Federal Family Education Loan Program

SUMMARY: The Secretary amends 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. The Secretary is making changes to the

FFEL Program regulations to conform the FFEL program regulations with

regulations and policies in effect in the William D. Ford Federal

Direct Student Loan Program, hereinafter referred to as the Direct Loan

Program.

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

affected parties do not have to comply with the information collection

requirements in sections 682.207, 682.209, 682.210, 682.211, 682.401,

682.412, 682.603, 682.604, and 682.605 until after the information

collection requirements contained in these sections have been approved

by the Office of Management and Budget under the Paperwork Reduction

Act of 1995.

FOR FURTHER INFORMATION CONTACT: Patricia Newcombe, FFELP Policy

Section Chief, or Barbara Bauman, FFELP Program Specialist, Loans

Branch, Policy Development Division, Policy, Training, and Analysis

Service, U.S. Department of Education, 600 Independence Avenue, S.W.

(room 3053, 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 amending 34 CFR Part 682 of the Department's

regulations to adopt certain policies and procedures that have been

used in the Direct Loan Program.

On September 21, 1995, the Secretary published a Notice of Proposed

Rulemaking (NPRM) in the Federal Register (60 FR 49130) proposing

changes to the FFEL regulations to conform with certain regulations and

policies in the Direct Loan program, wherever possible, to provide a

consistent approach in both programs. Many of the proposed changes

included in the NPRM were identified by commenters in response to an

earlier NPRM, published on October 7, 1994, also intended to conform

the two loan programs, but were outside the scope of the proposals in

that NPRM. In the final regulations published on November 29, 1994, the

Secretary promised to evaluate the merits and implications of these

additional proposals and include some of them in future regulations.

These final regulations reflect many of those proposals. These

regulations contain clarifying changes to certain existing provisions

of the FFEL program regulations.

The NPRM published for Part 682 in the Federal Register on

September 21, 1995 (59 FR 49130-49131) included a discussion of the

major issues surrounding the proposed changes, and the discussion will

not be repeated here. The following list summarizes those issues and

identifies the pages of the preamble to the NPRM on which a discussion

of those issues may be found:

Clarification of the definition of satisfactory repayment

arrangements for a borrower to renew eligibility for Title IV student

financial assistance (page 49130);

Borrower eligibility for a FFEL Consolidation loan for a

borrower in default status (page 49130);

Codification of the existing FFEL policy to allow a loan

to be disbursed in a single installment under certain circumstances

(page 49130);

Clarification of late disbursement provisions under

documented exceptional circumstances in sections 682.207(d)(2)(iii) and

682.604(e)(3) through amendments to those provisions (page 49130);

Lender application of borrower loan payments and treatment

of prepayments (page 49130);

Clarification of deferment eligibility for a borrower in

default status (page 49131);

Extension of administrative forbearance to a borrower who

ends an authorized deferment period in delinquent status (page 49131);

Treatment of loan insurance premiums when a school refunds

a loan or a portion thereof to a lender on behalf of a borrower (page

49131);

Treatment of payments received after loan discharge (page

49131);

Minor changes to provisions governing school loan

certification (page 49131); and

Technical changes to conform provisions governing a

school's determination of a borrower's withdrawal with the refund

provisions of section 668.22(j) (page 49131).

Substantive Revisions to the Notice of Proposed Rulemaking

Section 682.207 Due Diligence in Disbursing a Loan

The final regulations reflect an additional provision that allows a

single installment containing more than one loan disbursement to be

made prior to the midpoint of the loan period if the date of the

scheduled disbursement coincides with the beginning of the next

scheduled term for which the school has requested a disbursement as

provided for under law.

Section 682.209 Payment Application and Prepayment

The final regulations allow a lender to use a statement included in

the borrower's monthly billing statement or coupon book, in lieu of a

separate notice, to inform a borrower who submits full payments in

excess of the scheduled payment amount (without instructions to the

lender) regarding how those payments will be credited to the borrower's

account and how that crediting affects the borrower's next scheduled

due date for payment.

Section 682.211 Forbearance

The Secretary has changed the regulations to authorize lenders to

grant administrative forbearance to borrowers to cover any period of

delinquency that may exist after the close of a period of mandatory

forbearance, in addition to the close of an authorized deferment

period.

Section 682.607 Payment of a Refund to a Lender

The final regulations include a change to section 682.607(c)(1) to

clarify the interaction between sections 682.605 and 682.607 and

668.22(j) of the General Provisions regulations.

Analysis of Comments and Changes

In response to the Secretary's invitation in the NPRM, 40 parties

submitted comments on the proposed regulations. An analysis of the

comments and of the changes in the regulations since publication of the

NPRM follows.

[[Page 61751]]

Substantive issues are discussed under the section of the

regulations to which they pertain. Technical and other minor changes--

and suggested changes the Secretary is not legally authorized to make

under the applicable statutory authority--are generally not addressed.

General

Comments: Similar to the comments received in response to the

October 7, 1994 NPRM to conform the FFEL and Direct Loan programs, some

commenters suggested changes to the FFEL program regulations that were

not included in the NPRM. Some of the changes had nothing to do with

conforming the two loan programs. For example, one commenter suggested

that the Secretary revise the provisions in section 682.411(c) to

change the time frame within which a lender must send the first notice

of delinquency to a borrower. Some of the commenters repeated the

suggestions made in response to the October 7, 1994 NPRM to conform the

Direct Loan program regulations to the FFEL program regulations by

incorporating into the Direct Loan regulations the various requirements

in the FFEL regulations for documenting deferment and forbearance

eligibility, tracking deferments with statutory time maximums, and

backdating the start of deferment eligibility. Additionally, these

commenters recommended that FFEL regulations be revised to provide an

extended repayment option to FFEL borrowers, and to eliminate the

regulatory requirement in section 682.209(a)(6)(ii) that if a borrower

chooses a graduated or income-sensitive repayment schedule, the lender

may not provide the borrower with a repayment schedule that contains

any single installment that is more than three times greater than any

other installment.

Discussion: The Secretary does not believe that he currently has

the statutory authority to provide through regulations additional

repayment options for FFEL borrowers. Because of the constraints

presented by the statutory 10-year maximum time frame for repayment of

most FFEL program loans, the Secretary also does not believe that it is

advisable from a consumer protection standpoint to delete the provision

that restricts a lender's ability to establish a repayment schedule

that would provide for payments that are three times or more what the

borrower's normally scheduled payment would be. The Secretary does not

believe that an FFEL borrower is well served by establishing a

graduated or income-sensitive repayment schedule that provides low

payments initially only to lead to balloon payments that the borrower

is unable to meet later in the repayment period despite the use of

authorized forbearance. The Secretary also wishes to reiterate what he

said in the November 29, 1994 final regulations in response to

commenters who indicated that they believed the Secretary is required

to make the regulations and processes in the Direct Loan program

strictly conform to the FFEL regulations. The Secretary continues to

disagree with these commenters. There is no legal requirement that the

Secretary issue regulations to regulate internal agency processes in

the Direct Loan Program. The Department continues to assure FFEL

program participants that policies and procedures in the administration

of the Direct Loan program are consistent with FFEL regulatory

requirements to the extent practicable. Moreover, the Secretary is

committed to continuing to examine areas that affect substantive or

procedural rights of program participants that may require additional

regulations to ensure conformity between the programs. In regard to the

proposal to change the time frame for a lender to send the first notice

of delinquency to a borrower, the Secretary does not consider this

recommendation appropriate for this regulations package because it has

nothing to do with conformity between the FFEL and Direct Loan

programs. However, the Secretary will consider this proposal for future

regulations.

Section 682.200 Definitions

Comments: Most commenters agreed with the Secretary's decision to

clarify that a borrower may make satisfactory repayment arrangements on

a defaulted FFEL debt for purposes of regaining Title IV eligibility

only once. A couple of commenters urged the Secretary to allow a lender

to make documented exceptions to this requirement. Many commenters

recommended that the Secretary retain the terms ``consecutive'' and

``voluntary'' in current regulations to describe the series of full

monthly payments a borrower must make to regain eligibility. The

commenters believe it is necessary to clarify that a borrower cannot

regain eligibility through a lump sum payment and that payments secured

through involuntary means, such as wage garnishment or litigation, do

not count as one of the six required payments. Several commenters also

wanted the Secretary to clarify that the restriction on a borrower in

default status regaining Title IV eligibility only once did not apply

to that borrower's ability to make payments sufficient to move out of

default status on a loan.

Discussion: The Secretary agrees with the commenters that retaining

the terms ``consecutive'' and ``voluntary'' to describe the full

payments that must be made by the borrower to regain eligibility for

Title IV student assistance is essential for the reasons suggested by

the commenters. These terms were dropped from the NPRM proposal

inadvertently. The Secretary does not agree with the recommendation

that the regulations should be revised to authorize lenders to allow a

borrower to renew eligibility more than one time under certain

circumstances. This one-time restriction is statutory. The Secretary

wishes to clarify that this one-time restriction on regaining

eligibility in no way restricts the same borrower from bringing a loan

out of default status more than once.

Changes: A change has been made. The terms ``consecutive'' and

``voluntary'' have been reinserted into the definition to modify the

consecutive full payments that must be made by the borrower to regain

eligibility.

Section 682.201 Eligible Borrowers

Comments: Many commenters did not support the proposal to allow a

borrower to include a defaulted loan in an FFEL Consolidation loan

simply by agreeing to repay the Consolidation loan under an income-

sensitive repayment plan rather than by making the currently required

series of three consecutive payments on the defaulted loan. The

commenters also felt strongly that the similar borrower option that

exists in the Direct Loan program should be deleted from regulations.

These commenters believe that such a borrower should be required to

make actual payments on the defaulted loan to demonstrate an intent and

ability to repay the loan before the borrower is granted an additional

extension of federal credit in the form of a Consolidation Loan and,

possibly, additional Title IV student assistance to return to school.

These commenters also believe that this policy encourages the ``gaming

of the [student loan] system'' by allowing a borrower who has already

defaulted on one or more loans to avoid making any payments on any

Title IV student loan debt for a considerable period of time if the

borrower returns to school. One of these commenters pointed out that if

such a borrower cannot afford to make the three ``reasonable and

affordable'' payments on the defaulted debt, they would be equally

unable and unlikely to make scheduled payments on the Consolidation

loan. A couple of other commenters recommended that the regulations be

revised to retain the three

[[Page 61752]]

payment requirement, with the lender authorized to waive the

requirement based on documented exceptional circumstances if the

borrower demonstrates a willingness and ability to repay the

Consolidation loan. Some commenters supported the provision as proposed

in order to maintain parity between the FFEL and Direct Loan programs,

but some of those commenters questioned how the holder of the loan

would know or be able to verify that a borrower has agreed to repay the

loan under an income-sensitive repayment plan.

Discussion: The Secretary acknowledges the commenters' concerns

regarding providing this option to borrowers already in default on an

FFEL program loan. However, the Secretary believes that a significant

number of borrowers in the past have defaulted because they could not

afford to make required loan payments. When a borrower consolidates a

defaulted loan or loans under an income-sensitive repayment plan (or,

in the Direct Loan program, under an income-contingent repayment plan)

the amount the borrower will be required to repay will be one the

borrower can afford. The Secretary believes that an income-sensitive

payment amount coupled with the extended repayment period generally

available in the FFEL Consolidation loan program, significantly lessens

the risk that the borrower will default again. The Secretary also does

not believe that three consecutive monthly ``reasonable and

affordable'' payments from the borrower, which could be as low, for

example, as $2 per month, necessarily is a more significant indicator

of whether a borrower will default on the new Consolidation loan. It is

correct that borrowers paying off defaulted loans through loan

consolidation regain immediate eligibility for additional Title IV

student assistance and perhaps represent a slightly greater risk of

default on an even larger debt load. However, this risk was created

when Congress amended the HEA to allow borrowers to repay defaulted

loans through a Consolidation loan. The Secretary's decision to allow

defaulted borrowers to receive a Consolidation loan by agreeing to

repay the loan through an income-sensitive repayment arrangement does

not significantly increase that risk, and in fact, is likely to reduce

defaults. The Secretary believes that borrowers consolidating their

defaulted loans and regaining eligibility for Title IV student

assistance in order to obtain additional education or training are

worth the risk if this second chance leads to gainful employment that

will ultimately translate into greater returns to the FFEL program and

the federal taxpayers.

Mindful of the unease with which many in the student aid community

view this conforming change in FFEL regulations, the Secretary is

committed to monitoring the repayment records of these borrowers

through the use of the National Student Loan Data System over the next

few years. If the repayment patterns of such borrowers in the FFEL and

Direct Loan programs reach an unacceptable level of repeat defaults by

these borrowers, the Secretary will reconsider this policy in the FFEL

and Direct Loan programs.

With regard to the question about how a loan holder asked to

provide a certification to the consolidating lender is to know or

verify that the borrower has agreed to an income-sensitive repayment

plan option, the Secretary notes that it is the obligation of the

consolidating lender to determine if the borrower qualifies for the

consolidation loan. The consolidating lender will have to determine

whether the borrower has chosen an income-sensitive repayment plan or

needs to make the required monthly payments to the holder of the

defaulted loan. The Secretary also wishes to remind those commenters

who expressed concern about this approach that lenders in the FFEL

program always have the option not to make an FFEL Consolidation loan.

Changes: None.

Section 682.207 Due Diligence in Disbursing a Loan

Section 682.207(c)(4)

Comments: All of the commenters agreed with the proposal to codify

into the FFEL regulations the existing policy that allows a lender to

include more than one disbursement of a multiply-disbursed loan in the

same installment scheduled to be sent to the school if the midpoint of

the loan period has expired when the first disbursement is scheduled to

be made. Several commenters, however, asked that the provision be

revised to reflect the exception provided in the law for term-based

schools that allows a second or subsequent disbursement to be made

prior to the mid-point of the loan period if that is necessary to

coincide with the school's next scheduled term. The commenters pointed

out that the proposed rule would prevent a term-based school from

receiving two disbursements in a single installment if the start of the

next scheduled term was before the mid-point of the loan period.

Another commenter asked that the phrase ``for which the loan was made''

be inserted after the phrase ``loan period'' to clarify what the

midpoint is based on.

Discussion: The Secretary agrees with the commenters that these

revisions to the proposed provision are warranted.

Changes: Section 682.207(c)(4) has been revised to provide that

such a single installment can be made on the earlier of the mid-point

of the loan period for which the loan was made or the beginning of the

school's next scheduled term.

Section 682.207(d)(4)

Comments: All the commenters endorsed the clarifying changes made

to the late disbursement provisions in section 682.207(d)(4) and

corresponding changes made in section 682.604. One commenter suggested

an additional change to section 682.207(d)(2)(iii) to clarify that a

lender is not required to wait for notification from the school but may

presume that exceptional circumstances exist when making a disbursement

from the 61st day through the 90th day after the date the student

ceased enrollment on at least a half-time basis or the expiration date

of the period of enrollment for which the loan was intended. Upon

receipt of the disbursement, the school would be required to determine

and document in the student's file that exceptional circumstances

existed and deliver the loan proceeds or return the disbursement to the

lender.

Discussion: The Secretary agrees that this further clarification is

useful. The Secretary believes these procedures for lender and school

handling of a late disbursement during this period will be simple and

efficient for both the lender and school.

Changes: Section 682.207(d)(2)(iii) has been revised to reflect the

respective lender and school responsibilities and processes for

handling late disbursements during the last 30 days of the 90-day

period during which late disbursements may be made.

Section 682.209(b) Payment Application and Prepayment

Comments: One commenter recommended an additional change to section

682.209(b)(1) to clarify that a lender has the option to apply any

payment to late charges, collection costs, outstanding interest, and

outstanding principal in whatever order the lender chooses. The

commenter believes that the provision, as currently written, requires

application of payments first to late charges and collection costs,

then to outstanding interest, and finally to outstanding

[[Page 61753]]

principal. Most commenters supported the reduction (from three to one)

in section 682.209(b)(2)(ii) of the number of full excess payments a

lender must receive before the lender, absent instructions from the

borrower, is authorized to interpret the borrower's intent on the

handling of the prepayment and to apply them to future installment

payments on the loan. Some commenters, however, objected to changing

what had been a lender option in the handling of prepayments submitted

without borrower instructions to a requirement that the lender treat

them as intended for future installments. These commenters believe that

the lender is in the best position to review the borrower's repayment

pattern and to determine the borrower's intentions in making multiple

payments. Several commenters also noted that they interpreted the

prepayment provision of (b)(2)(ii) to apply to multiple partial

payments made by the borrower that the lender accumulates as well as

additional full payments. Other commenters recommended clarifying that

a lender's determination of whether a prepayment amount equals one or

more full scheduled payments should be made only after late charges and

collection costs have been paid. These same commenters also requested

that an additional sentence be added to (b)(2)(ii) to clarify that the

required notice to the borrower that the borrower's due date has been

advanced did not apply to borrowers making prepayments while they are

in an in-school, grace, deferment, or forbearance period because they

do not have a scheduled due date to which a future payment would be

applied. Many commenters disagreed strongly with the requirement in

(b)(2)(ii) that a lender provide the borrower with a notice informing

the borrower that the payments have been applied to future installments

and reminding the borrower of the repayment obligation and the next

scheduled due date. The commenters believe that this requirement is

overly prescriptive and burdensome to lenders and that it is

unnecessary to routinely notify the borrower that the due date has been

advanced. They also believe that a separate notification of this nature

outside the normal billing process is confusing to borrowers,

especially if the lender is generating them routinely to a borrower who

continues to submit additional full payments without instructions for

their handling. Many of these commenters recommended that a lender be

provided the alternative of providing this information through the use

of the billing statement or coupon book rather than providing a

separate notification after the funds have been applied as the

regulation proposes. They indicated that borrower coupon books and

billing statements are already being used to provide this kind of

information.

Discussion: The Secretary disagrees with the one commenter that

recommended that the payment application instruction in (b)(1) should

be modified to clarify that a lender may apply payments in any order to

late charges, collection costs, outstanding accrued interest and

principal. The language on payment application was modified, at the

request of lenders, in the FFEL regulations published on December 18,

1992 to clarify that a lender had the option to apply payments or

prepayments to outstanding late charges, collection costs, and

outstanding accrued interest before applying the remainder to

principal. The Secretary believes that the provision as currently

written provides lenders with the necessary flexibility in applying

payments and is consistent with how the Secretary is applying payments

in the Direct Loan Program.

The Secretary also disagrees that the treatment of additional full

payments submitted without instructions from the borrower for their

handling (e.g., multiple payment coupons enclosed with the check, a

written note on the billing statement or other written instructions, or

oral instructions to the lender documented in the borrower's file)

should be at the option of the lender. The Secretary now believes that,

absent the borrower's instruction, the most responsible approach to

handling additional full payments, and the likely intent of the

borrower in the majority of cases, is to apply that amount to future

installment payments on the loan and to advance the borrower's next

scheduled due date. In many instances, this approach will protect a

borrower who has submitted a large prepayment to cover a period when he

or she will not be available to make the normally scheduled payments

from entering a delinquent status. Mandating this treatment of such

prepayments by lenders also provides for a consistent, standardized

approach for all borrowers and is consistent with the Secretary's

treatment of additional full payments submitted without borrower

instructions in the Direct Loan program. The Secretary also wishes to

clarify that some commenters' interpretation that the provisions in

(b)(2)(ii) apply to accumulated partial payments received over time

from the borrower without instructions is incorrect. The Secretary

believes that a lender should only interpret that the borrower's

intent, absent instructions, is to apply the excess payments to future

installments if the prepayment amount submitted is at least one

additional full payment. The Secretary does not believe that this is

generally the borrower's intent when a borrower submits small

additional amounts in excess of the scheduled payment amount. The

Secretary expects these partial payment amounts, unless a lender

receives specific instructions from the borrower directing the lender

to accumulate them and eventually apply them to a future installment,

to be applied to outstanding principal (unless the borrower has

outstanding late or collection charges or outstanding accrued interest

to which the lender wishes to apply the partial payment before applying

the remainder to principal, as provided for under (b)(1) of this

section) with no advancement of the borrower's next scheduled due date.

The Secretary agrees that the determination of whether the excess

payment amount is sufficient to require the handling specified in

(b)(2)(ii) should be made after any late or collection charges and

outstanding interest are taken care of but does not believe that this

needs to be clarified in the regulations. The Secretary has made it

clear that the payment application provisions in (b)(1) apply to all

payments, including prepayments, so the Secretary believes any further

clarification in the regulations is unnecessary. The Secretary agrees

with the many commenters who recommended that the Secretary allow the

use of payment coupons and billing statements as alternatives to the

borrower notification required in (b)(2)(ii), provided the borrower is

effectively notified of the lender's handling of the excess payment

amounts and the advancement of the borrower's next scheduled due date.

The Secretary also agrees that notification of the advancement of the

payment due date is inappropriate for borrowers who make prepayments

without instructions during in-school, grace, deferment, and

forbearance periods when no payments are due.

Changes: The regulations have been revised in section

682.209(b)(2)(ii) to allow a lender to use a billing statement or a

payment coupon book to provide information to the borrower on how the

lender will treat additional full payment amounts if the borrower

submits one or more additional payments without instructions to the

lender as to their handling. The Secretary believes that a

[[Page 61754]]

prominent standard statement on each billing statement or in the

payment coupon book informing the borrower that the lender will apply

the payments to future installments and will advance the borrower's

next scheduled payment due date consistent with the number of

additional full payments received is comparable to the separate

notification the lender may send after receipt of such additional

payments. A sentence has also been added to this provision to clarify

that information related to advancing the borrower's scheduled payment

due date need not be provided if the borrower makes the prepayment

during an in-school, grace, deferment, or forbearance period.

Section 682.210 Deferment

Comments: Many commenters objected to the proposed clarifying

language that would restrict a defaulted borrower's eligibility for

deferment, as a result of arrangements made with the holder of the

loan, to the period up to the lender's filing of a default claim with

the guaranty agency. Many of these commenters felt strongly that a

lender should have the maximum flexibility in working with a borrower,

at least up until the default claim is paid by the guaranty agency, to

avert the claim payment, the point at which the borrower is subject to

adverse consequences of the default and the default becomes a cost to

the federal government. These commenters felt this more restrictive

language would severely hamper supplemental preclaims assistance

efforts of guaranty agencies that take place during this period. A

couple of these commenters recommended that the clarifying language be

revised to allow a lender to retrieve a loan from a guaranty agency

even after default claim payment if satisfactory arrangements can be

made with the borrower. One commenter recommended that the provision be

revised to provide that a borrower is not eligible for deferment after

default unless the borrower's eligibility for the deferment began prior

to the default or, if that is not the case, unless the borrower makes

satisfactory repayment arrangements with the lender prior to guaranty

agency payment of the default claim. Another commenter recommended that

language be included in this provision that clarifies that a lender's

granting of a deferment after the filing of the default claim is at the

lender's discretion. Several commenters recommended eliminating the

word ``repayment'' from the phrase ``satisfactory repayment

arrangements'' in order to clarify that the payment arrangements made

with the holder for the purposes of this provision need only be

acceptable to the holder, as opposed to meeting the statutory

requirement for a borrower who is in default to regain eligibility for

additional Title IV student assistance. Another commenter recommended

that the Secretary retain the current regulatory language because the

commenter interprets the provision as allowing a borrower in default to

be entitled to a deferment if satisfactory repayment arrangements are

made with the holder, regardless of whether the holder is a lender, a

guaranty agency, or the Secretary.

Discussion: The Secretary believes that clarification of this

provision is necessary because, as currently written, it suggests that

a borrower who has defaulted on the repayment of a loan and whose loan

is held by a guaranty agency or the Secretary can become eligible for

deferment of repayment on that loan by making satisfactory repayment

arrangements as that term is defined for regaining eligibility for

Title IV student assistance. This has never been the Secretary's

interpretation of the law with regard to deferment eligibility. The HEA

excludes defaulted borrowers from certain program benefits, a major one

of these being deferments. However, through this regulatory provision,

lenders have always had the ability, at their option, to make payment

arrangements with a borrower even after 180 days of delinquency in

order to avert a default claim. After a guaranty agency has paid a

claim, however, a borrower can regain eligibility for deferment on that

loan only through loan rehabilitation or lender repurchase of that

loan. A borrower who makes satisfactory repayment arrangements with a

guaranty agency to regain eligibility for Title IV student assistance,

as provided for under section 428F(b) of the HEA, does not regain

deferment eligibility on that defaulted loan that remains with the

agency. Borrowers are expected to continue to make payments on that

loan after the six required payments necessary to regain eligibility,

but guaranty agencies are strongly encouraged to provide forbearance to

such borrowers on the loan during the borrower's in-school period. Only

if the loan is successfully rehabilitated or a lender repurchase is

arranged does the borrower regain deferment eligibility. After

consideration of the comments, the Secretary has decided that lenders

and guaranty agencies should be allowed to work with defaulted

borrowers to avert default claim payment through the granting of

deferments and other administrative methods provided in the FFEL

program until the guaranty agency pays the claim. This provides

borrowers with ample opportunity to avert the consequences of default.

The Secretary does not believe this provision should apply after

default claim payment unless the lender determines the default claim

was filed in error and recalls the loan from the agency. At the point a

default claim is paid, Federal taxpayer funds have been used to repay

the borrower's debt and the guaranty agency has lost the use of that

money for other program purposes. The Secretary agrees that the phrase

``satisfactory repayment arrangements'' needs to be modified to avoid

any misinterpretation of what is required for purposes of this

provision. The term satisfactory repayment arrangements, as currently

defined, is intended to apply only to the requirements a defaulted

borrower must meet to regain Title IV eligibility. For purposes of this

provision, the arrangements must only be acceptable to the lender and

are left to the lender and borrower to work out. The Secretary also

agrees that a lender's acceptance of payments or granting of deferments

or forbearance as part of satisfactory arrangements to avert a default

claim payment at the post-180 or post-240 day stage of delinquency are

strongly encouraged, but optional on the part of the lender.

Changes: A change has been made. This provision of the regulations

has been revised to provide for deferment eligibility of a defaulted

borrower up to the payment of a default claim on the loan if the lender

agrees to make payment arrangements with the borrower. The phrase

``satisfactory repayment arrangements'' has been revised to read

``payment arrangements acceptable to the lender.''

Section 682.211 Forbearance

Comments: All commenters agreed with the Secretary's proposal to

allow lenders to apply an administrative forbearance in situations when

a borrower ends a period of deferment in a delinquent status. Many

commenters also recommended that the provision be expanded to include

those borrowers ending a period of mandatory forbearance in a

delinquent status. Another commenter recommended the addition of the

phrase ``until the next due date is established in accordance with

section 682.209(a)(3)(ii)(B)'' at the end of the provision.

Discussion: The Secretary agrees with the commenters.

Changes: A change has been made to include borrowers who have ended

a period of mandatory forbearance in a delinquent status and the

recommended

[[Page 61755]]

phrase related to next payment due date has been added.

Section 682.401(b)(10)(vi)(B) Basic Program Agreement

Comments: Several commenters requested clarification as to whether

the amount of the insurance premium to be returned was to be

proportional in instances where a school refunds a portion of a loan

that is less than a full disbursement to a lender, and the lender must

refund the insurance premium to the borrower. Many commenters requested

that the phrase ``a portion of the loan'' be replaced with the phrase

``full disbursement of the loan'' to reflect the fact that the

Secretary was maintaining his existing policy that such a refund is

necessary only if at least a full disbursement of the loan is returned.

Another commenter requested that the regulations be revised to be

consistent with the Direct Loan program by requiring that the refund of

the insurance premium be applied to the borrower's loan balance rather

than be refunded to the borrower. Other commenters suggested that the

phrase ``within 120 days of disbursement'' be inserted to clarify the

timeframe during which the refund of the insurance premium must be

done.

Discussion: The Secretary clarifies that the lender should pro-rate

the insurance premium fee. The Secretary also agrees that the refunds

of the insurance premium should be refunded through application to the

borrower's account, not a cash refund to the borrower. The Secretary

does not agree that reference to ``within 120 days of disbursement''

should be inserted in section 682.401(b)(10)(vi)(B)(1) because the

Secretary believes that the timing of the school's refund to the lender

on behalf of the student should not prevent the borrower from receiving

the benefit of the refund of the insurance premium.

Changes: The regulations have been revised to reflect that a

proportional amount of the insurance premium should be refunded if the

refund is less than the amount of a loan disbursement and that a refund

for this purpose is an application against the borrower's loan account

by the lender.

Section 682.402 (l)(1) Death, Disability, Closed School, False

Certification and Bankruptcy Discharge

Comments: Many commenters agreed with the concept of the proposed

regulations but requested that the regulations be revised to clarify

that all payments should be returned to the sender, as is the case in

the Direct Loan program, and that any notification of no further

obligation to repay a loan discharged in bankruptcy or loan cancelled

due to the borrower's total and permanent disability should be sent to

the borrower. Many comments also recommended that the regulations be

revised to provide that the lender return payments received only after

the guaranty agency has paid the claim. The commenters were concerned

that until the agency has reviewed and made a determination on the

lender's claim, it is risky to refund payments.

Discussion: The Secretary agrees with the commenters that lenders

and guaranty agencies should return payments on all discharged loans to

the sender consistent with the handling of discharges in the Direct

Loan program. However, the notification that there is no further

obligation to repay the loan should always be directed to the borrower.

The Secretary also agrees that payments received on discharged loans

should not be returned until the discharge claim is paid by the

guaranty agency.

Changes: The regulations have been revised to reflect the

commenters' recommendations.

Section 682.412(c) Consequences of the Failure of a Borrower or

Student To Establish Eligibility

Comments: Most commenters supported the Secretary's clarification

to allow a borrower 30 days from the date a final demand letter is

mailed by the lender to repay a loan amount that the borrower was

ineligible to receive. One commenter disagreed with the proposal,

stating that in a large agency it may be impossible to verify the date

the letter is mailed unless the borrower retains the envelope with the

post office cancellation stamp on it.

Discussion: The Secretary notes that lenders and guaranty agencies

are currently required to maintain records establishing the dates

certain collection notices are mailed (as required by 34 CFR

682.410(b)(1)(vi) and 682.411). Therefore, the Secretary believes that

lenders will be able to determine when a letter is mailed for this

purpose. The Secretary is concerned by the commenter's claim that large

agencies are not tracking these dates and will evaluate whether reviews

of lender operations in this area are necessary.

Changes: None.

Section 682.603 Certification by a Participating School in Connection

With a Loan Application

Comments: All commenters agreed with the Secretary's proposal that

in loan proration situations where a student is enrolled in a program

of study with less than a full academic year remaining, the school will

not be required to recalculate the amount of the loan if the number of

hours for which an eligible student is enrolled changes after the

school certifies the loan. One commenter suggested the insertion of the

phrase ``or the student in the case of a PLUS loan'' in section

682.603(g) of the regulations because the commenter was concerned that

in the case of the PLUS loan, the school would likely assess the

dependent student any fee since they would be unable to assess the

parent borrower.

Discussion: The Secretary agrees with the minor technical

correction to section 682.603(g).

Change: The phrase recommended by the commenter has been inserted

in section 682.603(g).

Section 682.605 Determining the Date of a Student's Withdrawal

Comments: All the commenters agreed with the Secretary's proposal

to reinsert into the regulations the guidance on determining the date

of a student's withdrawal in the case of a summer period of

nonenrollment (``summer break'') that had been inadvertently deleted

from the regulations. One commenter suggested the provision be revised

to reference the fact that the summer break could include summer terms

during which the school offers classes, but most students are generally

not required to attend. One commenter recommended that the ``summer

break'' approach be extended to other periods of nonenrollment during

the regular academic year. Several commenters also pointed out that an

earlier revision of the regulations in section 682.607(c), governing

the school's timeframe for making a refund to a lender for a student

who has withdrawn, could create, in the case of unofficial withdrawals,

unintended potential liability for schools. The commenters recommended

that the 60 days for a timely refund be based on the date the school

determines that a student has unofficially withdrawn as it was

formerly, not the date of withdrawal, which may have taken place weeks,

if not months, before the school determines the student has dropped

out. The commenters also suggested that section 682.607(c)(1) also be

revised to clarify what constitutes timely payment to the lender under

the ``summer break'' language of section 682.605.

Discussion: The Secretary does not agree that the approach to

determining student withdrawal following a period of summer

nonenrollment should be more broadly applied to other periods of

nonenrollment during the academic

[[Page 61756]]

year. Since this information is used to convert a borrower to repayment

in a timely manner, the Secretary believes it is not generally

appropriate, except in connection with a summer period, to delay the

school's determination of student withdrawal. The Secretary agrees that

the summer period of nonenrollment can include summer terms during

which the school offers classes, but most students are generally not

expected to attend. The Secretary also agrees that the technical

changes to section 682.607(c)(1) are needed for successful coordination

between section 668.22(j) of the General Provisions regulations and

sections 682.605 and .607 of the FFEL program regulations.

Change: None.

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 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: November 24, 1995.

Richard W. Riley,

Secretary of Education.

The Secretary amends 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.

Sec. 682.200 [Amended]

2. Section 682.200, paragraph (b) is amended by revising the

definition of ``Satisfactory repayment arrangement'' by adding at the

end of the paragraph (1), ``A borrower may only obtain the benefit of

this paragraph with respect to renewed eligibility once.'' and by

removing in paragraph (2) the reference to ``34 CFR

682.201(c)(iii)(C)'' and adding, in its place, ``34 CFR

682.201(c)(1)(iii)(C).''

3. Section 682.201 is amended by revising paragraph (c)(1)(iii)(C)

to read as follows:

Sec. 682.201 Eligible borrowers.

* * * * *

(c) * * *

(1) * * *

(iii) * * *

(C) In a default status and has either made satisfactory repayment

arrangements as defined in section 682.200(b)(2) or has agreed to repay

the consolidation loan under the income-sensitive repayment plan

described in Sec. 682.209(a)(6)(viii).

* * * * *

4. Section 682.207 is amended by revising paragraph (c)

introductory text; adding a new paragraph (c)(4) and revising

paragraphs (d)(1) and (d)(2)(iii) to read as follows:

Sec. 682.207 Due diligence in disbursing a loan.

* * * * *

(c) A lender shall disburse any Stafford or PLUS loan as follows:

* * * * *

(4) If the first disbursement of a loan is scheduled to be made on

the date of the second scheduled disbursement, the loan may be

disbursed in a single installment. This date may be on the earlier of--

(i) The midpoint of the loan period for which the loan was made; or

(ii) A date which coincides with the beginning of the next

scheduled term as provided for in the exception clause of paragraph

(c)(3) of this section.

(d)(1) A lender may disburse loan proceeds after the student has

ceased to be enrolled on at least a half-time basis or after the

expiration date of the period of enrollment for which the loan was

intended, in accordance with paragraphs (d) (2) and (3) of this

section.

(2) * * *

(iii) In exceptional circumstances within 30 days after the period

described in paragraph (d)(2)(ii) of this section. Between the 61st and

up through the 90th day, a lender may presume that exceptional

circumstances exist and make the disbursement. The school shall review

the borrower's circumstances and either determine that exceptional

circumstances exist or return the loan proceeds to the lender. The

school shall document the exceptional circumstances in the student's

file.

* * * * *

5. Section 682.209 is amended by revising paragraph (b) to read as

follows:

Sec. 682.209 Repayment of a loan.

* * * * *

(b) Payment application and prepayment. (1) The lender may credit

the entire payment amount first to any late charges accrued or

collection costs and then to any outstanding interest and then to

outstanding principal.

(2)(i) The borrower may prepay the whole or any part of a loan at

any time without penalty.

(ii) If the prepayment amount equals or exceeds the monthly payment

amount under the repayment schedule established for the loan, the

lender shall apply the prepayment to future installments by advancing

the next payment due date, unless the borrower requests otherwise. The

lender must either inform the borrower in advance using a prominent

statement in the borrower coupon book or billing statement that any

additional full payment amounts submitted without instructions to the

lender as to their handling will be applied to future scheduled

payments with the borrower's next scheduled payment due date advanced

consistent with the number of additional payments received, or provide

a notification to the borrower after the payments are received

informing the borrower that the payments have been so applied and the

date of the borrower's next scheduled payment due date. Information

related to next scheduled payment due date need not be provided to

borrower's making such prepayments while in an in-school, grace,

deferment, or forbearance period when payments are not due.

* * * * *

6. Section 682.210 is amended by revising paragraph (a)(8) to read

as follows:

Sec. 682.210 Deferment.

(a) * * *

(8) A borrower whose loan is in default is not eligible for a

deferment, unless the borrower has made payment arrangements acceptable

to the lender prior to the payment of a default claim by a guaranty

agency.

* * * * *

7. Section 682.211 is amended by adding a new paragraph (f)(9) to

read as follows:

Sec. 682.211 Forbearance.

* * * * *

(f) * * *

(9) For a period of delinquency that may remain after a borrower

ends a period of deferment or mandatory

[[Page 61757]]

forbearance until the next due date is established in accordance with

Sec. 682.209(a)(3)(ii)(B).

* * * * *

8. Section 682.401(b)(10)(vi)(B), is revised to read as follows:

Sec. 682.401 Basic program agreement.

* * * * *

(b) * * *

(10) * * *

(vi) * * *

(B) The premium or an appropriate prorated amount of the premium

must be refunded by application to the borrower's account if--

(1) The loan or a portion of a loan is returned by the school to

the lender;

(2) Within 120 days of disbursement, the loan is repaid in full;

(3) Within 120 days of disbursement, the loan check has not been

negotiated; or

(4) Within 120 days of disbursement, the loan proceeds disbursed by

electronic funds transfer or master check in accordance with

Sec. 682.207(b)(1)(ii) (B) and (C) have not been released from the

restricted account maintained by the school.

* * * * *

9. Section 682.402 is amended by revising paragraph (c)(3) and by

revising paragraphs (l)(1) and (l)(2) as set forth below; by amending

paragraph (l)(3) by replacing the reference to ``(l)(2)'' with

``(l)(1).''

Sec. 682.402 Death, disability, closed school, false certification,

and bankruptcy payments.

* * * * *

(c) * * *

(3) After being notified that the guaranty agency has paid a

disability discharge claim, the lender shall return to the sender any

payments received by the lender after the date that the borrower became

totally and permanently disabled as certified by the physician. At the

same time that the lender returns the payment, it shall notify the

borrower that there is no obligation to repay a loan discharged on the

basis of disability.

* * * * *

(l) * * *

(1) If the guaranty agency receives any payments from or on behalf

of the borrower on or attributable to a loan that has been discharged

in bankruptcy on which the Secretary previously paid a bankruptcy

claim, the guaranty agency shall return 100 percent of these payments

to the sender. The guaranty agency shall promptly return, to the

sender, any payment on a cancelled or discharged loan made by the

sender and received after the Secretary pays a closed school or false

certification claim. At the same time that the agency returns the

payment, it shall notify the borrower that there is no obligation to

repay a loan discharged on the basis of death, disability, bankruptcy,

false certification, or closing of the school.

(2) The guaranty agency shall remit to the Secretary all payments

received from a tuition recovery fund, performance bond, or other third

party with respect to a loan on which the Secretary previously paid a

closed school or false certification claim.

* * * * *

10. Section 682.412 is amended by revising paragraph (c) to read as

follows:

Sec. 682.412 Consequences of the failure of a borrower or student to

establish eligibility.

* * * * *

(c) In the final demand letter transmitted under paragraph (a) of

this section, the lender shall demand that within 30 days from the date

the letter is mailed the borrower repay in full any principal amount

for which the borrower is ineligible and any accrued interest,

including interest and all special allowance paid by the Secretary.

* * * * *

11. Section 682.603 is amended by adding a new paragraph (f)(4) and

by revising paragraph (g) to read as follows:

Sec. 682.603 Certification by a participating school in connection

with a loan application.

* * * * *

(f) * * *

(4) In prorating a loan amount for a student enrolled in a program

of study with less than a full academic year remaining, the school need

not recalculate the amount of the loan if the number of hours for which

an eligible student is enrolled changes after the school certifies the

loan.

(g) A school may not assess the borrower, or the student in the

case of a PLUS loan, a fee for the completion or certification of any

FFEL Program form or information or for providing any information

necessary for a student or parent to receive a loan under part B of the

Act or any benefits associated with such a loan.

12. Section 682.604 is amended by removing paragraph (e)(3),

redesignating paragraph (e)(4) as paragraph (e)(3), in redesignated

paragraph (e)(3), in the introductory text, remove ``the lender or

guaranty agency has not informed the school that it prohibits a late

disbursement as permitted by Sec. 682.207(d)(2)(i), and if''.

13. Section 682.605 is revised to read as follows:

Sec. 682.605 Determining the date of a student's withdrawal.

(a) Except in the case of a student who does not return for the

next scheduled term following a summer break, which includes any summer

term(s) in which classes are offered but students are not generally

required to attend, a school shall follow the procedures in 34 CFR

668.22(j) for determining the student's date of withdrawal. In the case

of a student who does not return from a summer break, the school must

follow the procedures in 34 CFR 668.22(j) except that the school shall

determine the student's withdrawal date no later than 30 days after the

first day of the next scheduled term.

(b) The school shall use the withdrawal date determined under 34

CFR 668.22(j) for the purpose of reporting to the lender the date that

the student has withdrawn from the school.

(c) For the purpose of a school's reporting to a lender, a

student's withdrawal date is the month, day and year of the withdrawal

date.

* * * * *

14. Section 682.607(c) is revised to read as follows:

Sec. 682.607 Payment of a refund to a lender.

* * * * *

(c) Timely payment. A school shall pay a refund that is due--

(1) Within 60 days of the date that the student officially

withdraws, is expelled, or the institution determines that a student

has unofficially withdrawn, as determined in accordance with 34 CFR

668.22(j) and Sec. 682.605.

(2) In the case of a student who does not return to school at the

expiration of an approved leave of absence under 34 CFR 668.22(j),

within 30 days of the earlier of the date of expiration of the leave of

absence or the date the student notifies the institution that the

student will not be returning to the institution after the expiration

of an approved leave of absence.

* * * * *

[FR Doc. 95-29179 Filed 11-30-95; 8:45 am]

BILLING CODE 4000-01-P