General Institutional Responsibilities

General Institutional
Chapter
2 Responsibilities

Summary
This chapter discusses the broad range of responsibilities of schools
participating in Title IV student financial aid programs (Title IV programs).
It presents information about institutional fiscal operations and network of
responsibilities, institutional eligibility, financial responsibility,
administrative capability (including separation of functions), and other
areas such as consumer information, institutional policies and procedures,
program evaluation, refunds and repayments, record maintenance, and
disclosing student information.

Key Terms
Access America for Students Modernization Blueprint
administrative capability net income ratio
Campus Security Act primary ratio
composite score Project Easy Access for Students
data universal numbering system and Institutions (EASI)
(DUNS) refund
equity ratio repayment
Family Education Rights and return of Title IV funds
Privacy Act (FERPA) Student Right-To-Know Act
financial responsibility unearned aid
leave of absence withdrawal date

2.1 Overview of Fiscal Operations and the

Network of Responsibilities
The term “fiscal operations” encompasses a broad range of processes. For
the Title IV programs, these include, but are not limited to:

• requesting funds from the federal government,

• disbursing funds to eligible students and parents,

• keeping accurate and auditable financial records,

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• managing cash,

• accounting for funds and financial activities, and

• reporting on these activities.

Schools organize and manage their fiscal operations differently, depending

on such factors as the size of the school administrative structure, staffing,
automation, and federal program participation. Although fiscal operations
can vary from school to school, successfully managing Title IV programs at
any school depends on coordinated efforts across institutional offices. To
illustrate this network of responsibilities, consider the relatively routine
activity of managing Federal Work-Study (FWS) time sheets for student
employees. Your process probably demonstrates the interdependence of
various offices at your school, as completing the FWS questionnaire on the
next page will show you.

Coordination has become increasingly important as automated systems have

replaced paper-based ones. Automated systems bring many benefits, such
as enhanced data integrity and speedy data exchange. However, they also
present challenges; the most critical, perhaps, is that automation can blur
responsibility for functions that must be kept separate, such as awarding
Reference: and disbursing financial aid awards. The American Institute of Certified
• www.aicpa.org Public Accountants provides guidance on these and other management,
accounting, and auditing issues.

Managing Title IV Programs

Managing Title IV financial aid is an institution-wide responsibility. The
entire school benefits from the Title IV programs. Therefore, all offices at a
school need to work together. However, managing Title IV programs
includes three main functional areas:

• the president’s office,

• the financial aid office, and

• the business (bursar’s) office.

As mentioned earlier in this chapter, schools differ in how they divide these
functions among administrative offices. However, the president’s office,
the financial aid office, and the business office always play key roles.

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Network of Responsibilities—FWS Questionnaire

The Federal Work-Study (FWS) time sheet requires an oversight signature.

• Who is authorized to sign and certify that a student’s work was performed in a satisfactory
manner?________________________________________________________________________

Students must remain eligible from one term to the next.

• Who monitors student eligibility and academic progress?____________________________________

Some eligibility requirements are school policies.

• Who develops these policies for the school?______________________________________________

Students are paid their wages on the basis of their time sheets.

• Who collects the time sheets from students?_____________________________________________

• Who processes the payroll?__________________________________________________________
• Who reconciles the payroll to the time sheets?____________________________________________

Students may only earn up to the amount of their authorized FWS awards.

• Who determines the amount of the award?_______________________________________________

• Who monitors students’ earnings to ensure that they do not earn in excess of that amount?__________

All schools are required to spend at least 7 percent of the federal allocation of their FWS funds to employ
students in community-service positions.

• Who locates and develops these jobs?__________________________________________________

• Who monitors the percentage of funds used for these jobs?__________________________________

Student earnings are part of the institution’s overall FWS budget.

• Who develops the budget?___________________________________________________________

• Who monitors expenditures?_________________________________________________________

Schools that receive FWS funds are required to apply for those funds and to report to ED on the use of
those funds.

• Who completes the application?_______________________________________________________

• Who completes the report?___________________________________________________________

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The Administrative Office

Responsibility for overall administration resides with the school’s president,
chancellor, or chief executive officer (CEO). The leadership and
management style of the person in this position sets the tone and direction
of the financial aid program for the entire institution.

Although authority and responsibility is delegated to other offices, the

leadership and support of the CEO/president are crucial to successfully
administering Title IV programs. By recognizing the importance of federal
aid programs, making Title IV program administration a high priority, and
holding key officials accountable, CEO/president leadership can foster an
environment that promotes an effective and responsive financial aid
program that meets institutional goals, students’ needs, and federal
requirements.

The checklist on the next page lists the responsibilities of the CEO/
president.

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 General Institutional Responsibilities

s
The CEO/president must ensure that a school...

is financially responsible to administer obtains a letter of credit (LOC)1 (if the

Title IV programs school has failed to meet the standards
of financial responsibility)
is administratively capable of administering
Title IV programs has an independent auditor perform an
annual nonfederal audit of the school’s
has a capable individual to administer
Title IV financial operations2
Title IV programs and coordinate federal
and nonfederal financial aid programs cooperates fully with any program reviews
or audits and makes available all necessary
has an adequate number of qualified staff to
information to the reviewers or auditors
administer Title IV programs
has no criminal or fraudulent activities
has established clear lines of responsibility
occur as it manages federal funds and
among the pertinent school offices
administers Title IV programs
has good communication and cooperation
has established reasonable standards of
among personnel in the pertinent school
satisfactory academic progress (SAP) for
offices
students
maintains effective record-keeping systems
has established a fair and equitable refund
for both student records and financial
policy
records
has an operable and accessible drug-abuse
has an adequate system of checks and
prevention program, as required by the
balances to ensure separation of award
Drug-Free Schools and Communities Act
functions from disbursement functions
is a drug-free workplace, as required by
has accurate information about student
the Drug-Free Workplace Act
applicants for Title IV aid and resolves any
discrepancies or inconsistencies makes available all published information
required by the Student Right-to-Know
provides adequate financial aid and debt
and Campus Security Act and any other
management counseling to students
pertinent laws and regulations
refers any suspected cases of Title IV fraud,
provides the services described in its
abuse, or misrepresentation to ED’s Office
publications
of Inspector General (OIG)
1. This is an ED requirement. A school would obtain the LOC from a bank or other financial institution in the amount of a
specific percentage of the school’s last year’s Title IV program drawdown. If it is a new school, the LOC would be in the
amount of the estimated/anticipated Title IV program drawdown. The LOC would be payable to ED, and ED would
draw on the LOC if there is cause. While the school may contest ED’s action to draw LOC funds, ED gets to hold these
funds while the school protest is processed. Although ED no longer requires that a school obtain a fidelity bond, the
school may choose to obtain one as a good business practice to protect itself against improper actions of employees, board
members, and so on.

2. If a school receives less than $200,000 in Title IV funds annually in each of the two award years prior to the audit period,
ED may authorize it to have audits every three years if the school submits a letter of credit for not less than one-half of
its annual potential liabilities as determined by ED. In addition, schools that are subject to A-133 and have under
$300,000 in Title IV funds are completely exempt from an annual audit. However, if the schools have audited financial
statements done for them, ED can ask for them.

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The Financial Aid Office

While a school’s financial aid office assumes most of the responsibility for
administering Title IV programs, its role in the institution’s fiscal operation
is usually a limited one. See the checklist below for a list of fiscal functions
carried out by financial aid administrators.

s
A school’s financial aid office must...

advise and counsel students and parents assist in reconciling loan records (for schools
about financial aid that participate in the Direct Loan Program)
provide students with consumer informa- reconcile student financial aid data provided
tion, as required by federal regulations to the business office to ensure that all
payments have been made, refunds have
develop written policies and procedures
been accounted for, and expenditures have
about the way the school administers
been reported
Title IV programs
adhere to the principle of separation of
determine students’ eligibility for financial aid
functions (no single office or individual may
make financial aid awards to students authorize payments and disburse Title IV
funds to students)
coordinate financial aid activities with those
of other school offices in administering perform (limited) fiscal operations, such as
financial aid programs
• authorizing payment of Title IV funds to
interact with various outside groups, agen- student accounts or to students directly
cies, associations, and individuals about issues
• authorizing refunds to students
concerning the school’s administration of
financial aid programs • authorizing refunds to Title IV program
accounts
monitor students’ satisfactory academic
progress (SAP) • ensuring that the school collects any
required repayments
maintain school records and student records
that document activities of the financial aid • coordinating submission of the Fiscal
office and provide data for reports Operations Report and Application to
Participate (FISAP)
keep current on changes in laws and regula-
tions to ensure that the school remains in provide entrance and exit counseling to
compliance borrowers of FFEL Program loans and
Direct Loan Program loans as part of the
assist in reporting Pell Grant expenditures
award and delivery process1
manage and report on activities that involve
provide entrance and exit counseling to
financial aid funds
borrowers of Federal Perkins Loans as part
of the award and delivery process1
1. At some schools, these activities are performed by the
business office. See page 2-8.

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 General Institutional Responsibilities

The Business Office

Title IV-related fiscal operations are handled by an institution’s business
office. This office may go by another name—fiscal office, finance office,
comptroller’s office, bursar’s office, treasurer’s office, or student accounts
office. For the duration of this book, this office will be referred to simply as
“the fiscal office” or “the business office.”

The business office provides critical services to the school in managing both
federal and nonfederal financial aid programs. Maintaining accounting,
record keeping, and reporting functions tied to the institution’s use of
federal and other funds requires many detailed, complex systems. Strong
internal controls and sound business and financial management practices
are keys to the success of these operations and delivery of funds to
students.

The checklist on the next page lists some of the major responsibilities of the
fiscal office.

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s
A school’s business office must...

coordinate activities and cooperate with the establish and implement the institution’s
financial aid office in: refund policy
• projecting cash flow needed to cover establish and monitor Federal Work-Study
awards (FWS) payroll and time sheets
• processing cancellations and refunds process refunds and credit balances to
Title IV accounts according to the
• obtaining authorization to pay Title IV institution’s refund policy and applicable
funds federal laws and regulations
• being aware of the changes in Title IV assist in reporting Title IV expenditures to
laws and regulations ED in a timely manner
• submitting accurate and timely reports reconcile accounts, including
• reconciling with the financial aid office • reconciling cash between school records
to ensure that all financial aid adjust- and bank statements
ments have been properly recorded
• reconciling federal funds between bank
maintain a system of internal controls that statements and federally reported
includes adequate checks and balances balances
ensure that the functions of authorizing and assist in completing applications and fiscal
disbursing Title IV funds remain separate reports for federal funds
maintain records according to federal and maintain a cash management system to meet
generally accepted accounting procedures disbursement requirements and federal laws
(GAAP) and regulations
maintain records to ensure a clear audit trail provide general stewardship for federal
draw down and return Title IV funds funds, including maintaining bank accounts
and investments as appropriate
disburse funds to eligible students from
Title IV program accounts prepare for and participate in program
reviews and audits
maintain individual student accounts that
record changes, credits, and amounts due provide entrance and exit counseling to
(if the school uses individual student ac- borrowers of FFEL Program loans and
counts) Direct Loan Program loans as part of the
disbursement process2
deliver FFEL Program loan proceeds
provide entrance and exit counseling to
collect Federal Perkins Loans1 borrowers of Federal Perkins Loans as
part of the disbursement process2
1. At some schools, a separate student loan office collects these loans.
2. At some schools, these activities are performed by the financial aid office (see page 2-6). In addition, the
business office may be responsible for administering other aspects of the Federal Perkins Loan Program.
While the financial aid office may be responsible for awarding Perkins Loan funds, the business office may
be responsible for collecting and handling promissory notes, billing borrowers in repayment, collecting
payments, authorizing deferments, cancelling loans, and reporting Perkins Loans to NSLDS.

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 General Institutional Responsibilities

2.2 Institutional Eligibility

Reference: To participate in any Title IV program(s), an institution must:
• Student Financial Aid
Handbook: Institutional • meet the standards for an eligible institution,
Eligibility and
Participation • demonstrate that it meets Title IV financial responsibility
requirements,

• demonstrate that it is administratively capable of managing

Title IV programs,

• enter into a written Program Participation Agreement (PPA)

with ED, and

• be certified to participate in Title IV programs.

Types of Eligible Institutions

Reference: The Higher Education Act of 1965, as amended (HEA), defines three types
• 34 CFR 600.4-600.6 of postsecondary institutions that are eligible to participate in
Title IV programs:

• institutions of higher education,

• proprietary institutions of higher education, and

• postsecondary vocational institutions.

A public or private non-profit school can fall into more than one category.
However, a proprietary school cannot fall into more than one category. The
type of institution is defined mainly by how the school is controlled (public,
private, for-profit, nonprofit) and by the minimum program length offered
by the school. Proprietary institutions have an additional eligibility
requirement called the “90/10” rule.

90/10 Rule
The 90/10 rule means that no more than 90 percent of a proprietary
institution’s revenue in a fiscal year may be derived from Title IV program
funds; at least 10 percent must come from non-Title IV program funds.
Federal funding that is not from Title IV funds may make up the
Reference: 10 percent.
• Student Financial Aid
Handbook: Institutional • An institution that determines it satisfied the 90/10 rule during its
Eligibility and most recently completed fiscal year must have the auditor preparing
Participation its audited financial statement report on the accuracy of that
• HEA, Section 102(b)

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determination. This is done in a footnote to the audited financial

statement.

Schools must report directly to ED within 90 days of the end of their fiscal
year when they do not satisfy this requirement. Audits of schools that do
satisfy this requirement must include a statement to that effect.

The institution’s overall financial management capability must be examined

annually by auditors to ensure that good practices are maintained and that
poor ones are corrected. Two important areas in which standards must be
upheld for continued participation in Title IV programs are financial
responsibility and administrative capability.

Application for Approval to Participate

Reference: An institution must be approved and certified by ED to participate in any
• 34 CFR 668.13 of the following Title IV programs:

• Federal Pell Grant,

• Federal Supplemental Educational Opportunity Grant (FSEOG),

• Federal Work-Study (FWS),

• Federal Perkins Loan (Perkins),

• Federal Direct Loan, and

• Federal Family Education Loan (FFEL).

Reference: To apply for institutional participation, an institution must submit an

• www.eligcert.ed.gov Application for Approval to Participate in Federal Student Financial Aid Programs
to ED as well as any other requested materials (such as a current letter of
accreditation and a valid state license or other state authorization). Schools
submit the application electronically using ED’s Web site. However,
schools must sign and send to ED Section L (signature page) of the
application along with all required supporting documents.

ED uses the information in the application to determine whether the school

meets Title IV eligibility requirements and is administratively capable and
financially responsible.

Program Participation Agreement

Reference: If ED approves a school’s application, ED sends the school two copies of a
• 34 CFR 668.14 Program Participation Agreement (PPA). The PPA includes the date the
school’s eligibility expires. The school must sign and return both copies of
the PPA to ED to participate in any Title IV program other than the

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 General Institutional Responsibilities

Leveraging Educational Assistance Partnership (LEAP) Program (formerly

the State Student Incentive Grant Program). ED then sends the school an
approval letter, an Eligibility and Certification Approval Report (ECAR),
and a copy of the school’s PPA signed and dated by ED.

• The ECAR contains the most critical data elements that form the
basis of the school’s approval and also a list of the highest level of
offering, any non-degree program or short-term programs, and any
additional locations that have been approved for the Title IV
programs. All of these documents must be kept available to be
reviewed by auditors and ED officials, including Title IV program
reviewers.

Under the PPA, an institution agrees to comply with the laws and
regulations governing Title IV programs. When entering into a PPA, the
school must demonstrate that it can carry out its financial responsibilities
for properly managing Title IV programs and is administratively capable of
providing the education it promises.

A school that wishes to continue to participate in Title IV aid programs

must submit a fully completed application requesting recertification 90 days
before the expiration date on its current PPA. ED will send a
recertification reminder notice to the school six months before its PPA
expires.

Single Identifier Initiative

Schools currently use an OPE-ID number—an eight digit, system-generated
identifier—that accounts for the institution’s main location, its off-site
locations, and its Electronic Data Exchange (EDE) addresses. In some
cases, different OPE-ID numbers (in some instances for the same Title IV
program) are used for the same institution. This situation impairs ED’s
ability to provide accurate information about the amount of financial aid a
college or university receives and hinders effective gatekeeping for Title IV
programs. To remedy this situation, ED has implemented a single
identifier.

The new numbering system is taking place in two phases:

Reference: • Phase One—Beginning 1999-2000, ED will implement a single
• DCL-ANN-97-4 eight-digit identification numbering system. ED internally
• DCL-ANN-97-7 rearranged identifiers so that schools that currently have more than
• DCL-GEN-98-8 one number will have one OPE-ID number. In December 1998,
Phase One completed and populated an identifier crosswalk in the
Reference: Postsecondary Education Participants System (PEPS) of all active
• www.sii.ed.gov
and inactive Office of Student Financial Aid (OSFA) program and
• www.dnb.com

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Electronic Data Exchange (EDE) identifiers. Those identifiers are

now crossed to an OPE-ID numbering system.
Reference: • Phase Two—From 1999 to 2001, ED will design and implement
• DCL-ANN-97-4 software changes required to use the data universal numbering
• DCL-ANN-97-7 system (DUNS). The DUNS number is the sole Title IV identifier
• DCL-GEN-98-8 for participating postsecondary educational institutions, lenders,
third-party servicers, and guarantors.
Reference:
• www.sii.ed.gov DUNS identifiers will be given to each eligible or ineligible non-
• www.dnb.com main campus educational site and each active or inactive Pell Grant,
Direct Loan, and need analysis electronic data exchange site. The
target date for incorporating the DUNS identifier within the OSFA
system is the 2001-2002 award year.

As part of the government-wide effort to adapt to electronic commerce, ED

intends to implement the DUNS identification system as the Title IV Single
Identifier for all participants: colleges and schools, lenders, servicers, and
guarantors.

• Not all third-party servicers will receive DUNS numbers because if

they do not have an OPE-ID number (a current record in PEPS),
ED cannot propose a DUNS number in the crosswalk.

Adoption of the DUNS identification system as the Title IV identifier

instead of an OPE-ID number will simplify participation in Title IV
programs as institutions are already required to have a DUNS identifier for
conducting electronic commerce.

2.3 Financial Responsibility Standards

Reference: Congress requires ED to assess whether institutions are financially
• Student Financial Aid responsible by determining if they satisfy three statutory components.
Handbook: Institutional See the chart on the next page.
Eligibility and
Participation According to ED regulations, a school is considered to be financially
• HEA, Section 498(c) responsible if it:
• 34 CFR 668, Subpart L
1. provides the services described in its official publications and
statements;

2. administers properly the Title IV programs in which it participates;

and

3. meets all of its financial obligations.

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 General Institutional Responsibilities

Using institutional audited financial statements and other information, ED

evaluates whether the school meets required financial responsibility
standards.

Components of Financial Responsibility

To be financially responsible, ED assesses schools on the basis of....

a school must...

• Making timely refunds to students

• Meet its financial obligation
• Making timely repayments to ED

• Being current on its debt payment

• Administer Title IV • Past performance

programs properly
• Program compliance

• Be in adequate financial
condition • Sufficient resources for its education
programs, services, and financial
obligations

Financial Responsibility Standards for Public Institutions

Reference: ED considers a public institution to be financially responsible if the
• Student Financial Aid institution:
Handbook: Institutional
Eligibility and • notifies ED that it is designated as a public institution by the state,
Participation
local, or municipal government entity, tribal authority, or other
• 34 CFR 668.171(c)(1)
and (2)
government entity that has legal authority to make that designation;

• provides a letter from an official of that state or government entity

confirming that the institution is a public institution; and

Reference: • is not in violation of any past performance requirement.

• 34 CFR 668.174

Financial Responsibility Standards for Proprietary and Private

Institutions
Reference: A for-profit or non-profit private institution is financially responsible if ED
• Student Financial Aid determines that it meets all of the four standards that follow and does not
Handbook: Institutional have an adverse, qualified, or disclaimed audit opinion or past performance
Eligibility and problem.
Participation

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Standard #1
Reference: The institution’s equity, primary reserve, and net income ratios must yield a
• Student Financial Aid composite score of at least 1.5. ED determines the composite score by:
Handbook: Institutional
Eligibility and 1. calculating the result of the school’s primary reserve equity and net
Participation
income ratios,
• 34 CFR 668.171(b)(1)
• 34 CFR 668.172(b)(1)(2) 2. calculating the strength factor score for each of those ratios by using
• 34 CFR 668, Appendix F the corresponding algorithm,
• 34 CFR 668, Appendix G
3. calculating the weighted score for each ratio by multiplying the
strength factor score by its corresponding weighted percentage,

4. summing the resulting weighted scores to arrive at the composite

score, and

5. rounding the composite score to one digit after the decimal point.

Reference: The ratios for proprietary institutions are:

• See pages 2-64 and
2-67 of this book for Primary Reserve ratio = Adjusted Equity
more information on Total Expenses
calculating ratio
methodologies for
proprietary and private
Equity ratio = Modified Equity
non-profit institutions. Modified Assets

Net income ratio = Income Before Taxes

Total Revenues

The ratios for private non-profit institutions are:

Primary Reserve ratio = Expendable Net Assets

Total Expenses

Equity ratio = Modified Net Assets

Modified Assets

Net income ratio = Change in Unrestricted Net Assets

Total Unrestricted Revenues

Reference: In calculating an institution’s ratios, the U.S. Secretary of Education

• 34 CFR 668.172(c) (the Secretary) generally excludes:
(1)(2)
• extraordinary gains or losses,

• income or losses from discontinued operations,

• prior period adjustments,

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 General Institutional Responsibilities

• the cumulative effect of changes in accounting principles, and

• the effect of changes in accounting estimates.

Reference: The Secretary may include or exclude the effects of questionable accounting
• 34 CFR 668.173(c) treatments, such as excessive capitalization of marketing costs.
(3)(4)
The Secretary also excludes:

• all unsecured or uncollateralized related-party receivables,

• all intangible assets defined as intangible in accordance with

generally accepted accounting principles (GAAP), and

Reference: • federal funds provided to an institution by the Secretary authorized

• 34 CFR 668.172(c)(5) by the HEA only if:
(i)(ii)
– the auditor, in notes on the audited financial statement or as a
separate attestation, discloses by name and CFDA number, the
amount of HEA program funds reported as expenses in the
Statement of Activities for the fiscal year covered by the audit
or attestation and

– the institution’s composite score, as determined by the

Secretary, is less than 1.5 before the reported expenses arising
from those HEA funds are excluded from the Primary Reserve
ratio.

Standard #2
Reference: The institution must have sufficient cash reserves to make required
• 34 CFR 668.171(b)(2) refunds. An institution is considered to have sufficient cash reserves if it:
• 34 CFR 668.173(a)
• satisfies the requirements of a public institution,

• is located in a state that has a tuition recovery fund approved by the

Secretary and the institution contributes to that fund, or

• demonstrates that it makes its refunds in a timely manner.

Reference: An institution makes timely refunds if the auditor(s) who conducted the
• 34 CFR 668.173(b) institution’s compliance audits for the institution’s two most recently
(1)(2) completed fiscal year or the Secretary, a state, or guaranty agency that
conducted a review of the institution covering those fiscal years:

• did not find in the sample of student records that:

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- the institution made late refunds to 5 percent or more of the

students in that sample or

- the institution made only one late refund to a student in that

sample, and

• did not note for either of those fiscal years a material weakness or a
reportable condition in the institution’s report on internal controls
that is related to refunds.

Reference: If an institution no longer satisfies a refund standard or is not making its

• 34 CFR 668.173(c) refunds in a timely manner, the institution must submit an irrevocable letter
of credit. The letter of credit must be:

• acceptable and payable to the Secretary and

• equal to 25 percent of the total amount of Title IV refunds the

institution made or should have made during its most recently
completed fiscal year.

Reference: The institution must submit this letter of credit to the Secretary no later
• 34 CFR 668.173(c) than:
(1)(2)
• 30 days after the date the institution is required to submit its
compliance audit to the Secretary, if the finding is by the auditor
who conducted that compliance audit or

• 30 days after the date the Secretary or the state or guaranty agency
that conducted a review of the institution notifies the institution of
the finding.

– The institution must also notify the Secretary of that finding and
of the state or guaranty agency that conducted a review of the
institution.

Reference: To determine whether to approve a state’s tuition recovery fund the

• 34 CFR 668.173(d) Secretary considers the extent to which that fund:

• provides refunds to both in-state and out-of-state students,

• allocates all refunds in accordance with the order required under

34 CFR 668.22, and

• provides a reliable mechanism for the state to replenish the fund

should any claims arise that deplete the fund’s assets.

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 General Institutional Responsibilities

Standard #3
Reference: The institution must be current in its debt payments. An institution is not
• 34 CFR 668.171(b)(3) current in its debt payments if:

• it is in violation of any existing loan agreement at its fiscal year end,

as disclosed in a note to its audited financial statements or audit
opinion or

• it fails to make a payment according to existing debt obligations for

more than 120 days, and at least one creditor has filed suit to
recover funds under those obligations.

Standard #4
Reference: The institution must meet all of its financial obligations, including (but not
• 34 CFR 668.171(b)(4) limited to):

• refunds that it is required to make; and

• repayments to ED for debts and liabilities arising from its

participation in Title IV programs.

Even if an institution satisfies all of these standards, ED will not consider

the school financially responsible if:

Reference: 1. the institution’s audited financial statements contain an adverse,

• 34 CFR 668.171(d) qualified, or disclaimed audit opinion, or the auditor expresses
(1)(2) doubts about the continued existence of the institution as a going
concern;

OR

2. the institution violated a Title IV program requirement, or the

persons or entities affiliated with the institution owe a liability for a
violation of a Title IV program requirement.

Reference: ED will disregard the first reason if the qualified or disclaimed opinion does
• 34 CFR 668.174(b)(2) not have a significant bearing on the institution’s financial condition. ED
will disregard the second reason if the liability in question is being repaid or
the persons or entities owing the liability do not exercise substantial control
over the institution.

Reference: Past Performance

• Student Financial Aid An institution is not financially responsible if the institution:
Handbook: Institutional
Eligibility and
Participation • has been limited, suspended, terminated, or entered into a
• 34 CFR 668.174(a)(1) settlement agreement to resolve a limitation, suspension, or

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termination action initiated by the Secretary or a guaranty agency as

defined in 34 CFR part 682, within the preceding five years;

Reference: • in either of its two most recent compliance audits had an audit
• 34 CFR 668.174(a)(2) finding or in a report issued by the Secretary had a program review
finding for its current fiscal year or in either of its preceding two
fiscal years that resulted in the institutions being required to repay
an amount greater than 5 percent of the funds that the institution
received under the Title IV programs during the year covered by
that audit or program review;

Reference: • has been cited during the preceding five years for failure to submit
• 34 CFR 668.174(a)(3) in a timely fashion acceptable compliance and financial statement
audits required under 34 CFR 668.174 or acceptable audit reports
required under the individual Title IV program regulations; or

Reference: • has failed to resolve satisfactorily any compliance problems

• 34 CFR 668.174(a)(4) identified in audit or program review reports based upon a final
decision for the Secretary issued pursuant to subpart G or H of
34 CFR 668.174.

Other Financial Responsibility Standards

Reference: Schools that are not financially responsible under the regular standards may
• Student Financial Aid begin participating or continue participating in Title IV programs by
Handbook: Institutional qualifying under an alternative standard. There are three types of
Eligibility and
Participation
alternative standards: letter-of-credit alternative, zone alternative, and
• 34 CFR 668.175(a)
provisional certification alternative. There are also specific financial
responsibility standards for schools that change ownership, guaranty
agencies, and third-party servicers.

Letter-of-Credit Alternative
Reference: An institution that seeks Title IV program participation for the first time,
• 34 CFR 668.175(b) but is not financially responsible solely because its composite score (from
its equity, primary, and net-income ratios) is less than 1.5, will qualify as a
financially responsible institution by submitting an irrevocable letter of
credit that is acceptable and payable to ED. ED will specify the amount,
but regulations require the letter of credit to equal at least 50 percent of the
amount of Title IV program funds the institution will receive during its
initial year of participation.

Reference: A participating institution that is not financially responsible because it does

• 34 CFR 668.175(c) not satisfy one or more of the financial responsibility standards or has an
unsatisfactory audit opinion can also use an irrevocable letter of credit. To
qualify as financially responsible, the letter must be acceptable and payable

The Blue Book June 1999

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 General Institutional Responsibilities

to ED. ED will specify the amount, but regulations require the letter of
credit to equal at least 50 percent of the Title IV program funds received by
the institution during its most recently completed fiscal year.

A participating school that is not financially responsible

due to past performance problems is not eligible for this
letter-of-credit alternative.

Zone Alternative
Reference: The zone alternative is only an option for a participating institution if the
• Student Financial Aid school is not financially responsible because its composite score is less than
Handbook: Institutional 1.5. If a participating school fails any other test of financial responsibility,
Eligibility and
Participation
the school cannot qualify for the zone alternative.
• 34 CFR 668.175
An institution qualifies as financially responsible under this alternative if its
composite score is in the range 1.0 to 1.4 (based on the audited financial
statement for its most recently completed fiscal year) and it satisfies other
standards of financial responsibility. ED may deem a school to be
financially responsible under the zone alternative for no more than three
consecutive years. An institution that qualifies under this alternative,
whether for three years or just one or two years, cannot use the zone
alternative again until the year after it achieves a composite score of at least
1.5.

To participate under the zone alternative, an institution must also meet the
following five requirements:

1. ED will require the school to use the cash monitoring or

reimbursement payment method to make disbursements to eligible
students and parents.

2. ED will require the school to provide timely information about any

of the following six oversight and financial events:

– any adverse action, including a probation or similar action, taken

against the institution by its accrediting agency;

– any event that causes the institution or a related entity to realize

any liability that was noted as a contingent liability in the
institution’s or related entity’s most recent audited financial
statement;

– any violation by the institution of any loan agreement;

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Chapter 2

– any failure of the institution to make a payment according to its

debt obligations that results in a creditor filing suit to recover
funds under those obligations;

– any withdrawal of owner’s equity from the institution by any

means, including declaring a dividend; or

– any extraordinary losses.

No later than 10 days after the event occurs, the school

must provide information on the above events by certified
mail, fax, or other electronic transmission. If fax or other
electronic transmission is used, the school is responsible for
confirming that ED received a complete, legible copy of the
transmission.

Reference: 3. ED may require the institution’s audited financial statement and

• 34 CFR 668.23(a)(4) compliance audit to be submitted earlier than specified in
regulations. For example, instead of six months after the end of the
school’s fiscal year, ED could require the school to submit its audit
reporting package as early as 60 days after the end of its fiscal year.

4. ED can require the institution to provide information about its

current operations and future plans.

5. The institution must, as a part of its compliance audit, require its

auditor to express an opinion on the school’s compliance with the
requirements under the zone alternative, including the school’s
administration of the payment method under which it received and
disbursed Title IV program funds.

Reference: Provisional Certification Alternative

• Student Financial Aid The provisional certification alternative is for participating institutions that
Handbook: Institutional
Eligibility and cannot qualify, or choose not to qualify, under any of the other alternatives.
Participation ED, at its discretion, may allow provisional certification for an institution
• 34 CFR 668.175(f) that is not financially responsible because:

Reference: • it does not satisfy the financial responsibility standards or has an

• 34 CFR 668.171(b) and unsatisfactory audit opinion;
(d)
OR

Reference: • its past performance shows that it violated a Title IV program

• 34 CFR 668.174(a) requirement, but it has satisfied or resolved the violation.

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 General Institutional Responsibilities

Under this alternative, an institution receives an initial provisional

Reference: certification, which cannot exceed three consecutive fiscal years. An initial
• Student Financial Aid
Handbook: Institutional
provisional certification carries the following three main conditions:
Eligibility and
Participation 1. The institution must submit an irrevocable letter of credit that is
acceptable and payable to ED. ED decides on the amount, but it
cannot be less than 10 percent of the Title IV program funds
received by the institution during its most recently completed fiscal
year.
Reference: 2. The institution must demonstrate that it was current on its debt
• 34 CFR 668.171(b)(3) payments and has met all of its financial obligations for its two
and (b)(4)
most recent fiscal years.
Reference: 3. The institution must comply with all of the provisions of the zone
• 34 CFR 668.175(d)(2) alternative.
and (d)(3)
When the initial provisional certification ends, if the institution is still not
financially responsible, ED may again permit it to participate under a
provisional certification. However, ED may impose one or both of the
following additional conditions:

1. ED may require the institution, or one or more persons or entities

that exercise substantial control over it, to submit financial
guarantees for an amount determined by ED to be sufficient to
satisfy any potential liabilities arising from the institution’s
participation in Title IV programs.

2. ED may require one or more persons or entities that exercise

substantial control over the institution to be jointly or severally
liable for any liabilities arising from the institution’s participation in
Title IV programs.

Provisional Certification Alternative for Institutions Controlled by Persons

or Entities Owing Liabilities
Reference: An institution may be deemed not financially responsible because the
• Student Financial Aid persons or entities that exercise substantial control over the institution owe
Handbook: Institutional
Eligibility and
a liability for a violation of a Title IV program requirement.
Participation
• 34 CFR 668.175(g)
In such cases, ED may allow the school to participate under a provisional
certification only on three conditions:

1. EITHER the persons or entities that exercise substantial control

repay or enter into an agreement with ED to repay the applicable
portion of that liability, OR the institution assumes that liability

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Chapter 2

and repays or enters into an agreement with ED to repay that

Reference:
liability.
• Student Financial Aid
Handbook: Institutional
Eligibility and
2. The institution must satisfy the standards of financial responsibility
Participation and demonstrate that it was current on its debt payments and has
met all of its financial obligations for its two most recent fiscal
years.

3. The institution must submit an irrevocable letter of credit that is

acceptable and payable to ED. ED decides on the amount, but it
cannot be less than 10 percent of the Title IV program funds
received by the institution during its most recently completed fiscal
year.

ED also requires the institution to comply with the provisions under the
zone alternative. Furthermore:

1. ED may require the institution, or one or more persons or entities

that exercise substantial control over the institution, or both, to
submit financial guarantees for an amount determined by ED to be
sufficient to satisfy any potential liabilities arising from the
institution’s participation in Title IV programs; and

2. ED may require one or more of the persons or entities that exercise

substantial control over the institution to be jointly or severally
liable for any liabilities arising from the institution’s participation in
Title IV programs.

Schools that Change Ownership

Reference: ED evaluates a school that changes ownership according to the factors of
• 34 CFR 668.15 financial responsibility contained in regulations. During the 1997-98
“transition year,” these regulations also applied to guaranty agencies, third-
party servicers, and schools. (The transition year allowed schools that were
not financially responsible under Subpart L solely because their composite
scores were less than 1.5 to qualify as financially responsible.)

Reference: A newly eligible institution or an institution that is undergoing a change of

• HEA, Section 487 ownership is required to implement a default management plan for two
years unless:

• the school’s branch campus or main campus has a cohort default

rate of 10 percent or less and

• the new owner does not own, and has not owned, any other school
with a cohort default rate in excess of 10 percent.

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 General Institutional Responsibilities

The checklist below lists the general rules a school that changes ownership
must follow to be considered financially responsible.

s
To be considered financially responsible, a school that changes ownership must...

provide the services described in its official not have an individual who exercises signifi-
publications and statements cant control over the school and owes a
liability for a Title IV program violation
provide the administrative resources neces-
unless the school and the individual owing
sary to comply with requirements for
the liability meet certain regulatory provisions
participating in Title IV programs
not have been limited, suspended, or termi-
meet all of its financial obligations, including
nated from a Title IV program or have not
paying required refunds to students and
entered into a settlement agreement to
debts to ED
resolve a limitation, suspension, or termina-
be current in paying any institutional debts tion within the preceding five years
post an irrevocable letter of credit (LOC), not have been required to repay an amount
acceptable and payable to ED, equal to greater than 5 percent of Title IV funds
25 percent of the total amount of Title IV received for an award year as a result of a
program refunds paid by the school in the finding during its two most recent program
previous fiscal year reviews or audits
not have part of its most recent audit report not have been cited during the preceding
be a statement expressing substantial doubt five years for failure to submit acceptable
of the school’s ability to continue as a “going audit reports in a timely manner
concern” or a disclaimed or adverse opinion
not have failed to resolve satisfactorily any
by the accountant
compliance problems identified during a
program review or audit

2.4 Administrative Capability

Reference: In addition to demonstrating that it is financially responsible, a school must
• 34 CFR 668.16 be administratively capable of participating in Title IV programs. Using a
school’s audited financial statements and other information, ED evaluates
the school’s administrative capability according to the standards contained
in regulations. (See checklist on the next page.)

If ED finds that a school is not administratively capable only on the basis

of its Federal Direct Loan Program, FFEL Program, and/or Federal
Perkins Loan Program cohort default rate(s), ED may provisionally certify
the school’s participation in Title IV programs.

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Chapter 2

s
To be considered administratively capable, a school must...

administer Title IV programs according to refer any credible information about Title IV
all Title IV requirements fraud, abuse, or misrepresentation to ED’s
Office of Inspector General (OIG)
use an adequate number of qualified persons
to administer Title IV programs in which the provide adequate financial aid counseling to
school participates Title IV applicants
designate a capable individual to be submit required Title IV reports in a timely
responsible for administering all Title IV manner, including fiscal reports, financial
programs statements, and reconciliations
communicate to the individual responsible not demonstrate any significant problems in
for administering Title IV programs all its ability to administer Title IV programs
information that bears on students’ Title IV
not have connected with the school any
eligibility
individual who is/has been debarred or
have written procedures for administering suspended or engaged in any activity that
Title IV programs would be cause for debarment or
suspension
administer Title IV programs with adequate
checks and balances in its system of internal not have had more than 33 percent of its
controls undergraduate regular students1 withdraw
during the latest completed award year (for a
separate the functions of authorizing Title IV
school seeking initial participation in a
payments and disbursing and/or delivering
Title IV program)
Title IV funds so that the functions are
carried out by at least two organizationally have a cohort default rate of less than
independent individuals 25 percent under the FFEL Program/Direct
Loan Program for each of the three most
establish and maintain required Title IV
recent fiscal years and that is equal to or less
records
than 15 percent under the Federal Perkins
establish, publish, and apply reasonable Loan Program
standards for measuring students’ satisfactory
not appear to lack the ability to administer
academic progress (SAP)
Title IV programs competently
develop an adequate system for resolving
participate in ED’s electronic processes
discrepancies in information related to
students’ applications for Title IV assistance

1. A regular student is a person who is enrolled or accepted for

enrollment at an institution for the purpose of obtaining a
degree, certificate, or other recognized educational credential
offered by that institution. See 34 CFR 600.2

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 General Institutional Responsibilities

If ED finds that a school is not administratively capable only on the basis of

its Federal Direct Loan Program, FFEL Program, and/or Federal Perkins
Loan Program cohort default rate(s), ED may provisionally certify the
school’s participation in Title IV programs.

Separation of Functions
Reference: Federal regulations require an institution to divide the functions of
• 34 CFR 668.16(c)(2) authorizing payments and disbursing funds so that no single office or
• See Section 5.4 of this individual has responsibility for both functions for any student receiving
book for further details Title IV funds. Even at very small institutions, no one person may be
on the separation of
allowed to authorize payment of Title IV funds and to disburse those funds.
functions.

In this regard, the school must ensure that these two functions for any
student receiving Title IV aid are carried out by at least two organizationally
independent individuals. These individuals cannot be members of the same
family and they cannot together exercise substantial control over the school.

Typically, the financial aid office awards Title IV funds and authorizes
payment of those funds to students. The fiscal office requests funds from
GAPS and disburses the funds by crediting student accounts, delivering
checks to students, or delivering cash to students. The person who awards
Title IV funds may not be authorized by the institution to sign checks or
deliver them to students, nor may he or she be permitted to deliver cash to
students or to credit student accounts for tuition, fees, books, supplies, or
other charges.

As mentioned earlier, electronic processes enhance accuracy and efficiency.

They also can blur separation of functions so the awarding and
disbursement occur virtually simultaneously.

Reference: • For example, in the advance payment method* under the Recipient
• See Section 6.1 of this Financial Management System (RFMS), an origination record must
book for more informa- be created for each student eligible to receive a Pell Grant as well as
tion on RFMS.
a disbursement record. The financial aid office authorizes the
*Under the just-in-time
payment method, payment (origination record and disbursement record) and the
schools handle the business office requests the funds from GAPS and disburses the
authorization and
disbursement process funds to the school’s bank account.
differently. The
disbursement record • For example, under the Direct Loan Program, a promissory note
itself in RFMS drives the
deposit of funds in the must be on file and an origination record must be created for each
school’s bank account. student eligible to receive a Direct Loan as well as a disbursement
record. Once the origination record is created, the financial aid
office receives a disbursement list. The financial aid office then
authorizes the loan to be disbursed and the business office requests
the funds from GAPS and disburses the funds.

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Chapter 2

Schools must set up controls to prevent an individual or an office from

Reference:
having the authority to perform both functions. For guidance on the
• See Appendix D for separation of functions, contact the Case Management Team that serves the
more information on
Case Management state of your school.
Teams.
Required Electronic Processes
Reference: To be considered administratively capable to participate in Title IV
• Student Financial Aid programs, an institution must participate in all electronic processes that are
Handbook: Institutional
Eligibility and
required by ED, if the processes are provided at no substantial charge to the
Participation school. ED informs schools of the required processes through notices
• Federal Register, published in the Federal Register.
September 19, 1997
• 34 CFR 668.16(o) ED requires all schools to use certain electronic processes to participate in
and administer Title IV programs. A list of the required processes and the
deadline dates for implementation is on page 27 and a list of the technical
specifications is on page 28.

Beginning with the 1999-2000 processing year, schools using a PC platform

to participate in and administer Title IV programs must be prepared to
process ED data using:

• Windows 95,

• Windows NT, or

• a newer version of the Windows operating system.

ED’s electronic services no longer support the disk operating system (DOS)
or any earlier versions of Windows.

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 General Institutional Responsibilities

Required Electronic Processes and Deadline Dates

Deadline Date Designated Electronic Processes

January 1, 1998 • Participate in the Title IV Wide Area Network (TIV WAN)1
• For the 1998-99 Processing Year2 and Beyond:
– Receiving Institutional Student Information Records (ISIRs)
– Adding your school to the Central Processing System (CPS)
Record
– Having online access to the National Student Loan Data
System (NSLDS)

July 1, 1998 • Having access to the Information for Financial Aid Professional
(IFAP) Web site
• Submitting the Application for Approval to Participate in Federal
Student Financial Aid Programs (initial certification, recertification,
reinstatement, and changes) through the Internet
• Submitting the Fiscal Operations Report and Application to
Participate (FISAP) to TIV WAN

July 1, 1999 • For the 1999-2000 Award Year and Beyond:

– Reporting Federal Pell Grant payments electronically through
TIV WAN3
• Submitting Student Status Confirmation Report (SSCR) data
electronically to NSLDS
• Submitting Federal Perkins Loan data electronically to NSLDS

1
Refer to DCL-98-24 (Action Letter #4) for enrollment procedures and updating enrollment
information for TIV WAN.
2
The application processing cycle lasts 18 months. For the 1998-1999 award year, application
processing begins in January 1999 and applications for that year will be accepted until June 30,
1999.
3
For the 1999-2000 award year only, schools have the option of continuing to send Federal Pell
Grant origination and disbursement data on tape via the Recipient Data Exchange (RDE). After
1999-2000 and beyond, RDE will be eliminated and schools must submit origination and
disbursement data electronically.

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Chapter 2

Technical Specifications
Equipment Minimum Configuration Required by January 1, 1999

Hardware • IBM or fully IBM-compatible PC

• 200 MHZ Pentium Processor or comparable
• 64 MB RAM
• 4.0 GB SCSI Hard Drive
• 56K Analog Modem
• 3.5-inch/1.44 MB Diskette Drive
• SVGA Monitor
• Windows 95 Keyboard
• Laser printer capable of printing on standard paper (8.5 x 11-inch)
• 12x CD-ROM with sound board1

Software • 32 bit operating system

• Windows 95, Windows 98, or Windows NT 4.x
• Internet Servicer Provider (ISP)2
• Netscape Navigator 3.0 or 3.01 (domestic), Explorer 4.0, or other
web browser3

Phone Line • Dedicated phone line

Diskettes • 3.5-inch high-density, double-sided diskettes

1
Required if school wants to use the EDExpress Tutorial and AWARE software.
2
Will be necessary to access the Information for Financial Aid Professionals (IFAP) Web site and to
submit the Application for Approval to Participate in Federal Student Financial Aid Programs (initial
certification, recertification, reinstatement, and changes).
3
Currently, must use Netscape Navigator 3.0 or 3.1 (domestic) to use FAFSA on the Web. ED is
testing other Web browsers that will be made available to the public in the near future.

The Blue Book June 1999

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 General Institutional Responsibilities

Year 2000 Compliant

Reference: Many existing computer systems were designed to store and process data
• www.ed.gov/offices/ using only the last two digits of the year. Unless these systems are
OCIO/year redesigned to use a four-digit character year and can account for the change
in the century, there is a major risk that they will incorrectly handle data for
Reference: years beyond 1999. For example, will a computer read the two-digit
• Student Financial Aid character year “00” as the year 1900 or the year 2000?
Handbook: Institutional
Eligibility and To address this problem, ED is redesigning all of its computer systems. ED
Participation also required that all computer systems schools use for processing financial
aid data be “Year 2000 Compliant” by January 1, 1999. By this date all
financial aid data processing systems, procedures, and protocols were
required to be able to store and report date data in ways that differentiate
between years before 2000 and beyond 2000. This requirement also
applied to any third-party servicer a school contracts with to administer
Title IV programs.

Modernization Blueprint (formerly Project Easy Access for Students and

Institutions [EASI])

Reference: On August 1, 1995, the U.S. Secretary of Education requested ED and its
• http://easi.ed.gov partners in the postsecondary education community to design, integrate,
and develop a comprehensive financial aid delivery system. In response to
this challenge, government, education, student, and business leaders
Reference: initiated the Modernization Blueprint.
• Student Financial Aid
Handbook: Institutional The Modernization Blueprint is a collaborative effort by members of the
Eligibility and postsecondary education community (including ED, schools, lenders,
Participation
servicers, guarantors, professional organizations, and state agencies) to
*Project EASI has been
define and implement a customer-focused system to support postsecondary
renamed the education as well as to improve customer access to information and funding
Modernization Blueprint. for education beyond high school.

The goals of the Modernization Blueprint include providing system users

with a single point of interface to the more streamlined processes associated
with postsecondary education, while reducing complexity, redundancy, and
cost.

The Modernization Blueprint has six major functional areas:

1. sharing information

2. applying for federal financial aid

3. disbursing federal financial aid

4. tracking and reporting enrollment

June 1999 The Blue Book

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Chapter 2

5. handling repayments of federal financial aid

6. providing program management and oversight

When fully implemented, the Modernization Blueprint will assist students

and their families in planning for postsecondary education, choosing among
postsecondary schools, and financing their choices.

Access America for Students

Reference: ED has joined with several other federal agencies to develop and
• http://easi.ed.gov implement Access America for Students (Access America). Access
America will provide electronic, Web-based access to government services.
The initiative will test the use of three basic tools for modernization of
government services:

• a Web site gateway to access government services,

• an electronic ID to complete transactions with the government and

other parties over the Internet, and

• a student account based on commercial financial infrastructure to

support the delivery of student aid and provide customer
information.

Access America also tests the key concepts of the Modernization Blueprint
(formerly Project EASI):

• providing the postsecondary education community with a single

point of interface for student financial aid information;

• developing an integrated student aid account;

• supporting a common origination and payment process;

• providing current information for improved management oversight

and analysis;

• providing a clear audit trail and minimizing reconciliation; and

• reducing overall administrative cost for all industry partners through

standardized data and business processes.

In the 1999-2000 funding year, seven schools will participate in the Access
America for Students pilot project for the Federal Pell Program and the
Direct Loan Program.

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 General Institutional Responsibilities

2.5 Student Consumer Information

Reference: Regulations specify published information that institutions are required to
• Student Financial Aid make available to students, prospective students, and employees. These
Handbook: Institutional regulations also allow ED to fine a school, or to limit, suspend, or terminate
Eligibility and
Participation
the participation of any school that substantially misrepresents the nature of
• 34 CFR 668 Subpart D
its educational program, financial charges, or the employability of its
graduates.

This is an area of responsibility that is shared among institutional offices.

In general, the financial aid and business offices share primary responsibility
for providing this information, but other offices must be involved as well.

Financial Aid Information

All institutions are required to provide information on:

• all financial aid programs available to students, the amounts of aid

available from each source, and the required application procedures,

• how student eligibility for aid is determined,

• how the school distributes aid among students,

• the rights and responsibilities of financial aid recipients,

• how and when financial aid will be disbursed,

• the terms and conditions of any employment offered as financial aid,

• the terms of, schedules for, and necessity of loan repayment,

• the criteria for measuring students’ satisfactory academic progress

and the procedures students must follow to regain eligibility if they
failed to meet these criteria,

• information on preventing drug and alcohol abuse,

• information about the availability of federal financial aid funds for

study-abroad programs, and

• information on availability of community-service FWS jobs.

General Information
Schools are also required to provide general information about themselves.
This information includes matters related to fiscal operations, such as:

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Chapter 2

• licensing and accreditation;

• costs of attendance, including tuition, fees, room and board,

transportation, books and supplies, loan fees, buying or renting a
computer, and additional costs associated with certain programs of
study;

• all requirements for officially withdrawing from school;

• institutional refund and repayment policies (and, as of October 7,

2000, the policy for return of Title IV aid, unless the school
implements the return of Title IV aid earlier than October 7, 2000);
and

• distributing student financial aid refunds and repayments to Title IV

programs.

Availability of Personnel
Federal regulations require that schools make personnel available during
normal operating hours to help current and prospective students obtain
consumer information.

Job Placement Claims

A school that makes marketing claims about job placement rates to recruit
students must disclose information supporting these claims to prospective
students at or before the time of application. This means that schools must
provide detailed statistics and other information necessary to substantiate
the truthfulness of their claims. If a school advertises job placement rates
to attract enrollment, it must inform prospective students of the state
licensing requirements for the jobs for which the students seek training.

Student Right-To-Know Provisions

All schools participating in Title IV programs are subject to the disclosure
requirements of the Student Right-To-Know Act (SRK). SRK requires a
school to make available its completion or graduation rates by July 1 of
each year. A school must provide the information upon request to enrolled
and prospective students.

• In the case of a prospective student, the school must provide

information before the student enters into a financial obligation.

A school also must provide the information to ED through the National

Center for Education Statistics annual graduation rate survey.

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 General Institutional Responsibilities

By July 1 of each year, SRK requires a school that awards athletically-

related student aid to report to ED various information concerning students
who receive athletic aid, including their completion or graduation rate.
SRK also requires a school to provide the information to a prospective
student-athlete and his or her parents, high school coach, and guidance
counselor at the time the school offers the prospective student-athlete
athletically-related student aid.

Equity in Athletics Provisions

The Equity in Athletics Disclosure Act (EADA) is designed to make
students, prospective students, and the interested public aware of:

• the athletic opportunities available to a school’s male and female

students and

• the financial resources and personnel the school dedicates to its

men’s and women’s teams.

EADA applies to any coeducational institution of higher education that

participates in a Title IV student aid program and has an intercollegiate
athletic program. Pursuant to EADA, a school must prepare an annual
report that includes information such as:

• a list of the school’s varsity teams,

• the number of participants on each team,

• the number of coaches for each team, and

• various breakdowns of athletically-related expenses and revenues.

Note that the HEA of 1998 moved certain athletically-related expense and
revenue disclosure requirements from the Program Participation Agreement
section of the HEA of 1965 to EADA. These amendments repealed the
audit requirement for those disclosures.

A school must make its EADA report available upon request to enrolled
students, prospective students, and the public by October 15 of each year
and the school also must submit the report to ED.

Campus Security Provisions

Reference: The Jeanne Clery Disclosure of Campus Security Policy and Campus Crime
• HEA, Section 485(f) Statistics Act (formerly the Campus Security Act of 1990) requires schools
to publish annually specific crime-related information. The report includes
information about a school’s security policies and procedures, crime

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Chapter 2

prevention programs, and campus crime statistics. The school must

distribute it to all current students and employees and, on request, to
prospective students and employees.

*The definition of Schools also must provide timely warning to the campus* community of any
“campus” includes
reasonable contiguous
occurrences of crimes that are reported to the campus security authorities or
property used by local police agencies and that are considered to represent a continuing
students that supports
institutional purposes
threat to students and/or employees. The crimes to be reported are:
such as a food court,
certain non-campus • murder,
buildings or property,
and public property.
• forcible and nonforcible sex offenses,

• robbery,

• aggravated assault,

• burglary,
**The HEA of 1998 added
the crimes of man-
slaughter, arson, and • motor vehicle theft,
arrests or persons
referred for campus • manslaughter,**
disciplinary action for
liquor law violations,
drug-related violations, • arson,** and
and weapons
possession.
• arrests or persons referred for campus disciplinary action for liquor
law violations, drug-related violations, and weapons possession.**

Schools must maintain daily logs of crimes reported to the police or security
departments. These daily logs:

• must include the nature, date, time, and general location of the
crime and

• must be open to public inspection within two business days of the

report except where

– prohibited by law,

– disclosure jeopardizes a victim’s confidentiality, or

– disclosure hinders investigation.

Campus crime statistics must be categorized on the basis of where a

criminal offense occurs:

• on campus,

• in or on a non-campus building or property,

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 General Institutional Responsibilities

• on public property, and

• in dormitories or other residential facilities for students on campus.

Schools must also maintain statistics by category of prejudice for any hate
crimes involving bodily injury. That is, crimes to any person in which the
victim is intentionally selected because of actual or perceived race, gender,
religion, sexual orientation, ethnicity, or disability.

*Prior to October 1998, These statistics are reported annually* to ED. ED will make copies of the
schools submitted these
statistics to ED only when
statistics available to the public.
requested by ED.
The provisions of the Family Educational Rights and Privacy Act (FERPA)
do not prohibit a school from complying with the requirements of the
campus security regulations.

2.6 Institutional Policies and Procedures

Manual
The law requires schools to have written policies and procedures for
administering Title IV programs. The policies and procedures must address:

• student consumer information,

• verification,

• satisfactory academic progress,

• refund and repayment, and

• loan disclosure statements and fact sheets (this requirement does

not apply to Direct Loans).

Advantages of Policies and Procedures Manual

Although the law does not require schools to maintain written policies and
procedures in a manual, schools generally find that a manual helps them
manage financial aid programs more effectively, efficiently, and
consistently. A comprehensive manual can:

• document how and when the school establishes specific policies and
procedures,

• provide a single location for the school’s policies and procedures,

and

• serve as a reference guide and training resource.

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A policies and procedures manual is also extremely valuable when a school

undergoes a compliance audit or program review.

Many institutions have business procedures manuals to cover fiscal matters,

such as accounting, budgeting, payroll, personnel, and the like. However,
due to the broad scope and complexity of financial aid programs, it is wise
to develop a separate financial aid policies and procedures manual. This
manual should address policies and procedures that affect all aspects of
financial aid administration from the perspectives of both the business
office and the financial aid office.

Suggested Topics for Policies and Procedures Manual

In addition to the required written policies listed at the beginning of this
section, a comprehensive policies and procedures manual would include:

• an overview of the institution itself, its mission, its students, and its
philosophies,

• descriptions of all federal, state, and institutional aid programs,

including application procedures, award amounts, and eligibility
requirements,

• descriptions of the organizational structures of the financial aid

office and the business office,

• a statement of the institution’s policy for awarding financial aid

(commonly referred to as its “packaging policy”),

• procedures for processing financial aid applications,

• procedures used in record keeping and reporting,

• calendar of activities, including dates and deadlines for students,

• procedures for evaluating business office and financial aid office

operations, and

• copies of forms, applications, standard correspondence, and other

printed materials routinely used by the financial aid office and
business office and/or distributed to students.

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2.7 Evaluating Your Management of Student

Financial Aid Programs
Schools should evaluate the way they administer Title IV programs on a
regular basis. This is a priority for ED, as well as for the business-officer
and financial-aid communities.

Evaluating Title IV administration serves many purposes, such as:

• ensuring that the school is complying with statutory and regulatory

requirements, and

• identifying school policies and procedures that need updating or

revision.

All schools that participate in Title IV financial aid programs must ensure
that their student aid operations, procedures, and policies remain in
compliance with statutory and regulatory requirements. Failure to do so
may have serious consequences:

• Institutional liabilities—The school will be required to repay any

misused funds to ED.

• Inequitable student aid distribution—Students at the school may be

awarded less or more aid than they are entitled to receive.

• Possible fines, limitation, suspension, or termination—If audits and

program reviews identify serious instances of noncompliance,
inappropriate use of funds, or fraud, the school may be subject to
emergency action by ED and may ultimately lose its eligibility for
federal student aid programs.

• Debarment—Individuals found responsible for fraud or serious

misuse of federal funds may be barred from involvement in any
federal programs.

Evaluation Methods
The primary methods for evaluating an institution’s management of Title IV
programs are:

• self-evaluation,

• peer evaluation, and

• ED’s Quality Assurance Program (QAP).

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Self-Evaluation
Institutional self-evaluation provides a way of maintaining internal quality
control and serves as an effective management tool. The process helps a
school detect and correct small problems before they become potential
sources of liability. Self-evaluation also helps the school prepare for future
program reviews and audits. A self-evaluation might include:

• reviewing a representative sample of student files,

• reviewing written policies and procedures, and

• observing financial-aid activities, such as loan counseling sessions.

Reference: The Self-Evaluation Guide, published by the National Association of Student

• Self-Evaluation Guide Financial Aid Administrators (NASFAA), can help schools develop
NASFAA comprehensive evaluation systems. This publication provides a step-by-
Washington, DC step outline for reviewing financial aid and fiscal policies, procedures, and
Tel: 202-785-0453 practices.
Web site:
www.nasfaa.org Peer Evaluation
Peer evaluation is another technique for obtaining an independent,
objective review of an institution’s administration of Title IV programs.
The peer evaluator can be a financial aid administrator or fiscal officer from
another school or a financial aid consultant.

During a peer evaluation, the school obtains an objective assessment of its

operation from someone at a similar institution. The person performing the
evaluation also benefits by getting a first-hand look at how another school
manages financial aid programs. Comparing notes and exchanging ideas are
methods by which colleagues in financial aid offices and business offices
can share their expertise for the good of all.

Quality Assurance Program

The Quality Assurance Program (QAP) is an ED initiative to promote
quality in administering Title IV programs. Participating institutions
implement a formal quality assurance program that includes a management
self-assessment, annual measurement, and quality improvement
components. This integrated approach to management embodies the
principles of continuous improvement that ED regards as essential to
quality assurance.

QAP takes a proactive approach by:

• focusing on preventing problems;

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 General Institutional Responsibilities

• improving existing procedures rather than penalizing institutions for

errors and management;

• improving the institution’s administration of the Title IV Programs;

and

• assisting institutions in minimizing program errors.

Schools that participate in QAP are exempt from certain ED reporting and
verification requirements if their institutional quality assurance measures
duplicate these requirements.

Quality assurance (QA) is required for schools participating in the Direct

Loan Program. ED assists these schools in conducting QA activities using
tools such as the Direct Loan Quality Assurance Planning Guide (QA Planning
Guide) and the QA module in EDExpress.

• There are several measurement tools in the “Tools” submenu of

EDExpress. These measurement tools can be used by Direct Loan
schools to measure and assess their operations in terms of volume
and timeliness.

Direct Loan schools have to maintain documentation about their quality

assurance activities in a QA master file. Although there is no QA reporting
requirement, Direct Loan schools participating in QAP must complete a
Title IV Management Assessment Worksheet to report results to ED using
routine QAP reporting procedures.

Reference: Beginning with the 1999-2000 award year, QAP will include broader
• HEA, Section 487A initiatives in awarding and disbursement, as well as exit and entrance
counseling. The increased scope of the QAP will be a quality partnership
that will serve all institutions participating in Title IV Program.

Schools that are interested in participating in QAP should contact ED’s

Performance and Accountability Improvement Branch (PAIB) at
(202) 260-4788.

2.8 Refunds and Repayments

The Higher Education Amendments of 1998 changed the refund and
repayment provisions. In addition to renaming the process “returning
Title IV funds,” it also revised how to calculate the amount that needs to
be returned to Title IV programs when a student does not complete an
enrollment or payment period. The new requirements go into effect on
October 7, 2000, although schools can choose to implement them before
this date. Many schools appear to be continuing to operate under the pre-

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1998 Higher Education Amendments’ refund and repayment provisions.

This edition of The Blue Book will discuss refund and repayment provisions
in effect before October 7, 2000 and highlight the return of Title IV funds
provisions that go into effect October 7, 2000. Regulations on returning
Title IV funds will be issued on the completion of negotiated rulemaking.

If a school wishes to implement these provisions before October 7, 2000, it

must:

• establish a specific date to implement the new provisions,

• implement all of the provisions, and

• apply the provisions to all students who

– enter after the implementation date and

– have been advised of the new policy.

Overview of Refunds and Repayments

Reference: When a student receives financial aid, the aid is intended to cover that
• Student Financial Aid period of enrollment for which the student is being charged. As a result, the
Handbook: Institutional school has special responsibilities if the student:
Eligibility and
Participation
• officially withdraws,

• drops out,

• is expelled,

• takes an unapproved leave of absence, or

• fails to return from an approved leave of absence.

In all of these cases, the student does not complete the enrollment period
for which he or she was charged. As a result, the student might have (or the
student’s account might be credited with) unearned aid. Whenever a
student fails to complete the period of enrollment for which he or she was
charged, an institution must determine:

• whether unearned aid credited to the student’s account to cover

institutional costs must be refunded to Title IV programs, other
sources of aid, and/or the student and

• whether unearned aid (usually paid in cash to the student) to cover

institutional costs must be repaid by the student and then returned
to the sources of financial aid.

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 General Institutional Responsibilities

General Definitions
A refund is the return of unearned aid (both Title IV and other sources of
aid) that was originally credited to a student’s institutional costs; any cash
paid to the student is not involved in a refund calculation.

• The school must return the funds to Title IV programs first, other
sources of aid second, and, if there are funds left, to the student
third.

A repayment involves unearned aid (usually paid directly to the student as

cash) to cover non-institutional costs.

• In this case, the student must return the unearned funds.

• Direct Loans or FFEL Program loans are not considered in

repayment calculations. By signing the promissory note, the student
has already agreed to repay the funds.

Federal Work-Study (FWS) funds that students earn for hours worked are
not considered when calculating refunds and repayments. However,
institutions are still required to perform the calculation for students whose
only Title IV aid is FWS.

Refunds
Under federal law, schools participating in any Title IV program are required
to have, in writing, a “fair and equitable” refund policy. The flowchart on
the next page shows the refund process and how the law defines it. A
school satisfies this requirement of being “fair and equitable” by calculating
all types of applicable refunds, then determining and using the largest
amount.

An institution must provide Title IV recipients a refund of at least as much

as the largest refund under the following three methods:

• the requirements of applicable state law or refund regulations

promulgated by a state agency that were established through a
legally enforceable regulatory process; or

• the specific refund requirements established by the school’s

nationally recognized accrediting agency and approved by the
*ED has not yet approved U.S. Secretary of Education*; or
any accrediting agency
refund policy.
• if applicable, a statutory pro rata refund calculation as defined by the
Higher Education Amendments of 1992. This applies to all
students who withdraw on or before the 60 percent point of the
enrollment period for which they were charged.

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Chapter 2

The Refund Process

Determine Withdrawal

First-time students (Title IV

recipients) withdrawing on All other students receiving
or before 60% enrollment Title IV aid
period has elapsed

State Accrediting
Refund Agency
Policy Policy
State Accrediting Pro Rata
Refund Agency Refund
Policy1 Policy1 Policy

If neither policy exists,

calculate and compare

Return Largest
Refund

Federal Institutional
Refund Refund
Policy2 Policy3

1
If there is no state refund policy and no ED-approved
accrediting agency, use the pro rata amount.
2
See Appendix A.
Return Larger Refund
3
All schools do not necessarily have an institutional
refund policy.

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 General Institutional Responsibilities

To calculate a refund that is at least as much as the largest refund produced

by the three methods just outlined, a school must:

• calculate the results of each refund method separately,

• compare the resulting amounts, and

• use the calculation that provides the largest refund.

In cases where the pro rata calculation does not apply, a refund must be the
larger of the results of the other two methods, as determined by state law or
the school’s accrediting agency.

In cases where no state or accrediting agency standards exist and pro rata
does not apply, the school must calculate a refund using the federal refund
calculation outlined in the Student Assistance General Provisions and the
school’s own refund policy (if one exists). The school must use the
calculation that produces the larger refund.

Repayments
An institution must return repayments of $100 or more of a Federal Perkins
Loan, Federal Pell Grant, or FSEOG to the appropriate program account
within 30 days of the date the student makes the repayment.

Although an institution is not liable for any part of a repayment that a

student owes, the institution is responsible for:

• notifying and billing the student for the amount due and

• collecting the repayment.

Until the repayment is resolved:

• the student is ineligible for further Title IV assistance and

• the school must report the repayment owed on any financial aid
transcript completed for the student or on any submission to
NSLDS.

In addition, if the school is unable to collect an FSEOG or Federal Pell

Grant repayment from the student, the school must refer the student to
ED for collection.

Beginning October 7, 2000 or earlier if the school chooses to implement the

new “Return of Funds” provision, the concept of refunds will change from
“refund of unearned institutional charges” to “return of unearned Title IV
Reference:
aid.”
• HEA, Section 484B

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Chapter 2

If a recipient of Title IV aid withdraws before completing 60 percent of the

payment period (or period of enrollment), the institution must calculate the
amount of Title IV aid the student did not earn. The amount of unearned
aid equals the difference between Title IV aid that was disbursed or could
have been disbursed for the payment period and the amount of Title IV aid
that was earned.

When schools return unearned Title IV aid, schools

• deal with Title IV aid only,

• apply provisions to all Title IV aid recipients except FWS recipients,

and

• reduce institutional charges,

In addition, there are no comparisons with other policies, no issues of

unpaid charges, and no impact on nonfederal aid.

Factors Affecting Refund and Repayment

Before schools can effectively develop or implement their refund policies,
they must understand a number of factors that underlie those policies and
that relate to applicable laws and regulations such as:

• institutional costs,

• noninstitutional costs,

• unpaid charges,

• applying and disbursing aid,

• withdrawal date, and

• leave of absence.

Institutional Costs
Unless demonstrated otherwise, institutional costs are charges owed directly
Reference:
to the school for tuition, fees, room and board contracted with the school,
• The Student Financial and other charges assessed by the school.
Aid Handbook:
Institutional Eligibility An institutional cost does not have to be charged to all students or be listed
and Participation as a charge in an enrollment agreement to be classified as an institutional
• Policy Bulletin, cost. Other charges may be considered institutional charges if they are
Calculating Institutional
Refunds: What are required for all students in a given program of study and if they are
Institutional Charges?, disclosed as such in the school’s published consumer information.
January 7, 1999

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 General Institutional Responsibilities

Books, supplies, and equipment are considered institutional charges if there

is no real and reasonable opportunity to buy the books, supplies, or
equipment from a source other than the institution.

Non-Institutional Costs
Non-institutional costs are those that are not owed directly to the school
but are related to a student’s education. Non-institutional costs include:

Reference:
• room and board charges not contracted with the institution;
• The Student Financial
Aid Handbook: • charges for any required course materials that an institution can
Institutional Eligibility document are non-institutional because the student had a real and
and Participation reasonable opportunity to purchase them elsewhere;
• Policy Bulletin,
Calculating Institutional • a charge to a student’s account for room charges that are collected
Refunds: What are
Institutional Charges?, by the institution, but are “passed through” to an unaffiliated entity;
January 7, 1999
• a charge to a student’s account for group health insurance fees, if
the insurance is required for all students and the coverage remains in
effect for the entire period for which the student was charged,
despite the student’s withdrawal; and

• a charge to a student’s account for discretionally, educationally

related expenses such as

– parking or library fines or

– cost of athletic or concert tickets.

Unpaid Charges
Reference: When calculating a refund, schools must first determine the student’s
• The Student Financial unpaid charges.
Aid Handbook:
Institutional Eligibility
and Participation Total Institutional Costs
- Total Aid Paid to Institutional Costs
Scheduled Cash Payment (SCP)
- Student’s Cash Paid
= Unpaid Charges

In calculating unpaid charges, schools must take into account any late
Title IV funds for which the student is still eligible, such as an approved
late disbursement of an FFEL Program loan or Federal Direct Loan. Any
such late disbursements should be counted toward aid paid to institutional
costs.

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Chapter 2

Applying and Disbursing Aid

Although schools may use whatever funds they receive first to pay
outstanding direct costs, such as tuition, ED recommends that schools
apply financial aid first to cover institutional costs.

• Schools generally do not wait to receive specific funds at their

institutions to satisfy specific categories of direct costs.

This practice ensures that federal funds are used first to pay direct costs
before funds are released to students for indirect costs, such as books and
transportation. ED also recommends that schools develop written policies
for applying financial aid to charges owed the school. Schools may wish to
design a priority system that specifies the sources and types of aid that
should first be applied to certain charges.*

• For example, a school might

determine that grant funds
(gift aid) from all sources *Schools must obtain students’
would be used first to pay written permission to credit their
accounts for anything other than
tuition, fees, and room and
tuition, fees, and room and board
board owed the school. contracted with the school.
After all grant funds had
been used, loans (self-help
aid) would be credited to
remaining charges for tuition, fees, and room and board. Any
unused loan funds would be disbursed to the student as cash for
other educationally related expenses.

If financial aid credited to charges owed to the school is not sufficient to

cover the charges, the student will still owe the school money. If the aid
credited exceeds charges owed, the student (or parent, in the case of a
PLUS Loan) will be due a cash disbursement in the form of cash or a check.
Funds may be held in a student’s account only with the student’s written
permission and only under certain circumstances. An institution must
record which types of aid have been applied to institutional costs and which
types were included in any cash disbursement. Such record keeping is
essential for calculating Title IV refunds and repayments.

Withdrawal Date
Reference: Schools must determine a student’s withdrawal date no later than 30 days
• Student Financial Aid after the expiration of the earliest of:
Handbook: Institutional
Eligibility and • the academic year in which the student withdrew,
Participation
• the period of enrollment for which the student has been charged, or

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 General Institutional Responsibilities

• the educational program from which the student withdrew.

The student’s withdrawal date is:

• for official withdrawal—either the date that the student officially

notifies the school that he or she is withdrawing or the date of the
withdrawal specified by the student, whichever is later, or

• for unofficial withdrawal—the last date of class attendance that the

school can document.

For correspondence courses, the date of withdrawal is the date of the last
lesson submitted by the student. If the student establishes, in writing, the
desire to continue in the program within 60 days of the date of the last
submitted lesson, the school may restore “in-school” status on a one-time-
only basis.

Beginning October 7, 2000, or earlier if the school chooses to implement

the new “Return of Funds” provision, the definition of withdrawal date will
be replaced by the following:

• for institutions required to take attendance, the date of withdrawal is

Reference: the last date of recorded attendance.
• HEA, Section 484B
• for institutions not required to take attendance, the withdrawal date
(determined by the school) is:

– the date the student began the withdrawal process prescribed by

the school;

– the date that the student otherwise provided the school with
official notification of the intent to withdraw; or

– if a student unofficially withdraws, the midpoint of the payment

period for which Title IV aid was disbursed or a later date
documented by the institution.

Special rule: The institution may determine the appropriate withdrawal date
if the student did not begin the withdrawal process or otherwise notify the
institution of the intent to withdraw due to:

• illness,

• accident,

• grievous personal loss,

• other such circumstances beyond the student’s control.

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Leave of absence
Reference:

• Student Financial Aid

An approved leave of absence (LOA) is not considered a withdrawal. An
Handbook: Institutional LOA may be approved by the school if:
Eligibility and
Participation • the student requests the LOA in writing,

• the LOA does not exceed 60 days,

• the LOA does not involve additional charges to the student, and

• there is no more than one approved LOA for the student in any
12-month period.

Any LOA that does not meet the above criteria is considered a standard
withdrawal, and a refund calculation must be performed.

If a student does not return after an approved LOA, the student is

considered as having withdrawn. A refund calculation must be performed,
using a withdrawal date that is the student’s last recorded date of
attendance before the beginning of the LOA. Any required refund must be
paid within 30 days after the LOA expires.

Beginning October 7, 2000, or earlier if the school chooses to implement

the new “Return of Funds” provision, an institution can grant a student
LOA provided that:

• the student follows the school’s procedures for requesting the LOA,
Reference:

• HEA, Section 484B • the LOA does not exceed 180 days in length in any 12-month
period; and

• the LOA does not involve additional charges to the student.

During the LOA, the student is not considered to have withdrawn and no
refund calculation is required if:

• the institution has a formal LOA policy,

• the student followed the institution’s policy in requesting an LOA,

and

• the institution approved the request in accordance with its policy.

If a student does not return to the institution at the end of an approved

LOA, the institution is required to calculate a refund based on the date the
student withdrew.

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 General Institutional Responsibilities

2.9 Record Maintenance and Retention

Requirements
Reference: Institutions participating in Title IV programs collect and generate a
• Student Financial Aid significant volume of program-related and student-related information on a
Handbook: Institutional yearly basis. Federal regulations specify which of these records must be
Eligibility and maintained and the period of time for which they must be retained. These
Participation
record maintenance and retention requirements are school-wide and include
fiscal, financial aid, and general institutional records.

The importance of maintaining complete and consistent records cannot be

overemphasized. These records are used to document a school’s
administrative capability and financial responsibility and are crucial in
maintaining eligibility to participate in Title IV programs. As such, schools
must make student financial aid program and general records available to
auditors and representatives of ED at their request. Records that are poorly
maintained or that are not readily available for review can lead to findings,
exceptions, and liabilities in the course of an audit or program review.

This section describes the record-keeping requirements contained in ED

regulations. A discussion of the Family Educational Rights and Privacy Act
(FERPA) is also included. FERPA is an important law that protects the
privacy of students and families by controlling disclosure of student records
to parties outside the institution and by allowing students access to their
own school records.

General Student Records

Schools must establish, maintain, and keep current certain records
pertaining to Title IV recipients. For each student receiving Title IV funds,
a school must keep records of:

• the student’s admission and enrollment status at the institution,

• the program of study and the courses in which the student has
enrolled,

• the student’s academic progress,

• all financial aid the student receives at the institution,

• the student’s prior receipt of financial aid at other institutions, if

applicable,

• all refunds due or paid to the student, Title IV programs, or FFEL

Program lenders,

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Chapter 2

• the student’s job placement (if the school provides a placement

service and the student uses that service), and

• verification of information reported on the student’s financial aid

application.

For all students, not just Title IV recipients, the school must keep records
about its admission requirements and the educational qualifications of each
student admitted to or enrolled in each eligible program.

Schools must also keep records relating to student consumer-information

requirements and to requirements under the Student Right-To-Know Act
(SRK) and Campus Security Act.

General Institutional Records

Reference: Schools must maintain all records that relate generally to the institution’s
• Student Financial Aid eligibility to participate in Title IV programs. Examples include:
Handbook: Institutional
Eligibility and • the institution’s Program Participation Agreement with ED;
Participation
• accrediting and licensing agency reviews, approvals, and reports;

• state agency reports;

• audit and program review reports; and

• self-evaluation reports.

General Fiscal Records

Reference: A school must keep consistent and accurate records of its use of Title IV
• Student Financial Aid funds. Program and fiscal records must show a clear (easily followed) audit
Handbook: Institutional
Eligibility and
trail for expenditures of federal funds. Similarly, these records must clearly
Participation show that funds were obtained, managed, disbursed, and returned in
• 34 CFR 668.24(b) accordance with federal regulations. Fiscal records that must be maintained
include:

• records of all Title IV program transactions,

• bank statements for accounts containing Title IV funds,

• student accounts, including (for each enrollment period)

institutional charges, cash payments, Title IV payments, cash
disbursements, refunds, and repayments,

• general ledger (control accounts) and related subsidiary ledgers that

identify each program transaction and separate those transactions
from the institution’s other financial transactions,

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 General Institutional Responsibilities

• Federal Work-Study (FWS) payroll records, and

• records that support data that appear on required reports.

Specific fiscal record-keeping requirements for each Title IV program are

discussed in that program’s regulations.

Financial Aid Application and Award Records

Reference: Schools are required to keep extensive records involving student
• 34 CFR 668.24(c) applications for financial aid and financial aid awards. Required records
include:

• student applications for financial aid and need analysis documents

for all eligible aid applicants who attended the school, whether or not
they received any financial aid,

• documents establishing a student’s financial need and eligibility for

Title IV aid,

*Schools have to provide • financial aid awards made to and accepted or declined by students,*
auditors or program
reviewers with records
of the notifications to • cost of attendance information for individual students,
students of their financial
aid awards. • verification documents, including student (and spouse, if applicable)
and parent federal tax returns,

• records of FFEL Program loans and Federal Direct Loans,

• documentation of required entrance and exit loan counseling for

students borrowing under the FFEL, Federal Direct Loan, and
Federal Perkins Loan Programs,

• data used to establish a student’s full-time or part-time enrollment

status and period(s) of enrollment,

• records of refunds due or paid to students, Title IV program

accounts, or FFEL Program lenders, and

• required certification statements and any documents used to support

or verify those certifications.

Reporting Records
Schools must maintain reports or copies of reports submitted or received in
connection with administering Title IV programs, including—

• Fiscal Operations Report and Application to Participate (FISAP),

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• Federal Pell Grant Program Electronic Statements of Account

(ESOAs),

• ED’s Payment Management System cash requests and quarterly or

monthly reports,

• Grant Administration and Payment System (GAPS) cash requests,

• reconciliation reports for Title IV programs,

*A school is required to • federal, state, and independent audit reports and school responses,*
keep all student records
that pertain to an audit or
program review findings • state grant and scholarship award rosters and reports, and
in case any finding is still
pending.
• accrediting and licensing agency reports.

In addition, schools must maintain records that support the data that appear
on all required reports.

Program Records
Reference: Schools must also keep records that relate specifically to each Title IV
• Student Financial Aid program, including–
Handbook: Institutional
Eligibility and
Participation
• records of its eligibility to participate in the Title IV programs,
• 34 CFR 668.24(a)
• records of the eligibility of its educational programs for Title IV
funds,

• records of its administration of Title IV program according to all

applicable requirements,

• records of its financial responsibility,

• records of information included in any application for Title IV

funds, and

• records of its disbursement and delivery of Title IV funds.

Federal Pell Grant Program

Reference: For the Federal Pell Grant Program, schools must maintain:
• 34 CFR 668.24
• 34 CFR 690.82
• a valid Institutional Student Information Record (ISIR) or Student
Aid Report (SAR) of each student applying for a Federal Pell Grant,

• records of the eligibility of each enrolled student for whom the

**The ISIR must be
maintained in the format school has an ISIR** or SAR,
in which it was originally
received from ED.

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 General Institutional Responsibilities

• the name and Social Security number of and the amount paid to
each student,

• the amount and date of each payment,

• the amount and date of any overpayment that is restored to the

program account,

• each student’s cost of attendance,

• how each student’s full-time or part-time enrollment status was

determined, and

• records of each student’s enrollment period.

FSEOG Program

Reference: For the Federal Supplemental Educational Opportunity Grant (FSEOG)

• 34 CFR 676.19 Program, schools must maintain:

• program records that are reconciled at least monthly,

• each student’s account and status,

• the eligibility of each student assisted under the program and how
each student’s need was met,

• all FSEOG applications for those students reported on the FISAP,

• all records supporting the school’s application for FSEOG funds,

and

• a noncash-contribution record to document payment of the

institution’s share of grants to students.

Federal Perkins Loan Program

Reference: For the Federal Perkins Loan Program, schools must maintain:
• 34 CFR 674.19
• program and fiscal records that are reconciled at least monthly,

• each student’s account and status,

• the eligibility of each student assisted under the program and how
each student’s need was met,

• original promissory notes and repayment schedules in a locked,

fireproof container until the loans are satisfied or until they are
assigned to ED for collection or as long as the documents are
needed to enforce the loan obligation,

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Chapter 2

• all loan applications for those students reported on the FISAP,

• all records supporting the school’s application for funds under the
Federal Perkins Loan Program,

• a repayment history for each borrower that shows the date and
amount of each repayment over the life of the loan and that
indicates the amount of each repayment credited to principal,
interest, collection costs, and penalty or late charges,

• documentation of the date, nature, and result of each contact with

the borrower or endorser in collection of an overdue loan, including
copies of all correspondence to or from the borrower and endorser
(except bills, routine overdue notices, and routine form letters),

• payment records (including cancellation and deferment requests),

• collection agency reports,

• litigation records (if litigation occurred), and

• information collected at entrance and exit loan counseling

conducted for the borrower.

Federal Work-Study
Reference: For the Federal Work-Study (FWS) Program, schools must maintain:
• 34 CFR 675.19
• program records that:

– are reconciled at least monthly,

– identify each student’s account and status,

– show the eligibility of each student assisted under the program,

and

– show how each student’s need was met,

• all employment applications for those students reported on the

FISAP,

• all records supporting the school’s application for FWS funds,

• a certification that each student has worked and earned the amount
paid, signed by the student’s supervisor, an official of the
institution, or off-campus employer,

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 General Institutional Responsibilities

• for students paid on an hourly basis, a time sheet showing the hours
each student worked in clock-time sequence or the total hours
worked each day,

• a payroll voucher containing sufficient information to support all

payroll disbursements, and

• a noncash-contribution record to document any payment of the

institution’s share of the student’s earnings in the form of services
and equipment.

Federal Family Education Loan Program

Reference: For the Federal Family Education Loan (FFEL) Program, schools must
• 34 CFR 682.610 maintain:

• a copy of the loan application or data electronically submitted to the

lender,

• the name and address of the lender,

• the amount of the loan and the loan period,

• the data used to construct an individual student’s budget or the

school’s itemized standard budget used to calculate students’
estimated costs of attendance,

• the sources and amounts of financial aid available to the student

that the school used to determine the student’s estimated financial
aid for the loan period,

• the amount of the student’s tuition and fees paid for the loan period
and the date the student paid the tuition and fees,

• the amount and basis of the calculation of any refund paid to or on

behalf of a student,

• for a subsidized Federal Stafford Loan for which the borrower

receives an interest subsidy, the data used to determine the
student’s Expected Family Contribution (EFC) and the
corresponding certification by the school to the lender,

• the date of each disbursement of the loan and the amount of that
disbursement,

• the date the school endorsed each loan check,

• the date(s) loan proceeds were delivered by the school to the

student,

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Chapter 2

• for loans delivered by electronic funds transfer (EFT) or master

check and the school has no authorization on the loan application,
the school must retain a copy of the student’s written authorization
for initial and subsequent disbursements,

• documentation that the student received entrance and exit loan

counseling, and

• litigation records (if litigation occurred).

In addition, schools must maintain any other records that document their
compliance with any applicable loan-related requirements.

Federal Direct Loan Program

Reference: For the Federal Direct Loan Program, schools must maintain a copy of the
• 34 CFR 685.309 application data submitted to ED and, on request, produce a record of:

• the amount of the loan and the loan period,

• the amount and date of tuition and fees paid for the loan period,

• the data in an individual student budget or the school’s itemized

standard budget that were used in calculating the student’s
estimated cost of attendance,

• the sources and amounts of financial aid available to the student

that the school used to determine the student’s estimated financial
aid for the loan period,

• the cost of attendance used to determine the student’s loan,

• the amount and basis of the calculation of any refund paid to or on

behalf of a student,

• for a subsidized Direct Loan, the data used to determine the

student’s EFC,

• for a subsidized or unsubsidized Direct Loan, the date of each

disbursement of the loan,

• the date of each disbursement of the loan and the amount of the
disbursement,
• the borrower’s information collected at the exit interview and
documentation that confirms that the student received entrance and
exit loan counseling,
• all record involved in any loan, claim, or expenditure questioned by
a federal audit until the resolution of any audit questions,

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 General Institutional Responsibilities

• program records that are reconciled at least monthly,

• each student’s account and status, and

• the eligibility of each student assisted under the program and how
each student’s need was met.

Record-Retention Requirements
Reference: Schools must retain all required records for a minimum of three years.
• Student Financial Aid However, the starting point is not the same for all records. The table below
Handbook: Institutional
Eligibility and
describes the required minimum retention period for records under various
Participation Title IV programs. In addition, some states require schools to retain such
• 34 CFR 668.24(e) records for longer periods.

Minimum Record-Retention Periods

End of the End of the End of the The loan is The date on
award year award year award year satisfied or the which a loan
in which for which in which the documents are is assigned
Title IV Program the report the aid was student last needed to to ED,
was awarded attended enforce the cancelled, or
submitted obligation repaid

Campus-Based and Pell Grant rs

3 Yea
Except:
• Fiscal Operations Report and
Application to Participate
(FISAP) and supporting records 3 Yea
rs

• Perkins repayment records rs

3 Yea

• Perkins original promissory notes

and repayment schedules
Until

FFEL and Direct Loans

• Records related to borrower’s

eligibility and participation 3 Yea
rs

• All other records, including any

other reports or forms rs
3 Yea

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Chapter 2

Record Maintenance
Reference: A school must maintain all required records in a systematically organized
• Student Financial Aid manner. Unless a specific format is required, a school may keep required
Handbook: Institutional records in hard copy, microform, computer file, optical disk, CD-ROM, or
Eligibility and
Participation other media form.
• 34 CFR 668.24(d)
Regardless of the format used to keep a record, all records (except ISIRs)
must be retrievable in a coherent hard copy format.

• A coherent hard copy format includes, for example, an easily

understandable print out of a computer file.

Any document that contains a signature, seal, certification, or any other

image or mark required to validate the authenticity of its information must
be maintained in its original hard copy or in an imaged media format.

• A school may maintain a record in an imaged media format only if

the format is capable of reproducing an accurate, legible, and
complete copy of the original document. When printed, the copy
must be approximately the same size as the original document.

Special Requirements
Special maintenance and availability requirements apply to SARs and ISIRs
because it is essential that these basic eligibility records be available in a
consistent, comprehensive, and verifiable format for program review and
audit purposes.

Reference: • The SAR must be available in its original hard copy format or in an
• 34 CFR 668.24(d)(3)(ii) imaged media format.

• The ISIR, an electronic record, must be maintained and available in

*The original format is in its original format*, that is, as it was supplied by ED to the school.
the form of a magnetic
tape, cartridge, or as it
was archived using A school that uses EDExpress software has the ability to maintain the ISIR
EDExpress software. data that it has maintained during the award year by archiving the data to a
disk or other computer format.

Records Examination
Reference: Schools must make their records available to ED at an institutional location
• Student Financial Aid that ED designates. These records must be readily available for review,
Handbook: Institutional
including any records of transactions between a school and the financial
Eligibility and
Participation institution where the school deposits its Title IV funds.
• 34 CFR 668.24(f)
A school and its third-party servicer must cooperate with the agencies or
individuals conducting audits, program reviews, investigations, or other

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 General Institutional Responsibilities

reviews authorized by law. This cooperation must be extended to the

following individuals and their authorized representatives:

• independent auditors,

• the U.S. Secretary of Education,

• ED’s Inspector General,

• the Comptroller General of the United States,

• any guaranty agency in whose program the school participates, and

• the school’s accrediting agency.

A school or its third-party servicer in the review process must cooperate by

providing timely access to requested records, pertinent books, documents,
papers, or computer programs for examination and copying.

A school or its third-party servicer must also provide reasonable access to

all personnel associated with the school’s or servicer’s administration of
federal student financial aid programs so that any of the agents listed above
may obtain relevant information. A school or its third-party servicer has
not provided reasonable access if it:

• refuses to allow personnel to supply all relevant information,

• permits interviews with those personnel only if the school’s or

servicer’s management is present, or

• permits interviews with those personnel only if the interviews are

tape recorded by the school or servicer.

If ED requests it, a school or its third-party servicer must promptly provide

any information about the last known address, full name, telephone
number, enrollment information, employer, and employer address of
Title IV fund recipients who attend or attended the school. A school must
also provide this information, on request, to a lender or guaranty agency in
the case of a borrower under the FFEL Program.

Reference: A school must still maintain required records, if the school:

• 34 CFR 668.24(d)(4)(i)
(ii) • stops providing educational programs,

• is terminated or suspended from participating in a Title IV

program(s),

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Chapter 2

• undergoes a change of ownership that results in a change in control,

or

• closes.

These records must be accessible for inspection and copying by the

Secretary or the Secretary’s authorized representative and the appropriate
guaranty agency (if applicable).

Disclosing Student Information

Reference: The Family Education Rights and Privacy Act of 1974 (FERPA) sets
• Student Financial Aid certain conditions on disclosure of personal information from records kept
Handbook: Institutional by schools participating in Title IV programs. The law pertains to all
Eligibility and
Participation
students attending these schools, not just Title IV recipients. In addition,
federal regulations issued under FERPA apply to all school records,
including admissions records, academic records, and financial aid records.

Reference: FERPA excludes from the definition of “education records” (and from the
• 34 CFR Part 99 restrictions and rights of access under FERPA) records that are maintained
by a law enforcement unit of an education agency or institution that were
created by that unit for the purpose of law enforcement.

School Requirements
Under FERPA, a school is required to:

• develop a written policy listing the types and locations of education

records maintained by the school and stating the procedures for
students and parents to review the records,

• notify students and parents of their rights with respect to education

records, and

• document the student’s file each time personally identifiable

information is disclosed to a person other than the student.

Student Rights
A student has the right to:

• inspect and review his or her education records,

• request an amendment to the records, and

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 General Institutional Responsibilities

• if the request for an amendment is denied, to request a hearing to

challenge the contents of the education records on the grounds that
the records are inaccurate, misleading, or violate the student’s
rights.

Disclosure to Third Parties

Reference: FERPA regulations also govern the disclosure of student information to

• Student Financial Aid parties other than the student. There are several conditions under which
Handbook: Institutional personally identifiable information may be disclosed without the student’s
Eligibility and prior written consent. Some of these conditions are of interest to the fiscal
Participation
officer:

• Disclosure may be made to authorized representatives of ED, ED’s

Office of Inspector General, or state and local education authorities.
These officials may have access to records as part of an audit or
program review or to ensure compliance with Title IV program
requirements.

• Disclosure may be made if it is in connection with financial aid that

the student received or applied for. Information may only be
released if it is needed to determine the amount of the aid, the
conditions for the aid, the student’s eligibility for the aid, or to
enforce the terms or conditions of the aid.

• Disclosure may be made to the student’s parent, if the student is a

dependent of the parent as defined by the Internal Revenue Service.

• Disclosure may be made to organizations that are conducting

studies concerning administration of student aid programs on behalf
of educational agencies or institutions.

Recording Disclosures
Schools are required to keep a record of each request for access and each
disclosure of personally identifiable student information. The record must
identify the parties who requested the information and their legitimate
interest in the information. This disclosure record must be maintained as
long as the records themselves are maintained.

Record Management Procedures

It is essential that schools maintain records related to Title IV programs in
an organized manner. Good record-management procedures assist
institutions in carrying out daily functions associated with administering
Title IV funds, filing required reports in an accurate and timely manner, and
maintaining a clear audit trail.

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One important aspect of record management is careful and orderly filing of

original records. Many schools establish individual, cumulative student aid
files, separating documents within each student’s file on the basis of award
year.

Clear Audit Trail

Although it is important to keep original records used in processing
financial aid, schools must also have a record-keeping system that traces
transactions involving those records. A school’s record-keeping procedures
should allow for establishing and maintaining a clear (easily followed) audit
trail. A clear audit trail is defined as maintaining required documentation
that supports each transaction involving receiving or expending federal
funds.

A school may maintain records in a manual, paper-based system or in a

computer database, or it may use a combination of these methods. For
example, a school that uses an automated system to manage records might
also maintain paper files that contain original documents needed to support
the electronic information stored in a database. As imaging technology
becomes more available, schools might choose to maintain electronically
imaged documents in lieu of paper originals.

In-House Control Documents

The in-house control documents a school uses to manage records can vary
on the basis of institutional policies and procedures. Some commonly used
control documents, whether paper or electronic, include:

• a communication log that summarizes all in-person or telephone

contacts with a student or about a student’s financial aid;

• a document control checklist that monitors documents received

against documents needed to process a student’s financial aid;

• an award packaging log that shows how and when a student’s award
was packaged and by whom;

• a loan status log for each federal student loan program that tracks
loan applications, disbursements, entrance and exit loan counseling,
refunds, repayments, and collection activities (if applicable); and

• a student master record that contains financial aid information for a

student for each award year.

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 General Institutional Responsibilities

Student Master Record

A student master record is used to record basic information relating to a
student’s application for and receipt of financial aid. The student master
record typically contains:

• demographic information, such as name, address, date of birth, and

citizenship status;

• enrollment information, such as admission status, enrollment dates,

credits attempted and completed, and grade point average;

• need analysis information, such as Expected Family Contribution

(EFC), family income, and cost of attendance (COA);

• award information, such as amounts and sources of funds awarded

and whether awards were accepted or declined; and

• student account information, such as tuition and fee charges

assessed, cash payments made by a student or parent, financial aid
disbursements, and refunds and repayments.

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Chapter 2

Appendix F—Ratio Methodology for Proprietary Institutions

Section 1: Ratios and Ratio Terms

Primary Reserve Ratio = Adjusted Equity

Total Expenses

Equity Ratio = Modified Equity

Modified Assets

Net Income Ratio = Income Before Taxes

Total Revenues

Definitions:

• Adjusted Equity = (total owner’s equity) – (intangible assets) – (unsecured related-party

receivables) – (net property, plant, and equipment)* + (post-employment and retirement
liabilities) + (all debt obtained for long-term purposes)**

• Total Expenses excludes income tax, discontinued operations, extraordinary losses, or change
in accounting principle.

• Modified Equity = (total owner’s equity) – (intangible assets) – (unsecured related-party

receivables)

• Modified Assets = (total assets) – (intangible assets) – (unsecured related-party receivables)

• Income Before Taxes is taken directly from the audited financial statement.

• Total Pre-Tax Revenues = (total operating revenues) + (non-operating revenue and gains)
Investment gains should be recorded net of investment losses. No revenues shown after
income taxes (e.g., discontinued operations, extraordinary gains, or change in accounting
principle) on the income statement should be excluded.

* The value of plant, property, and equipment is net of accumulated depreciation, including
capitalized lease assets.

** The value of all debt obtained for long-term purposes includes the short-term portion of the debt,
up to the amount of net property, plant, and equipment.

Source: 34 CFR 668 Subpart K. Added November 25, 1997, effective July 1, 1998.

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 General Institutional Responsibilities

Appendix F—Ratio Methodology for Proprietary Institutions

Section 2, Calculating the Ratios from the Balance Sheet and Income Statement

Balance Sheet Statement of Income and Retained Earnings

Line Line
1 Cash $ 190,000 25 Operating Income $ 9,700,000
2 Accounts Receivable 1,010,000 26 Non-Operating Income 300,000
3 Prepaid Expenses 150,000 27 Total Income 10,000,000
4 Inventoried 130,000 28 Cost of Goods Sold 6,800,000
5 Note Receivable from Affiliate 200,000 29 Administrative Expenses 2,600,000
6 Investments 330,000 30 Depreciation Expense 60,000
7 Total Current Assets 2,010,000 31 Interest Expense 40,000
8 Property and Equipment, net 500,000 32 Total Expenses 9,500,000
9 Amount Due from Owner 170,000 33 Other: Gain on Sale of
Investments 10,000
10 Goodwill 80,000
34 Net Income Before Taxes 510,000
11 Organization Costs 70,000
35 Federal Income Taxes 153,000
12 Deposits 60,000
36 Net Income After Taxes 357,000
13 Total Assets 2,890,000
37 Extraordinary Loss, net of Tax 800,000
14 Accounts Payable 200,000
38 Net Income (443,000)
15 Accrued Expenses 330,000
39 Retained Earnings,
16 Current Portion of
Beginning of year 1,263,000
Long-Term Debt 120,000
22 Total Expenses 820,000
17 Deferred Revenue 650,000
18 Total Current Liabilities 1,300,000
19 Long-Term Debt, net of Primary Reserve Ratio = (lines) 23-5-9-10-8+(16+19)* = $ 760,000 = 0.080
32 $9,5000,000
Current Portion 330,000
Equity Ratio = (lines) 23-5-9-10 = $ 810,000 = 0.332
20 Total Liabilities 1,630,000 13-5-9-10 $2,440,000

Net Income Ratio = (lines) 34 = $ 510,000 = 0.051

21 Contributed Capital 440,000 27+33 $10,010,000

22 Retained Earnings 820,000 * Long-Term Debt (lines 16 + 19) cannot exceed Property and
Equipment (line 8) in the formula.
23 Total Owner’s Equity 1,260,000
Source: 34 CFR 668 Subpart K. Added November 25, 1997, effective July 1, 1998.
24 Total Liabilities and
Owner’s Equity 2,890,000

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Appendix F—Ratio Methodology for Proprietary Institutions

Section 3: Calculating the Composite Score

Step 1: Calculate the strength factor score for each ratio, by using the following algorithms:
Example (for Proprietary Institutions)

•Primary Reserve strength factor score = 20 x* Primary Reserve ratio result: 20 x 0.080 = 1.600

•Equity strength factor score = 6 x Equity ratio result: 6 x 0.332 = 1.992

•Net Income strength factor score = 1 + (33.3 x Net Income ratio result): 1 + (33.3 x 0.051) = 2.698

If the strength factor score for any ratio is greater than or equal to 3, the strength factor score for that ratio is 3. If the
strength factor score for any ratio is less than or equal to -1, the strength factor score is that ratio is -1.

Step 2: Calculate the weighted score for each ratio and calculate the composite score by adding the three
weighted scores.
Example (for Proprietary Institutions)

•Primary Reserve weighted score = 30% x Primary Reserve strength factor score: 0.30 x 1.600 = 0.480

•Equity weighted score = 40% x Equity strength factor score: 0.40 x 1.992 = 0.797

•Net Income weighted score = 30% x Net Income strength factor score: 0.30 x 2.698 x = 0.809

•Composite score = sum of all weighted scores: 0.480 + 0.797 + 0.809 = 2.086

•Round the composite score to one digit after the decimal point to determine the final score: 2.1

* The symbol “x” denotes multiplication.

Source: 34 CFR 668 Subpart K. Added November 25, 1997, effective July 1, 1998.

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Appendix G—Ratio Methodology for Private Non-Profit Institutions

Section 1: Ratios and Ratio Terms

Primary Reserve Ratio = Expendable Net Assets
Total Expenses

Equity Ratio = Modified Net Assets

Modified Assets
Net Income Ratio = Change in Unrestricted Net Assets
Total Unrestricted Revenue
Definitions:
• Expendable Net Assets = (unrestricted net assets) + (temporarily restricted net assets) –
(annuities, term endowments, and life income funds that are temporarily restricted) -
(intangible assets) - (net property, plant, and equipment)* + (post-employment and retirement
liabilities) + (all debt obtained for long-term purposes)**
• Total Expenses is the total unrestricted expenses taken directly from the audited financial
statement.
• Modified Net Assets = (unrestricted net assets) + (temporarily restricted net assets) +
permanently restricted net assets) - (intangible assets) - (unsecured related-party receivables)
• Modified Assets = (total assets) – (intangible assets) – (unsecured related-party receivables)
• Change in Unrestricted Net Assets is taken directly from the audited financial statement.
• Total Unrestricted Revenue is taken directly from the audited financial statement. (This
amount includes net assets released from restriction during the fiscal year.
* The value of plant, property, and equipment is the net of accumulated depreciation, including
capitalized lease assets.
** The value of all debt obtained for long-term purposes includes the short-term portion of the debt,
up to the amount of net property, plant, and equipment.

Source: 34 CFR 668 Subpart K. Added November 25, 1997, effective July 1, 1998.

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 Balance Sheet Statement of Activities (column: a b c d)

Chapter 2
2-68
Unrestricted Temporarily Permanently Total
Line Line
Restricted Restricted
1 Cash and Cash Equivalents $ 1,000,000 27 Tuition and Fees $45,000,000 $45,000,000
2 Accounts Receivable 6,000,000 28 Contributions 1,200,000 $300,000 $120,000 1,620,000

Section 2, Calculating the Ratios from the Balance Sheet and Statement of Activities
3 Prepaid Expenses 1,500,000 29 Auxiliary Enterprises 5,500,000 5,500,000

Appendix G—Ratio Methodology for Private Non-Profit Institutions

4 Inventories 500,000 30 Net Assets Released from
5 Contributions Receivable 2,000,000 Restrictions 200,000 200,000

6 Student Loans Receivable 8,000,000 31 Total Revenue 51,900,000 300,000 120,000 52,320,000

7 Investments 6,000,000 32 Operating Expenses 38,000,000 38,000,000

8 Property and Equipment, net 50,000,000 33 Depreciation 5,000,000 5,000,000

9 Bond Insurance Costs 720,000 34 Interest Expense 2,880,000 2,880,000

10 Goodwill 500,000 35 Auxiliary Enterprise 5,200,00 5,200,000

The Blue Book

11 Deposits 20,000 36 Non-Operating Expenses 900,000 900,000

12 Total Assets 76,240,000 37 Net Assets Released from

Restrictions 200,000 ---- 200,000
13 Line of Credit 500,000
38 Total Expenses 51,980,000 200,000 ---- 52,180,000
14 Accounts Payable 2,000,000
39 Change in Net Assets (80,000)* 100,000 120,000 140,000
Source: 34 CFR 668 Subpart K. Added November 25, 1997, effective July 1, 1998.

15 Accrued Expenses 3,500,000

40 Net Assets at beginning
16 Deferred Revenue 650,000 of year 15,270,000 2,700,000 8,880,000 26,850,000
17 Post-Retirement Benefits Liability 6,600,000 41 Net Assets at end of year 15,190,000 2,800,000 9,000,000 26,990,000
18 Bonds Payable 36,000,000
19 Total Liabilities 49,250,00
20 Unrestricted Net Assets 15,190,000 Primary Reserve Ratio = (lines) 20+23-21-10-8+18**+17 = $ 9,790,000 = 0.188
38 a $51,980,000
21 Annuities 300,000 Equity Ratio = (lines) 25-10 = $26,490,000 = 0.350
12-10 $75,740,000
22 John Doe Scholarship Fund 2,500,000
Net Income Ratio = (lines) 39 a = $ (80,000) = (0.0015)
23 Total Temp. Restricted Net Assets 2,800,000 31 a $51,900,000

* In accounting statements, parenthesis denote negative numbers (i.e.,

24 Permanent Restr. Net Assets 9,000,000 (80,000) equals negative 80,000).
June 1999

25 Total Net Assets 26,990,000 ** Long-Term Debt (line 18) cannot exceed Property and Equipment, net
(line 8) in this formula.
26 Total Liabilities & Net Assets 76,240,000
 General Institutional Responsibilities

Appendix G—Ratio Methodology for Private Non-Profit Institutions

Section 3: Calculating the Composite Score

Step 1: Calculate the strength factor score for each ratio, by using the following algorithms:
Example (for Private Non-Profit Institutions)

•Primary Reserve strength factor score = 10 x* Primary Reserve ratio result: 10 x 0.188 = 1.880

•Equity strength factor score = 6 x Equity ratio result: 6 x 0.350 = 2.100

•Because the Net Income ratio is negative, the algorithm for negative net income is
used—Net Income strength factor score = 1 + (25 x Net Income ratio result): 1 + (25 x -0.0015) = 0.963

(Note: If the Net Income ratio result is positive, the following algorithm is used, Net Income strength factor score = 1 +
(50 + Net Income ratio result)—If the Net Income ratio result is 0, the Net Income strength factor score is 1).

If the strength factor score for any ratio is greater than or equal to 3, the strength factor score for that ratio is 3. If the
strength factor score for any ratio is less than or equal to -1, the strength factor score for that ratio is -1.

Step 2: Calculate the weighted score for each ratio and calculate the composite score by adding the three
weighted scores.
Example (for Private Non-Profit Institutions)

•Primary Reserve weighted score = 40% x Primary Reserve strength factor score: 0.40 x 1.880 = 0.752

•Equity weighted score = 40% x Equity strength factor score: 0.40 x 2.100 = 0.840

•Net Income weighted score = 20% x Net Income strength factor score: 0.20 x 0.963 x = 0.193

•Composite score = sum of all weighted scores: .752 + 0.840 + 0.193 = 1.785

•Round the composite score to one digit after the decimal point to determine the final score: 1.8

* The symbol “x” denotes multiplication.

Source: 34 CFR 668 Subpart K. Added November 25, 1997, effective July 1, 1998.

June 1999 The Blue Book

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