Maintained for Historical Purposes

This resource is being maintained for historical purposes only and is not currently applicable.

Institutional Eligibility and Administrative Requirements - Cash Management

AwardYear: 1995-1996
EnterChapterNo: 3
EnterChapterTitle: Institutional Eligibility and Administrative Requirements
SectionNumber: 3
SectionTitle: Cash Management
PageNumbers: 55-64


[[Final Rule 12-1-94]]
On December 1, 1994, the Department published regulations
that govern a school's management of most SFA funds.
These regulations are known as the "cash management"
regulations. These regulations establish rules and procedures
that a school must follow in requesting, maintaining, disbursing
and otherwise managing funds under the Pell Grant, PAS,
FSEOG, Perkins Loan, FWS, Direct Loan, and FFEL
programs. For purposes of this discussion SFA FUNDS refers
only to these SFA programs.

Previously, most cash management requirements were found in
the individual SFA program regulations or various Department
publications. The December 1, 1994 regulations consolidated
many of these requirements and added new requirements for
proper handling of SFA funds. This section will highlight the
provisions of these new regulations. However, a school is still
responsible for following other cash management rules and
procedures specific to an SFA program.

[[Third-party servicers]]
These rules and procedures also apply to a third-party
servicer. For more information about third-party servicers, see
the discussion on page 3-46.

As in the past, the SFA funds received by a school are
intended solely for the use of student beneficiaries, except for
funds received as an administrative cost allowance, which are
intended as a payment to the school. (See the Administrative
Cost Allowance discussion on pg. 3-49.) All other funds are
held in trust by the school for students and for the
Department. SFA funds cannot be used as collateral or for
any other purpose.


REQUESTING FUNDS

The December 1, 1994 regulations include provisions for
requesting SFA funds from the Department that are based on
longstanding Department policy.

The Department provides SFA funds to a school either by the
"advance payment method" or the "reimbursement payment
method."

[[Advance payment method]]
Under the advance payment method, the Department accepts a
school's request for funds and transfers the amount requested
to a bank account designated by the school. The school
cannot request more cash*1* than is needed to make
disbursements to students within three business days.
Therefore, a school must make the disbursements as soon as
administratively feasible, but no later than three business days
following the date the school received those funds.

[[Reimbursement payment method]]
Under the reimbursement method, a school must disburse
funds to eligible students before requesting funds from the
Department. The school cannot request more cash than the
amount that was actually disbursed to those eligible students.
Before approving a school's request for funds, the Department
ensures that the school has determined properly the SFA
eligibility of each student, made correct SFA payments to the
students included in its request, and submitted any
documentation required by the Department to support its
request.

[[FFEL/Direct Loan EFT]]
In certifying a loan application for a borrower who is not
subject to delayed disbursement provisions, a school may not
request that a lender provide by EFT or master check the loan
proceeds for that borrower earlier than 13 days before the first
day of a student's enrollment period. While the regulations
speak to the first day of the enrollment period, for subsequent
disbursements of Direct Loan or FFEL program loans, it is
expected that schools will not request that a lender provide the
loan proceeds earlier than 13 days before the first day of a
semester, term, or other period of enrollment for which the
disbursement is intended.


MAINTAINING FUNDS

[[Account for Federal funds]]
All schools must maintain a bank account into which the
Department transfers, or the school deposits, Federal funds
(other than FFEL program funds) that the school receives
from the SFA programs. The name of the account must
clearly disclose that Federal funds are deposited into that
account, or the school must notify the bank of the accounts
that contain Federal funds and keep a copy of this notice in its
records.*2*

[[UCC-1 statement]]
Regardless of which option a school chooses, the school is
required to file a UCC-1 statement that discloses that the
account contains Federal funds with the appropriate State or
municipal government entity. An example of an UCC-1 form
can be found on page 3-64. The school must keep a copy of
this statement in its records.

[[Interest-bearing or investment account]]
Except in the cases listed below, this account must be an
interest-bearing account or an investment account. An
interest-bearing account must be Federally insured or secured
by collateral of value reasonably equivalent to the amount of
SFA funds in the account. An investment account must
consist predominately of low-risk income-producing
securities. If a school chooses to maintain Federal funds in an
investment account, the school must maintain sufficient
liquidity in that account to make required disbursements to
students.

[[Interest must be remitted to the Department]]
This interest-bearing account or investment account is a
temporary holding account for SFA funds. Therefore, any
interest earned on SFA funds (other than Perkins Loan funds)
that exceeds $250 per year, must be remitted to the
Department at least once a year. A school may keep up to
$250 per year of the interest or investment revenue earned
(other than that earned on Perkins Loan funds) to pay for the
administrative expense of maintaining an interest-bearing
account. A school must keep any interest earned on Perkins
Loan funds for transfer to the Perkins Loan Fund.

[[Exceptions to interest-bearing account or investment
account]]
A school is not required to maintain funds in a interest-bearing
account or an investment account --

- The school drew down less than $3 million from the SFA
programs in the prior award year,

- The school earned less than $250 in interest on the total
amount of SFA funds drawn down in the prior award year, or

- The school can demonstrate that it would not earn over
$250 in interest on the total amount of SFA funds it
will draw down.

A non-interest-bearing account must be Federally insured, or
secured by collateral of value reasonably equivalent to the
amount of SFA funds in the account.

[[Federal Perkins Loan Program participants]]
A school that participates in the Perkins Loan Program must
ALWAYS maintain an interest-bearing account or an investment
account for Perkins Loan funds. If a school is also required
to maintain an interest-bearing account or investment account
for other Federal funds, the school may use one account for
Perkins Loan funds and all other Federal funds. If the school
chooses to maintain one account, it must determine the exact
amount of any interest earned on the Perkins Loan funds for
transfer to the Perkins Loan Fund.


DISBURSING FUNDS

The December 1, 1994 regulations consolidate and add to
existing requirements for disbursing SFA funds. These
requirements apply to all the SFA programs specified at the
beginning of this section, except for the FWS program. A
school must continue to follow all applicable FWS
disbursement procedures.

DISBURSE -- to make a payment of SFA funds, or to deliver
proceeds of an SFA loan to or on behalf of a student, directly or
by crediting a student’s account with SFA funds (posting payment
of funds).

A school may not make a disbursement to a student for a
payment period or period of enrollment until the student is
enrolled in classes for that period.

The earliest a school may pay a student is 10 days before the
first day of the payment period or period of enrollment. For
subsequent disbursements of Direct Loan or FFEL program
loans, the earliest a school may credit a student's account or
pay the student directly is 10 days before the first day of
a semester, term, or other period of enrollment for which
disbursement is intended.

[[When an SFA disbursement occurs]]
It is important for a school to understand when the crediting of
Federal student aid to a student's account will result in an SFA
disbursement. Knowing this will allow a school to determine
when it must comply with regulatory requirements related to
disbursements and other cash management issues. The
Department considers a disbursement of SFA funds to have
taken place by crediting a student's account only if --

- The crediting of the account is backed up with Federal funds.
That is, the school has either drawn down Federal funds or used
Federal funds it had in an account at the school such as funds
from the school's Perkins Revolving Account or carryover funds
from an earlier drawdown, or

- In the case of a school crediting a student's account with an
award made under the Direct Loan program, the school reports
a disbursement date to the Direct Loan servicer.

[[Early payments]]
Beginning with the 1995-96 award year, the regulations do not
allow either of these events to occur any earlier than 10 days
prior to the first day of the payment period or period of
enrollment.

Any crediting to a student's account which occurs without
either Federal funds being used or a disbursement date being
set. IS NOT A FEDERAL DISBURSEMENT. Therefore, a
school may credit a student's account with award amounts from SFA
programs earlier than 10 days prior to the beginning of the
payment or enrollment period as long as Federal funds are not
used and a Direct Loan disbursement date is not established.
A Federal disbursement will have occurred on the day that
Federal funds are taken to support the credit or on the date
established as the disbursement date for Direct Loan
purposes.

Note that if a student is in the first year of an undergraduate
program and is a first-time borrower under the FFEL or
Direct Loan program, a school may not release the first
installment of his or her loan until 30 days after the student's
first day of classes.

[[Crediting a student's account]]
A school may disburse SFA funds to a student by CREDITING A
STUDENT'S ACCOUNT for ALLOWABLE CHARGES.
(Note that a school may not apply SFA funds to charges assessed
the student in a prior award year or period of enrollment.)
Funds in excess of the allowable charges must be paid directly to
the student, unless otherwise authorized by the student.

ALLOWABLE CHARGES -- Includes tuition and fees, board (if
the student contracts with the school), room (if the student
contracts with the school), other cost-of-attendance charges (if the
school obtains the student’s authorization), and other school
charges that a student incurs at his or her discretion (if the school
obtains the student’s or parent’s authorization).

A school must notify a student (or parent borrower) of the
amount of SFA funds the student can expect to receive, and
how and when those funds will be paid. The school must also
notify a student (or parent borrower) in writing whenever the
school credits the student's account with Direct Loan or FFEL
program funds.

[[SFA credit balance]]
For the 1995-96 award year, if there are SFA funds that
exceed a student's allowable charges, a school must pay the
excess SFA funds directly to the student within 21 days of the
later of --

- the date the balance occurs on the student's account,

- the first day of classes of the payment period or period
of enrollment, or

- the date the student rescinds his or her authorization
for the school to retain funds in excess of the
amount needed to cover allowable charges.

For the 1996-97 award year and beyond, this period of time
will decrease from 21 days to 14 days.

Funds are disbursed "directly" by one of three methods --

- A school may make a payment by check (or other
means of payment) that is payable to and requires the
endorsement of the student (or parent borrower),

- A school may initiate an electronic funds transfer (EFT)
to a bank account designated by the student (or parent
borrower), and

- A school may pay the student in cash, provided that the
school obtains a signed receipt from the student.

[[EFT]]
BEGINNING WITH THE 95-96 AWARD YEAR, a school may
make an EFT payment to a student. A school must obtain voluntary
authorization from the student (or parent borrower) to disburse by
the EFT method into a bank account designated by the student or
parent.

[[Holding student funds]]
If a school receives authorization from the student to hold
excess student funds, the school must identify the student and
the amount of funds the school holds for the student in a
subsidiary ledger account designated for that purpose. The
school must maintain, at all times, cash in its bank account at
least equal to the amount the school holds for students. The
school is permitted to retain any interest earned on the
student's funds. A school may not hold excess funds for any
student if the Department determines that the school has failed
to meet the financial responsibility standards under º668.15
of the Student Assistance General Provisions regulations.

[[Student or parent authorization]]
In obtaining authorization from a student (or parent borrower) for
disbursing SFA funds by EFT, using SFA funds to pay for other
charges, or holding excess funds, a school may not REQUIRE the
authorization, and must allow the student or parent to rescind the
authorization at any time. An authorization is valid for the award
year or period of enrollment in which the authorization is obtained.
This authorization continues to be valid in subsequent award years if
the school notifies the student or parent prior to performing a
function that requires continued authorization in the subsequent
award year. The notification must clearly explain those functions for
which continued authorization is necessary (including what will
happen to any interest that the school earns on the student's funds)
and provide the student or parent with an opportunity to cancel or
modify the provisions of the authorization.


EXCESS CASH

"Excess cash" is any amount of SFA funds (other than FFEL
or Perkins funds) that a school does not disburse to students
by the end of the third business day following the school's
receipt of those funds. Excess cash must be returned to the
Department immediately. However, under certain
circumstances, a school may maintain an excess cash balance
for up to seven days.

[[Allowable excess cash tolerances]]
For a period of peak enrollment (see Handbook) at the school
during which a drawdown*3* of excess cash occurs, the school
can maintain the excess cash balance in its Federal account if
the excess cash balance is less than 3% of the school's total
prior-year drawdowns. The school is required to eliminate the
excess cash balance within the next seven days by disbursing
SFA funds to students for at least the amount of that excess
cash balance.

A period of peak enrollment at a school occurs when at least
25% of the school's students start classes during a given
30-day period. A school determines this percentage for an
award year with the following fraction:

[[The graphic on page 3-62 is currently unavailable for viewing. Please
reference your paper document for additional information.]]

For any period other than a period of peak enrollment, the
school can maintain the excess cash balance if the excess cash
balance isless than 1% of the school's prior-year drawdowns.
In this case also, the school is required to eliminate the excess
cash balance within the next seven days by disbursing
SFA funds to students for at least the amount of that balance.

If a school does not have prior-year drawdown data for the
Direct Loan program because it did not participate in the
Direct Loan program for that prior award year, the school may
include, for the latest year for which the Department has
complete data, the total amount of loans guaranteed under
the FFEL program for students attending the school during
that year in determining total prior-year drawdowns.

[[Consequences for improperly maintaining
excess cash balances]]
The Department reviews schools to determine where excess
cash balances have been improperly maintained and to seek
recovery from those schools of the resulting losses to the
government.

Upon a finding that a school has maintained an excess cash
balance in excess of allowable tolerances, a school is required
to reimburse the Department for the costs that the government
incurred in making those excess funds available to the school.
In addition, where excess cash balances are disproportionately
large to the size of the school or represent a continuing
problem with the school's responsibility to administer
efficiently the SFA programs, the Department may initiate a
proceeding to fine, limit, suspend, or terminate the school's
participation in one or more of the SFA programs. (For more
on fines and other actions against schools, see Section Ten.)

Generally, a check is "issued" when the school releases, distributes,
or makes available the check by mailing the check to the student or
parent (if applicable), or by notifying the student or parent
expeditiously that the check is available for immediate pickup.
However, upon a finding that a school has maintained excess cash
balances, the Department considers the school to have issued a
check on the date that check cleared the school's bank account,
unless the school demonstrates to the satisfaction of the Department
that it issued the check to the student shortly after the school wrote
that check.

Finally, the Department will assess a school that maintains
excess cash balances a liability that is equal to the difference
between the earnings those cash balances would have yielded
under a Treasury-derived rate and the actual interest earned on
those cash balances.

[[The "Financing Statement" on page 3-64 is currently unavailable
for viewing. Please reference your paper document for additional
information.]]


*1* A "request for cash" is a soliciation for cash in accordance with
procedures contained in the Recipient's Guide for the Department of
Education Payment Management System.

*2* A school is not required to maintain a separate account for SFA
funds unless the Department specifies otherwise.

*3* A "drawdown" is a process whereby a school requests and
receives SFA funds.