Some schools may suddenly learn that they are not in compliance with the cash management regulations based on guidance provided in a new position paper released by the Department of Education last week. At issue is how schools with academic years or programs that cross award years may apply Title IV funds to students' accounts.

On August 8, 2007, the Department of Education issued final rules on federal student aid general provisions that went into effect on July 1, 2008. Those final rules were built on agreements reached by federal and nonfederal negotiators through the negotiated rulemaking (negreg) process. At the request of nonfederal negotiators, the Department agreed to increase the amount of Title IV funds that could be used to pay for minor prior year expenses (from $100 to $200) as long as the school obtains permission from the student.

During negotiations, the Department reminded schools that HEA funds are for current year expenses and should not be used - with few exceptions - to pay for expenses incurred in previous years. The Department proposed eliminating the regulatory provision in Section 668.164(d)(1) that allowed schools discretion to exceed the dollar cap of current year Title IV funds that could be used for prior year expenses as long as those expenses did not prevent students from paying their current educational costs. The nonfederal negotiators agreed to eliminate this discretion in exchange for the $100 increase. However, it seems that the impact of the provision on periods of enrollment that cross award year divisions (i.e., that cross over July 1) was never thoroughly explored even before this most recent regulatory change. Now, many schools will be surprised to learn the full extent of the regulation as outlined in the Department's position paper.

The cash management regulations state that "current year" awards must be used for current year educational expenses, with a limited exception for payment of minor "prior award year charges." In accordance with the Department's position paper, for FFEL and DL, the "year" refers to the loan period. For Pell, ACG, SMART Grants, TEACH Grants, and campus-based aid, the "year" refers to the award year. Therefore, when determining how to disburse Title IV grants, FWS, and Perkins Loans for a payment period that begins after July 1, charges assessed during a payment period that began prior to July 1 must be considered prior year charges if that previous payment period is assigned to the concluding award year. Under the Department's interpretation, when an academic year or program for which a school charges all tuition or program fees upfront spans two separate award years, the school cannot apply any Title IV grant or campus-based aid disbursements that occur in the next award year towards those upfront charges in excess of $200.

For example, a student enrolls in a program with an academic year that starts in May 2008 and ends in December 2009, and the school makes the first Pell Grant disbursement from the 2007-08 award year and the second disbursement from the 2008-09 award year. If the school charges all of its tuition and fees upfront, it may only use up to $200 of the 2008-09 Pell Grant disbursement to cover those upfront charges - the remainder of the funds are considered a Title IV credit balance which must be disbursed to students in accordance with the cash management regulations. To avoid this problem, the school could charge students by the payment period so that funds from separate award years can be applied towards "current year" charges.

Note that if the academic year or program falls entirely within the same award year, this problem does not arise for Pell or other grants and campus-based aid programs. Any Title IV grant or campus-based aid disbursements made in the second academic year can be applied to institutional charges from the first academic year since they are attributable to same award year in which the charges were assessed. However, there are different implications for FFEL and DL proceeds if the program is more than one academic year. When this occurs, proceeds from the second loan period cannot be applied to the institutional charges assessed up front, since by definition they become prior year charges.

In discussions with NASFAA, the Department stated that too many schools have abused the "minor prior award year" provisions in the past by far exceeding the $100 limit on prior year educational expenses. In some cases, schools misunderstood the intent of the provision and examined only whether the student could cover direct institutional charges rather than all educational expenses including non-institutional costs. Removing the caveat in the cash management provisions that allows schools to exceed the prior year expense limit to cover prior year charges as long as it did not prevent the student from covering current year educational expenses eliminates those abuses, according to the Department.

New Guidance?

The Department points out that this guidance is not new, even though it will sound new to many financial aid professionals - especially those from career schools - who assumed that current year expenses referred to a student's current academic year or program, not their award year. Some schools see this guidance as an effort to control their procedures for assessing charges. However, the Department says that schools are free to charge students however they want; but one way to avoid the unwanted consequences of the prior year charges policy (and use disbursements from separate award years to pay institutional charges) would be to charge on a payment period basis. In the position paper, the Department also stresses that the guidance does not prohibit any institution that charges up front from entering into a contract with students to hold them responsible for the entire tuition amount in case students withdraw.

Because this issue was not clearly articulated in negreg, there is feeling in the financial aid community that the Department is regulating outside of the negreg process. While the Department said this issue could be discussed in future negreg sessions, it did not believe changing its interpretation is possible given the current regulatory wording. Nevertheless, NASFAA is pursuing further discussion of this issue.

What Now?

Schools that are not in compliance with the Department's guidance will be required to fix the problem by restructuring how they charge students or ensuring that any disbursements made in this award year are properly credited to students' accounts and the remaining credit balances are paid to the student. It is important to note that the Department has explicitly stated that the student may not endorse the credit balance check over to the school.

NASFAA will work to include this issue in upcoming negotiated rulemaking sessions. Schools may also raise this issue at one of upcoming public hearings that begin the rulemaking process (see below) and/or send written comments to:

Wendy Macias
U.S. Department of Education
1990 K Street, NW, Room 8017
Washington, DC 20006
Fax (202) 502-7874

You may also e-mail your comments to HEOA08@ed.gov.

Upcoming Public Hearings

• September 19, 2008, at Texas Christian University, Fort Worth, Texas

• September 29, 2008, at the University of Rhode Island, Providence Campus, Paff Auditorium, Providence, Rhode Island

• October 2, 2008, at Pepperdine University, Malibu, California

• October 6, 2008 at Johnson C. Smith University, Charlotte, North Carolina

• October 8, 2008, at the U.S. Department of Education, 8th Floor Conference Center, 1990 K Street, N.W., Washington, DC

• October 15, 2008 at Cuyahoga Community College, Cleveland, Ohio

By Justin Draeger, Associate Director of Communications, Stacey Peterson, Associate Director of Professional Assessment, Training, and Regulatory Assistance, and Joan Berkes, Director of Legislative and Regulatory Analysis

Posted 09/05/08 to www.NASFAA.org. Redistribution to non-NASFAA institutions is prohibited. Please submit Web Site questions or comments to Web@NASFAA.org.