[Federal Register Volume 59, Number 197 (Thursday, October 13, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-25363]


[[Page Unknown]]

[Federal Register: October 13, 1994]


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Part II





Department of Education





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34 CFR Part 682




Federal Family Education Loan Program; Proposed Rule
DEPARTMENT OF EDUCATION

34 CFR Part 682

RIN 1840-AC09

 
Federal Family Education Loan Program

AGENCY: Department of Education.

ACTION: Notice of proposed rulemaking.

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

SUMMARY: The Secretary proposes to amend the Federal Family Education 
Loan (FFEL) Program regulations. 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 certain changes made to the Higher 
Education Act of 1965, as amended (HEA), by the Omnibus Budget 
Reconciliation Act of 1993, enacted August 10, 1993, and by the Higher 
Education Technical Amendments of 1993, enacted December 20, 1993. The 
proposed regulations would also amend the FFEL Program regulations to 
permit a lender to issue a ``master check'' to an institution for 
purposes of disbursing Federal Stafford loan proceeds to an 
institution, to prohibit a subsequent holder of a loan to bill the 
Secretary for any applicable interest benefits or special allowance on 
a loan for which origination fees have not been paid, and to limit the 
collection charges that may be assessed a borrower with a defaulted 
loan that is paid off through loan consolidation. The proposed 
regulations would implement section 428(n) of the HEA as amended by 
OBRA which requires a State to share the costs of defaulted Federal 
Stafford and Federal SLS loans with the Federal government.

DATES: Comments must be received on or before November 14, 1994.
ADDRESSES: All comments concerning these proposed regulations should be 
addressed to Ms. Patricia Newcombe, Chief, Federal Family Education 
Loan Program Section, Loans Branch, U.S. Department of Education, 600 
Independence Avenue, SW., room 4310, Regional Office Building 3, 
Washington, DC 20202-5343. Comments may also be sent through the 
internet to ``[email protected].''
    A copy of any comments that concern information collection 
requirements should also be sent to the Office of Management and Budget 
at the address listed in the Paperwork Reduction Act section of this 
preamble.

FOR FURTHER INFORMATION CONTACT: Mr. Douglas D. Laine, Program 
Specialist, Federal Family Education Loan Program Section, Loans 
Branch, U.S. Department of Education, 600 Independence Avenue, SW., 
room 4310, Regional Office Building 3, Washington, DC 20202-5343, 
telephone: (202) 708-8242. Individuals who use a telecommunications 
device for the deaf (TDD) may call the Federal Information Relay 
Service (FIRS) at 1-800-877-8339 between 8 a.m. and 8 p.m., Eastern 
time, Monday through Friday.

SUPPLEMENTARY INFORMATION:

Background

    The FFEL Program regulations (34 CFR Part 682) govern the Federal 
Stafford Loan Program, the Federal SLS Program, the Federal PLUS 
Program, and the Federal Consolidation Loan Program (formerly the 
Guaranteed Student Loan programs).
    The Secretary is proposing to revise 34 CFR Part 682 to implement 
changes made to the HEA by the Omnibus Budget Reconciliation Act of 
1993 (OBRA) (Pub. L. 103-66) and the Higher Education Technical 
Amendments of 1993 (the Technical Amendments)(Pub. L. 103-208). OBRA 
added section 428(n) to the HEA to require a State to pay a fee to the 
Secretary based on the State's new FFEL loan volume and the dollars 
associated with the most recent cohort default rates calculated for 
schools in that State. This provision is intended to encourage a State 
to ensure that its educational institutions provide quality services to 
their students. A State may achieve this objective through licensing 
and State Postsecondary Review Entities. This provision is also 
intended to partially offset the cost to the Federal government of 
paying student loan default claims.
    These proposed regulations would also amend the FFEL Program 
regulations to reflect certain other changes made to the HEA by OBRA. 
The Secretary proposes to amend the regulations to reflect statutory 
provisions providing for the payment of lender referral fees to 
guaranty agencies, the reduction of the reinsurance coverage and 
reinsurance rates for a guaranty agency's losses on default claims and 
the reduction of insurance coverage a guaranty agency may pay on 
default claims.
    These proposed regulations would also amend the FFEL Program 
regulations to reflect certain changes to the HEA by the Technical 
Amendments. These changes require a lender to rebate excess interest on 
certain Federal Stafford loans to either the borrower or the Secretary 
and require lenders to convert the interest rates on certain Federal 
Stafford loans to a variable interest rate.
    These proposed regulations would also amend the FFEL Program 
regulations to permit a lender to disburse Federal Stafford loan 
proceeds to a school via a master check. This change is needed to 
facilitate a lender's ability to disburse Federal Stafford loans. These 
proposed regulations would also prohibit a subsequent holder of a loan 
to bill the Secretary for any applicable interest benefits or special 
allowance on a loan for which origination fees have not been paid. This 
change is needed to ensure that origination fees are paid on a loan if 
the loan is sold by considering the loan ineligible for reinsurance if 
such fees are not paid. These proposed regulations would also limit the 
collection charges that may be assessed a borrower with a defaulted 
loan that is paid off through loan consolidation. This change will 
encourage a borrower to get his or her loan out of default for purposes 
of Title IV eligibility by having it paid off through consolidation.
    The proposed regulations would delete current Sec. 682.407--
Administrative Cost Allowance for Guaranty Agencies. This section is no 
longer needed because OBRA removed the Secretary's authority for paying 
an administrative cost allowance to a guaranty agency from the HEA.

Proposed Regulatory Changes

    The following summarizes the major changes in this notice of 
proposed rulemaking:

Section 682.202  Permissible charges by lenders to borrowers.

    The proposed regulations would implement the requirements of 
section 427A(i) of the HEA as amended by the Technical Amendments. The 
changes in this section reflect the new statutory language that 
requires lenders to return excess interest to certain Stafford loan 
borrowers or the Secretary and requires the conversion of the interest 
rate on certain Federal Stafford loans to a variable interest rate.

Section 682.207  Due diligence in disbursing a loan.

    The proposed regulations would extend a provision of the FFEL 
Program regulations that were published on June 28, 1994 (59 FR 33334) 
that permitted the use of a master check for purposes of disbursing 
PLUS loans to the Federal Stafford loan programs. This proposed rule 
would allow a lender to use a master check to disburse Federal Stafford 
loans, thereby facilitating their disbursement. A ``master check'' is a 
check representing the disbursement of loan proceeds for more than one 
borrower. If a master check is used, the lender must provide the school 
with a list of the borrower's names, social security numbers, and the 
loan amounts disbursed through the master check. The proposed 
regulations would also require a lender to provide a school with a list 
of the borrowers' names, social security numbers, and the loan amounts 
if the loans are disbursed by electronic funds transfer.

Section 682.305  Procedures for payment of interest benefits and 
special allowance.

    The proposed regulations would amend the FFEL Program regulations 
to require an originating lender to pay origination fees to the 
Secretary. In many cases, the Secretary is not recovering the 
origination fees from the originating lender or any subsequent holder 
of a loan when the loan is sold. A June 1994 report conducted by the 
General Accounting Office and the Office of the Inspector General (GAO/
AIMD-94-131 and ACN 17-30302) has identified this as a potentially 
serious area of abuse that may be costing the Department a significant 
amount of money. The Secretary has decided that regulatory controls are 
needed to help reduce the incidence of abuse in this area. Therefore, 
in addition to the proposed rule that would require the originating 
lender to pay origination fees, the proposed regulations would also 
prevent a subsequent holder of a loan for which the origination fees 
were not paid from receiving any interest benefits or special allowance 
on that loan, or a guaranty agency from receiving reinsurance payments 
from the Secretary on that loan, until the origination fees have been 
paid.

Section 682.401  Basic program agreement.

    The proposed regulations are needed to implement section 428(e) of 
the HEA. Under this section, the Secretary will pay a lender referral 
fee to each guaranty agency with whom the Secretary has a lender 
referral agreement in an amount equal to 0.5 percent of the principal 
amount of a loan made as a result of the agency's referral services.
    The proposed regulations would also change the regulations to 
reflect a change made by OBRA to section 428(b)(1)(G) of the HEA that 
limits a guaranty agency to paying 98 percent of the unpaid principal 
balance of each loan on default claims on loans disbursed on or after 
October 1, 1993.
    The proposed regulations would add a new paragraph to the 
regulations that would limit the amount of collection charges and late 
fees a guaranty agency may guarantee when a defaulted loan is 
consolidated. Under the proposed regulations, a guaranty agency may not 
guarantee a consolidation loan that includes a defaulted loan if the 
collection fees and late charges assessed the borrower on the defaulted 
loan being consolidated exceeds 18.5 percent of the outstanding 
principal and interest on the defaulted loan at the time the pay-off 
amount of the loan is certified to the consolidating lender. The 
Secretary is proposing this provision to limit the amount of collection 
fees and late charges that a borrower may be liable for on a defaulted 
FFEL Program loan if such loan is consolidated. Because collection 
charges and late fees may be as high as 42 percent of the outstanding 
principal and interest of a defaulted loan, the Secretary is proposing 
this limitation to encourage a borrower to pay off a defaulted loan 
through loan consolidation and bring the loan out of default for 
purposes of title IV eligibility.

Section 682.404  Federal reinsurance agreement.

    The proposed regulations would amend this section of the 
regulations to reflect a change made by OBRA to section 428(c)(1) of 
the HEA that reduces the percentages the Secretary will reinsure on a 
guaranty agency's default claims on loans made on or after October 1, 
1993 from 100, 90, and 80 percent to 98, 88, and 78 percent, 
respectively, with two exceptions. First, the Secretary will reinsure 
loans at 100, 90, or 80 percent that are transferred from an insolvent 
guaranty agency or from an agency that withdraws its participation in 
the FFEL Program, under a plan approved by the Secretary. Second, the 
Secretary will provide 100 percent reinsurance for loans made under an 
approved lender-of-last-resort program.

Section 682.418  State share of default costs.

    This proposed rule would add a new Sec. 682.418 to the FFEL Program 
regulations to implement a change made by OBRA to section 428(n) of the 
Higher Education Act of 1965 (HEA). This provision requires a State to 
pay a fee to the Secretary if a school located in that State has a 
cohort default rate that exceeds 20 percent. The purpose of this fee is 
to partially offset the cost to the Federal government of paying 
default claims on FFEL Program loans by requiring a State to share the 
cost of defaults by student borrowers attending schools in the State. A 
State will be required to pay the fee to the Secretary within 60 days 
after the date it is notified by the Secretary of the fee it must pay.
    Section 428(n) mandates a formula for the Secretary to use to 
determine the amount of the State's fee. The State's fee is calculated 
by multiplying the State's new loan volume for FFEL Program loans for 
all schools in the State for the current fiscal year by 12.5 percent, 
and multiplying that result by the sum of the amounts calculated as 
explained in the following paragraph for each school in the State with 
a cohort default rate that exceeds 20 percent. That result is then 
divided by the amount of loan volume attributable to current and former 
students of schools in that State who entered repayment during the 
fiscal year used in calculating the cohort default rates. Under section 
428(n), the amount by which the State's new loan volume is multiplied 
increases from 12.5 percent to 20 percent in fiscal year 1996 and to 50 
percent in fiscal year 1997 and succeeding fiscal years.
    The amount by which a school exceeds the 20 percent default 
standard for this calculation is the amount of loan volume in default 
for the cohort default rate for the school minus 20 percent of the 
loans attributable to current and former students of the school who 
entered repayment during the fiscal year used in calculating the cohort 
default rate.
    The statutory requirements are more clearly represented using the 
following formula:

New Loan Volume x 0.125  x  {[A-(B  x  .2)]  C}

A=Dollars in default attributed to the cohort default rate for all 
schools in the State that have rates that exceed 20 percent.
B=Dollars entering repayment attributed to the cohort default rate for 
all schools in the State that have rates that exceed 20 percent.
C=Dollars entering repayment attributed to the cohort default rate for 
all schools in the State.

    The Secretary is considering the following approaches to implement 
the formula and is interested in public comment as to which approach 
would best implement the statute. The language in the statute indicates 
that the fee structure should be calculated using the new loan volume 
attributable to all institutions in the State for the current fiscal 
year. However, the Secretary will not know the final new loan volume 
data for a fiscal year until after the fiscal year has ended. The 
Secretary has identified the following two options to implement the 
statute: (1) to use the new loan volume for the fiscal year that 
precedes the fiscal year in which the fee is determined; or (2) to 
estimate the new loan volume for the fiscal year during which the State 
is assessed a fee. Also, because the time of the year the Secretary 
will be determining the fee coincides with the time of the year cohort 
default rates are generally determined, the Secretary may be presented 
with the opportunity to use either the cohort default rates that are 
currently being issued, or the rates that were issued the previous 
year. Schools would have had the chance to appeal the rates that were 
issued in the previous year based on inaccurate data, while the newer 
rates will more likely reflect the school's current situation. The 
Secretary is interested in comments regarding which rate should be used 
if this situation arises.
    The following example illustrates the application of the statutory 
formula and the resulting fee a State would be required to pay. If the 
new loan volume for a State is $100 million and $40 million of Stafford 
and SLS loans entered repayment during the fiscal year used for the 
relevant cohort default rates, and the dollars associated with the 
default rates of the schools in the State with cohort default rates 
above 20 percent is $10 million entering repayment and $4 million 
entering default, the State would pay $625,000 as a default offset fee 
for fiscal year 1995.

$100m  x  12.5%  x  {[$4m - ($10m  x  .2)]  $40m} = $625,000

    A State may charge a fee to schools located in the State that 
participate in the FFEL Program to defray the fee assessed the State by 
the Secretary. As required by the statute, the State's fee structure 
must be approved by the Secretary and be based on the relationship of 
the school's cohort default rate to the default fee assessed the State 
by the Secretary. A State may not develop its fee structure so that a 
school is assessed a fee by a State that is greater than that school's 
contribution to the fee the State is required to pay the Secretary. The 
State's school fee payment structure must also include a procedure by 
which a school with a high cohort default rate may be exempted from 
payment of the fee if the school can demonstrate to the satisfaction of 
the State that exceptional mitigating circumstances contributed to its 
cohort default rate. A State must provide a school a reasonable amount 
of time from the date it notifies the school that it is being assessed 
a fee under this provision to either pay the fee or submit an appeal, 
with appropriate documentation that demonstrates that exceptional 
mitigating circumstances contributed to its cohort default rate. The 
Secretary is particularly interested in knowing if the public believes 
it would be appropriate for the Secretary to provide regulatory 
guidance with respect to the exceptional mitigating circumstances a 
State may select. The Secretary also is interested in knowing if the 
public believes the following criteria would assist the States in 
developing their exceptional mitigating circumstances:
    (1) The completion and job placement rates of Stafford and SLS loan 
borrowers at the school whose loans entered repayment during the fiscal 
year used for calculating the school's cohort default rate;
    (2) The regional or State unemployment rates during the fiscal year 
used for calculating the school's cohort default rate and during the 
subsequent fiscal year;
    (3) The income level of former Stafford and SLS loan borrowers at 
the school whose loans entered repayment during the fiscal year used 
for calculating the school's cohort default rate and during subsequent 
fiscal year;
    (4) The exceptional mitigating circumstances criteria currently 
reflected in 34 CFR 668.17(d)(ii) under which a school may appeal its 
loss of eligibility to participate in the FFEL Program;
    (5) The school's status as a Historically Black College and 
University, a Tribally Controlled Community College under section 
2(a)(4) of the Tribally Controlled Community College Assistance Act of 
1978, and a Navajo Community College under the Navajo Community College 
Act.
    The Secretary is particularly interested in receiving public 
comment on these criteria as well as other criteria the public believes 
may assist a State in developing its exceptional mitigating 
circumstances.
    A State may not attempt to collect a fee from a school under these 
regulations during the school's appeal of the fee to the State or if 
the school satisfactorily demonstrates to the State that exceptional 
mitigating circumstances contributed to its cohort default rate.
    The Secretary is interested to know if the public believes that the 
State should be responsible in whole, or in part, for the portion of 
the State's fee that is attributed to: (1) the fees that are attributed 
to a school that has closed or no longer participates in the FFEL 
Program; (2) the fees attributed to schools that meet the exceptional 
mitigating circumstances standards established by the State; and, (3) 
the fees attributed to Historically Black Colleges and Universities, 
tribally controlled community colleges, and Navajo Community Colleges 
that are exempt from losing eligibility to participate in the FFEL 
Program under section 435(a)(2) of the HEA, if it is determined that 
such schools are not responsible for their contribution to the State's 
fee.

Executive Order 12866

1. Assessment of Costs and Benefits

    These proposed 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 proposed regulatory 
action.
    The potential costs associated with the proposed regulations are 
those resulting from statutory requirements and those determined by the 
Secretary to be necessary for administering the Title IV, HEA programs 
effectively and efficiently. Burdens specifically associated with 
information collection requirements, if any, are explained elsewhere in 
this preamble under the heading of Paperwork Reduction Act of 1980.
    In assessing the potential costs and benefits--both quantitative 
and qualitative--of these proposed regulations, the Secretary has 
determined that the benefits of the proposed regulations justify the 
costs.
    The Secretary has also determined that this regulatory action does 
not unduly interfere with State, local, and tribal governments in the 
exercise of their governmental functions.
    To assist the Department in complying with the specific 
requirements of Executive Order 12866, the Secretary invites comment on 
whether there may be further opportunities to reduce any potential 
costs or increase potential benefits resulting from these proposed 
regulations without impeding the effective and efficient administration 
of the Title IV, HEA programs.

2. Clarity of the Regulations

    Executive order 12866 requires each agency to write regulations 
that are easy to understand.
    The Secretary invites comments on how to make these regulations 
easier to understand, including answers to questions such as the 
following: (1) Are the requirements in the regulations clearly stated? 
(2) Do the regulations contain technical terms or other wording that 
interferes with their clarity? (3) Does the format of the regulations 
(grouping and order of sections, use of headings, paragraphing, etc.) 
aid or reduce their clarity? Would the regulations be easier to 
understand if they were divided into more (but shorter) sections? (A 
``section'' is preceded by the symbol ``Sec. '' and a numbered heading; 
for example, Sec. 682.410 Fiscal, administrative and enforcement 
requirements.) (4) Is the description of the proposed regulations in 
the ``Supplementary Information'' section of this preamble helpful in 
the understanding of the proposed regulations? How could this 
description be more helpful in making the proposed regulations easier 
to understand? (5) What else could the Department do to make the 
regulations easier to understand?
    A copy of any comments that concern whether these proposed 
regulations are easy to understand should also be sent to Stanley 
Cohen, Regulations Quality Officer, U.S. Department of Education, 600 
Independence Avenue, SW., (Room 5100 FB-10), Washington, D.C. 20202.

Regulatory Flexibility Act Certification

    The Secretary certifies that these proposed regulations would not 
have a significant economic impact on a substantial number of small 
entities. Certain reporting, recordkeeping, and compliance requirements 
are imposed on guaranty agencies, lenders, schools, and States by the 
regulations. These requirements, however, would not have a significant 
impact because the regulations would not impose excessive regulatory 
burdens or require unnecessary Federal supervision.

Paperwork Reduction Act of 1980

    There are no information collection requirements contained in these 
proposed regulations.

Invitation To Comment

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

Assessment of Educational Impact

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

List of Subjects in 34 CFR Part 682

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

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

    Dated: September 30, 1994.
Richard W. Riley,
Secretary of Education.

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

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

    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 adding new paragraphs (a)(6) and 
(a)(7) to read as follows:


Sec. 682.202  Permissible charges by lenders to borrowers.

* * * * *
    (a) * * *
    (6) Refund of excess interest paid on Stafford loans.
    (i) For a loan with an applicable interest rate of 10 percent made 
prior to July 23, 1992, and for a loan with an applicable interest rate 
of 10 percent made from July 23, 1992 through September 30, 1992, to a 
borrower with no outstanding FFEL Program loans--
    (A) If during any calendar quarter, the sum of the average of the 
bond equivalent rates of the 91-day Treasury bills auctioned for that 
quarter, plus 3.25 percent, is less than 10 percent, the lender shall 
calculate an adjustment and credit the adjustment as specified under 
paragraph (a)(6)(i)(B) of this section if the borrower's account is not 
more than 30 days delinquent on December 31. The amount of the 
adjustment for a calendar quarter is equal to--
    (1) 10 percent minus the sum of the average of the bond equivalent 
rates of the 91-day Treasury bills auctioned for the applicable quarter 
plus 3.25 percent;
    (2) Multiplied by the average daily principal balance of the loan 
(not including unearned interest added to principal); and
    (3) Divided by 4;
    (B) No later than 30 calendar days after the end of the calendar 
year, the holder of the loan shall credit any amounts computed under 
paragraph (a)(6)(i)(A) of this section to--
    (1) The Secretary, for amounts paid during any period in which the 
borrower is eligible for interest benefits;
    (2) The borrower's account to reduce the outstanding principal 
balance as of the date the holder adjusts the borrower's account, 
provided that the borrower's account was not more than 30 days 
delinquent on that December 31; or
    (3) The Secretary, for a borrower who on the last day of the 
calendar year is delinquent for more than 30 days.
    (ii) For a fixed interest rate loan made on or after July 23, 1992 
to a borrower with an outstanding FFEL Program loan--
    (A) If during any calendar quarter, the sum of the average of the 
bond equivalent rates of the 91-day Treasury bills auctioned for that 
quarter, plus 3.10 percent, is less than the applicable interest rate, 
the lender shall calculate an adjustment and credit the adjustment to 
reduce the average daily principal balance of the loan as specified 
under paragraph (a)(6)(ii)(C) of this section if the borrower's account 
is not more than 30 days delinquent on December 31. The amount of an 
adjustment for a calendar quarter is equal to--
    (1) The applicable interest rate minus the sum of the average of 
the bond equivalent rates of the 91-day Treasury bills auctioned for 
the applicable quarter plus 3.10 percent;
    (2) Multiplied by the outstanding principal balance of the loan 
(not including unearned interest added to principal); and
    (3) Divided by 4;
    (B) For any quarter or portion thereof that the Secretary was 
obligated to pay interest subsidy on behalf of the borrower, the holder 
of the loan shall refund to the Secretary, no later than the end of the 
following quarter, any excess interest calculated in accordance with 
paragraph (a)(6)(ii)(A) of this section;
    (C) For any other quarter, the holder of the loan shall, within 30 
days of the end of the calendar year, reduce the borrower's outstanding 
principal by the amount of excess interest calculated under paragraph 
(a)(6)(ii)(A) of this section, provided that the borrower's account was 
not more than 30 days delinquent as of December 31;
    (D) For a borrower who on the last day of the calendar year is 
delinquent for more than 30 days, any excess interest calculated shall 
be refunded to the Secretary; and
    (E) Notwithstanding paragraphs (a)(6)(ii) (B), (C), and (D) of this 
section, if the loan was disbursed during a quarter, the amount of any 
adjustment refunded to the Secretary or credited to the borrower for 
that quarter shall be prorated accordingly.
    (7) Conversion to Variable Rate. (i) A lender or holder shall 
convert the interest rate on a loan under paragraphs (a)(6) (i) or (ii) 
of this section to a variable rate.
    (ii) The applicable interest rate for each 12-month period 
beginning on July 1 and ending on June 1 preceding each 12-month period 
is equal to the sum of--
    (A) The bond equivalent rate of the 91-day Treasury bills auctioned 
at the final auction prior to June 1; and
    (B) 3.25 percent in the case of a loan described in paragraph 
(a)(6)(i) of this section or 3.10 percent in the case of a loan 
described in paragraph (a)(6)(ii) of this section.
    (iii) (A) In connection with the conversion specified in paragraph 
(a)(6)(ii) of this section for any period prior to the conversion for 
which a rebate has not been provided under paragraph (a)(6) of this 
section, a lender or holder shall convert the interest rate to a 
variable rate.
    (B) The interest rate for each period shall be reset quarterly and 
the applicable interest rate for the quarter or portion shall equal the 
sum of--
    (1) The average of the bond equivalent rates of 91-day Treasury 
bills auctioned for the preceding 3-month period; and
    (2) 3.25 percent in the case of loans as specified under paragraph 
(a)(6)(i) of this section or 3.10 percent in the case of loans as 
specified under paragraph (a)(6)(ii) of this section.
    (iv) (A) The holder of a loan being converted under paragraph 
(a)(7)(iii)(A) of this section shall complete such conversion on or 
before January 1, 1995.
    (B) The holder shall, not later than 30 days prior to the 
conversion provide the borrower with--
    (1) A notice informing the borrower that the loan is being 
converted to a variable interest rate;
    (2) A description of the rate to the borrower;
    (3) The current interest rate; and
    (4) An explanation that the variable rate will provide a 
substantially equivalent benefit as the adjustment otherwise provided 
under paragraph (a)(6) of this section.
    (iv) The notice may be provided as part of the disclosure 
requirement as specified under Sec. 682.205.
    (v) The interest rate as calculated under this paragraph may not 
exceed the maximum interest rate applicable to the loan prior to the 
conversion.
* * * * *
    3. Section 682.207 is amended by removing the word ``or'' at the 
end of paragraph (b)(1)(ii)(A); removing the semicolon at the end of 
paragraph (b)(1)(ii)(B), and adding, in its place, a period and a new 
sentence; and by adding a new paragraph (b)(1)(ii)(C) to read as 
follows:


Sec. 682.207  Due diligence in disbursing a loan.

* * * * *
    (b)(1) * * *
    (ii) * * *
    (B) * * * A disbursement made by electronic funds transfer must be 
accompanied by a list of the names, social security numbers, and loan 
amounts of the borrowers who are receiving a portion of the 
disbursement; or
    (C) A master check from the lender to the eligible institution to a 
separate account maintained by the school as trustee for the lender. A 
disbursement made by a master check must be accompanied by a list of 
the names, social security numbers, and loan amounts of the borrowers 
who are receiving a portion of the disbursement;
* * * * *
    4. Section 682.305 is amended by revising paragraph (a)(4) to read 
as follows:


Sec. 682.305  Procedures for payment of interest benefits and special 
allowance.

    (a) * * *
    (4) If an originating lender sells or otherwise transfers a loan to 
a new holder, the originating lender remains liable to the Secretary 
for payment of the origination fees. The Secretary will not pay 
interest benefits or special allowance to the new holder or pay 
reinsurance to the guaranty agency until the origination fees are paid 
to the Secretary.
* * * * *
    5. Section 682.401 is amended by adding new paragraphs (b)(10)(iii) 
and (b)(27); and by revising paragraph (b)(13) to read as follows:


Sec. 682.401  Basic program agreement.

* * * * *
    (b) * * *
    (10) * * *
    (iii) The Secretary will pay a lender referral fee to each guaranty 
agency with whom the Secretary has a lender referral agreement, an 
amount equal to 0.5 percent of the principal amount of a loan made as a 
result of the agency's referral service.
* * * * *
    (13) Guaranty liability. The guaranty agency shall guarantee--
    (A) 100 percent of the unpaid principal balance of each loan 
guaranteed for loans disbursed before October 1, 1993; and
    (B) Not more than 98 percent of the unpaid principal balance of 
each loan guaranteed for loans disbursed on or after October 1, 1993.
* * * * *
    (27) Collection Charges and Late Fees on Defaulted FFEL loans being 
Consolidated. A guaranty agency may not guarantee collection charges or 
late fees that exceed 18.5 percent of the outstanding principal and 
interest on a defaulted FFEL Program loan that is included in a Federal 
Consolidation loan.
* * * * *
    6. Section 682.404 is amended by revising paragraphs (a)(1), 
(b)(1), and (b)(2), by removing paragraph (b)(4), and by redesignating 
paragraph (b)(5) as paragraph (b)(4).


Sec. 682.404  Federal reinsurance agreement.

    (a) General. (1)(i) The Secretary may enter into a reinsurance 
agreement with a guaranty agency that has a basic program agreement. 
Except as provided in paragraph (b) of this section, under a 
reinsurance agreement the Secretary reimburses the guaranty agency for 
98 percent of its losses on default claim payments to lenders.
    (ii) Notwithstanding paragraph (a)(1)(i) of this section, the 
Secretary reimburses a guaranty agency for 100 percent of its losses on 
default claim payments--
    (A) For loans made prior to October 1, 1993;
    (B) For loans made under an approved lender-of-last-resort program;
    (C) For loans transferred under a plan approved by the Secretary 
from an insolvent guaranty agency or a guaranty agency that withdraws 
its participation in the FFEL Program;
    (D) For a guaranty agency that entered into a basic program 
agreement under section 428(b) of the Act after September 30, 1976, or 
was not actively carrying on a loan guarantee program covered by a 
basic program agreement on October 1, 1976 for five consecutive fiscal 
years beginning with the first year of its operation.
* * * * *
    (b) * * *
    (1) If the total of reinsurance claims paid by the Secretary to a 
guaranty agency during any fiscal year reaches 5 percent of the amount 
of loans in repayment at the end of the preceding fiscal year, the 
Secretary's reinsurance payment on a default claim subsequently paid by 
the guaranty agency during that fiscal year equals--
    (i) 90 percent of its losses for loans made before October 1, 1993 
or transferred under a plan approved by the Secretary from an insolvent 
guaranty agency or a guaranty agency that withdraws its participation 
in the FFEL Program; or
    (ii) 88 percent of its losses for loans made on or after October 1, 
1993.
    (2) If the total of reinsurance claims paid by the Secretary to a 
guaranty agency during any fiscal year reaches 9 percent of the amount 
of loans in repayment at the end of the preceding fiscal year, the 
Secretary's reinsurance payment on a default claim subsequently paid by 
the guaranty agency during that fiscal year equals--
    (i) 80 percent of its losses for loans made before October 1, 1993 
or transferred under a plan approved by the Secretary from an insolvent 
guaranty agency or a guaranty agency that withdraws its participation 
in the FFEL Program; or
    (ii) 78 percent of its losses for loans made on or after October 1, 
1993.
* * * * *
    7. Section 682.407 is removed and reserved.
    8. A new Sec. 682.418 is added to read as follows:


Sec. 682.418  State Share of Default Costs.

    (a) State Fee. (1) In the case of any State in which there are 
located any institutions of higher education that have a cohort default 
rate that exceeds 20 percent, the State shall pay to the Secretary an 
amount equal to--
    (i) The new loan volume attributable to all institutions in the 
State for the current fiscal year multiplied by the percentage 
specified in paragraph (b) of this section, multiplied by:
    (ii) The quotient of the sum of the amounts calculated under 
paragraph (c) of this section for each institution in the State with a 
cohort default rate that exceeds 20 percent, divided by:
    (iii) The total amount of loan volume attributable to current and 
former students of institutions located in that State entering 
repayment in the period used to calculate the cohort default rate.
    (2) A State must pay the fee to the Secretary under paragraph 
(d)(1) of this section within 60 days after the State receives 
notification from the Secretary of the fee.
    (b) Percentage. For purposes of paragraph (a)(1)(i) of this 
section, the percentage used shall be--
    (1) 12.5 percent for fiscal year 1995;
    (2) 20 percent for fiscal year 1996; and
    (3) 50 percent for fiscal year 1997 and succeeding fiscal years.
    (c) Calculation. (1) For purposes of paragraph (a)(1)(ii) of this 
section, the amount shall be determined by calculating for each 
applicable institution, the amount by which the loans received for 
attendance by each institution's current and former students who--
    (i) Enter repayment during the fiscal year used for the calculation 
of the cohort default rate; and
    (ii) Default before the end of the following fiscal year;
    (2) Exceeds 20 percent of the loans received for attendance by all 
the current and former students who enter repayment during the fiscal 
year used for the calculation of the cohort default rate.
    (d)(1) School Fee. A State may charge a fee to an institution of 
higher education that participates in the FFEL Program that is located 
in its State according to a fee structure, approved by the Secretary, 
that--
    (i) Is based on the institution's cohort default rate and the 
State's risk of loss; and
    (ii) Includes procedures under which a school that is subject to a 
fee under paragraph (d)(1) of this section may appeal the fee if the 
institution can demonstrate to the satisfaction of the State that--
    (A) The fee it is assessed by the State is greater than the fee it 
is liable for under the fee structure established by the State and 
approved by the Secretary; or
    (B) Exceptional mitigating circumstances contributed to its cohort 
default rate.
    (2) For purposes of paragraph (d)(1)(i) of this section, the State 
may not assess a fee to a school that is greater than the amount that 
the school contributes to the State's fee.
    (3) For purposes of paragraph (d)(1)(ii)(B) of this section, the 
State may select the exceptional mitigating circumstances which must be 
approved by the Secretary as part of the State's fee structure plan 
under section (d)(1) of this section.
    (4) A State may not assess a fee to a school under paragraph (d)(1) 
of this section until it has received written approval from the 
Secretary of its fee structure and the exceptional mitigating 
circumstances.
    (5) A State must provide a school a reasonable amount of time after 
the date the school receives notification from the State of the fee it 
is being assessed by the State to either pay the fee or--
    (i) Demonstrate to the State that the fee it is assessed by the 
State is greater than the fee it is liable for under the fee structure 
established by the State and approved by the Secretary; or
    (ii) Submit the documentation or other evidence required by the 
State to demonstrate that exceptional mitigating circumstances 
contributed to its cohort default rate.
    (6) A State may not attempt to collect a fee from a school under 
paragraph (d)(1) of this section--
    (i) During the timeframes established by the State under section 
(d)(5) of this section; and
    (ii) If the school satisfactorily demonstrates to the State that 
exceptional mitigating circumstances contributed to its cohort default 
rate.
    (7) A school is not exempt from a fee under this section if it 
withdraws its participation in the FFEL Program after receiving 
notification by a State that it is being assessed a fee under paragraph 
(d)(1) of this section.

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

[FR Doc. 94-25363 Filed 10-12-94; 8:45 am]
BILLING CODE 4000-01-P