[Federal Register Volume 59, Number 82 (Friday, April 29, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-10250]


[[Page Unknown]]

[Federal Register: April 29, 1994]


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Part IX





Department of Education





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34 CFR Part 682




Federal Family Education Loan Program; Final Rule
DEPARTMENT OF EDUCATION

34 CFR Part 682

RIN 1840-AB83

 
Federal Family Education Loan Program

AGENCY: Department of Education.

ACTION: Final regulations.

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SUMMARY: The Secretary amends the regulations governing the Federal 
Family Education Loan (FFEL) Program. The FFEL Program consists of the 
Federal Stafford, Federal Supplemental Loans for Students (SLS), 
Federal PLUS, and the Federal 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, and certain technical changes made by the Cash Management 
Improvement Act Amendments of 1992, the Omnibus Budget Reconciliation 
Act of 1993, and the Higher Education Technical Amendments of 1993. The 
regulations amend the FFEL Program loan discharge provisions and 
enhance the ability of lenders and guaranty agencies to service and 
collect FFEL Program loans.

DATES: These regulations take effect either 45 days after publication 
in the Federal Register or later if the Congress takes certain 
adjournments, with the exception of Secs. 682.202, 682.208, 682.402, 
682.410, and 682.411. These sections will become effective after the 
information collection requirements contained in these sections have 
been submitted by the Department of Education and approved by the 
Office of Management and Budget under the Paperwork Reduction Act of 
1980.
    If you want to know the effective date of these regulations, call 
or write the Department of Education contact person. A document 
announcing the effective date will be published in the Federal 
Register.
    Subject to approval under the Paperwork Reduction Act, the 
following applicability dates also apply to certain provisions of these 
regulations:
    Section 682.202(c), which reduces the amount of the origination fee 
charged on an FFEL Program loan, applies to loans for which the first 
disbursement is made on or after July 1, 1994, if the period of 
enrollment for which the loan is intended either includes that date or 
begins on or after that date.
    Section 682.202(d), which reduces the amount of the insurance 
premium charged on an FFEL Program loan, applies to loans for which the 
first disbursement is made on or after July 1, 1994, if the period of 
enrollment for which the loan is intended either includes that date or 
begins on or after that date.
    Section 682.410(b)(5)-(7), which requires guaranty agencies to warn 
defaulters that they may be subject to administrative wage garnishment 
and offset against federal or state income tax refunds, applies to 
claims paid by the agency on or after 120 days following the date of 
publication.
    Section 682.411, which requires lenders to warn delinquent 
borrowers that they may be subject to administrative wage garnishment 
and offset against federal or state income tax refunds if they default 
on their loans, applies to loans on which the first day of delinquency 
is on or after 120 days following the date of publication.

FOR FURTHER INFORMATION CONTACT: George Harris, 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: The Secretary is amending 34 CFR part 682 to 
implement changes made to the HEA by Public Law 102-325, enacted July 
23, 1992, as well as certain changes added by Public Law 103-66, 
enacted August 10, 1993 and Public Law 103-208, enacted December 20, 
1993. These regulations seek to improve the efficiency of federal 
student aid programs, and, by so doing, to improve their capacity to 
enhance opportunities for postsecondary education.
    On January 14, 1994, the Secretary published a notice of proposed 
rulemaking (NPRM) for part 682 in the Federal Register (59 FR 2486). 
The NPRM included a discussion of the major issues surrounding the 
proposed changes which will not be repeated here. The following list 
summarizes those issues and identifies the pages of the preamble to the 
NPRM on which a discussion of those issues may be found:
     Amendment to Sec. 682.208 to provide for borrower 
notification when there is a servicing change (page 2488);
     Addition to Sec. 682.402 to implement loan discharges if 
the student could not complete the educational program because the 
school closed (page 2491);
     Addition to Sec. 682.402 to implement loan discharges if 
the student's eligibility to borrow was falsely certified by the school 
(pages 2488-2490);
     Addition to Sec. 682.410 to implement administrative wage 
garnishment of borrowers who owe defaulted loans (page 2491).

Executive Order 12866

    These regulations 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 this regulatory action.
    The potential costs associated with the regulations are those 
resulting from statutory requirements and those determined by the 
Secretary to be necessary for administering this program effectively 
and efficiently, as discussed in those sections of the preamble that 
relate to specific sections of the regulations.
    In assessing the potential costs and benefits--both quantitative 
and qualitative--of these regulations, the Secretary has determined 
that the benefits of the regulations justify the costs, and do not 
interfere with State, local, and tribal governments in the exercise of 
their governmental functions. Substantive revisions to the Notice of 
Proposed Rulemaking.

Section 682.202  Permissible Charges by Lenders to Borrowers

     The Secretary has incorporated into the regulations the 
changes made by Public Law 103-66 and Public Law 103-208 to origination 
fees and insurance premiums. Section 682.202(a)(6) of the proposed 
regulations, which discussed the refund of excess interest paid on 
Stafford loans, has been deleted. Those refund provisions were 
substantially amended by Public Law 103-208, and will be the subject of 
future proposed regulations.

Section 682.208  Due Diligence in Servicing a Loan

     The Secretary has incorporated into the regulations the 
changes made by Public Law 103-208 to the notification requirements 
that apply to the sale or transfer of a loan.

Section 682.402  Death, Disability, Closed School, False Certification, 
and Bankruptcy Payments

     The Secretary has expanded the definition of what 
constitutes a school's ``false certification of a student's eligibility 
to borrow'' to include cases where a school signed a putative 
borrower's name on the loan application or the promissory note. The 
Secretary will also provide relief under these procedures to borrowers 
who demonstrate that the school, without authorization by the borrower, 
endorsed the borrower's loan check or signed the borrower's 
authorization for electronic funds transfer, if the student did not 
receive the loan proceeds, either by actual delivery of the funds or by 
application of the loan proceeds to institutional charges owed to the 
school.
     The Secretary has partially deleted the requirement that, 
as a condition of eligibility for a closed school or false 
certification discharge, a borrower must assign to and relinquish in 
favor of the Secretary any right to a loan refund (up to the amount 
discharged) from any public fund. However, a borrower will still be 
required to assign to and relinquish in favor of the Secretary any 
right to a loan refund (up to the amount discharged) from any private 
fund, including the portion of a public fund that represents funds 
received from a private party.
     The Secretary has deleted the requirement for the student 
to certify that, as a condition of eligibility for a false 
certification discharge, he or she was certified by the school on the 
application for the loan as an eligible student.

Section 682.410  Fiscal, Administrative, and Enforcement Requirements

     The regulations have been revised to incorporate the 
Secretary's guidance sent to guaranty agencies in July 1993 concerning 
(Pub. L. 102-589). That guidance explained that a guaranty agency was 
no longer required to assign loans to the Secretary for federal income 
tax refund offsets.
     The Secretary has deleted the provision of the proposed 
regulations that would have made a self-employed borrower subject to 
wage garnishment.

Analysis of Comments and Changes

    In response to the Secretary's invitation in the NPRM, 40 parties 
submitted comments on the proposed regulations. An analysis of the 
comments and of the changes made to the regulations as a result of 
those comments follows.
    Major issues are grouped according to subject, with references to 
the appropriate sections of the regulations. Other substantive issues 
are discussed under the section of the regulations to which they 
pertain. Technical and other minor changes, and suggested changes the 
Secretary is not legally authorized to make under the applicable 
statutory authority, are not addressed.

Section 682.202  Permissible Charges by Lenders to Borrowers

    1. Comment: A number of commenters noted that Public Law 103-66 and 
Public Law 103-208 made changes to the statute upon which the NPRM was 
based. The commenters recommended that regulatory provisions applying 
to borrower interest rates, refunds of excess interest paid, 
origination fees, and insurance premiums, should be updated to reflect 
current law. Some commenters recommended that a separate NPRM be issued 
to address the complex changes made by Public Law 103-208 to the 
provisions that mandate the refunding of excess interest.
    Discussion: To the extent that such changes can be readily made, 
the Secretary agrees that they should be. The Secretary has decided to 
issue a new notice of proposed rulemaking to implement the changes 
affecting the refund of excess interest paid, which had been the 
subject of Sec. 682.202(a)(6) of the proposed regulations.
    Change: The final regulations have been amended to incorporate the 
changes made by Public Law 103-208 to loan origination fees and 
insurance premiums. Interest rate changes will be in a subsequent NPRM. 
Section 682.202(a)(6) of the proposed regulations has been deleted, 
however, the Secretary has reserved that paragraph in these final 
regulations as the location for future regulations relating to the 
refunding of excess interest that is required by section 427A(i) of the 
HEA.

Section 682.202(c)(2)

    2. Comment: Some commenters objected to the requirement that a 
lender must charge an unsubsidized Federal Stafford Loan borrower a 6.5 
percent origination/insurance fee. The commenters believed that the 
lender should have an option to charge the borrower a lesser amount, as 
is permitted for a subsidized Federal Stafford Loan.
    Discussion: Prior to Public Law 103-66, section 428H(f)(1) of the 
HEA required the lender to charge an unsubsidized Federal Stafford Loan 
borrower a 6.5 percent origination/insurance fee. Public Law 103-66 
split the combined origination/insurance fee into two separate 
components: a 3 percent origination fee that is required to be charged 
to the borrower, and a 1 percent insurance premium that may be charged 
to the borrower. The origination and insurance fees applicable to a 
subsidized Federal Stafford Loan were also reduced by Public Law 103-66 
to 3 percent and 1 percent respectively. However, the HEA continues to 
permit a lender to charge a subsidized Federal Stafford Loan borrower a 
lesser amount than the maximum loan origination fee, whereas no similar 
option exists for an unsubsidized Federal Stafford Loan origination 
fee.
    Change: The final regulations have been revised to incorporate the 
reduced fees resulting from Public Law 103-66.

Section 682.202(c)(4)

    3. Comment: Some commenters noted a conflict between 
Sec. 682.202(c)(1) which stated that a lender may charge a borrower an 
origination fee on a subsidized Stafford loan, whereas 
Sec. 682.202(c)(4) mandated that the lender shall deduct a pro rata 
portion of such fee from each disbursement of the loan proceeds.
    Discussion: The Secretary agrees with the commenters.
    Change: Section 682.202(c)(4) has been amended to clarify that the 
pro rata deduction requirement applies only if the lender has chosen to 
charge an origination fee to the borrower.

Section 682.208  Due Diligence in Servicing a Loan

    4. Comment: A number of commenters favored an expansion in the 
notification requirements pertaining to an assignment of a loan or a 
change in the identity of the party to whom the borrower sends payments 
or communications concerning the loan. The commenters believed that the 
notice required to be sent by the holder of the loan should apply to 
all borrowers, and not be limited to only those borrowers in the grace 
or repayment periods. Some commenters also noted that Public Law 103-
208 made two changes to section 428(b)(2)(F) of the HEA: (1) The 
transferee (instead of the transferor) is now required to notify the 
guaranty agency when a loan is sold or transferred; and (2) the 
transferor and the transferee may now notify the borrower of the sale 
or transfer of a loan either jointly or separately (instead of only 
separately).
    Discussion: Section 428(b)(2)(F) of the HEA states that the 
notification requirements ``* * * shall only apply if the borrower is 
in the grace period * * * or is in repayment status.''
    Change: No changes are made with respect to the commenters' first 
comment. The final regulations have been revised to incorporate the 
notification changes resulting from Public Law 103-208.

Section 682.402  Death, Disability, Closed School, False Certification, 
and Bankruptcy Payments

Section 682.402(a)

    5. Comment: A number of commenters objected to the requirement 
that, in general, the borrower's loan must be a legally enforceable 
debt under applicable law by the holder of the loan to qualify a 
guaranty agency for a reinsurance payment under the closed school and 
false certification discharge provisions. The commenters believed that 
students should have their loans discharged, and the Secretary should 
reimburse guaranty agencies for such discharges, even if the borrower's 
debt is legally unenforceable by the holder of the loan. Of particular 
concern to some commenters were cases where the school signed the 
borrower's name on the loan documents or check. While the commenters 
generally recognized that the borrower technically does not owe the 
amount of the unenforceable debt, they were concerned that borrowers 
may not have the resources to pursue a legal or administrative 
determination of loan enforceability. The commenters also believed that 
even if the borrower did pursue that avenue, it could take many years 
to reach a resolution, during which the borrower would be subject to 
collection activity, damaged credit rating, and if in default, would be 
considered to be ineligible for additional federal student financial 
aid.
    In a related area, some commenters expressed concern that, under 
current federal regulations, a borrower would not receive a closed 
school or false certification discharge if federal reinsurance on the 
loan had been lost because of violations of due diligence or other 
programmatic requirements committed by the lender or the guarantor. The 
commenters believed that Congress intended to help a borrower who was 
victimized by a school's closing or false certification of eligibility 
to borrow, events that are beyond the control of the borrower.
    Discussion: The Secretary is persuaded that the term ``falsely 
certified,'' as used in section 437(c)(1) of the HEA, should be defined 
to include certain cases where a school signed the borrower's name on 
the loan application or promissory note. The definition of the term 
``falsely certified'' is extensively discussed in response to comment 
48. Because of the similarity of such cases to those involving the 
execution of the application or note by the school in the name of the 
borrower, the Secretary concluded that cases in which the school 
improperly endorsed the borrower's signature on the loan check or the 
authorization for electronic funds transfer should also be addressed 
under these regulatory procedures, although such misconduct is not by 
itself a false certification. Under these final regulations, therefore, 
the Secretary will provide relief to borrowers in cases of unauthorized 
endorsements, but except for the instances in which the school both 
falsely created a loan application or promissory note for a student and 
then endorsed the student's name on the loan check, the lender is 
responsible for ensuring the authenticity of a borrower's signature on 
the lender's loan check, and should continue to bear the risk of an 
improper endorsement. In those instances, although a borrower may under 
the procedure as modified here receive a discharge of any obligation to 
repay that portion of a loan disbursed by a check which he or she 
neither endorsed nor received the proceeds of, the lender will not be 
permitted to receive or retain a claim payment for that amount. Because 
the Secretary considers the lender to have not had routine access to 
the written authorization for electronic funds transfer, on the other 
hand, the lender would not have occasion to know of an unauthorized 
execution of that authorization in the name of the borrower, and would 
not be held at risk for such unauthorized disbursements under these 
procedures.
    The Secretary also agrees that the loss of federal reinsurance on 
the loan due to violations of due diligence or other programmatic 
requirements committed by the lender or the guarantor should not 
prevent an eligible borrower from receiving a closed school or false 
certification discharge. In such cases, the Secretary will use his 
authority pursuant to Sec. 682.406(b) to waive his right to refuse to 
make a reinsurance payment on the loan. Thus, (except in the case of a 
falsely endorsed check, as noted above) a lender may receive a claim 
payment and a guaranty agency may receive a reinsurance payment on a 
loan for which an eligible borrower would qualify for a closed school 
or false certification discharge, even though violations of program 
requirements committed by the lender or guarantor may have otherwise 
sufficed to cause federal reinsurance on the loan to have been lost.
    During the last few years, Congress and the Secretary have taken 
steps to combat unscrupulous individuals and program participants who 
have used the FFEL Program to exploit innocent students and taxpayers. 
The discharge of loans owed by the innocent victims is consistent with 
those actions. The Department intends to pursue the individuals and 
organizations who caused this situation so that the taxpayer can be 
reimbursed, and future students are protected.
    Change: As will be further discussed in response to comment 48, the 
Secretary has expanded the definition of what constitutes a school's 
``false certification of a student's eligibility to borrow'' to include 
a loan for which the school signed the name of an innocent victim on 
the application for the loan or the promissory note. The regulations 
will also provide relief in cases in which the borrower signed the loan 
application or promissory note, but the school signed the borrower's 
name on a loan check or authorization for electronic funds transfer, 
providing that the student did not receive, directly or indirectly, the 
benefits of the loan proceeds disbursed by that loan check or by virtue 
of the authorization for electronic funds transfer signed by the 
school.
    6. Comment: Some commenters believed that information concerning 
closed school or false certification discharges should be made 
available to the borrower at the time the loan is made or while the 
student is in school. The commenters believed that this important 
information may be easily overlooked by or not reach the borrower after 
the school has closed or the student has withdrawn.
    Discussion: This information is made available to the student in 
the common application/promissory note used by all guaranty agencies. 
In addition, if a borrower has questions concerning his or her loan 
obligation, a lender is required under Sec. 682.208(c)(1) to respond 
within 30 days after receipt of an inquiry from the borrower or any 
endorser on a loan.
    Change: None.

Section 682.402(b)(1)

    7. Comment: Some commenters believed that the regulations should 
state that a discharge of a Federal PLUS or Federal Consolidation Loan 
because of a borrower's death would apply only if both co-makers of the 
loan died.
    Discussion: This was stated in Sec. 682.402(a)(2) of the proposed 
regulations. Section Sec. 682.402(b)(1) addresses the loan obligation 
of an individual borrower who dies.
    Change: None.
    8. Comment: Some commenters recommended that the regulations state 
that the discharge of a Federal PLUS Loan because of the student's 
death applies only to student deaths occurring on or after July 23, 
1992.
    Discussion: The Secretary agrees that clarification is needed to 
reflect the effective date of section 437(d) of the HEA.
    Change: The final regulations have been revised accordingly.

Section 682.402(c)(1)

    9. Comment: Some commenters objected to the requirement that a 
Federal Consolidation Loan borrower must provide the disbursement dates 
of the underlying loans if the borrower requests a loan discharge for 
total and permanent disability based on a condition that pre-dated the 
Consolidation Loan. The commenters believed that this information is 
present in the borrower's Consolidation Loan file and the borrower 
should not be required to submit information already in the possession 
of the lender.
    Discussion: The regulations are designed to cover all cases, 
including those in which the information may not be present in the 
borrower's loan file, and it may be necessary in some cases, for the 
borrower to provide this documentation. For example, the lender's 
information may be incomplete or destroyed due to fire, flood, theft, 
etc. However, in other cases where the lender already possesses this 
information in the borrower's loan file, the Secretary agrees that the 
borrower should not be required to provide the same documentation.
    Change: Section 682.402(c)(1) has been revised to specify that the 
borrower's requirement to provide such documentation only applies if 
the lender does not already possess it.

Section 682.402(d)(1)(i)

    10. Comment: Some commenters were confused by references to ``the 
loan'' and thought that a borrower with multiple loans would not be 
completely covered under the closed school loan discharge provisions.
    Discussion: In general, regulatory language is more precise if it 
is based on the singular form of a noun. In the case of a closed school 
loan discharge, this permits each loan to be evaluated individually, 
and not be dependent on factors associated only with other loans. If 
the borrower qualifies for a discharge of more than one loan, then each 
loan will be discharged.
    Change: None.
    11. Comment: Some commenters believed that a borrower should be 
eligible for a closed school loan discharge for the portion of a 
Federal Consolidation Loan that repaid a loan that would have otherwise 
been discharged under the closed school provisions.
    Discussion: The Secretary agrees with the commenters. The Secretary 
has been given authority pursuant to section 437(c)(1) of the HEA to 
``* * * discharge the borrower's liability on the loan * * *'' if the 
student could not complete the program in which the student was 
enrolled because of the school's closure. Because section 437(c) 
provides for discharge of loans because of events that occur before the 
borrower enters repayment, the borrower's liability on the loan is the 
amount outstanding at that time, before the borrower enters repayment. 
If the borrower repays some or all of that amount, the discharge would 
be ineffective unless it includes relief from that liability through 
reimbursement for the amounts paid on the loan, and those amounts 
include amounts borrowed through a Consolidation Loan. The Secretary 
believes that the borrower's Consolidation Loan should be credited for 
the amount of the closed school loan discharge that would have been 
applicable to the borrower's loan before it was consolidated.
    Change: The final regulations have been revised accordingly.
    12. Comment: Some commenters believed that the 90-day period prior 
to a school's closing during which a student who withdrew would be 
eligible for a loan discharge is too short for many students who 
attended correspondence schools. The commenters noted that such 
students frequently are considered ``withdrawn'' as of the date of the 
last lesson submitted by the student if the student did not submit the 
next scheduled lesson in accordance with the schedule of lessons 
established under Sec. 682.602. However, the school may not have been 
considered to have officially closed until more than 90 days have 
elapsed from the date the student would be considered to have withdrawn 
under Sec. 682.605(b)(3). The commenters observed that in many cases, 
it was the school that withdrew from the student by its failure to 
grade lessons or provide subsequent lessons, or to otherwise 
communicate with a student who attempted to learn if the school was 
still operating. The commenters believed that correspondence students, 
unlike other students who attended a school at a school's actual 
location, are not in a position to see an obvious deterioration in the 
school's ability to provide education to students.
    Discussion: The Secretary believes that the 90-day period generally 
is sufficient for all categories of students. The Secretary notes that 
correspondence students may actually be in a better position than other 
students to realize that a school's ability to provide training and 
services is deteriorating. The absence of communication from a 
correspondence school to a student is an unmistakable sign that the 
school is not fulfilling its part of the enrollment agreement with the 
student. Other types of schools may be able to effectively camouflage 
their deteriorating capabilities and prevent students from seeing the 
true state of the school's fiscal and administrative situation, but a 
correspondence school student cannot be so easily deceived. The lack of 
communication from a school is a clear fact that speaks for itself. 
However, the Secretary agrees with the commenters that in some unique 
circumstances an extension of the 90-day period may be appropriate.
    Change: The final regulations have been revised to include a 
provision for the Secretary to extend the 90-day period if he believes 
an extension is appropriate in a particular case.

Section 682.402(d)(1)(ii)(A)

    13. Comment: Some commenters noted that schools that close will 
frequently phase-out their operations by sequentially eliminating 
individual programs even though the school remains open. The commenters 
believed that by linking a borrower's eligibility for a loan discharge 
to the date that the school ceased to provide educational instruction 
in all programs, the regulations would penalize a borrower who withdrew 
from school because of a terminated or deteriorated program earlier 
than 90 days before the school officially closed.
    Discussion: The Secretary has been given authority pursuant to 
section 437(c)(1) of the HEA to discharge the borrower's liability on 
the loan if the student could not complete the program ``* * * due to 
the closure of the institution.* * *'' The Secretary has no authority 
to discharge the borrower's loan obligation if the student's program 
was terminated but the school did not close.
    Change: None.
    14. Comment: Some commenters did not understand the reference to 
``the designated agency in the state in which the school is located.'' 
The commenters asked if the agency making the determination that a 
school had closed would be the guaranty agency, the state school 
licensing agency, or some other agency.
    Discussion: The Secretary understands the commenters' concerns and 
has concluded that he is in the best position to evaluate the 
information provided by various sources concerning whether a school has 
closed and the date of closure. Therefore, the determination of a 
school's closure date will be made by the Secretary and communicated to 
FFEL Program participants.
    Change: The regulation has been amended to read ``A school's 
closure date is the date that the school ceases to provide educational 
instruction in all programs, as determined by the Secretary;''

Section 682.402(d)(1)(ii)(C)

    15. Comment: Some commenters recommended that the regulations 
clarify that only a loan made for attendance at an eligible school 
could be discharged under the closed school loan discharge provisions. 
Some commenters also wanted the regulations to make it clear that the 
discharge provisions would apply only if the branch or location of the 
school where the student actually attended was itself ``eligible.''
    Discussion: The closed school loan discharge authorized in section 
437(c)(1) of the HEA is not restricted only to a loan made for 
attendance at an eligible school. The Secretary believes that Congress 
was aware of instances in which a school or its branch may have lost 
eligibility, but the school continued to certify loan applications 
under an eligible school identification code. The Secretary believes 
this is the reason why there is no requirement in section 437(c)(1) of 
the HEA that links a borrower's eligibility for a closed school loan 
discharge to only a loan certified by an eligible school.
    Change: None.

Section 682.402(d)(2)(iv)

    16. Comment: Some commenters recommended that the regulations 
require the holder of a loan discharged under the closed school loan 
discharge provision to forward the original promissory note marked 
``canceled'' or ``satisfied in full'' to the borrower within 30 days 
after discharging the borrower's loan obligation.
    Discussion: A loan that is discharged due to the borrower's death, 
permanent and total disability, or bankruptcy, is considered ``paid in 
full'' for the purposes of Sec. 682.414(a)(2). The Secretary will add a 
closed school loan discharge to the definition of the term ``paid in 
full'' found in Sec. 682.414(a)(2), but does not believe it is 
necessary to otherwise amend the requirements pertaining to the return 
of promissory notes (found in Sec. 682.414(a)(4) of the current 
regulations) in the manner recommended by the commenters. The return of 
a borrower's promissory note pursuant to a closed school discharge does 
not need to be accomplished any differently than the return of a 
borrower's promissory note pursuant to any other type of discharge.
    Change: Section 682.414(a)(2) has been amended to add a closed 
school loan discharge.

Section 682.402(d)(3)

    17. Comment: Some commenters recommended that the Secretary 
prescribe a standardized form for the closed school loan discharge 
application and associated sworn statement from the borrower.
    Discussion: The Secretary agrees that this would be helpful. 
Pursuant to the requirements of section 432(l) of the HEA, the 
Secretary will consult with FFEL participants to develop a standardized 
form.
    Change: None.
    18. Comment: Some commenters objected to the requirement that a 
borrower who requests a closed school loan discharge must submit the 
sworn statement described in the regulations. The commenters believed 
the sworn statement is unnecessary in cases where the holder of the 
loan or the guaranty agency has reliable information in their 
possession showing that the borrower was in attendance at the school 
when it closed or within 90 days before it closed. The commenters 
believed the borrower's loan obligation should be discharged based on 
those existing records.
    Discussion: The Secretary believes the borrower's sworn statement 
is necessary to adequately protect the interests of the taxpayers. The 
information provided on the borrower's sworn statement is not limited 
to the isolated historical record of the borrower's attendance at the 
closed school. For example, the borrower must state whether he or she 
took advantage of a teach-out or transferred academic credits from the 
closed school to another school. The borrower must also agree to 
cooperate with the Secretary or the Secretary's designee in enforcement 
actions in accordance with Sec. 682.402(d)(4). This information, and 
the borrower's agreement to cooperate, will not be in the possession of 
the guaranty agency and must be obtained in the borrower's sworn 
statement.
    Change: None.

Section 682.402(d)(3)(ii)(A)

    19. Comment: Some commenters requested clarification of whether the 
closed school loan discharge applied to a loan that was partially 
disbursed on or after January 1, 1986.
    Discussion: The Secretary has been given authority pursuant to 
section 437(c)(1) of the HEA to discharge the borrower's liability on a 
loan ``* * * received, on or after January 1, 1986 ``* * *'' if the 
student could not complete the program due to the closure of the 
school. For purposes of the closed school loan discharge, the Secretary 
will consider the borrower's entire loan eligible if any part of it was 
disbursed by the lender on or after January 1, 1986.
    Change: The final regulations have been revised to incorporate this 
clarification.

Section 682.402(d)(3)(ii)(C)

    20. Comment: Some commenters believed that a borrower who was 
unable to transfer all of the academic credits or hours earned at the 
closed school to another school should qualify for a partial loan 
discharge.
    Discussion: If a student chooses to transfer any amount of academic 
credits or hours earned at the closed school to another school, and as 
a result of that action is able to complete the program of study that 
the student was enrolled in at the closed school, the student would not 
meet the requirement contained in section 437(c)(1) of the HEA that 
restricts a closed school loan discharge to a student ``* * * unable to 
complete the program* * *'' because of the school's closing. Thus, 
there would be no statutory basis for discharging the borrower's loan 
obligation.
    Change: None.
    21. Comment: Some commenters believed that a borrower who 
transferred academic credits or hours earned at the closed school to 
another school should not qualify for a discharge if the borrower 
enrolled in a different program of study at the new school or enrolled 
in a similar program but quickly withdrew.
    Discussion: The Secretary believes that the borrower is entitled to 
a loan discharge under the HEA in any case in which a student's program 
of education is disrupted by the closing of the school to the extent 
that the student does not, for any reason, complete the program. The 
presumption must be that the school's closing directly hindered the 
student's achievement of his or her educational goals.
    Change: None.
    22. Comment: Some commenters recommended that the regulations 
define the term ``teach-out at another school.'' The commenters 
believed that the absence of a definition would result in widespread 
confusion as to what constitutes a ``teach-out'' for purposes of a 
closed school loan discharge. The commenters suggested that the key 
elements of a teach-out are: (a) No charges additional to the original 
program cost; (b) identity of subject matter taught; (c) geographic 
proximity between the original and teach-out schools; (d) demonstrated 
compatibility of program structure and scheduling (e.g., student is 
able to begin the teach-out within a reasonable time after the school 
closure, and the completion dates, class times, and instructional 
methodology are comparable); and (e) review and approval by the state 
licensing agency.
    Discussion: The Secretary believes that a prescriptive regulatory 
definition of ``teach-out'' is unnecessary. The Secretary notes that 
because a student may decline to complete the program through a teach-
out at another school for any reason, it is therefore reasonable to 
conclude that a student who chooses to participate in a teach-out and 
completes the program, has demonstrated an acceptance of those teach-
out conditions. In short, a student can be protected from being forced 
to accept what he or she believes to be an onerous teach-out condition 
by simply declining the teach-out. A student who, even though 
inconvenienced, chooses to complete his or her program through a teach-
out, has received value from the loan and needs no loan discharge.
    The Secretary asks interested parties to submit information to him 
concerning the actual costs paid by students who completed their 
programs through teach-outs. The Secretary will evaluate those costs to 
determine if the regulations should be revised in the future to permit 
a discharge based on certain circumstances.
    Change: None.

Section 682.402(d)(3)(iv)

    23. Comment: Some commenters, while believing that borrower 
cooperation is important in an enforcement action undertaken against a 
school or other related parties, were concerned that a borrower may be 
unable to take time away from work, home, or other activities to travel 
to multiple court appearances needed to assist the Secretary or his 
designee in the enforcement action. The commenters believed that a 
borrower should be required to assist in an enforcement action only to 
the extent practicable for the borrower.
    Discussion: It would not be in the interests of the Secretary or 
the taxpayer to make unreasonable demands on the borrower when pursuing 
an enforcement action. It would equally not be in the interests of the 
Secretary or the taxpayer to create an opportunity for a borrower to 
frustrate the Secretary's enforcement action by claiming that he or she 
was unavailable to testify. The use of the word ``cooperate'' in the 
regulations implies a process of two or more parties reasonably working 
together toward a common goal, and needs no further elaboration.
    Change:  None.

Section 682.402(d)(5)(i)

    24. Comment: Some commenters opposed the requirement that a 
borrower must assign to and relinquish in favor of the Secretary any 
right to a loan refund (up to the amount discharged) from any private 
or public fund. The commenters were particularly concerned with the 
effect they believed this requirement would have upon state tuition 
recovery funds. The commenters also believed that the Secretary has no 
statutory right to any claim against a state tuition recovery fund 
because the HEA fails to specifically provide the secretary with that 
right. The commenters noted that section 437(c)(2) of the HEA limits 
the assignment to the Secretary of a borrower's right to a loan refund 
only to the borrower's rights ``* * * against the institution and its 
affiliates and principals.'' The commenters contended that there is no 
indication that Congress intended the Secretary to have access to state 
funds or to require states to participate economically in closed school 
loan discharges. The commenters believed that the HEA's omission of 
state tuition recovery funds (or any other private or public fund) 
reflects the principal of statutory construction ``expressio unius est 
exclusio alterius'' (the expression of one thing is the exclusion of 
another).
    Discussion:  The Secretary believes that the statutory authority 
permitting the assignment to the Secretary of a borrower's right to 
recover a loan refund from the school, its affiliates, or principals 
clearly contemplates the recovery of refunds from private funds. A 
private fund is funded by parties who are directly or indirectly 
associated with the school, and the HEA intends that the Secretary 
shall have a legal claim to a private tuition recovery fund in the 
event of a school closure. Although they may be categorized as ``public 
funds,'' it is the Secretary's understanding that many state tuition 
recovery funds rely in whole, or in part, on private funding provided 
by a school, its owners, or affiliates. Therefore, the Secretary 
believes that a borrower's assignment of recovery rights against a 
public fund is applicable only to the extent that a state tuition 
recovery fund or any other such public fund contains private money. The 
public money in those funds should not be considered.
    Change:  The final regulations have been revised to exclude the 
portion of a public fund that represents public money.
    25. Comment:  Some commenters questioned why a borrower must assign 
to and relinquish in favor of the Secretary any right to a loan refund 
(up to the amount discharged) with respect to the enrollment agreement 
for the program for which the loan was received. The commenters 
believed that the assignment of a borrower's rights pursuant to the 
enrollment agreement would not gain anything for the Secretary. They 
were concerned that the borrower would be forced to surrender some 
rights (unspecified) unnecessarily, despite the statement in 
Sec. 682.402(d)(5)(iii) that permits the borrower (or student) to 
pursue legal and equitable relief regarding disputes arising from 
matters otherwise unrelated to the loan discharged.
    Discussion:  The requirement that the borrower must assign to and 
relinquish in favor of the Secretary any right to a loan refund (up to 
the amount discharged) does not preclude the borrower from pursuing 
legal action against the school or any related party with respect to 
the terms of the student's enrollment agreement with the school, or 
with respect to any other grievance the student may have against the 
school or those parties.
    Change:  None.

Section 682.402(d)(6)(i) and (ii)

    26. Comment: Some commenters believed it was confusing to link 
guaranty agency requirements to a date other than the actual date that 
a school closed.
    Discussion:  In some cases, a guaranty agency may not become aware 
of a school's closure until significantly after the date the school 
actually closed. Therefore, the only workable way to create timeframes 
for guaranty agencies to perform certain actions, such as notifying 
lenders to suspend collection efforts, would be to tie those timeframes 
to the date that the agency first became aware, or was notified by the 
Secretary, that a school had closed.
    Change: None.

Section 682.402(d)(6)(i)(C)

    27. Comment: Some commenters asked why August 29, 1994 was proposed 
as the effective date for this provision.
    Discussion: As a requirement for publishing the NPRM in the Federal 
Register, a specific date had to be used instead of a generic reference 
such as ``prior to the effective date of these regulations.'' 
Therefore, August 29, 1994 was the Secretary's estimation (made prior 
to the date the NPRM was published) of when the final regulations would 
be effective.
    Change: This date, and all other dates based on it, will be revised 
when the actual effective date is known.

Section 682.402(d)(6)(i)(D)

    28. Comment: Some commenters believed that the regulations should 
require a guaranty agency to provide loan-specific information to 
lenders so that lenders can more effectively suspend collection efforts 
against individuals with respect to loans made at closed schools. The 
commenters noted that a lender would not be able to identify a PLUS 
borrower if the guarantor notified the lender of the school code and 
closure date only.
    Discussion: The Secretary believes that because the loan 
application retained by the lender will have the name of the school and 
the period of enrollment for which the loan was made, the lender should 
be able to determine which individuals it should suspend collection 
efforts against once the lender is notified of the date a school 
closed. The Secretary encourages a guaranty agency to provide 
assistance to a lender that believes it is unable to identify the 
appropriate PLUS borrowers.
    Change: None.

Section 682.402(d)(6)(i)(E)

    29. Comment: Some commenters recommended that a guaranty agency be 
required to suspend collection activities on loans that it holds for 
borrowers who the agency believes may be eligible for a closed school 
loan discharge. The commenters noted that this is a requirement in the 
analogous regulation in Sec. 682.402(e)(6)(iv) and (v) with respect to 
false certification discharges.
    Discussion: The Secretary had intended that this requirement would 
be in the NPRM.
    Change: The regulations have been amended to require a guaranty 
agency to take the same actions with respect to a borrower who may be 
eligible for a closed school loan discharge as the agency is required 
to take under Sec. 682.402(e)(6)(iv) and (v) with respect to a borrower 
who may be eligible for a false certification discharge.
    30. Comment: Some commenters noted that Sec. 682.402(d)(6)(i) of 
the proposed regulations did not specify what a guaranty agency would 
be required to do upon the receipt of a complete application from a 
borrower whose loan is held by the guaranty agency. The commenters 
recommended that the procedures required under Sec. 682.402(d)(6)(ii) 
should also apply to Sec. 682.402(d)(6)(i).
    Discussion: The Secretary agrees that the requirement for notifying 
the borrower that he or she does not qualify for a loan discharge 
should be in both Sec. 682.402(d)(6)(i) and Sec. 682.402(d)(6)(ii).
    Change: The final regulations have been revised to add this 
requirement.

Section 682.402(d)(6)(i)(F)

    31. Comment: Some commenters objected to the requirement that a 
guaranty agency must consult with representatives of the closed school, 
the school's licensing agency, the accrediting agency, and other 
appropriate parties to learn the current address of borrowers whose 
loans are held by the guaranty agency, and who have been identified as 
potentially eligible for a closed school loan discharge. The commenters 
believed that the skiptracing efforts required under Sec. 682.410(b)(6) 
are more likely to be successful than contacts with the closed school 
and its related agencies.
    Discussion: The Secretary believes that special efforts should be 
made to contact borrowers who may be eligible for a closed school loan 
discharge, but whose current address is unknown. Therefore, the 
interests of fairness to all borrowers justifies the additional 
skiptracing efforts required by the regulations.
    Change: None.

Section 682.402(d)(6)(ii)(C)

    32. Comment: Some commenters believed that a guaranty agency should 
not be the party that mails a discharge application to a borrower 
identified under this subparagraph of the regulations. Instead, the 
commenters believed it would be more appropriate for the guaranty 
agency to mail the application package to the lender or servicer, who 
would then mail it to the borrower. The commenters believed that this 
change would assist the lender in determining when to cease collections 
and would also avoid any borrower confusion.
    Discussion: This provision of the proposed regulations requires a 
guaranty agency to ``* * * review its records of loans that it holds * 
* *'' (emphasis added). The lender is not the holder of loans held by 
the guaranty agency. The guaranty agency will mail the application 
package to a borrower whose loan is held by the agency. For loans held 
by a lender, the lender will mail the application package to the 
borrower.
    Change: None.

Section 682.402(d)(6)(ii)(D)

    33. Comment: Some commenters noted that, in the case of a loan held 
by the guaranty agency, the proposed regulations did not require the 
guaranty agency to inform a borrower that the borrower's loan 
obligation has been discharged.
    Discussion: The Secretary agrees with the commenters.
    Change: The final regulations have been revised to require a 
guaranty agency, in the case of a borrower whose loan is held by the 
agency, to send written notification to the borrower no later than 30 
days after the agency determines that the borrower has satisfied all of 
the conditions required for discharge of the loan.

Section 682.402(d)(6)(ii)(E)

    34. Comment: Some commenters believed it is counterproductive to 
set time limits that the borrower must meet if there is no penalty 
incurred by a borrower who fails to comply with those time limits. The 
commenters recommended a deletion of the prohibition against a borrower 
being denied a closed school loan discharge solely on the basis of the 
borrower's failure to meet any time limits set by the lender, guaranty 
agency, or Secretary.
    Discussion: There are no time-driven requirements with respect to 
the submission of information that a borrower must meet to qualify for 
a closed school loan discharge. Perhaps the commenters misinterpreted 
the lender's requirement in Sec. 682.402(d)(7)(ii) to resume collection 
efforts against a borrower who failed to submit, within 60 days, the 
written request and sworn statement necessary for loan discharge. 
However, that requirement only has the effect of reactivating 
collection efforts, and does not disqualify the borrower from later 
submitting a complete application for loan discharge.
    Change: None.

Section 682.402(d)(7)(i)

    35. Comment: Some commenters believed that a lender should not be 
permitted to suspend collection efforts against a borrower for whom the 
lender has received reliable information from a source other than a 
guaranty agency or the Secretary indicating that the borrower may be 
eligible for a closed school loan discharge.
    Discussion: The Secretary does not believe that either he or a 
guaranty agency will always be the first to know that a specific 
borrower may be eligible for a closed school loan discharge. For 
example, the school itself could notify the lender that it had closed, 
or a legal aid group working on behalf of students could notify the 
lender of students who it believed were eligible. The Secretary 
believes that it would be in the best interests of the borrower to 
permit a lender to exercise its judgment concerning the reliability of 
the sources of information it receives.
    Change: None.

Section 682.402(d)(7)(ii)

    36. Comment: Some commenters believed that a lender that resumes 
collection activity against a borrower who fails to submit the 
documentation required for a closed school loan discharge should be 
required to grant forbearance to the borrower to absolve the borrower 
of any delinquency status existing on the loan, including delinquency 
that occurred before the date the lender suspended collection activity. 
The commenters believed that the borrower's delinquency is generally 
the result of the borrower's inability to pay due to circumstances 
caused by the school.
    Discussion: The Secretary believes there is no reason to conclude 
that a borrower who did not qualify for a closed school loan discharge 
should, nevertheless, be presumed to have been harmed by the school to 
the extent that the borrower could not comply with the terms of his or 
her repayment agreement with the lender.
    Change: None.
    37. Comment: Some commenters believed the 60-day administrative 
forbearance period permitted while a lender awaited the borrower's 
submission of documentation is too short. The commenters believed that 
up to 90 days would be necessary to address the borrower's questions 
and for the borrower to submit documentation to the lender.
    Discussion: A 60-day period is the standard administrative 
forbearance period permitted for purposes of awaiting documentation for 
other purposes e.g., death, disability, or bankruptcy cancellations. 
The Secretary believes that 60 days is more than adequate for the 
borrower to submit the request for discharge and sworn statement for a 
closed school discharge.
    Change: None.

Section 682.402(d)(7)(iii)

    38. Comment: Some commenters objected to the requirement that a 
payment received by the lender from or on behalf of the borrower after 
the lender filed a claim on the loan with the guaranty agency must be 
forwarded to the guaranty agency within 30 days of its receipt. The 
commenters contended that the guaranty agency is not the legal holder 
of the loan until it pays a claim, and therefore has no right to the 
payment.
    Discussion: The Secretary sees no benefit in having the borrower's 
payment in the possession of the party that has forwarded other loan 
related documents to the guaranty agency. The Secretary is aware of at 
least two ways for a lender to forward the borrower's payment to a 
guaranty agency so that it can be applied to the borrower's outstanding 
loan balance: the lender could cash the borrower's check and forward 
its own check payable to the guaranty agency on behalf of the borrower, 
or the lender could forward the borrower's original check to the agency 
and the agency could hold the check until it paid the lender's claim.
    Change: None.

Section 682.402(d)(7)(iv)

    39. Comment: Some commenters believed that in the case of a claim 
filed by a lender, the guaranty agency, not the lender, should notify 
the borrower that a closed school loan discharge has been granted.
    Discussion: The borrower had an obligation to repay the loan to the 
lender. The borrower has no obligation to repay the loan (it has been 
discharged) to the guaranty agency. The borrower should be informed by 
the party to whom the borrower had been obligated (the lender, if the 
claim was filed by the lender, or the guaranty agency, if the 
borrower's loan was held by the guaranty agency) that the borrower's 
obligation to repay the loan to that party has been discharged.
    Change: None.
    40. Comment: Some commenters noted that the proposed regulations 
did not specify the actions that a lender must take when it is informed 
by a guaranty agency that a borrower's request for a closed school 
discharge has been denied.
    Discussion: The Secretary had intended that the procedures that 
applied in the case of a false certification request would apply to a 
closed school claim also.
    Change: The final regulations have been revised to specify in 
Sec. 682.402(d)(7)(v) the responsibilities of a lender when it is 
notified by a guaranty agency that a borrower's request for a closed 
school discharge has been denied.

Section 682.402(e)  False Certification by a School of a Student's 
Eligibility to Borrow

    41. Comment: Some commenters requested the Secretary to 
specifically state in the regulations what the effect of a false 
certification discharge would be on a school's cohort default rate.
    Discussion: This issue would be more appropriately addressed in the 
definition of a school's cohort default rate in 34 CFR Part 668. While 
the Secretary does not believe that a school that falsely certified a 
borrower's eligibility should be allowed to benefit from that false 
certification by having its default rate reduced as a consequence, he 
is studying this issue to determine the appropriate treatment of such 
cases, and will make a decision when information concerning actual 
cases of false certification discharges is available.
    Change: None.

Section 682.402(e)(1)

    42. Comment: Some commenters believed that a parent should not have 
a Federal PLUS Loan discharged if the school falsely certified the 
eligibility of the student for whom the parent obtained the PLUS Loan. 
The commenters believed that only loans obtained directly by the 
student should be discharged under this section.
    Discussion: Section 437(c)(1) of the HEA was amended by (Pub. L. 
103-208) to permit a parent to receive a discharge of a PLUS Loan if 
the school falsely certified the eligibility of the student for whom 
the parent obtained the PLUS Loan.
    Change: None.
    43. Comment: Some commenters requested clarification of whether the 
false certification discharge applied to a loan that was partially 
disbursed on or after January 1, 1986.
    Discussion: The Secretary has been given authority pursuant to 
section 437(c)(1) of the HEA to discharge the borrower's liability on a 
loan ``* * * received, on or after January 1, 1986 * * *'' if the 
student's eligibility to borrow was falsely certified by the school. 
For purposes of the false certification discharge, the Secretary will 
consider the borrower's entire loan eligible if any part of it was 
disbursed by the lender on or after January 1, 1986.
    Change: The final regulations have been revised to incorporate this 
clarification.
    44. Comment: Some commenters objected to the restriction that a 
false certification discharge would only apply if the false 
certification was made by an ``eligible'' institution. The commenters 
believed that the HEA intended the false certification discharge 
provision to apply to certifications made by both ``eligible'' and 
``ineligible'' schools.
    Discussion: This was discussed in detail on page 2490 of the NPRM 
published on January 14, 1994 (FR 59, No. 10). The Secretary has been 
given authority pursuant to section 437(c)(1) of the HEA to discharge 
the borrower's liability on a loan if the student's eligibility to 
borrow ``* * * was falsely certified by the eligible institution * * *. 
'' (emphasis added.) The statute prescribes the scope of the discharge 
for false certification under section 437(c) as extending to those 
instances in which the ``student's eligibility to borrow under this 
part was falsely certified by the eligible institution * * *.'' 20 
U.S.C. 1087(c)(1).
    The commenters proposal would have the effect of ignoring this 
language, which on its face limits relief to individuals whose personal 
eligibility status was falsely certified, rather than to those who 
contend that they were ineligible because the school at which they were 
enrolled was not an ``eligible institution.'' This limitation embodies 
a congressional choice to exclude those grounds that were really 
challenges to the eligibility status of the school itself, and nothing 
in the language or the legislative history suggests that this 
limitation is inadvertent or unintended. Moreover, institutional 
eligibility rests directly and indirectly on a host of qualifications. 
The lack of one or more of these qualities in a school mistakenly 
determined to be eligible by the Department would, under the 
commenters' view, suffice to make eligible for discharge all borrowers 
enrolled at the institution while the deficiency persisted--a period 
that could stretch over several years--regardless of whether that 
deficiency related to the adequacy of the training and skills provided 
to the borrower.
    The text itself and the legislative history show no intention of 
such a broad and costly view of the discharge provision. The Secretary 
does not, however, consider borrowers who attended schools that 
allegedly lacked eligibility to be barred by that alleged deficiency 
from relief under the false certification provision, but merely that 
the falsity on which they would seek relief must relate to a 
certification about their personal eligibility, and not that of the 
allegedly ineligible institution. The Secretary does not have the 
authority to discharge a loan that was made to a borrower for 
attendance at an ineligible school.
    Change: None.

Section 682.402(e)(2)(ii)

    45. Comment: Some commenters noted that lenders and guaranty 
agencies generally are not required to keep loan records longer than 
five years after the date a loan is paid in full. In light of the 
borrower's statutory right to a false certification discharge for loans 
received on or after January 1, 1986, the commenters recommended that 
the regulations prescribe the procedures to be followed by lenders and 
guaranty agencies who learn of borrowers who claim to have repaid their 
loans in full more than five years ago, but for whom the lender or 
guaranty agency has no existing records.
    Discussion: In these cases, the Secretary expects the lender and 
guaranty agency will examine records reasonably available to them from 
other sources. If the lender or guaranty agency are unable to locate 
records of a loan paid in full more than five years ago, it would be 
the responsibility of a borrower who requests a loan discharge to 
provide the required documentation needed for a discharge of the loan.
    Change: None.

Section 682.402(e)(2)(iv)

    46. Comment: Some commenters recommended that the regulations 
require the holder of a loan discharged under the false certification 
discharge provision to forward the original promissory note marked 
``canceled'' or ``satisfied in full'' to the borrower within 30 days 
after discharging the borrower's loan obligation.
    Discussion: The discussion following comment 16 also applies to a 
false certification discharge.
    Change: Section 682.414(a)(2) has been amended to add a false 
certification discharge.

Section 682.402(e)(3)

    47. Comment: Some commenters recommended that the Secretary 
prescribe a standardized form for the false certification discharge 
application and associated sworn statement from the borrower.
    Discussion: The discussion following comment 17 also applies to a 
false certification discharge.
    Change: None.

Section 682.402(e)(3)(ii)(B)

    48. Comment: Some commenters objected to the proposed regulation 
that would limit a false certification discharge to only those cases 
where a student admitted to a school on the basis of a purported 
ability to benefit from the school's training did not meet the 
applicable requirements for admission on the basis of ability to 
benefit. The commenters believed that the HEA did not envision any 
restriction as to what would constitute a school's false certification 
of a student's eligibility to borrow under the FFEL Program. Other 
commenters believed that some restrictions should apply, and proposed 
additional acts and certifications of a school that should be construed 
as false certifications. Some commenters were pleased with the 
regulations as written, and recommended no changes.
    Discussion: The additional acts and certifications by a school that 
the commenters proposed were the same as those discussed in the NPRM 
published on January 14, 1994 (FR 59, No. 10). For the reasons stated 
on pages 2488-2490 of the NPRM, and for the additional reasons 
discussed earlier in response to comment 5, the Secretary believes that 
the term ``falsely certified,'' when used for purposes of a false 
certification discharge, applies to cases involving a school's invalid 
certification that a student had the ability to benefit from the 
training offered by the school, or cases where the school signed a 
person's name on the loan application or the promissory note, and 
certain cases where the school wrongfully endorsed a person's name on 
the loan check, or the borrower's authorization for electronically 
transferring loan proceeds.
    The Secretary believes that if the school rather than the student 
signed a person's name on the loan application or the promissory note, 
the putative borrower is not aware that a loan was being applied for 
and had no intention of entering into an agreement to repay a loan. 
Therefore, it is reasonable to conclude that a borrower who did not 
sign the application or promissory note could not have completely 
understood that a check later presented for endorsement would represent 
the proceeds of such a loan, and would not have intended to signify by 
endorsing such a check or authorization to release funds that he or she 
agreed to become obligated to repay a loan. A school that signed a 
person's name on a precursory document (the loan application or the 
promissory note) effectively prevented the person from being fully 
aware of the relationship normally apparent to a borrower who first 
completes an application for a loan and later receives a loan 
disbursement as a result of that application.
    The Secretary understands that in some cases, an unscrupulous 
school may obtain the valid signature of a borrower on the loan 
application or promissory note and will later sign the student's name 
on the loan check or the authorization for electronic funds transfer. 
However, despite these actions, a student could have materially 
benefitted from the loan proceeds by a reduction of the charges owed to 
the school or by otherwise receiving proceeds of the loan delivered by 
the school. The Secretary believes that a person who signed the loan 
application and promissory note should be considered an individual who 
was aware that he or she requested a loan. Therefore, if the borrower 
(or student on whose behalf a parent borrowed a PLUS Loan) was enrolled 
at the school during the period of time that the loan (or an 
installment thereof) was intended to cover, and someone other than the 
borrower signed the borrower's name on a loan check or authorization 
for electronic funds transfer, causing the loan proceeds to be applied 
to the student's account to satisfy a liability for tuition and other 
charges owed to the school, or to be delivered to the borrower, it is 
reasonable to conclude that the borrower by that action received the 
proceeds of the loan he or she had applied. Because that borrower 
obtained the benefits of the loan disbursement, even though the 
borrower realized that he or she did not sign the loan check or the 
authorization for electronic funds transfer, that borrower would be 
legally obligated with respect to that disbursement. In this case, the 
Secretary does not believe that a loan discharge was contemplated by 
Congress. However, if it is determined that the borrower or student did 
not benefit from the loan proceeds, the Secretary believes that the 
borrower should be relieved of any obligation to repay the amount of 
the loan proceeds transmitted as a result of a falsely signed loan 
check or authorization for electronic funds transfer, and that such 
relief can be included in the procedures adopted for discharges under 
section 437(c) of the HEA.
    The Secretary is concerned with the plight of students who have 
been misled by unscrupulous schools, or who have been harmed by a 
school's failure to fulfill its obligations (such as the payment of a 
refund to the student). Practices of this sort are violations of 34 CFR 
part 668, subpart F, which governs misrepresentations by schools. The 
Secretary will take a broad range of sanctions against schools to 
enforce these provisions. The Secretary also notes that recent changes 
made to Title IV, Part H of the HEA will reduce the incidence of school 
malfeasance. Further, the Secretary will determine if relief can be 
provided to such students in future regulations or legislative 
amendments. However, not all cases of school malfeasance can currently 
be classified as a school's ``false certification of a student's 
eligibility to borrow'' that would permit a borrower to receive a loan 
discharge under the HEA. For example, although misrepresentations 
regarding the school's educational program or its financial or 
administrative capability, including the school's placement services or 
the quality of the school's facilities, faculty, or equipment, may well 
have induced the student to enroll at the school, those representations 
are not part of the process of ``certification'' of the student's 
eligibility to borrow.
    Change: The final regulations have been revised to permit false 
certification discharges in cases where the school, without the 
authorization of the individual, signed a person's name on the loan 
application or the promissory note. In addition, the regulations 
provide relief where the school, without borrower authorization, 
endorsed the borrower's name on a loan check or authorization for 
electronic funds transfer, providing that the student did not receive, 
directly or indirectly, the benefits of the loan proceeds disbursed by 
that loan check or authorization for electronic funds transfer that was 
signed by the school. The regulations will include provisions for a 
borrower to appeal to the Secretary if the borrower disagrees with a 
guaranty agency's decision that the signatures in question were signed 
by the borrower.

Section 682.402(e)(3)(ii)(C)

    49. Comment: Some commenters believed it was unnecessary for the 
student to certify that he or she was certified by the school on the 
application for the loan as an eligible student. The commenters 
believed that this information is seldom known to students because they 
may never see or understand what the school wrote on the application. 
The commenters noted that the student could generally deduce that the 
school had made such a certification by the fact that a lender made the 
loan, but believe that the same deduction could just as easily be made 
by a guaranty agency or the Secretary.
    Discussion: The Secretary agrees with the commenters.
    Change: The final regulations have been revised to delete this 
requirement.

Section 682.402(e)(3)(ii)(D)

    50. Comment: Some commenters believed there is no statutory 
justification for denying a false certification discharge if the 
student was able to obtain employment in the occupation for which the 
student's program was intended to provide training.
    Discussion: In the case of a discharge based on a school's 
defective certification that the student had the ability to benefit 
from the school's training, this was discussed in detail on pages 2488-
2490 of the NPRM published on January 14, 1994 (FR 59, No. 10). The 
Secretary believes that the ability of a student to obtain employment 
in the occupation for which the student's program was intended to 
provide training is evidence that the student was able to benefit from 
the education received, even though the school may have improperly 
tested, or failed to test, the student's ability to benefit from the 
school's training.
    Change: None.
    51. Comment: Some commenters questioned what would constitute a 
student's ``reasonable attempt to obtain employment'' and questioned 
whether it would be fair to expect the student to be able to document, 
or even remember such attempts that may have been made many years ago.
    Discussion: In the absence of evidence to the contrary, a student 
who states that he or she made a ``reasonable attempt to obtain 
employment'' will be presumed to have done so. The student is simply 
being asked to sign a statement to that effect.
    Change: None.

Section 682.402(e)(3)(iv)

    52. Comment: Some commenters, while believing that borrower 
cooperation is important in an enforcement action undertaken against a 
school or other related parties, were concerned that a borrower may be 
unable to take time away from work, home, or other activities to travel 
to multiple court appearances needed to assist the Secretary or his 
designee in the enforcement action. The commenters believed that a 
borrower should be required to assist in an enforcement action only to 
the extent practicable for the borrower.
    Discussion: The discussion following comment 23 also applies to a 
false certification discharge.
    Change: None.

Section 682.402(e)(5)(i)

    53. Comment: Some commenters opposed the requirement that a 
borrower must assign to and relinquish in favor of the Secretary any 
right to a loan refund (up to the amount discharged) from any private 
or public fund. The commenters were particularly concerned with the 
effect they believed this requirement would have upon state tuition 
recovery funds. The commenters also believed that the Secretary has no 
statutory right to any claim against a state tuition recovery fund 
because the HEA fails to specifically provide the secretary with that 
right. The commenters noted that the section 437(c)(2) of the HEA 
limits the assignment to the Secretary of a borrower's right to a loan 
refund only to the borrower's rights ``* * * against the institution 
and its affiliates and principals.'' The commenters contend that there 
is no indication that Congress intended the Secretary to have access to 
state funds or to require states to participate economically in false 
certification discharges. The commenters believed that the HEA's 
omission of state tuition recovery funds (or any other private or 
public fund) reflects the principal of statutory construction 
``expressio unius est exclusio alterius'' (the expression of one thing 
is the exclusion of another).
    Discussion: The discussion following comment 24 also applies to a 
false certification discharge.
    Change: The final regulations have been revised to exclude the 
portion of a public fund that represents public money.
    54. Comment: Some commenters questioned why a borrower must assign 
to and relinquish in favor of the Secretary any right to a loan refund 
(up to the amount discharged) with respect to the enrollment agreement 
for the program for which the loan was received. The commenters 
believed that the assignment of a borrower's rights pursuant to the 
enrollment agreement would not gain anything for the Secretary. They 
were concerned that the borrower would be forced to surrender some 
rights (unspecified) unnecessarily, despite the statement in 
Sec. 682.402(e)(5)(iii) that permits the borrower (or student) to 
pursue legal and equitable relief regarding disputes arising from 
matters otherwise unrelated to the loan discharged.
    Discussion: The discussion following comment 25 also applies to a 
false certification discharge.
    Change: None.

Section 682.402(e)(6)(i)

    55. Comment: Some commenters objected to the requirement that a 
guaranty agency must review records available from sources other than 
the guarantor after receiving a false certification claim from a lender 
or a discharge request from a borrower. The commenters believed this 
requirement is logistically unrealistic and unnecessarily complicates 
and delays the processing of a false certification claim.
    Discussion: The Secretary believes that the guaranty agency is in 
the best position to consult with other knowledgeable parties 
concerning a school's alleged false certification of a student's 
eligibility to borrow. The Secretary believes that the 90-day time 
period allows sufficient time for an agency to examine the lender's 
false certification claim in light of the information available to the 
agency and to either pay or return the claim to the lender.
    Change: None.

Section 682.402(e)(7)(ii)

    56. Comment: Some commenters believed that a lender that resumes 
collection activity against a borrower who fails to submit the 
documentation required for a false certification discharge should be 
required to grant forbearance to the borrower to absolve the borrower 
of any delinquency status existing on the loan, including delinquency 
that occurred before the date the lender suspended collection activity. 
The commenters believed that the borrower's delinquency is generally 
the result of the borrower's inability to pay due to circumstances 
caused by the school.
    Discussion: The discussion following comment 36 also applies to a 
false certification discharge.
    Change: None.

Section 682.402(e)(7)(iii)

    57. Comment: Some commenters objected to the requirement that a 
payment received by the lender from or on behalf of the borrower after 
the lender filed a claim on the loan with the guaranty agency must be 
forwarded to the guaranty agency within 30 days of its receipt. The 
commenters contended that the guaranty agency is not the legal holder 
of the loan until it pays a claim, and therefore has no right to the 
payment.
    Discussion: The discussion following comment 38 also applies to a 
false certification discharge.
    Change: None.

Section 682.402(e)(7)(iv)

    58. Comment: Some commenters believed the guaranty agency, not the 
lender, should notify the borrower that a false certification discharge 
has been granted.
    Discussion: The discussion following comment 39 also applies to a 
false certification discharge.
    Change: None.

Section 682.402(l)(3)

    59. Comment: Some commenters believed that any payments received by 
a guaranty agency from or on behalf of a borrower whose loan obligation 
has been discharged should be returned to the borrower or the party who 
made the payment.
    Discussion: If a borrower, or a borrower's representative remits a 
payment for a loan obligation that has been discharged, even though he 
or she previously has had the payment returned with a notice that the 
obligation has been discharged and no further payments are required, 
the Secretary believes it is reasonable to conclude that a subsequent 
payment from that individual is an indication that he or she has 
expressed a desire to repay the discharged loan. The Secretary does not 
believe that the borrower's (or his or her representative's) desire to 
repay the loan should be frustrated or the taxpayer denied the recovery 
of such payments.
    Change: None.

Section 682.410(b)(6)(i)

    60. Comment: Some commenters believed the proposed regulations 
would prohibit a guaranty agency from attempting an annual IRS offset 
against a borrower if the agency had initiated wage garnishment 
procedures against the borrower.
    Discussion: Under the proposed regulations, a guaranty agency was 
required to attempt an annual IRS offset against a borrower who owed a 
defaulted loan if the agency had not attempted to garnish the 
borrower's wages. Conversely, if an agency had initiated wage 
garnishment procedures against the borrower, it was not required to 
attempt an annual IRS offset, but could do so if it decided that it 
would be an appropriate action to take in addition to wage garnishment. 
Based on Public Law 102-589, the Secretary will now require a guaranty 
agency to attempt an annual IRS tax refund offset against both 
categories of borrowers.
    Change: The final regulations have been revised to incorporate this 
requirement.

Section 682.410(b)(6)(vii)(B)

    61. Comment: Some commenters noted that the Secretary's guidance to 
guaranty agencies in July 1993 concerning Public Law 102-589 explained 
that the law no longer required the Secretary to hold a loan to be 
collected by IRS offset, therefore, a guaranty agency was no longer 
required to assign a loan temporarily to the Secretary in order to 
allow the Secretary to collect the loan by federal income tax refund 
offset. The commenters recommended that references to such assignments 
be deleted from the regulations.
    Discussion: The Secretary agrees with the commenters.
    Change: Sections 682.410(b)(5)(vi)(H) and (L), 
Sec. 682.410(b)(6)(i), (iii), (iv)(B), (vii)(A)-(D), (viii)(A), (xii), 
and Sec. 682.410(b)(7(iv)(B) of the final regulations have been 
revised, renumbered, or deleted to remove references to such 
assignments.

Section 682.410(b)(10)(i)

    62. Comment: Some commenters objected to the requirement that a 
guaranty agency must follow the procedures prescribed in the 
regulations if it decided to garnish the wages of a borrower who owed a 
defaulted loan. The commenters believed that a guaranty agency that 
possessed authority under state law to effect a garnishment should be 
permitted to garnish the borrower's wages under the state's wage 
garnishment procedures.
    Discussion: The procedures that a guaranty agency must follow when 
attempting to garnish a borrower's wages are mandated by section 488A 
of the HEA. Those procedures supersede any state garnishment laws that 
do not comply with the requirements of the national wage garnishment 
authority established by the HEA.
    Change: None.
    63. Comment: Some commenters asked if the wage garnishment 
procedures would apply against borrowers and employers who were subject 
to tribal laws. The commenters noted that section 488A(a) of the HEA 
does not refer to tribal laws, but simply states that the garnishment 
provisions of the HEA apply ``* * *  (N)otwithstanding any provision of 
State law * * *.'' The commenters observed that because of the 
difficulty and low success ratio of obtaining a judgment through tribal 
courts, most creditors no longer even make the attempt.
    Discussion: Section 488A(a) of the HEA preempts state laws that 
might prohibit garnishment to collect student loan debts; it does not 
preempt such laws of a foreign nation. Certain tribes of American 
Indians are considered to have the same relationship with the United 
States as do foreign nations. Therefore, the laws of those tribes are 
not preempted by the wage garnishment provisions of the HEA.
    Change: None.

Section 682.410(b)(10)(i)(A)

    64. Comment: Some commenters believed the regulations should 
specify that the amount of a borrower's wages that may be garnished is 
the lesser of 10 percent of the borrower's disposable pay or the amount 
allowed by 15 U.S.C. 1673.
    Discussion: The Secretary agrees with the commenters.
    Change: The final regulations have been revised to incorporate this 
clarification.
    65. Comment: Some commenters believed the regulations should 
specify the deductions from a borrower's wages that would take 
precedence over a wage garnishment order.
    Discussion: Only a borrower's disposable pay is subject to 
garnishment. Since ``disposable pay'' is defined as that part of a 
borrower's compensation from an employer remaining after the deduction 
of any amounts required by law to be withheld, any such deductions 
``take precedence'' and will affect the amount recovered from the 
borrower through garnishment. The Secretary has no authority to modify 
the withholding orders issued by other entities legally empowered to 
garnish the borrower's pay for other purposes.
    Change: None.

Section 682.410(b)(10)(i)(D)

    66. Comment: Some commenters believed that a guaranty agency should 
be permitted to automatically garnish the wages of a borrower who 
failed to maintain the terms of a repayment agreement with the guaranty 
agency. The commenters believed that it is unnecessary to provide 
further notice or appeal opportunities to a borrower who has broken the 
terms of the repayment agreement. Similarly, other commenters believed 
that a guaranty agency should be permitted to proceed with wage 
garnishment against a borrower who has defaulted on a loan without 
being required to offer a repayment opportunity to the borrower. The 
commenters believed that a borrower who has defaulted on a loan has 
already had numerous opportunities to repay the loan. Some commenters 
suggested that a borrower be limited to only one repayment opportunity.
    Discussion: All attempted garnishments must be preceded by a notice 
to the borrower of the guaranty agency's intention to initiate 
garnishment proceedings and an explanation of the borrower's rights, 
including the right to a hearing. The due process protection afforded 
the borrower under the HEA's garnishment rules renders previous 
repayment arrangements between the borrower and the agency irrelevant. 
Each garnishment action must be able to stand on its own as far as 
compliance with the requirements of the statute and regulations is 
concerned.
    Change: None.
    67. Comment: Some commenters believed that the wage garnishment 
provisions of the HEA applied only to a borrower who entered into a 
repayment agreement with the guaranty agency and then later failed to 
comply with the terms of that agreement. The commenters believed there 
is no statutory authority to garnish the wages of a borrower simply 
because the borrower has defaulted on the loan obligation and has not 
made arrangements with the guaranty agency to repay the debt.
    Discussion: The HEA permits a guaranty agency to garnish the pay of 
a borrower who ``* * * is not currently making required repayment under 
a repayment agreement * * *.'' A borrower who owes a defaulted loan and 
has simply refused to make any repayment arrangement with a guaranty 
agency would certainly fit that description. Otherwise, borrowers could 
shield themselves from wage garnishment by refusing to enter into 
agreements to repay their loans to guaranty agencies. The HEA and the 
regulations are not designed to provide incentives to borrowers who 
refuse to repay their debts.
    Change: None.
    68. Comment: Some commenters believed that the terms of the 
repayment agreement opportunity that a guaranty agency must offer a 
borrower prior to wage garnishment must be similar to the terms offered 
to a borrower under the loan rehabilitation program, that is, the 
borrower may not be required to pay more than a reasonable and 
affordable amount.
    Discussion: Section 488A(a)(4) of the HEA states that an individual 
subject to wage garnishment shall be provided an opportunity to enter 
into a written agreement with the guaranty agency under terms agreeable 
to the guaranty agency. Unlike other areas of the HEA that contain 
provisions mandating that the borrower's payment be ``reasonable and 
affordable,'' the wage garnishment section of the HEA contains no such 
requirement. The Secretary believes this is because Congress realized 
that a borrower who has not repaid his or her loan will have had 
numerous opportunities to have done so prior to the initiation of a 
wage garnishment proceeding. For example, the borrower will have 
already declined the opportunity to make payments under the loan 
rehabilitation program.
    However, since it would make no sense to demand a payment amounts 
from a borrower who could document that he or she was unable to pay 
those amounts, the Secretary encourages a guaranty agency, even at this 
late point, to attempt to accommodate a borrower who expresses a 
willingness to repay the loan but who is unable to do so under the 
terms proposed by the guaranty agency because of a documented hardship 
explained by the borrower.
    Change: None.

Section 682.410(b)(10)(i)(E)

    69. Comment: Some commenters believed a guaranty agency should be 
permitted to include a notice to the borrower about wage garnishment 
with the agency's other notices to the borrower about hearing 
opportunities available to the borrower with respect to IRS offset 
procedures and credit bureau reporting. The commenters recommended that 
a guaranty agency not be required to provide the borrower with an 
opportunity for a hearing more than once every 12 months. The 
commenters also believed that if the borrower had received a hearing 
and unsuccessfully contested the existence or the amount of the debt, 
the borrower need not be provided another hearing on those issues.
    Discussion: As permitted under Sec. 682.410(b)(5)(vi)(H), a 
guaranty agency may send a combined notice, or separate notices to a 
borrower concerning credit bureau reporting, IRS offset, wage 
garnishment, and any other enforcement action that may be taken to 
collect the debt. However, each garnishment proceeding taken against a 
borrower must comply with the notice and due process requirements that 
are unique to wage garnishment.
    Change: None.

Section 682.410(b)(10)(i)(F)

    70. Comment: Some commenters objected to the requirement that a 
guaranty agency must sue an employer who fails to comply with a 
garnishment order. The commenters note that section 488A(a)(6) of the 
HEA provides an option by stating that a guaranty agency ``* * * may 
sue the employer.'' Other commenters recommended that the regulations 
permit a guaranty agency to decline to sue an employer who fails to 
comply with the wage garnishment order if the agency can demonstrate 
that the expected cost and probability of success of the litigation did 
not justify a lawsuit.
    Discussion: The statutory language provides the authority for a 
guaranty agency to sue the employer. A guaranty agency is not required 
to garnish the wages of borrowers who owe defaulted loans, but if an 
agency chooses to do so, it must follow the garnishment procedures 
prescribed in these regulations. In order to protect the interests of 
borrowers and taxpayers, the Secretary believes a guaranty agency 
should make use of the full extent of the statutory authority available 
to it under the HEA to compel an employer to comply with a wage 
garnishment order. The Secretary cannot envision any realistic 
probability that an agency would be unsuccessful in its suit against an 
employer that was in clear violation of the garnishment order. Given 
the expectation of such success, the Secretary believes the agency's 
litigation efforts and costs would be minimal. Accordingly, this would 
be part of the agency's normal performance of its role of ensuring the 
maximum collection of defaulted loans, and the Secretary may refuse to 
make reinsurance payments, or may recover reinsurance payments already 
made to an agency that fails to sue an employer that was in clear 
violation of the garnishment order.
    Change: None.
    71. Comment: Some commenters did not believe that a self-employed 
borrower should be considered an ``employer'' for wage garnishment 
purposes. The commenters believed that garnishment should be considered 
a proceeding to seize the wages of a debtor paid by another party.
    Discussion: The Secretary agrees with the commenters.
    Change: The reference to a self-employed borrower in 
Sec. 682.410(b)(10)(i)(F) has been deleted from the final regulations.

Section 682.410(b)(10)(i)(G)

    72. Comment: Some commenters were opposed to the qualified 
prohibition in the regulations that prevents a guaranty agency from 
garnishing the wages of a borrower whom it knows has been involuntarily 
separated from employment until the borrower has been reemployed 
continuously for at least 12 months. The commenters believed that the 
proposed regulations appear to condone garnishment as long as the 
guarantor is not aware that the borrower has been involuntarily 
separated from employment and has not been reemployed continuously for 
at least 12 months. They believed that the HEA does not permit 
garnishment under any circumstances until a borrower who has been 
involuntarily separated from employment has been reemployed 
continuously for at least 12 months.
     Discussion: The borrower will be informed of his or her rights 
with respect to wage garnishment in the notice sent to the borrower at 
least 30 days before the initiation of garnishment proceedings. That 
notice will include information about the exception provided for a 
borrower who has been involuntarily separated from employment.

    Note: All garnishments initiated by guaranty agencies on or 
after March 1, 1994 must comply with the standardized administrative 
wage garnishment procedures approved by the Secretary on February 1, 
1994. As part of those standardized procedures, a guaranty agency 
must send a notice to the borrower prior to initiating garnishment. 
The standardized notice fully explains the exception for 
involuntarily separated borrowers and includes a simple form for the 
borrower to fill out to request this exception.

    If a borrower who meets the conditions necessary for this exception 
wishes to take advantage of it, the borrower will be able to do so 
quite easily, either before the garnishment proceedings are initiated, 
or during the hearing available to the borrower. If the borrower 
chooses not to divulge information concerning an involuntary 
separation, and there is no reasonable expectation that the guaranty 
agency should have known about the borrower's undisclosed involuntary 
separation, the Secretary believes that a resulting garnishment of the 
borrower's wages should not be invalidated if the borrower later 
contests the garnishment on those grounds or if the agency later learns 
that the borrower would have been eligible for the exception.
    Change: None.

Section 682.410(b)(10)(i)(I)

    73. Comment: Some commenters believed the withholding notice sent 
to a borrower's employer should inform the employer that the HEA 
prohibits wage garnishment if the borrower has not been reemployed 
continuously for at least 12 months.
    Discussion: All information relating to the borrower's rights will 
be disclosed to the borrower. The borrower's employer needs to know 
only that information necessary for the employer to comply with the 
withholding order.
    Change: None.

Section 682.410(b)(10)(i)(J)

    74. Comment: Some commenters believed that, to avoid a 
misunderstanding, the regulations should state that the location of a 
borrower's wage garnishment hearing is established by the guaranty 
agency.
    Discussion: The Secretary agrees with the commenters.
    Change: The final regulations have been revised to incorporate this 
clarification.
    75. Comment: Some commenters believed that a wage garnishment 
hearing held by a guaranty agency should be a taped hearing held in a 
location accessible to the borrower. The commenters also believed that 
the borrower should be given the right to appeal any adverse decision 
of the guaranty agency to the Secretary, and the borrower should be 
informed of that right.
    Discussion: The regulations require a guaranty agency to provide a 
hearing by a telephone conference with a borrower who requests that 
type of hearing. All telephonic costs associated with the hearing will 
be the responsibility of the guaranty agency. The Secretary believes 
this option reasonably accommodates borrowers who either choose to or 
who are unable to attend an in-person hearing with the guaranty agency. 
The Secretary sees no reason to compel a guaranty agency to tape the 
hearing, but would not object if an agency wished to do so. The 
Secretary does not intend to second-guess an agency's decisions about 
wage garnishments on a case-by-case basis. However, if the Secretary 
learns that a guaranty agency has failed to comply with procedures 
prescribed by the HEA and the regulations, or has failed to adhere to 
the standardized procedures required of all agencies (see note included 
in the discussion for Sec. 682.410(b)(10)(i)(G) above), the Secretary 
will take appropriate action.
    Change: None.

Section 682.410(b)(10)(i)(K)

    76. Comment: Some commenters believed that the regulations should 
clarify that, absent evidence to the contrary, the borrower shall be 
deemed to have received the notice of intent to garnish five days after 
its mailing date. The commenters believed this would prevent disputes 
about the date the borrower received the notice.
    Discussion: The Secretary agrees with the commenters.
    Change: The final regulations have been revised to incorporate this 
clarification in this paragraph, and the associated paragraph 
682.410(b)(10)(i)(L).

Section 682.410(b)(10)(i)(L)

    77. Comment: Some commenters opposed the requirement that a 
guaranty agency must provide a hearing to a borrower whose written 
request for the hearing is received later than 15 days after the 
borrower received a notice of withholding. The commenters believed 
there is no statutory support for any exception to what they perceive 
to be a rigid 15-day deadline for a borrower to make such a request.
    Discussion: The commenters are incorrect. Section 488A(b) of the 
HEA specifically requires a guaranty agency to provide a hearing upon a 
borrower's request, even if the borrower's request is not made timely. 
Although the agency is not required to delay the issuance of a 
withholding order to the borrower's employer, the agency could do so, 
as explained in comment 78, if the agency believes a delay would be 
appropriate.
    Change: None.
    78. Comment: Some commenters believed that even though a borrower's 
written request for a hearing is submitted late, there could 
nevertheless be valid reasons why the guaranty agency should not issue 
a withholding order to the borrower's employer. The commenters believed 
that this section of the regulations conflicted with 
Sec. 682.410(b)(10)(i)(H) which permits a guaranty agency to delay or 
cancel the withholding order if the agency receives information that it 
believes justifies the delay or cancellation.
    Discussion: The Secretary agrees with the commenters.
    Change: The final regulations have been revised to permit a 
guaranty agency to exercise this option.

Section 682.410(b)(10)(i)(M)

    79. Comment: Some commenters believed that the regulations should 
clarify that guaranty agencies may use alternative types of hearing 
examiners and are not limited to appointing only an administrative law 
judge.
    Discussion: The Secretary did not intend that the regulations be 
interpreted in the limited manner that some commenters have done, or in 
a manner that the commenters believe that other parties will do. A 
guaranty agency's hearing official may be any qualified individual, 
including an administrative law judge, who is not under the supervision 
or control of the head of the guaranty agency.
    Change: The final regulations have been revised to incorporate this 
clarification.

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 Numbers: 84.032 Federal 
Family Education Loan Program)

    Dated: April 21, 1994.
Richard W. Riley,
Secretary of Education.

    The Secretary amends 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 682.202 is amended by adding paragraph (a) introductory 
text, revising paragraphs (a)(1) through (a)(4), and revising 
paragraphs (c) and (d) to read as follows:


Sec. 682.202  Permissible charges by lenders to borrowers.

* * * * *
    (a) Interest. The applicable interest rates for FFEL Program loans 
are given in paragraphs (a)(1) through (a)(4) of this section.
    (1) Stafford Loan Program. (i) If the borrower, on the date the 
promissory note evidencing the loan is signed, has an outstanding 
balance of principal or interest on a previous Stafford loan, the 
interest rate is the applicable interest rate on that previous Stafford 
loan.
    (ii) If the borrower, on the date the promissory note evidencing 
the loan is signed, has no outstanding balance on any FFEL Program 
loan, and the first disbursement is made--
    (A) Prior to October 1, 1992, for a loan covering a period of 
instruction beginning on or after July 1, 1988, the interest rate is 8 
percent until 48 months elapse after the repayment period begins, and 
10 percent thereafter; or
    (B) On or after October 1, 1992, the interest rate is a variable 
rate, applicable to each July 1-June 30 period, that equals the lesser 
of--
    (1) The bond equivalent rate of the 91-day Treasury bills auctioned 
at the final auction prior to the June 1 immediately preceding the July 
1-June 30 period, plus 3.10 percent; or
    (2) 9 percent.
    (iii) For a Stafford loan for which the first disbursement is made 
before October 1, 1992--
    (A) If the borrower, on the date the promissory note evidencing the 
loan is signed, has no outstanding balance on a Stafford loan but has 
an outstanding balance of principal or interest on a PLUS or SLS loan 
made for a period of enrollment beginning before July 1, 1988, or on a 
Consolidation loan that repaid a loan made for a period of enrollment 
beginning before July 1, 1988, the interest rate is 8 percent; or
    (B) If the borrower, on the date the promissory note evidencing the 
loan is signed, has an outstanding balance of principal or interest on 
a PLUS or SLS loan made for a period of enrollment beginning on or 
after July 1, 1988, or on a Consolidation loan that repaid a loan made 
for a period of enrollment beginning on or after July 1, 1988, the 
interest rate is 8 percent until 48 months elapse after the repayment 
period begins, and 10 percent thereafter.
    (iv) For a Stafford loan for which the first disbursement is made 
on or after October 1, 1992, if the borrower, on the date the 
promissory note evidencing the loan is signed, has no outstanding 
balance on a Stafford loan but has an outstanding balance of principal 
or interest on a PLUS, SLS, or Consolidation loan, the interest rate is 
8 percent.
    (2) PLUS Program. (i) For a combined repayment schedule under 
Sec. 682.209(d), the interest rate is the weighted average of the rates 
of all loans included under that schedule.
    (ii) For a loan disbursed on or after July 1, 1987 but prior to 
October 1, 1992, and for any loan made under Sec. 682.209 (e) or (f), 
the interest rate is a variable rate, applicable to each July 1-June 30 
period, that equals the lesser of--
    (A) The bond equivalent rate of the 52-week Treasury bills 
auctioned at the final auction prior to the June 1 immediately 
preceding the July 1-June 30 period, plus 3.25 percent; or
    (B) 12 percent.
    (iii) For a loan disbursed on or after October 1, 1992, the 
interest rate is a variable rate, applicable to each July 1-June 30 
period, that equals the lesser of--
    (A) The bond equivalent rate of the 52-week Treasury bills 
auctioned at the final auction prior to the June 1 immediately 
preceding the July 1-June 30 period, plus 3.10 percent; or
    (B) 10 percent.
    (3) SLS Program. (i) For a combined repayment schedule under 
Sec. 682.209(d), the interest rate is the weighted average of the rates 
of all loans included under that schedule.
    (ii) For a loan disbursed on or after July 1, 1987 but prior to 
October 1, 1992, and for any loan made under Sec. 682.209 (e) or (f), 
the interest rate is a variable rate, applicable to each July 1-June 30 
period, that equals the lesser of--
    (A) The bond equivalent rate of the 52-week Treasury bills 
auctioned at the final auction prior to the June 1 immediately 
preceding the July 1-June 30 period, plus 3.25 percent; or
    (B) 12 percent.
    (iii) For a loan disbursed on or after October 1, 1992, the 
interest rate is a variable rate, applicable to each July 1-June 30 
period, that equals the lesser of--
    (A) The bond equivalent rate of the 52-week Treasury bills 
auctioned at the final auction prior to the June 1 immediately 
preceding the July 1-June 30 period, plus 3.10 percent; or
    (B) 11 percent.
    (4) Consolidation Program. A Consolidation Program loan bears 
interest at the rate that is the greater of--
    (i) The weighted average of interest rates on the loans 
consolidated, rounded to the nearest whole percent; or
    (ii) 9 percent.
* * * * *
    (c) Fees for FFEL Program loans. A lender--
    (1) May charge a borrower an origination fee on a subsidized 
Stafford loan not to exceed the maximum rate specified by federal 
statute;
    (2) Shall charge a borrower an origination fee on an unsubsidized 
Stafford loan of 3 percent of the principal amount of the loan;
    (3) Shall charge a borrower an origination fee on an SLS or a PLUS 
loan of 3 percent of the principal amount of the loan;
    (4) Shall deduct a pro rata portion of the fee (if charged) from 
each disbursement; and
    (5) Shall refund by a credit against the borrower's loan balance 
the portion of the fee previously deducted from the loan that is 
attributable to any portion of the loan that is--
    (i) Returned by the school to the lender;
    (ii) Repaid within 120 days of disbursement; or
    (iii) Not delivered within 120 days of disbursement.
    (d) Insurance Premium. A lender may charge the borrower the amount 
of the insurance premium paid by the lender to the guarantor up to 1 
percent of the principal amount of the loan, if that charge is provided 
for in the promissory note.
* * * * *
(Authority: 20 U.S.C. 1077, 1078, 1078-1, 1078-2, 1078-3, 1079, 
1082, 1087-1, 1091a)

    3. Section 682.208 is amended by revising paragraphs (e)(1) and 
(e)(2), and adding new paragraphs (e)(4), (e)(5), and (h) to read as 
follows:


Sec. 682.208  Due diligence in servicing a loan.

* * * * *
    (e)(1) If the assignment of a Stafford, PLUS, or SLS loan is to 
result in a change in the identity of the party to whom the borrower 
must send subsequent payments, the assignor and assignee of the loan 
shall, no later than 45 days from the date the assignee acquires a 
legally enforceable right to receive payment from the borrower on the 
assigned loan, provide, either jointly or separately, a notice to the 
borrower of--
    (i) The assignment;
    (ii) The identity of the assignee;
    (iii) The name and address of the party to whom subsequent payments 
or communications must be sent; and
    (iv) The telephone numbers of both the assignor and the assignee.
    (2) If the assignor and assignee separately provide the notice 
required by paragraph (e)(1) of this section, each notice must indicate 
that a corresponding notice will be sent by the other party to the 
assignment.
* * * * *
    (4) The assignee, or the assignor on behalf of the assignee, shall 
notify the guaranty agency that guaranteed the loan within 45 days of 
the date the assignee acquires a legally enforceable right to receive 
payment from the borrower on the loan of--
    (i) The assignment; and
    (ii) The name and address of the assignee, and the telephone number 
of the assignee that can be used to obtain information about the 
repayment of the loan.
    (5) The requirements of this paragraph (e), as to borrower 
notification, apply if the borrower is in a grace period or has entered 
the repayment period.
* * * * *
    (h) Notifying the borrower about a servicing change. If an FFEL 
Program loan has not been assigned, but there is a change in the 
identity of the party to whom the borrower must send subsequent 
payments or direct any communications concerning the loan, the holder 
of the loan shall, no later than 45 days after the date of the change, 
provide notice to the borrower of the name, telephone number, and 
address of the party to whom subsequent payments or communications must 
be sent. The requirements of this paragraph apply if the borrower is in 
a grace period or has entered the repayment period.
* * * * *
(Authority: 20 U.S.C. 1077, 1078, 1078-1, 1078-2, 1078-3, 1079, 
1080, 1082, 1085)

    4. Section 682.402 is amended by revising the heading; by revising 
paragraph (a); by revising paragraphs (b) and (c)(1); by redesignating 
paragraphs (d), (e), (f), (g), (h), (i), (j), and (k) as paragraphs 
(f), (g), (h), (i), (j), (k), (l), and (m), respectively; by further 
redesignating newly designated paragraphs (g)(2)(ii), (h)(2)(ii) and 
(k)(3) as paragraphs (g)(2)(iv), (h)(2)(iii), and (k)(5), respectively; 
by adding new paragraphs (d), (e), (g)(1)(vi), (g)(1)(vii), (g)(2)(ii), 
(g)(2)(iii), (h)(1)(iii), (h)(2)(ii), (h)(2)(iv), (h)(2)(v), (k)(4), 
and (m)(5); by revising newly redesignated paragraphs (f)(2) and 
(f)(3), (f)(4) introductory text, (g) heading, (g)(1) introductory 
text, (g)(1)(i), (g)(2) introductory text, (g)(2)(i), (h) heading, 
(h)(2)(iii), (h)(3)(i), (h)(3)(ii), (i)(2) heading and introductory 
text, (i)(2)(iv), (j) heading, (j)(1) introductory text, (j)(2), 
(k)(2), (k)(5), (l), and (m) introductory text; by removing the word 
``and'' at the end of paragraph (m)(3)(ii); by adding and reserving 
paragraph (k)(3); and by removing the period at the end of paragraph 
(m)(4), and adding in its place, a semicolon, to read as follows:


Sec. 682.402  Death, disability, closed school, false certification, 
and bankruptcy payments.

    (a) General. (1) Rules governing the payment of claims based on 
filing for relief in bankruptcy, and discharge of loans due to death, 
total and permanent disability, attendance at a school that closes, and 
false certification by a school of a borrower's eligibility for a loan, 
are set forth in this section.
    (2) If a PLUS loan was obtained by two parents as co-makers, or a 
Consolidation loan was obtained by a married couple, and only one of 
the borrowers dies, becomes totally and permanently disabled, has 
collection of his or her loan obligation stayed by a bankruptcy filing, 
or has that obligation discharged in bankruptcy, the other borrower 
remains obligated to repay the loan.
    (3) Except for a borrower's loan obligation discharged by the 
Secretary under the false certification discharge provision of 
paragraphs (e)(1)(ii) of this section, a loan qualifies for payment 
under this section only to the extent that the loan is legally 
enforceable under applicable law by the holder of the loan.
    (4) For purposes of this section--
    (i) The legal enforceability of a loan is conclusively determined 
on the basis of a ruling by a court or administrative tribunal of 
competent jurisdiction with respect to that loan, or a ruling with 
respect to another loan in a judgment that collaterally estops the 
holder from contesting the enforceability of the loan;
    (ii) A loan is conclusively determined to be legally unenforceable 
to the extent that the guarantor determines, pursuant to an objection 
presented in a proceeding conducted in connection with credit bureau 
reporting, tax refund offset, wage garnishment, or in any other 
administrative proceeding, that the loan is not legally enforceable; 
and
    (iii) If an objection has been raised by the borrower or another 
party about the legal enforceability of the loan and no determination 
has been made under paragraph (a)(4) (i) or (ii) of this section, the 
Secretary may authorize the payment of a claim under this section under 
conditions the Secretary considers appropriate. If the Secretary 
determines in that or any other case that a claim was paid under this 
section with respect to a loan that was not a legally enforceable 
obligation of the borrower, the recipient of that payment must refund 
that amount of the payment to the Secretary.
    (b) Death. (1) If an individual borrower dies, or, on or after July 
23, 1992 the student for whom a parent received a PLUS loan dies, the 
obligation of the borrower and any endorser to make any further 
payments on the loan is discharged.
    (2) In determining that a borrower (or student) has died, the 
lender may rely on a death certificate or other proof of death that is 
acceptable under applicable state law. If a death certificate or other 
acceptable proof of death is not available, the borrower's obligation 
on the loan can be discharged only if the guaranty agency determines 
that other evidence establishes that the borrower (or student) has 
died.
    (3) After receiving information indicating that the borrower (or 
student) has died, the lender, if it believes the information to be 
reliable, shall suspend any collection activity against the borrower 
and promptly request that the borrower's representative (or the 
student's parent in the case of a PLUS loan) provide the documentation 
described in paragraph (b)(2) of this section. During the suspension of 
collection activity, which may not exceed 60 days, the lender shall 
diligently attempt to obtain documentation verifying the borrower's (or 
student's) death. If, despite diligent attempts, the lender is not able 
to confirm the borrower's (or student's) death within 60 days, the 
lender shall resume collection activity from the point that it had been 
discontinued and is deemed to have exercised forbearance as to 
repayment of the loan during the period when collection activity was 
suspended.
    (4) Once the lender has determined under paragraph (b)(2) of this 
section that the borrower (or student) has died, the lender may not 
attempt to collect on the loan from the borrower's estate or from any 
endorser.
    (5) The lender shall return to the sender any payments received 
from the estate or paid on behalf of the borrower after the date of the 
borrower's (or student's) death.
    (c) Total and permanent disability. (1) If the lender determines 
that an individual borrower is totally and permanently disabled, the 
obligation of the borrower and any endorser to make any further 
payments on the loan is discharged. A borrower is not considered 
totally and permanently disabled on the basis of a condition that 
existed at the time he or she applied for the loan, unless the 
borrower's condition has substantially deteriorated later, so as to 
render the borrower totally and permanently disabled. In the case of a 
Consolidation loan, the borrower must certify that the condition did 
not exist prior to the time the borrower applied for each of the 
underlying loans, unless the condition has substantially deteriorated, 
so as to render the borrower totally and permanently disabled. If the 
condition existed prior to the date the Consolidation loan was made, 
the borrower must provide the lender with the disbursement dates of the 
underlying loans if the information does not already appear in the 
borrower's loan file possessed by the lender.
* * * * *
    (d) Closed school.--(1) General. (i) The Secretary reimburses the 
holder of a loan received by a borrower on or after January 1, 1986, 
and discharges the borrower's obligation with respect to the loan in 
accordance with the provisions of paragraph (d) of this section, if the 
borrower (or the student for whom a parent received a PLUS loan) could 
not complete the program of study for which the loan was intended 
because the school at which the borrower (or student) was enrolled, 
closed, or the borrower (or student) withdrew from the school not more 
than 90 days prior to the date the school closed. This 90-day period 
may be extended if the Secretary determines that exceptional 
circumstances related to a school's closing would justify an extension.
    (ii) For purposes of the closed school discharge authorized by this 
section--
    (A) A school's closure date is the date that the school ceases to 
provide educational instruction in all programs, as determined by the 
Secretary;
    (B) The term ``borrower'' includes all endorsers on a loan; and
    (C) A ``school'' means a school's main campus or any location or 
branch of the main campus, regardless of whether the school or its 
location or branch is considered eligible.
    (2) Relief available pursuant to discharge. (i) Discharge under 
paragraph (d) of this section relieves the borrower of an existing or 
past obligation to repay the loan and any charges imposed or costs 
incurred by the holder with respect to the loan that the borrower is, 
or was otherwise obligated to pay.
    (ii) A discharge of a loan under paragraph (d) of this section 
qualifies the borrower for reimbursement of amounts paid voluntarily or 
through enforced collection on a loan obligation discharged under 
paragraph (d) of this section.
    (iii) A borrower who has defaulted on a loan discharged under 
paragraph (d) of this section is not regarded as in default on the loan 
after discharge, and is eligible to receive assistance under the Title 
IV, HEA programs.
    (iv) A discharge of a loan under paragraph (d) of this section must 
be reported by the loan holder to all credit reporting agencies to 
which the holder previously reported the status of the loan, so as to 
delete all adverse credit history assigned to the loan.
    (3) Borrower qualification for discharge. In order to qualify for 
discharge of a loan under paragraph (d) of this section a borrower 
shall submit to the holder of the loan a written request and sworn 
statement. The statement need not be notarized, but must be made by the 
borrower under penalty of perjury, and, in the statement, the borrower 
shall state--
    (i) Whether the student has made a claim with respect to the 
school's closing with any third party, such as the holder of a 
performance bond or a tuition recovery program, and if so, the amount 
of any payment received by the borrower (or student) or credited to the 
borrower's loan obligation;
    (ii) That the borrower (or the student for whom a parent received a 
PLUS loan)--
    (A) Received, on or after January 1, 1986, the proceeds of any 
disbursement of a loan disbursed, in whole or in part, on or after 
January 1, 1986 to attend a school;
    (B) Did not complete the educational program at that school because 
the school closed while the student was enrolled or on an approved 
leave of absence in accordance with Sec. 682.605(c), or the student 
withdrew from the school not more than 90 days before the school 
closed; and
    (C) Did not complete the program of study through a teach-out at 
another school or by transferring academic credits or hours earned at 
the closed school to another school;
    (iii) That the borrower agrees to provide, upon request by the 
Secretary or the Secretary's designee, other documentation reasonably 
available to the borrower that demonstrates, to the satisfaction of the 
Secretary or the Secretary's designee, that the student meets the 
qualifications in paragraph (d) of this section; and
    (iv) That the borrower agrees to cooperate with the Secretary or 
the Secretary's designee in enforcement actions in accordance with 
paragraph (d)(4) of this section, and to transfer any right to recovery 
against a third party in accordance with paragraph (d)(5) of this 
section.
    (4) Cooperation by borrower in enforcement actions. (i) In any 
judicial or administrative proceeding brought by the Secretary or the 
Secretary's designee to recover for amounts discharged under paragraph 
(d) of this section or to take other enforcement action with respect to 
the conduct on which those claims were based, a borrower who requests 
or receives a discharge under paragraph (d) of this section must 
cooperate with the Secretary or the Secretary's designee. At the 
request of the Secretary or the Secretary's designee, and upon the 
Secretary's or the Secretary's designee's tendering to the borrower the 
fees and costs as are customarily provided in litigation to reimburse 
witnesses, the borrower shall--
    (A) Provide testimony regarding any representation made by the 
borrower to support a request for discharge; and
    (B) Produce any documentation reasonably available to the borrower 
with respect to those representations and any sworn statement required 
by the Secretary with respect to those representations and documents.
    (ii) The Secretary revokes the discharge, or denies the request for 
discharge, of a borrower who--
    (A) Fails to provide testimony, sworn statements, or documentation 
to support material representations made by the borrower to obtain the 
discharge; or
    (B) Provides testimony, a sworn statement, or documentation that 
does not support the material representations made by the borrower to 
obtain the discharge.
    (5) Transfer to the Secretary of borrower's right of recovery 
against third parties. (i) Upon discharge under paragraph (d) of this 
section, the borrower is deemed to have assigned to and relinquished in 
favor of the Secretary any right to a loan refund (up to the amount 
discharged) that the borrower (or student) may have by contract or 
applicable law with respect to the loan or the enrollment agreement for 
the program for which the loan was received, against the school, its 
principals, affiliates and their successors, its sureties, and any 
private fund, including the portion of a public fund that represents 
funds received from a private party.
    (ii) The provisions of paragraph (d) of this section apply 
notwithstanding any provision of State law that would otherwise 
restrict transfer of such rights by the borrower (or student), limit or 
prevent a transferee from exercising those rights, or establish 
procedures or a scheme of distribution that would prejudice the 
Secretary's ability to recover on those rights.
    (iii) Nothing in this section shall be construed as limiting or 
foreclosing the borrower's (or student's) right to pursue legal and 
equitable relief regarding disputes arising from matters otherwise 
unrelated to the loan discharged.
    (6) Guaranty agency responsibilities--(i) Procedures applicable if 
a school closed on or after January 1, 1986, but prior to June 13, 
1994. (A) If a borrower received a loan for attendance at a school with 
a closure date on or after January 1, 1986, but prior to June 13, 1994, 
the loan may be discharged in accordance with the procedures specified 
in paragraph (d)(6)(i) of this section.
    (B) If a loan subject to paragraph (d) of this section was 
discharged in part in accordance with the Secretary's ``Closed School 
Policy'' as authorized by section IV of Bulletin 89-G-159, the guaranty 
agency shall initiate the discharge of the remaining balance of the 
loan not later than August 13, 1994.
    (C) A guaranty agency shall review its records and identify all 
schools that appear to have closed on or after January 1, 1986 and 
prior to June 13, 1994, and shall identify the loans made to any 
borrower (or student) who appears to have been enrolled at the school 
on the school closure date or who withdrew not more than 90 days prior 
to the closure date.
    (D) A guaranty agency shall notify the Secretary immediately if it 
determines that a school not previously known to have closed appears to 
have closed, and, within 30 days of making that determination, notify 
all lenders participating in its program to suspend collection efforts 
against individuals with respect to loans made for attendance at the 
closed school, if the student to whom (or on whose behalf) a loan was 
made, appears to have been enrolled at the school on the closing date, 
or withdrew not more than 90 days prior to the date the school appears 
to have closed. Within 30 days after receiving confirmation of the date 
of a school's closure from the Secretary, the agency shall--
    (1) Notify all lenders participating in its program to mail a 
discharge application explaining the procedures and eligibility 
criteria for obtaining a discharge and an explanation of the 
information that must be included in the sworn statement (which may be 
combined) to all borrowers who may be eligible for a closed school 
discharge; and
    (2) Review the records of loans that it holds, identify the loans 
made to any borrower (or student) who appears to have been enrolled at 
the school on the school closure date or who withdrew not more than 90 
days prior to the closure date, and mail a discharge application and an 
explanation of the information that must be included in the sworn 
statement (which may be combined) to the borrower. The application 
shall inform the borrower of the procedures and eligibility criteria 
for obtaining a discharge.
    (E) If a loan identified under paragraph (d)(6)(i)(D)(2) of this 
section is held by the guaranty agency as a defaulted loan and the 
borrower's current address is known, the guaranty agency shall 
immediately suspend any efforts to collect from the borrower on any 
loan received for the program of study for which the loan was made (but 
may continue to receive borrower payments), and notify the borrower 
that the agency will provide additional information about the 
procedures for requesting a discharge after the agency has received 
confirmation from the Secretary that the school had closed.
    (F) If a loan identified under paragraph (d)(6)(i)(D)(2) of this 
section is held by the guaranty agency as a defaulted loan and the 
borrower's current address is unknown, the agency shall, by June 13, 
1995, further refine the list of borrowers whose loans are potentially 
subject to discharge under paragraph (d) of this section by consulting 
with representatives of the closed school, the school's licensing 
agency, accrediting agency, and other appropriate parties. Upon 
learning the new address of a borrower who would still be considered 
potentially eligible for a discharge, the guaranty agency shall, within 
30 days after learning the borrower's new address, mail to the borrower 
a discharge application that meets the requirements of paragraph 
(d)(6)(i)(E) of this section.
    (G) If the guaranty agency determines that a borrower identified in 
paragraph (d)(6)(i)(E) or (F) of this section has satisfied all of the 
conditions required for a discharge, the agency shall notify the 
borrower in writing of that determination within 30 days after making 
that determination.
    (H) If the guaranty agency determines that a borrower identified in 
paragraph (d)(6)(i)(E) or (F) of this section does not qualify for a 
discharge, the agency shall notify the borrower in writing of that 
determination and the reasons for it within 30 days after the date the 
agency--
    (1) Made that determination based on information available to the 
guaranty agency;
    (2) Was notified by the Secretary that the school had not closed;
    (3) Was notified by the Secretary that the school had closed on a 
date that was more than 90 days after the borrower (or student) 
withdrew from the school;
    (4) Was notified by the Secretary that the borrower (or student) 
was ineligible for a closed school discharge for other reasons; or
    (5) Received the borrower's completed application and sworn 
statement.
    (I) If a borrower described in paragraph (d)(6)(i)(E) or (F) of 
this section fails to submit the written request and sworn statement 
described in paragraph (d)(3) of this section within 60 days of being 
notified of that option, the guaranty agency shall resume collection 
and shall be deemed to have exercised forbearance of payment of 
principal and interest from the date it suspended collection activity. 
The agency may capitalize, in accordance with Sec. 682.202(b), any 
interest accrued and not paid during that period.
    (J) A borrower's request for discharge may not be denied solely on 
the basis of failing to meet any time limits set by the lender, 
guaranty agency, or the Secretary.
    (ii) Procedures applicable if a school closed on or after June 13, 
1994. (A) A guaranty agency shall notify the Secretary immediately 
whenever it becomes aware of reliable information indicating a school 
may have closed. The designated guaranty agency in the state in which 
the school is located shall promptly investigate whether the school has 
closed and, within 30 days after receiving information indicating that 
the school may have closed, report the results of its investigation to 
the Secretary concerning the date of the school's closure and whether a 
teach-out of the closed school's program was made available to 
students.
    (B) If a guaranty agency determines that a school appears to have 
closed, it shall, within 30 days of making that determination, notify 
all lenders participating in its program to suspend collection efforts 
against individuals with respect to loans made for attendance at the 
closed school, if the student to whom (or on whose behalf) a loan was 
made, appears to have been enrolled at the school on the closing date, 
or withdrew not more than 90 days prior to the date the school appears 
to have closed. Within 30 days after receiving confirmation of the date 
of a school's closure from the Secretary, the agency shall--
    (1) Notify all lenders participating in its program to mail a 
discharge application explaining the procedures and eligibility 
criteria for obtaining a discharge and an explanation of the 
information that must be included in the sworn statement (which may be 
combined) to all borrowers who may be eligible for a closed school 
discharge; and
    (2) Review the records of loans that it holds, identify the loans 
made to any borrower (or student) who appears to have been enrolled at 
the school on the school closure date or who withdrew not more than 90 
days prior to the closure date, and mail a discharge application and an 
explanation of the information that must be included in the sworn 
statement (which may be combined) to the borrower. The application 
shall inform the borrower of the procedures and eligibility criteria 
for obtaining a discharge.
    (C) If a loan identified under paragraph (d)(6)(ii)(B)(2) of this 
section is held by the guaranty agency as a defaulted loan and the 
borrower's current address is known, the guaranty agency shall 
immediately suspend any efforts to collect from the borrower on any 
loan received for the program of study for which the loan was made (but 
may continue to receive borrower payments), and notify the borrower 
that the agency will provide additional information about the 
procedures for requesting a discharge after the agency has received 
confirmation from the Secretary that the school had closed.
    (D) If a loan identified under paragraph (d)(6)(ii)(B)(2) of this 
section is held by the guaranty agency as a defaulted loan and the 
borrower's current address is unknown, the agency shall, within one 
year after identifying the borrower, attempt to locate the borrower and 
further determine the borrower's potential eligibility for a discharge 
under paragraph (d) of this section by consulting with representatives 
of the closed school, the school's licensing agency, accrediting 
agency, and other appropriate parties. Upon learning the new address of 
a borrower who would still be considered potentially eligible for a 
discharge, the guaranty agency shall, within 30 days after learning the 
borrower's new address, mail to the borrower a discharge application 
that meets the requirements of paragraph (d)(6)(ii)(B) of this section.
    (E) If the guaranty agency determines that a borrower identified in 
paragraph (d)(6)(ii)(C) or (D) of this section has satisfied all of the 
conditions required for a discharge, the agency shall notify the 
borrower in writing of that determination within 30 days after making 
that determination.
    (F) If the guaranty agency determines that a borrower identified in 
paragraph (d)(6)(ii)(C) or (D) of this section does not qualify for a 
discharge, the agency shall notify the borrower in writing of that 
determination and the reasons for it within 30 days after the date the 
agency--
    (1) Made that determination based on information available to the 
guaranty agency;
    (2) Was notified by the Secretary that the school had not closed;
    (3) Was notified by the Secretary that the school had closed on a 
date that was more than 90 days after the borrower (or student) 
withdrew from the school;
    (4) Was notified by the Secretary that the borrower (or student) 
was ineligible for a closed school discharge for other reasons; or
    (5) Received the borrower's completed application and sworn 
statement.
    (G) Upon receipt of a closed school discharge claim filed by a 
lender, the agency shall review the borrower's request and supporting 
sworn statement in the light of information available from the records 
of the agency and from other sources, including other guaranty 
agencies, state authorities, and cognizant accrediting associations, 
and shall take the following actions--
    (1) If the agency determines that the borrower satisfies the 
requirements for discharge under paragraph (d) of this section, it 
shall pay the claim in accordance with Sec. 682.402(h) not later than 
90 days after the agency received the claim; or
    (2) If the agency determines that the borrower does not qualify for 
a discharge, the agency shall, not later than 90 days after the agency 
received the claim, return the claim to the lender with an explanation 
of the reasons for its determination.
    (H) If a borrower fails to submit the written request and sworn 
statement described in paragraph (d)(3) of this section within 60 days 
of being notified of that option, the lender or guaranty agency shall 
resume collection and shall be deemed to have exercised forbearance of 
payment of principal and interest from the date it suspended collection 
activity. The lender or guaranty agency may capitalize, in accordance 
with Sec. 682.202(b), any interest accrued and not paid during that 
period.
    (I) A borrower's request for discharge may not be denied solely on 
the basis of failing to meet any time limits set by the lender, 
guaranty agency, or the Secretary.
    (7) Lender responsibilities. (i) A lender shall comply with the 
requirements prescribed in paragraph (d) of this section. In the 
absence of specific instructions from a guaranty agency or the 
Secretary, if a lender receives information from a source it believes 
to be reliable indicating that an existing or former borrower may be 
eligible for a loan discharge under paragraph (d) of this section, the 
lender shall immediately notify the guaranty agency, and suspend any 
efforts to collect from the borrower on any loan received for the 
program of study for which the loan was made (but may continue to 
receive borrower payments).
    (ii) If the borrower fails to submit the written request and sworn 
statement described in paragraph (d)(3) of this section within 60 days 
after being notified of that option, the lender shall resume collection 
and shall be deemed to have exercised forbearance of payment of 
principal and interest from the date the lender suspended collection 
activity. The lender may capitalize, in accordance with 
Sec. 682.202(b), any interest accrued and not paid during that period.
    (iii) The lender shall file a closed school claim with the guaranty 
agency in accordance with Sec. 682.402(g) no later than 60 days after 
the lender receives the borrower's written request and sworn statement 
described in paragraph (d)(3) of this section. If a lender receives a 
payment made by or on behalf of the borrower on the loan after the 
lender files a claim on the loan with the guaranty agency, the lender 
shall forward the payment to the guaranty agency within 30 days of its 
receipt. The lender shall assist the guaranty agency and the borrower 
in determining whether the borrower is eligible for discharge of the 
loan.
    (iv) Within 30 days after receiving reimbursement from the guaranty 
agency for a closed school claim, the lender shall notify the borrower 
that the loan obligation has been discharged, and request that all 
credit bureaus to which it previously reported the status of the loan 
delete all adverse credit history assigned to the loan.
    (v) Within 30 days after being notified by the guaranty agency that 
the borrower's request for a closed school discharge has been denied, 
the lender shall resume collection and notify the borrower of the 
reasons for the denial. The lender shall be deemed to have exercised 
forbearance of payment of principal and interest from the date the 
lender suspended collection activity, and may capitalize, in accordance 
with Sec. 682.202(b), any interest accrued and not paid during that 
period.
    (e) False certification by a school of a student's eligibility to 
borrow and unauthorized disbursements.--(1) General. (i) The Secretary 
reimburses the holder of a loan received by a borrower on or after 
January 1, 1986, and discharges a current or former borrower's 
obligation with respect to the loan in accordance with the provisions 
of paragraph (e) of this section, if the borrower's (or the student for 
whom a parent received a PLUS loan) eligibility to receive the loan was 
falsely certified by an eligible school. For purposes of a false 
certification discharge, the term ``borrower'' includes all endorsers 
on a loan. A student's eligibility to borrow shall be considered to 
have been falsely certified by the school if the school--
    (A) Admitted the student on the basis of ability to benefit from 
its training and the student did not meet the applicable requirements 
for admission on the basis of ability to benefit as described in 
paragraph (e)(13) of this section; or
    (B) Signed the borrower's name without authorization by the 
borrower on the loan application or promissory note.
    (ii) The Secretary discharges the obligation of a borrower with 
respect to a loan disbursement for which the school, without the 
borrower's authorization, endorsed the borrower's loan check or 
authorization for electronic funds transfer, unless the student for 
whom the loan was made received the proceeds of the loan either by 
actual delivery of the loan funds or by a credit in the amount of the 
contested disbursement applied to charges owed to the school for that 
portion of the educational program completed by the student. However, 
the Secretary does not reimburse the lender with respect to any amount 
disbursed by means of a check bearing an unauthorized endorsement 
unless the school also executed the application or promissory note for 
that loan for the named borrower without that individual's consent.
    (2) Relief available pursuant to discharge. (i) Discharge under 
paragraph (e)(1)(i) of this section relieves the borrower of an 
existing or past obligation to repay the loan certified by the school, 
and any charges imposed or costs incurred by the holder with respect to 
the loan that the borrower is, or was, otherwise obligated to pay.
    (ii) A discharge of a loan under paragraph (e) of this section 
qualifies the borrower for reimbursement of amounts paid voluntarily or 
through enforced collection on a loan obligation discharged under 
paragraph (e) of this section.
    (iii) A borrower who has defaulted on a loan discharged under 
paragraph (e) of this section is not regarded as in default on the loan 
after discharge, and is eligible to receive assistance under the Title 
IV, HEA programs.
    (iv) A discharge of a loan under paragraph (e) of this section is 
reported by the loan holder to all credit reporting agencies to which 
the holder previously reported the status of the loan, so as to delete 
all adverse credit history assigned to the loan.
    (v) Discharge under paragraph (e)(1)(ii) of this section qualifies 
the borrower for relief only with respect to the amount of the 
disbursement discharged.
    (3) Borrower qualification for discharge. In order to qualify for 
discharge of a loan under paragraph (e) of this section the borrower 
shall submit to the holder of the loan a written request and a sworn 
statement. The statement need not be notarized, but must be made by the 
borrower under penalty of perjury, and, in the statement, the borrower 
shall--
    (i) State whether the student has made a claim with respect to the 
school's false certification with any third party, such as the holder 
of a performance bond or a tuition recovery program, and if so, the 
amount of any payment received by the borrower (or student) or credited 
to the borrower's loan obligation;
    (ii) In the case of a borrower requesting a discharge based on the 
school's defective testing of the student's ability to benefit, state 
that the borrower (or the student for whom a parent received a PLUS 
loan)--
    (A) Received, on or after January 1, 1986, the proceeds of any 
disbursement of a loan disbursed, in whole or in part, on or after 
January 1, 1986 to attend a school;
    (B) Was admitted to that school on the basis of ability to benefit 
from its training and did not meet the applicable requirements for 
admission on the basis of ability to benefit as described in paragraph 
(e)(13) of this section; and
    (C) Withdrew from the school and did not find employment in the 
occupation for which the program was intended to provide training, or 
completed the training program for which the loan was made and made a 
reasonable attempt to obtain employment in the occupation for which the 
program was intended to provide training, and--
    (1) Was not able to find employment in that occupation; or
    (2) Obtained employment in that occupation only after receiving 
additional training that was not provided by the school that certified 
the loan;
    (iii) In the case of a borrower requesting a discharge because the 
school signed the borrower's name on the loan application or promissory 
note--
    (A) State that the signature on either of those documents was not 
the signature of the borrower; and
    (B) Provide five different specimens of his or her signature, two 
of which must be not earlier or later than one year before or after the 
date of the contested signature;
    (iv) In the case of a borrower requesting a discharge because the 
school, without authorization of the borrower, endorsed the borrower's 
name on the loan check or signed the authorization for electronic funds 
transfer, the borrower shall--
    (A) Certify that he or she did not endorse the loan check or sign 
the authorization for electronic funds transfer, or authorize the 
school to do so;
    (B) Provide five different specimens of his or her signature, two 
of which must be not earlier or later than one year before or after the 
date of the contested signature; and
    (C) State that the proceeds of the contested disbursement were not 
received either through actual delivery of the loan funds or by a 
credit in the amount of the contested disbursement applied to charges 
owed to the school for that portion of the educational program 
completed by the student;
    (v) That the borrower agrees to provide upon request by the 
Secretary or the Secretary's designee, other documentation reasonably 
available to the borrower, that demonstrates, to the satisfaction of 
the Secretary or the Secretary's designee, that the student meets the 
qualifications in paragraph (e) of this section; and
    (vi) That the borrower agrees to cooperate with the Secretary or 
the Secretary's designee in enforcement actions in accordance with 
paragraph (e)(4) of this section, and to transfer any right to recovery 
against a third party in accordance with paragraph (e)(5) of this 
section.
    (4) Cooperation by borrower in enforcement actions. (i) In any 
judicial or administrative proceeding brought by the Secretary or the 
Secretary's designee to recover for amounts discharged under paragraph 
(e) of this section or to take other enforcement action with respect to 
the conduct on which those claims were based, a borrower who requests 
or receives a discharge under paragraph (e) of this section must 
cooperate with the Secretary or the Secretary's designee. At the 
request of the Secretary or the Secretary's designee, and upon the 
Secretary's or the Secretary's designee's tendering to the borrower the 
fees and costs as are customarily provided in litigation to reimburse 
witnesses, the borrower shall--
    (A) Provide testimony regarding any representation made by the 
borrower to support a request for discharge; and
    (B) Produce any documentation reasonably available to the borrower 
with respect to those representations and any sworn statement required 
by the Secretary with respect to those representations and documents.
    (ii) The Secretary revokes the discharge, or denies the request for 
discharge, of a borrower who--
    (A) Fails to provide testimony, sworn statements, or documentation 
to support material representations made by the borrower to obtain the 
discharge; or
    (B) Provides testimony, a sworn statement, or documentation that 
does not support the material representations made by the borrower to 
obtain the discharge.
    (5) Transfer to the Secretary of borrower's right of recovery 
against third parties. (i) Upon discharge under paragraph (e) of this 
section, the borrower is deemed to have assigned to and relinquished in 
favor of the Secretary any right to a loan refund (up to the amount 
discharged) that the borrower (or student) may have by contract or 
applicable law with respect to the loan or the enrollment agreement for 
the program for which the loan was received, against the school, its 
principals, affiliates and their successors, its sureties, and any 
private fund, including the portion of a public fund that represents 
funds received from a private party.
    (ii) The provisions of paragraph (e) of this section apply 
notwithstanding any provision of state law that would otherwise 
restrict transfer of such rights by the borrower (or student), limit or 
prevent a transferee from exercising those rights, or establish 
procedures or a scheme of distribution that would prejudice the 
Secretary's ability to recover on those rights.
    (iii) Nothing in this section shall be construed as limiting or 
foreclosing the borrower's (or student's) right to pursue legal and 
equitable relief regarding disputes arising from matters otherwise 
unrelated to the loan discharged.
    (6) Guaranty agency responsibilities--general. (i) A guaranty 
agency shall notify the Secretary immediately whenever it becomes aware 
of reliable information indicating that a school may have falsely 
certified a student's eligibility or caused an unauthorized 
disbursement of loan proceeds, as described in paragraph (e)(3) of this 
section. The designated guaranty agency in the state in which the 
school is located shall promptly investigate whether the school has 
falsely certified a student's eligibility and, within 30 days after 
receiving information indicating that the school may have done so, 
report the results of its preliminary investigation to the Secretary.
    (ii) If the guaranty agency receives information it believes to be 
reliable indicating that a borrower whose loan is held by the agency 
may be eligible for a discharge under paragraph (e) of this section, 
the agency shall immediately suspend any efforts to collect from the 
borrower on any loan received for the program of study for which the 
loan was made (but may continue to receive borrower payments), and 
inform the borrower of the procedures for requesting a discharge.
    (iii) If the borrower fails to submit the written request and sworn 
statement described in paragraph (e)(3) of this section within 60 days 
of being notified of that option, the guaranty agency shall resume 
collection and shall be deemed to have exercised forbearance of payment 
of principal and interest from the date it suspended collection 
activity. The agency may capitalize, in accordance with 
Sec. 682.202(b), any interest accrued and not paid during that period.
    (iv) Upon receipt of a discharge claim filed by a lender or a 
request submitted by a borrower with respect to a loan held by the 
guaranty agency, the agency shall have up to 90 days to determine 
whether the discharge should be granted. The agency shall review the 
borrower's request and supporting sworn statement in light of 
information available from the records of the agency and from other 
sources, including other guaranty agencies, state authorities, and 
cognizant accrediting associations.
    (v) A borrower's request for discharge and sworn statement may not 
be denied solely on the basis of failing to meet any time limits set by 
the lender or the guaranty agency.
    (7) Guaranty agency responsibilities with respect to a claim filed 
by a lender based on the borrower's assertion that he or she did not 
sign the loan application or the promissory note, or that the school 
failed to test, or improperly tested, the student's ability to benefit. 
(i) The agency shall evaluate the borrower's request and consider 
relevant information it possesses and information available from other 
sources, and follow the procedures described in paragraph (e)(7) of 
this section.
    (ii) If the agency determines that the borrower satisfies the 
requirements for discharge under paragraph (e) of this section, it 
shall, not later than 30 days after the agency makes that 
determination, pay the claim in accordance with Sec. 682.402(h) and--
    (A) Notify the borrower that his or her liability with respect to 
the amount of the loan has been discharged, and that the lender has 
been informed of the actions required under paragraph (e)(7)(ii)(C) of 
this section;
    (B) Refund to the borrower all amounts paid by the borrower to the 
lender or the agency with respect to the discharged loan amount, 
including any late fees or collection charges imposed by the lender or 
agency related to the discharged loan amount; and
    (C) Notify the lender that the borrower's liability with respect to 
the amount of the loan has been discharged, and that the lender must--
    (1) Immediately terminate any collection efforts against the 
borrower with respect to the discharged loan amount and any charges 
imposed or costs incurred by the lender related to the discharged loan 
amount that the borrower is, or was, otherwise obligated to pay; and
    (2) Within 30 days, report to all credit reporting agencies to 
which the lender previously reported the status of the loan, so as to 
delete all adverse credit history assigned to the loan.
    (iii) If the agency determines that the borrower does not qualify 
for a discharge, it shall, within 30 days after making that 
determination--
    (A) Notify the lender that the borrower's liability on the loan is 
not discharged and that, depending on the borrower's decision under 
paragraph (e)(7)(iii)(B) of this section, the loan shall either be 
returned to the lender or paid as a default claim; and
    (B) Notify the borrower that the borrower does not qualify for 
discharge, and state the reasons for that conclusion. The agency shall 
advise the borrower that he or she remains obligated to repay the loan 
and warn the borrower of the consequences of default, and explain that 
the borrower will be considered to be in default on the loan unless the 
borrower submits a written statement to the agency within 30 days 
stating that the borrower--
    (1) Acknowledges the debt and, if payments are due, will begin or 
resume making those payments to the lender; or
    (2) Requests the Secretary to review the agency's decision.
    (iv) Within 30 days after receiving the borrower's written 
statement described in paragraph (e)(7)(iii)(B)(1) of this section, the 
agency shall return the claim file to the lender and notify the lender 
to resume collection efforts if payments are due.
    (v) Within 30 days after receiving the borrower's request for 
review by the Secretary, the agency shall forward the claim file to the 
Secretary for his review and take the actions required under paragraph 
(e)(11) of this section.
    (vi) The agency shall pay a default claim to the lender within 30 
days after the borrower fails to return either of the written 
statements described in paragraph (e)(7)(iii)(B) of this section.
    (8) Guaranty agency responsibilities with respect to a claim filed 
by a lender based only on the borrower's assertion that he or she did 
not sign the loan check or the authorization for the electronic 
transfer of loan funds. (i) The agency shall evaluate the borrower's 
request and consider relevant information it possesses and information 
available from other sources, and follow the procedures described in 
paragraph (e)(8) of this section.
    (ii) If the agency determines that a borrower who asserts that he 
or she did not endorse the loan check satisfies the requirements for 
discharge under paragraph (e)(3)(iv) of this section, it shall, within 
30 days after making that determination--
    (A) Notify the borrower that his or her liability with respect to 
the amount of the contested disbursement of the loan has been 
discharged, and that the lender has been informed of the actions 
required under paragraph (e)(8)(ii)(B) of this section;
    (B) Notify the lender that the borrower's liability with respect to 
the amount of the contested disbursement of the loan has been 
discharged, and that the lender must--
    (1) Immediately terminate any collection efforts against the 
borrower with respect to the discharged loan amount and any charges 
imposed or costs incurred by the lender related to the discharged loan 
amount that the borrower is, or was, otherwise obligated to pay;
    (2) Within 30 days, report to all credit reporting agencies to 
which the lender previously reported the status of the loan, so as to 
delete all adverse credit history assigned to the loan;
    (3) Refund to the borrower, within 30 days, all amounts paid by the 
borrower with respect to the loan disbursement that was discharged, 
including any charges imposed or costs incurred by the lender related 
to the discharged loan amount; and
    (4) Refund to the Secretary, within 30 days, all interest benefits 
and special allowance payments received from the Secretary with respect 
to the loan disbursement that was discharged; and
    (C) Transfer to the lender the borrower's written assignment of any 
rights the borrower may have against third parties with respect to a 
loan disbursement that was discharged because the borrower did not sign 
the loan check.
    (iii) If the agency determines that a borrower who asserts that he 
or she did not sign the electronic funds transfer authorization 
satisfies the requirements for discharge under paragraph (e)(3)(iv) of 
this section, it shall, within 30 days after making that determination, 
pay the claim in accordance with Sec. 682.402(h) and--
    (A) Notify the borrower that his or her liability with respect to 
the amount of the contested disbursement of the loan has been 
discharged, and that the lender has been informed of the actions 
required under paragraph (e)(8)(iii)(C) of this section;
    (B) Refund to the borrower all amounts paid by the borrower to the 
lender or the agency with respect to the discharged loan amount, 
including any late fees or collection charges imposed by the lender or 
agency related to the discharged loan amount; and
    (C) Notify the lender that the borrower's liability with respect to 
the contested disbursement of the loan has been discharged, and that 
the lender must--
    (1) Immediately terminate any collection efforts against the 
borrower with respect to the discharged loan amount and any charges 
imposed or costs incurred by the lender related to the discharged loan 
amount that the borrower is, or was, otherwise obligated to pay; and
    (2) Within 30 days, report to all credit reporting agencies to 
which the lender previously reported the status of the loan, so as to 
delete all adverse credit history assigned to the loan.
    (iv) If the agency determines that the borrower does not qualify 
for a discharge, it shall, within 30 days after making that 
determination--
    (A) Notify the lender that the borrower's liability on the loan is 
not discharged and that, depending on the borrower's decision under 
paragraph (e)(8)(iv)(B) of this section, the loan shall either be 
returned to the lender or paid as a default claim; and
    (B) Notify the borrower that the borrower does not qualify for 
discharge, and state the reasons for that conclusion. The agency shall 
advise the borrower that he or she remains obligated to repay the loan 
and warn the borrower of the consequences of default, and explain that 
the borrower will be considered to be in default on the loan unless the 
borrower submits a written statement to the agency within 30 days 
stating that the borrower--
    (1) Acknowledges the debt and, if payments are due, will begin or 
resume making those payments to the lender; or
    (2) Requests the Secretary to review the agency's decision.
    (v) Within 30 days after receiving the borrower's written statement 
described in paragraph (e)(8)(iv)(B)(1) of this section, the agency 
shall return the claim file to the lender and notify the lender to 
resume collection efforts if payments are due.
    (vi) Within 30 days after receiving the borrower's request for 
review by the Secretary, the agency shall forward the claim file to the 
Secretary for his review and take the actions required under paragraph 
(e)(11) of this section.
    (vii) The agency shall pay a default claim to the lender within 30 
days after the borrower fails to return either of the written 
statements described in paragraph (e)(8)(iv)(B) of this section.
    (9) Guaranty agency responsibilities in the case of a loan held by 
the agency for which a discharge request is submitted by a borrower 
based on the borrower's assertion that he or she did not sign the loan 
application or the promissory note, or that the school failed to test, 
or improperly tested, the student's ability to benefit. (i) The agency 
shall evaluate the borrower's request and consider relevant information 
it possesses and information available from other sources, and follow 
the procedures described in paragraph (e)(9) of this section.
    (ii) If the agency determines that the borrower satisfies the 
requirements for discharge under paragraph (e)(3) of this section, it 
shall immediately terminate any collection efforts against the borrower 
with respect to the discharged loan amount and any charges imposed or 
costs incurred by the agency related to the discharged loan amount that 
the borrower is, or was otherwise obligated to pay and, not later than 
30 days after the agency makes the determination that the borrower 
satisfies the requirements for discharge--
    (A) Notify the borrower that his or her liability with respect to 
the amount of the loan has been discharged;
    (B) Report to all credit reporting agencies to which the agency 
previously reported the status of the loan, so as to delete all adverse 
credit history assigned to the loan; and
    (C) Refund to the borrower all amounts paid by the borrower to the 
lender or the agency with respect to the discharged loan amount, 
including any late fees or collection charges imposed by the lender or 
agency related to the discharged loan amount.
    (iii) If the agency determines that the borrower does not qualify 
for a discharge, it shall, within 30 days after making that 
determination, notify the borrower that the borrower's liability with 
respect to the amount of the loan is not discharged, state the reasons 
for that conclusion, and if the borrower is not then making payments in 
accordance with a repayment arrangement with the agency on the loan, 
advise the borrower of the consequences of continued failure to reach 
such an arrangement, and that collection action will resume on the loan 
unless within 30 days the borrower--
    (A) Acknowledges the debt and, if payments are due, reaches a 
satisfactory arrangement to repay the loan or resumes making payments 
under such an arrangement to the agency; or
    (B) Requests the Secretary to review the agency's decision.
    (iv) Within 30 days after receiving the borrower's request for 
review by the Secretary, the agency shall forward the borrower's 
discharge request and all relevant documentation to the Secretary for 
his review and take the actions required under paragraph (e)(11) of 
this section.
    (v) The agency shall resume collection action if within 30 days of 
giving notice of its determination the borrower fails to seek review by 
the Secretary or agree to repay the loan.
    (10) Guaranty agency responsibilities in the case of a loan held by 
the agency for which a discharge request is submitted by a borrower 
based only on the borrower's assertion that he or she did not sign the 
loan check or the authorization for the electronic transfer of loan 
funds. (i) The agency shall evaluate the borrower's request and 
consider relevant information it possesses and information available 
from other sources, and follow the procedures described in paragraph 
(e)(10) of this section.
    (ii) If the agency determines that a borrower who asserts that he 
or she did not endorse the loan check satisfies the requirements for 
discharge under paragraph (e)(3)(iv) of this section, it shall refund 
to the Secretary the amount of reinsurance payment received with 
respect to the amount discharged on that loan less any repayments made 
by the lender under paragraph (e)(10)(ii)(D)(2) of this section, and 
within 30 days after making that determination--
    (A) Notify the borrower that his or her liability with respect to 
the amount of the contested disbursement of the loan has been 
discharged;
    (B) Report to all credit reporting agencies to which the agency 
previously reported the status of the loan, so as to delete all adverse 
credit history assigned to the loan;
    (C) Refund to the borrower all amounts paid by the borrower to the 
lender or the agency with respect to the discharged loan amount, 
including any late fees or collection charges imposed by the lender or 
agency related to the discharged loan amount;
    (D) Notify the lender to whom a claim payment was made that the 
lender must refund to the Secretary, within 30 days--
    (1) All interest benefits and special allowance payments received 
from the Secretary with respect to the loan disbursement that was 
discharged; and
    (2) The amount of the borrower's payments that were refunded to the 
borrower by the guaranty agency under paragraph (e)(10)(iii)(C) of this 
section that represent borrower payments previously paid to the lender 
with respect to the loan disbursement that was discharged;
    (E) Notify the lender to whom a claim payment was made that the 
lender must, within 30 days, reimburse the agency for the amount of the 
loan that was discharged, minus the amount of borrower payments made to 
the lender that were refunded to the borrower by the guaranty agency 
under paragraph (e)(10)(iii)(C) of this section; and
    (F) Transfer to the lender the borrower's written assignment of any 
rights the borrower may have against third parties with respect to the 
loan disbursement that was discharged.
    (iii) In the case of a borrower who requests a discharge because he 
or she did not sign the electronic funds transfer authorization, if the 
agency determines that the borrower meets the conditions for a 
discharge, it shall immediately terminate any collection efforts 
against the borrower with respect to the discharged loan amount and any 
charges imposed or costs incurred by the agency related to the 
discharged loan amount that the borrower is, or was, otherwise 
obligated to pay, and within 30 days after making that determination--
    (A) Notify the borrower that his or her liability with respect to 
the amount of the contested disbursement of the loan has been 
discharged;
    (B) Refund to the borrower all amounts paid by the borrower to the 
lender or the agency with respect to the discharged loan amount, 
including any late fees or collection charges imposed by the lender or 
agency related to the discharged loan amount; and
    (C) Report to all credit reporting agencies to which the lender 
previously reported the status of the loan, so as to delete all adverse 
credit history assigned to the loan.
    (iv) The agency shall take the actions required under paragraphs 
(e)(9) (iii) through (v) if the agency determines that the borrower 
does not qualify for a discharge.
    (11) Guaranty agency responsibilities if a borrower requests a 
review by the Secretary. (i) Within 30 days after receiving the 
borrower's request for review under paragraph (e)(7)(iii)(B)(2), 
(e)(8)(iv)(B)(2), (e)(9)(iii)(B), or (e)(10)(iv)(B) of this section, 
the agency shall forward the borrower's discharge request and all 
relevant documentation to the Secretary for his review.
    (ii) The Secretary notifies the agency and the borrower of a 
determination on review. If the Secretary determines that the borrower 
is not eligible for a discharge under paragraph (e) of this section, 
within 30 days after being so informed, the agency shall take the 
actions described in paragraphs (e)(8) (iv) through (vii) or 
(e)(9)(iii) through (v) of this section, as applicable.
    (iii) If the Secretary determines that the borrower meets the 
requirements for a discharge under paragraph (e) of this section, the 
agency shall, within 30 days after being so informed, take the actions 
required under paragraph (e)(7)(ii), (e)(8)(ii), (e)(8)(iii), 
(e)(9)(ii), (e)(10)(ii), or (e)(10)(iii) of this section, as 
applicable.
    (12) Lender Responsibilities. (i) If the lender is notified by a 
guaranty agency or the Secretary, or receives information it believes 
to be reliable from another source indicating that a current or former 
borrower may be eligible for a discharge under paragraph (e) of this 
section, the lender shall immediately suspend any efforts to collect 
from the borrower on any loan received for the program of study for 
which the loan was made (but may continue to receive borrower payments) 
and, within 30 days of receiving the information or notification, 
inform the borrower of the procedures for requesting a discharge.
    (ii) If the borrower fails to submit the written request and sworn 
statement described in paragraph (e)(3) of this section within 60 days 
of being notified of that option, the lender shall resume collection 
and shall be deemed to have exercised forbearance of payment of 
principal and interest from the date the lender suspended collection 
activity. The lender may capitalize, in accordance with 
Sec. 682.202(b), any interest accrued and not paid during that period.
    (iii) The lender shall file a claim with the guaranty agency in 
accordance with Sec. 682.402(g) no later than 60 days after the lender 
receives the borrower's written request and sworn statement described 
in paragraph (e)(3) of this section. If a lender receives a payment 
made by or on behalf of the borrower on the loan after the lender files 
a claim on the loan with the guaranty agency, the lender shall forward 
the payment to the guaranty agency within 30 days of its receipt. The 
lender shall assist the guaranty agency and the borrower in determining 
whether the borrower is eligible for discharge of the loan.
    (iv) The lender shall comply with all instructions received from 
the Secretary or a guaranty agency with respect to loan discharges 
under paragraph (e) of this section.
    (v) The lender shall review a claim that the borrower did not 
endorse and did not receive the proceeds of a loan check. The lender 
shall take the actions required under paragraphs (e)(8)(ii)(A) and (B) 
of this section if it determines that the borrower did not endorse the 
loan check, unless the lender secures persuasive evidence that the 
proceeds of the loan were received by the borrower or the student for 
whom the loan was made, as provided in paragraph (e)(1)(ii). If the 
lender determines that the loan check was properly endorsed or the 
proceeds were received by the borrower or student, the lender may 
consider the borrower's objection to repayment as a statement of 
intention not to repay the loan, and may file a claim with the guaranty 
agency for reimbursement on that ground, but shall not report the loan 
to credit bureaus as in default until the guaranty agency, or, as 
applicable, the Secretary, reviews the claim for relief. By filing such 
a claim, the lender shall be deemed to have agreed to the following--
    (A) If the guarantor or the Secretary determines that the borrower 
endorsed the loan check or the proceeds of the loan were received by 
the borrower or the student, any failure to satisfy due diligence 
requirements by the lender prior to the filing of the claim that would 
have resulted in the loss of reinsurance on the loan in the event of 
default will be waived by the Secretary; and
    (B) If the guarantor or the Secretary determines that the borrower 
did not endorse the loan check and that the proceeds of the loan were 
not received by the borrower or the student, the lender will comply 
with the requirements specified in paragraph (e)(8)(ii)(B) of this 
section.
    (vi) Within 30 days after being notified by the guaranty agency 
that the borrower's request for a discharge has been denied, the lender 
shall notify the borrower of the reasons for the denial and, if 
payments are due, resume collection against the borrower. The lender 
shall be deemed to have exercised forbearance of payment of principal 
and interest from the date the lender suspended collection activity, 
and may capitalize, in accordance with Sec. 682.202(b), any interest 
accrued and not paid during that period.
    (13) Requirements for admission on the basis of ability to benefit. 
(i) For periods of enrollment beginning between July 1, 1987 and June 
30, 1991, a student who had a general education diploma or received one 
before the scheduled completion of the program of instruction is deemed 
to have the ability to benefit from the training offered by the school.
    (ii) A student not described in paragraph (e)(8)(i) of this section 
is considered to have the ability to benefit from training offered by 
the school if the student--
    (A) For periods of enrollment beginning prior to July 1, 1987, was 
determined by the school to have the ability to benefit from the 
school's training in accordance with the requirements of 34 CFR 668.6;
    (B) For periods of enrollment beginning on or after July 1, 1987, 
achieved a passing grade on a test--
    (1) Approved by the Secretary, for periods of enrollment beginning 
on or after July 1, 1991, or by the accrediting agency, for other 
periods; and
    (2) Administered substantially in accordance with the requirements 
for use of the test; or
    (C) Successfully completed a program of developmental or remedial 
education provided by the school.
    (iii) Notwithstanding paragraphs (e)(8) (i) and (ii) of this 
section, a student did not have the ability to benefit from training 
offered by the school if the student had, at the time of enrollment, a 
condition or status, including one based on a physical or mental 
condition, age, or criminal record, that would have prevented the 
student from satisfying the physical requirements or the legal 
requirements of the State in which the student resided when the loan 
was made for either acceptance into the educational program offered by 
the school or performance of the occupation for which the program of 
instruction was designed to prepare the student.
    (f) * * *
    (2) Suspension of collection activity. If the lender is notified 
that a borrower has filed a petition for relief in bankruptcy, the 
lender shall immediately suspend any collection efforts outside the 
bankruptcy proceeding against the borrower and--
    (i) Against any co-maker or endorser if the borrower has filed for 
relief under Chapters 12 or 13; and
    (ii) Against any co-maker or endorser who has filed for relief in 
bankruptcy.
    (3) Determination of filing. The lender shall determine that a 
borrower has filed a petition for relief in bankruptcy on the basis of 
receiving a notice of the first meeting of creditors or other 
confirmation issued by the bankruptcy court.
    (4) Proof of claim. Unless instructed otherwise by the guaranty 
agency, the lender shall file a proof of claim with the bankruptcy 
court within--
* * * * *
    (g) Claim procedures for a loan held by a lender--(1) 
Documentation. A lender shall provide the guaranty agency with the 
following documentation when filing a death, disability, closed school, 
false certification, or bankruptcy claim:
    (i) The original promissory note, or, if the lender no longer has 
the original promissory note, a copy of the note certified by the 
lender as a true and accurate copy;
* * * * *
    (vi) In the case of a closed school claim, the documentation 
described in paragraph (d)(3) of this section, or any other 
documentation as the Secretary may require;
    (vii) In the case of a false certification claim, the documentation 
described in paragraph (e)(3) of this section.
    (2) Filing deadlines. A lender shall file a death, disability, 
closed school, false certification, or bankruptcy claim within the 
following periods:
    (i) Within 60 days of the date on which the lender determines that 
a borrower (or the student on whose behalf a parent obtained a PLUS 
loan) has died, or the lender determines that the borrower is totally 
and permanently disabled.
    (ii) In the case of a closed school claim, the lender shall file a 
claim with the guaranty agency no later than 60 days after the borrower 
submits to the lender the written request and sworn statement described 
in paragraph (d)(3) of this section or after the lender is notified by 
the Secretary or the Secretary's designee or by the guaranty agency to 
do so.
    (iii) In the case of a false certification claim, the lender shall 
file a claim with the guaranty agency no later than 60 days after the 
borrower submits to the lender the written request and sworn statement 
described in paragraph (e)(3) of this section or after the lender is 
notified by the Secretary or the Secretary's designee or by the 
guaranty agency to do so.
* * * * *
    (h) Payment of death, disability, closed school, false 
certification, and bankruptcy claims by the guaranty agency.
    (1) * * *
    (iii) In the case of a closed school claim or a false certification 
claim based on the determination that the borrower did not sign the 
loan application, the promissory note, or the authorization for the 
electronic transfer of loan funds, or that the school failed to test, 
or improperly tested, the student's ability to benefit, the guaranty 
agency shall document its determination that the borrower is eligible 
for discharge under paragraphs (d) or (e) of this section and pay the 
borrower or the holder the amount determined under paragraph (h)(2) of 
this section.
    (2) * * *
    (ii) The amount of loss payable to a lender on a closed school 
claim or on a false certification claim is equal to the sum of the 
remaining principal balance and interest accrued on the loan, 
collection costs incurred by the lender and applied to the borrower's 
account within 30 days of the date those costs were actually incurred, 
and unpaid interest determined in accordance with paragraph (h)(3) of 
this section.
    (iii) In the case of a claim filed by a lender on an outstanding 
loan owed by the borrower, on the same date that the agency pays a 
claim to the lender, the agency shall pay the borrower an amount equal 
to the amount paid on the loan by or on behalf of the borrower, less 
any school tuition refunds or payments received by the holder or the 
borrower from a tuition recovery fund, performance bond, or other 
third-party source.
    (iv) In the case of a claim filed by a lender based on a request 
received from a borrower whose loan had been repaid in full by, or on 
behalf of the borrower to the lender, on the same date that the agency 
notifies the lender that the borrower is eligible for a closed school 
or false certification discharge, the agency shall pay the borrower an 
amount equal to the amount paid on the loan by or on behalf of the 
borrower, less any school tuition refunds or payments received by the 
holder or the borrower from a tuition recovery fund, performance bond, 
or other third-party source.
    (v) In the case of a loan that has been included in a Federal 
Consolidation Loan, the agency shall pay to the holder of the 
borrower's Consolidation Loan, an amount equal to--
    (A) The amount paid on the loan by or on behalf of the borrower at 
the time the loan was paid through consolidation;
    (B) The amount paid by the consolidating lender to the holder of 
the loan when it was repaid through consolidation; minus
    (C) Any school tuition refunds or payments received by the holder 
or the borrower from a tuition recovery fund, performance bond, or 
other third-party source if those refunds or payments were--
    (1) Received by the borrower or received by the holder and applied 
to the borrower's loan balance before the date the loan was repaid 
through consolidation; or
    (2) Received by the borrower or received by the Consolidation Loan 
holder on or after the date the consolidating lender made a payment to 
the former holder to discharge the borrower's obligation to that former 
holder.
    (3) * * *
    (i) During the period before the claim is filed, not to exceed the 
period provided for in paragraph (g)(2) of this section for filing the 
claim.
    (ii) During a period not to exceed 30 days following the receipt 
date by the lender of a claim returned by the guaranty agency for 
additional documentation necessary for the claim to be approved by the 
guaranty agency.
* * * * *
    (i) * * *
    (2) Response by a guaranty agency to plans proposed under Chapters 
11, 12, and 13. The guaranty agency shall take the following actions 
when a petition for relief in bankruptcy under Chapters 11, 12, or 13 
is filed:
* * * * *
    (iv) The agency shall monitor the debtor's performance under a 
confirmed plan. If the debtor fails to make payments required under the 
plan or seeks but does not demonstrate entitlement to discharge under 
11 U.S.C. 1328(b), the agency shall oppose any requested discharge or 
move to dismiss the case if the costs of litigation together with the 
costs incurred for objections to the plan are not reasonably expected 
to exceed one-third of the amount of the loan to be discharged under 
the plan.
* * * * *
    (j) Mandatory purchase by a lender of a loan subject to a 
bankruptcy claim. (1) The lender shall repurchase from the guaranty 
agency a loan held by the agency pursuant to a bankruptcy claim paid to 
that lender, unless the guaranty agency sells the loan to another 
lender, promptly after the earliest of the following events:
* * * * *
    (2) The lender may capitalize all outstanding interest accrued on a 
loan purchased under paragraph (j) of this section to cover any periods 
of delinquency prior to the bankruptcy action through the date the 
lender purchases the loan and receives the supporting loan 
documentation from the guaranty agency.
    (k) Claims for reimbursement from the Secretary on loans held by 
guaranty agencies.* * *
* * * * *
    (2) The Secretary pays a death, disability, bankruptcy, closed 
school, or false certification claim in an amount determined under 
Sec. 682.402(k)(5) on a loan held by a guaranty agency after the agency 
has paid a default claim to the lender thereon and received payment 
under its reinsurance agreement. The Secretary reimburses the guaranty 
agency only if--
    (i) The guaranty agency determines that the borrower (or the 
student for whom a parent obtained a PLUS loan or each of the co-makers 
of a PLUS loan) has died, or the borrower (or each of the co-makers of 
a PLUS loan) has become totally and permanently disabled since applying 
for the loan, or has filed for relief in bankruptcy, in accordance with 
the procedures in paragraphs (b), (c), or (f) of this section, or the 
student was unable to complete an educational program because the 
school closed, or the borrower's eligibility to borrow (or the 
student's eligibility in the case of a PLUS loan) was falsely certified 
by an eligible school. For purposes of this paragraph, references to 
the ``lender'' and ``guaranty agency'' in paragraphs (b) through (f) of 
this section mean the guaranty agency and the Secretary respectively;
    (ii) In the case of a Stafford, SLS, or PLUS loan, the guaranty 
agency determines that the borrower (or the student for whom a parent 
obtained a PLUS loan, or each of the co-makers of a PLUS loan) has 
died, or the borrower (or each of the co-makers of a PLUS loan) has 
become totally and permanently disabled since applying for the loan, or 
has filed the petition for relief in bankruptcy within 10 years of the 
date the borrower entered repayment, exclusive of periods of deferment 
or periods of forbearance granted by the lender that extended the 10-
year maximum repayment period, or the borrower (or the student for whom 
a parent received a PLUS loan) was unable to complete an educational 
program because the school closed, or the borrower's eligibility to 
borrow (or the student's eligibility in the case of a PLUS loan) was 
falsely certified by an eligible school;
    (iii) In the case of a Consolidation loan, the guaranty agency 
determines that the borrower (or each of the co-makers) has died, 
become totally and permanently disabled since applying for the 
Consolidation loan, or has filed the petition for relief in bankruptcy 
within the maximum repayment period described in Sec. 682.209(h)(2), 
exclusive of periods of deferment or periods of forbearance granted by 
the lender that extended the maximum repayment period;
    (iv) The guaranty agency has not written off the loan in accordance 
with the procedures established by the agency under 
Sec. 682.410(b)(6)(x), except for closed school and false certification 
discharges; and
    (v) The guaranty agency has exercised due diligence in the 
collection of the loan in accordance with the procedures established by 
the agency under Sec. 682.410(b)(6)(x), until the borrower (or the 
student for whom a parent obtained a PLUS loan, or each of the co-
makers of a PLUS loan) has died, or the borrower (or each of the co-
makers of a PLUS loan) has become totally and permanently disabled or 
filed a Chapter 12 or Chapter 13 petition, or had the loan discharged 
in bankruptcy, or for closed school and false certification claims, the 
guaranty agency receives a request for discharge from the borrower or 
another party.
    (3) [Reserved]
    (4) Within 30 days of receiving reimbursement for a closed school 
or false certification claim, the guaranty agency shall pay--
    (i) The borrower an amount equal to the amount paid on the loan by 
or on behalf of the borrower, less any school tuition refunds or 
payments received by the holder, guaranty agency, or the borrower from 
a tuition recovery fund, performance bond, or other third-party source; 
or
    (ii) The amount determined under paragraph (h)(2)(iv) of this 
section to the holder of the borrower's Consolidation Loan.
    (5) The Secretary pays the guaranty agency a percentage of the 
outstanding principal and interest that is equal to the complement of 
the reinsurance percentage paid on the loan. This interest includes 
interest that accrues during--
    (i) For death, disability, or bankruptcy claims, the shorter of 60 
days or the period from the date the guaranty agency determines that 
the borrower (or the student for whom a parent obtained a PLUS loan, or 
each of the co-makers of a PLUS loan) died, became totally and 
permanently disabled, or filed a petition for relief in bankruptcy 
until the Secretary authorizes payment; or
    (ii) For closed school or false certification claims, the period 
from the date on which the guaranty agency received payment from the 
Secretary on a default claim to the date on which the Secretary 
authorizes payment of the closed school or false certification claim.
    (l) Payments received after the Secretary's payment of a death, 
disability, closed school, false certification, or bankruptcy claim. 
(1) If the guaranty agency receives any payments from or on behalf of 
the borrower on or attributable to a loan on which the Secretary 
previously paid a bankruptcy claim, the guaranty agency shall remit 100 
percent of these payments to the Secretary.
    (2) The guaranty agency shall remit to the Secretary all payments 
received from a tuition recovery fund, performance bond, or other 
third-party with respect to a loan on which the Secretary previously 
paid a closed school or false certification claim. The guaranty agency 
shall promptly return to the borrower or the borrower's representative, 
any payment on a discharged loan made by the borrower (or 
representative) and received after the Secretary pays a closed school 
or false certification claim. At the same time that the agency returns 
the payment, it shall notify the borrower (or representative) that 
there is no obligation to repay a loan discharged by virtue of death, 
disability, false certification, or closing of the school.
    (3) If the guaranty agency has returned a payment to the borrower, 
or the borrower's representative, with the notice described in 
paragraph (l)(2) of this section, and the borrower (or representative) 
continues to send payments to the guaranty agency, the agency shall 
remit all of those payments to the Secretary.
    (m) Applicable suspension of the repayment period. For purposes of 
this section and 11 U.S.C. 523(a)(8)(A) with respect to loans 
guaranteed under the FFEL Program, an applicable suspension of the 
repayment period--
* * * * *
    (5) Includes the period between the filing of the petition for 
relief and the date on which the proceeding is completed or dismissed, 
unless payments have been made during that period in amounts sufficient 
to meet the amount owed under the repayment schedule in effect when the 
petition was filed.
* * * * *
(Authority: 20 U.S.C. 1078, 1078-1, 1078-2, 1078-3, 1082, 1087)

    5. Section 682.410 is amended by revising paragraphs (b)(5)(vi)(H) 
and (b)(5)(vi)(L), (b)(6)(i), (b)(6) (iii) introductory text and 
(b)(6)(iii)(A), (b)(6)(iv) introductory and (b)(6)(iv)(B), (B)(6)(vii) 
introductory text, (b)(6)(vii)(A), removing paragraphs (B)(6)(vii)(B) 
and (b)(6)(vii)(C) and redesignating paragraph (b)(6)(vii)(D) as 
paragraph (b)(6)(vii)(B) and reserving it, revising paragraph 
(b)(6)(xii), revising paragraph (b)(7)(iv)(B), and by adding a new 
paragraph (b)(10), and by revising the authority citation to read as 
follows:


Sec. 682.410  Fiscal, administrative, and enforcement requirements.

* * * * *
    (b) * * *
    (5) * * *
    (vi) * * *
    (H) Unless the agency uses a separate notice to advise the borrower 
regarding other proposed enforcement actions, describe specifically any 
other enforcement action, such as offset against federal or state 
income tax refunds or wage garnishment that the agency intends to use 
to collect the debt, and explain the procedures available to the 
borrower prior to those other enforcement actions for access to 
records, for an administrative review, or for agreement to alternative 
repayment terms;
* * * * *
    (L) Describe the collection actions that the agency may take in the 
future if those presently proposed do not result in repayment of the 
loan obligation, including the filing of a lawsuit against the borrower 
by the agency and assignment of the loan to the Secretary for the 
filing of a lawsuit against the borrower by the Federal Government.
    (6) Collection efforts on defaulted loans. (i) A guaranty agency 
shall engage in at least the collection activities described in 
paragraphs (b)(6) (iii) through (xii) of this section on a loan on 
which it pays a default claim filed by a lender, and shall attempt an 
annual IRS offset on each eligible loan, except that the agency may 
engage in the collection activities described in paragraph (b)(7) of 
this section in lieu of the activities described in paragraphs (b)(6) 
(iii) through (vi) of this section.
    If, after initiating wage garnishment procedures, the agency 
terminates those procedures for a particular borrower, the agency 
shall, within 30 days, commence collection efforts at least as forceful 
as those described in paragraphs (b)(6) (iii) through (xii) of this 
section. The agency's collection efforts shall begin with the same 
collection activities as those that immediately preceded the initiation 
of garnishment procedures, or, if no collection activities had been 
performed, the agency shall begin with the activities described in 
paragraph (b)(6)(iii) of this section, except that the agency may 
engage in the collection activities described in paragraph (b)(7) of 
this section in lieu of the activities described in paragraphs (b)(6) 
(iii) through (vi) of this section.
* * * * *
    (iii) One-45 days: During this period, the agency shall--
    (A) Send to the borrower the written notice described in paragraph 
(b)(5)(ii) of this section, and a written notice stating that the 
agency either will initiate procedures to garnish the borrower's wages, 
or institute a civil suit to compel repayment of the amount that the 
borrower owes plus related collection costs; and
* * * * *
    (iv) 46-180 days: During this period the agency shall--
* * * * *
    (B) Send at least three written notices to the borrower forcefully 
demanding that the borrower immediately commence repayment of the loan, 
and informing the borrower that the default has been reported to all 
national credit bureaus (if that is the case) and that the borrower's 
credit rating may thereby have been damaged. The final notice also must 
indicate that it is the final notice the borrower will receive before 
the agency will take more forceful action, including the initiation of 
procedures to garnish the borrower's wages, or to offset the borrower's 
state and federal income tax refunds, or instituting a civil suit to 
compel repayment of the amount that the borrower owes plus related 
collection costs.
* * * * *
    (vii) 181-545 days:
    (A) Except as provided in paragraph (b)(6)(vii)(B) of this section, 
during this period, but not sooner than 30 days after sending the 
notice described in paragraph (b)(5)(vi) of this section, the agency 
shall initiate proceedings to offset the borrower's state and federal 
income tax refunds, and shall either initiate wage garnishment 
proceedings against the borrower by the 225th day, or, by the 545th 
day, institute a civil suit against the borrower for repayment of the 
loan.
    (B) The agency need not file suit if the agency determines and 
documents in the borrower's file that--
    (1) The cost of litigation would exceed the likely recovery if 
litigation was begun; or
    (2) The borrower does not have the means to satisfy a judgment on 
the debt or a substantial portion thereof.
* * * * *
    (xii) Not later than 10 days after its receipt of information 
indicating that it does not know the current address of a borrower on a 
loan on which the agency has neither declined to sue under paragraph 
(b)(6)(vii)(B) of this section nor discontinued semi-annual inquiries 
under paragraph (b)(6)(x) of this section, or the 60th day after its 
payment of a default claim on the loan, whichever is later, the agency 
shall attempt diligently to locate the borrower through the use of all 
available skip-tracing techniques, including, but not limited to, any 
skip-tracing assistance available from the IRS, credit bureaus, and 
state motor vehicle departments. A guaranty agency shall use any 
information provided by a school about a borrower's location in 
conducting skip-tracing activities.
* * * * *
    (7) * * *
    (iv) * * *
    (B) By the end of this period, the agency shall refer the loan to a 
collection contractor in accordance with paragraph (b)(7)(iv)(C) of 
this section.
* * * * *
    (10) Administrative Garnishment. (i) If a guaranty agency decides 
to garnish the disposable pay of a borrower who is not making payments 
on a loan held by the agency, on which the Secretary has paid a 
reinsurance claim, it shall do so in accordance with the following 
procedures:
    (A) The employer shall deduct and pay to the agency from a 
borrower's wages an amount that does not exceed the lesser of 10 
percent of the borrower's disposable pay for each pay period or the 
amount permitted by 15 U.S.C. 1673, unless the borrower provides the 
agency with written consent to deduct a greater amount. For this 
purpose, the term ``disposable pay'' means that part of the borrower's 
compensation from an employer remaining after the deduction of any 
amounts required by law to be withheld.
    (B) At least 30 days before the initiation of garnishment 
proceedings, the guaranty agency shall mail to the borrower's last 
known address, a written notice of the nature and amount of the debt, 
the intention of the agency to initiate proceedings to collect the debt 
through deductions from pay, and an explanation of the borrower's 
rights.
    (C) The guaranty agency shall offer the borrower an opportunity to 
inspect and copy agency records related to the debt.
    (D) The guaranty agency shall offer the borrower an opportunity to 
enter into a written repayment agreement with the agency under terms 
agreeable to the agency.
    (E) The guaranty agency shall offer the borrower an opportunity for 
a hearing in accordance with paragraph (b)(10)(i)(J) of this section 
concerning the existence or the amount of the debt and, in the case of 
a borrower whose proposed repayment schedule under the garnishment 
order is established other than by a written agreement under paragraph 
(b)(10)(i)(D) of this section, the terms of the repayment schedule.
    (F) The guaranty agency shall sue any employer for any amount that 
the employer, after receipt of the garnishment notice provided by the 
agency under paragraph (b)(10)(i)(H) of this section, fails to withhold 
from wages owed and payable to an employee under the employer's normal 
pay and disbursement cycle.
    (G) The guaranty agency may not garnish the wages of a borrower 
whom it knows has been involuntarily separated from employment until 
the borrower has been reemployed continuously for at least 12 months.
    (H) Unless the guaranty agency receives information that the agency 
believes justifies a delay or cancellation of the withholding order, it 
shall send a withholding order to the employer within 20 days after the 
borrower fails to make a timely request for a hearing, or, if a timely 
request for a hearing is made by the borrower, within 20 days after a 
final decision is made by the agency to proceed with garnishment.
    (I) The notice given to the employer under paragraph (b)(10)(i)(H) 
of this section must contain only the information as may be necessary 
for the employer to comply with the withholding order.
    (J) The guaranty agency shall provide a hearing, which, at the 
borrower's option, may be oral or written, if the borrower submits a 
written request for a hearing on the existence or amount of the debt or 
the terms of the repayment schedule. The time and location of the 
hearing shall be established by the agency. An oral hearing may, at the 
borrower's option, be conducted either in-person or by telephone 
conference. All telephonic charges must be the responsibility of the 
guaranty agency.
    (K) If the borrower's written request is received by the guaranty 
agency on or before the 15th day following the borrower's receipt of 
the notice described in paragraph (b)(10)(i)(B) of this section, the 
guaranty agency may not issue a withholding order until the borrower 
has been provided the requested hearing. For purposes of this 
paragraph, in the absence of evidence to the contrary, a borrower shall 
be considered to have received the notice described in paragraph 
(b)(10)(i)(B) of this section 5 days after it was mailed by the agency. 
The guaranty agency shall provide a hearing to the borrower in 
sufficient time to permit a decision, in accordance with the procedures 
that the agency may prescribe, to be rendered within 60 days.
    (L) If the borrower's written request is received by the guaranty 
agency after the 15th day following the borrower's receipt of the 
notice described in paragraph (b)(10)(i)(B) of this section, the 
guaranty agency shall provide a hearing to the borrower in sufficient 
time that a decision, in accordance with the procedures that the agency 
may prescribe, may be rendered within 60 days, but may not delay 
issuance of a withholding order unless the agency determines that the 
delay in filing the request was caused by factors over which the 
borrower had no control, or the agency receives information that the 
agency believes justifies a delay or cancellation of the withholding 
order. For purposes of this paragraph, in the absence of evidence to 
the contrary, a borrower shall be considered to have received the 
notice described in paragraph (b)(10)(i)(B) of this section 5 days 
after it was mailed by the agency.
    (M) The hearing official appointed by the agency to conduct the 
hearing may be any qualified individual, including an administrative 
law judge, not under the supervision or control of the head of the 
guaranty agency.
    (N) The hearing official shall issue a final written decision at 
the earliest practicable date, but not later than 60 days after the 
guaranty agency's receipt of the borrower's hearing request.
    (O) As specified in section 488A(a)(8) of the HEA, the borrower may 
seek judicial relief, including punitive damages, if the employer 
discharges, refuses to employ, or takes disciplinary action against the 
borrower due to the issuance of a withholding order.
    (ii) References to ``the borrower'' in this paragraph include all 
endorsers on a loan.
* * * * *
(Authority: 20 U.S.C. 1078, 1078-1, 1078-2, 1078-3, 1080a, 1082, 
1087, 1091a, and 1099)

    6. Section 682.411 is amended by revising paragraph (d)(2) and the 
authority citation to read as follows:


Sec. 682.411  Due diligence by lenders in the collection of guaranty 
agency loans.

* * * * *
    (d) * * *
    (2) At least two of the collection letters required under paragraph 
(d)(1) of this section must warn the borrower that if the loan is not 
paid, the lender will assign the loan to the guaranty agency that, in 
turn, will report the default to all national credit bureaus, and that 
the agency may institute proceedings to offset the borrower's state and 
federal income tax refunds, to garnish the borrower's wages, and to 
bring suit against the borrower to compel repayment of the loan.
* * * * *
(Authority: 20 U.S.C. 1078, 1078-1, 1078-2, 1078-3, 1080a, 1082, 
1087)

    7. Section 682.414 is amended by revising paragraph (a)(2) and the 
authority citation to read as follows:


Sec. 682.414  Records, reports, and inspection requirements for 
guaranty agency programs.

    (a) * * *
    (2) The guaranty agency shall retain records for each loan for at 
least five years after the loan is paid in full or has been determined 
to be uncollectible in accordance with the agency's write-off 
procedures. For the purpose of this section, the term ``paid in full'' 
includes loans paid by the Secretary due to the borrower's death (or 
student's death in the case of a PLUS loan), the borrower's permanent 
and total disability or bankruptcy, the discharge of the borrower's 
loan obligation because of attendance at a closed school, or because 
the student's eligibility to borrow had been falsely certified by the 
school.
* * * * *
(Authority: 20 U.S.C. 1078, 1078-1, 1078-2, 1078-3, 1082, 1087)

[FR Doc. 94-10250 Filed 4-28-94; 8:45 am]
BILLING CODE 4000-01-P