Federal Family Education Loan Program

SUMMARY: The Secretary amends the regulations governing the Federal

Family Education Loan (FFEL) Program. The FFEL Program regulations

govern the Federal Stafford Loan Program, the Federal Supplemental

Loans for Students (Federal SLS) Program, the Federal PLUS Program, and

the Federal Consolidation Loan Program, collectively referred to as the

Federal Family Education Loan Program. The Federal Stafford Loan, the

Federal SLS, the Federal PLUS and the Federal Consolidation Loan

programs are hereinafter referred to as the Stafford, SLS, PLUS and

Consolidation Loan programs. The final regulations incorporate

statutory changes made to the Higher Education Act of 1965 (HEA) by the

Higher Education Amendments of 1992 (the 1992 Amendments), self-

implementing provisions of the Omnibus Budget Reconciliation Act of

1993 (OBRA), and the Higher Education Technical Amendments of 1993

(1993 Technical Amendments). Regulations needed to implement other OBRA

amendments and the 1993 Technical Amendments will be published

separately. The final regulations also reflect various policy

initiatives intended to improve program administration.

EFFECTIVE DATE: Pursuant to section 482(c) of the Higher Education Act

of 1965, as amended (20 U.S.C. 1089(c)), these regulations take effect

July 1, 1995, with the exception of Secs. 682.401, 682.405, and

682.409. These sections will become effective on July 1, 1995, or 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, whichever is later. A document announcing the effective date will

be published in the Federal Register.

FOR FURTHER INFORMATION CONTACT: Patricia Beavan, 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 Stafford, SLS, and PLUS Loan programs

provide loans to eligible student or parent borrowers who might

otherwise be unable to finance the costs of postsecondary education.

The Consolidation Loan Program gives borrowers an opportunity to

consolidate loans made under the Stafford loan, Perkins (formerly

National Direct Student Loan), Auxiliary Loans to Assist Students (as

in effect before October 17, 1986), PLUS, SLS, Health Professions

Student Loan (HPSL), and the Higher Education Assistance Loan (HEAL)

programs.

On March 16, 1994, the Secretary published a notice of proposed

rulemaking (NPRM) for the FFEL program in the Federal Register (59 FR

12484). Those proposed regulations were developed in compliance with

section 492 of the 1992 Amendments (Pub. L. 102-325), mandating that

the regulations be submitted to a negotiated rulemaking process.

Regional meetings were held during September 1992 to obtain public

involvement in the development of the proposed regulations and a

negotiated rulemaking process was conducted during January and February

1993. The NPRM published on March 16, 1994 provided an indepth

discussion of those areas where the negotiators reached a consensus as

reflected in those regulations.

These regulations improve the efficiency of the Federal student aid

programs, and, by so doing, improve their capacity to enhance

opportunities for postsecondary education. Encouraging students to

graduate from high school and to pursue high quality postsecondary

education are important elements of the National Education Goals. The

student aid programs also enable current and future workers to have the

opportunity to acquire both basic and technologically advanced skills

needed for today's and tomorrow's workplace. They provide the financial

means for an increasing number of Americans to receive an education

that will prepare them to think critically, communicate effectively,

and solve problems efficiently, as called for in the National Education

Goals.

Substantive Revisions to the Notice of Proposed Rulemaking

Subpart B--General Provisions

Section 682.200 Definitions

The Secretary has revised the definition of ``disposable

income'' to exclude: (1) child support or alimony payments that are

made under a court order or in accordance with a written legally

enforceable agreement and (2) the amounts withheld under wage

garnishment.

The Secretary has revised the definition of ``estimated

financial assistance'' to exclude the amount of expected Federal

Perkins loan or Federal Work-study aid if the borrower did not apply

for those funds.

The Secretary has revised the definition of ``repayment

period'' as it applies to the SLS Program to reflect the borrower's

option to delay repayment for a period consistent with the grace period

in the Stafford Loan Program.

The Secretary has revised the definition of ``satisfactory

repayment arrangement'' to provide that for purposes of consolidating a

defaulted loan, the borrower will be required to make three consecutive

reasonable and affordable full monthly voluntary payments rather than

six as provided in the NPRM. The definition has been also revised to

specify that an on-time payment is one received by a guaranty agency or

its agent within 15 days of the scheduled due date.

Section 682.204 Maximum Loan Amounts

The Secretary has revised the regulations to reflect the

changes to the proration of loan amounts made by the 1993 Technical

Amendments (Pub. L. 103-208).

Section 682.207 Due Diligence in Disbursing a Loan

The Secretary has revised the regulations to permit

lenders to disburse loans proceeds by use of a ``master check'' for a

number of borrowers in addition to an individual check or Electronic

Funds Transfer for each borrower.

Subpart D--Administration of the Federal Family Education Loan Programs

by a Guaranty Agency

Section 682.401 Basic Program Agreement

The Secretary has revised the regulations to delete the

proposed regulations reflecting limitation of lender-of-last-resort

(LLR) services in light of the deletion of these requirements by OBRA

(Pub. L. 103-66).

Section 682.405 Loan Rehabilitation Agreement

The Secretary has revised the regulations to allow the

guaranty agency to determine if the sale of a loan to a lender is

practicable.

The Secretary has revised the regulations to require

guaranty agencies to inform borrowers of the consequences of loan

rehabilitation.

Section 682.409 Mandatory Assignment by Guaranty Agencies of Defaulted

Loans to the Secretary

The Secretary has revised the regulations to require the

immediate assignment to the Department of loans held by a guaranty

agency if the Secretary deems it necessary to protect the Federal

fiscal interest, which includes ensuring an orderly transition from the

FFEL program to the Federal Direct Student Loan (FDSL) Program and

requiring the collection of unpaid loans owed by Federal employees by

Federal salary offset.

Section 682.414 Records, Reports, and Inspection Requirements for

Guaranty Agency Programs

The Secretary has revised the regulations to require a

lender to maintain a copy of the report of the required annual

independent audit for not less than five years after the report is

issued.

Analysis of Comments and Changes

In response to the Secretary's invitation in the NPRM, 71 parties

submitted comments on the proposed regulations. An analysis of the

comments and the changes in the regulations since publication of the

NPRM follows. Substantive issues and significant technical changes are

discussed under the section of the regulations to which they pertain.

Numerous comments were received to the effect that the proposed

regulations did not reflect OBRA or the 1993 Technical Amendments

changes and suggested that the Secretary publish a revised notice of

proposed rulemaking (NPRM) indicating which sections were superseded by

subsequent changes in law. Other than those provisions that are self-

implementing and are reflected in this package, the Secretary will

issue regulations to implement most substantive provisions from OBRA

and the 1993 Technical Amendments in a separate rulemaking package.

The Secretary also notes that technical corrections to the

regulations governing the FFEL Program were published in the Federal

Register on May 17, 1994 (59 FR 25750). Some comments made on the NPRM

are addressed by those corrections.

Section 682.100 The Federal Family Education Loan Programs

Section 682.100(a)(2)

Comments: Several commenters suggested that the regulations be

revised to reflect the elimination of the SLS program by OBRA.

Discussion: As the commenters noted, OBRA amended the HEA to end

the SLS program effective July 1, 1994. However, the Secretary does not

agree with the commenters that references to that program should be

removed from these regulations. SLS loans will remain outstanding for

many years after the program ends and the regulations need to reflect

the requirements relating to those loans. However, the Secretary

revises the regulations to make reference to the SLS program as in

effect prior to July 1, 1994.

Changes: The regulations have been revised to refer to the SLS

Program as in effect prior to July 1, 1994.

Section 682.100(a)(4)

Comments: Commenters suggested that the Secretary delete the

reference to parent PLUS loans made on or after October 17, 1986

because the statutory use of this term was ended by the 1993 Technical

Amendments. The commenters also suggested that the reference to a

requirement that a borrower must consolidate at least $7500 in eligible

student loans in the Consolidation Loan Program be deleted to reflect

the elimination of this requirement by OBRA. The commenters noted that

this change needs to be reflected in other sections of the regulations.

Discussion: The Secretary agrees that it is appropriate to reflect

these statutory changes. The reference to parent PLUS loans made on or

after October 17, 1986 was deleted in the technical corrections

package.

Changes: The regulations have been revised to reflect the

commenters' recommendations.

Section 682.102 Obtaining and Repaying a Loan

Section 682.102(e)(1)

Comments: A commenter suggested that the regulations imply that all

FFEL debt is forgiven for borrowers in certain areas of teaching or

nursing professions or community service.

Discussion: The Secretary agrees that the regulations could be

interpreted to indicate that the borrower's entire obligation to repay

a debt may be forgiven for borrowers performing certain public service.

However, section 428J of the HEA only authorizes the Secretary to repay

limited portions of certain Federal Stafford loan obligations for

individuals who enter certain specified teaching and nursing

professions or perform certain other national and community service.

Moreover, the loan forgiveness program is a demonstration program which

is not currently funded.

Changes: The regulations have been revised to reflect the

limitation on loan forgiveness for public service. The Secretary notes

that regulations reflecting this loan forgiveness demonstration program

are being published separately.

Section 682.200 Definitions

Co-Maker

Comments: A commenter noted that there is an understanding

throughout the FFEL industry that the Department is considering

deleting references to ``co-maker'' and replacing that term with the

term ``endorser.''

Discussion: The terms ``endorser'' and ``co-maker'' are not

synonymous and reflect different legal obligations. The Secretary will

not be deleting the reference to co-maker, since it is a term used in

the Consolidation Loan Program. ``Endorser'' is the term used in the

Federal PLUS Program for borrowers with adverse credit.

Changes: None.

Disposable Income

Comments: Some commenters suggested that in the definition of

``disposable income'' the reference to ``any amounts required by law to

be withheld'' was unclear and recommended further clarification. The

commenters noted, for example, that child support payments would

qualify under this definition if the payments were made under a divorce

settlement rather than a court order. The commenters believed that the

Department should not treat borrowers who are subject to garnishment

for private debts more favorably than borrowers who are making payments

without the need for court intervention.

Discussion: The Secretary clarifies that the definition of

``disposable income'' is that part of a borrower's compensation from an

employer and other income from any source that remains after the

deduction of amounts required by law to be withheld or any child

support or alimony payments that are made under a court order or in

accordance with a legally enforceable written agreement. The Secretary

has also revised the definition to exclude payments made under a wage

garnishment order.

Changes: The definition of ``disposable income'' has been revised

to clarify those payments that may be deducted from the borrower's

compensation.

Estimated Financial Assistance

Comments: Some commenters expressed the same opinion raised during

the negotiations that requiring aid officers to certify the student's

estimated eligibility for the Federal Perkins loan or Federal Work-

Study program regardless of whether the student applies for the aid is

not reasonable. Some commenters believed that it is unjust to penalize

a student who declines campus-based awards and that it is inappropriate

to have the financial aid administrator determine what is an

``acceptable reason'' for declining aid.

Discussion: After further consideration of the commenter's views,

the Secretary agrees that financial aid officers should not be required

to certify estimated eligibility for other aid that the student does

not apply for or consider as estimated financial assistance aid offered

but declined by the student. The Secretary believes that students and

their families should have discretion in those areas not prescribed by

law and that aid administrators should not be placed in the position of

evaluating the merits of a student's reason for declining an award. The

Secretary notes that this position is consistent with Federal Direct

Student Loan (FDSL) Program.

Changes: The regulations have been revised to delete reference to

``whether or not the student applied'' under paragraph (1)(vii) and

paragraph (2) has been added to delete the reference to the declining

aid for an acceptable reason.

Nonsubsidized Stafford Loan

Comments: A commenter recommended that the definition be revised to

reflect that those loans are not eligible for special allowance under

Sec. 682.302. The commenter suggested that confusion exists between the

terms ``unsubsidized Stafford Loan'' and ``nonsubsidized Stafford

Loan'' and the revision would clarify the difference.

Discussion: The Secretary agrees with the commenter's concern that

the regulations need to reflect a clear distinction between the two

programs and has revised the regulations to clarify that a

nonsubsidized loan does not qualify for special allowance payments.

Changes: The regulations have been revised to reflect the comment.

Repayment Period

Comments: Some commenters stated that they understood that the

Secretary had agreed during the negotiated rulemaking process to permit

a 13-year repayment schedule to be established for a borrower who

chooses to repay a loan under an income-sensitive repayment schedule.

The commenters also suggested that the definition be revised to

incorporate the 10-year repayment requirement for variable rate

interest loans. The commenters suggested that the 10-year repayment

period be extended in the case of an Unsubsidized Stafford Loan.

The commenters also pointed out that during negotiated rulemaking,

the Department agreed that in the case of the PLUS and SLS loans with a

variable rate, the lender could use the rate at the time the loan

entered repayment for purposes of establishing the initial repayment

period.

Discussion: During the negotiations the Secretary repeatedly made

it clear that he had no authority to extend the 10-year repayment

period provided by statute. The Secretary did agree to authorize a

three-year forbearance period in the case of an income-sensitive

repayment schedule and agreed to allow forbearance for a period of up

to one year in the case of a variable interest rate loan or graduated

repayment schedule.

The Secretary noted that these extensions have the practical effect

of extending the repayment period to eleven or thirteen years. The

Secretary is developing final regulations to the NPRM published on

March 24, 1994 that addresses extending the period of forbearance in

cases where the repayment schedule causes the extension of the maximum

repayment term of the loan.

The Secretary agrees with the commenters that a lender should use

the variable interest rate at the time the loan entered repayment for

purposes of establishing the initial repayment period. If the repayment

schedule leads to balloon payments or increased payments, and the

borrower is unable to make those payments, the lender may grant

forbearance, which is excluded from the 10-year period.

Changes: None.

Comments: A few commenters suggested that the Secretary revise the

definition of repayment period to include a cross-reference to

Sec. 682.209(d), which requires that the calculation of the repayment

period on the loans included in a PLUS or SLS combined repayment

schedule be based on the date entered repayment of the most recent

included loan.

Discussion: The Secretary does not agree that there should be a

cross-reference to Sec. 682.209(d). The definition of repayment

reflects statutory requirements. The provisions in Sec. 682.209(d)

govern specific servicing adjustments necessary in a combined repayment

situation and do not modify the basic statutory definition.

Changes: None.

Comments: Some commenters suggested that the definition of

repayment period for SLS be revised to incorporate the borrower's

option to delay repayment for a period consistent with the grace period

in the Stafford Loan Program. The commenters noted that it should be

clear that the delay in the repayment of an SLS is not a period of

deferment or forbearance and, as such, special documentation is not

required. The commenters also suggested that, since Sec. 682.202(c)

permits capitalization during grace periods if provided for in the

promissory note (and the addendum and common applications provided for

this capitalization), the Secretary should clarify that the lender may

capitalize interest during this period.

Discussion: The Secretary agrees with the commenters.

Changes: The Secretary has revised the definition of repayment

period to reflect the borrower's option in the SLS program to delay

repayment for a period consistent with the grace period in the Stafford

Loan Program. This change is consistent with the change made in

Sec. 682.102(e)(3) by the technical corrections. The regulations have

also been revised to clarify that the lender may capitalize interest

during this period.

Satisfactory Repayment Arrangements

Comments: While a number of commenters supported a uniform standard

for determining ``satisfactory repayment arrangements'' for defaulted

borrowers, many commenters objected to the use of the proposed uniform

standard for all purposes, including reinstatement of Title IV

eligibility for defaulted borrowers, rehabilitation of defaulted

student loans, and consolidation of defaulted student loans. The

commenters believed that use of the proposed standardized definition to

qualify a borrower for rehabilitation and consolidation is not in the

FFEL Program's best interest. Although the commenters supported a

standard definition of the term ``satisfactory repayment

arrangements'', they did not view the proposed definition as adequate.

Commenters believed that it did not adequately recognize the increase

in payments once the loan has been rehabilitated or consolidated and

that it did not provide for more lenient treatment based on the

borrower's individual circumstances.

Discussion: The Secretary notes that for purposes of rehabilitation

and reinstatement of borrower eligibility, the statutory language does

not provide flexibility in establishing the number of payments to

regain eligibility or rehabilitate a defaulted loan. In regard to

Consolidation loans, the 1993 Technical Amendments amended section 428C

of the HEA to refer to ``arrangements satisfactory to the holder.'' The

Secretary does not believe that this language was intended to conflict

with the statutory requirement in section 432 of the HEA that common

procedures be established or the need to ensure that similarly situated

borrowers be treated fairly. In light of these considerations and the

other comments received on this provision, the Secretary has determined

that three consecutive monthly payments will be required for a borrower

to consolidate a defaulted loan. The Secretary believes the making of

three consecutive monthly payments would allow a borrower to initiate

loan consolidation and add the defaulted loan to the consolidation loan

within the 180-day provision provided under section 428C(a)(3)(b)(II)

of the HEA.

Changes: The definition has been revised to distinguish the monthly

payments required to establish eligibility for rehabilitating,

consolidating or reinstating a defaulted loan.

Comments: Some commenters suggested that defining ``on-time'' to be

making a payment within 15 days of the scheduled due date is a new

condition that could not have been anticipated by guarantors, servicers

and lenders making good faith efforts to program their systems to

handle loan rehabilitation. Some commenters suggested that ``on-time''

be revised to mean a payment made within the calendar month. Other

commenters suggested that ``on-time'' be revised to be a payment

received by the guaranty agency or its agent within 15 days. The

commenters suggested that a guaranty agency is aware of the date on

which payments are received. Using the term ``made'' could be

interpreted to mean the date on which the check was issued by the

borrower, or the post-mark date, etc.

Discussion: The Secretary believes that it is critically important

for borrowers who have previously defaulted and who are entering into

satisfactory repayment arrangements with a guaranty agency to establish

a pattern of monthly payments that are made timely. For this reason,

the Secretary does not agree that an ``on-time'' payment should be one

that is made anytime during the calendar month. The Secretary also

notes that the kind of latitude provided by a payment deadline that is

anytime within the calendar month will not be available to the borrower

if the loan is rehabilitated subsequently and is then serviced by a

lender or lender servicer. The Secretary also believes there is

sufficient time for guaranty agencies to reprogram their systems prior

to the July 1, 1995 effective date of these regulations. The Secretary

agrees with the commenters who suggest that the on-time standard should

be based on when payments are ``received'' rather than ``made'' because

a guaranty agency or its agency is aware of this date and the word

``made'' is open to several different interpretations.

Changes: The definition has been revised to read that an on-time

payment is one that is received by the guaranty agency or its agent

within 15 days of the scheduled due date.

Comments: Some commenters suggested that the addition of a

definition of ``reasonable and affordable'' would impact the collection

of defaulted loans. The commenters suggested that, based upon the

definition provided, each time a guaranty agency changed the monthly

payment amount the agency would have to go through the process of

determining what is reasonable and affordable. The commenters further

suggested that a guaranty agency's collection agents or attorneys will

also be subject to conducting the same review whenever they attempt to

reach a repayment arrangement.

Discussion: The Secretary believes that this definition will not

have an impact on the collection of defaulted loans. This provision

applies to voluntary payments the borrower is making after the borrower

specifically initiates voluntary payment to reinstate eligibility,

rehabilitate, or consolidate a defaulted loan. These requirements do

not relate to other routine changes the guaranty agency makes to

monthly payment amounts.

Changes: None.

Comments: Commenters suggested that borrowers, whose loans are non-

dischargeable and who have not filed a hardship petition, should be

allowed to have their Chapter 12 or 13 plan payments count toward

regaining eligibility for FFEL loans. The commenters suggested that

these borrowers are not attempting to have the loan discharged and, as

such, are making voluntary payments.

Discussion: The Secretary does not agree with the commenters. The

Secretary believes that if a defaulted loan has been included in a

bankruptcy petition, then payments received under a court mandated

bankruptcy plan are not voluntary payments as required for this

purpose.

Changes: None.

Write-Off

Comments: Some commenters expressed concern that the definition of

``write-off'' was unclear as to which applicable standards the

definition incorporates. Some commenters suggested that the

``applicable standards'' could be easily read to include the closed

school/false certification provision.

Discussion: During negotiations, the Secretary agreed with certain

negotiators that a uniform standard for ``write-off'' was desirable for

guaranty agencies to use in determining what constitutes a ``write-

off'' in determining whether a borrower has an adverse credit history.

The applicable standards referenced in the definition refers to the

Write-off and Compromise Procedures which the Department of Education

is now developing in consultation with the Department of Treasury, in

accordance with the Treasury financial manual and OMB A-129. The

Secretary does not consider a loan that has been discharged under

section 437(c) of the Act (language in the preamble incorrectly

referred to 437(b)) to be considered a write-off nor does the Secretary

intend to require borrowers to reaffirm those loans to receive

additional aid under the FFEL program.

Changes: None.

Section 682.201 Eligible Borrowers

Section 682.201(b)

Comments: A few commenters suggested that the term ``endorser'' as

used in the NPRM implies that an endorser on a PLUS loan application

must be the other parent of the student for whom the loan is made.

These commenters pointed out that the Secretary has issued policy

guidance for the FFEL Program that would permit a creditworthy

nonparent to be an endorser on the Federal PLUS application of a non-

creditworthy parent borrower and that this would be in keeping with the

provisions of the Federal Direct Loan Program.

Discussion: The Secretary does not believe that the term

``endorser'' suggests such a restriction and believes that it is

unnecessary to reflect this guidance in the regulations.

Changes: None.

Section 682.201(b)(7)

Comments: Several commenters expressed a concern that lenders be

permitted to exercise ``professional judgment'' in determining whether

to make a Federal PLUS loan in spite of an initial finding of adverse

credit. They stated that the lender should have the option of using

this ``professional judgment'' to document the existence of extenuating

circumstances. They specifically expressed concern that the NPRM, as

written, restricted valid documentation of extenuating circumstances to

a new credit report, a statement from the creditor, or a statement from

the borrower in the event of a debt less than $500.

Discussion: These commenters were addressing two different but

related issues in their comments. The first issue addresses lender

flexibility in determining whether to make a loan when the initial

credit report includes indicators of adverse credit. The second issue

relates to the documentation needed by a lender when making a

determination that extenuating circumstances exist and determining to

make the PLUS loan based on that determination. The NPRM, as written,

states in Sec. 682.201(b)(7)(iii) that ``Unless the lender determines

that extenuating circumstances existed, the lender must consider each

applicant to have an adverse credit history * * *.'' This provision

specifically gives the lender the flexibility to determine that some

cases involve extenuating circumstances that would provide a legitimate

criterion for PLUS loan approval. The NPRM further states that the

lender must retain documentation demonstrating its basis for

determining that extenuating circumstances existed and that the

documentation may include an updated credit report, a statement from

the creditor that the borrower has made satisfactory arrangements to

repay the debt, or a satisfactory statement from the borrower

explaining any delinquencies with outstanding balances of less than

$500. The use of the word ``may'' indicates that there could be other

documentation that the lender would deem sufficient to override the

adverse credit determination.

Changes: The Secretary has amended the language in

Sec. 682.201(b)(7)(vi) of the regulations to include the phrase ``but

is not limited to'' to the list of documentation to clarify that the

list is not all-inclusive.

Comments: Some commenters believed that the definition of adverse

credit is too restrictive. The commenters believed that allowing one

account that is 90 days past due to prohibit borrowing when the parent

may have ten other accounts that are current is not a true indication

of the borrower's payment history. The commenters recommended that the

credit history have no more than an average of 30-day delinquency on

all debts.

Discussion: The Department views the averaging of past-due accounts

to be more burdensome than the 90-day standard proposed in the

regulations. Further, it is unnecessary given the discretion available

to a lender to apply the extenuating circumstances criterion.

Changes: None.

Comments: Several commenters stated that lenders should be given

the right to restrict the amount a parent borrows if the parent does

not have the capacity to repay the loan. This is especially significant

since Congress removed the cap on PLUS loans.

Discussion: This issue was discussed in the preamble to the NPRM.

While the statute does not include the ability to repay a PLUS loan as

an eligibility criterion, a lender is not prohibited from maintaining a

lending policy that would examine parental ability to repay in

determining whether to make a loan. However, once the lender has

decided to make a loan, the lender has no authority to reduce the

statutory limit provided under the PLUS program.

Changes: None.

Comments: A few commenters expressed concern about confusion

resulting from slightly different wording in Dear Colleague Letter 93-

L-159, dated September 1993, and the NPRM regarding interpretation of

the wording in the proposed regulation that ``* * * the applicant is

considered 90 or more days delinquent on the repayment of a debt.'' The

DCL indicated that one criterion for having adverse credit is that the

applicant is considered 90 days or more delinquent on the repayment of

a debt ``on the day of the lender's examination of the credit report.''

This was interpreted by some commenters to mean that the lender must

extrapolate delinquency based on the date of the credit report and the

date on which the lender examined that report.

Discussion: It was the Secretary's intention in the Dear Colleague

Letter that the lender would consider the applicant as being 90 days or

more delinquent on the repayment of a debt only if the applicant was

reported 90 days delinquent on the credit report being reviewed. The

regulations are consistent with this approach.

Changes: None.

Comments: Commenters expressed concern that there was no timeframe

in the NPRM indicating that the credit bureau report used in

determining adverse credit history must be current and accurate and not

outdated.

Discussion: In an attempt to give the lender greater flexibility,

the Secretary had not included a reference to a specific timeframe for

the credit report in the regulations. However, in DCL 93-L-159 the

Department stated that the credit report must be secured within a

timeframe that would ensure the most accurate, current representation

of the borrower's credit history before the first day of the period of

enrollment for which the loan was intended.

Changes: Since the language in the DCL reflects the Secretary's

position on the timing of securing the credit report, that language has

been added to the final regulations.

Comments: One commenter indicated that the ``90 days or more

delinquent on any debt'' requirement did not make any allowance for

disputed debts with a credit bureau that is still investigating the

dispute. This same commenter also found the term ``default

determination'' too vague and undefined.

Discussion: The Secretary believes that the lender's option of

applying the extenuating circumstances criterion would permit the

lender, based on its examination of supporting documentation presented

by the borrower, to override a determination of adverse credit in the

case of a legitimately disputed debt that was not resolved at the time

of the credit report.

The commenter correctly pointed out that while default has been

defined for purposes of the FFEL Program, its definition could vary

with regard to other debts. It is specifically for this reason that the

Secretary has not attempted to define, for purposes of these

regulations, the term non-Title IV debt.

Changes: None.

Section 682.201(c)

Comments: Several commenters recommended that the Secretary amend

this section to reflect the changes made to the Consolidation Loan

Program by OBRA and 1993 Technical Amendments. The commenters

specifically noted that OBRA deleted the requirement that the borrower

must consolidate at least $7,500 in eligible student loans. The

commenters also noted that the 1993 Technical Amendments modified the

requirement that a defaulted borrower who has made satisfactory

repayment arrangements may be eligible to borrow under the

Consolidation Loan Program.

Discussion: The Secretary agrees that these regulations should

reflect the self-implementing statutory changes made to the

Consolidation Loan Program.

Changes: The regulations have been revised to incorporate the self-

implementing statutory changes.

Section 682.204 Maximum Loan Amounts

Comments: Many commenters recommended that the annual loan limits

be revised to include changes made to the proration requirements by the

1993 Technical Amendments.

Discussion: The Secretary agrees with the commenters that the

regulations should reflect the new proration requirements.

Changes: The regulations have been revised to incorporate the new

loan proration requirements. The Secretary has also revised

Sec. 682.603(f)(3) to reflect the formula to be used in certifying a

Stafford or SLS loan amounts subject to proration.

Comments: Some commenters recommended that the regulations should

reflect the loan limits for the Unsubsidized Stafford Loan Program.

Discussion: The Secretary agrees with the commenters.

Changes: Section 682.204 (c), (d) and (e) incorporates the loan

limits for the Unsubsidized Stafford Loan Program.

Section 682.207 Due Diligence in Disbursing a Loan

Section 682.207(b)(1)(v)(B)(1)

Comments: Some commenters suggested that the regulations be revised

to specifically allow for the delivery of a lump sum or master check

from a lender to a school that can be placed in an account of the

school, as with electronic funds transfer, and credited to an

individual student's account.

Discussion: The Secretary agrees that the regulations should allow

for delivery of loan proceeds by means of a lump sum check. This change

recognizes the acceptance by the Department of the ``master check''

concept as provided in earlier guidance.

Changes: The regulations have been revised to permit the

disbursement of loan proceeds by ``master check'' for a number of

borrowers in addition to an individual check for each borrower. The

definition of ``disbursement'' has also been revised to include the

transfer of loan proceeds by a master check that represents loan

amounts for more than one borrower.

Comments: A commenter suggested that the Secretary expand the

regulations to provide that a student enrolled in a foreign school have

the option of having the loan proceeds delivered to the student or to

the foreign school. The commenter suggested that the regulations apply

to students studying abroad for credit at the home school and appear to

exclude students enrolled in a foreign school who are not studying for

credit at the home school.

Discussion: The Secretary agrees with the commenter that the

proposed regulations did not provide students attending eligible

foreign schools the option of receiving the loan proceeds directly or

having the funds delivered to the school. The Secretary recognizes that

section 428(b)(1)(N) of the HEA specifically provides borrowers in this

circumstance this option.

Changes: Section 682.207(b)(1)(v)(D) has been added to provide the

option to borrowers attending an eligible foreign school but who are

not studying for credit at a home school to have their loan proceeds

delivered to them directly or sent to the school.

Section 682.300 Payments of Interest Benefits on Stafford and

Consolidation Loans

Section 682.300 (a)

Comments: Several commenters noted that proposed Sec. 682.300(a)

should be revised to specify that the Secretary pays interest on

subsidized Stafford loans.

Discussion: The Secretary agrees that this change is necessary to

prevent confusion.

Changes: The regulations have been revised to specify ``subsidized

Stafford'' loans.

Section 682.300(c)

Comments: Several commenters suggested that the use of the word

``disbursement'' as it relates to the limitations on interest paid to a

lender prior to disbursement of a loan should be restricted to its more

``traditional'' use, i.e., issuing of loan proceeds by the lender,

rather than interpreting it to mean ``delivery'' of loan proceeds to

the borrower by the school.

Discussion: As noted in the preamble to the NPRM of March 16, 1994

(59 FR 12489), the Department's interpretation of Congress' use of the

word ``disbursement'' in this context and its applicability to the

interest limitation provision were thoroughly discussed during

negotiated rulemaking. However, as a result of discussions with the

negotiators, the Department agreed to proposed regulatory language that

would achieve the statutory intent while developing a schedule for

lender billing of interest on the more easily documented disbursement

date. The term ``disbursed'' as it is used in Sec. 682.300(c) refers to

the traditional use for issuance of funds by the lender. The interest

limitation provisions are then applied depending on whether the loan

proceeds are disbursed by the lender before or after the first day of

the period of enrollment for which the loan is intended.

Changes: None.

Section 682.301 Eligibility of Borrowers for Interest Benefits on

Stafford and Consolidation Loans

Section 682.301(a)(3)

Comments: Several commenters noted that Sec. 682.301(a)(3),

regarding the eligibility of Consolidation loan borrowers for interest

benefits during authorized deferment periods, should be revised to

reflect OBRA.

Discussion: OBRA changed section 428C(b)(4)(C)(i) of the HEA to

limit interest subsidized deferments to Consolidation loan borrowers

who receive Consolidation loans that discharge only subsidized Stafford

loans. This change was effective for Consolidation loans made based on

applications received by the lender on or after August 10, 1993.

Changes: The regulations have been revised to reflect the changes

made by OBRA.

Section 682.401 Basic Program Agreement

Section 682.401(b)(4)

Section 682.401(b)(4)(i)(B)

Comments: Some commenters expressed concern that borrowers not be

subjected to unreasonable and onerous demands for documentation for

purposes of reinstatement of borrower eligibility. The commenters

suggested that borrowers be allowed to provide documentation over the

phone or by facsimile.

Discussion: The Secretary does not believe that an agency can

assess a borrower's total financial circumstances to determine a

reasonable and affordable payment amount without examining

documentation from the borrower. The Secretary does not believe that

the documentation requirements contained in the regulations are

onerous. The Secretary believes that submission of a monthly budget

statement on a guaranty agency prepared form and some proof of current

income are minimal requirements. The Secretary believes that a

statement of the unpaid balance of all of a borrower's FFEL loans is

necessary only if the guaranty agency does not already have this

information. The Secretary has no objection to the borrower submitting

this documentation via facsimile technology.

Changes: None.

Comments: Many commenters were strongly opposed to the reference to

the $50 payment in proposed Sec. 682.401(b)(4)(i)(B) in regard to the

requirement that the guaranty agency document the borrower's file if

the borrower's reasonable and affordable payment is determined to be

less than $50. The commenters believe that agencies are using the

reference to $50 to justify their denial of payments of less than $50.

Discussion: The Secretary expects a guaranty agency to make a

determination of what constitutes a ``reasonable and affordable''

payment amount on a case-by-case basis after examining financial

information from the defaulted borrower who requests reinstatement of

eligibility for federal student financial assistance. The proposed rule

clearly stated that $50 may not be the required minimum payment for a

borrower if the agency determines that a smaller payment amount is

appropriate based on its examination of the borrower's total financial

circumstances. An agency is prohibited from establishing $50 or any

other amount as a required minimum threshold payment amount in lieu of

the appropriate reasonable and affordable payment based on the

borrower's total financial these circumstances. The reference to $50 in

the regulations is intended by the Secretary to be a documentation

standard for guaranty agencies. A guaranty agency is required to

document its determination of a borrower's reasonable and affordable

payment only if the payment is less than $50.

Changes: The regulations have been revised to clearly provide that

a guaranty agency must not establish a minimum payment amount of $50 if

the agency determines that a smaller payment amount is reasonable and

affordable based on the borrower's total financial circumstances.

Comments: Some commenters expressed concern that consideration of a

spouse's income in the determination of reasonable and affordable

payments may be in violation of the Federal Equal Credit Opportunity

Act. The commenters noted that the spouse is not liable for the other

spouse's individual debt and, therefore, consideration of the secondary

spouse's income may not be considered in determining a monthly

reasonable and affordable payment. The commenter suggested that

clarification must also be made in this section that disclosure of

child support and/or alimony payments is voluntary, consistent with the

Federal Equal Credit Opportunity Act.

Discussion: The Secretary believes that, for a borrower with

dependents, examining only the borrower's income and expenses may not

reveal the borrower's true financial circumstances. The Equal Credit

Opportunity Act relates to the application for credit. The

determination of reasonable and affordable payments in connection with

reinstatement of eligibility, rehabilitation or meeting conditions for

consolidation does not relate to the application for credit. See 12 CFR

Part 202.

Changes: None.

Section 682.401(b)(6)(i)

Comments: Some commenters supported the regulations that provide a

guaranty agency the authority to establish reasonable criteria for an

institution to participate in the guaranty agency's program. However,

many other commenters strongly objected to this provision. The

objecting commenters suggested that in Sec. 682.401(b)(6)(i), the

Secretary allows a guaranty agency to determine that an institution

does not satisfy the standards of administrative capability and

financial stability standards as defined in 34 CFR Part 668 and

believed that the Secretary is making the guaranty agencies enforcers

of the set of administrative capability and financial responsibility

standards. The commenters believed that this structure is entirely

outside of the statute and clearly ignores the program integrity triad

as mandated under the new Part H (Program Integrity) of the HEA with a

particular role for each part of the Triad. The commenters suggested

that if the Triad is to be successful, the responsibilities contained

in the statute must be clearly set forth in regulations with no

vagaries concerning responsibility. The commenters noted that in the

General Provisions NPRM, the Secretary proposed to provisionally

certify an institution that does not currently meet the standards of

administrative capability but is expected to meet those standards in a

reasonable period of time. The commenters suggested that under the

March 16, 1994 NPRM, a guaranty agency could deny participation to

these institutions, including an institution with a cohort default rate

of 20% or greater. The commenters believed that it is the Secretary's

role to ensure that institutions meet appropriate standards of

administrative capability and financial responsibility and believed the

Secretary does so by certifying institutions. The commenters suggested

that if the institution has been certified, the guaranty agency should

be required to rely on that certification unless and until the

Secretary uses his authority to revoke that certification. The

commenters suggested that a guaranty agency provided this improper

delegation of authority may well have an incentive to retaliate against

certain institutions as a result of their filing of appeals of their

cohort default rates. The commenters suggested that appeals of cohort

default rates, especially appeals alleging servicing error, may

directly or indirectly challenge the integrity of the guaranty agency

and may have the economic effect of removing certain loans from being

eligible for federal reinsurance. The commenters further suggested that

because of the clear possibility of conflict of interest, it is

irrational to allow guaranty agencies to effectively terminate the

participation of institutions in Title IV programs. The commenters

asserted that in contrast to a State Postsecondary Review Entity

(SPRE), an accreditation agency or the Department, a guaranty agency is

not an impartial adjudicator of these issues.

Discussion: The Secretary understands that a guaranty agency is not

a member of the Program Integrity Triad authorized under Part H of the

HEA and that the Triad has imposed a new management structure on the

oversight of schools participating in the Title IV student assistance

programs. However, the Secretary believes that the statute continues to

provide a guaranty agency with oversight authority for schools applying

to or continuing to participate in its guaranteed loan program and

disagrees that the regulations provide an improper delegation beyond

the scope of statutory authority. Section 428(b)(1)(V) provides

authority for the guaranty agency to require a participation agreement

between the agency and the school as a condition for the agency

guaranteeing loans for students attending the school. As part of that

process, the Secretary believes that a guaranty agency must be

permitted to establish standards that are consistent with the standards

of administrative capability and financial responsibility contained in

34 CFR 668 for a school's participation in its guaranteed loan program.

The Secretary believes that a guaranty agency should be allowed to

protect itself from schools that abuse the FFEL program. Generally, a

guaranty agency must assume that a school that the Secretary has found

to be eligible is eligible. However, because the agency's examination

of a school for participation in its program may take place a

significant period of time after the Secretary's examination of the

school for certification, the Secretary understands that the agency may

uncover information relevant to the school's administrative capability

and financial responsibility that it wishes the Secretary to consider

before signing a participation agreement with the school. Subject to

the Secretary's agreement that such information indicates the school's

failure to meet the standards of administrative capability and

financial responsibility contained in 34 CFR 668, the agency may

decline to establish a participation agreement with the school. The

Secretary believes this authority provided to a guaranty agency does

not intrude upon the statutory responsibilities of other members of the

Triad. The Secretary also notes that the guaranty agencies have long

had responsibility for reviewing schools and have specific statutory

authority in section 428(b)(1)(T)(ii)(I) for limiting, suspending, or

terminating a school from the FFEL program. The Secretary believes that

these regulations are consistent with the agency's statutory authority

and longstanding Department policy and regulation. Additionally, the

Secretary does not believe that this regulatory authority would provide

an agency with the opportunity to retaliate against a school as a

result of a school's appeal of its cohort default rate. Such an appeal

presumes that a school already participates in the agency's program.

The statute authorizes an agency to initiate an emergency action,

limitation, suspension or termination (LST) of an eligible institution,

but provides that the action must be undertaken pursuant to criteria,

rules, or regulations issued under the student loan insurance program

which are substantially the same as regulations issued by the

Secretary. Further, an emergency action or LST is subject to review by

the Secretary. Therefore, the Secretary does not believe that the

guaranty agency can use its authority to retaliate against a school as

the commenter suggests.

Changes: The Secretary has revised Sec. 682.401(b)(6)(i)(F) of the

regulations to clarify that a guaranty agency's determination that a

school does not satisfy the standards of administrative capability and

financial responsibility defined in 34 CFR 668 is subject to the

agreement of the Secretary.

Section 682.401(b)(6)(ii)

Comments: A number of commenters objected to the provision that

gives a guaranty agency the authority to limit the total number of

loans or the volume of loans made to students attending a particular

school, or to otherwise establish appropriate limitations on the

school's participation in the agency's program where the agency has

determined that a school does not satisfy the financial responsibility

and administrative capability standards. The commenters suggested that

this inappropriately places responsibility for evaluating a school's

administrative and financial responsibility in the hands of the

guaranty agency. Some commenters objected to applying this provision to

schools that are renewing an application to continue to participate.

Some commenters suggested that allowing guaranty agencies to limit the

participation of schools that seek to renew participation gives

guaranty agencies an easy way to retaliate against institutions that

appeal their cohort default rates or take other actions that challenge

the guaranty agency.

Discussion: Section 428(b)(1)(T) of the HEA authorizes a guaranty

agency to limit the total number of loans or the volume of loans to

students attending a particular eligible institution during any

academic year. The Secretary notes that there must be a legitimate

basis for the agency to impose such a limitation. The Secretary expects

a guaranty agency to maintain evidence of the school's questionable

administrative capability.

Changes: None.

Section 682.401(b)(6)(iii)

Comments: The commenters suggested that if a guaranty agency

limits, suspends, or terminates (LST) the participation of a school

that the Secretary should not extend the LST to all locations of the

school until the Department determines that the guaranty agency in fact

followed proper procedures, correctly interpreted the law and

regulations, and gave all due process rights to the institution.

Discussion: Section 428(b)(1)(T)(ii)(I) provides authority to a

guaranty agency to limit, suspend, terminate (or take emergency action

against) a school based on the Secretary's regulations or regulations

of the guaranty agency that are substantially the same as regulations

issued by the Secretary. The statute further directs the Secretary to

apply the limitation, suspension, or termination proceeding to all

locations of those schools unless the Secretary finds, within 30 days

of the guaranty agency's notification to the Secretary of the action,

that the action did not comply with the statute and regulations. To

make this finding, the Secretary reviews the guaranty agency's actions

under section 428(b)(1)(T)(ii) of the HEA before extending the LST to

all locations.

Changes: None.

Section 682.401(b)(16)

Comments: A few commenters suggested that the regulations be

revised to permit assignment of partially disbursed loans if the

lending institution closes or is terminated and the assignment is

necessary to be certain that undisbursed funds are delivered to the

student.

Discussion: Section 428G(g) of the HEA allows for sale and

transfers only when a loan is fully disbursed unless the sale will not

change the party to whom payments are to be made and the first

disbursement has been made.

Changes: None.

Section 682.401(b)(24)

Section 682.401(b)(24)(iv)

Comments: A few commenters suggested that the regulations be

revised to provide that the guaranty agency provide schools that

request information under this paragraph an appropriate number for

borrower inquiries if the assignee of a loan uses a lender servicer,

rather than the number of the lender. The commenters pointed out that

many lenders use servicers to address loan inquiries. The commenters

suggested that these lenders do not staff their offices to address

borrower inquiries, or maintain on-line access to borrower information.

Inclusion of the assignee's number will flood these offices with calls,

frustrating the intent of providing the borrower with loan information.

Discussion: The Secretary agrees with the commenters.

Changes: The regulations have been revised to include reference to

another appropriate number for borrower inquiries if the assignee uses

a lender servicer.

Section 682.401(b)(25)

Comments: Some commenters suggested that the designation as

exceptional servicer or lender is a significant event in the business

of the servicer or lender. The commenters suggested that the parties

should be aware of the progress of their application. Another commenter

suggested that the period of time for the guaranty agency to provide

the Secretary with any information regarding an eligible lender or

servicer applying for designation for exceptional performance should be

increased to 60 days.

Discussion: The Secretary notes that these comments relate to

Sec. 682.415 of the regulations included in a Notice of Proposed

Rulemaking published on April 20, 1994. The commenters' concerns will

be addressed in that package.

Changes: Section 682.401(b)(25) has been removed.

Section 682.401(c)

Comments: A number of commenters suggested that the Secretary

delete the LLR provisions from the regulations since some of these

provisions have been repealed by OBRA. Other commenters suggested that

the regulations should be revised to address the issues and changes

made by OBRA.

Discussion: The Secretary recognizes that OBRA repealed the

provisions providing guaranty agencies the authority to deny LLR

services to students attending certain categories of schools and has

removed these provisions from the regulations. In addition, the

Secretary has reflected certain other changes made by OBRA in these

regulations.

Changes: The regulations have been revised to delete the provisions

allowing limitations of LLR services. The Secretary has also

incorporated some changes made by OBRA affecting LLR services. Section

682.401(c) of the regulations has been revised to incorporate the new

requirements that: (1) The guaranty agency must respond to a student

within 60 days after the student submits an original complete

application; and (2) prohibit the agency from requiring a borrower to

obtain more than two rejections from eligible lenders.

Section 682.401(c)(8)

Comments: A commenter suggested that the provision be revised to

reflect that during the appeal process, for schools that have been

notified that LLR services will not be provided to the school's

students, the guaranty agency must provide LLR services to students

attending the school until the date on which the guarantor is notified

rather than until the date the Secretary rejects the appeal. The

commenter noted that the guaranty agency should be protected for LLR

loans made in the brief period between the date that the Secretary

rejects the appeal and the date that the guaranty agency is aware of

the rejection and ceases origination activities. The commenter

suggested that the regulations as currently written would appear to

cause these ``interim'' loans to be uninsured.

Discussion: The Secretary notes that, with the removal of the

provisions eliminating LLR services, the school's appeal process is no

longer applicable. Therefore, the Secretary has deleted this provision

from the regulations.

Changes: Section 682.401(c)(8) has been deleted.

Section 682.405 Loan Rehabilitation

Comments: Several commenters suggested that a defaulted borrower be

afforded only one opportunity to benefit from an agency's loan

rehabilitation program. The commenters believe that a borrower who

defaults again subsequent to rehabilitation is not likely to be a good

candidate for loan rehabilitation.

Discussion: The Secretary points out that pursuant to section

428F(a)(1)(A) of the HEA, a borrower may request to have a defaulted

loan rehabilitated and after the borrower has made 12 consecutive

monthly payments, the guaranty agency must, if practicable, sell the

loan to an eligible lender. Once a borrower's loan is rehabilitated,

the borrower is no longer considered to be in default on the loan and

regains eligibility for all program benefits. Section 428F(b) of the

HEA allows a borrower with one or more defaulted loans to regain

eligibility for Title IV student financial assistance after the

borrower has made six consecutive monthly payments. The Secretary notes

that section 428F(b) was amended by the 1993 Technical Amendments to

specifically permit borrowers to receive this benefit only once.

However, no such limitation was placed on the benefits of

rehabilitation. In determining whether rehabilitation is practicable, a

guaranty agency should determine whether a borrower who has made 12

consecutive monthly payments is a good candidate for loan

rehabilitation. A borrower's previous experience in the loan

rehabilitation program may be a factor considered by the guaranty

agency in making this assessment.

Changes: None.

Section 682.405(a)(1)

Comments: Some commenters suggested the regulations should be

revised to allow guaranty agencies to consider whether the borrower is

a good candidate for loan rehabilitation. The commenters noted that the

Dear Colleague Letter (GEN 92-91 dated October 1992) provides that ``In

determining whether a sale is practicable, a guaranty agency should

determine whether a borrower * * * is a good candidate for loan

rehabilitation.'' The commenters believed that the guaranty agency

should have the discretion to deny borrowers access to its

rehabilitation program if it believes existing circumstances so

warrant. The commenters suggested, for example, if there is a judgment

against a borrower, the original terms of the promissory note may have

been altered, and the original note may be nonexistent. The commenters

believed that it is overly burdensome, if not illegal, to rehabilitate

a loan if a judgment has been issued against the borrower.

Discussion: The Secretary interprets section 428F of the HEA to

require that the rehabilitation program must be available to all

defaulted borrowers even if a guaranty agency has previously been able

to secure payment from the borrower only through involuntary means

(e.g., through a court-ordered judgment, Internal Revenue Service tax

offset, or wage garnishment). The Secretary expects guaranty agencies

to provide, on an unsolicited basis, information on the loan

rehabilitation program to all defaulted borrowers. However, the

Secretary does not expect that payments made on the loan through

involuntary means be counted toward the borrower's required 12

consecutive payments for rehabilitation. The Secretary believes that

the defaulted borrower must initiate a voluntary series of payments for

this purpose. The Secretary understands, however, that even after the

required voluntary series of monthly reasonable and affordable

payments, the rehabilitation of the loan through its purchase by a

lender may not be possible in all cases. The Department expects

guaranty agencies to work diligently to identify lenders willing to

purchase these loans, thereby rehabilitating them. However, section

428F(a)(2) of the HEA states that the guaranty agency shall sell the

loan, if practicable [emphasis added]. The Secretary believes that the

agency has the authority in working with its repurchasing lenders to

determine if some borrowers are not good candidates for loan

rehabilitation because they continue to represent a high risk of

default once the loan is purchased. In those instances, the borrower's

loan would remain with the guaranty agency and the borrower would

continue to make payments on the loan to the agency.

Changes: Section 682.405(a)(1) of the regulations has been revised

to allow the agency to determine if the sale of a loan to another

lender is practicable for the purposes of loan rehabilitation.

Comments: Some commenters suggested that a loan should be

considered rehabilitated at such point that the borrower has met the

criteria over which the borrower has control, i.e., when the twelve

payments have been made. The commenters believed that the sale of the

loan to an eligible lender is an unrelated administrative task.

Discussion: The Secretary disagrees with the commenters. The

Secretary notes that the loan is still in default as long as it is with

the guaranty agency, even after the required series of payments are

made and the borrower is not eligible for all benefits of the program

(e.g., deferment). The Secretary notes that section 428F(a) of the HEA

provides that only after the loan has been repurchased by the lender

has it been effectively rehabilitated.

Changes: None.

Comments: Some commenters suggested that the proposed regulations

should be clarified to state that the borrower who rehabilitates a loan

regains full eligibility for deferments and forbearances, even if the

borrower previously received a deferment.

Discussion: The Secretary disagrees with the commenters that the

borrower should regain full eligibility for deferments. The Secretary

notes longstanding Department policy that the deferments with which a

maximum period is associated apply to the borrower and not to

individual sets of loans and that the borrower will only qualify for

the balance of deferment eligibility.

Changes: Section 682.405(a)(3) of the regulations has been revised

to provide that once the loan is rehabilitated, the borrower regains

all benefits of the program, including any remaining deferment

eligibility the borrower may have under the law from the date of the

rehabilitation.

Section 682.405(b)(1)

Comments: Some commenters suggested that the regulations be revised

to define ``voluntary payments'' to include payments made on behalf of

the borrower.

Discussion: The Secretary believes that the borrower must make a

good faith effort in making the required consecutive monthly payments

to qualify for loan rehabilitation. The Secretary does not believe that

payments made by parents or other individuals on behalf of the borrower

for purposes of rehabilitating a defaulted loan constitutes a good

faith effort on the part of the borrower.

Changes: None.

Comments: Some commenters noted that the regulations suggested that

a borrower may qualify for loan rehabilitation even if the guaranty

agency has obtained a judgment against the borrower for the defaulted

loan. The commenters suggested that since the original promissory note

is surrendered to the court when there is a judgment on the loan, it

would become very difficult to initiate legal proceedings against a

rehabilitated borrower who again defaulted on the rehabilitated loan.

Discussion: The Secretary shares the concerns raised by the

commenters. However, the Secretary also believes that a borrower should

not lose the opportunity to rehabilitate a defaulted loan due solely to

a judgment. Accordingly, the Secretary has modified the regulations to

require a borrower who wishes to rehabilitate a loan on which a

judgment has been entered to sign a new promissory note prior to the

sale of the loan to an eligible lender. This approach is necessary to

make sale of the loan practicable.

Changes: The Secretary has amended Sec. 682.405(a) to add a new

paragraph (4) to require a borrower against whom the agency has a

judgment to enter into a new promissory note.

Section 682.405(b)(1)(i)(A)

Comments: Some commenters suggested that the regulations should

allow for the inclusion of utilities and work-related expenses in the

listing of necessary expenses for the purpose of determining a

reasonable and affordable payment.

Discussion: The Secretary agrees with the commenters.

Changes: The regulations have been revised to include utilities and

work-related expenses.

Section 682.405(b)(1)(i)(C)(1)

Comments: Some commenters suggested that the regulations should be

revised to clarify that the borrower's financial status should be

determined by reviewing the most current information available,

particularly the most recent U.S. income tax return for documentation

of the borrower's current income.

Discussion: The Secretary agrees with the commenters.

Changes: The regulations have been revised to provide that the

borrower must provide the most recent U.S. income tax return.

Section 682.405(b)(1)(i)(C)(3)

Comments: A few commenters recommended that the unpaid balances on

all FFEL Program loans be considered when determining the monthly loan

amount that is reasonable and affordable, not just defaulted FFEL

loans.

Discussion: The Secretary agrees with the commenters.

Changes: Section 682.405(b)(1)(i)(C)(3) of the regulations has been

revised to provide that a guaranty agency shall consider unpaid

balances on all FFEL Program loans held by other holders when making a

determination of what constitutes a ``reasonable and affordable''

payment for loan rehabilitation or reinstatement of Title IV

eligibility.

Section 682.405(b)(1)(i)(C)(iv)

Comments: Some commenters suggested that a guaranty agency should

not be required to provide the borrower with a written statement

because the borrower may interpret such a statement as a new

obligation. The commenters stated that if the loan is rehabilitated,

the lender purchasing the rehabilitated loan will be required to

disclose new terms. The commenters further stated that if the borrower

has a written statement from the guaranty agency, but not from the

lender, the borrower may be able to claim that he or she has no legal

obligation to abide by the terms established by the rehabilitating

lender.

Discussion: The Secretary did not intend to require the guaranty

agency to disclose new repayment terms on the rehabilitation loan. The

Secretary agrees that it would be more appropriate for the disclosure

to be done by the purchasing lender. Rather, the Secretary merely

intended the guaranty agency to provide written confirmation of the

agency's determination of the borrower's reasonable and affordable

payment amount, the number of consecutive monthly payments that must be

made to qualify for consideration for loan rehabilitation, any

deadlines attached to those payments, and any factors the agency will

consider in determining whether the repurchase of the borrower's loan

is practicable.

Changes: Section 682.405(b)(1)(iv) of the regulations has been

revised to require the guaranty agency to provide a written statement

confirming the borrower's reasonable and affordable payment amount and

other conditions surrounding the loan rehabilitation.

Comments: Some commenters suggested that the guaranty agencies be

required to inform borrowers who enter into a renewed eligibility plan

of the possibility of loan rehabilitation after 12 months. The

commenters suggested that by doing so borrowers can make informed

decisions about whether exercising the option after 12 payments is to

their advantage.

Discussion: The Secretary agrees with the commenters that a

guaranty agency should be required to inform a borrower when entering

into an agreement to reinstate loan eligibility of the possibility of

loan rehabilitation after an additional six monthly payment amounts and

the potential consequences of loan rehabilitation. The Secretary

believes that a borrower should be provided sufficient information

about the circumstances and potential consequences of loan

rehabilitation to have an understanding of what is expected before

making the required 12 monthly payments. Borrowers should be aware of,

for example, that a potential increase in loan payment amounts may be

necessary once the loan is repurchased by the lender if the reasonable

and affordable monthly payment amount paid to the guaranty agency will

not provide for the borrower to repay the loan within the 10-year

maximum repayment period. The Secretary agrees that providing this

information will place the borrower in a position to make an informed

decision of whether or not to exercise his or her option for loan

rehabilitation.

Changes: The regulations have been revised to provide that guaranty

agencies must inform borrowers of the consequences of loan

rehabilitation after 12 months. Additionally, a new paragraph has been

added as Sec. 682.401(b)(4)(iv) to require guaranty agencies to provide

information to defaulted borrowers who made the required series of

monthly payments to reinstate Title IV eligibility of the possibility

of loan rehabilitation.

Section 682.406(a)(14)

Comments: A few commenters recommended that the regulations be

revised to reflect the 1993 Technical Amendments change that provides

that the guaranty agencies certify that diligent attempts of skip-

tracing have been made by the lender under Sec. 682.411 before

receiving reinsurance payments.

Some commenters suggested that the regulations should indicate that

the guaranty agency assures the Secretary that diligent attempts have

been made by the lender and the guaranty agency under Sec. 682.411 to

locate the borrower through the use of reasonable skip-tracing

techniques.

Discussion: Section 428(c)(2)(G) of the HEA, as changed by the 1993

Technical Amendments, provides that the guaranty agency may not receive

reinsurance payments unless it certifies that diligent attempts have

been made to locate the borrower through the use of reasonable skip-

tracing techniques. As pointed out in the preamble to the proposed

regulations, the Secretary believes that it is primarily a lender

responsibility to locate the borrower through the use of skip-tracing

techniques. However, the Secretary intends that diligent attempts must

be made by either the lender or the agency to locate the borrower. The

language of the regulations is intended to insure that if the lender

does not perform the required skip-tracing, the guaranty agency will be

responsible for doing so.

Changes: Section 682.406(a)(14) of the regulations has been revised

by using the word ``certifies'' rather than ``assures''.

Section 682.407

Comments: A few commenters pointed out that the language in

Sec. 682.407(f) incorrectly references ED Form 1189 for adjusting

improperly paid administrative cost allowance payments.

Discussion: The Secretary agrees with the commenters.

Changes: The regulations have been revised to reflect that the

adjustment is to be made on the ED Form 1130.

Section 682.409 Mandatory Assignment by Guaranty Agencies of Defaulted

Loans to the Secretary

Comments: One commenter asked if it is the intent of the Secretary

to only benefit borrowers who move from the FFEL program to the Federal

Direct Student Loan (FDSL) Program under this provision.

Discussion: Although the Secretary is authorized to require FFEL

loans to be assigned to the Secretary to affect an orderly transition

from the FFEL to the Federal Direct Loan Program, one of the primary

reasons for loan assignment is that the guaranty agency has been unable

to collect on a defaulted loan it holds and the Secretary believes that

the Department can more effectively collect on the loan. Loans assigned

to the Department under the authority specified in section 682.409 are

all defaulted FFEL loans held by guaranty agencies. These loans do not

include non-defaulted FFEL loans which a borrower has requested to be

consolidated under the Federal Direct Loan Consolidation Program. Until

a defaulted FFEL borrower resolves his default status with the holder

of the loan, either the guaranty agency prior to the assignment or the

Department following assignment, the borrower is not eligible for any

benefits under the FFEL or Federal Direct Loan Program. As a result,

the Secretary does not believe that the mandatory assignment process

benefits particular defaulted borrowers over others.

Changes: None.

Comments: One commenter asked what guidelines the Secretary would

choose to have loans assigned. Specifically, the commenter was

concerned that loan assignment might cause a guaranty agency to

experience financial instability.

Discussion: To the extent that the financial stability of a

guaranty agency is in the Federal fiscal interest, the Secretary may

choose, on a case-by-case basis, not to require the assignment of loans

if the assignment will jeopardize the agency's financial stability.

Changes: None.

Comments: One commenter requested clarification on how mandatory

assignment of FFEL loans relates to an orderly transition from the FFEL

Program to the FDSL Program.

Discussion: As noted by the commenter, section 428(c)(8) of the HEA

provides that the Secretary will require an agency to assign loans if

the Federal fiscal interest so requires. In addition, the statute deems

the orderly transition to the FDSL Program to be in the Federal fiscal

interest. The proposed regulations did not clearly reflect the

Secretary's discretion in this area. Accordingly, the Secretary has

revised the regulations to reflect the Secretary's statutory

discretion. The Secretary believes that the assignment of FFEL loans

will not impede the orderly transition to the FDSL Program. If it

appears to the Secretary that the orderly transition to the FDSL

Program is either impeded or facilitated by mandatory assignment, the

Secretary will exercise his authority to modify the assignment

criteria.

It is also the view of the Secretary that it is in the Federal

fiscal interest for the Federal government to collect defaulted student

loans owed by Federal employees unless the guaranty agency has obtained

a judgment against the Federal employee to collect by wage garnishment

15 percent or more of disposable pay as defined in 34 CFR Part 31.

Changes: The regulations have been changed to reflect the

Secretary's discretion.

Comments: One commenter indicated support for the criteria for

performance standards established in this section for mandatory

assignment of certain loans to the Secretary by a guaranty agency. The

commenter said the language in this section represents the efforts of

the community and the Secretary's staff in developing an equitable

criteria for the assignment of loans and that the criteria outlined in

this section best protect the Federal fiscal interest.

Discussion: The Secretary agrees with the commenter.

Changes: None.

Comments: Two commenters asked if this section should be revised to

exclude those agencies that are determined to qualify for Exceptional

Performer status.

Discussion: Designation as an Exceptional Performer means that a

guaranty agency has shown a high level of compliance with the

provisions of 34 CFR 682.410. That section of the regulations focuses

on the default collection process, not the results of the process.

Section 682.409 establishes standards that focus on outcomes as

expressed in fiscal year loan type recovery rates. The Secretary

believes that the collection of defaulted FFEL loans is important and

should be governed by both process and outcome requirements. The

Secretary does not believe that excusing guaranty agencies from

complying with outcome requirements because they have complied (even to

a high degree) with process requirements would adequately protect the

Federal fiscal interest.

Changes: None.

Comments: A commenter asked if these provisions would force

guaranty agencies to evaluate their entire preclaim and default

collection operations, in order to achieve the highest recovery rate.

Discussion: The Secretary agrees that guaranty agencies need to

evaluate their default prevention and default collection operations.

These regulations represent the initial attempt by the Secretary, in

consultation with the guaranty agencies, to establish default

collection performance standards. The Secretary believes that it is in

the Department's and the guaranty agencies' best interest to establish

default prevention performance standards as soon as practicable.

Changes: None.

Comments: A commenter observed that guaranty agencies will be

required to monitor their operations constantly, indicating that it

will be more difficult for an agency to continue producing recoveries

over the 80 percent standard required by the regulations. The commenter

noted that once the Secretary imposes additional assignment

requirements on agencies that fall below the 80 percent standard, this

provision will automatically increase the average recovery rate on

which the 80 percent is based.

Discussion: The Secretary agrees that guaranty agencies will have

to constantly monitor their operations to satisfy these standards. The

Secretary also expects that the assignment process based on recovery

rate standards will result in the gradual, steady increase in the

average recovery rate.

Changes: None.

Comments: A commenter observed that this section does not require

the Department to load and begin collection on defaulted loans assigned

to it within a specified time period. Collection activity could cease

for months while an account is being processed. The commenter noted

that it is in the Department's best interest to ensure that this gap in

collection activities is minimized by providing specific time periods

to begin the collection of new accounts.

Discussion: The Secretary agrees that it is desirable to load

assigned accounts quickly so that gaps in collection activity are

minimized. While these regulations do not control this process, the

Secretary intends to loan assigned accounts as quickly as possible.

Changes: None.

Section 682.409(a)(2)(i)

Comments: A commenter observed that participation in the IRS offset

program is required by the Department and recommended that offset

collections be included in calculating the recovery rate standards. The

commenter believed that this will help assure guarantor participation

in the IRS offset program to the maximum extent possible.

Discussion: The Secretary agrees with the commenter. However, the

Secretary notes that the regulations do not reflect the requirement

that guaranty agencies participate in the Federal Income Tax Refund

Offset program. The Secretary has modified the regulations to reflect

this requirement.

Changes: Section 682.409(a)(2)(i) has been revised to reference

collections by Federal Income Tax Refund Offset.

Section 682.409(a)(3)(i)(B)

Comments: A few commenters suggested that the Secretary amend the

appeals process for failure to meet performance standards. They asked

that the Secretary either permit agencies that have a large number of

borrowers making ``reasonable and affordable'' payments as a result of

the borrowers' financial circumstances to appeal on that basis or that

these loans be excluded entirely from the calculation.

Discussion: The Secretary agrees with the commenters that the

regulations should be revised to encourage compliance with the

provisions in Sec. 682.401(b)(4) and Sec. 682.405 requiring guaranty

agencies to provide certain borrowers with ``reasonable and

affordable'' payment plans. However, the Secretary believes that

excluding loans with ``reasonable and affordable'' payment plans from

the calculation would place an unnecessary reporting burden on the

guaranty agencies, as well as increase the costs that would be incurred

by the Department associated with collecting and auditing the data. The

Department will provide a guaranty agency with the opportunity to

demonstrate how ``reasonable and affordable'' payment arrangements have

affected its recovery rate. The Department will make a determination on

an acceptable agency recovery rate on an agency-by-agency basis. The

agency will be required to identify all borrower accounts for which

required reasonable and affordable payment amounts have impacted the

agency's collection recovery rate. The Department will examine a sample

of these accounts to determine how this should be assessed in

determining the agency's recovery rate.

Changes: The Secretary has revised Sec. 682.409(a)(3)(i)(B) to

provide that the Federal interest will be served if the agency

demonstrates that its compliance with Sec. 682.401(b)(4) and

Sec. 682.405 has reduced substantially its fiscal year loan type

recovery rate or rates.

Section 682.409(a)(3)(i)(C)(2)

Comments: A commenter suggested that as the paragraph is not

describing a mathematical derivation, the word ``categorized'' is more

appropriate.

Discussion: The Secretary agrees with the commenter.

Changes: Section 682.409(a)(3)(i)(C)(2) has been revised to replace

``divided'' with ``categorized.''

Section 682.409(c)(1)

Comments: A few commenters asked if Sec. 682.409(c)(1) needs to

specify the manner, information, and documentation necessary for

mandatory assignment.

Discussion: The Secretary considered expanding Sec. 682.409(c)(1)

to incorporate the manual assignment and computer tape assignment

procedures that are transmitted to the guaranty agencies each year by

mail. However, the Secretary believes that this informal notification

process has worked particularly well over the last two years, in part

because it has been accomplished without the burden presented by the

regulatory process. He believes that the current procedures have

provided for a flexible process that has been responsive to changing

guaranty agency and Departmental needs. Therefore, the Secretary has

decided not to expand these regulations to include operational

procedures associated with mandatory assignment.

Changes: None.

Section 682.410 Fiscal, Administrative, and Enforcement Requirements

Section 682.410 General

Comments: A few commenters noted that on-going negotiated

rulemaking sessions are addressing matters covered in this section of

the regulations. The commenters suggested that it would be

inappropriate for final rules to be issued in light of the negotiations

underway. Commenters recommended that the Department should propose

regulations for issues related to this section later through an NPRM

and final rules process devoted solely to these issues.

Discussion: The Secretary notes that these regulations are directly

related to the 1992 Amendments and were developed under the negotiated

rulemaking sessions required by the 1992 Amendments. The provisions of

the 1992 Amendments that were not changed by OBRA are reflected in

these final regulations. The Secretary intends to propose rules to

implement the provisions of OBRA related to guaranty agency reserves

soon after the conclusion of current negotiated rulemaking sessions on

this subject. In addition, the Secretary intends to have final

regulations implementing both the 1992 Amendments and OBRA go into

effect at the same time on July 1, 1995.

Changes: None.

Section 682.410(a)(1)(vii)

Comments: Commenters recommended that funds collected by the

guaranty agency, included under Sec. 682.410(a)(1)(vii) as reserve fund

assets, should include only funds collected on FFELP loans held by that

agency or FFELP loans for which the agency paid a claim.

Discussion: The Secretary agrees that clarification is necessary.

Changes: The final regulations have been revised to clarify that

only funds collected on FFELP loans on which a claim has been paid are

included in Sec. 682.410(a)(1)(vii).

Section 682.410(a)(3)

Comments: Commenters objected to Sec. 682.410(a)(3), Special rule

for use of certain reserve fund assets, as redundant and confusing.

Discussion: The Secretary agrees that Sec. 682.410(a)(3) is

unnecessary.

Changes: The language in Sec. 682.410(a)(3) has been simplified and

merged into Sec. 682.410(a)(2).

Section 682.410(a)(6)

Comments: A commenter urged that the Secretary consider provisions

for further review and due process in connection with the requirements

of Sec. 682.410(a)(6), minimum reserve fund level.

Discussion: Section 682.410(a)(6) simply states the statutory

requirements for minimum reserve levels. This paragraph specifies no

action by the Department requiring review or due process.

Changes: None.

Section 682.410(a)(7)

Comments: A commenter suggested that the calculation of the

guaranty agency ``Reserve fund level'' include receivables from ED and

exclude payables to ED. The commenter argued that acknowledgment of

those amounts is essential for an accurate determination of a

guarantor's financial status.

Discussion: The Secretary is interested in determining the amount

of assets in a guaranty agency's reserve fund at a point in time. The

Secretary acknowledges that the reserve fund level as defined in this

paragraph does not accurately reflect the overall financial condition

of the guaranty agency. However, the Secretary also believes that

including receivables from ED and deducting payables to ED would also

not result in an accurate calculation of the agency's financial

condition since agencies have receivables from and payables to parties

other than ED. The Secretary agrees that if an agency's reserve fund

level, calculated in accordance with this section, is less than the

minimum specified in Sec. 682.410(a)(6), the guaranty agency will be

provided with the opportunity to submit information concerning its

accounts payable and accounts receivable in extenuation of its reserve

level.

Changes: None.

Section 682.410(a)(8)(ii)(B)

Comments: A commenter recommended removing loan guarantees

transferred to another agency pursuant to a plan of the Secretary in

response to the insolvency of the agency as an exclusion from loan

guarantees transferred to another agency in Sec. 682.410(a)(8)(ii)(B).

Discussion: The Secretary agrees that the reference to those loans

should be removed from Sec. 682.410(a)(8)(ii)(B) because it is

duplicative of 34 CFR 682.410(a)(8)(i)(B) which already provides for

this exclusion.

Changes: Section 682.410(a)(8)(ii)(B) has been revised to delete

the reference to loans transferred because of insolvency.

Section 682.410(a)(8)(ii)(E)

Comments: Some commenters recommended that all loans for which a

claim has been paid be subtracted from the total loans guaranteed in

calculating loans outstanding in Sec. 682.410(a)(8), definition of

amount of loans outstanding. One commenter recommended subtracting from

the amount of loans for which a claim has been paid only those loans

for which claims were paid at the direction of the Secretary.

Discussion: The proposed rule would have subtracted loans for which

claims are paid under Sec. 682.412(e) on ineligible loans, under

Sec. 682.509(a)(1) because of school closing, or at the direction of

the Secretary, from total loans for which a claim has been paid. The

Secretary agrees that loans for which claims have been paid are not

outstanding.

Changes: The regulations have been revised to remove the three

exclusions.

Section 682.410(a)(8)

Comments: A commenter recommended adding to Sec. 682.410(a)(8),

amount of loans outstanding, a new paragraph (iii) to subtract the

principal amount of loans not disbursed because the loan guarantee was

partially canceled.

Discussion: Reporting requirements for Form 1130 provide detailed

definitions for the items listed in Sec. 682.410(a)(8). Partially

canceled loans are one of the categories reported under cancelled loan

guarantees and are therefore included in Sec. 682.410(a)(8)(ii)(A).

Changes: None.

Section 682.414 Records, Reports, and Inspection Requirements for

Guaranty Agency Programs

Comments: A commenter recommended that Sec. 682.414(a)(3)(ii)(K) be

revised to explicitly require lenders to retain copies of audit reports

for not less than five years after the report is issued. While

Sec. 682.414(a)(3)(ii)(K) implies that audits are covered under this

section because they are reports, the commenter suggested that the

section be revised explicitly to require that the audit reports be kept

on file.

Discussion: The Secretary agrees with the commenter that the

regulations should explicitly require a lender to retain a copy of its

annual audit report for not less than five years after the report is

issued.

Changes: Section 682.414(a)(3) has been revised to incorporate the

commenter's recommendation.

Section 682.511 Due Diligence in Collecting a Loan

Comments: A few commenters suggested that the regulations be

revised to reflect that joint borrowers may cancel a loan even if they

do not simultaneously satisfy the same cancellation criterion but the

loan would otherwise be ``cancellable''. The commenters cited the

example of a loan with joint borrowers where one borrower becomes

totally, permanently disabled and the other files for bankruptcy (with

the loan subject to discharge), both conditions under which a borrower

would normally be able to cancel a loan.

Discussion: The Secretary clarifies that a lender may file a claim

for reimbursement based on the fact that, at the time of the request

for discharge, joint borrowers both have a condition under which a

borrower would qualify to cancel a loan.

Changes: The regulations have been revised to reflect that a claim

may be filed based on each borrower satisfying the criteria.

Section 682.603 Certification by a Participating School in Connection

With a Loan Application

Section 682.603(h)

Comments: Several commenters suggested that the wording of

Sec. 682.603(h) could be made clearer by substituting ``earlier than

the 24th day of the student's period of enrollment'' for ``earlier than

7 days prior to the 31st day of the student's period of enrollment.''

Discussion: Paragraph (h) of Sec. 682.603 is meant to achieve, in

the case of new borrowers subject to delayed delivery of loan proceeds,

the appropriate interest limitation Congress intended in Sec. 682.300

using a schedule based on the date of disbursement by the lender. The

Secretary agrees that the suggested rewording would more clearly state

that requirement.

Changes: A change has been made to reflect that a school may not

request the disbursement of loan proceeds for a first time borrower who

has not previously borrowed a Stafford or SLS loan earlier than the

24th day of the student's period of enrollment.

Section 682.604 Processing the Borrower's Loan Proceeds and Counseling

Borrowers

Section 682.604(c)(3)

Comments: Some commenters suggested that the Secretary revise the

language to codify the Department's earlier guidance that eliminates

the separate borrower authorization statement for those students who

provide the authorization for electronic fund transfer disbursement on

the common loan application.

Discussion: The Secretary agrees that this provision does not apply

in those instances where the borrower has provided a separate

authorization for electronic fund transfer via the common loan

application.

Changes: The regulations have been revised to provide that the

school fulfills this requirement if the borrower has authorized the

electronic fund transfer on the common loan application.

Section 682.604(g)(2)(vi)

Comments: A commenter recommended that the language be revised to

reflect that when a borrower has obtained loans from multiple

guarantors, that the institution provide the required updated

information to all guarantors listed in the borrower's file.

Discussion: The Secretary agrees that updated information should be

provided to the guaranty agency or agencies within the specified time.

Changes: The regulations have been revised to incorporate the

commenter's recommendation.

Section 682.604(h)

Comments: A few commenters suggested that the overaward tolerance

for the FFEL program be consistent with the $200 overaward allowed in

the campus-based programs. Some commenters suggested that the statutory

silence on the issue of tolerance does not constitute a prohibition.

Discussion: There is no statutory basis for providing a $200

tolerance in the treatment of an FFEL program overaward. Congress has

provided specific statutory tolerances in the campus-based overaward

provisions and for limited purposes in the FFEL program in section

428G(d) of the HEA. Given these precedents, if Congress had intended to

provide for a general tolerance it would have included it in the

statute.

Changes: None.

Executive Order 12866

These final 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 final regulations are those

resulting from statutory requirements and those determined by the

Secretary to be necessary for administering this program effectively

and efficiently. Burdens specifically associated with information

collection requirements were identified and explained in the NPRM.

In assessing the potential costs and benefits--both quantitative

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

that the benefits of these regulations justify the costs.

The Secretary has also determined that this regulatory action does

not unduly interfere with State, local, and tribal governments in the

exercise of their governmental functions.

Waiver of Proposed Rulemaking

In addition to the changes made to part 682 based on public comment

on the notice of proposed rulemaking, the Secretary has revised the

regulations to include technical changes made by certain legislation,

as stated above.

It is the practice of the Secretary to offer interested parties the

opportunity to comment on proposed regulations in accordance with

section 431(b)(2)(A) of the General Education Provisions Act (20 U.S.C.

1232(b)(2)(A)) and the Administrative Procedure Act, 5 U.S.C. 553.

However, since these changes merely reflect statutory changes in the

regulations and do not establish substantive policy changes, public

comment could have no effect. Therefore, the Secretary has determined,

pursuant to 5 U.S.C. 553(b)(B), that public comment on these amendments

to the regulations is unnecessary and contrary to the public interest.

Assessment of Educational Impact

In the notice of proposed regulations, the Secretary requested

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.

Based on the response to the proposed rules and on its own review,

the Department has determined that the regulations in this document do

not 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.

(Catalog of Federal Domestic Assistance Number 84.032, Federal

Family Education Loan Program)

Dated: May 25, 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 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 682.100 is amended by revising paragraphs (a)(2), (a)(3)

and (a)(4) to read as follows:

Sec. 682.100 The Federal Family Education Loan programs.

(a)* * *

(2) The Federal Supplemental Loans for Students (SLS) Program, as

in effect for periods of enrollment beginning prior to July 1, 1994,

which encourages making loans to graduate, professional, independent

undergraduate, and certain dependent undergraduate students.

(3) The Federal PLUS (PLUS) Program, which encourages making loans

to parents of dependent undergraduate students. Before October 17,

1986, the PLUS Program also provided for making loans to graduate,

professional, and independent undergraduate students. Before July 1,

1993, the PLUS Program also provided for making loans to parents of

dependent graduate students.

(4) The Federal Consolidation Loan (Consolidation) Program, which

encourages making loans to borrowers for the purpose of consolidating

their repayment obligations, with respect to loans received while they

were students, under the Federal Insured Student Loan (FISL), Stafford

loan, SLS, ALAS (as in effect before October 17, 1986), PLUS, and

Perkins Loan programs, the Health Professions Student Loan (HPSL)

Program authorized by subpart II of Part A of Title VII of the Public

Health Services Act, and Health Education Assistance Loans (HEAL)

authorized by Subpart I of Part A of Title VII of the Health Services

Act.

* * * * *

3. Section 682.101 is amended by revising paragraph (c) to read as

follows:

Sec. 682.101 Participation in the FFEL programs.

* * * * *

(c) Students who meet certain requirements, including enrollment at

a participating school, may borrow under the Stafford Loan and, prior

to July 1, 1994, the SLS program. Parents of eligible dependent

undergraduate students may borrow under the PLUS Program. Borrowers

with outstanding Stafford, SLS, FISL, Perkins, HPSL, HEAL, ALAS, or

PLUS loans or married couples each of whom have eligible loans under

these programs may borrow under the Consolidation Loan Program.

* * * * *

4. Section 682.102 is amended by adding a new sentence at the end

of the second sentence in paragraph (d); and by adding a new sentence

at the end of paragraph (e)(1) to read as follows:

Sec. 682.102 Obtaining and repaying a loan.

* * * * *

(d) Consolidation loan application. * * * In the case of a married

couple seeking a Consolidation loan, only the holders for one of the

applicants must be contacted for consolidation.* * *

(e) Repaying a loan. (1) * * * The borrower's obligation to repay a

PLUS loan is cancelled if the student, on whose behalf the parent

borrowed, dies. The borrower's obligation to repay all or a portion of

his or her loan may be cancelled if the borrower is unable to complete

his or her program of study because the school closed or the borrower's

eligibility to borrow was falsely certified by the school. The

obligation to repay all or a portion of a loan may be forgiven for

borrowers who enter certain areas of the teaching or nursing

professions or perform certain kinds of national or community service.

* * * * *

5. Section 682.200 is amended by redesignating paragraphs (a)(1)(i)

and (a)(1)(ii) as paragraphs (a)(1) and (a)(2) respectively; removing

``Eligible institution'' from redesignated paragraph (a)(2); revising

the definition of ``Co-maker'' in paragraph (b); revising the

definition of ``Disbursement'' in paragraph (b); revising paragraph (1)

of the definition of ``Estimated financial assistance''in paragraph

(b); adding a new sentence at the end of the definition of ``Grace

period'' in paragraph (b); revising paragraph (2), and redesignating

paragraphs (3) and (4) as paragraphs (4) and (5) respectively, and

adding a new paragraph 3, in the definition of ``Lender'' in paragraph

(b); revising the definitions of ``Repayment period'' and ``Stafford

Loan Program'' in paragraph (b); adding, in alphabetical order, new

definitions of ``Disposable income'', ``Nonsubsidized Stafford loan'',

``Satisfactory repayment arrangement'', ``Subsidized Stafford loan'',

``Unsubsidized Stafford loan'', and ``Write-off'' in paragraph (b) to

read as follows:

Sec. 682.200 Definitions.

* * * * *

Co-maker. One of two parents who are joint borrowers on a PLUS loan

or one of two individuals who are joint borrowers on a Consolidation

loan, each of whom are eligible and who are jointly and severally

liable for repayment of the loan.

Disbursement. The transfer of loan proceeds by a lender to a

borrower, a school, or an escrow agent by issuance of an individual

check, a master check that represents loan amounts for more than one

borrower, or by electronic funds transfer.

* * * * *

Disposable income. That part of a borrower's compensation from an

employer and other income from any source that remains after the

deduction of any amounts required by law to be withheld, or any child

support or alimony payments that are made under a court order or

legally enforceable written agreement. Amounts required by law to be

withheld include, but are not limited, to Federal and State taxes,

Social Security contributions, and wage garnishment payments.

* * * * *

Estimated financial assistance. (1) The estimated amount of

assistance that a student has been or will be awarded for a period of

enrollment, beginning on or after July 1, 1993, for which the loan is

sought, from Federal, State, institutional, or other scholarship,

grant, financial need-based employment, or loan programs, including but

not limited to--

(i) Veterans' educational benefits paid under Chapters 30, 31, 32,

and 35 of Title 38 of the United States Code;

(ii) Educational benefits paid under Chapters 106 and 107 of Title

10 of the United States Code (Selected Reserve Educational Assistance

Program);

(iii) Reserve Officer Training Corps (ROTC) scholarships and

subsistence allowances awarded under Chapter 2 of Title 10 and Chapter

2 of Title 37 of the United States Code;

(iv) Benefits paid under Pub. L. 97-376, section 156: Restored

Entitlement Program for Survivors (or Quayle benefits);

(v) Benefits paid under Pub. L. 96-342, section 903: Educational

Assistance Pilot Program;

(vi) Any educational benefits paid because of enrollment in a

postsecondary education institution;

(vii) The estimated amount of other Federal student financial aid,

including, but not limited to, a Stafford loan, Pell Grant and, to the

extent funding is available and according to the school's award

packaging policy, campus-based aid the student is expected to receive;

(viii) In the case of a PLUS loan, the estimated amount of other

Federal student financial aid, including but not limited to, a Stafford

loan, Pell Grant and campus-based aid that the student has been or will

be awarded.

(2) The estimated amount of assistance does not include--

(i) Those amounts used to replace the expected family contribution,

including--

(A) Nonsubsidized Stafford loan amounts for which interest benefits

are not payable;

(B) SLS and PLUS loan amounts; or

(C) Private and state-sponsored loan programs; and

(ii) Perkins loan and College Work-Study funds that the school

determines the student has declined.

* * * * *

Grace period. * * * For an SLS borrower who also has a Federal

Stafford loan on which the borrower has not yet entered repayment, the

grace period is an equivalent period after the borrower ceases to be

enrolled as at least a half-time student at an eligible institution.

* * * * *

Lender. * * *

(2) With respect to a National or State chartered bank, a mutual

savings bank, a savings and loan association, a stock savings bank, or

a credit union--

(i) The phrase ``subject to examination and supervision'' in

section 435(d) of the Act means ``subject to examination and

supervision in its capacity as a lender'';

(ii) The phrase ``does not have as its primary consumer credit

function the making or holding of loans made to students under this

part'' in section 435(d) of the Act means that the lender does not, or

in the case of a bank holding company, the company's wholly-owned

subsidiaries as a group do not at any time, hold FFEL Program loans

that total more than one-half of the lender's or subsidiaries' combined

consumer credit loan portfolio, including home mortgages held by the

lender or its subsidiaries.

(3) A bank that is subject to examination and supervision by an

agency of the United States, making student loans as a trustee, may be

an eligible lender if it makes loans under an express trust, operated

as a lender in the FFEL programs prior to January 1, 1975, and met the

requirements of this paragraph prior to July 23, 1992.

* * * * *

Nonsubsidized Stafford loan. A Stafford loan made prior to October

1, 1992 that does not qualify for interest benefits under

Sec. 682.301(b) or special allowance payments under Sec. 682.302.

* * * * *

Repayment period. (1) For a Stafford loan, the period beginning on

the date following the expiration of the grace period and ending no

later than 10 years from the date the first payment of principal is due

from the borrower, exclusive of any period of deferment or forbearance.

(2) For unsubsidized Stafford loans, the period that begins on the

day after the expiration of the applicable grace period that follows

after the student ceases to be enrolled on at least a half-time basis

and ending no later than 10 years from that date, exclusive of any

period of deferment or forbearance. However, payments of interest are

the responsibility of the borrower during the in-school and grace

period, but may be capitalized by the lender.

(3) For SLS loans, the period that begins on the date the loan is

disbursed, or if the loan is disbursed in more than one installment, on

the date the last disbursement is made and ending no later than 10

years from that date, exclusive of any period of deferment or

forbearance. The first payment of principal is due within 60 days after

the loan is fully disbursed unless a borrower who is also a Stafford

loan borrower but who, has not yet entered repayment on the Stafford

loan requests that commencement of repayment on the SLS loan be delayed

until the borrower's grace period on the Stafford loan expires.

Interest on the loan accrues and is due and payable from the date of

the first disbursement of the loan. The borrower is responsible for

paying interest on the loan during the grace period and periods of

deferment, but the interest may be capitalized by the lender.

(4) For Federal PLUS loans, the period that begins on the date the

loan is disbursed, or if the loan is disbursed in more than one

installment, on the date the last disbursement is made and ending no

later than 10 years from that date, exclusive of any period of

deferment or forbearance. Interest on the loan accrues and is due and

payable from the date of the first disbursement of the loan.

(5) For Federal Consolidation loans, the period that begins on the

date the loan is disbursed and ends no later than 10, 12, 15, 20, 25,

or 30 years from that date depending upon the sum of the amount of the

Consolidation loan, and the unpaid balance on other student loans,

exclusive of any period of deferment or forbearance.

Satisfactory repayment arrangement. (1) For purposes of regaining

eligibility under section 428F(b) of the HEA, the making of six (6)

consecutive voluntary full monthly payments on a defaulted loan.

(2) For purposes of consolidating a defaulted loan under 34 CFR

682.201(c)(iii)(C), the making of three (3) consecutive voluntary full

monthly payments on a defaulted loan.

(3) The required full monthly payment amount may not be more than

is reasonable and affordable based on the borrower's total financial

circumstances. Voluntary payments are those payments made directly by

the borrower, and do not include payments obtained by income tax off-

set, garnishment, or income or asset execution. On-time means a payment

received by the Secretary or a guaranty agency or its agent within 15

days of the scheduled due date.

* * * * *

Stafford Loan Program. The loan program authorized by Title IV-B of

the Act which encourages the making of subsidized and unsubsidized

loans to undergraduate, graduate, and professional students and is one

of the Federal Family Education Loan programs.

* * * * *

Subsidized Stafford loan. A loan authorized under section 428(b) of

the Act for borrowers who qualify for interest benefits under

Sec. 682.301(b).

* * * * *

Unsubsidized Stafford loan. A loan made after October 1, 1992,

authorized under section 428H of the Act for borrowers who do not

qualify for interest benefits under Sec. 682.301(b).

Write-off. Cessation of collection activity on a defaulted FFEL

loan due to a determination in accordance with applicable standards

that no further collection activity is warranted.

6. Section 682.201 is amended by revising paragraph (a)(2);

revising paragraphs (b) introductory text and (b)(1); removing ``and''

at the end of paragraph (b)(5); removing the period at the end of

paragraph (b)(6), and adding in its place, ``; and''; adding a new

paragraph (b)(7); and revising paragraph (c) to read as follows:

Sec. 682.201 Eligible borrowers.

(a) * * *

(2) In the case of any student who, for a period of enrollment that

begins prior to July 1, 1994, seeks an SLS loan for the cost of

attendance at a school that participates in the Stafford Loan Program,

the student must have--

(i) Received a determination of need for a subsidized Stafford

loan, and if determined to have need in excess of $200, have filed an

application with a lender for a subsidized Stafford loan;

(ii) Filed an application with a lender for an unsubsidized

Stafford loan up to the Stafford loan annual maximum unless the school

declines to certify such an application under section 428(a)(2)(F) of

the HEA; and

(iii) Received a certification of graduation from a school

providing secondary education or the recognized equivalent;

* * * * *

(b) Parent borrower. A parent borrower, is eligible to receive a

PLUS Program loan, other than a loan made under Sec. 682.209(e), if the

parent--

(1) Is borrowing to pay for the educational costs of a dependent

undergraduate student who meets the requirements for an eligible

student set forth in 34 CFR Part 668;

* * * * *

(7) (i) In the case of a Federal PLUS loan made on or after July 1,

1993, does not have an adverse credit history.

(ii) For purposes of this section, the lender must obtain a credit

report on each applicant from at least one national credit bureau. The

credit report must be secured within a timeframe that would ensure the

most accurate, current representation of the borrower's credit history

before the first day of the period of enrollment for which the loan is

intended.

(iii) Unless the lender determines that extenuating circumstances

existed, the lender must consider each applicant to have an adverse

credit history based on the credit report if--

(A) The applicant is considered 90 or more days delinquent on the

repayment of a debt;

(B) The applicant has been the subject of a default determination,

bankruptcy discharge, foreclosure, repossession, tax lien, wage

garnishment, or write-off of a Title IV debt, during the five years

preceding the date of the credit report.

(iv) Nothing in this paragraph precludes the lender from

establishing more restrictive credit standards to determine whether the

applicant has an adverse credit history.

(v) The absence of any credit history is not an indication that the

applicant has an adverse credit history and is not to be used as a

reason to deny a PLUS loan to that applicant.

(vi) The lender must retain documentation demonstrating its basis

for determining that extenuating circumstances existed. This

documentation may include, but is not limited to, an updated credit

report, a statement from the creditor that the borrower has made

satisfactory arrangements to repay the debt, or a satisfactory

statement from the borrower explaining any delinquencies with

outstanding balances of less than $500.

(c) Consolidation Program Borrower. (1) An individual is eligible

to receive a Consolidation loan if, at the time of application for a

Consolidation loan, the individual--

(i) For a Consolidation loan made on or after January 1, 1993 but

prior to July 1, 1994, has an outstanding indebtedness of not less than

$7,500 that are eligible for consolidation under Sec. 682.100;

(ii) Has ceased, or, in the case of a PLUS borrower, the dependent

student on whose behalf the parent is borrowing has ceased, at least

half-time enrollment at a school;

(iii) Is, on the loans being consolidated--

(A) In a grace period preceding repayment on the loans being

consolidated;

(B) Is in repayment status; or

(C) In a default status and has made satisfactory repayment

arrangements with the holder on a defaulted loan being consolidated;

(iv) Certifies that no other application for a Consolidation loan

is pending;

(v) Agrees to notify the holder of any changes in address; and

(vi) Certifies that the lender holds an outstanding loan of the

borrower that is being consolidated or that the borrower has

unsuccessfully sought a loan from the holders of the outstanding loans

and was unable to secure a Consolidation loan from the holder.

(2) A married couple is eligible to receive a Consolidation loan in

accordance with this section if each--

(i) Agrees to be held jointly and severally liable for the

repayment of the total amount of the Consolidation loan;

(ii) Agrees to repay the debt regardless of any change in marital

status; and

(iii) Meets the requirements of paragraph (c)(1) of this section,

and only one must have met the requirements of paragraph (c)(1)(vi) of

this section.

(3) To be eligible to receive a Consolidation loan, in the case of

a student, parent, or Consolidation loan borrower who is currently in

default on an FFEL Program loan, the borrower must have made

satisfactory repayment arrangements.

(4) A borrower's eligibility to receive a Consolidation loan

terminates upon receipt of a Consolidation loan except--

(i) With respect to student loans received after the date the

Consolidation loan is made; or

(ii) Eligible loans received prior to the date the Consolidation

loan was made can be added to the Consolidation loan during the 180-day

period after the making of the Consolidation loan.

7. Section 682.204 is revised to read as follows:

Sec. 682.204 Maximum loan amounts.

(a) Stafford Loan Program annual limits. (1) In the case of a

dependent undergraduate student who has not successfully completed the

first year of a program of undergraduate education, the total amount

the student may borrow for any academic year of study under the

Stafford Loan Program and the Direct Stafford Loan Program may not

exceed--

(i) $2,625 for a program whose length is at least a full academic

year in length;

(ii) $1,750 for a program whose length is at least two-thirds but

less than a full academic year in length; and

(iii) $875 for a program whose length is at least one-third but

less than two-thirds of an academic year length.

(2) In the case of a student who has successfully completed the

first year of an undergraduate program but has not successfully

completed the second year of an undergraduate program, the total amount

the student may borrow for any academic year of study under the

Stafford Loan Program may not exceed--

(i) $3,500 for a program whose length is at least a full academic

year in length; or

(ii) For a Stafford loan first disbursed on or after July 1, 1994

for a period of enrollment beginning on or after July 1, 1994, if the

student is enrolled in a program, with less than a full academic year

remaining, a prorated amount that bears the same ratio to $3,500 as the

remainder of the program measured in semester, trimester, quarter, or

clock hours bears to one academic year.

(3) In the case of a student who has successfully completed the

first and second year of a program of undergraduate education but has

not successfully completed the remainder of the program, the total

amount the student may borrow for academic year of study under the

Stafford Loan and Direct Stafford Loan Program may not exceed--

(i) $5,500 for a program whose length is at least an academic year

in length;

(ii) For a Stafford loan first disbursed on or after July 1, 1994

for a period of enrollment beginning on or after July 1, 1994, if the

student is enrolled in a program with less than a full academic year

remaining, a prorated amount that bears the same ratio to $5,500 as the

remainder of the program measured in semester, trimester, quarter, or

clock hours bears to one academic year.

(4) In the case of a student in a program who has an associate or

baccalaureate degree which is required for admission into the program,

the total amount the student may borrow for an academic year of study

may not exceed the amount in paragraph (a)(3)(i) of this section.

(5) In the case of a graduate or professional student, the total

amount the student may borrow for any academic year of study under the

Stafford Loan Program, in combination with any amount borrowed under

the Direct Stafford Loan Program, may not exceed $8,500.

(b) Stafford Loan Program aggregate limits. The aggregate unpaid

principal amount of all Stafford Loan Program and loans received under

the Direct Stafford Loan Program may not exceed--

(1) $23,000 in the case of any student who has not successfully

completed a program of study at the undergraduate level; and

(2) $65,000, in the case of a graduate or professional student,

including loans for undergraduate study.

(c) Unsubsidized Stafford Loan Program. In the case of a dependent

graduate student, the total amount the student may borrow for any

period of study for the Unsubsidized Stafford Loan Program and Direct

Unsubsidized Stafford Loan Program is the same as the amount determined

under paragraph (a) of this section, less any amount received under the

Stafford Loan Program.

(d) Additional eligibility under the Unsubsidized Stafford Loan

Program. In addition to any amount borrowed under paragraph (b) of this

section, an independent undergraduate student, graduate or professional

student, or certain dependent undergraduate students may borrow

additional amounts under the Unsubsidized Stafford Loan Program. The

additional amount that such a student may borrow under the Unsubsidized

Stafford Loan Program, in combination with Unsubsidized Stafford loans,

for any academic year of study--

(1) In the case of a student who has not successfully completed the

first and second year of a program of undergraduate education, may not

exceed--

(i) $4,000 for enrollment in a program whose length is at least a

full academic year in length;

(ii) $2,500 for enrollment in a program whose length is at least

two-thirds but less than a full academic year in length;

(iii) $1,500 for enrollment in a program whose length is at least

one-third but less than two-thirds of an academic year in length;

(2) In the case of a student who has successfully completed the

first and second year of an undergraduate program, but has not

completed the remainder of the program, may not exceed--

(i) $5,000 for enrollment in a program whose length is at least a

full academic year;

(ii) If the student is enrolled in a program with less than a full

academic year remaining, a prorated amount that bears the same ratio to

$5,000 as the remainder of the program measured in semester, trimester,

quarter, or clock hours bears to one academic year;

(3) In the case of a student in a program who has an associate or

baccalaureate degree which is required for admission into the program,

the total amount the student may borrow for an academic year under the

Unsubsidized Stafford Loan and Direct Unsubsidized Stafford Loan

Program may not exceed the amount in paragraph (d)(2)(i) of this

section; and

(4) In the case of a graduate or professional student, may not

exceed $10,000.

(e) Unsubsidized Stafford Loan Program aggregate limits. The total

unpaid principal amount of Stafford Loans, Direct Stafford Loans,

Unsubsidized Stafford Loans, Direct Unsubsidized Stafford Loans and SLS

Loans, may not exceed--

(1) $46,000 for an undergraduate student; and

(2) $138,500 for a graduate or professional student.

(f) SLS Program annual limit. (1) In the case of a loan for which

the first disbursement is made prior to July 1, 1993, the total amount

of all SLS loans that a student may borrow for any academic year may

not exceed $4,000 or, if the student is entering or is enrolled in a

program of undergraduate education that is less than one academic year

in length and the student's SLS loan application is certified pursuant

to Sec. 682.603 by the school on or after January 1, 1990--

(i) $2,500 for a student enrolled in a program whose length is at

least two-thirds of an academic year but less than a full academic year

in length;

(ii) $1,500 for a student enrolled in a program whose length is

less than two-thirds of an academic year in length; and

(iii) $0 for a student enrolled in a program whose length is less

than one-third of an academic year in length.

(2) In the case of a loan for which a first disbursement is made on

or after July 1, 1993, the total amount a student may borrow for an

academic year under the SLS program--

(i) In the case of a student who has not successfully completed the

first and second year of a program of undergraduate education, may not

exceed--

(A) $4,000 for enrollment in a program whose length is at least a

full academic year in length;

(B) $2,500 for enrollment in a program whose length is at least

two-thirds but less than a full academic year in length;

(C) $1,500 for enrollment in a program whose length is least one-

third but less than two-thirds of an academic year in length;

(ii) Except as provided in paragraph (f)(4) of this section, in the

case of a student who successfully completed the first and second year

of an undergraduate program, but has not completed the remainder of the

program, may not exceed--

(A) $5,000 for enrollment in a program whose length is at least a

full academic year;

(B) $3,325 for enrollment in a program whose length is at least

two-thirds of an academic year but less than a full academic year in

length; and

(C) $1,675 for enrollment in a program whose length is at least

one-third of an academic year but less than two-thirds of an academic

year; and

(iii) In the case of a graduate or professional student, may not

exceed $10,000.

(4) For a period of enrollment beginning after October 1, 1993, but

prior to July 1, 1994 for which the first disbursement is made prior to

July 1, 1994, in the case of a student who has successfully completed

the first and second years of a program but has not successfully

completed the remainder of a program of undergraduate education--

(i) $5,000; or

(ii) If the student is enrolled in a program, the remainder of

which is less than a full academic year, the maximum annual amount that

the study may receive may not exceed the amount that bears the same

ratio to the amount in paragraph (f)(4)(i) of this section as the

remainder measured in semester, trimester, quarter, or clock hours

bears to one academic year.

(g) SLS Program aggregate limit. The total unpaid principal amount

of SLS Program loans made to--

(1) An undergraduate student may not exceed--

(i) $20,000, for loans for which the first disbursement is made

prior to July 1, 1993; or

(ii) $23,000, for loans for which the first disbursement was made

on or after July 1, 1993; and

(2) A graduate student may not exceed--

(i) $20,000, for loans for which the first disbursement is made

prior to July 1, 1993; or

(ii) $73,000, for loans for which the first disbursement was made

on or after July 1, 1993 including loans for undergraduate study.

(h) PLUS Program annual limit. The total amount of all PLUS Program

loans that parents may borrow on behalf of each dependent student for

any academic year of study may borrow for enrollment in an eligible

program of study may not exceed the student's cost of education minus

other estimated financial assistance for that student.

(i) Minimum loan interval. The annual loan limits applicable to a

student apply to the length of the school's academic year.

(j) Treatment of Consolidation loans for purposes of determining

loan limits. The percentage of the outstanding balance on a

Consolidation loan counted against a borrower's aggregate loan limits

under the Stafford loan, Unsubsidized Stafford loan, Direct Stafford

loan, Direct Unsubsidized loan, SLS, PLUS, Perkins Loan, or HPSL

program must equal the percentage of the original amount of the

Consolidation loan attributable to loans made to the borrower under

that program.

(k) Maximum loan amounts. In no case may a Stafford, PLUS, or SLS

loan amount exceed the student's estimated cost of attendance for the

period of enrollment for which the loan is intended, less--

(1) The student's estimated financial assistance for that period;

and

(2) The borrower's expected family contribution for that period, in

the case of a Stafford loan that is eligible for interest benefits.

(l) In determining a Stafford loan amount in accordance with

Sec. 682.204 (a), (c) and (d), the school must use the definition of

academic year in 34 CFR 668.2.

8. Section 682.206 is amended by revising the introductory text in

paragraph (c)(2); and revising paragraph (e)(2) to read as follows:

Sec. 682.206 Due diligence in making a loan.

* * * * *

(c) * * *

(2) Except in the case of a Consolidation loan, in determining the

amount of the loan to be made, the lender must review the data on the

student's cost of attendance and estimated financial assistance that is

provided by the school. In no case may the loan amount exceed the

student's estimated cost of attendance less the sum of--

* * * * *

(e) * * *

(2) A Federal PLUS Program loan and Federal Consolidation Program

Loan may be made to two eligible borrowers who agree to be jointly and

severally liable for repayment of the loan as co-makers.

* * * * *

9. Section 682.207 is amended by revising paragraphs (b)(1)(v) (A)

and (B),and adding a new paragraph (b)(1)(v)(D) to read as follows:

Sec. 682.207 Due diligence in disbursing a loan.

* * * * *

(b)(1) * * *

(v) * * *

(A) Except as provided in paragraph (b)(1)(v) (C)(1) and (D) of

this section, directly to the school;

(B) In the case of a Federal PLUS loan--

(1) By electronic funds transfer or master check from the lender to

the eligible institution to a separate account maintained by the school

as trustee for the lender; or

(2) By a check from the lender that is made co-payable to the

institution and the parent borrower directly to the eligible

institution.

* * * * *

(D) In the case of a student enrolled in an eligible foreign

school, if the student requests--

(1) Directly to the student; or

(2) To the institution if the borrower provides a power-of-attorney

to an individual not affiliated with the institution to endorse the

check or complete an electronic funds transfer authorization.

* * * * *

10. Section 682.209 is amended by revising paragraph (c)(2) to read

as follows:

Sec. 682.209 Repayment of a loan.

* * * * *

(c) * * *

(2) The provisions of paragraphs (c)(1) (i) and (ii) of this

section may not result in an extension of the maximum repayment period

unless forbearance as described in Sec. 682.211, or deferment described

in Sec. 682.210, has been approved.

* * * * *

11. Section 682.300 is amended by revising the section heading;

revising paragraph (a); revising paragraph (b)(1)(i); and revising

paragraph (c) to read as follows:

Sec. 682.300 Payment of interest benefits on Stafford and

Consolidation loans.

(a) General. The Secretary pays a lender a portion of the interest

on a subsidized Stafford loan and, on a Consolidation loan that only

consolidated subsidized Stafford loans, on behalf of a borrower who

qualifies under Sec. 682.301. This payment is known as interest

benefits.

(b) * * *

(1) * * *

(i) During all periods prior to the beginning of the repayment

period, except as provided in paragraphs (b)(2) and (c) of this

section.

* * * * *

(c) Interest not covered. The Secretary does not pay--

(1) Interest for which the borrower is not otherwise liable;

(2) Interest paid on behalf of the borrower by a guaranty agency;

(3) Interest that accrues on the first disbursement of a loan for

any period that is earlier than--

(i) In the case of a subsidized Stafford loan disbursed by a check,

10 days prior to the first day of the period of enrollment for which

the loan is intended or, if the loan is disbursed after the first day

of the period of enrollment, 3 days after the disbursement date on the

check; or

(ii) In the case of a loan disbursed by electronic funds transfer,

3 days prior to the first day of the period of enrollment or, if the

loan is disbursed after the first day of the period of enrollment, 3

days after disbursement.

(4) In the case of a loan disbursed on or after October 1, 1992,

interest on a loan if--

(i) The disbursement check is returned uncashed to the lender or

the lender is notified that the disbursement made by electronic funds

transfer will not be released from the restricted account maintained by

the school; or

(ii) The check for the disbursement has not been negotiated before

the 120th day after the date of disbursement or the disbursement made

by electronic funds transfer has not been released from the restricted

account maintained by the school before that date.

* * * * *

12. Section 682.301 is amended by revising the section heading;

revising paragraph (a)(1); adding new paragraphs (a)(3) and (a)(4); and

revising paragraph (b) introductory text to read as follows:

Sec. 682.301 Eligibility of borrowers for interest benefits on

Stafford and Consolidation loans.

(a) * * *

(1) To qualify for benefits on a Stafford loan, a borrower must

demonstrate financial need in accordance with Part F of the Act.

* * * * *

(3) A Consolidation loan borrower qualifies for interest benefits

during authorized periods of deferment on the portion of the loan that

does not represent HEAL loans if the loan application was received by

the lender on or after January 1, 1993 but prior to August 10, 1993.

(4) A Consolidation loan borrower qualifies for interest benefits

only if the loan consolidates subsidized Stafford loans.

(b) Application for interest benefits. To apply for interest

benefits on a Stafford loan, the student, or the school at the

direction of the student, must submit a loan application to the lender.

The application must include a certification from the student's school

of the following information:

* * * * *

13. Section 682.302 is amended by revising paragraphs (b),

(c)(1)(iii), (c)(2) introductory text, (c)(3)(i) introductory text,

(c)(3)(ii) introductory text, and adding paragraph (c)(3)(iii) to read

as follows:

Sec. 682.302 Payment of special allowance on FFEL loans.

* * * * *

(b) Eligible loans. (1) Except for nonsubsidized Federal Stafford

loans disbursed on or after October 1, 1981, for periods of enrollment

beginning prior to October 1, 1992, or as provided in paragraph (b)(2)

or (e) of this section, FFEL loans that otherwise meet program

requirements are eligible for special allowance payments.

(2) For a loan made under the Federal SLS or Federal PLUS Program

on or after July 1, 1987 or under Sec. 682.209 (e) or (f), no special

allowance is paid for any period for which the interest rate determined

under Sec. 682.202(a)(2)(iv)(A) for that loan does not exceed--

(i) 12 percent in the case of a Federal SLS or PLUS loan made prior

to October 1, 1992;

(ii) 11 percent in the case of a Federal SLS loan made on or after

October 1, 1992; or

(iii) 10 percent in the case of a Federal PLUS loan made on or

after October 1, 1992.

(3) In the case of a subsidized Stafford loan disbursed on or after

October 1, 1992, the Secretary does not pay special allowance on a

disbursement if--

(i) The disbursement check is returned uncashed to the lender or

the lender is notified that the disbursement made by electronic funds

transfer will not be released from the restricted account maintained by

the school; or

(ii) The check for the disbursement has not been negotiated before

the 120th day after the date of disbursement or the disbursement made

by electronic funds transfer has not been released from the restricted

account maintained by the school before that date.

(c) * * *

(1) * * *

(iii) Adding--

(A) 3.1 percent to the resulting percentage for a loan made on or

after October 1, 1992;

(B) 3.25 percent to the resulting percentage, for a loan made on or

after November 16, 1986, but before October 1, 1992;

(C) 3.25 percent to the resulting percentage, for a loan made on or

after October 17, 1986 but before November 16, 1986, for a period of

enrollment beginning on or after November 16, 1986;

(D) 3.5 percent to the resulting percentage, for a loan made prior

to October 17, 1986, or a loan described in paragraph (c)(2) of this

section; or

(E) 3.5 percent to the resulting percentage, for a loan made on or

after October 17, 1986 but before November 16, 1986, for a period of

enrollment beginning prior to November 16, 1986;

* * * * *

(2) The special allowance rate determined under paragraph

(c)(1)(iii)(D) of this section applies to loans made or purchased from

funds obtained from the issuance of an obligation of the--

* * * * *

(3)(i) Subject to paragraphs (c)(3) (ii) and (iii) of this section,

the special allowance rate is one-half of the rate calculated under

paragraph (c)(1)(iii)(D) of this section for a loan made or guaranteed

on or after October 1, 1980 that was made or purchased with funds

obtained by the holder from--

* * * * *

(ii) The special allowance rate applicable to loans described in

paragraph (c)(3)(i) of this section that are made prior to October 1,

1992, may not be less than--

* * * * *

(iii) The special allowance rate applicable to loans described in

paragraph (c)(3)(i) of this section that are made on or after October

1, 1992, may not be less than 9\1/2\ percent minus the applicable

interest rate.

* * * * *

14. Section 682.400 is amended by revising paragraph (b)

introductory text; revising paragraph (b)(1)(i); and adding a new

paragraph (b)(4) to read as follows:

Sec. 682.400 Agreements between a guaranty agency and the Secretary.

* * * * *

(b) There are four agreements:

(1) * * *

(i) Borrowers whose Stafford and Consolidation loans that

consolidate only subsidized Stafford loans are guaranteed by the agency

may qualify for interest benefits that are paid to the lender on the

borrower's behalf;

* * * * *

(4) Loan Rehabilitation Agreement. A guaranty agency must have an

agreement for rehabilitating a loan for which the Secretary has made a

reinsurance payment under section 428(c)(1) of the Act.

* * * * *

15. Section 682.401 is amended by revising paragraphs (b)(1) and

(b)(2); redesignating paragraphs (b)(4) through (b)(24) as paragraphs

(b)(5) through (b)(25), respectively; adding a new paragraph (b)(4);

revising redesignated paragraph (b)(6); revising redesignated paragraph

(b)(14); revising redesignated paragraph (b)(16)(i) introductory text;

adding a new paragraph (b)(16)(iii); adding new paragraphs (b)(24);

revising paragraph (c); redesignating paragraphs (e)(2) and (e)(3) as

paragraphs (e)(3) and (e)(4) respectively; and adding a new paragraph

(e)(2) to read as follows:

Sec. 682.401 Basic program agreement.

* * * * *

(b) * * *

(1) Aggregate loan limits. The aggregate guaranteed unpaid

principal amount for all Stafford, SLS, PLUS loans made to a borrower

may not exceed the amounts set forth in Sec. 682.204 (b), (e), and (h).

(2) Annual loan limits. (i) The annual loan maximum amount for a

borrower that may be guaranteed for an academic year may not exceed the

amounts set forth in Sec. 682.204 (a), (c), (d), (f), and (g).

(ii) A guaranty agency may make the loan amounts authorized under

paragraph (b)(2)(i) of this section applicable for either--

(A) A period of not less than that attributable to the academic

year; or

(B) A period attributable to the academic year in which the student

earns the amount of credit in the student's program of study required

by the student's school as the amount necessary for the student to

advance in academic standing as normally measured on an academic year

basis (for example, from freshman to sophomore or, in the case of

schools using clock hours, completion of at least 900 clock hours.

(iii) The amount of a loan guaranteed may not exceed the amount set

forth in Sec. 682.204(i).

* * * * *

(4) Reinstatement of borrower eligibility. For a borrower's loans

held by a guaranty agency on which a reinsurance claim has been paid by

the Secretary, the guaranty agency must afford a defaulted borrower,

upon the borrower's request, renewed eligibility for Title IV

assistance once the borrower has made satisfactory repayment

arrangements as that term is defined in Sec. 682.200.

(i) For purposes of this section, the determination of reasonable

and affordable must--

(A) Include consideration of the borrower's and spouse's disposable

income and necessary expenses including, but not limited to, housing,

utilities, food, medical costs, dependent care costs, work-related

expenses and other Title IV repayment;

(B) Not be a required minimum payment amount, e.g. $50, if the

agency determines that a smaller amount is reasonable and affordable

based on the borrower's total financial circumstances. The agency must

include documentation in the borrower's file of the basis for the

determination, if the monthly reasonable and affordable payment

established under this section is less than $50.00 or the monthly

accrued interest on the loan, whichever is greater.

(C) Be based on the documentation provided by the borrower or other

sources including, but not limited to--

(1) Evidence of current income (e.g. proof of welfare benefits,

Social Security benefits, Supplemental Security Income, Workers'

Compensation, child support, veterans' benefits, two most recent pay

stubs, most recent copy of U.S. income tax return, State Department of

Labor reports);

(2) Evidence of current expenses (e.g. a copy of the borrower's

monthly household budget, on a form provided by the guaranty agency);

and

(3) A statement of the unpaid balance on all FFEL loans held by

other holders.

(ii) A borrower may request that the monthly payment amount be

adjusted due to a change in the borrower's total financial

circumstances upon providing the documentation specified in paragraph

(b)(4)(i)(C) of this section.

(iii) A guaranty agency must provide the borrower with a written

statement of the reasonable and affordable payment amount required for

the reinstatement of the borrower's eligibility for Title IV student

assistance, and provide the borrower with an opportunity to object to

those terms.

(iv) A guaranty agency must provide the borrower with written

information regarding the possibility of loan rehabilitation if the

borrower makes six additional reasonable and affordable monthly

payments after making payments to regain eligibility for Title IV

assistance and the consequences of loan rehabilitation.

* * * * *

(6) School eligibility. (i) General. A school that has a program

participation agreement in effect with the Secretary under Sec. 682.600

is eligible to participate in the program of the agency under

reasonable criteria established by the guaranty agency, and approved by

the Secretary, under paragraph (d)(2) of this section, except to the

extent that--

(A) The school's eligibility is limited, suspended, or terminated

by the Secretary under 34 CFR Part 668 or by the guaranty agency under

standards and procedures that are substantially the same as those in 34

CFR Part 668;

(B) The Secretary upholds the limitation, suspension, or

termination of a school by a guaranty agency and extends that sanction

to all guaranty agency programs under section 432(h)(3) of the Act or

Sec. 682.713;

(C) The school is ineligible under sections 428A(a)(2) or 435(a)(2)

of the Act;

(D) There is a State constitutional prohibition affecting the

school's eligibility;

(E) The school's programs consist of study solely by

correspondence;

(F) The agency determines, subject to the agreement of the

Secretary, that the school does not satisfy the standards of

administrative capability and financial responsibility as defined in 34

CFR Part 668;

(G) The school fails to make timely refunds to students as required

in Sec. 682.607(c);

(H) The school has not satisfied, within 30 days of issuance, a

final judgment obtained by a student seeking a refund;

(I) The school or an owner, director, or officer of the school is

found guilty or liable in any criminal, civil, or administrative

proceeding regarding the obtaining, maintenance, or disbursement of

State or Federal student grant, loan, or work assistance funds; or

(J) The school or an owner, director, or officer of the school has

unpaid financial liabilities involving the improper acquisition,

expenditure, or refund of State or Federal student financial assistance

funds.

(ii) Limitation by a guaranty agency of a school's participation.

For purposes of this paragraph, a school that is subject to limitation

of participation in the guaranty agency's program may be either a

school that is applying to participate in the agency's program for the

first time, or a school that is renewing its application to continue

participation in the agency's program. A guaranty agency may limit the

total number of loans or the volume of loans made to students attending

a particular school, or otherwise establish appropriate limitations on

the school's participation, if the agency makes a determination that

the school does not satisfy--

(A) The standards of financial responsibility defined in 34 CFR

668.5; or

(B) The standards of administrative capability defined in 34 CFR

668.16.

(iii) Limitation, suspension, or termination of school eligibility.

A guaranty agency may limit, suspend, or terminate the participation of

an eligible school. If a guaranty agency limits, suspends, or

terminates the participation of a school from the agency's program, the

Secretary applies that limitation, suspension, or termination to all

locations of the school.

(iv) Condition for guaranteeing loans for students attending a

school. The guaranty agency may require the school to execute a

participation agreement with the agency and to submit documentation

that establishes the school's eligibility to participate in the

agency's program.

* * * * *

(14) Guaranty agency verification of default data. A guaranty

agency must respond to an institution's written request for

verification of its default rate data for purposes of an appeal

pursuant to 34 CFR 668.15(g)(1)(i) within 15 working days of the date

the agency receives the institution's written request pursuant to 34

CFR 668.15(g)(7), and simultaneously provide a copy of that response to

the Secretary's designated Department official.

* * * * *

(16) * * *

(i) Except as provided in paragraph (b)(16)(iii) of this section,

the guaranty agency must allow a loan to be assigned only if the loan

is fully disbursed and is assigned to--

* * * * *

(iii) The guaranty agency must allow a loan to be assigned under

paragraph (b)(16)(i) of this section, following the first disbursement

of the loan if the assignment does not result in a change in the

identity of the party to whom payments must be made.

* * * * *

(24) Information on loan sales or transfers. The guaranty agency

must, upon the request of an eligible school, furnish to the school

last attended by the student, information with respect to the sale or

transfer of a borrower's loan prior to the beginning of the repayment

period, including--

(i) Notice of the assignment;

(ii) The identity of the assignee;

(iii) The name and address of the party by which contact may be

made with the holder concerning repayment of the loan; and

(iv) The telephone number of the assignee, or if the assignee uses

a lender servicer, another appropriate number for borrower inquiries.

* * * * *

(c)(1) Lender-of-last-resort. The guaranty agency must ensure that

it or an eligible lender described in section 435(d)(1)(D) of the Act

serves as a lender-of-last-resort in the State in which it is the

principal guaranty agency, as defined in Sec. 682.800(d).

(2) The lender-of-last-resort must make a subsidized Stafford loan

to any eligible student who satisfies the lender's eligibility

requirements and--

(i) Qualifies for interest benefits, pursuant to Sec. 682.301, for

a loan amount of at least $200; and

(ii) Has been otherwise unable after conscientious efforts to

obtain a loan from another eligible lender for the same period of

enrollment.

(3) The guaranty agency or an eligible lender described in section

435(d)(1)(D) of the Act may arrange for a loan required to be made

under paragraph (c)(1) of this section to be made by another eligible

lender.

(4) The guaranty agency must develop policies and operating

procedures for its lender-of-last-resort program that provide for the

accessibility of lender-of-last-resort loans. These policies and

procedures must be submitted to the Secretary for approval as required

under paragraph (d)(2) of this section. The policies and procedures for

the agency's lender-of-last-resort program must ensure that--

(i) The guaranty agency will serve eligible students attending any

eligible school;

(ii) The program establishes operating hours and methods of

application designed to facilitate application by students; and

(iii) Information about the availability of loans under the program

is made available to schools in the State;

(iv) Appropriate steps are taken to ensure that borrowers receiving

loans under the program are appropriately counseled on their loan

obligation;

(v) The guaranty agency will respond to a student within 60 days

after the student submits an original complete application; and

(vi) Borrowers are not required to obtain more than two objections

from eligible lenders prior to requesting assistance under the lender-

of-last-resort program.

* * * * *

(e) * * *

(2)(i) Offer, directly or indirectly, any premium, incentive

payment, or other inducement to any lender, or any person acting as an

agent, employee, or independent contractor of any lender or other

guaranty agency to administer or market FFEL loans, other than

unsubsidized Stafford loans or subsidized Stafford loans made under a

guaranty agency's lender-of-last-resort program, in an effort to secure

the guaranty agency as an insurer of FFEL loans. Examples of prohibited

inducements include, but are not limited to--

(A) Compensating lenders or their representatives for the purpose

of securing loan applications for guarantee;

(B) Performing functions normally performed by lenders without

appropriate compensation;

(C) Providing equipment or supplies to lenders at below market cost

or rental; or

(D) Offering to pay a lender, that does not hold loans guaranteed

by the agency, a fee for each application forwarded for the agency's

guarantee.

(ii) For the purposes of this section, the terms ``premium'',

``inducement'', and ``incentive'' do not include services directly

related to the enhancement of the administration of the FFEL Program

the guaranty agency generally provides to lenders that participate in

its program. However, the terms ``premium'', ``inducement'', and

``incentive'' do apply to other activities specifically intended to

secure a lender's participation in the agency's program.

* * * * *

16. A new Sec. 682.405 is added to read as follows:

Sec. 682.405 Loan rehabilitation agreement.

(a) General. (1) A guaranty agency that has a basic program

agreement must enter into a loan rehabilitation agreement with the

Secretary. The guaranty agency must establish a loan rehabilitation

program for all borrowers with an enforceable promissory note for the

purpose of rehabilitating defaulted loans so that the loan may be

purchased, if practicable, by an eligible lender and removed from

default status.

(2) A loan is considered to be rehabilitated only after the

borrower has made one voluntary reasonable and affordable full payment

each month and the payment is received by a guaranty agency or its

agent within 15 days of the scheduled due date for 12 consecutive

months in accordance with this section, and the loan has been sold to

an eligible lender.

(3) After the loan has been rehabilitated, the borrower regains all

benefits of the program, including any remaining deferment eligibility

under section 428(b)(1)(M) of the Act, from the date of the

rehabilitation.

(4) A borrower who wishes to rehabilitate a loan on which a

judgment has been entered must sign a new promissory note prior to the

sale of the loan to an eligible lender.

(b) Terms of agreement. In the loan rehabilitation agreement, the

guaranty agency agrees to ensure that its loan rehabilitation program

meets the following requirements at all times:

(1) A borrower may request the rehabilitation of the borrower's

defaulted FFEL loan held by the guaranty agency. The borrower must make

one voluntary full payment each month for 12 consecutive months to be

eligible to have the defaulted loans rehabilitated. For purposes of

this section, ``full payment'' means a reasonable and affordable

payment agreed to by the borrower and the agency. The required amount

of such monthly payment may be no more than is reasonable and

affordable based upon the borrower's total financial circumstances.

Voluntary payments are those made directly by the borrower regardless

of whether there is a judgment against the borrower, and do not include

payments obtained by income tax off-set, garnishment, or income or

asset execution. A guaranty agency must attempt to secure a lender to

purchase the loan at the end of the twelve-(12-)month payment period.

(i) For purposes of this section, the determination of reasonable

and affordable must--

(A) Include a consideration of the borrower's and spouse's

disposable income and reasonable and necessary expenses including, but

not limited to, housing, utilities, food, medical costs, work-related

expenses, dependent care costs and other Title IV repayment;

(B) Not be a required minimum payment amount, e.g. $50, if the

agency determines that a smaller amount is reasonable and affordable

based on the borrower's total financial circumstances. The agency must

include documentation in the borrower's file of the basis for the

determination if the monthly reasonable and affordable payment

established under this section is less than $50.00 or the monthly

accrued interest on the loan, whichever is greater. However, $50.00 may

not be the minimum payment for a borrower if the agency determines that

a smaller amount is reasonable and affordable; and

(C) Be based on the documentation provided by the borrower or other

sources including, but not be limited to--

(1) Evidence of current income (e.g., proof of welfare benefits,

Social Security benefits, child support, veterans' benefits,

Supplemental Security Income, Workmen's Compensation, two most recent

pay stubs, most recent copy of U.S. income tax return, State Department

of Labor reports);

(2) Evidence of current expenses (e.g., a copy of the borrower's

monthly household budget, on a form provided by the guaranty agency);

and

(3) A statement of the unpaid balance on all FFEL loans held by

other holders.

(ii) The agency must include any payment made under

Sec. 682.401(b)(4) in determining whether the 12 consecutive payments

required under paragraph (b)(1) of this section have been made.

(iii) A borrower may request that the monthly payment amount be

adjusted due to a change in the borrower's total financial

circumstances only upon providing the documentation specified in

paragraph (b)(1)(i)(C) of this section.

(iv) A guaranty agency must provide the borrower with a written

statement confirming the borrower's reasonable and affordable payment

amount, as determined by the agency, and explaining any other terms and

conditions applicable to the required series of payments that must be

made before a borrower's account can be considered for repurchase by an

eligible lender. The statement must inform borrowers of the

consequences of having their loans rehabilitated (e.g. credit clearing,

possibility of increased monthly payments). The statement must inform

the borrower of the amount of the collection costs to be added to the

unpaid principal at the time of the sale. The collection costs may not

exceed 18.5 percent of the unpaid principal and accrued interest at the

time of the sale.

(v) A guaranty agency must provide the borrower with an opportunity

to object to terms of the rehabilitation of the borrower's defaulted

loan.

(2) The guaranty agency must report to all national credit bureaus

within 90 days of the date the loan was rehabilitated that the loan is

no longer in a default status.

(3) An eligible lender purchasing a rehabilitated loan must

establish a repayment schedule that meets the same requirements that

are applicable to other FFEL Program loans made under the same loan

type and provides for the borrower to make monthly payments at least as

great as the average of the 12 consecutive monthly payments received by

the guaranty agency. For the purposes of the maximum loan repayment

period, the lender must treat the first payment made under the 12

consecutive payments as the first payment under the 10-year maximum.

(Authority: 20 U.S.C. 1078-6)

17. Section 682.406 is amended by removing ``and'' at the end of

paragraph (a)(12); removing the period at the end of paragraph (a)(13)

and adding in its place, ``; and'' and adding a new paragraph (a)(14)

to read as follows:

Sec. 682.406 Conditions of reinsurance coverage.

(a) * * *

(14) The guaranty agency certifies to the Secretary that diligent

attempts have been made by the lender and the guaranty agency under

Sec. 682.411(g) to locate the borrower through the use of reasonable

skip-tracing techniques.

* * * * *

18. Section 682.407 is amended by adding a new paragraph (e) to

read as follows:

Sec. 682.407 Administrative cost allowance for guaranty agencies.

* * * * *

(e) An administrative cost allowance improperly paid on a loan to a

guaranty agency must be deducted by the agency from the amount

reflected in the following quarter's ED form 1130 when it is submitted

to the Department for payment.

* * * * *

19. Section 682.409 is amended by revising paragraph (a); revising

paragraph (c)(1); and adding a new paragraph (c)(6) to read as follows:

Sec. 682.409 Mandatory assignment by guaranty agencies of defaulted

loans to the Secretary.

(a) (1) If the Secretary determines that action is necessary to

protect the Federal fiscal interest, the Secretary will direct a

guaranty agency to promptly assign to the Secretary any loan held by

the agency on which the agency has received payment under

Sec. 682.402(d), 682.402(i), or 682.404. An orderly transition from the

FFEL program to the Federal Direct Student Loan (FDSL) Program and the

collection of unpaid loans owed by Federal employees by Federal salary

offset are, among other things, deemed to be in the Federal fiscal

interest. Unless the Secretary notifies an agency, in writing, that

other loans must be assigned to the Secretary, an agency must assign

any loan that meets all of the following criteria as of April 15 of

each year:

(i) The unpaid principal balance is at least $100.

(ii) For each of the two fiscal years following the fiscal year in

which these regulations are effective, the loan, and any other loans

held by the agency for that borrower, have been held by the agency for

at least four years; for any subsequent fiscal year such loan must have

been held by the agency for at least five years.

(iii) A payment has not been received on the loan in the last year.

(iv) A judgment has not been entered on the loan against the

borrower.

(2) If the agency fails to meet a fiscal year recovery rate

standard under paragraph (a)(2)(ii) of this section for a loan type,

and the Secretary determines that additional assignments are necessary

to protect the Federal fiscal

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