Student Assistance General Provisions

SUMMARY: The Secretary amends the loan default reduction and prevention

measures in the Student Assistance General Provisions regulations in 34

CFR part 668. These regulations reflect changes made by the Higher

Education Amendments of 1998 to the Higher Education Act of 1965, as

amended (HEA).

DATES: These regulations are effective July 1, 2000.

FOR FURTHER INFORMATION CONTACT: Kenneth Smith, U.S. Department of

Education, 400 Maryland Avenue, SW., ROB-3, room 3045, Washington, DC

20202-5447. 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: The Higher Education Amendments of 1998

(Pub. L. 105-244, enacted October 7, 1998, and referred to in the

preamble to these final regulations as the ``1998 Amendments'') changed

some requirements relating to the calculation of a school's Federal

Family Education Loan (FFEL) Program cohort default rate, William D.

Ford Federal Direct Loan (Direct Loan) Program cohort rate, or weighted

average cohort rate. The Secretary is revising 34 CFR 668.17 of the

Student Assistance General Provisions regulations to reflect these

changes.

On July 30, 1999, we published a notice of proposed rulemaking

(NPRM) for the Student Assistance General Provisions in the Federal

Register (64 FR 41752). In the preamble to the NPRM, we discussed on

pages 41753 through 41758 the major changes proposed in that document

for the loan default reduction and prevention measures in the Student

Assistance General Provisions:

Amending Sec. 668.17(a)(1) and 668.17(j) to change the

process that schools use to identify and challenge or request an

adjustment to incorrect data.

Amending Sec. 668.17(b)(4) to reflect the amendment to the

HEA that makes a school ineligible to participate in the Federal Pell

Grant Program when it becomes ineligible to participate in the FFEL or

Direct Loan Program due to excessive rates.

Amending Sec. 668.17(b)(5)(ii) and 668.17(b)(6) to

implement the statutory amendments that make a school liable for the

loans it certifies and delivers or originates and disburses while it is

appealing a loss of participation.

Amending Sec. 668.17(c)(1)(ii)(A) and 668.17(j)(4) to

reflect the statutory changes that modify the requirements for a

school's appeal on the basis of its participation rate index (PRI).

Amending Sec. 668.17(c)(1)(ii)(B) and 668.17(c)(7) to

reflect the amendments that modify requirements for a school's

mitigating circumstances appeal based on its economically disadvantaged

rate and completion or placement rate.

Adding Sec. 668.17(c)(1)(ii)(C) and (D) to permit a school

to appeal its loss of participation on the basis of two new mitigating

circumstances.

Amending Sec. 668.17(e), 668.17(f), and 668.17(h)(2)(iii)

to conform to statutory changes in the definition of ``default.''

Adding Sec. 668.17(k) and Appendix H to implement the

statutory changes relating to the treatment of special institutions.

Except for minor editorial and technical revisions and revisions

that provide clarification, there are no differences between the NPRM

and these final regulations. As in the NPRM, to avoid confusion in the

preamble to these final regulations, we use the word ``rate'' by itself

to refer to an FFEL Program cohort default rate, Direct Loan Program

cohort rate, or weighted average cohort rate. We use the complete term

if we are referring to another type of ``rate'': an ``economically

disadvantaged rate,'' a ``completion rate,'' a ``placement rate,'' or a

``participation rate.''

Discussion of Student Financial Assistance Regulations Development

Process

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 30, 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 23 comments were received. An analysis of the comments

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 in the proposed regulations, and we do not respond to

comments suggesting changes that the Secretary is not authorized by law

to make.

Analysis of Comments and Changes

General

Comments: In general, the commenters supported the proposed

regulations and appreciated the Department's responsiveness to the

student aid community.

Discussion: We appreciate the commenters' support for the proposed

regulations and the work of the members of the negotiated rulemaking

committee that resulted in the proposed regulations.

Changes: None.

Challenges and Adjustments to Inaccurate Data Used To Calculate Rates

(Sec. 668.17(a)(1) and 668.17(j))

Comments: The commenters supported the proposed changes to the

process for a school to challenge its draft data, especially the

extension of the time limit for schools to submit the challenge, from

30 to 45 days. One commenter, while applauding the proposed change,

recommended extending the time limit further, to 60 days. The commenter

reasoned that this extension is necessary because the data review

process usually takes place when schools are beginning their processing

for the next academic year and when their State reports are due. The

commenter also reasoned that the extension was necessary because

formatting or other software changes may be needed to accommodate the

electronic supporting data.

Several other commenters noted that the proposed regulations did

not include a change to the 30-day timeframe under which a guaranty

[[Page 58975]]

agency must respond to a school's challenge. The commenters reasoned

that new benefits associated with low cohort default rates may increase

the number of challenges to draft rates and that it may be difficult

for guaranty agencies to respond to challenges within the current 30-

day timeframe. Commenters asked us to revise the regulations to allow

the Secretary to extend a guaranty agency's response period if there

are extenuating circumstances, acceptable to the Secretary, that will

impair the agency's ability to respond within the required timeframe.

Discussion: Because of statutory requirements for the issuance and

review of draft data and the issuance of final rates by September 30,

the time period for the draft data review process is necessarily short.

Extending the period for schools to challenge their draft rates from 30

to 45 days will further shorten the period. Under the process included

in the regulations, schools must challenge their draft rates within 45

days, and guaranty agencies will have 30 days to respond to those

challenges. An additional 2 months are needed for the guaranty agencies

to submit corrected data to the National Student Loan Data System

(NSLDS). At least two submission cycles are needed to ensure that NSLDS

data has been updated and that any rejected data is corrected. In

addition, we use this 2-month period to review guaranty agencies'

responses to schools.

We intend to issue draft rates by late March. Final rates must be

calculated by late August to ensure that they are published by

September 30. Thus, the timeframes for the review process are very

tight, and we do not believe it is possible to further extend the

deadlines for individual actions. Allowing an option to extend

timeframes for guaranty agencies on a case-by-case basis is not a

workable alternative. Delayed responses from one or two guaranty

agencies could significantly affect the accuracy of many schools'

rates.

Changes: None.

Comments: In the preamble to the NPRM, the Department announced

administrative changes to the process used by a school to request an

adjustment to a published rate: supporting data will be provided to

more schools with their published rates, a school will have more time

to request an adjustment, and a school will be able to request an

adjustment of the data used to calculate its published rate that was

not used to calculate its draft rate (``new data''). Commenters

generally expressed appreciation for all of these changes. Several

commenters asked for clarification in the preamble to these final

regulations concerning the types of adjustments to new data that a

school would be able to request.

Discussion: The ``new data adjustment,'' which will be available to

schools beginning with receipt of the fiscal year (FY) 1998 published

rates, will be used only to adjust rates based on incorrect new data.

``New data'' are data that were reported one way in the draft rate and

a different way in the published rate. Schools may not use this process

to correct data that were used to calculate their draft rates: a school

must have challenged its draft rate to correct the data on which the

draft rate was based.

For example, if a borrower was included in the denominator of the

calculation of a school's draft rate but was not included in the

calculation of its final rate, the school may use a new data adjustment

to correct the data that resulted in the removal of the borrower,

incorrectly, from the calculation of the published rate. However, if a

borrower was not included in both the draft and published rates, the

school may not use a new data adjustment to correct data that resulted

in the borrower's exclusion from its published rate.

Changes: None.

Comments: The NPRM's preamble announced other administrative

changes to the process used to challenge and adjust rates. These

changes included making supporting data available to schools in an

electronic format and allowing schools to view, year round, ``real-

time'' loan repayment and default data that will be used to calculate

their rates. These changes will affect the process for both draft and

published rates and will be implemented under the timelines announced

in the preamble to the NPRM.

Several commenters asked for clarification in this preamble

concerning the process for providing electronic supporting data and

real-time data. Two commenters recommended that we make electronic data

available to all schools and guaranty agencies, in a format compatible

with schools' software, and that eventually we provide electronic data

automatically to all schools. Commenters recommended that we provide

real-time data via a system to which schools currently have access, and

they suggested the use of the National Student Loan Data System (NSLDS)

for this purpose. The commenters reasoned that these provisions would

reduce the administrative and financial burden for schools.

Discussion: We intend to meet the implementation timeframes

described in the preamble to the NPRM for providing supporting data to

schools electronically and for providing data on a real-time basis.

After those deadlines are met, we expect eventually to provide

supporting data electronically to all schools and to guaranty agencies.

We are also working with schools to ensure that the format of the

electronic supporting data is compatible with schools' computer

hardware and software. In addition, we plan to provide real-time data

to schools via NSLDS.

Changes: None.

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

Comments: In the preamble to the NPRM, we addressed the concerns

expressed by some non-Federal negotiators during negotiated rulemaking

about the possible consequences of our issuing rates after the date

required by statute, September 30 of a year. Four commenters noted that

the Department's guidance is not currently included in regulations or

other guidance issued by the Department and recommended that the

guidance be provided more formally. Two commenters reasoned that,

without this formal guidance, a school's eligibility may be challenged

by a party critical of the guidance. Commenters recommended that the

guidance be provided in the Student Financial Aid Handbook and in the

Cohort Default Rate Guide. One commenter recommended including the

guidance in regulations.

Discussion: We have already published the Department's view of the

effect of a later publication of rates in the FY 1997 Official Cohort

Default Rate Guide and in the 1999-2000 Student Financial Aid Handbook.

It is not appropriate or necessary to include this guidance in

regulations because the Department intends to meet the statutory

requirements and publish rates by September 30 of each year.

Changes: None.

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

Comments: One commenter stated that the compromise reached during

negotiated rulemaking was fair in allowing a school with excessive

rates to continue participating in the Federal Pell Grant Program if it

had not certified an FFEL loan or originated a Direct Loan on or after

July 7, 1998. Several commenters asked us to clarify in this preamble

whether a school could meet this criteria if it delivered FFEL funds or

disbursed Direct Loan funds after July

[[Page 58976]]

7, 1998, for a loan certified or originated before that date.

Another commenter recommended removing this provision entirely. The

commenter reasoned that, as the process to develop the statute was

lengthy, schools had adequate time to withdraw formally from the FFEL

and Direct Loan programs before its enactment. The commenter believed

that the basis provided for including this provision was speculative

and that its inclusion in regulations would lead to the loss of Federal

funds.

Discussion: Under Sec. 668.17(b)(4)(iii), a school with excessive

rates would be allowed to continue participating in the Federal Pell

Grant Program if it has not certified an FFEL loan or originated a

Direct Loan on or after July 7, 1998. Because this criterion is

specific to the certification or origination of loans, a school's

delivery or disbursement of funds after July 7, 1998, for a loan that

was certified or originated before that date does not affect a school's

satisfaction of the criterion.

We do not agree with the recommendation that the provision allowing

continued participation in the Federal Pell Grant Program be removed

from the regulations. The Department is satisfied that there were cases

in which schools that intended to withdraw from the FFEL or the Direct

Loan Program were not aware that they needed to notify the Department

in writing and instead simply stopped certifying or originating loans.

The Department believes that these schools should not lose the

opportunity to participate in the Federal Pell Grant Program based on

their rates.

Changes: None.

Comments: One commenter recommended that a school be allowed to

continue participating in the Federal Pell Grant Program, despite loss

of participation in the FFEL or Direct Loan Program due to excessive

rates, if the school: (1) Is in good standing with the community and

its accreditation organization, (2) was not aware of the provisions in

the 1998 Amendments for loss of eligibility to participate in the

Federal Pell Grant Program, and (3) returns all FFEL Program and Direct

Loan Program funds received after the date of enactment of the 1998

Amendments. The commenter reasoned that this provision would allow

schools to continue participating in the Federal Pell Grant Program and

providing an education to needy students.

Discussion: The commenter's recommendations are inconsistent with

statutory requirements. The HEA provides only two exceptions to the

loss of participation in the Federal Pell Grant Program based on

excessive rates: (1) The school did not have the opportunity to appeal

its rate under the appropriate regulations, and (2) the school did not

participate in the FFEL or Direct Loan Program on or after the date of

enactment.

Changes: None.

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

668.17(b)(6))

Comments: Several commenters asked for clarification of the

regulations for establishing a school's liability on loans made during

an unsuccessful appeal. In particular, the commenters requested that we

provide further explanation of--

(1) Whether the liability determination would apply to schools that

are subject to loss of participation based on three rates over 25

percent, for schools with one rate over 40 percent, or for special

institutions that are continuing to participate by complying with the

requirements of Sec. 668.17(k);

(2) The formula that will be used to calculate a school's

liability;

(3) The beginning and ending date of the period during which a

school would be liable;

(4) Whether a school that suspends its participation to avoid a

liability may resume its participation 45 days after the submission of

its completed appeal, without incurring a liability, if we have not

made a determination on the appeal; and

(5) Whether the repayment terms for a liability will be flexible

enough to ensure a school's repayment without causing serious financial

problems for the school and its students.

Discussion: Responses to each of the commenters' issues follow:

(1) The liability for loans made during the appeal process only

applies to a school with rates of 25 percent or more for 3 consecutive

years that is subject to an action under Sec. 668.17 (a)(3), (b)(1), or

(b)(2). The 1998 Amendments do not require a similar liability

determination for a school subject to termination from all of the Title

IV programs based on a rate over 40 percent. In addition, a special

institution would only be subject to this type of liability if it is

not in compliance with Sec. 668.17(k) and its rates for the 3 most

recent fiscal years are 25 percent or more. If a special institution is

in compliance with Sec. 668.17(k), and thus not subject to an action

under Sec. 668.17 (a)(3), (b)(1), or (b)(3), it may challenge its rate

without incurring a potential liability.

(2) A more detailed description of the estimated loss formula is

available to the public on the Internet at the following site: http://

ifap.ed.gov/csb__html/procmemo.htm.

The current guidance on the estimated loss formula is provided on

that site, under ``Procedure Memos Sorted by Memo Number,'' in IRB Memo

92-3, which is listed as ``I92-3.''

(3) The period during which a school would be liable begins 30

calendar days after it receives its published rate and ends on the 45th

calendar day after the school submits its completed appeal.

(4) The final regulations have been changed to clarify that a

school's suspension of its participation need not continue longer than

45 days after it submits its completed appeal to the Department. Like

other schools, a school that suspends its participation would not incur

this type of liability for funds delivered or disbursed more than 45

calendar days after it submits its completed appeal to the Department.

(5) We will consider a school's request for more time to repay a

liability, over a period greater than the 45 days allowed in the

regulations, on a case-by-case basis. A determination to extend a

school's repayment period may include a consideration of the school's

circumstances, its students' circumstances, and the best method to

ensure that funds are recovered.

Changes: We have revised Sec. 668.17(b)(6) to clarify that, if a

school suspends its participation in order to avoid a liability, the

suspension may end 45 days after the school submits its completed

appeal. We have also revised the regulations to clarify that a school

is subject to a potential liability for loans certified and delivered

or originated and disbursed during the appeal process if the school is

subject to an action under Sec. 668.17(a)(3), (b)(1), or (b)(2).

Comments: One commenter stated that the use of the Department's

``Estimated Loss Formula'' to determine a school's liability for loans

made during an unsuccessful appeal, as described in the NPRM,

exaggerates the potential loss to the Government and would make appeals

prohibitively expensive. The commenter stated that the intent of

Congress was to focus on the amount of interest and special allowance

for loans made during the appeals period, rather than on the amounts

calculated under the ``Estimated Loss Formula.'' The commenter did not

believe that the issue is adequately addressed by allowing a school to

avoid a liability by suspending its participation.

Discussion: Under the amendments to section 435(a)(2)(A) of the

HEA, a school's liability is not limited to the amount of the interest

and special allowance on the loans made during its appeal. Rather, the

HEA requires an institution to pay ``an amount equal to

[[Page 58977]]

the amount of interest, special allowance, reinsurance, and any related

payments.'' Thus, the amount of the Government's costs for reinsurance

and any related payments must be included in the calculation of the

school's liability.

We also do not agree that the Department's ``Estimated Loss

Formula'' exaggerates potential losses to the Government. As described

in the NPRM, the formula uses the school's most recent published rate

to estimate the principal amount of the loans that would be expected to

default and estimates the costs that will be incurred for interest,

special allowance, and other losses on the loans. These amounts are

equivalent to the amounts that the HEA requires a school to pay. The

formula is used by the Department to calculate schools' liabilities in

other, similar circumstances, and it has proven to be a reliable and

supportable measure of potential losses to the government.

Assessing a liability does not make appeals prohibitively expensive

because any school may avoid a liability by suspending its

participation in the loan program or programs during the appeal

process. If a school has confidence in the basis for its appeal, it

will be able to continue to participate during the appeal process with

the same confidence. The regulations ensure that the school, rather

than the Government, assumes the risk for the cost of the loans made

during an unsuccessful appeal.

Changes: None.

Comments: The proposed Sec. 668.17(b)(6)(ii)(C)(1) would permit a

school to appeal, under subpart H of 34 CFR part 668, a liability

calculated for loans made during an unsuccessful appeal. As the

provisions in subpart H are used by schools to appeal final audit and

program review determinations, one commenter asked for clarification of

the procedures that a school would use to file this type of appeal. The

commenter did not understand how or why subpart H could be used to

appeal the calculation of this liability.

Discussion: In appealing a calculation of a liability for loans

under these regulations, under subpart H, the calculation will be

treated as a program review determination.

Changes: We have revised Sec. 668.17(b)(6)(ii)(C)(1) to clarify the

procedures for the appeal of a liability.

Participation Rate Index (PRI) (Sec. 668.17(c)(1)(ii)(A) and

668.17(j)(4))

Comments: None.

Discussion: On further review, we have determined that the language

in Sec. 668.17(c)(1)(ii)(A)(2), explaining the method for calculating a

PRI, could be misinterpreted. We have modified the language to avoid

confusion. The new language does not change the substance of the

calculation.

Changes: We have revised Sec. 668.17(c)(1)(ii)(A)(2) to more

clearly describe the calculation of a school's PRI for a fiscal year.

Comments: Several commenters recommended that the regulations be

revised to clarify the procedures that may be used by schools to

challenge an anticipated loss of participation, on the basis of a

participation rate index (PRI), during the draft rate process. The

commenters stated that the proximity of the proposed regulations in

Sec. 668.17(j)(4) to the provisions for a challenge of incorrect data

may cause confusion. They were especially concerned that schools may

send their PRI challenges to guaranty agencies, rather than to the

Department.

Discussion: Though the two paragraphs contain separate

requirements, we agree that their proximity in the regulations could

cause some confusion.

Changes: We have revised Sec. 668.17(j)(4) to distinguish more

clearly between the procedures and requirements for a challenge of

inaccurate data and those for a PRI challenge.

Comments: One commenter asked us to clarify the consequences of a

school's successful PRI appeal based on a draft rate, if the school's

published rate for the same fiscal year would not result in a

successful PRI appeal. Another commenter noted that under the proposed

regulations, if a school successfully challenges an anticipated loss of

participation during the draft rate process, the school would have to

appeal again the following year to continue participating, even if the

draft rate upon which the school based its original challenge is equal

to or higher than the same fiscal year's published rate. The commenter

stated that this type of second appeal is unnecessarily burdensome and

recommended that it be required only if the draft rate upon which a

school bases its PRI challenge is lower than the published rate.

Discussion: Since a PRI challenge or appeal may be based on the PRI

for any of the 3 most recent fiscal years for which data are available,

the same PRI may be a criterion for a school's challenge or appeal in

more than one year. A school that successfully challenges or appeals a

loss of participation, based on its PRI, does not need to challenge or

appeal again in a subsequent year as long as the same, successful PRI

could be used as a basis for the subsequent appeal. An example is

provided in the preamble to the NPRM.

If a school's PRI challenge based on a draft rate is successful,

and the school's published rate for the same fiscal year would not

result in a successful appeal, the school has still successfully

challenged its loss of participation for that year. However, when rates

are published the following year, the prior, successful PRI challenge,

based on a draft rate, cannot be used to continue the school's

participation, because a prior year's draft rate is not a basis for a

challenge or appeal of a school's current loss of participation.

We agree with the comment suggesting that we should not require a

school to appeal a second time if it successfully appealed the previous

year on the basis of a PRI calculated using its draft rate and its

published rate for the same fiscal year was equal to or lower than its

draft rate. In that case, there is no need for the school to submit

another appeal because we already have enough information to determine

that the school's appeal would be successful.

The administrative procedure used to make the determination that

the school's appeal would be successful will be similar to the

procedure used for the new mitigating circumstances appeals provided in

Sec. 668.17(c)(1)(ii)(C) and (D). There is no need to include this

procedure in the regulations. If information we maintain can be used to

determine that a school's PRI appeal would be successful, we will

calculate the results and notify the school. In addition to the

circumstances noted by the commenter, this calculation would also be

performed if a school's challenge during the draft rate process is

unsuccessful, its published rate for the same fiscal year is lower than

its draft rate, and an appeal based on the published rate would be

successful. In that case, we would also calculate the results of the

school's PRI appeal and notify the school.

Changes: None.

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

668.17(c)(7))

Comments: Previously, the economically disadvantaged rates,

completion rates, and placement rates used to determine a school's

mitigating circumstances appeal were calculated as percentages of all

of the school's regular students. The NPRM proposed to limit the groups

of students for whom the percentages are calculated to include only

students who are enrolled in programs eligible for Title IV aid. This

change was requested by some of the negotiators during negotiated

rulemaking because they believed it was

[[Page 58978]]

unlikely that the records needed to determine a school's economically

disadvantaged rate would be available for students not in Title IV

eligible programs.

In general, commenters supported this change. They reasoned that if

the change were not made, it would be difficult for schools to obtain

the information necessary to determine eligibility for this type of

appeal. One commenter stated that this change was also appropriate

because it focused on the completion and placement outcomes for

students attending classes supported by Title IV funds.

Several other commenters suggested that only the economically

disadvantaged rate should be based on students enrolled in programs

eligible for Title IV aid and that a school should have an option to

base its completion rate or placement rate on either its regular

students or on the students in Title IV eligible programs. They

reasoned that, as the same problem with records does not apply to

completion and placement rates, giving a school this option may provide

a small degree of assistance for schools to satisfy the criteria for a

successful appeal and to continue to serve economically disadvantaged

students.

Discussion: All of the commenters' suggestions were considered and

rejected during the negotiated rulemaking process. As one commenter

noted, one of the reasons for restricting the calculation to students

in Title IV eligible programs was that, in doing so, the calculation

would be restricted to the loan programs that are actually serving the

low-income population. Basing the economically disadvantaged rate and

the completion and placement rates on different populations would not

ensure that the benefit shown in the school's completion or placement

rate was actually received by economically disadvantaged students.

Changes: None.

Comments: One commenter asked for clarification concerning our

intent to explain to a school the reasons that we have determined an

independent auditor's report or an institution's management's assertion

to be ``contradicted or otherwise refuted.'' Another commenter

recommended that we define ``independent auditor'' in these final

regulations and that we include provisions for rejecting an auditor's

certification that a school meets the criteria for the appeal if the

facts demonstrate that the auditor's opinion is fraudulent or

inaccurate. The commenter also recommended that we use more than just

the information we maintain when making a determination on an appeal.

The commenter recommended that these final regulations be revised to

allow us to routinely obtain information for making our determinations,

reasoning that limiting ourselves to the information that we maintain

invites abuses and that we have no reason to believe that auditors will

always act honestly and truthfully.

Discussion: If a school's appeal is not accepted because we

determine an independent auditor's report or an institution's

management's assertion to be ``contradicted or otherwise refuted'' by

the information we maintain, the reasons for our determination will be

explained in the notification we send to the school.

We agree with the commenter's recommendation that a definition of

``independent auditor'' should be referenced in these regulations.

``Independent auditor'' is already defined in Sec. 668.23(a)(1), and we

have incorporated that definition into this section of the regulations.

The additional requirements that the commenter recommends to

prevent fraud or inaccuracies are not needed.

The proposed regulations allow us to deny an institution's appeal

if we determine that the independent auditor's report does not meet the

requirements of Sec. 668.17 or that it is contradicted or otherwise

refuted by information that we maintain. The standards for the

engagement that forms the basis for an independent auditor's opinion,

in Sec. 668.17(c)(7)(ii)(B), include criteria that address an auditor's

proficiency and independence. Also, as we noted in the NPRM's preamble,

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

could be pursued under other legal authority.

We also do not agree with the commenter's recommendation that we

routinely obtain information to evaluate the validity of the auditor's

certification for these appeals. As we discussed in the preamble to the

NPRM, it would be inappropriate for us to ignore information we

maintain or any contradictions in the data of an independent auditor's

report when deciding whether a school meets the appeal's criteria.

However, we believe that it would be inconsistent with congressional

intent for us to routinely duplicate the work of an independent auditor

by conducting investigations to gather additional information.

Changes: We have revised Sec. 668.17(c)(1)(ii)(B)(1) to incorporate

the definition of ``independent auditor'' from Sec. 668.23.

Other Mitigating Circumstances Appeals (Sec. 668.17(c)(1)(ii)(C) and

(D))

Comments: Many commenters strongly supported the two new mitigating

circumstances that were included in the NPRM, which will allow schools

to appeal based on the total number of borrowers in the 3 most recent

fiscal years and will allow schools with ``average'' rates to appeal

based on the rate for a single fiscal year only. The commenters stated

that these new mitigating circumstances are a significant improvement

toward eliminating sanctions based on statistically insignificant

percentages and that they represent movement in a positive direction

toward reducing unnecessary regulatory penalties. Commenters asked that

the Secretary revisit these and other issues related to schools' rates

in future negotiations.

One commenter noted that, under the 1998 Amendments, the Secretary

is required to conduct a study of the effectiveness of rates for

certain schools at which a small percentage of students receive loans.

The commenter asked the Department to further address these schools'

circumstances after conducting the required study. The commenter felt

that this is necessary because a school's excessive rates may cause it

to suffer from public criticism or to be placed on a provisional

certification status, regardless of its being allowed to continue its

participation in the Title IV programs as the result of a successful

appeal.

Discussion: We appreciate the commenters' support for the proposed

regulations, and their interest in this issue and in the study of the

effectiveness of rates. We will consider these issues and the results

of the study during the ongoing review of the regulations for the Title

IV programs.

Changes: None.

Comments: Several commenters stated that the language in the

preamble to the NPRM and in the proposed regulations was in error when

it used the phrase ``30 or fewer.'' They noted that an average rate, as

described in Sec. 668.17(d), (e), and (f), is calculated for a school

with ``fewer than 30'' borrowers entering repayment in that fiscal

year. The commenters asked us to correct the language in the NPRM.

Discussion: There is no error. The phrases ``30 or fewer'' and

``fewer than 30,'' as used in the preamble to the NPRM and in the

proposed regulations, apply to separate, unrelated requirements. As the

commenters note, an ``average'' rate is calculated for a school with

``fewer than 30'' borrowers entering repayment during a fiscal year.

[[Page 58979]]

However, the proposed regulations would add a new mitigating

circumstance that allows a school to appeal its loss of participation

if the total number of its borrowers entering repayment in the 3 most

recent fiscal years for which data are available is ``30 or fewer.''

The former standard is used in determining how a school's rate is

calculated. The latter standard is used in determining a school's

eligibility to appeal a loss of participation. However, we do recognize

the value of making terms in these regulations consistent, and we will

reconsider this issue during the ongoing review of the regulations for

the Title IV programs.

Changes: None.

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

668.17(h)(2)(iii))

Comments: Several commenters were concerned that readers might be

confused by the NPRM's explanation of the date on which a loan is

considered to be in default for the purpose of calculating a rate. They

stated that some readers might believe, based on the preamble's

language, that the actual definition of ``default'' for an FFEL Program

loan was changing from 270 days of delinquency to 360 days and asked us

to provide clarification in the preamble to these final regulations.

Discussion: The 1998 Amendments changed the definition of a default

on an FFEL or a Direct Loan Program loan from 180 days to 270 days past

due for a loan that is repayable in monthly installments and from 240

days to 330 days past due for loans repayable in less frequent

installments. The definition of ``default'' that is used in Sec. 668.17

for the purpose of calculating rates is based on this general

definition. It is not the same as the definition provided in the

statute for the date of a borrower's default.

For the purposes of calculating an FFEL Program cohort default

rate, a default is generally considered to have occurred on the date

that a claim for insurance is paid on the loan by a guaranty agency.

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

borrower defaults and the date that an insurance claim is paid, an FFEL

Program loan would not normally be considered in default for the

purposes of calculating a school's rate until it is at least 360 days

past due (270 days + 90 days = 360 days). For consistency, because

Direct Loans do not go through a claims payment process, these final

regulations change from 270 to 360 the number of days past due after

which a Direct Loan borrower is considered in default for purposes of

calculating a school's rate.

Changes: None.

Comments: Several commenters expressed concerns about the impact of

the change in the definition of ``default,'' from 180 days to 270 days,

upon the calculation of a school's rate. The commenters were concerned

that, using the current method to calculate rates, the change in the

timeframe may remove a significant number of defaulted borrowers from

the calculation of rates, decreasing their consistency and accuracy as

a reflection of the borrowing history of a school and affecting the

effectiveness of default prevention activities conducted by schools.

Some commenters stated that it is appropriate for the Department to

consider the impact of the change in the definition of ``default'' on

schools' rates and to communicate its intentions concerning anticipated

future changes, if any, to the calculation of rates. One commenter

asked the Department to devise a calculation that would address the

lengthened default period.

Discussion: The calculation of a school's rate is defined in

section 435(m) of the HEA.

Changes: None.

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

Comments: One commenter stated that historically black colleges or

universities, tribally controlled community colleges, and Navajo

community colleges (``special institutions'') have already had an

adequate length of time to reduce their rates to acceptable levels. The

commenter objected to continuing a double standard and asked to either

eliminate the provisions that allow special institutions with excessive

rates to continue to participate or to apply the same criteria to all

schools with excessive rates.

Another commenter questioned the creation of a new Appendix H when

Appendix D of 34 CFR part 668 already addresses default management

plans. The commenter suggested that, since Appendix D needs to be

updated, the two appendices should be combined, updated, and applied to

all schools. The commenter also asked that regulations specify whether

a special institution would be subject to loss of participation in the

Federal Pell Grant Program if it is not in compliance with

Sec. 668.17(k).

Discussion: The provisions that provide a different treatment for

special institutions with excessive rates are statutory and cannot be

changed by regulations. Also, it is not necessary to specify in

Sec. 668.17(k) that a school is subject to loss of participation in the

Federal Pell Grant Program if it is not in compliance with that

paragraph. If any school is subject to a loss of participation in the

FFEL or Direct Loan Program under Sec. 668.17, it is also subject to

loss of participation in the Federal Pell Grant Program if it meets the

criteria in Sec. 668.17(b)(4).

The requirements reflected in Sec. 668.17(k) are limited to a 3-

year transition period, after which the consequences of excessive rates

will become fully applicable to special institutions. As other schools

do not have the same transition period, these criteria are not

appropriate for them.

Finally, we believe it would be inappropriate to revise, in these

final regulations, the current Appendix D to include some or all of the

guidance in Appendix H, because the revision would go beyond the scope

of the proposed regulations. However, the updates to Appendix D

suggested by the commenter will be considered during the ongoing review

of the regulations for the Title IV programs.

Changes: None.

Comments: The criteria for determining whether a special

institution has made substantial improvement are listed in paragraphs

(A) through (H) of Sec. 668.17(k)(4)(i). One commenter stated that

while it is appropriate to use either paragraph (A) or (B), by itself,

to determine a school's substantial improvement, the commenter did not

believe that any of the remaining criteria, alone, would adequately

reduce a school's rate. The commenter suggested that, if a school

cannot show that it has met the criterion in either paragraph (A) or

(B), a school should be required to meet more than one of the remaining

criteria in order for the Secretary to determine that the school has

made substantial improvement.

The commenter also suggested the following changes to Appendix H:

(1) to include, under ``Core Default Reduction Strategies,'' the design

of procedures to reduce a school's rate by identifying and implementing

alternative financial aid award policies and developing alternative

financial resources; (2) to provide for monthly, rather than annual,

targets for reductions in a school's rate; (3) to make item 7 the first

item under ``Additional Default Reduction Strategies,'' reasoning that

this item is the most effective long-term solution; (4) to remove item

1 under ``Statistics for Measuring Progress;'' and (5) to provide for

the tracking of sub-categories of borrowers under items 2 and 7 under

``Additional Default Reduction Strategies.'' The commenter felt that

these changes would assist schools in identifying potential problems

and

[[Page 58980]]

reacting to them more quickly and effectively.

Discussion: The requirements in Sec. 668.17(k) and the sample plan

in Appendix H are provided to ensure that a school that is subject to

those provisions will, no later than July 1, 2002, have a rate that is

less than 25 percent. To regulate the requirements in more detail, as

the commenter suggests, or to provide more detailed guidance in the

sample plan in Appendix H, may tend to limit a school's choices and

make a school less able to devote its resources effectively to the task

at hand. Each school needs the flexibility to implement a plan that

addresses its individual circumstances.

The same flexibility is needed in making a determination of a

school's substantial improvement under Sec. 668.17(k)(4)(i). The

criteria in that paragraph are the bases for a determination of

substantial improvement, but the criteria will be applied to schools as

appropriate to their individual circumstances, as described in

Sec. 668.17(k)(4)(ii). If a school's performance under any one of the

criteria is adequate to determine that it has made substantial

improvement, there is no reason to require the school to meet another

criterion under that paragraph.

Changes: None.

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 these programs 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.

We summarized the potential costs and benefits of these final

regulations in the preamble to the NPRM (64 FR 41752).

Paperwork Reduction Act of 1995

The Paperwork Reduction Act of 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 number assigned to the

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

affected section of the regulations.

Intergovernmental Review

The Federal Supplemental Educational Opportunity Grant Program and

the State Student Incentive Grant Program are subject to Executive

Order 12372 and the regulations in 34 CFR part 79. 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 our specific plans and actions for these

programs.

The Federal Family Education Loan, Federal Supplemental Loans for

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

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

programs are not subject to Executive Order 12372 and the regulations

in 34 CFR part 79.

Assessment of Educational Impact

In the NPRM we requested comments on whether the proposed

regulations would require transmission of information that any other

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

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

determined that these final regulations do not require transmission of

information that any other agency or authority of the United States

gathers or makes available.

Electronic Access to This Document

You may view this document 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, DC, area at (202) 512-1530.

Note: The official version of this document is the document

published in the Federal Register. Free Internet access to the

official edition of the Federal Register and the Code of Federal

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

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

(Catalog of Federal Domestic Assistance Numbers: 84.007 Federal

Supplemental Educational Opportunity Grant Program; 84.032 Federal

Family Education Loan Program; 84.032 Federal PLUS Program; 84.032

Federal Supplemental Loans for Students Program; 84.033 Federal

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

Federal Pell Grant Program; 84.069 State Student Incentive Grant

Program; 84.226 Income Contingent Loan Program; and 84.268 William

D. Ford Federal Direct Loan Program)

List of Subjects in 34 CFR Part 668

Administrative practice and procedure, Colleges and universities,

Consumer protection, Education, Grant programs-education, Loan

programs-education, Reporting and recordkeeping requirements, Student

aid, Vocational education.

Dated: October 20, 1999.

Richard W. Riley,

Secretary of Education.

For the reasons discussed in the preamble, the Secretary amends

part 668 of title 34 of the Code of Federal Regulations as follows:

PART 668--STUDENT ASSISTANCE GENERAL PROVISIONS

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

follows:

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

1141, unless otherwise noted.

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

A. Revising paragraph (a)(1).

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

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

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

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

participation continues''.

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

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

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

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

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

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

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

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

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

[[Page 58981]]

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

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

the appeal data must be submitted.''

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

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

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

``360''.

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

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

delinquency began before October 7, 1998)''.

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

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

Secretary removes them from both the number of students who entered

repayment and the number of students who defaulted.''

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

respect to the servicing and collecting of delinquent loans prior to

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

history records maintained by the Department's Direct Loan Servicer

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

cohort rate or weighted average cohort rate''.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

U. Adding a new paragraph (k).

V. Revising the OMB control number following the section.

Sec. 668.17 Default reduction and prevention measures.

(a) * * *

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

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

for an institution, the Secretary notifies the institution of that

rate.

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

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

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

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

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

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

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

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

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

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

copy of the data to the institution.

* * * * *

(b) * * *

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

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

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

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

Federal Pell Grant Program if the Secretary determines that the

institution--

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

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

not reinstated;

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

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

did not subsequently re-apply to participate; or

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

or after July 7, 1998.

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

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

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

institution--

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

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

Program;

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

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

agreement satisfactory to the Secretary; and

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

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

this section.

(6)(i) An institution may, notwithstanding Sec. 668.26, continue to

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

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

the Secretary receives an appeal that is complete, accurate, and timely

in accordance with paragraph (c) of this section.

(ii) If an institution subject to an action under paragraph (a)(3),

(b)(1), or (b)(2) of this section files a complete, accurate, and

timely appeal under paragraph (c) of this section and the institution's

appeal is unsuccessful--

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

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

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

Direct Loan Program loan for which the institution certified and

delivered or originated and disbursed funds more than 30 calendar days

after the date the institution received its most recent notification

under paragraph (a)(1)(i) of this section;

(B) The Secretary excludes from the estimate calculated under

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

to funds delivered or disbursed by the institution more than 45

calendar days after the date on which the institution submitted its

completed appeal to the Secretary; and

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

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

of the Secretary's notification, unless--

(1) The institution files an appeal under the procedures

established in subpart H of this part, for which the calculation of the

institution's liability

[[Page 58982]]

is considered a final program review determination; or

(2) The Secretary permits a longer repayment period.

(iii) An institution may suspend its participation in the FFEL or

Direct Loan Program during the period in which it would otherwise be

subject to a liability under paragraph (b)(6)(ii) of this section.

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

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

(k) of this section.

(c) * * *

(1) * * *

(ii) The institution meets one of the following exceptional

mitigating circumstances:

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

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

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

are available.

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

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

determined by multiplying its FFEL Program cohort default rate, Direct

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

fiscal year by the percentage that is calculated by dividing--

(i) The number of students who received an FFEL or Direct Loan to

attend the institution during a loan period that coincided with any

part of a 12-month period that ended during the 6 months immediately

preceding that fiscal year; by

(ii) The number of regular students, as defined in 34 CFR 600.2,

who were enrolled at the institution on at least a half-time basis

during any part of the same 12-month period.

(B)(1) The report of an independent auditor (as defined in

Sec. 668.23(a)(1)), submitted under paragraph (c)(7) of this section,

certifies that the institution's economically disadvantaged rate is

two-thirds or more, as determined under paragraph (c)(1)(ii)(B)(2) of

this section, and--

(i) If the institution offers an associate, baccalaureate, graduate

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

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

section; or

(ii) If the institution does not offer an associate, baccalaureate,

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

percent or more, as determined under paragraph (c)(1)(ii)(B)(4) of this

section.

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

an institution's economically disadvantaged rate is the percentage of

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

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

ended during the 6 months immediately preceding the fiscal year for

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

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

weighted average cohort rate) is determined, who--

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

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

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

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

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

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

the Department of Health and Human Services.

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

an institution's completion rate is the percentage of its regular

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

program and scheduled to complete their programs, as described in

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

to determine its economically disadvantaged rate under paragraph

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

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

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

program;

(iii) Remained enrolled and making satisfactory progress toward

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

month period; or

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

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

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

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

an institution's placement rate is the percentage of its former

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

section, who are employed, in an occupation for which the institution

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

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

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

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

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

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

institution.

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

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

of this section.

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

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

section include only students who were initially enrolled in eligible

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

the time of enrollment, to complete their educational programs during

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

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

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

student would have received a 100 percent tuition refund from the

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

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

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

program at the institution and is making satisfactory progress.

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

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

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

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

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

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

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

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

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

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

has determined the institution's rate, a total of 30 or fewer borrowers

entered repayment on a loan or loans included in a calculation of the

institution's rate.

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

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

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

which--

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

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

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

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

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

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

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

[[Page 58983]]

student remained enrolled at that level of enrollment throughout the

program.

* * * * *

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

exceptional mitigating circumstances criteria in paragraph

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

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

loss of participation, notice of its intent to appeal under that

paragraph, in a format prescribed by the Secretary; and

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

loss of participation, the independent auditor's compliance attestation

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

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

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

Secretary.

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

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

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

management's assertion met the exceptional mitigating circumstances

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

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

material respects.

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

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

engagement performed in accordance with the American Institute of

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

Attestation Engagements, Compliance Attestation (AICPA, Professional

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

Standards issued by the Comptroller General of the United States.

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

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

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

meets the criteria for the appeal; or

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

or institution's management's assertion described in paragraph

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

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

examination does not meet the requirements of this section; or

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

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

the Secretary.

* * * * *

(j) * * *

(1) * * *

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

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

calculation of that draft rate.

* * * * *

(4)(i) An institution may challenge an anticipated loss of

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

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

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

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

considered to be its most recent rate.

(iii) An institution's challenge under paragraph (j)(4)(i) of this

section must be submitted to the Secretary, in writing, no more than 30

calendar days after the date that the institution receives the draft

default rate information from the Secretary.

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

its challenge before the institution's FFEL Program cohort default

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

is published.

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

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

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

(b)(1), or (b)(2) of this section and the provisions of Sec. 668.16(m)

do not apply to a historically black college or university within the

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

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

Controlled Community College Assistance Act of 1978, or a Navajo

community college under the Navajo Community College Act if the

institution submits to the Secretary--

(i) By July 1, 1999--

(A) A default management plan; and

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

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

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

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

during the preceding 1-year period;

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

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

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

cohort rate; and

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

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

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

management plan must provide reasonable assurance that it will, no

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

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

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

provide this assurance include but are not limited to--

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

executive officer and relevant senior executive officials of the

institution and enlisting the support of representatives from offices

other than the financial aid office;

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

financial resources appropriate to implement the default management

plan;

(C) Defining the roles and responsibilities of the independent

third party;

(D) Defining evaluation methods and establishing a data collection

system for measuring and verifying relevant default management

statistics, including a statistical analysis of the borrowers who

default on their loans;

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

rate; and

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

institution's rate.

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

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

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

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

default management plan is unacceptable, the institution must consult

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

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

notice from the Secretary that the plan is unacceptable.

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

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

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

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

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

the Secretary.

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

this part. The sample is included to illustrate additional components

of an acceptable default management plan. Because institutions' family

income profiles, student borrowing patterns, histories, resources,

dollars in default, and targets for default reduction are

[[Page 58984]]

different, an institution must consider its own, individual

circumstances in developing and submitting its plan.

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

any individual or entity that--

(A) Provides technical assistance in developing and implementing

the institution's default management plan; and

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

substantial control over the institution.

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

for its services.

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

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

section are not considered to be inducements under 34 CFR 682.200 or

682.401(e).

(4) Substantial improvement. (i) For purposes of this section, an

institution's substantial improvement is determined based upon--

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

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

weighted average cohort rate;

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

default by using deferments, forbearances, and job placement

assistance;

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

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

professional study;

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

address is known;

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

by the institution;

(G) The implementation of alternative financial aid award policies

and development of financial resources that reduce the need for student

borrowing; or

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

status changes submitted by the institution to the National Student

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

(SSCR).

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

improvement, the Secretary considers the institution's performance in

light of--

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

default reduction;

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

default management plan during the previous

1-year period; and

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

1-year period.

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

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

provisions of paragraph (a)(3), (b)(1), or (b)(2) of this section and

the provisions of Sec. 668.16(m) do not apply to the institution for

that 1-year period, beginning on July 1, 1999, 2000, or 2001.

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

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

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

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

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

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

(Approved by the Office of Management and Budget under control

number 1845-0022)

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

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

Institutions

This appendix is provided as a sample plan for those schools

developing a default management plan in accordance with 34 CFR

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

reducing the number of students that default on federally funded

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

developing a default management plan. In developing a default

management plan, each school must consider its own history,

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

determine which activities will result in the most benefit to the

students and the school.

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

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

executive officer and relevant senior executive officials of the

school and enlisting the support of representatives from offices

other than the financial aid office.

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

financial resources appropriate to implement the default management

plan.

(3) Define the roles and responsibilities of the independent

third party.

(4) Define evaluation methods and establish a data collection

system for measuring and verifying relevant default management

statistics, including a statistical analysis of the borrowers who

default on their loans.

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

rate.

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

rate.

Additional Default Reduction Strategies

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

repayment responsibilities through counseling and debt management

activities.

(2) Enhance the enrollment retention and academic persistence of

borrowers through counseling and academic assistance.

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

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

borrower.

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

from lenders and guaranty agencies for FFEL Program loans and from

the Secretary for Direct Loan Program loans.

(5) Enhance student loan repayments through counseling the

borrower on loan repayment options and facilitating contact between

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

the Secretary for Direct Loan Program loans.

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

employment through career counseling, job placement assistance, and

facilitating unemployment deferments.

(7) Identify and implement alternative financial aid award

policies and develop alternative financial resources that will

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

academic study.

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

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

status by increasing, whenever possible, the communication and

contact with the parent or adult relative or guardian.

Defining the Roles and Responsibilities of Independent Third Party

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

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

third party.

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

of specific tasks.

(4) Assure that all the required work is satisfactorily

completed.

Statistics for Measuring Progress

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

fiscal year.

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

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

fiscal year.

(4) The number of enrolled borrowers that received default

prevention counseling services each fiscal year.

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

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

during each fiscal year.

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

fiscal year.

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

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

accordance with the default management plan.

[FR Doc. 99-28274 Filed 10-29-99; 8:45 am]

BILLING CODE 4000-01-U