Student Assistance General Provisions, Federal Perkins Loan Program, Federal Family Education Loan Program, and William D. Ford Federal Direct Loan Program

DEPARTMENT OF EDUCATION

34 CFR Parts 668, 674, 682, and 685

RIN 1840-AD12

[Docket ID ED-2013-OPE-0063]

Student Assistance General Provisions, Federal Perkins Loan Program, Federal Family Education Loan Program, and William D. Ford Federal Direct Loan Program

AGENCY:

Office of Postsecondary Education, Department of Education.

ACTION:

Notice of proposed rulemaking.

SUMMARY:

The Secretary proposes to amend the Student Assistance General Provisions, Federal Perkins Loan (Perkins Loan) Program, Federal Family Education Loan (FFEL) Program, and William D. Ford Federal Direct Loan (Direct Loan) Program regulations. The proposed regulations would: amend the FFEL and Direct Loan program regulations to reflect changes made to the Higher Education Act of 1965, as amended (HEA), by the SAFRA Act included in the Health Care and Education Reconciliation Act of 2010; incorporate other recent statutory changes in the Direct Loan Program regulations; update, strengthen, and clarify various areas of the Student Assistance General Provisions, Perkins Loan, FFEL, and Direct Loan program regulations; and provide for greater consistency in the regulations governing the title IV, HEA student loan programs. These proposed regulations would ensure that the title IV, HEA Federal student aid programs operate as efficiently as possible.

DATES:

We must receive your comments on or before August 28, 2013.

ADDRESSES:

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

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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 “Are you new to the site?”

•

Postal Mail, Commercial Delivery, or Hand Delivery:

If you mail or deliver your comments about these proposed regulations, address them to Jessica Finkel, U.S. Department of Education, 1990 K Street NW., Room 8031, Washington, DC 20006-8502.

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:

Jessica Finkel, U.S. Department of Education, 1990 K Street NW., Room 8031, Washington, DC 20006-8502. Telephone: (202) 502-7647 or by email:

mailto:

jessica.finkel@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: These regulations would address issues arising from the changes made to the HEA by the SAFRA Act, included in the Health Care and Education Reconciliation Act of 2010 (Pub. L. 111-152). The SAFRA Act ended the origination of new loans under the FFEL Program after June 30, 2010. With this change, all new Stafford, PLUS, and Consolidation loans with a first disbursement on or after July 1, 2010, are now made under the Direct Loan Program. Because all new loans are being made under the Direct Loan Program, the proposed regulations would amend the FFEL Program regulations in 34 CFR part 682 by removing provisions related to the making of new loans. The proposed regulations would also amend the Direct Loan Program regulations in 34 CFR part 685 by adding detailed regulations in areas where the Direct Loan Program regulations currently cross-reference the FFEL Program regulations.

The proposed regulations would also strengthen and clarify provisions of the Perkins Loan, FFEL, and Direct Loan program regulations including, but not limited to, regulations governing: Deferments, forbearances, loan cancellation, rehabilitation of defaulted loans, administrative wage garnishment, and satisfactory repayment arrangements. The proposed regulations would also make the rules governing the various title IV, HEA loan programs more consistent.

Summary of the Major Provisions of This Regulatory Action: The proposed regulations would—

• Raise the participation rate index ceiling applicable to institutions that have a single three-year cohort default rate of over 40 percent for purposes of challenges to and appeals from sanctions based on that default rate.

• Clarify the Perkins Loan, FFEL, and Direct Loan program regulations to provide that a borrower who makes six payments in the course of rehabilitating a defaulted loan, but who does not seek additional title IV aid, will not be considered to have used the one-time-only opportunity to regain title IV eligibility by making satisfactory repayment arrangements. The proposed regulations would also define the term “satisfactory repayment arrangement” more consistently across the title IV, HEA loan programs.

• Amend the closed school discharge provisions in the Perkins Loan, FFEL, and Direct Loan program regulations to specify that a borrower may qualify for a loan discharge if the borrower withdrew from school not more than 120 days before the school closed, instead of the current 90-day standard. The proposed regulations would also add examples of the types of exceptional circumstances under which the Department may extend the 120-day window.

• Update the FFEL and Direct Loan program enrollment status reporting requirements for institutions to reflect current processes and eliminate obsolete terms and procedures. The proposed regulations would also add comparable enrollment status reporting provisions to the Perkins Loan Program regulations.

• Revise the terms under which a guaranty agency in the FFEL Program may authorize a lender to grant forbearance to permit a borrower or endorser to resume honoring the agreement to repay a debt after default but prior to claim payment to require either a signed written agreement to repay or an oral affirmation of the borrower's or endorser's obligation to repay the debt. The proposed regulations would provide that if a forbearance is granted based on the borrower's or endorser's oral request and affirmation of the obligation, the forbearance is limited to 120 days and cannot be granted for consecutive periods. In addition, the lender must orally review with the borrower the terms and conditions of the forbearance and send a notice to the borrower or endorser that confirms the terms of the forbearance. The proposed regulations would also define the term “affirmation.” Finally, the proposed regulations would add comparable provisions in the Direct Loan Program.

• Require that lenders grant forbearance to FFEL borrowers who are performing service that qualifies them for loan repayment under the Department of Defense student loan repayment programs in addition to the program authorized by 10 U.S.C. 2171 (which is currently referenced in the regulations). A comparable forbearance provision would be added to the Direct Loan Program regulations.

• Authorize a lender to grant an administrative forbearance to a FFEL borrower who is delinquent at the beginning of an authorized period of forbearance and add a corresponding provision to the Direct Loan Program regulations.

• Provide that the Secretary, in the Direct Loan Program, and the guaranty agency, in the FFEL Program, would determine a borrower's reasonable and affordable payment amount under a loan rehabilitation agreement based on the borrower's and, if applicable, the borrower's spouse's current disposable income, family size, and reasonable and necessary expenses. The information about income and expenses needed to determine the reasonable and affordable payment amount would be provided by the borrower to the Secretary or the guaranty agency on a form approved by the Secretary and, if requested, with supporting documentation from the borrower or other sources.

• Specify in the FFEL and Direct Loan program regulations that a reasonable and affordable loan rehabilitation payment amount must not be a required minimum payment, a percentage of the borrower's total loan balance, or an amount based on other criteria unrelated to the borrower's total financial circumstances.

• Require that the Secretary, in the Direct Loan Program, or the guaranty agency, in the FFEL Program, provide the borrower with a written rehabilitation agreement within 15 business days of the determination of the borrower's reasonable and affordable payment amount along with a comprehensive description of the borrower's rights, the terms and conditions of the payments, the effects of loan rehabilitation, and, for a FFEL borrower, the treatment of unpaid collection costs.

• Provide that, if the borrower objects to the payment amount determined by the guaranty agency based on the income and expenses shown by the borrower and contained in the written repayment agreement offered to the borrower, the guaranty agency or the Secretary will calculate an amount for the borrower's rehabilitation payment using the formula for calculating a monthly payment amount under the income-based repayment (IBR) plan in the Direct Loan and FFEL Program regulations, and offer the borrower the option to use that amount as the rehabilitation payment amount. The borrower would be free to choose between the amount determined initially and the IBR-based payment amount.

• Provide that, while the borrower is making payments under a rehabilitation agreement, the Secretary and the guaranty agency would limit contact with the borrower to collection activities required by law or regulation and communications that support the rehabilitation.

• Amend the Direct Loan and FFEL program regulations to provide that, when a loan is being collected by administrative wage garnishment (AWG), the Secretary or the guaranty agency, respectively, will suspend AWG after the borrower makes five qualifying monthly payments under a loan rehabilitation agreement, unless the borrower requests that AWG continue.

• Incorporate into the Perkins Loan Program the same eligibility criteria used in the Direct Loan and FFEL programs to define an “eligible graduate fellowship program” and to establish the eligibility of a Perkins Loan borrower for a graduate fellowship deferment.

• Eliminate the debt-to-income economic hardship deferment category in the Perkins Loan Program.

• Modify the rehabilitation provisions in the Perkins Loan Program regulations to define the term “on-time” as it relates to the series of payments required to successfully rehabilitate a defaulted loan.

• Allow assignment of a Perkins Loan to the Secretary without the borrower's Social Security Number if the loan was made before September 13, 1982.

• Permit a Perkins Loan borrower who is unable to complete the second half of an academic year of teaching due to a condition covered under the Family and Medical Leave Act (FMLA) to still count that year as eligible teaching service for loan cancellation purposes, if the borrower's employer considers the borrower to have fulfilled the teacher contract requirements for that academic year.

• Permit a Perkins Loan borrower who is unable to complete a full year of eligible public service due to a condition that is covered under the FMLA to count that year as a full year of public service for loan cancellation purposes if the borrower completes at least six months of consecutive eligible service.

• Specify that, if a Perkins Loan borrower who is performing service that qualifies the borrower for loan cancellation at a cancellation rate progression of 15 percent for the first and second years of qualifying service, 20 percent for the third and fourth years of qualifying service, and 30 percent for the fifth year of qualifying service, takes a job in a different field that qualifies the borrower under a different cancellation category that provides loan cancellation at the same cancellation rate progression as the prior category, the borrower's cancellation rate under the new cancellation category would continue from the last year the borrower received a cancellation under the former cancellation category, rather than starting over at the first-year cancellation rate.

• Change the timeframe for FFEL lenders to send the required repayment disclosure for borrowers who are 60 days delinquent from five calendar days to five business days after the date the borrower becomes 60 days delinquent.

• Amend the FFEL Program regulations to provide that a lender does not have to send a repayment disclosure to a borrower who is having difficulty making payments if the borrower's difficulty has been resolved through contact resulting from an earlier disclosure or from other contact between the lender and the borrower.

• Amend the regulations governing AWG to reflect the borrower's right to request a hearing on the enforceability of the debt and to allow the borrower to object to the amount or rate of AWG withholding if such withholding would cause financial hardship to the borrower.

• Revise the regulations governing AWG to conform the requirements for borrowers whose defaulted loans are held by a guaranty agency to the rules and procedures used by the Secretary.

• Amend the regulations governing AWG to incorporate existing policy guidance related to third-party servicers or collection contractors retained by guaranty agencies.

• Amend the regulations governing AWG to more clearly describe the process, from the initial garnishment notice to withholding.

• Amend the regulations governing AWG to better reflect due process requirements and to specify the functions, delegations of authority, recordkeeping requirements, and permissible activities of guaranty agencies and third-party servicers or collection contractors.

• Clarify the limitations on the amount that may be subject to AWG if a guaranty agency is garnishing pay

from a borrower who is not already subject to a withholding order or from a borrower who is already subject to one or more withholding orders. The proposed regulations would also permit a greater amount or percentage to be withheld with the borrower's consent.

• Require that for a borrower to receive a hearing before AWG begins, the borrower's written request for a hearing must be received on or before the 30th day following the date the garnishment notice was sent, and delete a provision that a borrower is considered to have received a garnishment notice five days following the date of the notice.

• Provide that if a borrower's written request for a hearing is received by the guaranty agency after the 30th day following the date of the garnishment notice, the agency must provide the borrower a hearing and issue a decision within 60 days following receipt of the request. If a decision is not rendered within 60 days, the guaranty agency must suspend the order beginning on the 61st day after the hearing request was received until a hearing is provided and a decision is rendered.

• Amend the FFEL Program regulations to: Specify the contents of an AWG notice; describe how an AWG hearing is administered, including provisions for the submission of additional evidence and the granting of continuances; provide for the withholding order to end by either rescission or full recovery of amounts owed by the borrower; and clarify that a borrower who wishes to object that he or she is not subject to garnishment because of involuntary separation bears the burden of raising and proving that claim.

• Eliminate provisions in the FFEL Program regulations governing loan origination and disbursement and related requirements and activities except for certain school-based requirements and related activities.

• Eliminate obsolete provisions that do not reflect the current procedures in the FFEL Program.

• Make necessary conforming changes in various FFEL Program provisions to update the regulations.

• In the Direct Loan Program regulations, modify the exception to the minimum loan period requirement for clock-hour and certain non-standard term programs that allows a school, in certain transfer student situations, to originate a loan for a period shorter than the lesser of the academic year or program length only if the school accepts credit or clock hours from the school that the student was previously attending. The proposed regulations would remove the provision that limits this exception to situations in which the school into which the student transfers accepts credit or clock hours from the prior school.

• Add detailed regulations to 34 CFR part 685 in areas where the Direct Loan Program regulations currently just cross-reference the FFEL Program regulations.

• Remove obsolete provisions that do not reflect current procedures used in administering the Direct Loan Program.

• Revise the Direct Loan Program regulations to reflect the impact of the SAFRA Act and other recent statutory changes.

Please refer to the

Summary of Proposed Changes

section of this preamble for more details on the major provisions contained in this notice of proposed rulemaking (NPRM).

Costs and Benefits: The proposed regulations are estimated to have a net budget impact of $2.8 to $3.4 million over ten years from 2013 to 2022. Consistent with the requirements of the Credit Reform Act of 1990 (2 U.S.C. 661(a)(5)), budget cost estimates for the student loan programs reflect the estimated net present value of all future non-administrative Federal costs associated with a cohort of loans. (A cohort reflects all loans originated in a given fiscal year.)

Absent evidence of the impact of these regulations on student behavior, budget cost estimates were based on behavior as reflected in various Department data sets and longitudinal surveys listed under

Assumptions, Limitations, and Data Sources.

Program cost estimates were generated by running projected cash flows related to each provision through the Department's student loan cost estimation model. Student loan cost estimates are developed across five risk categories. The categories are:

• Loans for students attending less than four-year for-profit institutions;

• Loans for students attending less than four-year public and non-profit institutions;

• Loans for freshmen or sophomores in four-year institutions of all types;

• Loans for juniors or seniors in four-year institutions of all types; and

• Loans for graduate students in institutions of all types.

Risk categories have separate assumptions based on the historical pattern of the behavior of borrowers in each category, such as the likelihood of default or of the use of statutory deferment or discharge benefits.

Overall, the proposed regulations would strengthen and streamline the Federal student loan programs and help support the American postsecondary education system. As more and more students depend on student loans to pay for their college education, it is essential that borrowers are able to fully understand and comprehend their rights and responsibilities in relation to their student debt obligations. It is also essential that the student loan programs operate as efficiently as possible. A college education has become essential for employment in a large part of the American economy and the percentage of jobs that require a degree will only increase in the future. The Department's loan programs support over ten million students per year, and this number will grow if the country pursues the President's 2020 goal of leading the world in college degree attainment. Keeping a strong and efficient higher education system is essential to America maintaining its economic advantage in the world.

Invitation to Comment:

As outlined in

Negotiated Rulemaking,

significant public participation, through three public hearings and three negotiated rulemaking sessions, has occurred in developing this NPRM. We invite you to submit comments regarding these proposed 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 proposed regulations that each of your comments addresses and to arrange your comments in the same order as the proposed 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 proposed 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 Department's programs and activities.

During and after the comment period, you may inspect all public comments about these proposed regulations by accessing Regulations.gov. You may also inspect the comments in person, in Room 8031, 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. Please contact the person listed under

FOR FURTHER INFORMATION CONTACT

.

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 proposed 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

.

Negotiated Rulemaking

Section 492 of the HEA requires the Secretary, before publishing any proposed regulations for programs authorized by title IV of the HEA, to obtain public involvement in the development of the proposed regulations. After obtaining advice and recommendations from the public, including individuals and representatives of groups involved in the Federal student financial assistance programs, the Secretary must establish a negotiated rulemaking committee and subject the proposed regulations to a negotiated rulemaking process. All proposed regulations that the Department publishes on which the negotiators reached consensus must conform to final agreements resulting from that process unless the Secretary reopens the process or provides a written explanation to the participants stating why the Secretary has decided to depart from the agreements. Further information on the negotiated rulemaking process may be found at:

www2.ed.gov/policy/highered/reg/hearulemaking/2011/loans.html

.

On May 5, 2011, the Department published a notice in the

Federal Register

(76 FR 25650) announcing our intent to establish up to two negotiated rulemaking committees to prepare proposed regulations. One committee would focus on issues related to streamlining institutional reporting requirements and proposed regulations regarding better State identification of low-performing teacher preparation programs pursuant to sections 205 and 207 of the HEA by focusing reporting on improved measures of program quality. A second committee (the “negotiating committee”) would address Federal student loan issues. The regulations considered by the negotiating committee would: Implement changes made by the SAFRA Act (Pub. L. 111-152), which ended the making of new loans in the FFEL Program as of July 1, 2010; make improvements to the income-contingent and income-based repayment plans; and improve the process for consideration of applications for total and permanent disability discharges. The notice requested nominations of individuals for membership on the committees who could represent the interests of key stakeholder constituencies on each committee.

The Department developed a list of proposed regulatory provisions from advice and recommendations submitted to the Department in testimony by individuals and organizations in a series of three public hearings and a roundtable discussion held on:

• May 12, 2011, at Tennessee State University, Nashville, Tennessee.

• May 16, 2011, at Pacific Lutheran University, Tacoma, Washington.

• May 19, 2011, at Loyola University—Lakeshore Campus, Chicago, Illinois.

• May 26, 2011, at College of Charleston, Charleston, South Carolina.

In addition, the Department accepted written comments on possible regulatory provisions submitted directly to the Department by interested parties and organizations. Transcripts of the regional meetings can be accessed at

www2.ed.gov/policy/highered/reg/hearulemaking/2011/loans.html

and are also accessible in the rulemaking docket on

www.regulations.gov

.

Staff within the Department also identified issues for discussion and negotiation.

The negotiating committee included the following members:

• Mr. Getachew Kassa, Legislative Director, United States Student Association, and Mr. Abou Amara, Jr. (alternate), President, Graduate and Professional Student Association, University of Minnesota, Twin Cities.

• Ms. Deanne Loonin, National Consumer Law Center, and Ms. Radhika Miller (alternate), Program Manager, Educational Debt Relief and Outreach, Equal Justice Works.

• Ms. Jennifer Mishory, Deputy Director, Young Invincibles, and Ms. Maureen Thompson (alternate), The Hastings Group, LLC.

• Ms. Margaret Rodriguez, Senior Associate Director of Financial Aid, University of Michigan, and Chair, National Direct Student Loan Coalition, and Ms. Elizabeth Hicks (alternate), Executive Director, Student Financial Services, Massachusetts Institute of Technology.

• Mr. David Glezerman, Assistant Vice President and University Bursar, Temple University, and Ms. Maria Livolsi (alternate), Student Loan Service Center, State University of New York.

• Mr. Robert Perrin, President, Williams & Fudge, Inc.

• Mr. Todd Leatherman, Executive Director, Office of Consumer Protection, Office of the Kentucky Attorney General, and Ms. Michele Casey (alternate), Assistant Attorney General, Consumer Fraud Bureau Office of the Illinois Attorney General.

• Ms. Cristi Millard, Director of Financial Aid, Salt Lake Community College, and Mr. Chris Christensen, (alternate), Director of Financial Aid, Johnson County Community College, Kansas.

• Ms. Kris Wright, Director, Office of Student Finance, University of Minnesota, and Executive Council Member and Secretary, National Direct Student Loan Coalition, and Ms. Elaine Papas-Varas (alternate), University Director of Student Financial Aid and Director of the Primary Care Loan Redemption Program of New Jersey, University of Medicine and Dentistry of New Jersey.

• Ms. Yvonne Gutierrez-Sandoval, Senior Associate Director of Financial Aid, Pitzer College, and Mr. Jeffrey A. Gall (alternate), Associate Dean, Office of Student Financial Services, Georgetown University.

• Mr. Tom Sakos, Director of Student Lending and Regulatory Quality Assurance, DeVry Inc., and Mr. Anthony Fragomeni (alternate), Director of Governmental Affairs, Empire Education Group, and Chairman, American Association of Cosmetology Schools' Government Relations Team.

• Ms. Betsy Mayotte, Director, Regulatory Compliance and Privacy, American Student Assistance, and Mr. Scott Giles (alternate), Vice President for Operations, Social Marketing and Strategy, Vermont Student Assistance Corporation.

• Mr. Robert Sandlin, Director of Policy and Compliance, Higher Education Servicing Corporation, and Ms. Vicki Shipley (alternate), Senior Advisor, National Council of Higher Education Loan Programs.

• Mr. Albert Gray, Executive Director and CEO, Accrediting Council for Independent Colleges and Schools, and Ms. Sharon Tanner (alternate), Chief Executive Officer, National League for Nursing Accreditation.

• Ms. Pamela Moran and Ms. Gail McLarnon, U.S. Department of Education.

The negotiating committee met to develop proposed regulations during the months of January, February, and March of 2012. These proposed regulations, which reflect the work of this committee, relate to the administration of the Federal student loan programs.

At its first meeting, the negotiating committee reached agreement on its protocols and proposed agenda. The negotiating committee's protocols provided that, unless agreed to otherwise, for the committee to be considered to have reached consensus

on the regulations, consensus must be reached on all of the proposed regulations. Consensus means that there must be no dissent by any member.

During its first meeting, the negotiating committee agreed to negotiate an agenda of 25 student loan-related issues. The most significant issues were: Developing regulations necessary to implement the President's “Pay As You Earn” repayment initiative; developing regulations to incorporate statutory changes to the IBR plan and to address certain problems in the administration of the IBR and the income-contingent repayment (ICR) plans; overhauling the total and permanent disability discharge process; updating the FFEL Program regulations to eliminate obsolete and unnecessary provisions governing loan origination and disbursement; revising the Direct Loan Program regulations to eliminate cross-references to the FFEL Program regulations; revising regulations governing the determination of a defaulted borrower's reasonable and affordable payment amount for purposes of rehabilitation of the borrower's defaulted loan; revising the regulations governing AWG for defaulted borrowers in the FFEL Program; and providing for consistent treatment of borrowers requesting forbearance on or after the 270th day of delinquency.

The proposed regulations would also include certain technical changes to the regulations that are needed to reflect recent amendments to the HEA and to correct technical errors. These types of changes are not normally subject to the statutory requirements for negotiated rulemaking and public notice and comment. However, since those changes affected the regulations that would be considered by the negotiated rulemaking committee, the Secretary chose to include those changes in the proposed regulations to be considered by the committee to ensure that the committee could evaluate the full scope of changes to those regulations.

The Department stated its commitment to publishing the regulations to implement the Pay As You Earn repayment initiative and to overhaul and improve the total and permanent disability discharge process for borrowers as soon as possible.

During the development of proposed regulatory language and prior to the second meeting of the negotiating committee, the Department concluded that the scope and volume of the likely resulting proposed regulations resulting from the agenda approved by the negotiating committee would require extensive and significant changes to the regulations. In particular, updating the FFEL Program regulations and making major changes to the Direct Loan Program regulations involved changes to the entirety of those program regulations. The Department determined that it was unlikely that one NPRM reflecting all of the issues could be published by the deadline established by section 482(c) of the HEA. To ensure the earliest possible implementation of the Pay As You Earn repayment initiative and the revised total and permanent disability discharge regulations, which will provide significant benefits to student loan borrowers, the Department determined that two NPRMs would result from the negotiating committee's work.

During the second meeting of the negotiating committee, the Department explained to the negotiating committee members that one NPRM would contain proposed regulations to implement the Pay As You Earn repayment initiative, to incorporate statutory changes in the IBR plan, to make other changes to improve the administration of the IBR and ICR plans, and to overhaul the total and permanent disability discharge process. The second NPRM would contain all the remaining proposed regulations that were on the negotiating committee's agenda, including proposed regulations involving rehabilitation of defaulted loans and AWG in the FFEL Program. The Department also explained that any final regulations published as a result of the second NPRM would not be published by November 1, 2012, and therefore would not become effective until July 1, 2014, under the master calendar provisions of section 482(c)(1) of the HEA. The Department committed, however, to authorize, to the extent possible, early implementation of the final regulations published as a result of the second NPRM under the Secretary's authority to designate regulatory provisions for early implementation by program participants under section 482(c)(2) of the HEA.

At the final meeting in March 2012, the negotiating committee reached consensus on the full agenda of loans issues.

On July 17, 2012, the Secretary published the first NPRM to propose changes to implement the President's Pay As You Earn repayment plan and to make changes to the ICR and IBR plans and the process for evaluating disability discharge requests (77 FR 42086). After reviewing the public comments received on the proposed rule, the Secretary published the final regulations on November 1, 2012 (77 FR 66088).

This NPRM is the second of the two NPRMs resulting from the negotiating committee's negotiations. It contains proposed regulations to: Amend the provisions governing the participation rate index ceiling applicable to institutions with a single three-year cohort default rate of over 40 percent for purposes of challenges to and appeals from sanctions; revise the definitions of “satisfactory repayment arrangement” in the Perkins Loan, FFEL, and Direct Loan programs; amend the closed school loan discharge regulations in the Perkins Loan, FFEL, and Direct Loan programs; update the enrollment status reporting requirements in the FFEL and Direct Loan program regulations and add comparable requirements to the Perkins Loan Program regulations; amend the forbearance regulations in the FFEL and Direct Loan programs; amend the FFEL and Direct Loan program regulations governing the determination of a borrower's reasonable and affordable payment amount under a loan rehabilitation agreement, and the treatment of payments made through AWG while the borrower is also making payments under a loan rehabilitation agreement; amend the Perkins Loan Program regulations governing graduate fellowship and economic hardship deferments; modify the Perkins Loan Program regulations governing rehabilitation of a defaulted loan; amend the requirements for assigning a Perkins Loan to the Secretary; amend the Perkins Loan Program regulations related to loan cancellation; amend the FFEL Program regulations governing certain lender disclosures to borrowers; amend the FFEL Program regulations governing the AWG process; revise the FFEL Program regulations by removing provisions that are no longer needed and make necessary technical and conforming changes; amend the Direct Loan Program regulations governing the minimum period of enrollment for which a loan may be originated in certain transfer student situations; revise the Direct Loan Program regulations by incorporating provisions that apply in the Direct Loan Program but are currently only incorporated by reference to the FFEL Program regulations; amend the Direct Loan Program regulations to reflect recent statutory changes; remove obsolete provisions from the Direct Loan Program regulations; and make necessary technical corrections and conforming changes throughout the Direct Loan Program regulations.

More information on the work of the negotiating committee can be found at:

www.ed.gov/policy/highered/reg/hearulemaking/2008/loans.html

.

Summary of Proposed Changes

Student Assistance General Provisions

For purposes of challenges to and appeals from sanctions, the proposed regulations would raise the participation rate index ceiling applicable to institutions that have a single three-year cohort default rate of over 40 percent from 0.06015 to 0.0832.

Changes That Apply to the Perkins Loan, FFEL, and Direct Loan Programs

• The definitions of “satisfactory repayment arrangement” in the Perkins Loan, FFEL, and Direct Loan program regulations would be revised to provide that a borrower is not considered to have used the one-time-only opportunity to regain eligibility for title IV aid by making satisfactory repayment arrangements if the borrower makes six payments during the course of rehabilitating a defaulted loan, but does not seek additional title IV aid after making those six payments. The proposed regulations would also extend the time period after the payment due date during which a payment is considered to be on-time for purposes of making satisfactory repayment arrangements in the FFEL and Direct Loan programs from 15 to 20 days, and would establish the same 20-day standard in the Perkins Loan Program. In addition, the proposed regulations would define the term “satisfactory repayment arrangement” more consistently across the title IV, HEA loan programs.

• The closed school loan discharge provisions in the Perkins Loan, FFEL, and Direct Loan program regulations would be revised to specify that a borrower who withdraws from a school prior to the school's closure may qualify for a discharge if the borrower withdraws not more than 120 days before the date the school closes, instead of the current standard of not more than 90 days. The proposed regulations would also add examples of the types of exceptional circumstances under which the Department may allow borrowers who withdraw from a school more than 120 days prior to the school's closure date to qualify for loan discharge.

• The FFEL Program enrollment status reporting requirements for institutions would be updated by eliminating outdated references to receiving enrollment reports from guaranty agencies and reporting enrollment status information to guaranty agencies, and by removing an obsolete requirement to report information about students who have ceased to be enrolled on a full-time basis. The Direct Loan Program enrollment status reporting requirements would be revised by eliminating obsolete references to the frequency with which the Department provides student status confirmation reports to schools and the format of those reports. Both the FFEL and Direct Loan program enrollment status reporting requirements for institutions would be updated to eliminate obsolete terms and procedures, reflect current processes, and require institutions to report certain enrollment status changes for recipients of any type of title IV loan. Comparable enrollment status reporting requirements would be added to the Perkins Loan Program regulations.

FFEL and Direct Loan Programs

• The proposed regulations would revise the terms under which a guaranty agency in the FFEL Program may authorize a lender to grant forbearance to permit a borrower or endorser to resume honoring the agreement to repay a debt after default but prior to claim payment. The proposed regulations would require the borrower or endorser to provide either a signed written repayment agreement or an oral affirmation of the repayment obligation. The proposed regulations would further provide that if a forbearance is granted based on the borrower's or endorser's oral request and affirmation of the obligation: (1) The forbearance may not exceed 120 days and cannot be granted for consecutive periods; (2) the lender must orally review with the borrower the terms and conditions of the forbearance, including the consequences of interest capitalization and other available repayment options; and (3) the lender must send a notice to the borrower or endorser that confirms the terms of the forbearance and the affirmation of the repayment obligation within 30 days of that affirmation. The proposed regulations would also define the term “affirmation.” Finally, the proposed regulations would add comparable forbearance provisions in the Direct Loan Program.

• The current FFEL Program forbearance provision for borrowers who are performing service that qualifies them for loan repayment under the student loan repayment program administered by the Department of Defense under 10 U.S.C. 2171 would be modified to also require lenders to grant forbearance to borrowers performing service that qualifies them for loan repayment under Department of Defense loan repayment programs that are authorized under 10 U.S.C. 2173 and 2174, and any other student loan repayment programs administered by the Department of Defense. A comparable forbearance provision would be added to the Direct Loan Program regulations.

• The conditions under which a FFEL Program lender may grant an administrative forbearance would be modified to include a circumstance in which a borrower is delinquent at the beginning of an authorized forbearance period, and a corresponding forbearance provision would be added to the Direct Loan Program regulations.

• The proposed regulations would include the following changes to the provisions governing loan rehabilitation in the Direct Loan and FFEL programs:

○ The Secretary or the guaranty agency, as applicable, would determine a borrower's reasonable and affordable payment amount under a loan rehabilitation agreement based on the borrower's and, if applicable, the borrower's spouse's current disposable income, family size, and reasonable and necessary expenses. The borrower would be required to provide the Secretary or guaranty agency with the information needed to determine the reasonable and affordable payment amount on a form approved by the Secretary and, if requested, would be required to provide supporting documentation. The proposed regulations would include a detailed list of the types of expenses that the Secretary or guaranty agency would consider in determining a borrower's reasonable and affordable rehabilitation payment amount.

○ The reasonable and affordable loan rehabilitation payment amount must not be: (1) A required minimum payment, such as $50, if the guaranty agency or the Secretary determines that a smaller amount is reasonable and affordable; (2) a percentage of the borrower's total loan balance; or (3) an amount based on any other formula or criteria unrelated to the individual borrower's total financial circumstances.

○ The Secretary or the guaranty agency would provide the borrower with a written rehabilitation agreement within 15 business days of the determination of the borrower's reasonable and affordable payment. The agreement would include: (1) The rehabilitation payment amount; (2) a prominent statement that the borrower may object to the payment amount and the method and timeframe for raising such an objection; (3) an explanation of the terms and conditions of the required series of payments, and the effects of loan rehabilitation; and (4) for a FFEL borrower, the amount of unpaid collection costs to be added to the unpaid principal of the rehabilitated

loan when the loan is sold to an eligible FFEL lender.

○ A borrower's rehabilitation payment amount would be recalculated if the borrower objects to the payment amount in the written repayment agreement. If the borrower objects to the amount determined based on an evaluation of income and expenses documented by the borrower, the Secretary or the guaranty agency would recalculate an alternative rehabilitation payment amount, based on documentation provided by the borrower, using the formula for calculating a monthly payment amount under the IBR plan in the Direct Loan and FFEL program regulations. If the recalculated amount using the IBR formula is less than $5, the borrower's recalculated monthly rehabilitation payment amount would be $5. The borrower may choose either rehabilitation payment amount.

○ While a borrower is making payments under a rehabilitation agreement, the Secretary or guaranty agency would limit contact with the borrower to collection activities required by law or regulation and communications that support the rehabilitation.

○ If a borrower who is making voluntary payments on a defaulted loan under a loan rehabilitation agreement is also making payments through AWG, the Secretary or guaranty agency would suspend collection through AWG after the borrower has made five qualifying monthly payments under the loan rehabilitation agreement. A borrower would have the option of requesting that the Secretary or guaranty agency continue collecting on the loan through AWG while the borrower continues to make voluntary payments under the loan rehabilitation agreement. A borrower would have only one opportunity to benefit from suspension of AWG while attempting to rehabilitate a defaulted loan.

Perkins Loan Program

• Schools that participate in the Perkins Loan Program would be required to use the same eligibility criteria used in the Direct Loan and FFEL programs to define an “eligible graduate fellowship program” and to establish the eligibility of a Perkins Loan borrower to receive a deferment while participating in a graduate fellowship program. The proposed regulations would add a definition of the term “eligible graduate fellowship program” to the Perkins Loan Program regulations consistent with the definition currently used in the Direct Loan and FFEL program regulations.

• The Perkins Loan economic hardship deferment eligibility criteria would be revised by eliminating the deferment category for borrowers who work less than full-time and have a specified debt-to-income ratio.

• The Perkins Loan rehabilitation provisions would be modified to specify that an “on-time” payment, for the purpose of loan rehabilitation, is a payment that is made within 20 days of the due date.

• For Perkins Loans that were made before September 13, 1982, the date the Secretary began requiring institutions to collect a borrower's Social Security Number (SSN) on the Perkins Loan Program promissory notes, the proposed regulations would allow assignment of those loans to the Secretary without the borrower's SSN.

• A Perkins Loan borrower who completes half of an academic year of teaching, but who is unable to complete the second half of the academic year due to a condition covered under the FMLA, would be able to count that year as a full year of eligible teaching service for loan cancellation purposes, if the borrower's employer considers the borrower to have fulfilled the teacher contract requirements for that academic year. In addition, the proposed regulations would allow a borrower who is unable to complete a full year of public service under other loan cancellation categories due to a condition covered under the FMLA to count that year as a full year of public service for loan cancellation purposes if the borrower completes at least six months of consecutive eligible service.

• If a Perkins Loan borrower who is performing service that qualifies the borrower for loan cancellation at a cancellation rate progression of 15 percent for the first and second years of qualifying service, 20 percent for the third and fourth years of qualifying service, and 30 percent for the fifth year of qualifying service, takes a job in a different field that qualifies the borrower under a different cancellation category that provides loan cancellation at the same cancellation rate progression as the prior category, the borrower's cancellation rate progression would be uninterrupted. The borrower's cancellation rate under the new cancellation category would continue from the last year the borrower received a cancellation under the former cancellation category, rather than reverting to the first-year cancellation rate of 15 percent.

FFEL Program

• The timeframe for FFEL lenders to send the required repayment disclosure for borrowers who are 60 days delinquent would be changed from five calendar days to five business days after the date the borrower becomes 60 days delinquent.

• The proposed regulations would eliminate the requirement for a lender to provide a repayment disclosure to a borrower who is having difficulty making payments if the borrower's difficulty has been resolved through contact resulting from an earlier disclosure or from other contact between the lender and the borrower.

• The proposed regulations would include the following changes to the rules governing AWG in the FFEL Program:

○ The proposed regulations would clarify the burden of proof that must be met by the borrower during the hearing process, specify the procedures that must be followed by the borrower and guaranty agency when objections are raised, and specify requirements that must be followed by a hearing official in determining whether the proposed withholding amount would cause a financial hardship for the borrower.

○ The regulations would be revised to provide more consistent treatment with respect to AWG for borrowers whose defaulted loans are held by a guaranty agency and borrowers whose defaulted loans are held by the Secretary.

○ Existing policy guidance related to functions that may be performed by third-party servicers or collection contractors retained by guaranty agencies for AWG purposes would be incorporated in the regulations, and the regulations would include examples of permissible activities of third-party contractors.

○ The regulations would be revised to more clearly describe the complete AWG process, from the initial garnishment notice to the withholding of the borrower's wages.

○ Regulations would be amended to better reflect due process requirements and to specify the functions, delegations of authority, recordkeeping requirements, and permissible activities of guaranty agencies and third-party servicers or collection contractors.

○ The regulations would be amended to specify the limitations on the amount that may be subject to AWG if a guaranty agency is garnishing pay from a borrower who is not already subject to a withholding order, and to clarify the withholding amount or percentage and priority if a guaranty agency is garnishing the pay of a borrower who is already subject to one or more withholding orders. The proposed regulations would also permit a greater

amount or percentage to be withheld with the borrower's consent.

○ The proposed regulations would require that for a borrower to receive a hearing before AWG begins, the borrower's written request for a hearing must be received on or before the 30th day following the date the garnishment notice was sent, instead of on or before the 15th day following the borrower's receipt of a garnishment notice, as under current regulations. The proposed regulations would also delete a provision that a borrower is considered to have received a garnishment notice five days following the date of the notice.

○ If a borrower's written request for a hearing is received by the guaranty agency after the 30th day following the date of the garnishment notice, the agency must provide the borrower a hearing and issue a decision within 60 days following receipt of the request. If a decision is not rendered within 60 days, the guaranty agency would be required to suspend the order beginning on the 61st day after the hearing request was received until a hearing is provided and a decision is rendered.

○ The proposed regulations would also: (1) Specify the information that a guaranty agency must provide in the AWG notice it sends to a defaulted borrower; (2) describe how an AWG hearing must be conducted, including with respect to the submission of additional evidence and the granting of continuances; (3) provide for the withholding order to end by either rescission of the order for AWG or full recovery of the amount owed by the borrower; and (4) clarify that a borrower who wishes to object that he or she should not be subject to garnishment because of involuntary separation from employment bears the burden of raising and proving that claim.

• To reflect the impact of the SAFRA Act, FFEL Program regulations governing loan origination and disbursement and related requirements and activities (for example, requirements for due diligence in the making and disbursing of loans) would be eliminated, except for certain school-based requirements and related activities (for example, exit counseling requirements).

• FFEL Program regulations that are obsolete (for example, rules governing the Federal Insured Student Loan (FISL) Program) would be eliminated.

• Conforming changes and technical corrections would be made as necessary throughout the regulations to ensure consistency and accuracy.

Direct Loan Program

• The Direct Loan Program regulations would be expanded by adding provisions that apply in the Direct Loan Program, but which are currently reflected in 34 CFR part 685 only by cross-reference to the FFEL Program regulations (for example, eligibility criteria for graduate fellowship and economic hardship deferments).

• The proposed regulations would remove provisions that are obsolete or that do not reflect current procedures used in administering the Direct Loan program, such as loan limit amounts that are no longer applicable because of recent statutory changes, and outdated school loan origination options and eligibility criteria for initial participation in the Direct Loan Program.

• The Direct Loan Program deferment regulations would be restructured for greater clarity.

• The exception to the minimum loan period requirement for clock-hour and certain non-term programs that allows a school to originate a loan for a transfer student to cover a period of enrollment shorter than the academic year or the program length only if the school accepts credit or clock hours from the school the student previously attended would be revised by removing the provision that limits the exception to situations in which the new school accepts transfer credits or clock hours from the prior school.

• Throughout the Direct Loan Program regulations, conforming changes would be made to reflect the impact of the SAFRA Act and other recent statutory changes, and other conforming changes and technical corrections would be made as necessary.

Significant Proposed Regulations

We group major issues according to subject, with appropriate sections of the proposed regulations referenced in parentheses. We begin with an issue that involves the Student Assistance General Provisions regulations in 34 CFR part 668, followed by issues that apply to all three title IV loan programs, issues that apply to the FFEL and Direct Loan programs, issues that apply only to the Perkins Loan Program, issues that apply only to the FFEL Program, and finally issues that apply only to the Direct Loan Program. We discuss substantive issues under the sections of the proposed regulations to which they pertain. Generally, we do not address proposed regulatory changes that are technical or otherwise minor in effect.

Student Assistance General Provisions

Three-Year Cohort Default Rate Participation Rate Index Challenges and Appeals (34 CFR 668.204 and 668.214)

Statute:

Under section 435(a)(8) of the HEA, an institution's participation rate index (PRI) is determined by multiplying the institution's Direct Loan/FFEL cohort default rate (CDR) by the percentage of the institution's regular students, enrolled on at least a half-time basis, who received such a loan for a 12-month period ending during the six months immediately preceding the fiscal year for which the cohort of borrowers used to calculate the institution's CDR is determined. Effective for fiscal years beginning on and after October 1, 2011, section 435(a)(8)(A) of the HEA provides that an institution that demonstrates to the Secretary that its PRI is equal to or less than 0.0625 for any of the three most recent fiscal years for which data is available will not lose eligibility to participate in the FFEL and Direct Loan programs for having three three-year CDRs that are equal to or greater than 30 percent.

Current Regulations:

Under section 668.206(a)(1), an institution that has one three-year CDR of over 40 percent loses its eligibility to participate in the FFEL and Direct Loan programs. Sections 668.204(c)(1)(i), 668.214(a)(1), and 668.214(d)(2) use a participation rate index of 0.06015 as the ceiling for successful PRI challenges and appeals brought by institutions having one three-year CDR of over 40 percent.

Proposed Regulations:

Proposed §§ 668.204(c)(1)(i) and 668.214(a)(1) substitute 0.0832 as the PRI ceiling for purposes of challenges to and appeals from sanctions based on one three-year CDR of over 40 percent. Similarly, in proposed § 668.214(d)(2), “0.06015” is replaced with “0.0832.”

Reasons:

Under the statutory PRI ceiling of 0.0625, which applies to sanctions based on three three-year CDRs of 30 percent or higher, institutions can be excused from sanctions based on the percentage of Direct Loan and FFEL borrowers among their enrollment even if that percentage is as high as almost 21 percent, depending on the lowest of the institution's three excessive CDRs (0.30 CDR × 0.20 < 0.0625 ceiling).

In contrast, using the current regulatory 0.06015 PRI ceiling for an institution that has a single three-year CDR of over 40 percent means that the cutoff for a successful PRI appeal of or challenge to the regulatory loss of eligibility is a borrower population

comprising no more than approximately 15 percent of enrollment (0.401 CDR × 0.15 = 0.06015 ceiling).

The Department is proposing to raise the PRI ceiling applicable to institutions that have a single three-year CDR of over 40 percent so that, as with the PRI challenge and appeal established by statute for three-year CDRs of 30 percent or higher, the institution can have borrower enrollment as high as almost 21 percent and still bring a successful PRI challenge to or appeal from the loss of eligibility (0.401 CDR × 0.20 < 0.0832).

Perkins Loan, FFEL, and Direct Loan Programs: Satisfactory Repayment Arrangements (34 CFR 674.2(b), 674.9(k), 682.200(b), 685.102(b), and 685.200)

Statute:

Under section 428F(b) of the HEA, which is applicable to the Direct Loan Program under section 455(a)(1) of the HEA, a defaulted FFEL or Direct Loan borrower may regain eligibility for title IV student financial assistance if the borrower makes six consecutive, monthly payments on the defaulted FFEL or Direct Loan Program loan. The borrower may only regain eligibility once under this provision of the HEA.

Under section 464(h)(2) of the HEA, a defaulted Perkins Loan borrower may regain eligibility for title IV student financial assistance by making six on-time, consecutive, monthly payments on the defaulted Perkins Loan Program loan. As with FFEL and Direct Loan borrowers, a Perkins Loan borrower may only regain eligibility once under this provision of the HEA.

Current Regulations:

In the Perkins Loan, FFEL, and Direct Loan programs, a defaulted borrower may regain eligibility for title IV student financial assistance by making satisfactory repayment arrangements with the loan holder. The term “satisfactory repayment arrangement” is defined in 34 CFR 674.2(b), 682.200(b), and 685.102(b) for the Perkins Loan, FFEL, and Direct Loan programs, respectively.

The “satisfactory repayment arrangement” definitions are slightly different for each of the three loan programs. For Perkins Loan borrowers, a satisfactory repayment arrangement is the making of six, on-time, consecutive, monthly payments on a defaulted loan. 34 CFR 674.2(b) (“Satisfactory repayment arrangement”). For FFEL and Direct Loan borrowers, for purposes of regaining eligibility, a satisfactory repayment arrangement is the making of six consecutive, on-time, voluntary, full monthly payments on a defaulted loan. 34 CFR 682.200(b) (“Satisfactory repayment arrangement”) and 685.102(b)(“Satisfactory repayment arrangement”). For FFEL and Direct Loan borrowers, an on-time payment is a payment made within 15 days of the due date. The Perkins Loan Program regulations do not specify a standard for on-time payments. The standard for an on-time payment is established by the institution that is collecting the Perkins Loan, or by the Secretary if the Secretary holds the loan.

The “satisfactory repayment arrangement” definitions in the FFEL and Direct Loan program regulations specify that voluntary payments are payments made directly by the borrower and do not include payments obtained by income tax offset, garnishment, or income or asset execution. These limitations are not in the Perkins Loan Program definition of “satisfactory repayment arrangement,” but are in § 674.9(j) of the Perkins Loan Program regulations.

The FFEL and Direct Loan program regulations specify that a borrower may only obtain the benefit of regaining title IV eligibility by making satisfactory repayment arrangements once. The Perkins Loan Program regulations state that a borrower may only obtain the benefit of regaining title IV eligibility by making satisfactory repayment arrangements on a defaulted loan once.

None of the definitions address the status of borrowers who, in the course of making rehabilitation payments on a defaulted title IV loan, also make the required number of payments to regain title IV eligibility under a satisfactory repayment arrangement.

Proposed Regulations:

The proposed regulations would make the definitions of “satisfactory repayment arrangement” more consistent across the three title IV student loan programs. Proposed § 674.2(b) would add to the definition of “satisfactory repayment arrangement” in the Perkins Loan Program regulations the requirements that the monthly payments be “voluntary” and “full.” The proposed Perkins Loan Program regulations would also specify that voluntary payments are payments made by the borrower and do not include payments obtained by income tax offset, garnishment, or income or asset execution. The revised definition of “satisfactory repayment arrangement” in the Perkins Loan Program regulations would also specify that a borrower may only receive the benefit of regaining title IV eligibility by a satisfactory repayment arrangement once, not once on a defaulted loan, as in the current regulation.

The revisions to the “satisfactory repayment arrangement” definitions for the FFEL and Direct Loan programs in proposed §§ 682.200(b) and 685.102(b) would extend the length of time during which a payment would be considered on-time from within 15 days of the due date to within 20 days of the due date. The revision to the “satisfactory repayment arrangement” definition for the Perkins Loan Program in proposed § 674.2(b) would establish the same 20-day standard for an on-time payment.

The proposed regulations would add a new paragraph to the definitions of “satisfactory repayment arrangement” in §§ 674.2(b), 682.200(b), and 685.102(b) of the Perkins Loan, FFEL, and Direct Loan program regulations. The proposed new paragraph would provide that a borrower who makes six qualifying payments under an agreement to rehabilitate a loan, but who does not receive additional title IV aid prior to defaulting on the loan again, will not be considered to have used the one opportunity the borrower has to renew eligibility for title IV aid by making satisfactory repayment arrangements.

The proposed regulations would add a new § 674.9(k) to the Perkins Loan Program regulations, to provide that a borrower who is in default on a FFEL or Direct Loan program loan may regain eligibility to receive a Perkins Loan if the borrower makes satisfactory repayment arrangements on the FFEL or Direct Loan program loan, as determined by the loan holder. The proposed regulations would also revise § 685.200(d) of the Direct Loan Program regulations, by adding a reference to defaulted Perkins Loans as well as to defaulted FFEL and Direct Loan program loans.

Reasons:

A defaulted borrower may regain eligibility for Federal student aid by making satisfactory repayment arrangements on a title IV loan. In addition, a borrower also has the option of rehabilitating a defaulted title IV loan by making a series of on-time, voluntary, full monthly payments as part of a rehabilitation agreement with the loan holder. To rehabilitate a loan in the Direct Loan or FFEL program, a borrower must make nine reasonable and affordable payments within 20 days of the due date during ten consecutive months. To rehabilitate a loan in the Perkins Loan Program, a borrower is required to make nine consecutive monthly payments. In the course of making loan rehabilitation payments, a title IV borrower may also make the six consecutive on-time monthly payments necessary to regain eligibility for title IV aid.

A borrower making payments under a loan rehabilitation agreement might not have plans to return to school or to seek additional title IV aid after making the

required payments. The Department has previously been asked whether a borrower who makes the six payments needed under satisfactory repayment arrangements in the course of making loan rehabilitation payments, but who does not request additional title IV aid, will automatically be considered to have used the one-time-only opportunity to regain eligibility by making satisfactory repayment arrangements. The Secretary's policy is that a borrower in this situation has not used the one-time opportunity to regain title IV eligibility by making satisfactory repayment arrangements unless the borrower receives title IV aid after regaining eligibility. As a result of these inquiries, the Secretary proposed amending the “satisfactory repayment arrangement” definitions in the Perkins Loan, FFEL, and Direct Loan program regulations to codify this policy. The negotiating committee agreed with the changes proposed by the Department.

The Secretary also proposed making the definition of “satisfactory repayment arrangement” more consistent across the three loan programs. The Secretary proposed removing the language in the Perkins Loan Program regulations that stated that a borrower may only obtain this benefit once “on a defaulted loan.” The proposed change would make the Perkins Loan Program definition consistent with the FFEL and Direct Loan program definitions, which state that a borrower may only obtain this benefit “once.” Non-Federal negotiators recommended that the “on a defaulted loan” language be added to the FFEL and Direct Loan program definitions, rather than removed from the Perkins Loan Program definition. The Secretary reviewed the Perkins Loan and FFEL program statutory provisions, and determined that the HEA restricts this benefit to once per borrower, not once per loan, in all three of the title IV student loan programs. Accordingly, the Secretary declined to accept this recommendation from the non-Federal negotiators.

Non-Federal negotiators recommended expanding the standard for an on-time payment in the FFEL and Direct Loan definitions of “satisfactory repayment arrangements” from within 15 days of the due date to within 20 days of the due date. They also recommended adding this on-time payment standard to the Perkins Loan Program definition. The negotiators noted that the 20-day standard is already established for loan rehabilitation payments, and believed that it would be appropriate to use the same standard for payments made under a satisfactory repayment arrangement. Using the same standard for on-time payments for purposes of satisfactory repayment arrangements and for purposes of loan rehabilitation would reduce complexity and confusion for borrowers and loan servicers. The Secretary agreed with the recommendation to have the same standard for on-time payments made under satisfactory repayment arrangements in the three title IV loan programs, and to make that standard consistent with the standard for rehabilitation payments.

The Secretary proposed revising the Perkins Loan and Direct Loan student and borrower eligibility regulations to specify that a defaulted FFEL or Direct Loan program borrower can qualify for a new Perkins Loan by making satisfactory repayment arrangements on the defaulted loan, and to specify that a defaulted Perkins Loan Program borrower can qualify for a new Direct Loan by making satisfactory repayment arrangements. Sections 428F(b) and 455(a)(1) of the HEA already provide for this treatment, and the Secretary proposed revising the Perkins and Direct Loan program regulations to more closely match these HEA statutory provisions.

Closed School Discharge (34 CFR 674.33(g), 682.402(d), and 685.214)

Statute:

Sections 437(c)(1) (which is applicable to the Direct Loan Program under section 455 of the HEA) and 464(g) of the HEA provide for a closed school discharge for borrowers in the Perkins Loan, Direct Loan, and FFEL programs who are unable to complete a program of study because of a school closure.

Current Regulations:

Under §§ 674.33(g), 685.214, and 682.402(d) of the Department's current regulations, borrowers in the Perkins Loan, Direct Loan, and FFEL programs (and PLUS loan endorsers) may receive a loan discharge if the borrower (or the student on whose behalf a parent borrowed) could not complete the program of study at the school because the school closed while the borrower (or student) was enrolled, or if the borrower (or student) withdrew from the school no more than 90 days before the school closed.

Sections 674.33(g), 685.214, and 682.402(d) of the Department's regulations provide that the 90-day period may be extended if the Secretary determines that exceptional circumstances related to the school closure justify an extension. The school's closure date is the date the school ceases to provide educational instruction in all of its programs, as determined by the Secretary. For closed school discharge purposes a “school” is the school's main campus, or any location or branch of the main campus, regardless of whether the school or its location or branch is considered eligible for title IV purposes.

Proposed Regulations:

Proposed §§ 674.33(g)(4)(i)(B), 682.402(d)(1)(i), and 685.214(c)(1)(ii), respectively, would extend the current 90-day window for students who leave before a school closes to 120 days, and add examples of the types of exceptional circumstances under which the Department may extend the 120-day window. Specifically, the proposed regulations would list the following examples of exceptional circumstances for this purpose: The school's loss of accreditation; the school's discontinuation of the majority of its academic programs; action by the State to revoke the school's license to operate or award academic credentials in the State; or a finding by a State or Federal government agency that the school violated State or Federal law.

Reasons:

During the public hearings prior to the initiation of the negotiated rulemaking sessions, some commenters suggested that the 90-day window for student withdrawal prior to a school's closure date may be too short because there may be numerous signs of a school's pending closure that may prompt a student to withdraw more than 90 days prior to the school's closure date. The commenters also noted that the Department has not previously provided examples in the regulations of the exceptional circumstances under which the Department would extend the 90-day window.

To inform the discussions around the closed school discharge, the Department presented information to the negotiating committee on its experience with closed school discharges. In the last five years, 128 schools that participated in the title IV programs have closed. The primary reason for the school closures has been the loss of accreditation. Of the 128 schools that closed, 82 were proprietary schools.

The non-Federal negotiators raised many questions about the Department's implementation of the statutory requirement that a school must close in order for the borrower to receive a loan discharge. Some negotiators argued that the closed school discharge should include instances in which a program at the school is discontinued but the school continues to operate, especially in the case of a school that offers many of its programs online and which does not associate its online programs with a

physical location. The non-Federal negotiators asked the Department to clarify whether students would be eligible for a closed school loan discharge if a school discontinued one of its traditional or online programs.

In response to the negotiators' questions, the Department noted that for a borrower to receive a loan discharge, current regulations require that the school must close. Under §§ 674.33(g), 682.402(d), and 685.214(a), the term “school” means a school's main campus or any location or branch of the main campus, and a school is considered closed as of the date that the school ceases to provide education in all programs. The law and regulations do not provide a loan discharge when a program, either traditional or distance, is discontinued. The Department also noted that distance education programs are not locations of a school for title IV eligibility purposes. A location is a physical site where a student can receive instruction in 50 percent or more of an eligible program. If a school offers online programs, the online programs are considered associated with the main campus of the school. Thus, a borrower enrolled in an online course would receive a closed school discharge only if the main campus of the school closed.

The Department proposed expanding from 90 to 120 days the window in which a student must be enrolled at a school that closed for a borrower to receive the closed school loan discharge. Expanding the window should help address the circumstances under which a borrower has enough information to determine that a school is not providing an appropriate education and may close and withdraws from the school prior to its formal closure date. The Department believes that the extra time would help borrowers who are in this situation and would allow them to take advantage of other opportunities, such as the option to take advantage of a teach-out plan.

The non-Federal negotiators agreed that this change would be beneficial for borrowers and should be made.

In response to public commenters' requests that the Department provide examples of exceptional circumstances that might justify an extension of the window under §§ 674.33(g), 682.402(d), and 685.214(c), the Department invited the non-Federal negotiators to provide examples of what they believed should be considered exceptional circumstances. After much discussion, some of the non-Federal negotiators recommended that the following examples be included in the proposed regulations: The school's loss of accreditation; the school's discontinuation of the majority of its academic programs; action by the State to revoke the school's license to operate or award academic credentials in the State; or a finding by a State or Federal government agency that the school violated State or Federal law.

In response to a question from some negotiators, in regard to the last of the listed examples, we note that we would consider the term “finding” to refer to a conclusion in a final or formal document issued by the State or Federal agency.

Some non-Federal negotiators believed that it was particularly important to treat as an exceptional circumstance a school's discontinuance of the majority of its programs. Those negotiators noted that while it is highly improbable that a school will be able to continue its operations after closing the majority of its programs, there is a possibility that a school in this situation will remain open. In light of the fact that a borrower cannot receive a loan discharge based upon a single discontinued program, the non-Federal negotiators believed this language would cover the exception and provide relief for affected borrowers.

It is important to note that, although the Secretary would view the cited examples as exceptional circumstances, these examples would not be exclusive or otherwise narrow the scope of exceptional circumstances that the Secretary would consider. The Secretary has the discretion to consider other extenuating circumstances that may warrant a closed school loan discharge for a borrower who withdrew from a school more than 120 days before the school closed. As the Department noted during the negotiated rulemaking session, the Secretary determines whether exceptional circumstances exist on a case-by-case basis and takes into account the facts of the particular situation.

The Secretary also wants to note that the listing of these examples is not intended to provide borrowers with a guaranteed right to a discharge. The Secretary would still need to determine that the situation presents exceptional circumstances justifying an extension of the 120-day window. Moreover, these examples are not intended to provide a borrower with a private right of action against the school; these examples would not establish any rights between the student and the school.

After much deliberation and discussion between the Department and the non-Federal negotiators, the Department and the non-Federal negotiators reached consensus on the proposed changes to the closed school loan discharge regulations.

School Enrollment Status Reporting Requirements (34 CFR 674.61, 682.605, 682.610, and 685.309)

Statute:

Section 428(b)(1)(P) of the HEA requires a borrower who received a FFEL Program loan to notify the school of any change in the borrower's local address while the borrower is enrolled. It also requires the borrower and the school to promptly notify the loan holder, either directly or through the guaranty agency, if there is a change in the borrower's permanent address, if the student ceases to be enrolled on at least a half-time basis, or if there is any other change in status that affects the student's eligibility for the loan.

Section 454(a)(1)(E)(i) of the HEA requires a school that participates in the Direct Loan Program to provide the Secretary with timely and accurate information concerning the status of student borrowers (and students on whose behalf parents borrow Direct PLUS Loans) while the students are in attendance at the school, and any new information related to students or parents after the borrowers leave the school. This information is provided to the Secretary to assist in the servicing and collection of Direct Loan Program loans.

Section 487(a)(3) of the HEA requires a school that participates in a program under title IV of the HEA to establish and maintain such administrative and fiscal procedures and records as are necessary to ensure the proper and efficient administration of funds received from the Secretary or from students. Upon request and in a timely manner, schools must provide information relating to their administrative capability and financial responsibility to the Secretary, the appropriate guaranty agency, and the appropriate accrediting agency or association. In addition, section 487(a)(5) of the HEA requires a school that participates in the title IV, HEA programs to submit reports to the Secretary (and to the holders of loans made to the institution's students) at such times and containing such information as the Secretary requires to carry out the purpose of title IV of the HEA.

Current Regulations:

For the FFEL Program, current § 682.610(c) requires a school, upon receipt of a student status confirmation report from the Secretary or a similar report from a guaranty agency, to complete and return the report to the Secretary or guaranty agency, as appropriate. Unless the school expects to submit its next

student status confirmation report to the Secretary or guaranty agency within the next 60 days, the current regulations require a school to notify the guaranty agency or lender within 30 days if the school discovers that a student who received a FFEL Program loan has changed his or her permanent address, or discovers that: (1) A FFEL Program loan has been made to or on behalf of a student who enrolled at the school, but who has ceased to be enrolled on at least a half-time basis; (2) a loan has been made to or on behalf of a student who has been accepted for enrollment, but who failed to enroll on at least a half-time basis; or (3) a loan has been made on behalf of a full-time student who has ceased to be enrolled on a full-time basis. Current § 682.605(b) provides that if a student withdraws, the school must use the withdrawal date determined under § 668.22(b) or 668.22(c), as applicable, for the purpose of reporting to the lender the date that the student withdrew from the school. Current § 682.605(c) provides that, for the purpose of a school's reporting to the lender, a student's withdrawal date is the month, day, and year of the withdrawal date.

For the Direct Loan Program, current § 685.309(b) includes provisions comparable to § 682.610(c). That regulation requires schools participating in the Direct Loan Program to submit student status confirmation reports and information about address and enrollment status changes to the Secretary. However, there is no requirement for a school to report that a full-time student who received a Direct Loan has ceased to be enrolled on a full-time basis, as is the case in the FFEL Program under § 682.610(c)(2)(iii). In addition, current §§ 685.309(b)(3) and 685.309(b)(4) specify that the Secretary provides student status confirmation reports to a school at least semi-annually, and that the Secretary may provide these reports in either paper or electronic format.

For the Perkins Loan Program, current regulations do not include enrollment reporting requirements for schools comparable to the FFEL and Direct Loan program requirements.

Proposed Regulations:

For the Perkins Loan Program, the proposed regulations would add a new § 674.19(f) with the heading “Enrollment reporting process.” Proposed § 674.19(f)(1) would provide that, upon receipt of an enrollment report from the Secretary, an institution must update all information included in the report and return the report to the Secretary in the manner and format and within the timeframe prescribed by the Secretary. Proposed § 674.19(f)(2) would provide that, unless it expects to submit its next updated enrollment report to the Secretary within the next 60 days, an institution must notify the Secretary within 30 days after the date the school discovers that: (1) A loan under title IV of the HEA was made to a student who was enrolled or accepted for enrollment at the institution, and the student has ceased to be enrolled on at least a half-time basis; (2) a student failed to enroll on at least a half-time basis for the period for which a loan was intended; or (3) a student who is enrolled at the institution and who received a loan under title IV of the HEA has changed his or her permanent address.

For the FFEL Program, the proposed regulations would retitle § 682.610(c) “Enrollment reporting process,” and replace the term “student status confirmation report” with “enrollment report.” They would also revise § 682.610(c)(1) to provide that, upon receipt of an enrollment report from the Secretary, a school must update all information included in the report and return the report to the Secretary in the manner and format and within the timeframe specified by the Secretary. Proposed § 682.610(c)(2) would provide that, unless a school expects to submit its next updated enrollment report to the Secretary within the next 60 days, the school must notify the Secretary within 30 days after the date the school discovers that: (1) A title IV loan was made to or on behalf of a student who was enrolled or accepted for enrollment at the school, and the student has ceased to be enrolled on at least a half-time basis; (2) a student failed to enroll on at least a half-time basis for the intended loan period; or (3) a student who is enrolled at the school and who has received a loan under title IV of the HEA has changed his or her permanent address. References in the current regulations to receiving enrollment reports from a guaranty agency or reporting enrollment status information to guaranty agencies would be removed. The proposed regulations would also amend §§ 682.605(b) and 682.605(c) to require schools to report information about a student's withdrawal to both the lender and the Secretary.

For the Direct Loan Program, the proposed regulations would retitle § 685.309(b) “Enrollment reporting process,” and replace the term “student status confirmation report” with the term “enrollment report.” It would also revise § 685.309(b)(1) to provide that upon receipt of an enrollment report from the Secretary, a school must update all information included in the report and return the report to the Secretary in the manner and format and within the timeframe prescribed by the Secretary. Proposed § 685.309(b)(2) would provide that, unless a school expects to submit its next updated enrollment report to the Secretary within the next 60 days, the school must notify the Secretary within 30 days after the date the school discovers that: (1) A title IV, HEA program loan was made to or on behalf of a student who was enrolled or accepted for enrollment at the school, and the student has ceased to be enrolled on at least a half-time basis; (2) the student failed to enroll on at least a half-time basis for the intended loan period; or (3) a student who is enrolled at the school and who received a title IV loan has changed his or her permanent address. Current §§ 685.309(b)(3) and 685.309(b)(4) would be removed.

Reasons:

The current FFEL and Direct Loan program regulations in §§ 682.610(c) and 685.309(b) reflect terminology and procedures that are not consistent with current practices. These obsolete provisions include the use of the term “student status confirmation report,” the references in the FFEL Program regulations to receiving enrollment reports from guaranty agencies and reporting information to guaranty agencies, and the references in the Direct Loan Program regulations to the frequency with which the Secretary provides student status confirmation reports and the format of those reports. In addition, the current FFEL Program provision requiring a school to report that a student has ceased to be enrolled on a full-time basis reflects an obsolete eligibility requirement. The proposed regulations would revise §§ 682.605(a) and 685.309(b) to reflect the current processes by which schools receive and report student enrollment status information. The proposed regulations would also provide the Secretary with greater flexibility to modify enrollment reporting procedures in the future by providing that schools must update all information included in the enrollment report received from the Secretary and return the report to the Secretary in the manner and format and within the timeframe specified by the Secretary. Further, the proposed regulations would replace the current provisions in the FFEL Program regulations that require a school to report certain status changes only for their students who received FFEL Program loans, and the comparable provisions in the Direct Loan Program regulations that require schools to report information only for students who received Direct Loan Program loans, with a more general

requirement for schools to report these status changes for students who received any type of title IV loan. The Department believes that it is appropriate to establish this more general requirement, since the National Student Loan Data System (NSLDS) enrollment reporting files that schools receive from the Department include all of a school's students who have received loans under the Direct Loan, FFEL, or Perkins Loan programs. The proposed changes to the FFEL and Direct Loan program regulations described here would also be incorporated in the proposed new enrollment status reporting requirements for the Perkins Loan Program that are discussed later in this section.

To reflect current procedures, current §§ 682.605(b) and 682.605(c) would be modified to state that a school must report information about student withdrawals to both the FFEL Program lender and the Secretary.

Schools that participate in the Perkins Loan Program have indicated to the Department's NSLDS staff that having enrollment status information on Perkins borrowers from all schools attended by the borrowers would improve loan servicing in the Perkins Loan Program. In response to this request, the Department modified the NSLDS enrollment reporting file sent to schools by the Department to include, beginning in June 2012, all of the school's students who received a Perkins Loan for attendance at any school. Perkins Loan schools, or their servicers, may enroll with NSLDS to receive enrollment data on their Perkins Loan recipients. This will help schools track their former students who have enrolled at other schools, and will allow schools to use NSLDS for enrollment verification rather than having to rely on paper Perkins Loan enrollment verification forms. Proposed § 674.61(f) would establish enrollment reporting requirements for Perkins Loan schools to support this new process.

To ensure more timely reporting of certain student status changes, the Department initially proposed to modify current § 682.610(c)(2) to provide that, unless a school expects to submit its next updated enrollment report to the Secretary within the next 60 days, a school must notify the Secretary within 15 days (instead of the current 30 days) after the date the school discovers that certain status changes have occurred. The Department proposed to make the same change to current § 685.309(b)(2), and to incorporate the 15-day reporting deadline in proposed § 674.19(f). Although the non-Federal negotiators generally had no objections to the Department's proposed changes to enrollment status reporting requirements, some of the negotiators expressed concerns about the proposed change from a 30-day reporting deadline to a 15-day deadline. Those negotiators were concerned that it may be difficult for some schools to report the required information within this shorter timeframe. These negotiators asked that the Department retain the current 30-day reporting deadline. After further consideration, the Department agreed to retain the current 30-day deadline.

FFEL and Direct Loan Program Common Issues Forbearance for Borrowers Who Are 270 or More Days Delinquent Prior to Guaranty Agency Default Claim Payment or Transfer by the Department to Collection Status (34 CFR 682.211(d) and 685.205)

Statute:

Section 435(l) of the HEA defines default on a loan as being 270 days past due in the case of a loan that is repayable in monthly installments. Section 428(c)(3) of the HEA specifies that a guaranty agency is not precluded from permitting the parties to a FFEL Program loan from entering into a forbearance agreement solely because the loan is in default. Under section 455(a)(1) of the HEA, Direct Loans have the same terms and conditions as FFEL Program loans unless provided otherwise.

Current Regulations:

Section 682.211(b)(1) of the FFEL Program regulations provides that a lender may grant forbearance if the lender and the borrower or endorser agree to the terms of a forbearance and, unless the agreement was in writing, the lender sends a notice to the borrower or endorser confirming the terms of the forbearance within 30 days of the agreement and records the terms of the forbearance in the borrower's file. Section 682.211(c) of the FFEL regulations provides that a lender may grant a forbearance for up to one year at a time if both the borrower or endorser and the lender agree to the terms of the forbearance. If the lender and the borrower or endorser agree to the terms of the forbearance orally, the lender must send a notice to the borrower or endorser confirming the terms of the forbearance within 30 days of the agreement.

Section 682.211(d) of the FFEL regulations provides that a guaranty agency may authorize a lender to grant forbearance to permit a borrower or endorser to resume honoring the agreement to repay the debt after the borrower has defaulted on a loan but before the guaranty agency has paid the lender's default claim. The regulations further provide that the terms of the forbearance in this situation must include a new agreement to repay the debt signed by the borrower.

The Direct Loan Program regulations governing forbearance in § 685.205 do not include a comparable forbearance provision for borrowers who are 270 or more days past due on loan payments. However, Direct Loan borrowers are granted forbearance under the same circumstances based on the borrower's written or oral request.

Proposed Regulations:

The proposed regulations would amend current § 682.211(c) to provide that if the forbearance is granted based on the borrower's or endorser's oral request and oral agreement to the terms of the forbearance, the lender must send a notice confirming the terms of the agreement within 30 days of the agreement. Section 682.211(d) of the proposed regulations would also be amended to specify in paragraph (d)(1) that in the case of a forbearance granted to a borrower or endorser who is in default, but prior to default claim payment, the forbearance agreement must include either a new agreement to repay the debt signed by the borrower or endorser, or a written or oral affirmation of the borrower's or endorser's obligation to repay the debt. Proposed § 682.211(d)(2) of the FFEL regulations would require that if a forbearance in this situation is based on the borrower's or endorser's oral request and affirmation of the obligation to repay the debt: (1) The forbearance period is limited to 120 days; (2) forbearance cannot be granted for consecutive periods; (3) the lender must orally review with the borrower the terms and conditions of the forbearance, including the consequences of interest capitalization and other repayment options available to the borrower; and (4) the lender must send the borrower or endorser a notice that confirms the terms of the forbearance and the borrower's or endorser's affirmation of the obligation to repay the debt within 30 days of that agreement, and must retain a record of the terms and conditions of the forbearance and affirmation in the borrower's or endorser's file. Finally, proposed § 682.211(d)(3) would define “affirmation” for this purpose as an acknowledgement of the loan by the borrower or endorser in a legally binding manner that can take the form of, but is not limited to: (1) A new signed repayment agreement or schedule, or another form of signed agreement to repay the debt; (2) an oral acknowledgment and agreement to

repay the debt documented by the lender in the borrower's or endorser's file and confirmed by the lender in a notice to the borrower; or (3) a payment made on the loan by the borrower or endorser.

The proposed regulations would also add comparable forbearance provisions to § 685.205(a) for the Direct Loan Program.

Reasons:

Prior to the formal negotiated rulemaking sessions, the Department received public comments requesting that § 682.211(d) of the FFEL regulations be amended to eliminate the requirement that a lender collect a signed repayment agreement from the borrower as a condition for granting a forbearance to a borrower who is in default on a loan for which the guaranty agency has not yet paid the default claim to the lender. Commenters noted that under the Department's current procedures, a forbearance may be granted to a defaulted Direct Loan borrower under the same circumstances without a signed repayment agreement. These commenters argued that the same terms and conditions for granting a forbearance to a defaulted borrower should apply in both programs.

During the negotiations, the Department stated its preference for retaining the requirement for a signed repayment agreement in the FFEL regulations and, for consistency, adding a comparable provision to the Direct Loan Program regulations. The Department indicated that it believes a written affirmation of the debt by a borrower who is in default after failing to make payments for 270 or more days increases the prospect that the borrower will resume repayment following the end of the forbearance period. Some non-Federal negotiators argued that lenders should have maximum flexibility to work with borrowers at the late stages of delinquency to avoid the negative consequences of default and supported a policy of allowing a lender to grant forbearance based on an oral request and oral affirmation of the debt documented in the borrower's file. One non-Federal negotiator noted that granting forbearance to a borrower who is more than 270 days delinquent is a matter of lender discretion and would be granted only when appropriate. Another non-Federal negotiator disagreed with permitting oral affirmation of the debt without a separate acknowledgment of the affirmation from the borrower that would become part of the forbearance agreement.

Some negotiators raised the issue of whether a written forbearance request and affirmation is demonstrably more effective at ensuring a borrower's successful repayment following the end of a forbearance period than an oral request and affirmation. To address this issue, Department staff and lender servicing representatives reviewed data on delinquent and defaulted accounts on which forbearance was granted, but determined that most servicing systems did not capture the method used to request the forbearance. Limited data available from one servicer of Department-held loans suggested there was virtually no difference in successful repayment outcomes for borrowers making written requests and providing written affirmation of the debt versus those making an oral request and providing an oral affirmation of the debt. Taking all of these considerations into account, the negotiating committee agreed on the approach in the proposed regulations which permits forbearance based on the borrower's oral affirmation of the debt but requires the lender to follow-up on the oral agreement by sending a written notice to the borrower.

Non-Federal negotiators representing State Attorneys General raised concerns about the possible misuse of oral forbearance requests and affirmations by institutions of higher education that might try to manipulate their default rates. They requested that the Department consider ways to address the potential for abuse they believed was inherent in an oral forbearance request and authorization process by requiring verification of the identity of the borrower through the use of voice recognition software or telephone recordings of the borrower's request and affirmation. The Department noted that any conversation between a borrower and a lender servicer could lead to a forbearance agreement and, given applicable consent requirements, this proposal could necessitate recording all loan servicing calls with borrowers. The Department also noted that due to varying State laws on recording of conversations, it was not feasible to add a requirement to program regulations that would ensure compliance with all State laws. The Department agreed to monitor the use of forbearances in its oversight of schools and third-party servicers who are working on default aversion services on behalf of the schools.

The State Attorneys General representatives and student and consumer advocate representatives provided evidence to the negotiating committee that suggested that some institutions were attempting to manage their student loan cohort default rates by convincing borrowers to request forbearances for the cohort default rate period, whether or not it benefited the borrower. This could allow the institution to evade the consequences of high default rates. To address this potential problem, the Department agreed to include a limit of 120 days on any forbearance granted to a defaulted borrower or endorser based on an oral request and affirmation, and to prohibit a servicer from granting the borrower or endorser consecutive 120-day period forbearances.

Some non-Federal negotiators also expressed concern that granting forbearance to a defaulted borrower or endorser may simply delay a default claim payment or transfer of the loan for default collections if the borrower or endorser is not provided with information on other repayment options. The Department agreed that a lender should be required to orally review with the borrower the various repayment options available to the borrower for any forbearance that is based on an oral request and affirmation. The Department also reminded the non-Federal negotiators that information on available repayment plans is disclosed to delinquent borrowers in their monthly billing statements prior to default claim filing or the transfer of the loan to default collections, and as part of due diligence and default aversion efforts in the FFEL and Direct Loan programs.

Forbearance Provisions for Borrowers Receiving Department of Defense Student Loan Repayment Benefits (34 CFR 682.211(h) and 685.205)

Statute:

Section 428(c)(3)(A)(i)(IV) of the HEA requires that, upon the borrower's request, a FFEL lender shall grant forbearance in renewable 12-month intervals to a borrower who is eligible for interest payments to be made on his or her loans under the repayment benefit program authorized in 10 U.S.C. 2174 for service in the Armed Forces. Under section 428(c)(3)(A)(ii)(II) of the HEA, this forbearance may not exceed three years. Under section 455(a)(1) of the HEA, this forbearance is also available to eligible Direct Loan borrowers.

Current Regulations:

The mandatory forbearance for borrowers who are eligible for interest payments under the loan repayment program authorized in 10 U.S.C. 2174 is reflected in 34 CFR 682.211(h)(2)(ii)(B), but the current regulations include an incorrect statutory citation. There is no comparable provision in the Direct Loan Program regulations governing forbearance at 34 CFR 685.205.

Proposed Regulations:

The proposed regulations would amend 34 CFR 682.211(h)(2)(ii)(B) of the FFEL regulations to require that lenders grant forbearance to borrowers who are performing service that qualifies them for loan repayment under the Department of Defense student loan repayment programs authorized by 10 U.S.C. 2171, 2173, or 2174, or under any other student loan repayment programs administered by the Department of Defense. We are also proposing to amend 34 CFR 685.205(a)(9) of the Direct Loan Program regulations to include a comparable forbearance provision.

Reasons:

Current FFEL regulations require a lender to grant forbearance to a borrower who is performing service that qualifies the borrower for a partial repayment of his or her loan only under the Student Loan Repayment Programs authorized under 10 U.S.C. 2171. During the public hearings prior to the formal negotiated rulemaking sessions, a number of commenters recommended that the regulations be revised to also include borrowers who receive benefits under other student loan repayment programs administered by the Department of Defense. The commenters also noted that there is no comparable forbearance provision in the Direct Loan Program regulations and recommended that one be added to ensure consistency between the two programs. The negotiating committee agreed that these regulatory changes should be made.

Borrowers Who Are Delinquent When an Authorized Forbearance Is Granted (34 CFR 682.211(f) and 685.205)

Statute:

Under section 428(c)(3) of the HEA, FFEL Program lenders may exercise certain administrative forbearances that do not require the agreement of the borrower under conditions specified by the Secretary. The HEA specifies that such forbearances shall include forbearances for borrowers who are delinquent at the time an authorized period of deferment is granted and for borrowers who are less than 60 days delinquent on their loans at the time the loan is sold or transferred to another entity.

Current Regulations:

The conditions under which a FFEL Program lender may grant an administrative forbearance, a form of forbearance that does not require a request and documentation from the borrower, are specified in 34 CFR 682.211(f). In addition to the circumstances identified in the HEA for granting such a forbearance, the regulations also authorize a FFEL Program lender to grant an administrative forbearance in a number of other circumstances, including: (1) If the borrower has payments that are overdue at the beginning of a properly granted period of deferment for which the lender learns the borrower did not qualify; or (2) a forbearance period not to exceed three months when the lender determines that a borrower's ability to make payments has been adversely affected by a natural disaster, a local or national emergency as declared by the appropriate government agency, or a military mobilization. The current regulations do not authorize a forbearance for a period in which a borrower has payments that are overdue at the beginning of an authorized period of forbearance.

Proposed Regulations:

The proposed regulations would amend 34 CFR 682.211(f) to authorize a lender to grant an administrative forbearance to a borrower who is delinquent at the beginning of an authorized period of forbearance and would add a corresponding provision to the Direct Loan regulations in 34 CFR 685.205(b).

Reasons:

Under the FFEL Program regulations, a borrower who is delinquent at the beginning of an authorized period of forbearance will remain in a delinquent payment status on the loan at the end of the authorized forbearance period, unless the borrower provides the lender with documentation to support granting an authorized forbearance that covers the borrower's entire period of delinquency. During the public comment period prior to the beginning of the formal negotiated rulemaking sessions, representatives of FFEL lenders and loan servicers asked the Department to amend the regulations to authorize FFEL lenders to grant administrative forbearances to borrowers to eliminate a period of delinquency prior to the borrower's authorized forbearance period that is not covered by the authorized forbearance, to ensure that the borrower is current in repayment at the end of the authorized forbearance period. The negotiating committee agreed that such a change would be beneficial for borrowers and would reduce the likelihood that a borrower will be confused if the borrower finds that the loan is considered delinquent at the end of a significant period of authorized forbearance. For purposes of consistency, the negotiating committee also agreed to include a comparable provision in 34 CFR 685.205(b) of the Direct Loan Program regulations.

Loan Rehabilitation Agreement: Reasonable and Affordable Payment Standard (34 CFR 682.405(b) and 685.211(f))

Statute:

Under section 428F of the HEA, a borrower may rehabilitate a defaulted FFEL loan if the borrower makes at least nine payments on the loan, each of which is made within 20 days of its scheduled due date and all of which are made over a period of 10 consecutive months beginning with the month in which the first scheduled payment is to be made under the rehabilitation agreement. Once the borrower meets this standard the guaranty agency must, if practicable, sell the defaulted FFEL loan to an eligible lender. The guaranty agency may not demand from the borrower a monthly rehabilitation payment amount that is more than is reasonable and affordable based on the borrower's total financial circumstances. After selling the loan to an eligible FFEL lender, the guaranty agency must request any consumer reporting agency to which the guaranty agency reported the loan default to remove the record of default from the borrower's credit history. The requirements in section 428F(a) of the HEA also apply to defaulted FFEL loans held by the Secretary.

Section 428F(a)(1)(D)(i)(II)(aa) of the HEA authorizes a guaranty agency to charge the borrower collection costs not in excess of 18.5 percent of the outstanding principal and interest at the time the guaranty agency sells the rehabilitated loan to an eligible lender.

Current Regulations:

Sections 685.211(f)(1) and 682.405(b)(1) of the Direct Loan and FFEL program regulations provide that the Secretary (for Direct Loans) and the guaranty agency (in FFEL) will provide a loan rehabilitation program for defaulted Direct Loan and FFEL borrowers. To rehabilitate a defaulted loan, a Direct Loan or FFEL borrower who requests rehabilitation must make nine, monthly, voluntary, on-time payments within a ten-month period. The payments must be for the full monthly payment amount required under the rehabilitation agreement, and must be received by the Secretary or the guaranty agency within 20 days of the payment due date. The monthly rehabilitation payment amount must be reasonable and affordable as determined by the Secretary under § 685.211(f)(1) of the Direct Loan regulations or by the guaranty agency under § 682.405(b)(1)(iii) of the FFEL regulations.

The Direct Loan Program regulations in § 685.211(f)(1) state that the Secretary's determination of reasonable

and affordable payment amounts will be based on the borrower's total financial circumstances. Under § 682.405(b)(1)(iii)(A), a guaranty agency's determination of reasonable and affordable includes a consideration of the disposable income of the borrower and the borrower's spouse and of the borrower's reasonable and necessary expenses. Reasonable and necessary expenses include, but are not limited to: housing, utilities, food, medical costs, work-related expenses, dependent care costs, and repayment of other title IV loans.

Section 682.405(b)(1)(iii)(B) of the FFEL regulations specifies that a reasonable and affordable payment amount may not be a required minimum payment amount, such as $50, if the guaranty agency determines that a smaller amount is reasonable and affordable based on the borrower's total financial circumstances. If the guaranty agency determines that a reasonable and affordable payment for the borrower is less than $50 or the monthly accrued interest on the loan, whichever is greater, the agency must include documentation in the borrower's file supporting that determination.

Section 682.405(b)(1)(iii)(C) requires a guaranty agency to base its determination of a reasonable and affordable rehabilitation payment on documentation provided by the borrower, or from other sources. The documentation that may be considered includes, but is not limited to:

• Evidence of current income (such as proof of welfare benefits, Social Security benefits, child support, veterans' benefits, Supplemental Security Income, Workmen's Compensation, the two most recent pay stubs, the most recent copy of a U.S. income tax return, or State Department of Labor reports);

• Evidence of current expenses (such as a copy of the borrower's monthly household budget on a form provided by the guaranty agency); and

• A statement of the unpaid balance on all FFEL loans held by other lenders.

Section 682.405(b)(1)(v) authorizes a FFEL borrower to request that the guaranty agency adjust the monthly payment amount due to a change in the borrower's total financial circumstances. The borrower must provide documentation supporting this request to the guaranty agency.

Section 682.405(b)(1)(vi) requires a guaranty agency to provide a FFEL borrower with a written statement confirming the borrower's reasonable and affordable payment amount. The written statement must explain any other terms and conditions applicable to the required series of payments that the borrower must make before the borrower's account can be considered for repurchase by an eligible FFEL lender. The statement must inform the borrower of the effects of loan rehabilitation, and of the amount of the collection costs that will be added to the unpaid principal at the time the loan is sold to a FFEL lender. The collection costs may not exceed 18.5 percent of the unpaid principal and accrued interest at the time of the sale.

Section 682.405(b)(1)(vii) requires a guaranty agency to provide a FFEL borrower with an opportunity to object to the terms of the rehabilitation agreement.

Section 682.405(b)(2) requires a guaranty agency to attempt to secure a lender to purchase the loan after the borrower makes the required number of qualifying rehabilitation payments.

Section 682.405(b)(3)(i)(B) requires the guaranty agency, within 45 days of selling a rehabilitated loan to an eligible FFEL lender, to request that any consumer reporting agency to which the default was reported remove the record of the default from the borrower's credit history.

Some of the details related to loan rehabilitation in the FFEL Program regulations are not reflected in the current Direct Loan Program regulations. These include, for example, details such as the specific types of documentation of income and expenses that the Secretary uses to determine a borrower's reasonable and affordable payment amount.

Proposed Regulations:

The proposed regulations would incorporate many of the details in current FFEL Program regulations at § 682.405(b) into the Direct Loan regulations at § 685.211(f) and also add new details into both of these sections. Specifically, the proposed regulations would add new §§ 685.211(f)(1)(i) and 682.405(b)(1)(iii) to provide that the Secretary (in the Direct Loan Program) and the guaranty agency (in the FFEL Program) would base the determination of reasonable and affordable rehabilitation payment amounts on information provided by the borrower on a form approved by the Secretary, and, if requested, supporting documentation provided by the borrower.

Proposed §§ 685.211(f)(1)(i)(A) and 682.405(b)(1)(iii)(A) would provide that the Secretary and the guaranty agency will consider the borrower's and, if applicable, the borrower's spouse's current disposable income in determining a reasonable and affordable rehabilitation payment. Disposable income includes public assistance payments and other income received by the borrower and the spouse, such as welfare benefits, Social Security benefits, Supplemental Security Income benefits, and workers' compensation benefits. Under proposed §§ 685.211(f)(1)(i)(A) and 682.405(b)(1)(iii)(A), spousal income would not be considered if the spouse does not contribute to the borrower's household income.

Proposed §§ 685.211(f)(1)(i)(B) and 682.405(b)(1)(iii)(B) would provide that, in determining the reasonable and affordable payment amount, the Secretary and the guaranty agency will consider the borrower's family size, as defined in §§ 685.221(a)(3) and 682.215(a)(3).

Proposed §§ 685.211(f)(1)(i)(C) and 682.405(b)(1)(iii)(C) would provide a more detailed list of the reasonable and necessary expenses that the Secretary and a guaranty agency will consider in determining a borrower's rehabilitation payment amount. The proposed expenses include:

• Food;

• Housing;

• Utilities;

• Basic communication expenses;

• Necessary medical and dental costs;

• Necessary insurance costs;

• Transportation costs;

• Dependent care and other work-related expenses;

• Legally required child and spousal support;

• Other title IV and non-title IV student loan payments; and

• Other expenses approved by the Secretary.

Proposed §§ 685.211(f)(1)(ii) and 682.405(b)(1)(iv) would provide that a reasonable and affordable rehabilitation payment amount must not be a required minimum payment, such as $50, if the Secretary or the guaranty agency determines that a smaller amount is reasonable and affordable. The payment amount also must not be a percentage of the borrower's total loan balance, or be based on other criteria unrelated to the borrower's total financial circumstances.

Under proposed §§ 685.211(f)(1)(iii) and 682.405(b)(1)(v), the Secretary or the guaranty agency would provide the borrower with a written rehabilitation agreement within 15 business days of the determination of the borrower's reasonable and affordable payment amount. The written rehabilitation agreement would include the rehabilitation payment amount, a prominent statement that the borrower may object orally or in writing to the payment amount, and the method and timeframe for raising an objection to the payment amount. The written rehabilitation agreement would provide

an explanation of any other terms and conditions applicable to the required series of payments. The Secretary or the guaranty agency may not impose any other conditions unrelated to the amount or timing of the rehabilitation payments in the rehabilitation agreement. The written rehabilitation agreement would inform the borrower of the effects of having a loan rehabilitated. For FFEL Program loans, the written repayment agreement would inform the borrower of the amount of any unpaid collection costs to be added to the unpaid principal of the loan when the loan is sold to an eligible FFEL lender

Proposed §§ 685.211(f)(3) and 682.405(b)(1)(vi) would provide that the borrower's rehabilitation payment amount would be recalculated if the borrower objects to the payment amount contained in the written repayment agreement that the Secretary or the guaranty agency would send to the borrower under proposed §§ 685.211(f)(4) and 682.405(b)(1)(vi).

Under §§ 685.211(f)(5) and 682.405(b)(1)(vii) a borrower who objects to the monthly repayment amount contained in the written repayment agreement would provide the Secretary or guaranty agency the documentation needed to recalculate a monthly payment amount under the IBR formula. The Secretary or the guaranty agency would recalculate the rehabilitation payment amount using the formula for calculating a monthly payment amount under the IBR plan in § 685.221(b)(1) and (b)(2) of the Direct Loan regulations or § 682.215(b)(1) of the FFEL regulations. If the recalculated amount using the IBR plan formula is less than $5, the borrower's recalculated monthly rehabilitation payment would be $5. If the borrower does not provide the required documentation to the Secretary or the guaranty agency, the Secretary or the guaranty agency would not proceed with the rehabilitation process.

Under proposed § 685.211(f)(7), a Direct Loan borrower may request that the Secretary adjust the borrower's monthly rehabilitation payment if there is a change in the borrower's financial circumstances. The borrower would be required to provide the documentation specified in proposed § 685.211(f)(1)(i) to support the request. This is comparable to the requirement in § 682.405(b)(1) of the current FFEL regulations.

Under proposed §§ 685.211(f)(8) and 682.405(b)(1)(x), while the borrower is making payments under a rehabilitation agreement, the Secretary and the guaranty agency would limit contact with the borrower on the loan being rehabilitated. Contact with the borrower would be restricted to collection activities that are required by law or regulation, and to communications that support the rehabilitation.

After a defaulted Direct Loan has been rehabilitated, proposed § 685.211(f)(9) provides that the Secretary will instruct any consumer reporting agency to which the default was reported to remove the default from the borrower's credit history. This is comparable to the requirement in § 682.405(b)(3)(i)(B) of the current FFEL regulations.

Proposed revisions to §§ 685.211(f) and 682.405(a) relating to the interplay of AWG and loan rehabilitation payments are discussed in the

Loan Rehabilitation Agreement: Treatment of Borrowers Subject to Administrative Wage Garnishment

section of this preamble.

Reasons:

During the public comment period prior to the formal negotiated rulemaking sessions, some commenters recommended that the Secretary consider using the IBR plan formula to determine a borrower's reasonable and affordable payment amount for loan rehabilitation purposes. IBR, which provides for a monthly loan payment that is intended to be affordable based on a borrower's income and family size, became available to borrowers in the Direct Loan and FFEL programs on July 1, 2009. The commenters believed that using the IBR formula would simplify and standardize the process for the determination of loan rehabilitation payments. In addition, the commenters argued that the availability of IBR as a repayment option for borrowers after rehabilitation of a loan provides further support for using the IBR formula to determine a reasonable and affordable payment for loan rehabilitation purposes, since borrowers who have rehabilitated their defaulted loans may request to repay under IBR.

Before the availability of IBR as a repayment option, a borrower who made very low monthly payments under a rehabilitation agreement based on the borrower's income might be faced with a much larger post-rehabilitation monthly payment amount that the borrower could not easily afford, since there were no available repayment plans that would provide for a payment as low as the rehabilitation agreement payment. If a FFEL Program borrower made very low payments during the rehabilitation period, the borrower might not have been able to make the larger, post-rehabilitation payments. Therefore, the guaranty agency might have had difficulty selling the loan to a FFEL lender, or might have been forced to sell the loan at a discount. A FFEL loan is not rehabilitated until the guaranty agency sells it to a lender. The Secretary believes that using the IBR formula to determine what is a reasonable and affordable payment amount for loan rehabilitation purposes would address the issue of borrowers' payment amounts being too high after rehabilitation, since a borrower who paid the IBR amount during the rehabilitation period could choose IBR as his or her repayment plan post-rehabilitation. Therefore, the Secretary agreed to include this proposal on the agenda for negotiated rulemaking.

At the first meeting of the negotiating committee, non-Federal negotiators representing legal aid and consumer advocacy organizations proposed that the IBR formula be used as the starting point for determining a Direct Loan or FFEL borrower's reasonable and affordable rehabilitation payment amount. If the borrower objected to the payment amount determined using the IBR formula and could justify a lower amount, the Secretary or the guaranty agency could reduce the payment below the amount determined under the IBR formula.

Non-Federal negotiators representing guaranty agencies argued that requiring the use of the IBR formula would reduce their ability to work with borrowers to arrive at a rehabilitation payment amount acceptable to both the guaranty agency and to the borrower. They pointed out that it is not in anyone's interest to set a borrower's rehabilitation payment so high that the borrower cannot meet it. They contended that, under their current procedures, negotiations on loan rehabilitation that occur between a borrower and a guaranty agency result in appropriate rehabilitation payment amounts. Those negotiators contended that if the amount initially proposed is too high, the borrower will object and that the negotiations generally result in an amount acceptable to both parties. Using the IBR formula would preclude any such negotiations between the borrower and the guaranty agency. They argued that any change to the regulations with regard to reasonable and affordable rehabilitation payment amounts would amount to fixing a problem that does not exist.

Non-Federal negotiators representing consumer advocacy groups and students disputed this claim. They contended that defaulted borrowers rarely are given an opportunity to negotiate their loan rehabilitation payments and are often intimidated by the debt collectors trying to collect the loan. These negotiators asserted that borrowers are told by debt collectors that they have no choice but to accept the loan rehabilitation

payment amount that is proposed to them, even if the borrower has no practical means of paying that amount.

These non-Federal negotiators also asserted that the statutory requirement that a loan rehabilitation payment amount be “reasonable and affordable based on the borrower's total financial circumstances” is routinely ignored by guaranty agencies and the Secretary. The current calculation methods, in their view, are designed to require the borrower to make as high a payment as possible, with no consideration of the borrower's ability to maintain that level of payment throughout the rehabilitation period. These non-Federal negotiators contended that collection agencies working on behalf of guaranty agencies and the Secretary on a commission rate basis have no incentive to help borrowers successfully rehabilitate their loans.

Non-Federal negotiators representing guaranty agencies and collection agencies countered by noting that a collection agency does not earn a commission unless the borrower makes a payment. Setting the payment amount too high is counter-productive to that goal. These negotiators also stated that guaranty agencies do look at a borrower's total financial situation when determining reasonable and affordable payment amounts. They stated that it is routine practice to review a borrower's income and expenses when determining rehabilitation payment amounts.

The negotiators representing guaranty agencies also pointed out that under the IBR formula a $0 payment is possible, and they argued that $0 should not be an acceptable payment amount for purposes of rehabilitating a defaulted loan. They emphasized that loan rehabilitation is a significant benefit. It allows defaulted borrowers to have their credit reports cleared of the default and also allows them to receive additional title IV aid, including new title IV loans. Loan rehabilitation is intended to help the borrower develop a pattern of making monthly, on-time payments on the loan. If a borrower succeeds in making the required number of monthly payments, the borrower is more likely to succeed in continuing to make payments on the loan once the loan goes back into regular repayment. These negotiators pointed out that a borrower may only rehabilitate a loan once. If a borrower rehabilitates a loan, and then re-defaults on the loan, the borrower will not have another opportunity to rehabilitate that loan. These negotiators contended that allowing a borrower to rehabilitate a loan by making monthly payments as low as $0 would not be beneficial to the borrower or to taxpayers.

Non-Federal negotiators representing consumer advocacy groups agreed to address the $0 payment issue by setting a minimum payment amount. However, they argued that the minimum payment should be a very low amount, such as $5, arguing that there is no evidence that borrowers who successfully rehabilitate their loans by making small monthly payments are more likely to re-default than other borrowers or that guaranty agencies have difficulty selling these loans after the borrower has made the required rehabilitation payments. On the contrary, these negotiators asserted that borrowers who make small monthly rehabilitation payments are more likely to get into the habit of making on-time, monthly payments, and to continue making these payments after completing rehabilitation.

Non-Federal negotiators representing guaranty agencies pointed out, however, that, while a low-income borrower might have very small monthly payments under the IBR formula, a borrower with a high income would have higher payments under the IBR formula than under a different approach. Using the IBR formula for calculation of the reasonable and affordable payment amount could result in higher payment amounts than the guaranty agency would propose to a borrower under their current methodologies.

The proposed regulations attempt to address the concerns expressed on both sides of this debate. The proposed regulations would allow the Secretary and the guaranty agencies to retain the flexibility to work with borrowers to determine reasonable and affordable repayment amounts, but would more clearly define the parameters within which the guaranty agencies must work. The Secretary and the guaranty agencies would still be free, under the proposed regulations, to develop their own methodologies for determining the reasonable and affordable payment amount initially proposed to the borrower. However, the Secretary and all of the guaranty agencies would base their determinations of loan rehabilitation payment amounts on the same factors. Specifically, the proposed regulations would require the Secretary and the guaranty agencies to collect information on a borrower's income and expenses using a standardized form. The form would identify the sources of income that the Secretary or the guaranty agency will consider, apply a consistent definition of family size for borrowers, and identify the types of expenses the Secretary or the guaranty agency must take into account in determining the reasonable and affordable payment amount for the borrower.

The Secretary invites comment on whether the final regulations should require the Secretary and the guaranty agencies to use a standardized methodology to determine reasonable and affordable rehabilitation payment amounts. Under a standardized methodology, in addition to identifying the types of expenses that the Secretary or the guaranty agency may consider, we would use standard allowable expense amounts, such as the IRS National Standards, for each type of expense reported by the borrower so that the payment calculation is based on allowable expenses that are consistent across all borrowers. The IRS National Standards are described under the section of this preamble titled “Borrower Hearing Opportunities on the Enforceability of the Debt and a Borrower's Claim of Financial Hardship.”

Regardless of the methodology used to determine the payment amount, the proposed regulations would establish a process by which borrowers may object to the payment amount proposed by the Secretary or the guaranty agency. The Secretary or the guaranty agency will notify the borrower of the reasonable and affordable payment amount the Secretary or the agency has calculated for the borrower. The notice would include a prominent statement that the borrower may object to the amount proposed. The borrower would be allowed to object, verbally or in writing, to the payment amount that has been determined. If the borrower objects, the Secretary or the guaranty agency would recalculate the amount using the IBR formula. This establishes the IBR formula as a fallback methodology for determining reasonable and affordable payment amounts for loan rehabilitation purposes. Furthermore, the borrower would have the option to reject the amount calculated using the IBR formula and accept the amount initially proposed for any reason, such as if the initially proposed amount is lower than the amount calculated using the IBR formula.

To address the concerns regarding the potential of payments of $0, the proposed regulations specify that if the IBR formula results in a payment of $0, the payment amount would be set at $5. A payment amount this small would apply only to borrowers with extremely low incomes, and would help these borrowers establish the habit of making monthly, on-time payments on the loan.

We believe that this approach preserves flexibility for the Secretary and the guaranty agencies, while at the same time providing a borrower with access to an alternative payment amount if the borrower feels the payment amount proposed by the Secretary or the guaranty agency is too high. The proposed regulations would also ensure that, regardless of which method is used to determine the borrower's rehabilitation payment amount, the amount will be based on the borrower's total financial circumstances without regard to other factors.

Under proposed §§ 685.211(f)(5) and 682.405(b)(1)(vii), if a borrower objects to the initial monthly payment amount, but does not provide the documentation required to calculate a monthly payment amount using the income-based repayment plan formula, the rehabilitation does not proceed. However, the borrower may have already provided some or all of the information required for a recalculation when the borrower initially requested rehabilitation. We invite comments on whether it would be appropriate to make a change in the final regulations to require a borrower to submit information needed to recalculate the borrower's reasonable and affordable rehabilitation payment amount only if new information is required beyond what the borrower provided when he or she initially requested loan rehabilitation.

To ensure consistency in the treatment of Direct Loan and FFEL borrowers, the changes to the regulations discussed above would also be made in the Direct Loan program regulations and the Secretary would follow these same guidelines for defaulted FFEL loans held by the Secretary. We are also proposing to incorporate into the Direct Loan Program regulations the provision in § 682.405(b)(1)(v) of the current FFEL Program regulations that allows a borrower to request that the monthly payment amount be adjusted due to a change in the borrower's total financial circumstances and that specifies the documentation a borrower must provide to support this request.

The proposed regulations would limit contact between the Secretary or a guaranty agency and the borrower during the rehabilitation period. Only those contacts required by law or regulation, or that support the rehabilitation, would be permitted. This addresses a concern raised during the negotiated rulemaking sessions that borrowers who are making good faith efforts to rehabilitate their defaulted Direct Loan or FFEL program loans should not be subject to inappropriate collection contacts while they are making rehabilitation payments.

Loan Rehabilitation Agreement: Treatment of Borrowers Subject to Administrative Wage Garnishment (34 CFR 682.405(a) and 685.211(f))

Statute:

Section 428F(a) of the HEA governs rehabilitation of defaulted loans; however, it does not address the treatment of borrowers who are subject to AWG while making voluntary payments under a loan rehabilitation agreement.

Current Regulations:

The current Direct Loan and FFEL program regulations do not specifically address payments collected by AWG while a Direct Loan or FFEL borrower is also making voluntary payments under a loan rehabilitation agreement.

Proposed Regulations:

The proposed regulations would add new §§ 685.211(f)(12) and 682.405(a)(3) to the Direct Loan and FFEL program regulations to provide that the Secretary or the guaranty agency, respectively, will suspend collection on a defaulted loan through AWG after the borrower makes five qualifying payments under a loan rehabilitation agreement. The suspension of the AWG collection would be automatic after the borrower makes five qualifying payments, but the borrower could request that the Secretary or the guaranty agency continue collecting on the loan through AWG while the borrower also makes voluntary payments under the rehabilitation agreement. The Secretary or the guaranty agency would not suspend AWG unless and until the borrower makes the fifth payment under a loan rehabilitation agreement.

Under proposed new §§ 685.211(f)(12)(ii) and 682.405(a)(3)(ii), the borrower would have only one opportunity to benefit from a suspension of AWG while attempting to rehabilitate a defaulted loan.

Reasons:

Loan rehabilitation provides a borrower who has defaulted on a Direct Loan or a FFEL Program loan the opportunity to reaffirm his or her intention to repay the defaulted loan and to establish a repayment history sufficient to support treating the loan as no longer in default. In addition to regaining the benefits that apply to a non-defaulted Direct Loan or FFEL program loan, if a borrower successfully rehabilitates a loan the Secretary or guaranty agency requests that credit bureaus remove the default from the borrower's credit report. Loan rehabilitation payments in the Direct Loan and FFEL programs must be made voluntarily. Payments made through AWG are not voluntary payments.

Currently, for loans held by the Secretary, if a borrower is subject to AWG at the time the borrower enters into a loan rehabilitation agreement, the Secretary will continue to collect on the loan by AWG while the borrower makes the series of voluntary payments necessary to rehabilitate the loan. The voluntary payments the borrower must make are over and above the payments secured through the AWG process.

In response to public comments received on this issue before the negotiated rulemaking sessions, the Secretary initially proposed to relax the requirement that loans continue to be collected through AWG while borrowers who are subject to AWG attempt to rehabilitate a loan. Many of the non-Federal negotiators argued that continuing to collect through AWG while a borrower makes voluntary rehabilitation payments makes it harder for a borrower to complete loan rehabilitation. The negotiations around this issue centered on the following issues: whether there should be a distinction between borrowers already subject to AWG at the time the borrower requests loan rehabilitation and borrowers for whom AWG is about to be initiated; the appropriate number of voluntary payments a borrower should make before AWG is suspended; and how frequently a borrower should be allowed to qualify for this opportunity.

In addition, although the Secretary's initial proposal did not address whether the amount of an AWG payment should affect rehabilitation payments, the negotiators discussed whether the total amount of an involuntary AWG payment and a voluntary rehabilitation payment should be limited to the calculated reasonable and affordable payment amount under the loan rehabilitation agreement.

Under current Department policy, a guaranty agency should not start AWG for a borrower who has requested loan rehabilitation. If the borrower requests the opportunity for rehabilitation, the borrower should be allowed that opportunity before the guaranty agency initiates AWG. If AWG collections started before the borrower requests rehabilitation, guaranty agencies are not required to suspend AWG during the loan rehabilitation process.

Negotiators representing guaranty agencies indicated that the guaranty agencies have different policies with regard to suspending AWG during the rehabilitation period. Some guaranty agencies do not suspend AWG while a borrower is making rehabilitation payments out of a concern that the

borrower will stop making payments as soon as AWG is suspended. Other guaranty agencies suspend AWG after six rehabilitation payments are received from the borrower; and some suspend AWG after three or fewer payments by the borrower.

A non-Federal negotiator representing consumer groups argued that having a single standard for all guaranty agencies would be preferable to having standards that vary from guaranty agency to guaranty agency. Although a uniform standard may increase the number of loan rehabilitation payments some borrowers would be required to make before AWG is suspended, this negotiator contended that, overall, standardizing the number of payments would be more beneficial to borrowers. That negotiator recommended a three-payment standard.

Borrowers are not subject to AWG unless they have been in default on the loan for a lengthy period of time and other collection efforts have been unsuccessful. Given the administrative requirements for initiating AWG, the Secretary does not believe that a standard of three voluntary payments is sufficient as a uniform standard for suspending AWG. The Secretary initially proposed requiring five payments—slightly more than half the number of payments needed to rehabilitate a defaulted Direct Loan or FFEL program loan—before the Secretary or a guaranty agency would suspend AWG.

A non-Federal negotiator representing students proposed that the five-payment requirement be a cap on the number of required payments. Under this proposal, guaranty agencies could suspend AWG after the borrower has made fewer than five loan rehabilitation payments, but would be required to suspend AWG after the fifth payment.

The Secretary believes this approach would contravene one of the goals of the proposal—to standardize the treatment of borrowers who are making loan rehabilitation payments while the loan is also being collected by AWG—and did not accept this proposal. The negotiating committee reached consensus on the Secretary's initial proposal of requiring five AWG payments before the Secretary or a guaranty agency would suspend AWG during a concurrent period of rehabilitation.

Some non-Federal negotiators asked whether borrowers who are subject to AWG by mistake would be required to continue in AWG for five months before AWG could be suspended. The proposed regulations would not affect longstanding guidance from the Secretary that if a borrower is approved for AWG by mistake, the guaranty agency should immediately take steps to terminate AWG. The proposed regulations only apply to suspension of AWG due to payments made under a loan rehabilitation agreement.

Non-Federal negotiators representing guaranty agencies expressed concerns that borrowers who do not intend to actually rehabilitate the loan might use this provision to force guaranty agencies to suspend AWG indefinitely. Although a borrower may only successfully rehabilitate a loan once, there is no limit to the number of times a borrower may attempt to rehabilitate a loan. The guaranty agencies expressed concern that a borrower could interfere with the guaranty agency's ability to collect on a loan through AWG by requesting loan rehabilitation over and over again. These negotiators pointed out that AWG is an effective tool for collecting on student loans, and that the proposed regulations should not provide a loophole for defaulted borrowers to indefinitely forestall AWG.

To address the concern raised by these negotiators, the proposed regulations specify that a borrower may only receive this benefit once. If a borrower subject to AWG makes five qualifying payments on a loan under a rehabilitation agreement, AWG will be suspended. If the borrower fails to make qualifying loan rehabilitation payments, the Secretary or the guaranty agency may take the steps necessary to reinstate AWG. If the borrower attempts to rehabilitate the loan again, AWG would remain in place during the entire loan rehabilitation period.

A non-Federal negotiator asked whether a guaranty agency would be required to go through the AWG hearing and notice requirements if it resumes AWG. Since AWG would be suspended but not withdrawn, the formal hearing requirements would not apply. However, consistent with requirements to provide other notices to the borrower throughout the AWG process, the guaranty agency would be expected to notify the borrower of the resumption of AWG.

Although the proposal only addresses the suspension of AWG during a period in which the borrower is making payments under a loan rehabilitation agreement, some non-Federal negotiators asked about the relationship between the amount of money collected involuntarily from the borrower through AWG and the voluntary payments the borrower makes under a loan rehabilitation agreement. As discussed earlier in the

Loan Rehabilitation Agreement: Reasonable and Affordable Payment Standard

section of this preamble, a loan rehabilitation payment amount must be reasonable and affordable. Non-Federal negotiators representing consumer groups and students recommended that the regulations require that the Secretary or the guaranty agency adjust the amounts collected under AWG and the loan rehabilitation agreement, so that the two payments would combine to equal the reasonable and affordable payment amount agreed to by the guaranty agency and the borrower in the rehabilitation agreement.

Under the HEA, a rehabilitation payment must not only be reasonable and affordable, but it must also be made voluntarily. AWG payments are not voluntary, and are not part of a borrower's loan rehabilitation payment.

Non-Federal negotiators representing guaranty agencies stated that some guaranty agencies currently do reduce AWG payments for borrowers who are rehabilitating their loans. These negotiators indicated that guaranty agencies would likely continue this practice under the proposed regulations, but, to preserve flexibility for guaranty agencies, they did not support requiring this practice in the regulations. The Department agreed with these negotiators that, since the guaranty agencies work with many different types of borrowers, it would be preferable to continue to allow the guaranty agencies flexibility in making these determinations. Therefore, proposed §§ 685.211(f) and 682.405(a) do not require the Secretary or the guaranty agencies to reduce AWG payments to reflect the amount of payments made by the borrower under a loan rehabilitation agreement, nor do they prevent the Secretary or a guaranty agency from making such reductions at their discretion.

Some non-Federal negotiators suggested that some borrowers may prefer to continue AWG payments while they are also making loan rehabilitation payments. These borrowers might view the AWG payments as similar to automatic debit payments that would pay down their loans faster than rehabilitation payments alone. These negotiators recommended that the proposed regulations allow these borrowers to request that AWG continue while they make rehabilitation payments. The Secretary agreed with this suggestion.

Perkins Loan Program Issues

Federal Perkins Loan Graduate Fellowship Deferment Eligibility (34 CFR 674.34(b)(1) and (f))

Statute:

Section 464(c)(2)(A)(i)(II) of the HEA authorizes a deferment for a Perkins Loan borrower while the borrower is pursuing a course of study pursuant to a graduate fellowship program approved by the Secretary, except that a borrower is not eligible for a deferment while serving in a medical internship or residency program. HEA section 464(c)(2)(A)(i)(II) does not specify the requirements that a Perkins Loan borrower must meet to be eligible for the graduate fellowship deferment.

Current Regulations:

The Perkins Loan Program regulations in § 674.34(b)(1)(ii) provide that a Perkins Loan borrower is eligible for a graduate fellowship deferment when the borrower is enrolled and in attendance as a regular student in a course of study that is part of a graduate fellowship program approved by the Secretary. To qualify for the deferment, § 674.34(f) requires a borrower to provide certification to the institution that the borrower has been accepted or is engaged in full-time study in the institution's graduate fellowship program.

Proposed Regulations:

The proposed regulations in § 674.34(f)(1) would require schools that participate in the Perkins Loan Program to use the same eligibility criteria that lenders use in the FFEL Program (under § 682.210(d)) to define an eligible graduate fellowship program and to establish the eligibility of a Perkins Loan borrower for a graduate fellowship deferment. Proposed § 674.34(f)(2) would define an “eligible graduate fellowship program” as a program that:

• Provides sufficient financial support to allow for full-time study for at least six months;

• Requires a written statement from each applicant explaining the applicant's objectives before the award of that financial support;

• Requires a graduate fellow to submit periodic reports, projects, or evidence of the fellow's progress; and

• In the case of a course of study at a foreign university, accepts the course of study for completion of the fellowship program.

Proposed § 674.34(f)(1) would also require a statement signed by an official of the program certifying:

• That the borrower holds at least a baccalaureate degree conferred by an institution of higher education;

• That the borrower has been accepted or recommended by an institution of higher education for acceptance on a full-time basis into an eligible graduate fellowship program; and

• The borrower's anticipated completion date in the program.

Reasons:

We are proposing changes to § 674.34(f)(1) of the Perkins Loan Program regulations to mirror the definition of an “eligible graduate fellowship program” and the graduate fellowship deferment eligibility criteria that are used in the FFEL and Direct Loan programs. These changes would provide consistent treatment of borrowers across the HEA, title IV loan programs.

Federal Perkins Loan Economic Hardship Deferment Debt-to-Income Ratio Provision (34 CFR 674.34(e)(4))

Statute:

Section 304 of the College Cost Reduction and Access Act (CCRAA), Public Law 110-84, amended the definition of “economic hardship” in section 435(o) of the HEA by eliminating section 435(o)(1)(B). That section defined the term “economic hardship” to include a borrower who is working full-time and has a Federal educational debt burden that equals or exceeds 20 percent of the borrower's adjusted gross income (AGI), if the difference between the borrower's AGI and the borrower's Federal debt burden is less than 220 percent of either the annual minimum wage or the poverty line.

Current Regulations:

Under § 674.34(e)(4), a Perkins Loan borrower may receive an economic hardship deferment if he or she is not receiving total monthly gross income that exceeds twice the amount specified in § 674.34(e)(3) and, after deducting an amount equal to the borrower's payments on Federal postsecondary education loans, the remaining amount of the borrower's income does not exceed the amount specified in § 674.34(e)(3). The amount specified in § 674.34(e)(3) is the greater of the monthly earnings of an individual earning the minimum wage rate, or an amount equal to 150 percent of the poverty guideline for the borrower's family size.

Proposed Regulations:

The proposed regulations would remove the debt-to-income economic hardship deferment category in § 674.34(e)(4) and related provisions in § 674.34(e)(6) and (e)(9) from the Perkins Loan Program regulations.

Reasons:

Final regulations published by the Department on October 23, 2008, (73 FR 63232) eliminated from the Perkins, Direct Loan, and FFEL regulations the debt-to-income economic hardship deferment that was based on former section 435(o)(1)(B) of the HEA. The final regulations also eliminated a similar debt-to-income economic hardship deferment category for a borrower who is working less than full-time from the Direct Loan and FFEL regulations, but inadvertently retained the comparable category in § 674.34(e)(4) of the Perkins Loan Program regulations, thus creating a disparity between the economic hardship deferment eligibility criteria in the Perkins program and the eligibility criteria in the Direct Loan and FFEL programs. We are proposing to eliminate § 674.34(e)(4) and related provisions in § 674.34(e)(6) and (e)(9) to reflect the statutory change made to the definition of “economic hardship” in HEA section 435(o) and to make the Perkins Loan Program regulations consistent with the comparable FFEL and Direct Loan program regulations.

Federal Perkins Loan Standard for On-Time Loan Rehabilitation Payment (34 CFR 674.39(a)(2))

Statute:

In accordance with section 464(h)(1)(A) of the HEA, a defaulted Perkins loan is successfully rehabilitated if a borrower makes nine on-time, consecutive, monthly payments of amounts owed on the loan, as determined by the institution, or by the Secretary. The term “on-time” is not defined.

Current Regulations:

Under § 674.39(a)(2), a defaulted Perkins Loan is rehabilitated if the borrower makes an on-time, monthly payment, as determined by the institution, each month for nine consecutive months and the borrower requests rehabilitation. The term “on-time” is not defined. In § 682.405(a)(2)(A)(3) of the FFEL Program regulations and § 685.211(f)(1) of the Direct Loan Program regulations, a payment made within 20 days of the due date is considered “on-time” for the purposes of rehabilitating a defaulted loan.

Proposed Regulations:

The proposed regulations would modify § 674.39(a)(2) by requiring a borrower to make a full, monthly payment, as determined by the institution, within 20 days of the due date, each month, for nine consecutive months.

Reasons:

The issue of establishing a standard for an on-time payment for the purposes of rehabilitating a defaulted Perkins Loan was added to the negotiating agenda at the suggestion of a non-Federal negotiator. The non-Federal negotiator believed that a similar standard for determining “on-time” in the Perkins Loan, FFEL, and Direct Loan programs would help

borrowers with more than one type of title IV loan to successfully rehabilitate the loan and would provide consistency across the HEA, title IV loan programs in the treatment of borrowers who are rehabilitating a defaulted loan. The Department agreed.

Social Security Number Requirement (SSN) for Assignment of Defaulted Federal Perkins Loans to the United States (34 CFR 674.50(e)(1))

Statute:

The HEA does not include any specific rules for the process for assigning defaulted Perkins Loans.

Current Regulations:

The current regulations in § 674.50(e)(1) provide that the Secretary does not accept assignment of a loan if the institution has not provided the SSN of the borrower, unless the loan is submitted for assignment under § 674.8(d)(3). (§ 674.8(d)(3) refers to the Secretary's authority to mandate assignment of certain defaulted Perkins Loans. This authority was eliminated by the Higher Education Opportunity Act of 2008, Public Law 110-315 (HEOA)).

Proposed Regulations:

The proposed regulations in § 674.50(e)(1) would allow assignment of a Perkins Loan without the borrower's SSN if the loan was made before September 13, 1982, which was the date the Department began requiring institutions to collect the borrower's SSN on the Perkins Loan Program promissory notes.

Reasons:

The Department believes that it is unfair to require an institution to provide the borrower's SSN when assigning a Perkins Loan if the institution was not required to collect the SSN at the time the loan was made. The proposed regulations would give the institution the option of assigning such a loan to the Department, rather than holding on to a defaulted loan that the institution has little chance of collecting.

Federal Perkins Loan Break in Cancellation Service Due to a Condition Covered Under the Family and Medical Leave Act (34 CFR 674.52(b)(2))

Statute:

Section 465(a)(3)(A) of the HEA provides that a specified percentage of principal and interest on a Perkins Loan can be cancelled for each “year” during which the borrower is employed in certain specified positions. Section 465(a)(4) provides that the term “year” where applied to employment as a teacher means the academic year as defined by the Secretary. The HEA does not provide for a break in qualified service for cancellation purposes.

Current Regulations:

Current regulations in § 674.52(b)(2) allow a borrower who is performing qualified teaching service, but who is unable to complete the academic year due to illness or pregnancy, to still qualify for cancellation of the principal and interest on his or her Perkins Loan if the borrower completes the first half of the academic year, and has begun teaching the second half, and the borrower's employer considers the borrower to have fulfilled his or her contract for the academic year for purposes of salary increment, tenure, and retirement. The regulations in § 674.52(b)(2) address only qualified teaching service, not other types of employment which may qualify the borrower for loan cancellation, such as nursing or law enforcement.

In the FFEL and Direct Loan programs, under §§ 682.216(c)(7)(ii) and 685.217(c)(7)(ii), respectively, if the borrower is unable to complete the second half of an academic year of teaching due to a condition covered under the FMLA, the teaching service for loan cancellation purposes in those programs may still count as a year of eligible teaching service if the borrower's employer considers the borrower to have fulfilled the teacher contract requirements for that academic year. Conditions covered under the FMLA include:

• The birth of a child and to care for the newborn child within one year of birth;

• The placement with the employee of a child for adoption or foster care and to care for the newly placed child within one year of placement;

• To care for the employee's spouse, child, or parent who has a serious health condition;

• A serious health condition that makes the employee unable to perform the essential functions of his or her job;

• Any qualifying exigency arising out of the fact that the employee's spouse, son, daughter, or parent is a covered military member on “covered active duty;” and

• To care for a covered service member with a serious injury or illness who is the spouse, son daughter, parent, or next of kin to the employee (military caregiver leave). (29 U.S.C. 2601 et seq.)

Proposed Regulations:

The proposed regulations in § 674.52(c)(1) would allow a Perkins Loan borrower who is unable to complete the second half of an academic year of teaching due to a condition covered under the FMLA to still count that year as eligible teaching service if the borrower's employer considers the borrower to have fulfilled the teacher contract requirements for that academic year. In addition, the proposed regulations in § 674.52(c)(2) would allow a Perkins Loan borrower who is unable to complete a full year of eligible public service under §§ 674.56, 674.57, 674.59, or 674.60 due to a condition that is covered under the FMLA to count that year as a full year of public service if the borrower completes at least six months of consecutive eligible service.

Reasons:

By allowing a Perkins Loan borrower to count a year of teaching service that is interrupted by a condition covered under the FMLA, the proposed regulations would provide for more consistent treatment of similarly situated borrowers who are performing teaching service that may qualify them for FFEL or Direct Loan teacher loan forgiveness. By allowing a Perkins Loan borrower to count a year of service that has been interrupted by a condition covered under the FMLA for the public service loan cancellations under §§ 674.56, 674.57, 674.59, or 674.60, the proposed regulations would provide for consistent treatment of all Perkins Loan borrowers who are seeking cancellation benefits on their Perkins Loans, not just those borrowers seeking a cancellation based on employment as a teacher.

Federal Perkins Loan Cancellation Rate Progress

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