Federal Direct Student Loan Program; Proposed Rule

DEPARTMENT OF EDUCATION

34 CFR Part 685

Federal Direct Student Loan Program

RIN 1840-AC05

AGENCY: Department of Education.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Secretary of Education proposes to amend the Federal

Direct Student Loan (Direct Loan) Program regulatory policies and

procedures which apply to loans under the Federal Direct Stafford Loan

Program, the Federal Direct Unsubsidized Stafford Loan Program, the

Federal Direct PLUS Program, and the Federal Direct Consolidation Loan

Program, collectively referred to as the Direct Loan Program. These

proposed regulatory policies and procedures would streamline the loan

application and disbursement processes, provide ease in school

administration of the loans, ensure program integrity, and protect the

Federal fiscal interest.

DATES: Comments must be received on or before October 3, 1994.

ADDRESSES: All comments concerning these proposed regulations should be

addressed to Ms. Rachel Edelstein, U.S. Department of Education, 400

Maryland Avenue SW. (Room 4100, ROB-3), Washington, DC 20202-5257.

(Internet address: direct [email protected]). All comments will be available

for public review on the Department's Direct Loan bulletin board. The

access number for the bulletin board for individuals with

communications software and modems is 1-800-429-9933. In addition,

Internet users may access the bulletin board by using the TCP/IP

telenet command facility at the above Internet address.

A copy of any comments that concern information collection

requirements should also be sent to the Office of Management and Budget

at the address listed in the Paperwork Reduction Act section of this

preamble.

FOR FURTHER INFORMATION CONTACT: Ms. Rachel Edelstein, telephone: (202)

708-9406. (Internet address: direct [email protected]). 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:

Background

The Student Loan Reform Act of 1993, enacted on August 10, 1993,

established the Direct Loan Program under the Higher Education Act of

1965, as amended (HEA). See Subtitle A of the Omnibus Budget

Reconciliation Act of 1993 (Pub. L. 103-66). Under the Direct Loan

Program, loan capital is provided directly to student and parent

borrowers by the Federal Government rather than through private

lenders.

The Direct Loan Program provides borrowers with a streamlined

application process, flexible repayment options, and a simplified

collection process. Direct Loan Program student borrowers apply for a

loan at the same time that they apply for other title IV student

financial assistance. No additional forms are required. Further, under

the Direct Loan Program borrowers will be eligible for a variety of new

repayment plans, including an extended repayment plan, a graduated

repayment plan with an extended term, an income contingent repayment

plan, and an alternative repayment plan. These repayment plans allow

borrowers to tailor their loan repayment to their individual

circumstances. The new repayment plans also give borrowers the

opportunity to enter into lower-paying service careers while making

reasonable payments on their educational debt. The income contingent

repayment plan will reduce the incidence of default, because borrowers

are required to repay only what they can reasonably afford. In

addition, repayment procedures will be easier for borrowers under the

Direct Loan Program than under the Federal Family Education Loan (FFEL)

Program because the borrower will interact with only one servicer at a

time throughout the life of the loan, rather than with multiple loan

holders.

The HEA directed the Secretary to consult with members of the

higher education community and to publish a notice of standards,

criteria, and procedures for the program's first year (July 1, 1994 to

June 30, 1995) in lieu of issuing regulations using the Department's

usual procedures. In compliance with that requirement, the Secretary

published three sets of rules for the first year. The first of these

rules was published on September 10, 1993, and contained standards for

school participation and loan origination criteria. The second was

published on January 4, 1994, and included most of the policies and

procedures relating to schools and borrowers in the Direct Loan

Program. The third set of rules was published on July 1, 1994, and

governed the repayment plans available to Direct Loan borrowers,

including an income contingent repayment plan, and standards and

procedures relating to Federal Direct Consolidation Loans.

The HEA also directed the Secretary, to the extent practicable, to

develop proposed rules for the Direct Loan Program through a negotiated

rulemaking process for the second and subsequent years of the program

(1995-1996 and beyond). With two exceptions, negotiated rulemaking was

used to develop these proposed rules. The standards for school

participation in the Direct Loan Program for the 1995-1996 academic

year, which were published on February 17, 1994, and the criteria

schools would need to meet to originate student loans in the Direct

Loan Program in the 1995-1996 academic year, which were published on

April 26, 1994, were discussed with members of the Direct Student Loan

Regulations Negotiated Rulemaking Advisory Committee. In many cases,

the results of those discussions were incorporated into those standards

and criteria. The timely implementation of the Direct Loan Program for

the 1995-1996 academic year did not permit the solicitation of further

comment on those rules, and they were published in final form.

The negotiated rulemaking process for the development of this

notice of proposed rulemaking began in January of 1994. The Direct

Student Loan Regulations Negotiated Rulemaking Advisory Committee (the

negotiators) met for several days each month from January through June

and for one day in July. The goal of the negotiations was to reach

consensus on a full notice of proposed rulemaking (NPRM) with consensus

being defined as an absence of dissent from any of the negotiators.

While consensus on an NPRM was not attained, substantive agreement was

reached on most of the issues addressed by the regulations.

Provisions Proposed

These proposed regulations include policies and procedures

necessary for borrowers and schools to participate in the Direct Loan

Program for the 1995-1996 and subsequent academic years, including

provisions relating to repayment of Direct Loans. Provisions relating

to school participation and loan origination in this document are

proposed for the 1996-1997 and subsequent academic years.

The policies and procedures in these proposed regulations have been

selected to promote the statutory mandate that the Secretary make loans

under the Direct Loan Program available to all eligible students

attending participating institutions and their parents. For the 1996-

1997 academic year, the Secretary estimates that 50 percent of all new

loans made under the Department of Education's two major student loan

programs will be made to students and their parents participating in

the Direct Loan Program. Thus, over three million recipients will

benefit from this program during the 1996-1997 academic year, and

millions more will benefit in future years. Due to the size and

importance of this program, the proposed regulatory policies and

procedures in this document have been chosen because they would

streamline the loan application and disbursement processes, provide

ease in school administration of the loans, ensure program integrity,

and protect the Federal fiscal interest. Meeting Summaries of each

meeting of the Direct Student Loan Regulations Negotiated Rulemaking

Advisory Committee contain a fuller description of the considerations

that were taken into account in the preparation of these proposed

regulations. Copies of the Meeting Summaries will be available for

public inspection with the comments submitted in response to the

proposed rules.

In certain sections where Direct Loan provisions are different from

(FFEL) Program provisions, the Secretary will propose comparable

changes to FFEL Program regulations in a separate Notice of Proposed

Rulemaking to be published shortly. Anticipated changes to the FFEL

program are noted in the following discussion. The Secretary expects

that the comment period end dates and effective dates for the final

FFEL Program and Direct Loan Program regulations will coincide.

Summary of Contents

Subpart A--Purpose and Scope

Sec. 685.100 The Federal Direct Student Loan Program.

This section contains a general description of the program and

lists the following components of the Federal Direct Student Loan

Program:

(1) The Federal Direct Stafford Loan Program;

(2) The Federal Direct Unsubsidized Stafford Loan Program;

(3) The Federal Direct PLUS Loan Program; and

(4) The Federal Direct Consolidation Loan Program.

Sec. Section 685.101 Participation in the Direct Loan Program.

This section authorizes colleges, universities, graduate and

professional schools, vocational, and proprietary schools selected by

the Secretary to participate in the Direct Loan Program and allows the

Secretary to permit a school to participate in both the FFEL Program

and the Direct Loan Program simultaneously. A school may participate in

both loan programs under such terms as it determines would best serve

the needs of its students, subject to the agreement of the Secretary.

For example, a school could make the Direct Loan Program available to

its first-time borrowers only and the FFEL Program available to its

other students, or it could choose to participate in the Federal Direct

Stafford Loan Program, the Federal Direct Unsubsidized Stafford Loan

Program, and the Federal PLUS Program. In the latter example, a student

could receive a Direct Loan while the student's parent could receive an

FFEL loan.

Sec. Section 685.102 Definitions.

This section identifies the definitions in this notice of proposed

rulemaking that are found in other Department regulations, i.e., in the

Student Assistance General Provisions regulations (34 CFR Part 668), in

the Institutional Eligibility regulations (34 CFR Part 600), and in the

FFEL Program regulations (34 CFR Part 682), and also defines terms that

are specific to these proposed rules. In several of these definitions

the Secretary has incorporated revisions suggested by one or more of

the negotiators.

Under the proposed definition of the term ``estimated financial

assistance'', Federal Perkins Loan Program and Federal Work-Study

Program aid that the student does not accept is not considered

estimated financial assistance. Some negotiators criticized this

proposal on the ground that it takes discretion away from the financial

aid administrator. However, the financial aid administrator retains

discretion in certifying the loan application. Under

Sec. 685.301(a)(5), an aid administrator may reduce the borrower's

determination of need on a case-by-case basis, including a case in

which a reduction in need is warranted even though the borrower has

declined campus-based aid; the reason for the reduction must be

documented in the student's file. The negotiators did not reach

agreement on the definition for ``estimated financial assistance''.

The definition for ``repayment period'', contained in the

regulations for the first year of the program, has been deleted from

these proposed regulations because information that was provided in

that definition (on which the negotiators disagreed) is included in

other provisions.

The definition of the term ``estimated cost of attendance'' in the

first-year regulations has also been deleted from these proposed

regulations and will likewise be proposed to be deleted from FFEL

Program regulations. A definition of this term will be proposed in

forthcoming General Provisions regulations.

Sec. 685.103--Applicability of Subparts

This section states in general terms the content of each subpart of

this notice of proposed rulemaking. Subpart A addresses the purpose and

scope of the document. Subpart B addresses borrower provisions. Subpart

C addresses school requirements. Subpart D contains standards for the

participation of schools in the program and the criteria for

determining a school's role in the loan origination process.

Subpart B--Borrower Provisions

Sec. 685.200 Borrower Eligibility.

This section lists the eligibility requirements for a student

borrower in paragraph (a) and for a parent borrower in paragraph (b).

Currently, a borrower whose previous loan was cancelled due to total

and permanent disability is not eligible for a new loan unless he or

she reaffirms the prior debt and receives a certification from a

physician that the borrower's condition has improved. Based on comments

from a number of the negotiators, these proposed regulations would

eliminate those requirements. The borrower would need to obtain a

certification from a physician that the borrower is able to engage in

substantial gainful activity (but not that the borrower's condition has

improved). The Secretary intends to propose identical changes for the

FFEL Program. The Secretary invites comments on how to define

``substantial gainful activity'' for this purpose. The negotiators did

not reach agreement on the requirement in Sec. 685.200(a)(1)(iv)(A)

that a student reaffirm previous loans that were discharged in

bankruptcy to qualify for a Direct Loan or on the requirement in

Sec. 685.200(b)(7)(i)(C) that a parent document extenuating

circumstances if he or she has an adverse credit history and wants to

receive a Direct PLUS Loan.

This section also requires, in paragraph (c), that a borrower who

is currently in default on a FFEL loan or a Direct Loan must make

satisfactory repayment arrangements on the defaulted loan to be

eligible to borrow under the Direct Loan Program. This requirement does

not apply to defaulted borrowers who consolidate their loans and agree

to repay under the income contingent repayment plan. Finally, paragraph

(d) lists the loans that may be used to replace a student's expected

family contribution.

Sec. 685.201. Obtaining a Loan.

Paragraph (a) of this section describes the requirement for a

student who wishes to obtain a Direct Student Loan to complete a Free

Application for Federal Student Aid and the school's responsibility to

perform certain functions to process that loan application. A school's

responsibilities are differentiated depending on the procedures it

follows to originate loans, or whether it uses the services of an

alternative originator. Paragraph (b) describes the process a parent

borrower uses to apply for a Direct PLUS Loan and also describes the

school's responsibilities according to the procedures it follows to

originate or assist in the origination of PLUS Loans. Paragraph (c)

describes the process for obtaining a Direct Consolidation Loan. The

negotiators did not reach agreement on the application procedures for a

Direct Consolidation Loan in Sec. 685.201(c).

Sec. 685.202 Charges for Which Direct Loan Program Borrowers are

Responsible.

This section specifies the charges that a borrower may incur in the

Direct Loan Program. The loan interest rates applicable to various

types of loans are listed in paragraph (a), and the rules on when

unpaid interest is capitalized are detailed in paragraph (b). Based on

comments from many of the negotiators, the Secretary has specified when

the capitalization of interest will occur. Interest on a Direct

Unsubsidized Loan will not be capitalized until the borrower enters

repayment. If a borrower is in a deferment period on a Direct

Unsubsidized Loan, or in a forbearance period on any loan, the

Secretary will capitalize interest that has accrued at the expiration

of the deferment or forbearance. If a borrower has agreed to make

payments of interest when payments of principal are not due and becomes

past due on those interest payments, the Secretary will capitalize the

unpaid interest, after notification to the borrower, in order to keep

that borrower from defaulting on those interest payments. Finally, with

certain exceptions referred to in Sec. 685.202(b)(5), if a borrower is

making payments on a loan that do not cover all of the accruing

interest, the Secretary will capitalize the remaining interest on an

annual basis.

Loan fees, late charges, and collection charges (both before and

after default) are addressed in paragraphs (c), (d), and (e) of this

section, respectively. The section specifies the Secretary's authority

to assess certain charges but does not require the Secretary to do so.

The maximum fees and charges that could be charged in the Direct Loan

Program are the same as those authorized for the FFEL Program. The

negotiators did not reach agreement on late charges and collection

charges in Sec. 685.202 (d) and (e).

Sec. 685.203 Loan Limits.

This section contains the statutory loan limits, both annual and

aggregate amounts (and prorated amounts for programs that are less than

an academic year), for various classes of students and for the various

Direct Loans. The amount available for a Direct Subsidized Loan to an

undergraduate student in the first year of his or her program is

determined by the length of the program in comparison to the academic

year. An undergraduate student in subsequent years of his or her

program is eligible for increasingly higher loan amounts, but those

amounts are prorated for that portion of the program less than an

academic year in length that remains after the student completes one or

more academic years of study. For example, an undergraduate student in

the second year of his or her program has a loan limit of $3,500 for an

academic year of study. However, if that student has less than a full

academic year of study remaining in the program, that loan limit would

be prorated based on the number of hours for which the student enrolls

(see Secs. 685.203(a) (2), (3) and 685.301(a)(4)(ii)). If this borrower

needed nine semester hours but was enrolled for 12 semester hours

(which is one-half of an academic year) the borrower would qualify for

a $1,750 loan.

Students may also be eligible to borrow Direct Unsubsidized Loans.

The loan limits are the same as for Direct Subsidized Loans, minus the

amount of any Direct Subsidized Loan amount borrowed. For example, if

the limit is $3,500 and the borrower received a $2,000 Direct

Subsidized Loan, that borrower may receive a $1,500 Direct Unsubsidized

Loan. Independent, graduate and professional students, and certain

dependent students may borrow additional amounts of Direct Unsubsidized

Loans.

Paragraphs (d) and (e) describe the aggregate loan limits for

Direct Subsidized and Direct Unsubsidized Loans. The aggregate amount a

dependent undergraduate could receive under these programs is $23,000;

an independent undergraduate could receive $46,000. A graduate student

could receive $138,500, including any loans for undergraduate study.

Paragraphs (f) and (g) discuss loan limits for PLUS Loan borrowers. For

both annual and aggregate PLUS limits, the total amount of the loan may

not exceed the cost of attendance minus other estimated financial

assistance for that student.

Sec. 685.204 Deferment.

This section lists the conditions under which a Direct Loan Program

borrower is eligible for deferment of payments. For Direct

Unsubsidized, Direct Subsidized, and Direct PLUS Loans, the conditions

for deferment are limited to the conditions listed in the statute for

Direct Loans. However, the statute provides the Secretary with latitude

in setting the terms, conditions, and benefits (including deferment

provisions) for Federal Direct Consolidation Loans. In order to

establish comparable deferment provisions under both the Direct Loan

and FFEL Programs, the proposed regulations provide that Direct Loan

borrowers with outstanding FFEL loans as of June 30, 1993, who

consolidate their FFEL loans or their Direct Loans, or both, into a

Direct Consolidation Loan are eligible for deferments under the

provisions that were in effect prior to the recent reauthorization of

the Higher Education Act. Thus, these borrowers maintain the same

deferment benefits for which they would have been eligible under the

FFEL Program and are eligible for the deferments that are available to

other Direct Loan borrowers if they consolidate into the Direct Loan

Program.

A Direct Loan borrower is eligible for an economic hardship

deferment under the same standards that apply under the FFEL Program.

This deferment is available for periods of up to one year at a time

that, collectively, do not exceed three years if the borrower (1) Has

been granted an economic hardship deferment under either the FFEL or

the Federal Perkins Loan Programs; (2) is receiving payment under a

Federal or State public assistance program; (3) is working full-time

and earning a total monthly gross income that does not exceed the

greater of the minimum wage or the poverty level for a family of two;

or (4) is not receiving total monthly gross income that exceeds twice

the minimum wage or the poverty level for a family of two, and, after

deducting monthly payments on Federal postsecondary loans, the

remaining amount does not exceed the minimum wage or the poverty level

for a family of two. See Sec. 682.210(s)(6) of the FFEL Program

regulations.

Sec. 685.205 Forbearance.

This section defines forbearance (the temporary cessation of

payments, an extension of time for making payments, or making smaller

payments than originally scheduled) and lists the reasons for which the

Secretary grants forbearance. Paragraph (a) lists five reasons for

which the borrower may request forbearance: (1) The borrower's

inability to make payments; (2) payment of principal is being deferred

and payment of interest is not subsidized; (3) certain medical and

dental internships and residencies; (4) national service under the

National and Community Service Trust Act of 1993; and (5) title IV loan

payment amounts are equal to or greater than 20 percent of total

monthly gross income. The borrower must provide documentation to

support the request for forbearance.

The Secretary grants administrative forbearance in a number of

circumstances, examples of which are listed in paragraph (b).

Documentation from the borrower is not required for administrative

forbearance.

Sec. 685.206 Borrower responsibilities and defenses.

Paragraph (a) of this section lists the information a borrower must

provide in order to start the origination process for a Direct Loan.

Paragraph (b) requires the borrower to notify the Secretary of changes

in certain personal information, such as name and address. Paragraph

(c) describes certain defenses a borrower may raise against repayment.

A Direct Loan borrower may request that the Secretary exercise his

long-standing authority to relieve the borrower of his or her

obligation to repay a loan on the basis of an act or omission of the

borrower's school. This paragraph lists several types of proceedings

(including but not limited to a tax refund offset proceeding, a wage

garnishment proceeding, a salary offset proceeding (for Federal

employees), and a credit bureau reporting proceeding) in which a

borrower may assert a defense. Paragraph (c) also states the relief

that the Secretary grants to the borrower (beyond relief from the

obligation to repay the loan) if the defense against repayment is

successful. The paragraph further states that the Secretary may

initiate an appropriate proceeding to require the school to pay the

amount of the loan to which a successful defense applies. Under the

proposed rules, the Secretary does not initiate such a proceeding after

the period during which the school is required to retain records unless

the school receives actual notice of the borrower's claim during that

period.

This proposed rule relating to borrower defenses to repayment of a

loan is intended to be effective for the 1995-1996 academic year only.

After the publication of this proposed rule, the Secretary will work

with interested parties to develop regulations for borrower defenses

that would apply to both the Direct Loan Program and the FFEL Program.

When published in final form, the new regulations would apply to the

1996-1997 and subsequent academic years.

Sections 685.207-685.211

During negotiations concerning repayment provisions, the Department

and the community each made major compromises and reached agreement on

many repayment issues in, but not all of the terms of, Secs. 685.207

through 685.211. The Department incorporated many of the suggestions

made by the negotiators relating to the repayment provisions, including

extending the number of years of repayment under the graduated

repayment plan and making extensive changes to the income contingent

repayment plan (ICRP).

The Secretary believes that these repayment plans, as proposed,

provide a broad array of options that allow borrowers to repay their

loans in the ways that best suit their needs. Moreover, borrowers can

change repayment plans as their financial circumstances change. The

Secretary has determined that the proposed repayment plans are cost-

neutral for the Federal government; that is, the repayment plans as a

whole would not exceed the cost of the standard repayment plan. Under

the ICRP, the Secretary proposes that interest no longer be capitalized

once the principal loan balance reaches one and one-half times the

amount owed by the borrower when the borrower enters repayment. This

proposal would allow borrowers who cannot make loan payments in some

years because of low incomes, but can repay in other years when their

incomes are higher, to do so while limiting the increase in the amount

owed due to capitalization. The Secretary seeks comments from the

public relating to the repayment provisions, especially the ICRP. The

Secretary believes that the proposed rules in the ICRP would provide

students at various income levels the opportunity to obtain further

education and choose career paths without being limited by the amount

of their student loan debt. The plan would also ensure that borrowers

repay their loans if they are able to do so.

The Secretary particularly seeks comments on whether the proposed

percentage of income required to be paid under the ICRP is too high and

on whether the proposed length of the repayment periods should be

longer. The Secretary also seeks comments on the limits on

capitalization and the repayment amounts for low-income borrowers. The

Secretary intends to review the ICRP formula for borrowers whose first

Direct Loan is entering repayment each year and make any necessary

changes based on the experience of the program.

Sec. Section 685.207 Obligation to repay.

This section contains provisions relating to a borrower's

obligation to repay a Direct Loan that generally parallel provisions

applicable to the FFEL program. On the basis of consultations with

members of the higher education community, the Secretary has included

clarifying provisions concerning (1) the collection costs for which a

borrower is responsible (in paragraph (a)) and (2) the borrower's

obligations upon re-enrolling in school after a loan has entered

repayment (in paragraph (b)(1)).

Sec. Section 685.208 Repayment Plans.

This section describes the various repayment plans available to

Direct Loan borrowers under section 455(d)(1) of the HEA. These

repayment plans offer borrowers flexible alternatives and allow

borrowers to determine the type of repayment that best suits their

individual financial situations. Although the negotiators did not reach

agreement on this section, it reflects many suggestions made by

negotiators. The Secretary requests comments on the proposed provisions

of the repayment plans.

To simplify the administration of the program, paragraph (a)(4)

requires that all Direct Loans obtained by a borrower be repaid

together under the same repayment plan. The sole exception to this

requirement is that Direct PLUS Loans (which are the only loans that

may not be repaid under the income contingent repayment plan) may be

repaid separately.

The features of the standard repayment plan, described in paragraph

(b), are comparable to the standard repayment plan under the FFEL

Program. Generally, a borrower must repay the loan by making fixed

monthly payments for ten years. Under the extended repayment plan

described in paragraph (c), a borrower must repay the loan by making

fixed monthly payments within an extended period of time of 12 to 30

years that varies with the borrower's debt level. The repayment period

under this plan is the same as the period for repayment of a

consolidation loan under the FFEL Program.

Under the graduated repayment plan described in paragraph (d), a

borrower must repay the loan by making monthly payments at two or more

levels within the same period of time as under the extended repayment

plan. The Secretary believes that making the repayment period under the

graduated repayment plan equal to the repayment period under the

extended payment plan offers flexibility and enables a borrower to

assess the relative benefits of the various repayment plans. This

section provides that the Secretary may adjust the number of payments

or the monthly payment amount under the standard, extended, and

graduated repayment plans to reflect changes in the variable interest

rate identified in Sec. 685.202(a).

The income contingent repayment plan is summarized in paragraph (f)

and described in detail in Sec. 685.209 and Appendix A. Under this

plan, a borrower may choose to repay Direct Loans in one of two ways

described in Sec. 685.209. A borrower's monthly repayment amount

generally varies with the Adjusted Gross Income (AGI) reported by the

borrower, the amount of the borrower's Direct Loan debt, and family

size. However, a borrower would have the option of never making a

monthly repayment under ICRP that is greater than the amount the

borrower would repay over 12 years using standard amortization.

Specific provisions in Sec. 685.209 apply in the case of a married

couple who wish to repay their Direct Loans jointly. Payments under the

income contingent repayment plan increase progressively with debt to

discourage excessive borrowing and to ensure that most borrowers repay

their loans within the 25-year period allowed by the statute. The

borrower is not required to repay any amount that remains outstanding

at the end of the repayment period. Under current tax law, any amount

not repaid is considered taxable income.

The Secretary intends to review periodically the method for

calculating monthly repayment amounts under the income contingent

repayment plan. However, if the Secretary amends the regulations

governing that method, the regulations in effect when a borrower's

first Direct Loan enters repayment determine the monthly repayment

amount for all the borrower's Direct Loans unless the borrower requests

otherwise.

The alternative repayment plan provisions in paragraph (g)

implement the Secretary's statutory authority to provide an alternative

plan, on a case-by-case basis, to a borrower who can demonstrate that

none of the other available plans can accommodate the borrower's

exceptional circumstances.

Under these proposed regulations, PLUS borrowers are eligible for

repayment periods of up to 30 years under the extended and graduated

repayment plans, depending on their debt levels. The Secretary requests

comments concerning whether the 30-year repayment period is appropriate

for PLUS borrowers or whether the maximum repayment periods for these

borrowers should be shorter.

Sec. 685.209 Income contingent repayment plan.

This section contains provisions governing the two options

available for repayment of Direct Loans under the income contingent

repayment plan (ICRP). The ICRP is designed to be attractive to a broad

range of borrowers. Although the negotiators did not reach agreement on

this section, it reflects many of their suggestions. The plan provides

reasonable monthly repayment amounts for borrowers with varying amounts

of debt and income and ensures that most borrowers repay their loans in

a reasonable amount of time. The plan also addresses excessive

borrowing through a payback rate that rises as debt increases. Examples

of the calculation of monthly repayment amounts under both options,

together with a table showing the repayment amounts for borrowers at

various income and debt levels, are included in Appendix A to the

regulations. Borrowers may change between the two ICRP options one time

each year. There are no limits on the number of times a borrower who is

not in default may switch among repayment plans.

Option 1. Calculation of the monthly payment under Option 1 of the

ICRP is described in paragraph (b). In general, the borrower's annual

repayment obligation is the borrower's AGI multiplied by a ``payback

rate'' that is based on the borrower's debt. The monthly payment is the

annual repayment obligation divided by 12, minus an adjustment for

family size. The ``payback rate'' varies from four to 15 percent,

calculated as described in paragraph (b)(2). The family size adjustment

is seven dollars per dependent for up to five dependents. If the

calculated monthly payment is less than $25, the borrower is not

required to make a payment. When a borrower is not required to make a

payment or the payment does not fully cover interest, any unpaid

interest on the principal accrues and is capitalized until the

limitation on capitalization of interest is reached.

Option 2. Calculation of the monthly payment under Option 2 of the

ICRP is described in paragraph (c). In general, under this option, a

borrower's monthly payment is the same as under Option 1 except that no

payment exceeds the monthly amount the borrower would repay over 12

years using standard amortization. If a borrower chooses this option:

(1) The borrower's payments do not exceed the 12-year standard

amortization amount regardless of the borrower's income; (2) the

borrower's repayment period may be extended beyond the repayment period

under Option 1 (but not beyond the 25-year maximum repayment period

described in Sec. 685.209(d)(2)(i); and (3) interest accrues throughout

the repayment period and is capitalized until the limitation on

capitalization of interest is reached.

Joint repayment by married borrowers. This section includes

provisions for joint repayment of Direct Loans by married borrowers. A

step-by-step calculation of a combined amount is included as Example 2

in Appendix A.

Repayment period. Provisions governing the repayment period under

the ICRP are contained in paragraph (d)(2). The maximum period is 25

years, excluding periods of authorized deferment and forbearance under

Secs. 685.204 and 685.205, respectively, and periods in which the

borrower made payments under another repayment plan. The Secretary

believes the exclusion of repayment periods under other plans is needed

to prevent abuses through which a borrower might be able to avoid

repaying a portion of the loan by shifting from one plan to another as

the borrower's income changed.

If a borrower repays more than one loan under the ICRP and the

loans enter repayment at different times, a separate repayment period

for each loan begins when the loan enters repayment. This approach

ensures that no loan will be repaid under the ICRP for more than 25

years. If multiple loans enter repayment at the same time, a single

repayment period applies.

To encourage borrowers to begin repaying their loans and to limit

negative amortization at the beginning of the repayment period, a

borrower must make monthly payments of accrued interest until the

Secretary calculates the borrower's monthly payment on the basis of the

borrower's income. A borrower who is unable to make monthly payments of

accrued interest or qualify for a deferment under Sec. 685.204 may

request forbearance under Sec. 685.205 or may request an alternative

repayment plan under Sec. 685.208(g).

Limit on capitalization of interest. The Secretary believes that

the proposed limit on the amount of interest that is added to principal

(the capitalization of interest) reflects an appropriate balance

between ensuring that a borrower repays, if he or she can, and

extending the opportunity for students to invest in themselves. This

limit on capitalization is desirable to prevent an excessive increase

in a borrower's debt when the borrower's income is insufficient to

cover accruing interest, while maintaining the program's cost-

neutrality for the Federal government. Paragraph (d)(3) permits

capitalization of unpaid interest until the outstanding principal

amount increases to one and one-half times the amount owed by the

borrower when the borrower enters repayment. Thereafter, unpaid

interest accrues but is not capitalized. For example, if a Direct

Unsubsidized Loan borrower owes $10,000 upon entering repayment (after

interest that accrued during the in-school period is capitalized),

interest will no longer be capitalized if the borrower's principal

balance increases to $15,000.

Consent to disclosure of tax return information. In order to repay

a Direct Loan under the ICRP, a borrower must consent, on a form

provided by the Secretary, to the disclosure of certain tax return

information by the Internal Revenue Service to agents of the Secretary

for purposes of calculating a monthly repayment amount and servicing

and collecting a loan. The information subject to disclosure is

taxpayer identity information as defined in 26 U.S.C. 6103(b)(6)

(including such information as name, address, and social security

number), tax filing status, and AGI. Paragraph (d)(5) describes the

procedures for providing written consent and requires that consent be

provided for a period of five years. If a borrower selects the ICRP but

fails to provide or renew consent, or withdraws consent without

selecting a different repayment plan, the Secretary designates the ten-

year standard repayment plan for the borrower.

Sec. 685.210 Choice of Repayment Plan.

This section governs a borrower's initial selection of a repayment

plan and the borrower's ability to change plans thereafter. Before a

Direct Loan enters repayment, the Secretary sends the borrower a

description of the available repayment plans and requests the borrower

to select one. If the borrower does not select a plan within 45 days,

the Secretary designates the standard repayment plan for the borrower.

To accommodate the many changes in life circumstances that a

borrower may experience over the life of a loan, the Secretary has

placed no limit on the number of times a borrower may change plans,

other than limits on a borrower who is repaying a defaulted loan under

the ICRP. Such a borrower must demonstrate a consistent pattern of

repayment and obtain the Secretary's approval before changing repayment

plans. Under Sec. 685.209(a)(2), a borrower may change options under

the ICRP no more frequently than once a year.

A borrower may change to the ICRP at any time, but may not change

to any other plan if that plan has a maximum repayment period of less

than the period the loan has already been in repayment. For example, a

borrower who makes payments for 12 years under the extended repayment

plan may not change to the standard repayment plan, which has a ten-

year repayment period. The repayment period under the new plan is

calculated from the date the loan initially entered repayment, except

in the case of the ICRP (see Sec. 685.209(d)(2)). Thus, a borrower who

repays a loan under the extended repayment plan for three years and

then changes to the standard repayment plan has seven more years to

repay the loan. The negotiators did not reach agreement on this

section.

Sec. 685.211 Miscellaneous Repayment Provisions.

This section governs an assortment of topics relating to the

repayment of Direct Loans. Paragraph (a) permits a borrower to prepay

all or part of a loan at any time and states how a prepayment is

applied. Negotiators disagreed, in particular, on the order in which

the Secretary applies payments to accrued charges and collection costs,

outstanding interest, and outstanding principal on loans in

Sec. 685.211(a)(1). Paragraph (b) states how the Secretary applies a

refund due to a borrower from a school and provides that the Secretary

notifies the borrower of the refund. Paragraph (c) describes the

effects of a borrower's default on a Direct Loan. Paragraph (d) sets

out the standards by which the Secretary determines that a borrower is

ineligible for some or all of a Direct Loan and describes how the

Secretary seeks repayment of the loan. Paragraph (e) contains the

conditions under which a defaulted Direct Loan is rehabilitated and

states that the Secretary then instructs any credit bureau to which the

default was reported to remove the default from the borrower's credit

history.

Sec. 685.212 Discharge of a Loan Obligation.

This section provides for the Secretary's discharge of the

obligation of a borrower and any endorser to repay a loan if (1) the

borrower (or the student on whose behalf a parent borrowed) has died;

(2) the borrower has become totally and permanently disabled, as

described in paragraph (b); (3) the borrower's obligation to repay is

discharged in bankruptcy; (4) the borrower meets the criteria in

Sec. 685.213, relating to closed schools; or (5) the borrower meets the

criteria in Sec. 685.214, relating to false certification or

unauthorized disbursement.

Sec. 685.213 Closed School Discharge.

This section provides for the discharge of the obligation of a

borrower and any endorser to repay a loan if the borrower (or student

on whose behalf the parent borrowed) did not complete the program of

study for which the loan was made because the school closed. The

provisions of this section are modeled on provisions for the FFEL

Program published on April 29, 1994 (59 FR 22462), in order to provide

borrowers with comparable protection under both programs. The

qualifications for discharge under this section are set out in

paragraphs (c) through (e). Among other requirements, a borrower must

cooperate with the Secretary in any judicial or administrative

proceeding to recover amounts discharged or to take related enforcement

action. The Secretary will request only the reasonable cooperation of

the borrower. Negotiators disagreed, in particular, on the requirement

for a student to have withdrawn from a school within 90 days (or longer

in exceptional circumstances) of the school's closure in order for the

student to qualify for a closed-school discharge of his or her loan in

Sec. 685.213(c)(1)(ii). The discharge procedures used by the Secretary

are described in paragraph (f).

Sec. 685.214 Discharge for False Certification of Student Eligibility

or Unauthorized Payment.

This section provides for the discharge of the obligation of a

borrower and any endorser to repay a loan if (1) a school falsely

certifies the loan eligibility of the borrower (or the student on whose

behalf a parent borrowed), or (2) the school endorsed the borrower's

loan check or signed the borrower's authorization for electronic funds

transfer without authorization. The provisions of this section are

modeled on the April 29, 1994 FFEL Program provisions. During

negotiations, some negotiators expressed concern that

Sec. 685.214(a)(1) could be read to encourage loans to students who

could not meet the basic requirements for employment in the occupation

for which they were being trained. To address this concern, a new

paragraph (a)(1)(iii) has been added. The Secretary emphasizes (1) that

this paragraph is not intended to affect the application of any Federal

or State statute that prohibits discrimination, including the Americans

with Disabilities Act (42 U.S.C. 12101 et seq), and (2) that this

section pertains to the discharge of a borrower's obligation to repay a

Direct Loan and does not address school liability.

The qualifications for discharge under this section are set out in

paragraph (c) and include the requirements in Sec. 685.213 relating to

cooperation with the Secretary in enforcement actions and transfers to

the Secretary of any rights to a loan refund.

The Secretary will request only the reasonable cooperation of the

borrower. The discharge procedures used by the Secretary are described

in paragraph (d). The negotiators disagreed on the eligibility of a

student for loan discharge due to false certification or unauthorized

payment by the school under Sec. 685.214.

Sec. 685.215 Consolidation.

This section contains provisions governing the consolidation of

certain Federal education loans into Federal Direct Consolidation

Loans.

Eligible loans. The types of loans that may be consolidated under

this section are listed in paragraph (b) and include all loans made

under the Federal Family Education Loan (FFEL) Program, the Direct Loan

Program, and the Federal Perkins Loans Program, as well as certain

loans made under the Public Health Service Act. The Secretary has

included consolidation loans made under the FFEL Program to permit

virtually all FFEL borrowers to participate in the income contingent

repayment plan that is available only under the Direct Loan Program.

Types of Federal Direct Consolidation Loans. There are three types

of Federal Direct Consolidation Loans--subsidized, PLUS, and

unsubsidized consolidation loans. The loans that may be consolidated

into each type of consolidation loan are listed in paragraph (c).

Subsidized consolidation loans allow borrowers to continue to be free

of the obligation to pay interest during authorized periods of

deferment. PLUS consolidation loans are available for loans made to

parents on behalf of students. Unsubsidized consolidation loans are

available for all other eligible types of loans.

Borrower eligibility. The eligibility requirements that a borrower

must meet to obtain a Federal Direct Consolidation Loan are stated in

paragraph (d). In the second year of the program, a borrower attending

a Direct Loan school will be able to consolidate both FFEL and Direct

Loan Program loans during the in-school period. If a borrower does so,

the borrower receives a six-month grace period on the Direct

Consolidation Loan. Direct Loan borrowers and FFEL loan borrowers may

consolidate their loans under the Direct Loan Program if they meet the

requirements of paragraph (d). With the exception of provisions taken

from statute concerning FFEL loans that may be consolidated into a

Direct Loan, most of the requirements parallel requirements for the

FFEL Program.

The Secretary has included provisions that prevent consolidation by

(1) a borrower who is in default, unless the borrower has made

satisfactory arrangements to repay the defaulted loan or agrees to

repay the consolidation loan under the ICRP; and (2) a PLUS loan

borrower with an adverse credit history at the time of consolidation,

unless the borrower obtains an endorser or provides evidence of

extenuating circumstances. Married borrowers may consolidate their

loans jointly if they agree to be held jointly and severally liable on

the consolidation loan and meet the other requirements of paragraph

(d)(2).

Loan application and origination. A single application for one or

more consolidation loans is permitted under paragraph (e). That

paragraph also permits a borrower to add eligible loans upon request

within 180 days after the date of the consolidation loan's origination.

Provisions in paragraph (f) govern origination of consolidation loans.

Paragraph (f)(1) provides that, in making a consolidation loan, the

Secretary pays the holder of a consolidated loan the amount necessary

to discharge the loan. The amount paid to the holder of a loan not in

default is the amount of the unpaid principal, accrued interest, and

allowable charges. In the case of a loan that is in default, and on

which the holder may have submitted a claim for reinsurance, the

Secretary is considering how to determine the appropriate amount to be

paid to discharge the loan and invites comments on the question.

In addition, regarding defaulted loans that are consolidated into a

Direct Consolidation Loan, paragraph (f)(1) limits collection costs for

which the borrower is responsible to no more than those authorized

under the FFEL Program (currently 18\1/2\ percent of the consolidated

loan). This paragraph also provides that the Secretary may establish

new lower reasonable limits on the amount of collection costs paid to

the holder of the defaulted loan, such as the actual cost incurred by

the note holder. The Secretary specifically invites comments on how

reasonable limits on these costs should be established.

Interest rates. The Secretary has decided to apply to Federal

Direct Consolidation Loans the same variable interest rates that apply

to other Direct Loans. The Secretary believes these rates will be

beneficial to most borrowers.

Repayment and refunds. As provided in paragraph (h), a borrower may

repay a Federal Direct Consolidation Loan under any of the Direct Loan

repayment plans, except that certain restrictions apply to defaulted

borrowers, and the ICRP is not available to a PLUS consolidation loan

borrower. The Secretary has included the exception for PLUS borrowers

to provide consistency with the statutory prohibition against repayment

of Direct Loans by parents under the ICRP. The provisions of paragraphs

(i) and (j), relating to repayment periods and repayment schedules,

respectively, are taken from the FFEL Program, as are provisions in

paragraph (k), relating to a lender's obligations upon receiving a

refund from a school on a loan that has been consolidated.

Joint consolidation loans. If two married borrowers obtain a joint

consolidation loan, special provisions apply under paragraph (l). This

paragraph provides that both borrowers must meet the requirements of

the applicable section in order to obtain a deferment under

Sec. 685.204 or forbearance under Sec. 685.205. To obtain a discharge

under Sec. 685.212, each spouse must qualify for one of the types of

discharge described in that section. The Secretary discharges a portion

of the loan if one spouse meets the requirements of Sec. 685.212 (d) or

(e).

Subpart C--Requirements, Standards, and Payments for Direct Loan

Program Schools

Sec. 685.300 Agreements between an eligible school and the secretary

for participation in the direct loan program.

Paragraph (a) of this section states the requirements for a school

to participate in the Direct Loan Program. First, the school must meet

the requirements for eligibility under the HEA and applicable

regulations. Second, the school must enter into a written program

participation agreement with the Secretary. Under the agreement, the

school agrees to comply with the HEA and applicable regulations, and

paragraph (b) lists several specific provisions of the program

participation agreement. Paragraph (c) states the requirement that a

school or a consortium of schools enter into a supplemental agreement

if the school or consortium originates loans in the Direct Loan

Program.

Sec. 685.301 Certification of a loan by a Direct Loan Program school.

This section states the requirement that a school participating in

the Direct Loan Program provide accurate information to the Secretary

in connection with the origination of a loan and details other

provisions relating to the determination of borrower eligibility and

loan amount. Paragraph (b) addresses the procedures the school must

follow in disbursing the loan. Paragraph (c) requires that a school

that originates a loan provide a promissory note to the Secretary.

Sec. 685.302 Schedule requirements for courses of study by

correspondence.

This section contains requirements relating to the enrollment

status of students in schools that offer programs of study by

correspondence, including the requirement that the school establish a

schedule for the submission of lessons and provide it to prospective

students.

Sec. 685.303 Processing loan proceeds and counseling borrowers.

This section establishes requirements for a school's processing a

borrower's Direct Loan and counseling borrowers. The purpose of this

section is stated in paragraph (a). Standards regarding the timing,

amount, and procedures for the disbursement of funds to a borrower are

set out in paragraphs (b) through (d). These standards vary according

to the type of school, year of the borrower's program of study, and the

school's mode of origination. Paragraph (b)(3) states the obligations

of a school when a student does not attend school during the loan

period.

A number of the restrictions that are proposed in this section,

such as the limitation that a school may not credit a student's account

more than 21 days prior to the first day of the period of enrollment,

or that the school may not pay the student directly more than 10 days

prior to the first day of the period of enrollment, are limitations

that currently exist in the administration of the other title IV

programs. The negotiators did not reach agreement on the requirements

in Sec. 685.303(c)(1)(i) and (iii) that a school credit a student's

account and make available the remaining proceeds to the borrower in a

specified number of days.

While these procedures are being proposed in this document for the

Direct Loan Program, the Secretary intends to study these and other

related ``cash management'' issues (e.g., excess cash and allowable

charges to a student's account) further. In the near future, the

Secretary intends to propose a set of regulations that addresses cash

management issues in all title IV programs and that will replace the

proposals in this document.

Paragraph (c)(3) of this section provides that a school, as a

fiduciary for the benefit of the student, may retain loan proceeds for

the student in order to assist that student in managing loan funds. The

school need not hold the funds in a separate bank account. Rather, the

school may maintain these funds in a separately-designated subsidiary

account under its general bank account. Funds in this account must be

restricted for use by students. The Secretary intends to propose

comparable changes for the FFEL Program.

Paragraph (d) specifies the requirements for late disbursements. In

general, a school may not make any late disbursement beyond the 60th

day after the loan period, or after the student ceases to be enrolled

at the school on at least a half-time basis, as applicable. However, a

school may make a disbursement within 30 days after the applicable

period in documented exceptional circumstances, such as a student's

serious, unexpected illness. The Secretary intends to propose a

comparable provision for the FFEL Program. Negotiators did not reach

agreement on the restrictions on late disbursements in Sec. 685.303(d).

Counseling requirements for schools are found in paragraphs (e) and

(f) of this section. The procedures to be used and the information to

be provided by the school to the student for both initial and exit

counseling are specified in detail. The Secretary will provide

materials to schools to assist them in providing entrance and exit

counseling. These proposed regulations require that schools provide

entrance counseling to most first-time borrowers. They do not require

entrance counseling for transfer students who have already borrowed

under the FFEL or Direct Loan Program. The procedures and information

relating to the exit counseling are, for the most part, required by

section 485(b) of the HEA. However, the initial counseling requirements

are not specified by the statute. The Secretary proposes to allow

schools to follow the initial counseling requirements in these

regulations or to develop an alternative plan for initial counseling as

part of their quality assurance plans. Under an alternative plan for

initial counseling, the school must ensure that most first-time

borrowers receive written counseling materials. An alternative plan

must also be designed to target students most likely to default and

provide them more intensive counseling and support services. Finally,

such a plan must include performance indicators, e.g., the effect of

the plan on the number of students in default.

The Secretary specifically invites comments on alternative

approaches to initial counseling and what performance indicators should

be used to evaluate alternative approaches. The Secretary intends to

develop performance standards to be used in evaluating success in

initial counseling. When those standards are established, the Secretary

may require schools to use them as part of their quality assurance

plans. The Secretary may review a school's alternative plan at any time

and may require the school to change from its alternative plan to the

procedures provided under this section. The Secretary intends to

propose comparable changes for initial counseling requirements in the

FFEL Program. In addition, the Secretary may provide additional loan

counseling to Direct Loan borrowers. The negotiators did not reach

agreement on the provisions on initial counseling in Sec. 685.303(e).

Finally, paragraph (g) contains requirements that apply to schools

in the treatment of excess loan proceeds.

Sec. 685.304 Determining the date of a student's withdrawal.

This section states that, for purposes of the Direct Loan Program,

a school must determine the date of a student's withdrawal by following

the procedures in 34 CFR 668.22(i).

Those procedures govern such a determination for all of the title

IV student assistance programs and indicate that a student's withdrawal

date generally is the date the student notifies the school of his or

her withdrawal, or the date specified by the student, whichever is

later. However, if the student drops out without notifying the school

or takes an approved leave of absence, the last recorded date of class

attendance becomes the withdrawal date. For students in correspondence

courses, the date the student submitted his or her last lesson

generally becomes the student's withdrawal date.

A school is required to determine a student's withdrawal date

within 30 days of the expiration of the student's period of enrollment,

academic year, or educational program, whichever is earliest.

Sec. 685.305 Payment of a refund to the secretary.

Paragraph (a) of this section states that, by applying for a Direct

Loan, a borrower authorizes the school to pay that portion of the

borrower's refund that is allocable to a Direct Loan to the Secretary.

The school is required to do that and to notify the borrower when it

does. Paragraph (b) states that, in determining the portion of the

refund that is allocable to a Direct Loan, the school must follow the

procedures in 34 CFR 668.22. Those procedures list the order in which a

refund must be applied to the various title IV programs, and state that

a school shall pay a refund within 30 days of the student's withdrawal

date if the student officially withdraws or is expelled. If the student

unofficially drops out, the school must pay the refund within 30 days

of the date the school determines the student dropped out, the

expiration of the academic term in which the student withdrew, or the

expiration of the period of enrollment for which the student has been

charged, whichever is earliest. The negotiators did not reach agreement

on refund procedures in Sec. 685.305(b).

Sec. 685.306 Withdrawal procedure for schools participating in the

Direct Loan Program.

This section allows a school to withdraw from the Direct Loan

Program by giving 60 days written notice to the Secretary. The

effective date of such a withdrawal is the later of 60 days after the

school provides that notice or the date set by the school, unless the

Secretary approves an earlier date.

Sec. 685.307 Remedial actions.

This section describes the remedial actions that the Secretary may

take against a school for violation of applicable Federal statutory or

regulatory requirements. Paragraph (a) states the circumstances under

which the school may be required to repay funds and purchase loans made

to its students. Paragraph (b) references the procedures in 34 CFR part

668, Subpart H, which the Secretary follows in requiring the repayment

of funds and the purchase of loans in connection with an audit or

program review. Paragraph (c) states that the Secretary may impose a

fine or take an emergency action against a school or limit, suspend, or

terminate a school's participation in the Direct Loan Program using the

procedures in 34 CFR part 668, subpart G.

Sec. 685.308 Administrative and fiscal control and fund accounting

requirements for schools participating in the Direct Loan Program.

Paragraph (a) of this section requires a participating school to

maintain proper administrative and fiscal procedures and records as set

forth in the Direct Loan Program regulations and in 34 CFR part 668,

and to submit all reports required by those regulations. Paragraph (b)

details the procedures a school must follow in filing its student

status confirmation reports with the Secretary, including the time

constraints associated with those reports. A school will receive these

reports in either paper or electronic format from the Secretary at

least semi-annually. However, beginning with the 1995-1996 academic

year, the Secretary will offer schools the option of receiving these

reports as often as every 60 days.

The length of time that a school is required to keep records is set

forth in paragraph (c), as is the school's responsibility to provide

for the retention of those records (and access to them) in the event of

such changes in the school's status as closure, loss of eligibility, or

change in ownership. The school may keep these records in a number of

machine readable formats.

The specific loan record requirements for the program are set forth

in paragraph (d). The general inspection requirements, including the

types of access required, for these loan records (and all other

required records) are addressed in paragraph (e). Paragraph (f)

requires the school to provide to the Secretary, upon request, certain

information, such as the borrower's name and address, and to notify the

Secretary of a borrower's change in permanent address when such a

change is discovered.

Paragraph (g) requires the school to establish certain accounting

records, maintained in accordance with generally-accepted accounting

principles, and paragraph (h) requires the school to establish a

separate account as trustee for the Secretary and the borrower for

Direct Loan Program funds. Any interest earned on those funds must be

returned to the Secretary.

Paragraph (i) states that a school is required to divide the

functions of authorizing payment and disbursing funds to borrowers

between different offices. Paragraph (j) states that Direct Loan

Program funds may be used only to make Direct Loans to eligible

borrowers; however, funds received under section 452(b)(1) of the HEA

may be used to offset the costs of loan origination.

Subpart D--School Participation and Loan Origination in the Direct Loan

Program

Sec. 685.400 School participation requirements for academic year 1996-

1997 and beyond.

On February 17, 1994, the Secretary published standards for

participation in the Direct Loan Program for the academic year

beginning July 1, 1995. Under those standards, a school must: (1) Meet

the eligibility requirements in section 435(a) of the HEA and (2) have

a cohort default rate of less than 25 percent for one of the two most

recent years for which default rates are available at the time of the

first selection decision following its application (subject to waiver

in certain circumstances).

The Secretary is proposing to modify the standards for

participation for the academic years beginning July 1, 1996. The

Secretary proposes that a school must meet the following standards: (1)

Meet the eligibility requirements in section 435(a) of the HEA,

including the statutory requirement relating to default rates and (2)

not be subject to an emergency action or a proposed or final

limitation, suspension, or termination action under sections

428(b)(1)(T), 432(h), or 487(c) of the HEA. The second standard applies

to initial eligibility to participate. Once a school is participating,

it will not automatically become ineligible due to a proposed or final

limitation, suspension, or termination action.

The Secretary proposes these standards for two reasons. First, the

Secretary believes that the benefits of the Direct Loan Program should

not be available to a school that has lost its eligibility to

participate in the FFEL Program. Second, it would not be sound business

practice to admit a school into the Direct Loan Program when evidence

exists that the school has had problems administering another Federal

student aid program.

Sec. 685.401 Selection criteria and process for academic years 1996-

1997 and beyond.

The Secretary proposes two goals for selecting schools to

participate in the Direct Loan Program. The first goal is that, to the

extent possible, selected schools should be reasonably representative

of the schools participating in the FFEL Program on the basis of

several listed characteristics. The second goal is that in order to

ensure an expeditious but orderly transition from the FFEL Program to

the Direct Loan Program, selected schools should make the transition as

smooth as possible.

Sec. 685.402 Criteria for schools to originate loans for academic

years 1996-1997 and beyond.

This section sets out the initial criteria participating schools

must meet to originate loans. Three types of origination are defined in

Subpart A: Standard origination, school origination option 1, and

school origination option 2. A discussion of these types of origination

follows.

The Department contracts with organizations to assist schools in

the origination and servicing of Direct Loans. While these entities may

perform both origination and servicing functions, in the proposed

regulations they are referred to as ``alternative originators'' when

they perform origination functions for schools and as ``servicers''

when they perform servicing functions.

Under standard origination, an alternative originator provides a

number of services to participating schools. The alternative originator

manages both the promissory note and funds management processes for

these schools. The alternative originator generates the promissory note

based on data transmitted by the school. The alternative originator

also sends the promissory note to the borrower and subsequently

initiates the transfer of funds to the school prior to the anticipated

loan disbursement date.

Under school origination option 1, a participating school is

assisted by the Servicer primarily in the management of funds. Under

this option, a school is responsible for transmitting completed and

signed promissory notes to the Servicer. The Servicer initiates the

transfer of funds to the school prior to the anticipated loan

disbursement date.

Under school origination option 2, a participating school is

responsible for funds management as well as promissory note functions.

Under this option, a school is responsible for transmitting completed

and signed promissory notes to the Servicer. An option 2 school also

requests and obtains loan funds from the Secretary using a process

similar to the process for drawing down funds for other Department of

Education programs. An option 2 school transmits to the Secretary a

specific Direct Loan funding request that is separate from its funding

requests for other programs and is based on immediate disbursement

needs. Direct Loan capital is tracked separately and cannot be used for

purposes other than making Direct Loans. The funds received by an

option 2 school that are intended for specific borrowers but are not

disbursed to those borrowers may be used for other borrowers. After the

first disbursement is made, the school records the actual disbursed

amount and the date of the disbursement in the loan origination record

and transmits the completed record and promissory note (if not

previously submitted) to the Servicer.

Schools participating under origination option 2 will have greater

funds management responsibility than schools participating under

origination option 1. Because of this greater responsibility, a school

participating under option 2 will receive a higher administrative fee

for each borrower than a school participating under option 1.

Similarly, schools participating in Direct Loans under options 1 and 2

perform more promissory note functions than schools participating under

standard origination. The HEA does not allow schools participating

under standard origination to receive administrative fees.

Schools choosing to participate in the Direct Loan Program under

either option 1 or 2 will have more control over funds management or

promissory note functions, or both, than schools participating under

standard origination. However, these options also require schools to

assume greater responsibility than those participating in standard

origination. Therefore, some schools may choose to participate under

standard origination even if they qualify to participate under option 1

or 2. Because of the greater responsibility that schools assume under

option 1 or 2, paragraph (a) establishes stricter criteria for

originating schools than for schools participating in standard

origination. The criteria are intended to be predictive of an

institution's ability to perform the necessary functions to operate as

an originator; therefore, many of the criteria pertain to the financial

operations of institutions.

Paragraph (a)(2)(iii) requires that originating schools, in the

Secretary's opinion, have no severe performance deficiencies for any of

the programs under title IV of the HEA, including deficiencies

demonstrated by the most recent audit or program review. The Secretary

will consider whether performance deficiencies demonstrated in audits

or program reviews would affect the school's ability to comply with

origination requirements. Examples of severe performance deficiencies

that may disqualify a school from origination include, but are not

limited to, the school's failure to make title IV refunds,

falsification of student records or financial data, improperly

disbursed loans resulting in a significant liability to the school,

misuse of title IV funds, and failure to meet relevant regulatory

standards of administrative capability (such as failure to maintain

adequate fiscal records of title IV disbursements). In determining

whether schools have severe title IV performance deficiencies, the

Secretary will allow schools to demonstrate that past problems have

been corrected.

Paragraph (a)(2)(v) states that to be eligible to participate under

option 1 or 2, a school must be current on program and financial

reports and audits required under title IV of the HEA for the 12-month

period immediately preceding its application to participate in the

program. Program reports referred to here would include the

Institutional Payment Summary (IPS) and the Fiscal Operations Report

and Application to Participate (FISAP). Similarly, paragraph (a)(2)(vi)

states that, to be eligible to participate under option 1 or 2, a

school must be current on Federal cash transaction reports required

under title IV for the same 12-month period. These reports include the

ED Payment Management System Form 272.

Paragraph (b)(1) permits the Secretary, on a case-by-case basis, to

allow a school to originate loans under option 1 or 2 notwithstanding

its failure to meet the criteria. Paragraph (b)(2)(i) provides that a

school may request to change from option 2 to option 1 or to standard

origination, or from option 1 to standard origination, at any time.

This provision allows schools that choose to decrease their

administrative responsibilities to take advantage of additional

assistance from the Servicer or the alternative originator. In

addition, paragraph (b)(3) provides that, after one full year of

participation in its initial origination status, a school that wishes

to increase its administrative responsibilities may apply to move from

option 1 to option 2, or from standard origination to option 1 or 2. In

reviewing these applications, the Secretary intends to apply criteria

and performance standards, including those enumerated in paragraph

(b)(3)(iii).

Paragraph (c) provides that, at any time after the determination of

a school's initial origination status, the Secretary may require a

school to change its origination status if such a change is necessary

to ensure program integrity or if the school fails to meet criteria and

performance standards established by the Secretary. The Secretary may

require a school to convert from origination option 2 to option 1 or

standard origination, or from origination option 1 to standard

origination.

In evaluating a school's origination performance, the Secretary

intends to consider the eligibility criteria listed in

Sec. 685.402(a)(2) and additional performance measures. To establish

additional performance measures, the Secretary requests input from the

community, particularly from schools participating in the Direct Loan

Program in academic year 1994-1995. For all schools, the Secretary is

considering developing standards based upon such considerations as the

percentage of errors on origination and disbursement records, as well

as the timeliness of the submission of such documents. For option 1 and

2 schools, the Secretary is considering additional performance

standards based upon the percentage of errors on promissory notes and

the timeliness of the submission of these documents. For option 2

schools, the Secretary is considering developing quantitative measures

of funds management performance, based on the amount of a school's

excess cash and the timeliness and accuracy of a school's drawdown

request.

Paragraph (e) of this section provides that a school may request a

change in the Servicer performing origination or servicing functions.

The Secretary would grant a school's request if the Secretary

determined that the school's claim of unsatisfactory performance by its

current Servicer was accurate and substantial and the change could be

accommodated by the Servicer requested by the school. Examples of a

substantial claim include a pattern of failure to process promissory

notes in a timely manner, significant and repeated errors in handling

and reviewing school transmissions of student data, repeated late

billing of borrowers, inability to process payments in a timely

fashion, and inability to track the status of borrower accounts. The

Secretary recognizes that high quality servicing will be a key factor

in the success of the Direct Loan Program. Therefore, the Secretary is

committed to promoting high-quality servicing and to including

institutional choice in servicing arrangements if institutions receive

unsatisfactory Servicer performance. To meet these goals, the Secretary

intends to encourage competition among servicers. To that end, the

Secretary will solicit proposals and attempt to award contracts to more

servicers than would be immediately necessary to handle servicing

volumes. This will allow the flexibility necessary to terminate

contracts due to poor performance. The origination contractor will be

encouraged to propose methods that will allow for similar competition

among subcontractors or origination sites.

Executive Order 12866

1. Assessment of Costs and Benefits

These proposed 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 proposed regulatory

action.

The potential costs associated with the proposed regulations are

those resulting from statutory requirements and those determined by the

Secretary to be necessary for administering the title IV, HEA programs

effectively and efficiently. Burdens specifically associated with

information collection requirements, if any, are explained elsewhere in

this preamble under the heading of Paperwork Reduction Act of 1980.

In assessing the potential costs and benefits--both quantitative

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

determined that the benefits of the proposed regulations justify the

costs. A further discussion of the benefits and costs of the proposed

regulations is contained in the summary of the provisions proposed.

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.

To assist the Department in complying with the specific

requirements of Executive Order 12866, the Secretary invites comment on

whether there may be further opportunities to reduce any potential

costs or increase potential benefits resulting from these proposed

regulations without impeding the effective and efficient administration

of the title IV, HEA programs.

2. Clarity of the Regulations

Executive Order 12866 requires each agency to write regulations

that are easy to understand.

The Secretary invites comments on how to make these regulations

easier to understand, including answers to questions such as the

following: (1) Are the requirements in the regulations clearly stated?

(2) Do the regulations contain technical terms or other wording that

interferes with their clarity? (3) Does the format of the regulations

(grouping and order of sections, use of headings, paragraphing, etc.)

aid or reduce their clarity? Would the regulations be easier to

understand if they were divided into more (but shorter) sections? (A

``section'' is preceded by the symbol ``Sec. '' and a numbered heading;

for example, Sec. 685.200 Borrower eligibility.) (4) Is the description

of the proposed regulations in the ``Supplementary Information''

section of this preamble helpful in the understanding of the proposed

regulations? How could this description be more helpful in making the

proposed regulations easier to understand? (5) What else could the

Department do to make the regulations easier to understand?

A copy of any comments that concern whether these proposed

regulations are easy to understand should also be sent to Stanley

Cohen, Regulations Quality Officer, U.S. Department of Education, 400

Maryland Avenue, SW., (Room 5125 FOB-6), Washington, DC 20202-2241.

Regulatory Flexibility Act Certification

The Secretary certifies that these proposed regulations would not

have a significant economic impact on a substantial number of small

entities. The small entities that would be affected by these

regulations are institutions of higher education. Many provisions of

the proposed regulations repeat statutory requirements. Certain

reporting, recordkeeping, and compliance requirements are imposed by

the regulations. However, these requirements are modeled on existing

regulations for other Federal student financial aid programs.

Institutions of higher education are therefore familiar with these

requirements, and the regulations would not have a significant

additional impact on these institutions.

Paperwork Reduction Act of 1980

Sections 685.204, 685.206, 685.209, 685.213, 685.214, 685.215,

685.301, 685.302, 685.303, 685.308 and 685.401 contain information

collection requirements. As required by the Paperwork Reduction Act of

1980, the Department of Education will submit a copy of these proposed

regulations to the Office of Management and Budget (OMB) for its

review. (44 U.S.C. 3504(h))

These proposed regulations affect students who apply for Federal

student financial assistance authorized by title IV of the Higher

Education Act of 1965, as amended, and postsecondary institutions

administering the Direct Loan Program. Annual public reporting burden

for this collection of information is estimated to average 29 minutes

for each of the estimated 2,483,906 individuals providing information

regarding eligibility for a loan, deferment, income-contingent

repayment, or a Direct Consolidation Loan (or 1,200,554 hours total)

and 12 minutes for a postsecondary institution for each of the

estimated 4,068,121 responses relating to postsecondary institutions'

administration of a student loan program (or 813,624 hours total)

including the time for reviewing instructions, searching existing data

sources, gathering and maintaining the data needed, and completing and

reviewing the collection of information.

Organizations and individuals desiring to submit comments on the

information collection requirements should direct them to the Office of

Information Regulatory Affairs, OMB, Room 10235, New Executive Office

Building, Washington, DC 20503; Attention: Daniel J. Chenok.

Invitation to Comment

Interested persons are invited to submit comments and

recommendations regarding these proposed regulations. All comments

submitted in response to these proposed regulations will be available

for public inspection, during and after the comment period, in room

4624, Regional Office Building 3, 7th and D Streets, SW., Washington,

DC, between the hours of 8:30 a.m. and 4 p.m., Monday through Friday of

each week except Federal holidays.

To expedite ED's review and response, comments should be identified

by specific sections of the NPRM and presented sequentially.

Assessment of Educational Impact

The Secretary particularly requests comments on whether the

proposed regulations in this document would require transmission of

information that is being gathered by or is available from any other

agency or authority of the United States.

List of Subjects in 34 CFR Part 685

Administrative practice and procedure, Colleges and universities,

Education, Loan programs-education, Reporting and recordkeeping

requirements, Student aid, Vocational education.

(Catalog of Federal Domestic Assistance Number 84.268, Federal

Direct Student Loan Program)

Dated: August 1, 1994.

Richard W. Riley,

Secretary of Education.

The Secretary proposes to revise part 685 of title 34 of the Code

of Federal Regulations to read as follows:

PART 685--FEDERAL DIRECT STUDENT LOAN PROGRAM

Subpart A--Purpose and Scope

Sec.

685.100 The Federal Direct Student Loan Program.

685.101 Participation in the Direct Loan Program.

685.102 Definitions.

685.103 Applicability of subparts.

Subpart B--Borrower Provisions

685.200 Borrower eligibility.

685.201 Obtaining a loan.

685.202 Charges for which Direct Loan Program borrowers are

responsible.

685.203 Loan limits.

685.204 Deferment.

685.205 Forbearance.

685.206 Borrower responsibilities and defenses.

685.207 Obligation to repay.

685.208 Repayment plans.

685.209 Income contingent repayment plan.

685.210 Choice of repayment plan.

685.211 Miscellaneous repayment provisions.

685.212 Discharge of a loan obligation.

685.213 Closed school discharge.

685.214 Discharge for false certification of student eligibility or

unauthorized payment.

685.215 Consolidation.

Subpart C--Requirements, Standards, and Payments for Direct Loan

Program Schools

685.300 Agreements between an eligible school and the Secretary for

participation in the Direct Loan Program.

685.301 Certification of a loan by a Direct Loan Program school.

685.302 Schedule requirements for courses of study by

correspondence.

685.303 Processing loan proceeds and counseling borrowers.

685.304 Determining the date of a student's withdrawal.

685.305 Payment of a refund to the Secretary.

685.306 Withdrawal procedure for schools participating in the

Direct Loan Program.

685.307 Remedial actions.

685.308 Administrative and fiscal control and fund accounting

requirements for schools participating in the Direct Loan Program.

Subpart D--School Participation and Loan Origination in the Direct Loan

Program

685.400 School participation requirements for academic years 1996-

1997 and beyond.

685.401 Selection criteria and process for academic years 1996-1997

and beyond.

685.402 Criteria for schools to originate loans for academic years

1996-1997 and beyond.

Appendix A--Income Contingent Repayment Examples of the Calculation of

Monthly Repayment Amounts

Authority: 20 U.S.C. 1087a et seq.

Subpart A--Purpose and Scope

Sec. 685.100 The Federal Direct Student Loan Program.

(a) Under the Federal Direct Student Loan Program (Direct Loan

Program), the Secretary makes loans to enable a student or parent to

pay the costs of the student's attendance at a postsecondary school.

This part governs the Federal Direct Stafford Loan Program, the Federal

Direct Unsubsidized Stafford Loan Program, the Federal Direct PLUS

Program, and the Federal Direct Consolidation Loan Program. The

Secretary makes loans under the following program components:

(1) Federal Direct Stafford Loan Program, which provides loans to

undergraduate, graduate, and professional students. The Secretary

subsidizes the interest while the borrower is in an in-school, grace,

or deferment period.

(2) Federal Direct Unsubsidized Stafford Loan Program, which

provides loans to undergraduate, graduate and professional students.

The borrower is responsible for the interest that accrues during any

period.

(3) Federal Direct PLUS Program, which provides loans to parents of

dependent students. The borrower is responsible for the interest that

accrues during any period.

(4) Federal Direct Consolidation Loan Program, which provides loans

to borrowers to consolidate certain Federal educational loans.

(b) The Secretary makes a Direct Subsidized Loan, a Direct

Unsubsidized Loan, or a Direct PLUS Loan only to a student or a parent

of a student enrolled in a school that has been selected by the

Secretary to participate in the Direct Loan Program.

(c) The Secretary makes a Direct Consolidation Loan only to--

(1) A borrower with a loan made under the Direct Loan Program; or

(2) A borrower with a loan made under the Federal Family Education

Loan Program who is not able to receive--

(i) A Federal Consolidation Loan; or

(ii) A Federal Consolidation Loan with income-sensitive repayment

terms that are satisfactory to the borrower.

(Authority: 20 U.S.C. 1087a et seq.)

Sec. 685.101 Participation in the Direct Loan Program.

(a)(1) Colleges, universities, graduate and professional schools,

vocational, and proprietary schools selected by the Secretary may

participate in the Direct Loan Program. Participation in the Direct

Loan Program enables an eligible student or parent to obtain a loan to

pay for the student's cost of attendance at the school.

(2) The Secretary may permit a school to participate in both the

Federal Family Education Loan (FFEL) Program, as defined in 34 CFR Part

600, and the Direct Loan Program. A school permitted to participate in

both the FFEL Program and the Direct Loan Program may certify loan

applications under the FFEL Program according to the terms of its

agreement with the Secretary.

(b) An eligible student who is enrolled at a school participating

in the Direct Loan Program may borrow under the Federal Direct Stafford

Loan and Federal Direct Unsubsidized Stafford Loan Programs. An

eligible parent of an eligible dependent student enrolled at a school

participating in the Direct Loan Program may borrow under the Federal

Direct PLUS Program.

(Authority: 20 U.S.C. 1087a et seq.)

Sec. 685.102 Definitions.

(a)(1) The following definitions are set forth in the Student

Assistance General Provisions, 34 CFR Part 668:

Academic year

Campus-based programs

Dependent student

Eligible program

Eligible student

Enrolled

Federal Consolidation Loan Program

Federal Direct Student Loan Program (Direct Loan Program)

Federal Pell Grant Program

Federal Perkins Loan Program

Federal PLUS Program

Federal State Student Incentive Grant Program

Federal Supplemental Educational Opportunity Grant Program

Federal Work-Study Program

Independent student

One-third of an academic year

Parent

State

Two-thirds of an academic year

U.S. citizen or national

(2) The following definitions are set forth in the regulations for

Institutional Eligibility under the Higher Education Act of 1965, as

amended, 34 CFR Part 600:

Accredited

Clock hour

Educational program

Eligible institution

Federal Family Education Loan (FFEL) Program

Institution of higher education

Nationally recognized accrediting agency or association

Preaccredited

Program of study by correspondence

Secretary

(3) The following definitions are set forth in the regulations for

the Federal Family Education Loan Program (FFEL) Program, 34 CFR Part

682:

Act

Endorser

Expected family contribution

Federal Insured Student Loan (FISL) Program

Federal Stafford Loan Program

Foreign school

Full-time student

Graduate or professional student

Guaranty agency

Holder

Legal guardian

Lender

Totally and permanently disabled

Undergraduate student

(b) The following definitions also apply to this part:

Alternative originator: An entity under contract with the Secretary

that originates Direct Loans to students and parents of students who

attend a Direct Loan Program school that does not originate loans.

Consortium: For purposes of this part, a consortium is a group of

two or more schools that interacts with the Secretary in the same

manner as other schools, except that the communication between the

Secretary and the schools is channeled through a single point. Each

school in a consortium shall sign a Direct Loan Program participation

agreement with the Secretary and be responsible for the information it

supplies through the consortium.

Default: The failure of a borrower and endorser, if any, to make an

installment payment when due, or to meet other terms of the promissory

note, if the Secretary finds it reasonable to conclude that the

borrower and endorser, if any, no longer intend to honor the obligation

to repay, provided that this failure persists for--

(1) 180 days for a loan repayable in monthly installments; or

(2) 240 days for a loan repayable in less frequent installments.

Disbursement: (1) Except for a Direct Consolidation Loan, the

delivery by a school of an installment of a loan to a borrower. The

disbursement date is the earliest date when the proceeds are applied to

a student's account or when the proceeds are made available to the

borrower.

(2) For a Direct Consolidation Loan, disbursement is the payment by

the Secretary to the holder or holders of the underlying loans and

occurs when the Direct Consolidation Loan is made.

Estimated financial assistance: (1) The estimated amount of

assistance that a student will receive from Federal, State,

institutional, or other sources for a period of enrollment. Types of

assistance include scholarships, grants, financial need-based

employment, or loans, such as--

(i) Benefits paid under section 156 of title 42 of the United

States Code (formerly Social Security Benefits);

(ii) Veterans' educational benefits paid under chapters 30, 31, 32,

and 35 of title 38 of the United States Code;

(iii) Educational benefits paid under chapters 106 and 107 of title

10 of the United States Code (Selected Reserve Educational Assistance

Program);

(iv) 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;

(v) Benefits paid under Public Law 97-376, section 156: Restored

Entitlement Program for Survivors (or Quayle benefits);

(vi) Benefits paid under Public Law 96-342, section 903:

Educational Assistance Pilot Program;

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

postsecondary education institution;

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

including but not limited to a Direct Subsidized Loan, a Direct

Unsubsidized Loan, a Federal Pell Grant, and campus-based aid;

(ix) In the case of a Direct PLUS Loan, the estimated amount of

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

Direct Subsidized Loan, a Direct Unsubsidized Loan, a Federal Pell

Grant, and campus-based aid; and

(x) If the student is applying for a loan to cover expenses

incurred within the same enrollment period as that for which a prior

Federal or non-Federal student loan was received, the amount of loan

proceeds withheld by the Secretary, lender, or guaranty agency making

or insuring the loan if those costs were included in computing the

borrower's estimated cost of attendance for the prior loan.

(2) Estimated financial assistance does not include--

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

including--

(A) Direct PLUS Loan amounts;

(B) Direct Unsubsidized Loan amounts; and

(C) Non-Federal loan amounts; and

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

student has declined.

Federal Direct Consolidation Loan Program: A loan program

authorized by title IV, part D of the Act that provides loans to

borrowers who consolidate certain Federal educational loans, and one of

the components of the Direct Loan Program. Loans made under this

program are referred to as Direct Consolidation Loans. There are three

types of Direct Consolidation Loans:

(1) Direct Subsidized Consolidation Loans. Subsidized title IV

education loans may be consolidated into a Direct Subsidized

Consolidation Loan. Interest is not charged to the borrower during in-

school and deferment periods.

(2) Direct Unsubsidized Consolidation Loans. Certain Federal

education loans may be consolidated into a Direct Unsubsidized

Consolidation Loan. The borrower is responsible for the interest that

accrues during any period.

(3) Direct PLUS Consolidation Loans. Parent Loans for Undergraduate

Students, Federal PLUS, Direct PLUS, and Direct PLUS Consolidation

Loans may be consolidated into a Direct PLUS Consolidation Loan. The

borrower is responsible for the interest that accrues during any

period.

Federal Direct PLUS Program: A loan program authorized by title IV,

part D of the Act that provides loans to parents of dependent students

attending schools that participate in the Direct Loan Program, and one

of the components of the Direct Loan Program. The borrower is

responsible for the interest that accrues during any period. Loans made

under this program are referred to as Direct PLUS Loans.

Federal Direct Stafford Loan Program: A loan program authorized by

title IV, part D of the Act that provides loans to undergraduate,

graduate, and professional students attending Direct Loan Program

schools, and one of the components of the Direct Loan Program. The

Secretary subsidizes the interest while the borrower is in an in-

school, grace, or deferment period. Loans made under this program are

referred to as Direct Subsidized Loans.

Federal Direct Unsubsidized Stafford Loan Program: A loan program

authorized by title IV, part D of the Act that provides loans to

undergraduate, graduate, and professional students attending Direct

Loan Program schools, and one of the components of the Direct Loan

Program. The borrower is responsible for the interest that accrues

during any period. Loans made under this program are referred to as

Direct Unsubsidized Loans.

Grace period: A six-month period that begins on the day after a

Direct Loan Program borrower ceases to be enrolled as at least a half-

time student at an eligible institution and ends on the day before the

repayment period begins.

Half-time student: A student who is not a full-time student and who

is enrolled in a school participating in the FFEL Program or the Direct

Loan Program and is carrying an academic workload that is at least one-

half the workload of a full-time student, as determined by the school.

A student enrolled solely in an eligible program of study by

correspondence is considered a half-time student.

Interest rate: The annual interest rate that is charged on a loan,

under title IV, part D of the Act.

Loan fee: A fee, payable by the borrower, that is used to help

defray the costs of the Direct Loan Program.

Period of enrollment: The period for which a Direct Subsidized,

Direct Unsubsidized, or Direct PLUS Loan is intended. The period of

enrollment must coincide with one or more academic terms established by

the school (such as semester, trimester, quarter, academic year, and

length of the program of study), for which institutional charges are

generally assessed. The period of enrollment is also referred to in

this part as the loan period.

Satisfactory repayment arrangement. The making of six consecutive,

voluntary, on-time, full monthly payments on a defaulted loan to regain

further eligibility for student aid under title IV of the Act. The

required monthly payment amount may not be more than is reasonable and

affordable based on the borrower's total financial circumstances. ``On-

time'' means a payment made within 15 days of the scheduled due date,

and voluntary payments are those payments made directly by the

borrower, regardless of whether there is a judgment against the

borrower, and do not include payments obtained by income tax offset,

garnishment, or income or asset execution.

School origination option 1: The process by which a school creates

a loan origination record, transmits the record to the Servicer,

prepares the promissory note, obtains a completed and signed promissory

note from a borrower, transmits the promissory note to the Servicer,

receives the funds electronically, disburses a loan to a borrower,

creates a disbursement record, transmits the disbursement record to the

Servicer, and reconciles on a monthly basis. The Servicer initiates the

drawdown of funds for schools participating in school origination

option 1.

School origination option 2: The process by which a school creates

a loan origination record, transmits the record to the Servicer,

prepares the promissory note, obtains a completed and signed promissory

note from a borrower, transmits the promissory note to the Servicer,

determines funding needs, initiates the drawdown of funds, receives the

funds electronically, disburses a loan to a borrower, creates a

disbursement record, transmits the disbursement record to the Servicer,

and reconciles on a monthly basis.

Servicer: An entity that has contracted with the Secretary to act

as the Secretary's agent in providing services relating to the

origination or servicing of Direct Loans.

Standard origination: The process by which a school creates a loan

origination record, transmits the record to the alternative originator,

receives the funds electronically, disburses funds, creates a

disbursement record, transmits the disbursement record to the

alternative originator, and reconciles on a monthly basis. The

alternative originator prepares the promissory note, obtains a

completed and signed promissory note from a borrower, and initiates the

drawdown of funds for schools participating in standard origination.

(Authority: 20 U.S.C. 1087a et seq.)

Sec. 685.103 Applicability of subparts.

(a) Subpart A contains general provisions regarding the purpose and

scope of the Direct Loan Program.

(b) Subpart B contains provisions regarding borrowers in the Direct

Loan Program.

(c) Subpart C contains certain requirements regarding schools in

the Direct Loan Program.

(d) Subpart D contains provisions regarding school eligibility for

participation and origination in the Direct Loan Program.

(Authority: 20 U.S.C. 1087a et seq.)

Subpart B--Borrower Provisions

Sec. 685.200 Borrower eligibility.

(a) Student borrower. (1) A student is eligible to receive a Direct

Subsidized Loan, a Direct Unsubsidized Loan, or a combination of these

loans, if the student meets the following requirements:

(i) The student is enrolled in a school that participates in the

Direct Loan Program.

(ii) The student meets the requirements for an eligible student

under 34 CFR Part 668.

(iii) In the case of an undergraduate student who seeks a Direct

Subsidized Loan or a Direct Unsubsidized Loan at a school that

participates in the Federal Pell Grant Program, the student has

received a determination of Federal Pell Grant eligibility for the

period of enrollment for which the loan is sought.

(iv)(A) The student reaffirms any FFEL Program or Direct Loan

Program debt that previously was discharged in bankruptcy.

(B) For purposes of paragraph (a)(1)(iv)(A) of this section, a

reaffirmation is an acknowledgement of the loan by the borrower in a

legally binding manner. The acknowledgement may include, but is not

limited to, the borrower's--

(1) Signing a new promissory note or repayment schedule; or

(2) Making a payment on the loan.

(v) In the case of a borrower whose previous loan was cancelled due

to total and permanent disability, the student--

(A) Obtains a certification from a physician that the borrower is

able to engage in substantial gainful activity; and

(B) Signs a statement acknowledging that the Direct Loan the

borrower receives cannot be cancelled in the future on the basis of any

impairment present when the new loan is made, unless that impairment

substantially deteriorates.

(vi) In the case of any student who seeks a loan but does not have

a certificate of graduation from a school providing secondary education

or the recognized equivalent of such a certificate, the student--

(A) Has passed an independently administered examination approved

by the Secretary; or

(B) Has been determined to have the ability to benefit from the

program in accordance with a State process approved by the Secretary.

(2)(i) A Direct Subsidized Loan borrower must demonstrate financial

need in accordance with title IV, part F of the Act.

(ii) The Secretary considers a member of a religious order, group,

community, society, agency, or other organization who is pursuing a

course of study at an institution of higher education to have no

financial need if that organization--

(A) Has as its primary objective the promotion of ideals and

beliefs regarding a Supreme Being;

(B) Requires its members to forego monetary or other support

substantially beyond the support it provides; and

(C)(1) Directs the member to pursue the course of study; or

(2) Provides subsistence support to its members.

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

Loan if the parent meets the following requirements:

(1) The parent is borrowing to pay for the educational costs of a

dependent undergraduate student who meets the requirements for an

eligible student under 34 CFR Part 668.

(2) The parent provides his or her and the student's social

security number.

(3) The parent meets the requirements pertaining to citizenship and

residency that apply to the student under 34 CFR 668.7.

(4) The parent meets the requirements concerning defaults and

overpayments that apply to the student in 34 CFR 668.7.

(5) The parent complies with the requirements for submission of a

Statement of Educational Purpose that apply to the student under 34 CFR

Part 668, except for the completion of a Statement of Selective Service

Registration Status.

(6) The parent meets the requirements that apply to a student under

paragraphs (a)(1)(iv) and (v) of this section.

(7)(i) The parent--

(A) Does not have an adverse credit history;

(B) Has an adverse credit history but has obtained an endorser who

does not have an adverse credit history; or

(C) Has an adverse credit history but documents to the satisfaction

of the Secretary that extenuating circumstances exist.

(ii) For purposes of paragraph (b)(7)(i) of this section, an

adverse credit history means that as of the date of the credit report,

the applicant--

(A) Is 90 or more days delinquent on any debt; or

(B) Has been the subject of a default determination, bankruptcy

discharge, foreclosure, repossession, tax lien, wage garnishment, or

write-off of a debt under title IV of the Act during the five years

preceding the date of the credit report.

(c) Defaulted FFEL Program and Direct Loan borrowers. Except as

noted in Sec. 685.215(d)(1)(ii)(E), in the case of a student or parent

borrower who is currently in default on an FFEL Program or a Direct

Loan Program Loan, the borrower shall make satisfactory repayment

arrangements on the defaulted loan. The definition of a satisfactory

repayment arrangement is provided in 34 CFR 685.102.

(d) Use of loan proceeds to replace expected family contribution. A

borrower may use the amount of a Direct Unsubsidized Loan, a Direct

PLUS Loan, a State-sponsored loan, or another non-Federal loan obtained

for a loan period to replace the expected family contribution for that

loan period.

(Authority: 20 U.S.C. 1087a et seq.)

Sec. 685.201 Obtaining a loan.

(a) Application for a Direct Subsidized Loan or a Direct

Unsubsidized Loan. (1) To obtain a Direct Subsidized Loan or a Direct

Unsubsidized Loan, a student shall complete a Free Application for

Federal Student Aid and submit it in accordance with instructions in

the application.

(2) If the student is eligible for a Direct Subsidized Loan or a

Direct Unsubsidized Loan, the school in which the student is enrolled

shall perform the following functions:

(i) A school participating under school origination option 2 shall

create a loan origination record, obtain a completed promissory note

from the student, draw down funds, and disburse the funds.

(ii) A school participating under school origination option 1 shall

create a loan origination record, obtain a completed promissory note

from the student, and transmit the record and promissory note to the

Servicer. The Servicer initiates the drawdown of funds, and the school

disburses the funds.

(iii) If the student is attending a school participating under

standard origination, the school shall create a loan origination record

and transmit the record to the alternative originator, which prepares

the promissory note and sends it to the student and receives the

completed promissory note from the student. The Servicer initiates the

drawdown of funds, and the school disburses the funds.

(b) Application for a Direct PLUS Loan. To obtain a Direct PLUS

Loan, the parent shall complete the application/promissory note and

submit it to the school at which the student is enrolled. The school

shall complete its portion of the application/promissory note and

submit it to the Servicer, which makes a determination as to whether

the parent has an adverse credit history. A school participating under

school origination option 2 shall draw down funds and disburse the

funds. For a school participating under school origination option 1 or

standard origination, the Servicer initiates the drawdown of funds, and

the school disburses the funds.

(c) Application for a Direct Consolidation Loan. (1) To obtain a

Direct Consolidation Loan, the applicant shall complete the

application/promissory note and submit it to the Servicer. The

application/promissory note sets forth the terms and conditions of the

Direct Consolidation Loan and informs the applicant how to contact the

Servicer. The Servicer answers questions regarding the process of

applying for a Direct Consolidation Loan and provides information about

the terms and conditions of both Direct Consolidation Loans and the

types of loans that may be consolidated.

(2) Once the applicant has submitted the completed application/

promissory note to the Servicer, the Secretary makes the Direct

Consolidation Loan under the procedures specified in Sec. 685.215.

(Authority: 20 U.S.C. 1087a et seq., 1091a)

Sec. 685.202 Charges for which Direct Loan Program borrowers are

responsible.

(a) Interest--(1) Interest rate for Direct Subsidized Loans and

Direct Unsubsidized Loans. (i) For Direct Subsidized Loans and Direct

Unsubsidized Loans in repayment, the interest rate during any twelve-

month period beginning on July 1 and ending on June 30 is determined on

the June 1 immediately preceding that period. The interest rate is

equal to the bond equivalent rate of 91-day Treasury bills auctioned at

the final auction held prior to that June 1 plus 3.1 percentage points,

but does not exceed 8.25 percent.

(ii) For Direct Subsidized Loans and Direct Unsubsidized Loans

prior to the beginning of the repayment period or during the period of

deferment under Sec. 685.204, the interest rate during any twelve-month

period beginning on July 1 and ending on June 30, is determined on the

June 1 immediately preceding that period. The interest rate is equal to

the bond equivalent rate of 91-day Treasury bills auctioned at the

final auction held prior to that June 1; plus 2.5 percentage points,

but does not exceed 8.25 percent.

(2) Interest rate for the Direct PLUS Loans. The interest rate on a

Direct PLUS Loan during any twelve-month period beginning on July 1 and

ending on June 30 is determined on the June 1 preceding that period.

The interest rate is equal to the bond equivalent rate of 52-week

Treasury bills auctioned at the final auction held prior to that June 1

plus 3.1 percentage points, but does not exceed 9 percent.

(b) Capitalization. (1) The Secretary may add accrued interest to

the borrower's unpaid principal balance. This increase in the principal

balance of a loan is called ``capitalization.''

(2) For a Direct Unsubsidized Loan, the Secretary capitalizes the

interest that accrues on the loan when the borrower enters repayment.

(3) For a Direct Loan not eligible for interest subsidies during

periods of deferment, and for all Direct Loans during periods of

forbearance, the Secretary capitalizes the interest that has accrued on

the loan upon the expiration of the deferment or forbearance.

(4) If a borrower is in a period of deferment, forbearance, or the

in-school or grace period on a Direct Loan and agrees to monthly or

quarterly payments of interest, the Secretary notifies the borrower

that the borrower's failure to resolve any delinquency constitutes the

borrower's consent to capitalization of delinquent interest and all

interest that accrues through the remainder of that period. The

Secretary capitalizes the interest that has accrued on the loan upon

the expiration of that period.

(5) Except as provided in Sec. 685.209(d)(3) and in the case of a

Direct Unsubsidized Loan borrower who has not entered repayment, is in

deferment, or in forbearance, the Secretary annually capitalizes

interest payable by the borrower when the borrower does not make

payments sufficient to cover the interest that has accrued on the loan.

(c) Loan fee for Direct Subsidized, Direct Unsubsidized, and Direct

PLUS Loans. The Secretary--

(1) Charges a borrower a loan fee of four percent of the principal

amount of the loan on a Direct Subsidized, Direct Unsubsidized, or

Direct PLUS Loan;

(2) Deducts the loan fee from the proceeds of the loan;

(3) In the case of a loan disbursed in multiple installments,

deducts a pro rated portion of the fee from each disbursement; and

(4) Applies to a borrower's loan balance the portion of the loan

fee previously deducted from the loan that is attributable to a

disbursement of the loan that is repaid within 120 days of disbursement

or that should have been repaid within that period by the school.

(d) Late charge. (1) The Secretary may require the borrower to pay

a late charge of up to six cents for each dollar of each installment or

portion thereof that is late under the circumstances described in

paragraph (d)(2) of this section.

(2) The late charge may be assessed if the borrower fails to pay

all or a portion of a required installment payment within 30 days after

it is due.

(e) (1) Collection charges before default. Notwithstanding any

provision of State law, the Secretary may require that the borrower or

any endorser pay costs incurred by the Secretary or the Secretary's

agents in collecting installments not paid when due. These charges do

not include routine collection costs associated with preparing letters

or notices or with making personal contacts with the borrower (e.g.,

local and long-distance telephone calls).

(2) Collection charges after default. If a borrower defaults on a

Direct Loan, the Secretary assesses collection costs on the basis of 34

CFR 30.60.

(Authority: 20 U.S.C. 1087a et seq., 1091a)

Sec. 685.203 Loan limits.

(a) Direct Subsidized Loans. (1) In the case of an 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 Federal Direct Stafford Loan

Program in combination with the Federal Stafford Loan Program may not

exceed the following:

(i) $2,625 for a program of study of at least a full academic year

in length.

(ii) $1,750 for a program of study of at least two-thirds but less

than a full academic year in length.

(iii) $875 for a program of study of at least one-third but less

than two-thirds of an academic year in length.

(2) In the case of an undergraduate 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 Federal Direct Stafford Loan Program in combination with the

Federal Stafford Loan Program may not exceed the following:

(i) $3,500 for a program of study of at least a full academic year

in length.

(ii) If the student is enrolled in a program of study with less

than a full academic year remaining, an amount that bears the same

ratio to $3,500 as the number of semester, trimester, quarter, or clock

hours for which the student enrolls bears to one academic year.

(3) In the case of an undergraduate student who has successfully

completed the first and second year of a program of study of

undergraduate education but has not successfully completed the

remainder of the program, or 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

any academic year of study under the Federal Direct Stafford Loan

Program in combination with the Federal Stafford Loan Program may not

exceed the following:

(i) $5,500 for a program of study of at least an academic year in

length.

(ii) For a student enrolled in a program of study with less than a

full academic year remaining, an amount that bears the same ratio to

$5,500 as the number of semester, trimester, quarter, or clock hours

for which the student enrolls bears to one academic year.

(4) In the case of a graduate or professional student, the total

amount the student may borrow for any academic year of study under the

Federal Direct Stafford Loan Program in combination with the Federal

Stafford Loan Program may not exceed $8,500.

(b) Direct Unsubsidized Loans. The total amount a student may

borrow under any period of study for the Federal Direct Unsubsidized

Loan Program and the Federal Unsubsidized Stafford Loan Program is the

same as the amount determined under paragraph (a) of this section, less

any amount received under the Federal Direct Stafford Loan Program or

the Federal Stafford Loan Program.

(c) Additional eligibility for Direct Unsubsidized Loans. (1)(i) An

independent undergraduate student, graduate or professional student,

and certain dependent undergraduate students may borrow amounts under

the Federal Direct Unsubsidized Loan Program in addition to any amount

borrowed under paragraph (b) of this section.

(ii) In order for a dependent undergraduate student to receive this

additional loan amount, the financial aid administrator must determine

that the student's parents likely will be precluded by exceptional

circumstances from borrowing under the Federal Direct PLUS Program or

the Federal PLUS Program and the student's family is otherwise unable

to provide the student's expected family contribution. The financial

aid administrator shall base the determination on a review of the

family financial information provided by the student and consideration

of the student's debt burden and shall document the determination in

the school's file.

(iii) ``Exceptional circumstances'' under paragraph (c)(1)(ii) of

this section include but are not limited to circumstances in which the

student's parent receives only public assistance or disability

benefits, the parent is incarcerated, the parent has an adverse credit

history, or the parent's whereabouts are unknown. A parent's refusal to

borrow a Federal PLUS Loan or Direct PLUS Loan does not constitute

``exceptional circumstances.''

(2) The additional amount that a student described in paragraph

(c)(1)(i) of this section may borrow under the Federal Direct

Unsubsidized Loan Program and the Federal Unsubsidized Stafford Loan

Program, for any academic year of study may not exceed the following:

(i) In the case of a student who has not successfully completed the

first and second year of a program of undergraduate education--

(A) $4,000 for enrollment in a program of study of at least a full

academic year in length;

(B) $2,500 for enrollment in a program of study of at least two-

thirds but less than a full academic year in length; and

(C) $1,500 for enrollment in a program of study of at least one-

third but less than two-thirds of an academic year in length.

(ii) 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 of study--

(A) For a student enrolled in a program of study of at least a full

academic year, $5,000; and

(B) For a student enrolled in a program of study with less than a

full academic year remaining, an amount that bears the same ratio to

$5,000 as the number of semester, trimester, quarter, or clock hours

for which the student enrolls bears to one academic year.

(iii) In the case of a graduate or professional student, $10,000.

(d) Federal Direct Stafford Loan Program and Federal Stafford Loan

Program aggregate limits. The aggregate unpaid principal amount of all

Direct Subsidized Loans and Federal Stafford Loans made to a student

may not exceed the following:

(1) $23,000 in the case of any student who has not successfully

completed a program of study at the undergraduate level.

(2) $65,500 in the case of a graduate or professional student,

including loans for undergraduate study.

(e) Aggregate limits for unsubsidized loans. The total amount of

Direct Unsubsidized Loans, Federal Unsubsidized Stafford Loans, and

Federal SLS Loans may not exceed the following:

(1) For a dependent undergraduate student, $23,000 minus any Direct

Subsidized Loan and Federal Stafford Loan amounts, unless the student

qualifies under paragraph (c) of this section for additional

eligibility or qualified for that additional eligibility under the

Federal SLS Program.

(2) For an independent undergraduate or a dependent undergraduate

who qualifies for additional eligibility under paragraph (c) of this

section or qualified for this additional eligibility under the Federal

SLS Program, $46,000 minus any Direct Subsidized Loan and Federal

Stafford Loan amounts.

(3) For a graduate or professional student, $138,500 including any

loans for undergraduate study, minus any Direct Subsidized Loan,

Federal Stafford Loan, and SLS Program loan amounts.

(f) Direct PLUS Loans annual limit. The total amount of all Direct

PLUS Loans that a parent or parents may borrow on behalf of each

dependent student for any academic year of study may not exceed the

cost of attendance minus other estimated financial assistance for that

student.

(g) Direct PLUS Loans aggregate limit. The total amount of all

Direct PLUS Loans that a parent or parents may borrow on behalf of each

dependent student for enrollment in an eligible program of study may

not exceed the student's cost of attendance minus other estimated

financial assistance for that student for the entire period of

enrollment.

(h) Loan limit period. The annual loan limits apply to an academic

year.

(i) Treatment of Direct Consolidation Loans and Federal

Consolidation Loans. The percentage of the outstanding balance on

Direct Consolidation Loans or Federal Consolidation Loans counted

against a borrower's aggregate loan limits is calculated as follows:

(1) For Direct Subsidized Loans, the percentage equals the

percentage of the original amount of the Direct Consolidation Loan or

Federal Consolidation Loan attributable to the Direct Subsidized and

Federal Stafford Loans.

(2) For Direct Unsubsidized Loans, the percentage equals the

percentage of the original amount of the Direct Consolidation Loan or

Federal Consolidation Loan attributable to the Direct Unsubsidized,

SLS, and Federal Unsubsidized Stafford Loans.

(j) Maximum loan amounts. In no case may a Direct Subsidized,

Direct Unsubsidized, or Direct PLUS 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) In the case of a Direct Subsidized Loan, the borrower's

expected family contribution for that period.

(Authority: 20 U.S.C. 1087a et seq.)

Sec. 685.204 Deferment.

(a)(1) A Direct Loan borrower whose loan is eligible for interest

subsidies and who meets the requirements described in paragraph (b) of

this section is eligible for a deferment during which periodic

installments of principal and interest need not be paid.

(2) A Direct Loan borrower whose loan is not eligible for interest

subsidies and who meets the requirements described in paragraph (b) of

this section is eligible for a deferment during which periodic

installments of principal need not be paid but interest does accrue and

is capitalized or paid by the borrower.

(b) Except as provided in paragraph (d) of this section, a Direct

Loan borrower is eligible for a deferment during any period during

which the borrower meets any of the following requirements:

(1)(i) The borrower--

(A) Is carrying at least one-half the normal full-time work load

for the course of study that the borrower is pursuing, as determined by

the eligible school the borrower is attending;

(B) Is pursuing a course of study pursuant to a graduate fellowship

program approved by the Secretary; or

(C) Is pursuing a rehabilitation training program, approved by the

Secretary, for individuals with disabilities; and

(ii) The borrower is not serving in a medical internship or

residency program, except for a residency program in dentistry.

(2)(i) The borrower is seeking and unable to find full-time

employment.

(ii) For purposes of paragraph (b)(2)(i) of this section, the

Secretary determines whether a borrower is eligible for a deferment due

to the inability to find full-time employment using the standards and

procedures set forth in 34 CFR 682.210(h) with references to the lender

understood to mean the Secretary.

(3)(i) The borrower has experienced or will experience an economic

hardship.

(ii) For purposes of paragraph (b)(3)(i) of this section, the

Secretary determines whether a borrower is eligible for a deferment due

to an economic hardship using the standards and procedures set forth in

34 CFR 682.210(s)(6) with references to the lender understood to mean

the Secretary.

(c) No deferment under paragraphs (b)(2) or (3) of this section may

exceed three years.

(d) If, at the time of consolidation, a Direct Consolidation Loan

borrower has an outstanding balance on an FFEL Program loan that was

made prior to July 1, 1993, the borrower is eligible for a deferment

during--

(1) The periods described in paragraph (b) of this section; and

(2) The periods described in 34 CFR 682.210(b), including those

periods that apply to a ``new borrower'' as that term is defined in 34

CFR 682.210(b)(7).

(Authority: 20 U.S.C. 1087a et seq.)

Sec. 685.205 Forbearance.

(a) General. ``Forbearance'' means permitting the temporary

cessation of payments, allowing an extension of time for making

payments, or temporarily accepting smaller payments than previously

scheduled. The borrower has the option to choose the form of

forbearance. If payments of interest are forborne, they are

capitalized. The Secretary grants forbearance if the borrower or

endorser intends to repay the loan but requests forbearance and

provides sufficient documentation to support this request, and--

(1) The Secretary determines that, due to poor health or other

acceptable reasons, the borrower or endorser is currently unable to

make scheduled payments;

(2) The borrower's payments of principal are deferred under

Sec. 685.204 and the Secretary does not subsidize the interest benefits

on behalf of the borrower.

(3) The borrower is in a medical or dental internship or residency

that must be successfully completed before the borrower may begin

professional practice or service, or the borrower is serving in a

medical or dental internship or residency program leading to a degree

or certificate awarded by an institution of higher education, a

hospital, or a health care facility that offers postgraduate training;

(4) The borrower is serving in a national service position for

which the borrower or endorser is receiving a national service

educational award under the National and Community Service Trust Act of

1993; or

(5) For not more than three years, the borrower or endorser--

(i) Is currently obligated to make payments on loans under title IV

of the Act; and

(ii) The sum of these payments each month (or a proportional share

if the payments are due less frequently than monthly) is equal to or

greater than 20 percent of the borrower or endorser's total monthly

gross income.

(b) Administrative forbearance. In certain circumstances, the

Secretary grants forbearance without requiring documentation from the

borrower. These circumstances include but are not limited to--

(1) A properly granted period of deferment for which the Secretary

learns the borrower did not qualify;

(2) The period for which payments are overdue at the beginning of

an authorized deferment period;

(3) The period beginning when the borrower entered repayment until

the first payment due date was established;

(4) The period prior to a borrower's filing of a bankruptcy

petition;

(5) A period after the Secretary receives reliable information

indicating that the borrower (or the student in the case of a Direct

PLUS Loan) has died, or the borrower has become totally and permanently

disabled, until the Secretary receives documentation of death or total

and permanent disability;

(6) Periods necessary for the Secretary to determine the borrower's

eligibility for discharge--

(i) Under Sec. 685.213;

(ii) Under Sec. 685.214; or

(iii) Due to the borrower's or endorser's (if applicable)

bankruptcy;

(7) A period of up to three years in cases where the effect of a

variable interest rate on a fixed-amount or graduated repayment

schedule causes the extension of the maximum repayment term; or

(8) A period in the event of a national military mobilization or

other local or national emergency.

(c) Period of forbearance. (1) The Secretary grants forbearance for

a period of up to one year.

(2) The forbearance is renewable, upon request of the borrower, for

the duration of the period in which the borrower meets the condition

required for the forbearance.

(Authority: 20 U.S.C. 1087a et seq.)

Sec. 685.206 Borrower responsibilities and defenses.

(a) The borrower shall give the school the following information as

part of the origination process for a Direct Subsidized, Direct

Unsubsidized, or Direct PLUS Loan:

(1) A statement, as described in 34 CFR Part 668, that the loan

will be used for the cost of the student's attendance.

(2) Information demonstrating that the borrower is eligible for the

loan.

(3) Information concerning the outstanding FFEL Program and Direct

Loan Program loans of the borrower and, for a parent borrower, of the

student, including any Federal Consolidation Loan or Direct

Consolidation Loan.

(4) A statement authorizing the school to release to the Secretary

information relevant to the student's eligibility to borrow or to have

a parent borrow on the student's behalf (e.g., the student's enrollment

status, financial assistance, and employment records).

(b)(1) The borrower shall promptly notify the Secretary of any

change of name, address, student status to less than half-time,

employer, or employer's address; and

(2) The borrower shall promptly notify the school of any change in

address during enrollment.

(c) Borrower defenses. (1) In any proceeding to collect on a Direct

Loan, the borrower may assert as a defense against repayment, any act

or omission of the school attended by the student that would give rise

to a cause of action against the school under applicable State law.

These proceedings include, but are not limited to, the following:

(i) Tax refund offset proceedings under 34 CFR 30.33.

(ii) Wage garnishment proceedings under section 488A of the Act.

(iii) Salary offset proceedings for Federal employees under 34 CFR

Part 31.

(iv) Credit bureau reporting proceedings under 31 U.S.C. 3711(f).

(2) If the borrower's defense against repayment is successful, the

Secretary notifies the borrower that the borrower is relieved of the

obligation to repay all or part of the loan and associated costs and

fees that the borrower would otherwise be obligated to pay. The

Secretary affords the borrower such further relief as the Secretary

determines is appropriate under the circumstances. Further relief may

include, but is not limited to, the following:

(i) Reimbursing the borrower for amounts paid toward the loan

voluntarily or through enforced collection.

(ii) Determining that the borrower is not in default on the loan

and is eligible to receive assistance under title IV of the Act.

(iii) Updating reports to credit bureaus to which the Secretary

previously made adverse credit reports with regard to the borrower's

Direct Loan.

(3) The Secretary may initiate an appropriate proceeding to require

the school whose act or omission resulted in the borrower's successful

defense against repayment of a Direct Loan to pay to the Secretary the

amount of the loan to which the defense applies. However, the Secretary

does not initiate such a proceeding after the period for the retention

of records described in Sec. 685.308(c) unless the school received

actual notice of the claim during that period.

(Authority: 20 U.S.C. 1087a et seq.)

Sec. 685.207 Obligation to repay.

(a) Obligation of repayment in general. (1) A borrower is obligated

to repay the full amount of a Direct Loan, including the principal

balance, fees, any collection costs charged under Sec. 685.202(e), and

any interest not subsidized by the Secretary, unless the borrower is

relieved of the obligation to repay as provided in this part.

(2) The borrower's repayment of a Direct Loan may also be subject

to the deferment provisions in Sec. 685.204, the forbearance provisions

in Sec. 685.205, and the discharge provisions in Sec. 685.212.

(b) Direct Subsidized Loan repayment. (1) During the period in

which a borrower is enrolled at an eligible school on at least a half-

time basis, the borrower is in an ``in-school'' period and is not

required to make payments on a Direct Subsidized Loan unless--

(i) The loan entered repayment before the in-school period began;

and

(ii) The borrower has not been granted a deferment under

Sec. 685.204.

(2)(i) When a borrower ceases to be enrolled at an eligible school

on at least a half-time basis, a six-month grace period begins, unless

the grace period has been previously exhausted.

(ii) During a grace period, the borrower is not required to make

payments on a Direct Subsidized Loan.

(3) A borrower is not obligated to pay interest on a Direct

Subsidized Loan for in-school or grace periods unless the borrower is

required to make payments on the loan during those periods under

paragraph (b)(1) of this section.

(4) The repayment period for a Direct Subsidized Loan begins the

day after the grace period ends. A borrower is obligated to repay the

loan under paragraph (a) of this section during the repayment period.

(c) Direct Unsubsidized Loan repayment. (1) During the period in

which a borrower is enrolled at an eligible school on at least a half-

time basis, the borrower is in an ``in-school'' period and is not

required to make payments of principal on a Direct Unsubsidized Loan

unless--

(i) The loan entered repayment before the in-school period began;

and

(ii) The borrower has not been granted a deferment under

Sec. 685.204.

(2)(i) When a borrower ceases to be enrolled at an eligible school

on at least a half-time basis, a six-month grace period begins, unless

the grace period has been previously exhausted.

(ii) During a grace period, the borrower is not required to make

any principal payments on a Direct Unsubsidized Loan.

(3) A borrower is responsible for the interest that accrues on a

Direct Unsubsidized Loan during in-school and grace periods. Interest

that accrues may be capitalized or paid by the borrower.

(4) The repayment period for a Direct Unsubsidized Loan begins the

day after the grace period ends. A borrower is obligated to repay the

loan under paragraph (a) of this section during the repayment period.

(d) Direct PLUS Loan repayment. The repayment period for a Direct

PLUS Loan begins on the day the loan is fully disbursed. Interest

begins to accrue on the day the first installment is disbursed. A

borrower is obligated to repay the loan under paragraph (a) of this

section during the repayment period.

(e) Direct Consolidation Loan repayment. The repayment period for a

Direct Consolidation Loan begins and interest begins to accrue on the

day the loan is disbursed. The borrower is obligated to repay the loan

under paragraph (a) of this section during the repayment period.

(Authority: 20 U.S.C. 1087a et seq.)

Sec. 685.208 Repayment plans.

(a) General. (1) A borrower may repay a Direct Subsidized Loan, a

Direct Unsubsidized Loan, a Direct Subsidized Consolidation Loan, or a

Direct Unsubsidized Consolidation Loan under the standard repayment

plan, the extended repayment plan, the graduated repayment plan, or the

income contingent repayment plan.

(2) A borrower may repay a Direct PLUS Loan or a Direct PLUS

Consolidation Loan under the standard repayment plan, the extended

repayment plan, or the graduated repayment plan.

(3) The Secretary may provide an alternative repayment plan in

accordance with paragraph (g) of this section.

(4) All Direct Loans obtained by one borrower must be repaid

together under the same repayment plan, except that a borrower of a

Direct PLUS Loan or a Direct PLUS Consolidation Loan may repay the

Direct PLUS Loan or the Direct PLUS Consolidation Loan separately from

other Direct Loans obtained by that borrower.

(b) Standard repayment plan. (1) Under the standard repayment plan,

a borrower shall repay a loan in full within ten years from the date

the loan entered repayment by making fixed monthly payments.

(2) Periods of authorized deferment or forbearance are not included

in the ten-year repayment period.

(3) A borrower's payments under the standard repayment plan are at

least $50 per month, except that a borrower's final payment may be less

than $50.

(4) The number of payments or the fixed monthly repayment amount

may be adjusted to reflect changes in the variable interest rate

identified in Sec. 685.202(a).

(c) Extended repayment plan. (1) Under the extended repayment plan,

a borrower shall repay a loan in full by making fixed monthly payments

within an extended period of time that varies with the total amount of

the borrower's loans, as described in paragraph (e) of this section.

(2) Periods of deferment and forbearance are not included in the

number of years of repayment.

(3) A borrower makes fixed monthly payments of at least $50, except

that a borrower's final payment may be less than $50.

(4) The number of payments or the fixed monthly repayment amount

may be adjusted to reflect changes in the variable interest rate

identified in Sec. 685.202(a).

(d) Graduated repayment plan. (1) Under the graduated repayment

plan, a borrower shall repay a loan in full by making payments at two

or more levels within a period of time that varies with the total

amount of the borrower's loans, as described in paragraph (e) of this

section.

(2) Periods of deferment and forbearance are not included in the

number of years of repayment.

(3) The number of payments or the monthly repayment amount may be

adjusted to reflect changes in the variable interest rate identified in

Sec. 685.202(a).

(4) No scheduled payment under the graduated repayment plan may be

less than the amount of interest accrued on the loan between monthly

payments, less than 50% of the payment amount that would be required

under the standard repayment plan, or more than 150% of the payment

amount that would be required under the standard repayment plan.

(e) Repayment period for the extended and graduated plans. Under

the extended and graduated repayment plans, if the total amount of the

borrower's Direct Loans is--

(1) Less than $10,000, the borrower shall repay the loans within 12

years of entering repayment;

(2) Greater than or equal to $10,000 but less than $20,000, the

borrower shall repay the loans within 15 years of entering repayment;

(3) Greater than or equal to $20,000 but less than $40,000, the

borrower shall repay the loans within 20 years of entering repayment;

(4) Greater than or equal to $40,000 but less than $60,000, the

borrower shall repay the loans within 25 years of entering repayment;

and

(5) Greater than or equal to $60,000, the borrower shall repay the

loans within 30 years of entering repayment.

(f) Income contingent repayment plan. (1) Under the income

contingent repayment plan, a borrower's monthly repayment amount is

generally based on the total amount of the borrower's (and, in some

circumstances, the borrower's spouse's) Direct Loans, family size, and

Adjusted Gross Income (AGI) reported by the borrower for the most

recent year for which the Secretary has obtained income information. In

the case of a married borrower who files a joint Federal income tax

return and is not repaying loans jointly with a spouse under

Sec. 685.209(a)(4), the borrower's AGI includes the income of the

borrower's spouse. A borrower shall make payments on a loan until the

loan is repaid in full or until the loan has been in repayment through

the end of the income contingent repayment period.

(2) The regulations in effect at the time a borrower's first Direct

Loan enters repayment govern the method for determining the borrower's

monthly repayment amount for all of the borrower's Direct Loans,

unless--

(i) The Secretary amends the regulations relating to a borrower's

monthly repayment amount under the income contingent repayment plan;

and

(ii) The borrower submits a written request that the amended

regulations apply to the repayment of the borrower's Direct Loans.

(3) Provisions governing the income contingent repayment plan are

set out in Sec. 685.209.

(g) Alternative repayment. (1) The Secretary may provide an

alternative repayment plan for a borrower who demonstrates to the

Secretary's satisfaction that the terms and conditions of the repayment

plans specified in paragraphs (b) through (f) of this section are not

adequate to accommodate the borrower's exceptional circumstances.

(2) The Secretary may require a borrower to provide evidence of the

borrower's exceptional circumstances before permitting the borrower to

repay a loan under an alternative repayment plan.

(3) If the Secretary agrees to permit a borrower to repay a loan

under an alternative repayment plan, the Secretary notifies the

borrower in writing of the terms of the plan. After the borrower

receives notification of the terms of the plan, the borrower may accept

the plan or choose another repayment plan.

(4) If a borrower's payment under the alternative repayment plan is

less than the accrued interest on the loan, the unpaid interest is

added to the principal balance of the loan.

(Authority: 20 U.S.C. 1087a et seq.)

Sec. 685.209 Income contingent repayment plan.

(a)(1) Under the income contingent repayment plan described in

Sec. 685.208(f), a borrower may choose to repay Direct Loans in one of

two ways. The borrower's options are described in paragraphs (b) and

(c) of this section.

(2) A borrower may change options under the income contingent

repayment plan by notifying the Secretary in writing. However, a

borrower may change options no more frequently than once a year. The

Secretary annually provides the borrower with estimates of monthly

payment amounts under each option.

(3) The Secretary may determine that special circumstances, such as

a loss of employment by the borrower or the borrower's spouse, warrant

an adjustment to the borrower's repayment obligations.

(4) Married borrowers may repay their loans jointly if they meet

the following requirements:

(i) Each spouse is repaying a Direct Loan under the same option of

the income contingent repayment plan.

(ii) The spouses filed a joint Federal income tax return for the

most recent year for which the Secretary has obtained income

information.

(iii) The spouses submit a written request that includes their

names and social security numbers to the Secretary.

(5) Examples of the calculation of the monthly repayment amounts

under both options of the income contingent repayment plan and a table

that shows monthly repayment amounts for borrowers at various income

and debt levels under both options are included in Appendix A to this

part.

(b) Option 1.--(1) General. (i) In general, under Option 1, a

borrower shall make monthly payments calculated using a percentage of

the borrower's Adjusted Gross Income (AGI) called the ``payback rate.''

The payback rate is based upon the total amount of the borrower's

Direct Loans, as described under paragraph (b)(2) of this section. The

minimum payback rate is four percent, and the maximum rate is 15

percent.

(ii) If a borrower provides documentation acceptable to the

Secretary that the borrower has one or more dependents other than the

borrower's spouse, the Secretary subtracts from the borrower's monthly

payment a family size adjustment of seven dollars per dependent for up

to five dependents.

(iii) A borrower's monthly payment is equal to the borrower's AGI

multiplied by the payback rate, divided by 12 months, minus the family

size adjustment amount. However, if the monthly repayment amount is

less than $25, the borrower is not required to make a payment.

(2) Payback rate. (i) A borrower's payback rate is based upon the

borrower's Direct Loan debt when the borrower's first loan enters

repayment and does not change unless the borrower obtains another

Direct Loan or the borrower and the borrower's spouse obtain approval

to repay their loans jointly under paragraph (a)(4) of this section. If

the borrower obtains another Direct Loan, a new payback rate for all of

the borrower's Direct Loans is calculated on the basis of the combined

amounts of the loans when the loans entered repayment.

(ii) If the total amount of a borrower's Direct Loans is less than

or equal to $1,000, the payback rate is four percent. If the total

amount of a borrower's Direct Loans is greater than $1,000, the payback

rate is four percent plus an additional percent that begins at zero and

increases at a rate of 0.2 percent for each additional $1,000 borrowed

up to a maximum payback rate of 15 percent.

(iii) More specifically, if the total amount of a borrower's Direct

Loans is greater than $1,000, the payback rate is the lesser of 0.15 or

the following: 0.04 + (debt-1,000) (0.000002).

(3) Exception for certain married borrowers. The combined monthly

payment amount for married borrowers who repay their loans jointly

under paragraph (a)(4) of this section is the total of the individual

monthly payment amounts for each borrower calculated under paragraph

(b)(1)(iii) of this section. The amount of a borrower's individual

monthly payment amount is applied to that borrower's debt. The payback

rate for each borrower is calculated separately on the basis of the

amount of the borrower's Direct Loans. For purposes of this paragraph,

the Secretary assumes that the AGI for each borrower is proportionate

to the relative size of the borrower's individual debt and subtracts

one half of the applicable family size adjustment from each borrower's

monthly payment amount. If the combined monthly repayment amount is

less than $25, the borrowers are not required to make a payment.

(c) Option 2. (1) In general, under Option 2, a borrower shall make

monthly payments as calculated under Option 1, except that no monthly

payment exceeds the amount the borrower would repay over 12 years using

standard amortization. The Secretary calculates the 12-year standard

amortization amount on the basis of the interest rate in effect when

the borrower chooses Option 2. The amount a borrower would repay over

12 years using standard amortization is determined without any family

size adjustment or minimum monthly repayment amount.

(2) More specifically, if a borrower chooses Option 2 under the

income contingent repayment plan--

(i) The borrower's payments do not exceed the 12-year standard

amortization amount regardless of the borrower's income;

(ii) The borrower's repayment period may be extended beyond the

repayment period under Option 1 (but not beyond the 25-year maximum

period described in Sec. 685.209(d)(2)(i)); and

(iii) Interest accrues throughout the repayment period and is

capitalized until the limitation on capitalization of interest in

paragraph (d)(3) of this section is reached.

(3) Exception for certain married borrowers. The combined monthly

payment amount for married borrowers who repay their loans jointly

under paragraph (a)(4) of this section is the total of the individual

monthly payment amounts for each borrower calculated under paragraph

(b)(1)(iii) of this section, unless the combined amount exceeds the 12-

year standard amortization amount. If the combined amount exceeds the

12-year standard amortization amount, the couple pays the 12-year

standard amortization amount, and the amount applied to each borrower's

debt is determined by calculating the 12-year standard amortization

amount for that borrower's debt.

(d) Other features of the income contingent repayment plan. (1)

Alternative documentation of income. If a borrower's AGI is not

available or if, in the Secretary's opinion, the borrower's reported

AGI does not reasonably reflect the borrower's current income, the

Secretary may use other documentation of income provided by the

borrower to calculate the borrower's monthly repayment amount.

(2) Repayment period. (i) The maximum repayment period under the

income contingent repayment plan is 25 years.

(ii) The repayment period does not include periods in which the

borrower makes payments under the standard, extended, graduated, or

alternative repayment plan or periods of authorized deferment or

forbearance.

(iii) If a borrower repays more than one loan under the income

contingent repayment plan, a separate repayment period for each loan

begins when that loan enters repayment.

(iv) If a borrower has not repaid a loan in full at the end of the

25-year repayment period under the income contingent repayment plan,

the Secretary cancels the unpaid portion of the loan.

(v) At the beginning of the repayment period, a borrower shall make

monthly payments of the amount of interest that accrues on the

borrower's Direct Loans until the Secretary calculates the borrower's

monthly repayment amount on the basis of the borrower's income.

(3) Limitation on capitalization of interest. If the amount of a

borrower's monthly payment is less than the accrued interest, the

unpaid interest is capitalized until the outstanding principal amount

increases to one and one-half times the original principal amount.

After the outstanding principal amount reaches one and one-half times

the original amount, interest continues to accrue but is not

capitalized. For purposes of this paragraph, the original amount is the

amount owed by the borrower when the borrower enters repayment.

(4) Notification of terms and conditions. When a borrower selects

or is required by the Secretary to repay a loan under the income

contingent repayment plan, the Secretary notifies the borrower of the

terms and conditions of the plan, including--

(i) That the Internal Revenue Service will disclose certain tax

return information to the Secretary or the Secretary's agents; and

(ii) That if the borrower believes that special circumstances

warrant an adjustment to the borrower's repayment obligations, as

described in Sec. 685.209(a)(3), the borrower may contact the Secretary

and obtain the Secretary's determination as to whether an adjustment is

appropriate.

(5) Consent to disclosure of tax return information. (i) A borrower

shall provide written consent to the disclosure of certain tax return

information by the Internal Revenue Service (IRS) to agents of the

Secretary for purposes of calculating a monthly repayment amount and

servicing and collecting a loan under the income contingent repayment

plan. The borrower shall provide consent by signing a consent form,

developed consistent with 26 CFR 301.6103(c)-1 and provided to the

borrower by the Secretary, and shall return the signed form to the

Secretary.

(ii) The borrower shall consent to disclosure of the borrower's

taxpayer identity information as defined in 26 U.S.C. 6103(b)(6), tax

filing status, and AGI.

(iii) The borrower shall provide consent for a period of five years

from the date the borrower signs the consent form. The Secretary

provides the borrower a new consent form before that period expires.

The IRS does not disclose tax return information after the IRS has

processed a borrower's withdrawal of consent.

(iv) The Secretary designates the standard repayment plan for a

borrower who selects the income contingent repayment plan but--

(A) Fails to provide the required written consent;

(B) Fails to renew written consent upon the expiration of the five-

year period for consent; or

(C) Withdraws consent and does not select another repayment plan.

(v) If a borrower defaults and the Secretary designates the income

contingent repayment plan for the borrower but the borrower fails to

provide the required written consent, the Secretary consults with the

borrower prior to establishing a repayment plan for the borrower.

(Authority: 20 U.S.C. 1087a et seq.)

Sec. 685.210 Choice of repayment plan.

(a) Initial selection of a repayment plan. (1) Before a Direct Loan

enters into repayment, the Secretary provides the borrower a

description of the available repayment plans and requests the borrower

to select one. A borrower may select a repayment plan before the loan

enters repayment by notifying the Secretary of the borrower's selection

in writing.

(2) If a borrower does not select a repayment plan within 45 days

after the Secretary provides the borrower with a description of

available repayment plans, the Secretary designates the standard

repayment plan described in Sec. 685.208(b) for the borrower.

(b) Changing repayment plans. (1) A borrower may change repayment

plans at any time after the loan has entered repayment by notifying the

Secretary in writing. However, a borrower who is repaying a defaulted

loan under the income contingent repayment plan under

Sec. 685.211(c)(3)(ii) may not change to another repayment plan

unless--

(i) The borrower was required to and did make a payment under the

income contingent repayment plan in each of the prior six months; and

(ii) The borrower makes and the Secretary approves a request to

change plans.

(2)(i) A borrower may not change to a repayment plan that has a

maximum repayment period of less than the number of years the loan has

already been in repayment, except that a borrower may change to the

income contingent repayment plan at any time.

(ii) If a borrower changes plans, the repayment period is the

period provided for under the borrower's new repayment plan, calculated

from the date the loan initially entered repayment. However, if a

borrower changes to the income contingent repayment plan, the repayment

period is calculated as described in Sec. 685.209(d)(2).

(Authority: 20 U.S.C. 1087a et seq.)

Sec. 685.211 Miscellaneous repayment provisions.

(a) Payment application and prepayment. (1) The Secretary applies

any payment first to any accrued charges and collection costs, then to

any outstanding interest, and then to outstanding principal.

(2) A borrower may prepay all or part of a loan at any time without

penalty. If a borrower pays any amount in excess of the amount due, the

excess amount is a prepayment.

(3) If a prepayment equals or exceeds the monthly repayment amount

under the borrower's repayment plan, the Secretary--

(i) Applies the prepaid amount according to paragraph (a)(1) of

this section;

(ii) Advances the due date of the next payment unless the borrower

requests otherwise; and

(iii) Notifies the borrower of any revised due date for the next

payment.

(4) If a prepayment is less than the monthly repayment amount, the

Secretary applies the prepayment according to paragraph (a)(1) of this

section.

(b) Refunds from schools. The Secretary applies any refund due to a

borrower that the Secretary receives from a school under Sec. 668.22

against the borrower's outstanding principal and notifies the borrower

of the refund.

(c) Default--(1) Acceleration. If a borrower defaults on a Direct

Loan, the entire unpaid balance and accrued interest are immediately

due and payable.

(2) Collection charges. If a borrower defaults on a Direct Loan,

the Secretary assesses collection charges in accordance with

Sec. 685.202(e).

(3) Collection of a defaulted loan. (i) The Secretary may take any

action authorized by law to collect a defaulted Direct Loan including,

but not limited to, filing a lawsuit against the borrower, reporting

the default to national credit bureaus, requesting the Internal Revenue

Service to offset the borrower's Federal income tax refund, and

garnishing the borrower's wages.

(ii) If a borrower defaults on a Direct Stafford Loan, a Direct

Unsubsidized Stafford Loan, a Direct Unsubsidized Consolidation Loan or

a Direct Subsidized Consolidation Loan, the Secretary may designate the

income contingent repayment plan for the borrower.

(d) Ineligible borrowers. (1) The Secretary determines that a

borrower is ineligible if, at the time the loan was made and without

the school's or the Secretary's knowledge, the borrower (or the student

on whose behalf a parent borrowed) provided false or erroneous

information or took actions that caused the borrower or student--

(i) To receive a loan for which the borrower is wholly or partially

ineligible;

(ii) To receive interest benefits for which the borrower was

ineligible; or

(iii) To receive loan proceeds for a period of enrollment for which

the borrower was not eligible.

(2) If the Secretary makes the determination described in paragraph

(d)(1) of this section, the Secretary sends an ineligible borrower a

demand letter that requires the borrower to repay some or all of a

loan, as appropriate. The demand letter requires that within 30 days of

the borrower's receipt of the letter, the borrower repay any principal

amount for which the borrower is ineligible and any accrued interest,

including interest subsidized by the Secretary, through the previous

quarter.

(3) If a borrower fails to comply with the demand letter described

in paragraph (d)(2) of this section, the borrower is in default.

(4) A borrower may not consolidate a loan under Sec. 685.215 for

which the borrower is wholly or partially ineligible.

(e) Rehabilitation of defaulted loans. A defaulted Direct Loan is

rehabilitated if the borrower makes 12 consecutive on-time, reasonable,

and affordable monthly payments. The amount of such a payment is

determined on the basis of the borrower's total financial

circumstances. If a defaulted loan is rehabilitated, the Secretary

instructs any credit bureau to which the default was reported to remove

the default from the borrower's credit history.

(Authority: 20 U.S.C. 1087a et seq.)

Sec. 685.212 Discharge of a loan obligation.

(a) Death. If the Secretary receives acceptable documentation that

a borrower (or the student on whose behalf a parent borrowed) has died,

the Secretary discharges the obligation of the borrower and any

endorser to make any further payments on the loan.

(b) Total and permanent disability. If the Secretary receives

acceptable documentation that a borrower has become totally and

permanently disabled, the Secretary discharges the obligation of the

borrower and any endorser to make any further payments on the loan. A

borrower is not considered totally and permanently disabled based on a

condition that existed at the time the borrower applied for the loan

unless the borrower's condition substantially deteriorated after the

loan was made so as to render the borrower totally and permanently

disabled.

(c) Bankruptcy. If a borrower's obligation to repay a loan is

discharged in bankruptcy, the Secretary does not require the borrower

or any endorser to make any further payments on the loan.

(d) Closed schools. If a borrower meets the requirements in

Sec. 685.213, the Secretary discharges the obligation of the borrower

and any endorser to make any further payments on the loan.

(e) False certification and unauthorized disbursement. If a

borrower meets the requirements in Sec. 685.214, the Secretary

discharges the obligation of the borrower and any endorser to make any

further payments on the loan.

(f) Payments received after eligibility for discharge. The

Secretary returns to the sender or, for

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