Federal Perkins Loan Program

SUMMARY: The Secretary amends the Federal Perkins Loan Program

regulations. The regulations implement changes to the Higher Education

Act of 1965, as amended (HEA), resulting from the Higher Education

Amendments of 1998 (1998 Amendments). These final regulations reflect

the provisions of the 1998 Amendments that affect the institutions that

participate in, and borrowers who have loans made under, the Federal

Perkins Loan Program. These final regulations expand borrower benefits

under the Federal Perkins Loan program by increasing loan limits,

expanding borrower eligibility for deferments and cancellations,

establishing a loan rehabilitation program for borrowers in default on

their Federal Perkins Loans, establishing an incentive repayment

program, and providing a closed school discharge.

DATES: Effective Date: These regulations are effective July 1, 2000.

Implementation Date: The Secretary has determined, in accordance

with section 482(c)(2)(A) of the HEA, that institutions that

participate in the Federal Perkins Loan Program may, at their

discretion, choose to implement the provisions of Secs. 674.2,

674.5(c), 674.9, 674.16, 674.33(f), 674.41, 674.42, and 674.45 in these

final regulations, on or after October 28, 1999. For further

information see ``Implementation Date of These Regulations'' under the

SUPPLEMENTARY INFORMATION: Section of this preamble.

FOR FURTHER INFORMATION CONTACT: Gail McLarnon, Program Specialist,

Program Development Division, Office of Student Financial Assistance,

400 Maryland Avenue, SW, ROB-3, Room 3045, Washington, D.C. 20202-5449.

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 contact person listed in the preceding

paragraph.

SUPPLEMENTARY INFORMATION: These regulations implement the Higher

Education Amendments of 1998 (Pub. L. 105-244), enacted October 7,

1998.

On July 29, 1999, the Secretary published a notice of proposed

rulemaking (NPRM) for the Federal Perkins Loan Program regulations in

the Federal Register (64 FR 41231). In the preamble to the NPRM, the

Secretary discussed the following major proposed changes:

Amending Sec. 674.2 to add a definition of the term ``satisfactory

repayment arrangements'' (page 41233).

Amending Sec. 674.5 to establish, effective with award year 2000-

2001, a default penalty of zero Federal Capital Contribution for

institutions with a cohort default rate of 25 percent or higher and a

new default penalty that terminates the eligibility of an institution

to participate in the Federal Perkins Loan Program if the institution

has a cohort default rate of 50 percent or higher for the three most

recent years for which data are available. The Secretary also discussed

amending Sec. 674.5 to allow an institution to exclude certain loans

from its cohort default rate calculation (pages 41233-41234).

Removing and reserving Sec. 674.7 in accordance with the

elimination of the Expanded Lending Option.

Amending Sec. 674.9 to authorize the use of the same criteria that

remove a borrower from an institution's cohort default rate to re-

establish a borrower's eligibility for additional Federal Perkins Loans

(pages 41234-41235).

Amending Sec. 674.12 to increase annual maximum loan amounts and

increase the aggregate maximum loan amounts allowable for an eligible

student to levels formerly authorized under the Expanded Lending Option

(page 41235).

Amending Secs. 674.16, 674.31, and 674.45 to update and clarify

credit bureau reporting requirements with which an institution must

comply (page 41235 and page 41238).

Amending Sec. 674.31 to exclude from a borrower's initial grace

period any period, not to exceed three years, during which a borrower

who is a member of an Armed Forces reserve component is called or

ordered to active duty (page 41235).

Amending Sec. 674.33 to authorize institutions to establish an

incentive repayment program to reduce defaults and replenish their

Federal Perkins Loan revolving fund. Also amending Sec. 674.33 to

establish a closed school discharge for Federal Perkins Loan borrowers

who are unable to complete their programs of study due to an

institution's closure (pages 41235-41236).

Amending Sec. 674.34 to extend the deferment benefits in this

section to all borrowers regardless of the terms of the borrower's

promissory note or when the loan was made (page 41236).

Amending Sec. 674.39 to require institutions to establish a loan

rehabilitation program for all defaulted Federal Perkins Loan borrowers

(pages 41236-41237).

Amending Secs. 674.41, 674.42 and 674.45 to require that

institutions participating in the Federal Perkins Loan Program provide

borrowers with information on the availability of the Student Loan

Ombudsman's office (pages 41237-41238).

Amending Sec. 674.42 to facilitate the use of electronic means in

providing personalized exit counseling and make exit counseling

requirements in the Federal Perkins Loan Program consistent with those

in the Federal Direct Loan and the Federal Family Education Loan

Programs (pages 41237-41238).

Amending Sec. 674.47 to authorize an institution, until July 1,

2002, to charge its revolving fund for any collection costs assessed on

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

that may be passed along to the borrower (page 41238).

Amending Sec. 674.49 to reflect changes made to section 523(a)(8)

of the Bankruptcy Code that eliminate a borrower's ability to have a

student loan discharged on the ground that the loan has been in

repayment for seven years or more (page 41238).

Amending Secs. 674.53, 674.56, 674.57, 674.58, and 674.60 to extend

the cancellation benefits authorized by these sections, for eligible

service performed on or after October 7, 1998, to all borrowers with a

loan made under the Federal Perkins Loan program regardless of the date

the loan was made or the terms of the borrower's promissory note (pages

41238-41239).

Implementation Date of These Regulations

Section 482(c) of the Higher Education Act of 1965, as amended (20

U.S.C. 1089(c)) requires that regulations affecting programs under

title IV of the Act be published in final form by November 1 prior to

the start of the award year in which they apply. However, that section

also permits the Secretary to designate any regulation as one that an

entity subject to the regulation may choose to implement earlier. If

the Secretary designates a regulation for early implementation, he may

specify when and under what conditions the entity may implement it.

Under this authority, the Secretary has

[[Page 58299]]

designated the following regulations for early implementation:

Section 674.2--Upon publication, institutions may implement the

``satisfactory repayment arrangements'' as defined in this provision.

Section 674.5(c)(3)--Upon publication, institutions may exclude

certain loans from its cohort default rate calculation.

Section 674.9--Upon publication, institutions may use the criterion

that removes a borrower from its cohort default rate to re-establish a

borrower's eligibility for Perkins Loans.

Sections 674.16, 674.31 and 674.45--Upon publication, institutions

may implement the credit bureau reporting requirements contained in

these sections.

Section 674.33(f)--Upon publication, institutions may implement

incentive repayment programs.

Sections 674.41, 674.42 and 674.45--Upon publication, institutions

may provide borrowers with information on the availability of the

Student Loan Ombudsman's office.

These final regulations contain changes from the NPRM that are

explained in the Analysis of Comments and Changes that follow.

Analysis of Comments and Changes

The regulations in this document were developed through the use of

negotiated rulemaking. Section 492 of the Higher Education Act requires

that, before publishing any proposed regulations to implement programs

under Title IV of the Act, the Secretary obtain public involvement in

the development of the proposed regulations. After obtaining advice and

recommendations, the Secretary must conduct a negotiated rulemaking

process to develop the proposed regulations. All proposed regulations

must conform to agreements resulting from the negotiated rulemaking

process unless the Secretary reopens that process or explains any

departure from the agreements to the negotiated rulemaking

participants.

These regulations were published in proposed form on July 29, 1999,

in conformance with the consensus of the negotiated rulemaking

committee. Under the committee's protocols, consensus meant that no

member of the committee dissented from the agreed-upon language. The

Secretary invited comments on the proposed regulations by September 15,

1999, and several comments were received. An analysis of the comments

and of the changes in the proposed regulations 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.

General Comment

Comment: We received 28 comments on the Federal Perkins Loan

Program NPRM published July 29, 1999. The comments were generally

supportive. However, one commenter stated that any changes made by the

Secretary in the Federal Perkins Loan program final regulations that

represent a substantive departure from the proposed regulations

published on July 29, 1999, would be viewed as a failure to honor the

consensus reached by Committee II, a violation of the good faith with

which members of Committee II engaged in negotiated rulemaking and

would be detrimental to future negotiations.

Discussion: The 1998 Amendments amended section 492 of the HEA to

require that all Title IV proposed regulations be subject to the

negotiated rulemaking process. While this change requires the Secretary

to publish proposed regulations that conform to agreements resulting

from a negotiated rulemaking process, the 1998 Amendments did not

change the process by which final regulations are promulgated. All

proposed regulations continue to be subject to a public comment period,

as required by the Administrative Procedure Act, and may be changed as

a result of our full and careful consideration of the comments we

receive from the public on an NPRM, regardless of agreements reached on

proposed regulations during the negotiated rulemaking process.

Section 674.2 Definitions

Comment: One commenter expressed the view that the proposed

definition of ``satisfactory repayment arrangements,'' which requires

the borrower to make six on-time, consecutive, monthly payments on a

defaulted loan to re-establish Title IV HEA eligibility, should specify

how an institution determines the amount of the six monthly payments

the borrower must make.

Discussion: The concept of satisfactory repayment arrangements is

not new to the Federal Perkins Loan Program. The Federal Perkins Loan

program regulations have contained a definition of satisfactory

repayment arrangements since July 1, 1995. The regulatory definition

required that a defaulted borrower either repay the loan in full, or

execute a new written repayment agreement and make one payment each

month for six consecutive months to re-establish title IV eligibility.

We disagree that the regulations should specify how an institution

determines the amount of the six monthly payments the borrower must

make to re-establish Title IV eligibility. However, it has been our

long-standing interpretation that the institution would calculate the

amount due for each of the six payments consistent with an overall

payment schedule that would allow the borrower to satisfy the

outstanding balance on the loan in the time remaining in the original

10-year repayment period. The new written repayment agreement

facilitated this calculation.

A similar definition of satisfactory repayment arrangements was

codified in law by the 1998 Amendments but does not contain the

requirement that the borrower execute a new written repayment agreement

when making satisfactory repayment arrangements. Regardless of that

fact, it remains our interpretation that in determining the amount of

the six payments a borrower must make to re-establish Title IV

eligibility, an institution must calculate a payment amount consistent

with a payment schedule that satisfies the total amount due on the loan

within the time remaining in the original ten-year repayment period,

especially absent statutory language in the 1998 Amendments that

specifies that the monthly payment amount as determined by the

institution be reasonable and affordable based on the borrower's total

financial circumstances, as is the case in the Federal Family Education

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

programs. We believe the definition of satisfactory repayment

arrangements, as proposed, is the best reflection of both the statute

and our long-standing interpretation of the payment amount required by

a borrower.

Changes: None.

Section 674.5 Federal Perkins Loan Program cohort default rate and

penalties

Comment: One commenter objected to the elimination of the graduated

default penalties imposed on institutions with cohort default rates

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

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

or exceeds 25 percent. The commenter felt that this change creates a

disincentive for institutions to collect on defaulted loans.

Discussion: We appreciate the commenter's concern. However, the

elimination of the graduated default penalties is required by the 1998

[[Page 58300]]

Amendments. The final regulations reflect this statutory change.

Changes: None.

Comment: We received several comments regarding Sec. 674.5(a)(2),

which reflects a new default penalty that terminates an institution's

eligibility to participate in the Federal Perkins Loan Program if it

has a cohort default rate of 50 percent or higher for the three most

recent years for which data are available. One commenter recommended

that we specify in regulation that an institution's cohort default rate

must equal or exceed 50 percent for each of the three most recent

``consecutive'' years for which cohort default data is available. One

commenter suggested that the regulation clearly state that an

institution does not lose eligibility to participate in the Federal

Perkins Loan program if, upon appealing a determination of

ineligibility, any one of the three rates used to make that

determination is found to be below 50 percent. Lastly, one commenter

suggested that we clarify in the regulations that an institution loses

its eligibility to participate only in the Federal Perkins Loan program

if its Perkins Loan cohort default rates meet the criteria set forth in

this section.

Discussion: We do not agree that the word ``consecutive'' should be

added to the regulatory language. Although the regulations do not

contain the word ``consecutive'' in describing the three years of

cohort default data that will be used by the Secretary to make a

determination of ineligibility, it is our intent to use consecutive

year cohort default rate data as long as it is available. However, we

believe that a requirement that we use consecutive year data could

prevent the Department from making a determination of ineligibility,

thus thwarting legislative intent, if either the Department or an

institution is unable to calculate an institution's cohort default rate

in any given year because of unforeseen circumstances. We believe that

language requiring the use of an institution's cohort default rate data

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

better reflects statutory intent.

As to the request for clarification regarding the appeals process

and the loss of Federal Perkins Loan program eligibility, the language

in Sec. 674.5(a)(2)(i)(A) clearly states that an institution will not

lose eligibility if, as a result of an appeal, any one of the three

cohort rates used to make a determination of ineligibility is below 50

percent. We also note that the language in Sec. 674.5(a)(2) also

clearly states that an institution loses eligibility to participate

only in the Federal Perkins Loan program.

Changes: None.

Comment: Two commenters objected to the elimination of the

provision allowing an institution to exclude improperly serviced loans

from its cohort default rate.

Discussion: The elimination of this provision reflects a 1998

Amendments change. This provision had the perverse effect of rewarding

an institution for its, or its servicer's, lack of due diligence in

servicing and collecting its Perkins Loans by allowing the institution

to remove defaulted borrowers from its cohort default rate.

Changes: None.

Comment: We received several comments regarding the exclusion of

borrowers from an institution's cohort default rate in

Sec. 674.5(c)(3)(i). One commenter suggested that borrowers who are

considered paid-in-full as a result of a small balance write-off of

their loan under Sec. 674.47(h) be referenced in

Sec. 674.5(c)(3)(i)(C). One commenter urged us to add language allowing

a school to exclude from its cohort default rate calculation all

borrowers who have filed for bankruptcy and are in a stay of

collection. Lastly, one commenter suggested that Sec. 674.5(c)(3)(i)(D)

be clarified to state that the borrower's status must be less than 240-

or 270-days past due as a result of receiving a deferment or

forbearance.

Discussion: We agree that adding a reference to borrowers whose

loans have been written off under Sec. 674.47(h) would add clarity to

the regulations. However, we believe this addition is more

appropriately added in Sec. 674.5(c)(3)(ii)(D).

We disagree with the commenter who believes that all borrowers who

have filed for bankruptcy and are in a stay of collections should be

excluded from an institution's cohort default rate calculation. During

the required stay of collection, a loan is considered to be in a

suspended status. It does not continue to age, although interest

continues to accrue for which the borrower is responsible. If a

borrower files a bankruptcy petition that includes a defaulted Perkins

loan that has not reached a 240- or 270-day past due status, the loan

will retain its pre-240-or 270-day status and will be excluded from the

calculation of a school's cohort rate until the bankruptcy proceeding

has concluded. If the borrower includes a defaulted loan that is more

than 240 or 270 days past due, the loan will retain its more than 240-

or 270-day past due status and be included in the calculation of the

school's cohort default rate. While we realize that an institution is

unable to contact the borrower during a stay of collections, we believe

that the time to work those accounts and perform the due diligence

necessary to return the borrower to repayment is before the borrower

becomes 240 or 270 days past due.

We do not agree that additional language specifying that a

deferment or forbearance must bring the borrower to a pre-240- or 270-

day status is necessary. As currently drafted, the regulations allow

the institution to exclude a borrower from its cohort calculation if

the borrower has ``received a deferment or forbearance based on a

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

due status.'' The addition of language specifying that the deferment or

forbearance has brought the borrower to a pre-240- or 270-day status is

unnecessary.

Changes: A reference to loans repaid in full in accordance with

Sec. 674.47(h) has been added to Sec. 674.5(c)(3)(ii)(D).

Comment: Several commenters objected to the proposal that payments

obtained through income tax offset, wage garnishment, income or asset

execution, or pursuant to a judgment should not be considered voluntary

payments for the purpose of removing borrowers from an institution's

cohort default rate calculation if the borrower voluntarily makes six

consecutive payments or voluntarily makes all payments currently due.

One commenter stated that our definition of voluntary payments is

unnecessarily harsh and that all payments, regardless of how they are

made, should be considered voluntary. One commenter noted that a

borrower's payments are not guaranteed by a judgment--a school must

still work the account to ensure that payments are made. The commenter

also noted that many borrowers consider payments obtained through

income tax offset to take the place of regularly scheduled payments

that the borrower is already making on their own.

Discussion: We disagree that payments obtained through income tax

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

judgment should be considered voluntary payments made by the borrower

in order to remove a borrower whose loans are brought current or who

has made six consecutive monthly payments from an institution's cohort

default rate calculation. Generally, payments obtained by these methods

are automatically deducted from the borrower's Federal or state tax

refund,

[[Page 58301]]

wages, or assets and the borrower has no control or choice in the

payment process. We continue to believe that the initiation of court

action to obtain payment on a defaulted loan represents last resort due

diligence efforts on the part of the school. Payments obtained through

this process would not have been obtained otherwise and cannot be

considered voluntary. While we recognize that a school may have to work

to collect the payments due on some judgment accounts, the required

payments are nonetheless made as a result of a court order. Further,

borrowers have no control over a payment applied to their defaulted

loan as a result of income tax offset regardless of the fact that the

borrower may already be making payments.

Changes: None.

Section 674.9 Student Eligibility

Comment: One commenter felt strongly that restoring eligibility for

a Federal Perkins Loan to a borrower who meets any of the criteria that

would remove him or her from an institution's cohort default rate

calculation is bad public policy.

Discussion: Although the return of Federal Perkins Loan eligibility

to a borrower who meets any of the criteria that remove him or her from

an institution's cohort default rate calculation represents a

significant departure from past policy, this is a statutory requirement

enacted as part of the 1998 Amendments.

Changes: None.

Comment: One commenter strongly supported our definition of

``voluntary'' payments for the purpose of a borrower re-establishing

eligibility for a Perkins Loan under this section.

Discussion: We appreciate the support of the commenter and believe

it is an important condition to re-establishing eligibility.

Changes: None.

Comment: One commenter suggested that we quantify in

Sec. 674.9(i)(1) what amount a payment made ``over and above'' a

payment made pursuant to a judgment must be to qualify as a voluntary

payment when a school enters into a repayment agreement with the

borrower on a judgment. For example, if a school has entered into an

agreement with a borrower that requires $50 monthly payments to satisfy

a judgment, what payment amount ``over and above'' the $50 payment

would a borrower be required to make in order for his or her payment to

be considered voluntary? The commenter believed that specific language

would clarify the conditions a borrower must satisfy to re-establish

eligibility.

Discussion: We do not believe that further clarification of the

definition of voluntary payment for the purpose of re-establishing a

defaulted borrower's eligibility for Federal Perkins Loans is

necessary. However, a payment that is generally equal to the payment

the borrower is required to make pursuant the judgment will satisfy the

definition of voluntary in this section. We believe an approach that

treats borrowers consistently and precludes situations in which one

borrower might be required to make small payments while another

borrower might be required to make large payments over and above

payments made pursuant to a judgment is an important consideration when

re-establishing eligibility.

In almost all cases, the terms of a judgment make the whole

obligation due in full immediately, and any monthly payment arrangement

that arises is solely by agreement between the borrower and the school.

In some cases, the borrower and the school negotiate a repayment

arrangement that is subsequently incorporated in a consent judgment. A

school is free to agree to any monthly payment that it considers

reasonable in such an agreed judgment or in a repayment agreement to

satisfy a judgment. Therefore, we would consider payments over and

above the amount owed under the judgment itself or the repayment

agreement already reached to satisfy that judgment to be voluntary

payments for purposes of reestablishing eligibility for new student

aid. This level of payment not only represents a good faith effort on

the part of the borrower to repay the debt in a manner that is neither

required nor automatic, but also represents a good faith effort on the

part of the school to replenish its revolving fund and responsibly

administer the Federal Perkins Loan Program.

Using the above example, if a school has entered into an agreement

with a borrower that requires $50 monthly payments on a judgment, we

would consider a borrower that makes payments of at least $50 to be

making voluntary payments.

Changes: None.

Comment: One commenter objected to having one definition of

``voluntary'' payments for re-establishing a borrower's eligibility for

Federal Perkins Loans and another definition of ``voluntary'' payments

in order to determine which borrowers can be excluded from an

institution's cohort default rate. The commenter felt that the

definition of voluntary payments should be consistent within the

program regulations.

Discussion: We disagree that the definition of ``voluntary''

payments must be consistent within the program regulations. Denying a

borrower access to additional student financial assistance has far more

serious consequences than excluding that borrower from an institution's

cohort default rate. The negotiators agreed that cutting off a

borrower's access to Federal Perkins Loans had the potential to

prohibit the borrower from furthering his or her education, securing

employment and honoring his or her student loan obligations. The

negotiators also agreed that a borrower who made payments over and

above the payments made on a judgment was making a good faith effort to

repay the debt and that those efforts should be recognized.

Changes: None.

Comment: One commenter felt that language restricting the

definition of ``voluntary'' payments to those payments made directly by

the borrower was too restrictive and that payments made on behalf of

the borrower should be included as well.

Discussion: We disagree with the commenter that payments made on

behalf of the borrower should be included in the definition of

voluntary payments for the purpose of re-establishing a defaulted

borrower's eligibility for Federal Perkins Loans. Payments made on

behalf of the borrower are not payments made directly by the borrower

and are payments over which the borrower has no control or choice.

Payments made in this manner cannot be considered voluntary in this

context.

Changes: None.

Section 674.12 Loan Maximums

Comment: All of the comments we received on the new increased loan

maximums and the use of the aggregate unpaid balance in determining a

borrower's eligibility for additional loans under the Federal Perkins

Loan Program were supportive.

Changes: None.

Section 674.16 Making and disbursing loans

Comment: Several commenters supported language in this section that

requires an institution to report to at least one national credit

bureau information concerning the repayment and collection of the loan

until the loan is paid in full. One commenter believed that it would be

a violation of the Fair Credit Reporting Act (FCRA), however, for an

institution to report on the loan until it is paid in full. Several

commenters urged the Secretary to work

[[Page 58302]]

with the Federal Trade Commission to amend the FCRA to require consumer

reporting agencies to make reports containing credit information

regarding the status of a borrower's Federal Perkins Loan until the

loan is paid in full rather than for seven years as currently required

under the FCRA.

Discussion: The general requirement that an institution report on

the status of the loan to a consumer reporting agency until it is paid

in full is not a new requirement under section 463 of the HEA. The 1998

Amendments did change this section of the HEA and codified many of the

credit bureau reporting requirements that institutions have been

required to perform for some time. We should also note that it is not

now, and has not been, a violation of the FCRA for a consumer reporting

agency to accept and disseminate information on a loan until the loan

is paid in full; it was, prior to the 1998 Amendments to section 463, a

violation of the FCRA for a consumer reporting agency to make reports

for certain purposes that contain adverse information on accounts for

more than seven years from the date of the adverse event reported. (The

1998 Amendments to section 463 the HEA give credit reporting agencies

the option to make reports containing adverse credit information until

the loan is paid in full; they do not require it.)

We will pursue opportunities to work with the Federal Trade

Commission as they arise to amend the FCRA in ways that support and

strengthen the repayment of Title IV student loans.

Changes: None.

Section 674.31 Promissory Note

Comment: One commenter noted that the promissory note used in the

Federal Perkins Loan Program does not reflect the new provision in this

section that excludes 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 from the borrower's initial

grace period. The commenter requests that we clarify our intentions

with regard to the development of a new Federal Perkins Loan promissory

note.

Discussion: We appreciate the commenter's concern regarding the

development of a promissory note that contains terms and conditions

that reflect the changes made to the HEA by the 1998 Amendments. We

plan to develop, as soon as possible after the publication of final

regulations, an addendum to the Federal Perkins Loan program promissory

note now in use that reflects the new provisions of the 1998

Amendments. The development of a new promissory note will follow. Until

an addendum or a new note is developed, however, we would note that

institutions must comply with the changes made to the HEA by the 1998

Amendments and that the promissory notes contained in CB-96-8 and CB-

93-9 are legally valid documents.

Changes: None.

Section 674.33 Repayment

(Note: In this and other sections of the regulations in Part 674,

the holder of a loan may be the Secretary or a non-Federal party. In

these cases, requirements are written in the present indicative,

rather than using the word ``must.'' However, we intend these

provisions to be mandatory, regardless of who holds the loan.)

Comment: Several commenters objected to the requirement that the

institution reimburse its revolving fund for any money lost to its fund

that otherwise would have been paid by the borrower if the borrower had

not received one of the repayment incentive discounts described in this

section. The commenters felt that the Secretary should pay for

incentive repayment discounts or that the revolving fund should absorb

the cost of any incentive repayment that an institution may extend to

its borrowers.

Discussion: The 1998 Amendments prohibit an institution from using

Federal funds, including Federal funds from an institution's revolving

fund, or institutional funds from the revolving fund to pay for any

repayment incentive.

Changes: None.

Comment: One commenter, while supporting repayment incentives in

general, believed that the regulations should allow an institution to

factor in administrative savings in reimbursing its revolving fund for

any money lost due to incentive repayment discounts that otherwise

would have been paid by the borrower. The commenter felt that the

purpose of repayment incentives is to encourage prompt repayments

without increasing, and perhaps even lowering, the administrative costs

to the revolving fund.

Discussion: We appreciate the commenter's desire to reflect the

administrative savings generated by borrowers who pay the loan in full

prior to the end of the repayment period or who make regular

consecutive payments for 48 months, thereby offsetting an institution's

required reimbursement of money lost to its revolving fund. However, we

believe it would take a statutory change to reflect those savings in

the regulations.

Changes: None.

Comment: One commenter felt that offering repayment incentives to

borrowers who repay their loans in a timely fashion does nothing to

help needy borrowers, the intended beneficiaries of the Federal Perkins

Loan program, who may be struggling to repay their loans.

Discussion: While we appreciate the concerns expressed by the

commenter regarding borrowers who may be struggling to repay their

Federal Perkins Loan, the provision allowing institutions to offer

incentive repayment discounts to borrowers who repay their loans timely

is statutory and voluntary on the institution's part. Additionally, we

believe that incentives encourage borrowers to repay in full, or to

begin or maintain repayment on a regular basis, thereby replenishing an

institution's revolving fund and making more money available to the

needy individuals for whom Federal Perkins Loans are intended.

Changes: None.

Section 674.34 Deferment of repayment--Federal Perkins loans, National

Direct Student loans and Defense loans

Comment: One commenter suggested that the final regulations be

revised to extend the Federal Perkins Loan program deferments contained

in statute prior to July 1, 1993 to borrowers who are currently

eligible only for the deferments contained in section 464(c)(2)(A) of

the HEA. The commenter believed that making this change would simplify

the deferment process for borrowers and institutions and reduce the

amount of paperwork that the deferment process requires.

Discussion: We are sympathetic to the commenter's suggestion.

However, we are unable to revise the regulations to expand the

deferments available to Federal Perkins Loan borrowers because it is

beyond the scope of the 1998 Amendments change to the HEA and would

require additional statutory change.

Changes: None.

Section 674.39 Loan Rehabilitation

Comment: We received many comments on the new loan rehabilitation

provisions in this section. Many commenters questioned aspects of loan

rehabilitation that are required by statute. Other commenters asked

only for clarification regarding the rehabilitation process without

objecting to or requesting revisions to the regulations.

Discussion: We cannot address requests for revisions to the

proposed regulations that are inconsistent with

[[Page 58303]]

the statute. We believe it is helpful to review the aspects of loan

rehabilitation in the Perkins Loan Program that relate to borrower

benefits and institutional responsibilities that are required by law,

and therefore cannot be changed.

Under the 1998 Amendments, a defaulted loan is considered

rehabilitated if ``the borrower of a loan made under this part who has

defaulted on the loan'' makes the required 12 payments. Accordingly,

loan rehabilitation is available to all defaulted borrowers with a loan

made under the Federal Perkins Loan Program. If a borrower requests

loan rehabilitation, the institution or its servicer must allow the

borrower to rehabilitate his or her loan. This also applies to

defaulted loans that an institution has placed with a collection

agency. However, the borrower may only rehabilitate a defaulted loan

once. Because the statute specifically refers to a stream of 12

payments as determined by the institution, the institution must work

with the borrower to determine a payment amount that is appropriate.

The statute does not require a signed rehabilitation agreement.

In accordance with the 1998 Amendments, once the loan is

rehabilitated (after the 12th payment has been made), the institution

or its servicer must request that any credit bureau to which the

defaulted loan was reported remove the default from the borrower's

credit history. The borrower is brought current and is no longer

considered to be delinquent or in default. Removing the default is

consistent with the requirements of the Fair Credit Reporting Act

(FCRA), which requires that an institution correct and update the

information it furnishes to a credit reporting agency. In this case,

the institution would be updating the borrower's credit history to

reflect the rehabilitation of the loan. The FCRA also requires credit

reporting agencies to have reasonable procedures in place to accept

updated or corrected information.

Once the loan is rehabilitated, the borrower is subject to the

terms, conditions, benefits and privileges of the borrower's original

promissory note. This includes eligibility for deferments, forbearance,

cancellations, and flexible repayment options. The borrower is also

subject to the same responsibilities under the note, which include, but

are not limited to, making regular payments and informing the school or

servicer of an address change or the need for flexible repayment

arrangements. We sum up this status by saying the borrower is returned

to regular repayment status in Sec. 674.39(b)(1) of the regulations.

Finally, in accordance with the 1998 Amendments, a borrower who has

rehabilitated his or her loan re-establishes eligibility for Title IV

student financial assistance, as long as the borrower is otherwise

eligible.

Changes: None.

Comment: One commenter requested clarification regarding when an

institution must notify a defaulted borrower of the option and

consequences of rehabilitating the loan. The commenter also asked us to

specifically state what the consequences of loan rehabilitation are in

the Federal Perkins Loan Program.

Discussion: An institution has several opportunities under the

requirements in Subpart C-Due Diligence of the Federal Perkins Loan

Program to notify a defaulted borrower of his or her option to

rehabilitate. We will not regulate prescriptively in this area and will

leave the timing of that notification to the institution. Clearly,

however, once a borrower has begun to miss payments, the billing

procedures in Sec. 674.43 require an institution to contact the

borrower to demand payment. A notification of the option and the

consequences of loan rehabilitation can be included as part of any or

all of these payment demands. We believe that this notification should

be made no later than the final demand for payment required by

Sec. 674.43(d). Further, notification regarding the option and

consequences of loan rehabilitation should also be provided during the

more intensive efforts an institution, or its servicer, makes to

recover amounts owed on a defaulted loan under Sec. 674.45. Regardless

of the timing of the notification and regardless of whether the

institution is servicing the loan or a billing or collection agency is

servicing the loan, the borrower may request rehabilitation of his or

her defaulted loan at any time. Additionally, although the proposed

regulations require that an institution notify only a defaulted

borrower, institutions are encouraged to include information regarding

loan rehabilitation as part of the disclosures regarding the definition

and consequences of default required when making and disbursing a loan

under Sec. 674.16(a)(1)(x) and when conducting exit counseling under

Sec. 674.42(b)(2)(v).

The consequences of rehabilitating a defaulted loan of which the

borrower should be advised include returning the borrower to regular

repayment status, treating the first payment made under the twelve

consecutive payments as the first payment in a new repayment period of

up to 10 years, instructing any credit bureau to which the default was

reported to remove the default from the borrower's credit history, and

the re-establishment of the borrower's eligibility for Title IV student

financial assistance, provided that the borrower is otherwise eligible.

Changes: None.

Comment: Several commenters requested clarification regarding

whether or not a borrower must request loan rehabilitation. One

commenter suggested that we revise the regulations to require that the

borrower contact the institution prior to the first of the twelve

payments so that the institution can work with the borrower to assure

their successful rehabilitation.

Discussion: We agree that a borrower must notify the institution of

his or her desire to rehabilitate a defaulted loan and believe this is

implicitly stated in the regulations in describing rehabilitation as

the making of 12 consecutive on-time, consecutive, monthly payments

``as determined by the institution.'' However, in order to avoid

confusion and add clarity to this section, we have amended the

regulations to require a request from the borrower. We note, however,

that we are not specifying that the borrower's request be written nor

that the borrower's request precede the 12 consecutive on-time, monthly

payments.

Changes: We are adding the phrase ``and the borrower requests

rehabilitation,'' to Sec. 674.39(a)(2).

Comment: One commenter requested clarification regarding whether a

revised repayment schedule is required for a rehabilitated loan.

Discussion: We will not specify in regulations that an institution

must prepare a revised repayment agreement for a rehabilitated

borrower. However, institutions are required under Sec. 674.39(b)(2) to

treat the first payment made under the 12 consecutive payments as the

first payment under a new repayment period of up to 10 years. Servicing

a rehabilitated loan in a manner consistent with program regulations

would appear to necessitate a revised repayment agreement to ensure a

borrower's successful repayment. We believe that a new revised

repayment agreement is probably in the best interests of both the

school and the borrower.

Changes: None.

Comment: One commenter requested clarification regarding when an

institution may begin counting payments made by a borrower toward the

rehabilitation of the borrower's defaulted loan. The commenter asked if

only payments made on or after the

[[Page 58304]]

effective date of the final regulations (July 1, 2000) may be counted

toward the 12 payments the borrower is required to make in order to

rehabilitate a defaulted loan or if payments made before the effective

date of the final regulations may be counted toward the rehabilitation.

Discussion: An institution may count payments made before July 1,

2000, toward the 12 on-time, monthly payments the borrower must make to

rehabilitate a defaulted Federal Perkins Loan as long as at least one

of the 12 payments is made on or after the July 1, 2000, effective date

of the final regulations.

Changes: None.

Comment: One commenter recommended that we revise the regulations

to prohibit a borrower from rehabilitating a defaulted Federal Perkins

Loan on which a judgment has been rendered because the judgment has

taken the place of the original promissory note as the debt instrument.

Discussion: We disagree that the regulations should be revised to

prohibit borrowers from rehabilitating a defaulted loan on which a

judgment has been rendered. We interpret section 464(h) of the HEA to

require that a rehabilitation program must be available to all

defaulted borrowers even if the institution has secured a judgment

against the borrower. This is consistent with the statutory

interpretation of loan rehabilitation in both the FFEL and Federal

Direct Loan Programs. However, we share the commenter's concern that

the promissory note already signed by the borrower in these cases no

longer embodies that borrower's obligations with respect to the debt.

Therefore, the borrower of a defaulted loan on which a judgment has

been entered must sign a new promissory note that incorporates

outstanding principal after making the 12 on-time, consecutive, monthly

payments required by rehabilitation. In addition to the amount of the

new promissory note, the borrower is responsible for interest and late

charges that accrued while the borrower was in default. The borrower is

also subject to the same 24 percent limit on collection costs once the

loan has been rehabilitated.

Changes: We have amended Sec. 674.39 by adding a new paragraph

(a)(3) to require a defaulted borrower to sign a new promissory note if

the institution has a judgment against the borrower.

Comment: Several commenters objected to extending a new ten-year

repayment period to rehabilitated borrowers because it would delay the

replenishment of the institution's revolving fund and is inequitable to

other Federal Perkins Loan borrowers. One commenter recommended that a

borrower be required to repay the outstanding balance on a

rehabilitated loan in the remaining time left in the borrower's

original ten-year repayment period. Further, this commenter felt that

if the borrower's original ten-year repayment period had elapsed, the

borrower should be required to repay the defaulted loan in full in the

twelve payments that constitute rehabilitation.

Discussion: The point of rehabilitation is to return the borrower

to regular repayment on a defaulted loan to ensure successful payment

in full. We do not believe that rehabilitating a borrower's loan only

to encourage redefault by establishing an unreasonable repayment

schedule is within the intent of the rehabilitation program. Further, a

successful post-rehabilitation payment returns money to an

institution's revolving fund and reduces costs associated with default

collections. The extension of a new repayment period of up to 10 years,

which assumes minimum monthly payments in some cases, is also

consistent with the rehabilitation provisions in the Federal Family

Education Loan and the Federal Direct Loan Programs.

Changes: None.

Comment: One commenter asked whether an institution may shorten a

rehabilitated borrower's repayment period by requiring a minimum

monthly payment.

Discussion: An institution may require a borrower to pay a minimum

monthly payment on a rehabilitated loan only if the institution

required a minimum monthly payment under the borrower's original

promissory note and the payment amount due on the rehabilitated loan is

less than the minimum monthly payment. This does not preclude the

borrower and the institution from agreeing to a monthly repayment

amount on a rehabilitated loan that repays the loan in less than 10

years if the institution did not exercise the minimum monthly payment

option in the original note. As stated earlier, a new repayment period

of up to 10 years, assuming a minimum monthly payment in some cases, is

extended to a rehabilitated borrower to ensure that the borrower

successfully rehabilitates the loan.

Changes: None.

Comment: One commenter supported the provision returning the

benefits and privileges of the original promissory note to the

rehabilitated borrower, but believed that the regulations should

reflect the borrower's eligibility only for the remaining balance of

those privileges under the statutory maximums contained in the HEA. For

example, if a borrower had received one year of forbearance before

rehabilitating the loan, the borrower would be eligible for only two

years of forbearance after rehabilitation.

Discussion: We agree that the borrower is eligible only for the

statutory maximums on benefits available under the original promissory

note and that language reflecting this change would improve the clarity

of the regulations.

Changes: Section 674.39(d) has been changed to specify that the

borrower regains eligibility for the balance of benefits and privileges

available under the original promissory note.

Comment: Several commenters requested clarification regarding

whether an institution must require the return of a rehabilitated loan

from a collection agency after receipt of the required 12 consecutive

monthly payment amounts.

One commenter, noting the borrower's return to regular repayment

status, the return of all of the benefits and privileges of the

original promissory note, and the borrower's ability to request

flexible repayment options, stated that collection agencies typically

focus only on collecting the total amount of any debt placed with it

and not on servicing loans in regular repayment status. The commenter

stated that the return of these benefits would suggest the return of

the account to the institution.

Discussion: The issue of whether a loan may remain with a

collection agency after rehabilitation was discussed during negotiated

rulemaking. Committee II reached consensus on the rehabilitation

provisions in this section with the understanding that an institution

may allow a rehabilitated loan to remain with a collection agency.

The institution is responsible for insuring that any third party

servicer with which it contracts is in compliance with required

statutory and regulatory program requirements, which would include the

requirements of rehabilitation in the Federal Perkins Loan program. If

the institution chooses to leave the rehabilitated account with a

collection agency, the collection agency must provide the rehabilitated

borrower with all of the benefits associated with loan rehabilitation

and required by this section. An institution may leave a rehabilitated

loan with a collection agency only if that agency is capable of

providing the following services in a manner consistent with program

regulations:

billing the borrower (Sec. 674.43);

[[Page 58305]]

processing deferment and cancellation requests

(Secs. 674.34, 674.35, 674.36, 674.37, 674.38 and Subpart D-Loan

Cancellation);

providing flexible repayment arrangements in accordance

with the terms of the promissory note (Sec. 674.33);

providing any notice or disclosure required under the

program regulations (Subpart C-Due Diligence); and

providing any other statutory or regulatory benefit to

which the borrower is entitled.

If the collection agency is unable to provide a rehabilitated

borrower with the benefits of rehabilitation, the institution must

remove the account from the agency.

Changes: None.

Comment: Many commenters objected to the provision limiting

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

loan to 24 percent of the unpaid principal and accrued interest.

Several commenters believed that it will be problematic to

renegotiate contracts with collection agencies and that the terms of

collection agency contracts should be flexible and subject only to

negotiation between the school and the collection agency. They believed

that the 24 percent cap on collection costs that can be passed on to a

rehabilitated borrower will limit the number of collection agencies an

institution is able to contract with to those collection agencies that

charge lower rates as opposed to those that are best at recovering

debts, thereby limiting the ability of an institution to maximize the

return of funds to its revolving fund.

Several commenters stated that accounting for collection costs that

are different depending on the type of loan on which they are assessed

is burdensome, confusing and time-consuming. The commenters questioned

why rehabilitated loans should be treated differently than other

Federal Perkins Loans since, under the terms of their promissory notes,

all borrowers are responsible for reasonable collection costs incurred

by an institution in collecting the loan.

Discussion: We disagree that the renegotiation of collection agency

contracts will be problematic and that schools will be limited in their

choice of collection agencies to those that charge lower fees as

opposed of those that are best at collecting debts. We believe that the

marketplace will generate competition among collection agencies and

that collection agencies will adapt their rates and their servicing

practices to those rates and practices required to service

rehabilitated loans. We also believe that a borrower is more likely to

continue paying on his or her loan once the loan is rehabilitated and

that these payments will replenish an institution's revolving fund, not

deplete it.

We further believe that collection costs on a rehabilitated loan

should be reduced once the borrower has successfully rehabilitated a

defaulted loan. A rehabilitated borrower has re-established eligibility

for Title IV student financial assistance, is once again entitled to

all of the benefits and privileges available under the promissory note

and, most importantly, is no longer considered to be in default on the

loan. We believe that to assess collection costs on a loan in good

standing at a rate higher than the 24 percent maximum is excessive.

Lastly, a reduction in the collection costs that can be charged to

a rehabilitated borrower was intensely debated during the negotiated

rulemaking process. Committee II reached consensus on a collection cost

cap of 24 percent. This rate is consistent with the reduction of

collection costs that may be charged to a rehabilitated borrower in the

FFEL and Federal Direct Loan Programs, adjusted to allow for the fact

that collection costs cannot be capitalized in the Federal Perkins Loan

program as they are in the FFEL and Direct Loan programs.

Changes: None.

Comment: Two commenters, while not objecting to the proposed

regulations agreed to by the negotiators that cap the collection costs

that can be charged to a rehabilitated borrower at 24 percent,

expressed concern that the preamble language in the NPRM does not

accurately reflect current Federal policy contained in 34 CFR 30.60 on

assessing collection costs to defaulted borrowers. The commenters

stated that institutions and their servicers would be forced to incur

significant expenses in reprogramming and redesigning current systems

and procedures to comply with a process that required them to calculate

a 24 percent cap on collection costs on the unpaid principal and

accrued interest remaining on the loan at the time it is rehabilitated.

The commenters also expressed concern that the NPRM preamble

language states that payments on a rehabilitated loan cannot be treated

on a ``fee-on-fee,'' basis which is a widely accepted method for

determining collection costs on delinquent debtors. The commenters

expressed confidence, however, that institutions and servicers could

utilize current systems and procedures, along with the fee-on-fee

method of determining collection costs, in such a way as to not exceed

the 24 percent cap on rehabilitated loans.

Conversely, three commenters suggested that the text of the

preamble discussion be included in the final regulations. They believed

that this would provide clarity to the regulations and guard against

the possibility that a rehabilitated borrower would be charged in

excess of the 24 percent cap on collection costs after the loan has

been successfully rehabilitated.

Discussion: The preamble language contained in the NPRM accurately

describes the basis on which consensus was reached on the 24 percent

cap on collection costs that may be charged on a rehabilitated Federal

Perkins Loan. Default-related collection costs of up to 18.5 percent

are passed along to the borrower of a rehabilitated FFEL or Federal

Direct Loan, are capitalized, and become part of the rehabilitated

principal on which interest accrues after rehabilitation. As a result,

an FFEL or Federal Direct Loan borrower ultimately pays post-

rehabilitation collection costs of approximately 24 percent over the

remaining life of the loan. In order to treat rehabilitated borrowers

consistently across the Title IV loan programs, the negotiators agreed

to a generally comparable 24 percent cap on collection costs on a

rehabilitated Federal Perkins Loan, acknowledging that because

collection costs in the Federal Perkins Loan Program cannot be

capitalized they must be treated as a separate cost. The use of current

Federal policy contained in 34 CFR 30.60 when assessing collection

costs on a rehabilitated Federal Perkins loan was not specifically

discussed. However, several negotiators were very concerned that the 24

percent cap on collection costs on a rehabilitated Federal Perkins loan

would be exceeded depending on how the payments from the borrower were

applied.

An institution, or its servicer, charges a commission on each

payment the borrower makes on a defaulted loan using the formula in 34

CFR 30.60(a)(1). The formula does not take into account interest that

continues to accrue on the outstanding balance of a defaulted loan as

it is paid down. However, because a rehabilitated loan is no longer

considered to be in default, interest must be a factor when applying

payments to a rehabilitated loan. Therefore, if an institution or its

servicer uses the formula contained in 34 CFR 30.60, it must ensure

that when the commissions retained on payments received from the

borrower on a rehabilitated loan reach an amount equal to 24 percent of

the original principal and accrued interest that

[[Page 58306]]

remained on the loan after the borrower made the 12 payments, no more

costs may be calculated or assessed against the borrower.

We agree that clarifying the regulations to guard against the

possibility that a rehabilitated borrower will be charged collection

costs in excess of the 24 percent cap is appropriate. An institution,

or its servicer, must consider the interest that accrues on the

outstanding balance of the rehabilitated loan over the length of the

post-rehabilitation repayment period to ensure that collection costs of

no more than 24 percent of the unpaid principal and accrued interest as

of the date following application of the twelfth payment are paid by

the borrower.

Changes: Section 674.39(c)(1) has been changed to specify that

collection costs, if charged to the borrower, may not exceed 24 percent

of the unpaid principal and accrued interest as of the date following

application of the twelfth payment.

Comment: One commenter believed that the regulations should be

revised to allow an institution to charge collection costs not paid by

the borrower on a rehabilitated loan to its revolving fund if the

borrower subsequently redefaults.

Discussion: We disagree that the regulations should be revised to

allow an institution to charge its revolving fund for collection costs

not paid by the borrower if the borrower subsequently redefaults. If

the borrower redefaults on a rehabilitated loan, the borrower would be

responsible for paying any reasonable collection costs incurred by the

institution in attempting to collect the debt. We would note that if a

rehabilitated loan is being serviced by a collection agency,

Sec. 674.48(e) of the Federal Perkins Loan Program regulations requires

an institution to recall the loan and place it with a different

collection agency if the loan redefaults. Section 674.48(b) prohibits

an institution from using a billing service (which are the duties

assumed by the collection agency upon the successful rehabilitation of

a loan) and a collection agency that is owned or controlled by the same

entity.

Changes: None.

Section 674.41 Due Diligence--General requirements

Comment: Several commenters objected to the requirement that, as

part of an institution's general due diligence activities, it provide

the borrower with information on the availability of the Student Loan

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

writing and the institution does not resolve the dispute. The

commenters felt there was no need for a Student Loan Ombudsman's

office, that it would be an unnecessary expense and that it would be a

bureaucratic intrusion between the institution and the borrower. We

received similar objections to the addition of language in Secs. 674.42

and 674.45 that requires an institution to inform borrower's of the

availability of the Student Loan Ombudsman's office.

Discussion: The 1998 Amendments require the Department of Education

to appoint a Student Loan Ombudsman who must receive, review and

attempt to resolve informally complaints from borrowers regarding the

terms of their loans. Although there is no specific statutory

requirement that institutions or other loan participants disseminate

information regarding the availability of the Student Loan Ombudsman to

borrowers, the negotiators for Committees I and II agreed that as our

partners in student loan administration, it made sense for loan

participants, as well as the Department, to provide borrowers with

information on the Student Loan Ombudsman's office. The negotiators

agreed that adding a provision on the availability of this service to

Sec. 674.41, as well as to Secs. 674.42 and 674.45, will increase

borrower awareness and greatly enhance successful repayment of student

loans and reduce defaults.

Changes: None

Comment: Several commenters expressed concern that the proposed

regulations did not address what kind of information an institution

must provide to borrowers when complying with the requirement to inform

them about the availability of the Student Loan Ombudsman's office. One

commenter felt that the proposed regulations should be revised to

require institutions to provide the borrower with information on the

availability of the Student Loan Ombudsman's office only as that

information is provided to institutions by the Secretary.

Discussion: The proposed regulations require that an institution

provide the borrower with information about the availability of the

Student Loan Ombudsman's office. This information is meant to convey to

the borrower that, if the borrower is unable to resolve a dispute with

the loan holder, another avenue of redress is available. An institution

may comply with this requirement by providing the borrower with the

Ombudsman's website address or mailing address at the Department of

Education. The Student Loan Ombudsman's website address is http://

www.sfahelp.ed.gov.

Changes: None.

Section 674.42 Contact with the borrower

Comment: One commenter applauded our initiative to allow for loan

counseling through interactive electronic means but objected to the

requirement that the institution obtain through return receipt or some

other mechanism documentation that the student received and completed

the materials when electronic exit counseling is used. The commenter

believed that obtaining return receipt that the student received and

completed electronic exit counseling was too high a standard of

compliance for institutions to meet and suggested that we adopt the

receipt standards of the U.S. Postal Service, which are that if mail is

not returned to the sender, it can be considered delivered.

Discussion: We disagree that obtaining documentation that the

borrower has received and completed exit counseling, either through

return receipt or some other mechanism, is too high a standard to

require when an institution provides exit counseling electronically.

Institutions were previously required to provide exit counseling to

their borrowers either in person or in a group to ensure that borrowers

received and completed exit counseling. We believe that providing exit

counseling electronically should be viewed as comparable to providing

in person counseling and should provide the same assurances.

The standards of the U.S. Postal service provide that if mail is

not returned to the sender, it can be considered delivered. Because

there is currently no similar standard for electronic mail, we believe

that it is in the best interest of borrowers to require an institution

to take reasonable steps to ensure that each student borrower receives

the counseling materials and participates in and completes interactive

electronic exit counseling given the current available technology.

Changes: None.

Comment: One commenter supported the requirement that an

institution provide a borrower with an explanation of any options the

borrower might have to consolidate or refinance his or her loan during

exit counseling. However, the commenter suggested that we require

institutions to inform Federal Perkins Loan borrowers that the interest

rate on a consolidation loan may be higher than the 5 percent interest

rate on their Federal Perkins loan.

Discussion: Because Federal Perkins loan borrowers lose eligibility

for cancellation benefits and are charged a different rate of interest

upon

[[Page 58307]]

consolidating their Perkins loans, we agree that disclosing the

consequences of consolidating a Federal Perkins loan will help

borrowers make an informed decision.

Change: Section 674.42(b)(2)(ii) has been amended to require an

institution to inform borrowers about the consequences of consolidating

a Federal Perkins Loan.

Comment: One commenter stated that the provision requiring schools

to provide borrowers with ``additional matters that the Secretary

recommends that a school include in the exit counseling or materials

set forth in Appendix D to 34 CFR 668'' be deleted. The commenter

believes that such a requirement is unnecessary especially given the

elimination of default reduction plans in the Federal Perkins Loan

Program.

Discussion: We disagree that this provision should be deleted.

Including additional information recommended by the Secretary or

materials in Appendix D in exit counseling is an option, not a

requirement. We believe that Appendix D is a useful resource to

institutions when counseling borrowers on default avoidance.

Changes: None.

Section 674.47 Costs chargeable to the fund

Comment: One commenter expressed concern that institutions may be

unable to renegotiate collection agency contracts by July 1, 2002 that

comply with the requirement that no more than 24 percent of the unpaid

principal and accrued interest remaining on the loan at the time the

loan is rehabilitated can be assessed a borrower in collection costs.

The commenter requested that we include an explicit commitment in the

preamble of the final regulations to revisit this issue if the majority

of institutions are unable to renegotiate contracts to account for the

24 percent collection costs cap.

Discussion: We believe that because this will be a general program

requirement, the market will expand to meet institutional needs.

Further, we believe it is inappropriate for us to commit to a

regulatory change outside of the negotiated rulemaking process required

by the 1998 Amendments. However, we will carefully consider this

provision in the future as part of our ongoing regulatory review.

Changes: None.

Section 674.49 Bankruptcy of borrower

Comment: One commenter submitted a detailed analysis of Sec. 674.49

and suggested substantive changes to this section of the regulations.

These suggested changes included eliminating paragraph (b), which

requires an institution to file a proof of claim in a bankruptcy;

eliminating paragraph (e), which outlines an institution's

responsibilities when a borrower files a Chapter 13 bankruptcy; and,

clarifying paragraph (g)(1)(i), which deals with termination of

collection and write-off of the loan under certain circumstances.

Discussion: We appreciate the analysis of Sec. 674.49 submitted by

the commenter. However, we did not propose to amend this section other

than to:

Reflect the change to the bankruptcy code that eliminates

a borrower's ability to discharge a loan in bankruptcy on the basis of

the loan being in repayment for more than seven years, and require all

borrowers who seek discharge of a Perkins loan to prove undue hardship;

Clarify that the seven year repayment period on

bankruptcies filed before October 8, 1998, excludes applicable

suspensions of the repayment period; and

Insert language stating that the institution must use

diligence and may assert any defense consistent with its status under

applicable law to avoid the discharge of the loan.

While this section may undoubtedly deserve closer scrutiny, we do

not believe it is appropriate to make the changes suggested by the

commenter outside of the negotiating rulemaking process.

Changes: None.

Comment: One commenter suggested that we delete Sec. 674.49(4)(i),

which requires an institution to monitor the borrower's compliance with

the requirements of a Chapter 13 repayment plan, and to take certain

steps if the borrower has not made payments or has requested a hardship

discharge on the debt. The commenter asserted that the institution has

no legal grounds to monitor the borrower unless the institution

appoints a trustee.

Discussion: The code expressly directs that a trustee be appointed

for every Chapter 13 proceeding and authorizes any ``party in

interest'' or ``creditors'' to move for any of a number of reasons to

have a Chapter 13 proceeding dismissed or converted to a Chapter 7, 11

U.S.C. 1302, 1307(c). Because the comment has no basis in the law, we

disagree with the commenter's suggestion that we delete this paragraph

from the regulations. The proposed changes to this paragraph reflect

only the deletion of language that referred to loans held by an

institution that had been in repayment for more than seven years. We

believe that any further changes in this section of the regulation

should be undertaken only as part of negotiated rulemaking process.

Changes: None.

Comment: One commenter noted an inconsistency between the preamble

discussion on Sec. 674.49(c)(1) and the proposed regulatory language.

Specifically, the preamble states that ``the proposed regulations would

amend this section to `require' institutions to use due diligence and

assert any defense consistent with its status.'' The actual regulatory

language states that ``the institution must use diligence and `may'

assert any defense consistent with its status.'' The commenter

requested that we correct the preamble in the NPRM.

Discussion: Any inconsistency between the preamble and the proposed

regulatory language was not intended. Recently, some State institutions

have responded to undue hardship complaints by asserting that sovereign

immunity barred relief on these claims in bankruptcy proceedings. We

intend the proposed amendment to make clear that every institution must

use due diligence to oppose discharge, but that State institutions may

do so--if they wish--by asserting sovereign immunity as a defense to an

undue hardship complaint. Unfortunately, some courts misconstrue

Department regulations to bar State institutions from asserting

sovereign immunity in these circumstances. We intend this amendment as

an authoritative explanation of the meaning of the Federal Perkins Loan

regulations and Program Participation Agreement on this due diligence

obligation.

Changes: None.

Section 674.54 Teacher cancellation--Federal Perkins loans and Direct

loans made before July 23, 1992

Comment: One commenter suggested that we consider removing and

reserving Sec. 674.54 of the Federal Perkins Loan Program regulations

because it is redundant with Sec. 674.53. (Section 674.54 authorizes

teaching cancellation benefits for Federal Perkins Loans and Direct

Loans made before July 23, 1992. All borrowers with loans made before

July 23, 1992 are eligible for all of the cancellation provisions

contained in Sec. 674.53.)

Discussion: We agree that Sec. 674.54 is redundant and should be

removed and reserved. We note that borrowers who teach handicapped

students and receive cancellation benefits under Sec. 674.54(b) remain

eligible for cancellation under Sec. 674.53(b)--Full time teaching in

special education.

Changes: Section 674.54 is removed and reserved.

[[Page 58308]]

Executive Order 12866

We have reviewed these final regulations in accordance with

Executive Order 12866. Under the terms of the 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 to

be 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 justify the costs.

We have also determined that this regulatory action does not unduly

interfere with State, local, and tribal governments in the exercise of

their governmental functions.

Paperwork Reduction Act of 1995

The Paperwork Reduction Act of the 1995 does not require you to

respond to a collection of information unless it displays a valid OMB

control number. We display the valid OMB control numbers assigned to

the collections of information in these final regulations at the end of

the affected sections of the regulations.

Intergovernmental Review

This program is subject to the requirements of Executive Order

12372 and the regulations in 34 CFR part 79. The objective of the

Executive Order is to foster an intergovernmental partnership and a

strengthened federalism by relying on processes developed by State and

local governments for coordination and review of proposed Federal

financial assistance.

In accordance with the order, we intend this document to provide

early notification of the Department's specific plans and actions for

this program.

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 review this document in text or Adobe Portable Document

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

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

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

http://ifap.ed.gov/csb__html/fedlreg.htm

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, D.C., area at (202) 512-1530.

Note: The official version of this document is the document

published in the Federal Register. Free Internet access to the

official edition of the Federal Register and the Code of Federal

Regulations is available on GPO Access at:

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

(Catalog of Federal Domestic Assistance Number: 84.037 Federal

Perkins Loan Program)

List of Subjects in 34 CFR Part 674

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

requirements.

Dated: October 20, 1999.

Richard W. Riley,

Secretary of Education.

PART 674--FEDERAL PERKINS LOAN PROGRAM

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

follows:

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

otherwise noted.

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

definition of ``satisfactory repayment arrangement,'' to read as

follows:

Sec. 674.2 Definitions.

* * * * *

(b) * * *

Satisfactory repayment arrangement: For purposes of regaining

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

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

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

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

renewed eligibility once on a defaulted loan.

* * * * *

3. Section 674.5 is amended as follows:

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

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

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

as paragraph (b)(2).

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

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

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

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

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

Sec. 674.5 Federal Perkins Loan Program cohort default rate and

penalties.

(a) * * *

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

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

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

years, an institution with a cohort default rate that equals or exceeds

50 percent for each of the three most recent years for which cohort

default rate data are available is ineligible to participate in the

Federal Perkins Loan Program. Following a review of that data and upon

notification by the Secretary, an institution is ineligible to

participate for the award year, or the remainder of the award year, in

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

institution may appeal a notification of ineligibility from the

Secretary within 30 days of its receipt.

(i) Appeal procedures.

(A) Inaccurate calculation. An institution may appeal a notice of

ineligibility based upon the submission of erroneous data by the

institution, the correction of which would result in a recalculation

that reduces the institution's cohort default rate to below 50 percent

for any of the three award years used to make a determination of

ineligibility. The Secretary considers the edit process, by which an

institution adjusts the cohort default rate data that it submits to the

Secretary on its Fiscal Operations Report, to constitute the procedure

to appeal a determination of ineligibility based on a claim of

erroneous data.

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

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

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

the Secretary to make a determination of ineligibility.

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

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

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

in the program

[[Page 58309]]

until the Secretary issues a decision on the institution's appeal.

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

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

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

the appeal, the institution must--

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

distribution of the liquid assets of the Fund according to section

466(c) of the HEA; and

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

the Secretary in accordance with Sec. 674.50.

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

section are effective with the cohort default rate calculated as of

June 30, 2001.

* * * * *

(c) * * *

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

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

has--

(A) Voluntarily made six consecutive monthly payments;

(B) Voluntarily made all payments currently due;

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

and collection costs that have accrued on the loan;

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

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

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

due.

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

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

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

(B) Discharged in bankruptcy;

(C) Discharged due to a closed school; or

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

Sec. 674(h).

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

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

judgment are not considered voluntary.

* * * * *

Sec. 674.9 [Removed and Reserved]

4. Section 674.6 is removed and reserved.

Sec. 674.7 [Removed and Reserved]

5. Section 674.7 is removed and reserved.

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

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

Sec. 674.9 Student eligibility.

* * * * *

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

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

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

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

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

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

payments made pursuant to a judgment; and

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

tax refund offset, garnishment, income or asset execution, or pursuant

to a judgment.

* * * * *

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

(d) to read as follows:

Sec. 674.12 Loan maximums.

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

Loans an eligible student may borrow is--

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

undergraduate education; and

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

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

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

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

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

the degree;

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

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

* * * * *

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

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

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

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

of the HEA at any institution.

* * * * *

8. Section 674.16 is amended by revising paragraph (i) and the

Office of Management and Budget control number to read as follows:

Sec. 674.16 Making and disbursing loans.

* * * * *

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

bureau--

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

(ii) Information concerning the repayment and collection of the

loan until the loan is paid in full; and

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

reason.

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

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

information was previously reported.

(Approved by the Office of Management and Budget under control

number 1845-0019)

* * * * *

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

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

(b)(2)(i)(C); by revising paragraph (b)(10)(i); and by revising the

Office of Management and Budget control number to read as follows:

Sec. 674.31 Promissory note.

* * * * *

(b) * * *

(2) * * *

(i) * * *

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

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

referenced in paragraph (b)(2)(i) of this section exclude any period

during which a borrower who is a member of a reserve component of the

Armed Forces named in section 10101 of Title 10, United States Code is

called or ordered to active duty for a period of more than 30 days. Any

single excluded period may not exceed three years and includes the time

necessary for the borrower to resume enrollment at the next available

regular enrollment period. Any Direct or Perkins loan borrower who is

in a grace period when called or ordered to active duty as specified in

this paragraph is entitled to a new 6- or 9-month grace period upon

completion of the excluded period.

* * * * *

(10) * * *

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

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

relevant information.

* * * * *

(Approved by the Office of Management and Budget under control

number 1845-0019)

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

and by revising the Office of Management and Budget Control number to

read as follows:

Sec. 674.33 Repayment.

* * * * *

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

the following repayment incentives:

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

a loan on

[[Page 58310]]

which the borrower has made 48 consecutive, monthly repayments.

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

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

repayment period.

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

institution determines will reduce defaults and replenish its Fund.

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

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

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

result of establishing a repayment incentive under paragraphs

(f)(1)(i), (ii) and (iii) of this section.

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

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

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

section.

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

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

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

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

school at which the borrower was enrolled closed.

(ii) For the purposes of this section--

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

provide educational instruction in all programs, as determined by the

Secretary;

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

branch of the main campus; and

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

loan.

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

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

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

loan.

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

borrower for reimbursement of amounts paid voluntarily or through

enforced collection on the loan.

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

section is not considered to have been in default on the loan after

discharge, and such a borrower is eligible to receive assistance under

programs authorized by title IV of the HEA.

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

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

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

(3) Determination of borrower qualification for discharge by the

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

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

Secretary determines that--

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

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

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

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

Secretary lacked the statutory authority to discharge the loan; or

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

borrower qualifies for a discharge.

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

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

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

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

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

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

the statement the borrower must--

(i) State that the borrower--

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

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

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

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

(or longer in exceptional circumstances); and

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

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

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

transferring academic credit earned at the closed school to another

school, or by any other comparable means;

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

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

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

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

loan obligation; and

(iii) State that the borrower--

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

documentation reasonably available to the borrower that demonstrates

that the borrower meets the qualifications for discharge under this

section; and

(B) Agrees to cooperate with the Secretary in enforcement actions

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

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

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

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

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

administrative tribunal of competent jurisdiction, is ineligible for a

discharge under this section.

(6) Cooperation by borrower in enforcement actions.

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

must cooperate with the Secretary in any judicial or administrative

proceeding brought by the Secretary to recover amounts discharged or to

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

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

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

customarily provided in litigation to reimburse witnesses, the borrower

must--

(A) Provide testimony regarding any representation made by the

borrower to support a request for discharge;

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

respect to those representations; and

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

regarding those documents and representations.

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

discharge of a borrower who--

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

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

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

not support the material representations made by the borrower to obtain

the discharge.

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

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

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

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

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

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

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

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

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

that represents funds received from a private party.

(ii) The provisions of this section apply notwithstanding any

provision of State law that would otherwise restrict transfer of those

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

those rights, or establish

[[Page 58311]]

procedures or a scheme of distribution that would prejudice the

Secretary's ability to recover on those rights.

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

right to pursue legal and equitable relief regarding disputes arising

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

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

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

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

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

prior to the closure date.

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

loan mails the borrower a discharge application and an explanation of

the qualifications and procedures for obtaining a discharge. The holder

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

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

receive borrower payments.

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

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

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

discharge under this section by consulting with representatives of the

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

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

school accrediting agency, and other appropriate parties. If the

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

the borrower a discharge application and explanation and suspends

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

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

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

and determine the borrower's potential eligibility for a discharge

under this section by taking steps required to locate the borrower

under Sec. 674.44.

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

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

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

holder of the loan resumes collection and grants forbearance of

principal and interest for the period during which collection activity

was suspended.

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

requests a discharge meets the qualifications for a discharge, the

holder of the loan notifies the borrower in writing of that

determination.

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

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

qualifications for a discharge, the Secretary notifies that borrower,

in writing, of that determination and the reasons for the

determination.

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

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

qualifications for discharge, the school submits that determination and

all supporting materials to the Secretary for approval. The Secretary

reviews the materials, makes an independent determination, and notifies

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

determination.

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

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

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

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

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

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

collection costs the borrower paid on a loan discharged under this

section.

* * * * *

(Approved by the Office of Management and Budget under control

number 1845-0019)

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

revising paragraphs (a) and (c); and adding the Office of Management

and Budget control number to read as follows:

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

loans and Defense loans.

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

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

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

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

section.

* * * * *

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

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

for any period during which the borrower is engaged in service

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

674.59, and 674.60.

* * * * *

(Approved by the Office of Management and Budget under control

number 1845-0019)

12. Section 674.39 is revised to read as follows:

Sec. 674.39 Loan rehabilitation.

(a) Each institution must establish a loan rehabilitation program

for all borrowers for the purpose of rehabilitating defaulted loans

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

must provide that--

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

of rehabilitating a loan; and

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

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

twelve consecutive months and the borrower requests rehabilitation; and

(3) A borrower who wishes to rehabilitate a loan on which a

judgment has been entered must sign a new promissory note after

rehabilitating the loan.

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

consecutive, monthly payment, the institution must--

(1) Return the borrower to regular repayment status;

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

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

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

remove the default from the borrower's credit history.

(c) Collection costs on a rehabilitated loan--

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

unpaid principal and accrued interest as of the date following

application of the twelfth payment; and

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

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

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

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

repayment status, the borrower regains the balance of the benefits and

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

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

from offering the borrower flexible repayment options following the

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

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

(Approved by the Office of Management and Budget under control

number 1845-0019)

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

by

[[Page 58312]]

adding the Office of Management and Budget control number to read as

follows:

Sec. 674.41 Due diligence--general requirements.

(a) * * *

* * * * *

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

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

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

dispute.

* * * * *

(Approved by the Office of Management and Budget under control

number 1845-0023).

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

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

revising the Office of Management and Budget control number to read as

follows:

Sec. 674.42 Contact with the borrower.

(a) Disclosure of repayment information. The institution must

disclose the following information in a written statement provided to

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

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

borrower enters the repayment period without the institution's

knowledge, the institution must provide the required disclosures to the

borrower in writing immediately upon discovering that the borrower has

entered the repayment period. The institution must disclose the

following information:

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

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

whom communications should be sent.

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

sent.

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

the repayment period is scheduled to begin.

(4) The stated interest rate on the loan.

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

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

number, amount, and frequency of required payments.

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

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

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

any time without penalty.

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

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

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

consequence of default, such as liability for expenses reasonably

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

the loan.

(9) The total interest charges which the borrower will pay on the

loan pursuant to the projected repayment schedule.

(10) A copy of the borrower's signed promissory note.

(b) Exit interview. (1) An institution must conduct exit counseling

with each borrower either in person, by audiovisual presentation, or by

interactive electronic means. The institution must conduct this

counseling shortly before the borrower ceases at least half-time study

at the institution. As an alternative, in the case of a student

enrolled in a correspondence program or a study-abroad program that the

school approves for credit, the school may provide written counseling

materials by mail within 30 days after the borrower completes the

program. If the borrower withdraws from school without the school's

prior knowledge or fails to complete an exit counseling session as

required, the school must provide exit counseling through either

interactive electronic means or by mailing counseling material to the

borrower at the borrower's last known address within 30 days after

learning that the borrower has withdrawn from school or failed to

complete exit counseling as required.

(2) In conducting the exit counseling, the school must--

(i) Inform the student as to the average anticipated monthly

repayment amount based on the student's indebtedness or on the average

indebtedness of students who have obtained Perkins loans for attendance

at that school or in the borrower's program of study;

(ii) Review for the borrower available repayment options (e.g. loan

consolidation and refinancing, including the consequences of

consolidating a Federal Perkins Loan);

(iii) Suggest to the borrower debt-management strategies that the

school determines would best assist repayment by the borrower;

(iv) Emphasize to the borrower the seriousness and importance of

the repayment obligation the borrower is assuming;

(v) Describe in forceful terms the likely consequences of default,

including adverse credit reports and litigation;

(vi) Emphasize that the borrower is obligated to repay the full

amount of the loan even if the borrower has not completed the program,

is unable to obtain employment upon completion, or is otherwise

dissatisfied with or does not receive the educational or other services

that the borrower purchased from the school;

(vii) Review with the borrower the conditions under which the

borrower may defer repayment or obtain partial cancellation of a loan;

(viii) Require the borrower to provide corrections to the

institution's records concerning name, address, social security number,

references, and driver's license number, the borrower's expected

permanent address, the address of the borrower's next of kin, as well

as the name and address of the borrower's expected employer; and

(ix) Review with the borrower information on the availability of

the Student Loan Ombudsman's office.

(3) Additional matters that the Secretary recommends that a school

include in the exit counseling session or materials are in appendix D

to 34 CFR part 668.

(4) An institution that conducts exit counseling through

interactive electronic means must take reasonable steps to ensure that

each student borrower receives the counseling materials and

participates in and completes the exit counseling.

(5) The institution must maintain documentation substantiating the

school's compliance with this section for each borrower.

* * * * *

(Approved by the Office of Management and Budget under control

number 1845-0023)

15. Section 674.45 is amended by revising paragraph (b), by adding

a new paragraph (h), and by revising the Office of Management and

Budget control number to read as follows:

Sec. 674.45 Collection procedures.

* * * * *

(b)(1) An institution must report to any national credit bureau to

which it reported the default, according to the reporting procedures of

the national credit bureau, any changes to the account status of the

loan.

(2) The institution must resolve, within 30 days of its receipt,

any inquiry from any credit bureau that disputes the completeness or

accuracy of information reported on the loan.

* * * * *

(h) As part of the collection activities provided for in this

section, the institution must provide the borrower with information on

the availability of the Student Loan Ombudsman's office.

* * * * *

(Approved by the Office of Management and Budget under control

number 1845-0023)

[[Page 58313]]

16. Section 674.47 is amended by redesignating paragraphs (e)(5)

and (e)(6) as (e)(6) and (e)(7), respectively, by adding new paragraph

(e)(5), and by revising the Office of Management and Budget control

number to read as follows:

Sec. 674.47 Costs chargeable to the Fund.

* * * * *

(e) * * *

(5) Until July 1, 2002 on loans rehabilitated pursuant to

Sec. 674.39, amounts that exceed the amounts specified in

Sec. 674.39(c)(1) but are less than--

(i) 30 percent if the loan was rehabilitated while in a first

collection effort; or

(ii) 40 percent if the loan was rehabilitated while in a second

collection effort.

* * * * *

(Approved by the Office of Management and Budget under control

number 1845-0023)

17. Section 674.49 is amended as follows:

A. By redesignating paragraphs (f)(2)(ii)(A) and (f)(2)(ii)(B) as

paragraphs (f)(2)(ii)(B) and (f)(2)(ii)(C), respectively; and adding a

new paragraph (f)(2)(ii)(A).

B. By redesignating paragraphs (f)(3)(ii)(A) and (f)(3)(ii)(B) as

paragraphs (f)(3)(ii)(B) and (f)(3)(ii)(C), respectively; and adding a

new paragraph (f)(3)(ii)(A). By revising paragraphs (c)(1), (c)(2) and

(c)(3);

C. Revising paragraph (e)(4)(i) introductory text; newly

redesignated paragraphs (f)(2)(ii)(B) and (f)(3)(ii)(B); and paragraph

(g).

D. By revising the Office of Management and Budget control number.

Sec. 674.49 Bankruptcy of borrower.

* * * * *

(c) * * *

(1) The institution must use due diligence and may assert any

defense consistent with its status under applicable law to avoid

discharge of the loan. The institution must follow the procedures in

this paragraph to respond to a complaint for a determination of

dischargeability under 11 U.S.C. 523(a)(8) on the ground that repayment

of the loan would impose an undue hardship on the borrower and his or

her dependents, unless discharge would be more effectively opposed by

avoiding that action.

(2) If the petition for relief in bankruptcy was filed before

October 8, 1998 and more than seven years of the repayment period on

the loan (excluding any applicable suspension of the repayment period

defined in 34 CFR 682.402(m)) have passed before the borrower filed the

petition, the institution may not oppose a determination of

dischargeability requested under 11 U.S.C. 523(a)(8)(B) on the ground

of undue hardship.

(3) In any other case, the institution must determine, on the basis

of reasonably available information, whether repayment of the loan

under either the current repayment schedule or any adjusted schedule

authorized under subpart B or D of this part would impose an undue

hardship on the borrower and his or her dependents.

* * * * *

(e) * * *

* * * * *

(4)(i) The institution must monitor the borrower's compliance with

the requirements of the plan confirmed by the court. If the institution

determines that the debtor has not made the payments required under the

plan, or has filed a request for a ``hardship discharge'' under 11

U.S.C. 1328(b), the institution must determine from its own records and

information derived from documents filed with the court--

* * * * *

(f) * * *

(2) * * *

(ii)(A) The petition for relief was filed before October 8, 1998;

(B) The loan entered the repayment period more than seven years

(excluding any applicable suspension of the repayment period as defined

by 34 CFR 682.402(m), and

* * * * *

(3) * * *

(ii)(A) The petition for relief was filed before October 8, 1998;

(B) The loan entered the repayment period more than seven years

(excluding any application suspension of the repayment period as

defined by 34 CFR 682.402(m) before the filing of the petition; and

* * * * *

(g) Termination of collection and write-off. (1) An institution

must terminate all collection action and write off a loan if it

receives a general order of discharge--

(i) In a bankruptcy in which the borrower filed for relief before

October 8, 1998, if the loan entered the repayment period more than

seven years (exclusive of any applicable suspension of the repayment

period defined by 34 CFR 682.402(m)) from the date on which a petition

for relief was filed; or

(ii) In any other case, a judgment that repayment of the debt would

constitute an undue hardship and that the debt is therefore

dischargeable.

(2) If an institution receives a repayment from a borrower after a

loan has been discharged, it must deposit that payment in its Fund.

* * * * *

(Approved by the Office of Management and Budget under control

number 1845-0023)

18. Section 674.52 is amended by revising paragraphs (c)(1) and

(d); and by revising the Office of Management and Budget control number

to read as follows:

Sec. 674.52 Cancellation procedures.

* * * * *

(c) Cancellation of a defaulted loan. (1) Except with regard to

cancellation on account of the death or disability of the borrower, a

borrower whose defaulted loan has not been accelerated may qualify for

a cancellation by complying with the requirements of paragraph (a) of

this section.

* * * * *

(d) Concurrent deferment period. The Secretary considers a Perkins

Loan, Direct Loan or Defense Loan borrower's loan deferment under

Sec. 674.34(c) to run concurrently with any period for which

cancellation under Secs. 674.53, 674.54, 674.55, 674.56, 674.57,

674.58, 674.59, and 674.60 is granted.

* * * * *

(Approved by the Office of Management and Budget under control

number 1845-0019)

19. Section 674.53 is amended by redesignating paragraphs (a)(2),

(a)(3), (a)(4), (a)(5), and (a)(6) as (a)(3), (a)(4), (a)(5), (a)(6),

and (a)(7), respectively; by revising the heading of the section; by

adding a new paragraph (a)(2); by revising paragraphs (a)(1), (b), and

(c) to read as follows:

Sec. 674.53 Teacher cancellation--Federal Perkins, Direct and Defense

loans.

(a) Cancellation for full-time teaching in an elementary or

secondary school serving low-income students.

(1)(i) An institution must cancel up to 100 percent of the

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

made on or after July 23, 1992, for full-time teaching in a public or

other nonprofit elementary or secondary school.

(ii) An institution must cancel up to 100 percent of the

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

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

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

section are not included in the terms of the borrower's promissory

note.

(2) The borrower must be teaching full-time in a public or other

nonprofit elementary or secondary school that--

[[Page 58314]]

(i) Is in a school district that qualified for funds, in that year,

under title I of the Elementary and Secondary Education Act of 1965, as

amended; and

(ii) Has been selected by the Secretary based on a determination

that more than 30 percent of the school's total enrollment is made up

of title I children.

* * * * *

(b) Cancellation for full-time teaching in special education. (1)

An institution must cancel up to 100 percent of the outstanding balance

on a borrower's Federal Perkins loan or Direct loan made on or after

July 23, 1992, for the borrower's service as a full-time special

education teacher of infants, toddlers, children, or youth with

disabilities, in a public or other nonprofit elementary or secondary

school system.

(2) An institution must cancel up to 100 percent of the outstanding

loan balance on a Federal Perkins, Direct or Defense loan made prior to

July 23, 1992, for teaching service performed on or after October 7,

1998, if the cancellation benefits provided under this section are not

included in the terms of the borrower's promissory note.

(c) Cancellation for full-time teaching in fields of expertise. (1)

An institution must cancel up to 100 percent of the outstanding balance

on a borrower's Federal Perkins loan or Direct loan made on or after

July 23, 1992, for full-time teaching in mathematics, science, foreign

languages, bilingual education, or any other field of expertise where

the State education agency determines that there is a shortage of

qualified teachers.

(2) An institution must cancel up to 100 percent of the outstanding

loan balance on a Federal Perkins, Direct or Defense loan made prior to

July 23, 1992, for teaching service performed on or after October 7,

1998, if the cancellation benefits provided under this section are not

included in the terms of the borrower's promissory note.

* * * * *

Sec. 674.54 [Removed and Reserved]

20. Section 674.54 is removed and reserved.

21. Section 674.56 is amended by revising the section heading and

paragraphs (a), (b), and (c) to read as follows:

Sec. 674.56 Employment cancellation--Federal Perkins, Direct and

Defense loans.

(a) Cancellation for full-time employment as a nurse or medical

technician. (1) An institution must cancel up to 100 percent of the

outstanding balance on a borrower's Federal Perkins or Direct loan made

on or after July 23, 1992, for full-time employment as a nurse or

medical technician providing health care services.

(2) An institution must cancel up to 100 percent of the outstanding

balance on a Federal Perkins, Direct or Defense loan made prior to July

23, 1992, for full-time service as a nurse or medical technician

performed on or after October 7, 1998, if the cancellation benefits

provided under this section are not included in the borrower's

promissory note.

(b) Cancellation for full-time employment in a public or private

nonprofit child or family service agency. (1) An institution must

cancel up to 100 percent of the outstanding balance on a borrower's

Federal Perkins or Direct loan made on or after July 23, 1992, for

service as a full-time employee in a public or private nonprofit child

or family service agency who is providing, or supervising the provision

of, services to high-risk children who are from low-income communities

and the families of these children.

(2) An institution must cancel up to 100 percent of the outstanding

loan balance on a Federal Perkins, Direct or Defense loan made prior to

July 23, 1992, for employment in a child or family service agency on or

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

section are not included in the terms of the borrower's promissory

note.

(c) Cancellation for service as a qualified professional provider

of early intervention services. (1) An institution must cancel up to

100 percent of the outstanding balance on a borrower's Federal Perkins

or Direct loan made on or after July 23, 1992, for the borrower's

service as a full-time qualified professional provider of early

intervention services in a public or other nonprofit program under

public supervision by the lead agency as authorized in section

676(b)(9) of the Individual with Disabilities Act.

(2) An institution must cancel up to 100 percent of the outstanding

loan balance on a Federal Perkins, Direct or Defense loan made prior to

July 23, 1992 for early intervention service performed on or after

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

section are not included in the terms of the borrower's promissory

note.

* * * * *

22. Section 674.57 is amended by redesignating paragraphs (a)(2),

(a)(3), (a)(4), (a)(5), (a)(6), and (a)(7) as (a)(3), (a)(4), (a)(5),

(a)(6), (a)(7), and (a)(8), respectively; by revising the section

heading and paragraph (a)(1); and adding a new paragraph (a)(2) to read

as follows:

Sec. 674.57 Cancellation for law enforcement or corrections officer

service--Federal Perkins, Direct and Defense loans.

(a)(1) An institution must cancel up to 100 percent of the

outstanding balance on a borrower's Federal Perkins or Direct Loan made

on or after November 29, 1990, for full-time service as a law

enforcement or corrections officer for an eligible employing agency.

(2) An institution must cancel up to 100 percent of the outstanding

loan balance on a Federal Perkins, Direct or Defense loan made prior to

November 29, 1990, for law enforcement or correction officer service

performed on or after October 7, 1998, if the cancellation benefits

provided under this section are not included in the terms of the

borrower's promissory note.

* * * * *

23. Section 674.58 is amended by revising paragraph (a) to read as

follows:

Sec. 674.58 Cancellation for service in a Head Start Program.

(a)(1) An institution must cancel up to 100 percent of the

outstanding balance on a borrower's Direct or Federal Perkins loan, for

service as a full-time staff member in a Head Start program.

(2) An institution must cancel up to 100 percent of the outstanding

balance on a Defense loan for service as a full-time staff member in a

Head Start program performed on or after October 7, 1998, if the

cancellation benefits provided under this section are not included in

the terms of the borrower's promissory note.

(3) The Head Start program in which the borrower serves must

operate for a complete academic year, or its equivalent.

(4) In order to qualify for cancellation, the borrower's salary may

not exceed the salary of a comparable employee working in the local

educational agency of the area served by the local Head Start program.

* * * * *

24. Section 674.60 is amended by revising the section heading and

paragraph (a) to read as follows:

Sec. 674.60 Cancellation for volunteer service--Perkins loans, Direct

loans and Defense loans.

(a)(1) An institution must cancel up to 70 percent of the

outstanding balance on a Perkins loan, and 70 percent of the

outstanding balance of an NDSL made on or after October 7, 1998, for

service as a volunteer under The Peace Corps Act or The Domestic

Volunteer Service Act of 1973 (ACTION programs).

(2) An institution must cancel up to 70 percent of the outstanding

balance on a Direct or Defense loan for service as

[[Page 58315]]

a volunteer under The Peace Corps Act or The Domestic Volunteer Service

Act of 1973 (ACTION programs) performed on or after October 7, 1998, if

the cancellation benefits provided under this section are not included

in the terms of the borrower's promissory note.

* * * * *

Sec. 674.8, 674.10, 674.19, 674.20, 674.35, 674.36, 674.38,674.50,

674.61 [Amended]

25. Sections 674.8, 674.10, 674.19, 674.20, 674.35, 674.36, 674.38,

674.50, and 674.61 are amended by revising the Office of Management and

Budget control number to read ``1845-0019''.

26. Sections 674.13 is amended by adding the Office of Management

and Budget control number before the authority citation.

Sec. 674.13 Reimbursement to the Fund.

* * * * *

(Approved by the Office of Management and Budget under control

number 1845-0019)

27. Section 674.37 is amended by adding the Office of Management

and Budget control number before the authority citation.

Sec. 674.37 Deferment of repayment--Direct loans made before October

1, 1980 and Defense loans.

* * * * *

(Approved by the Office of Management and Budget under control

number 1845-0019)

Sec. 674.43, 674.48 [Amended]

28. Sections 674.43 and 674.48 are amended by revising the Office

of Management and Budget control number to read ``1845-0023''.

[FR Doc. 99-28168 Filed 10-27-99; 8:45 am]

BILLING CODE 4000-01-P