William D. Ford Federal Direct Loan Program

SUMMARY: The Secretary amends the regulations governing the William D.

Ford Federal Direct Loan (Direct Loan) Program. These amendments are a

result of recently enacted changes to the Higher Education Act of 1965,

as amended by the Higher Education Amendments of 1998. These final

regulations remove references to the phase-in of the Direct Loan

Program, update the loan interest rate formulas, and reflect the

Secretary's authority to charge reduced loan fees on Direct Subsidized

and Direct Unsubsidized Loans.

DATES: These regulations are effective August 24, 1999.

FOR FURTHER INFORMATION CONTACT:

Ms. Nicki Meoli, U.S. Department of Education, 400 Maryland Avenue,

SW., ROB-3, Room 3045, 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

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

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

paragraph.

SUPPLEMENTARY INFORMATION: These regulations address changes made to

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

244) that affect the Direct Loan Program. On June 16, 1999, the

Secretary published a notice of proposed rulemaking (NPRM) for the

Direct Loan Program in the Federal Register (64 FR 32358). In the

preamble to the NPRM, the Secretary discussed on pages 32359 and 32360

the following proposed changes:

Amending Sec. 685.202(a) to include the interest rate

formulas that apply to Direct Subsidized, Direct Unsubsidized, and

Direct PLUS Loans that are first disbursed on or after October 1, 1998

and before July 1, 2003, and to Direct Consolidation Loans that are

first disbursed on or after July 1, 1998.

Amending Sec. 685.202(c) to reflect that the Secretary

charges a loan fee on a Direct Subsidized or Direct Unsubsidized Loan

not to exceed four percent of the principal amount of the loan.

Amending Sec. 685.211 to allow the Secretary to charge

borrowers reduced interest rates to encourage on-time loan repayment.

Moving the school selection provisions in Sec. 685.401 to

Sec. 685.400 and removing Sec. 685.401 from the Direct Loan Program

regulations to delete all references to the phase-in of the Direct Loan

Program and the transition from the Federal Family Education Loan

(FFEL) Program to the Direct Loan Program.

The amendments to Secs. 685.202(a), 685.400, and 685.401 reflect

statutory changes that became effective on October 1, 1998, in

accordance with section 3 of the 1998 Amendments. The amendments to

Sec. 685.202(c) reflect the Secretary's interpretative rule with

respect to the 1998 Amendments that became effective upon its

announcement in the NPRM published on June 16, 1999.

In the preamble to the NPRM, the Secretary discussed amending

Sec. 685.211 to allow the Secretary to charge borrowers reduced

interest rates to encourage on-time loan repayment. This proposed

amendment is not included in these final regulations. Section 455(b)(7)

of the HEA includes certain requirements that must be met before final

regulations on this subject are published. For example, a report from

the Office of Management and Budget (OMB) on the cost neutrality of a

proposed repayment incentive must be submitted to Congress not less

than 60 days prior to publishing final regulations. At this time, the

OMB report has not been submitted to Congress. The Secretary will

publish final regulations for the repayment incentive provision once

the Department has complied with the applicable statutory requirements.

Analysis of Comments and Changes

In response to the Secretary's invitation in the NPRM, several

parties submitted comments on the proposed regulations. An analysis of

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

the NPRM follows.

We discuss substantive issues under the sections of the regulations

to which they pertain. Generally, we do not address technical and other

minor changes--and suggested changes the law does not authorize the

Secretary to make.

Interest Rates (Sec. 685.202(a)(3)(i)(E) and (ii)(D))

Comments: Commenters representing guaranty agencies, lenders, and

servicers in the FFEL Program submitted joint and individual comments

in which they requested that the Secretary provide further

clarification on the calculation of the interest rate on a Direct

Consolidation Loan for which the consolidation application is received

by the Secretary on or after February 1, 1999 and before July 1, 2003.

The commenters stated that there is confusion as to whether the Direct

Consolidation Loan interest rate calculation is the same as the

interest rate calculation for consolidation loans made under the FFEL

Program. The commenters also repeated the belief they stated during

negotiated rulemaking that the repayment period interest rate, rather

than the in-school, grace, or deferment period interest rate, always

should be used to calculate the weighted average interest rate on

consolidation loans made under the Direct Loan and FFEL programs.

Further, the commenters believe that Congress intended for the

repayment period interest rate to be used in all cases.

Discussion: As provided in section 455(b)(6)(D) of the HEA, the

interest rate on a Direct Consolidation Loan for which the

consolidation application is received by the Secretary on or after

February 1, 1999 and before July 1, 2003 is based on the weighted

average of the interest rates on the loans being consolidated, rounded

to the nearest higher one-eighth of one percent, not to exceed 8.25

percent. Section 427A(k)(4) of the HEA establishes the same interest

rate formula for consolidation loans made under the FFEL Program for

which the consolidation application is received by the lender on or

after October 1, 1998 and before July 1, 2003.

The Secretary believes that in both the Direct Loan and FFEL

programs, the weighted average interest rate should be calculated based

on the interest rates that apply to the loans being consolidated at the

time the loan holders complete the verification certificates. An

interest rate that is lower than the repayment period rate applies to

most subsidized and unsubsidized Direct Loan and FFEL program loans

during the in-school, grace, and deferment periods. If, for example, a

loan is in a grace period at the time the loan holder completes the

verification certificate, the lower grace period interest rate would be

used in the calculation of the weighted average interest rate on the

consolidation loan.

To do as the commenters have suggested and always use the repayment

period interest rate would mean that, in cases in which the loan being

consolidated is in an in-school, grace, or deferment period, the

weighted average

[[Page 46253]]

interest rate would be based on an interest rate that may never apply

to the loan and is speculative since it would not be known when that

loan would enter repayment. We know of no legal basis to support the

commenters' approach and do not agree that this was the intent of

Congress.

Change: None.

Loan Fees (Sec. 685.202(c)(1))

Comments: A number of commenters representing individual schools

and associations representing schools supported the Secretary's

proposed rule that would reflect the Secretary's authority to charge a

loan fee not to exceed four percent on a Direct Subsidized or Direct

Unsubsidized Loan. These commenters agreed with the Secretary's

interpretation of the statute as discussed in the NPRM.

A number of commenters representing guaranty agencies, lenders, and

services in the FFEL Program submitted joint and individual comments in

which they questioned the Secretary's legal authority for proposing to

amend the regulations to clarify that the Secretary may charge a loan

fee not to exceed four percent on a Direct Subsidized or a Direct

Unsubsidized Loan. The commenters argued that such a proposal was not

consistent with the HEA.

Discussion: The Secretary continues to believe that he has the

legal authority to charge a loan fee of less than four percent on the

same basis as lenders in the FFEL Program. The Secretary appreciates

the support provided by the commenters representing schools.

The loan fee in the Direct Loan Program is the equivalent of the

three percent loan origination fee and the one percent insurance

premium charged to borrowers in the FFEL Program. Prior to enactment of

the 1998 Amendments, the Secretary charged borrowers the full four

percent fee. This practice was generally consistent with the practice

in the FFEL Program. Some Lenders charged some borrowers less than the

full four percent but the HEA did not control this practice and lenders

had complete discretion to offer a lower fee to some borrowers and not

to others.

The 1998 Amendments made a significant change in the lender's

authority to charge a lower loan origination fee to some borrowers and

not others.

The 1998 Amendments made a significant change in the lender's

authority to charge a lower loan origination fee to some borrowers and

not others. The 1998 Amendments modified section 438(c)(2) of the HEA

to establish, for the first time, legally binding standards that must

be met for a lender to reduce loan origination fees charged to

borrowers in the FFEL Program. The HEA now requires lenders to provide

reduced loan origination fees to all borrowers or to borrowers who

demonstrate a greater financial need. The negotiated rulemaking

committee reached consensus on proposed regulations that established

national standards governing the reduction of loan fees. The creation

of these standards under the HEA make a reduced loan fee a term and

condition of the borrower's FFEL loans. A borrower now has a legal

basis to insist on equal treatment from the lender on loan fees,

including a lower fee, if the lender offers a lower fee to any other

borrowers.

Under section 455(a) of the HEA, Direct Loan Program loans made to

borrowers under the HEA ``shall have the same terms, conditions, and

benefits'' as FFEL Program loans unless otherwise specified. As

discussed above, the 1998 Amendments changed the HEA to modify the

terms, conditions, and benefits of FFEL Program loans in regard to the

charging of loan fees to borrowers. The Secretary believes that, under

section 455(a) of the HEA, Direct Loan borrowers are entitled to a

reduction in the loan fee under the same conditions as FFEL Program

borrowers. Thus, the Secretary will provide a lower loan fee in the

Direct Loan Program under the same conditions that govern a lender's

authority to charge a reduced loan fee in the FFEL Program.

Some commenters representing lenders, guaranty agencies, and

servicers in the FFEL Program argued that the authority to provide a

reduced loan fee does not apply to the Direct Loan Program because

section 455(c) of the HEA states that the Secretary ``shall'' charge a

loan fee of four percent. These commenters, however, ignore the fact

that their interpretation would cause a conflict between the language

in section 455(c) and the requirement in section 455(a) that loans made

under the Direct Loan Program ``shall'' have the same terms,

conditions, and benefits as loans made under the FFEL Program. The

commenters' interpretation would give borrowers in the FFEL Program a

reduced loan fee as a term of their loan, while denying the same

opportunity to borrowers in the Direct Loan Program. The Secretary is

required to interpret the statute as a whole to give meaning to all

statutory provisions. The Secretary's interpretation gives meaning to

the requirements in both sections 455(a) and 455(c). The Secretary also

notes that nothing in the 1998 Amendments or its legislative history

indicates that Congress intended to deny the opportunity for reduced

loan fees provided to FFEL Program borrowers to Direct Loan Program

borrowers. Accordingly, the Secretary declines to adopt the

interpretation proposed by these commenters.

In commenting on the proposed rule, some commenters argued that the

interpretation was inconsistent with prior interpretations of the word

``shall'' by the Secretary in other contexts. The examples provided by

these commenters are not inconsistent with the Secretary's proposed

rule in this case. In interpreting statutory language the Secretary is

required to interpret the statute as a whole. In other circumstances,

the Secretary has interpreted the word ``shall'' as denying any

discretion to the Secretary when the rest of the statute does not

support any other approach on a particular issue. As noted above,

however, in this case, the Secretary believes that the statute as a

whole supports the interpretation reflected in these regulations.

The commenters representing lenders, guaranty agencies, and

servicers in the FFEL Program also argued that the Secretary should

only implement a reduced loan fee in the Direct Loan Program when the

HEA is changed to provide for a reduced loan fee in both programs.

These comments, however, are based on a misunderstanding of the

Secretary's position. The proposed rule simply applies the same new

statutory provision governing reduced loan fees to borrowers in the

Direct Loan Program that now applies to borrowers in the FFEL Program

under section 438(c) (2) of the HEA. Thus, the Secretary's

interpretation and proposed rule results in equal treatment of

borrowers in both programs. In contrast, failing to apply the new rule

to the Direct Loan Program would deny Direct Loan borrowers an

opportunity for a reduced loan fee that is now guaranteed by statute in

the FFEL Program.

In addition, we note that any statutory reduction in the fee would

benefit the lender, not necessarily the borrower. The lender is

required to pay the fee in the FFEL Program to the Secretary and may

choose to pass the fee on to the borrower as permitted by section

438(b)(2) of the HEA. Competition in the FFEL Program has already led

many lenders to offer borrowers reduced loan fees, which in turn

reduces the lenders; revenues from those borrowers. Reducing the fee in

the statute would simply increase the lender's profits by reducing the

fee the lender is required to pay without necessarily reducing fees

charged to borrowers.

Change: None.

[[Page 46254]]

Executive Order 12866

We have reviewed these final regulations in accordance with

Executive Order 12866. Under the terms of this order, we have assessed

the potential costs and benefits of this regulatory action.

The potential costs associated with the final regulations are those

resulting from statutory requirements and those we have determined as

necessary for administering this program effectively and efficiently.

In assessing the potential costs and benefits--both quantitative

and qualitative--of these final regulations, we have determined that

the benefits of the regulations 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 summarized the potential costs and benefits of these final

regulations in the preamble to the NPRM on page 32360.

Paperwork Reduction Act of 1995

These regulations do not contain any information collection

requirements.

Assessment of Educational Impact

In the NPRM, we requested comments on whether the proposed

regulations would require transmission of information that any other

agency or authority of the United States gathers or makes available.

Based on the response to the NPRM and on our review, we have

determined that these final regulations do not require transmission of

information that any other agency or authority of the United States

gathers or makes available.

Electronic Access to This Document

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

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

Portable Document Format (PDF) on the Internet at either of the

following sites:

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

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

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area at (202) 512-1530.

Note: The official version of this document is the document

published in the Federal Register. Free Internet access to the

official edition of the Federal Register and the Code of Federal

Regulations is available on GPO Access at:

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

(Catalog of Federal Domestic Assistance Number 84.268 William D.

Ford Federal Direct Loan Program.)

List of Subjects in 34 CFR Part 685

Administrative practice and procedure, Colleges and universities,

Education, Loan programs-education, Student aid, Vocational education.

Dated: August 13, 1999.

Richard W. Riley,

Secretary of Education.

For the reasons discussed in the preamble, the Secretary amends

title 34 of the Code of Federal Regulations by amending part 685 as

follows:

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

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

follows:

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

2. Section 685.202 is amended by revising paragraphs (a) and (c)

(1) to read as follows:

Sec. 685.202 Charges for which Direct Loan Program borrowers are

responsible.

(a) Interest--(1) Interest rate for Direct Subsidized Loans and

Direct Unsubsidized Loans. (i) Loans first disbursed before July 1,

1995. During all periods, the interest rate during any twelve-month

period beginning on July 1 and ending on June 30 is determined on the

June 1 immediately preceding that period. The interest rate is equal to

the bond equivalent rate of 91-day Treasury bills auctioned at the

final auction held prior to that June 1 plus 3.1 percentage points, but

does not exceed 8.25 percent.

(ii) Loans first disbursed on or after July 1, 1995 and before July

1, 1998. (A) During the in-school, grace, and deferment periods. The

interest rate during any twelve-month period beginning on July 1 and

ending on June 30 is determined on the June 1 immediately preceding

that period. The interest rate is equal to the bond equivalent rate of

91-day Treasury bills auctioned at the final auction held prior to that

June 1 plus 2.5 percentage points, but does not exceed 8.25 percent.

(B) During all other periods. The interest rate during any twelve-

month period beginning on July 1 and ending on June 30 is determined on

the June 1 immediately preceding that period. The interest rate is

equal to the bond equivalent rate of 91-day Treasury bills auctioned at

the final auction held prior to that June 1 plus 3.1 percentage points,

but does not exceed 8.25 percent.

(iii) Loans first disbursed on or after July 1, 1998. (A) During

the in-school, grace, and deferment periods. The interest rate during

any twelve-month period beginning on July 1 and ending on June 30 is

determined on the June 1 immediately preceding that period. The

interest rate is equal to the bond equivalent rate of 91-day Treasury

bills auctioned at the final auction held prior to that June 1 plus 1.7

percentage points, but does not exceed 8.25 percent.

(B) During all other periods. The interest rate during any twelve-

month period beginning on July 1 and ending on June 30 is determined on

the June 1 immediately preceding that period. The interest rate is

equal to the bond equivalent rate of 91-day Treasury bills auctioned at

the final auction held prior to that June 1 plus 2.3 percentage points,

but does not exceed 8.25 percent.

(2) Interest rate for Direct PLUS Loans. (i) Loans first disbursed

before July 1, 1998. During all periods, the interest rate during any

twelve-month period beginning on July 1 and ending on June 30 is

determined on the June 1 preceding that period. The interest rate is

equal to the bond equivalent rate of 52-week Treasury bills auctioned

at the final auction held prior to that June 1 plus 3.1 percentage

points, but does not exceed 9 percent.

(ii) Loans first disbursed on or after July 1, 1998. During all

periods, the interest rate during any twelve-month period beginning on

July 1 and ending on June 30 is determined on the June 1 preceding that

period. The interest rate is equal to the bond equivalent rate of 91-

day Treasury bills auctioned at the final auction held prior to that

June 1 plus 3.1 percentage points, but does not exceed 9 percent.

(3) Interest rate of Direct Consolidation Loans. (i) Interest rate

for Direct Subsidized Consolidation Loans and Direct Unsubsidized

Consolidation Loans. (A) Loans first disbursed before July 1, 1995. The

interest rate is the rate established for Direct Subsidized Loans and

Direct Unsubsidized Loans in paragraph (a)(1)(i) of this section.

(B) Loans first disbursed on or after July 1, 1995 and before July

1, 1998. The interest rate is the rate established for Direct

Subsidized Loans and Direct Unsubsidized Loans in paragraph (a)(1)(ii)

of this section.

(C) Loans for which the first disbursement is made on or after July

1, 1998 and prior to October 1, 1998, and loans for which the

disbursement is

[[Page 46255]]

made on or after October 1, 1998 for which the consolidation

application was received by the Secretary before October 1, 1998. The

interest rate is the rate established for District Subsidized Loans and

Direct Unsubsidized Loans in paragraph (a)(1)(iii) of this section.

(D) Loans for which the consolidation application is received by

the Secretary on or after October 1, 1998 and before February 1, 1999.

During all periods, the interest rate during any twelve-month period

beginning on July 1 and ending on June 30 is determined on the June 1

immediately preceding that period. The interest rate is equal to the

bond equivalent rate of 91-day Treasury bills auctioned at the final

auction held prior to that June 1 plus 2.3 percentage points, but does

not exceed 8.25 percent.

(E) Loans for which the consolidation application is received by

the Secretary on or after February 1, 1999. During all periods, the

interest rate is based on the weighted average of the interest rates on

the loans being consolidated, rounded to the nearest higher one-eighth

of one percent, but does not exceed 8.25 percent.

(ii) Interest rate for Direct PLUS Consolidation Loans. (A) Loans

first disbursed before July 1, 1998. The interest rate is the rate

established for Direct PLUS Loans in paragraph (a)(2)(i) of this

section.

(B) Loans for which the first disbursement is made on or after July

1, 1998 and prior to October 1, 1998, and loans for which the

disbursement is made on or after October 1, 1998 for which the

consolidation application was received by the Secretary before October

1, 1998. The interest rate is the rate established for Direct PLUS

Loans in paragraph (a)(2)(ii) of this section.

(C) Loans for which the consolidation application is received by

the Secretary on or after October 1, 1998 and before February 1, 1999.

During all periods, the interest rate during any twelve-month period

beginning on July 1 and ending on June 30 is determined on the June 1

immediately preceding that period. The interest rate is equal to the

bond equivalent rate of 91-day Treasury bills auctioned at the final

auction held prior to that June 1 plus 2.3 percentage points, but does

not exceed 8.25 percent.

(D) Loans for which the consolidation application is received by

the Secretary on or after February 1, 1999. During all periods, the

interest rate is based on the weighted average of the interest rates on

the loans being consolidated, rounded to the nearest higher one-eighth

of one percent, but does not exceed 8.25 percent.

* * * * *

(c) * * *

(1)(i) Charges a borrower a loan fee not to exceed four percent of

the principal amount of the loan on a Direct Subsidized or Direct

Unsubsidized Loan; and

(ii) Charges a borrower a loan fee of four percent of the principal

amount of the loan on a Direct PLUS Loan.

* * * * *

3. Section 685.400 is amended by adding a new paragraph (d) to read

as follows:

Sec. 685.400 School participation requirements.

* * * * *

(d) The Secretary selects schools to participate in the Direct Loan

Program from among those that apply to participate and meet the

requirements in paragraphs (a)(1), (b), and (c) of this section.

Sec. 685.401 [Removed]

4. Section 685.401 is removed and reserved.

[FR Doc. 99-21957 Filed 8-23-99; 8:45 am]

BILLING CODE 4000-01-M