[Federal Register Volume 59, Number 80 (Tuesday, April 26, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-9851]


[[Page Unknown]]

[Federal Register: April 26, 1994]


_______________________________________________________________________

Part II





Department of Education





_______________________________________________________________________



34 CFR Part 685




Federal Direct Student Loan Program; Final Rule
DEPARTMENT OF EDUCATION

34 CFR Part 685

 
Federal Direct Student Loan Program

AGENCY: Department of Education.

ACTION: Announcement of criteria for loan origination--1995-1996 
academic year.

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

SUMMARY: The Secretary of Education issues criteria for the origination 
of student loans by schools participating in the Federal Direct Student 
Loan (Direct Loan) Program in the 1995-1996 academic year, which begins 
July 1, 1995. This notice relates to the Federal Direct Stafford Loan 
Program, the Federal Direct Unsubsidized Stafford Loan Program, and the 
Federal Direct PLUS Program, collectively referred to as the Direct 
Loan Program.

DATES: Effective Date: The criteria are effective June 10, 1994 or 
later if the Congress takes certain adjournments. If you want to know 
the effective date of these criteria, call or write the Department of 
Education contact person.
    Applicable Period: The criteria are applicable for the 1995-1996 
academic year, which begins July 1, 1995. Criteria for loan origination 
for the 1994-1995 academic year were published in the Federal Register 
on September 10, 1993 (58 FR 47816). The standards, criteria, and 
procedures governing other aspects of the Direct Loan Program for the 
1994-1995 academic year only were published in the Federal Register as 
34 CFR part 685 on January 4, 1994 (59 FR 472).

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

SUPPLEMENTARY INFORMATION: The Student Loan Reform Act of 1993, enacted 
on August 10, 1993, established the Direct Loan Program under the 
Higher Education Act of 1965, as amended (HEA). See Subtitle A of the 
Omnibus Budget Reconciliation Act of 1993 (Pub. L. 103-66). Under the 
Direct Loan Program, loan capital is provided directly to student and 
parent borrowers by the Federal Government rather than through private 
lenders as in the Federal Family Education Loan Program.

Background

    The statute directs the Secretary to exercise discretion in the 
selection of schools so that the loans made under the Direct Loan 
Program will represent 40 percent of the new student loan volume for 
academic year 1995-1996, the second year of this program. The standards 
for participation in the Direct Loan Program in the second year were 
published in the Federal Register on February 17, 1994 (59 FR 8080). 
The Secretary will select schools for the 1995-1996 academic year from 
schools that respond to the February 17, 1994 invitation to participate 
in the Direct Loan Program, as well as those eligible schools that 
applied for the 1994-1995 academic year.
    The criteria for originating loans in the second year of the Direct 
Loan Program are issued in this announcement in final form. The program 
regulations to implement other aspects of the Direct Loan Program in 
the second year and subsequent academic years are being developed 
through a negotiated rulemaking process. The Secretary anticipates 
publishing final program regulations for the 1995-1996 academic year by 
December 1, 1994.
    While the criteria in this document were not developed through 
negotiated rulemaking, the members of the Direct Student Loan 
Regulations Negotiated Rulemaking Advisory Committee were consulted in 
the development of the criteria at their February meeting.

Eligibility for Origination

    In the 1995-1996 academic year, a school originating loans in the 
Direct Loan Program will be in one of two levels of origination. The 
Secretary has adopted the criteria in this document because they are 
indicators of a school's ability to administer financial aid programs. 
Under the criteria, a school may participate in the first level of 
origination (Level 1) only if it has a demonstrated ability to fully 
administer the Direct Loan program.
    A school that meets all the criteria for Level 1 origination is 
eligible to perform all originating functions. If a school does not 
qualify for Level 1 origination, it is eligible to perform those 
functions allowed in the second level of origination (Level 2), unless 
it fails to meet one or more of the criteria required for that level.
    A school that is eligible for Level 1 origination may choose to 
participate in Level 2 origination or use the services of an 
alternative originator. Similarly, a school eligible for Level 2 
origination may choose to use the services of an alternative 
originator.
    The Secretary may exercise discretion and allow a school to 
originate loans at a level for which it would not otherwise be eligible 
if the Secretary determines that the school is fully capable of 
originating loans at that level. The Secretary may also require a 
school that meets the criteria for Level 2 origination to use the 
services of an alternative originator if the extent to which the school 
fails to meet certain other origination criteria merits such an action.

Functions Performed by Level 1 and Level 2 Originating Schools

    Under the Direct Loan Program, schools and consortia that originate 
loans must use software provided by the Secretary, or other software 
based on specifications provided by the Secretary, to create a loan 
origination record containing the basic information necessary to make a 
loan. The software provided by the Secretary reformats the data 
received from the Central Processing System and computes gross 
disbursements, loan fees, and net disbursements on the basis of the 
loan amounts entered by the school. The school must add data, such as 
the type of loan, loan amount, and disbursement dates, and may 
computer-generate the Stafford Promissory Note and Disclosure 
(promissory note). A school may also transmit the information collected 
by the school to the Direct Loan Program Servicer (Servicer) which, 
upon request, prints promissory notes on behalf of the school and sends 
them to the school.
    A student who accepts a Direct Loan completes a promissory note and 
returns it to the school; the school may not disburse Direct Loan funds 
without a completed promissory note.

Functions Performed Only by Level 1 Originating Schools

    A Level 1 originating school in the Direct Loan Program requests 
and obtains loan funds from the Secretary using a process similar to 
the process for drawing down funds for other Department of Education 
(ED) programs. A Level 1 originating school transmits to ED a specific 
Direct Loan funding request that is separate from its funding requests 
for other programs and is based on immediate disbursement needs. Direct 
Loan capital must be tracked separately and cannot be used for purposes 
other than making Direct Loans. The electronic transfer of funds uses 
the same delivery process as is used for the Federal Pell Grant 
Program. After a request for funds is received, the Secretary uses the 
Automated Clearinghouse (ACH) process through the Federal Reserve 
Banking system to deposit funds in a school's designated bank account. 
Currently, this process takes between 48 to 72 hours from the school's 
request for funds until the school's receipt of funds.
    After receiving funds from the Secretary, a school disburses funds 
to students by issuing checks or by crediting their accounts at the 
school. Before a school may disburse funds to a borrower, the school 
must ensure that it has a completed and signed promissory note. The 
funds received by a Level 1 originating school that are intended for 
specific borrowers but not disbursed to those borrowers may be used to 
fund other borrowers. After the first disbursement is made, the school 
must record the actual disbursed amount and the date of the 
disbursement in the loan origination record and transmit all completed 
loan records and promissory notes (if not previously submitted) to the 
Servicer. The school transmits subsequent disbursement data to the 
Servicer as the disbursements occur.

Functions Performed by Level 2 Originating Schools

    A Level 2 originating school is assisted in the management of funds 
by the Servicer. The Servicer reviews the loan origination records and 
promissory notes transmitted by the school before funds are disbursed. 
The promissory notes must be correct and complete before funds can be 
disbursed. The Servicer initiates the transfer of funds to the school 
three days prior to the anticipated loan disbursement date on the basis 
of loan origination records and the completed promissory notes. The 
school receives a roster from the Servicer identifying each borrower, 
the anticipated disbursement date and amount to be disbursed for each 
borrower, and the total amount of funds received by the school. Through 
the ACH process, the funds are sent to the school's bank within 48 to 
72 hours following the initiation of the transfer of funds. The funds 
received by a Level 2 originating school are intended for specific 
borrowers and may not be used to fund other borrowers. Level 2 
originating schools are responsible for reporting actual disbursement 
data to the Servicer.

Schools That Use an Alternative Originator

    The alternative originator manages both the promissory note and 
funds management processes for schools that use the alternative 
originator. These schools transmit the data necessary for the 
alternative originator to generate the promissory note. The alternative 
originator sends the promissory note to the borrower. The borrower must 
complete the promissory note and send it back to the alternative 
originator. The alternative originator reviews the promissory note 
before funds are disbursed. The promissory note must be correct and 
complete before funds can be disbursed. The alternative originator 
initiates the transfer of funds to the school three days prior to the 
anticipated loan disbursement date on the basis of the loan origination 
records and the completed promissory notes. The school receives a 
roster from the alternative originator identifying each borrower, the 
anticipated disbursement date and amount to be disbursed for each 
borrower, and the total amount of funds received by the school. Using 
the ACH process, the funds are sent to the school's bank within 48 to 
72 hours following the initiation of the transfer of funds. The funds 
received by a school using the alternative originator are intended for 
specific borrowers and may not be used to fund other borrowers. Schools 
that use the alternative originator are responsible for reporting 
actual disbursement data to the Servicer. In addition, the Secretary 
may provide additional loan counseling to students at a school under 
alternative origination.

Federal Direct Plus Loans

    Federal Direct PLUS loans are made through a process similar to the 
one used in the Federal PLUS loan program. The parent obtains an 
Application and Promissory Note (promissory note) from the school and, 
after completing the promissory note, sends it to the school. The 
school completes the school section of the promissory note and forwards 
it to the Servicer, where data from the note is key entered and a 
credit check is performed. Alternatively, a school enters data from the 
note using the software provided and electronically forwards this 
information to the Servicer along with the paper copy of the promissory 
note. In either case, the Servicer performs a credit check to determine 
whether the parent has an adverse credit history and notifies the 
school and the parent of the results. If the loan is approved, the 
Servicer sends a disclosure statement to the parent. If the credit 
check indicates an adverse credit history, the Servicer advises the 
parent of available options; for example, the parent may obtain an 
endorser without an adverse credit history. If the loan is approved and 
the school is a Level 1 originating school, the school may draw down 
money and disburse loan funds in the same manner as it would for other 
loans made under the Direct Loan Program. If the school is not a Level 
1 originating school, the Servicer electronically transmits the funding 
request for the school based on the loan origination records and 
promissory notes that the Servicer holds for that school.

Reconciliation of Records Performed by All Participating Schools

    A school is required to reconcile cash and individual loan records 
monthly. To reconcile cash, a school must provide documentation to the 
Servicer that the total net disbursements minus cancellations, plus 
return of excess cash, is equal to the amount of money the school has 
drawn down during a one-month period. This process must be completed by 
the end of the next month. For example, loan records and promissory 
notes for all disbursements and cancellations made in July 1995 must be 
transmitted to the Servicer by the end of August 1995. To reconcile 
loan records, a school's records must match the records of the 
Servicer. The software that is provided to participating schools is 
designed to assist schools in this reconciliation process.

Administrative Fees

    Level 1 originating schools will have greater responsibility than 
Level 2 originating schools in the area of funds management. Because of 
this greater responsibility, a Level 1 originating school will receive 
a higher administrative fee than a Level 2 originating school. The HEA 
does not allow a school that participates under alternative origination 
to receive administrative fees.

Consortia

    A consortium of schools in the Direct Loan Program interacts with 
the Secretary in the same manner as other schools, except that the 
communication between the Secretary and the schools in the consortium 
is consolidated and channeled through a single point. Each school in a 
consortium must sign the Direct Loan Program participation agreement 
with the Secretary and is responsible for the information it supplies 
through the consortium. If a consortium wishes to originate loans, each 
school in the consortium must be eligible to originate. The consortium 
will be eligible to originate at the most restrictive level any school 
in the consortium is eligible to originate. For example, if one school 
in a consortium is eligible to originate at the second level and the 
other schools in the consortium are eligible to originate at the first 
level, the consortium is eligible to originate only at the second level 
of origination.

Criteria Chart

    The following chart is provided to show, in a summary format, the 
criteria for the different levels of origination. Any differences 
between the language in the chart and the language in the criteria 
announced in this document should be resolved in favor of the latter.

 Criteria for Loan Origination.--1995-1996 Academic Year--an X Indicates
     That the Criterion Must Be Met To Participate at the Indicated     
                            Origination Level                           
------------------------------------------------------------------------
                                               Original       Original  
                 Criteria                      level 1        level 2   
------------------------------------------------------------------------
1. Be currently participating in the        X                           
 Federal Perkins Loan Program or the                                    
 Federal Pell Grant Program or, for a                                   
 graduate or professional school, a                                     
 similar program.                                                       
2. If participating in the Federal Perkins  X                           
 Loan Program, not have exceeded the                                    
 applicable maximum default rate under                                  
 section 462(g) of the HEA.                                             
3. Have participated in at least one of     X                           
 the student financial assistance programs                              
 under title IV of the HEA for the three                                
 years immediately preceding July 1, 1995.                              
4. Not be provisionally certified to        X                           
 participate in programs under title IV of                              
 the HEA.                                                               
5. Not be on the reimbursement system of    X              X            
 payment in the Federal Pell Grant Program.                             
6. Not have received notice that the        X              X            
 school is subject to an emergency action                               
 or a proposed or final limitation,                                     
 suspension, or termination action under                                
 the HEA.                                                               
7. Not, in the opinion of the Secretary,    X              X            
 have had severe performance deficiencies                               
 for any of the programs under title IV of                              
 the HEA.                                                               
8. If participating in the Federal Pell     X                           
 Grant Program, have submitted Student Aid                              
 Reports on a timely basis.                                             
9. Not be overdue on Federal cash           X                           
 transaction reports required under title                               
 IV of the HEA.                                                         
10. Not be overdue on program or financial  X                           
 reports or audits required under title IV                              
 of the HEA.                                                            
11. Provide an assurance that the school    X                           
 has no delinquent outstanding debts to                                 
 the Federal Government (subject to                                     
 certain exceptions).                                                   
------------------------------------------------------------------------

    A school that does not meet the criteria to originate loans must 
use the services of an alternative originator.
    The Secretary may allow a school to originate loans at a level for 
which it would not otherwise be eligible if the Secretary determines 
that the school is fully capable of originating loans at that level. 
The Secretary may also require a school that meets the criteria for the 
second level of origination to use the services of an alternative 
originator if the extent to which the school fails to meet other 
criteria merits such an action. A consortium of schools may originate 
loans at a level of origination for which all members of the consortium 
are eligible.

Executive Order 12866

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

Waiver of Rulemaking

    It is the practice of the Secretary to offer interested parties the 
opportunity to comment on proposed regulations. The Secretary has 
consulted with the members of the Direct Student Loan Regulations 
Negotiated Rulemaking Advisory Committee in the development of the 
criteria in this announcement, and many of the comments of those 
members have been adopted. However, the timely implementation of the 
Direct Loan Program for the 1995-1996 academic year does not permit the 
solicitation of further public comment on the criteria for origination 
for that year.
    To ensure successful implementation of the Direct Loan Program in 
the second year, schools need to receive program and software training, 
integrate Direct Loan Program materials into school publications, and 
interface Direct Loan software and origination procedures with the 
school's own systems and procedures. The Secretary believes that the 
training of school personnel, the development and distribution of 
materials, and the updating of Direct Loan systems and procedures must 
begin by June 1994. These preparations require that the Secretary, as 
soon as possible, initiate the school selection process and prescribe 
the standards and procedures for the origination of loans by schools 
that are considering whether to participate.
    The increase from five percent of new student loan volume in the 
first year of the program to 40 percent in the second year means that 
the number of schools participating in the program in the second year 
is likely to increase from 104 to over 2,000. In light of the 
preparations required to accommodate the dramatic growth in the Direct 
Loan Program in the 1995-1996 academic year, the Secretary finds that 
the requirements for the second-year implementation of the program do 
not permit the solicitation of further public comment on the criteria 
for loan origination in that year. Therefore, the Secretary finds that 
such a solicitation would be impracticable and contrary to the public 
interest under 5 U.S.C. 553(b)(B).
    Accordingly, under the authority of the Higher Education Act of 
1965, as amended, the Secretary announces the criteria for loan 
origination for the 1995-1996 academic year, as follows:

Criteria for Loan Origination--1995-1996 Academic Year

I. Origination

    (a) To be eligible to participate in the first level of origination 
of the Direct Loan Program, a school must meet the following criteria:
    (1) Be currently participating in the Federal Perkins Loan Program 
or the Federal Pell Grant Program or, for a graduate and professional 
school, a similar program.
    (2) If participating in the Federal Perkins Loan Program, not have 
exceeded the applicable maximum default rate under section 462(g) of 
the Higher Education Act (HEA) for the most recent fiscal year for 
which data are available.
    (3) Have participated in at least one of the student financial 
assistance programs under title IV of the HEA for the three years 
immediately preceding July 1, 1995.
    (4) Not be provisionally certified to participate in programs under 
title IV of the HEA.
    (5) Not be on the reimbursement system of payment in the Federal 
Pell Grant Program.
    (6) Not have received notice that the school is subject to an 
emergency action or a proposed or final limitation, suspension, or 
termination action under section 428(b)(1)(T), 432(h), or 487(c) of the 
HEA.
    (7) Not, in the opinion of the Secretary, have had severe 
performance deficiencies for any of the programs under title IV of the 
HEA, including deficiencies demonstrated by audits or program reviews 
submitted or conducted during the five calendar years immediately 
preceding the date of application to participate in the Direct Loan 
Program. These performance deficiencies may also include the school's 
failure to fulfill its responsibilities as an originating school in the 
program.
    (8) If participating in the Federal Pell Grant Program, have 
submitted Student Aid Reports on a timely basis.
    (9) Not be overdue on Federal cash transaction reports required 
under title IV of the HEA.
    (10) Not be overdue on program or financial reports or audits 
required under title IV of the HEA.
    (11) Provide an assurance that the school has no delinquent 
outstanding debts to the Federal Government, unless (i) those debts are 
being repaid under or in accordance with a repayment arrangement 
satisfactory to the Federal Government, or (ii) the Secretary 
determines that the existence or amount of the debts has not been 
finally determined by the cognizant Federal agency.
    (b) To be eligible to participate in the second level of 
origination, a school must meet the criteria in part I (a)(5), (6), and 
(7) of this announcement.

II. Alternative Origination

    A school participating in the Direct Loan Program that is not 
eligible to originate loans under part I of this announcement must use 
the services of an alternative originator.

III. Determination of Origination Status

    The Secretary may allow a school to originate loans at a level for 
which it would not otherwise be eligible if the Secretary determines 
that the school is fully capable of originating loans at that level. 
The Secretary may also require a school that meets the criteria for the 
second level of origination to use the services of an alternative 
originator if the extent to which the school fails to meet other 
origination criteria merits such an action. A consortium of schools may 
originate loans at a level of origination for which all members of the 
consortium are eligible.

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

    Dated: April 14, 1994.
Richard W. Riley,
Secretary of Education.

(Catalog of Federal Domestic Assistance Number 84.268, Federal 
Direct Student Loan Program)
[FR Doc. 94-9851 Filed 4-25-94; 8:45 am]
BILLING CODE 4000-01-P