Federal Family Education Loan Program and William D. Ford Federal Direct Loan Program

SUMMARY: The Secretary proposes to amend the Federal Family Education

Loan (FFEL) Program regulations and the William D. Ford Federal Direct

Loan (Direct Loan) Program regulations. These proposed regulations are

needed to implement recently enacted changes to the Higher Education

Act of 1965 made by the Higher Education Amendments of 1998. The

proposed regulations deal with provisions of the Higher Education

Amendments of 1998 that affect FFEL borrowers, schools, lenders, and

guaranty agencies and Direct Loan borrowers and schools. These proposed

regulations seek to improve the efficiency of Federal student aid

programs, and, by so doing, to improve their capacity to enhance

opportunities for postsecondary education.

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

ADDRESSES: Address all comments concerning these proposed regulations

to Ms. Patsy Beavan and Ms. Nicki Meoli, U.S. Department of Education,

PO 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

representatives named in this section.

FOR FURTHER INFORMATION CONTACT: For the FFEL Program, Ms. Patsy

Beavan, or for the Direct Loan Program, Ms. Nicki Meoli, U.S.

Department of Education, 400 Maryland Avenue, SW., Room 3045, Regional

Office Building 3, Washington, DC 20202-5346. 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 one of the contact persons 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, DC, between the hours

of 8:30 a.m. and 4 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 FIRS at 1-

800-877-8339.

General

Background

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

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

amend the Higher Education Act of 1965, as amended (HEA). The 1998

Amendments contained a number of changes to the Title IV programs. This

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

affect the FFEL and Direct Loan programs.

Negotiated Rulemaking

Section 492 of the HEA requires that, before publishing any

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

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

[[Page 43429]]

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 Negotiating Committee II (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.

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 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

These proposed regulations include, in addition to the changes made

to the HEA by the 1998 Amendments, conforming changes and minor

technical changes.

The proposed regulations address changes that are specific to the

FFEL Program and changes that are common to both the FFEL and Direct

Loan programs. The following discussion of the proposed regulations

begins with changes that affect only the FFEL Program, followed by

changes that affect both the FFEL and Direct Loan programs.

Federal Family Education Loan Program Changes

Section 682.102--Obtaining and Repaying a Loan

The proposed regulations would modify this section to reflect the

change made by the 1998 Amendments to section 432(m)(1)(C) of the HEA,

to require the use of the Free Application for Federal Student Aid

(FAFSA) as the application for FFEL subsidized and unsubsidized

Stafford loans beginning in academic year 1999-2000. These proposed

regulations also include language to reflect the use of a Master

Promissory Note (MPN) that would allow borrowers to receive, in

addition to an initial loan, additional loans for the same or

subsequent periods.

The proposed regulations also would revise this section to reflect

the change made by the 1998 Amendments to allow a borrower with

multiple FFEL holders to secure an FFEL Consolidation loan from any

eligible FFEL lender.

Section 682.200--Definitions

The proposed regulations would implement changes made by the 1998

Amendments to the definition of an eligible lender in section 435(d)(5)

of the HEA. Specifically, the 1998 Amendments created an exception to

the long-standing provision that prohibits a lender from providing

inducements to schools to secure loan applications. The exception added

by the 1998 Amendments provides that, notwithstanding the general

prohibition on inducements, a lender may provide a school with

assistance ``that is comparable to the kinds of assistance that is

provided by the Department of Education.''

The Department expressed its view that the purpose of the new

exception was to allow lenders to provide assistance to schools similar

to that provided by the Department to schools in the Direct Loan

Program and therefore suggested that the proposed regulations be

limited to the assistance provided by the Department for the Direct

Loan Program. The committee agreed to proposed regulatory language that

permits lenders to provide assistance ``comparable to the kinds of

assistance provided by the Secretary under, or in furtherance of the

Federal Direct Loan Program.'' This proposed language would reflect

congressional intent to broaden the types of assistance that lenders

may provide to a school while retaining meaning for the prohibition

against lenders providing inducements to schools.

The 1998 Amendments did not change the general prohibition that

lenders cannot provide services, at less than market value, to a school

in order to secure applications. In general, we believe that most goods

and services that a lender provides to a school at less than their fair

market value are, by definition, an inducement. If those goods and

services are provided by the lender to secure applicants for loans, the

inducement would be prohibited. This is especially true with regard to

goods and services provided by a lender that are used by the school to

meet its Title IV program responsibilities under the law and the

regulations. The Secretary believes that it is not necessary for the

lender to specifically tie the goods and services to loan applications

for certain activities to be considered improper inducements.

Prior to the 1998 Amendments, certain activities by lenders could

have constituted a prohibited inducement. In light of the new law,

these proposed regulations broaden the types of assistance that lenders

may provide to schools. Accordingly, the following are examples of

activities that would not jeopardize a lender's status as an eligible

lender:

Counseling: A lender may support schools in meeting their

responsibilities to provide borrowers with initial counseling, exit

counseling, and general debt counseling. In providing this support,

lenders may:

Assist in the development, production, and distribution of

materials used by schools in counseling activities.

Develop, and offer to schools, electronic products and

services, including web-based processes, that can be used to meet

counseling requirements.

Participate in counseling sessions offered by a school,

provided that the school maintains control of these events and school

staff members are present.

Participate in initial counseling, provided that the

lender's activities reinforce the student's right to choose a lender.

Outreach: A lender may support schools in activities to

inform the public or students of the availability of student aid,

including student loans. Lender participation might include such

[[Page 43430]]

activities as: Providing publicity for outreach events; preparing,

producing, and distributing materials; providing light refreshment; and

providing staff to assist the school in the presentation. Permissible

outreach activities also include those that are undertaken by a lender

in conjunction with a guaranty agency.

Computer Support: A lender may provide computer software,

technical support, and training-- but not computer hardware-- that

support the technological processes used by the lender in its

administration of the FFEL Program.

Training: A lender may provide specialized training to

schools in support of their FFEL Program processes. This training may

be provided in person, either on or off campus, or through the use of

technology. A lender may not provide school staff additional services

or goods (other than items of nominal value) in connection with the

training, and it may not pay expenses incurred by school staff for the

training.

Section 682.201--Eligible Borrowers

The proposed regulations would implement a change made by the 1998

Amendments to section 428C(a)(3)(A) of the HEA that prohibits a

borrower from receiving an FFEL Consolidation loan if the borrower is

subject to a judgment secured through litigation or to an

administrative wage garnishment order on a loan made under the HEA. The

committee agreed to apply this restriction only to the loans the

borrower wishes to consolidate. Therefore, a borrower against whom an

administrative wage garnishment order or a judgment has been issued may

receive an FFEL Consolidation loan, but may not include loans subject

to litigation or administrative wage garnishment in the FFEL

Consolidation loan. The committee also agreed that these loans should

be ineligible for consolidation only until the judgment has been

vacated or the administrative wage garnishment order has been lifted.

The proposed regulations also would reflect the changes made by the

1998 Amendments to section 428C(a)(3)(B) of the HEA to expand the

universe of loans that may be included in an FFEL Consolidation loan.

Under the 1998 Amendments, loans received prior to the borrower's

receipt of an FFEL Consolidation loan may be added to the FFEL

Consolidation loan during the 180-day period following the making of

the FFEL Consolidation loan. Loans received by the borrower during the

180-day period following the making of the FFEL Consolidation loan may

also be added during that period. Finally, loans received prior to the

date of a borrower's first FFEL Consolidation loan may be added to any

subsequent FFEL Consolidation loan the borrower obtains. However, the

proposed regulations would clarify that a single FFEL Consolidation

loan may not be reconsolidated without the borrower having another

eligible loan to consolidate.

Prior to enactment of the 1998 Amendments, a borrower's eligibility

to receive an FFEL Consolidation loan terminated upon receipt of an

FFEL Consolidation loan, except that the borrower could add loans

received prior to the date of the FFEL Consolidation loan during the

180-day period after the FFEL Consolidation loan was made. Loans made

prior to, but not included in, the FFEL Consolidation loan were

permanently ineligible for consolidation. The new statutory provisions

that are reflected in these proposed regulations would provide more

opportunities for borrowers to add loans to existing FFEL Consolidation

loans.

The proposed regulations also would reflect the change made by the

1998 Amendments to section 428C(b)(1)(A)(i) of the HEA that permits a

borrower who has multiple FFEL Program holders to apply to any eligible

FFEL lender for an FFEL Consolidation loan. Prior to this change, a

borrower had to request an FFEL Consolidation loan from the holders of

all of his or her existing loans before requesting a loan from a

different lender. Under the proposed rules, a borrower with a single

holder may apply to another eligible FFEL lender only if the borrower

is either unable to receive an FFEL Consolidation loan from the holder

or is unable to receive an FFEL Consolidation loan with income-

sensitive repayment terms.

Section 682.202--Permissible Charges by Lenders to Borrowers

Capitalization of Interest

Interest Rates

The proposed regulations would reflect the changes made by the 1998

Amendments to the interest rate formulas for FFEL Program loans in

section 427A of the HEA. The 1998 Amendments made permanent the

temporary interest rate formulas that were added to the HEA by the

Transportation Equity Act for the 21st Century, Pub. L. 105-178 (TEA),

enacted June 9, 1998. TEA created interest rate formulas for new

student and parent loans first disbursed on or after July 1, 1998, and

before October 1, 1998. The 1998 Amendments applied these same formulas

to loans first disbursed on or after October 1, 1998, and before July

1, 2003. Accordingly, the proposed regulations reflect the different

formulas for interest rates on FFEL Program loans.

As provided by the HEA and reflected in these proposed regulations,

the interest rate on Stafford loans during the repayment period is

calculated based on the bond equivalent rate of the 91-day Treasury

bills auctioned at the final auction prior to the June 1 immediately

preceding the July 1-June 30 period plus 2.3 percent and during the in-

school and grace periods as the 91-day Treasury bills plus 1.7 percent,

with a cap during these periods of 8.25 percent. The formula for PLUS

loan interest rates is the 91-day Treasury bills plus 3.1 percent not

to exceed 9 percent. In addition, the proposed regulations reflect the

statutory formula for the interest rate on FFEL Consolidation loans for

which the application is received by the lender on or after October 1,

1998, as the lesser of the weighted average of the interest rates on

the loans consolidated rounded upward to the nearest one-eighth of one

percent, or 8.25 percent.

Capitalization of Interest

The proposed regulations also would implement the changes made by

the 1998 Amendments to the rules for capitalization of interest on

unsubsidized Stafford loans. The 1998 Amendments modified the rules

governing the frequency of capitalization during certain periods in

which the borrower is not making payments on the principal of an

unsubsidized Stafford loan. Under these new rules, a lender would be

able to add accrued interest to the principal only when the loan enters

repayment, at the expiration of a period of authorized deferment, at

the expiration of a period of authorized forbearance, and when the

borrower defaults.

The committee engaged in lengthy discussions as to how interest

that accrues during a period of forbearance should be treated. There

was also lengthy discussion as to whether these changes covered

subsidized Stafford loans during periods of forbearance as well as

unsubsidized Stafford loans during all periods in which payments of

principal are not being made. (The only issue on subsidized Stafford

loans was the treatment of periods of forbearance because the

Department does not pay interest on the borrower's behalf during these

periods.) The committee also engaged in lengthy discussions as to

whether, if there were consecutive periods covered by these new

[[Page 43431]]

requirements (for example, a deferment period immediately followed by a

forbearance period), the capitalization of the accrued interest should

take place at the end of each period or the end of the consecutive

covered periods.

After much discussion, the committee reached consensus on these

draft regulations. Under these proposed rules, for loans first

disbursed on or after July 1, 2000 (the effective date of these

proposed regulations), periods of forbearance on both subsidized and

unsubsidized Stafford loans would be covered by the new capitalization

rules. Further, the committee agreed to propose that the capitalization

could take place at the expiration of each covered period rather than

at the end of a series of consecutive covered periods. For unsubsidized

Stafford loans disbursed on or after the date of enactment of the 1998

Amendments (October 7, 1998) and prior to July 1, 2000, the lender must

capitalize interest pursuant to section 428H(e)(2) of the HEA.

The committee believed that the proposed regulations would maximize

borrower benefits by reducing the costs of capitalization. The

Secretary believes that the proposed regulations would maintain the

historic regulatory approach of treating periods of deferment and

forbearance similarly in the area of capitalization.

Origination Fees

The proposed regulations would also implement changes to the rules

governing origination fees made to section 438(c) of the HEA by the

1998 Amendments. The 1998 Amendments require any lender who charges

student borrowers an origination fee to charge the same fee to all

student borrowers. The law also permits a lender to assess a lower

origination fee to a borrower demonstrating ``greater financial need,''

as determined by the borrower's adjusted gross income. The 1998

Amendments, for the first time, establish provisions governing a

lender's decision to offer a reduced origination fee on subsidized and

unsubsidized Stafford loans. Prior to these amendments, a lender had

discretion to waive or lower the fee charged to a particular subsidized

Stafford loan borrower. The 1998 Amendments limit the lender's

discretion and make a lower fee a term or condition of the loan if the

lender chooses to charge a reduced fee to any borrower.

The committee engaged in extensive discussions regarding the

appropriate standard for determining ``greater financial need'' for

this purpose. The committee discussed a number of different possible

standards including: an expected family contribution (EFC) of ``O,'' an

EFC that makes students eligible for a Federal Pell Grant, and

eligibility for a subsidized Stafford loan. In addition, since each

lender must apply its origination fee policies to all borrowers, there

were also extensive discussions as to what constitutes a lender for

purposes of this provision. Some negotiators inquired about how trust

relationships would be evaluated under this regulation.

Ultimately, the committee reached consensus on both of these

issues. On the issue of the standard for ``greater financial need,''

the committee agreed to propose that a lender would be permitted to use

two standards to determine whether a borrower demonstrates greater

financial need to allow lenders operational and financial flexibility.

Under the proposed regulations, a lender could consider a borrower as

demonstrating greater financial need if--

The borrower's EFC used to determine eligibility for the

loan is equal to or less than the maximum qualifying EFC for a Federal

Pell Grant at the time the loan is certified; or

The borrower qualifies for a subsidized Stafford loan.

To allow for situations in which a lender wants to use a comparable

alternative, the committee also agreed to propose that a lender, with

the approval of the Secretary, would be able to use some other standard

to determine whether a borrower demonstrates greater financial need.

The proposed regulations would specify that a lender that charges a

borrower a lower origination fee on the borrower's unsubsidized

Stafford loan must charge the same lower fee on the borrower's

subsidized Stafford loan. This requirement will ensure that borrowers

who demonstrate greater financial need will receive the benefit of

lower origination fees on both loan types for which they may be

eligible.

The proposed regulations also would provide that all lenders under

common ownership, including ownership by a common holding company,

constitute a single lender for purposes of this section. The proposed

regulations further would provide that any beneficial owner of loans

that provides funds to an eligible lender trustee to make loans on the

beneficial owner's behalf is considered the lender. We believe that

this definition will ensure that all borrowers who have loans from a

particular lender will be treated equitably.

Section 682.206--Due Diligence in Making a Loan

The proposed regulations include changes in this section to conform

these rules to proposed changes made in Sec. 682.603 of the regulations

related to loan certification of borrower eligibility by the school,

and in Sec. 682.401 of the regulations related to the use of the MPN.

Section 682.207--Due Diligence in Disbursing a Loan

Section 682.207 of the proposed regulations would add a new

provision to require lenders to disburse loans in a single installment

(rather than in multiple installments as generally required) if so

directed by a school that meets certain criteria specified in the 1998

Amendments. The criteria, contained in Sec. 682.604 of the proposed

regulations, specify that the exemption applies to two groups of

schools: (1) Those certifying loans for a single term, with FFEL cohort

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

cohort rates of less than ten percent for each of the three most recent

years for which rates have been calculated and; (2) those certifying

loans for students in study abroad programs when the school certifying

the loan has an FFEL cohort default rate, Direct Loan Program cohort

rate, or weighted average cohort rate of less than five percent for the

most recent year for which rates have been calculated. Consistent with

the current practice, the committee agreed to propose that lenders

would be permitted to rely upon the disbursement schedule provided by

the school in making single installment loans.

Section 682.209--Repayment of a Loan

The proposed regulations would implement the addition made by the

1998 Amendments of section 428(b)(9)(A)(iv) of the HEA that requires a

lender to offer FFEL borrowers, including FFEL Consolidation loan

borrowers, an extended repayment plan with fixed or graduated repayment

amounts to be paid over a period not to exceed 25 years. The extended

repayment plan is available to a new borrower (one with no outstanding

balance on an FFEL Program loan as of October 7, 1998), whose total

outstanding FFEL loans exceed $30,000.

The proposed regulations in this section also would reflect the new

statutory provision allowing borrowers to change repayment plans

annually.

[[Page 43432]]

Section 682.300--Payments of Interest Benefits on Stafford and

Consolidation Loans

The proposed regulations include a change in this section to

conform these rules to a proposed change in Sec. 682.301 of the

regulations related to the interest subsidy payment on the portion of

an FFEL Consolidation loan that repaid a subsidized FFEL or Direct Loan

program loan during a period of authorized deferment.

Section 682.301--Eligibility of Borrowers for Interest Benefits on

Stafford and Consolidation Loans

The proposed regulations would reflect changes made by the 1998

Amendments to section 428C(b) of the HEA that extended the authority

for payment of interest subsidy on the portion of an FFEL Consolidation

loan that repaid a subsidized FFEL or Direct Loan program loan during a

period of authorized deferment. This provision does not apply to the

portion of the loan that does not represent Health Education Assistance

Loans (HEAL). This borrower benefit was originally included in the

Emergency Student Loan Consolidation Act of 1997 and was extended by

the 1998 Amendments.

Section 682.301 also includes provisions necessary to conform to

the changes in Sec. 682.603 of the proposed regulations related to loan

certification by a school.

Section 682.402--Death, Disability, Closed School, False Certification,

Unpaid Refunds, and Bankruptcy Payments

The proposed regulations would modify this section to reflect

amendments to section 523(a)(8) of Title 11 of the United States Code

(the Bankruptcy Code) included in the 1998 Amendments that eliminate

the seven-year repayment provision for discharge of FFEL Program loans

for bankruptcy petitions filed on or after October 8, 1998. The

Bankruptcy Code now permits discharge of an FFEL Program loan after

that date only on the grounds of undue hardship. The proposed

regulations reflect the change in the criteria for bankruptcy petitions

filed on or after October 8, 1998, and revise lender and guaranty

agency claim filing procedures related to these loans.

Section 682.402 of the proposed regulations also includes

conforming changes necessary for the implementation and use of the MPN.

In particular, the proposed regulations would provide that a lack of

evidence of a borrower's confirmation for subsequent loans made under

an MPN will not lead to a denial of claim payment to the lender unless

the loan is found to be unenforceable. However, if a court rules that

the loan is not enforceable solely because of the lack of evidence of

the confirmation process or processes, the lender and the guaranty

agency must repay any insurance and reinsurance payments received on

the loan.

Section 682.406--Conditions of Reinsurance Coverage

The proposed regulations would include conforming changes necessary

to implement and use the MPN.

Section 682.409--Mandatory Assignment by Guaranty Agencies of Defaulted

Loans to the Secretary

The proposed regulations contain a conforming change relating to

the MPN. The proposed regulations would clarify the rules governing

assignment of defaulted loans to the Secretary by specifying that

mandatory assignment of one loan made under an MPN does not constitute

assignment of all loans made under the MPN.

Section 682.414--Records, Reports, and Inspection Requirements for

Guaranty Agency Programs

The proposed regulations would make conforming changes to this

section which are necessary to implement the MPN. In particular, this

section would require lenders to maintain documentation of the

confirmation processes the lender and the school used for subsequent

loans under an MPN and specify that a lender or guaranty agency may, to

accommodate the MPN process, retain a true and exact copy of the

promissory note rather than the original note.

Section 682.603--Certification by a Participating School in Connection

with a Loan Application

The proposed regulations would reflect changes made by the 1998

Amendments to section 428(a)(2) of the HEA that reduce the types of

information a school is required to provide to a lender in certifying a

Stafford loan. To reflect the statute, the proposed regulations would

require the school to certify only the loan amount for which the

borrower is eligible and to provide a disbursement schedule. The

proposed regulations would require the school to maintain documentation

of the determination of the borrower's need (based on the cost of

attendance, estimated financial assistance, and, if applicable, EFC).

The proposed regulations in this section also would specify that

schools that qualify for exemption from the multiple disbursement

requirement or the requirement for delayed delivery of loan funds for

first-time borrowers-- due to their low FFEL cohort default rates,

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

must cease certifying loans based on those criteria no later than 30

days after the school is notified that it no longer meets the

qualifications. The committee agreed that this 30-day period after

notification was necessary to allow the school sufficient time to

advise students of this change in the school's status and to make

necessary system and procedural changes.

Section 682.610--Administrative and Fiscal Requirements for

Participating Schools

The proposed regulations would make conforming changes to this

section that are necessary to implement and use the MPN and to reflect

the modified loan certification requirements of the school in 682.603

of the proposed regulations.

FFEL and Direct Loan Program Changes

Sections 682.102 and 685.201--Master Promissory Note

The proposed regulations in these sections would make conforming

changes necessary to reflect the implementation of the MPN in the FFEL

and Direct Loan programs. A more detailed discussion of the MPN is

provided in the discussion of changes to Secs. 682.401 and 685.402 in

this preamble.

Sections 682.200 and 685.102--Definitions of Default, Estimated

Financial Assistance, and Master Promissory Note

The proposed regulations would revise the FFEL and Direct Loan

program definitions of ``Default'' and ``Estimated financial

assistance'' to reflect changes made to sections 435(l) and

428(a)(2)(C) of the HEA by the 1998 Amendments. The proposed

regulations also would add the term ``Master promissory note'' to the

definition sections in the FFEL and Direct Loan program regulations, as

part of the implementation of the MPN as provided in section

432(m)(1)(D) of the HEA.

Default

The 1998 Amendments extended the length of time a borrower is

delinquent before a default occurs on an FFEL or Direct Loan program

loan from--

180 days to 270 days for FFEL and Direct Loan program

loans repayable in monthly installments; and

240 days to 330 days for FFEL Program loans repayable less

frequently than monthly installments.

[[Page 43433]]

The proposed regulations would modify the existing definition of

default to reflect this statutory change.

Estimated Financial Assistance

Before enactment of the 1998 Amendments, schools were required to

include veterans' educational benefits paid under Chapter 30 of Title

38 of the United States Code as ``estimated financial assistance'' for

the purpose of determining a borrower's eligibility for FFEL and Direct

Loan program loans. The 1998 Amendments changed this requirement for

the purpose of determining eligibility for subsidized FFEL and Direct

Loan program loans. Schools no longer are required to include the

specified veterans' educational benefits paid in the calculation of

estimated financial assistance when determining eligibility for

subsidized FFEL and Direct Loan program loans.

The 1998 Amendments also now require schools to include national

service education awards or post-service benefits under Title I of the

National and Community Service Act of 1990 (Americorps) as estimated

financial assistance for the purpose of determining a borrower's

eligibility for unsubsidized FFEL and Direct Loan program loans.

However, schools are not required to include these benefits when

determining a borrower's eligibility for subsidized FFEL and Direct

Loan program loans.

The proposed regulations reflect these statutory changes affecting

the treatment of veterans' educational and Americorps benefits in

determining estimated financial assistance.

Master Promissory Note

The proposed regulations include a definition of the term ``Master

promissory note'' (MPN). An MPN is a promissory note under which a

borrower may receive loans for a single academic year or multiple

academic years. The 1998 Amendments direct us to develop and require

the use of an MPN for periods of enrollment beginning not later than

July 1, 2000. Initially, not all borrowers will be permitted to receive

multiple loans under the MPN. To receive multiple loans under an MPN,

the borrower must attend a school that is authorized for multi-year use

of the MPN. However, some schools that are authorized for multi-year

use of the MPN may choose not to exercise this option. Further, a

borrower who attends a school exercising the multi-year option may

choose to receive and sign an MPN for each loan that he or she

receives.

A more detailed discussion of the MPN is covered in

Sec. Sec. 682.401 and 685.402. Other conforming changes appear

throughout the regulations.

Sections 682.204 and 685.203--Loan Limits

The proposed regulations would implement changes made by the 1998

Amendments to sections 428(b) and 428H(d) of the HEA that specify the

annual loan limits for an academic year. The proposed regulations would

reflect these changes and modify the method for calculating the reduced

annual loan limits that apply to FFEL and Direct Loan borrowers

enrolled in programs of study or remaining balances of programs of

study that are less than an academic year in length. The proposed

regulations also specify annual loan limits for non-degree preparatory

and teaching credential coursework. The 1998 Amendments simplified the

proration calculation but did not change the conditions under which

proration would be required.

Reduced Loan Limits

The proposed regulations would implement changes in the HEA that

altered the method of calculating statutorily mandated reduced annual

loan limits for borrowers enrolled in a program of undergraduate

education that is less than one academic year. Prior to enactment of

the 1998 Amendments, the HEA included specific loan limits that applied

to these borrowers. The 1998 Amendments eliminated these specified loan

amounts and replaced them with a calculation that reduces the loan

amount proportionally based on the relationship of the program length

to the length of the academic year. The HEA now provides that the

maximum amount that a borrower enrolled in a program of undergraduate

education that is less than one academic year may receive is the amount

that bears the same ratio to the statutory annual maximum ($2,625 for

subsidized and unsubsidized, and $4,000 for additional unsubsidized) as

the program of study in which the borrower is enrolled bears to one

academic year.

The 1998 Amendments also clarified that annual loan limits are

authorized for an academic year as that term is defined in section

481(a)(2) of the HEA, which contains a minimum standard of

instructional time and academic coursework. The committee agreed that

students enrolled in a program that does not meet one or both of the

statutory minimum standards for an academic year not receive a full

annual loan amount. After some discussion, the committee agreed that

the draft regulations should propose that the calculation of the

proportional loan amount for a program of study that is less than a

full academic year should use the ratio that is the lesser of the ratio

of academic credit or number of weeks to the academic year.

For prorating loan limits for remaining balances of programs that

are equal to or greater than an academic year in length, the committee

agreed that a proportional loan amount calculated as simply a ratio of

the academic credit to the academic year could be used. This is because

these programs already meet the two standards (instructional weeks or

academic credit) for an academic year.

Preparatory Coursework

The proposed regulations would reflect the change made by the 1998

Amendments to specify the annual loan amount in the FFEL and Direct

Loan programs that a borrower may receive if he or she is enrolled in

preparatory coursework required for admission into an undergraduate

degree or certificate program or for enrollment in a graduate or

professional degree or certificate program. The loan limits specified

in the statute are the same as the limits previously specified in the

Department's guidance for loans made to these borrowers. The proposed

regulations provide that the maximum loan amount that such a borrower

may receive for coursework necessary for admission into an

undergraduate program is $2,625 in subsidized and unsubsidized loans

and, for independent students and certain dependent students, an

additional $4,000 in unsubsidized loans. In the case of a borrower who

has obtained a baccalaureate degree, the proposed regulations provide

that the maximum amount a borrower may receive for coursework necessary

for admission into a graduate or professional program is $5,500 in

subsidized and unsubsidized loans and $10,500 (less any subsidized

amount borrowed) in additional unsubsidized loans.

Teaching Credentials

The proposed regulations would reflect the change made by the 1998

Amendments to specify the annual loan amount that a borrower may

receive for enrollment in postbaccalaureate coursework necessary for a

professional credential or teacher certification by a State for

teaching in elementary or secondary schools. The HEA specifies that

such a borrower may receive an annual limit of up to $5,500 in

subsidized and unsubsidized loans and

[[Page 43434]]

$5,000 in additional unsubsidized loans for such coursework. The loan

limits specified in the statute are the same limits as those previously

specified in the Department's guidance for loans made to these

borrowers following enactment of section 484(b)(4) of the HEA in 1992,

which made these borrowers eligible for loans.

Sections 682.207, 682.604, 685.301, and 685.303--Disbursement

Exemptions

The proposed regulations would implement changes made to section

428G(a)(3), (b)(1), and (e) of the HEA by the 1998 Amendments that

authorize exemptions to the requirements for disbursing loan proceeds

to FFEL and Direct Loan program borrowers. These exemptions apply to

FFEL and Direct Loan program schools that meet specific criteria.

Multiple Disbursement Exemption

Generally, an FFEL or Direct Loan program loan must be disbursed in

more than one installment. As a result of the 1998 Amendments, loan

proceeds may now be disbursed to the borrower in one installment if--

The loan period is equal to or shorter than one semester,

one trimester, one quarter, or four months; and

The school has an FFEL cohort default rate, Direct Loan

Program cohort rate, or weighted average cohort rate of less than 10

percent for each of the three most recent fiscal years for which data

are available.

Loan proceeds to cover the cost of attendance in a study abroad

program also may be disbursed in one installment if the school has an

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

average cohort rate of less than five percent for the single most

recent fiscal year for which data are available.

Delayed Delivery/Disbursement Exemption for First-Year, First-Time

Borrowers

In general, FFEL and Direct Loan program schools must delay

delivery or disbursement of an installment of loan proceeds to first-

year, first-time borrowers until 30 days after the first day of the

student's program of study. First-year, first-time borrowers are

students who are enrolled in their first year of an undergraduate

program of study and who have not previously received an FFEL

Subsidized Stafford, FFEL Unsubsidized Stafford, Federal Supplemental

Loans for Students (SLS), Direct Subsidized, or Direct Unsubsidized

loan.

Under the proposed regulations and in accordance with the statute,

an FFEL or Direct Loan program school may deliver or disburse loan

proceeds to first-year, first-time borrowers without the 30-day delay

if the school--

Has an FFEL cohort default rate, Direct Loan Program

cohort rate, or weighted average cohort rate of less than 10 percent

for each of the three most recent fiscal years for which data are

available or

Is an eligible postsecondary home school certifying or

originating a loan to cover the cost of attendance in a study abroad

program; and

Has an FFEL cohort default rate, Direct Loan Program

cohort rate, or weighted average cohort rate of less than five percent

for the single most recent fiscal year for which data are available.

A school's eligibility for these exemptions is based on the

school's published FFEL cohort default rate, Direct Loan Program cohort

rate, or weighted average cohort rate. To be eligible, the school must

have a published rate calculated for each of the required number of

years. For example, a new school that has only one published FFEL

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

average cohort rate of less than 10 percent and wants to disburse a

one-semester loan in a single installment would not qualify for the

multiple disbursement exemption.

Annually, the Secretary notifies schools of their published FFEL

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

average cohort rates. Under the proposed regulations, schools that no

longer qualify for the exemptions would have to cease certifying or

originating loans based on the exemptions beginning 30 days after the

school received the Department's notice that it no longer qualifies for

the exemptions. A school would be responsible for certifying or

originating loans in accordance with the applicable regulations and its

default rate, and FFEL lenders and guaranty agencies would be able to

rely upon the school certifications.

Sections 682.209 and 685.207--Grace Period for Military Service

The proposed regulations would implement changes made by the 1998

Amendments to section 428(b)(7)(D) of the HEA that authorize the

exclusion of certain periods of service in the Armed Forces from the

six-month grace period for FFEL and Direct Loan program borrowers. To

qualify, a borrower must be--

A member of a reserve component of the Armed Forces named

in section 10101 of Title 10 of the United States Code; and

Called or ordered to active duty for a period of more than

30 days.

For borrowers who qualify, the following periods would be excluded

from the six-month grace period for the borrower's subsidized and

unsubsidized student loans:

Periods during which a borrower serves in the Armed

Forces; and

The period necessary for a borrower to resume enrollment

at the next available regular enrollment period when the borrower

returns from service.

The committee discussed the incidence of a borrower serving more

than one period of active duty. To ensure that borrowers receive the

benefit each time they serve, the committee agreed that the proposed

regulations should provide that each period that coincides with the

borrower's loans being in an in-school or grace status is subject to

the three-year limit.

The committee also discussed the fact that the time period in which

a borrower needs to re-enroll in the ``next available regular

enrollment period'' after returning from service in the Armed Forces

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

borrower is pursuing a non-traditional academic program. As a result of

these discussions, the committee agreed that the proposed regulations

should require that all borrowers must re-enroll within 12 months of

their return from active duty service. Borrowers would not be required

to re-enroll in the same program in which they were enrolled at the

time they were called or ordered to active duty.

The proposed regulations also would provide that borrowers who were

in their grace period when called or ordered to active duty receive a

full six-month grace period when they return from service in the Armed

Forces. The committee believed that this provision would be in the best

interest of borrowers--many of whom must secure jobs upon their return.

Sections 682.210 and 685.204--Deferment

The proposed regulations would implement changes made by the 1998

Amendments to requirements for deferments in section 428(b)(1) of the

HEA. These changes affect the qualifications for the in-school and

unemployment deferments.

In-School Deferment

Prior to enactment of the 1998 Amendments, certain FFEL Program

borrowers who were enrolled less than full time had to borrow a loan

for the

[[Page 43435]]

same period of enrollment for which the borrower was seeking an in-

school deferment in order to qualify for the deferment. These ``new

borrowers'' are defined for deferment purposes, as those who did not

have an outstanding balance on an FFEL loan made prior to July 1, 1987

and who received an FFEL loan on or prior to June 30, 1993. The 1998

Amendments eliminated the requirement that the borrower take out a loan

to qualify for the deferment. The proposed regulations would provide

these FFEL borrowers enrolled at least half time at an eligible school

may qualify for an in-school deferment.

The 1998 Amendments also changed the HEA to specify three methods

by which FFEL lenders and the Secretary will determine a borrower's

eligibility for an in-school deferment. The proposed regulations would

provide that a borrower may be determined eligible for an in-school

deferment when--

The borrower submits a request for deferment along with

documentation verifying the borrower's eligibility for the deferment to

the borrower's FFEL lender or the Secretary for a Direct Loan;

The borrower's FFEL lender or the Secretary for a Direct

Loan receives either a newly completed loan application or, as part of

the MPN process, information from the borrower's school indicating that

the borrower is eligible to receive a new loan; or

The borrower's FFEL lender, or the Secretary for a Direct

Loan, receives student status information from the borrower's school,

either directly or indirectly, indicating that the borrower is enrolled

on at least a half-time basis.

Before the 1998 Amendments, a borrower could only receive an in-

school deferment by submitting a request and the required verification

of eligibility to the borrower's FFEL lender or the Secretary for a

Direct Loan. The Department's current regulations allow FFEL lenders to

determine a borrower's eligibility for an in-school deferment when they

received new loan eligibility information from a borrower's school.

The statute requires an FFEL lender, or the Secretary for a Direct

Loan, to notify a borrower when granting an in-school deferment based

on new loan eligibility or student status information. The committee

agreed that to provide borrowers with the opportunity to make an

informed choice, the proposed regulations would provide that this

notice must inform the borrower of the option to make interest payments

on an unsubsidized loan during the deferment period and of the

opportunity to cancel the deferment and continue paying on the loan.

The proposed regulations also provide that, in the case of a borrower

who chooses to cancel the deferment and continue paying on the loan,

the borrower may exercise his or her option to avoid capitalization of

unpaid interest by making the principal and interest payments that were

deferred.

Unemployment Deferment

Prior to the 1998 Amendments, to qualify for additional periods of

an unemployment deferment after an initial six months, FFEL and Direct

Loan program borrowers were required to submit a written certification

that described the borrower's conscientious search for full-time

employment. Alternatively, a borrower could provide comparable

documentation the borrower had used to meet the requirements of the

Unemployment Insurance Service.

The 1998 Amendments modified the HEA to permit borrowers who are

eligible for unemployment insurance benefits to submit evidence of

their eligibility for the benefits to their FFEL lender, or to the

Secretary for a Direct Loan, to qualify for initial and subsequent

periods of an unemployment deferment. The proposed regulations reflect

this change in the HEA. However, borrowers who are not eligible for

unemployment insurance benefits may continue to provide written

certifications to their FFEL lender or the Secretary.

As part of the discussions of this statutory change, the committee

agreed that borrowers who are eligible for unemployment insurance

benefits should not have to receive those benefits to qualify for an

unemployment deferment. The proposed regulations reflect this standard

of eligibility. The committee believed that the statute's goal was to

reduce the burden on the borrower. Therefore, the committee agreed that

a borrower should simply submit documentation proving that he or she is

eligible to receive the unemployment insurance benefits for the period

during which the borrower is requesting an unemployment deferment.

The committee also discussed the minimum documentation that a

borrower should be required to provide. Some negotiators suggested that

the documentation should include, at a minimum--

The borrower's personal identifying information (i.e.,

name, address, and social security number); and

The effective dates of the borrower's eligibility to

receive unemployment insurance benefits.

However, following these discussions, the committee did not include

these requirements in the proposed regulations. The Secretary invites

comment as to whether these items should be included in the final

regulations.

Sections 682.211 and 685.205--Forbearance

The proposed regulations would implement changes to sections

428(c)(3) and 428H(e) of the HEA made by the 1998 Amendments. These

changes remove the requirement that forbearance requests be in writing

and add a new basis for granting a forbearance.

Under new sections 428(c)(3)(D) and 428H(e)(7) of the HEA, an FFEL

lender, and the Secretary for a Direct Loan, may grant a forbearance to

a borrower for a period not to exceed 60 days after the borrower

requests a deferment, a forbearance, a change in repayment plan, or a

consolidation loan. The purpose of this forbearance period is to allow

time for FFEL lenders and the Secretary to collect and process

documentation supporting these requests. Lenders and the Secretary may

not capitalize interest that accrues during this forbearance period.

Sections 682.401 and 685.402--Multi-Year Use of the Master Promissory

Note

The proposed regulations would modify Secs. 682.401 and 685.402 to

reflect the adoption of an MPN in the FFEL and Direct Loan Programs.

Even before enactment of the 1998 Amendments, the Department, in

consultation with the financial aid community, developed an MPN and a

process for multi-year use of the MPN for FFEL and Direct Stafford

loans. The Department's adoption of an MPN was confirmed by changes

made to section 432(m)(1)(D) of the HEA by the 1998 Amendments. The

proposed regulations would further this process by stating the

requirements that a school must meet to be authorized for multi-year

use of the MPN.

Under the proposed regulations, a school would have to be

authorized by the Secretary to use a single MPN as the basis for

multiple loans obtained by a particular borrower. A borrower attending

a school that is not authorized by the Secretary for multi-year use of

the MPN would have to complete a new MPN for each subsequent loan.

Under the proposed regulations, to be eligible for multi-year use

of the MPN, a school would have to be a four-year or graduate/

professional school, or meet criteria or be otherwise designated at the

sole discretion of the Secretary. The school also would have to meet

the following requirements:

Not be subject to an emergency action or a proposed or

final limitation,

[[Page 43436]]

suspension, or termination action under sections 428(b)(1)(T), 432(h),

or 487(c) of the HEA; and

Meet other performance criteria determined by the

Secretary.

The proposed regulations provide that the Secretary may designate

additional institutions to use the multi-year feature of the MPN, in

his sole discretion. It is our current intention to allow schools

(other than four-year and graduate/professional schools) to request

approval for use of the multi-year feature of the MPN at any time after

the publication of the final regulations. Any such requests will be

considered at the Secretary's sole discretion. At some point after

final regulations are published, it is also our intention to establish

and announce criteria and a process that will be used by the Department

for consideration of requests for approval of the use of the multi-year

feature of the MPN by schools other than four-year and graduate/

professional schools.

We believe the proposed regulations would give the Secretary

adequate flexibility to implement multi-year use of the MPN.

The adoption of the MPN for multi-year use will require significant

changes to the systems and procedures currently in place for lenders,

schools, servicers, and the Department. It will also require increased

efforts by all parties to ensure that borrowers understand their

obligations and rights under the new note. In light of these changes,

the Secretary believes it is appropriate to phase in the multi-year use

of the MPN. Accordingly, at this time, the Secretary will authorize

multi-year use of the MPN only for four-year or graduate/professional

schools that are not subject to an emergency action or a proposed or

final limitation, suspension, or termination action. However, it is the

Secretary's ultimate goal to allow multi-year use of the MPN by all

schools that meet the eligibility requirements.

Consistent with the statutory requirements, the proposed

regulations would require schools that are authorized for multi-year

use of the MPN to develop and document a confirmation process or

processes along with the FFEL lender, or the Secretary for Direct

Loans, to ensure that the borrower wants subsequent loans.

The negotiators agreed that a confirmation process is required now

and that schools and lenders may follow the guidance in the

Department's Dear Colleague Letters--GEN-98-25, November 1998 and GEN-

99-08, February 1999--in developing and documenting that confirmation

process. As technology develops and different methods of confirmation

are tested, the Secretary will continue to issue guidance regarding

confirmation methods. Any guidelines will be issued in accordance with

applicable requirements of the Administrative Procedures Act.

Ultimately, after evaluating various confirmation processes, the

Secretary plans to develop regulations governing the confirmation

process.

It is the Secretary's goal to maintain and enhance a borrower's

control over the lending process. To that end, the Secretary intends to

work with students, schools, lenders, guaranty agencies, and other

interested parties to develop improved technologies and processes that

will enable borrowers to further control the lending process. These

efforts will include the development of borrower-control mechanisms

such as the--

Use of electronic signatures to confirm acceptance of

loans;

Use of PIN numbers to access and confirm loan records and

amounts; and

Adoption of on-line or other initial counseling that

includes acknowledgment of the loan.

Sections 682.402, 685.212, and 685.215--Unpaid Refund Discharge

The proposed regulations would implement changes made to section

437(c)(1) of the HEA by the 1998 Amendments. These changes provide for

the discharge of the amount of a borrower's FFEL or Direct Loan program

loan that should have been refunded by the borrower's school. This

discharge is available for loans disbursed on or after January 1, 1986.

Under the proposed regulations, the loan discharge would be available

to any borrower whose school failed to refund loan proceeds to an FFEL

lender or the Secretary on behalf of a borrower who was entitled to a

refund. While technically the return of Title IV loan proceeds that

have been applied to the account of a borrower who never attended a

school does not meet the definition of a Title IV refund, the committee

agreed to be fair to borrowers in this situation, and propose to make

these borrowers eligible for the unpaid refund discharge.

The rules proposed by the committee for unpaid refund discharges

are generally consistent with the rules governing application for

closed school and false certification discharges. The committee

believed that adopting consistent rules would help assure consistent

administration and fair treatment for borrowers. The proposed

regulations therefore would require FFEL and Direct Loan program

borrowers to submit a complete application for an unpaid refund

discharge. However, the committee agreed that an application should not

be required in all cases. The proposed regulations would allow the

Secretary or the guaranty agency, with the approval of the Secretary,

to discharge a loan based on information in his/its possession that

shows that the borrower is eligible for a discharge. Under the proposed

regulations, collection efforts on the loan would cease from the time

the borrower submits the application until such time as a determination

is made as to the borrower's eligibility for the discharge.

Under the proposed regulations, the borrower would have to agree to

provide, upon request, any additional documentation reasonably

available to the borrower but not submitted with the application, to

demonstrate that the borrower meets the qualifications for the

discharge. Examples of documentation reasonably available to the

borrower include copies of the tuition bill, the enrollment contract,

the school's catalog or other documents stating the school's refund

policy, and any correspondence from the school specifying the

borrower's withdrawal date or the amount of the refund owed.

Unpaid refund discharge requests will involve both schools that

have closed and schools that are open. However, the issues presented by

those situations differ. Accordingly, the proposed regulations provide

different procedures for closed and open school situations.

Closed School Situations

Under the proposed regulations, if the school has closed, the

guaranty agency or the Secretary would discharge the amount of the loan

equal to the unpaid refund and any associated accrued interest and

other charges based on a complete application from the borrower or,

under limited circumstances, information otherwise available to the

guaranty agency or to the Secretary.

Open School Situations

Under the proposed regulations, if the school is open, the guaranty

agency or the Secretary would discharge the amount of the loan equal to

the unpaid refund and any associated accrued interest and other charges

if--

The borrower no longer attends the school that owes the

refund;

The borrower has been unable to resolve the unpaid refund

with the school; and

The guaranty agency or the Secretary has been unable to

resolve the unpaid refund with the school within 120 days from the date

the borrower

[[Page 43437]]

submits a complete application for the unpaid refund discharge.

Under the proposed regulations, the guaranty agency or the

Secretary would notify the school of the receipt of an unpaid refund

discharge application. Within 60 days of the date of this notice, the

school would have to submit documentation demonstrating that the school

either made the refund, or is not required to make the refund.

In both closed and open school situations, the proposed regulations

would provide that the guaranty agency or the Secretary would determine

the amount eligible for discharge based on information showing the

refund amount that was not made or by applying the appropriate refund

formula to data that the borrower provides or that is otherwise

available to the guaranty agency or to the Secretary. If this

information is not available, the guaranty agency or the Secretary

would use one of two formulas to determine the amount eligible for

discharge. Two formulas must be considered because of changes made to

the HEA by the 1998 Amendments that modify the calculation of Title IV

refunds. The effective date for the new refund calculation is October

7, 2000 and that date will be used to determine which of the following

formulas applies.

For Students Who Fail To Attend, Withdraw, or Are Terminated Before

October 7, 2000

To determine unpaid refund discharges for borrowers in this group,

the guaranty agency or the Secretary would calculate and discharge the

lesser of the institutional charges unearned by the school or the loan

amount. The amount of institutional charges unearned equals--

[GRAPHIC] [TIFF OMITTED] TP10AU99.000

For Students Who Fail To Attend, Withdraw, or Are Terminated On or

After October 7, 2000

To determine unpaid refund discharges for borrowers in this group,

a guaranty agency or the Secretary would calculate and discharge the

loan amount unearned by the school. The loan amount unearned equals--

[GRAPHIC] [TIFF OMITTED] TP10AU99.001

The refund resulting from the above calculation may never exceed the

loan amount, including accrued interest and other charges.

Sections 682.604 and 685.304--Counseling Borrowers

The proposed regulations would reflect changes made to section

485(b)(2)(C) of the HEA by the 1998 Amendments clarifying that schools

may use electronic means to provide exit counseling to FFEL and Direct

Stafford loan borrowers. The statutory change addresses only exit

counseling because initial counseling is not required by the HEA.

However, because electronic counseling gives flexibility to both

borrowers and schools, the committee agreed that the proposed

regulations should also permit schools to use electronic means to

provide initial counseling to borrowers. This change also would conform

to the guidance issued by the Department before enactment of the 1998

Amendments, which permitted schools to use electronic means to provide

initial and exit counseling to FFEL and Direct Loan program borrowers.

The proposed regulations also would update the counseling elements to

require schools to include information about two new statutory

initiatives--the MPN and the availability of the Department's Student

Loan Ombudsman's office.

Use of Electronic Means To Provide Counseling

The proposed regulations make changes based on the statutory

authorization for schools to use electronic means to provide counseling

to borrowers. Under the proposed regulations, FFEL and Direct Loan

program schools would be authorized to provide initial and exit

counseling to borrowers--

In person;

By audiovisual presentation; or

By interactive electronic means.

In any case, schools would continue to be required to ensure that

an individual with knowledge of Title IV programs is reasonably

available shortly after the counseling to answer borrowers' questions.

The proposed regulations would also continue to allow schools to

provide written counseling materials to borrowers who are enrolled in a

correspondence program or a study abroad program approved for credit at

a postsecondary home school. In the case of a borrower who withdraws

from school without the school's prior knowledge or who fails to

complete the exit counseling as required, the proposed regulations

would now require a school to provide exit counseling through

interactive electronic means or by mailing written counseling materials

to the borrower within 30 days after the school learns that the

borrower has withdrawn from school or failed to complete the exit

counseling as required.

The committee members pointed out that there are different

electronic means by which schools may provide initial and exit

counseling to FFEL and Direct Loan borrowers. Moreover, new and

improved electronic means are continually becoming available. At the

same time, the committee agreed that it was important to ensure that

the quality of the counseling that schools provide to borrowers is

enhanced rather than diminished by advancing technology. For these

reasons, the proposed regulations would not prescribe specific

electronic means by which schools may provide initial and exit

counseling. Rather, the proposed regulations would specify that the

electronic means the school uses must be interactive, which at a

minimum, requires schools to take reasonable steps to ensure that each

borrower receives the counseling

[[Page 43438]]

materials and participates in and completes the counseling. For

example, simply ensuring that the student received and ``opened'' an

electronic message that contained loan counseling information would not

be sufficient.

The proposed regulations would continue to require schools to

maintain documentation substantiating their compliance with the initial

and exit counseling requirements for each borrower. However, in

recognition of the unique features of electronic counseling, the

proposed regulations would eliminate the requirement that a school

maintain the documentation in a borrower's file. For schools that send

initial and exit counseling materials by e-mail or other electronic

means, the school's documentation would have to include proof that the

borrower received the materials. This does not mean that the school

must receive a personal response from the borrower, rather the school

can accept an electronic ``receipt'', or other comparable response,

that is a feature of most electronic mail systems. Proof of receipt

would not be required if schools send the materials via U.S. mail.

New Counseling Elements

The proposed regulations also would require that, as part of

initial and exit counseling, schools include information about two new

initiatives authorized by the 1998 Amendments. The committee believed

that these statutory initiatives are important for borrowers to be

informed of during the appropriate counseling session. Under the

proposed regulations, schools would have to--

Explain the use of an MPN during the initial counseling;

and

Review information on the availability of the Department's

Student Loan Ombudsman's office during the exit counseling.

The committee also agreed that borrowers should be informed of the

availability of the Department's Student Loan Ombudsman's office by

FFEL lenders and guaranty agencies at specific points in the life of

the loan. The agreed-upon points at which information on the

Ombudsman's services would be provided are included and discussed in

the NPRM of Committee I.

Section 685.300--Choice of Loan Programs

The 1998 Amendments modified section 498(b) of the HEA to require

that the application for schools to participate in the Title IV

programs provide schools the option to participate in one or more of

the loan programs under the FFEL and Direct Loan programs. As a result

of this change, a school may choose to participate in either the

subsidized or the unsubsidized Stafford loan programs, or both. A

school also has the option to choose whether or not to participate in

the PLUS loan program. The proposed Direct Loan Program regulations

contain a conforming change in 685.300 to reflect this statutory

change. The prior FFEL Program regulations that provided for agreements

between an eligible school and the Secretary for participation in the

FFEL Program were removed and reserved in regulations published on July

1, 1995. Therefore, a comparable conforming change is not proposed for

those regulations. Notwithstanding that fact, FFEL schools also have

the option to decide in which FFEL loan programs they wish to

participate.

The committee considered whether a student attending a school that

chose not to participate in the PLUS loan program would be

automatically eligible to borrow additional unsubsidized FFEL or Direct

Loan program funds as the law provides for dependent students whose

parents are unable to borrow under the PLUS loan program. After much

discussion, the committee agreed that the proposed regulations should

not permit a dependent student attending such a school to be eligible

to receive additional unsubsidized FFEL or Direct Loan program funds

based on the school's decision not to participate in the PLUS loan

program. Some negotiators agreed with the Department's belief that this

went beyond the scope of the intent of the law.

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 these programs effectively

and efficiently.

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 subject 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.

Summary of Potential Costs and Benefits

The following is an analysis of the costs and benefits of the most

significant provisions of the proposed regulations, all of which

reflect statutory changes included in the 1998 Amendments. There are

additional proposed changes including conforming and minor technical

changes intended to further improve the administration of the FFEL and

Direct Loan programs, which are discussed elsewhere in this preamble

under the heading Proposed Regulatory Changes. The Department does not

consider there to be significant costs associated with those

provisions.

Interest Rates

The 1998 Amendments changed the basis for calculating borrower

interest rates on new Stafford and unsubsidized Stafford loans from a

security of comparable maturity plus 1 percent for both in-school and

repayment periods, to the 91-day T-bill interest rate plus 1.7 percent

for in-school, grace, and deferment periods, and the 91-day T-bill

interest rate plus 2.3 percent for repayment periods. These changes are

incorporated in proposed 682.202. At the time the 1998 Amendments

passed, the 91-day T-bill interest rate plus 2.3 percent was roughly

equal to the 10-20 year bond interest rate plus 1 percent; as a result

this change had no financial impact for loans in repayment. The lower

in-school costs of unsubsidized Stafford loans result in significant

student benefits. The cost to loan holders is estimated to be $56

million for loans originated in FY 2000.

The interest rate on FFEL Consolidation loans with applications

received by the lender on or after October 1, 1998, was changed to the

lesser of the weighted average of interest rates on the loans

consolidated, rounded to the nearest higher 1/8th of 1 percent, or 8.25

percent. The cost to loan holders for the lower borrower interest rate

is estimated to total $52 million for FFEL Consolidation loans

originated in FY 2000.

Capitalization

Section 682.202 also reflects the changes made to the HEA that

govern the frequency with which FFEL loan holders may capitalize

accrued interest. In addition, they clarify that these frequency of

capitalization rules apply

[[Page 43439]]

to subsidized loans as well as to unsubsidized loans. In accordance

with the 1998 Amendments, a loan holder may only add accrued interest

to the principal when a borrower enters repayment, at the expiration of

a period of authorized deferment, at the expiration of a period of

authorized forbearance, and when the borrower defaults. This provision

would benefit borrowers and would result in an estimated cost to loan

holders of $45 million for loans originated in FY 2000. Of this amount,

$354,000 is the cost of including subsidized loans.

FFEL Extended Repayment Plan

Section 682.209 incorporates the new FFEL extended repayment plan

for new borrowers with outstanding FFEL Program loans exceeding $30,000

which would allow those borrowers to repay their loans, including FFEL

Consolidation loans, over a period not to exceed 25 years with fixed or

graduated repayment amounts. Assuming the same proportion of FFEL

borrowers take advantage of these provisions as in the Direct Loan

Program, lender's interest receipts may increase by as much as $55

million over the 30-year life of a loan. This increased revenue should

more than offset any additional administrative costs lenders may incur.

Further, it is likely that many or most small lenders will sell loans

in the extended repayment plan to larger loan holders in the secondary

markets.

Bankruptcy Discharge

Section 682.402 reflects changes made to the Bankruptcy Code by the

1998 Amendments that eliminates the seven-year repayment provision for

discharge of FFEL Program loans for bankruptcy petitions filed on or

after October 8, 1998. This change limits the FFEL Program loans that

may be discharged in bankruptcy to those that qualify on grounds of

undue hardship. The discharge of fewer loans would save the Federal

Government an estimated $66 million for loans originated in FY 2000.

Overall, these regulations would result in savings to borrowers and

the Federal Government, and would have a cost to loan holders in the

FFEL Program as shown in the table below. These costs are a direct

result of changes made to the HEA by the 1998 Amendments and have been

implemented prior to the development of these proposed regulations.

FY 2000 Costs

[In millions of dollars]

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

Federal FFEL loan

Provision government All Borrowers holders

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

Interest Rate Reduction......................................... .............. -108 108

Capitalization Upon Repayment................................... .............. -45 45

Limit Bankruptcy Discharge...................................... -66 66

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

Total....................................................... -66 - 87 153

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

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. 682.202 Permissible charges by lenders to borrowers.)

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 persons 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.

Entities affected by these regulations are institutions of higher

education and loan holders that participate in the Title IV, HEA

programs, and individual FFEL and Direct Loan borrowers. Institutions

would experience positive impacts from these proposed regulations.

Individuals are not considered small entities for this purpose. Nearly

all of the roughly 4,800 participating FFEL loan holders would be

defined as small entities under U.S. Small Business Administration

(SBA) guidelines. (Student loans are originated by lenders and are

often sold in packages to larger secondary market participants.) Small

lenders originate only 16 percent of new loans. The economic impact for

loans originated in FY 2000 would be $24 million or approximately

$5,000 per average lender.

The Secretary invites comments on this determination, and welcomes

proposals on any significant alternatives that would satisfy the same

legal and policy objectives of these proposals while minimizing the

economic impact on small entities.

Paperwork Reduction Act of 1995

Sections 682.102, 682.200, 682.402, 682.604, 682.610, 685.215, and

685.304 contain information collection requirements and require OMB

approval. Sections 682.210(h), 682.301(b), 682.401(b)(5), 685.204(b)

and 685.205 are affected by the NPRM and require continued approval by

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

Department has submitted a copy of these sections to the Office of

Management and Budget (OMB) for its review.

Collection of Information: Federal Family Education Loan Program

and William D. Ford Federal Direct Loan Program.

Section 682.102--Obtaining and Repaying a Loan

We are proposing to require the use of the Free Application for

Federal Student

[[Page 43440]]

Aid (FAFSA), beginning in academic year 1999-2000, as the application

for subsidized and unsubsidized Stafford loans, as required by the 1998

Amendments. Borrowers would no longer be required to complete a

separate loan application. This provision would reduce the burden hours

required for a lender's processing of the loan application. The

Department currently has the burden hours for this provision accounted

for under 682.401(b)(4) and approved under OMB control numbers 1840-

0742 and 1840-0717. We will submit a change request to reflect the

reduction in burden hours to OMB.

Section 682.200--Definitions

We are proposing to change the definition of ``Default'' by

increasing the number of days a borrower may be delinquent before an

FFEL Program Loan becomes defaulted from 180 days to 270 days for loans

repayable in monthly installments, and from 240 days to 330 days for

loans repayable less frequently than monthly installments. We

anticipate no change in burden hours as a result of this change.

Section 682.402--Death, Disability, Closed School, False Certification,

Unpaid Refunds, and Bankruptcy Payments

We are proposing changes that would provide for the discharge of

all or a portion of a borrower's FFEL Program loan if a school failed

to refund loan proceeds to the lender on behalf of a borrower who

withdrew or was terminated from the school within a timeframe that

entitled the borrower to a Title IV refund. This proposed statutory

change would be retroactive to loans disbursed on or after January 1,

1986. The proposed unpaid refund discharge would involve both schools

that have closed and schools that are open. Annual reporting burden

hours for this collection of information for processing unpaid refund

discharge payments is estimated to average one hour per response for

500 borrowers, equaling a total of 500 new burden hours. This figure is

based on unpaid refund discharge payments for an estimated 400

borrowers in closed school situations and an estimated 100 borrowers in

open school situations.

Section 682.604--Processing the Borrower's Loan Proceeds and Counseling

Borrowers

We are proposing to change the regulations to clarify that schools

are not restricted to providing in-person exit counseling to borrowers,

but may use interactive electronic means to conduct entrance and exit

counseling for borrowers. Our recalculation of burden hours also

reflects the streamlining of an in-person counseling since the

inception of the process in 1989. Annual public reporting burden for

the collection of information for initial counseling is estimated to

average 0.25 hour per response for 5,899 FFEL Program schools times

eight sessions per school for a total of 11,798 burden hours. This

equals a decrease of 4,514 burden hours. Annual public reporting burden

for the collection of information for exit counseling is estimated to

average 0.25 hour per response for 836,124 students for a total of

209,031 burden hours. This equals an increase of 77,814 burden hours

over the current inventory. The large increase results from the large

increase of respondents since the last calculation of these numbers.

Section 682.610--Administrative and Fiscal Requirements for

Participating Schools

This provision would require a school to maintain documentation of

any confirmation process or processes the school may have used for

borrowers who use the multi-year feature of the Master Promissory Note.

This provision has information collection requirements that affect

schools. Annual reporting burden for this collection of information is

estimated to average 20 minutes to prepare a document describing the

school's confirmation process or processes for MPN multi-year

borrowers. There are 5,899 FFELP schools. This equals a total of 1,947

new burden hours.

Section 685.215--Unpaid Refund Discharge

This proposed provision would allow a borrower to have all or a

portion of the borrower's loan discharged if a school failed to make a

refund. The provision has information collection requirements that

would affect borrowers and schools. In the majority of cases, borrowers

would be required to complete a form to apply for an unpaid refund

discharge. This form will be developed following publication of the

final regulations and, when cleared, will account for the burden to

borrowers. In cases in which a borrower applies for an unpaid refund

discharge based on the actions of a school that is open, schools would

need to respond to an inquiry by the Department as to the unpaid refund

allegation. The Department estimates that 100 Direct Loan borrowers

will submit unpaid refund discharge applications and that 25% of those

applications would require schools that are open to spend one hour to

respond to the allegations for an estimated total of 25 new burden

hours.

Section 685.304--Counseling Borrowers

This proposed provision would revise existing regulations to allow

schools to provide initial and exit counseling to borrowers by one of

three methods: in person, by audiovisual presentation, or by

interactive electronic means. Schools would continue to be affected by

the information collection requirements in the existing regulations--

they would have to collect and maintain documentation substantiating

their compliance with the initial and exit counseling requirements for

each borrower. However, with the authorization for providing initial

and exit counseling through electronic means, the time required for

schools to collect and maintain the information would be reduced. For

initial counseling, the Department estimates that 1,230 Direct Loan

schools will conduct an average of eight counseling sessions and spend

.25 hour per session collecting and maintaining the required

documentation for a total of 2,460 burden hours. For exit counseling,

the Department estimates that Direct Loan schools will spend .25 hour

collecting and maintaining the required documentation for each of

836,124 borrowers who must complete exit counseling for a total of

209,301 burden hours. The combined burden hours for the information

collection requirements associated with initial and exit counseling

equal 211,491. While this is an increase of 182,097 burden hours to the

29,394 burden hours reported in the Department's most recent inventory,

the increase is due to the growth of the Direct Loan Program.

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

representatives named in the ADDRESSES section of this preamble.

We consider your comments in 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;

[[Page 43441]]

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 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 84.032 Federal

Family Education Loan Program, and 84.268 William D. Ford Federal

Direct Loan Program)

List of Subjects in 34 CFR Parts 682 and 685

Administrative practice and procedure, Colleges and universities,

Education, Loan programs-education, Reporting and recordkeeping

requirements, Student aid, Vocational education.

Dated: July 22, 1999.

Richard W. Riley,

Secretary of Education.

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

amend title 34 of the Code of Federal Regulations by revising parts 682

and 685 as follows:

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

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

follows:

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

2. Section 682.100 paragraph (a)(4) is amended by removing ``other

loans, including,''; and by adding ``Loans for Disadvantaged Students

(LDS)'', after ``(HPSL)''.

3. Section 682.102, paragraph (a), is revised; paragraph (b) is

removed and reserved; and paragraph (d) is revised to read as follows:

Sec. 682.102 Obtaining and repaying a loan.

(a) Stafford loan application. Generally, to obtain a Stafford

loan, a student requests a loan by completing the Free Application for

Federal Student Aid (FAFSA), or contacting the school, lender or

guarantor. The school determines and certifies the student's

eligibility for the loan. Prior to loan disbursement, the lender

obtains a loan guarantee from a guaranty agency or the Secretary and

the student completes a promissory note, unless the student has

previously completed a Master Promissory Note (MPN) that the lender may

use for the new loan.

(b) [Reserved]

* * * * *

(d) Consolidation loan application. To obtain a Consolidation loan,

a borrower completes an application and submits it to the lender

holding the borrower's FFEL Program loan. If the borrower has multiple

holders of FFEL Program loans, or if the borrower's single loan holder

declines to make a Consolidation loan, or declines to make one with

income-sensitive repayment, the borrower may submit the application to

any lender participating in the Consolidation Loan Program. In the case

of a married couple seeking a Consolidation loan, only the holders for

one of the applicants must be contacted for consolidation. If a lender

decides to make the loan, the lender obtains a loan guarantee from a

guaranty agency or the Secretary.

* * * * *

4. Section 682.200(b) is amended as follows:

A. By amending the definitions of Default by revising paragraphs

(1) and (2), Estimated financial assistance by revising paragraphs

(1)(i) (2)(i)(B) and (C), (2)(ii), and by adding (2)(iii).

B. By revising the definition of Holder.

C. In the definition of ``Lender,'' by revising paragraph (5)(i)

and by renumbering the second paragraph (5) as paragraph (6).

D. By adding a new definition ``Master promissory note (MPN)'' in

alphabetical order.

E. In the definition of ``Repayment period,'' in paragraph (1), by

adding ``or 25 years under an extended repayment schedule,'', after

``10 years''; in paragraph (2), by adding ``or 25 years under an

extended repayment schedule,'', after ``10 years''.

Sec. 682.200 Definitions.

* * * * *

Default.

* * * * *

(1) 270 days for a loan repayable in monthly installments; or

(2) 330 days for a loan repayable in less frequent installments.

* * * * *

Estimated financial assistance.

(1) * * *

(i) Except as provided in paragraph (2)(iii) of this definition,

national service education awards or post-service benefits under title

I of the National and Community Service Act of 1990 and veterans'

educational benefits paid under chapters 30, 31, 32, and 35 of title 38

of the United States Code;

* * * * *

(2) * * *

(i) * * *

(A) * * *

(B) PLUS loan amounts; or

(C) Private and state-sponsored loan programs; and

(ii) Federal Perkins loan and Federal Work-Study funds that the

school determines the student has declined; and

(iii) For the purpose of determining eligibility for a subsidized

Stafford loan, veterans' educational benefits paid under chapter 30 of

title 38 of the United States Code and national service education

awards or post-service benefits under title I of the National and

Community Service Act of 1990.

* * * * *

Holder. An eligible lender owning an FFEL Program loan including a

Federal or State agency or an organization or corporation acting on

behalf of such an agency and acting as a conservator, liquidator, or

receiver of an eligible lender.

* * * * *

Lender.

* * * * *

[[Page 43442]]

(5) * * *

(i) Offered, directly or indirectly, points, premiums, payments, or

other inducements, to any school or other party to secure applicants

for FFEL loans, except that a lender is not prohibited from providing

assistance to schools comparable to the kinds of assistance provided by

the Secretary to schools under, or in furtherance of, the Federal

Direct Loan Program.

* * * * *

Master promissory note (MPN). A promissory note under which the

borrower may receive loans for a single period of enrollment or

multiple periods of enrollment.

* * * * *

5. Section 682.201 is amended as follows:

A. By revising paragraph (a)(2).

B. By revising paragraph (c)(1); in paragraph (c)(2)(iii) by

removing ``(c)(1)(vi)'', and by adding in its place, ``(c)(1)(iv)'';

and by removing paragraphs (c)(3) and (c)(4).

C. By adding a new paragraph (d).

D. By adding a new paragraph (e).

Sec. 682.201 Eligible borrowers.

(a) * * *

(2) In the case of any student who seeks an unsubsidized Stafford

loan for the cost of attendance at a school that participates in the

Stafford Loan Program, the student must--

(i) Receive a determination of need for a subsidized Stafford loan;

and

(ii) If the determination of need is in excess of $200, have made a

request to a lender for a subsidized Stafford loan;

* * * * *

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

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

Consolidation loan, the individual--

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

(A) In a grace period preceding repayment;

(B) In repayment status;

(C) In a default status on a title IV loan and has either made

satisfactory repayment arrangements as defined in 682.200(b)(2) or has

agreed to repay the consolidation loan under the income-sensitive

repayment plan described in 682.209(a)(6)(viii);

(D) Not subject to a judgment secured through litigation, unless

the judgment has been vacated; or

(E) Not subject to an order for wage garnishment under section 488A

of the Act, unless the order has been lifted;

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

is pending;

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

(iv)(A) Certifies that the lender holds the outstanding loan of the

borrower that is being consolidated; or

(B) Applies to any eligible consolidation lender if the borrower--

(1) Has multiple holders of FFEL loans; or

(2) Has been unable to receive from the holder of the borrower's

outstanding loans, a Consolidation loan or a Consolidation loan with

income-sensitive repayment.

* * * * *

(d) A borrower's eligibility to receive a Consolidation loan

terminates upon receipt of a Consolidation loan except that--

(1) A borrower who receives an eligible loan after the date a

Consolidation loan is made may receive a subsequent Consolidation loan;

and

(2) Eligible loans received prior to the date a Consolidation loan

was made and loans received during the 180-day period following the

date a Consolidation loan was made, may be added to the Consolidation

loan based on the borrower's request received by the lender during the

180-day period after the date the Consolidation loan was made.

(e) A Consolidation loan borrower may consolidate an existing

Consolidation loan only if the borrower has other outstanding eligible

loans that will be consolidated.

(Authority: 20 U.S.C. 1077, 1078, 1078-1, 1078-2, 1078-3, 1082, and

1091)

6. Section 682.202 is amended as follows:

A. In paragraph (a)(1)(i) by removing ``If'' and by adding, in its

place, ``For loans made prior to July 1, 1994, if,''.

B. In paragraph (a)(1)(ii)(B) by adding ``and prior to July 1,

1994,'' after ``October 1, 1992''.

C. In paragraph (a)(1)(iii)(A) by removing ``evidencing the loan''.

D. In paragraph (a)(1)(iv) by adding ``but before December 29,

1993,'' after ``October 1, 1992''.

E. By adding new paragraphs (a)(1)(v) through (a)(1)(viii).

F. In paragraph (a)(2)(iii), introductory text, by adding ``and

prior to July 1, 1994,'' after ``October 1, 1992''.

G. By adding new paragraphs (a)(2)(iv) and (a)(2)(v).

H. In paragraph (a)(3)(iii), introductory text, by removing

``1992,'' and by adding, in its place, ``1992 and for loans made prior

to July 1, 1994 for a period of enrollment that began prior to July 1,

1994''.

I. In paragraph (a)(4) by adding ``(i)'' at the beginning of the

sentence before ``A Consolidation'', by adding ``made before July 1,

1994'' after ``loan'', by designating paragraph ``(i)'' as ``(A)'', by

designating paragraph ``(ii)'' as ``(B)'', by adding new paragraphs

(a)(4)(ii) through (a)(4)(v).

J. In paragraph (b)(1), by removing ``paragraph (b)(2) of''; and by

revising paragraph (b)(2).

K. In paragraph (b)(3) by removing ``, except that

capitalization'', and by adding in its place, ``. Capitalization''.

L. By removing paragraph (b)(5).

M. By redesignating paragraph (b)(4) as paragraph (b)(5); and

adding a new paragraph (b)(4).

N. By revising the newly redesignated paragraph (b)(5).

O. By revising paragraphs (c)(1) and (c)(2).

P. By redesignating paragraphs (c)(3) through (c)(5) as paragraphs

(c)(5) through (c)(7); and by adding new paragraphs (c)(3) and (c)(4).

Sec. 682.202 Permissible charges by lenders to borrowers.

(a) * * *

(1) * * *

(v) For a Stafford loan for which the first disbursement is made on

or after December 20, 1993 and prior to July 1, 1994, if the borrower,

on the date the promissory note is signed, has no outstanding balance

on a Stafford loan but has an outstanding balance of principal or

interest on a PLUS, SLS, or Consolidation loan, the interest rate is

the rate provided in paragraph (a)(1)(ii)(B) of this section.

(vi) For a Stafford loan for which the first disbursement is made

on or after July 1, 1994 and prior to July 1, 1995, for a period of

enrollment that includes or begins on or after July 1, 1994, the

interest rate is a variable rate, applicable to each July 1-June 30

period, that equals the lesser of--

(A) The bond equivalent rate of the 91-day Treasury bills auctioned

at the final auction prior to the June 1 immediately preceding the July

1-June 30 period, plus 3.10; or

(B) 8.25 percent.

(vii) For a Stafford loan for which the first disbursement is made

on or after July 1, 1995 and prior to July 1, 1998 for a period of

enrollment that includes or begins on or after July 1, 1995, the

interest rate is a variable rate applicable to each July 1-June 30

period, that equals the lesser of--

(A) The bond equivalent rate of the 91-day Treasury bills auctioned

at the final auction prior to the June 1 immediately preceding the July

1-June 30 period, plus 2.5 percent during the in-school, grace and

deferment period and 3.10 percent during repayment; or

(B) 8.25 percent.

(viii) For a Stafford loan for which the first disbursement is made

on or after

[[Page 43443]]

July 1, 1998, the interest rate is a variable rate, applicable to each

July 1-June 30 period, that equals the lesser of--

(A) The bond equivalent rate of the 91-day Treasury bills auctioned

at the final auction prior to the June 1 immediately preceding the July

1-June 30 period plus 1.7 percent during the in-school, grace and

deferment periods and 2.3 percent during repayment; or

(B) 8.25 percent.

* * * * *

(2) * * *

(iv) For a loan for which the first disbursement is made on or

after July 1, 1994 and prior to July 1, 1998, the interest rate is a

variable rate applicable to each July 1-June 30 period, that equals the

lesser of--

(A) The bond equivalent rate of the 52-week Treasury bills

auctioned at the final auction prior to the June 1 immediately

preceding the July 1-June 30 period, plus 3.10 percent; or

(B) 9 percent.

(v) For a loan for which the first disbursement is made on or after

July 1, 1998, the interest rate is a variable rate, applicable to each

July 1-June 30 period, that equals the lesser of--

(A) The bond equivalent rate of the 91-day Treasury bills auctioned

at the final auction prior to the June 1 immediately preceding the July

1-June 30 period, plus 3.10 percent; or

(B) 9 percent.

* * * * *

(4) * * *

(ii) A Consolidation loan made on or after July 1, 1994, for which

the loan application was received by the lender before November 13,

1997, bears interest at the rate that is equal to the weighted average

of interest rates on the loans consolidated, rounded upward to the

nearest whole percent.

(iii) For a Consolidation loan for which the loan application was

received by the lender on or after November 13, 1997 and before October

1, 1998, the interest rate for the portion of the loan that

consolidated loans other than HEAL loans is a variable rate, applicable

to each July 1-June 30 period, that equals the lesser of--

(A) The bond equivalent rate of the 91-day Treasury bills auctioned

at the final auction held prior to June 1 of each year plus 3.10

percent; or

(B) 8.25 percent.

(iv) For a Consolidation loan for which the application was

received by the lender on or after October 1, 1998, the interest rate

for the portion of the loan that consolidated loans other than HEAL

loans is a fixed rate that is the lesser of--

(A) The weighted average of interest rates on the loans

consolidated, rounded to the nearest higher one-eighth of one percent;

or

(B) 8.25 percent.

(v) For a Consolidation loan for which the application was received

by the lender on or after November 13, 1997, the annual interest rate

applicable to the portion of each consolidation loan that repaid HEAL

loans is a variable rate adjusted annually on July 1 and must be equal

to the average of the bond equivalent rates of the 91-day Treasury

bills auctioned for the quarter ending June 30, plus 3 percent. There

is no maximum rate on this portion of the loan.

* * * * *

(b) * * *

(2) Except as provided in paragraph (b)(4) of this section, a

lender may capitalize interest payable by the borrower that has

accrued--

(i) For the period from the date the first disbursement was made to

the beginning date of the in-school period;

(ii) For the in-school or grace periods, or for a period needed to

align repayment of an SLS with a Stafford loan if capitalization is

expressly authorized by the promissory note (or with the written

consent of the borrower);

(iii) For a period of authorized deferment;

(iv) For a period of authorized forbearance; or

(v) For the period from the date the first installment payment was

due until it was made.

* * * * *

(4)(i) For unsubsidized Stafford loans disbursed on or after

October 7, 1998 and prior to July 1, 2000, the lender may capitalize

the unpaid interest that accrues on the loan according to the

requirements of section 428H(e)(2) of the Act.

(ii) For Stafford loans first disbursed on or after July 1, 2000,

the lender may capitalize the unpaid interest--

(A) When the loan enters repayment;

(B) At the expiration of a period of authorized deferment;

(C) At the expiration of a period of authorized forbearance; and

(D) When the borrower defaults.

(5) For any borrower in an in-school or grace period or the period

needed to align repayment, deferment, or forbearance status, during

which the Secretary does not pay interest benefits and for which the

borrower has agreed to make payments of interest, the lender may

capitalize past due interest after notification to the borrower that

the borrower's failure to resolve any delinquency constitutes the

borrower's consent to capitalization of delinquent interest and all

interest that will accrue through the remainder of that period.

(c) Fees for FFEL Program loans. A lender--

(1) May charge a borrower an origination fee on a Stafford loan not

to exceed 3 percent of the principal amount of the loan. Except as

provided in paragraph (c)(2) of this section, a lender must charge all

borrowers the same origination fee.

(2)(i) May charge a lower origination fee than the amount specified

in paragraph (c)(1) of this section to a borrower whose expected family

contribution (EFC), used to determine eligibility for the loan, is

equal to or less than the minimum qualifying EFC for a Federal Pell

Grant at the time the loan is certified or to borrowers who qualify for

a subsidized Stafford loan.

(ii) If a lender charges a lower origination fee pursuant to this

subparagraph, the lender must charge all similarly situated borrowers

the same origination fee.

(iii) A lender may use a comparable standard with the approval of

the Secretary.

(3) If a lender charges a lower origination fee on unsubsidized

loans under paragraphs (c)(1) or (c)(2) of this section, the lender

must charge the same fee on subsidized loans.

(4) For purposes of paragraphs (c)(1) and (c)(2) of this section,

all lenders under common ownership, including ownership by a common

holding company, constitute a single lender. Any beneficial owner of

loans, that provides funds to an eligible lender trustee to make loans

on the beneficial owner's behalf, is considered the lender for this

purpose.

* * * * *

7. Section 682.204 is amended as follows:

A. By revising paragraphs (a), (b), (c), (d), and (e).

B. In paragraph (f)(2)(i) by adding ``the following'', after

``exceed''.

C. In paragraph (f)(2)(ii) by adding ``the following'' after

``exceed''.

D. In paragraph (f)(2)(ii)(B) by removing ``and'', and by adding,

in its place, ``or''.

Sec. 682.204 Maximum loan amounts.

(a) Stafford Loan Program annual limits. (1) In the case of an

undergraduate student who has not successfully completed the first year

of a program of undergraduate education, the total amount the student

may borrow for any academic year of study under the Stafford Loan

Program in combination with the Federal Direct

[[Page 43444]]

Stafford/Ford Loan Program may not exceed the following:

(i) $2,625 for a program of study of at least a full academic year

in length.

(ii) For a one-year program of study with less than a full academic

year remaining, the amount that is the same ratio to $2,625 as the--

[GRAPHIC] [TIFF OMITTED] TP10AU99.002

(iii) For a program of study that is less than a full academic year

in length, the amount that is the same ratio to $2,625 as the lesser of

the--

[GRAPHIC] [TIFF OMITTED] TP10AU99.003

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

first year of an undergraduate program but has not successfully

completed the second year of an undergraduate program, the total amount

the student may borrow for any academic year of study under the

Stafford Loan Program in combination with the Federal Direct Stafford/

Ford Loan Program may not exceed the following:

(i) $3,500 for a program whose length is at least a full academic

year in length.

(ii) For a program of study with less than a full academic year

remaining, an amount that is the same ratio to $3,500 as the--

[GRAPHIC] [TIFF OMITTED] TP10AU99.004

(3) In the case of an undergraduate student who has successfully

completed the first and second years of a program of study of

undergraduate education but has not successfully completed the

remainder of the program, the total amount the student may borrow for

any academic year of study under the Stafford Loan Program in

combination with the Federal Direct Stafford/Ford Loan Program may not

exceed the following:

(i) $5,500 for a program whose length is at least an academic year

in length.

(ii) For a program of study with less than a full academic year

remaining, an amount that is the same ratio to $5,500 as the--

[GRAPHIC] [TIFF OMITTED] TP10AU99.005

(4) In the case of a student who has an associate or baccalaureate

degree that is required for admission into a program and who is not a

graduate or professional student, the total amount the student may

borrow for any academic year of study may not exceed the amounts in

paragraph (a)(3) of this section.

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

amount the student may borrow for any academic year of study under the

Stafford Loan Program, in combination with any amount borrowed under

the Federal Direct Stafford/Ford Loan Program, may not exceed $8,500.

(6) In the case of a student enrolled for no longer than one

consecutive 12-month period in a course of study necessary for

enrollment in a program leading to a degree or certificate, the total

amount the student may borrow for any academic year of study under the

Stafford Loan Program in combination with the Federal Direct Stafford/

Ford Loan Program may not exceed:

(i) $2,625 for coursework necessary for enrollment in an

undergraduate degree or certificate program.

(ii) $5,500 for coursework necessary for enrollment in a graduate

or professional degree or certificate program for a student who has

obtained a baccalaureate degree.

(7) In the case of a student who has obtained a baccalaureate

degree and is enrolled or accepted for enrollment in coursework

necessary for a professional credential or certification from a State

that is required for employment as a teacher in an elementary or

secondary school in that State, the total amount the student may borrow

for any academic year of study under the Stafford Loan Program in

combination with the Federal Direct Stafford/Ford Loan Program may not

exceed $5,500.

(b) Stafford Loan Program aggregate limits. The aggregate unpaid

principal amount of all Stafford Loan Program loans in combination with

loans received by the student under the Federal Direct Stafford/Ford

Loan Program, but excluding the amount of capitalized interest may not

exceed the following:

(1) $23,000 in the case of any student who has not successfully

completed a program of study at the undergraduate level.

(2) $65,500, in the case of a graduate or professional student,

including loans for undergraduate study.

(c) Unsubsidized Stafford Loan Program. (1) In the case of an

[[Page 43445]]

undergraduate student, the total amount the student may borrow for any

period of study under the Unsubsidized Stafford Loan Program in

combination with the Federal Direct Unsubsidized Stafford/Ford Loan

Program is the same as the amount determined under paragraph (a) of

this section, less any amount received under the Stafford Loan Program

or the Federal Direct Stafford/Ford Loan Program.

(2) In the case of an independent undergraduate student, a graduate

or professional student, or certain dependent undergraduate students,

the total amount the student may borrow for any period of enrollment

under the Unsubsidized Stafford Loan and Federal Direct Unsubsidized

Stafford/Ford Loan programs may not exceed the amounts determined under

paragraph (a) of this section less any amount received under the

Federal Stafford Loan Program or the Federal Direct Stafford/Ford Loan

Program, in combination with the amounts determined under paragraph (d)

of this section.

(d) Additional eligibility under the Unsubsidized Stafford Loan

Program. In addition to any amount borrowed under paragraphs (a) and

(c) of this section, an independent undergraduate student, graduate or

professional student, and certain dependent undergraduate students may

borrow additional amounts under the Unsubsidized Stafford Loan Program.

The additional amount that such a student may borrow under the

Unsubsidized Stafford Loan Program in combination with the Federal

Direct Unsubsidized Stafford/Ford Loan Program, in addition to the

amounts allowed under paragraphs (b) and (c) of this section for any

academic year of study--

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

first year of a program of undergraduate education, may not exceed the

following:

(i) $4,000 for a program of study of at least a full academic year.

(ii) For a one-year program of study with less than a full academic

year remaining, the amount that is the same ratio to $4,000 as the--

[GRAPHIC] [TIFF OMITTED] TP10AU99.006

(iii) For a program of study that is less than a full academic year

in length, an amount that is the same ratio to $4,000 as the lesser

of--

[GRAPHIC] [TIFF OMITTED] TP10AU99.007

(2) In the case of a student who has completed the first year of a

program of undergraduate education but has not successfully completed

the second year of a program of undergraduate education may not exceed

the following:

(A) $4,000 for a program of study of at least a full academic year

in length.

(B) For a one-year program of study with less than a full academic

year remaining, an amount that is the same ratio to $4,000 as the--

[GRAPHIC] [TIFF OMITTED] TP10AU99.008

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

second year of a program of undergraduate education, but has not

completed the remainder of the program, may not exceed the following:

(i) $5,000 for a program of study of at least a full academic year.

(ii) For a program of study with less than a full academic year

remaining, an amount that is the same ratio to $5,000 as the--

[GRAPHIC] [TIFF OMITTED] TP10AU99.009

(4) In the case of a student who has an associate or baccalaureate

degree which is required for admission into a program and who is not a

graduate or professional student, the total amount the student may

borrow for any academic year of study may not exceed the amounts in

paragraph (d)(3) of this section.

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

exceed $10,000.

(6) In the case of a student enrolled for no longer than one

consecutive 12-month period in a course of study necessary for

enrollment in a program leading to a degree or a certificate may not

exceed the following:

(i) $4,000 for coursework necessary for enrollment in an

undergraduate degree or certificate program.

(ii) $5,000 for coursework necessary for enrollment in a graduate

or professional degree or certificate program for a student who has

obtained a baccalaureate degree.

(iii) In the case of a student who has obtained a baccalaureate

degree and is enrolled or accepted for enrollment in a program

necessary for a professional credential or a certification from a State

that is required for employment as a teacher in an elementary or

secondary school in that State, $5,000.

(e) Combined Federal Stafford, SLS and Federal Unsubsidized

Stafford Loan Program aggregate limits. The aggregate unpaid principal

amount of Stafford Loans, Federal Direct Stafford/Ford Loans,

Unsubsidized Stafford Loans, Federal Direct Unsubsidized Stafford/

[[Page 43446]]

Ford Loans and SLS Loans, but excluding the amount of capitalized

interest may not exceed the following:

(1) $46,000 for an undergraduate student.

(2) $138,500 for a graduate or professional student.

* * * * *

8. Section 682.206 is amended as follows:

A. By revising paragraph (a)(1);

B. By removing ``on the application form or data electronically

transmitted to the lender'' in paragraph (c)(1);

C. By revising paragraph (c)(2);

D. By removing paragraph (c)(3); and

E. By revising paragraph (d)(1).

Sec. 682.206 Due diligence in making a loan.

(a) General. (1) Loan-making duties include determining the

borrower's loan amount, approving the borrower for a loan, explaining

to the borrower his or her rights and responsibilities under the loan,

and completing and having the borrower sign the promissory note (except

with respect to multiple loans made under an MPN).

* * * * *

(c) * * *

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

amount of the loan to be made, in no case may the loan amount exceed

the lesser of the amount the borrower requests, the amount certified by

the school under Sec. 682.603 or the loan limits under Sec. 682.204.

* * * * *

(d)(1) The lender must ensure that each loan is supported by an

executed legally-enforceable promissory note as proof of the borrower's

indebtedness.

* * * * *

9. Section 682.207 is amended as follows:

A. By revising the introductory text of paragraph (c);

B. By removing paragraph (c)(5);

C. By redesignating paragraph (d) as paragraph (f);

D. By redesignating paragraph (c)(4) as paragraph (d);

E. By adding a new paragraph (e); and

F. By revising the newly redesignated paragraph (f).

Sec. 682.207 Due diligence in disbursing a loan.

* * * * *

(c) Except as provided in paragraph (e) of this section, a lender

must disburse any Stafford or PLUS loan in accordance with the

disbursement schedule provided by the school as follows:

* * * * *

(e) A lender must disburse the loan in one installment if the

school submits a schedule for disbursement of loan proceeds in one

installment as authorized by Sec. 682.604(c)(10).

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

ceased to be enrolled on at least a half-time basis only if--

(i) The school certified the borrower's loan eligibility and the

loan funds will be used to pay educational costs that the school

determines the student incurred for the period in which the student was

enrolled and eligible;

(ii) The student completed the first 30 days of his or her program

of study if the student was a first-year, first-time borrower as

described in Sec. 682.604(c)(5); and

(iii) In the case of a second or subsequent disbursement, the

student graduated or successfully completed the period of enrollment

for which the loan was intended.

(2) The lender must give notice to the school that the loan

proceeds have been disbursed in accordance with paragraph (f)(1) of

this section at the time the lender sends the loan proceeds to the

school.

10. Section 682.209 is amended as follows:

A. By revising paragraph (a)(4).

B. By redesignating paragraphs (a)(6), (a)(7), and (a)(8) as

paragraphs (a)(7), (a)(8), and (a)(9), respectively.

C. By adding a new paragraph (a)(6).

D. By revising the newly redesignated paragraph (a)(7)(iii).

E. In the newly redesignated paragraph (a)(7)(v)(A) by removing

``income-sensitive or a graduated repayment'', and adding, in its

place, ``income-sensitive, a graduated, or if applicable, an extended

repayment''.

F. By redesignating paragraph (a)(7)(ix) as paragraph (a)(7)(xi).

G. By adding new paragraphs (a)(7)(ix) and (x).

H. By revising paragraph (c)(1)(i).

I. By removing paragraph (h)(3); by redesignating paragraphs

(h)(4), (h)(5), and (h)(6), as paragraphs (h)(3), (h)(4), and (h)(5),

respectively; by revising the newly redesignated paragraph (h)(3); and

by removing redesignated paragraph (h)(4)(ii) and redesignating

paragraph (h)(4)(iii) as paragraph (h)(4)(ii).

Sec. 682.209 Repayment of a loan.

(a) * * *

(4) For a borrower of a Stafford loan who is a correspondence

student, the grace period specified in paragraph (a)(3)(i) of this

section begins on the earliest of--

(i) The day after the borrower completes the program;

(ii) The day after withdrawal as determined pursuant to 34 CFR

668.22; or

(iii) 60 days following the last day for completing the program as

established by the school.

* * * * *

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

period for Stafford and SLS loans, the grace periods referenced in

paragraphs (a)(2)(iii) and (a)(3)(i) 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 Stafford or SLS borrower who is in a

grace period when called or ordered to active duty as specified in this

paragraph is entitled to a full grace period upon completion of the

excluded period.

(7) * * *

(iii) Not more than six months prior to the date that the

borrower's first payment is due, the lender must offer the borrower a

choice of a standard, income-sensitive, or if applicable, an extended

repayment schedule.

* * * * *

(ix) Under an extended repayment schedule, the borrower may repay

the loan on a fixed annual repayment amount or a graduated repayment

amount for a period that may not exceed 25 years. For purposes of this

section, a ``new borrower'' is an individual who has no outstanding

principal or interest balance on an FFEL Program loan as of October 7,

1998, or on the date he or she obtains an FFEL Program loan after

October 7, 1998.

(x) A borrower may request a change in the repayment schedule on a

loan. The lender must permit the borrower to change the repayment

schedule no less frequently than annually.

* * * * *

(c) Minimum annual payment. (1)(i) Subject to paragraph (c)(1)(ii)

of this section and except as otherwise provided by a graduated,

income-sensitive, or extended repayment plan selected by the borrower,

during each year of the repayment period, a borrower's total payments

to all holders of the borrower's FFEL Program loans must total at least

$600 or the unpaid balance of all loans, including interest, whichever

amount is less.

* * * * *

(h) * * *

[[Page 43447]]

(3) For the purpose of paragraph (h)(2) of this section, the unpaid

balance on other student loans--

(i) May not exceed the amount of the Consolidation loan; and

(ii) With the exception of the defaulted title IV loans on which

the borrower has made satisfactory repayment arrangements with the

holder of the loan, does not include the unpaid balance on defaulted

loans.

* * * * *

11. Section 682.210 is amended as follows:

A. By revising paragraphs (a)(3), (a)(4), and (a)(6)(iv); in

paragraph (a)(7) by removing ``180- or 240-day'' and adding, in its

place, ``270- or 330-day''.

B. By revising paragraph (b)(4).

C. By revising the heading in paragraph (c); by revising paragraph

(c)(1), by redesignating paragraphs (c)(2) through (c)(4) as paragraphs

(c)(3) through (c)(5), respectively; and by adding a new paragraph

(c)(2).

D. In redesignated paragraph (c)(3) by adding ``or other form

certified by the school'' after ``application''.

E. In redesignated paragraph (c)(4) by removing ``SLS or PLUS'' and

adding, in its place, ``SLS, PLUS or Consolidation loan'' after

``Stafford''.

F. In redesignated paragraph (c)(5), by adding ``or PLUS (unless

based on the dependent's status)'' after ``Stafford''.

G. By revising paragraph (h).

Sec. 682.210 Deferment.

(a) * * *

(3) Interest accrues and is paid by the borrower during the

deferment period and the post-deferment grace period, if applicable,

unless interest accrues and is paid by the Secretary for a Stafford

loan and for all or a portion of a qualifying Consolidation loan that

meets the requirements under 682.301 when the loan is made.

(4) As a condition for receiving a deferment, except for purposes

of paragraphs (c)(1)(ii) and (iii) of this section, the borrower must

request the deferment, and provide the lender with all information and

documents required to establish eligibility for a specific type of

deferment.

* * * * *

(6) * * *

(iv) In the case of a student deferment, the student's anticipated

graduation date as certified by an authorized official of the school

and as updated by notice or SSCR update to the lender from the school

or guaranty agency; or

* * * * *

(b) * * *

(4) For a ``new borrower,'' as defined in paragraph (b)(7) of this

section, deferment is authorized during periods when the borrower is

engaged in at least half-time study at a school, unless the borrower is

not a national of the United States and is pursuing a course of study

at a school not located in a State.

* * * * *

(c) In-School deferment. (1) Except as provided in paragraph (c)(5)

of this section, the lender processes a deferment for full-time study

or half-time study at a school, when--

(i) The borrower submits a request and supporting documentation for

a deferment;

(ii) The lender receives information from the borrower's school

about the borrower's eligibility in connection with a new loan; or

(iii) The lender receives student status information indicating

that the borrower's enrollment status supports eligibility for a

deferment.

(2) The lender must notify the borrower that a deferment has been

granted based on paragraphs (c)(1)(ii) or (iii) of this section and of

the borrower's option to pay interest that accrues on an unsubsidized

Federal Stafford loan or to cancel the deferment and continue paying on

the loan.

* * * * *

(h) Unemployment deferment. (1) A borrower qualifies for an

unemployment deferment by providing evidence of eligibility for

unemployment benefits to the lender.

(2) A borrower also qualifies for an unemployment deferment by

providing to the lender a written certification--

(i) Describing the borrower's conscientious search for full-time

employment during the preceding six months, except in the case of the

initial period of unemployment, including, for each of at least six

attempts to secure employment to support the period covered by the

certification--

(A) The name of the employer contacted;

(B) The employer's address and phone number; and

(C) The name or title of the person contacted;

(ii) Setting forth the borrower's latest permanent home address

and, if applicable, the borrower's latest temporary address; and

(iii) Affirming that the borrower has registered with a public or

private employment agency, if one is within a 50-mile radius of the

borrower's permanent or temporary address, specifying the agency's name

and address and date of registration.

(3) For purposes of obtaining an unemployment deferment under

paragraph (h)(2) of this section, the following rules apply:

(i) A borrower may qualify for an unemployment deferment whether or

not the borrower has been previously employed.

(ii) An unemployment deferment is not justified if the borrower

refuses to seek or accept employment in kinds of positions or at salary

and responsibility levels for which the borrower feels overqualified by

virtue of education or previous experience.

(iii) Full-time employment involves at least 30 hours of work a

week and is expected to last at least three months.

(iv) A lender may not grant a deferment based on a single

certification under paragraph (h)(1) of this section beyond the date

that is six months after the date of the certification.

(v) A lender may accept, as an alternative to the certification of

employer contacts required under paragraph (h)(2)(i) of this section,

comparable documentation the borrower has used to meet the requirements

of the Unemployment Insurance Service, provided it shows the same

number of contacts and contains the same information the borrower would

be required to provide under this section.

* * * * *

12. Section 682.211 is amended as follows:

A. By revising paragraph (a)(4);

B. In paragraph (b) by removing ``in writing'';

C. By adding a new paragraph (f)(9);

D. In paragraphs (h)(l) and (h)(2), by removing the word

``written''; and

E. By removing paragraph (h)(2)(ii)(B) and designating paragraph

(h)(2)(ii)(C) as paragraph (h)(2)(ii)(B) to read as follows:

Sec. 682.211 Forbearance.

(a) * * *

(4) Except as provided in paragraph (f)(10) of this section, if

payments of interest are forborne, they may be capitalized as provided

in 682.202(b).

* * * * *

(f) * * *

(9) For a period not to exceed 60 days necessary for the lender to

collect and process documentation supporting the borrower's request for

a deferment, forbearance, change in repayment plan, or consolidation

loan. Interest that accrues during this period is not capitalized.

* * * * *

13. Section 682.300 is amended by revising paragraph (a) to read as

follows:

Sec. 682.300 Payments of interest benefits on Stafford and

Consolidation loans.

(a) General. The Secretary pays a lender, on behalf of a borrower,

a

[[Page 43448]]

portion of the interest on a subsidized Stafford loan and on all or a

portion of a qualifying Consolidation loan that meets the requirements

under 682.301. This payment is known as interest benefits.

* * * * *

14. Section 682.301 is amended as follows:

A. By revising paragraph (a)(3);

B. By removing paragraph (a)(4); and

C. By revising paragraphs (b) and (c).

Sec. 682.301 Eligibility of borrowers for interest benefits on

Stafford and Consolidation loans.

(a) * * *

(3) A Consolidation loan borrower qualifies for interest benefits

during authorized periods of deferment on the portion of the loan that

does not represent HEAL loans if the loan application was received by

the lender--

(i) On or after January 1, 1993 but prior to August 10, 1993;

(ii) On or after August 10, 1993, but prior to November 13, 1997

only if the loan consolidates subsidized Stafford loans; and

(iii) On or after November 13, 1997 for the portion of the loan

that repaid subsidized FFEL loans and Direct Subsidized Loans.

(b) Application for interest benefits. To apply for interest

benefits on a Stafford loan, the student, or the school at the

direction of the student, must submit a statement to the lender

pursuant to 682.603. The student must qualify for interest benefits if

the eligible institution has determined and documented the student's

amount of need for a loan based on the student's estimated cost of

attendance, estimated financial assistance, and expected family

contribution as determined under part F of the Act.

(c) Use of loan proceeds to replace expected family contribution. A

borrower may use the amount of a PLUS, unsubsidized Stafford loan,

State sponsored loan, or private program loan obtained for a period of

enrollment to replace the expected family contribution for that period

of enrollment.

(Authority: 20 U.S.C. 1078, 1082, 1087-1)

15. Section 682.401 is amended as follows:

A. By revising paragraphs (b)(5)(i) and (ii);

B. By redesignating paragraphs (d)(4) and (d)(5) as paragraphs

(d)(5) and (d)(6), respectively; and

C. By adding a new paragraph (d)(4).

Sec. 682.401 Basic program agreement.

* * * * *

(b) * * *

(5) Borrower responsibilities. (i) The borrower must indicate his

or her preferred lender on the promissory note or application, if he or

she has such a preference.

(ii) The borrower must give the lender, as part of the promissory

note or application process for a Stafford or PLUS loan--

(A) A statement, as described in 34 CFR part 668, that the loan

will be used for the cost of the student's attendance;

(B) In the case of a PLUS loan request, information concerning the

outstanding FFEL loans of the borrower and of the student, including

any Consolidation loan used to repay a Stafford, SLS, or PLUS loan;

(C) A statement from the student authorizing the school to release

information relevant to the student's eligibility to borrow or to have

a parent borrow on the student's behalf (e.g., the student's enrollment

status, financial assistance, and employment records); and

(D) Information from the school demonstrating that the student

qualifies as an eligible student and providing the maximum amount that

may be borrowed by or on behalf of the student.

* * * * *

(d) * * *

(4)(i) The Secretary authorizes the use of the multi-year feature

of the Master Promissory Note (MPN)--

(A) For students and parents for attendance at four-year or

graduate/professional schools; and

(B) For students and parents for attendance at other institutions

meeting criteria or otherwise designated at the sole discretion of the

Secretary.

(ii) The Secretary may prohibit use of the multi-year feature of

the MPN at specific schools described under paragraph (i) of this

section. The criteria to be used by the Secretary to prohibit use of

the multi-year feature include the school being subject to an emergency

action or a limitation, suspension, or termination action, or not

meeting other performance criteria determined by the Secretary.

(iii) A borrower attending a school for which the multi-year

feature of the MPN has not been authorized must complete a new

promissory note for each period of enrollment.

(iv) Each loan made under an MPN is enforceable in accordance with

the terms of the MPN and is eligible for claim payment based on a true

and exact copy of such MPN.

(v) A lender's ability to make additional loans under an MPN will

automatically expire upon the earliest of--

(A) The date the lender receives written notification from the

student asking that the MPN no longer be used as the basis for

additional loans;

(B) Twelve months after the original MPN was signed if no

disbursements are issued by the lender under that MPN; or

(C) Ten years from the date the student signed the MPN or the date

the lender receives the MPN. However, if a portion of a loan is made on

or before 10 years from the signature date, remaining disbursements of

that loan may be made.

(vi) The lender and school must develop and document a confirmation

process in accordance with guidelines established by the Secretary.

* * * * *

16. Section 682.402 is amended as follows:

A. By revising the section heading; by revising paragraph (a)(1);

in paragraph (a)(3), by adding ``and as provided in paragraph

(h)(1)(iv) of this section,'' after ``section''.

B. In paragraph (f)(1) by removing ``(f) through (m)'', and adding,

in its place, ``(h) through (k)''; by revising paragraph (f)(3); in

paragraph (f)(5)(i)(B) by adding ``before October 8, 1998'' after

``Code''.

C. By revising paragraphs (g)(1)(i) and (ii).

D. In paragraph (h)(1)(i), by removing ``paragraph (g)'', and

adding, in its place, ``paragraph (h)''; by adding a new paragraph

(h)(1)(iv);

E. By revising paragraph (i)(1); and by removing paragraph (i)(3)

in its entirety.

F. In paragraph (j)(1)(ii), by removing ``(B)''; and by revising

paragraph (j)(1)(iii).

G. By revising paragraph (k)(1)(i)(A).

H. By redesignating paragraphs (l) and (m) as paragraphs (r) and

(s); and by adding new paragraphs (l) through (q).

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

unpaid refunds, and bankruptcy payments.

(a) General. (1) Rules governing the payment of claims based on

filing for relief in bankruptcy, and discharge of loans due to death,

total and permanent disability, attendance at a school that closes,

false certification by a school of a borrower's eligibility for a loan,

and unpaid refunds by a school are set forth in this section.

* * * * *

(f) * * *

(3) Determination of filing. The lender must determine that a

borrower has filed a petition for relief in bankruptcy on the basis of

receiving a notice of the first meeting of creditors or other proof of

filing provided by the debtor's attorney or the bankruptcy court.

* * * * *

[[Page 43449]]

(g) * * *

(1) * * *

(i) The original promissory note or a copy of the promissory note

certified by the lender as true and accurate.

(ii) The loan application, if a separate loan application was

provided to the lender.

* * * * *

(h) * * *

(1) * * *

(iv) In reviewing a claim under this section, the issue of

confirmation of subsequent loans under an MPN will not be reviewed and

a claim will not be denied based on the absence of any evidence

relating to confirmation in a particular loan file. However, if a court

rules that a loan is unenforceable solely because of the lack of

evidence of the confirmation process or processes, insurance benefits

must be repaid.

* * * * *

(i) Guaranty agency participation in bankruptcy proceedings--(1)

Undue hardship claims. (i) In response to a petition filed with regard

to any bankruptcy proceeding by the borrower for discharge under 11

U.S.C. 523(a)(8) on the grounds of undue hardship, the guaranty agency

must, on the basis of reasonably available information if the petition

for relief in bankruptcy was filed prior to October 8, 1998, determine

whether the first payment on the loan was due more than 7 years

(exclusive of any applicable suspension of the repayment period) before

the filing of that petition and, if so, process the claim; and

(ii) In all other cases, determine whether repayment under either

the current repayment schedule or any adjusted schedule authorized

under this part would impose an undue hardship on the borrower and his

or her dependents.

(iii) If the agency determines that repayment would not constitute

an undue hardship, the agency must then determine whether the expected

costs of opposing the discharge petition would exceed one-third of the

total amount owed on the loan, including principal, interest, late

charges, and collection costs.

(iv) The agency must use diligence and may assert any defense

consistent with its status under applicable law to avoid discharge of

the loan. Unless discharge would be more effectively opposed by not

taking the following actions, the agency must--

(A) Oppose the borrower's petition for a determination of

dischargeability; and

(B) If the borrower is in default on the loan, seek a judgment for

the amount owed on the loan.

(v) In opposing a petition for a determination of dischargeability

on the grounds of undue hardship, a guaranty agency may agree to

discharge of a portion of the amount owed on a loan if it reasonably

determines that the agreement is necessary in order to obtain a

judgment on the remainder of the loan.

* * * * *

(j) * * * (1) * * *

(iii) The entry of an order granting discharge under chapter 12 or

13, or confirming a plan of arrangement under chapter 11, unless the

court determined that the loan is dischargeable under 11 U.S.C.

523(a)(8) on grounds of undue hardship.

* * * * *

(k) * * *

(1) * * *

(i) * * *

(A) A determination by the court that the loan is dischargeable

under 11 U.S.C. 523(a)(8) with respect to a proceeding initiated under

chapter 7 or chapter 11; or

* * * * *

(l) Unpaid refund discharge.

(1) Unpaid refunds in closed school situations. In the case of a

school that has closed, the Secretary reimburses the guarantor of a

loan and discharges a former or current borrower's (and any endorser's)

obligation to repay that portion of an FFEL Program loan (disbursed on

or after January 1, 1986) equal to the refund that should have been

made by the school under applicable Federal law and regulations,

including this section. Any accrued interest and other charges (late

charges, collection costs, origination fees, and insurance premiums)

associated with the unpaid refund are also discharged.

(2) Unpaid refunds in open school situations. In the case of a

school that is open, the guarantor discharges a former or current

borrower's (and any endorser's) obligation to repay that portion of an

FFEL loan (disbursed on or after January 1, 1986) equal to the amount

of the refund that should have been made by the school under applicable

Federal law and regulations, including this section, if--

(i) The borrower has ceased to attend the school that owes the

refund; and

(ii) The guarantor receives documentation regarding the refund and

the borrower and guarantor have been unable to resolve the unpaid

refund within 120 days from the date the borrower submits a complete

application in accordance with paragraph (l)(4) of this section. Any

accrued interest and other charges (late charges, collection costs,

origination fees, and insurance premiums) associated with the amount of

the unpaid refund amount are also discharged.

(3) Relief to borrower (and any endorser) following discharge. (i)

If a borrower receives a discharge of a portion of a loan under this

section, the borrower is reimbursed for any amounts paid in excess of

the remaining balance of the loan (including accrued interest, late

charges, collection costs, origination fees, and insurance premiums)

owed by the borrower at the time of discharge.

(ii) The holder of the loan reports the discharge of a portion of a

loan under this section to all credit reporting agencies to which the

holder of the loan previously reported the status of the loan.

(4) Borrower qualification for discharge. To receive a discharge of

a portion of a loan under this section, a borrower must submit a

written application to the holder or guaranty agency except as provided

in paragraph (l)(5)(iv) of this section. The application requests the

information required to calculate the amount of the discharge and

requires the borrower to sign a statement swearing to the accuracy of

the information in the application. 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 (or the student on whose behalf a

parent borrowed)--

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

(B) Did not attend, withdrew, or was terminated from the school

within a timeframe that entitled the borrower to a refund; and

(C) Did not receive the benefit of a refund to which the borrower

was entitled either from the school or from a third party, such as a

holder of a performance bond or a tuition recovery program.

(ii) State whether the borrower has any other application for

discharge pending for this loan; and

(iii) State that the borrower--

(A) Agrees to provide upon request by the Secretary or the

Secretary's designee other documentation reasonably available to the

borrower that demonstrates that the borrower meets the qualifications

for an unpaid refund discharge under this section; and

(B) Agrees to cooperate with the Secretary or the Secretary's

designee in enforcement actions in accordance with paragraph (e) of

this section and to transfer any right to recovery against a third

party to the Secretary in

[[Page 43450]]

accordance with paragraph (d) of this section.

(5) Unpaid refund discharge procedures. (i) Except for the

requirements of paragraph (l)(5)(iv) of this section related to an open

school, if the holder or guaranty agency learns that a school did not

pay a refund of loan proceeds owed under applicable law and

regulations, the holder or the guaranty agency sends 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.

(ii) If the borrower returns the application, specified in

paragraph (l)(4) of this section, the holder or the guaranty agency

must review the application to determine whether the application

appears to be complete. In the case of a loan held by a lender, once

the lender determines that the application appears complete, it must

provide the application and all pertinent information to the guaranty

agency including, if available, the borrower's last date of attendance.

If the borrower returns the application within 60 days, the lender must

extend the period during which efforts to collect on the affected loan

are suspended to the date the lender receives either a denial of the

request or the unpaid refund amount from the guaranty agency. At the

conclusion of the period during which the collection activity was

suspended, the lender may capitalize any interest accrued and not paid

during that period in accordance with Sec. 682.202(b).

(iii) If the borrower fails to return the application within 60

days, the holder of the loan resumes collection efforts and grants

forbearance of principal and interest for the period during which the

collection activity was suspended. The holder may capitalize any

interest accrued and not paid during that period in accordance with

Sec. 682.202(b).

(iv) The guaranty agency may, with the approval of the Secretary,

discharge a portion of a loan under this section without an application

if the guaranty agency determines, based on information in the guaranty

agency's possession, that the borrower qualifies for a discharge.

(v) If the holder of the loan or the guaranty agency determines

that the information contained in its files conflicts with the

information provided by the borrower, the guaranty agency must use the

most reliable information available to it to determine eligibility for

and the appropriate payment of the refund amount.

(vi) If the holder of the loan is the guaranty agency and the

agency determines that the borrower qualifies for a discharge of an

unpaid refund, the guaranty agency must suspend any efforts to collect

on the affected loan and, within 30 days of its determination,

discharge the appropriate amount and inform the borrower of its

determination. Absent documentation of the exact amount of refund due

the borrower, the guaranty agency must calculate the amount of the

unpaid refund using the unpaid refund calculation defined in paragraph

(o) of this section.

(vii) If the guaranty agency determines that a borrower does not

qualify for an unpaid refund discharge, (or, if the holder is the

lender and is informed by the guarantor that the borrower does not

qualify for a discharge)--

(A) The agency must notify the borrower in writing of the reason

for the determination and of the borrower's right to request a review

of the agency's determination within 30 days of the borrower's

submission of additional documentation supporting the borrower's

eligibility that was not considered in the initial determination.

During the review period, collection activities must be suspended; and

(B) The holder must resume collection if the determination remains

unchanged and grant forbearance of principal and interest for the

period during which collection activity was suspended. The holder may

capitalize any interest accrued and not paid during the review period

in accordance with Sec. 682.202(b).

(viii) If the guaranty agency determines that a current or former

borrower at an open school may be eligible for a discharge under this

section, the guaranty agency must notify the lender and the school of

the unpaid refund allegation. The notice to the school must include all

pertinent facts available to the guaranty agency regarding the alleged

unpaid refund. The school must, no later than 60 days after receiving

the notice, provide the guaranty agency with documentation

demonstrating, to the satisfaction of the guarantor, that the alleged

unpaid refund was either paid or not required to be paid.

(ix) In the case of a school that does not make a refund or provide

sufficient documentation demonstrating the refund was either paid or

was not required, within 60 days of its receipt of the allegation

notice from the guaranty agency, relief is provided to the borrower

(and any endorser) if the guaranty agency determines the relief is

appropriate. The agency must forward documentation of the school's

failure to pay the unpaid refund to the Secretary.

(m) Unpaid refund discharge procedures for a loan held by a lender.

In the case of an unpaid refund discharge request, the lender must

provide the guaranty agency with documentation related to the

borrower's qualification for discharge as specified in paragraph (l)(4)

of this section.

(n) Payment of an unpaid refund discharge request by a guaranty

agency-- (1) General. The guaranty agency must review an unpaid refund

discharge request promptly and must pay the lender the amount of loss

as defined in paragraphs (l)(1) and (l)(2) of this section, related to

the unpaid refund not later than 45 days after a properly filed request

is made.

(2) Determination of the unpaid refund discharge amount to the

lender. The amount of loss payable to a lender on an unpaid refund

includes that portion of an FFEL Program loan equal to the amount of

the refund required under applicable Federal law and regulations,

including this section, and including any accrued interest and other

charges (late charges, collection costs, origination fees, and

insurance premiums) associated with the unpaid refund.

(o)(1) Determination of amount eligible for discharge. The guaranty

agency determines the amount eligible for discharge based on

information showing the refund amount or by applying the appropriate

refund formula to information that the borrower provides or that is

otherwise available to the guaranty agency. For purposes of this

section, all unpaid refunds are considered to be attributed to loan

proceeds.

(2) If the information in paragraph (o)(1) of this section is not

available, the guaranty agency uses the following formulas to determine

the amount eligible for discharge:

(i) In the case of a student who fails to attend or whose

withdrawal or termination date is before October 7, 2000, the guaranty

agency discharges the lesser of the institutional charges unearned or

the loan amount. The guaranty agency determines the amount of the

institutional charges unearned by--

(A) Calculating the ratio of the amount of time in the loan period

after the student's last day of attendance to the actual length of the

loan period; and

(B) Multiplying the resulting factor by the institutional charges

assessed the student for the loan period.

(ii) In the case of a student who fails to attend or whose

withdrawal or termination date is on or after October

[[Page 43451]]

7, 2000, the guaranty agency discharges the loan amount unearned. The

guaranty agency determines the loan amount unearned by--

(A) Calculating the ratio of the amount of time remaining in the

loan period after the student's last day of attendance to the actual

length of the loan period; and

(B) Multiplying the resulting factor by the total amount of title

IV grants and loans received by the student, or if unknown, the loan

amount.

(p) Requests for reimbursement from the Secretary on loans held by

guaranty agencies. The Secretary reimburses the guaranty agency for its

losses on unpaid refund request payments to lenders or borrowers in an

amount that is equal to the amount specified in paragraph (n)(2) of

this section.

(q) Payments received after the guaranty agency's payment of an

unpaid refund request. (1) The holder must promptly return to the

sender any payment on a fully discharged loan, received after the

guaranty agency pays an unpaid refund request unless the sender is

required to pay (as in the case of a tuition recovery fund) in which

case, the payment amount must be forwarded to the Secretary. At the

same time that the holder returns the payment, it must notify the

borrower that there is no obligation to repay a loan fully discharged.

(2) If the holder has returned a payment to the borrower, or the

borrower's representative, with the notice described in paragraph

(q)(1) of this section, and the borrower (or representative) continues

to send payments to the holder, the holder must remit all of those

payments to the Secretary.

(3) If the loan has not been fully discharged, payments must be

applied to the remaining debt.

* * * * *

17. Section 682.406 is amended by adding a new paragraph (c) to

read as follows:

Sec. 682.406 Conditions of reinsurance coverage.

* * * * *

(c) In evaluating a claim for insurance or reinsurance, the issue

of confirmation of subsequent loans under an MPN will not be reviewed

and a claim will not be denied based on the absence of any evidence

relating to confirmation in a particular loan file. However, if a court

rules that a loan is unenforceable solely because of the lack of

evidence of a confirmation process or processes, insurance and

reinsurance benefits must be repaid.

(Authority: 20 U.S.C. 1078, 1078-1, 1078-2, 1078-3, 1082)

18. Section 682.409 is amended as follows:

A. By revising paragraph (c)(2);

B. In paragraph (c)(4)(i) by adding ``original or a true and exact

copy of the'' after ``The'';

C. In paragraph (c)(4)(iv) by adding ``, if a separate application

was provided to the lender'', after ``application'';

D. In paragraph (c)(5), and by removing ``certified'' after

``submit'' and by removing ``if no originals exist'' after

``originals''.

Sec. 682.409 Mandatory assignment by guaranty agencies of defaulted

loans to the Secretary.

* * * * *

(c) * * *

(2) The guaranty agency must execute an assignment to the United

States of America of all right, title, and interest in the promissory

note or judgment evidencing a loan assigned under this section. If more

than one loan is made under an MPN, the assignment of the note only

applies to the loan or loans being assigned to the Secretary.

* * * * *

19. Section 682.414 is amended, as follows:

A. In paragraph (a)(4)(ii)(A) by adding ``if a separate application

was provided to the lender'' after ``application'';

B. In paragraph (a)(4)(ii)(B) by removing ``, including the

repayment instrument'' after ``note'';

C. In paragraph (a)(4)(ii)(J) by removing ``and'' at the end of

sentence;

D. By redesignating paragraph (a)(4)(ii)(K) as paragraph

(a)(4)(ii)(L);

E. By adding a new paragraph (a)(4)(ii)(K);

F. In paragraph (a)(5)(i) by removing ``(K)'', and adding, in its

place, ``(L)'';

G. By revising paragraph (a)(5)(ii); and

H. By removing paragraph (a)(5)(iii).

Sec. 682.414 Records, reports, and inspection requirements for

guaranty agency programs.

(a) * * *

(4) * * *

(i) * * *

(K) Documentation of any confirmation process or processes; and

* * * * *

(5) * * *

(ii) A lender or guaranty agency holding a promissory note must

retain the original or a true and exact copy of the promissory note

until the loan is paid in full or assigned to the Secretary. When a

loan is paid in full by the borrower, the lender or guaranty agency

must return either the original or a true and exact copy of the note to

the borrower or notify the borrower that the loan is paid in full, and

retain a copy for the prescribed period.

* * * * *

20. Section 682.603 is amended as follows:

A. By revising paragraph (b);

B. By adding a new paragraph (c);

C. By redesignating paragraphs (g) and (h) as paragraphs (h) and

(i), respectively; and

D. By adding a new paragraph (g).

Sec. 682.603 Certification by a participating school in connection

with a loan application.

* * * * *

(b) The information to be provided by the school about the borrower

making application for the loan pertains to--

(1) The borrower's eligibility for a loan, as determined in

accordance with Sec. 682.201 and Sec. 682.204;

(2) For a subsidized Stafford loan, the student's eligibility f

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