# William D. Ford Federal Direct Loan Program; Final Rule

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URL: https://www.frixlaw.com/law-library/documents/fr%3A94-29260

## Record

- **Collection:** Federal Register
- **Document type:** Uncategorized Document
- **Published:** December 1, 1994

## Text

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 pa

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A94-29260. Public record. Not legal advice.