Federal Family Education Loan Program; Final Rule DEPARTMENT OF EDUCATION

SUMMARY: The Secretary amends the regulations governing the Federal

Family Education Loan (FFEL) Program. The FFEL Program consists of the

Federal Stafford, Federal Supplemental Loans for Students (SLS),

Federal PLUS, and the Federal Consolidation Loan programs. These

amendments are needed to implement changes made to the Higher Education

Act of 1965, as amended (HEA), by the Higher Education Amendments of

1992, and certain technical changes made by the Cash Management

Improvement Act Amendments of 1992, the Omnibus Budget Reconciliation

Act of 1993, and the Higher Education Technical Amendments of 1993. The

regulations amend the FFEL Program loan discharge provisions and

enhance the ability of lenders and guaranty agencies to service and

collect FFEL Program loans.

DATES: These regulations take effect either 45 days after publication

in the Federal Register or later if the Congress takes certain

adjournments, with the exception of Secs. 682.202, 682.208, 682.402,

682.410, and 682.411. These sections will become effective after the

information collection requirements contained in these sections have

been submitted by the Department of Education and approved by the

Office of Management and Budget under the Paperwork Reduction Act of

1980.

If you want to know the effective date of these regulations, call

or write the Department of Education contact person. A document

announcing the effective date will be published in the Federal

Register.

Subject to approval under the Paperwork Reduction Act, the

following applicability dates also apply to certain provisions of these

regulations:

Section 682.202(c), which reduces the amount of the origination fee

charged on an FFEL Program loan, applies to loans for which the first

disbursement is made on or after July 1, 1994, if the period of

enrollment for which the loan is intended either includes that date or

begins on or after that date.

Section 682.202(d), which reduces the amount of the insurance

premium charged on an FFEL Program loan, applies to loans for which the

first disbursement is made on or after July 1, 1994, if the period of

enrollment for which the loan is intended either includes that date or

begins on or after that date.

Section 682.410(b)(5)-(7), which requires guaranty agencies to warn

defaulters that they may be subject to administrative wage garnishment

and offset against federal or state income tax refunds, applies to

claims paid by the agency on or after 120 days following the date of

publication.

Section 682.411, which requires lenders to warn delinquent

borrowers that they may be subject to administrative wage garnishment

and offset against federal or state income tax refunds if they default

on their loans, applies to loans on which the first day of delinquency

is on or after 120 days following the date of publication.

FOR FURTHER INFORMATION CONTACT: George Harris, Senior Program

Specialist, Loans Branch, Division of Policy Development, Policy,

Training, and Analysis Service, U.S. Department of Education, 400

Maryland Avenue, SW. (Room 4310, ROB-3), Washington, DC 20202-5449.

Telephone: (202) 708-8242. Individuals who use a telecommunications

device for the deaf (TDD) may call the Federal Information Relay

Service (FIRS) at 1-800-877-8339 between 8 a.m. and 8 p.m., Eastern

time, Monday through Friday.

SUPPLEMENTARY INFORMATION: The Secretary is amending 34 CFR part 682 to

implement changes made to the HEA by Public Law 102-325, enacted July

23, 1992, as well as certain changes added by Public Law 103-66,

enacted August 10, 1993 and Public Law 103-208, enacted December 20,

1993. These regulations seek to improve the efficiency of federal

student aid programs, and, by so doing, to improve their capacity to

enhance opportunities for postsecondary education.

On January 14, 1994, the Secretary published a notice of proposed

rulemaking (NPRM) for part 682 in the Federal Register (59 FR 2486).

The NPRM included a discussion of the major issues surrounding the

proposed changes which will not be repeated here. The following list

summarizes those issues and identifies the pages of the preamble to the

NPRM on which a discussion of those issues may be found:

Amendment to Sec. 682.208 to provide for borrower

notification when there is a servicing change (page 2488);

Addition to Sec. 682.402 to implement loan discharges if

the student could not complete the educational program because the

school closed (page 2491);

Addition to Sec. 682.402 to implement loan discharges if

the student's eligibility to borrow was falsely certified by the school

(pages 2488-2490);

Addition to Sec. 682.410 to implement administrative wage

garnishment of borrowers who owe defaulted loans (page 2491).

Executive Order 12866

These regulations have been reviewed in accordance with Executive

Order 12866. Under the terms of the order the Secretary has assessed

the potential costs and benefits of this regulatory action.

The potential costs associated with the regulations are those

resulting from statutory requirements and those determined by the

Secretary to be necessary for administering this program effectively

and efficiently, as discussed in those sections of the preamble that

relate to specific sections of the regulations.

In assessing the potential costs and benefits--both quantitative

and qualitative--of these regulations, the Secretary has determined

that the benefits of the regulations justify the costs, and do not

interfere with State, local, and tribal governments in the exercise of

their governmental functions. Substantive revisions to the Notice of

Proposed Rulemaking.

Section 682.202 Permissible Charges by Lenders to Borrowers

The Secretary has incorporated into the regulations the

changes made by Public Law 103-66 and Public Law 103-208 to origination

fees and insurance premiums. Section 682.202(a)(6) of the proposed

regulations, which discussed the refund of excess interest paid on

Stafford loans, has been deleted. Those refund provisions were

substantially amended by Public Law 103-208, and will be the subject of

future proposed regulations.

Section 682.208 Due Diligence in Servicing a Loan

The Secretary has incorporated into the regulations the

changes made by Public Law 103-208 to the notification requirements

that apply to the sale or transfer of a loan.

Section 682.402 Death, Disability, Closed School, False Certification,

and Bankruptcy Payments

The Secretary has expanded the definition of what

constitutes a school's ``false certification of a student's eligibility

to borrow'' to include cases where a school signed a putative

borrower's name on the loan application or the promissory note. The

Secretary will also provide relief under these procedures to borrowers

who demonstrate that the school, without authorization by the borrower,

endorsed the borrower's loan check or signed the borrower's

authorization for electronic funds transfer, if the student did not

receive the loan proceeds, either by actual delivery of the funds or by

application of the loan proceeds to institutional charges owed to the

school.

The Secretary has partially deleted the requirement that,

as a condition of eligibility for a closed school or false

certification discharge, a borrower must assign to and relinquish in

favor of the Secretary any right to a loan refund (up to the amount

discharged) from any public fund. However, a borrower will still be

required to assign to and relinquish in favor of the Secretary any

right to a loan refund (up to the amount discharged) from any private

fund, including the portion of a public fund that represents funds

received from a private party.

The Secretary has deleted the requirement for the student

to certify that, as a condition of eligibility for a false

certification discharge, he or she was certified by the school on the

application for the loan as an eligible student.

Section 682.410 Fiscal, Administrative, and Enforcement Requirements

The regulations have been revised to incorporate the

Secretary's guidance sent to guaranty agencies in July 1993 concerning

(Pub. L. 102-589). That guidance explained that a guaranty agency was

no longer required to assign loans to the Secretary for federal income

tax refund offsets.

The Secretary has deleted the provision of the proposed

regulations that would have made a self-employed borrower subject to

wage garnishment.

Analysis of Comments and Changes

In response to the Secretary's invitation in the NPRM, 40 parties

submitted comments on the proposed regulations. An analysis of the

comments and of the changes made to the regulations as a result of

those comments follows.

Major issues are grouped according to subject, with references to

the appropriate sections of the regulations. Other substantive issues

are discussed under the section of the regulations to which they

pertain. Technical and other minor changes, and suggested changes the

Secretary is not legally authorized to make under the applicable

statutory authority, are not addressed.

Section 682.202 Permissible Charges by Lenders to Borrowers

1. Comment: A number of commenters noted that Public Law 103-66 and

Public Law 103-208 made changes to the statute upon which the NPRM was

based. The commenters recommended that regulatory provisions applying

to borrower interest rates, refunds of excess interest paid,

origination fees, and insurance premiums, should be updated to reflect

current law. Some commenters recommended that a separate NPRM be issued

to address the complex changes made by Public Law 103-208 to the

provisions that mandate the refunding of excess interest.

Discussion: To the extent that such changes can be readily made,

the Secretary agrees that they should be. The Secretary has decided to

issue a new notice of proposed rulemaking to implement the changes

affecting the refund of excess interest paid, which had been the

subject of Sec. 682.202(a)(6) of the proposed regulations.

Change: The final regulations have been amended to incorporate the

changes made by Public Law 103-208 to loan origination fees and

insurance premiums. Interest rate changes will be in a subsequent NPRM.

Section 682.202(a)(6) of the proposed regulations has been deleted,

however, the Secretary has reserved that paragraph in these final

regulations as the location for future regulations relating to the

refunding of excess interest that is required by section 427A(i) of the

HEA.

Section 682.202(c)(2)

2. Comment: Some commenters objected to the requirement that a

lender must charge an unsubsidized Federal Stafford Loan borrower a 6.5

percent origination/insurance fee. The commenters believed that the

lender should have an option to charge the borrower a lesser amount, as

is permitted for a subsidized Federal Stafford Loan.

Discussion: Prior to Public Law 103-66, section 428H(f)(1) of the

HEA required the lender to charge an unsubsidized Federal Stafford Loan

borrower a 6.5 percent origination/insurance fee. Public Law 103-66

split the combined origination/insurance fee into two separate

components: a 3 percent origination fee that is required to be charged

to the borrower, and a 1 percent insurance premium that may be charged

to the borrower. The origination and insurance fees applicable to a

subsidized Federal Stafford Loan were also reduced by Public Law 103-66

to 3 percent and 1 percent respectively. However, the HEA continues to

permit a lender to charge a subsidized Federal Stafford Loan borrower a

lesser amount than the maximum loan origination fee, whereas no similar

option exists for an unsubsidized Federal Stafford Loan origination

fee.

Change: The final regulations have been revised to incorporate the

reduced fees resulting from Public Law 103-66.

Section 682.202(c)(4)

3. Comment: Some commenters noted a conflict between

Sec. 682.202(c)(1) which stated that a lender may charge a borrower an

origination fee on a subsidized Stafford loan, whereas

Sec. 682.202(c)(4) mandated that the lender shall deduct a pro rata

portion of such fee from each disbursement of the loan proceeds.

Discussion: The Secretary agrees with the commenters.

Change: Section 682.202(c)(4) has been amended to clarify that the

pro rata deduction requirement applies only if the lender has chosen to

charge an origination fee to the borrower.

Section 682.208 Due Diligence in Servicing a Loan

4. Comment: A number of commenters favored an expansion in the

notification requirements pertaining to an assignment of a loan or a

change in the identity of the party to whom the borrower sends payments

or communications concerning the loan. The commenters believed that the

notice required to be sent by the holder of the loan should apply to

all borrowers, and not be limited to only those borrowers in the grace

or repayment periods. Some commenters also noted that Public Law 103-

208 made two changes to section 428(b)(2)(F) of the HEA: (1) The

transferee (instead of the transferor) is now required to notify the

guaranty agency when a loan is sold or transferred; and (2) the

transferor and the transferee may now notify the borrower of the sale

or transfer of a loan either jointly or separately (instead of only

separately).

Discussion: Section 428(b)(2)(F) of the HEA states that the

notification requirements ``* * * shall only apply if the borrower is

in the grace period * * * or is in repayment status.''

Change: No changes are made with respect to the commenters' first

comment. The final regulations have been revised to incorporate the

notification changes resulting from Public Law 103-208.

Section 682.402 Death, Disability, Closed School, False Certification,

and Bankruptcy Payments

Section 682.402(a)

5. Comment: A number of commenters objected to the requirement

that, in general, the borrower's loan must be a legally enforceable

debt under applicable law by the holder of the loan to qualify a

guaranty agency for a reinsurance payment under the closed school and

false certification discharge provisions. The commenters believed that

students should have their loans discharged, and the Secretary should

reimburse guaranty agencies for such discharges, even if the borrower's

debt is legally unenforceable by the holder of the loan. Of particular

concern to some commenters were cases where the school signed the

borrower's name on the loan documents or check. While the commenters

generally recognized that the borrower technically does not owe the

amount of the unenforceable debt, they were concerned that borrowers

may not have the resources to pursue a legal or administrative

determination of loan enforceability. The commenters also believed that

even if the borrower did pursue that avenue, it could take many years

to reach a resolution, during which the borrower would be subject to

collection activity, damaged credit rating, and if in default, would be

considered to be ineligible for additional federal student financial

aid.

In a related area, some commenters expressed concern that, under

current federal regulations, a borrower would not receive a closed

school or false certification discharge if federal reinsurance on the

loan had been lost because of violations of due diligence or other

programmatic requirements committed by the lender or the guarantor. The

commenters believed that Congress intended to help a borrower who was

victimized by a school's closing or false certification of eligibility

to borrow, events that are beyond the control of the borrower.

Discussion: The Secretary is persuaded that the term ``falsely

certified,'' as used in section 437(c)(1) of the HEA, should be defined

to include certain cases where a school signed the borrower's name on

the loan application or promissory note. The definition of the term

``falsely certified'' is extensively discussed in response to comment

48. Because of the similarity of such cases to those involving the

execution of the application or note by the school in the name of the

borrower, the Secretary concluded that cases in which the school

improperly endorsed the borrower's signature on the loan check or the

authorization for electronic funds transfer should also be addressed

under these regulatory procedures, although such misconduct is not by

itself a false certification. Under these final regulations, therefore,

the Secretary will provide relief to borrowers in cases of unauthorized

endorsements, but except for the instances in which the school both

falsely created a loan application or promissory note for a student and

then endorsed the student's name on the loan check, the lender is

responsible for ensuring the authenticity of a borrower's signature on

the lender's loan check, and should continue to bear the risk of an

improper endorsement. In those instances, although a borrower may under

the procedure as modified here receive a discharge of any obligation to

repay that portion of a loan disbursed by a check which he or she

neither endorsed nor received the proceeds of, the lender will not be

permitted to receive or retain a claim payment for that amount. Because

the Secretary considers the lender to have not had routine access to

the written authorization for electronic funds transfer, on the other

hand, the lender would not have occasion to know of an unauthorized

execution of that authorization in the name of the borrower, and would

not be held at risk for such unauthorized disbursements under these

procedures.

The Secretary also agrees that the loss of federal reinsurance on

the loan due to violations of due diligence or other programmatic

requirements committed by the lender or the guarantor should not

prevent an eligible borrower from receiving a closed school or false

certification discharge. In such cases, the Secretary will use his

authority pursuant to Sec. 682.406(b) to waive his right to refuse to

make a reinsurance payment on the loan. Thus, (except in the case of a

falsely endorsed check, as noted above) a lender may receive a claim

payment and a guaranty agency may receive a reinsurance payment on a

loan for which an eligible borrower would qualify for a closed school

or false certification discharge, even though violations of program

requirements committed by the lender or guarantor may have otherwise

sufficed to cause federal reinsurance on the loan to have been lost.

During the last few years, Congress and the Secretary have taken

steps to combat unscrupulous individuals and program participants who

have used the FFEL Program to exploit innocent students and taxpayers.

The discharge of loans owed by the innocent victims is consistent with

those actions. The Department intends to pursue the individuals and

organizations who caused this situation so that the taxpayer can be

reimbursed, and future students are protected.

Change: As will be further discussed in response to comment 48, the

Secretary has expanded the definition of what constitutes a school's

``false certification of a student's eligibility to borrow'' to include

a loan for which the school signed the name of an innocent victim on

the application for the loan or the promissory note. The regulations

will also provide relief in cases in which the borrower signed the loan

application or promissory note, but the school signed the borrower's

name on a loan check or authorization for electronic funds transfer,

providing that the student did not receive, directly or indirectly, the

benefits of the loan proceeds disbursed by that loan check or by virtue

of the authorization for electronic funds transfer signed by the

school.

6. Comment: Some commenters believed that information concerning

closed school or false certification discharges should be made

available to the borrower at the time the loan is made or while the

student is in school. The commenters believed that this important

information may be easily overlooked by or not reach the borrower after

the school has closed or the student has withdrawn.

Discussion: This information is made available to the student in

the common application/promissory note used by all guaranty agencies.

In addition, if a borrower has questions concerning his or her loan

obligation, a lender is required under Sec. 682.208(c)(1) to respond

within 30 days after receipt of an inquiry from the borrower or any

endorser on a loan.

Change: None.

Section 682.402(b)(1)

7. Comment: Some commenters believed that the regulations should

state that a discharge of a Federal PLUS or Federal Consolidation Loan

because of a borrower's death would apply only if both co-makers of the

loan died.

Discussion: This was stated in Sec. 682.402(a)(2) of the proposed

regulations. Section Sec. 682.402(b)(1) addresses the loan obligation

of an individual borrower who dies.

Change: None.

8. Comment: Some commenters recommended that the regulations state

that the discharge of a Federal PLUS Loan because of the student's

death applies only to student deaths occurring on or after July 23,

1992.

Discussion: The Secretary agrees that clarification is needed to

reflect the effective date of section 437(d) of the HEA.

Change: The final regulations have been revised accordingly.

Section 682.402(c)(1)

9. Comment: Some commenters objected to the requirement that a

Federal Consolidation Loan borrower must provide the disbursement dates

of the underlying loans if the borrower requests a loan discharge for

total and permanent disability based on a condition that pre-dated the

Consolidation Loan. The commenters believed that this information is

present in the borrower's Consolidation Loan file and the borrower

should not be required to submit information already in the possession

of the lender.

Discussion: The regulations are designed to cover all cases,

including those in which the information may not be present in the

borrower's loan file, and it may be necessary in some cases, for the

borrower to provide this documentation. For example, the lender's

information may be incomplete or destroyed due to fire, flood, theft,

etc. However, in other cases where the lender already possesses this

information in the borrower's loan file, the Secretary agrees that the

borrower should not be required to provide the same documentation.

Change: Section 682.402(c)(1) has been revised to specify that the

borrower's requirement to provide such documentation only applies if

the lender does not already possess it.

Section 682.402(d)(1)(i)

10. Comment: Some commenters were confused by references to ``the

loan'' and thought that a borrower with multiple loans would not be

completely covered under the closed school loan discharge provisions.

Discussion: In general, regulatory language is more precise if it

is based on the singular form of a noun. In the case of a closed school

loan discharge, this permits each loan to be evaluated individually,

and not be dependent on factors associated only with other loans. If

the borrower qualifies for a discharge of more than one loan, then each

loan will be discharged.

Change: None.

11. Comment: Some commenters believed that a borrower should be

eligible for a closed school loan discharge for the portion of a

Federal Consolidation Loan that repaid a loan that would have otherwise

been discharged under the closed school provisions.

Discussion: The Secretary agrees with the commenters. The Secretary

has been given authority pursuant to section 437(c)(1) of the HEA to

``* * * discharge the borrower's liability on the loan * * *'' if the

student could not complete the program in which the student was

enrolled because of the school's closure. Because section 437(c)

provides for discharge of loans because of events that occur before the

borrower enters repayment, the borrower's liability on the loan is the

amount outstanding at that time, before the borrower enters repayment.

If the borrower repays some or all of that amount, the discharge would

be ineffective unless it includes relief from that liability through

reimbursement for the amounts paid on the loan, and those amounts

include amounts borrowed through a Consolidation Loan. The Secretary

believes that the borrower's Consolidation Loan should be credited for

the amount of the closed school loan discharge that would have been

applicable to the borrower's loan before it was consolidated.

Change: The final regulations have been revised accordingly.

12. Comment: Some commenters believed that the 90-day period prior

to a school's closing during which a student who withdrew would be

eligible for a loan discharge is too short for many students who

attended correspondence schools. The commenters noted that such

students frequently are considered ``withdrawn'' as of the date of the

last lesson submitted by the student if the student did not submit the

next scheduled lesson in accordance with the schedule of lessons

established under Sec. 682.602. However, the school may not have been

considered to have officially closed until more than 90 days have

elapsed from the date the student would be considered to have withdrawn

under Sec. 682.605(b)(3). The commenters observed that in many cases,

it was the school that withdrew from the student by its failure to

grade lessons or provide subsequent lessons, or to otherwise

communicate with a student who attempted to learn if the school was

still operating. The commenters believed that correspondence students,

unlike other students who attended a school at a school's actual

location, are not in a position to see an obvious deterioration in the

school's ability to provide education to students.

Discussion: The Secretary believes that the 90-day period generally

is sufficient for all categories of students. The Secretary notes that

correspondence students may actually be in a better position than other

students to realize that a school's ability to provide training and

services is deteriorating. The absence of communication from a

correspondence school to a student is an unmistakable sign that the

school is not fulfilling its part of the enrollment agreement with the

student. Other types of schools may be able to effectively camouflage

their deteriorating capabilities and prevent students from seeing the

true state of the school's fiscal and administrative situation, but a

correspondence school student cannot be so easily deceived. The lack of

communication from a school is a clear fact that speaks for itself.

However, the Secretary agrees with the commenters that in some unique

circumstances an extension of the 90-day period may be appropriate.

Change: The final regulations have been revised to include a

provision for the Secretary to extend the 90-day period if he believes

an extension is appropriate in a particular case.

Section 682.402(d)(1)(ii)(A)

13. Comment: Some commenters noted that schools that close will

frequently phase-out their operations by sequentially eliminating

individual programs even though the school remains open. The commenters

believed that by linking a borrower's eligibility for a loan discharge

to the date that the school ceased to provide educational instruction

in all programs, the regulations would penalize a borrower who withdrew

from school because of a terminated or deteriorated program earlier

than 90 days before the school officially closed.

Discussion: The Secretary has been given authority pursuant to

section 437(c)(1) of the HEA to discharge the borrower's liability on

the loan if the student could not complete the program ``* * * due to

the closure of the institution.* * *'' The Secretary has no authority

to discharge the borrower's loan obligation if the student's program

was terminated but the school did not close.

Change: None.

14. Comment: Some commenters did not understand the reference to

``the designated agency in the state in which the school is located.''

The commenters asked if the agency making the determination that a

school had closed would be the guaranty agency, the state school

licensing agency, or some other agency.

Discussion: The Secretary understands the commenters' concerns and

has concluded that he is in the best position to evaluate the

information provided by various sources concerning whether a school has

closed and the date of closure. Therefore, the determination of a

school's closure date will be made by the Secretary and communicated to

FFEL Program participants.

Change: The regulation has been amended to read ``A school's

closure date is the date that the school ceases to provide educational

instruction in all programs, as determined by the Secretary;''

Section 682.402(d)(1)(ii)(C)

15. Comment: Some commenters recommended that the regulations

clarify that only a loan made for attendance at an eligible school

could be discharged under the closed school loan discharge provisions.

Some commenters also wanted the regulations to make it clear that the

discharge provisions would apply only if the branch or location of the

school where the student actually attended was itself ``eligible.''

Discussion: The closed school loan discharge authorized in section

437(c)(1) of the HEA is not restricted only to a loan made for

attendance at an eligible school. The Secretary believes that Congress

was aware of instances in which a school or its branch may have lost

eligibility, but the school continued to certify loan applications

under an eligible school identification code. The Secretary believes

this is the reason why there is no requirement in section 437(c)(1) of

the HEA that links a borrower's eligibility for a closed school loan

discharge to only a loan certified by an eligible school.

Change: None.

Section 682.402(d)(2)(iv)

16. Comment: Some commenters recommended that the regulations

require the holder of a loan discharged under the closed school loan

discharge provision to forward the original promissory note marked

``canceled'' or ``satisfied in full'' to the borrower within 30 days

after discharging the borrower's loan obligation.

Discussion: A loan that is discharged due to the borrower's death,

permanent and total disability, or bankruptcy, is considered ``paid in

full'' for the purposes of Sec. 682.414(a)(2). The Secretary will add a

closed school loan discharge to the definition of the term ``paid in

full'' found in Sec. 682.414(a)(2), but does not believe it is

necessary to otherwise amend the requirements pertaining to the return

of promissory notes (found in Sec. 682.414(a)(4) of the current

regulations) in the manner recommended by the commenters. The return of

a borrower's promissory note pursuant to a closed school discharge does

not need to be accomplished any differently than the return of a

borrower's promissory note pursuant to any other type of discharge.

Change: Section 682.414(a)(2) has been amended to add a closed

school loan discharge.

Section 682.402(d)(3)

17. Comment: Some commenters recommended that the Secretary

prescribe a standardized form for the closed school loan discharge

application and associated sworn statement from the borrower.

Discussion: The Secretary agrees that this would be helpful.

Pursuant to the requirements of section 432(l) of the HEA, the

Secretary will consult with FFEL participants to develop a standardized

form.

Change: None.

18. Comment: Some commenters objected to the requirement that a

borrower who requests a closed school loan discharge must submit the

sworn statement described in the regulations. The commenters believed

the sworn statement is unnecessary in cases where the holder of the

loan or the guaranty agency has reliable information in their

possession showing that the borrower was in attendance at the school

when it closed or within 90 days before it closed. The commenters

believed the borrower's loan obligation should be discharged based on

those existing records.

Discussion: The Secretary believes the borrower's sworn statement

is necessary to adequately protect the interests of the taxpayers. The

information provided on the borrower's sworn statement is not limited

to the isolated historical record of the borrower's attendance at the

closed school. For example, the borrower must state whether he or she

took advantage of a teach-out or transferred academic credits from the

closed school to another school. The borrower must also agree to

cooperate with the Secretary or the Secretary's designee in enforcement

actions in accordance with Sec. 682.402(d)(4). This information, and

the borrower's agreement to cooperate, will not be in the possession of

the guaranty agency and must be obtained in the borrower's sworn

statement.

Change: None.

Section 682.402(d)(3)(ii)(A)

19. Comment: Some commenters requested clarification of whether the

closed school loan discharge applied to a loan that was partially

disbursed on or after January 1, 1986.

Discussion: The Secretary has been given authority pursuant to

section 437(c)(1) of the HEA to discharge the borrower's liability on a

loan ``* * * received, on or after January 1, 1986 ``* * *'' if the

student could not complete the program due to the closure of the

school. For purposes of the closed school loan discharge, the Secretary

will consider the borrower's entire loan eligible if any part of it was

disbursed by the lender on or after January 1, 1986.

Change: The final regulations have been revised to incorporate this

clarification.

Section 682.402(d)(3)(ii)(C)

20. Comment: Some commenters believed that a borrower who was

unable to transfer all of the academic credits or hours earned at the

closed school to another school should qualify for a partial loan

discharge.

Discussion: If a student chooses to transfer any amount of academic

credits or hours earned at the closed school to another school, and as

a result of that action is able to complete the program of study that

the student was enrolled in at the closed school, the student would not

meet the requirement contained in section 437(c)(1) of the HEA that

restricts a closed school loan discharge to a student ``* * * unable to

complete the program* * *'' because of the school's closing. Thus,

there would be no statutory basis for discharging the borrower's loan

obligation.

Change: None.

21. Comment: Some commenters believed that a borrower who

transferred academic credits or hours earned at the closed school to

another school should not qualify for a discharge if the borrower

enrolled in a different program of study at the new school or enrolled

in a similar program but quickly withdrew.

Discussion: The Secretary believes that the borrower is entitled to

a loan discharge under the HEA in any case in which a student's program

of education is disrupted by the closing of the school to the extent

that the student does not, for any reason, complete the program. The

presumption must be that the school's closing directly hindered the

student's achievement of his or her educational goals.

Change: None.

22. Comment: Some commenters recommended that the regulations

define the term ``teach-out at another school.'' The commenters

believed that the absence of a definition would result in widespread

confusion as to what constitutes a ``teach-out'' for purposes of a

closed school loan discharge. The commenters suggested that the key

elements of a teach-out are: (a) No charges additional to the original

program cost; (b) identity of subject matter taught; (c) geographic

proximity between the original and teach-out schools; (d) demonstrated

compatibility of program structure and scheduling (e.g., student is

able to begin the teach-out within a reasonable time after the school

closure, and the completion dates, class times, and instructional

methodology are comparable); and (e) review and approval by the state

licensing agency.

Discussion: The Secretary believes that a prescriptive regulatory

definition of ``teach-out'' is unnecessary. The Secretary notes that

because a student may decline to complete the program through a teach-

out at another school for any reason, it is therefore reasonable to

conclude that a student who chooses to participate in a teach-out and

completes the program, has demonstrated an acceptance of those teach-

out conditions. In short, a student can be protected from being forced

to accept what he or she believes to be an onerous teach-out condition

by simply declining the teach-out. A student who, even though

inconvenienced, chooses to complete his or her program through a teach-

out, has received value from the loan and needs no loan discharge.

The Secretary asks interested parties to submit information to him

concerning the actual costs paid by students who completed their

programs through teach-outs. The Secretary will evaluate those costs to

determine if the regulations should be revised in the future to permit

a discharge based on certain circumstances.

Change: None.

Section 682.402(d)(3)(iv)

23. Comment: Some commenters, while believing that borrower

cooperation is important in an enforcement action undertaken against a

school or other related parties, were concerned that a borrower may be

unable to take time away from work, home, or other activities to travel

to multiple court appearances needed to assist the Secretary or his

designee in the enforcement action. The commenters believed that a

borrower should be required to assist in an enforcement action only to

the extent practicable for the borrower.

Discussion: It would not be in the interests of the Secretary or

the taxpayer to make unreasonable demands on the borrower when pursuing

an enforcement action. It would equally not be in the interests of the

Secretary or the taxpayer to create an opportunity for a borrower to

frustrate the Secretary's enforcement action by claiming that he or she

was unavailable to testify. The use of the word ``cooperate'' in the

regulations implies a process of two or more parties reasonably working

together toward a common goal, and needs no further elaboration.

Change: None.

Section 682.402(d)(5)(i)

24. Comment: Some commenters opposed the requirement that a

borrower must assign to and relinquish in favor of the Secretary any

right to a loan refund (up to the amount discharged) from any private

or public fund. The commenters were particularly concerned with the

effect they believed this requirement would have upon state tuition

recovery funds. The commenters also believed that the Secretary has no

statutory right to any claim against a state tuition recovery fund

because the HEA fails to specifically provide the secretary with that

right. The commenters noted that section 437(c)(2) of the HEA limits

the assignment to the Secretary of a borrower's right to a loan refund

only to the borrower's rights ``* * * against the institution and its

affiliates and principals.'' The commenters contended that there is no

indication that Congress intended the Secretary to have access to state

funds or to require states to participate economically in closed school

loan discharges. The commenters believed that the HEA's omission of

state tuition recovery funds (or any other private or public fund)

reflects the principal of statutory construction ``expressio unius est

exclusio alterius'' (the expression of one thing is the exclusion of

another).

Discussion: The Secretary believes that the statutory authority

permitting the assignment to the Secretary of a borrower's right to

recover a loan refund from the school, its affiliates, or principals

clearly contemplates the recovery of refunds from private funds. A

private fund is funded by parties who are directly or indirectly

associated with the school, and the HEA intends that the Secretary

shall have a legal claim to a private tuition recovery fund in the

event of a school closure. Although they may be categorized as ``public

funds,'' it is the Secretary's understanding that many state tuition

recovery funds rely in whole, or in part, on private funding provided

by a school, its owners, or affiliates. Therefore, the Secretary

believes that a borrower's assignment of recovery rights against a

public fund is applicable only to the extent that a state tuition

recovery fund or any other such public fund contains private money. The

public money in those funds should not be considered.

Change: The final regulations have been revised to exclude the

portion of a public fund that represents public money.

25. Comment: Some commenters questioned why a borrower must assign

to and relinquish in favor of the Secretary any right to a loan refund

(up to the amount discharged) with respect to the enrollment agreement

for the program for which the loan was received. The commenters

believed that the assignment of a borrower's rights pursuant to the

enrollment agreement would not gain anything for the Secretary. They

were concerned that the borrower would be forced to surrender some

rights (unspecified) unnecessarily, despite the statement in

Sec. 682.402(d)(5)(iii) that permits the borrower (or student) to

pursue legal and equitable relief regarding disputes arising from

matters otherwise unrelated to the loan discharged.

Discussion: The requirement that the borrower must assign to and

relinquish in favor of the Secretary any right to a loan refund (up to

the amount discharged) does not preclude the borrower from pursuing

legal action against the school or any related party with respect to

the terms of the student's enrollment agreement with the school, or

with respect to any other grievance the student may have against the

school or those parties.

Change: None.

Section 682.402(d)(6)(i) and (ii)

26. Comment: Some commenters believed it was confusing to link

guaranty agency requirements to a date other than the actual date that

a school closed.

Discussion: In some cases, a guaranty agency may not become aware

of a school's closure until significantly after the date the school

actually closed. Therefore, the only workable way to create timeframes

for guaranty agencies to perform certain actions, such as notifying

lenders to suspend collection efforts, would be to tie those timeframes

to the date that the agency first became aware, or was notified by the

Secretary, that a school had closed.

Change: None.

Section 682.402(d)(6)(i)(C)

27. Comment: Some commenters asked why August 29, 1994 was proposed

as the effective date for this provision.

Discussion: As a requirement for publishing the NPRM in the Federal

Register, a specific date had to be used instead of a generic reference

such as ``prior to the effective date of these regulations.''

Therefore, August 29, 1994 was the Secretary's estimation (made prior

to the date the NPRM was published) of when the final regulations would

be effective.

Change: This date, and all other dates based on it, will be revised

when the actual effective date is known.

Section 682.402(d)(6)(i)(D)

28. Comment: Some commenters believed that the regulations should

require a guaranty agency to provide loan-specific information to

lenders so that lenders can more effectively suspend collection efforts

against individuals with respect to loans made at closed schools. The

commenters noted that a lender would not be able to identify a PLUS

borrower if the guarantor notified the lender of the school code and

closure date only.

Discussion: The Secretary believes that because the loan

application retained by the lender will have the name of the school and

the period of enrollment for which the loan was made, the lender should

be able to determine which individuals it should suspend collection

efforts against once the lender is notified of the date a school

closed. The Secretary encourages a guaranty agency to provide

assistance to a lender that believes it is unable to identify the

appropriate PLUS borrowers.

Change: None.

Section 682.402(d)(6)(i)(E)

29. Comment: Some commenters recommended that a guaranty agency be

required to suspend collection activities on loans that it holds for

borrowers who the agency believes may be eligible for a closed school

loan discharge. The commenters noted that this is a requirement in the

analogous regulation in Sec. 682.402(e)(6)(iv) and (v) with respect to

false certification discharges.

Discussion: The Secretary had intended that this requirement would

be in the NPRM.

Change: The regulations have been amended to require a guaranty

agency to take the same actions with respect to a borrower who may be

eligible for a closed school loan discharge as the agency is required

to take under Sec. 682.402(e)(6)(iv) and (v) with respect to a borrower

who may be eligible for a false certification discharge.

30. Comment: Some commenters noted that Sec. 682.402(d)(6)(i) of

the proposed regulations did not specify what a guaranty agency would

be required to do upon the receipt of a complete application from a

borrower whose loan is held by the guaranty agency. The commenters

recommended that the procedures required under Sec. 682.402(d)(6)(ii)

should also apply to Sec. 682.402(d)(6)(i).

Discussion: The Secretary agrees that the requirement for notifying

the borrower that he or she does not qualify for a loan discharge

should be in both Sec. 682.402(d)(6)(i) and Sec. 682.402(d)(6)(ii).

Change: The final regulations have been revised to add this

requirement.

Section 682.402(d)(6)(i)(F)

31. Comment: Some commenters objected to the requirement that a

guaranty agency must consult with representatives of the closed school,

the school's licensing agency, the accrediting agency, and other

appropriate parties to learn the current address of borrowers whose

loans are held by the guaranty agency, and who have been identified as

potentially eligible for a closed school loan discharge. The commenters

believed that the skiptracing efforts required under Sec. 682.410(b)(6)

are more likely to be successful than contacts with the closed school

and its related agencies.

Discussion: The Secretary believes that special efforts should be

made to contact borrowers who may be eligible for a closed school loan

discharge, but whose current address is unknown. Therefore, the

interests of fairness to all borrowers justifies the additional

skiptracing efforts required by the regulations.

Change: None.

Section 682.402(d)(6)(ii)(C)

32. Comment: Some commenters believed that a guaranty agency should

not be the party that mails a discharge application to a borrower

identified under this subparagraph of the regulations. Instead, the

commenters believed it would be more appropriate for the guaranty

agency to mail the application package to the lender or servicer, who

would then mail it to the borrower. The commenters believed that this

change would assist the lender in determining when to cease collections

and would also avoid any borrower confusion.

Discussion: This provision of the proposed regulations requires a

guaranty agency to ``* * * review its records of loans that it holds *

* *'' (emphasis added). The lender is not the holder of loans held by

the guaranty agency. The guaranty agency will mail the application

package to a borrower whose loan is held by the agency. For loans held

by a lender, the lender will mail the application package to the

borrower.

Change: None.

Section 682.402(d)(6)(ii)(D)

33. Comment: Some commenters noted that, in the case of a loan held

by the guaranty agency, the proposed regulations did not require the

guaranty agency to inform a borrower that the borrower's loan

obligation has been discharged.

Discussion: The Secretary agrees with the commenters.

Change: The final regulations have been revised to require a

guaranty agency, in the case of a borrower whose loan is held by the

agency, to send written notification to the borrower no later than 30

days after the agency determines that the borrower has satisfied all of

the conditions required for discharge of the loan.

Section 682.402(d)(6)(ii)(E)

34. Comment: Some commenters believed it is counterproductive to

set time limits that the borrower must meet if there is no penalty

incurred by a borrower who fails to comply with those time limits. The

commenters recommended a deletion of the prohibition against a borrower

being denied a closed school loan discharge solely on the basis of the

borrower's failure to meet any time limits set by the lender, guaranty

agency, or Secretary.

Discussion: There are no time-driven requirements with respect to

the submission of information that a borrower must meet to qualify for

a closed school loan discharge. Perhaps the commenters misinterpreted

the lender's requirement in Sec. 682.402(d)(7)(ii) to resume collection

efforts against a borrower who failed to submit, within 60 days, the

written request and sworn statement necessary for loan discharge.

However, that requirement only has the effect of reactivating

collection efforts, and does not disqualify the borrower from later

submitting a complete application for loan discharge.

Change: None.

Section 682.402(d)(7)(i)

35. Comment: Some commenters believed that a lender should not be

permitted to suspend collection efforts against a borrower for whom the

lender has received reliable information from a source other than a

guaranty agency or the Secretary indicating that the borrower may be

eligible for a closed school loan discharge.

Discussion: The Secretary does not believe that either he or a

guaranty agency will always be the first to know that a specific

borrower may be eligible for a closed school loan discharge. For

example, the school itself could notify the lender that it had closed,

or a legal aid group working on behalf of students could notify the

lender of students who it believed were eligible. The Secretary

believes that it would be in the best interests of the borrower to

permit a lender to exercise its judgment concerning the reliability of

the sources of information it receives.

Change: None.

Section 682.402(d)(7)(ii)

36. Comment: Some commenters believed that a lender that resumes

collection activity against a borrower who fails to submit the

documentation required for a closed school loan discharge should be

required to grant forbearance to the borrower to absolve the borrower

of any delinquency status existing on the loan, including delinquency

that occurred before the date the lender suspended collection activity.

The commenters believed that the borrower's delinquency is generally

the result of the borrower's inability to pay due to circumstances

caused by the school.

Discussion: The Secretary believes there is no reason to conclude

that a borrower who did not qualify for a closed school loan discharge

should, nevertheless, be presumed to have been harmed by the school to

the extent that the borrower could not comply with the terms of his or

her repayment agreement with the lender.

Change: None.

37. Comment: Some commenters believed the 60-day administrative

forbearance period permitted while a lender awaited the borrower's

submission of documentation is too short. The commenters believed that

up to 90 days would be necessary to address the borrower's questions

and for the borrower to submit documentation to the lender.

Discussion: A 60-day period is the standard administrative

forbearance period permitted for purposes of awaiting documentation for

other purposes e.g., death, disability, or bankruptcy cancellations.

The Secretary believes that 60 days is more than adequate for the

borrower to submit the request for discharge and sworn statement for a

closed school discharge.

Change: None.

Section 682.402(d)(7)(iii)

38. Comment: Some commenters objected to the requirement that a

payment received by the lender from or on behalf of the borrower after

the lender filed a claim on the loan with the guaranty agency must be

forwarded to the guaranty agency within 30 days of its receipt. The

commenters contended that the guaranty agency is not the legal holder

of the loan until it pays a claim, and therefore has no right to the

payment.

Discussion: The Secretary sees no benefit in having the borrower's

payment in the possession of the party that has forwarded other loan

related documents to the guaranty agency. The Secretary is aware of at

least two ways for a lender to forward the borrower's payment to a

guaranty agency so that it can be applied to the borrower's outstanding

loan balance: the lender could cash the borrower's check and forward

its own check payable to the guaranty agency on behalf of the borrower,

or the lender could forward the borrower's original check to the agency

and the agency could hold the check until it paid the lender's claim.

Change: None.

Section 682.402(d)(7)(iv)

39. Comment: Some commenters believed that in the case of a claim

filed by a lender, the guaranty agency, not the lender, should notify

the borrower that a closed school loan discharge has been granted.

Discussion: The borrower had an obligation to repay the loan to the

lender. The borrower has no obligation to repay the loan (it has been

discharged) to the guaranty agency. The borrower should be informed by

the party to whom the borrower had been obligated (the lender, if the

claim was filed by the lender, or the guaranty agency, if the

borrower's loan was held by the guaranty agency) that the borrower's

obligation to repay the loan to that party has been discharged.

Change: None.

40. Comment: Some commenters noted that the proposed regulations

did not specify the actions that a lender must take when it is informed

by a guaranty agency that a borrower's request for a closed school

discharge has been denied.

Discussion: The Secretary had intended that the procedures that

applied in the case of a false certification request would apply to a

closed school claim also.

Change: The final regulations have been revised to specify in

Sec. 682.402(d)(7)(v) the responsibilities of a lender when it is

notified by a guaranty agency that a borrower's request for a closed

school discharge has been denied.

Section 682.402(e) False Certification by a School of a Student's

Eligibility to Borrow

41. Comment: Some commenters requested the Secretary to

specifically state in the regulations what the effect of a false

certification discharge would be on a school's cohort default rate.

Discussion: This issue would be more appropriately addressed in the

definition of a school's cohort default rate in 34 CFR Part 668. While

the Secretary does not believe that a school that falsely certified a

borrower's eligibility should be allowed to benefit from that false

certification by having its default rate reduced as a consequence, he

is studying this issue to determine the appropriate treatment of such

cases, and will make a decision when information concerning actual

cases of false certification discharges is available.

Change: None.

Section 682.402(e)(1)

42. Comment: Some commenters believed that a parent should not have

a Federal PLUS Loan discharged if the school falsely certified the

eligibility of the student for whom the parent obtained the PLUS Loan.

The commenters believed that only loans obtained directly by the

student should be discharged under this section.

Discussion: Section 437(c)(1) of the HEA was amended by (Pub. L.

103-208) to permit a parent to receive a discharge of a PLUS Loan if

the school falsely certified the eligibility of the student for whom

the parent obtained the PLUS Loan.

Change: None.

43. Comment: Some commenters requested clarification of whether the

false certification discharge applied to a loan that was partially

disbursed on or after January 1, 1986.

Discussion: The Secretary has been given authority pursuant to

section 437(c)(1) of the HEA to discharge the borrower's liability on a

loan ``* * * received, on or after January 1, 1986 * * *'' if the

student's eligibility to borrow was falsely certified by the school.

For purposes of the false certification discharge, the Secretary will

consider the borrower's entire loan eligible if any part of it was

disbursed by the lender on or after January 1, 1986.

Change: The final regulations have been revised to incorporate this

clarification.

44. Comment: Some commenters objected to the restriction that a

false certification discharge would only apply if the false

certification was made by an ``eligible'' institution. The commenters

believed that the HEA intended the false certification discharge

provision to apply to certifications made by both ``eligible'' and

``ineligible'' schools.

Discussion: This was discussed in detail on page 2490 of the NPRM

published on January 14, 1994 (FR 59, No. 10). The Secretary has been

given authority pursuant to section 437(c)(1) of the HEA to discharge

the borrower's liability on a loan if the student's eligibility to

borrow ``* * * was falsely certified by the eligible institution * * *.

'' (emphasis added.) The statute prescribes the scope of the discharge

for false certification under section 437(c) as extending to those

instances in which the ``student's eligibility to borrow under this

part was falsely certified by the eligible institution * * *.'' 20

U.S.C. 1087(c)(1).

The commenters proposal would have the effect of ignoring this

language, which on its face limits relief to individuals whose personal

eligibility status was falsely certified, rather than to those who

contend that they were ineligible because the school at which they were

enrolled was not an ``eligible institution.'' This limitation embodies

a congressional choice to exclude those grounds that were really

challenges to the eligibility status of the school itself, and nothing

in the language or the legislative history suggests that this

limitation is inadvertent or unintended. Moreover, institutional

eligibility rests directly and indirectly on a host of qualifications.

The lack of one or more of these qualities in a school mistakenly

determined to be eligible by the Department would, under the

commenters' view, suffice to make eligible for discharge all borrowers

enrolled at the institution while the deficiency persisted--a period

that could stretch over several years--regardless of whether that

deficiency related to the adequacy of the training and skills provided

to the borrower.

The text itself and the legislative history show no intention of

such a broad and costly view of the discharge provision. The Secretary

does not, however, consider borrowers who attended schools that

allegedly lacked eligibility to be barred by that alleged deficiency

from relief under the false certification provision, but merely that

the falsity on which they would seek relief must relate to a

certification about their personal eligibility, and not that of the

allegedly ineligible institution. The Secretary does not have the

authority to discharge a loan that was made to a borrower for

attendance at an ineligible school.

Change: None.

Section 682.402(e)(2)(ii)

45. Comment: Some commenters noted that lenders and guaranty

agencies generally are not required to keep loan records longer than

five years after the date a loan is paid in full. In light of the

borrower's statutory right to a false certification discharge for loans

received on or after January 1, 1986, the commenters recommended that

the regulations prescribe the procedures to be followed by lenders and

guaranty agencies who learn of borrowers who claim to have repaid their

loans in full more than five years ago, but for whom the lender or

guaranty agency has no existing records.

Discussion: In these cases, the Secretary expects the lender and

guaranty agency will examine records reasonably available to them from

other sources. If the lender or guaranty agency are unable to locate

records of a loan paid in full more than five years ago, it would be

the responsibility of a borrower who requests a loan discharge to

provide the required documentation needed for a discharge of the loan.

Change: None.

Section 682.402(e)(2)(iv)

46. Comment: Some commenters recommended that the regulations

require the holder of a loan discharged under the false certification

discharge provision to forward the original promissory note marked

``canceled'' or ``satisfied in full'' to the borrower within 30 days

after discharging the borrower's loan obligation.

Discussion: The discussion following comment 16 also applies to a

false certification discharge.

Change: Section 682.414(a)(2) has been amended to add a false

certification discharge.

Section 682.402(e)(3)

47. Comment: Some commenters recommended that the Secretary

prescribe a standardized form for the false certification discharge

application and associated sworn statement from the borrower.

Discussion: The discussion following comment 17 also applies to a

false certification discharge.

Change: None.

Section 682.402(e)(3)(ii)(B)

48. Comment: Some commenters objected to the proposed regulation

that would limit a false certification discharge to only those cases

where a student admitted to a school on the basis of a purported

ability to benefit from the school's training did not meet the

applicable requirements for admission on the basis of ability to

benefit. The commenters believed that the HEA did not envision any

restriction as to what would constitute a school's false certification

of a student's eligibility to borrow under the FFEL Program. Other

commenters believed that some restrictions should apply, and proposed

additional acts and certifications of a school that should be construed

as false certifications. Some commenters were pleased with the

regulations as written, and recommended no changes.

Discussion: The additional acts and certifications by a school that

the commenters proposed were the same as those discussed in the NPRM

published on January 14, 1994 (FR 59, No. 10). For the reasons stated

on pages 2488-2490 of the NPRM, and for the additional reasons

discussed earlier in response to comment 5, the Secretary believes that

the term ``falsely certified,'' when used for purposes of a false

certification discharge, applies to cases involving a school's invalid

certification that a student had the ability to benefit from the

training offered by the school, or cases where the school signed a

person's name on the loan application or the promissory note, and

certain cases where the school wrongfully endorsed a person's name on

the loan check, or the borrower's authorization for electronically

transferring loan proceeds.

The Secretary believes that if the school rather than the student

signed a person's name on the loan application or the promissory note,

the putative borrower is not aware that a loan was being applied for

and had no intention of entering into an agreement to repay a loan.

Therefore, it is reasonable to conclude that a borrower who did not

sign the application or promissory note could not have completely

understood that a check later presented for endorsement would represent

the proceeds of such a loan, and would not have intended to signify by

endorsing such a check or authorization to release funds that he or she

agreed to become obligated to repay a loan. A school that signed a

person's name on a precursory document (the loan application or the

promissory note) effectively prevented the person from being fully

aware of the relationship normally apparent to a borrower who first

completes an application for a loan and later receives a loan

disbursement as a result of that application.

The Secretary understands that in some cases, an unscrupulous

school may obtain the valid signature of a borrower on the loan

application or promissory note and will later sign the student's name

on the loan check or the authorization for electronic funds transfer.

However, despite these actions, a student could have materially

benefitted from the loan proceeds by a reduction of the charges owed to

the school or by otherwise receiving proceeds of the loan delivered by

the school. The Secretary believes that a person who signed the loan

application and promissory note should be considered an individual who

was aware that he or she requested a loan. Therefore, if the borrower

(or student on whose behalf a parent borrowed a PLUS Loan) was enrolled

at the school during the period of time that the loan (or an

installment thereof) was intended to cover, and someone other than the

borrower signed the borrower's name on a loan check or authorization

for electronic funds transfer, causing the loan proceeds to be applied

to the student's account to satisfy a liability for tuition and other

charges owed to the school, or to be delivered to the borrower, it is

reasonable to conclude that the borrower by that action received the

proceeds of the loan he or she had applied. Because that borrower

obtained the benefits of the loan disbursement, even though the

borrower realized that he or she did not sign the loan check or the

authorization for electronic funds transfer, that borrower would be

legally obligated with respect to that disbursement. In this case, the

Secretary does not believe that a loan discharge was contemplated by

Congress. However, if it is determined that the borrower or student did

not benefit from the loan proceeds, the Secretary believes that the

borrower should be relieved of any obligation to repay the amount of

the loan proceeds transmitted as a result of a falsely signed loan

check or authorization for electronic funds transfer, and that such

relief can be included in the procedures adopted for discharges under

section 437(c) of the HEA.

The Secretary is concerned with the plight of students who have

been misled by unscrupulous schools, or who have been harmed by a

school's failure to fulfill its obligations (such as the payment of a

refund to the student). Practices of this sort are violations of 34 CFR

part 668, subpart F, which governs misrepresentations by schools. The

Secretary will take a broad range of sanctions against schools to

enforce these provisions. The Secretary also notes that recent changes

made to Title IV, Part H of the HEA will reduce the incidence of school

malfeasance. Further, the Secretary will determine if relief can be

provided to such students in future regulations or legislative

amendments. However, not all cases of school malfeasance can currently

be classified as a school's ``false certification of a student's

eligibility to borrow'' that would permit a borrower to receive a loan

discharge under the HEA. For example, although misrepresentations

regarding the school's educational program or its financial or

administrative capability, including the school's placement services or

the quality of the school's facilities, faculty, or equipment, may well

have induced the student to enroll at the school, those representations

are not part of the process of ``certification'' of the student's

eligibility to borrow.

Change: The final regulations have been revised to permit false

certification discharges in cases where the school, without the

authorization of the individual, signed a person's name on the loan

application or the promissory note. In addition, the regulations

provide relief where the school, without borrower authorization,

endorsed the borrower's name on a loan check or authorization for

electronic funds transfer, providing that the student did not receive,

directly or indirectly, the benefits of the loan proceeds disbursed by

that loan check or authorization for electronic funds transfer that was

signed by the school. The regulations will include provisions for a

borrower to appeal to the Secretary if the borrower disagrees with a

guaranty agency's decision that the signatures in question were signed

by the borrower.

Section 682.402(e)(3)(ii)(C)

49. Comment: Some commenters believed it was unnecessary for the

student to certify that he or she was certified by the school on the

application for the loan as an eligible student. The commenters

believed that this information is seldom known to students because they

may never see or understand what the school wrote on the application.

The commenters noted that the student could generally deduce that the

school had made such a certification by the fact that a lender made the

loan, but believe that the same deduction could just as easily be made

by a guaranty agency or the Secretary.

Discussion: The Secretary agrees with the commenters.

Change: The final regulations have been revised to delete this

requirement.

Section 682.402(e)(3)(ii)(D)

50. Comment: Some commenters believed there is no statutory

justification for denying a false certification discharge if the

student was able to obtain employment in the occupation for which the

student's program was intended to provide training.

Discussion: In the case of a discharge based on a school's

defective certification that the student had the ability to benefit

from the school's training, this was discussed in detail on pages 2488-

2490 of the NPRM published on January 14, 1994 (FR 59, No. 10). The

Secretary believes that the ability of a student to obtain employment

in the occupation for which the student's program was intended to

provide training is evidence that the student was able to benefit from

the education received, even though the school may have improperly

tested, or failed to test, the student's ability to benefit from the

school's training.

Change: None.

51. Comment: Some commenters questioned what would constitute a

student's ``reasonable attempt to obtain employment'' and questioned

whether it would be fair to expect the student to be able to document,

or even remember such attempts that may have been made many years ago.

Discussion: In the absence of evidence to the contrary, a student

who states that he or she made a ``reasonable attempt to obtain

employment'' will be presumed to have done so. The student is simply

being asked to sign a statement to that effect.

Change: None.

Section 682.402(e)(3)(iv)

52. Comment: Some commenters, while believing that borrower

cooperation is important in an enforcement action undertaken against a

school or other related parties, were concerned that a borrower may be

unable to take time away from work, home, or other activities to travel

to multiple court appearances needed to assist the Secretary or his

designee in the enforcement action. The commenters believed that a

borrower should be required to assist in an enforcement action only to

the extent practicable for the borrower.

Discussion: The discussion following comment 23 also applies to a

false certification discharge.

Change: None.

Section 682.402(e)(5)(i)

53. Comment: Some commenters opposed the requirement that a

borrower must assign to and relinquish in favor of the Secretary any

right to a loan refund (up to the amount discharged) from any private

or public fund. The commenters were particularly concerned with the

effect they believed this requirement would have upon state tuition

recovery funds. The commenters also believed that the Secretary has no

statutory right to any claim against a state tuition recovery fund

because the HEA fails to specifically provide the secretary with that

right. The commenters noted that the section 437(c)(2) of the HEA

limits the assignment to the Secretary of a borrower's right to a loan

refund only to the borrower's rights ``* * * against the institution

and its affiliates and principals.'' The commenters contend that there

is no indication that Congress intended the Secretary to have access to

state funds or to require states to participate economically in false

certification discharges. The commenters believed that the HEA's

omission of state tuition recovery funds (or any other private or

public fund) reflects the principal of statutory construction

``expressio unius est exclusio alterius'' (the expression of one thing

is the exclusion of another).

Discussion: The discussion following comment 24 also applies to a

false certification discharge.

Change: The final regulations have been revised to exclude the

portion of a public fund that represents public money.

54. Comment: Some commenters questioned why a borrower must assign

to and relinquish in favor of the Secretary any right to a loan refund

(up to the amount discharged) with respect to the enrollment agreement

for the program for which the loan was received. The commenters

believed that the assignment of a borrower's rights pursuant to the

enrollment agreement would not gain anything for the Secretary. They

were concerned that the borrower would be forced to surrender some

rights (unspecified) unnecessarily, despite the statement in

Sec. 682.402(e)(5)(iii) that permits the borrower (or student) to

pursue legal and equitable relief regarding disputes arising from

matters otherwise unrelated to the loan discharged.

Discussion: The discussion following comment 25 also applies to a

false certification discharge.

Change: None.

Section 682.402(e)(6)(i)

55. Comment: Some commenters objected to the requirement that a

guaranty agency must review records available from sources other than

the guarantor after receiving a false certification claim from a lender

or a discharge request from a borrower. The commenters believed this

requirement is logistically unrealistic and unnecessarily complicates

and delays the processing of a false certification claim.

Discussion: The Secretary believes that the guaranty agency is in

the best position to consult with other knowledgeable parties

concerning a school's alleged false certification of a student's

eligibility to borrow. The Secretary believes that the 90-day time

period allows sufficient time for an agency to examine the lender's

false certification claim in light of the information available to the

agency and to either pay or return the claim to the lender.

Change: None.

Section 682.402(e)(7)(ii)

56. Comment: Some commenters believed that a lender that resumes

collection activity against a borrower who fails to submit the

documentation required for a false certification discharge should be

required to grant forbearance to the borrower to absolve the borrower

of any delinquency status existing on the loan, including delinquency

that occurred before the date the lender suspended collection activity.

The commenters believed that the borrower's delinquency is generally

the result of the borrower's inability to pay due to circumstances

caused by the school.

Discussion: The discussion following comment 36 also applies to a

false certification discharge.

Change: None.

Section 682.402(e)(7)(iii)

57. Comment: Some commenters objected to the requirement that a

payment received by the lender from or on behalf of the borrower after

the lender filed a claim on the loan with the guaranty agency must be

forwarded to the guaranty agency within 30 days of its receipt. The

commenters contended that the guaranty agency is not the legal holder

of the loan until it pays a claim, and therefore has no right to the

payment.

Discussion: The discussion following comment 38 also applies to a

false certification discharge.

Change: None.

Section 682.402(e)(7)(iv)

58. Comment: Some commenters believed the guaranty agency, not the

lender, should notify the borrower that a false certification discharge

has been granted.

Discussion: The discussion following comment 39 also applies to a

false certification discharge.

Change: None.

Section 682.402(l)(3)

59. Comment: Some commenters believed that any payments received by

a guaranty agency from or on behalf of a borrower whose loan obligation

has been discharged should be returned to the borrower or the party who

made the payment.

Discussion: If a borrower, or a borrower's representative remits a

payment for a loan obligation that has been discharged, even though he

or she previously has had the payment returned with a notice that the

obligation has been discharged and no further payments are required,

the Secretary believes it is reasonable to conclude that a subsequent

payment from that individual is an indication that he or she has

expressed a desire to repay the discharged loan. The Secretary does not

believe that the borrower's (or his or her representative's) desire to

repay the loan should be frustrated or the taxpayer denied the recovery

of such payments.

Change: None.

Section 682.410(b)(6)(i)

60. Comment: Some commenters believed the proposed regulations

would prohibit a guaranty agency from attempting an annual IRS offset

against a borrower if the agency had initiated wage garnishment

procedures against the borrower.

Discussion: Under the proposed regulations, a guaranty agency was

required to attempt an annual IRS offset against a borrower who owed a

defaulted loan if the agency had not attempted to garnish the

borrower's wages. Conversely, if an agency had initiated wage

garnishment procedures against the borrower, it was not required to

attempt an annual IRS offset, but could do so if it decided that it

would be an appropriate action to take in addition to wage garnishment.

Based on Public Law 102-589, the Secretary will now require a guaranty

agency to attempt an annual IRS tax refund offset against both

categories of borrowers.

Change: The final regulations have been revised to incorporate this

requirement.

Section 682.410(b)(6)(vii)(B)

61. Comment: Some commenters noted that the Secretary's guidance to

guaranty agencies in July 1993 concerning Public Law 102-589 explained

that the law no longer required the Secretary to hold a loan to be

collected by IRS offset, therefore, a guaranty agency was no longer

required to assign a loan temporarily to the Secretary in order to

allow the Secretary to collect the loan by federal income tax refund

offset. The commenters recommended that references to such assignments

be deleted from the regulations.

Discussion: The Secretary agrees with the commenters.

Change: Sections 682.410(b)(5)(vi)(H) and (L),

Sec. 682.410(b)(6)(i), (iii), (iv)(B), (vii)(A)-(D), (viii)(A), (xii),

and Sec. 682.410(b)(7(iv)(B) of the final regulations have been

revised, renumbered, or deleted to remove references to such

assignments.

Section 682.410(b)(10)(i)

62. Comment: Some commenters objected to the requirement that a

guaranty agency must follow the procedures prescribed in the

regulations if it decided to garnish the wages of a borrower who owed a

defaulted loan. The commenters believed that a guaranty agency that

possessed authority under state law to effect a garnishment should be

permitted to garnish the borrower's wages under the state's wage

garnishment procedures.

Discussion: The procedures that a guaranty agency must follow when

attempting to garnish a borrower's wages are mandated by section 488A

of the HEA. Those procedures supersede any state garnishment laws that

do not comply with the requirements of the national wage garnishment

authority established by the HEA.

Change: None.

63. Comment: Some commenters asked if the wage garnishment

procedures would apply against borrowers and employers who were subject

to tribal laws. The commenters noted that section 488A(a) of the HEA

does not refer to tribal laws, but simply states that the garnishment

provisions of the HEA apply ``* * * (N)otwithstanding any provision of

State law * * *.'' The commenters observed that because of the

difficulty and low success ratio of obtaining a judgment through tribal

courts, most creditors no longer even make the attempt.

Discussion: Section 488A(a) of the HEA preempts state laws that

might prohibit garnishment to collect student loan debts; it does not

preempt such laws of a foreign nation. Certain tribes of American

Indians are considered to have the same relationship with the United

States as do foreign nations. Therefore, the laws of those tribes are

not preempted by the wage garnishment provisions of the HEA.

Change: None.

Section 682.410(b)(10)(i)(A)

64. Comment: Some commenters believed the regulations should

specify that the amount of a borrower's wages that may be garnished is

the lesser of 10 percent of the borrower's disposable pay or the amount

allowed by 15 U.S.C. 1673.

Discussion: The Secretary agrees with the commenters.

Change: The final regulations have been revised to incorporate this

clarification.

65. Comment: Some commenters believed the regulations should

specify the deductions from a borrower's wages that would take

precedence over a wage garnishment order.

Discussion: Only a borrower's disposable pay is subject to

garnishment. Since ``disposable pay'' is defined as that part of a

borrower's compensation from an employer remaining after the deduction

of any amounts required by law to be withheld, any such deductions

``take precedence'' and will affect the amount recovered from the

borrower through garnishment. The Secretary has no authority to modify

the withholding orders issued by other entities legally empowered to

garnish the borrower's pay for other purposes.

Change: None.

Section 682.410(b)(10)(i)(D)

66. Comment: Some commenters believed that a guaranty agency should

be permitted to automatically garnish the wages of a borrower who

failed to maintain the terms of a repayment agreement with the guaranty

agency. The commenters believed that it is unnecessary to provide

further notice or appeal opportunities to a borrower who has broken the

terms of the repayment agreement. Similarly, other commenters believed

that a guaranty agency should be permitted to proceed with wage

garnishment against a borrower who has defaulted on a loan without

being required to offer a repayment opportunity to the borrower. The

commenters believed that a borrower who has defaulted on a loan has

already had numerous opportunities to repay the loan. Some commenters

suggested that a borrower be limited to only one repayment opportunity.

Discussion: All attempted garnishments must be preceded by a notice

to the borrower of the guaranty agency's intention to initiate

garnishment proceedings and an explanation of the borrower's rights,

including the right to a hearing. The due process protection afforded

the borrower under the HEA's garnishment rules renders previous

repayment arrangements between the borrower and the agency irrelevant.

Each garnishment action must be able to stand on its own as far as

compliance with the requirements of the statute and regulations is

concerned.

Change: None.

67. Comment: Some commenters believed that the wage garnishment

provisions of the HEA applied only to a borrower who entered into a

repayment agreement with the guaranty agency and then later failed to

comply with the terms of that agreement. The commenters believed there

is no statutory authority to garnish the wages of a borrower simply

because the borrower has defaulted on the loan obligation and has not

made arrangements with the guaranty agency to repay the debt.

Discussion: The HEA permits a guaranty agency to garnish the pay of

a borrower who ``* * * is not currently making required repayment under

a repayment agreement * * *.'' A borrower who owes a defaulted loan and

has simply refused to make any repayment arrangement with a guaranty

agency would certainly fit that description. Otherwise, borrowers could

shield themselves from wage garnishment by refusing to enter into

agreements to repay their loans to guaranty agencies. The HEA and the

regulations are not designed to provide incentives to borrowers who

refuse to repay their debts.

Change: None.

68. Comment: Some commenters believed that the terms of the

repayment agreement opportunity that a guaranty agency must offer a

borrower prior to wage garnishment must be similar to the terms offered

to a borrower under the loan rehabilitation program, that is, the

borrower may not be required to pay more than a reasonable and

affordable amount.

Discussion: Section 488A(a)(4) of the HEA states that an individual

subject to wage garnishment shall be provided an opportunity to enter

into a written agreement with the guaranty agency under terms agreeable

to the guaranty agency. Unlike other areas of the HEA that contain

provisions mandating that the borrower's payment be ``reasonable and

affordable,'' the wage garnishment section of the HEA contains no such

requirement. The Secretary believes this is because Congress realized

that a borrower who has not repaid his or her loan will have had

numerous opportunities to have done so prior to the initiation of a

wage garnishment proceeding. For example, the borrower will have

already declined the opportunity to make payments under the loan

rehabilitation program.

However, since it would make no sense to demand a payment amounts

from a borrower who could document that he or she was unable to pay

those amounts, the Secretary encourages a guaranty agency, even at this

late point, to attempt to accommodate a borrower who expresses a

willingness to repay the loan but who is unable to do so under the

terms proposed by the guaranty agency because of a documented hardship

explained by the borrower.

Change: None.

Section 682.410(b)(10)(i)(E)

69. Comment: Some commenters believed a guaranty agency should be

permitted to include a notice to the borrower about wage garnishment

with the agency's other notices to the borrower about hearing

opportunities available to the borrower with respect to IRS offset

procedures and credit bureau reporting. The commenters recommended that

a guaranty agency not be required to provide the borrower with an

opportunity for a hearing more than once every 12 months. The

commenters also believed that if the borrower had received a hearing

and unsuccessfully contested the existence or the amount of the debt,

the borrower need not be provided another hearing on those issues.

Discussion: As permitted under Sec. 682.410(b)(5)(vi)(H), a

guaranty agency may send a combined notice, or separate notices to a

borrower concerning credit bureau reporting, IRS offset, wage

garnishment, and any other enforcement action that may be taken to

collect the debt. However, each garnishment proceeding taken against a

borrower must comply with the notice and due process requirements that

are unique to wage garnishment.

Change: None.

Section 682.410(b)(10)(i)(F)

70. Comment: Some commenters objected to the requirement that a

guaranty agency must sue an employer who fails to comply with a

garnishment order. The commenters note that section 488A(a)(6) of the

HEA provides an option by stating that a guaranty agency ``* * * may

sue the employer.'' Other commenters recommended that the regulations

permit a guaranty agency to decline to sue an employer who fails to

comply with the wage garnishment order if the agency can demonstrate

that the expected cost and probability of success of the litigation did

not justify a lawsuit.

Discussion: The statutory language provides the authority for a

guaranty agency to sue the employer. A guaranty agency is not required

to garnish the wages of borrowers who owe defaulted loans, but if an

agency chooses to do so, it must follow the garnishment procedures

prescribed in these regulations. In order to protect the interests of

borrowers and taxpayers, the Secretary believes a guaranty agency

should make use of the full extent of the statutory authority available

to it under the HEA to compel an employer to comply with a wage

garnishment order. The Secretary cannot envision any realistic

probability that an agency would be unsuccessful in its suit against an

employer that was in clear violation of the garnishment order. Given

the expectation of such success, the Secretary believes the agency's

litigation efforts and costs would be minimal. Accordingly, this would

be part of the agency's normal performance of its role of ensuring the

maximum collection of defaulted loans, and the Secretary may refuse to

make reinsurance payments, or may recover reinsurance payments already

made to an agency that fails to sue an employer that was in clear

violation of the garnishment order.

Change: None.

71. Comment: Some commenters did not believe that a self-employed

borrower should be considered an ``employer'' for wage garnishment

purposes. The commenters believed that garnishment should be considered

a proceeding to seize the wages of a debtor paid by another party.

Discussion: The Secretary agrees with the commenters.

Change: The reference to a self-employed borrower in

Sec. 682.410(b)(10)(i)(F) has been deleted from the final regulations.

Section 682.410(b)(10)(i)(G)

72. Comment: Some commenters were opposed to the qualified

prohibition in the regulations that prevents a guaranty agency from

garnishing the wages of a borrower whom it knows has been involuntarily

separated from employment until the borrower has been reemployed

continuously for at least 12 months. The commenters believed that the

proposed regulations appear to condone garnishment as long as the

guarantor is not aware that the borrower has been involuntarily

separated from employment and has not been reemployed continuously for

at least 12 months. They believed that the HEA does not permit

garnishment under any circumstances until a borrower who has been

involuntarily separated from employment has been reemployed

continuously for at least 12 months.

Discussion: The borrower will be informed of his or her rights

with respect to wage garnishment in the notice sent to the borrower at

least 30 days before the initiation of garnishment proceedings. That

notice will include information about the exception provided for a

borrower who has been involuntarily separated from employment.

Note: All garnishments initiated by guaranty agencies on or

after March 1, 1994 must comply with the standardized administrative

wage garnishment procedures approved by the Secretary on February 1,

1994. As part of those standardized procedures, a guaranty agency

must send a notice to the borrower prior to initiating garnishment.

The standardized notice fully explains the exception for

involuntarily separated borrowers and includes a simple form for the

borrower to fill out to request this exception.

If a borrower who meets the conditions necessary for this exception

wishes to take advantage of it, the borrower will be able to do so

quite easily, either before the garnishment proceedings are initiated,

or during the hearing available to the borrower. If the borrower

chooses not to divulge information concerning an involuntary

separation, and there is no reasonable expectation that the guaranty

agency should have known about the borrower's undisclosed involuntary

separation, the Secretary believes that a resulting garnishment of the

borrower's wages should not be invalidated if the borrower later

contests the garnishment on those grounds or if the agency later learns

that the borrower would have been eligible for the exception.

Change: None.

Section 682.410(b)(10)(i)(I)

73. Comment: Some commenters believed the withholding notice sent

to a borrower's employer should inform the employer that the HEA

prohibits wage garnishment if the borrower has not been reemployed

continuously for at least 12 months.

Discussion: All information relating to the borrower's rights will

be disclosed to the borrower. The borrower's employer needs to know

only that information necessary for the employer to comply with the

withholding order.

Change: None.

Section 682.410(b)(10)(i)(J)

74. Comment: Some commenters believed that, to avoid a

misunderstanding, the regulations should state that the location of a

borrower's wage garnishment hearing is established by the guaranty

agency.

Discussion: The Secretary agrees with the commenters.

Change: The final regulations have been revised to incorporate this

clarification.

75. Comment: Some commenters believed that a wage garnishment

hearing held by a guaranty agency should be a taped hearing held in a

location accessible to the borrower. The commenters also believed that

the borrower should be given the right to appeal any adverse decision

of the guaranty agency to the Secretary, and the borrower should be

informed of that right.

Discussion: The regulations require a guaranty agency to provide a

hearing by a telephone conference with a borrower who requests that

type of hearing. All telephonic costs associated with the hearing will

be the responsibility of the guaranty agency. The Secretary believes

this option reasonably accommodates borrowers who either choose to or

who are unable to attend an in-person hearing with the guaranty agency.

The Secretary sees no reason to compel a guaranty agency to tape the

hearing, but would not object if an agency wished to do so. The

Secretary does not intend to second-guess an agency's decisions about

wage garnishments on a case-by-case basis. However, if the Secretary

learns that a guaranty agency has failed to comply with procedures

prescribed by the HEA and the regulations, or has failed to adhere to

the standardized procedures required of all agencies (see note included

in the discussion for Sec. 682.410(b)(10)(i)(G) above), the Secretary

will take appropriate action.

Change: None.

Section 682.410(b)(10)(i)(K)

76. Comment: Some commenters believed that the regulations should

clarify that, absent evidence to the contrary, the borrower shall be

deemed to have received the notice of intent to garnish five days after

its mailing date. The commenters believed this would prevent disputes

about the date the borrower received the notice.

Discussion: The Secretary agrees with the commenters.

Change: The final regulations have been revised to incorporate this

clarification in this paragraph, and the associated paragraph

682.410(b)(10)(i)(L).

Section 682.410(b)(10)(i)(L)

77. Comment: Some commenters opposed the requirement that a

guaranty agency must provide a hearing to a borrower whose written

request for the hearing is received later than 15 days after the

borrower received a notice of withholding. The commenters believed

there is no statutory support for any exception to what they perceive

to be a rigid 15-day deadline for a borrower to make such a request.

Discussion: The commenters are incorrect. Section 488A(b) of the

HEA specifically requires a guaranty agency to provide a hearing upon a

borrower's request, even if the borrower's request is not made timely.

Although the agency is not required to delay the issuance of a

withholding order to the borrower's employer, the agency could do so,

as explained in comment 78, if the agency believes a delay would be

appropriate.

Change: None.

78. Comment: Some commenters believed that even though a borrower's

written request for a hearing is submitted late, there could

nevertheless be valid reasons why the guaranty agency should not issue

a withholding order to the borrower's employer. The commenters believed

that this section of the regulations conflicted with

Sec. 682.410(b)(10)(i)(H) which permits a guaranty agency to delay or

cancel the withholding order if the agency receives information that it

believes justifies the delay or cancellation.

Discussion: The Secretary agrees with the commenters.

Change: The final regulations have been revised to permit a

guaranty agency to exercise this option.

Section 682.410(b)(10)(i)(M)

79. Comment: Some commenters believed that the regulations should

clarify that guaranty agencies may use alternative types of hearing

examiners and are not limited to appointing only an administrative law

judge.

Discussion: The Secretary did not intend that the regulations be

interpreted in the limited manner that some commenters have done, or in

a manner that the commenters believe that other parties will do. A

guaranty agency's hearing official may be any qualified individual,

including an administrative law judge, who is not under the supervision

or control of the head of the guaranty agency.

Change: The final regulations have been revised to incorporate this

clarification.

Assessment of Educational Impact

The Secretary particularly requests comments on whether the

proposed regulations in this document would require transmission of

information that is being gathered by or is available from any other

agency or authority of the United States.

List of Subjects in 34 CFR Part 682

Administrative practice and procedure, Colleges and universities,

Education, Loan programs--education, Reporting and recordkeeping

requirements, Student aid, Vocational education.

(Catalog of Federal Domestic Assistance Numbers: 84.032 Federal

Family Education Loan Program)

Dated: April 21, 1994.

Richard W. Riley,

Secretary of Education.

The Secretary amends part 682 of title 34 of the Code of Federal

Regulations as follows:

PART 682--FEDERAL FAMILY EDUCATION LOAN (FFEL) PROGRAM

1. The authority citation for part 682 continues to read as

follows:

Authority: 20 U.S.C. 1071 to 1087-2, unless otherwise noted.

2. Section 682.202 is amended by adding paragraph (a) introductory

text, revising paragraphs (a)(1) through (a)(4), and revising

paragraphs (c) and (d) to read as follows:

Sec. 682.202 Permissible charges by lenders to borrowers.

* * * * *

(a) Interest. The applicable interest rates for FFEL Program loans

are given in paragraphs (a)(1) through (a)(4) of this section.

(1) Stafford Loan Program. (i) If the borrower, on the date the

promissory note evidencing the loan is signed, has an outstanding

balance of principal or interest on a previous Stafford loan, the

interest rate is the applicable interest rate on that previous Stafford

loan.

(ii) If the borrower, on the date the promissory note evidencing

the loan is signed, has no outstanding balance on any FFEL Program

loan, and the first disbursement is made--

(A) Prior to October 1, 1992, for a loan covering a period of

instruction beginning on or after July 1, 1988, the interest rate is 8

percent until 48 months elapse after the repayment period begins, and

10 percent thereafter; or

(B) On or after October 1, 1992, the interest rate is a variable

rate, applicable to each July 1-June 30 period, that equals the lesser

of--

(1) The bond equivalent rate of the 91-day Treasury bills auctioned

at the final auction prior to the June 1 immediately preceding the July

1-June 30 period, plus 3.10 percent; or

(2) 9 percent.

(iii) For a Stafford loan for which the first disbursement is made

before October 1, 1992--

(A) If the borrower, on the date the promissory note evidencing the

loan is signed, has no outstanding balance on a Stafford loan but has

an outstanding balance of principal or interest on a PLUS or SLS loan

made for a period of enrollment beginning before July 1, 1988, or on a

Consolidation loan that repaid a loan made for a period of enrollment

beginning before July 1, 1988, the interest rate is 8 percent; or

(B) If the borrower, on the date the promissory note evidencing the

loan is signed, has an outstanding balance of principal or interest on

a PLUS or SLS loan made for a period of enrollment beginning on or

after July 1, 1988, or on a Consolidation loan that repaid a loan made

for a period of enrollment beginning on or after July 1, 1988, the

interest rate is 8 percent until 48 months elapse after the repayment

period begins, and 10 percent thereafter.

(iv) For a Stafford loan for which the first disbursement is made

on or after October 1, 1992, if the borrower, on the date the

promissory note evidencing the loan is signed, has no outstanding

balance on a Stafford loan but has an outstanding balance of principal

or interest on a PLUS, SLS, or Consolidation loan, the interest rate is

8 percent.

(2) PLUS Program. (i) For a combined repayment schedule under

Sec. 682.209(d), the interest rate is the weighted average of the rates

of all loans included under that schedule.

(ii) For a loan disbursed on or after July 1, 1987 but prior to

October 1, 1992, and for any loan made under Sec. 682.209 (e) or (f),

the interest rate is a variable rate, applicable to each July 1-June 30

period, that equals the lesser of--

(A) The bond equivalent rate of the 52-week Treasury bills

auctioned at the final auction prior to the June 1 immediately

preceding the July 1-June 30 period, plus 3.25 percent; or

(B) 12 percent.

(iii) For a loan disbursed on or after October 1, 1992, the

interest rate is a variable rate, applicable to each July 1-June 30

period, that equals the lesser of--

(A) The bond equivalent rate of the 52-week Treasury bills

auctioned at the final auction prior to the June 1 immediately

preceding the July 1-June 30 period, plus 3.10 percent; or

(B) 10 percent.

(3) SLS Program. (i) For a combined repayment schedule under

Sec. 682.209(d), the interest rate is the weighted average of the rates

of all loans included under that schedule.

(ii) For a loan disbursed on or after July 1, 1987 but prior to

October 1, 1992, and for any loan made under Sec. 682.209 (e) or (f),

the interest rate is a variable rate, applicable to each July 1-June 30

period, that equals the lesser of--

(A) The bond equivalent rate of the 52-week Treasury bills

auctioned at the final auction prior to the June 1 immediately

preceding the July 1-June 30 period, plus 3.25 percent; or

(B) 12 percent.

(iii) For a loan disbursed on or after October 1, 1992, the

interest rate is a variable rate, applicable to each July 1-June 30

period, that equals the lesser of--

(A) The bond equivalent rate of the 52-week Treasury bills

auctioned at the final auction prior to the June 1 immediately

preceding the July 1-June 30 period, plus 3.10 percent; or

(B) 11 percent.

(4) Consolidation Program. A Consolidation Program loan bears

interest at the rate that is the greater of--

(i) The weighted average of interest rates on the loans

consolidated, rounded to the nearest whole percent; or

(ii) 9 percent.

* * * * *

(c) Fees for FFEL Program loans. A lender--

(1) May charge a borrower an origination fee on a subsidized

Stafford loan not to exceed the maximum rate specified by federal

statute;

(2) Shall charge a borrower an origination fee on an unsubsidized

Stafford loan of 3 percent of the principal amount of the loan;

(3) Shall charge a borrower an origination fee on an SLS or a PLUS

loan of 3 percent of the principal amount of the loan;

(4) Shall deduct a pro rata portion of the fee (if charged) from

each disbursement; and

(5) Shall refund by a credit against the borrower's loan balance

the portion of the fee previously deducted from the loan that is

attributable to any portion of the loan that is--

(i) Returned by the school to the lender;

(ii) Repaid within 120 days of disbursement; or

(iii) Not delivered within 120 days of disbursement.

(d) Insurance Premium. A lender may charge the borrower the amount

of the insurance premium paid by the lender to the guarantor up to 1

percent of the principal amount of the loan, if that charge is provided

for in the promissory note.

* * * * *

(Authority: 20 U.S.C. 1077, 1078, 1078-1, 1078-2, 1078-3, 1079,

1082, 1087-1, 1091a)

3. Section 682.208 is amended by revising paragraphs (e)(1) and

(e)(2), and adding new paragraphs (e)(4), (e)(5), and (h) to read as

follows:

Sec. 682.208 Due diligence in servicing a loan.

* * * * *

(e)(1) If the assignment of a Stafford, PLUS, or SLS loan is to

result in a change in the identity of the party to whom the borrower

must send subsequent payments, the assignor and assignee of the loan

shall, no later than 45 days from the date the assignee acquires a

legally enforceable right to receive payment from the borrower on the

assigned loan, provide, either jointly or separately, a notice to the

borrower of--

(i) The assignment;

(ii) The identity of the assignee;

(iii) The name and address of the party to whom subsequent payments

or communications must be sent; and

(iv) The telephone numbers of both the assignor and the assignee.

(2) If the assignor and assignee separately provide the notice

required by paragraph (e)(1) of this section, each notice must indicate

that a corresponding notice will be sent by the other party to the

assignment.

* * * * *

(4) The assignee, or the assignor on behalf of the assignee, shall

notify the guaranty agency that guaranteed the loan within 45 days of

the date the assignee acquires a legally enforceable right to receive

payment from the borrower on the loan of--

(i) The assignment; and

(ii) The name and address of the assignee, and the telephone number

of the assignee that can be used to obtain information about the

repayment of the loan.

(5) The requirements of this paragraph (e), as to borrower

notification, apply if the borrower is in a grace period or has entered

the repayment period.

* * * * *

(h) Notifying the borrower about a servicing change. If an FFEL

Program loan has not been assigned, but there is a change in the

identity of the party to whom the borrower must send subsequent

payments or direct any communications concerning the loan, the holder

of the loan shall, no later than 45 days after the date of the change,

provide notice to the borrower of the name, telephone number, and

address of the party to whom subsequent payments or communications must

be sent. The requirements of this paragraph apply if the borrower is in

a grace period or has entered the repayment period.

* * * * *

(Authority: 20 U.S.C. 1077, 1078, 1078-1, 1078-2, 1078-3, 1079,

1080, 1082, 1085)

4. Section 682.402 is amended by revising the heading; by revising

paragraph (a); by revising paragraphs (b) and (c)(1); by redesignating

paragraphs (d), (e), (f), (g), (h), (i), (j), and (k) as paragraphs

(f), (g), (h), (i), (j), (k), (l), and (m), respectively; by further

redesignating newly designated paragraphs (g)(2)(ii), (h)(2)(ii) and

(k)(3) as paragraphs (g)(2)(iv), (h)(2)(iii), and (k)(5), respectively;

by adding new paragraphs (d), (e), (g)(1)(vi), (g)(1)(vii), (g)(2)(ii),

(g)(2)(iii), (h)(1)(iii), (h)(2)(ii), (h)(2)(iv), (h)(2)(v), (k)(4),

and (m)(5); by revising newly redesignated paragraphs (f)(2) and

(f)(3), (f)(4) introductory text, (g) heading, (g)(1) introductory

text, (g)(1)(i), (g)(2) introductory text, (g)(2)(i), (h) heading,

(h)(2)(iii), (h)(3)(i), (h)(3)(ii), (i)(2) heading and introductory

text, (i)(2)(iv), (j) heading, (j)(1) introductory text, (j)(2),

(k)(2), (k)(5), (l), and (m) introductory text; by removing the word

``and'' at the end of paragraph (m)(3)(ii); by adding and reserving

paragraph (k)(3); and by removing the period at the end of paragraph

(m)(4), and adding in its place, a semicolon, to read as follows:

Sec. 682.402 Death, disability, closed school, false certification,

and bankruptcy payments.

(a) General. (1) Rules governing the payment of claims based on

filing for relief in bankruptcy, and discharge of loans due to death,

total and permanent disability, attendance at a school that closes, and

false certification by a school of a borrower's eligibility for a loan,

are set forth in this section.

(2) If a PLUS loan was obtained by two parents as co-makers, or a

Consolidation loan was obtained by a married couple, and only one of

the borrowers dies, becomes totally and permanently disabled, has

collection of his or her loan obligation stayed by a bankruptcy filing,

or has that obligation discharged in bankruptcy, the other borrower

remains obligated to repay the loan.

(3) Except for a borrower's loan obligation discharged by the

Secretary under the false certification discharge provision of

paragraphs (e)(1)(ii) of this section, a loan qualifies for payment

under this section only to the extent that the loan is legally

enforceable under applicable law by the holder of the loan.

(4) For purposes of this section--

(i) The legal enforceability of a loan is conclusively determined

on the basis of a ruling by a court or administrative tribunal of

competent jurisdiction with respect to that loan, or a ruling with

respect to another loan in a judgment that collaterally estops the

holder from contesting the enforceability of the loan;

(ii) A loan is conclusively determined to be legally unenforceable

to the extent that the guarantor determines, pursuant to an objection

presented in a proceeding conducted in connection with credit bureau

reporting, tax refund offset, wage garnishment, or in any other

administrative proceeding, that the loan is not legally enforceable;

and

(iii) If an objection has been raised by the borrower or another

party about the legal enforceability of the loan and no determination

has been made under paragraph (a)(4) (i) or (ii) of this section, the

Secretary may authorize the payment of a claim under this section under

conditions the Secretary considers appropriate. If the Secretary

determines in that or any other case that a claim was paid under this

section with respect to a loan that was not a legally enforceable

obligation of the borrower, the recipient of that payment must refund

that amount of the payment to the Secretary.

(b) Death. (1) If an individual borrower dies, or, on or after July

23, 1992 the student for whom a parent received a PLUS loan dies, the

obligation of the borrower and any endorser to make any further

payments on the loan is discharged.

(2) In determining that a borrower (or student) has died, the

lender may rely on a death certificate or other proof of death that is

acceptable under applicable state law. If a death certificate or other

acceptable proof of death is not available, the borrower's obligation

on the loan can be discharged only if the guaranty agency determines

that other evidence establishes that the borrower (or student) has

died.

(3) After receiving information indicating that the borrower (or

student) has died, the lender, if it believes the information to be

reliable, shall suspend any collection activity against the borrower

and promptly request that the borrower's representative (or the

student's parent in the case of a PLUS loan) provide the documentation

described in paragraph (b)(2) of this section. During the suspension of

collection activity, which may not exceed 60 days, the lender shall

diligently attempt to obtain documentation verifying the borrower's (or

student's) death. If, despite diligent attempts, the lender is not able

to confirm the borrower's (or student's) death within 60 days, the

lender shall resume collection activity from the point that it had been

discontinued and is deemed to have exercised forbearance as to

repayment of the loan during the period when collection activity was

suspended.

(4) Once the lender has determined under paragraph (b)(2) of this

section that the borrower (or student) has died, the lender may not

attempt to collect on the loan from the borrower's estate or from any

endorser.

(5) The lender shall return to the sender any payments received

from the estate or paid on behalf of the borrower after the date of the

borrower's (or student's) death.

(c) Total and permanent disability. (1) If the lender determines

that an individual borrower is totally and permanently disabled, the

obligation of the borrower and any endorser to make any further

payments on the loan is discharged. A borrower is not considered

totally and permanently disabled on the basis of a condition that

existed at the time he or she applied for the loan, unless the

borrower's condition has substantially deteriorated later, so as to

render the borrower totally and permanently disabled. In the case of a

Consolidation loan, the borrower must certify that the condition did

not exist prior to the time the borrower applied for each of the

underlying loans, unless the condition has substantially deteriorated,

so as to render the borrower totally and permanently disabled. If the

condition existed prior to the date the Consolidation loan was made,

the borrower must provide the lender with the disbursement dates of the

underlying loans if the information does not already appear in the

borrower's loan file possessed by the lender.

* * * * *

(d) Closed school.--(1) General. (i) The Secretary reimburses the

holder of a loan received by a borrower on or after January 1, 1986,

and discharges the borrower's obligation with respect to the loan in

accordance with the provisions of paragraph (d) of this section, if the

borrower (or the student for whom a parent received a PLUS loan) could

not complete the program of study for which the loan was intended

because the school at which the borrower (or student) was enrolled,

closed, or the borrower (or student) withdrew from the school not more

than 90 days prior to the date the school closed. This 90-day period

may be extended if the Secretary determines that exceptional

circumstances related to a school's closing would justify an extension.

(ii) For purposes of the closed school discharge authorized by this

section--

(A) A school's closure date is the date that the school ceases to

provide educational instruction in all programs, as determined by the

Secretary;

(B) The term ``borrower'' includes all endorsers on a loan; and

(C) A ``school'' means a 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.

(2) Relief available pursuant to discharge. (i) Discharge under

paragraph (d) of this section relieves the borrower of an existing or

past obligation to repay the loan and any charges imposed or costs

incurred by the holder with respect to the loan that the borrower is,

or was otherwise obligated to pay.

(ii) A discharge of a loan under paragraph (d) of this section

qualifies the borrower for reimbursement of amounts paid voluntarily or

through enforced collection on a loan obligation discharged under

paragraph (d) of this section.

(iii) A borrower who has defaulted on a loan discharged under

paragraph (d) of this section is not regarded as in default on the loan

after discharge, and is eligible to receive assistance under the Title

IV, HEA programs.

(iv) A discharge of a loan under paragraph (d) of this section must

be reported by the loan holder to all credit reporting agencies to

which the holder previously reported the status of the loan, so as to

delete all adverse credit history assigned to the loan.

(3) Borrower qualification for discharge. In order to qualify for

discharge of a loan under paragraph (d) of this section a borrower

shall submit to the holder of the loan a written request and sworn

statement. The statement need not be notarized, but must be made by the

borrower under penalty of perjury, and, in the statement, the borrower

shall state--

(i) Whether the student has made a claim with respect to the

school's closing with any third party, such as the holder of a

performance bond or a tuition recovery program, and if so, the amount

of any payment received by the borrower (or student) or credited to the

borrower's loan obligation;

(ii) That the borrower (or the student for whom a parent received a

PLUS loan)--

(A) Received, on or after January 1, 1986, the proceeds of any

disbursement of a loan disbursed, in whole or in part, on or after

January 1, 1986 to attend a school;

(B) Did not complete the educational program at that school because

the school closed while the student was enrolled or on an approved

leave of absence in accordance with Sec. 682.605(c), or the student

withdrew from the school not more than 90 days before the school

closed; and

(C) Did not complete the program of study through a teach-out at

another school or by transferring academic credits or hours earned at

the closed school to another school;

(iii) That the borrower agrees to provide, upon request by the

Secretary or the Secretary's designee, other documentation reasonably

available to the borrower that demonstrates, to the satisfaction of the

Secretary or the Secretary's designee, that the student meets the

qualifications in paragraph (d) of this section; and

(iv) That the borrower agrees to cooperate with the Secretary or

the Secretary's designee in enforcement actions in accordance with

paragraph (d)(4) of this section, and to transfer any right to recovery

against a third party in accordance with paragraph (d)(5) of this

section.

(4) Cooperation by borrower in enforcement actions. (i) In any

judicial or administrative proceeding brought by the Secretary or the

Secretary's designee to recover for amounts discharged under paragraph

(d) of this section or to take other enforcement action with respect to

the conduct on which those claims were based, a borrower who requests

or receives a discharge under paragraph (d) of this section must

cooperate with the Secretary or the Secretary's designee. At the

request of the Secretary or the Secretary's designee, and upon the

Secretary's or the Secretary's designee's tendering to the borrower the

fees and costs as are customarily provided in litigation to reimburse

witnesses, the borrower shall--

(A) Provide testimony regarding any representation made by the

borrower to support a request for discharge; and

(B) Produce any documentation reasonably available to the borrower

with respect to those representations and any sworn statement required

by the Secretary with respect to those representations and documents.

(ii) The Secretary revokes the discharge, or denies the request for

discharge, of a borrower who--

(A) Fails to provide testimony, sworn statements, or documentation

to support material representations made by the borrower to obtain the

discharge; or

(B) Provides testimony, a sworn statement, or documentation that

does not support the material representations made by the borrower to

obtain the discharge.

(5) Transfer to the Secretary of borrower's right of recovery

against third parties. (i) Upon discharge under paragraph (d) of this

section, the borrower is deemed to have assigned to and relinquished in

favor of the Secretary any right to a loan refund (up to the amount

discharged) that the borrower (or student) may have by contract or

applicable law with respect to the loan or the enrollment agreement for

the program for which the loan was received, against the school, its

principals, affiliates and their successors, its sureties, and any

private fund, including the portion of a public fund that represents

funds received from a private party.

(ii) The provisions of paragraph (d) of this section apply

notwithstanding any provision of State law that would otherwise

restrict transfer of such rights by the borrower (or student), limit or

prevent a transferee from exercising those rights, or establish

procedures or a scheme of distribution that would prejudice the

Secretary's ability to recover on those rights.

(iii) Nothing in this section shall be construed as limiting or

foreclosing the borrower's (or student's) right to pursue legal and

equitable relief regarding disputes arising from matters otherwise

unrelated to the loan discharged.

(6) Guaranty agency responsibilities--(i) Procedures applicable if

a school closed on or after January 1, 1986, but prior to June 13,

1994. (A) If a borrower received a loan for attendance at a school with

a closure date on or after January 1, 1986, but prior to June 13, 1994,

the loan may be discharged in accordance with the procedures specified

in paragraph (d)(6)(i) of this section.

(B) If a loan subject to paragraph (d) of this section was

discharged in part in accordance with the Secretary's ``Closed School

Policy'' as authorized by section IV of Bulletin 89-G-159, the guaranty

agency shall initiate the discharge of the remaining balance of the

loan not later than August 13, 1994.

(C) A guaranty agency shall review its records and identify all

schools that appear to have closed on or after January 1, 1986 and

prior to June 13, 1994, and shall identify the loans made to any

borrower (or student) who appears to have been enrolled at the school

on the school closure date or who withdrew not more than 90 days prior

to the closure date.

(D) A guaranty agency shall notify the Secretary immediately if it

determines that a school not previously known to have closed appears to

have closed, and, within 30 days of making that determination, notify

all lenders participating in its program to suspend collection efforts

against individuals with respect to loans made for attendance at the

closed school, if the student to whom (or on whose behalf) a loan was

made, appears to have been enrolled at the school on the closing date,

or withdrew not more than 90 days prior to the date the school appears

to have closed. Within 30 days after receiving confirmation of the date

of a school's closure from the Secretary, the agency shall--

(1) Notify all lenders participating in its program to mail a

discharge application explaining the procedures and eligibility

criteria for obtaining a discharge and an explanation of the

information that must be included in the sworn statement (which may be

combined) to all borrowers who may be eligible for a closed school

discharge; and

(2) Review the records of loans that it holds, identify the loans

made to any borrower (or student) who appears to have been enrolled at

the school on the school closure date or who withdrew not more than 90

days prior to the closure date, and mail a discharge application and an

explanation of the information that must be included in the sworn

statement (which may be combined) to the borrower. The application

shall inform the borrower of the procedures and eligibility criteria

for obtaining a discharge.

(E) If a loan identified under paragraph (d)(6)(i)(D)(2) of this

section is held by the guaranty agency as a defaulted loan and the

borrower's current address is known, the guaranty agency shall

immediately suspend any efforts to collect from the borrower on any

loan received for the program of study for which the loan was made (but

may continue to receive borrower payments), and notify the borrower

that the agency will provide additional information about the

procedures for requesting a discharge after the agency has received

confirmation from the Secretary that the school had closed.

(F) If a loan identified under paragraph (d)(6)(i)(D)(2) of this

section is held by the guaranty agency as a defaulted loan and the

borrower's current address is unknown, the agency shall, by June 13,

1995, further refine the list of borrowers whose loans are potentially

subject to discharge under paragraph (d) of this section by consulting

with representatives of the closed school, the school's licensing

agency, accrediting agency, and other appropriate parties. Upon

learning the new address of a borrower who would still be considered

potentially eligible for a discharge, the guaranty agency shall, within

30 days after learning the borrower's new address, mail to the borrower

a discharge application that meets the requirements of paragraph

(d)(6)(i)(E) of this section.

(G) If the guaranty agency determines that a borrower identified in

paragraph (d)(6)(i)(E) or (F) of this section has satisfied all of the

conditions required for a discharge, the agency shall notify the

borrower in writing of that determination within 30 days after making

that determination.

(H) If the guaranty agency determines that a borrower identified in

paragraph (d)(6)(i)(E) or (F) of this section does not qualify for a

discharge, the agency shall notify the borrower in writing of that

determination and the reasons for it within 30 days after the date the

agency--

(1) Made that determination based on information available to the

guaranty agency;

(2) Was notified by the Secretary that the school had not closed;

(3) Was notified by the Secretary that the school had closed on a

date that was more than 90 days after the borrower (or student)

withdrew from the school;

(4) Was notified by the Secretary that the borrower (or student)

was ineligible for a closed school discharge for other reasons; or

(5) Received the borrower's completed application and sworn

statement.

(I) If a borrower described in paragraph (d)(6)(i)(E) or (F) of

this section fails to submit the written request and sworn statement

described in paragraph (d)(3) of this section within 60 days of being

notified of that option, the guaranty agency shall resume collection

and shall be deemed to have exercised forbearance of payment of

principal and interest from the date it suspended collection activity.

The agency may capitalize, in accordance with Sec. 682.202(b), any

interest accrued and not paid during that period.

(J) A borrower's request for discharge may not be denied solely on

the basis of failing to meet any time limits set by the lender,

guaranty agency, or the Secretary.

(ii) Procedures applicable if a school closed on or after June 13,

1994. (A) A guaranty agency shall notify the Secretary immediately

whenever it becomes aware of reliable information indicating a school

may have closed. The designated guaranty agency in the state in which

the school is located shall promptly investigate whether the school has

closed and, within 30 days after receiving information indicating that

the school may have closed, report the results of its investigation to

the Secretary concerning the date of the school's closure and whether a

teach-out of the closed school's program was made available to

students.

(B) If a guaranty agency determines that a school appears to have

closed, it shall, within 30 days of making that determination, notify

all lenders participating in its program to suspend collection efforts

against individuals with respect to loans made for attendance at the

closed school, if the student to whom (or on whose behalf) a loan was

made, appears to have been enrolled at the school on the closing date,

or withdrew not more than 90 days prior to the date the school appears

to have closed. Within 30 days after receiving confirmation of the date

of a school's closure from the Secretary, the agency shall--

(1) Notify all lenders participating in its program to mail a

discharge application explaining the procedures and eligibility

criteria for obtaining a discharge and an explanation of the

information that must be included in the sworn statement (which may be

combined) to all borrowers who may be eligible for a closed school

discharge; and

(2) Review the records of loans that it holds, identify the loans

made to any borrower (or student) who appears to have been enrolled at

the school on the school closure date or who withdrew not more than 90

days prior to the closure date, and mail a discharge application and an

explanation of the information that must be included in the sworn

statement (which may be combined) to the borrower. The application

shall inform the borrower of the procedures and eligibility criteria

for obtaining a discharge.

(C) If a loan identified under paragraph (d)(6)(ii)(B)(2) of this

section is held by the guaranty agency as a defaulted loan and the

borrower's current address is known, the guaranty agency shall

immediately suspend any efforts to collect from the borrower on any

loan received for the program of study for which the loan was made (but

may continue to receive borrower payments), and notify the borrower

that the agency will provide additional information about the

procedures for requesting a discharge after the agency has received

confirmation from the Secretary that the school had closed.

(D) If a loan identified under paragraph (d)(6)(ii)(B)(2) of this

section is held by the guaranty agency as a defaulted loan and the

borrower's current address is unknown, the agency shall, within one

year after identifying the borrower, attempt to locate the borrower and

further determine the borrower's potential eligibility for a discharge

under paragraph (d) of this section by consulting with representatives

of the closed school, the school's licensing agency, accrediting

agency, and other appropriate parties. Upon learning the new address of

a borrower who would still be considered potentially eligible for a

discharge, the guaranty agency shall, within 30 days after learning the

borrower's new address, mail to the borrower a discharge application

that meets the requirements of paragraph (d)(6)(ii)(B) of this section.

(E) If the guaranty agency determines that a borrower identified in

paragraph (d)(6)(ii)(C) or (D) of this section has satisfied all of the

conditions required for a discharge, the agency shall notify the

borrower in writing of that determination within 30 days after making

that determination.

(F) If the guaranty agency determines that a borrower identified in

paragraph (d)(6)(ii)(C) or (D) of this section does not qualify for a

discharge, the agency shall notify the borrower in writing of that

determination and the reasons for it within 30 days after the date the

agency--

(1) Made that determination based on information available to the

guaranty agency;

(2) Was notified by the Secretary that the school had not closed;

(3) Was notified by the Secretary that the school had closed on a

date that was more than 90 days after the borrower (or student)

withdrew from the school;

(4) Was notified by the Secretary that the borrower (or student)

was ineligible for a closed school discharge for other reasons; or

(5) Received the borrower's completed application and sworn

statement.

(G) Upon receipt of a closed school discharge claim filed by a

lender, the agency shall review the borrower's request and supporting

sworn statement in the light of information available from the records

of the agency and from other sources, including other guaranty

agencies, state authorities, and cognizant accrediting associations,

and shall take the following actions--

(1) If the agency determines that the borrower satisfies the

requirements for discharge under paragraph (d) of this section, it

shall pay the claim in accordance with Sec. 682.402(h) not later than

90 days after the agency received the claim; or

(2) If the agency determines that the borrower does not qualify for

a discharge, the agency shall, not later than 90 days after the agency

received the claim, return the claim to the lender with an explanation

of the reasons for its determination.

(H) If a borrower fails to submit the written request and sworn

statement described in paragraph (d)(3) of this section within 60 days

of being notified of that option, the lender or guaranty agency shall

resume collection and shall be deemed to have exercised forbearance of

payment of principal and interest from the date it suspended collection

activity. The lender or guaranty agency may capitalize, in accordance

with Sec. 682.202(b), any interest accrued and not paid during that

period.

(I) A borrower's request for discharge may not be denied solely on

the basis of failing to meet any time limits set by the lender,

guaranty agency, or the Secretary.

(7) Lender responsibilities. (i) A lender shall comply with the

requirements prescribed in paragraph (d) of this section. In the

absence of specific instructions from a guaranty agency or the

Secretary, if a lender receives information from a source it believes

to be reliable indicating that an existing or former borrower may be

eligible for a loan discharge under paragraph (d) of this section, the

lender shall immediately notify the guaranty agency, and suspend any

efforts to collect from the borrower on any loan received for the

program of study for which the loan was made (but may continue to

receive borrower payments).

(ii) If the borrower fails to submit the written request and sworn

statement described in paragraph (d)(3) of this section within 60 days

after being notified of that option, the lender shall resume collection

and shall be deemed to have exercised forbearance of payment of

principal and interest from the date the lender suspended collection

activity. The lender may capitalize, in accordance with

Sec. 682.202(b), any interest accrued and not paid during that period.

(iii) The lender shall file a closed school claim with the guaranty

agency in accordance with Sec. 682.402(g) no later than 60 days after

the lender receives the borrower's written request and sworn statement

described in paragraph (d)(3) of this section. If a lender receives a

payment made by or on behalf of the borrower on the loan after the

lender files a claim on the loan with the guaranty agency, the lender

shall forward the payment to the guaranty agency within 30 days of its

receipt. The lender shall assist the guaranty agency and the borrower

in determining whether the borrower is eligible for discharge of the

loan.

(iv) Within 30 days after receiving reimbursement from the guaranty

agency for a closed school claim, the lender shall notify the borrower

that the loan obligation has been discharged, and request that all

credit bureaus to which it previously reported the status of the loan

delete all adverse credit history assigned to the loan.

(v) Within 30 days after being notified by the guaranty agency that

the borrower's request for a closed school discharge has been denied,

the lender shall resume collection and notify the borrower of the

reasons for the denial. The lender shall be deemed to have exercised

forbearance of payment of principal and interest from the date the

lender suspended collection activity, and may capitalize, in accordance

with Sec. 682.202(b), any interest accrued and not paid during that

period.

(e) False certification by a school of a student's eligibility to

borrow and unauthorized disbursements.--(1) General. (i) The Secretary

reimburses the holder of a loan received by a borrower on or after

January 1, 1986, and discharges a current or former borrower's

obligation with respect to the loan in accordance with the provisions

of paragraph (e) of this section, if the borrower's (or the student for

whom a parent received a PLUS loan) eligibility to receive the loan was

falsely certified by an eligible school. For purposes of a false

certification discharge, the term ``borrower'' includes all endorsers

on a loan. A student's eligibility to borrow shall be considered to

have been falsely certified by the school if the school--

(A) Admitted the student on the basis of ability to benefit from

its training and the student did not meet the applicable requirements

for admission on the basis of ability to benefit as described in

paragraph (e)(13) of this section; or

(B) Signed the borrower's name without authorization by the

borrower on the loan application or promissory note.

(ii) The Secretary discharges the obligation of a borrower with

respect to a loan disbursement for which the school, without the

borrower's authorization, endorsed the borrower's loan check or

authorization for electronic funds transfer, unless the student for

whom the loan was made received the proceeds of the loan either by

actual delivery of the loan funds or by a credit in the amount of the

contested disbursement applied to charges owed to the school for that

portion of the educational program completed by the student. However,

the Secretary does not reimburse the lender with respect to any amount

disbursed by means of a check bearing an unauthorized endorsement

unless the school also executed the application or promissory note for

that loan for the named borrower without that individual's consent.

(2) Relief available pursuant to discharge. (i) Discharge under

paragraph (e)(1)(i) of this section relieves the borrower of an

existing or past obligation to repay the loan certified by the school,

and any charges imposed or costs incurred by the holder with respect to

the loan that the borrower is, or was, otherwise obligated to pay.

(ii) A discharge of a loan under paragraph (e) of this section

qualifies the borrower for reimbursement of amounts paid voluntarily or

through enforced collection on a loan obligation discharged under

paragraph (e) of this section.

(iii) A borrower who has defaulted on a loan discharged under

paragraph (e) of this section is not regarded as in default on the loan

after discharge, and is eligible to receive assistance under the Title

IV, HEA programs.

(iv) A discharge of a loan under paragraph (e) of this section is

reported by the loan holder to all credit reporting agencies to which

the holder previously reported the status of the loan, so as to delete

all adverse credit history assigned to the loan.

(v) Discharge under paragraph (e)(1)(ii) of this section qualifies

the borrower for relief only with respect to the amount of the

disbursement discharged.

(3) Borrower qualification for discharge. In order to qualify for

discharge of a loan under paragraph (e) of this section the borrower

shall submit to the holder of the loan a written request and a sworn

statement. The statement need not be notarized, but must be made by the

borrower under penalty of perjury, and, in the statement, the borrower

shall--

(i) State whether the student has made a claim with respect to the

school's false certification with any third party, such as the holder

of a performance bond or a tuition recovery program, and if so, the

amount of any payment received by the borrower (or student) or credited

to the borrower's loan obligation;

(ii) In the case of a borrower requesting a discharge based on the

school's defective testing of the student's ability to benefit, state

that the borrower (or the student for whom a parent received a PLUS

loan)--

(A) Received, on or after January 1, 1986, the proceeds of any

disbursement of a loan disbursed, in whole or in part, on or after

January 1, 1986 to attend a school;

(B) Was admitted to that school on the basis of ability to benefit

from its training and did not meet the applicable requirements for

admission on the basis of ability to benefit as described in paragraph

(e)(13) of this section; and

(C) Withdrew from the school and did not find employment in the

occupation for which the program was intended to provide training, or

completed the training program for which the loan was made and made a

reasonable attempt to obtain employment in the occupation for which the

program was intended to provide training, and--

(1) Was not able to find employment in that occupation; or

(2) Obtained employment in that occupation only after receiving

additional training that was not provided by the school that certified

the loan;

(iii) In the case of a borrower requesting a discharge because the

school signed the borrower's name on the loan application or promissory

note--

(A) State that the signature on either of those documents was not

the signature of the borrower; and

(B) Provide five different specimens of his or her signature, two

of which must be not earlier or later than one year before or after the

date of the contested signature;

(iv) In the case of a borrower requesting a discharge because the

school, without authorization of the borrower, endorsed the borrower's

name on the loan check or signed the authorization for electronic funds

transfer, the borrower shall--

(A) Certify that he or she did not endorse the loan check or sign

the authorization for electronic funds transfer, or authorize the

school to do so;

(B) Provide five different specimens of his or her signature, two

of which must be not earlier or later than one year before or after the

date of the contested signature; and

(C) State that the proceeds of the contested disbursement were not

received either through actual delivery of the loan funds or by a

credit in the amount of the contested disbursement applied to charges

owed to the school for that portion of the educational program

completed by the student;

(v) That the borrower agrees to provide upon request by the

Secretary or the Secretary's designee, other documentation reasonably

available to the borrower, that demonstrates, to the satisfaction of

the Secretary or the Secretary's designee, that the student meets the

qualifications in paragraph (e) of this section; and

(vi) That the borrower agrees to cooperate with the Secretary or

the Secretary's designee in enforcement actions in accordance with

paragraph (e)(4) of this section, and to transfer any right to recovery

against a third party in accordance with paragraph (e)(5) of this

section.

(4) Cooperation by borrower in enforcement actions. (i) In any

judicial or administrative proceeding brought by the Secretary or the

Secretary's designee to recover for amounts discharged under paragraph

(e) of this section or to take other enforcement action with respect to

the conduct on which those claims were based, a borrower who requests

or receives a discharge under paragraph (e) of this section must

cooperate with the Secretary or the Secretary's designee. At the

request of the Secretary or the Secretary's designee, and upon the

Secretary's or the Secretary's designee's tendering to the borrower the

fees and costs as are customarily provided in litigation to reimburse

witnesses, the borrower shall--

(A) Provide testimony regarding any representation made by the

borrower to support a request for discharge; and

(B) Produce any documentation reasonably available to the borrower

with respect to those representations and any sworn statement required

by the Secretary with respect to those representations and documents.

(ii) The Secretary revokes the discharge, or denies the request for

discharge, of a borrower who--

(A) Fails to provide testimony, sworn statements, or documentation

to support material representations made by the borrower to obtain the

discharge; or

(B) Provides testimony, a sworn statement, or documentation that

does not support the material representations made by the borrower to

obtain the discharge.

(5) Transfer to the Secretary of borrower's right of recovery

against third parties. (i) Upon discharge under paragraph (e) of this

section, the borrower is deemed to have assigned to and relinquished in

favor of the Secretary any right to a loan refund (up to the amount

discharged) that the borrower (or student) may have by contract or

applicable law with respect to the loan or the enrollment agreement for

the program for which the loan was received, against the school, its

principals, affiliates and their successors, its sureties, and any

private fund, including the portion of a public fund that represents

funds received from a private party.

(ii) The provisions of paragraph (e) of this section apply

notwithstanding any provision of state law that would otherwise

restrict transfer of such rights by the borrower (or student), limit or

prevent a transferee from exercising those rights, or establish

procedures or a scheme of distribution that would prejudice the

Secretary's ability to recover on those rights.

(iii) Nothing in this section shall be construed as limiting or

foreclosing the borrower's (or student's) right to pursue legal and

equitable relief regarding disputes arising from matters otherwise

unrelated to the loan discharged.

(6) Guaranty agency responsibilities--general. (i) A guaranty

agency shall notify the Secretary immediately whenever it becomes aware

of reliable information indicating that a school may have falsely

certified a student's eligibility or caused an unauthorized

disbursement of loan proceeds, as described in paragraph (e)(3) of this

section. The designated guaranty agency in the state in which the

school is located shall promptly investigate whether the school has

falsely certified a student's eligibility and, within 30 days after

receiving information indicating that the school may have done so,

report the results of its preliminary investigation to the Secretary.

(ii) If the guaranty agency receives information it believes to be

reliable indicating that a borrower whose loan is held by the agency

may be eligible for a discharge under paragraph (e) of this section,

the agency shall immediately suspend any efforts to collect from the

borrower on any loan received for the program of study for which the

loan was made (but may continue to receive borrower payments), and

inform the borrower of the procedures for requesting a discharge.

(iii) If the borrower fails to submit the written request and sworn

statement described in paragraph (e)(3) of this section within 60 days

of being notified of that option, the guaranty agency shall resume

collection and shall be deemed to have exercised forbearance of payment

of principal and interest from the date it suspended collection

activity. The agency may capitalize, in accordance with

Sec. 682.202(b), any interest accrued and not paid during that period.

(iv) Upon receipt of a discharge claim filed by a lender or a

request submitted by a borrower with respect to a loan held by the

guaranty agency, the agency shall have up to 90 days to determine

whether the discharge should be granted. The agency shall review the

borrower's request and supporting sworn statement in light of

information available from the records of the agency and from other

sources, including other guaranty agencies, state authorities, and

cognizant accrediting associations.

(v) A borrower's request for discharge and sworn statement may not

be denied solely on the basis of failing to meet any time limits set by

the lender or the guaranty agency.

(7) Guaranty agency responsibilities with respect to a claim filed

by a lender based on the borrower's assertion that he or she did not

sign the loan application or the promissory note, or that the school

failed to test, or improperly tested, the student's ability to benefit.

(i) The agency shall evaluate the borrower's request and consider

relevant information it possesses and information available from other

sources, and follow the procedures described in paragraph (e)(7) of

this section.

(ii) If the agency determines that the borrower satisfies the

requirements for discharge under paragraph (e) of this section, it

shall, not later than 30 days after the agency makes that

determination, pay the claim in accordance with Sec. 682.402(h) and--

(A) Notify the borrower that his or her liability with respect to

the amount of the loan has been discharged, and that the lender has

been informed of the actions required under paragraph (e)(7)(ii)(C) of

this section;

(B) Refund to the borrower all amounts paid by the borrower to the

lender or the agency with respect to the discharged loan amount,

including any late fees or collection charges imposed by the lender or

agency related to the discharged loan amount; and

(C) Notify the lender that the borrower's liability with respect to

the amount of the loan has been discharged, and that the lender must--

(1) Immediately terminate any collection efforts against the

borrower with respect to the discharged loan amount and any charges

imposed or costs incurred by the lender related to the discharged loan

amount that the borrower is, or was, otherwise obligated to pay; and

(2) Within 30 days, report to all credit reporting agencies to

which the lender previously reported the status of the loan, so as to

delete all adverse credit history assigned to the loan.

(iii) If the agency determines that the borrower does not qualify

for a discharge, it shall, within 30 days after making that

determination--

(A) Notify the lender that the borrower's liability on the loan is

not discharged and that, depending on the borrower's decision under

paragraph (e)(7)(iii)(B) of this section, the loan shall either be

returned to the lender or paid as a default claim; and

(B) Notify the borrower that the borrower does not qualify for

discharge, and state the reasons for that conclusion. The agency shall

advise the borrower that he or she remains obligated to repay the loan

and warn the borrower of the consequences of default, and explain that

the borrower will be considered to be in default on the loan unless the

borrower submits a written statement to the agency within 30 days

stating that the borrower--

(1) Acknowledges the debt and, if payments are due, will begin or

resume making those payments to the lender; or

(2) Requests the Secretary to review the agency's decision.

(iv) Within 30 days after receiving the borrower's written

statement described in paragraph (e)(7)(iii)(B)(1) of this section, the

agency shall return the claim file to the lender and notify the lender

to resume collection efforts if payments are due.

(v) Within 30 days after receiving the borrower's request for

review by the Secretary, the agency shall forward the claim file to the

Secretary for his review and take the actions required under paragraph

(e)(11) of this section.

(vi) The agency shall pay a default claim to the lender within 30

days after the borrower fails to return either of the written

statements described in paragraph (e)(7)(iii)(B) of this section.

(8) Guaranty agency responsibilities with respect to a claim filed

by a lender based only on the borrower's assertion that he or she did

not sign the loan check or the authorization for the electronic

transfer of loan funds. (i) The agency shall evaluate the borrower's

request and consider relevant information it possesses and information

available from other sources, and follow the procedures described in

paragraph (e)(8) of this section.

(ii) If the agency determines that a borrower who asserts that he

or she did not endorse the loan check satisfies the requirements for

discharge under paragraph (e)(3)(iv) of this section, it shall, within

30 days after making that determination--

(A) Notify the borrower that his or her liability with respect to

the amount of the contested disbursement of the loan has been

discharged, and that the lender has been informed of the actions

required under paragraph (e)(8)(ii)(B) of this section;

(B) Notify the lender that the borrower's liability with respect to

the amount of the contested disbursement of the loan has been

discharged, and that the lender must--

(1) Immediately terminate any collection efforts against the

borrower with respect to the discharged loan amount and any charges

imposed or costs incurred by the lender related to the discharged loan

amount that the borrower is, or was, otherwise obligated to pay;

(2) Within 30 days, report to all credit reporting agencies to

which the lender previously reported the status of the loan, so as to

delete all adverse credit history assigned to the loan;

(3) Refund to the borrower, within 30 days, all amounts paid by the

borrower with respect to the loan disbursement that was discharged,

including any charges imposed or costs incurred by the lender related

to the discharged loan amount; and

(4) Refund to the Secretary, within 30 days, all interest benefits

and special allowance payments received from the Secretary with respect

to the loan disbursement that was discharged; and

(C) Transfer to the lender the borrower's written assignment of any

rights the borrower may have against third parties with respect to a

loan disbursement that was discharged because the borrower did not sign

the loan check.

(iii) If the agency determines that a borrower who asserts that he

or she did not sign the electronic funds transfer authorization

satisfies the requirements for discharge under paragraph (e)(3)(iv) of

this section, it shall, within 30 days after making that determination,

pay the claim in accordance with Sec. 682.402(h) and--

(A) Notify the borrower that his or her liability with respect to

the amount of the contested disbursement of the loan has been

discharged, and that the lender has been informed of the actions

required under paragraph (e)(8)(iii)(C) of this section;

(B) Refund to the borrower all amounts paid by the borrower to the

lender or the agency with respect to the discharged loan amount,

including any late fees or collection charges imposed by the lender or

agency related to the discharged loan amount; and

(C) Notify the lender that the borrower's liability with respect to

the contested disbursement of the loan has been discharged, and that

the lender must--

(1) Immediately terminate any collection efforts against the

borrower with respect to the discharged loan amount and any charges

imposed or costs incurred by the lender related to the discharged loan

amount that the borrower is, or was, otherwise obligated to pay; and

(2) Within 30 days, report to all credit reporting agencies to

which the lender previously reported the status of the loan, so as to

delete all adverse credit history assigned to the loan.

(iv) If the agency determines that the borrower does not qualify

for a discharge, it shall, within 30 days after making that

determination--

(A) Notify the lender that the borrower's liability on the loan is

not discharged and that, depending on the borrower's decision under

paragraph (e)(8)(iv)(B) of this section, the loan shall either be

returned to the lender or paid as a default claim; and

(B) Notify the borrower that the borrower does not qualify for

discharge, and state the reasons for that conclusion. The agency shall

advise the borrower that he or she remains obligated to repay the loan

and warn the borrower of the consequences of default, and explain that

the borrower will be considered to be in default on the loan unless the

borrower submits a written statement to the agency within 30 days

stating that the borrower--

(1) Acknowledges the debt and, if payments are due, will begin or

resume making those payments to the lender; or

(2) Requests the Secretary to review the agency's decision.

(v) Within 30 days after receiving the borrower's written statement

described in paragraph (e)(8)(iv)(B)(1) of this section, the agency

shall return the claim file to the lender and notify the lender to

resume collection efforts if payments are due.

(vi) Within 30 days after receiving the borrower's request for

review by the Secretary, the agency shall forward the claim file to the

Secretary for his review and take the actions required under paragraph

(e)(11) of this section.

(vii) The agency shall pay a default claim to the lender within 30

days after the borrower fails to return either of the written

statements described in paragraph (e)(8)(iv)(B) of this section.

(9) Guaranty agency responsibilities in the case of a loan held by

the agency for which a discharge request is submitted by a borrower

based on the borrower's assertion that he or she did not sign the loan

application or the promissory note, or that the school failed to test,

or improperly tested, the student's ability to benefit. (i) The agency

shall evaluate the borrower's request and consider relevant information

it possesses and information available from other sources, and follow

the procedures described in paragraph (e)(9) of this section.

(ii) If the agency determines that the borrower satisfies the

requirements for discharge under paragraph (e)(3) of this section, it

shall immediately terminate any collection efforts against the borrower

with respect to the discharged loan amount and any charges imposed or

costs incurred by the agency related to the discharged loan amount that

the borrower is, or was otherwise obligated to pay and, not later than

30 days after the agency makes the determination that the borrower

satisfies the requirements for discharge--

(A) Notify the borrower that his or her liability with respect to

the amount of the loan has been discharged;

(B) Report to all credit reporting agencies to which the agency

previously reported the status of the loan, so as to delete all adverse

credit history assigned to the loan; and

(C) Refund to the borrower all amounts paid by the borrower to the

lender or the agency with respect to the discharged loan amount,

including any late fees or collection charges imposed by the lender or

agency related to the discharged loan amount.

(iii) If the agency determines that the borrower does not qualify

for a discharge, it shall, within 30 days after making that

determination, notify the borrower that the borrower's liability with

respect to the amount of the loan is not discharged, state the reasons

for that conclusion, and if the borrower is not then making payments in

accordance with a repayment arrangement with the agency on the loan,

advise the borrower of the consequences of continued failure to reach

such an arrangement, and that collection action will resume on the loan

unless within 30 days the borrower--

(A) Acknowledges the debt and, if payments are due, reaches a

satisfactory arrangement to repay the loan or resumes making payments

under such an arrangement to the agency; or

(B) Requests the Secretary to review the agency's decision.

(iv) Within 30 days after receiving the borrower's request for

review by the Secretary, the agency shall forward the borrower's

discharge request and all relevant documentation to the Secretary for

his review and take the actions required under paragraph (e)(11) of

this section.

(v) The agency shall resume collection action if within 30 days of

giving notice of its determination the borrower fails to seek review by

the Secretary or agree to repay the loan.

(10) Guaranty agency responsibilities in the case of a loan held by

the agency for which a discharge request is submitted by a borrower

based only on the borrower's assertion that he or she did not sign the

loan check or the authorization for the electronic transfer of loan

funds. (i) The agency shall evaluate the borrower's request and

consider relevant information it possesses and information available

from other sources, and follow the procedures described in paragraph

(e)(10) of this section.

(ii) If the agency determines that a borrower who asserts that he

or she did not endorse the loan check satisfies the requirements for

discharge under paragraph (e)(3)(iv) of this section, it shall refund

to the Secretary the amount of reinsurance payment received with

respect to the amount discharged on that loan less any repayments made

by the lender under paragraph (e)(10)(ii)(D)(2) of this section, and

within 30 days after making that determination--

(A) Notify the borrower that his or her liability with respect to

the amount of the contested disbursement of the loan has been

discharged;

(B) Report to all credit reporting agencies to which the agency

previously reported the status of the loan, so as to delete all adverse

credit history assigned to the loan;

(C) Refund to the borrower all amounts paid by the borrower to the

lender or the agency with respect to the discharged loan amount,

including any late fees or collection charges imposed by the lender or

agency related to the discharged loan amount;

(D) Notify

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