ED Clarifies Policy on Prorating Course Materials That Result in Institutional Charges

In early March, the Department of Education (ED) issued an electronic announcement clarifying its policy with respect to the proration of institutional charges associated with course materials used across multiple academic terms or payment periods.

ED released this guidance in response to recent confusion about how to treat cosmetology kits purchased with financial aid at proprietary cosmetology schools under the 2016 cash management rules. According to ED, these cosmetology kits met the definition of “institutional charges” under Return of Title IV (R2T4) guidance and, consequently, ED required the cosmetology schools to prorate the kits in accordance with the 2016 cash management rules.

The implications of the announcement are far-reaching. The new guidance could impact school sales of all course materials resulting in institutional charges if those materials are used for more than a single academic term. This could include anything from computers to scrubs to graphic calculators. Because the difference between an institutional charge and a non-institutional charge hinges, in many cases, on the availability of financial aid funds and whether students have an equal opportunity to use those funds at outside retailers, this new guidance could incentivize some schools to change the way they disburse aid or extend bookstore credit/vouchers.

At its heart, ED’s newest guidance rests on the definition of an institutional charge under R2T4 guidance and how these institutional charges should be treated under the 2016 cash management rules. 

Institutional Charges Under R2T4

Under R2T4 guidance, most costs charged by a school are considered institutional charges, including expenses for required course materials, excluding unreturnable equipment or equipment that is not returned in good condition in 20 days. However, ED offers an exemption and will classify required books and supplies as non-institutional charges if schools can show that their students have a “real and reasonable opportunity” to buy those items from an alternative source. 

An institution can demonstrate this if:

1. Course materials are available from a vendor unaffiliated with the school and are relatively convenient for students to purchase; and
2. The school provides financial aid funds in a way that makes it possible for students to buy course materials from an outside vendor in a timely manner; and
3. School practices do not discourage students from buying required books or supplies from unaffiliated retailers.

Crucially, the Federal Student Aid handbook clarifies that crediting students’ accounts with all financial aid and extending lines of credit for purchases at the school bookstore does not afford students an equal opportunity to buy books from the campus store or an independent vendor, thereby violating the third condition for exempt status. Moreover, allowing students to opt out of this practice does not eliminate the competitive advantage for campus stores because a student whose education is mainly funded through financial aid must still take the extra step of specifically requesting that the institution release his or her credit balance. Therefore, if a school provides bookstore vouchers or credit to students based on their estimated financial aid packages, then all course materials purchased at the school bookstore with Title IV funds will result in institutional charges.

Requirements Under Cash Management Rules

Given the definition of institutional charges under R2T4 guidance, it’s important to keep in mind that the 2016 cash management rules also impose additional requirements on schools selling course materials that fall under this designation. Specifically, when selling these books and supplies at least one of the following conditions must be met:

1. An institution must:
   1. Make those course materials available to students at below-competitive market prices; and
   2. Make those books and supplies available to students by the seventh day of a payment period; and
   3. Allow students to opt out of the general process by which schools make those course materials available to students.
2. A school must document that the course materials are not available from an alternative vendor; or
3. A school must provide a compelling health or safety reason.

Therefore, if a school extends bookstore vouchers or credit to students based on their estimated aid packages, then the institution will have to ensure that the campus bookstore sells those course materials at below-market rates unless the items are not available through another vendor or the school can cite a compelling health or safety concern.

Cash Management Rules and Proration

Under the 2016 cash management rules, any institutional charge associated with materials that will be used beyond the current payment period (e.g., academic term) must be prorated. When applying the definition of institutional charges laid out under R2T4 guidance, this means schools that credit students’ accounts with financial aid and extend lines of credit for purchases at the campus store will have to charge prorated amounts for all course materials that will be used beyond a single term if they are purchased using Title IV funds. This applies to a variety of items, including kits and packages, computers, tablets, graphic calculators, scrubs, specialized equipment, and more. Additionally, if an academic program requires students to buy specialized kits or equipment that cannot be purchased from another retailer, those course materials automatically qualify as institutional charges under R2T4 guidance unless the equipment is unreturnable.

Implications for Schools

To comply with the cash management rules, campus stores at schools that extend lines of credit will have to review all course materials purchased by students with financial aid packages and determine whether these items will be used beyond a single academic term. Schools will then have to determine the appropriate prorated amount to charge in cases where materials will be used beyond the current payment period. Moreover, if the items are available elsewhere, schools that extend campus bookstore vouchers or credit will have to ensure that these course materials are sold at below-competitive market rates unless the institution can cite a compelling health or safety concern.

For materials that are readily available from other retailers, schools can also comply with cash management rules without prorating the cost of materials or selling them at below-market rates by ending the practice of crediting students’ accounts with all financial aid and extending lines of credit for purchases at the campus bookstore. However, even schools that end this practice will still have to prorate costs for specialized kits and returnable equipment that are not available from outside vendors. In these cases, schools will likely have to absorb the remaining cost of these specialized materials when a student withdraws from a program before completing his or her course of study.