THREE STEPS TO CASH MANAGEMENT COMPLIANCE

Higher Ed Executives Financial Aid Consultants Can help you gain compliance with title iv cash management regulations

FSA recently released an electronic announcement reminding institutions of the requirements for proper cash management compliance. Disbursing aid timely, resolving excess cash and reconciliation are necessary procedures and controls to ensure compliance with the federal regulations. Noncompliance in these areas often results in institutions being placed on the Heightened Cash Monitoring disbursement method and often with a requirement that the school post an irrevocable Letter of Credit equal to a percentage of title iv funds that have been drawn down in prior years. It’s not pretty. The simplest thing to do to avoid this is to have a handle on some cash management basics.

Three Steps to Cash Management Compliance:

1. Submit disbursement records timely.

All disbursement records should be sent to COD within 15 days after making the disbursement or becoming aware of the need to adjust a student’s previously reported disbursement.

2. Keep an eye out for excess cash and if necessary, return any undisbursed funds to the Department.

Excess Cash is any amount of title iv funds (excluding Perkins) that the school does not disburse to students or parents by the end of the third business day after the date the school received funds from the department. Excess cash can also occur when a school deposits previously disbursed funds into their federal bank account and lets it sit for more than three days before disbursing it to another student or returning it to the Department.

3. Reconcile regularly.

If you are reconciling all title iv disbursements on at least a monthly basis, you’ll be in a good position to ensure that you are meeting the disbursement reporting and excess cash deadlines. Regularly reconciling both internally between business office and financial aid office data as well as externally between financial aid office data and the Department’s COD and G5 systems will make final reconciliation and program year closeouts a snap. Plus, your auditors will be very happy to see the proof of your regular efforts.

TITLE IV FUNDS MUST NEVER ESCHEAT TO A THIRD PARTY

At schools that issue paper checks to students for credit balances, the check issuing process is often handled by someone removed from the financial aid and student accounts functions. Check processing is typically handled by an accounts payable employee or someone similar in the back accounting office. The same goes for EFT/ACH transactions. When a school issues a check, EFT or ACH payment to a student that results from a Title IV Credit Balance, it must have a process in place to ensure that the funds are delivered to the student and never escheat to a third party. 

A school’s credit balance process must ensure that FSA funds never escheat to a state, or revert to the school, or any other third party. All Title IV Credit Balances must be issued to the student (or parent for PLUS loan funds). However, if after attempting to deliver the funds to a student the school determines it is not possible to do so, funds must be returned to the Department of Education.

All Title IV funds, except FWS Program funds that a school attempts to disburse directly to a student or parent must be returned to the Department if the student or parent does not receive the funds or cash the check. For FWS Program funds, a school is required to return only the Federal portion of the payroll disbursement. If a school attempts to disburse a credit balance by check or EFT and the check is not cashed or the EFT is rejected, the school must return the funds no later than 240 days after the date it issued that check or made the EFT. Therefore schools should have a process to ensure that all student disbursement checks (including EFT and ACH) are cashed within 240 days or otherwise returned to the department.  This rule is applicable to all credit balances of one-dollar or more.

Schools are required to abide by the federal regulations which govern how FSA funds must be managed and those that fail to have adequate systems in place run the risk of administrative capability findings in annual audits and program reviews.

DEADLINE FOR T1 AND T2 ARRANGEMENTS EXTENDED

The cash management final regulations, published on October 30, 2015 require institutions with Tier One (T1) and Tier Two (T2) arrangements to list and identify the major features and commonly assessed fees associated with each financial account offered under those arrangements during the process through which a student chooses options for receiving payments of Federal student aid. Schools were required to follow the format that the Department specified in disclosing this information to students by July 1, 2017, but the Department had not provided the format leaving schools to develop their own.

After soliciting comments, the Department announced the release of their new suggested disclosure format. To allow institutions sufficient time to adopt the final format, if they elect to do so, the Department is allowing additional time, until January 1, 2018 to comply with the applicable disclosure requirements.

According to an Electronic Announcement, the official version of this document is the document published in the Federal Register. This document has been sent to the Office of the Federal Register but has not yet been scheduled for publication. You can grab it here in the meantime.

TIER ONE AND TIER TWO DISCLOSURE REQUIREMENTS

Multiple independent agencies (Consumers Union, GAO, USPIRG, ED’s OIG, FDIC etc.) have found that students in relationships with third-party servicers that provide direct payments to students often face higher costs, deceptive business practices, and misleading direct marketing. As a result in 2015, the Department began requiring institutions to provide disclosures to their students and report certain data about their contracts to ED.

A Tier 1 (T1) Arrangement is one in which a school contracts with a third-party servicer to perform one or more of the functions associated with processing direct payments of Title IV funds on behalf of the school, and the school, or third-party servicer makes payments to one of the following:

• One or more financial accounts that are offered to students under 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 is communicated directly to students by an entity contracted with or affiliated with the third-party servicer.

A Tier 2 (T2) Arrangement is one in which a school has a contract with a financial institution, or entity that offers financial accounts through a financial institution, under which financial accounts are offered and marketed directly to students enrolled at the school.

A financial account is marketed directly if
• the school communicates information directly to its students about the financial account and how it may be opened;
• the financial account or access device is cobranded with the school’s name, logo, mascot, or other affiliation and is marketed principally to students at the institution; or
• a card or tool that is provided to the student for school purposes, such as a student ID card, is validated, enabling the student to use the device to access a financial account.

By September 1, 2017, any institution with a Tier one (T1) arrangement, and/or a Tier two (T2) must post on its website T1 and/or T2 contract data pertaining to the total consideration paid or received by the contracting parties under the arrangement for the most recently completed award year.
Each such institution must also post the mean and median costs its students incurred, as well as the number of students who had financial accounts under the contract at any time during the most recently completed award year, unless the institution had fewer than 30 enrolled students with accounts opened under the T1 or T2 arrangement. The regulations require that thereafter, these postings must be updated within 60 days after the end of each award year.

To meet this requirement, institutions must do the following:
• Post information regarding the mean and median costs students incurred and the number of student accountholders prominently, and as the first piece of information at the URL provided to the Department under §668.164(e)(2)(viii) and (f)(4)(v)
• Place information regarding to the total monetary consideration paid or received by the contracting parties directly below the information regarding student accounts
• Place any non-monetary consideration between the contracting parties directly below information pertaining to the monetary consideration.

For more information on the most recent Cash Management guidelines associated with T1 and T2 arrangements, click here.

MONTHLY DIRECT LOAN RECONCILIATION REQUIREMENTS

Reconciliation is the process by which a school reviews and compares Title IV aid (grants, loans, and campus-based aid) recorded on the Department’s systems with the information in the school’s internal records. Through reconciliation, disbursement and cash discrepancies are identified and resolved in a timely manner to ensure the school meets all regulatory requirements. Schools must document their reconciliation efforts and retain this documentation for auditing purposes.

There are two types of reconciliation schools must perform on an ongoing basis:

Internal Reconciliation – This is the process where the business and financial aid offices compare the monthly financial aid office roster of scheduled disbursements to a monthly business office cash detail report that reflects funds drawn down and funds disbursed for the month. If discrepancies are found, your school should document and resolve them in a timely manner.

External Reconciliation – The school compares its reconciled internal records to the Department’s records of funds received and returned, and loans originated and disbursed to students at the school. At a minimum, this reconciliation must be completed at least monthly to ensure that data is correct in all systems and that cash management and disbursement reporting timelines are being met. If you have completed your internal reconciliation first, your school will have fewer discrepancies to resolve when you perform this external reconciliation. The Department offers various tools to assist you with external reconciliation. For more information, see the attachment to this announcement.

Direct Loan schools must also complete a final reconciliation to a zero ($0) Ending Cash Balance at the end of their processing year. This should occur shortly after you submit and the COD System accepts, your final disbursements but no later than the Program Year Closeout deadline, which is the last processing day in July of the year following the end of the Award Year.

FSA recently provided an updated FAQ offering solid pointers for schools to aid in their ongoing reconciliation efforts. http://bit.ly/2hzXT2K

ANNUAL REMINDER: DISBURSEMENT REPORTING, EXCESS CASH, AND RECONCILIATION,

FSA provided a reaffirmation of longstanding guidance related to cash management after a number of schools reviewed by ED were not able to adequately document they were meeting all of the regulatory requirements. The guidance below summarizes the general disbursement reporting, excess cash, and reconciliation requirements for all Title IV programs.  Because these requirements apply to disbursement and financial data, both the Financial Aid Office and Business Office should review the information.

Disbursement Reporting Requirements – a school must submit disbursement records no later than 15 days after making a disbursement or becoming aware of the need to adjust a student’s previously reported disbursement.

Excess Cash Requirements – Excess cash is any amount of Title IV funds that a school does not disburse to students or parents by the end of the third business day after the date the school (1) received the funds from the Department, or (2) deposited or transferred to its federal account previously disbursed Title IV funds received from the Department.  In some circumstances, cash may be held for up to an additional 7 calendar days if a school meets the excess cash tolerance and can disburse the aid to students within that time frame.  In no circumstance should cash balances remain beyond the additional 7-day period.

Reconciliation – Reconciliation is the process by which a school reviews and compares Title IV aid (grants, loans, and campus-based aid) recorded on the Department’s systems with the information in the school’s internal records.  Schools should reconcile both internally (between Business Office and Financial Aid Office data) and externally (between school data and the COD System/G5).  Through reconciliation, disbursement and cash discrepancies are identified and resolved in a timely manner to ensure the school meets all regulatory requirements.  Schools must document their reconciliation efforts and retain this documentation for auditing purposes. For more information click here: http://bit.ly/2gZyAva

Clarification of Books and Supplies Provisions in Cash Management Regulations

Can Books and Supplies be included in tuition and fees

The following new guidance from ED provides clarification on the treatment of books and supplies when an institution chooses to include them in their tuition and fees. It was widely believed that schools that listed these kinds of charges as separate line items on an enrollment agreement were exempt from the Cash Management regulations summarized below. However Ed officials have only just confirmed that simply disaggregating the costs of books and supplies as separate line item charges on an enrollment agreement does not exclude those charges from being considered tuition and fees under the cash management regulations published last year. This is because the act of signing the enrollment agreement obligates the student to pay the amount specified for the program. According to a Department official, “itemizing the underlying costs does not affect the calculus of whether such charges are required to be paid (and therefore included in the overall tuition and fees). This clarifying guidance will have a significant impact on institutions that choose to include charges for books, supplies, tools, and kits in their tuition and fees.

Books and supplies may only be included in tuition and fees if:

  • the school has an arrangement with a book publisher or other entity that makes the books and supplies available to at costs below competitive market rates,
  • the school provides a means for students to obtain the books and supplies by the 7th day of the associated payment period, and
  • the school has a policy that allows students to decline or opt-out of obtaining their books and supplies through the school by the 7th day of the payment period.

Additionally books and supplies may be included if:

  • the books and supplies are not available or accessible from sources other than those provided by the school, or,
  • there is a compelling health or safety reason for the school to provide the books and supplies directly to students.

Schools which include books and supplies in their tuition and fees must give students an option to opt out of purchasing materials provided by school. Ed recommends that schools provide a separate notice from the enrollment agreement to ensure students are aware of their right to do so.

Books and supplies should be prorated over the whole program when determining R2T4 costs and credit balances. Ed advises institutions to prorate the total of the books and supplies just like tuition, by the applicable payment periods for R2T4 and to determine if a credit balance exists.

Institutions with questions pertaining to this or other matters of compliance with Accreditation, Federal Student Aid standards are welcome to contact our offices for additional assistance.

Understanding Heightened Cash Monitoring

Letter of Credit, Heightened Cash Monitoring,

The U.S. Department of Education often places schools on Heightened Cash Monitoring when their policies and procedures have been called into question. How does a school get placed on Heightened Cash Monitoring?

Understanding Heightened Cash Monitoring

The purpose of the cash management regulations are to promote sounds cash management of Federal Student Aid program funds by schools. Institutions receive aid funds from the U.S. Department of Education and holds funds in trust for the students. By acting as a fiduciary in this way, schools help the government minimize the costs of making grant and loan funds to students and do it much cheaper than if they did it on their own. This also allows the government to keep the costs down for students, thus Federal Student Loans generally carry very low fees.

Schools may be placed on one of the Department’s Heightened Cash Monitoring payment methods so the Department can closely monitor the institutions cash management.

Heightened Cash Monitoring 1 (HCM1)  – Under HCMI, a school first makes disbursements to students from institutional funds and then submits disbursement records to COD, drawing down funds once the records have been accepted. However under the Department’s HCM2 method, the process is much more onerous.

Heightened Cash monitoring 2 (HCM2) – Under HCM2, schools must make disbursements to students from institutional funds and then submit a Reimbursement Payment Request for those funds. It’s much more onerous because the school must also send documents and records to ED for each student, showing that they were eligible for and received those funds. Schools can only submit a Reimbursement Payment Request once during any 30 day period. As you can imagine, this severely impacts cash flow and in recent years, a number of schools and colleges have folded because they couldn’t correct the deficiencies that landed them on Heightened Cash monitoring in the first place.

Schools subject to one of the Heightened Cash Monitoring methods of disbursement must pay credit balances due to students before requesting funds. Rules were enacted last year which went into place on July 1, 2016. The rules not only require that schools pay these credit balances, but also prevent schools from holding credit balances, even when a student has given authorization to do so.

How does an institution get put on Heightened Cash Monitoring?

  • Late or Missing Audits –  Annual HEA Title IV Audit
  • Repeat Audit or Program Review Findings – Failure to Implement Corrective Action
  • Excessive Audit Findings
  • Excessive Program Review Findings
  • Failure to Meet Financial Standards
  • Composite Score – Weighted Sum of Primary Reserve, Equity, and Net Income Ratios
  • Refund Reserves – Failure to maintain sufficient cash reserves
  • Returning Funds – Late Refunds or Incorrect R2T4
  • Provisional Certification Requiring a Letter of Credit

It’s important to note that the administration of the Cash Monitoring Program must be audited every year. The independent auditor engaged by the school must express an opinion in the audit report regarding the school’s compliance with the cash monitoring requirements.

Institutions with questions pertaining to this blog post or other matters of compliance with Accreditation, Federal Student Aid standards are welcome to contact our offices for additional assistance.


Peter Terebesi is the President and founder of Higher Ed Executives. You can find Peter on Twitter (@HigherEdPete), and reach him through the Higher Ed Executives website. You may also email info@ed-executives.com.

As stated in our disclaimers, blog posts by Higher Ed Executives, shared on Twitter, LinkedIn, or elsewhere, should not be considered legal advice. Please consult a qualified advisor.