William D. Ford Federal Direct Loan Program; Final Rule

DEPARTMENT OF EDUCATION

34 CFR Part 685

RIN 1840-AC05

William D. Ford Federal Direct Loan Program

AGENCY: Department of Education.

ACTION: Final regulations.

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SUMMARY: The Secretary of Education amends the William D. Ford Federal

Direct Loan (Direct Loan) Program regulations. These regulations apply

to loans under the Federal Direct Stafford/Ford Loan Program, the

Federal Direct Unsubsidized Stafford/Ford Loan Program, the Federal

Direct PLUS Program, and the Federal Direct Consolidation Loan Program,

collectively referred to as the Direct Loan Program. These regulations

streamline the loan application and disbursement processes, assist in

school administration of the loans, ensure program integrity, and

protect the Federal fiscal interest.

EFFECTIVE DATE: These regulations take effect July 1, 1995. However,

affected parties do not have to comply with the information collection

requirements in Secs. 685.204, 685.206, 685.209, 685.213, 685.214,

685.215, 685.301, 685.302, 685.303, 685.309 and 685.401 until the

Department of Education publishes in the Federal Register the control

number assigned by the Office of Management and Budget (OMB) to these

information collection requirements. Publication of the control number

notifies the public that OMB has approved these information collection

requirements under the Paperwork Reduction Act of 1980.

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

708-9406. 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 (OBRA) of 1993 (Pub. L. 103-66).

The Improving America's Schools Act of 1994 (Pub. L. 103-382) also

amended the HEA in areas that affect the Direct Loan Program. These

amendments are reflected in these final regulations.

OBRA 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). These final regulations are a product of the

extensive negotiating rulemaking sessions that were used to develop the

proposed rule.

On August 18, 1994, the Secretary published a notice of proposed

rulemaking (NPRM) for part 685 in the Federal Register. This NPRM

included a discussion of the major issues concerning the proposed rule

and will not be repeated here. The following section summarizes the

major revisions to the proposed rule.

Substantive Revisions to the Proposed Rule

Section 685.100 The William D. Ford Federal Direct Loan Program

The Secretary has modified the final regulations to

reflect recent statutory amendments. The program formerly known as the

``Federal Direct Student Loan Program'' has been renamed the ``William

D. Ford Federal Direct Loan Program.'' Also, the ``Federal Direct

Stafford Loan Program'' and the ``Federal Direct Unsubsidized Stafford

Loan Program'' have been renamed the ``Federal Direct Stafford/Ford

Loan Program'' and the ``Federal Direct Unsubsidized Stafford/Ford Loan

Program,'' respectively.

Section 685.102 Definitions

The definition of ``satisfactory repayment arrangement''

has been modified for the purpose of consolidating a defaulted loan

into a Direct Consolidation Loan. The definition requires making three,

instead of six, monthly payments.

Section 685.202 Charges for Which Direct Loan Program Borrowers Are

Responsible

The Secretary has added wording to clarify that interest

may be capitalized when a borrower defaults on a Direct Loan.

Section 685.204 Deferment

The regulations have been revised to reflect recent

amendments to the HEA that allow a Direct Loan borrower who has an

outstanding balance on an FFEL Program loan made prior to July 1, 1993

to be eligible for any deferment available to FFEL borrowers that was

in effect on July 22, 1992. The HEA amendments also expanded the

definition of an economic hardship for purposes of obtaining a

deferment. This change applies to all borrowers. The definition now

includes a borrower who works full-time and has educational debt burden

equal to or greater than 20 percent of the borrower's adjusted gross

income (AGI), and the difference between AGI and educational debt

burden is less than 220 percent of the greater of the annual earnings

of an individual earning the minimum wage or the poverty line for a

family of two.

Section 685.207 Obligation To Repay

The Secretary has specified the time at which a grace

period begins for students enrolled in correspondence programs.

Section 685.208 Repayment Plans

The Secretary has established the maximum repayment period

allowable under the alternative repayment plan at 30 years. Further,

under the alternative plan, interest that accrues and is not paid will

be capitalized annually until the outstanding principal is 10 percent

greater than the original principal amount.

Section 685.209 Income Contingent Repayment Plan

The Secretary has significantly modified the income

contingent repayment (ICR) plan provisions to address concerns of

commenters. The Secretary is lowering the limit on interest

capitalization that may occur when interest accrues, but is not paid,

from 50 percent greater than the original principal amount to 10

percent greater than the original principal amount. Also, monthly

payments will be limited to 20 percent of discretionary income (AGI

minus the poverty level appropriate to the family size). This change

eliminates the need for the previous family size offset of $7 and

provides a new cap on the amount of income assessed. The Secretary is

including years of repayment under the 10-year standard repayment plan

and the 12-year extended repayment plan as years eligible for

determining the 25-year period for loan forgiveness. The monthly

repayment amount below which no payment is required under the formula

calculation is $15. Under the 12-year standard amortization cap, the

minimum payment is $15 (that is, a borrower must pay at least $15 each

month). The 12-year standard amortization cap calculation has been

modified to provide for the recalculation of the cap following periods

of negative amortization because these periods result in an increase in

the outstanding loan balance. The payback rate for married borrowers

paying jointly under ICR will be calculated on the outstanding debt at

the time the borrowers are approved for joint repayment. For borrowers

repaying jointly, payments will be applied to interest on both accounts

prior to principal reduction in either.

Section 685.210 Choice of Repayment Plans

The Secretary has reduced from six to three the number of

monthly payments that must be made before a borrower, who is required

to repay a defaulted loan under the ICR plan, may switch to another

repayment plan. Further, if the borrower's scheduled payment under the

ICR plan is zero, the borrower has the option of paying three

``reasonable and affordable'' payments in order to meet the condition

to switch to another plan.

Section 685.211 Miscellaneous Repayment Provisions

The Secretary has added language to clarify that if a

borrower is ineligible for a portion of the loan and does not comply

with the repayment demand letter, the borrower is considered to be in

default on the entire loan. Further, the borrower will have 30 days

from the date the letter is mailed to repay the loan.

Section 685.215 Consolidation

The Secretary has clarified that Federal Consolidation

Loans eligible for interest benefits during a period of deferment under

section 428C(b)(4)(C) of the HEA may be consolidated into a Direct

Subsidized Consolidation Loan. Further, the regulations provide that a

borrower attending a Direct Loan school may consolidate during the in-

school period, even if the borrower does not have a Direct Loan. A

provision has been added that allows, at the discretion of the

Secretary, consolidation of loans where a judgment has been obtained

against the borrower. The Secretary has clarified that holders of loans

being consolidated must provide certification of the amount owed within

10 business days of receipt of the request. The regulations also have

been revised to reflect recent amendments to the HEA that provide that

loans made under subpart II of part B of title VIII of the Public

Health Service Act may be consolidated into a Direct Unsubsidized

Consolidation Loan.

Section 685.303 Processing Loan Proceeds

The Secretary has added wording to clarify that

disbursements to students who delay their start of attendance is

permitted. For the student financial aid programs, the Secretary has

consolidated and standardized many of the procedures a school must

follow when it is disbursing funds. The relevant provisions have been

removed from these final regulations and are now set forth in 34 CFR

Part 668.

Section 685.304 Counseling Borrowers

The Secretary has clarified that, within an institution's

quality assurance plan, the performance measures used to demonstrate

the effectiveness of a school's alternative approach to initial

counseling must include objective outcomes, such as withdrawal rates.

The Secretary has added a requirement that borrowers provide State of

issuance information concerning their driver's license.

Section 685.309 Administrative and Fiscal Control and Fund Accounting

Requirements for Schools Participating in the Direct Loan Program

The regulations have been amended to require schools to

report a borrower's change of permanent address on the school's student

status confirmation report. For the student financial aid programs, the

Secretary has consolidated and standardized many of the procedures a

school must follow when it is maintaining funds. The relevant

provisions have been removed from these final regulations and are now

set forth in 34 CFR Part 668.

Section 685.400 School Participation Requirements for Academic Years

1996-1997 and Beyond

The Secretary has clarified the provision that a school

must meet the eligibility requirement in section 435(a) of the HEA,

which includes having a cohort default rate of less than 25 percent

during one of the three most recent fiscal years for which data are

available. This eligibility requirement will be enforced for two years

after a school enters the Direct Loan Program (that is, through the

last full year of a school's participation in the FFEL program).

Analysis of Comments and Changes

In response to the Secretary's invitation in the NPRM, 98 parties

submitted comments on the proposed regulations. An analysis of the

comments and the changes follows. Following a general discussion of the

changes, major issues are discussed. The major issues are grouped

according to subject, with references to the appropriate sections of

the regulations. Other substantive issues are discussed under the

section of the regulations to which they pertain. Technical and other

minor changes, and suggested changes the Secretary is not legally

authorized to make under the applicable statutory authority, generally

are not addressed.

General Discussion of Loan Repayment

The Secretary, in consultation with members of the higher education

community through negotiated rulemaking and in response to public

comment on the August 18, 1994, Notice of Proposed Rulemaking (NPRM),

has designed an income contingent repayment (ICR) plan (or ``Pay-As-

You-Can'' plan) in which the borrower will repay monthly a small

percentage of his or her income, adjusted for the borrower's debt

level. By giving borrowers the opportunity to repay student loans over

time as a small percentage of their incomes, this plan provides a

number of important benefits for the borrower.

ICR reduces the financial burden of student loan repayment and

gives borrowers the opportunity to accept lower-paid employment,

including public service positions, for a few years or an entire

working career. It also provides borrowers the chance to start a

business or meet other family responsibilities. The Secretary is

especially sensitive to the demands on family finances faced by the

lowest-income borrowers. ICR borrowers will pay between 4 and 15

percent of their annual adjusted gross income (AGI), except that

monthly payments are limited to 20 percent of discretionary income (AGI

minus the poverty level appropriate to the family size). Under the

formula calculation, borrowers are not required to make a monthly

payment if the calculated amount is less than $15. Borrowers also can

choose to limit their monthly ICR obligations to the amount calculated

based on a fixed-payment, 12-year repayment schedule. The ICR plan

permits high-debt borrowers to repay their loans in a reasonable time

period and avoids a ``marriage penalty'' for two-debt households.

The Secretary will continue to conduct analyses of the ICR plan to

ensure that the formula meets the needs of borrowers and protects the

interest of the Federal taxpayer. Further, the Secretary is committed

to providing comprehensive, easy to understand counseling materials to

borrowers before they choose the ICR plan. If the Secretary changes the

formula once borrowers are paying under the ICR plan, borrowers will

have the option to change to the the new formula. The Secretary will

notify borrowers of changes in the formula to ensure that they have

enough information to decide whether to remain under the old or change

to the new formula.

Under the ICR plan, some borrowers may make monthly payments that

are insufficient to cover the interest due on their loans. However, the

Secretary will encourage borrowers who are eligible for subsidized

periods of deferment (including an economic hardship deferment) to use

them because interest does not accrue on subsidized loans during these

periods (up to three years). When interest does accrue, the Secretary

is limiting the capitalization of unpaid interest to an amount that is

just ten percent of the borrower's original debt, rather than 50

percent as proposed in the NPRM. This protects borrowers from

compounding interest charges while ensuring that those who have

sufficient long-term resources to repay their loans do so. By

minimizing individual debt burden, this plan not only allows borrowers

to choose from the full range of employment opportunities, but also

reduces the incidence, and therefore the cost, of default.

Some borrowers in the ICR plan may not earn sufficient income to

fully repay their loans within the statutory 25-year time period. In

this event, the Secretary will forgive any outstanding loan balance

(principal plus interest) that is unpaid after 25 years. The Secretary

is including years in repayment under both the 10-year standard plan

and the 12-year extended plan as years eligible to count toward the 25

years for ICR loan forgiveness, because payments in these plans are at

least equal to, and very often larger than, those required under ICR.

Under current laws, the Internal Revenue Service regards the

outstanding loan balance forgiven after 25 years in the ICR plan as

taxable income. The Secretary is committed to exploring vigorously a

change to current law to provide ICR borrowers complete forgiveness of

any unpaid loan balance that remains outstanding at the end of the ICR

repayment period.

In addition to the ICR plan, the Secretary is providing borrowers

with other flexible repayment options. The graduated repayment plan

allows borrowers to repay their loans by making small payments at the

beginning of their repayment periods, when their incomes are likely to

be lower, and larger payments in later years. These borrowers will

repay their loans in 12 to 30 years based on individual debt levels.

The extended repayment plan provides for fixed but smaller monthly

payments over a 12 to 30 year period, again based on individual debt

levels. Borrowers will also still be able to choose the fixed-payment,

10-year repayment plan that currently is the most commonly used plan.

Irrespective of the plan selected, borrowers may prepay without penalty

all or part of their loans at any time. Moreover, borrowers can switch

among repayment plans whenever they wish to do so.

Section 685.209 (ICR plan) contains provisions governing the two

monthly payment calculations, namely the formula amount and the capped

amount, available for repayment of Direct Loans under the ICR plan.

Borrowers may choose to repay either the formula amount or the capped

amount. (See Appendix A for detailed examples illustrating, for single

borrowers and for married borrowers who are repaying under the ICR

plan, the calculations of the formula and capped monthly repayment

amounts.)

Formula Amount. Calculation of the ICR formula monthly payment

amount is described in paragraph (b) of this section. 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. The ``payback

rate'' varies from four to 15 percent, calculated as described in

paragraph (b)(2). The payment amount cannot exceed 20 percent of

discretionary income (AGI minus the annual poverty level appropriate to

the family size) divided by 12. If the calculated monthly payment is

less than $15, the borrower is not required to make a payment. When a

borrower is not required to make a payment, interest on the principal

accrues and will be capitalized until the limitation on capitalization

is reached.

Capped Amount. Calculation of the capped monthly payment amount is

described in paragraph (c), and equals the monthly amount the borrower

would repay over 12 years using standard amortization schedules. If the

formula amount exceeds the capped amount, the borrower may choose to

pay the capped amount. If the borrower chooses to pay the capped

amount, the borrower's repayment period may be longer than if the

borrower chooses to pay the higher formula amount.

Joint repayment by married borrowers. This section includes

provisions for joint income contingent repayment of Direct Loans by

married borrowers. Negative amortization is minimized by attributing

joint repayments first to the interest due on each spouse's account and

then to principal. A step-by-step calculation of a combined repayment

amount is included as Example 2 in Appendix A.

Repayment period. Provisions governing the repayment period under

ICR 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 a repayment plan other than the 10-year

standard or 12-year extended plans. The Secretary believes the

exclusion of repayment periods under all other extended and graduated

plans is needed to prevent potential borrower repayment abuses.

If a borrower repays more than one loan under ICR 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 ICR for more than 25 years. If 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 is unable to qualify for a deferment under

Sec. 685.204, may request forbearance under Sec. 685.205.

Limit on capitalization of interest. The Secretary believes a limit

on the amount of interest that is added to principal (the

capitalization of interest) is desirable to prevent an excessive

increase in a borrower's debt burden when the borrower's income is

insufficient to cover accruing interest. Paragraph (d)(3) permits

capitalization of unpaid interest until the outstanding principal

amount is 10 percent greater than the original principal amount, a

decrease from the 50 percent proposed in the NPRM. Thereafter, unpaid

interest accrues but is not capitalized.

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

a Direct Loan under ICR, 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 ICR but fails to provide or

renew consent, or withdraws consent without selecting a different

repayment plan, the Secretary designates the 10-year standard repayment

plan for the borrower.

General Discussion of Other Comments

Regulating Internal Procedures

A number of commenters suggested that the regulations include more

specific requirements relating to the Secretary's internal procedures

for implementing the Direct Loan Program. For example, some commenters

suggested that the Secretary regulate the collection efforts that will

be used to collect from defaulted borrowers. In a number of cases, the

commenters suggested that the Secretary should include specific time

deadlines for actions by the Secretary in connection with the Direct

Loan program. The commenters pointed out that the FFEL regulations

frequently include specific time deadlines on actions by guaranty

agencies and lenders and suggested that the Direct Loan rules should

provide similar requirements on the Secretary.

In these regulations, the Secretary has tried to provide sufficient

information for the public to understand the rules governing the

program without adding unnecessary complexity to the regulations. The

Secretary is not required to issue regulations that are intended to

regulate internal agency processes but do not affect the substantive or

procedural rights of program participants. Therefore, the Secretary has

not included regulations governing such processes as when specific loan

collection efforts will be taken against defaulted borrowers. A

borrower does not have a substantive right to receive a letter at a

specific time.

In addition, the Secretary has not included in these regulations

other rules governing the Department's actions which already have

binding effect. For instance, the Department's regulations at 34 CFR

Part 30 include specific procedural protections available to a borrower

before the Department reports a debt to a credit bureau. 34 CFR 30.35.

Moreover, other laws and rules (such as, in certain instances, the Fair

Debt Collection Practices Act) govern various aspects of the

Secretary's implementation of the Direct Loan Program. The Secretary

will comply with those laws and rules to the extent they are applicable

to the Direct Loan Program, but the specifics of those requirements do

not have to be reflected in these regulations.

The Secretary does not agree with the commenters' suggestion that

the time deadlines binding guaranty agencies and lenders in the FFEL

Program should apply to the Secretary in the Direct Loan Program. The

time requirements in the FFEL Program are designed to protect the

Federal taxpayer by ensuring that lenders and guaranty agencies which

receive Federal funds meet certain requirements before those benefits

are paid. The same goal does not exist in the Direct Loan Program.

However, the Secretary is fully committed to timely communications with

borrowers and schools.

Cash Management Provisions

To reduce regulatory burden on schools, some sections concerning

cash management issues have been removed from these final regulations

and cross-references to the new subpart K of the Student Assistance

General Provisions regulations have been made. In this new subpart, the

Secretary has consolidated most of the current cash management

requirements in the title IV, HEA program regulations, codified

existing cash management policies and procedures currently specified in

subregulatory guidance, and amended some existing requirements to

promote sound cash management practices by schools. Comments to the

NPRM regarding the cash management issues now addressed in subpart K

were forwarded for full consideration in the development of those final

regulations.

The changes concerning cash management provisions made to these

final regulations include:

Section 685.102 Definitions

In paragraph (a)(1), the definition for ``disburse'' was added to

the list of definitions which are set forth in the Student Assistance

General Provisions, 34 CFR Part 668. Additionally, in paragraph (b),

the definition for ``disbursement'' has been removed since the

definition for ``disburse'' is set forth in 34 CFR 668.162.

Section 685.303 Processing Loan Proceeds

Paragraph (c) has been amended to delete language in this section

and to cross reference section 34 CFR 668.165, which establishes the

procedures a school must follow when disbursing funds.

Section 685.309 (Proposed 685.308) Administrative and fiscal control

and fund accounting requirements for schools participating in the

Direct Loan Program

Paragraph (g) has been amended to delete language in this section

and to cross reference 34 CFR 668.164. Paragraph (h) also has been

amended to delete language in this section and to cross reference 34

CFR 668.164, which establishes the procedures a school must follow for

maintaining funds.

Inspection Requirements and Division of Functions Provisions

Paragraph (e) of Sec. 685.309 (proposed Sec. 685.308) has been

amended to delete language in this section and to cross reference more

comprehensive provisions in 34 CFR 668.23(b). Paragraph (i) of

Sec. 685.309 also has been amended to delete this language and to cross

reference more comprehensive provisions contained in 34 CFR 668.16(c).

Bankruptcy Provisions

The Secretary is not including proposed Sec. 685.200(a)(1)(iv) in

this final rule because that provision would have required

reaffirmation of a loan that had been discharged in bankruptcy as a

prerequisite to further eligibility to participate in the Direct Loan

Program. This requirement is no longer permissible by operation of law

pursuant to amendments to 11 U.S.C. section 525 made by section 313 of

the Bankruptcy Reform Act of 1994, P.L. 103-394. These amendments took

effect on October 22, 1994, the date of enactment. Section 525 as

amended prohibits denial of a loan or loan guarantee based on

bankruptcy discharge, but does not prohibit consideration of that fact

in determining the future creditworthiness of a loan applicant.

Consistent with the new law, these regulations provide that a

bankruptcy discharge may evidence an adverse credit history, as a

result of which the PLUS Loan applicant must furnish an explanation of

that event or secure a credit-worthy endorser.

Discussion of Major Issues

Section 685.100 The William D. Ford Federal Direct Loan Program

Section 685.100(a)(1)

Comments: None.

Discussion: Recent amendments to the HEA were included in the

Improving America's Schools Act of 1994 and enacted into law on October

20, 1994. These changes provide that the name of the program authorized

by Part D of the HEA shall be referred to as the ``William D. Ford

Federal Direct Loan Program.'' Thus, the ``Federal Direct Student Loan

Program'' has been renamed the ``William D. Ford Federal Direct Loan

Program.'' However, the program still will be cited as the ``Direct

Loan Program'' within these regulations. Further, the loan program

previously referred to as the ``Federal Direct Stafford Loan Program''

has been renamed the ``Federal Direct Stafford/Ford Loan Program'' and

loans made under this program will continue to be cited as ``Direct

Subsidized Loans.'' The loan program previously referred to as the

``Federal Direct Unsubsidized Stafford Loan Program'' has been renamed

the ``Federal Direct Unsubsidized Stafford/Ford Loan Program'' and

loans made under this program will continue to be cited as ``Direct

Unsubsidized Loans.''

Changes: Section 685.100 reflects programmatic name changes,

including the ``William D. Ford Federal Direct Loan Program,'' formerly

known as the ``Federal Direct Student Loan Program;'' the ``Federal

Direct Stafford/Ford Loan Program,'' formerly known as the''Federal

Direct Stafford Loan Program;'' and the ``Federal Direct Unsubsidized

Stafford/Ford Loan Program,'' formerly known as the ``Federal Direct

Unsubsidized Stafford Loan Program.''

Sections 685.100(a)(1) and 685.100(a)(4)

Comments: Commenters believed that Sec. 685.100(a)(1) should

specify that interest is paid on a Direct Subsidized Loan by the

Secretary only if that student is eligible for these interest payments

on the loan. These commenters also stated that Sec. 685.100(a)(4),

concerning consolidation loans, should be modified to state the party

responsible for interest payment during periods of in-school, grace, or

deferment status of the borrower.

Discussion: The Secretary believes that the regulations provide

sufficient distinction between Direct Subsidized and Direct

Unsubsidized loans. Section 685.215 clearly distinguishes between

Direct Subsidized and Direct Unsubsidized Consolidation Loans.

Changes: None.

Section 685.100(b)

Comments: Many commenters stated that in the FFEL Program

regulations, 34 CFR 682.100, Federal loans such as Stafford, SLS, PLUS,

and Consolidation Loans do not incorporate the term ``Federal'' in

their names. However, within the Direct Loan Program and General

Provisions regulations, the term ``Federal'' is used when describing

these loans. These commenters stated that the wording must be

consistent throughout all Department regulations.

Discussion: The Secretary notes the comments regarding use of

program names.

Changes: The Secretary intends to make future modifications to the

FFEL regulations to ensure consistency in use of program names.

Section 685.101 Participation in the Direct Loan Program

Section 685.101(a)(2)

Comments: Many commenters supported the provision allowing schools

to participate simultaneously in both the Direct Loan and FFEL

Programs. However, some of these commenters recommended that an

institution, not the Secretary, determine its level of participation in

the two programs. These commenters expressed concern that the NPRM

would limit an institution's choice by subjecting an institution's

participation in both programs to the Secretary's approval.

Discussion: The language contained in Sec. 685.101(a)(2) allows an

institution the choice of determining its level of participation in the

Direct Loan Program. During the first year of the Direct Loan Program,

some schools have chosen to participate in both programs and no

school's requested level of participation was denied or modified by the

Secretary. However, the Secretary will continue to retain the authority

to approve such participation to ensure a smooth transition from the

FFEL Program to the Direct Loan Program.

Changes: None.

Section 685.102 Definitions

Section 685.102(a)(1)

Comments: A commenter noted an apparent inconsistency in the law

regarding stepparents that limits the loan assistance available to a

dependent student. The commenter believed that because the law requires

that, in certain circumstances, the income of stepparents must be used

to calculate the expected family contribution, the Secretary should

explicitly provide that stepparents would be eligible to obtain Direct

PLUS loans. The commenter asked that the Secretary provide

clarification.

Discussion: A ``parent'' is defined in 34 CFR 668.2(b) as a

student's natural or adoptive mother or father, or a student's legal

guardian who has been appointed by a court and who is specifically

required by the court to use his or her own resources to support the

student. A stepparent cannot be a student's natural mother or father,

but may be a student's adoptive mother or father, or the student's

legal guardian. However, if the stepparent is not legally considered to

be the student's adoptive mother or father, or the student's legal

guardian, the stepparent is not an eligible borrower in either the

Direct or FFEL PLUS Program for that student.

Changes: None.

Section 685.102(b)

Comments: One commenter noted that the Direct Loan Program

regulations varied from the FFEL Program requirement of three

``reasonable and affordable'' payments for borrowers to be eligible to

consolidate defaulted loans.

Discussion: The Secretary agrees with the commenter that the terms

for defaulted FFEL and Direct Loan borrowers who wish to obtain a

consolidation loan should be the same. For the sake of consistency,

defaulted borrowers who do not wish to repay under ICR will be required

to make three payments prior to consolidation. Similarly, the Secretary

intends that borrowers who do not make any payments prior to

consolidation should be allowed to change out of the ICR plan after

making three payments.

Changes: The definition of ``satisfactory repayment arrangement''

in Sec. 685.102(b) is revised to provide that three consecutive,

voluntary, full monthly payments on a defaulted loan satisfy the

requirements of ``satisfactory repayment arrangements'' for the

purposes of consolidation.

Section 685.210(b)(1)(i) is revised to require a defaulted ICR

borrower to make three monthly payments in order to change to another

repayment plan. Section 685.210(b)(1)(ii) is added to provide that a

defaulted ICR borrower who is not required to make payments must

actually make three reasonable and affordable payments in order to

change to another Direct Loan repayment plan.

Comments: A number of commenters requested a clarification of the

definition of ``consortium''. Commenters noted that the definition

states that for schools in a consortium, the communication is between

the Secretary and a single point. Commenters asked whether ``the

communication'' refers to all contracts, policy information and

compliance reports or to borrower-specific loan information only.

Discussion: All electronic communication will be through the main

contact in the consortium agreement; the Secretary may send other

communication materials directly to individual institutions within the

consortium. As noted in the definition, each school must sign a

participation agreement with the Secretary, and is held responsible for

the administration of the Program.

Changes: The definition of ``consortium'' is amended to clarify

that the electronic communication between the Secretary and the schools

in a consortium is channeled through a single point.

Comments: Commenters pointed out that the definition of estimated

financial assistance is not comparable to the definition in the FFEL

Program regulations.

Discussion: The Secretary agrees that the definition of estimated

financial assistance in the FFEL Program regulations differs from the

language in the Direct Loan NPRM. Therefore, the Secretary has made

revisions to this section in both these regulations and the FFEL final

regulations to simplify and clarify the definition of estimated

financial assistance.

Changes: The introductory paragraph of the definition of estimated

financial assistance has been revised; paragraphs (i), (ix) and (x)

have been deleted; and paragraph (viii) has been revised.

685.200 Borrower Eligibility

Section 685.200(a)

Comments: Many commenters suggested that the Secretary should

clarify if a borrower must apply for a Direct Subsidized Loan before he

or she may apply, and be determined eligible for, a Direct Unsubsidized

Loan. Also, the commenters suggested that the Department clarify that a

borrower with need for less than $200 should not be required to apply

for a Direct Subsidized Loan.

Discussion: The Secretary does not have the authority to set a

minimum borrowing amount on a Direct Subsidized Loan, nor does the

Secretary have the authority to require a borrower to apply for a

Direct Subsidized loan before the borrower applies for a Direct

Unsubsidized loan. It should be noted, however, that a student applies

for both Direct Subsidized and Unsubsidized Loans by completing the

Free Application for Federal Student Aid. Based on that application, a

school determines student eligibility for a Direct Subsidized Loan

prior to determining any Direct Unsubsidized Loan amount. Further, an

institution may establish a minimum loan amount.

Changes: None.

Section 685.200(b)(7)

Comments: Many commenters suggested that the Secretary require a

parent with an adverse credit history to document extenuating

circumstances to establish eligibility for the loan, even if the

borrower obtained an endorser who did not have an adverse credit

history. The commenters argued that if this requirement were not

included in the final regulations, many Direct PLUS Loans would go into

default.

Discussion: The Secretary agrees with the commenters that a

borrower who has an adverse credit history may have an increased risk

of defaulting on a loan than a borrower without an adverse credit

history. However, the Secretary does not believe that documenting

extenuating circumstances with respect to a borrower's adverse credit

history is the only way to reduce such risk. The Secretary believes

that requiring a borrower with an adverse credit history to obtain an

endorser who does not have an adverse credit history is an effective

way to reduce the incidence of default. In the event that the borrower

defaults, the endorser would be required to repay the loan. Therefore,

the Secretary is providing a borrower with an adverse credit history

two options to establish eligibility for a Direct PLUS Loan: (1)

document to the satisfaction of the Secretary that extenuating

circumstances exist, or (2) obtain an endorser who does not have an

adverse credit history. This provision is the same as the applicable

FFEL Program regulation.

Section 685.200(c)

Comments: Several commenters suggested that the regulations address

eligibility of defaulted FFEL, Direct Loan, and Perkins borrowers.

Discussion: The Direct Loan Program regulations are comparable to

the FFEL Program regulations, which also do not address the eligibility

of defaulted Perkins borrowers (see 34 CFR 682.201(a)). The eligibility

of defaulted Perkins borrowers is addressed in 34 CFR 668.7(e) of the

General Provisions regulations.

Changes: None.

Section 685.201 Obtaining a Loan

Section 685.201 General

Comments: Many commenters suggested that the Secretary disclose to

the borrower upon disbursement of the loan, borrower-specific terms

such as loan fees retained, net balance, interest rate, total debt, as

well as the name, address and phone number of the Direct Loan Servicing

Center.

Discussion: The Secretary agrees with the commenters that it is

important that a borrower receive such information with respect to his

or her debt when a loan is disbursed, and makes such a disclosure with

each disbursement.

Changes: None.

Section 685.202 Charges for Which Direct Loan Program Borrowers Are

Responsible

Section 685.202(e)

Comments: Some commenters expressed concern that the collection

formula prescribed by 34 CFR 30.60 results in unreasonable collection

fees. The commenters suggested that the Department limit collection

costs to those costs actually incurred, provided those charges are

reasonable.

Discussion: The Secretary does not agree with the commenters that

the collection costs prescribed by 34 CFR 30.60 are unreasonable. This

regulation, which uses a formula to determine average collection costs,

is consistent with the Federal Claims Collection Standards, 4 CFR Part

101, et seq. Those standards require the Secretary to recover his costs

in collecting a delinquent debt. The Department does not charge a

borrower the actual costs incurred in collecting his or her loan. These

costs may not only exceed the thresholds prescribed by 34 CFR 30.60,

but in the case of certain low balance loans, may be greater than the

outstanding balance of the loan. The Secretary believes that the

formula provided by 34 CFR 30.60 provides a reasonable measure of

collection costs that should be charged on a defaulted loan.

Changes: None.

Comments: Commenters noted that the fees charged to borrowers under

Sec. 685.202(e) must be the same as those charged under the FFEL

Program.

Discussion: The maximum fees and charges that can be charged in the

Direct Loan Program are the same as those authorized for the FFEL

Program.

Changes: None.

Section 685.203 Loan Limits

Sections 685.203(a)-(c)

Comments: Many commenters suggested that the Secretary permit a

school to use a student's satisfactory academic progress to determine

if a student's loan amount should be prorated. Many of the commenters

argued that determining if proration is needed is unreasonably

complicated. Many of the commenters argued that satisfactory academic

progress is an appropriate means to measure if a student needs

additional time to complete an educational program and suggested that a

financial aid administrator be given the authority to use satisfactory

academic progress to determine if loan proration is necessary. Other

commenters suggested that a school should be permitted to use other

means, such as the number of weeks of enrollment or the number of

credit hours in the student's loan period to determine if loan

proration is necessary.

Discussion: The Secretary does not have the authority to permit a

school to use a student's satisfactory academic progress or any means

other than those expressly provided by the statute, which are reflected

in the regulations, to determine if a student's loan should be

prorated.

Changes: None.

Section 685.204 Deferment

Section 685.204(b)(3)

Comments: Two commenters suggested that the Secretary provide

automatic economic hardship deferments to borrowers who chose the ICR

option and argued that ICR borrowers should not be required to apply

for the economic hardship deferment. The commenters suggested that the

economic hardship deferment be granted on the basis of ICR income

figures.

Discussion: The Secretary reminds the commenters that the

provisions on economic hardship apply to all borrowers regardless of

which plan they choose and that the Secretary is committed to providing

all borrowers with timely information regarding deferment eligibility.

However, because the Secretary has additional information about ICR

borrowers, he will facilitate the process regarding economic hardship

for these borrowers. Based on income and debt information (data

elements necessary to calculate the ICR amount) for ICR borrowers, the

Secretary will counsel borrowers and, through the dissemination of

informational materials, will make deferment options clear to these

borrowers. Due to statutory differences between the information used

for the ICR plan and the economic hardship deferment provisions, it is

not possible for the Secretary to make ``automatic'' deferment

eligibility determinations.

Changes: None.

Comments: A commenter suggested that the Secretary include in the

final regulations the definition of economic hardship that was included

in the notice of proposed rulemaking for the FFEL Program published in

the Federal Register on March 24, 1994 (59 FR 14047). Under the

proposed rule, a borrower would be considered to be experiencing an

economic hardship if the borrower is earning no more than either four

times the minimum wage rate or the poverty level and whose payments on

Federal educational loans are at least 20 percent of the borrower's

monthly disposable income. The commenter also suggested that the

Secretary extend the eligibility for in-school deferment to medical

interns or residents.

Discussion: The Secretary believes that the expansion of economic

hardship as requested by the commenter could make a borrower eligible

for an economic hardship deferment when he or she is not experiencing

any financial difficulties. The HEA has been amended by the Improving

America's Schools Act of 1994 to expand the definition of economic

hardship to apply to a borrower who is working full-time and has a

Federal education debt burden that equals or exceeds 20 percent of such

borrower's adjusted gross income, and the difference between the

borrower's adjusted gross income and his or her Federal education debt

burden is less than 220 percent of the greater of the annual earnings

of an individual earning the minimum wage or the income official

poverty line applicable to a family of two. This provision is

applicable to all borrowers under the Direct Loan Program. Further, the

statute does not provide in-school deferment eligibility to medical

residents and interns.

Changes: The definition of economic hardship has been expanded to

incorporate the statutory change. A change has been included in the

FFEL Program regulations. Section 685.204(b)(3)(ii) references the

applicable FFEL Program provision.

Section 685.204(d)

Comments: A commenter suggested that the Secretary extend the

eligibility to medical students to defer repayment on Direct Loans if

they received FFEL Program loans prior to July 1, 1993.

Discussion: At the time the NPRM was published, the Secretary did

not have the authority to permit a Direct Loan borrower to defer

repayment based on criteria applicable to FFEL Program loan borrowers

who borrowed before July 1, 1993. However, on October 20, 1994, the

Higher Education Act of 1965 was amended by the Improving America's

Schools Act of 1994, to provide that a Direct Loan borrower who has an

outstanding balance on an FFEL Program loan made prior to July 1, 1993

is eligible for any deferment available to FFEL Program borrowers that

were in effect on July 22, 1992.

Changes: A change has been made. The regulations have been amended

to provide that a Direct Loan borrower who has an outstanding FFEL

Program loan made prior to July 1, 1993 is eligible for all the

deferments available to FFEL Program borrowers in addition to the

deferments available to Direct Loan borrowers.

Section 685.204(e)

Comments: A number of commenters objected to the Secretary's

proposal to permit a borrower who consolidates FFEL Program loans into

a Direct Consolidation Loan to defer repayment on the Consolidation

Loan under all the deferment conditions available to Direct Loan

borrowers in addition to all of the deferment conditions available

under the FFEL Program (even if the borrower was not previously

eligible for all of the deferments under the FFEL Program). Many

commenters stated that the deferment conditions should be identical for

the Direct Loan and FFEL Programs.

Many other commenters agreed with the Secretary's proposal to

provide the same deferments to borrowers as they have under the FFEL

Program in addition to the Direct Loan Program deferments because it

maximizes the deferments available to the borrower.

Discussion: The Congress specifically exempted the Federal Direct

Consolidation Loan Program from having parallel terms, conditions, and

benefits as consolidation loans under the FFEL Program. The Secretary

has exercised his authority to set the terms, conditions, and benefits

for Direct Consolidation Loans to provide that a borrower will be

eligible for any deferment benefits for which he or she would have been

eligible under the FFEL Program, and be eligible for deferments

available to other Direct Loan borrowers. The Secretary believes that

it is appropriate to maximize the deferment benefits for which a

borrower may be eligible when he has the authority to do so. Further,

as a result of a recent statutory amendment, these deferment benefits

are the same as those provided by Congress for borrowers under the

Direct Subsidized, Direct Unsubsidized, and Direct PLUS Loans. The

Secretary does not have the authority to expand the deferment

conditions available to borrowers who consolidate loans under the FFEL

Program.

Changes: None.

Section 685.205 Forbearance

Section 685.205(a)

Comments: One commenter suggested that if a borrower fails to

designate a form of forbearance, the Secretary should grant cessation

of payments.

Discussion: The Secretary believes there is no need to prescribe a

default to a particular form of forbearance to address cases where

borrowers fail to designate the form of forbearance they prefer. The

borrower will be required to contact the Direct Loan Servicing Center

in order to obtain a forbearance. The Servicing Center will provide the

borrower with adequate information to ensure that the borrower

understands his or her options under forbearance. Furthermore, the

Servicing Center will be very flexible on a month to month basis. The

Servicing Center will accept zero payments, partial payments, or

interest only payments from any borrower in forbearance; the borrower

will be able to choose to pay or not to pay on a monthly basis.

Changes: None.

Comments: Some commenters suggested that the Secretary specify in

the regulations that a borrower may receive a forbearance if he or she

is serving in a position that would qualify for loan forgiveness under

34 CFR 682.215.

Discussion: The Secretary agrees with the commenters that a

borrower is eligible to forbear repayment of a Direct Loan if he or she

qualifies for loan forgiveness under 34 CFR 682.215.

Changes: A change has been made. A new paragraph (5) has been added

to Sec. 685.205(a) that allows a borrower under the Direct Loan Program

to forbear if he or she is serving in a position that qualifies for

loan forgiveness under 34 CFR 682.215.

Section 685.206 Borrower Responsibilities and Defenses

Section 685.206(b)(1)

Comments: A commenter suggested that the proposed requirement for a

borrower to notify the Secretary of a change of address be removed. The

commenter was concerned that disadvantaged persons could easily fail to

comply with the requirement because they are confronted with many

requirements to report various types of information to many different

agencies. Another commenter proposed that paragraph (b)(1) be revised

to eliminate duplication and unrealistic expectations by requiring an

enrolled borrower to report changes in name, address, employer, and

employer's address to the school instead of the Secretary, and to

require the borrower to report address changes to the Secretary after

he or she is no longer enrolled. The commenter also suggested that

there is no need for the borrower to report changes in enrollment

status to the school, because the school already has this information.

Discussion: The Secretary would not be able to effectively collect

loans without current information concerning a borrower's name,

address, employment, and student status. For this reason, it is

imperative that the borrower (who is the best source of this

information) ensure that the Secretary is informed of changes.

Requiring students to notify their schools of any changes in address

promotes rapid exchange of information, particularly in instances where

a borrower drops out of school or drops below half time enrollment.

This rapid exchange of information ensures that the borrower receives

prompt exit counseling and guidance on entering repayment well before

the first payment is due, and facilitates a school's calculation and

return of a refund, if any. At some institutions, there is a delay

between the time a student changes enrollment status and the time that

this information is made available to the financial aid office.

Changes: None.

Section 685.206(c)

Comments: Several commenters supported the proposed language

relating to borrower defenses because it strikes a reasonable balance

between the needs of students and institutions. Commenters stated that

it is important that a system be established to assure that valid

claims are processed, frivolous claims are screened out, and schools

are protected from liability if a delay in bringing the claim reduces

the school's ability to access evidence opposing the claim.

Discussion: The Secretary believes that the proposed regulations

provide an adequate system for adjudicating claims by borrowers that

have a defense against repayment of a loan based on the acts or

omissions of the school. The Secretary notes that the regulations

identify formal proceedings in which borrowers may raise the acts or

omissions of the school as a defense against collection of the loan.

The Secretary does not believe that these proceedings will be used by

borrowers to raise frivolous appeals. Moreover, schools are further

protected from frivolous claims by the requirement that the Secretary

initiate a second proceeding to enforce a liability against the school.

Changes: None.

Comments: One commenter stated that the Department should recognize

that defenses against collection of a loan based on abuses by schools

must be preserved. Another commenter suggested that further

clarification is needed to determine what is meant by the reference to

an act or omission by the school that would give rise to a cause of

action under state law. The commenter suggests that this language

encourages spurious attempts by borrowers to assert claims against an

institution.

Discussion: The proposed regulations reflect the Secretary's view

that an act or omission of the school may, under certain circumstances,

be a defense against collection of a loan. The Secretary believes that

the reference in the regulation to ``an act or omission of the school

that would give rise to a cause of action under state law'' provides an

acceptable interim standard for resolving claims in this area. In the

preamble to the proposed rules, the Secretary committed to working with

interested parties to develop revised regulations for borrower defenses

that would provide further detailed guidance in this area.

Changes: None.

Comments: A number of commenters who participate in the FFEL

Program stated that they were concerned that institutional exposure to

potential liability in the FFEL Program could be increased as the

Department attempts to address an alleged problem of higher potential

institutional liability in the Direct Loan Program. These commenters

also stated that schools with no history of abuse should not be subject

to increased regulation as the Direct Loan Program is implemented.

Discussion: The commenters' claim that schools may be subject to

greater liabilities in the Direct Loan Program than in the FFEL Program

is inaccurate. Schools in both programs face essentially the same risk

of liability. Similarly, the commenters' suggestion that the Direct

Loan Program will result in increased regulation of schools is

incorrect. In fact, these final regulations, in many cases, reduce the

burdens on schools, and the Secretary is applying many of these changes

to the FFEL Program as appropriate.

Changes: None.

Comments: Some commenters supported the Secretary's announcement in

the preamble to work with interested parties to develop regulations for

borrower defenses that would apply to both the Direct Loan Program and

the FFEL Program. These commenters urged the Secretary to structure the

discussions under a negotiated rulemaking process and identified

particular representatives for the process. Some of these commenters

suggested that the Secretary issue rules for both programs in this area

by December 1, 1994 to take effect on July 1, 1995.

Discussion: In the preamble to the NPRM, the Secretary stated that

he would work with interested parties to develop further regulations

for borrower defenses. The Secretary has not yet determined what

process will be used for the development of those regulations. However,

the Secretary will ensure that interested parties are invited to

participate in the process. As the preamble also noted, however, the

regulations that will be developed will apply to the 1996-97 and

subsequent academic years. The Secretary concluded that there was not

sufficient time to consult with interested parties and issue final

regulations by December 1, 1994.

Changes: None.

Comments: One commenter requested clarification of the effective

date of the various borrower defense provisions in the regulations. The

commenter recommended that the regulations in effect at the time the

defense is raised be deemed the operative regulations.

Discussion: The Secretary believes that the issue of the effective

date of the borrower defense provisions should be resolved during the

process for developing final borrower defense provisions for both the

FFEL Program and the Direct Loan Program. Until final borrower defense

provisions are issued, the Secretary intends to apply the regulations

in effect at the time the borrower asserts the defense against

repayment.

Changes: None.

Comments: One commenter stated that the FFEL Program promissory

note only permits a borrower to assert a defense against repayment of a

loan received for attendance at a ``for profit'' school that has a

business relationship with the lender and suggested that the same rule

should apply to the Direct Loan Program.

Discussion: The comment reflects a misunderstanding of the language

in the FFEL Program's common promissory note. That promissory note

includes a provision that reflects the requirements of the Federal

Trade Commission's ``Holder Rule''. The FTC only regulates ``for

profit'' entities and the promissory note provision reflects that

limitation. However, the promissory note also specifically provides

that applicable State law may provide for certain borrower rights,

remedies and defenses in addition to those stated in the note. Thus,

contrary to the commenter's suggestion, the promissory note does not

prohibit borrowers from asserting a defense against repayment of a loan

received for attendance at a not-for-profit school.

Changes: None.

Section 685.207 Obligation to Repay

Section 685.207(a)(1)

Comments: Another commenter wanted assurance that fees and

collection costs charged under the Direct Loan Program would be

adequate to ensure ``aggressive collection of FDSLP loans''.

Discussion: The Secretary will implement effective collection

procedures. Similarly, the Secretary intends to assess collection fees

in accordance with the guidelines provided in the regulations, which

are the same as for the FFEL Program.

Changes: None.

Section 685.207(b)(4)

Comments: One commenter suggested that Sec. 685.207(b)(4) be

revised to state that, in the event that the effective interest rate

increases and causes an increase in the repayment period or fixed

monthly payment amount, the Secretary will advise the borrower of the

change and notify the borrower of the right to select a different

repayment plan.

Discussion: Prior to entering repayment, borrowers will be given

information on all the repayment plans available under the Direct Loan

Program; information provided will include information on possible

changes in interest rates and possible resulting changes in the number

of payments or fixed monthly amount of payments. Borrowers will be

notified of changes in interest rates and the impact of the changes on

an annual basis. On the notification, a borrower will be instructed

that he or she may opt to repay at the new increased or decreased

monthly repayment amount, or choose to take no action. If the borrower

does not opt to repay the adjusted monthly payment amount, the term of

the loan will automatically be adjusted.

Changes: None.

Section 685.207(b)-(d)

Comments: Several commenters requested that the regulations provide

specific time frames for the first payment due date on Direct

Subsidized Loans, Direct Unsubsidized Loans, and Direct PLUS Loans.

Commenters suggested that Direct Subsidized Loans and PLUS Loans

require a first payment due date of 60 days following the first day

that the repayment period begins and that Direct Unsubsidized Loans

require a first payment due date of 45 days following the first day

that the repayment period begins. Other commenters recommended

establishing due dates of 45 days following the first day that the

repayment period begins for Direct Subsidized and Direct Unsubsidized

Loans.

Discussion: Under the Direct Loan Program, the Servicing Center

notifies the borrower when the first payment is due; this date may vary

for individual borrowers, depending upon when the borrower enters

repayment in the Servicing Center's billing cycle. Payments will

typically be due within 60 days from the date the borrower enters

repayment.

Such obligations are ``regulated'' by contract terms with the

Direct Loan servicing entities, rather than in federal regulations,

because the Secretary is not obligated under the due diligence

requirements that require first payment due dates for lenders.

Changes: None.

Section 685.207(c)(3)

Comments: A commenter suggested that Sec. 685.207(c)(3) should be

revised to clarify that interest begins to accrue on a Direct

Unsubsidized Loan on the day the first installment is disbursed. This

revision would make this section consistent with Sec. 685.207(d) that

specifies when interest begins to accrue on a Direct PLUS Loan.

Discussion: The commenter is correct in noting that interest begins

to accrue on a Direct Unsubsidized Loan on the day the first

installment is disbursed.

Changes: A sentence has been added to Sec. 685.207(c)(3) stating

that interest begins to accrue on the day the first installment is

disbursed.

Section 685.207(f)

Comments: A number of commenters also noted that the regulations

should clarify the time at which a grace period begins for students

enrolled in correspondence programs.

Discussion: The commenters are correct in noting that the NPRM did

not clarify the time at which a grace period begins for students

enrolled in correspondence programs.

Changes: Section 685.207(f) has been added to specify the time at

which a grace period begins for students enrolled in correspondence

programs.

Section 685.208 Repayment Plans

Comments: Some commenters believe that FFEL repayment options

should be expanded. Several commenters suggested that the Secretary

meet with the FFEL community to explore how FFEL repayment options

might be expanded.

Discussion: The HEA establishes the repayment plans available under

the Direct Loan and FFEL Programs. Under FFEL, Consolidation loan

borrowers are able to receive extended repayment plans (repayment

periods that are longer than 10 years) if they qualify on the basis of

outstanding loan balances; however, in all other instances, the statute

restricts FFEL Program loans to 10-year terms, excluding periods of

deferment and forbearance.

Changes: None.

Comments: Several commenters stated that the loan repayment options

seem complex and should be simplified. Some of these commenters

believed that it may be possible to eliminate some of the repayment

plans.

Other commenters supported the number of repayment plans offered

and supported the ability of borrowers to switch repayment plans as

needed.

Discussion: The HEA authorizes four repayment plans for the Direct

Loan Program: the standard, graduated, extended, and ICR plans.

Additionally, the HEA authorizes the Secretary to create alternative

repayment plans on a case-by-case basis if the other plans do not meet

a borrower's needs. The Secretary believes that this range of repayment

plans is very important and will allow borrowers to choose how to best

repay based on their personal financial circumstances. As required by

law, this regulation establishes the specific rules for these repayment

plans. The Secretary will provide explanatory materials to borrowers

that will clearly explain the differences among the repayment plans in

easy to understand terms.

Changes: None

Comments: A number of commenters also suggested comparability with

FFEL by modifying Sec. 685.208(b)(4), (c)(4), and (d)(3) to state that

a forbearance will be granted to a borrower for a period of up to three

in years accordance with Sec. 685.205(b)(7).

Discussion: Section 685.205(b)(7) provides for forbearance for 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. This provision applies to

standard, extended, and graduated repayment plans.

Changes: None.

Section 685.208(a)

Comments: Some commenters expressed concern that Direct Loan

borrowers will not be given adequate counseling about repayment options

and consolidation loans. In particular, the commenters were concerned

that students may choose the ICR plan without understanding the

consequences of interest accrual if their payments are smaller than the

interest that accrued.

Discussion: The Secretary believes that providing clear information

to borrowers on repayment and consolidation options is essential to the

success of the Direct Loan program. In section 685.304(b), schools are

required to conduct in-person exit counseling for Direct Loan

borrowers. Schools are also required to provide information on

repayment options, including ICR and loan consolidation, as part of

their exit counseling to borrowers.

In the Direct Loan Program, borrower counseling begins immediately

and is a continuous process. The Secretary, through the Direct Loan

Servicing Center, will send a letter to the student after each

disbursement. Borrowers with Direct Unsubsidized Loans will receive

quarterly statements while they are in school, before repayment begins.

In addition, the Department has developed an exit counseling video,

exit counseling brochure, and repayment brochure to inform borrowers

about loan repayment options prior to entering repayment. Further,

every borrower will receive individualized counseling materials

explaining the four repayment plans and showing how much the borrower

would repay monthly and over the life of the loan. While in repayment,

borrowers will receive an annual statement informing them of applicable

interest rates and advising them to consider a different repayment plan

if their circumstances have changed. The Servicing Center will act as a

single point of contact for borrowers in repayment in the Direct Loan

Program. The Secretary has obtained and will continue to welcome input

from members of the higher education community in the development of

borrower information materials.

Changes: None.

Comments: One commenter recommended that the Secretary allow PLUS

borrowers with loans for two or more children to choose a different

repayment option for each child's loans.

Discussion: For purposes of program simplicity, the Secretary has

decided that all PLUS loans obtained by one borrower must be repaid

under one plan. If a parent has a cash flow problem, the borrower can

easily switch to another repayment option that will reduce current

payments.

Changes: None.

Comments: One commenter asked how the Secretary would calculate

repayment periods if a borrower obtains a Direct Consolidation Loan

consisting of a Direct PLUS Consolidation Loan and a Direct Subsidized

and/or Direct Unsubsidized Consolidation Loan, and pays these loans

under different repayment plans. The commenter wanted to know if the

aggregate loan balance, or the separate loan balances for the PLUS and

other loans would be used to determine the length of the repayment

period for each loan's payment plan.

Discussion: The commenter is correct in noting that a borrower may

choose to repay Direct PLUS Loans separately from student loans. If the

borrower chooses to repay either the PLUS or student loans under the

graduated or extended plans, the Secretary would use the aggregate

balance of all loans to calculate the repayment periods for each of the

components of the Direct Consolidation Loan. This policy is consistent

with the policy in Sec. 685.215(i)(2), which states that the repayment

periods for graduated and extended repayment plans on consolidation

loans will be calculated on the basis of all education loans, including

certain loans that are not eligible for consolidation. However, if the

borrower chooses to repay the student loans under the ICR plan, only

those loans repaid under ICR will be used to calculate the payback

rate.

Changes: None.

Sections 685.208(b)(3) and (c)(3)

Comments: A number of commenters noted that Sec. 685.208(b)(3) and

685.208(c)(3) should be revised to reference an annual payment of $600,

rather than a monthly minimum payment of $50, in order to be consistent

with the wording of the statute and to ensure comparability to FFEL

regulations.

Discussion: A $50 minimum payment amount is equivalent to a $600

annual minimum repayment. The difference in language does not reflect a

difference in the terms of the two loan programs.

Changes: None.

Section 685.208(d)

Comments: Some commenters suggested offering to borrowers a series

of graduated payment options with terms that are tied to the size of

the borrowers' debt. These commenters recommended that the maximum

repayment period for the graduated repayment plan be shortened to 15

years.

Discussion: The Secretary believes that the terms of the graduated

repayment plan should be tied to the size of the borrower's debt and

has designed a graduated repayment plan in which the borrower's term

increases as the borrower's debt increases. For purposes of simplicity,

the Secretary believes that the repayment periods for the graduated and

extended plans should be identical. Also, these terms are similar to

those available under the FFEL Consolidation Program. As is always the

case, a borrower may repay a loan more rapidly than required without

any penalty.

Changes: None.

Section 685.208(e)

Comments: In response to the Secretary's request for comments as to

whether 30-year repayment terms are appropriate for PLUS borrowers, two

commenters recommended that 30-year repayment periods be available to

PLUS borrowers.

Discussion: The Secretary will continue to offer 30-year repayment

terms to PLUS borrowers who have debt levels sufficient to qualify for

the 30-year repayment terms under the extended and graduated repayment

plans.

Changes: None.

Section 685.208(f)(1)

Comments: One commenter noted that the section of the preamble to

the NPRM discussing the provisions for the ICR plan does not include

that income information from the borrower's spouse is a variable that

affects a borrower's monthly payment amount.

Discussion: As required by law, the Secretary uses a borrower's

adjusted gross income (AGI) to calculate the borrower's monthly

payment. If the borrower files a joint income tax return with a spouse,

the spouse's income is included in the AGI and, therefore, in the

calculation of the borrower's monthly payment. If the borrower files

separately, the spouse's income is not included in the borrower's AGI

and, therefore, is not included in the calculation of the monthly

repayment amount.

Changes: None.

Section 685.208(f)(2)

Comments: Two commenters suggested that the Secretary eliminate the

language under this section that requires borrowers to remain subject

to repayment regulations in effect when the borrower's initial loan

enters repayment; these commenters stated that borrowers should be able

to benefit from changes in the regulations.

Discussion: Under Sec. 685.208(f)(2), borrowers are not required to

remain under the ICR regulations enforced when the borrower's initial

loan enters repayment. Rather, borrowers have the option of requesting

that the ICR repayment terms of the amended regulations apply to their

loans. The Secretary will not automatically apply changes in the ICR

formula to all borrowers. The Secretary will provide clear information

to borrowers concerning the ICR formula changes, so the borrower can

make an informed decision. This policy provides borrowers with

protection from significant formula changes; at the same time, this

policy offers borrowers the flexibility to choose a formula change, if

the borrower determines that such a change would be beneficial.

Changes: None.

Section 685.208(g)

Comments: Commenters recommended that the alternative repayment

plan should provide loan forgiveness after 25 years of repayment and

should limit the amount of capitalization of interest. One commenter

suggested that proposed Sec. 685.208(g)(4) be modified to state that

the frequency of capitalization under an alternative repayment plan

(when a borrower's payment amount does not cover accrued interest) is

annual in order to clarify the Secretary's intent.

The commenters supported the idea of alternative repayment as a

``safety net'' for those borrowers who are unable to afford payment

under any other repayment plan.

Several commenters requested additional information on the

alternative repayment plan, such as the types of borrowers who might

qualify for this plan. One commenter requested information concerning

how a borrower would demonstrate that the terms of the other repayment

plans are not adequate to meet that borrower's needs.

Discussion: As authorized by the HEA, loan cessation is only

available under the ICR plan. Borrowers who wish to receive the

benefits of loan cessation should choose the ICR plan. However, the

Secretary has determined that the amount of capitalization permitted

under the alternative repayment plan should be consistent with the

policy on ICR. The Secretary also has established a maximum 30-year

repayment term under alternative repayment.

The Secretary will determine which borrowers qualify for an

alternative repayment plan on a case-by-case basis. Types of

documentation requested would include pay stubs and other documentation

of any income, as well as documentation of financial obligations, such

as medical bills. This option provides another choice to borrowers who

are unable to make payments under other options.

Changes: Section 685.208(g) is amended by adding a new paragraph

(4) to provide that borrowers must repay a loan under the alternative

repayment plan within 30 years of entering repayment.

Section 685.208(g)(5) is amended to provide that unpaid interest is

capitalized until the outstanding principal amount is 10 percent

greater than the original principal balance. Once this 10 percent limit

is reached, interest continues to accrue but is not capitalized.

Comments: Commenters requested that language be added to this

section requiring that the borrower make a choice of repayment plans

within 45 days of notification, consistent with Sec. 685.210(a)(2).

Discussion: The Secretary anticipates that the number and variety

of established repayment plans will address the needs of most

borrowers. During exit counseling, borrowers will be informed that if

the available repayment plans do not meet their needs, they should

contact the Direct Loan Servicing Center. The Direct Loan Servicing

Center will arrange alternative repayment plans for borrowers if the

available plans do not meet their individual needs. Therefore, the

process for selection of alternative repayment plans is different from

the selection of the other repayment plans and there is no need for the

suggested change. Upon further consideration, the Secretary believes

that the 45 day requirement is not necessary for any borrowers. This is

because borrowers will be given several opportunities rather than one,

including following exit counseling and grace period, if any, to select

a repayment plan. If a borrower does not select a repayment plan prior

to entering repayment, the Secretary designates the standard repayment

plan.

Changes: Section 685.210(a)(2) has been revised so that borrowers

are no longer required to select their repayment plans within 45 days

of receiving notification.

Section 685.209 Income Contingent Repayment Plan

Comments: Many commenters suggested that the Department delay

implementation of the ICR plan until problems identified by the higher

education community have been resolved.

Discussion: The Secretary has incorporated several changes into the

ICR plan that address the major concerns expressed by some in the

higher education community. The Secretary believes that the ICR plan is

well designed and provides choice to borrowers given their personal

circumstances. For example, the Secretary is limiting payments to 20

percent of discretionary income (AGI minus the poverty level

appropriate to the family size). This change reduces payments for the

lowest income borrowers. Also, the Secretary is lowering the limit on

interest capitalization from 50 percent to 10 percent of the original

debt. This change limits increases in debt accumulation and protects

borrowers from compounding interest charges. Furthermore, the Secretary

is including years of repayment under the 10-year standard plan and the

12-year extended plan as years eligible for loan forgiveness under

income contingency. This allows borrowers to count those years of

repayment in which they paid at least as much as they would have under

income contingency toward the 25 years in repayment required for loan

forgiveness. Finally, the Secretary will vigorously explore the

elimination of the current Federal income tax liability on any unpaid

loan balance that remains outstanding at the end of the 25-year ICR

period. This change would eliminate large payments at year 25 that

borrowers might not be able to afford.

Changes: None.

Comments: One commenter stressed that the Secretary must make

borrowers aware of the potential tax liability resulting from

cancellation after 25 years of repayment.

Discussion: Counseling materials prepared by the Secretary

emphasize the possibility of a tax liability resulting from

cancellation of a Direct Loan debt after 25 years because under current

law, such forgiveness is taxable. The Secretary will vigorously

encourage the elimination of the Federal income tax liability on any

outstanding loan balance that remains at the end of the 25-year ICR

period. The Secretary appreciates that taxation of loan forgiveness

could affect the benefit a borrower receives by choosing to repay his

or her Direct Loans under income contingency. For a full discussion of

issues concerning counseling, see comments and discussion under section

685.208.

Changes: None

Comments: One commenter stated that low-income borrowers are more

likely to default on their loans than other borrowers, but under ICR,

these borrowers will make low or no monthly payments, thus minimizing

defaults. As a result, institutions will not be triggered for a review

by a State Postsecondary Review Entity (SPRE) due to high default

rates.

Discussion: The Secretary expects the volume of defaults to decline

with the implementation of the ICR plan because ICR payments are

designed to be affordable for all borrowers, and the primary reason for

default is that borrowers cannot afford the level of payments expected

under existing repayment plans. In addition, defaults are expected to

decline because all Direct Loans will be held by the Secretary, and

borrowers will always know where to call with questions or problems and

where to send their checks.

Borrowers who are not required to and do not make payments under

ICR will not be considered defaulters. However, if a borrower is in ICR

and does not make required scheduled payments, a default will occur.

An institution's default rate is not the only criterion that can

trigger a SPRE review. The Secretary expects that the availability of

ICR will facilitate loan repayment and will reduce the validity of

default rates as a measure of institutional performance.

The Secretary intends to monitor several objective performance

measures for schools participating in the Direct Loan Program. The

Secretary believes that such a performance-based approach will increase

the accountability and integrity of the Direct Loan Program.

Changes: None.

Section 685.209(a)(2)

Comments: One commenter recommended that the Secretary meet the

requirement of annually providing the borrower with estimates of

monthly payment amounts under ICR by including this information on or

with the annual statement. The commenter further recommended that the

Secretary provide the borrower with a sufficient period of time to

review this information and elect a new repayment amount.

Discussion: The Secretary agrees that borrowers must be provided

with complete information to enable them to make informed decisions

regarding the options available within the ICR plan--the formula amount

or the capped amount--and will ensure that this information is covered

in borrower counseling sessions and included in relevant materials. The

Secretary has specified a single condition--one change each year--with

respect to choosing one of the two ICR amounts. The rule as written

provides borrowers with as much time as needed to review all applicable

information prior to changing ICR options.

Changes: None.

Section 685.209(a)(4)(i)

Comments: One commenter asked whether spouses who wish to repay

jointly under ICR and currently are not repaying under the same ICR

option have to wait a year to change options.

Discussion: No. Repaying under the same ICR option is a necessary

condition for joint repayment by married borrowers because it would be

impossible to calculate a joint repayment amount otherwise. The

Secretary does not consider changing to joint repayment to be the same

as a change in option.

Changes: None.

Section 685.209(b)

Comments: Several commenters argued that ICR would allow borrowers

to make low payments over a long period of time, therefore increasing

the costs of student borrowing.

Discussion: Borrowers will be given written information and

counseling explaining the difference in total interest they would pay

under the various repayment options. For some borrowers, it may be an

advantage to make smaller payments over a longer period of time, even

though it may ultimately result in higher interest payments. For other

borrowers, it may be advantageous to repay their loans more quickly.

The Secretary is offering borrowers the opportunity to tailor their

payments to their personal financial circumstances. Borrowers will have

the opportunity to consider career goals, education choices, and other

life plans in making repayment decisions. Borrowers can always prepay

without penalty or change repayment plans at any time if their

financial situation changes over time.

Changes: None.

Comments: One commenter asked why deferments and forbearances would

not address the problems of negative amortization that occurs under

ICR.

Discussion: Borrowers who are eligible to defer repayment of their

Direct Subsidized loans will avoid negative amortization during the

deferment period. However, interest continues to accrue for Direct

Unsubsidized loan borrowers during deferment periods and for all

borrowers during forbearance periods. If the borrower fails to pay the

interest due during these periods, negative amortization will occur.

Changes: None.

Comments: Several commenters suggested providing more flexibility

in the percentage-of-income cap, currently set at 15 percent of AGI.

One commenter suggested that the cap could be modified to take into

account the substantially smaller amount of available income at lower

AGI levels. A variable percentage of income cap could be implemented as

part of the formula.

However, another commenter specifically supported the 15 percent

limit on the amount of the AGI that would be required to be paid for

educational loans.

Discussion: The Secretary agrees that borrowers at lower AGI levels

must dedicate a higher percentage of their incomes to subsistence

spending, including food, shelter, and clothing. Hence, these borrowers

have less income available for servicing their student loan debt.

However, the Secretary believes that the commenters' concerns can best

be addressed by keeping the maximum payback rate at 15 percent of AGI

but limiting the monthly payment amount to 20 percent of discretionary

income (AGI minus the poverty level based on family size).

Changes: A change has been made. Section 685.209(b)(1)(ii) has been

amended to include a maximum payment amount equal to 20 percent of the

borrower's discretionary income. Discretionary income is defined as AGI

minus the current poverty income level appropriate to the borrower's

family size, as published by the U.S. Department of Health and Human

Services.

Section 685.209(b)(1)

Comments: One commenter recommended that the regulations provide an

index to update the $7.00 family-size offset.

Discussion: The Secretary has eliminated the $7.00 per month

payment deduction for each dependent and replaced it with a maximum

payment amount equal to 20 percent of discretionary income.

Discretionary income is based on the poverty income level appropriate

to the borrower's family size, as published by the U.S. Department of

Health and Human Services. These poverty guidelines are updated

annually to reflect changes in the cost of living.

Changes: A change has been made. The reference to the $7.00 monthly

payment deduction in Sec. 685.209(b)(1)(ii) has been deleted.

Comments: One commenter suggested that ICR repayment amounts should

not be based solely on the reported AGI of a borrower. This commenter

suggests that AGI is not always an accurate indicator of a borrower's

ability to repay a loan.

Discussion: The HEA requires the Secretary to use AGI of the

borrower (and the borrower's spouse if the borrower is married and

filed a joint return) in determining repayment under the ICR (see

455(e) of the HEA). However, the statute also provides that if AGI is

unavailable or does not reasonably reflect the borrower's current

income, the Secretary may use other documentation of income. The

regulations provide for alternative documentation of income (see

Sec. 689.209(d)).

If the Secretary receives information that suggests that the

borrower's AGI does not reflect the borrower's current income, the

Secretary will request that the borrower send additional documentation.

The Secretary will use this information to adjust the borrower's

repayment obligation if circumstances warrant such an adjustment (see

Sec. 685.209(a)(3)).

Changes: None.

Comments: Several commenters noted that due to a small change in

income, a borrower's payment under ICR would go from $0 to $25. Several

commenters suggested that defaults could be caused by this increase.

Several commenters suggested the payment be ``phased in'' rather than

initially set at $25.

Two commenters suggested establishing a targeted income offset

rather than a $25 floor. One of these commenters suggested subtracting

the $25 payment over a range of low incomes, such as up to 200% of the

poverty level (about $25,000 for a family of 3). This commenter argued

that the $25 floor may create a disincentive for people on welfare to

work.

One commenter argued against permitting zero payments in cases

where the borrower's required payment is below an established minimum

amount. This commenter stated that required payments that are less than

$25 will ensure that the borrower remains aware of the debt and will

facilitate long-term collectibility of the loans.

Discussion: The Secretary shares the commenters' concerns with

regard to the effect of implementing a $25 ICR floor payment. The

change to these regulations that incorporates a maximum payment amount

equal to 20 percent of discretionary income essentially accomplishes

the same result as a ``phased in'' floor amount or a targeted income

offset. In fact, the maximum payment amount is based on poverty income

which is consistent with the comment that the floor payment should be

more sensitive to borrowers at lower income levels.

Further, the Secretary notes that a loan servicing system that

routinely collects very small scheduled payment amounts is less cost-

efficient. Consequently, the Secretary will retain the concept of a

floor, but will reduce this amount from $25 to $15 to address

commenter's concerns.

Changes: A change has been made. Section 685.209(b)(1)(ii)

specifies a monthly payment amount of zero if the calculated payment

amount is less than $15.

Section 685.209(b)(2)

Comments: Many commenters suggested that the ICR formula proposed

by the Department requires monthly payments that are too high for low-

income borrowers and too low for other borrowers. These commenters

argued that low-income borrowers would not be given a viable

alternative to default, while middle-income borrowers would repay over

too long a period of time. One commenter suggested that the ICR formula

be redesigned to meet the needs of low-income borrowers, because they

believed that none of the repayment options would be reasonable for

these borrowers. Several commenters noted that payments required of

low-income borrowers would increase too dramatically with increased

income.

Several commenters suggested specific changes to the ICR formula.

One commenter suggested the Secretary redesign the calculation formula

to produce more graduated repayment amounts at the lower income levels.

Another commenter suggested that the Secretary apply the payback rate

to income over a threshold amount, such as the tax filing status.

Another commenter noted that the formula ``severed'' the monthly

repayment amounts on student loans from the applicable interest rates.

One commenter suggested reducing the flat rate of the formula from 4

percent to 3 percent, and increasing the debt-differentiation factor

from .2 percent to .3 percent, which would effectively reduce payments

for low-income borrowers and increase payments for middle- and upper-

income borrowers. A second commenter argued for a higher rate of

repayment than the one proposed because an increase in market interest

rates would result in sharply increased costs of income contingency.

Another commenter supported the existing formula.

Discussion: The Secretary believes that each borrower is best able

to determine the repayment plan (standard, graduated, extended or ICR)

that accommodates his or her own financial circumstance. He reminds

commenters that the ICR plan is not mandatory because borrowers choose

the plan that best suits their needs and can change plans over time.

Further, the Secretary believes that the ICR plan has been well

designed to meet the needs of a wide range of borrowers including those

borrowers who experience short-term or extended periods of low income.

The Secretary also notes that under the ICR formula, payments will

change with income. Any ICR borrower whose income increases

dramatically can choose to pay the formula amount in which loan

payments increase when income increases. Borrowers who choose to repay

the formula amount will retire their debts more quickly. Additionally,

any borrower can switch to another repayment plan at any time or prepay

without penalty.

The Secretary has incorporated a maximum payment amount, 20 percent

of discretionary income, to ameliorate the effects of the 15 percent-

of-income limit for low-income borrowers. The effect of this change is

similar to the effect of modifying the ICR algorithm to provide more

graduated repayment amounts at lower income levels. Also, the Secretary

investigated applying the payback rate to income above a threshold

amount. In order to remain within program cost limits, this change

would need to be coupled with a higher initial payback rate to minimize

costs to the taxpayer of the ICR plan. This approach, assessing income

above a threshold at a higher rate, was rejected by the non-Federal

negotiators who helped develop the first-year ICR rule and who

preferred a lower initial payback rate.

The Secretary believes that he has addressed the commenters'

concerns with respect to payments required from low-income borrowers by

incorporating the 20 percent cap on discretionary income. The Secretary

notes that applicable borrower interest rates are incorporated in the

ICR payment cap calculation (the 12-year standard amortization amount).

Finally, the Secretary reminds the commenters that the statute

specifies a maximum borrower interest rate of 8.25 percent, and that

ICR borrowers may prepay their loans or change payment plans without

penalty if they wish to lower the absolute cost of their loans.

Changes: None.

Comments: Several commenters suggested that the Secretary should

consider income and debt in calculating the payback rate, in order to

be more sensitive to debt at low-income levels. As a related matter,

several commenters noted that the Secretary's proposal creates

different repayment obligations for borrowers with identical income.

Discussion: The Secretary believes that including an income

variable, in addition to the debt variable, in the payback rate

calculation unnecessarily complicates the ICR formula. The borrower's

income level is taken into account when income is multiplied by the

payback rate to determine the borrower's payment amount. Establishing a

maximum payment amount equal to 20 percent of discretionary income

further adjusts for income. This change to Sec. 685.209(b)(1)(i) has

been previously described. Debt differentiation in the payback rate is

important to discourage excessive borrowing and to be sure that high

debt borrowers who can repay do so.

The Secretary notes that under the other repayment plans--standard,

extended and graduated--borrowers with identical incomes would have

different repayment obligations if their debts were different.

Changes: None.

Comments: One commenter was concerned that the payback rate does

not take a borrower's non-Federal debt into account.

Discussion: The payback rate is based on the loans the borrower is

repaying under the ICR plan. Borrowers cannot consolidate non-Federal

loans into a Direct Loan. Therefore, the Secretary believes that non-

Federal debt should not be used to determine the payback rate. However,

the Secretary notes that the flexibility offered by the ICR plan for

Federal education debt can help ease the borrower's overall debt

burden.

Changes: None.

Section 685.209(b)(3)

Comments: Several commenters argued that, to improve the repayment

plan for married borrowers repaying jointly, the Secretary should apply

payments to interest on both accounts before principal reduction takes

place in either, which would help avoid negative amortization. This

same commenter suggested that, because married borrowers may not be in

the same repayment cohorts, their payback rate should be calculated

based on their outstanding principal, rather than initial debt.

Discussion: For borrowers repaying jointly under ICR, the Secretary

agrees that payments should be applied to interest on both accounts

before principal reduction takes place in either. The Secretary also

agrees that the payback rate should be calculated based on outstanding

debt rather than initial debt.

Changes: A change has been made. Sections 685.209(b)(3) has been

amended to clarify that, for borrowers repaying jointly under ICR,

payments will be applied to interest on both accounts prior to

principal reduction in either. Section 685.209(b)(3) is also amended to

clarify that the payback rate for a married borrower paying jointly

under ICR will be calculated on the outstanding debt at the time the

borrower was approved for joint repayment.

Section 685.209(c)

Comments: Several commenters stated that the cap on repayments

imposed by the 12-year amortization level on the ICR capped amount was

not sensitive enough to income. One commenter recommended using an 8-

year cap, if the Secretary provides an income-adjustment factor (see

discussion concerning sensitivity to income), or a 10-year cap, if the

formula includes no adjustment for income. Another commenter supported

the recommendation for a 10-year cap for the ICR capped amount.

Discussion: The Secretary included the 12-year amortization cap in

the ICR plan to provide borrowers whose incomes are higher with the

option to limit the amounts of their monthly payments. Consequently,

the Secretary agrees that the 12-year cap extends payments for middle-

and upper-income borrowers with low or medium loan balances and

disagrees that it accelerates repayment for high-income, high-debt

borrowers. In fact, the 12-year cap extends repayment for any borrower

who chooses this option because his or her payment under the ICR

formula calculation option would be higher. Further, the Secretary

agrees that borrowers with the same debt who choose to repay the capped

amount pay the same amount regardless of income, but reminds commenters

that these borrowers can choose to pay off their loans more quickly by

repaying the ICR formula amount or switching to another plan. To limit

the extent to which repayment is extended, the Secretary is modifying

the calculation of the 12-year amortization cap. The cap will be

increased when the outstanding balance of the loan increases (that is,

following periods of negative amortization).

The Secretary established the fixed-payment, 12-year amortization

schedule for the ICR cap amount because this repayment term is

consistent with the minimum repayment periods available under the other

two non-standard repayment plans (graduated and extended).

Changes: A change has been made. Section 685.209(c) includes a

technical correction to the manner in which the 12-year payment cap

amount is computed. After each period of negative amortization, that

is, when the outstanding balance of the loan has increased, the 12-year

amortization amount will be calculated using the higher outstanding

loan amount. The payment cap will always be calculated on fixed-

payment, 12-year amortization schedules. A change in presentation has

also been made. References to option 1 and option 2 are deleted.

Instead, two calculations are presented that incorporate the

calculations previously described under options 1 and 2. Section

685.209(b) describes the formula amount, which is based on income, and

Sec. 685.209(c) describes the capped amount, which is based on 12-year

standard amortization schedules. The Secretary intends to present both

amounts to a borrower repaying under ICR, explaining that the borrower

may choose to repay either amount. Section 685.209(c) has been modified

to require a minimum monthly capped amount of $15. The detailed

examples in Appendix A have also been modified to take into account

these changes.

Section 685.209(d)(1)

Comments: Several commenters suggested that the Secretary provide

examples of alternative documentation of income, in cases where a

borrower's AGI is not available or where the AGI does not reasonably

reflect the borrower's current income.

Discussion: Such documentation could include pay statements from

employers, documentation of income received by the borrower from other

parties, and, if no other documentation is available, certification

statements of income from the borrower.

Changes: None.

Section 685.209(d)(2)

Comments: One commenter suggested that years in which an ICR

borrower receives an economic hardship deferment or a forbearance

(granted because the borrower was unable to make payments) should be

counted towards the maximum 25 years of repayment. The commenter argued

that excluding periods of forbearance and deferment from the 25-year

period treats a borrower who is required to make zero payments more

favorably than a borrower who chooses an economic hardship deferment,

because the borrower making zero payments would be allowed to count

this period towards the 25 years under ICR while a borrower in

deferment or forbearance would not.

Discussion: Under section 428(b)(7) of the HEA, the maximum years

in repayment in the FFEL Program exclude periods of deferment and

forbearance. Direct Loans have the same terms, conditions and benefits

as FFEL Program loans, unless otherwise specified (see section

455(a)(1)); therefore, the Secretary excludes periods of forbearance

and deferment from the 25 years of repayment under ICR.

The economic hardship deferment is beneficial to borrowers who have

subsidized loans. Borrowers required to make zero payments who are

eligible for an economic hardship deferment are not responsible for

paying the interest on the loan during the deferment period. If a

borrower chooses not to take the deferment, the borrower's interest

will accrue throughout the period that the borrower makes zero

payments.

Changes: None.

Comments: Several commenters suggested that years in repayment in

other repayment plans should be counted towards the maximum 25-year

repayment period under the ICR plan.

One commenter suggested that years under which borrowers repay

under standard or 12-year extended repayment plans should count toward

the 25-year ICR period.

Discussion: If all borrowers were allowed to count years in

repayment under other plans toward the maximum 25-year period under

ICR, the potential exists for certain borrowers to switch repayment

plans when their incomes fluctuate to avoid repayment of their loans.

However, the Secretary agrees that under the standard repayment plan

and the 12-year extended repayment plan, borrowers would pay larger

amounts than they would under the ICR option and could not usually

avoid repaying their loans by switching repayment plans.

Changes: A change has been made. Section 685.209(d)(2)(ii) has been

revised to provide that years spent in standard repayment and 12-year

extended repayment will count towards the maximum 25-year repayment

period under ICR.

Comments: Several commenters noted that under current tax law, any

debt forgiven under the ICR plan would be treated as taxable income.

Many of the commenters requested a commitment from the Secretary to try

to revise current law.

Discussion: The Secretary will work vigorously to develop a

legislative proposal to eliminate the Federal income tax liability on

any outstanding loan balance that remains at the end of the 25-year

repayment period.

Changes: None.

Comments: Several commenters urged the Secretary to shorten the 25-

year forgiveness period under ICR, especially for low-income borrowers

and borrowers who opt for public service jobs.

Discussion: The Secretary is reluctant to shorten the 25-year loan

forgiveness period for some borrowers because this approach would

require the Secretary to determine which occupations and/or borrowers

are most suited for this special consideration. The Secretary believes

that each borrower is responsible for his or her own debt, and that the

25-year maximum repayment period generally encompasses the time period

during which borrowers are most likely to experience widely fluctuating

incomes. Although the statute permits contracting the 25-year

forgiveness period, the Secretary believes that his interpretation of

the statutory 25-year forgiveness rule is consistent with Congressional

intent.

Changes: None.

Comments: One commenter recommended that the Secretary indicate how

long interest-only payments may be required until the Secretary

calculates a borrower's monthly repayment amount on the basis of the

borrower's income. The commenter further recommended that the

regulations permit the borrower to be eligible for forbearance, or

alternative repayment, if the borrower is unable to meet the interest

payments during this period.

Discussion: The Secretary included this provision to ensure that

borrowers who choose the ICR plan make loan payments for the short

period of time between the expiration of the grace period and the

verification of the borrower's reported income by the Internal Revenue

Service. Borrowers under any repayment plan are eligible to forbear

repayment if they are willing but unable to make scheduled payments.

Changes: None.

Section 685.209(d)(3)

Comments: Numerous commenters recommended that the Secretary lower

the level at which interest is no longer capitalized on loans paid

under the ICR plan. Several commenters suggested that the Secretary

lower the ceiling on capitalization from 150 percent of principal to

110 percent or 105 percent. Many other commenters suggested that the

Secretary charge only simple interest on loans being repaid under the

ICR plan.

Several commenters suggested that the Department limit the level of

capitalization for borrowers serving in the public interest.

Discussion: The Secretary agrees that the interest capitalization

limit should be lowered from the current 150 percent of principal.

The Secretary is reluctant to limit interest capitalization for

certain borrowers and not for others. This approach would require the

Secretary to determine which occupations and/or borrowers are most

suited for such special consideration. The Secretary believes that the

purpose of the ICR program is best served by the broadest possible

application of the benefit of lower interest capitalization.

Consequently, the Secretary is reducing the interest capitalization

limit to the extent it can be accomplished within current program cost

constraints.

Changes: A change has been made. Section 685.209(d)(3) states that

unpaid interest is capitalized until the outstanding principal amount

is 10 percent greater than the original amount.

Comments: For purposes of limiting capitalization, one commenter

asked how a borrower's original balance would be calculated if the

borrower enters repayment, makes some principal repayments, then

returns to school and borrows more.

Discussion: The loan amount used for purposes of calculating the

interest capitalization limit for any Direct Loan borrower who obtains

additional loans after commencing repayment is the sum of the

outstanding amounts on all loans in repayment at the time the borrower

re-enters repayment.

Changes: None.

Section 685.209(d)(5)

Comments: One commenter asked the Secretary to specify the

conditions under which defaulted borrowers will be placed in ICR.

Another commenter suggested that this section assumes that all

defaulters will be placed in ICR, unless the defaulter fails to provide

written consent to disclosure of tax return information.

Discussion: The Secretary will maintain maximum flexibility in

determining which borrowers will be required to repay under ICR. The

Secretary believes that it is important to consider a borrower's

individual circumstances to determine whether it is in the best

interest of the borrower to repay under the ICR plan.

Changes: None.

Section 685.210 Choice of Repayment Plan

Section 685.210(a)(1)

Comments: Commenters argued that this section should be modified to

incorporate timing requirements applicable to the FFEL Program.

Discussion: The Secretary will satisfy the statutory obligations to

provide required repayment information on a timely basis to each

individual borrower and will provide materials that clearly explain a

borrower's repayment options. Borrowers will be informed of their

repayment obligations and their repayment options during exit

counseling and during the grace period. The Secretary believes that it

is unnecessary to specify the number of days prior to repayment that

disclosure must occur.

Changes: None.

Comments: Many commenters supported the borrower's choice of

repayment plans; one commenter asserted that the Direct Loan repayment

plans should be made available to all borrowers who wish to

participate.

Discussion: All Direct Loan borrowers, except Direct PLUS borrowers

and certain defaulted borrowers, will have the choice of any repayment

plans. FFEL borrowers who cannot obtain a FFEL Consolidation Loan or a

FFEL Consolidation Loan with satisfactory income-sensitive terms will

also be able to consolidate into Direct Loans and choose a repayment

plan available through the Direct Loan Program.

Changes: None.

Section 685.210(b)(2)(i)

Comment: A commenter asked why the Secretary has prohibited

borrowers who have been repaying under certain plans for longer than

ten years from switching to the standard repayment plan in order to

accelerate payments.

Discussion: To simplify the repayment procedures, the Secretary

will calculate repayment periods under all repayment plans, other than

ICR, from the time the borrower enters repayment. Therefore, after a

borrower has been repaying for ten years, the borrower will be unable

to switch to the standard repayment plan, which provides only 10 years

to repay the loan. If borrowers wish to accelerate their payments, they

can always prepay without penalty.

Changes: None.

Section 685.211 Miscellaneous Repayment Provisions

Section 685.211(a)(3)

Comment: A commenter suggested that Sec. 685.211(a) be rewritten to

allow borrowers to allocate prepayments to principal. The commenter

suggested that Sec. 685.211(a) provide that payments are applied first

to interest, then principal, then to charges such as late fees, and

then to collection costs.

Other commenters supported the application of payments first to any

accrued charges and collection costs. Some of these commenters

requested a corresponding modification to FFEL requirements to make

them comparable to the Direct Loan payment and prepayment application

provisions set forth in Sec. 685.211(a)(3).

Discussion: The provisions for prepayment were agreed upon during

negotiated rulemaking and establish consistent guidelines for the

equitable treatment of all Direct Loan borrowers.

Changes: None.

Section 685.211(c)(3)

Comment: Some commenters suggested that the Department prescribe

administrative procedures for challenging the past-due status or legal

enforceability of a Direct Loan prior to making a report to a credit

bureau and prior to offsetting the borrower's debt.

Discussion: The Secretary agrees with the commenters that a

notification must be provided to the borrower before the Secretary may

report the debt to a credit bureau or take offset action against the

borrower to recover the debt. The Secretary will provide this

notification to such borrowers. The Secretary does not believe a change

in the regulations is necessary.

Changes: None.

Section 685.211(d)(2)

Comments: One commenter suggested that Section 685.211(d)(2) should

be modified in accordance with Sec. 682.412 of the FFEL Program

regulations to assign a specific start date to the 30-day period during

which a borrower must repay an ineligible loan. The regulation

currently states that the 30-day period begins when a borrower receives

a final demand notification, but this commenter asserts that the

Secretary would be unaware of the date on which the borrower received

such notification.

Discussion: The commenter is correct in noting that the Secretary

would be unaware of the day that a borrower receives notification.

However, the Secretary could easily track when the notification is

mailed.

Changes: Section 685.211(d)(2) is modified to state that the

borrower must repay the loan within 30 days after the demand letter is

mailed.

Section 685.211(d)(3)

Comment: One commenter suggested adding language to

Sec. 685.211(d)(3) to provide that if a portion of a loan is determined

ineligible and that portion is not repaid within 30 days, the borrower

is considered in default on the entire loan, not just the portion of

the loan determined ineligible.

Discussion: The commenter is correct in noting that if a borrower

is ineligible for a portion of a loan and does not comply with the

demand letter described in Sec. 685.211(d)(2), the borrower is

considered to be in default on the entire loan, not just the portion of

the loan determined ineligible.

Changes: Section 685.211(d)(3) is modified to state the borrower is

in default on the entire loan.

Section 685.211(e)

Comments: A commenter wanted clarification in 685.211(e) on what

constitutes a reasonable and affordable monthly payment.

Discussion: The Secretary will obtain information from the borrower

concerning the borrower's income, student loan debt, and other payment

obligations and will use this information to determine what the

borrower can reasonably afford to pay.

Changes: None.

Section 685.212 Discharge of a Loan Obligation

Sections 685.212 (a) and (b)

Comment: Several commenters objected to the fact that the proposed

regulations provide no definition of ``acceptable documentation'' as

the phrase appears in Sec. 685.212 (a) and (b). The commenters noted

that this phrase is defined in the FFEL Program regulations.

Discussion: The Secretary is not required to regulate the forms of

documentation that the Secretary will accept for discharge. However,

the Secretary intends to use forms of documentation that are similar to

those prescribed in the FFEL Program.

Changes: None.

Section 685.212(c)

Comment: Several commenters noted that Sec. 685.212(c) does not

prescribe the steps that must be taken, continued, or suspended during

the pendency of a bankruptcy proceeding. These commenters noted that

the FFEL Program regulations provide an extensive outline of the steps

which must be taken.

Discussion: The Secretary is not required to regulate himself in

this situation. The Secretary is not under the same requirements as

lenders and guarantors in the FFEL Program.

Changes: None.

Sections 685.212 (d) and (e)

Comment: One commenter noted that Sec. 685.212 (d) and (e) should

clarify that payments made prior to loan discharge will be refunded to

the borrower whose loan has been discharged due to closed school or

false certification issues.

Discussion: The commenter is reminded that Sec. 685.213(b)(2) and

Sec. 685.214(b)(3) provide that a borrower will be reimbursed for

amounts paid voluntarily or through enforced collection on the loan.

Changes: None.

Section 685.212(f)

Comments: One commenter suggested comparability with FFEL

requirements by adding language to Sec. 685.212(f) to state that

payments are returned to the borrower after a lender is notified of the

borrower's condition, not (as currently stated) after the requirements

for discharge have been met by a borrower.

Another commenter requested comparability to FFEL requirements by

asserting that a definition of ``acceptable documentation'' is

necessary.

Discussion: Although the commenter is correct in noting that the

wording is slightly different, the policy reflected in the FFEL and

Direct Loan Program regulations is the same.

Changes: None.

Section 685.213 Closed School Discharge

Comments: Some commenters recommended that the regulation include

time frames for the Secretary's actions.

Discussion: The Secretary is committed to ensuring that borrowers

receive a timely response.

Changes: None.

Comments: One commenter requested that the Secretary clarify that

the part of a consolidation loan that reflects a loan that would have

been discharged before consolidation would also be discharged.

Discussion: The Secretary agrees with the commenter that a

borrower's consolidation loan should be credited for the amount of the

closed school loan discharge that would have been applicable to the

borrower's loan before the consolidation. Section 685.213 (b)(1)

provides that the borrower will be relieved of any past or present

obligation to repay the loan and would be reimbursed for amounts paid

on the loan. This provision is the same as the regulation for the FFEL

Program.

Changes: None.

Section 685.213(c)

Comments: Some commenters stated that requiring sworn statements

and other affirmative action from borrowers puts unnecessary barriers

to relief and is likely to result in eligible borrowers not obtaining

the discharge. One commenter stated that the Secretary and guaranty

agencies should take affirmative steps to assure that relief is

available. Another commenter recommended that the Secretary should

simply discharge the loan if the existing records indicate that the

borrower was eligible for the discharge.

Discussion: The Secretary believes that the requirement for a sworn

statement by the borrower is necessary to protect the interests of the

taxpayer. Much of the information provided in the sworn statement is

not otherwise available to the Secretary, and the Secretary cannot

usually determine if the borrower is eligible for discharge based

solely on existing records. The Secretary also believes that it is

appropriate to require the borrower to take affirmative action and

provide evidence supporting his or her eligibility for the discharge.

Changes: None.

Section 685.213(c)(1)(ii)

Comments: One commenter recommended that the regulations be revised

to provide a discharge to borrowers enrolled in a program the school

ceased to offer within 180 days of the closure.

Discussion: The Secretary believes that the regulatory provision

allowing borrowers who withdraw within 90 days prior to a school's

closing is sufficient. Section 437(c)(1) of the HEA authorizes the

Secretary to discharge a borrower's liability on a loan if the borrower

does not complete a program due to the school's closure. The regulation

reflects this statutory focus on the date of the school's closure

rather than on the date the school ceases to offer a certain program.

Changes: None.

Section 685.213(c)(1)(iii)

Comments: One commenter recommended that the regulations provide a

definition of a teach-out as referring only to arrangements in which

the borrower receives all the instruction promised at no additional

charge at an institution geographically close to the closing school and

under an arrangement approved by the State licensing body.

Discussion: The Secretary believes that a prescriptive regulatory

definition of ``teach-out'' is unnecessary. A student who chooses to

complete his or her program through a teach-out has received value from

the loan and does not need a loan discharge.

Changes: None.

Section 685.213(d)(1)

Comments: One commenter recommended that paragraph (d)(1) be

modified to require the borrower to cooperate with ``reasonable

requests'' for cooperation by the Secretary, and to cooperate with the

Secretary to the extent practicable.

Discussion: The use of the word ``cooperate'' in the regulations

reflects the Secretary's intention to work with the borrower toward a

common goal. This provision outlines what is expected of the borrower

and references documents ``reasonably available'' to the borrower.

Changes: None.

Section 685.213(d)(2)

Comments: One commenter recommended that paragraph (d)(2) be

modified to permit the Secretary to revoke a loan discharge only if the

discharge was based upon a material, false statement by the borrower

made with fraudulent intent to receive a benefit the borrower would not

otherwise be entitled to receive, or if the borrower willfully fails to

cooperate with a reasonable request to support the Secretary's efforts

to recover from the school or its principals.

Discussion: To protect the Federal fiscal interest, the Secretary

believes that it is appropriate to revoke or deny a discharge for a

borrower who fails to support the representations made to receive that

benefit.

Changes: None.

Section 685.213(e)

Comments: Two commenters objected to the provision requiring a

borrower to transfer the borrower's right to recover against state

tuition recovery funds for the amount of a discharged loan. Another

commenter also recommended deletion of paragraph (e)(3) because it

could be construed to limit the borrower's rights.

Discussion: The Secretary believes that the authority in section

437(c)(2) of the HEA permitting the assignment to the Secretary of the

borrower's right to recover a loan refund from the school, its

affiliates or principals, clearly applies as well to the recovery of

refunds from private funds which support the schools. A private fund is

generally funded by the types of schools who present the greatest risk

of liability or by parties who are associated with those schools. Under

these conditions, the Secretary believes that the HEA intends that the

Secretary shall have a legal claim to a refund from these funds. The

Secretary also does not agree with the suggestion that the reference to

the borrower's assignment of claims with respect to the enrollment

agreement and paragraph (e)(3) should be deleted. The Secretary does

not believe that these provisions will be read to surrender the

borrowers' rights beyond the limited scope required to receive the loan

discharge.

Changes: None.

Section 685.213(f)

Comments: One commenter recommended that the regulations be

modified to specifically provide that, after a loan is discharged, the

Secretary will send the borrower the original promissory note marked

``canceled'' or ``satisfied in full'' and a notice that the credit

agencies have been informed of the cancellation. Another commenter

noted that the regulations do not address the removal of the adverse

credit history from the borrower's credit report.

Discussion: A loan that is discharged is considered ``paid in

full'' and the Secretary will notify the borrower that the borrower's

loan obligation has been satisfied. In addition, Sec. 685.213(b)(4)

provides that the Secretary will provide notice of the discharge to all

credit reporting agencies which were notified of the status of the

loan. The Secretary believes that these steps will provide the

protection for the borrowers requested by the commenters.

Changes: None.

Comments: One commenter recommended that the regulations be

modified to include recent guidance provided in the FFEL Program

regarding borrowers who are initially determined eligible for discharge

based on a school closure date that is later determined inaccurate.

Discussion: The Secretary believes that the guidance referred to by

the commenters does not need to be in regulation. However, borrowers in

both the FFEL Program and the Direct Loan Program will generally be

treated the same for purposes of the loan discharge provision.

Changes: None.

Comments: One commenter suggested that the regulation provide for

the resumption of collection activities and specify the treatment of

payments of principal and interest due during the period in which

collection of the loan is suspended.

Discussion: Section 685.213(f)(4) of the regulations provides the

information requested by the commenter.

Changes: None.

Section 685.214 Discharge for False Certification of Student

Eligibility or Unauthorized Payment

Comments: One commenter suggested that the discharge also be

applied to the amount of a Consolidation loan that reflects a loan that

would have been eligible for discharge except that it had been

consolidated.

Discussion: The Secretary agrees with the commenter that a

borrower's Consolidation loan should be credited for the amount of the

false certification loan discharge that would have been applicable to

the borrower's loan before the consolidation. Section 685.214(b)(1)

provides that the borrower would be relieved of any past or present

obligation to repay the loan and would be reimbursed for amounts paid

on the loan. The regulation is the same as the regulation for the FFEL

Program.

Changes: None.

Comments: One commenter argued that the Secretary should be more

receptive to remedying abuses where the ability to benefit is lacking.

The commenter was particularly concerned about borrowers who become

employed in their general area of study but at lower level positions

than they expected when they signed up for training. The commenter

claimed that false certification was intended to address these

problems.

Discussion: Section 437(c) of the HEA provides for discharge of a

loan only when the school falsely certifies the student's eligibility

to borrow. It is not intended to address every instance of alleged

school malfeasance. In particular, section 437(c) is not intended to

provide a loan discharge for all the borrowers who believe that they

have not obtained the employment that they believe was promised. The

Secretary does not endorse or guarantee the quality of education

offered by schools participating in the Title IV programs. The

Secretary does not approve the school's curriculum or practices, except

as they relate to operation of the Title IV programs. Accordingly,

student borrowers have the responsibility of any consumer to evaluate

the services that will be provided by the school in light of the

expense.

Changes: None.

Comments: One commenter claimed that the Secretary's approach to

the discharge for false certification is overly restrictive and not

consistent with the statutory language. The commenter recommended that

the regulation should not limit the type of false certification that

could result in a discharge.

Discussion: Section 437(c) of the HEA has a limited scope. It

provides for discharge of a loan for a borrower when the school has

falsely certified the student's eligibility to borrow. The Secretary

believes that the regulations properly reflect the limited scope of the

statute.

Changes: None.

Comments: One commenter suggested that the regulation be revised to

apply the time limits applicable to guaranty agencies under the similar

provision in the FFEL Program to the Secretary.

Discussion: The Secretary is committed to ensuring that borrowers

receive a timely response but regulatory time frames are not necessary.

In the FFEL Program, however, the Secretary is regulating the

activities of third parties and regulatory time frames are needed to

ensure that those parties fulfill their programmatic responsibilities.

Changes: None.

Section 685.214(a)(1)(iii)

Comments: One commenter objected to the provision that a borrower

would be eligible for a loan discharge if the school certified the

student's eligibility for a loan and the student had a physical or

mental condition, age or criminal record that prevents the borrower

from satisfying the physical or legal requirements for employment in

the occupation for which the borrower received training. The commenter

suggested that the school could, under certain circumstances, violate

the Americans with Disabilities Act (ADA). The commenter suggested that

if the State standard violated the ADA, the school could be sued by the

student for refusing to certify the loan application, or could face

action by the Department if the loan was certified.

Discussion: As noted in the preamble to the NPRM, 59 FR 42651-

42652, paragraph (a)(1)(iii) is not intended to affect the application

of any Federal or State statute (including the ADA) that prohibits

discrimination. The Secretary does not expect that schools will be held

liable for certifying any loan application that they are required to

certify by another law. However, the Secretary does not believe that a

change in the regulations, as suggested by the commenter, is needed.

Changes: None.

Comments: One commenter suggested that the language pertaining to

the false certification of the eligibility of a student who does not

meet the basic requirements for employment is unclear particularly when

applied to four year and degree granting institutions. The commenter

stated that the school does not have access to the information

mentioned in the regulation and cannot be expected to have knowledge of

the potential occupations and requirements for employment for students

who pursue the academic programs in a university. The commenter argued

that this language would encourage students to raise illegitimate

claims against schools.

Discussion: The regulatory language is limited and designed to

address those situations in which the school proposed to train the

student for an occupation with specific requirements for employment.

The Secretary does not anticipate that this regulation will apply to

many students pursuing academic programs in a university.

Changes: None.

Section 685.214(c)(1)

Comments: One commenter argued that a borrower should be able to

receive a loan discharge if the borrower did not have the ability to

benefit from the training, even if the borrower got a job for which he

received training.

Discussion: The Secretary believes that the ability of a student to

obtain employment in the occupation for which the student's program

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

the education received, even if the school initially failed to test or

improperly tested the student's ability to benefit from the training.

Changes: None.

Comments: One commenter suggested that the regulations be modified

to require the borrower to make a reasonable effort to secure

employment in the field in which the program was intended before a

discharge can be granted.

Discussion: The Secretary agrees with the commenter's suggestion.

The requirement that the borrower make a reasonable attempt to obtain

employment in the occupation for which the program was intended is

included in the FFEL Program regulations at 34 CFR 682.402(e)(3)(ii)(C)

and should be incorporated into the Direct Loan program.

Changes: Section 685.214(c)(1)(iii)(B) has been changed to require

the borrower to provide a statement acknowledging that he or she made

reasonable attempts to obtain employment in the occupation for which

the program was intended.

Changes: None.

Section 685.214(c)(5)

Comments: One commenter recommended that this subsection be

modified to only require the borrower to cooperate with ``reasonable

requests'' for cooperation by the Secretary, and to cooperate with the

Secretary to the extent practicable.

Discussion: The use of the word ``cooperate'' in the regulations

reflects the Secretary's intention to work with the borrower toward a

common goal and does not need to be restricted. The section references

the provision of documents ``reasonably available'' to the borrower.

Changes: None.

Section 685.214(d)(4)

Comments: One commenter recommended that the regulations be

modified to specifically provide that, after a loan is discharged, the

Secretary will send to the borrower the original promissory note marked

``canceled'' or ``satisfied in full'' and a notice that the credit

agencies have been informed of the cancellation. Another commenter

noted that the regulations do not address the removal of the adverse

credit history from the borrower's credit report.

Discussion: A loan that is discharged is considered ``paid in

full'' and the Secretary will notify the borrower that the borrower's

loan obligation has been satisfied. In addition, Sec. 685.214(b)(5)

provides that the Secretary will provide notice of the discharge to all

credit reporting agencies which were notified of the status of the

loan. The Secretary believes that these steps will provide the

protection for the borrowers requested by the commenters.

Changes: None.

Section 685.215 Consolidation

Comments: Some commenters noted that the terms of Direct

Consolidation Loans with respect to deferment eligibility and interest

rates are not identical to the terms of FFEL Consolidation Loans.

Some commenters supported the differences because the differences

benefit borrowers. Other commenters wanted Direct Consolidation Loans

to have the same terms as FFEL Consolidation Loans.

Discussion: Section 455(g) of the HEA indicates that the Secretary

has discretion in establishing the terms and conditions of the Federal

Direct Consolidation Loan Program. The Secretary has established a

Direct Consolidation Loan Program that maximizes benefits to the

borrower and complies with statutory guidance. The Secretary does not

have the authority to extend these provisions to borrowers of FFEL

Consolidation Loans.

Changes: None.

Comments: Some commenters requested the Secretary to allow Direct

Loans to be consolidated into FFEL Consolidation Loans so that

borrowers can choose their servicer.

Discussion: The statute prohibits the consolidation of Direct Loans

into FFEL Program loans. Moreover, the commenter's claim that borrowers

have a choice of servicer in the FFEL Program is inaccurate. Borrowers

under the FFEL Program are frequently not able to choose their

servicers; rather, the servicing of their loans is determined by who

holds the notes, which are often sold on the secondary market without

any borrower consultation.

Sections 685.402(e)(2) and (3) state that a school participating in

the Direct Loan Program may request that the Secretary designate a

different Servicer for reasons of unsatisfactory performance. Thus, a

change of Servicer will be possible under the Direct Loan Program.

Changes: None.

Comments: Some commenters noted that the Department should refund

fees paid by a lender or guarantor on an FFEL Program loan that is

subsequently consolidated into the Direct Loan Program.

Discussion: The Secretary does not agree with the commenters that

the Secretary should rebate any fees charged to a lender or guaranty

agency when an FFEL Program loan is consolidated into a Direct

Consolidation Loan. A lender or guaranty agency is required by statute

to pay such fees to the Secretary. The Secretary does not have the

authority to return fees to a lender or guaranty agency.

Changes: None.

Section 685.215(b)

Comments: None.

Discussion: The categories of loans eligible for consolidation

under the Direct Loan Program have been expanded to include loans made

under subpart II of part B of title VIII of the Public Health Service

Act. This change is the result of recent amendments to the HEA

contained in the Improving America's Schools Act of 1994, which was

enacted into law on October 20, 1994.

Changes: Section 685.215(b) has been revised to include loans made

under subpart II of part B of title VIII of the Public Health Service

Act in the list of loans that may be consolidated into a Direct

Unsubsidized Consolidation Loan.

Section 685.215(c)(3)

Comments: Some commenters stated that a subsidized FFEL

Consolidation Loan should qualify for inclusion into a Direct

Subsidized, rather than Direct Unsubsidized, Consolidation Loan.

Further, Sec. 685.215(b)(15) should reflect this change since

Sec. 685.102 states that a ``subsidized Title IV education loan may be

consolidated into a Direct Subsidized Consolidation Loan'' and a

subsidized FFEL Consolidation Loan is a title IV loan.

Other commenters noted that there is no statutory authority to

include HEAL loans in Federal Direct Consolidation Loans, since the

reference to HEAL loans is stated in section 428C(d) of the statute and

section 455(g) states that Direct Loan consolidation borrowers may

include in their consolidation loans only those loans described in

section 428C(a)(4). One commenter stated that subsidized Health and

Human Services loans should be eligible for inclusion in Direct

Subsidized Consolidation Loans, rather than unsubsidized ones as

currently regulated. Some commenters believed that there is no

statutory authority for the Direct Loan Program to consolidate FFEL

consolidation loans, because the statute states that loan eligibility

under 428C of the HEA terminates when a consolidation loan is received.

Discussion: The Secretary agrees with the commenters that a

subsidized FFEL Consolidation Loan should be included in a Direct

Subsidized Consolidation Loan. Subsidized HHS Loans will not qualify

for subsidy under the HEA Programs because the loans are not subsidized

by the Secretary but by another Federal agency.

With regard to the statutory authority to consolidate HEAL Program

loans, the commenters are correct in noting that the authority to

consolidate HEAL loans is found in section 428C(d). Section 428C(d)(4)

authorizes the Secretary to publish regulations to facilitate carrying

out the goal of consolidating HEAL loans. The Secretary believes that

the provision for the consolidation of HEAL loans should be extended to

the Direct Loan Program. The regulatory provision for consolidating

HEAL loans under Direct Loans is consistent with the statutory

authority in 428C(d)(4).

Changes: Section 685.215(c)(3) is amended to clarify that Federal

Consolidation Loans may be consolidated into a Direct Subsidized

Consolidation Loan, if they are eligible for interest benefits during a

deferment period under section 428(b)(4)(C).

Section 685.215(d)(1)(i)(B)

Comments: Some commenters suggested that documentation be required

to prove that a borrower is unable to obtain a Federal Consolidation

Loan, or one with income-sensitive terms satisfactory to the borrower.

Others suggested that the phrase ``*** acceptable to the borrower'' be

deleted since it gives broad discretion to any FFEL borrower, eligible

for ICR under Direct Loans, to apply for a Direct Consolidation Loan.

Discussion: On the Direct Loan Consolidation Application and

Promissory Note, the borrower certifies that he or she meets the

eligibility criteria to consolidate under the Direct Loan Program. The

Secretary believes that this certification is sufficient documentation

and that requiring further documentation would be unnecessarily

burdensome. The phrase ``acceptable to the borrower'' is statutory.

Changes: None.

Section 685.215(d)(1)(ii)(B)

Comments: Some commenters stated that the statute does not

authorize Direct Consolidation Loans to be made available to students

during in-school status. Other commenters supported in-school

consolidation because they believed that extending the eligibility of a

student to consolidate his or her loans under the Direct Loan program

while he or she is still in school enhances the flexibility of the

repayment options available to students.

Discussion: The statute permits the Secretary to allow loan

consolidation under the Direct Loan Program while a borrower is

enrolled in school. Section 455(g) of the HEA states that Direct

Consolidation Loans are established ``only under such terms and

conditions as the Secretary shall establish pursuant to section

457(a)(1) or regulations promulgated under this part''. Thus, the

Secretary has discretion in setting the terms, conditions, and benefits

for Direct Consolidation Loans. Section 455(a) of the statute does not

require consolidation loans under the Direct Loan program to have

terms, conditions, and benefits parallel to consolidation loans made

under the FFEL Program.

Changes: The final regulations have added a new paragraph to

Sec. 685.215(d)(1). FFEL borrowers will be allowed to consolidate their

FFEL loans during the in-school period, even if they have no Direct

Loans, as long as they are attending schools that participate in the

Direct Loan Program. The Secretary believes that this will allow for

maximum program flexibility. Also, there will be a number of benefits

available to each borrower as a result of in-school consolidation. For

example, borrowers of unsubsidized loans will be able to make interest

payments to just one holder of the loan(s). The convenience of

repayment will be enhanced, because it will not be necessary for FFEL

borrowers to enter repayment under the FFEL Program and then switch to

Direct Loans in order to obtain the repayment options available under

the new program.

Section 685.215(d)(1)(v)(B)

Comments: In section 685.215(d)(1)(v)(B), several commenters noted

that the regulations do not state that the absence of a credit history

should not be construed as an adverse credit history.

Discussion: The Secretary agrees that the absence of a credit

history should not be construed as an adverse credit history.

Changes: Section 685.200(b)(7) is amended to provide that an

absence of credit history is not an adverse credit history.

Section 685.215(d)(1)(vi)

Comments: None.

Discussion: The NPRM essentially provided for unlimited

consolidation of Direct Loans. This meant that a borrower could default

on a Direct Consolidation Loan and simply consolidate again. The credit

report each time would be updated to show that the underlying loan had

been paid in full (although it would still be listed as a default).

Each default would also result in the capitalization of collection

costs and any outstanding interest and fees, thereby increasing the

borrower's debt substantially. To prevent potential abuse of the

consolidation eligibility provisions, the Secretary will restrict

consolidation of a defaulted Direct Loan.

Changes: Paragraph (vi) has been added to section 685.215(d)(1) to

permit borrowers to consolidate a defaulted Direct Loan only with the

approval of the Secretary.

Section 685.215(d)(1)(vii)

Comments: Although not specifically addressed in the NPRM, some

commenters wanted to exclude from Direct Loan Consolidation those FFEL

loans where judgment actions have been taken against the borrower.

Discussion: The Secretary has decided to proceed cautiously with

the consolidation of loans where judgment actions have been taken

against the borrower. Consolidation of judgments will be allowed only

when the consolidation of such loans is in the Federal fiscal interest.

The Secretary recognizes that obtaining a judgment is the most

costly step in the debt collection process. Further, judgments are

generally not obtained unless the borrowers' income or assets show they

have the ability to pay. In light of these actions, the Secretary does

not believe it is in the best interest of the Direct Loan and FFEL

Programs to establish a rule that a borrower owing on a judgment is

entitled to consolidate. Therefore, the Secretary has decided to allow

consolidation of judgments into Direct Loans only if the judgment

holder agrees to the purchase and the Secretary determines that the

consolidation is in the Federal fiscal interest.

Changes: Section 685.215(d) has been amended to provide for the

consolidation of judgments at the discretion of the Secretary.

Section 685.215(f)(1)

Comments: None.

Discussion: The timely processing of consolidation loans is an

essential component of debt management for some borrowers and of

quality loan servicing for all consolidation loan applicants. For these

reasons, the Secretary has modified this section to require the holder

of a loan that is being consolidated to complete and return the loan

certification request within a specified period of time.

Changes: A new paragraph (i) has been added to section

685.215(f)(1) that requires holders of loans that are being

consolidated to process the loan verification certificate within 10

business days of receipt of the form.

Comments: Some commenters requested the deletion of provisions

regarding the Secretary's authority to impose reasonable limits on

collection costs paid to the holder of a defaulted loan that is being

consolidated.

Discussion: When a defaulted loan is consolidated, the holder of

the defaulted loan is no longer required to collect on the defaulted

loan. Instead, the underlying loan is fully discharged and the

collection costs are capitalized, increasing the student's debt. If

collection costs were not limited, the full amount of the collection

costs would be charged to the borrower, even though the amount of

collection activity and costs incurred on the part of the defaulted

loan holder would be substantially reduced. The Secretary does not

believe that borrowers should be required to pay these full defaulted

loan costs or that agencies should receive compensation for services

that are not rendered. The Secretary realizes that there are certain

expenses that have been incurred by the holder of a defaulted loan

being consolidated, but these costs are not the full amount of the

collection costs originally applied to the borrower's account. For

these reasons, the Secretary reserves the right to impose reasonable

limits on collection costs paid to the holder of the loan.

The regulation also places a limit on collection costs to be

charged by restricting these costs to ``no more than those authorized

under the FFEL Program''.

Changes: None.

Section 685.215(h)

Comments: Some commenters stated that Direct Consolidation Loans

should not be used to encourage FFEL borrowers to pay under the ICR

plan. Others believe that FFEL borrowers must evidence need for ICR,

and pay only under that plan, if applying for Direct Consolidation

Loans.

Discussion: Participation in the Direct Loan Program is voluntary

and borrowers may choose any of the four repayment plans after

consolidation. Section 428C(b)(5) of the statute allows borrowers who

do not have a Direct Loan to consolidate into Direct Loans if they meet

certain conditions. The statute further allows the resulting Direct

Consolidation Loan to be repaid under any repayment provision allowed

under the Direct Loan statute. The Secretary believes that providing

borrowers with a choice of repayment options is in the best interest of

the borrower, and that repayment options, including ICR, should be

available broadly.

Changes: None.

Section 685.215(j)(2)

Comments: One commenter noted that the Department must redisclose

new loan amount and term information to a borrower when an additional

loan has been included in the borrower's Direct Consolidation Loan

during the allowable 180-day period and recommended that this language

be added to Sec. 685.215(j)(2). Another commenter suggested that the

Secretary should clarify that a redisclosure will be provided to the

borrower if there is any additional amount of money needed to discharge

a loan being consolidated into a Direct Consolidation Loan.

Discussion: The Secretary will redisclose the new loan amount and

term information (if adjusted), when a loan is added to a Direct

Consolidation Loan within the allowable 180-day period. However, it is

not necessary or appropriate for the Secretary to include this

requirement that applies only to the Secretary in regulations. Further,

mechanisms such as contract terms with contractors and other Federal

regulations control these requirements.

Changes: None.

Section 685.215(k)

Comments: Many commenters suggested that the Secretary state in the

regulations that a borrower will be notified when the Secretary

receives a refund from a school on a loan that has been discharged

through consolidation, and that such refund has been applied to the

borrower's account.

Discussion: The Secretary agrees with the commenters that a

borrower should be notified when the Secretary receives a refund and

applies it to the borrower's account. The Secretary will provide the

borrower such notification and does not believe that a change in the

regulations is necessary.

Changes: None.

Section 685.215(l)(3)(ii)

Comments: Some commenters stated that Sec. 685.215(l)(3)(ii) should

be expanded to state that if one of the borrowers of a joint (spousal)

Direct Consolidation Loan qualifies for discharge of a loan, that

borrower's portion of the joint loan will be discharged for any of the

reasons listed in Sec. 685.212. Furthermore, these discharge provisions

should be extended to joint FFEL Consolidation Loans.

Discussion: Discharge of a loan under the closed school and false

certification provisions in Sec. 685.212(d) and (e) are loan-specific.

This means that the loan is discharged because the loan meets a

condition for discharge, rather than the borrower meeting a condition

for discharge. The conditions listed in Sec. 685.212(a), (b), and (c)

(death, total and permanent disability, and bankruptcy) are borrower-

specific rather than loan-specific. In these situations, both spouses

must meet a condition for the loan to be forgiven under a joint Direct

Consolidation Loan because both spouses are borrowers of the loan.

Changes: None.

Section 685.301 Certification of a Loan by a Direct Loan Program

School

Comments: A number of commenters pointed out that the proposed

requirements for the multiple disbursement of a loan would apply even

when the loan period corresponds to a single academic term. One

commenter suggested consolidating all procedures and requirements

concerning disbursements into a single section of the regulations. The

commenters criticized the proposed regulations for failing to comply

with the intent of section 455(j)(2) of the HEA, which requires the

Secretary to establish periods for paying loan proceeds that are

consistent with the payment periods used under the Federal Pell Grant

Program.

Discussion: Section 454(a)(1)(D) of the statute clearly requires

that a school participating in the Direct Loan Program set a schedule

for the disbursement of loan proceeds in installments, following the

requirements of section 428G of the statute. Section 428G requires

multiple disbursements even if a student is enrolled for only one term.

Section 455(j)(2), which requires the establishment of payment periods

consistent with the Pell Grant Program, is not inconsistent with

section 454(a)(1)(D). Within such payment periods, schools are still

required to disburse loans in multiple installments if a student is

enrolled for only one term.

The Secretary is committed to seeking legislative changes to reduce

the burden on schools with respect to this requirement under both the

Direct Loan and FFEL Programs. The Secretary also agrees that

procedures and requirements concerning disbursements for all title IV

programs be consolidated into one section of the regulations. To the

extent allowed under the statute for the various programs, the

Secretary has consolidated requirements in subpart K of the Student

Assistance General Provisions regulations.

Changes: Paragraph (c) has been amended to delete language

concerning disbursement procedures and to cross reference new

procedures in Sec. 668.164 in the Student Assistance General

Provisions.

Section 685.303 Processing Loan Proceeds

Section 685.303(b)(2)(i)

Comments: Two commenters believed that the proposed requirement

that a school confirm a student's enrollment status before making each

disbursement is burdensome for schools and suggested adopting the

procedures of the Federal Pell Grant and Campus-based programs

concerning when and how to confirm the enrollment status of students.

Three commenters suggested adding a provision in paragraph (b)(2)

similar to the one under the FFEL programs permitting disbursements to

a student who delays the start of attendance for up to 30 days.

Discussion: The requirement to confirm enrollment status prior to

making a disbursement under the Direct Loan Program is the same as the

requirement for all other title IV programs. The Secretary has not

established a stricter requirement for the Direct Loan Program. The

Secretary agrees with the commenters that disbursements to students who

delay the start of attendance are permitted.

Changes: Section 685.303(b)(2) has been modified to permit

disbursements to students who delay their start of attendance.

Section 685.303(b)(3)(ii)

Comments: A commenter suggested that paragraph (b)(3)(ii) be

revised to permit the return to the Secretary of the gross amount of a

loan, rather than the net amount, in the event of a registered

student's withdrawal or other failure to begin attendance before the

first day of classes.

Discussion: It is not necessary for the school to return the gross

amount of the loan if the student fails to attend during the period of

enrollment. In this situation, the loan is canceled and the student is

not charged the loan fee, so the net disbursement amount would be

sufficient to fully discharge the borrower's obligation.

Changes: None.

Section 685.303(b)(4)

Comments: A commenter urged the elimination of the proposed

requirement for a 30-day delayed disbursement for a first-year student

who is a first-time recipient under the FFEL and Direct Loan programs.

Discussion: The requirement that a disbursement for a first-year

student who is a first-time recipient under the FFEL and Direct Loan

programs be delayed for 30 days is a statutory requirement.

Changes: None.

Section 685.303(d)

Comments: Several commenters supported the flexibility in the

proposed late disbursement procedures and urged that the procedures be

adopted in the FFEL program. One commenter suggested that the 30-day

extension in paragraph (d)(4) for a late disbursement in exceptional

circumstances be increased to 60 days and adopted for the FFEL

programs. Two commenters asked that there be unlimited time provided

for late disbursements in exceptional circumstances if the delays are

not caused by a borrower, and that the same provision be adopted for

the FFEL program.

Discussion: For exceptional circumstances, the late disbursement

provision allows a disbursement up to 90 days after a student ceases to

be enrolled on at least a half-time basis or after the end of the loan

period. The Secretary is convinced that three-months time is both

reasonable and sufficient to resolve any outstanding loan issues and to

make a disbursement. The late disbursement provisions for the FFEL

Program are being modified to match the guidelines in the Direct Loan

Program.

Changes: None.

Section 685.303(e) (Proposed 685.303(g))

Comments: A commenter suggested that a school be permitted to

reduce the amount of a disbursement already made in the event that the

reduction of one or more subsequent disbursements would not eliminate

an overaward.

Discussion: If an overaward occurs that cannot be reduced by

subsequent disbursements, no adjustment to the loan for the amount that

has already been disbursed is required. However, a school may reduce

the loan if it chooses to do so.

Changes: None.

Section 685.304 (Proposed 685.303) Counseling Borrowers

Comments: Some commenters recommended strengthening the counseling

requirements for schools in the Direct Loan Program and asked that the

Department provide additional support for institutions' counseling

efforts by providing funds for schools to hire counselors or creating a

comprehensive training program for school counselors. Some commenters

suggested that the Department provide software to institutions that

would allow counselors to compute different repayment scenarios for

individual borrowers during exit interviews. One commenter recommended

that the Department require one-on-one counseling of borrowers who wish

to participate in the ICR Program.

Discussion: The Department of Education conducted a national

training session by means of a video conference in November 1994, to

assist schools in preparing for and conducting exit counseling under

the Direct Loan Program. The Secretary will continue to use innovative

technologies in providing support to institutions, including the

development of PC-based software for schools and borrowers. In

addition, the Department has developed an exit counseling video, exit

counseling brochure, and repayment brochure for borrowers. The

Secretary has worked closely with the financial aid community to

develop strong counseling materials and he will continue to solicit

input from members of the higher education community in the development

of borrower information materials.

The Direct Loan Servicing Center, accessible via a toll-free

number, is equipped with software that generates different repayment

scenarios for an individual borrower. The Direct Loan Servicing Center

will provide this individualized information to all borrowers prior to

the time they enter repayment. Schools may choose to distribute the

individualized information to borrowers during the exit interview or

have the Servicing Center mail the materials directly to the borrower.

The Secretary believes that the existing provisions for exit counseling

to borrowers are sufficient and that a requirement of one-on-one

counseling is unnecessary and would be burdensome for institutions.

Changes: None.

Section 685.304(a) (Proposed 685.303(e))

Comments: A number of commenters recommended that initial

counseling should advise the borrower of the obligation to repay the

loan even if the borrower does not complete the program, is unable to

obtain employment upon completion, or is otherwise dissatisfied with

the services that the borrower purchased from the school.

Discussion: Borrowers receive a statement of borrower's rights and

responsibilities which includes this information during the loan

origination process.

Changes: None.

Comments: A commenter suggested that borrowers need counseling

before they sign the promissory note and have a legal obligation to

repay, rather than ``prior to making the first disbursement,'' as the

regulation requires.

Discussion: Entrance counseling materials, as well as the

promissory note provide borrowers with substantial information about

their legal obligation to repay the loan prior to making the first

disbursement. Requiring schools to provide additional counseling to

borrowers prior to signing a promissory note would impose a substantial

administrative burden and would not likely result in significant

behavioral changes.

Changes: None.

Comments: A commenter urged the Secretary to provide additional

loan counseling to borrowers whose schools participate under standard

origination, because these schools may not meet the same eligibility

criteria as schools that participate under school origination.

Discussion: All schools meet the same eligibility criteria to

participate in the Direct Loan Program. The criteria to originate loans

measure primarily the fiscal and administrative capabilities of an

institution and, as such, are separate from the institutional

eligibility criteria. The fact that a school is required to participate

or chooses to participate at a certain level of origination, is not

necessarily indicative of the institution's ability to counsel

borrowers. The Secretary, of course, retains the authority to provide

additional counseling to any Direct Loan borrower.

Changes: None.

Section 685.304(a)(1)(ii) (Proposed 685.303(e)(1)(ii))

Comments: A commenter suggested that the Department require

counseling for each borrower new to the institution, rather than only

borrowers who have never received a student loan.

Discussion: The Secretary believes that borrowers who have received

initial loan counseling at one institution should not be required to

attend initial counseling again. The primary purpose of initial

counseling is to inform the borrower of the obligation to repay and to

provide in

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