How the Department of Education’s clarification on proration of charges for Title IV funds can impact your for-profit institution
In the IFAP – Electronic Announcement dated March 5, 2019, the Department of Education provided clarification on crediting a student’s ledger with Title IV funds to pay for allowable charges. These acceptable charges include those associated with a payment period where an institution debits an account at the beginning of a student’s enrollment for the cost of books, supplies and equipment to be used throughout the program.
Prior to July 1, 2016, institutions were allowed to include the full cost of books, supplies and equipment at the beginning of a student’s enrollment. However, with the implementation of the cash management final regulations on July 1, 2016, the Department clarified in instances where the institution charged these items upfront, and students did not have a real and reasonable opportunity to obtain materials elsewhere, the institution must prorate the costs of those materials when determining the amount of Title IV aid to provide to a student as a credit balance during each payment period.
Under this order, charges are considered institutional charges if students were not provided a real and reasonable opportunity to purchase course materials from any other source but the school.
Defining Real and Reasonable
A student has a “real and reasonable” opportunity to obtain required course materials from another source if:
- The required course materials are available for purchase at a relatively convenient location unaffiliated in any way with the institution; and
- The institution does not restrict the availability of financial aid funds, so the student can exercise the option to purchase the required course materials from alternative sources in a timely manner.
Breaking Down the Clarifications
At the time an institution provides students with notice of their financial aid fund availability, they must also include at least one alternative source for a student to purchase supplies in a timely manner. Schools can determine the quality of the supplies needed, but they cannot limit the availability of branded products to force students to buy directly from the school.
The Department now considers online providers as eligible alternative sources. In addition, a distributor or cosmetology supply company that is owned by or connected with the institution is considered an alternative source for students purchasing kits and supplies, as long as the materials are widely available on the retail market. The Department does require that merchandise from affiliated distributors be sold to students and the public at the same price.
An affiliated entity is a related party that provides books, supplies and equipment only to students at the institution that are either customized by the seller for the institution or are not generally available in the retail market.
If the components are part of a widely available product line, this would meet the requirement that the student has a real and reasonable opportunity to purchase the supplies elsewhere.
Lastly, there is no requirement that a certain percentage of students must purchase their materials from an alternate source. As long as an alternative source is available and students have a real and reasonable opportunity to purchase materials elsewhere, there is no violation.
Exceptions to the Clarifications
The Department previously viewed any amounts for materials on the enrollment agreement as being institutional charges. However, because some states require schools to include material costs on the enrollment agreement (which is beyond the school’s control), the Department will not consider them institutional charges if the following conditions are met:
- There is no up-front charge for books, supplies or equipment on the student’s account ledger, and the student does not in any way incur a financial obligation to the institution (with respect to those charges) by signing an enrollment agreement. Essentially, the student must only sign to acknowledge that a specific kit or other type of equipment is required for the program;
- A real and reasonable opportunity, as explained above, exists for students to purchase the kit from a source other than the school; and
- In the case where a student opts to buy the kit from the school, a student authorization is obtained in accordance with Student Assistance General Provisions (34 CFR 668.165(b) Notices and Authorizations), allowing the institution to use Title IV funds to pay for charges other than tuition and fees and institutionally provided room and board. Once this is obtained, you may charge the student’s account for the kit and use Title IV funds to cover those charges.
The Department’s clarification may have a direct impact on your institution. Make sure your school is complying with this update and talk through your specific situation with a Title IV audit expert.
About the Author
TIM GABER, CPA
Tim serves Title IV schools and other entities with their audit requirements and needs.