UNITED STATES DEPARTMENT OF EDUCATION
WASHINGTON, D.C. 20202
In the Matter of
Docket Nos. 98-72-SA & 98-73-SA
CANNELLA SCHOOLS OF HAIR DESIGN,
Consolidated Student Financial
_______________________________________ ACNs: 05-96-74212 & 05-96-74207
Appearances: Stanley A. Freeman, Esq., and Joel M. Rudnick, Esq., Powers, Pyles, Sutter, &
Verville, P.C., for Respondents.
Alexandra Gil-Montero, Esq., Office of the General Counsel, U.S. Department of
Education, for Student Financial Assistance Programs.
Before: Frank K. Krueger, Jr., Administrative Judge.
The Respondents are two cosmetology schools owned by the same individual and
separately eligible to participate in the programs authorized under Title IV of the Higher
Education Act of 1964, as amended _ the Cannella School of Hair Design, located at 3646 N.
Broadway, Chicago, Illinois, and the Cannella School of Hair Design, located at 5912 W.
Roosevelt Road, also in Chicago, with a branch at 12840 South Western Avenue, Blue Island,
Illinois. This case involves appeals by the Respondents from final audit determinations made by
the Student Financial Assistance Programs (SFAP), U.S. Department of Education, concerning
the 1995-96 award year and the Pell Grant program. SFAP assessed liability of $3,775
concerning the Broadway school and $14,689 concerning the Roosevelt school. Neither school
participated in the Federal Family Education Loan program during the award year at issue.
SFAP contends that Respondents improperly excluded the full cost of books, equipment,
and other supplies from pro-rata refund calculations. For the reasons discussed below, I find in
favor of the Respondents.
Students attending the Respondent schools were required to purchase certain books,
equipment, and other supplies necessary to participate in the training program. (See
Respondents' Exhibit 10-004 for a complete list.) Although the schools made it clear that a
student was required to have the necessary supplies at the beginning of the program, and made
the supplies available for purchase directly from the school in a supply kit, the students were
given the option of purchasing the materials from an outside source. The schools did not include
a charge for the supply kit in the student enrollment agreements. Prior to enrollment, the schools
presented each student with an Equipment Acknowledgment form which notified the student
that he or she was not required to purchase the supplies from the school, but could purchase the
supplies from an outside source. The form read as follows:
I understand that the fees associated with books, required
equipment and chemicals are not being charged to me directly by
Cannella School of Hair Design. . . . I further understand that these
fees are optional and will be incurred if I elect to purchase such
books, equipment and chemicals from Cannella School of Hair
Design. . . . I understand that I have the option of purchasing the
required books, equipment and chemicals from an outside source,
and should I choose to do so, I agree to have a complete set of
books, equipment and chemicals prior to the beginning class at
Cannella School of Hair Design. . . .
[ ] I choose to purchase my books, equipment and chemicals from
Cannella School of Hair Design. . . . I understand that the cost of
these items is separate from and in addition to my other course
costs, and is not refundable except under the circumstances
described in the school's refund policy. The cost is: $600.00
[ ] I choose to purchase my books, equipment and chemicals from
an outside vendor, such as Sally Beauty Supply or Marianna, etc.
See, e.g., Respondents' Exhibit 6-002. The remainder of the document repeated the same
information in Spanish and had a line for the student's signature and date.
Although no student during the year in question elected to purchase the required supplies
from an outside vendor, the Respondents' Director of Financial Aid stated that, if a student
elected to purchase the supplies elsewhere, the schools would provide the student with a check
drawn from the student's Pell Grant or the student would pay for the supplies using his or her
own funds. Declaration of David R. Adams, Respondents Exhibit 2-002. There were a number
of vendors located within 10 to 20 blocks of each school from which the students could purchase
the required supplies. Id. at 2-002 - 2-003. There were over one hundred such stores in the
Chicago metropolitan area. Id. and Declaration of John Kungis, Manager, Cannella School of
Hair Design, Respondents' Exhibit 10-001. The cost of the required supplies when purchased
from the Respondent schools was competitive with the cost of the supplies when purchased from
an outside vendor. See Respondents Exhibit 10-002.
If a student dropped out of the Respondent schools, the entire costs of the supply kit was
excluded from the pro-rata refund calculation. SFAP contends that this practice violates the
Title IV regulations.
The applicable regulation, at 34 C.F.R. § 668.22 (1995), provides as follows:
(c) Pro Rata refund. (1) Pro rata refund, as used in this section,
means a refund by an institution to a student attending that
institution for the first time of not less than that portion of the
tuition, fees, room, board, and other charges assessed the student
by the institution equal to the portion of the period of enrollment
for which the student has been charged that remains on the
withdrawal date . . . .
(5)(i) For purposes of this section, other charges assessed
the student by the institution include, but are not limited to,
charges for any equipment (including books and supplies) issued
by an institution to the student if the institution specifies in the
enrollment agreement a separate charge for equipment that the
student actually obtains or if the institution refers the student to a
vendor operated by the institution or an entity affiliated or related
to the institution. [Underlining added.]
When this regulation was published in final, the preamble provided as follows:
Comments: One commentator suggested that the definition
of other charges assessed by the institution not include the
documented cost for services provided by the institution as a
convenience to the student. For example, a book charge would not
be an institutional charge if the institution permitted the purchase
of the books as a convenience and the book charge was not
included in the enrollment agreement.
Discussion: The Secretary [of Education] notes that . . . an
institution is required to include the full amount of charges for
equipment in the calculation of a pro rata refund if a separate
charge exists for the equipment by the institution or if the
institution requires the student to purchase the equipment from a
certain vendor. If an institution does not have a separate charge for
equipment and the student has the option of purchasing the
equipment from more than one source, the institution would not
have to include the equipment charge in the pro rata refund
59 Fed. Reg. 61163 (November 29, 1994) underlining added.
The 1995-96 Federal Student Aid Handbook, at 3-85, provides as follows:
Usually, if the student purchases the item from the school, it's an
institutional cost. However, ED has determined that if the student
has a real and reasonable opportunity of obtaining the items (such
as books) elsewhere, and only chooses to get them at the school as
a matter of convenience, the cost is a noninsitutional charge.
Respondents were in compliance with all applicable regulations and guidelines. Under
34 C.F.R. § 668.22, Respondents were obligated to include in their pro-rata refund calculations
tuition, fees, room, board, and other charges assessed. Other charges assessed . . . include,
but are not limited to, charges for any equipment (including books and supplies) . . . if the
institution specifies in the enrollment agreement a separate charge for equipment . . . or if the
institution refers the student to a vendor operated by the institution or related to the institution.
Under the clear language of the regulations, other charges must be included in the refund
calculations if one of two conditions are present _ (1) the enrolment agreement specifies a
separate charge or (2) the student is referred to a vendor operated by or related to the institution.
This reading of the regulation is consistent with the preamble to the regulation quoted above. In
the present case, the enrollment agreements did not contain a separate charge for the supply kit;
and the students were not referred to outside vendors operated by or related to the Respondents.
SFAP contends that, since the definition of other charges includes the language but are
not limited to, there may be other unspecified conditions which dictate the inclusion of
equipment and supplies in the refund calculation. In other words, even if a school, as
Respondents in the present case, does not specify a separate charge for equipment and supplies in
the enrollment agreement, and does not refer students to outside vendors operated by or related to
the school, the cost of equipment and supplies must still be included in the refund calculation if
certain other unspecified conditions are present. SFAP contends that the two conditions
specified by the regulation are mere examples and simply provide a framework and are not meant
to be exclusive.
Given this framework, in a case such as this where the charges do
not fall under either example, we must examine whether the
charges represent federal student aid funds paid directly to the
institution or whether they were instead paid directly to the
students as non-institutional charges.
SFAP brief, p. 5.
SFAP misreads the regulation. The not limited to language means that other charges
may include items other than equipment. When other charges include equipment the other
charges must only be included in the pro-rata refund calculation if one of the two stated
conditions are met. The contention that the specified conditions are examples and that, if the
charges questioned do not fall within either of the examples, we must still examine whether the
charges represent Federal funds paid directly to the school is sophistry. Under the clear language
of the regulation, if the charges in question do not fall within the examples, then the charges
need not be included in the refund calculation. The regulation does not state, as SFAP apparently
wishes it did, that all Federal payments made directly to a school must be included in refund
SFAP also contends that Respondents are not in compliance with the Federal Student
Aid Handbook quoted from above _ namely, that their students did not have a real and
reasonable opportunity to purchase the required equipment and supplies elsewhere and only
chose to purchase them from the school as a matter of convenience. As evidence of this
contention, SFAP points out that no students elected to purchase the equipment and supplies
from an outside source and that Respondents never made Federal funds available to the students
for such purchases. The fact that no students elected to purchase the required equipment and
supplies from outside sources is not dispositive. There were a number of retail outlets within ten
to fifteen blocks of the schools, and over one hundred such sources in the Chicago metropolitan
area, from which the required materials could have been purchased. The schools were not
charging prices which were much different from those charged by the retail outlets. Under the
circumstances, it is clear that the students purchased the required materials directly from the
schools as a matter of convenience, avoiding the hassle of traveling to a retail supplier to
purchase the same materials for approximately the same price. As stated by Mr. Adams,
Students purchasing the necessary supplies elsewhere
would have to make a separate trip to one or more of the nearby
beauty supply stores, locate and acquire the numerous required
separate items of equipment, and bring their supplies to the school.
Students purchasing equipment directly from Cannella received
their supplies at one time, at the school, assembled and packaged
largely in one box.
Respondents' Exhibit 2_003. See also Respondents' Exhibit 10-003. According to Declaration
of Mr. Adams, had a student elected to purchase the equipment and supplies from an outside
source, Respondents would have provided the student with a check drawn on the student's Pell
account. Respondents' Exhibit 2-002. Although SFAP dismisses this statement as self-
serving, there is no contrary evidence in the record and I must accept it as true. Given the
convenience of purchasing the supplies and equipment directly from the schools, I do not find it
unusual that no students elected to purchase the supplies from outside sources.
Respondents were in full compliance with all applicable regulations and guidelines when
excluding the full costs of their supply kit from pro-rata refund calculations for the 1995-96
award year. Accordingly, Respondents have no further liability under the final audit
determinations issued in this case.
Date: February 22, 1999
A copy of the attached initial decision was sent by registered mail, return receipt
requested, to the following:
Stanley A. Freeman, Esq.
Joel M. Rudnick, Esq.
Powers, Pyles, Sutter & Verville, PC
Attorneys at Law
1875 Eye Street, N.W.
Washington, D.C. 20006-5409
Alexandra Gil-Montero, Esq.
Office of the general Counsel
U.S. Department of Education
400 Maryland Avenue, S.W.
Washington, D.C. 20202-2110