[Federal Register Volume 71, Number 211 (Wednesday, November 1, 2006)]
[Rules and Regulations]
[Pages 64378-64400]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-18183]
[[Page 64377]]
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Part III
Department of Education
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34 CFR Parts 668, 673, 682 and 685
Federal Student Aid Programs; Final Rule
Federal Register / Vol. 71, No. 211 / Wednesday, November 1, 2006 /
Rules and Regulations
[[Page 64378]]
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DEPARTMENT OF EDUCATION
34 CFR Parts 668, 673, 682 and 685
RIN 1840-AC87
Federal Student Aid Programs
AGENCY: Office of Postsecondary Education, Department of Education.
ACTION: Final regulations.
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SUMMARY: The Secretary is amending the Federal Student Aid Program
regulations to implement the changes to the Higher Education Act of
1965, as amended (HEA), resulting from the Higher Education
Reconciliation Act of 2005 (HERA), Pub. L. 109-171, and other recently
enacted legislation. These final regulations reflect the provisions of
the HERA that affect students, borrowers, postsecondary educational
institutions, lenders, and other program participants in the Federal
student aid programs authorized under Title IV of the HEA.
Final regulations for the two new Title IV grant programs created
by the HERA, the Academic Competitiveness Grant Program and the
National Science and Mathematics Access to Retain Talent (SMART) Grant
Program, are being published in a separate notice in the Federal
Register.
DATES: Effective Date: These final regulations are effective December
1, 2006.
FOR FURTHER INFORMATION CONTACT: Ms. Gail McLarnon, U.S. Department of
Education, 1990 K Street, NW., 8th Floor, Washington, DC 20006.
Telephone: (202) 219-7048 or via the Internet at: [email protected].
If you use a telecommunications device for the deaf (TDD), you may
call the Federal Relay Service (FRS) at 1-800-877-8339.
Individuals with disabilities may obtain this document in an
alternative format (e.g., Braille, large print, audiotape, or computer
diskette) on request to the contact person listed under FOR FURTHER
INFORMATION CONTACT.
SUPPLEMENTARY INFORMATION: On August 9, 2006, the Secretary published
in the Federal Register interim final regulations with a request for
comments (71 FR 45666) for the Federal student financial assistance
programs. The interim final regulations were effective on September 8,
2006, and implemented most of the changes made to the HEA by the HERA,
enacted as part of the Deficit Reduction Act of 2005 (Pub. L. 109-171).
The interim final regulations also implemented changes made to the HEA
by: The Taxpayer-Teacher Protection Act of 2004 (Pub. L. 108-409);
certain provisions of Pub. L. 107-139; the Pell Grant Hurricane and
Disaster Relief Act (Pub. L. 109-66); the Student Grant Hurricane and
Disaster Relief Act (Pub. L. 109-67); and the Emergency Supplemental
Appropriations Act for Defense, the Global War on Terror, and Hurricane
Recovery, 2006 (Pub. L. 109-234).
The August 9, 2006, interim final regulations included a request
for public comment. This document contains a discussion of the comments
we received and revisions to the interim final regulations that we made
as a result of these comments.
In the interim final regulations, we stated that changes to the
final regulations made after consideration of the public comments would
be effective July 1, 2007. After considering the comments we received,
we have decided not to make any substantive changes to the regulations.
We have made some technical and conforming changes that were identified
during the public comment period, but these technical changes are not
subject to the delayed effective date under section 482 of the HEA, and
therefore become effective 30 days after publication of these final
regulations.
Analysis of Comments and Changes
The changes to the interim final regulations included in this
document were developed through the analysis of comments received on
the interim final regulations published on August 9, 2006. We received
55 comments on the interim final regulations.
An analysis of the comments and of the changes in the regulations
since publication of the interim final regulations follows. We group
major issues according to subject, with appropriate sections of the
regulations referenced in parentheses. Generally, we do not address
technical and other minor changes and suggested changes the law does
not authorize the Secretary to make. We also do not respond to comments
pertaining to issues that were not within the scope of the interim
final regulations.
Definition of Telecommunications Course (Sec. 600.2)
Comments: A commenter representing accrediting agencies believed
that the reference to ``regular and substantive interaction'' in the
definition of telecommunications course was inconsistent with Congress'
intent to permit institutions maximum flexibility in the development
and application of curriculum, and placed an undue burden on
accrediting agencies.
Discussion: The Secretary does not agree. The regulations do not
restrict the curricula institutions may offer or the delivery modes
they may use. Instead, the regulations reflect the clear distinction in
the HERA between telecommunications courses and correspondence courses.
This distinction is necessary because the HERA eliminated the
circumstances under which telecommunications courses are considered
correspondence courses, and excluded telecommunications courses from
the ``50 percent rule'' limitations on institutional eligibility for
Title IV, HEA program assistance, while retaining them for
correspondence courses. Because of the changes made by the HERA, it is
necessary to clarify the regulatory definition to distinguish
telecommunications courses from correspondence courses. We have defined
the term telecommunications course to conform to the usage of that term
by the higher education community. None of the commenters proposed
alternative language.
The revised definition of the term telecommunications course does
not impose any new requirements on accrediting agencies. Since 1998,
section 496(n)(3) of the HEA has required the Secretary to specifically
designate whether recognized accrediting agencies have accreditation of
distance education within the scope of their recognition. Since 1994,
accrediting agencies have also been required under Sec.
602.22(a)(2)(iii) to provide prior approval for an institution's
addition of courses or programs that represent a significant departure
in the method of delivery from those previously offered. The interim
final regulations do not modify these requirements, or add any new
ones.
Changes: None.
Comments: While supporting our effort to draw a clear distinction
between telecommunications and correspondence courses, one commenter
thought that the language in the definition of telecommunications
course was not specific enough to determine how much interactivity was
sufficient. The commenter suggested that the definition be revised to
include interaction among students and that we clarify that ``regular''
interaction means ``not trivial'' rather than ``at specific
intervals.''
Discussion: The primary purpose of revising the definition of
telecommunications course was to draw a clear distinction between
telecommunications and correspondence courses. In drawing this
[[Page 64379]]
distinction, we wanted to avoid as much as possible dictating a
particular teaching method. The Secretary believes that requiring
interaction among students, as well as between students and the
instructor, would preclude certain teaching methods, such as self-paced
instruction.
We disagree with the commenter on the meaning of ``regular''
interaction. We believe the phrase ``regular and substantive'' means
that the interaction should both take place at regular intervals and
not be trivial.
Changes: None.
Comments: Two commenters representing financial aid administrators
supported the change in the definition of the term telecommunications
course but asked whether instruction by video cassette or disc
recording would be considered to be telecommunications coursework.
Discussion: We believe that the definition of telecommunications
course adequately addresses the issue raised in the comments. The
regulations provide that instruction by video cassette or disc
recording is telecommunications coursework when the course involves the
use of other telecommunications technologies for regular and
substantive interaction between students and instructor, and when the
course is offered onsite in the same award year. Otherwise, the use of
video cassettes or disc recording is considered a correspondence
course.
Changes: None.
Distance Education (Sec. Sec. 600.2, 600.7, 600.51, 668.8 and 668.38)
Comments: One commenter agreed that academic programs offered
through any use of telecommunications or correspondence by foreign
schools should not be eligible for Title IV, HEA program assistance.
A few commenters did not believe that the HERA intended to deny
eligibility under the Federal Family Education Loan (FFEL) Program to a
student who physically attends a foreign school but takes a portion of
his or her program through telecommunications classes. The commenters
felt that it is unfair to bar from FFEL eligibility a student who could
fulfill a program requirement only through telecommunications
coursework because the class is not offered at the foreign school the
student attends. One commenter suggested that U.S. military personnel
deployed outside of the U.S. may need to take courses via
telecommunications instruction as part of their program of study.
The commenters recommended that the definition of an eligible
program for a foreign school be modified to permit the inclusion of
telecommunications courses. Specifically, the commenters suggested the
definition be changed to include a program at a foreign school that
requires on-site attendance in traditional classroom or lab settings in
at least one class while permitting one or more additional
telecommunications classes, while excluding a program at a foreign
school that permits the student to attend courses solely via
telecommunications instruction.
Alternatively, the commenters suggested that the effective date of
the regulations be changed to allow foreign schools to deliver second
and subsequent disbursements of pending loans on or after July 1, 2006
if the first disbursement was made prior to July 1, 2006.
Discussion: The final regulations reflect the statutory
requirements for an eligible program to include programs offered in
whole or in part through telecommunications instruction by institutions
in the United States with appropriate accreditation. The statute does
not extend this eligibility to foreign schools and the Secretary does
not have the authority to do so by regulation.
In response to the comment regarding U.S. military personnel
located abroad, it is the Secretary's understanding that such students
do not usually attend foreign schools because they have access to
programs offered by domestic institutions. Lastly, the effective date
is established by the HERA and cannot be changed by regulation.
Changes: None.
Academic Year (Sec. 668.3)
Comments: One commenter suggested that the Secretary change the
definition of an academic year so that institutions can use the same
definition as they use for grade level in the Stafford Loan Program.
Discussion: The definition of an academic year in Sec. 668.3
reflects the statutory definition in section 481(a) of the HEA, and the
Secretary cannot change that definition.
Changes: None.
Direct Assessment Programs (Sec. 668.10)
Comments: One commenter agreed that direct assessment programs
offered at foreign schools should not be considered eligible for Title
IV funding.
Discussion: The Secretary appreciates the commenter's support.
Changes: None.
Comments: One commenter representing several higher education
associations, and two commenters representing financial aid
administrators, asked how the Department will evaluate satisfactory
academic progress for direct assessment programs.
Discussion: Students enrolled in direct assessment programs who are
receiving Title IV HEA, program assistance must meet the same
satisfactory academic progress requirements as do students attending
other types of programs. However, since direct assessment programs may
be designed in a variety of ways, we will determine how we will
evaluate institutional compliance with satisfactory academic progress
standards on a case-by-case basis as part of the initial eligibility
review.
Changes: None.
Comments: One commenter thought that Sec. 668.10(a)(3) was
intended to require an institution to develop a protocol for equating
programs administered under direct assessment rules with clock hours
for credit hour measurements, but that the text in the interim final
regulations was unclear. The commenter suggested some revised language.
Discussion: The commenter is correct about the intent of the
regulations. We agree that the commenter's proposed revised language is
clearer than the language in the interim final regulations.
Changes: We have revised Sec. 668.10(a)(3) for clarity, but
without changing the meaning.
Treatment of Title IV Funds When a Student Withdraws (Sec. Sec.
668.22, 668.35, and 668.173)
Post-Withdrawal Disbursement Counseling
Comments: Several commenters questioned why an institution must
obtain the student's confirmation to apply loan funds to the student's
account, but not to apply other Title IV program funds to that account.
Several commenters questioned why an institution must obtain
confirmation that a student wishes to receive grant funds as a direct
disbursement. Commenters noted that the HERA provision that changed the
post-withdrawal disbursement requirements addressed confirmation of
receipt of loan funds, but not grant funds.
Discussion: As in the past, Sec. 668.164(d)(1) and (d)(2) require
an institution to obtain a student's authorization (or a parent's
authorization in the case of a parent PLUS loan) to credit the
student's account with any Title IV, HEA funds for charges other than
tuition, fees, and room and board if the student contracts with the
institution for other services.
[[Page 64380]]
An institution may obtain such an authorization from a student or
parent at any time. The HERA added a new provision that goes beyond the
pre-existing requirements in Sec. 668.164(d)(1) and (d)(2) to require
an institution to obtain confirmation from a student (or a parent in
the case of a parent PLUS Loan) before making any post-withdrawal
disbursement of loan funds. This confirmation cannot be made until the
need for the post-withdrawal disbursement has been determined, i.e.,
after the student withdraws. This change ensures that a student or a
parent has an opportunity after the student's withdrawal to decline all
or a part of the loan, thus eliminating or reducing his or her loan
debt. The Secretary did not add a similar change to the regulations for
grant funds because she believes the requirements of Sec.
668.164(d)(1) and (d)(2) are sufficient to control the application of
grant funds to a student's account.
The requirement in Sec. 668.164(g)(3)(i) that an institution
obtain confirmation that a student wishes to receive a post-withdrawal
direct disbursement of grant funds is not new. Students are provided
with an opportunity to refuse direct disbursements of grant funds so
that they may preserve the amount of their grant eligibility if they
return to school within the award year.
Changes: None.
Comments: Several commenters felt that the interim final
regulations did not clearly explain how the requirements in Sec.
668.22 are applied in concert with the regulations for making a late
disbursement (Sec. 668.164(g)(3)) and for notifying a student, or
parent (for a parent PLUS Loan), to provide that student or parent an
opportunity to cancel a loan when the institution credits the student's
account with FFEL, Direct Loan, or Perkins Loan program funds (Sec.
668.165(a)(2)). Many commenters believed a conforming amendment was
needed to clarify whether Sec. 668.165(a)(2) applies in the case of a
post-withdrawal disbursement.
Discussion: The new confirmation requirements do not apply to late
disbursements made to students who did not withdraw. Section
668.164(g)(3)(i) requires an institution to make any post-withdrawal
disbursement due to a student who withdraws during a payment period or
period of enrollment in accordance with the new post-withdrawal
disbursement procedures. However, the new post-withdrawal disbursement
requirements do not apply to late disbursements made to students who
successfully complete the payment period or period of enrollment (Sec.
668.164(g)(3)(ii)) or to students who do not withdraw, but cease to be
enrolled as at least half-time students (Sec. 668.164(g)(3)(iii)).
The commenters are correct that a conforming amendment to Sec.
668.165(a)(2) is necessary. For students who withdraw and are due a
post-withdrawal disbursement, the new post-withdrawal disbursement
procedures in Sec. 668.22 supersede the provisions in Sec.
668.165(a)(2) that require an institution to notify a student or parent
of loan funds that are credited to a student's account. Because the new
post-withdrawal disbursement procedures require an institution to
obtain a student's confirmation (or a parent's confirmation in the case
of a parent PLUS Loan), the institution does not have to notify the
student or parent again when the institution credits the loan funds to
the student's account after it receives the borrower's confirmation.
The notification requirement in Sec. 668.165(a)(2) still applies in
all other cases when an institution credits loan funds to a student's
account.
Changes: The Secretary has revised Sec. 668.165(a)(2) to make it
clear that an institution is not required to notify a student or parent
of loan funds that are credited to a student's account for students who
withdraw and are due a post-withdrawal disbursement.
Comments: Several commenters noted that requiring an institution to
provide notification of the outcome of a post-withdrawal disbursement
request ``electronically or in writing'' is redundant, because ``in
writing'' means through conventional mailing methods or electronically.
Discussion: The commenters are correct.
Changes: The reference to electronic notification has been removed
from Sec. 668.22(a)(5)(iii)(E).
Withdrawals From Clock Hour Programs
Comments: One commenter supported the new regulatory provisions
governing the Return of Title IV Funds in the case of clock hour
programs. One commenter felt that the regulations should allow an
institution to determine the percentage of aid earned by a student who
withdraws and has completed more clock hours than he or she was
scheduled to complete by using the completed hours, rather than the
scheduled hours. The commenter noted that this was consistent with the
previous policy for students withdrawing from clock-hour programs.
Discussion: Prior to the enactment of the HERA, either completed
hours or scheduled hours were used to determine earned aid for a
student who withdrew from a clock-hour program. However, the HERA
changed the law to allow the use of scheduled hours only.
Changes: None.
Grant Overpayment Requirements
Comments: One commenter suggested that the regulations be modified
to clarify that the provision that a student is not required to return
an original grant overpayment amount of $50 or less applies on a Title
IV, HEA program-by-program basis.
Discussion: The Secretary agrees with the commenter.
Changes: Section 668.22(h)(3)(ii)(B) has been revised to make it
clear that the provision that a student is not required to return an
original grant overpayment amount of $50 or less applies on a Title IV,
HEA program-by-program basis.
Comments: Several commenters asked the Department to raise to $50
the $25 de minimis amount for overpayments in the Academic
Competitiveness Grant (ACG) and National SMART grant programs and other
Title IV programs to match the de minimis grant overpayment amount for
students who withdraw, which was raised to $50 by the HERA.
Discussion: The Secretary does not agree that the amounts should
correspond. The $25 de minimis standard used in the regulations is
based upon the Department's determination of the amount that is cost
effective for the Department to collect on outstanding balances owed to
the Department. We are able to successfully pursue collections of $25
or higher with Internal Revenue Service (IRS) offsets and other
methods.
Changes: None.
Waiver of Grant Overpayment for Students Affected by a Disaster
Comments: One commenter felt that the regulatory language applying
the waiver of grant overpayment for students affected by a disaster to
students ``whose withdrawal ended within the award year during which
the designation occurred or during the next succeeding award year'' was
unclear. The commenter asked the Secretary to clarify that students
remain eligible for the grant overpayment waiver even if they do not
return to the same institution in the following year.
Discussion: An otherwise eligible student qualifies for the waiver
if he or she withdraws during the award year during which the major
disaster designation occurred or during the next succeeding award year,
if the student withdrew because of the major disaster.
Changes: Section 668.22(h)(5)(iii) has been revised to clarify that
the grant
[[Page 64381]]
overpayment waiver applies to students whose withdrawal due to a
disaster occurred, rather than ended, within the award year during
which the designation occurred or during the next succeeding award
year.
Order of Return of Grant Funds
Comments: One commenter felt that the regulations should be changed
to make it clear that an institution will not have to return funds to
both the ACG and National SMART Grant programs for the same withdrawal.
Discussion: Because an institution may opt to use the period of
enrollment, rather than the payment period, to perform a Return of
Title IV Funds calculation for a student who withdraws from a non-
standard term or non-term program, it is possible, although highly
unlikely, that both an ACG and a National SMART Grant could be
disbursed (or scheduled to be disbursed) to a student for the same
period. In such a case, funds from both the ACG and National SMART
Grant programs may need to be returned for the same withdrawal.
Changes: None.
Return of Funds Within 45 Days
Comments: One commenter felt that the Secretary should extend the
other deadlines under Sec. 668.22 from 30 days to 45 days to
correspond to the extension of the maximum amount of time an
institution has to return unearned funds for which it is responsible.
The commenter felt this extension should also be applied to
notifications to students for post-withdrawal disbursements and
notifications to students of Title IV grant overpayments resulting from
withdrawal. The commenter asserted that a uniform deadline makes sense
because the same Return of Title IV Funds process leads up to all three
requirements, and consistency would help ensure compliance.
Discussion: Institutions have previously indicated that they needed
an extension of the former 30-day return deadline to provide additional
time to perform the administrative functions necessary to return the
funds. The actual calculation of earned funds is not time consuming.
The Secretary believes that providing institutions with over four weeks
to enter information from their records and calculate the amount to be
returned is more than sufficient.
With regard to the request that the Secretary extend the 30-day
deadlines for notifications to students, the Secretary does not believe
it is in the best interest of students to extend these deadlines merely
for consistency's sake. The Secretary believes that the sooner an
institution attempts to contact these students, the more likely it is
that the institution will reach the students.
Changes: None.
Student Debts Under the HEA and to the U.S. (Sec. 668.35)
Comments: Several commenters suggested that Sec. 668.35(e)(3),
which governs the amount of an overpayment that renders a student
ineligible for additional Title IV, HEA program assistance, be changed
from $25 to $50 to be consistent with the new statutory requirement
governing repayment of grant funds under the return of Title IV aid
provisions.
Discussion: The Secretary disagrees with the commenters. In 2002,
we published final regulations to make the treatment of overpayments
consistent in the Title IV, HEA programs, including incorporating the
de minimis amount concept that applied to grant overpayments under the
return to Title IV aid requirements. We decided to use the $25 de
minimis standard for consistency and simplicity, and because it is cost
effective. We do not believe it is appropriate to raise the de minimis
amount applicable to overpayments when the Department has the tools and
resources available to collect these amounts.
However, as a result of the change in the minimum amount of a grant
repayment for which a student is responsible under the return of Title
IV aid provisions from $25 to $50, we are amending Sec. 668.35(e) to
clarify that a student who owes a grant overpayment of $50 or less that
is not a remaining balance and is a result of the return of Title IV
aid calculation is eligible to receive additional Title IV, HEA program
assistance.
Changes: We have added a new paragraph (4) to Sec. 668.35(e) to
clarify that a student who owes a grant overpayment of $50 or less
under the circumstances explained above is eligible to receive
additional Title IV, HEA program assistance.
Estimated Financial Assistance (Sec. Sec. 673.5, 682.200, and 685.102)
Comments: One commenter suggested that we add benefits paid under
Section 903 of Pub. L. 96-342 (Educational Assistance Pilot Program)
that is currently in the definition of estimated financial assistance
in Sec. Sec. 682.200(b) and 685.102(b) to the definition of estimated
financial assistance in Sec. 673.5(c). The commenter also suggested
that we add language in Sec. 682.200(b)(1)(iv), which includes in the
definition of estimated financial assistance benefits paid under the
Veteran's Affairs Educational Assistance Pilot Program and language
from Sec. 685.102(b)(2)(ii), which excludes from estimated financial
assistance the amounts of Federal Perkins Loan and Federal Work-Study
funds that the student has declined.
Another commenter requested that the definition of estimated
financial assistance in all three sections be modified to exclude any
alternative or private loans not certified by the institution. This
commenter suggested that only those loans that the institution is aware
the student is receiving should be included in the definition of
estimated financial assistance. An additional, similar comment was
received suggesting that language be added to the definitions in all
three sections to specifically state that only benefits that an
institution is aware of must be considered estimated financial
assistance.
Discussion: Although the list of individual veterans' education
benefits in each of the three sections that define estimated financial
assistance is not all inclusive, the Secretary agrees with the first
commenter that, for consistency, benefits paid under section 903 of
Pub. L. 96-342 (Educational Assistance Pilot Program) should be
included in Sec. 673.5(c). However, it would be redundant to
specifically exclude from the definition of estimated financial
assistance in Sec. 673.5(c) the amounts of Federal Perkins Loan and
Federal Work-Study funds that the student has declined. Section Sec.
673.5 defines the term estimated financial assistance for the purpose
of determining eligibility for campus-based funds. It would not make
sense to exclude campus-based funds declined by a student from the list
of items used to determine that student's eligibility for those campus-
based funds. If a student declines funds from a campus-based program,
the amount of those declined funds would not be used to determine
eligibility for campus-based funds.
With respect to the proposal to define estimated financial
assistance as including only loans of which the institution is aware,
we note that, under the administrative capability guidelines in Sec.
668.16(b) and (f), an institution must have a mechanism in place for
obtaining and reviewing all information it receives that has a bearing
on a student's eligibility for Title IV, HEA assistance. The
institution must communicate this information to the individual
designated to administer the Title IV programs at the institution. In
light of this requirement, we believe that it is unlikely that a
student will be
[[Page 64382]]
receiving loans of which the institution is not aware.
Changes: The definition of estimated financial assistance in Sec.
673.5(c)(1)(ix) has been revised to include benefits paid under section
903 of Pub. L. 96-342 (Educational Assistance Pilot Program). A
technical change has also been made to correct the reference in Sec.
685.102(b)(1)(ix) from ``paragraph (2)(iii)'' to ``paragraph (2)(iv)''.
Military Deferment (Sec. Sec. 674.34, 682.210(t), 682.211(i) and
685.204)
Comments: One commenter recommended that we extend eligibility for
the new military deferment established by the HERA to Perkins Loans
disbursed before July 1, 2001 if the borrower received at least one
Perkins Loan first disbursed on or after July 1, 2001.
Discussion: Section 8007(f) of the HERA specifies that the military
deferment applies to loans ``for which the first disbursement is made
on or after July 1, 2001.'' The Secretary does not have the authority
to extend eligibility for the military deferment to loans for which the
first disbursement was made before July 1, 2001.
Changes: None.
Comments: Some commenters asked if a qualified borrower who
experiences multiple deployments could receive separate deferments for
each of his or her eligible Perkins, FFEL and Direct Loan program
loans, as long as each deferment period did not last longer than the
three-year maximum.
Discussion: The three-year maximum for the military deferment
applies to each loan, not to the borrower. If a borrower receives a
military deferment on a loan for three years, or receives multiple
military deferments on a loan that add up to three years, that loan no
longer qualifies for a military deferment. If the borrower goes back to
school, obtains more Title IV loans, and then is called back to active
duty, the new loans would qualify for up to three years of military
deferment. However, the older loan that has already been in a military
deferment for the three-year maximum would not qualify for a military
deferment.
Changes: None.
Comments: Several commenters recommended that we confirm that a
lender has the authority to grant a mandatory administrative
forbearance, as provided for in Sec. 682.211(i), on a borrower's pre-
July 1, 2001 loans, if the borrower qualifies for a military deferment
on loans that were first disbursed on or after July 1, 2001.
Discussion: FFEL lenders are required to grant mandatory
administrative forbearances when notified by the Secretary that
exceptional circumstances exist, such as a local or national emergency
or a military mobilization. Some borrowers may qualify for a military
deferment on loans first disbursed on or after July 1, 2001 and also
may qualify for a mandatory administrative forbearance on loans first
disbursed before July 1, 2001. However, not all borrowers who qualify
for a military deferment necessarily qualify for a mandatory
administrative forbearance.
Changes: None.
Comments: Several commenters recommended that we change the name of
the prior military deferment that is available to borrowers with loans
made before July 1, 1993, to the ``Armed Forces deferment'', to avoid
confusion with the new military deferment enacted by the HERA.
Discussion: The FFEL and Direct Loan Public Service Deferment
Request forms do not use the term ``military deferment'' to refer to
the pre-July 1, 1993 military deferment mentioned in the comments.
Instead, these forms refer to borrowers who are ``on active duty in the
Armed Forces of the United States.'' These forms are the primary source
of information to borrowers on the prior military deferment.
Accordingly, we do not believe that there will be any significant
confusion among borrowers. Moreover, we believe that re-naming the old
military deferment in the regulations serves no purpose.
Changes: None.
Perkins Loan Rehabilitation (Sec. 674.39)
Comments: One commenter questioned the statutory basis for denying
a borrower who has been convicted of, or has pled nolo contendere or
guilty to, a crime involving fraud in obtaining the Perkins Loan the
opportunity to rehabilitate the defaulted Perkins Loan. The commenter
questioned the statutory basis for denying loan rehabilitation to such
borrowers. The commenter also contended that institutions have no
reasonable way of knowing whether a borrower has been convicted of, or
has pled nolo contendere or guilty to, a crime involving fraud in
obtaining a Perkins Loan.
Discussion: Section 8021(a) of the HERA provides that a student who
has been convicted of, or has pled nolo contendere or guilty to a crime
involving fraud in obtaining Title IV, HEA program assistance is not
eligible for additional Title IV assistance unless he or she has repaid
the fraudulently obtained Title IV aid. If a borrower were permitted to
rehabilitate a fraudulently obtained Perkins Loan under Sec. 674.39 of
the Perkins Loan program regulations, the borrower would regain
eligibility for additional Title IV, HEA program assistance without
having repaid the fraudulently obtained loan in full, as required by
the HERA.
We do not agree with the commenter's contention that an institution
will not know if a borrower was found guilty of fraud. The institution
would almost certainly be involved in any legal proceedings relating to
a Perkins Loan that was fraudulently obtained from that institution.
Changes: None.
Definition of Satisfactory Repayment Arrangement (Sec. Sec. 682.200
and 685.102)
Comments: Several commenters pointed out that the standard for an
on-time payment for purposes of rehabilitating a loan is now different
from the standard for an on-time payment for purposes of making
satisfactory repayment arrangements on a defaulted loan to regain Title
IV, HEA program assistance eligibility. Under the rehabilitation rules,
an on-time payment is a payment made within 20 days of the due date.
Under the satisfactory repayment arrangement rules, an on-time payment
is a payment made within 15 days of the due date. Since some borrowers
make satisfactory repayment arrangements and attempt loan
rehabilitation concurrently, the commenters recommended using within 20
days of the due date as the on-time standard for both purposes.
Discussion: The making of six consecutive monthly payments under
satisfactory repayment arrangements restores Title IV, HEA program
assistance eligibility to a defaulted borrower. We believe that the
standard for on-time payments for purposes of regaining eligibility for
Title IV, HEA program assistance should be stricter than the standard
for rehabilitation of a defaulted loan. In addition, the on-time
payment standard for borrowers who are in a regular repayment status
requires that the payments be made within 15 days of the due date. We
do not believe that it is appropriate to provide a longer period for
on-time payments for borrowers who are in default on their loans than
for borrowers who are current on their loans. Borrowers in default
should be held to an on-time standard that is at least as strict as the
standard applied to current borrowers, not rewarded with extra time to
make a payment. Finally, we note that Congress did not apply the 20-day
standard adopted for the loan rehabilitation program to borrowers in
other situations.
[[Page 64383]]
Changes: None.
Eligible Borrower (Sec. Sec. 682.201 and 685.200)
Comments: Two commenters recommended adding language to Sec. Sec.
682.201 and 685.200 to provide that a student borrower is not eligible
for Title IV, HEA program assistance unless the borrower has repaid any
Title IV, HEA program assistance obtained by fraud, if the student has
been convicted of, or has pled nolo contendere or guilty to, a crime
involving fraud in obtaining Title IV, HEA program assistance. These
commenters also recommended that we revise Sec. 682.201 to list the
general eligibility requirements for all borrowers, and then the
requirements that are specific to each loan type. The commenters felt
that this approach would be more efficient and eliminate unnecessary
redundancies.
Discussion: The interim final regulations in Sec. Sec. 668.32(m)
and 668.35(i) include the new eligibility provision that prohibits a
student borrower from obtaining Title IV, HEA program assistance unless
the borrower has repaid any Title IV, HEA program assistance obtained
by fraud. Section 682.201(a) and (b) of the FFEL regulations stipulate
that a Stafford Loan borrower and a student PLUS borrower,
respectively, must meet the eligibility requirements in 34 CFR part 668
to qualify for a Stafford Loan. Similar references to the eligibility
requirements in 34 CFR part 668 are in Sec. 685.200(a)(1)(ii) and
685.200(b)(1)(ii) of the Direct Loan regulations. We believe that it
would be redundant to include the language regarding the student
eligibility requirements already outlined in part 668 in Sec. Sec.
682.201 and 685.200.
We disagree with the suggestion that restructuring Sec. 682.201
would be more efficient. In developing the interim final regulations,
we determined that the most efficient and easily understandable way to
incorporate the changes mandated by the HERA into Sec. 682.201 was to
fit the changes into the existing structure of this section. We believe
that it is easier to identify changes that we have made to a section if
the overall structure of the section remains consistent with past
versions of that section. Although some redundancy is unavoidable with
this approach, we have reduced the redundancies through the use of
cross-references.
Changes: None.
Comments: Several commenters noted that a student borrower may
receive a Federal Direct Subsidized Stafford/Ford Loan or a Federal
Direct Unsubsidized Stafford/Ford Loan and a FFEL Program Student PLUS
Loan for the same period of enrollment. These commenters recommended
revising the PLUS loan student eligibility requirements in both the
FFEL and Direct Loan programs, to stipulate that a graduate or
professional student's annual loan maximum eligibility for either a
FFEL Stafford Loan or a Direct Stafford/Ford Loan, as applicable, must
be determined before awarding the student a PLUS Loan.
Discussion: The Secretary has previously issued guidance stating
that a graduate or professional student's maximum annual Stafford Loan
eligibility must be determined before the student applies for a PLUS
Loan, although the student is not first required to borrower up to his
or her maximum annual Stafford Loan limit before receiving a PLUS Loan.
If a school participates in both the FFEL and Direct Loan programs, the
school must determine the borrower's maximum annual Stafford Loan
eligibility under the program the school is participating in for
Stafford Loan purposes. We agree that this guidance should be
incorporated in the regulations.
Changes: We have revised Sec. Sec. 682.201(b)(3) and
685.200(b)(1)(iv) to specify that a graduate or professional student's
maximum annual Stafford Loan eligibility under either the Direct Loan
or FFEL program must be determined before the student applies for a
PLUS Loan.
Comments: Two commenters recommended that Sec. 682.201(d)(1) be
revised to stipulate that a borrower who obtained a loan by identity
theft or some other illegitimate means, or who obtained a loan for
which he or she was ineligible, may not consolidate that loan. In
addition, these commenters recommended that these borrowers not be
permitted to consolidate loans for which the borrower is eligible until
the loans for which the borrower was ineligible have been paid in full.
Several commenters noted that new Sec. 682.201(d)(2) states that a
borrower may not consolidate a loan for which the borrower is wholly or
partially responsible. Because our revision stipulating that a borrower
who obtained a loan by identity theft or some other illegitimate means,
or who obtained a loan for which he or she was ineligible, may not
consolidate that loan was unclear, several commenters asked if the word
``not'' was inadvertently dropped from this section.
Discussion: Section 682.201(d)(2) of the interim final regulations
should have read, ``A borrower may not consolidate a loan under this
section for which the borrower is wholly or partially ineligible.''
This language mirrors the existing provisions in Sec. 685.211(e)(4) of
the Direct Loan regulations. The revised Sec. 682.201(d)(2) precludes
a borrower who obtained a Title IV loan by identity theft, fraud, or
some other illegitimate means from consolidating the ineligible loan.
However, we do not believe that the HERA prohibits a borrower who has
obtained loans for which the borrower is ineligible from consolidating
loans for which the borrower is eligible, and we do not believe we have
the authority to impose such a restriction by regulation. We believe
the revision to Sec. 682.201(d)(2) adequately addresses commenters'
concerns and that revising Sec. 682.201(d)(1) is unnecessary.
Changes: We have replaced ``responsible'' with ``ineligible'' in
Sec. 682.201(d)(2).
Eligibility for a Direct Consolidation Loan (Sec. Sec. 682.201,
685.100 and 685.220)
Comments: Two commenters recommended that we amend the FFEL and
Direct Loan program regulations to clarify that, in the case of a
borrower who wishes to consolidate a Federal Consolidation Loan that
has been submitted for default aversion into the Direct Loan Program,
the borrower must be delinquent or in default on the Federal
Consolidation Loan at the time the borrower applies for the Direct
Consolidation Loan. The commenters believed that the current regulatory
language would allow a borrower to consolidate a Federal Consolidation
Loan on which the borrower is current on making payments into a Direct
Consolidation Loan, if the Federal Consolidation Loan had been
submitted for default aversion at some time in the past.
Discussion: We agree that Federal Consolidation Loans that are
currently delinquent or in default may be consolidated into a Direct
Consolidation Loan. However, we do not believe that it is necessary to
amend the current regulatory language in Sec. Sec. 682.201, 685.100
and 685.220 to state this requirement more explicitly.
Changes: None.
Comments: Several commenters urged the Secretary to clarify that
borrowers with defaulted Federal Consolidation Loans are eligible to
consolidate into the Direct Loan Program, without including another
eligible loan, for the purpose of obtaining an income contingent
repayment (ICR) plan. Section 428C(a)(3)(B)(i)(IV) of the HEA provides
this option for borrowers with delinquent Federal Consolidation Loans
that have been submitted to the guaranty agency for default aversion.
The commenters believed that this
[[Page 64384]]
provision of the law, which was added by the HERA, was intended to
provide the ICR option to borrowers who are either seriously delinquent
or in default on their Federal Consolidation Loans. They also noted
that the statutory language does not distinguish between non-defaulted
and defaulted borrowers, and that any default claim filing would have
been preceded by a default aversion submission.
Discussion: The commenters are correct in reading the regulations
implementing the changes made to section 428C(a)(3)(B)(i)(IV) of the
HEA to allow a borrower to consolidate a single defaulted Federal
Consolidation Loan into the Direct Loan Program for the purpose of
obtaining an ICR plan. We believe that the regulatory language is
sufficiently clear and that it is not necessary to revise the
regulations to state this more explicitly.
An otherwise eligible borrower may also consolidate a single
Federal Consolidation Loan into the Direct Loan Program for the purpose
of obtaining an income contingent repayment plan if the borrower has
filed an adversary complaint in a bankruptcy proceeding seeking to have
the Federal Consolidation Loan discharged, regardless of whether that
Federal Consolidation Loan is current, delinquent, or in default. A
borrower who is seeking to have a Federal Consolidation Loan discharged
in bankruptcy should be treated the same as a borrower whose loan has
been submitted for default aversion. A borrower who seeks to have a
loan discharged in bankruptcy is clearly stating his or her intent not
to repay the loan, but the bankruptcy filing precludes the submission
of a default aversion request. Offering the Direct Loan Program ICR
option to such a borrower provides an alternative to having the loan
discharged in bankruptcy.
Changes: None.
Permissible Charges by Lenders to Borrowers (Sec. 682.202(a))
Commments: One commenter urged the Department to develop and
publish regulations to restrict a lender's ability to charge an FFEL
Program borrower an interest rate that is less than the rate specified
in the HEA and the program regulations. The commenter believes that the
regulations should require lenders to charge all borrowers the same
rate to stop lenders from using interest rates to discriminate between
institutions and borrowers based on inequitable criteria or to
eliminate competition in the student lending market.
Discussion: Section 427A(l) of the HEA provides that nothing shall
prohibit a lender from charging a borrower an interest rate less than
the rate specified in the statute. Accordingly, we do not have the
statutory authority to require lenders to charge all borrowers the same
interest rate.
Changes: None.
Insurance Premium and Federal Default Fees (Sec. Sec. 682.202(d)(2)
and 682.401(b)(10))
Comments: One commenter stated that the changes made to Sec. Sec.
682.202(d)(2) and 682.401(b)(10) in the interim final regulations
appear to eliminate the authority of a lender or guaranty agency, under
Sec. 682.209(f)(4), to charge a guarantee fee to a borrower who is
refinancing a fixed rate PLUS Loan or a Supplemental Loans for Students
(SLS) Loan made prior to July 1, 1987 under Sec. 682.209(f)(1). The
commenter believes that the HERA provisions that changed the optional
insurance premium to a mandatory Federal default fee did not remove a
lender's or guaranty agency's authority to charge a guarantee fee in
these cases.
Discussion: We agree that the HERA did not remove a lender's or
guaranty agency's authority to charge a guarantee fee if a borrower
refinances a fixed rate PLUS or SLS loan made prior to July 1, 1987.
However, we believe the existing language in Sec. 682.209(f)(4), which
specifically states that the refinancing lender may charge the borrower
a guarantee fee in these circumstances, already addresses this issue.
Changes: None.
Loan Disbursement Through an Escrow Agent (Sec. Sec. 682.207(b)(1)(iv)
and 682.408(c))
Comments: Many commenters noted that the discussion in the preamble
of the interim final regulations related to the new 10-day deadline for
a lender to pay funds to an escrow agent for disbursement to a school
differed from the regulatory language and requested clarification. The
commenters indicated that the preamble stated that the transfer of loan
funds must take place no earlier than 10 days prior to disbursement to
the borrower, while the regulations indicated that the 10 days referred
to the transfer of the loan funds to the school prior to the school's
delivery of the funds to the borrower. A couple of commenters indicated
that an additional change was needed to Sec. 682.408(c)(2) to reflect
the reduction from 21 to 10 days for disbursement through an escrow
agent. Several commenters also recommended that Sec. 682.408(c) be
revised to provide that an escrow agent, as the lender's agent, could
disburse loan funds directly to a borrower in a study-abroad program at
the borrower's request.
Discussion: We agree with the commenters that there is a difference
between the discussions of the 10-day period in the preamble and in the
interim final regulations. The language in the interim final
regulations that states that the escrow agent shall transmit loan
proceeds received from a lender to a school not later than 10 days
after the agent receives the funds from the lender accurately reflects
our policy on this issue.
A revision to Sec. 682.408(c)(2) reflecting the reduction from 21
to 10 days for disbursement through an escrow agent is unnecessary.
Paragraph (c)(2) of Sec. 682.408 was incorporated into new Sec.
682.408(c) in the interim final regulations and the reduction from 21
to 10 days for disbursement through an escrow agent is reflected in
this new paragraph.
We agree with the commenters who recommended that Sec. 682.408(c)
be revised to provide that an escrow agent, as the lender's agent,
could disburse loan funds directly to a borrower in a study-abroad
program at the borrower's request.
Changes: We have amended Sec. 682.408(c) to clarify that an escrow
agent may disburse Stafford Loan proceeds directly to a borrower who is
attending a study-abroad program and who requests a direct disbursement
from the lender.
Due Diligence in Disbursing a Loan (Sec. Sec. 682.207 and 682.604)
Comments: Several commenters disagreed with our determination that
PLUS Loan funds cannot be disbursed directly to a borrower enrolled in
a study-abroad program or at a foreign school. The commenters believed
that the ``same terms and conditions'' provision in section 428B(a)(2)
of the HEA permits retention of the prior policy allowing direct
disbursement of PLUS Loan funds. The commenters noted that, while the
PLUS funds check must still be made co-payable to the institution and
the borrower under 428B(c)(2) of the HEA, disbursing funds directly to
a borrower to be endorsed and mailed to an institution may assist
borrowers in paying for expenses while traveling to a foreign school.
Discussion: Section 428B(a)(2) of the HEA does not authorize the
Secretary to establish disbursement rules for PLUS Loans made to pay
for attendance at foreign institutions or for students enrolled in
study-abroad programs that
[[Page 64385]]
are different from the rules for other FFEL Loans for attendance at
those institutions.
Changes: None.
Comments: One commenter suggested that the regulations in Sec.
682.207(b)(1)(v)(C)(1) be revised to clarify that a lender or guaranty
agency must verify a student's enrollment with the home institution,
rather than with the foreign school, before making a direct
disbursement to a student in a study-abroad program.
Discussion: The Secretary agrees with the commenters.
Changes: Section 682.207(b)(1)(v)(C)(1) has been revised to clarify
that a lender or guaranty agency may make a disbursement directly to a
student enrolled in a study-abroad program only after verification of
the student's enrollment with the home institution.
Comments: One commenter did not agree that a lender or guaranty
agency should be required to verify that a continuing student is still
enrolled at the enrollment status for which the loan was certified
before making a disbursement of Stafford Loan funds directly to a
student at a foreign school. The commenter noted that, although the
preamble stated that the verification requirements in the regulations
are based on those in Dear Colleague Letter (DCL) G-03-348, this
requirement differs from that in the DCL, which simply required
verification that the student was accepted for enrollment at the
foreign school. The commenter felt that the institution should be
responsible for notifying the lender if the borrower's enrollment
status changed to less than half-time.
A couple of commenters did not believe that the regulations should
limit how a lender or guaranty agency may contact a foreign school or
home institution to verify enrollment. The commenters felt that other
forms of contact, in addition to contact by telephone or e-mail, such
as facsimile, should be acceptable.
One commenter was concerned that the regulations do not specify who
at a foreign school may authorize a disbursement to be sent directly to
a borrower. The commenter felt that this gap left the process open to
abuse.
Discussion: The intent of the statutory requirement is to require a
confirmation that a student who is attending or plans to attend a
foreign school is actually eligible to receive FFEL funds when those
funds will not be sent to the school, but will be disbursed directly to
a student. Therefore, we believe it is appropriate to require a lender
or guaranty agency to confirm that a continuing student's enrollment
(at least half-time) supports eligibility for the loan disbursement. As
the commenter noted, a change in enrollment status would affect a
student's eligibility for a loan only if the student has dropped below
half-time enrollment. Therefore, the lender or guaranty agency need
only confirm that the student is still enrolled at least half-time.
Because of concerns with timeliness and security, the Secretary
does not believe that all forms of contact are appropriate for the
verification of enrollment. However, the Secretary does agree that
contact by facsimile is acceptable.
The Secretary agrees that not just any individual at a foreign
school should be permitted to authorize a disbursement directly to a
student. In DCL GEN-06-11, the Department asked foreign schools to use
the modified institutional eligibility electronic application (EAPP) to
enter the names of the individuals who are authorized by the school to
certify FFEL Loan applications. The DCL noted that the Department
expects guaranty agencies or lenders to contact these individuals,
whose names will be accessible in the Department's Postsecondary
Education Participants Systems (PEPS), to verify enrollment. To the
extent that a foreign school notifies a guaranty agency or lender of
other individuals who are authorized to provide this information, the
guaranty agency or lender must verify the information with at least one
of the persons entered by the school on the EAPP that those officials
are authorized to act on behalf of the institution in administering the
FFEL Program. To allow the Secretary the flexibility to change this
process in response to possible systems changes, the Secretary does not
believe that the procedures for this contact should be specified in the
regulations. However, the Secretary has decided that the regulations
should require guaranty agencies and lenders to contact foreign schools
in accordance with any procedures specified by the Department.
Changes: Section 682.207(b)(2)(i) has been revised to permit a
lender or guaranty agency to contact a foreign school via facsimile to
verify a student's enrollment. In addition, Sec. 682.207(b)(2)(i)(A)
has been changed to require guaranty agencies and lenders to contact
foreign schools in accordance with any procedures specified by the
Secretary.
Parental Leave and Working Mother Deferments (Sec. Sec. 682.210(o) and
(r) and 685.204(d)(2))
Comments: Many commenters asked whether the deletion of section
428(b)(7)(A)(ii) from the HEA by the HERA effectively eliminated the
parental leave and working mother deferments for borrowers with loans
disbursed before July 1, 1993. The commenters are concerned that these
deferments will not be available to an otherwise eligible borrower
because the borrower must waive up to one month of the borrower's grace
period in order to meet the eligibility criteria for the deferment.
Discussion: The requirement that a borrower waive at least one
month of the grace period so the borrower may be certified as having
been enrolled at least half time within the six-month period preceding
the deferment start date in Sec. 682.210(o) applies only to the
parental leave deferment. Deferments are a term and condition of the
borrower's promissory note. The Congress, in making changes to the HEA
historically, has not eliminated deferments already granted to a
borrower as a term and condition of the borrower's loan, and it does
not appear that Congress intended to do so in this case. Accordingly,
otherwise eligible borrowers may continue to waive a month of the grace
period, if necessary, in order to qualify for the parental leave
deferment.
Changes: None.
Forbearance (Sec. 682.211)
Comments: Several commenters suggested that we eliminate Sec.
682.211(h)(3) of the FFEL regulations because section 8014(e) of the
HERA amended the HEA to remove the requirement that the terms of a
mandatory forbearance be in writing.
Discussion: While we agree that the HERA eliminated the requirement
that the terms of a mandatory forbearance agreement be in writing, we
also note that the HERA requires that the terms of a mandatory
forbearance agreed to by the lender and the borrower or endorser be
documented by a confirmation notice sent by the lender to the borrower/
endorser and by the lender recording the terms in the borrower's file.
We believe that, with the exception of administrative forbearances in
Sec. 682.211(f), the same procedures should apply to all the
forbearances. The interim final regulations amended Sec. 682.211(b)(1)
to reflect the new forbearance requirements. We believe that Sec.
682.211(h)(3) should also be changed to reflect the new requirements
that the lender send a notice to the
[[Page 64386]]
borrower/endorser and include a notation in the borrower's file
confirming the forbearance rather than simply eliminating the
requirement for a written forbearance agreement.
Changes: We have amended Sec. 682.211(h)(3) to reflect these
changes.
Teacher Loan Forgiveness (Sec. Sec. 682.215(c) and 685.217(c))
Comments: One commenter noted that the use of the word ``either''
with regard to a borrower qualifying for teacher loan forgiveness based
on teaching special education in ``either an eligible elementary or
secondary school'' could be misinterpreted. The commenter recommended
removing the word ``either'' to make it clear that a borrower could
combine teaching service in an eligible elementary school and an
eligible secondary school to qualify for teacher loan forgiveness as a
highly qualified special education teacher.
Discussion: Use of the word ``either'' was not intended to imply
that service as a highly qualified special education teacher in an
eligible elementary school and service as a highly qualified special
education teacher in an eligible secondary school could not be combined
to qualify a borrower for teacher loan forgiveness.
Changes: We have removed the word ``either'' from Sec. Sec.
682.215(c)(3)(ii)(B), 682.215(c)(4)(ii)(B), 685.217(c)(3)(ii)(B), and
685.217(c)(4)(ii)(B).
Payment of Special Allowance on FFEL Loans (Sec. 682.302)
Comments: One commenter asked us to clarify the effective date for
the change made by the HERA to the calculation of special allowance
payments for PLUS Loans.
Discussion: As reflected in the interim final regulations, PLUS
Loans made after January 1, 2000 are no longer subject to the minimum 9
percent trigger for special allowance payments. In accordance with the
effective date for the provision of the HERA that made this change,
lenders will be paid special allowance on these loans for activity
beginning April 1, 2006, which will be reflected on billing reports
submitted to the Department after June 30, 2006.
Changes: None.
Comments: Some commenters, particularly from the FFEL industry,
claimed that the regulations are impermissibly retroactive. In
particular, these commenters claimed that the interim final regulations
improperly applied the statutory changes made by the Taxpayer-Teacher
Protection Act of 2004 (TTPA), and the HERA, to periods before those
statutes became effective. The commenters pointed to the explanation of
certain terms in Sec. 682.302(f) as an example of the changes that
they felt were being improperly applied retroactively.
Discussion: The changes made to Sec. 682.302 are not retroactive.
Prior to the publication of the August 9 interim final regulations, the
regulatory provisions in Sec. 682.302 had not been updated since 1994,
except for a change to reflect the 1993 statutory amendment that
eliminated the 9.5 percent minimum special allowance payment (SAP) rate
on loans acquired with funds from a tax-exempt obligation originally
issued on or after October 1, 1993. Thus, the prior regulations did not
reflect guidance issued by the Department since 1993 to interpret the
HEA and the regulations (DCL L-93-161 (November 1993), L-93-163
(December 1993), and L-96-186 (March 1996), FP-05-01 and FP-06-01) or
the changes made to those requirements by the TTPA or HERA.
The regulations must reflect the rules for the special allowance
eligibility of both loans for which SAP at the 9.5 percent minimum rate
is now claimed and loans on which this rate may be claimed in the
future. The TTPA placed significant restrictions on the eligibility of
new loans for the 9.5 percent SAP, and the HERA significantly
restricted whether additional loans could acquire eligibility. However,
the eligibility of the great majority of loans on which a 9.5 percent
SAP is now and will be claimed depends on, or may be affected by,
transactions such as various refinancing transactions that occurred
prior to the effective date of either the TTPA or HERA. The prior
regulations did not state the consequences of some of those
transactions, even though those consequences had been well settled,
under the Department's interpretations of the law in effect when the
transactions occurred. To clarify the requirements for 9.5 percent SAP
eligibility, the interim final regulations first incorporate these
interpretations, and then address changes made by the TTPA to the
continued eligibility of these loans for 9.5 percent SAP, and by the
HERA as to whether loans may acquire that eligibility.
The interim final regulations include in Sec. 682.302(f) an
explanation of certain terms (refinance and originally issued) that
reflects Departmental interpretations and usage of those terms
historically. Based on that usage, it is reasonable to conclude that
the terms are already generally understood as explained in the
regulations.
The interim final regulations, as published on August 9, 2006, do
no more than provide loan holders (and other interested parties) an
orderly statement of the requirements for acquiring and continued
eligibility for 9.5 percent SAP for all cohorts of loans, both as in
effect before the 2004 and 2006 amendments to the HEA, and under the
2004 and 2006 amendments to the HEA. The interim final regulations did
not create or change the terms, conditions, and requirements for the
eligibility for the 9.5 percent SAP from those which already existed
under applicable law. To the extent that loan holders were in
compliance with the requirements of: (1) The then-current regulations;
(2) applicable prior Department interpretations of those regulations
and the HEA; and (3) changes made by the TTPA and by the HERA, the
billing status of loans was not changed with the publication of the
interim final regulations.
Changes: None.
Comment: Several commenters claimed that Sec. 682.302(e)(2) and
(3) improperly requires that a loan acquired with pre-October 1, 1993
tax-exempt funding be ``financed continuously'' by tax-exempt financing
to retain eligibility for SAP at the 9.5 percent minimum rate. Some
believed that the interpretations on which the Department relied in
adopting the interim final regulations had not been communicated to the
public, or that the regulations went beyond merely updating existing
regulations to reflect longstanding policy. Another commenter
questioned whether the ``debt'' to which Sec. 682.302(e)(2)(i)(B)
refers to as having been ``refinanced'' is a student loan or a bond.
Discussion: The term ``financed continuously'', to which the
comments refer, appears only in Sec. 682.302(e)(2). Section
682.302(e)(2) describes the special allowance rate applicable to any
loan acquired with funds from a source that makes the loan eligible for
a SAP at the 9.5 percent minimum rate that has been refinanced. All
loans that are initially eligible for a 9.5 percent SAP and have been
refinanced can be divided into two mutually exclusive groups. The first
group includes only those loans that have been refinanced exclusively
and continuously from tax-exempt sources. The second group includes all
loans not in the first group. The phrase ``financed continuously'' is
used to describe the first group, not to exclude the second group from
potential eligibility for SAP at the 9.5 percent minimum rate. The
interim final regulations contained no provisions that limit continued
eligibility for SAP at the 9.5 percent minimum rate only to loans in
the first group--those loans continuously refinanced from tax-
[[Page 64387]]
exempt sources. Some loans in the second group also retain that
eligibility after refinancing. The regulations add no condition on 9.5
percent SAP eligibility that was not already contained in the statute
or regulations.
The regulations accurately reflect Department interpretations of
applicable law that establish which SAP rate applied to loans
refinanced using tax-exempt sources. The Department has had numerous
discussions with program participants who have cited these
interpretations and it is clear that the loan industry has been aware
of the Department's interpretation of these terms. The regulations in
Sec. 682.302(e)(2)(i)(A) and (B) describe the first group of
refinanced loans--those continuously refinanced using tax-exempt
sources--and state that such loans qualify for a SAP at the 9.5 percent
minimum return rate.
These regulations rest squarely on the Department's interpretation
of the HEA as articulated in previous guidance issued in DCL 93-L-161
(November 1993), p. 13; Dear Colleague Letter 93-L-163 (December 1993),
p. 2. Under the Department's interpretation of the regulations included
in the DCLs, loans that were eligible for the 9.5 percent SAP rate
prior to a tax-exempt refinancing remained eligible after that
refinancing. Because refinancing from tax-exempt sources does not alter
eligibility of the loan for the 9.5 percent SAP rate, there is no need
to distinguish between loans involved in a single tax-exempt
refinancing and those involved in a series of tax-exempt refinancings.
The regulations therefore include in this first group all loans that
have been associated only with a tax-exempt refinancing, without regard
to the number of those refinancings. The phrase ``financed continuously
by tax-exempt obligations,'' in Sec. 682.302(e)(2)(i)(B)(2) simply
describes loans associated exclusively with tax-exempt refinancing.
The regulations do not exclude from eligibility for the 9.5 percent
SAP loans affected by other refinancings. The Department's regulations
in Sec. 682.302(e)(2)(ii) describe loans refinanced from sources other
than qualified tax-exempt sources. This second group consists of two
subgroups, which are distinguished by the treatment of the tax-exempt
obligation affected by the refinancing. If the prior tax-exempt
obligation is retired or deceased, SAP is payable at the taxable rate.
This rule has been in effect since 1985. If the prior tax-exempt
obligation has not been retired or defeased, SAP remains payable at the
9.5 percent minimum return rate as discussed in DCL 96-L-186 (March
1996).
The regulations use the words ``a loan is refinanced'' to describe
the refinancing of an individual student loan. The term ``refinance''
is commonly used as well to refer to the refunding of an outstanding
bond or other financial obligation. The regulations in Sec.
682.302(e)(2)(i) use the phrase to refer to a bond or other instrument
issued to refund an existing bond or other obligation of the issuer.
Changes: Section 682.302(e)(2) as revised in the interim final
regulations effectively explains the applicability of the SAP rates and
so it is not necessary for us to retain paragraph (c)(5) of Sec.
682.302. Therefore, subparagraph (c)(5) is removed.
Comments: One commenter objected to the explanation in Sec.
682.302(f)(2) that a bond is considered to be ``originally issued''
when issued to obtain funds to make or acquire loans in which the
Authority did not have an interest. This explanation, the commenter
noted, would exclude a tax-exempt obligation issued to refund an
existing taxable bond or to refinance loans already held by the
Authority. The provision would thus disqualify from eligibility for the
9.5 percent SAP loans acquired with proceeds of those obligations, even
if they had been issued prior to October 1, 1993.
Discussion: The provision addressing the phrase ``originally
issued'' is used to explain how the October 1, 1993, deadline affects
at least four different types of tax-exempt obligations: (a)
Obligations used to obtain funds to make loans or acquire loans from
third parties; (b) obligations that refund a pre-October 1, 1993,
qualifying obligation or are part of a series of such refunding issues;
(c) obligations used to refund a taxable obligation of the issuer; and
(d) obligations used to obtain funds to acquire loans that the
Authority made or purchased using funds from either a taxable
obligation or a tax-exempt obligation issued on or after October 1,
1993, but not to refund that obligation.
The language in Sec. 682.302(f)(2) to which the commenter objects
clearly applies to the ``new money'' issues, described in paragraph (a)
above. However, we agree with the commenter that the language could be
read to exclude from tax-exempt special allowance treatment loans
acquired with funds from tax-exempt obligations described in paragraphs
(c) and (d), even if the tax-exempt bond had been issued before October
1, 1993. That result would be contrary to the position taken in the
1985 regulations and contrary to our intent in using this particular
language.\1\ We also believe that the language should be revised to
make it clear that a tax-exempt refunding, or series of such
refundings, of a tax-exempt obligation does not change the SAP status
of loans made or purchased with funds obtained from the first such tax-
exempt obligation so refunded, as described in paragraph (b).
---------------------------------------------------------------------------
\1\ The term purchase includes acquisition of an interest in a
loan by means of a pledge of the loan, and the 1985 regulations
implicitly interpret the term purchase as used in section 438 of the
HEA to include acquisition of a loan by pledge, not merely
acquisition from another party.
---------------------------------------------------------------------------
Changes: The interim final regulations were intended to state, and
not change, existing law. Accordingly, we have revised Sec. 682.302 to
state, in new paragraph (f)(2)(i), that an obligation the proceeds of
which are used to make or purchase loans, including by pledge as
collateral for that obligation, is considered to be originally issued
on the date it is issued. The limitation that loans are considered
purchased only if the Authority has neither an existing legal or
equitable interest in the loan is removed. Second, the regulation is
revised to add a new paragraph (f)(2)(ii) to address specifically a
tax-exempt obligation that refunds, initially or in a series of such
refundings, a tax-exempt obligation the proceeds of which were used to
make or purchase loans (one described in paragraph (f)(2)(i)). Such a
tax-exempt refunding obligation is considered to be originally issued
on the date on which the initial tax-exempt obligation, described in
paragraph (f)(2)(i), was issued.
Basic Program Agreement (Sec. 682.401)
Comments: One commenter requested that we revise Sec.
682.401(b)(10)(iii) to clarify that a lender is required to charge an
insurance premium or Federal default fee.
Discussion: Sections 682.401(b)(10)(i)(A) and (B) clearly states,
with the exception of a Consolidation Loan or SLS or PLUS Loan
refinanced under Sec. 682.209(e) or (f), the requirements on the
collection of insurance premiums and Federal default fees by a guaranty
agency. Further clarification is unnecessary.
Changes: None.
Comments: Several commenters requested that a change be made to
Sec. 682.401(b)(14) to reflect the payment to lenders of exempt,
lender-of-last-resort, and other claims that may be paid at 100 percent
insurance.
Discussion: This section of the FFEL regulations outlines the basic
program agreement between the guaranty agency and the Secretary.
Specifically, Sec. 682.401(b)(14) outlines the guarantee
[[Page 64388]]
liability of the agency, which relates primarily to the payment of
default claims. Although other kinds of claims may be paid on a loan,
we do not believe that it would be appropriate to include these other
claim types, none of which can be reasonably anticipated at the time of
guarantee, in Sec. 682.401(b)(14).
Changes: None.
Comments: Several commenters stated that the HERA revised section
428(c)(2) of the HEA to require guarantors to establish procedures to
ensure that Consolidation Loans are not an excessive proportion of the
guaranty agency's recoveries on defaulted loans, but objected to the
inclusion in Sec. 682.401(b)(29) of the requirement that guarantors
submit these procedures to the Secretary for approval.
Discussion: We believe that if a guarantor is required by law to
establish procedures to ensure that Consolidation Loans are not an
excessive portion of the agency's recoveries on defaulted loans, then
the Secretary has a fiscal responsibility to review and approve such
procedures. The requirement to submit these procedures to the Secretary
for approval is also authorized by Sec. 682.401(d)(2).
Changes: None.
Identity Theft (Sec. Sec. 682.402 and 685.215)
Comments: Many commenters expressed concern regarding the
provisions of the interim final regulations that implement the HERA
provisions relating to the discharge of an FFEL or Direct Loan that was
falsely certified as the result of the crime of identity theft. Several
commenters felt that a definition of identity theft based on the
adjudication of a crime is too narrow and burdensome and that we should
adopt the definition of identity theft used in the Fair Credit
Reporting Act (FCRA) and by the Federal Trade Commission (FTC).
Many commenters felt that tying a discharge of an FFEL or Direct
Loan to a determination by a Federal, State or local court that the
crime of identity theft had occurred, and requiring documentation of
that fact, was unduly restrictive. The commenters believed that
requiring victims whose cases are actually prosecuted to await the
outcome of a judicial process for relief fails to provide discharges
and reimbursements in a timely fashion and fails to offer victims of
identity theft proper relief. Several commenters asked for
clarification on how a loan would be discharged under the common law
defense of forgery if a law enforcement agency does not pursue a
perpetrator of identity theft. Finally, the commenters requested that
we immediately adopt an explicit, reliable process that provides
sufficient protection to bona fide victims of identity theft and that
we also track cases of unresolved identity thefts within the
Department.
Several commenters did not agree with the requirement that a lender
and guarantor demand payment on a discharged loan from the perpetrator
and pursue collection action if payment in full is not received. These
commenters urged the Department to allow guarantors either to subrogate
loans discharged based on identity theft to the Department or refer the
loans to the appropriate enforcement agencies for action.
Several commenters stated that the provisions related to identity
theft would be better placed in a discrete section of the regulations.
They believe this approach would facilitate processing and reporting,
and ensure that lenders, guarantors, and other program participants
have access to comprehensive regulations in a single, identifiable
section.
Several commenters noted inconsistencies between the regulations
and the preamble with respect to identity theft. These commenters state
that the preamble erroneously suggested that the new regulations
provide for reimbursement to the loan holder only when perpetrator is
affiliated with the school. The commenters requested that preamble to
the final regulations accurately describe the identity theft provisions
in this regard.
Discussion: The HERA amended the HEA to authorize a discharge of a
FFEL or Direct Loan Program loan if the borrower's eligibility was
falsely certified because the borrower was a victim of the ``crime'' of
identity theft. The HERA specifically provides for a loan discharge
only when a ``crime'' of identity theft has occurred. For this reason,
the interim final regulations provide relief only to the victim of a
proven crime of identity theft.
The purpose of the Fair and Accurate Credit Transactions Act (FACT)
(which amended the FCRA) and similar legislation and the FTC rules is
to enable individuals who believe that their identifying information
has been misappropriated to alert parties who might extend credit to
the thief based on that stolen identity information. The purpose of the
identity theft provision in the HEA is different--to relieve borrowers
and lenders from liability on loans that result from proven misuse of
that information. Thus, the FACT Act requires credit reporting agencies
to post ``fraud alerts'' on an individual's credit record to deter
lenders from extending credit to a thief who uses the stolen identity
information, and to block the reporting of any information on the
record that the individual identifies as resulting from that identity
theft. 16 U.S.C. Sec. Sec. 1681c-1, 1681c-2. There is little, if any,
substantive difference between the FACT Act definition of ``identity
theft'' in 16 U.S.C. Sec. 1681a(q)(3) and the descriptive definition
used in the interim final regulations. Therefore, there is no reason to
use the specific FACT Act definition.
The commenters' claim that the regulations are unduly restrictive
is contrary to American common law. As indicated in the preamble to the
interim final regulations, under generally applicable laws, individuals
who do not apply for loans, execute promissory notes for loans or
knowingly accept the benefits of loan disbursements are not liable to
repay those loans, even if their names were forged on the loan
instrument. An individual who claims that his or her signature was
forged is not required to delay asserting that claim until a criminal
prosecution occurs and nothing in the Department's regulations require
such a delay. An individual who claims that his or her signature was
forged can assert that claim to oppose liability on a loan and the
holder of the loan must evaluate and accept or reject that claim
whether or not a criminal prosecution occurs.
The regulations require the guaranty agency, not the lender, to
demand payment from the perpetrator of the identity theft. Guaranty
agencies must ordinarily use due diligence to collect FFEL Program
loans and the perpetrator is liable for such a debt. In some instances,
the Department may choose to take assignment of the debt. However, the
regulations do not require a guaranty agency to take unusual or
extraordinary steps to collect this debt.
The comment that the regulations regarding identity theft discharge
relief should be placed in a separate section does not explain why such
treatment would improve clarity of the procedure. The provisions added
in the interim final regulations implement a specific discharge
provision added by the HERA to the other discharge relief available
under section 437(c) of the HEA. The regulations are not intended to
provide general guidance on handling claims that loan applications or
promissory notes have been forged where the claim does not rest on a
proven crime. Because each provision for discharge relief under section
437(c) of the HEA offers relief to borrowers or purported borrowers by
payment to the holder of the loan, it is logical to include
[[Page 64389]]
procedures for handling claims under the new discharge provision among
the existing procedures for claims for other kinds of discharge relief.
The comment suggesting that the Department adopt a process for
tracking what it refers to as unresolved identity thefts does not
appear to be practicable at this time. To the extent that this proposal
is meant to deter lenders from extending new credit based on new false
applications using the same individual's identity, the proposal
duplicates the procedure already required under the FACT Act. Lenders
must obtain a credit report in order to qualify an applicant for a PLUS
Loan, and therefore, the alert option available under the FACT Act can
be expected to provide effective prospective relief with respect to
applications for PLUS Loans.
Implementation of a system that would prospectively protect alleged
victims of identity theft from misuse under all the student loan
programs requires participation and input from many participants in the
loan programs. Such a process may be both costly and complicated. The
Department is open to considering practical proposals in the future.
Finally, the commenter is correct that there are inconsistencies
between the preamble to the interim final regulations and the interim
final regulations, themselves, regarding reimbursement to the loan
holder when the perpetrator of identity theft is affiliated with a
school. As noted in the preamble to the interim final regulations,
Sec. 682.402(e)(1)(i)(B) of the false certification discharge
provisions has, since 1994, made discharge relief, with the
accompanying reimbursement to the lender, available in instances in
which an individual's signature was forged on a promissory note or loan
application by the school. If the forgery is not committed by someone
affiliated with a school, the purported borrower would not ordinarily
be legally liable for the loan. However because the loan is not legally
enforceable against the borrower, the loan does not qualify for any
FFEL payments from the Department. The new identity theft provision in
Sec. 682.402(e)(1)(i)(C) allows the lender to be reimbursed when the
loan was made by reason of a crime of the theft of the identity of the
purported borrower, without regard to whether the thief was affiliated
with a school. The final regulations bar payment to the lender if the
theft was committed by the lender or an agent of the lender. The
preamble to the interim final regulations accurately stated these
elements of the regulation. We will revise Sec. 682.402(e)(1)(iii)(A)
to be consistent with the preamble discussion in the interim final
regulations.
While we believe that the interim final regulations are fully
consistent with the HEA and other laws, we are sympathetic to the
concerns of the commenters. We intend to include this issue on the
agenda for a future negotiated rulemaking to possibly consider other
approaches.
Changes: Section 682.402(e)(1)(iii)(A) has been revised by adding
the word ``not'' before the words ``pay reinsurance''.
Rehabilitation of Defaulted Loans (Sec. 682.405(a)(2)(i)(B))
Comments: Several commenters stated that the regulations for
rehabilitation of a defaulted loan do not account for borrowers who
make only sporadic payments before beginning the required number of
qualifying payments to rehabilitate the loan. They also claimed that
the regulations did not reflect the 20-day grace period for a timely
payment as provided in the statute.
Discussion: We believe the regulations accurately reflect the HEA
and Congressional intent. Borrowers must request, or in some fashion
initiate, loan rehabilitation so that the period during which the 9
qualifying payments must be made is clear for both the guaranty agency
and the borrower.
Additionally, a reasonable and affordable payment amount needs to
be established, and the consequences of loan rehabilitation, such as
the addition of collection costs to the rehabilitated loan amount, the
post-rehabilitation payment period and the likely increased payment
amount, need to be explained to the borrower. Although the borrower can
now make 9 qualifying payments over a 10 consecutive month period to
rehabilitate a defaulted loan, a borrower should not be encouraged to
make late payments or to miss a monthly payment as part of a loan
rehabilitation agreement.
Changes: None.
Comments: One commenter noted that the original Sec.
682.405(b)(1)(ii) through (v) had been removed from the interim final
regulations and asked if this was intentional.
Discussion: We thank the commenter for bringing this inadvertent
drafting error to our attention.
Changes: We have reinserted these paragraphs and renumbered them
accordingly.
Special Insurance and Reinsurance Rules (Sec. 682.415)
Comments: Some commenters asked the Secretary to interpret the
change in the HERA that reduced the insurance percentage paid to
lenders and lender servicers that have been designated as ``exceptional
performers'' not to apply to loans for which the first disbursement was
made before October 1, 1993. These commenters noted that, prior to
October 1, 1993, the HEA required guaranty agencies to provide 100
percent insurance to lenders, but that rate was later reduced to 98 and
97 percent. Until enactment of the HERA, however, lenders or lender
servicers who were designated as exceptional performers received 100
percent insurance on all claims. The HERA reduced the insurance for
exceptional performers to 99 percent. The commenters argue that the
HERA should not be interpreted to reduce the insurance on loans for
which the first disbursement was made before October 1, 1993 to 99
percent for exceptional performers. The commenters also argue that to
interpret the HERA to apply to loans for which the first disbursement
was made before October 1, 1993, would violate the lenders' contractual
and Constitutional rights.
Discussion: The Secretary does not agree with the commenters. The
HERA amended section 428I(b)(1) of the HEA to provide that a lender or
lender servicer designated for exceptional performance would receive 99
percent insurance on ``all loans for which claims are submitted for
payment by that eligible lender or servicer for the one-year period''
for which the lender or lender servicer has been designated. In making
this change, Congress eliminated all references to 100 percent
insurance for exceptional performers. Congress did not retain the 100
percent insurance for any group of loans. Thus, there is no statutory
basis for the Secretary to authorize 100 percent insurance on any
claims submitted by an exceptional performer after the effective date
of the HERA (July 1, 2006).
The Secretary also does not agree that this change violates any
contractual or constitutional rights of a lender. A lender chooses to
apply for exceptional performer status because of the benefits it
provides to the lender. A lender is not required to apply for such
status or to retain such status after it has been granted. Moreover,
Congress can modify the terms of the exceptional performer status or
end it completely without any violation of a lender's rights. In the
HERA, Congress chose to reduce the insurance coverage on loans held by
exceptional performers that were made before October 1, 1993,
apparently as a way of offsetting the overall costs of providing higher
insurance coverage to
[[Page 64390]]
exceptional performer lenders and lender servicers than to others. A
lender or lender servicer that has been designated as an exceptional
performer can still receive 100 percent insurance on loans disbursed
prior to October 1, 1993 by relinquishing its exceptional performer
status. By relinquishing its exceptional performer status, however, it
will be accepting a lower insurance rate on all other claims.
Changes: None.
School as FFEL Lender (Sec. 682.601(a) and (b))
Comments: Many commenters asked that we clarify the regulations
regarding a school lender's use of proceeds from the sale or other
disposition of loans for need-based grants. These same commenters
questioned the difference between the items identified in the
parenthetical phrase in Sec. 682.601(a)(8) and those identified as not
considered ``reasonable and direct administrative expenses'' in Sec.
682.601(b) and asked that these discrepancies be eliminated.
One commenter requested that we identify the mandated costs of
reduced origination fees and reduced interest rates as allowable,
reasonable and direct administrative expenses for school lenders. A
couple of commenters asked for guidelines on how a school lender should
use loan proceeds for required need-based grants in a manner that would
supplement, but not supplant non-Federal funds that would otherwise be
used for need-based student grant programs. The commenters also noted
that no definition of need-based grant was provided in the regulations.
One of those same commenters also asked us to clarify that a school
operating as a FFEL school lender would not be prohibited from
providing assistance to its students, other than Stafford Loans, from
institutional sources. Another commenter stated that required need-
based grants from loan proceeds should be based on the school lender's
actual net loan proceeds from the prior year.
One commenter suggested that Sec. 682.601(a)(9) be revised to
clarify that the loans a school lender must make prior to April 1, 2006
be FFEL program loans. Another commenter asked us to clarify whether a
FFEL school lender was required to conduct a separate independent audit
of its lender operation.
Discussion: In reviewing the regulatory provisions that address the
use of loan proceeds for need-based grants and allowable, reasonable
and direct administrative expenses, we agree that further clarification
is appropriate.
We believe that certain FFEL school lender's mandated or required
expenses can be characterized as programmatic expenses, but not as
direct administrative expenses under the HEA. As a result, Sec.
682.601(b) specifies that reasonable and direct administrative expenses
do not include the costs associated with securing financing, the cost
of offering reduced origination fees or reduced interest rates to
borrowers, or the cost of offering reduced Federal default fees to
borrowers. However, we have decided to permit a school lender to
exclude the costs of other statutorily mandated or necessary
programmatic expenses from the calculation of ``proceeds from the sale
or other disposition of loans'' that must be used for need-based
grants. The parenthetical phrase in Sec. 682.601(a)(8) addresses this
exclusion. Certain optional costs, such as reduced Federal default
fees, are not covered by the exclusion from loan proceeds or as a
reasonable and direct administrative expense.
A school that is also a FFEL Program lender should be able to
demonstrate on an ongoing basis that there is no pattern or practice of
reducing institutional funds available for use as non-Federal need-
based grants or scholarships as a result of the availability of lender
produced funds that must also be used for need-based grants.
An institution's continued commitment to use institutional as well
as school lending-produced proceeds for this purpose will demonstrate
that the school is supplementing, not supplanting, institutional funds
committed to need-based grants and scholarships.
We will not dictate a specific approach a school lender must use to
determine its budget for need-based grants from lending-produced
proceeds. The lender must be able to show clearly that all proceeds
from the sources listed in Sec. 682.601(a)(8), except for those
authorized to be used for reasonable and direct administrative expenses
and other required programmatic costs that can be netted from proceeds,
are used for need-based grants. We understand that award commitments
are made in advance of the start of the school's academic year and that
this period does not generally correspond with the school lender's
fiscal year. Determining the pool of funds available for need-based
grants based on the school lender's immediately preceding fiscal year's
lending performance, with an additional factor for increased proceeds
based on increased loan volume, if applicable, would appear to be a
reasonable approach. ``Need,'' for purposes of need-based grants, is
documented need for Title IV, HEA program purposes. The provisions
governing FFEL school lenders do not prohibit the school from making
other forms of student financial assistance available to its students.
As provided in Sec. 682.601(a)(7) and discussed in the preamble of
the interim final regulations, a FFEL school lender must submit a
compliance audit as a lender in accordance with the requirements
contained in Sec. 682.305(c)(2) for any fiscal year in which the
school engages in activities as an eligible lender, beginning with the
first fiscal year beginning on or after July 1, 2006. School lenders
subject to the Single Audit Act, 31 U.S.C. 7502, will be required under
Sec. 682.601(a)(7) to include its FFEL Program lending activities in
the annual audit and to include information on those activities in the
audit report, whether or not the lending activities or the student
financial aid programs are considered a ``major program'' under the
Single Audit Act. Other school lenders will have to arrange for a
separate audit of their lending activities using the Lender Audit Guide
available through the Department of Education's Office of Inspector
General.
In making the changes to clarify the audit requirements, we
determined that Sec. 682.305(c)(2)(v) and (vi) included outdated
references to other Departmental regulations and audit requirements. We
have corrected the citations to the audit requirements for governmental
entities in Sec. 682.305(c)(2)(v). We have also added nonprofit
organizations to Sec. 682.305(c)(2)(v), because amendments to the
Single Audit Act apply the same requirements to governmental entities
and nonprofit organizations. We have removed the separate discussion of
audit requirements for nonprofit organizations in Sec.
682.305(c)(2)(vi) and replaced it with a cross-reference to the school
lender audit requirements.
Changes: The requirement that school lenders have an annual audit
in Sec. 682.601(a)(7) has been amended to clarify that, in addition, a
school lender subject to the Single Audit Act must in addition during
years when the student financial aid cluster, as defined in OMB
Circular A-133 Compliance Supplement, is not audited as a major
program, also audit the school's lending activities as a major program
under the Single Audit Act. This additional requirement is without
regard to the amount of loans made. We have also made technical
corrections to Sec. 682.305(c)(2) as discussed above.
Section 682.601(a)(8) has been revised to remove the words ``which
does not include providing origination fees or interest rates at less
than the fee or rate
[[Page 64391]]
authorized under the provisions of the Act'' following the words
``need-based grants'' and before ``; and''. A technical change has also
been made to Sec. 682.601(a)(9) to reflect the requirement that an
eligible school lender must have made one or more FFEL program loans on
or before April 1, 2006.
Processing Loan Proceeds (Sec. Sec. 682.604 and 685.304)
Comments: Several commenters recommended requiring entrance and
exit counseling for graduate or professional students who borrow PLUS
Loans. The commenters noted that a graduate or professional student
PLUS borrower who has not also borrowed a Stafford Loan would never
have had the benefit of Stafford Loan entrance or exit counseling. In
addition, these commenters recommended that the exit counseling clarify
the different repayment rules for PLUS loans and Stafford Loans. Two
commenters suggested that graduate or professional students with both
Stafford Loans and PLUS Loans could be exempted from the entrance
counseling requirement for their PLUS Loans, because these borrowers
would have already received entrance and exit counseling on their
Stafford Loans.
Discussion: The HEA exempts PLUS Loan borrowers from exit
counseling requirements. Although the Secretary encourages institutions
to provide exit counseling to graduate and professional student PLUS
Loan borrowers, the Secretary does not have the authority to require
such counseling by regulation.
With regard to entrance counseling, FFEL lenders are already
required, under Sec. 682.205, to provide extensive disclosure
information to borrowers before disbursing a loan. This disclosure
information, which can be provided through either the rights and
responsibilities statement or a plain language disclosure sent to the
borrower, includes an explanation of when repayment of the loan is
required. Lenders are also required to provide a disclosure to
borrowers prior to the loan going into repayment. This disclosure must
include the borrower's repayment schedule, the due date of the first
installment payment, and the number, amount, and frequency of payments.
For Direct Loans, the Department provides essentially the same
information to borrowers that FFEL lenders provide under Sec. 682.205.
We believe that these disclosures are sufficient for the limited number
of graduate or professional student PLUS borrowers who have not
received Stafford Loan entrance counseling.
Changes: None.
Comments: One commenter requested that PLUS Loans be covered in the
overaward language in Sec. 682.604(h) because graduate and
professional students are now eligible PLUS Loan borrowers.
Discussion: We agree with the commenter that the overaward language
should be amended to include student PLUS Loans.
Changes: Section 682.604(h) has been amended to reflect this
change. We have also made the same change in Sec. 685.303(e) of the
Direct Loan Program regulations.
Borrower Eligibility (Sec. 685.200)
Comments: Several commenters recommended that we revise Sec.
685.200(b)(1)(iv) to allow a student Direct PLUS Loan applicant who is
determined to have an adverse credit history to receive a Direct PLUS
Loan if the student obtains an endorser who does not have an adverse
credit history. The commenters noted that the endorser option is
available to student PLUS applicants in the FFEL Program.
Discussion: We did not intend to deny student applicants for Direct
PLUS Loans the option of obtaining an endorser.
Changes: We have revised Sec. 685.200(b)(5) of the regulations to
more clearly reflect that a student Direct PLUS Loan applicant who is
determined to have an adverse credit history may receive a Direct PLUS
Loan if he or she obtains an endorser who does not have an adverse
credit history, or documents to the satisfaction of the Secretary that
there are extenuating circumstances.
Charges for Which Direct Loan Borrowers Are Responsible (Sec. 685.202)
Comments: Several commenters suggested that we revise Sec.
685.202(a)(3) to provide that the portion of a Direct Consolidation
Loan that is attributable to Health Education Assistance Loan Program
(HEAL) loans is subject to the same interest rate provision that
applies to Federal Consolidation Loans under Sec. 682.202(a)(4)(v).
The commenters noted that section 455(a)(1) of the HEA, as amended by
the HERA, requires Direct Consolidation Loans and Federal Consolidation
Loans to have the same terms, conditions, and benefits, unless
otherwise specified in Part D of the HEA.
Discussion: The HERA amended the HEA to require that Direct
Consolidation Loans have the same terms, conditions, and benefits as
Federal Consolidation Loans, unless otherwise specified in the law.
However, in this case, there is a specific interest rate provision for
Direct Consolidation Loans in section 455(b)(7)(C) of the HEA, and that
provision does not specify a different interest rate for the portion of
a Direct Consolidation Loan that is attributable to HEAL Loans.
Therefore, Direct Consolidation Loans are not subject to the provision
that applies to Federal Consolidation Loans under section 428C(d)(2) of
the HEA.
Changes: None.
Repayment Plans (Sec. 685.208)
Comments: Several commenters suggested that the HERA requires that
the graduated and extended repayment plans do not require a borrower to
repay the minimum amount allowed under statute. In addition, these
commenters suggested that a borrower's monthly payments under these
repayment plans must be at least the amount of interest and that we add
a provision that would disallow single graduated payments that exceed
three times any other graduated installment payment.
Discussion: We agree that the minimum annual repayment rules should
not apply to a graduated repayment plan. The HEA exempts graduated and
income sensitive repayment plans from the minimum annual repayment
provisions. The HEA does not exempt extended repayment plans from the
minimum annual payment requirement. In addition, the FFEL Program
regulations state that graduated and income sensitive repayment plans
may have installments less than the minimum. However, the FFEL Program
regulations do not provide for extended repayment plans to have
installments less than the minimum annual payment amount. The final
regulations provide that the 10-year graduated repayment plan and the
extended repayment plan can have graduated payments.
We do need to add to the regulations for the graduated repayment
plan, for borrowers entering repayment on or after July 1, 2006, a
provision that does not allow any single installment payment to be more
than three times the amount of any other payment.
Although the HEA does not specifically require that the payments
must be at least the amount of interest, we agree that the regulations
would be clearer by including a provision that monthly payments on all
Direct Loan Program repayment plans must be at least the amount of the
monthly accrued interest, except that the monthly payment amount under
the Income Contingent and Alternative repayment plans may be less than
the monthly accrued interest.
[[Page 64392]]
Changes: We have revised Sec. 685.208(g)(3) and 685.208(h)(2) to
provide that, under a graduated repayment schedule, a borrower's
payments may be less than $50 a month and any single installment
payment may not be more than three times the amount of any other
installment payment.
We have added a new paragraph (a)(2)(iv) in Sec. 685.220 of the
Direct Loan repayment regulations to provide that monthly repayment
plans, except Income Contingent and Alternative repayment plans, must
be at least the amount of the monthly accrued interest.
Consolidation (Sec. 685.220)
Comments: Several commenters recommended that we revise Sec.
685.220(c)(1) to clarify that, if a Federal Consolidation Loan is
consolidated into a Direct Consolidation Loan, only the portion of the
Federal Consolidation Loan that qualified for an interest subsidy will
be included in the subsidized portion of the new Direct Consolidation
Loan. The commenters noted that in many cases, only a portion of a
Federal Consolidation Loan qualifies for an interest subsidy.
Discussion: We agree that the current regulatory language is
unclear with respect to the treatment of Federal Consolidation Loans
that are included in the subsidized portion of Direct Consolidation
Loans.
Changes: We have revised Sec. 685.220(c)(1) to clarify that only
the portion of a Federal Consolidation Loan that qualified for an
interest subsidy will be included in the subsidized portion of a Direct
Consolidation Loan.
Comments: Several commenters pointed out that Sec.
685.220(d)(1)(ii)(E) and (F) prohibit a borrower from consolidating a
loan that is subject to a judgment or an order for wage garnishment
unless the judgment has been vacated or the wage garnishment order has
been lifted at the time the borrower applies for a Direct Consolidation
Loan. In contrast, the corresponding FFEL Program regulations in Sec.
682.201(c) provide that a judgment or wage garnishment order must have
been vacated or lifted at the time a Federal Consolidation Loan is
made. The commenters recommended that we revise Sec. 685.220 to be
consistent with the FFEL Program requirements related to the
consolidation of loans subject to a judgment or wage garnishment.
Discussion: We agree with the commenters that the Direct Loan
Program regulations should make it clear that the judgment and wage
garnishment eligibility requirements must be met at the time the Direct
Consolidation Loan is made rather than at the time of the borrower's
application for the loan.
Changes: We have revised Sec. 685.220(d) to clarify that the
eligibility requirements for consolidating a loan subject to a judgment
or wage garnishment must be met at the time a Direct Consolidation Loan
is made.
Comments: To ensure that Direct Loan Program borrowers have the
same options for resolving a default as FFEL Program borrowers, some
commenters recommended that the Secretary clarify in the regulations
that a borrower with a defaulted Direct Consolidation Loan remains
eligible for loan rehabilitation with a repayment plan that provides
for reasonable and affordable payments such as those available under an
income contingent repayment plan. Other commenters recommended that the
Secretary amend the Direct Loan Program regulations to allow a borrower
to consolidate a defaulted Direct Consolidation Loan if the borrower
first makes satisfactory repayment arrangements on the defaulted loan
and includes at least one additional eligible loan in the
consolidation.
Discussion: There is nothing in the regulations that prohibits a
borrower with a defaulted Direct Consolidation Loan from entering into
an agreement to rehabilitate that loan under a repayment plan that
provides for reasonable and affordable payments.
We agree that the Direct Loan Program regulations, as currently
written, might suggest that a borrower with a defaulted Direct
Consolidation Loan is ineligible to consolidate that loan into a new
Direct Consolidation Loan under any conditions. However, this was not
our intent. A borrower with a defaulted Direct Consolidation Loan may
consolidate that loan into a new Direct Consolidation Loan if the
borrower includes at least one additional eligible loan in the
consolidation, and meets the other eligibility requirements that apply
to borrowers who wish to consolidate a defaulted loan.
Changes: We have revised the regulations in Sec. 685.220(d)(1)(ii)
to clarify that a borrower may consolidate a defaulted Direct
Consolidation Loan if the borrower: (1) makes satisfactory repayment
arrangements on the defaulted loan or agrees to repay the new Direct
Consolidation Loan under the income contingent repayment plan; and (2)
includes at least one additional eligible loan in the consolidation.
Agreements Between an Eligible School and the Secretary for
Participation in the Direct Loan Program (Sec. 685.300)
Comments: Several commenters recommended that we amend the
regulations to reflect the Department's previous guidance that a school
that awards Direct Subsidized Loans and Direct Unsubsidized Loans to
its graduate or professional students through the Direct Loan Program
may award PLUS Loans to its graduate or professional students through
the FFEL Program, and that a school may also award Direct PLUS Loans to
its graduate and professional students through the Direct Loan Program
and Subsidized and Unsubsidized Federal Stafford Loans through the FFEL
Program.
Discussion: We agree that the Department's prior guidance should be
incorporated in the regulations.
Changes: We have revised Sec. 685.300(b)(8) to clarify that a
school may award a PLUS Loan to a parent or to a graduate or
professional student through either the Direct Loan Program or the FFEL
Program, and a Stafford Loan through the other loan program to a
dependent undergraduate or graduate or professional student borrower
for the same period of enrollment. However, a school may not award the
same type of loan (i.e., Stafford or PLUS) from different loan programs
to the same student or parent borrower for the same period of
enrollment.
Executive Order 12866
Regulatory Impact Analysis
Under Executive Order 12866, the Secretary must determine whether
this regulatory action is ``significant'' and therefore subject to the
requirements of the Executive order and subject to review by the OMB.
Section 3(f) of Executive Order 12866 defines a ``significant
regulatory action'' as an action likely to result in a rule that may
(1) have an annual effect on the economy of $100 million or more, or
adversely affect a sector of the economy, productivity, competition,
jobs, the environment, public health or safety, or State, local or
tribal governments or communities in a material way (also referred to
as an ``economically significant'' rule); (2) create serious
inconsistency or otherwise interfere with an action taken or planned by
another agency; (3) materially alter the budgetary impacts of
entitlement grants, user fees, or loan programs or the rights and
obligations of recipients thereof; or (4) raise novel legal or policy
issues arising out of legal mandates, the President's priorities, or
the principles set forth in the Executive order.
[[Page 64393]]
Pursuant to the terms of the Executive order, it has been
determined this regulatory action will have an annual effect on the
economy of more than $100 million. Therefore, this action is
``economically significant'' and subject to OMB review under section
3(f)(1) of Executive Order 12866. The Secretary accordingly has
assessed the potential costs and benefits of this regulatory action and
has determined the benefits justify the costs.
Need for Federal Regulatory Action
These final regulations are needed to implement recent amendments
to the HEA that affect students, borrowers and program participants in
the Federal student aid programs authorized under Title IV of the HEA.
The Secretary has limited discretion in implementing most of these
provisions. The majority of the changes included in these final
regulations simply modify the Department's regulations to reflect
statutory changes made by the HERA and the other laws mentioned
earlier. These statutory provisions are either already effective or
will be effective shortly.
The Secretary has exercised limited discretion in implementing the
HERA provisions in the following areas:
Direct Assessment: The HERA extends eligibility for Title
IV, HEA programs to instructional programs using or recognizing the use
by others of direct assessment of student learning;
Identity Theft: The HERA authorizes a discharge of a FFEL
or Direct Loan Program loan if the borrower's eligibility to borrow was
falsely certified because the borrower was a victim of the crime of
identity theft; and
Special Allowance Payments: The HERA modifies the
conditions under which a loan holder qualifies for special allowance
interest benefits related to PLUS loans the first disbursement of which
was made on or after January 1, 2000.
The following section addresses the alternatives that the Secretary
considered in implementing these discretionary portions of the HERA
provisions.
Regulatory Alternatives Considered
Direct Assessment Alternatives: In developing the direct assessment
regulations, the Secretary drew upon the Department's experience with
Western Governors University (WGU), the only institution currently
participating in the Title IV student financial assistance programs
that uses direct assessment, in lieu of credit or clock hours, as a
measure of student learning. WGU became an eligible institution by
participating in the Distance Education Demonstration Program.
The Secretary looked at how the Title IV student financial aid
rules had been applied in both the nonterm and non-standard term models
employed by WGU and identified basic principles on which to base the
regulations. One principle is that institutions that use direct
assessment would need to develop equivalencies in credit or clock hours
in terms of instructional time for the amount of student learning being
assessed. This was necessary because many applicable Title IV, HEA
program requirements use time and/or credit or clock hours to measure
things other than student learning. In addition, institutions would
have to define enrollment status, payment periods, and satisfactory
academic progress.
A second principle is tied to the statutory language that
characterizes direct assessment programs as instructional programs. The
Secretary determined that institutions must provide a means for
students to fill in the gaps in their knowledge and that Title IV, HEA
program funds should only be used to pay for learning that occurs while
the student is enrolled in the program.
The Secretary considered what should constitute ``instruction'' in
a direct assessment program. The word ``instruction'' is not
specifically defined in the Department's regulations and, in its
ordinary meaning the word connotes teaching. There are several other
ways, however, in which an institution might assist students to prepare
for assessments. The Secretary considered whether the definition of
instructional time in Sec. 668.8(b)(3), which is used for other types
of programs, could be used for direct assessment programs and
determined that the definition was not sufficiently broad to be used in
this context.
The Secretary recognized that institutions offering direct
assessment programs might use courses or learning materials developed
by other entities, such as training and professional development
organizations and other educational institutions, to assist students in
preparing for the assessments. The Secretary considered whether the use
of outside resources could be considered contracting out a portion of
an educational program and determined that it could be. Therefore, the
Secretary included in the direct assessment regulations a provision
that exempts direct assessment programs from the limitations on
contracting for part of an educational program.
Identity Theft Alternatives: Section 8012 of the HERA authorizes a
discharge of a FFEL or Direct Loan Program loan under section 437(c) of
the HEA if the eligibility of the borrower was falsely certified as a
result of the crime of identity theft. In developing regulations to
implement section 8012, we sought to reflect the statutory language
that requires the Department to discharge the borrower's responsibility
to repay the loan when a ``crime of identity theft'' has occurred. The
final regulations require that to receive a discharge on a loan, an
individual must provide the holder of the loan, a copy of a local,
State, or Federal court verdict or judgment that conclusively
determines that the individual who is the named borrower of the loan
was the victim of the crime of identity theft. We adopted this standard
as an inexpensive and reliable way to implement the new discharge
provision. If the perpetrator of an identity theft is never prosecuted,
and no judicial determination that a crime occurred is rendered, a
borrower can still be relieved of any responsibility to repay the loan
under the common law (and in many instances, State law) defense of
forgery. We stressed this consideration in the preamble to the interim
final regulations.
One alternative we considered was to authorize a discharge for
``identity theft'' based on representations from the individual, much
as is now done for closed school discharge relief, that the crime of
identity theft had been committed, and that the claimant was the victim
of that criminal act. We rejected this alternative as costly,
unworkable, and unnecessary to provide relief to the individuals who
may be victims of this crime. Under this alternative, the claimant and/
or the lender would be required to submit evidence needed to establish
whether conduct has occurred that would constitute the crime of
identity theft. That evidence may be voluminous, difficult to obtain,
and would likely include witness testimony. Amassing and transmitting
that evidence would be difficult and costly for lenders and claimants.
Furthermore, determining whether a crime has been committed requires
discerning the identity of the perpetrator and determining the state of
mind of that person. Neither the Department nor the guaranty agency is
authorized to determine whether that evidence shows that a crime has
been committed. That determination is routinely and reliably made
through the judicial process, which is designed to perform this
function. Moreover, there
[[Page 64394]]
is no need to ignore the judicial process in order to give relief to
those individuals who did not in fact take out the loans for which they
are listed as borrowers. Under State statutes and common law,
individuals whose signatures have been forged on loan documents are not
liable for those debts. Individuals who show that their signatures have
been forged on loan documents, and that they neither authorized nor
received a loan made in their name, are not held liable by the
Department. For these reasons, we rejected the alternative that would
entail an extra-judicial proof of a crime. Instead, we simply require
the claimant to submit a copy of a judicial verdict that identity theft
was committed.
Special Allowance Payment Alternatives: The Department considered a
number of alternatives related to the effective date for implementation
of section 8006 of the HERA, which eliminates the limitation that
special allowance payments on PLUS Loans for which the first
disbursement was made on or after January 1, 2000, only be paid if the
formula for determining the borrower interest rate produces a rate that
exceeds the statutory maximum borrower rate of 9 percent.
The first alternative was to make this provision retroactive to
January 1, 2000, an approach that would result in substantial
additional special allowance payments to many PLUS Loan holders.
Although this option was suggested by some members of the student loan
industry, the Department determined that this approach was inconsistent
with the statute.
Other alternatives considered reflected differing interpretations
of the provision's effective date. Section 8006 states that
``amendments made by this subsection shall not apply with respect to
any special allowance payment made under section 438 of the Higher
Education Act of 1965 (20 U.S.C. 1087-1) before April 1, 2006.'' Since
special allowance payments are made on a quarterly basis, the
Department had to determine whether the statute's intent was to remove
the limitation on PLUS special allowance payments for the quarter of
January-March 2006--the first quarter for which bills would be
submitted, verified, and paid after April 1, 2006 or for the quarter of
April-June 2006, the first full quarter after the HERA's enactment. The
Department estimated Federal costs would increase by $53 million if the
limitation was removed for the January-March quarter. This estimate was
based on data on special allowance rates and balances for the affected
quarter. After a careful review of the statutory language, the
Department determined that the statute's likely intent was to remove
the limitation for the January-March 2006 quarter, since this was the
first quarter for which payments would be made after April 1, 2006. The
final regulations reflect this determination.
Benefits
Given the breadth of these regulations, the discussion of benefits
and costs will be limited in most cases to provisions with an economic
impact of $100 million or more in any one year. By facilitating the
implementation of changes made in the HERA and other recent student
aid-related statutes, these final regulations will support the
provision of a broad range of student benefits. In general, these
benefits reduce the costs of higher education to students, increase the
amount of Federal student aid or increase the number of students
eligible for Federal student aid. The economic benefits of any specific
change are difficult to discern, as they have direct benefit to the
individual aid recipient and broader societal benefits resulting from
the economic impact and tax-paying potential of a well-educated
population. Research indicates that reductions in the cost of higher
education are correlated to increased student enrollment, retention,
and completion. The U.S. Census Bureau has found people with a
bachelor's degree realize as much as 75 percent higher lifetime
earnings than those whose education is limited to a high school degree.
(``The Big Payoff: Educational Attainment and Synthetic Estimates of
Work-Life Earnings,'' July 2002.)
Specific benefits provided to student borrowers in these final
regulations include increases in certain FFEL and Direct Loan Program
loan limits; reduced origination fees in the FFEL and Direct Loan
Programs; broadened eligibility for PLUS Loans to include graduate and
professional students; expanded access to distance education programs;
permanently expanded loan forgiveness for highly qualified math,
science, and special education teachers at low-income schools; and a
new deferment for FFEL, Direct Loan and Perkins Loan Program borrowers
who serve on active duty military service during times of war or
national emergency. These benefits are projected to increase Federal
outlays by $5.2 billion for loans originated in FY 2006-2010. This
estimate was developed using projected interest rate, loan volume, and
borrower demographic data used in preparing the FY 2007 President's
Budget. Projected loan volume and borrower data are based on trend
analyses of actual program activity, primarily drawn from the National
Student Loan Data System (NSLDS) and other Department systems.
These estimates were derived from the Department's projections that
show that loan volume will increase an estimated $3.2 billion in award
year 2007-2008 and $11.6 billion from fiscal year 2006-2010 as a result
of higher loan limits. Over the latter period, average loan amounts are
estimated to increase by $184 for Stafford Loans and $156 for
Unsubsidized Stafford Loans. The phased reduction of loan origination
fees is estimated to reduce fees by $5.6 billion on 70,000 loans over
award years 2006-2010.
The expansion of distance education made possible by the changes to
the ``50 percent rule'' and the definition of correspondence courses
will allow institutions to more aggressively pursue new communication
technologies to provide students significantly greater flexibility in
the scheduling and location of academic programs. The Department
estimates this expanded flexibility will increase the pool of students
eligible for Federal student aid by 30,000 students a year in 2006 and
2007, of whom 17,000 per year will be eligible to receive a Pell Grant.
With an average grant of $2,306, these additional Pell Grant recipients
will receive an estimated $196 million in Pell Grant aid over 2006-
2010. This estimate is based on a trend analysis of Pell Grant program
data and projections of institutional and program eligibility for
Federal student aid derived through the use of accreditation data. The
Department included in these estimates that additional students made
eligible for student aid would borrow $441 million in student loans
over 2006-2010.
The regulation's teacher loan forgiveness provisions offer
incentives to help address longstanding national and regional
elementary and secondary school staffing problems. Many studies (Boe,
Bobbitt, & Cook, 1997; Grissmer & Kirby, 1992; Murnane et al. , 1991;
Rumberger, 1987) and extensive research prepared for the National
Commission on Mathematics and Science Teaching) have found math,
science, and special education to be fields with especially high
turnover and those predicted most likely to suffer shortages. More than
tripling the teacher loan forgiveness amount--from $5,000 to $17,500--
for qualifying teachers in these fields should offer a powerful
incentive for recruitment and retention, especially given the
additional eligibility requirement that recipients
[[Page 64395]]
teach for five consecutive years before receiving the benefit. The
Department estimates this expanded benefit will increase Federal loan
subsidy costs in the FFEL and Direct Loan programs by $825 million for
loans originated in 2007-2010. These estimates assume over 32,000
teachers will be eligible for additional forgiveness amounts,
increasing the average amount forgiven for those borrowers by
approximately $8,500, from $4,700 to $13,300. (The additional benefits
were available for loans made in 2006 as a result of the Taxpayer-
Teacher Protection Act of 2004, so for the purposes of this analysis
additional benefits have only been considered for 2007 and beyond.)
This estimate was developed using projected interest rate, loan volume,
and borrower demographic data used in preparing the FY 2007 President's
Budget. Estimates of borrower eligibility were based on program data--
primarily from NSLDS--demographic information from the National Center
for Education Statistics' Schools and Staffing Survey.
Lastly, the Department's estimates took into account the creation
of a new deferment related to active-duty military service during a war
or national emergency is estimated to reduce interest payments by an
average of $1,500 for 21,000 borrowers.
In addition to implementing expanded borrower benefits, these final
regulations also implement a number of provisions intended to improve
the cost-effectiveness and efficiency of the FFEL and Direct Loan
programs, streamline program operations for participating institutions,
and standardize loan terms and conditions across the two programs.
These changes are estimated to reduce Federal outlays by $7.0 billion
for loans made in FY 2006-2010, freeing up resources for other urgent
requirements. This estimate was also developed using projected interest
rate, loan volume, and borrower demographic data used in preparing the
FY 2007 President's Budget. Projected loan volume, guaranty agency and
lender information, and borrower data are based on trend analyses of
actual program activity, primarily drawn from NSLDS and other
Department systems.
Provisions intended to enhance loan program efficiency include a
number of changes intended to promote risk-sharing by FFEL participants
through reduced program subsidies, including: restrictions on higher-
than-standard special allowance payments for loans funded through tax-
exempt securities; provisions under which the Department will recover
excess interest paid to loan holders when student interest payments
exceed the special allowance level set in the statute; and a reduction
in loan holder's insurance against default from 98 percent to 97
percent of a loan's principle and accrued interest. Given the broad
availability of FFEL program loans--over 4,000 lenders provided more
than $43 billion in new loans and an additional $53 billion in
consolidation loans in FY 2005--these changes are not expected to
reduce student and parent access to loan capital.
The student loan industry features high competition among loan
providers, using an array of interest rate discounts and other borrower
benefits to attract volume. The overwhelming majority of student loans
are sold by the originating lender in the secondary market. The impact
on individual lenders of HERA provisions reducing Federal subsidies are
inestimable; a substitution of subsidies for student interest rate cuts
may occur or the secondary market price of securitized loans may be
revalued. Given the high level of government guaranty on these loans,
as well as the guaranteed rate of return, continued access to loan
capital for all borrowers should be assured. The impact on individual
loan holders may be mitigated by investment and tax considerations from
their investment portfolios as a whole. Higher borrower loan limits and
standardized repayment terms may increase long-term interest income to
some loan holders under these regulations.
The estimates were derived from changes to limit the payment of
higher-than-standard special allowance on loans funded through tax-
exempt securities, balances eligible to receive the higher special
allowance payments are estimated to decrease from $15.5 billion in FY
2006 to $8.3 billion in FY 2010. While the recovery of excess interest
subsidies produced no estimated savings under interest rate projections
used for the FY 2007 President's Budget, this policy does save
significant amounts under the probabilistic interest rate forecasting
methodology used by the Congressional Budget Office and adopted by the
Administration for the FY 2007 Mid-Session Review. These savings are
not included in the estimate of total savings discussed above, as this
was developed prior to the Mid-Session Review. Reducing lender
insurance against default from 98 percent to 97 percent is estimated to
decrease Federal payments by $37.5 million over FYs 2006-2010.
Lastly, the final regulations include a number of provisions
intended to standardize terms and conditions and broaden borrower
choices, particularly for consolidation loans. These changes include
the repeal of the single holder rule, which limits the ability of FFEL
borrowers whose loans are held by a single holder to consolidate with
other lenders, and the standardization of graduated and extended
repayment plans--previously different for Direct Loans and FFEL--on the
FFEL model. The repeal of the single holder rule should give all
borrowers access to interest rate discounts and other benefits
available through the highly competitive consolidation loan market. The
standardization of repayment plan terms will eliminate a possible
source of confusion for borrowers and promote equity across the two
loan programs. Under this provision, the Department estimates more
Direct Loan borrowers who wish to obtain longer-than standard repayment
plans will consolidate their loans. As a result, the estimated
percentage of Stafford Loan borrowers in standard repayment will
increase from 76 percent to 87 percent, while the percentage in
graduated and extended repayment will decrease from 23 percent to 11
percent.
These provisions also are expected to improve market transparency
and remove transaction barriers for loan borrowers, improving market
openness and efficiency for both borrowers and loan providers.
Costs
These final regulations include a number of provisions that will
impose increased costs on some borrowers, such as an increase in the
loan interest rate for FFEL PLUS borrowers, the elimination of in-
school and joint consolidation loans, and the mandatory imposition of
the previously optional 1 percent guaranty agency default insurance
premium. (At the same time, these provisions will reduce the Federal
costs of these programs and, in the case of the guaranty fee, improve
the financial stability of guaranty agencies. Only 14 of 35 agencies
collected this fee in FY 2005; the mandatory imposition of the fee is
estimated to add $1.5 billion to the balance of agency Federal Funds
over 2006-2010.) Prior to the HERA, these provisions allowed loan
providers or guaranty agencies to discriminate among borrowers through
the unequal distribution of borrower costs. While some borrowers may
lose unearned benefits through these statutory and regulatory changes,
market equitability and transparency are improved.
These final regulations also authorize the Secretary to waive a
student's Title IV grant repayment if the student withdrew from an
institution of higher education because of a major disaster as
[[Page 64396]]
declared by the President in accordance with the Robert T. Stafford
Disaster Relief and Emergency Assistance Act. The Secretary will
exercise this waiver authority on a case-by-case basis after
determining that a major disaster has significantly affected recipients
of Title IV grant aid.
Because entities affected by these regulations already participate
in the Title IV, HEA programs, these lenders, guaranty agencies, and
schools must have already established systems and procedures in place
to meet program eligibility requirements. These regulations generally
involve discrete changes in specific parameters associated with
existing guidance--such as changes in origination fees, loan limits, or
reinsurance percentages--rather than wholly new requirements.
Accordingly, institutions wishing to continue to participate in the
student aid programs have already absorbed most of the administrative
costs related to implementing these final regulations. Marginal costs
over this baseline are primarily related to one-time system changes
that, while possibly significant in some cases, are an unavoidable cost
of continued program participation. The Department is particularly
interested in comments on possible administrative burdens related to
these system or process changes.
Assumptions, Limitations, and Data Sources
Because these final regulations largely restate statutory
requirements that would be self-implementing in the absence of
regulatory action, cost estimates provided above reflect a pre-
statutory baseline in which the HERA and other statutory changes
implemented in these regulations do not exist. Costs have been
quantified for five years, as over time this has been a typical period
between reauthorizations of the HEA.
In developing these estimates, a wide range of data sources were
used, including the NSLDS, operational and financial data from
Department of Education systems, and data from a range of surveys
conducted by the National Center for Education Statistics such as the
2004 National Postsecondary Student Aid Survey, the 1994 National
Education Longitudinal Study, and the 1996 Beginning Postsecondary
Student Survey.
Elsewhere in this SUPPLEMENTARY INFORMATION section we identify and
explain burdens specifically associated with information collection
requirements. See the heading Paperwork Reduction Act of 1995.
Accounting Statement
As required by OMB Circular A-4 (available at http://www.Whitehouse.gov/omb/Circulars/a004/a-4.pdf), in Table 2 below, we
have prepared an accounting statement showing the classification of the
expenditures associated with the provisions of these final regulations.
This table provides our best estimate of the changes in Federal student
aid payments as a result of these final regulations. Expenditures are
classified as transfers to postsecondary students; savings are
classified as transfers from program participants (lenders, guaranty
agencies).
Table 2.--Accounting Statement: Classification of Estimated Expenditures
[In millions]
------------------------------------------------------------------------
Category Transfers
------------------------------------------------------------------------
Annualized Monetized Transfers............ $976.
From Whom To Whom? Federal Government to
Postsecondary Students;
Student Aid Program
Participants to Federal
Government.
------------------------------------------------------------------------
Paperwork Reduction Act of 1995
We received one comment on the Paperwork Reduction Act portion of
the interim final regulations. The commenter disagreed with the
Paperwork Reduction Act information collection burden analysis for the
changes we made to Sec. 682.604. These changes implemented section
8010 of the HERA to end the exemption from multiple disbursement
requirements for eligible foreign institutions. Our analysis stated
that, in the vast majority of cases, the lender or guaranty agency is
already required to disburse a FFEL Program Loan in two installments as
a regular business practice and that this change would produce no
additional burden for foreign schools.
The commenter stated that, while the requirement to disburse a loan
in two installments is a regular business practice at U.S.
institutions, prior to publication of the interim final regulations, it
had not been true for foreign schools. The commenter stated that
disbursing a loan in two installments is a new burden for foreign
schools and for lenders and guaranty agencies that provide loans to
their American students enrolled in foreign schools.
As a result of public comment, we have reconsidered and recognized
the burden associated with the elimination of the exemption of single
disbursement of FFEL Loans to students attending foreign institutions.
While there is additional burden associated with making two
disbursements of a FFEL Loan for a student attending a foreign
institution, the burden is primarily at the institution in the
processing of an additional disbursement. Since the normal business
process for a lender or guaranty agency includes making multiple
disbursements of FFEL Loans, there is no significant additional burden
to the lender or guaranty agency. These additional activities will
increase burden hours by 20,000. A Paperwork Reduction Act submission
for OMB Control Number 1845-0020, which covers the burden in Sec.
682.604, has been submitted to OMB for approval.
As noted in the interim final rules, the Department has been
working with its major stakeholders to develop the forms and
applications necessary to implement many of the provisions of this
rulemaking activity. The Department plans to separately publish the
required Federal Register notices for the collections of information
associated with the following sections: active duty military
(Sec. Sec. 674.34, 682.210, and 685.204), obtaining and repaying a
loan (Sec. 682.102), identity theft (Sec. 682.402), and consolidation
(Sec. 685.220).
OMB has already approved the increased burden for the information
collection requirements associated with the teacher loan forgiveness
provisions (Sec. Sec. 682.215 and 685.217) under OMB Control Number
1845-0059.
Assessment of Education Impact
Based on our own review, we have determined that these final
regulations do not require transmission of information that any other
agency or authority of the United States gathers or makes available.
Electronic Access to This Document
You may view this document, as well as all other Department of
Education documents published in the Federal Register, in text or Adobe
Portable Document Format (PDF) on the Internet at the following site:
http://www.ed.gov/news/Fedregister.
To use PDF you must have Adobe Acrobat Reader, which is available
free at this site. If you have questions about using PDF, call the U.S.
Government Printing Office (GPO), toll free, at 1-888-293-6498; or in
the Washington, DC, area at (202) 512-1530.
Note:
The official version of this document is the document published
in the Federal Register. Free Internet access to the official
edition of the Federal Register and the Code
[[Page 64397]]
of Federal Regulations is available on GPO Access at: http://www.gpoaccess.gov/nara/index.html.
List of Subjects
34 CFR Part 668
Administrative practice and procedure, Colleges and universities,
Consumer protection, Education, Grant programs--education, Loan
programs--education, Reporting and recordkeeping requirements, Student
aid, Vocational education.
34 CFR Part 673
Administrative practice and procedure, Colleges and universities,
Consumer protection, Education, Employment, Grant programs--education,
Loan programs--education, Reporting and recordkeeping requirements,
Student aid, Vocational education.
34 CFR Parts 682 and 685
Administrative practice and procedure, Colleges and universities,
Education, Loans program--education, Reporting and recordkeeping
requirements, Student aid, Vocational education.
Dated: October 25, 2006.
Margaret Spellings,
Secretary of Education.
0
For the reasons discussed in the preamble, the Secretary amends parts
668, 673, 674, 682, and 685 of title 34 of the Code of Federal
Regulations as follows:
PART 668--STUDENT ASSISTANCE GENERAL PROVISIONS
0
1. The authority citation for part 668 continues to read as follows:
Authority: 20 U.S.C. 1001, 1002, 1003, 1085, 1091b, 1092, 1094,
1099c, and 1099c-1, unless otherwise noted.
Sec. 668.2 [Amended]
0
2. Section 668.2 is amended in paragraph (b) in the first sentence of
the definition of Federal PLUS program by adding the word ``dependent''
immediately after the words ``encourages the making of loans to parents
of''.
0
3. Section 668.10 is amended by revising paragraph (a)(3) introductory
text to read as follows:
Sec. 668.10 Direct assessment programs.
(a) * * *
(3) All regulatory requirements in this chapter that refer to
credit or clock hours as a measurement apply to direct assessment
programs. Because a direct assessment program does not utilize credit
or clock hours as a measure of student learning, an institution must
establish a methodology to reasonably equate the direct assessment
program (or the direct assessment portion of any program, as
applicable) to credit or clock hours for the purpose of complying with
applicable regulatory requirements. The institution must provide a
factual basis satisfactory to the Secretary for its claim that the
program or portion of the program is equivalent to a specific number of
credit or clock hours.
* * * * *
Sec. 668.22 [Amended]
0
4. Section 668.22 is amended by:
0
A. In paragraph (a)(5)(iii)(E), removing the words ``electronically
or''.
0
B. In paragraph (h)(3)(ii)(B), removing the word ``A'' and adding, in
its place, the words ``With respect to any grant program, a''.
0
C. In paragraph (h)(5)(iii), removing the word ``ended'' and adding, in
its place, the word ``occurred''.
0
5. Section 668.35 is amended by:
0
A. In paragraph (e)(2), removing the word ``or''.
0
B. In paragraph (e)(3), removing the punctuation ``.'' at the end of
the paragraph and adding, in its place, the words ``; or''.
0
C. Adding a new paragraph (e)(4).
The addition reads as follows:
Sec. 668.35 Student debts under the HEA and to the U.S.
* * * * *
(e) * * *
(4) The overpayment is an amount that a student is not required to
return under the requirements of Sec. 668.22(h)(3)(ii)(B).
* * * * *
Sec. 668.164 [Amended]
0
6. Section 668.164 is amended in paragraph (g)(2)(i) by adding the word
``parent'' immediately before the word ``PLUS''.
0
7. Section 668.165 is amended by revising the introductory text of
paragraph (a)(2) to read as follows:
Sec. 668.165 Notices and authorizations.
(a) * * *
(2) Except in the case of a post-withdrawal disbursement made in
accordance with 34 CFR 668.22(a)(5), if an institution credits a
student's account at the institution with Direct Loan, FFEL, or Federal
Perkins Loan Program funds, the institution must notify the student, or
parent of--
* * * * *
PART 673--GENERAL PROVISIONS FOR THE FEDERAL PERKINS LOAN PROGRAM,
FEDERAL WORK-STUDY PROGRAM, AND FEDERAL SUPPLEMENTAL EDUCATIONAL
OPPORTUNITY GRANT PROGRAM
0
8. The authority citation for part 673 continues to read as follows:
Authority: 20 U.S.C. 421-429, 1070b-1070b-3, and 1087aa-1087ii;
42 U.S.C. 2751-2756b, unless otherwise noted.
Sec. 673.5 [Amended]
0
9. Section 673.5 is amended in paragraph (c)(1)(ix) by removing the
word ``and'' immediately before the number ``1607'' and adding the
words ``, and Section 903 of Public Law 96-342 (Educational Assistance
Pilot Program)'' at the end of the paragraph.
PART 682--FEDERAL FAMILY EDUCATION LOAN (FFEL) PROGRAM
0
10. The authority citation for part 682 continues to read as follows:
Authority: 20 U.S.C. 1071 to 1087-2, unless otherwise noted.
Sec. 682.101 [Amended]
0
11. Section 682.101 is amended in paragraph (c) by removing the words
``, or married couples each of whom have eligible loans under these
programs'', in the third sentence.
Sec. 682.201 [Amended]
0
12. Section 682.201 is amended by:
0
A. In paragraph (b)(3), adding the words ``or under the Federal Direct
Subsidized Stafford/Ford Loan Program and Federal Direct Unsubsidized
Stafford/Ford Loan Program, as applicable'' immediately after the words
``Unsubsidized Stafford Loan Program''.
0
B. In paragraph (c)(1)(vii), removing the parentheticals ``(b)(2)(ii)''
and adding, in their place, the parentheticals ``(c)(2)(ii)''.
0
C. In paragraph (c)(3), removing the parentheticals ``(b)(1)'' and
adding, in their place, the parentheticals ``(c)(1)''.
0
D. In paragraph (d)(1)(i)(A)(3), removing the reference to ``Sec.
682.209(a)(7)(viii)'' and adding, in its place, a reference to ``Sec.
682.209(a)(6)(iii)''.
0
E. In paragraph (d)(2), removing the word ``responsible'' and adding,
in its place, the word ``ineligible''.
Sec. 682.204 [Amended]
0
13. Section 682.204 is amended by:
0
A. In paragraph (a)(1)(i), removing the word ``certified'' and adding,
in its place, the word ``disbursed''.
0
B. In paragraph (a)(1)(ii), removing the word ``certified'' and adding,
in its place, the word ``disbursed''.
[[Page 64398]]
0
C. In paragraph (a)(1)(iii), removing the word ``certified'' and
adding, in its place, the word ``disbursed''.
0
D. In paragraph (a)(2)(i), removing the word ``certified'' and adding,
in its place, the word ``disbursed''.
0
E. In paragraph (a)(2)(ii), removing the word ``certified'' and adding,
in its place, the word ``disbursed''.
0
F. In paragraph (d)(5), removing the word ``certified'' and adding, in
its place, the word ``disbursed''.
0
G. In paragraph (d)(6)(ii), removing the word ``certified'' and adding,
in its place, the word ``disbursed''.
0
H. In paragraph (d)(6)(iii), removing the word ``certified'' and
adding, in its place, the word ``disbursed''.
Sec. 682.206 [Amended]
0
14. Section 682.206 is amended in paragraph (e)(3) by adding the words
``, based on an application received prior to July 1, 2006,''
immediately before the word ``may''.
0
15. Section 682.207 is amended by:
0
A. In paragraph (b)(1)(v)(C)(1), adding the words ``with the home
institution'' after the words ``verification of the student's
enrollment''.
0
B. Revising paragraph (b)(2)(i)(A)(2).
0
C. Revising paragraph (b)(2)(i)(A)(3).
0
D. In paragraph (b)(2)(i)(B), adding the word ``, facsimile'' after the
word ``telephone''.
0
E. In paragraph (b)(2)(iv) introductory text, removing the
parentheticals ``(b)(1)(v)(D)(1)'' and adding, in their place, the
parentheticals ``(b)(1)(v)(D)''.
The revisions read as follows:
Sec. 682.207 Due diligence in disbursing a loan.
(b) * * *
(2) * * *
(i) * * *
(A) * * *
* * * * *
(2) For a new student, contacting the foreign school the student is
to attend in accordance with procedures specified by the Secretary, by
telephone, e-mail or facsimile to verify the student's admission to the
foreign school for the period for which the loan is intended at the
enrollment status for which the loan was certified.
(3) For a continuing student, contacting the foreign school the
student is to attend in accordance with procedures specified by the
Secretary, by telephone, e-mail or facsimile to verify that the student
is still enrolled at the foreign school for the period for which the
loan is intended at the enrollment status for which the loan was
certified.
* * * * *
Sec. 682.209 [Amended]
0
16. Section 682.209 is amended by:
0
A. In paragraph (a)(6)(v)(B), removing the parentheticals
``(a)(7)(viii)(C)'' and adding, in their place, the parentheticals
``(a)(6)(viii)(C)''.
0
B. In paragraph (a)(7)(iv), removing the parentheticals ``(a)(8)(iii)''
and adding, in their place, the parentheticals, ``(a)(7)(iii)''.
0
17. Section 682.211 is amended by:
0
A. In paragraph (f)(6), removing the words ``in the case of parent a
PLUS Loan'' and adding, in their place, the words ``on whose behalf a
parent has borrowed a PLUS Loan''.
0
B. Revising paragraph (h)(3).
The revision reads as follows:
Sec. 682.211 Forbearance.
* * * * *
(h) * * *
(3) Forbearance agreement. After the lender determines the
borrower's or endorser's eligibility, and the lender and the borrower
or endorser agree to the terms of the forbearance granted under this
section, the lender sends, within 30 days, a notice to the borrower or
endorser confirming the terms of the forbearance and records the terms
of the forbearance in the borrower's file.
* * * * *
Sec. 682.215 [Amended]
0
18. Section 682.215 is amended by:
0
A. In paragraph (c)(3)(ii)(B), removing the word ``either''.
0
B. In paragraph (c)(4)(ii)(B), removing the word ``either''.
0
19. Section 682.302 is amended by:
0
A. Revising paragraph (c)(1)(iii)(B)(4).
0
B. In paragraph (c)(1)(iii)(B)(5), removing the cross-reference ``Sec.
682.202(a)(2)(v)'' and adding, in its place, the cross-reference
``Sec. 682.202(a)(2)(v)(A)''.
0
C. Removing paragraph (c)(5).
0
D. Revising paragraph (f) introductory text.
0
E. Revising paragraph (f)(2).
The revision reads as follows:
Sec. 682.302 Payment of Special Allowance on FFEL loans.
* * * * *
(c) * * *
(1) * * *
(iii) * * *
(B) * * *
(4) A Federal PLUS Loan made on or after July 1, 1998 and prior to
October 1, 1998, except that no special allowance shall be paid any
quarter unless the rate determined under Sec. 682.202(a)(2)(v)(A)
exceeds 9 percent;
(f) For purposes of this section--
* * * * *
(2) The date on which an obligation is considered to be
``originally issued'' is determined under Sec. 682.302(f)(2)(i) or
(ii), as applicable.
(i) An obligation issued to obtain funds to make loans, or to
purchase a legal or equitable interest in loans, including by pledge as
collateral for that obligation, is considered to be originally issued
on the date issued.
(ii) A tax-exempt obligation that refunds, or is one of a series of
tax-exempt refundings with respect to a tax-exempt obligation described
in Sec. 682.302(f)(2)(i), is considered to be originally issued on the
date on which the obligation described in Sec. 682.302(f)(2)(i) was
issued.
* * * * *
0
20. Section 682.305 is amended by:
0
A. In paragraph (c)(2)(v), adding the words ``or a nonprofit
organization'' after the words ``governmental entity'' and removing the
words ``and 34 CFR, part 80, appendix G'' and adding in their place the
words ``and 34 CFR Sec. Sec. 74.26 and 80.26, as applicable''.
0
B. Revising paragraph (c)(2)(vi).
0
C. In paragraph (d)(1), by adding the word ``rate'' immediately after
the word ``interest'' the third time it appears in the sentence.
The revisions read as follows:
Sec. 682.305 Procedures for payment of interest benefits and special
allowance and collection of loan origination fees.
* * * * *
(c) * * *
(2) * * *
(vi) With regard to a school that makes or originates loans, the
audit requirements are in 34 CFR Sec. 682.601(a)(7).
* * * * *
Sec. 682.401 [Amended]
0
21. Section 682.401 is amended in paragraph (b)(27)(iv) by removing the
parentheticals ``(b)(27)(ii)(D)'' and adding, in their place, the
parentheticals ``(b)(27)(v)''.
Sec. 682.402 [Amended]
0
22. Section 682.402 is amended by:
0
A. In paragraph (e), in the paragraph heading, removing the word
``borrower'' and adding, in its place, the word ``borrow''.
0
B. In paragraph (e)(1)(iii)(A), adding the word ``not'' immediately
before the word ``pay''.
0
23. Section 682.405 is amended by adding new paragraphs (b)(1)(iii)
through (vii) to read as follows:
Sec. 682.405 Loan rehabilitation agreement.
* * * * *
(b) * * *
[[Page 64399]]
(1) * * *
(iii) For the purposes of this section, the determination of
reasonable and affordable must--
(A) Include a consideration of the borrower's and spouse's
disposable income and reasonable and necessary expenses including, but
not limited to, housing, utilities, food, medical costs, work-related
expenses, dependent care costs and other Title IV repayment;
(B) Not be a required minimum payment amount, e.g. $50, if the
agency determines that a smaller amount is reasonable and affordable
based on the borrower's total financial circumstances. The agency must
include documentation in the borrower's file of the basis for the
determination if the monthly reasonable and affordable payment
established under this section is less than $50 or the monthly accrued
interest on the loan, whichever is greater. However, $50 may not be the
minimum payment for a borrower if the agency determines that a smaller
amount is reasonable and affordable; and
(C) Be based on the documentation provided by the borrower or other
sources including, but not be limited to--
(1) Evidence of current income (e.g., proof of welfare benefits,
Social Security benefits, child support, veterans' benefits,
Supplemental Security Income, Workmen's Compensation, two most recent
pay stubs, most recent copy of U.S. income tax return, State Department
of Labor reports);
(2) Evidence of current expenses (e.g., a copy of the borrower's
monthly household budget, on a form provided by the guaranty agency);
and
(3) A statement of the unpaid balance on all FFEL loans held by
other holders.
(iv) The agency must include any payment made under Sec.
682.401(b)(4) in determining whether the nine out of ten payments
required under paragraph (b)(1) of this section have been made.
(v) A borrower may request that the monthly payment amount be
adjusted due to a change in the borrower's total financial
circumstances only upon providing the documentation specified in
paragraph (b)(1)(iii)(C) of this section.
(vi) A guaranty agency must provide the borrower with a written
statement confirming the borrower's reasonable and affordable payment
amount, as determined by the agency, and explaining any other terms and
conditions applicable to the required series of payments that must be
made before a borrower's account can be considered for repurchase by an
eligible lender. The statement must inform borrowers of the effects of
having their loans rehabilitated (e.g., credit clearing, possibility of
increased monthly payments). The statement must inform the borrower of
the amount of the collection costs to be added to the unpaid principal
at the time of the sale. The collection costs may not exceed 18.5
percent of the unpaid principal and accrued interest at the time of the
sale.
(vii) A guaranty agency must provide the borrower with an
opportunity to object to terms of the rehabilitation of the borrower's
defaulted loan.
* * * * *
Sec. 682.408 [Amended]
0
24. Section 682.408 is amended in paragraph (c) by adding, after the
words ``Sec. 682.207(b)(1)(ii) and (iv)'', the phrase ``, or Stafford
Loan proceeds to a borrower in accordance with the requirements of
Sec. 682.207(b)(1)(i) and (ii),''.
0
25. Section 682.601 is amended by:
0
A. Revising paragraph (a)(7).
0
B. Revising paragraph (a)(8).
0
C. In paragraph (a)(9), adding the words ``one or more FFEL program''
before the word ``loans''.
The revisions read as follows:
Sec. 682.601 Rules for a school that makes or originates loans.
(a) * * *
(7) Must, for any fiscal year beginning on or after July 1, 2006 in
which the school engages in activities as an eligible lender, submit an
annual compliance audit that satisfies the following requirements:
(i) With regard to a school that is a governmental entity or a
nonprofit organization, the audit must be conducted in accordance with
Sec. 682.305(c)(2)(v) and chapter 75 of title 31, United States Code,
and in addition, during years when the student financial aid cluster
(as defined in Office of Management and Budget Circular A-133, Appendix
B, Compliance Supplement) is not audited as a ``Major Program'' (as
defined under 31 U.S.C. 7501) must, without regard to the amount of
loans made, include in such audit the school's lending activities as a
Major Program.
(ii) With regard to a school that is not a governmental entity or a
nonprofit organization, the audit must be conducted annually in
accordance with Sec. 682.305(c)(2)(i) through (iii);
(8) Must use any proceeds from special allowance payments and
interest payments from borrowers, interest subsidy payments, and any
proceeds from the sale or other disposition of loans (exclusive of
return of principal, any financing costs incurred by the school to
acquire funds to make the loans, and the cost of charging origination
fees or interest rates at less than the fees or rates authorized under
the HEA) for need-based grants; and
* * * * *
Sec. 682.604 [Amended]
0
26. Section 682.604 is amended in the introductory text to paragraph
(h) by removing the words ``or SLS'' and adding, in their place, ``,
SLS or PLUS''.
PART 685--WILLIAM D. FORD FEDERAL DIRECT LOAN PROGRAM
0
27. The authority citation for part 685 continues to read as follows:
Authority: 20 U.S.C. 1087a et seq., unless otherwise noted.
Sec. 685.102 [Amended]
0
28. Section 685.102 is amended in the definition of Estimated Financial
Assistance in paragraph (b)(1)(ix) by removing the parentheticals
``(2)(iii)'' and adding, in their place, the parentheticals
``(2)(iv)''.
Sec. 685.200 [Amended]
0
29. Section 685.200(b) is amended by:
0
A. Removing the paragraph (b)(1) designation.
0
B. Redesignating paragraphs (b)(1)(i), (ii), (iii), (iv), and (v) as
paragraphs (b)(1), (2), (3), (4), and (5), respectively.
0
C. In newly redesignated paragraph (b)(4), removing the words ``and
Stafford Ford/Loan Program; and'' and adding, in their place, the words
``Stafford/Ford Loan Program or under the Federal Subsidized and
Unsubsidized Stafford Loan Program, as applicable; and''.
0
D. In newly redesignated paragraph (b)(5), removing the words ``does
not have an adverse credit history in accordance with'' and adding, in
their place, the words ``meets the requirements of''.
Sec. 685.203 [Amended]
0
30. Section 685.203 is amended by:
0
A. In paragraph (a)(1)(i), removing the word ``originated'' and adding,
in its place, the word ``disbursed''.
0
B. In paragraph (a)(1)(ii), removing the word ``originated'' and
adding, in its place, the word ``disbursed''.
0
C. In paragraph (a)(1)(iii), removing the word ``originated'' and
adding, in its place, the word ``disbursed''.
0
D. In paragraph (a)(2)(i), removing the word ``originated'' and adding,
in its place, the word ``disbursed''.
0
E. In paragraph (a)(2)(ii), removing the word ``originated'' and
adding, in its place, the word ``disbursed''.
0
F. In paragraph (c)(2)(v), removing the word ``originated'' and adding,
in its place, the word ``disbursed''.
[[Page 64400]]
0
G. In paragraph (c)(2)(vi)(B), removing the word ``originated'' and
adding, in its place, the word ``disbursed''.
0
H. In paragraph (c)(2)(vii), removing the word ``originated'' and
adding, in its place, the word ``disbursed''.
0
31. Section 685.208 is amended as follows:
0
A. By adding a new paragraph (a)(2)(iv).
0
B. By revising paragraph (g)(3).
0
C. By revising paragraph (h)(2).
Sec. 685.208 Repayment plans.
(a) * * *
(2) * * *
(iv) No scheduled payment may be less than the amount of interest
accrued on the loan between monthly payments, except under the income
contingent repayment plan or an alternative repayment plan.
(g) * * *
(3) A borrower's payments under this repayment plan may be less
than $50 per month. No single payment under this plan will be more than
three times greater than any other payment.
(h) * * *
(2) A borrower's payments under this repayment plan may be less
than $50 per month. No single payment under this plan will be more than
three times greater than any other payment.
* * * * *
Sec. 685.217 [Amended]
0
32. Section 685.217 is amended by:
0
A. In paragraph (c)(3)(ii)(B), removing the word ``either''.
0
B. In paragraph (c)(4)(ii)(B), removing the word ``either''.
0
33. Section 685.220 is amended by:
0
A. In paragraph (c)(1), removing the words ``and to'' immediately
before the words ``Federal Consolidation Loans'' and adding, in their
place, the words ``and attributable to the portion of'', and by
removing the words ``if they are'' and adding, in their place, the
words ``that is''.
0
B. In paragraph (d)(1) introductory text, removing the words ``, at the
time the borrower applies for such a loan,''.
0
C. In paragraph (d)(1)(i) introductory text, removing the word ``The''
and adding, in its place, the words ``At the time the borrower applies
for a Direct Consolidation Loan, the''.
0
D. In paragraph (d)(1)(ii) introductory text, adding the words ``At the
time the borrower applies for the Direct Consolidation Loan,''
immediately before the words ``on the loans being consolidated,''.
0
E. In paragraph (d)(1)(ii)(A), removing the words ``six-month''.
0
F. In paragraph (d)(1)(ii)(D), removing the words ``Except as provided
in paragraph (d)(4) of this section, in'' and adding, in their place,
the word ``In''.
0
G. Redesignating paragraphs (d)(1)(iii) and (d)(1)(iv) as paragraphs
(d)(1)(iv) and (d)(1)(v), respectively.
0
H. Adding a new paragraph (d)(1)(iii).
0
I. Removing paragraph (d)(4).
0
J. Redesignating paragraph (h)(1) as paragraph (h)(1)(i).
0
K. Redesignating paragraph (h)(2) as paragraph (h)(1)(ii).
0
L. Redesignating paragraph (h)(3) as paragraph (h)(2).
The addition reads as follows:
Sec. 685.220 Consolidation.
* * * * *
(d) * * *
(1) * * *
(iii) On the loans being consolidated, the borrower is--
(A) Not subject to a judgment secured through litigation, unless
the judgment has been vacated; or
(B) Not subject to an order for wage garnishment under section 488A
of the Act, unless the order has been lifted.
* * * * *
0
34. Section 685.300 is amended by revising paragraph (b)(8) to read as
follows:
Sec. 685.300 Agreements between and eligible school and the Secretary
for participation in the Direct Loan Program.
* * * * *
(b) * * *
(8) Provide that eligible students at the school and their parents
may participate in the programs under part B of the Act at the
discretion of the Secretary for the period during which the school
participates in the Direct Loan Program under part D of the Act, except
that--
(i) A student may not receive a Direct Subsidized Loan and/or a
Direct Unsubsidized Loan under part D of the Act and a subsidized and/
or unsubsidized Federal Stafford Loan under part B of the Act for the
same period of enrollment;
(ii) A graduate or professional student or a parent borrowing for
the same dependent student may not receive a Direct PLUS Loan under
part D of the Act and a Federal PLUS Loan under part B of the Act for
the same period of enrollment;
* * * * *
Sec. 685.303 [Amended]
0
35. Section 685.303(e) introductory text is amended by removing the
words ``or Direct Unsubsidized Loan'' and adding, in their place, the
words ``, Direct Unsubsidized, or Direct PLUS Loan''.
* * * * *
[FR Doc. E6-18183 Filed 10-31-06; 8:45 am]
BILLING CODE 4000-01-P