Federal Register: November 1, 2002 (Volume 67, Number 212)
DOCID: FR Doc 02-27627
DEPARTMENT OF EDUCATION
Veterans Affairs Department
CFR Citation: 34 CFR Parts 600, 668, 673, 674, 675, 682, 685, 690, and 694
RIN ID: RIN 1845-AA23
NOTICE: Part III
DOCUMENT ACTION: Final regulations.
Federal Student Aid Programs
DATES: Effective Date: Except for the amendment to section 694.10, these regulations are effective July 1, 2003. The amendment to section 694.10 becomes effective December 2, 2002.
Implementation Date: The Secretary has determined, in accordance with section 482(c)(2)(A) of the Higher Education Act of 1965, as amended (HEA) (20 U.S.C. 1089(c)(2)(A)), that institutions, lenders, guaranty agencies, and state grant agencies that administer Title IV, HEA programs may, at their discretion, choose to implement all of the provisions of these final rules on or after November 1, 2002. For further information, see ``Implementation Date of These Regulations'' under the SUPPLEMENTARY INFORMATION section of this preamble.
The Secretary amends the Institutional Eligibility Under the Higher Education Act of 1965, as Amended; Student Assistance General Provisions; General Provisions for the Federal Perkins Loan Program, Federal WorkStudy Program, and Federal Supplemental Educational Opportunity Grant Program; Federal Perkins Loan (Perkins Loan) Program; Federal WorkStudy (FWS) Programs; Federal Family Education Loan (FFEL) Program; William D. Ford Federal Direct Loan (Direct Loan) Program; Federal Pell Grant Program; and Gaining Early Awareness and Readiness for Undergraduate Programs (GEAR UP) regulations. The Secretary is amending these regulations to reduce administrative burden for program participants, and to provide them with greater flexibility to serve students and borrowers.
66767-66816; 66817-66866; 66867-66916; 66917-66966; 66967-67016; 67017-67046; Education Department,
On August 6, 2002, and August 8, 2002, the Secretary published in the Federal Register two separate notices of proposed rulemaking (NPRMs) (67 FR 51036 and 67 FR 51718, respectively) for the Federal student assistance programs authorized by Title IV of the HEA. This document contains the final regulations for the rules that were proposed in both of these NPRMs.
The August 6, 2002 NPRM included proposed rules for the Student Assistance General Provisions, Perkins Loan Program, FFEL Program, and Direct Loan Program regulations.
In the preamble to the August 6, 2002 NPRM, the Secretary discussed
on pages 51037 through 51046 the major changes proposed to improve the
Federal student assistance programs. These included the following:
[sbull] Amending Sec. 668.35 to state the conditions under which a
borrower who is subject to a judgment obtained on a Title IV loan may
regain eligibility for additional Title IV student financial assistance. [page 51037]
[sbull] Amending Sec. Sec. 674.39, 682.405, and 685.211 to exclude from rehabilitation defaulted Perkins Loan, FFEL, and Direct Loan program loans on which a judgment has been obtained. [page 51037] [sbull] Amending Sec. Sec. 674.19, 682.402, and 682.414 to clarify the record retention requirements for promissory notes under the Perkins Loan and FFEL programs. [page 51038]
[sbull] Amending Sec. Sec. 674.34, 682.210, and, by reference, 685.204, to modify the way loan holders in the Perkins Loan, FFEL, and Direct Loan programs calculate Federal postsecondary educational loan debt for purposes of determining a borrower's eligibility for an economic hardship deferment. [page 51039]
[sbull] Amending Sec. Sec. 674.42, 682.604, and 685.304 to clarify that entities other than the institution may provide initial and exit loan counseling on the institution's behalf and to provide consistency in the information that must be disclosed to borrowers. [page 51039] [sbull] Amending Sec. Sec. 682.204 and 685.203 to clarify loan limits for separate standalone programs in the FFEL and Direct Loan programs. [page 51039]
[sbull] Amending Sec. 682.210 and, by reference, Sec. 685.204 to make it easier for borrowers in the FFEL and Direct Loan programs to certify eligibility for an unemployment deferment. [page 51040] [sbull] Amending Sec. Sec. 682.402, 685.212, and 685.220 to expand the instances where FFEL and Direct Loan program borrowers can have a portion of a consolidation loan discharged. [page 51040]
[sbull] Amending Sec. Sec. 674.2 and 674.16 to provide for the use of a Master Promissory Note (MPN) in the Perkins Loan Program. [page 51041]
[sbull] Amending Sec. Sec. 674.9 and 674.47 to modify the low balance writeoff options for institutions that participate in the Perkins Loan Program. [page 51042]
[sbull] Amending Sec. 674.17 to clarify that when an institution participating in the Perkins Loan Program closes, or otherwise leaves the program, that institution must assign its outstanding loans to the Secretary and liquidate its Perkins Loan fund according to the Secretary's instructions. [page 51042]
[sbull] Amending Sec. Sec. 674.33 and 674.42 to clarify the conditions under which an institution must coordinate minimum repayment options when a Perkins Loan borrower has received loans from more than one institution. [page 51042]
[sbull] Amending Sec. 674.42 to provide flexibility to institutions that participate in the Perkins Loan Program in providing copies of promissory notes to borrowers. [page 51042]
[sbull] Amending Sec. 674.43 to provide institutions increased flexibility in assessing late fees in the Perkins Loan Program. [page 51043]
[sbull] Amending Sec. 674.45 to clarify when an institution that participates in the Perkins Loan Program must report a defaulted account to a national credit bureau. [page 51043]
[sbull] Amending Sec. 674.46 to simplify the requirements for an institution that participates in the Perkins Loan Program to determine if it should initiate litigation against a defaulted borrower. [page 51043]
[sbull] Amending Sec. 674.50 to provide consistency within the regulations for the assignment to the Secretary of Perkins loans. [page 51043]
[sbull] Amending Sec. 682.200 to revise the definition of lender to clarify the treatment of loans held by trustee lenders. [page 51044] [sbull] Amending Sec. 682.209 to allow an FFEL lender to establish a borrower's first payment due date up to 60 days after the borrower enters repayment, to provide increased flexibility to FFEL
lenders when they receive updates to a borrower's enrollment status from an institution, and to provide a simplified method for a borrower in the FFEL Program to ask a lender to increase the length of the repayment period. [page 51044]
[sbull] Amending Sec. 682.211 to simplify the process by which a lender and a borrower in the FFEL Program may agree to a discretionary forbearance. [page 51044]
[sbull] Amending Sec. 682.402 to clarify that a State guaranty agency is not required to file a proof of claim in a bankruptcy filing and may instruct lenders not to file a proof of claim if filing a proof of claim would waive the State's sovereign immunity. [page 51045] [sbull] Amending Sec. 682.402 to provide that a guaranty agency may take up to 90 days to review a total and permanent disability discharge claim under the FFEL Program. [page 51045]
[sbull] Amending Sec. Sec. 668.183 and 668.193 to revise, for purposes of calculating an institution's cohort default rate, the definition of a defaulted loan. [page 51045]
[sbull] Amending Sec. 685.102 to modify the provisions governing the expiration of a Master Promissory Note in the Direct Loan Program. [page 51046]
The August 8, 2002 NPRM included proposed rules for the Institutional Eligibility Under the Higher Education Act of 1965, as Amended; Student Assistance General Provisions; General Provisions for the Federal Perkins Loan Program, Federal WorkStudy Program, and Federal Supplemental Educational Opportunity Grant Program; FWS Programs; FFEL Program; Direct Loan Program; Federal Pell Grant Program; and GEAR UP regulations.
In the preamble to the August 8, 2002 NPRM, the Secretary discussed
on pages 51720 through 51733 the major changes proposed to improve the
Federal student assistance programs. These included the following:
[sbull] Amending Sec. 600.8 to reflect that the statutory
provision that a branch campus must be in existence for two years
before seeking to be designated as a main campus applies only to
proprietary institutions of higher education and postsecondary vocational institutions. [page 51720]
[sbull] Amending Sec. Sec. 600.21, 600.31, and 668.174 to provide clarification and additional flexibility to the change of ownership provisions by expanding the definition of family members and broadening the transactions that are not considered to be a change of ownership. [page 51720]
[sbull] Amending Sec. Sec. 668.2, 668.3, and 668.8 to remove the socalled ``12hour'' rule that defined a week of instructional time for credit hour nonterm and nonstandard term educational programs. [page 51720]
[sbull] Amending Sec. Sec. 668.4, 682.603, 685.301, and 690.75 to revise the definition of payment period for credit hour nonterm educational programs and to clarify the definition of a payment period when a student withdraws and then returns to school. [page 51721] [sbull] Amending Sec. 668.14 to clarify the statutory program participation agreement provision concerning incentive payment restrictions. [page 51722]
[sbull] Amending Sec. 668.22 to clarify when an institution is considered to be one that is required to take attendance for purposes of determining a student's last date of attendance. [page 51725] [sbull] Amending Sec. 668.22 to simplify the definition of a leave of absence and to allow for multiple leaves of absence not to exceed 180 days in any 12month period. [page 51726]
[sbull] Amending Sec. Sec. 668.35, 673.5, and 690.79 to provide consistent requirements for handling Title IV overpayments, including a provision under which, in most cases, a student who owes an overpayment of a Title IV grant or loan of less than $25 does not lose eligibility for additional Title IV aid. [page 51726]
[sbull] Amending Sec. Sec. 668.32 and 668.151 to eliminate the provision that limits the duration of a passing score on an approved abilitytobenefit (ATB) test to 12 months before a student initially receives Title IV aid. [page 51728]
[sbull] Amending Sec. 668.164 to clarify when an institution is required to make a late disbursement and to provide increased flexibility for an institution to make a late disbursement to a student. [page 51728]
[sbull] Amending Sec. 668.165 to eliminate the requirement that an institution must confirm the receipt of a notice sent electronically to a student or parent. [page 51730]
[sbull] Amending Sec. Sec. 668.171 and 668.173 to establish clear requirements for returning unearned Title IV program funds and the conditions under which an institution must submit a letter of credit if it does not return those funds in a timely manner. [page 51730] [sbull] Amending Sec. Sec. 675.2 and 675.21 to provide greater flexibility for the employment of FWS students by proprietary institutions. [page 51731]
[sbull] Amending Sec. 694.10 to remove language in the GEAR UP regulations related to the packaging of GEAR UP scholarships by institutions. [page 51732]
We strongly encourage the reader to refer to the preambles of both the August 6, 2002, and August 8, 2002, NPRMs for a full discussion of the topics proposed in those NPRMs and finalized in this document.
These final regulations contain a few changes from the NPRMs. We fully explain these changes in the Analysis of Comments and Changes elsewhere in this preamble.
Implementation Date of These Regulations
Section 482(c) of the HEA requires that regulations affecting programs under Title IV of the HEA be published in final form by November 1 prior to the start of the award year (July 1) to which they apply. However, that section also permits the Secretary to designate any regulation as one that an entity subject to the regulation may choose to implement earlier and the conditions under which the entity may implement the provisions early.
Note: Section 482 does not apply to the GEAR UP program (34 CFR part 694).
In response to our request in the NPRMs for suggestions on which provisions the Secretary should designate for early implementation, most of the commenters supported making all of the provisions available for early implementation at the discretion of the regulated entity. Therefore, consistent with the intent of this regulatory effort to reduce burden and to provide greater flexibility, the Secretary is using the authority granted him under section 482(c) to designate all of the regulations subject to that section included in this document for early implementation at the discretion of each institution, lender, guaranty agency, or state agency, as appropriate.
In accordance with the authority provided by section 482(c) of the HEA, the Secretary has determined that for some provisions, there are conditions that must be met in order for an institution, lender, guaranty agency, or state agency, as appropriate, to implement those provisions early. The conditions are
Provision: Sections 674.34 and 682.210 that modify the formula used by Title IV loan holders when calculating a borrower's eligibility for an economic hardship deferment.
Condition: Until the Secretary has announced the approval of revised deferment forms, loan holders must provide alternative methods by which borrowers provide them with the loan detail information needed to perform the calculation using the modified formula.
Provision: Section 682.210 that modifies the information that a borrower must provide to a loan holder when requesting an unemployment deferment.
Condition: Until the Secretary has announced the approval of a revised deferment form, loan holders must provide alternative methods by which borrowers certify their eligibility for an unemployment deferment under the revised rules.
Provision: Sections 674.2 and 674.16 that provide for a Master Promissory Note (MPN) in the Federal Perkins Loan Program.
Condition: Implementation cannot occur until the Secretary has announced the approval of the Perkins MPN.
Provision: Section 668.22 that clarifies when an institution is considered to be one that is required to take attendance.
Condition: An institution must apply these provisions to all students who withdraw on or after the institution's implementation of these regulations.
Provision: Section 668.22 that provides increased flexibility in the granting of leaves of absence under the Return of Title IV Funds regulations.
Condition: An institution must apply these provisions to all students who are granted a leave of absence on or after the institution's implementation of these regulations.
Analysis of Comments and Changes
The regulations in this document were developed through the use of negotiated rulemaking. Section 492 of the HEA requires that, before publishing any proposed regulations to implement programs under Title IV of the HEA, the Secretary obtain public involvement in the development of the proposed regulations. After obtaining advice and recommendations, the Secretary must conduct a negotiated rulemaking process to develop the proposed regulations. All proposed regulations must conform to agreements resulting from the negotiated rulemaking process unless the Secretary reopens that process or explains any departure from the agreements to the negotiated rulemaking participants.
These regulations were published in proposed form on August 6, 2002, and on August 8, 2002, following the completion of the negotiated rulemaking process. The Secretary invited comments on the proposed regulations by October 7 for both NPRMs. We received 32 comments on the August 6, 2002 NPRM and 55 comments on the August 8, 2002 NPRM. In addition to their general support of our efforts to simplify the regulations and to reduce regulatory burden on students, borrowers, institutions, lenders, and guaranty agencies, the overwhelming majority of the commenters on both NPRMs also expressed support for the individual proposals included in the NPRMs.
We also received several comments on changes in the negotiated rulemaking process. Most of the commenters expressed appreciation to the Department of Education (Department) for the new scope and structure of the negotiated rulemaking process. Some commenters, however, felt that the Department should have included representatives of certain other organizations in the negotiations, but did not question the constituencies identified. Other commenters expressed the view that the Department should have excludedand should exclude from future negotiationsindividuals or groups that failed to negotiate in good faith and blocked consensus. We note that all organizations had an opportunity to submit institutional nominees and to form coalitions within the constituency groups identified and all nominations were carefully considered to achieve a balanced product. In creating the negotiating committees, the Department encouraged nominations of individuals from coalitions of individuals and organizations representing the constituencies. Moreover, the Department encouraged nominations of individuals who are actively involved in administering the Federal student financial assistance programs or whose interests are significantly affected by the regulations. We, and most of the commenters, believe that the Department was successful in assuring that individuals directly involved in administering the Federal student financial assistance programs appropriately represented the constituencies. In structuring future negotiations, however, the Department will take the comments received into consideration.
An analysis of the comments and of the changes in the regulations since publication of the NPRMs follows. We group major issues according to subject, with appropriate sections of the regulations referenced in parentheses. Generally, we do not address technical and other minor changesand suggested changes the law does not authorize the Secretary to make.
Change of Ownership (Sections 600.21, 600.31, and 668.174)
Comments: One commenter requested that the preamble discussion clarify that a transfer by an owner to a family member does not require the family member acquiring the institution to have previously worked there.
Discussion: The commenter is correct that the exception does not require a family member of the owner to have worked at the institution.
Definition of Academic Year``12Hour Rule'' (Sections 668.2, 668.3, and 668.8)
Comments: Most of the comments we received supported the proposed change that would eliminate the socalled ``12hour'' rule for determining a week of instructional time for credit hour nonterm and nonstandard term educational programs. Most commenters were very supportive of the proposal to use a single standard for all educational programs by extending the current ``oneday'' rule used for termbased and clock hour programs to credit hour nonterm and nonstandard term programs. One commenter specifically noted that the 12hour rule acted as an impediment to increasing access to higher education. Others noted that the 12hour rule was at odds with the educational advantages that flexible program calendars and formats, including webbased programs, provide to working adults. Two commenters noted that the Webbased Education Commission, chartered by the Higher Education Amendments of 1998, called for the elimination of the 12hour rule. Another commenter noted that the House of Representatives' Committee on Education and the Workforce called the 12hour rule ``outdated and obsolete.'' Finally, a commenter, in support of the proposed change, agreed that the 12hour rule sometimes results in disparities in the amount of Title IV, HEA program funding that students receive for the same amount of academic credit.
Discussion: We appreciate the commenters' support.
Comments: A number of commenters expressed concern with the proposal or requested that we not proceed with this change to the regulations. None of these commenters suggested alternatives or modifications to the proposal that was included in the NPRM.
Several commenters suggested that the issue should await the
reauthorization of the HEA, so that Congress could consider it in
conjunction with other issues related to distance and other
nontraditional modes of instruction. One commenter noted that an
independent study of the use of the credit hour in postsecondary
education was being undertaken and that the results of that study could
help inform Congress on this and related issues. One commenter specifically
stated that Congress should address issues of cost of attendance and disbursement schedules for students enrolled in nontraditional programs.
Discussion: We created the oneday rule and the 12hour rule to implement the statutory condition that an academic year consist of at least 30 weeks of instructional time. We believe that the 12hour rule had many unintended consequences and believe that one single standard is preferable for the reasons we stated in the preamble to the August 8, 2002 NPRM. Since the original establishment of the rule was a regulatory action, we believe that it does not require any legislative action. Therefore, we see no need to wait for Congress to deal with this issue in the next reauthorization of the HEA. This change will allow Title IV, HEA program eligibility to be determined on the same basis regardless of how a student's academic program is structured. Thus it provides for consistent and equitable treatment for individuals seeking a postsecondary education. We note that nothing prevents Congress from taking further action on this or any other issue. Finally, we do not see the change to the oneday rule from the 12hour rule as having any effect on how Congress should address issues of cost of attendance and disbursements in nontraditional programs.
Comments: One commenter suggested that changing from the 12hour rule to the oneday rule would add a new category of eligible programs, and therefore a new group of eligible students who would compete with students in more traditional programs for scarce Title IV grant funding.
Discussion: We disagree with the commenter. Programs that previously were covered by the 12hour rule were eligible to participate in the Title IV, HEA programs. Therefore, we do not believe that this change will result in an increased number of students receiving Title IV assistance. Under the oneday rule, students enrolled in those programs would be able to receive the same amount of assistance that students in termbased programs currently do.
Comments: A few commenters disagreed with the proposal to eliminate the 12hour rule, based upon their view that, while not perfect, the requirement that a nonterm or nonstandard term academic program include at least 12 hours of instruction per week provides some assurance that the program provides sufficient educational content to make the student's and taxpayer's investment worthwhile. One commenter questioned whether educational quality can be measured by time, particularly given new technological delivery systems. However, the commenter felt that it would be inappropriate to eliminate the 12hour rule at this time because matters of educational quantity/quality need further study. One commenter, representing several consumer law advocacy organizations, opposed the elimination of the 12hour rule, suggesting that it currently provides a quantitative method to measure the quality of an academic program. The commenter also stated that the proposed change would encourage some institutions to reduce program content without a commensurate reduction in tuition and other charges.
Discussion: We disagree with the commenter that the 12hour rule provided any assurance that institutions would provide a minimum quantity of education to warrant support under the Title IV, HEA programs. Hours of regularly scheduled instruction are not the exclusive measure of the quantity of education provided in a postsecondary educational program. For example, in certain educational programs, research papers and projects may make up a considerable portion of that program, and the work associated with carrying out those papers and projects would not be considered as instructional hours under the 12hour rule or the oneday rule. We believe that the oneday rule is adequate for programs offered in traditional terms and have no evidence to suggest that it is inadequate for programs offered in nonstandard terms and nonterms.
The 12hour rule was established to measure educational quantity,
not educational quality. It was established to implement the statutory
requirement that an academic year for Title IV, HEA program purposes
had to contain at least 30 weeks of instructional time, which in turn
was enacted for the purpose of determining how much Title IV, HEA
program funds a student could receive. As we noted in the preamble to
the August 8, 2002 NPRM, we believe that there are adequate safeguards
in place to ensure program integrity, such as the changes to the
definition of a payment period made by this final rule, the clockhour/
credithour conversion regulations, and program monitoring by
accrediting agencies. Finally, we are aware of no evidence that the
proposed change would encourage some institutions to reduce program content.
Comments: One commenter suggested that our statement in the preamble to the August 8, 2002 NPRM that the clockhour/credithour conversion regulations provide adequate safeguards is questionable since those requirements do not apply to programs that are two years or longer in length and lead to a degree. The commenter stated the belief that the existence of what was perceived to be ``lowcontent degree programs'' offered by forprofit institutions demonstrates that the clockhour/credithour conversion is not as valuable as we had stated.
Discussion: We disagree with the commenter because, based upon our
experience with the clock/credit hour conversion controversy, the
problems that needed to be addressed were found in shortterm
vocational programs, not in associate and higher degree programs.
Moreover, we have no evidence that any institutions have reduced
educational content in educational programs that lead to associate and higher degrees.
Comments: A commenter representing accrediting agencies asked for clarification as to whether the change from the 12hour rule to the oneday rule will impose any additional responsibilities on those agencies or on the process by which the Secretary recognizes accrediting agencies.
Discussion: No additional regulatory requirements are being placed on accrediting agencies as a result of this change.
Comments: Two commenters requested specific clarification as to what exactly constituted a day of instruction. One of those commenters asked how much time during each day must actually be spent on instruction. The other commenter asked specifically how one day would be counted for a program offered online. That same commenter suggested that we make it clear that the oneday rule did not have to be met on a weekbyweek basis, but could be met on average. That is, the requisite number of days must be met over the course of the program.
Discussion: We do not believe it is appropriate for the Department to limit institutional flexibility by establishing a rigid definition of how many hours of instructional time must be included in order for a day to be considered a day of instruction. We agree with the commenter who suggested that the measure should be whether the institution can demonstrate that the activities that make up a day of instruction are reasonable in both content and time. We also will rely upon the determination of the relevant accrediting agency in this regard.
We disagree with the commenter who suggested that the oneday rule did not
require one day each week but could be met by the program having an average of one day per week over the course of the program. The basis for the oneday rule is the requirement contained in section 481 of the HEA that states that an academic year must contain at least 30 weeks of instructional time. The oneday rule simply defines a week of instructional time as one that includes at least one day of instruction or examinations. The regulations make it clear that a week is a consecutive sevenday period. Therefore, a week in which there is not at least one day of instruction or examination cannot be counted as one of the 30 weeks of instructional time required by the statute. In order for a program to meet the 30 weeks of instructional time requirement, it must include at least 30 separate weeks in which at least one day of instruction or examination occurs.
Payment Periods (Sections 668.4, 682.603, 685.301, and 690.75)
Comments: One commenter was uncertain whether the proposal to require a payment period to be made up of both the requisite number (usually half) of credit hours in an academic year or program, and the requisite number (usually half) of weeks in the academic year or program was to be applied to both credithour programs with terms and credithour programs without terms.
Discussion: The proposal applies only to credithour programs without terms.
Comments: A number of commenters supported the Department's proposal that students who withdraw from an institution during a payment period and then return within 180 days to the same program remain in the same payment period. But one commenter wondered what would happen when the student returns, and thus the resumption of the payment period, was in a different award year. The commenter suggested that, if some of the funds for the payment period were to be paid from a different (new) award year, they should be a percentage of the aid that would have been scheduled for that payment period in the new award year, equal to the percentage of the original payment period amount that was not disbursed or returned from the initial period of attendance.
Discussion: A student who was originally enrolled in a payment period that began, and was scheduled to end, in one award year could return after the end of that award year (June 30). However, the intent of these regulations is that such a student is considered, upon his or her return, to be in the same payment period. Therefore, any Title IV program funds that will be disbursed to the student should be paid from the original award year regardless of whether the resumption of the payment period is in a new award year. Generally, the original payment for the payment period would have come from the earlier award year and any new disbursements would be from that same year. Of course, if the original payment period had been a crossover payment period (one that was originally scheduled to begin in one award year and end in the following award year) and the institution had paid (or planned to pay) the student from the second award year, then the resumption of the payment period and any required disbursements would remain in the second award year.
Finally, even if the student's absence and subsequent return causes
more than six months of the recalculated payment period to fall into
the second award year, we will still consider that the institution's
original decision to place the payment period in the first award year
remains valid based on the fact that, at the time of that original
choice, less than six months of the payment period was scheduled to fall into the second award year.
Comments: With regard to the student's withdrawal and subsequent return (within 180 days) to the same program, one commenter asked whether, if aid had not been disbursed during the original enrollment, credits earned for the entire payment period, both those enrolled in before the withdrawal and those enrolled in after the return, could be included in determining payment eligibility.
Discussion: The regulation addressing the situation in which a student withdraws from a program and then returns to that program within 180 days applies only to clockhour programs and credithour programs without terms. For those programs, the regulations define a payment period in a way that generally requires the clockhours or credithours in one payment period to be completed before the next payment period begins. Further, students in those payment periods are generally paid for onehalf of the program or academic year, as appropriate, at a time. Thus, regardless of whether the student had already been paid for a certain number of clock or credithours before the student's withdrawal, upon the student's subsequent return to the same program within 180 days, the institution would not be adding hours to the payment period, but would simply be keeping the student in the same payment period (consisting of the same number of clock or credit hours) he or she was in before withdrawing. Then, upon completion of the hours (and weeks for a credithour without terms program) in that payment period, the student would advance to the next payment period.
Comments: A number of commenters asked how a Return of Title IV Funds calculation would be performed if a student withdrew from a program during a payment period and returned to that program within 180 days, and then withdrew a second time during that same payment period.
Discussion: When a student withdraws (the first time) without
completing the payment period, a Return of Title IV Funds calculation
is performed. If the student returns to the program within 180 days of
his or her initial withdrawal, the student is put back into the same
payment period he or she withdrew from, and any Title IV funds that the
student or institution returned to the Title IV programs or to a lender
for that payment period as a result of the earlier withdrawal are
restored to the student. If the student then withdraws from the
institution again during that same payment period, a new Return of
Title IV Funds calculation, based on the second withdrawal date, would
be performed using the full payment period and the full amount of Title IV aid for the payment period.
Comments: One commenter raised general questions about the way payment periods are determined for programs that measure progress in credit hours but do not use terms. The commenter suggested that there should not be any rigid rules for such programs, but that the institution should have flexibility in determining the length and timing of a student's payment period based upon the program length and a student's enrollment pattern.
Discussion: The changes proposed in the August 8, 2002 NPRM and finalized in this document do not address the entire concept of payment periods, but instead only relate to two issues: (1) For nonterm credit hour programs, requiring a payment period to include, in addition to half the number of credits in the academic year, program, or remainder of the program, also half the number of weeks in that period, and (2) guidance on the treatment for a student who withdraws from a clockhour or credithour nonterm program, and then returns to school.
Therefore, since a more comprehensive review of payment [[Page 67053]]
periods was not included in either the negotiated rulemaking process that led to the August 8, 2002 NPRM or in the proposal presented in the NPRM, we do not believe that it would be appropriate to make additional changes to the payment period regulations at this time.
Comments: One commenter asked whether an institution should remove costs for the period that the student was out of school in those cases where the student withdrew from an institution and returned within 180 days, and was worried that if that were done the student might not qualify for the original loan amount once he returned to the institution.
Discussion: The cost of attendance would be the costs associated
with the original period before the student withdrew. Once the student
has withdrawn and then returned to the same program within a 180day
period, the regulation states that the student remains in the same
payment period. The cost of attendance for such a student returning to
the same program within 180 days must reflect the original educational
costs associated with the payment period from which the student withdrew.
Comments: One commenter suggested that if a student withdraws but returns to the institution during the period in which the institution is required to return funds under the Return of Title IV Funds calculation, the institution would not have to return any funds or notify the lender of the enrollment change. In essence, the student would be retroactively granted a leave of absence.
Discussion: If a student returns to the institution before the
Title IV funds are returned, the institution is not required to return
the funds. However, Sec. 668.22(j) requires an institution to return
unearned funds for which it is responsible as soon as possible, but no
later than 30 days after the date of the institution's determination
that the student withdrew. Therefore, an institution is expected to
begin the Return of Title IV Funds process immediately upon its determination that a student has withdrawn.
Comments: One commenter stated that it was his understanding that students who withdraw and return after 180 days, or transfer to new programs within any timeframe, have their payment periods restarted, and that this meant that these students would not have to complete the credits that they were already paid for before they could receive additional student aid payments.
Discussion: The regulation addresses the determination of payment
periods for students who have withdrawn and either returned to the same
program after 180 days, or returned to another program within any
timeframe. The regulation specifies that students who have withdrawn
and either returned to the same program after 180 days, or returned to
another program within any timeframe start a new payment period.
However, a student's eligibility for additional Title IV funds may be
subject to a variety of limitations associated with the aid the student
received during the most recent period of attendance. For example, in
the Federal Pell Grant Program, a student may never receive more than
the student's scheduled annual award. In the FFEL Program, there are
limitations imposed by annual loan limits, the existence of crossover loan periods, and overlapping award years.
Comments: A couple of commenters asked for further clarification of the payment period provisions as they relate to the Return of Title IV Funds provisions and various Title IV program provisions.
Discussion: We will provide additional clarification on the
applicability of these changes through appropriate Department publications after publication of these final regulations.
Program Participation Agreement (Section 668.14)
Comments: The vast majority of commenters supported the proposal
that came out of the negotiated rulemaking sessions to establish safe
harbors that institutions could use to avoid the statutory prohibition
against making incentive payments to recruiters and other covered personnel.
Comments: Some commenters opposed any change to the current regulations dealing with incentive compensation. They believed that the proposed regulations were not authorized under section 487(a)(20) of the HEA, were ambiguous, and were burdensome to institutions.
Discussion: We disagree with the commenters. With regard to the first point, we believe that the regulations lawfully implement section 487(a)(20) of the HEA. As indicated in the preamble to the proposed regulations, the Congress recognized that if given a strictly literal interpretation, section 487(a)(20) of the HEA could be interpreted to cover almost every compensation arrangement involving a student's ultimate admission to a postsecondary institution. As a result, when enacting section 487(a)(20) of the HEA in 1992, the conference report resolving the different House and Senate versions of the Higher Education Amendments of 1992 indicated that the statutory words ``directly'' and ``indirectly'' in section 487(a)(20) of the HEA did not imply that institutions could not base salaries or salary increases on merit. Thus, Congress recognized that the scope of section 487(a)(20) of the HEA had limits, even though that section precluded incentive payments based directly or indirectly on success in securing enrollments.
Consistent with this clarification of legislative intent, we based the proposed safe harbors on a ``purposive reading'' of section 487(a)(20) of the HEA. This purposive reading is based upon our view that Congress enacted this provision with the purpose of preventing an institution from providing incentives to its staff to enroll unqualified students.
In viewing the scope of section 487(a)(20) of the HEA through this purposive reading, we determined that various payment arrangements constituted legitimate business practices that did not support the enrollment of unqualified students and therefore did not fall within the scope of section 487(a)(20) of the HEA. Making these determinations is within the scope of the Secretary's authority of interpreting the statutory provisions he is charged with administering.
With regard to the commenters' other two points, we agree with the
vast majority of commenters that, rather than being ambiguous, the safe
harbors clarify the current law for most institutions by setting forth
specific payment arrangements that an institution may carry out that
have been determined not to violate the incentive compensation
prohibition in section 487(a)(20) of the HEA. Moreover, no burden is
placed upon an institution that uses a payment arrangement set forth in one of the safe harbors.
Comments: The commenters who felt that the regulations were not
authorized under section 487(a)(20) of the HEA also felt that any
change to the current regulations would allow unscrupulous institutions
to engage in the kinds of improper recruiting activities that gave rise
to section 487(a)(20) of the HEA. They also felt that there was no
demonstrated need for any change to the current regulations covering the
incentive compensation prohibition, and that any change should be made through legislation during the next HEA reauthorization.
Discussion: We believe that the primary purpose of the regulatory safe harbors is to provide guidance to institutions so they may adopt compensation arrangements that do not run afoul of the incentive compensation prohibition contained in section 487(a)(20) of the HEA. The safe harbors are based on comments we received from institutions during the FED UP initiative that requested that we provide clearer and more detailed guidance regarding this topic, suggestions by negotiators, and numerous questions we have received from institutions during the last eight years. We believe that institutions need this guidance now, and therefore it is neither necessary nor desirable to wait to make changes legislatively during the next HEA reauthorization.
Finally, we do not agree with the commenters that the safe harbors will allow unscrupulous institutions to engage in the kinds of improper recruiting activities that took place during the 1980s and early 1990s. As the commenters noted, during that period, institutions would recruit abilitytobenefit students who were not qualified to enroll in their institutions and keep the Title IV, HEA program funds those students received. That result is no longer possible today.
The incentive compensation prohibition is only one of the remedies that Congress has enacted to preclude such results. First, most of those unscrupulous institutions were terminated from participating in the Title IV, HEA programs because of their high cohort default rates. Second, there is a strengthened abilitytobenefit process that walls off institutions from the process and has higher standards of judging a student's abilitytobenefit. Third, if an institution enrolls unqualified students who then drop out, the institution may only keep Title IV, HEA program funds that the student has earned and must return unearned funds under the Return of Title IV Funds rules set forth in Sec. 668.22. Fourth, under the default rate termination provisions, the institution would put its continuing eligibility to participate in the Title IV loan programs in jeopardy if their unqualified students fail to repay their loans. Finally, an institution could have its eligibility terminated if it misrepresents its programs to students.
Comments: A commenter asked about the interrelationship between the various safe harbors.
Discussion: The 12 safe harbors are divided into two categories. The first category relates to whether a particular compensation payment is an incentive payment. The first safe harbor addresses this category by describing the conditions under which an institution may pay compensation without that compensation being considered an incentive payment.
The second category relates to the conditions under which an institution may make an incentive payment to an individual or entity that could be construed as based upon securing enrollments. The remaining 11 safe harbors address this category by describing the conditions under which such a payment may be made. These 11 safe harbors reflect our view that the individuals and activities described in a safe harbor are not covered by the statutory prohibition.
With regard to the latter 11 safe harbors, if an incentive payment
arrangement falls within any one safe harbor, that payment arrangement is not covered by the statutory prohibition.
Comments: Several commenters suggested that the Secretary include additional safe harbors in the final regulations and provided examples of safe harbors that they would like to see added.
Discussion: We proposed 12 safe harbors based upon the suggestions of the negotiators and questions we received regarding the incentive compensation prohibition. We intended that these safe harbors be clear and uncomplicated. As a result, we believe that institutions can use these safe harbors as a workable framework to determine if their payment arrangements violate the incentive compensation prohibition.
Comments: A commenter suggested that we discuss the penalties that apply if an institution violates the incentive compensation prohibition.
Discussion: We believe that a discussion of the penalties for violating the incentive compensation prohibition are outside the scope of this exercise in developing final regulations for the provision.
Comments: A commenter indicated that the safe harbors should specifically indicate that an institution could pay an incentive payment to a person or entity that was in the safe harbor.
Discussion: The last 11 safe harbors describe situations under which an institution can make an incentive payment to an individual or entity based upon success in securing enrollments. Therefore, it is not necessary to include that statement in each safe harbor. For this very reason, as noted below, we will eliminate the restriction in the last sentence in the ``clerical preenrollment'' safe harbor, Sec. 668.14(b)(22)(ii)(F).
Changes: See discussion under PreEnrollment Activities. Adjustments to Employee Compensation (Section 668.14(b)(22)(ii)(A))
Comments: Many commenters approved of our determination set forth in the first safe harbor that fixed compensation could include up to two adjustments in a twelvemonth period as long as no adjustment is based solely on success in securing enrollments. Some commenters believed that two adjustments were too many; that two adjustments during a 12month period was a loophole that institutions could use to bundle their bonuses and pay them as a salary adjustment.
Discussion: We believe that defining fixed compensation to include
up to two pay adjustments during a 12month period is not inconsistent
with standard business practice, particularly as this safe harbor
includes pay adjustments to an individual for any reason, including promotions.
Comments: Almost all commenters approved our determination that one cost of living increase that is paid to all or substantially all employees would not count as one of the two allowable adjustments. One commenter asked the effect of an employer policy that withheld costof living increases to poorly performing employees. Another pointed out that employers treat fulltime employees differently from parttime employees, and suggested that cost of living increases that are paid to all or substantially all fulltime employees not count as an adjustment in the safe harbor.
Discussion: We believe that if an employer has a written policy that indicates that cost of living increases are denied to poorly performing employees, that policy would not disqualify cost of living increases from being treated in the manner described in this safe harbor unless such a written policy has the effect of no longer applying the cost of living increase to ``all or substantially all'' employees, and other relevant factors reveal the increase to be tied to student recruitment and not within any of the prescribed safe harbors.
We agree with the commenters that employers often treat fulltime
employees differently from parttime employees, and therefore agree with the
commenters' suggestion that costofliving increases that are given to all or substantially all of an institution's fulltime employees would not be considered a compensation adjustment.
Changes: Section 668.14(b)(22)(ii)(A) is changed to reflect that cost of living increases that are given to all or substantially all of an institution's fulltime employees will not be considered a compensation adjustment.
Comments: Many commenters noted that salary adjustments could not be based solely on the number of students recruited, admitted, enrolled, or awarded financial aid, and asked whether the term ``solely'' was being used in its dictionary definition. If it was not, the commenters suggested a definition.
Discussion: In this safe harbor, the word ``solely'' is being used in its dictionary definition.
Comments: Commenters raised a series of questions concerning various aspects of fixed compensation, including how overtime should be treated, how employee benefits should be treated, and the effect under this safe harbor if some of an institution's employees are unionized and others are not.
Discussion: With regard to overtime and benefits, if the basic
compensation of an employee would not be an incentive payment, neither
would overtime pay required under the Federal Labor Standards Act.
Generally, the fact that some of an institution's employees are
unionized and others are not should have no bearing on this safe harbor.
Comments: One commenter asked about activities that recruiters could perform that would not be considered recruitment.
Discussion: There are a myriad of nonrecruitment activities that a
recruiter may engage in on a daytoday basis, but we do not believe
that it is practical nor necessary to provide an exhaustive list for purposes of this discussion.
Enrollment in Programs That Are Not Eligible for Title IV, HEA Assistance (Section 668.14(b)(22)(ii)(B))
Comments: Some commenters objected to this safe harbor, because they believed that the Secretary had no authority to establish it because section 487(a)(20) of the HEA does not cover incentive payments to enroll students in educational programs that are not eligible programs under the Title IV, HEA programs. Another commenter objected to the safe harbor because it would encourage institutions to promote private loans.
Discussion: We disagree with the commenters. The safe harbor is
authorized, as well as appropriate, because it informs institutions of
the scope of the coverage of the incentive compensation prohibition of
section 487(a)(20) of the HEA. Moreover, we believe that this safe
harbor will have no bearing on whether institutions promote private loan programs to students attending ineligible programs.
Contracts With Employers (Section 668.14(b)(22)(ii)(C))
Comments: Most commenters supported this safe harbor. The commenters recognized that the underlying rationale for the safe harbor was that an employer should have a significant stake in the education being offered its employees under a contract with an institution that uses a recruiter who receives an incentive payment. However, several commenters objected to the conditions that employers under this safe harbor had to satisfy. In particular, they objected to the conditions that an employer had to pay at least 50 percent of the tuition and fees charged its employees, and that recruiters have no contact with the employees. Some commenters recommended that these conditions be eliminated; that the employer/employee relationship itself provided a sufficient stake in the education being offered. Some commenters indicated that the percentage of tuition and fees that an employer had to pay should be a smaller percentage, while others indicated that the employer's stake in the education being offered could be demonstrated by other criteria. One commenter noted that literally no one could satisfy this safe harbor because a recruiter had to contact an employee in order to negotiate the contract. Another commenter recommended that Title IV, HEA program funds could not be used to pay the portion of the tuition and fees not paid by the employer.
Discussion: This safe harbor represents that, in general, business tobusiness marketing of employerprovided education is not covered by the incentive compensation prohibition. However, not all businessto business transactions are paid in the same manner, such as the straightforward payment by a company to an institution to educate its employees. This safe harbor deals with an iteration of that scheme; the payment of employees' tuition and fee charges by the employer under a contract arranged by an institution's recruiter who is paid an incentive.
In this safe harbor, the Secretary believes that the 50 percent requirement is a simple, straightforward standard to assure that an employer has a significant financial stake in the outcome of the education provided to its employees. This standard was supported by a majority of the negotiators. Therefore, we disagree with the commenters who suggested that this safe harbor be changed to allow an employer to pay less than 50 percent of its employees' tuition and fee charges.
With regard to the alternatives suggested by commenters, we believe
that they are too complicated for a safe harbor. With regard to
recruiter contact with employees, the contact that is prohibited does not include the contact necessary to obtain the contract.
ProfitSharing or Bonus Payments (Section 668.14(b)(22)(ii)(D))
Comments: Most commenters supported this safe harbor. However, one commenter objected to it because the commenter considered that the safe harbor could be manipulated. Several commenters pointed out that the safe harbor allowed a profit sharing plan to be limited to employees in an ``organizational level'' at an institution rather than the institution as a whole, and asked whether an organizational level in a multischool institution could be one of the institutions. Other commenters suggested that the definition of ``profit'' be defined as ``total profit resulting when total costs are subtracted from total revenue at the institution.'' One commenter noted that while the regulatory safe harbor required that profit sharing or bonus payments be provided to all or substantially all of an institution's fulltime employees, the preamble indicated that such payments had to be substantially the same amount, or based upon the same percentage of salary. The commenter recommended that the preamble requirement be eliminated as unnecessary. Moreover, if this condition is to be retained, the commenter proposed that percentage increases, like dollar increases, should also be substantially the same to all covered employees.
Discussion: We do not agree with the commenter who indicated that
this safe harbor could be manipulated to provide incentive payments to
recruiters under the guise of profit sharing because the payments must
be made to all or substantially all of the fulltime employees at one
or more organizational level at the institution. In response to [[Page 67056]]
comments relating to organizational level, we believe an
``organizational level'' at a multischool institution would be one of the institutions.
We do not believe that it is necessary to define the term ``profit'' in this safe harbor as it is a commonly used business term that needs no explanation.
With regard to the last comment, we agree that a safe harbor should be in the regulation itself rather than in the preamble. Contrary to the commenter's suggestion, we believe that the safe harbor for bonuses and profit sharing should require that the payments to employees be substantially the same amount or the same percentage of salary. We do not, however, see the need to allow percentage increases to be substantially the same. We believe that this safe harbor already provides significant flexibility particularly since institutions can provide different percentages of compensation based on employees' organizational levels.
Changes: Section 668.14(b)(22)(ii)(D) is changed to reflect that
the safe harbor only applies if the profit sharing or bonus payment is
substantially the same amount or the same percentage of salary or wages.
Compensation Based Upon Completion of Program (Section
Comments: Most commenters supported this safe harbor. However, several objected to it on the grounds that completion of an educational program is not a valid measure when the quality of an institution's programs is poor. One commenter, quoting from our preamble statement of April 24, 1994, when the current regulation was published, objected to the use of retention as a safe harbor, and also objected to the one year retention period as too short.
Discussion: As previously indicated, we believe that the purpose of the incentive compensation prohibition is to prevent institutions from enrolling unqualified students. We note that other legislative and regulatory requirements are designed to weed out institutions with poor quality programs. We agree with most of the commenters that a student who successfully completes an educational program in which he or she was enrolled means, for this purpose, that the student was qualified to attend the institution.
With regard to retention, we believe that the successful completion
of 24 semester or trimester credit hours, 36 quarter credit hours, or
900 clock hours of instruction also means that the student was
qualified to enroll at the institution. Moreover, as a general matter,
retention and completion of programs by students is a positive result that should be encouraged.
Comments: Several commenters requested that the measure of whether a student completes one year of a program should be time rather than credits earned. One commenter asked whether all the required credits or hours had to be earned at the institution, or could they include transfer credits, life experience credit, or credits earned through tests. Another commenter asked whether the student had to earn one academic year of credit within the institution's satisfactory progress standard, and another asked whether the 30 weeks of instructional time element of the definition of an ``academic year'' was included in this safe harbor. A commenter indicated that the safe harbor should indicate that retention for one year is a minimum requirement and institutions are free to establish longer periods. Finally, one commenter asked whether a recruiter could get paid a bonus for each year the student successfully completes, so that the recruiter can theoretically receive four years of bonuses for a student enrolled in a fouryear program.
Discussion: We believe that the appropriate method of measuring whether a student completes one academic year is by determining that the student has earned one academic year of credit rather than by not dropping out during a 12month period. Therefore, we do not agree with the commenters' suggestions to substitute time for credits earned. To answer the questions raised by the other commenters: All the credits have to be earned at the institution as a result of taking courses at that institution; we have not applied the 30 weeks of instructional time element of the definition of an ``academic year'' to this safe harbor. Thus, this safe harbor applies when a student earns, for example, 24 semester credits no matter how short or long a time that takes.
We agree with the commenter that the oneyear retention condition requirement is a minimum. Finally, if an institution so chooses, it may pay a recruiter a bonus for each academic year a student completes and not be in violation.
Changes: Section 668.14(b)(22)(ii)(E) is changed to reflect that the one academic year's worth of credit or hours must be earned at the institution.
PreEnrollment Activities (Section 668.14(b)(22)(ii)(F))
Comments: Most commenters supported this safe harbor. Some commenters objected to the requirement that the preenrollment activity had to be clerical in nature, with some noting that the clerical requirement was not in the proposed safe harbor itself, but was in the preamble discussion of the safe harbor. Some commenters concluded that the safe harbor described an individual rather than an activity, and based upon that interpretation, the commenters were concerned that recruiters could not be paid a bonus based upon their performance of preenrollment activities.
Some commenters requested that the list of preenrollment activities be expanded, and other commenters objected to the characterization that soliciting students for interviews is a recruitment activity rather than a preenrollment activity. Other commenters asked whether institutions could purchase leads to potential students for a flat fee from a third party under this safe harbor.
Discussion: We believe that one of the most important criterion for inclusion in this safe harbor is the clerical nature of the pre enrollment activities that are being performed. Limiting preenrollment activities to rote clerical activities helps to draw the line between recruiting and preenrollment activity. Therefore, we will incorporate this requirement into the regulations.
We disagree with the characterization that this safe harbor describes an individual rather than an activity. However, by the very job description, a recruiter's job is to recruit. Therefore, as a practical matter, it would be very difficult for an institution to document that it was paying a bonus based upon enrollments to a recruiter solely for clerical preenrollment activities.
We are not going to expand the list of acceptable clerical pre enrollment activities because no list will be allinclusive, and we believe that institutions can determine whether activities qualify as clerical preenrollment activities based upon the current examples. Contrary to the commenter's conclusion, we believe that soliciting students for interviews is a core recruiting activity. Finally, although we believe that buying leads from third parties for a flat fee is not a clerical preenrollment activity under this safe harbor, we believe that the activity is not covered under the incentive compensation prohibition. Buying leads from third parties for a flat fee is not providing a commission, bonus, or other incentive payment based directly or indirectly on success in securing enrollments.
Changes: Section 668.14(b)(22)(ii)(F) is changed to add the
requirement that preenrollment activities must be clerical in nature, and, for the reasons
stated earlier in connection with the general comments, we are deleting the requirement that compensation is not based upon the number of people actually enrolled.
Managerial and Supervisory Employees (Section 668.14(b)(22)(ii)(G))
Comments: One commenter objected to this safe harbor because the commenter believed that managers of recruiters and other covered persons should not be covered by the incentive compensation prohibition, and therefore should be included in this safe harbor. Other commenters objected to the preamble discussion of this safe harbor, where we indicated that an individual's occasional direct contact with students in the recruiting process would not turn that individual into a recruiter, because it would not necessarily be easy to determine whether an individual's involvement was occasional.
Discussion: As indicated in the preamble to the proposed
regulations, we believe that direct supervisors of recruiters and other
covered persons should be excluded from this safe harbor because their
actions have a direct and immediate effect on the recruiters and other covered persons.
Token Gifts (Section 668.14(b)(22)(ii)(H))
Comments: One commenter appreciated the increase in the cost of token gifts allowed under th
FOR FURTHER INFORMATION CONTACT
For provisions related to the Title IV loan programs (Perkins Loan Program, FFEL Program, and Direct Loan Program): Ms. Gail McLarnon, U.S. Department of Education, 1990 K Street, NW, (8th Floor) Washington, DC 20006, Telephone: (202) 2197048 or via the Internet: Gail.McLarnon@ed.gov.
For other provisions: Ms. Wendy Macias, U.S. Department of Education, 1990 K Street, NW, (8th Floor), Washington, DC, 20006, Telephone: (202) 5027526 or via the Internet: Wendy.Macias@ed.gov.
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