William D. Ford Federal Direct Loan Program

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

Direct Loan (Direct Loan) Program regulations. The regulations apply to

loans under the Federal Direct Stafford/Ford Loan (Direct Subsidized

Loan) Program, the Federal Direct Unsubsidized Stafford/Ford Loan

(Direct Unsubsidized Loan) Program, the Federal Direct PLUS Loan

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

(Direct Consolidation Loan) Program, collectively referred to as the

Direct Loan Program. These regulations provide schools with more

flexibility in performing origination functions, and clarify the date

of loan origination. Further, these regulations set timelines for the

submission of promissory notes, disbursement records, and origination

records.

EFFECTIVE DATE: These regulations take effect July 1, 1996.

FOR FURTHER INFORMATION CONTACT: Ms. Katrina Ingalls, Program

Specialist, Direct Loan Policy Group, Policy Development Division, U.S.

Department of Education, Room 3053, ROB-3, 600 Independence Avenue,

SW., Washington, DC 20202-5400. Telephone: (202) 708-9406. Individuals

who use a telecommunications device for the deaf (TDD) may call the

Federal Information Relay Service (FIRS) at 1-800-877-8339 between 8

a.m. and 8 p.m., Eastern time, Monday through Friday.

SUPPLEMENTARY INFORMATION:

Background

The Secretary is amending the Direct Loan Program regulations to

improve the program based on experience gained during the first year of

operation. These amended regulations reflect programmatic changes that

the Secretary believes will improve services to student and parent

borrowers, increase institutional flexibility, and enhance the

Department's administrative and fiscal oversight capabilities.

On September 20, 1995, the Secretary published the proposed amended

regulations in a notice of proposed rulemaking (NPRM) for part 685 in

the Federal Register (60 FR 48858). The major issues surrounding the

proposed changes were discussed in the NPRM and thus will not be

repeated here.

The following section summarizes the two revisions to the proposed

rule.

Substantive Revisions to the Proposed Rule

Section 685.215(h)(2) Repayment Plans

The NPRM proposed to revise the repayment plan regulations to

reflect the Secretary's current operational practice regarding

repayment plan selection for certain Direct Consolidation Loan

borrowers. Under the NPRM, borrowers who consolidate only one FFEL

Program loan into the Direct Loan Program would be required to select

initially a repayment plan other than the standard repayment plan. The

Secretary has determined that this restriction will not be included in

the final regulations.

Section 685.301 Origination of a Loan by a Direct Loan Program School

The NPRM proposed that the date of loan origination be the earlier

of the date the promissory note is printed or the date the origination

record is accepted by the Secretary. The Secretary has revised

Sec. 685.301(a)(5) to provide that the date of loan origination is the

date the school creates the electronic loan origination record for a

borrower. Beginning with the 1996-1997 academic year, enhanced loan

origination software will record the date of origination permanently on

the borrower's loan file when the borrower's origination record is

created by the school. Modifying the Direct Loan school software to

record automatically the date the school creates the origination record

will ensure that a school is able to document clearly the date that it

certified the borrower's eligibility for the loan, the loan amount, and

anticipated disbursement dates. The date the electronic origination

record is created occurs earlier in loan processing than either

printing the promissory note or the origination record being accepted

by the Secretary. This change will result in improved service to

schools by automatically generating the information necessary to

document the origination process and will improve services to borrowers

by promoting flexibility in processing loans.

Analysis of Comments and Changes

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

submitted comments on the proposed regulations. An analysis of the

comments appears below, beginning with a general discussion of the

comments received concerning the length of the comment period. This is

followed by a general discussion of the comments received regarding the

Secretary's consideration of establishing foreign school participation

requirements for the Direct Loan Program.

A discussion of the major issues that generated comments follows.

The major issues are grouped according to subject, with references to

the appropriate sections of the regulations. Technical and other minor

changes, and suggested changes the Secretary is not legally authorized

to make under the applicable statutory authority, generally are not

addressed.

General Discussion of Length of Comment Period

Several commenters argued that the comment period was too short,

especially considering that the Department published six NPRMs, all

with comment periods ending at approximately the same time.

In the six NPRMs referred to above, the Secretary proposed numerous

improvements and necessary changes to the Student Financial Assistance

Programs. The ``Master Calendar'' provisions contained in section 482

of the Higher Education Act of 1965 (HEA) require that regulations be

published in final form by December 1 prior to the start of the award

year for which they will become effective. Because of the importance of

implementing these changes and improvements for the award year

beginning July 1, 1996, the Secretary established a comment period that

would allow publication of these final regulations by December 1, 1995,

consistent with the ``Master Calendar'' timeframe. The Secretary always

endeavors to provide as long a comment period as possible.

General Discussion of Foreign School Participation Comments

In the preamble of the NPRM, the Secretary asked for comments and

supporting arguments on:

What, if any, additional standards should be established

for foreign schools that participate in the Direct Loan Program;

Potential financial risks as well as benefits of admitting

foreign schools into the Direct Loan Program; and

Potential losses or benefits to students related to

foreign school participation in the Direct Loan Program.

One foreign school responded to the Secretary's invitation for

comments. This school expressed enthusiasm about the Direct Loan

Program because it

[[Page 61791]]

views potential participation as a way to solve some of the problems

the school is currently experiencing in receiving loan funds under the

FFEL Program. The commenter supported foreign school participation in

the Direct Loan Program.

Further, the commenter suggested that the Secretary should not

group all foreign schools together for purposes of participation in the

Direct Loan Program and recommended that a separate category be

established for schools that are located outside of the U.S. but are

U.S. accredited. It is the school's opinion that this group would

present a lower potential financial risk for the Federal Government

since these schools maintain a U.S. Admissions Office and a U.S. dollar

bank account. This commenter also pointed out the importance of making

sure that foreign schools have trained individuals processing loans for

their students.

Another commenter felt that it was premature to consider foreign

school participation in the Direct Loan Program and recommended that

processing system changes be implemented prior to allowing foreign

school participation.

A third commenter recommended that foreign schools be allowed to

participate, but not allowed to originate loans. This commenter

suggested that foreign schools be required to use an alternative

originator. This suggestion was made based on the commenter's opinion

that all foreign schools are not uniform in their ability to administer

the Title IV programs.

The Secretary understands and appreciates the issues raised by

these commenters. As discussed in the NPRM, the Secretary is aware

that, due to the nature of the Direct Loan Program, additional fiscal

oversight and administrative requirements are warranted for

participating foreign schools. The Direct Loan Program is unique among

the financial aid programs with respect to its funds disbursement

processes and requirements. Because there is no authorized limit to the

amount of funds that schools may draw down in the Direct Loan Program,

the Department must rigorously oversee the funds disbursement process.

To prevent potential program abuse, the Secretary is committed to the

careful monitoring of the drawdown of funds to schools and the

disbursement to students.

Based on the comments received, the Secretary has determined that

the issue of foreign school participation in the Direct Loan Program

warrants further consideration. Therefore, no specific provisions

related to foreign school participation are included in these

regulations.

Discussion of Major Issues

Section 685.102 Definitions

School Origination Option 1, School Origination Option 2, and Standard

Origination

Section 685.102(b)

Comments: Several commenters responded to the proposed revisions of

the current definitions of school origination option 1, school

origination option 2, and standard origination. These commenters viewed

these changes as a positive step that would allow institutions greater

flexibility to have the origination process modified based on the their

unique capabilities and individual needs.

Several other commenters did not support the proposed change. These

commenters argued that the Secretary should not amend the ``origination

requirements.''

Discussion: It appeared from the comments that there may be some

confusion regarding the proposed change. The Secretary is not changing

the origination criteria, nor is the Secretary redesignating the

functions performed at a given level of origination. The purpose of

this amendment is to allow a school the flexibility to ask the

Secretary to perform a function that the school must, under current

regulation, perform, at a given origination level. If the Secretary

approves the school's request, the Secretary will perform the

functions, but the school would not be required to change its

origination level.

For example, during the 1996-1997 academic year, an origination

option 2 level school is fully qualified to perform all loan

origination functions and to draw down loan funds. If a school wanted

to ask the Secretary to handle the promissory note functions, but still

wanted to be able to draw down funds (for which the school is fully

qualified), current regulations would not allow this option. The

proposed change would allow the Secretary to establish this type of

individual agreement with the school.

The proposed regulatory amendment would not undermine the integrity

of the program or the Secretary's ability to provide sound oversight.

Furthermore, the change is consistent with the Secretary's current

initiative to promote regulatory flexibility and reduce unnecessary

burden on institutions. The Secretary is confident that this regulatory

change allows schools to customize the origination process in a manner

that would be beneficial for schools, as well as the Direct Loan

Program.

Change: For clarity, the word ``status'' has been changed to

``options'' in each of the definitions.

Comments: A number of commenters recommended that any revisions to

the origination criteria be established through negotiated rulemaking.

These commenters noted that the existing origination criteria were

developed through extensive negotiated rulemaking.

Discussion: Section 457 of the HEA requires the Secretary to

conduct negotiated rulemaking for the Direct Loan Program only to the

extent practicable. This section does not require negotiated rulemaking

for amendments to existing regulations. Further, the Secretary does not

believe that it is practicable to conduct negotiated rulemaking for

amendments to these regulations. Negotiated rulemaking is a lengthy

process that would have prevented implementation of the revised

definitions of school origination option 1, school origination option

2, and standard origination for the 1996/1997 academic year. For these

amendments, the Secretary has decided not to use the negotiated

rulemaking process to solicit input from the higher education

community. In the Secretary's opinion, these changes are a positive

step that allow institutions the flexibility to modify the origination

process based on their individual needs and capabilities. Because this

is an improvement over the existing process, schools should be able to

benefit from these regulatory revisions as soon as possible. The

majority of the commenters supported the Secretary's proposal to revise

these definitions of origination criteria.

Changes: None.

Section 685.208 Repayment Plans, Section 685.210 Choice of Repayment

Plans, and Section 685.215 Consolidation

Comments: None of the commenters supported these proposed

amendments. One commenter argued that borrowers with one FFEL Program

loan should not be precluded from initially consolidating into the

Direct Loan Program using the standard repayment plan. The commenter

felt that a borrower's repayment options should not be limited by the

number of loans the borrower wishes to consolidate. The commenter also

asserted that, if the standard repayment plan offered the best terms

for that Direct Consolidation Loan borrower, that option should be

available to the borrower.

[[Page 61792]]

Discussion: The Departmental practice of requiring borrowers who

consolidate only one FFEL Program loan into the Direct Loan Program to

initially select a repayment plan other than the standard repayment

plan had been implemented in response to the concerns of the FFEL

community. However, none of the commenters wrote in support of this

provision. Further, the only specific comment addressing this proposal

was received from a member of the FFEL community, and that commenter

urged the Secretary to delete this provision.

Change: Proposed amendments to Secs. 685.208, 685.210 and 685.215

have been removed.

Section 685.301 Origination of a Loan by a Direct Loan Program School

Section 685.301(a)(5) Determining Eligibility and Loan Amount

Comments: Several commenters supported the amendment to clarify the

date of loan origination. One commenter objected to the Secretary's

clarification of the date of loan origination for the Direct Loan

Program. This commenter felt that both the Direct Loan and FFEL

Programs should establish the same definition for the ``date of

origination.'' If this is not possible, the commenter suggested the

Secretary create another term for ``the date of origination'' in the

Direct Loan Program to avoid possible confusion among Direct Loan and

FFEL Program participants.

Discussion: It is important to establish clearly the date of

origination, because a school may only originate a loan while the

borrower meets the eligibility requirements. The NPRM proposed that the

date of loan origination be the earlier of the date the promissory note

is printed or the date the origination record is accepted by the

Secretary. Beginning with the 1996-1997 academic year, enhanced loan

origination software will record the date of origination permanently on

the borrower's loan file when the borrower's origination record is

created by the school. Modifying the Direct Loan school software to

record automatically the date the school creates the origination record

will ensure that the school is able to document clearly the date that

it certified a borrower's eligibility for a loan, the loan amount, and

anticipated disbursement dates. Further, because the electronic

origination record is created earlier in loan processing than either

printing the promissory note or the origination record being accepted

by the Secretary, this change will result in improved service to both

schools and borrowers. Service to schools is improved because the

information necessary to document the origination process is

automatically generated in the student's electronic file; service to

borrowers is improved by promoting flexibility in processing loans.

The Secretary is making every effort to ensure conformity between

the Direct Loan and the FFEL Programs whenever possible. However, there

is no definition of ``date of origination'' in the FFEL Program.

Further, the programs operate differently and it is impossible to

attain absolute conformity between the programs in all aspects. For

example, loan origination in the Direct Loan Program is similar to

certification of the loan application in the FFEL Program but because

of the inherent operational differences between the program, the two

events are not necessarily identical. In the FFEL Program, school

officials certify borrower information on a combined application and

promissory note. In the Direct Loan Program, the application process is

separate from certification of loan information. Therefore, Direct Loan

eligibility is certified by means of the electronic origination record

and a written statement provided by the school after submitting the

origination record. On the origination record, a school certifies a

borrower's eligibility, the loan amount, and the anticipated

disbursement dates. Due to these operational differences, it is not

appropriate to have the same provision in both loan programs. Further,

because very few schools participate in both the Direct Loan and FFEL

Programs, the Secretary does not believe that this terminology will

cause confusion.

The Secretary wants to clarify that the use of the phrase ``date of

loan origination'' in the Direct Loan Program is intended for

operational purposes only and does not constitute a commitment on the

part of the Federal Government to make a loan. This distinction is

important to avoid possible confusion with the use of the term

``origination'' for Federal budgetary purposes.

Changes: The regulation has been revised to reflect that the date

of loan origination is the date a school creates an electronic loan

origination record.

Section 685.301(d) Reporting to the Secretary

Comments: Three commenters felt that the requirement for schools to

submit the promissory note, disbursement record, and origination record

no later than 30 days following the date of disbursement of loan funds

was too restrictive. One of these commenters asked the Secretary to

reconsider this timeline because the 30-day deadline would be too

burdensome to adhere to in light of other program requirements, such as

reconciliation reporting requirements. Another of these commenters

suggested that the timeline be extended to 45 days to aid financial aid

administrators during their demanding Fall season. This commenter felt

that the extra 15 days would make a significant difference in the

management of financial aid processes.

Several other commenters strongly endorsed the 30-day reporting

requirement. They argued that if schools are required to submit these

documents to the Secretary quickly, borrowers will be better served.

Additionally, these commenters felt this requirement would result in

the reconciliation processing working more smoothly and occurring on a

more timely basis--ultimately leading to better fiscal control over

federal funds.

One commenter recommended that regulations be added to limit a

school's ability to draw down funds until the school had reconciled the

funds it had already disbursed. Another commenter recommended that,

even though the commenter supported the 30-day reporting requirement,

the Secretary should grant schools a brief extension if this

requirement presents unanticipated compliance difficulties.

Discussion: The Secretary disagrees with the commenters that assert

that this requirement is too restrictive and overly burdensome for the

schools. In previous guidance, the Department has advised all Direct

Loan schools that they should reconcile and submit all loan origination

records, promissory notes, and disbursement records on a monthly basis

[see the April 26, 1994, Announcement of Criteria for Loan

Origination--1995-1996 Academic Year (59 FR 21804) and Chapter 7 of the

Direct Loan School Guide]. This requirement is needed to ensure that

borrowers receive disbursement disclosure information and loan

servicing information shortly after the loan is disbursed. Further,

Direct PLUS Loan borrowers enter repayment when the loan is fully

disbursed and the Department must receive disbursement information in a

timely manner in order to establish repayment terms. Requiring the

timely submission of program data by schools to the Direct Loan

Servicer will enhance the Department's administrative and fiscal

oversight capabilities and will help ensure that up-to-date data are

maintained in the National Student Loan Data System.

After a year of experience in administering the Direct Loan

Program,

[[Page 61793]]

the Secretary is convinced that services to borrowers would be

substantially improved by requiring schools to submit the promissory

note, disbursement record, and origination record no later than 30 days

following the date of disbursement of loan funds. The implementation of

this 30-day requirement is in the best interest of federal taxpayers as

well as Direct Loan schools. Furthermore, the timely submission of

origination records, promissory notes, and initial and subsequent

disbursement records is particularly critical at the end of the Federal

fiscal year (September 30).

Ultimately, the result of this requirement will be that borrowers

will have fewer questions and problems in the initial phase of the loan

process. Also, schools will benefit from this change because schools

that do not report disbursements in a timely manner appear to have

excess cash even when they have properly disbursed funds to borrowers

in compliance with the cash management regulations. The Secretary is

confident that the 30-day reporting requirement will help the

reconciliation process to work more smoothly and on a more timely

basis, ultimately leading to better fiscal control over federal funds

and improved services to borrowers.

The Secretary understands that, particularly for Direct Loan

schools during their first year of participation in the program, the

Department may initially need to extend reasonable lenience when

enforcing this requirement. These schools may need additional time or

assistance until they become familiar with the Direct Loan processes

and procedures. Furthermore, the Secretary has already committed to

current program participants that the Secretary will assist any schools

having difficulty in complying with this requirement. The Secretary is

ready to provide technical support to schools and is willing to review

a school's on-site operations, if requested, to make suggestions

regarding changes that will enable the school to meet this requirement.

Based on the comments received on this issue, it appears that some

commenters are confused about when a borrower receives the disclosure

of loan information in the Direct Loan Program. Every Direct Loan

borrower receives disclosure information on the Direct Loan promissory

note prior to disbursement. The disclosure that is mailed from the

Direct Loan Servicing Center following any disbursement is in addition

to the initial disclosure.

Changes: None.

Executive Order 12866

These final regulations have been reviewed in accordance with

Executive Order 12866. Under the terms of the order the Secretary has

assessed the potential costs and benefits of this regulatory action.

The potential costs associated with the final regulations are those

resulting from statutory requirements and those determined by the

Secretary as necessary for administering this program effectively and

efficiently.

In assessing the potential costs and benefits--both quantitative

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

determined that the benefits of the regulations justify the costs.

The Secretary has also determined that this regulatory action does

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

exercise of their governmental functions.

Summary of Potential Costs and Benefits

The potential costs and benefits of these final regulations are

discussed elsewhere in this preamble under the following heading:

Analysis of Comments and Changes.

Assessment of Educational Impact

In the NPRM, the Secretary requested comments on whether the

proposed regulations would require transmission of information that is

being gathered by, or is available from, any other agency or authority

of the United States.

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

the Department has determined that the regulations in this document do

not require transmission of information that is being gathered by, or

is available from, any other agency or authority of the United States.

List of Subjects in 34 CFR Part 685

Administrative practice and procedure, Colleges and universities,

Education, Loan programs-education, Reporting and recordkeeping

requirements, Student aid, Vocational education.

(Catalog of Federal Domestic Assistance Numbers: 84.268, William D.

Ford Federal Direct Loan Program)

Dated: November 22, 1995.

Richard W. Riley,

Secretary of Education.

The Secretary amends part 685 of title 34 of the Code of Federal

Regulations to read as follows:

PART 685--WILLIAM D. FORD FEDERAL DIRECT LOAN PROGRAM

1. The authority citation for Part 685 continues to read as

follows:

Authority: 20 U.S.C. 1087a et seq., unless otherwise noted.

2. Section 685.102, paragraph (b) is amended by revising the

definition of ``School origination option 1,'' ``School origination

option 2,'' and ``Standard origination.''

Sec. 685.102 Definitions.

* * * * *

(b) * * *

School origination option 1: In general, under this option the

school performs the following functions: creates a loan origination

record, transmits the record to the Servicer, prepares the promissory

note, obtains a completed and signed promissory note from a borrower,

transmits the promissory note to the Servicer, receives the funds

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

record, transmits the disbursement record to the Servicer, and

reconciles on a monthly basis. The Servicer initiates the drawdown of

funds for schools participating in school origination option 1. The

Secretary may modify the functions performed by a particular school.

School origination option 2: In general, under this option the

school performs the following functions: creates a loan origination

record, transmits the record to the Servicer, prepares the promissory

note, obtains a completed and signed promissory note from a borrower,

transmits the promissory note to the Servicer, determines funding

needs, initiates the drawdown of funds, receives the funds

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

record, transmits the disbursement record to the Servicer, and

reconciles on a monthly basis. The Secretary may modify the functions

performed by a particular school.

* * * * *

Standard origination: In general, under this option the school

performs the following functions: creates a loan origination record,

transmits the record to the Servicer, receives funds electronically,

disburses funds, creates a disbursement record, transmits the

disbursement record to the Servicer, and reconciles on a monthly basis.

The Servicer prepares the promissory note, obtains a completed and

signed promissory note from a borrower, and initiates the drawdown of

funds for schools participating in standard

[[Page 61794]]

origination. The Secretary may modify the functions performed by a

particular school.

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

3. Section 685.201 is amended by revising paragraph (a)(2)

introductory text, and paragraph (b) to read as follows:

Sec. 685.201 Obtaining a loan.

(a) * * *

(2) If the student is eligible for a Direct Subsidized Loan or a

Direct Unsubsidized Loan, the Secretary or the school in which the

student is enrolled shall perform specific functions. Unless a school's

agreement with the Secretary specifies otherwise, the school shall

perform the following functions:

* * * * *

(b) Application for a Direct PLUS Loan. To obtain a Direct PLUS

Loan, the parent shall complete the application and promissory note and

submit it to the school at which the student is enrolled. The school

shall complete its portion of the application and promissory note and

submit it to the Servicer, which makes a determination as to whether

the parent has an adverse credit history. Unless a school's agreement

with the Secretary specifies otherwise, the school shall perform the

following functions: A school participating under school origination

option 2 shall draw down funds and disburse the funds. For a school

participating under school origination option 1 or standard

origination, the Servicer initiates the drawdown of funds, and the

school disburses the funds.

* * * * *

(Authority: 20 U.S.C. 1087a et seq., 1091a)

4. Section 685.301 is amended by redesignating paragraphs (a)(5)

and (a)(6) as paragraphs (a)(6) and (a)(7), respectively, adding a new

paragraph (a)(5) and by adding a new paragraph (d) to read as follows:

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

(a) * * *

(5) The date of loan origination is the date a school creates the

electronic loan origination record.

* * * * *

(d) Reporting to the Secretary. (1) A school that originates a loan

must submit the promissory note, loan origination record, and initial

and subsequent disbursement records to the Secretary no later than 30

days following the date of disbursement. A school must submit the loan

origination record and disbursement record to the Secretary no later

than 30 days following the date of disbursement for each subsequent

disbursement.

(2) A school that participates under standard origination must

submit the initial and subsequent disbursement record to the Secretary

no later than 30 days following the date of disbursement. A school must

submit the disbursement record to the Secretary no later than 30 days

following the date of disbursement for each subsequent disbursement.

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

(Approved by the Office of Management and Budget under Control

Number 1840-0672)

[FR Doc. 95-29126 Filed 11-30-95; 8:45 am]

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