Federal Family Education Loan Program; Proposed Rule DEPARTMENT OF EDUCATION

SUMMARY: The Secretary proposes to amend the regulations governing the

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

govern the Federal Stafford Loan Program, the Federal Supplemental

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

the Federal Consolidation Loan Program, collectively referred to as the

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

Federal SLS, the Federal PLUS and the Federal Consolidation Loan

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

Consolidation Loan programs. These amendments are needed to implement

changes made to the Higher Education Act of 1965, as amended (HEA), by

the Higher Education Amendments of 1992.

DATES: Comments must be received on or before April 15, 1994.

ADDRESSES: All comments concerning these proposed regulations should be

addressed to Pamela A. Moran, Acting Chief, Loans Branch, Division of

Policy Development, Policy, Training, and Analysis Service, U.S.

Department of Education, 400 Maryland Avenue, SW. (room 4310, ROB-3),

Washington, DC 20202-5449.

A copy of any comments that concern information collection

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

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

preamble.

FOR FURTHER INFORMATION CONTACT: Patricia Beavan, Senior Program

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

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

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

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

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

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

time, Monday through Friday.

SUPPLEMENTARY INFORMATION:

Background

The Secretary is proposing to revise 34 CFR part 682 of the FFEL

Program regulations, published in the Federal Register on December 18,

1992, to implement changes made to the HEA by the Higher Education

Amendments of 1992 (Pub. L. 102-325) (the Amendments), enacted July 23,

1992. These regulations would affect the implementation of the program

for all participants. The regulations would improve the efficiency of

the Federal student aid programs, and by so doing, improve their

capacity to enhance opportunities for postsecondary education.

Encouraging students to graduate from high school and to pursue high

quality postsecondary education are important elements of the National

Education Goals.

The student aid programs also enable both current and future

workers to have the opportunity to acquire both basic and

technologically advanced skills needed for today's and tomorrow's

workplace. They provide the financial means for an increasing number of

Americans to receive an education that will prepare them to think

critically, communicate effectively, and solve problems efficiently, as

called for in the National Education Goals.

Summary of Comments From Regional Meetings

In compliance with section 492(a) of the HEA, the Secretary

convened regional meetings during September 1992 to obtain public

involvement in the development of proposed regulations. The purpose of

the meetings was to ``provide for a comprehensive discussion and

exchange of information concerning the implementation'' of certain

parts of the HEA, as amended by Public Law 102-325. In addition,

attendees of the regional meetings were asked to nominate individuals

to act as negotiators in the negotiated rulemaking process required by

section 492(b) of the HEA.

The regional meetings were conducted for two days each in San

Francisco, California; New York, New York; Atlanta, Georgia; and Kansas

City, Missouri. Each participant at the regional meetings was assigned

to one of six groups that were asked to discuss particular issue areas

identified by the Department. Each group at the regional meetings

prepared a report of its discussion and recommendations and those

reports were presented to the Department for consideration during the

preparation of the proposed regulations.

Below is a summary of the information received and the proposals

made to the Secretary during the regional meetings relating to these

proposed regulations:

1. Guaranty agency limitation of a school's participation--The

attendees of the regional meetings in San Francisco, New York and

Atlanta discussed this issue. Attendees at the San Francisco meeting

recommended that guaranty agencies be allowed to set limits on loan

volume for schools but that a review process should be provided by the

guarantor. The attendees at the New York and Atlanta meetings

recommended that the guaranty agencies be allowed to set limits for

schools that are newly participating with the agency. Attendees at the

New York meeting recommended certain criteria that an agency could use

to limit a school's participation and recommended that all guarantors

be required to comply with the restrictions placed by any agency.

Attendees at the Atlanta meeting recommended that an agency's decision

on loan limits should be subject to appeal but that the limit should

remain in place during the appeal.

2. Lender-of-last-resort services--The attendees of the regional

meeting in San Francisco recommended that, for schools with default

rates exceeding 25 percent, ``exceptional mitigating circumstances''

for a school's appeal of denial for lender-of-last-resort (LLR)

services should be defined to include program completion and job

placement rates, if available; default rates; loan volume as a

proportion of a school's student population; and other pertinent

factors. The attendees also recommended that for a school subject to a

limitation, suspension or termination (LST) action, exceptional

mitigating circumstances should consider the above factors and the

nature of the LST action. The majority of the Kansas City meeting

attendees supported use of the definition of ``exceptional mitigating

circumstances'' provided in the cohort default rate regulations

published in the Federal Register on July 19, 1991 and the required

default management plan to determine if a guaranty agency must offer

LLR services to students attending a school with a cohort default rate

greater than 25 percent. The minority view at the Kansas City meeting

was that the regulatory criteria are too restrictive. Attendees at the

New York meeting recommended that other factors be considered in

addition to current law to define exceptional mitigating circumstances

i.e., two-thirds of registered students actually begin class and the

percentage of students receiving loans at schools with 15 percent to 25

percent cohort default rates. The attendees also expressed concern

about the timeliness of the appeal process and their desire that

students should not be penalized. The attendees at the New York meeting

supported the regulatory definition of exceptional mitigating

circumstances with the inclusion of a comparison of student costs of

education to post-graduation earnings and consideration of personal

mitigating circumstances of students.

3. Income-contingent repayment--The attendees at the regional

meetings in San Francisco, New York, and Kansas City made

recommendations for the Secretary to consider in developing regulations

to allow certain defaulted borrowers a repayment schedule that assesses

a borrower's debt-to-income ratio and that provides the borrower up to

25 years to repay a loan. The attendees at the San Francisco meeting

recommended that consideration be given to the amount of the borrower's

educational loan scheduled repayment in relation to his or her

anticipated income. They indicated that they believed that a smaller

percent of income should probably be expected in loan repayment from

low income borrowers. Attendees at the San Francisco meeting also

recommended that educational debt should include all educational loans,

not just Title IV student loans and that the term (borrower's)

``income'' needed to be defined for this purpose. They suggested that

if ``income'' includes the borrower's spouse's income, the spouse's

educational debts should also be included. Attendees at the New York

meeting recommended that guaranty agencies be permitted to exempt loans

from mandatory assignment and instead be able to offer their borrowers

income-contingent repayment. The attendees at the New York meeting also

recommended that income-contingent repayment should take into

consideration the impact of negative amortization and the overall cost

of repayment, include a requirement for annual review, and allow

guaranty agencies to determine the interest rate. Attendees at the

Kansas City meeting recommended that factors for the Secretary's

evaluation should include whether collection of the note would be

enhanced, costs associated with income-contingent collection vs.

existing repayment structures, and the cost effectiveness of Federal

collection. The Kansas City meeting attendees also recommended that

longer repayment periods be allowed. However, they expressed concern

that such repayment periods could result in an incentive to default.

4. Federal Stafford and Federal SLS loan limits--The attendees at

the regional meetings in San Francisco, New York and Atlanta discussed

the issue of reduced loan limits for programs of less than an academic

year and recommended that if the definition of ``less than an academic

year'' would include students who are in a second or subsequent year of

a program of study for a period of enrollment of less than a year, that

a technical amendment should be sought to clarify Congress' intent as

to which borrowers were covered by the provision.

5. Federal PLUS loans--determination of adverse credit--The

attendees at the San Francisco, Kansas City and Atlanta meetings

generally recommended that adverse credit history should include

outstanding tax liens, unpaid judgments, bankruptcy, default on or

failure to pay Federal debts or obligations, charge offs, collection

accounts, foreclosures and repossessions. The San Francisco meeting

attendees also recommended the regulations specify that the lack of a

credit history should not be considered adverse credit. The attendees

at the San Francisco meeting expressed concern about PLUS borrowers'

ability to repay loans given the repeal of the PLUS annual and

aggregate loan limits. The attendees recommended that the lender and or

guaranty agency counsel borrowers with regard to debt load, repayment

obligations, etc. Attendees at the San Francisco meeting also

recommended that the lender be allowed to establish additional

eligibility criteria, including reviewing situations where potential

borrowers are currently 60 days or more delinquent on other consumer

accounts. The attendees at the San Francisco and Kansas City meetings

recommended that lenders should also exercise discretion in allowing

borrowers to provide explanations regarding circumstances that resulted

in a determination of adverse credit. Attendees at the San Francisco

and Kansas City meetings also recommended that the lender be required

to obtain a credit report from a nationally recognized credit reporting

agency. The San Francisco, Atlanta, and Kansas City attendees also

recommended that in disbursing a PLUS loan the school require one

authorization per loan (not disbursement) and allow parents to

authorize electronic fund transmission. The attendees at the Kansas

City meeting recommended that amounts of less than $100 in charge off

or collection accounts not be held against a PLUS applicant when

determining adverse credit. The New York meeting attendees recommended

that the regulations require credit decisions by the lender using the

applicant's credit report.

6. Default reduction program--Attendees at the Kansas City meeting

recommended that the determination that post-default payments are

``reasonable and affordable based upon the borrower's total financial

circumstances'' be made on a case-by-case basis based on a debt-to-

income analysis (including family size) by the guaranty agency. The

attendees recommended that payments be at least $5.00 and be voluntary

consecutive payments. However, the attendees also expressed concern

about accepting less than interest payments. The Kansas City meeting

attendees discussed the distinction between the Title IV renewal of

eligibility provision in the law that requires six reasonable and

affordable consecutive payments and the rehabilitation program that

requires 12 reasonable and affordable payments. They recommended that

guaranty agencies be given wide discretion to evaluate the defaulter's

personal circumstances and history to determine what constitutes

reasonable and affordable payments so that if a loan is repurchased

under the rehabilitation program, the borrower will be able to meet the

lender's repayment terms and not fall into default again. Attendees at

the Kansas City meeting also recommended that the guaranty agency be

allowed to determine the documentation required to establish the

reasonable and affordable payment amounts and that a review of the

borrower's circumstances be required semi-annually. The attendees at

the San Francisco, New York and Atlanta meetings recommended that

guaranty agencies be allowed flexibility in determining if the payment

amount is reasonable and affordable by taking into account the

borrower's family circumstances, income, size, and by giving special

consideration to borrowers receiving public assistance. The San

Francisco attendees also recommended that the guaranty agency be

required to notify the school in writing when a borrower has regained

Title IV eligibility.

7. Mandatory assignment of loans to the Secretary--Attendees at the

meetings in New York, San Francisco and Kansas City discussed the issue

of mandatory assignment. The Kansas City meeting recommended that the

Secretary determine the criteria for assignment on a case-by-case basis

and recommended consideration of several issues by the Secretary.

Attendees at the New York meeting recommended that the Secretary

establish a simple set of general rules under which mandatory

assignment would apply to loans on which payments had not been received

for a certain period of time. Attendees at the San Francisco meeting

recommended that the criteria for mandatory assignment be determined by

regulation and not by individual negotiations with each agency and

proposed certain specific criteria for the assignment.

8. Restrictions on guaranty agency incentive payments--The

participants in the New York meeting asked that the regulations clearly

define ``premium'' and ``inducement'' for purposes of this provision.

Attendees at the San Francisco regional meeting concluded that the

statute was intended to prohibit cash payments by a guaranty agency to

a lender but that agency activities to encourage participation or

provide state-of-the-art processing in the loans programs were

acceptable. In Kansas City, participants concluded that regulations

must ensure that services provided by guarantors which improve a

lender's ability to meet the needs of students, schools and the

Secretary should not be considered inducements. In addition, the Kansas

City participants recommended that services permitted under existing

guarantor and lender relationships not be prohibited but that direct

fee payments from a guarantor to a lender be prohibited. The attendees

to the Atlanta meeting recommended that the regulations define

``inducement'' as something of value (such as cash, premiums based on

loan volume, or gifts) that is given by the guarantor with the intent

of causing the lender to choose the guarantor. In addition, the

attendees at the Atlanta meeting recommended that computer system

connections that allow a lender to utilize a guarantor's procedures not

be considered an inducement.

9. Guaranty reserve level--Attendees at all of the regional

meetings recommended that uniform definitions be developed for

determining the required reserve level for each of the guaranty

agencies. However, participants at each of the meetings suggested

different formulas for the determination of whether a guaranty agency

satisfied its minimum requirement. Attendees at all of the regional

meetings also recommended that, if a management plan is required

because a guaranty agency drops below the minimum reserve level, the

guaranty agency, rather than the Secretary, should be responsible for

preparing the plan. Finally, the participants at all the meetings

recommended that, if a guaranty agency becomes insolvent, the Secretary

should first consider a solution in which other agencies assume the

insolvent agency's responsibilities rather than have the Secretary take

over the agency's role.

10. Restriction on lender interest subsidy--Attendees at all of the

regional meetings rejected the suggestion that a lender could charge a

borrower for the interest not paid by the Secretary because of the

restriction on the interest subsidy added to the law. The Atlanta

attendees objected to the suggestion that the term ``disbursement'' in

section 428(a)(3) of the HEA meant the delivery of funds to the student

and instead asked that the industry's traditional definition of the

term as referring to when the funds are available to the school be

maintained. The Atlanta attendees also disagreed with the idea of a

standardized schedule for the interest billing. The Kansas City

attendees recommended that the term ``disbursement'' be defined as the

date the borrower negotiates the loan check or the funds are

transferred to the borrower's account. The Kansas City attendees also

recommended the adoption of a standardized schedule for interest

billings. The San Francisco attendees recommended that the Secretary

seek a statutory change that would prohibit schools from requesting

funds prior to the deadlines established for interest payment. The New

York attendees also recommended that a restriction be placed on the

school's authority to request funds and suggested that a standardized

schedule for interest billing be developed.

11. Loans that have not been consummated--The Amendments prohibit a

lender from receiving interest and special allowance payments on loans

for which the disbursement checks have not been cashed or the

electronic funds transaction is not completed. The Atlanta meeting

recommended that this restriction apply to loans when the check is

returned or has not been negotiated within 120 days or when the school

notifies the lender that the transaction is cancelled. Attendees at the

Kansas City meeting concluded that the statute clearly defined the

loans on which interest would be restricted but recommended that

lenders should be allowed to bill for interest and special allowance

until they learn that the loan was not consummated and then adjust

future billings. The San Francisco attendees simply expressed their

objection to the law.

12. Prohibition on the sale of loans prior to disbursement--The

Amendments changed section 428G(g) to limit the ability of a lender to

sell a loan prior to full disbursement of the loan proceeds. The

attendees at the Kansas City meeting recommended that the restriction

should not apply as long as the address to which payments are made does

not change and the change is ``transparent'' to the borrower. Attendees

at the San Francisco meeting recommended that transfer (which it

defined as a sale) of a loan be prohibited until after all

disbursements are made. Attendees at the New York meeting recommended

that the restriction apply only when the ownership of the loan note is

transferred and that the restriction should not apply when a lender is

ending its participation in the FFEL Program. The attendees at the

Atlanta meeting concluded that the restriction on transfers should not

apply if the transfer does not change the borrower's perception of

where to send payments.

The Department considered all of the comments received during the

regional meetings in preparing draft proposed regulations.

Negotiated Rulemaking

After completion of the regional meetings, the Department prepared

draft proposed regulations to implement the provisions of Public Law

102-325 relating to the FFEL Program. In accordance with the

requirements of section 492(b) of the HEA, those regulations were

submitted to a negotiated rulemaking process. During the weeks of

January 4-8 and February 1-5, 1993, the Department met with negotiators

selected from among individuals nominated by attendees at the regional

meetings.

The discussion below of the proposed regulations reflects those

areas where the negotiators reached a consensus and the proposed

regulations reflect that agreement. The discussion below also indicates

where consensus was not reached during the negotiations. However, the

negotiators did not choose to discuss every part of the proposed

regulations. Accordingly, the discussion below of those issues not

discussed during the negotiations reflects only the views of the

Secretary.

Proposed Regulatory Changes

Section 682.100 The Federal Family Education Loan Programs

Section 682.100(a)(3)--The Secretary proposes to amend the

regulations to reflect the statutory change that parent PLUS borrowers

may no longer borrow on behalf of dependent graduate students.

Section 682.100(a)(4)--The Secretary proposes to amend the

regulations to reflect the statutory change that a Consolidation Loan

may include Higher Education Assistant Loan (HEAL) Program loans

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

Services Act, and parent PLUS borrowers whose loans were made on or

after October 17, 1986.

Section 682.101(c)--The NPRM is revised to include the statutory

change that HEAL loans and parent PLUS borrowers whose loans were made

on or after October 17, 1986 may be included in a Consolidation Loan

and married couples who have a combined indebtedness of at least $7,500

in eligible loans may borrow under the Consolidation Loan Program.

Section 682.200 Definitions

This section of the regulations is being amended to reflect changes

made to various definitions by Public Law 102-325. The Secretary also

proposes to change other definitions to ensure clarity and consistency

within the FFEL Program. During the negotiations, the following

definitions were discussed and changes were made to address the

negotiators' concerns.

Co-maker--The Secretary proposes to revise the definition of co-

maker in the proposed regulations to include its use in the

Consolidation Loan Program. The current regulatory definition only

references the PLUS loan program. The Secretary proposes to revise the

definition to also describe the status of a married couple who are

joint borrowers on a Consolidation loan. The Secretary wishes to point

out that a co-maker on a PLUS or Consolidation loan must be an eligible

borrower.

Disposable income--The Secretary proposes to revise this section by

adding a definition of the term ``disposable income.'' The proposed

regulations would provide a uniform standard for guaranty agencies to

use in determining what constitutes disposable income in determining a

reasonable and affordable payment based on the borrower's total

financial circumstances for purposes of reinstatement of borrower

eligibility (Sec. 682.401) and rehabilitating a borrower's defaulted

loan (Sec. 682.405).

Estimated Financial Assistance--During the negotiated rulemaking

sessions, discussion ensued regarding the definition of ``estimated

financial assistance.'' The definition of estimated financial

assistance reiterates the language in the December 18, 1992 regulations

that requires a school to include, as estimated financial assistance,

Federal Perkins loan or Federal Work-Study awards that were offered to

a student and declined, unless an award was declined for an acceptable

reason. The negotiators expressed concern that the requirement that aid

officers must certify estimated eligibility for these programs

regardless of whether (1) the student applies for the aid, (2) the

student meets established institutional deadlines for consideration, or

(3) the student applies, but funds are not available, is not reasonable

or practicable given the deadline that schools have for packaging their

campus-based financial aid programs.

The Secretary is concerned that students be considered for more

desirable campus-based aid, if available, before they turn to FFELP

loans. However, at the request of the negotiators, the Secretary

proposes to clarify that a school would be expected to include Federal

Perkins Loan or Federal Work-Study award estimates for a student only

to the extent funding is available. The Secretary intends that a school

need not include hypothetical campus-based awards if those funds are no

longer available or cannot be expected to become available at that

school. Also, a campus-based award declined by the student would not

need to be considered as estimated financial assistance if the

institution's packaging policy would not normally make certain types of

awards to a particular category of students. For example, if the

institution's packaging policy would not normally award a Perkins loan

to a freshman student, that aid would not need to be included as part

of ``estimated financial assistance'' when certifying a FFEL Program

loan application for the student.

The negotiators also recommended that the definition of estimated

financial assistance should be revised to provide a different

definition of estimated financial assistance for PLUS loans. They

believed a school should be able to certify a PLUS application without

taking into consideration the dependent student's eligibility for other

Title IV student loan assistance if the parent wishes to take on a loan

obligation in lieu of the student becoming obligated. The Secretary

strongly encourages students to utilize all financial aid available to

them. However, the Secretary recognizes that the statute provides

authority for PLUS parent borrowers to borrow up to the cost of

education. Given the fact that schools will be participating in both

the Federal Direct Loan and FFEL programs, the Secretary believes that

the treatment of PLUS loans needs to be consistent across the loan

programs. Therefore, the Secretary proposes to revise the definition of

estimated financial assistance in the FFEL Program to be consistent

with the same definition in the Federal Direct Student Loan Program and

to permit a PLUS parent borrower the option of borrowing to cover both

parental contribution and the amount of the student's eligibility for

Federal loans up to the cost of attendance.

Grace period--The Secretary proposes to revise the definition of

grace period to reflect the change in the HEA that allows an SLS

borrower who also has a Stafford loan to delay beginning repayment on

the SLS loan for a period of time concurrent with the borrower's grace

period on the Stafford loan so that repayment begins on the two loans

at the same time.

Repayment period--The Secretary proposes to revise the definition

of repayment period to reflect section 428H of the HEA, which provides

that the repayment period for an Unsubsidized Stafford Loan begins on

the day after the grace period expires. The NPRM reflects that payments

of interest on an Unsubsidized Stafford Loan during the in-school and

grace period are the responsibility of the borrower.

Satisfactory repayment arrangement--The Secretary proposes to

revise this section by adding a definition for the term ``satisfactory

repayment arrangement.'' Consistent with the effort to standardize and

simplify the FFEL Program and the requirements of section 428F of the

HEA, the proposed regulations would provide a uniform standard for

guaranty agencies to use in determining what constitutes a

``satisfactory repayment arrangement'' by a defaulted borrower. A

borrower would be required to have made satisfactory repayment

arrangements on a defaulted loan prior to regaining eligibility for

further Title IV assistance or including a defaulted loan in a

Consolidation loan. The negotiators expressed concern about the effects

of applying the same definition to other aspects of the FFEL Program

that they believe go beyond the reinstatement of a defaulted borrower's

eligibility for Title IV assistance. For example, a borrower who wishes

to consolidate a defaulted loan is required to make a satisfactory

repayment arrangement on the defaulted loan and provide evidence of the

arrangement to the consolidating lender. The negotiators believed that

guaranty agencies should have the discretion to implement a stricter

standard for satisfactory repayment arrangements for differing

circumstances. The Secretary believes, however, that the Congress

intended one uniform standard for satisfactory repayment arrangements

to be used nationwide for all FFEL Program purposes.

Stafford Loan Program--The negotiators indicated that the different

names used in the Federal Stafford Loan Program confuse borrowers and

other program participants. The Secretary is proposing to define the

different types of loans involved. The term ``Stafford Loan Program''

refers to the program authorized by Title IV-B of the HEA, which

encourages the making of subsidized and unsubsidized loans to

undergraduate, graduate, and professional students and is one of the

Federal Family Education Loan programs. The term ``Stafford Loan

Program'' will serve as the umbrella term for all Stafford loans,

subsidized, unsubsidized, and nonsubsidized.

Write-off--The Secretary proposes to revise this section by adding

a definition for the term ``write-off.'' The proposed regulations would

provide a uniform standard for guaranty agencies to use in determining

what constitutes a ``write-off'' for purposes of determining whether a

borrower is considered to have an adverse credit history if a credit

report reflects that a borrower has been the subject of a write-off.

Section 682.201 Eligible borrowers

Section 682.201(a)(2)--The NPRM proposes to establish a sequence in

certification of borrower eligibility in the FFEL Program in response

to the negotiators' request that clarification be provided in the

regulations. Consistent with the requirements of sections 428H(b)(2)

and 484(b)(2) of the HEA, a borrower must first receive a determination

of need for a subsidized Stafford loan and, if determined to have need

in excess of $200, have submitted an application to a lender. The

borrower must next receive a determination of need for an unsubsidized

Stafford loan regardless of whether the amount of the need is less than

$200. Finally, an eligible borrower may have an SLS loan application

certified which contains, under ``estimated financial assistance'', the

full amount of the borrower's Stafford Loan (subsidized and

unsubsidized) eligibility. The Secretary notes that the Omnibus Budget

Reconciliation Act of 1993 (Pub. L. 103-66), enacted on August 10,

1993, provides that no new Federal SLS Loans may be made for a period

of enrollment beginning on or after July 1, 1994. The Federal SLS

Program will be replaced with increased annual loan amounts available

under the unsubsidized component of the Federal Stafford Loan Program.

Section 682.201(b)--The NPRM proposes to reflect the change in the

HEA that provides that graduate or professional students are considered

independent students, thereby restricting PLUS loan eligibility to

parents of dependent undergraduate students.

Section 682.201(b)(7)--The proposed regulations implement section

428B(a) of the HEA that provides the eligibility requirements for the

PLUS program. Specifically, in order for a parent to be eligible to

borrow a PLUS loan on behalf of a dependent student, the parent must be

determined not to have an ``adverse credit history.'' During the

negotiations some lenders expressed the need for flexibility to

exercise individual judgment in determining adverse credit. The

Secretary accepted the negotiators' recommendation that the proposed

rules should not preclude a lender from requiring a PLUS applicant to

meet more stringent credit criteria. However, the Secretary did not

accept other lenders' recommendations that, in exercising this

judgment, the lender should be allowed to use more lenient standards on

an exceptional basis.

Lenders expressed concern about parent borrowers' ability to repay

the loans given the repeal of the PLUS annual and aggregate loan

limits. Some lenders recommended that the proposed regulations used to

determine borrower eligibility for PLUS loans go beyond a standard to

determine adverse credit history to also include a determination of a

borrower's ability to repay the debt. Although the Secretary shares the

lenders' concerns, he declined to accept the negotiators'

recommendation because there is no statutory authority for including

such an additional eligibility criterion. However, the Secretary notes

that a lender is not prohibited from maintaining a lending policy that

would examine parental ability to repay the PLUS loan.

The draft NPRM discussed at the negotiated rulemaking sessions

would have required a lender to obtain a credit report on the PLUS

applicant from at least one national credit bureau organization not

more than 60 days before the first day of the period of enrollment for

which the loan was intended. The negotiators believed the time frame

for obtaining the credit report was too restrictive. The Secretary,

therefore, has removed the proposed time frame and is proposing that

the lender determine adverse credit history based on the examination of

the required credit report.

The Department also proposed in the draft NPRM that the PLUS

applicant would be considered to have an adverse credit history if the

borrower is more than 90 days delinquent on a repayment of any debt, 60

or more days delinquent on the repayment of each of two or more debts,

or has been, during the five years preceding the date of the credit

report, the subject of a default determination, bankruptcy filing,

foreclosure, repossession, tax lien, wage garnishment, write-off, or

any Federal or state government action to collect a debt. The lender

could not consider insufficient or lack of a credit history for the

parent borrower to be an adverse credit history. Some negotiators

objected to the proposal that a borrower would be considered to have an

adverse credit history if the borrower is more than 90-days delinquent

on a repayment of any debt or 60 or more days delinquent on the

repayment of each of two or more debts because they believed the

proposal was overly complicated and too stringent. The Secretary

removed the 60-day restriction to simplify the standard; however, the

Secretary indicated that the 90-day delinquency requirement would be

retained because he believed this to be an appropriate threshold of

delinquency for this purpose.

The negotiators believed that the proposed draft regulations also

did not provide the lender with enough flexibility to consider

extenuating circumstances, such as delinquency on small dollar debts

that may have been beyond the control of the borrower. They recommended

that lenders be able to apply a tolerance for small dollar debts. The

negotiators indicated that delinquent debts of less than $500 are an

industry-wide acceptable tolerance. The Department agreed to propose to

allow the lender the flexibility in determining adverse credit if the

lender retains documentation supporting its basis for determining that

extenuating circumstances existed. The documentation may include an

updated credit report, a statement from the creditor that the borrower

has made satisfactory arrangements to repay the debt, or an acceptable

statement from the borrower explaining any delinquencies with

outstanding balances of less than $500.

Student advocates requested that the Department clarify that a

borrower who has a loan discharged under section 437(b) of the HEA

would not be considered to have an adverse credit history. The

Department agreed to clarify in the preamble to the regulations that a

borrower would not be considered to have an adverse credit history

based solely on a loan discharged under this provision appearing on the

borrower's credit history.

Section 682.201(c)--The Secretary proposes to amend the regulations

to reflect the new statutory changes to Consolidation loan eligibility.

The NPRM would provide that the following borrowers are now eligible

for a Consolidation loan: A borrower who has a minimum debt under the

eligible loan programs of at least $7,500; a defaulted borrower who

will reenter repayment through loan consolidation; a parent PLUS

borrower who has loans made after October 17, 1986; and a married

couple who will jointly consolidate their individual loans. The NPRM

also reflects the statutory provision allowing a borrower to add loans

received prior to the date of the consolidation during the 180-day

period after the lender has made the Consolidation loan.

The proposed regulations also provide that a borrower who is

currently in default on a FFEL loan must, to make the defaulted loan an

eligible loan to be consolidated, have made satisfactory repayment

arrangements with the holder of the defaulted loan. The negotiators

held an in-depth discussion as to whether there should be a separate,

stricter criterion for ``satisfactory repayment arrangements'' for the

inclusion of a defaulted loan in a Consolidation loan as provided in

the NPRM. The Secretary strongly believes that a single, standard

definition of this term, as provided in Sec. 682.200, should be applied

consistently throughout FFEL Program regulations. Therefore a borrower

would be required to make six consecutive reasonable and affordable

monthly payments on the defaulted loan before it was eligible for

inclusion in the Consolidation loan.

Section 682.204 Maximum Loan Amounts

The Secretary has proposed to amend the regulations by inserting

the new statutory loan limits for the FFEL Program loans that became

effective on or after July 1, 1993. Changes in loan limits made by the

Amendments that became effective earlier were included in the FFEL

regulations that were published in the December 18, 1992 Federal

Register. The negotiators indicated that they believe that the NPRM

does not reflect the intent of the HEA in regard to the limits for

programs of less than one academic year. The Secretary recognizes that

the language in the HEA is defective and has recommended to the

Congress a technical change to address Stafford loan limits for

programs of less than one year when the student is beyond the first

year of undergraduate education.

The negotiators believed the Department should provide guidance for

schools in certifying a Stafford or SLS loan amount for a borrower

enrolled in a program of study of less than an academic year. The

Secretary has proposed in Sec. 682.603(f)(3) a formula for the school

to use in determining the borrower's annual loan limit based on whether

the school meets the academic year standards specified in section

481(d)(2) of the HEA.

The negotiators requested that the Department define ``course of

study'' so that students enrolled in multi-year programs be exempted

from prorated loan limits. The Secretary believes, however, that, as

the statute is currently written, a borrower enrolled for a period of

enrollment that is less than an academic year in length necessary to

complete a program of study is subject to reduced annual loan limits

for any loan made for that period of enrollment. For term-based

schools, this approach applies only if the period of enrollment that is

less than an academic year is beyond the normal time frame for

completion of the program as determined by the school.

Section 682.207 Due Diligence in Disbursing a Loan

This section of the regulations is being amended to provide that a

PLUS loan check from a lender that is co-payable to the institution and

the parent borrower must be sent directly to the eligible institution.

Some negotiators favored mailing the check to the PLUS borrower for

endorsement first and directing the borrower to then forward the check

to the school. These negotiators believe that the co-payable check

format provides sufficient protection to the Federal government against

the misuse of PLUS funds. However, the Department's experience in the

PLUS loan program has shown that sending the check directly to the

borrower contributes to confusion in the program and may result in

funds being made available to PLUS borrowers on behalf of students who

are no longer enrolled. The Secretary has proposed that the check be

mailed to the school first to verify student eligibility prior to

forwarding it to the parent for endorsement.

Section 628.300 Payment of Interest Benefits on Federal Stafford Loans

The HEA provides that a lender may not receive interest on loans

for periods earlier than either 10 days prior to the date the proceeds

of the loan disbursed by check are delivered to the borrower by the

school or 3 days prior to the date the proceeds of the disbursement

made by electronic funds transfer are released from the restricted

account maintained by the school. The major point of disagreement

during the negotiations regarding this provision of the statute was the

Department's interpretation of Congress' use of the word

``disbursement'', as used in section 428(a)(3)(A)(v) of the HEA, to

mean ``delivery'' of loan proceeds to the borrower by the school. The

Secretary believes this is the only viable interpretation of the

statute as the use of the term disbursement would result in an

expansion rather than restriction on interest billed the Secretary.

Considerable discussion occurred during the negotiation sessions

regarding the 3-day/10-day interest limitation. The Department pointed

out that Congress clearly intended to limit the lender's ability to

bill the Department for interest to the period after funds are

delivered to the student. The legislative history of this provision

indicates that Congress intended to achieve significant savings by this

change. The negotiators argued that in developing the regulations, the

Department should consider that lenders do not consistently track a

student's period of enrollment or the date of delivery of proceeds to

the borrower. The negotiators believed the regulations should be

written based on a formula driven by the date of disbursement to the

school.

The negotiators ultimately recommended that interest be limited to

10 days prior to the first day of the period of enrollment for which

the loan check is intended or, if the loan is disbursed after the start

of the period of enrollment, 3 days after the disbursement date of the

check. For a loan disbursed by electronic funds transfer, interest will

be limited to 3 days prior to the first day of the period of enrollment

or if the loan is disbursed after the start of the period of

enrollment, 3 days after disbursement. To achieve Congress' intent to

limit unnecessary interest payments using the date of loan disbursement

to the school rather than delivery date to the borrower, the Secretary

also believes it is necessary in Sec. 682.603(h) to limit the period

during which the school may request the disbursement of loan proceeds

for a new borrower who is enrolled in his or her first year of

undergraduate study.

The Secretary also proposes to amend the regulations to reflect the

provision in section 428(a)(7) in the HEA under which a lender may not

receive interest benefits for any disbursement of a loan for which

checks have not been cashed or for which electronic funds transfer has

not been completed.

Section 682.301 Eligibility of Borrowers for Interest Benefits on

Stafford and Consolidation Loans

This section of the regulations is being amended to reflect the

statutory change that provides that a Consolidation loan borrower whose

application was received by the lender on or after January 1, 1993

qualifies for interest benefits during authorized periods of deferment

on the portion of the loan that does not represent HEAL loans.

Section 682.302 Payment of Special Allowance on FFEL Loans

The Secretary proposes to amend the regulations to reflect the

provision in section 428(a)(7) of the HEA under which a lender may not

receive special allowance payments for loans for which checks have not

been cashed or for which electronic funds transfers have not been

completed.

The Secretary also proposes to amend this section to reflect other

changes made by the Amendments. The proposed regulations reflect the

change under section 438(b)(2)(C) that special allowance is not paid

unless the new variable interest rate calculations produce an interest

rate that is greater than the statutory standard interest rate (10

percent for PLUS, 11 percent for SLS). The proposed regulations also

reflect the new statutory special allowance formula and a new special

allowance ``floor'' for tax-exempt loans, both of which are effective

for loans made on or after October 1, 1992. In addition, the proposed

regulations would provide, in accordance with the Amendments, that

unsubsidized Federal Stafford loans made pursuant to section 428H of

the Act are now eligible for special allowance payments.

Section 682.400 Agreements Between a Guaranty Agency and the Secretary

The Secretary proposes to revise this section of the regulations to

implement section 428F of the HEA that requires all guaranty agencies

to participate in the loan rehabilitation program.

Section 682.401 Basic Program Agreement

Section 682.401(b)(4)--The proposed regulations implement the

requirements of section 428F of the HEA that require a guaranty agency

to permit a defaulted borrower to regain eligibility for Title IV

assistance once the borrower has made satisfactory repayment

arrangements as defined in Sec. 682.200. The HEA provides that a

guaranty agency may not demand that a borrower make monthly payments

that exceed an amount that is ``reasonable and affordable'' based upon

the borrower's total financial circumstances. In developing criteria to

be used by guaranty agencies in determining what constitutes a

reasonable and affordable payment amount, the Secretary proposes to

require the agency to require income and expense documentation from the

borrower to make a determination of a reasonable and affordable amount.

The guaranty agency must also document the basis for the determination

if it determines that a defaulted borrower cannot make a monthly

payment of at least $50 or the monthly accrued interest on the loan,

whichever is greater, based on the borrower's total financial

circumstances. Several negotiators expressed their belief that the

documentation requirement for borrower payments that are less than $50

would be construed as a minimum monthly payment requirement resulting

in an adverse impact on low-income borrowers who have defaulted and

request reinstatement of eligibility for additional Title IV

assistance.

The Secretary does not intend the requirement that the agency

document the basis for payments of under $50 to harm defaulted low-

income borrowers. The proposed regulations clearly provide that

payments of less than $50 are permissible. The proposed regulations

merely require the guaranty agency to assess the borrower's disposable

income and necessary expenses to determine a reasonable and affordable

payment, and to document the borrower's file to substantiate the fact

that the borrower's financial circumstances support a smaller payment

than is generally required of other FFEL borrowers. The Secretary notes

that a borrower's objection to the ``affordable and reasonable

payment'' amount determined by the guaranty agency based on its

assessment of the borrower's disposable income and necessary expenses

should be made to officials of the guaranty agency. However, if the

guaranty agency and the borrower are unable to come to an agreement on

the amount identified by the agency following this assessment, the

borrower may contact the Department for assistance.

Section 682.401(b)(6)--The proposed regulations implement the

requirements of section 428(b)(1)(T) of the HEA that provide a guaranty

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

of loans made to students attending a particular school. During the

regional meetings, many commenters expressed the opinion that the

limitation should only apply to a school that is a first-time applicant

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

also believes that this new provision should be applicable to schools

that are applying to renew their participation in the guaranty agency's

program, as well as schools that are applying to participate in the

agency's program for the first time. The Secretary believes it is

reasonable to treat renewal applicants in the same manner as first-time

applicants for purposes of determining a school's eligibility to

participate in a guaranty agency program. The application process

provides the guaranty agency with an opportunity to review a school's

capability in its administration of the FFEL Program. The Secretary

proposes that a guaranty agency may establish reasonable criteria

approved by the Secretary to implement this authority.

Section 682.401(b)(14)--The Secretary proposes to include

Sec. 682.401(b)(14), as published in the July 19, 1991 Student

Assistance General Provisions and Guaranteed Student Loan Programs

final regulations, which requires a guaranty agency to provide the

Secretary's designated Department official a copy of its response to

the institution's request for verification of its cohort default rate

data. This provision was inadvertently not included in the final FFEL

regulations published on December 18, 1992.

Section 682.401(b)(16)--The Secretary proposes to amend this

section to prohibit a lender from selling or transferring a promissory

note for any FFEL Program until the final disbursement of the loan has

been made, unless the sale or transaction does not result in the change

in the identity of the party to whom payment on the loan will be made.

Section 682.401(b)(24)--The Secretary proposes to amend the NPRM to

reflect the HEA requirement that the guaranty agency must, upon the

request of the eligible school, notify the last institution the student

attended of any sale, transfer, or assignment of the loan to another

holder and the address and telephone number by which contact may be

made with the new loan holder concerning repayment of the loan.

Section 682.401(b)(25)--The Secretary proposes to amend this

section of the regulations to establish a time frame for a guaranty

agency to send the Secretary information on program participants

requesting designation as exceptional performers. The Secretary also

proposes to amend this section to reflect the statutory requirement

that a guaranty agency provide a school with information on any sale or

transfer of a loan that results in payments being sent to a different

place. This information will assist the school's efforts to help its

students avoid defaulting on their loans.

Section 682.401(c)(1)--The proposed regulations implement the new

statutory provisions allowing guaranty agencies to limit access to

lender-of-last-resort in certain circumstances and allows a mechanism

for the school to appeal to the Secretary if lender-of-last-resort

services are to be denied by the designated guaranty agency required to

provide those services on this basis. The proposed regulations would

require a guaranty agency to ensure that lender-of-last-resort loans

are available for attendance at a school with a default rate over 25

percent; has not been eligible for and has not participated in the

Federal Stafford Loan Program during the prior 18 months; or is the

subject of an emergency action or limitation, suspension, or

termination proceeding, if there are exceptional mitigating

circumstances that would make the new statutory limitations on the

agency's lender-of-last-resort program inequitable. The Secretary

proposes to use the definition of exceptional mitigating circumstances

in 34 CFR 668.15(g) to evaluate appeals filed by schools under this

provision. The public, at the regional meetings, expressed its belief

that the current regulatory criteria for exceptional mitigating

circumstances were too stringent. However, the Secretary notes that

Congress was aware of the Department's interpretation of the term

``exceptional mitigating circumstances'' in 34 CFR 668.15(g) and used

the same term in the amendments to the lender-of-last-resort provision

in section 428(j) of the HEA. Therefore, the Secretary believes that it

is appropriate to use the existing regulatory definition of

``exceptional mitigating circumstances'' for appeals of denials of

lender-of-last-resort services.

Section 682.401(e)--The Amendments expanded the prohibited

inducement provisions relating to guaranty agencies. The Secretary has

proposed to modify the regulations to reflect this amendment and

include examples of the prohibited inducements. The list of examples is

not all-inclusive. For example, offering computer support that it does

not make available to all lenders in its program as part of a marketing

appeal to a lender with whom an agency does not do business in order to

secure that lender's loans would constitute an inducement. Also, any

cash payment from a guaranty agency to a lender on a per application

basis is strictly prohibited, except as necessary to secure lenders to

participate in the agency's lender-of-last-resort program. The

Secretary proposes to amend the regulations to reflect that inducements

are only those things that are not available to all lenders in the

guaranty agency's program or will not be available to all lenders after

new enhancements or products have been tested.

Section 682.405 Loan Rehabilitation Agreement

The proposed regulations implement the amendments to the loan

rehabilitation provision in section 428F of the HEA, under which

guaranty agencies are required to enter into a loan rehabilitation

agreement with the Secretary. Previously, the loan rehabilitation

program was voluntary for guaranty agencies. The statute provides that,

as part of a loan rehabilitation, the Secretary or a guaranty agency

may not demand from a defaulted borrower a monthly payment amount more

than is ``reasonable and affordable'' based upon the borrower's total

financial circumstances. The Secretary notes that a borrower's

objection to the ``affordable and reasonable payment'' amount

determined by the guaranty agency based on its assessment of the

borrower's disposable income and necessary expenses should be made to

officials of the guaranty agency. However, if the guaranty agency and

the borrower are unable to come to an agreement on the amount

identified by the agency following this assessment, the borrower may

contact the Department for assistance. Some attendees at the regional

meetings indicated that they believed that each guaranty agency should

be permitted to develop its own criteria for determining a payment

amount that is reasonable and affordable. The Secretary disagrees and

has proposed regulations that would standardize this requirement for

all guaranty agencies to ensure that a defaulted borrower in one state

is provided with the same opportunity to rehabilitate his or her

defaulted loan as a borrower in another state.

Section 682.406 Conditions of Reinsurance Coverage

The proposed regulations implement the requirement in section

428(c)(2)(G) of the HEA that provides that a guaranty agency may not

receive reinsurance unless it demonstrates to the Secretary that

diligent attempts have been made to locate the borrower through the use

of reasonable skip-tracing techniques. The Secretary believes that it

is primarily a lender responsibility in the due diligence process to

locate the borrower through the use of reasonable skip-tracing

techniques. However, the Secretary will not reimburse a guaranty agency

when a default claim is based on an inability to locate the borrower,

unless the guaranty agency, at the time of filing a claim, demonstrates

that diligent attempts have been made by either the lender or the

agency to locate the borrower.

Section 682.407 Administrative Cost Allowance for Guaranty Agencies

The Secretary proposes to implement the provision in section

428(f)(1) of the HEA that provides that administrative cost allowance

payments may not be made to a guaranty agency for a loan for which the

disbursement check has not been cashed or for which an electronic funds

transfer has not been completed.

Section 682.409 Mandatory Assignment By Guaranty Agencies of

Defaulted Loans to the Secretary

In a decision memo dated March 14, 1991, the Secretary stated that

the Department would require the assignment of certain defaulted FFEL

Program loans by guaranty agencies to the Department for collection in

two phases. The age-based phase of the assignment policy, Phase I,

began in July 1991. This preamble clarifies Phase I and outlines Phase

II of the policy--guaranty agency default collection performance

standards. The Phase II standards for assignment were developed in

accordance with the purposes of section 428(c)(8) of the HEA, as

amended by the 1992 Amendments, and are designed to give the Secretary

flexibility in resolving existing defaulted FFEL Program loans to

maximize collection revenues from the entire defaulted student loan

portfolio. Because successful collection of defaulted student loans

depends on a number of factors, including the nature, quality and

timing of collection efforts and the resources of debtors, the adequacy

of collection efforts must be evaluated in terms of process as well as

outcomes. Section 682.410 contains the process requirements.

Under these proposed standards, guaranty agencies with recovery

rates equal to or higher than the regulatory recovery rate standards

will continue collecting all defaulted student loans which have been in

their portfolios less than four years. Guaranty agencies with recovery

rates lower than the regulatory recovery rate standards will continue

collecting defaulted student loans, but their workloads would be

reduced to better allow them to collect the loans they retain. These

guaranty agencies would be required to assign additional loans to the

Department, as well as loans required to be assigned under Phase I of

the policy. Any additional loans required to be assigned in a given

fiscal year will be in proportion to the difference between the

guaranty agency's actual recovery rate and the regulatory recovery rate

standards. Guaranty agencies demonstrating marked improvement in

collections by achieving regulatory recovery rate standards the

following fiscal year after being required to assign additional loans,

will not be required to assign any loan which they have held less than

four years.

The performance standards for each separate FFEL Program (i.e.

Stafford, SLS, PLUS, Consolidation) will be 80 percent of the average

annual recovery rate for that program for all guaranty agencies for the

first two years. For subsequent years, the performance standard for

each program will increase to 90 percent of the average annual recovery

rate for all guaranty agencies. At the same time, the age-based

assignment requirement will change from four to five years. Guaranty

agencies not meeting these goals will have their defaulted student loan

portfolios reduced to levels which will be more conducive to achieving

higher recovery rates. The reductions will be in amounts sufficient to

cause the affected guaranty agency's recovery rates by loan type to

equal the average guaranty agency recovery rate for that loan type when

the amount assigned to the Secretary is subtracted from the amount of

loans outstanding--the denominator in the recovery rate calculation.

This policy will give the Secretary the flexibility to curtail

assignments, or select the types of accounts to be assigned if the

solvency of a guarantor is threatened. The Secretary will review this

standard annually and make adjustments, as appropriate.

In determining the basis for this policy, the Secretary considered

the annual defaulted student loan recovery rates of all guaranty

agencies over the last five years. The standards for assignment of

loans were generally agreed to by the negotiators with only a few

objections. The Secretary notes, however, that changes to section

428(c)(8) of the HEA were made by the Omnibus Budget Reconciliation Act

(OBRA) of 1993 (Pub. L. 103-66) subsequent to the development and

negotiation of the proposed regulations governing mandatory assignment

of guaranty agency loans. Specifically, the HEA has been amended to

give the Secretary authority to direct a guaranty agency to promptly

assign loans to the Secretary if the Secretary determines that action

to be necessary for an orderly transition from the FFEL Program to the

Federal Direct Student Loan Program. Therefore, the Secretary

specifically solicits comments on the proposed standards for assignment

in light of the additional changes made to this section of the law.

Further, the Secretary reserves the right during the development of the

final regulations to make whatever changes he deems necessary to

implement the requirements of the OBRA in this area.

Section 682.410 Fiscal, Administrative, and Enforcement Requirements

The statute now requires the guaranty agency to maintain a minimum

reserve fund level as a percentage of the amount of all outstanding

loans guaranteed by the agency. The proposed regulations define the

reserve fund level as total sources less total uses of the reserve

fund, and defines in detail the amount of outstanding loans guaranteed.

The Secretary notes that the Omnibus Reconciliation Act of 1993

made additional changes to section 428(c) of the HEA. Those changes

will be addressed in separate regulations that are currently being

developed under negotiated rulemaking.

Section 682.601 Rules for a School That Makes or Originates Loans

Section 682.601(a) of the proposed regulations would provide that

an institution may be an eligible lender only if its cohort default

rate does not exceed 15 percent. Further, the institution may only use

special allowance payments and interest payments received on loans that

it originated for need-based grant programs for its students or for

reasonable administrative expenses directly related to the FFEL

Program. These proposed changes reflect changes made to the HEA in

section 435(d)(2)(E).

Section 682.603 Certification By a Participating School in Connection

With a Loan Application

Proposed Sec. 682.603(f)(3) provides a formula for a school to use

in determining the annual loan amount for a borrower enrolled in a

program of study of less than an academic year that meets the standards

specified in section 481(d) of the HEA. This change is needed to

implement the restriction on the annual limit provided by sections

428(b)(1)(A) and 428A(b)(1) of the HEA.

The Secretary also proposes to amend the NPRM by adding a new

paragraph (h) to achieve, in the case of new borrowers subject to

delayed delivery of loan proceeds, the appropriate interest limitation

Congress intended in Sec. 682.300 using a formula based on the date of

loan disbursement. The Secretary believes that restricting the school's

request for disbursement of the borrower's loan proceeds to seven days

prior to the 31st day of the student's period of enrollment will still

provide the school sufficent time to process the new borrower's loan

proceeds while ensuring the required interest limitation.

Section 682.604 Processing the Borrower's Loans Proceeds and

Counseling Borrowers

Section 682.604(g). Section 485(b) of the Act was amended to delete

the requirement that a school counsel borrowers concerning the average

indebtedness of FFEL borrowers. The Secretary proposes to remove the

previous regulatory requirement. The school must now review with the

borrower all conditions under which the borrower may defer repayment.

The proposed regulations would simply revise the previous requirement

that the school provide information only about three specific

deferments. The proposed regulations also list other items that must be

updated by the borrower during exit counseling.

Section 682.604(h). Discussion occurred during the negotiated

rulemaking sessions regarding the school's treatment of an overaward

when proceeds which have not been delivered to a student exceed that

amount of assistance for which the student is eligible. Section 428G(d)

of the HEA requires the school to return the amount of the overaward to

the lender. An overaward can result from aid received from any form of

assistance defined as estimated financial assistance pursuant to 34 CFR

682.200 or a recalculation by the institution of a family's Expected

Family Contribution (EFC) based on information not considered in the

original EFC calculation. The negotiators expressed concern that one of

the most time-consuming and frustrating parts of financial aid work,

for both aid administrators and students, is resolving small $50 to

$200 overawards. The negotiators suggested a tolerance of $500 to

relieve some administrative burden. The Department indicated that the

treatment of an overaward is a current statutory requirement, not

subject to negotiated rulemaking, and that the statute does not provide

tolerance language. Therefore, the Secretary cannot arbitrarily insert

this provision in the regulations.

The Secretary proposes to revise the NPRM to include the change in

the HEA that provides that funds obtained from any need-based

employment is not considered an overaward, provided the amount of the

funds does not exceed $300.

Income contingent repayment--The statute provides that the

Secretary may issue regulations allowing certain defaulted borrowers a

repayment schedule that assesses the borrower's income and provides up

to 25 years to repay the loan. The Secretary is to contract with

private firms or other government agencies to perform the collection

activities on these loans. The Secretary must publish a finding that

the collection mechanism selected will provide a high degree of

certainty of collection on the defaulted loans and that the use of the

repayment option and collection mechanism will result in an increase in

the net amount of collections. To be eligible, the borrower's note must

provide for this type of repayment option and the note must be assigned

to the Secretary following default. The Secretary is currently

reviewing the options regarding the establishment of the collection

mechanism mandated prior to issuing proposed regulations on this

repayment option.

Regulatory Flexibility Act Certification

The Secretary certifies that these proposed regulations would not

have a significant economic impact on a substantial number of small

entities.

While the statute requires that the Secretary regulate certain

actions that must be taken by various program participants, these

requirements would not have a significant impact because they would not

impose excessive regulatory burdens or require unnecessary Federal

supervision. The regulations would impose minimal additional

requirements to protect the Federal fiscal interest, as well as the

interests of the borrowers under the programs.

Paperwork Reduction Act of 1980

Sections 682.401, 682.405 and 682.409 contain information

collection requirements. As required by the Paperwork Reduction Act of

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

to the Office of Management and Budget (OMB) for its review. (44 U.S.C.

3504(h))

Under Sec. 682.401, a guaranty agency would be required to permit

defaulted borrowers to regain eligibility for Title IV assistance. In

doing so, a guaranty agency would be required to collect data to

substantiate its determination of a borrower's total financial

circumstances. Based on an estimated 4000 applicants, at .08 hours per

response, this would result in 320 burden hours.

Under Sec. 682.405, a guaranty agency is required to participate in

a loan rehabilitation loan program for the purpose of rehabilitating a

defaulted loan so that the loan may be purchased by an eligible lender

and removed from default status. In rehabilitating a loan, a guaranty

agency would be required to collect data to substantiate its

determination of a borrower's total financial circumstances. Based on

an estimated 4800 applicants, at .08 hours per response, this would

result in 384 burden hours.

Organizations and individuals desiring to submit comments on the

information collection requirements should direct them to the Office of

Information and Regulatory Affairs, OMB, Room 3002, New Executive

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

Invitation to Comment

Interested persons are invited to submit comments and

recommendations regarding these proposed regulations.

All comments submitted in response to these proposed regulations

will be available for public inspection, during and after the comment

period, in ROB-3, room 4310, 7th and D Streets, SW., Washington, DC,

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

each week except Federal holidays.

Assessment of Educational Impact

The Secretary particularly requests comments on whether the

proposed regulations in this document would require transmission of

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

agency or authority of the United States.

List of Subjects in 34 CFR Part 682

Administrative practice and procedure, Colleges and universities,

Education, Loan programs-education, Reporting and recordkeeping

requirements, Student aid, Vocational education.

(Catalog of Federal Domestic Assistance Number 84.032, Federal

Family Education Loan Program)

Dated: March 9, 1994.

Richard W. Riley,

Secretary of Education.

The Secretary proposes to amend part 682 of title 34 of the Code of

Federal Regulations as follows:

PART 682--FEDERAL FAMILY EDUCATION LOAN (FFEL) PROGRAM

1. The authority citation for part 682 continues to read as

follows:

Authority: 20 U.S.C. 1071 to 1087-2, unless otherwise noted.

2. Section 682.100 is amended by revising paragraphs (a)(3) and

(a)(4) to read as follows:

Sec. 682.100 The Federal Family Education Loan programs.

(a) * * *

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

to parents of dependent undergraduate students. Before October 17,

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

professional, and independent undergraduate students. Before July 1,

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

dependent graduate students.

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

encourages making loans to borrowers for the purpose of consolidating

their repayment obligations, with respect to loans received while they

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

loan, SLS, ALAS (as in effect before October 17, 1986), Perkins Loan

programs, Health Professions Student Loan (HPSL) Program authorized by

Subpart II of part C of Title VII of the Public Health Service Act, and

the Higher Education Assistance Loan (HEAL) Program authorized by

Subpart I of part A of Public Title VII of the Health Services Act, and

for parent PLUS borrowers whose loans were made on or after October 17,

1986.

* * * * *

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

follows:

Sec. 682.101 Participation in the FFEL programs.

* * * * *

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

a participating school, may borrow under the Stafford loan and SLS

programs. Parents of eligible dependent students may borrow under the

PLUS Program. Student borrowers who have at least $7,500 outstanding in

Stafford, SLS, FISL, Perkins, HPSL, HEAL, ALAS, student PLUS loans or

married couples who have a combined indebtedness of at least $7,500

under these programs or Parent PLUS loans made on or after October 17,

1986 may borrow under the Consolidation Loan Program.

* * * * *

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

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

the end of paragraph (e)(1); and by revising the last sentence in

paragraph (e)(4) to read as follows:

Sec. 682.102 Obtaining and repaying a loan.

* * * * *

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

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

applicants must be contacted for consolidation. * * *

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

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

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

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

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

eligibility to borrow was falsely certified by the school. The

obligation to repay may be forgiven for borrowers who enter certain

areas of the teaching or nursing professions or perform certain kinds

of national or community service.

* * * * *

(4) PLUS loan repayment. * * * The first payment of principal and

interest on a PLUS loan is due from the borrower within 60 days after

the loan is disbursed.

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

(a)(1)(ii) as (a)(1) and (a)(2) respectively; removing ``Eligible

institution'' from redesignated paragraph (a)(2); revising the

definition of ``Co-maker''; revising the introductory text of the

definition of ``Default''; revising paragraph (1) of the definition of

``Estimated financial assistance''; adding a new sentence at the end of

the definition of ``Grace period''; revising paragraph (2), and

redesignating paragraphs (3) and (4) as paragraphs (4) and (5)

respectively, and adding a new paragraph (3), in the definition of

``Lender''; revising the definitions of ``Repayment period'' and

``Stafford Loan Program''; adding, in alphabetical order, new

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

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

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

read as follows:

Sec. 682.200 Definitions.

* * * * *

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

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

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

liable for repayment of the loan.

Default. The failure of a borrower and endorser, if any, or joint

borrowers on a PLUS or Consolidation loan, to make an installment

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

Secretary or guaranty agency finds it reasonable to conclude that the

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

to repay, provided that this failure persists for--

* * * * *

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

employer or other income from any source that remains after the

deduction of any amounts required by law to be withheld.

* * * * *

Estimated financial assistance. (1) The estimated amount of

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

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

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

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

not limited to--

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

and 35 of Title 38 of the United States Code;

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

10 of the United States Code (Selected Reserve Educational Assistance

Program);

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

subsistence allowances awarded under Chapter 2 of Title 10 and Chapter

2 of Title 37 of the United States Code;

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

Entitlement Program for Survivors (or Quayle benefits);

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

Assistance Pilot Program;

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

postsecondary education institution;

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

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

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

packaging policy, campus-based aid the student would be expected to

receive if the student applied, whether or not the student has applied

for that aid;

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

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

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

be awarded.

* * * * *

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

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

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

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

* * * * *

Lender. * * *

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

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

a credit union--

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

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

supervision in its capacity as a lender'';

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

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

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

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

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

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

consumer credit loan portfolio, including home mortgages held by the

lender or its subsidiaries.

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

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

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

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

requirements of this paragraph prior to July 23, 1992.

* * * * *

Nonsubsidized Stafford loan. A Stafford loan made prior to October

1, 1992 that does not qualify for interest benefits under

Sec. 682.301(b).

* * * * *

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

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

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

deferment or forbearance.

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

on the day after the expiration of the applicable grace period that

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

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

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

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

period, but may be capitalized by the lender.

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

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

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

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

deferment or forbearance.

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

loan is disbursed and ending no later than 10 years from that date,

exclusive of any period of deferment or forbearance.

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

date the loan is disbursed and ends no later than 12, 15, 20, 25, or 30

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

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

exclusive of any period of deferment or forbearance.

Satisfactory repayment arrangement. The making of six (6)

consecutive voluntary on-time full monthly payments on a defaulted loan

to regain further eligibility for FFEL Program loans. The required full

monthly payment amount may not be no more than is reasonable and

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

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

voluntary payments are those payments made directly by the borrower,

regardless of whether there is a judgment against the borrower, and do

not include payments obtained by income tax off-set, garnishment, or

income or asset execution.

* * * * *

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

the Act which encourages the making of subsidized and unsubsidized

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

of the Federal Family Education Loan programs.

* * * * *

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

the Act for borrowers who qualify for interest benefits under

Sec. 682.301(b).

* * * * *

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

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

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

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

loan due to a determination in accordance with applicable standards

that no further collection activity is warranted.

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

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

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

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

paragraph (b)(7); revising paragraph (c); and adding a new paragraph

(d) to read as follows:

Sec. 682.201 Eligible borrowers.

(a) * * *

(2) In the case of any student who seeks an SLS loan for the cost

of attendance at a school that participates in the Stafford Loan

Program, the student must have--

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

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

application with a lender for a subsidized Stafford loan;

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

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

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

the HEA; and

(iii) Received a certification of graduation from a school

providing secondary education or the recognized equivalent;

* * * * *

(b) Parent borrower. A parent borrower, and if applicable a parent

co-maker, is eligible to receive a PLUS Program loan, other than a loan

made under Sec. 682.209(e), if the parent--

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

undergraduate student who meets the requirements for an eligible

student set forth in 34 CFR part 668;

* * * * *

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

1993, does not have an adverse credit history.

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

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

(iii) Unless the lender determines that extenuating circumstances

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

credit history based on the credit report if--

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

repayment of a debt;

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

bankruptcy discharge, foreclosure, repossession, tax lien, wage

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

preceding the date of the credit report.

(iv) Nothing in this paragraph precludes the lender from

establishing more restrictive credit standards to determine whether the

applicant has an adverse credit history.

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

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

reason to deny a PLUS loan to that applicant.

(vi) The lender must retain documentation demonstrating its basis

for determining that extenuating circumstances existed. This

documentation may include an updated credit report, a statement from

the creditor that the borrower has made satisfactory arrangements to

repay the debt, or a satisfactory statement from the borrower

explaining any delinquencies with outstanding balances of less than

$500.

(c) Consolidation program borrower. (1) An individual is eligible

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

Consolidation loan, the individual--

(i) Has an outstanding indebtedness of not less than $7,500 on

loans the individual is consolidating that are eligible for

consolidation under Sec. 682.100;

(ii)(A) Has ceased, or in the case of a PLUS borrower, the

dependent student on whose behalf the parent is borrowing, has ceased

at least half-time enrollment at a school;

(B) Is, on the loans being consolidated--

(1) In a grace period preceding repayment on the loans being

consolidated;

(2) Is in repayment status; or

(3)(i) Is delinquent or has made satisfactory repayment

arrangements with the holder on a defaulted loan being consolidated;

(ii) Will reenter repayment through consolidation;

(iii) Certifies that no other application for a Consolidation loan

is pending;

(iv) Agrees to notify the holder of any changes in address; and

(v) Certifies that he or she has a loan with the consolidating

lender or has sought a loan from his or her holder and was unable to

secure a Consolidation loan from the holder.

(2) A married couple is eligible to receive a Consolidation loan in

accordance with this section if each--

(i) Agrees to be held jointly and severally liable for the

repayment of the total amount of the Consolidation loan;

(ii) Agrees to repay the debt regardless of any change in marital

status; and

(iii) Meets the requirements of paragraph (c)(1) of this section,

except that their combined indebtedness may not be less than $7,500 on

loans eligible for consolidation under Sec. 682.100 and only one must

have met the requirements of paragraph (c)(1)(v) of this section.

(3) Eligibility for consolidation terminates upon receipt of a

Consolidation loan except--

(i) With respect to student loans received after the date the

Consolidation loan is made; or

(ii) Loans received prior to the date the Consolidation loan was

made can be added to the Consolidation loan during the 180-day period

after the making of the Consolidation loan.

(d) Defaulted FFEL borrower. In the case of a student, parent, or

Consolidation loan borrower who is currently in default on an FFEL

Program loan, the borrower has made satisfactory repayment

arrangements.

7. Section 682.204 is amended by adding new paragraphs (a)(3),

(a)(4), and (a)(5); revising paragraphs (b), (c) and (d); revising

paragraph (e)(1) introductory text; redesignating paragraph (e)(2) as

paragraph (e)(3); adding a new paragraph (e)(2); and revising paragraph

(f) to read as follows:

Sec. 682.204 Maximum loan amounts.

(a) * * *

(3) In the case of a student who has successfully completed the

first year of an undergraduate program but has not successfully

completed the remainder of an undergraduate program, the total amount

the student may borrow may not exceed--

(i) $3,500 for enrollment in a program of study of at least a full

academic year in length;

(ii) $2,325 for enrollment in a program of study of at least two-

thirds but less than a full academic year in length;

(iii) $1,175 for enrollment in a program of study of at least one-

third but less than two-thirds of an academic year in length.

(4) In the case of a student who has successfully completed the

first and second year of a program of study of undergraduate education

but not successfully completed the remainder of the program, the total

amount the student may borrow may not exceed--

(i) $5,500 for a program of study of at least an academic year in

length;

(ii) $3,675 for enrollment in a program of study of at least two-

thirds of an academic year but less than an academic year in length;

(iii) $1,825 for a program of study of at least one-third of an

academic year in length but less than two-thirds of an academic year in

length; and

(iv) $4,000 for a loan for which the first disbursement is made on

or before July 1, 1993.

(5) In the case of a graduate or professional student, the total

amount the student may borrow may not exceed--

(i) $7,500 per academic year; or

(ii) $8,500 for loans to cover the cost of instruction for periods

of enrollment beginning on or after October 1, 1993.

(b) Stafford Loan Program aggregate limits. The aggregate

guaranteed unpaid principal amount of all Stafford loans made to a

student may not exceed--

(1) For loans for which the first disbursement is made prior to

July 1, 1993--

(i) $17,250, in the case of an undergraduate student for programs

of study at the undergraduate level; and

(ii) $54,750 in the case of a graduate or professional student,

including loans for undergraduate study.

(2) For loans for which the first disbursement is made on or after

July 1, 1993--

(i) $23,000 in the case of any student who has not successfully

completed a program of study at the undergraduate level; and

(ii) $65,500, in the case of a graduate or professional student,

including loans for undergraduate study.

(c) PLUS Program annual limit. The total amount of all PLUS loans

that a parent may borrow on behalf of each dependent student for any

academic year of study may not exceed--

(1) Except as provided in paragraph (c)(2) of this section, $4,000;

(2) In the case of a loan made on or after July 1, 1993, the cost

of education for the student minus other estimated financial

assistance.

(d) PLUS Program aggregate limit. (1) Except as provided in

paragraph (d)(2) of this section, the total guaranteed unpaid principal

amount of PLUS program loans that a parent may borrow on behalf of each

dependent student may not exceed $20,000.

(2) In the case of loans made on or after July 1, 1993, the total

guaranteed unpaid principal amount of PLUS Program loans that a parent

may borrow on behalf of each dependent student is unlimited subject to

the annual limit in paragraph (c)(2) of this section.

(e) SLS Program annual limit. (1) In the case of a loan for which

the first disbursement is made prior to July 1, 1993, the total amount

of all SLS loans that a student may borrow for any academic year of

study may not exceed $4,000 or, if the student is entering or is

enrolled in a program of undergraduate education that is less than one

academic year in length and the student's SLS loan application is

certified pursuant to Sec. 682.603 by the school on or after January 1,

1990--

* * * * *

(2) In the case of a loan for which a first disbursement is made on

or after July 1, 1993, the total amount a student may borrow for an

academic year of study under the SLS program--

(i) In the case of a student who has not successfully completed the

first and second year of a program of undergraduate education, may not

exceed--

(A) $4,000 for enrollment in a program of study of at least a full

academic year in length;

(B) $2,500 for enrollment in a program of study of at least two-

thirds but less than a full academic year in length;

(C) $1,500 for enrollment in a program of study of at least one-

third but less than two-thirds of an academic year in length.

(ii) In the case of a student who successfully completed the first

and second year of an undergraduate program, but has not completed the

remainder of the program of study, may not exceed--

(A) $5,000 for enrollment in a program of study of at least a full

academic year;

(B) $3,325 for enrollment in a program of study of at least two-

thirds of an academic year but less than a full academic year in

length; and

(C) $1,675 for enrollment in a program of study of at least one-

third of an academic year but less than two-thirds of an academic year.

(iii) In the case of a graduate or professional student, may not

exceed $10,000.

* * * * *

(f) SLS Program aggregate limit. The total unpaid principal amount

of SLS Program loans made to--

(1) An undergraduate student may not exceed--

(i) $20,000, for loans for which the first disbursement is made

prior to July 1, 1993, or

(ii) $23,000, for loans for which the first disbursement was made

on or after July 1, 1993; and

(2) A graduate student may not exceed--

(i) $20,000, for loans for which the first disbursement is made

prior to July 1, 1993, or

(ii) $73,000, for loans for which the first disbursement was made

on or after July 1, 1993 including loans for undergraduate study.

* * * * *

8. Section 682.206 is amended by revising the introductory text in

paragraph (c)(2); and revising paragraph (e)(2) to read as follows:

Sec. 682.206 Due diligence in making a loan.

* * * * *

(c) * * *

(2) Except in the case of a Consolidation loan, in determining the

amount of the loan to be made, the lender must review the data on the

student's cost of attendance and estimated financial assistance that is

provided by the school. In no case may the loan amount exceed the

student's estimated cost of attendance less the sum of--

* * * * *

(e) * * *

(2) A Federal PLUS Program loan and Federal Consolidation Program

Loan may be made to two eligible borrowers who agree to be jointly and

severally liable for repayment of the loan as co-makers.

* * * * *

9. Section 682.207 is amended by revising paragraph (b)(1)(v)(B) to

read as follows:

Sec. 682.207 Due diligence in disbursing a loan.

* * * * *

(b)(1) * * *

(v) * * *

(B) In the case of a Federal PLUS loan--

(1) By electronic funds transfer from the lender to the eligible

institution to a separate account maintained by the school as trustee

for the lender; or

(2) By a check from the lender that is made co-payable to the

institution and the parent borrower directly to the eligible

institution.

* * * * *

10. Section 682.209 is amended by revising paragraph (c)(2) to read

as follows:

Sec. 682.209 Repayment of a loan.

* * * * *

(c) * * *

(2) The provisions of paragraphs (c)(1)(i) and (ii) of this section

may not result in an extension of the maximum repayment period unless

forbearance, as described in Sec. 682.211 or deferment described in

Sec. 682.210, has been approved.

* * * * *

11. Section 682.300 is amended by revising the section heading;

paragraph (a); paragraph (b)(1)(i); and paragraph (c) to read as

follows:

Sec. 682.300 Payment of interest benefits on Stafford and

Consolidation loans.

(a) General. The Secretary pays a lender a portion of the interest

on a Stafford loan and, except for that portion of the loan that

represents HEAL loans, on a Consolidation loan on behalf of a borrower

who qualifies under Sec. 682.301. This payment is known as interest

benefits.

(b) * * *

(1) * * *

(i) During all periods prior to the beginning of the repayment

period, except as provided in paragraphs (b)(2) and (c) of this

section.

* * * * *

(c) Interest not covered. The Secretary does not pay--

(1) Interest for which the borrower is not otherwise liable;

(2) Interest paid on behalf of the borrower by a guaranty agency;

(3) Interest that accrues on the first disbursement of a loan for

any period that is earlier than--

(i) In the case of a subsidized Stafford loan disbursed by a check,

10 days prior to the first day of the period of enrollment for which

the loan is intended or, if the loan is disbursed after the first day

of the period of enrollment, 3 days after the disbursement date on the

check; or

(ii) In the case of a loan disbursed by electronic funds transfer,

3 days prior to the first day of the period of enrollment or, if the

loan is disbursed after the first day of the period of enrollment, 3

days after disbursement.

(4) In the case of a loan disbursed on or after October 1, 1992,

interest on a loan if--

(i) The disbursement check is returned uncashed to the lender or

the lender is notified that the disbursement made by electronic funds

transfer will not be released from the restricted account maintained by

the school; or

(ii) The check for the disbursement has not been negotiated before

the 120th day after the date of disbursement or the disbursement made

by electronic funds transfer has not been released from the restricted

account maintained by the school before that date.

(5) Interest on the portion of a Consolidation loan that represents

HEAL loans that have been consolidated.

* * * * *

12. Section 682.301 is amended by revising the section heading;

revising paragraph (a)(1); adding a new paragraph (a)(3); and revising

paragraph (b) introductory text to read as follows:

Sec. 682.301 Eligibility of borrowers for interest benefits on

Stafford and Consolidation loans.

(a) * * *

(1) To qualify for benefits on a Stafford loan, a borrower must

demonstrate financial need in accordance with Part F of the Act.

* * * * *

(3) A Consolidation loan borrower whose loan application was

received by the lender on or after January 1, 1993 qualifies for

interest benefits during authorized periods of deferment on the portion

of the loan that does not represent HEAL loans.

(b) Application for interest benefits. To apply for interest

benefits on a Stafford loan, the student, or the school at the

direction of the student, must submit a loan application to the lender.

The application must include a certification from the student's school

of the following information:

* * * * *

13. Section 682.302 is amended by revising paragraphs (b),

(c)(1)(iii), (c)(2) introductory text, (c)(3)(i) introductory text,

(c)(3)(ii) introductory text, and adding paragraph (c)(3)(iii) to read

as follows:

Sec. 682.302 Payment of special allowance on FFEL loans.

* * * * *

(b) Eligible loans. (1) Except for nonsubsidized Federal Stafford

loans disbursed on or after October 1, 1981, for periods of enrollment

beginning prior to October 1, 1992, or as provided in paragraphs (b)(2)

or (e) of this section, FFEL loans that otherwise meet program

requirements are eligible for special allowance payments.

(2) For a loan made under the Federal SLS or Federal PLUS Program

on or after July 1, 1987 or under Sec. 682.209(e) or (f), no special

allowance is paid for any period for which the interest rate determined

under Sec. 682.202(a)(2)(iv)(A) for that loan does not exceed--

(i) 12 percent in the case of a Federal SLS or PLUS loan made prior

to October 1, 1992;

(ii) 11 percent in the case of a Federal SLS loan made on or after

October 1, 1992; or

(iii) 10 percent in the case of a Federal PLUS loan made on or

after October 1, 1992.

(3) In the case of a subsidized Stafford loan disbursed on or after

October 1, 1992, the Secretary does not pay special allowance on a

disbursement if--

(i) The disbursement check is returned uncashed to the lender or

the lender is notified that the disbursement made by electronic funds

transfer will not be released from the restricted account maintained by

the school; or

(ii) The check for the disbursement has not been negotiated before

the 120th day after the date of disbursement or the disbursement made

by electronic funds transfer has not been released from the restricted

account maintained by the school before that date.

(c) * * *

(1) * * *

(iii) Adding--

(A) 3.1 percent to the resulting percentage for a loan made on or

after October 1, 1992;

(B) 3.25 percent to the resulting percentage, for a loan made on or

after November 16, 1986, but before October 1, 1992;

(C) 3.25 percent to the resulting percentage, for a loan made on or

after October 17, 1986 but before November 16, 1986, for a period of

enrollment beginning on or after November 16, 1986;

(D) 3.5 percent to the resulting percentage, for a loan made prior

to October 17, 1986, or a loan described in paragraph (c)(2) of this

section; or

(E) 3.5 percent to the resulting percentage, for a loan made on or

after October 17, 1986 but before November 16, 1986, for a period of

enrollment beginning prior to November 16, 1986;

* * * * *

(2) The special allowance rate determined under paragraph

(c)(1)(iii)(D) of this section applies to loans made or purchased from

funds obtained from the issuance of an obligation of the--

* * * * *

(3)(i) Subject to paragraphs (c)(3)(ii) and (iii) of this section,

the special allowance rate is one-half of the rate calculated under

paragraph (c)(1)(iii)(D) of this section for a loan made or guaranteed

on or after October 1, 1980 that was made or purchased with funds

obtained by the holder from--

* * * * *

(ii) The special allowance rate applicable to loans described in

paragraph (c)(3)(i) of this section that are made prior to October 1,

1992, may not be less than--

* * * * *

(iii) The special allowance rate applicable to loans described in

paragraph (c)(3)(i) of this section that are made on or after October

1, 1992, may not be less than 9\1/2\ percent minus the applicable

interest rate.

* * * * *

14. Section 682.400 is amended by revising paragraph (b)

introductory text; revising paragraph (b)(1)(i); and adding a new

paragraph (b)(4) to read as follows:

Sec. 682.400 Agreements between a guaranty agency and the Secretary.

* * * * *

(b) There are four agreements:

(1) * * *

(i) Borrowers whose Stafford and Consolidation loans are guaranteed

by the agency may qualify for interest benefits that are paid to the

lender on the borrower's behalf;

* * * * *

(4) Loan Rehabilitation Agreement. A guaranty agency must have an

agreement for rehabilitating a loan for which the Secretary has made a

reinsurance payment under section 428(c)(1) of the Act.

* * * * *

15. Section 682.401 is amended by redesignating paragraphs (b)(4)

through (b)(22) as paragraphs (b)(5) through (b)(23), respectively;

adding a new paragraph (b)(4); revising redesignated paragraph (b)(6);

revising redesignated paragraph (b)(14); revising redesignated

paragraph (b)(16)(i) introductory text; adding a new paragraph

(b)(16)(iii); adding new paragraphs (b)(24) and (b)(25); revising

paragraph (c); redesignating paragraphs (e)(2) and (e)(3) as (e)(3) and

(e)(4) respectively; and adding a new paragraph (e)(2) to read as

follows:

Sec. 682.401 Basic program agreement.

* * * * *

(b) * * *

(4) Reinstatement of borrower eligibility. For a borrower's loans

held by a guaranty agency on which a reinsurance claim has been paid by

the Secretary, the guaranty agency must afford a defaulted borrower,

upon the borrower's request, renewed eligibility for Title IV

assistance once the borrower has made satisfactory repayment

arrangements as that term is defined in Sec. 682.200.

(i) For purposes of this section, the determination of reasonable

and affordable must--

(A) Include consideration of the borrower's and spouse's disposable

income and necessary expenses including, but not limited to, housing,

food, medical costs, dependent care costs and other Title IV repayment;

(B) Include documentation in the borrower's file of the basis for

the determination, if the monthly reasonable and affordable payment

established under this section is less than $50.00 or the monthly

accrued interest on the loan, whichever is greater. However, $50.00 may

not be the minimum payment for a borrower if the agency determines that

a smaller amount is reasonable and affordable.

(C) Be based on the documentation provided by the borrower or other

sources including, but not limited to--

(1) Evidence of current income (e.g. proof of welfare benefits,

Social Security benefits, Supplemental Security Income, Workers'

Compensation, child support, veterans' benefits, two most recent pay

stubs, copy of U.S. income tax return, State Department of Labor

reports);

(2) Evidence of current expenses (e.g. a copy of the borrower's

monthly household budget, on a form provided by the guaranty agency);

and

(3) A statement of the unpaid balance on all defaulted FFEL loans.

(ii) A borrower may request that the monthly payment amount be

adjusted due to a change in the borrower's total financial

circumstances upon providing the documentation specified in paragraph

(b)(4)(i)(C) of this section.

(iii) A guaranty agency must provide the borrower with a written

statement of the reasonable and affordable payment amount required for

the reinstatement of the borrower's eligibility for Title IV student

assistance, and provide the borrower with an opportunity to object to

such terms.

* * * * *

(6) School eligibility--(i) General. A school that has a program

participation agreement in effect with the Secretary under Sec. 682.600

is eligible to participate in the program of the agency under

reasonable criteria established by the guaranty agency, and approved by

the Secretary, under paragraph (d)(2) of this section, except to the

extent that--

(A) The school's eligibility is limited, suspended, or terminated

by the Secretary under 34 CFR part 668 or by the guaranty agency under

standards and procedures that are substantially the same as those in 34

CFR part 668;

(B) The Secretary upholds the limitation, suspension, or

termination of a school by a guaranty agency and extends such sanction

to all guaranty agency programs under section 432(h)(3) of the Act or

Sec. 682.713;

(C) The school is ineligible under sections 428A(a)(2) or 435(a)(2)

of the Act;

(D) There is a State constitutional prohibition affecting the

school's eligibility;

(E) The school's programs consist of study solely by

correspondence;

(F) The agency determines that the school does not satisfy the

standards of administrative capability and financial responsibility as

defined in 34 CFR part 668;

(G) The school fails to make timely refunds to students as required

in Sec. 682.607(c);

(H) The school has not satisfied within 30 days of issuance a final

judgment obtained by a student seeking a refund;

(I) The school or an owner, director, or officer of the school is

found guilty or liable in any criminal, civil, or administrative

proceeding regarding the obtaining, maintenance, or disbursement of

State or Federal student grant, loan, or work assistance funds; or

(J) The school or an owner, director, or officer of the school has

unpaid financial liabilities involving the improper acquisition,

expenditure, or refund of State or Federal student financial assistance

funds.

(ii) Limitation by a guaranty agency of a school's participation.

For purposes of this paragraph, a school that is subject to limitation

of participation in the guaranty agency's program may be either a

school that is applying to participate in the agency's program for the

first time, or a school that is renewing its application to continue

participation in the agency's program. A guaranty agency may limit the

total number of loans or the volume of loans made to students attending

a particular school, or otherwise establish appropriate limitations on

the school's participation, if the agency makes a determination that

the school does not satisfy--

(A) The standards of financial responsibility defined in 34 CFR

668.13; or

(B) The standards of administrative capability defined in 34 CFR

668.14 and 34 CFR 668.15.

(iii) Limitation, suspension, or termination of school eligibility.

A guaranty agency may limit, suspend, or terminate the participation of

an eligible school. If a guaranty agency limits, suspends, or

terminates the participation of a school from the agency's program, the

Secretary applies that limitation, suspension, or termination to all

locations of the school.

(iv) Condition for guaranteeing loans for students attending a

school. The guaranty agency may require the school to execute a

participation agreement with the agency and to submit documentation

that establishes the school's eligibility to participate in the

agency's program.

* * * * *

(14) Guaranty agency verification of default data. A guaranty

agency must respond to an institution's written request for

verification of its default rate data for purposes of an appeal

pursuant to 34 CFR 668.15(g)(1)(i) within 15 working days of the date

the agency receives the institution's written request pursuant to 34

CFR 668.15(g)(7), and simultaneously provide a copy of that response to

the Secretary's designated Department official.

* * * * *

(16) * * *

(i) Except as provided in paragraph (b)(16)(iii), the guaranty

agency must allow a loan to be assigned only if the loan is fully

disbursed and is assigned to--

* * * * *

(iii) The guaranty agency must allow a loan to be assigned under

paragraph (b)(16)(i) of this section, following the first disbursement

of the loan if the assignment does not result in a change in the

identity of the party to whom payments must be made.

* * * * *

(24) Information on loan sales or transfers. The guaranty agency

must, upon the request of an eligible school, furnish to the school

last attended by the borrower, information with respect to the sale or

transfer of a student's loan prior to the beginning of the repayment

period, including--

(i) Notice of the assignment;

(ii) The identity of the assignee;

(iii) The name and address of the party by which contact may be

made with the holder concerning repayment of the loan; and

(iv) The telephone number of the assignee.

(25) Information on designation for exceptional performance. A

guaranty agency must provide the Secretary with any information in its

possession regarding an eligible lender or servicer applying for

designation for exceptional performance within 30 days following the

agency's receipt of a copy of the lender's or servicer's request for

designation under 34 CFR 682.415(a)(2). The information provided by the

guaranty agency must include, but is not limited to, records relating

to the lender's or servicer's compliance with FFEL Program regulations

and any information suggesting that the lender or servicer does not

meet the requirements for designation for exceptional performance.

* * * * *

(c)(1) Lender-of-last-resort. The guaranty agency must ensure that

it or an eligible lender described in section 435(d)(1)(D) of the Act

serves as a lender-of-last-resort in the State in which it is the

principal guaranty agency, as defined in Sec. 682.800(d).

(2) The lender-of-last-resort must make a subsidized Stafford loan

to any eligible student who satisfies the lender's eligibility

requirements and--

(i) Qualifies for interest benefits, pursuant to Sec. 682.301, for

a loan amount of at least $200; and

(ii) Has been otherwise unable after conscientious efforts to

obtain a loan from another eligible lender for the same period of

enrollment.

(3) The guaranty agency or an eligible lender described in section

435(d)(1)(D) of the Act may arrange for a loan required to be made

under paragraph (c)(1) of this section to be made by another eligible

lender.

(4) The guaranty agency must develop policies and operating

procedures for its lender-of-last-resort program that provide for the

accessibility of lender-of-last-resort loans. These policies and

procedures must be submitted to the Secretary for approval as required

under paragraph (d)(2) of this section. The policies and procedures for

the agency's lender-of-last-resort program must ensure that--

(i) The program establishes operating hours and methods of

application designed to facilitate application by students; and

(ii) Information about the availability of loans under the program

is made available to schools in the State; and

(iii) Appropriate steps are taken to ensure that borrowers

receiving loans under the program are appropriately counseled on their

loan obligation.

(5) Limitations on lender-of-last-resort services. Except as

provided in paragraphs (c)(6) and (c)(10) of this section, the lender-

of-last-resort is not required to make a subsidized Stafford loan to a

student for attendance at a school that--

(i) Has a cohort default rate, as defined in section 435(m) of the

Act, that exceeds 25 percent for the most recent year for which a rate

has been calculated by the Secretary;

(ii) Has not been eligible for, and has not participated in, the

FFEL Program during the most recent 18 months; or

(iii) Is currently subject to emergency action or limitation,

suspension, or termination by the Secretary under 34 CFR Part 668 or by

any guaranty agency.

(6) Notwithstanding paragraph (c)(5)(i) of this section, the

Secretary requires a guaranty agency or an eligible lender described in

section 435(d)(1)(D) of the Act to make a subsidized Stafford loan for

attendance at a school if there are, in the judgment of the Secretary,

``exceptional mitigating circumstances'', as defined in 34 CFR

668.15(g)(1)(iii), that would make the application of the limitations

inequitable.

(7) A guaranty agency must provide a school and the Secretary with

written notification of the agency's intent to deny lender-of-last-

resort services to the school's students.

(8) The school may submit to the Secretary, with a copy to the

guaranty agency, a complete appeal with supporting documentation that

is based on the mitigating circumstances of paragraph (c)(6) of this

section. Such appeal must be submitted no later than 30 days after the

date of the guaranty agency's notice to the school. If the school

submits such a complete appeal, the guaranty agency must provide

lender-of-last-resort services to students attending the school until

the date on which the Secretary rejects the appeal, if it is rejected.

(9) The Secretary makes a case-by-case determination on each appeal

by a school that has been notified that lender-of-last-resort services

will not be provided to the school's students, and takes action on the

school's appeal no later than 45 days after receipt of the school's

complete appeal with supporting documentation.

(10) The provisions of paragraph (c)(5) of this section do not

apply to institutions that have been designated as historically black

colleges and universities, tribally-controlled community colleges, or

Navajo community colleges until July 1, 1994.

* * * * *

(e) * * *

(2)(i) Offer, directly or indirectly, any premium, incentive

payment, or other inducement to any lender, or any person acting as an

agent, employee, or independent contractor of any lender or other

guaranty agency to administer or market FFEL loans, other than

unsubsidized Stafford loans or subsidized Stafford loans made under a

guaranty agency's lender-of-last-resort program, in an effort to secure

the guaranty agency as an insurer of FFEL loans. Examples of prohibited

inducements include, but are not limited to--

(A) Compensating lenders or their representatives for the purpose

of securing loan applications for guarantee;

(B) Performing functions normally performed by lenders without

appropriate compensation;

(C) Providing equipment or supplies to lenders at below market cost

or rental; or

(D) Offering to pay a lender, that does not hold loans guaranteed

by the agency, a fee for each application forwarded for the agency's

guarantee.

(ii) For the purposes of this section, the terms ``premium'',

``inducement'', and ``incentive'' do not include services directly

related to the enhancement of the administration of the FFEL Program

the guaranty agency generally provides to lenders that participate in

its program. However, the terms ``premium'', ``inducement'', and

``incentive'' do apply to other activities specifically intended to

secure a lender's participation in the agency's program.

* * * * *

16. A new Sec. 682.405 is added to read as follows:

Sec. 682.405 Loan Rehabilitation agreement.

(a) General. (1) A guaranty agency that has a basic program

agreement must enter into a loan rehabilitation agreement with the

Secretary. The guaranty agency must establish a loan rehabilitation

program for all borrowers for the purpose of rehabilitating defaulted

loans so that the loan may be purchased by an eligible lender and

removed from default status.

(2) A loan is considered to be rehabilitated only after the

borrower has made one voluntary reasonable and affordable full payment

each month within 15 days of the scheduled due date for 12 consecutive

months in accordance with this section, and the loan has been sold to

an eligible lender.

(b) Terms of agreement. In the loan rehabilitation agreement, the

guaranty agency agrees to ensure that its loan rehabilitation program

meets the following requirements at all times--

(1) A borrower may request the rehabilitation of the borrower's

defaulted FFEL loan held by the guaranty agency. The borrower must make

one voluntary on-time full payment each month for 12 consecutive months

to be eligible to have the defaulted loans rehabilitated. For purposes

of this section, on-time means a payment made within 15 days of the

scheduled due date and ``full payment'' means a reasonable and

affordable payment agreed to by the borrower and the agency. The

required amount of such monthly payment may be no more than is

reasonable and affordable based upon the borrower's total financial

circumstances. Voluntary payments are those made directly by the

borrower, regardless of whether there is a judgment against the

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

garnishment, or income or asset execution. A guaranty agency must

attempt to secure a lender to purchase the loan at the end of the

twelve-(12-) month payment period.

(i) For purposes of this section, the determination of reasonable

and affordable must--

(A) Include a consideration of the borrower's and spouse's

disposable income and reasonable and necessary expenses including, but

not limited to, housing, food, medical costs, dependent care costs and

other Title IV repayment.

(B) Include documentation in the borrower's file of the basis for

the determination if the monthly reasonable and affordable payment

established under this section is less than $50.00 or the monthly

accrued interest on the loan, whichever is greater. However, $50.00 may

not be the minimum payment for a borrower if the agency determines that

a smaller amount is reasonable and affordable.

(C) Be based on the documentation provided by the borrower or other

sources including, but not be limited to--

(1) Evidence of current income (e.g., proof of welfare benefits,

Social Security benefits, child support, veterans' benefits,

Supplemental Security Income, Workmen's Compensation, two most recent

pay stubs, copy of U.S. income tax return, State Department of Labor

reports);

(2) Evidence of current expenses (e.g., a copy of the borrower's

monthly household budget, on a form provided by the guaranty agency);

and

(3) A statement of the unpaid balance on all defaulted FFEL loans.

(ii) The agency must include any payment made under

Sec. 682.401(b)(4) in determining whether the 12 consecutive payments

required under paragraph (b)(1) of this section have been made.

(iii) A borrower may request that the monthly payment amount be

adjusted due to a change in the borrower's total financial

circumstances only upon providing the documentation specified in

paragraph (b)(1)(i)(C) of this section.

(iv) A guaranty agency must provide the borrower with a written

statement of the terms of the rehabilitation of the borrower's

defaulted loan and provide the borrower with an opportunity to object

to such terms.

(2) The guaranty agency must report to all national credit bureaus

within 90 days of the date the loan was rehabilitated that the loan is

no longer in a default status.

(3) An eligible lender purchasing a rehabilitated loan must

establish a repayment schedule that meets the same requirements that

are applicable to other FFEL Program loans made under the same loan

type. For the purposes of the maximum loan repayment period, the lender

must treat the first payment made under the 12 consecutive payments as

the first payment under the 10-year maximum.

(Authority: 20 U.S.C. 1078-6)

17. Section 682.406 is amended by removing ``and'' at the end of

paragraph (a)(12); removing the period at the end of paragraph (a)(13)

and adding in its place, ``; and'' and adding a new paragraph (a)(14)

to read as follows:

Sec. 682.406 Conditions of reinsurance coverage.

(a) * * *

(14) The guaranty agency assures the Secretary that diligent

attempts have been made by the lender and the guaranty agency under

Sec. 682.411(g) to locate the borrower through the use of reasonable

skip-tracing techniques.

* * * * *

18. Section 682.407 is amended by adding new paragraphs (e) and (f)

to read as follows:

Sec. 682.407 Administrative cost allowance for guaranty agencies.

* * * * *

(e) The Secretary does not pay an administrative cost allowance to

a guaranty agency based on loans for which the disbursement check has

not been cashed or for which an electronic funds transfer has not been

completed.

(f) An administrative cost allowance improperly paid on a loan to a

guaranty agency must be deducted by the agency from the amount

reflected in the following quarter's ED form 1189 when it is submitted

to the Department for payment.

* * * * *

19. Section 682.409 is amended by revising paragraph (a); revising

paragraph (c)(1); and adding a new paragraph (c)(6) to read as follows:

Sec. 682.409 Mandatory assignment by guaranty agencies of defaulted

loans to the Secretary.

(a)(1) If the Secretary determines that action is necessary to

protect the Federal fiscal interest, the Secretary may direct a

guaranty agency to assign to the Secretary any loan held by the agency

on which the agency has received payment under Sec. 682.402(d),

682.402(i), or 682.404 that meets the following criteria as of April 15

of each year--

(i) The unpaid principal balance is at least $100;

(ii) For each of the two fiscal years following the fiscal year in

which these regulations are effective, the loan, and any other loans

held by the agency for that borrower, have been held by the agency for

at least four years; for any subsequent fiscal year such loan must have

been held by the agency for at least five years;

(iii) A payment has not been received on the loan in the last year;

and

(iv) A judgment has not been entered on the loan against the

borrower.

(2) If the agency fails to meet a fiscal year recovery rate

standard under paragraph (a)(2)(ii) of this section for a loan type,

and the Secretary determines that additional assignments are necessary

to protect the Federal fiscal interest, the Secretary may require the

agency to assign in addition to those loans described in paragraph

(a)(1) of this section, loans in amounts needed to satisfy the

requirements of paragraph (a)(2)(iii) or (a)(3)(i) of this section.

(i) Calculation of fiscal year loan type recovery rate. A fiscal

year loan type recovery rate for an agency is determined by dividing

the amount collected on defaulted loans for each loan program (i.e.,

the Stafford, PLUS, SLS, and Consolidation loan programs) by the agency

for loans of that program (including payments received by the agency on

loans under Sec. 682.401(b)(4) and Sec. 682.409 and the amounts of any

loans purchased from the guaranty agency by an eligible lender) during

the most recent fiscal year for which data are available by the total

of principal and interest owed to an agency on defaulted loans for each

loan program at the beginning of the same fiscal year, less accounts

permanently assigned to the Secretary through the most recent fiscal

year.

(ii) Fiscal year loan type recovery rates standards. (A) If, in

each of the two fiscal years following the fiscal year in which these

regulations are effective, the fiscal year loan type recovery rate for

a loan program for an agency is below 80 percent of the average

recovery rate of all active guaranty agencies in each of the same two

fiscal years for that program type, and the Secretary determines that

additional assignments are necessary to protect the Federal fiscal

interest, the Secretary may require the agency to make additional

assignments in accordance with paragraph (a)(2)(iii) of this section.

(B) In any subsequent fiscal year the loan type recovery rate

standard for a loan program must be 90 percent of the average recovery

rate of all active guaranty agencies.

(iii) Non-achievement of loan type recovery rate standards. (A)

Unless the Secretary determines under paragraph (a)(2)(iv) of this

section that protection of the Federal fiscal interest requires that a

lesser amount be assigned, upon notice from the Secretary, an agency

with a fiscal year loan type recovery rate described in paragraph

(a)(2)(ii) of this section must promptly assign to the Secretary a

sufficient amount of defaulted loans, in addition to loans to be

assigned in accordance with paragraph (a)(1) of this section, to cause

the fiscal year loan type recovery rate of the agency that fiscal year

to equal or exceed the average rate of all agencies described in

paragraph (a)(2)(ii) of this section when recalculated to exclude from

the denominator of the agency's fiscal year loan type recovery rate the

amount of these additional loans.

(B) The Secretary, in consultation with the guaranty agency, may

require the amount of loans to be assigned under paragraph (a)(2) of

this section to include particular categories of loans that share

characteristics that make the performance of the agency fall below the

appropriate percentage of the loan type recovery rate as described in

paragraph (a)(2)(ii) of this section.

(iv) Calculation of loan type recovery rate standards. The

Secretary, within 30 days after the date for submission of the second

quarterly report from all agencies, makes available to all agencies a

mid-year report, showing the recovery rate for each agency and the

average recovery rate of all active guaranty agencies for each loan

type. In addition, the Secretary, within 120 days after the beginning

of each fiscal year, makes available a final report showing such rates

and the average rate for each loan type for the preceding fiscal year.

(3)(i) Determination that the protection of the Federal fiscal

interest requires assignments. Upon petition by an agency submitted

within 45 days of the notice required by paragraph (a)(2)(iii)(A) of

this section, the Secretary may determine that protection of the

Federal fiscal interest does not require assignment of all loans

described in paragraph (a)(1) of this section or of loans in the full

amount described in paragraph (a)(2)(iii) of this section only after

review of the agency's petition. In making this determination, the

Secretary considers all relevant information available to him

(including any information and documentation obtained by the Secretary

in reviews of the agency or submitted to the Secretary by the agency)

as follows:

(A) For each of the two fiscal years following the fiscal year in

which these regulations are effective, the Secretary considers

information presented by an agency with a fiscal year loan type

recovery rate above the average rate of all active agencies to

demonstrate that the protection of the Federal fiscal interest will be

served if any amounts of loans of such loan type required to be

assigned to the Secretary under paragraph (a)(1) of this section are

retained by that agency. For any subsequent fiscal year, the Secretary

considers information presented by an agency with a fiscal year

recovery rate 10 percent above the average rate of all active agencies.

(B) The Secretary considers information presented by an agency that

is required to assign loans under paragraph (a)(2) of this section to

demonstrate that the protection of the Federal fiscal interest will be

served if the agency is not required to assign amounts of loans that

would otherwise have to be assigned.

(C) The information provided by an agency pursuant to paragraphs

(a)(3)(i)(A) and (B) of this section may include, but is not limited to

the following:

(1) The fiscal year loan type recovery rate within such school

sectors as the Secretary may designate for the agency, and for all

agencies;

(2) The fiscal year loan type recovery rate for loans for the

agency and for all agencies divided by age of the loans as the

Secretary may determine;

(3) The performance of the agency, and all agencies, in default

aversion;

(4) The agency's performance on judgment enforcement;

(5) The existence and use of any state or guaranty agency-specific

collection tools;

(6) The agency's level of compliance with Secs. 682.409 and

682.410(b)(6); and

(7) Other factors that may affect loan repayment such as State or

regional unemployment and natural disasters.

(ii) Denial of an agency's petition. If the Secretary does not

accept the agency's petition, the Secretary provides, in writing, to

the agency the Secretary's reasons for concluding that the Federal

fiscal interest is best protected by requiring the assignment.

* * * * *

(c)(1) A guaranty agency must assign a loan to the Secretary under

this section at the time, in the manner, and with the information and

documentation that the Secretary requires. The agency must submit this

information and documentation in the form (including magnetic media)

and format specified by the Secretary.

* * * * *

(6) The Secretary may accept the assignment of a loan without all

of the documents listed in paragraph (c)(4) of this section. If

directed to do so, the agency must retain these documents for

submission to the Secretary at some future date.

* * * * *

20. Section 682.410 is amended by revising paragraphs (a)(1)

through (a)(3)(i); and adding paragraphs (a)(6) through (a)(8) to read

as follows:

Sec. 682.410 Fiscal, administrative, and enforcement requirements.

(a) * * *

(1) Reserve fund assets. The guaranty agency must establish and

maintain a reserve fund to be used solely for the FFEL Program to which

the guaranty agency must credit--

(i) The total amount of insurance premiums collected;

(ii) Funds appropriated by a State for the agency's loan guaranty

program, including matching funds under section 422(a) of the Act;

(iii) Federal advances obtained under sections 422(a) and (c) of

the Act;

(iv) Federal payments for default, bankruptcy, death and

disability, closed schools and false certification claims;

(v) Supplemental preclaims assistance payments;

(vi) Administrative cost allowance payments received under

Sec. 682.407;

(vii) Funds collected by the guaranty agency;

(viii) Investment earnings on the reserve fund; and

(ix) Funds received by the guaranty agency from any other source

for the agency's loan guaranty program.

(2) Uses of reserve fund assets. Except as provided in paragraphs

(a)(3) through (a)(5) of this section, a guaranty agency may only use

the assets of the reserve fund established under paragraph (a)(1) of

this section to pay--

(i) Insurance claims;

(ii) Operating costs, including payments necessary in administering

loan collections, preclaims assistance, monitoring enrollment and

repayment status and any other activities under this part;

(iii) Lenders that participate in a loan referral service under

section 428(e) of the Act;

(iv) The Secretary's equitable share of collections;

(v) Federal advances and other funds owed to the Secretary;

(vi) Reinsurance fees;

(vii) Insurance premiums related to cancelled loans; and

(viii) Any other amounts authorized or directed by the Secretary.

(3) Special rule for use of certain reserve fund assets. (i) Except

as provided in paragraph (a)(4) of this section, a guaranty agency may

use funds received as insurance premiums, administrative cost

allowances, amounts collected on FFEL loans, interest or investment

earnings, and receipts described in paragraph (a)(1)(vi) of this

section only for payments necessary to perform functions directly

related to the guaranty agency's agreement with the Secretary and for

the proper administration of the guaranty agency's FFEL loan guarantee

activities.

* * * * *

(6) Minimum reserve fund level. The guaranty agency must maintain a

current minimum reserve fund level of not less than--

(i) .5 percent of the amount of loans outstanding, for the fiscal

year of the agency that begins in calendar year 1993;

(ii) .7 percent of the amount of loans outstanding, for the fiscal

year of the agency that begins in calendar year 1994;

(iii) .9 percent of the amount of loans outstanding, for the fiscal

year of the agency that begins in calendar year 1995; and

(iv) 1.1 percent of the amount of loans outstanding, for each

fiscal year of the agency that begins on or after January 1, 1996.

(7) For purposes of this section, reserve fund level means--

(i) The total of the reserve fund assets as defined in paragraph

(a)(1) of this section, minus

(ii) The total of the amount of the reserve fund assets used in

accordance with paragraphs (a) (2) and (3) of this section.

(8) For purposes of this section, amount of loans outstanding

means--

(i) The sum of--

(A) The original principal amount of all loans guaranteed by the

agency; and

(B) The original principal amount of any loans on which the

guarantee was transferred to the agency from another guarantor,

excluding loan guarantees transferred to the agency pursuant to a plan

of the Secretary in response to the insolvency of the transferring

guaranty agency;

(ii) Minus the original principal amount of all loans on which--

(A) The loan guarantee was cancelled;

(B) The loan guarantee was transferred to another agency, excluding

loan guarantees transferred to another agency pursuant to a plan of the

Secretary in response to the insolvency of the agency;

(C) Payment in full has been made by the borrower;

(D) Reinsurance coverage has been lost and cannot be regained; and

(E) The agency paid claims, excluding the amount of those claims--

(1) Paid under Sec. 682.412(e);

(2) Paid under a policy established by the agency that is

consistent with Sec. 682.509(a)(1); or

(3) Paid at the direction of the Secretary.

* * * * *

21. Section 682.507 is amended by revising paragraph (a)(2) to read

as follows:

Sec. 682.507 Due diligence in collecting a loan.

(a) * * *

(2) If two borrowers are liable for repayment of a Federal PLUS or

Consolidation loan as co-makers, the lender must follow these

procedures with respect to both borrowers.

* * * * *

22. Section 682.511 is amended by revising paragraph (a)(2) to read

as follows:

Sec. 682.511 Procedures for filing a claim.

(a) * * *

(2) If a Federal PLUS loan was obtained by two eligible parents as

co-makers, or a Consolidation loan was obtained jointly by a married

couple, the reason for filing a claim must hold true for both

applicants.

* * * * *

23. Section 682.601 is amended by removing ``and'' at the end of

paragraph (a)(4); removing the period at the end of paragraph (a)(5)

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

and (a)(7) to read as follows:

Sec. 682.601 Rules for a school that makes or originates loans.

(a) * * *

(6) The school's cohort default rate as calculated under

Sec. 668.15 may not exceed 15 percent; and

(7) Except for reasonable administrative expenses directly related

to the FFEL Program, the school must use payments received under

Sec. 682.300 and Sec. 682.302 for need-based grant programs for its

students.

* * * * *

24. Section 682.603 is amended by adding new paragraphs (f)(3),

(f)(4) and (h) to read as follows:

Sec. 682.603 Certification by a participating school in connection

with a loan application.

* * * * *

(f) * * *

(3) In certifying a Stafford or SLS loan amount in accordance with

Sec. 682.204 (a) and (e) for a borrower enrolled in a program of study

of less than 900 clock hours or 24 semester or trimester hours, or 36

quarter hours (where the school defines its academic year to be at

least 30 weeks in length), the school must determine the annual FFEL

loan limit for the borrower by determining what portion of the academic

year the program of study represents by calculating--

(i) Number of clock-hours in program--

-----------------------------------------------------------------------

900 hours; or

(ii) Credit hours in program

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24 semester or trimester hours or 36 quarter hours.

(4) In certifying a Stafford or SLS loan amount in accordance with

Sec. 682.204(a) and (e) for a borrower enrolled in a program of study

of at least 900 clock hours, 24 semester or trimester hours, or 36

quarter hours (where the school defines its academic year to be less

than 30 weeks in length), the school must determine the annual FFEL

loan limit for the borrower by determining what portion of the academic

year the program represents by calculating--

Number of weeks in program

-----------------------------------------------------------------------

30 weeks.

* * * * *

(h) Pursuant to paragraph (b)(5) of this section, a school may not

request the disbursement of loan proceeds for a borrower who is

enrolled in the first year of an undergraduate program of study and who

has not previously received a Stafford or SLS loan earlier than 7 days

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

25. Section 682.604 is amended by revising paragraph (c)(3)

introductory text; removing paragraph (g)(2)(i); redesignating

paragraphs (g)(2)(ii) through (g)(2)(vi), as paragraphs (g)(2)(i)

through (g)(2)(v) respectively; removing ``and'' at the end of

redesignated (g)(2)(iv); revising redesignated paragraph (g)(2)(v);

adding a new paragraph (g)(2)(vi); revising the introductory text of

paragraph (h); and adding a new paragraph (h)(4) to read as follows:

Sec. 682.604 Processing the borrower's loan proceeds and counseling

borrowers.

* * * * *

(c) * * *

(3) If the loan proceeds are disbursed by electronic funds transfer

to an account of the school on behalf of a borrower in accordance with

Sec. 682.207(b)(1)(ii)(B), the school must, not more than 30 days prior

to the first day of classes of the period of enrollment for which the

loan is intended, obtain the student's, or in the case of a Federal

PLUS loan, the parent borrower's written authorization for the release

of the initial and any subsequent disbursement of each FFEL loan to be

made, and after the student has registered either--

* * * * *

(g) * * *

(2) * * *

(v) Review with the borrower the conditions under which the

borrower may defer repayment or obtain partial cancellation of a loan;

and

(vi) Require the borrower to provide corrections to the

institution's records concerning name, address, social security number,

references, and driver's license number, as well as the name and

address of the borrower's expected employer that will then be provided

within 60 days to the guaranty agency listed in the borrower's records.

* * * * *

(h) * * * Except as provided under paragraph (h)(ii) of this

section, or in the case of a student attending a foreign school, if,

before the delivery of any Stafford or SLS loan disbursement, the

school learns that the borrower will receive or has received financial

aid for the period of enrollment for which the loan was made that

exceeds the amount of assistance for which the student is eligible, the

school shall reduce or eliminate the overaward by either--

* * * * *

(4) For purposes of this section, funds obtained from any need-

based employment that does not exceed $300 shall not be considered as

excess loan proceeds.

[FR Doc. 94-6004 Filed 3-15-94; 8:45 am]

BILLING CODE 4000-01-P