Disbursing FSA Funds | 2022-2023 Federal Student Aid Handbook (2024)

This chapter explains the rules for crediting Federal Student Aid (FSA) funds to the student’s account and making direct disbursem*nts to the student or parent, as well as different types of disbursem*nts including early and late disbursem*nts. These rules apply to the Pell Grant, Teacher Education Assistance for College and Higher Education (TEACH) Grant, Iraq and Afghanistan Service Grant, Federal Supplemental Educational Opportunity (FSEOG) Grant, and Direct Loan programs. We also note specifically when any rules apply to Federal Work-Study (FWS) disbursem*nts.

Notifications

Notification of disbursem*nt

In general, there are two types of notifications a school mustprovide: (1) a general notification to parent Direct PLUS borrowers andall students receiving FSA funds, and (2) a notice when Direct Loan funds orTEACH Grant funds are credited to a student’s account.

General notification

Direct Loan and TEACH Grant notification

Except in the case of loan funds made as part of a post-withdrawal disbursem*nt (see Volume 5 for notification requirements in such cases), when Direct Loan or TEACH funds are being credited to a student’s ledger account, the school must also notify the borrower in writing (paper or electronically) of the:

• anticipated date and amount of the disbursem*nt;

• student’s or parent’s right to cancel all or a portion of a Direct Loan, loandisbursem*nt, TEACH Grant, or TEACH Grant disbursem*ntand have the loan proceeds or TEACH Grant proceeds returnedto the Department; and

• procedures and deadlines by which the student or parent mustnotify the school that he or she wishes to cancel the Direct Loan, loandisbursem*nt, TEACH Grant, or TEACH Grant disbursem*nt.

• if the school obtains affirmative confirmation, no earlier than30 days before and no later than 30 days after crediting thestudent’s account; or

• if the school does NOT obtain affirmative confirmation, noearlier than 30 days before and no later than 7 days aftercrediting the student’s account.

If the borrower or TEACH Grant recipient wishes to cancel all or a portion of a Direct Loan, or TEACH Grant disbursem*nt, he or she must inform the school. A school must return the loan or grant, cancel it, or do both, provided that the school receives the loan cancellation request within the following time frames:

• If the school obtains affirmative confirmation from the student,by the later of the first day of a payment period or 14 days afterthe date the school notifies the student or parent of his or herright to cancel all or a part of a loan or grant; or

• If the school does NOT obtain affirmative confirmation from the student, within 30 days of the date the school notifies thestudent or parent of his or her to cancel all or a part of a loan.

Authorizations

You must obtain authorization from a student (or parent borrower)before your school can perform any of the following activities:

• Use FSA funds to pay for allowable educationally related charges, including prior year changes, other than tuition, fees, and room and board (if the student contracts with the school).

• Credit FWS wages to a student’s account to pay anyeducationally related charges. See 34 CFR 675.16(b)(1)(i).

• Hold an FSA credit balance (see the discussion later in thischapter).

Holding Title IV credit balance authorizations

If a school holds excess student funds, the school must:

• identify the amount of funds the institution holds for each student or parent in a subsidiary ledger account designed for thatpurpose;

• maintain, at all times, cash in its depository account in anamount at least equal to the amount of funds the institutionholds on behalf of the student or the parent; and

• notwithstanding any authorization obtained by the school, payany remaining balance on loan funds by the end of the loan period, and any other remaining Title IV funds by the end ofthe last payment period in the award year for which the funds were awarded.

If a student or parent cancels an authorization to hold excess Title IV funds, the funds must be paid directly to the student or parent as soon as possible but no later than 14 days after the school receives the notice. (See the discussion under Time frame for paying FSA credit balances later in this chapter.)

Using electronic processes for notifications and authorizations

The annual individual notice must:

• identify the information required to be disclosed that year;

• provide the exact Internet or intranet address where the information can be found; and

• state that, upon request, individuals are entitled to a papercopy, and inform students how to request a paper copy

Limitations on using power of attorney in disbursing FWS funds

A school may not obtain a student’s power of attorney to authorize FWS disbursem*nts unless the Department has granted prior approval (contact your School Participation Division). A school must be able to demonstrate that there is no one else (such as a relative, landlord, or member of the clergy, for example) who could act on behalf of the student.

Institutional Charges

Institutional versus noninstitutional charges

1. The school demonstrates there is a compelling health or safetyreason for it to provide the books and supplies,

2. The school documents on a current basis that the books andsupplies, including digital and electronic course materials,are not available elsewhere or accessible by students enrolledin that program from sources other than those provided orauthorized by the school, or

3. The school -

   • has an arrangement with a book publisher or other entitythat enables it to make those books or supplies available tostudents below competitive market rates,

   • provides a way for a student to obtain those books andsupplies by the seventh day of a payment period, and

   • offers a student the ability to opt out of the way a schoolprovides books and supplies.

If a school charges for books and supplies as part of its tuition and fees and a student opts out of that method for providing books and supplies, the school must reduce the student’s tuition and fees by the amount associated with the books and supplies.

Noninstitutional charges in an enrollment agreement

Generally, if a school includes charges for books, supplies, andequipment (including kits) as part of a program’s enrollment agreement,they are considered institutional charges. However, they can be excludedfrom institutional charges if all the following criteria are met:

1. There is no up-front charge for the books, supplies, or equipment on the student's account ledger, and signing the enrollment agreement does not incur a financial obligation for those items but only acknowledges that they are necessary for the program.

2. A real and reasonable opportunity exists for students to purchase these items from a source other than the school; and

3. The school gets written authorization from students who opt to buy these items from the school, in accordance with 34 CFR 668.165(b), allowing the school to use Title IV funds to pay for charges other than tuition and fees and school provided room and board. The school may then charge student accounts for the kit and use Title IV funds to pay for it.

Using Title IV funds to pay overtime charges is prohibited

A school may not use Title IV funds to pay overtime charges for a student who fails to complete his or her academic program within the normal time, even with a student’s authorization. Section 472 of the HEA defines cost of attendance as the tuition and fees normally assessed a student carrying the academic workload required of all students in the same course of study. Because overtime charges are in addition to usual tuition and fees and are not normally assessed, they may not be included in a student’s cost of attendance for Title IV purposes, nor paid for with any Title IV funds. (See Volume 3, Chapter 2, for additional information.)

Prorating charges

In most cases, the total charges a school assesses the student in a semester, academic year, or other instructional period are for educationand services the institution provides within that period of time. However, some schools charge a student up front for the total cost of a multiyear program (for example, the student signs an enrollment agreement and is charged for the total costs of an 1,800-clock-hour program at the beginning of the program). In this case, because the charges assessed up front represent the costs of education and services that will be provided over a two-year period, the institution would, on a program basis, prorate the total charges over the two-year period to determine the amount of charges applicable to each year (each loan period or award year, as appropriate) for the purpose of determining the amount of Title IV aid that may be credited to a student’s account and the amount that must be provided to a student as a credit balance.

Paying Institutional Charges

Paying pass-through charges

The law allows a school to credit a student’s account with FSA funds to pay for institutionally provided housing or to pay for charges incurred at a school-owned bookstore. However, it is not necessary that the school actually own the student housing or the bookstore. The school may enter into a contract with a third party to provide institutional housing and/or bookstore services. A school that has such a contractual agreement for housing and books and supplies is viewed as providing the goods and services itself.

As allowed under 34 CFR 668.164(c), a school may credit thestudent’s account with Title IV, HEA funds to pay for housing and foreducationally related goods and services from the bookstore (with thestudent’s authorization if such charges are not institutional charges).If a third party operates the bookstore, the school must have a writtencontract or other legal agreement with it, under which the student isable to charge the goods and services. Other FSA requirements apply tohousing and the bookstore. For instance,

• A school must give a student the opportunity to opt out of having purchases of books and supplies from an institutionallyowned or contracted bookstore charged to his or her account.[34 CFR 668.164(m)(3)]

• A school must include the cost of housing as an institutional charge in any return calculation required when an eligible recipient ceases to be enrolled prior to the end of the payment period or period of enrollment. (See Volume 5.)

• Bookstore charges must count as institutional charges when performing a return calculation if students did not have a “real and reasonable opportunity” to purchase the books and supplies from any place other than that bookstore. (See Volume 5.)

• The school must include the contracted third-party housingamong the locations for which it fulfills the requirements forreporting campus crime and safety information.

• If the bookstore is on campus or in any off-campus building or property the school owns or controls, the school must include the bookstore among the locations for which it reports campus crime and safety information. See Volume 2 for more information.

The third party that owns the housing or bookstore also must comply with the civil rights and privacy requirements contained in the school’s program participation agreement (see Volume 2).

Paying prior-year charges

In general, FSA funds may only be used to pay for the student’s costsfor the period for which the funds are provided. However, a school mayuse current-year funds to satisfy prior-year charges of not more than$200 for:

• tuition, fees, and room and board (provided by the school)without obtaining the student’s or parent’s authorization; and

• educationally related goods and services provided by the schoolif it obtains (or had already obtained) the student’s or parent’sauthorization under §668.165(b).

• For a student or parent who receives only a Direct Loan in apayment period, the current year is the current loan period.

• For a student who does not receive a Direct Loan but receivesother Title IV funds in a payment period, the current year isthe current award year.

• For a student or parent who receives a Direct Loan AND fundsfrom any other Title IV program in a payment period, the currentyear is either the current loan period or the current awardyear as determined by the school.

Disbursem*nts by payment period

Checking Eligibility At The Time Of Disbursem*nt

Before a school awards funds to a student, it confirms that the student is an eligible student and is making satisfactory academic progress (see Volume 1). Also, before disbursing FSA funds, the school must determine and document that the student remains eligible to receive the type and amount of FSA funds that it expects to disburse. The school and its third-party servicer, if applicable, must have a process (consistent with the regulations) for determining student eligibility at the time of disbursem*nt. See the discussion under Third-Party Servicers Disbursing Credit Balances by EFT and Tier One and Tier Two Arrangements later in this chapter for additional information about working with third-party servicers. Confirmation includes, but is not limited to, the following:

• for Direct Loans, the student is enrolled at least half time and has avalid, linked MPN;

• for a student otherwise eligible for a Pell Grant, the scheduled disbursem*nt will not cause the student to exceed his or her lifetime eligibility (see Volume 3);

• a student enrolled in a non-term program or nonstandard termprogram with terms that are not substantially equal in length(for Direct Loan purposes) has completed the previous period (credits/clock hours and weeks of instruction);

• first-time FSA borrowers have completed entrance counseling, and received the required disclosures (see Volume 3);

• first-time, first year borrowers have completed the first 30 days of their academic program (see Volume 3);

• for TEACH Grant awards, the student has

  1. completed initial or subsequent counseling, as appropriate (see Volume 3);

  2. signed an Agreement to Serve or Repay; and

  3. earned the appropriate GPA, otherwise met the performance standard through testing, or is a retiree or a current or former teacher (see Volume 1).

Conditions under which a third-party servicer is responsible for confirming a student’s eligibility

A third-party servicer is bound by the same provisions that applyto a school. The servicer must carry out its contracted activities in amanner keeping with a fiduciary under the Title IV, HEA programs.It is responsible for confirming student eligibility if the school engagesthe servicer to perform activities or transactions that lead to or supportTitle IV disbursem*nts. Examples of activities and transactions are:

• processing financial aid applications;

• performing need analysis;

• verifying students have begun attendance in the classes onwhich their Title IV aid was based;

• verifying that students are making satisfactory academic progress (SAP);

• performing verification;

• determining the type and amount of Title IV funds that studentsare eligible to receive;

• creating origination, disbursem*nt, or other records in theCOD System;

• requesting funds under the advance, reimbursem*nt, or heightenedcash monitoring (HCM) payment methods; or

• accounting for funds that are originated, requested, ordisbursed in reports or data submissions to the Department.

When schools can’t make interim disbursem*nts

Time Frames For Paying FSA Funds

Prompt disbursem*nt (three-day) rule

Reporting disbursem*nts within 15 days

Early Disbursem*nts

The earliest a school may disburse Title IV funds to an eligiblestudent or parent is:

• if the student is enrolled in a credit-hour program offered in terms that are substantially equal in length that is not a subscription-based program, 10 days before the first day of classes of a payment period; or

• if the student is enrolled in a clock-hour program, a non-term credit-hour program, or a credit-hour program offered in terms that are not substantially equal in length that is not a subscription-based program, the later of -

  1. 10 days before the first day of classes of a paymentperiod or

  2. the date the student completed the previouspayment period for which he or she received Title IVfunds.

• if the student is enrolled in a subscription-based program, the later of -

  1. 10 days before the first day of classes of a payment period or

  2. the date the student completed the cumulative number of credit hours associated with the student’s enrollment status in all prior terms that the student attended under the definition of a subscription-based program in 34 CFR 668.2.

Retroactive Payments

Late Disbursem*nts

Generally, an otherwise eligible student or parent becomes ineligibleto receive FSA funds on the date that:

• for the Direct Loan program, the student is no longer enrolledat the school as at least a half-time student for the period ofenrollment for which the loan was intended; or

• for the FSA grant programs, the student is no longer enrolledat the school for the award year.

However, if certain conditions are met, students must be consideredfor a disbursem*nt after the date they became ineligible. Thesedisbursem*nts are called “late disbursem*nts.”

Conditions for a late disbursem*nt

A student must be considered for a late disbursem*nt (and the parent for a parent PLUS Loan disbursem*nt) if the Department processed a SAR/ISIR with an official EFC before the student became ineligible. Therefore, a school must review its records to see if a student who did not receive a disbursem*nt of FSA funds before becoming ineligible is eligible for a late disbursem*nt. (Check the processed date as described below.)

In addition, for a Direct Loan or an award under the TEACH Grant Program, the school must have originated the loan or grant prior to the date the student became ineligible (see below). For an FSEOG, the school must have made the award to the student prior to the date he or she became ineligible.

Processed date

Date of origination

The regulations define the date of loan origination as “the date a school creates the electronic loan origination record.” If the schoolcreated an electronic loan origination record in its system before the date the student became ineligible, and the school can document the creation of that record, the school satisfies the date of origination component required for making a late disbursem*nt of Direct Loans (assuming all other late disbursem*nt requirements are met).

Limitations on making a late disbursem*nt

The regulations prohibit a school from making a late disbursem*nt in certain situations, **even if a student otherwise meets the conditions for a late disbursem*nt (see previous chart). A school is prohibited from making:

• a late second or subsequent disbursem*nt of Direct Loan fundsunless the student has successfully completed the loan period;

• a late disbursem*nt of Direct Loan funds to a first-year, first time borrower who withdraws before the 30th day of the student’s program of study, unless the school meets the requirements for a waiver based on low default rates (see Volume 3);

• a late first disbursem*nt of a Direct Loan (i.e., the first disbursem*nt of a Direct Loan in a loan period) if the student has withdrawn (post withdrawal disbursem*nt) and has not begun attendance in enough courses to establish a half-time enrollment status. Section 668.164(j)(3)(iii) which permits an institution to make a late disbursem*nt of a Direct Loan for costs incurred to a student who did not withdraw, but ceased to be enrolled as at least a half-time student, does not apply because the student never really was a half-time student. (See for more information); and

• a late disbursem*nt of Title IV funds to a student for whom the school did not have a valid SAR/ISIR by the deadline established by the Department.

In addition, a school may not make a late disbursem*nt later than 180 days after the date the student becomes ineligible.

Late disbursem*nts that must be made vs. late disbursem*nts that may be made

Paying a late disbursem*nt

Flexibility in contacting students

To avoid having to contact students multiple times, a school may useone contact to:

• counsel borrowers about their loan repayment obligations;

• obtain permission to credit loan funds to students’ accounts tocover unpaid institutional charges;

• obtain permission to make a late disbursem*nt of grant or loanfunds for other than institutional charges (if not previouslyobtained);

• obtain permission to make a late disbursem*nt of grant or loanfunds directly to students; and

• confirm that students wish the school to receive, as a directdisbursem*nt, any grant or loan funds the students are due as alate disbursem*nt.

Students’ response to an offer of a late disbursem*nt does not have tobe in writing, but the school must document it.

Extended processing

• select the correct award year and program for the request;

• choose the general reason why extended processing is beingrequested from the reason code dropdown menu;

• provide an explanation for the request; and

• select “Submit.”

Correcting disbursem*nts

If your school incorrectly returned funds or failed to draw downall the funds a student was entitled to, please note that disbursing or redisbursingTitle IV funds to resolve a school disbursem*nt error is stillconsidered a disbursem*nt under the definition in 34 CFR 668.164(a).As such, the disbursem*nt (even if correcting an error) must meet allthe cash management disbursem*nt rules, including all of the late disbursem*ntconditions, if applicable. That means, if a school discovers adisbursem*nt error after a student is no longer eligible, any corrective disbursem*ntsmust be made within the 180 day late disbursem*nt deadline.

Disbursing FWS Wages

Noncash contributions

Crossover payment periods

When a payment period is in two award years (that is, when it begins before July 1 and ends on or after July 1), the student is paid for compensation earned through June 30 with FWS funds allocated for the first award year and for compensation earned beginning July 1 with FWS funds allocated for the following award year. (See Volume 6 for a discussion of carrying back funds for summer employment.)

Holding FWS funds on behalf of the student

With written authorization from a student, a school may hold, onbehalf of the student, FWS funds that would otherwise be paid directlyto the student (unless this is prohibited by the terms of a reimbursem*ntpayment method). The restrictions for such an authorization are the sameas those that apply to written authorizations to credit FWS disbursem*ntsto student accounts. If your school holds FWS funds on behalf ofstudents, it must:

• identify the amount of FWS funds held for each student in adesignated subsidiary ledger account;

• maintain cash in its bank account that is always at a minimumequal to the FWS funds being held for students; and

• disburse any remaining balance by the end of the school’s final FWS payroll period for an award year.

Method of Disbursem*nt

There are two ways to disburse FSA funds: by crediting the student’s account for allowable charges at your school or by paying the student or parent directly. A school can evaluate their disbursem*nt procedures by referring to the “Fiscal Management Assessment”

Credit to the student’s account

• current charges incurred by the student at the school for tuition, fees, and room and board if the student contracts with the school (third-party or passthrough charges are not included except in the case of third-party housing, books, and supplies contracted by the school);

• the prorated amount of those charges if the institution debitsthe student’s ledger account for more than the charges associatedwith the payment period;

• books, supplies, and other educationally related goods andservices provided by the institution if you obtain the student’sor parent’s (as applicable) written authorization; and

• prior-year charges not exceeding $200 (see the discussion under Paying prior-year charges earlier in this chapter).

Direct disbursem*nt to the student or parent

• initiating an EFT of that amount to the student’s financial account, including transferring funds to stored-value cards and debit cards (see the discussion under Paying FSA Credit Balances later in this chapter);

• issuing a check or other instrument payable to and requiringthe endorsem*nt or certification of the student; or

• dispensing cash for which the school obtains a receipt signed bythe student.

A school makes a direct payment to a parent, for the amount of theDirect PLUS Loan funds that a parent does not authorize the student toreceive, by:

• initiating an EFT of that amount to the parent’s financialaccount;

• issuing a check for that amount payable to and requiring theendorsem*nt of the parent; or

• dispensing cash for which the school obtains a receipt signedby the parent.

When the Department considers a check to have been issued

The Department considers that a school has issued a check on thedate the school:

• mails the check to the student or parent; or

• notifies the student or parent that the check is available for immediatepick-up at a specified location at the institution.

A school may hold the check for no longer than 21 days after the datethe school notifies the student or parent. If the student or parent does notpick up the check, the school must immediately (1) mail the check to thestudent or parent, (2) pay the student or parent directly by other means,or (3) return the funds to the appropriate Title IV program.

Disbursem*nts in short programs where grades aren’t awarded until the end of the program

Before making a second disbursem*nt to students enrolled in one year or shorter programs for which they do not receive grades or credits until the end of the program, your school must have a satisfactory academic progress standard as described in Volumes 1 and 2 and you must:

• measure a student’s academic progress by the time the student has completed one-half of the program (one payment period); if no grades are given for the first half/payment period, a comparable assessment must be made; and

• not make a second disbursem*nt of FSA funds to students who are not making satisfactory academic progress, except that students on probation or warning may receive a second disbursem*nt if they completed the clock hours or credit hours associated with the first period.

Title IV Credit Balances

A Title IV credit balance occurs whenever the amount of Title IVfunds credited to a student’s account for a payment period exceeds theamount assessed the student for allowable charges associated with thatpayment period. Please see Volume 5 for a discussion of credit balanceswhen a student withdraws.

If FSA disbursem*nts to a student’s account at the school create a Title IV credit balance, the school must pay the credit balance directly to the student or parent as soon as possible but no later than 14 days after:

• the first day of class of a payment period if the credit balanceoccurred on or before that day, or

• the balance occurred if that was after the first day of class.

Refunds vs. paying credit balances

FSA regulations refer to the amount of aid that exceeds the allowablecharges as a credit balance. School administrators sometimes refer tothis as a refund; however, it is not the same thing as a refund under theschool’s refund policy or a post-withdrawal disbursem*nt given to astudent under the return of Title IV funds rules.

Paying Title IV Credit Balances

A school may pay a Title IV credit balance several ways including issuing a check, initiating an EFT process, or dispensing cash.

Paying Title IV credit balances by issuing a check

A school that is paying a student his or her credit balance with adirect disbursem*nt must pay the student within the 14-day time frame.A school may pay a Title IV credit balance by issuing a check payableto and requiring the endorsem*nt of the student or parent. A school isconsidered to have issued the check on the date that it:

• mails the check to the student or parent; or

• notifies the student that a check is available for immediatepickup and provides the specific location.

If notified that a check is available for immediate pickup, the schoolmust be able to give the student a check when the student comes to theoffice within the 14-day time frame. For example, if a student is told(within the 14-day period) to come to the business office to pick up hisor her credit balance, the student must be able to leave the business officewith the funds in some form (e.g., a check, cash, or an appropriate stored valuecard), and not be told that a check will be mailed to him or her.

A school may hold the check for up to 21 days after the date it notifiesthe student. If the student does not pick up the check within this 21-dayperiod, the institution must immediately mail the check to the studentor parent, initiate an EFT to the student’s or parent’s bank account, orreturn the funds to the appropriate FSA program.

Heightened cash monitoring and reimbursem*nt payment method schools and Title IV credit balances

The Department considers a school on Heightened CashMonitoring and Reimbursem*nt to have made a disbursem*nt when itsatisfies the conditions and deadlines explained under Defining the Date of Disbursem*nt earlier in the chapter. If a disbursem*nt creates a TitleIV credit balance, the school must pay the balance directly to the studentor parent before it requests funds through G5 or the Departmentas appropriate.

Paying Title IV credit balances by initiating an EFT

A school may pay a credit balance by initiating an EFT to a bank account designated by the student or parent. Moreover, a school may establish a policy requiring its students to provide information about an existing bank account or open an account at a bank of the student’s choosing as long as this policy does not delay the disbursem*nt of FSA funds to students. Consequently, if a student does not comply with the school’s policy, the school must nevertheless disburse the funds to the student either by dispensing cash, for which the school obtains a signed receipt, or issuing a check. A school must disburse the credit balance within the regulatory time frame. (See the discussion under When a school uses third-party servicers to disburse FSA funds by EFT later in this chapter for additional information.)

Special provisions for books and supplies

In order to academically succeed in a program, a student must be ableto purchase books and supplies at the beginning of the academic period.Therefore, by the seventh day of a payment period, a school must providea way for a student who is eligible for FSA funds to obtain or purchasethe books and supplies required for the payment period if:

• ten days before the beginning of the payment period, theschool could have disbursed FSA funds to the student; and

• disbursem*nt of those funds would have created a Title IV credit balance.

Time Frame For Returning An Unclaimed Title IV Credit Balance

However, the school must cease all attempts to disburse the funds and ensure that all unclaimed credit balance funds are returned no later than 240 days after the date it issued the check. All unclaimed credit balances must be returned—there is no de minimis amount.

To ensure the applicable deadlines are met, we encourage schoolsto develop a process to periodically check for returned Title IV creditbalances resulting from unclaimed checks or rejected EFTs prior to thedeadlines.

Holding Title IV Credit Balances

• any remaining balance on FSA loan funds by the end of theloan period, and

• any other remaining FSA program funds by the end of thelast payment period in the award year for which they wereawarded.

Authorization to hold a Title IV credit balance

All elements of an authorization to hold a Title IV credit balance must be conspicuous. An authorization must include the following:

• An authorization must explain what FSA funds are covered bythe document, and it must specify the time period covered.

• An authorization must clearly provide the student or parentwith the information he or she needs to make an informeddecision.

• The student/parent must be informed that they may refuse toprovide authorization, that they may cancel such authorizationat any time, and that a cancellation is not retroactive.

• A credit-balance authorization must provide detail that is sufficientto give the student or parent an idea of how the creditbalance will be used.

Schools on the HCM and reimbursem*nt payment methods are prohibited from holding credit balances

Schools on the heightened cash monitoring and reimbursem*ntpayment methods must credit a student’s ledger account for the amountof Title IV funds the student or parent is eligible to receive and pay theamount of any credit balance due under 34 CFR 668.164(h) before theschools submit a request for those funds. A requirement to pay studentstheir credit balances prohibits schools from obtaining student/parentauthorizations to hold Title IV credit balance funds.

Prohibited Behavior

Third-Party Servicers Disbursing Credit Balances By EFT

In response to current trends, banks and financial service companiesare now offering services that include the following:

• obtaining a student’s authorization to perform electronic transfers;

• transferring Title IV funds electronically to a student’s bankaccount;

• opening a bank account for the student; and

• issuing debit cards in conjunction with a participating bank.

Notifying the Department About Third-Party Servicers

• The school enters into a contract with a new third-party servicer.

• The school significantly modifies a contract with an existing third-partyservicer.

• The school or one of its third-party servicers terminates a contract.

• A third-party servicer ceases to provide contracted services, goes outof business, or files for bankruptcy.

Schools Must Provide Students A Choice Of The Way They Receive Title IV Credit Balances

• inform students in writing that they are not required to openor obtain a financial account or access device offered by orthrough a specific financial institution in order to receive theirTitle IV credit balances;

• ensure that student options for receiving direct payments aredescribed and presented in a clear, fact-based, and neutralmanner;

• ensure that initiating direct payments by EFT to students’ existingfinancial accounts is as timely and no more onerous to studentsthan initiating an EFT to accounts provided under Tier 1and Tier 2 arrangements;

• allow students, at any time, to change their previouslyselected payment options, as long as students provide theschool with written notice of the change within a reasonabletime;

• ensure that no account option is preselected; and

• ensure that students who do not make an affirmativeselection are paid the full amount of their credit balance withinthe time frame specified in the appropriate regulations.

In describing the options under its selection process, a school:

• must prominently present, as the first option, a financialaccount belonging to the student;

• must list and identify the major features and commonlyassessed fees associated with each financial account underTier 1 and Tier 2 arrangements (see the Federal Register of July 18, 2017, for the final suggested format for the disclosure offeatures and fees associated with financial accounts under T1and T2 arrangements);

• must provide a URL for a webpage on which the terms andconditions associated with each account are provided;

• may provide, for the benefit of the student, information about available financial accounts (other than those provided in Tier 1 and Tier 2 arrangements) that are checking, savings, or similar accounts insured by the Federal Deposit Insurance Corporation (FDIC) accounts or National Credit Union Administration (NCUA).

A school that does not offer or use any financial accounts underTier 1 or Tier 2 arrangements may make direct payments to a student’s orparent’s existing financial account, or issue a check or disburse cash to thestudent or parent without establishing this selection process.

Tier One And Tier Two Arrangements

Tier 1 Arrangements (T1)

A T1 arrangement is one in which a school located in a statecontracts with a third-party servicer to perform one or more of thefunctions associated with processing direct payments of Title IV fundson behalf of the school, and the school or third-party servicer makespayments to one of the following:

• One or more financial accounts that are offered to studentsunder the contract.

• A financial account where information about the account is communicated directly to students by the third-party servicer,or the school on behalf of or together with the third-party servicer.

• A financial account where information about the account iscommunicated directly to students by an entity contracted oraffiliated with the third-party servicer.

Examples of functions associated with processing direct payments ofTitle IV funds on behalf of the school include: receiving Title IV funds;posting Title IV funds to student accounts; calculating a student’s Title IVcredit balance; processing documents for direct payment to students; anddisbursing or delivering FSA funds.

Privacy and Security in T1 Accounts

• directory information;

• a unique student identifier generated by the school that doesnot include a Social Security number, in whole or in part;

• the disbursem*nt amount;

• a password, PIN code, or other shared secret provided by theschool that is used to identify the student; and

• any additional items specified by the Department in a noticepublished in the Federal Register.

Schools, third-party servicers, and financial institutions are jointlyresponsible for ensuring that any personally identifiable informationabout students is used solely for activities that support making directpayments to the student and not for direct marketing or any otherpurpose; and is not shared with any other affiliate or entity except forpurposes of making direct payments of Title IV, HEA program funds.

Student access to and costs for T1 accounts

Schools located in a state must ensure that students who choose toparticipate in accounts offered under T1 arrangements:

• have convenient access to the funds in the financial accountthrough a surcharge-free national or regional Automated TellerMachine (ATM) network that has ATMs sufficient in numberand housed and serviced in a way that guarantees that TitleIV funds are reasonably available to students, including at thetimes the school or its third-party servicer makes direct paymentsinto the financial accounts of those students;

• do not incur any costs associated with:

  • opening the financial account or initiallyreceiving an access device;

  • conducting a balance inquiry or withdrawal of fundsat an ATM in a state that belongs to the surcharge-freeregional or national network;

  • conducting point-of-sale transactions in a state (assessedby the institution, third-party servicer, or afinancial institution associated with the third-partyservicer);

• have no credit extended or associated with the financialaccount; and

• have no fees charged to the student for any transaction orwithdrawal that exceeds the balance in the financial account oron the access device.

Other responsibilities of schools that offer T1 accounts

A school offering accounts under T1 arrangements must ensure that:

• financial accounts and access devices are not marketed, portrayedas, or converted into credit cards;

• no credit is extended or associated with the financial account,and no fee is charged to the student for any transaction orwithdrawal that exceeds the balance in the financial account oron the access device, except that a transaction or withdrawalthat exceeds the balance may be permitted only for an inadvertentlyauthorized overdraft, so long as no fee is charged to thestudent for such inadvertently authorized overdraft;

• the school, third-party servicer, or third-party servicer’s associatedfinancial institution provides a student account holderconvenient access to Title IV, HEA program funds in part andin full up to the account balance via domestic withdrawals andtransfers without charge, during the student’s entire period ofenrollment following the date that such Title IV, HEA programfunds are deposited or transferred to the financial account;

• the school takes affirmative steps, by way of contractualarrangements with its third-party servicer as necessary, toensure all requirements for T1 arrangements are met;

• the school provides a URL for a webpage on which the terms and conditions associated with the contract are provided; and

• ensure that the terms of the accounts offered pursuant to a T1 arrangement are not inconsistent with the best financial interests of the students opening them.

  The Department considers this requirement to be met if:

  • a school documents that it conducts reasonable duediligence reviews at least every two years to ascertainwhether the fees imposed under the T1 arrangementare, considered as a whole, consistent with or belowprevailing market rates; and

  • all contracts for the marketing or offering of a school’sT1 arrangements to its students make provision fortermination of the arrangement by the school basedon complaints received from students or adetermination by the school that the fees assessedunder the T1 arrangement are not consistent with orare higher than prevailing market rates.

When a student who receives T1 payments is no longer enrolled

Except for the disclosure requirements about students enrolledduring the award year, the T1 requirements cease when the student is nolonger enrolled and there are no pending Title IV disbursem*nts at theschool. A school may continue to share information related to enrollmentstatus with the servicer so that it can comply with the regulations.

Tier 2 Arrangements (T2)

• the school communicates information directly to its studentsabout the financial account and how it may be opened;

• the financial account or access device is cobranded with theschool’s name, logo, mascot, or other affiliation and is marketedprincipally to students at the institution; or

• a card or tool provided to the student for school purposes, suchas a student ID card, is validated, enabling the student to usethe device to access a financial account.

Formula for determining the required level of school compliance

A school must comply with all of the requirements that apply toTier 2 arrangements if, for the three most recently completed awardyears:

1. an average of 500 or more of its students had a Title IV creditbalance; or

2. an average of 5% or more of the students enrolled at the institution had a Title IV credit balance as determined through the following formula:

   The average number of students with credit balances for the three most recently completed award years

   ÷

   The average number of students enrolled at the institution at any time during the three most recently completed award years

Schools that fall below this threshold but have at least one studentwith a Title IV credit balance for the three most recently completedaward years are exempt from certain requirements as described later inthis chapter under Schools that fall below the threshold.

Privacy and security in T2 accounts

• the school provides, or permits a third-party servicer to provide,any personally identifiable information about the studentto the financial institution or its agents, other than directoryinformation; and

• an access device, or a representation of an access device, is sentto the student.

  However, a school may send a student an access device that isa card provided to the student for school activities, such as astudent ID card, so long as the school or financial institutionobtains the student’s consent before validating the access devicefor use by the student in relation to the financial account.

In addition, before the final T2 account is opened, schools must:

• list and identify the major features and commonlyassessed fees associated with each financial account offered underTier 1 and Tier 2 arrangements; and

• provide a URL for a webpage on which the terms and conditionsassociated with each account are provided.

Student access to and costs for T2 accounts

Schools must ensure that students who choose to participate inaccounts offered under T2 arrangements:

• have convenient access to the funds in the financial accountthrough a surcharge-free national or regional automated tellermachine (ATM) network that has ATMs sufficient in numberand housed and serviced in a way that guarantees that TitleIV funds are reasonably available to students, including at thetimes the school or its third-party servicer makes direct paymentsinto the financial accounts of those students; and

• do not incur any costs associated with:

  • opening the financial account or initiallyreceiving an access device; or

  • conducting a balance inquiry or withdrawal of funds at anATM in a state that belongs to the surcharge-free regionalor national network.

Other responsibilities of schools that offer T2 accounts

A school offering accounts under T2 arrangements must ensure that:

• the financial accounts are not marketed or portrayed as, orconverted into, credit cards;

• the school takes affirmative steps, by way of contractual arrangements with its third-party servicer as necessary, to ensure all requirements for T2 arrangements are met; and

• the terms of all T2 accounts offered are consistent with the best financial interests of the students opening them.

  The Department considers this requirement to be met if—

  • The school documents that it conducts reasonable duediligence reviews at least every two years toascertain whether the fees imposed under the T2arrangement are, on the whole, consistent with orbelow prevailing market rates; and

  • All contracts for the marketing or offering of accountsto students allow the school to end the arrangementbased on complaints from students or a determinationin a school review (see the previous bullet) thatthe fees assessed under the T2 arrangement are notconsistent with or are above prevailing market rates.

Note that the fee restrictions that apply to Tier 1 accounts do notapply to Tier 2 accounts.

When a student who receives T2 payments is no longer enrolled

Except for the disclosure requirements regarding students enrolledduring the award year, the T2 requirements end when the student isno longer enrolled and there are no pending Title IV disbursem*ntsat the school. A school may continue to share information related toenrollment status with the financial institution or entity that is party tothe arrangement.

Schools that fall below the threshold (to meet all requirements)

A school that had at least one student with a Title IV credit balancefor the three most recently completed award years, but had less thanthe number and percentage of students with credit balances describedunder Formula for determining the required level of school compliance earlier in this chapter is exempt from the following T2 requirements:

• the requirement discussed earlier in this chapter under School must provide students a choice;

• the web disclosure requirements described later in this chapter,though the Department encourages schools that fall below thethreshold to comply voluntarily with those requirements;

• ensuring the terms of all accounts offered under a T2arrangement are consistent with the best financial interests ofthe students opening them; and

• ensuring that students have convenient access to the fundsin the financial account through a surcharge-free national orregional ATM network that has ATMs sufficient in numberand housed and serviced in a way that guarantees that TitleIV funds are reasonably available to students, including at thetimes the school or its third-party servicer makes direct paymentsinto the financial accounts of those students.

Cobranding of financial accounts that are not T2 accounts

Disclosure Requirements for T1 and T2 Arrangements

• Prominently place first the number of student account holdersand the information on the mean and median costs they incurred.

• Place information on the total monetary consideration paid orreceived by the contracting parties directly below the information onstudent accounts.

• Place any non-monetary consideration between the contractingparties directly below the monetary consideration.

• Display the monetary consideration and the mean and median fees charged to students in a format that includes a dollar sign, theamount in whole dollars, and a comma after the thousands place (e.g., $1,234).

See DCL GEN-16-16 for more about the cost disclosure requirements above, including suggestions on calculating cost disclosure information, and the June 16, 2017, electronic announcement, which has more information about the format schools should use in making the disclosures. This information must also be included on the website where the contract information was posted.

T1 and T2 accounts must meet the regulations on federal participation in the Automated Clearing House (ACH)

When T1 and T2 accounts are opened through outreach to a school’s students and made through ACH credit of Title IV funds, those are federal payments and as such must be deposited into an account at a financial institution in the name of the student.

All payments of Title IV funds deposited to an account that studentswill access through a prepaid card must:

• be held at a financial institution;

• must meet the requirements for pass-through deposit or shareinsurance such that the funds accessible through the card areinsured for the benefit of the recipient by the Federal DepositInsurance Corporation (FDIC) or the National Credit UnionShare Insurance Fund (NCUSIF) in accordance with applicablelaw; and

• NOT be attached to a line of credit or loan agreement underwhich repayment from the account is triggered upon delivery ofthe Title IV payments.

In addition, the financial institution issuing the card must provide theholder of the card with all of the consumer protections, and must complywith all of the requirements that apply to a payroll card account under therules implementing the Electronic Fund Transfer Act, as amended.

Situations that are neither T1 nor T2 arrangements

Examples of circ*mstances that are neither T1 nor T2 arrangements and, therefore, are not subject to the regulations include:

• General marketing of a financial institution that does not specify thekind of account or how it may be opened (i.e., not direct marketingdescribed under §668.164(f)(3))

• Sponsorship of on-campus facilities with financial institutionbranding that does not promote particular accounts

• A lease permitting the operation of an on-campus branch or on-campus ATMs

• A list of area financial institutions recommended generally tostudents for informational purposes rather than being provided aspart of a contract with the institution

• Providing students access to Title IV credit balances through school issued, stored-value cards with no third-party involvement. See the discussion later in this chapter

School-Issued, Stored-Value Cards With No Third-Party Involvement

• there is no financial institution or third-party involved in marketingthe school-issued stored-value cards;

• the school itself is holding and is in control of the funds heldon those cards;

• the “stored-value cards” are the students’ IDs;

• the ID cards are not “branded” with the name of a financial institutionor bank; and

• the ATMs through which students access their funds are leasedor owned by the school