Student Assistance General Provisions

DEPARTMENT OF EDUCATION

34 CFR Part 668

RIN 1845-AA04

Student Assistance General Provisions

AGENCY: Department of Education.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Secretary proposes to amend the loan default reduction and

prevention measures in the Student Assistance General Provisions

regulations in 34 CFR part 668. This notice of proposed rulemaking

(NPRM) reflects changes made by the Higher Education Amendments of 1998

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

DATES: We must receive your comments on or before September 15, 1999.

ADDRESSES: Address all comments about these proposed regulations to

Kenneth Smith, U.S. Department of Education, P.O. Box 23272,

Washington, DC 20026-3272. 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: Kenneth Smith. Telephone: (202) 708-

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

may call the Federal Information Relay Service (FIRS) 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 programs.

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, DC, 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.

Background

The Higher Education Amendments of 1998 (Pub. L. 105-244, enacted

October 7, 1998, and referred to in this NPRM as the ``1998

Amendments'') changed some requirements relating to the calculation of

a school's Federal Family Education Loan (FFEL) Program cohort default

rate, William D. Ford Federal Direct Loan (Direct Loan) Program cohort

rate, or weighted average cohort rate. The Secretary is proposing to

revise 34 CFR 668.17 of the Student Assistance General Provisions

regulations to reflect these changes.

Negotiated Rulemaking Process

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, DC, Chicago, and Los Angeles, and

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

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

The proposed regulations contained in this NPRM reflect the final

consensus of the negotiating committee, 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

[[Page 41753]]

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 Financial 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 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

US Public Interest Research Group

As stated in the 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

Proposed Regulatory Changes

To help readers understand the proposed regulatory changes, we

believe it is appropriate to provide a brief description of the

processes available for schools to challenge or appeal their FFEL

Program cohort default rates, Direct Loan Program cohort rates, or

weighted average cohort rates. To avoid confusion in this NPRM, we use

the word ``rate'' by itself to refer to FFEL Program cohort default

rates, Direct Loan Program cohort rates, and weighted average cohort

rates. We use the complete term if we are referring to another type of

``rate'': an ``economically disadvantaged rate,'' a ``completion

rate,'' a ``placement rate,'' or a ``participation rate.''

Each school receives only one of the three types of rates each

year: an FFEL Program cohort default rate, a Direct Loan Program cohort

rate, or a weighted average cohort rate. However, unless specifically

stated in the regulations, the rules and processes for submitting

appeals and making challenges apply regardless of which rate a school

receives. For example, under the proposed regulations, a school must

notify us within 30 calendar days of its intent to appeal a rate on the

grounds of exceptional mitigating circumstances, regardless of whether

the school's rate is an FFEL Program cohort default rate, a Direct Loan

Program cohort rate, or a weighted average cohort rate.

The rate process begins when we send draft rates to schools

participating in the FFEL or Direct Loan Program. The rates are

accompanied by supporting data, giving detailed information on the

loans included in the calculation of the rate. A school may challenge

the calculation of a draft rate by following the process outlined in

the regulations. In this NPRM we refer to this process as the

``challenge'' process.

After the completion of the draft rate challenge process, we notify

each school of its official rate and publish a listing of all the

rates. This NPRM refers to these rates as ``published rates.'' A school

may file an appeal of any sanctions resulting from published rates by

following the procedures outlined in the regulations. We refer to the

process for contesting published rates as an ``appeal.''

A discussion of each substantive proposed change follows.

1. Challenges and Adjustments to Inaccurate Data Used to Calculate FFEL

Cohort Default Rates, Direct Loan Program Cohort Rates, or Weighted

Average Cohort Rates (Secs. 668.17(a)(1) and 668.17(j))

Why are changes proposed?

Amendments to section 428G of the HEA provide reduced

administrative requirements for schools with FFEL Program cohort

default rates, Direct Loan Program cohort rates, or weighted average

cohort rates that are less than 5 or 10 percent. To help implement

these new provisions, we are proposing to change the process that

schools use to identify and challenge incorrect data.

Before describing the proposed changes, we will describe the

current process used to identify and challenge incorrect data.

If a school is not subject to loss of participation, how does it

currently correct data used to calculate its rate?

The current process for correcting data has two steps:

Challenging draft data. Any school may challenge the

accuracy of any data used to calculate its draft rate. We send

supporting data to schools with draft rates of 20 percent or more, and

any school that does not receive supporting data may request it. The

supporting data reflect the basis for the calculation of a school's

rate. A school compares the information in the supporting data with its

own records and with information obtained from outside sources to

identify possible inaccuracies. A school must challenge any inaccurate

draft data within 30 calendar days of receiving the supporting data.

Adjustments to published rates. We send supporting data to

schools with published rates of 20 percent or more. Any school that

does not receive supporting data may request it. If corrections

identified during the draft challenge process are not reflected in a

school's published rate, the school may request that its rate be

adjusted to reflect those corrections. Adjustment requests must be made

within 10 working days of receiving the supporting data. A school may

not request an adjustment that is based on data that were changed or

added after the draft rate was calculated. Between the calculation of

the draft and official rates, data may be corrected, changed, or added

by a guaranty agency (for FFEL loans) or the Direct Loan Servicing

Center (for Direct Loans).

How would this process be changed under these proposed regulations?

The proposed regulations would retain the two current steps, with

the following improvements:

Challenging draft data. We would provide supporting data

to all schools when we notify the schools of their draft rates, and we

would lengthen the period during which a school may challenge the

accuracy of its draft rate from 30 to 45 calendar days.

Adjustments to published rates. We would provide

supporting data with the notification of published rates sent to all

schools having rates of 10 percent or more. Schools with rates lower

than 10 percent would be able to request supporting data separately.

Will there be other changes to this process?

Yes, we will also make some administrative changes to the process

for reviewing and challenging rates. Since these are administrative

changes, they are not included in these proposed regulations.

The most significant administrative changes will be to the process

for requesting adjustments to a published rate. The period during which

a school may request an adjustment to its published rate will be

extended from 10 working days to 30 calendar days. Also, upon receiving

its published rate, a school will be able to request an adjustment to

any incorrect new data

[[Page 41754]]

that were included after the draft rate was calculated. This ``new data

adjustment'' will be available to schools beginning with receipt of FY

1998 rates, which will be released before September 30, 2000. This new

administrative process will be explained more fully in the FY 1998

Official Cohort Default Rate Guide, which will be sent to a school with

the notification of its published rate for FY 1998.

We will also make the following additional administrative

improvements to this process:

Electronic supporting data. We will make supporting data

available to schools upon request in an electronic format. This will

help schools prepare their challenges and appeals more quickly and with

less work. We plan to begin this service with the publication of rates

for FY 1998. Initially, it is unlikely that we will be able to send

electronic data with the notifications of the rates themselves.

Instead, we plan to make electronic data available to requesting

schools after the notifications are issued, and for subsequent draft

and published rates.

Real-time data. Schools will be able to view, year-round,

the loan repayment and default data that will be used to calculate

their rates. By having access to this ``real-time'' data, schools will

be able to identify errors and to correct them, by working with the

data's provider, on a schedule that is compatible with the schools'

ongoing workload. We plan to begin this service by the end of 1999.

2. Deadline for Publishing Rates (Sec. 668.17(b)(3))

What happens if the deadline is missed?

The 1998 Amendments adds a new section 435(m)(4)(D) to the HEA,

which directs the Secretary to issue cohort default rates by September

30 each year. During the negotiated rulemaking process, some

negotiators expressed a concern about the possible consequences for

schools if we issued rates after that date. Under section 435(a)(2) of

the HEA, a school's loss of participation in the loan programs based on

excessive rates continues for the fiscal year (FY) for which the

determination of the loss is made and for the 2 succeeding fiscal

years. Some negotiators were concerned that schools might be subject to

an additional year of ineligibility if we issued rates after September

30.

The committee discussed an example in which a determination issued

before this year's deadline of September 30, 1999, would subject a

school to loss of participation for the remainder of this fiscal year

(FY 1999) and for the 2 following fiscal years (FY 2000 and FY 2001).

By contrast, if the determination was issued after September 30, 1999,

the committee asked whether the school would be subject to loss of

participation for the remainder of that fiscal year (FY 2000) and for

the 2 following fiscal years (FY 2001 and FY 2002).

The Department expects to meet the goal of issuing rates by

September 30 each year. If, however, rates are not issued until after

that date, a school's loss of eligibility in that case would continue

only for the remainder of the fiscal year in which the rates are issued

and for the following fiscal year. As this procedure would be

administrative, it is not reflected in these proposed regulations.

3. Loss of Pell Eligibility (Sec. 668.17(b)(4))

How does a school's rate affect its eligibility to participate in

the Pell program?

These provisions reflect amendments to section 401(j) of the HEA.

Under the amendments, a school becomes ineligible to participate in the

Federal Pell Grant Program when it becomes ineligible to participate in

the FFEL or Direct Loan Program due to excessive rates. A school that

was not participating in the FFEL or Direct Loan Program on October 7,

1998 (the date on which the 1998 Amendments was enacted), is not

subject to this provision unless it subsequently participates in either

of those programs.

What criteria would be used to determine that a school was not

participating in the FFEL or Direct Loan Program on or after October 7,

1998?

Under the proposed regulations, a school would not be considered to

have been participating in the FFEL or Direct Loan Program on or after

October 7, 1998, if the school--

Was ineligible to participate in those programs before

October 7, 1998, and the school did not regain eligibility;

Requested in writing, before October 7, 1998, to withdraw

its participation in those programs and did not subsequently re-apply

to participate; or

Has not certified an FFEL loan or originated a Direct Loan

on or after July 7, 1998.

The deadline date of July 7, 1998, was selected as a compromise and

agreed to by the committee. The Department believes this date is

appropriate because it provides some protection for a school that had

stopped certifying or originating loans, intending to end its

participation in these loan programs, but had not sent a written

request to withdraw its participation. At the same time, we also

believe that this date is appropriate because it provides a sufficient

period of time before the date of enactment to verify the school's

intent not to participate.

4. Liability for Unsuccessful Appeals (Secs. 668.17(b)(5)(ii) and

668.17(b)(6))

What liability would a school assume for loans made while appealing

a loss of participation?

These provisions reflect amendments to section 435(a)(2)(A) of the

HEA that are intended to reduce the likelihood of frivolous appeals by

schools that are subject to loss of eligibility due to excessive rates.

A school that certifies and delivers FFEL Program loans or originates

and disburses Direct Loan Program loans during its appeal would be

required to reimburse the Secretary for an amount equal to the amount

of interest, special allowance, reinsurance, and any related or similar

payments the Secretary makes, or will be obligated to make, on those

loans.

How will the Department determine a school's liability for loans

made during an unsuccessful appeal?

We intend to determine a school's liability using the Department's

``Estimated Loss Formula.'' We currently use this formula to calculate

schools' liabilities in other circumstances related to the loan

programs. In this instance, the formula would use the school's most

recent published rate to estimate the principal amount of the loans

that would be expected to default. In addition, the formula would be

used to estimate costs to the Secretary for interest, special

allowance, and other losses on these loans, using timeframes

appropriate for the type of school.

For example, an estimate of a 2-year public school's liability

would be based on average timeframes for 2-year public schools. To

calculate an estimate of the--

Interest subsidy, the Department would project the

interest that would accrue on the total principal amount of the

subsidized student loans, during the average number of days, for a 2-

year public school, between the date the loans were disbursed and the

date they entered repayment.

Special allowance, the Department would project the

special allowance that would accrue on the total principal amount of

the subsidized and unsubsidized student loans and PLUS loans, during

the average number of days, for a 2-year public school, between the

date the loans enter repayment and either the date they default or the

date on which they are paid in full.

[[Page 41755]]

How could a school appeal its loss of participation without

incurring a liability?

Any school may stop certifying and delivering FFEL Program loans or

originating and disbursing Direct Loan Program loans by ending its

participation in the program. Also, under the proposed regulations, a

school could prevent the possibility of incurring a liability during an

appeal by temporarily not certifying and delivering FFEL Program loans

and originating and disbursing Direct Loan Program loans during the

appeal. This suspension would be at the discretion of the school, and

the school would not be required to notify or seek the approval of the

Secretary.

5. Participation Rate Index (Secs. 668.17(c)(1)(ii)(A) and

668.17(j)(4))

What changes would be made to a school's ability to appeal on the

basis of its participation rate index (PRI)?

The proposed regulations reflect the provisions of section

435(a)(6) of the HEA. These provisions are similar in many respects to

the Department's regulatory requirements for an appeal on the basis of

a school's PRI under 34 CFR 668.17(c)(1)(ii)(A). However, unlike those

regulatory requirements, under which a school files a PRI appeal after

it receives its published rate, the 1998 Amendments provides for a PRI

challenge that is made after a school receives its draft rate. Also,

the provisions of the 1998 Amendments allow a school to base its PRI

calculation on the fiscal year of the school's draft rate or either of

its two most recent published rates, rather than the school's most

recent published rate only.

What if a school's published rate isn't the same as its draft rate,

and the newly published rate would make its PRI lower than 0.0375?

The proposed regulations retain the opportunity for a school to

appeal its published rate on the basis of a PRI lower than 0.0375. (The

process that occurs after the draft rate is a ``challenge,'' but the

process that occurs after the published rate is an ``appeal.'') Because

a school's draft rate is not always the same as its published rate,

there may be cases in which a school's challenge based on its draft

rate would be denied, but an appeal based on the school's published

rate would be accepted.

For example, a school with a draft rate of 38 percent and with 10

percent of its students receiving loans would have a PRI of .0380 (0.38

multiplied by 0.10 is .0380). Since the school's PRI would be greater

than .0375, its challenge would be denied. However, if the school's

published rate were calculated 1 percent lower, as 37 percent, the same

school would then have a PRI of .0370 (0.37 multiplied by 0.10 is

.0370). Since this PRI meets the criterion, the school's appeal would

be accepted.

Once a school's PRI challenge or appeal is accepted, would the

school need to challenge or appeal again the following year?

A school's successful PRI challenge to the draft rate or appeal of

the published rate would not apply to a future loss of participation

unless the rate upon which the challenge or appeal was originally based

was a rate that could also be used as a basis for the subsequent

challenge or appeal. For example, a school that is subject to a loss of

participation based on its rates for FY 1999, FY 1998, and FY 1997 may

challenge or appeal the loss using a PRI based on any of the following

rates:

----------------------------------------------------------------------------------------------------------------

PRI based on rate for...

Upon receipt of... -----------------------------------------------

FY 1999 FY 1998 FY 1997

----------------------------------------------------------------------------------------------------------------

Draft rate...................................................... Draft Published Published

Published rate.................................................. Published Published Published

----------------------------------------------------------------------------------------------------------------

The school files a successful challenge or appeal but is again

subject to loss of participation the following year, based on its rates

for FY 2000, FY 1999, and FY 1998. At that time, the school may

challenge or appeal using a PRI based on any of the following rates:

----------------------------------------------------------------------------------------------------------------

PRI based on rate for...

Upon receipt of... -----------------------------------------------

FY 2000 FY 1999 FY 1998

----------------------------------------------------------------------------------------------------------------

Draft rate...................................................... Draft Published Published

Published rate.................................................. Published Published Published

----------------------------------------------------------------------------------------------------------------

The only rates that appear in both tables are the school's published

rates for FY 1999 and FY 1998. If the school's successful original

challenge or appeal was based on the--

Published rate for FY 1999 or FY 1998, then the school

would not need to file another challenge or appeal in order to continue

participating.

Draft rate for FY 1999 or the published rate for FY 1997,

then the school would need to file another successful PRI, or other

type of appeal, in order to continue participating.

6. Mitigating Circumstances Appeals (Secs. 668.17(c)(1)(ii)(B) and

668.17(c)(7))

What changes would there be to appeals made on the basis of

mitigating circumstances?

These provisions reflect the amendments to section 435(a)(2)(A)(ii)

of the HEA and add the provisions of new section 435(a)(4) of the HEA.

The amended and new provisions are similar to the current regulatory

requirements for an appeal due to mitigating circumstances (see 34 CFR

668.17(c)(1)(ii)(B)). However, the 1998 Amendments makes several

substantive modifications to the regulatory requirements:

The criterion based on a school's economically

disadvantaged rate is reduced from a minimum of 70 percent to a minimum

of two-thirds.

The criterion based on a school's placement rate is

reduced from a minimum of 50 percent to a minimum of 44 percent.

The groups of students used in the calculations that

determine the school's appeal are re-defined.

An independent auditor must agree, in a written opinion

included with the appeal, that the school meets the appeal's criteria.

[[Page 41756]]

How would the modified requirement for an independent auditor's

opinion be implemented under the proposed regulations?

The following process is proposed to incorporate the modified

requirement for an auditor's opinion:

Within 30 days of being notified that its participation

will end due to excessive FFEL Program cohort default rates, Direct

Loan Program cohort rates, or weighted average cohort rates, or that a

prior loss of participation will be extended, the school must notify us

that it is appealing under these provisions.

Within 60 days of being notified that its participation

will end due to excessive rates, or that a prior loss of participation

will be extended, the school must send us the independent auditor's

report. The report must include the school's written assertions and be

in a format prescribed by us.

We consider the auditor's report and compare the

assertions in the report with the information we maintain.

If the independent auditor's opinion supports the school's

position, and the report's documentation or our data do not contradict

the opinion, then the appeal is approved.

If the independent auditor's opinion does not support the

school's assertion, or if the report's documentation or our data

contradict the opinion, the appeal is denied.

We rely upon the opinion of the independent auditor in determining

whether a school meets the mitigating circumstance criteria. However,

it would not be appropriate for us to decide that a school meets the

criteria if an auditor's opinion is contradicted by data in the report

itself or by data that we maintain.

As agreed during negotiated rulemaking, the data that we would use

to evaluate a report's acceptability would be limited to data that the

school has supplied to us for other reasons or data that is otherwise

available to the school. For example, when making a determination, we

may compare data in the report to the data maintained in the Federal

Pell Grant Program payment systems, the National Student Loan Data

System (NSLDS), the Integrated Postsecondary Education Data System

(IPEDS), or other data sources.

We would not typically investigate a school's assertions in making

our determination. For example, we would not routinely contact the

employers of the school's former students to gather additional

information to use in evaluating their placement rate assertions. If

improprieties are suspected in a school's appeal, an investigation

would be pursued under other legal authority.

How would the groups of students used to calculate economically

disadvantaged, completion, and placement rates be re-defined?

The 1998 Amendments changes the definitions of the groups of

students used to calculate economically disadvantaged rates, completion

rates, and placement rates:

A student is considered economically disadvantaged if the

student is eligible to receive a Federal Pell Grant award that is at

least equal to one-half the maximum Federal Pell Grant award for which

the student would be eligible based on the student's enrollment status.

The previous regulatory criterion considered a student with an expected

family contribution (EFC) of zero to be economically disadvantaged.

A student is considered to have completed a program or to

have been placed if the student enters active duty in the Armed Forces

of the United States.

Additional changes are included in these proposed regulations.

Currently, the economically disadvantaged rates, completion rates, and

placement rates used to determine a school's eligibility for this type

of appeal are calculated as percentages of all of the school's regular

students. The proposed regulations limit the groups of students for

whom the percentages are calculated to include only students who are

enrolled in programs eligible for Title IV aid.

This change is proposed at the request of some of the non-Federal

negotiators, in consideration of the types of student records needed by

a school to calculate its eligibility for this appeal and of the

likelihood that these records may not be maintained by schools for

students who were not enrolled in Title IV eligible programs. We

especially request comments on the benefit or harm that this proposed

change might cause schools.

7. Other Mitigating Circumstances Appeals (Secs. 668.17(c)(1)(ii)(A),

(C), and (D))

Why are additional mitigating circumstances proposed?

These provisions are based on the authority given to the Secretary

under new section 435(a)(2)(iii) of the HEA. Under this section, the

Secretary may identify mitigating circumstances, in addition to those

identified in the HEA, that make the consequences of FFEL Program

cohort default rates, Direct Loan Program cohort rates, or weighted

average cohort rates inequitable. Schools meeting the criteria for

these additional mitigating circumstances may be allowed to continue

participating in the FFEL and Direct Loan programs.

What additional mitigating circumstances are proposed?

The proposed regulations include the following additional

mitigating circumstances for a school to use in appealing a loss of

participation based on three consecutive rates of 25 percent or

greater:

A successful appeal, based on a school's participation

rate index, that is made upon receipt of the school's published rate

rather than its draft rate. The proposed regulations retain and modify

previous regulatory requirements. (See the previous discussion of

``Participation Rate Index.'')

The total number of a school's borrowers entering

repayment in the 3 most recent fiscal years for which data are

available is 30 or fewer. For example, if the number of a school's

borrowers entering repayment in FY 1996 was 6, in FY 1997 was 10, and

in FY 1998 was 8, then the total number of a school's borrowers

entering repayment during those 3 fiscal years is 24 (6+10+8=24). The

school in the example would be eligible for an appeal of a loss of

participation based on the rates for those 3 fiscal years, because the

total number of its borrowers entering repayment (24) is 30 or fewer.

This additional mitigating circumstance was developed by the

committee and based on the reasoning that schools that make very few

loans only pose a minimal financial risk to the taxpayers. The

aggregate amount of the funds used to make these few loans is small.

The committee was of the view that it was inequitable to subject these

schools to loss of participation in the FFEL and Direct Loan programs,

and especially to loss of participation in the Federal Pell Grant

Program.

At least two of the three rates upon which a school's loss

of participation is based are calculated as ``average'' rates

(``average'' rates are calculated for schools with fewer than 30

borrowers in a fiscal year, on the basis of combined data for 3 fiscal

years) and would be less than 25 percent if calculated using data

specific to each fiscal year.

As an example of this appeal, data for a sample school are provided

below:

[[Page 41757]]

----------------------------------------------------------------------------------------------------------------

Rate based on . . .

-------------------------

FY Students Default 3 years of 1 year of

data data

(percent) (percent)

----------------------------------------------------------------------------------------------------------------

FY 1994..................................................... 25 7 ........... 28.0

FY 1995..................................................... 25 6 ........... 24.0

FY 1996..................................................... 25 10 30.7 40.0

FY 1997..................................................... 25 4 26.7 16.0

FY 1998..................................................... 25 5 25.3 20.0

----------------------------------------------------------------------------------------------------------------

In the example, a school's rates for FY 1996, FY 1997, and FY 1998, as

calculated under 34 CFR 668.17(d)(1)(i)(B) (in the ``3 Years of Data''

column), are 30.7 percent, 26.7 percent, and 25.3 percent. Since

calculations for FY 1997 and FY 1998, using data unique to each of

those fiscal years (in the ``1 Year of Data'' column), are both less

than 25 percent, the school in the example would meet the criteria for

this mitigating circumstance.

The proposed regulations include this mitigating circumstance

because we believe such an approach is consistent with the legislative

intent of section 435(m)(1)(C) of the HEA, which provides for the

calculation of ``average'' rates, the rates that are applicable to

schools with fewer than 30 borrowers entering repayment during a fiscal

year. In providing for a calculation based on an ``average'' rate, we

believe that the legislative intent of the HEA is to reduce the effects

of volatile rates on schools with fewer than 30 borrowers entering

repayment in a fiscal year. However, as shown in the preceding example,

using an ``average'' rate may have the opposite effect in some cases:

data for a single fiscal year (in the example, FY 1996) may raise a

school's subsequent rates and, absent this proposed mitigating

circumstance, could cause the school to lose its eligibility to

participate.

8. Definition of ``Default'' (Secs. 668.17(e), 668.17(f), and

668.17(h)(2)(iii))

Why are changes to the definition of ``default'' included in these

proposed regulations?

These provisions would conform 34 CFR 668.17 to an amendment to

section 435(l) of the HEA, which changes the definition of ``default''

from 180 days to 270 days for borrowers who first became delinquent on

or after October 7, 1998.

How would the change in the definition of ``default'' affect a

school's rate?

For purposes of calculating a school's rate, an FFEL Program

borrower is generally considered to be in default if a claim for

insurance is paid on the borrower's loan before the end of the fiscal

year that immediately follows the fiscal year in which the loan entered

repayment. For Direct Loan Program loans, specific timeframes are

included in regulations to determine whether a Direct Loan is

considered to be in default for purposes of the Direct Loan Program

cohort rate or weighted average cohort rate.

Since there is generally a 90-day delay between the date that an

FFEL Program loan defaults and the date that an insurance claim is

paid, a corresponding 90-day period is provided in the timeframe used

for Direct Loans. Thus, since the timeframe for considering a borrower

in default on an FFEL Program loan is changing from 270 days to 360

days, the proposed regulations would change, from 270 days to 360

days--

The number of days of delinquency after which a borrower

would be considered in default on a Direct Loan, if the borrower's

delinquency began on or after October 7, 1998; and

The number of days of repayment on a Direct Loan, under

the income-contingent repayment plan, after which a borrower would be

included in a school's rate under Sec. 668.17 (e) or (f).

9. Loan Servicing Calculation (Sec. 668.17(h)(2)(ii))

What changes would there be to the calculation of a school's rate

after a loan servicing appeal?

These provisions reflect amendments to section 435(m)(1)(B) of the

HEA. The section specifies that a loan is removed from both the

numerator and denominator of a rate's calculation if the loan is

determined to have been improperly serviced or collected. This is not a

change from the current method used to calculate a school's rate for

this purpose. The new language in the proposed regulations is included

only to reflect the changes to the statute.

10. Definition of ``Loan Servicing Records'' (Secs. 668.17(h)(3)(ii)(B)

and 668.17(h)(3)(iii)(B))

Why is the definition of ``loan servicing records'' changing?

These provisions reflect amendments to section 435(a)(3) of the

HEA. The section clarifies the definition of the loan servicing records

that guaranty agencies and the Direct Loan Servicer provide to schools

during appeals on the basis of improper loan servicing or collection.

How would the definition of ``loan servicing records'' change?

The definition of ``loan servicing records'' would remain

essentially the same for both the FFEL and Direct Loan programs:

FFEL Program loan servicing records are the collection and

payment history records used by a guaranty agency to determine whether

to pay a claim on a defaulted loan.

Direct Loan Program loan servicing records are the

collection and payment history records that we use to determine a

school's Direct Loan Program cohort rate or weighted average cohort

rate.

These revisions do not reflect a change in our current procedures.

The proposed regulations provide clarification to reflect more closely

the language in the 1998 Amendments.

11. Special Institutions (Sec. 668.17(k) and Appendix H)

How would a special institution's eligibility to participate be

affected by the proposed regulations?

These provisions reflect amendments to section 435(a)(2)(C) of the

HEA and add the provisions of the new section 435(a)(5) of the HEA. The

1998 Amendments extends, from July 1, 1998, to July 1, 1999, the date

on which the consequences of excessive rates are applicable to

historically black colleges or universities, tribally controlled

community colleges, and Navajo community colleges. In certain cases,

the Secretary may treat one of these special institutions that is

subject to loss of participation due to excessive rates as an eligible

institution during the 1-year periods beginning on July 1, 1999, 2000,

and 2001. The proposed regulations include the requirements under which

these schools may maintain eligibility during the 1-year periods.

During negotiations, the committee had extensive discussions about

the amount of procedural detail needed in these regulations for special

institutions. The Department's initial position was that these

regulations should provide only the most general requirements, so

[[Page 41758]]

that the process would be flexible enough to account for changes in

circumstances and for experiences gained in administering the

requirements. Negotiators for special institutions were of the view

that it was more important to emphasize the consequences of the

requirements and to ensure stricter, more consistent requirements

throughout the process, so that schools could devote appropriate

resources to the task of reducing rates and would not be subject to

changing requirements. The committee came to consensus on this proposed

draft.

We note that proposed Sec. 668.17(k)(2)(iii) and the introduction

to proposed Appendix H use the word ``should'' rather than the word

``must,'' which is used throughout the rest of this NPRM. The word

``should'' was included by agreement during the negotiated rulemaking

process, and we chose not to change it at this stage of the process.

Although the meaning of this word may differ in different

circumstances, we want to emphasize that the term ``should'' in this

particular case is intended to mean ``must,'' and commenters should use

this interpretation in developing their comments. We intend to change

this section in the final regulations to use the word ``must,'' instead

of ``should,'' unless commenters indicate a substantial reason to keep

the word ``should.''

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 determined to be

necessary for the effective and efficient administration of the Title

IV programs.

In assessing the potential costs and benefits of this regulatory

action--both quantitative and qualitative--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 subject to

negotiated rulemaking, the costs and benefits of the various

requirements were discussed thoroughly by 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. 668.17 Default reduction and prevention measures.)

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

ADDRESS 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. Entities affected by these regulations are institutions of

higher education that participate in the title IV, HEA programs and

individual recipients of title IV, HEA program funds. Institutions 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, or entities controlled by governmental

entities with populations of 50,000 or less. Individuals are not

considered small entities for this purpose. These proposed regulations,

which generally reduce operational burden and offer institutions

additional ways to maintain their eligibility to participate in the

Title IV aid programs, would not have a significant economic impact on

small institutions.

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

Section 668.17 contains an information collection requirement.

Under the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)), the

Department of Education has submitted a copy of this section to the

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

Collection of Information: Student Assistance General Provisions--

668.17--Default reduction and prevention measures.

Under the proposed regulations, a historically black college or

university, tribally controlled community college, or Navajo community

college may continue to participate in the FFEL or Direct Loan Program

even though it is subject to loss of participation due to excessive

rates. This continued participation may only occur during the 1-year

periods beginning on July 1, 1999, 2000, and 2001, and depends upon the

Secretary's determination of the school's compliance with the proposed

regulations.

To make this determination, we need to collect information from

schools. Each school is required to submit a default management plan on

or before July 1, 1999. On or before July 1, 2000 and 2001, each school

is required to submit evidence of the implementation of its plan and of

improvement in the preceding 1-year period. Some schools may be

required to submit revised default management plans.

Fourteen schools submitted this collection in 1999. We estimate

that 8 schools will submit this collection in 2000 and 4 schools will

submit this collection in 2001. We estimate a burden of 200 hours per

school to create/revise a default management plan, and an additional

burden of 200 hours per school to submit evidence of their plan's

implementation and of improvement in the preceding 1-year period.

As calculated in the table below, the annual burden is estimated to

be 2534 hours:

[[Page 41759]]

----------------------------------------------------------------------------------------------------------------

Default Evidence

plan hours hours Total hours

Year Number of (Schools x (Schools x (Default

schools 200 hrs) 200 hrs) plan +

evidence)

----------------------------------------------------------------------------------------------------------------

1999........................................................ 14 2800 N/A 2800

2000........................................................ 8 1600 1600 3200

2001........................................................ 4 800 800 1600

------------

Total (2800+3200+1600) =................................ ........... ........... ........... 7600

Average (Total/3) =..................................... ........... ........... ........... 2534

----------------------------------------------------------------------------------------------------------------

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 this proposed collection of

information in--

Deciding whether the proposed collection is 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 collection, 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 collection 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 your comments within 30 days of

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

on the proposed regulations.

Intergovernmental Review

The Federal Supplemental Educational Opportunity Grant Program and

the State Student Incentive Grant Program are subject to Executive

Order 12372 and the regulations in 34 CFR part 79. One of the

objectives of the Executive order is to foster an intergovernmental

partnership and a strengthened federalism. The Executive order relies

on processes developed by State and local governments for coordination

and review of proposed Federal financial assistance.

This document provides early notification of our specific plans and

actions for these programs.

The Federal Family Education Loan, Federal Supplemental Loans for

Students, Federal Work-Study, Federal Perkins Loan, Federal Pell Grant,

Income Contingent Loan, and William D. Ford Federal Direct Loan

programs are not subject to Executive Order 12372 and the regulations

in 34 CFR part 79.

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 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 the first 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 Numbers: 84.007 Federal

Supplemental Educational Opportunity Grant Program; 84.032 Federal

Family Education Loan Program; 84.032 Federal PLUS Program; 84.032

Federal Supplemental Loans for Students Program; 84.033 Federal

Work-Study Program; 84.038 Federal Perkins Loan Program; 84.063

Federal Pell Grant Program; 84.069 State Student Incentive Grant

Program; 84.226 Income Contingent Loan Program; and 84.268 William

D. Ford Federal Direct Loan Program)

List of Subjects in 34 CFR Part 668

Administrative practice and procedure, Colleges and universities,

Consumer protection, Education, Grant programs--education, Loan

programs--education, Reporting and recordkeeping requirements, Student

aid, Vocational education.

Dated: July 27, 1999.

Richard W. Riley,

Secretary of Education.

For the reasons discussed in the preamble, the Secretary proposes

to amend part 668 of title 34 of the Code of Federal Regulations as

follows:

PART 668--STUDENT ASSISTANCE GENERAL PROVISIONS

1. The authority citation for part 668 continues to read as

follows:

Authority: 20 U.S.C. 1085, 1088, 1091, 1092, 1094, 1099c, and

1141, unless otherwise noted.

2. Section 668.17 is amended to read as follows by--

A. Revising paragraph (a)(1).

B. In the introductory language for paragraph (b)(3), removing the

word ``institution's'' and adding, in its place, ``institution whose'';

removing the word ``respectively''; and removing the words ``section

and continuing'' and adding, in their place, ``section. The loss of

participation continues''.

C. Revising paragraphs (b)(4) through (b)(6).

D. In the introductory text for paragraph (c)(1), after ``except

that an institution may submit an appeal under'', removing the word

``section'' and adding, in its place, ``paragraph''; removing the words

``the information required by paragraph (c)(7) may be submitted in

accordance with that paragraph'' and adding, in their place, ``an

institution submits an appeal under paragraph (c)(1)(ii)(B) of this

section in accordance with paragraph (c)(7) of this section''; and

removing the sentence, ``The additional 30-day period specified

[[Page 41760]]

in paragraph (c)(7) of this section is an extension for the submission

of the auditor's statement only and does not affect the date by which

the appeal data must be submitted.''

E. Revising paragraphs (c)(1)(ii), (c)(2), and (c)(7).

F. In paragraphs (e)(1)(ii)(A), (e)(1)(ii)(B), (f)(1)(ii)(A), and

(f)(1)(ii)(B), removing the number ``270'' and adding, in its place,

``360''.

G. In paragraphs (e)(3) and (f)(3), removing ``270 days'' and

adding, in its place, ``360 days (or for 270 days, if the borrower's

delinquency began before October 7, 1998)''.

H. In paragraph (h)(2)(ii), adding, at the end of the paragraph,

``In excluding loans from the calculations of these rates, the

Secretary removes them from both the number of students who entered

repayment and the number of students who defaulted.''

I. In paragraph (h)(2)(iii), removing the number ``270'' and

adding, in its place, ``360''.

J. In the introductory language for paragraph (h)(3)(ii)(B),

removing the words ``with a representative sample'' and adding, in

their place, ``with access, for a reasonable period of time not to

exceed 30 days, to a representative sample''; and removing the words

``records submitted by the lender to the guaranty agency to support the

lender's submission of a default claim and included in the claim file''

and adding, in their place, ``collection and payment history records

provided to the guaranty agency by the lender and used by the guaranty

agency in determining whether to pay a claim on a defaulted loan''.

K. In the introductory language for paragraph (h)(3)(iii)(B),

removing the words ``with a representative sample'' and adding, in

their place, ``with access, for a reasonable period of time not to

exceed 30 days, to a representative sample''; and removing the words

``records maintained by the Department's Direct Loan Servicer with

respect to the servicing and collecting of delinquent loans prior to

the default'' and adding, in their place, ``collection and payment

history records maintained by the Department's Direct Loan Servicer

that are used in determining an institution's Direct Loan Program

cohort rate or weighted average cohort rate''.

L. Revising paragraph (j)(1)(ii).

M. Removing paragraph (j)(1)(iii).

N. Redesignating paragraphs (j)(2), (j)(3), (j)(4), (j)(5), and

(j)(7) as paragraphs (j)(3)(i), (j)(3)(ii), (j)(3)(iii), (j)(3)(iv),

and (j)(3)(v), respectively.

O. Redesignating paragraph (j)(6) as (j)(2).

P. In the redesignated paragraph (j)(2), removing the cross-

reference ``(h)(1)'' and adding, in its place, ``(j)(1)''.

Q. In the redesignated paragraph (j)(3)(i), removing the number

``30'' and adding, in its place, ``45''.

R. In the redesignated paragraph (j)(3)(ii), removing the citation

``(h)(2)'' and adding, in its place, ``(j)(3)(i)''.

S. In the redesignated paragraph (j)(3)(v), removing the citation

``(d)(1)'' and adding, in its place, ``(c)(1)(i)''; removing the word

``preliminary'' and adding, in its place, ``draft''; and removing the

citation ``(h)'' and adding, in its place, ``(j)(3)''.

T. Adding a new paragraph (j)(4).

U. Adding a new paragraph (k).

Sec. 668.17 Default reduction and prevention measures.

(a) * * *

(1)(i) If the Secretary calculates an FFEL Program cohort default

rate, Direct Loan Program cohort rate, or weighted average cohort rate

for an institution, the Secretary notifies the institution of that

rate.

(ii) If an institution has an FFEL Program cohort default rate,

Direct Loan Program cohort rate, or weighted average cohort rate of 10

percent or more, the Secretary includes a copy of the supporting data

used in the calculation of the rate with the notice of the rate.

(iii) An institution with an FFEL Program cohort default rate,

Direct Loan Program cohort rate, or weighted average cohort rate of

less than 10 percent may request a copy of the supporting data used in

the calculation of the rate. The institution's request must be sent to

the Secretary within 10 working days of receiving the Secretary's

notice. Upon receiving the institution's request, the Secretary sends a

copy of the data to the institution.

* * * * *

(b) * * *

(4) If an institution loses eligibility to participate in the FFEL

or Direct Loan Program under this section, it also loses eligibility to

participate in the Federal Pell Grant Program for the same period of

time, except that the institution may continue to participate in the

Federal Pell Grant Program if the Secretary determines that the

institution--

(i) Was ineligible to participate in the FFEL and Direct Loan

programs before October 7, 1998, and the institution's eligibility was

not reinstated;

(ii) Requested in writing, before October 7, 1998, to withdraw its

participation in the FFEL and Direct Loan programs, and the institution

did not subsequently re-apply to participate; or

(iii) Has not certified an FFEL loan or originated a Direct Loan on

or after July 7, 1998.

(5) An institution whose participation in the FFEL, Direct Loan, or

Federal Pell Grant Program ends under paragraph (a)(3), (b)(1), (b)(2),

or (b)(4) of this section may not participate in that program until the

institution--

(i) Demonstrates to the Secretary that it meets all requirements

for participation in the FFEL, Direct Loan, or Federal Pell Grant

Program;

(ii) Has paid any amount owed to the Secretary under paragraph

(b)(6)(ii)(B) of this section or is meeting that obligation under an

agreement satisfactory to the Secretary; and

(iii) Executes a new agreement with the Secretary for participation

in that program following the period described in paragraph (b)(3) of

this section.

(6)(i) An institution may, notwithstanding 34 CFR 668.26, continue

to participate in the FFEL, Direct Loan, and Federal Pell Grant

programs until the Secretary issues a decision on the institution's

appeal if the Secretary receives an appeal that is complete, accurate,

and timely in accordance with paragraph (c) of this section; or it may

suspend its participation during the appeal.

(ii) If an institution continues to participate in the FFEL or

Direct Loan Program under paragraph (b)(6)(i) of this section, and the

institution's appeal of its loss of participation is unsuccessful--

(A) The Secretary estimates the amount of interest, special

allowance, reinsurance, and any related or similar payments made by the

Secretary (or which the Secretary is obligated to make) on any FFEL or

Direct Loan Program loan for which the institution certified and

delivered or originated and disbursed funds during the period in which

the institution would have been otherwise ineligible to certify and

deliver or originate and disburse those funds, if it had not appealed;

(B) The Secretary excludes from the estimate calculated under

paragraph (b)(6)(ii)(A) of this section any amount that is attributable

to funds delivered or disbursed by the institution more than 45

calendar days after the date on which the institution submitted its

completed appeal to the Secretary; and

(C) The institution must pay the Secretary the amount estimated

under paragraph (b)(6)(ii) of this section within 45 days of the date

of the Secretary's notification, unless--

(1) The institution files an appeal under the procedures

established in subpart H of this part; or

[[Page 41761]]

(2) The Secretary permits a longer repayment period.

(iii) An institution may also continue to participate in the FFEL

Program or Direct Loan Program if it is in compliance with paragraph

(k) of this section.

(c) * * *

(1) * * *

(ii) The institution meets one of the following exceptional

mitigating circumstances:

(A)(1) The institution's participation rate index, as determined

under paragraph (c)(1)(ii)(A)(2) of this section, is equal to or less

than 0.0375 for any of the 3 most recent fiscal years for which data

are available.

(2) For the purpose of (c)(1)(ii)(A)(1) of this section, an

institution's participation rate index for a fiscal year is determined

by multiplying its FFEL Program cohort default rate, Direct Loan

Program cohort rate, or weighted average cohort rate for that fiscal

year by the percentage of its regular students, as defined in 34 CFR

600.2, who--

(i) Were enrolled on at least a half-time basis during any part of

a 12-month period ending during the 6 months immediately preceding the

fiscal year for which the cohort of borrowers (used to calculate the

institution's FFEL Program cohort default rate, Direct Loan Program

cohort rate, or weighted average cohort rate) is determined; and

(ii) Received an FFEL or Direct Loan for attendance at the

institution for a loan period that coincides with any part of the same

12-month period.

(B)(1) If in the opinion of an independent auditor, as submitted

under paragraph (c)(7) of this section, the institution's economically

disadvantaged rate is two-thirds or more, as determined under paragraph

(c)(1)(ii)(B)(2) of this section; and

(i) If it offers an associate, baccalaureate, graduate or

professional degree, the institution's completion rate is 70 percent or

more, as determined under paragraph (c)(1)(ii)(B)(3) of this section;

or

(ii) If it does not offer an associate, baccalaureate, graduate or

professional degree, the institution's placement rate is 44 percent or

more, as determined under paragraph (c)(1)(ii)(B)(4) of this section.

(2) For the purpose of (c)(1)(ii)(B)(1) of this section, an

institution's economically disadvantaged rate is the percentage of its

students, enrolled on at least a half-time basis in an eligible program

at the institution during any part of a 12-month period that ended

during the 6 months immediately preceding the fiscal year for which the

cohort of borrowers (used to calculate the institution's FFEL Program

cohort default rate, Direct Loan Program cohort rate, or weighted

average cohort rate) is determined, who--

(i) Are eligible to receive a Federal Pell Grant award of at least

one-half the maximum Federal Pell Grant award for which the student

would be eligible based on the student's enrollment status; or

(ii) Have an adjusted gross income that, if added to the adjusted

gross income of the student's parents (unless the student is an

independent student), is less than the poverty level as determined by

the Department of Health and Human Services.

(3) For the purpose of (c)(1)(ii)(B)(1) of this section, an

institution's completion rate is the percentage of its regular

students, initially enrolled on a full-time basis in an eligible

program and scheduled to complete their programs, as described in

paragraph (c)(2) of this section, during the same 12-month period used

to determine its economically disadvantaged rate under paragraph

(c)(1)(ii)(B)(2) of this section, who--

(i) Completed the educational programs in which they were enrolled;

(ii) Transferred from the institution to a higher level educational

program;

(iii) Remained enrolled and making satisfactory progress toward

completion of the student's educational programs at the end of the 12-

month period; or

(iv) Entered active duty in the Armed Forces of the United States

within 1 year after their last day of attendance at the institution.

(4)(i) Except as provided in paragraph (c)(1)(ii)(B)(4)(ii) of this

section, for the purpose of (c)(1)(ii)(B)(1) of this section, an

institution's placement rate is the percentage of its former students,

as described in paragraph (c)(1)(ii)(B)(4)(iii) of this section, who

are employed, in an occupation for which the institution provided

training, on the date following 1 year after their last date of

attendance at the institution; were employed, in an occupation for

which the institution provided training, for at least 13 weeks before

the date following 1 year after their last date of attendance at the

institution; or entered active duty in the Armed Forces of the United

States within 1 year after their last date of attendance at the

institution.

(ii) If a former student's employer is the institution, the student

is not considered employed for the purposes of paragraph (c)(1)(ii)(B)

of this section.

(iii) The former students who are used to determine an

institution's placement rate under paragraph (c)(1)(ii)(B)(4) of this

section include only students who were initially enrolled in eligible

programs on at least a half-time basis; were originally scheduled, at

the time of enrollment, to complete their educational programs during

the same 12-month period used to determine the institution's

economically disadvantaged rate under paragraph (c)(1)(ii)(B)(2) of

this section; and remained in the program beyond the point at which a

student would have received a 100 percent tuition refund from the

institution. A student is not included in the calculation of the

placement rate if that student, on the date that is 1 year after the

student's scheduled completion date, remains enrolled in the same

program at the institution and is making satisfactory progress.

(C) At least two of the rates that result in a loss of eligibility

under paragraph (a)(3), (b)(1), or (b)(2) of this section--

(1) Are calculated using data for the 3 most recent fiscal years,

pursuant to paragraph (d)(1)(i)(B), (e)(1)(i)(B), (e)(1)(ii)(B),

(f)(1)(i)(B), or (f)(1)(ii)(B) of this section; and

(2) Would be less than 25 percent if calculated using data for only

the fiscal year for which the institution received its rate, pursuant

to paragraph (d)(1)(i)(A), (e)(1)(i)(A), (e)(1)(ii)(A), (f)(1)(i)(A),

or (f)(1)(ii)(A) of this section, respectively.

(D) During the 3 most recent fiscal years for which the Secretary

has determined the institution's rate, a total of thirty or fewer

borrowers entered repayment on a loan or loans included in a

calculation of the institution's rate.

(2) For the purposes of the completion rate and placement rate

described in paragraphs (c)(1)(ii)(B)(3) and (4) of this section, a

student is scheduled to complete an educational program on the date on

which--

(i) If the student is initially enrolled full-time, the student

will have been enrolled in the program for the amount of time specified

in the institution's enrollment contract, catalog, or other materials,

for completion of the program by a full-time student; or

(ii) If the student is initially enrolled less than full-time, the

student will have been enrolled in the program for the amount of time

that it would take the student to complete the program if the student

remained enrolled at that level of enrollment throughout the program.

* * * * *

(7)(i) An institution that appeals on the grounds that it meets the

exceptional mitigating circumstances criteria in paragraph

(c)(1)(ii)(B) of this section must submit to the Secretary--

(A) Within 30 calendar days of the date that it was notified of its

loss of

[[Page 41762]]

participation, notice of its intent to appeal under that paragraph, in

a format prescribed by the Secretary; and

(B) Within 60 calendar days of the date that it was notified of its

loss of participation, the independent auditor's compliance attestation

report, as described in paragraph (c)(7)(ii) of this section, including

the specific institution's management's written assertions for which

the independent auditor opines, all in a format prescribed by the

Secretary.

(ii)(A) The report of the independent auditor, required for an

institution's appeal under paragraph (c)(1)(ii)(B) of this section,

must state whether, in the auditor's opinion, the institution's

management's assertion met the exceptional mitigating circumstances

criteria specified in paragraph (c)(1)(ii)(B) of this section, as

provided to the auditor to examine, and is fairly stated in all

material respects.

(B) The engagement that forms the basis of the independent

auditor's opinion must be an examination-level compliance attestation

engagement performed in accordance with the American Institute of

Certified Public Accountant's (AICPA) Statement on Standards for

Attestation Engagements, Compliance Attestation (AICPA, Professional

Standards, vol. 1, AT sec. 500), as amended, and Government Auditing

Standards issued by the Comptroller General of the United States.

(iii) The Secretary denies an institution's appeal under paragraph

(c)(1)(ii)(B) of this section if--

(A) The independent auditor does not opine that the institution

meets the criteria for the appeal; or

(B) The Secretary determines that the independent auditor's report

or institution's management's assertion described in paragraph

(c)(7)(i) of this section--

(1) Demonstrates that the independent auditor's report or

examination does not meet the requirements of this section; or

(2) Is contradicted or otherwise refuted, to an extent that would

render the auditor's report unacceptable, by information maintained by

the Secretary.

* * * * *

(j) * * *

(1) * * *

(ii) The Secretary's notice to an institution of its draft cohort

default rate includes a copy of the supporting data used in the

calculation of that draft rate.

* * * * *

(4)(i) Within 30 calendar days of receiving the draft default rate

information from the Secretary, an institution may challenge an

anticipated loss of participation under (a)(3), (b)(1), or (b)(2) of

this section using the criteria in Sec. 668.17(c)(1)(ii)(A).

(ii) In meeting the requirements of Sec. 668.17(c)(1)(ii)(A) during

a challenge under this paragraph, the institution's draft rate is

considered to be its most recent rate.

(iii) The Secretary notifies an institution of the determination on

its challenge before the institution's FFEL Program cohort default

rate, Direct Loan Program cohort rate, or weighted average cohort rate

is published.

(k) Special institutions. (1) Applicability of requirements. For

each 1-year period beginning on July 1 of 1999, 2000, or 2001, the

Secretary may determine that the provisions of paragraph (a)(3),

(b)(1), or (b)(2) of this section and the provisions of 34 CFR

668.16(m) do not apply to a historically black college or university

within the meaning of section 322(2) of the HEA, a tribally controlled

community college within the meaning of section 2(a)(4) of the Tribally

Controlled Community College Assistance Act of 1978, or a Navajo

community college under the Navajo Community College Act if the

institution submits to the Secretary--

(i) By July 1, 1999--

(A) A default management plan; and

(B) A certification that the institution has engaged an independent

third party, as described in paragraph (k)(3) of this section; and

(ii) By July 1, 2000 and 2001--

(A) Evidence that it has implemented its default management plan

during the preceding 1-year period;

(B) Evidence that it has made substantial improvement in the

preceding 1-year period in the institution's FFEL Program cohort

default rate, Direct Loan Program cohort rate, or weighted average

cohort rate; and

(C) A certification that it continues to engage an independent

third party, as described in paragraph (k)(3) of this section.

(2) Default management plan. (i) An institution's default

management plan must provide reasonable assurance that it will, no

later than July 1, 2002, have an FFEL Program cohort default rate,

Direct Loan Program cohort rate, or weighted average cohort rate that

is less than 25 percent. Measures that an institution must take to

provide this assurance include but are not limited to--

(A) Establishing a default management team by engaging the chief

executive officer and relevant senior executive officials of the

institution and enlisting the support of representatives from offices

other than the financial aid office;

(B) Identifying and allocating the personnel, administrative, and

financial resources appropriate to implement the default management

plan;

(C) Defining the roles and responsibilities of the independent

third party;

(D) Defining evaluation methods and establishing a data collection

system for measuring and verifying relevant default management

statistics, including a statistical analysis of the borrowers who

default on their loans;

(E) Establishing annual targets for reductions in the institution's

rate; and

(F) Establishing a process to ensure the accuracy of the

institution's rate.

(ii) An institution's default management plan must be acceptable to

the Secretary, after consideration of that institution's history,

resources, dollars in default, and targets for default reduction.

(iii) If the Secretary determines that an institution's proposed

default management plan is unacceptable, the institution should consult

with the Secretary to develop a revised plan, and the institution must

submit the revised plan to the Secretary within 30 calendar days of

notice from the Secretary that the plan is unacceptable.

(iv) If the Secretary determines, based on evidence submitted under

paragraph (k)(1)(ii) of this section, that an institution's default

management plan is no longer acceptable, the institution must develop a

revised plan in consultation with the Secretary, and it must submit the

revised plan to the Secretary within 60 calendar days of notice from

the Secretary.

(v) A sample default management plan is provided in appendix H to

this part. The sample is included to illustrate additional components

of an acceptable default management plan. Because institutions' family

income profiles, student borrowing patterns, histories, resources,

dollars in default, and targets for default reduction are different, an

institution must consider its own, individual circumstances in

developing and submitting its plan.

(3) Independent third party. (i) An independent third party may be

any individual or entity that--

(A) Provides technical assistance in developing and implementing

the institution's default management plan; and

(B) Is not substantially controlled by a person who also exercises

substantial control over the institution.

(ii) An independent third party need not be paid by the institution

for its services.

[[Page 41763]]

(iii) The services of a lender, guaranty agency, or secondary

market as an independent third party under paragraph (k) of this

section are not considered to be inducements under Sec. 682.200 or

Sec. 682.401(e).

(4) Substantial improvement.

(i) For purposes of this section, an institution's substantial

improvement is determined based upon--

(A) A reduction in the institution's most recent draft or published

FFEL Program cohort default rate, Direct Loan Program cohort rate, or

weighted average cohort rate;

(B) An increase in the percentage of delinquent borrowers who avoid

default by using deferments, forbearances, and job placement

assistance;

(C) An increase in the academic persistence of student borrowers;

(D) An increase in the percentage of students pursuing graduate or

professional study;

(E) An increase in the percentage of borrowers for whom a current

address is known;

(F) An increase in the percentage of delinquent borrowers contacted

by the institution;

(G) The implementation of alternative financial aid award policies

and development of financial resources that reduce the need for student

borrowing; or

(H) An increase in the percentage of accurate and timely enrollment

status changes submitted by the institution to the National Student

Loan Data System (NSLDS) on the Student Status Confirmation Report

(SSCR).

(ii) When making a determination of an institution's substantial

improvement, the Secretary considers the institution's performance in

light of--

(A) Its history, resources, dollars in default, targets for default

reduction;

(B) Its level of effort in meeting the terms of its approved

default management plan during the previous 1-year period; and

(C) Any other mitigating circumstance at the institution during the

1-year period.

(5) Secretary's determination. (i) If the Secretary determines that

an institution is in compliance with paragraph (k) of this section,

then the provisions of paragraph (a)(3), (b)(1), or (b)(2) of this

section and the provisions of 34 CFR 668.16(m) do not apply to the

institution for that 1-year period, beginning on July 1 of 1999, 2000,

or 2001.

(ii) If the Secretary determines that an institution is not in

compliance with paragraph (k) of this section, the institution is

subject to the provisions of paragraph (a)(3), (b)(1), or (b)(2) of

this section and the provisions of 34 CFR 668.16(m). The institution's

participation in the FFEL and Direct Loan programs ends on the date

that the institution receives notice of the Secretary's determination.

3. A new appendix H is added to part 668 to read as follows:

Appendix H to Part 668--Default Management Plans for Special

Institutions

This appendix is provided as a sample plan for those schools

developing a default management plan in accordance with 34 CFR

668.17(k). It describes some measures schools may find helpful in

reducing the number of students that default on federally funded

loans. These are not the only measures a school could implement when

developing a default management plan. In developing a default

management plan, each school should consider its own history,

resources, dollars in default, and targets for default reduction to

determine which activities will result in the most benefit to the

students and the school.

Core Default Reduction Strategies (from Sec. 668.17(k)(2)(i))

(1) Establish a default management team by engaging the chief

executive officer and relevant senior executive officials of the

school and enlisting the support of representatives from offices

other than the financial aid office.

(2) Identify and allocate the personnel, administrative, and

financial resources appropriate to implement the default management

plan.

(3) Define the roles and responsibilities of the independent

third party.

(4) Define evaluation methods and establish a data collection

system for measuring and verifying relevant default management

statistics, including a statistical analysis of the borrowers who

default on their loans.

(5) Establish annual targets for reductions in the school's

rate.

(6) Establish a process to ensure the accuracy of the school's

rate.

Additional Default Reduction Strategies

(1) Enhance the borrower's understanding of his or her loan

repayment responsibilities through counseling and debt management

activities.

(2) Enhance the enrollment retention and academic persistence of

borrowers through counseling and academic assistance.

(3) Maintain contact with the borrower after he or she leaves

the school by using activities such as skip-tracing to locate the

borrower.

(4) Track the borrower's delinquency status by obtaining reports

from lenders and guaranty agencies for FFEL Program loans and from

the Secretary for Direct Loan Program loans.

(5) Enhance student loan repayments through counseling the

borrower on loan repayment options and facilitating contact between

the borrower and lender for FFEL Program loans and the borrower and

the Secretary for Direct Loan Program loans.

(6) Assist a borrower who is experiencing difficulty in finding

employment through career counseling, job placement assistance, and

facilitating unemployment deferments.

(7) Identify and implement alternative financial aid award

policies and develop alternative financial resources that will

reduce the need for student borrowing in the first 2 years of

academic study.

(8) Familiarize the parent, or other adult relative or guardian,

with the student's debt profile, repayment obligations, and loan

status by increasing, whenever possible, the communication and

contact with the parent or adult relative or guardian.

Defining the Roles and Responsibilities of Independent Third Party

(1) Specifically define the role of the independent third party.

(2) Specify the scope of work to be performed by the independent

third party.

(3) Tie the receipt of payments, if required, to the performance

of specific tasks.

(4) Assure that all the required work is satisfactorily

completed.

Statistics for Measuring Progress

(1) The number of students enrolled at the school during each

fiscal year.

(2) The average amount borrowed by a student each fiscal year.

(3) The number of borrowers scheduled to enter repayment each

fiscal year.

(4) The number of enrolled borrowers that received default

prevention counseling services each fiscal year.

(5) The average number of contacts the school or its agent had

with a borrower who was in deferment/forbearance or repayment status

during each fiscal year.

(6) The number of borrowers at least 60 days delinquent each

fiscal year.

(7) The number of borrowers who defaulted in each fiscal year.

(8) The type, frequency, and results of activities performed in

accordance with the default management plan.

[FR Doc. 99-19518 Filed 7-29-99; 8:45 am]

BILLING CODE 4000-01-U