# William D. Ford Federal Direct Loan Program

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URL: https://www.frixlaw.com/law-library/documents/fr%3A2013-11515

## Record

- **Collection:** Federal Register
- **Document type:** Rule
- **Published:** May 16, 2013
- **Citation:** 78 FR 28954

## Text

DEPARTMENT OF EDUCATION
34 CFR Part 685
[Docket ID ED-2013-OPE-0066]
RIN 1840-AD13
William D. Ford Federal Direct Loan Program

AGENCY:

Office of Postsecondary Education, Department of Education.

ACTION:

Interim final rule; request for comments.

SUMMARY:

The Secretary amends the William D. Ford Federal Direct Loan Program (Direct Loan Program) regulations to reflect changes made to the program by the Moving Ahead for Progress in the 21st Century Act (MAP-21), Public Law 112-141. Specifically, these interim final regulations reflect the provisions in MAP-21 that amended the Higher Education Act of 1965, as amended (HEA) to extend the 3.4 percent interest rate on Direct Subsidized Loans from July 1, 2012, to July 1, 2013, and to ensure that a borrower may not receive Direct Subsidized Loans for more than 150 percent of the published length of the educational program in which the borrower is enrolled. Under the changes made by MAP-21, if the borrower exceeds this Direct Subsidized Loan limit, the borrower also becomes responsible for the accruing interest on the Direct Subsidized Loans.

DATES:

These interim final regulations are effective May 16, 2013. We must receive your comments on or before July 1, 2013.

ADDRESSES:

Submit your comments through the Federal eRulemaking Portal or via U.S. mail, commercial delivery, or hand delivery. We will not accept comments by fax or by email. Please submit your comments only once in order to ensure that we do not receive duplicate copies. In addition, please include the Docket ID at the top of your comments.

•
Federal eRulemaking Portal:
Go to
www.regulations.gov
to submit your comments electronically. Information on using regulations.gov, including instructions for accessing agency documents, submitting comments, and viewing the docket, is available on the site under “How To Use This Site.”

•
Postal Mail, Commercial Delivery, or Hand Delivery:
If you mail or deliver your comments about these interim final regulations, address them to Nathan Arnold, U.S. Department of Education, 1990 K Street NW., Room 8084, Washington, DC 20006-8542.

Privacy Note:

The Department's policy is to make all comments received from members of the public available for public viewing in their entirety on the Federal eRulemaking Portal at
www.regulations.gov
. Therefore, commenters should be careful to include in their comments only information that they wish to make publicly available.

FOR FURTHER INFORMATION CONTACT:

Nathan Arnold, U.S. Department of Education, 1990 K Street NW., Room 8084, Washington, DC 20006-8542. Telephone: (202) 219-7134 or via Internet at:
Nathan.Arnold@ed.gov
.

If you use a telecommunications device for the deaf (TDD) or a text telephone (TTY), call the Federal Relay Service (FRS), toll free, at 1-800-877-8339.

SUPPLEMENTARY INFORMATION:

Executive Summary

Purpose of This Regulatory Action: On July 6, 2012, the President signed into law MAP-21, which, among other things, made two changes to section 455 of the HEA. First, the law extended for an additional year the 3.4 percent interest rate that had applied to Direct Subsidized Loans made to undergraduate students since July 1, 2011. Second, the law placed a limit on Direct Subsidized Loan eligibility for new borrowers on or after July 1, 2013. Specifically, the statute provides that a new borrower on or after July 1, 2013, becomes ineligible to receive additional Direct Subsidized Loans if the period during which the borrower has received such loans exceeds 150 percent of the published length of the borrower's educational program. The borrower also becomes responsible for accruing interest during all periods as of the date the borrower exceeds the 150 percent limit. The purpose of the statutory changes is to encourage students to complete their academic programs in a timely manner. Timely completion of programs will allow borrowers to reap the benefits of a postsecondary degree or credential and avoid incurring unnecessary student loan debt. This interim final rule implements the required statutory changes.

Summary of the Major Provisions of This Regulation:

Action:
This interim final rule incorporates the statutory changes made by MAP-21 by—

• Providing that a Direct Subsidized Loan first disbursed on or after July 1, 2012, and before July 1, 2013, has an interest rate of 3.4 percent.

• Establishing new Direct Loan Program regulations that provide that a new borrower on or after July 1, 2013, is no longer eligible to receive additional Direct Subsidized Loans if the period during which the borrower has received such loans meets or exceeds 150 percent of the published length of the program in which the borrower is currently enrolled. These borrowers may still receive Direct Unsubsidized Loans for which they are otherwise eligible.

• Establishing new Direct Loan Program regulations that provide that new borrowers who are ineligible for Direct Subsidized Loans as a result of these provisions and enroll in a program for which the borrower would otherwise be eligible for a Direct Subsidized Loan become responsible for accruing interest on all previously received Direct Subsidized Loans during all future periods, beginning on the date of the triggering enrollment.

• Prorating periods of Direct Subsidized Loan receipt during part-time enrollment for purposes of the limit on Direct Subsidized Loan eligibility.

• Establishing special rules for applying the limit on Direct Subsidized Loan eligibility for borrowers enrolled in preparatory coursework required for enrollment in an undergraduate or a graduate or professional program and teacher certification coursework necessary for a State teaching credential for which the institution awards no academic credential. These special rules limit the borrower's responsibility for accruing interest in certain circumstances.

• Modifying existing entrance- and exit-counseling requirements to provide borrowers with information regarding the 150 percent limit on Direct Subsidized Loans.

Please refer to the
Significant Proposed Regulations
section of this preamble for a detailed discussion of the major provisions contained in this interim final rule.

Chart 1 summarizes the interim final regulations and related benefits, costs, and transfers that are discussed in more detail in the
Regulatory Impact Analysis
of this preamble. The Department estimates that approximately 62,000 borrowers will be affected by these interim final regulations in the 2013 loan cohort, with the number of borrowers affected increasing in each cohort to approximately 578,000 borrowers in the 2023 loan cohort. The benefits of these interim final regulations include reduced loan balances and lower payments for borrowers receiving Direct Subsidized Loans between July 1, 2012, and July 1, 2013, and the creation of incentives for first-time borrowers on or after July 1, 2013, to complete academic programs in

a timely manner. The net budget impact of the interim final regulations is −$3.9 billion over the 2013 to 2023 loan cohorts.

Chart 1—Summary of the Proposed Regulations

Issue and key features
Benefits
Cost/transfers

Interest rate reduction, limitations on eligibility for Direct Subsidized Loans, and responsibility for accruing interest for first-time borrowers on or after July 1, 2013 (34 CFR part 685)

Reduction of interest rate on Direct Subsidized Loans to 3.4 percent after July 1, 2011, and before July 1, 2013
Reduced loan balance and lower payments for borrowers

Limitation on Direct Subsidized Loan eligibility for borrowers who receive such loans for 150 percent of the published length of the educational program and borrower responsibility for accruing interest for enrollment after meeting or exceeding this limit
Create incentives for students to complete academic programs in a timely manner and avoid incurring unnecessary loan debt

Prorating periods of Direct Subsidized Loan receipt during part-time enrollment
Account for differing enrollment levels for borrower equity
Estimated net budget impact of −$3.9 billion over the 2013-2023 loan cohort.

Specialized treatment for borrowers enrolled in preparatory coursework required for enrollment in an eligible program and teacher certification coursework necessary for a State teaching credential for which the institution awards no academic credential
Limit borrower responsibility for accruing interest to encourage completion

Modified entrance- and exit-counseling requirements to provide borrowers with information regarding the 150 percent limit on Direct Subsidized Loans
Provide borrowers with information on eligibility limitations and potential responsibility for accruing interest
Estimated cost of $4.21 million in increased burden to institutions and borrowers.

Invitation to Comment

We invite you to submit comments regarding these interim final regulations. To ensure that your comments have maximum effect in developing the final regulations, we urge you to identify clearly the specific section or sections of the interim final regulations that each of your comments addresses and to arrange your comments in the same order as the interim final regulations. We will consider these comments in determining whether to revise these interim final regulations.

We invite you to assist us in complying with the specific requirements of Executive Orders 12866 and 13563 and their overall requirement of reducing regulatory burden that might result from these interim final regulations. Please let us know of any further ways we could reduce potential costs or increase potential benefits while preserving the effective and efficient administration of the Direct Loan Program.

During and after the comment period, you may inspect all public comments about these interim final regulations by accessing www.regulations.gov. You may also inspect the comments in person in room 8083, 1990 K Street, NW., Washington, DC, between 8:30 a.m. and 4:00 p.m. Washington, DC time, Monday through Friday of each week, except Federal holidays.

Assistance to Individuals With Disabilities in Reviewing the Rulemaking Record

On request, we will provide an appropriate accommodation or auxiliary aid to an individual with a disability who needs assistance to review the comments or other documents in the public rulemaking record for these interim final regulations. If you want to schedule an appointment for this type of accommodation or auxiliary aid, please contact the person listed under
FOR FURTHER INFORMATION CONTACT
.

Background

On July 6, 2012, the President signed MAP-21 into law. MAP-21 included two changes to the Direct Loan Program. First, MAP-21 amended section 455 of the HEA to extend the 3.4 percent fixed interest rate that applies to Direct Subsidized Loans made to undergraduate students before July 1, 2013. Second, the law placed a limit on Direct Subsidized Loan eligibility for new borrowers on or after July 1, 2013. Specifically, a new borrower on or after July 1, 2013 is no longer eligible to receive additional Direct Subsidized Loans if the period during which the borrower has received such loans exceeds 150 percent of the published length of the borrower's educational program. Additionally, the borrower becomes responsible for accruing interest on any Direct Subsidized Loan made to the borrower on or after July 1, 2013 if he or she is enrolled in an undergraduate program after reaching this 150 percent limit. These restrictions apply to a “first-time borrower” on or after July 1, 2013; a first-time borrower is one who on that date has no outstanding balance of principal or interest on a Direct Loan Program or FFEL Program loan.

The amendments to section 455 of the HEA that limit eligibility for Direct Subsidized Loans require implementing regulations. Under MAP-21 these regulations are not subject to the requirements in sections 482 and 492 of the HEA for negotiated rulemaking and publication of regulations in accordance with the master calendar provisions. These interim final regulations contain the provisions necessary to implement the amendments to section 455 of the HEA.

The Department will be making significant changes to its student financial aid systems to implement the new statutory requirements. Those changes are described in more detail at the conclusion of this preamble. The Department will be responsible for the following: tracking borrowers' Direct Subsidized Loan borrowing in greater detail; informing institutions of the number of periods a borrower has received Direct Subsidized Loans; and informing borrowers when they exceed the eligibility limit and become responsible for accruing interest. Institutions will not be required to track this information or inform borrowers of their status on a continual basis. However, for the Department to ensure the integrity of the Direct Loan Program and compliance with the new statutory

and regulatory requirements, institutions will be required to report certain additional program and borrower enrollment information to the Department.

Significant Regulations

We discuss substantive issues under the sections of the regulations to which they pertain. Generally, we do not address regulatory provisions that are technical or otherwise minor in effect.

Part 685—William D. Ford Federal Direct Loan Program Extension of the 3.4 Percent Fixed Interest Rate on Direct Subsidized Loans until July 1, 2013 (§ 685.202(a)(1)(v)(E))

Statute:
MAP-21 amended section 455(b)(7)(D) of the HEA to extend, until July 1, 2013, the period during which the fixed interest rate on new Direct Subsidized Loans will be 3.4 percent. The interest rate on new loans was scheduled to increase to a fixed interest rate of 6.8 percent beginning with loans first disbursed on or after July 1, 2012. The increase in the interest rate to 6.8 percent is now scheduled to begin with loans first disbursed on or after July 1, 2013.

Current Regulations:
Under current § 685.202(a)(1)(v)(E) of the regulations, the interest rate on a Direct Subsidized Loan first disbursed on or after July 1, 2011, and before June 30, 2012, is 3.4 percent. Under § 685.202(a)(1)(iv), the interest rate on Direct Subsidized Loans disbursed on or after July 1, 2012, is 6.8 percent. Direct Subsidized Loans are only available to undergraduate borrowers.

New Regulations:
We are revising § 685.202(a)(1)(v)(E) of the Direct Loan regulations to reflect that the unpaid balance on a Direct Subsidized Loan first disbursed on or after July 1, 2011, and before July 1, 2013, has an interest rate of 3.4 percent.

Reasons:
This change reflects the amendment to section 455(b)(7)(D) of the HEA.

Application of the 150 Percent Direct Subsidized Loan Limit to First-Time Borrowers on or After July 1, 2013 (§ 685.200(f)(1)(i))

Statute:
MAP-21 added section 455(q)(1) to the HEA, which provides that any borrower who is a new borrower on or after July 1, 2013, is subject to the revised eligibility requirements that limit the borrower's receipt of Direct Subsidized Loans to 150 percent of the published length of the borrower's educational program.

Current Regulations:
There are no existing regulations.

New Regulations:
Section 685.200(f)(1)(i) defines the term “first-time borrower” as an individual who has no outstanding balance of principal or interest on a loan made under the Direct Loan Program or the FFEL Program (regardless of loan type) on July 1, 2013, or on the date the borrower obtains a Direct Loan after July 1, 2013.

The limitation on Direct Subsidized Loan eligibility only applies to a “first-time borrower” on or after July 1, 2013. A borrower who has an outstanding loan balance as of that date is not subject to the 150 percent Direct Subsidized Loan eligibility limit. If the borrower had such a loan balance prior to July 1, 2013, and paid off that balance in full, and then received a new Direct Loan on or after July 1, 2013, the borrower is considered a “first-time borrower” and subject to the Direct Subsidized Loan eligibility limit.

A borrower who has an outstanding balance on a Direct Loan or a FFEL program loan prior to July 1, 2013, and who consolidates those loans on or after July 1, 2013, does not become a “first-time borrower” for this purpose by consolidating the loans. Finally, we do not consider a borrower's outstanding balance on a Federal Perkins loan in the determination of whether a borrower is a first-time borrower who will be subject to the Direct Subsidized loan eligibility limit.

Reasons:
We have defined the term “first-time borrower” to reflect the provision of MAP-21 that applies the 150 percent Direct Subsidized Loan eligibility limit to first-time borrowers on or after July 1, 2013. The definition of “first-time borrower” for this purpose is consistent with how we have treated similarly situated borrowers for other purposes elsewhere in the Direct Loan and FFEL program regulations (see, e.g., §§ 685.209(a)(1) and 685.217(a)(1)).

Limitations on Eligibility for Direct Subsidized Loans (§ 685.200(a)(2), § 685.200(f)(2))

Statute:
MAP-21 added section 455(q)(1) to the HEA. Section 455(q)(1) of the HEA provides that any borrower who is a new Direct Loan borrower on or after July 1, 2013, is not eligible for a Direct Subsidized Loan if the period of time for which the borrower has received Direct Subsidized Loans, in the aggregate, exceeds 150 percent of the published length of the borrower's educational program. Such a borrower may still receive any Direct Unsubsidized Loan for which the borrower is otherwise eligible.

Current Regulations:
There are no existing regulations.

New Regulations:
Section 685.200(f)(2) provides that a first-time borrower loses eligibility for new Direct Subsidized Loans when the borrower has no remaining eligibility period, as defined in § 685.200(f)(1)(iv) (this and other defined terms are discussed in the next section of the preamble). The interim final regulations also provide that such a borrower may still receive a Direct Unsubsidized Loan for which the borrower is otherwise eligible. In addition, we have updated § 685.200(a)(2)(i) to reflect that, in addition to demonstrating financial need in accordance with Title IV, part F of the HEA, a first-time borrower must also not have met or exceeded the limitations on receipt of Direct Subsidized Loans described in § 685.200(f).

Reasons:
Section 685.200(f)(2) reflects section 455(q)(1) of the HEA, which places a limit on eligibility for Direct Subsidized Loans if a first-time borrower on or after July 1, 2013, receives Direct Subsidized Loans in excess of 150 percent of the published length of the borrower's educational program. We are including a cross reference to § 685.200(f) in § 685.200(a)(2)(i) to ensure that first-time borrowers understand that eligibility for Direct Subsidized Loans depends on meeting the eligibility requirements in § 685.200(f).

Calculation of a Borrower's Maximum Eligibility Period, Subsidized Usage Period, and Remaining Eligibility Period (§ 685.200(f)(1)(ii)-(f)(1)(iv))

Statute:
Under section 455(q) of the HEA a borrower is no longer eligible for additional Direct Subsidized Loans if the period of time for which the borrower has received Direct Subsidized Loans exceeds the aggregate period of enrollment described in section 455(q)(3). Section 455(q)(3) defines the term “aggregate period of enrollment” as the lesser of: (1) a period equal to 150 percent of the published length of the educational program in which the student is enrolled; or (2) in the case of a borrower who was previously enrolled in one or more other educational programs that began on or after July 1, 2013, a period of time equal to the difference between 150 percent of the published length of the longest educational program in which the borrower was, or is, enrolled and any periods of enrollment in which the borrower received a Direct Subsidized Loan.

Current Regulations:
There are no existing regulations.

New Regulations:
Section 685.200(f)(1)(ii) defines the term

“maximum eligibility period” and describes how we will calculate it for a borrower. The “maximum eligibility period” is the regulatory term we have adopted to refer to the “aggregate period of enrollment” described in section 455(q)(1) and (q)(3)(A) of the HEA. Section 685.200(f)(1)(ii) provides that a borrower's maximum eligibility period for Direct Subsidized Loans is equal to 150 percent of the length of the educational program, as published by the institution, in which the borrower is currently enrolled. Therefore, we will calculate a borrower's “maximum eligibility period” by multiplying the published length of the borrower's current educational program by 1.5.

Section 685.200(f)(1)(iii) defines the term “subsidized usage period” and provides that we will calculate it by dividing the number of days in the borrower's loan period for a Direct Subsidized Loan by the number of days in the academic year for which the borrower receives the Direct Subsidized Loan. The interim final regulations provide that this time period will be measured in academic years, which we will calculate using the information provided by the institution (this reporting requirement is discussed in more detail in the section of this preamble covering operational issues). A borrower's “subsidized usage period” includes only those periods of time for which the borrower received a Direct Subsidized Loan, rather than all of the periods that a borrower is enrolled in one or more educational programs.

Section 685.200(f)(1)(iii) also specifies that the number of years in a borrower's subsidized usage period will be rounded down to the nearest quarter of a year. For example, a subsidized usage period of 0.53 years would be rounded to 0.5 years and a subsidized usage period of 0.88 years would be rounded to 0.75 years.

Section 685.200(f)(1)(iv) of the interim final regulations defines the term “remaining eligibility period” and provides that it is calculated as the difference, measured in academic years, between the borrower's maximum eligibility period and the sum of the borrower's subsidized usage periods. When the difference between a borrower's maximum eligibility period and the sum of the borrower's subsidized usage periods is zero, the borrower has no remaining eligibility period. As provided in § 685.200(f)(2), a first-time borrower who has no remaining eligibility period is no longer eligible for additional Direct Subsidized Loans. A borrower's ability to regain eligibility for Direct Subsidized Loans is discussed later in this preamble.

A borrower's maximum eligibility period and remaining eligibility period are calculated in the same manner regardless of whether the borrower graduates, transfers, or withdraws from the program. However, the interim final regulations treat a borrower who graduates from his or her program in a timely manner differently for purposes of borrower responsibility for the accruing interest (see the preamble discussion of § 685.200(f)(3)).

Section 685.200(f)(1)(ii) provides that we will calculate a borrower's maximum eligibility period based on the published length of the educational program in which the borrower is currently enrolled. Therefore, if a borrower subsequently enrolls in a program that is shorter or longer than the borrower's current program, we will recalculate the borrower's maximum eligibility period based on the length of the new program. Because § 685.200(f)(1)(iv) provides that a borrower's remaining eligibility period is based (in part) on the sum of the borrower's subsidized usage periods, subsidized usage periods accrued during previously-enrolled programs count against the maximum eligibility period of the program in which the borrower is currently enrolled.

Examples 1 through 5 illustrate how we will calculate a borrower's maximum eligibility period, subsidized usage period, and remaining eligibility period:

Example 1:
A borrower enrolls in a two-year undergraduate program and receives Direct Subsidized Loans for one academic year. The program's academic year is comprised of 30 weeks (or 210 days) of instructional time.

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The borrower's maximum eligibility period is 150 percent of the two-year program, or three academic years. Because the borrower has already received a Direct Subsidized Loan for one academic year, the borrower's subsidized usage period is one academic year. The difference between the borrower's maximum eligibility period (three academic years) and the sum of the borrower's subsidized usage periods (one academic year) is the borrower's remaining eligibility period (two academic years). (For purposes of simplicity and clarity, subsequent examples will not include the conversion from days to years for a borrower's subsidized usage period for each loan and will refer to an “academic year” as a “year” unless necessary to illustrate the operation of a specific regulatory provision.)

Example 2:
A borrower enrolls in a four-year program and receives Direct Subsidized Loans for each of the four years.

Year 1
Year 2
Year 3
Year 4

Maximum eligibility period for program
6 years
6 years
6 years
6 years.

Subsidized usage period
1 year
1 year
1 year
1 year.

Sum of all subsidized usage periods
1 year
2 years
3 years
4 years.

Remaining eligibility period at end of year
5 years
4 years
3 years
2 years.

The borrower's program has a published length of four years and a maximum eligibility period of six years (150 percent of the four-year program) and the borrower received Direct Subsidized Loans for four years. The subsidized usage period for each year is one year and the sum of the subsidized usage periods is four years. At the end of the fourth year, the borrower's remaining eligibility period is two years, which is the difference between the borrower's maximum eligibility period (six years) and the sum of the borrower's subsidized usage periods (four years).

Example 3:
A borrower enrolls in a two-year program and receives Direct Subsidized Loans for two years. The borrower then transfers to a four-year program, but has not yet received any Direct Subsidized Loans for attendance in the four-year program.

After year 2 of
two-year program

Upon transfer to
four-year program

Maximum eligibility period for program
3 years
6 years.

Sum of all subsidized usage periods
2 years
2 years.

Remaining eligibility period
1 years
4 years.

The borrower's original two-year program had a maximum eligibility period of three years. Because the borrower received Direct Subsidized Loans for each of the two years of enrollment, the sum of the borrower's subsidized usage periods is two years. When the borrower enrolls in the four-year program, the borrower's maximum eligibility period is recalculated to six years (150 percent of the four-year program). The borrower's prior subsidized usage periods in the two-year program count against the borrower's new maximum eligibility period. Therefore, the borrower's remaining eligibility period is four years, which is the difference between the borrower's new maximum eligibility period (six years) and the sum of the borrower's subsidized usage periods (two years). (Subsequent examples will only detail the sum of all of a borrower's subsidized usage periods unless necessary to clarify the application of the interim final regulations.)

Example 4:
A borrower enrolls in a four-year program and receives Direct Subsidized Loans for two years. The borrower then withdraws before completing the four-year program, and subsequently enrolls in a two-year program. The borrower has not yet received any Direct Subsidized Loans for attendance in the two-year program.

Maximum eligibility period for two-year program
3 years.

Sum of all subsidized usage periods
2 years.

Remaining eligibility period
1 year.

The borrower's four-year program has a maximum eligibility period of six years. When the borrower enrolls in the two-year program, the borrower's maximum eligibility period is recalculated as three years (150 percent of the two-year program). The borrower's prior subsidized usage periods (two years) in the four-year program count against the borrower's new maximum eligibility period in the two-year program. Therefore, the borrower's remaining eligibility period is one year, which is the difference between the borrower's maximum eligibility period (three years) and the sum of the borrower's subsidized usage periods (two years).

Example 5:
A borrower enrolls in a four-year program and receives Direct Subsidized Loans for three years. The borrower completes the degree program at the end of the fourth year, but does not receive any Direct Subsidized Loans for that year. The borrower then enrolls in a different four-year undergraduate program, but has not yet received any Direct Subsidized Loans in the new program.

Maximum eligibility period
6 years.

Sum of the subsidized usage periods
3 years.

Remaining eligibility period
3 years.

The borrower's original four-year program has a maximum eligibility period of six years. The borrower received Direct Subsidized Loans for three years. The borrower's maximum eligibility period in the second four-year program is also six years, and the borrower's prior subsidized usage periods count against the borrower's maximum eligibility period in the second program. Therefore, the borrower's remaining eligibility period is three years, which is the difference between the borrower's maximum eligibility period (six years) and the sum of the borrower's subsidized usage periods (three years). The borrower's fourth year of enrollment in the original program has no effect on the borrower's remaining eligibility period because the borrower did not receive any Direct Subsidized Loans for that year.

In addition to the standard calculations described above, we note that § 685.301(a)(10) and (c) continue to apply and effectively limit the length of time a borrower may receive loans under the interim final regulations.

Specifically, § 685.301(a)(10) describes the minimum permissible length of a loan period. If the borrower's remaining eligibility period (as calculated under § 685.200(f)(1)(iv)) is less than the minimum permissible loan period associated with the borrower's program of study, then the institution may not disburse a Direct Subsidized Loan to that borrower.

Under § 685.301(c), borrowers enrolled in clock-hour, non-term, or certain non-standard term programs are not eligible for a new annual loan limit until they complete either the weeks of instructional time or clock hours required. Thus, students enrolled in these types of programs are effectively limited to receiving Direct Subsidized Loans for 100 percent of the length of the program, notwithstanding the 150 percent maximum eligibility period of the program as calculated under section 455(q) of the HEA. As a result, the 150 percent limit does not affect a borrower enrolled in such a program unless the borrower subsequently enrolls in another educational program (whether a standard-term, non-standard-term, or non-term program).

The requirements of § 685.301(a)(10) are summarized in Table 1, below. Examples 6 and 7 illustrate the effect on

the 150 percent limitations of § 685.301(a)(10) and (c), respectively.

Table 1—Minimum Loan Periods for Differing Program Types

Type of program
Minimum loan period

Credit hour, standard term program
One term.

Credit hour, non-standard term program with terms substantially equal and at least nine weeks of instructional time
One term.

Credit hour, non-standard term program without terms substantially equal or at least nine weeks of instructional time
Lesser of the length of the program or the program's academic year.

Credit hour, non-term program
Lesser of the length of the program or the program's academic year.

Clock hour program
Lesser of the length of the program or the program's academic year.

Example 6:
The borrower is enrolled in a 22-week (or 154-day), 800-clock-hour certificate program that defines its academic year as 26 weeks (or 182 days) of instructional time. The borrower receives a Direct Subsidized Loan that covers the length of the program. Upon completing the certificate program, the borrower enrolls in a two-year associate's degree program that defines its academic year as 30 weeks (or 210 days) of instructional time, and that uses credit hours and semesters. In each of the borrower's first two years in the associate's degree program, the borrower receives a Direct Subsidized Loan for the academic year. The borrower has not yet completed the associate's degree program, and is requesting loans for the third year.

After Certificate
program

After year 1 in the two-year program
After year 2 in the two-year program

Maximum eligibility period of program
1.27 years
3 years
3 years.

Subsidized usage period
0.85 years, rounded down to 0.75 years
1 year
1 year.

Sum of all subsidized usage periods
0.75 years
1.75 years
2.75 years.

Remaining eligibility period at end of the year
0.52 years
1.25 years
0.25 years.

The borrower's 22-week certificate program, which is the equivalent of 0.85 academic years

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has a maximum eligibility period of 1.27 academic years (0.85 academic years multiplied by 150 percent). The borrower's subsidized usage period for the certificate program is the same as the length of the program, 0.85 academic years

ER16MY13.002

which is rounded down to the nearest quarter-year, or 0.75 years. Upon transferring to the two-year program, the borrower's maximum eligibility period is three years. After two years in the two-year program, during which the borrower receives Direct Subsidized Loans equaling two years, the sum of the borrower's subsidized usage periods is 2.75 years (two years from the two-year program plus 0.75 years from the certificate program). After two years in the two-year program, the borrower's remaining eligibility period is 0.25 years (the difference between the two-year program's maximum eligibility period (three years) and the sum of the borrower's subsidized usage periods (2.75 years)). The borrower has a remaining eligibility period of 52.5 days (0.25 years × 210 days in an academic year). Because the borrower is enrolled in a program that uses credit hours and semesters, under § 685.301(a)(10), the minimum loan period for this borrower is one term. Because the borrower's remaining eligibility period of 52.5 days is less than the length of a semester (generally 98-112 days, or 14-16 weeks), the institution cannot disburse a Direct Subsidized Loan to this borrower, even though the borrower's remaining eligibility period is greater than zero.

Example 7:
The borrower is enrolled in a one-year, 900 clock hour certificate program that defines its academic year as 26 weeks (or 182 days) of instructional time. The institution disburses a Direct Subsidized Loan to the borrower for the academic year. The borrower completes only 700 clock hours of instructional time during the academic year.

Maximum eligibility period
1.5 years.

Subsidized usage period
1 year.

Remaining eligibility period
0.5 years, subject to the limitation below.

The borrower's one-year program has a maximum eligibility period of 1.5 years and the borrower's subsidized usage period is one year. The borrower's remaining eligibility period is 0.5 years (the difference between the borrower's maximum eligibility period (1.5 years) and the sum of the borrower's subsidized usage periods (one year)). Because the program is a clock hour program, and because the borrower has only completed 700 clock hours of instructional time, the borrower may not progress to the next academic year. Because § 685.301(c) applies, this borrower is not eligible to receive an additional Direct Subsidized Loan in this program, notwithstanding the borrower's remaining eligibility period of 0.5 years.

Example 7 illustrates that borrowers in clock-hour, non-term, and certain non-standard term programs are effectively limited to receiving Direct Subsidized Loans for 100 percent of the

length of the program. Borrowers in such programs are not able to receive Direct Subsidized Loans for their remaining eligibility period unless they subsequently enroll in another program, as illustrated in example 6.

Reasons:
MAP-21 added section 455(q)(3)(A) to the HEA, which provides the method by which a borrower's eligibility for Direct Subsidized Loans is determined. To implement this provision, it is necessary to issue regulations that describe the statutory calculations with greater specificity.

Section 685.200(f)(1)(ii) implements section 455(q)(3) of the HEA and establishes the rule for determining a borrower's maximum eligibility period for Direct Subsidized Loans. To avoid potentially misleading borrowers, we elected to use the term “maximum eligibility period” rather than the statutory term “aggregate period of enrollment.” Because the 150 percent limit on eligibility is measured by the period for which a borrower receives Direct Subsidized Loans, rather than the period of time that a borrower is enrolled, using the statutory term could cause borrower confusion.

Section 685.200(f)(1)(ii) bases the calculation of a borrower's maximum eligibility period on the published length of the program in which the borrower is currently enrolled because failing to do so would result in inequitable treatment of similarly situated borrowers. For example, if enrolling in a new, shorter educational program did not result in recalculating a borrower's maximum eligibility period, transfer and non-transfer students would have significantly divergent remaining eligibility periods simply by virtue of enrollment in a different program. Suppose a borrower is enrolled in a four-year program, receives a Direct Subsidized Loan for one year, and then transfers to a two-year program. If we did not recalculate the borrower's maximum eligibility period, that borrower would be eligible for five additional years of Direct Subsidized Loans. In contrast, a borrower who had been enrolled in the two-year program from the beginning and also received a Direct Subsidized Loan for one year would only have two years of eligibility remaining. Without recalculating a borrower's maximum eligibility period when the borrower enrolls in a different program, otherwise-equivalent borrowers would have inconsistent and inequitable eligibility periods. To treat all borrowers who receive Direct Subsidized Loans equitably, regardless of whether they have previously enrolled in programs of differing durations for which they received Direct Subsidized Loans, we are determining eligibility for Direct Subsidized Loans in this manner.

Section 685.200(f)(1)(iii) of the interim final regulations, which defines the term “subsidized usage period,” is necessary to implement the requirement in section 455(q)(1) of the HEA that the borrower not receive Direct Subsidized Loans for a period in excess of the borrower's maximum eligibility period. This provision provides a method to calculate the period for which a borrower has received Direct Subsidized Loans to ensure the statutory maximum is not exceeded. We chose to round borrowers' subsidized usage periods down to the nearest quarter year to make it easier for borrowers and institutions to understand and communicate a borrower's eligibility for Direct Subsidized Loans. In addition, we chose to round down to ensure that borrowers were not denied eligibility for Direct Subsidized Loans solely on the basis of rounding.

Because section 455(q)(3)(A) of the HEA does not explicitly provide a method for calculating a borrower's remaining eligibility period, we needed to issue regulations to establish rules for calculation of that period. Section 685.200(f)(1)(iv) provides that a borrower's “remaining eligibility period” is defined as the difference, measured in academic years, between the borrower's maximum eligibility period and the sum of the borrower's subsidized usage periods with certain exceptions as discussed in the next paragraph. The remaining eligibility period will inform borrowers of the period they have remaining before becoming ineligible for Direct Subsidized Loans.

Finally, as explained above, § 685.200(f)(1)(iv) is subject to the existing provisions of § 685.301(a)(10) and (c), which govern the minimum length of loan periods for students enrolled in clock hour, non-term, or certain non-standard term programs. Because MAP-21 did not include any changes to the statutory provisions reflected in § 685.301(a)(10) and (c), the calculations specified under § 685.200(f)(1) must be consistent with those existing regulatory requirements.

Exceptions to the Calculation of the 150 Percent Limit for Students Enrolled on Less Than a Full-Time Basis or Who Receive the Full Annual Loan Limit for a Loan Period of Less Than an Academic Year (§ 685.200(f)(4))

Statute:
MAP-21 added section 455(q)(3)(B) to the HEA, which directs the Department to specify in regulations how the aggregate period of enrollment will be calculated with respect to borrowers who are enrolled on less than a full-time basis. While section 428(b)(1)(A) of the HEA permits borrowers to receive an amount equal to the full annual loan limit for periods of less than an academic year, revised section 455(q) of the HEA does not provide a specific rule for applying the 150 percent limit to these borrowers.

Current Regulations:
There are no existing regulations.

New Regulations:
The interim final regulations provide two exceptions to the rules for the calculation of a borrower's subsidized usage period in § 685.200(f)(1)(iii).

The first exception applies to borrowers who receive the full Direct Subsidized Loan annual loan limit for a period of enrollment that is less than an academic year. Section 685.200(f)(4)(i) provides that, in this circumstance, a borrower's subsidized usage period is one year notwithstanding the subsidized usage period calculated under § 685.200(f)(1)(iii).

The second exception applies to borrowers who are enrolled in an educational program on less than a full-time basis. Section 685.200(f)(4)(ii) of the interim final regulations provides that, except as provided in § 685.200(f)(4)(i) (the exception described in the preceding paragraph), the Secretary will prorate the subsidized usage period for borrowers enrolled on a half-time or three-quarter-time basis. This proration is done by multiplying the borrower's subsidized usage period by 0.5 (for half-time) or 0.75 (for three-quarter-time), respectively.

Examples 8 through 11 illustrate the calculation of a borrower's maximum eligibility period, subsidized usage period, and remaining eligibility period if the borrower receives a Direct Subsidized Loan in the amount of the full annual loan limit for a period less than an academic year, for less than full-time enrollment, or both.

Example 8:
A first-year borrower is enrolled in a four-year, semester-based program and has received a Direct Subsidized Loan in the amount of $3,500 (the full annual loan limit) that covers the fall semester. The borrower does not enroll in the spring semester.

Maximum eligibility period
6 years.

Subsidized usage period
1 year.

Remaining eligibility period
5 years.

The borrower's four-year program has a maximum eligibility period of six years. The borrower received a Direct Subsidized Loan in the amount of the full annual loan limit for one term. Under § 685.200(f)(1)(iii), the borrower's

subsidized usage period would be 0.5 years

ER16MY13.003

However, because the borrower received a Direct Subsidized Loan in the amount of a full annual loan limit for a period of less than a full academic year, § 685.200(f)(4)(i) applies, and the borrower's subsidized usage period is one year, notwithstanding the subsidized usage period calculated under § 685.200(f)(1)(iii). Therefore, the borrower's remaining eligibility period is five years, which is the difference between the borrower's maximum eligibility period (six years) and the sum of the borrower's subsidized usage periods (one year).

Example 9:
A borrower enrolls on a half-time basis for two years of a four-year program and receives Direct Subsidized Loans for each of the two academic years.

Maximum eligibility period
6 years.

Sum of the subsidized usage periods
2 years.

Applicable Proration
0.5.

Prorated subsidized usage period
1 year.

Remaining eligibility period
5 years.

The borrower's four-year program has a maximum eligibility period of six years. Because the borrower was enrolled on a half-time basis, each of the borrower's subsidized usage periods is prorated by multiplying the subsidized usage period by 0.5, resulting in two separate 0.5-year subsidized usage periods, for a total subsidized usage period of one year. Therefore, the borrower's remaining eligibility period is five years, the difference between the borrower's maximum eligibility period (six years) and the sum of the borrower's prorated subsidized usage periods (one year).

Example 10:
A borrower enrolls in a four-year program and receives Direct Subsidized Loans for all four academic years. The borrower is enrolled full time during the first academic year, half time during the second and third academic years, and three-quarter time during the fourth year.

Year 1
Year 2
Year 3
Year 4

Maximum eligibility period for program
6 years
6 years
6 years
6 years

Subsidized usage period
1 year
1 year
1 year
1 year

Applicable Proration
N/A
0.5
0.5
0.75

Prorated subsidized usage period (if applicable)
1 year (not prorated)
0.5 years
0.5 years
0.75 years

Remaining eligibility period at end of year
5 years
4.5 years
4 years
3.25 years

The borrower's maximum eligibility period for the four-year program is six years. Because the borrower had varying enrollment levels during the four years, prorated subsidized usage periods must be determined and then added together to determine the borrower's remaining eligibility period. As the table above shows, in the first year, the borrower's subsidized usage period is not prorated because the borrower is enrolled full time. In the second and third years, however, the borrower's subsidized usage period is prorated by 0.5 because the borrower is enrolled half time. In the fourth year, the borrower's subsidized usage period is prorated by 0.75 because the borrower is enrolled three-quarter time. If the borrower had been enrolled full time during all four academic years, and received Direct Subsidized Loans for each of those years, the sum of the borrower's subsidized usage periods would be four years at the end of the four academic years. However, because the borrower was not enrolled on a full-time basis during all four academic years, and has subsidized usage periods that are prorated, the sum of the borrower's subsidized usage periods is 2.75 years. As a result, the borrower's remaining eligibility period is 3.25 years, which is the difference between the borrower's maximum eligibility period (six years) and the sum of the borrower's subsidized usage periods (2.75 years).

Example 11:
Two first-year borrowers are enrolled in a two-year, semester-based program. Both borrowers are enrolled on a half-time basis. Borrower 1 receives a Direct Subsidized Loan for the fall term in the amount of $3,500, which is the full annual loan limit. Borrower 2 receives a Direct Subsidized Loan for the fall term in the amount of $3,000. Neither borrower enrolls in the spring semester.

Borrower 1
Borrower 2

Maximum eligibility period
3 years
3 years.

Subsidized usage period
1 year
0.5 years.

Applicable proration
N/A
0.5.

Prorated usage period
N/A
0.25 years.

Remaining eligibility period
2 years
2.75 years.

The two-year program in which the borrowers are enrolled has a maximum eligibility period of three years. Borrower 1 received a Direct Subsidized Loan in the amount of the full annual loan limit for one term. Borrower 2 received a Direct Subsidized Loan for one term, but for less than the amount of the full annual loan limit. Both borrowers were enrolled on a half-time basis.

For Borrower 1, the calculated subsidized usage period under § 685.200(f)(1)(iii) would be 0.5 years

ER16MY13.004

However, because Borrower 1 received a subsidized loan in the amount of the full annual loan limit for a period of less than a full academic year, § 685.200(f)(4)(i) applies. Therefore, the borrower's subsidized usage period is one year and is not prorated.

For Borrower 2, the calculated subsidized usage period is 0.5 years

ER16MY13.005

Because the borrower's loan amount is for less than the full annual loan limit, § 685.200(f)(4)(i) does not apply. Therefore, in accordance with

§ 685.200(f)(4)(ii), Borrower 2's subsidized usage period is prorated based on the borrower's half-time enrollment status. Because Borrower 2 is enrolled on a half-time basis, the borrower's subsidized usage period of 0.5 years is multiplied by 0.5, resulting in a prorated subsidized usage period of 0.25 years.

For Borrower 1, the remaining eligibility period is two years, which is the difference between the borrower's maximum eligibility period (three years) and the sum of the borrower's subsidized usage periods (one year). For Borrower 2, the remaining eligibility period is 2.75 years, which is the difference between the borrower's maximum eligibility period (three years) and the sum of the borrower's subsidized usage periods (0.25 years).

Reasons:
Section 685.200(f)(4)(i) provides the first exception to the definition of the term “subsidized usage period”: If a first-time borrower receives a Direct Subsidized Loan in an amount that is equal to the annual loan limit for a loan period that is less than a full academic year in length, the subsidized usage period is one year.

Under current law and regulations, a borrower can receive a Direct Subsidized Loan in an amount equal to the full annual loan limit for a period that is as short as a term (e.g., a semester). Absent § 685.200(f)(4)(i), a borrower would be able to partially circumvent the limitations on Direct Subsidized Loan eligibility enacted by MAP-21: An institution could double a borrower's Direct Subsidized Loan eligibility by disbursing the full annual Direct Subsidized Loan limit for a single term of the academic year (e.g., one semester). If this pattern were extended for the duration of the program, the borrower's subsidized usage period would be only 0.5 years for each academic year and the borrower would have effectively doubled his or her eligibility for Direct Subsidized Loans. Section 685.200(f)(4)(i) prevents this type of circumvention of MAP-21's limitations on Direct Subsidized Loan eligibility.

Section 685.200(f)(4)(ii) provides the second exception to the definition of the term “subsidized usage period”: If a first-time borrower is enrolled on a half-time or three-quarter-time basis, the borrower's subsidized usage period is prorated by multiplying the borrower's subsidized usage period, as determined in accordance with § 685.200(f)(1)(iii), by 0.5 or 0.75, respectively. Section 685.200(f)(4)(ii) implements revised section 455(q)(3)(B)(i) of the HEA, which directs the Secretary to specify in regulation how a borrower's subsidized usage period will be calculated when the borrower is enrolled on less than a full-time basis. Unlike other Federal student aid programs, such as the Federal Pell Grant Program, Direct Loans are not prorated based on the borrower's enrollment status. Thus, if a borrower who is enrolled on a part-time basis has the same costs and financial need as a borrower who is enrolled on a full-time basis, then both borrowers will be eligible for a Direct Subsidized Loan in the same amount (assuming the borrowers' years in school are equivalent). Because borrowers may decide to enroll on less than a full-time basis for many different reasons, we believe it is unlikely that failing to prorate such borrowers' subsidized usage periods would provide a sufficient incentive for such borrowers to enroll on a full-time basis. Furthermore, we believe that not prorating a borrower's subsidized usage period based on the borrower's enrollment status would unfairly punish borrowers who choose to enroll on a part-time basis, by further limiting such borrower's eligibility for Direct Subsidized Loans. Finally, prorating a borrower's subsidized usage period will not result in these borrowers receiving significantly higher levels of Direct Subsidized Loan funds than borrowers who are enrolled full time, because many borrowers who take out Direct Subsidized Loans in significant amounts will reach the aggregate Direct Subsidized Loan limit of $23,000 prior to reaching their maximum eligibility period under these provisions.

Borrower Responsibility for Accruing Interest on Existing Direct Subsidized Loans for Borrowers Who Continue Enrollment After Reaching the 150 Percent Subsidized Loan Limit (§ 685.200(f)(3))

Statute:
Section 455(q)(2) of the HEA, added by MAP-21, provides that interest accrues on all Direct Subsidized Loans disbursed to certain borrowers on or after July 1, 2013. A borrower is responsible for the accruing interest on these loans if the borrower is ineligible for additional Direct Subsidized Loans because of the 150 percent limitation and is enrolled in a program that would otherwise qualify the borrower for a Direct Subsidized Loan. Section 455(q)(2) further provides that interest on a Direct Subsidized Loan is paid and capitalized in the same manner as interest on a Direct Unsubsidized Loan.

Current Regulations:
There are no existing regulations.

New Regulations:
Section 685.200(f)(3)(i) describes the circumstances under which a first-time borrower becomes responsible for accruing interest on his or her existing Direct Subsidized Loans. Notwithstanding any other provision in the regulations that limits the borrower's responsibility for accruing interest, the borrower exceeds the eligibility limit and becomes responsible for accruing interest on all Direct Subsidized Loans if the borrower: (1) has no remaining eligibility period; and (2) attends any undergraduate program or preparatory coursework on at least a half-time basis at an eligible institution that participates in the Title IV, HEA programs. (
Note:
throughout this preamble the terms enrollment and attendance are used interchangeably to describe a borrower taking courses at a program.)

Attendance in an eligible undergraduate program causes a borrower to become responsible for accruing interest even if the borrower does not request or receive a new loan. A borrower's enrollment in graduate or professional programs, enrollment on less than a half-time basis, or enrollment in programs at an institution that does not participate in the Title IV loan programs will not result in borrower responsibility for accruing interest because borrowers in those programs are not eligible for Direct Subsidized Loans. In addition, if a borrower has a Direct Consolidation Loan that repaid a Direct Subsidized Loan, and then the borrower subsequently becomes responsible for accruing interest, interest that accrues on that portion of the Direct Consolidation Loan is the responsibility of the borrower.

There are three circumstances in which a borrower becomes responsible for accruing interest on all Direct Subsidized Loans. The first is when a borrower who has no remaining eligibility period for Direct Subsidized Loans continues enrollment in the program for which the borrower received the loans. The second is when a borrower has no remaining eligibility period for a program and, after withdrawing or transferring, enrolls in a different program that is equal to or shorter in duration than the prior program. The third is when a borrower who previously received Direct Subsidized Loans and who still has some remaining eligibility period for that program withdraws or transfers from that program to a program of a shorter duration than the prior program. In some cases, enrolling in another program results in the sum of the borrower's subsidized usage periods equaling or exceeding the new program's maximum eligibility period. In such cases, the borrower's enrollment

in the shorter program causes the borrower to have no remaining eligibility period (which causes a loss of eligibility for additional Direct Subsidized Loans) and to become responsible for accruing interest on the outstanding loans.

Under § 685.200(f)(3)(i), a borrower becomes responsible for accruing interest on his or her outstanding loans from the date that the conditions of § 685.200(f)(3)(i)(A) and (B) are both met. The borrower is responsible for accruing interest when the borrower is enrolled at least half time at an eligible institution, during the grace period, during deferment periods, or during certain periods when the borrower is repaying Direct Loans under the Pay As You Earn or Income-Based Repayment plans (existing regulations governing those repayment plans provide that under certain circumstances borrowers are not responsible for accruing interest).

Section 685.200(f)(3)(ii) provides that, if a borrower previously became responsible for accruing interest on a Direct Subsidized Loan and then receives a Direct Consolidation Loan that repays that loan, the borrower continues to be responsible for the accruing interest on the portion of that Direct Consolidation Loan that repaid the Direct Subsidized Loan.

Section 685.200(f)(3)(iii) provides that, for any outstanding Direct Subsidized Loans for which the borrower becomes responsible for accruing interest, interest that accrued prior to the date on which the borrower became responsible for accruing interest does not become the borrower's responsibility; rather, the borrower is responsible only for the interest that accrues after the borrower meets both conditions specified in § 685.200(f)(3)(i)(A) and (B) (we use the term “accruing interest” in this preamble to indicate this distinction). Borrowers have the option of paying the interest portion or allowing interest to be capitalized. Unpaid interest is capitalized in the same manner as it is on a Direct Unsubsidized Loan.

Section 685.200(f)(3)(iv) specifies the effect on a borrower's responsibility for accruing interest caused by attendance in a subsequent program if the borrower completes his or her current program in a timely manner. If a borrower completes an undergraduate program without becoming responsible for accruing interest, attendance in a subsequent program will not cause borrower responsibility for accruing interest on previously received loans, even if the borrower has no remaining eligibility period.

Examples 12 through 16 illustrate how a borrower becomes responsible for accruing interest under § 685.200(f)(3):

Example 12:
A borrower enrolls in a four-year program, but takes six years to complete the program and receives Direct Subsidized Loans for each of those six years. The borrower then continues to be enrolled in the same program for a seventh year.

Maximum eligibility period
6 years.

Subsidized usage period
6 years.

Remaining eligibility period
0 years.

Borrower responsibility for accruing interest
The borrower becomes responsible for accruing interest upon enrollment in the seventh year.

The maximum eligibility period for the four-year program is six years. The borrower received Direct Subsidized Loans for all six years, meaning that the borrower is no longer eligible for additional Direct Subsidized Loans. Because the borrower continues enrollment in the same program after losing eligibility for additional Direct Subsidized Loans, the borrower becomes responsible for accruing interest on all of his or her outstanding Direct Subsidized Loans, regardless of whether he or she requests or receives additional Federal student aid. If the borrower had graduated or discontinued enrollment before the seventh year, the borrower would not have become responsible for accruing interest on his or her Direct Subsidized Loans.

Example 13:
A borrower enrolls in a four-year program, receives Direct Subsidized Loans for four years, but discontinues enrollment before completing the program. The borrower then enrolls in a two-year program, but does not request Federal student aid of any kind.

Maximum eligibility period for 2-year program
3 years.

Subsidized usage period
4 years.

Remaining eligibility period
−1 years.

Borrower responsibility for accruing interest
The borrower becomes responsible for accruing interest upon enrollment in the two-year program.

The borrower's four-year program has a maximum eligibility period of six years. The borrower receives Direct Subsidized Loans for the four years the borrower is enrolled in that program. Upon withdrawing from that program, the borrower would have been eligible for Direct Subsidized Loans for an additional two years if he or she had remained in that program. However, when the borrower enrolls in the two-year program, the borrower's maximum eligibility period is recalculated as three years. Furthermore, the period during which the borrower previously received Direct Subsidized Loans counts against the borrower's new maximum eligibility period. The borrower is ineligible for additional Direct Subsidized Loans because the borrower has no remaining eligibility period (the borrower's maximum eligibility period upon enrollment in the two-year program (three years) is less than the sum of the borrower's subsidized usage periods (four years)). The borrower's enrollment in the shorter program causes the borrower to become ineligible for additional Direct Subsidized Loans and to become responsible for accruing interest on all previously received Direct Subsidized Loans.

We note that, although the calculations in example 13 arithmetically result in a remaining eligibility period that is a negative number, the effect is the same as if the borrower had a remaining eligibility period of zero years and then enrolled in a program of equal or shorter duration. A negative remaining eligibility period does not require that the borrower or institution return any portion of previously disbursed Direct Subsidized Loan.

Example 14:
A borrower enrolls in a four-year undergraduate program and receives Direct Subsidized Loans for six years. The borrower then enrolls in a two-year master's degree program.

Maximum eligibility period
Not applicable.

Subsidized usage period
6 years.

Remaining eligibility period
Not applicable.

Borrower responsibility for accruing interest
The borrower is not responsible for accruing interest.

The borrower's four-year program has a maximum eligibility period of six years. The borrower received Direct Subsidized Loans for six years. When the borrower enrolls in the graduate program, the borrower is not eligible for additional Direct Subsidized Loans because graduate students are not eligible for Direct Subsidized Loans. Under § 685.200(f)(3)(i)(B), enrollment in such programs does not result in a borrower becoming responsible for accruing interest. Therefore, enrollment in the master's degree program does not cause the borrower to become responsible for accruing interest on Direct Subsidized Loans.

Example 15:
A borrower enrolls in a four-year undergraduate program, receives Direct Subsidized Loans for four years, and graduates on time. The borrower then enrolls in a two-year undergraduate program.

Maximum eligibility period
3 years.

Subsidized usage period
4 years.

Remaining eligibility period
−1 years.

Borrower responsibility for accruing interest
The borrower is not responsible for accruing interest.

The borrower's four year program had a maximum eligibility period of six years and the borrower received Direct Subsidized Loans for four years in that program. When the borrower enrolls in the two-year program, the borrower's maximum eligibility period is recalculated as three years. The sum of the borrower's subsidized usage periods (four years) exceeds the borrower's maximum eligibility period (three years); the borrower has no remaining eligibility period and is therefore no longer eligible for Direct Subsidized Loans. Under § 685.200(f)(3)(i), because the borrower had no remaining eligibility period upon enrollment in an undergraduate program, the borrower would normally become responsible for accruing interest. However, under § 685.200(f)(3)(iv), because the borrower graduated from the four-year program before becoming responsible for accruing interest, enrollment in the two-year program does not result in the borrower becoming responsible for accruing interest on any loans.

Example 16:
A borrower enrolls in a two-year program and receives Direct Subsidized Loans for two years. The borrower does not complete that program, but transfers to a four-year program and receives four years of Direct Subsidized Loans, graduating on time. The borrower then enrolls in a one-year certificate program.

After year 2 of two-year program

Upon completion of four-year
program

Upon attendance in the one-year program

Maximum eligibility period for program
3 years
6 years
1.5 years.

Sum of all subsidized usage periods
2 years
6 years
6 years.

Remaining eligibility period
1 year
0 years
−4.5 years.

Borrower responsibility for accruing interest
Borrower not responsible for accruing interest
Borrower not responsible for accruing interest
Borrower not responsible for accruing interest.

The borrower transferred to the four-year program before becoming responsible for accruing interest in the two-year program. When the borrower transferred, the borrower's maximum eligibility period was recalculated as six years, resulting in a remaining eligibility period of four years. The borrower completed the four-year program before becoming responsible for accruing interest. Therefore, under § 685.200(f)(3)(iv), upon enrollment in the one-year certificate program, the borrower does not become responsible for accruing interest on any of the borrower's previously received Direct Subsidized Loans. However, the borrower is not eligible to receive Direct Subsidized Loans while attending the one-year certificate program.

Reasons:
MAP-21 added section 455(q)(2) to the HEA, which provides that if a borrower is no longer eligible for Direct Subsidized Loans and is enrolled in a program of education or training for which the borrower is otherwise eligible to receive Direct Subsidized Loans, interest will accrue on all of the borrower's Direct Subsidized Loans that were disbursed to the borrower on or after July 1, 2013. We believe that the limit on subsidy duration in MAP-21 was meant to encourage timely completion.
1

We have therefore drafted implementing regulations consistent with that goal.

1
The Senate Appropriations Committee's report on the 2013 Appropriations bill funding the Department states that limiting “subsidy duration will encourage borrowers to complete their educational program in a timelier manner.” S.Rpt. 112-176, 112th Cong. 2d Sess. at 190 (2012).

Section 685.200(f)(3) provides that a borrower becomes responsible for accruing interest on all Direct Subsidized Loans only if the borrower has no remaining eligibility period and then enrolls at least half time in an eligible undergraduate program or preparatory coursework at an institution that participates in the Title IV, HEA programs. This is consistent with the requirements of section 455(q) of the HEA. Specifically, the statute provides a progression of actions and consequences

for Direct Subsidized Loan borrowers which ultimately results in a borrower becoming responsible for accruing interest. First, section 455(q)(3)(A) of the HEA provides that a borrower may not receive Direct Subsidized Loans in excess of the borrower's maximum eligibility period. Second, section 455(q)(1) of the HEA provides that such borrowers lose eligibility for Direct Subsidized Loans if the borrower meets or exceeds his or her maximum eligibility period. Finally, section 455(q)(2) of the HEA provides that, if the borrower is enrolled in a program of education or training after having lost eligibility for Direct Subsidized Loans, interest on the borrower's Direct Subsidized Loans disbursed on or after July 1, 2013 accrues, notwithstanding any other provision of law that would relieve the borrower of the obligation to pay interest.

A consequence of § 685.200(f)(3)(i) is that a borrower will become responsible for accruing interest on outstanding Direct Subsidized Loans by enrolling in an undergraduate program that is shorter than the program for which the borrower previously received Direct Subsidized Loans, even if the borrower does not receive new Direct Subsidized Loans. For the reasons articulated in the preamble discussion of § 685.200(f)(1)(ii)-(iv), the interim final regulations require that a borrower's maximum eligibility period changes to reflect the length of the program in which the borrower is currently enrolled. If a borrower had previously borrowed for a longer program (even if the borrower had a remaining eligibility period greater than zero for that program), then, by virtue of the previous borrowing, it is possible for the borrower to have no remaining eligibility period for the shorter program even if the borrower does not receive any Direct Subsidized Loans for the shorter program. By enrolling in the shorter program, the borrower immediately satisfies the condition of section 455(q)(3)(A) of the HEA (that the borrower is no longer eligible for Direct Subsidized Loans) as well as the condition of section 455(q)(2) of the HEA (that the borrower is enrolled after losing eligibility for additional Direct Subsidized Loans). Therefore, to implement section 455(q) of the HEA, the interim final regulations require that enrollment in a shorter program after meeting or exceeding the borrower's maximum eligibility period will result in the borrower becoming responsible for accruing interest on all outstanding Direct Subsidized Loans.

We recognize that under this framework, a borrower could become responsible for accruing interest on his or her Direct Subsidized Loans by enrolling in a program of equal or shorter duration even if the borrower completed a prior program in a timely manner. Because we believe that MAP-21 was intended to encourage borrowers to complete their programs in a timely manner, § 685.200(f)(3)(iv) specifies that such a circumstance will not result in borrower responsibility for accruing interest (see examples 15 and 16). Absent such treatment, borrowers who complete their programs in a timely manner, consistent with the statutory intent, could still become responsible for accruing interest. In addition, without this treatment, the regulations would create a disincentive for borrowers who completed their programs on time but are nevertheless unemployed or underemployed and need to return to a short-term educational program for job retraining. For these reasons, we have specified in regulation that borrowers who complete their programs in a timely manner do not become responsible for accruing interest, consistent with the intent of MAP-21.

Section 685.200(f)(3)(i) also specifies that borrowers who become responsible for accruing interest on outstanding Direct Subsidized Loans will be responsible for such interest for the life of the loans, including periods of in-school status, grace periods, deferment periods, and certain periods of repayment under the Income-Based Repayment and Pay As You Earn Repayment plans. Section 455(q)(2) of the HEA provides that the borrower is responsible for accruing interest on outstanding Direct Subsidized Loans “notwithstanding subsection (f)(1)(A) or any other provision of this title.” Section 455(f)(1)(A) of the HEA provides that during periods of eligible deferments, interest does not accrue and is not paid by the borrower. Therefore, under section 455(q)(2) a borrower who becomes responsible for accruing interest does so even during periods of deferment. The interim final regulations implement this statutory requirement by providing that, when a borrower becomes responsible for accruing interest on Direct Subsidized Loans, interest accrues and is the responsibility of the borrower even during periods of deferment. Similarly, section 455(a)(2) of the HEA requires that the borrower becomes responsible for accruing interest during similar periods when interest would not otherwise be the responsibility of the borrower. The interim final regulations therefore require that, when repaying Direct Subsidized Loans under the Pay As You Earn or Income-Based Repayment plans, a borrower who would otherwise not be responsible for accruing interest during certain periods of repayment will become responsible for such interest if the borrower meets the conditions of § 685.200(f)(3).

Finally, § 685.200(f)(3)(i)(B) reflects section 455(q)(2) of the HEA, which provides that a borrower becomes responsible for accruing interest if the borrower is enrolled in a program for which the borrower is otherwise eligible to receive a Direct Subsidized Loan.

Regaining Eligibility for Direct Subsidized Loans (§ 685.200(f)(5))

Statute:
MAP-21 added section 455(q)(1) to the HEA to provide that a borrower loses eligibility for Direct Subsidized Loans if the period of time for which the borrower has received Direct Subsidized Loans exceeds the aggregate period of enrollment as described in section 455(q)(3) of the HEA.

Current Regulations:
There are no existing regulations.

New Regulations:
Section 685.200(f)(5) provides that a first-time borrower who had previously lost eligibility to receive additional Direct Subsidized Loans may regain eligibility for Direct Subsidized Loans if the borrower attends an educational program that is longer than the prior educational program in which the borrower was enrolled. This provision applies even if the borrower has become responsible for accruing interest on previously received Direct Subsidized Loans under § 685.200(f)(3). Example 17 illustrates this regulatory provision:

Example 17:
A borrower enrolls in a two-year program and receives Direct Subsidized Loans for the maximum eligibility period of three years. The borrower is no longer eligible for further Direct Subsidized Loans in this program. Then, the borrower enrolls in a four-year undergraduate program.

Maximum eligibility period for 4-year program
6 years.

Subsidized usage period
3 years.

Remaining eligibility period
3 years.

The borrower's two-year program had a maximum eligibility period of three years and the borrower received Direct Subsidized Loans for three years for that program. Because the borrower had no remaining eligibility period in that program, the borrower becomes ineligible for additional Direct Subsidized Loans. However, when the borrower enrolls in the four-year program the borrower's maximum

eligibility period is 6 years. Since the borrower has used three years of eligibility, the borrower now becomes eligible for an additional three years of Direct Subsidized Loans. Therefore, the borrower has regained eligibility by enrolling in a program of greater duration than the borrower's previous program.

Reasons:
Section 685.200(f)(5) incorporates the calculations of section 455(q)(3) of the HEA into the interim final regulations. Specifically, this regulatory provision provides that a borrower may regain eligibility for Direct Subsidized Loans if the borrower attends an educational program longer than the program in which the borrower was previously enrolled. A borrower enrolling in such a program would have a new, longer eligibility period and would regain eligibility for additional Direct Subsidized Loans.

Failing to allow a borrower to regain eligibility in this manner would result in inequitable treatment of similarly situated borrowers. For example, if enrolling in a new, longer educational program did not expand a borrower's maximum eligibility period, students enrolling in two different programs would have significantly reduced Direct Subsidized Loan eligibility compared to borrowers who only enrolled in the longer program. Suppose a borrower is enrolled in a two-year program and receives Direct Subsidized Loans for three years. If the borrower then transfers to a four-year program and if the borrower's maximum eligibility period were not adjusted to six years, then the borrower would not be eligible for any additional Direct Subsidized Loans. In contrast, a borrower who had been enrolled in the four-year program from the beginning and who had also received Direct Subsidized Loans for three years would have three years of eligibility remaining. Therefore, to provide equal treatment to these and similar borrowers, under these interim final regulations, borrowers who attend programs of greater duration can regain eligibility for Direct Subsidized Loans.

Treatment of Preparatory Coursework Required for Enrollment in a Degree or Certificate Program (§ 685.200(f)(6))

Statute:
MAP-21 added section 455(q)(3)(B) to the HEA. This section directs the Secretary to specify in regulation how the 150 percent limit on Direct Subsidized Loans applies to students who are enrolled in coursework necessary for admission into a degree or certificate program. Section 484(b)(3)(B) of the HEA authorizes an otherwise-eligible student to receive a Direct Loan for one 12-month period in a course of study necessary for enrollment in a degree or certificate program.

Current Regulations:
Current 34 CFR 668.32(a)(1)(ii) reflects the requirements of section 484(b)(3)(B) of the HEA. Section 685.203(a)(6) provides that, for one 12-month period, a student may receive a Direct Loan up to an annual loan limit of $2,625 for coursework necessary for enrollment in an undergraduate degree or certificate program, and up to an annual loan limit of $5,500 for coursework necessary for a graduate or professional degree or certificate program. There are no current regulations that address the application of the 150 percent Direct Subsidized Loan limit on borrowers enrolled in coursework necessary for a graduate or professional program.

New Regulations:
The interim final regulations provide that the provisions of § 685.200(f), which govern the 150 percent limit on Direct Subsidized Loan eligibility, do not supersede the existing 12-month maximum period of loan eligibility limitation imposed by § 668.32(a)(1)(ii). Section 685.200(f)(6) of the interim final regulations establishes rules for determining the eligibility for Direct Subsidized Loans received for preparatory coursework necessary for enrollment in undergraduate or graduate or professional programs. Section 685.200(f)(6) treats coursework required for an undergraduate degree or certificate program differently than coursework required for a graduate or professional program. However, § 685.200(f)(6)(i) specifies that Direct Subsidized Loans received for either type of preparatory coursework are included in the calculation of a borrower's subsidized usage period.

Section 685.200(f)(6)(ii) provides that the maximum eligibility period for Direct Subsidized Loans for students completing preparatory coursework required for enrollment in an undergraduate program is the maximum eligibility period applicable to the undergraduate program for which the preparatory coursework is required. Enrollment in preparatory coursework does not increase the borrower's maximum eligibility period. Furthermore, § 685.200(f)(6)(iv) provides that for undergraduate preparatory coursework, the borrower becomes responsible for accruing interest if the borrower has no remaining eligibility period in the program for which the coursework is required. This occurs if the maximum eligibility period of the undergraduate program for which the preparatory coursework is required is less than the sum of the borrower's subsidized usage periods based on the borrower's prior enrollment in one or more educational programs.

Section 685.200(f)(6)(iii) provides that the maximum eligibility period for preparatory coursework required for enrollment in a graduate or professional program is the maximum eligibility period for the undergraduate program for which the borrower most recently received a Direct Subsidized Loan. A borrower with no remaining eligibility period based on the maximum eligibility period for that undergraduate program may not receive Direct Subsidized Loans to complete the required coursework; however, the borrower may receive Direct Unsubsidized Loans.

Section 685.200(f)(6)(v) provides that enrollment in preparatory coursework required for enrollment in a graduate or professional program does not result in the borrower becoming responsible for accruing interest on previously received Direct Subsidized Loans. Examples 18 through 22 illustrate the regulatory treatment of preparatory coursework:

Example 18:
A borrower enrolls in preparatory coursework required for enrollment in an undergraduate program and receives Direct Subsidized Loans for one year. The borrower then enrolls in a four-year degree program for which the preparatory coursework was required.

Maximum eligibility period
6 years.

Subsidized usage period
1 year.

Remaining eligibility period
5 years.

Under § 685.200(f)(6)(ii), the borrower's maximum eligibility period is calculated as 150 percent of the four-year program, which results in a maximum eligibility period of six years. The borrower received Direct Subsidized Loans for one year of preparatory coursework; under § 685.200(f)(6)(i), this period counts toward the borrower's maximum eligibility period for the four-year program for which the preparatory coursework was required. The difference between the maximum eligibility period (six years) and the sum of the borrower's subsidized usage periods from the preparatory coursework (one year) results in a remaining eligibility period of five years for the four-year program.

Example 19:
A borrower enrolls in preparatory coursework for enrollment in a two-year undergraduate program and receives Direct Subsidized Loans for one year. The borrower then enrolls in the two-year undergraduate program for which the preparatory coursework

was required and receives Direct Subsidized Loans for two years. The borrower then enrolls in a four-year program.

After
preparatory coursework

After
2-year program

Upon enrollment in
4-year program

Maximum eligibility period of the program
3 years
3 years
6 years.

Sum of subsidized usage periods
1 year
3 years
3 years.

Remaining eligibility period
2 years
0 years
3 years.

When the borrower enrolled in the preparatory coursework, the borrower's maximum eligibility period under § 685.200(f)(6)(ii) was the maximum eligibility period for the two-year program for which the coursework is required, or three years. The borrower received Direct Subsidized Loans for one year of preparatory coursework and had two years of eligibility remaining. The borrower then enrolled in the two-year program. The borrower received Direct Subsidized Loans for two years and, after two years, had no remaining eligibility for Direct Subsidized Loans. When the borrower enrolls in the four-year program, the borrower's maximum eligibility period under § 685.200(f)(1)(ii) is calculated as 150 percent of the four-year program, or six years. Under §§ 685.200(f)(1)(iii) and 685.200(f)(6)(i), the period in which the borrower previously received Direct Subsidized Loans, including the loan received for the preparatory coursework, count against the borrower's new six-year maximum eligibility period. The sum of the borrower's subsidized usage periods upon enrollment in the four-year program is three years. The borrower has three years of Direct Subsidized Loan eligibility remaining—the difference between six years and three years.

Example 20:
A borrower enrolls in a two-year program and receives Direct Subsidized Loans for the maximum eligibility period of three years. The borrower withdraws and wants to enroll in another two-year program, but is required to complete preparatory coursework for enrollment in that program.

Maximum eligibility period
3 years.

Subsidized usage period
3 years.

Remaining eligibility period
0 years.

Borrower responsibility for accruing interest
The borrower is responsible for accruing interest.

When the borrower enrolled in the initial two-year program, the borrower's maximum eligibility period was three years. The borrower received Direct Subsidized Loans for the three-year maximum eligibility period. The borrower wants to enroll in another two-year program but is required to complete preparatory coursework for admission to that program. Under § 685.200(f)(6)(ii), the borrower's maximum eligibility period for the preparatory coursework is three years—the maximum eligibility period for the new two-year program. Upon enrollment in the preparatory coursework for the new two-year program, the borrower does not have any remaining eligibility period because the borrower has already received Direct Subsidized Loans for three years. In addition, under § 685.200(f)(6)(iv), enrollment in the undergraduate preparatory coursework causes the borrower to become responsible for accruing interest on all of the borrower's previously received Direct Subsidized Loans, because the borrower has no remaining eligibility period. Finally, § 685.200(f)(3)(iv) does not apply because the borrower did not complete the initial two-year program.

Example 21:
A borrower enrolls in a four-year undergraduate program and receives Direct Subsidized Loans for five years. The borrower wants to enroll in a graduate degree program, but is required to complete preparatory coursework for enrollment in that program.

Maximum eligibility period
6 academic years.

Subsidized usage period
5 academic years.

Remaining eligibility period
1 academic year, subject to the limitation below.

Under § 685.200(f)(1)(ii), the borrower's maximum eligibility period for the four-year program is six academic years (150 percent of the four-year undergraduate program). The borrower received Direct Subsidized Loans for five years. Under § 685.200(f)(6)(iii), the borrower's eligibility for Direct Subsidized Loans for preparatory coursework necessary for enrollment in a graduate program is based on the borrower's most recent undergraduate program of study in which the borrower received a Direct Subsidized Loan. The borrower has a remaining eligibility period of one academic year based on the six academic year maximum eligibility period for the prior undergraduate program, but § 668.32(a)(1)(ii) limits loan eligibility for preparatory coursework to one consecutive 12-calendar month period. The borrower therefore has a remaining eligibility period of one academic year, but must use that eligibility during one consecutive 12 calendar month period.

Example 22:
A borrower enrolls in a four-year undergraduate program and receives Direct Subsidized Loans for the maximum eligibility period of six years. The borrower wants to enroll in a graduate program, but is required to complete preparatory coursework for enrollment in that program.

Maximum eligibility period
6 years.

Subsidized usage period
6 years.

Remaining eligibility period
0 years.

Borrower responsibility for accruing interest
The borrower is not responsible for accruing interest.

Under § 685.200(f)(1)(ii), the borrower's maximum eligibility period for the four-year program is six years. The borrower received Direct Subsidized Loans for the maximum eligibility period of six years. Under § 685.200(f)(6)(iii), the borrower's eligibility for Direct Subsidized Loans for preparatory coursework for enrollment in a graduate program is based on the borrower's most recent undergraduate program of study in which the borrower received a Direct Subsidized Loan. In this case, the borrower used the six years of maximum eligibility for the four-year undergraduate program and has no remaining eligibility period in the preparatory coursework necessary for enrollment in the graduate program. Although the borrower has lost eligibility for Direct Subsidized Loans, § 685.200(f)(6)(v) provides that the borrower's enrollment in the preparatory coursework does not result in the borrower becoming responsible for accruing interest on the borrower's previously received Direct Subsidized Loans.

Reasons:
Section 685.200(f)(6) of the interim final regulations implements section 455(q)(3)(B)(ii) of the HEA, which requires the Secretary to promulgate regulations that address how the 150 percent limitations apply to borrowers enrolled in coursework necessary for enrollment in an eligible undergraduate program or a graduate or professional program.

We chose to treat Direct Subsidized Loans received for preparatory coursework as part of the borrower's related undergraduate program for purposes of the 150 percent limit. This approach is consistent with the statutory goal of creating an incentive for borrowers to complete their programs in a timely manner. We also believe the maximum eligibility period calculated under the 150 percent limit will generally allow borrowers to receive Direct Subsidized Loans while completing 12 calendar months of preparatory coursework and the undergraduate program for which the preparatory coursework is intended. Furthermore, borrowers in such preparatory coursework that are ineligible for further Direct Subsidized Loans would still be eligible for Direct Unsubsidized Loans to complete their preparatory coursework.

The interim final regulations treat preparatory coursework for enrollment in a graduate or professional program differently than coursework required for an undergraduate program. Section 685.200(f)(6)(iii) limits a borrower's Direct Subsidized Loan eligibility for graduate or professional preparatory coursework to the maximum eligibility period applicable to the undergraduate program for which the borrower most recently received a Direct Subsidized Loan.

We chose this approach because preparatory coursework for graduate or professional programs is considered baccalaureate in nature for Direct Loan purposes and is therefore subject to undergraduate loan limits under current § 685.203. Such coursework is also limited to one 12-calendar month period and is a series of specified courses required for admission to a program rather than a stand-alone program of study. An alternative we considered was to treat this coursework as a one-year stand-alone program; however, we rejected this approach because it would cause all borrowers with subsidized usage periods of 1.5 years or more from their prior undergraduate enrollment to become ineligible for Direct Subsidized Loans to complete this preparatory coursework (see example 13 and discussion in the related reasons section).

In addition to addressing borrower eligibility for Direct Subsidized Loans during preparatory coursework, the interim final regulations also address the possibility that a borrower will become responsible for accruing interest that could result from enrollment in such coursework after a borrower reaches the 150 percent limit and is no longer eligible for additional Direct Subsidized Loans. For enrollment in preparatory coursework necessary for enrollment in an undergraduate program, § 685.200(f)(6)(iv) provides that a borrower would become responsible for accruing interest only if the borrower had no remaining eligibility period in the program for which the coursework is required. We believe that this provision will be inapplicable to most borrowers because borrowers rarely enroll in preparatory coursework for an undergraduate program after having already received a significant number of Direct Subsidized Loans. In addition, such borrowers will ultimately become responsible for accruing interest by enrolling in the undergraduate program for which the preparatory coursework is required. Therefore, preventing borrower responsibility for accruing interest during the related preparatory coursework would only delay borrower responsibility for accruing interest for a short period.

In contrast, under § 685.200(f)(6)(v), a borrower's enrollment in preparatory coursework required for a graduate or professional program does not result in the borrower becoming responsible for accruing interest on previously received loans. Borrowers enrolling in graduate or professional preparatory coursework often have borrowed Direct Subsidized Loans during undergraduate programs. Borrower responsibility for accruing interest caused by enrollment in such preparatory coursework could have a significant impact on borrowers who then enroll in a graduate or professional program—such borrowers would be responsible for interest that accrues during all the years of the graduate or professional program. If this were to occur, the costs of borrowing for graduate or professional programs would increase significantly. For example, suppose a borrower with no remaining eligibility period and $23,000 in Direct Subsidized Loan principal (the aggregate loan limit) enrolled in one year of preparatory coursework for a two-year master's degree program. Assuming an interest rate of 6.8% on the borrower's loans, the borrower would be responsible for more than $5,000 in capitalized interest that accrued during those three years of enrollment. Without § 685.200(f)(6)(v), we believe such increased costs of borrowing could deter borrowers who require preparatory coursework from pursuing graduate- or professional-level study.

Furthermore, without § 685.200(f)(6)(v), borrowers who require preparatory coursework for graduate or professional programs would otherwise be treated inequitably compared to those who do not need such preparatory coursework. Because enrollment in graduate and professional programs does not result in borrower responsibility for accruing interest, without § 685.200(f)(6)(v), borrowers who need such preparatory coursework would become responsible for accruing interest while those who do not need preparatory coursework would not. This would result in significantly divergent and inequitable principal balances at the conclusion of the graduate or professional coursework. For these

reasons, the interim final regulations prevent enrollment in such preparatory coursework from resulting in borrower responsibility for accruing interest.

Treatment of Teacher Certification Coursework for Which the Institution Awards No Academic Credential (§ 685.200(f)(7))

Statute:
MAP-21 added section 455(q)(3)(B) to the HEA. This section directs the Secretary to specify in regulations how the 150 percent Direct Subsidized Loan eligibility limit will apply to borrowers at an eligible institution who are enrolled in coursework required for a professional State credential or certification necessary for employment as an elementary or secondary school teacher, but for which the institution awards no academic credential. Section 484(b)(4) of the HEA authorizes a student to receive Title IV student loans for such coursework.

Current Regulations:
Current 34 CFR 668.32(a)(1)(iii) reflects section 484(b)(4) of the HEA, which provides that students are eligible for Direct Loans if they are enrolled in teacher certification coursework that does not lead to an academic credential awarded by an institution, but which is required for certification by the State to teach in an elementary or secondary school. Current § 685.203(a)(7) provides that a student may receive up to an annual Direct Subsidized Loan limit of $5,500 for such coursework. There are no current regulations that specify the treatment of students enrolled in teacher certification coursework for purposes of the 150 percent Direct Subsidized Loan limit. (Throughout the preamble to this interim final regulation, any reference to “teacher certification coursework” only includes teacher certification coursework for which the institution awards no academic credential, unless otherwise specified.)

New Regulations:
Section 685.200(f)(7)(i) of the regulations provides that the maximum eligibility period for a first-time borrower enrolled in teacher certification coursework is calculated as 150 percent of the published length of the teacher certification coursework in which the borrower is currently enrolled.

Section 685.200(f)(7)(ii) provides that, when determining a borrower's remaining eligibility period for teacher certification coursework, only periods in which a borrower received Direct Subsidized Loans for such teacher certification coursework are included in the borrower's subsidized usage period.

Section 685.200(f)(7)(iii) provides that, when determining a borrower's remaining eligibility period for any program or coursework other than teacher certification coursework, periods in which a borrower received Direct Subsidized Loans for such teacher certification coursework are excluded.

Together, these latter two paragraphs provide that we treat the sum of the borrower's subsidized usage periods accrued during teacher certification coursework separately from the borrower's subsidized usage periods accrued during all other undergraduate programs or coursework in which the borrower may have enrolled. Direct Subsidized Loans received for teacher certification coursework count only against the maximum eligibility period for the borrower's teacher certification coursework.

Finally, § 685.200(f)(7)(iv) provides that enrollment in teacher certification coursework for which an academic credential is not awarded by the institution does not cause a borrower to become responsible for accruing interest on the borrower's outstanding Direct Subsidized Loans, including any Direct Subsidized Loans received for periods of undergraduate study.

The provisions of § 685.200(f)(7) cover teacher certification coursework for which an institution does not award an academic credential. Teacher preparation programs for which an institution awards an academic credential are governed by § 685.200(f)(1)-(f)(6), similar to other undergraduate or graduate programs.

Examples 23 through 25 illustrate the treatment of borrowers enrolled in teacher certification coursework.

Example 23:
A borrower completes a four-year baccalaureate degree program and receives four years of Direct Subsidized Loans for that program. The borrower then enrolls in teacher certification coursework that is one year in duration.

Maximum eligibility period for the teacher certification coursework
1.5 years.

Subsidized usage period
0 years.

Remaining eligibility period
1.5 years.

The borrower received Direct Subsidized Loans for four years before enrolling in the teacher certification coursework. When the borrower enrolls in the one year of teacher certification coursework, the calculation of the borrower's maximum eligibility period, subsidized usage period, and remaining eligibility period are unaffected by the borrower's prior enrollment or borrowing. The borrower therefore has 1.5 years of eligibility for Direct Subsidized Loans remaining.

Example 24:
A borrower enrolls in one year of teacher certification coursework and receives Direct Subsidized Loans for one year. The borrower then enrolls in separate teacher certification coursework for two years.

Maximum eligibility period for the teacher certification coursework
3 years.

Subsidized usage period
1 year.

Remaining eligibility period
2 years.

The borrower received Direct Subsidized Loans for one year of teacher certification coursework, and has a remaining eligibility period of 0.5 years after the first year. When the borrower enrolls in the separate two years of teacher certification coursework, the borrower's maximum eligibility period is three years (150 percent of the two years of coursework), but the borrower's previous subsidized usage period of one year counts against the borrower's new maximum eligibility period. Therefore, the borrower has a remaining eligibility period of two years.

Example 25:
A borrower enrolls in a two-year undergraduate degree program and receives Direct Subsidized Loans for three years. The borrower then enrolls in two years of teacher certification coursework, receives Direct Subsidized Loans for three years, and is therefore not eligible for more Direct Subsidized Loans. The borrower continues enrollment in the teacher certification coursework.

Maximum eligibility period for the teacher certification coursework
3 years.

Subsidized usage period
3 years.

Remaining eligibility period
0 years.

Borrower responsibility for accruing interest
The borrower does not become responsible for accruing interest on loans for the undergraduate program or teacher certification coursework.

After completing the two-year undergraduate program, the borrower enrolled in two years of teacher certification coursework and received Direct Subsidized Loans for three years. When the borrower enrolled in the teacher certification coursework, the borrower's maximum eligibility period and remaining eligibility period were both three years because the borrower's previous undergraduate borrowing does not count against the teacher certification maximum eligibility period. The borrower subsequently used all three years of Direct Subsidized Loan eligibility for the teacher certification coursework and therefore has no remaining eligibility period for Direct Subsidized Loans in the teacher certification coursework. When the borrower continues enrollment in the teacher certification coursework, this does not result in the borrower becoming responsible for accruing interest on his or her existing Direct Subsidized Loans, either those received for the undergraduate degree program or those received for the teacher certification coursework.

Reasons:
Section 685.200(f)(7) implements section 455(q)(3)(B)(ii) of the HEA, which requires the Secretary to promulgate regulations that address how the 150 percent Direct Subsidized Loan eligibility limitations apply to borrowers enrolled in teacher certification coursework for which the institution awards no academic credential. The interim final regulations reflect the unique characteristics of this coursework within the general requirements of section 455(q)(3)(A) of the HEA.

We chose to calculate the 150 percent subsidized limit for teacher certification coursework in a manner similar to the approach used to calculate the limit for undergraduate degree programs. However, in calculating the remaining eligibility period, we chose to exclude Direct Subsidized Loans borrowed for earlier undergraduate programs. Borrowers enrolled in teacher certification coursework required for licensure or certification have already completed baccalaureate degree programs for which they may have received numerous Direct Subsidized Loans. Because this teacher certification coursework is typically one or two years in duration, counting earlier undergraduate loans would likely cause numerous borrowers to lose eligibility for further Direct Subsidized Loans and to become responsible for accruing interest upon enrollment (see example 13). This may discourage students from pursuing education to become teachers. Therefore, we chose to treat borrowing and enrollment in this coursework separately from the borrowing and enrollment in undergraduate programs.

The Secretary believes that individuals should be encouraged to become teachers and to continue teaching. The Secretary also believes that teacher certification coursework is an important national resource for teacher preparation and continued professional development. Treating borrowing during teacher certification coursework separately for purposes of the 150 percent limit preserves sufficient Direct Subsidized Loan eligibility for most borrowers who have financial need while preventing such borrowers from having unlimited Direct Subsidized Loan eligibility for teacher certification coursework. Allowing unlimited eligibility for such coursework would be contrary to the intent of MAP-21, which established a time limit on eligibility for Direct Subsidized Loans and we believe was intended to provide incentives for timely completion.

In addition to treating Direct Subsidized Loans borrowed for teacher certification coursework as separate from prior undergraduate Direct Subsidized Loan borrowing, § 685.200(f)(7)(iv) also provides that a borrower will not be responsible for accruing interest on prior loans based on subsequent enrollment in teacher certification coursework. Many States have certification standards that require teachers to take teacher certification coursework to continue teaching in the State. For these teachers, enrollment in this coursework is legally required for continued employment, not an option that a borrower can exercise. Therefore, we have determined that enrollment in this coursework should not result in the borrower becoming responsible for accruing interest on all of the borrower's outstanding loans.

New Entrance and Exit Counseling Requirements (§ 685.304(a)(6)(xiii), § 685.304(b)(4)(xii))

Statute:
Section 485(l) of the HEA requires an eligible institution to provide entrance counseling to first-time borrowers at or prior to disbursement of a Direct Subsidized Loan or a Direct Unsubsidized Loan. The counseling may be provided in person, on a separate written form provided to and signed and returned by the borrower, or online with the borrower acknowledging receipt. The entrance counseling must include:

• Information on the terms and conditions of the loan;

• The borrower's responsibilities under the loan;

• The effects of the loan on other student aid eligibility;

• An explanation of the use of the master promissory note;

• An explanation of interest accrual and capitalization;

• The borrower's option to pay the accruing interest while in school;

• The consequences of not maintaining half-time enrollment;

• The borrower's responsibility to contact the institution if the borrower withdraws;

• Sample monthly repayment amounts;

• Information on the National Student Loan Data System (NSLDS);

• The borrower's obligation to repay the loan regardless of program completion or completion within the regular timeframe for completion;

• The consequences of default; and

• The name and contact information for a person the borrower may contact if the borrower has any questions.

Section 485(b) of the HEA requires eligible institutions to provide exit counseling to Direct Subsidized Loan or Direct Unsubsidized Loan borrowers prior to the borrower completing the course of study or at the time the borrower departs from, or drops below half-time enrollment at, the institution. The exit counseling must provide:

• Information on the available repayment plans and their features;

• Debt management strategies to facilitate loan repayment;

• Loan forgiveness and cancellation provisions with a description of their terms and conditions;

• Forbearance provisions and their terms and conditions;

• The consequences of default;

• The effects of loan consolidation;

• The types of tax benefits that may be available; and

• The availability of NSLDS and how it can be used by borrowers to access their records and obtain information on the repayment status of their loans.

Current Regulations:
Current § 685.304(a)(6) and (b)(4) of the Department's regulations reflect the borrower entrance and exit counseling requirements contained in the HEA. The information that institutions are required to provide to borrowers during entrance and exit counseling does not currently include information on the Direct Subsidized Loan eligibility limits and the potential borrower responsibility for accruing interest.

New Regulations:
The regulations governing entrance and exit counseling requirements are being amended to require that institutions inform borrowers of the 150 percent Direct Subsidized Loan eligibility limitations

and possible borrower responsibility for accruing interest.

We have added § 685.304(a)(6)(xiii) of the Direct Loan regulations to require that the information provided as part of entrance counseling include:

• The possible loss of eligibility for additional Direct Subsidized Loans;

• How a borrower's maximum eligibility period, remaining eligibility period, and subsidized usage period are determined;

• The potential for a borrower becoming responsible for all accruing interest on Direct Subsidized Loans during in-school periods, grace periods, and periods of authorized deferment; and

• The impact of borrower responsibility for accruing interest on the borrower's total debt.

We have also amended § 685.304(b)(4)(xii) of the Direct Loan regulations governing required exit counseling to require, in addition to the information required as part of entrance counseling, that information be provided to the borrower on:

• The sum of the borrower's subsidized usage periods at the time of the exit counseling;

• How to get information from NSLDS on whether he or she has become responsible for accruing interest on any of his or her Direct Subsidized Loans and whether the borrower is eligible to receive additional Direct Subsidized Loans;

• The possible consequences of receiving additional Direct Subsidized Loans for additional undergraduate programs; and

• The potential for a borrower becoming responsible for all accruing interest on Direct Subsidized Loans during in-school periods, grace periods, and periods of authorized deferment, even if the borrower does not receive an additional Direct Subsidized Loan.

We will modify our entrance counseling material prior to July 1 to reflect the additional information that must be provided to borrowers under new § 685.304(a)(6)(xiii). We will also modify our exit counseling material to reflect the additional information that must be provided to borrowers under new § 685.304(b)(4)(xii). Institutions may continue to rely on the Department's revised counseling materials to comply with these revised regulatory requirements. The Department will post an electronic announcement on the Information for Financial Aid Professionals Web site when revised counseling materials are available.

Reasons:
The amendments made to the HEA by MAP-21 significantly alter borrower eligibility requirements for Direct Subsidized Loans for first-time borrowers on or after July 1, 2013. The amendments also make changes to the terms and conditions of those loans. It is critical that institutions communicate information on these important changes to borrowers as part of their entrance and exit counseling. Without this information, borrowers could be affected by the 150 percent limit without knowing about the limit, without understanding how it is calculated, and without understanding the significant financial implications for them if they reach or exceed the limit. Therefore, we have added this information to the information that institutions must provide during entrance and exit counseling. Enhanced counseling about these requirements will mitigate borrower confusion, encourage accurate budgeting and debt management by borrowers, and help borrowers make informed educational plans mindful of all potential costs.

Additional Reporting Requirements and Modifications to Departmental Systems

To effectively implement the regulatory provisions contained in these interim final regulations, the Department will make a number of changes to NSLDS and to the Common Origination and Disbursement (COD) System. The COD System will collect information needed to determine whether a borrower continues to be eligible for Direct Subsidized Loans; NSLDS will collect information needed to determine whether a borrower becomes responsible for the accruing interest on the Direct Subsidized Loans the borrower previously received. Institutions will not be responsible for officially determining whether a borrower has a remaining eligibility period under these interim final regulations. The Department will have the primary responsibility for making eligibility determinations, determining whether a borrower becomes responsible for accruing interest, and making this information available to borrowers. In the event that there are questions regarding the validity of any determination made by the Department with respect to these provisions, we will develop a process to research data integrity issues, and, if necessary, adjust previously made determinations. However, institutions will be required to report additional information to both the COD System and NSLDS, as discussed below. We are committed to making the necessary systems changes as quickly as possible and will issue further guidance at a later date.

The 150 percent limit only applies to borrowers who are “first-time borrowers” on or after July 1, 2013. The Secretary will have the information necessary to determine whether a borrower is a first-time borrower as defined in § 685.200(f)(1)(i). Institutions will not be required to determine or report this information. However, institutions will be required to supply the information below for all borrowers who receive Direct Loans on or after the date that we implement the system changes necessary to support these interim final regulations.

To allow the Department to calculate a borrower's maximum eligibility period, institutions will be required to report additional information to the COD System when originating and disbursing Direct Loans. The additional information will include, but not be limited to:

• The Classification of Instructional Programs (CIP) Code for the program in which the borrower is enrolled;

• The credential level for the borrower's program;

• The length of the borrower's program (in academic years, months, or weeks);

• The enrollment status of the borrower at the time the loan is disbursed (full time, half time, or three-quarter time);

• If appropriate, an indication that the Direct Loan is intended for preparatory coursework for an undergraduate program;

• If appropriate, an indication that the Direct Loan is intended for preparatory coursework for a graduate or professional program; and

• If appropriate, an indication that the Direct Loan is intended for teacher certification coursework for which the institution does not award an academic credential.

Note:

An enrollment status of less than half time will not be included in the COD System because a borrower is not eligible to receive a Direct Loan for enrollment on a less than half-time basis (this information will continue to be included in NSLDS, however).

We will use the CIP Code, credential level, and program length to define the program in which the borrower is enrolled. We need this information because section 455(q) of the HEA and these implementing regulations require that the borrower's maximum eligibility period be determined program by program.

We are requiring that institutions report the borrower's enrollment status as of the date that the loan is disbursed, as full time, three-quarter time, or half time because the Secretary generally

prorates the subsidized usage period in cases where the borrower is enrolled less than full time.

Finally, institutions must identify Direct Loans that are intended to support preparatory coursework for undergraduate programs, preparatory coursework for graduate or professional programs, and teacher certification coursework because the interim final regulations treat loans for such coursework differently than loans for other programs.

To calculate the borrower's subsidized usage period, the COD System will divide the number of days in each loan period by the number of days in the academic year associated with the loan, as reported by the institution in the award record for the loan. An institution's failure to report this information accurately will not only cause borrowers to appear to have less eligibility for Direct Subsidized Loans than they should but may also cause disbursement records to be rejected by the COD System or result in adverse findings in compliance reviews of the institution, fines, or other sanctions.

By comparing the sum of the borrower's subsidized usage periods to the borrower's maximum eligibility period, the COD System will reject any disbursement record of a Direct Subsidized Loan if the borrower has lost eligibility for Direct Subsidized Loans as a result of new § 685.200(f)(2).

The COD System will track and calculate a borrower's maximum eligibility period, subsidized usage period, and remaining eligibility period, and the Secretary will provide borrowers and institutions with information about the borrower's subsidized usage periods using Student Aid Reports (SARs) and Institutional Student Information Records (ISIRs) through the Central Processing System (CPS). This will allow institutions to counsel Direct Loan borrowers about their maximum eligibility periods and remaining eligibility periods based on the length of the program in which the borrower is enrolled. This information will also allow institutions to determine whether the borrower has any Direct Subsidized Loan eligibility remaining before submitting an origination or disbursement record to the COD System.

In addition to the additional reporting to the COD System, institutions will be required to report additional information to NSLDS as part of their reporting of enrollment information on student loan borrowers. The Department requires this additional information to implement the requirements concerning borrowers' responsibility for accruing interest. The additional information will include, but not be limited to:

• The CIP Code and credential level for the program in which the borrower is enrolled;

• The length of the program in which the borrower is enrolled in academic years, months, or weeks (consistent with institutional reporting in the COD System);

• The enrollment status of the borrower at the time the institution completes the enrollment reporting;

• If appropriate, an indication that the borrower is enrolled in preparatory coursework for an undergraduate program;

• If appropriate, an indication that the borrower is enrolled in preparatory coursework for a graduate or professional program; and

• If appropriate, an indication that the borrower is enrolled in teacher certification coursework for which the institution does not award an academic credential.

The Secretary will use the information regarding CIP Code, credential level, and program length to define the program in which the borrower is enrolled (e.g., as a graduate program or an undergraduate program) and to calculate the appropriate 150 percent limit.

The Secretary will also use the information about the length of the borrower's current program to ensure that borrowers do not improperly become responsible for accruing interest.

Finally, the Secretary will use information that institutions are already required to report concerning a student's graduation to determine whether a borrower will not become responsible for accruing interest under § 685.200(f)(3)(iv) because the borrower completed his or her program in a timely manner.

The Secretary is requiring that institutions flag borrower enrollment in preparatory coursework and teacher certification coursework because of the special rules that apply to borrowers enrolled in those programs.

We will use this information in NSLDS to determine whether a borrower becomes responsible for accruing interest on his or her Direct Subsidized Loans (and the effective date on which the borrower becomes responsible for that interest). This information will be conveyed to the borrower's Federal loan servicer, which will notify the borrower that he or she is responsible f

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2013-11515. Public record. Not legal advice.