[Federal Register Volume 59, Number 2 (Tuesday, January 4, 1994)]
[Rules and Regulations]
[Pages 472-486]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 93-32065]


[[Page Unknown]]

[Federal Register: January 4, 1994]


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Part VI





Department of Education





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34 CFR Part 685




Federal Direct Student Loan Program; Final Rule
DEPARTMENT OF EDUCATION

34 CFR Part 685

RIN 1840-AC05

 
Federal Direct Student Loan Program

AGENCY: Department of Education.

ACTION: Final standards, criteria, and procedures.

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SUMMARY: The Secretary of Education issues standards, criteria, and 
procedures governing the Federal Direct Student Loan (Direct Loan) 
Program in the academic year beginning July 1, 1994.
    These standards, criteria, and procedures govern the Federal Direct 
Stafford Loans Program, the Federal Direct Unsubsidized Stafford Loans 
Program, and the Federal Direct PLUS Program, collectively referred to 
as the Direct Loan Program.

EFFECTIVE DATE: The standards, criteria, and procedures in this notice 
are effective on January 4, 1994, with the exception of Secs. 685.204, 
685.206, 685.301, 685.302, 685.303, 685.304, and 685.308. These 
sections will become effective after the information collection 
requirements contained in those sections have been submitted by the 
Department of Education to, and approved by, the Office of Management 
and Budget under the Paperwork Reduction Act of 1980. If you want to 
know the effective date of these sections, call or write the Department 
of Education contact person. A document announcing the effective date 
will be published in the Federal Register.

FOR FURTHER INFORMATION CONTACT:
Lloyd Robertson, U.S. Department of Education, 400 Maryland Avenue, 
SW., (room 4310, ROB-3), Washington, DC 20202-5162. Telephone: (202) 
708-8242. Individuals who use a telecommunications device for the deaf 
(TDD) may call the Federal Information Relay Service (FIRS) at 1-800-
877-8339 between 8 a.m. and 8 p.m., Eastern time, Monday through 
Friday.

SUPPLEMENTARY INFORMATION: The Student Loan Reform Act of 1993, enacted 
on August 10, 1993, established the Direct Loan Program under the 
Higher Education Act of 1965, as amended (HEA). See subtitle A of the 
Omnibus Budget Reconciliation Act of 1993 (Pub. L. 103-66). Under the 
Direct Loan Program, loan capital is provided directly to student and 
parent borrowers by the Federal Government rather than through private 
lenders. This program replaces the direct loan demonstration program 
that was authorized to begin in July 1994 by the Higher Education 
Amendments of 1992 (Pub. L. 102-325).
    The HEA directs the Secretary to consult with members of the higher 
education community and to publish a notice of standards, criteria, and 
procedures for the program's first year in lieu of issuing regulations 
using the Department's usual procedures. The Secretary's 
representatives participated in regional meetings at various locations 
around the country in which members of the higher education community 
including representatives of colleges, universities, proprietary 
schools, and educational associations were consulted. The Secretary's 
representatives have also met with numerous national, regional, and 
state organizations representing the financial aid community to discuss 
various aspects of the Direct Loan Program. The Secretary's 
representatives have met with personnel from schools and financial 
advisors to assist in the development of the software that will be used 
by Direct Loan Program schools. In addition, the notice is based in 
part on final regulations for the direct loan demonstration program in 
34 CFR part 685 that were published in the Federal Register on July 2, 
1993 (58 FR 36088), following the publication of a notice of proposed 
rulemaking and consideration of public comment. The Secretary believes 
that participating schools' familiarity with those regulations will 
ease the burden of their participation in the Direct Loan Program.
    This notice establishes the policies and procedures necessary for 
schools to implement the Direct Loan Program and most of the policies 
and procedures relating to borrowers in the Direct Loan Program. The 
Secretary anticipates publishing another notice in the spring of 1994 
to govern repayment of loans for the 1994-1995 academic year and 
establish standards and procedures relating to Federal Direct 
Consolidation Loans.

I. Background

    On September 10, 1993, the Secretary published a notice in the 
Federal Register (58 FR 47816) soliciting applications from schools for 
participation in the Direct Loan Program. Over 1,100 schools responded 
to that invitation. The Secretary selected 104 schools, representing 
approximately five percent (5%) of the total Federal Family Education 
Loan Program (FFEL) loan volume, to participate in the Direct Loan 
Program for the academic year beginning July 1, 1994. The rules in this 
notice are applicable for the period beginning July 1, 1994, and ending 
June 30, 1995. As required by statute, program regulations for the 
Direct Loan Program in future years will be developed through the use 
of a negotiated rulemaking process to the extent practicable.

II. Participation

    Schools may participate in the Direct Loan Program by originating 
loans directly, by participating in a consortium of schools that 
originates loans directly, or by using an alternative originator to 
originate loans. All schools are responsible for determining student 
eligibility for Direct Loan and disbursing loan proceeds to borrowers. 
Some schools participate in the Direct Loan Program and the FFEL 
concurrently, while the rest of the selected schools participate 
exclusively in the Direct Loan Program. Some of the schools that 
participate in both programs concurrently make Direct Loans available 
to first time borrowers only; other schools make Direct Loans available 
to students studying in certain divisions of the school and make FFEL 
loans available to their other students.
    The standards and procedures in this notice are, unless otherwise 
noted, applicable to each participating school regardless of its method 
or volume of participation. As stated in the notice announcing the 
selection of participating schools for the 1994-95 academic year, a 
school may withdraw from participation within 30 days of the 
publication of these standards, criteria, and procedures.

III. Administrative Fee for Loan Origination

    Schools and consortia that originate loans will be paid a fee to 
assist in meeting the costs of loan origination, including the costs 
associated with drawing down the funds, maintaining the Direct Loan 
Program account, and reconciling cash and individual loan records with 
the Secretary each month. The Secretary prefers that originating 
schools print promissory note/disclosure statements on site. To assist 
in compensating for the costs associated with this function, schools 
that print promissory notes/disclosure statements will be paid a larger 
fee than schools that do not print promissory note/disclosure 
statements.
    The administrative fee is paid for borrowers for whom a first 
disbursement has been made and for whom the first disbursement has been 
reconciled with the Secretary. For the 1994-1995 academic year, the 
program-wide average administrative fee may not exceed $10 per 
borrower. The Secretary will notify schools that originate loans of the 
actual fee schedule and payment procedures when they are determined.
    This fee structure is applicable to the first year of the program 
only and is likely to be restructured through the negotiated rulemaking 
process and when additional data are available.

IV. Making Direct Loans

    Beginning with the 1994-95 academic year, all student applications 
for Federal student aid, including Direct Loans, will be processed by 
the Central Processor System (CPS). The school will receive an official 
output from the CPS in the form of a Student Aid Report (SAR) or an 
Electronic Student Aid Report (ESAR). The ESAR output may be on tapes, 
cartridges, or rosters. With this official output, the school will be 
able to assemble a financial aid award package. A school participating 
in the Direct Loan Program may package Direct Loans as part of the 
financial aid package in the same manner that a school participating in 
the FFEL Program packages FFEL Program loans.
    A school in the Direct Loan Program will either originate loans or 
use the services for an alternative originator. A school will use an 
alternative originator if it chooses not to originate loans or is not 
eligible to originate loans. For the first year of the Direct Loan 
Program, the criteria for eligibility to originate were prescribed by 
statute. These criteria were included in the September 10, 1993 Federal 
Register notice.

A. Originating Schools

    Under the Direct Loan Program, schools and consortia that originate 
loans must use software provided by the Secretary, or other software 
based on specifications provided by the Secretary, to create a loan-
origination record containing the basic information necessary to make a 
loan. The software provided by the Secretary reformats the data 
received from the CPS and prompts the school to add data collected by 
the school, such as the type of loan, loan amount, and disbursement 
dates. Because schools have different needs, various options are 
available to schools after they generate the loan origination record. 
The software allows schools to computer-generate combined promissory 
notes/disclosure statements. Alternatively, a school could transmit the 
information collected by the school to the Direct Loan Program 
Servicer, which upon request, will print promissory notes/disclosure 
statements on behalf of the school and ship them to the school.
    A student who accepts a Direct Loan completes a promissory note and 
returns it to the school; the school may not disburse Direct Loan funds 
without a completed promissory note.
    An originating school in the Direct Loan Program requests and 
obtains loan funds from the Secretary using a process similar to the 
process for drawing down funds for other Department of Education (ED) 
programs. The Secretary adopted this process to ease the burden on 
schools participating in the Direct Loan Program. The Direct Loan 
Program system, however, differs from the systems used for other ED 
programs in two ways. First, a school transmits to ED a specific Direct 
Loan funding request that is separate from its funding requests for 
other programs. Direct Loan capital must be tracked separately and 
cannot be used for purposes other than making Direct Loans. The actual 
transmission request and subsequent electronic transfer of funds uses 
the same delivery process as is used for the Federal Pell Grant 
Program. After a request for funds is received, the Secretary uses the 
Automated Clearinghouse (ACH) process through the Federal Reserve 
Banking system to deposit funds in a school's designated bank account. 
Currently, this process takes between 48 to 72 hours from the school's 
request for funds until the school's receipt of funds.
    The second difference between the Direct Loan Program system and 
the system used for other ED programs is that the amount of loan 
capital needed by the school is dependent on the eligibility of student 
and parent borrowers at the school. Funds for the Direct Loan Program 
are not limited by Congressional appropriations. As a result, there is 
no need for a maximum funding level to be authorized for a school in 
the Direct Loan Program. The Direct Loan system, however, incorporates 
internal fund controls to monitor school drawdown requests; these 
controls will flag any requests that appear excessive. The system also 
identifies schools that have failed to comply with program 
requirements. These flags result in immediate inquiry and intervention 
by the Secretary.
    The software provided by the Secretary computes gross 
disbursements, loan fees, and net disbursements on the basis of the 
loan amounts entered by the school. A school requests the amount needed 
to fund net disbursements to borrowers. The Secretary expects that 
schools will follow the guidelines for cash management set out in The 
Blue Book, which is the manual of accounting, recordkeeping, and 
reporting requirements for postsecondary educational institutions under 
the federally-funded student financial aid programs. This notice 
requires any interest earned on funds drawn down to be returned to the 
Secretary. For future years, the Secretary anticipates that issues 
related to fiscal control and final accountability will be addressed in 
more detail in negotiated rulemaking.
    After receiving funds from the Secretary, a school disburses funds 
to students by crediting their accounts at the school or by sending 
checks to the students. Before a school may disburse funds to a 
borrower, the school must ensure that it has a completed and signed 
promissory note. After the first disbursement is made, the school must 
record the actual disbursed amount and the date of each disbursement in 
the loan-origination record and transmit all completed loan records and 
promissory notes to the Secretary. The school transmits subsequent 
disbursement data to the Secretary as the disbursements occur.
    A school is required to reconcile cash and individual loan records 
monthly. To reconcile cash, a school must provide documentation that 
the total disbursement minus cancellations, plus return of excess cash, 
is equal to the amount of money the school has drawn down during a one-
month period by the end of the next month. For example, loan records 
and promissory notes for all disbursements and cancellations made in 
July 1994 must be transmitted to the Secretary by the end of August 
1994. To reconcile loan records, a school's records must match the 
records of the Direct Loan Program Servicer. The software that is 
provided to participating schools is designed to assist schools in this 
reconciliation process.

B. Schools That Use an Alternative Originator

    Schools that use an alternative originator transmit to the Direct 
Loan Program Servicer the data necessary for the Direct Loan Program 
Servicer to generate the combined promissory note/disclosure statement 
unless the school chooses to print the promissory note/disclosure 
statement on its premises. After the Direct Loan Program Servicer 
generates the promissory note/disclosure statement, it is sent to the 
school or to the borrower depending upon the school's established 
procedures. The borrower must complete the promissory note/disclosure 
statement and forward it as instructed to the Direct Loan Program 
Servicer or to the school. The Direct Loan Program Servicer must review 
the promissory note/disclosure statement before funds can be disbursed. 
If the Direct Loan Program Servicer or the school determines that the 
promissory note/disclosure statement is not accurate or complete, the 
promissory note/disclosure statement must be correct and complete 
before funds can be disbursed. The Direct Loan Program Servicer 
initiates drawdown of funds to the school based on the completed 
promissory note/disclosure statement. The school also receives a roster 
from the Direct Loan Program Servicer identifying each borrower, the 
disbursement date and amount to be disbursed for each borrower, and the 
total amount of funds received by the school. Schools that use 
alternative origination are still responsible for reporting actual 
disbursement data, reconciling cash, and returning funds that are not 
used or for which the borrower is not eligible.
    In short, the procedures used by a school that uses alternative 
origination differ in two ways from the procedures of originating 
schools. The first is that a school under alternative origination may 
choose to designate the alternative originator as the manager of 
promissory note/disclosure statements. The second is that a school 
under alternative origination does not manage the funds draw down 
process; instead, the school receives funds drawn down by the 
alternative originator only for those completed promissory notes in the 
possession of the alternative originator.
    The Secretary anticipates that issues related to participation of 
alternative originators in future years will be subject to the 
negotiated rulemaking process.

C. Federal Direct PLUS Loans

    Federal Direct PLUS loans are made through a process similar to the 
one used in the Federal PLUS loan program. The parent obtains a 
combined application/promissory note from the school and, after 
completing the combined application/promissory note, sends it to the 
school. The school completes the school section of the application/
promissory note and forwards it to the Direct Loan Program Servicer 
where data from the note is key entered and a credit check is 
performed. Alternatively, a school enters data from the note using the 
software provided by the Direct Loan Program Servicer and 
electronically forwards this information to the Direct Loan Program 
Servicer. In either case, the Direct Loan Program Servicer performs a 
credit check to determine, as required by section 428B(a) of the HEA, 
whether the parent has an adverse credit history and notifies the 
school and the parent of the results. If the loan is approved, the 
Direct Loan Program Servicer sends a disclosure statement to the 
parent. If the credit check indicates an adverse credit history, the 
Secretary advises the parent of available options; for example, the 
parent could obtain an endorser without an adverse credit history. If 
the loan is approved and the school originates loans, the school may 
draw down money and disburse loan funds in the same manner as it would 
for other loans made under the Direct Loan Program. If the school does 
not originate loans, the alternative originator electronically 
transmits the funding request for the school based on the application/
promissory notes that the Direct Loan Program Servicer holds for that 
school.

V. Loan Servicing

    The Secretary is responsible for servicing and collecting Direct 
Loans. As noted above, a notice specifically concerned with repayment 
and collection will be published shortly.
    A school's interaction with the Direct Loan Program Servicer during 
the servicing and collection of the loan is similar to the interaction 
schools currently have with lenders and guaranty agencies in the FFEL 
Program. Schools must respond to periodic student status confirmation 
requests as well as to ad hoc requests for information regarding 
borrowers from the Direct Loan Program Servicer.
    Borrowers who default on Direct Loans are added to ED's debt 
collection system and are subject to all legally authorized default-
collection activities.

VI. Impact of Other Rules

    Many of the provisions of the FFEL Program that are applicable to 
the Direct Loan Program have been incorporated into this notice of 
standards, criteria, and procedures. The Secretary adopted those 
provisions because schools are familiar with them from their 
participation in the FFEL Program. Certain policies and procedures 
currently being developed through negotiated rulemaking for FFEL 
Program regulations will be adopted in the Direct Loan Program, 
including policies relating to borrower forgiveness for students who 
attended schools that have closed or whose eligibility was falsely 
certified and policies controlling the deferment for economic hardship.

VII. Summary of Contents

A. Subpart A--Purpose and Scope

    Subpart A contains descriptions of the types of loans that will be 
made, the entities involved, and the definitions used in the Direct 
Loan Program.

B. Subpart B--Borrower Provisions

    Subpart B contains conditions of borrower eligibility, which are 
identical to the borrower eligibility provisions in the FFEL Program. 
The charges for which borrowers are responsible, loan limits, deferment 
and forbearance options, and borrower defenses to repayment are also 
included. The Student Loan Reform Act of 1993 eliminated the Federal 
Supplemental Loans for Students (SLS) program but increased the loan 
limits for the Unsubsidized Stafford Program beginning July 1, 1994. 
The Higher Education Technical Amendments of 1993 further revised the 
loan limits. The revised loan limits are included in this notice along 
with a chart (Appendix A) which illustrates the loan limits that will 
be applicable as of July 1, 1994.

C. Subpart C--Requirements, Standards, and Payments for Schools in the 
Direct Loan Program

    Subpart C contains those provisions governing a school's 
participation in the Direct Loan Program, including disbursement 
procedures, entrance and exit counseling, withdrawal procedures, 
recordkeeping and funds control requirements. The Secretary anticipates 
that schools will continue with the conscientious efforts demonstrated 
in the FFEL Program in tailoring the counseling to the borrower's 
particular needs and making counseling accessible. These efforts have 
included, for example, sign language interpreters for hearing impaired 
borrowers or translations for limited English proficient borrowers.

Executive Order 12866

    The contents of this notice have been reviewed in accordance with 
Executive Order 12866. Under the terms of the order, the Secretary has 
assessed the potential costs and benefits of the standards, criteria, 
and procedures in this notice.
    The potential costs associated with the contents of this notice are 
those resulting from statutory requirements and those determined by the 
Secretary to be necessary for administering this program effectively 
and efficiently. In assessing the potential costs and benefits--both 
quantitative and qualitative--of these standards, criteria, and 
procedures, the Secretary has determined that the benefits of these 
standards, criteria, and procedures justify the costs.
    The Secretary has also determined that the contents of this notice 
do not unduly interfere with State, local, and tribal governments in 
the exercise of their governmental functions.
    The contents of this notice are consistent with the requirements of 
the HEA and promote the President's priorities.

Waiver of Rulemaking

    It is the practice of the Secretary to offer interested parties an 
opportunity to comment on proposed regulations. However, Public Law 
103-66 requires that the Secretary publish a notice in lieu of 
regulations for the first year of the Direct Loan Program and exempts 
the contents of the notice from the rulemaking requirements of section 
431 of the General Education Provisions Act. While the Secretary has 
consulted with members of the higher education community in the 
development of this notice, the statutory timeframe for the program 
does not permit the solicitation of further public comment. A public 
comment period, while helpful, would seriously delay the provision of 
necessary guidance for the operation of the Direct Loan Program. 
Therefore, the Secretary finds that solicitation of public comments 
would be impracticable and contrary to the public interest under 5 
U.S.C. 553(b)(B).

List of Subjects in 34 CFR Part 685

    Administrative practice or procedure, Colleges and universities, 
Education, Loan programs-education, Student aid, Vocational education.

(Catalog of Federal Domestic Assistance Number 84.268, Federal 
Direct Student Loan Program)

    Dated: December 27, 1993.
Richard W. Riley,
Secretary of Education.
    The Secretary revises part 685 of title 34 of the Code of Federal 
Regulations to read as follows:

PART 685--STANDARDS, CRITERIA, AND PROCEDURES FOR THE DIRECT LOANS 
PROGRAM

Subpart A--Purpose and Scope

Sec.
685.100  The Federal Direct Student Loan Program.
685.101  Participation in the Direct Loan Program.
685.102  Definitions.
685.103  Applicability of subparts.

Subpart B--Borrower Provisions

685.200  Borrower eligibility.
685.201  Obtaining a loan.
685.202  Charges for which Direct Loan Program borrowers are 
responsible.
685.203  Loan limits.
685.204  Deferment.
685.205  Forbearance.
685.206  Borrower responsibilities.

Subpart C--Requirements, Standards and Payments for Direct Loan Program 
Schools

685.300  Agreements between an eligible school and the Secretary for 
participation in the Direct Loan Program.
685.301  Certification by a Direct Loan Program school for a loan.
685.302  Correspondence school schedule requirements.
685.303  Disbursing borrowers' loan proceeds and counseling 
borrowers.
685.304  Determining the date of a student's withdrawal.
685.305  Payment of a refund to the Secretary.
685.306  Withdrawal procedure for schools participating in the 
Direct Loan Program.
685.307  Remedial actions.
685.308  Administrative and fiscal control and fund accounting 
requirements for schools participating in the Direct Loan Program.

Appendix A  New Loan Maximums as of July 1, 1994

    Authority: 20 U.S.C. 1087a et seq.

Subpart A--Purpose and Scope


Sec. 685.100  The Federal Direct Student Loan Program.

    (a) Under the Federal Direct Student Loan Program (Direct Loan 
Program), the Secretary makes loans to enable a student or parent to 
pay the costs of the student's attendance at postsecondary schools. 
This part governs the Federal Direct Stafford Loan Program, the Federal 
Direct Unsubsidized Stafford Loan Program, and the Federal Direct PLUS 
Program for the academic year beginning July 1, 1994. The Secretary 
makes loans under the following program components:
    (1) Federal Direct Stafford Loan Program, which provides loans to 
undergraduate, graduate, and professional students. The Secretary 
subsidizes the interest while the borrower is in an in-school, grace, 
or deferment period.
    (2) Federal Direct Unsubsidized Stafford Loan Program, which 
provides loans to undergraduate, graduate and professional students. 
The borrower is responsible for the interest that accrues during any 
period.
    (3) Federal Direct PLUS Program, which provides loans to parents of 
dependent students. The borrower is responsible for the interest that 
accrues during any period.
    (b) The Secretary makes a Federal Direct Stafford Loan, a Federal 
Direct Unsubsidized Stafford Loan, or a Federal Direct PLUS loan only 
to a student or a parent of a student enrolled in a school that has 
been selected by the Secretary to participate in the Direct Loan 
Program.


(Authority: 20 U.S.C. 1087a et seq.)


Sec. 685.101  Participation in the Direct Loan Program.

    (a)(1) Colleges, universities, graduate and professional schools, 
vocational, and technical schools selected by the Secretary may 
participate in the Direct Loan Program. Participation in the Direct 
Loan Program enables an eligible student or parent to obtain a loan to 
pay for the student's cost of education at the school.
    (2) The Secretary has the authority to permit a school to 
participate in both the Federal Family Education Loan (FFEL) Program, 
as defined in 34 CFR part 600 and the Direct Loan Program. A school 
permitted to participate in both the FFEL Program and the Direct Loan 
Program may certify loans under the FFEL Program according to the terms 
of its agreement with the Secretary.
    (b) An eligible student who is enrolled at a school participating 
in the Direct Loan Program may borrow under the Federal Direct Stafford 
Loan and Federal Direct Unsubsidized Stafford Loan programs. A parent 
of an eligible dependent student may borrow under the Federal Direct 
PLUS Program.

(Authority: 20 U.S.C. 1087a et seq.)


Sec. 685.102  Definitions.

    (a)(1) The following definitions are set forth in the Student 
Assistance General Provisions, 34 CFR part 668:

Academic year
Campus-based programs
Dependent student
Eligible program
Eligible student
Enrolled
Federal Consolidation Loan Program
Federal Direct Student Loan Program (Direct Loan Program)
Federal Pell Grant Program
Federal Perkins Loan Program
Federal PLUS Program
Federal-State Student Incentive Grant Program
Federal Supplemental Educational Opportunity Grant Program
Federal Work-Study Program
Independent student
Parent
State
U.S. citizen or national

    (2) The following definitions are set forth in the regulations for 
Institutional Eligibility Under the Higher Education Act of 1965, as 
amended, 34 CFR part 600:

Accredited
Clock hour
Educational program
Eligible institution
Federal Family Education Loan (FFEL) Program
Institution of higher education
Nationally recognized accrediting agency or association
Preaccredited
Program of study by correspondence
Secretary

    (3) The following definitions are set forth in the regulations for 
the Federal Family Education Loan (FFEL) Program, 34 CFR part 682:

Act
Endorser
Expected family contribution
Federal Insured Student Loan (FISL) Program
Federal Stafford Loan Program
Foreign school
Full-time student
Graduate or professional student
Guaranty agency
Holder
Legal guardian
Lender
Totally and permanently disabled
Undergraduate student

    (b) The following definitions also apply to this part:
    Alternative originator: An entity that originates Direct Loans to 
students and parents of students who attend a Direct Loan Program 
school that does not have an agreement with the Secretary to originate 
loans.
    Direct Loan Program borrower: An individual to whom a Direct Loan 
is made.
    Default: The failure of a borrower and endorser, if any, to make an 
installment payment when due, or to meet other terms of the promissory 
note, if the Secretary finds it reasonable to conclude that the 
borrower and endorser, if any, no longer intend to honor the obligation 
to repay, provided that this failure persists for--
    (1) 180 days for a loan repayable in monthly installments; or
    (2) 240 days for a loan repayable in less frequent installments.
    Direct Loan Program school: A school that has an agreement with the 
Secretary under Sec. 685.300 to participate in the Direct Loan Program.
    Disbursement: The delivery of loan proceeds by a school to a 
borrower, either directly or by applying the proceeds to the student's 
account with the school.
    Estimated cost of attendance: The tuition and fees normally 
assessed a student carrying the same academic workload as the student 
to whom or on whose behalf a Direct Loan is sought, as determined by 
the school, plus the school's estimate of other expenses reasonably 
related to attendance at that school, for the period of enrollment for 
which the loan is sought. They may include, but are not limited to--
    (1) The costs for rental or purchase of any equipment, materials, 
or supplies required of all students in the student's course of study, 
except for the cost of rental or purchase of telecommunications 
equipment for a student receiving all or part of his or her instruction 
by means of that telecommunications technology;
    (2) For a student attending the school on at least a half-time 
basis, an allowance for books, supplies, transportation, and 
miscellaneous personal expenses;
    (3) If applicable, the loan fee for the loan;
    (4) An allowance, as determined by the school, for room and board 
costs incurred by the student that includes--
    (i) For a student, without dependents, residing at home with 
parents, an allowance of at least $1,500;
    (ii) For a student, without dependents, residing in institutionally 
owned or operated housing, a standard allowance based on the amount 
normally assessed most of the school's residents for room and board; 
and
    (iii) For all other students, an allowance of not less than $2,500 
for expenses reasonably incurred by those students for room and board;
    (5) For a student enrolled in a program of study by correspondence, 
only the tuition and fees and, if required, books and supplies, travel, 
and room and board costs incurred specifically in fulfilling a required 
period of residential training;
    (6) For a student enrolled in an educational program that normally 
includes a formal program of study abroad, reasonable costs associated 
with that study;
    (7) For a student with one or more dependents, an allowance based 
on the expenses reasonably incurred for dependent care based on the 
number and age of the dependents; and
    (8) For a student with a disability, an allowance for those 
expenses related to his or her disability, including special services, 
transportation, equipment, and supplies that reasonably are incurred 
and not provided by other assisting agencies.
    Estimated financial assistance: (1) The estimated amount of 
assistance that a student has been or will be awarded, for a period of 
enrollment, from Federal, State, institutional, or other scholarship, 
grant, financial need-based employment, or loan programs, including but 
not limited to--
    (i) Veterans' educational benefits paid under chapters 30, 31, 32, 
and 35 of title 38 of the United States Code;
    (ii) Educational benefits paid under chapters 106 and 107 of title 
10 of the United States Code (Selected Reserve Educational Assistance 
Program);
    (iii) Reserve Officer Training Corps (ROTC) scholarships and 
subsistence allowances awarded under chapter 2 of title 10 and chapter 
2 of title 37 of the United States Code;
    (iv) Benefits paid under Public Law 97-376, section 156: Restored 
Entitlement Program for Survivors (or Quayle benefits);
    (v) Benefits paid under Public Law 96-342, section 903: Educational 
Assistance Pilot Program;
    (vi) Any educational benefits paid because of enrollment in a 
postsecondary education institution;
    (vii) The estimated amount of other Federal student financial aid, 
including, but not limited to, a Federal Direct Stafford loan eligible 
for interest subsidies, Federal Pell Grants, and to the extent funding 
is available, campus-based aid the student would be expected to receive 
if the student has applied or will apply for that aid; and
    (viii) In the case of a Federal Direct PLUS loan, the estimated 
amount of other Federal student financial aid, including but not 
limited to, a Federal Direct Stafford loan, Federal Pell grant, and 
campus-based aid that the student has been or will be awarded.
    (ix) If the student is applying for a loan to cover expenses 
incurred within the same enrollment period as that for which a prior 
Federal or conventional student loan was received, the amount of loan 
proceeds withheld by the Secretary, lender, or guaranty agency making 
or insuring the loan if those costs were included in computing the 
borrower's estimated cost of attendance for the prior loan.
    (2) The estimated amount of assistance does not include--
    (i) Those amounts used to replace the expected family contribution, 
including--
    (A) Federal Direct PLUS loan amounts; and
    (B) Private and State-sponsored loan program loan amounts; and
    (ii) Federal Perkins loan and Federal Work-Study funds that the 
school determines the student has declined for an acceptable reason.
    Federal Direct PLUS Program: A loan program authorized by title IV, 
part D of the Act that provides loans to parents of undergraduate 
students attending Direct Loan Program schools and one of the 
components of the Direct Loan Program.
    Federal Direct Stafford Loan Program: A loan program authorized by 
title IV, part D of the Act that provides loans to undergraduate, 
graduate, and professional students attending Direct Loan Program 
schools and one of the components of the Direct Loan Program.
    Federal Direct Unsubsidized Stafford Loan Program: A loan program 
authorized by title IV, part D of the Act that provides loans to 
undergraduate, graduate, and professional students attending Direct 
Loan Program schools and one of the components of the Direct Loan 
Program. The interest that accrues during all periods is paid by the 
borrower.
    Grace period: The period that begins on the day after a Direct Loan 
Program borrower ceases to be enrolled as at least a half-time student 
at an eligible institution and ends on the day before the repayment 
period begins.
    Half-time student: A student enrolled in a school that is 
participating in the FFEL Program or the Direct Loan Program and is 
carrying an academic workload that amounts to at least one-half the 
workload of a full-time student, as determined by the school, and is 
not a full-time student. A student enrolled solely in an eligible 
program of study by correspondence as defined in 34 CFR 668.8 is 
considered a half-time student.
    Interest rate: The annual interest rate that is charged on a loan, 
under title IV, part D of the Act.
    Loan fee: A fee, payable by the borrower, that is used to help 
defray the costs of the Direct Loan Program.
    Originating school: A school that has an agreement with the 
Secretary under Sec. 685.300(b) to originate loans in the Direct Loan 
Program. An originating school requests and obtains funds to originate 
Direct Loans using a draw down process similar to the process for 
drawing down funds for other federal student aid programs.
    Period of enrollment: The period for which a Federal Direct 
Stafford, Federal Direct Unsubsidized Stafford, or Federal Direct PLUS 
loan is intended. The period of enrollment must coincide with a bona 
fide academic term (i.e., semester trimester, quarter, academic year, 
and length of the program of study), established by the school, for 
which institutional charges are generally assessed. The period of 
enrollment is also referred to as the loan period.
    Repayment period: (1) For a Federal Direct Stafford Loan or Federal 
Direct Unsubsidized Stafford Loan, the period beginning on the date 
following the expiration of the grace period and ending when the loan 
is paid-in-full, exclusive of any period of deferment or forbearance.
    (2) For a Federal Direct PLUS loan, the period that begins on the 
date the loan is fully disbursed and ends when the loan is paid-in-
full, exclusive of any period of deferment or forbearance.
    Satisfactory repayment arrangement. The making of six consecutive 
voluntary on-time full monthly payments on a defaulted loan to regain 
further eligibility for Direct Loan Program loans. The required monthly 
payment amount may not be more than is reasonable and affordable based 
on the borrower's total financial circumstances. On-time means a 
payment made within fifteen days of the scheduled due date and 
voluntary payments are those payments made directly by the borrower, 
regardless of whether there is a judgment against the borrower, and do 
not include payments obtained by income tax offset, garnishment, or 
income or asset execution.

(Authority: 20 U.S.C. 1087a et seq.)


Sec. 685.103  Applicability of subparts.

    (a) Subpart A contains general information regarding the purpose 
and scope of the Direct Loan Program.
    (b) Subpart B contains provisions that apply to borrowers in the 
Direct Loan Program.
    (c) Subpart C contains certain requirements that apply to schools 
in the Direct Loan Program.

(Authority: 20 U.S.C. 1087a et seq.)

Subpart B--Borrower Provisions


Sec. 685.200  Borrower eligibility.

    (a)(1) Student borrower. A student is eligible to receive a Federal 
Direct Stafford Loan, or a Federal Direct Unsubsidized Stafford Loan, 
or a combination of such loans, if the student is enrolled in a Direct 
Loan Program school, meets the requirements for an eligible student 
under 34 CFR part 668, and--
    (i) In the case of an undergraduate student who seeks a Federal 
Direct Stafford or Federal Direct Unsubsidized Stafford Loan for the 
cost of attendance at a school that participates in the Federal Pell 
Grant Program, has received a final determination, or, in the case of a 
student who has filed an application with the school for a Federal Pell 
Grant, a preliminary determination from the school of the student's 
eligibility or ineligibility for a Federal Pell Grant and, if eligible, 
has applied for the period of enrollment for which the loan is sought;
    (ii)(A) Reaffirms any FFEL Program or Direct Loan Program amount 
that previously was cancelled due to the borrower's total and permanent 
disability, or that was discharged in bankruptcy, or written off.
    (B) For purposes of this paragraph, reaffirmation means the 
acknowledgement of the loan by the borrower in a legally binding 
manner. The acknowledgement may include, but is not limited to, the 
borrower--
    (1) Signing a new promissory note or repayment schedule; or
    (2) Making a payment on the loan;
    (iii)(A) In the case of a borrower whose previous loan was 
cancelled due to total and permanent disability, obtains a 
certification from a physician that the borrower's condition has 
improved and that the borrower is able to engage in substantial gainful 
activity; and
    (B) Signs a statement acknowledging that any Direct Loan the 
borrower receives cannot be cancelled in the future on the basis of any 
present impairment, unless that condition substantially deteriorates;
    (iv) In the case of any student who seeks a loan but does not have 
a certificate of graduation from a school providing secondary education 
or the recognized equivalent of such a certificate, has passed an 
independently administered examination approved by the Secretary; and
    (v) Is not serving in a medical internship or residency program, 
except for an internship in dentistry.
    (2) Special conditions for Federal Direct Stafford Loan borrowers.
    (i) A Federal Direct Stafford loan borrower must demonstrate 
financial need in accordance with title IV, part F of the act.
    (ii) The Secretary considers a member of a religious order, group, 
community, society, agency, or other organization who is pursuing a 
course of study at an institution of higher education to have no 
financial need if that organization--
    (A) Has as its primary objective the promotion of ideals and 
beliefs regarding a Supreme Being;
    (B) Requires its members to forego monetary or other support 
substantially beyond the support it provides; and
    (C)(1) Directs the member to pursue the course of study; or
    (2) Provides subsistence support to its members.
    (b) Parent borrower. A parent is eligible to receive a Federal 
Direct PLUS loan, if the parent--
    (1) Is borrowing to pay for the educational costs of a dependent 
undergraduate student who meets the requirements for an eligible 
student set forth in 34 CFR part 668;
    (2) Provides his or her and the student's social security number;
    (3) Meets the requirements pertaining to citizenship and residency 
that apply to the student in 34 CFR 668.7;
    (4) Meets the requirements concerning defaults and overpayments 
that apply to the student in 34 CFR 668.7;
    (5) Except for the completion of a Statement of Selective Service 
Registration Status, complies with the requirements for submission of a 
Statement of Educational Purpose that apply to the student in 34 CFR 
part 668; and
    (6) Meets the requirements of paragraphs (a)(1)(ii) and (a)(1)(iii) 
of this section; and
    (7)(i)(A) Does not have an adverse credit history; or
    (B) Has an adverse credit history, but has obtained an endorser who 
does not have an adverse credit history.
    (ii) For purposes of paragraph (b)(7)(i) of this section, an 
adverse credit history means that as of the date of the credit report, 
the applicant--
    (A) Is 90 or more days delinquent on any debt;
    (B) Has been the subject of a default determination on any debt; or
    (C) Has been the subject of a bankruptcy discharge, foreclosure, 
repossession, tax lien, wage garnishment or write-off of a Title IV 
debt during the five years preceding the date of the credit report.
    (c) Use of loan proceeds to replace expected family contribution. A 
borrower may use the amount of a Federal Direct Unsubsidized Loan, 
Federal Direct PLUS loan, State-sponsored loan or other non-Federal 
loan obtained for a loan period to replace the expected family 
contribution for that loan period.
    (d) Defaulted FFEL Program borrower. In the case of a student, or 
parent, borrower who is currently in default on an FFEL Program loan, 
the borrower must make satisfactory repayment arrangements on the 
defaulted loan.

(Authority: 20 U.S.C. 1087a et seq.)

Sec. 685.201  Obtaining a loan.

    (a) Application for a Federal Direct Stafford loan. To obtain a 
Federal Direct Stafford loan, a student shall complete and submit a 
Free Application for Federal Student Aid. If the student is eligible 
for a Federal Direct Stafford loan, the school shall obtain a completed 
promissory note from the student and complete the origination of the 
loan. If the student is attending a school that uses an alternative 
originator, the school must transmit the student's loan origination 
record to the alternative originator, which will complete the 
origination of the loan.
    (b) Application for a Federal Direct Unsubsidized loan. To obtain a 
Federal Direct Unsubsidized loan, a student shall complete and submit a 
Free Application for Federal Student Aid. If the student is eligible 
for a Federal Direct Unsubsidized Stafford loan, the school shall 
obtain a completed promissory note from the student and complete the 
origination of the loan. If the student is attending a school that uses 
an alternative originator, the school must transmit a student's loan 
origination record to the alternative originator, which will complete 
the origination of the loan.
    (c) Application for a Federal Direct PLUS loan. To obtain a Federal 
Direct PLUS loan, the parent shall complete an application/promissory 
note and submit it to the school. After the school completes its 
portion of the application/promissory note, the school submits it to 
the Secretary. If the parent does not have an adverse credit history an 
originating school shall complete the origination of the loan. If the 
student for whom the loan is intended is attending a school that uses 
an alternative originator, the alternative originator will complete the 
origination of the loan.

(Authority: 20 U.S.C. 1087a et seq., 1091a)


Sec. 685.202  Charges for which Direct Loan Program borrowers are 
responsible.

    (a) Interest--(1) Interest rate under the Federal Direct Stafford 
Loan Program and the Federal Direct Unsubsidized Stafford Loan Program. 
For Federal Direct Stafford Loans and Federal Direct Unsubsidized 
Stafford Loans, the interest rate, during any twelve month period 
beginning on July 1 and ending on June 30, is determined on the 
preceding June 1 and is equal to the bond equivalent rate of 91-day 
Treasury bills auctioned at the final auction held prior to that June 
1; plus 3.1 percent, but does not exceed 8.25 percent.
    (2) Interest rate under the Federal Direct PLUS Program. The 
interest rate on a Federal Direct PLUS loan, during any 12-month period 
beginning on July 1 and ending on June 30, is determined on the 
preceding June 1 and is equal to the bond equivalent rate of 52-week 
Treasury bills auctioned at the final auction held prior to that June 
1; plus 3.1 percent, but does not exceed nine percent.
    (b) Capitalization. (1) The Secretary may add accrued interest to 
the borrower's unpaid principal balance. This increase in the principal 
balance of a loan is called ``capitalization.''
    (2) The Secretary may capitalize interest payable by the borrower 
that has accrued--
    (i) During the period from the date the first disbursement was made 
to the date the repayment period begins;
    (ii) During a period of authorized deferment;
    (iii) During a period of authorized forbearance; or
    (iv) During the period from the date the first installment payment 
was due until it was made.
    (3) Under the Federal Direct Unsubsidized Stafford Loan Program and 
the Federal Direct PLUS Program, the Secretary requires the borrower to 
pay on a monthly or quarterly basis, or may capitalize on a quarterly 
or less frequent basis, interest that has accrued during periods of 
deferment.
    (4) For a borrower who is in a period of deferment, a mandatory 
forbearance, or the in-school or grace period on a Federal Direct 
Unsubsidized Stafford Loan and has agreed to monthly or quarterly 
payments of interest, the Secretary capitalizes past due interest after 
notification to the borrower that the borrower's failure to resolve any 
delinquency constitutes the borrower's consent to capitalization of 
delinquent interest and all interest that would accrue through the 
remainder of that period.
    (c) Loan Fee for Federal Direct Stafford, Federal Direct 
Unsubsidized Stafford, and Federal Direct PLUS loans. The Secretary--
    (1) Charges a borrower a loan fee on a Federal Direct Stafford, 
Federal Direct Unsubsidized Stafford or Federal Direct PLUS loan of 
four percent of the principal amount of the loan;
    (2) Deducts the loan fee from the proceeds of the loan;
    (3) In the case of a loan disbursed in multiple installments, 
deducts a pro rata portion of the fee from each disbursement; and
    (4) Refunds by a credit against the borrower's loan balance the 
portion of the loan fee previously deducted from the loan that is 
attributable to a disbursement of that loan that is repaid within 120 
days of disbursement.
    (d) Late charge. (1) The Secretary may require the borrower to pay 
a late charge of up to six cents for each dollar of each installment or 
portion thereof that is late under the circumstances described in 
paragraph (d)(2) of this section.
    (2) The late charge may be assessed if the borrower fails to pay 
all or a portion of a required installment payment within ten days 
after it is due.
    (e)(1) Collection charges before default. Notwithstanding any 
provisions of State law, the Secretary may require that the borrower or 
any endorser pay costs incurred by the Secretary or his agents in 
collecting installments not paid when due, including, but not limited 
to--
    (i) Attorney's fees;
    (ii) Court costs;
    (iii) Telegrams; and
    (iv) Fees on checks returned due to non-sufficient funds.
    (2) Collection charges after default. If a borrower defaults on a 
Direct Loan Program loan, he or she is assessed collection costs under 
the formula in 34 CFR 30.60.

(Authority: 20 U.S.C. 1087a et seq., 1091a)


Sec. 685.203  Loan limits.

    (a) Federal Direct Stafford Loan Program. (1) In the case of a 
dependent undergraduate student who has not successfully completed the 
first year of a program of undergraduate education, the total amount 
the student may borrow for any academic year of study under the Federal 
Direct Stafford Loan Program, and the Federal Stafford Loan Program, 
may not exceed--
    (i) $2,625 for a program of study of at least a full academic year 
in length;
    (ii) $1,750 for a program of study of at least two-thirds but less 
than a full academic year in length; and
    (iii) $875 for a program of study of at least one-third but less 
than two-thirds of an academic year in length.
    (2) In the case of a dependent undergraduate student who has 
successfully completed the first year of an undergraduate program but 
has not successfully completed the second year of an undergraduate 
program, the total amount the student may borrow for any academic year 
of study under the Federal Direct Stafford Loan Program, and the 
Federal Stafford Loan Program, may not exceed--
    (i) $3,500 for a program of study of at least a full academic year 
in length; or
    (ii) If the student is enrolled in a program of study with less 
than a full academic year remaining, a prorated amount that bears the 
same ratio to $3,500 as the remainder of the program measured in 
semester, trimester, quarter, or clock hours bears to one academic 
year.
    (3) In the case of a dependent undergraduate student who has 
successfully completed the first and second year of a program of study 
of undergraduate education but has not successfully completed the 
remainder of the program, or in the case of a student in a program who 
has an associate or baccalaureate degree which is required for 
admission into the program, the total amount the student may borrow for 
any academic year of study under the Federal Direct Stafford Loan 
Program, and the Federal Stafford Loan Program, may not exceed--
    (i) $5,500 for a program of study of at least an academic year in 
length;
    (ii) If the student is enrolled in a program of study with less 
than a full academic year remaining, a prorated amount that bears the 
same ratio to $5,500 as the remainder of the program measured in 
semester, trimester, quarter, or clock hours bears to one academic 
year.
    (4) In the case of a graduate or professional student, the total 
amount the student may borrow for any academic year of study under the 
Federal Direct Stafford Loan Program, in combination with any amount 
borrowed under the Federal Stafford Loan Program, may not exceed 
$8,500.
    (b) Federal Direct Unsubsidized Stafford Loan Program. In the case 
of a dependent graduate student, the total amount the student may 
borrow for any period of study for the Federal Direct Unsubsidized 
Stafford Loan Program and Federal Unsubsidized Stafford Loan Program is 
the same as the amount determined under paragraph (a) of this section, 
less any amount received under the Federal Direct Stafford Loan Program 
or Federal Stafford Loan Program.
    (c) Additional eligibility under the Federal Direct Unsubsidized 
Stafford Loan Program. In addition to any amount borrowed under 
paragraph (b), an independent undergraduate student, graduate or 
professional student, or certain dependent undergraduate students may 
borrow additional amounts under the Federal Direct Unsubsidized Loan 
Program. In order for a dependent undergraduate student to receive this 
additional loan amount, the financial aid administrator must determine 
and document in the school's file, after review of the family financial 
information provided by the student and consideration of the student's 
debt burden, that the student's parents likely will be precluded by 
exceptional circumstances (e.g., the student's parent receives only 
public assistance or disability benefits, is incarcerated, has an 
adverse credit history, or his or her whereabouts are unknown) from 
borrowing under the Federal Direct PLUS Program or the Federal PLUS 
Program and the student's family is otherwise unable to provide the 
student's expected family contribution. A parent's refusal to borrow a 
Federal PLUS loan or Federal Direct PLUS loan does not constitute an 
exceptional circumstance. The additional amount that such a student may 
borrow under the Federal Direct Unsubsidized Stafford Loan Program, in 
combination with Federal Unsubsidized Stafford loans, for any academic 
year of study is--
    (1) In the case of a student who has not successfully completed the 
first and second year of a program of undergraduate education, may not 
exceed--
    (i) $4,000 for enrollment in a program of study of at least a full 
academic year in length;
    (ii) $2,500 for enrollment in a program of study of at least two-
thirds but less than a full academic year in length;
    (iii) $1,500 for enrollment in a program of study of at least one-
third but less than two-thirds of an academic year in length.
    (2) In the case of a student who has successfully completed the 
first and second year of an undergraduate program, but has not 
completed the remainder of the program of study, may not exceed--
    (i) $5,000 for enrollment in a program of study of at least a full 
academic year;
    (ii) If the student is enrolled in a program of study with less 
than a full academic year remaining, a prorated amount that bears the 
same ratio to $5,000 as the remainder of the program measured in 
semester, trimester, quarter, or clock hours bears to one academic 
year.
    (3) In the case of a graduate or professional student, may not 
exceed $10,000.2
    (d) Federal Direct Stafford Loan Program and Federal Stafford Loan 
Program aggregate limits. The aggregate unpaid principal amount of all 
Federal Direct Stafford Loans and loans received under the Federal 
Stafford Loan Program made to a student may not exceed--
    (1) $23,000 in the case of any student who has not successfully 
completed a program of study at the undergraduate level; and
    (2) $65,500, in the case of a graduate or professional student, 
including loans for undergraduate study.
    (e) Federal Direct PLUS Program annual limit. The total amount of 
all Federal Direct PLUS loans that a parent or parents may borrow on 
behalf of each dependent student for any academic year of study may not 
exceed the cost of education minus other estimated financial assistance 
for that student.
    (f) Federal Direct PLUS Program aggregate limit. The total amount 
of all Federal Direct PLUS Program loans that a parent or parents may 
borrow on behalf of each dependent student for enrollment in an 
eligible program of study may not exceed the student's cost of 
education minus other estimated financial assistance for that student.
    (g) Federal Direct Stafford Loan and Federal Direct Unsubsidized 
Stafford Loan Program aggregate limits. The total unpaid principal 
amount of Federal Direct Stafford Loans, Federal Direct Unsubsidized 
Stafford Loans, Federal Stafford Loans and Federal Unsubsidized 
Stafford Loans may not exceed--
    (1) $46,000 for an undergraduate student.
    (2) $138,500 for a graduate or professional student.
    (h) Minimum loan interval. The annual loan limits applicable to a 
student shall apply to the length of the school's academic year as the 
term is used under the FFEL Program.
    (i) Treatment of Federal Direct Consolidation loans and Federal 
Consolidation loans for purposes of determining loan limits. The 
percentage of the outstanding balance on a Federal Direct Consolidation 
loan or Federal Consolidation Loans counted against a borrower's 
aggregate loan limits--
    (1) For the Federal Direct Stafford Loan Program, equals the 
percentage of the original amount of the Federal Direct Consolidation 
loan or Federal Consolidation loan attributable to the Federal Direct 
Stafford and Federal Stafford loans; and
    (2) For the Federal Direct Unsubsidized Stafford Loan Program, 
equals the percentage of the original amount of the Federal Direct 
Consolidation loan or Federal Consolidation loan attributable to the 
Federal Direct Unsubsidized Stafford Loan and Federal Unsubsidized 
Stafford loans.
    (j) Maximum loan amounts. In no case may a Federal Direct Stafford, 
Federal Direct Unsubsidized Stafford, or Federal Direct PLUS loan 
amount exceed the student's estimated cost of attendance for the period 
of enrollment for which the loan is intended, less--
    (1) The student's estimated financial assistance for that period; 
and
    (2) The borrower's expected family contribution for that period, in 
the case of a Federal Direct Stafford loan.

(Authority: 20 U.S.C. 1087a et seq.)


Sec. 685.204  Deferment.

    (a) (1) A Federal Direct Stafford Loan borrower who meets the 
requirements described in subparagraph (b) is eligible for a deferment 
during which periodic installments of principal need not be paid, and 
interest does not accrue.
    (2) A Federal Direct Unsubsidized Stafford Loan borrower or a 
Federal Direct PLUS borrower who meets the requirements described in 
paragraph (b) is eligible for a deferment during which periodic 
installments of principal need not be paid, but interest does accrue 
and is capitalized or paid by the borrower.
    (b) A Direct Loan Program borrower is eligible for a deferment 
during any period during which the borrower--
    (1) Is carrying at least one-half the normal full-time work load 
for the course of study that the borrower is pursuing, as determined by 
the eligible school the borrower is attending.
    (2) Is pursuing--
    (i) A course of study pursuant to a graduate fellowship program 
approved by the Secretary; or
    (ii) A rehabilitation training program, approved by the Secretary, 
for individuals with disabilities.
    (3) Not in excess of three years is seeking and unable to find 
full-time employment; or
    (4) Not in excess of three years has experienced or will experience 
an economic hardship.
    (c) No borrower is eligible for a deferment, or a loan made under 
this part while serving in a medical internship or residency program.

(Authority: 20 U.S.C. 1087a et seq.)


Sec. 685.205  Forbearance.

    (a)(1) A Direct Loan Program borrower or endorser may receive 
forbearance from the Secretary if the borrower or endorser is willing 
but unable to make scheduled loan payments. ``Forbearance'' means 
permitting the temporary cessation of payments, allowing an extension 
of time for making payments, or temporarily accepting smaller payments 
than previously scheduled. A forbearance is granted by the Secretary 
only if the borrower or endorser requests forbearance, and--
    (i) The Secretary believes that the borrower or endorser intends to 
repay the loan but, due to poor health or other acceptable reasons, is 
currently unable to make scheduled payments; or
    (ii) The borrower's payments of principal are deferred under 
Sec. 685.204 and the Secretary does not subsidize the interest benefits 
on behalf of the borrower under Sec. 685.200(a)(2).
    (2) If payments of interest are forborne, they are capitalized.
    (b) Mandatory forbearance. (1) Medical or dental interns or 
residents. Upon receipt of a written request and sufficient supporting 
documentation from a borrower serving in a medical or dental internship 
or residency program, the Secretary grants forbearance renewable at 12-
month intervals to a borrower--
    (i) For the length of time remaining in the borrower's medical or 
dental internship or residency that must be successfully completed 
before the borrower may begin professional practice or service; or
    (ii) For the length of time that the borrower is serving in a 
medical or dental internship or residency program leading to a degree 
or certificate awarded by an institution of higher education, a 
hospital, or a health care facility that offers postgraduate training.
    (2) Borrowers and endorsers with high debt burdens. Upon receipt of 
a written request and sufficient supporting documentation from an 
endorser, or from a borrower (other than a borrower who is serving in a 
medical or dental internship or residency described in paragraph (i)(1) 
of this section), the Secretary grants forbearance in increments of up 
to one year, for periods that, collectively, do not exceed three years, 
if the borrower or endorser--
    (i) Is currently obligated to make payments on Title IV loans; and
    (ii) The amount of such payments each month (or a proportional 
share if the payments are due less frequently than monthly) is 
collectively equal to or greater than 20 percent of the borrower or 
endorser's monthly disposable income.
    (3) Borrowers and endorsers in National and Community Service. Upon 
receipt of a written request and sufficient supporting documentation 
from a borrower or endorser serving in a national service position for 
which the borrower or endorser receives a national service educational 
award under the National and Community Service Trust Act of 1993, the 
Secretary grants forbearance for the duration of the borrower's or 
endorser's term of service under that statute.

(Authority: 20 U.S.C. 1087a et seq.)


Sec. 685.206  Borrower responsibilities and defenses.

    (a) The borrower shall give the school, as part of the origination 
process for a Federal Direct Stafford, Federal Direct Unsubsidized 
Stafford, or Federal Direct PLUS loan--
    (1) A statement, as described in 34 CFR part 668, that the loan 
will be used for the cost of the student's attendance;
    (2) Information demonstrating that the borrower is eligible for the 
loan;
    (3) Information concerning the outstanding FFEL Program and Direct 
Loan Program loans of the borrower and, for a parent borrower, of the 
student, including any Federal Consolidation loan or Federal Direct 
Consolidation loan used to discharge a Federal Stafford, Federal PLUS 
loan, Federal Direct Stafford, Federal Direct Unsubsidized Stafford or 
Federal Direct PLUS loan;
    (4) A statement authorizing the school to release information to 
the Secretary relevant to the student's eligibility to borrow or to 
have a parent borrow on the student's behalf (e.g., the student's 
enrollment status, financial assistance, and employment records).
    (b) The borrower shall promptly notify--
    (1) The Secretary of any change of name, address, student status to 
less than half-time, employer, or employer's address; and
    (2) The school of any change in address during enrollment.
    (c) Borrower defenses. A Direct Loan Program borrower may assert as 
a defense against the repayment of the loan a claim based on the act or 
omission of the school only if--
    (1) The act or omission gives rise to a cause of action against the 
school recognized under the law of the State in which the school 
attended by the student was located;
    (2) Prior to asserting the claim as a defense to repayment, the 
borrower presented that claim to the school and received no 
satisfaction; and
    (3) The borrower presented the claim in writing to the Department 
within 18 months of the date the loan was disbursed to the borrower.

(Authority: 20 U.S.C. 1087a et seq.)

Subpart C--Requirements, Standards, and Payments for Direct Loan 
Program Schools


Sec. 685.300  Agreements between an eligible school and the Secretary 
for participation in the Direct Loan Program.

    (a) (1) General. Participation of a school in the Direct Loan 
Program means that the school's students are eligible to receive Direct 
Loans. To participate in the Direct Loan Program, a school must--
    (i) Demonstrate to the satisfaction of the Secretary that it meets 
the elements of basic eligibility as defined in 34 CFR part 600 through 
certification by the Secretary; and
    (ii) Enter into a written program participation agreement with the 
Secretary that is signed by the Chief Executive Officer of the school 
on a form approved by the Secretary.
    (2) Program participation agreement. The school, in the program 
participation agreement, shall promise to comply with the applicable 
provisions of--
    (i) The Act and applicable regulations including notices;
    (ii) The Student Assistance General Provisions, 34 CFR part 668; 
and
    (iii) The Institutional Eligibility regulations, 34 CFR part 600.
    (b) (1) In the participation agreement, the school shall agree to--
    (i) Identify eligible students who seek student financial 
assistance at the institution in accordance with section 484 of the 
Act;
    (ii) Estimate the need of each of these students as required by 
part F of the Act for an academic year, except that any loan obtained 
by a student under this part with the same terms as Federal Direct 
Unsubsidized Stafford Loans, or Federal Direct PLUS Loans, or obtained 
under any State-sponsored or private loan program, may be used to 
offset the expected family contribution of the student for that year;
    (iii) Provide a statement that certifies the eligibility of any 
student to receive a loan under part D of the Act is not in excess of 
the annual or aggregate limit applicable to the loan;
    (iv) Set forth a schedule for disbursement of the proceeds of the 
loan in installments, consistent with the requirements of section 428G 
of the Act; and;
    (v) Provide timely and accurate information to the Secretary for 
the servicing and collecting of loans--
    (A) Concerning the status of student borrowers (and students on 
whose behalf parents borrow) while these students are in attendance at 
the school and concerning any new information of which the school 
becomes aware for these students (or their parents) after the student 
leaves the school; and
    (B) Concerning student eligibility and need, for the alternative 
origination of loans to eligible students and parents in accordance 
with part D of the Act;
    (2) Provide assurances that the school will comply with 
requirements established by the Secretary relating to student loan 
information with respect to loans made under the Direct Loan Program;
    (3) Provide that the school will accept responsibility and 
financial liability stemming from its failure to perform its functions 
pursuant to the agreement;
    (4) Provide that students at the school and their parents will be 
eligible to participate in the programs under part B of the Act at the 
discretion of the Secretary for the period during which the school 
participates in the Direct Loan Program under part D of the Act, except 
that a student or parent may not receive loans under both part D of the 
Act and part B of the Act for the same period of enrollment;
    (5) Provide for the implementation of a quality assurance system, 
as established by the Secretary and developed in consultation with the 
school, to ensure that the school is complying with program 
requirements and meeting program objectives;
    (6) Provide that the institution will not charge any fees of any 
kind, however described, to student or parent borrowers for origination 
activities or the provision of any information necessary for a student 
or parent to receive a loan under part D of the Act, or any benefits 
associated with such loan; and
    (7) Comply with other provisions that the Secretary determines are 
necessary to protect the interests of the United States and to promote 
the purposes of part D of the Act.
    (c) Origination. A school or consortium that originates loans in 
the Federal Direct Student Loan Program must have a supplemental 
agreement that--
    (1) Provides that the institution or consortium will originate 
loans to eligible students and parents in accordance with part D of the 
Act; and
    (2) Provide that the note or evidence of obligation on the loan is 
the property of the Secretary.

(Authority: 20 U.S.C. 1087a et seq., 1094)


Sec. 685.301  Certification by a Direct Loan Program school for a loan.

    (a)(1) A school participating in the Direct Loan Program shall 
ensure that any information it provides to the Secretary in connection 
with loan origination is complete and accurate. Except as provided in 
34 CFR part 668, subpart E, a school may rely in good faith upon 
statements made on the application by the student.
    (2) The information to be provided to the Secretary by the school 
about the borrower receiving the loan includes but is not limited to--
    (i) The borrower's eligibility for a loan, as determined in 
accordance with Sec. 685.200 and Sec. 685.203;
    (ii) The student's loan amount; and
    (iii) The anticipated and actual disbursement date or dates and 
disbursement amounts of the loan proceeds.
    (3) A school may not certify a Federal Direct Stafford, Federal 
Direct Unsubsidized Stafford, or Federal Direct PLUS loan, or a 
combination of loans, for an amount that--
    (i) The school has reason to know would result in the borrower 
exceeding the annual or maximum loan amounts in Sec. 685.203; or
    (ii) Exceeds the student's estimated cost of attendance, less--
    (A) The student's estimated financial assistance for that period; 
and
    (B) In the case of a Federal Direct Stafford Loan, the borrower's 
expected family contribution for that period.
    (4) In determining a Federal Direct Stafford or Federal Direct 
Unsubsidized Stafford loan amount in accordance with Sec. 685.203, for 
a borrower enrolled in a program of study of less than 900 clock hours 
or 24 semester or trimester hours, or 36 quarter hours (where the 
school defines its academic year to be at least 30 weeks in length), 
the school must determine the annual loan limit for the borrower by 
determining what portion of the academic year the program of study 
represents by calculating--
    (i) Number of clock-hours in program  900 hours; or
    (ii) Credit hours in program  24 semester or 36 quarter 
hours.
    (5) In determining a Federal Direct Stafford or Federal Direct 
Unsubsidized Stafford loan amount in accordance with Sec. 685.203, for 
a borrower enrolled in a program of study of less than 900 clock hours 
or 24 semester or trimester hours, or 36 quarter hours (where the 
school defines its academic year to be less than 30 weeks in length), 
the school must determine the annual loan limit for the borrower by 
determining what portion of the academic year the program of study 
represents by calculating--
    Number of weeks in program  30 weeks.
    (6) A school may refuse to certify a Federal Direct Stafford, 
Federal Direct Unsubsidized Stafford, or Federal Direct PLUS loan or 
may reduce the borrower's determination of need for the loan if the 
reason for that action is documented and provided to the student in 
writing, provided--
    (i) The determination is made on a case-by-case basis;
    (ii) The documentation supporting the determination is retained in 
the student's file; and
    (iii) The school does not engage in any pattern or practice that 
results in a denial of a borrower's access to Direct Loans because of 
the borrower's race, sex, color, religion, national origin, age, 
disability status, or income.
    (7) A school may not assess a fee for the completion or 
certification of any Direct Loan Program loan forms or information.
    (b) Disbursing a loan. (1) Before disbursing a loan, a school must 
determine that all information required by the loan application and 
promissory note has been provided by the borrower and, if applicable, 
the student.
    (2) A school shall establish disbursement dates for any Direct Loan 
Program loan as follows:
    (i) Disbursements must be in two or more installments;
    (ii) No installment may exceed one-half the loan; and
    (iii) At least one-half of the loan period must elapse before the 
second installment is disbursed, except as necessary to permit the 
second installment to be disbursed at the beginning of the next 
semester, quarter, or similar division of the loan period.
    (c) Promissory note. (1) The Secretary provides promissory notes 
for use in the Direct Loan Program and a school may not modify, or make 
any additions to, the promissory note without the Secretary's prior 
written approval.
    (2) A school shall provide to the Secretary an executed legally 
enforceable promissory note as proof of the borrower's indebtedness.

(Authority: 20 U.S.C. 1087a et seq.)


Sec. 685.302  Correspondence school schedule requirements.

    (a) A school offering a course of study by correspondence shall 
establish a schedule for submission of lessons by its students and 
provide it to a prospective student prior to the student's enrollment.
    (b) The school shall include in its schedule--
    (1) A due date for each lesson in the course;
    (2) A description of the options, if any, available to the student 
for altering the sequence of lesson submissions from the sequence in 
which they are otherwise required to be submitted;
    (3) The date by which the course is to be completed; and
    (4) The date by which any resident training must begin, the 
location of any residential training, and the period of time within 
which that resident training must be completed.

(Authority: 20 U.S.C. 1087a et seq.)


Sec. 685.303  Disbursing borrowers' loan proceeds and counseling 
borrowers.

    (a) Purpose. This section establishes rules governing a school's 
disbursement of a borrower's Federal Direct Stafford, Federal Direct 
Unsubsidized Stafford, or Federal Direct PLUS loan proceeds, and for 
counseling borrowers. The school shall also comply with any rules for 
processing a loan contained in 34 CFR part 668.
    (b) General. (1) A school may not disburse any loan proceeds unless 
the school or the alternative originator has obtained an executed 
legally enforceable promissory note from the borrower.
    (2)(i) Except in the case of a late disbursement under paragraph 
(d) of this section, or as provided in paragraph (b)(2)(iii) of this 
section, a school may disburse loan proceeds only to a student whom the 
school determines continuously has maintained eligibility in accordance 
with the provisions of Sec. 685.200 from the beginning of the loan 
period certified by the school.
    (ii) If, after the first disbursement is made to the student, the 
student becomes ineligible due solely to the school's loss of 
eligibility to participate in the Title IV programs or the Direct Loan 
Program, the school may make the second or subsequent disbursement to 
the borrower as permitted by 34 CFR part 668.
    (iii) If, prior to when the loan is made to the student, the 
student temporarily ceases to be enrolled on at least a half-time 
basis, the school may make the first disbursement of the loan and any 
subsequent disbursement to the student if the school subsequently 
determines and documents in the student's file--
    (A) That the student has resumed enrollment on at least a half-time 
basis;
    (B) The student's revised cost of attendance; and
    (C) That the student continues to qualify for the entire amount of 
the loan, notwithstanding any reduction in the student's cost of 
attendance caused by the student's temporary cessation of enrollment on 
at least a half-time basis.
    (3) The school may credit a registered student's account with only 
those loan proceeds covering costs of attendance owed to the school by 
the student for which substantially all of the school's students 
incurring those costs have been billed.
    (4) A school may not deliver loan proceeds to a student borrower 
earlier than ten days before the first day of the period of enrollment.
    (5) If a registered student withdraws or is expelled prior to the 
first day of classes of the period of enrollment for which the loan is 
made or fails to attend school during that period, or if the school is 
unable for any other reason to document that the student attended 
school during that period, the school, within 30 days of the period 
described in Sec. 685.304(b), shall notify the Secretary of the 
student's withdrawal, expulsion, or failure to attend school, if 
applicable, and return to the Secretary--
    (i) Any loan proceeds credited directly by the school to the 
student's account; and
    (ii) The amount of payments made directly by the student to the 
school, to the extent that they do not exceed the amount of any loan 
proceeds delivered by the school to the student.
    (6) A school may not apply the first disbursement of a Federal 
Direct Stafford or Federal Direct Unsubsidized Stafford loan to the 
account of a student who is enrolled in the first year of an 
undergraduate program of study and who has not previously received a 
Federal Stafford, Federal Supplemental Loans for Students, Federal 
Direct Stafford, or Federal Direct Unsubsidized Stafford loan until 30 
days after the first day of the student's program of study.
    (c) Processing of the proceeds of a Direct Loan Program loan. (1) 
After the student has registered, the school shall--
    (i) Not more than three weeks prior to the first day of the period 
of enrollment--
    (A) Credit the amount of the loan proceeds to the student's 
account;
    (B) Notify the student or parent borrower in writing that it has so 
credited that account; and
    (C) Deliver to the student or parent borrower the remaining loan 
proceeds, subject to paragraph (b)(5) of this section, not later than 
45 days after the disbursement of the funds.
    (ii) Subject to paragraph (b)(5) of this section, disburse the loan 
proceeds to the borrower.
    (2) A school may not credit a student's account or release the 
proceeds of a loan to a student who is on a leave of absence, as 
described in Sec. 685.304(c).
    (d) Late disbursement. (1) For purposes of this paragraph, a 
disbursement is late if the school delivers loan proceeds--
    (i) After the loan period; or
    (ii) Before the end of the loan period, but after the student 
ceased to be enrolled at the school on at least a half-time basis.
    (2) A school may make a late disbursement only if the school or the 
alternative originator has received a completed promissory note prior 
to the 30th day after the applicable condition in paragraph (d)(1) of 
this section.
    (3) Notwithstanding paragraph (d)(2) of this section, a school may 
not make--
    (i) A late second or subsequent disbursement of a Federal Direct 
Stafford or Federal Direct Unsubsidized Stafford loan to a borrower who 
has ceased to be enrolled on at least a half-time basis unless the 
borrower has graduated or successfully completed the period of 
enrollment for which the loan was intended; or
    (ii) Any late disbursement that under 34 CFR part 668 is considered 
to be awarded for a payment period in which the student was not 
enrolled on at least a half-time basis at the school.
    (e) Initial counseling.  (1) Except in the case of a correspondence 
school or for a student enrolled in a study-abroad program approved for 
credit at the home institution, a school shall conduct counseling with 
each Federal Direct Stafford and Federal Direct Unsubsidized Stafford 
borrower either in person or by videotape presentation. In each case, 
the school shall conduct this counseling prior to making the first 
disbursement of the proceeds of the first Federal Direct Stafford or 
Federal Direct Unsubsidized Stafford loan made to a borrower who has 
not received a Federal Stafford loan for attendance at the school and 
shall ensure that an individual with expertise in the title IV programs 
is reasonably available shortly after the counseling to answer the 
borrower's questions regarding those programs. In the case of a 
correspondence school or a student enrolled in a study-abroad program 
that the school approves for credit, the school shall provide the 
borrower with written counseling materials by mail prior to releasing 
those proceeds.
    (2) In conducting the initial counseling, the school must--
    (i) Emphasize to the borrower the seriousness and importance of the 
repayment obligation the borrower is assuming; and
    (ii) Describe in forceful terms the likely consequences of default, 
including adverse credit reports, garnishment of wages, and litigation.
    (3) Additional matters that the Secretary recommends that a school 
include in the initial counseling session or materials are set forth in 
appendix D to 34 CFR part 668.
    (f) Exit counseling. (1) A school shall conduct in-person exit 
counseling with each Federal Direct Stafford, or Federal Direct 
Unsubsidized Stafford borrower shortly before the borrower ceases at 
least half-time study at the school, except that--
    (i) In the case of a correspondence school, the school shall 
provide the borrower with written counseling materials by mail within 
30 days after the borrower completes the program; and
    (ii) If the borrower withdraws from school without the school's 
prior knowledge or fails to attend an exit counseling session as 
scheduled, the school shall mail written counseling material to the 
borrower at the borrower's last known address within 30 days after the 
school learns that the borrower has withdrawn from school or failed to 
attend the scheduled session.
    (2) In conducting the exit counseling, the school shall--
    (i) Provide the borrower with general information with respect to 
the average indebtedness of students who have obtained Federal Direct 
Stafford or Federal Direct Unsubsidized Stafford loans for attendance 
at that school;
    (ii) Inform the student as to the average anticipated monthly 
repayment for those students based on that average indebtedness;
    (iii) Review for the borrower available repayment options (e.g., 
standard repayment plan, extended repayment plan, graduated repayment 
plan, income contingent repayment plan, loan consolidation, 
refinancing);
    (iv) Suggest to the borrower debt-management strategies that the 
school determines would best assist repayment by the borrower;
    (v) Include the matters described in paragraph (e)(2) of this 
section; and
    (vi) Review with the borrower the conditions under which the 
borrower may defer repayment or obtain cancellation of a loan;
    (vii) Require the borrower to provide corrections to the 
institutions's records concerning name, address, social security 
number, references, and driver's license number, as well as the name 
and address of the borrower's expected employer that must be provided 
within 60 days to the Secretary.
    (3) Additional matters that the Secretary recommends that a school 
include in the exit counseling session or materials are set forth in 
appendix D to 34 CFR part 668.
    (4) The school shall maintain in the student borrower's file 
documents substantiating the school's compliance with paragraphs (e) 
and (f) of this section as to that borrower.
    (g) Treatment of excess loan proceeds. Before the delivery of any 
Federal Direct Stafford or Federal Direct Unsubsidized Stafford loan 
disbursement, if a school learns that the borrower would receive or has 
received financial aid for the period of enrollment for which the loan 
was intended that exceeds the amount of assistance for which the 
student is eligible, the school shall reduce or eliminate the overaward 
by either--
    (1) Using the student's Federal Direct Unsubsidized Stafford, 
Federal Direct PLUS, or State-sponsored or private loan to cover the 
expected family contribution, if not already done; or
    (2) Reducing one or more disbursements to eliminate the overaward.

(Authority: 20 U.S.C. 1087a et seq.)


Sec. 685.304  Determining the date of a student's withdrawal.

    (a) Purpose. This section establishes rules for how a school shall 
determine the withdrawal date for a student to whom or on whose behalf 
a loan has been made under this part for the purpose of reporting to 
the Secretary the date that the student has withdrawn from the school 
and for determining when a refund must be paid under Sec. 685.305.
    (b) The withdrawal date. (1) Except as provided in paragraphs 
(b)(2) and (b)(3) of this section, the student's withdrawal date is the 
earlier of--
    (i) The date the student notifies the school of the student's 
withdrawal or the date of withdrawal specified by the student, 
whichever is later; or
    (ii) The date of withdrawal as determined by the school. The school 
must determine the student's date of withdrawal no later than--
    (A) Forty-five days after the expiration date of the academic term 
in which the student was enrolled for a school that uses academic terms 
(e.g., semester, trimester, or quarter), except that 30 days after the 
first day of the next scheduled term may be used in the case of a 
summer break; or
    (B) Twenty-five days after a student's last date of attendance for 
a school that measures academic progress either in clock hours or 
credit hours but does not use a semester, trimester, or quarter system.
    (2) If the student has not returned to school at the expiration of 
a leave of absence approved under paragraph (c) of this section, the 
student's withdrawal date is the first day of the leave of absence.
    (3) If the student is enrolled in a program of study by 
correspondence, the student's withdrawal date is the date of the last 
lesson submitted if the student fails to submit the next scheduled 
lesson in accordance with the schedule of lessons established under 
Sec. 685.302. However, if the student establishes in writing, within 60 
days of the date of the last lesson submitted, a desire to continue in 
the program and an understanding that the required lessons must be 
submitted on time, the school may restore that student to in-school 
status for purposes of the loan made under this part. The school may 
not grant the student more than one restoration to in-school status on 
this basis.
    (4) For the purpose of a school's reporting to the Secretary, a 
student's withdrawal date is the month, day, and year of the withdrawal 
date determined under paragraphs (b)(1)-(b)(3) of this section.
    (c) Leaves of absence. A student who has been absent from school 
and has been granted a leave of absence by a school in accordance with 
this paragraph is not considered to have withdrawn from school for 
purposes of paragraph (a) of this section. In any 12-month period, a 
school may grant no more than a single leave of absence to a student, 
provided that--
    (1) The student has made a written request to be granted a leave of 
absence;
    (2) The leave of absence involves no additional charges by the 
school to the student; and
    (3) The leave of absence does not exceed--
    (i) Sixty days; or
    (ii) Six months under either of the following circumstances:
    (A) The school is not a correspondence school and the school's next 
period of enrollment after the start of the leave of absence would 
begin more than 60 days after the first day of the leave of absence.
    (B) The leave of absence is requested because of the student's 
medically determinable condition, in which case the student must 
provide the school with a written recommendation from a physician for a 
leave of absence longer than 60 days.

(Authority: 20 U.S.C. 1087a et seq.)


Sec. 685.305  Payment of a refund to the Secretary.

    (a) General. By applying for a Direct Loan, a borrower authorizes 
the school to pay directly to the Secretary that portion of a refund 
from the school that is allocable to the loan. A school--
    (1) Shall pay that portion of the student's refund that is 
allocable to a Direct Loan to the Secretary; and
    (2) Shall provide simultaneous written notice to the borrower if 
the school pays a refund to the Secretary on behalf of that student.
    (b) Allocation of refund. In determining the portion of a student's 
refund for an academic period that is allocable to a Direct Loan 
received by the borrower for that academic period, the school shall 
follow the procedures established in 34 CFR Part 668 for allocating a 
refund that is payable.
    (c) Timely payment. A school shall pay a refund that is due--
    (1) Within 60 days after the student's withdrawal as determined 
under Sec. 685.304(b)(1)-(3); or
    (2) In the case of a student who does not return to school at the 
expiration of an approved leave of absence under Sec. 685.304(c), 
within 30 days after the last day of that leave of absence.

(Authority: 20 U.S.C. 1087a et seq.)


Sec. 685.306  Withdrawal procedure for schools participating in the 
Direct Loan Program.

    (a) A school participating in the Direct Loan Program may submit a 
written request to the Secretary to withdraw from participation in the 
Direct Loan Program explaining why it seeks to withdraw.
    (b) The Secretary reviews the school's request to determine if the 
school has the ability to administer the Direct Loan Program properly 
and notifies the school of his decision to approve or disapprove the 
request within 30 days of receiving the school's request.
    (c) In reviewing a school's request, the Secretary considers 
whether the reasons for the request apply only to participation in the 
Direct Loan Program or to participation in either the Direct Loan 
Program or the FFEL Program.
    (d) If a school's request is approved by the Secretary, the 
withdrawal becomes effective on the first of July following the 
school's request.

(Authority: 20 U.S.C. 1087a et seq.)


Sec. 685.307  Remedial actions.

    (a) General. The Secretary requires a school to purchase that 
portion of a Direct Loan that is unenforceable, or that the borrower 
was ineligible to receive. The Secretary requires the repayment of 
funds and the purchase of loans if the Secretary determines that the 
unenforceability of a loan or loans, or the disbursement of loan 
amounts for which the borrower was ineligible resulted in whole or in 
part from--
    (1) The school's violation of a Federal statute or regulation; or
    (2) The school's negligent or willful false certification.
    (b) In requiring a school to repay funds to the Secretary or to 
purchase loans from the Secretary in connection with an audit or 
program review, the Secretary follows the procedures described in 34 
CFR part 668, subpart H.
    (c) Notwithstanding paragraph (a) of this section, the Secretary 
may waive the right to require repayment of funds or purchasing of 
loans by a school if, in the Secretary's judgment, the best interest of 
the United States so requires.
    (d) The Secretary may impose a fine or take an emergency action 
against a school or limit, suspend, or terminate a school's 
participation in the Direct Loan Program in accordance with 34 CFR part 
668, subpart G.
    (e) The Secretary may take any other action necessary to enforce 
the Secretary's rights under the agreement specified in Sec. 685.300.

(Authority: 20 U.S.C. 1087a et seq.)


Sec. 685.308  Administrative and fiscal control and fund accounting 
requirements for schools participating in the Direct Loan Program.

    (a) General. Each school shall--
    (1) Establish and maintain proper administrative and fiscal 
procedures and all necessary records as set forth in the regulations in 
this part and in 34 CFR part 668 in order to--
    (i) Protect the rights of student and parent borrowers;
    (ii) Protect the United States from unreasonable risk of loss; and
    (iii) Comply with specific requirements in those regulations; and
    (2) Submit all reports required by this part and 34 CFR part 668 to 
the Secretary.
    (b) Student status confirmation reports. A school shall--
    (1) Upon receipt of a student status confirmation report from the 
Secretary, complete and return that report to the Secretary within 30 
days of receipt; and
    (2) Unless it expects to submit its next student status 
confirmation report to the Secretary within the next 60 days, notify 
the Secretary within 30 days--
    (i) If it discovers that a Federal Direct Stafford, Federal Direct 
Unsubsidized Stafford, or Federal Direct PLUS loan has been made to or 
on behalf of a student who enrolled at that school, but who has ceased 
to be enrolled on at least a half-time basis;
    (ii) If it discovers that a Federal Direct Stafford, Federal Direct 
Unsubsidized Stafford or Federal Direct PLUS loan has been made to or 
on behalf of a student who has been accepted for enrollment at that 
school, but who failed to enroll on at least a half-time basis for the 
period for which the loan was intended; or
    (iii) If it discovers that a Federal Direct Stafford, Federal 
Direct Unsubsidized Stafford, or Federal Direct PLUS loan has been made 
to or on behalf of a full-time student who has ceased to be enrolled on 
a full-time basis.
    (c) Record retention requirements. Unless otherwise directed by the 
Secretary, the school or its successors--
    (1) Shall keep all records required under the regulations in this 
part for five years following the last day of the borrower's attendance 
at the school;
    (2) Shall keep for five years after completion, copies of reports 
and other forms used by the school relating to the Federal Direct 
Stafford, Federal Direct Unsubsidized Stafford, or Federal Direct PLUS 
programs;
    (3) Shall keep all records involved in any loan, claim, or 
expenditure questioned by a Federal audit until resolution of any audit 
questions;
    (4) Shall provide, in the event of the school's closure, 
termination, suspension, or change in ownership resulting in a change 
of control as described in 34 CFR part 600, for the retention of the 
records and reports required by the regulations in this part and for 
access by the Secretary or the Secretary's authorized representatives 
to those records and reports for inspection and copying; and
    (5) May keep records and copies of reports on microfilm, optical 
disk, or in other machine readable format.
    (d) Loan record requirements. In addition to records required by 34 
CFR part 668, for each Federal Direct Stafford, Federal Direct 
Unsubsidized Stafford, and Federal Direct PLUS loan received under this 
part by or on behalf of its students, a school shall maintain a copy of 
the loan application or data electronically submitted to the Secretary 
and shall, upon request, produce a record of--
    (1) The amount of the loan and the loan period;
    (2) The data used to construct an individual student budget or the 
school's itemized standard budget used in calculating the student's 
estimated cost of attendance;
    (3) The sources and amounts of financial assistance available to 
the student that the school used in determining the student's estimated 
financial assistance for the loan period in accordance with 
Sec. 685.102;
    (4) The amount of the student's tuition and fees paid for the loan 
period and the date the student paid the tuition and fees;
    (5) The amount and basis of its calculation of any refund paid to 
or on behalf of a student;
    (6) In the case of a Federal Direct Stafford loan under 
Sec. 685.200, the data used to determine the student's expected family 
contribution;
    (7) In the case of a Federal Direct Stafford, Federal Direct 
Unsubsidized Stafford, or Federal Direct PLUS loan--
    (i) The date the school received a completed promissory note from 
the borrower; and
    (ii) The date of each disbursement of the loan.
    (8) The student's job placement, if known; and
    (9) Any other matter for which a record would be required for the 
school to be able to document its compliance with applicable 
requirements with respect to the loan.
    (e) Inspection requirements. Upon request, a school or its agent 
shall cooperate with an independent auditor, the Secretary, the 
Department of Education Office of Inspector General, and the 
Comptroller General of the United States, or their authorized 
representatives, in the conduct of audits, investigations, and program 
reviews authorized by law. This cooperation must include--
    (1) Providing timely access for examination and copying to the 
records (including computerized records) required by the applicable 
regulations and to any other pertinent books, documents, papers, 
computer programs, and records; and
    (2) Providing reasonable access to institutional personnel 
associated with the institution's administration of the Title IV, HEA 
programs for the purpose of obtaining relevant information. In 
providing reasonable access, the institution may not--
    (i) Refuse to supply any information deemed relevant by the 
Secretary;
    (ii) Refuse to permit interviews with those personnel without the 
presence of representatives of the institution's management; and
    (iii) Refuse to permit interviews with those personnel unless they 
are recorded by the institution.
    (f) Information sharing. (1) Upon request of the Secretary, a 
school promptly shall provide the Secretary with any information the 
school has respecting the last known address, surname, employer, and 
employer address of a borrower who attends or has attended the school.
    (2) If the school discovers that a student who is enrolled and who 
has received a Federal Direct Stafford, or Federal Direct Unsubsidized 
Stafford loan has changed his or her permanent address, the school 
shall notify the Secretary within 30 days thereafter.
    (g)(1) Accounting requirements. A school shall establish and 
maintain on a current basis financial records that reflect all 
transactions for the bank account specified in paragraph (h)(1). The 
school shall establish and maintain general ledger control accounts and 
related subsidiary accounts that identify each program transaction and 
separate those transactions from all of the school's other financial 
activities.
    (2) The school shall account for receiving and expending Direct 
Loan Program funds in accordance with generally accepted accounting 
principles.
    (h)(1) Direct Loan Program bank account. The school shall establish 
and maintain a bank account as trustee for the Secretary and the 
borrower for Direct Loan Program funds. The school shall notify the 
bank where the Direct Loan Program account is located in writing that 
the Direct Loan Program account contains Federal funds. In addition, 
the school must provide that the word ``Federal'' is in the name of the 
school's Direct Loan Program account. If the school's accounting system 
and practices meet the requirements of paragraph (g) of this section, 
the school's Direct Loan Program account need not be a separate bank 
account. The Secretary reserves the right to require a school to 
maintain a separate account for the Direct Loan Program.
    (2) Any interest earned on Direct Loan Program funds deposited in 
the school's account is considered Federal funds and must be returned 
to the Secretary.
    (i) A school shall divide the functions of authorizing payments and 
disbursing funds to borrowers so that no single office has 
responsibility for both functions under the Direct Loan Program.
    (j) Funds received by a school under this part may be used only to 
make Direct Loan Program loans to eligible borrowers and may not be 
used or hypothecated for any other purpose.
    (k) The Secretary may take any action that he deems appropriate to 
protect the Federal fiscal interest, including such actions as 
requiring that a school that originates Direct Loans use an alternative 
originator instead.

(Authority: 20 U.S.C. 1087a et seq.)

     Appendix A to Part 685.--New Loan Maximums as of July 1, 1994      
------------------------------------------------------------------------
                  Direct Loan Program and FFEL Program                  
-------------------------------------------------------------------------
                                                  Sub./                 
                                              Unsubsidized   Additional 
               Academic level                    Federal    unsubsidized
                                                Stafford     eligibility
                                                  loans                 
------------------------------------------------------------------------
               1Annual Limits                                           
                                                                        
First Year Student:                                                     
  Full academic year........................      $2,625        $4,000  
  \2/3\ academic year.......................       1,750         2,500  
  \1/3\ academic year.......................         875         1,500  
Second Year Student                                                     
  Full academic year........................       3,500         4,000  
  \2/3\ academic year.......................         (1)         2,500  
  \1/3\ academic year.......................         (1)         1,500  
Third Year Student and Beyond:                                          
  Full academic year........................       5,500         5,000  
  Less than academic year...................    Prorated      Prorated  
Graduate or Professional Student............       8,500       10,000   


                                                                        
Aggregate Limits:                                                       
  Undergraduate.....................................            $46,000 
  Graduate..........................................           138,500  
1Prorated for less than academic year.                                  
                                                                        
Notes: For independent students or dependent students whose parents     
  cannot borrow under the PLUS program, the amount a student can borrow 
  under the unsubsidized loan program during any academic year is: (A)  
  the Stafford loan limits plus; (B) first 2 years $4,000 per year; (C) 
  remainder of undergraduate program $5,000 per year; (D) Graduate      
  $10,000 per year.                                                     

[FR Doc. 93-32065 Filed 12-30-93; 8:45 am]
BILLING CODE 4000-01-P