Institutional Eligibility; Student Assistance General Provisions; Federal Work-Study Programs; and the Federal Pell Grant Program

AGENCY:

Office of Postsecondary Education, Department of Education.

ACTION:

Final regulations.

SUMMARY:

The Secretary amends the Institutional Eligibility, the Student Assistance General Provisions, the Federal Work-Study (FWS) Programs, and the Federal Pell Grant Program regulations. These final regulations implement changes negotiated under the negotiated rulemaking process mandated by Congress under section 492 of the Higher Education Act of 1965, as amended, (HEA). These changes streamline the application, reapplication, and certification processes for institutions that wish to participate in the title IV, HEA programs and provide simplification and flexibility in other provisions of the regulations that apply to the title IV HEA programs.

DATES:

Effective Date: These regulations are effective July 1, 2001.

Implementation Date: The Secretary has determined, in accordance with section 482(c)(2)(A) of the HEA (20 U.S.C. 1089(c)(2)(A)), that institutions that administer title IV, HEA program funds may, at their discretion, choose to implement §§ 600.31, 668.5 and 675.19 on or after November 1, 2000. For further information see “Implementation Date of These Regulations” under the SUPPLEMENTARY INFORMATION section of this preamble.

FOR FURTHER INFORMATION CONTACT:

Mark Washington, U.S. Department of Education, 400 Maryland Avenue, SW., Room 3045, ROB-3, Washington, DC 20202-5447. Telephone: (202) 260-9321.

If you use a telecommunications device for the deaf (TDD), you may call the Federal Information Relay Service (FIRS) at 1-800-877-8339.

Individuals with disabilities may obtain this document in an alternative format (e.g., Braille, large print, audiotape, or computer diskette) on request to the contact person listed under FOR FURTHER INFORMATION CONTACT.

SUPPLEMENTARY INFORMATION:

On August 10, 2000 the Secretary published a notice of proposed rulemaking (NPRM) for Institutional Eligibility, Student Assistance General Provisions, Federal Work-Study Programs (FWS), Federal Family Education Loan (FFEL) Program, William D. Ford Direct Loan (Direct Loan) Program; and the Federal Pell Grant Program, in the Federal Register (65 FR 49134).

In the preamble to the NPRM, the Secretary discussed on pages 49135 through 49147 the major changes proposed in that document. These included the following:

• Revising §§ 600.20 and 600.21, amending §§ 600.10 and 600.31, and removing §§ 600.9 and 600.30 to streamline the application, reapplication and certification processes for institutions that wish to participate in the title IV, HEA programs (pages 49149-49152).
• Revising § 600.31 to clarify the reporting responsibilities for institutions that undergo a change of ownership that results in change of control (pages 49151-49152).
• Revising § 668.5 to expand the possibilities for institutions to create written agreements with certain other entities to have part or all of their eligible programs provided by those entities (pages 49152-49153).
• Adding flexibility in § 668.13 to the training requirements for institutional certification (page 49153).
• Revising in § 668.19 the process for obtaining a transfer student's financial aid history (page 49153).
• Revising § 675.19 to permit additional certification and record retention options for FWS program administration (pages 49153-49154).
• Providing in §§ 682.604 and 685.301 additional flexibility in the loan disbursement rules for students enrolled in non-traditional programs (page 49154).
• Clarifying in § 668.165 the notification requirements when title IV loan proceeds are credited to a student's institutional account (page 49154).
• Adding flexibility in § 682.207 to lender disbursement requirements and eligibility determinations for students receiving loan proceeds under the FFEL Program (page 49154).

In these final regulations, we make two significant changes from the regulations that we proposed in the NPRM published on August 10, 2000. First, we will require all institutions to report to us of their intent to add a location offering 50 percent or more of an eligible program, regardless of the type of institution. A small number of institutions—those that meet one or more of the specified conditions discussed later in the analysis of comments—will have to await our approval of the new location before disbursing title IV, HEA program funds to students at that location. Other institutions must report to us their intent to add additional locations, but are not required to wait for our approval of those locations.

Second, public institutions must report changes in governance to us within 10 days of their occurrence.

The Secretary published an NPRM on July 27, 2000, for parts 682 and 685 in the Federal Register (65 FR 46316). In the preamble to that NPRM, the Secretary discussed (on pages 46317-46320) proposed changes to the FFEL and Direct Loan regulations. In order to consolidate the final regulations for the FFEL and Direct Loan programs into a single Federal Register publication, those proposed provisions of parts 682 and 685 that were published in the August 10, 2000 NPRM are now included as a part of the final regulations that respond to the July 27, 2000 NPRM. We strongly encourage the reader to refer to the preambles from both of the NPRMs for a full discussion of these regulations.

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 (which begins July 1) to which they apply. However, that section of the HEA also permits the Secretary to designate any regulation as one that an entity subject to the regulation may choose to implement earlier. If the Secretary designates a regulation for early implementation, he may specify when and under what conditions the entity may implement it. Under this authority, the Secretary has designated the following regulations for early implementation:

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

These regulations may be implemented upon publication of this final rule. This means that if an institution is subject to loss of eligibility due to a change in ownership that results in a change of control, it may ask the Secretary to permit it to continue to participate in the title IV, HEA programs on a provisional basis, provided that the institution submits a materially complete application.

This early implementation also changes the definition of “ownership interests” to exclude certain institutional investors, and clarifies when a shareholder would be deemed a controlling shareholder for change of control issues.

Early implementation means that public institutions that experience a change in governance will not be considered to have undergone a change in ownership resulting in a change of control, but these institutions must report such changes within ten days of the occurrence.

Finally, early implementation means that the provisions that define more clearly ownership in a publicly-traded institution will be in effect.

Section 668.5—Written Arrangements To Provide Educational Programs

These regulations may be implemented by institutions upon publication of this final rule. This means that a school may use a single written arrangement with a study-abroad organization to represent agreements between the school and one or more foreign schools. Also, any of the eligible institutions that are parties to a written arrangement may make title IV calculations and disbursements and will not be considered third-party servicers.

Section 675.19—Fiscal Procedures and Records

These regulations may be implemented upon publication of this final rule. Institutions that administer the Federal Work-Study (FWS) Programs will now have the option to certify FWS timesheets in writing or electronically. If an institution elects to use an electronic certification option, it should be certain to use the appropriate safeguards, as outlined in the NPRM at page 49145.

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.

These regulations were published in proposed form on August 10, 2000, following the completion of the negotiated rulemaking process. The Secretary invited comments on the proposed regulations that were due by September 25, 2000, and we received thirty-three comments.

An analysis of the comments we received and of the changes we made in the regulations since publication of the NPRM follows.

We group major issues according to subject. We discuss other substantive issues under the sections of the regulations to which they pertain. Generally, we do not address technical and other minor changes—and suggested changes the law does not authorize the Secretary to make.

Section 600.20—Application Procedures for Establishing, Reestablishing, Maintaining, or Expanding Institutional Eligibility and Certification

Applying for Additional Locations (Permanent and Temporary)

Comments: Many commenters supported exempting public institutions from applying for approval to add an additional location at which 50 percent or more of an eligible program will be offered, if the additional location is properly licensed and accredited, and located within the same state as the main campus. Commenters opined that the exemption is warranted because the Federal government's interests are generally protected by sufficient oversight and systems of control at public institutions. Additionally, most of these commenters believed that sufficient financial backing by those governing public entities, and monitoring by accrediting agencies are suitable to ensure the academic quality of the location and to protect students who rely upon title IV assistance.

One commenter believed the exemption is appropriate because public institutions that have added locations in the past have not placed Federal funds at risk.

Another commenter generally supported the proposed exemption, but believed that the exemption should apply to an additional location even if the location is not in the same state as the main campus. That commenter believed that the reasons given by the Department for the proposed exemption for public institutions (sufficient oversight and financial backing by a public entity) are valid, regardless of whether the additional location is located in the same state as the main campus.

Six commenters did not support requiring public institutions to report a new location. The commenters contended that, because we have virtually always approved additional locations for public institutions, required reporting would create unnecessary paperwork and a potential for delay. Some of the commenters also believed that the minimal risk represented by public institutions delivering title IV, HEA assistance made reporting unnecessary.

Another commenter supported requiring public institutions to inform us of a new location. That commenter felt that six years between recertification cycles for participation in the student aid programs is too long for locations to go unreported. The commenter believed that those entities charged with oversight will improve the quality of such oversight, by having an awareness of such locations. The commenter noted that these benefits appear to outweigh the minimal burden of reporting the locations.

Several commenters opposed our proposal exempting public institutions from applying for approval of an additional location. These commenters felt that treating public institutions differently from other institutions is unwarranted, and would give an unfair advantage to public institutions by eliminating potential delays. The commenters believed that one set of criteria should be developed for all institutions.

Two commenters felt that the unfair competitive advantage referred to above would not serve the needs of students nor the public interest, because it would not produce the best range of educational offerings or encourage the most efficient use of resources. Another commenter noted that in some highly competitive disciplines, such as computer science, information technology, and business administration or executive management, even a 35 day head start (our stated goal for the length of time within which we will process applications for approval) constitutes a significant advantage in terms of public relations and market share.

Three commenters believed that there are many poorly performing public institutions and that such an exemption would unnecessarily put taxpayer funds at risk. One of these commenters was specifically concerned that the proposed exemption for public institutions would permit higher-risk public institutions, such as those on provisional certification or the reimbursement payment method, to open new locations and disburse title IV aid without our approval. The commenter felt that this scenario would contradict the purpose of provisional certification and reimbursement, which is to permit us to more closely monitor higher-risk institutions. The commenter felt that it was arbitrary and capricious to allow such high-risk public institutions to open additional locations without our approval, while denying this benefit to non-public institutions with strong records of administrative capability and regulatory compliance.

Another commenter stated that there was no publicly available evidence to support the contention that all public institutions provide better oversight and control, plan better, and have more fiscal resources than institutions in other sectors. The commenter was convinced that there is evidence to the contrary, such as the placement of public institutions on provisional certification, the failure of public institutions to meet their unique financial responsibility standards, and those public institutions with high student loan default rates.

Some commenters that did not support the exemption for public institutions suggested a number of general criteria that should be used in determining whether any institution qualifies for an exemption. One commenter suggested that the criteria should reward those institutions that have demonstrated appropriate administrative capability. Another commenter felt that the Federal interest in additional locations should focus on an institution's maintenance of quality in their educational programs. The commenter stated that we seemed to acknowledge that the quality of programs is the issue by our statement in the preamble to the NPRM that, “some non-public institutions grew so rapidly that the integrity of their educational and student aid programs was compromised”.

Other commenters offered specific ideas about criteria that should be used to determine if any institution should be granted an exemption from reporting additional locations. One commenter suggested that an exemption should be given to an institution that: satisfies the criteria we proposed in § 600.20(d)(2) for temporary locations, is fully certified, meets the general standards of financial responsibility, has no late audits or significant audit findings in the last two years, has no significant program review liabilities, and was not subject to a limitation, suspension, or termination action within the last three years. Another commenter generally agreed with the suggested criteria but instead of supporting the proposed criteria in § 600.20(d)(2), suggested the following criteria: the institution has full regional or national accreditation, would not be subject to a loss of eligibility under § 668.188 if it adds a new location, and has not added more than 10 locations at which it offered 50 percent or more of an educational program since it was last certified to participate in the title IV programs. The commenter also believed that to qualify for an exemption, an institution should have no late audits or significant audit findings in the last five years and never have been subject to a program review liability.

Another commenter believed that it is appropriate for us to learn about temporary locations that have been opened through annual compliance audits. The commenter did not feel that a separate notification would be needed.

However, another commenter representing the largest professional association of certified public accountants disagreed. In particular, the commenter stated that we should require institutions to submit information on temporary locations directly to us. The commenter noted that if we want independent third-party assurances on an institution's management's assertions regarding the institution's compliance with such a requirement, compliance objectives and associated auditor reporting could be developed as part of the annual compliance audit.

One commenter supported the provision that would exempt a non-public institution from applying for approval of licensed and accredited temporary locations if it met the proposed criteria, including the limitation on adding no more than six locations offering 50 percent or more of a program since it was last certified. Another commenter felt that it is more appropriate to focus on the number of such locations established in a short period of time rather than over the entire certification period. The commenter recommended that no more than two such locations should be added during any 12-month period, and that for any more locations an institution should be required to obtain our approval prior to disbursing any title IV funds to students attending those locations.

Another commenter suggested that the criteria for exemption of temporary locations should include a certification from the institution's Chief Executive Officer that the institution currently meets all applicable federal requirements regarding financial and administrative capability (based on the institution's most recent audited financial statement and compliance audit, recent regulatory reviews, and program participation agreement). The commenter believed that no more title IV funds should be disbursed to students at a temporary location after the end of the first year, until we have approved the location, unless the institution submitted a materially complete application for our approval at least 35 days before the end of the period.

The commenter also felt that the proposed requirement that the institution must not have acquired the assets of another institution that formerly provided programs at that site was stated in an overly broad manner. Instead, the commenter recommended that the institution must not have acquired a substantial amount of the assets of another institution that formerly provided programs at that site within the past 12 months. The commenter believed that this would address significant, recent acquisitions or transfers of assets that we need to be aware of without providing for unnecessary scrutiny of insignificant transactions that do not pose concern.

Finally, one commenter noted inconsistencies between the proposed regulatory language for § 600.20(d)(2)(ii) (which refers to locations at which more than 50 percent of a program is added) and the description of the proposed provision (which refers to locations as “offering at least 50 percent of an educational program” in one place and “offered more than 50 percent of an educational program” in another). The commenter believed that the correct wording is “at least 50 percent”.

Discussion: We appreciate the careful analysis and consideration given to these issues by the commenters. With regard to the last comment, the commenter is correct that we inadvertently used imprecise language in describing the requirement when we published the NPRM. The correct term, and the one used in the regulations is “50 percent or more”.

We carefully considered the comments received on both the proposal to exempt public institutions from applying for approval of an additional location where the institution will offer 50 percent or more of an eligible program, and the proposal to exempt all institutions from the requirement to apply for approval of an additional location if it will be in operation for less than 12 months.

We agree that the approach to additional locations in the NPRM had the potential to bar some high performing, non-public institutions from the benefits and incentives we desire to make available to those who administer our programs properly.

We stated in the NPRM our belief that the proposed regulations would enhance efficiency and provide administrative relief for a sizable segment of the population of eligible institutions, by not requiring them to report locations they add until the next scheduled recertification. Upon consideration of the comments, we believe there is an opportunity to meet that objective in a manner that may benefit more schools than we initially anticipated. This is possible if we focus on reviewing and approving those institutions that give us clear reasons for special attention, while allowing others that demonstrate good compliance and stability to merely report to us of their actions. Thus, we can preserve our desire to provide regulatory and administrative relief where merited by compliance and performance. This flexibility is supported by a set of standards that identifies those schools that we should review before approving their ability to disburse title IV, HEA funds at a new location, regardless of the type of institution.

Based upon the comments received on these issues and our plans to improve the efficiency of the reporting process, we are persuaded that it is prudent and not particularly burdensome, to require all institutions report to us if they wish to disburse title IV, HEA program funds to students enrolled at a new additional location, at which 50 percent or more of an eligible program will be offered.

For the purposes of these regulations, reporting consists of submitting an electronic application which provides specific information and required supporting documentation regarding the new location.

While all institutions must report their new locations, only those that meet certain criteria are required to wait for our approval before disbursing title IV, HEA program funds to eligible students at those locations. A full explanation of those criteria follows later in this discussion. For the purposes of these regulations, approval consists of the Secretary's written response to an application, granting specific permission to an institution to disburse funds to students enrolled at the specified location. If an institution is not required to wait for our approval, it must simply report to us through the electronic application process prior to disbursing title IV, HEA program funds.

These provisions replace the proposed across-the-board exemption from reporting or approval for public institutions and the exemption for temporary locations included in the NPRM.

Under these new provisions, no distinction is made between temporary and permanent locations. All institutions are required to report to us any new location where 50 percent or more of an eligible program is offered. The report must include supporting documentation and be provided before the institution disburses title IV, HEA funds to students at that location. Those institutions that are only required to report to us before they disburse federal student aid need not wait for our approval. However, those institutions that meet any of the criteria discussed below must report to us and then wait for our approval before they can disburse title IV, HEA program funds to eligible students at the new location.

We will only require an institution to apply and wait for our approval to disburse title IV, HEA program funds at locations where they offer 50 percent or more of an eligible location if the institution: (1) Is provisionally certified, (2) is on the reimbursement or cash monitoring system of payment, (3) has acquired the assets of another institution that provided educational programs at that location during the preceding year, and the other institution participated in the title IV, HEA programs during that year, (4) would be subject to a loss of eligibility under the cohort default rate regulations at § 688.188 if it adds that location, or if (5) the Secretary previously prohibited it from disbursing title IV, HEA program funds to students enrolled at an additional location before the Secretary notifies it that the location is eligible to participate in the title IV, HEA programs.

Under the last criteria we may preclude an institution from adding locations due to financial, administrative, compliance or other concerns about an institution. In this case, the institution will receive a written notice that sets out the reason it will be required to apply for approval for additional locations. The institution may request reconsideration of that decision if it shows there are material errors in the facts we considered in making our determination.

With regard to the criteria related to provisional certification, the Secretary plans to publish a change to the provision in 34 CFR 668.16(m) that relates to placing an institution on provisional certification if it has a cohort default rate in the FFEL and/or Direct Loan programs of 25 percent or greater. That change will provide more flexibility to the Secretary in choosing whether or not to place such an institution on provisional certification.

We believe that many more institutions will benefit from the provision that they must only report to us and not await our approval, since it allows them to begin disbursing aid at these new locations immediately upon their reporting to us. We anticipate the number of institutions that qualify for this flexibility will be much greater than the number of institutions that will be required to await our approval before disbursing title IV, HEA program funds to eligible students at those locations. Also, the minimal reporting burden required of an institution enables us to maintain accurate and updated records of all locations where students who are receiving title IV, HEA funds are enrolled.

Institutions are responsible for knowing whether they need to obtain our approval to disburse title IV, HEA program funds to eligible students at the new location. If an institution is unsure whether it meets the criteria requiring it to wait for our approval, it may contact us for specific guidance. Institutions that add locations without obtaining our approval when they knew, or should have known, that they were required to wait may be subject to administrative repayments and other sanctions.

Changes: We are revising § 600.20(c) to eliminate the exemptions for public institutions and for temporary additional locations that were proposed in § 600.20(d) of the NPRM and any related references to those exemptions. Under § 600.21(a)(3), all institutions are required to report to us if they wish to add an additional location where they offer or will offer 50 percent or more of an eligible program. Section 600.20(c) provides that an institution must apply to us for approval if it has added an additional location and must await the Secretary's approval before disbursing title IV, HEA program funds at that location if it meets one or more of the conditions described above and included in the regulation at § 600.20(c)(1)(i)-(v).

Comments: One commenter, in focusing on the Secretary's possible responses to an application as proposed in § 600.20(f)—§ 600.20(e) in these final rules —, asked us to clarify the difference between a “program in which it is eligible to participate” versus “programs in which it is eligible to apply for funds” in § 600.20(f)(2) —§ 600.20(e)(2) in these final rules —. The commenter also asked for clarification of the reference to a branch campus in § 600.20(f)(4)-§ 600.20(e)(6) in these final rules.

Discussion: Section 600.20(e)(2) reflects the current regulations at § 600.21(a), which identifies the conditions and applications to which the Secretary will respond. Section 600.20(e)(2)(i) states that the Secretary will notify an institution whether it is eligible to participate in the title IV, HEA programs. Section 600.20(e)(2)(ii) states that the notification will enumerate the specific title IV, student aid programs in which the institution is eligible to participate. Section 600.20(e)(2)(iii) states that the Secretary notifies the institution of the specific title IV, student aid programs for which the institution must submit an additional application to receive funding. For example, the campus-based programs require submission of an annual application (FISAP) before funds are allocated to an institution.

Notices sent according to § 600.20(e)(2)(iv) and 600.20(e)(2)(v) will indicate the effective dates of eligibility, and any conditions, related to that eligibility respectively.

We agree with the commenter that § 600.20(f)(4) in the NPRM does not provide a reference to § 600.20(c)(4) and (5). We will make the necessary corrections.

Changes: Section 600.20(e) has been revised to identify how the Secretary responds to applications for branch campuses.

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

Publicly-Traded Corporations

Comments: A commenter recommended that we include a succinct definition of the term “institutional investor” that specifically mentions the following types of investors: investment companies, registered investment advisors, business development companies, employee benefit plans, banks, insurance companies, pension funds, and securities dealers.

Discussion: We agree that our definition of the term “institutional investor” should be clarified. However, we find that definitions of this industry term are often more descriptive of entities to be included, rather than exhaustive of the characteristics of such entities. Therefore, we defer to the Securities and Exchange Commission's (SEC) regulatory definition of a U.S. institutional investor, with which publicly-traded corporations and most investors can be expected to be familiar.

Changes: We have added a cross-reference from the SEC regulations in 17 CFR 240.15a-6(b)(7) to the reference “U.S. institutional investor” in the definitions at § 600.31(b)(2)(ii) and 600.31(c)(2)(ii)(A). Although illustrative of the entities that will be considered institutional investors under this regulation, the reference is not intended to be exhaustive.

Comments: One commenter felt that the proposed definition of a “controlling shareholder” equates “voting stock” with “shares”. The commenter noted that voting stock is not always equivalent to the number of shares of stock an individual may own in a corporation, as in the case where non-voting stock has been issued. The commenter believed that if this definition is based on other regulatory provisions that raise the same issue, we should address all occurrences of this in the final regulations.

Another commenter suggested clarifying in proposed § 600.31(c)(2)(ii)(A) that the controlling shareholder be determined through measuring only the voting stock, by adding the phrase “of the voting stock” after the word “shares” to read: “A controlling shareholder is a shareholder who holds or controls through agreement both 25 percent or more of the total outstanding voting stock of the corporation and more shares of the voting stock than any other shareholder.”

Discussion: We agree that the term “share” is not synonymous with actual voting stock. The integral element of this topic relates to a shareholder's ability to significantly impact or control the actions of a corporation, or its management. Thus, we agree that revising the regulation to focus on ownership and control of voting stock is appropriate.

Changes: Section 600.31(c)(2)(ii)(A) has been changed to add the words “of voting stock” after the word “shares”, signaling that the regulation applies to stock that contains voting privileges.

Comments: A commenter believed that the proposed wording used to describe who is not a controlling shareholder in § 600.31(c)(2)(ii)(A) should be modified. The commenter suggested that the regulation should exclude from consideration all shares held in the categories listed, rather than only excluding such stock if it represents the individual's sole holdings in that corporation. The commenter recommended revising the third sentence to exclude all of the shares held in the excluded capacities in determining whether the shareholder is a controlling shareholder to read: “Any shares of the corporation's voting stock held by a shareholder (1) as an institutional investor, (2) in mutual funds, (3) through a profit-sharing plan or (4) in an Employee Stock Ownership Plan (ESOP) are excluded for purposes of determining whether the shareholder is a controlling shareholder.”

Discussion: We disagree. When identifying those shareholders whose ability to influence a corporation's management of student assistance merits scrutiny, we believe that it is reasonable to exclude large, institutional investors whose only investment with a specific corporation exists solely for the investment value. We consider these investors generally to have investment objectives that differ from other investors who take a controlling position in a corporation. The objectives of the institutional investor normally prompt a lesser interest in influencing management policies that may affect the administration of student assistance than those of other controlling shareholders. It is reasonable to infer that a shareholder who acquires control of the voting rights of stock held by others who qualify as institutional investors does not show this same lack of interest in those management policies.

Therefore, a person who controls 25 percent or more of the outstanding voting stock of a company and more stock than any other person by a combination of personal investment ownership and representation of institutional investors uniquely classifies one as a controlling shareholder, who can reasonably be expected to exercise real influence over management and its policies. The effect of this kind of shareholder's control on the corporation deserves the same scrutiny as that of any other shareholder who can control corporate policies.

Thus, to determine whether a shareholder is a controlling shareholder under the bright-line test, the rule counts all voting stock held or controlled by a shareholder, unless all stock held by that shareholder is held as an institutional investor.

Changes: None.

Comments: One commenter disagreed with our proposal to suspend eligibility by defining a change of ownership resulting in a change of control to occur when a stockholder's ownership share crosses what he believed to be an arbitrary “bright line”. He thought it was unfair to define a decrease in stock ownership by a controlling shareholder in a way that caused the negative result of suspending an institution's eligibility until a new application has been reviewed and approved. The commenter noted that, while the SEC and GAAP may require certain reporting activities for certain events, they do not cause immediate suspension of business activities or licenses. The commenter recommended that eligibility should be continued if financial responsibility and administrative capability has already been demonstrated and has not been downgraded by the ownership change. The commenter felt that the 25 percent threshold is arbitrary. The commenter contended that, while 25 percent may be a large enough percentage of stock to allow an individual to influence a corporation, more than 50 percent of the stock must be owned for an individual to have control of the corporation. The commenter also noted that control does not necessarily change with purchase or sale of stock. He stated that control is exercised by a corporation's Board of Directors, which does not automatically change with purchase and sale of stock. He felt that any review or suspension of an institution's eligibility should be predicated on a precipitous change in Directors, not stock ownership.

Discussion: We disagree with the commenter's notion that the use of a clear threshold in determining ownership and control is unfair or arbitrary. Quite the contrary, we sought to avoid such treatment by referencing established standards and guidelines of the accounting industry, which are accepted and adopted by most publicly-traded corporations.

Since most financial transactions are accounted for in accordance with the established system of accounting principles, we patterned our “bright line” threshold directly after Accounting Principles Board Opinion No. 18, which defines for GAAP purposes the percentage of ownership that can reasonably be presumed to give an investor the ability to exercise significant influence over an investee.

GAAP provides that control of 20 percent of the voting stock of a corporation raises a rebuttable presumption of control of the corporation and conversely, that control of a smaller percentage of a corporation's stock raises a rebuttable presumption that the holder lacks control. We chose that adoption of an irrebutable “bright line” test was desirable both to allow institutions to plan their financial affairs with greater predictability, and to eliminate the burden of our examining the circumstances surrounding each significant diminution in ownership interest of an institution owned by a publicly-traded corporation. We believe that a higher threshold than 20 percent should be used in return for adoption of a “bright line” standard. The choice of 25 percent as the threshold is not compelled by statute or regulation, but is a reasonable choice. We therefore choose to retain 25 percent as the “bright line” measure of control.

We also disagree that while 25 percent ownership of stock may be influential, 50 percent is required to control an entity. For publicly-traded corporations, the opposite inference is compelling: The more widely held the stock of a corporation, the smaller the percentage of its stock that need be controlled by a person in order to allow that person to “direct or cause the direction of the management and policies” of the corporation (see, § 600.31(b) definition of “control”). The investing public and the accounting profession recognize that a shareholder can control a corporation while owning or controlling far less than 50 percent of its stock. There is no reason that we should ignore that same conclusion.

Finally, the position that eligibility and certification lapse upon a change in ownership that results in a change in control is not a position that we arbitrarily adopted, but is required by the HEA. Section 498(i) mandates that eligibility must be reestablished after a change in ownership resulting in a change in control, and that the transfer of the controlling interest of stock of the institution is an action that results in such a change in control.

Changes: None.

Comments: Another commenter supported adding specific references to “private nonprofit and private for-profit institutions”. The commenter believed that these terms help nonprofit institutions recognize that certain change of ownership provisions apply to them, because the words “change of ownership” could suggest applicability only to the for-profit sector. The commenter did not feel that the proposed changes to § 600.31(c)(7) are an appropriate recognition of differences among the sectors in postsecondary education, and believes that the change of ownership regulations for independent nonprofit institutions should be reconsidered in negotiated rulemaking in the near future. The commenter believed that some mergers between institutions should be allowed without triggering a change of ownership resulting in a change of control, such as the merger of two independent nonprofit institutions, both of which are participating in good standing in the title IV programs. The commenter believed that such a merger could serve the best interest of students and society by allowing distinctive educational programs to continue to be available to students, supported by the stronger financial and administrative base of the merged institution.

Discussion: We believe Congress considered similar arguments when it deliberated the latest reauthorization of the HEA. While the specific terminology suggested by the commenter may not appear in the statute, the very example that the commenter provides regarding a merger between institutions is specifically addressed in section 498(i)(2)(C) of the HEA. We considered suggestions that we should implement certain labels to clarify the full extent and application of this section to all institutions, regardless of unique sectors. Thus we included the terms “private nonprofit” and “private for-profit” as descriptive modifiers where appropriate. We disagree with the notion that certain entities are disadvantaged by general labels or the lack of more specific ones.

Changes: None.

Public Institutions

Comments: Nine commenters supported the proposed provision that does not regard a change in governance at a public institution as a change in ownership, if the institution's new governing body is in the same State included in the institution's program participation agreement and the new governing body has acknowledged the institution's responsibilities under its program participation agreement. The commenters felt this exemption was appropriate for the same reasons that some commenters supported exempting public institutions from applying for our approval of an additional location: sufficient oversight and systems of control by governing public entities, sufficient financial backing of the governing public entity, and monitoring by the institution's accrediting agency to ensure that the Federal government's interests are protected.

One commenter supported the provision that would provide that a change in governance at a public institution is not a change in ownership. Additionally, the commenter did not believe that it was necessary to limit this to changes in governance in the same state included in the program participation agreement. The commenter felt that the same assurances associated with the fact that public oversight of the institution exists would also apply in the rare instance that the governance of a public institution switched from one state to another. The commenter also did not believe that it would be necessary to require the new governing authority to acknowledge the institution's responsibilities under its program participation agreement. The commenter noted that the institution remains the same institution and, therefore, retains the responsibilities it acquired by signing its program participation agreement.

Five commenters did not believe that a particular form of acknowledgement should be required for institutions that must acknowledge their continuing responsibilities under the program participation agreement because the formal transfer of governing authority might not include such an acknowledgement. These commenters felt it would be more useful for institutions to tailor their acknowledgement to reflect the specific circumstances of the transfer of governance. One commenter felt that a letter or statement from the institutional authority would be sufficient.

Three commenters did not support the proposed provision allowing a change in governance at a public institution to not be considered a change in ownership if the institution's new governing body is in the same State. The commenters contended that there are several circumstances where a public institution should be considered to have had a change in ownership.

The commenters also believed that a change in ownership has occurred when a public institution is transferred from control from a higher level of governmental authority (such as a State) to a lower one (such as a county) which may not have the same level of resources to commit to the institution. One commenter believed that in such a case there was no guarantee of continuing operational effectiveness. The commenter felt that such an exemption for all public schools would put taxpayers' funds at risk. Two of the commenters believed that, at the very least, the institution should be required to inform us of the change so that we can determine whether it meets the requirements for the exemption.

One commenter felt that new types of “quasi public” institutions, such as charter colleges are not likely to have the same level of oversight and financial stability as a traditional public institution, and should not be given broad regulatory exemptions. The commenter also felt that we should retain an interest in approving a change in which an institution, for the first time, will be administering the Federal financial aid programs. The commenter gave an example of several two-year colleges in a state that have been managed by four-year institutions, but may be given autonomy to operate (and presumably, participate in the title IV, HEA programs) on their own. The commenter concluded by noting that all of the public institutions in that state may have their state funding tied to meeting specific performance goals.

Discussion: We explained in the NPRM and in the earlier discussion related to additional locations that there has been a consistent history of stability, compliance and accountability in the operation of public institutions that supports the proposal to exempt certain governance changes within the State from being considered changes of ownership resulting in changes of control. Moreover, this level of accountability has been present at every level of government that operates public institutions. For that reason, we are not persuaded that the level of oversight or the systems of control that monitor the performance of these institutions will change drastically because of a transfer in control between governing public entities within a State.

We are not persuaded to extend the scope of the proposal to permit a public institution in one State to acquire a public institution in another State without having that change considered a change of ownership resulting in a change in control, and thus requiring the institution to apply for approval of a change of ownership. In such an instance, the ownership and control of the institution would be changing from one State to another, so that an entirely different public constituency would be assuming responsibility for the institution. This type of structure would also raise questions about State licensing, since the public institution owned by one State would be operating under the State licensing requirements of a different State. We have considered the suggestions from commenters that public institutions should be required to report to us when a change of governance takes place even if that change is not considered a change in ownership resulting in a change in control, and we agree. Such information will permit us to examine the transaction to ensure that it meets the definitional requirements and to determine if there are any other issues involving the institution warranting further action.

We agree with the comments that cautioned against exempting changes of governance at a public institution that is transferred to a “quasi public” entity such as a charter college or other hybrid entity. As we stated in the NPRM, the provision does not apply if a change in governance involves a hybrid entity, such as a corporation with limited liability, public-private partnerships, or joint ownership with out-of-State entities.

Changes: Section 600.21(a)(9) has been added to require public institutions to report to us within 10 days of when they experience a change in governance.

Comments: A commenter asked us to clarify the manner in which the institution's continuing responsibilities must be acknowledged. The commenter noted that in the preamble to the NPRM (page 49141), we stated that the acknowledgment must be written and must be a part of the documents that transfer control to the new governing body. The commenter felt that the next sentence confuses the meaning of the previous sentence by stating that the written acknowledgment, if not included in the documents transferring control, can be submitted separately to us. The commenter believed that we intended to say that notification without acknowledgment suffices if that acknowledgment is included in the official transfer documents; otherwise, notification of the change (not simply acknowledgement of its official records) is required.

Discussion: As explained above, the regulation is being changed to require public institutions to report to us within 10 days of undergoing a change in governance. If documentation transferring the governance from one public entity to another within the State explicitly acknowledges the institution's continuing responsibilities under its Program Participation Agreement, that documentation is sufficient, and no additional acknowledgment must be provided in the notice, or separately. Such an acknowledgment may be based on the circumstances of the transfer, and simply included in the official transfer documentation. If the documentation transferring control of the public institution to another in-State public entity does not acknowledge the institution's continuing responsibilities under its Program Participation Agreement, the institution must acknowledge its continuing responsibilities by separate letter or in the notice advising us of the change in governance.

Changes: None.

Section 668.5—Written Arrangements To Provide Educational Programs

Comments: One commenter from a public institution noted that the proposed flexibilities that would extend to institutions participating in study-abroad programs would eliminate many current deterrents for students trying to gain access to aid for those programs. He believed that the existing guidance regarding contractual and consortium agreements often causes confusion. The commenter stated that the proposed regulation would clarify the required procedures and effectively minimize such confusion. The commenter noted the clarification the proposed regulation makes by defining third-party providers and study-abroad organizations as appropriate constituent groups in study-abroad programs.

Another commenter representing a large, private university supported the proposed revisions, and expected a significant reduction in the administrative burden experienced, as schools currently must obtain and maintain separate agreements with each foreign institution that its students are attending. The commenter believed that the ability to make agreements with study-abroad organizations will enhance the quality and consistency of information shared between home and host institutions, and will likely create more expedient delivery of the title IV, HEA program funds to students in these programs.

Discussion: We appreciate the positive responses to this proposal. We anticipate that these regulations will make it substantially easier for students to receive financial aid while enrolled in eligible domestic programs away from their home institutions. We believe that the ability for either home or host institutions to pay the student's title IV, HEA program funds is a significant feature that will enhance and expand diverse learning opportunities.

Changes: None.

Section 668.13—Certification Procedures

Comments: One commenter agreed with our proposal to permit the chief executive of an institution to designate another executive level officer to serve as an alternate for certification training purposes. The commenter also thought it made sense not to require schools to attend training when a participating institution was merely adding a new title IV, HEA program.

Discussion: We believe that all eligible, participating institutions should receive basic training about the federal regulations and procedural requirements that pertain to administering the title IV, HEA programs. We want to assure students and taxpayers that they can expect an accurate application of the program requirements and a consistent level of proficiency on the part of the institutions we authorize to deliver title IV assistance.

We regularly review the training requirements to ensure that relevance, accuracy, and practicality are reflected in the subject matter. We also seek to continually simplify the training requirements without diluting the core content, to encourage institutions to make use of these resources when assessing and maintaining the technical readiness of their staffs.

Changes: None.

Section 668.19—Financial Aid History

Comments: Several commenters supported the proposal to eliminate the paper financial aid transcript (FAT) requirements for all transfer students in favor of a process under which the National Student Loan Data System (NSLDS) provides financial aid history information about current-year transfer students directly to schools that need it for one or more of their transfer students.

Discussion: We appreciate the support of the commenters.

Changes: None.

Comments: One commenter asked whether the school or the student is liable for an overpayment of title IV aid based on the financial aid history information the school receives from NSLDS after the seven day timeframe.

Discussion: Once a school receives information that limits a student's eligibility, it may not disburse additional title IV, HEA aid to that student until the problem is revolved. As currently provided in Dear Colleague Letter GEN-96-13, a school that follows the procedures in obtaining financial aid history information from NSLDS may rely on that information in making eligibility and award determinations. The school is not liable for any overpayments. The same is true under this rule. A school that notifies NSLDS and either waits seven days or checks NSLDS on-line before it disburses title IV, HEA program funds is not liable for any overpayments based on information it receives from NSLDS at a later date.

However, a student may be liable for any overpayment that is the result of information the school receives after it follows the procedures in these rules. This concept is explained more fully in Dear Colleague Letter GEN-96-13.

Changes: None.

Comments: One commenter suggested that the Secretary designate this regulation as one that a school may implement as soon as it is published as a final rule instead of waiting until it normally takes effect on July 1, 2001.

Discussion: We are currently discussing with schools and other partners various administrative approaches that could be used to implement this rule. After we complete those discussions, system improvements and enhancements need to be made to NSLDS before schools can use it for this purpose. Therefore, it is unlikely that we will have the systems support needed to implement the new provisions before July 1, 2001.

Changes: None.

Comments: One commenter stated that the NSLDS information on an Institutional Student Information Record (ISIR) should be current with all financial aid transactions contained in NSLDS. This case requires no distinction between current-year and prior-year transfer students with respect to the ISIR information a school uses to make eligibility and award determinations. The commenter further stated that if the information on an ISIR is not the same as that in NSLDS, as implied in the preamble discussion, we should provide current NSLDS information to schools via the ISIR process.

Discussion: The financial aid history information on an ISIR reflects NSLDS information as of the date that the ISIR is created. Currently, an ISIR is not updated solely to reflect disbursements of title IV aid that are reported by an NSLDS data provider. This is because, under such a process, every school that a student listed on the FAFSA would be required to receive an updated ISIR every time new disbursements were reported to NSLDS, including the school that reported those disbursements. Certainly, there is no benefit in providing to schools, at considerable costs to the taxpayers and institutions, millions of updated ISIR records that contain information they do not need.

On the other hand, we agree with the commenter's general view that there should be a single process under which a school receives updated financial aid history information for all transfer students. However, in many cases (particularly for prior-year transfer students) the updated information will not affect those students' current year eligibility or award amounts. Moreover, currently we have no way of determining which school a transfer student is attending until after NSLDS receives disbursement information identifying that school.

For these reasons, we proposed a targeted approach under which a school would inform NSLDS of the transfer students that are attending (or planning to attend) their school and NSLDS would provide, directly to that school, updated information about those students. Although these rules apply only to current-year transfer students, a school may use the new NSLDS process to receive updated information for any transfer student.

Changes: None.

Section 668.165—Notices and Authorizations

Comments: Two commenters representing a large coalition in the higher education community stated that requiring confirmation and retention of electronic notices is counter-productive, and diminishing to the efficiencies inherent in constantly advancing technologies. By comparison they noted that we do not require similar tracking and confirmation of receipt for mail sent via the U.S. Postal Service (USPS).

Discussion: After many discussions regarding the practical complications of documenting receipt of electronic mail, we agree that some schools may experience an impractical, although unintended, burden to maintain copies of the student's or parent's confirmation of a disbursement notice. Given the range and diversity of capabilities in various e-mail and other electronic applications, we believe that institutions should determine the best way for them to confirm that a student or parent received an electronic notice. Thus, the language in the NPRM, and in the final rule, allows electronic notices, while only requiring that institutions confirm that those notices reached the intended parties.

We noted in the NPRM that we support the presumption recognized in the law that mail deposited with the USPS is delivered. Certainly, there are documented cases where this presumption fails because of the potential for error that accompanies any system dependent upon human interaction. However, we see the differences between an established, federally supported, national delivery system and an electronic delivery method that operates independently and through many different private software providers without a uniform standard, as very significant.

The USPS has several proven methods and systems that it may use to track mail deposited in its system. It also utilizes uniform automated systems that process mail throughout the nation. The USPS also sets coherent operating standards and employs a system of quality assurance to monitor the application and effectiveness of those standards.

On the contrary, both the software applications and the hardware upon which they operate generally limit e-mail capabilities. There are no observed standards or mandated features inherent in all e-mail software applications that provide the quality assurance or maintain a similar level of consistency that parallels that of the USPS.

Changes: None.

Section 675.19—Fiscal Procedures and Records

Comments: One commenter strongly supported our proposal to allow electronic certification of Federal Work-Study (FWS) timesheets. The commenter believed that this option alleviates some of the inconvenience of loss, damage, forgery and other complications that may occur when using paper certifications. The commenter also felt that the proposed regulations will enhance the timeliness of the delivery of FWS funds, and will improve the security and retention of the related records.

Another commenter was also supportive of our proposal to allow electronic certification by a supervisor to approve FWS hours recorded on a student's time record. The commenter noted that many of the departments at her school have several hundred employees each. Accordingly, the commenter was aware that several of these departments have implemented electronic timekeeping systems, which have vastly improved the accuracy of the timekeeping function for such a large number of employees. The commenter also felt that being able to move the FWS payroll employees to a more technologically advanced system would be less burdensome, and would avoid having to keep a separate time system for FWS students. The commenter believed that these regulations would improve the utilization of FWS in both on-campus jobs and increasingly, in off-campus employment.

Discussion: We appreciate the support for these regulations. Just as we do with manual certification systems, we continue to urge institutions to assess the adequacy of their systems and internal controls, to assure that reasonable safeguards exist to secure certifications that will be completed electronically.

We refer those who administer the FWS Program to page 49145 of the August 10, 2000 NPRM for a full discussion of the safeguards we expect schools to include in any electronic certification process they implement.

Changes: None.

Executive Order 12866

We have reviewed these final regulations in accordance with Executive Order 12866. Under the terms of the order we have assessed the potential costs and benefits of this regulatory action.

The potential costs associated with the final regulations are those resulting from statutory requirements and those we have determined to be necessary for administering these programs effectively and efficiently.

In assessing the potential costs and benefits—both quantitative and qualitative—of these final regulations, we have determined that the benefits of the regulations justify the costs.

We have also determined that this regulatory action does not unduly interfere with state, local, and tribal governments in the exercise of their governmental functions.

We discussed the potential costs and benefits of these final regulations in the preamble to the NPRM under Executive Order 12866 (see page 49147 of the NPRM) Potential Costs and Benefits.

Paperwork Reduction Act of 1995

The Paperwork Reduction Act of 1995 does not require you to respond to a collection of information unless it displays a valid Office of Management and Budget (OMB) control number. We display the valid OMB control numbers assigned to the collections of information in these final regulations at the end of the affected sections of the regulations.

Assessment of Educational Impact

In the NPRM we requested comments on whether the proposed regulations would require transmission of information that any other agency or authority of the United States gathers or makes available.

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

Electronic Access to This Document

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Note:

The official version of this document is the document published in the Federal Register. Free Internet access to the official edition of the Federal Register and the Code of Federal Regulations is available on GPO Access at: http://www.access.gpo.gov/nara/index.html

(Catalog of Federal Domestic Assistance Number: 84.033 Federal Work-Study Program; 84.063 Federal Pell Grant Program)

List of Subjects

34 CFR Part 600

• Administrative practice and procedure
• Colleges and universities
• Consumer protection
• Grant programs-education
• Reporting and recordkeeping requirements
• Student aid

34 CFR Part 668

• Administrative practice and procedure
• Colleges and universities
• Consumer protection
• Grant programs—education
• Loan programs—education
• Reporting and recordkeeping requirements
• Student aid

34 CFR Part 675

• Colleges and universities
• Employment
• Grant programs—education
• Reporting and recordkeeping requirements
• Student aid

34 CFR Part 690

• Grant programs—education
• Reporting and recordkeeping requirements
• Student aid

For the reasons stated in the preamble, the Secretary amends title 34 of the Code of Federal Regulations by amending parts 600, 668, 675, and 690 as follows:

PART 600—INSTITUTIONAL ELIGIBILITY UNDER THE HIGHER EDUCATION ACT OF 1965, AS AMENDED

1. The authority citation for part 600 continues to read as follows:

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

2. Sections 600.9 and 600.30 are removed and reserved.

3. Section 600.10 is amended by removing and reserving paragraph (a)(2) and by revising paragraphs (b)(3)(i) and (b)(3)(ii) to read as follows:

4. Section 600.20 is revised to read as follows:

5. Section 600.21 is revised to read as follows:

6. Section 600.31 is amended by:

A. Revising the section heading.

B. Revising paragraph (a)(1).

C. Redesignating paragraph (a)(2) as paragraph (a)(3) and adding a new paragraph (a)(2).

D. Removing the definition of “ownership” in paragraph (b) and adding, in its place, the definition of “ownership or ownership interest”.

E. Revising paragraphs (c)(2), (c)(6), and (c)(7).

F. Revising paragraph (d)(7).

The additions and revisions read as follows:

PART 668—STUDENT ASSISTANCE GENERAL PROVISIONS

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

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

8. Section 668.2(b) is amended by revising paragraphs (2)(ii) and (iii) and adding paragraph (2)(iv) to the definition of the term “academic year” to read as follows:

9. A new § 668.5 is added to read as follows:

10. Section 668.8 is amended by revising paragraphs (b)(3) and (b)(4) to read as follows:

11. Section 668.12 is removed and reserved.

12. Section 668.13 is amended by revising paragraph (a) read as follows:

13. Section 668.19 is revised to read as follows:

14. Section 668.165(a)(3)(ii) is revised to read as follows:

PART 675—FEDERAL WORK-STUDY PROGRAMS

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

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

16. Section 675.19 is amended by revising paragraphs (b)(1) and (b)(2) to read as follows:

PART 690—FEDERAL PELL GRANT PROGRAM

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

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

18. Section 690.9 is removed.

19. Section 690.75 is amended by removing the words “financial aid transcript” in paragraph (a); by removing the reference to “ 34 CFR 668.7” in paragraph (a)(1) and adding, in its place, “34 CFR part 668, subpart C”; and by revising the OMB control number to read as follows: