Institutional Eligibility and Administrative Requirements - Cash Management

AwardYear: 1998-1999
EnterChapterNo: 3
EnterChapterTitle: Institutional Eligibility and Administrative Requirements
SectionNumber: 3
SectionTitle: Cash Management
PageNumbers: 55-76


The cash management requirements govern a school's management
of most SFA Program funds. These requirements establish rules and
procedures that a school must follow in requesting, maintaining,
disbursing, and otherwise managing funds under the Pell Grant,
FSEOG, Perkins Loan, FWS, Direct Loan, and FFEL programs.


GENERAL REQUIREMENTS
-----------------------

The cash management requirements are intended to

[[Purpose of cash management requirements]]
- promote sound cash management of SFA Program funds by
schools,

- minimize the costs to the government of making SFA Program
funds available to students and schools, and

- minimize the costs that accrue to students who receive SFA loans.

The SFA Program 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, and funds used for the Job Location and Development
Program under the FWS Program. (See the Administrative Cost
Allowance discussion on page 3-75.) All other funds are held in
trust by the school for students, the Department, and also, in the case
of FFEL Program funds, for lenders and guaranty agencies. SFA
Program funds cannot be used as collateral or for any other purpose.

[[Third-party services]]
These rules and procedures also apply to a third-party servicer. For
more information about third-party servicers, see the discussion on
page 3-47.

[[Definition of "parent"]]
Note that for purposes of these cash management requirements, a
"parent" means a parent borrower under the PLUS Program.


REQUESTING FUNDS
-------------------

Currently, the Department provides Pell Grant, Direct Loan, and
campus based program funds to a school either by the "advance
payment method" or the "reimbursement payment method." The
November 29, 1996 final regulations introduced a third method for
requesting funds from the Department: the just-in-time payment
method. The Department has the sole discretion to determine the
method under which SFA Program funds are provided to a school
(although at this time, participation in the just-in-time payment
method will be voluntary).

[[Advance payment method]]
Under the advance payment method, a school may submit
a request for Pell Grant, Direct Loan, and campus-based program
funds to the Department prior to disbursing aid to eligible students
and parents. If the Department accepts a school's request for funds, it
will make an electronic funds transfer (EFT) of the amount requested
to a bank account designated by the school. A school may not
request more funds than the school needs immediately for
disbursements the school has made or will make to eligible students
and parents. 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.

The Department does not automatically accept a request for funds
from a school under the advance payment method. For example, the
Department may reject a request if the amount of the request exceeds
the amount of funds the school is authorized to draw down.

[[Reimbursement payment method]]
Under the reimbursement method, a school must disburse
Pell Grant, Direct Loan, and campus-based program funds to eligible
students and parents before requesting funds from the Department.
Generally, the Department places a school on the reimbursement
payment method if it determines that there is a need to monitor
strictly the school's participation in the SFA Programs. The school
cannot request more cash than the amount that it actually disbursed
to those eligible students and parents. As part of the school's request
the school must

- identify the students and parents for whom it is seeking
reimbursement, and

- submit documentation demonstrating that each student and parent
included in the request was eligible to receive and has received the
SFA Program funds for which reimbursement is requested.

Before approving a school's request for funds, the Department
determines that the school has

- accurately determined the SFA eligibility of each student,

- accurately determined the SFA payment to each student and
parent included in its request, and

- submitted the required documentation.

There are comparable limitations on the use of FFEL funds. These
limitations apply to any school on reimbursement on or after July 1,
1997. If a school is placed on reimbursement, or a school that
participates only in the FFEL Program has most of the limitations of
reimbursement placed on it, the school

[[Limitations on use of FFEL funds]]
- may not disburse FFEL Program funds to a borrower until the
Department approves the school's request to disburse funds to that
borrower (this restriction applies to any loan proceeds received by
the school on or after July 1, 1997), and

- if prohibited by the Department, may not certify a loan application
for a borrower until the Department approves the school's request
to make the certification for that borrower (this restriction applies
on the date that the Department notifies a school that it must
obtain approval from the Department to certify loan applications).

The school must provide documentation demonstrating that each
borrower included in the request is eligible to receive the
disbursement or certification. The documentation must be provided
to the Department or an entity approved by the Department for that
purpose (for example, a certified public accountant, financial aid
consultant, or guaranty agency).

Until the Department approves a request, the school may be

- prohibited from endorsing a master check or obtaining a
borrower's endorsement of any loan check the school receives
from a lender,

- required to maintain loan funds that it receives from a lender via
EFT in a separate bank account, and

- prohibited from certifying a borrower's loan application.

Because the school's submission and the Department's review of
documentation to support a borrower's eligibility takes time, the
school may delay returning FFEL Program funds provided by EFT
or master check to a lender for a specified period of time (see
Chapter 10).

[[Just-in-time payment method]]
The just-in-time payment method, introduced in the
November 29, 1996 final regulations, will be part of the student-
centered integrated delivery system under development by Project
EASI. (For more information on Project EASI, see Section 2). At this
time, the Department expects to use the just-in-time payment method
only at schools that volunteer for participation. Moreover, a school
will be able to choose the SFA Programs for which it would use the
just-in-time method. For example, a school may volunteer to
participate in the just-in-time payment method for the Pell Grant
Program only, and continue to request and receive funds under the
advance payment method for the Direct Loan and campus-based
programs. More information on the implementation of the just-in-
time payment method will be provided to schools by the Department
in the future.

Under the just-in-time payment method, a school will submit
electronically a request for funds on or near the actual date of
disbursement. The request will include the date and amount of the
disbursement it will make or has made to each student or parent. For
each request the Department accepts for a student or parent, the
funds will be provided to the school through EFT on or before the
disbursement date reported by the school.

If for some reason a student is not eligible to receive the amount
requested at the time the funds are actually disbursed, the school
must report the adjustment in the funds for which the student is
eligible within 30 days of the date that the school becomes aware of
the change. A school will be permitted to make a disbursement of
funds to a student or parent prior to submitting a record of that
disbursement to the Department. However, if the student's eligibility
for those funds has changed by the actual date of disbursement, any
adjustment must be reported.

[[Exemption from excess cash requirements]]
Schools using the just-in-time payment method will be exempt from
the requirements for returning excess cash (see page 3-74). Using
this payment method, schools will have only a nominal amount of
excess cash created by minor period adjustments. Since the
Department will modify new requests for funds after deducting any
adjustments reported by the school, large amounts of excess cash
should not occur.

The just-in-time payment method will enable the delivery system to
provide the most current payment information to students and other
system users, thereby reducing burden related to the reconciliation of
payment data. This payment information will form the core of the
individual student account that is the basis for the Project EASI
integrated delivery system. By providing funds based on current
student-level data, this payment method will strengthen the
Department's ability to monitor the integrity of the SFA Programs by
reducing the potential for the misuse of funds.

[[GAPS]]
[[NEW]]

In the first quarter of calendar year 1998, the Department is
implementing a new centralized financial management system called
the Education Central Automated Processing System (EDCAPS).
Within EDCAPS is the new Grants Administration and Payments
System (GAPS), a state-of-the-art delivery system that supports Title
IV award and payment administration. GAPS will house the
complete grant cycle and employs the latest system and financial
management technologies (such as relational database and Internet
technologies).

Under GAPS, schools will request funds by SFA Program using the
program and fiscal year designation (award number) that the
Department assigned to the authorized funds. This new method for
requesting funds was introduced in final regulations published
November 29, 1996. In addition, the new system will require schools
to certify their expenditures only once a year versus four to 12 times
a year under the current system. GAPS implementation will result in
several benefits to schools, the Department, and other Education
recipients and partners. These benefits include

- providing schools with on-line access via the Internet to request
funds, adjust drawdowns, and report expenditures,

- simplifying expenditure reporting with schools certifying
expenditures once a year versus monthly/quarterly under the
current system, and

- providing schools with easy access to both grant and payment
information, such as authorization amounts, current balances, and
award and payment request histories.

Schools that participate in Title IV programs that require them to
submit a payment request, such as Pell Grants or campus-based
programs, will use GAPS to request funds. Direct Loan schools will
also use this new system to request funds. Additional information on
GAPS can be found on the Department's web page at
http://www.ed.gov/offices/OCFO/ or a school may contact its
payment account representative. In addition, a GAPS Users Guide
will be sent to all schools in early December 1997.


MAINTAINING AND ACCOUNTING FOR FUNDS
-----------------------------------------
All schools must maintain a bank account into which the Department
transfers, or the school deposits, SFA Program funds. The account
must be federally insured or secured by collateral of value
reasonably equivalent to the amount of SFA Program funds in the
account. A school is not required to maintain a separate account for
SFA Program funds unless the Department specifies otherwise.

A school is not required to maintain a separate bank account for
FFEL Program funds that the school receives from a lender by EFT.
A school must maintain and account for FFEL Program funds in the
same manner required for other SFA Program funds.

[[Bank account notification requirements]
For each account that contains SFA Program funds, a school must
identify that SFA Program funds are maintained in the account by

- including the phrase "federal funds" in the name of the account, or

- notifying the bank or investment company of the accounts that
contain SFA Program funds and keeping a copy of this notice in
its records and, except for public institutions, filing a UCC-1
statement with the appropriate state or municipal government
entity that discloses that an account contains federal funds.

The school must keep a copy of the UCC-1 statement in its records.

[[Public schools exempt from UCC-1 requirement]]
The requirement that a school file a UCC-1 statement when an
account's name does not include the phrase "federal funds" was
established to reduce the possibility that a school could misrepresent
federal funds as its own funds to obtain a loan or secure credit.
Because public institutions generally do not seek to obtain credit in
the same manner as private institutions, they have been exempted
from the requirement.

The Department may require a school to maintain SFA Program
funds in a separate account that contains only SFA Program funds if
the Department determines that the school failed to comply with cash
management requirements, recordkeeping and reporting
requirements, or other applicable program regulations.

[[Interest-bearing or investment account]]
Except in the instances discussed below, the account that Direct
Loan, Pell Grant, FSEOG, and FWS program funds are deposited in
must be an interest-bearing account or an investment 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]]
Any interest earned on Direct Loan, Pell Grant, FSEOG, and FWS
program funds maintained in an interest-bearing account or an
investment account 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 Direct Loan, Pell Grant,
FSEOG, and FWS program funds in a interest-bearing account or an
investment account for an award year if

- the school drew down less than $3 million from these funds in the
prior award year and anticipates that it will not draw down more
than $3 million in the current award year,

- the school can demonstrate that it would not earn over $250 in
interest on the funds it will draw down during the award year, or

- the school requests these funds under the just-in-time payment
method.

Schools that request funds under the just-in-time payment method
are exempt because this method would ensure the expeditious
accounting and disbursement of program funds. Therefore, little or
no interest would be earned on funds provided to the school.

[[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.

[[Accounting and financial requirements]]
If a school is not required to maintain separate accounts and chooses
not to, it must maintain accounting and internal control systems that

- identify the balance of the funds of each SFA Program that are
included in the school's bank or investment account as readily as if
those funds were in a separate account, and

- identify earnings on SFA Program funds in the school's bank or
investment account.

A school must maintain its financial records in accordance with the
recordkeeping requirements of 34 CFR 668.24 (see Section 7).


DISBURSING FUNDS
-------------------

These disbursement requirements apply to all the SFA Programs
specified at the beginning of this section, except for the FWS
Program. A school must follow the disbursement procedures in 34
CFR 675.16 for paying a student his or her wages under the FWS
Program (see Chapter 7).

SFA Program funds are disbursed when a school credits a
student's account with the funds or pays a student or parent directly
with

- SFA Program funds received from the Department,

- FFEL funds received from a lender, or

- institutional funds labeled as SFA Program funds in advance of
receiving actual SFA Program funds (except in the instances noted
below).

[[Definition of "disbursed"]]
This definition of "disbursed" was included in final regulations
published November 29, 1996. The definition is effective for SFA
Program funds that are credited to a student's account or paid
directly to a student or parent on or after July 1, 1997.

[[Knowing when an SFA disbursement occurs]]
It is important to distinguish when SFA Program funds have been
disbursed for a number of reasons. To begin with, once SFA
Program funds have been disbursed, a student becomes an SFA
recipient and the rights and responsibilities of an SFA recipient are in
effect. For example, as an SFA recipient, a student has the right to
the protection of the refund and repayment requirements and the
responsibility to meet the satisfactory academic progress
requirements. If the student is an SFA loan recipient, he or she
assumes responsibility for the loan (and all interest accruing on the
loan if it is unsubsidized), and has the right to cancel the loan. In
addition, knowing when an SFA disbursement occurs will allow a
school to determine when it must comply with regulatory
requirements related to disbursements and other cash management
issues.

This definition of "disbursed" makes clear that any funds labeled as
SFA Program funds are SFA Program funds.

However, because of other SFA Program requirements, there are two
instances when crediting institutional funds labeled as SFA Program
funds to a student's account in advance of receiving the actual SFA
Program funds will not result immediately in an SFA disbursement:

[[Exceptions]]
- If a school credits a student's account with the institutional funds
in advance of receiving SFA Program funds earlier than 10 days
before the first day of classes of a payment period, the SFA
disbursement occurs on the tenth day before the first day of classes.
See the example below. (This provision corresponds to the early
disbursement requirements. See page 3-66.)

- For a student whose loan funds are subject to the 30-day
disbursement delay, if a school credits the student's account with
institutional funds in advance of receiving SFA Program funds
earlier than 30 days after the first day of the payment period, the
SFA loan disbursement occurs on the 30th day after the beginning of
the payment period.

[[This file contains the "Example - Advance credit to
account" on page 3-63 in Portable Document Format (PDF). It can
be viewed with version 3.0 or greater of the free Adobe Acrobat
Reader software.]]

In addition, if a school simply makes a memo entry for billing
purposes or credits a student's account and does not identify it as an
SFA credit (for example, an "estimated Federal Pell Grant") the
disbursement does not occur until the posting is subsequently
converted to an actual credit. If the posting is never converted to an
actual credit, it never becomes an SFA Program disbursement.

[[Disbursement by crediting a student's account]]
When a school disburses SFA Program funds to a student by
crediting a student's account, it may only do so for
allowable charges. Funds in excess of the allowable
charges must be paid directly to the student, unless otherwise
authorized by the student. (An exception for the payment of prior
year charges is discussed on page 3-69.)

Allowable charges are

[[Allowable charges]]
- current charges for tuition and fees (as defined in section 472 of
the Higher Education Act of 1965, as amended [HEA]), room and
board (if the student contracts with the school), and

- other current charges that a student incurs for educationally
related activities, if the school obtains the student's or parent's
authorization to have such charges credited with SFA Program
funds.

If a charge does not meet the definition of tuition and fees in Section
472 of the HEA (with the exception of contracted room and board
charges), the school must obtain the student's permission (or parent's,
if applicable) to credit the student's account with SFA Program funds
for the charges.

Current charges: Charges assessed the student by the
school for the current award year or the loan period for which the
school certified or originated a FFEL or Direct Loan.

[[Disbursing SFA funds directly]]
In addition to crediting a student's account, SFA Program funds may
be disbursed directly to a student or parent. A school may disburse
funds "directly" by one of four methods:

- releasing a check provided to the school by a FFEL Program
lender to the student or parent;

- issuing a check or other instrument payable to and requiring the
endorsement or certification of the student or parent. (A check is
issued if the school releases or mails the check to a student or
parent, or notifies the student or parent that the check is available
for immediate pickup.);

- initiating an electronic funds transfer (EFT) to a bank account
designated by the student or parent; and

- paying the student in cash, provided that the school obtains a
signed receipt from the student or parent.

A parent borrower of PLUS Loan funds may authorize the school to
transfer PLUS Loan funds to a bank account in the student's name.

Note that the law requires a school that disburses Direct Loans to
student accounts to first use Direct Loan funds to pay for outstanding
allowable charges. This does not mean that Direct Loan funds must
be credited to a student's account prior to other funds. The law
simply requires that if there is any outstanding balance for current or
authorized charges on the student's account when Direct Loan funds
are disbursed, the Direct Loan funds must be applied to those
outstanding charges before any Direct Loan funds may be disbursed
directly to the borrower.


DISBURSEMENT BY PAYMENT PERIOD
----------------------------------

Schools must disburse all SFA Program funds (except FWS) on a
payment period basis (for more information on the definition of a
payment period, see Section 1). However, disbursement requirements
vary by program. For information on the specific effects of the
payment period disbursement requirement on disbursement of funds
under a particular SFA Program, please see the applicable Handbook
chapter.

Unless a student is eligible to receive a late disbursement of SFA
Program funds, a school may disburse SFA Program funds to a
student or parent for a payment period only if the student is enrolled
for classes for that payment period and is eligible to receive those
funds.

[[Excused absence]]
An excused absence (an absence that does not have to be made up)
may be counted as a completed clock hour under certain
circumstances. For a student enrolled in a program measured in clock
hours, the school may include clock hours for which the student has
an excused absence in determining whether the student completes the
clock hours in the payment period if

- the school has a written policy that permits excused absences, and

- for SFA purposes, the number of excused absences under the
policy does not exceed the lesser of

- the policy on excused absences of the school's designated
accrediting agency,

- the policy on excused absences of any state agency that legally
authorizes the school to operate, or

- 10% of the clock hours in the payment period.

An excused absence may only be counted if the student is excused
from hours that were actually scheduled, missed, and not to be made
up.


EARLY AND LATE DISBURSEMENTS
--------------------------------

[[Early disbursements]]
The earliest a school may disburse SFA Program funds is

- for a student enrolled in a credit-hour program offered in
semester, trimester, or quarter academic terms, 10 days before the
first day of classes for a payment period.

- for a student enrolled in a clock hour program or a credit-hour
program that is not offered in semester, trimester, or quarter
academic terms, the later of 10 days before the first day of
classes for the payment period, or the date the student completed
the previous payment period for which he or she received SFA
Program funds (see the example below). This provision generally
applies only to the first disbursement of an FFEL or Direct Loan.
(This requirement is applicable to any payment period beginning
on or after July 1, 1997.)

[[This file contains the chart "Example - Early disbursement"
on page 3-66 in Portable Document Format (PDF). It can be viewed with
version 3.0 or greater of the free Adobe Acrobat Reader software.]]

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 disburse the first installment of his or her loan until
30 days after the student's first day of classes.

[[Late disbursements]]
A student who withdraws or otherwise ceases attendance has lost
SFA eligibility and generally may not be paid further funds for the
enrollment period. However, a late disbursement of SFA Program
funds may be made to an ineligible student if the student became
ineligible only because

- for purposes of the Direct Loan and FFEL programs, the student is
no longer enrolled at the school as at least a half-time student for
the loan period, and

- for purposes of the Pell Grant, FSEOG, and Perkins Loan
programs, the student is no longer enrolled at the school for the
award year.

In addition, other conditions must be met depending on the SFA
Program from which the late disbursement is to be made. The
following chart lists these conditions:

[[This file contains the chart "Late Disbursements"
on page 3-67 in Portable Document Format (PDF). It can be viewed
with version 3.0 or greater of the free Adobe Acrobat Reader
software.]]

[[Institutional late disbursement policy]]
A school may make the late disbursement only if the funds are used
to pay for unpaid educational costs that the school determines the
student incurred for the period in which the student was enrolled and
eligible. A school is not required to obtain detailed expenditure
documentation from the student. Instead, the school may develop a
policy that it applies in all cases. For example, a school may adopt a
policy that all expenses for books and supplies are considered to
have been incurred by a student who withdraws after the first two
weeks of the term (provided that this policy does not conflict with
any applicable refund requirements).

[[Deadline for payment]]
The school must make the late disbursement to the student no later
than 90 days after the date that the student becomes ineligible. For a
FFEL, this means that the funds would have to be disbursed to the
school by the lender to provide sufficient time for the school to
disburse the funds to the student within 90 days.

This definition of a "late disbursement" was included in final
regulations published November 29, 1996. The definition is
applicable to any student that becomes ineligible on or after July 1,
1997.


CREDIT BALANCES AND PRIOR-YEAR CHARGES
-------------------------------------------

[[SFA credit balance]]
Whenever a school credits SFA Program funds to a student's
account, and those funds exceed the student's allowable charges, an
SFA credit balance occurs. A school must pay the excess SFA
Program funds (the credit balance) directly to the student as soon as
possible, but no later than 14 days after the later of

- the date the balance occurred on the student's account, if the
balance occurred after the first day of class of a payment period
(see Example 1 below), or

- the first day of classes of the payment period if the credit balance
occurred on or before the first day of class of that payment period
(see Example 2 below).

[[This file contains Examples 1 and 2 in the chart "Example -
Payment of a credit balance" on page 3-68 in Portable Document Format
(PDF). It can be viewed with version 3.0 or greater of the free Adobe
Acrobat Reader software.]]

Note that the law requires that any excess PLUS Loan funds be
returned to the parent. Therefore, if a school determines that
PLUS Loan funds created a credit balance, the credit balance would
have to be given to the parent. At this time, the Department does not
specify how a school must determine which SFA Program funds
create a credit balance. For information on the treatment of a credit
balance when a student withdraws, see Section 4.

[[Holding excess funds]]
A school is permitted to hold excess funds (credit balances) if it
obtains a voluntary authorization from the student or parent. If a
school receives authorization to hold excess funds, the school must
identify the student or parent and the amount of funds the school
holds for the student or parent 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. Because SFA Program funds are awarded to students to
pay current year charges, notwithstanding any authorization obtained
by a school from a student or parent, the school must pay

- any remaining balance on loan funds by the end of the loan
period, and

- any other remaining SFA Program funds by the end of the last
payment period in the award year for which they were awarded.

This provision for payment of SFA Program fund balances was
effective on July 1, 1997.

The school is permitted to retain any interest earned on the student's
credit balance funds. The Department may prohibit a school that has
been placed on reimbursement from holding excess funds. If the
Department determines that the school has failed to meet the
financial responsibility standards, a limitation may be places on the
school preventing it from holding excess funds for any student.

[[Payment of prior year charges]]
In general, SFA Program funds are allowed to be used to pay only
for educational expenses a student incurs in the period for which
those funds are provided. However, a school is permitted to use a
student's SFA Program funds to pay minor prior-year institutional
charges if the student has or will have an SFA credit balance, and the
school obtains the student's or parent's authorization to pay the prior-
year charges.

A school may obtain authorization from a student in advance to use
SFA Program funds to cover prior-year charges that are less than
$100. To pay prior-year charges for amounts equal to or greater than
$100, in addition to obtaining an authorization, a school must
determine that payment would not prevent the student from paying
for his or her current educational expenses.


REQUIRED SCHOOL NOTIFICATIONS
---------------------------------

Before a school disburses SFA Program funds for any award year,
the school must notify a student of the amount of SFA Program
funds the student and his or her parent can expect to receive
from each SFA Program, and how and when those funds will be
disbursed. If those funds include Direct Loan or FFEL Program
funds, the notice must indicate which funds are from subsidized
loans and which are from unsubsidized loans (this requirement was
included in final regulations published November 29, 1996 and
applies to loan periods beginning on or after July 1, 1997).

A school must provide the best information it has regarding the
amount of SFA Program funds a student can expect to receive.
Because the actual loan disbursements received by a student may
differ slightly from the amount expected by the school (due to loan
fees and rounding differences), a school may include the gross
amount of the loan disbursement or a close approximation of the net
disbursement amount.

[[Opportunity for loan cancellation]]
Because incurring a loan obligation is a serious responsibility, a
borrower must be given the opportunity to cancel the loan at or close
to the time the funds are actually disbursed and the debt incurred.
Notification of when a loan disbursement occurs is required to
remind borrowers of their loan obligation and to give students the
opportunity to replace credited loan proceeds with other funds.
Therefore, the school must notify a student or parent in writing or
electronically whenever the school credits the student's account with
Direct Loan, FFEL, or Perkins Loan program funds. The notification
must include

- the date and amount of the disbursement;

- the right of the student or parent borrower to cancel all or a
portion of the loan. (This is applicable to FFEL Program funds
only if the school received the loan funds from a lender through
EFT payment or master check.); and

- the procedures and the time by which the student or parent
borrower must notify the school that he or she wishes to cancel the
loan or a portion of the loan.

This notification requirement was included in final regulations
published November 29, 1996. The definition applies to loan funds
that are credited to a student's account on or after July 1, 1997.

A school is not required to provide notification of cancellation rights
if the school disburses a FFEL directly to the student or parent by
check. This is because a student or parent who receives a FFEL
disbursement via check has the opportunity to refuse the funds by not
endorsing the check or by returning the check.

[[60 day window for notification]]
This notification of crediting a student's account with loan funds
must be sent no earlier than 30 days before and no later than 30 days
after crediting the student's account (see example below). If a school
notifies a borrower electronically, it must request that the borrower
confirm the receipt of the notice and the school must maintain a copy
of that confirmation. For example, if a school notifies a borrower
through electronic mail, the school must request a "return receipt"
message and keep a copy of the receipt on file.

[[This file contains the chart "Example - Notification when
credit account" on page 3-71 in Portable Document Format (PDF). It can
be viewed with version 3.0 or greater of the free Adobe Acrobat Reader
software.]]

A school may not use an in-person or telephonic conversation as
the sole means of notification. In-person and telephonic
conversations are not adequate and verifiable methods of providing
notice. However, notification to borrowers in-person and by
telephone may be done in addition to providing written or electronic
notice.

[[14 day cancellation window]]
Once the school has provided notification, if the student or parent
wishes to cancel all or a portion of a loan, he or she must inform the
school. The school must honor the request if the request is received
no later than

- 14 days after the date the school sends the notice (see example 1
on the next page), or

- the first day of the payment period, if the school sends the notice
more than 14 days before the first day of the payment period (see
example 2 on the next page).

[[This file contains Examples 1 and 2 in the chart "Example -
14 day cancellation period on page 3-72 in Portable Document Format
(PDF). It can be viewed with version 3.0 or greater of the free Adobe
Acrobat Reader software.]]

[[Response to request is required]]
If a student's or parent's request for cancellation is received within
the specified time period, the school must return the loan proceeds
and/or cancel the loan as appropriate. If a student's or parent's request
for cancellation is received after the specified time period, the
school may, but is not required to, honor the request. Regardless of
when the request is received, the school must inform the student or
parent, in writing or electronically, of the outcome of the request.

A school is not responsible for returning a
portion of a loan that was disbursed to a
student or parent directly before the request
for cancellation was received. However, a
school is encouraged to take an active role in
advising the borrower to return the portion of
funds already received
.


REQUIRED STUDENT AUTHORIZATIONS
------------------------------------

A school must obtain authorization from a student (or parent
borrower) before

- disbursing SFA Program funds by EFT to a bank account
designated by the student or parent

- using SFA Program funds to pay for allowable charges other than
tuition, fees and room and board (if the student contracts with the
school)

- holding excess SFA Program funds (credit balances)

- applying SFA Program funds to prior-year charges.

In obtaining an authorization from a student or parent, a school
may not require or coerce the authorization and
must notify the student or parent that he or she may cancel or modify
the authorization at any time. Once a student or parent cancels or
modifies his or her authorization, the school may not perform the
function, or must perform the function as modified, from that date
forward.

[[Effective date of cancellation]]
A cancellation or modification is not retroactive. If a student or
parent cancels an authorization to use SFA Program funds to pay for
allowable charges other than tuition, fees, and room and board (if the
student contracts with the school), or prior-year charges, the school
may use SFA Program funds to pay any authorized charges incurred
by the student before the notice was received by the school. If a
student or parent cancels an authorization to hold excess funds, the
funds must be paid directly to the student or parent as soon as
possible, but no later than 14 days after the school receives the notice
(see example below).

[[This file contains the chart "Example - Payment after cancel
authorization" on page 3-73 in Portable Document Format (PDF). It can be
viewed with version 3.0 or greater of the free Adobe Acrobat Reader software.]]

A school may include two or more of the items that require
authorization on one statement. However, a student (or parent
borrower) must be informed that he or she may refuse to authorize
any individual item on the statement.

Any authorization must clearly explain how the school will carry out
an activity. It does not need to detail every aspect pertaining to the
activity; however, a blanket authorization that only identifies the
activities to be performed is not acceptable. For example, an
authorization permitting a school to use excess SFA Program funds
must provide detail that is sufficient to give the student (or parent) a
general idea of what the excess funds would be used to pay. A
blanket statement that excess funds would cover any charges is not
acceptable.

Unless otherwise specified, a student or parent may authorize a
school to carry out the activities for which authorization is provided
for the entire period during which the student is enrolled at the
school. As mentioned above, a student or parent may cancel or
modify an authorization at any time. This one-time authorization
provision was included in final regulations published November 29,
1996. The definition applies to any authorization obtained by a
school to carry out these activities beginning on or after July 1, 1997.


EXCESS CASH
-------------

"Excess cash" is any amount of SFA Program funds, other than funds
received under the just-in-time payment method (see page 3-58), that
a school does not disburse to students by the end of the third business
day following the date the school receives 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 additional days.

[[Allowable excess cash tolerances]]
For a period of peak enrollment (see below) at the school during
which a drawdown 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 Program 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:

Number of students who started classes in the comparable
30-day period in the prior award year
---------------------------------------------------------------
Total number of students who started classes during the
entire prior award year

For any period other than a period of peak enrollment, the school can
maintain the excess cash balance if the excess cash balance is less
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 Program funds to students for at
least the amount of that balance.

If a school that is participating in the Direct Loan Program 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 the total amount of loans guaranteed
under the FFEL Program for students attending the school during
that year in determining total prior-year drawdowns.

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.

[[Consequences for improperly maintaining excess cash balances]]
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 9.)

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.


ADMINISTRATIVE COST ALLOWANCE
---------------------------------

[[Pell Grant allowance]]
The Department pays an administrative cost allowance (ACA) to
schools to offset some of the administrative costs related to the Pell
Grant and campus-based programs. As defined in the regulations, the
Pell Grant Program ACA is $5 for each Pell Grant recipient at the
school (calculated by the Department, based on the number of Pell
Grant recipients reported by the school). Schools are notified of their
Pell Grant ACA by mail three times during the processing year. The
Pell Grant allowance is paid directly to the school from the Federal
Reserve. (For more information, see Chapter 4.)

[[Campus-based allowance]]
A school calculates its own campus-based program ACA in its
annual Fiscal Operations Report and Application to Participate
(FISAP), based on a percentage of its campus-based expenditures in
the previous award year (see Chapter 5). Unlike the Pell Grant ACA
procedures, the school must draw down the campus-based ACA from
its program allocation using the ED Payment System. (A school may
use up to 10% of the FWS-based ACA for expenses incurred for its
community service program.)