institution establish and evaluate the contract governing the
arrangement in light of the best financial interests of students.
The regulations also--
Allow an institution offering term-based programs to
count, for enrollment status 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.
Costs and Benefits: The expected effects of these final regulations
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, and redistribution of some of the costs
of payment of credit balances 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. Institutions, third-party
servicers, and financial institutions will incur implementation costs
related to the regulations. The anticipated effects of the regulations
are detailed in the Discussion of Costs, Benefits, and Transfers in the
Regulatory Impact Analysis as well as the Paperwork Reduction Act of
1995 section of this preamble.
Public Comment: In response to our invitation in the NPRM, 211
parties submitted comments on the proposed regulations. We group major
issues according to subject, with appropriate sections of the
regulations referenced in parentheses. We discuss other substantive
issues under the sections of the proposed regulations to which they
pertain. Generally, we do not address technical or other minor changes.
Analysis of Comments and Changes: An analysis of the comments and
of any changes in the regulations since publication of the NPRM
follows.
General Comments
Comments: The Department received many positive comments regarding
the proposed regulations. These commenters argued that in light of
several recent consumer and government reports and legal actions
documenting troubling practices on the
[[Page 67128]]
part of financial account providers, the Department was justified in
proposing changes to the cash management regulations to ensure title IV
student aid recipients are able to access their title IV funds. The
commenters praised the Department's proposed regulations and stated
that the changes would provide strong protections for students and
disclosure rules that would provide incentives for better behavior in
the college card marketplace.
Many other commenters had concerns about the regulations or
suggestions for how to improve them. These suggestions are discussed in
detail in the remaining sections of this preamble.
Other commenters argued that it would be counterproductive for the
Department to regulate in this area. One commenter asserted that the
fees that students are paying are already lower than the fees they
would be charged for a standard bank account. Other commenters argued
that providers of both T1 and T2 arrangements would be forced to exit
the marketplace, leaving institutions with limited options for
delivering title IV credit balances. Another commenter stated that
institutions would choose not to renew contracts with account
providers. One commenter noted that if this happens, students may be
pushed towards higher-fee products. Other commenters contended that the
costs of compliance would force institutions to raise tuition. One
commenter suggested that the Department assist institutions with the
cost of compliance.
Discussion: We thank the commenters who provided thoughtful
suggestions for how to improve the proposed regulations, and we also
thank those who supported the proposal generally.
We disagree with the commenter who stated that fees under T1 and T2
arrangements are lower than the fees students would encounter in
traditional banking relationships. As stated in the NPRM, there is
significant evidence that students are incurring unreasonably high
fees, particularly, although not exclusively, under T1 arrangements.\3\
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\3\ 80 FR at 28506.
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We also disagree with commenters who expressed concerns that the
new requirements will drive account providers from the marketplace, to
the disadvantage of both institutions and students. We note that
account providers are still permitted to charge the institution
whatever costs the two parties agree to, we have simply limited the
amount and types of fees that are charged to title IV recipients (and
also note that certain fees, including monthly maintenance fees, can
still be passed on to offset costs). In addition, we believe that
account providers recognize the long-term value in establishing
relationships with students who may, in the future, require other
products and services offered by their financial institutions. Because
these more transparent and commonplace fees will be allowable under the
regulations and because of the future opportunities created by
establishing a banking relationship with students, we do not foresee a
situation in which account providers will exit the market and students
will be forced to choose among options that include even higher fees.
Because third-party servicers will still be able to offer savings to
institutions, we do not believe that institutions will choose to
abandon their providers.
We also note that schools are responsible for the costs of
participating in the title IV programs and are required to ensure that
students receive the full balance of title IV funds to which they are
entitled, without additional financial assistance from the Department.
Changes: None.
Legal Authority
Comments: Some commenters supported the Department's legal
authority to regulate issues relating to disbursements of title IV
funds, to ensure that institutions and their servicers act as
responsible stewards of taxpayer dollars, and to enable students to
access the full balance of their Federal student aid.
Several commenters questioned our legal authority to promulgate
these regulations, arguing that the Department lacks the legal
authority to regulate banks and financial accounts.
Commenters further argued that the Department was acting outside
its statutory authority in regulating T2 arrangements, because the bank
accounts under those arrangements fall within the purview of other
government agencies and not within the authority of the Department
under the HEA. Instead, the commenters believed that the Department
should limit its regulations to institutions. These commenters also
pointed to section 492(a)(1) of the HEA, which states that for purposes
of negotiated rulemaking, the Department must consult with
``representatives of the groups involved in student financial
assistance programs under this title, such as students, legal
assistance organizations that represent students, institutions of
higher education, State student grant agencies, guaranty agencies,
lenders, secondary markets, loan servicers, guaranty agency servicers,
and collection agencies.'' The commenters argued that because banks are
not among those groups enumerated in this list, the Department does not
have authority to regulate them.
Another commenter argued that the proposed regulations
impermissibly expanded the definition of ``disbursement,'' and that the
HEA does not authorize the Department to expand the definition of
``disbursement services.''
Another commenter argued that the proposed regulations violate the
First Amendment. Specifically, the commenter argued that by requiring
institutions to list a student's preexisting bank account as the first
and most prominent option, the Department was depriving institutions
that believe that a student's preexisting account is not in the
student's best interests of the right to more prominently display
another account. The commenter argued that a less restrictive means of
achieving the Department's goal would be to require that all account
options are listed neutrally and with objective information.
Discussion: We appreciate the comments supporting our proposal and
agreeing that we have the statutory authority to promulgate the
regulations.
We disagree with the commenters who argued that these regulations
are outside of our purview under title IV of the HEA. The Department is
responsible for overseeing Federal student aid, which annually
disburses billions of dollars intended to benefit students, to ensure
that the program operates as effectively and efficiently as possible.
Multiple statutory provisions vest the Department with broad rulemaking
authority to effectuate the purposes of the program. See, e.g., 20
U.S.C. 1094(c)(1)(B); 1221e-3; 3474. As the statute makes clear,
foremost among those purposes is ensuring that students actually
receive the awards Congress authorized. Thus, for example, Section 487
of the HEA requires that in the program participation agreement an
otherwise eligible institution must enter into before it is authorized
to award title IV funds, the institution must pledge to ``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 ``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.'' Similarly, section
401(f)(1) of the HEA provides that ``[e]ach student financial aid
administrator [at each institution] shall . . . (C) make the
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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 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)(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.'' Given
that these provisions and many more demonstrate an overriding purpose
of ensuring that students receive their title IV funds, it is the
Department's responsibility to use its rulemaking authority to ensure
title IV does not operate as a means to benefit third parties while
inhibiting students' access to the full amounts of their awards. The
GAO report and other investigations show that college card programs can
and sometimes do operate to impair full access. These regulations are
narrowly tailored to prevent that from continuing to happen. The
regulations address a problem directly within the Department's
cognizance and are an appropriate exercise of the Department's
rulemaking authority.
We have consistently interpreted the HEA as authorizing regulation
of the matters addressed in the regulations, including in the 2007 cash
management regulations 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.
Furthermore, we disagree that section 492(a)(1) of the HEA provides
evidence that we are acting outside our statutory authority; on the
contrary, we believe that section further supports our authority.
Section 492(a)(1) provides a list of the groups ``involved'' in the
title IV programs, ``such as'' lenders, secondary markets, and
collection agencies. The term ``such as'' signifies that the list is
illustrative, rather than comprehensive; indeed, the Department has
previously included several other types of representative groups in
negotiated rulemaking. The rulemaking that led to these final
regulations included banking sector representatives who provided
helpful expertise in improving the regulations we proposed. In
addition, the term ``involved'' denotes Congress's recognition that the
Department's regulation of institutions would necessarily impact groups
that are not directly regulated, as is the case here. Finally, lenders,
secondary markets, and collection agencies are certainly entities that
are directly regulated by other government entities, yet are impacted
by the Department's regulation of institutions and the title IV
programs, similar to financial account providers in these regulations.
We are regulating the disbursement process and institutions (and their
servicers) that are authorized to disburse title IV funds under the
HEA.
We also disagree with the commenter who argued that we do not have
the authority to clarify the definition of disbursement services. In
section 401(e) of the HEA, regarding Pell Grants, Congress directed
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.'' This
section further states 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. . .
.'' Under section 455(a)(1) of the HEA, Congress directed the Secretary
to prescribe such regulations as may be necessary to carry out the
purposes of the Direct Loan program. This includes regulations
applicable to third-party servicers and for the assessment against such
servicers of liabilities for violations of the program regulations, to
establish minimum standards with respect to sound management and
accountability of the Direct Loan programs. 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.
Finally, we disagree with the commenter who argued that the
proposed regulations violate the First Amendment. The regulations do
not require an institution to endorse a particular banking product as a
vehicle for title IV credit balance funds--in fact, the regulations
prohibit institutions from expressly stating or implying that a
particular account is required to receive their funds. We included this
limitation to counteract the practices employed by some financial
account providers that were leading title IV recipients to believe that
a particular account was required. The provision requiring that the
student be given a neutral list of accounts affords the student the
opportunity to select an account that is the best fit for that
individual. The requirement that a student's preexisting account be
listed first and most prominently, rather than endorsing that option,
simply ensures that students can easily locate and select the option to
receive their funds via an account they have already chosen without
confusion or additional steps. As we described in more detail in the
NPRM,\4\ we proposed this requirement because government and consumer
reports found several examples where it was difficult or impossible for
a student to determine how to have funds deposited in a preexisting
account. In addition, we have eliminated the requirement for a
``default'' option (please refer to the student choice section of this
preamble for further discussion); we believe that this will provide a
student with a simple, neutral means of determining the available
options for receiving title IV funds and represents the least
restrictive means for doing so. For these reasons, among others, the
provision does not violate the First Amendment, but is absolutely
necessary.
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\4\ 80 FR at 28497-28499.
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Changes: None.
Possible Conflict With Existing Laws and Regulations
Comments: Some commenters argued that the Department's regulatory
efforts are duplicative of, or will conflict with, existing banking
regulations from other Federal entities. These commenters argued that
other existing federal laws and regulations, including the Electronic
Fund Transfer Act,\5\ the Dodd-Frank Wall Street Reform and Consumer
Protection Act,\6\ the Truth in Savings Act,\7\ the Expedited Funds
Availability Act,\8\ and the Federal Trade Commission Act of 1914,\9\
already
[[Page 67130]]
provide sufficient student choice measures and protections and the
Department's efforts would conflict with those provisions.
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\5\ Public Law 95-630, and implemented in Regulation E, 12 CFR
part 205.
\6\ Public Law 111-203.
\7\ Public Law 102-242.
\8\ Public Law 100-86.
\9\ 15 U.S.C. 41-58.
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Commenters contended that the existence of these laws demonstrates
a congressional intent to exclude the Department from regulating in
this area, and that the Department lacks the expertise to do so. One
commenter also alleged that the Department issued the proposed
regulations based only on information from consumer advocacy groups and
without consulting banking regulators.
Discussion: We disagree with commenters who argued that the
proposed regulations would duplicate or conflict with existing banking
regulations. As we repeatedly stated throughout the preamble to the
NPRM, we are not regulating banks or banking products. As a threshold
matter, to the extent that institutions elect to contract with other
parties, the regulations may impact those contracted parties. That does
not, however, make those parties the subjects of the Department's
regulations.
We recognize that there are numerous laws, regulations, and
government entities that govern the banking sector and we have
specifically limited the reach of the regulations where there might
have been conflict or overlap (for example, by not requiring a
duplicative disclosure of account terms already required under banking
regulations when a student has already selected an account outside the
student choice menu). We wish to make clear that these regulations
govern institutions and the arrangements they voluntarily enter into
that directly affect title IV disbursements, recipients, and taxpayer
funds authorized under the HEA.
The commenters did not identify language in any law or regulation
administered by another Federal agency that conflicts with the
regulations, and neither have we in conducting our review or consulting
with other agencies, including the Consumer Financial Protection Bureau
(CFPB). Congress entrusted the Department with the responsibility for
protecting the integrity of the title IV, HEA programs, and that is the
purpose these regulations serve.
We also disagree with the commenter who stated that the Department
did not seek out the expertise of banking regulators. As stated in the
NPRM, the Department ``consulted Federal banking regulators at FDIC,
[the Office of the Comptroller of the Currency] OCC, and the Bureau of
the Fiscal Service at the United States Department of the Treasury
(Treasury Department), and CFPB, for help in understanding Federal
banking regulations and the Federal bank regulatory framework'' while
developing the proposed regulations.\10\ We have continued discussing
these matters as we developed the final regulations to ensure that any
regulatory changes are appropriate given existing banking rules.
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\10\ 80 FR at 28523.
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Changes: None.
Role of Existing Protections and Validity of Consumer and Government
Reports
Comments: Some commenters argued that existing cash management
regulations provide sufficient protections for students and these
regulations are unnecessary. These commenters noted that existing
regulations already contain certain disclosure, notification, and
insurance requirements, as well as some fee prohibitions. One commenter
argued that existing Federal requirements have already resulted in
corrective action.
One commenter questioned the validity of the reports underlying the
justification for the proposed regulations. This commenter noted that
the Office of the Inspector General (OIG) only studied four schools,
just one of which had a T2 arrangement, and that no issues were found
regarding the T2 arrangement. This commenter also contended that the
Government Accountability Office (GAO) stated that the practices it
uncovered already violated current regulations and consumer protection
laws.
Discussion: We disagree with the commenters who argued that the
Department's existing cash management regulations provide sufficient
protections to students. As commenters noted, our long-standing
regulations authorized under the HEA already contain requirements
relating to disclosures, notifications, fee prohibitions, and several
other topics involving the institutional disbursement process. While we
believe these protections are important for students, the numerous
instances of troubling behavior identified by government and consumer
groups and discussed in detail in the NPRM demonstrate that additional
protection is necessary. We also note that while the legal system has
addressed some issues associated with these types of arrangements, it
has not and cannot resolve every issue that has been raised regarding
T1 and T2 arrangements, and thousands of title IV recipients would be
harmed in the intervening time. We believe the regulatory framework
presented in this document is better suited to address the issues and
recommendations jointly agreed upon by numerous government and consumer
investigations.
We also disagree with the commenter who questioned the Department's
reliance on an OIG report. Although the OIG reviewed the practices of
only four schools, those schools collectively represent 158,000
enrolled students and 596.6 million title IV dollars in total.\11\ The
OIG noted in its report that under what would now been defined as T2
arrangements, ``students sometimes misunderstood how the two accounts
worked and whether the checking account was required.'' \12\
Additionally, the proposed regulations were based on much more than a
single report. As we noted throughout the preamble to the NPRM, a
number of independently prepared government and consumer reports from
the GAO, United States Public Interest Research Group (USPIRG),
Consumers Union, and others all came to a consensus (shared by the OIG
report) regarding the severity and scope of the troubling practices
employed by several financial account providers in the college card
market. Additionally, legal actions, both by private individuals and
government entities, substantiated many of the claims in these reports.
These reports were also in agreement that corrective action and
additional protections are needed. For all these reasons--rather than
on the basis of a single, limited report as the commenter implied--we
proposed regulatory changes to subpart K.
---------------------------------------------------------------------------
\11\ 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].''
\12\ OIG at 11.
---------------------------------------------------------------------------
We also disagree that the GAO only found violations of current
consumer protection laws and regulations. For example, the GAO
specifically recommended several corrective actions for the Secretary
to undertake, including developing requirements for distributing
objective and neutral information to students and parents.\13\ Changes:
None.
---------------------------------------------------------------------------
\13\ United States Government Accountability Office. ``College
Debit Cards: Actions Needed to Address ATM Access, Student Choice,
and Transparency,'' page 35 (2014), available at www.gao.gov/assets/670/660919.pdf (hereinafter referred to as ``GAO at [page
number]'').
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Request for Extension of the Comment Period
Comments: In view of the length and nature of the issues discussed
in the NPRM, some commenters requested that the Department extend the
comment period. One commenter requested a 30-
[[Page 67131]]
day extension, while another commenter requested an extension of at
least 60 days to be consistent with the general recommendations in
Executive Order 13563.
Discussion: While we agree that the issues addressed in the
proposed regulations are important and deserve thoughtful deliberation
and discussion, we also have a duty to protect title IV funds, aid
recipients, and taxpayers. If we had extended the comment period beyond
45 days, we would have been unable to comply with the master calendar
provision of section 482(c) of the HEA, which requires that the
Department publish final regulations before November 1 to take effect
on July 1 of the following year. (In this case, we need to publish
final regulations by November 1, 2015, in order for the regulations to
be effective on July 1, 2016.) An extension of the comment period would
therefore allow the abuses identified to persist an additional year. We
also believe that 45 days provided the public a meaningful opportunity
to comment, and this is supported by the complex and thoughtful
comments we received.
Executive Order 13563 seeks, where feasible and in accordance with
law, to promote participation and input by and from the public and
interested stakeholders in general notice and comment rulemaking that
is conducted pursuant to the Administrative Procedure Act (APA), 5
U.S.C. 553. The APA, in contrast to title IV, does not contemplate
proceedings that include negotiated rulemaking--extensive additional
participatory proceedings that are generally required by title IV and
were in fact conducted as part of this rulemaking. Those negotiations,
preceded by regional public hearings, provided opportunities for public
participation and stakeholder input far in excess of 60 days. The
purposes of the Executive order have been more than met, and a longer
comment period would have been neither feasible, consistent with the
master calendar provision, nor in the public interest.
We also note that we directly responded to each of the commenters
who requested an extension of the comment period with a message similar
in substance to the preceding discussion. We sent these responses as
quickly as was practicable to provide notice to these commenters that
we would not be extending the comment period and to give them
sufficient time to submit substantive comments on the proposed
regulations prior to the close of the comment period.
Changes: None.
Definitions (Sec. 668.161(a))
Comments: One commenter generally appreciated the inclusion of
credit unions in the definitions of ``financial institution'' and
``depository institution.'' However, this commenter also asked that the
Department recognize the unique structure of credit unions as ``member-
owned cooperatives'' when drafting future regulations. Another
commenter asked that the Department exempt credit unions that serve
students and alumni of an institution. Another commenter praised the
Department for adding definitions of ``access device,'' ``depository
account,'' ``EFT (Electronic Funds Transfer),'' ``financial account,''
``financial institution,'' and ``student ledger account.''
However, one commenter also asked that we include a clear
definition of ``third-party servicer'' in the regulations, stating that
it was unclear without such a definition whether certain banking
activities could cause a financial institution to become a T1 entity.
Discussion: We thank the commenters for their support of our
definitions, and we will take note of one commenter's request to keep
the unique structure of credit unions in mind as we draft future
regulations. However, on review of the final regulations, we have found
no provisions warranting separate treatment of credit unions.
Finally, for a more thorough discussion regarding what types of
activities would trigger the T1 requirements, please see the Tier One
(T1) Arrangements section of this preamble.
Changes: Consistent with the removal of ``parents'' in Sec.
668.164(d)(4)(i), (e), and (f) in this final rule(the reasons for which
are discussed in the student choice section of this preamble), we have
also removed references to ``parent'' from the definition of ``access
device.''
Non-Prepaid/Debit Provisions
Paying Credit Balances Under the Reimbursement and Heightened Cash
Monitoring (HCM) Payment Methods (Sec. 668.162(c) and (d))
Comments: Several commenters objected to the provision in Sec.
668.162(c) and (d) under which an institution must pay any credit
balance due to a student or parent before it seeks reimbursement from,
or submits a request for funds to, the Secretary. For the benefit of
the reader, HCM1 refers to the payment method described under the
heightened cash monitoring provisions in Sec. 668.162(d)(1) and HCM2
refers to the provisions in Sec. 668.162(d)(2).
One of the commenters argued that a credit balance does not occur
when an institution posts on a student's ledger account, as an
``anticipated disbursement,'' the amount of title IV, HEA program funds
that the student is expected to receive. The commenter asserted that at
the time the institution submits a reimbursement request such postings
are merely transactions on student ledger accounts pending the
Department's review and subsequent release of the funds associated with
the posted amounts. The commenter argued that without a requirement on
the Department to process reimbursement requests in a timely manner,
institutions will have to wait for the requested funds through a
process than can be arduous and riddled with delays, citing instances
where reimbursement requests were delayed for 45 to 60 days because the
analysts assigned by the Department to review those requests were out
of the office or assigned to other projects. The commenter stated that
these delays are further exacerbated by an administrative process under
which the Department allows an institution to submit only one
reimbursement request every 30 days, which further delays the release
of title IV, HEA program funds to the institution to cover a student's
direct cost of tuition, books, and fees. However, the commenter
believed this proposal was reasonable for an institution placed on HCM1
because under that payment method the institution is not dependent on
the Department to act timely--it controls the timing of its cash
requests. Finally, some commenters stated that the HCM requirements
were not clearly articulated in the proposed regulations, and
questioned whether the requirement to first pay credit balances applied
to an institution placed on HCM1. The commenters suggested that the
Department only require institutions placed in HCM2 to pay credit
balances before seeking reimbursement.
Another commenter noted that guidance published in the 2014-15 FSA
Handbook already provides that an institution placed on reimbursement
must first pay required credit balances before it submits a
reimbursement request, but questioned why the Department extended that
provision in the NPRM to apply to an institution placed on heightened
cash monitoring. This commenter, and others, argued that the Department
should consider the nature of the compliance concerns that trigger
whether an institution is placed on reimbursement or HCM. For example,
where there are serious concerns about an institution's ability to
[[Page 67132]]
account appropriately for title IV, HEA program funds an institution
would be placed on reimbursement, but for technical reasons or less
troublesome compliance and financial issues, the institution could be
placed on HCM1. The commenters noted that an institution is typically
placed on HCM1 for failing to meet the financial responsibility
standards under Subpart L of the General Provisions regulations; but
under those regulations the institution must a submit a letter of
credit for an amount determined by the Department and payable to the
Department. The commenters stated that the letter of credit serves as a
sufficient guarantee of the institution's ability to fulfill its
financial obligations.
Under the circumstance where administrative capability is not at
issue, the commenters questioned why the Department proposed to require
the institution, which may be operating at lean margins at the
beginning of a payment period, to ``front'' additional funds to pay
credit balances to students that may include significant amounts for
student housing and other living expenses. Similarly, another commenter
believed that an institution would be penalized by having to act as a
private lender of their own funds to students to meet the proposed
requirement to pay credit balances before seeking funds from the
Department. The commenter suggested regulatory language that would
allow the institution to pay credit balances upon receiving funds from
the Department. Alternatively, the commenter suggested changing the
definition of disbursement for an institution placed on HCM or
reimbursement to stipulate that funds requested for non-direct costs
that would generate a credit balance are considered disbursed after the
institution credits the student's account and receives the funds from
the Department.
One commenter argued that requiring the institution to pay credit
balances with institutional funds would push it into a temporary cash-
flow position under which the institution would shoulder the costs of
students' decisions about how much to borrow above the cost of tuition
and fees, particularly where those decisions are beyond the control of
the institution. The commenter stated that under the gainful employment
regulations, the Department does not hold an institution accountable
for costs that it does not control and should therefore refrain from
placing undue financial strain on an institution that stems from
decisions made by students. Moreover, because students may add or drop
classes early in a payment period, students may move from one category
to the other, introducing additional burden. For these reasons, the
commenter suggested that an institution placed on HCM should have the
option of (1) paying credit balances before seeking reimbursement, or
(2) putting in escrow an amount equal to the expected credit balances
and subsequently requesting funds prior to paying those credit
balances.
One commenter stated that if the intent of the proposed regulations
is to require an institution placed on HCM1 to first make credit
balance payments, the commenter suggested that the Department
explicitly require that as soon as an HCM1 institution initiates an EFT
to the student's account, it may immediately request the funds from the
Department and that those funds will be available within the same 24-48
hours timeframe that is currently in place.
A commenter questioned whether the Department intended to require
an institution to credit all of a student's title IV, program funds at
once, thereby creating a credit balance, or prohibit the institution
from submitting a reimbursement request that includes a credit balance
that has not been paid. The commenter provided the following example: a
student is due to receive $15,000 in title IV program funds and
institutional charges are $10,000. Can the institution credit just
$10,000, get reimbursed, then credit or directly pay the other $5,000,
and then get reimbursed for that, or must the institution credit all
$15,000 and pay out the $5,000 before it can get any funds back in
reimbursement? Along the same lines, another commenter argued that the
proposed regulations present a significant administrative burden for an
institution placed on HCM1 because the institution would need to seek
payment from the Department separately for two categories of students--
those who are expected to receive a credit balance and those who are
not.
A commenter requested the Department to provide examples of
documentation that may be considered appropriate proof that an
institution paid credit balances prior to seeking reimbursement, and to
outline the steps necessary for the institution to be removed from the
HCM and reimbursement payment methods.
Discussion: As a general matter, under the current and previous
regulations the payment method under which the Department provides
title IV, HEA program funds to an institution does not in any way
excuse the institution from meeting the 14-day credit balance
requirements under Sec. 668.164(h) or the provisions for books and
supplies under Sec. 668.164(m). In the NPRM, we proposed to require an
institution placed on HCM or reimbursement to make any credit balance
payments due to students and parents before the institutions would be
able to submit a reimbursement request under HCM2 or submit a request
for cash under HCM1, to assure the Department that the institution made
those payments before title IV funds are provided or made available to
the institution. We note that an institution may still make credit
balance payments at any time within the 14-day timeframe, but if the
institution wants to include in its reimbursement or cash request a
student or parent who is due a credit balance, the institution must pay
that credit balance even if there is time remaining under 14-day
provisions to make that payment.
With regard to payment methods, under section 401(a)(1) of the HEA
and Sec. 668.162(a), the Secretary has the sole discretion to
determine whether to provide title IV, HEA program funds to an
institution in advance or by way of reimbursement. The Department
places an institution on reimbursement or HCM for compliance,
financial, or other issues the Department believes necessitate a higher
level of scrutiny. In general, these issues relate directly to the
compliance history of the institution or its failure to satisfy
financial standards that serve as proxy for the institution's ability
to (1) provide the services described in its official publications, (2)
administer properly the tile IV, HEA programs in which it participates,
and (3) meet all of its financial obligations. Requiring institutions
to pay credit balances prior to obtaining funds from the Department is
consistent with that higher level of scrutiny.
To provide the reader a more complete primer, under Sec.
668.164(a), 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 (1) funds its receives from the
Secretary, or (2) institutional funds used in advance of receiving
title IV, HEA program funds. With regard to crediting a student's
ledger account, we clarified in the preamble to the NPRM published on
September 23, 1996 (61 FR 49878) and in the preamble to the final
regulations published on November 29, 1996 (61 FR 60589) that a
``credit memo'' is not a disbursement--it merely represents an entry
made by the institution, noting the type and amount of the title IV,
HEA program awards the student qualifies to receive, for the purpose of
generating invoices or bills
[[Page 67133]]
to students for institutional charges not covered by those awards.
With this background in mind, the comment that transactions on the
student's ledger account are merely anticipated disbursements pending
review by the Department of a reimbursement request is, at best,
confusing. If the postings of anticipated disbursements are credit
memos, then an institution placed on reimbursement or HCM cannot submit
a reimbursement or cash request because it has not properly made
disbursements to eligible students. If the postings represent actual
disbursements, then regardless of any delays or administrative
processes, under current and past regulations the institution is
obligated to pay any credit balances due to students regardless of when
the institution received funds to make those payments. With regard to
comments about processing reimbursement requests timely, the Department
takes care to assign adequate staff, but minor delays will occur from
time to time. We note that the vast majority of delays in approving
reimbursement requests occur because institutions do not provide the
requested documentation or acceptable documentation.
With regard to the comments that the Department should distinguish
between the alternate methods of payment (i.e., between HCM and
reimbursement or between HCM1 and HCM2) in applying the requirement to
pay credit balances before requesting funds, we do not believe the
distinction is warranted. Regardless of the alternate payment method
the institution is placed on, or whether it submits a letter of credit
to the Department for failing to satisfy the financial responsibility
standards or for other reasons, the institution must still make
required credit balance payments to students in a timely fashion. While
we agree with the commenters that a letter of credit provides some
measure of protection to the Department, it does nothing for students
who are the primary beneficiaries of title IV, HEA program funds, and
is not tied in any way that we can determine with the institution's
fiduciary duty to make timely payments to students.
With respect to the comments that an institution would have to
``front'' institutional funds to students, that has always been and
continues to be the nature of the alternate payment methods. As
previously noted, in the ordinary course, an institution is placed on
an alternate payment method based on concerns about its financial
capacity or ability to properly administer the title IV, HEA programs.
Requiring that the student beneficiaries are protected under these
circumstances is consistent with the purpose behind the alternate
methods of payment. In addition, we do not believe it is appropriate to
change the disbursement process, such as putting credit balances in
escrow or altering when funds are considered disbursed, to accommodate
institutions with compliance issues.
With respect to the comment that the Department does not hold an
institution accountable under the gainful employment regulations for
costs it does not control, we note that a student's loan debt is capped
at the total amount of tuition, fees, books, supplies, and equipment in
determining the debt to earnings (D/E) rate of a program. So, to the
extent that the student borrows funds in excess of that amount to pay
for living costs, the excess funds are not counted in calculating the
D/E rate, but all of the student's loan funds are counted in
calculating the median loan debt of the program that is used for
disclosure purposes. In any event, capping loan debt for the purpose of
calculating a performance metric has no bearing on paying credit
balances to students. Regardless of whether an institution has or
exercises control of the amount of title IV, HEA program funds the
student elects to borrow, the institution is responsible for disbursing
the awards, including making credit payments to those students.
In response to the comment that the Department explicitly allow an
institution on HCM1 institution to request funds immediately after it
initiates an EFT to the student's account, we note that under Sec.
668.164(a) an institution makes a disbursement on the date it credits a
student's ledger account or pays the student directly. As provided in
Sec. 668.164(d), an institution pays a student directly on the date it
initiates an EFT to the student's financial account. So, the
regulations already provide that as soon as an institution on HCM1
makes a disbursement, it may request funds from the Department.
In response to the comment about whether an institution must credit
the student's account with all the funds the student is eligible to
receive for a payment period, it depends. For example, if the
institution determines at or before the time it submits a reimbursement
or cash request that a student is eligible for a Federal Pell Grant but
not yet eligible for a Direct Loan (either because the student has not
signed a master promissory note or for some other reason), the
institution may include the student on that reimbursement or cash
request. When the student establishes eligibility for the Direct Loan,
the institution is required to credit the student's account with the
loan funds and pay any resulting credit balance before including that
student on a subsequent reimbursement or cash request. In most cases,
however, the institution will have determined before submitting a
reimbursement or cash request that the student was eligible to receive
all of his or her awards for a payment period and therefore the amount
of all of those awards will have to be credited, in full, to the
student's ledger account and the institution will have to pay any
resulting credit balance before including the student on a
reimbursement or cash request.
With respect to the request that the Department provide examples of
the documentation needed to prove that an institution paid credit
balances and outline the steps necessary for an institution to be
removed from the HCM and reimbursement payment methods, we believe that
both of these issues are best addressed administratively on a case-by-
case basis depending on how the payments were made or the steps than an
institution takes to correct its financial or compliance issues.
Changes: None.
Institutional Depository Account (Sec. 668.163)
Comments: Under proposed Sec. 668.163(a), an institution located
in a State must maintain title IV, HEA program funds in an insured
depository account. Some commenters supported the Department's proposal
that an institution may not engage in any practice that risks the loss
of Federal funds.
One commenter noted than an institution may have a ``sub'' account
for title IV, HEA program funds within its operating account and asked
whether this arrangement was acceptable or whether the institution
needed to maintain title IV funds in a completely different bank
account with no other operating funds and insured at the FDIC limit of
$250,000. Similarly, another commenter asked the Department to clarify
the insurance requirement because most institutions maintain title IV
funds in accounts with balances that exceed FDIC or NCUA insurance
limits.
Another commenter asked whether an institution had to disburse
title IV, HEA program funds from the same account that the funds were
originally deposited into, and, if not, whether the institution could
sweep the funds in the account from which they are disbursed.
Another commenter stated that nightly sweeps are a standard
practice for large organizations and the commenter is not aware of any
losses
[[Page 67134]]
stemming from funds held in secured investment accounts. However,
because most colleges and universities disburse title IV funds before
submitting a cash request or disburse shortly after receiving the
funds, the commenter stated the issue of where the funds are held is
less important than it was in the past.
Discussion: Under Sec. 668.163(b), the Department may require an
institution with compliance issues to maintain title IV, HEA program
funds in a separate depository account. However, as a general matter,
an institution may use its operating account, or a subaccount of its
operating account, as long as the operating account satisfies the
requirements in Sec. 668.163(a)(2). With regard to the insurance
limit, it does not matter whether an institution maintains title IV,
HEA programs funds in a depository account in an amount higher than the
insurance limit, it only matters that the account itself is insured by
the FDIC or NCUA.
In response to whether an institution must use the same account for
depositing and disbursing title IV, HEA program funds, the institution
may choose to use the same depository account or different accounts
(e.g., a depository account into which title IV, HEA program funds
received from the Department are transferred or deposited and an
operating account from which disbursements are made to students and
parents). Regardless of whether the institution uses the same account
or more than one account, it must ensure that title IV, HEA program
funds maintained in any account are not included in any sweeps of any
account. For example, if an institution transfers funds from its title
IV depository account to its operating account, any title IV funds held
on behalf of students cannot be included as part of the sweep of other
funds in its operating account.
With regard to the commenter who stated no losses have occurred on
title IV funds held in secure investment accounts, we reiterate our
position that, given the $500 limit on retaining interest earnings,
there is no point in placing Federal funds at risk. About the comment
regarding the declining importance of maintaining Federal funds in
investment accounts, we assume the commenter is referring to the wind-
down of the Federal Perkins Loan Program (see Dear Colleague Letter
GEN-15-03). Previously, an institution could maintain its Perkins Loan
Fund in a secure investment account and any interest earned would
become part of the Fund and available to the institution to make
Perkins Loans to students. Now that the statutory authority for
institutions to make Perkins Loans has ended, there is no need for
investment accounts.
Changes: None.
Comments: A commenter agreed with our proposal in Sec.
668.163(a)(1) that the Secretary may approve a depository account
designated by a foreign institution if the government of the country in
which the institution is located does not have an agency equivalent to
the FDIC or NCUA. However, the commenter believed that the requirements
in Sec. 668.163(a)(2)--that the name of the depository account must
contain the phrase ``Federal funds'' or the institution must notify the
depository institution that the account contains title IV, HEA program
funds--were not meaningful in a foreign context and should be removed.
In addition, the commenter noted that the laws in foreign countries may
in some cases preclude an institution from maintaining funds in
interest-bearing accounts as required under Sec. 668.163(c). To avoid
conflicts with the regulations in these instances, the commenter
suggested that the provisions for interest-bearing accounts apply only
to domestic institutions.
Discussion: We agree that the provisions for maintaining title IV,
HEA program funds in interest-bearing accounts, and for including the
phrase ``Federal funds'' in the name of the depository account or
notifying the depository institution that Federal funds are maintained
in those accounts, may not be meaningful or relevant to foreign
institutions.
Changes: We have revised the notice requirements in Sec.
668.163(a)(2) and the interest-bearing account requirements in Sec.
668.163(c)(1) so they apply only to institutions located in a State.
Disbursements During the Current Payment Period (Sec. 668.164(b)(1))
Comments: Under proposed Sec. 668.164(b)(1), an institution must
disburse during the current payment period the amount of title IV, HEA
program funds the student or parent is eligible to receive, except for
Federal Work Study (FWS) funds or unless the provisions in 34 CFR
685.303 apply. Because Sec. 685.303 contains a number of provisions,
one commenter asked the Department to specify the provisions that apply
to disbursing funds during the current payment period.
Discussion: We agree with the commenter that a specific cross
reference to Sec. 685.303 would be helpful. Under Sec.
685.303(d)(4)(i), if one or more payment periods have elapsed before an
institution makes a disbursement, the institution may include loan
proceeds for completed payment periods in the disbursement. This is the
only circumstance in Sec. 685.303 that is an exception to the general
rule specified in Sec. 668.164(b)(1) that an institution must disburse
during the current payment period the amount of title IV, HEA program
funds the student or parent is eligible to receive.
Changes: We have amended Sec. 668.164(b)(1) to specify that an
institution must disburse during the current payment period the amount
of title IV, HEA program funds the student or parent is eligible to
receive except for FWS funds or unless 34 CFR 685.303(d)(4)(i) applies.
Confirming Eligibility (Sec. 668.164(b)(3))
Comments: Some commenters objected to the proposal in Sec.
668.164(b)(3) under which a third-party servicer, along with the
institution, would be responsible for confirming a student's
eligibility at the time a disbursement is made. The commenters stated
the current regulations are clear that a disbursement occurs when an
institution credits a student's account with title IV funds or pays
title IV funds to a student directly. These commenters argued that the
proposal contradicts the existing provision in 34 CFR 668.25(c)(4) by
expanding the requirement to confirm student eligibility to servicers
who have any involvement with the disbursement process and not just to
servicers who actually disburse funds as already provided in Sec.
668.25. The commenters noted that many third-party servicers provide,
among other services, reporting and reconciliation of institutionally
provided data to the Department as a liaison between the institution
and the Department. The commenters stated that extensive regulations
already cover disbursement of Federal aid to eligible students, and
that it is ultimately the institution's responsibility to ensure fiscal
accountability and to fulfill its fiduciary duty under the terms of its
Program Participation Agreement. The commenters opined that requiring a
servicer to confirm a student's eligibility results in a higher
standard of care, additional administrative burdens and cost being
forced upon institutions that elect to engage a servicer that do not
exist for institutions that do not use a servicer. The commenters
argued that the additional and duplicative confirmation process would
also likely result in unnecessary disbursement delays to eligible
students. The commenters also objected to third-party servicers being
held jointly responsible for the veracity of any information provided
to them by the institution,
[[Page 67135]]
arguing that servicers are not officials of the institution, or part of
its ownership or on-campus management team. The commenters reasoned
that requiring a servicer, or any other unrelated entity, to be
responsible for information provided by its client institution is
comparable to requiring a CPA or other tax preparation service to be
responsible for the accuracy, completeness, and validity of their
clients' income, expense, and deduction claims. Because rules are
already in place regarding taxpayer and institutional liability for
non-compliance with Federal aid disbursements, the commenters argued
that expanding institutional liability to third-party servicers that
have no authority to control the actions of institutions or their
employees is unnecessary. The commenters stated that institutions that
typically engage a servicer are small businesses and the significant
cost that they would incur to have servicers perform a function that
the institution is already required by regulation to perform would
result in either school closures, higher tuition costs, or
inexperienced aid administrators with no ability to engage a servicer.
Similarly, another commenter opined that the proposed regulations
would apply to nearly all servicers since virtually all of them perform
activities that could be characterized as ``leading to or supporting''
disbursements. The commenter stated that the function of confirming the
enrollment and eligibility status for each student for whom a
disbursement is ordered requires review of original source records and
information created and maintained by the institution, a process which
can entail a considerable amount of time. Although the commenter
acknowledged that the Department indicated in the preamble to the NPRM
that an institution and a servicer could establish a process under
which the servicer periodically affirms that the institution confirmed
student eligibility at the of disbursement, the commenter argued that
the language in proposed Sec. 668.164(b)(3) appeared to impose a duty
on the servicers themselves to confirm enrollment and eligibility
status. In addition, the commenter argued that the process discussed in
the preamble was ambiguous, with many unaddressed factors including the
frequency of servicer reviews, the percentage of files that need to be
sampled, the method of selecting files, the level of error that should
be cause for concern, and the course of action that should be taken if
that error level is detected.
The commenter also inferred that third-party servicers who perform
activities leading to or supporting a disbursement will be required to
calculate the return of title IV funds for those students who withdraw
prior to completing a payment period for which a disbursement is made.
The commenter argued this proposal effectively redefines when a
servicer is considered to be a servicer who ``disburses funds'' for
purposes of 34 CFR 668.25(c)(4). Moreover, the commenter was concerned
that if a servicer is considered to have a separate and independent
duty to confirm enrollment and eligibility under Sec. 668.164(b)(3),
the servicer would be liable under 34 CFR 668.25(c)(3) for paying those
liabilities in the event the institution closed. In addition, the
commenter opined that the HEA does not authorize the Secretary to
impose on servicers, through an expansive definition of disbursement,
title IV functions and obligations of an institution that the servicer
has not agreed to assume under its contractual relationship with that
institution.
The commenter lastly opined that it would be inconsistent to treat
a software provider as a third-party servicer if the provider used
student aid information from its software product to perform COD
reporting, reconciliations, or other business functions, but not treat
as a third-party servicer a software provider whose product performs
the same functions, including activities that lead to or support a
disbursement, that are carried out by an institution. Along these
lines, the commenter concluded that third-party servicers and software
providers that perform title IV functions on behalf of institutions
would potentially be jointly and severally liable for title IV errors,
but a software provider whose product is used solely by an institution
would not, even though that product performs functions that lead to or
support disbursements. For these reasons, the commenter concluded that
the proposed regulations likely will preclude many institutions from
having access to the expertise and services provided by third-party
servicers and software service providers and thereby will result in a
higher incidence of title IV errors. In addition, the commenter argued
that the proposed regulation likely will put some third-party
servicers, software service providers, and institutions out of
business.
Another commenter noted that organizations are considered third-
party servicers if they deliver title IV credit balances, but opined
that the cash management regulations appear to be written for a very
small subset of servicers who have complete access to all award and
billing information, enabling them to make title IV eligibility
determinations and consequently control the disbursement process. The
commenter stated that most third-party servicers participate in only a
few steps of the overall disbursement process and have very little
insight or influence on the process of awarding financial aid. These
third-party servicers are not involved in determining the eligibility
of students or the corresponding amounts to be disbursed. The commenter
was concerned that unless the proposed rule is amended, the
responsibility and potential liability of a service provider could far
outweigh any reasonable charges for disbursement services, and
suggested that the Department clarify the various types of service
providers and the degree of responsibility and liability associated
with each type.
Discussion: We disagree with the commenters that portray a third-
party servicer as merely a liaison between an institution and the
Department or as an unrelated entity that simply uses whatever
information a client provides to conduct transactions on the client's
behalf. As provided in Sec. 668.25(c)(1), when a third-party servicer
enters into a contract with an institution, the servicer must agree to
comply with the statutory provisions in the HEA and the regulations
governing the title IV, HEA programs that fall within the ambit of the
activities and transactions the servicer will perform under that
contract. In performing those activities and transactions on behalf of
the institution, the third-party servicer must act as a fiduciary in
the same way that the institution is required to act if it performed
those activities or transactions itself. So, in the capacity of a
fiduciary, the third-party servicer is subject to the highest standard
of care and diligence in performing its obligations and in accounting
to the Secretary for any title IV, HEA program funds that it
administers on behalf of the institution.
In situations like those described in the NPRM, where a third-party
servicer determines the type and amount of title IV, HEA program awards
that students are eligible to receive, requests title IV funds from the
Department for those students, or accounts for those funds in reports
and data submissions to the Department, the servicer has a fiduciary
duty to ensure that disbursements are made only to eligible students
for the correct amounts. Otherwise, improper disbursements may be made
to students that in turn affect the accuracy of the institution's
fiscal records and data
[[Page 67136]]
reported to the Department. Moreover, where a third-party servicer is
engaged to perform one or more of these activities it is not possible
to confine the servicer's fiduciary responsibilities to discrete
functions, as the commenters proffer, because these activities are
interrelated. For example, a servicer that determines the type and
amount of awards that students are eligible to receive and requests
funds from the Department, would rely on the award amounts for those
students in requesting the funds necessary to meet the institution's
immediate disbursement needs.
We disagree with the assertion made by the commenters that an
institution is solely responsible for disbursement errors simply
because the institution makes an entry crediting a student's ledger
account. As a practical matter, where a third-party servicer is engaged
to determine the type and amount of title IV, HEA program funds that a
student is eligible to receive, the institution may reasonably rely on
that information in crediting the student's ledger account. Moreover,
disbursing funds is a process that begins with determining the awards
that a student is eligible to receive and culminates in making payments
of those awards to the student. So, the act of crediting the student's
ledger account is just part of that process--it simply identifies the
date on which the student receives the benefit of title IV, HEA program
funds.
With regard to the concerns raised by the commenters that requiring
a third-party servicer to confirm eligibility at the time of
disbursement would be costly, cause delays, and duplicate the work of
the institution, we believe those concerns are overstated. As discussed
more fully in Volume 4, Chapter 2 of the FSA Handbook,\14\ in
confirming eligibility, an institution determines whether any changes
or events have occurred, from the date that a student's awards were
made to the date the student's ledger account is credited, that may
affect the type and amount of those awards. Most of these changes and
events relate to the student's enrollment at the institution--whether
the student began attendance in classes, the student's enrollment
status, whether the student successfully completed the hours in the
prior payment period, and whether a first-time borrower has completed
the first 30 days of his or her program. Other events include whether
the institution has any new information that would cause the student to
exceed his or her lifetime eligibility for Federal Grants, or for
Direct Loans, whether the student has a valid master promissory note.
These are basic enrollment and award tracking functions required of all
institutions under the record retention provisions in Sec. 668.24 and
applicable program regulations, so we see no reason why it would be
costly or time consuming for an institution to implement a process
where this information is shared with its third-party servicer.
---------------------------------------------------------------------------
\14\ Available at https://ifap.ed.gov/ifap/byAwardYear.jsp?type=fsahandbook&awardyear=2015-2016.
---------------------------------------------------------------------------
As we explained in the preamble to the NPRM (80 FR 28495), the
institution and its third-party servicer may establish a process under
which the institution confirms eligibility and the servicer verifies
periodically that the confirmations were made in accordance with that
process. With regard to the comments that the Department should specify
the requirements or procedures used under these processes, we do not
believe that is necessary--the institution and the servicer should be
sufficiently motivated to implement credible processes because they are
jointly responsible and jointly liable.
With regard to comments that the proposed regulations contradict
the existing provisions in Sec. 668.25(c)(4), the Department
respectfully disagrees. As discussed previously in this section and in
the NPRM, the language holding an institution and its third-party
servicer responsible for confirming a student's eligibility is not a
new policy or a change in policy--it merely emphasizes current
requirements and reiterates institutional and servicer
responsibilities.
In response to the comment about whether software providers or the
use of their products are treated in the same way as third-party
servicers, we would make that determination on a case-by-case basis
depending on the how the software products are used and the role of the
software provider in performing title IV functions.
With regard to the comments that the proposed regulations require
servicers who perform activities leading to or supporting a
disbursement to also calculate the return of Title IV funds for
students who withdraw, that responsibility already exists in 34 CFR
668.25(c)(4)(ii). Changes to that regulation are beyond the scope of
these regulations.
In response to the suggestion that the Department clarify the
various types of service providers and the degree of responsibility and
liability associated with each type, doing so is beyond the scope of
these regulations. However, a third-party servicer is not subject to
the provisions for confirming eligibility under Sec. 668.164(b)(4) if,
for example, the servicer is engaged only to deliver credit balance
payments to students, or only to provide exit counseling to student
loan borrowers.
Changes: We have revised Sec. 668.164(b) to clarify that an
institution remains responsible for confirming a student's eligibility
at the time of disbursement. We also clarify that a third-party
servicer is responsible for confirming eligibility if the servicer is
engaged to perform activities or transactions that lead to or support a
disbursement, and identify the general scope of those activities and
transactions.
Books and Supplies (Sec. 668.164(c)(2))
Comments: Under proposed Sec. 668.164(c)(2), if an institution
includes the costs of books and supplies as part of tuition and fees it
must separately disclose those costs and explain why including them is
in the best financial interests of students.
Several commenters stated that these disclosures were redundant and
unnecessary. Some of the commenters cited section 133 of the HEA and
the Department's Dear Colleague Letters GEN 08-12 and GEN 10-09 that
describe the provisions for textbook disclosures, and noted that,
according to these sources, institutions are required to comply with
the textbook disclosure requirements even if the textbooks are included
as part of the tuition and fees. A few commenters believed the proposed
disclosure requirements violate section 133(i) of the HEA, which
prohibits the Secretary from regulating textbook disclosures.
In response to our request for comment about how and the frequency
with which an institution should disclose the costs of books and
supplies that are included as part of tuition and fees, one commenter
recommended that the disclosures be made at the time of enrollment and
then again at the beginning of each payment period.
Another commenter stated that if these disclosures would be most
useful when a student is deciding whether to contract for the program
of study, the disclosures should be made prior to a student entering
into a financial obligation with the institution for enrolling in a
program of study. Further, if the costs of books and supplies are
included as part of tuition and fees for all students in a program, the
commenter recommended that charges for those materials should be listed
in an offer of admission and financial aid, so that students are able
to make enrollment decisions that include all mandatory costs.
[[Page 67137]]
One commenter argued that there are no effective ramifications of
the disclosure (e.g., there is no obligation on the institution to
reverse those charges so the student can purchase the materials
elsewhere) so the only real effect of the disclosure is to persuade the
student not to enroll or to seek a similar program elsewhere. However,
the commenter did not recommend that an institution be required to
reverse the charges, stating that would undermine legitimate efforts by
the institution to negotiate better deals for students on a volume
basis. The commenter, and others, also suggested that any student
consumer information or disclosures should be not be part of the cash
management regulations, but in subpart D of the General Provisions
regulations.
Another commenter agreed with the Department's concerns regarding
institutions artificially inflating the cost of books and supplies, but
did not believe that such disclosures are warranted under the statute,
and doubted that they would actually address the Department's concerns.
The commenter contended that the disclosure provision would be
potentially time-consuming and expensive to implement, and confusing or
meaningless to students.
A commenter supported the disclosures arguing that the cost of
books and supplies should be listed as specific line items on the bill
or invoice sent to the student, along with the explanation of why those
materials are required, so the student can make appropriate financial
aid decisions.
A few commenters did not find compelling or relevant the
Department's rationale for initially proposing that institutions may
not include books and supplies as part of tuition and fees, and they
stated that the attorneys present at the negotiated rulemaking sessions
submitted documents that did not include any findings of institutions
charging inflated prices. Although there was a report submitted at a
Department hearing concerning books and supplies, the concerns raised
in that report had more to do with manipulating credit balances to
coerce students to buy books directly from the institution rather than
the issues raised by the Department in the NPRM. In addition, the
commenters stated that the Department's regulatory intent was not
clear, with one commenter providing an example where an institution
includes as part of tuition and fees the cost of a new hardbound
textbook under an arrangement where it negotiated a discount in the
student price of that textbook from $400 to $100. In this case, the
commenter asked whether the Department would allow that arrangement as
in the best financial interest of the student or disallow the
arrangement because the textbook is nevertheless available in the
marketplace.
The same commenters took exception to the Department's position in
the preamble to the NPRM that the costs of attendance provisions in
section 472 of the HEA treat books and supplies as separate from
tuition and fees. One commenter argued that under the plain meaning of
the statute, institutions have the sole discretion to determine what
constitutes tuition and fees, pointing to the provision in section
472(1) of the HEA that states that tuition and fees may include the
costs for rental or purchase of ``any materials'' or ``supplies.'' The
commenter opined that these terms are broad enough to include learning
materials like textbooks and digital learning platforms. Where tuition
and fees do not include the costs of materials and supplies, the cost
of attendance also includes an allowance for books, supplies,
transportation, and other expenses under section 472(2) of the HEA. The
commenters concluded that instead of providing the Department with
authority to limit the institutions' ability to include books and
supplies as part of tuition and fees, section 472 of the HEA appears to
provide institutions with authority to do just that--i.e., include
books and supplies as part of tuition and fees. Moreover, the
commenters contended that while section 401(e) of the HEA limits the
disbursement of title IV funds to tuition and fees, because it is
silent on the question of what constitutes tuition and fees, it does
nothing to limit the discretion vested in institutions by section 472.
Some commenters argued that using title IV funds to pay for books
and supplies included as part of tuition and fees benefits students in
two ways. First, it ensures that students are able to have all the
required learning materials in their possession on the first day of
class, which educators agree is an important element in overall student
success. Second, it often provides students with substantial discounts,
because, by including books and supplies as tuition and fees,
institutions are able to negotiate volume discounts on behalf of their
students. In addition, as more classes are taught using digital
learning platforms, institutions will require flexibility to adopt new
models for how those materials may be used and purchased. Digital
learning platforms fully integrate content with personalized learning
technologies and other elements to provide students with a holistic
learning experience that can be accessed with a laptop, a tablet, a
smartphone or some combination of devices. The commenter stated that
the emergence of digital learning platforms will also create new market
dynamics. While many of these new dynamics are over the horizon, some
are reasonably clear at present. Because digital learning platforms
integrate content with personalized quizzes, exercises and problems as
well as a calendar of assignments and student-faculty online
communication, the platforms are not optional--students must have
access to the digital learning platform by the first day of class.
Moreover, the commenter contended there can be no legitimate
aftermarket for digital learning platforms and there is no way to
legitimately access the platforms except through portals authorized by
the digital learning company. Consequently, including digital learning
platforms as tuition and fees is one way to ensure that students have
access to this new technology in a convenient and timely manner.
A few commenters stated that if the Department goes forward with
the regulations, it should require that, as proposed by the community
colleges during negotiated rulemaking, if an institution includes the
cost of books and supplies as part of tuition and fees, it must
separately and publicly disclose such costs in the schedule of tuition
and fees along with a written statement justifying the reason for this
inclusion and the value to students for taking this approach by the
institution. The commenters argued that this proposal requires
disclosure and promotes transparency, and also incorporates the concept
of ``value to the student'' which would include both the financial best
interest of the student as well as the pedagogical value to the
student. The commenters explained that under the community colleges'
proposal, books and supplies could be included as tuition and fees
where there is pedagogical benefit to the student but the effect on the
student's financial best interest is neutral. The commenters concluded
by stating that it is clear that including books and supplies as
tuition and fees can provide pedagogical benefits to students: Those
benefits should be taken into account by any regulation promulgated by
the Department and should be sufficient in and of themselves to justify
including books and supplies as part of tuition and fees.
Other commenters agreed with the proposal. Some believed the
proposal would provide helpful transparency around the practice of
including charges for books and supplies along with
[[Page 67138]]
tuition and fees which sometimes limits the ability of students to make
purchasing decisions on their own. Another commenter noted this that
this provision will prevent institutions from automatically lumping
books and supplies into tuition and fees, which simply increases the
amount of funds that the institution gets to keep before making credit
balance payments to students. In addition, the commenter believed the
provision provides students with needed transparency about precisely
what is being charged by institutions, arguing that if an institution
cannot provide a plausible explanation that it is providing the
materials at below market cost or the provided materials are generally
not otherwise available, then the institution will not be able to
include these costs. Instead, those costs will be treated in the
traditional manner as part of the additional cost of attendance and the
aid that would have otherwise been used to pay those costs will be
forwarded to the student.
While acknowledging the Department's concerns about overcharging
for otherwise widely available materials, one commenter disagreed that
imposing the ``best financial interest'' requirement on all
institutions is warranted or applicable when course materials are not
widely available or available electronically only through the
institution. Instead, the commenter suggested that the regulations
merely require an institution to disclose the amounts separately,
arguing that this allows for students to do a cost comparison for
materials that may be available through other channels and make an
informed decision.
Discussion: After considering all of the comments received on this
topic, we are revising the provision to set forth three conditions
under which an institution may include the costs of books and supplies
as part of tuition and fees. Because the final regulations do not
require an institution to make textbook disclosures, we are not
addressing as part of this discussion the merits of the comments
regarding those disclosures.
We take issue with the notion that institutions enjoy complete
discretion to include books and supplies in tuition and fees pursuant
to section 472 of the HEA. Books are referenced in section 472(2), a
paragraph separate and apart from section 472(1), the provision
regarding tuition and fees. Moreover, ``supplies'' are addressed not
only in section 472(1), but also in 472(2)--the first covering
``tuition and fees normally assessed a student carrying the same
academic workload as determined by the institution, and including costs
for rental or purchase of any equipment, materials, or supplies
required of all students in the same course of study,'' and the second
covering ``an allowance for books, supplies, transportation, and
miscellaneous personal expenses. . . .'' So section 472 on its face
contains no justification for including books, whether paper or
digitized, as tuition and fees; and it permits an institution to treat
supplies as tuition and fees only if they are ``normally assessed'' and
``required of all students in the same course of study.'' This
structure is inconsistent with the commenter's claims.
Furthermore, it would be unlawful to read section 472 in isolation
from the other portions of title IV of the HEA. Whenever books and
supplies are included in tuition and fees, this results in students
having no opportunity to decide for themselves whether or how to obtain
these materials or what if anything to pay for them. Two separate
provisions of title IV prohibit such a result. Section 401(e) of the
HEA, regarding Pell Grants, provides that ``any disbursement allowed to
be made [by an institution] by crediting the student's [ledger] account
shall be limited to tuition and fees and, in the case of
institutionally owned housing, room and board. The student may elect to
have the institution provide other such goods and services by crediting
the student's [ledger] account.'' (Emphasis added). Section 455(j)(1)
of the HEA, regarding Direct Loans, states that ``Proceeds of loans to
students under this part shall be applied to the student's account for
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.'' (Emphasis added). Sections 401(e) and
455(j)(1) serve to ensure students are free to make the choices they
regard as in their own best interests as consumers. Under well-settled
principles of statutory construction, these consumer rights cannot be
read out of the statute through a construction of section 472(1) as
permitting institutions broad discretion to designate charges for goods
and services that are purchased rather than produced by the institution
as tuition and fees. Instead, reading the statute as a whole and in
harmony as required by law, any such discretion is circumscribed and
must conform to the purposes of sections 401(e) and 455(j)(1) of
protecting the rights of students as consumers.
With regard to the request that we adopt the community college
proposal under which an institution that includes books and supplies as
part of tuition and fees would provide a written statement justifying
the reason and the value to student for doing so, we decline. As noted
by the commenters, under this proposal an institution could provide a
pedagogical reason for including books and supplies. Although well
intended, the proposal would allow some institutions to include the
costs of books and supplies as part of tuition and fees to the
detriment of students. Neither students nor the Department would be
positioned to evaluate claims regarding pedagogical value, and under
HEA sections 401(e) and 455(j)(1) consumer protection supersedes
pedagogy. For these reasons, and to enable to the Department to take
enforcement actions, we proposed in the NPRM that including books and
supplies had to be in the best financial interests of students.
However, we are partially persuaded by the commenters to adopt a
different approach that is beneficial to students and institutions,
while also addressing the Department's concerns.
Under this approach, an institution may include the costs of books
and supplies as part of tuition and fees under three circumstances: (1)
The institution has an arrangement with a book publisher or other
entity that enables it to make those books or supplies available to
students at below competitive market rates, (2) the books or supplies,
including digital or electronic course materials, are not available
elsewhere or accessible by students enrolled in that program from
sources other than those provided or authorized by the institution; or
(3) the institution demonstrates there is a compelling health or safety
reason.
The commenters made a persuasive argument that including books and
supplies would not only enable an institution to negotiate better
prices for its students, it would result in students having required
course materials at the beginning of a term or payment period. Although
the commenters did not elaborate on the extent to which an institution
could negotiate better prices, if the price charged to students is not
below prevailing market prices, the only remaining benefit to the
student is that he or she will have the materials at the beginning of
the term. But, that is already addressed by Sec. 668.164(m), which
requires an institution to provide a way for many students to obtain or
purchase required books and supplies
[[Page 67139]]
by the seventh day of a payment period. Therefore, we believe that
arrangements with book publishers or other entities must result in
books and supplies costs that are below competitive market rates.
However, even if the institution's prices are below competitive
market rates, by allowing the institution to include books and supplies
as part of tuition and fees, students will not have the option of
seeking even lower cost alternatives such as used books, rentals, or e-
books. This is the same outcome that may occur by the way an
institution provides books and supplies to students under Sec.
668.164(m). Under that section, the student may opt out of the way
provided by the institution and use his or her credit balance funds to
obtain books and supplies elsewhere. The same opt out provision is
needed here to enable students to seek potentially lower cost
alternatives. We note that a student who opts out under this section is
considered to also opt out under Sec. 668.164(m), and vice versa,
because the student has determined to obtain books and supplies
elsewhere. But, even with an opt out provision, we are concerned that
students who would otherwise seek lower cost alternatives will settle,
out of sheer convenience, for the price of books and supplies
negotiated by the institution. So, we encourage institutions to
negotiate agreements with publishers and other entities that provide
options for students. Finally, we adopt for this provision the same
approach used in Sec. 668.164(m), that an institution must provide a
way for a student to obtain the books and supplies included as part of
tuition and fees by the seventh day of a payment period.
We are convinced that digital platforms, and digital course content
in general, will become more ubiquitous and that including digital
content as part of tuition and fees ensures that students have access
to this technology. Similarly, we agree with some commenters that where
books and supplies are not available from sources other than
institution, those materials may be included as part of tuition and
fees.
Lastly, as discussed during the negotiated rulemaking sessions, if
there are compelling health or safety concerns, an institution may
include, as part of tuition and fees, the cost of materials, supplies,
or equipment needed to mitigate those concerns. For example, as part of
a marine biology or oceanographic degree program, an institution
requires students to take a scuba diving class where it is critical
that those students have specific and properly functioning equipment to
avoid serious health issues. To ensure the safety of its students, the
institution maintained and provided the same equipment to all of the
students in the class.
An institution that does not satisfy or choose to exercise at least
one these options, may not include the costs of books and supplies as
part of tuition and fees for a program. In that case, the institution
has to obtain the student's authorization under Sec. 668.165(b) to use
title IV, HEA programs to pay for books and supplies that it provides.
We remind institutions that under Sec. 668.165(b)(2)(i), they may not
require or coerce a student to provide that authorization. Therefore,
an institution may not require a student to purchase or obtain books
and supplies that it provides. This consequence, and the condition
where an arrangement with a publisher or other entity must result in
below market prices, addresses the Department's concerns that students
may be overcharged for books and supplies.
Changes: We have amended Sec. 668.164(c) to state that an
institution may include the costs of books and supplies as part of
tuition and fees if: (1) The institution has an arrangement with a book
publisher or other entity that enables it to make those books or
supplies available to students at below competitive market rates.
However, the institution must provide a way for a student to obtain the
books and supplies by the seventh day of a payment period and must
establish a policy under which a student may opt out of the way
provided by the institution, (2) the institution documents on a current
basis that the books or supplies, including digital or electronic
course materials, are not available elsewhere or accessible by students
enrolled in that program from sources other than those provided or
authorized by the institution, or (3) the institution demonstrates
there is a compelling health or safety reason.
Prior-Year Charges (Sec. 668.164(c)(3) and (4))
Comments: Proposed Sec. 668.164(c)(3) addresses the payment of
prior year charges with current year funds. One commenter supported our
proposal in Sec. 668.164(c)(3)(ii) to define the terms ``current
year'' and ``prior year'' in the same way those terms were defined in
our Dear Colleague Letter GEN 09-11. However, another commenter
suggested that the Department allow an institution the flexibility to
determine the current year period when both loans and other title IV
funds (e.g., Pell Grants or campus-based funds) are in play. The
commenter also stated that the guidance issued by the Department
defining a prior year was confusing in a number of circumstances. In
general, the commenter was concerned that the regulation's lack of
flexibility could cause some undesirable outcomes when the loan period
for a Direct Loan and the award year for a Pell Grant did not match up,
for example, situations where there are multiple loan periods within
the same academic year, and where institutions assign summer cross-over
periods to either the upcoming award year or to the concluding award
year. The commenter did not like the fact that in some situations,
charges that fell within the same academic year had to be considered
prior year charges because a loan period was being used instead of an
award year to define the current year for payment purposes. The
commenter also took issue with the fact that, because an institution
has the authority to assign cross-over payment periods on a student by
student basis, the results might vary student by student depending on
which award year the institution assigns to a cross-over payment
period. Basically, the comment reflected frustrations that others have
expressed over the years with the fact that there is a limitation on
the amount of a student's ``current year'' aid that can be used to pay
for outstanding ``prior year'' charges.
On a separate issue, this commenter asked whether proposed Sec.
668.164(c)(4) would work as intended when aid from different title IV,
HEA programs comes in at different times. The commenter posited the
example of a student getting Pell Grant and campus-based aid for the
fall and spring terms on time, but also getting a Direct Loan (that was
intended for the fall and spring) disbursed as a single late payment in
the spring term. In view of proposed Sec. 668.164(c)(4) which allows
an institution to include in the current payment period allowable
charges from a 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 a previous payment period, the commenter asked
whether the portion of the loan applicable to the fall could be used to
credit the student's account for allowable outstanding fall charges
under proposed Sec. 668.164(c)(1) (basically tuition and fees, and
room and board charges) without the student's permission even though
the student was paid other aid in the fall. The commenter also asked
whether there would be an exception to the rule in Sec. 668.164(c)(4)
when institutional charges were greater in one term compared to another
term, since Pell
[[Page 67140]]
Grant and Direct Loan payments are made in equal installments.
Discussion: The basic premise behind the limitation on the use of
current year funds to pay for prior year charges is the statutory
construct that title IV, HEA program funds are provided to a student to
cover educational expenses associated with a particular period of time.
Thus, it could be argued that none of a student's title IV, HEA program
funds for a given year should ever be used to cover expenses associated
with a prior year. However, because students may be prevented from
registering for classes because of minor unpaid prior year charges and,
more importantly, because these charges are small enough to be
construed as inconsequential, the Department has taken the position
that it is acceptable to use a corresponding de minimis amount of
current year funds (currently $200 or less) to pay for prior year
charges. It should be an unusual situation when title IV funds for a
current period are used for expenses for a prior period, and such a use
should only be allowed when the expenses in question are of a de
minimis nature. This then left us with the issue of how to determine
the period of time that should be used to define ``current year'' and
``prior year'' for purposes of this provision. Considering the
complicating facts that (1) Federal title IV aid is often given for
different periods of time, and (2) schools often comingle a student's
aid from different sources in a single student account, the Department
proposed a rule that would allow the school to use a single period of
time as the current year, depending on whether a Direct Loan was part
of the aid package. While this appeared to work well in the vast
majority of situations for the past six years, we agree that less than
desirable results can sometimes occur. Thus, we are revising the
``current year/prior year charges'' provision in Sec. 668.164(c)(3) to
allow a school some additional flexibility in this area, while still
maintaining the concept that, except for the $200 that can be used for
prior year expenses, aid intended for a current year must be used for
expenses associated with that current year.
With regard to Sec. 668.164(c)(4), we agree with the commenter who
suggested that Direct Loan funds (or any title IV funds) that are
intended to cover previous payment period expenses, but are disbursed
late in a lump sum in a subsequent payment period, should be allowed to
be credited to a student's account without the student's permission to
cover unpaid charges from those previous payment periods,
notwithstanding the fact that the student may have already been paid
some other title IV aid for those previous payment periods. Had the aid
in question been ideally disbursed, it would have been disbursed in all
payment periods for which it was intended and such disbursements would
have alleviated, or substantially reduced, any carry over charges from
the earlier payment periods. In fact, we believe that the institution
should be able to bring forward to the current payment period any
unpaid allowable charges from previous payment periods in the current
award year or current loan period for which the student was eligible
for title IV, HEA program funds. The principle behind Sec.
668.164(c)(1) is that an institution should not be able to collect from
title IV funds institutional charges for the entire program in the
first few payment periods, thereby denying the student the ability to
use some of his or her funds for non-institutional educational expenses
in those early payment periods. Ideally, some of a student's title IV
aid should be available to the student to pay for non-institutional
educational expenses in each payment period. However, if the student
has allowable outstanding institutional charges associated with
previous payment periods in the current award year or loan period, as
opposed to charges associated with future payment periods, then we
believe it is appropriate for the institution to be able to use title
IV funds to cover those expenses before it makes those funds available
to the student for non-institutional educational expenses.
Changes: We have revised Sec. 668.164(c)(3)(ii) to state the
following rules. If a student's title IV aid package includes only a
Direct Loan, the current year is the current loan period. If a
student's title IV aid package includes only non-Direct Loan aid, the
current year is the award year. If a student's title IV aid package
includes both a Direct Loan and other aid, the institution may choose
to use either the loan period or the award year as the current year.
And, we have clarified that a prior year is any loan period or award
year prior to the current loan period or award year.
We have also revised Sec. 668.164(c)(4) to indicate that all
allowable unpaid prior payment period charges from payment periods in
the current award year or loan period for which the student was
eligible for title IV aid can be brought forward and associated with
the current payment period.
Prorating Charges (668.164(c)(5))
Comments: When an institution charges a student up front (i.e., it
debits the student's account) for more than the costs associated with a
payment period, for the purpose of determining the amount of any credit
balance, the institution must prorate those charges under the
procedures in Sec. 668.164(c)(5) to reflect the amount associated with
the payment period.
One commenter asked whether book charges must be prorated in the
same way as tuition and fees, and room and board. Another commenter
opined that the prorating provisions effectively preclude an
institution from charging by the program. A third commenter believed
that the proposed method for prorating charges was appropriate, but
questioned whether it would have any effect on the regulation
addressing the treatment of title IV funds under Sec. 668.22 when a
student withdraws from the institution. The commenter also noted that
current rules addressing the cost of attendance for loan recipients
require an institution that charges for more than one year up front to
include all the program charges in the cost of attendance for a loan
made for the first year, and include only costs other than the program
charges in the cost of attendance for loans made for subsequent years.
The commenter reasoned that this loan provision coupled with the
proposed requirement to evenly prorate institutional charges over the
number of payment periods in the program may result in large credit
balances provided to the student for the payment periods covered by the
first year loan, while the smaller, subsequent year loan payments
applied to prorated charges may not produce any credit balances for the
student.
Discussion: Under Sec. 668.164(c)(5), an institution is required
to prorate charges for books only if those charges are included as part
of tuition and fees under Sec. 668.164(c)(2), and the institution
charges the student upfront for an amount of tuition and fees that
exceeds the amount associated with the payment period.
Prorating charges under Sec. 668.164(c)(5) does not affect the
return of title IV funds calculation under Sec. 668.22.
We acknowledge that that the cost of attendance rules for loans
coupled with prorating charges could result in the outcome noted by the
commenter. However, we believe the advantages of prorating charges--
that students will generally have credit balance funds available to
meet current educational expenses--outweigh the anomalous situation
created by institutions that charge students upfront. If they choose,
institutions can easily avoid the outcome of uneven credit balances by
[[Page 67141]]
charging students each payment period, instead of upfront.
Changes: None
Direct Payments by the Secretary (Sec. 668.164(d)(3))
Comments: Although proposed Sec. 668.164(d)(3) states that the
Department may pay title IV credit balances directly to students or
parents using a method established or authorized by the Secretary, it
does not say that the Department will use that method. However, a
number of commenters believed the regulation would set up such a
payment system. Those who were against having such a direct payment
system argued that it would cause delays for students, and stifle
competition that could otherwise lead to improvements in payment
systems. Some of these commenters also believed that the government
usually does not perform as efficiently as private business and they
worried about the transition between the current use of private sector
systems and the ``up-coming'' use of a government system. Some
commenters also believed that, with a government system set up to
disburse title IV funds, there would still need to be a private system
to disburse non-title IV funds and that the two systems would be costly
and inefficient. One commenter argued that the government should not
rely on its experience with the disbursement of Social Security
benefits, noting a number of differences between that program and its
recipients compared to the Federal student aid programs and its
recipients. Several commenters urged the Department to engage in
additional notice and comment rulemaking before implementing a
governmental payment system.
Those who favored establishing a direct payment system noted that
other Federal agencies have successfully implemented such systems and
that the receipt of Federal benefits under those systems has gone
smoothly. Some commenters also noted that government-issued cards can
be a good solution for people without bank accounts; and one noted that
the government's negotiating power could compel vendors to create a
product with low fees and consumer-friendly features. Thus, some
commenters urged the Department to continue to explore such a method of
payment and, in fact, to expedite its initiation.
Discussion: Section 668.164(d)(3) states that the Secretary may pay
title IV credit balances directly to students (or parents). This
regulation does not set up such a payment system, but simply serves as
a notice of the Secretary's prerogative in this area. If the Secretary
should determine that it would be prudent to put such a system into
effect, the Department would provide advance notice to institutions and
others that the system will be implemented by publishing that
information in the Federal Register. If the Secretary should adopt a
method that requires a revision to existing regulations through
negotiated rulemaking, the Secretary would initiate those proceedings.
A determination on that matter, however, cannot be made unless and
until the Secretary decides whether and how to exercise his or her
authority in this area.
We thank all those commenters who shared their thoughtful analyses
of whether such a direct payment system would be in the best interests
of students, institutions, private parties, and the government itself.
Their comments constitute a good beginning in the overall analysis of
the possible benefits and pitfalls of establishing a direct payment
system. We will consider this feedback as we continue to determine how
title IV credit balance funds may be delivered to students in the most
effective, efficient, and convenient manner possible.
Changes: None.
Tier One (T1) Arrangements (Sec. 668.164(e)(1))
Comments: We received several comments expressing support for our
regulatory framework that differentiates the arrangements institutions
enter into with third-party servicers that also offer accounts to
students from arrangements between institutions and non-third-party-
servicers that are typically more traditional banking entities (the
accounts offered under these two types of arrangements were described
as ``sponsored accounts'' during negotiated rulemaking and not
differentiated in the regulations prior to the NPRM). These commenters
stated that the proposed approach struck an appropriate balance in
light of practices that led to the rulemaking. Some commenters who also
served as non-Federal negotiators noted that this issue was
particularly difficult for the rulemaking committee and commended the
Department for employing an approach with differentiated levels of
regulatory scrutiny that appropriately responded to the levels of risk
presented by different arrangements. These commenters agreed that
government and consumer reports illustrated both the incentives for
securing short-term, fee-related revenue for T1 arrangements and the
evidence that students opening accounts under such arrangements were
more likely to face unusual or onerous fees. The commenters stated that
the proposed regulations provided strong consumer protections in
situations where USPIRG, Consumers Union, GAO, and OIG noted troubling
practices.
Other commenters stated that the Department's increased scrutiny of
T1 arrangements and third-party servicers was misplaced and
unwarranted. These commenters argued that we did not demonstrate why a
higher level of scrutiny was appropriate for third-party servicers that
offer financial products than for more traditional banking entities
that directly market their products to students.
Discussion: We appreciate the comments supporting our proposed
regulatory approach and our decision to bifurcate the level of scrutiny
applied to different types of arrangements that govern the accounts
offered to title IV recipients. We agree with the commenters that noted
the troubling examples cited in government and consumer reports and
that led to legal actions against certain account providers, and
believe that a higher level of regulatory scrutiny is appropriate for
certain types of arrangements, especially with respect to fees, to
protect title IV recipients from abusive practices and ensure they are
able to access the student aid funds to which they are entitled.
We disagree with the commenters who asserted that we did not
provide sufficient justification for subjecting accounts offered under
a T1 arrangement to a higher level of regulatory scrutiny. To the
contrary, in the preamble to the NPRM, we describe in detail the
findings of several consumer groups and government entities. As stated
in the NPRM, ``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.'' \15\ Banks and credit unions have incentives to
create long-term relationships with college students because such
providers are working to establish a relationship (and resultant fee-
or interest-based revenue) long after the student has left the
institution.\16\
---------------------------------------------------------------------------
\15\ 80 FR at 28498.
\16\ Consumers Union. ``Campus Banking Products: College
Students Face Hurdles to Accessing Clear Information and Accounts
that Meet Their Needs,'' page 5 (2014), available at:
consumersunion.org/wp-content/uploads/2014/08/Campus_banking_products_report.pdf (hereinafter referred to as
``Consumers Union at [page number]'').
---------------------------------------------------------------------------
Other types of entities--third-party servicers in particular--are
more likely to ``seek to partner with schools to provide fee-based
services to both the
[[Page 67142]]
institution and the student.'' \17\ The relationship with a student
typically 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.'' \18\ In addition,
third-party servicers have privileged access to systems and data that
more traditional banks not serving as third-party servicers do not. As
a result, these third-party servicers have been able to brand or market
access devices in ways that may be confuse students into assuming the
device is required as part of enrollment, can prioritize electronic
delivery of credit balances to a preferred account before a preexisting
bank account, and access personal student information for targeted
marketing purposes.
---------------------------------------------------------------------------
\17\ USPIRG. ``The Campus Debit Card Trap,'' page 13 (2012),
available at: www.uspirg.org/sites/pirg/files/reports/thecampusdebitcardtrap_may2012_uspef.pdf (hereinafter referred to as
``USPIRG at [page number]'').
\18\ Ibid.
---------------------------------------------------------------------------
These issues are not merely theoretical. OIG found that ``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.'' \19\ There have also been a
series of legal actions, including allegations by the FDIC of ``unfair
and deceptive practices,'' and violations of the Federal Trade
Commission Act.20 21 Third-party servicer practices were
specifically and repeatedly highlighted in recommendations to the
Department for a higher level of regulatory scrutiny.\22\ For these
reasons, and others discussed in the NPRM, we are declining to alter
our heightened regulatory scrutiny of T1 arrangements.
---------------------------------------------------------------------------
\19\ OIG at 5.
\20\ GAO at 24.
\21\ ``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 (hereinafter referred
to as ``FDIC at [page number]'').
\22\ OIG at 5.
---------------------------------------------------------------------------
Changes: None.
Comments: Several commenters pointed out what they believed were
ambiguities in the proposed definition of ``T1 arrangement.'' These
commenters stated that such arrangements only involved accounts offered
by third-party servicers and that the rule should further clarify that
the rules do not apply with respect to practices that do not create a
third-party servicer relationship. Specifically, many commenters opined
that ``treasury management services'' or ``normal bank electronic
transfers'' should not be considered third-party servicer functions
under paragraph (1)(i)(F) of the definition of third-party servicer at
34 CFR 668.2(b). These commenters described a situation where an entity
contracts with an institution to conduct electronic funds transfer
services to bank accounts, and that entity also offers bank accounts to
the general public that are not offered in connection with the entity's
contractual relationship with the institution. The commenters asserted
that the existence of both a contractual relationship with the
institution to provide disbursement services and account offerings to
the public (some of whom may be students) would create a regulatory
obligation on the part of the entity to ensure that all the entity's
account offerings comply with the regulatory provisions of Sec.
668.164(e). Consequently, the commenters requested that the Department
explicitly exempt bank electronic funds transfers from establishing a
third-party servicer relationship that would trigger the regulatory
requirements of Sec. 668.164(e).
Many of the same commenters also stated that the regulatory
provisions establishing the conditions of a T1 arrangement were, in
their opinion, overly broad. They argued that because many banking
entities also provide third-party services, and because Sec.
668.164(e)(1) establishes that accounts ``that are offered under the
contract or by the third-party servicer'' (emphasis added) fall under
the purview of the regulations, these entities would have to comply
with the T1 regulatory requirements regardless of whether the accounts
are promoted specifically to students or selected through the student
choice menu, noting that such accounts are ones that are also often
offered to the general public. Therefore, they argued, such a set of
circumstances would effectively require a banking entity that serves as
a third-party servicer for even a single institution to ensure all of
its accounts offered to the general public comply with the regulatory
requirements of Sec. 668.164(e). These commenters argued that it would
be impractical, expensive, and outside the Department's legal authority
to alter the account terms of such a broad swath of the general banking
market. They also argued that such accounts were not those identified
by government and consumer reports as requiring regulatory scrutiny.
Some commenters recommended eliminating this provision entirely; others
proposed that we limit the provisions of Sec. 668.164(e) to only those
accounts chosen under the student choice process.
Discussion: We agree with commenters who point out that the
definition of ``third-party servicer'' under Sec. 668.2 excludes
``normal bank electronic fund transfers.'' However, that same
definition also explicitly includes as third-party servicing the
``receiving, disbursing, or delivering [of t]itle IV, HEA program
funds.'' Rather than altering the definition of third-party servicer,
these regulations specify that the third-party servicing activities
that lead to or support making direct payments of title IV funds are
those that are encompassed under Sec. 668.164(e).
We understand and acknowledge that there are some entities that
simply provide EFT services to institutions and may deliver funds
electronically as a contracted function independent of their marketing
of other banking services to the general public. However, contrary to
commenters' fears, we are not altering the definition of third-party
servicer, which already provides that ``normal bank electronic fund
transfers'' does not trigger a third-party servicing relationship.
Doing so would be outside the scope of this rulemaking. Because
``third-party servicer'' is a defined term, and these regulations refer
to that defined term, we believe it is clear which entities are covered
by the regulations and which are not. For entities that are not third-
party servicers--for example, those whose sole function on behalf of
the institution is normal bank electronic fund transfers--these
regulations neither alter their status nor subsume the contract they
have with the institution into a T1 arrangement. We therefore decline
to include additional language exempting arrangements that do not go
beyond normal bank electronic funds transfers from the regulatory
description of T1 arrangement because our use of the defined term
``third-party servicer'' already does this.
We appreciate the comments that pointed out the consequences of the
proposed definition of ``T1 arrangement,'' and that any third-party
servicer that offers accounts generally to the public would fall under
the provisions of Sec. 668.164(e). We note, as a threshold matter,
that it was not our intention to regulate accounts only incidentally
offered to students. As we noted throughout the preamble to the NPRM,
these regulations seek to govern institutions, third-party servicers,
and the arrangements those entities voluntarily enter into that impact
title IV funds.
We are persuaded that a portion of the definition of ``T1
arrangement,'' as
[[Page 67143]]
proposed in the NPRM, is overly broad. Section 668.164(e)(1), as
proposed, stated that 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.
We did not receive comments about the majority of this proposed
language; however, we agree that the language ``or by the third-party
servicer, or by an entity contracting with or affiliated with the
third-party servicer to students and their parents'' would subsume
accounts into the regulatory framework that we had not intended to
cover.
As we explained in the preamble to the NPRM, our intent for
including these additional clauses was to prevent an easily exploitable
loophole whereby a third-party servicer who offers one or more accounts
to title IV recipients simply omits any mention of such accounts from
the contract with the institution. However, commenters correctly
pointed out that some third-party servicers are also banking entities
that offer several different types of accounts to the general public,
and that by fulfilling both the condition of being a third-party
servicer that performs one or more of the functions associated with
processing direct payments of title IV, HEA program funds and the
condition of offering accounts to the public, some of whom may be
students, all of the servicer's generally-available accounts would be
required to comply with Sec. 668.164(e). This was not our intent, and
we agree that the regulations should be modified to reflect these
comments.
However, we disagree with commenters who recommended two
alternative approaches--eliminating the provision entirely, or limiting
the scope of the regulations to accounts chosen under the student
choice process. For the reasons explained in the NPRM and the preceding
paragraphs of this section, these alternatives would create a loophole
easily exploitable by those seeking to evade the regulatory
requirements applicable to T1 arrangements; simply omitting mention of
the account in question from the contract establishing a T1
arrangement, establishing a separate contract, or involving a third-
party as either the servicer or the account provider would render Sec.
668.164(e) without effect. Similarly, limiting the provisions of Sec.
668.164(e) to those accounts selected under the student choice menu
would create an incentive to avoid the regulatory requirements by
ensuring that students sign up for an account through any other method.
Instead, we believe an appropriate alternative is to continue to
cover those accounts offered under the contract between the institution
and third-party servicer, but limit other accounts covered by Sec.
668.164(e) to those where information about the account is communicated
directly to students by the third-party servicer, the institution on
behalf of or in conjunction with the third-party servicer, or an entity
contracting with or affiliated with the third-party servicer. This not
only limits the scope of the provision to those accounts that are
intended for title IV recipients but does so in a way where third-party
servicers that also offer accounts to the general public can ensure
that general-purpose accounts not actually marketed directly to
students need not be covered by the regulations.
In Departmental reviews of accounts offered to students at
institutions with contracts that would fall under Sec. 668.164(e) as
proposed, we have observed that the predominant practice of account
providers under T1 arrangements is to offer a separate, standalone
student banking product. While this practice may not be universal, its
prevalence indicates that it is both financially and operationally
feasible to offer students a standalone financial product that complies
with the fee limitations and other requirements of Sec. 668.164(e). To
the extent that a student opens an account offered to the general
public and not marketed under or pursuant to a T1 arrangement and then
elects to use that preexisting account option under Sec.
668.164(d)(4), that account would not be required to comply with the
provisions of Sec. 668.164(e). Therefore, if a third-party servicer
were concerned that all of its general banking products would be
covered by Sec. 668.164(e) because it markets and promotes all of
those products to students at the contracting institution, it can elect
to establish a standalone banking product that complies with the
provisions of Sec. 668.164(e) and limit its direct marketing,
promotion, and specialized communications to students at that
institution to this latter bank account offering. This practice, which
we have observed is already common among many third-party servicer
financial account providers, would ensure that only the account
designed for title IV recipients at the institution would have to
comply with Sec. 668.164(e).
Changes: We have amended Sec. 668.164(e)(1) to replace the second
and third references to an account ``offered'' by a third-party
servicer or other entity with: An account where information about the
account is communicated directly to students by the third-party
servicer, the institution on behalf of or in conjunction with the
third-party servicer, or an entity contracting with or affiliated with
the third-party servicer.
Comments: Some commenters pointed out that they have multiple
agreements with institutions and questioned whether it was possible
under the proposed regulations to have accounts offered under both T1
and T2 arrangements with a particular institution, where the two
accounts would have different regulatory requirements, as opposed to
both accounts having to comply with the requirements applicable to T1
arrangements.
Some commenters requested that the Department provide specific
examples of what would constitute a T1 arrangement, a T2 arrangement,
or neither; these commenters stated that examples would assist
institutions attempting to comply with the regulations. One commenter
believed that an institution assisting a student in opening an account,
regardless of the actual relationship between the institution and the
bank, would give rise to a T1 arrangement.
We also received comments arguing that parents should not be
included in the regulatory provisions under T1 arrangements because
they are not typically the recipients of credit balances; and even when
they are, such credit balances are typically transferred to a
preexisting account, rather than an account offered under a T1
arrangement.
One commenter requested that we clarify whether the requirements
for T1 arrangements continue to apply when the student is no longer
enrolled at the institution.
Discussion: With respect to commenters' questions about whether it
would be possible to have both T1 and T2 arrangements at a single
institution, we note that this scenario would be possible. For this to
occur, the institution would have to have separate agreements with
different financial account providers: One that provided third-party
servicing functions and the other that provided accounts that met the
T2 arrangement direct marketing definition in some way, perhaps by
offering account functionality through student IDs.
[[Page 67144]]
To the extent that a single provider serves as a third-party
servicer and offers multiple account options to students of that
institution, those account offerings must comply with the requirements
for T1 arrangements even if, absent the third-party relationship, one
or more of those offerings would only constitute a T2 arrangement. This
is because the differentiating factor between these two types of
arrangements is the presence of a third-party servicer that is offering
(or communicating information about) the account to students. If a
third-party servicer that contracts with an institution is offering or
marketing multiple accounts to title IV recipients at that institution,
all of those accounts would be required to comply with the requirements
for T1 arrangements. We intended this different treatment because, as
we explained earlier in this section of the preamble and in the NPRM, a
third-party servicer exerts a tremendous amount of control over the
disbursement process and timing. Simply because such a financial
account provider offers functionality through, for example, a student
ID that would only constitute a T2 arrangement absent a third-party
servicer relationship, does not obviate the potential for abuse when
such a third-party servicer relationship does exist. Therefore, it
would not be possible for a single financial account provider to offer
two different types of accounts at a single institution, one that was
required to comply with the requirements for T1 arrangements and the
other with the requirements for T2 arrangements.
In response to providing examples of what constitutes the two
different arrangements under the proposed regulations, we believe the
regulatory language and the extensive descriptions of these
arrangements in the preambles to the proposed and final regulations
provide sufficient detail. In short, accounts offered under the
contract with third-party servicers or marketed by third-party
servicers, their agents, or the institution on behalf of the third-
party servicer, are T1 arrangements that fall under Sec. 668.164(e).
Accounts offered by non-third-party servicers and directly marketed to
students (either by the institution, through the use of a student ID,
or through a cobranding arrangement) are T2 arrangements that fall
under Sec. 668.164(f). Accounts offered to students that do not fall
under either of these arrangements are not subject to the regulations.
Examples of such circumstances include general marketing agreements
(i.e. no direct marketing) that do not specify the kind of account or
how it may be opened, arrangements sponsoring on-campus facilities
(e.g., stadium or building naming rights), lease agreements for on-
campus branches or ATMs, or a list of area financial institutions
recommended generally to students solely for informational purposes.
With respect to the commenter who stated that an institution
assisting a student in opening an account would give rise to a T1
arrangement, this is not the case. An arrangement qualifies as a T1
arrangement only if an institution engages a third-party servicer to
perform activities on its behalf.
We agree with the commenter who argued that parents should not be
included in Sec. 668.164(e). We discuss our reasons for this change in
greater detail in the student choice section of this document.
Because the purpose of these regulations is to ensure that students
have access to their title IV credit balance funds, we believe the
regulations should not apply when a student is no longer enrolled and
there are no pending title IV disbursements, because it is not then
possible for the student to receive title IV credit balance funds into
an account offered under a T1 arrangement. We are therefore adding a
provision specifying this treatment; because the considerations are
equally applicable to T2 arrangements, we will add an equivalent
provision in Sec. 668.164(f). However, we do not believe this should
eliminate institutions' responsibility to limit the sharing of private
student information and because institutions are already limited from
sharing that information under the final regulation, we do not believe
a continued limitation would present an additional appreciable burden.
For students who discontinue enrollment but then reenroll at a
later date, either at the same institution or a different institution,
they would go through the same student choice process described in
Sec. 668.164(d)(4)(i) as any other student receiving a credit balance.
Such students would either communicate preexisting account information
or select an account offered under a T1 arrangement from the student
choice menu.
We note that this provision ending the regulation of accounts
opened under T1 and T2 arrangements does not limit the requirement that
an institution must report the mean and median annual cost information
for students who were enrolled in a preceding award year. For example,
a student is enrolled and receives credit balance funds in the 2018-
2019 award year and then graduates at the end of that year. Although
the provisions of Sec. 668.164(e) would no longer apply to that
student in award year 2019-2020, the institution would still have to
include the student in its report of mean and median annual cost
information for award year 2018-2019, even if the reporting itself is
completed during award year 2019-2020.
Changes: We have removed references to ``parent'' in Sec.
668.164(e).
We have added Sec. 668.164(e)(3) to specify that the requirements
applicable to T1 arrangements cease to apply with respect to a student
when the student is no longer enrolled and there are no pending title
IV disbursements at the institution, except for Sec.
668.164(e)(2)(ii)(B) and (C), governing the limitation on use and
sharing of private student information. We have specified in paragraph
(e)(3) that this does not limit the institution's responsibility to
report mean and median annual cost information with respect to students
enrolled during the award year for which the institution is reporting.
We have also clarified that an institution may share information
related to title IV recipients' enrollment status with the servicer or
entity that is party to the arrangement for purposes of compliance with
paragraph (e)(3).
Tier Two (T2) Arrangements (Sec. 668.164(f)(1)-(3))
Comments: A number of commenters recommended that we apply the fee-
related provisions under T1 arrangements to accounts offered under T2
arrangements. These commenters argued that the dangers present for T1
arrangements are equally applicable to T2 arrangements, in that the
contracts governing both of those arrangements require direct marketing
by the institution and are intended to strongly encourage students to
deposit title IV funds into accounts offered under the arrangements.
Moreover, the commenters believed there is no functional difference
between accounts under these arrangements when those accounts are
offered as a part of the disbursement selection process. The commenters
noted that the proposed regulations treated the two types of
arrangements equally for purposes of the student and parent choice
protections (Sec. 668.164(d)(4)) and argued this was evidence that the
fee provisions should apply equally as well. Other commenters noted
that institutions benefit from T2 arrangements in the form of bonus
payments or a share of interchange fees, and that title IV funds will
almost assuredly be deposited into such accounts when title IV credit
[[Page 67145]]
balance recipients are present at a particular institution--therefore,
they argued, the Department has an interest in regulating such
arrangements.
Several commenters argued that agreements that constitute T2
arrangements under the proposed regulations are outside the
Department's purview. Some commenters argued that the simple presence
of cobranding or direct marketing did not amount to coercion of
students to sign up for the financial product in question. Others
argued that the government and consumer reports cited by the Department
in the NPRM did not single out arrangements that would constitute T2
arrangements as posing additional danger to students, and therefore
regulation of these arrangements was unwarranted. Some commenters
recommended that the Department eliminate the requirements relating to
T2 arrangements; others suggested that we instead require institutions
to prominently inform students that no account is required to receive
title IV aid.
Discussion: We appreciate that the commenters who urged us to apply
the fee limitation provisions for T1 arrangements to T2 arrangements
believe that doing so would ultimately be beneficial to students.
However, we believe that applying the fee limitations to T2
arrangements would be contrary to the rationale outlined in the NPRM
and would effectively collapse any distinction between T1 and T2
arrangements. Although we acknowledge that T2 arrangements, as defined
in the proposed regulations, involve products marketed to students with
the apparent endorsement of the institution, we believe those products
nevertheless represent a lower level of risk than products offered
under T1 arrangements.
As we explained in the NPRM, T1 arrangements involve account
offerings where the financial account provider acts in place of the
institution as a third-party servicer, controlling the mechanics of the
disbursement process itself. The arrangements are also geared toward
shorter-term fee revenue,\23\ whereas T2 arrangements usually involve
more traditional banking entities that have an incentive to establish a
longer-term banking relationship.\24\ Indeed, GAO found that several of
these types of providers do not charge fees ``higher than those
associated with other banking products available to students.'' \25\
The evidence presented in government and consumer reports bears out
this difference in risk. The most troubling practices were
predominantly employed by third-party servicers, and, in some cases,
students with accounts offered under T2 arrangements actually received
rates more favorable than available in the general market.
---------------------------------------------------------------------------
\23\ USPIRG at 13.
\24\ Consumers Union at 5.
\25\ GAO at 15.
---------------------------------------------------------------------------
Nevertheless, contrary to the claims of the commenters who urged us
to abandon the regulations governing T2 arrangements, these accounts
are not without risks to title IV recipients. As we noted in the NPRM,
the account offered under a T2 arrangement has an apparent
institutional endorsement, and the marketing or branding of the access
device associated with that account is likely to lead students to
believe that the account is required to receive title IV funds. In
addition, offering an account under a T2 arrangement gives students the
impression that the terms of the account have been competitively bid
and negotiated by the institution, or, at a minimum, represents a good
deal because it has been endorsed by the institution. As we detailed in
the NPRM, the institution's assistance in marketing activities and
apparent seal of approval led to take-up rates far in excess of what
would occur in the event of arms-length transactions by consumers
choosing a product in their best interest.\26\ The CFPB agreed with
this conclusion, noting that the mismatched incentives created by these
arrangements can lead to skewed adoption rates of these financial
products.\27\ Specifically, the special marketing advantage enjoyed by
a financial account provider under a T2 arrangement, might still
encourage providers to offer title IV recipients less competitive terms
than those available on the market generally, although not as much as
in T1 arrangements.
---------------------------------------------------------------------------
\26\ 80 FR at 28499.
\27\ Consumer Financial Protection Bureau presentation.
``Perspectives on Financial Products Marketed to College Students,''
pages 14-15 (2014), available at: www2.ed.gov/policy/highered/reg/hearulemaking/2014/pii2-cfpb-presentation.pdf (hereinafter referred
to as ``CFPB Presentation at [Page number])''.
---------------------------------------------------------------------------
We believe the best way to mitigate the risks presented by accounts
offered under different types of arrangements is the tiered framework
we proposed in the NPRM. If we applied the fee provisions applicable to
T1 arrangements to T2 arrangements, we believe this distinction would
break down and we would not be applying a regulatory framework
appropriate to the dangers that different types of accounts present to
students receiving title IV aid. If we instead eliminated the proposed,
more limited regulatory provisions governing T2 arrangements, the
disclosure requirements would not be in place to serve the dual
functions of ensuring that students receive adequate information prior
to account opening and that institutions are entering into contracts
that provide fair terms to aid recipients. We also note that consistent
with some commenters' recommendations, the proposed regulations already
required that institutions inform credit balance recipients that their
receipt of title IV funds does not require that they open any
particular financial account. As we explained in the NPRM, we believe
the approach proposed strikes the proper balance and targets regulatory
action to the areas where it is warranted.
Changes: None.
Comments: Some commenters argued that the Department does not have
authority over accounts offered under T2 arrangements. One commenter
supported the Department's intent to regulate only these arrangements
when the disbursement of title IV funds is involved; another suggested
that we only regulate arrangements that specifically address title IV
disbursements in the contractual language establishing the arrangement.
We received a number of comments on the provision in the proposed
definition of ``T2 arrangement'' and the limitation where the
requirements do not apply if the institution awarded no credit balances
in the previous year. Some commenters supported the approach in the
proposed regulations and recommended that even if we altered the
numerical threshold, we should maintain the structure of the provision,
which requires institutions to document that they are exempt from the
requirement, rather than establishing the presumption of an exemption.
Other commenters claimed that institutions would not be able to
determine whether any students were credit balance recipients in the
prior award year. Many commenters believed that a threshold of a single
title IV recipient was not commensurate with the cost and burden
imposed on institutions to comply with the requirements of Sec.
668.164(f). Several commenters supported a ``reasonable'' threshold,
but did not specify what ``reasonable'' would constitute. However, only
one of these commenters offered an alternative threshold for a safe
harbor. That commenter recommended a safe harbor threshold of 5,000
enrolled students (rather than title IV credit balance recipients)
before applying the requirements of Sec. 668.164(f), but did not
provide any
[[Page 67146]]
basis for why this threshold should be adopted or why it should be
based on enrolled students rather than title IV credit balance
recipients.
Discussion: We agree with commenters who argued that we should not
attempt to regulate arrangements wholly unrelated to disbursing title
IV funds. As we stated in the NPRM, ``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. In these circumstances, the
integrity of the title IV programs is not at issue.'' \28\ For this
reason, we explicitly proposed to limit our oversight of T2
arrangements to those instances where it is likely the case that title
IV credit balance funds are at issue. In the NPRM, we recognized that
our authority is limited in instances where no credit balance
recipients exist at an institution and requested comment on whether
this was an appropriate threshold. We disagree with commenters who
recommended that we limit our oversight to those instances where title
IV disbursements are explicitly mentioned in the contractual language
of the arrangement or where the title IV funds are disbursed as part of
the selection process. We believe such an approach would be easily
circumvented by, for instance, not explicitly mentioning title IV funds
in the contract establishing the relationship or by forcing students to
sign up for an account outside the disbursement process in a deliberate
effort to avoid the regulatory requirements. Instead, we believe that
the combination of (1) the presence of title IV credit balances
recipients at the institution, (2) the uptake rates of accounts that
are endorsed or marketed by institutions,\29\ (3) the requirement that
institutions responsible for paying credit balances ensure that funds
are disbursed to students in a timely manner, and (4) a contractual
arrangement between the institution and financial account provider
(evidencing that the account provider has privileged marketing access
to a lucrative customer cohort) demonstrates that a T2 arrangement
warrants regulations safeguarding the integrity of the title IV funds.
---------------------------------------------------------------------------
\28\ 80 FR at 28499.
\29\ Ibid.
---------------------------------------------------------------------------
As discussed below, we agree with commenters that a higher
threshold of title IV recipients at an institution in a given year is
appropriate for certain T2 requirements. Nonetheless, we agree with
commenters who recommended that, whatever threshold applies, we should
continue to require institutions to document that they are exempt,
rather than establishing a presumption that institutions are exempt. We
believe that for reasons of student protection and ensuring compliance
with program reviews, requiring institutions to document that they
qualify for an exception is a more appropriate framework.
We reject the assertion that institutions are unable to determine
the number of credit balance recipients in a prior award year. Under
the record keeping requirements of 34 CFR 668.24 and the 14-day credit
balance requirements that have been in effect for many years, an
institution is responsible not only for maintaining records of those
credit balances, but for showing that those balances were paid in a
timely manner to students and parents. Therefore, if a credit balance
occurs, the school must not only pay it, but also have records of such
payment.
We requested comment on whether the number of recipients should be
expanded beyond a single credit balance recipient in the previous award
year. While we appreciate that several commenters believed the
threshold should be increased, with one exception, commenters did not
offer alternatives and supporting evidence, as we requested. We are not
adopting the only suggested threshold of 5,000 enrolled students for
several reasons. First, there was no reasoning provided for this
alternative threshold. Second, this number is based on enrollment
rather than the number of title IV or credit balance recipients, and
therefore is not sufficiently related to the Department's intent of
exercising appropriate regulatory oversight of the title IV programs.
We continue to believe that a number of the T2 protections should
apply unless the institution documents that it had no credit balance
recipients in at least one of the three most recently completed award
years. For example, if an institution had no credit balance recipients
two years ago, but had credit balance recipients both last year and
three years ago, it would not be required to comply with the regulatory
provisions associated with T2 arrangements. This is to ensure that for
an institution that had a credit balance recipient in only a single
year and for which this was a unique occurrence, it would not be
subject to regulatory requirements designed for institutions where
credit balance recipients are consistently present. Under these final
regulations, if an institution had at least one title IV credit balance
recipient in each of three most recently completed award years, the
institution: (1) Needs to ensure that students incur no cost for
opening the account or initially receiving an access device; (2) must
ensure that the student's consent to open the financial account is
obtained before the institution or its third-party servicer provides
any personally identifiable about the student to the financial
institution or its agents (other than directory information under 34
CFR 99.3 that is disclosed pursuant to 34 CFR 99.31(a)(11) and 99.37),
sends the student a financial account access device, or validates a
financial account access device that is also used for institutional
purposes; (3) must include the account offered under the T2 arrangement
on the student choice menu and disclose as part of that choice process
the terms and conditions of the account; (4) must ensure that the
account is not marketed or portrayed as a credit card; (5) must
disclose the contract between the financial account provider and the
institution by posting it on the institution's Web site and providing
an up-to-date URL to the Secretary; and (6) must ensure that the
provisions in the contract underlying the T2 arrangement are consistent
with the regulatory requirements of Sec. 668.164(f)(4).
We continue to believe the above provisions should apply unless
there were no credit balance recipients in at least one of the three
most recently completed award years for several reasons: To comply with
provisions of the HEA; because of the risks present to students absent
these protections; and because of the low burden of compliance for
institutions. Most importantly, the prohibition on account-opening fees
is mandated by, for example, HEA sections 487(a)(2) and 454(a)(5).
In addition, obtaining the student's consent before private
information is shared, or an unsolicited access device is provided, is
necessary to ensure the protection of student data and that students
are given account information before being sent an access device. These
provisions ensure that title IV does not become a vehicle for
circumventing the privacy protections in FERPA. We also note that under
the revisions made in these final regulations, the financial account
provider may secure this consent.
[[Page 67147]]
The requirements to include the account on the student choice menu
and provide the student with the terms and conditions of the account
are likewise applicable under the final rule. All of the non-Federal
negotiators and numerous commenters stated that a crucial principle in
this rulemaking is ensuring that all students are provided account
terms up front so they can properly understand the terms and fees of an
account before they consent to open it. Because financial account
providers will be required to comply with the upcoming CFPB card
disclosures, and because those disclosures can be provided
electronically, these provisions do not go beyond ensuring that
information required to be disclosed anyway is furnished in a time and
manner that is effective in helping title IV recipients choose a
financial account. The burden associated with providing these
disclosures to students as a part of the student choice menu is
negligible and occurs at a juncture at which institutions are already
required to communicate with prospective credit balance recipients. We
see no justification for not providing these disclosures in any
circumstance in which title IV credit balance recipients are among the
population affected by a T2 arrangement.
We are also requiring that institutions post their T2 contracts to
their Web sites and provide the Secretary with an up-to-date URL for
that Web site (up-to-date signifying that should relevant documentation
no longer be located at that URL, that the institution must provide the
Secretary with an updated URL). The Department and the public have a
strong interest in knowing the terms of marketing contracts shown to
have the potential for operating to the financial detriment of the
millions of students receiving millions of dollars in Federal student
aid. The HEA strongly supports providing important consumer information
to students and the public, as evidenced by, for example, Parts C and E
of title I, and section 485 of title IV. Increased transparency will
help ensure accountability and encourage institutional practices that
are in the interests of students. We also note that at least one
commenter who is a financial account provider expressed both
willingness for contractual disclosure and the ability of all parties
to the contract to be able to comply with disclosure requirements.
Given that some States already require such disclosure and for the
preceding reasons, we believe this requirement is not only important,
but of minimal additional burden.
The final requirements for this credit balance recipient threshold,
that the access device not be portrayed as a credit card and that the
contract comply with the requirements of Sec. 668.164(f)(4), are also
important to ensure that even if a limited number of students receive
credit balances, those students are not under the false impression that
they have received a credit card, and that the institution's contract
is in compliance with the regulatory requirements set out for T2
arrangements. We also note that these provisions present little
additional burden to the institution. The credit card prohibition is an
existing requirement and we do not believe institutions or their
financial account providers will have difficulty continuing to comply
with a requirement that prevents them from portraying an access device
as a credit card. Similarly, because institutions with a contract
governing the direct marketing specified in Sec. 668.164(f)(3) will
necessarily have to negotiate the terms of that contract, we do not
believe appreciable additional burden is entailed by ensuring that such
contracts comply with the applicable regulatory provisions outlined in
these regulations.
However, we agree with the balance of the comments that one title
IV recipient is too low a threshold for several of the other provisions
in Sec. 668.164(f)(4); and are therefore establishing a higher
threshold of credit balance recipients that would trigger the
requirements in Sec. 668.164(f)(4)(iv)-(vi) and (f)(4)(viii). These
requirements are: The yearly posting of certain cost and account
enrollment figures on the same institutional Web site that contains the
full posted contract--the requirement for which would already exist
because of the presence of one credit balance recipient at the
institution; the availability of surcharge-free ATMs; and the due
diligence of institutions in entering into and maintaining T2
arrangements. While these provisions focus on the terms of the T2
contract and attempt to ensure, through transparency and affirmative
requirements, that the accounts that institutions market to title IV
credit balance recipients provide favorable terms and convenient
access, we recognize that at many institutions that may have T2
arrangements, relatively high tuition and fees mean that students
receiving credit balances may be the exception rather than the rule. At
these institutions where title IV credit balances are atypical, if the
number of credit balance recipients is sufficiently small, a number of
factors come into play, drawing into question the benefit of applying
one or more of the provisions at Sec. 668.164(f)(4)(iv)-(vi) and
(f)(4)(viii):
As many commenters noted, these provisions do impose some
burden. They involve the tracking, compilation, and public disclosure
of statistical data and other information; are more likely to require
negotiations between the institution and its T2 partner(s); and
necessitate providing convenient ATM access and ongoing efforts on the
part of the institution in providing the due diligence required.
An institution with few credit balance recipients will, in
all likelihood, be negotiating a T2 arrangement for accounts to be used
almost exclusively by more affluent students able to maintain higher
account balances. Such an institution will have different goals and
account features in mind, and the financial account provider will have
different incentives, than would be the case if the students enrolled
included a significant number of lower-income credit balance
recipients.
More broadly, as mentioned, a number of financial
institution commenters have questioned the link between campus
marketing arrangements and title IV administration. Immediate prior
history of the enrollment of a significant proportion of credit balance
recipients at the institution establishes that credit balance
recipients are necessarily among the intended targets of the marketing
campaign and in sufficient numbers to justify requiring specific
attention be paid to their interests.
After considering all of the above, we believe Sec.
668.164(f)(4)(iv)-(vi) and (f)(4)(viii) should not apply to
institutions at which the occurrence of credit balance recipients is
purely incidental and de minimis, and have included in the rules
criteria necessary to identify such institutions. Under these rules,
institutions will be subject to the provisions in Sec.
668.164(f)(4)(iv)-(vi) and (f)(4)(viii) unless they document that they
fall below both of the following thresholds: (A) Five percent or more
of the total number of students enrolled at the institution received a
title IV credit balance; or (B) the average number of credit balance
recipients for the three most recently completed award years is 500 or
more.
The five percent figure is calculated by dividing:
(1) For the numerator, the average number of students who received
a title IV credit balance during the three most recently completed
award years;
(2) For the denominator, the average of the number of students who
were
[[Page 67148]]
enrolled at the institution during the three most recently completed
award years. We have defined enrollment for purposes of these
thresholds as the number of students enrolled at an institution at any
time during an award year. For both of these thresholds we are using
averages to smooth fluctuations in enrollment or title IV credit
balance recipients that may occur year to year. The three-year period
for calculating the thresholds is consistent with the period of time
for which an institution is required to maintain records under 34 CFR
668.24.
With regard to the threshold based on percentages of credit balance
recipients, the Department has found a five percent threshold useful
and reliable in other contexts in identifying when an occurrence or
characteristic is too infrequent to warrant application of regulatory
requirements. In the Department's financial responsibility regulations
at 34 CFR 668.174(a)(2), we set a threshold of five percent of title IV
funds received as the level at which liabilities assessed for program
violations are significant enough to take the violation into account in
determining the past performance aspect of financial responsibility.
Likewise, 34 CFR 668.173(c) provides that an institution is not in
compliance with the refund reserve requirements if a program review or
audit establishes that the institution failed to return unearned funds
timely for five percent or more of the students in the sample reviewed
or audited. Similarly here, the five percent threshold operates to
exempt institutions from the requirements in Sec. 668.164(f)(4)(iv)-
(vi) and (f)(4)(viii) where receipt of a credit balance is atypical. At
the same time, the data related to the average enrollment among the
various sectors of institutions (discussed in more detail in the
Regulatory Impact Analysis section) shows that using a threshold of
five percent will not stand in the way of these provisions reaching all
sectors of institutions identified in the oversight and consumer
reports as having card agreements.
We recognize that using a five percent threshold may, in a limited
number of cases, affect smaller institutions with relatively few credit
balance recipients. For example, an institution with 1000 students
could conceivably have as few as 50 credit balance recipients before
being required to comply with the entirety of the provisions relating
to T2 arrangements. First, we note that such cases will be extremely
rare. An institution with so few credit balance recipients is unlikely
to provide a sufficiently large potential customer base for a financial
account provider to enter into a T2 arrangement with the institution.
Furthermore, it is entirely within the institution's control whether
they choose to enter into a direct marketing contract with a financial
account provider. If the institution decides that it would like to have
a financial account available for its students, it can easily provide
information about locally-available accounts without entering into a
contract with a financial account provider at all. Alternatively, it
can enter into a contract with a financial account provider, but ensure
that the institution is not directly marketing the account or
providing, for example, cobranded card features. By ensuring that the
account is only generally marketed to students, the school can choose
not to have a T2 arrangement and will not have to comply with the
regulatory requirements.
The final rule supplements the five percent threshold with a
threshold relating to the average number of credit balance recipients,
because at large institutions, a five percent threshold, standing
alone, would leave large numbers of title IV credit balance recipients
without the protections of Sec. 668.164(f)(4)(iv)-(vi) and
(f)(4)(viii). We believe Sec. 668.164(f)(4)(iv)-(vi) and (f)(4)(viii)
should, at a minimum, apply to any institution at which credit balance
recipients are numerous enough, standing alone, to significantly impact
the commercial viability of entering into a T2 arrangement. Based on
the data currently available to the Department, we have determined that
a threshold of 500 credit balance recipients satisfies this test and
have incorporated that figure as a separate threshold triggering
applicability of Sec. 668.164(f)(4)(iv)-(vi) and (f)(4)(viii). In
establishing that threshold, we note that, in examining publicly
available institutional and financial account provider data reflecting
the institutions that have elected to enter into agreements with
financial account providers, institutions with an average enrollment as
low as approximately 2,000 students nevertheless had a sufficiently
large student population to lead to formation of these agreements. Five
hundred credit balance recipients would represent almost 25 percent of
the students receiving T2 marketing materials at these
institutions.\30\ Furthermore, given evidence gathered by the GAO that
the take-up rate for T2 accounts ranges between 20 and 80 percent,\31\
a 500 credit balance recipient threshold would approximate, standing
alone, a sufficient market to support a T2 arrangement experiencing a
take-up rate at the lower end of this range in take-up rates.
Accordingly, where on average at least 500 credit balance recipients
are included in the school's enrollment, we see no justification for
the institution failing to negotiate with their interests in mind and
providing them with the protections described in the regulations. In
addition, at the average level of 500 credit balances over three years,
we believe a high-tuition institution has shown sufficient commitment
to low-income students that it will not eliminate tuition discounts as
a means of avoiding applicability of these rules.
---------------------------------------------------------------------------
\30\ While there were few credit balance recipients at some of
the smaller institutions in question, we have no evidence that a
higher number of credit balance recipients would have adversely
impacted the viability of the T2 arrangements. In fact, according to
the GAO, some institutions make cards available only to students
receiving balances. GAO report at 12. The Department's experience
indicates that there may be a variety of factors that cause smaller
institutions not to have credit balances.
\31\ 80 FR at 28499.
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In sum, we believe that requiring that an institution have credit
balance recipients either comprising five percent of enrollment or
totaling 500 students, averaged over three years, before Sec.
668.164(f)(4)(iv)-(vi) and (f)(4)(viii) are triggered will exclude
institutions at which credit balances are atypical and credit balance
recipients are few, while maintaining a separate threshold to provide
students the other benefits and protections afforded under T2
arrangements and in providing the Department and the public with
information regarding the nature of these arrangements. We also note
that these thresholds do not preclude schools from providing this
information to the Department or negotiating their contracts in the
best interests of students, and have added regulatory language
reflecting this fact. Ultimately, we believe this will assist in future
policymaking to ensure we are properly balancing the considerations
discussed in the preceding paragraphs. We recognize that some
institutions exempted by our thresholds will nonetheless provide all of
the protections described in the final rule, and we are including a
provision encouraging them to do so.
Changes: We have revised Sec. 668.164(f)(2) to specify that an
institution does not have to comply with the requirements described in
Sec. 668.164(d)(4)(i) or (f)(4) if it documents that no students
received a credit balance in at least one of the three most recently
completed award years, and that it does not have to comply with
[[Page 67149]]
the requirements described in Sec. 668.164(f)(4)(iv)-(vi) and
(f)(4)(viii) if it documents that the average number of students who
received a title IV credit balance during the three most recent
completed award years is less than five percent of the average number
of students enrolled during those years, and the average number of
credit balance recipients in the three most recently completed award
years is also less than 500. We have defined enrollment for purposes of
these thresholds as the number of students enrolled at an institution
at any time during an award year. We have added Sec.
668.164(f)(4)(xii), encouraging institutions falling below these
thresholds to comply voluntarily with all the requirements of paragraph
(f)(4).
Comments: We received a number of comments regarding the proposed
definition of ``direct marketing,'' specifically as it relates to
cobranded cards. Commenters argued that many cobranding agreements are
not marketed to students, but instead offered by the financial account
provider to the general public as part of ``affinity arrangements.'' As
described by the commenters, under these arrangements cobranded card
products are offered to any customer of a financial institution--the
cobranded products are not marketed principally to title IV recipients,
and the financial institution may have little or no on-campus presence
or affiliation with an institution beyond the use of the institution's
logo. The commenters stated that affinity arrangements required a
contractual agreement with the institution (in order to use the
institution's intellectual property) and that cobranded products under
these arrangements are offered as a benefit to existing or prospective
accountholders rather than used as a method to market accounts to title
IV recipients, or to imply an institutional endorsement of the
cobranded product. Some commenters recommended that we specifically
exempt general affinity cobranding agreements if the cobranded access
device is available universally to the public (not just enrolled or
prospective students) and the institution does not communicate
information about the account underlying the access device to students
or parents or assist them in opening that account. Other commenters
recommended that we ban cobranding on cards under T2 arrangements
entirely. Some commenters requested that we provide further guidance
specifying the meaning of cobranding under the regulations.
Some commenters also opposed categorizing student IDs with
financial account access features as accounts that are directly
marketed to students for purposes of Sec. 668.164(f)(1). These
commenters stated that the dual functionality provided by these
products are a benefit to students and are not the types of products
that students may confuse as a required prerequisite to enrollment or
receipt of title IV funds.
Some commenters expressed concern that the definition of a ``T2
arrangement,'' especially with respect to direct marketing, was vague.
These commenters argued that the regulations would introduce
uncertainty as to whether certain products would constitute directly
marketed accounts for purposes of Sec. 668.164(f)(1). Another
commenter requested that we specify that the examples cited in the
preamble were illustrative, not comprehensive, and that other types of
arrangements could also fall outside the definition of ``T2
arrangement'' under Sec. 668.164(f)(1). Some commenters asked that we
further define ``direct marketing.'' For example, one commenter asked
whether a financial account provider that directly markets a product
without assistance from the institution would be conducting direct
marketing under Sec. 668.164(f)(1).
Other commenters contended that the proposed regulations would
discourage institutions from informing students about the types of
accounts available for receiving their student aid funds, arguing, this
would constitute direct marketing activity that would create a T2
arrangement. These commenters believed that institutions should be able
to inform students and parents of all the options available for
obtaining title IV credit balances.
Some commenters requested that we exempt general marketing, lease
agreements, and other non-direct marketing activities from Sec.
668.164(f). Commenters also requested that we incorporate the preamble
discussion from the NPRM into Sec. 668.164(f) and enumerate through
regulation examples of practices to which Sec. 668.164 does not apply.
Discussion: With respect to affinity agreements, we are persuaded
that the proposed definition of cobranding under Sec. 668.164(f)(3)
may be too expansive because card products under these agreements are
generally intended for banking consumers or other groups and not for
students with the title IV credit balances.
Nevertheless, based on consumer reports, there are several
instances of cobranding arrangements outside of the student ID context
in which students are subject to the types of direct marketing
specified under Sec. 668.164(f) and therefore the risks we have
described are still present. For this reason, although we are narrowing
the types of cobranding arrangements that will constitute financial
accounts that are directly marketed for purposes of Sec. 668.164(f),
we believe it is appropriate to include certain instances of
cobranding. Based on program reviews, and as described in the comments,
we believe the distinguishing characteristic between affinity
agreements and those instances where students are the subject of direct
marketing is whether the access device is principally marketed to
students, rather than offered as a perquisite to the general public.
We believe that in the vast majority of cases this distinction will
be plainly evident from the underlying contracts, based on the
descriptions of how those contracts in public comments and the
practices identified in consumer and government reports. In affinity
agreements, the contract typically covers the use of the intellectual
property, whereas in cases where there is a more comprehensive
cobranding marketing contract, bonuses or incentive payments may compel
an institution to take actions to sign up a certain number of
accountholders. This likely explains some of the practices observed
during program reviews such as the presence of the financial account
provider at registration events or the institution's administrative
offices. Therefore, we will limit the requirements relating to T2
arrangements to those cobranding arrangements where the access device
is marketed principally to students at the institution. For
institutions with affinity agreements, the widespread availability of a
cobranded access device (as well as devices with cobranding of entities
other than a single institution of higher education) to the general
public and the language of the agreement itself will be strong evidence
that the underlying agreement is not a T2 arrangement.
However, in order to ensure that institutions and financial account
providers are not exploiting this safe harbor, an institution must
retain the contract and document, if applicable, why the contract does
not establish a T2 arrangement (e.g., because of the widespread
availability from the account provider of the institution's cobranded
access device, and of access devices cobranded with a variety of
entities rather than exclusively with the T2 postsecondary
institution). This will enable the Department to determine during
program reviews that institutions with T2 arrangements are not evading
the disclosure requirements by falsely claiming that cobranded card
products
[[Page 67150]]
are marketed under an affinity agreement. We believe this is a balanced
approach. Rather than banning the use of cobranding altogether in
connection with accounts in which title IV credit balances are received
or subjecting all cobranded accounts, including those available to the
general public, to the requirements of Sec. 668.164(f), it targets the
protections to those instances of cobranding that occur in the context
of the T2 arrangement and accordingly pose the danger of exposing title
IV credit balance recipients to the problematic marketing practices
identified in consumer and government reports.
We disagree with the commenters who suggested that student IDs
should not be covered under the regulations. While we agree that
student IDs with financial account functionality may represent a
convenience for some students, that fact does not obviate the concerns
regarding marketing and institutional endorsement identified in the
NPRM, especially if the terms of the underlying account are not
favorable to the student. We disagree with commenters who argued that
students would not confuse such functionality with a requirement to use
the account as a condition to enroll or receive aid. To the contrary,
most student IDs are institutional requirements, provided by the
institution itself, and certainly bear the branding of the institution.
We believe that students could easily be led to believe that activating
financial account functionality on such a student ID is tantamount to
activating the student ID itself; and therefore, disclosure
requirements for these accounts are necessary under these
circumstances.
We disagree with the commenters who argued the definition of
``direct marketing'' is vague. In Sec. 668.164(f)(3) we proposed a
general set of actions and circumstances that would be considered
direct marketing under the regulations. To ensure the regulations are
understandable and because it would not be feasible to address every
possible circumstance in detail, we decline to set out a list in the
regulations of all specific actions and circumstances that may or may
not constitute direct marketing. However, we agree with the commenters
who noted that the examples provided in the preamble to the NPRM are
illustrative of conduct that does not constitute direct marketing,
rather than comprehensive, and decline to include those examples in the
regulations. We believe those examples on their face fall outside the
plain language of Sec. 668.164(f)(3) and its description of ``direct
marketing'' for the purposes of the T2 arrangement requirements. We
believe that institutions and financial account providers considering
whether their agreements fall under the definition of ``T2
arrangement'' can determine whether the institution itself communicates
information directly to its students about the financial account and
how it may be opened. If, for example, the institution publishes
instructions for opening the account on its Web site, sends students
links via text message to a Web page with promotional materials for the
account, or sends a mailing to students with account information
produced by the account provider, these practices are plainly direct
marketing because the institution is directly conveying information
about the account itself or how to open it. If, in contrast, the
institution includes advertisements for the financial account provider
(rather than the account itself) in a magazine or displays the
financial account provider's logo in a dining hall or Web site, these
practices would not fall under the ``direct marketing'' definition in
the regulations and would be considered general marketing, as described
in the NPRM. To the extent that a financial account provider markets a
product to students without assistance from the institution (and if the
product is not a cobranded access device or student ID), that is not
direct marketing by the institution under the regulations for the
preceding reasons.
We also disagree with commenters who argued that institutions would
be discouraged from informing students about the types of accounts
available for receiving their student aid funds because that would
constitute direct marketing activity and would create a T2 arrangement.
Institutions that sincerely believe that an account is a good deal for
students can continue to provide information about that account absent
a contractual agreement with the financial account provider. However,
we believe that when an agreement is entered into, the institution has
an obligation to promote the account, resulting in an intensity of
effort more likely to prompt students to regard the account as a
requirement for receipt of title IV aid.
We also disagree with the commenter who stated that a lease
agreement would constitute a T2 arrangement. This is plainly not direct
marketing under our definition and was highlighted in the NPRM as an
example of general marketing that does not constitute direct marketing.
Changes: We have revised Sec. 668.164(f)(3)(ii) to specify that a
cobranded financial account or access device is marketed directly if it
is marketed principally to enrolled students. We have also added Sec.
668.164(f)(4)(xi) to provide that if an institution enters into an
agreement for the cobranding of a financial account with the
institution's name, logo, mascot or other affiliation but the account
is not marketed principally to its enrolled students and is not
otherwise marketed directly within the meaning of paragraph (f)(3), the
institution must retain the cobranding contract and other documentation
that the account is not marketed principally to its enrolled students,
including documentation that the cobranded financial account or access
device is offered generally to the public.
Comments: One commenter pointed out that institutions that did not
have to comply with the T2 arrangements provisions under Sec.
668.164(f)(1) because they did not have any title IV credit balance
recipients in the preceding award year would still have to comply with
the requirements of Sec. 668.164(d)(4) to establish a student choice
menu.
Although the commenter did not explicitly argue that this
requirement was inappropriate, it appears that the commenter believed
that the accounts offered pursuant to a T2 arrangement at an
institution where there are no credit balances should not be subject to
the student choice requirements.
We also received comments arguing that parents should not be
included in the regulatory provisions under T2 arrangements because
they are not typically the recipients of credit balances; and, even
when they are, the credit balances are typically transferred to a
preexisting account, rather than an account offered under a T2
arrangement.
One commenter noted that once a student is no longer enrolled at an
institution and therefore will no longer be receiving a title IV credit
balance disbursement, the regulatory requirements should no longer
apply.
Discussion: We agree with the commenter who pointed out that under
the proposed regulations, an institution would have to establish a
student choice menu under Sec. 668.164(d)(4)(i), even if no student
received a title IV credit balance in the prior year. We have included
a cross-reference to Sec. 668.164(d)(4)(i) to address this issue.
We agree with the commenter who argued that parents should not be
included in the provisions of Sec. 668.164(f). We discuss our reasons
for this change in greater detail in the student choice section of the
preamble.
We also added a paragraph specifying that the requirements relating
to T2
[[Page 67151]]
arrangements no longer apply when a student ceases enrollment at an
institution. For a detailed discussion of this issue, please refer to
the preamble discussion in the section on T1 arrangements, where we
have added an equivalent provision.
Changes: We have removed the references to ``parent'' in Sec.
668.164(f).
We have added paragraph Sec. 668.164(f)(5) to specify that the
requirements for T2 arrangements no longer apply when the student is no
longer enrolled and there are no pending title IV disbursements at the
institution. We have also specified that paragraph (f)(5) does not
limit the institution's responsibility to report mean and median annual
cost information with respect to students enrolled during the award
year for which the institution is reporting. We have also specified
that an institution may share information related to title IV
recipients' enrollment status with the financial institution or entity
that is party to the arrangement to carry out this paragraph.
Student Choice (Sec. 668.164(d)(4))
Comments: Under proposed Sec. 668.164(d)(4), if an institution has
a T1 or T2 arrangement under Sec. 668.164(e) or (f) and plans to pay
credit balances by EFT, it must establish a selection process under
which a student or parent chooses an option to receive those payments.
This selection process must present various options in a neutral
manner. One commenter noted that it has been extensively documented by
the Department's Inspector General, the GAO, the CFPB, the Federal
Reserve, and independent research that institutions and banks engage in
a variety of practices intended to steer students into accounts offered
under T1 or T2 arrangements. This commenter stated that students have
been forced into accounts by deceptive marketing practices that make it
seem as if the sponsored account is the only feasible choice, and that
the proposed regulations would correctly restore choice to the extent
possible without a complete ban on revenue sharing or third-party
servicing account offers. Another commenter echoed this sentiment,
stating that the reforms proposed by the Department correct a history
of deceptive practices and will help students shop for the best
accounts that meet their financial needs. In addition, this commenter
urged the Department to require schools to communicate with students
about their disbursement choices early, before funds are ready to be
disbursed, so that students who do not have bank accounts have the
opportunity to open an account that works best for them. Students who
have existing accounts (or open new ones) should be able to provide the
bank account and routing numbers in advance so that funds can be
directly deposited as soon as possible. Several commenters noted that
the proposed regulations would provide relief for students who have
often been compelled to sign up for an institutional-sponsored bank
account by: Prohibiting deceitful tactics that enable financial
institutions to mail an institutional-sponsored debit card to a student
aid recipient before the student gets to campus; stopping the
prioritization of financial aid deposits into institutional-sponsored
accounts while delaying deposits into existing bank accounts;
prohibiting the creation of non-essential barriers that make it more
time-consuming for the student to choose his or her existing account
over one sponsored by the institution; and requiring marketing material
to be presented in a neutral way that enables the student to choose
either his or her own account or the campus account without being
coerced into choosing the campus account. A number of commenters voiced
strong support for the concept of a neutral presentation of options
within the school's selection process, with one commenter suggesting
that language be added to prevent a school or financial account
provider from undermining that neutrality by communicating with the
student outside the selection process or telling the student that the
institution endorses or otherwise recommends a certain provider or its
products. Other commenters suggested that, notwithstanding the desire
for an overall neutral presentation of options, the student's existing
account should be the prominent first option.
Discussion: Section 668.164(d)(4) of the proposed regulations would
require institutions that are making direct payments to students or
parents by EFT and that have entered into a T1 or T2 arrangement under
Sec. 668.164(e) or (f) to establish a selection process under which
students or parents choose how they will receive those payments. Under
this selection process in the proposed regulations, the institution
must (1) inform the students and parents that they are not required to
use a financial account offered by any specific financial institution,
(2) ensure that the various options in the selection process are
presented in a clear, fact-based, and neutral manner, (3) ensure that
initiating payments to the student's or parent's existing account is as
timely and easy for the student or parent as initiating payments to any
accounts offered in the selection process under T1 or T2 arrangements,
and (4) allow the students or parents to change their choice about
which account is to be used with written notice provided in a
reasonable time. Further, in listing the options in this selection
process under the proposed regulations, the institution (1) must
prominently present the student's or parent's existing account as the
first and default option, (2) must identify the major features and fees
associated with any account offered under a T1 or T2 arrangement that
the school lists in the selection process, and (3) may provide
information about certain other accounts.
We generally agree with the commenters who stated that proposed
Sec. 668.164(d)(4) provides relief for students who have often been
compelled to sign up for certain institutionally-sponsored accounts,
and continue to believe that a number of choices for receiving credit
balance payments should be available to students in certain
circumstances, such as those associated with the required selection
process described above. In particular, for reasons we discussed at
length in the NPRM, we believe that the basic requirement that certain
options be presented to students in a clear, fact-based, and neutral
manner is very important.\32\ However, presuming that most students
with an existing bank account have already, to some degree, made their
choice, we believe that the selection process should continue to
prominently list the student's existing bank account as the first
option. Certainly, it is possible that one or more of the remaining
options offer the student a better deal than his or her existing
account, and that the existing account may not have the same
protections that are afforded to students under these regulations.
However, the clear, fact-based information associated with the required
presentation of the student's options will allow the student to compare
and choose how to receive his or her title IV funds. In addition, the
requirement that the student be allowed at any time to change his or
her choice (as long as written notice of such a requested change is
provided within a reasonable time) provides even greater assurance that
the student has a real opportunity to receive title IV funds in an
inexpensive and convenient manner that suits the student's needs.
---------------------------------------------------------------------------
\32\ 80 FR at 28501-28503.
---------------------------------------------------------------------------
We agree that it is important for the student to be given neutral
information about account choices. However, we do
[[Page 67152]]
not agree, as one commenter suggested, that there is a need to add
language to the regulations that would prevent an institution or
financial account provider from undermining that neutrality through
communications with the student outside the selection process. Indeed,
this outside direct marketing activity is what distinguishes many of
the arrangements that are covered by the regulations. Nor do we believe
that additional language is needed in the regulations to require
institutions to communicate early with students about their
disbursement choices. By requiring, in certain situations, that an
institution establish a selection process for students to choose how to
receive their credit balance payments, Sec. 668.164(d)(4) already
sufficiently contemplates that.
Changes: None.
Comments: One commenter stated that the student choice provisions
strengthen the student's ability to deposit disbursements into an
existing account, which is often the best option. The commenter further
noted that ensuring that direct deposit remains a choice has been a
consistent challenge in the face of attempts to mandate use of a
specific product under contract. Another commenter suggested that we
require the institution to make direct deposit to an existing account
the most prominent and default option for receiving funds. However,
several commenters objected to requiring institutions to list an
existing account as the prominent first option, arguing that it may
mislead individuals into thinking that it is the best option (which may
not be the case). These commenters stated that existing accounts would
not be subject to the same requirements as would accounts offered under
T1 or T2 arrangements and, thus, students would not receive the benefit
of the protections provided under the regulations related to those
accounts. They also noted that it is problematic to make an existing
account the default option if an election is not made as to how to
receive the credit balance. Without existing account EFT information,
an institution would have no way to disburse funds into the appropriate
account. In the absence of an election, the sole way to comply with the
14-day credit balance regulation would be to issue a check (a far less
efficient and manual process). The commenters contended that setting an
existing account as the default option would imply the school's
endorsement of the existing account (about which the school has no
information). Institution would be steering recipients toward their
existing accounts, with no way of knowing whether those accounts are
the best option. Further, a number of commenters stated that making the
existing account the default option goes against the Department's
encouragement of a clear, fact-based, and neutral presentation of
options. This, the commenters argued, could discourage students' review
of other options that could be more affordable and more convenient for
their needs. Other commenters noted that many students with existing
accounts do not attend college in the same city where the existing
account is located. They stated that participation in institutional-
sponsored accounts ensures that those accounts are ones that provide
ATMs on campus (whereas the existing account might not). Another
commenter stated that experience has shown that many students prefer
not to put their credit balance payments in their checking accounts in
order to keep those funds separate from their other funds. Still
another commenter stated that the majority of students at many colleges
come to campus without a banking relationship, and that creating a
default to an existing account will cause confusion among those
students and result in their receipt of a check. This commenter noted
that EFT is a more appropriate solution based on its security,
convenience, and efficiency and that any action that will hinder this
process should be reconsidered. One commenter contended that the vast
majority of college students either already have bank accounts when
they enroll, or would be able to easily obtain a bank account on the
open market. This commenter stated that the neutrality provision of the
proposed regulations encourages an open and free market, and that this
competition will result in better and more innovative financial
products and accounts for students that have low fees and meet their
needs.
One commenter noted that, in its 2014 report, the GAO identified
situations in which schools did not present disbursement options in a
clear and neutral manner, and appeared to encourage students to select
school-sponsored accounts. In some cases, choosing a different option--
such as the student's existing bank account--required additional
documentation that was time-consuming to locate, and often was not
readily available online. This commenter noted that, when making a
disbursement selection, a student is effectively at the point of sale
and, therefore, most vulnerable to steering practices, and that the
Department may want to further specify the order in which the
disbursement options must be displayed. The commenter pointed out that,
at the negotiated rulemaking session, some negotiators recommended a
two-step approach whereby the disbursement selection screen would offer
the direct deposit option in a prominent and central location, and then
include links further down the page that students could click on if
they did not have existing account information to provide.
Discussion: It was not our intent under the proposed regulation
that a student's existing account be used for the receipt of credit
balances in the event that a student makes no affirmative selection or
does not provide his or her existing account information. Rather, our
intent was that the existing account option would be preselected on the
choice menu. This was proposed in response to concerns that
institutional-sponsored accounts had been preselected in the past.
However, the menu would allow students to change that account by
selecting any other option (account). Certainly, the student must
provide the necessary information associated with his or her account to
enable the institution or third-party servicer to use it. If a student
does not make an affirmative selection from the student choice menu,
the institution will still have to comply with the appropriate 14-day
time-frame in Sec. 668.164(h)(2) and pay the student the full amount
of the student's credit balance due by EFT, issuing a check, or
dispensing cash with a receipt signed by the student.
However, based on the concerns expressed, we are eliminating the
proposed requirement that the student's existing account must be pre-
selected on the choice menu (i.e., that it must be a ``default''
option). Instead, no option may be pre-selected, making the selection
process more neutral in terms of how options are presented. We do not
believe that it is necessary to further specify the order in which
disbursement options are presented. Instead, we are convinced that the
approach of establishing a clear, fact-based, and substantially equal
presentation of options (with the student's existing account being
prominently presented first) is sufficient to prevent institutions or
others from unfairly steering students toward accounts that may not be
in their best interest.
Changes: We have revised Sec. 668.164(d)(4)(i)(B)(1) by removing
the reference to ``default'' to indicate that the student's existing
financial account must be prominently presented as the first option in
the selection process without requiring that it be a default option. We
have added Sec. 668.164(d)(4)(i)(A)(5) to indicate that
[[Page 67153]]
no option can be preselected in the student choice process. We have
also added Sec. 668.164(d)(4)(i)(A)(6) to specify that if a student
does not make an affirmative selection from the student choice menu,
the institution must still pay the full amount of the student's credit
balance within the time-period specified in Sec. 668.164(h)(2), using
a method specified in Sec. 668.164(d)(1), i.e., by initiating an EFT
to the student's financial account, issuing a check, or dispensing cash
with a receipt signed by the student within the appropriate 14-day
time-period.
Comments: One commenter indicated that an institution should not be
forced to offer any sponsored accounts to students under a selection
process, and another commenter argued that establishing a selection
process places a burden on colleges that are trying to find ways to cut
costs and operate more efficiently under budget limitations. This
commenter questioned whether the college would have to act as a
personal banker during the admissions process. The commenter also asked
whether the college would have to compare account options and, in
essence, become an extension of the financial (banking) industry, or
whether communicating to students that they can use an existing account
or utilize a sponsored account would be enough.
Discussion: We disagree with the commenter who stated that
institutions should not have to include sponsored accounts in a
selection process. And, we disagree with the commenter who stated that
institutions should not have to establish a selection process. When an
institution chooses to make direct payments to a student by EFT and has
entered into an arrangement under Sec. 668.164(e) or (f) (a T1 or T2
arrangement), the Department believes that it is imperative that
students be given a choice as to where they will receive their title IV
credit balances. As discussed elsewhere in this document, students have
too often been forced to receive their credit balances in accounts that
have proven to be too costly for them. Establishing a selection process
under which the student is presented information about various options
(financial accounts) and is able to choose one of them for receiving
his or her title IV credit balance payments corrects many of the
problems that students have encountered in the past. Institutions do
not have to act as a personal banker under this requirement. However,
in compliance with Sec. 668.164(d)(4), if they have a T1 or T2
arrangement, they will have to describe the student's options,
including listing and identifying the major features and commonly
assessed fees associated with financial accounts described in Sec.
668.164(e) or (f) (T1 or T2 arrangement accounts) that are options in
the selection process.
Changes: None.
Comments: One commenter indicated that banks embrace informed
choice as a vital consumer protection, and stated that it is critical
for a student refund selection process to offer information about
credit balance payment options in a clear, fact-based, and neutral
manner. But, the commenter argued that, only if the credit balance
payment process facilitates the opening of an account as an integrated
step within the process, should the account be part of the selection
process. Thus, the commenter stated that it is critically important to
distinguish between accounts opened for receipt of title IV credit
balances within the selection process, and ordinary bank accounts
opened for general use--including accounts available for use with a
validated access device that is also used for institutional purposes
(such as a student ID), enabling the student to use the device to
access a financial account (previously we had referred to this type of
arrangement as an account linked to a card used for institutional
purposes, but we have changed our terminology to better conform with
banking regulations). This commenter contended that the proposed
regulations would convert traditional, general-use, deposit accounts
into accounts regulated by the Department, and that it would,
therefore, obligate institutions with stand-alone campus card or
cobranded debit card programs--T2 arrangements as described in Sec.
668.164(f)--to list all such T2 accounts within the institution's
credit balance payment selection process, even though the card programs
operate completely independently from those arrangements. The commenter
noted that, because some T2 arrangements allow a student ID card to
become a validated access device, enabling the student to use the
device to access a financial account, the proposed regulations could
require schools to list terms and conditions for not just one account,
but for a bank's entire selection of eligible consumer-deposit
accounts. The commenter concluded that the appropriate focus for the
proposed regulations should be on non-standard deposit accounts opened
through the title IV credit balance payment process. Thus, the
commenter argued that T2 accounts should be excluded from the scope of
the student choice process.
Another commenter echoed this sentiment, stating that colleges and
universities should not be required to bring T2 financial accounts into
the selection process for title IV refunds. This commenter noted that
at many schools T2 arrangements are completely independent of the
credit balance payment process and are not explicitly offered as a
choice at the time a student is asked to tell the school how he or she
prefers to receive credit balance payments. The commenter noted that
this is particularly true when the student financial accounts offered
under a T2 arrangement take the form of a checking account. The
commenter argued that the college typically has no role in the
student's effort to open an account. With respect to the selection
process, this commenter argued that students who have opted to open an
account at a bank with a T2 arrangement should simply be viewed as
having an existing account that they will designate for direct deposit
of their credit balances. Along similar lines, another commenter urged
the Department to amend proposed Sec. 668.164(d)(4) to provide that an
institution does not have to provide students with specific options for
receiving title IV payments if it: (1) Requests that students or
parents simply identify a deposit account to receive their funds when
setting up credit balance payment plans, and (2) makes no specific
recommendations on the deposit account to be used during the process of
setting up those plans.
Discussion: We disagree with the argument that an account offered
under a T2 arrangement should only be required to be part of the
selection process if the account is opened for the purpose of receiving
credit balance payments. T2 arrangements involve accounts that are
opened under institutional contracts with financial entities (such as
banks or credit unions) and that are offered and marketed directly to
students. When a financial entity enters into a contract with an
institution with 500 credit balance recipients or five percent or more
of its enrollment comprised of credit balance recipients and, pursuant
to that contract, it or the institution markets financial accounts
directly to students, it is reasonable to conclude that the parties
anticipate that some or all of the students opening the accounts will
use them to receive title IV credit balances. This is true regardless
of whether the contract or arrangement is agreed to independent of the
credit balance payment process, and regardless of whether the
institution makes any specific recommendations on the deposit account
to be used when setting
[[Page 67154]]
up credit balance payment plans. Thus, we believe it is reasonable to
require that accounts offered under a T2 arrangement be a part of the
selection process in all situations. By doing so, we are making it
easier for students to make informed choices regarding where their
credit balances are to be sent. Financial entities that have objected
to having accounts offered under a T2 arrangement be part of the
selection process have done so on grounds that institutions must list
the major features and commonly assessed fees associated with such
accounts and that these accounts may include a number of general use
deposit accounts that happen to be campus card or cobranded debit card
accounts. However, we are unpersuaded by these concerns. Both the
financial entities offering these accounts and the institutions that
have contracted with them are benefitting from the direct marketing of
those accounts to students. These students, if they are receiving title
IV student aid, should be afforded the benefits and protections
associated with having these accounts be a part of the selection
process for the payment of credit balances. As noted above, the parties
to a T2 arrangement are free to develop a standalone account for
purposes of the arrangement and avoid subjecting general use deposit
accounts to these rules.
Changes: None.
Comments: One commenter suggested that an institution that enters
into a contractual arrangement with a third party to provide deposit
services or distribute title IV funds should be required to establish a
review process or panel to ensure that certain benefits and protections
are provided to its students. As envisioned by this commenter, this
panel or process would:
(1) Ensure that bank account fees and ATM locations meet regulatory
requirements;
(2) Guarantee that all bank accounts are insured ones and that any
fees are charged and received by the insured (banking) institution;
(3) Decide the order in which the various options to receive credit
balances are presented to the student, based on how well each account
provides banking services, considering costs, convenience and other
factors;
(4) Ensure that all student options are presented in a neutral
manner;
(5) Ensure that student payments are made as expeditiously as
possible;
(6) Share appropriate personal information in a timely manner so
that each depository institution can meet its obligations to verify the
student's identity and other information necessary to expedite the
delivery of funds;
(7) Require third-party servicers who disburse or accept title IV
funds to enter into non-disclosure agreements to protect student
privacy and commit to not using the personal information for anything
other than its intended purposes without the student's consent;
(8) Allow the depository institution to charge a reasonable fee for
more than one overdraft a month; and
(9) Require that financial literacy education be provided to
students as part of each bank offering.
Discussion: We disagree. Institutions are required to ensure that
they comply with all aspects of the regulations and, in order to ensure
that compliance, an institution could establish a panel or process, but
it could also ensure compliance in other ways. The Department has also
decided not to adopt some of the requirements that the commenter
suggested with regard to a panel or process. For example, the final
regulations do not require an institution to base the order in which
student options are presented on how well each account provides banking
services, considering costs, convenience, and other factors. We believe
that the existing regulatory requirements that the student's options be
presented in a clear, fact-based, and neutral manner are sufficient to
ensure that necessary protections are provided to the student. Thus,
after prominently listing the student's existing account as the first
option, there is not any other mandatory order in which the options
must be presented. And, while we agree that financial literacy
education would benefit students, we believe that the required
disclosures that institutions must make with regard to the major
features and commonly assessed fees associated with accounts described
in Sec. 668.164(e) and (f)(T1 and T2 accounts) will provide students
with sufficient information to make an informed choice. Many of the
commenter's other suggestions that certain benefits and protections are
provided to students--such as requiring institutions to present options
in a neutral manner, ensure that student payments are made
expeditiously, share only appropriate personal information, and not use
such information for anything other than its intended purposes without
the student's consent--are incorporated in various ways in other parts
of the regulations and are discussed elsewhere in this preamble.
Changes: None.
Comments: One commenter noted that few institutions offer parents
the option to receive credit balance payments for PLUS loans by EFT.
This is generally because institutions do not maintain separate records
for parents in their databases and are not inclined to gather and
manage this additional information. Further, the commenter stated that
it is rare for institutions to include financial accounts for parents
within the scope of their agreements with servicers and financial
institutions. Thus, this commenter argued that, even if the institution
offers parents a choice of an EFT or check, it does not make sense to
require the institution to provide information and disclosures to
parents unless the institution also offers them an account under a T1
or T2 arrangement.
Discussion: We agree that it may not be necessary to require
institutions to provide information and disclosures to parents in their
credit balance selection process. Credit balance payments for PLUS
loans to parents are often sent to the student's account (on whose
behalf the parent borrowed the money), even though the parent can
choose to have the money sent to himself or herself. And, even if the
credit balance portion of the PLUS loan is sent to the parent, the
parent generally has more experience with, and a better understanding
of, banking account options, and is more likely to already have a bank
account, than a student. Thus, we are changing the final regulations so
that Sec. 668.164(d)(4) addresses ``student'' choice, and not
``student or parent'' choice, in the institution's selection process
for an EFT option for the receipt of title IV funds. Section 668.164(e)
and (f) (T1 and T2 arrangements) will similarly be modified to clarify
that they apply only to students. Thus, institutions may, but will not
be required to, provide the parents of students with a choice of
options as to how they will receive title IV funds, and they may, but
will not be required to, have the accounts offered pursuant to their T1
and T2 arrangements to the parents of their students comply with the
provisions of Sec. 668.164(e) and (f) when those parents receive
parent PLUS loan credit balance funds.
Changes: We have removed the references to ``parents'' in Sec.
668.164(d)(4)(i). However, we retained the reference to ``parents'' in
Sec. 668.164(d)(4)(ii) to specify that an institution does not have to
set up a student choice menu if it has no T1 or T2 arrangement but
instead makes direct payments to a student's or parent's existing
financial account, or issues a check or disburses cash to the student
or parent.
[[Page 67155]]
Comments: Several commenters stated that there should be no delays
in receiving funds via direct deposit to an existing account, i.e.,
that it should be as fast as when funds are deposited into an
institutional-sponsored account. On the other hand, numerous commenters
noted that while institution can indeed initiate electronic payments in
a timely manner without regard to which account the funds are being
sent, as required under Sec. 668.164(d)(4)(i)(A)(3) of the proposed
regulations, they have no way to ensure that electronic payments made
to existing accounts are received in as timely a manner as
disbursements made to accounts offered under T1 or T2 arrangements.
According to one commenter, after an institution initiates an EFT, it
can take between two and four business days for the funds to be
received at the financial account in question, depending on the
receiving bank's policy. This commenter also pointed out that there are
currently disbursement methods that provide students with access to
their funds within 15 minutes when those funds are directed to a
prepaid card.
Discussion: If the student chooses to use an existing account,
there should be no delay in transmitting funds, i.e., the deposit to an
existing account should be initiated as quickly as it would be if funds
were deposited into an institutional-sponsored account. The requirement
that deposits be as timely regardless of which account a student
chooses pertains to initiating electronic payments by the institution
or its servicer, not the actual date when funds are received by the
bank in question. The proposed regulation reflected this concept. The
Department understands that once an electronic payment is initiated the
institution does not have any control over the practices of the bank
offering the student's existing account with respect to when that bank
makes the funds in question available to the student.
Changes: None.
Comment: Another commenter raised a couple of technical concerns
with proposed Sec. 668.164(d)(4)(i)(A)(3), recommending that we
replace the phrase ``initiating direct payments electronically to a
financial account'' with the phrase ``initiating direct payment by EFT
. . .,'' since the term EFT is used in other places in the regulations,
and also pointed out that technically an EFT would not be made to an
access device, but rather to the financial account underlying that
device.
Discussion: The Department agrees to use the term ``EFT'' in place
of the word ``electronically'' in Sec. 668.164(d)(4)(i)(A)(3), and
that we should eliminate the concept that payments can be made by EFT
to an access device.
Changes: We have revised Sec. 668.164(d)(4)(i)(A)(3) to indicate
that initiating direct payments by EFT to a student's existing
financial account must be as timely and no more onerous to the student
as initiating direct payments by EFT to an account offered pursuant to
a T1 or T2 arrangement. We have also revised Sec.
668.164(d)(4)(i)(A)(3) by removing the reference to an ``access
device'' to indicate that, even if an access device is used, the direct
payment is made to the financial account that is associated with that
access device, and not to the access device itself.
Comments: One commenter contended that the requirements related to
student or parent choice with respect to a selection process for
receiving credit balance funds are impractical for a foreign
institution wishing to provide timely processing of student loan funds.
According to the commenter, in many cases, it may not be possible to
use the various alternative methods of processing payments anticipated
by the proposed regulations. This commenter argued that if this
provision is applied to foreign institutions, the result will be delays
in processing payments, which not only can be inconvenient but can
result in visa problems for the students, who often must be able to
show that they have sufficient funds to support themselves before they
are permitted to travel to the foreign institution. Thus, this
commenter stated that the provisions of Sec. 668.164(d)(4) should
apply only to domestic institutions.
Discussion: We agree that the requirements related to student
choice in a selection process for receiving credit balance funds may be
impractical for many foreign educational institutions wishing to
provide timely processing of student loan funds. We recognize that both
the foreign educational institutions and the students attending them
often face problems that domestic institutions and their students do
not--including potential visa problems. Thus, we agree that the
provisions of Sec. 668.164(d)(4) should apply only to domestic
institutions.
Changes: We have revised Sec. 668.164(d)(4) to state that the
student choice provisions apply only to institutions located in a
State.
Comments: With respect to Sec. 668.164(d)(4)(i)(A)(4) (the
requirement that schools allow students the option to change their
choices as to how the payment of credit balances are to be made, so
long as they provide the school with written notice within a reasonable
time), one commenter questioned what a reasonable time would be and
encouraged the Department to offer some guidance in this area.
Discussion: The institution should accommodate a student's written
request to change financial accounts or payment options as soon as
administratively feasible. We recognize, however, that in cases where
the institution or third-party servicer receives the student's request
shortly after it has initiated an EFT or issued a check, there may be
delays in honoring the student's request pending the disposition of the
funds disbursed. In these cases, the institution may have a policy
regarding how or whether it will reissue the check, initiate an EFT to
the new account, or recover the funds disbursed. Consequently, we are
not specifying a timeframe.
Changes: None.
Requirement To Include Checks as an Option for Receipt of Title IV
Credit Balance Funds (Sec. 668.164(d)(4)(i)(B)(4))
Comments: A number of commenters stated that including checks as a
disbursement choice is impractical, short sighted, and old fashioned.
Others stated that checks are a costly and inefficient option that many
institutions are trying to avoid as they will cause a delay in the
receipt of funds by students. Several commenters noted that a large
number of institutions offer only electronic disbursement options
upfront for security and efficiency. One commenter specifically
mentioned the time and expense required to issue checks and postage, to
reissue lost checks, to complete stop payment processes, and complete
escheatment processes for uncashed checks. Other commenters noted that
some students have to take their checks to a check-cashing facility and
pay significant fees, which undermines a goal of the regulations--to
give students fee-free access to their funds. Some commenters also
stated that fraud is more prevalent with checks, and several noted that
checks are easily lost, misplaced, or stolen. Several commenters noted
that the check option creates greater risk than other options,
particularly with putting unbanked students in a position where they
are carrying large amounts of cash. They argued that even if students
have bank accounts and deposit their checks into those accounts, they
will typically have their funds held for 3-5 business days, negating
the intended benefit of the regulations to give students timely access
to their financial aid funds. Another commenter
[[Page 67156]]
stated that the Department's goal should be to enable students to have
access to a cost-effective, low-risk, FDIC-insured account, so that
they have an opportunity to manage their title IV funds wisely for the
entire school year. This commenter argued that, with the fee
restrictions proposed on accounts offered under T1 arrangements, there
is no reason not to continue to pursue a goal of 100 percent electronic
disbursement to an FDIC-insured account. Several commenters also
mentioned that the requirement to offer a check option to students runs
counter to the regulations encouraging electronic disbursement of
refunds and certain Federal requirements for electronic disbursement of
Federal benefits. The commenters noted that, according to the Treasury
Department, direct deposit is safer, easier, faster, and more
convenient than checks. One commenter argued that the use of prepaid
cards in lieu of checks has enabled government agencies to outsource
many of the administrative responsibilities associated with managing a
payment program and, in the process, reduce costs. The commenter noted
that prepaid cards also offer numerous advantages to students over
checks, such as real-time access to funds, a means to participate in
the modern economy, and access to the same consumer protections that
apply to traditional debit cards. The commenter stated that requiring
schools to specifically offer students the option of receiving their
credit balances by check ignores this trend and that including this
method of disbursement as a student choice would signal a backward
movement in getting funds to students in a safe and efficient way.
Reiterating that direct deposits are usually a better option than
checks, several commenters suggested that the Department keep its
current practice of allowing an institution to ``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 the disbursement of title IV, HEA program funds to students.''
On the other hand, several commenters supported the requirement
that schools include checks as an option in their selection process for
the receipt of credit balances. One commenter stated that, while most
students today may opt for electronic receipt of their financial aid
funds, some may find that a check better meets their needs. Further,
some institutions such as community colleges may not have direct
control over how funds are disbursed due to State or municipal
regulations, and may not be able to provide direct deposit as a
disbursement option at the present time. The commenter argued that, for
these reasons, retaining the check option makes sense at least in the
short term. The commenter suggested that the Department could consider
a gradual phase-out of checks in three to five years as an alternative
approach that would encourage States and municipalities to facilitate a
move toward EFT options for impacted institutions. Another commenter
noted that, in fiscal year 2014, his school issued 18,999 refunds,
totaling $23.9 million. Of those 18,999 refunds, 10,794 were checks and
8,205 were EFT direct deposit (i.e, 57 percent of students at this
school chose the check option). Based on this, the commenter encouraged
the Department to maintain the check option. The commenter further
suggested that the Department should consider eliminating the cash
option, as institutions of higher education should not be placed in the
position of handling potentially millions of dollars in cash. Another
commenter stated that offering a check as an option provides some
benefit toward student choice. While acknowledging that a check may
represent the least convenient option for students, and is potentially
a more costly option for schools, this commenter suggested that the
presence of a check option, which permits a student to fully ``opt
out'' of the processes associated with EFT, may serve a purpose in
providing an incentive for all parties to ensure that EFT methods work
well, are convenient to access, and are priced appropriately.
Discussion: We invited comments in the NPRM as to whether the
option to receive a check should be affirmatively offered to students
through a school's selection process, and we received a number of
comments on both sides of that issue. However, the majority of
commenters believed that checks, in most circumstances, should be used
only as a last resort. We agree that, in many circumstances, checks are
a less efficient means of transferring money and understand the desire
of many to move exclusively (to the extent possible) to electronic
banking methods. We also find persuasive the fact that many government
agencies are moving away from checks to electronic banking methods
because direct deposit is safer, faster, easier, and more convenient,
and the argument that the Department should not ignore this trend.
While we understand that some students may prefer to receive a check,
we do not believe that fact should dictate to an institution that it
must write checks to anyone who wants one when the institution wishes
to move forward to a more cost-effective and secure method of
disbursing money to its students. This does not mean that the
institution cannot choose to use checks in those situations where it
finds doing so is to its benefit, just that it should not be forced to
affirmatively offer a check option to its students. Similarly, with
regard to institutions that find themselves in a position in which they
cannot use electronic banking options, such institutions always have
the option of choosing to use checks or including them in the student
choice selection process. For similar reasons, we do not find
persuasive the suggestion that the Department implement a gradual
phase-out of paper checks over three to five years. If an institution
wants to continue to use checks or include them in a student choice
selection process, it may do so. With regard to the comment that
acknowledges that checks are an inferior way of disbursing money in
most instances, but that the check option should perhaps be preserved
anyway to provide an incentive for all parties to ensure that EFT
methods work well, are convenient to access, and are priced
appropriately, we do not believe that that is the best way to achieve
that goal. We believe that the regulations sufficiently address these
goals and that any incremental value in keeping checks for this purpose
is outweighed by the costs to institutions of requiring checks as a
payment option.
The Department acknowledges that there are times when issuing a
check will be necessary to pay a credit balance to a student. As is the
case under the current regulations, when an institution wishes to pay a
student with an EFT, but the student does not choose such an option, or
otherwise fails to supply the institution with sufficient information
in a timely manner to allow the institution to disburse the title IV
credit balance in the desired fashion, the institution must still pay
the student. The institution can then issue a check to that individual
to fulfil the requirement. And we acknowledge that some institutions
may choose to use checks exclusively or in limited circumstances.
However, after considering the arguments made by the commenters, we
agree that a check is not usually the best choice for the institution
or the student and that the Department should not require it to be
offered as an option to the student in the selection process. The
institution should be left with the option here, and
[[Page 67157]]
be able to choose to use checks exclusively or move its disbursement
process towards electronic processes and only have to issue a check (or
pay with cash) as a last resort.
Finally, with regard to the suggestion to eliminate the cash
option, the Department believes that, while it is probably only rarely
used, it may be a convenient way for an institution to pay a student in
some circumstances and, therefore, is being retained. However, this
option is not required to be listed in a school's selection process
and, thus, is not one that a student can choose.
Changes: We have revised Sec. 668.164(d)(4) by removing the
requirement that an institution must include checks as an option in its
selection process, and we are adding a requirement that indicates that
the institution must be able to issue a check or disburse cash in a
timely manner to a student in situations where the student does not
provide the institution with the necessary information to receive a
disbursement under one of the methods in the institution's selection
process.
Ban on Sharing Student Information Prior to Account Selection (Sec.
668.164(e)(2)(i)(A) and (f)(4)(i)(A))
Comments: Several commenters expressed support for limiting the
amount of personally identifiable information shared between schools
and financial institutions or third-party servicers that offer
financial products to students. However, other commenters expressed
concerns that the Department's proposal, as written, would not allow
institutions to share enough information with their servicers to
prevent fraud and ensure accuracy. These commenters suggested that, at
minimum, a servicer would need a student ID number to authenticate a
student's identity. Commenters also suggested that a photograph, a
unique identifier, the amount of the disbursement, the date of birth,
and a ``shared secret'' would also be necessary to ensure the security
of title IV funds.
One commenter stated that universities have the right to share
information relating to their business practices with third-party
servicers without requesting prior permission and that this provision
could cause delays in transferring title IV funds to students. Another
commenter stated that the allowable data that could be disclosed under
the proposed regulations would be more limited than what educational
institutions are permitted to disclose under the directory information
exception to consent under the Family Educational Rights and Privacy
Act (FERPA), 20 U.S.C. 1232g(a)(5) and 34 CFR 99.31(a)(11) and 99.37.
Commenters also expressed concern that the proposed regulations
could cause increased administrative burden for institutions. One
commenter suggested that institutions would have to implement a
roundabout process wherein institutions themselves would ask students
if they wanted to open a financial account and then, only upon
receiving consent to the opening of the account, share the information
necessary to permit the third-party servicer to authenticate the
student's identity or cut a disbursement check. That commenter noted
that such a process would be impractical. Other commenters suggested
that the proposed language would interfere with a student's ability to
select another disbursement option such as a check or EFT to a
preexisting account.
One commenter suggested that current regulations prevent student
information from being used for purposes other than identification, and
noted that other government programs use Social Security numbers or
dates of birth for identification purposes. Another commenter
recommended that the Department revise the regulations to clarify that
third-party servicers are still able to obtain information required to
perform general administrative purposes.
However, other commenters suggested that the proposed regulations
did not go far enough. These commenters expressed concern that even the
limited personal information that servicers and financial institutions
can receive prior to a student giving consent allows account providers
to market accounts to students and that the materials received by
students under these circumstances imply a school's endorsement of
those accounts. Commenters also suggested that we include a provision
strictly limiting use of data shared with a third-party servicer to the
processing of title IV disbursements, and prohibit institutions from
disclosing this information to any other entity except for the purposes
of fulfilling title IV duties.
Discussion: We generally agree with the commenters who stated that
some additional information is necessary for third-party servicers to
ensure that title IV funds are safely transferred to the students for
whom they are intended. For example, we agree that sharing a student ID
number (as long as it does not include the Social Security number of
the student); the amount of the disbursement; and a password, PIN code,
or other shared secret provided by the institution that is used to
identify the student serves a legitimate authentication purpose. We
also believe the regulations should provide for the sharing of any
other data deemed necessary by the Secretary in a Federal Register
notice, so as to ensure that the regulations can be kept up to date
with technology and changes in best practices. As a result, we have
added these items to the list of data an institution may share with an
account provider under a T1 arrangement. We have also accommodated the
need of servicers for additional information by making this information
available upon selection by the student of the servicer's account in
the student choice process. We note that this information sharing is
unnecessary if the student opts to use an existing account, but if the
student chooses the servicer's account, we regard that as tantamount to
consent to sharing by the institution with the servicer of the
information necessary to authenticate the student's identity for
purposes of making the title IV payment. We did not wish to delay
disbursement in the latter situation.
We disagree with the commenter who stated that universities have
the right to share any information they choose with their business
partners without prior consent. FERPA, 20 U.S.C. 1232g and 34 CFR part
99, contains broad limits on the right of educational institutions and
agencies receiving funding under a program administered by the
Department to disclose an eligible student's personally identifiable
information from education records without the student's prior, written
consent. Wholesale sharing of information, beyond the information
needed to perform the servicing tasks, is not within the servicer's
purview under title IV.
We also disagree that this regulatory provision, with the changes
described above, will cause significant delays with regard to
transferring title IV credit balances to students. An institution
desiring to share additional information needed by the servicer only
has to ensure that the student made a selection in the student choice
process that triggers additional disclosure of personally identifiable
information.
We agree with the commenter who stated that the provision, as
proposed in the NPRM, would have been more restrictive than FERPA with
respect to the disclosure of directory information. As a result, for
accounts offered under T1 arrangements, we have clarified that an
institution may share directory information, as defined in 34 CFR 99.3
and in conformity with the requirements of 34 CFR 99.31(a)(11) and
99.37, in addition to the student ID
[[Page 67158]]
number; the amount of the disbursement; and a password, PIN code, or
other shared secret provided by the institution that is used to
identify the student prior to selection of the account in the student
choice process. For accounts offered under T2 arrangements, we have
clarified that an institution may share directory information, as
defined in 34 CFR 99.3 and in conformity with the requirements of 34
CFR 99.31(a)(11) and 99.37--but nothing else--with the account provider
prior to obtaining consent to open an account.
We acknowledge that the restrictions on information sharing may
create additional administrative burden for institutions. However, we
believe that the changes made to these provisions ensure that
institutions that have T1 arrangements will not have to engage in the
two-step process envisioned by these commenters to deliver a credit
balance. We believe that the changes to the regulations ensure that
institutions can continue to use third-party servicers to contact
students, safely identify them, and guide them through the selection
process. A student can then either choose an account offered under a T1
arrangement, prompting the sharing of additional information, or
provide his or her banking information at the selection menu. For this
reason, we do not believe these regulations will interfere with a
student's ability to select his or her own, preexisting account.
In addition, we do not believe that the restrictions on
information-sharing as they apply to accounts offered under T2
arrangements are problematic from a credit balance delivery perspective
since account providers under T2 arrangements do not manage direct
payments of title IV funds. Before the student has agreed to open the
account, there is no need or justification for sharing the student's
non-directory information with the account provider. We disagree with
the commenter who suggested that current regulations have been
sufficient to deter unwarranted sharing of personally identifiable
information. Oversight reports \33\ have shown otherwise. Moreover,
while other government programs may use Social Security numbers or
dates of birth for identification purposes, in light of the noted
concerns about unwanted (and unnecessary) sharing of student personally
identifiable information, we do not believe that there is any need for
sharing personally identifiable information beyond that permitted by
the regulations, as revised, prior to selection by the student of the
servicer's account or consent from the student to the opening of an
account offered under a T2 arrangement.
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\33\ OIG at 19.
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We disagree with the commenter who suggested that we clarify that
third-party servicers are still able to obtain information required to
perform general administrative purposes. We believe such a statement is
too broad and would undermine our ability to ensure that student
information is not used for purposes other than the delivery of title
IV credit balances.
We agree with the commenters who suggested that the provision as
drafted did not address the fact that shared information should only be
used for legitimate title IV purposes and not the marketing of
financial accounts. As a result, we have revised the section on T1
arrangements to state that institutions must ensure that information
shared prior to student selection is used solely for activities that
support making direct payments of title IV funds and cannot be shared
with any other affiliate or entity. We have not made a similar change
to the provisions governing accounts offered under T2 arrangements
because those account providers do not process title IV funds.
Furthermore, under the regulations account providers under T2
arrangements will not have any non-directory information to disclose
prior to the student's consent to opening the account.
Changes: We have revised Sec. 668.164(e)(2)(ii) to state that,
under a T1 arrangement, the institution must ensure that any
information shared as a result of the institution's arrangement with
the third-party servicer before a student makes a selection of the
financial account associated with the third-party servicer as described
under paragraph (d)(4)(i) of the section does not include information
about the student other than directory information under 34 CFR 99.3
and disclosed pursuant to 34 CFR 99.31(a)(11) and 99.37, beyond--
A unique student identifier generated by the institution
that does not include a Social Security number or date of birth, in
whole or in part;
The disbursement amount;
A password, PIN code, or other shared secret provided by
the institution that is used to identify the student; or
Any additional items specified by the Secretary in a
notice published in the Federal Register.
We have also revised Sec. 668.164(e)(2)(ii) to provide that the
institution must ensure that the information--
Is used solely to support making direct payments of title
IV, HEA program funds and not for any other purpose; and
Is not shared with any other affiliate or entity for any
other purpose.
We have also revised Sec. 668.164(f)(4)(i)(A) to state that, under
a T2 arrangement, the institution must ensure that the student's
consent to open the financial account is obtained before the
institution provides, or permits a third-party servicer to provide, any
personally-identifiable information about the student to the financial
institution or its agents, other than directory information under 34
CFR 99.3 that is disclosed pursuant to 34 CFR 99.31(a)(11) and 99.37.
Sending an Access Device Prior to Consent (Sec. 668.164(e)(2)(i) and
(f)(4)(i)(B))
Sending an Access Device Not Used for Institutional Purposes
Comments: While many commenters expressed strong support for the
provision preventing institutions from sending an access device to a
student before receiving consent to open an account on the grounds that
this procedure implies that the card is required to receive title IV
funds, some commenters did object to the ban on sending access devices
prior to receiving consent.
Several commenters who objected stated that this provision would
slow the speed with which students are able to receive their title IV
funds and that this provision would create more administrative burden
for institutions, financial institutions, and third-party servicers in
delivering credit balances to students. Other commenters also stated
that this provision disproportionally disadvantaged unbanked students
and students who do not currently have a preexisting bank account by
delaying their access to title IV funds.
Several commenters contended that requiring institutions to obtain
consent would greatly increase administrative burden. One commenter in
particular noted that, while they supported the provision generally,
the regulatory language suggests that a school must obtain the consent
from a student to open an account, even if the student has already
provided consent to the third-party servicer or a financial
institution. This commenter suggested that requiring a school to obtain
consent could confuse students. The commenter requested that we clarify
that a third-party servicer or financial institution is able to obtain
the consent necessary to receive an access device.
Finally, several commenters suggested that existing laws and
regulations make
[[Page 67159]]
this provision unnecessary, and that the existing requirement to
disclose terms and conditions of an account prior to its opening
provides sufficient consumer protections for students. Commenters also
argued that strict requirements regarding financial accounts already
exist and that it could be difficult for financial account providers to
comply with new requirements.
Discussion: While we acknowledge that prohibiting an institution or
third-party servicer from sending an access device to a student prior
to the student's consent may in some cases cause delays in disbursing
title IV funds, we do not feel those delays outweigh the concerns
stated in the NPRM that the pre-mailing of an inactive access device
implies that the associated account is required by the institution.\34\
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\34\ 80 FR 28504.
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We also acknowledge the commenter's concerns that this provision
would disproportionally disadvantage students without existing bank
accounts by delaying their access to title IV funds. However, we do not
feel that this provision creates a significant disadvantage since
students will still be able to obtain an access device after providing
consent to open an account. Institutions may time their student choice
process so as to accommodate these students.
With regard to the comment that the proposed regulations implied
that the institution, not the third-party servicer or financial
institution, would have to obtain consent to open a financial account
before sending an access device, we note that this was not our
intention. We have revised Sec. 668.164(e)(2)(i)(A) and Sec.
668.164(f)(4)(i)(B) of the final regulations to clarify that a third-
party servicer or financial institution can obtain the consent before
sending an access device. We believe this also addresses the commenters
who raised concerns about administrative burden for institutions.
However, we note that institutions are responsible for ensuring that a
process is in place to obtain consent before an access device is sent.
We respectfully disagree with the commenters that argued that
sufficient consumer protections already exist in current law or in
other provisions of these regulations that render this provision
unnecessary, especially in light of adoption rates ranging from 50
percent to over 80 percent at some institutions.\35\ We also agree with
the commenters that stated that this provision is necessary to dispel
the implication that these cards are required for students to access
their title IV funds.
---------------------------------------------------------------------------
\35\ Consumer Financial Protection Bureau, Request for
Information Regarding Financial Products to Students Enrolled in
Institutions of Higher Education (Feb. 2013) (hereinafter referred
to as ``CFPB RFI'').
---------------------------------------------------------------------------
Changes: We have condensed the two separate provisions regarding
sending and validating an access device into a single provision. We
also have revised Sec. 668.164(e)(2)(i)(A) and (f)(4)(i)(B) to remove
language specifying that it must be the institution that obtains the
student's consent to opening the financial account before an access
device may be sent to a student.
Sending an Access Device Also Used for Institutional Purposes
Comments: Many commenters expressed support for the provision that
would ban the practice of allowing an access device used for
institutional purposes to be validated to enable the student to access
the financial account before the student consents to open the financial
account. However, several commenters stated that this provision still
does not go far enough, arguing that allowing access devices used for
institutional purposes to be validated still suggests that such an
account is a preferred option. Other commenters expressed concern that
sending a cobranded student ID card that has this capability still
allows a third-party servicer or financial institution to send access
devices to students before they have consented to open an account. One
commenter requested that the Department prohibit all cobranding of
student ID cards.
Finally, one commenter suggested that, while they agree with the
provision, third-party servicers and financial institutions should be
allowed to collect the consent needed to validate an access device that
is also used for institutional purposes, arguing that forcing the
institution to do so creates unnecessary administrative burden.
Discussion: We acknowledge that allowing access devices used for
institutional purposes to be validated, enabling the student to access
a financial account, still implies that such an account is preferred or
required. However, we do not feel that concerns over this implication
outweigh the benefits a student might receive from such an arrangement
and have chosen not to regulate this practice beyond what was proposed
in the NPRM.
We also acknowledge that this provision may allow an institution
and its third-party servicer or financial institution to send
unsolicited access devices that also function as school ID cards before
a student consents to open an account. One possible approach to this
circumstance would be to prohibit an institution from sending a student
ID with an inactive access device and effectively require institutions
and their third-party servicer or financial account provider to send a
second student ID with an activated access device only after the
student consents. As we explained in the NPRM, we recognize the costs
to institutions with mandating such a framework and therefore declined
to require this two-step process in the regulations. Nevertheless, we
note that financial institutions must still comply with consumer
protection rules regarding unsolicited access device issuance (as set
forth in Regulation E, 12 CFR 1005.5).
We disagree with the commenter who requested that we ban all
cobranding on access devices used for institutional purposes. Our
concern with respect to these arrangements is the effect of cobranding
on a participating institution's discharge of its responsibilities for
delivering title IV funds. The related requirements in the regulations
are tailored to that purpose.
Finally, as with the provision requiring institutions to obtain
consent to open an account before sending an access device, we have
clarified that a third-party servicer or financial institution can
collect the consent required prior to validating an access device that
is also used for institutional purposes.
Changes: We have condensed the two separate provisions regarding
sending and validating an access device used for institutional purposes
into a single provision, and we have changed the language referencing
``linking'' an access device used for institutional purposes to
``validating'' in order to better conform with banking regulations and
terminology. We also have revised Sec. 668.164(e)(2)(i)(B) and
(f)(4)(i)(C) to remove language specifying that it must be the
institution that obtains the student's consent to open an account or
validate an access device.
Disclosure of Account Information (Sec. 668.164(d)(4)(i)(B)(2))
Comments: Several commenters expressed concern that the disclosure
requirements in Sec. 668.164(d)(4)(i)(B)(2) could conflict with the
disclosure forms the CFPB is developing. Commenters also noted that
having duplicative disclosures could confuse students and significantly
increase costs for account providers. Some of these commenters also
requested that the Department specify that any disclosures required by
the CFPB would satisfy the requirements under these regulations. One
commenter contended that a
[[Page 67160]]
standard disclosure would not capture the disparate needs of various
institutions and the students they serve.
Some commenters also expressed concern over transparency, and other
risks of duplicative or conflicting requirements. One commenter stated
that standard banking disclosures are sufficient to inform students of
the terms and conditions of an account and asked that we strike this
requirement entirely. Another commenter stated that transparency was
already in the best interests of the financial institutions as they
compete for business. Another commenter contended that requiring
disclosures for only accounts offered under T1 or T2 arrangements would
not be helpful or transparent for students since they would not receive
comparable information regarding check fees or preexisting financial
accounts. Finally, one commenter suggested that requiring these
disclosures may inadvertently compel institutions to market these
accounts to students.
Commenters also stated that there may be insurmountable
difficulties in delivering these disclosures in certain situations. For
example, some commenters noted that, for a student opening a bank
account at a financial institution prior to enrolling in an institution
of higher education, it would be impossible to give that student the
disclosure, as the financial institution would not know that the
prospective accountholder was planning to become a student at an
institution where a T1 or T2 arrangement exists.
Other commenters expressed concerns with the process of developing
the disclosures. One commenter expressed disappointment that a
prototype of the disclosures was not included in the NPRM. Other
commenters opposed the creation of a disclosure form without notice and
comment rulemaking. One commenter expressed concern that the NPRM did
not elaborate on what would constitute a ``commonly-assessed fee'' and
how we would determine which fees would be included in the disclosure.
Another commenter asked that we create a consumer-friendly and
consumer-tested format for these disclosures, and that the Department
seek feedback from students, families, and other groups when developing
the form in a process similar to the development of Truth in Lending
Act disclosures for private student loans.
One commenter stated that the Department should ensure that there
is adequate time for financial institutions to develop and begin
delivering disclosures to students.
However, several commenters noted that they supported the idea of
increased transparency for students and the creation of the new
disclosures. One commenter in particular requested that the Department
create a database containing all of the disclosures collected from
financial institutions with T1 or T2 arrangements.
Finally, one commenter noted the importance of disclosing the
manner in which a financial institution calculates overdrafts in the
forms, including the order in which transactions are processed, the
maximum number of overdrafts that can be charged in a day, any
exceptions to the overdraft fee, sustained overdraft fees and the
number of days before that fee is charged, and alternatives to
overdraft fees.
Discussion: The Department appreciates the commenters' concern that
having duplicative disclosures could be both confusing for students and
expensive for financial account providers to develop. However, as
explained in the NPRM, because the CFPB's disclosure forms have not yet
been finalized and because, as proposed, they would apply only to
certain kinds of accounts, we are unable to determine that those
specific disclosures will be appropriate for all accounts offered under
T1 and T2 arrangements.\36\ These disclosures also would not
necessarily be triggered by the student choice process established by
these regulations. Nevertheless, we will continue to work with the CFPB
as it finalizes its disclosure forms to ensure that our forms do not
conflict with the CFPB's final disclosures and, to the maximum extent
possible, we will work to ensure that the CFPB's disclosures and the
disclosures required for accounts offered under T1 and T2 arrangements
are as similar as possible to mitigate confusion and administrative
burden.
---------------------------------------------------------------------------
\36\ 80 FR 28503.
---------------------------------------------------------------------------
We disagree with the commenter who stated that the disclosures
would not be helpful because different institutions and different
students have different needs, and we believe the nature of these
disclosures will make it easier for students to determine whether the
accounts meet their needs, since the information will be presented in a
standardized way.
We continue to believe that clear, short-form disclosures are
necessary for students to make informed choices regarding financial
accounts opened for deposit of title IV funds. For the reasons
expressed in the NPRM,\37\ including concerns regarding the need for
objective and neutral information laid out in numerous government and
consumer reports,38 39 we do not believe that current
banking disclosures and free-market principles regarding transparency
guarantee that title IV recipients are fully informed of the most
relevant terms of their accounts or their rights and options when asked
by or on behalf of their educational institution to select a financial
account into which their title IV funds will be deposited.
---------------------------------------------------------------------------
\37\ 80 FR 28503.
\38\ USPIRG at 28.
\39\ GAO at 35.
---------------------------------------------------------------------------
We disagree with the commenter that stated that these disclosures
would not be helpful to students since they do not receive comparable
information for other account options. Because accounts are marketed
specifically to students through T1 and T2 arrangements by institutions
of higher education that participate in the title IV, HEA programs, we
believe that a higher standard of disclosure is required to ensure that
students are informed of the terms and conditions of the account before
the account is opened, enabling them to make the choices best suited to
maximizing the value of their title IV awards. We also disagree that
objectively disclosing the terms of the accounts in the selection menu
constitutes marketing by the school or the financial institution
because the information is given as a standardized disclosure of
consumer information and a student's own bank account is required to be
the first, most prominent choice in the selection menu.
We thank and agree with the commenters who stated that it would be
impossible for financial institutions to guarantee that students
receive disclosures in cases where students open an account at a
location outside the selection menu, such as at a bank branch. In
response, we would like to note that these disclosures only have to be
made in the selection menu in order for institutions to meet the
requirements of Sec. 668.164(d)(4)(i)(B)(2). In addition, the
regulations impose no requirements in the student choice process as to
disclosures with respect to pre-existing bank accounts.
We understand the concerns of the commenters who would have
preferred for the forms to be published as part of the NPRM. However,
because some of the accounts will be subject to CFPB disclosure
requirements, we believe it is crucial to ensure that the student
choice disclosures for those accounts dovetail with the CFPB's
requirements once finalized to avoid confusion. When the Department's
disclosures are developed, they will be published in the Federal
[[Page 67161]]
Register, and we will provide notice and an opportunity for comment at
that time. This process will provide interested parties with the
opportunity to comment to the Department and for the forms to
ultimately reflect input received from both the CFPB and the
Department. The Department's notice will also clarify which fees the
Department considers to be ``commonly assessed.''
We agree with the concern that there may not be enough time for
institutions to implement this requirement given that the disclosures
have not yet been developed. For this reason, we have delayed
implementation of this requirement to July 1, 2017.
We thank the commenter who suggested that we create a database of
these disclosures. However, we believe that this is contrary to the
purpose of the disclosures. The disclosures are meant to be given to
students at the time they select an account for title IV purposes to
ensure that they understand the features and fees associated with the
account. We believe that creating such a database would not be
consistent with this function and may in fact cause unnecessary
confusion for students.
We thank the commenter who asked that we use consumer-testing and
seek feedback from student and families. However, since we intend to
work closely with the CFPB to mirror their consumer-tested forms and
since we will subject the disclosures to publication in the Federal
Register and notice and comment, we believe that additional formal
consumer-testing is unnecessary in this case.
Finally, we thank the commenter who asked that we require
institutions to disclose the manner in which overdrafts are calculated.
We will take this feedback into account as we work to develop the
disclosures.
Changes: We have revised Sec. 668.164(d)(4)(i)(B)(2) to specify
that institutions will not be required to list and identify the major
features and commonly assessed fees associated with accounts offered
under T1 and T2 arrangements until July 1, 2017.
General Comments on Fees (Sec. 668.164(e)(2)(iii)(B) and (f)(4)(ix))
Comments: There was strong support from several commenters for the
fee limitations proposed in the NPRM. These commenters noted the
importance of providing students protections sufficient to ensure they
have reasonable opportunities to access their title IV aid without fees
and are not charged unreasonable, onerous, or confusing fees. The
commenters also agreed with the extensive documentation of unreasonable
fee practices in consumer and government reports and discussed at
length in the NPRM in support of these fee limitations.
Several other commenters opposed the proposed limitations on fees,
arguing that student choice was a sufficient protection, and students
affirmatively choosing to select a particular account will have a
reasonable understanding of the fees associated with that account.
These commenters also argued that the fee limitations would increase
costs and burden on institutions and financial account providers
because they would limit the costs that could be assessed to
accountholders for the convenience of utilizing the accounts. Some
commenters argued that limitations on fees would discourage responsible
behavior on the part of accountholders--specifically, that learning to
deal with account fees is part of becoming a responsible accountholder.
Some commenters also expressed support for the existing provision,
maintained in the proposed regulations, that prohibits a fee for
opening an account.
Commenters also submitted numerous additional recommendations
specific to the individual fee provisions. We discuss those comments in
subsequent sections of the preamble.
Discussion: We appreciate the support from numerous commenters for
the proposed limitations on fees under Sec. 668.164(e)(2)(iii)(B) and
(f)(4)(ix). We agree with commenters that the specific fees prohibited
are especially confusing, uncommon, or onerous, or otherwise have a
high likelihood to deprive title IV recipients of an opportunity to
reasonably access their student aid. We also thank commenters for
supporting our decision to maintain the prohibition on a fee for
opening an account.
We disagree with those commenters who argued that the fee
limitations are unnecessary. We discussed in great detail our reasons
for proposing to limit fees in the NPRM, and we believe the comments
generally support those limitations.\40\ We also believe the extensive
documentation of troubling behavior by financial account providers in
consumer and government reports reflects structural problems that
prevent market mechanisms--disclosures and choice alone--from
sufficiently protecting title IV recipients. We also disagree with
commenters who argued that the fee limitations would lead to
irresponsible accountholder behavior. On the contrary, government and
consumer reports documented that the practices of account providers in
the college banking market are troubling and not representative of the
typical banking practices in the broader marketplace. These fee
limitations are designed to eliminate the confusing, uncommon, and
onerous fee practices of financial account providers that act in place
of the institution and provide students with account options that allow
them to access their title IV aid.
---------------------------------------------------------------------------
\40\ 80 FR 28505-28509.
---------------------------------------------------------------------------
We agree with the commenters who argued that the proposed
provisions will limit the ability of institutions and financial account
providers to pass the costs of administering the title IV, HEA programs
on to students. While we have allowed a reasonable fee structure to
remain in place, an important impetus behind this rulemaking was a
recognition that too many institutions were passing along the costs of
administering financial aid programs to the aid recipients through
these arrangements and generating artificial demand for otherwise
uncompetitive financial accounts. This also resulted in the financial
account providers profiting at students' and taxpayers' expense. In
light of the fiduciary role of institutions as stewards of the title
IV, HEA programs, we believe that this institutional cost shifting is
an impermissible development and that students should not be in the
position to pay significant, unavoidable, and misleading costs as a
prerequisite to obtaining their Federal student aid.
Changes: None.
Prohibition on Charging an Account-Opening Fee (Sec.
668.164(e)(2)(iv)(B)(1) and (f)(4)(x))
Comments: Some commenters expressed concern over prohibiting a fee
for account opening as it relates to student ID cards that serve both
institutional and financial purposes. They suggested either altering or
removing this provision, arguing that these multi-function cards
primarily serve institutional purposes.
One commenter described student ID cards as primarily serving an
institutional need and only including payment functionality as an
``incidental'' mechanism. The commenter expressed concern that under
the account-opening fee provision, schools could not charge students to
obtain these cards, resulting in a lack of funding for other programs.
The commenter also expressed concern that this provision would prohibit
charging a student for replacing an ID card.
[[Page 67162]]
Another commenter noted that a fee normally charged for opening a
student ID card is allotted to a ``campus access control system,'' and
eliminating the fee would result in less robust campus security.
Both commenters recommended that the Department exclude student ID
cards from the provision prohibiting fees for account opening.
Discussion: We believe the concerns expressed by these commenters
address an issue separate from the account-opening fee subject to these
regulations. We understand that student IDs are by their nature
primarily used for institutional purposes--whether for simple
identification or to access student services, such as libraries,
fitness facilities, and on-campus housing. However, the prohibition on
fees charged for opening an account has been a longtime requirement
under existing regulations.
Existing Sec. 668.164(c)(3)(iv) requires that an institution
ensure that the student 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. We have retained this existing
requirement in the final regulations--specifically, Sec.
668.164(e)(2)(iv)(B)(1) and(f)(4)(x) require that an institution
``ensure students incur no cost for opening the account or initially
receiving an access device.''
It appears that the commenters' concern derives from the use of the
term ``access device.'' However, this term is distinguished in the
regulations from ``a card or tool provided to the student for
institutional purposes, such as a student ID card'' (see, e.g.,
Sec. Sec. 668.165(e)(2)(i)(C) and 668.164(f)(4)(i)(C)). To the extent
that an institution recoups the costs of disseminating a student ID
card to all its enrolled students through direct fees, tuition costs,
or other measures, this is not prohibited under the regulations.
However, we maintain in the regulations the prohibition on charging a
fee when a student ID card is validated, enabling the student to use
the device to access a financial account or when the underlying
financial account is opened.
While we intended this distinction in the proposed regulations and
we are making no substantive change to the proposed regulations, we
recognize that additional clarifying language will ensure that students
are not charged a fee to open an account into which title IV funds will
be deposited.
Changes: We have revised Sec. 668.164(e)(2)(iv)(B)(1) and
(f)(4)(x) to clarify the prohibition of a fee for allowing a card or
tool provided to the student for institutional purposes, such as a
student ID card to be validated, enabling the student to use the device
to access a financial account, in addition to the existing prohibition
on opening the account or initially receiving an access device.
ATM Access (Sec. 668.164(e)(2)(iii)(A) and (f)(4)(v))
Comments: Several commenters praised the Department for proposing
regulations that would provide for the availability of free access to
ATMs. These commenters noted the problems cited in consumer and
government reports demonstrating that in several instances students
attempting to withdraw their title IV funds were faced with an
insufficient number of ATMs, ATMs running out of cash, ATMs in locked
buildings, and other factors forcing students to out-of-network ATMs
where they incurred quickly mounting fees. These commenters encouraged
the Department to maintain requirements ensuring ATM access to title IV
recipients.
Some commenters expressed support for the Department's approach of
providing more specificity for the term ``convenient access'' than
exists under the current regulations, while still allowing sufficient
flexibility to provide ATM access tailored to individual institutions.
Other commenters requested that the Department provide additional
detail, expressing concern that without explicit guidance, financial
account providers would be reluctant to offer campus cards for fear of
running afoul of the regulatory requirements.
Several commenters argued that the requirement for access to a
national or regional ATM network was both unnecessary and economically
infeasible. One commenter argued that the OIG report showed that ATM
access at the reviewed institutions was not an issue and that students
had sufficient access to funds. Other commenters stated that the ATM
access requirements would prevent providers from offering cost-
efficient services and the costs of providing a fee-free network would
be passed on to students or result in financial firms exiting the
campus financial products marketplace. Other commenters also contended
that the ATM access requirements are unnecessary, arguing that cash is
increasingly becoming an outmoded method of payment, especially among
students.
Some commenters stated that the requirements for access to a
national or regional ATM network should apply equally to T1 and T2
arrangements. One commenter also stated that solely applying the
requirements to T1 arrangements demonstrated the Department's
unjustified preference for preexisting accounts. Another commenter
recommended that the requirements be applied to T2 arrangements to
ensure that students have sufficient access to their student aid credit
balances.
One commenter expressed concern regarding withdrawal limits and
noted that for students with large credit balances, daily limitations
on the amount of funds that can be withdrawn would effectively
eliminate the convenient access requirements under the regulations.
This commenter recommended that we provide a mechanism by which
students have fee-free access to their title IV refunds throughout the
payment period.
Several commenters expressed concern that the convenient access
requirements would be difficult for campuses located in rural, less
populated areas. These commenters argued that ATMs have relatively high
maintenance costs (one commenter stated that these costs are $20,000 to
$40,000 per year), making it economically infeasible to install an ATM
at those locations. Most of these commenters suggested that the
Department establish a safe harbor providing a minimum number of
students before the ATM access requirements would apply at a location;
however, no commenters provided a recommendation for such a numerical
threshold or justification for a particular number of students. Another
commenter suggested that the Department should, rather than quantifying
a required threshold for ATM access, evaluate each school on an
individual and ongoing basis to ensure that students had sufficient ATM
access. Other commenters recommended that we simply remove the
convenient-access requirement from the regulations.
Some commenters noted that ATM access provided to accountholders in
the general financial products marketplace rarely includes
international access to ATMs. These commenters recommended that the
provision governing convenient access to ATMs apply only to domestic
ATM access.
Some commenters also noted that certain ATMs provide functionality
unrelated to more traditional banking services, such as purchasing
postage or other services. These commenters recommended we limit fee-
free access to the more traditional banking services.
[[Page 67163]]
Finally, some commenters stated that out-of-network ATM fees are
instrumental in recovering the funds lost in allowing out-of-network
activity. These commenters recommended that the Department not prohibit
fees charged for out-of-network ATM access for students.
Discussion: We appreciate the support from numerous commenters for
the Department's proposal to provide specificity to existing
regulations requiring that title IV recipients have convenient access
to ATMs. As we explained in detail in the NPRM, there have been
numerous troubling instances of students without the access required
under the regulations, especially among third-party servicers offering
financial accounts. An example of this included a financial provider
which is responsible for disbursing title IV funds at about 520
schools, but, with 700 ATMs in service,\41\ 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. As we
explained in the NPRM, in the worst cases, 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 \42\ or causing dozens of students to line up to withdraw their
money.\43\ This raises a number of concerns regarding student access to
title IV funds, not the least of which is the numerous fees many
students incur when they are forced to withdraw their funds from out-
of-network ATMs, sometimes at $5 per withdrawal.\44\
---------------------------------------------------------------------------
\41\ USPIRG at 16.
\42\ Ibid. at 17.
\43\ GAO at 22.
\44\ USPIRG at 17.
---------------------------------------------------------------------------
We also appreciate commenters' recognition, discussed during the
negotiated rulemaking, that the Department has provided more
specificity to the meaning of ``convenient access,'' while still
recognizing that different institutional profiles require that we
provide flexibility for account providers to meet this requirement.
While we appreciate the request from some commenters that we provide
even more detail, we believe that, by setting a clear standard without
specifying one particular method by which providers ensure there are
sufficient funds available, we take a balanced approach that recognizes
the challenges of serving a varied higher education market.
In general, we disagree with commenters who claim access to a
regional or national ATM network is unnecessary and economically
infeasible. As described by the GAO report, and not disputed during
negotiations by those representing financial institutions and
servicers, 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, for some product offerings, restrict
surcharge-free access still provide broader network coverage for a flat
monthly fee, indicating this requirement should be feasible for
providers.\45\ We believe that this practice is already employed in the
market, demonstrating that such products are economically feasible, and
will not force account providers to stop providing cost-efficient
services, or opt out of the market entirely. For these reasons, we also
agree generally with commenters arguing that the ATM requirements
should apply to both T1 and T2 accounts.
---------------------------------------------------------------------------
\45\ GAO at 22.
---------------------------------------------------------------------------
As discussed in a prior section we have, however, limited the ATM
requirements applicable to T2 arrangements at institutions where the
incidence of credit balances is de minimis as measured against
thresholds of five percent of enrollment or 500 students.
With respect to the commenter who expressed concern that students
would not have sufficient access to their title IV aid due to
withdrawal limits, we believe this concern, while well-intentioned,
will have limited practical impact because of the other regulatory
provisions. Most relevant are the changes we describe in the section
discussing the NPRM's 30-day fee restriction (discussed subsequently),
which we proposed in part to address the situation described by this
commenter. We believe that by providing students a method to withdraw a
portion or the entirety of their aid free of charge students will be
ensured sufficient access to funds to cover educationally related
expenses. We also believe that the requirement for neutral presentation
of account information will allow students to make an account choice
that further limits the negative circumstances the commenter describes.
Similarly, we see no utility in regulating for a cash-free economy that
does not yet exist, at a time when cash remains a convenient means of
exchange readily accepted from and usable by all students.
We recognize the merit of commenters' concerns about providing ATM
access to all institutional locations, especially those with few title
IV recipients. While we do not agree with the cost estimates provided
in the comments--especially for ATMs located in less populated areas
\46\--we believe it is important to balance the cost and burden of
providing ATMs against the real need for students to have convenient
access to their student aid, which is an existing regulatory
requirement. We agree that institutions and their partner financial
account providers' responsibility for providing an ATM at an
institutional location should depend on the title IV credit balance
recipient population at a particular location. Because commenters did
not provide any estimate of what such a limit should be or basis on
which such a limit should be calculated, we believe it would be overly
proscriptive to set a particular numerical threshold that may bear
little resemblance to the varied needs of divergent institutional
locations. Instead, we believe that the additional detail we included
in the NPRM with respect to the meaning of ``convenient access''
provides sufficient specificity. By requiring that there are in-network
ATMs sufficient in number and housed and serviced such that the funds
are reasonably available to the accountholder, the students will have
access to their funds while institutions will have flexibility in
instances where few credit balance recipients are enrolled. For
example, at a large campus with thousands of title IV recipients, it is
likely that several ATMs would be required. In contrast, if an
institution has a location with only a few credit balance recipients,
or a location where students are only taking one class, an ATM that is
part of a larger regional network at a store several blocks away may be
sufficient. A location of an institution providing students with 100
percent of an educational program in a small town in a rural region
would need to provide ATM access on campus if students would otherwise
have no free access to their funds through an in-network ATM or branch
office of the account provider located in the town.
---------------------------------------------------------------------------
\46\ The cost of providing such ATMs is discussed in further
detail in the Regulatory Impact Analysis section of this preamble.
---------------------------------------------------------------------------
We believe that Sec. 668.164(e)(2)(viii) and (f)(4)(viii), which
govern the best interests of accountholders, will enable institutions
to ensure they are complying with this provision. If there continues to
be ``runs'' on fee-free ATMs, or if students are forced to incur an
abnormally high number of out-of-network ATM fees, or if the
institution receives complaints about the number and location of its
ATMs (all indicators that were cited in consumer and
[[Page 67164]]
government reports), there would be good evidence that the institution
is not complying with the fee-free convenient ATM access provisions of
the regulations and would need to evaluate whether additional ATMs or
different locations would be necessary.
It is also our expectation that, in practice, student access to a
national or regional ATM network required under T1 arrangements will
compensate for the absence of ATMs at very sparsely attended locations
and will help bolster the number of fee-free ATMs at highly attended
locations where market demand would be met by ATMs provided by a
national or regional network. We believe that this approach will
obviate the need for the Department to conduct ongoing monitoring of
ATMs at each institution, which we think is unworkable. Instead, we
think that periodic compliance reviews, in combination with access to
fee-free ATM networks, will significantly improve student access to
ATMs.
We also agree that fee-free international ATM access is not a
common feature of the financial products marketplace, and we are
accepting the commenters' suggestion that we limit this provision to
domestic ATM access. In addition, we clarify that it was our intent to
limit this provision to the basic banking functions of balance
inquiries and cash withdrawals, and we did not intend to include more
atypical or nonfinancial transactions.
Finally, we recognize that out-of-network ATM fees are both a
common feature of the market and necessary in recovering the costs of
providing access to such ATMs. While we never prohibited the owners of
ATMs from assessing fees, we proposed to limit the imposition of an
additional fee by the student's financial account provider for 30 days
following each disbursement of title IV funds. However, due to changes
we are making to that provision, which are discussed in detail in the
section on the 30-day fee-free restriction, we are no longer limiting
those fees.
Changes: We have revised Sec. 668.164(e)(2)(iv)(A) and
(e)(2)(iv)(B)(3) to specify that the institution must ensure that a
student enrolled at an institution located in a State, has convenient
access to the funds in the financial account through a surcharge-free
national or regional ATM network that has ATMs sufficient in number and
housed and serviced such that the funds are reasonably available to the
accountholder, including at the times the institution or its third-
party servicer makes direct payments into the student financial
accounts. Similarly, for financial accounts under T2 arrangements, we
have revised Sec. 668.164(f)(4)(vi) to specify that an institution
located in a State must ensure that students have access to title IV
funds deposited into those accounts through surcharge-free in-network
ATMs sufficient in number and housed and serviced such that the funds
are reasonably available to the accountholder, including at the times
the institution makes direct payments of those funds. Finally, we have
revised both provisions to limit the fee-free access requirement to
balance inquiries and cash withdrawals.
Prohibition on Point-of-Sale (POS) Fees (Sec.
668.164(e)(2)(iii)(B)(2))
Comments: There was universal support among commenters for
prohibiting POS fees that accompany the debit and PIN transaction
system for T1 arrangements. Commenters characterized these fees as
unusual, expensive, and atypical of the financial products marketplace.
Since POS fees are generally not part of regular banking practices,
commenters argued that students do not realize that the fees exist when
opening an account. Commenters contended that it is entirely
appropriate for the Department to ensure a fee is not charged to title
IV recipients when that fee is not generally assessed in the banking
market.
Some commenters suggested broadening the provision to ban all fees
that serve to steer accountholders to a particular type of payment
network. One commenter also explained that evolving payment systems may
lead to additional, unforeseen fees that should be covered in the POS
fee provision. This commenter recommended that the Department prohibit
``any discriminatory cost . . . for the use of any particular
electronic payment network or electronic payment type.''
One commenter noted that it is customary practice for banks to
charge per-purchase transaction costs for international purchases and
recommended that we limit the POS fee prohibition to transactions
conducted domestically.
Discussion: We appreciate the support of commenters for this
provision and the idea that students' title IV aid should be protected
from fees that are difficult to understand or anticipate, and are
unusual or present particular danger to student aid recipients.
As we stated in the NPRM, most campus cards are portrayed as debit
cards (or having functionality more similar to a debit card than a
credit card) and students are therefore likely to misunderstand that
selecting a ``debit'' option is not required to complete a transaction,
or that doing so would result in a fee.47 48 Because these
POS fees can quickly add up, depriving students of the title IV funds
to which they are entitled,49 50 and because these fees are
atypical to the market,\51\ we agree with commenters that it is
especially troubling that these fees are charged to student aid
recipients, many of whom may still be gaining a familiarity with
banking products. Because of the practices employed by certain
providers and identified in consumer and government reports, we
continue to believe that a prohibition on this fee for T1 arrangements
is appropriate.
---------------------------------------------------------------------------
\47\ OIG at 13.
\48\ GAO at 20.
\49\ Ibid.
\50\ CFPB RFI.
\51\ GAO at 20.
---------------------------------------------------------------------------
While we appreciate the principle underlying commenters'
recommendation to expand this prohibition, we continue to believe that
doing so to include T2 arrangements is unwarranted at this time. For
the reasons discussed at length in the NPRM and reiterated in the
section discussing fees generally, we believe it is appropriate to
apply the fee restrictions only to T1 arrangements. Because POS fees
are not charged by traditional banking entities \52\ we are not
expanding this provision to T2 arrangements.
---------------------------------------------------------------------------
\52\ USPIRG at 27.
---------------------------------------------------------------------------
We acknowledge the commenter's interest in protecting students
against unforeseen fees that may become established as technology
progresses and other payment methods gain widespread use. Throughout
the negotiated rulemaking process, we received a significant amount of
feedback emphasizing that the financial products marketplace is
changing and will continue to change rapidly. We have made a
significant effort throughout this rulemaking process to protect
student aid recipients and safeguard taxpayer dollars, while remaining
mindful of possible unintended consequences, such as the restriction of
technological progress. We believe we have struck a balance in the
regulations that will allow students the opportunity to make an
individualized choice of account option with sufficient protections,
while giving account providers flexibility to develop new student-
friendly payment methods.
The commenter's suggested language to prohibit all unanticipated
fees is well intentioned, but we believe it is overly broad. We believe
that it would be infeasible to determine the
[[Page 67165]]
permissibility of a fee based on whether a cost is ``discriminatory.''
Instead, we have designed Sec. 668.164(e)(2)(viii) and (f)(4)(vii) to
accomplish the goals implicit in the commenter's suggestion. By
requiring that institutions conduct reasonable due diligence reviews
regarding the fees under the contract, we believe the regulations will
help prevent fees similar to POS fees from being charged to students.
Finally, we agree with the commenter that international per-
purchase transaction fees are a common characteristic of financial
products, and it is reasonable for students to expect those fees. We
are therefore altering the POS fee prohibition to reflect that it will
apply only to domestic transactions.
Changes: We have revised Sec. 668.164(e)(2)(iii)(B)(2) to specify
that the institution must ensure that the student does not incur any
cost assessed by the institution, third-party servicer, or third-party
servicer's associated financial institution when the student conducts a
POS transaction in a State.
Overdraft Fee Limitation/Conversion to Credit Instrument (Sec.
668.164(e)(2)(v)(B) and (f)(4)(vi))
Comments: Several commenters expressed support for the overdraft
fee limitations, citing not only the supporting research we highlighted
in the NPRM, but also additional support from government sources
including the CFPB, as well as their own experiences with overdraft
fees, particularly those imposed on students at their institutions.
These commenters noted that students may be particularly vulnerable to
overdraft fees because of their relative inexperience with banking
products. They also noted that title IV recipients would be vulnerable
to these fees, because many have relatively lower incomes. Commenters
further stated that overdraft fees are of particular concern because
overdrafts are more likely to occur without the knowledge of the
student.
Multiple commenters stated that the overdraft fee limitation should
extend to students with accounts offered under T2 arrangements as well,
arguing that the dangers of overdraft fees for T1 arrangements are
equally present in T2 arrangements.
In contrast, other commenters argued that overdrafts represent a
benefit to accountholders. These commenters argued that overdrafts (and
their associated fees) represent a protection, allowing recipients to
utilize the overdraft feature in the case of an emergency, which would
be impermissible with the overdraft fee limitation. These commenters
also stated that the proposed fee limitation ignores current regulatory
procedures (including Regulation E and Regulation DD) that require
accountholders to opt-in to enable overdrafts and the related fees.
These commenters argued that overdraft fees are common to the banking
market and that it would be operationally difficult to apply a
particular fee limitation to a subset of accountholders. For these
reasons, these commenters recommended removing the limitation on
overdraft fees in the regulations.
Some commenters suggested that the regulations specify that the
overdraft fee limitation does not apply to bounced checks or Automated
Clearinghouse (ACH) over-withdrawals. Another commenter asked for
clarification on whether the provision only applies when the student is
using a card or if it applies to any transaction that exceeds the
balance of the financial account. Another commenter requested
clarification as to whether schools would automatically violate the
provision if a student with pre-approved overdraft services retains his
or her account when enrolling.
That commenter also stated that the term ``credit card'' is not
defined in the proposed regulations, and suggested that we clarify that
the provision does not apply to financial institutions when they are
marketing credit cards outside of a T1 or T2 arrangement. Finally, the
commenter recommended that we clarify that the provision does not apply
to linking an account to a credit card for the purpose of making credit
card payments or covering insufficient funds when a credit card product
is opened under a mechanism separate from the depository account.
We also received a limited number of comments from a financial
account provider and its payment processer that currently offer a
financial product that does not allow overdrafts or charge any related
fees. These comments were more technical in nature and laid out a set
of scenarios where the proposed regulations would create significant
operational difficulties for the functioning of their voluntary
prohibition on overdrafts. While the commenters' specific accounts
prevent accountholders from exceeding the balance in their accounts,
the commenters pointed out that there are circumstances where an
overdraft of the account is unavoidable. The simplest iteration is
force-post transactions (where a matching authorization is not received
prior to the settlement of the transaction, often when a merchant
authorizes a transaction but does not settle it with the issuer until a
later date). An example of such a transaction would be if an
accountholder has sufficient funds to charge a restaurant bill and the
transaction is therefore approved, but the accountholder adds a tip
after the transaction is approved that exceeds the remaining account
balance; when the transaction processing is completed, the
accountholder has a negative balance. The commenters stated that the
financial account provider is unable to know of these circumstances at
the point of the transaction is approved and thus cannot deny the
initial transaction without overly onerous transaction-denial practices
(e.g., denying a charge on a card if the remaining balance after the
charge would be less than $50).
These commenters identified three other types of situations where
similar circumstances exist: Stand-in processing (where the amount
charged cannot be determined due to a communication error between the
account provider and the transaction processer but the parties have an
agreement for a limited pre-approved charge amount); batch processing
(when transactions are not approved in real time but are instead
``batched'' and approved in 24-hour increments or a similar time
period); and offline authorizations (where a communication error occurs
in the merchant's system, the merchant nevertheless accepts the charge
but the payment cannot be reconciled by the issuer or account provider
at the moment of the transaction, so the accountholder's balance will
not accurately reflect the balance or prevent future overdrafts). In
all of these cases, the commenter noted, the overdraft is inadvertent
on the part both of the account holder and the account provider, and a
product of the operational realities of the payment processing system
common to financial accounts. For the commenters' customers, no fees
are charged to the accountholder for these overdrafts.
The commenters noted that while we acknowledged these scenarios in
the preamble to the NPRM, we did not create an exemption for these
technical limitations. They encouraged the Department to create an
exception for these limited, more technical overdrafts without changing
the overall structure of the overdraft fee limitation, arguing that in
the absence of such an exception they would not be able to offer
accounts that already disallow overdrafts and related fees.
Discussion: We appreciate the commenters who supported our decision
to propose an overdraft fee limitation in the NPRM. As we explained in
detail in the NPRM, there
[[Page 67166]]
are numerous reports that document the many dangers of overdraft fees,
particularly to title IV recipients.\53\ These fees can quickly add up
with little notice to the accountholder, can exceed some students'
total credit balance, and are easily misinterpreted as a benefit when
in fact a transaction can easily be denied at no cost to either the
accountholder or account provider. We believe these concerns are
further supported by the successful implementation of accounts such as
those described by commenters that generally do not allow
accountholders to overdraft and thus prevent the student from incurring
multiple fees that can potentially cost hundreds of dollars.
---------------------------------------------------------------------------
\53\ 80 FR 28508-28509.
---------------------------------------------------------------------------
The facts supporting the overdraft fee limitation were not
sufficiently rebutted by commenters who recommended that we eliminate
the limitation. Contrary to commenters' arguments, we believe a
financial institution that charges accountholders a fee that often far
exceeds both the cost of the underlying transaction and the cost of
providing the service itself is not providing a benefit, especially
when the charge can be denied prior to a cost being incurred. The
evidence that some account providers purposefully reorder transactions
to maximize overdrafts fees helps persuade us that charging overdraft
fees in general is simply a way to extract the maximum amount of fee
revenue from accountholders, rather than serving as a benefit to
accountholders.\54\
---------------------------------------------------------------------------
\54\ 80 FR at 28508.
---------------------------------------------------------------------------
While we acknowledged in the NPRM that, under other Federal
regulations, an opt-in is required before overdraft charges are
assessed, the research we cited \55\ demonstrating that individuals are
easily misled into believing that overdraft ``protection'' actually
prevents the account provider from charging overdrafts calls into
serious question commenters' claim that we were disregarding the
existing opt-in requirements as providing sufficient protection for
title IV recipients. With respect to commenters' argument that
overdraft fees are common in the banking market, given the general
confusion about them, we think additional protection for title IV
recipients is warranted in the interests of responsibly administering
the title IV programs. Notwithstanding the prevalence of these charges,
we detailed in the NPRM why overdraft charges are particularly
dangerous for students and title IV credit balance recipients
specifically.\56\
---------------------------------------------------------------------------
\55\ Ibid.
\56\ Ibid.
---------------------------------------------------------------------------
With respect to commenters that stated it would be operationally
difficult to apply the overdraft fee limitation to a subset of
accountholders, where an institution and a financial account provider
choose to voluntarily enter into a contract that gives rise to a T1
arrangement but nevertheless regard this operational hurdle as
impossible to overcome, we believe that one alternative would be to
offer title IV recipients at the contracting institution a standalone
bank account that complies with the requirements for T1 arrangements.
For a further discussion of this issue, please refer to the discussion
under the section discussion T1 arrangements generally.
However, we decline to expand the overdraft provision to T2
arrangements for the same reasons we are not expanding the other fee-
related provisions applicable to T1 arrangements. As we discuss in more
detail in the other relevant sections of this preamble, we believe that
expanding the fee provisions as commenters suggested would collapse the
distinction between T1 and T2 arrangements and would not properly
reflect the respective levels of control over the disbursement process
and risk presented by different types of arrangements.
With respect to commenters' questions regarding what types of
practices are included in this overdraft limitation, the text of the
regulations make clear that it is any transaction that causes the
balance to be exceeded, whether completed at an ATM, online, or with a
physical card or access device. However, it was not our intent to
include bounced checks or inbound ACH debits (i.e., those authorized to
a merchant and merchant's financial institution) as a part of this
limitation because the consumer's institution is unable to decline such
transactions when these transactions are initiated. On the other hand,
we do not find this same distinction in the case of outbound ACH
payments (i.e., bill payments in which the consumer provides
authorization and instruction directly to his or her institution). In
contrast to checks and inbound ACH, an account provider could deny an
outbound ACH payment request before the transaction is submitted to the
ACH network, regardless of whether the payment is a standalone request
or recurring preauthorized payment.
We appreciate the detailed comments laying out the specific
circumstances under which overdrafts are unavoidable as an operational
matter even for products that do not allow accountholders to overdraft.
We are persuaded that there are circumstances outside the control of
both the accountholder and financial institution in which inadvertently
authorized overdrafts can occur. We also understand that these
circumstances are relatively limited in nature, are all characterized
by the fact that the overdraft cannot be preempted, and do not prevent
the financial account provider from preempting the more typical and
more harmful overdrafts that occur when the transaction exceeds the
account balance at the time of authorization. Most importantly,
accountholders are not charged a fee for these transactions. In these
instances, the accountholder would be informed that they have exceeded
the balance on their account when the student checks their account
balance, the financial institution notifies the student (such as
through text message), or when a subsequent transaction is rejected,
and would therefore be quickly informed that additional funds should be
deposited on the account without incurring a fee. Permitting these
inadvertently authorized overdrafts would also allow the account
provider to continue offering its present services. We are persuaded
that it is reasonable and practical to allow for a limited set of
circumstances in which accounts may exceed the remaining balance, but
do not result in fees imposed on students. We were initially concerned
that negative balances arising from inadvertently authorized overdrafts
would result in inquiries and negative ratings on accountholders'
credit bureau reports. However, following conversations with the CFPB,
we believe these concerns are not sufficient to disallow this practice.
Based on these conversations, we believe that credit bureau reporting
would be unlikely, both because financial account providers would be
unlikely to report them, and because accountholders, in most cases,
would be able to easily replenish the negative balances on their
accounts. Even in the event of credit bureau reporting, the amounts in
question are so small that it would be relatively easy to cure such a
negative report.
For these reasons, we are establishing an exception for the
overdraft limitation where, in the case of an inadvertently authorized
overdraft (specifically, force-post transactions, stand-in processing,
batch processing, and offline authorizations), it is permissible for an
[[Page 67167]]
account balance to be negative so long as the accountholder is not
charged a fee for the inadvertently authorized overdraft.
For accounts that are offered under a T1 arrangement, such accounts
would have to be in compliance with the overdraft provision on or
before the effective date of the final regulations. We also note that
accounts offered under T1 arrangements would have to comply with this
provision regardless of whether the student has already elected to
receive an account with overdraft services.
We believe the term ``credit card'' is sufficiently clear--the
credit card prohibition has long been part of the cash management
regulations and, to our knowledge, has not caused any confusion. For
accounts that link a preexisting credit card or a credit card that is
opened in a distinct process and that complies with existing credit
card regulatory and statutory requirements, we do not believe that
credit is being extended to the account offered under a T1 arrangement
and therefore the overdraft limit is not at issue. In this
circumstance, the credit is being offered under a distinct product and
account that must comply with separate banking and credit card
requirements.
Changes: We have revised Sec. 668.164(e)(2)(v)(B) to allow for an
inadvertently authorized overdraft where an accountholder has
sufficient funds at the time of authorization but insufficient funds at
the time of transaction processing, so long as no fee is charged to the
student for the inadvertently authorized overdraft.
30-Day Free Access to Funds (Sec. 668.164(e)(2)(iii)(B)(4))
Comments: The overwhelming majority of commenters objected to this
provision for several reasons. Many commenters noted its broad
application, which would effectively prohibit fees assessed to students
for banking transactions that are unusual or not typically provided
free of charge. Such transactions identified by commenters included,
among others, wire transfers, bounced checks, replacement cards, and
international transactions. These commenters noted that this broad
application would allow students to use their accounts in irresponsible
ways, would force account providers to cover costs not typically
provided for free to the general market, and would increase costs to an
extent that account providers would exit the student market.
Several commenters argued that this provision would ultimately harm
students. These commenters suggested that a 30-day window would provide
strong incentives for students to spend their funds more quickly than
they otherwise would, encouraging irresponsible spending at the expense
of building good savings habits. These commenters also suggested that
because such a provision is so at odds with normal banking practices,
it would be counterproductive from a financial literacy standpoint
because it would not paint a realistic picture of the banking options
students will have upon graduation.
Many commenters presented operational concerns about the 30-day fee
restriction, arguing that tracking separate, perhaps overlapping 30-day
timeframes for multiple disbursements would be overly complex and
expensive. These commenters noted that some disbursements to financial
accounts contain title IV funds, but others do not, or may contain a
combination of Federal funds, State funds, and private or institutional
funds. The commenters asserted that the difficulty associated with
separately identifying and tracking a 30-day period associated with
only certain disbursements vastly outweighs the benefits provided to
the student. Some commenters also noted that for institutions that
offer FWS funds or make multiple disbursements within a payment period,
additional disbursements may occur more frequently than every 30 days.
They noted that for these institutions and their title IV recipients,
such a circumstance would effectively create a perpetual fee
prohibition. They noted that this may have the unintended consequence
of discouraging institutions from experimenting with methods involving
multiple, smaller disbursements.
Some commenters noted that the underlying purpose of this provision
was to provide students a reasonable opportunity to access their title
IV funds free of charge, and contended that by providing ATM access and
banning POS fees and overdraft fees, the Department had already met
that goal. These commenters also asserted that this provision in
particular runs contrary to the Department's goal of allowing a
reasonable fee structure to remain in place to support the continued
viability of account offerings, as account providers generally incur
some costs. A few commenters in particular recommended that as an
alternative to the Department's proposal, students should have a method
by which to access their funds without charge, and without regard to a
time period.
One commenter suggested that we expand the time period for access
to funds for the entire payment period, to ensure that the student is
able to withdraw their funds without fees at any time. Another
commenter suggested that 30 days is too long and that the time frame
should be changed to 14 days. Some commenters argued that this
prohibition is necessary to ensure students have fee-free access to
their accounts when it is most likely that title IV funds will be
present. Other commenters noted that this provision would be less
beneficial to the student than intended, because it assumes that the
student knows and is able to keep track of when the 30-day window
begins and ends. These commenters stated that students may incur fees,
believing they are still protected when in fact the relevant time
period has elapsed.
Discussion: In our discussion of the 30-day fee restriction in the
NPRM, we stated that ``[t]he 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 a reasonable opportunity to access
their full title IV credit balance.'' \57\ We continue to believe that
title IV recipients should have a reasonable opportunity to access
their student aid funds without charge. This principle endures
notwithstanding how common such a practice may be in the general
banking market, because the HEA directs the Department to ensure that
students are provided with the full amount of their Federal student
aid. However, we are persuaded by the commenters' arguments that, for
several reasons, the provision as proposed is too broad to achieve this
objective.
---------------------------------------------------------------------------
\57\ 80 FR 28509.
---------------------------------------------------------------------------
Commenters correctly pointed out that, as proposed, the provision
allows students to conduct unusual or ancillary transactions that would
incur a fee under nearly all typical banking arrangements. Commenters
are also correct that for some students and some institutions, multiple
frequent disbursements would create a situation where an account
provider is effectively prohibited from charging any fees at all. These
outcomes are inconsistent with our intent. We acknowledged throughout
the NPRM that we believe account providers delivering services beyond
simple delivery of credit balances should be allowed to charge
reasonable fees to provide student banking products.
We are also persuaded that the time-based structure of the proposed
provision is impractical for operational reasons. We agree that
tracking
[[Page 67168]]
individual disbursements on an ongoing basis and logging multiple,
perhaps overlapping time frames and matching such time periods with fee
limitations would present an operational burden and costs in excess of
the benefit it would provide to students. For these reasons and
consistent with commenters' recommendations, we have decided to
eliminate the 30-day time frame in this provision. We are also
persuaded that the treatment should be adjusted in a way that does not
preclude fee structures that are reasonable and that support continuing
availability of accounts, without increased costs to students.
Nonetheless, we continue to agree with the commenters who
recommended that we provide a mechanism by which title IV recipients
can have reasonable, fee-free access to their student aid. As an
alternative to our proposed provision, we are instead requiring that
under a T1 arrangement, students must be provided with convenient
withdrawals to access the title IV funds in their account, up to the
remaining balance in their account, in part and in full, at any time
without charge for the withdrawal.
From the student perspective, we believe this approach is an
improvement. It maintains the overarching goal that aid recipients have
fee-free access to withdraw their title IV funds, up to the remaining
balance in the account. It relieves students and financial institutions
of having to keep track of a 30-day period, limits confusion about why
fees are charged at certain times but not others, and no longer forces
students to spend or withdraw their funds more quickly than they might
want or actually need to. It ensures that at any time, even more than
30 days following a disbursement, a student can still have full access
to his or her funds, up to the remaining balance in the account,
without a fee charged for the withdrawal.
From the perspective of financial account providers, we also
believe this approach is an improvement. We believe it addresses all
commenters' concerns, especially regarding the effective blanket
prohibition on all fees and the operational burdens of having to track
30-day windows for multiple disbursements and determine whether such
disbursements trigger the requirement. Instead, providers will have to
determine at least one method by which the aid recipient may withdraw
or use his or her title IV funds, up the remaining balance in his or
her account, in whole or in part, without charge. For example, a more
traditional bank may find it more feasible to allow fee-free
withdrawals from a local branch location. Another provider may instead
allow unlimited fee-free withdrawals from in-network ATMs without daily
or monthly withdrawal limits. This also limits the burden on financial
account providers of having to track the source of the funds deposited
into the account and determine whether those funds stem from title IV
aid programs or originate from another source. The basis of the limit
will be the total title IV dollars deposited--i.e., once a student has
exhausted the amount of title IV funds in the account, the fee-free
access requirement no longer exists. To the extent that financial
account providers do not want or are unable to track the amount of each
title IV deposit, they can continue to offer the withdrawal method(s)
to accountholders. We believe that, in contrast to the proposed rule,
continuing to offer the withdrawal method(s) represents a small
marginal cost after establishing the withdrawal method(s) initially.
This approach will also address commenters' concerns (addressed in
the section of the preamble discussing ATM access) that limits on ATM
withdrawals will limit the effectiveness of that provision. This
provision would require that the provider either eliminate such
withdrawal limits or provide another convenient method for students to
access their title IV funds.
Changes: We have revised Sec. 668.164(e)(2)(v)(C) to specify that
under a T1 arrangement, an institution, third-party servicer, or third-
party servicer's associated financial institution must provide
convenient access to title IV, HEA program funds in part and in full up
to the account balance via domestic withdrawals and transfers without
charge, during the student's entire period of enrollment following the
date that such title IV, HEA program funds are deposited or transferred
to the financial account.
Disclosure of the Full Contract (Sec. 668.164(e)(2)(vi), (e)(2)(viii),
(f)(4)(iii), and (f)(4)(v))
Comments: Many commenters supported the provision requiring
institutions to post the full contract for T1 or T2 arrangements on
their Web site, stating that the release of the contract would allow
policymakers to analyze these agreements and help make sure that
students are well-informed about their financial choices. One of these
commenters also noted that this provision was likely to promote
competition by encouraging new providers to enter the market.
However, some commenters raised concerns about the provision.
Several commenters noted that the posting of a lengthy legal document
would do little to inform students about the arrangement between an
institution and a third-party servicer or financial institution.
Another commenter suggested that students already have enough
information to make an informed decision, rendering the disclosure of
the contract and summary unnecessary. Some commenters suggested that,
rather than posting the full contract, we should consider simply
requiring institutions to post a statement informing the public that an
arrangement exists between the institution and third-party servicer or
financial institution. Another commenter suggested that we require
disclosure of the contract data only and not the publication of the
full contract. One commenter also expressed concerns that this
requirement may be duplicative of some State laws.
Other commenters raised concerns about the effect the posting of
the full contract may have on their business models. For example, some
commenters argued that this requirement, even with the option to redact
information regarding personal privacy, proprietary information
technology, or the security of information technology or of physical
facilities, would still require third-party servicers and financial
institutions to disclose confidential business information that could
damage competition in the marketplace. One commenter contended that the
proposed allowable redactions did not allow third-party servicers or
financial institutions to redact proprietary business information.
Another commenter asserted that one unintended consequence of this
could be that financial institutions would be less likely to enter into
specialized deals with institutions. One commenter stated that the
release of this information raises antitrust concerns that could
conflict with the Federal Trade Commission's restrictions on price
fixing.
Discussion: We thank the commenters that expressed support for this
provision on the grounds that increased transparency will help ensure
that students are protected from abusive practices in the future. We
agree that posting the full contract to an institution's Web site is
necessary to ensure that these agreements are more beneficial to
students in the future and that this requirement is likely to increase
competition in the marketplace.
[[Page 67169]]
We disagree with the commenters who stated that disclosure of the
full contract would not help inform students about the terms and
conditions of T1 and T2 arrangements. A common criticism of these
agreements between institutions and financial institutions is the lack
of transparency, and we believe that posting the full contract will
allow all interested parties to review these agreements and ensure that
the terms of T1 and T2 arrangements are fair for students.
We also disagree with the commenters who stated that a summary of
the contract would be sufficient for consumer information purposes. The
contract data, while helpful, will not allow interested parties to view
the agreement as a whole and will not be available at all institutions
with T2 agreements. We are also concerned that the required disclosures
in the summary alone will not allow students, researchers, and
policymakers to understand the entire scope of the agreement. A summary
by its nature is selective, and we do not agree that it would enhance
competition or work to prevent abuse to allow those parties broad
discretion to decide which terms will be made public and which will
not.
We disagree with the commenter who suggested that students already
have enough information to make an informed decision. As stated
elsewhere in this preamble, because these financial products are so
specifically targeted to students, and because the title IV
disbursement system creates unique consumer protection challenges, we
believe that this additional disclosure, specific to the title IV
context, is necessary.
While we recognize that certain institutions are subject to very
strict State ``sunshine'' laws that similar to these requirements, we
note that not all institutions are subject to those laws, and that even
where they apply, the difficulty interested parties face in attempting
to access these contracts varies by institution. For the sake of
consistency, we believe it best to ensure that these disclosures are
adopted uniformly across all institutions that receive title IV aid and
have T1 or T2 arrangements with third-party servicers or financial
institutions.
We disagree with the commenters who stated that disclosures of
contracts with only specific information redacted would result in
decreased competition. We continue to believe that disclosures of this
type increase competition, and in the absence of very specific
recommendations regarding other types of information that should be
redacted from the contract posted to an institution's Web site, we have
made no changes to the types of information that may be redacted from a
contract.
We disagree with the commenter who suggested adding proprietary
business information to the list of allowable redactions as we believe
that the reference to ``proprietary information technology'' addresses
this concern in part. In addition, we believe that ``proprietary
business information'' is too broad a term and that, if added, it could
undermine our efforts to ensure transparency of T1 and T2 arrangements.
While financial institutions may no longer enter into special or
unique agreements with institutions, this is a decision that will lie
with financial institutions. Financial institutions will have the
option to decline to offer the same arrangement to every institution if
they wish. However, we agree with the commenter who stated that posting
these agreements may encourage new providers to enter the market. With
more than one provider offering services to an institution, access to
this information could allow new providers to offer more competitive
deals to institutions.
We also disagree that the posting of contracts governing T1 and T2
arrangements could result in price fixing or antitrust concerns,
especially since other Federal laws already require the disclosure of
contracts for public review. For example, the Credit CARD Act of 2009
requires institutions to ``publicly disclose any contract or other
agreement made with a card issuer or creditor for the purpose of
marketing a credit card.'' \58\ We also continue to believe that
posting these agreements increases competition in the marketplace.
---------------------------------------------------------------------------
\58\ 15 U.S. Code section 1650(f).
---------------------------------------------------------------------------
Changes: In Sec. 668.164 (f)(4)(iii), we have removed the phrase
``provide to the Secretary'' in order to clarify that institutions need
only post the contracts to their Web sites and provide the URL to the
Secretary for publication in the database. We have also clarified the
regulatory language to state that institutions must comply with this
requirement by September 1, 2016.
Disclosure of Contract Data (Sec. 668.164(e)(2)(v)(B)-(C) and
(f)(4)(iii)(B)-(C))
Comments: Many commenters expressed support for the publication of
contract data, stating that it would be easier for students to
understand than the full contract document and would act as an
important source of consumer information. In addition, other commenters
asked that we include additional information, such as: The duration of
the contract, any benefits that the institution might accrue under the
contract, any minimum usage requirements, the number of students
receiving a disbursement, the amount of disbursed funds issued, and the
frequency of each method of disbursement delivery.
Many commenters expressed concerns about how institutions would
calculate the data required in the disclosure. Specifically, commenters
asked how institutions could calculate the number of accountholders and
the mean and median of the actual costs incurred by those
accountholders, especially in cases where a student opened a bank
account before choosing to enroll in an institution. One commenter
noted that universities do not typically track the costs of the
accounts their students use. Other commenters stated that it would be
difficult for financial institutions to know who is and is not a
current student at an institution without a list of current students.
These commenters also pointed out that this list would have to include
personally identifiable information about those students in order to
ensure that the calculations are accurate. Another commenter stated
that tracking costs becomes even more difficult in cases where the
accountholder has received a parent PLUS loan. One commenter also
stated that calculating the mean and median costs would be impossible
without defining which costs must be included in that calculation.
Another commenter expressed concerns that inactive accounts or accounts
that are used for short periods (such as a semester) could skew the
data and that publishing fee information violates a student's privacy.
Other commenters expressed concerns that the statistics disclosed
may not be helpful. Specifically, one commenter stated that information
about whether or not a school receives remuneration under the contract
would not be likely to impact a student's decision whether or not to
open a financial account. That same commenter, along with others,
stated that the size of the student population, the differing needs of
students at different types of institutions, and the behavior of
accountholders could result in higher or lower fees, rather than
reflect the behavior of a financial institution. One commenter stated
that because these data only contain information about one account,
they lack context for students to be able to evaluate the information
most effectively. Other commenters stated
[[Page 67170]]
that these requirements may result in account providers offering fewer
services to students in order to keep costs low. One commenter asked
that we exempt an institution from this requirement if it can prove
that the institution receives no form of compensation under the
contract. Another commenter stated that publishing fee schedules did
enough to ensure transparency for students. One commenter also
suggested that the Department create a disclosure template that would
summarize important details of a contract for students.
Discussion: We thank the commenters who supported the release of
contract data on the grounds that they would provide easily
understandable information to students and families and appreciate the
suggestions for additional data disclosure. However, we believe that
the data we have identified would be the most useful information for
students. We are also concerned that additional information may confuse
students and families, diluting the effect of disclosing data at all.
We disagree with the commenter who asked us to remove these
requirements because institutions do not typically track this
information and who concluded that compliance with this provision would
be too difficult. While we believe that the parties will be able to
design their T1 or T2 arrangement to allow a third-party servicer or
financial institution to perform this type of tracking, we have chosen
to exempt institutions from this requirement in cases where on average
less than 500 students and five percent of the total number of students
enrolled at an institution with a T2 arrangement receive a credit
balance for reasons discussed earlier in this preamble. In response the
commenter who asked whether previously opened accounts should be
counted, we note that accounts that are not opened under a T1 or T2
arrangement are not included in the contract data.
We acknowledge the concerns about how to calculate the number of
accountholders and mean and median costs associated with accounts
offered under T1 and qualifying T2 arrangements. However, in a T1
arrangement, the third-party servicer will know which accounts are
opened under the student choice process and can communicate that
information to the account provider (if the two are different
entities), so that the account provider under a T1 arrangement will
know which individuals and accounts to track for purposes of
determining and disclosing this data. Institutions with a sufficient
number of credit balance recipients and financial account providers
entering into a T2 arrangement will need to include in their contracts
a mechanism for meeting these requirements. For example, the terms of
the contract may include requirements that the institution keep the
account provider apprised of the names and addresses of its currently
enrolled students, and the institution would include this sharing of
directory information in the directory information policy it is
required to publish under FERPA.
We agree, in part, with the commenters who stated that it would be
impossible for financial institutions to know that an accountholder is
a student at an institution without sharing student information.
However, we disagree that the information would have to include
personally identifiable information that is protected under FERPA. The
final regulations do not preclude sharing of directory information, as
well as, for accounts offered under T1 arrangements, the sharing of the
specified information necessary to authenticate the of students.
Additional information may be shared with these account providers
following the student's selection of the account in the student choice
process, wherein an institution will know the students who chose to
open an account offered under a T1 arrangement. In the case of T2
arrangements, the institution may periodically provide to its partner
financial institutions a list of currently enrolled students that
includes directory information. We believe that student directory
information will provide a financial institution with enough
information to calculate contract data for enrolled students.
We agree with the commenter who noted that tracking parent PLUS
loans that are deposited into parent accounts would be particularly
difficult. In response to these concerns, we have removed the
references to parents in Sec. 668.164(e)(2)(vii)(C) and (f)(4)(iv)(C).
We disagree with the commenter who stated that tracking the costs
incurred under accounts offered under T1 or T2 arrangements will be
impossible without a list of costs to be included. Because of the
changing nature of the marketplace, we believe that it is best for all
fees incurred by accountholders to be included in the contract data.
While some accountholders may incur unusually high fees, this should be
offset by a higher number of more moderate users; there is no basis for
presuming this factor will unfairly affect one provider's accounts more
than another. We also believe that if there are a high number of
students incurring large amounts of fees and charges, it may be
indicative of a larger issue at the institution that should be
disclosed.
We agree with the commenter who stated that inactive accounts or
accounts open for a short time could skew the mean and median fees
incurred. However, we believe that the changes to Sec. 668.164(e)(3)
and (f)(5) stating that the requirements of this section, including the
reporting requirements, cease to apply when the accountholder is no
longer a student addresses the issue of inactive accounts.
We do not agree that data from accounts opened for a short time are
necessarily less relevant consumer information than those from accounts
opened for a longer time period. For example, arrangements for some
schools may serve otherwise unbanked students who attend an institution
for a short period of time and then withdraw, closing their accounts in
the process. It may be useful for such students to have data from
students like them incorporated into the consumer information. There is
no reason to regard that group of students as uniquely atypical.
We agree with the commenter who stated that the publication of fee
information in the form of contract data raises privacy concerns. In
the final regulations, we require that an average of at least 500 title
IV credit balance recipients or five percent of the total number of
students enrolled at an institution with a T2 arrangement have to
receive a credit balance during the three most recently completed award
years for these requirements to apply. However, we acknowledge that
disclosing annual cost information could present privacy and data
validity issues in cases where a small number of students enrolled at
an institution during an award year open an account offered under a T1
or qualifying T2 arrangement. In these cases, the privacy of those
students may be compromised because it may be possible to discern their
identity or establish a picture of students' (or groups of students,
such as low-income students) account behavior, especially if the mean
and median fee figures were sufficiently divergent (suggesting a small
number of students may be accruing particularly high levels of fees).
In such cases, the validity of the data would also be at issue, given
the small sample size.
In the unlikely event that a small number of students open an
account at an institution with a T1 or qualifying T2 arrangement, we
exempt institutions from disclosing contract data in cases where fewer
than 30 students have the account in question. We have chosen an
[[Page 67171]]
n-size of 30 to address privacy and data validity concerns consistent
with other instances of a minimum n-size being used to ensure both the
protection of students' privacy and the validity of the data presented,
such as the calculation of cohort default rates. We do not believe
that, with these changes, aggregated data present a threat to student
privacy or data validity.
We disagree with the commenter who opined that it is not useful to
consumers to know whether or not the school receives remuneration under
the contract. We believe that the knowing whether or not a school
receives payment from a partnership with an account provider may well
impact a student's decision to open a particular account. We believe
this transparency will also dissuade institutions from using T1 and T2
arrangements to profit at students' expense and shift the cost of
disbursement of title IV funds to students. We note that consumer
advocates and Federal negotiators emphasized the importance of these
data,\59\ and commenters further stressed the need for this information
in absence of a ban on the practice of revenue-sharing.
---------------------------------------------------------------------------
\59\ 80 FR 28510.
---------------------------------------------------------------------------
While we do agree with the commenter that students at different
institutions may exhibit differing financial habits, resulting in
higher fees, we also believe that the fees that students are charged to
access their money reflect how well a third-party servicer or financial
institution serves the student population, and how well an institution
has analyzed students' best interests in entering into the arrangement.
As a result, we feel that these disclosures are necessary for students
and institutions to make financial choices that are consistent with the
goals of the title IV programs. In addition, we believe that most
interested parties will be able to take into account characteristics of
the student body that may impact the data, such as socio-economic
status or student background. For example, a community college
researching these agreements will most likely look at data pertaining
to other community colleges.
We disagree with the commenter who contended that because the
contract data only cover accounts offered under T1 and T2 arrangements,
and not the other types of accounts a student may choose, the contract
data will not be helpful consumer information. As we have stated
elsewhere in this preamble, we believe that the preferential status
that a third-party servicer or financial institution receives from a T1
or T2 arrangement necessitates a higher standard of disclosure.
While it is possible that these requirements could result in
account providers offering fewer services to students in order to keep
costs low, we do not believe that that this outcome negates the
benefits of these disclosures. We continue to believe that these
requirements will result in students choosing better accounts and
accordingly being able to access more of their title IV funds.
We disagree with the commenter who suggested that institutions that
do not receive direct compensation as a result of their arrangements
with third-party servicers and financial institutions should be exempt
from these requirements. Because the benefits an institution receives
are not always in the form of direct payments, and because a school-
sponsored account may be less than favorable to students even if the
institution does not profit from it, it is important to ensure that all
forms of remuneration and the effects of these arrangements on students
are disclosed.
We disagree with the commenter who stated that disclosing the fee
schedules is enough to inform students of account terms and conditions.
We continue to believe that disclosing the nature of the relationship
between an institution and third-party servicer or financial
institution is essential to ensure that students are both well-informed
and not subject to abusive practices. We also continue to concur with
the OIG on the point that institutions should be required ``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'' \60\ and have kept the informative data points that we
proposed in the NPRM.\61\
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\60\ OIG at 15.
\61\ 80 FR 28510.
---------------------------------------------------------------------------
We agree that it is necessary for the Department to create a
disclosure template for the contract data, and we will release that
format at a later date. Standardizing the format of the contract data
will not only improve the consistency and clarity of the disclosures,
as suggested by commenters, but it will also enable third parties to
more easily perform analyses on contract data. Specifically,
standardizing the format will allow the contract data to be presented
in a way that can be read by software and aggregated more quickly.
Finally, while we feel that the contract data provide essential
consumer information, we understand that it will take institutions and
their third-party servicers or financial institutions time to implement
these requirements, and we have chosen to delay implementation of this
requirement until September 1, 2017.
Changes: We have revised Sec. 668.164(e)(2)(vii) and (f)(4)(iv) to
state that this requirement will not go into effect until September 1,
2017. However, we note that institutions will still be expected to post
the full contract to their Web sites by September 1, 2016, the
effective date for the rest of the provisions of the regulations.
We have also changed these provisions to state that the contract
data must be disclosed in a format established by the Secretary; and
that this requirement will not apply at institutions with T2
arrangements where there are fewer than 500 title IV credit balance
recipients and less than five percent of the total number of students
enrolled at an institution receive a credit balance. In cases where
fewer than 30 students have the account in question, an institution
with either a T1 or T2 arrangement will be exempt from this
requirement.
We have also added Sec. 668.164(e)(3) and (f)(5), which state that
the requirements of this section, including reporting requirements, no
longer apply when the accountholder is no longer a student.
We have also clarified the regulatory language to state that
institutions must comply with this requirement by September 1, 2017.
Finally, we have removed ``and parents'' from Sec.
668.164(e)(2)(vii)(C) and (f)(4)(iv)(C).
Submission of the URL for the Contract and Summary to a Centralized
Database (Sec. 668.164(e)(2)(viii) and (f)(4)(iii) and (v))
Comments: Some commenters expressed concerns about posting contract
data in an online database, stating that the information contains
confidential or proprietary information. However, many commenters
expressed support for maintaining a database of contract internet
addresses for the sake of transparency. One commenter suggested that
account providers should be required to send contract information to
the database within 30 days of the regulations becoming effective and
that the contracts should also be cross-posted to institutional Web
sites. However, another commenter pointed out that the CFPB recently
delayed implementation on requiring financial institutions to submit
credit card agreements to a centralized database due to the
administrative burden involved.
[[Page 67172]]
Discussion: We disagree with the commenter who stated that a
centralized database of URLs of contracts and their data could
compromise confidential and proprietary information for reasons
explained in the Disclosure of the Full Contract section of this
preamble.
We thank the commenters that expressed support for the database.
While we do not yet have a target date for the creation of the
database, we will require institutions to post to their institutional
Web sites the full contracts by September 1, 2016 and the contract data
by September 1, 2017. Soon after the system is created, we will require
institutions to send us the URL for the contract and the contract data,
and we will make this information available to the public.
Changes: We have added the phrase ``accessible to the public'' to
Sec. 668.164(e)(2)(viii) and (f)(4)(v) to clarify that the information
in the database will be publically available. We have also changed the
regulatory language to clarify that institutions with T2 arrangements
where there are, on average, fewer than 500 title IV credit balance
recipients, and less than five percent of the total number of students
enrolled at an institution receive a credit balance will not be
required to post account holder cost data, though they will still be
required to post their full contracts and provide to the Department the
URL where those contracts are posted. Similarly, an institution with
either a T1 or T2 arrangement where fewer than 30 students have the
account in question will be also not be required to post account holder
cost data.
Best Financial Interests of Account Holders (Sec. 668.164(e)(2)(viii)
and (f)(4)(vii))
Comments: Commenters universally supported the principle that
student accountholder interests should be paramount under T1 and T2
arrangements, but there was disagreement about how to achieve this
goal.
Several commenters strongly supported the proposal that accounts
offered under T1 or T2 arrangements not be inconsistent with the
students' best financial interests. These commenters argued that it was
a key mechanism to ensure that institutions place the interests of
their students first; one commenter stated that this provision was the
single most important regulatory change proposed in the NPRM. Some
commenters supported this provision because, they argued, additional
types of fees may be introduced in the future and this provision would
continue to proactively provide student protections for fees or
practices that are presently unknowable.
However, many of these same commenters argued that the language
proposed in the NPRM represents a weakened standard relative to the
drafts discussed during negotiated rulemaking because those proposals
included references to nonmonetary metrics such as customer service and
because the language required that the terms offered to students be
equal or superior to those offered in the general market, not simply
that the terms not be worse than those offered in the general market;
the commenters recommended incorporating these characteristics into the
final regulation. Some commenters suggested that we expand this
provision to account for considerations beyond financial ones--for
example, customer service and account features. Other commenters
recommended that the provision should require that contracts are
established with the best interests of students as the primary
consideration, not simply that the contract is not inconsistent with
the best interests of students. These commenters argued that absent
such a change, an institution could still select a proposal if it
provided the most revenue to the institution, even if another proposal
offered better rates for students. Other commenters argued that T1 and
T2 arrangements should be held to a higher standard than prevailing
market rates.
Many commenters asserted that the proposed provisions were
unnecessary, excessively vague, and did not provide objective standards
against which account terms would be compared. These commenters argued
that prevailing market rates varied in different parts of the country
and for different institutions. Commenters also noted that the uncommon
and unreasonable fees we highlighted in the NPRM were already
prohibited and therefore additional protections were unworkable and
unnecessary. Commenters also argued that termination on the basis of
accountholder complaints was a vague standard--they questioned whether
an official complaint process would be necessary or whether
institutions would be permitted to discount frivolous complaints. One
commenter recommended that we require a formal mechanism for collecting
and reporting complaints. Another commenter recommended that we limit
this provision to ``valid'' complaints. Commenters expressed concern
that the lack of an objective standard for contract termination would
allow institutions to terminate contracts for inconsequential reasons
and, therefore, induce financial account providers to exit the college
card market. Some of these commenters argued that the best interest
provision be retained for contract formation but recommended we remove
the remainder of the provision specifying how an institution would
determine that students' best interests were not being met. Others
strongly supported the continued inclusion of termination clauses to
allow sufficient flexibility to address student complaints. One
commenter noted that many institutions already include such clauses in
their contracts with financial institutions.
Another frequent comment regarding vagueness concerned the
requirement that ``periodic'' institutional due diligence reviews be
conducted. Commenters pointed out that fees were unlikely to change
repeatedly or frequently and that the term periodic did not give
institutions sufficient guidance regarding the timeframes of such
reviews. Some commenters recommended that we specify a number of years
for this period, and several noted that either two or three years would
be a reasonable standard.
Some commenters argued that institutions and financial account
providers do not have the information or expertise necessary to
determine whether the fees charged to accountholders are not excessive
in light of prevailing market rates. These commenters argued that this
puts a burden on institutions to evaluate a complex banking market to
determine what types of fees are reasonable. One commenter argued that
this provision would require schools act as de facto financial
regulators.
A commenter that served on the negotiated rulemaking committee as
representative of financial institutions argued that this provision
would not present an excessive burden because in many cases the
financial account provider would assist the institution in securing the
information necessary to enable the due diligence reviews. The
commenter further noted that financial account providers produce
extensive fee-related (and other) information as part of requests for
proposals and institutions would therefore have extensive information
about the rates and fees charged in the market. The commenter also
noted the financial industry's expectation that the CFPB will release a
scorecard that will further support this information gathering
function.
Other commenters argued that institutions are not in a position to
objectively review the contracts to which they are a party. These
[[Page 67173]]
commenters noted that because institutions are receiving payment as a
part of these contracts, the regulations should instead require that a
neutral third party should review the contract to determine whether it
is in the best financial interests of students.
One commenter suggested that rather than requiring annual
reporting, we require institutions demonstrate at the time the contract
is established, and upon its renewal, that students are being charged
reasonable fees and that the institutions disclose the payment amount
they are receiving for the contract.
Discussion: We appreciate the comments we received in support of
this provision and agree that it is a vital element to ensure not only
that students will receive sufficient protections to access their title
IV aid at the time the regulations are published, but that the
regulations continue to be effective in the future.
We agree with commenters who noted that this provision is necessary
to provide protections to title IV recipients in instances where their
institutions enter into arrangements with financial account providers
to offer accounts to those aid recipients. As we explained in the NPRM,
we believe that the many examples cited by government and consumer
reports demonstrated that institutions were frequently entering into
arrangements where the interests of their students were not a
consideration. Instead, title IV recipients were often subject to
substandard account offerings so that institutions could save on the
costs of administering the title IV, HEA programs or receive large
lump-sum payments in consideration for the group of new customers
offered to the financial account provider. These recipients were often
unable to access their title IV funds without incurring onerous or
uncommon account fees, had difficulty having their funds deposited into
a preexisting account, or were not fully informed of the terms of the
account the institution was promoting. For institutions that have a
fiduciary duty to ensure the integrity of the student aid programs, we
believe this outcome is unacceptable. This provision, along with the
other regulatory changes we are making, will mitigate such practices.
Equally important, however, is the point made by several commenters
that this provision will provide student protections into the future.
As was repeatedly noted during the negotiated rulemaking process, the
financial products marketplace is a rapidly changing sector. In
promulgating regulations that cover institutions choosing to enter into
arrangements with financial account providers, we are aware that parts
of these regulations could be rendered obsolete by virtue of these
changes. For this reason rather than trying to predict future
developments, we identified the most problematic practices identified
by consumer groups and government entities. For future practices, which
are difficult if not impossible to predict, this provision will provide
assurance that institutions are still entering into and evaluating
agreements with the best interests of their student accountholders.
We disagree with commenters who argued that the provision as
proposed represented a weaker standard than what was proposed at the
close of negotiated rulemaking because it omitted from consideration
nonfinancial factors such as customer service and account features. On
the contrary, we believe that this change strengthens the rule. By
narrowing the scope of what is actively considered to be an objective
metric, we believe it will be more difficult to circumvent these
requirements using difficult to measure alternatives as justification
for charging students higher account fees. However, we agree that the
proposed standard of ``not excessive'' in light of prevailing market
rates is too weak. Instead, we agree that such fees should be
``consistent with or below'' market rates--that is, roughly in line
with rates charged in the general marketplace or below such rates.
Furthermore, we believe that the fees charged in the general
market, for the most part, represent a level of revenue that can
support the offering of such products while providing a product that
the public is willing to purchase. While some institutions may be able
to negotiate better terms for their students--and the regulations
permit them to do so--we decline to force institutions to secure such
terms when it may not be within their power to do so. Some
institutional characteristics may drive certain financial account
providers to offer below-market rates to serve a loss-leader function
and secure a lucrative future customer cohort, but we believe that not
all institutions will be able to accomplish such terms. By setting a
minimum permissible threshold for arrangements impacting title IV
recipients and taxpayer funds under the regulations, we believe we have
provided protections that represent a significant improvement over
current practices at many institutions, where market pressures are not
brought to bear because students often believe they have no alternative
method for receiving title IV funds. If we amended the regulations to
go beyond such protections, we are concerned that we would simply drive
good actors from the market and deprive many students of account
options.
We disagree with commenters who argued that this provision must
require that the best interests of students be the ``primary''
consideration in formalizing the arrangement. By enumerating a set of
objective, measurable metrics by which the institution has to ensure
that the best interests of students are being met, we believe the
commenters' arguments will be addressed. Put simply, if the
institution's sole consideration in entering into an arrangement is the
fee revenue that will be generated by the contract, and such an
arrangement results in fees that are not at or below market rates or
that results in numerous student complaints, the institution will be in
violation of this provision of the regulations. We believe this has the
benefit of clarity for institutions and protections for title IV
recipients.
We disagree with commenters that the other fee limitations for T1
arrangements render this provision redundant. Not only does the
provision help protect students against similarly onerous, confusing,
or usual fees that financial account providers could develop at some
future point, it also protects students from being charged overly
onerous and excessive fees that are not expressly prohibited under the
regulations (e.g., a $100 monthly fee, which is plainly excessive, and
an account feature clearly not in the best interests of students, in
light of prevailing market rates).
We also disagree with commenters who argued that the proposed
standards are impracticable as a general matter. While commenters are
correct to note that often prices and practices can vary from market to
market, such differences are usually marginal. In contrast, the various
consumer groups, government agencies, and numerous lawsuits were able
to clearly delineate the types of practices and fees that were outside
the mainstream of typical account providers. The regulations do not
require institutions to conduct a market-by-market comparison of all
the various fees that are charged. Rather, institutions are required to
recognize, based on student complaints and the general practices of the
market at large, whether the account provider is charging fees of a
type or in an amount that is consistent with or lower than rates
charged in the general market. As commenters noted, this responsibility
will be aided significantly by the financial institutions through the
[[Page 67174]]
proposals they submit and by the upcoming release of the CFPB
scorecard. While it was not explicitly mentioned by commenters, we also
believe that the full contract disclosure and contract data, including
mean and median annual costs to accountholders, will similarly aid in
this function. As we noted in the preamble to the NPRM, when an
institution discovered that the fees that were being charged to
students exceeded prevailing market rates, it was able to successfully
negotiate that provision out of its existing contract. As noted in a
prior section, we have made the ``best interest'' provisions binding on
institutions that have made T2 arrangements only if there are on
average 500 or more credit balance recipients or credit balance
recipients on average comprise five percent or more of total
enrollment.
We also disagree with commenters that argued institutions do not
have the expertise to make the best interest and market rate
determinations. Institutions enter into many contracts as a part of
their operations. We trust that institutions that choose to voluntarily
enter into these contracts have the expertise necessary to understand
and evaluate the associated costs and benefits.
We also believe that institutions with sufficient knowledge to
contract with financial account providers for accounts to be offered to
their title IV recipients have the ability to reasonably discern which
complaints have merit and which are frivolous. The volume, nature, and
severity of these complaints should inform institutions of whether
renegotiation or termination of the contract is warranted under this
provision. We also believe several avenues already exist to handle
student complaints to their institutions and regulating a separate
process would be duplicative. Again, we point to the example laid out
in the preamble to the NPRM demonstrating that student complaints led
to awareness at an institutional level that certain fees were
excessive, and the institution was able to successfully renegotiate the
contract to benefit of students. We reject the notion that an
institution's contractual right to cancel a marketing arrangement for
accounts that generate undue student complaints will dissuade
responsible financial institutions from entering into the arrangement.
We are persuaded that the requirement to conduct ``periodic''
reviews would benefit from additional specificity. While we used this
term in our proposed rule to provide flexibility to institutions, the
comments we received convinced us that institutions would prefer a
concrete timeframe. For that reason, and because we agree with
commenters who argued that fees are unlikely to change on an annual
basis, we are accepted in the recommendation of several commenters to
specify that due diligence reviews must occur at least every two years.
We disagree with the commenter who suggested that we only require
review of the contract at the time of contractual formation and upon
its renewal. For contracts that are several years in length, this would
not provide sufficient protection to title IV recipients in the event
that fee structures change significantly or in situations where many
student complaints have been received.
Finally, we do not believe that independent oversight of each
contract at its formation is either necessary or practicable. We trust
that institutions will comply with the new regulations and ensure that
the contracts in question are made with the best financial interests of
accountholders in mind. In addition, as a reminder, the contracts that
are governed by this provision will be posted on institutions' Web
sites and will be available publicly in a Department database. To the
extent that our program reviews find that the fees being charged to
students are not consistent with or are higher than market rates or
that institutions are not responsive to complaints, institutions will
be subject to the enforcement actions associated with regulatory
noncompliance.
Changes: We have revised Sec. 668.164(e)(2)(viii) and (f)(4)(vii)
to specify that due diligence reviews must be conducted at least every
two years, rather than ``periodically,'' and that institutions
conducting the reviews must consider whether fees imposed under the
arrangement are, as a whole, consistent with or below prevailing market
rates.
Miscellaneous Comments on Financial Account Provisions
Comments: Several commenters asked the Department to restrict other
common practices. For example, multiple commenters asked the Department
to ban ``binding arbitration'' provisions on the grounds that they
limit student access to the judicial system. Several commenters also
asked that the Department ban revenue sharing, arguing that this
practice presents a conflict of interest for institutions. One
commenter requested that the Department ban T1 and T2 arrangements
entirely.
A number of commenters focused on the role of students in the
financial aid disbursement process. Some commenters stated that
students should be required to undergo more financial literacy
education so they can better understand their options regarding
financial accounts, and another stated that many students come to
campus with little financial experience. One commenter noted that
financial account providers often provide financial literacy training.
One commenter noted that students often demand quick access to their
title IV funds. Other commenters stated that some students may not have
access to bank accounts due to minimum balance requirements, and that
third-party servicers alleviate this concern. One commenter noted that
because they offer their products to all students regardless of past
banking behavior, they take on a higher risk than other financial
institutions.
Another commenter noted that these accounts exist to provide access
to banking services to students, not to attract title IV funds. One
commenter stated that the creation of a disbursement selection process
and the fee restrictions for in-network ATMs, opening accounts, and
point-of-sale fees alone would provide enough protection for students.
One commenter stated that no student or parent should be charged a
fee for the processing or delivery of title IV credit balances. Another
suggested that the Department mandate a specific financial institution
review process.
Finally, one commenter asked that foreign institutions be
completely exempt from the proposed regulations on the grounds that
many foreign institutions have a small number of Americans in their
student body and that overly proscriptive regulations could limit
access to programs overseas.
Discussion: We are not addressing the issues of binding
arbitration, revenue-sharing, or outright banning T1 and T2
arrangements in this rulemaking. We declined to add these issues to the
agenda during negotiated rulemaking, because we concluded these topics
would be best addressed in another context. Accordingly, we believe it
is inappropriate to take up these issues at this stage in the
rulemaking.
While we agree with the commenters who stressed the importance of
financial literacy education, this topic is outside the scope of this
rulemaking effort. We note that nothing in the regulations limits the
ability of institutions to offer financial counseling to students.
We also believe that, as one commenter stated, because some new
students have little financial experience, clear disclosures are all
the more important to help them avoid
[[Page 67175]]
unnecessary charges. While students may demand quick access to their
funds, that does not negate the role that institutions must play in
ensuring that students receive their money safely and are not coerced
into any particular option. To the commenter who noted that some
students do not have access to banks because of minimum balance
requirements, we note that the regulations do not ban T1 and T2
arrangements, and the range of financial options for students without
access to the banking system should remain unchanged by these
regulations.
We acknowledge that third-party servicers often take on more risk
because they do not prescreen their customers. However, our regulations
do not ban all fees outright, but rather limit abusive practices,
certain fees that can cost students access to excessive amounts of
their title IV dollars, and, indirectly, certain cost shifting.
To the commenter who stated that these accounts do not exist to
attract title IV funds, we disagree that these accounts can be fairly
characterized as existing primarily to provide students with banking
services generally, based on the proliferation of the accounts subject
to these regulations among institutions having the highest percentage
of credit balance recipients. Even if this were not the case, the fact
is that these accounts do attract title IV funds as a result of their
close affiliation with institutions. As stated in the NPRM, ``for many
card providers, adoption rates were close to 50 percent of students;
some providers' rates exceeded 80 percent.'' \62\ As a result, we
believe that Departmental intervention is required to protect both
students and their title IV funds from excessive charges. We also
believe that, while the fee restrictions and establishment of a
disbursement selection process are important, the required fee
disclosures, posting of contracts and summaries, and provisions
regarding the best interests of the students are equally important
consumer protections for the reasons described in the NPRM and in the
respective preamble sections of this document.
---------------------------------------------------------------------------
\62\ CFPB RFI.
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We thank the commenter who suggested that the Department ban fees
for the processing and delivery of financial aid. However, we believe
that the ban on fees for opening an account addresses this concern. We
also do not believe that mandating a specific institutional review
process would be helpful for institutions as they work to comply with
the new regulations. Instead, we believe that institutional flexibility
will be most helpful as institutions decide how to comply moving
forward.
We agree that the requirements for these arrangements may be
impractical for many foreign educational institutions wishing to
provide timely processing of student loan funds. We recognize that both
the foreign educational institutions and the students attending them
often face problems that domestic institutions and their students do
not--including potential visa problems. Thus, we agree that the
provisions of Sec. 668.164(e) and (f) should apply only to domestic
institutions.
Changes: We have revised Sec. 668.164(e)(1) and (f)(1) to apply
only to institutions located in a State.
Credit balances (Sec. 668.164(h))
Comments: A commenter noted that proposed Sec. 668.164(h) refers
to ``funds credited to a student's account,'' and suggested for clarity
and consistency with proposed Sec. 668.161 that we change this
reference to ``funds credited to a student's ledger account.''
Discussion: We agree.
Changes: We have revised Sec. 668.164(h) to include the phrase
``student ledger account.''
Retroactive Payments (Sec. 668.164(k))
Comment: Under proposed Sec. 668.164(k) an institution may make
retroactive payments to students. One commenter noted that if the
provisions in this section are subject to the requirements of 34 CFR
690.76(b) of the Federal Pell Grant regulations, then a reference to
the Pell regulations would be useful.
Discussion: Yes, retroactive payments of Pell Grant funds under
Sec. 668.164(k) would be subject to Sec. 690.76(b). Under Sec.
690.76(b), when an institution pays Pell Grant funds in a lump sum for
prior payment periods within the award year for which the student was
eligible, but for which the student had not received payment, the
student's enrollment status for those prior payment periods is
determined according to work already completed. For example, if the
student started such a prior payment period as a full-time student, but
only completed work within that payment period as a half-time student,
eligibility for that payment period would be based on the student's
half-time status. Thus, we agree with the commenter that there should
be a reference to Sec. 690.76(b) in Sec. 668.164(k).
Changes: We have revised Sec. 668.164(k) to state that a student's
enrollment status for a retroactive payment of a Pell Grant must be
determined according to work already completed, as required by 34 CFR
690.76(b).
Presumptive Credit Balances, Books and Supplies (Sec. 668.164(m))
Comments: Several commenters were concerned that the Department did
not explain in the NPRM why it was expanding the books and supplies
provision in Sec. 668.164(m) to include not just Federal Pell Grant
recipients but all title IV, HEA program recipients. Some of the
commenters noted the Department's original stated intent in 2010 was to
enable very needy students to purchase books and supplies at the
beginning of the term or enrollment period and to prevent disbursement
delays at some institutions from forcing very needy students to take
out private loans to pay for books and supplies that would otherwise be
paid for by Federal Pell Grant funds. Further, in response to public
comment in 2010, the Department declined to expand the scope of the
requirement to apply to students who are eligible for other title IV
funds.
One commenter explained that if an institution is required to
advance funds to students during the first seven days of a payment
period, but then cannot later show that the students began attendance
during the payment period, under Sec. 668.21(a)(1) the institution
would have to return those funds. The commenter opined that when the
number of students for whom an institution must make provisions for
books and supplies increases dramatically under the proposed
regulation, the potential institutional liability increases
accordingly.
Another commenter stated that due to the lack of explanation of
this change in the preamble to the proposed regulation, many interested
parties may not have noticed the proposed expansion and therefore did
not submit comments. Although the commenter noted the expansion was a
significant change, the commenter did not object because the commenter
stated that many institutions have already expanded the current
requirement to most students. In addition, the commenter requested that
the Department clarify in the final regulations whether first-time
students who are subject to the 30-day delayed disbursement provisions
for Direct Loans would be included or excluded from this provision.
Another commenter agreed that because it is reasonable to assume
that students who receive forms of need-based aid other than Pell Grant
recipients have limited resources to buy books, students whose only
title IV aid
[[Page 67176]]
is unsubsidized, or who only benefit from parent PLUS loans, should not
be included in the provision. In addition, the commenter noted that
many institutions make accommodations for students regardless of type
of aid received, but that should be an institutional choice based on
the best use of limited resources.
One commenter stated that the institution pays credit balances to
students beginning ten days before the start of a semester, thus
providing students with access to funds for books and supplies
purchases. In addition, the commenter stated that the proposed books
and supplies provision would be limited to the on-campus bookstore for
both legal and practical reasons, even though many students choose to
purchase their books online or off-campus. The commenter concluded that
this provision would be administratively burdensome, particularly when
weighed against the limited benefit to students at that institution,
and urged the Department to withdraw the proposal.
Other commenters supported the proposed expansion, noting that that
while Pell Grant eligible students are likely to need assistance for
purchasing books and supplies, they are not the only students who need
assistance. The commenters believed the proposed provision will ensure
that title IV funding is made available to students to purchase
required books and supplies to prepare them for academic success.
Discussion: Although this provision was included in the regulations
section of the NPRM, we inadvertently omitted discussing it in the
preamble to the NPRM and apologize to the community for this oversight.
We note that this provision was discussed during the negotiated
rulemaking sessions preceding publication of the NPRM. The reason for
expanding the provision to include all students who are eligible for
title IV, HEA program funds is simple--we no longer hold the view that
only the neediest students should benefit from having required books
and supplies at the beginning of a term or payment period. As noted by
some of the commenters, students who qualify for loans and other title
IV aid also need assistance and we see no reason to deny assistance to
those students.
With regard to the comment that expanding the current books and
supplies provision will dramatically increase the potential liability
of an institution, we note that under Sec. 668.21(a)(1) and (2), an
institution would have to return any title IV grant or loans funds that
were credited to the student's ledger account or disbursed directly to
the student if the student did not begin attendance during the payment
period or period of enrollment. Under Sec. 668.164(m), an institution
has until the seventh day of a payment period to provide a way for a
student to obtain or purchase books and supplies, and if it does so,
may wait that long to document that a student began attendance to
mitigate liability concerns. Or, the institution may mitigate liability
concerns stemming from providing title IV funds directly to a student
to purchase books and supplies, by issuing a voucher to the student
redeemable at a book store or establishing another way for the student
to obtain books and supplies.
With regard to students who are subject to the 30-day delayed
disbursement provision under the Direct Loan Program, because an
institution may not disburse those funds 10 days before the beginning
of a payment period, those loan funds are not included in determining
whether the student has a presumptive credit balance.
In response to the commenter whose institution generally pays
credit balances 10 days before the beginning a payment period, we note
that the institution satisfies the books and supplies provision for
students who receive those credit balances. This institution will still
need to provide a way for the remaining students to obtain or purchase
books and supplies, but the burden for doing so should be minimal in
view of the institution's general credit balance practice.
Changes: None.
Holding Credit Balances (Sec. 668.165(b)(1))
Comments: A commenter stated that it was inappropriate for the
Department to assert in the preamble for proposed Sec.
668.165(b)(1)(ii) that when an institution obtains written
authorization from a student or parent to hold title IV, HEA program
funds on his or her behalf, the institution would be acting ``to
circumvent the proposed requirement that it directly pay credit
balances to students and parents.'' The commenter stated that any
institution participating in the title IV, HEA programs--including an
institution participating under the reimbursement payment method or the
HCM payment method--must hold all title IV funds in trust for the
intended student beneficiaries or the Secretary. The commenter argued
that while the Department may justifiably prohibit an institution on
HCM or reimbursement from holding credit balances under the current
regulations where there is a demonstrated weakness in the institution's
administrative capability that could put in jeopardy the institution's
ability to act as a trustee of Federal funds, in other circumstances
removing the ability of students to authorize institutions to hold a
portion of their credit balance is an ill-targeted reform with negative
consequences for students. Many students who affirmatively authorize
institutions to hold a portion of their title IV credit balance do so
as a means of managing those funds during an award year, consistent
with the Department's original stated intent for permitting such
authorizations. The commenter opined that restricting a student's
ability to partner with an institution in this way unnecessarily limits
the student's attempt to act as an informed, responsible consumer and
undercuts the Department's ongoing efforts to encourage institutions to
counsel and empower students to be responsible borrowers. Furthermore,
the commenter stated that any concerns that the Department may have
about an institution's administrative capability or financial
responsibility that result in the institution being placed on an
alternate payment method should not prevent students from reaping the
full benefit of the title IV programs available to students enrolled at
other title IV-participating institutions. As an alternative, the
commenter suggested that the Department allow an institution placed on
the reimbursement or HCM payment method to hold credit balance funds on
behalf of students or parents if the institution holds those funds in
escrow. Doing so would provide students the benefit currently available
to budget their funds over the course of a payment period while
ensuring that the institution acts as a responsible trustee of Federal
funds.
Another commenter objected to proposed requirement arguing that it
would essentially remove an institutional authority to ``carry'' credit
balances from one term to the next. For example, a student may receive
a credit balance in his or her first payment period but owe a payment
back to the institution in the second payment period when tuition is
charged. The commenter stated that, as proposed, this requirement would
remove the choice from students and parents who request to have their
credit balances applied toward future educationally related charges
instead of pocketing the overage, impacting students who potentially
are the most fiscally responsible. With such a heightened focus on
financial literacy and rising default rates in recent years, the
[[Page 67177]]
commenter believed the proposed rule would remove an important choice
from responsible borrowers, thus restricting an institution from
helping students and parents borrow responsibly to reduce indebtedness.
For these reasons, the commenter suggested removing the proposed
restriction and amending the regulations to provide that if a student
or parent does not authorize an institution to hold Direct Loan funds,
then the current provisions under Sec. 668.164(e)(1) and (2) would
apply.
Discussion: As we noted in the NPRM, and described more fully under
the heading ``Paying credit balances under the reimbursement and
heightened cash monitoring payment methods,'' the impetus for placing
institutions on HCM or reimbursement payment methods, generally
speaking, is material compliance or financial issues. We believe that
institutions who have jeopardized or compromised their fiduciary duties
under the title IV, HEA programs should not be allowed to handle or
maintain title IV program funds any longer than needed and for no
purpose other than making timely disbursements to students and parents.
Although we do not discount the value of helping students properly
budget their funds, that reason alone does not outweigh the risk that
affected institutions will use Federal funds for other purposes or
cease to be going concerns.
With respect to the comment that an institution placed on an
alternate payment method maintain credit balance funds in an escrow
account, the commenter did not specify the controls that would need to
be in place to ensure that the institution immediately transferred the
funds to the escrow account or how an escrow agent or trusted third
party would make those funds available to students. We believe the
complexity in administering, monitoring, and later auditing an escrow
arrangement, and the costs associated with these activities, is not
warranted for this purpose.
With regard to the comment that the prohibition on holding credit
balances will remove the ability of an affected institution to carry
credit balances from one term to the next, while we agree that is a
consequence of this provision, we do not believe it will have the
impact envisioned by the commenter because the institution will still
be able to carry forward charges from one term to another term within
the current year, as defined under Sec. 668.164(c)(3)(ii)(A)--the
charges carried forward may be paid by the title IV.
Finally, in the NPRM under Sec. 668.165(b)(1)(ii) we erroneously
cross referenced ``Sec. 668.162(c)(2) or (d)(2).'' These cross
references should have referred to ``Sec. 668.162(c) or (d).''
Changes: We have revised Sec. 668.165(b)(1)(ii) to cross reference
Sec. 668.162(c) or (d).
Retaking Coursework (Sec. 668.2)
Comments: Many commenters supported our proposal to eliminate the
provision in the current regulations that prohibits an institution from
counting for enrollment purposes any course passed in a previous term
of the program that the student is retaking due to having failed other
coursework.
One of the commenters specifically supported the applicability of
the amended regulations to undergraduates, graduates, and professional
students, because this change will be a benefit to students. The
commenter asked the Department to clarify in the Federal Student Aid
Handbook that the amended regulation applies to these groups of
students because this is a change in policy that is not reflected in
the regulations.
Discussion: We thank the commenters for their support, and agree
that amending the definition of full-time student in Sec. 668.2(b)
will be beneficial for students who retake coursework.
In regard to the commenter's recommendation that we clarify the
applicability of the amended regulations to undergraduates, graduates,
and professional students, we plan to update the Federal Student Aid
Handbook, as well as all other applicable Departmental publications and
Web sites, to reflect the changes to the retaking coursework provision
after the final regulations become effective.
Changes: None.
Comments: One commenter disagreed with the Secretary's proposal to
allow a student to receive title IV aid to retake a previously passed
course. This commenter expressed concern about the availability of
funding, and stated that a more reasonable approach would be for an
institution to not charge students for courses that a student could
bypass through a challenge process such as an exam.
Discussion: In general, the regulations do not dictate whether a
student may retake coursework in term-based programs, including
repeating courses to achieve a higher grade. The regulations only apply
to determining enrollment status for title IV, HEA program purposes. We
allow an institution this flexibility as long as it does not use title
IV program funds for repeated coursework where prohibited by the
regulation.
Moreover, the regulations do not limit an institution's ability to
establish policies for title IV, HEA program purposes so long as those
policies are not in conflict with title IV, HEA program requirements.
An institution may, for example, allow a student to challenge, or
``test out of,'' a course or courses. Title IV funds cannot be used to
pay for any courses that a student ``tests out of''; and an institution
may establish its own policies for these situations, including passing
the costs of the tests on to the student. However, with respect to
repeating coursework previously passed by a student in a term-based
program, under the final regulations, a student may use title IV, HEA
funds for retaking previously passed coursework, but only one time per
course. For example, the student may need to retake a course to meet an
academic standard for that particular course, such as a minimum grade.
Additionally, a student may use title IV, HEA funds for retaking
coursework if the student is required to retake the course because the
student failed the course in a prior term.
We believe the rule serves to prevent potential abuse from courses
being retaken multiple times, while providing institutions sufficient
flexibility to meet the needs of most students.
Changes: None.
Clock-to-Credit-Hour Conversion (Sec. 668.8(k))
Comments: The majority of commenters expressed strong support for
the proposal to streamline the requirements governing clock-to-credit-
hour conversion, with one commenter thanking the Department for
responding to the concerns that institutions have expressed since
publication of the previous rules. Generally, the commenters stated
that the simplification of the regulations proposed in the NPRM will
reduce burden and be a positive change. One commenter also noted that
since accrediting agencies are already required to review the
assignment of credit hours under 34 CFR 600.2 and 602.24, the
requirements outlined in Sec. 668.8(k)(2) of the final regulations
published on October 29, 2010 were unnecessary. Another commenter noted
that the provisions previously in Sec. 668.8(k)(2), which required
some programs to be treated like clock hour programs for title IV
purposes even after they were converted to credit hour programs, were
confusing. This commenter further noted that those provisions
interfered with State requirements relating to program delivery and
that the current conversion
[[Page 67178]]
formulas contained in Sec. 668.8(l) are sufficient to ensure that
clock hours are appropriately converted to credit hours.
One commenter who supported the proposal stated that the Department
should not remove the part of the current and familiar definition of a
credit hour that is contained in 34 CFR 600.2, which equates one hour
of classroom instruction and at least two hours of out-of-class student
work per week (for 15 weeks, for example, for a semester credit).
Discussion: We appreciate the overall support offered in the
comments. With regard to the comment requesting that we keep the part
of the current and familiar definition of a credit hour that is
contained in 34 CFR 600.2, which equates one hour of classroom
instruction and at least two hours of out-of-class student work per
week (for 15 weeks, for example, for a semester credit), we note that
we are not changing the definition of a credit hour in 34 CFR 600.2.
However, in that definition of a credit hour, there is a reference to
Sec. 668.8(k) and (l), which together contain the requirements that
must be met when certain programs are offered in credit hours. In
particular, Sec. 668.8(l) provides the formulas that must be used to
determine how many clock hours of instruction each semester, trimester,
and quarter credit hour must have for certain credit hour programs. The
formulas in Sec. 668.8(l), for the educational programs covered by
that section of the regulations, are used in lieu of the general
definition of a credit hour found in 34 CFR 600.2. Those formulas are
based on a comparison of the definitions of an academic year for credit
hour and clock hour programs: A clock hour program requires 900 clock
hours; and credit hour program requires either 24 semester or trimester
credit hours or 36 quarter credit hours. Thus, 900 divided by 24 equals
the 37.5 clock hours that are generally needed for a semester or
trimester hour; and 900 divided by 36 equals the 25 clock hours that
are generally needed for a quarter credit hour.
This approach to the determination of what a credit hour consists
of is somewhat different than the approach used in the definition of a
credit hour in 34 CFR 600.2, and, thus, appears to result in a
different number of clock hours associated with each credit hour than
what would be the case if the definition of a credit hour in 34 CFR
600.2 were used. However, with respect to programs covered by Sec.
668.8(l)(1), the formula assumes that there is some outside of class
work; and with respect to programs covered by Sec. 668.8(l)(2), the
formula specifies a minimum amount of outside of class work required.
When these aspects of the formulas in Sec. 668.8(l) are considered, it
is assumed that the amount of work required for a student to earn a
credit hour is roughly equal in all cases. Nevertheless, as stated
above, the appropriate formula in Sec. 668.8(l) is what is used to
determine the number of credit hours in a program covered by that
section of the regulations in lieu of that part of the definition of a
credit hour in 34 CFR 600.2 that specifies that each credit hour
includes 1 hour of classroom work plus at least two hours of out of
class work.
Changes: None.
Implementation
Comments: Several commenters requested a longer implementation
period to give institutions time to comply with the new requirements.
Commenters stated that certain requirements of the proposed
regulations include many different components that present major
obstacles for institutions and their partner financial institutions.
For example, some of the key portions of the proposed regulations that
commenters stated may be particularly difficult to implement by July 1,
2016 include updating disclosure materials and network systems;
identifying the major features and commonly assessed fees associated
with all financial accounts described in paragraphs; posting contract
data to the institution's Web site; revising agreements between
institutions and financial institutions; ensuring convenient access to
ATMs for students; reviewing agreements to make sure that they are in
the best interests of the students, as defined in the regulations;
updating the physical debit and campus cards to comply with
requirements; and adopting new policies and procedures to ensure that
title IV funds are delivered to students in compliance with the new
requirements. Another commenter noted that other agencies frequently
allow a longer implementation period, and suggested 24 months as a
reasonable timeframe.
Several commenters asked the Department to address how existing
products and services will be affected by the regulations, and some
commenters suggested that the regulations should only be applied
prospectively to new T1 and T2 arrangements.
Discussion: While we will not delay implementation of all of the
final regulations, we agree that it may be difficult for institutions
to implement certain components of the regulations by July 1, 2016.
Consequently, we have chosen to delay implementation of the required
disclosures identifying the major features and commonly assessed fees
associated with all T1 and T2 financial accounts until July 1, 2017, to
delay the posting of the contract until September 1, 2016, and to delay
the posting of the contract data until September 1, 2017. We believe
that institutions will be able to comply with the other requirements in
the regulations by July 1, 2016.
We disagree with the commenter that suggested that the regulations
should apply only to T1 and T2 arrangements entered into after the
effective date. T1 and T2 agreements are already a common practice at
institutions, and we believe that enforcing these regulations uniformly
across all institutions is the best way to protect title IV funds.
Institutions will have the time required under the HEA's Master
Calendar provision--until July 1, 2016--to take all necessary steps to
conform their arrangements to the final regulations.
Changes: We have revised Sec. 668.164(d)(4)(i)(B)(2) to specify
that implementation of the required consumer disclosures will not be
required until July 1, 2017. We have also revised Sec.
668.164(e)(2)(vii) and (f)(4)(iv) to state that the posting of the
contract data will not be required until September 1, 2017. We have
revised Sec. 668.164(e)(2)(vi) and (f)(4)(iii) to state that the
posting of the contract will not be required until September 1, 2016.
Executive Orders 12866 and 13563
Regulatory Impact Analysis
Introduction
As described in the NPRM, the Department is issuing the regulations
in order to address a changing marketplace as it relates to financial
aid disbursement by third-party servicers. In 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
[[Page 67179]]
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 final 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--
(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. Reports from GAO, USPIRG, and OIG,
among others, document the troubling practices that necessitated this
regulatory action and affect a potentially large number of students.
The ``Summary of Changes and Final Regulations'' briefly describes
the changes the Department is making in the regulations. The
regulations amend the cash management regulations, as well as address
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 regulations for
students, financial institutions, and postsecondary institutions.
Specifically, the Department 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 final regulations would not have a significant net budget
impact on the Federal government.
Under ``Alternatives Considered'' the Department discusses other
regulatory approaches we considered for key provisions of the
regulations.
Finally, the ``Final Regulatory Flexibility Analysis'' considers
the effect of the regulations on small entities.
Need for Regulatory Action
The Department's main goal in promulgating the regulations is to
address major concerns regarding the rapidly changing financial aid
marketplace wherein products are offered by financial institutions
under agreements with institutions to students who receive title IV,
HEA credit balances.
Changes in the student financial aid marketplace make the final
regulations necessary. As discussed in the NPRM, the number of
institutions entering into these agreements continues to increase as
these agreements help institutions save money on administrative costs
that they would otherwise incur in disbursing title IV credit balances
to students. These agreements have raised concerns over the practices
employed by financial institutions and third-party servicers. Some of
these troubling practices include an insistence on using 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 encouraging a proliferation of uncommon
and confusing fees that are charged to aid recipients for accessing
their funds. These practices, along with others discussed in the NPRM,
reduce the amount of title IV aid available for educational expenses.
As detailed in the NPRM, these practices are concerning because of
the number of students impacted. While data on credit card agreements
and credit balances are 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.\63\
---------------------------------------------------------------------------
\63\ GAO at 9.
---------------------------------------------------------------------------
Chart 1: College Card Agreements by Number of Schools and Number of
Students that Participate in Federal Student Aid Programs.
[[Page 67180]]
[GRAPHIC] [TIFF OMITTED] TR30OC15.014
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 with 6.5 percent at not-for-
profit schools and 3.5 percent at for-profit schools (see table [1]).
Comprehensive data do not currently exist for the number of students
who use accounts falling under these college card agreements. 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.\64\ Students at public two-year institutions are most
likely to receive a financial aid payment (credit balance) due to the
low tuition and fees deducted from total aid received.
---------------------------------------------------------------------------
\64\ GAO at 9.
---------------------------------------------------------------------------
Table 1: Percentage of Schools with College Card Agreements by
Sector and Program Length, as of July 2013.
[GRAPHIC] [TIFF OMITTED] TR30OC15.015
Based on the data available on the number of students affected by
these college card agreements, the questionable practices of the
providers, and the amount of Federal funds at stake, we believe that
amending the regulations governing title IV student aid disbursement is
warranted.
Summary of Changes and Final Regulations
The final regulations are intended to ensure students have
convenient access to their title IV, HEA program funds without charge,
and are not led to believe they must open a particular financial
account to receive their Federal student aid. As discussed in the
Analysis of Comments and Changes section of this document, the
Department considered over 200 comments on a variety of topics related
to the proposed regulations. Significant changes made in response to
the comments include:
(1) Replacing the 30-day fee restriction with a provision requiring
that students are provided at least one free mechanism to conveniently
access their title IV, HEA program funds in full
[[Page 67181]]
or in part once the funds have been deposited or transferred to the
financial account, up to the account balance;
(2) Establishing a threshold for the 3 most recently completed
award years, that students with a title IV credit balance represent an
average of five percent or more of the students enrolled at the
institution; or an average of 500 students enrolled at the institution
have title IV, credit balances at an institution for several of the
requirements relating to T2 arrangements to apply;
(3) Exempting foreign locations from the requirement from the
requirement of convenient ATM access; and
(4) Eliminating the requirement that checks be listed on the
student choice menu while still allowing students to affirmatively
request a refund by check and allowing institutions to list a check as
an option.
We also 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
regulations.
Table 2--Summary of the Major Provisions of the Regulations
----------------------------------------------------------------------------------------------------------------
Description of provision
Provision Reg section -----------------------------------------------------
T1 T2
----------------------------------------------------------------------------------------------------------------
Defines T1 and T2 arrangements Sec. 668.164........ Arrangement between an Arrangement between an
between institutions and institution and a third- institution and a
financial account providers. party servicer that financial institution
performs the functions under which financial
of processing direct accounts are offered and
payments of title IV marketed directly to
funds on behalf of the students. Provisions
institution and that related to disclosure of
offers one or more contract data, ATM
financial accounts to requirements, and the
students. best interest provisions
apply only to those
institutions with at
least 5 percent of the
average enrollment for
the 3 most recently
completed award years or
an average of 500
students with a credit
balance for the 3 most
recently completed award
years. For the
calculation of the 5
percent threshold,
enrollment means
students enrolled at the
institution at any time
during the three most
recently completed award
years.
Fee mitigation.................... Sec. 668.164........ Prohibits point- Not Applicable.
of-sale and overdraft
fees..
Requires at
least 1 convenient
mechanism for students
to access title IV, HEA
funds in full and in
part without charge.
----------------------------------------------------------------------------------------------------------------
Applicable to Entities with T1 and T2 Arrangements
----------------------------------------------------------------------------------------------------------------
Reasonable access to funds........ Sec. 668.164........ Requires reasonable access to fee-free ATMs or a
surcharge-free ATM network. Applies only to
institutions located in a State. For T2
arrangements, the threshold of 5 percent of the
average enrollment over the most recent 3 award
years or an average of 500 credit balance
recipients for the 3 most recent award years
applies.
Student choice process............ Sec. 668.164........ Requires institutions to establish a student choice
process that:
Prohibits institutions from requiring
students to open a specific financial account to
receive credit balances
Provides students a list of options for
receiving credit balance funds with each option
presented in a neutral manner
Lists pre-existing accounts as the first,
and most prominent, option, with no option
preselected
Establishes that aid recipients have the
right to receive funds to existing accounts
Ensures that electronic payments made to
pre-existing accounts are initiated as timely as
and are no more onerous than payments made to an
account on the list of options
Consent to open account........... Sec. 668.164........ Student choice of the account or consent required to
open account before:
Providing information about student to
financial account provider
Sending access device to student
Associating student ID with a financial
account
Contract disclosure............... Sec. 668.164........ Public disclosure of contracts governing
arrangements and related cost information
Contract evaluation............... Sec. 668.164........ Requires institutions to establish and evaluate T1
and T2 arrangements in light of the best interests
of students
----------------------------------------------------------------------------------------------------------------
Additional Provisions
----------------------------------------------------------------------------------------------------------------
Secretary's reservation of right.. Sec. 668.164........ Confirms that the Secretary reserves the right to
establish a method for directly paying credit
balances to student aid recipients.
Retention of interest on accounts Sec. 668.163........ Increases the amount of interest accrued in accounts
holding title IV funds. holding title IV funds that non-Federal entities
are allowed to retain from $250 to $500 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.
[[Page 67182]]
Clock-to-credit hour conversion... Sec. 668.8(k) and Eliminate Sec. 668.8(k)(2) and (3), and make a
(l). 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
As discussed in the NPRM, the expected effects of the final
regulations include improved information and transparency to facilitate
consumer choice of financial accounts for receiving title IV credit
balance funds; reasonable access to title IV funds without fees; a
redistribution of some costs 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. The parties that will
experience the largest impacts are students, institutions, and the
third-party servicers and financial institutions that have contractual
relationships described as T1 and T2 arrangements in the final
regulations.
Data and Methodology
In an attempt to quantify some of the costs and to reduce the
burden associated with the 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 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 does 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 regulations and to evaluate whether 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 Department's office of Federal Student Aid's
National Student Loan Data System (NSLDS)) 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 used
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. The data
estimated a total 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 all of the four-year
institutions had significant estimated numbers of students who received
a credit balance, 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 [3]).
The numbers of institutions and students who received a credit balance
were lowest at the less-than-two-year institutions, which represented
approximately 1.8 percent of institutions and under one percent of
students who received a credit balance from the 3,400 institutions with
both tuition and fee and financial aid data.
Table 3: Number of Institutions and Students who Received a Credit
Balance.
Number of Institutions and Students who Received 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 1,297 97,071
or 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...........................
[[Page 67183]]
Private not-for-profit, less- 10 132
than 2-year....................
---------------------------------------
Total....................... 3,400 2,816,104
------------------------------------------------------------------------
As several provisions of the regulations apply to institutions with
T1 or T2 arrangements, we obtained from the CFPB a listing of 914
institutions that were known to have card agreements with financial
institutions and applied the same methodology described above to this
subset of institutions. Of these 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 with the four-year institutions also having significant
numbers (See Table [4]). The less-than-two-year institutions had
inconclusive data. Again, this subset provided no additional
information on a clear de minimis amount.
Table 4: Students with a Credit Balance at Known Institutions that
Have Card Agreements.
Students with a Credit Balance at Known Institutions That 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 113 10,001
or 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- N/A N/A
than 2-year....................
---------------------------------------
Total....................... 672 1,322,615
------------------------------------------------------------------------
In a final analysis of the data, we took the subset and identified
only those institutions that had what would be considered a T2
arrangement under the final regulations. 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 [5]) and produced inconclusive results.
Table 5: Students with a Credit Balance at Known Institutions that
Have T2 Arrangements.
Students With a Credit Balance at Known Institutions That 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 54 68
or above.......................
---------------------------------------
Total....................... 160 191,242
------------------------------------------------------------------------
Costs
As discussed in the Costs, Benefits, and Transfers section of the
NPRM, the provisions related to T1 arrangements would require a
servicer in a T1 arrangement to provide student accountholders with
convenient access to a surcharge-free regional or national ATM network.
This requirement has potential cost implications for third-party
servicers who currently do not meet this requirement. A few commenters
contended that we had failed to quantify such costs and stated that
this could have a substantial financial burden on some banks.
Some commenters suggested that the cost of installing and operating
an ATM for one year could range from $20,000 to $40,000, and our market
research found wide variations in cost based on the type, capacity, and
condition of the ATMs. Used ATMs can be bought from wholesalers or on
discount Web sites for less than $600 while many of the newer
technologies cost between $4,000 and $10,000 per unit, not including
the cost of installation. Furthermore, ATMs often cost upwards of $1000
a month to maintain. As some commenters noted, there are also
additional costs to operating ATMs, such as providing electricity to
power the machines, as well as ensuring that the machines are in secure
locations.
If we assume a $25,000 cost to install and operate an ATM and apply
that to the estimated 914 institutions with T1
[[Page 67184]]
or T2 arrangements, the estimated cost for one year of operation would
be $22.9 million, with costs in subsequent years reduced to operating
and maintenance costs of $12,000 annually for a total of approximately
$11.0 million. However, this cost is a rough approximation as some
institutions may have more than one location and several factors will
mitigate those costs.
First, as several commenters have noted, many financial
institutions already have ATMs in place on campus and will not have to
make any changes to comply with the reasonable access provision.
Additionally, under the final regulations, institutions will be in
compliance with the reasonable access provision applies if they provide
sufficient access to an ATM given the student population at a given
location. In the course of developing the final regulations, we
examined the available data to see if a de minimis threshold could be
determined and asked for feedback about such a threshold. Many
commenters agreed that a threshold should be established, but there
were no suggestions on a specific number. Based on this feedback, the
Department established the sufficient access standard described above.
We believe this approach strikes a reasonable balance between concerns
regarding the cost of providing ATM access and the interests of
students who need to access their funds through this mechanism. As this
approach does not specify a threshold that applies across all
institutional circumstances, the Department cannot specify the exact
burden the reasonable access provision will place on institutions. For
example, if institutions decided a threshold of 30 students with a
credit balance merited the provision of an ATM at a location, the
Department estimates that, for institutions in T1 or T2 arrangements,
over 70 percent of locations representing over 95 percent of students
with credit balances would be over that number when using an eight-
digit NSLDS school code as a proxy for location and the estimates of
students with credit balances as described in the Data and Methodology
section of this RIA. The revised provision relies on institutional
knowledge of enrollment and location in determining the number of
additional ATMS needed to satisfy the standard of convenient access,
and, along with the preexisting access, will likely reduce the $22.9
million in initial costs and $11.0 million in annual costs estimated
above.
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 of this RIA, 10 million students (Chart 1) are at title IV-
participating schools where card agreements are prevalent. As described
in the NPRM, data limitations and uncertainty about the student
reaction to the information and options that will be part of the
student choice menu under the final regulations present challenges in
estimating the costs of the T2 arrangements. If students move away from
products offered under T2 arrangements, providers may incur additional
marketing expense or other costs to administer the accounts.
Based on this feedback, the Department decided that institutions
must meet a certain threshold to be subject to certain requirements
relating to T2 arrangements including disclosure of the contract data,
the ATM requirements, and the best interests sections. Institutions are
subject to those requirements if five percent or more of the total
number of students enrolled at the institution received at title IV
credit balance, or the average number of credit balance recipients for
the three most recently completed award years is 500 or more. For
institutions that do not have significant percentage or numbers of
students with a credit balance, the threshold for classification as a
T2 arrangement will potentially provide some mitigation of the costs
associated with T2 arrangements.
Additional discussion of the costs of implementing and complying
with these final regulations can be found in the Paperwork Reduction
Act section of this document.
Transfers: Fee-Related Provisions Applicable to Institutions With T1
Arrangements
Institutions with T1 arrangements are required to mitigate fees
that could be incurred by student aid recipients by prohibiting point-
of-sale fees and overdraft fees charged to students. Additionally,
these institutions must ensure that students have convenient access
through surcharge-free ATMs that are part of a national or regional ATM
network. 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 [6]). However, college card fees were lower
than alternative financial products, such as check-cashing
services.\65\
---------------------------------------------------------------------------
\65\ GAO at 18.
---------------------------------------------------------------------------
Table 6: Account Fees by Provider Type
Account Fees by Provider Type
----------------------------------------------------------------------------------------------------------------
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
[[Page 67185]]
revenues for FY 2013.\66\ Not all of those fees are subject to the
provisions of the final regulations, but the amount of student account
revenue affected by the changes across the industry will be
significant.
---------------------------------------------------------------------------
\66\ Higher One Holdings, Inc. ``SEC Form 10-K,'' pages 41-42
(2014), available at www.sec.gov/Archives/edgar/data/1486800/000148680014000018/one10k.htm.
---------------------------------------------------------------------------
Along with being unable to determine the total amount of college
card fees paid by students, student behavior is also unpredictable, and
student response to the information about account options and costs
will significantly contribute to the effect of the regulations. While
it is assumed that consumers with appropriate information would make
rational decisions, such as avoiding withdrawals from out-of-network
ATMs or choosing debit transactions that require signatures rather than
a PIN, some students may not make the optimal choices in managing their
accounts. The Department does not have the distribution of students in
accounts with specific fee arrangements, data on student usage
patterns, or data on the responsiveness of students to the information
that will be provided under the regulations, and therefore it is
difficult for us to estimate the exact transfers that will occur when
certain fees on student accounts are prohibited. Some analysis has been
done on account usage that can be used to establish a range of possible
effects of the regulations. In its August 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.\67\ This range of outcomes
indicates how the distribution of students in accounts and the student
response to account information disclosed under the regulations will
help determine the fee revenue affected by the regulations.
---------------------------------------------------------------------------
\67\ Consumers Union at 16.
---------------------------------------------------------------------------
An additional analysis by U.S. PIRG included data on overdraft
behavior by age range, with adults in the 18 to 25 age range having the
highest incidence of paying overdraft fees--53.6 percent paying zero,
21.5 percent paying $1 to $4, 10.3 percent paying $5 to $9, 7.9 percent
paying $10 to $19, and 6.8 percent paying $20 or more for each
overdrafts.\68\ While not all students will fall within this age range,
given the high percentage that pays at least one overdraft fee and the
amount of overdraft fees ranging from $25 to $38 when applied, the
amount of money 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.\69\
---------------------------------------------------------------------------
\68\ USPIRG at 32.
\69\ 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
regulations is the response of financial institutions and institutions.
The fee provisions imposed on accounts offered pursuant to T1
arrangements will have cost implications for affected servicers. One
intent of the regulations is to allow students to access financial aid
funds without burden from fees or other costs; however, the Department
acknowledges that many of these servicers could restructure their
accounts to earn some of those funds through fees not affected by the
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.
Benefits: Disclosure Provisions, Student Choice, and Access to Funds
As noted in the Summary of Changes and Final Regulations,
institutions with T1 and T2 arrangements are subject to several
provisions focused on increasing disclosure of information related to
student accounts and emphasizing the availability of options for
students to receive credit balances. 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 (NCES), 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 at a bank
themselves (38.5 percent). The remaining 24.3 percent of students
receive refunds by cashing refunds 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.\70\
---------------------------------------------------------------------------
\70\ U.S. Department of Education, National Center for Education
Statistics, 2011-12 National Postsecondary Student Aid Study
(NPSAS:12).
---------------------------------------------------------------------------
One of the largest benefits for students from the regulations is
that students will have access to account disclosures and critical
information to allow them to make informed decisions regarding the
handling and distribution of their title IV funds. The fee and contract
disclosures will help students and regulators determine whether the
financial products marketed by financial institutions with
relationships to their school are the best option for them. These
disclosures will also help prevent students from being misled into
believing that they must use those financial products.
With respect to including the costs of books and supplies in
tuition and fees, the Department has changed the ``best financial
interest'' standard in the NPRM to allowing the inclusion under three
circumstances. As described in the Analysis of Comments and Changes,
those three circumstances are: (1) The institution has an arrangement
with a book publisher or other entity that enables it to make those
books or supplies available to students at or below competitive market
rates (with an opt out provision for the student); (2) the books or
supplies, including digital or electronic course materials, are not
available elsewhere or accessible by students enrolled in that program
from sources other than those provided or authorized by the
institution; or (3) the institution demonstrates there is a compelling
health or safety reason. These final regulations allow, but do not
require, institutions to disclose the prices of books and other
materials that they include as part of tuition and fees. We believe
this revised treatment benefits students through the buying power of
the school in cases where the school can source the materials for lower
than market costs and the ability of the institution to provide digital
and other materials that cannot be sourced elsewhere. If these three
circumstances are not met, institutions would need authorization from
the student to use title IV, HEA funds on books and supplies, and the
student would have the ability to look at alternate providers for
better value before providing such authorization.
The regulations also help protect students from deceptive marketing
practices aimed at encouraging them to do business with a particular
financial institution. When students are not presented with clear
choices or
[[Page 67186]]
information, they may be pushed into using financial accounts with
higher fees and/or less access than other available options. The
student choice provisions aid in the decision making process by
allowing students who may have otherwise chosen a higher fee option to
identify and choose accounts with lower fees. These students will save
money and be able to use all or more of their title IV aid for expenses
critical to their educational needs.
Other Benefits
As discussed in the NPRM, the regulations provide other benefits
for students and institutions. Institutions will benefit from being
able to keep the first $500 in interest accrued on accounts holding
title IV funds. Institutions and students will benefit from the
retaking coursework regulations as students will be able to continue
paying for educational costs with title IV aid. The clock-to-credit-
hour conversion regulations also will benefit institutions through
simplification of regulations affecting institutional determinations
relating to title IV eligibility.
Net Budget Impacts
The final regulations are not estimated to 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 regulations require disclosures of institutional agreements
with financial services providers through which students may opt to
receive title IV credit balances, and restrict the fees students can be
charged for accounts offered pursuant to T1 arrangements. Additionally,
the proposed regulations make technical changes to subpart K cash
management rules to reflect technological advances and improved
disbursement practices. The regulations also 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 regulations eliminate the provision that prevents
institutions from counting previously passed courses towards enrollment
where the repetition is due to the student failing other coursework.
The regulations affect the arrangements among institutions,
students, and financial service providers, but are not expected to
affect the volume of title IV aid disbursed or the repayment patterns
of students, and therefore, we estimate no significant budget impact on
title IV programs.
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
[7], we have prepared an accounting statement showing the
classification of the expenditures associated with the provisions of
these regulations.
Table 7--Accounting Statement: Classification of Estimated Expenditures
[In millions]
------------------------------------------------------------------------
7% 3%
------------------------------------------------------------------------
Category Benefits
------------------------------------------------------------------------
Greater disclosure of arrangements
between institutions and financial
service providers and clearer
disclosure of fees and conditions of
student accounts....................... Not Quantified.
------------------------------------------------------------------------
Category Costs
------------------------------------------------------------------------
Costs of compliance with paperwork
requirements.
------------------------------------------------------------------------
Category Transfers
------------------------------------------------------------------------
$21.0 $21.2
------------------------------------------------------------------------
Final Regulatory Flexibility Act Analysis
The final 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
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 subject to the regulations
are small, leading to the preparation of the following Final Regulatory
Flexibility Act 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 also 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 is amending the cash management regulations under
subpart K issued under the HEA to address a number of disturbing
practices
[[Page 67187]]
identified by multiple government and consumer group reports. These
reports indicate 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 suggesting that a
particular financial account is required to receive student aid. The
regulations also make changes to update subpart K consistent with
contemporary disbursement practices. Finally, the final regulations
update two additional, unrelated provisions of interest to students and
institutions: revising the way previously passed coursework is treated
for title IV eligibility purposes so that 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 concerning
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 made a number of more minor changes throughout
subpart K in the final regulations.
Description of and, Where Feasible, an Estimate of the Number of Small
Entities to Which the Regulations Will Apply
These final regulations would affect institutions, financial
services providers that enter into certain arrangements with
institutions, 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 number 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 not-for-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 [8] summarizes the distribution of small
entities affected by the regulations by sector.
Table 8--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
rrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr
Total....................................................... 4,253 7,539 56
----------------------------------------------------------------------------------------------------------------
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 Requirements
and the Type of Professional Skills Necessary for Preparation of the
Report or Record
The various provisions in the regulations require disclosures by
institutions as discussed in the Paperwork Reduction Act section of
this preamble. Table [9] summarizes the estimated burden on small
entities from the paperwork requirements associated with the final
regulations.
Table 9--Summary of Paperwork Requirements for Small Entities
----------------------------------------------------------------------------------------------------------------
Provision Reg Section OMB control No. Hours Costs
----------------------------------------------------------------------------------------------------------------
Require institutions to establish an account 668.164(d)(4) OMB 1845-0106 3,920 143,276
selection process..........................
Compliance with T1 requirements: provide the 668.164e OMB 1845-0106 6,710 245,251
terms and conditions of the financial
accounts; provide convenient access to
ATMs; ensure accounts cannot be converted
to a credit instrument; and disclose the
contract, the mean and median costs
incurred over the prior year, and the
number of students with these financial
accounts...................................
Compliance with T2 requirements: obtain 668.164(f) OMB 1845-0106 3,285 120,067
consent to open an account; provide terms
and conditions; and disclose the contract,
the number of students participating, and
the mean and median actual costs for the
prior year.................................
-------------------------------------------------------------------
[[Page 67188]]
Total................................... .............. .................. 13,915 508,593
----------------------------------------------------------------------------------------------------------------
Identification, to the Extent Practicable, of All Relevant Federal
Regulations that May Duplicate, Overlap, or Conflict With the
Regulations
The final 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 the CFPB, for help in understanding Federal banking
regulations and the Federal bank regulatory framework. 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, although the threshold of 500
students with a credit balance for classification as a T2 arrangement
and the sufficient access standard for ATMs at campus locations may
have a greater effect on small entities.
Collection of Information
Assessment of Educational Impact
In the NPRM we requested comments on whether the proposed
regulations would require transmission of information that any other
agency or authority of the United States gathers or makes available.
Based on the response to the NPRM and on our review and further
consideration of the regulations, we have determined that the final
regulations do not require transmission of information that any other
agency or authority of the United States gathers or makes available.
Paperwork Reduction Act of 1995
The Paperwork Reduction Act of 1995 (PRA) (44 U.S.C. 3507(d)) does
not require a response to a collection of information unless it
displays a valid OMB control number. We display the valid OMB control
number assigned to this collection of information in the final
regulations at the end of the affected sections of the regulations.
Section 668.164 contains information collection requirements. Under
the PRA, the Department has submitted a copy of this section, related
forms, and the Information Collections Request (ICR) to the Office of
Management and Budget (OMB) for its review.
The OMB Control number associated with the final regulation is
1845-0106.
Section 668.164 Disbursing Funds
Requirements: Student choice.
Under Sec. 668.164(d)(4)(i), an institution in a State that makes
direct payments to a student by EFT and that chooses to enter into an
arrangement described in Sec. 668.164(e) or (f), including an
institution that uses a third-party servicer to make those payments,
must establish a selection process under which the student chooses one
of several options for receiving those payments. The institution must
inform the student 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. The institution must ensure that the
student's options for receiving direct payments are described and
presented in a clear, fact-based, and neutral manner, and with no
option preselected, except that the institution must prominently
present as the first option, the financial account or access device
associated with an existing account belonging to the student.
The institution must ensure that initiating the EFT to a financial
account or access device associated with an existing student financial
account is as timely and no more onerous to the student as initiating
the electronic transfer process to an account offered under a T1 or T2
arrangement. The institution must allow the student to change his or
her choice as to how direct payments are made, as long as the student
provides the institution with written notice of the change within a
reasonable amount of time. The institution must ensure that a student
who does not make an affirmative selection of how direct payments are
to be made is paid the full amount of the credit balance due consistent
with the regulations. In describing the options, the institution must
list and identify the major features and commonly assessed fees
associated with all accounts offered under a T1 or T2 arrangement, as
well as a URL for the terms and conditions of those accounts. For each
account, if an institution by July 1, 2017 follows the format and
content requirements specified by the Secretary in a notice published
in the Federal Register, it will be in compliance with these
requirements.
Alternatively, an institution that does not offer accounts under a
T1 or 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, issue a check, or disburse cash to the
student.
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 (according to FSA data)
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
[[Page 67189]]
subset of institutions. Utilizing publically available sources and
working with the CFPB, we identified 914 institutions that were known
to have card agreements with financial institutions. The Department
also had available through NSLDS and IPEDS tuition and fees and aid
recipient data for 672 of these institutions. From the data for these
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 card agreements, the NSLDS-IPEDS-CFPB
data show that 685 institutions are public institutions. On average, we
estimate the burden associated with developing and implementing the
student choice options will increase by 20 hours per institution and
therefore we estimate a total burden of 13,700 hours (685 institutions
times 20 hours per institution) under OMB Control Number 1845-0106.
Of the 914 institutions with card agreements, the NSLDS-IPEDS-CFPB
data show that 154 institutions are private not-for-profit
institutions. On average, we estimate the burden associated with
developing and implementing the student choice options will increase by
20 hours per institution and therefore we estimate a total burden of
3,080 hours (154 institutions times 20 hours per institution) under OMB
Control Number 1845-0106.
Of the 914 institutions with card agreements, the NSLDS-IPEDS-CFPB
data show that 75 are private for-profit institutions. On average, we
estimate the burden associated with developing and implementing the
student choice options will increase by 20 hours per institution and
therefore we estimate a total burden of 1,500 hours (75 institutions
times 20 hours per institution) under OMB Control Number 1845-0106.
Overall, burden to institutions will increase by 18,280 hours (the
sum of 13,700 hours, 3,080 hours, and 1,500 hours).
The NSLDS-IPEDS-CFPB data indicate that 1,798,756 title IV
recipients with credit balances for the 2013-14 award year will be
impacted by this regulation. We estimate that each of the affected
title IV recipients will 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 will 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 will 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 will 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 will increase by 593,590
hours (the sum of 572,927 hours, 4,488 hours, and 16,175 hours).
Requirements: T1 arrangements
Under Sec. 668.164(e), a T1 arrangement exists when an institution
in a State enters into 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, and the institution or third party servicer
makes payments to one or more financial accounts that are offered to
students under the contract, or to a financial account where
information about the account is communicated directly to students by
the third-party servicer or by the institution on behalf of or in
conjunction with the third party servicer.
An institution with a T1 arrangement must comply with the following
requirements:
1. The institution must ensure that the student's consent to open
the financial account has been obtained before an access device, or any
representation of an access device is sent to the student, or an access
device that is provided to the student for institutional purposes, such
as a student ID card, is validated, enabling the student to use the
device to access a financial account. Before a student makes a
selection of the financial account, the institution must not share with
the third-party servicer under a T1 arrangement any information about
the student, other than directory information under 34 CFR 99.3 that is
disclosed pursuant to 34 CFR 99.31(a)(11) and 99.37, beyond a unique
student identifier generated by the institution that does not include a
Social Security number, in whole or in part; the disbursement amount; a
password, PIN code, or other shared secret provided by the institution
that is used to identify the student; or any additional items specified
by the Secretary in a notice published in the Federal Register. Such
information may be used solely for activities that support making
direct payments of title IV, HEA program funds and not for any other
purpose and cannot be shared with any other affiliate or entity for any
other purpose.
2. The institution must inform the student 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 has convenient
access to the financial account through a surcharge-free national or
regional ATM network. Those ATMs must be sufficient in number and
housed and serviced such that the funds are reasonably available to the
accountholder, including at the times the institution or its third-
party servicer makes direct payments into them. The institution must
also ensure that students 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
conducts point-of-sale transactions in a State; or for conducting any
transaction on an ATM that belongs to the surcharge-free regional or
national network.
4. The institution must ensure that: The financial account or
access device is not marketed or portrayed as, or converted into a
credit card; no credit may be extended or associated with the financial
account; and no fee is charged to the student for any transaction or
withdrawal exceeding the balance on the card, except that a transaction
that exceeds the balance on the card may be permitted only for
inadvertently approved overdrafts as long as no fee is charged to the
student for such overdraft.
5. The institution, third-party servicer, or third-party servicer's
associated financial institution must provide domestic withdrawals for
a student accountholder to conveniently access title IV, HEA program
funds in
[[Page 67190]]
part and in full, without charge, up to the account balance, following
the date that such title IV, HEA program funds are deposited or
transferred to the financial account.
6. No later than September 1, 2016, the institution must disclose
conspicuously on its Web site, and thereafter timely update, 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. No later than
September 1, 2017, and then 60 days following the most recently
completed award year thereafter, disclose conspicuously on its Web site
in a format to be published by the Department: The total consideration,
monetary and non-monetary, paid or received by the parties under the
terms of the contract; the number of students who had active 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 active account holders. The institution must also
annually provide to the Secretary a URL link to the agreement and the
foregoing contract data for publication in a centralized database
accessible to the public.
7. The institution must ensure that the terms of the accounts
offered under a T1 arrangement are not inconsistent with the best
financial interests of the students opening them. The Secretary
considers this requirement to be met if the institution documents that
it conducts reasonable due diligence reviews at least every two years,
to ascertain whether the fees imposed under the T1 arrangement are,
considered as a whole, consistent with or lower than prevailing market
rates; and all contracts for the marketing or offering of accounts
under a T1 arrangement to the institution's students provide for
termination of the arrangement at the discretion of the institution
based on complaints received from students or a determination by the
institution that the fees assessed under the account are not consistent
with or are above prevailing market rates.
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 accounts
offered pursuant to T1 arrangements.
9. The requirements of paragraph (e)(2) do not apply to a student
no longer enrolled if there are no pending title IV disbursements
pending for that students, except that the institution remains
responsible for including in the disclosures required of it any data
regarding a T1 account maintained by a student during the preceding
award year and the fees the student incurred, regardless of whether the
student is no longer enrolled at the time institution discloses the
data.
Burden Calculation: We expect that institutions with T1 or T2
arrangements will have to modify their systems or procedures to ensure
compliance with these regulations including to establish a consent
process; provide account terms and conditions disclosures; and provide
the disclosures, contract disclosures, and use and cost data after the
end of the award year. In addition, it is likely that institutions will
make other changes in order to conduct their 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 are not consistent with or
lower than prevailing market rates.
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 constitute T1 or T2 arrangements under
the regulations, we determined that there are 541 public institutions
with a T1 arrangement. We estimate that the changes necessitated by the
requirements relating to T1 arrangements will 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 constitute T1 or T2 arrangements under
the regulations, we determined that there are 80 private not-for-profit
institutions with a T1 arrangement. We estimate that the changes
necessitated by the requirements relating to T1 arrangements will 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 constitute T1 or T2 arrangements under
the regulations, we determined that there are 75 private for-profit
institutions with a T1 arrangement. We estimate that the changes
necessitated by the requirements relating to T1 arrangements will 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 will increase by 38,280
hours (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 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 will take 15 minutes (.25 hours) to
read 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, the
number of students who had financial accounts under the T1 arrangement
for the most recently completed year, the mean and median costs
incurred by account holders, and determine whether to provide their
consent to the institution. Therefore, the additional burden on title
IV recipients will 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 will take 15 minutes (.25
hours) to read 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, the number of students who had financial accounts under
the T1 arrangement for the most recently completed year, the mean and
median costs incurred by account holders, and determine whether to
provide their consent to the institution. Therefore, the additional
burden on title IV recipients will 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 will take 15
[[Page 67191]]
minutes (.25 hours) to read 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, the number of students who had financial
accounts under the T1 arrangement for the most recently completed year,
the mean and median costs incurred by account holders, and determine
whether to provide their consent to the institution. Therefore, the
additional burden on title IV recipients will increase by 12,254 hours
under OMB Control Number 1845-0106.
Overall, burden to recipients will increase by 384,667 hours (the
sum of 369,036 hours, 3,377 hours, and 12,254 hours).
Requirements: T2 arrangements.
Under Sec. 668.164(f), a T2 arrangement exists when an institution
enters into 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.
However, the institution does not have to comply with
paragraphs(d)(1)(4) or (f)(4) and (5) if it had no credit balance
recipients in one or more of the preceding three award years, nor with
certain requirements in Sec. 668.164(f)(4) if it documents that, on
average over the preceding three years, fewer than 500 students
received a credit balance and credit balance recipients comprised less
than five percent of enrollment. The Secretary considers that a
financial account is marketed directly if the institution communicates
information directly to its students about the financial account and
how it may be opened; the financial account or access device is
cobranded with the institution's name, logo, mascot, or other
affiliation and marketed principally to students; or an access device
that is provided to the student for institutional purposes, such as a
student ID card, is validated, enabling the student to use the device
to access a financial account.
Under a T2 arrangement, the institution must comply with the
following requirements:
1. The institution must ensure that the student's consent to open
the financial account is obtained before: The institution provides, or
permits a third-party servicer to provide, any personally identifiable
about the student to the financial institution or its agents other than
directory information under 34 CFR 99.3 that is disclosed pursuant to
34 CFR 99.31(a)(11) and 99.37; or an access device, or any
representation of an access device, is sent to the student (except that
an institution may send the student an access device that is a card
provided to the student for institutional purposes, such as a student
ID card, so long as the institution or financial institution obtains
the student's consent before validating the device to enable the
student to access the financial account).
2. The institution must inform the student 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.
3. No later than September 1, 2016, the institution must 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, will compromise personal privacy,
proprietary information technology, or the security of information
technology or of physical facilities, and must also provide to the
Secretary the URL for the contract for publication in a centralized
database accessible to the public, and must thereafter update the
contract posted with any changes. No later than September 1, 2017, and
thereafter no later than 60 days following the most recently completed
award year thereafter, the institution must disclose conspicuously on
its Web site in a format to be published by the Department the total
consideration, monetary and non-monetary, paid or received by the
parties under the terms of the contract; and, for any year in which the
institution's enrolled students had open 30 or more financial accounts
marketed under the T2 arrangement, the number of students 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 active account holders. The institution must
ensure that the foregoing data is included on the URL provided to the
Secretary disclosing the contract.
4. If the institution is located in a State, it must ensure that
the student accountholder can execute balance inquiries and access
funds deposited in the financial accounts through surcharge-free in-
network ATMs sufficient in number and housed and serviced such that the
funds are reasonably available to the accountholder, 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 accounts
offered under a T2 arrangement are not inconsistent with the best
financial interests of the students opening them. The Secretary
considers this requirement to be met if the institution documents that
it conducts reasonable due diligence reviews at least every two years,
to ascertain whether the fees imposed under the accounts are,
considered as a whole, consistent with or lower than prevailing market
rates; and all contracts for the marketing or offering of the accounts
to the institution's students provide for termination of the
arrangement at the discretion of the institution based on complaints
received from students or a determination by the institution that the
fees assessed under the account are not consistent with or are above
prevailing market rates.
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 accounts
offered under a T2 arrangement.
8. The institution must ensure that students incur no cost for
opening the account or initially receiving or validating an access
device.
9. If the institution enters into an agreement for the cobranding
of a financial account but maintains that the account is not marketed
principally to its enrolled students and is not otherwise marketed
directly, the institution must retain the cobranding contract and other
documentation it believes establishes this.
10. The requirements of paragraph (f)(4) do not apply to a student
no longer enrolled if there are no pending title IV disbursements
pending for that students, except that the institution remains
responsible for including in the disclosures required of it any data
regarding a T2 account maintained by a student during the preceding
award year and the fees the student incurred, regardless of whether the
student is no longer enrolled at the time institution discloses the
data.
Burden calculation: Under the regulations, we estimate that an
institution with a T2 arrangement will have to modify its systems or
procedures to, among other things: establish a consent process; provide
account terms and conditions disclosures; provide the required
disclosures, contract disclosures, and
[[Page 67192]]
use and cost data within 60 days after the end of the award year. In
addition, other changes may be required regarding how the institution
will conduct its 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 inconsistent with or higher than prevailing
market rates.
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 these 7,539 institutions, according to NSLDS-IPEDS-CFPB data,
144 are public institutions with T2 arrangements. We estimate that the
changes necessitated by the requirements relating to T2 arrangements
will add an additional 45 hours of burden per institution, increasing
burden by 6,480 hours under OMB Control Number 1845-0106.
Of the 7,539 institutions, according to NSLDS-IPEDS-CFPB data, 74
are private not-for-profit institutions with T2 arrangements. We
estimate that the changes necessitated by the requirements relating to
T2 arrangements will add an additional 45 hours of burden per
institution, increasing burden by 3,330 hours under OMB Control Number
1845-0106.
Of the 7,539 institutions, according to NSLDS-IPEDS-CFPB data, no
private for-profit institutions where title IV recipients had credit
balances have T2 arrangements.
Overall, burden to institutions will 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 those recipients, the data showed that 259,997 were
enrolled at public institutions. We estimate that, on average, each
recipient will take 15 minutes (.25 hours) to read the institution's
required disclosures and consent information and decide whether to
provide consent or not. Therefore, the additional burden on title IV
recipients will 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 will take 15 minutes (.25 hours) to read the
institution's required disclosures and consent information and decide
whether to provide consent or not. Therefore, the additional burden on
title IV recipients will 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 title IV recipients will increase by 65,022
hours (the sum of 64,999 hours and 23 hours).
Collectively, the total increase in burden for Sec. 668.164 will
be 1,109,649 hours under OMB Control Number 1845-0106.
Consistent with the discussion above, the following chart describes
the sections of the final regulations involving information
collections, the information being collected, and the collections that
the Department has submitted to OMB for approval, 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 final regulations require OMB 1845-0106........... $19,431,272
institutions to establish an This will be a revised
account selection process if the collection. We estimate
institution sends EFT payments to that the burden will
an account described in Sec. increase by 1,109,649
668.164(e) or (f). Under Sec. hours..
668.164(e), when an institution
enters into a T1 arrangement, the
institution must, among other
things, provide the terms and
conditions of the financial
accounts, provide convenient
access to ATMs if the institution
is located in a State, ensure the
account cannot be converted to a
credit instrument, disclose the
details of the contract on 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 with these financial
accounts. Under Sec. 668.164(f),
when an institution enters into a
T2 arrangement, the institution or
financial account provider must,
among other things, obtain consent
to open an financial account or
provide an access device that is
cobranded with the institution's
name, logo, mascot, or other
affiliation and principally
marketed to students, or a card or
tool that is provided to the
student for institutional purposes
such as a student ID card that is
linked to the financial account,
and 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 these regulations follows:
[[Page 67193]]
------------------------------------------------------------------------
Total proposed Proposed change in
Control No. burden hours burden hours
------------------------------------------------------------------------
1845-0106....................... 4,282,188 + 3,599,340
---------------------------------------
Total....................... 4,282,188 = 3,599,340
------------------------------------------------------------------------
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(Catalog of Federal Domestic Assistance Number does not apply.)
List of Subjects in 34 CFR Part 668
Colleges and universities, Consumer protection, Grant programs--
education, Loan programs--education, Reporting and recordkeeping
requirements, Student aid.
Dated: October 21, 2015.
Arne Duncan,
Secretary of Education.
For the reasons discussed in the preamble, the Secretary of
Education amends 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 is revised to read as follows:
Authority: 20 U.S.C. 1001-1003, 1070a, 1070g, 1085, 1087b,
1087d, 1087e, 1088, 1091, 1092, 1094, 1099c, 1099c-1, 1221e-3, and
3474, 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.
(Authority: 20 U.S.C. 1082 and 1088)
0
3. Section 668.8 is amended by revising paragraphs (k) and (l) 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--
(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 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
[[Page 67194]]
(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 a
student 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, issues to a student
an access device associated with a financial account, and agrees with
the student 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; and
(ix) Title IV, HEA programs means 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 20 CFR
part 675, subpart B, 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 heightened
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.
(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 has 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--
[[Page 67195]]
(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 paragraphs (b)(1) and (2) of this section,
except that the institution's request may not exceed the amount of the
disbursements the institution has 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 located in a State 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 located
in a State 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. No later than 30
days after the end 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)(5), 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(d)(4)(i)
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 covered by
that prior year, late, or retroactive disbursement.
(3) At the time a disbursement is made to a student for a payment
period, an institution must confirm that the student is eligible for
the type and amount of title IV, HEA program funds identified by that
disbursement. A third-party servicer is also responsible for confirming
the student's eligibility if the institution engages the servicer to
perform activities or transactions that lead to or support that
disbursement. Those activities and transactions include but are not
limited to--
(i) Determining the type and amount of title IV, HEA program funds
that a student is eligible to receive;
(ii) Requesting funds under a payment method described in Sec.
668.162; or
(iii) Accounting for funds that are originated, requested, or
disbursed, in reports or data submissions to the Secretary.
(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
[[Page 67196]]
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) An institution may include the costs of books and supplies as
part of tuition and fees under paragraph (c)(1)(i) of this section if
--
(i) The institution--
(A) Has an arrangement with a book publisher or other entity that
enables it to make those books or supplies available to students below
competitive market rates;
(B) Provides a way for a student to obtain those books and supplies
by the seventh day of a payment period; and
(C) Has a policy under which the student may opt out of the way the
institution provides for the student to obtain books and supplies under
this paragraph (c)(2). A student who opts out under this paragraph
(c)(2) is considered to also opt out under paragraph (m)(3) of this
section;
(ii) The institution documents on a current basis that the books or
supplies, including digital or electronic course materials, are not
available elsewhere or accessible by students enrolled in that program
from sources other than those provided or authorized by the
institution; or
(iii) The institution demonstrates there is a compelling health or
safety reason.
(3)(i) An institution may include in one or more payment periods
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--
(1) The current loan period for a student or parent who receives
only a Direct Loan;
(2) The current award year for a student who does not receive a
Direct Loan but receives funds under any other title IV, HEA program;
or
(3) At the discretion of the institution, either the current loan
period or the current award year if a student receives a Direct Loan
and funds from any other title IV, HEA program.
(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 unpaid
allowable charges from any previous payment period in the current award
year or current loan period for which the student was eligible for
title IV, HEA program funds.
(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 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) Direct payments. (1) 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 choice. (i) An institution located in a State that
makes direct payments to a student by EFT and that enters 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
chooses one of several options for receiving those payments.
(A) In implementing its selection process, the institution must--
(1) Inform the student 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 options for receiving direct payments
are described and presented in a clear, fact-based, and neutral manner;
(3) Ensure that initiating direct payments by EFT to a student's
existing financial account is as timely and no more onerous to the
student as initiating an EFT to an account provided under an
arrangement described in paragraph (e) or (f) of this section;
(4) Allow the student to change, at any time, his or her previously
selected payment option, as long as the student provides the
institution with written notice of the change within a reasonable time;
(5) Ensure that no account option is preselected; and
(6) Ensure that a student who does not make an affirmative
selection is paid the full amount of the credit balance within the
appropriate time-period specified in paragraph (h)(2) of this section,
using a method specified in paragraph (d)(1) of this section.
(B) In describing the options under its selection process, the
institution--
(1) Must present prominently as the first option, the financial
account belonging to the student;
(2) Must list and identify the major features and commonly assessed
fees
[[Page 67197]]
associated with each financial account offered under the arrangements
described in paragraphs (e) and (f) of this section, as well as a URL
for the terms and conditions of each account. For each account, if an
institution by July 1, 2017 follows the format, content, and update
requirements specified by the Secretary in a notice published in the
Federal Register following consultation with the Bureau of Consumer
Financial Protection, it will be in compliance with the requirements of
this paragraph with respect to the major features and assessed fees
associated with the account; and
(3) May provide, for the benefit of the student, 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.
(ii) An institution that does not offer or use any financial
accounts offered under paragraph (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--
(i) An institution located in a State 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; and
(ii) The institution or third-party servicer makes payments to--
(A) One or more financial accounts that are offered to students
under the contract;
(B) A financial account where information about the account is
communicated directly to students by the third-party servicer, or the
institution on behalf of or in conjunction with the third-party
servicer; or
(C) A financial account where information about the account is
communicated directly to students by an entity contracting with or
affiliated with the third-party servicer.
(2) Under a T1 arrangement, the institution must--
(i) Ensure that the student's consent to open the financial account
is obtained before an access device, or any representation of an access
device, is sent to the student, except that an institution may send the
student an access device that is a card provided to the student for
institutional purposes, such as a student ID card, so long as the
institution or financial institution obtains the student's consent
before validating the device to enable the student to access the
financial account;
(ii) Ensure that any personally identifiable information about a
student that is shared with the third-party servicer before the student
makes a selection under paragraph (d)(4)(i) of this section--
(A) Does not include information about the student, other than
directory information under 34 CFR 99.3 that is disclosed pursuant to
34 CFR 99.31(a)(11) and 99.37, beyond--
(1) A unique student identifier generated by the institution that
does not include a Social Security number, in whole or in part;
(2) The disbursement amount;
(3) A password, PIN code, or other shared secret provided by the
institution that is used to identify the student; or
(4) Any additional items specified by the Secretary in a notice
published in the Federal Register;
(B) Is used solely for activities that support making direct
payments of title IV, HEA program funds and not for any other purpose;
and
(C) Is not shared with any other affiliate or entity except for the
purpose described in paragraph (e)(2)(ii)(B) of this section;
(iii) Inform the student of the terms and conditions of the
financial account, as required under paragraph (d)(4)(i)(B)(2) of this
section, before the financial account is opened;
(iv) Ensure that the student--
(A) Has convenient access to the funds in the financial account
through a surcharge-free national or regional Automated Teller Machine
(ATM) network that has ATMs sufficient in number and housed and
serviced such that title IV funds are reasonably available to students,
including at the times the institution or its third-party servicer
makes direct payments into the financial accounts of those students;
(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 a
financial institution associated with the third-party servicer, when
the student conducts point-of-sale transactions in a State; and
(3) For conducting a balance inquiry or withdrawal of funds at an
ATM in a State that belongs to the surcharge-free regional or national
network;
(v) Ensure that--
(A) The financial account or access device is not marketed or
portrayed as, or converted into, a credit card;
(B) No credit is extended or associated with the financial account,
and no fee is charged to the student for any transaction or withdrawal
that exceeds the balance in the financial account or on the access
device, except that a transaction or withdrawal that exceeds the
balance may be permitted only for an inadvertently authorized
overdraft, so long as no fee is charged to the student for such
inadvertently authorized overdraft; and
(C) The institution, third-party servicer, or third-party
servicer's associated financial institution provides a student
accountholder convenient access to title IV, HEA program funds in part
and in full up to the account balance via domestic withdrawals and
transfers without charge, during the student's entire period of
enrollment following the date that such title IV, HEA program funds are
deposited or transferred to the financial account;
(vi) No later than September 1, 2016, and then no later than 60
days following the most recently completed award year thereafter,
disclose conspicuously on the institution's Web site the contract(s)
establishing the T1 arrangement between the institution and third-party
servicer or 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;
(vii) No later than September 1, 2017, and then no later than 60
days following the most recently completed award year thereafter,
disclose conspicuously on the institution's Web site and in a format
established by the Secretary--
(A) 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
(B) For any year in which the institution's enrolled students open
30 or more financial accounts under the T1 arrangement, the number of
students 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;
(viii) Provide to the Secretary an up-to-date URL for the contract
for publication in a centralized database accessible to the public;
(ix) Ensure that the terms of the accounts offered pursuant to a T1
arrangement are not inconsistent with the best financial interests of
the students opening them. The Secretary
[[Page 67198]]
considers this requirement to be met if--
(A) The institution documents that it conducts reasonable due
diligence reviews at least every two years to ascertain whether the
fees imposed under the T1 arrangement are, considered as a whole,
consistent with or below prevailing market rates; and
(B) All contracts for the marketing or offering of accounts
pursuant to T1 arrangements to the institution's students make
provision for termination of the arrangement by the institution based
on complaints received from students or a determination by the
institution under paragraph (e)(2)(ix)(A) of this section that the fees
assessed under the T1 arrangement are not consistent with or are higher
than prevailing market rates; and
(x) 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.
(3) Except for paragraphs (e)(2)(ii)(B) and (C) of this section,
the requirements of paragraph (e)(2) of this section no longer apply to
a student who has an account described under paragraph (e)(1) of this
section when the student is no longer enrolled at the institution and
there are no pending title IV disbursements for that student, except
that nothing in this paragraph (e)(3) should be construed to limit the
institution's responsibility to comply with paragraph (e)(2)(vii) of
this section with respect to students enrolled during the award year
for which the institution is reporting. To effectuate this provision,
an institution may share information related to title IV recipients'
enrollment status with the servicer or entity that is party to the
arrangement.
(f) Tier two arrangement. (1) In a Tier two (T2) arrangement, an
institution located in a State 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 enrolled at the institution.
(2) Under a T2 arrangement, an institution must--
(i) Comply with the requirements described in paragraphs (d)(4)(i),
(f)(4)(i) through (iii), (vii), and (ix) through (xi), and (f)(5) of
this section if it has at least one student with a title IV credit
balance in each of the three most recently completed award years, but
has less than the number and percentage of students with credit
balances as described in paragraphs (f)(2)(ii)(A) and (B) of this
section; and
(ii) Comply with the requirements specified in paragraphs
(d)(4)(i), (f)(4), and (f)(5) of this section if, for the three most
recently completed award years--
(A) An average of 500 or more of its students had a title IV credit
balance; or
(B) An average of five percent or more of the students enrolled at
the institution had a title IV credit balance. The institution
calculates this percentage as follows:
The average number of students with credit balances for the three
most recently completed award years
The average number of students enrolled at the institution at any
time during the three most recently completed award years.
(3) The Secretary considers that a financial account is marketed
directly if--
(i) The institution communicates information directly to its
students about the financial account and how it may be opened;
(ii) The financial account or access device is cobranded with the
institution's name, logo, mascot, or other affiliation and is marketed
principally to students at the institution; or
(iii) A card or tool that is provided to the student for
institutional purposes, such as a student ID card, is validated,
enabling the student to use the device to access a financial account.
(4) Under a T2 arrangement, the institution must--
(i) Ensure that the student's consent to open the financial account
has been obtained before--
(A) The institution provides, or permits a third-party servicer to
provide, any personally identifiable about the student to the financial
institution or its agents, other than directory information under 34
CFR 99.3 that is disclosed pursuant to 34 CFR 99.31(a)(11) and 99.37;
(B) An access device, or any representation of an access device, is
sent to the student, except that an institution may send the student an
access device that is a card provided to the student for institutional
purposes, such as a student ID card, so long as the institution or
financial institution obtains the student's consent before validating
the device to enable the student to access the financial account;
(ii) Inform the student of the terms and conditions of the
financial account as required under paragraph (d)(4)(i)(B)(2) of this
section, before the financial account is opened;
(iii) No later than September 1, 2016, and then no later than 60
days following the most recently completed award year thereafter--
(A) Disclose conspicuously on the institution's Web site 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; and
(B) Provide to the Secretary an up-to-date URL for the contract for
publication in a centralized database accessible to the public;
(iv) No later than September 1, 2017, and then no later than 60
days following the most recently completed award year thereafter,
disclose conspicuously on the institution's Web site and in a format
established by the Secretary--
(A) 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
(B) For any year in which the institution's enrolled students open
30 or more financial accounts marketed under the T2 arrangement, the
number of students 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;
(v) Ensure that the items under paragraph (f)(4)(iv) of this
section are posted at the URL that is sent to the Secretary under
paragraph (f)(4)(iii)(B) of this section for publication in a
centralized database accessible to the public;
(vi) If the institution is located in a State, ensure that the
student accountholder can execute balance inquiries and access funds
deposited in the financial accounts through surcharge-free in-network
ATMs sufficient in number and housed and serviced such that the funds
are reasonably available to the accountholder, including at the times
the institution or its third-party servicer makes direct payments into
them;
(vii) Ensure that the financial accounts are not marketed or
portrayed as, or converted into, credit cards;
(viii) Ensure that the terms of the accounts offered pursuant to a
T2 arrangement are not inconsistent with the best financial interests
of the students opening them. The Secretary considers this requirement
to be met if--
(A) The institution documents that it conducts reasonable due
diligence reviews at least every two years to ascertain whether the
fees imposed under the T2 arrangement are,
[[Page 67199]]
considered as a whole, consistent with or below prevailing market
rates; and
(B) All contracts for the marketing or offering of accounts
pursuant to T2 arrangements to the institution's students make
provision for termination of the arrangement by the institution based
on complaints received from students or a determination by the
institution under paragraph (f)(4)(viii)(A) of this section that the
fees assessed under the T2 arrangement are not consistent with or are
above prevailing market rates;
(ix) 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
(x) Ensure students incur no cost for opening the account or
initially receiving or validating an access device.
(xi) If the institution enters into an agreement for the cobranding
of a financial account with the institution's name, logo, mascot, or
other affiliation but maintains that the account is not marketed
principally to its enrolled students and is not otherwise marketed
directly within the meaning of paragraph (f)(3) of this section, the
institution must retain the cobranding contract and other documentation
it believes establishes that the account is not marketed directly to
its enrolled students, including documentation that the cobranded
financial account or access device is offered generally to the public.
(xii) Institutions falling below the thresholds described in
paragraph (f)(2) of this section are encouraged to comply voluntarily
with the provisions of paragraphs (d)(4)(i), (f)(4), and (f)(5) of this
section.
(5) The requirements of paragraph (f)(4) of this section no longer
apply with respect to a student who has an account described under
paragraph (f)(1) of this section when the student is no longer enrolled
at the institution and there are no pending title IV disbursements,
except that nothing in this paragraph should be construed to limit the
institution's responsibility to comply with paragraph (f)(4)(iv) of
this section with respect to students enrolled during the award year
for which the institution is reporting. To effectuate this provision,
an institution may share information related to title IV recipients'
enrollment status with the financial institution or entity that is
party to the arrangement.
(g) Ownership of financial accounts opened through outreach to an
institution's students. Any financial account offered or marketed
pursuant to an arrangement described in paragraph (e) or (f) of this
section must meet the requirements of 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 ledger 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) Fourteen (14) days after the balance occurred if the credit
balance occurred after the first day of class of a payment period; or
(ii) Fourteen (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, 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)(5). This restriction does not apply
if the institution is exempt from the 30-day delayed disbursement
requirements under 34 CFR 685.303(b)(5)(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 (j), 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 (j)(4) of this section, a student who becomes ineligible, as
described in paragraph (j)(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 in paragraph (j)(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
[[Page 67200]]
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 (j)(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)(5) 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)(5)(i)(A) or (B).
(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. For Pell Grant payments under this paragraph (k), the
student's enrollment status must be determined according to work
already completed, as required by 34 CFR 690.76(b).
(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 to the
institution 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 (m). A student who
opts out under this paragraph is considered to also opt out under
paragraph (c)(2)(i)(C) of this section;
(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)(1)(ii) 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,
which are from unsubsidized loans, and which are from PLUS 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 or 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 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.
[[Page 67201]]
(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 by this section 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) or (d), 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 a 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 on
behalf of the student or the parent; 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. 2015-27145 Filed 10-29-15; 8:45 am]
BILLING CODE 4000-01-P