Federal Perkins Loan Program

DEPARTMENT OF EDUCATION

34 CFR Part 674

RIN 1840-AC70

Federal Perkins Loan Program

AGENCY: Department of Education.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Secretary proposes to amend the Federal Perkins Loan

Program regulations. These proposed regulations are needed to implement

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

resulting from the Higher Education Amendments of 1998 (the 1998

Amendments). The proposed regulations reflect the provisions of the

1998 Amendments that affect the institutions that participate in, and

borrowers who have loans made under, the Federal Perkins Loan Program.

These proposed regulations would expand borrower benefits under the

Federal Perkins Loan program by increasing loan limits, expanding

borrower eligibility for deferments and cancellations, establishing a

loan rehabilitation program for borrowers in default on their Federal

Perkins Loans, establishing an incentive repayment program, and

providing a closed school discharge.

DATES: We must receive your comments by September 15, 1999.

ADDRESSES: Address all comments about these proposed regulations to Ms.

Gail McLarnon, Program Specialist, Policy Development Division, Office

of Student Financial Assistance, U.S. Department of Education, 400

Maryland Avenue, SW., Room 3042, Regional Office Building 3,

Washington, DC 20202-5449. If you prefer to send your comments through

the Internet, use the following address: [email protected]

If you want to comment on the information collection requirements

you must send your comments to the Office of Management and Budget at

the address listed in the Paperwork Reduction Act section of this

preamble. You may also send a copy of these comments to the Department

representative named in this section.

FOR FURTHER INFORMATION CONTACT: Ms. Gail McLarnon, Program Specialist,

U.S. Department of Education, 400 Maryland Avenue, SW., Room 3045,

Regional Office Building 3, Washington, DC 20202-5449. Telephone: (202)

708-8242. If you use a telecommunications device for the deaf (TDD),

you may call the Federal Information Relay Service at 1-800-877-8339.

Individuals with disabilities may obtain this document in an

alternate format (e.g., Braille, large print, audiotape, or computer

diskette) on request to the contact person listed in the preceding

paragraph.

SUPPLEMENTARY INFORMATION:

Invitation to Comment

We invite you to submit comments regarding these proposed

regulations. To ensure that your comments have maximum effect in

developing the final regulations, we urge you to identify clearly the

specific section or sections of the proposed regulations that each of

your comments addresses and to arrange your comments in the same order

as the proposed regulations.

We invite you to assist us in complying with the specific

requirements of Executive Order 12866 and its overall requirement of

reducing regulatory burden that might result from these proposed

regulations. Please let us know of any further opportunities we should

take to reduce potential costs or increase potential benefits while

preserving the effective and efficient administration of the program.

During and after the comment period, you may inspect all public

comments about these proposed regulations in Room 3045, Regional Office

Building 3, 7th and D Streets, SW., Washington, D.C., between the hours

of 8:30 a.m. and 4:00 p.m., Eastern time, Monday through Friday, of

each week except Federal holidays.

Assistance to Individuals With Disabilities in Reviewing the

Rulemaking Record

On request, we will supply an appropriate aid, such as a reader or

print magnifier, to an individual with a disability who needs

assistance to review the comments or other documents in the public

rulemaking docket for these proposed regulations. If you want to

schedule an appointment for this type of aid, you may call (202) 205-

8113 or (202) 260-9895. If you use a TDD, you may call the Federal

Information Relay Service at 1-800-877-8339.

General

Background

On October 7, 1998, President Clinton signed into law the Higher

Education Amendments of 1998 (the 1998 Amendments), Pub. L. 105-244,

that amended the Higher Education Act of 1965, as amended (the HEA).

This notice of proposed rulemaking (NPRM) addresses the changes that

affect the Federal Perkins Loan Program.

Negotiated Rulemaking

Section 492 of the HEA requires that, before publishing any

proposed regulations to implement programs under Title IV of the Act,

the Secretary obtain public involvement in the development of the

proposed regulations. After obtaining advice and recommendations, the

Secretary must conduct a negotiated rulemaking process to develop the

proposed regulations. All published proposed regulations must conform

to agreements resulting from the negotiated rulemaking process unless

the Secretary reopens the negotiated rulemaking process or provides a

written explanation to the participants in that process why the

Secretary has decided to depart from the agreements.

To obtain public involvement in the development of the proposed

regulations, we published a notice in the Federal Register (63 FR

59922, November 6, 1998) requesting advice and recommendations from

interested parties concerning what regulations were necessary to

implement Title IV of the HEA. We also invited advice and

recommendations concerning which regulated issues should be subjected

to a negotiated rulemaking process. We further requested advice and

recommendations concerning ways to prioritize the numerous issues in

Title IV, in order to meet statutory deadlines. Additionally, we

requested advice and recommendations concerning how to conduct the

negotiated rulemaking process, given the time available and the number

of regulations that needed to be developed.

In addition to soliciting written comments, we held three public

hearings and several informal meetings to give interested parties an

opportunity to share advice and recommendations with the Department.

The hearings were held in Washington, D.C., Chicago, and Los Angeles,

and we posted transcripts of those hearings to the Department's

Information for Financial Aid Professionals' website (http://

www.ifap.ed.gov).

We then published a second notice in the Federal Register (63 FR

71206, December 23, 1998) to announce the Department's intention to

establish four negotiated rulemaking committees to draft proposed

regulations implementing Title IV of the HEA. The notice announced the

organizations or groups believed to represent the interests that should

participate in the negotiated rulemaking process and announced that the

Department would select participants for the process from nominees of

those organizations or

[[Page 41233]]

groups. We requested nominations for additional participants from

anyone who believed that the organizations or groups listed did not

adequately represent the list of interests outlined in section 492 of

the HEA. Once the four committees were established, they met to develop

proposed regulations over the course of several months, beginning in

January.

Proposed regulations contained in this NPRM reflect the final

consensus of negotiating Committee II, which was made up of the

following members:

American Association of Community Colleges.

American Association of Cosmetology Schools.

American Association of State Colleges and Universities.

American Council on Education.

Career College Association.

Coalition of Associations of Schools of the Health

Professions.

Coalition of Higher Education Assistance Organizations.

Consumer Bankers Association.

Education Finance Council.

Education Loan Management Resources.

Legal Services Counsel (a coalition).

National Association of College and University Business

Officers.

National Association for Equal Opportunity in Higher

Education.

National Association of Graduate/Professional Students.

National Association of Independent Colleges and

Universities.

National Association of State Student Grant and Aid

Programs/National Council of Higher Education Loan Programs.

National Association of State Universities and Land-Grant

Colleges.

National Association of Student Financial Aid

Administrators.

National Association of Student Loan Administrators.

National Council of Higher Education Loan Programs.

National Direct Student Loan Coalition.

Sallie Mae, Inc.

Student Loan Servicing Alliance.

The College Board.

The College Fund/United Negro College Fund.

United States Department of Education.

United States Student Association.

U.S. Public Interest Research Group.

Under committee protocols, consensus means that there must be no

dissent by any member in order for the committee to be considered to

have reached agreement. Consensus was reached on all of the proposed

regulations in this document.

The Secretary will publish a technical correction package at a

later date that replaces all references to ``Direct Loan'' in the

Federal Perkins Loan Program and Student Assistance General Provisions

regulations with ``National Direct Student Loan Program'' or the

acronym ``NDSL.'' The negotiators agreed that such a change would

eliminate confusion between the National Direct Student Loan Program

and the William D. Ford Federal Direct Student Loan Program.

Summary of Proposed Regulatory Changes

We propose to amend the following sections of the regulations:

Section 674.2 Definitions

We propose to amend Sec. 674.2 by adding a definition of the term

``satisfactory repayment arrangement'' in accordance with changes made

to the 1998 Amendments. The 1998 Amendments define ``satisfactory

repayment arrangements'' as the return of Title IV HEA eligibility to a

defaulted Federal Perkins Loan borrower, to the extent the borrower is

otherwise eligible, if the borrower makes six on-time, consecutive,

monthly payment of amounts owed on the loan. As specified in the 1998

Amendments, the proposed regulations would authorize the restoration of

the borrower's Title IV eligibility only once on a defaulted Federal

Perkins loan.

Section 674.5 Federal Perkins Loan Program Default Rate and Penalties

Effective with the 2000-2001 award year, the 1998 Amendments

eliminate the requirement that an institution file a default reduction

plan with the Secretary if the institution's cohort default rate equals

or exceeds 15 percent. The 1998 Amendments also eliminate the series of

graduated default penalties imposed on institutions with cohort default

rates that equal or exceed 20, 25, or 30 percent or more in favor of

one default penalty of zero if an institution's cohort default rate

equals or exceeds 25 percent. A default rate penalty of zero eliminates

an institution's Federal Capital Contribution. We are proposing to

amend Sec. 674.5 to reflect these changes.

For award years that precede award year 2000-2001, the 1998

Amendments also contain a provision that exempts an institution from

the default reduction plan filing requirement if the institution has

less than 100 students who have Federal Perkins Loans in that academic

year and a cohort default rate that is equal to or greater than 15

percent but less than 20 percent. The negotiators agreed not to develop

proposed regulations that reflect this change because the final

regulations that implement this provision would be outdated immediately

upon taking effect on July 1, 2000. However, because the 1998

Amendments were enacted on October 7, 1998, the Secretary will not

require an institution that meets the statutory criteria to file a

default reduction plan for award years 1998-99 and 1999-2000.

The proposed regulations would further amend this section to

reflect a new default penalty established by the 1998 Amendments that

terminates the eligibility to participate in the Federal Perkins Loan

Program if an institution has a cohort default rate of 50 percent or

higher for the three most recent years for which data are available. An

institution would be ineligible to participate for the award year in

which the determination is made and the two succeeding award years.

Under the proposed regulations, the new ineligibility default penalty

would become effective with the cohort default rate calculated as of

June 30, 2001. The negotiating committee agreed that the cohort default

rate calculated as of this date will represent the last of the three

most recent years of available cohort default rate data used by the

Secretary to make a determination of ineligibility. Thus, the cohort

default rates calculated as of June 30, 2001, June 30, 2000, and June

30, 1999 would be the three years used by the Department to make the

initial determination of ineligibility under the proposed regulations.

The proposed regulations would allow an institution to appeal a

determination of ineligibility, within 30 days of notification by the

Secretary, based on an inaccurate calculation of its cohort default

rate if a recalculation using corrected data would reduce the

institution's cohort default rate to below 50 percent for any of the

three award years used to make the determination. This appeal is

discussed more fully in the next paragraph. An institution may also

appeal if, on average, 10 or fewer borrowers enter repayment for the

three most recent award years used to make a determination of

ineligibility. For example, an institution might have 5 borrowers

entering repayment in the first year, 15 borrowers entering repayment

in the second year and 10 borrowers entering repayment in the third

year, for an average of 10 borrowers entering repayment per year over

the three-year period used to make an eligibility determination. The

Secretary has 45 days to issue a decision following the institution's

timely submission of a complete and accurate

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appeal, during which time the institution may continue to participate

in the program. If an institution's appeal is denied by the Secretary,

the institution must liquidate its revolving student loan fund in

accordance with section 466A of the HEA and assign any outstanding

loans to the Secretary in accordance with Sec. 674.50 of the Federal

Perkins Loan Program regulations.

In the Federal Perkins Loan Program, an institution's cohort

default rate is calculated based on data submitted to the Secretary by

the institution on its Fiscal Operations Report and through the edit

process used by the institution to adjust the data on its Fiscal

Operations Report. We recognize that in order to appeal a notice of

ineligibility based on an inaccurate calculation of this data, the

institution must correct its own data submission. We consider the

complete and timely re-submission of corrected data, both in writing

and through the edit process, to be the mechanism an institution uses

to affect an appeal. The negotiating Committee agreed that this

procedure provided adequate due process since the school submits the

actual data used to calculate its Federal Perkins Loan Program cohort

default data.

We recognize that the process used to calculate an institution's

cohort default rate is unique to the Federal Perkins Loan Program. If,

at any time in the future, the National Student Loan Data System

(NSLDS) or another method is used to calculate an institution's Federal

Perkins Loan Program cohort default rate, we will revisit and revise

accordingly the regulations that govern the appeal process under this

section.

We are also proposing to amend this section of the regulations to

reflect provisions in the 1998 Amendments that allow an institution to

exclude loans from its cohort default rate calculation. These

exclusions include loans on which the borrower has voluntarily made six

consecutive payments, voluntarily made all payments currently due,

repaid the loan in full, received a deferment or forbearance based on a

condition that predates the borrower reaching a 240/270-day past due

status, or rehabilitates the loan after becoming 240/270 past due. The

proposed regulations would also allow an institution to remove a loan

that is canceled due to death or permanent and total disability,

discharged in bankruptcy, forgiven due to a closed school situation, or

repaid in full under the compromise repayment provisions contained in

Sec. 674.33(e) of the Federal Perkins Loan program regulations.

The 1998 Amendments require that the payments a borrower makes when

making six consecutive payments or bringing the loan current be

``voluntary'' payments in order for a school to exclude the borrower

from its cohort default rate calculation. In order to clarify the

proposed regulations and avoid confusion when a school calculates its

cohort default rate, we are proposing that ``voluntary'' payments

exclude payments obtained by income tax offset, wage garnishment,

income or asset execution, or pursuant to a judgment. Generally,

payments obtained by these methods are automatically deducted from the

borrower's tax return, wages or assets and the borrower has no control

or choice in the payment process. Payments made pursuant to a judgment,

although not always automatic, are payments made as the result of a

court order and represent last resort due diligence efforts on the part

of the school to obtain payment from the borrower. For this reason, the

negotiators agreed that payments obtained by judgment also should not

be considered voluntary for the purposes of calculating the Federal

Perkins Loan Program cohort default rate.

We are also proposing to add the requirement that the six

consecutive voluntary payments that a borrower makes on a defaulted

loan be ``monthly'' payments in order for a school to remove that

borrower from its cohort default rate calculation. We are proposing the

addition of the word monthly to provide consistency in interpreting the

timeframe in which the payments must be made. We are also proposing to

require monthly payments to maintain regulatory consistency in this

area. The Federal Perkins Loan Program regulations, as currently

written, allow schools to remove a borrower from its cohort default

rate calculation if the borrower has made six, consecutive, monthly

payments on a defaulted loan.

In accordance with the 1998 Amendments, the proposed regulations

would eliminate an institution's authority to exclude improperly

serviced loans from its cohort default rate.

Lastly, the paragraphs in this section that describe satisfactory

arrangements to repay the loan and loan rehabilitation have been

deleted and relocated for administrative ease. The 1998 Amendments

modified the definition of satisfactory repayment arrangements and

authorized a loan rehabilitation program in the Federal Perkins Loan

Program. These provisions are reflected in Secs. 674.2 and 674.39 of

the proposed regulations.

Section 674.6 Default Reduction Plan

For award year 2000-2001 and succeeding award years, the 1998

Amendments eliminate the requirement that an institution with a cohort

default rate that equals or exceeds 15 percent establish and implement

a default reduction plan. Therefore, we are proposing to remove the

default reduction plan provisions contained in Sec. 674.6 from the

Federal Perkins Loan Program regulations.

Section 674.7 Expanded Lending Option

Effective October 1, 1998, the 1998 Amendments eliminated the

Expanded Lending Option in the Federal Perkins Loan Program. This

option previously allowed participating institutions to lend at higher

limits after depositing an Institutional Capital Contribution equal to

100 percent of their Federal Capital Contribution into their Perkins

Loan Revolving Fund. The proposed regulations would eliminate the

expanded lending option provisions in Sec. 674.7 to reflect this

statutory change.

Section 674.9 Student Eligibility

The 1998 Amendments authorize the use of the same criteria that

remove a borrower from an institution's cohort default rate in

Sec. 674.5 to re-establish a borrower's eligibility for additional

Federal Perkins Loans. Accordingly, we are proposing to revise

Sec. 674.9 by adding a new paragraph that re-establishes a borrower's

eligibility for a Perkins Loan if the borrower voluntarily makes six

consecutive monthly payments, voluntarily makes all payments currently

due, repays the loan in full, receives a deferment or forbearance based

on a condition that predates the borrower reaching a 240/270-day past

due status, or rehabilitates the loan after becoming 240/270 days past

due. A borrower's eligibility for a Perkins Loan is also re-established

if the borrower's loan is discharged due to permanent and total

disability, discharged in bankruptcy, forgiven due to a closed school

situation, or repaid in full in accordance with Sec. 674.33 of the

Federal Perkins Loan Program regulations.

For the purpose of a borrower re-establishing eligibility for a

Perkins Loan under this section, the proposed regulations would define

``voluntary'' payments as those payments made directly by the borrower,

including payments made over and above a payment made pursuant to a

judgment. We are proposing to define payments made over and above the

payments required on a judgment as voluntary

[[Page 41235]]

because the borrower is freely choosing to make a payment of this

nature. Payments made over and above those required on a judgement are

not automatic nor are they required. The negotiators agreed that a

borrower who opts to make payments over and above payments made

pursuant to a judgment is making a good faith effort to repay the debt

and should not lose the benefit of Federal Perkins Loan eligibility.

For the purpose of re-establishing a borrower's eligibility for a

Federal Perkins Loan, the proposed definition of voluntary payments

excludes payments made under the following conditions because a

borrower has no control or choice in making these types of payments:

Payments obtained by income tax offset.

Payments obtained through wage garnishment.

Payments obtained through income or asset execution.

Payments made pursuant to a judgment.

Section 674.12 Loan maximums

The 1998 Amendments increase annual maximum loan amounts and

increase the aggregate maximum loan amounts allowable for an eligible

student to the levels formerly authorized for schools that participated

in the Expanded Lending Option. The proposed regulations reflect the

following increased annual loan limits for all eligible borrowers:

$4,000 for a student who has not successfully completed a program of

undergraduate education and $6,000 for a graduate or professional

student. The proposed regulations would require that aggregate loan

limits not exceed $40,000 for graduate and professional students,

$20,000 for a student who has successfully completed two years of a

program of education leading to a bachelor's degree but who has not

completed his or her degree work, and $8,000 in the case of students

who have not completed the first two years of undergraduate work.

During the negotiated rulemaking discussions on this section, the

Committee discussed whether this proposed change would create the

potential for the inadvertent overaward of Federal Perkins Loans in

excess of the new statutory aggregate maximum of $8,000, especially on

loans made on or about the date of enactment. Loan maximums in effect

prior to enactment of the 1998 Amendments did not tie aggregate loan

limits to the completion of two years of undergraduate education. We

are aware of this potential problem and will not require resolution of

an overaward made prior to the publication of this proposed regulation

if a Federal Perkins Loan borrower was inadvertently awarded an amount

in excess of the new statutory aggregate maximum of $8,000 and did not

complete two years of undergraduate work.

The 1998 Amendments also changed the definition of aggregate loan

limits to include only unpaid principal as is the case in the Federal

Family Education Loan and Federal Direct Loan Programs. This change

allows a borrower who has borrowed the maximum cumulative amount as an

undergraduate or professional student to re-establish eligibility for

further Perkins loans up to the principal amount the borrower has

repaid. Our proposed amendments to Sec. 674.12 of the regulations

reflect this change as well.

Section 674.16 Making and Disbursing Loans

The proposed regulations would amend this section, in accordance

with the 1998 Amendments, to clarify the credit bureau reporting

requirements with which an institution must comply after making and

disbursing a Federal Perkins Loan. The proposed regulations would amend

Sec. 674.16 to require that an institution report to at least one

national credit bureau information concerning the repayment and

collection of the loan until the loan is paid in full, including the

date the loan was repaid, canceled or discharged for any reason. The

proposed regulations would also add a new paragraph that requires an

institution to report promptly any changes to information previously

reported on a loan to the same credit bureaus to which the information

was previously reported. The negotiators agreed that reporting a change

of information on a loan to the same credit bureaus to which it was

previously reported was an important protection for the borrower should

the school decide to contract with a different credit bureau at a later

date. Reporting changes of information on a loan to the same credit

bureaus provides a consistent picture of the borrower's credit history

and eliminates the risk that negative credit history might remain on

the borrower's record when, in fact, it should have been removed or

updated.

Section 674.31 Promissory Note

The proposed regulations would amend Sec. 674.31, in accordance

with the 1998 Amendments, to exclude from a Federal Perkins Loan

Program borrower's initial grace period any period, not to exceed three

years, during which a borrower who is a member of the Armed Forces

reserve component is called or ordered to active duty for a period of

more than 30 days. The proposed regulations would require that any

single excluded period may not exceed three years and must include the

time necessary for the borrower to resume enrollment at the next

available regular enrollment period. We are also proposing that any

borrower in a grace period when called or ordered to active duty be

entitled to another full six or nine-month grace period upon completion

of the excluded period of service.

Discussion of this provision at the negotiated rulemaking sessions

focused on the valuable service that these borrowers are providing to

our country as members of the Armed Forces reserve component and the

care that must be taken not to penalize borrowers returning from active

duty. In this regard, we would like to clarify that the time period in

which a borrower must re-enroll in the ``next available enrollment

period'' after returning from active duty service in the Armed Forces

may be longer for some borrowers than others, especially if the

borrower is pursuing a non-traditional program. Additionally, the

possibility exists that borrowers may not re-enroll in the same program

in which they were enrolled at the time they were called to active

duty. It was the consensus of the negotiating team that the proposed

regulations should provide flexibility in the administration of these

aspects of a borrower's grace period.

The proposed regulations would also amend Sec. 674.31 by requiring

an institution to disclose to at least one national credit bureau the

amount of the loan made to the borrower, along with other relevant

information, so as to not restrict an institution from reporting to

more than one credit bureau should the institution desire to do so.

Previously, this section required an institution to report to any one

national credit bureau.

Section 674.33 Repayment

The proposed regulations would amend Sec. 674.33 to reflect a new

provision of the 1998 Amendments that authorizes an institution to

establish an incentive repayment program to reduce defaults and

replenish its Federal Perkins Loan revolving fund. The proposed

regulations would authorize an institution to offer a reduction of no

more than one percent of the interest rate on a loan on which the

borrower has made 48 consecutive, monthly payments; a discount of no

more than five percent on the balance owed on a loan if the borrower

pays in full prior to the end of the repayment period; and,

[[Page 41236]]

with the Secretary's approval, any other incentive an institution

determines will reduce defaults and replenish its fund. The proposed

regulations reflect the requirement in the 1998 Amendments that an

institution not use Federal funds, including Federal funds from its

Federal Perkins Loan revolving fund, or institutional funds from the

fund to pay for any repayment incentive. In this regard, the proposed

regulations require an institution to reimburse its Fund, on at least a

quarterly basis, for any money lost to its Fund that otherwise would

have been paid by the borrower if the borrower had not received the

repayment incentive. The negotiators agreed that unless a school

reimburses its Federal Perkins Loan revolving fund for the money lost

to incentives, funding for future Federal Perkins Loan borrowers might

be jeopardized.

The proposed regulations would also amend Sec. 674.33 by adding a

new section that implements a closed school discharge for Federal

Perkins Loan borrowers as authorized by the 1998 Amendments. Prior to

passage of the 1998 Amendments, the Secretary lacked the statutory

authority to discharge a Federal Perkins Loan due to a closed school

situation. The proposed regulations would authorize the holder of the

loan to discharge a borrower's total liability on any loan made under

the Federal Perkins Loan Program on or after January 1, 1986, if the

borrower is unable to complete the program of study in which the

borrower is enrolled due to the institution's closure. The proposed

regulations would require that the borrower be reimbursed for any

amounts the borrower paid on a discharged loan either voluntarily or

through enforced collection. A borrower who has defaulted on a loan

that is discharged is no longer considered to be in default and is

eligible to receive further Title IV aid. The holder of the loan is

required to report the discharge of the loan to all credit bureaus to

which the status of the loan was previously reported.

Program regulations that authorize the discharge of a loan made

under both the Federal Direct Student Loan (Direct Loan) and Federal

Family Education Loan (FFEL) Program have been in effect since July 1,

1995. The proposed regulations include closed school discharge

provisions for the Federal Perkins Loan Program that are based largely

on the regulations in existence for these programs.

The proposed regulations would authorize a closed school discharge

by either the Secretary or the institution. This reflects the

possibility that an institution may continue to hold a loan that is

eligible for a closed school discharge due to the closure of a location

or branch campus of the school, and not the closure of the school

itself. However, in order to protect the borrower, the proposed

regulations would require a school that denies a borrower's request for

a closed school discharge to submit the materials that support such a

determination for review and an independent determination of the

dischargeability of the loan by the Secretary.

The proposed regulations would also allow the Secretary to

discharge a loan based on a school closure without an application from

the borrower. The Secretary may discharge a loan without an application

if it were determined that the borrower qualified for and received a

discharge on his or her FFEL or Direct Loan and was unable to secure a

discharge on his or her Federal Perkins Loan only because the Secretary

lacked the statutory authority. The proposed regulations would also

authorize the Secretary to discharge a Federal Perkins Loan without an

application from the borrower based on information in the Secretary's

possession that qualified the borrower for a discharge.

Lastly, the proposed regulations contain a provision that would

disallow a closed school discharge if the borrower secured his or her

Federal Perkins Loan through fraudulent means as determined by the

ruling of a court or an administrative tribunal. The negotiators agreed

that the discharge of a fraudulently obtained loan would constitute an

inappropriate use of federal tax dollars and compromise the integrity

of the Federal Perkins Loan Program.

Section 674.34 Deferment of Repayment--Federal Perkins Loans, Direct

Loans and Defense Loans

The proposed regulations would amend Sec. 674.34, in accordance

with changes made in the Amendments, to extend the deferment benefits

described in this section to all borrowers with loans made before July

1, 1993, regardless of the terms of the borrower's promissory note.

Current regulations authorize the deferments in this section only for

an eligible borrower with a loan made on or after July 1, 1993. The

extension of the deferments in this section to borrowers with a loan

made before July 1, 1993, is effective October 7, 1998.

The proposed amendments to this section would also authorize a

deferment for any borrower with a loan made under the program,

including National Direct and Defense Loans, during any period in which

the borrower is engaged in service that subsequently qualifies the

borrower for cancellation of his or her loan. Prior to passage of the

1998 Amendments, if the borrower had a loan under the Federal Perkins

Loan Program that was made before July 1, 1993, the borrower was

eligible for a postponement of his or her repayment while doing service

that qualified the borrower for cancellation. Because all borrowers are

now eligible for a deferment in anticipation of cancellation, the

postponement provisions in Sec. 674.39 would be removed. Deferments in

anticipation of cancellation authorized by this section may not be

granted retroactively to cover any period of time prior to October 7,

1998.

Section 674.39 Loan rehabilitation

The 1998 Amendments authorize institutions that participate in the

Federal Perkins Loan Program to establish a loan rehabilitation program

for all defaulted Federal Perkins Loan borrowers. The proposed

regulations in Sec. 674.39 would define rehabilitation as the making of

an on-time, monthly payment, as defined by the institution, each month

for twelve consecutive months by the defaulted borrower. As specified

in the 1998 Amendments, a borrower may rehabilitate a loan only once.

The proposed regulations would require an institution to notify a

defaulted borrower of the option and consequences of rehabilitating a

defaulted loan. The consequences of rehabilitating a defaulted loan

include returning the borrower to regular repayment status, treating

the first payment made under the twelve consecutive payments as the

first payment in a new ten-year repayment period, and instructing any

credit bureau to which the default was reported to remove the default

from the borrower's credit history.

The proposed regulations would limit collection costs that can be

assessed a borrower on a rehabilitated loan to 24 percent. However, the

proposed regulations would also allow an institution to charge any

collection costs that exceed 24 percent on a rehabilitated loan, and

that may not be passed along to the borrower, to their Federal Perkins

Loan Revolving Fund until July 1, 2002. This would give institutions a

chance to renegotiate contracts and service agreements with third-party

collection agencies that currently provide for higher collection

percentages.

There was much discussion among the negotiators regarding the limit

on collection costs that can be charged to the borrower of a

rehabilitated Federal Perkins loan. A proposal to limit the

[[Page 41237]]

collection costs that may be charged to a Federal Perkins Loan borrower

on a rehabilitated loan to 18.5 percent, in order to be consistent with

the FFEL and Federal Direct Loan Programs, did not receive the full

support of the negotiators. Several negotiators noted that a Federal

Perkins Loan borrower might have accrued collection costs in excess of

18.5 percent on a rehabilitated loan, and that institutions would have

to cover the spread between an 18.5 percent cap and actual collection

costs incurred. Several negotiators suggested that the competitive

marketplace should determine the collection costs assessed to the

borrower, not an arbitrary cap, and that collection agencies would not

agree to contract with schools, especially small schools with low

volume business, for such a low fee. However, other negotiators felt

that borrowers faced with added marketplace collection costs of 30 to

40 percent when repaying a loan are pushed to the extreme financially.

Also, several negotiators felt that, to the extent feasible, collection

costs assessed on rehabilitated loans should be consistent across the

Title IV loan programs. FFEL and Federal Direct Loan borrowers are not

subject to further collection costs beyond the maximum 18.5 percent

after rehabilitating their loan.

Several negotiators noted that in the FFEL and Federal Direct Loan

programs, collection costs that are charged to a borrower are included

in the ``new outstanding principal balance'' of the loan after it has

been rehabilitated and returned to current status. That is, the

collection costs of up to 18.5 percent are capitalized. This results in

an actual higher charge to the borrower as he or she repays the new,

higher balance, over time and with interest charged on the full amount.

They noted that capitalizing an 18.5 percent collection cost on an FFEL

or Federal Direct Loan is equal to assessing approximately a 24 percent

fee on a Federal Perkins Loan, since collection costs are not

capitalized in the Federal Perkins Loan Program. A proposal to limit

the collection costs to 24 percent did not yield immediate consensus.

However, negotiators reviewed data and confirmed that a capitalized

18.5 percent collection cost on an FFEL and Federal Direct Loan

increases the balance of the loan, which in turn increases the amount

of interest that accrues on that balance over the repayment of the

loan. The difference in the borrower's monthly payment needed to cover

both the collection cost and the interest accruing on an increased

principal balance, yields an amount equal to 24 percent of the original

principal and interest due on the loan after it has rehabilitated.

For example, on an FFEL or Federal Direct Loan with an outstanding

balance of $1,000 after rehabilitation, capitalizing an 18.5 percent

collection cost will add an additional $185.00 to the loan, yielding a

new outstanding balance of $1,185.00. The borrower's payment will

increase by $.46 per month over the life of the loan because of the

added $185.00. Over 10 years, the borrower makes 120 payments. The

extra $55.20 (120 monthly payments x $.46) added to the original

$185.00 in collection costs that were added to the loan balance

(capitalized) means that the borrower will repay $240.00 in collection

costs over the life of the rehabilitated loan. Therefore, the

negotiators felt that a cap of 24 percent on the collection costs that

may be charged on a rehabilitated Federal Perkins Loan was comparable

to the 18.5 percent cap on FFEL and Federal Direct Loans. They reached

consensus on the 24 percent cap with the understanding that, as the

example presented illustrates:

No further collection costs are assessed the borrower.

That is, payments are not treated on a ``fee on fee'' basis which is

often used by collection agencies.

The uncapitalized collection costs of 24 percent of the

principal and interest due after the loan is rehabilitated is treated

as a separate cost.

The borrower's monthly payment reflects an amount that

spreads the collection costs over the life of the loan.

Finally, the proposed regulations would return the benefits and

privileges of the promissory note to the rehabilitated borrower as they

applied prior to the borrower's default and authorizes institutions to

offer flexible repayment options following the borrower's return to

regular repayment status. This flexibility was noted in the regulation

to assure schools that they can work with rehabilitated borrowers to

establish realistic repayment plans in order to avoid a return to a

default status.

Section 674.41 Due Diligence--General Requirements

The 1998 Amendments provide for the establishment of a Student Loan

Ombudsman's office in order to provide timely assistance to borrowers

with loans made under Title IV of the HEA. The 1998 Amendments also

require that information about the availability and functions of the

Ombudsman be made available to all borrowers in the Title IV student

loan programs. The proposed regulations would amend Sec. 674.41 to

comply with this new requirement. The proposed regulations would

require that institutions participating in the Federal Perkins Loan

Program, as part of the general due diligence requirements, provide the

borrower with information on the availability of the Student Loan

Ombudsman's office if the borrower disputes the terms of the loan in

writing and the institution does not resolve the dispute.

Section 674.42 Contact With the Borrower

The 1998 Amendments modified section 486(b) of the HEA by

eliminating the requirement that institutions conduct exit counseling

individually or in groups and by encouraging institutions to use

electronic means in providing personalized exit counseling. The

proposed regulations in Sec. 674.42 would facilitate these changes and

make exit counseling requirements in the Federal Perkins Loan Program

consistent with those in the Federal Direct Loan and the Federal Family

Education Loan Programs.

Specifically, the proposed regulations would reorganize this

section by first describing the disclosures that an institution is

required to make to a Federal Perkins Loan borrower under section

463A(b) of the HEA, either as part of the promissory note or in another

written statement provided to the borrower. The disclosure requirements

have not changed. However, the proposed regulations would provide that

the institution must make these disclosures either shortly before the

borrower ceases at least half-time study at the institution, during the

exit interview, or immediately by mail, if the borrower enters

repayment without the institution's knowledge. As currently written,

the regulations stipulate that the institution must make these

disclosures during exit counseling.

The proposed regulations would require an institution to provide

exit counseling to each borrower either in person, by audiovisual

presentation, or by interactive electronic means before the student

ceases at least half-time study. The proposed regulations would provide

alternative written and electronic counseling options for borrowers

engaged in study-abroad or correspondence study, and for borrowers who

have left school without the institution's knowledge. In conducting

exit counseling, the proposed regulations would require that an

institution inform the borrower of the anticipated monthly repayment

amount, review repayment options, suggest debt

[[Page 41238]]

management strategies, emphasize the seriousness of the repayment

obligation and the consequences of default, review deferment and

cancellation benefits of the loan, require the borrower to provide

corrections to the institution's records, and review with the borrower

information on the availability of the Student Loan Ombudsman's office.

They would also propose that institutions that provide exit counseling

by electronic means take reasonable steps to ensure that each borrower

receives the counseling materials and actively participates in and

completes the exit counseling. If, for example, a school sends

counseling materials by electronic mail or other electronic means, not

including the U.S. mail, the school must obtain documentation through

return receipt or some other mechanism that the student received the

materials and completed them.

Lastly, in order to facilitate the use of electronic exit

counseling, the proposed regulations would eliminate the requirements

that a school, as part of exit counseling, have the borrower sign a

copy of the repayment schedule and provide a copy of the signed

repayment schedule and the signed promissory note to the borrower. The

institution would still have to provide the borrower with a copy of the

borrower's repayment schedule and the promissory note as part of the

disclosure requirements listed in Sec. 674.42(a).

Section 674.45 Collection Procedures

The 1998 Amendments clarify an institution's credit bureau

reporting responsibilities by requiring that a school promptly disclose

changes to any information it has reported on a borrower's Federal

Perkins Loan. As currently written, Sec. 674.45 requires a school to

report changes on a defaulted loan to the same credit bureau to which

it originally reported the default. Section 674.45 also currently

requires an institution to respond within one month of its receipt to

any inquiry from any credit bureau regarding the information reported

on the loan amount. In order to prevent the borrower from suffering the

negative consequences that may result from the existence of an

inaccurate credit history, the proposed regulation amends the

collection procedures in Sec. 674.45 to require that an institution

report changes to the account status of a defaulted loan to any

national credit bureau to which it reported the default. The regulation

also proposes, in accordance with provisions in the Fair Credit

Reporting Act, that an institution be required to resolve, within 30

days of its receipt, any inquiry from any credit bureau that disputes

the completeness or accuracy of information reported on the loan. This

would protect the borrower from the negative impact of a protracted

resolution in disputes involving the accuracy of his or her credit

history.

The 1998 Amendments require an institution to disseminate

information regarding the Student Loan Ombudsman to borrowers who are

unable to resolve a dispute over the terms of their loan with the loan

holder. A new paragraph is proposed for Sec. 674.45 that would require

an institution, as part of the collection activities contained in this

section, to provide the borrower with information on the availability

of the Student Loan Ombudsman's office.

Section 674.47 Costs Chargeable to the Fund

The proposed regulations would amend Sec. 674.47, in accordance

with the loan rehabilitation provisions in Sec. 674.39 of the proposed

regulations. The proposed change would authorize an institution, until

July 1, 2002, to charge its Fund for any collection costs assessed on a

rehabilitated loan that are in excess of the 24 percent maximum limit

that may be passed along to the borrower. This authority is necessary

to give institutions time to renegotiate contracts with collection

agencies if current contracts call for the assessment of collection

fees in excess of 24 percent of outstanding principal, interest and

late fees due on defaulted loans.

Section 674.49 Bankruptcy of Borrower

The proposed regulations would amend Sec. 674.49 in order to

reflect changes made to section 523(a)(8) of title 11 of the United

States Bankruptcy Code by the Amendments. Effective October 8, 1998,

the 1998 Amendments eliminated a borrower's ability to have a student

loan automatically discharged due to bankruptcy if the loan has been in

repayment for seven years or more. The proposed regulations would also

clarify that the seven-year repayment period on bankruptcies filed

before October 8, 1998, excludes any applicable suspension of the

repayment period as defined by 34 CFR 682.402(m) of the Federal Family

Education Loan Program regulations. Lastly, the proposed regulations

would amend this section to require institutions to use due diligence

and assert any defense consistent with its status under applicable law

to avoid discharge of a Federal Perkins Loan in a bankruptcy

proceeding.

Section 674.52 Cancellation Procedures

The proposed regulations would amend this section to clarify that a

borrower whose defaulted loan has not been accelerated may qualify for

any cancellation authorized by section 465 of the HEA and Subpart D of

the Federal Perkins Loan Program regulations by complying with the

requirements of this section. In current regulations, the wording in

this paragraph erroneously states that borrowers whose defaulted loans

have not been accelerated could qualify only for teaching, volunteer,

or military service cancellations by complying with the requirements of

this section.

The proposed regulations also would amend paragraph (d) of this

section to clarify that a Federal Perkins loan, Direct loan or Defense

loan borrower's deferment under Sec. 674.34(c) runs concurrently with

any period for which cancellation under Secs. 674.53-674.60 is granted.

Section 674.53 Teacher cancellation--Federal Perkins, Direct and

Defense Loans.

Effective October 7, 1998, the 1998 Amendments extended the Federal

Perkins Loan Program cancellation benefits in section 465(a)(2) of the

HEA to all borrowers with outstanding loan balances who perform

qualifying service regardless of when the loans were made or any

contrary provisions of the borrowers' promissory notes. Prior to the

addition of this language to the HEA, the benefits were based upon when

the loan was made and the provisions of the borrower's promissory note.

The proposed regulations would amend Sec. 674.53 to extend the

following teaching cancellation benefits to all borrowers, regardless

of when their loan was made or the terms of the borrower's promissory

note:

teaching in a low-income school,

full-time teaching in special education, and

full-time teaching in fields of expertise.

These teaching benefits would be extended to any borrower with an

outstanding loan balance on a Federal Perkins, Direct or Defense loan

made prior to July 23, 1992, for teaching service performed on or after

October 7, 1998, if the cancellation benefits provided under this

section are not included in the borrower's promissory note. We would

like to emphasize that cancellation benefits may not be granted

retroactively for teaching service performed prior to October 7, 1998.

[[Page 41239]]

Section 674.56 Employment Cancellation--Federal Perkins Loan, Direct

and Defense Loans

The 1998 Amendments amended the HEA to extend all cancellations in

section 465(a)(2) to all borrowers with outstanding balances as of

October 7, 1998. The proposed regulations would amend Sec. 674.56 to

extend the following cancellation benefits to all borrowers with an

outstanding balance on Federal Perkins, Direct or Defense loans made

before July 23, 1992, for employment in these areas on or after October

7, 1998, regardless of when their loan was made or the terms of the

borrower's promissory note:

full-time employment as a nurse or medical technician,

full-time employment in a public or private nonprofit

child or family service agency, and

full-time employment as a qualified professional provider

of early intervention services.

Only periods of qualifying service performed on or after October 7,

1998, are eligible for cancellation benefits if the borrower was not

previously eligible due to the date the loan was made.

Section 674.57 Cancellation for Law Enforcement or Corrections Officer

Service--Federal Perkins, Direct and Defense Loans

The proposed regulations would amend Sec. 674.57 to extend the

cancellation for full-time service as a law enforcement or corrections

officer for an eligible employing agency to any borrower with an

outstanding loan balance on a Federal Perkins, Direct or Defense loan

made prior to November 29, 1990, for law enforcement or correction

officer service performed on or after October 7, 1998, in accordance

with changes to the HEA by the Amendments. Cancellation benefits may

not be granted retroactively for qualifying service performed before

October 7, 1998.

Section 674.58 Cancellation for Service in a Head Start Program

The proposed regulations would amend Sec. 674.58 to extend

cancellation for service as a full-time staff member in a ``Head

Start'' program to any borrower with an outstanding balance on a

Defense loan for service performed on or after October 7, 1998, in

accordance with changes made to the HEA by the Amendments. Federal

Perkins and Direct loan borrowers have always been eligible for this

cancellation and would not be affected by this regulatory change.

Section 674.60 Cancellation for Volunteer Service--Perkins Loans,

Direct Loans and Defense Loans

The proposed regulations would amend Sec. 674.60 to extend

cancellation for service as a volunteer under The Peace Corps Act or

The Domestic Volunteer Service Act of 1973, to any Direct loan borrower

with a loan made on or after October 7, 1998, and any borrower with an

outstanding balance on a Direct or Defense loan for service as a

volunteer under the above Acts performed on or after October 7, 1998,

if the cancellation benefits provided under this section are not

included in the borrower's promissory note, in accordance with the

Amendments.

Executive Order 12866

1. Potential Costs and Benefits

Under Executive Order 12866, we have assessed the potential costs

and benefits of this regulatory action.

The potential costs associated with the proposed regulations are

those resulting from statutory requirements and those we have

determined as necessary for administering this program effectively and

efficiently. There is a detailed discussion of the cost implications

associated with the rehabilitation of a Federal Perkins Loan under the

heading Sec. 674.39 Loan rehabilitation in the preamble of this NPRM.

In assessing the potential costs and benefits--both quantitative

and qualitative--of this regulatory action, we have determined that the

benefits would justify the costs.

We have also determined that this regulatory action would not

unduly interfere with State, local, and tribal governments in the

exercise of their governmental functions.

We note that, as these proposed regulations were subjected to

negotiated rulemaking, the costs and benefits of the various

requirements were discussed thoroughly by the negotiators. The

resultant consensus reached on a particular requirement generally

reflected agreement on the best possible approach to that requirement

in terms of cost and benefit.

To assist the Department in complying with the specific

requirements of Executive Order 12866, the Secretary invites comments

on whether there may be further opportunities to reduce any potential

costs or to increase any potential benefits resulting from these

proposed regulations without impeding the effective and efficient

administration of the title IV, HEA programs.

2. Clarity of the Regulations

Executive Order 12866 and the President's Memorandum of June 1,

1998 on ``Plain Language in Government Writing'' require each agency to

write regulations that are easy to understand.

The Secretary invites comments on how to make these proposed

regulations easier to understand, including answers to questions such

as the following:

Are the requirements in the proposed regulations clearly

stated?

Do the proposed regulations contain technical terms or

other wording that interferes with their clarity?

Does the format of the proposed regulations (grouping and

order of sections, use of headings, paragraphing, etc.) aid or reduce

their clarity?

Would the proposed regulations be easier to understand if

we divided them into more (but shorter) sections? (A ``section'' is

preceded by the symbol ``Sec. '' and a numbered heading; for example,

Sec. 674.41 Due diligence--general requirements.)

Could the description of the proposed regulations in the

SUPPLEMENTARY INFORMATION section of this preamble be more helpful in

making the proposed regulations easier to understand? If so, how?

What else could we do to make the proposed regulations

easier to understand?

Send any comments that concern how the Department could

make these proposed regulations easier to understand to the person

listed in the ADDRESSES section of the preamble.

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.

The parties affected by these proposed regulations are institutions

of higher education that participate in the Federal Perkins Loan

Program, and individual Federal Perkins Loan borrowers. Federal Perkins

Loan borrowers are not considered small entities under the Regulatory

Flexibility Act. Institutions of higher education are defined as small

entities, according to the U.S. Small Business Administration, if they

are: for-profit or nonprofit entities with total revenue of $5,000,000

or less; and entities controlled by governmental entities with

populations of 50,000 or less. Of the institutions of higher education

that participate in the Federal Perkins Loan program, approximately 12

percent would be considered small entities under the definition. Those

small institutions receive approximately three percent of new Federal

Capital Contributions.

[[Page 41240]]

These proposed regulations would not impose a significant economic

impact on a substantial number of small entities. The proposed

regulations would expand borrower benefits, and provide additional

flexibility in the administration of the Federal Perkins Loan Program

to both large and small institutions without requiring significant

changes to current institutional system operations.

The Secretary invites comments from small institutions as to

whether the proposed changes would have a significant economic impact

on them.

Paperwork Reduction Act of 1995

Sections 674.6, 674.16, 674.31, 674.33, 674.34, 674.39, 674.41,

674.42, 674.45, 674.47, and 674.49 contain information collection

requirements. Under the Paperwork Reduction Act of 1995 (44 U.S.C.

3507(d)), the Department of Education has submitted a copy of these

sections to the Office of Management and Budget (OMB) for its review.

Collection of Information: Federal Perkins Loan Program

Section 674.6 Default reduction plan. The Department currently has

this section approved under OMB control number 1840-0535. The

Amendments eliminated the requirement that institutions with a cohort

default rate that equals or exceeds 15 percent submit a default

reduction plan to the Secretary. Therefore, we are proposing to remove

the required default reduction plan measures from the regulations. The

total annual recordkeeping and reporting burden hours for Sec. 674.6

equals 579 hours. The proposed regulation will therefore eliminate 579

hours from the 12,719 total recordkeeping and burden hours contained in

the information collection requirements under OMB control number 1840-

0535.

Section 674.16 Making and disbursing loans. The Department

currently has this section approved under OMB control number 1840-0535.

We are proposing to clarify the credit bureau reporting requirements

with which a school must comply when making and disbursing loans in

accordance with the changes made to the HEA by the Amendments. Because

credit bureau reporting is considered to be a normal business practice

in the administration of the Federal Perkins Loan program, there is no

additional burden associated with this section.

Section 674.31 Promissory Note. The Department currently has this

section approved under OMB control number 1840-0535. We are proposing

to exclude any period during which a borrower who is a member of the

reserve component of the Armed Forces is called or ordered to active

duty for a period of more than 30 days from the borrower's initial

grace period. This exclusion will be contained in the terms of the

borrower's Federal Perkins Loan promissory note. Because institutional

use of the Secretary's promissory note in the Federal Perkins Loan

program is considered part of normal business practice in administering

the Federal Perkins Loan program, there are no burden hours calculated

for this section. We are also proposing to require an institution to

disclose to at least one national credit bureau the amount of the loan

made to the borrower, along with other relevant information.

Previously, the institution was required to report to ``any'' national

credit bureau. This proposed change does not increase or decrease the

frequency or amount of credit bureau reporting required by an

institution. Additionally, credit bureau reporting is considered to be

a normal business practice associated with the administration of the

Federal Perkins Loan program and no burden hours are associated with

this section.

Section 674.33 Repayment. The Department currently has this

section approved under OMB control number 1840-0535. We are proposing

to authorize institutions to establish repayment incentives for

borrowers by reducing by no more than 1 percent the interest rate on a

loan on which the borrower has made 48 consecutive, monthly repayments;

discounting by no more than 5 percent the balance owed on a loan which

the borrower pays in full prior to the end of the repayment period; or,

by offering any other incentive, with the Secretary's approval, that

the institution determines will reduce defaults and replenish its

revolving fund. The establishment of repayment incentives is not

mandatory nor are institutions required to notify borrowers of the

existence of repayment incentives. Institutions are currently required

to retain a repayment history on each Federal Perkins Loan borrower

that includes the frequency, timeliness, and number of repayments made

by the borrower under the information collection requirements contained

in Sec. 674.19 and currently approved under OMB control number 1840-

0073. Because institutions are already collecting the information

needed to implement repayment incentives, there is no change to the

information collection contained in this section.

We are also proposing a closed school discharge in this section for

Federal Perkins Loan borrowers who did not complete the program of

study for which the loan was made because the school at which the

borrower was enrolled closed. This proposed change is retroactive to

loans made on or after January 1, 1986. The proposed regulations would

allow for a closed school discharge by an institution, as well as the

Secretary. The proposed regulations would authorize the Secretary to

discharge a loan based on a school closure without an application from

the borrower if the borrower qualified for and received a discharge on

his or her FFEL or Federal Direct Loan and was unable to secure a

discharge on his or her Federal Perkins Loan only because the Secretary

lacked the statutory authority. The proposed regulations would also

authorize the Secretary to discharge a Federal Perkins Loan without an

application from the borrower based on information in the Secretary's

possession that qualifies the borrower for a discharge. The proposed

regulations would also provide for an application process in the case

of loans that the Secretary cannot discharge based on the above two

criteria. Under the proposed regulations, the information the borrower

is asked to provide in order to obtain the discharge of a debt based on

the closure of a school is consistent with the information required

under the application process currently in place for the FFEL and

Federal Direct Loan programs. However, the application used in the FFEL

and Federal Direct Loan Program does not currently apply to the

discharge of loans made under the Federal Perkins Loan program. The

current form will require revision or, alternately, a new form will be

developed for the Federal Perkins Loan Program. Until such time as we

are able to develop an application for borrowers seeking a closed

school discharge of a Federal Perkins Loan, we cannot accurately

project the number of burden hours contained in this section, although

we expect the completion of such a form to be no more burdensome to

applicants than the form used in the FFEL and Federal Direct Loan

Programs. The burden hours associated with completing the closed school

discharge form in the FFEL and Direct Loan Programs is currently 30

minutes or .5 hours per response.

Section 674.34 Deferment of repayment--Federal Perkins Loans,

Direct Loans and Defense Loans. The Department currently has this

section approved under OMB control number 1840-0535. We are proposing,

in accordance with the Amendments, to extend the deferment benefits in

this

[[Page 41241]]

section to borrowers who were formerly ineligible because of when their

loans were made or the terms of their promissory notes. This change

offers greater flexibility to both the borrower and the institution in

defining the circumstances in which a deferment of repayment is

appropriate. This proposed change does not affect the deferment process

nor does it change the eligibility requirements with which a borrower

must comply. Therefore, this provision would not add burden hours to

the current information collection requirements associated with this

section.

Section 674.39 Loan Rehabilitation. The Department currently has

this section approved under OMB control number 1840-0535. We are

proposing a new section that requires an institution to establish a

loan rehabilitation program. A loan is considered rehabilitated when

the borrower makes an on-time, monthly payment, as determined by the

institution, each month for twelve consecutive months. The institution

must notify a defaulted borrower of the option and consequences of

rehabilitating a loan under these proposed regulations. Once the loan

is rehabilitated, the borrower is returned to regular repayment status,

the first payment made under the 12 consecutive payments is treated as

the first payment under a new 10-year repayment period and any adverse

credit bureau history related to the default is removed from the

borrower's credit report. Under Sec. 674.16 and Sec. 674.42 of current

and proposed regulations, respectively, institutions are required to

disclose to the borrower the definition of default and the consequences

of defaulting on a Federal Perkins Loan, along with information on any

cost that may be assessed to the borrower in the collection of the

loan, including late charges and collection costs. The institution is

required to provide this information in writing as part of the written

application material, as part of the promissory note or on a separate

written form before making and disbursing a Federal Perkins Loan to the

borrower. The institution is again required to disclose information on

the consequences of default to the borrower before he or she ceases at

least half-time study at the institution, during the exit interview or

immediately, in writing, if the borrower enters repayment without the

institution's knowledge. There is ample opportunity for a school to

disclose information to the borrower regarding the availability and

consequences of loan rehabilitation when making the disclosures

currently required under Sec. 674.16 and Sec. 674.42. Disclosures made

under Sec. 674.16 are considered part of normal business practice under

OMB control number 1840-0535. Further calculation of burden hours under

Sec. 674.42 for providing notice of the option and consequences of

rehabilitation would duplicate hours already calculated and cleared

under OMB 1840-0535 that account for the disclosures that an

institution is currently required to make that section. Because any

burden associated with notifying a borrower of the option and

consequences of rehabilitation is burden associated with or accounted

for under other sections of the regulations, there are no new burden

hours contained in this section.

Section 674.41 Due diligence--general requirements. The Department

is adding this section as a new section approved under OMB control

number 1840-0581. The proposed regulation would require institutions to

provide a Federal Perkins Loan Program borrower with information on the

availability of the Student Loan Ombudsman's office if the borrower

disputes the terms of the loan in writing and the institution does not

resolve the dispute. A total of 1,049,216 Federal Perkins Loan

borrowers were in repayment as of June 30, 1998. The Department

estimates that 5,246 (.5 percent) borrowers in repayment may require

information on the availability of the Student Loan Ombudsman's office

after failing to resolve a dispute regarding the terms of the loan with

the institution. The Department further estimates that providing

information on the availability of the Student Loan Ombudsman's office

will average 5 minutes per response. The 437 hours and 10 minutes of

burden associated with this section.

Section 674.42 Contact with the borrower. The Department currently

has this section approved under OMB control number 1840-0581. The

proposed regulation reorders the provisions in Sec. 674.42 by moving

the disclosure requirements with which an institution must comply under

section 463A(b) of the HEA, either as part of the promissory note or in

another written statement, to paragraph Sec. 674.42(a). The disclosures

have not changed. However, the proposed regulations give a school

additional flexibility in the timing of the disclosures. Therefore, the

information collection requirements remain unchanged for this section.

In accordance with the Amendments, this proposed change also

authorizes an institution to use electronic means to facilitate exit

counseling in the Federal Perkins Loan program. Previously, an

institution was required to offer the borrower exit counseling in

person or in groups. Exit counseling provisions are contained in

Sec. 674.42(b) of the proposed regulation. The proposed regulation

provides consistency across the title IV, HEA loan programs in

describing the disclosures that an institution is required to make

during exit counseling. Because the authority to use electronic means

in offering exit counseling does not change the nature of the

information disseminated, there are no additional information

collections that result from this change.

Lastly, in order to facilitate the use of electronic exit

counseling, we are proposing regulations that would eliminate the

requirement that a school, as part of exit counseling, have the

borrower sign a copy of the repayment schedule and provide a copy of

the signed repayment schedule and the signed promissory note to the

borrower. However, because an institution must still provide the

borrower with a copy of the borrower's repayment schedule and the

promissory note as part of the disclosures required by Sec. 674.42(a)

of this section, the information collection burden contained in this

section does not change.

Section 674.45 Collection procedures. The Department currently has

this section approved under OMB control number 1840-0581. We are

proposing to clarify that an institution must report any changes

regarding a defaulted borrower to any national credit bureau to which

it reported the default. The institution must also resolve, within 30

days of its receipt, any inquiry from any credit bureau that disputes

the completeness or accuracy of information reported on the loan.

Institutions are currently reporting information to credit bureaus that

reflect the recent changes made to the HEA by the Amendments. The

Amendments merely codify standard business practice as it relates to

credit bureau reporting. This provision does not change the information

collection contained in this section. We are also proposing that as

part of the collection activities provided for in this section, the

institution provide the borrower with information on the availability

of the Student Loan Ombudsman. The information collection contained in

this section takes into account more intensive efforts an institution

must make to recover amounts owed from defaulted borrowers. Information

on the availability of the Student Loan Ombudsman is easily

incorporated into the existing due diligence efforts required of

institutions. Any further calculation of burden hours for this

[[Page 41242]]

requirement would duplicate hours already calculated and cleared under

OMB 1840-0581.

Section 674.47 Costs chargeable to the Fund. The Department has

this section approved under OMB control number 1840-0581. We are

proposing to amend this section, in accordance with the loan

rehabilitation provisions in Sec. 674.39 of the proposed regulations.

The proposed change would authorize an institution, until July 1, 2002,

to charge its Fund for any collection costs assessed on a rehabilitated

loan that are in excess of the maximum 24 percent limit that may be

passed along to the borrower. This authority spares an institution any

out-of-pocket expense that it may incur in complying with the terms of

existing contracts with collection agencies that call for collection

fees in excess of 24 percent. The proposed regulation would provide a

transition period during which an institution could, in the normal

course of business, renegotiate or renew existing contracts in order to

accommodate the 24 percent limit on collection costs. The proposed

regulations authorizing an institution to charge collection costs in

excess of 24 percent to its Fund does not substantially change the

information collection contained in this section.

Section 674.49 Bankruptcy of borrower. The Department currently

has this section approved under OMB control number 1840-0581. We are

proposing to amend this section in order to reflect changes made to the

U.S. Bankruptcy Code that eliminate the automatic discharge of a

student loan if the loan was in repayment for seven years or more. The

fact that a federal student loan cannot be automatically discharged in

a bankruptcy filing does not change the due diligence efforts required

of an institution in collecting on a loan, defaulted or otherwise. The

institution's collection responsibilities remain as a matter of normal

business practice and the proposed regulations would not change the

information collection contained in this section.

If you want to comment on the information collection requirements,

please send your comments to the Office of Information and Regulatory

Affairs, OMB, room 10235, New Executive Office Building, Washington, DC

20503; Attention: Desk Officer for U.S. Department of Education. You

may also send a copy of these comments to the Department representative

named in the ADDRESSES section of this preamble.

We consider your comments on these proposed collections of

information in--

Deciding whether the proposed collections are necessary

for the proper performance of our functions, including whether the

information will have practical use;

Evaluating the accuracy of our estimate of the burden of

the proposed collections, including the validity of our methodology and

assumptions;

Enhancing the quality, usefulness, and clarity of the

information we collect; and

Minimizing the burden on those who must respond. This

includes exploring the use of appropriate automated, electronic,

mechanical, or other technological collection techniques or other forms

of information technology; e.g., permitting electronic submission of

responses.

OMB is required to make a decision concerning the collections of

information contained in these proposed regulations between 30 and 60

days after publication of this document in the Federal Register.

Therefore, to ensure that OMB gives your comments full consideration,

it is important that OMB receives the comments within 30 days of

publication. This does not affect the deadline for your comments to us

on the proposed regulations.

Assessment of Educational Impact

The Secretary particularly requests comments on whether these

proposed regulations would require transmission of information that any

other agency or authority of the United States gathers or makes

available.

Electronic Access to This Document

You may view this document, as well as other Department of

Education documents published in the Federal Register, in text or Adobe

Portable Document Format (PDF) on the Internet at the following sites:

http://ocfo.ed.gov/fedreg.htm

http://ifap.ed.gov/csb__

html/fedlreg.htm

http://www.ed.gov/legislation/HEA/rulemaking

To use the PDF you must have the Adobe Acrobat Reader Program with

Search, which is available free at either of the previous sites. If you

have questions about using the PDF, call the U.S. Government Printing

Office (GPO), toll free, at 1-888-293-6498; or in the Washington, DC.,

area at (202) 512-1530.

Note: The official version of this document is the document

published in the Federal Register. Free Internet access to the

official edition of the Federal Register and the Code of Federal

Regulations is available on GPO Access at: http://

www.access.gpo.gov/nara/index.html

(Catalog of Federal Domestic Assistance Number: 84.037 Federal

Perkins Loan Program)

List of Subjects in 34 CFR Part 674

Loan programs--education, Student aid, Reporting and recordkeeping

requirements.

Dated: July 12, 1999.

Richard W. Riley,

Secretary of Education.

For the reasons stated in the preamble, the Secretary proposes to

amend part 674 of title 34 of the Code of Federal Regulations as

follows:

PART 674--FEDERAL PERKINS LOAN PROGRAM

1. The authority citation for part 674 continues to read as

follows:

Authority: 20 U.S.C. 1087aa-1087ii and 20 U.S.C. 421-429, unless

otherwise noted.

2. Section 674.2(b) is amended by adding, in alphabetical order,

the following definition:

Sec. 674.2 Definitions.

* * * * *

(b) * * *

Satisfactory repayment arrangement: For purposes of regaining

eligibility for grant, loan, or work assistance under Title IV of the

HEA, to the extent that the borrower is otherwise eligible, the making

of six (6) on-time, consecutive, monthly payments on a defaulted loan.

A borrower may obtain the benefit of this paragraph with respect to

renewed eligibility once on a defaulted loan.

* * * * *

3. Section 674.5 is amended as follows:

A. By revising paragraphs (a)(1) and (a)(2).

B. By removing paragraphs (a)(3) and (a)(4).

C. By removing paragraph (b)(2) and redesignating paragraph (b)(3)

as paragraph (b)(2).

D. By removing paragraph (c)(4); and redesignating paragraph

(c)(3)(ii) as paragraph (c)(4) and by removing ``; and'' at the end of

the sentence in the new paragraph (c)(4) and adding, in its place, a

period; and by revising paragraph (c)(3).

E. By removing paragraphs (e) and (f).

Sec. 674.5 Federal Perkins Loan Program cohort default rate and

penalties.

(a) * * *

(1) FCC reduction. If the institution's cohort default rate equals

or exceeds 25 percent, the institution's FCC is reduced to zero.

(2) Ineligibility. For award year 2000-2001 and succeeding award

years, an institution with a cohort default rate

[[Page 41243]]

that equals or exceeds 50 percent for each of the three most recent

years for which cohort default rate data are available is ineligible to

participate in the Federal Perkins Loan Program. Following a review of

that data and upon notification by the Secretary, an institution is

ineligible to participate for the award year in which the determination

is made and the two succeeding award years. An institution may appeal a

notification of ineligibility from the Secretary within 30 days of its

receipt.

(i) Appeal procedures.--(A) Inaccurate calculation. An institution

may appeal a notice of ineligibility based upon the submission of

erroneous data by the institution, the correction of which would result

in a recalculation that reduces the institution's cohort default rate

to below 50 percent for any of the three award years used to make a

determination of ineligibility. The Secretary considers the edit

process, by which an institution adjusts the cohort default rate data

that it submits to the Secretary on its Fiscal Operations Report, to

constitute the procedure to appeal a determination of ineligibility

based on a claim of erroneous data.

(B) Small number of borrowers entering repayment. An institution

may appeal a notice of ineligibility if, on average, 10 or fewer

borrowers enter repayment for the three most recent award years used by

the Secretary to make a determination of ineligibility.

(C) Decision of the Secretary. The Secretary issues a decision on

an appeal within 45 days of the institution's submission of a complete,

accurate, and timely appeal. An institution may continue to participate

in the program until the Secretary issues a decision on the

institution's appeal.

(ii) Liquidation of an institution's Perkins Loan portfolio. Within

90 days of receiving a notification of ineligibility or, if the

institution appeals, within 90 days of the Secretary's decision to deny

the appeal, the institution must--

(A) Liquidate its revolving student loan fund by making a capital

distribution of the liquid assets of the Fund according to section

466(c) of the HEA; and

(B) Assign any outstanding loans in the institution's portfolio to

the Secretary in accordance with Sec. 674.50.

(iii) Effective date. The provisions of paragraph (a)(2) of this

section are effective beginning with the cohort default rate calculated

as of June 30, 2001.

* * * * *

(c) * * *

* * * * *

(3)(i) In determining the number of borrowers who default before

the end of the following award year, a loan is excluded if the borrower

has--

(A) Voluntarily made six consecutive monthly payments;

(B) Voluntarily made all payments currently due;

(C) Repaid the full amount due, including any interest, late fees,

and collection costs that have accrued on the loan;

(D) Received a deferment or forbearance based on a condition that

predates the borrower reaching a 240- or 270-day past due status; or

(E) Rehabilitated the loan after becoming 240- or 270-days past

due.

(ii) A loan is considered canceled and also excluded from an

institution's cohort default rate calculation if the loan is--

(A) Discharged due to death or permanent and total disability;

(B) Discharged in bankruptcy;

(C) Discharged due to a closed school; or

(D) Repaid in full in accordance with Sec. 674.33(e).

(iii) For the purpose of this section, funds obtained by income tax

offset, garnishment, income or asset execution, or pursuant to a

judgment are not considered voluntary.

* * * * *

674.6 [Removed and Reserved]

4. Section 674.6 is removed and reserved.

674.7 [Removed and Reserved]

5. Section 674.7 is removed and reserved.

6. Section 674.9 is amended by redesignating paragraph (i) as

paragraph (j) and adding new paragraph (i) to read as follows:

Sec. 674.9 Student eligibility.

* * * * *

(i) In the case of a borrower who is in default on a Federal

Perkins Loan, NDSL or Defense loan, satisfies one of the conditions

contained in Sec. 674.5(c)(3)(i) or (ii) except that--

(1) For the purposes of this section, voluntary payments made by

the borrower under paragraph (i) of this section are those payments

made directly by the borrower, including payments made over and above

payments made pursuant to a judgment; and

(2) Voluntary payments do not include payments obtained by income

tax offset, garnishment, income or asset execution or pursuant to a

judgment.

* * * * *

7. Section 674.12 is amended by revising paragraphs (a), (b) and

(d) to read as follows:

Sec. 674.12 Loan maximums.

(a) The maximum annual amount of Federal Perkins Loans and Direct

Loans an eligible student may borrow is--

(1) $4,000 for a student who is enrolled in a program of

undergraduate education; and

(2) $6,000 for a graduate or professional student.

(b) The aggregate unpaid principal amount of all Federal Perkins

Loans and Direct Loans received by an eligible student may not exceed--

(1) $20,000 for a student who has successfully completed two years

of a program leading to a bachelor's degree but who has not received

the degree;

(2) $40,000 for a graduate or professional student; and

(3) $8,000 for any other student.

* * * * *

(d) For each student, the maximum annual amounts described in

paragraphs (a) and (c) of this section, and the aggregate maximum

amounts described in paragraphs (b) and (c) of this section, include

any amounts borrowed previously by the student under title IV, part E

of the HEA at any institution.

* * * * *

8. Section 674.16 is amended by revising paragraph (i) to read as

follows:

Sec. 674.16 Making and disbursing loans.

* * * * *

(i)(1) An institution must report to at least one national credit

bureau--

(i) The amount and the date of each disbursement;

(ii) Information concerning the repayment and collection of the

loan until the loan is paid in full; and

(iii) The date the loan was repaid, canceled or discharged for any

reason.

(2) An institution must promptly report any changes to information

previously reported on a loan to the same credit bureaus to which the

information was previously reported.

* * * * *

9. Section 674.31(b)(2)(i) is amended by redesignating paragraphs

(C) and (D) as (D) and (E), respectively; by adding new paragraph

(b)(2)(i)(C); and by revising paragraph (b)(10)(i) to read as follows:

Sec. 674.31 Promissory note.

* * * * *

(b) * * *

(2) * * *

(i) * * *

(C) For purposes of establishing the beginning of the repayment

period for Direct or Perkins loans, the 6- and 9-

[[Page 41244]]

month grace periods referenced in paragraph (b)(2)(i) of this section

exclude any period during which a borrower who is a member of a reserve

component of the Armed Forces named in section 10101 of Title 10,

United States Code is called or ordered to active duty for a period of

more than 30 days. Any single excluded period may not exceed three

years and includes the time necessary for the borrower to resume

enrollment at the next available regular enrollment period. Any Direct

or Perkins loan borrower who is in a grace period when called or

ordered to active duty as specified above is entitled to a new 6- or 9-

month grace period upon completion of the excluded period.

* * * * *

(10) * * *

(i) The institution must disclose to at least one national credit

bureau the amount of the loan made to the borrower, along with other

relevant information.

* * * * *

10. Section 674.33 is amended by adding new paragraphs (f) and (g)

to read as follows:

Sec. 674.33 Repayment.

* * * * *

(f) Incentive repayment program. (1) An institution may establish

the following repayment incentives:

(i) A reduction of no more than one percent of the interest rate on

a loan on which the borrower has made 48 consecutive, monthly

repayments.

(ii) A discount of no more than five percent on the balance owed on

a loan which the borrower pays in full prior to the end of the

repayment period.

(iii) With the Secretary's approval, any other incentive the

institution determines will reduce defaults and replenish its Fund.

(2) Limitation on the use of funds. (i) The institution must

reimburse its Fund, on at least a quarterly basis, for interest lost to

its Fund that otherwise would have been paid by the borrower as a

result of establishing a repayment incentive under paragraph (f)(1)(i)

and (ii) of this section.

(ii) An institution may not use Federal funds, including Federal

funds from the student loan fund, or institutional funds from the

student loan fund to pay for any repayment incentive authorized by this

section.

(g) Closed school discharge. (1) General. (i) The holder of an NDSL

or a Federal Perkins Loan discharges the borrower's (and any

endorser's) obligation to repay the loan if the borrower did not

complete the program of study for which the loan was made because the

school at which the borrower was enrolled closed.

(ii) For the purposes of this section--

(A) A school's closure date is the date that the school ceases to

provide educational instruction in all programs, as determined by the

Secretary;

(B) ``School'' means a school's main campus or any location or

branch of the main campus; and

(C) The ``holder'' means the Secretary or the school that holds the

loan.

(2) Relief pursuant to discharge. (i) Discharge under this section

relieves the borrower of any past or present obligation to repay the

loan and any accrued interest or collection costs with respect to the

loan.

(ii) The discharge of a loan under this section qualifies the

borrower for reimbursement of amounts paid voluntarily or through

enforced collection on the loan.

(iii) A borrower who has defaulted on a loan discharged under this

section is not considered to be in default on the loan after discharge,

and such a borrower is eligible to receive assistance under programs

authorized by title IV of the HEA.

(iv) The Secretary or the school, if the school holds the loan,

reports the discharge of a loan under this section to all credit

bureaus to which the status of the loan was previously reported.

(3) Determination of borrower qualification for discharge by the

Secretary. The Secretary may discharge the borrower's obligation to

repay an NDSL or Federal Perkins Loan without an application if the

Secretary determines that--

(i) The borrower qualified for and received a discharge on a loan

pursuant to 34 CFR 682.402(d) (Federal Family Education Loan Program)

or 34 CFR 685.213 (Federal Direct Loan Program), and was unable to

receive a discharge on an NDSL or Federal Perkins Loan because the

Secretary lacked the statutory authority to discharge the loan, or

(ii) Based on information in the Secretary's possession, the

borrower qualifies for a discharge.

(4) Borrower qualification for discharge. Except as provided in

paragraph (g)(3) of this section, in order to qualify for discharge of

an NDSL or Federal Perkins Loan, a borrower must submit to the holder

of the loan a written request and sworn statement, and the factual

assertions in the statement must be true. The statement need not be

notarized but must be made by the borrower under penalty of perjury. In

the statement the borrower must--

(i) State that the borrower--

(A) Received the proceeds of a loan to attend a school;

(B) Did not complete the program of study at that school because

the school closed while the student was enrolled, or the student

withdrew from the school not more than 90 days before the school closed

(or longer in exceptional circumstances); and

(C) Did not complete and is not in the process of completing the

program of study through a teachout at another school as defined in 34

CFR 602.2 and administered in accordance with 34 CFR 602.207(b)(6), by

transferring academic credit earned at the closed school to another

school, or by any other comparable means.

(ii) State whether the borrower has made a claim with respect to

the school's closing with any third party, such as the holder of a

performance bond or a tuition recovery program, and, if so, the amount

of any payment received by the borrower or credited to the borrower's

loan obligation; and

(iii) State that the borrower--

(A) Agrees to provide to the holder of the loan upon request other

documentation reasonably available to the borrower that demonstrates

that the borrower meets the qualifications for discharge under this

section; and

(B) Agrees to cooperate with the Secretary, in the case of a

discharged loan held by the Secretary, in enforcement actions in

accordance with paragraph (g)(6) of this section and to transfer any

right to recovery against a third party to the Secretary in accordance

with paragraph (g)(7) of this section.

(5) Fraudulently obtained loans. A borrower who secured a loan

through fraudulent means, as determined by the ruling of a court or an

administrative tribunal of competent jurisdiction, is ineligible for a

discharge under this section.

(6) Cooperation by borrower in enforcement actions.

(i) In order to obtain a discharge under this section, a borrower

must cooperate with the Secretary in any judicial or administrative

proceeding brought by the Secretary to recover amounts discharged or to

take other enforcement action with respect to the conduct on which the

discharge was based. At the request of the Secretary and upon the

Secretary's tendering to the borrower the fees and costs that are

customarily provided in litigation to reimburse witnesses, the borrower

must--

(A) Provide testimony regarding any representation made by the

borrower to support a request for discharge;

[[Page 41245]]

(B) Provide any documents reasonably available to the borrower with

respect to those representations; and

(C) If required by the Secretary, provide a sworn statement

regarding those documents and representations.

(ii) The holder denies the request for a discharge or revokes the

discharge of a borrower who--

(A) Fails to provide the testimony, documents, or a sworn statement

required under paragraph (g)(6)(i) of this section; or

(B) Provides testimony, documents, or a sworn statement that does

not support the material representations made by the borrower to obtain

the discharge.

(7) Transfer to the Secretary of borrower's right of recovery

against third parties. (i) In the case of a loan held by the Secretary,

upon discharge under this section, the borrower is deemed to have

assigned to and relinquished in favor of the Secretary any right to a

loan refund (up to the amount discharged) that the borrower may have by

contract or applicable law with respect to the loan or the enrollment

agreement for the program for which the loan was received, against the

school, its principals, its affiliates and their successors, its

sureties, and any private fund, including the portion of a public fund

that represents funds received from a private party.

(ii) The provisions of this section apply notwithstanding any

provision of State law that would otherwise restrict transfer of those

rights by the borrower, limit or prevent a transferee from exercising

those rights, or establish procedures or a scheme of distribution that

would prejudice the Secretary's ability to recover on those rights.

(iii) Nothing in this section limits or forecloses the borrower's

right to pursue legal and equitable relief regarding disputes arising

from matters unrelated to the discharged NDSL or Federal Perkins Loan.

(8) Discharge procedures. (i) After confirming the date of a

school's closure, the holder of the loan identifies any NDSL or Federal

Perkins Loan borrower who appears to have been enrolled at the school

on the school closure date or to have withdrawn not more than 90 days

prior to the closure date.

(ii) If the borrower's current address is known, the holder of the

loan mails the borrower a discharge application and an explanation of

the qualifications and procedures for obtaining a discharge. The holder

of the loan also promptly suspends any efforts to collect from the

borrower on any affected loan. The holder of the loan may continue to

receive borrower payments.

(iii) In the case of a loan held by the Secretary, if the

borrower's current address is unknown, the Secretary attempts to locate

the borrower and determine the borrower's potential eligibility for a

discharge under this section by consulting with representatives of the

closed school or representatives of the closed school's third-party

billing and collection servicers, the school's licensing agency, the

school accrediting agency, and other appropriate parties. If the

Secretary learns the new address of a borrower, the Secretary mails to

the borrower a discharge application and explanation and suspends

collection, as described in paragraph (g)(8)(ii) of this section.

(iv) In the case of a loan held by the school, if the borrower's

current address is unknown, the school attempts to locate the borrower

and determine the borrower's potential eligibility for a discharge

under this section by taking steps required to locate the borrower

under Sec. 674.44.

(v) If the borrower fails to submit the written request and sworn

statement described in paragraph (g)(4) of this section within 60 days

of the holder of the loan's mailing the discharge application, the

holder of the loan resumes collection and grants forbearance of

principal and interest for the period during which collection activity

was suspended.

(vi) If the holder of the loan determines that a borrower who

requests a discharge meets the qualifications for a discharge, the

holder of the loan notifies the borrower in writing of that

determination.

(vii) In the case of a loan held by the Secretary, if the Secretary

determines that a borrower who requests a discharge does not meet the

qualifications for a discharge, the Secretary notifies that borrower,

in writing, of that determination and the reasons for the

determination.

(viii) In the case of a loan held by a school, if the school

determines that a borrower who requests a discharge does not meet the

qualifications for discharge, the school submits that determination and

all supporting materials to the Secretary for approval. The Secretary

reviews the materials, makes an independent determination, and notifies

the borrower in writing of the determination and the reasons for the

determination.

(ix) In the case of a loan held by an school and discharged by

either the school or the Secretary, the school must reimburse its Fund

for the entire amount of any outstanding principal and interest on the

loan, and any collection costs charged to the Fund as a result of

collection efforts on a discharged loan. The school must also reimburse

the borrower for any amount of principal, interest, late charges or

collection costs the borrower paid on a loan discharged under this

section.

* * * * *

11. Section 674.34 is amended by revising the section heading; and

revising paragraphs (a) and (c) to read as follows:

Sec. 674.34 Deferment of repayment--Federal Perkins loans, Direct

loans and Defense loans.

(a) The borrower may defer making a scheduled installment repayment

on a Federal Perkins loan, a Direct loan, or a Defense loan, regardless

of contrary provisions of the borrower's promissory note and regardless

of the date the loan was made, during periods described in this

section.

* * * * *

(c) The borrower of a Federal Perkins loan, a Direct loan, or a

Defense loan need not repay principal, and interest does not accrue,

for any period during which the borrower is engaged in service

described in Secs. 674.53, 674.54, 674.55, 674.56, 674.57, 674.58,

674.59, and 674.60.

* * * * *

12. Section 674.39 is revised to read as follows:

Sec. 674.39 Loan rehabilitation.

(a) Each institution must establish a loan rehabilitation program

for all borrowers for the purpose of rehabilitating defaulted loans

made under this part. The institution's loan rehabilitation program

must provide that--

(1) A defaulted borrower is notified of the option and consequences

of rehabilitating a loan; and

(2) A loan is rehabilitated if the borrower makes an on-time,

monthly payment, as determined by the institution, each month for

twelve consecutive months.

(b) Within 30 days of receiving the borrower's last on-time,

consecutive, monthly payment, the institution must--

(1) Return the borrower to regular repayment status;

(2) Treat the first payment made under the 12 consecutive payments

as the first payment under the 10-year repayment maximum; and

(3) Instruct any credit bureau to which the default was reported to

remove the default from the borrower's credit history.

(c) Collection costs on a rehabilitated loan--

[[Page 41246]]

(1) If charged to the borrower, may not exceed 24 percent of the

unpaid principal and accrued interest; and

(2) That exceed the amounts specified in paragraph (c)(1) of this

section may be charged to an institution's Fund until July 1, 2002, in

accordance with Sec. 674.47(e)(5).

(d) After rehabilitating a defaulted loan and returning to regular

repayment status, the borrower regains all of the benefits and

privileges of the promissory note as applied prior to the borrower's

default on the loan. Nothing in this paragraph prohibits an institution

from offering the borrower flexible repayment options following the

borrower's return to regular repayment status on a rehabilitated loan.

(e) The borrower may rehabilitate a defaulted loan only one time.

* * * * *

13. Section 674.41 is amended by adding a new paragraph (a)(3) to

read as follows:

Sec. 674.41 Due diligence--general requirements.

(a) * * *

* * * * *

(3) Provide the borrower with information on the availability of

the Student Loan Ombudsman's office if the borrower disputes the terms

of the loan in writing and the institution does not resolve the

dispute.

* * * * *

14. Section 674.42 is amended by redesignating paragraph (b) as

paragraph (c), revising paragraph (a) and adding a new paragraph (b) to

read as follows:

Sec. 674.42 Contact with the borrower.

(a) Disclosure of repayment information. The institution must

disclose the following information in a written statement provided to

the borrower either shortly before the borrower ceases at least half-

time study at the institution or during the exit interview. If the

borrower enters the repayment period without the institution's

knowledge, the institution must provide the required disclosures to the

borrower in writing immediately upon discovering that the borrower has

entered the repayment period. The institution must disclose the

following information--

(1) The name and address of the institution to which the debt is

owed and the name and address of the official or servicing agent to

whom communications should be sent.

(2) The name and address of the party to which payments should be

sent.

(3) The estimated balance owed by the borrower on the date on which

the repayment period is scheduled to begin.

(4) The stated interest rate on the loan.

(5) The repayment schedule for all loans covered by the disclosure

including the date the first installment payment is due, and the

number, amount, and frequency of required payments.

(6) An explanation of any special options the borrower may have for

loan consolidation or other refinancing of the loan, and a statement

that the borrower has the right to prepay all or part of the loan at

any time without penalty.

(7) A description of the charges imposed for failure of the

borrower to pay all or part of an installment when due.

(8) A description of any charges that may be imposed as a

consequence of default, such as liability for expenses reasonably

incurred in attempts by the Secretary or the institution to collect on

the loan.

(9) The total interest charges which the borrower will pay on the

loan pursuant to the projected repayment schedule.

(10) A copy of the borrower's signed promissory note.

(b) Exit interview. (1) An institution must conduct exit counseling

with each borrower either in person, by audiovisual presentation, or by

interactive electronic means. The institution must conduct this

counseling shortly before the borrower ceases at least half-time study

at the institution. As an alternative, in the case of a student

enrolled in a correspondence program or a study-abroad program that the

school approves for credit, the school may provide written counseling

materials by mail within 30 days after the borrower completes the

program. If the borrower withdraws from school without the school's

prior knowledge or fails to complete an exit counseling session as

required, the school must provide exit counseling through either

interactive electronic means or by mailing counseling material to the

borrower at the borrower's last known address within 30 days after

learning that the borrower has withdrawn from school or failed to

complete exit counseling as required.

(2) In conducting the exit counseling, the school must--

(i) Inform the student as to the average anticipated monthly

repayment amount based on the student's indebtedness or on the average

indebtedness of students who have obtained Perkins loans for attendance

at that school or in the borrower's program of study;

(ii) Review for the borrower available repayment options (e.g. loan

consolidation and refinancing);

(iii) Suggest to the borrower debt-management strategies that the

school determines would best assist repayment by the borrower;

(iv) Emphasize to the borrower the seriousness and importance of

the repayment obligation the borrower is assuming;

(v) Describe in forceful terms the likely consequences of default,

including adverse credit reports and litigation;

(vi) Emphasize that the borrower is obligated to repay the full

amount of the loan even if the borrower has not completed the program,

is unable to obtain employment upon completion, or is otherwise

dissatisfied with or does not receive the educational or other services

that the borrower purchased from the school;

(vii) Review with the borrower the conditions under which the

borrower may defer repayment or obtain partial cancellation of a loan;

(viii) Require the borrower to provide corrections to the

institution's records concerning name, address, social security number,

references, and driver's license number, the borrower's expected

permanent address, the address of the borrower's next of kin, as well

as the name and address of the borrower's expected employer; and

(ix) Review with the borrower information on the availability of

the Student Loan Ombudsman's office.

(3) Additional matters that the Secretary recommends that a school

include in the exit counseling session or materials set forth in

appendix D to 34 CFR part 668.

(4) An institution that conducts exit counseling through

interactive electronic means must take reasonable steps to ensure that

each student borrower receives the counseling materials, and

participates in and completes the exit counseling.

(5) The institution must maintain documentation substantiating the

school's compliance with this section for each borrower.

* * * * *

15. Section 674.45 is amended by revising paragraph (b) and adding

a new paragraph (h) to read as follows:

Sec. 674.45 Collection procedures.

* * * * *

(b)(1) An institution must report to any national credit bureau to

which it reported the default, according to the reporting procedures of

the national credit bureau, any changes to the account status of the

loan.

[[Page 41247]]

(2) The institution must resolve within 30 days of its receipt, any

inquiry from any credit bureau that disputes the completeness or

accuracy of information reported on the loan.

* * * * *

(h) As part of the collection activities provided for in this

section, the institution must provide the borrower with information on

the availability of the Student Loan Ombudsman's office.

* * * * *

16. Section 674.47 is amended by redesignating paragraphs (e)(5)

and (e)(6) as (e)(6), and (e)(7), respectively, and by adding new

paragraph (e)(5) to read as follows:

Sec. 674.47 Costs chargeable to the Fund.

* * * * *

(e) * * *

(5) Until July 1, 2002 on loans rehabilitated pursuant to

Sec. 674.39, amounts that exceed the amounts specified in

Sec. 674.39(c)(1) but are less than--

(i) 30 percent if the loan was rehabilitated while in a first

collection effort; or

(ii) 40 percent if the loan was rehabilitated while in a second

collection effort.

* * * * *

17. Section 674.49 is amended as follows:

A. By redesignating paragraphs (f)(2)(ii)(A) and (f)(2)(ii)(B) as

paragraphs (f)(2)(ii)(B) and (f)(2)(ii)(C), respectively; and adding a

new paragraph (f)(2)(ii)(A).

B. By redesignating paragraphs (f)(3)(ii)(A) and (f)(3)(ii)(B) as

paragraphs (f)(3)(ii)(B) and (f)(3)(ii)(C), respectively; and adding a

new paragraph (f)(3)(ii)(A).

C. By revising paragraphs (c)(1), (c)(2) and (c)(3); paragraph

(e)(4)(i); newly redesignated paragraphs (f)(2)(ii)(B) and

(f)(3)(ii)(B); and paragraph (g).

Sec. 674.49 Bankruptcy of borrower.

* * * * *

(c) * * *

(1) The institution must use diligence and may assert any defense

consistent with its status under applicable law to avoid discharge of

the loan. The institution must follow the procedures in this paragraph

to respond to a complaint for a determination of dischargeability under

11 U.S.C. 523(a)(8) on the ground that repayment of the loan would

impose an undue hardship on the borrower and his or her dependents,

unless discharge would be more effectively opposed by avoiding that

action.

(2) If the petition for relief in bankruptcy was filed before

October 8, 1998 and more than seven years of the repayment period on

the loan (excluding any applicable suspension of the repayment period

defined in 34 CFR 682.402(m)) have passed before the borrower filed the

petition, the institution may not oppose a determination of

dischargeability requested under 11 U.S.C. 523(a)(8)(B) on the ground

of undue hardship.

(3) In any other case, the institution must determine, on the basis

of reasonably available information, whether repayment of the loan

under either the current repayment schedule or any adjusted schedule

authorized under subpart B or D of this part would impose an undue

hardship on the borrower and his or her dependents.

* * * * *

(e) * * *

* * * * *

(4)(i) The institution must monitor the borrower's compliance with

the requirements of the plan confirmed by the court. If the institution

determines that the debtor has not made the payments required under the

plan, or has filed a request for a ``hardship discharge'' under 11

U.S.C. 1328(b), the institution must determine from its own records and

information derived from documents filed with the court--

* * * * *

(f) * * *

(2) * * *

(ii)(A) The petition for relief was filed before October 8, 1998;

(B) The loan entered the repayment period more than seven years

(excluding any applicable suspension of the repayment period as defined

by 34 CFR 682.402(m)), and

(3) * * *

(ii)(A) The petition for relief was filed before October 8, 1998;

(B) The loan entered the repayment period more than seven years

(excluding any application suspension of the repayment period as

defined by 34 CFR 682.402(m)) before the filing of the petition, and

* * * * *

(g) Termination of collection and write-off. (1) An institution

must terminate all collection action and write off a loan if it

receives a general order of discharge--

(i) In a bankruptcy in which the borrower filed for relief before

October 8, 1998, if the loan entered the repayment period more than

seven years (exclusive of any applicable suspension of the repayment

period defined by 34 CFR 682.402(m)) from the date on which a petition

for relief was filed; or

(ii) In any other case, a judgment that repayment of the debt would

constitute an undue hardship and that the debt is therefore

dischargeable.

(2) If an institution receives a repayment from a borrower after a

loan has been discharged, it must deposit that payment in its Fund.

* * * * *

18. Section 674.52 is amended by revising paragraphs (c)(1) and (d)

to read as follows:

Sec. 674.52 Cancellation procedures.

* * * * *

(c) Cancellation of a defaulted loan. (1) Except with regard to

cancellation on account of the death or disability of the borrower, a

borrower whose defaulted loan has not been accelerated may qualify for

a cancellation by complying with the requirements of paragraph (a) of

this section.

* * * * *

(d) The Secretary considers a Perkins loan, Direct loan or Defense

loan borrower's loan deferment under Sec. 674.34(c) to run concurrently

with any period for which cancellation under Secs. 674.53, 674.54,

674.55, 674.56, 674.57, 674.58, 674.59, and 674.60 is granted.

* * * * *

19. Section 674.53 is amended by redesignating paragraphs (a)(2),

(a)(3), (a)(4), (a)(5), and (a)(6) as (a)(3), (a)(4), (a)(5), (a)(6),

and (a)(7), respectively; by revising the heading of the section; by

adding a new paragraph (a)(2); by revising paragraph (a)(1), paragraph

(b), and paragraph (c) to read as follows:

Sec. 674.53 Teacher cancellation--Federal Perkins, Direct and Defense

loans.

(a)(1) Cancellation for full-time teaching in an elementary or

secondary school serving low-income students.

(i) An institution must cancel up to 100 percent of the outstanding

loan balance on a Federal Perkins loan or a Direct loan made on or

after July 23, 1992, for full-time teaching in a public or other

nonprofit elementary or secondary school.

(ii) An institution must cancel up to 100 percent of the

outstanding loan balance on a Federal Perkins, Direct or Defense loan

made prior to July 23, 1992, for teaching service performed on or after

October 7, 1998, if the cancellation benefits provided under this

section are not included in the terms of the borrower's promissory

note.

(2) The borrower must be teaching full-time in a public or other

nonprofit elementary or secondary school that--

(i) Is in a school district that qualified for funds, in that year,

under title I of the Elementary and Secondary Education Act of 1995, as

amended; and

[[Page 41248]]

(ii) Has been selected by the Secretary based on a determination

that more than 30 percent of the school's total enrollment is made up

of title I children.

(b) Cancellation for full-time teaching in special education. (1)

An institution must cancel up to 100 percent of the outstanding balance

on a borrower's Federal Perkins loan or Direct loan made on or after

July 23, 1992, for the borrower's service as a full-time special

education teacher of infants, toddlers, children, or youth with

disabilities, in a public or other nonprofit elementary or secondary

school system.

(2) An institution must cancel up to 100 percent of the outstanding

loan balance on a Federal Perkins, Direct or Defense loan made prior to

July 23, 1992, for teaching service performed on or after October 7,

1998, if the cancellation benefits provided under this section are not

included in the terms of the borrower's promissory note.

* * * * *

(c) Cancellation for full-time teaching in fields of expertise. (1)

An institution must cancel up to 100 percent of the outstanding balance

on a borrower's Federal Perkins loan or Direct loan made on or after

July 23, 1992, for full-time teaching in mathematics, science, foreign

languages, bilingual education, or any other field of expertise where

the State education agency determines that there is a shortage of

qualified teachers.

(2) An institution must cancel up to 100 percent of the outstanding

loan balance on a Federal Perkins, Direct or Defense loan made prior to

July 23, 1992, for teaching service performed on or after October 7,

1998, if the cancellation benefits provided under this section are not

included in the terms of the borrower's promissory note.

* * * * *

20. Section 674.56 is amended by revising the section heading and

paragraphs (a), (b) and (c) to read as follows:

Sec. 674.56 Employment cancellation--Federal Perkins, Direct and

Defense loans.

(a) Cancellation for full-time employment as a nurse or medical

technician. (1) An institution must cancel up to 100 percent of the

outstanding balance on a borrower's Federal Perkins or Direct loan made

on or after July 23, 1992, for full-time employment as a nurse or

medical technician providing health care services.

(2) An institution must cancel up to 100 percent of the outstanding

balance on a Federal Perkins, Direct or Defense loan made prior to July

23, 1992, for full-time service as a nurse or medical technician

performed on or after October 7, 1998, if the cancellation benefits

provided under this section are not included in the borrower's

promissory note.

(b) Cancellation for full-time employment in a public or private

nonprofit child or family service agency. (1) An institution must

cancel up to 100 percent of the outstanding balance on a borrower's

Federal Perkins or Direct loan made on or after July 23, 1992, for

service as a full-time employee in a public or private nonprofit child

or family service agency who is providing, or supervising the provision

of, services to high-risk children who are from low-income communities

and the families of such children.

(2) An institution must cancel up to 100 percent of the outstanding

loan balance on a Federal Perkins, Direct or Defense loan made prior to

July 23, 1992, for employment in a child or family service agency on or

after October 7, 1998, if the cancellation benefits provided under this

section are not included in the terms of the borrower's promissory

note.

(c) Cancellation for service as a qualified professional provider

of early intervention services. (1) An institution must cancel up to

100 percent of the outstanding balance on a borrower's Federal Perkins

or Direct loan made on or after July 23, 1992, for the borrower's

service as a full-time qualified professional provider of early

intervention services in a public or other nonprofit program under

public supervision by the lead agency as authorized in section

676(b)(9) of the Individual with Disabilities Act.

(2) An institution must cancel up to 100 percent of the outstanding

loan balance on a Federal Perkins, Direct or Defense loan made prior to

July 23, 1992 for early intervention service performed on or after

October 7, 1998, if the cancellation benefits provided under this

section are not included in the terms of the borrower's promissory

note.

* * * * *

21. Section 674.57 is amended by redesignating paragraphs (a)(2),

(a)(3), (a)(4), (a)(5), (a)(6), and (a)(7) as (a)(3), (a)(4), (a)(5),

(a)(6), (a)(7), and (a)(8), respectively; by revising the section

heading and paragraph (a)(1); and adding a new paragraph (a)(2) to read

as follows:

Sec. 674.57 Cancellation for law enforcement or corrections officer

service--Federal Perkins, Direct and Defense loans.

(a)(1) An institution must cancel up to 100 percent of the

outstanding balance on a borrower's Federal Perkins or Direct Loan made

on or after November 29, 1990, for full-time service as a law

enforcement or corrections officer for an eligible employing agency.

(2) An institution must cancel up to 100 percent of the outstanding

loan balance on a Federal Perkins, Direct or Defense loan made prior to

November 29, 1990, for law enforcement or correction officer service

performed on or after October 7, 1998, if the cancellation benefits

provided under this section are not included in the terms of the

borrower's promissory note.

* * * * *

22. Section 674.58 is amended by revising paragraph (a) to read as

follows:

Sec. 674.58 Cancellation for service in a Head Start Program.

(a)(1) An institution must cancel up to 100 percent of the

outstanding balance on a borrower's Direct or Federal Perkins loan, for

service as a full-time staff member in a ``Head Start'' program.

(2) An institution must cancel up to 100 percent of the outstanding

balance on a Defense loan for service as a full-time staff member in a

``Head Start'' program performed on or after October 7, 1998, if the

cancellation benefits provided under this section are not included in

the terms of the borrower's promissory note.

(3) The Head Start program in which the borrower serves must

operate for a complete academic year, or its equivalent.

(4) In order to qualify for cancellation, the borrower's salary may

not exceed the salary of a comparable employee working in the local

educational agency of the area served by the local Head Start program.

* * * * *

23. Section 674.60 is amended by revising the section heading and

paragraph (a) to read as follows:

Sec. 674.60 Cancellation for volunteer service--Perkins loans, Direct

loans and Defense loans.

(a)(1) An institution must cancel up to 70 percent of the

outstanding balance on a Perkins loan, and 70 percent of the

outstanding balance of an NDSL made on or after October 7, 1998, for

service as a volunteer under The Peace Corps Act or The Domestic

Volunteer Service Act of 1973 (ACTION programs).

(2) An institution must cancel up to 70 percent of the outstanding

balance on a Direct or Defense loan for service as a volunteer under

The Peace Corps Act or The Domestic Volunteer Service Act of 1973

(ACTION programs) performed on or after October 7, 1998, if the

cancellation benefits provided under

[[Page 41249]]

this section are not included in the terms of the borrower's promissory

note.

* * * * *

[FR Doc. 99-19230 Filed 7-28-99; 8:45 am]

BILLING CODE 4000-01-U