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Revisions to Rules Governing Return of Funds Effective July 1

July 7, 2008

Final rules issued by the Department of Education on November 1, 2007, include changes to sections of the regulations that set out the requirements for institutions to return Title IV funds for "no show" students and those who drop out in the middle of a payment period. The changes to these regulations, which are part of the Student Assistance General Provisions, are discussed below.

§668.21  Returning Title IV aid when recipient does not begin attendance.

If a student fails to begin attendance at an institution, he or she is not entitled to Title IV aid. The new regulations provide more detailed guidance to institutions about their responsibilities for returning aid that was disbursed for such students, for the most part pulling together requirements from various program regulations in one place. As before, the institution continues to be responsible for returning any funds that were credited to the student account or paid directly to the student from the Title IV grant programs--Pell, SEOG, ACG, and SMART--and from the Perkins Loan program.

This section of the regulations now also specifically addresses the institution’s responsibility for returning FFEL or Direct loan proceeds. The institution must return to the lender:

  • All loan funds that were credited to the student’s account, and
  • The amount of any payments made directly by or on behalf of the student to the institution for the payment period or period of enrollment, up to the total amount of loan funds disbursed.

The institution is not responsible for returning any additional loan funds that were paid directly to the student, including funds paid by a lender to a student for a study-abroad program, but the institution must immediately notify the FFEL lender, or ED in the case of a Direct Loan, that the student did not begin attendance.

If the institution knew that the student would not be attending, the institution is responsible for returning all loan funds even if they were paid to the student.

A student did not begin attendance if the institution cannot document the student’s attendance at any class during the payment period or period of enrollment. The institution should return the funds to the appropriate program as soon as possible but no later than 30 days from the date it became aware that the student did not begin attendance.

§668.22  Treatment of Title IV funds when a student withdraws.

There are three notable changes to the rules governing the return of Title IV funds, generally referred to as R2T4, when students leave school in the middle of a payment period:

  • Eliminating the requirement to obtain the student’s permission for a post-withdrawal disbursement of grant funds
  • Adjusting the time frame for post-withdrawal disbursements of grant and loan funds
  • Adjusting payment period calculations for credit-hour programs with nonstandard terms to align with changes in definitions

(a)(5) Post-Withdrawal Disbursements.

Grant Funds.  A previous revision to the R2T4 rules required the institution to notify and obtain permission from a former student before making a post-withdrawal disbursement directly to a student of grant funds that had been "earned" before withdrawal but not yet paid. This approval was not required for funds that were credited to the student’s account at the institution. The new changes eliminate this requirement for student confirmation before a direct payment of grant funds, since there is generally no downside for the student as there is with loan funds. However, the preamble to the final rules does note that, in some cases, a student may prefer to turn down a disbursement of grant funds in order to preserve the student’s eligibility for grant funds for attendance at a different institution. The institution is not required to pay grant funds to a former student if the student indicates that he does not want to receive them.

The institution must pay grant funds owed to a former student as soon as possible but no later than 45 days of the date that it determined that the student withdrew.

Loan Funds.  An institution is still required to obtain confirmation from a former student, or parent in the case of PLUS loans, before disbursing any Title IV loan funds after the student has withdrawn. The rules that take effect July 1 conform the time frame for making such a disbursement to those for post-withdrawal disbursements. The institution should make such a disbursement as soon as possible, but no later than 180 days after the date it determined that the student withdrew. 

 (e)(5)(iii) Payment Periods.

The November 1 final rules made changes to the definitions of payment periods in order to conform, to the extent possible, payment periods for grant and loan programs. One category of program--credit hour programs that use nonstandard terms that are not substantially equal in length—will still end up using two different payment periods, one for grant and Perkins Loan programs and another for Federal Family Education Loans or Federal Direct Loans. In this case, the R2T4 regulations stipulate that the institution should use the payment period that ends later in its R2T4 calculations.

TEACH Grants

Note that in a June 23 regulatory notice implementing the new Teacher Education Assistance for College and Higher Education (TEACH) Grant program, the R2T4 regulations were further revised to include the TEACH Grant program as one of the applicable grant programs, but placing these grants (which convert to loans if the student does not complete agreed-to services as a teacher) in the loan category for determining the order in which unearned funds should be returned. Thus, if the institution needs to return funds as determined by the R2T4 calculations, funds should be returned to programs in the following order:

  1. Unsubsidized Federal Stafford loans
  2. Subsidized Federal Stafford loans
  3. Unsubsidized Federal Direct Stafford loans
  4. Subsidized Federal Direct Stafford loans
  5. TEACH Grants
  6. Federal PLUS loans received on behalf of the student
  7. Federal Direct PLUS received on behalf of the student

Resource:  ED has updated the Federal Student Aid Handbook, volume 5, chapter 2, covering R2T4, although page 5-97 fails to list TEACH Grants in the order of return of funds.

NACUBO Contact:  Anne C. Gross, vice president, regulatory affairs, 202.861.2544