[Federal Register Volume 59, Number 51 (Wednesday, March 16, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-6004]


[[Page Unknown]]

[Federal Register: March 16, 1994]


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Part V





Department of Education





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34 CFR Part 682




Federal Family Education Loan Program; Proposed Rule
DEPARTMENT OF EDUCATION

34 CFR Part 682

RIN: 1840-AB97

 
Federal Family Education Loan Program

AGENCY: Department of Education.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Secretary proposes to amend the regulations governing the 
Federal Family Education Loan (FFEL) Program. The FFEL regulations 
govern the Federal Stafford Loan Program, the Federal Supplemental 
Loans for Students (Federal SLS) Program, the Federal PLUS Program, and 
the Federal Consolidation Loan Program, collectively referred to as the 
Federal Family Education Loan Program. The Federal Stafford Loan, the 
Federal SLS, the Federal PLUS and the Federal Consolidation Loan 
programs are hereinafter referred to as the Stafford, SLS, PLUS and 
Consolidation Loan programs. These amendments are needed to implement 
changes made to the Higher Education Act of 1965, as amended (HEA), by 
the Higher Education Amendments of 1992.

DATES: Comments must be received on or before April 15, 1994.

ADDRESSES: All comments concerning these proposed regulations should be 
addressed to Pamela A. Moran, Acting Chief, Loans Branch, Division of 
Policy Development, Policy, Training, and Analysis Service, U.S. 
Department of Education, 400 Maryland Avenue, SW. (room 4310, ROB-3), 
Washington, DC 20202-5449.
    A copy of any comments that concern information collection 
requirements should also be sent to the Office of Management and Budget 
at the address listed in the Paperwork Reduction Act section of this 
preamble.

FOR FURTHER INFORMATION CONTACT: Patricia Beavan, Senior Program 
Specialist, Loans Branch, Division of Policy Development, Policy, 
Training, and Analysis Service, U.S. Department of Education, 400 
Maryland Avenue, SW. (room 4310, ROB-3), Washington, DC 20202-5449. 
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:

Background

    The Secretary is proposing to revise 34 CFR part 682 of the FFEL 
Program regulations, published in the Federal Register on December 18, 
1992, to implement changes made to the HEA by the Higher Education 
Amendments of 1992 (Pub. L. 102-325) (the Amendments), enacted July 23, 
1992. These regulations would affect the implementation of the program 
for all participants. The regulations would improve the efficiency of 
the Federal student aid programs, and by so doing, improve their 
capacity to enhance opportunities for postsecondary education. 
Encouraging students to graduate from high school and to pursue high 
quality postsecondary education are important elements of the National 
Education Goals.
    The student aid programs also enable both current and future 
workers to have the opportunity to acquire both basic and 
technologically advanced skills needed for today's and tomorrow's 
workplace. They provide the financial means for an increasing number of 
Americans to receive an education that will prepare them to think 
critically, communicate effectively, and solve problems efficiently, as 
called for in the National Education Goals.

Summary of Comments From Regional Meetings

    In compliance with section 492(a) of the HEA, the Secretary 
convened regional meetings during September 1992 to obtain public 
involvement in the development of proposed regulations. The purpose of 
the meetings was to ``provide for a comprehensive discussion and 
exchange of information concerning the implementation'' of certain 
parts of the HEA, as amended by Public Law 102-325. In addition, 
attendees of the regional meetings were asked to nominate individuals 
to act as negotiators in the negotiated rulemaking process required by 
section 492(b) of the HEA.
    The regional meetings were conducted for two days each in San 
Francisco, California; New York, New York; Atlanta, Georgia; and Kansas 
City, Missouri. Each participant at the regional meetings was assigned 
to one of six groups that were asked to discuss particular issue areas 
identified by the Department. Each group at the regional meetings 
prepared a report of its discussion and recommendations and those 
reports were presented to the Department for consideration during the 
preparation of the proposed regulations.
    Below is a summary of the information received and the proposals 
made to the Secretary during the regional meetings relating to these 
proposed regulations:
    1. Guaranty agency limitation of a school's participation--The 
attendees of the regional meetings in San Francisco, New York and 
Atlanta discussed this issue. Attendees at the San Francisco meeting 
recommended that guaranty agencies be allowed to set limits on loan 
volume for schools but that a review process should be provided by the 
guarantor. The attendees at the New York and Atlanta meetings 
recommended that the guaranty agencies be allowed to set limits for 
schools that are newly participating with the agency. Attendees at the 
New York meeting recommended certain criteria that an agency could use 
to limit a school's participation and recommended that all guarantors 
be required to comply with the restrictions placed by any agency. 
Attendees at the Atlanta meeting recommended that an agency's decision 
on loan limits should be subject to appeal but that the limit should 
remain in place during the appeal.
    2. Lender-of-last-resort services--The attendees of the regional 
meeting in San Francisco recommended that, for schools with default 
rates exceeding 25 percent, ``exceptional mitigating circumstances'' 
for a school's appeal of denial for lender-of-last-resort (LLR) 
services should be defined to include program completion and job 
placement rates, if available; default rates; loan volume as a 
proportion of a school's student population; and other pertinent 
factors. The attendees also recommended that for a school subject to a 
limitation, suspension or termination (LST) action, exceptional 
mitigating circumstances should consider the above factors and the 
nature of the LST action. The majority of the Kansas City meeting 
attendees supported use of the definition of ``exceptional mitigating 
circumstances'' provided in the cohort default rate regulations 
published in the Federal Register on July 19, 1991 and the required 
default management plan to determine if a guaranty agency must offer 
LLR services to students attending a school with a cohort default rate 
greater than 25 percent. The minority view at the Kansas City meeting 
was that the regulatory criteria are too restrictive. Attendees at the 
New York meeting recommended that other factors be considered in 
addition to current law to define exceptional mitigating circumstances 
i.e., two-thirds of registered students actually begin class and the 
percentage of students receiving loans at schools with 15 percent to 25 
percent cohort default rates. The attendees also expressed concern 
about the timeliness of the appeal process and their desire that 
students should not be penalized. The attendees at the New York meeting 
supported the regulatory definition of exceptional mitigating 
circumstances with the inclusion of a comparison of student costs of 
education to post-graduation earnings and consideration of personal 
mitigating circumstances of students.
    3. Income-contingent repayment--The attendees at the regional 
meetings in San Francisco, New York, and Kansas City made 
recommendations for the Secretary to consider in developing regulations 
to allow certain defaulted borrowers a repayment schedule that assesses 
a borrower's debt-to-income ratio and that provides the borrower up to 
25 years to repay a loan. The attendees at the San Francisco meeting 
recommended that consideration be given to the amount of the borrower's 
educational loan scheduled repayment in relation to his or her 
anticipated income. They indicated that they believed that a smaller 
percent of income should probably be expected in loan repayment from 
low income borrowers. Attendees at the San Francisco meeting also 
recommended that educational debt should include all educational loans, 
not just Title IV student loans and that the term (borrower's) 
``income'' needed to be defined for this purpose. They suggested that 
if ``income'' includes the borrower's spouse's income, the spouse's 
educational debts should also be included. Attendees at the New York 
meeting recommended that guaranty agencies be permitted to exempt loans 
from mandatory assignment and instead be able to offer their borrowers 
income-contingent repayment. The attendees at the New York meeting also 
recommended that income-contingent repayment should take into 
consideration the impact of negative amortization and the overall cost 
of repayment, include a requirement for annual review, and allow 
guaranty agencies to determine the interest rate. Attendees at the 
Kansas City meeting recommended that factors for the Secretary's 
evaluation should include whether collection of the note would be 
enhanced, costs associated with income-contingent collection vs. 
existing repayment structures, and the cost effectiveness of Federal 
collection. The Kansas City meeting attendees also recommended that 
longer repayment periods be allowed. However, they expressed concern 
that such repayment periods could result in an incentive to default.
    4. Federal Stafford and Federal SLS loan limits--The attendees at 
the regional meetings in San Francisco, New York and Atlanta discussed 
the issue of reduced loan limits for programs of less than an academic 
year and recommended that if the definition of ``less than an academic 
year'' would include students who are in a second or subsequent year of 
a program of study for a period of enrollment of less than a year, that 
a technical amendment should be sought to clarify Congress' intent as 
to which borrowers were covered by the provision.
    5. Federal PLUS loans--determination of adverse credit--The 
attendees at the San Francisco, Kansas City and Atlanta meetings 
generally recommended that adverse credit history should include 
outstanding tax liens, unpaid judgments, bankruptcy, default on or 
failure to pay Federal debts or obligations, charge offs, collection 
accounts, foreclosures and repossessions. The San Francisco meeting 
attendees also recommended the regulations specify that the lack of a 
credit history should not be considered adverse credit. The attendees 
at the San Francisco meeting expressed concern about PLUS borrowers' 
ability to repay loans given the repeal of the PLUS annual and 
aggregate loan limits. The attendees recommended that the lender and or 
guaranty agency counsel borrowers with regard to debt load, repayment 
obligations, etc. Attendees at the San Francisco meeting also 
recommended that the lender be allowed to establish additional 
eligibility criteria, including reviewing situations where potential 
borrowers are currently 60 days or more delinquent on other consumer 
accounts. The attendees at the San Francisco and Kansas City meetings 
recommended that lenders should also exercise discretion in allowing 
borrowers to provide explanations regarding circumstances that resulted 
in a determination of adverse credit. Attendees at the San Francisco 
and Kansas City meetings also recommended that the lender be required 
to obtain a credit report from a nationally recognized credit reporting 
agency. The San Francisco, Atlanta, and Kansas City attendees also 
recommended that in disbursing a PLUS loan the school require one 
authorization per loan (not disbursement) and allow parents to 
authorize electronic fund transmission. The attendees at the Kansas 
City meeting recommended that amounts of less than $100 in charge off 
or collection accounts not be held against a PLUS applicant when 
determining adverse credit. The New York meeting attendees recommended 
that the regulations require credit decisions by the lender using the 
applicant's credit report.
    6. Default reduction program--Attendees at the Kansas City meeting 
recommended that the determination that post-default payments are 
``reasonable and affordable based upon the borrower's total financial 
circumstances'' be made on a case-by-case basis based on a debt-to-
income analysis (including family size) by the guaranty agency. The 
attendees recommended that payments be at least $5.00 and be voluntary 
consecutive payments. However, the attendees also expressed concern 
about accepting less than interest payments. The Kansas City meeting 
attendees discussed the distinction between the Title IV renewal of 
eligibility provision in the law that requires six reasonable and 
affordable consecutive payments and the rehabilitation program that 
requires 12 reasonable and affordable payments. They recommended that 
guaranty agencies be given wide discretion to evaluate the defaulter's 
personal circumstances and history to determine what constitutes 
reasonable and affordable payments so that if a loan is repurchased 
under the rehabilitation program, the borrower will be able to meet the 
lender's repayment terms and not fall into default again. Attendees at 
the Kansas City meeting also recommended that the guaranty agency be 
allowed to determine the documentation required to establish the 
reasonable and affordable payment amounts and that a review of the 
borrower's circumstances be required semi-annually. The attendees at 
the San Francisco, New York and Atlanta meetings recommended that 
guaranty agencies be allowed flexibility in determining if the payment 
amount is reasonable and affordable by taking into account the 
borrower's family circumstances, income, size, and by giving special 
consideration to borrowers receiving public assistance. The San 
Francisco attendees also recommended that the guaranty agency be 
required to notify the school in writing when a borrower has regained 
Title IV eligibility.
    7. Mandatory assignment of loans to the Secretary--Attendees at the 
meetings in New York, San Francisco and Kansas City discussed the issue 
of mandatory assignment. The Kansas City meeting recommended that the 
Secretary determine the criteria for assignment on a case-by-case basis 
and recommended consideration of several issues by the Secretary. 
Attendees at the New York meeting recommended that the Secretary 
establish a simple set of general rules under which mandatory 
assignment would apply to loans on which payments had not been received 
for a certain period of time. Attendees at the San Francisco meeting 
recommended that the criteria for mandatory assignment be determined by 
regulation and not by individual negotiations with each agency and 
proposed certain specific criteria for the assignment.
    8. Restrictions on guaranty agency incentive payments--The 
participants in the New York meeting asked that the regulations clearly 
define ``premium'' and ``inducement'' for purposes of this provision. 
Attendees at the San Francisco regional meeting concluded that the 
statute was intended to prohibit cash payments by a guaranty agency to 
a lender but that agency activities to encourage participation or 
provide state-of-the-art processing in the loans programs were 
acceptable. In Kansas City, participants concluded that regulations 
must ensure that services provided by guarantors which improve a 
lender's ability to meet the needs of students, schools and the 
Secretary should not be considered inducements. In addition, the Kansas 
City participants recommended that services permitted under existing 
guarantor and lender relationships not be prohibited but that direct 
fee payments from a guarantor to a lender be prohibited. The attendees 
to the Atlanta meeting recommended that the regulations define 
``inducement'' as something of value (such as cash, premiums based on 
loan volume, or gifts) that is given by the guarantor with the intent 
of causing the lender to choose the guarantor. In addition, the 
attendees at the Atlanta meeting recommended that computer system 
connections that allow a lender to utilize a guarantor's procedures not 
be considered an inducement.
    9. Guaranty reserve level--Attendees at all of the regional 
meetings recommended that uniform definitions be developed for 
determining the required reserve level for each of the guaranty 
agencies. However, participants at each of the meetings suggested 
different formulas for the determination of whether a guaranty agency 
satisfied its minimum requirement. Attendees at all of the regional 
meetings also recommended that, if a management plan is required 
because a guaranty agency drops below the minimum reserve level, the 
guaranty agency, rather than the Secretary, should be responsible for 
preparing the plan. Finally, the participants at all the meetings 
recommended that, if a guaranty agency becomes insolvent, the Secretary 
should first consider a solution in which other agencies assume the 
insolvent agency's responsibilities rather than have the Secretary take 
over the agency's role.
    10. Restriction on lender interest subsidy--Attendees at all of the 
regional meetings rejected the suggestion that a lender could charge a 
borrower for the interest not paid by the Secretary because of the 
restriction on the interest subsidy added to the law. The Atlanta 
attendees objected to the suggestion that the term ``disbursement'' in 
section 428(a)(3) of the HEA meant the delivery of funds to the student 
and instead asked that the industry's traditional definition of the 
term as referring to when the funds are available to the school be 
maintained. The Atlanta attendees also disagreed with the idea of a 
standardized schedule for the interest billing. The Kansas City 
attendees recommended that the term ``disbursement'' be defined as the 
date the borrower negotiates the loan check or the funds are 
transferred to the borrower's account. The Kansas City attendees also 
recommended the adoption of a standardized schedule for interest 
billings. The San Francisco attendees recommended that the Secretary 
seek a statutory change that would prohibit schools from requesting 
funds prior to the deadlines established for interest payment. The New 
York attendees also recommended that a restriction be placed on the 
school's authority to request funds and suggested that a standardized 
schedule for interest billing be developed.
    11. Loans that have not been consummated--The Amendments prohibit a 
lender from receiving interest and special allowance payments on loans 
for which the disbursement checks have not been cashed or the 
electronic funds transaction is not completed. The Atlanta meeting 
recommended that this restriction apply to loans when the check is 
returned or has not been negotiated within 120 days or when the school 
notifies the lender that the transaction is cancelled. Attendees at the 
Kansas City meeting concluded that the statute clearly defined the 
loans on which interest would be restricted but recommended that 
lenders should be allowed to bill for interest and special allowance 
until they learn that the loan was not consummated and then adjust 
future billings. The San Francisco attendees simply expressed their 
objection to the law.
    12. Prohibition on the sale of loans prior to disbursement--The 
Amendments changed section 428G(g) to limit the ability of a lender to 
sell a loan prior to full disbursement of the loan proceeds. The 
attendees at the Kansas City meeting recommended that the restriction 
should not apply as long as the address to which payments are made does 
not change and the change is ``transparent'' to the borrower. Attendees 
at the San Francisco meeting recommended that transfer (which it 
defined as a sale) of a loan be prohibited until after all 
disbursements are made. Attendees at the New York meeting recommended 
that the restriction apply only when the ownership of the loan note is 
transferred and that the restriction should not apply when a lender is 
ending its participation in the FFEL Program. The attendees at the 
Atlanta meeting concluded that the restriction on transfers should not 
apply if the transfer does not change the borrower's perception of 
where to send payments.
    The Department considered all of the comments received during the 
regional meetings in preparing draft proposed regulations.

Negotiated Rulemaking

    After completion of the regional meetings, the Department prepared 
draft proposed regulations to implement the provisions of Public Law 
102-325 relating to the FFEL Program. In accordance with the 
requirements of section 492(b) of the HEA, those regulations were 
submitted to a negotiated rulemaking process. During the weeks of 
January 4-8 and February 1-5, 1993, the Department met with negotiators 
selected from among individuals nominated by attendees at the regional 
meetings.
    The discussion below of the proposed regulations reflects those 
areas where the negotiators reached a consensus and the proposed 
regulations reflect that agreement. The discussion below also indicates 
where consensus was not reached during the negotiations. However, the 
negotiators did not choose to discuss every part of the proposed 
regulations. Accordingly, the discussion below of those issues not 
discussed during the negotiations reflects only the views of the 
Secretary.

Proposed Regulatory Changes

Section 682.100  The Federal Family Education Loan Programs

    Section 682.100(a)(3)--The Secretary proposes to amend the 
regulations to reflect the statutory change that parent PLUS borrowers 
may no longer borrow on behalf of dependent graduate students.
    Section 682.100(a)(4)--The Secretary proposes to amend the 
regulations to reflect the statutory change that a Consolidation Loan 
may include Higher Education Assistant Loan (HEAL) Program loans 
authorized by Subpart I of Part A of Public Title VII of the Health 
Services Act, and parent PLUS borrowers whose loans were made on or 
after October 17, 1986.
    Section 682.101(c)--The NPRM is revised to include the statutory 
change that HEAL loans and parent PLUS borrowers whose loans were made 
on or after October 17, 1986 may be included in a Consolidation Loan 
and married couples who have a combined indebtedness of at least $7,500 
in eligible loans may borrow under the Consolidation Loan Program.

Section 682.200  Definitions

    This section of the regulations is being amended to reflect changes 
made to various definitions by Public Law 102-325. The Secretary also 
proposes to change other definitions to ensure clarity and consistency 
within the FFEL Program. During the negotiations, the following 
definitions were discussed and changes were made to address the 
negotiators' concerns.
    Co-maker--The Secretary proposes to revise the definition of co-
maker in the proposed regulations to include its use in the 
Consolidation Loan Program. The current regulatory definition only 
references the PLUS loan program. The Secretary proposes to revise the 
definition to also describe the status of a married couple who are 
joint borrowers on a Consolidation loan. The Secretary wishes to point 
out that a co-maker on a PLUS or Consolidation loan must be an eligible 
borrower.
    Disposable income--The Secretary proposes to revise this section by 
adding a definition of the term ``disposable income.'' The proposed 
regulations would provide a uniform standard for guaranty agencies to 
use in determining what constitutes disposable income in determining a 
reasonable and affordable payment based on the borrower's total 
financial circumstances for purposes of reinstatement of borrower 
eligibility (Sec. 682.401) and rehabilitating a borrower's defaulted 
loan (Sec. 682.405).
    Estimated Financial Assistance--During the negotiated rulemaking 
sessions, discussion ensued regarding the definition of ``estimated 
financial assistance.'' The definition of estimated financial 
assistance reiterates the language in the December 18, 1992 regulations 
that requires a school to include, as estimated financial assistance, 
Federal Perkins loan or Federal Work-Study awards that were offered to 
a student and declined, unless an award was declined for an acceptable 
reason. The negotiators expressed concern that the requirement that aid 
officers must certify estimated eligibility for these programs 
regardless of whether (1) the student applies for the aid, (2) the 
student meets established institutional deadlines for consideration, or 
(3) the student applies, but funds are not available, is not reasonable 
or practicable given the deadline that schools have for packaging their 
campus-based financial aid programs.
    The Secretary is concerned that students be considered for more 
desirable campus-based aid, if available, before they turn to FFELP 
loans. However, at the request of the negotiators, the Secretary 
proposes to clarify that a school would be expected to include Federal 
Perkins Loan or Federal Work-Study award estimates for a student only 
to the extent funding is available. The Secretary intends that a school 
need not include hypothetical campus-based awards if those funds are no 
longer available or cannot be expected to become available at that 
school. Also, a campus-based award declined by the student would not 
need to be considered as estimated financial assistance if the 
institution's packaging policy would not normally make certain types of 
awards to a particular category of students. For example, if the 
institution's packaging policy would not normally award a Perkins loan 
to a freshman student, that aid would not need to be included as part 
of ``estimated financial assistance'' when certifying a FFEL Program 
loan application for the student.
    The negotiators also recommended that the definition of estimated 
financial assistance should be revised to provide a different 
definition of estimated financial assistance for PLUS loans. They 
believed a school should be able to certify a PLUS application without 
taking into consideration the dependent student's eligibility for other 
Title IV student loan assistance if the parent wishes to take on a loan 
obligation in lieu of the student becoming obligated. The Secretary 
strongly encourages students to utilize all financial aid available to 
them. However, the Secretary recognizes that the statute provides 
authority for PLUS parent borrowers to borrow up to the cost of 
education. Given the fact that schools will be participating in both 
the Federal Direct Loan and FFEL programs, the Secretary believes that 
the treatment of PLUS loans needs to be consistent across the loan 
programs. Therefore, the Secretary proposes to revise the definition of 
estimated financial assistance in the FFEL Program to be consistent 
with the same definition in the Federal Direct Student Loan Program and 
to permit a PLUS parent borrower the option of borrowing to cover both 
parental contribution and the amount of the student's eligibility for 
Federal loans up to the cost of attendance.
    Grace period--The Secretary proposes to revise the definition of 
grace period to reflect the change in the HEA that allows an SLS 
borrower who also has a Stafford loan to delay beginning repayment on 
the SLS loan for a period of time concurrent with the borrower's grace 
period on the Stafford loan so that repayment begins on the two loans 
at the same time.
    Repayment period--The Secretary proposes to revise the definition 
of repayment period to reflect section 428H of the HEA, which provides 
that the repayment period for an Unsubsidized Stafford Loan begins on 
the day after the grace period expires. The NPRM reflects that payments 
of interest on an Unsubsidized Stafford Loan during the in-school and 
grace period are the responsibility of the borrower.
    Satisfactory repayment arrangement--The Secretary proposes to 
revise this section by adding a definition for the term ``satisfactory 
repayment arrangement.'' Consistent with the effort to standardize and 
simplify the FFEL Program and the requirements of section 428F of the 
HEA, the proposed regulations would provide a uniform standard for 
guaranty agencies to use in determining what constitutes a 
``satisfactory repayment arrangement'' by a defaulted borrower. A 
borrower would be required to have made satisfactory repayment 
arrangements on a defaulted loan prior to regaining eligibility for 
further Title IV assistance or including a defaulted loan in a 
Consolidation loan. The negotiators expressed concern about the effects 
of applying the same definition to other aspects of the FFEL Program 
that they believe go beyond the reinstatement of a defaulted borrower's 
eligibility for Title IV assistance. For example, a borrower who wishes 
to consolidate a defaulted loan is required to make a satisfactory 
repayment arrangement on the defaulted loan and provide evidence of the 
arrangement to the consolidating lender. The negotiators believed that 
guaranty agencies should have the discretion to implement a stricter 
standard for satisfactory repayment arrangements for differing 
circumstances. The Secretary believes, however, that the Congress 
intended one uniform standard for satisfactory repayment arrangements 
to be used nationwide for all FFEL Program purposes.
    Stafford Loan Program--The negotiators indicated that the different 
names used in the Federal Stafford Loan Program confuse borrowers and 
other program participants. The Secretary is proposing to define the 
different types of loans involved. The term ``Stafford Loan Program'' 
refers to the program authorized by Title IV-B of the HEA, which 
encourages the making of subsidized and unsubsidized loans to 
undergraduate, graduate, and professional students and is one of the 
Federal Family Education Loan programs. The term ``Stafford Loan 
Program'' will serve as the umbrella term for all Stafford loans, 
subsidized, unsubsidized, and nonsubsidized.
    Write-off--The Secretary proposes to revise this section by adding 
a definition for the term ``write-off.'' The proposed regulations would 
provide a uniform standard for guaranty agencies to use in determining 
what constitutes a ``write-off'' for purposes of determining whether a 
borrower is considered to have an adverse credit history if a credit 
report reflects that a borrower has been the subject of a write-off.

Section 682.201  Eligible borrowers

    Section 682.201(a)(2)--The NPRM proposes to establish a sequence in 
certification of borrower eligibility in the FFEL Program in response 
to the negotiators' request that clarification be provided in the 
regulations. Consistent with the requirements of sections 428H(b)(2) 
and 484(b)(2) of the HEA, a borrower must first receive a determination 
of need for a subsidized Stafford loan and, if determined to have need 
in excess of $200, have submitted an application to a lender. The 
borrower must next receive a determination of need for an unsubsidized 
Stafford loan regardless of whether the amount of the need is less than 
$200. Finally, an eligible borrower may have an SLS loan application 
certified which contains, under ``estimated financial assistance'', the 
full amount of the borrower's Stafford Loan (subsidized and 
unsubsidized) eligibility. The Secretary notes that the Omnibus Budget 
Reconciliation Act of 1993 (Pub. L. 103-66), enacted on August 10, 
1993, provides that no new Federal SLS Loans may be made for a period 
of enrollment beginning on or after July 1, 1994. The Federal SLS 
Program will be replaced with increased annual loan amounts available 
under the unsubsidized component of the Federal Stafford Loan Program.
    Section 682.201(b)--The NPRM proposes to reflect the change in the 
HEA that provides that graduate or professional students are considered 
independent students, thereby restricting PLUS loan eligibility to 
parents of dependent undergraduate students.
    Section 682.201(b)(7)--The proposed regulations implement section 
428B(a) of the HEA that provides the eligibility requirements for the 
PLUS program. Specifically, in order for a parent to be eligible to 
borrow a PLUS loan on behalf of a dependent student, the parent must be 
determined not to have an ``adverse credit history.'' During the 
negotiations some lenders expressed the need for flexibility to 
exercise individual judgment in determining adverse credit. The 
Secretary accepted the negotiators' recommendation that the proposed 
rules should not preclude a lender from requiring a PLUS applicant to 
meet more stringent credit criteria. However, the Secretary did not 
accept other lenders' recommendations that, in exercising this 
judgment, the lender should be allowed to use more lenient standards on 
an exceptional basis.
    Lenders expressed concern about parent borrowers' ability to repay 
the loans given the repeal of the PLUS annual and aggregate loan 
limits. Some lenders recommended that the proposed regulations used to 
determine borrower eligibility for PLUS loans go beyond a standard to 
determine adverse credit history to also include a determination of a 
borrower's ability to repay the debt. Although the Secretary shares the 
lenders' concerns, he declined to accept the negotiators' 
recommendation because there is no statutory authority for including 
such an additional eligibility criterion. However, the Secretary notes 
that a lender is not prohibited from maintaining a lending policy that 
would examine parental ability to repay the PLUS loan.
    The draft NPRM discussed at the negotiated rulemaking sessions 
would have required a lender to obtain a credit report on the PLUS 
applicant from at least one national credit bureau organization not 
more than 60 days before the first day of the period of enrollment for 
which the loan was intended. The negotiators believed the time frame 
for obtaining the credit report was too restrictive. The Secretary, 
therefore, has removed the proposed time frame and is proposing that 
the lender determine adverse credit history based on the examination of 
the required credit report.
    The Department also proposed in the draft NPRM that the PLUS 
applicant would be considered to have an adverse credit history if the 
borrower is more than 90 days delinquent on a repayment of any debt, 60 
or more days delinquent on the repayment of each of two or more debts, 
or has been, during the five years preceding the date of the credit 
report, the subject of a default determination, bankruptcy filing, 
foreclosure, repossession, tax lien, wage garnishment, write-off, or 
any Federal or state government action to collect a debt. The lender 
could not consider insufficient or lack of a credit history for the 
parent borrower to be an adverse credit history. Some negotiators 
objected to the proposal that a borrower would be considered to have an 
adverse credit history if the borrower is more than 90-days delinquent 
on a repayment of any debt or 60 or more days delinquent on the 
repayment of each of two or more debts because they believed the 
proposal was overly complicated and too stringent. The Secretary 
removed the 60-day restriction to simplify the standard; however, the 
Secretary indicated that the 90-day delinquency requirement would be 
retained because he believed this to be an appropriate threshold of 
delinquency for this purpose.
    The negotiators believed that the proposed draft regulations also 
did not provide the lender with enough flexibility to consider 
extenuating circumstances, such as delinquency on small dollar debts 
that may have been beyond the control of the borrower. They recommended 
that lenders be able to apply a tolerance for small dollar debts. The 
negotiators indicated that delinquent debts of less than $500 are an 
industry-wide acceptable tolerance. The Department agreed to propose to 
allow the lender the flexibility in determining adverse credit if the 
lender retains documentation supporting its basis for determining that 
extenuating circumstances existed. The documentation may include an 
updated credit report, a statement from the creditor that the borrower 
has made satisfactory arrangements to repay the debt, or an acceptable 
statement from the borrower explaining any delinquencies with 
outstanding balances of less than $500.
    Student advocates requested that the Department clarify that a 
borrower who has a loan discharged under section 437(b) of the HEA 
would not be considered to have an adverse credit history. The 
Department agreed to clarify in the preamble to the regulations that a 
borrower would not be considered to have an adverse credit history 
based solely on a loan discharged under this provision appearing on the 
borrower's credit history.
    Section 682.201(c)--The Secretary proposes to amend the regulations 
to reflect the new statutory changes to Consolidation loan eligibility. 
The NPRM would provide that the following borrowers are now eligible 
for a Consolidation loan: A borrower who has a minimum debt under the 
eligible loan programs of at least $7,500; a defaulted borrower who 
will reenter repayment through loan consolidation; a parent PLUS 
borrower who has loans made after October 17, 1986; and a married 
couple who will jointly consolidate their individual loans. The NPRM 
also reflects the statutory provision allowing a borrower to add loans 
received prior to the date of the consolidation during the 180-day 
period after the lender has made the Consolidation loan.
    The proposed regulations also provide that a borrower who is 
currently in default on a FFEL loan must, to make the defaulted loan an 
eligible loan to be consolidated, have made satisfactory repayment 
arrangements with the holder of the defaulted loan. The negotiators 
held an in-depth discussion as to whether there should be a separate, 
stricter criterion for ``satisfactory repayment arrangements'' for the 
inclusion of a defaulted loan in a Consolidation loan as provided in 
the NPRM. The Secretary strongly believes that a single, standard 
definition of this term, as provided in Sec. 682.200, should be applied 
consistently throughout FFEL Program regulations. Therefore a borrower 
would be required to make six consecutive reasonable and affordable 
monthly payments on the defaulted loan before it was eligible for 
inclusion in the Consolidation loan.

Section 682.204  Maximum Loan Amounts

    The Secretary has proposed to amend the regulations by inserting 
the new statutory loan limits for the FFEL Program loans that became 
effective on or after July 1, 1993. Changes in loan limits made by the 
Amendments that became effective earlier were included in the FFEL 
regulations that were published in the December 18, 1992 Federal 
Register. The negotiators indicated that they believe that the NPRM 
does not reflect the intent of the HEA in regard to the limits for 
programs of less than one academic year. The Secretary recognizes that 
the language in the HEA is defective and has recommended to the 
Congress a technical change to address Stafford loan limits for 
programs of less than one year when the student is beyond the first 
year of undergraduate education.
    The negotiators believed the Department should provide guidance for 
schools in certifying a Stafford or SLS loan amount for a borrower 
enrolled in a program of study of less than an academic year. The 
Secretary has proposed in Sec. 682.603(f)(3) a formula for the school 
to use in determining the borrower's annual loan limit based on whether 
the school meets the academic year standards specified in section 
481(d)(2) of the HEA.
    The negotiators requested that the Department define ``course of 
study'' so that students enrolled in multi-year programs be exempted 
from prorated loan limits. The Secretary believes, however, that, as 
the statute is currently written, a borrower enrolled for a period of 
enrollment that is less than an academic year in length necessary to 
complete a program of study is subject to reduced annual loan limits 
for any loan made for that period of enrollment. For term-based 
schools, this approach applies only if the period of enrollment that is 
less than an academic year is beyond the normal time frame for 
completion of the program as determined by the school.

Section 682.207  Due Diligence in Disbursing a Loan

    This section of the regulations is being amended to provide that a 
PLUS loan check from a lender that is co-payable to the institution and 
the parent borrower must be sent directly to the eligible institution. 
Some negotiators favored mailing the check to the PLUS borrower for 
endorsement first and directing the borrower to then forward the check 
to the school. These negotiators believe that the co-payable check 
format provides sufficient protection to the Federal government against 
the misuse of PLUS funds. However, the Department's experience in the 
PLUS loan program has shown that sending the check directly to the 
borrower contributes to confusion in the program and may result in 
funds being made available to PLUS borrowers on behalf of students who 
are no longer enrolled. The Secretary has proposed that the check be 
mailed to the school first to verify student eligibility prior to 
forwarding it to the parent for endorsement.

Section 628.300  Payment of Interest Benefits on Federal Stafford Loans

    The HEA provides that a lender may not receive interest on loans 
for periods earlier than either 10 days prior to the date the proceeds 
of the loan disbursed by check are delivered to the borrower by the 
school or 3 days prior to the date the proceeds of the disbursement 
made by electronic funds transfer are released from the restricted 
account maintained by the school. The major point of disagreement 
during the negotiations regarding this provision of the statute was the 
Department's interpretation of Congress' use of the word 
``disbursement'', as used in section 428(a)(3)(A)(v) of the HEA, to 
mean ``delivery'' of loan proceeds to the borrower by the school. The 
Secretary believes this is the only viable interpretation of the 
statute as the use of the term disbursement would result in an 
expansion rather than restriction on interest billed the Secretary.
    Considerable discussion occurred during the negotiation sessions 
regarding the 3-day/10-day interest limitation. The Department pointed 
out that Congress clearly intended to limit the lender's ability to 
bill the Department for interest to the period after funds are 
delivered to the student. The legislative history of this provision 
indicates that Congress intended to achieve significant savings by this 
change. The negotiators argued that in developing the regulations, the 
Department should consider that lenders do not consistently track a 
student's period of enrollment or the date of delivery of proceeds to 
the borrower. The negotiators believed the regulations should be 
written based on a formula driven by the date of disbursement to the 
school.
    The negotiators ultimately recommended that interest be limited to 
10 days prior to the first day of the period of enrollment for which 
the loan check is intended or, if the loan is disbursed after the start 
of the period of enrollment, 3 days after the disbursement date of the 
check. For a loan disbursed by electronic funds transfer, interest will 
be limited to 3 days prior to the first day of the period of enrollment 
or if the loan is disbursed after the start of the period of 
enrollment, 3 days after disbursement. To achieve Congress' intent to 
limit unnecessary interest payments using the date of loan disbursement 
to the school rather than delivery date to the borrower, the Secretary 
also believes it is necessary in Sec. 682.603(h) to limit the period 
during which the school may request the disbursement of loan proceeds 
for a new borrower who is enrolled in his or her first year of 
undergraduate study.
    The Secretary also proposes to amend the regulations to reflect the 
provision in section 428(a)(7) in the HEA under which a lender may not 
receive interest benefits for any disbursement of a loan for which 
checks have not been cashed or for which electronic funds transfer has 
not been completed.

Section 682.301  Eligibility of Borrowers for Interest Benefits on 
Stafford and Consolidation Loans

    This section of the regulations is being amended to reflect the 
statutory change that provides that a Consolidation loan borrower whose 
application was received by the lender on or after January 1, 1993 
qualifies for interest benefits during authorized periods of deferment 
on the portion of the loan that does not represent HEAL loans.

Section 682.302  Payment of Special Allowance on FFEL Loans

    The Secretary proposes to amend the regulations to reflect the 
provision in section 428(a)(7) of the HEA under which a lender may not 
receive special allowance payments for loans for which checks have not 
been cashed or for which electronic funds transfers have not been 
completed.
    The Secretary also proposes to amend this section to reflect other 
changes made by the Amendments. The proposed regulations reflect the 
change under section 438(b)(2)(C) that special allowance is not paid 
unless the new variable interest rate calculations produce an interest 
rate that is greater than the statutory standard interest rate (10 
percent for PLUS, 11 percent for SLS). The proposed regulations also 
reflect the new statutory special allowance formula and a new special 
allowance ``floor'' for tax-exempt loans, both of which are effective 
for loans made on or after October 1, 1992. In addition, the proposed 
regulations would provide, in accordance with the Amendments, that 
unsubsidized Federal Stafford loans made pursuant to section 428H of 
the Act are now eligible for special allowance payments.

Section 682.400  Agreements Between a Guaranty Agency and the Secretary

    The Secretary proposes to revise this section of the regulations to 
implement section 428F of the HEA that requires all guaranty agencies 
to participate in the loan rehabilitation program.

 Section 682.401  Basic Program Agreement

    Section 682.401(b)(4)--The proposed regulations implement the 
requirements of section 428F of the HEA that require a guaranty agency 
to permit a defaulted borrower to regain eligibility for Title IV 
assistance once the borrower has made satisfactory repayment 
arrangements as defined in Sec. 682.200. The HEA provides that a 
guaranty agency may not demand that a borrower make monthly payments 
that exceed an amount that is ``reasonable and affordable'' based upon 
the borrower's total financial circumstances. In developing criteria to 
be used by guaranty agencies in determining what constitutes a 
reasonable and affordable payment amount, the Secretary proposes to 
require the agency to require income and expense documentation from the 
borrower to make a determination of a reasonable and affordable amount. 
The guaranty agency must also document the basis for the determination 
if it determines that a defaulted borrower cannot make a monthly 
payment of at least $50 or the monthly accrued interest on the loan, 
whichever is greater, based on the borrower's total financial 
circumstances. Several negotiators expressed their belief that the 
documentation requirement for borrower payments that are less than $50 
would be construed as a minimum monthly payment requirement resulting 
in an adverse impact on low-income borrowers who have defaulted and 
request reinstatement of eligibility for additional Title IV 
assistance.
    The Secretary does not intend the requirement that the agency 
document the basis for payments of under $50 to harm defaulted low-
income borrowers. The proposed regulations clearly provide that 
payments of less than $50 are permissible. The proposed regulations 
merely require the guaranty agency to assess the borrower's disposable 
income and necessary expenses to determine a reasonable and affordable 
payment, and to document the borrower's file to substantiate the fact 
that the borrower's financial circumstances support a smaller payment 
than is generally required of other FFEL borrowers. The Secretary notes 
that a borrower's objection to the ``affordable and reasonable 
payment'' amount determined by the guaranty agency based on its 
assessment of the borrower's disposable income and necessary expenses 
should be made to officials of the guaranty agency. However, if the 
guaranty agency and the borrower are unable to come to an agreement on 
the amount identified by the agency following this assessment, the 
borrower may contact the Department for assistance.
    Section 682.401(b)(6)--The proposed regulations implement the 
requirements of section 428(b)(1)(T) of the HEA that provide a guaranty 
agency the authority to limit the total number of loans or the volume 
of loans made to students attending a particular school. During the 
regional meetings, many commenters expressed the opinion that the 
limitation should only apply to a school that is a first-time applicant 
to participate in the guaranty agency's program. However, the Secretary 
also believes that this new provision should be applicable to schools 
that are applying to renew their participation in the guaranty agency's 
program, as well as schools that are applying to participate in the 
agency's program for the first time. The Secretary believes it is 
reasonable to treat renewal applicants in the same manner as first-time 
applicants for purposes of determining a school's eligibility to 
participate in a guaranty agency program. The application process 
provides the guaranty agency with an opportunity to review a school's 
capability in its administration of the FFEL Program. The Secretary 
proposes that a guaranty agency may establish reasonable criteria 
approved by the Secretary to implement this authority.
    Section 682.401(b)(14)--The Secretary proposes to include 
Sec. 682.401(b)(14), as published in the July 19, 1991 Student 
Assistance General Provisions and Guaranteed Student Loan Programs 
final regulations, which requires a guaranty agency to provide the 
Secretary's designated Department official a copy of its response to 
the institution's request for verification of its cohort default rate 
data. This provision was inadvertently not included in the final FFEL 
regulations published on December 18, 1992.
    Section 682.401(b)(16)--The Secretary proposes to amend this 
section to prohibit a lender from selling or transferring a promissory 
note for any FFEL Program until the final disbursement of the loan has 
been made, unless the sale or transaction does not result in the change 
in the identity of the party to whom payment on the loan will be made.
    Section 682.401(b)(24)--The Secretary proposes to amend the NPRM to 
reflect the HEA requirement that the guaranty agency must, upon the 
request of the eligible school, notify the last institution the student 
attended of any sale, transfer, or assignment of the loan to another 
holder and the address and telephone number by which contact may be 
made with the new loan holder concerning repayment of the loan.
    Section 682.401(b)(25)--The Secretary proposes to amend this 
section of the regulations to establish a time frame for a guaranty 
agency to send the Secretary information on program participants 
requesting designation as exceptional performers. The Secretary also 
proposes to amend this section to reflect the statutory requirement 
that a guaranty agency provide a school with information on any sale or 
transfer of a loan that results in payments being sent to a different 
place. This information will assist the school's efforts to help its 
students avoid defaulting on their loans.
    Section 682.401(c)(1)--The proposed regulations implement the new 
statutory provisions allowing guaranty agencies to limit access to 
lender-of-last-resort in certain circumstances and allows a mechanism 
for the school to appeal to the Secretary if lender-of-last-resort 
services are to be denied by the designated guaranty agency required to 
provide those services on this basis. The proposed regulations would 
require a guaranty agency to ensure that lender-of-last-resort loans 
are available for attendance at a school with a default rate over 25 
percent; has not been eligible for and has not participated in the 
Federal Stafford Loan Program during the prior 18 months; or is the 
subject of an emergency action or limitation, suspension, or 
termination proceeding, if there are exceptional mitigating 
circumstances that would make the new statutory limitations on the 
agency's lender-of-last-resort program inequitable. The Secretary 
proposes to use the definition of exceptional mitigating circumstances 
in 34 CFR 668.15(g) to evaluate appeals filed by schools under this 
provision. The public, at the regional meetings, expressed its belief 
that the current regulatory criteria for exceptional mitigating 
circumstances were too stringent. However, the Secretary notes that 
Congress was aware of the Department's interpretation of the term 
``exceptional mitigating circumstances'' in 34 CFR 668.15(g) and used 
the same term in the amendments to the lender-of-last-resort provision 
in section 428(j) of the HEA. Therefore, the Secretary believes that it 
is appropriate to use the existing regulatory definition of 
``exceptional mitigating circumstances'' for appeals of denials of 
lender-of-last-resort services.
    Section 682.401(e)--The Amendments expanded the prohibited 
inducement provisions relating to guaranty agencies. The Secretary has 
proposed to modify the regulations to reflect this amendment and 
include examples of the prohibited inducements. The list of examples is 
not all-inclusive. For example, offering computer support that it does 
not make available to all lenders in its program as part of a marketing 
appeal to a lender with whom an agency does not do business in order to 
secure that lender's loans would constitute an inducement. Also, any 
cash payment from a guaranty agency to a lender on a per application 
basis is strictly prohibited, except as necessary to secure lenders to 
participate in the agency's lender-of-last-resort program. The 
Secretary proposes to amend the regulations to reflect that inducements 
are only those things that are not available to all lenders in the 
guaranty agency's program or will not be available to all lenders after 
new enhancements or products have been tested.

Section 682.405  Loan Rehabilitation Agreement

    The proposed regulations implement the amendments to the loan 
rehabilitation provision in section 428F of the HEA, under which 
guaranty agencies are required to enter into a loan rehabilitation 
agreement with the Secretary. Previously, the loan rehabilitation 
program was voluntary for guaranty agencies. The statute provides that, 
as part of a loan rehabilitation, the Secretary or a guaranty agency 
may not demand from a defaulted borrower a monthly payment amount more 
than is ``reasonable and affordable'' based upon the borrower's total 
financial circumstances. The Secretary notes that a borrower's 
objection to the ``affordable and reasonable payment'' amount 
determined by the guaranty agency based on its assessment of the 
borrower's disposable income and necessary expenses should be made to 
officials of the guaranty agency. However, if the guaranty agency and 
the borrower are unable to come to an agreement on the amount 
identified by the agency following this assessment, the borrower may 
contact the Department for assistance. Some attendees at the regional 
meetings indicated that they believed that each guaranty agency should 
be permitted to develop its own criteria for determining a payment 
amount that is reasonable and affordable. The Secretary disagrees and 
has proposed regulations that would standardize this requirement for 
all guaranty agencies to ensure that a defaulted borrower in one state 
is provided with the same opportunity to rehabilitate his or her 
defaulted loan as a borrower in another state.

Section 682.406  Conditions of Reinsurance Coverage

    The proposed regulations implement the requirement in section 
428(c)(2)(G) of the HEA that provides that a guaranty agency may not 
receive reinsurance unless it demonstrates to the Secretary that 
diligent attempts have been made to locate the borrower through the use 
of reasonable skip-tracing techniques. The Secretary believes that it 
is primarily a lender responsibility in the due diligence process to 
locate the borrower through the use of reasonable skip-tracing 
techniques. However, the Secretary will not reimburse a guaranty agency 
when a default claim is based on an inability to locate the borrower, 
unless the guaranty agency, at the time of filing a claim, demonstrates 
that diligent attempts have been made by either the lender or the 
agency to locate the borrower.

 Section 682.407  Administrative Cost Allowance for Guaranty Agencies

    The Secretary proposes to implement the provision in section 
428(f)(1) of the HEA that provides that administrative cost allowance 
payments may not be made to a guaranty agency for a loan for which the 
disbursement check has not been cashed or for which an electronic funds 
transfer has not been completed.

 Section 682.409  Mandatory Assignment By Guaranty Agencies of 
Defaulted Loans to the Secretary

    In a decision memo dated March 14, 1991, the Secretary stated that 
the Department would require the assignment of certain defaulted FFEL 
Program loans by guaranty agencies to the Department for collection in 
two phases. The age-based phase of the assignment policy, Phase I, 
began in July 1991. This preamble clarifies Phase I and outlines Phase 
II of the policy--guaranty agency default collection performance 
standards. The Phase II standards for assignment were developed in 
accordance with the purposes of section 428(c)(8) of the HEA, as 
amended by the 1992 Amendments, and are designed to give the Secretary 
flexibility in resolving existing defaulted FFEL Program loans to 
maximize collection revenues from the entire defaulted student loan 
portfolio. Because successful collection of defaulted student loans 
depends on a number of factors, including the nature, quality and 
timing of collection efforts and the resources of debtors, the adequacy 
of collection efforts must be evaluated in terms of process as well as 
outcomes. Section 682.410 contains the process requirements.
    Under these proposed standards, guaranty agencies with recovery 
rates equal to or higher than the regulatory recovery rate standards 
will continue collecting all defaulted student loans which have been in 
their portfolios less than four years. Guaranty agencies with recovery 
rates lower than the regulatory recovery rate standards will continue 
collecting defaulted student loans, but their workloads would be 
reduced to better allow them to collect the loans they retain. These 
guaranty agencies would be required to assign additional loans to the 
Department, as well as loans required to be assigned under Phase I of 
the policy. Any additional loans required to be assigned in a given 
fiscal year will be in proportion to the difference between the 
guaranty agency's actual recovery rate and the regulatory recovery rate 
standards. Guaranty agencies demonstrating marked improvement in 
collections by achieving regulatory recovery rate standards the 
following fiscal year after being required to assign additional loans, 
will not be required to assign any loan which they have held less than 
four years.
    The performance standards for each separate FFEL Program (i.e. 
Stafford, SLS, PLUS, Consolidation) will be 80 percent of the average 
annual recovery rate for that program for all guaranty agencies for the 
first two years. For subsequent years, the performance standard for 
each program will increase to 90 percent of the average annual recovery 
rate for all guaranty agencies. At the same time, the age-based 
assignment requirement will change from four to five years. Guaranty 
agencies not meeting these goals will have their defaulted student loan 
portfolios reduced to levels which will be more conducive to achieving 
higher recovery rates. The reductions will be in amounts sufficient to 
cause the affected guaranty agency's recovery rates by loan type to 
equal the average guaranty agency recovery rate for that loan type when 
the amount assigned to the Secretary is subtracted from the amount of 
loans outstanding--the denominator in the recovery rate calculation. 
This policy will give the Secretary the flexibility to curtail 
assignments, or select the types of accounts to be assigned if the 
solvency of a guarantor is threatened. The Secretary will review this 
standard annually and make adjustments, as appropriate.
    In determining the basis for this policy, the Secretary considered 
the annual defaulted student loan recovery rates of all guaranty 
agencies over the last five years. The standards for assignment of 
loans were generally agreed to by the negotiators with only a few 
objections. The Secretary notes, however, that changes to section 
428(c)(8) of the HEA were made by the Omnibus Budget Reconciliation Act 
(OBRA) of 1993 (Pub. L. 103-66) subsequent to the development and 
negotiation of the proposed regulations governing mandatory assignment 
of guaranty agency loans. Specifically, the HEA has been amended to 
give the Secretary authority to direct a guaranty agency to promptly 
assign loans to the Secretary if the Secretary determines that action 
to be necessary for an orderly transition from the FFEL Program to the 
Federal Direct Student Loan Program. Therefore, the Secretary 
specifically solicits comments on the proposed standards for assignment 
in light of the additional changes made to this section of the law. 
Further, the Secretary reserves the right during the development of the 
final regulations to make whatever changes he deems necessary to 
implement the requirements of the OBRA in this area.

 Section 682.410  Fiscal, Administrative, and Enforcement Requirements

    The statute now requires the guaranty agency to maintain a minimum 
reserve fund level as a percentage of the amount of all outstanding 
loans guaranteed by the agency. The proposed regulations define the 
reserve fund level as total sources less total uses of the reserve 
fund, and defines in detail the amount of outstanding loans guaranteed.
    The Secretary notes that the Omnibus Reconciliation Act of 1993 
made additional changes to section 428(c) of the HEA. Those changes 
will be addressed in separate regulations that are currently being 
developed under negotiated rulemaking.

 Section 682.601  Rules for a School That Makes or Originates Loans

    Section 682.601(a) of the proposed regulations would provide that 
an institution may be an eligible lender only if its cohort default 
rate does not exceed 15 percent. Further, the institution may only use 
special allowance payments and interest payments received on loans that 
it originated for need-based grant programs for its students or for 
reasonable administrative expenses directly related to the FFEL 
Program. These proposed changes reflect changes made to the HEA in 
section 435(d)(2)(E).

 Section 682.603  Certification By a Participating School in Connection 
With a Loan Application

    Proposed Sec. 682.603(f)(3) provides a formula for a school to use 
in determining the annual loan amount for a borrower enrolled in a 
program of study of less than an academic year that meets the standards 
specified in section 481(d) of the HEA. This change is needed to 
implement the restriction on the annual limit provided by sections 
428(b)(1)(A) and 428A(b)(1) of the HEA.
    The Secretary also proposes to amend the NPRM by adding a new 
paragraph (h) to achieve, in the case of new borrowers subject to 
delayed delivery of loan proceeds, the appropriate interest limitation 
Congress intended in Sec. 682.300 using a formula based on the date of 
loan disbursement. The Secretary believes that restricting the school's 
request for disbursement of the borrower's loan proceeds to seven days 
prior to the 31st day of the student's period of enrollment will still 
provide the school sufficent time to process the new borrower's loan 
proceeds while ensuring the required interest limitation.

 Section 682.604  Processing the Borrower's Loans Proceeds and 
Counseling Borrowers

    Section 682.604(g). Section 485(b) of the Act was amended to delete 
the requirement that a school counsel borrowers concerning the average 
indebtedness of FFEL borrowers. The Secretary proposes to remove the 
previous regulatory requirement. The school must now review with the 
borrower all conditions under which the borrower may defer repayment. 
The proposed regulations would simply revise the previous requirement 
that the school provide information only about three specific 
deferments. The proposed regulations also list other items that must be 
updated by the borrower during exit counseling.
    Section 682.604(h). Discussion occurred during the negotiated 
rulemaking sessions regarding the school's treatment of an overaward 
when proceeds which have not been delivered to a student exceed that 
amount of assistance for which the student is eligible. Section 428G(d) 
of the HEA requires the school to return the amount of the overaward to 
the lender. An overaward can result from aid received from any form of 
assistance defined as estimated financial assistance pursuant to 34 CFR 
682.200 or a recalculation by the institution of a family's Expected 
Family Contribution (EFC) based on information not considered in the 
original EFC calculation. The negotiators expressed concern that one of 
the most time-consuming and frustrating parts of financial aid work, 
for both aid administrators and students, is resolving small $50 to 
$200 overawards. The negotiators suggested a tolerance of $500 to 
relieve some administrative burden. The Department indicated that the 
treatment of an overaward is a current statutory requirement, not 
subject to negotiated rulemaking, and that the statute does not provide 
tolerance language. Therefore, the Secretary cannot arbitrarily insert 
this provision in the regulations.
    The Secretary proposes to revise the NPRM to include the change in 
the HEA that provides that funds obtained from any need-based 
employment is not considered an overaward, provided the amount of the 
funds does not exceed $300.
    Income contingent repayment--The statute provides that the 
Secretary may issue regulations allowing certain defaulted borrowers a 
repayment schedule that assesses the borrower's income and provides up 
to 25 years to repay the loan. The Secretary is to contract with 
private firms or other government agencies to perform the collection 
activities on these loans. The Secretary must publish a finding that 
the collection mechanism selected will provide a high degree of 
certainty of collection on the defaulted loans and that the use of the 
repayment option and collection mechanism will result in an increase in 
the net amount of collections. To be eligible, the borrower's note must 
provide for this type of repayment option and the note must be assigned 
to the Secretary following default. The Secretary is currently 
reviewing the options regarding the establishment of the collection 
mechanism mandated prior to issuing proposed regulations on this 
repayment option.

Regulatory Flexibility Act Certification

    The Secretary certifies that these proposed regulations would not 
have a significant economic impact on a substantial number of small 
entities.
    While the statute requires that the Secretary regulate certain 
actions that must be taken by various program participants, these 
requirements would not have a significant impact because they would not 
impose excessive regulatory burdens or require unnecessary Federal 
supervision. The regulations would impose minimal additional 
requirements to protect the Federal fiscal interest, as well as the 
interests of the borrowers under the programs.

Paperwork Reduction Act of 1980

    Sections 682.401, 682.405 and 682.409 contain information 
collection requirements. As required by the Paperwork Reduction Act of 
1980, the Department of Education will submit a copy of these sections 
to the Office of Management and Budget (OMB) for its review. (44 U.S.C. 
3504(h))
    Under Sec. 682.401, a guaranty agency would be required to permit 
defaulted borrowers to regain eligibility for Title IV assistance. In 
doing so, a guaranty agency would be required to collect data to 
substantiate its determination of a borrower's total financial 
circumstances. Based on an estimated 4000 applicants, at .08 hours per 
response, this would result in 320 burden hours.
    Under Sec. 682.405, a guaranty agency is required to participate in 
a loan rehabilitation loan program for the purpose of rehabilitating a 
defaulted loan so that the loan may be purchased by an eligible lender 
and removed from default status. In rehabilitating a loan, a guaranty 
agency would be required to collect data to substantiate its 
determination of a borrower's total financial circumstances. Based on 
an estimated 4800 applicants, at .08 hours per response, this would 
result in 384 burden hours.
    Organizations and individuals desiring to submit comments on the 
information collection requirements should direct them to the Office of 
Information and Regulatory Affairs, OMB, Room 3002, New Executive 
Office Building, Washington, DC 20503; Attention: Daniel J. Chenok.

Invitation to Comment

    Interested persons are invited to submit comments and 
recommendations regarding these proposed regulations.
    All comments submitted in response to these proposed regulations 
will be available for public inspection, during and after the comment 
period, in ROB-3, room 4310, 7th and D Streets, SW., Washington, DC, 
between the hours of 8:30 a.m. and 4 p.m., Monday through Friday of 
each week except Federal holidays.

Assessment of Educational Impact

    The Secretary particularly requests comments on whether the 
proposed regulations in this document would require transmission of 
information that is being gathered by or is available from any other 
agency or authority of the United States.

List of Subjects in 34 CFR Part 682

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

(Catalog of Federal Domestic Assistance Number 84.032, Federal 
Family Education Loan Program)

    Dated: March 9, 1994.
Richard W. Riley,
Secretary of Education.

    The Secretary proposes to amend part 682 of title 34 of the Code of 
Federal Regulations as follows:

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

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

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

    2. Section 682.100 is amended by revising paragraphs (a)(3) and 
(a)(4) to read as follows:


Sec. 682.100  The Federal Family Education Loan programs.

    (a) * * *
    (3) The Federal PLUS (PLUS) Program, which encourages making loans 
to parents of dependent undergraduate students. Before October 17, 
1986, the PLUS Program also provided for making loans to graduate, 
professional, and independent undergraduate students. Before July 1, 
1993, the PLUS Program also provided for making loans to parents of 
dependent graduate students.
    (4) The Federal Consolidation Loan (Consolidation) Program, which 
encourages making loans to borrowers for the purpose of consolidating 
their repayment obligations, with respect to loans received while they 
were students, under the Federal Insured Student Loan (FISL), Stafford 
loan, SLS, ALAS (as in effect before October 17, 1986), Perkins Loan 
programs, Health Professions Student Loan (HPSL) Program authorized by 
Subpart II of part C of Title VII of the Public Health Service Act, and 
the Higher Education Assistance Loan (HEAL) Program authorized by 
Subpart I of part A of Public Title VII of the Health Services Act, and 
for parent PLUS borrowers whose loans were made on or after October 17, 
1986.
* * * * *
    3. Section 682.101 is amended by revising paragraph (c) to read as 
follows:


Sec. 682.101  Participation in the FFEL programs.

* * * * *
    (c) Students who meet certain requirements, including enrollment at 
a participating school, may borrow under the Stafford loan and SLS 
programs. Parents of eligible dependent students may borrow under the 
PLUS Program. Student borrowers who have at least $7,500 outstanding in 
Stafford, SLS, FISL, Perkins, HPSL, HEAL, ALAS, student PLUS loans or 
married couples who have a combined indebtedness of at least $7,500 
under these programs or Parent PLUS loans made on or after October 17, 
1986 may borrow under the Consolidation Loan Program.
* * * * *
    4. Section 682.102 is amended by adding a new sentence at the end 
of the second sentence in paragraph (d); by adding a new sentence at 
the end of paragraph (e)(1); and by revising the last sentence in 
paragraph (e)(4) to read as follows:


Sec. 682.102  Obtaining and repaying a loan.

* * * * *
    (d) Consolidation loan application. * * * In the case of a married 
couple seeking a Consolidation loan, only the holder for one of the 
applicants must be contacted for consolidation. * * *
    (e) Repaying a loan. (1) * * * The borrower's obligation to repay a 
PLUS loan is cancelled if the student, on whose behalf the parent 
borrowed, dies. The borrower's obligation to repay all or a portion of 
his or her loan may be cancelled if the borrower is unable to complete 
his or her program of study because the school closed or the borrower's 
eligibility to borrow was falsely certified by the school. The 
obligation to repay may be forgiven for borrowers who enter certain 
areas of the teaching or nursing professions or perform certain kinds 
of national or community service.
* * * * *
    (4) PLUS loan repayment. * * * The first payment of principal and 
interest on a PLUS loan is due from the borrower within 60 days after 
the loan is disbursed.

    5. Section 682.200 is amended by redesignating (a)(1)(i) and 
(a)(1)(ii) as (a)(1) and (a)(2) respectively; removing ``Eligible 
institution'' from redesignated paragraph (a)(2); revising the 
definition of ``Co-maker''; revising the introductory text of the 
definition of ``Default''; revising paragraph (1) of the definition of 
``Estimated financial assistance''; adding a new sentence at the end of 
the definition of ``Grace period''; revising paragraph (2), and 
redesignating paragraphs (3) and (4) as paragraphs (4) and (5) 
respectively, and adding a new paragraph (3), in the definition of 
``Lender''; revising the definitions of ``Repayment period'' and 
``Stafford Loan Program''; adding, in alphabetical order, new 
definitions of ``Disposable income'', ``Nonsubsidized Stafford loan'', 
``Satisfactory repayment arrangement'', ``Subsidized Stafford loan'', 
``Unsubsidized Stafford loan'', and ``Write-off'' in paragraph (b) to 
read as follows:


Sec. 682.200  Definitions.

* * * * *
    Co-maker. One of two parents who are joint borrowers on a PLUS loan 
or one of two individuals who are joint borrowers on a Consolidation 
loan, each of whom are eligible and who are jointly and severally 
liable for repayment of the loan.
    Default. The failure of a borrower and endorser, if any, or joint 
borrowers on a PLUS or Consolidation loan, to make an installment 
payment when due, or to meet other terms of the promissory note, if the 
Secretary or guaranty agency 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--
* * * * *
    Disposable income. That part of a borrower's compensation from an 
employer or other income from any source that remains after the 
deduction of any amounts required by law to be withheld.
* * * * *
    Estimated financial assistance. (1) The estimated amount of 
assistance that a student has been or will be awarded for a period of 
enrollment, beginning on or after July 1, 1993, for which the loan is 
sought, 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 Pub. L. 97-376, section 156: Restored 
Entitlement Program for Survivors (or Quayle benefits);
    (v) Benefits paid under Pub. L. 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 Stafford loan, Pell Grant and, to the 
extent funding is available and according to the school's award 
packaging policy, campus-based aid the student would be expected to 
receive if the student applied, whether or not the student has applied 
for that aid;
    (viii) In the case of a PLUS loan, the estimated amount of other 
Federal student financial aid, including but not limited to, a Stafford 
loan, Pell Grant and campus-based aid that the student has been or will 
be awarded.
* * * * *
    Grace period. * * * For an SLS borrower who also has a Federal 
Stafford loan on which the borrower has not yet entered repayment, the 
grace period is an equivalent period after the borrower ceases to be 
enrolled as at least a half-time student at an eligible institution.
* * * * *
    Lender. * * *
    (2) With respect to a National or State chartered bank, a mutual 
savings bank, a savings and loan association, a stock savings bank, or 
a credit union--
    (i) The phrase ``subject to examination and supervision'' in 
section 435(d) of the Act means ``subject to examination and 
supervision in its capacity as a lender'';
    (ii) The phrase ``does not have as its primary consumer-credit 
function the making or holding of loans made to students under this 
part'' in section 435(d) of the Act means that the lender does not, or 
in the case of a bank holding company, the company's wholly-owned 
subsidiaries as a group do not at any time, hold FFEL Program loans 
that total more than one-half of the lender's or subsidiaries' combined 
consumer credit loan portfolio, including home mortgages held by the 
lender or its subsidiaries.
    (3) A bank that is subject to examination and supervision by an 
agency of the United States, making student loans as a trustee, may be 
an eligible lender if it makes loans under an express trust, operated 
as a lender in the FFEL programs prior to January 1, 1975, and met the 
requirements of this paragraph prior to July 23, 1992.
* * * * *
    Nonsubsidized Stafford loan. A Stafford loan made prior to October 
1, 1992 that does not qualify for interest benefits under 
Sec. 682.301(b).
* * * * *
    Repayment period. (1) For a Stafford loan, the period beginning on 
the date following the expiration of the grace period and ending no 
later than 10 years from that date, exclusive of any period of 
deferment or forbearance.
    (2) For unsubsidized Federal Stafford loans, the period that begins 
on the day after the expiration of the applicable grace period that 
follows after the student ceases to be enrolled on at least a half-time 
basis and ending no later than 10 years from that date, exclusive of 
any period of deferment or forbearance. However, payments of interest 
are the responsibility of the borrower during the in-school and grace 
period, but may be capitalized by the lender.
    (3) For Federal SLS loans, the period that begins on the date the 
loan is disbursed, or if the loan is disbursed in more than one 
installment, on the date the last disbursement is made and ending no 
later than 10 years from that date, exclusive of any period of 
deferment or forbearance.
    (4) For Federal PLUS loans, the period that begins on the date the 
loan is disbursed and ending no later than 10 years from that date, 
exclusive of any period of deferment or forbearance.
    (5) For Federal Consolidation loans, the period that begins on the 
date the loan is disbursed and ends no later than 12, 15, 20, 25, or 30 
years from that date depending upon the sum of the amount of the 
Consolidation loan, and the unpaid balance on other student loans, 
exclusive of any period of deferment or forbearance.
    Satisfactory repayment arrangement. The making of six (6) 
consecutive voluntary on-time full monthly payments on a defaulted loan 
to regain further eligibility for FFEL Program loans. The required full 
monthly payment amount may not be no more than is reasonable and 
affordable based on the borrower's total financial circumstances. On-
time means a payment made within 15 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 off-set, garnishment, or 
income or asset execution.
* * * * *
    Stafford Loan Program. The loan program authorized by Title IV-B of 
the Act which encourages the making of subsidized and unsubsidized 
loans to undergraduate, graduate, and professional students and is one 
of the Federal Family Education Loan programs.
* * * * *
    Subsidized Stafford loan. A loan authorized under section 428(b) of 
the Act for borrowers who qualify for interest benefits under 
Sec. 682.301(b).
* * * * *
    Unsubsidized Stafford loan. A loan made after October 1, 1992, 
authorized under section 428H of the Act for borrowers who do not 
qualify for interest benefits under Sec. 682.301(b).
    Write-off. Cessation of collection activity on a defaulted FFEL 
loan due to a determination in accordance with applicable standards 
that no further collection activity is warranted.

    6. Section 682.201 is amended by revising paragraph (a)(2); 
revising paragraphs (b) introductory text and (b)(1); removing ``and'' 
at the end of paragraph (b)(5); removing the period at the end of 
paragraph (b)(6), and adding in its place, ``; and''; adding a new 
paragraph (b)(7); revising paragraph (c); and adding a new paragraph 
(d) to read as follows:


Sec. 682.201  Eligible borrowers.

    (a) * * *
    (2) In the case of any student who seeks an SLS loan for the cost 
of attendance at a school that participates in the Stafford Loan 
Program, the student must have--
    (i) Received a determination of need for a subsidized Stafford 
loan, and if determined to have need in excess of $200, have filed an 
application with a lender for a subsidized Stafford loan;
    (ii) Filed an application with a lender for an unsubsidized 
Stafford loan up to the Stafford loan annual maximum unless the school 
declines to certify such an application under section 428(a)(2)(F) of 
the HEA; and
    (iii) Received a certification of graduation from a school 
providing secondary education or the recognized equivalent;
* * * * *
    (b) Parent borrower. A parent borrower, and if applicable a parent 
co-maker, is eligible to receive a PLUS Program loan, other than a loan 
made under Sec. 682.209(e), 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;
* * * * *
    (7)(i) In the case of a Federal PLUS loan made on or after July 1, 
1993, does not have an adverse credit history.
    (ii) For purposes of this section, the lender must obtain a credit 
report on each applicant from at least one national credit bureau.
    (iii) Unless the lender determines that extenuating circumstances 
existed, the lender must consider each applicant to have an adverse 
credit history based on the credit report if--
    (A) The applicant is considered 90 or more days delinquent on the 
repayment of a debt;
    (B) The applicant has been the subject of a default determination, 
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.
    (iv) Nothing in this paragraph precludes the lender from 
establishing more restrictive credit standards to determine whether the 
applicant has an adverse credit history.
    (v) The absence of any credit history is not an indication that the 
applicant has an adverse credit history and is not to be used as a 
reason to deny a PLUS loan to that applicant.
    (vi) The lender must retain documentation demonstrating its basis 
for determining that extenuating circumstances existed. This 
documentation may include an updated credit report, a statement from 
the creditor that the borrower has made satisfactory arrangements to 
repay the debt, or a satisfactory statement from the borrower 
explaining any delinquencies with outstanding balances of less than 
$500.
    (c) Consolidation program borrower. (1) An individual is eligible 
to receive a Consolidation loan if, at the time of application for a 
Consolidation loan, the individual--
    (i) Has an outstanding indebtedness of not less than $7,500 on 
loans the individual is consolidating that are eligible for 
consolidation under Sec. 682.100;
    (ii)(A) Has ceased, or in the case of a PLUS borrower, the 
dependent student on whose behalf the parent is borrowing, has ceased 
at least half-time enrollment at a school;
    (B) Is, on the loans being consolidated--
    (1) In a grace period preceding repayment on the loans being 
consolidated;
    (2) Is in repayment status; or
    (3)(i) Is delinquent or has made satisfactory repayment 
arrangements with the holder on a defaulted loan being consolidated;
    (ii) Will reenter repayment through consolidation;
    (iii) Certifies that no other application for a Consolidation loan 
is pending;
    (iv) Agrees to notify the holder of any changes in address; and
    (v) Certifies that he or she has a loan with the consolidating 
lender or has sought a loan from his or her holder and was unable to 
secure a Consolidation loan from the holder.
    (2) A married couple is eligible to receive a Consolidation loan in 
accordance with this section if each--
    (i) Agrees to be held jointly and severally liable for the 
repayment of the total amount of the Consolidation loan;
    (ii) Agrees to repay the debt regardless of any change in marital 
status; and
    (iii) Meets the requirements of paragraph (c)(1) of this section, 
except that their combined indebtedness may not be less than $7,500 on 
loans eligible for consolidation under Sec. 682.100 and only one must 
have met the requirements of paragraph (c)(1)(v) of this section.
    (3) Eligibility for consolidation terminates upon receipt of a 
Consolidation loan except--
    (i) With respect to student loans received after the date the 
Consolidation loan is made; or
    (ii) Loans received prior to the date the Consolidation loan was 
made can be added to the Consolidation loan during the 180-day period 
after the making of the Consolidation loan.
    (d) Defaulted FFEL borrower. In the case of a student, parent, or 
Consolidation loan borrower who is currently in default on an FFEL 
Program loan, the borrower has made satisfactory repayment 
arrangements.

    7. Section 682.204 is amended by adding new paragraphs (a)(3), 
(a)(4), and (a)(5); revising paragraphs (b), (c) and (d); revising 
paragraph (e)(1) introductory text; redesignating paragraph (e)(2) as 
paragraph (e)(3); adding a new paragraph (e)(2); and revising paragraph 
(f) to read as follows:


Sec. 682.204  Maximum loan amounts.

    (a) * * *
    (3) In the case of a student who has successfully completed the 
first year of an undergraduate program but has not successfully 
completed the remainder of an undergraduate program, the total amount 
the student may borrow may not exceed--
    (i) $3,500 for enrollment in a program of study of at least a full 
academic year in length;
    (ii) $2,325 for enrollment in a program of study of at least two-
thirds but less than a full academic year in length;
    (iii) $1,175 for enrollment in a program of study of at least one-
third but less than two-thirds of an academic year in length.
    (4) In the case of a student who has successfully completed the 
first and second year of a program of study of undergraduate education 
but not successfully completed the remainder of the program, the total 
amount the student may borrow may not exceed--
    (i) $5,500 for a program of study of at least an academic year in 
length;
    (ii) $3,675 for enrollment in a program of study of at least two-
thirds of an academic year but less than an academic year in length;
    (iii) $1,825 for a program of study of at least one-third of an 
academic year in length but less than two-thirds of an academic year in 
length; and
    (iv) $4,000 for a loan for which the first disbursement is made on 
or before July 1, 1993.
    (5) In the case of a graduate or professional student, the total 
amount the student may borrow may not exceed--
    (i) $7,500 per academic year; or
    (ii) $8,500 for loans to cover the cost of instruction for periods 
of enrollment beginning on or after October 1, 1993.
    (b) Stafford Loan Program aggregate limits. The aggregate 
guaranteed unpaid principal amount of all Stafford loans made to a 
student may not exceed--
    (1) For loans for which the first disbursement is made prior to 
July 1, 1993--
    (i) $17,250, in the case of an undergraduate student for programs 
of study at the undergraduate level; and
    (ii) $54,750 in the case of a graduate or professional student, 
including loans for undergraduate study.
    (2) For loans for which the first disbursement is made on or after 
July 1, 1993--
    (i) $23,000 in the case of any student who has not successfully 
completed a program of study at the undergraduate level; and
    (ii) $65,500, in the case of a graduate or professional student, 
including loans for undergraduate study.
    (c) PLUS Program annual limit. The total amount of all PLUS loans 
that a parent may borrow on behalf of each dependent student for any 
academic year of study may not exceed--
    (1) Except as provided in paragraph (c)(2) of this section, $4,000;
    (2) In the case of a loan made on or after July 1, 1993, the cost 
of education for the student minus other estimated financial 
assistance.
    (d) PLUS Program aggregate limit. (1) Except as provided in 
paragraph (d)(2) of this section, the total guaranteed unpaid principal 
amount of PLUS program loans that a parent may borrow on behalf of each 
dependent student may not exceed $20,000.
    (2) In the case of loans made on or after July 1, 1993, the total 
guaranteed unpaid principal amount of PLUS Program loans that a parent 
may borrow on behalf of each dependent student is unlimited subject to 
the annual limit in paragraph (c)(2) of this section.
    (e) SLS Program annual limit. (1) In the case of a loan for which 
the first disbursement is made prior to July 1, 1993, the total amount 
of all SLS loans that a student may borrow for any academic year of 
study may not exceed $4,000 or, if the student is entering or is 
enrolled in a program of undergraduate education that is less than one 
academic year in length and the student's SLS loan application is 
certified pursuant to Sec. 682.603 by the school on or after January 1, 
1990--
* * * * *
    (2) In the case of a loan for which a first disbursement is made on 
or after July 1, 1993, the total amount a student may borrow for an 
academic year of study under the SLS program--
    (i) 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--
    (A) $4,000 for enrollment in a program of study of at least a full 
academic year in length;
    (B) $2,500 for enrollment in a program of study of at least two-
thirds but less than a full academic year in length;
    (C) $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.
    (ii) In the case of a student who 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--
    (A) $5,000 for enrollment in a program of study of at least a full 
academic year;
    (B) $3,325 for enrollment in a program of study of at least two-
thirds of an academic year but less than a full academic year in 
length; and
    (C) $1,675 for enrollment in a program of study of at least one-
third of an academic year but less than two-thirds of an academic year.
    (iii) In the case of a graduate or professional student, may not 
exceed $10,000.
* * * * *
    (f) SLS Program aggregate limit. The total unpaid principal amount 
of SLS Program loans made to--
    (1) An undergraduate student may not exceed--
    (i) $20,000, for loans for which the first disbursement is made 
prior to July 1, 1993, or
    (ii) $23,000, for loans for which the first disbursement was made 
on or after July 1, 1993; and
    (2) A graduate student may not exceed--
    (i) $20,000, for loans for which the first disbursement is made 
prior to July 1, 1993, or
    (ii) $73,000, for loans for which the first disbursement was made 
on or after July 1, 1993 including loans for undergraduate study.
* * * * *
    8. Section 682.206 is amended by revising the introductory text in 
paragraph (c)(2); and revising paragraph (e)(2) to read as follows:


Sec. 682.206  Due diligence in making a loan.

* * * * *
    (c) * * *
    (2) Except in the case of a Consolidation loan, in determining the 
amount of the loan to be made, the lender must review the data on the 
student's cost of attendance and estimated financial assistance that is 
provided by the school. In no case may the loan amount exceed the 
student's estimated cost of attendance less the sum of--
* * * * *
    (e) * * *
    (2) A Federal PLUS Program loan and Federal Consolidation Program 
Loan may be made to two eligible borrowers who agree to be jointly and 
severally liable for repayment of the loan as co-makers.
* * * * *
    9. Section 682.207 is amended by revising paragraph (b)(1)(v)(B) to 
read as follows:


Sec. 682.207  Due diligence in disbursing a loan.

* * * * *
    (b)(1) * * *
    (v) * * *
    (B) In the case of a Federal PLUS loan--
    (1) By electronic funds transfer from the lender to the eligible 
institution to a separate account maintained by the school as trustee 
for the lender; or
    (2) By a check from the lender that is made co-payable to the 
institution and the parent borrower directly to the eligible 
institution.
* * * * *
    10. Section 682.209 is amended by revising paragraph (c)(2) to read 
as follows:


Sec. 682.209  Repayment of a loan.

* * * * *
    (c) * * *
    (2) The provisions of paragraphs (c)(1)(i) and (ii) of this section 
may not result in an extension of the maximum repayment period unless 
forbearance, as described in Sec. 682.211 or deferment described in 
Sec. 682.210, has been approved.
* * * * *
    11. Section 682.300 is amended by revising the section heading; 
paragraph (a); paragraph (b)(1)(i); and paragraph (c) to read as 
follows:


Sec. 682.300  Payment of interest benefits on Stafford and 
Consolidation loans.

    (a) General. The Secretary pays a lender a portion of the interest 
on a Stafford loan and, except for that portion of the loan that 
represents HEAL loans, on a Consolidation loan on behalf of a borrower 
who qualifies under Sec. 682.301. This payment is known as interest 
benefits.
    (b) * * *
    (1) * * *
    (i) During all periods prior to the beginning of the repayment 
period, except as provided in paragraphs (b)(2) and (c) of this 
section.
* * * * *
    (c) Interest not covered. The Secretary does not pay--
    (1) Interest for which the borrower is not otherwise liable;
    (2) Interest paid on behalf of the borrower by a guaranty agency;
    (3) Interest that accrues on the first disbursement of a loan for 
any period that is earlier than--
    (i) In the case of a subsidized Stafford loan disbursed by a check, 
10 days prior to the first day of the period of enrollment for which 
the loan is intended or, if the loan is disbursed after the first day 
of the period of enrollment, 3 days after the disbursement date on the 
check; or
    (ii) In the case of a loan disbursed by electronic funds transfer, 
3 days prior to the first day of the period of enrollment or, if the 
loan is disbursed after the first day of the period of enrollment, 3 
days after disbursement.
    (4) In the case of a loan disbursed on or after October 1, 1992, 
interest on a loan if--
    (i) The disbursement check is returned uncashed to the lender or 
the lender is notified that the disbursement made by electronic funds 
transfer will not be released from the restricted account maintained by 
the school; or
    (ii) The check for the disbursement has not been negotiated before 
the 120th day after the date of disbursement or the disbursement made 
by electronic funds transfer has not been released from the restricted 
account maintained by the school before that date.
    (5) Interest on the portion of a Consolidation loan that represents 
HEAL loans that have been consolidated.
* * * * *
    12. Section 682.301 is amended by revising the section heading; 
revising paragraph (a)(1); adding a new paragraph (a)(3); and revising 
paragraph (b) introductory text to read as follows:


Sec. 682.301  Eligibility of borrowers for interest benefits on 
Stafford and Consolidation loans.

    (a) * * *
    (1) To qualify for benefits on a Stafford loan, a borrower must 
demonstrate financial need in accordance with Part F of the Act.
* * * * *
    (3) A Consolidation loan borrower whose loan application was 
received by the lender on or after January 1, 1993 qualifies for 
interest benefits during authorized periods of deferment on the portion 
of the loan that does not represent HEAL loans.
    (b) Application for interest benefits. To apply for interest 
benefits on a Stafford loan, the student, or the school at the 
direction of the student, must submit a loan application to the lender. 
The application must include a certification from the student's school 
of the following information:
* * * * *
    13. Section 682.302 is amended by revising paragraphs (b), 
(c)(1)(iii), (c)(2) introductory text, (c)(3)(i) introductory text, 
(c)(3)(ii) introductory text, and adding paragraph (c)(3)(iii) to read 
as follows:


Sec. 682.302  Payment of special allowance on FFEL loans.

* * * * *
    (b) Eligible loans. (1) Except for nonsubsidized Federal Stafford 
loans disbursed on or after October 1, 1981, for periods of enrollment 
beginning prior to October 1, 1992, or as provided in paragraphs (b)(2) 
or (e) of this section, FFEL loans that otherwise meet program 
requirements are eligible for special allowance payments.
    (2) For a loan made under the Federal SLS or Federal PLUS Program 
on or after July 1, 1987 or under Sec. 682.209(e) or (f), no special 
allowance is paid for any period for which the interest rate determined 
under Sec. 682.202(a)(2)(iv)(A) for that loan does not exceed--
    (i) 12 percent in the case of a Federal SLS or PLUS loan made prior 
to October 1, 1992;
    (ii) 11 percent in the case of a Federal SLS loan made on or after 
October 1, 1992; or
    (iii) 10 percent in the case of a Federal PLUS loan made on or 
after October 1, 1992.
    (3) In the case of a subsidized Stafford loan disbursed on or after 
October 1, 1992, the Secretary does not pay special allowance on a 
disbursement if--
    (i) The disbursement check is returned uncashed to the lender or 
the lender is notified that the disbursement made by electronic funds 
transfer will not be released from the restricted account maintained by 
the school; or
    (ii) The check for the disbursement has not been negotiated before 
the 120th day after the date of disbursement or the disbursement made 
by electronic funds transfer has not been released from the restricted 
account maintained by the school before that date.
    (c) * * *
    (1) * * *
    (iii) Adding--
    (A) 3.1 percent to the resulting percentage for a loan made on or 
after October 1, 1992;
    (B) 3.25 percent to the resulting percentage, for a loan made on or 
after November 16, 1986, but before October 1, 1992;
    (C) 3.25 percent to the resulting percentage, for a loan made on or 
after October 17, 1986 but before November 16, 1986, for a period of 
enrollment beginning on or after November 16, 1986;
    (D) 3.5 percent to the resulting percentage, for a loan made prior 
to October 17, 1986, or a loan described in paragraph (c)(2) of this 
section; or
    (E) 3.5 percent to the resulting percentage, for a loan made on or 
after October 17, 1986 but before November 16, 1986, for a period of 
enrollment beginning prior to November 16, 1986;
* * * * *
    (2) The special allowance rate determined under paragraph 
(c)(1)(iii)(D) of this section applies to loans made or purchased from 
funds obtained from the issuance of an obligation of the--
* * * * *
    (3)(i) Subject to paragraphs (c)(3)(ii) and (iii) of this section, 
the special allowance rate is one-half of the rate calculated under 
paragraph (c)(1)(iii)(D) of this section for a loan made or guaranteed 
on or after October 1, 1980 that was made or purchased with funds 
obtained by the holder from--
* * * * *
    (ii) The special allowance rate applicable to loans described in 
paragraph (c)(3)(i) of this section that are made prior to October 1, 
1992, may not be less than--
* * * * *
    (iii) The special allowance rate applicable to loans described in 
paragraph (c)(3)(i) of this section that are made on or after October 
1, 1992, may not be less than 9\1/2\ percent minus the applicable 
interest rate.
* * * * *
    14. Section 682.400 is amended by revising paragraph (b) 
introductory text; revising paragraph (b)(1)(i); and adding a new 
paragraph (b)(4) to read as follows:


Sec. 682.400  Agreements between a guaranty agency and the Secretary.

* * * * *
    (b) There are four agreements:
    (1) * * *
    (i) Borrowers whose Stafford and Consolidation loans are guaranteed 
by the agency may qualify for interest benefits that are paid to the 
lender on the borrower's behalf;
* * * * *
    (4) Loan Rehabilitation Agreement. A guaranty agency must have an 
agreement for rehabilitating a loan for which the Secretary has made a 
reinsurance payment under section 428(c)(1) of the Act.
* * * * *
    15. Section 682.401 is amended by redesignating paragraphs (b)(4) 
through (b)(22) as paragraphs (b)(5) through (b)(23), respectively; 
adding a new paragraph (b)(4); revising redesignated paragraph (b)(6); 
revising redesignated paragraph (b)(14); revising redesignated 
paragraph (b)(16)(i) introductory text; adding a new paragraph 
(b)(16)(iii); adding new paragraphs (b)(24) and (b)(25); revising 
paragraph (c); redesignating paragraphs (e)(2) and (e)(3) as (e)(3) and 
(e)(4) respectively; and adding a new paragraph (e)(2) to read as 
follows:


Sec. 682.401  Basic program agreement.

* * * * *
    (b) * * *
    (4) Reinstatement of borrower eligibility. For a borrower's loans 
held by a guaranty agency on which a reinsurance claim has been paid by 
the Secretary, the guaranty agency must afford a defaulted borrower, 
upon the borrower's request, renewed eligibility for Title IV 
assistance once the borrower has made satisfactory repayment 
arrangements as that term is defined in Sec. 682.200.
    (i) For purposes of this section, the determination of reasonable 
and affordable must--
    (A) Include consideration of the borrower's and spouse's disposable 
income and necessary expenses including, but not limited to, housing, 
food, medical costs, dependent care costs and other Title IV repayment;
    (B) Include documentation in the borrower's file of the basis for 
the determination, if the monthly reasonable and affordable payment 
established under this section is less than $50.00 or the monthly 
accrued interest on the loan, whichever is greater. However, $50.00 may 
not be the minimum payment for a borrower if the agency determines that 
a smaller amount is reasonable and affordable.
    (C) Be based on the documentation provided by the borrower or other 
sources including, but not limited to--
    (1) Evidence of current income (e.g. proof of welfare benefits, 
Social Security benefits, Supplemental Security Income, Workers' 
Compensation, child support, veterans' benefits, two most recent pay 
stubs, copy of U.S. income tax return, State Department of Labor 
reports);
    (2) Evidence of current expenses (e.g. a copy of the borrower's 
monthly household budget, on a form provided by the guaranty agency); 
and
    (3) A statement of the unpaid balance on all defaulted FFEL loans.
    (ii) A borrower may request that the monthly payment amount be 
adjusted due to a change in the borrower's total financial 
circumstances upon providing the documentation specified in paragraph 
(b)(4)(i)(C) of this section.
    (iii) A guaranty agency must provide the borrower with a written 
statement of the reasonable and affordable payment amount required for 
the reinstatement of the borrower's eligibility for Title IV student 
assistance, and provide the borrower with an opportunity to object to 
such terms.
* * * * *
    (6) School eligibility--(i) General. A school that has a program 
participation agreement in effect with the Secretary under Sec. 682.600 
is eligible to participate in the program of the agency under 
reasonable criteria established by the guaranty agency, and approved by 
the Secretary, under paragraph (d)(2) of this section, except to the 
extent that--
    (A) The school's eligibility is limited, suspended, or terminated 
by the Secretary under 34 CFR part 668 or by the guaranty agency under 
standards and procedures that are substantially the same as those in 34 
CFR part 668;
    (B) The Secretary upholds the limitation, suspension, or 
termination of a school by a guaranty agency and extends such sanction 
to all guaranty agency programs under section 432(h)(3) of the Act or 
Sec. 682.713;
    (C) The school is ineligible under sections 428A(a)(2) or 435(a)(2) 
of the Act;
    (D) There is a State constitutional prohibition affecting the 
school's eligibility;
    (E) The school's programs consist of study solely by 
correspondence;
    (F) The agency determines that the school does not satisfy the 
standards of administrative capability and financial responsibility as 
defined in 34 CFR part 668;
    (G) The school fails to make timely refunds to students as required 
in Sec. 682.607(c);
    (H) The school has not satisfied within 30 days of issuance a final 
judgment obtained by a student seeking a refund;
    (I) The school or an owner, director, or officer of the school is 
found guilty or liable in any criminal, civil, or administrative 
proceeding regarding the obtaining, maintenance, or disbursement of 
State or Federal student grant, loan, or work assistance funds; or
    (J) The school or an owner, director, or officer of the school has 
unpaid financial liabilities involving the improper acquisition, 
expenditure, or refund of State or Federal student financial assistance 
funds.
    (ii) Limitation by a guaranty agency of a school's participation. 
For purposes of this paragraph, a school that is subject to limitation 
of participation in the guaranty agency's program may be either a 
school that is applying to participate in the agency's program for the 
first time, or a school that is renewing its application to continue 
participation in the agency's program. A guaranty agency may limit the 
total number of loans or the volume of loans made to students attending 
a particular school, or otherwise establish appropriate limitations on 
the school's participation, if the agency makes a determination that 
the school does not satisfy--
    (A) The standards of financial responsibility defined in 34 CFR 
668.13; or
    (B) The standards of administrative capability defined in 34 CFR 
668.14 and 34 CFR 668.15.
    (iii) Limitation, suspension, or termination of school eligibility. 
A guaranty agency may limit, suspend, or terminate the participation of 
an eligible school. If a guaranty agency limits, suspends, or 
terminates the participation of a school from the agency's program, the 
Secretary applies that limitation, suspension, or termination to all 
locations of the school.
    (iv) Condition for guaranteeing loans for students attending a 
school. The guaranty agency may require the school to execute a 
participation agreement with the agency and to submit documentation 
that establishes the school's eligibility to participate in the 
agency's program.
* * * * *
    (14) Guaranty agency verification of default data. A guaranty 
agency must respond to an institution's written request for 
verification of its default rate data for purposes of an appeal 
pursuant to 34 CFR 668.15(g)(1)(i) within 15 working days of the date 
the agency receives the institution's written request pursuant to 34 
CFR 668.15(g)(7), and simultaneously provide a copy of that response to 
the Secretary's designated Department official.
* * * * *
    (16) * * *
    (i) Except as provided in paragraph (b)(16)(iii), the guaranty 
agency must allow a loan to be assigned only if the loan is fully 
disbursed and is assigned to--
* * * * *
    (iii) The guaranty agency must allow a loan to be assigned under 
paragraph (b)(16)(i) of this section, following the first disbursement 
of the loan if the assignment does not result in a change in the 
identity of the party to whom payments must be made.
* * * * *
    (24) Information on loan sales or transfers. The guaranty agency 
must, upon the request of an eligible school, furnish to the school 
last attended by the borrower, information with respect to the sale or 
transfer of a student's loan prior to the beginning of the repayment 
period, including--
    (i) Notice of the assignment;
    (ii) The identity of the assignee;
    (iii) The name and address of the party by which contact may be 
made with the holder concerning repayment of the loan; and
    (iv) The telephone number of the assignee.
    (25) Information on designation for exceptional performance. A 
guaranty agency must provide the Secretary with any information in its 
possession regarding an eligible lender or servicer applying for 
designation for exceptional performance within 30 days following the 
agency's receipt of a copy of the lender's or servicer's request for 
designation under 34 CFR 682.415(a)(2). The information provided by the 
guaranty agency must include, but is not limited to, records relating 
to the lender's or servicer's compliance with FFEL Program regulations 
and any information suggesting that the lender or servicer does not 
meet the requirements for designation for exceptional performance.
* * * * *
    (c)(1) Lender-of-last-resort. The guaranty agency must ensure that 
it or an eligible lender described in section 435(d)(1)(D) of the Act 
serves as a lender-of-last-resort in the State in which it is the 
principal guaranty agency, as defined in Sec. 682.800(d).
    (2) The lender-of-last-resort must make a subsidized Stafford loan 
to any eligible student who satisfies the lender's eligibility 
requirements and--
    (i) Qualifies for interest benefits, pursuant to Sec. 682.301, for 
a loan amount of at least $200; and
    (ii) Has been otherwise unable after conscientious efforts to 
obtain a loan from another eligible lender for the same period of 
enrollment.
    (3) The guaranty agency or an eligible lender described in section 
435(d)(1)(D) of the Act may arrange for a loan required to be made 
under paragraph (c)(1) of this section to be made by another eligible 
lender.
    (4) The guaranty agency must develop policies and operating 
procedures for its lender-of-last-resort program that provide for the 
accessibility of lender-of-last-resort loans. These policies and 
procedures must be submitted to the Secretary for approval as required 
under paragraph (d)(2) of this section. The policies and procedures for 
the agency's lender-of-last-resort program must ensure that--
    (i) The program establishes operating hours and methods of 
application designed to facilitate application by students; and
    (ii) Information about the availability of loans under the program 
is made available to schools in the State; and
    (iii) Appropriate steps are taken to ensure that borrowers 
receiving loans under the program are appropriately counseled on their 
loan obligation.
    (5) Limitations on lender-of-last-resort services. Except as 
provided in paragraphs (c)(6) and (c)(10) of this section, the lender-
of-last-resort is not required to make a subsidized Stafford loan to a 
student for attendance at a school that--
    (i) Has a cohort default rate, as defined in section 435(m) of the 
Act, that exceeds 25 percent for the most recent year for which a rate 
has been calculated by the Secretary;
    (ii) Has not been eligible for, and has not participated in, the 
FFEL Program during the most recent 18 months; or
    (iii) Is currently subject to emergency action or limitation, 
suspension, or termination by the Secretary under 34 CFR Part 668 or by 
any guaranty agency.
    (6) Notwithstanding paragraph (c)(5)(i) of this section, the 
Secretary requires a guaranty agency or an eligible lender described in 
section 435(d)(1)(D) of the Act to make a subsidized Stafford loan for 
attendance at a school if there are, in the judgment of the Secretary, 
``exceptional mitigating circumstances'', as defined in 34 CFR 
668.15(g)(1)(iii), that would make the application of the limitations 
inequitable.
    (7) A guaranty agency must provide a school and the Secretary with 
written notification of the agency's intent to deny lender-of-last-
resort services to the school's students.
    (8) The school may submit to the Secretary, with a copy to the 
guaranty agency, a complete appeal with supporting documentation that 
is based on the mitigating circumstances of paragraph (c)(6) of this 
section. Such appeal must be submitted no later than 30 days after the 
date of the guaranty agency's notice to the school. If the school 
submits such a complete appeal, the guaranty agency must provide 
lender-of-last-resort services to students attending the school until 
the date on which the Secretary rejects the appeal, if it is rejected.
    (9) The Secretary makes a case-by-case determination on each appeal 
by a school that has been notified that lender-of-last-resort services 
will not be provided to the school's students, and takes action on the 
school's appeal no later than 45 days after receipt of the school's 
complete appeal with supporting documentation.
    (10) The provisions of paragraph (c)(5) of this section do not 
apply to institutions that have been designated as historically black 
colleges and universities, tribally-controlled community colleges, or 
Navajo community colleges until July 1, 1994.
* * * * *
    (e) * * *
    (2)(i) Offer, directly or indirectly, any premium, incentive 
payment, or other inducement to any lender, or any person acting as an 
agent, employee, or independent contractor of any lender or other 
guaranty agency to administer or market FFEL loans, other than 
unsubsidized Stafford loans or subsidized Stafford loans made under a 
guaranty agency's lender-of-last-resort program, in an effort to secure 
the guaranty agency as an insurer of FFEL loans. Examples of prohibited 
inducements include, but are not limited to--
    (A) Compensating lenders or their representatives for the purpose 
of securing loan applications for guarantee;
    (B) Performing functions normally performed by lenders without 
appropriate compensation;
    (C) Providing equipment or supplies to lenders at below market cost 
or rental; or
    (D) Offering to pay a lender, that does not hold loans guaranteed 
by the agency, a fee for each application forwarded for the agency's 
guarantee.
    (ii) For the purposes of this section, the terms ``premium'', 
``inducement'', and ``incentive'' do not include services directly 
related to the enhancement of the administration of the FFEL Program 
the guaranty agency generally provides to lenders that participate in 
its program. However, the terms ``premium'', ``inducement'', and 
``incentive'' do apply to other activities specifically intended to 
secure a lender's participation in the agency's program.
* * * * *
    16. A new Sec. 682.405 is added to read as follows:


Sec. 682.405  Loan Rehabilitation agreement.

    (a) General. (1) A guaranty agency that has a basic program 
agreement must enter into a loan rehabilitation agreement with the 
Secretary. The guaranty agency must establish a loan rehabilitation 
program for all borrowers for the purpose of rehabilitating defaulted 
loans so that the loan may be purchased by an eligible lender and 
removed from default status.
    (2) A loan is considered to be rehabilitated only after the 
borrower has made one voluntary reasonable and affordable full payment 
each month within 15 days of the scheduled due date for 12 consecutive 
months in accordance with this section, and the loan has been sold to 
an eligible lender.
    (b) Terms of agreement. In the loan rehabilitation agreement, the 
guaranty agency agrees to ensure that its loan rehabilitation program 
meets the following requirements at all times--
    (1) A borrower may request the rehabilitation of the borrower's 
defaulted FFEL loan held by the guaranty agency. The borrower must make 
one voluntary on-time full payment each month for 12 consecutive months 
to be eligible to have the defaulted loans rehabilitated. For purposes 
of this section, on-time means a payment made within 15 days of the 
scheduled due date and ``full payment'' means a reasonable and 
affordable payment agreed to by the borrower and the agency. The 
required amount of such monthly payment may be no more than is 
reasonable and affordable based upon the borrower's total financial 
circumstances. Voluntary payments are those made directly by the 
borrower, regardless of whether there is a judgment against the 
borrower, and do not include payments obtained by income tax off-set, 
garnishment, or income or asset execution. A guaranty agency must 
attempt to secure a lender to purchase the loan at the end of the 
twelve-(12-) month payment period.
    (i) For purposes of this section, the determination of reasonable 
and affordable must--
    (A) Include a consideration of the borrower's and spouse's 
disposable income and reasonable and necessary expenses including, but 
not limited to, housing, food, medical costs, dependent care costs and 
other Title IV repayment.
    (B) Include documentation in the borrower's file of the basis for 
the determination if the monthly reasonable and affordable payment 
established under this section is less than $50.00 or the monthly 
accrued interest on the loan, whichever is greater. However, $50.00 may 
not be the minimum payment for a borrower if the agency determines that 
a smaller amount is reasonable and affordable.
    (C) Be based on the documentation provided by the borrower or other 
sources including, but not be limited to--
    (1) Evidence of current income (e.g., proof of welfare benefits, 
Social Security benefits, child support, veterans' benefits, 
Supplemental Security Income, Workmen's Compensation, two most recent 
pay stubs, copy of U.S. income tax return, State Department of Labor 
reports);
    (2) Evidence of current expenses (e.g., a copy of the borrower's 
monthly household budget, on a form provided by the guaranty agency); 
and
    (3) A statement of the unpaid balance on all defaulted FFEL loans.
    (ii) The agency must include any payment made under 
Sec. 682.401(b)(4) in determining whether the 12 consecutive payments 
required under paragraph (b)(1) of this section have been made.
    (iii) A borrower may request that the monthly payment amount be 
adjusted due to a change in the borrower's total financial 
circumstances only upon providing the documentation specified in 
paragraph (b)(1)(i)(C) of this section.
    (iv) A guaranty agency must provide the borrower with a written 
statement of the terms of the rehabilitation of the borrower's 
defaulted loan and provide the borrower with an opportunity to object 
to such terms.
    (2) The guaranty agency must report to all national credit bureaus 
within 90 days of the date the loan was rehabilitated that the loan is 
no longer in a default status.
    (3) An eligible lender purchasing a rehabilitated loan must 
establish a repayment schedule that meets the same requirements that 
are applicable to other FFEL Program loans made under the same loan 
type. For the purposes of the maximum loan repayment period, the lender 
must treat the first payment made under the 12 consecutive payments as 
the first payment under the 10-year maximum.

(Authority: 20 U.S.C. 1078-6)

    17. Section 682.406 is amended by removing ``and'' at the end of 
paragraph (a)(12); removing the period at the end of paragraph (a)(13) 
and adding in its place, ``; and'' and adding a new paragraph (a)(14) 
to read as follows:


Sec. 682.406  Conditions of reinsurance coverage.

    (a) * * *
    (14) The guaranty agency assures the Secretary that diligent 
attempts have been made by the lender and the guaranty agency under 
Sec. 682.411(g) to locate the borrower through the use of reasonable 
skip-tracing techniques.
* * * * *
    18. Section 682.407 is amended by adding new paragraphs (e) and (f) 
to read as follows:


Sec. 682.407  Administrative cost allowance for guaranty agencies.

* * * * *
    (e) The Secretary does not pay an administrative cost allowance to 
a guaranty agency based on loans for which the disbursement check has 
not been cashed or for which an electronic funds transfer has not been 
completed.
    (f) An administrative cost allowance improperly paid on a loan to a 
guaranty agency must be deducted by the agency from the amount 
reflected in the following quarter's ED form 1189 when it is submitted 
to the Department for payment.
* * * * *
    19. Section 682.409 is amended by revising paragraph (a); revising 
paragraph (c)(1); and adding a new paragraph (c)(6) to read as follows:


Sec. 682.409  Mandatory assignment by guaranty agencies of defaulted 
loans to the Secretary.

    (a)(1) If the Secretary determines that action is necessary to 
protect the Federal fiscal interest, the Secretary may direct a 
guaranty agency to assign to the Secretary any loan held by the agency 
on which the agency has received payment under Sec. 682.402(d), 
682.402(i), or 682.404 that meets the following criteria as of April 15 
of each year--
    (i) The unpaid principal balance is at least $100;
    (ii) For each of the two fiscal years following the fiscal year in 
which these regulations are effective, the loan, and any other loans 
held by the agency for that borrower, have been held by the agency for 
at least four years; for any subsequent fiscal year such loan must have 
been held by the agency for at least five years;
    (iii) A payment has not been received on the loan in the last year; 
and
    (iv) A judgment has not been entered on the loan against the 
borrower.
    (2) If the agency fails to meet a fiscal year recovery rate 
standard under paragraph (a)(2)(ii) of this section for a loan type, 
and the Secretary determines that additional assignments are necessary 
to protect the Federal fiscal interest, the Secretary may require the 
agency to assign in addition to those loans described in paragraph 
(a)(1) of this section, loans in amounts needed to satisfy the 
requirements of paragraph (a)(2)(iii) or (a)(3)(i) of this section.
    (i) Calculation of fiscal year loan type recovery rate. A fiscal 
year loan type recovery rate for an agency is determined by dividing 
the amount collected on defaulted loans for each loan program (i.e., 
the Stafford, PLUS, SLS, and Consolidation loan programs) by the agency 
for loans of that program (including payments received by the agency on 
loans under Sec. 682.401(b)(4) and Sec. 682.409 and the amounts of any 
loans purchased from the guaranty agency by an eligible lender) during 
the most recent fiscal year for which data are available by the total 
of principal and interest owed to an agency on defaulted loans for each 
loan program at the beginning of the same fiscal year, less accounts 
permanently assigned to the Secretary through the most recent fiscal 
year.
    (ii) Fiscal year loan type recovery rates standards. (A) If, in 
each of the two fiscal years following the fiscal year in which these 
regulations are effective, the fiscal year loan type recovery rate for 
a loan program for an agency is below 80 percent of the average 
recovery rate of all active guaranty agencies in each of the same two 
fiscal years for that program type, and the Secretary determines that 
additional assignments are necessary to protect the Federal fiscal 
interest, the Secretary may require the agency to make additional 
assignments in accordance with paragraph (a)(2)(iii) of this section.
    (B) In any subsequent fiscal year the loan type recovery rate 
standard for a loan program must be 90 percent of the average recovery 
rate of all active guaranty agencies.
    (iii) Non-achievement of loan type recovery rate standards. (A) 
Unless the Secretary determines under paragraph (a)(2)(iv) of this 
section that protection of the Federal fiscal interest requires that a 
lesser amount be assigned, upon notice from the Secretary, an agency 
with a fiscal year loan type recovery rate described in paragraph 
(a)(2)(ii) of this section must promptly assign to the Secretary a 
sufficient amount of defaulted loans, in addition to loans to be 
assigned in accordance with paragraph (a)(1) of this section, to cause 
the fiscal year loan type recovery rate of the agency that fiscal year 
to equal or exceed the average rate of all agencies described in 
paragraph (a)(2)(ii) of this section when recalculated to exclude from 
the denominator of the agency's fiscal year loan type recovery rate the 
amount of these additional loans.
    (B) The Secretary, in consultation with the guaranty agency, may 
require the amount of loans to be assigned under paragraph (a)(2) of 
this section to include particular categories of loans that share 
characteristics that make the performance of the agency fall below the 
appropriate percentage of the loan type recovery rate as described in 
paragraph (a)(2)(ii) of this section.
    (iv) Calculation of loan type recovery rate standards. The 
Secretary, within 30 days after the date for submission of the second 
quarterly report from all agencies, makes available to all agencies a 
mid-year report, showing the recovery rate for each agency and the 
average recovery rate of all active guaranty agencies for each loan 
type. In addition, the Secretary, within 120 days after the beginning 
of each fiscal year, makes available a final report showing such rates 
and the average rate for each loan type for the preceding fiscal year.
    (3)(i) Determination that the protection of the Federal fiscal 
interest requires assignments. Upon petition by an agency submitted 
within 45 days of the notice required by paragraph (a)(2)(iii)(A) of 
this section, the Secretary may determine that protection of the 
Federal fiscal interest does not require assignment of all loans 
described in paragraph (a)(1) of this section or of loans in the full 
amount described in paragraph (a)(2)(iii) of this section only after 
review of the agency's petition. In making this determination, the 
Secretary considers all relevant information available to him 
(including any information and documentation obtained by the Secretary 
in reviews of the agency or submitted to the Secretary by the agency) 
as follows:
    (A) For each of the two fiscal years following the fiscal year in 
which these regulations are effective, the Secretary considers 
information presented by an agency with a fiscal year loan type 
recovery rate above the average rate of all active agencies to 
demonstrate that the protection of the Federal fiscal interest will be 
served if any amounts of loans of such loan type required to be 
assigned to the Secretary under paragraph (a)(1) of this section are 
retained by that agency. For any subsequent fiscal year, the Secretary 
considers information presented by an agency with a fiscal year 
recovery rate 10 percent above the average rate of all active agencies.
    (B) The Secretary considers information presented by an agency that 
is required to assign loans under paragraph (a)(2) of this section to 
demonstrate that the protection of the Federal fiscal interest will be 
served if the agency is not required to assign amounts of loans that 
would otherwise have to be assigned.
    (C) The information provided by an agency pursuant to paragraphs 
(a)(3)(i)(A) and (B) of this section may include, but is not limited to 
the following:
    (1) The fiscal year loan type recovery rate within such school 
sectors as the Secretary may designate for the agency, and for all 
agencies;
    (2) The fiscal year loan type recovery rate for loans for the 
agency and for all agencies divided by age of the loans as the 
Secretary may determine;
    (3) The performance of the agency, and all agencies, in default 
aversion;
    (4) The agency's performance on judgment enforcement;
    (5) The existence and use of any state or guaranty agency-specific 
collection tools;
    (6) The agency's level of compliance with Secs. 682.409 and 
682.410(b)(6); and
    (7) Other factors that may affect loan repayment such as State or 
regional unemployment and natural disasters.
    (ii) Denial of an agency's petition. If the Secretary does not 
accept the agency's petition, the Secretary provides, in writing, to 
the agency the Secretary's reasons for concluding that the Federal 
fiscal interest is best protected by requiring the assignment.
* * * * *
    (c)(1) A guaranty agency must assign a loan to the Secretary under 
this section at the time, in the manner, and with the information and 
documentation that the Secretary requires. The agency must submit this 
information and documentation in the form (including magnetic media) 
and format specified by the Secretary.
* * * * *
    (6) The Secretary may accept the assignment of a loan without all 
of the documents listed in paragraph (c)(4) of this section. If 
directed to do so, the agency must retain these documents for 
submission to the Secretary at some future date.
* * * * *
    20. Section 682.410 is amended by revising paragraphs (a)(1) 
through (a)(3)(i); and adding paragraphs (a)(6) through (a)(8) to read 
as follows:


Sec. 682.410  Fiscal, administrative, and enforcement requirements.

    (a) * * *
    (1) Reserve fund assets. The guaranty agency must establish and 
maintain a reserve fund to be used solely for the FFEL Program to which 
the guaranty agency must credit--
    (i) The total amount of insurance premiums collected;
    (ii) Funds appropriated by a State for the agency's loan guaranty 
program, including matching funds under section 422(a) of the Act;
    (iii) Federal advances obtained under sections 422(a) and (c) of 
the Act;
    (iv) Federal payments for default, bankruptcy, death and 
disability, closed schools and false certification claims;
    (v) Supplemental preclaims assistance payments;
    (vi) Administrative cost allowance payments received under 
Sec. 682.407;
    (vii) Funds collected by the guaranty agency;
    (viii) Investment earnings on the reserve fund; and
    (ix) Funds received by the guaranty agency from any other source 
for the agency's loan guaranty program.
    (2) Uses of reserve fund assets. Except as provided in paragraphs 
(a)(3) through (a)(5) of this section, a guaranty agency may only use 
the assets of the reserve fund established under paragraph (a)(1) of 
this section to pay--
    (i) Insurance claims;
    (ii) Operating costs, including payments necessary in administering 
loan collections, preclaims assistance, monitoring enrollment and 
repayment status and any other activities under this part;
    (iii) Lenders that participate in a loan referral service under 
section 428(e) of the Act;
    (iv) The Secretary's equitable share of collections;
    (v) Federal advances and other funds owed to the Secretary;
    (vi) Reinsurance fees;
    (vii) Insurance premiums related to cancelled loans; and
    (viii) Any other amounts authorized or directed by the Secretary.
    (3) Special rule for use of certain reserve fund assets. (i) Except 
as provided in paragraph (a)(4) of this section, a guaranty agency may 
use funds received as insurance premiums, administrative cost 
allowances, amounts collected on FFEL loans, interest or investment 
earnings, and receipts described in paragraph (a)(1)(vi) of this 
section only for payments necessary to perform functions directly 
related to the guaranty agency's agreement with the Secretary and for 
the proper administration of the guaranty agency's FFEL loan guarantee 
activities.
* * * * *
    (6) Minimum reserve fund level. The guaranty agency must maintain a 
current minimum reserve fund level of not less than--
    (i) .5 percent of the amount of loans outstanding, for the fiscal 
year of the agency that begins in calendar year 1993;
    (ii) .7 percent of the amount of loans outstanding, for the fiscal 
year of the agency that begins in calendar year 1994;
    (iii) .9 percent of the amount of loans outstanding, for the fiscal 
year of the agency that begins in calendar year 1995; and
    (iv) 1.1 percent of the amount of loans outstanding, for each 
fiscal year of the agency that begins on or after January 1, 1996.
    (7) For purposes of this section, reserve fund level means--
    (i) The total of the reserve fund assets as defined in paragraph 
(a)(1) of this section, minus
    (ii) The total of the amount of the reserve fund assets used in 
accordance with paragraphs (a) (2) and (3) of this section.
    (8) For purposes of this section, amount of loans outstanding 
means--
    (i) The sum of--
    (A) The original principal amount of all loans guaranteed by the 
agency; and
    (B) The original principal amount of any loans on which the 
guarantee was transferred to the agency from another guarantor, 
excluding loan guarantees transferred to the agency pursuant to a plan 
of the Secretary in response to the insolvency of the transferring 
guaranty agency;
    (ii) Minus the original principal amount of all loans on which--
    (A) The loan guarantee was cancelled;
    (B) The loan guarantee was transferred to another agency, excluding 
loan guarantees transferred to another agency pursuant to a plan of the 
Secretary in response to the insolvency of the agency;
    (C) Payment in full has been made by the borrower;
    (D) Reinsurance coverage has been lost and cannot be regained; and
    (E) The agency paid claims, excluding the amount of those claims--
    (1) Paid under Sec. 682.412(e);
    (2) Paid under a policy established by the agency that is 
consistent with Sec. 682.509(a)(1); or
    (3) Paid at the direction of the Secretary.
* * * * *
    21. Section 682.507 is amended by revising paragraph (a)(2) to read 
as follows:


Sec. 682.507  Due diligence in collecting a loan.

    (a) * * *
    (2) If two borrowers are liable for repayment of a Federal PLUS or 
Consolidation loan as co-makers, the lender must follow these 
procedures with respect to both borrowers.
* * * * *
    22. Section 682.511 is amended by revising paragraph (a)(2) to read 
as follows:


Sec. 682.511  Procedures for filing a claim.

    (a) * * *
    (2) If a Federal PLUS loan was obtained by two eligible parents as 
co-makers, or a Consolidation loan was obtained jointly by a married 
couple, the reason for filing a claim must hold true for both 
applicants.
* * * * *
     23. Section 682.601 is amended by removing ``and'' at the end of 
paragraph (a)(4); removing the period at the end of paragraph (a)(5) 
and adding in its place, ``; and''; and adding new paragraphs (a)(6) 
and (a)(7) to read as follows:


Sec. 682.601  Rules for a school that makes or originates loans.

    (a) * * *
    (6) The school's cohort default rate as calculated under 
Sec. 668.15 may not exceed 15 percent; and
    (7) Except for reasonable administrative expenses directly related 
to the FFEL Program, the school must use payments received under 
Sec. 682.300 and Sec. 682.302 for need-based grant programs for its 
students.
* * * * *
    24. Section 682.603 is amended by adding new paragraphs (f)(3), 
(f)(4) and (h) to read as follows:


Sec. 682.603  Certification by a participating school in connection 
with a loan application.

* * * * *
    (f) * * *
    (3) In certifying a Stafford or SLS loan amount in accordance with 
Sec. 682.204 (a) and (e) 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 FFEL 
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 trimester hours or 36 quarter hours.

    (4) In certifying a Stafford or SLS loan amount in accordance with 
Sec. 682.204(a) and (e) for a borrower enrolled in a program of study 
of at least 900 clock hours, 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 FFEL 
loan limit for the borrower by determining what portion of the academic 
year the program represents by calculating--

Number of weeks in program

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

        30 weeks.

* * * * *
    (h) Pursuant to paragraph (b)(5) of this section, a school may not 
request the disbursement of loan proceeds for a borrower who is 
enrolled in the first year of an undergraduate program of study and who 
has not previously received a Stafford or SLS loan earlier than 7 days 
prior to the 31st day of the student's period of enrollment.

    25. Section 682.604 is amended by revising paragraph (c)(3) 
introductory text; removing paragraph (g)(2)(i); redesignating 
paragraphs (g)(2)(ii) through (g)(2)(vi), as paragraphs (g)(2)(i) 
through (g)(2)(v) respectively; removing ``and'' at the end of 
redesignated (g)(2)(iv); revising redesignated paragraph (g)(2)(v); 
adding a new paragraph (g)(2)(vi); revising the introductory text of 
paragraph (h); and adding a new paragraph (h)(4) to read as follows:


Sec. 682.604  Processing the borrower's loan proceeds and counseling 
borrowers.

* * * * *
    (c) * * *
    (3) If the loan proceeds are disbursed by electronic funds transfer 
to an account of the school on behalf of a borrower in accordance with 
Sec. 682.207(b)(1)(ii)(B), the school must, not more than 30 days prior 
to the first day of classes of the period of enrollment for which the 
loan is intended, obtain the student's, or in the case of a Federal 
PLUS loan, the parent borrower's written authorization for the release 
of the initial and any subsequent disbursement of each FFEL loan to be 
made, and after the student has registered either--
* * * * *
    (g) * * *
    (2) * * *
    (v) Review with the borrower the conditions under which the 
borrower may defer repayment or obtain partial cancellation of a loan; 
and
    (vi) Require the borrower to provide corrections to the 
institution'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 will then be provided 
within 60 days to the guaranty agency listed in the borrower's records.
* * * * *
    (h) * * * Except as provided under paragraph (h)(ii) of this 
section, or in the case of a student attending a foreign school, if, 
before the delivery of any Stafford or SLS loan disbursement, the 
school learns that the borrower will receive or has received financial 
aid for the period of enrollment for which the loan was made that 
exceeds the amount of assistance for which the student is eligible, the 
school shall reduce or eliminate the overaward by either--
* * * * *
    (4) For purposes of this section, funds obtained from any need-
based employment that does not exceed $300 shall not be considered as 
excess loan proceeds.

[FR Doc. 94-6004 Filed 3-15-94; 8:45 am]
BILLING CODE 4000-01-P