[Federal Register Volume 59, Number 230 (Thursday, December 1, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-29260]
[[Page Unknown]]
[Federal Register: December 1, 1994]
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Part IV
Department of Education
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34 CFR Part 685
William D. Ford Federal Direct Loan Program; Final Rule
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DEPARTMENT OF EDUCATION
34 CFR Part 685
RIN 1840-AC05
William D. Ford Federal Direct Loan Program
AGENCY: Department of Education.
ACTION: Final regulations.
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SUMMARY: The Secretary of Education amends the William D. Ford Federal
Direct Loan (Direct Loan) Program regulations. These regulations apply
to loans under the Federal Direct Stafford/Ford Loan Program, the
Federal Direct Unsubsidized Stafford/Ford Loan Program, the Federal
Direct PLUS Program, and the Federal Direct Consolidation Loan Program,
collectively referred to as the Direct Loan Program. These regulations
streamline the loan application and disbursement processes, assist in
school administration of the loans, ensure program integrity, and
protect the Federal fiscal interest.
EFFECTIVE DATE: These regulations take effect July 1, 1995. However,
affected parties do not have to comply with the information collection
requirements in Secs. 685.204, 685.206, 685.209, 685.213, 685.214,
685.215, 685.301, 685.302, 685.303, 685.309 and 685.401 until the
Department of Education publishes in the Federal Register the control
number assigned by the Office of Management and Budget (OMB) to these
information collection requirements. Publication of the control number
notifies the public that OMB has approved these information collection
requirements under the Paperwork Reduction Act of 1980.
FOR FURTHER INFORMATION CONTACT: Ms. Rachel Edelstein, telephone: (202)
708-9406. 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 Student Loan Reform Act of 1993, enacted on August 10, 1993,
established the Direct Loan Program under the Higher Education Act of
1965, as amended (HEA). See Subtitle A of the Omnibus Budget
Reconciliation Act (OBRA) of 1993 (Pub. L. 103-66).
The Improving America's Schools Act of 1994 (Pub. L. 103-382) also
amended the HEA in areas that affect the Direct Loan Program. These
amendments are reflected in these final regulations.
OBRA directed the Secretary, to the extent practicable, to develop
proposed rules for the Direct Loan Program through a negotiated
rulemaking process for the second and subsequent years of the program
(1995-1996 and beyond). These final regulations are a product of the
extensive negotiating rulemaking sessions that were used to develop the
proposed rule.
On August 18, 1994, the Secretary published a notice of proposed
rulemaking (NPRM) for part 685 in the Federal Register. This NPRM
included a discussion of the major issues concerning the proposed rule
and will not be repeated here. The following section summarizes the
major revisions to the proposed rule.
Substantive Revisions to the Proposed Rule
Section 685.100 The William D. Ford Federal Direct Loan Program
The Secretary has modified the final regulations to
reflect recent statutory amendments. The program formerly known as the
``Federal Direct Student Loan Program'' has been renamed the ``William
D. Ford Federal Direct Loan Program.'' Also, the ``Federal Direct
Stafford Loan Program'' and the ``Federal Direct Unsubsidized Stafford
Loan Program'' have been renamed the ``Federal Direct Stafford/Ford
Loan Program'' and the ``Federal Direct Unsubsidized Stafford/Ford Loan
Program,'' respectively.
Section 685.102 Definitions
The definition of ``satisfactory repayment arrangement''
has been modified for the purpose of consolidating a defaulted loan
into a Direct Consolidation Loan. The definition requires making three,
instead of six, monthly payments.
Section 685.202 Charges for Which Direct Loan Program Borrowers Are
Responsible
The Secretary has added wording to clarify that interest
may be capitalized when a borrower defaults on a Direct Loan.
Section 685.204 Deferment
The regulations have been revised to reflect recent
amendments to the HEA that allow a Direct Loan borrower who has an
outstanding balance on an FFEL Program loan made prior to July 1, 1993
to be eligible for any deferment available to FFEL borrowers that was
in effect on July 22, 1992. The HEA amendments also expanded the
definition of an economic hardship for purposes of obtaining a
deferment. This change applies to all borrowers. The definition now
includes a borrower who works full-time and has educational debt burden
equal to or greater than 20 percent of the borrower's adjusted gross
income (AGI), and the difference between AGI and educational debt
burden is less than 220 percent of the greater of the annual earnings
of an individual earning the minimum wage or the poverty line for a
family of two.
Section 685.207 Obligation To Repay
The Secretary has specified the time at which a grace
period begins for students enrolled in correspondence programs.
Section 685.208 Repayment Plans
The Secretary has established the maximum repayment period
allowable under the alternative repayment plan at 30 years. Further,
under the alternative plan, interest that accrues and is not paid will
be capitalized annually until the outstanding principal is 10 percent
greater than the original principal amount.
Section 685.209 Income Contingent Repayment Plan
The Secretary has significantly modified the income
contingent repayment (ICR) plan provisions to address concerns of
commenters. The Secretary is lowering the limit on interest
capitalization that may occur when interest accrues, but is not paid,
from 50 percent greater than the original principal amount to 10
percent greater than the original principal amount. Also, monthly
payments will be limited to 20 percent of discretionary income (AGI
minus the poverty level appropriate to the family size). This change
eliminates the need for the previous family size offset of $7 and
provides a new cap on the amount of income assessed. The Secretary is
including years of repayment under the 10-year standard repayment plan
and the 12-year extended repayment plan as years eligible for
determining the 25-year period for loan forgiveness. The monthly
repayment amount below which no payment is required under the formula
calculation is $15. Under the 12-year standard amortization cap, the
minimum payment is $15 (that is, a borrower must pay at least $15 each
month). The 12-year standard amortization cap calculation has been
modified to provide for the recalculation of the cap following periods
of negative amortization because these periods result in an increase in
the outstanding loan balance. The payback rate for married borrowers
paying jointly under ICR will be calculated on the outstanding debt at
the time the borrowers are approved for joint repayment. For borrowers
repaying jointly, payments will be applied to interest on both accounts
prior to principal reduction in either.
Section 685.210 Choice of Repayment Plans
The Secretary has reduced from six to three the number of
monthly payments that must be made before a borrower, who is required
to repay a defaulted loan under the ICR plan, may switch to another
repayment plan. Further, if the borrower's scheduled payment under the
ICR plan is zero, the borrower has the option of paying three
``reasonable and affordable'' payments in order to meet the condition
to switch to another plan.
Section 685.211 Miscellaneous Repayment Provisions
The Secretary has added language to clarify that if a
borrower is ineligible for a portion of the loan and does not comply
with the repayment demand letter, the borrower is considered to be in
default on the entire loan. Further, the borrower will have 30 days
from the date the letter is mailed to repay the loan.
Section 685.215 Consolidation
The Secretary has clarified that Federal Consolidation
Loans eligible for interest benefits during a period of deferment under
section 428C(b)(4)(C) of the HEA may be consolidated into a Direct
Subsidized Consolidation Loan. Further, the regulations provide that a
borrower attending a Direct Loan school may consolidate during the in-
school period, even if the borrower does not have a Direct Loan. A
provision has been added that allows, at the discretion of the
Secretary, consolidation of loans where a judgment has been obtained
against the borrower. The Secretary has clarified that holders of loans
being consolidated must provide certification of the amount owed within
10 business days of receipt of the request. The regulations also have
been revised to reflect recent amendments to the HEA that provide that
loans made under subpart II of part B of title VIII of the Public
Health Service Act may be consolidated into a Direct Unsubsidized
Consolidation Loan.
Section 685.303 Processing Loan Proceeds
The Secretary has added wording to clarify that
disbursements to students who delay their start of attendance is
permitted. For the student financial aid programs, the Secretary has
consolidated and standardized many of the procedures a school must
follow when it is disbursing funds. The relevant provisions have been
removed from these final regulations and are now set forth in 34 CFR
Part 668.
Section 685.304 Counseling Borrowers
The Secretary has clarified that, within an institution's
quality assurance plan, the performance measures used to demonstrate
the effectiveness of a school's alternative approach to initial
counseling must include objective outcomes, such as withdrawal rates.
The Secretary has added a requirement that borrowers provide State of
issuance information concerning their driver's license.
Section 685.309 Administrative and Fiscal Control and Fund Accounting
Requirements for Schools Participating in the Direct Loan Program
The regulations have been amended to require schools to
report a borrower's change of permanent address on the school's student
status confirmation report. For the student financial aid programs, the
Secretary has consolidated and standardized many of the procedures a
school must follow when it is maintaining funds. The relevant
provisions have been removed from these final regulations and are now
set forth in 34 CFR Part 668.
Section 685.400 School Participation Requirements for Academic Years
1996-1997 and Beyond
The Secretary has clarified the provision that a school
must meet the eligibility requirement in section 435(a) of the HEA,
which includes having a cohort default rate of less than 25 percent
during one of the three most recent fiscal years for which data are
available. This eligibility requirement will be enforced for two years
after a school enters the Direct Loan Program (that is, through the
last full year of a school's participation in the FFEL program).
Analysis of Comments and Changes
In response to the Secretary's invitation in the NPRM, 98 parties
submitted comments on the proposed regulations. An analysis of the
comments and the changes follows. Following a general discussion of the
changes, major issues are discussed. The 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, generally
are not addressed.
General Discussion of Loan Repayment
The Secretary, in consultation with members of the higher education
community through negotiated rulemaking and in response to public
comment on the August 18, 1994, Notice of Proposed Rulemaking (NPRM),
has designed an income contingent repayment (ICR) plan (or ``Pay-As-
You-Can'' plan) in which the borrower will repay monthly a small
percentage of his or her income, adjusted for the borrower's debt
level. By giving borrowers the opportunity to repay student loans over
time as a small percentage of their incomes, this plan provides a
number of important benefits for the borrower.
ICR reduces the financial burden of student loan repayment and
gives borrowers the opportunity to accept lower-paid employment,
including public service positions, for a few years or an entire
working career. It also provides borrowers the chance to start a
business or meet other family responsibilities. The Secretary is
especially sensitive to the demands on family finances faced by the
lowest-income borrowers. ICR borrowers will pay between 4 and 15
percent of their annual adjusted gross income (AGI), except that
monthly payments are limited to 20 percent of discretionary income (AGI
minus the poverty level appropriate to the family size). Under the
formula calculation, borrowers are not required to make a monthly
payment if the calculated amount is less than $15. Borrowers also can
choose to limit their monthly ICR obligations to the amount calculated
based on a fixed-payment, 12-year repayment schedule. The ICR plan
permits high-debt borrowers to repay their loans in a reasonable time
period and avoids a ``marriage penalty'' for two-debt households.
The Secretary will continue to conduct analyses of the ICR plan to
ensure that the formula meets the needs of borrowers and protects the
interest of the Federal taxpayer. Further, the Secretary is committed
to providing comprehensive, easy to understand counseling materials to
borrowers before they choose the ICR plan. If the Secretary changes the
formula once borrowers are paying under the ICR plan, borrowers will
have the option to change to the the new formula. The Secretary will
notify borrowers of changes in the formula to ensure that they have
enough information to decide whether to remain under the old or change
to the new formula.
Under the ICR plan, some borrowers may make monthly payments that
are insufficient to cover the interest due on their loans. However, the
Secretary will encourage borrowers who are eligible for subsidized
periods of deferment (including an economic hardship deferment) to use
them because interest does not accrue on subsidized loans during these
periods (up to three years). When interest does accrue, the Secretary
is limiting the capitalization of unpaid interest to an amount that is
just ten percent of the borrower's original debt, rather than 50
percent as proposed in the NPRM. This protects borrowers from
compounding interest charges while ensuring that those who have
sufficient long-term resources to repay their loans do so. By
minimizing individual debt burden, this plan not only allows borrowers
to choose from the full range of employment opportunities, but also
reduces the incidence, and therefore the cost, of default.
Some borrowers in the ICR plan may not earn sufficient income to
fully repay their loans within the statutory 25-year time period. In
this event, the Secretary will forgive any outstanding loan balance
(principal plus interest) that is unpaid after 25 years. The Secretary
is including years in repayment under both the 10-year standard plan
and the 12-year extended plan as years eligible to count toward the 25
years for ICR loan forgiveness, because payments in these plans are at
least equal to, and very often larger than, those required under ICR.
Under current laws, the Internal Revenue Service regards the
outstanding loan balance forgiven after 25 years in the ICR plan as
taxable income. The Secretary is committed to exploring vigorously a
change to current law to provide ICR borrowers complete forgiveness of
any unpaid loan balance that remains outstanding at the end of the ICR
repayment period.
In addition to the ICR plan, the Secretary is providing borrowers
with other flexible repayment options. The graduated repayment plan
allows borrowers to repay their loans by making small payments at the
beginning of their repayment periods, when their incomes are likely to
be lower, and larger payments in later years. These borrowers will
repay their loans in 12 to 30 years based on individual debt levels.
The extended repayment plan provides for fixed but smaller monthly
payments over a 12 to 30 year period, again based on individual debt
levels. Borrowers will also still be able to choose the fixed-payment,
10-year repayment plan that currently is the most commonly used plan.
Irrespective of the plan selected, borrowers may prepay without penalty
all or part of their loans at any time. Moreover, borrowers can switch
among repayment plans whenever they wish to do so.
Section 685.209 (ICR plan) contains provisions governing the two
monthly payment calculations, namely the formula amount and the capped
amount, available for repayment of Direct Loans under the ICR plan.
Borrowers may choose to repay either the formula amount or the capped
amount. (See Appendix A for detailed examples illustrating, for single
borrowers and for married borrowers who are repaying under the ICR
plan, the calculations of the formula and capped monthly repayment
amounts.)
Formula Amount. Calculation of the ICR formula monthly payment
amount is described in paragraph (b) of this section. In general, the
borrower's annual repayment obligation is the borrower's AGI multiplied
by a ``payback rate'' that is based on the borrower's debt. The monthly
payment is the annual repayment obligation divided by 12. The ``payback
rate'' varies from four to 15 percent, calculated as described in
paragraph (b)(2). The payment amount cannot exceed 20 percent of
discretionary income (AGI minus the annual poverty level appropriate to
the family size) divided by 12. If the calculated monthly payment is
less than $15, the borrower is not required to make a payment. When a
borrower is not required to make a payment, interest on the principal
accrues and will be capitalized until the limitation on capitalization
is reached.
Capped Amount. Calculation of the capped monthly payment amount is
described in paragraph (c), and equals the monthly amount the borrower
would repay over 12 years using standard amortization schedules. If the
formula amount exceeds the capped amount, the borrower may choose to
pay the capped amount. If the borrower chooses to pay the capped
amount, the borrower's repayment period may be longer than if the
borrower chooses to pay the higher formula amount.
Joint repayment by married borrowers. This section includes
provisions for joint income contingent repayment of Direct Loans by
married borrowers. Negative amortization is minimized by attributing
joint repayments first to the interest due on each spouse's account and
then to principal. A step-by-step calculation of a combined repayment
amount is included as Example 2 in Appendix A.
Repayment period. Provisions governing the repayment period under
ICR are contained in paragraph (d)(2). The maximum period is 25 years,
excluding periods of authorized deferment and forbearance under
Secs. 685.204 and 685.205, respectively, and periods in which the
borrower made payments under a repayment plan other than the 10-year
standard or 12-year extended plans. The Secretary believes the
exclusion of repayment periods under all other extended and graduated
plans is needed to prevent potential borrower repayment abuses.
If a borrower repays more than one loan under ICR and the loans
enter repayment at different times, a separate repayment period for
each loan begins when the loan enters repayment. This approach ensures
that no loan will be repaid under ICR for more than 25 years. If loans
enter repayment at the same time, a single repayment period applies.
To encourage borrowers to begin repaying their loans and to limit
negative amortization at the beginning of the repayment period, a
borrower must make monthly payments of accrued interest until the
Secretary calculates the borrower's monthly payment on the basis of the
borrower's income. A borrower who is unable to make monthly payments of
accrued interest or is unable to qualify for a deferment under
Sec. 685.204, may request forbearance under Sec. 685.205.
Limit on capitalization of interest. The Secretary believes a limit
on the amount of interest that is added to principal (the
capitalization of interest) is desirable to prevent an excessive
increase in a borrower's debt burden when the borrower's income is
insufficient to cover accruing interest. Paragraph (d)(3) permits
capitalization of unpaid interest until the outstanding principal
amount is 10 percent greater than the original principal amount, a
decrease from the 50 percent proposed in the NPRM. Thereafter, unpaid
interest accrues but is not capitalized.
Consent to disclosure of tax return information. In order to repay
a Direct Loan under ICR, a borrower must consent, on a form provided by
the Secretary, to the disclosure of certain tax return information by
the Internal Revenue Service to agents of the Secretary for purposes of
calculating a monthly repayment amount and servicing and collecting a
loan. The information subject to disclosure is taxpayer identity
information as defined in 26 U.S.C. 6103(b)(6) (including such
information as name, address, and social security number), tax filing
status, and AGI. Paragraph (d)(5) describes the procedures for
providing written consent and requires that consent be provided for a
period of five years. If a borrower selects ICR but fails to provide or
renew consent, or withdraws consent without selecting a different
repayment plan, the Secretary designates the 10-year standard repayment
plan for the borrower.
General Discussion of Other Comments
Regulating Internal Procedures
A number of commenters suggested that the regulations include more
specific requirements relating to the Secretary's internal procedures
for implementing the Direct Loan Program. For example, some commenters
suggested that the Secretary regulate the collection efforts that will
be used to collect from defaulted borrowers. In a number of cases, the
commenters suggested that the Secretary should include specific time
deadlines for actions by the Secretary in connection with the Direct
Loan program. The commenters pointed out that the FFEL regulations
frequently include specific time deadlines on actions by guaranty
agencies and lenders and suggested that the Direct Loan rules should
provide similar requirements on the Secretary.
In these regulations, the Secretary has tried to provide sufficient
information for the public to understand the rules governing the
program without adding unnecessary complexity to the regulations. The
Secretary is not required to issue regulations that are intended to
regulate internal agency processes but do not affect the substantive or
procedural rights of program participants. Therefore, the Secretary has
not included regulations governing such processes as when specific loan
collection efforts will be taken against defaulted borrowers. A
borrower does not have a substantive right to receive a letter at a
specific time.
In addition, the Secretary has not included in these regulations
other rules governing the Department's actions which already have
binding effect. For instance, the Department's regulations at 34 CFR
Part 30 include specific procedural protections available to a borrower
before the Department reports a debt to a credit bureau. 34 CFR 30.35.
Moreover, other laws and rules (such as, in certain instances, the Fair
Debt Collection Practices Act) govern various aspects of the
Secretary's implementation of the Direct Loan Program. The Secretary
will comply with those laws and rules to the extent they are applicable
to the Direct Loan Program, but the specifics of those requirements do
not have to be reflected in these regulations.
The Secretary does not agree with the commenters' suggestion that
the time deadlines binding guaranty agencies and lenders in the FFEL
Program should apply to the Secretary in the Direct Loan Program. The
time requirements in the FFEL Program are designed to protect the
Federal taxpayer by ensuring that lenders and guaranty agencies which
receive Federal funds meet certain requirements before those benefits
are paid. The same goal does not exist in the Direct Loan Program.
However, the Secretary is fully committed to timely communications with
borrowers and schools.
Cash Management Provisions
To reduce regulatory burden on schools, some sections concerning
cash management issues have been removed from these final regulations
and cross-references to the new subpart K of the Student Assistance
General Provisions regulations have been made. In this new subpart, the
Secretary has consolidated most of the current cash management
requirements in the title IV, HEA program regulations, codified
existing cash management policies and procedures currently specified in
subregulatory guidance, and amended some existing requirements to
promote sound cash management practices by schools. Comments to the
NPRM regarding the cash management issues now addressed in subpart K
were forwarded for full consideration in the development of those final
regulations.
The changes concerning cash management provisions made to these
final regulations include:
Section 685.102 Definitions
In paragraph (a)(1), the definition for ``disburse'' was added to
the list of definitions which are set forth in the Student Assistance
General Provisions, 34 CFR Part 668. Additionally, in paragraph (b),
the definition for ``disbursement'' has been removed since the
definition for ``disburse'' is set forth in 34 CFR 668.162.
Section 685.303 Processing Loan Proceeds
Paragraph (c) has been amended to delete language in this section
and to cross reference section 34 CFR 668.165, which establishes the
procedures a school must follow when disbursing funds.
Section 685.309 (Proposed 685.308) Administrative and fiscal control
and fund accounting requirements for schools participating in the
Direct Loan Program
Paragraph (g) has been amended to delete language in this section
and to cross reference 34 CFR 668.164. Paragraph (h) also has been
amended to delete language in this section and to cross reference 34
CFR 668.164, which establishes the procedures a school must follow for
maintaining funds.
Inspection Requirements and Division of Functions Provisions
Paragraph (e) of Sec. 685.309 (proposed Sec. 685.308) has been
amended to delete language in this section and to cross reference more
comprehensive provisions in 34 CFR 668.23(b). Paragraph (i) of
Sec. 685.309 also has been amended to delete this language and to cross
reference more comprehensive provisions contained in 34 CFR 668.16(c).
Bankruptcy Provisions
The Secretary is not including proposed Sec. 685.200(a)(1)(iv) in
this final rule because that provision would have required
reaffirmation of a loan that had been discharged in bankruptcy as a
prerequisite to further eligibility to participate in the Direct Loan
Program. This requirement is no longer permissible by operation of law
pursuant to amendments to 11 U.S.C. section 525 made by section 313 of
the Bankruptcy Reform Act of 1994, P.L. 103-394. These amendments took
effect on October 22, 1994, the date of enactment. Section 525 as
amended prohibits denial of a loan or loan guarantee based on
bankruptcy discharge, but does not prohibit consideration of that fact
in determining the future creditworthiness of a loan applicant.
Consistent with the new law, these regulations provide that a
bankruptcy discharge may evidence an adverse credit history, as a
result of which the PLUS Loan applicant must furnish an explanation of
that event or secure a credit-worthy endorser.
Discussion of Major Issues
Section 685.100 The William D. Ford Federal Direct Loan Program
Section 685.100(a)(1)
Comments: None.
Discussion: Recent amendments to the HEA were included in the
Improving America's Schools Act of 1994 and enacted into law on October
20, 1994. These changes provide that the name of the program authorized
by Part D of the HEA shall be referred to as the ``William D. Ford
Federal Direct Loan Program.'' Thus, the ``Federal Direct Student Loan
Program'' has been renamed the ``William D. Ford Federal Direct Loan
Program.'' However, the program still will be cited as the ``Direct
Loan Program'' within these regulations. Further, the loan program
previously referred to as the ``Federal Direct Stafford Loan Program''
has been renamed the ``Federal Direct Stafford/Ford Loan Program'' and
loans made under this program will continue to be cited as ``Direct
Subsidized Loans.'' The loan program previously referred to as the
``Federal Direct Unsubsidized Stafford Loan Program'' has been renamed
the ``Federal Direct Unsubsidized Stafford/Ford Loan Program'' and
loans made under this program will continue to be cited as ``Direct
Unsubsidized Loans.''
Changes: Section 685.100 reflects programmatic name changes,
including the ``William D. Ford Federal Direct Loan Program,'' formerly
known as the ``Federal Direct Student Loan Program;'' the ``Federal
Direct Stafford/Ford Loan Program,'' formerly known as the''Federal
Direct Stafford Loan Program;'' and the ``Federal Direct Unsubsidized
Stafford/Ford Loan Program,'' formerly known as the ``Federal Direct
Unsubsidized Stafford Loan Program.''
Sections 685.100(a)(1) and 685.100(a)(4)
Comments: Commenters believed that Sec. 685.100(a)(1) should
specify that interest is paid on a Direct Subsidized Loan by the
Secretary only if that student is eligible for these interest payments
on the loan. These commenters also stated that Sec. 685.100(a)(4),
concerning consolidation loans, should be modified to state the party
responsible for interest payment during periods of in-school, grace, or
deferment status of the borrower.
Discussion: The Secretary believes that the regulations provide
sufficient distinction between Direct Subsidized and Direct
Unsubsidized loans. Section 685.215 clearly distinguishes between
Direct Subsidized and Direct Unsubsidized Consolidation Loans.
Changes: None.
Section 685.100(b)
Comments: Many commenters stated that in the FFEL Program
regulations, 34 CFR 682.100, Federal loans such as Stafford, SLS, PLUS,
and Consolidation Loans do not incorporate the term ``Federal'' in
their names. However, within the Direct Loan Program and General
Provisions regulations, the term ``Federal'' is used when describing
these loans. These commenters stated that the wording must be
consistent throughout all Department regulations.
Discussion: The Secretary notes the comments regarding use of
program names.
Changes: The Secretary intends to make future modifications to the
FFEL regulations to ensure consistency in use of program names.
Section 685.101 Participation in the Direct Loan Program
Section 685.101(a)(2)
Comments: Many commenters supported the provision allowing schools
to participate simultaneously in both the Direct Loan and FFEL
Programs. However, some of these commenters recommended that an
institution, not the Secretary, determine its level of participation in
the two programs. These commenters expressed concern that the NPRM
would limit an institution's choice by subjecting an institution's
participation in both programs to the Secretary's approval.
Discussion: The language contained in Sec. 685.101(a)(2) allows an
institution the choice of determining its level of participation in the
Direct Loan Program. During the first year of the Direct Loan Program,
some schools have chosen to participate in both programs and no
school's requested level of participation was denied or modified by the
Secretary. However, the Secretary will continue to retain the authority
to approve such participation to ensure a smooth transition from the
FFEL Program to the Direct Loan Program.
Changes: None.
Section 685.102 Definitions
Section 685.102(a)(1)
Comments: A commenter noted an apparent inconsistency in the law
regarding stepparents that limits the loan assistance available to a
dependent student. The commenter believed that because the law requires
that, in certain circumstances, the income of stepparents must be used
to calculate the expected family contribution, the Secretary should
explicitly provide that stepparents would be eligible to obtain Direct
PLUS loans. The commenter asked that the Secretary provide
clarification.
Discussion: A ``parent'' is defined in 34 CFR 668.2(b) as a
student's natural or adoptive mother or father, or a student's legal
guardian who has been appointed by a court and who is specifically
required by the court to use his or her own resources to support the
student. A stepparent cannot be a student's natural mother or father,
but may be a student's adoptive mother or father, or the student's
legal guardian. However, if the stepparent is not legally considered to
be the student's adoptive mother or father, or the student's legal
guardian, the stepparent is not an eligible borrower in either the
Direct or FFEL PLUS Program for that student.
Changes: None.
Section 685.102(b)
Comments: One commenter noted that the Direct Loan Program
regulations varied from the FFEL Program requirement of three
``reasonable and affordable'' payments for borrowers to be eligible to
consolidate defaulted loans.
Discussion: The Secretary agrees with the commenter that the terms
for defaulted FFEL and Direct Loan borrowers who wish to obtain a
consolidation loan should be the same. For the sake of consistency,
defaulted borrowers who do not wish to repay under ICR will be required
to make three payments prior to consolidation. Similarly, the Secretary
intends that borrowers who do not make any payments prior to
consolidation should be allowed to change out of the ICR plan after
making three payments.
Changes: The definition of ``satisfactory repayment arrangement''
in Sec. 685.102(b) is revised to provide that three consecutive,
voluntary, full monthly payments on a defaulted loan satisfy the
requirements of ``satisfactory repayment arrangements'' for the
purposes of consolidation.
Section 685.210(b)(1)(i) is revised to require a defaulted ICR
borrower to make three monthly payments in order to change to another
repayment plan. Section 685.210(b)(1)(ii) is added to provide that a
defaulted ICR borrower who is not required to make payments must
actually make three reasonable and affordable payments in order to
change to another Direct Loan repayment plan.
Comments: A number of commenters requested a clarification of the
definition of ``consortium''. Commenters noted that the definition
states that for schools in a consortium, the communication is between
the Secretary and a single point. Commenters asked whether ``the
communication'' refers to all contracts, policy information and
compliance reports or to borrower-specific loan information only.
Discussion: All electronic communication will be through the main
contact in the consortium agreement; the Secretary may send other
communication materials directly to individual institutions within the
consortium. As noted in the definition, each school must sign a
participation agreement with the Secretary, and is held responsible for
the administration of the Program.
Changes: The definition of ``consortium'' is amended to clarify
that the electronic communication between the Secretary and the schools
in a consortium is channeled through a single point.
Comments: Commenters pointed out that the definition of estimated
financial assistance is not comparable to the definition in the FFEL
Program regulations.
Discussion: The Secretary agrees that the definition of estimated
financial assistance in the FFEL Program regulations differs from the
language in the Direct Loan NPRM. Therefore, the Secretary has made
revisions to this section in both these regulations and the FFEL final
regulations to simplify and clarify the definition of estimated
financial assistance.
Changes: The introductory paragraph of the definition of estimated
financial assistance has been revised; paragraphs (i), (ix) and (x)
have been deleted; and paragraph (viii) has been revised.
685.200 Borrower Eligibility
Section 685.200(a)
Comments: Many commenters suggested that the Secretary should
clarify if a borrower must apply for a Direct Subsidized Loan before he
or she may apply, and be determined eligible for, a Direct Unsubsidized
Loan. Also, the commenters suggested that the Department clarify that a
borrower with need for less than $200 should not be required to apply
for a Direct Subsidized Loan.
Discussion: The Secretary does not have the authority to set a
minimum borrowing amount on a Direct Subsidized Loan, nor does the
Secretary have the authority to require a borrower to apply for a
Direct Subsidized loan before the borrower applies for a Direct
Unsubsidized loan. It should be noted, however, that a student applies
for both Direct Subsidized and Unsubsidized Loans by completing the
Free Application for Federal Student Aid. Based on that application, a
school determines student eligibility for a Direct Subsidized Loan
prior to determining any Direct Unsubsidized Loan amount. Further, an
institution may establish a minimum loan amount.
Changes: None.
Section 685.200(b)(7)
Comments: Many commenters suggested that the Secretary require a
parent with an adverse credit history to document extenuating
circumstances to establish eligibility for the loan, even if the
borrower obtained an endorser who did not have an adverse credit
history. The commenters argued that if this requirement were not
included in the final regulations, many Direct PLUS Loans would go into
default.
Discussion: The Secretary agrees with the commenters that a
borrower who has an adverse credit history may have an increased risk
of defaulting on a loan than a borrower without an adverse credit
history. However, the Secretary does not believe that documenting
extenuating circumstances with respect to a borrower's adverse credit
history is the only way to reduce such risk. The Secretary believes
that requiring a borrower with an adverse credit history to obtain an
endorser who does not have an adverse credit history is an effective
way to reduce the incidence of default. In the event that the borrower
defaults, the endorser would be required to repay the loan. Therefore,
the Secretary is providing a borrower with an adverse credit history
two options to establish eligibility for a Direct PLUS Loan: (1)
document to the satisfaction of the Secretary that extenuating
circumstances exist, or (2) obtain an endorser who does not have an
adverse credit history. This provision is the same as the applicable
FFEL Program regulation.
Section 685.200(c)
Comments: Several commenters suggested that the regulations address
eligibility of defaulted FFEL, Direct Loan, and Perkins borrowers.
Discussion: The Direct Loan Program regulations are comparable to
the FFEL Program regulations, which also do not address the eligibility
of defaulted Perkins borrowers (see 34 CFR 682.201(a)). The eligibility
of defaulted Perkins borrowers is addressed in 34 CFR 668.7(e) of the
General Provisions regulations.
Changes: None.
Section 685.201 Obtaining a Loan
Section 685.201 General
Comments: Many commenters suggested that the Secretary disclose to
the borrower upon disbursement of the loan, borrower-specific terms
such as loan fees retained, net balance, interest rate, total debt, as
well as the name, address and phone number of the Direct Loan Servicing
Center.
Discussion: The Secretary agrees with the commenters that it is
important that a borrower receive such information with respect to his
or her debt when a loan is disbursed, and makes such a disclosure with
each disbursement.
Changes: None.
Section 685.202 Charges for Which Direct Loan Program Borrowers Are
Responsible
Section 685.202(e)
Comments: Some commenters expressed concern that the collection
formula prescribed by 34 CFR 30.60 results in unreasonable collection
fees. The commenters suggested that the Department limit collection
costs to those costs actually incurred, provided those charges are
reasonable.
Discussion: The Secretary does not agree with the commenters that
the collection costs prescribed by 34 CFR 30.60 are unreasonable. This
regulation, which uses a formula to determine average collection costs,
is consistent with the Federal Claims Collection Standards, 4 CFR Part
101, et seq. Those standards require the Secretary to recover his costs
in collecting a delinquent debt. The Department does not charge a
borrower the actual costs incurred in collecting his or her loan. These
costs may not only exceed the thresholds prescribed by 34 CFR 30.60,
but in the case of certain low balance loans, may be greater than the
outstanding balance of the loan. The Secretary believes that the
formula provided by 34 CFR 30.60 provides a reasonable measure of
collection costs that should be charged on a defaulted loan.
Changes: None.
Comments: Commenters noted that the fees charged to borrowers under
Sec. 685.202(e) must be the same as those charged under the FFEL
Program.
Discussion: The maximum fees and charges that can be charged in the
Direct Loan Program are the same as those authorized for the FFEL
Program.
Changes: None.
Section 685.203 Loan Limits
Sections 685.203(a)-(c)
Comments: Many commenters suggested that the Secretary permit a
school to use a student's satisfactory academic progress to determine
if a student's loan amount should be prorated. Many of the commenters
argued that determining if proration is needed is unreasonably
complicated. Many of the commenters argued that satisfactory academic
progress is an appropriate means to measure if a student needs
additional time to complete an educational program and suggested that a
financial aid administrator be given the authority to use satisfactory
academic progress to determine if loan proration is necessary. Other
commenters suggested that a school should be permitted to use other
means, such as the number of weeks of enrollment or the number of
credit hours in the student's loan period to determine if loan
proration is necessary.
Discussion: The Secretary does not have the authority to permit a
school to use a student's satisfactory academic progress or any means
other than those expressly provided by the statute, which are reflected
in the regulations, to determine if a student's loan should be
prorated.
Changes: None.
Section 685.204 Deferment
Section 685.204(b)(3)
Comments: Two commenters suggested that the Secretary provide
automatic economic hardship deferments to borrowers who chose the ICR
option and argued that ICR borrowers should not be required to apply
for the economic hardship deferment. The commenters suggested that the
economic hardship deferment be granted on the basis of ICR income
figures.
Discussion: The Secretary reminds the commenters that the
provisions on economic hardship apply to all borrowers regardless of
which plan they choose and that the Secretary is committed to providing
all borrowers with timely information regarding deferment eligibility.
However, because the Secretary has additional information about ICR
borrowers, he will facilitate the process regarding economic hardship
for these borrowers. Based on income and debt information (data
elements necessary to calculate the ICR amount) for ICR borrowers, the
Secretary will counsel borrowers and, through the dissemination of
informational materials, will make deferment options clear to these
borrowers. Due to statutory differences between the information used
for the ICR plan and the economic hardship deferment provisions, it is
not possible for the Secretary to make ``automatic'' deferment
eligibility determinations.
Changes: None.
Comments: A commenter suggested that the Secretary include in the
final regulations the definition of economic hardship that was included
in the notice of proposed rulemaking for the FFEL Program published in
the Federal Register on March 24, 1994 (59 FR 14047). Under the
proposed rule, a borrower would be considered to be experiencing an
economic hardship if the borrower is earning no more than either four
times the minimum wage rate or the poverty level and whose payments on
Federal educational loans are at least 20 percent of the borrower's
monthly disposable income. The commenter also suggested that the
Secretary extend the eligibility for in-school deferment to medical
interns or residents.
Discussion: The Secretary believes that the expansion of economic
hardship as requested by the commenter could make a borrower eligible
for an economic hardship deferment when he or she is not experiencing
any financial difficulties. The HEA has been amended by the Improving
America's Schools Act of 1994 to expand the definition of economic
hardship to apply to a borrower who is working full-time and has a
Federal education debt burden that equals or exceeds 20 percent of such
borrower's adjusted gross income, and the difference between the
borrower's adjusted gross income and his or her Federal education debt
burden is less than 220 percent of the greater of the annual earnings
of an individual earning the minimum wage or the income official
poverty line applicable to a family of two. This provision is
applicable to all borrowers under the Direct Loan Program. Further, the
statute does not provide in-school deferment eligibility to medical
residents and interns.
Changes: The definition of economic hardship has been expanded to
incorporate the statutory change. A change has been included in the
FFEL Program regulations. Section 685.204(b)(3)(ii) references the
applicable FFEL Program provision.
Section 685.204(d)
Comments: A commenter suggested that the Secretary extend the
eligibility to medical students to defer repayment on Direct Loans if
they received FFEL Program loans prior to July 1, 1993.
Discussion: At the time the NPRM was published, the Secretary did
not have the authority to permit a Direct Loan borrower to defer
repayment based on criteria applicable to FFEL Program loan borrowers
who borrowed before July 1, 1993. However, on October 20, 1994, the
Higher Education Act of 1965 was amended by the Improving America's
Schools Act of 1994, to provide that a Direct Loan borrower who has an
outstanding balance on an FFEL Program loan made prior to July 1, 1993
is eligible for any deferment available to FFEL Program borrowers that
were in effect on July 22, 1992.
Changes: A change has been made. The regulations have been amended
to provide that a Direct Loan borrower who has an outstanding FFEL
Program loan made prior to July 1, 1993 is eligible for all the
deferments available to FFEL Program borrowers in addition to the
deferments available to Direct Loan borrowers.
Section 685.204(e)
Comments: A number of commenters objected to the Secretary's
proposal to permit a borrower who consolidates FFEL Program loans into
a Direct Consolidation Loan to defer repayment on the Consolidation
Loan under all the deferment conditions available to Direct Loan
borrowers in addition to all of the deferment conditions available
under the FFEL Program (even if the borrower was not previously
eligible for all of the deferments under the FFEL Program). Many
commenters stated that the deferment conditions should be identical for
the Direct Loan and FFEL Programs.
Many other commenters agreed with the Secretary's proposal to
provide the same deferments to borrowers as they have under the FFEL
Program in addition to the Direct Loan Program deferments because it
maximizes the deferments available to the borrower.
Discussion: The Congress specifically exempted the Federal Direct
Consolidation Loan Program from having parallel terms, conditions, and
benefits as consolidation loans under the FFEL Program. The Secretary
has exercised his authority to set the terms, conditions, and benefits
for Direct Consolidation Loans to provide that a borrower will be
eligible for any deferment benefits for which he or she would have been
eligible under the FFEL Program, and be eligible for deferments
available to other Direct Loan borrowers. The Secretary believes that
it is appropriate to maximize the deferment benefits for which a
borrower may be eligible when he has the authority to do so. Further,
as a result of a recent statutory amendment, these deferment benefits
are the same as those provided by Congress for borrowers under the
Direct Subsidized, Direct Unsubsidized, and Direct PLUS Loans. The
Secretary does not have the authority to expand the deferment
conditions available to borrowers who consolidate loans under the FFEL
Program.
Changes: None.
Section 685.205 Forbearance
Section 685.205(a)
Comments: One commenter suggested that if a borrower fails to
designate a form of forbearance, the Secretary should grant cessation
of payments.
Discussion: The Secretary believes there is no need to prescribe a
default to a particular form of forbearance to address cases where
borrowers fail to designate the form of forbearance they prefer. The
borrower will be required to contact the Direct Loan Servicing Center
in order to obtain a forbearance. The Servicing Center will provide the
borrower with adequate information to ensure that the borrower
understands his or her options under forbearance. Furthermore, the
Servicing Center will be very flexible on a month to month basis. The
Servicing Center will accept zero payments, partial payments, or
interest only payments from any borrower in forbearance; the borrower
will be able to choose to pay or not to pay on a monthly basis.
Changes: None.
Comments: Some commenters suggested that the Secretary specify in
the regulations that a borrower may receive a forbearance if he or she
is serving in a position that would qualify for loan forgiveness under
34 CFR 682.215.
Discussion: The Secretary agrees with the commenters that a
borrower is eligible to forbear repayment of a Direct Loan if he or she
qualifies for loan forgiveness under 34 CFR 682.215.
Changes: A change has been made. A new paragraph (5) has been added
to Sec. 685.205(a) that allows a borrower under the Direct Loan Program
to forbear if he or she is serving in a position that qualifies for
loan forgiveness under 34 CFR 682.215.
Section 685.206 Borrower Responsibilities and Defenses
Section 685.206(b)(1)
Comments: A commenter suggested that the proposed requirement for a
borrower to notify the Secretary of a change of address be removed. The
commenter was concerned that disadvantaged persons could easily fail to
comply with the requirement because they are confronted with many
requirements to report various types of information to many different
agencies. Another commenter proposed that paragraph (b)(1) be revised
to eliminate duplication and unrealistic expectations by requiring an
enrolled borrower to report changes in name, address, employer, and
employer's address to the school instead of the Secretary, and to
require the borrower to report address changes to the Secretary after
he or she is no longer enrolled. The commenter also suggested that
there is no need for the borrower to report changes in enrollment
status to the school, because the school already has this information.
Discussion: The Secretary would not be able to effectively collect
loans without current information concerning a borrower's name,
address, employment, and student status. For this reason, it is
imperative that the borrower (who is the best source of this
information) ensure that the Secretary is informed of changes.
Requiring students to notify their schools of any changes in address
promotes rapid exchange of information, particularly in instances where
a borrower drops out of school or drops below half time enrollment.
This rapid exchange of information ensures that the borrower receives
prompt exit counseling and guidance on entering repayment well before
the first payment is due, and facilitates a school's calculation and
return of a refund, if any. At some institutions, there is a delay
between the time a student changes enrollment status and the time that
this information is made available to the financial aid office.
Changes: None.
Section 685.206(c)
Comments: Several commenters supported the proposed language
relating to borrower defenses because it strikes a reasonable balance
between the needs of students and institutions. Commenters stated that
it is important that a system be established to assure that valid
claims are processed, frivolous claims are screened out, and schools
are protected from liability if a delay in bringing the claim reduces
the school's ability to access evidence opposing the claim.
Discussion: The Secretary believes that the proposed regulations
provide an adequate system for adjudicating claims by borrowers that
have a defense against repayment of a loan based on the acts or
omissions of the school. The Secretary notes that the regulations
identify formal proceedings in which borrowers may raise the acts or
omissions of the school as a defense against collection of the loan.
The Secretary does not believe that these proceedings will be used by
borrowers to raise frivolous appeals. Moreover, schools are further
protected from frivolous claims by the requirement that the Secretary
initiate a second proceeding to enforce a liability against the school.
Changes: None.
Comments: One commenter stated that the Department should recognize
that defenses against collection of a loan based on abuses by schools
must be preserved. Another commenter suggested that further
clarification is needed to determine what is meant by the reference to
an act or omission by the school that would give rise to a cause of
action under state law. The commenter suggests that this language
encourages spurious attempts by borrowers to assert claims against an
institution.
Discussion: The proposed regulations reflect the Secretary's view
that an act or omission of the school may, under certain circumstances,
be a defense against collection of a loan. The Secretary believes that
the reference in the regulation to ``an act or omission of the school
that would give rise to a cause of action under state law'' provides an
acceptable interim standard for resolving claims in this area. In the
preamble to the proposed rules, the Secretary committed to working with
interested parties to develop revised regulations for borrower defenses
that would provide further detailed guidance in this area.
Changes: None.
Comments: A number of commenters who participate in the FFEL
Program stated that they were concerned that institutional exposure to
potential liability in the FFEL Program could be increased as the
Department attempts to address an alleged problem of higher potential
institutional liability in the Direct Loan Program. These commenters
also stated that schools with no history of abuse should not be subject
to increased regulation as the Direct Loan Program is implemented.
Discussion: The commenters' claim that schools may be subject to
greater liabilities in the Direct Loan Program than in the FFEL Program
is inaccurate. Schools in both programs face essentially the same risk
of liability. Similarly, the commenters' suggestion that the Direct
Loan Program will result in increased regulation of schools is
incorrect. In fact, these final regulations, in many cases, reduce the
burdens on schools, and the Secretary is applying many of these changes
to the FFEL Program as appropriate.
Changes: None.
Comments: Some commenters supported the Secretary's announcement in
the preamble to work with interested parties to develop regulations for
borrower defenses that would apply to both the Direct Loan Program and
the FFEL Program. These commenters urged the Secretary to structure the
discussions under a negotiated rulemaking process and identified
particular representatives for the process. Some of these commenters
suggested that the Secretary issue rules for both programs in this area
by December 1, 1994 to take effect on July 1, 1995.
Discussion: In the preamble to the NPRM, the Secretary stated that
he would work with interested parties to develop further regulations
for borrower defenses. The Secretary has not yet determined what
process will be used for the development of those regulations. However,
the Secretary will ensure that interested parties are invited to
participate in the process. As the preamble also noted, however, the
regulations that will be developed will apply to the 1996-97 and
subsequent academic years. The Secretary concluded that there was not
sufficient time to consult with interested parties and issue final
regulations by December 1, 1994.
Changes: None.
Comments: One commenter requested clarification of the effective
date of the various borrower defense provisions in the regulations. The
commenter recommended that the regulations in effect at the time the
defense is raised be deemed the operative regulations.
Discussion: The Secretary believes that the issue of the effective
date of the borrower defense provisions should be resolved during the
process for developing final borrower defense provisions for both the
FFEL Program and the Direct Loan Program. Until final borrower defense
provisions are issued, the Secretary intends to apply the regulations
in effect at the time the borrower asserts the defense against
repayment.
Changes: None.
Comments: One commenter stated that the FFEL Program promissory
note only permits a borrower to assert a defense against repayment of a
loan received for attendance at a ``for profit'' school that has a
business relationship with the lender and suggested that the same rule
should apply to the Direct Loan Program.
Discussion: The comment reflects a misunderstanding of the language
in the FFEL Program's common promissory note. That promissory note
includes a provision that reflects the requirements of the Federal
Trade Commission's ``Holder Rule''. The FTC only regulates ``for
profit'' entities and the promissory note provision reflects that
limitation. However, the promissory note also specifically provides
that applicable State law may provide for certain borrower rights,
remedies and defenses in addition to those stated in the note. Thus,
contrary to the commenter's suggestion, the promissory note does not
prohibit borrowers from asserting a defense against repayment of a loan
received for attendance at a not-for-profit school.
Changes: None.
Section 685.207 Obligation to Repay
Section 685.207(a)(1)
Comments: Another commenter wanted assurance that fees and
collection costs charged under the Direct Loan Program would be
adequate to ensure ``aggressive collection of FDSLP loans''.
Discussion: The Secretary will implement effective collection
procedures. Similarly, the Secretary intends to assess collection fees
in accordance with the guidelines provided in the regulations, which
are the same as for the FFEL Program.
Changes: None.
Section 685.207(b)(4)
Comments: One commenter suggested that Sec. 685.207(b)(4) be
revised to state that, in the event that the effective interest rate
increases and causes an increase in the repayment period or fixed
monthly payment amount, the Secretary will advise the borrower of the
change and notify the borrower of the right to select a different
repayment plan.
Discussion: Prior to entering repayment, borrowers will be given
information on all the repayment plans available under the Direct Loan
Program; information provided will include information on possible
changes in interest rates and possible resulting changes in the number
of payments or fixed monthly amount of payments. Borrowers will be
notified of changes in interest rates and the impact of the changes on
an annual basis. On the notification, a borrower will be instructed
that he or she may opt to repay at the new increased or decreased
monthly repayment amount, or choose to take no action. If the borrower
does not opt to repay the adjusted monthly payment amount, the term of
the loan will automatically be adjusted.
Changes: None.
Section 685.207(b)-(d)
Comments: Several commenters requested that the regulations provide
specific time frames for the first payment due date on Direct
Subsidized Loans, Direct Unsubsidized Loans, and Direct PLUS Loans.
Commenters suggested that Direct Subsidized Loans and PLUS Loans
require a first payment due date of 60 days following the first day
that the repayment period begins and that Direct Unsubsidized Loans
require a first payment due date of 45 days following the first day
that the repayment period begins. Other commenters recommended
establishing due dates of 45 days following the first day that the
repayment period begins for Direct Subsidized and Direct Unsubsidized
Loans.
Discussion: Under the Direct Loan Program, the Servicing Center
notifies the borrower when the first payment is due; this date may vary
for individual borrowers, depending upon when the borrower enters
repayment in the Servicing Center's billing cycle. Payments will
typically be due within 60 days from the date the borrower enters
repayment.
Such obligations are ``regulated'' by contract terms with the
Direct Loan servicing entities, rather than in federal regulations,
because the Secretary is not obligated under the due diligence
requirements that require first payment due dates for lenders.
Changes: None.
Section 685.207(c)(3)
Comments: A commenter suggested that Sec. 685.207(c)(3) should be
revised to clarify that interest begins to accrue on a Direct
Unsubsidized Loan on the day the first installment is disbursed. This
revision would make this section consistent with Sec. 685.207(d) that
specifies when interest begins to accrue on a Direct PLUS Loan.
Discussion: The commenter is correct in noting that interest begins
to accrue on a Direct Unsubsidized Loan on the day the first
installment is disbursed.
Changes: A sentence has been added to Sec. 685.207(c)(3) stating
that interest begins to accrue on the day the first installment is
disbursed.
Section 685.207(f)
Comments: A number of commenters also noted that the regulations
should clarify the time at which a grace period begins for students
enrolled in correspondence programs.
Discussion: The commenters are correct in noting that the NPRM did
not clarify the time at which a grace period begins for students
enrolled in correspondence programs.
Changes: Section 685.207(f) has been added to specify the time at
which a grace period begins for students enrolled in correspondence
programs.
Section 685.208 Repayment Plans
Comments: Some commenters believe that FFEL repayment options
should be expanded. Several commenters suggested that the Secretary
meet with the FFEL community to explore how FFEL repayment options
might be expanded.
Discussion: The HEA establishes the repayment plans available under
the Direct Loan and FFEL Programs. Under FFEL, Consolidation loan
borrowers are able to receive extended repayment plans (repayment
periods that are longer than 10 years) if they qualify on the basis of
outstanding loan balances; however, in all other instances, the statute
restricts FFEL Program loans to 10-year terms, excluding periods of
deferment and forbearance.
Changes: None.
Comments: Several commenters stated that the loan repayment options
seem complex and should be simplified. Some of these commenters
believed that it may be possible to eliminate some of the repayment
plans.
Other commenters supported the number of repayment plans offered
and supported the ability of borrowers to switch repayment plans as
needed.
Discussion: The HEA authorizes four repayment plans for the Direct
Loan Program: the standard, graduated, extended, and ICR plans.
Additionally, the HEA authorizes the Secretary to create alternative
repayment plans on a case-by-case basis if the other plans do not meet
a borrower's needs. The Secretary believes that this range of repayment
plans is very important and will allow borrowers to choose how to best
repay based on their personal financial circumstances. As required by
law, this regulation establishes the specific rules for these repayment
plans. The Secretary will provide explanatory materials to borrowers
that will clearly explain the differences among the repayment plans in
easy to understand terms.
Changes: None
Comments: A number of commenters also suggested comparability with
FFEL by modifying Sec. 685.208(b)(4), (c)(4), and (d)(3) to state that
a forbearance will be granted to a borrower for a period of up to three
in years accordance with Sec. 685.205(b)(7).
Discussion: Section 685.205(b)(7) provides for forbearance for a
period of up to three years in cases where the effect of a variable
interest rate on a fixed-amount or graduated repayment schedule causes
the extension of the maximum repayment term. This provision applies to
standard, extended, and graduated repayment plans.
Changes: None.
Section 685.208(a)
Comments: Some commenters expressed concern that Direct Loan
borrowers will not be given adequate counseling about repayment options
and consolidation loans. In particular, the commenters were concerned
that students may choose the ICR plan without understanding the
consequences of interest accrual if their payments are smaller than the
interest that accrued.
Discussion: The Secretary believes that providing clear information
to borrowers on repayment and consolidation options is essential to the
success of the Direct Loan program. In section 685.304(b), schools are
required to conduct in-person exit counseling for Direct Loan
borrowers. Schools are also required to provide information on
repayment options, including ICR and loan consolidation, as part of
their exit counseling to borrowers.
In the Direct Loan Program, borrower counseling begins immediately
and is a continuous process. The Secretary, through the Direct Loan
Servicing Center, will send a letter to the student after each
disbursement. Borrowers with Direct Unsubsidized Loans will receive
quarterly statements while they are in school, before repayment begins.
In addition, the Department has developed an exit counseling video,
exit counseling brochure, and repayment brochure to inform borrowers
about loan repayment options prior to entering repayment. Further,
every borrower will receive individualized counseling materials
explaining the four repayment plans and showing how much the borrower
would repay monthly and over the life of the loan. While in repayment,
borrowers will receive an annual statement informing them of applicable
interest rates and advising them to consider a different repayment plan
if their circumstances have changed. The Servicing Center will act as a
single point of contact for borrowers in repayment in the Direct Loan
Program. The Secretary has obtained and will continue to welcome input
from members of the higher education community in the development of
borrower information materials.
Changes: None.
Comments: One commenter recommended that the Secretary allow PLUS
borrowers with loans for two or more children to choose a different
repayment option for each child's loans.
Discussion: For purposes of program simplicity, the Secretary has
decided that all PLUS loans obtained by one borrower must be repaid
under one plan. If a parent has a cash flow problem, the borrower can
easily switch to another repayment option that will reduce current
payments.
Changes: None.
Comments: One commenter asked how the Secretary would calculate
repayment periods if a borrower obtains a Direct Consolidation Loan
consisting of a Direct PLUS Consolidation Loan and a Direct Subsidized
and/or Direct Unsubsidized Consolidation Loan, and pays these loans
under different repayment plans. The commenter wanted to know if the
aggregate loan balance, or the separate loan balances for the PLUS and
other loans would be used to determine the length of the repayment
period for each loan's payment plan.
Discussion: The commenter is correct in noting that a borrower may
choose to repay Direct PLUS Loans separately from student loans. If the
borrower chooses to repay either the PLUS or student loans under the
graduated or extended plans, the Secretary would use the aggregate
balance of all loans to calculate the repayment periods for each of the
components of the Direct Consolidation Loan. This policy is consistent
with the policy in Sec. 685.215(i)(2), which states that the repayment
periods for graduated and extended repayment plans on consolidation
loans will be calculated on the basis of all education loans, including
certain loans that are not eligible for consolidation. However, if the
borrower chooses to repay the student loans under the ICR plan, only
those loans repaid under ICR will be used to calculate the payback
rate.
Changes: None.
Sections 685.208(b)(3) and (c)(3)
Comments: A number of commenters noted that Sec. 685.208(b)(3) and
685.208(c)(3) should be revised to reference an annual payment of $600,
rather than a monthly minimum payment of $50, in order to be consistent
with the wording of the statute and to ensure comparability to FFEL
regulations.
Discussion: A $50 minimum payment amount is equivalent to a $600
annual minimum repayment. The difference in language does not reflect a
difference in the terms of the two loan programs.
Changes: None.
Section 685.208(d)
Comments: Some commenters suggested offering to borrowers a series
of graduated payment options with terms that are tied to the size of
the borrowers' debt. These commenters recommended that the maximum
repayment period for the graduated repayment plan be shortened to 15
years.
Discussion: The Secretary believes that the terms of the graduated
repayment plan should be tied to the size of the borrower's debt and
has designed a graduated repayment plan in which the borrower's term
increases as the borrower's debt increases. For purposes of simplicity,
the Secretary believes that the repayment periods for the graduated and
extended plans should be identical. Also, these terms are similar to
those available under the FFEL Consolidation Program. As is always the
case, a borrower may repay a loan more rapidly than required without
any penalty.
Changes: None.
Section 685.208(e)
Comments: In response to the Secretary's request for comments as to
whether 30-year repayment terms are appropriate for PLUS borrowers, two
commenters recommended that 30-year repayment periods be available to
PLUS borrowers.
Discussion: The Secretary will continue to offer 30-year repayment
terms to PLUS borrowers who have debt levels sufficient to qualify for
the 30-year repayment terms under the extended and graduated repayment
plans.
Changes: None.
Section 685.208(f)(1)
Comments: One commenter noted that the section of the preamble to
the NPRM discussing the provisions for the ICR plan does not include
that income information from the borrower's spouse is a variable that
affects a borrower's monthly payment amount.
Discussion: As required by law, the Secretary uses a borrower's
adjusted gross income (AGI) to calculate the borrower's monthly
payment. If the borrower files a joint income tax return with a spouse,
the spouse's income is included in the AGI and, therefore, in the
calculation of the borrower's monthly payment. If the borrower files
separately, the spouse's income is not included in the borrower's AGI
and, therefore, is not included in the calculation of the monthly
repayment amount.
Changes: None.
Section 685.208(f)(2)
Comments: Two commenters suggested that the Secretary eliminate the
language under this section that requires borrowers to remain subject
to repayment regulations in effect when the borrower's initial loan
enters repayment; these commenters stated that borrowers should be able
to benefit from changes in the regulations.
Discussion: Under Sec. 685.208(f)(2), borrowers are not required to
remain under the ICR regulations enforced when the borrower's initial
loan enters repayment. Rather, borrowers have the option of requesting
that the ICR repayment terms of the amended regulations apply to their
loans. The Secretary will not automatically apply changes in the ICR
formula to all borrowers. The Secretary will provide clear information
to borrowers concerning the ICR formula changes, so the borrower can
make an informed decision. This policy provides borrowers with
protection from significant formula changes; at the same time, this
policy offers borrowers the flexibility to choose a formula change, if
the borrower determines that such a change would be beneficial.
Changes: None.
Section 685.208(g)
Comments: Commenters recommended that the alternative repayment
plan should provide loan forgiveness after 25 years of repayment and
should limit the amount of capitalization of interest. One commenter
suggested that proposed Sec. 685.208(g)(4) be modified to state that
the frequency of capitalization under an alternative repayment plan
(when a borrower's payment amount does not cover accrued interest) is
annual in order to clarify the Secretary's intent.
The commenters supported the idea of alternative repayment as a
``safety net'' for those borrowers who are unable to afford payment
under any other repayment plan.
Several commenters requested additional information on the
alternative repayment plan, such as the types of borrowers who might
qualify for this plan. One commenter requested information concerning
how a borrower would demonstrate that the terms of the other repayment
plans are not adequate to meet that borrower's needs.
Discussion: As authorized by the HEA, loan cessation is only
available under the ICR plan. Borrowers who wish to receive the
benefits of loan cessation should choose the ICR plan. However, the
Secretary has determined that the amount of capitalization permitted
under the alternative repayment plan should be consistent with the
policy on ICR. The Secretary also has established a maximum 30-year
repayment term under alternative repayment.
The Secretary will determine which borrowers qualify for an
alternative repayment plan on a case-by-case basis. Types of
documentation requested would include pay stubs and other documentation
of any income, as well as documentation of financial obligations, such
as medical bills. This option provides another choice to borrowers who
are unable to make payments under other options.
Changes: Section 685.208(g) is amended by adding a new paragraph
(4) to provide that borrowers must repay a loan under the alternative
repayment plan within 30 years of entering repayment.
Section 685.208(g)(5) is amended to provide that unpaid interest is
capitalized until the outstanding principal amount is 10 percent
greater than the original principal balance. Once this 10 percent limit
is reached, interest continues to accrue but is not capitalized.
Comments: Commenters requested that language be added to this
section requiring that the borrower make a choice of repayment plans
within 45 days of notification, consistent with Sec. 685.210(a)(2).
Discussion: The Secretary anticipates that the number and variety
of established repayment plans will address the needs of most
borrowers. During exit counseling, borrowers will be informed that if
the available repayment plans do not meet their needs, they should
contact the Direct Loan Servicing Center. The Direct Loan Servicing
Center will arrange alternative repayment plans for borrowers if the
available plans do not meet their individual needs. Therefore, the
process for selection of alternative repayment plans is different from
the selection of the other repayment plans and there is no need for the
suggested change. Upon further consideration, the Secretary believes
that the 45 day requirement is not necessary for any borrowers. This is
because borrowers will be given several opportunities rather than one,
including following exit counseling and grace period, if any, to select
a repayment plan. If a borrower does not select a repayment plan prior
to entering repayment, the Secretary designates the standard repayment
plan.
Changes: Section 685.210(a)(2) has been revised so that borrowers
are no longer required to select their repayment plans within 45 days
of receiving notification.
Section 685.209 Income Contingent Repayment Plan
Comments: Many commenters suggested that the Department delay
implementation of the ICR plan until problems identified by the higher
education community have been resolved.
Discussion: The Secretary has incorporated several changes into the
ICR plan that address the major concerns expressed by some in the
higher education community. The Secretary believes that the ICR plan is
well designed and provides choice to borrowers given their personal
circumstances. For example, the Secretary is limiting payments to 20
percent of discretionary income (AGI minus the poverty level
appropriate to the family size). This change reduces payments for the
lowest income borrowers. Also, the Secretary is lowering the limit on
interest capitalization from 50 percent to 10 percent of the original
debt. This change limits increases in debt accumulation and protects
borrowers from compounding interest charges. Furthermore, the Secretary
is including years of repayment under the 10-year standard plan and the
12-year extended plan as years eligible for loan forgiveness under
income contingency. This allows borrowers to count those years of
repayment in which they paid at least as much as they would have under
income contingency toward the 25 years in repayment required for loan
forgiveness. Finally, the Secretary will vigorously explore the
elimination of the current Federal income tax liability on any unpaid
loan balance that remains outstanding at the end of the 25-year ICR
period. This change would eliminate large payments at year 25 that
borrowers might not be able to afford.
Changes: None.
Comments: One commenter stressed that the Secretary must make
borrowers aware of the potential tax liability resulting from
cancellation after 25 years of repayment.
Discussion: Counseling materials prepared by the Secretary
emphasize the possibility of a tax liability resulting from
cancellation of a Direct Loan debt after 25 years because under current
law, such forgiveness is taxable. The Secretary will vigorously
encourage the elimination of the Federal income tax liability on any
outstanding loan balance that remains at the end of the 25-year ICR
period. The Secretary appreciates that taxation of loan forgiveness
could affect the benefit a borrower receives by choosing to repay his
or her Direct Loans under income contingency. For a full discussion of
issues concerning counseling, see comments and discussion under section
685.208.
Changes: None
Comments: One commenter stated that low-income borrowers are more
likely to default on their loans than other borrowers, but under ICR,
these borrowers will make low or no monthly payments, thus minimizing
defaults. As a result, institutions will not be triggered for a review
by a State Postsecondary Review Entity (SPRE) due to high default
rates.
Discussion: The Secretary expects the volume of defaults to decline
with the implementation of the ICR plan because ICR payments are
designed to be affordable for all borrowers, and the primary reason for
default is that borrowers cannot afford the level of payments expected
under existing repayment plans. In addition, defaults are expected to
decline because all Direct Loans will be held by the Secretary, and
borrowers will always know where to call with questions or problems and
where to send their checks.
Borrowers who are not required to and do not make payments under
ICR will not be considered defaulters. However, if a borrower is in ICR
and does not make required scheduled payments, a default will occur.
An institution's default rate is not the only criterion that can
trigger a SPRE review. The Secretary expects that the availability of
ICR will facilitate loan repayment and will reduce the validity of
default rates as a measure of institutional performance.
The Secretary intends to monitor several objective performance
measures for schools participating in the Direct Loan Program. The
Secretary believes that such a performance-based approach will increase
the accountability and integrity of the Direct Loan Program.
Changes: None.
Section 685.209(a)(2)
Comments: One commenter recommended that the Secretary meet the
requirement of annually providing the borrower with estimates of
monthly payment amounts under ICR by including this information on or
with the annual statement. The commenter further recommended that the
Secretary provide the borrower with a sufficient period of time to
review this information and elect a new repayment amount.
Discussion: The Secretary agrees that borrowers must be provided
with complete information to enable them to make informed decisions
regarding the options available within the ICR plan--the formula amount
or the capped amount--and will ensure that this information is covered
in borrower counseling sessions and included in relevant materials. The
Secretary has specified a single condition--one change each year--with
respect to choosing one of the two ICR amounts. The rule as written
provides borrowers with as much time as needed to review all applicable
information prior to changing ICR options.
Changes: None.
Section 685.209(a)(4)(i)
Comments: One commenter asked whether spouses who wish to repay
jointly under ICR and currently are not repaying under the same ICR
option have to wait a year to change options.
Discussion: No. Repaying under the same ICR option is a necessary
condition for joint repayment by married borrowers because it would be
impossible to calculate a joint repayment amount otherwise. The
Secretary does not consider changing to joint repayment to be the same
as a change in option.
Changes: None.
Section 685.209(b)
Comments: Several commenters argued that ICR would allow borrowers
to make low payments over a long period of time, therefore increasing
the costs of student borrowing.
Discussion: Borrowers will be given written information and
counseling explaining the difference in total interest they would pay
under the various repayment options. For some borrowers, it may be an
advantage to make smaller payments over a longer period of time, even
though it may ultimately result in higher interest payments. For other
borrowers, it may be advantageous to repay their loans more quickly.
The Secretary is offering borrowers the opportunity to tailor their
payments to their personal financial circumstances. Borrowers will have
the opportunity to consider career goals, education choices, and other
life plans in making repayment decisions. Borrowers can always prepay
without penalty or change repayment plans at any time if their
financial situation changes over time.
Changes: None.
Comments: One commenter asked why deferments and forbearances would
not address the problems of negative amortization that occurs under
ICR.
Discussion: Borrowers who are eligible to defer repayment of their
Direct Subsidized loans will avoid negative amortization during the
deferment period. However, interest continues to accrue for Direct
Unsubsidized loan borrowers during deferment periods and for all
borrowers during forbearance periods. If the borrower fails to pay the
interest due during these periods, negative amortization will occur.
Changes: None.
Comments: Several commenters suggested providing more flexibility
in the percentage-of-income cap, currently set at 15 percent of AGI.
One commenter suggested that the cap could be modified to take into
account the substantially smaller amount of available income at lower
AGI levels. A variable percentage of income cap could be implemented as
part of the formula.
However, another commenter specifically supported the 15 percent
limit on the amount of the AGI that would be required to be paid for
educational loans.
Discussion: The Secretary agrees that borrowers at lower AGI levels
must dedicate a higher percentage of their incomes to subsistence
spending, including food, shelter, and clothing. Hence, these borrowers
have less income available for servicing their student loan debt.
However, the Secretary believes that the commenters' concerns can best
be addressed by keeping the maximum payback rate at 15 percent of AGI
but limiting the monthly payment amount to 20 percent of discretionary
income (AGI minus the poverty level based on family size).
Changes: A change has been made. Section 685.209(b)(1)(ii) has been
amended to include a maximum payment amount equal to 20 percent of the
borrower's discretionary income. Discretionary income is defined as AGI
minus the current poverty income level appropriate to the borrower's
family size, as published by the U.S. Department of Health and Human
Services.
Section 685.209(b)(1)
Comments: One commenter recommended that the regulations provide an
index to update the $7.00 family-size offset.
Discussion: The Secretary has eliminated the $7.00 per month
payment deduction for each dependent and replaced it with a maximum
payment amount equal to 20 percent of discretionary income.
Discretionary income is based on the poverty income level appropriate
to the borrower's family size, as published by the U.S. Department of
Health and Human Services. These poverty guidelines are updated
annually to reflect changes in the cost of living.
Changes: A change has been made. The reference to the $7.00 monthly
payment deduction in Sec. 685.209(b)(1)(ii) has been deleted.
Comments: One commenter suggested that ICR repayment amounts should
not be based solely on the reported AGI of a borrower. This commenter
suggests that AGI is not always an accurate indicator of a borrower's
ability to repay a loan.
Discussion: The HEA requires the Secretary to use AGI of the
borrower (and the borrower's spouse if the borrower is married and
filed a joint return) in determining repayment under the ICR (see
455(e) of the HEA). However, the statute also provides that if AGI is
unavailable or does not reasonably reflect the borrower's current
income, the Secretary may use other documentation of income. The
regulations provide for alternative documentation of income (see
Sec. 689.209(d)).
If the Secretary receives information that suggests that the
borrower's AGI does not reflect the borrower's current income, the
Secretary will request that the borrower send additional documentation.
The Secretary will use this information to adjust the borrower's
repayment obligation if circumstances warrant such an adjustment (see
Sec. 685.209(a)(3)).
Changes: None.
Comments: Several commenters noted that due to a small change in
income, a borrower's payment under ICR would go from $0 to $25. Several
commenters suggested that defaults could be caused by this increase.
Several commenters suggested the payment be ``phased in'' rather than
initially set at $25.
Two commenters suggested establishing a targeted income offset
rather than a $25 floor. One of these commenters suggested subtracting
the $25 payment over a range of low incomes, such as up to 200% of the
poverty level (about $25,000 for a family of 3). This commenter argued
that the $25 floor may create a disincentive for people on welfare to
work.
One commenter argued against permitting zero payments in cases
where the borrower's required payment is below an established minimum
amount. This commenter stated that required payments that are less than
$25 will ensure that the borrower remains aware of the debt and will
facilitate long-term collectibility of the loans.
Discussion: The Secretary shares the commenters' concerns with
regard to the effect of implementing a $25 ICR floor payment. The
change to these regulations that incorporates a maximum payment amount
equal to 20 percent of discretionary income essentially accomplishes
the same result as a ``phased in'' floor amount or a targeted income
offset. In fact, the maximum payment amount is based on poverty income
which is consistent with the comment that the floor payment should be
more sensitive to borrowers at lower income levels.
Further, the Secretary notes that a loan servicing system that
routinely collects very small scheduled payment amounts is less cost-
efficient. Consequently, the Secretary will retain the concept of a
floor, but will reduce this amount from $25 to $15 to address
commenter's concerns.
Changes: A change has been made. Section 685.209(b)(1)(ii)
specifies a monthly payment amount of zero if the calculated payment
amount is less than $15.
Section 685.209(b)(2)
Comments: Many commenters suggested that the ICR formula proposed
by the Department requires monthly payments that are too high for low-
income borrowers and too low for other borrowers. These commenters
argued that low-income borrowers would not be given a viable
alternative to default, while middle-income borrowers would repay over
too long a period of time. One commenter suggested that the ICR formula
be redesigned to meet the needs of low-income borrowers, because they
believed that none of the repayment options would be reasonable for
these borrowers. Several commenters noted that payments required of
low-income borrowers would increase too dramatically with increased
income.
Several commenters suggested specific changes to the ICR formula.
One commenter suggested the Secretary redesign the calculation formula
to produce more graduated repayment amounts at the lower income levels.
Another commenter suggested that the Secretary apply the payback rate
to income over a threshold amount, such as the tax filing status.
Another commenter noted that the formula ``severed'' the monthly
repayment amounts on student loans from the applicable interest rates.
One commenter suggested reducing the flat rate of the formula from 4
percent to 3 percent, and increasing the debt-differentiation factor
from .2 percent to .3 percent, which would effectively reduce payments
for low-income borrowers and increase payments for middle- and upper-
income borrowers. A second commenter argued for a higher rate of
repayment than the one proposed because an increase in market interest
rates would result in sharply increased costs of income contingency.
Another commenter supported the existing formula.
Discussion: The Secretary believes that each borrower is best able
to determine the repayment plan (standard, graduated, extended or ICR)
that accommodates his or her own financial circumstance. He reminds
commenters that the ICR plan is not mandatory because borrowers choose
the plan that best suits their needs and can change plans over time.
Further, the Secretary believes that the ICR plan has been well
designed to meet the needs of a wide range of borrowers including those
borrowers who experience short-term or extended periods of low income.
The Secretary also notes that under the ICR formula, payments will
change with income. Any ICR borrower whose income increases
dramatically can choose to pay the formula amount in which loan
payments increase when income increases. Borrowers who choose to repay
the formula amount will retire their debts more quickly. Additionally,
any borrower can switch to another repayment plan at any time or prepay
without penalty.
The Secretary has incorporated a maximum payment amount, 20 percent
of discretionary income, to ameliorate the effects of the 15 percent-
of-income limit for low-income borrowers. The effect of this change is
similar to the effect of modifying the ICR algorithm to provide more
graduated repayment amounts at lower income levels. Also, the Secretary
investigated applying the payback rate to income above a threshold
amount. In order to remain within program cost limits, this change
would need to be coupled with a higher initial payback rate to minimize
costs to the taxpayer of the ICR plan. This approach, assessing income
above a threshold at a higher rate, was rejected by the non-Federal
negotiators who helped develop the first-year ICR rule and who
preferred a lower initial payback rate.
The Secretary believes that he has addressed the commenters'
concerns with respect to payments required from low-income borrowers by
incorporating the 20 percent cap on discretionary income. The Secretary
notes that applicable borrower interest rates are incorporated in the
ICR payment cap calculation (the 12-year standard amortization amount).
Finally, the Secretary reminds the commenters that the statute
specifies a maximum borrower interest rate of 8.25 percent, and that
ICR borrowers may prepay their loans or change payment plans without
penalty if they wish to lower the absolute cost of their loans.
Changes: None.
Comments: Several commenters suggested that the Secretary should
consider income and debt in calculating the payback rate, in order to
be more sensitive to debt at low-income levels. As a related matter,
several commenters noted that the Secretary's proposal creates
different repayment obligations for borrowers with identical income.
Discussion: The Secretary believes that including an income
variable, in addition to the debt variable, in the payback rate
calculation unnecessarily complicates the ICR formula. The borrower's
income level is taken into account when income is multiplied by the
payback rate to determine the borrower's payment amount. Establishing a
maximum payment amount equal to 20 percent of discretionary income
further adjusts for income. This change to Sec. 685.209(b)(1)(i) has
been previously described. Debt differentiation in the payback rate is
important to discourage excessive borrowing and to be sure that high
debt borrowers who can repay do so.
The Secretary notes that under the other repayment plans--standard,
extended and graduated--borrowers with identical incomes would have
different repayment obligations if their debts were different.
Changes: None.
Comments: One commenter was concerned that the payback rate does
not take a borrower's non-Federal debt into account.
Discussion: The payback rate is based on the loans the borrower is
repaying under the ICR plan. Borrowers cannot consolidate non-Federal
loans into a Direct Loan. Therefore, the Secretary believes that non-
Federal debt should not be used to determine the payback rate. However,
the Secretary notes that the flexibility offered by the ICR plan for
Federal education debt can help ease the borrower's overall debt
burden.
Changes: None.
Section 685.209(b)(3)
Comments: Several commenters argued that, to improve the repayment
plan for married borrowers repaying jointly, the Secretary should apply
payments to interest on both accounts before principal reduction takes
place in either, which would help avoid negative amortization. This
same commenter suggested that, because married borrowers may not be in
the same repayment cohorts, their payback rate should be calculated
based on their outstanding principal, rather than initial debt.
Discussion: For borrowers repaying jointly under ICR, the Secretary
agrees that payments should be applied to interest on both accounts
before principal reduction takes place in either. The Secretary also
agrees that the payback rate should be calculated based on outstanding
debt rather than initial debt.
Changes: A change has been made. Sections 685.209(b)(3) has been
amended to clarify that, for borrowers repaying jointly under ICR,
payments will be applied to interest on both accounts prior to
principal reduction in either. Section 685.209(b)(3) is also amended to
clarify that the payback rate for a married borrower paying jointly
under ICR will be calculated on the outstanding debt at the time the
borrower was approved for joint repayment.
Section 685.209(c)
Comments: Several commenters stated that the cap on repayments
imposed by the 12-year amortization level on the ICR capped amount was
not sensitive enough to income. One commenter recommended using an 8-
year cap, if the Secretary provides an income-adjustment factor (see
discussion concerning sensitivity to income), or a 10-year cap, if the
formula includes no adjustment for income. Another commenter supported
the recommendation for a 10-year cap for the ICR capped amount.
Discussion: The Secretary included the 12-year amortization cap in
the ICR plan to provide borrowers whose incomes are higher with the
option to limit the amounts of their monthly payments. Consequently,
the Secretary agrees that the 12-year cap extends payments for middle-
and upper-income borrowers with low or medium loan balances and
disagrees that it accelerates repayment for high-income, high-debt
borrowers. In fact, the 12-year cap extends repayment for any borrower
who chooses this option because his or her payment under the ICR
formula calculation option would be higher. Further, the Secretary
agrees that borrowers with the same debt who choose to repay the capped
amount pay the same amount regardless of income, but reminds commenters
that these borrowers can choose to pay off their loans more quickly by
repaying the ICR formula amount or switching to another plan. To limit
the extent to which repayment is extended, the Secretary is modifying
the calculation of the 12-year amortization cap. The cap will be
increased when the outstanding balance of the loan increases (that is,
following periods of negative amortization).
The Secretary established the fixed-payment, 12-year amortization
schedule for the ICR cap amount because this repayment term is
consistent with the minimum repayment periods available under the other
two non-standard repayment plans (graduated and extended).
Changes: A change has been made. Section 685.209(c) includes a
technical correction to the manner in which the 12-year payment cap
amount is computed. After each period of negative amortization, that
is, when the outstanding balance of the loan has increased, the 12-year
amortization amount will be calculated using the higher outstanding
loan amount. The payment cap will always be calculated on fixed-
payment, 12-year amortization schedules. A change in presentation has
also been made. References to option 1 and option 2 are deleted.
Instead, two calculations are presented that incorporate the
calculations previously described under options 1 and 2. Section
685.209(b) describes the formula amount, which is based on income, and
Sec. 685.209(c) describes the capped amount, which is based on 12-year
standard amortization schedules. The Secretary intends to present both
amounts to a borrower repaying under ICR, explaining that the borrower
may choose to repay either amount. Section 685.209(c) has been modified
to require a minimum monthly capped amount of $15. The detailed
examples in Appendix A have also been modified to take into account
these changes.
Section 685.209(d)(1)
Comments: Several commenters suggested that the Secretary provide
examples of alternative documentation of income, in cases where a
borrower's AGI is not available or where the AGI does not reasonably
reflect the borrower's current income.
Discussion: Such documentation could include pay statements from
employers, documentation of income received by the borrower from other
parties, and, if no other documentation is available, certification
statements of income from the borrower.
Changes: None.
Section 685.209(d)(2)
Comments: One commenter suggested that years in which an ICR
borrower receives an economic hardship deferment or a forbearance
(granted because the borrower was unable to make payments) should be
counted towards the maximum 25 years of repayment. The commenter argued
that excluding periods of forbearance and deferment from the 25-year
period treats a borrower who is required to make zero payments more
favorably than a borrower who chooses an economic hardship deferment,
because the borrower making zero payments would be allowed to count
this period towards the 25 years under ICR while a borrower in
deferment or forbearance would not.
Discussion: Under section 428(b)(7) of the HEA, the maximum years
in repayment in the FFEL Program exclude periods of deferment and
forbearance. Direct Loans have the same terms, conditions and benefits
as FFEL Program loans, unless otherwise specified (see section
455(a)(1)); therefore, the Secretary excludes periods of forbearance
and deferment from the 25 years of repayment under ICR.
The economic hardship deferment is beneficial to borrowers who have
subsidized loans. Borrowers required to make zero payments who are
eligible for an economic hardship deferment are not responsible for
paying the interest on the loan during the deferment period. If a
borrower chooses not to take the deferment, the borrower's interest
will accrue throughout the period that the borrower makes zero
payments.
Changes: None.
Comments: Several commenters suggested that years in repayment in
other repayment plans should be counted towards the maximum 25-year
repayment period under the ICR plan.
One commenter suggested that years under which borrowers repay
under standard or 12-year extended repayment plans should count toward
the 25-year ICR period.
Discussion: If all borrowers were allowed to count years in
repayment under other plans toward the maximum 25-year period under
ICR, the potential exists for certain borrowers to switch repayment
plans when their incomes fluctuate to avoid repayment of their loans.
However, the Secretary agrees that under the standard repayment plan
and the 12-year extended repayment plan, borrowers would pay larger
amounts than they would under the ICR option and could not usually
avoid repaying their loans by switching repayment plans.
Changes: A change has been made. Section 685.209(d)(2)(ii) has been
revised to provide that years spent in standard repayment and 12-year
extended repayment will count towards the maximum 25-year repayment
period under ICR.
Comments: Several commenters noted that under current tax law, any
debt forgiven under the ICR plan would be treated as taxable income.
Many of the commenters requested a commitment from the Secretary to try
to revise current law.
Discussion: The Secretary will work vigorously to develop a
legislative proposal to eliminate the Federal income tax liability on
any outstanding loan balance that remains at the end of the 25-year
repayment period.
Changes: None.
Comments: Several commenters urged the Secretary to shorten the 25-
year forgiveness period under ICR, especially for low-income borrowers
and borrowers who opt for public service jobs.
Discussion: The Secretary is reluctant to shorten the 25-year loan
forgiveness period for some borrowers because this approach would
require the Secretary to determine which occupations and/or borrowers
are most suited for this special consideration. The Secretary believes
that each borrower is responsible for his or her own debt, and that the
25-year maximum repayment period generally encompasses the time period
during which borrowers are most likely to experience widely fluctuating
incomes. Although the statute permits contracting the 25-year
forgiveness period, the Secretary believes that his interpretation of
the statutory 25-year forgiveness rule is consistent with Congressional
intent.
Changes: None.
Comments: One commenter recommended that the Secretary indicate how
long interest-only payments may be required until the Secretary
calculates a borrower's monthly repayment amount on the basis of the
borrower's income. The commenter further recommended that the
regulations permit the borrower to be eligible for forbearance, or
alternative repayment, if the borrower is unable to meet the interest
payments during this period.
Discussion: The Secretary included this provision to ensure that
borrowers who choose the ICR plan make loan payments for the short
period of time between the expiration of the grace period and the
verification of the borrower's reported income by the Internal Revenue
Service. Borrowers under any repayment plan are eligible to forbear
repayment if they are willing but unable to make scheduled payments.
Changes: None.
Section 685.209(d)(3)
Comments: Numerous commenters recommended that the Secretary lower
the level at which interest is no longer capitalized on loans paid
under the ICR plan. Several commenters suggested that the Secretary
lower the ceiling on capitalization from 150 percent of principal to
110 percent or 105 percent. Many other commenters suggested that the
Secretary charge only simple interest on loans being repaid under the
ICR plan.
Several commenters suggested that the Department limit the level of
capitalization for borrowers serving in the public interest.
Discussion: The Secretary agrees that the interest capitalization
limit should be lowered from the current 150 percent of principal.
The Secretary is reluctant to limit interest capitalization for
certain borrowers and not for others. This approach would require the
Secretary to determine which occupations and/or borrowers are most
suited for such special consideration. The Secretary believes that the
purpose of the ICR program is best served by the broadest possible
application of the benefit of lower interest capitalization.
Consequently, the Secretary is reducing the interest capitalization
limit to the extent it can be accomplished within current program cost
constraints.
Changes: A change has been made. Section 685.209(d)(3) states that
unpaid interest is capitalized until the outstanding principal amount
is 10 percent greater than the original amount.
Comments: For purposes of limiting capitalization, one commenter
asked how a borrower's original balance would be calculated if the
borrower enters repayment, makes some principal repayments, then
returns to school and borrows more.
Discussion: The loan amount used for purposes of calculating the
interest capitalization limit for any Direct Loan borrower who obtains
additional loans after commencing repayment is the sum of the
outstanding amounts on all loans in repayment at the time the borrower
re-enters repayment.
Changes: None.
Section 685.209(d)(5)
Comments: One commenter asked the Secretary to specify the
conditions under which defaulted borrowers will be placed in ICR.
Another commenter suggested that this section assumes that all
defaulters will be placed in ICR, unless the defaulter fails to provide
written consent to disclosure of tax return information.
Discussion: The Secretary will maintain maximum flexibility in
determining which borrowers will be required to repay under ICR. The
Secretary believes that it is important to consider a borrower's
individual circumstances to determine whether it is in the best
interest of the borrower to repay under the ICR plan.
Changes: None.
Section 685.210 Choice of Repayment Plan
Section 685.210(a)(1)
Comments: Commenters argued that this section should be modified to
incorporate timing requirements applicable to the FFEL Program.
Discussion: The Secretary will satisfy the statutory obligations to
provide required repayment information on a timely basis to each
individual borrower and will provide materials that clearly explain a
borrower's repayment options. Borrowers will be informed of their
repayment obligations and their repayment options during exit
counseling and during the grace period. The Secretary believes that it
is unnecessary to specify the number of days prior to repayment that
disclosure must occur.
Changes: None.
Comments: Many commenters supported the borrower's choice of
repayment plans; one commenter asserted that the Direct Loan repayment
plans should be made available to all borrowers who wish to
participate.
Discussion: All Direct Loan borrowers, except Direct PLUS borrowers
and certain defaulted borrowers, will have the choice of any repayment
plans. FFEL borrowers who cannot obtain a FFEL Consolidation Loan or a
FFEL Consolidation Loan with satisfactory income-sensitive terms will
also be able to consolidate into Direct Loans and choose a repayment
plan available through the Direct Loan Program.
Changes: None.
Section 685.210(b)(2)(i)
Comment: A commenter asked why the Secretary has prohibited
borrowers who have been repaying under certain plans for longer than
ten years from switching to the standard repayment plan in order to
accelerate payments.
Discussion: To simplify the repayment procedures, the Secretary
will calculate repayment periods under all repayment plans, other than
ICR, from the time the borrower enters repayment. Therefore, after a
borrower has been repaying for ten years, the borrower will be unable
to switch to the standard repayment plan, which provides only 10 years
to repay the loan. If borrowers wish to accelerate their payments, they
can always prepay without penalty.
Changes: None.
Section 685.211 Miscellaneous Repayment Provisions
Section 685.211(a)(3)
Comment: A commenter suggested that Sec. 685.211(a) be rewritten to
allow borrowers to allocate prepayments to principal. The commenter
suggested that Sec. 685.211(a) provide that payments are applied first
to interest, then principal, then to charges such as late fees, and
then to collection costs.
Other commenters supported the application of payments first to any
accrued charges and collection costs. Some of these commenters
requested a corresponding modification to FFEL requirements to make
them comparable to the Direct Loan payment and prepayment application
provisions set forth in Sec. 685.211(a)(3).
Discussion: The provisions for prepayment were agreed upon during
negotiated rulemaking and establish consistent guidelines for the
equitable treatment of all Direct Loan borrowers.
Changes: None.
Section 685.211(c)(3)
Comment: Some commenters suggested that the Department prescribe
administrative procedures for challenging the past-due status or legal
enforceability of a Direct Loan prior to making a report to a credit
bureau and prior to offsetting the borrower's debt.
Discussion: The Secretary agrees with the commenters that a
notification must be provided to the borrower before the Secretary may
report the debt to a credit bureau or take offset action against the
borrower to recover the debt. The Secretary will provide this
notification to such borrowers. The Secretary does not believe a change
in the regulations is necessary.
Changes: None.
Section 685.211(d)(2)
Comments: One commenter suggested that Section 685.211(d)(2) should
be modified in accordance with Sec. 682.412 of the FFEL Program
regulations to assign a specific start date to the 30-day period during
which a borrower must repay an ineligible loan. The regulation
currently states that the 30-day period begins when a borrower receives
a final demand notification, but this commenter asserts that the
Secretary would be unaware of the date on which the borrower received
such notification.
Discussion: The commenter is correct in noting that the Secretary
would be unaware of the day that a borrower receives notification.
However, the Secretary could easily track when the notification is
mailed.
Changes: Section 685.211(d)(2) is modified to state that the
borrower must repay the loan within 30 days after the demand letter is
mailed.
Section 685.211(d)(3)
Comment: One commenter suggested adding language to
Sec. 685.211(d)(3) to provide that if a portion of a loan is determined
ineligible and that portion is not repaid within 30 days, the borrower
is considered in default on the entire loan, not just the portion of
the loan determined ineligible.
Discussion: The commenter is correct in noting that if a borrower
is ineligible for a portion of a loan and does not comply with the
demand letter described in Sec. 685.211(d)(2), the borrower is
considered to be in default on the entire loan, not just the portion of
the loan determined ineligible.
Changes: Section 685.211(d)(3) is modified to state the borrower is
in default on the entire loan.
Section 685.211(e)
Comments: A commenter wanted clarification in 685.211(e) on what
constitutes a reasonable and affordable monthly payment.
Discussion: The Secretary will obtain information from the borrower
concerning the borrower's income, student loan debt, and other payment
obligations and will use this information to determine what the
borrower can reasonably afford to pay.
Changes: None.
Section 685.212 Discharge of a Loan Obligation
Sections 685.212 (a) and (b)
Comment: Several commenters objected to the fact that the proposed
regulations provide no definition of ``acceptable documentation'' as
the phrase appears in Sec. 685.212 (a) and (b). The commenters noted
that this phrase is defined in the FFEL Program regulations.
Discussion: The Secretary is not required to regulate the forms of
documentation that the Secretary will accept for discharge. However,
the Secretary intends to use forms of documentation that are similar to
those prescribed in the FFEL Program.
Changes: None.
Section 685.212(c)
Comment: Several commenters noted that Sec. 685.212(c) does not
prescribe the steps that must be taken, continued, or suspended during
the pendency of a bankruptcy proceeding. These commenters noted that
the FFEL Program regulations provide an extensive outline of the steps
which must be taken.
Discussion: The Secretary is not required to regulate himself in
this situation. The Secretary is not under the same requirements as
lenders and guarantors in the FFEL Program.
Changes: None.
Sections 685.212 (d) and (e)
Comment: One commenter noted that Sec. 685.212 (d) and (e) should
clarify that payments made prior to loan discharge will be refunded to
the borrower whose loan has been discharged due to closed school or
false certification issues.
Discussion: The commenter is reminded that Sec. 685.213(b)(2) and
Sec. 685.214(b)(3) provide that a borrower will be reimbursed for
amounts paid voluntarily or through enforced collection on the loan.
Changes: None.
Section 685.212(f)
Comments: One commenter suggested comparability with FFEL
requirements by adding language to Sec. 685.212(f) to state that
payments are returned to the borrower after a lender is notified of the
borrower's condition, not (as currently stated) after the requirements
for discharge have been met by a borrower.
Another commenter requested comparability to FFEL requirements by
asserting that a definition of ``acceptable documentation'' is
necessary.
Discussion: Although the commenter is correct in noting that the
wording is slightly different, the policy reflected in the FFEL and
Direct Loan Program regulations is the same.
Changes: None.
Section 685.213 Closed School Discharge
Comments: Some commenters recommended that the regulation include
time frames for the Secretary's actions.
Discussion: The Secretary is committed to ensuring that borrowers
receive a timely response.
Changes: None.
Comments: One commenter requested that the Secretary clarify that
the part of a consolidation loan that reflects a loan that would have
been discharged before consolidation would also be discharged.
Discussion: The Secretary agrees with the commenter that a
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 the consolidation. Section 685.213 (b)(1)
provides that the borrower will be relieved of any past or present
obligation to repay the loan and would be reimbursed for amounts paid
on the loan. This provision is the same as the regulation for the FFEL
Program.
Changes: None.
Section 685.213(c)
Comments: Some commenters stated that requiring sworn statements
and other affirmative action from borrowers puts unnecessary barriers
to relief and is likely to result in eligible borrowers not obtaining
the discharge. One commenter stated that the Secretary and guaranty
agencies should take affirmative steps to assure that relief is
available. Another commenter recommended that the Secretary should
simply discharge the loan if the existing records indicate that the
borrower was eligible for the discharge.
Discussion: The Secretary believes that the requirement for a sworn
statement by the borrower is necessary to protect the interests of the
taxpayer. Much of the information provided in the sworn statement is
not otherwise available to the Secretary, and the Secretary cannot
usually determine if the borrower is eligible for discharge based
solely on existing records. The Secretary also believes that it is
appropriate to require the borrower to take affirmative action and
provide evidence supporting his or her eligibility for the discharge.
Changes: None.
Section 685.213(c)(1)(ii)
Comments: One commenter recommended that the regulations be revised
to provide a discharge to borrowers enrolled in a program the school
ceased to offer within 180 days of the closure.
Discussion: The Secretary believes that the regulatory provision
allowing borrowers who withdraw within 90 days prior to a school's
closing is sufficient. Section 437(c)(1) of the HEA authorizes the
Secretary to discharge a borrower's liability on a loan if the borrower
does not complete a program due to the school's closure. The regulation
reflects this statutory focus on the date of the school's closure
rather than on the date the school ceases to offer a certain program.
Changes: None.
Section 685.213(c)(1)(iii)
Comments: One commenter recommended that the regulations provide a
definition of a teach-out as referring only to arrangements in which
the borrower receives all the instruction promised at no additional
charge at an institution geographically close to the closing school and
under an arrangement approved by the State licensing body.
Discussion: The Secretary believes that a prescriptive regulatory
definition of ``teach-out'' is unnecessary. A student who chooses to
complete his or her program through a teach-out has received value from
the loan and does not need a loan discharge.
Changes: None.
Section 685.213(d)(1)
Comments: One commenter recommended that paragraph (d)(1) be
modified to require the borrower to cooperate with ``reasonable
requests'' for cooperation by the Secretary, and to cooperate with the
Secretary to the extent practicable.
Discussion: The use of the word ``cooperate'' in the regulations
reflects the Secretary's intention to work with the borrower toward a
common goal. This provision outlines what is expected of the borrower
and references documents ``reasonably available'' to the borrower.
Changes: None.
Section 685.213(d)(2)
Comments: One commenter recommended that paragraph (d)(2) be
modified to permit the Secretary to revoke a loan discharge only if the
discharge was based upon a material, false statement by the borrower
made with fraudulent intent to receive a benefit the borrower would not
otherwise be entitled to receive, or if the borrower willfully fails to
cooperate with a reasonable request to support the Secretary's efforts
to recover from the school or its principals.
Discussion: To protect the Federal fiscal interest, the Secretary
believes that it is appropriate to revoke or deny a discharge for a
borrower who fails to support the representations made to receive that
benefit.
Changes: None.
Section 685.213(e)
Comments: Two commenters objected to the provision requiring a
borrower to transfer the borrower's right to recover against state
tuition recovery funds for the amount of a discharged loan. Another
commenter also recommended deletion of paragraph (e)(3) because it
could be construed to limit the borrower's rights.
Discussion: The Secretary believes that the authority in section
437(c)(2) of the HEA permitting the assignment to the Secretary of the
borrower's right to recover a loan refund from the school, its
affiliates or principals, clearly applies as well to the recovery of
refunds from private funds which support the schools. A private fund is
generally funded by the types of schools who present the greatest risk
of liability or by parties who are associated with those schools. Under
these conditions, the Secretary believes that the HEA intends that the
Secretary shall have a legal claim to a refund from these funds. The
Secretary also does not agree with the suggestion that the reference to
the borrower's assignment of claims with respect to the enrollment
agreement and paragraph (e)(3) should be deleted. The Secretary does
not believe that these provisions will be read to surrender the
borrowers' rights beyond the limited scope required to receive the loan
discharge.
Changes: None.
Section 685.213(f)
Comments: One commenter recommended that the regulations be
modified to specifically provide that, after a loan is discharged, the
Secretary will send the borrower the original promissory note marked
``canceled'' or ``satisfied in full'' and a notice that the credit
agencies have been informed of the cancellation. Another commenter
noted that the regulations do not address the removal of the adverse
credit history from the borrower's credit report.
Discussion: A loan that is discharged is considered ``paid in
full'' and the Secretary will notify the borrower that the borrower's
loan obligation has been satisfied. In addition, Sec. 685.213(b)(4)
provides that the Secretary will provide notice of the discharge to all
credit reporting agencies which were notified of the status of the
loan. The Secretary believes that these steps will provide the
protection for the borrowers requested by the commenters.
Changes: None.
Comments: One commenter recommended that the regulations be
modified to include recent guidance provided in the FFEL Program
regarding borrowers who are initially determined eligible for discharge
based on a school closure date that is later determined inaccurate.
Discussion: The Secretary believes that the guidance referred to by
the commenters does not need to be in regulation. However, borrowers in
both the FFEL Program and the Direct Loan Program will generally be
treated the same for purposes of the loan discharge provision.
Changes: None.
Comments: One commenter suggested that the regulation provide for
the resumption of collection activities and specify the treatment of
payments of principal and interest due during the period in which
collection of the loan is suspended.
Discussion: Section 685.213(f)(4) of the regulations provides the
information requested by the commenter.
Changes: None.
Section 685.214 Discharge for False Certification of Student
Eligibility or Unauthorized Payment
Comments: One commenter suggested that the discharge also be
applied to the amount of a Consolidation loan that reflects a loan that
would have been eligible for discharge except that it had been
consolidated.
Discussion: The Secretary agrees with the commenter that a
borrower's Consolidation loan should be credited for the amount of the
false certification loan discharge that would have been applicable to
the borrower's loan before the consolidation. Section 685.214(b)(1)
provides that the borrower would be relieved of any past or present
obligation to repay the loan and would be reimbursed for amounts paid
on the loan. The regulation is the same as the regulation for the FFEL
Program.
Changes: None.
Comments: One commenter argued that the Secretary should be more
receptive to remedying abuses where the ability to benefit is lacking.
The commenter was particularly concerned about borrowers who become
employed in their general area of study but at lower level positions
than they expected when they signed up for training. The commenter
claimed that false certification was intended to address these
problems.
Discussion: Section 437(c) of the HEA provides for discharge of a
loan only when the school falsely certifies the student's eligibility
to borrow. It is not intended to address every instance of alleged
school malfeasance. In particular, section 437(c) is not intended to
provide a loan discharge for all the borrowers who believe that they
have not obtained the employment that they believe was promised. The
Secretary does not endorse or guarantee the quality of education
offered by schools participating in the Title IV programs. The
Secretary does not approve the school's curriculum or practices, except
as they relate to operation of the Title IV programs. Accordingly,
student borrowers have the responsibility of any consumer to evaluate
the services that will be provided by the school in light of the
expense.
Changes: None.
Comments: One commenter claimed that the Secretary's approach to
the discharge for false certification is overly restrictive and not
consistent with the statutory language. The commenter recommended that
the regulation should not limit the type of false certification that
could result in a discharge.
Discussion: Section 437(c) of the HEA has a limited scope. It
provides for discharge of a loan for a borrower when the school has
falsely certified the student's eligibility to borrow. The Secretary
believes that the regulations properly reflect the limited scope of the
statute.
Changes: None.
Comments: One commenter suggested that the regulation be revised to
apply the time limits applicable to guaranty agencies under the similar
provision in the FFEL Program to the Secretary.
Discussion: The Secretary is committed to ensuring that borrowers
receive a timely response but regulatory time frames are not necessary.
In the FFEL Program, however, the Secretary is regulating the
activities of third parties and regulatory time frames are needed to
ensure that those parties fulfill their programmatic responsibilities.
Changes: None.
Section 685.214(a)(1)(iii)
Comments: One commenter objected to the provision that a borrower
would be eligible for a loan discharge if the school certified the
student's eligibility for a loan and the student had a physical or
mental condition, age or criminal record that prevents the borrower
from satisfying the physical or legal requirements for employment in
the occupation for which the borrower received training. The commenter
suggested that the school could, under certain circumstances, violate
the Americans with Disabilities Act (ADA). The commenter suggested that
if the State standard violated the ADA, the school could be sued by the
student for refusing to certify the loan application, or could face
action by the Department if the loan was certified.
Discussion: As noted in the preamble to the NPRM, 59 FR 42651-
42652, paragraph (a)(1)(iii) is not intended to affect the application
of any Federal or State statute (including the ADA) that prohibits
discrimination. The Secretary does not expect that schools will be held
liable for certifying any loan application that they are required to
certify by another law. However, the Secretary does not believe that a
change in the regulations, as suggested by the commenter, is needed.
Changes: None.
Comments: One commenter suggested that the language pertaining to
the false certification of the eligibility of a student who does not
meet the basic requirements for employment is unclear particularly when
applied to four year and degree granting institutions. The commenter
stated that the school does not have access to the information
mentioned in the regulation and cannot be expected to have knowledge of
the potential occupations and requirements for employment for students
who pursue the academic programs in a university. The commenter argued
that this language would encourage students to raise illegitimate
claims against schools.
Discussion: The regulatory language is limited and designed to
address those situations in which the school proposed to train the
student for an occupation with specific requirements for employment.
The Secretary does not anticipate that this regulation will apply to
many students pursuing academic programs in a university.
Changes: None.
Section 685.214(c)(1)
Comments: One commenter argued that a borrower should be able to
receive a loan discharge if the borrower did not have the ability to
benefit from the training, even if the borrower got a job for which he
received training.
Discussion: The Secretary believes that the ability of a student to
obtain employment in the occupation for which the student's program
provided training is evidence that the student was able to benefit from
the education received, even if the school initially failed to test or
improperly tested the student's ability to benefit from the training.
Changes: None.
Comments: One commenter suggested that the regulations be modified
to require the borrower to make a reasonable effort to secure
employment in the field in which the program was intended before a
discharge can be granted.
Discussion: The Secretary agrees with the commenter's suggestion.
The requirement that the borrower make a reasonable attempt to obtain
employment in the occupation for which the program was intended is
included in the FFEL Program regulations at 34 CFR 682.402(e)(3)(ii)(C)
and should be incorporated into the Direct Loan program.
Changes: Section 685.214(c)(1)(iii)(B) has been changed to require
the borrower to provide a statement acknowledging that he or she made
reasonable attempts to obtain employment in the occupation for which
the program was intended.
Changes: None.
Section 685.214(c)(5)
Comments: One commenter recommended that this subsection be
modified to only require the borrower to cooperate with ``reasonable
requests'' for cooperation by the Secretary, and to cooperate with the
Secretary to the extent practicable.
Discussion: The use of the word ``cooperate'' in the regulations
reflects the Secretary's intention to work with the borrower toward a
common goal and does not need to be restricted. The section references
the provision of documents ``reasonably available'' to the borrower.
Changes: None.
Section 685.214(d)(4)
Comments: One commenter recommended that the regulations be
modified to specifically provide that, after a loan is discharged, the
Secretary will send to the borrower the original promissory note marked
``canceled'' or ``satisfied in full'' and a notice that the credit
agencies have been informed of the cancellation. Another commenter
noted that the regulations do not address the removal of the adverse
credit history from the borrower's credit report.
Discussion: A loan that is discharged is considered ``paid in
full'' and the Secretary will notify the borrower that the borrower's
loan obligation has been satisfied. In addition, Sec. 685.214(b)(5)
provides that the Secretary will provide notice of the discharge to all
credit reporting agencies which were notified of the status of the
loan. The Secretary believes that these steps will provide the
protection for the borrowers requested by the commenters.
Changes: None.
Section 685.215 Consolidation
Comments: Some commenters noted that the terms of Direct
Consolidation Loans with respect to deferment eligibility and interest
rates are not identical to the terms of FFEL Consolidation Loans.
Some commenters supported the differences because the differences
benefit borrowers. Other commenters wanted Direct Consolidation Loans
to have the same terms as FFEL Consolidation Loans.
Discussion: Section 455(g) of the HEA indicates that the Secretary
has discretion in establishing the terms and conditions of the Federal
Direct Consolidation Loan Program. The Secretary has established a
Direct Consolidation Loan Program that maximizes benefits to the
borrower and complies with statutory guidance. The Secretary does not
have the authority to extend these provisions to borrowers of FFEL
Consolidation Loans.
Changes: None.
Comments: Some commenters requested the Secretary to allow Direct
Loans to be consolidated into FFEL Consolidation Loans so that
borrowers can choose their servicer.
Discussion: The statute prohibits the consolidation of Direct Loans
into FFEL Program loans. Moreover, the commenter's claim that borrowers
have a choice of servicer in the FFEL Program is inaccurate. Borrowers
under the FFEL Program are frequently not able to choose their
servicers; rather, the servicing of their loans is determined by who
holds the notes, which are often sold on the secondary market without
any borrower consultation.
Sections 685.402(e)(2) and (3) state that a school participating in
the Direct Loan Program may request that the Secretary designate a
different Servicer for reasons of unsatisfactory performance. Thus, a
change of Servicer will be possible under the Direct Loan Program.
Changes: None.
Comments: Some commenters noted that the Department should refund
fees paid by a lender or guarantor on an FFEL Program loan that is
subsequently consolidated into the Direct Loan Program.
Discussion: The Secretary does not agree with the commenters that
the Secretary should rebate any fees charged to a lender or guaranty
agency when an FFEL Program loan is consolidated into a Direct
Consolidation Loan. A lender or guaranty agency is required by statute
to pay such fees to the Secretary. The Secretary does not have the
authority to return fees to a lender or guaranty agency.
Changes: None.
Section 685.215(b)
Comments: None.
Discussion: The categories of loans eligible for consolidation
under the Direct Loan Program have been expanded to include loans made
under subpart II of part B of title VIII of the Public Health Service
Act. This change is the result of recent amendments to the HEA
contained in the Improving America's Schools Act of 1994, which was
enacted into law on October 20, 1994.
Changes: Section 685.215(b) has been revised to include loans made
under subpart II of part B of title VIII of the Public Health Service
Act in the list of loans that may be consolidated into a Direct
Unsubsidized Consolidation Loan.
Section 685.215(c)(3)
Comments: Some commenters stated that a subsidized FFEL
Consolidation Loan should qualify for inclusion into a Direct
Subsidized, rather than Direct Unsubsidized, Consolidation Loan.
Further, Sec. 685.215(b)(15) should reflect this change since
Sec. 685.102 states that a ``subsidized Title IV education loan may be
consolidated into a Direct Subsidized Consolidation Loan'' and a
subsidized FFEL Consolidation Loan is a title IV loan.
Other commenters noted that there is no statutory authority to
include HEAL loans in Federal Direct Consolidation Loans, since the
reference to HEAL loans is stated in section 428C(d) of the statute and
section 455(g) states that Direct Loan consolidation borrowers may
include in their consolidation loans only those loans described in
section 428C(a)(4). One commenter stated that subsidized Health and
Human Services loans should be eligible for inclusion in Direct
Subsidized Consolidation Loans, rather than unsubsidized ones as
currently regulated. Some commenters believed that there is no
statutory authority for the Direct Loan Program to consolidate FFEL
consolidation loans, because the statute states that loan eligibility
under 428C of the HEA terminates when a consolidation loan is received.
Discussion: The Secretary agrees with the commenters that a
subsidized FFEL Consolidation Loan should be included in a Direct
Subsidized Consolidation Loan. Subsidized HHS Loans will not qualify
for subsidy under the HEA Programs because the loans are not subsidized
by the Secretary but by another Federal agency.
With regard to the statutory authority to consolidate HEAL Program
loans, the commenters are correct in noting that the authority to
consolidate HEAL loans is found in section 428C(d). Section 428C(d)(4)
authorizes the Secretary to publish regulations to facilitate carrying
out the goal of consolidating HEAL loans. The Secretary believes that
the provision for the consolidation of HEAL loans should be extended to
the Direct Loan Program. The regulatory provision for consolidating
HEAL loans under Direct Loans is consistent with the statutory
authority in 428C(d)(4).
Changes: Section 685.215(c)(3) is amended to clarify that Federal
Consolidation Loans may be consolidated into a Direct Subsidized
Consolidation Loan, if they are eligible for interest benefits during a
deferment period under section 428(b)(4)(C).
Section 685.215(d)(1)(i)(B)
Comments: Some commenters suggested that documentation be required
to prove that a borrower is unable to obtain a Federal Consolidation
Loan, or one with income-sensitive terms satisfactory to the borrower.
Others suggested that the phrase ``*** acceptable to the borrower'' be
deleted since it gives broad discretion to any FFEL borrower, eligible
for ICR under Direct Loans, to apply for a Direct Consolidation Loan.
Discussion: On the Direct Loan Consolidation Application and
Promissory Note, the borrower certifies that he or she meets the
eligibility criteria to consolidate under the Direct Loan Program. The
Secretary believes that this certification is sufficient documentation
and that requiring further documentation would be unnecessarily
burdensome. The phrase ``acceptable to the borrower'' is statutory.
Changes: None.
Section 685.215(d)(1)(ii)(B)
Comments: Some commenters stated that the statute does not
authorize Direct Consolidation Loans to be made available to students
during in-school status. Other commenters supported in-school
consolidation because they believed that extending the eligibility of a
student to consolidate his or her loans under the Direct Loan program
while he or she is still in school enhances the flexibility of the
repayment options available to students.
Discussion: The statute permits the Secretary to allow loan
consolidation under the Direct Loan Program while a borrower is
enrolled in school. Section 455(g) of the HEA states that Direct
Consolidation Loans are established ``only under such terms and
conditions as the Secretary shall establish pursuant to section
457(a)(1) or regulations promulgated under this part''. Thus, the
Secretary has discretion in setting the terms, conditions, and benefits
for Direct Consolidation Loans. Section 455(a) of the statute does not
require consolidation loans under the Direct Loan program to have
terms, conditions, and benefits parallel to consolidation loans made
under the FFEL Program.
Changes: The final regulations have added a new paragraph to
Sec. 685.215(d)(1). FFEL borrowers will be allowed to consolidate their
FFEL loans during the in-school period, even if they have no Direct
Loans, as long as they are attending schools that participate in the
Direct Loan Program. The Secretary believes that this will allow for
maximum program flexibility. Also, there will be a number of benefits
available to each borrower as a result of in-school consolidation. For
example, borrowers of unsubsidized loans will be able to make interest
payments to just one holder of the loan(s). The convenience of
repayment will be enhanced, because it will not be necessary for FFEL
borrowers to enter repayment under the FFEL Program and then switch to
Direct Loans in order to obtain the repayment options available under
the new program.
Section 685.215(d)(1)(v)(B)
Comments: In section 685.215(d)(1)(v)(B), several commenters noted
that the regulations do not state that the absence of a credit history
should not be construed as an adverse credit history.
Discussion: The Secretary agrees that the absence of a credit
history should not be construed as an adverse credit history.
Changes: Section 685.200(b)(7) is amended to provide that an
absence of credit history is not an adverse credit history.
Section 685.215(d)(1)(vi)
Comments: None.
Discussion: The NPRM essentially provided for unlimited
consolidation of Direct Loans. This meant that a borrower could default
on a Direct Consolidation Loan and simply consolidate again. The credit
report each time would be updated to show that the underlying loan had
been paid in full (although it would still be listed as a default).
Each default would also result in the capitalization of collection
costs and any outstanding interest and fees, thereby increasing the
borrower's debt substantially. To prevent potential abuse of the
consolidation eligibility provisions, the Secretary will restrict
consolidation of a defaulted Direct Loan.
Changes: Paragraph (vi) has been added to section 685.215(d)(1) to
permit borrowers to consolidate a defaulted Direct Loan only with the
approval of the Secretary.
Section 685.215(d)(1)(vii)
Comments: Although not specifically addressed in the NPRM, some
commenters wanted to exclude from Direct Loan Consolidation those FFEL
loans where judgment actions have been taken against the borrower.
Discussion: The Secretary has decided to proceed cautiously with
the consolidation of loans where judgment actions have been taken
against the borrower. Consolidation of judgments will be allowed only
when the consolidation of such loans is in the Federal fiscal interest.
The Secretary recognizes that obtaining a judgment is the most
costly step in the debt collection process. Further, judgments are
generally not obtained unless the borrowers' income or assets show they
have the ability to pay. In light of these actions, the Secretary does
not believe it is in the best interest of the Direct Loan and FFEL
Programs to establish a rule that a borrower owing on a judgment is
entitled to consolidate. Therefore, the Secretary has decided to allow
consolidation of judgments into Direct Loans only if the judgment
holder agrees to the purchase and the Secretary determines that the
consolidation is in the Federal fiscal interest.
Changes: Section 685.215(d) has been amended to provide for the
consolidation of judgments at the discretion of the Secretary.
Section 685.215(f)(1)
Comments: None.
Discussion: The timely processing of consolidation loans is an
essential component of debt management for some borrowers and of
quality loan servicing for all consolidation loan applicants. For these
reasons, the Secretary has modified this section to require the holder
of a loan that is being consolidated to complete and return the loan
certification request within a specified period of time.
Changes: A new paragraph (i) has been added to section
685.215(f)(1) that requires holders of loans that are being
consolidated to process the loan verification certificate within 10
business days of receipt of the form.
Comments: Some commenters requested the deletion of provisions
regarding the Secretary's authority to impose reasonable limits on
collection costs paid to the holder of a defaulted loan that is being
consolidated.
Discussion: When a defaulted loan is consolidated, the holder of
the defaulted loan is no longer required to collect on the defaulted
loan. Instead, the underlying loan is fully discharged and the
collection costs are capitalized, increasing the student's debt. If
collection costs were not limited, the full amount of the collection
costs would be charged to the borrower, even though the amount of
collection activity and costs incurred on the part of the defaulted
loan holder would be substantially reduced. The Secretary does not
believe that borrowers should be required to pay these full defaulted
loan costs or that agencies should receive compensation for services
that are not rendered. The Secretary realizes that there are certain
expenses that have been incurred by the holder of a defaulted loan
being consolidated, but these costs are not the full amount of the
collection costs originally applied to the borrower's account. For
these reasons, the Secretary reserves the right to impose reasonable
limits on collection costs paid to the holder of the loan.
The regulation also places a limit on collection costs to be
charged by restricting these costs to ``no more than those authorized
under the FFEL Program''.
Changes: None.
Section 685.215(h)
Comments: Some commenters stated that Direct Consolidation Loans
should not be used to encourage FFEL borrowers to pay under the ICR
plan. Others believe that FFEL borrowers must evidence need for ICR,
and pay only under that plan, if applying for Direct Consolidation
Loans.
Discussion: Participation in the Direct Loan Program is voluntary
and borrowers may choose any of the four repayment plans after
consolidation. Section 428C(b)(5) of the statute allows borrowers who
do not have a Direct Loan to consolidate into Direct Loans if they meet
certain conditions. The statute further allows the resulting Direct
Consolidation Loan to be repaid under any repayment provision allowed
under the Direct Loan statute. The Secretary believes that providing
borrowers with a choice of repayment options is in the best interest of
the borrower, and that repayment options, including ICR, should be
available broadly.
Changes: None.
Section 685.215(j)(2)
Comments: One commenter noted that the Department must redisclose
new loan amount and term information to a borrower when an additional
loan has been included in the borrower's Direct Consolidation Loan
during the allowable 180-day period and recommended that this language
be added to Sec. 685.215(j)(2). Another commenter suggested that the
Secretary should clarify that a redisclosure will be provided to the
borrower if there is any additional amount of money needed to discharge
a loan being consolidated into a Direct Consolidation Loan.
Discussion: The Secretary will redisclose the new loan amount and
term information (if adjusted), when a loan is added to a Direct
Consolidation Loan within the allowable 180-day period. However, it is
not necessary or appropriate for the Secretary to include this
requirement that applies only to the Secretary in regulations. Further,
mechanisms such as contract terms with contractors and other Federal
regulations control these requirements.
Changes: None.
Section 685.215(k)
Comments: Many commenters suggested that the Secretary state in the
regulations that a borrower will be notified when the Secretary
receives a refund from a school on a loan that has been discharged
through consolidation, and that such refund has been applied to the
borrower's account.
Discussion: The Secretary agrees with the commenters that a
borrower should be notified when the Secretary receives a refund and
applies it to the borrower's account. The Secretary will provide the
borrower such notification and does not believe that a change in the
regulations is necessary.
Changes: None.
Section 685.215(l)(3)(ii)
Comments: Some commenters stated that Sec. 685.215(l)(3)(ii) should
be expanded to state that if one of the borrowers of a joint (spousal)
Direct Consolidation Loan qualifies for discharge of a loan, that
borrower's portion of the joint loan will be discharged for any of the
reasons listed in Sec. 685.212. Furthermore, these discharge provisions
should be extended to joint FFEL Consolidation Loans.
Discussion: Discharge of a loan under the closed school and false
certification provisions in Sec. 685.212(d) and (e) are loan-specific.
This means that the loan is discharged because the loan meets a
condition for discharge, rather than the borrower meeting a condition
for discharge. The conditions listed in Sec. 685.212(a), (b), and (c)
(death, total and permanent disability, and bankruptcy) are borrower-
specific rather than loan-specific. In these situations, both spouses
must meet a condition for the loan to be forgiven under a joint Direct
Consolidation Loan because both spouses are borrowers of the loan.
Changes: None.
Section 685.301 Certification of a Loan by a Direct Loan Program
School
Comments: A number of commenters pointed out that the proposed
requirements for the multiple disbursement of a loan would apply even
when the loan period corresponds to a single academic term. One
commenter suggested consolidating all procedures and requirements
concerning disbursements into a single section of the regulations. The
commenters criticized the proposed regulations for failing to comply
with the intent of section 455(j)(2) of the HEA, which requires the
Secretary to establish periods for paying loan proceeds that are
consistent with the payment periods used under the Federal Pell Grant
Program.
Discussion: Section 454(a)(1)(D) of the statute clearly requires
that a school participating in the Direct Loan Program set a schedule
for the disbursement of loan proceeds in installments, following the
requirements of section 428G of the statute. Section 428G requires
multiple disbursements even if a student is enrolled for only one term.
Section 455(j)(2), which requires the establishment of payment periods
consistent with the Pell Grant Program, is not inconsistent with
section 454(a)(1)(D). Within such payment periods, schools are still
required to disburse loans in multiple installments if a student is
enrolled for only one term.
The Secretary is committed to seeking legislative changes to reduce
the burden on schools with respect to this requirement under both the
Direct Loan and FFEL Programs. The Secretary also agrees that
procedures and requirements concerning disbursements for all title IV
programs be consolidated into one section of the regulations. To the
extent allowed under the statute for the various programs, the
Secretary has consolidated requirements in subpart K of the Student
Assistance General Provisions regulations.
Changes: Paragraph (c) has been amended to delete language
concerning disbursement procedures and to cross reference new
procedures in Sec. 668.164 in the Student Assistance General
Provisions.
Section 685.303 Processing Loan Proceeds
Section 685.303(b)(2)(i)
Comments: Two commenters believed that the proposed requirement
that a school confirm a student's enrollment status before making each
disbursement is burdensome for schools and suggested adopting the
procedures of the Federal Pell Grant and Campus-based programs
concerning when and how to confirm the enrollment status of students.
Three commenters suggested adding a provision in paragraph (b)(2)
similar to the one under the FFEL programs permitting disbursements to
a student who delays the start of attendance for up to 30 days.
Discussion: The requirement to confirm enrollment status prior to
making a disbursement under the Direct Loan Program is the same as the
requirement for all other title IV programs. The Secretary has not
established a stricter requirement for the Direct Loan Program. The
Secretary agrees with the commenters that disbursements to students who
delay the start of attendance are permitted.
Changes: Section 685.303(b)(2) has been modified to permit
disbursements to students who delay their start of attendance.
Section 685.303(b)(3)(ii)
Comments: A commenter suggested that paragraph (b)(3)(ii) be
revised to permit the return to the Secretary of the gross amount of a
loan, rather than the net amount, in the event of a registered
student's withdrawal or other failure to begin attendance before the
first day of classes.
Discussion: It is not necessary for the school to return the gross
amount of the loan if the student fails to attend during the period of
enrollment. In this situation, the loan is canceled and the student is
not charged the loan fee, so the net disbursement amount would be
sufficient to fully discharge the borrower's obligation.
Changes: None.
Section 685.303(b)(4)
Comments: A commenter urged the elimination of the proposed
requirement for a 30-day delayed disbursement for a first-year student
who is a first-time recipient under the FFEL and Direct Loan programs.
Discussion: The requirement that a disbursement for a first-year
student who is a first-time recipient under the FFEL and Direct Loan
programs be delayed for 30 days is a statutory requirement.
Changes: None.
Section 685.303(d)
Comments: Several commenters supported the flexibility in the
proposed late disbursement procedures and urged that the procedures be
adopted in the FFEL program. One commenter suggested that the 30-day
extension in paragraph (d)(4) for a late disbursement in exceptional
circumstances be increased to 60 days and adopted for the FFEL
programs. Two commenters asked that there be unlimited time provided
for late disbursements in exceptional circumstances if the delays are
not caused by a borrower, and that the same provision be adopted for
the FFEL program.
Discussion: For exceptional circumstances, the late disbursement
provision allows a disbursement up to 90 days after a student ceases to
be enrolled on at least a half-time basis or after the end of the loan
period. The Secretary is convinced that three-months time is both
reasonable and sufficient to resolve any outstanding loan issues and to
make a disbursement. The late disbursement provisions for the FFEL
Program are being modified to match the guidelines in the Direct Loan
Program.
Changes: None.
Section 685.303(e) (Proposed 685.303(g))
Comments: A commenter suggested that a school be permitted to
reduce the amount of a disbursement already made in the event that the
reduction of one or more subsequent disbursements would not eliminate
an overaward.
Discussion: If an overaward occurs that cannot be reduced by
subsequent disbursements, no adjustment to the loan for the amount that
has already been disbursed is required. However, a school may reduce
the loan if it chooses to do so.
Changes: None.
Section 685.304 (Proposed 685.303) Counseling Borrowers
Comments: Some commenters recommended strengthening the counseling
requirements for schools in the Direct Loan Program and asked that the
Department provide additional support for institutions' counseling
efforts by providing funds for schools to hire counselors or creating a
comprehensive training program for school counselors. Some commenters
suggested that the Department provide software to institutions that
would allow counselors to compute different repayment scenarios for
individual borrowers during exit interviews. One commenter recommended
that the Department require one-on-one counseling of borrowers who wish
to participate in the ICR Program.
Discussion: The Department of Education conducted a national
training session by means of a video conference in November 1994, to
assist schools in preparing for and conducting exit counseling under
the Direct Loan Program. The Secretary will continue to use innovative
technologies in providing support to institutions, including the
development of PC-based software for schools and borrowers. In
addition, the Department has developed an exit counseling video, exit
counseling brochure, and repayment brochure for borrowers. The
Secretary has worked closely with the financial aid community to
develop strong counseling materials and he will continue to solicit
input from members of the higher education community in the development
of borrower information materials.
The Direct Loan Servicing Center, accessible via a toll-free
number, is equipped with software that generates different repayment
scenarios for an individual borrower. The Direct Loan Servicing Center
will provide this individualized information to all borrowers prior to
the time they enter repayment. Schools may choose to distribute the
individualized information to borrowers during the exit interview or
have the Servicing Center mail the materials directly to the borrower.
The Secretary believes that the existing provisions for exit counseling
to borrowers are sufficient and that a requirement of one-on-one
counseling is unnecessary and would be burdensome for institutions.
Changes: None.
Section 685.304(a) (Proposed 685.303(e))
Comments: A number of commenters recommended that initial
counseling should advise the borrower of the obligation to repay the
loan even if the borrower does not complete the program, is unable to
obtain employment upon completion, or is otherwise dissatisfied with
the services that the borrower purchased from the school.
Discussion: Borrowers receive a statement of borrower's rights and
responsibilities which includes this information during the loan
origination process.
Changes: None.
Comments: A commenter suggested that borrowers need counseling
before they sign the promissory note and have a legal obligation to
repay, rather than ``prior to making the first disbursement,'' as the
regulation requires.
Discussion: Entrance counseling materials, as well as the
promissory note provide borrowers with substantial information about
their legal obligation to repay the loan prior to making the first
disbursement. Requiring schools to provide additional counseling to
borrowers prior to signing a promissory note would impose a substantial
administrative burden and would not likely result in significant
behavioral changes.
Changes: None.
Comments: A commenter urged the Secretary to provide additional
loan counseling to borrowers whose schools participate under standard
origination, because these schools may not meet the same eligibility
criteria as schools that participate under school origination.
Discussion: All schools meet the same eligibility criteria to
participate in the Direct Loan Program. The criteria to originate loans
measure primarily the fiscal and administrative capabilities of an
institution and, as such, are separate from the institutional
eligibility criteria. The fact that a school is required to participate
or chooses to participate at a certain level of origination, is not
necessarily indicative of the institution's ability to counsel
borrowers. The Secretary, of course, retains the authority to provide
additional counseling to any Direct Loan borrower.
Changes: None.
Section 685.304(a)(1)(ii) (Proposed 685.303(e)(1)(ii))
Comments: A commenter suggested that the Department require
counseling for each borrower new to the institution, rather than only
borrowers who have never received a student loan.
Discussion: The Secretary believes that borrowers who have received
initial loan counseling at one institution should not be required to
attend initial counseling again. The primary purpose of initial
counseling is to inform the borrower of the obligation to repay and to
provide information about the average indebtedness and average monthly
payments the borrower is likely to face.
Changes: None.
Section 685.304(a)(3)(iii) (Proposed 685.303(e)(3)(iii)
Comments: A commenter recommended that borrowers be counseled about
average indebtedness under both the FFEL and Direct Loan programs since
statistics for Direct Loans will not be immediately available.
Discussion: The Secretary recognizes that information about total
indebtedness under Direct Loans will be incomplete during the first
years of the program. However, this provision does not preclude schools
from providing information about average indebtedness of these students
under the FFEL program.
Changes: None.
Section 685.304(a)(3)(iv) (Proposed 685.303(e)(3)(iv))
Comments: A commenter recommended that the anticipated monthly
repayment amount schools are required to provide to students in initial
counseling should be based upon the standard repayment plan.
Discussion: Because the Direct Loan Program provides borrowers with
a variety of repayment options, schools must counsel students about the
availability of these options. The Secretary does not believe the
Department should require schools to counsel students based on the
standard repayment plan only. The entrance materials developed by the
Secretary for use by Direct Loan schools provide information about
repayment under the four different repayment plans. Materials will
include information on the monthly payment amounts, as well as
estimated total costs over the full repayment period.
Changes: None.
Section 685.304(a)(5) (Proposed 685.303(e)(5))
Comments: Many commenters supported the Secretary's efforts to
allow alternative procedures for initial loan counseling. Some
commenters said the Department should not provide specific guidance on
what the alternative counseling procedures should include.
Discussion: The Secretary believes that allowing an alternative
approach to initial counseling provides schools with an appropriate
level of flexibility in determining how to inform borrowers of their
loan responsibilities. The regulation still requires that schools
following an alternative approach provide certain information in
written form to all first-time borrowers.
Changes: None.
Comments: One commenter suggested that schools using an alternative
approach should be exempt from the Department's requirement that
schools maintain a record of compliance in each borrowers' file.
Discussion: Schools using the alternative approach are still
required to provide certain written information to all first-time
borrowers. The Department will continue to require schools to maintain
a record of compliance. Since schools are given substantial flexibility
in determining how to conduct the counseling, the Secretary considers
recordkeeping to be a critical component of measuring the effectiveness
of the school's alternative approach.
Changes: None.
Comments: One commenter supported the alternative approach, but
suggested that the Department should not let all schools participate.
Schools with excessive default rates or schools with significant
numbers of students who speak English as a second language should not
be allowed to adopt an alternative approach to initial counseling.
Discussion: Institutions have argued that they are in the best
position to determine the unique counseling needs of their student
bodies and therefore, should be able to develop a counseling approach
designed to meet their institutional needs. For this reason, the
Secretary is providing schools with the authority to design innovative
counseling plans and to develop programs to reduce default. However,
the Secretary agrees that the alternative approach may not be
appropriate for all schools, and reserves the right to prohibit a
particular school from using an alternative approach.
Changes: The following phrase has been added to the end of the
first paragraph of Sec. 685.304(a)(5): ``For this school.''
Comments: A few commenters suggested the following measures as
appropriate performance indicators to be used in demonstrating the
effectiveness of a school's alternative approach: Default rates,
verified placement rates for vocational programs, verified licensing
exam pass rates for vocational programs that require licensure.
Discussion: The Secretary believes that performance indicators used
to demonstrate the effectiveness of a school's alternative approach
must be objective outcome measures. Appropriate performance indicators
may include such measures as levels of borrowing, default rates, and
withdrawal rates.
Changes: The following sentence has been added to the end of
Sec. 685.304(a)(5)(iii): ``These performance measures must include
objective outcomes, such as levels of borrowing, default rates, and
withdrawal rates.''
Section 685.304(b)(1)(i) (Proposed 685.303(f)(1)(i))
Comments: One commenter recommended that borrowers enrolled in a
program of study abroad be excluded from the requirement for in-person
exit counseling.
Discussion: Unlike the initial counseling provisions, exit
counseling is required by section 485(b) of the HEA. The only borrowers
exempted from exit counseling in the statute are those borrowers who
leave an institution without the prior knowledge of the institution. In
this case, the institution must provide the exit counseling information
to the student in writing.
Changes: None.
Section 685.305 (Proposed Section 685.304) Determining the Date of a
Student's Withdrawal
Comments: Most commenters who commented on this section supported
it. One commenter suggested that, to be consistent with the FFEL
Programs, a student on an approved leave of absence should be treated
as an enrolled student for purposes of a deferment.
Discussion: The Secretary agrees that there should be consistent
treatment of leaves of absence among all the title IV, HEA programs.
The Secretary has modified the Student Assistance General Provisions
regulations that would provide for that consistent treatment.
Changes: None.
Section 685.307 (Proposed Section 685.306) Withdrawal Procedure for
Schools Participating in the Direct Loan Program
Comment: Many commenters asked the Secretary to specifically state
in the regulations that a school that withdraws its participation in
the Direct Loan Program will not be limited from participating in the
FFEL Program.
Discussion: The Secretary agrees with the commenters that a school
that withdraws from the Direct Loan Program should not be limited from
participating in the FFEL Program because of that withdrawal. A school
that participates in the Direct Loan Program may still be eligible to
participate in the FFEL Program pursuant to its title IV participation
agreement. However, this regulation applies only to a school's
participation in the Direct Loan Program.
Changes: None.
Section 685.309 (Proposed Section 685.308) Administrative and Fiscal
Control and Fund Accounting Requirements for Schools Participating in
the Direct Loan Program
Comments: A number of commenters supported the provisions of this
section. Two commenters requested the Secretary to clarify that
paragraph (c)(1) of this section pertains to the retention of records
relating to a student's participation in the Direct Loan Program and
paragraph (c)(2) pertains to the retention of all other records
relating to a school's participation in the Direct Loan Program. A
commenter was concerned that permitting a school to maintain records in
a format other than original paper copies might create difficulties in
litigation or enforcement efforts. A number of commenters suggested
that the requirement in paragraph (d) to maintain loan records include
information on a student's job placement, if known. Several commenters
believed that information concerning permanent address changes should
be provided upon request to the Secretary within 30 days, consistent
with a similar requirement under the regulations for the FFEL programs.
Discussion: The Secretary agrees that paragraph (c)(1) and (2) of
this section need clarification. With respect to the retention of
records in microfilm or other format, the Secretary acknowledges that
the alteration of some original documents could escape detection if a
school does not maintain the originals. However, the maintenance of
records in formats other than paper is generally legally accepted. The
Secretary considers the benefits of offering convenience and a reduced
burden to schools through the option allowed under this provision to
outweigh the risk of fraud resulting from the use of these record
storage formats.
The requirement to collect information concerning a student's
expected employer job placement is contained in 685.304(b), and the
maintenance of this information is covered under section 685.309(c)(1).
The Secretary agrees with the commenters that the Secretary needs
to have information about permanent address changes without serious
delay. In order to simplify the notification process and to provide an
adequate timeframe for providing the required information, the
Secretary believes schools should be able to notify the Secretary of a
change in a borrower's permanent address through the student status
confirmation report.
Changes: Paragraph (c)(1) is revised to make clear that required
records concerning a student's eligibility for or receipt of a loan
under this part must be maintained for at least five years after the
student's last day of attendance. Paragraph (c)(2) is revised to make
clear that copies of any other required report and form for the
programs under this part must be maintained for at least five years
after the completion of the report or form.
Paragraph (b)(iii) has been added to require schools to report to
the Secretary a change in a borrower's permanent address through the
student status confirmation report.
Section 685.400 School Participation Requirements for Academic Years
1996-1997 and Beyond
Comments: A commenter suggested that the Secretary create a new
section of the regulations to prescribe conditions and procedures by
which schools participating in school origination can recover
permissible administrative costs.
Discussion: The Secretary does not intend to regulate the
conditions and procedures related to receiving reimbursement for loan
origination at the present time. This information will be provided to
schools on an annual basis. Information related to costs (or savings)
incurred by schools that originate Direct Loans and the impact that
borrower volume has on those costs is being collected during the first
and subsequent years of the Direct Loan Program. Until solid data
become available to establish administrative fee guidelines, the
Secretary will retain the authority to look at programmatic information
as it becomes available and to set fee guidelines that will best
promote sound program development.
Changes: None.
Comments: A commenter suggested that schools already participating
in the Quality Assurance Program should be exempt from the regulations
specifying criteria for school participation in the Direct Loan
Program.
Discussion: The Secretary disagrees with the commenter. Eligibility
criteria deemed significant under the Quality Assurance Program may
differ somewhat from the eligibility and selection requirements
developed to fit the needs and goals of the Direct Loan Program.
Changes: None.
Section 685.400(a)
Comments: A commenter suggested that the default rate criteria in
section 685.400(a) be modified to take into account only the rates from
the two most recent, rather than the three most recent, fiscal years.
Other commenters supported the use of the statutory default rate
criteria already specified in the NPRM.
Discussion: The Secretary agrees with the commenters that support
the use of the statutory default rate criteria for determining
eligibility to participate in the Direct Loan Program. Establishing
stringent criteria to participate in the Direct Loan protects the
Federal fiscal interest and promotes program integrity. The Secretary
will continue to use FFEL default rate information to determine
eligibility to participate in the Direct Loan Program for those years
that a school participated in the FFEL Program that were prior to a
school's participation in the Direct Loan Program.
Changes: Section 685.400(a) has been modified to provide that to
continue to be eligible to participate in the Direct Loan Program, a
school must have a cohort default rate of less than 25 percent for at
least one of the three most recent fiscal years for which data are
available and that are prior to a school's participation in the Direct
Loan Program.
Section 685.400(b)
Comments: A commenter requested that schools subject to a proposed
or final limitation, suspension, or termination action be considered on
a case-by-case basis for participation in the Direct Loan Program.
Other commenters supported the initial participation requirement that
schools not be subject to a proposed or final limitation, suspension,
or termination action. One commenter believed that schools already
participating in the program should not be allowed to continue
participation if subject to a proposed or final limitation, suspension,
or termination action.
Discussion: While interested in program flexibility, the Secretary
also believes that participation requirements must be sufficiently
stringent to ensure that participating schools can adequately perform
functions necessary for administration of the Direct Loan Program. The
Secretary believes that the benefits of this new program should not be
made available to a school that has lost its eligibility to participate
in the FFEL Program. In his opinion, this would not constitute sound
administration. However, if a school initially qualifies for
participation and is later subject to a limitation, suspension, or
termination action, the result of that action will dictate whether the
school can continue to participate in the Direct Loan Program.
Changes: None.
Section 685.401 Selection Criteria and Process for Academic Years
1996-1997 and Beyond
Comments: Commenters requested that the Secretary clarify the means
used to evaluate whether a school can assist in a ``smooth'' transition
to the implementation of the new Direct Loan Program. A commenter
stated that the statutory requirement that Direct Loan schools be
representative of FFEL participants should be clarified as the main
criterion for selection.
Discussion: The selection criterion that allows the Secretary to
select schools to ensure an expeditious but orderly transition from the
FFEL Program to the Direct Loan Program is necessary because there is
no cap on the number of schools that can participate in the Direct
Loans in 1996-97. Instead, the statute waives the cap when demand
exceeds the statutory goal of 50 percent of total loan volume for that
year. Besides representativeness of schools, the Secretary needs to
consider such factors as the stability of the FFEL market and the
Department's operational capacity to handle a larger loan volume.
Changes: None.
Section 685.402 Criteria for Schools To Originate Loans for Academic
Year 1996-1997 and Beyond
Section 685.402(a)
Comments: Some commenters believed that additional performance
measures should be used to determine a school's eligibility for school
origination levels 1 and 2. For example, they suggested evaluating a
school on measures such as lack of timeliness or accuracy in drawdown
requests, and maintaining excess cash in school accounts.
A commenter suggested that the regulation should be modified to
state that the Secretary may, rather than will, consider for
participation schools with past performance deficiencies which have
been corrected. This commenter also suggested that schools be appraised
on ability to pay student refunds, and that this criterion should be
added after Sec. 685.402(a)(2)(viii).
Discussion: The Department is developing comprehensive performance
measures to evaluate school origination performance. These measures
will incorporate input from the financial aid community, as was
indicated in the preamble to the NPRM. The Secretary appreciates the
suggestions made by various commenters on this issue and wishes to note
that the specific measures mentioned by these commenters (timeliness
and accuracy of drawdown requests, not maintaining excess cash, ability
to make title IV refunds in an accurate and timely manner) had already
been given as examples of sufficient performance standards in both the
NPRM preamble and Sec. 685.402(c)(2). The Secretary intends to
establish operational guidelines for the timely submission of
disbursement records (sections 685.402(b)(3)(iii)(B) and
685.402(c)(2)(i)). The Secretary does not propose to prescribe this
submission timeframe in regulations; however, if timely submission of
disbursement records becomes a problem, the Secretary intends to
propose regulations addressing the submission of disbursement records.
In addition, the Secretary is committed to maintaining stringent
origination criteria for each level. It should be noted that a school
that does not make timely refunds would be cited in a program review
and/or audit, and would not meet criteria in Secs. 685.402(a)(2)(iii)
and 685.402(a)(2)(vii).
Changes: None.
Section 685.402(c)
Comments: Many commenters supported the provision allowing
voluntary origination level changes. One commenter wanted the
Department to provide a school whose origination status is changed by
the Secretary the reason for that change in status so the school has an
opportunity to respond to the Secretary's concerns. Some commenters
believed that Sec. 685.402(c) should be modified to include feedback
from borrowers concerning whether a school is adequately performing its
origination functions. This would enable the Secretary to more
accurately determine whether to assign a school to a different
origination level.
Discussion: The Secretary will disclose the reasons for a change in
origination level to the school. The Secretary will base such a
decision on an accurate and fair analysis of each school's ability to
perform the required functions associated with its level of
origination. The Secretary will consider seriously any feedback
provided by students on the school's performance. The reasons for a
required change should already be known to the school, because the
Secretary will have provided technical assistance to any school that is
not performing well. There will be opportunities for a school to
improve performance before such an action is taken by the Secretary.
Therefore, his decision regarding change in status shall be final.
However, as stated in Sec. 685.402(b)(3)(ii), applications to
participate under another origination option are considered on an
annual basis. This measure ensures program flexibility within
reasonable limits.
Changes: None.
Section 685.402(e)
Comment: Some commenters objected to the requirement that the
Secretary retain the authority to approve or disapprove a change in
servicer by schools participating in the Direct Loan Program. Other
commenters believed it would be appropriate for the Secretary to employ
a third party to determine if a change in servicer is warranted.
Discussion: The Secretary believes that a school should have the
opportunity to change its servicer. However, the Secretary does not
believe that it is in the best interests of the program to permit
uncontrolled changes in school servicers. The Secretary believes that
it is only necessary for a school to change servicers when the servicer
is not performing satisfactorily. The Secretary will grant the school's
request if the Secretary determines that the servicer is not performing
satisfactorily and that the servicer selected by the school is able to
accommodate the school's needs.
Changes: None.
Waiver of Proposed Rulemaking
In addition to the changes made to part 685 based on public comment
on the notice of proposed rulemaking, the Secretary has revised the
regulations to include changes made by the Improving America's Schools
Act of 1994 (Pub. L. 103-382), enacted subsequent to publication of the
notice of proposed rulemaking.
It is the practice of the Secretary to offer interested parties the
opportunity to comment on proposed regulations in accordance with the
Administrative Procedure Act, 5 U.S.C. 553. However, since these
changes merely incorporate statutory changes into the regulations,
public comment could have no effect. Therefore, the Secretary has
determined pursuant to 5 U.S.C. 553(b)(B) that public comment on the
regulations is unnecessary and contrary to the public interest.
Executive Order 12866
These final 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 these 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. In assessing the potential costs and
benefits--both quantitative and qualitative--of these proposed
regulations, the Secretary has determined that the benefits of these
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.
Paperwork Reduction Act of 1980
Sections 685.204, 685.206, 685.209, 685.213, 685.214, 685.215,
685.301, 685.302, 685.303, 685.309 and 685.401 contain information
collection requirements. As required by the Paperwork Reduction Act of
1980, the Department of Education will submit a copy of these proposed
regulations to the Office of Management and Budget (OMB) for its
review. (44 U.S.C. 3504(h))
These regulations affect students who apply for Federal student
financial assistance authorized by title IV of the Higher Education Act
of 1965, as amended, and postsecondary institutions administering the
Direct Loan Program. Annual public reporting burden for this collection
of information is estimated to average 29 minutes for each of the
estimated 2,321,583 individuals providing information regarding
eligibility for a loan, deferment, income contingent repayment, or a
Direct Consolidation Loan (or 1,122,098 hours total) and 12 minutes for
a postsecondary institution for each of the estimated 4,068,121
responses relating to postsecondary institutions' administration of a
student loan program (or 813,624 hours total) including the time for
reviewing instructions, searching existing data sources, gathering and
maintaining the data needed, and completing and reviewing the
collection of information.
Organizations and individuals desiring to submit comments on the
information collection requirements should direct them to the Office of
Information Regulatory Affairs, OMB, Room 10235, New Executive Office
Building, Washington, D.C. 20503; Attention: Daniel J. Chenok.
Assessment of Educational Impact
In the NPRM, the Secretary requested comments on whether the
proposed regulations would require transmission of information that is
being gathered by, or is available from, any other agency or authority
of the United States.
Based on the response to the proposed rules and on its own review,
the Department has determined that the regulations in this document do
not 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 685
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: 84.268, William D.
Ford Federal Direct Loan Program)
Dated: November 22, 1994.
Richard W. Riley,
Secretary of Education.
The Secretary revises part 685 of title 34 of the Code of Federal
Regulations to read as follows:
PART 685--WILLIAM D. FORD FEDERAL DIRECT LOAN PROGRAM
Subpart A--Purpose and Scope
Sec.
685.100 The William D. Ford Federal Direct Loan Program.
685.101 Participation in the Direct Loan Program.
685.102 Definitions.
685.103 Applicability of subparts.
Subpart B--Borrower Provisions
685.200 Borrower eligibility.
685.201 Obtaining a loan.
685.202 Charges for which Direct Loan Program borrowers are
responsible.
685.203 Loan limits.
685.204 Deferment.
685.205 Forbearance.
685.206 Borrower responsibilities and defenses.
685.207 Obligation to repay.
685.208 Repayment plans.
685.209 Income contingent repayment plan.
685.210 Choice of repayment plan.
685.211 Miscellaneous repayment provisions.
685.212 Discharge of a loan obligation.
685.213 Closed school discharge.
685.214 Discharge for false certification of student eligibility or
unauthorized payment.
685.215 Consolidation.
Subpart C--Requirements, Standards, and Payments for Direct Loan
Program Schools
685.300 Agreements between an eligible school and the Secretary for
participation in the Direct Loan Program.
685.301 Certification of a loan by a Direct Loan Program school.
685.302 Schedule requirements for courses of study by
correspondence.
685.303 Processing loan proceeds
685.304 Counseling Borrowers
685.305 Determining the date of a student's withdrawal.
685.306 Payment of a refund to the Secretary.
685.307 Withdrawal procedure for schools participating in the
Direct Loan Program.
685.308 Remedial actions.
685.309 Administrative and fiscal control and fund accounting
requirements for schools participating in the Direct Loan Program.
Subpart D--School Participation and Loan Origination in the Direct Loan
Program
685.400 School participation requirements for academic years 1996-
1997 and beyond.
685.401 Selection criteria and process for academic years 1996-1997
and beyond.
685.402 Criteria for schools to originate loans for academic years
1996-1997 and beyond.
Appendix A--Income Contingent Repayment Examples of the Calculation of
Monthly Repayment Amounts
Authority: 20 U.S.C. 1078a et seq.
Subpart A--Purpose and Scope
Sec. 685.100 The William D. Ford Federal Direct Loan Program.
(a) Under the William D. Ford Federal Direct Loan (Direct Loan)
Program (formerly known as the Federal Direct Student Loan Program),
the Secretary makes loans to enable a student or parent to pay the
costs of the student's attendance at a postsecondary school. This part
governs the Federal Direct Stafford/Ford Loan Program, the Federal
Direct Unsubsidized Stafford/Ford Loan Program, the Federal Direct PLUS
Program, and the Federal Direct Consolidation Loan Program. The
Secretary makes loans under the following program components:
(1) Federal Direct Stafford/Ford Loan Program (formerly known as
the Federal Direct Stafford Loan Program), which provides loans to
undergraduate, graduate, and professional students. The Secretary
subsidizes the interest while the borrower is in an in-school, grace,
or deferment period.
(2) Federal Direct Unsubsidized Stafford/Ford Loan Program
(formerly known as the Federal Direct Unsubsidized Stafford Loan
Program), which provides loans to undergraduate, graduate and
professional students. The borrower is responsible for the interest
that accrues during any period.
(3) Federal Direct PLUS Program, which provides loans to parents of
dependent students. The borrower is responsible for the interest that
accrues during any period.
(4) Federal Direct Consolidation Loan Program, which provides loans
to borrowers to consolidate certain Federal educational loans.
(b) The Secretary makes a Direct Subsidized Loan, a Direct
Unsubsidized Loan, or a Direct PLUS Loan only to a student or a parent
of a student enrolled in a school that has been selected by the
Secretary to participate in the Direct Loan Program.
(c) The Secretary makes a Direct Consolidation Loan only to--
(1) A borrower with a loan made under the Direct Loan Program; or
(2) A borrower with a loan made under the Federal Family Education
Loan Program who is not able to receive--
(i) A Federal Consolidation Loan; or
(ii) A Federal Consolidation Loan with income-sensitive repayment
terms that are satisfactory to the borrower.
(Authority: 20 U.S.C. 1087a et seq.)
Sec. 685.101 Participation in the Direct Loan Program.
(a)(1) Colleges, universities, graduate and professional schools,
vocational schools, and proprietary schools selected by the Secretary
may participate in the Direct Loan Program. Participation in the Direct
Loan Program enables an eligible student or parent to obtain a loan to
pay for the student's cost of attendance at the school.
(2) The Secretary may permit a school to participate in both the
Federal Family Education Loan (FFEL) Program, as defined in 34 CFR Part
600, and the Direct Loan Program. A school permitted to participate in
both the FFEL Program and the Direct Loan Program may certify loan
applications under the FFEL Program according to the terms of its
agreement with the Secretary.
(b) An eligible student who is enrolled at a school participating
in the Direct Loan Program may borrow under the Federal Direct
Stafford/Ford Loan and Federal Direct Unsubsidized Stafford/Ford Loan
Programs. An eligible parent of an eligible dependent student enrolled
at a school participating in the Direct Loan Program may borrow under
the Federal Direct PLUS Program.
(Authority: 20 U.S.C. 1087a et seq.)
Sec. 685.102 Definitions.
(a)(1) The following definitions are set forth in the Student
Assistance General Provisions, 34 CFR Part 668:
Academic year
Campus-based programs
Dependent student
Disburse
Eligible program
Eligible student
Enrolled
Federal Consolidation Loan Program
Federal Direct Student Loan Program (Direct Loan Program)
Federal Pell Grant Program
Federal Perkins Loan Program
Federal PLUS Program
Federal State Student Incentive Grant Program
Federal Supplemental Educational Opportunity Grant Program
Federal Work-Study Program
Independent student
One-third of an academic year
Parent
State
Two-thirds of an academic year
U.S. citizen or national
(2) The following definitions are set forth in the regulations for
Institutional Eligibility under the Higher Education Act of 1965, as
amended, 34 CFR Part 600:
Accredited
Clock hour
Educational program
Eligible institution
Federal Family Education Loan (FFEL) Program
Institution of higher education
Nationally recognized accrediting agency or association
Preaccredited
Program of study by correspondence
Secretary
(3) The following definitions are set forth in the regulations for
the Federal Family Education Loan Program (FFEL) Program, 34 CFR Part
682:
Act
Endorser
Expected family contribution
Federal Insured Student Loan (FISL) Program
Federal Stafford Loan Program
Foreign school
Full-time student
Graduate or professional student
Guaranty agency
Holder
Legal guardian
Lender
Totally and permanently disabled
Undergraduate student
(b) The following definitions also apply to this part:
Alternative originator: An entity under contract with the
Secretary that originates Direct Loans to students and parents of
students who attend a Direct Loan Program school that does not
originate loans.
Consortium: For purposes of this part, a consortium is a group of
two or more schools that interacts with the Secretary in the same
manner as other schools, except that the electronic communication
between the Secretary and the schools is channeled through a single
point. Each school in a consortium shall sign a Direct Loan Program
participation agreement with the Secretary and be responsible for the
information it supplies through the consortium.
Default: The failure of a borrower and endorser, if any, to make an
installment payment when due, or to meet other terms of the promissory
note, if the Secretary finds it reasonable to conclude that the
borrower and endorser, if any, no longer intend to honor the obligation
to repay, provided that this failure persists for 180 days.
Estimated financial assistance: (1) The estimated amount of
assistance for a period of enrollment that a student (or a parent on
behalf of a student) will receive from Federal, State, institutional,
or other sources, such as scholarships, grants, financial need-based
employment, or loans, including but not limited to--
(i) Veterans' educational benefits paid under chapters 30, 31, 32,
and 35 of title 38 of the United States Code;
(ii) Educational benefits paid under chapters 106 and 107 of title
10 of the United States Code (Selected Reserve Educational Assistance
Program);
(iii) Reserve Officer Training Corps (ROTC) scholarships and
subsistence allowances awarded under chapter 2 of title 10 and chapter
2 of title 37 of the United States Code;
(iv) Benefits paid under Public Law 97-376, section 156: Restored
Entitlement Program for Survivors (or Quayle benefits);
(v) Benefits paid under Public Law 96-342, section 903: Educational
Assistance Pilot Program;
(vi) Any educational benefits paid because of enrollment in a
postsecondary education institution;
(vii) The estimated amount of other Federal student financial aid,
including but not limited to a Federal Pell Grant, campus-based aid,
and the gross amount (including fees) of a Direct Subsidized, Direct
Unsubsidized, and Direct PLUS Loan.
(2) Estimated financial assistance does not include--
(i) Those amounts used to replace the expected family contribution,
including--
(A) Direct PLUS Loan amounts;
(B) Direct Unsubsidized Loan amounts; and
(C) Non-Federal loan amounts; and
(ii) Federal Perkins loan and Federal Work-Study funds that the
student has declined.
Federal Direct Consolidation Loan Program: A loan program
authorized by title IV, part D of the Act that provides loans to
borrowers who consolidate certain Federal educational loan(s), and one
of the components of the Direct Loan Program. Loans made under this
program are referred to as Direct Consolidation Loans. There are three
types of Direct Consolidation Loans:
(1) Direct Subsidized Consolidation Loans. Subsidized title IV
education loans may be consolidated into a Direct Subsidized
Consolidation Loan. Interest is not charged to the borrower during in-
school and deferment periods.
(2) Direct Unsubsidized Consolidation Loans. Certain Federal
education loans may be consolidated into a Direct Unsubsidized
Consolidation Loan. The borrower is responsible for the interest that
accrues during any period.
(3) Direct PLUS Consolidation Loans. Parent Loans for Undergraduate
Students, Federal PLUS, Direct PLUS, and Direct PLUS Consolidation
Loans may be consolidated into a Direct PLUS Consolidation Loan. The
borrower is responsible for the interest that accrues during any
period.
Federal Direct PLUS Program: A loan program authorized by title IV,
part D of the Act that provides loans to parents of dependent students
attending schools that participate in the Direct Loan Program, and one
of the components of the Direct Loan Program. The borrower is
responsible for the interest that accrues during any period. Loans made
under this program are referred to as Direct PLUS Loans.
Federal Direct Stafford/Ford Loan Program: A loan program
authorized by title IV, part D of the Act that provides loans to
undergraduate, graduate, and professional students attending Direct
Loan Program schools, and one of the components of the Direct Loan
Program. The Secretary subsidizes the interest while the borrower is in
an in-school, grace, or deferment period. Loans made under this program
are referred to as Direct Subsidized Loans.
Federal Direct Unsubsidized Stafford/Ford Loan Program: A loan
program authorized by title IV, part D of the Act that provides loans
to undergraduate, graduate, and professional students attending Direct
Loan Program schools, and one of the components of the Direct Loan
Program. The borrower is responsible for the interest that accrues
during any period. Loans made under this program are referred to as
Direct Unsubsidized Loans.
Grace period: A six-month period that begins on the day after a
Direct Loan Program borrower ceases to be enrolled as at least a half-
time student at an eligible institution and ends on the day before the
repayment period begins.
Half-time student: A student who is not a full-time student and who
is enrolled in a school participating in the FFEL Program or the Direct
Loan Program and is carrying an academic workload that is at least one-
half the workload of a full-time student, as determined by the school.
A student enrolled solely in an eligible program of study by
correspondence is considered a half-time student.
Interest rate: The annual interest rate that is charged on a loan,
under title IV, part D of the Act.
Loan fee: A fee, payable by the borrower, that is used to help
defray the costs of the Direct Loan Program.
Period of enrollment: The period for which a Direct Subsidized,
Direct Unsubsidized, or Direct PLUS Loan is intended. The period of
enrollment must coincide with one or more academic terms established by
the school (such as semester, trimester, quarter, academic year, and
length of the program of study), for which institutional charges are
generally assessed. The period of enrollment is also referred to in
this part as the loan period.
Satisfactory repayment arrangement. (1) For the purpose of
regaining eligibility under section 428F(b) of the HEA, the making of
six consecutive, voluntary, on-time, full monthly payments on a
defaulted loan.
(2) For the purpose of consolidating a defaulted loan under 34 CFR
685.215(d)(1)(ii)(E), the making of three consecutive, voluntary, on-
time, full monthly payments on a defaulted loan.
(3) The required monthly payment amount may not be more than is
reasonable and affordable based on the borrower's total financial
circumstances. ``On-time'' means a payment made within 15 days of the
scheduled due date, and voluntary payments are those payments made
directly by the borrower, regardless of whether there is a judgment
against the borrower, and do not include payments obtained by income
tax offset, garnishment, or income or asset execution.
School origination option 1: The process by which a school creates
a loan origination record, transmits the record to the Servicer,
prepares the promissory note, obtains a completed and signed promissory
note from a borrower, transmits the promissory note to the Servicer,
receives the funds electronically, disburses a loan to a borrower,
creates a disbursement record, transmits the disbursement record to the
Servicer, and reconciles on a monthly basis. The Servicer initiates the
drawdown of funds for schools participating in school origination
option 1.
School origination option 2: The process by which a school creates
a loan origination record, transmits the record to the Servicer,
prepares the promissory note, obtains a completed and signed promissory
note from a borrower, transmits the promissory note to the Servicer,
determines funding needs, initiates the drawdown of funds, receives the
funds electronically, disburses a loan to a borrower, creates a
disbursement record, transmits the disbursement record to the Servicer,
and reconciles on a monthly basis.
Servicer: An entity that has contracted with the Secretary to act
as the Secretary's agent in providing services relating to the
origination or servicing of Direct Loans.
Standard origination: The process by which a school creates a loan
origination record, transmits the record to the alternative originator,
receives the funds electronically, disburses funds, creates a
disbursement record, transmits the disbursement record to the
alternative originator, and reconciles on a monthly basis. The
alternative originator prepares the promissory note, obtains a
completed and signed promissory note from a borrower, and initiates the
drawdown of funds for schools participating in standard origination.
(Authority: 20 U.S.C. 1087a et seq.)
Sec. 685.103 Applicability of subparts.
(a) Subpart A contains general provisions regarding the purpose and
scope of the Direct Loan Program.
(b) Subpart B contains provisions regarding borrowers in the Direct
Loan Program.
(c) Subpart C contains certain requirements regarding schools in
the Direct Loan Program.
(d) Subpart D contains provisions regarding school eligibility for
participation and origination in the Direct Loan Program.
(Authority: 20 U.S.C. 1087a et seq.)
Subpart B--Borrower Provisions
Sec. 685.200 Borrower eligibility.
(a) Student borrower. (1) A student is eligible to receive a Direct
Subsidized Loan, a Direct Unsubsidized Loan, or a combination of these
loans, if the student meets the following requirements:
(i) The student is enrolled in a school that participates in the
Direct Loan Program.
(ii) The student meets the requirements for an eligible student
under 34 CFR Part 668.
(iii) In the case of an undergraduate student who seeks a Direct
Subsidized Loan or a Direct Unsubsidized Loan at a school that
participates in the Federal Pell Grant Program, the student has
received a determination of Federal Pell Grant eligibility for the
period of enrollment for which the loan is sought.
(iv) In the case of a borrower whose previous loan was cancelled
due to total and permanent disability, the student--
(A) Obtains a certification from a physician that the borrower is
able to engage in substantial gainful activity; and
(B) Signs a statement acknowledging that the Direct Loan the
borrower receives cannot be cancelled in the future on the basis of any
impairment present when the new loan is made, unless that impairment
substantially deteriorates.
(v) In the case of any student who seeks a loan but does not have a
certificate of graduation from a school providing secondary education
or the recognized equivalent of such a certificate, the student meets
the requirements under 34 CFR 668.7(b).
(2)(i) A Direct Subsidized Loan borrower must demonstrate financial
need in accordance with title IV, part F of the Act.
(ii) The Secretary considers a member of a religious order, group,
community, society, agency, or other organization who is pursuing a
course of study at an institution of higher education to have no
financial need if that organization--
(A) Has as its primary objective the promotion of ideals and
beliefs regarding a Supreme Being;
(B) Requires its members to forego monetary or other support
substantially beyond the support it provides; and
(C)(1) Directs the member to pursue the course of study; or
(2) Provides subsistence support to its members.
(b) Parent borrower. A parent is eligible to receive a Direct PLUS
Loan if the parent meets the following requirements:
(1) The parent is borrowing to pay for the educational costs of a
dependent undergraduate student who meets the requirements for an
eligible student under 34 CFR Part 668.
(2) The parent provides his or her and the student's social
security number.
(3) The parent meets the requirements pertaining to citizenship and
residency that apply to the student under 34 CFR 668.7.
(4) The parent meets the requirements concerning defaults and
overpayments that apply to the student in 34 CFR 668.7.
(5) The parent complies with the requirements for submission of a
Statement of Educational Purpose that apply to the student under 34 CFR
Part 668, except for the completion of a Statement of Selective Service
Registration Status.
(6) The parent meets the requirements that apply to a student under
paragraph (a)(1)(iv) of this section.
(7)(i) The parent--
(A) Does not have an adverse credit history;
(B) Has an adverse credit history but has obtained an endorser who
does not have an adverse credit history; or
(C) Has an adverse credit history but documents to the satisfaction
of the Secretary that extenuating circumstances exist.
(ii) For purposes of paragraph (b)(7)(i) of this section, an
adverse credit history means that as of the date of the credit report,
the applicant--
(A) Is 90 or more days delinquent on any debt; or
(B) Has been the subject of a default determination, bankruptcy
discharge, foreclosure, repossession, tax lien, wage garnishment, or
write-off of a debt under title IV of the Act during the five years
preceding the date of the credit report.
(iii) For the purposes of (b)(7)(i) of this section, the Secretary
does not consider the absence of a credit history is as an adverse
credit history and does not deny a Direct PLUS loan on that basis.
(c) Defaulted FFEL Program and Direct Loan borrowers. Except as
noted in Sec. 685.215(d)(1)(ii)(E), in the case of a student or parent
borrower who is currently in default on an FFEL Program or a Direct
Loan Program Loan, the borrower shall make satisfactory repayment
arrangements on the defaulted loan. The definition of a satisfactory
repayment arrangement is provided in 34 CFR 685.102.
(d) Use of loan proceeds to replace expected family contribution.
The amount of a Direct Unsubsidized Loan, a Direct PLUS Loan, a State-
sponsored loan, or another non-Federal loan obtained for a loan period
may be used to replace the expected family contribution for that loan
period.
(Authority: 20 U.S.C. 1087a et seq.)
Sec. 685.201 Obtaining a loan.
(a) Application for a Direct Subsidized Loan or a Direct
Unsubsidized Loan. (1) To obtain a Direct Subsidized Loan or a Direct
Unsubsidized Loan, a student shall complete a Free Application for
Federal Student Aid and submit it in accordance with instructions in
the application.
(2) If the student is eligible for a Direct Subsidized Loan or a
Direct Unsubsidized Loan, the school in which the student is enrolled
shall perform the following functions:
(i) A school participating under school origination option 2 shall
create a loan origination record, obtain a completed promissory note
from the student, draw down funds, and disburse the funds.
(ii) A school participating under school origination option 1 shall
create a loan origination record, obtain a completed promissory note
from the student, and transmit the record and promissory note to the
Servicer. The Servicer initiates the drawdown of funds, and the school
disburses the funds.
(iii) If the student is attending a school participating under
standard origination, the school shall create a loan origination record
and transmit the record to the alternative originator, which prepares
the promissory note and sends it to the student and receives the
completed promissory note from the student. The Servicer initiates the
drawdown of funds, and the school disburses the funds.
(b) Application for a Direct PLUS Loan. To obtain a Direct PLUS
Loan, the parent shall complete the application and promissory note and
submit it to the school at which the student is enrolled. The school
shall complete its portion of the application and promissory note and
submit it to the Servicer, which makes a determination as to whether
the parent has an adverse credit history. A school participating under
school origination option 2 shall draw down funds and disburse the
funds. For a school participating under school origination option 1 or
standard origination, the Servicer initiates the drawdown of funds, and
the school disburses the funds.
(c) Application for a Direct Consolidation Loan. (1) To obtain a
Direct Consolidation Loan, the applicant shall complete the application
and promissory note and submit it to the Servicer. The application and
promissory note set forth the terms and conditions of the Direct
Consolidation Loan and inform the applicant how to contact the
Servicer. The Servicer answers questions regarding the process of
applying for a Direct Consolidation Loan and provides information about
the terms and conditions of both Direct Consolidation Loans and the
types of loans that may be consolidated.
(2) Once the applicant has submitted the completed application and
promissory note to the Servicer, the Secretary makes the Direct
Consolidation Loan under the procedures specified in Sec. 685.215.
(Authority: 20 U.S.C. 1087a et seq., 1091a)
Sec. 685.202 Charges for which Direct Loan Program borrowers are
responsible.
(a) Interest. (1) Interest rate for Direct Subsidized Loans and
Direct Unsubsidized Loans. (i) For Direct Subsidized Loans and Direct
Unsubsidized Loans in repayment, the interest rate during any twelve-
month period beginning on July 1 and ending on June 30 is determined on
the June 1 immediately preceding that period. The interest rate is
equal to the bond equivalent rate of 91-day Treasury bills auctioned at
the final auction held prior to that June 1 plus 3.1 percentage points,
but does not exceed 8.25 percent.
(ii) For Direct Subsidized Loans and Direct Unsubsidized Loans
prior to the beginning of the repayment period or during the period of
deferment under Sec. 685.204, the interest rate during any twelve-month
period beginning on July 1 and ending on June 30 is determined on the
June 1 immediately preceding that period. The interest rate is equal to
the bond equivalent rate of 91-day Treasury bills auctioned at the
final auction held prior to that June 1 plus 2.5 percentage points, but
does not exceed 8.25 percent.
(2) Interest rate for the Direct PLUS Loans. The interest rate on a
Direct PLUS Loan during any twelve-month period beginning on July 1 and
ending on June 30 is determined on the June 1 preceding that period.
The interest rate is equal to the bond equivalent rate of 52-week
Treasury bills auctioned at the final auction held prior to that June 1
plus 3.1 percentage points, but does not exceed 9 percent.
(b) Capitalization. (1) The Secretary may add accrued interest to
the borrower's unpaid principal balance. This increase in the principal
balance of a loan is called ``capitalization.''
(2) For a Direct Unsubsidized Loan, the Secretary capitalizes the
interest that accrues on the loan when the borrower enters repayment.
(3) For a Direct Loan not eligible for interest subsidies during
periods of deferment, and for all Direct Loans during periods of
forbearance, the Secretary capitalizes the interest that has accrued on
the loan upon the expiration of the deferment or forbearance.
(4) Except as provided in paragraph (b)(3) of this section and in
Sec. 685.208(g)(5), and Sec. 685.209(d)(3), the Secretary annually
capitalizes interest payable by the borrower when the borrower is
paying under the alternative or income contingent repayment plans and
the borrower's scheduled payments do not cover the interest that has
accrued on the loan.
(5) The Secretary may capitalize interest payable by the borrower
when the borrower defaults on the loan.
(c) Loan fee for Direct Subsidized, Direct Unsubsidized, and Direct
PLUS Loans. The Secretary--
(1) Charges a borrower a loan fee of four percent of the principal
amount of the loan on a Direct Subsidized, Direct Unsubsidized, or
Direct PLUS Loan;
(2) Deducts the loan fee from the proceeds of the loan;
(3) In the case of a loan disbursed in multiple installments,
deducts a pro rated portion of the fee from each disbursement; and
(4) Applies to a borrower's loan balance the portion of the loan
fee previously deducted from the loan that is attributable to a
disbursement of the loan that is repaid within 120 days of disbursement
or that should have been repaid within that period by the school.
(d) Late charge. (1) The Secretary may require the borrower to pay
a late charge of up to six cents for each dollar of each installment or
portion thereof that is late under the circumstances described in
paragraph (d)(2) of this section.
(2) The late charge may be assessed if the borrower fails to pay
all or a portion of a required installment payment within 30 days after
it is due.
(e)(1) Collection charges before default. Notwithstanding any
provision of State law, the Secretary may require that the borrower or
any endorser pay costs incurred by the Secretary or the Secretary's
agents in collecting installments not paid when due. These charges do
not include routine collection costs associated with preparing letters
or notices or with making personal contacts with the borrower (e.g.,
local and long-distance telephone calls).
(2) Collection charges after default. If a borrower defaults on a
Direct Loan, the Secretary assesses collection costs on the basis of 34
CFR 30.60.
(Authority: 20 U.S.C. 1087a et seq., 1091a)
Sec. 685.203 Loan limits.
(a) Direct Subsidized Loans. (1) In the case of an undergraduate
student who has not successfully completed the first year of a program
of undergraduate education, the total amount the student may borrow for
any academic year of study under the Federal Direct Stafford/Ford Loan
Program in combination with the Federal Stafford Loan Program may not
exceed the following:
(i) $2,625 for a program of study of at least a full academic year
in length.
(ii) $1,750 for a program of study of at least two-thirds but less
than a full academic year in length.
(iii) $875 for a program of study of at least one-third but less
than two-thirds of an academic year in length.
(2) In the case of an undergraduate student who has successfully
completed the first year of an undergraduate program but has not
successfully completed the second year of an undergraduate program, the
total amount the student may borrow for any academic year of study
under the Federal Direct Stafford/Ford Loan Program in combination with
the Federal Stafford Loan Program may not exceed the following:
(i) $3,500 for a program of study of at least a full academic year
in length.
(ii) If the student is enrolled in a program of study with less
than a full academic year remaining, an amount that bears the same
ratio to $3,500 as the number of semester, trimester, quarter, or clock
hours for which the student enrolls bears to one academic year.
(3) In the case of an undergraduate student who has successfully
completed the first and second years of a program of study of
undergraduate education but has not successfully completed the
remainder of the program, or in the case of a student in a program who
has an associate or baccalaureate degree which is required for
admission into the program, the total amount the student may borrow for
any academic year of study under the Federal Direct Stafford/Ford Loan
Program in combination with the Federal Stafford Loan Program may not
exceed the following:
(i) $5,500 for a program of study of at least an academic year in
length.
(ii) For a student enrolled in a program of study with less than a
full academic year remaining, an amount that bears the same ratio to
$5,500 as the number of semester, trimester, quarter, or clock hours
for which the student enrolls bears to one academic year.
(4) In the case of a graduate or professional student, the total
amount the student may borrow for any academic year of study under the
Federal Direct Stafford/Ford Loan Program in combination with the
Federal Stafford Loan Program may not exceed $8,500.
(b) Direct Unsubsidized Loans. The total amount a student may
borrow under any period of study for the Federal Direct Unsubsidized
Loan Program and the Federal Unsubsidized Stafford/Ford Loan Program is
the same as the amount determined under paragraph (a) of this section,
less any amount received under the Federal Direct Stafford/Ford Loan
Program or the Federal Stafford Loan Program.
(c) Additional eligibility for Direct Unsubsidized Loans. (1)(i) An
independent undergraduate student, graduate or professional student,
and certain dependent undergraduate students may borrow amounts under
the Federal Direct Unsubsidized Loan Program in addition to any amount
borrowed under paragraph (b) of this section.
(ii) In order for a dependent undergraduate student to receive this
additional loan amount, the financial aid administrator must determine
that the student's parent likely will be precluded by exceptional
circumstances from borrowing under the Federal Direct PLUS Program or
the Federal PLUS Program and the student's family is otherwise unable
to provide the student's expected family contribution. The financial
aid administrator shall base the determination on a review of the
family financial information provided by the student and consideration
of the student's debt burden and shall document the determination in
the school's file.
(iii) ``Exceptional circumstances'' under paragraph (c)(1)(ii) of
this section include but are not limited to circumstances in which the
student's parent receives only public assistance or disability
benefits, the parent is incarcerated, the parent has an adverse credit
history, or the parent's whereabouts are unknown. A parent's refusal to
borrow a Federal PLUS Loan or Direct PLUS Loan does not constitute
``exceptional circumstances.''
(2) The additional amount that a student described in paragraph
(c)(1)(i) of this section may borrow under the Federal Direct
Unsubsidized Stafford/Ford Loan Program and the Federal Unsubsidized
Stafford Loan Program for any academic year of study may not exceed the
following:
(i) In the case of a student who has not successfully completed the
first and second year of a program of undergraduate education--
(A) $4,000 for enrollment in a program of study of at least a full
academic year in length;
(B) $2,500 for enrollment in a program of study of at least two-
thirds but less than a full academic year in length; and
(C) $1,500 for enrollment in a program of study of at least one-
third but less than two-thirds of an academic year in length.
(ii) In the case of a student who has successfully completed the
first and second year of an undergraduate program but has not completed
the remainder of the program of study--
(A) For a student enrolled in a program of study of at least a full
academic year, $5,000; and
(B) For a student enrolled in a program of study with less than a
full academic year remaining, an amount that bears the same ratio to
$5,000 as the number of semester, trimester, quarter, or clock hours
for which the student enrolls bears to one academic year.
(iii) In the case of a graduate or professional student, $10,000.
(d) Federal Direct Stafford/Ford Loan Program and Federal Stafford
Loan Program aggregate limits. The aggregate unpaid principal amount of
all Direct Subsidized Loans and Federal Stafford Loans made to a
student may not exceed the following:
(1) $23,000 in the case of any student who has not successfully
completed a program of study at the undergraduate level.
(2) $65,500 in the case of a graduate or professional student,
including loans for undergraduate study.
(e) Aggregate limits for unsubsidized loans. The total amount of
Direct Unsubsidized Loans, Federal Unsubsidized Stafford Loans, and
Federal SLS Loans may not exceed the following:
(1) For a dependent undergraduate student, $23,000 minus any Direct
Subsidized Loan and Federal Stafford Loan amounts, unless the student
qualifies under paragraph (c) of this section for additional
eligibility or qualified for that additional eligibility under the
Federal SLS Program.
(2) For an independent undergraduate or a dependent undergraduate
who qualifies for additional eligibility under paragraph (c) of this
section or qualified for this additional eligibility under the Federal
SLS Program, $46,000 minus any Direct Subsidized Loan and Federal
Stafford Loan amounts.
(3) For a graduate or professional student, $138,500 including any
loans for undergraduate study, minus any Direct Subsidized Loan,
Federal Stafford Loan, and Federal SLS Program loan amounts.
(f) Direct PLUS Loans annual limit. The total amount of all Direct
PLUS Loans that a parent or parents may borrow on behalf of each
dependent student for any academic year of study may not exceed the
cost of attendance minus other estimated financial assistance for that
student.
(g) Direct PLUS Loans aggregate limit. The total amount of all
Direct PLUS Loans that a parent or parents may borrow on behalf of each
dependent student for enrollment in an eligible program of study may
not exceed the student's cost of attendance minus other estimated
financial assistance for that student for the entire period of
enrollment.
(h) Loan limit period. The annual loan limits apply to an academic
year.
(i) Treatment of Direct Consolidation Loans and Federal
Consolidation Loans. The percentage of the outstanding balance on
Direct Consolidation Loans or Federal Consolidation Loans counted
against a borrower's aggregate loan limits is calculated as follows:
(1) For Direct Subsidized Loans, the percentage equals the
percentage of the original amount of the Direct Consolidation Loan or
Federal Consolidation Loan attributable to the Direct Subsidized and
Federal Stafford Loans.
(2) For Direct Unsubsidized Loans, the percentage equals the
percentage of the original amount of the Direct Consolidation Loan or
Federal Consolidation Loan attributable to the Direct Unsubsidized,
Federal SLS, and Federal Unsubsidized Stafford Loans.
(j) Maximum loan amounts. In no case may a Direct Subsidized,
Direct Unsubsidized, or Direct PLUS Loan amount exceed the student's
estimated cost of attendance for the period of enrollment for which the
loan is intended, less--
(1) The student's estimated financial assistance for that period;
and
(2) In the case of a Direct Subsidized Loan, the borrower's
expected family contribution for that period.
(Authority: 20 U.S.C. 1087a et seq.)
Sec. 685.204 Deferment.
(a)(1) A Direct Loan borrower whose loan is eligible for interest
subsidies and who meets the requirements described in paragraph (b) of
this section is eligible for a deferment during which periodic
installments of principal and interest need not be paid.
(2) A Direct Loan borrower whose loan is not eligible for interest
subsidies and who meets the requirements described in paragraph (b) of
this section is eligible for a deferment during which periodic
installments of principal need not be paid but interest does accrue and
is capitalized or paid by the borrower.
(b) Except as provided in paragraph (d) of this section, a Direct
Loan borrower is eligible for a deferment during any period during
which the borrower meets any of the following requirements:
(1)(i) The borrower--
(A) Is carrying at least one-half the normal full-time work load
for the course of study that the borrower is pursuing, as determined by
the eligible school the borrower is attending;
(B) Is pursuing a course of study pursuant to a graduate fellowship
program approved by the Secretary; or
(C) Is pursuing a rehabilitation training program, approved by the
Secretary, for individuals with disabilities; and
(ii) The borrower is not serving in a medical internship or
residency program, except for a residency program in dentistry.
(2)(i) The borrower is seeking and unable to find full-time
employment.
(ii) For purposes of paragraph (b)(2)(i) of this section, the
Secretary determines whether a borrower is eligible for a deferment due
to the inability to find full-time employment using the standards and
procedures set forth in 34 CFR 682.210(h) with references to the lender
understood to mean the Secretary.
(3)(i) The borrower has experienced or will experience an economic
hardship.
(ii) For purposes of paragraph (b)(3)(i) of this section, the
Secretary determines whether a borrower is eligible for a deferment due
to an economic hardship using the standards and procedures set forth in
34 CFR 682.210(s)(6) with references to the lender understood to mean
the Secretary.
(c) No deferment under paragraphs (b) (2) or (3) of this section
may exceed three years.
(d) If, at the time of application for a Direct Loan, a borrower
has an outstanding balance of principal or interest owing on any FFEL
Program loan that was made, insured, or guaranteed prior to July 1,
1993, the borrower is eligible for a deferment during--
(1) the periods described in paragraph (b) of this section; and
(2) the periods described in 34 CFR 682.210(b), including those
periods that apply to a ``new borrower'' as that term is defined in 34
CFR 682.210(b)(7).
(Authority: 20 U.S.C. 1087a et seq.)
Sec. 685.205 Forbearance.
(a) General. ``Forbearance'' means permitting the temporary
cessation of payments, allowing an extension of time for making
payments, or temporarily accepting smaller payments than previously
scheduled. The borrower has the option to choose the form of
forbearance. If payments of interest are forborne, they are
capitalized. The Secretary grants forbearance if the borrower or
endorser intends to repay the loan but requests forbearance and
provides sufficient documentation to support this request, and--
(1) The Secretary determines that, due to poor health or other
acceptable reasons, the borrower or endorser is currently unable to
make scheduled payments;
(2) The borrower's payments of principal are deferred under
Sec. 685.204 and the Secretary does not subsidize the interest benefits
on behalf of the borrower.
(3) The borrower is in a medical or dental internship or residency
that must be successfully completed before the borrower may begin
professional practice or service, or the borrower is serving in a
medical or dental internship or residency program leading to a degree
or certificate awarded by an institution of higher education, a
hospital, or a health care facility that offers postgraduate training;
(4) The borrower is serving in a national service position for
which the borrower or endorser is receiving a national service
educational award under the National and Community Service Trust Act of
1993;
(5) The borrower is eligible for loan forgiveness under the Federal
Stafford Loan Forgiveness Demonstration Program, if the program is
funded, for performing the type of service described in
Sec. 682.215(b); or
(6) For not more than three years during which the borrower or
endorser--
(i) Is currently obligated to make payments on loans under title IV
of the Act; and
(ii) The sum of these payments each month (or a proportional share
if the payments are due less frequently than monthly) is equal to or
greater than 20 percent of the borrower's or endorser's total monthly
gross income.
(b) Administrative forbearance. In certain circumstances, the
Secretary grants forbearance without requiring documentation from the
borrower. These circumstances include but are not limited to--
(1) A properly granted period of deferment for which the Secretary
learns the borrower did not qualify;
(2) The period for which payments are overdue at the beginning of
an authorized deferment period;
(3) The period beginning when the borrower entered repayment until
the first payment due date was established;
(4) The period prior to a borrower's filing of a bankruptcy
petition;
(5) A period after the Secretary receives reliable information
indicating that the borrower (or the student in the case of a Direct
PLUS Loan) has died, or the borrower has become totally and permanently
disabled, until the Secretary receives documentation of death or total
and permanent disability;
(6) Periods necessary for the Secretary to determine the borrower's
eligibility for discharge--
(i) Under Sec. 685.213;
(ii) Under Sec. 685.214; or
(iii) Due to the borrower's or endorser's (if applicable)
bankruptcy;
(7) A period of up to three years in cases where the effect of a
variable interest rate on a fixed-amount or graduated repayment
schedule causes the extension of the maximum repayment term; or
(8) A period during which the Secretary has authorized forbearance
due to a national military mobilization or other local or national
emergency.
(c) Period of forbearance. (1) The Secretary grants forbearance for
a period of up to one year.
(2) The forbearance is renewable, upon request of the borrower, for
the duration of the period in which the borrower meets the condition
required for the forbearance.
(Authority: 20 U.S.C. 1087a et seq.)
Sec. 685.206 Borrower responsibilities and defenses.
(a) The borrower shall give the school the following information as
part of the origination process for a Direct Subsidized, Direct
Unsubsidized, or Direct PLUS Loan:
(1) A statement, as described in 34 CFR Part 668, that the loan
will be used for the cost of the student's attendance.
(2) Information demonstrating that the borrower is eligible for the
loan.
(3) Information concerning the outstanding FFEL Program and Direct
Loan Program loans of the borrower and, for a parent borrower, of the
student, including any Federal Consolidation Loan or Direct
Consolidation Loan.
(4) A statement authorizing the school to release to the Secretary
information relevant to the student's eligibility to borrow or to have
a parent borrow on the student's behalf (e.g., the student's enrollment
status, financial assistance, and employment records).
(b)(1) The borrower shall promptly notify the Secretary of any
change of name, address, student status to less than half-time,
employer, or employer's address; and
(2) The borrower shall promptly notify the school of any change in
address during enrollment.
(c) Borrower defenses. (1) In any proceeding to collect on a Direct
Loan, the borrower may assert as a defense against repayment, any act
or omission of the school attended by the student that would give rise
to a cause of action against the school under applicable State law.
These proceedings include, but are not limited to, the following:
(i) Tax refund offset proceedings under 34 CFR 30.33.
(ii) Wage garnishment proceedings under section 488A of the Act.
(iii) Salary offset proceedings for Federal employees under 34 CFR
Part 31.
(iv) Credit bureau reporting proceedings under 31 U.S.C. 3711(f).
(2) If the borrower's defense against repayment is successful, the
Secretary notifies the borrower that the borrower is relieved of the
obligation to repay all or part of the loan and associated costs and
fees that the borrower would otherwise be obligated to pay. The
Secretary affords the borrower such further relief as the Secretary
determines is appropriate under the circumstances. Further relief may
include, but is not limited to, the following:
(i) Reimbursing the borrower for amounts paid toward the loan
voluntarily or through enforced collection.
(ii) Determining that the borrower is not in default on the loan
and is eligible to receive assistance under title IV of the Act.
(iii) Updating reports to credit bureaus to which the Secretary
previously made adverse credit reports with regard to the borrower's
Direct Loan.
(3) The Secretary may initiate an appropriate proceeding to require
the school whose act or omission resulted in the borrower's successful
defense against repayment of a Direct Loan to pay to the Secretary the
amount of the loan to which the defense applies. However, the Secretary
does not initiate such a proceeding after the period for the retention
of records described in Sec. 685.309(c) unless the school received
actual notice of the claim during that period.
(Authority: 20 U.S.C. 1087a et seq.)
Sec. 685.207 Obligation to repay.
(a) Obligation of repayment in general. (1) A borrower is obligated
to repay the full amount of a Direct Loan, including the principal
balance, fees, any collection costs charged under Sec. 685.202(e), and
any interest not subsidized by the Secretary, unless the borrower is
relieved of the obligation to repay as provided in this part.
(2) The borrower's repayment of a Direct Loan may also be subject
to the deferment provisions in Sec. 685.204, the forbearance provisions
in Sec. 685.205, and the discharge provisions in Sec. 685.212.
(b) Direct Subsidized Loan repayment. (1) During the period in
which a borrower is enrolled at an eligible school on at least a half-
time basis, the borrower is in an ``in-school'' period and is not
required to make payments on a Direct Subsidized Loan unless--
(i) The loan entered repayment before the in-school period began;
and
(ii) The borrower has not been granted a deferment under
Sec. 685.204.
(2)(i) When a borrower ceases to be enrolled at an eligible school
on at least a half-time basis, a six-month grace period begins, unless
the grace period has been previously exhausted.
(ii) During a grace period, the borrower is not required to make
payments on a Direct Subsidized Loan.
(3) A borrower is not obligated to pay interest on a Direct
Subsidized Loan for in-school or grace periods unless the borrower is
required to make payments on the loan during those periods under
paragraph (b)(1) of this section.
(4) The repayment period for a Direct Subsidized Loan begins the
day after the grace period ends. A borrower is obligated to repay the
loan under paragraph (a) of this section during the repayment period.
(c) Direct Unsubsidized Loan repayment. (1) During the period in
which a borrower is enrolled at an eligible school on at least a half-
time basis, the borrower is in an ``in-school'' period and is not
required to make payments of principal on a Direct Unsubsidized Loan
unless--
(i) The loan entered repayment before the in-school period began;
and
(ii) The borrower has not been granted a deferment under
Sec. 685.204.
(2)(i) When a borrower ceases to be enrolled at an eligible school
on at least a half-time basis, a six-month grace period begins, unless
the grace period has been previously exhausted.
(ii) During a grace period, the borrower is not required to make
any principal payments on a Direct Unsubsidized Loan.
(3) A borrower is responsible for the interest that accrues on a
Direct Unsubsidized Loan during in-school and grace periods. Interest
begins to accrue on the day the first installment is disbursed.
Interest that accrues may be capitalized or paid by the borrower.
(4) The repayment period for a Direct Unsubsidized Loan begins the
day after the grace period ends. A borrower is obligated to repay the
loan under paragraph (a) of this section during the repayment period.
(d) Direct PLUS Loan repayment. The repayment period for a Direct
PLUS Loan begins on the day the loan is fully disbursed. Interest
begins to accrue on the day the first installment is disbursed. A
borrower is obligated to repay the loan under paragraph (a) of this
section during the repayment period.
(e) Direct Consolidation Loan repayment. (1) Except as provided in
paragraphs (e)(2) and (e)(3) of this section, the repayment period for
a Direct Consolidation Loan begins and interest begins to accrue on the
day the loan is made. The borrower is obligated to repay the loan under
paragraph (a) of this section during the repayment period.
(2) A borrower who obtains a Direct Subsidized Consolidation Loan
during an in-school period will be subject to the repayment provisions
in paragraph (b) of this section.
(3) A borrower who obtains a Direct Unsubsidized Consolidation Loan
during an in-school period will be subject to the repayment provisions
in paragraph (c) of this section.
(f) Determining the date on which the grace period begins for a
borrower in a correspondence program. For a borrower of a Direct
Subsidized or Direct Unsubsidized Loan who is a correspondence student,
the grace period begins on the earliest of the date--
(1) The borrower completes the program;
(2) The borrower falls 60 days behind the due date for submission
of a scheduled assignment, according to the schedule required in
Sec. 685.302. However, a school may grant the borrower one restoration
to in-school status if the borrower fails to submit a lesson within
this 60-day period after the due date for submission of a particular
assignment if, within the 60-day period, the borrower declares, in
writing, an intention to continue in the program and an understanding
that the required lessons must be submitted on time; or
(3) That is 60 days following the latest allowable date established
by the school for completing the program under the schedule required
under Sec. 685.302.
(Authority: 20 U.S.C. 1087a et seq.)
Sec. 685.208 Repayment plans.
(a) General. (1) A borrower may repay a Direct Subsidized Loan, a
Direct Unsubsidized Loan, a Direct Subsidized Consolidation Loan, or a
Direct Unsubsidized Consolidation Loan under the standard repayment
plan, the extended repayment plan, the graduated repayment plan, or the
income contingent repayment plan.
(2) A borrower may repay a Direct PLUS Loan or a Direct PLUS
Consolidation Loan under the standard repayment plan, the extended
repayment plan, or the graduated repayment plan.
(3) The Secretary may provide an alternative repayment plan in
accordance with paragraph (g) of this section.
(4) All Direct Loans obtained by one borrower must be repaid
together under the same repayment plan, except that a borrower of a
Direct PLUS Loan or a Direct PLUS Consolidation Loan may repay the
Direct PLUS Loan or the Direct PLUS Consolidation Loan separately from
other Direct Loans obtained by that borrower.
(b) Standard repayment plan. (1) Under the standard repayment plan,
a borrower shall repay a loan in full within ten years from the date
the loan entered repayment by making fixed monthly payments.
(2) Periods of authorized deferment or forbearance are not included
in the ten-year repayment period.
(3) A borrower's payments under the standard repayment plan are at
least $50 per month, except that a borrower's final payment may be less
than $50.
(4) The number of payments or the fixed monthly repayment amount
may be adjusted to reflect changes in the variable interest rate
identified in Sec. 685.202(a).
(c) Extended repayment plan. (1) Under the extended repayment plan,
a borrower shall repay a loan in full by making fixed monthly payments
within an extended period of time that varies with the total amount of
the borrower's loans, as described in paragraph (e) of this section.
(2) Periods of deferment and forbearance are not included in the
number of years of repayment.
(3) A borrower makes fixed monthly payments of at least $50, except
that a borrower's final payment may be less than $50.
(4) The number of payments or the fixed monthly repayment amount
may be adjusted to reflect changes in the variable interest rate
identified in Sec. 685.202(a).
(d) Graduated repayment plan. (1) Under the graduated repayment
plan, a borrower shall repay a loan in full by making payments at two
or more levels within a period of time that varies with the total
amount of the borrower's loans, as described in paragraph (e) of this
section.
(2) Periods of deferment and forbearance are not included in the
number of years of repayment.
(3) The number of payments or the monthly repayment amount may be
adjusted to reflect changes in the variable interest rate identified in
Sec. 685.202(a).
(4) No scheduled payment under the graduated repayment plan may be
less than the amount of interest accrued on the loan between monthly
payments, less than 50 percent of the payment amount that would be
required under the standard repayment plan, or more than 150 percent of
the payment amount that would be required under the standard repayment
plan.
(e) Repayment period for the extended and graduated plans. Under
the extended and graduated repayment plans, if the total amount of the
borrower's Direct Loans is--
(1) Less than $10,000, the borrower shall repay the loans within 12
years of entering repayment;
(2) Greater than or equal to $10,000 but less than $20,000, the
borrower shall repay the loans within 15 years of entering repayment;
(3) Greater than or equal to $20,000 but less than $40,000, the
borrower shall repay the loans within 20 years of entering repayment;
(4) Greater than or equal to $40,000 but less than $60,000, the
borrower shall repay the loans within 25 years of entering repayment;
and
(5) Greater than or equal to $60,000, the borrower shall repay the
loans within 30 years of entering repayment.
(f) Income contingent repayment plan. (1) Under the income
contingent repayment plan, a borrower's monthly repayment amount is
generally based on the total amount of the borrower's (and, in some
circumstances, the borrower's spouse's) Direct Loans, family size, and
Adjusted Gross Income (AGI) reported by the borrower for the most
recent year for which the Secretary has obtained income information. In
the case of a married borrower who files a joint Federal income tax
return, the borrower's AGI includes the income of the borrower's
spouse. A borrower shall make payments on a loan until the loan is
repaid in full or until the loan has been in repayment through the end
of the income contingent repayment period.
(2) The regulations in effect at the time a borrower's first Direct
Loan enters repayment govern the method for determining the borrower's
monthly repayment amount for all of the borrower's Direct Loans,
unless--
(i) The Secretary amends the regulations relating to a borrower's
monthly repayment amount under the income contingent repayment plan;
and
(ii) The borrower submits a written request that the amended
regulations apply to the repayment of the borrower's Direct Loans.
(3) Provisions governing the income contingent repayment plan are
set out in Sec. 685.209.
(g) Alternative repayment. (1) The Secretary may provide an
alternative repayment plan for a borrower who demonstrates to the
Secretary's satisfaction that the terms and conditions of the repayment
plans specified in paragraphs (b) through (f) of this section are not
adequate to accommodate the borrower's exceptional circumstances.
(2) The Secretary may require a borrower to provide evidence of the
borrower's exceptional circumstances before permitting the borrower to
repay a loan under an alternative repayment plan.
(3) If the Secretary agrees to permit a borrower to repay a loan
under an alternative repayment plan, the Secretary notifies the
borrower in writing of the terms of the plan. After the borrower
receives notification of the terms of the plan, the borrower may accept
the plan or choose another repayment plan.
(4) A borrower shall repay a loan under an alternative repayment
plan within 30 years of the date the loan entered repayment, not
including periods of deferment and forbearance.
(5) If the amount of a borrower's monthly payment under an
alternative repayment plan is less than the accrued interest on the
loan, the unpaid interest is capitalized until the outstanding
principal amount is 10 percent greater than the original principal
amount. After the outstanding principal amount is 10 percent greater
than the original principal amount, interest continues to accrue but is
not capitalized. For purposes of this paragraph, the original principal
amount is the amount owed by the borrower when the borrower enters
repayment.
(Authority: 20 U.S.C. 1087a et seq.)
Sec. 685.209 Income contingent repayment plan.
(a) General. (1) Under the income contingent repayment plan
described in Sec. 685.208(f), a borrower may choose to repay under the
formula described in paragraph (b) or may choose to have payments
capped as described in paragraph (c). The amount calculated under
paragraph (b) is called the ``formula amount,'' and the amount
calculated under paragraph (c) is called the ``capped amount.''
(2) Borrowers may choose to repay either the formula amount or the
capped amount when they enter repayment and may change between the
options one time each year.
(3) The Secretary may determine that special circumstances, such as
a loss of employment by the borrower or the borrower's spouse, warrant
an adjustment to the borrower's repayment obligations.
(4) Married borrowers may repay their loans jointly if they meet
the following requirements:
(i) The spouses have both chosen either the formula amount or the
capped amount.
(ii) The spouses filed a joint Federal income tax return for the
most recent year for which the Secretary has obtained income
information.
(iii) The spouses submit a written request to the Secretary that
includes their names and social security numbers.
(5) Examples of the calculation of monthly repayment amounts and
tables that shows monthly repayment amounts for borrowers at various
income and debt levels are included in Appendix A to this part.
(b) Formula amount. (1) General. (i) If a borrower chooses to pay
the formula amount under the income contingent repayment plan, the
borrower generally makes monthly payments that are calculated using a
percentage of the borrower's Adjusted Gross Income (AGI) called the
``payback rate.''
(ii) A borrower's monthly payment is equal to the borrower's AGI
multiplied by the payback rate, divided by 12 months. However, a
borrower's monthly payment is never larger than 20 percent of the
borrower's discretionary income as defined in paragraph (b)(1)(iii) of
this section, divided by 12 months. Additionally, if the monthly
repayment amount is less than $15, the borrower is not required to make
a payment.
(iii) For purposes of this section, discretionary income is defined
as a borrower's AGI minus the amount of the ``HHS Poverty Guideline for
all States (except Alaska and Hawaii) and the District of Columbia'' as
published by the United States Department of Health and Human Services
on an annual basis.1 If a borrower provides documentation
acceptable to the Secretary that the borrower has more than one person
in the borrower's family, the Secretary applies the HHS Poverty
Guideline for the borrower's family size.
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\1\The HHS Poverty Guidelines are available from the Office of
the Assistant Secretary for Planning and Evaluation, Department of
Health and Human Services (HHS), Room 438F, Humphrey Building, 200
Independence Avenue, S.W., Washington, D.C. 20201.
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(2) Payback rate. (i) A borrower's payback rate is based upon the
borrower's Direct Loan debt when the borrower's first loan enters
repayment and does not change unless the borrower obtains another
Direct Loan or the borrower and the borrower's spouse obtain approval
to repay their loans jointly under paragraph (a)(4) of this section. If
the borrower obtains another Direct Loan, a new payback rate for all of
the borrower's Direct Loans is calculated on the basis of the combined
amounts of the loans when the last loan enters repayment. If the
borrower and the borrower's spouse repay the loans jointly, the
provisions under (b)(3) apply.
(ii) If the total amount of a borrower's Direct Loans is less than
or equal to $1,000, the payback rate is four percent. If the total
amount of a borrower's Direct Loans is greater than $1,000, the payback
rate is four percent plus an additional percent that begins at zero and
increases at a rate of 0.2 percent for each additional $1,000 borrowed
up to a maximum payback rate of 15 percent.
(iii) More specifically, if the total amount of a borrower's Direct
Loans is greater than $1,000, the payback rate is the lesser of 0.15 or
the following: 0.04 + (debt - 1,000) (0.000002).
(3) Exception for certain married borrowers. (i) The combined
monthly payment amount for married borrowers who repay their loans
jointly under paragraph (a)(4) of this section and who repay the
formula amount is the total of the individual monthly payment amounts
for each borrower calculated under paragraph (b)(1)(ii) of this
section.
(ii) The payback rate for each borrower is calculated separately on
the basis of the amount of the outstanding debt on the borrower's
Direct Loans at the time the borrower enters into joint repayment with
the borrower's spouse. For purposes of this paragraph, the Secretary
assumes that the AGI for each borrower is proportionate to the relative
size of the borrower's individual debt.
(iii) For purposes of determining whether a borrower's payment
amount is larger than 20 percent of the borrower's discretionary income
under paragraph (b)(1)(ii), a portion of the appropriate HHS Poverty
Guideline for the borrowers' family size is applied to each borrower in
proportion to the relative size of the individual borrower's debts.
(iv) If the combined monthly repayment amount is less than $15, the
borrowers are not required to make a payment.
(v) The amount of a borrower's individual monthly payment is
applied to the borrower's debt, except that the Secretary credits joint
payments toward interest accrued on any loan before any payment is
credited to principal.
(c) Capped amount. (1) General If a borrower's monthly payments
calculated under the formula amount as determined in paragraph (b) are
greater than the capped amount calculated under paragraph (c)(2), the
borrower may choose to repay the capped amount.
(2) Calculation of the capped amount. (i) The capped amount is the
amount that a borrower would repay monthly over 12 years using standard
amortization or $15, whichever is greater.
(ii) The amount of the cap is recalculated on an annual basis to
include changes in the variable rate.
(iii) After periods in which a borrower makes payments that are
less than interest accrued on the loan, the amount of the cap is
recalculated. If the new cap is larger than the existing cap, the new
cap is applied. If the new cap is smaller than or equal to the existing
cap, the existing cap is applied.
(3) Exception to the calculation of the capped amount for certain
married borrowers. The capped amount for married borrowers who repay
jointly under paragraph (a)(4) of this section is the same amount as
calculated under paragraph (c)(2) of this section except that the
amount is based on the combined Direct Loan debt of the borrowers.
(d) Other features of the income contingent repayment plan. (1)
Alternative documentation of income. If a borrower's AGI is not
available or if, in the Secretary's opinion, the borrower's reported
AGI does not reasonably reflect the borrower's current income, the
Secretary may use other documentation of income provided by the
borrower to calculate the borrower's monthly repayment amount.
(2) Repayment period. (i) The maximum repayment period under the
income contingent repayment plan is 25 years.
(ii) The repayment period includes periods in which the borrower
makes payments under the standard repayment plan and under extended
repayment plans in which payments are based on a repayment period that
is up to 12 years. The repayment period does not include periods in
which the borrower makes payments under the graduated and alternative
repayment plans or periods of authorized deferment or forbearance. The
repayment period also does not include periods in which the borrower
makes payments under an extended repayment plan in which payments are
based on a repayment period that is longer than 12 years.
(iii) If a borrower repays more than one loan under the income
contingent repayment plan, a separate repayment period for each loan
begins when that loan enters repayment.
(iv) If a borrower has not repaid a loan in full at the end of the
25-year repayment period under the income contingent repayment plan,
the Secretary cancels the unpaid portion of the loan.
(v) At the beginning of the repayment period under the income
contingent repayment plan, a borrower shall make monthly payments of
the amount of interest that accrues on the borrower's Direct Loans
until the Secretary calculates the borrower's monthly repayment amount
on the basis of the borrower's income.
(3) Limitation on capitalization of interest. If the amount of a
borrower's monthly payment is less than the accrued interest, the
unpaid interest is capitalized until the outstanding principal amount
is ten percent greater than the original principal amount. After the
outstanding principal amount is ten percent greater than the original
amount, interest continues to accrue but is not capitalized. For
purposes of this paragraph, the original amount is the amount owed by
the borrower when the borrower enters repayment.
(4) Notification of terms and conditions. When a borrower elects or
is required by the Secretary to repay a loan under the income
contingent repayment plan, the Secretary notifies the borrower of the
terms and conditions of the plan, including--
(i) That the Internal Revenue Service will disclose certain tax
return information to the Secretary or the Secretary's agents; and
(ii) That if the borrower believes that special circumstances
warrant an adjustment to the borrower's repayment obligations, as
described in Sec. 685.209(a)(3), the borrower may contact the Secretary
and obtain the Secretary's determination as to whether an adjustment is
appropriate.
(5) Consent to disclosure of tax return information. (i) A borrower
shall provide written consent to the disclosure of certain tax return
information by the Internal Revenue Service (IRS) to agents of the
Secretary for purposes of calculating a monthly repayment amount and
servicing and collecting a loan under the income contingent repayment
plan. The borrower shall provide consent by signing a consent form,
developed consistent with 26 CFR 301.6103(c)-1 and provided to the
borrower by the Secretary, and shall return the signed form to the
Secretary.
(ii) The borrower shall consent to disclosure of the borrower's
taxpayer identity information as defined in 26 U.S.C. 6103(b)(6), tax
filing status, and AGI.
(iii) The borrower shall provide consent for a period of five years
from the date the borrower signs the consent form. The Secretary
provides the borrower a new consent form before that period expires.
The IRS does not disclose tax return information after the IRS has
processed a borrower's withdrawal of consent.
(iv) The Secretary designates the standard repayment plan for a
borrower who selects the income contingent repayment plan but--
(A) Fails to provide the required written consent;
(B) Fails to renew written consent upon the expiration of the five-
year period for consent; or
(C) Withdraws consent and does not select another repayment plan.
(v) If a borrower defaults and the Secretary designates the income
contingent repayment plan for the borrower but the borrower fails to
provide the required written consent, the Secretary mails a notice to
the borrower establishing a repayment schedule for the borrower.
(Authority: 20 U.S.C. 1087a et seq.)
Sec. 685.210 Choice of repayment plan.
(a) Initial selection of a repayment plan. (1) Before a Direct Loan
enters into repayment, the Secretary provides the borrower a
description of the available repayment plans and requests the borrower
to select one. A borrower may select a repayment plan before the loan
enters repayment by notifying the Secretary of the borrower's selection
in writing.
(2) If a borrower does not select a repayment plan, the Secretary
designates the standard repayment plan described in Sec. 685.208(b) for
the borrower.
(b) Changing repayment plans. (1) A borrower may change repayment
plans at any time after the loan has entered repayment by notifying the
Secretary. However, a borrower who is repaying a defaulted loan under
the income contingent repayment plan under Sec. 685.211(c)(3)(ii) may
not change to another repayment plan unless--
(i) The borrower was required to and did make a payment under the
income contingent repayment plan in each of the prior three (3) months;
or
(ii) The borrower was not required to make payments but made three
reasonable and affordable payments in each of the prior three months;
and
(iii) The borrower makes and the Secretary approves a request to
change plans.
(2)(i) A borrower may not change to a repayment plan that has a
maximum repayment period of less than the number of years the loan has
already been in repayment, except that a borrower may change to the
income contingent repayment plan at any time.
(ii) If a borrower changes plans, the repayment period is the
period provided under the borrower's new repayment plan, calculated
from the date the loan initially entered repayment. However, if a
borrower changes to the income contingent repayment plan, the repayment
period is calculated as described in Sec. 685.209(d)(2).
(Authority: 20 U.S.C. 1087a et seq.)
Sec. 685.211 Miscellaneous repayment provisions.
(a) Payment application and prepayment. (1) The Secretary applies
any payment first to any accrued charges and collection costs, then to
any outstanding interest, and then to outstanding principal.
(2) A borrower may prepay all or part of a loan at any time without
penalty. If a borrower pays any amount in excess of the amount due, the
excess amount is a prepayment.
(3) If a prepayment equals or exceeds the monthly repayment amount
under the borrower's repayment plan, the Secretary--
(i) Applies the prepaid amount according to paragraph (a)(1) of
this section;
(ii) Advances the due date of the next payment unless the borrower
requests otherwise; and
(iii) Notifies the borrower of any revised due date for the next
payment.
(4) If a prepayment is less than the monthly repayment amount, the
Secretary applies the prepayment according to paragraph (a)(1) of this
section.
(b) Refunds from schools. The Secretary applies any refund due to a
borrower that the Secretary receives from a school under Sec. 668.22
against the borrower's outstanding principal and notifies the borrower
of the refund.
(c) Default. (1) Acceleration. If a borrower defaults on a Direct
Loan, the entire unpaid balance and accrued interest are immediately
due and payable.
(2) Collection charges. If a borrower defaults on a Direct Loan,
the Secretary assesses collection charges in accordance with
Sec. 685.202(e).
(3) Collection of a defaulted loan. (i) The Secretary may take any
action authorized by law to collect a defaulted Direct Loan including,
but not limited to, filing a lawsuit against the borrower, reporting
the default to national credit bureaus, requesting the Internal Revenue
Service to offset the borrower's Federal income tax refund, and
garnishing the borrower's wages.
(ii) If a borrower defaults on a Direct Subsidized Loan, a Direct
Unsubsidized Loan, a Direct Unsubsidized Consolidation Loan or a Direct
Subsidized Consolidation Loan, the Secretary may designate the income
contingent repayment plan for the borrower.
(d) Ineligible borrowers. (1) The Secretary determines that a
borrower is ineligible if, at the time the loan was made and without
the school's or the Secretary's knowledge, the borrower (or the student
on whose behalf a parent borrowed) provided false or erroneous
information or took actions that caused the borrower or student--
(i) To receive a loan for which the borrower is wholly or partially
ineligible;
(ii) To receive interest benefits for which the borrower was
ineligible; or
(iii) To receive loan proceeds for a period of enrollment for which
the borrower was not eligible.
(2) If the Secretary makes the determination described in paragraph
(d)(1) of this section, the Secretary sends an ineligible borrower a
demand letter that requires the borrower to repay some or all of a
loan, as appropriate. The demand letter requires that within 30 days
from the date the letter is mailed, the borrower repay any principal
amount for which the borrower is ineligible and any accrued interest,
including interest subsidized by the Secretary, through the previous
quarter.
(3) If a borrower fails to comply with the demand letter described
in paragraph (d)(2) of this section, the borrower is in default on the
entire loan.
(4) A borrower may not consolidate a loan under Sec. 685.215 for
which the borrower is wholly or partially ineligible.
(e) Rehabilitation of defaulted loans. A defaulted Direct Loan is
rehabilitated if the borrower makes 12 consecutive on-time, reasonable,
and affordable monthly payments. The amount of such a payment is
determined on the basis of the borrower's total financial
circumstances. If a defaulted loan is rehabilitated, the Secretary
instructs any credit bureau to which the default was reported to remove
the default from the borrower's credit history.
(Authority: 20 U.S.C. 1087a et seq.)
Sec. 685.212 Discharge of a loan obligation.
(a) Death. If the Secretary receives acceptable documentation that
a borrower (or the student on whose behalf a parent borrowed) has died,
the Secretary discharges the obligation of the borrower and any
endorser to make any further payments on the loan.
(b) Total and permanent disability. If the Secretary receives
acceptable documentation that a borrower has become totally and
permanently disabled, the Secretary discharges the obligation of the
borrower and any endorser to make any further payments on the loan. A
borrower is not considered totally and permanently disabled based on a
condition that existed at the time the borrower applied for the loan
unless the borrower's condition substantially deteriorated after the
loan was made so as to render the borrower totally and permanently
disabled.
(c) Bankruptcy. If a borrower's obligation to repay a loan is
discharged in bankruptcy, the Secretary does not require the borrower
or any endorser to make any further payments on the loan.
(d) Closed schools. If a borrower meets the requirements in
Sec. 685.213, the Secretary discharges the obligation of the borrower
and any endorser to make any further payments on the loan.
(e) False certification and unauthorized disbursement. If a
borrower meets the requirements in Sec. 685.214, the Secretary
discharges the obligation of the borrower and any endorser to make any
further payments on the loan.
(f) Payments received after eligibility for discharge. The
Secretary returns to the sender, or, for a discharge based on death,
the borrower's estate, those payments received after the requirements
for discharge have been met.
(g) Loan forgiveness demonstration program. If funds are
appropriated for the loan forgiveness demonstration program authorized
by section 428J of the Act, the Secretary follows the procedures and
applies the standards in 34 CFR 682.215 for borrowers under the Direct
Loan Program.
(Authority: 20 U.S.C. 1087a et seq.)
Sec. 685.213 Closed school discharge.
(a) General. (1) The Secretary discharges the borrower's (and any
endorser's) obligation to repay a Direct Loan in accordance with the
provisions of this section if the borrower (or the student on whose
behalf a parent borrowed) did not complete the program of study for
which the loan was made because the school at which the borrower (or
student) was enrolled closed, as described in paragraph (c) of this
section.
(2) For purposes of this section--
(i) A school's closure date is the date that the school ceases to
provide educational instruction in all programs, as determined by the
Secretary; and
(ii) ``School'' means a school's main campus or any location or
branch of the main campus.
(b) Relief pursuant to discharge. (1) Discharge under this section
relieves the borrower of any past or present obligation to repay the
loan and any accrued charges or collection costs with respect to the
loan.
(2) The discharge of a loan under this section qualifies the
borrower for reimbursement of amounts paid voluntarily or through
enforced collection on the loan.
(3) The Secretary does not regard a borrower who has defaulted on a
loan discharged under this section as in default on the loan after
discharge, and such a borrower is eligible to receive assistance under
programs authorized by title IV of the Act.
(4) The Secretary reports the discharge of a loan under this
section to all credit reporting agencies to which the Secretary
previously reported the status of the loan.
(c) Borrower qualification for discharge. In order to qualify for
discharge of a loan under this section, a borrower shall submit to the
Secretary a written request and sworn statement, and the factual
assertions in the statement must be true. The statement need not be
notarized but must be made by the borrower under penalty of perjury. In
the statement, the borrower shall--
(1) State that the borrower (or the student on whose behalf a
parent borrowed)--
(i) Received the proceeds of a loan to attend a school;
(ii) Did not complete the program of study at that school because
the school closed while the student was enrolled, or the student
withdrew from the school not more than 90 days before the school closed
(or longer in exceptional circumstances); and
(iii) 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;
(2) State whether the borrower (or 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; and
(3) State that the borrower (or student)--
(i) Agrees to provide to the Secretary upon request other
documentation reasonably available to the borrower that demonstrates
that the borrower meets the qualifications for discharge under this
section; and
(ii) Agrees to cooperate with the Secretary in enforcement actions
in accordance with paragraph (d) of this section and to transfer any
right to recovery against a third party to the Secretary in accordance
with paragraph (e) of this section.
(d) Cooperation by borrower in enforcement actions. (1) In order to
obtain a discharge under this section, a borrower shall cooperate with
the Secretary in any judicial or administrative proceeding brought by
the Secretary to recover amounts discharged or to take other
enforcement action with respect to the conduct on which the discharge
was based. At the request of the Secretary and upon the Secretary's
tendering to the borrower the fees and costs that are customarily
provided in litigation to reimburse witnesses, the borrower shall--
(i) Provide testimony regarding any representation made by the
borrower to support a request for discharge;
(ii) Produce any documents reasonably available to the borrower
with respect to those representations; and
(iii) If required by the Secretary, provide a sworn statement
regarding those documents and representations.
(2) The Secretary denies the request for a discharge or revokes the
discharge of a borrower who--
(i) Fails to provide the testimony, documents, or a sworn statement
required under paragraph (d)(1) of this section; or
(ii) Provides testimony, documents, or a sworn statement that does
not support the material representations made by the borrower to obtain
the discharge.
(e) Transfer to the Secretary of borrower's right of recovery
against third parties. (1) Upon discharge under 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, its
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.
(2) The provisions of this section apply notwithstanding any
provision of State law that would otherwise restrict transfer of those
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.
(3) Nothing in this section limits or forecloses the borrower's (or
student's) right to pursue legal and equitable relief regarding
disputes arising from matters unrelated to the discharged Direct Loan.
(f) Discharge procedures. (1) After confirming the date of a
school's closure, the Secretary identifies any Direct Loan borrower (or
student on whose behalf a parent borrowed) who appears to have been
enrolled at the school on the school closure date or to have withdrawn
not more than 90 days prior to the closure date.
(2) If the borrower's current address is known, the Secretary mails
the borrower a discharge application and an explanation of the
qualifications and procedures for obtaining a discharge. The Secretary
also promptly suspends any efforts to collect from the borrower on any
affected loan. The Secretary may continue to receive borrower payments.
(3) If the borrower's current address is unknown, the Secretary
attempts to locate the borrower and determines the borrower's potential
eligibility for a discharge under this section by consulting with
representatives of the closed school, the school's licensing agency,
the school's accrediting agency, and other appropriate parties. If the
Secretary learns the new address of a borrower, the Secretary mails to
the borrower a discharge application and explanation and suspends
collection, as described in paragraph (f)(2) of this section.
(4) If a borrower fails to submit the written request and sworn
statement described in paragraph (c) of this section within 60 days of
the Secretary's mailing the discharge application, the Secretary
resumes collection and grants forbearance of principal and interest for
the period in which collection activity was suspended. The Secretary
may capitalize any interest accrued and not paid during that period.
(5) If the Secretary determines that a borrower who requests a
discharge meets the qualifications for a discharge, the Secretary
notifies the borrower in writing of that determination.
(6) If the Secretary determines that a borrower who requests a
discharge does not meet the qualifications for a discharge, the
Secretary notifies that borrower in writing of that determination and
the reasons for the determination.
(Authority: 20 U.S.C. 1087a et seq.)
Sec. 685.214 Discharge for false certification of student eligibility
or unauthorized payment.
(a) Basis for discharge. (1) False certification. The Secretary
discharges a borrower's (and any endorser's) obligation to repay a
Direct Loan in accordance with the provisions of this section if a
school falsely certifies the eligibility of the borrower (or the
student on whose behalf a parent borrowed) to receive the loan. The
Secretary considers a student's eligibility to borrow to have been
falsely certified by the school if the school--
(i) Certified the student's eligibility for a Direct Loan on the
basis of ability to benefit from its training and the student did not
meet the eligibility requirements described in 34 CFR part 668 and
section 484(d) of the Act, as applicable;
(ii) Signed the borrower's name on the loan application or
promissory note without the borrower's authorization; or
(iii) Certified the eligibility of a student who, because of a
physical or mental condition, age, criminal record, or other reason
accepted by the Secretary, would not meet the requirements for
employment (in the student's State of residence when the loan was
certified) in the occupation for which the training program supported
by the loan was intended.
(2) Unauthorized payment. The Secretary discharges a borrower's
(and any endorser's) obligation to repay a Direct Loan if the school,
without the borrower's authorization, endorsed the borrower's loan
check or signed the borrower's authorization for electronic funds
transfer, unless the proceeds of the loan were delivered to the student
or applied to charges owed by the student to the school.
(b) Relief pursuant to discharge. (1) Discharge for false
certification under paragraph (a)(1) of this section relieves the
borrower of any past or present obligation to repay the loan and any
accrued charges and collection costs with respect to the loan.
(2) Discharge for unauthorized payment under paragraph (a)(2) of
this section relieves the borrower of the obligation to repay the
amount of the payment discharged.
(3) The discharge under this section qualifies the borrower for
reimbursement of amounts paid voluntarily or through enforced
collection on the discharged loan or payment.
(4) The Secretary does not regard a borrower who has defaulted on a
loan discharged under this section as in default on the loan after
discharge, and such a borrower is eligible to receive assistance under
programs authorized by title IV of the Act.
(5) The Secretary reports the discharge under this section to all
credit reporting agencies to which the Secretary previously reported
the status of the loan.
(c) Borrower qualification for discharge. In order to qualify for
discharge under this section, the borrower shall submit to the
Secretary a written request and a sworn statement, and the factual
assertions in the statement must be true. The statement need not be
notarized but must be made by the borrower under penalty of perjury. In
the statement, the borrower shall meet the requirements in paragraphs
(c) (1) through (5) of this section.
(1) Ability to benefit. In the case of a borrower requesting a
discharge based on the school's defective testing of the student's
ability to benefit, the borrower shall state that the borrower (or the
student on whose behalf a parent borrowed)--
(i) Received a disbursement of a loan to attend a school;
(ii) Received a Direct Loan at that school on the basis of an
ability to benefit from the school's training and did not meet the
eligibility requirements described in 34 CFR Part 668 and section
484(d) of the Act, as applicable; and
(iii) Either--
(A) Withdrew from the school and did not find employment in the
occupation for which the training program was intended; or
(B) Completed the training program for which the loan was made,
made reasonable attempts to obtain employment in the occupation for
which the program was intended, and was not able to find employment in
that occupation or obtained employment in that occupation only after
receiving additional training that was not provided by the school that
certified the loan.
(2) Unauthorized loan. In the case of a borrower requesting a
discharge because the school signed the borrower's name on the loan
application or promissory note without the borrower's authorization,
the borrower shall--
(i) State that he or she did not sign the document in question or
authorize the school to do so; and
(ii) Provide five different specimens of his or her signature, two
of which must be within one year before or after the date of the
contested signature.
(3) Unauthorized payment. In the case of a borrower requesting a
discharge because the school, without the borrower's authorization,
endorsed the borrower's loan check or signed the borrower's
authorization for electronic funds transfer, the borrower shall--
(i) State 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;
(ii) Provide five different specimens of his or her signature, two
of which must be within one year before or after the date of the
contested signature;
(iii) State that the proceeds of the contested disbursement were
not delivered to the student or applied to charges owed by the student
to the school.
(4) Claim to third party. The borrower shall state whether the
borrower (or student) has made a claim with respect to the school's
false certification or unauthorized payment 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.
(5) Cooperation with Secretary. The borrower shall state that the
borrower (or student)--
(i) Agrees to provide to the Secretary upon request other
documentation reasonably available to the borrower that demonstrates
that the borrower meets the qualifications for discharge under this
section; and
(ii) Agrees to cooperate with the Secretary in enforcement actions
as described in Sec. 685.213(d) and to transfer any right to recovery
against a third party to the Secretary as described in Sec. 685.213(e).
(d) Discharge procedures. (1) If the Secretary determines that a
borrower's Direct Loan may be eligible for a discharge under this
section, the Secretary mails the borrower a disclosure application and
an explanation of the qualifications and procedures for obtaining a
discharge. The Secretary also promptly suspends any efforts to collect
from the borrower on any affected loan. The Secretary may continue to
receive borrower payments.
(2) If the borrower fails to submit the written request and sworn
statement described in paragraph (c) of this section within 60 days of
the Secretary's mailing the disclosure application, the Secretary
resumes collection and grants forbearance of principal and interest for
the period in which collection activity was suspended. The Secretary
may capitalize any interest accrued and not paid during that period.
(3) If the borrower submits the written request and sworn statement
described in paragraph (c) of the section, the Secretary determines
whether to grant a request for discharge under this section by
reviewing the request and sworn statement in light of information
available from the Secretary's records and from other sources,
including guaranty agencies, State authorities, and cognizant
accrediting associations.
(4) If the Secretary determines that the borrower meets the
applicable requirements for a discharge under paragraph (c) of this
section, the Secretary notifies the borrower in writing of that
determination.
(5) If the Secretary determines that the borrower does not qualify
for a discharge, the Secretary notifies the borrower in writing of that
determination and the reasons for the determination.
(Authority: 20 U.S.C. 1087a et seq.)
Sec. 685.215 Consolidation.
(a) Direct Consolidation Loans. A borrower may consolidate one or
more education loans made under certain Federal programs into one or
more Direct Consolidation Loans. Loans consolidated into a Direct
Consolidation Loan are discharged when the Direct Consolidation Loan is
originated.
(b) Loans eligible for consolidation. The following loans may be
consolidated into a Direct Consolidation Loan:
(1) Federal Stafford Loans.
(2) Guaranteed Student Loans.
(3) Federal Insured Student Loans (FISL).
(4) Direct Subsidized Loans.
(5) Direct Subsidized Consolidation Loans.
(6) Federal Perkins Loans.
(7) National Direct Student Loans (NDSL).
(8) National Defense Student Loans (NDSL).
(9) Federal PLUS Loans.
(10) Parent Loans for Undergraduate Students (PLUS).
(11) Direct PLUS Loans.
(12) Direct PLUS Consolidation Loans.
(13) Federal Unsubsidized Stafford Loans.
(14) Federal Supplemental Loans for Students (SLS).
(15) Federal Consolidation Loans.
(16) Direct Unsubsidized Loans.
(17) Direct Unsubsidized Consolidation Loans.
(18) Auxiliary Loans to Assist Students (ALAS).
(19) Health Professions Student Loans (HPSL).
(20) Health Education Assistance Loans (HEAL).
(21) Other loans made under subpart II of part A of title VII of
the Public Health Service Act.
(22) Loans made under subpart II of part B of title VIII of the
Public Health Service Act.
(c) Types of Direct Consolidation Loans. (1) The loans identified
in paragraphs (b)(1) through (8) of this section may be consolidated
into a Direct Subsidized Consolidation Loan.
(2) The loans identified in paragraphs (b)(9) through (12) of this
section may be consolidated into a Direct PLUS Consolidation Loan.
(3) The loans identified in paragraphs (b)(13) through (22) of this
section may be consolidated into a Direct Unsubsidized Consolidation
Loan. In addition, Federal Consolidation Loans under (b)(15) of this
section may be consolidated into a Direct Subsidized Consolidation
Loan, if they are eligible for interest benefits during a deferment
period under Section 428C(b)(4)(C) of the Act.
(d) Eligibility for a Direct Consolidation Loan. (1) A borrower may
obtain a Direct Consolidation Loan if, at the time the borrower applies
for such a loan, the borrower meets the following requirements:
(i) The borrower either--
(A) Has an outstanding balance on a Direct Loan; or
(B) Has an outstanding balance on an FFEL loan and asserts either--
(1) That the borrower is unable to obtain an FFEL consolidation
loan; or
(2) That the borrower is unable to obtain an FFEL consolidation
loan with income-sensitive repayment terms acceptable to the borrower
and is eligible for the income contingent repayment plan under the
Direct Loan Program.
(ii) On the loans being consolidated, the borrower is--
(A) In an in-school period and seeks to consolidate loans made
under both the FFEL Program and the Direct Loan Program;
(B) In an in-school period at a school participating in the Direct
Loan Program and seeks to consolidate loans made under the FFEL
Program;
(C) In a six-month grace period;
(D) In a repayment period but not in default;
(E) In default but has made satisfactory arrangements to repay the
defaulted loan; or
(F) In default but agrees to repay the consolidation loan under the
income contingent repayment plan described in Sec. 685.208(f) and signs
the consent form described in Sec. 685.209(d)(5).
(iii) The borrower certifies that no other application to
consolidate any of the borrower's loans listed in paragraph (b) of this
section is pending with any other lender.
(iv) The borrower agrees to notify the Secretary of any change in
address.
(v) In the case of a Direct PLUS Consolidation Loan--
(A) The borrower may not have an adverse credit history as defined
in Sec. 685.200(b)(7)(ii); or
(B) If the borrower has such an adverse credit history, the
borrower shall obtain an endorser for the consolidation loan who does
not have an adverse credit history or provide documentation
satisfactory to the Secretary that extenuating circumstances relating
to the borrower's credit history exist.
(vi) In the case of a defaulted Direct Consolidation Loan, the
borrower obtains the approval of the Secretary.
(vii) In the case of a loan on which the holder has obtained a
judgment, the borrower obtains the approval of the Secretary.
(2) Two married borrowers may consolidate their loans together if
they meet the following requirements:
(i) At least one spouse meets the requirements of paragraphs
(d)(1)(i) and (d)(1)(v) of this section.
(ii) Both spouses meet the requirements of paragraphs (d)(1) (ii)
through (d)(1)(iv) of this section.
(iii) Each spouse agrees to be held jointly and severally liable
for the repayment of the total amount of the consolidation loan and to
repay the loan regardless of any change in marital status.
(e) Application for a Direct Consolidation Loan. To obtain a Direct
Consolidation Loan, a borrower or borrowers shall submit a completed
application to the Secretary. A single application may be used for one
or more consolidation loans. A borrower may add eligible loans to a
Direct Consolidation Loan by submitting a request to the Secretary
within 180 days after the date on which the Direct Consolidation Loan
is originated.
(f) Origination of a consolidation loan. (1)(i) The holder of a
loan that a borrower wishes to consolidate into a Direct Loan shall
complete and return the Secretary's request for certification of the
amount owed within 10 business days of receipt or, if it is unable to
provide the certification, provide to the Secretary a written
explanation of the reasons for its inability to provide the
certification.
(ii) If the Secretary approves an application for a consolidation
loan, the Secretary pays to each holder of a loan selected for
consolidation the amount necessary to discharge the loan.
(iii) For a loan that is in default, the Secretary limits
collection costs that may be charged to the borrower to no more than
those authorized under the FFEL Program and may impose reasonable
limits on collection costs paid to the holder.
(2) Upon receipt of the proceeds of a Direct Consolidation Loan,
the holder of a consolidated loan shall promptly apply the proceeds to
fully discharge the borrower's obligation on the consolidated loan. The
holder of a consolidated loan shall notify the borrower that the loan
has been paid in full.
(3) The principal balance of a Direct Consolidation Loan is equal
to the sum of the amounts paid to the holders of the consolidated
loans.
(4) If the amount paid by the Secretary to the holder of a
consolidated loan exceeds the amount needed to discharge that loan, the
holder of the consolidated loan shall promptly refund the excess amount
to the Secretary to be credited against the outstanding balance of the
Direct Consolidation Loan.
(5) If the amount paid by the Secretary to the holder of the
consolidated loan is insufficient to discharge that loan, the holder
shall notify the Secretary in writing of the remaining amount due on
the loan. The Secretary promptly pays the remaining amount due.
(g) Interest rate. The interest rate on a Direct Subsidized
Consolidation Loan or a Direct Unsubsidized Consolidation Loan is the
rate established for Direct Subsidized Loans and Direct Unsubsidized
Loans under Sec. 685.202(a)(1). The interest rate on a Direct PLUS
Consolidation Loan is the rate established for Direct PLUS Loans under
Sec. 685.202(a)(2).
(h) Repayment plans. A borrower may repay a Direct Consolidation
Loan under any of the repayment plans described in Sec. 685.208, except
that--
(1) A borrower may not repay a Direct PLUS Consolidation Loan under
the income contingent repayment plan; and
(2) A borrower who became eligible to consolidate a defaulted loan
under paragraph (d)(1)(ii)(E) of this section shall repay the
consolidation loan under the income contingent repayment plan unless--
(i) The borrower was required to and did make a payment under the
income contingent repayment plan in each of the prior three (3) months;
or
(ii) The borrower was not required to make payments but made three
reasonable and affordable payments in each of the prior three (3)
months; and
(iii) The borrower makes and the Secretary approves a request to
change plans.
(i) Repayment period. (1) Except as noted in paragraph (i)(4) of
this section, the repayment period for a Direct Consolidation Loan
begins on the day the loan is disbursed.
(2) Under the extended or graduated repayment plan, the Secretary
determines the repayment period under Sec. 685.208(e) on the basis of
the outstanding balances on all of the borrower's loans that are
eligible for consolidation and the balances on other education loans
except as provided in paragraph (i)(3) of this section.
(3)(i) The total amount of outstanding balances on the other
education loans used to determine the repayment period under the
graduated or extended repayment plan may not exceed the amount of the
Direct Consolidation Loan.
(ii) The borrower may not be in default on the other education loan
unless the borrower has made satisfactory repayment arrangements with
the holder of the loan.
(iii) The lender of the other educational loan may not be an
individual.
(4) A Direct Consolidation Loan receives a grace period if it
includes a Direct Loan or FFEL Program loan for which the borrower is
in an in-school period at the time of consolidation. The repayment
period begins the day after the grace period ends.
(j) Repayment schedule. (1) The Secretary provides a borrower of a
Direct Consolidation Loan a repayment schedule before the borrower's
first payment is due. The repayment schedule identifies the borrower's
monthly repayment amount under the repayment plan selected.
(2) If a borrower adds an eligible loan to the consolidation loan
under paragraph (e) of this section, the Secretary makes appropriate
adjustments to the borrower's monthly repayment amount and repayment
period.
(k) Refunds received from schools. If a lender receives a refund
from a school on a loan that has been consolidated into a Direct
Consolidation Loan, the lender shall transmit the refund and an
explanation of the source of the refund to the Secretary within 30 days
of receipt.
(l) Special provisions for joint consolidation loans. The
provisions of paragraphs (l)(1) through (3) of this section apply to a
Direct Consolidation Loan obtained by two married borrowers.
(1) Deferment. To obtain a deferment on a joint Direct
Consolidation Loan under Sec. 685.204, both borrowers shall meet the
requirements of that section.
(2) Forbearance. To obtain forbearance on a joint Direct
Consolidation Loan under Sec. 685.205, both borrowers shall meet the
requirements of that section.
(3) Discharge. (i) To obtain a discharge of a joint Direct
Consolidation Loan under Sec. 685.212, each borrower shall meet the
requirements for one of the types of discharge described in that
section.
(ii) If a borrower meets the requirements for discharge under
Sec. 685.212(d) or (e) on a loan that was consolidated into a joint
Direct Consolidation Loan and the borrower's spouse does not meet the
requirements for any type of discharge described in Sec. 685.212, the
Secretary discharges a portion of the consolidation loan equal to the
amount of the loan that would have been eligible for discharge under
the provisions of Sec. 685.212(d) or (e), as applicable.
(Authority: 20 U.S.C. 1078-8, 1087a et seq.)
Subpart C--Requirements, Standards, and Payments for Direct Loan
Program Schools
Sec. 685.300 Agreements between an eligible school and the Secretary
for participation in the Direct Loan Program.
(a) General. (1) Participation of a school in the Direct Loan
Program means that eligible students at the school may receive Direct
Loans. To participate in the Direct Loan Program, a school shall--
(i) Demonstrate to the satisfaction of the Secretary that the
school meets the requirements for eligibility under the Act and
applicable regulations; and
(ii) Enter into a written program participation agreement with the
Secretary.
(2) The chief executive officer of the school shall sign the
program participation agreement on behalf of the school.
(b) Program participation agreement. In the program participation
agreement, the school shall promise to comply with the Act and
applicable regulations and shall agree to--
(1) Identify eligible students who seek student financial
assistance at the institution in accordance with section 484 of the
Act;
(2) Estimate the need of each of these students as required by part
F of the Act for an academic year. For purposes of estimating need, a
Direct Unsubsidized Loan, a Direct PLUS Loan, or any loan obtained
under any State-sponsored or private loan program may be used to offset
the expected family contribution of the student for that year;
(3) Certify that the amount of the loan for any student under part
D of the Act is not in excess of the annual limit applicable for that
loan program and that the amount of the loan, in combination with
previous loans received by the borrower, is not in excess of the
aggregate limit for that loan program;
(4) Set forth a schedule for disbursement of the proceeds of the
loan in installments, consistent with the requirements of section 428G
of the Act;
(5) Provide timely and accurate information to the Secretary for
the servicing and collecting of loans--
(i) Concerning the status of student borrowers (and students on
whose behalf parents borrow) while these students are in attendance at
the school;
(ii) Upon request by the Secretary, concerning any new information
of which the school becomes aware for these students (or their parents)
after the student leaves the school; and
(iii) Concerning student eligibility and need, for the alternative
origination of loans to eligible students and parents in accordance
with part D of the Act;
(6) Provide assurances that the school will comply with
requirements established by the Secretary relating to student loan
information with respect to loans made under the Direct Loan Program;
(7) Provide that the school will accept responsibility and
financial liability stemming from its failure to perform its functions
pursuant to the agreement;
(8) Provide that eligible students at the school and their parents
may participate in the programs under part B of the Act at the
discretion of the Secretary for the period during which the school
participates in the Direct Loan Program under part D of the Act, except
that a student may not receive loans under both part D of the Act and
part B of the Act for the same period of enrollment and a parent
(borrowing for the same student) may not receive loans under both part
D of the Act and part B of the Act for the same period of enrollment;
(9) Provide for the implementation of a quality assurance system,
as established by the Secretary and developed in consultation with the
school, to ensure that the school is complying with program
requirements and meeting program objectives;
(10) Provide that the school will not charge any fees of any kind,
however described, to student or parent borrowers for origination
activities or the provision of any information necessary for a student
or parent to receive a loan under part D of the Act or any benefits
associated with such a loan; and
(11) Comply with other provisions that the Secretary determines are
necessary to protect the interests of the United States and to promote
the purposes of part D of the Act.
(c) Origination. (1) If a school or consortium originates loans in
the Direct Loan Program, it shall enter into a supplemental agreement
that--
(i) Provides that the school or consortium will originate loans to
eligible students and parents in accordance with part D of the Act; and
(ii) Provides that the note or evidence of obligation on the loan
is the property of the Secretary.
(2) The chief executive officer of the school shall sign the
supplemental agreement on behalf of the school.
(Authority: 20 U.S.C. 1087a et seq., 1094)
Sec. 685.301 Certification of a loan by a Direct Loan Program school.
(a) Determining eligibility and loan amount. (1) A school
participating in the Direct Loan Program shall ensure that any
information it provides to the Secretary in connection with loan
origination is complete and accurate. Except as provided in 34 CFR Part
668, subpart E, a school may rely in good faith upon statements made in
the application by the student.
(2) A school shall provide to the Secretary borrower information
that includes but is not limited to--
(i) The borrower's eligibility for a loan, as determined in
accordance with Sec. 685.200 and Sec. 685.203;
(ii) The student's loan amount; and
(iii) The anticipated and actual disbursement date or dates and
disbursement amounts of the loan proceeds.
(3) A school may not certify a Direct Subsidized, Direct
Unsubsidized, or Direct PLUS Loan, or a combination of loans, for an
amount that--
(i) The school has reason to know would result in the borrower
exceeding the annual or maximum loan amounts in Sec. 685.203; or
(ii) Exceeds the student's estimated cost of attendance less--
(A) The student's estimated financial assistance for that period;
and
(B) In the case of a Direct Subsidized Loan, the borrower's
expected family contribution for that period.
(4)(i) A school determines a Direct Subsidized or Direct
Unsubsidized Loan amount in accordance with Sec. 685.203 and the
definitions in 34 CFR 668.2 for the proration of loan amounts required
for undergraduate students.
(ii) When prorating a loan amount for a student enrolled in a
program of study with less than a full academic year remaining, the
school need not recalculate the amount of the loan if the number of
hours for which an eligible student is enrolled changes after the
school certifies the loan.
(5) A school may refuse to certify a Direct Subsidized, Direct
Unsubsidized, or Direct PLUS Loan or may reduce the borrower's
determination of need for the loan if the reason for that action is
documented and provided to the student in writing, and if--
(i) The determination is made on a case-by-case basis;
(ii) The documentation supporting the determination is retained in
the student's file; and
(iii) The school does not engage in any pattern or practice that
results in a denial of a borrower's access to Direct Loans because of
the borrower's race, gender, color, religion, national origin, age,
disability status, or income.
(6) A school may not assess a fee for the completion or
certification of any Direct Loan Program forms or information.
(b) Determining disbursement dates and amounts. (1) Before
disbursing a loan, a school that originates loans shall determine that
all information required by the loan application and promissory note
has been provided by the borrower and, if applicable, the student.
(2) Except as provided in paragraph (b)(3) of this section, a
school shall establish disbursement dates for any Direct Loan made for
a period of enrollment as follows:
(i) Except as provided in paragraph (b)(2)(iv) of this section,
disbursements must be in two or more installments.
(ii) No installment may exceed one-half the loan.
(iii) At least one-half of the loan period must elapse before the
second installment is disbursed except as necessary to permit the
second installment to be disbursed at the beginning of the next
semester, quarter, or similar division of the loan period.
(iv) If at least one-half of the loan period has elapsed when the
first disbursement is made, the loan may be disbursed in a single
installment.
(3) A school that is not in a State is not required to establish
disbursement dates under paragraph (b)(2) of this section.
(c) Promissory note handling. (1) The Secretary provides promissory
notes for use in the Direct Loan Program. A school may not modify, or
make any additions to, the promissory note without the Secretary's
prior written approval.
(2) A school that originates a loan shall provide to the Secretary
an executed, legally enforceable promissory note as proof of the
borrower's indebtedness.
(Authority: 20 U.S.C. 1087a et seq.)
Sec. 685.302 Schedule requirements for courses of study by
correspondence.
(a) This section contains requirements relating to the enrollment
status of students in schools that offer programs of study by
correspondence.
(b) A school that offers a course of study by correspondence shall
establish a schedule for submission of lessons by its students and
provide it to a prospective student prior to the student's enrollment.
(c) The school shall include in its schedule--
(1) A due date for each lesson in the course;
(2) A description of the options, if any, available to the student
for altering the sequence of lesson submissions from the sequence in
which they are otherwise required to be submitted;
(3) The date by which the course is to be completed; and
(4) The date by which any resident training must begin, the
location of any resident training, and the period of time within which
that resident training must be completed.
(Authority: 20 U.S.C. 1087a et seq.)
Sec. 685.303 Processing loan proceeds.
(a) Purpose. This section establishes rules governing a school's
processing of a borrower's Direct Subsidized, Direct Unsubsidized, or
Direct PLUS Loan proceeds. The school shall also comply with any rules
for processing loan proceeds contained in 34 CFR Part 668.
(b) General. (1)(i) A school that initiates the drawdown of funds.
A school may not disburse loan proceeds to a borrower unless the school
has obtained an executed, legally enforceable promissory note from the
borrower.
(ii) A school that does not initiate the drawdown of funds. A
school may disburse loan proceeds only to a borrower for whom the
school has received funds from the Secretary.
(2)(i) Except in the case of a late disbursement under paragraph
(d) of this section, or as provided in paragraph (b)(2)(iii) of this
section, a school may disburse loan proceeds only to a student whom the
school determines has continuously maintained eligibility in accordance
with the provisions of Sec. 685.200 from the beginning of the loan
period described in the promissory note.
(ii) In the event a student delays attending school for a period of
time, the school may consider that student to have maintained
eligibility for the loan from the first day of the period of
enrollment. However, the school must comply with the requirements under
paragraph (b)(3) of this section.
(iii) If, after a school makes the first disbursement to a
borrower, the student becomes ineligible due solely to the school's
loss of eligibility to participate in the title IV programs or the
Direct Loan Program, the school may make subsequent disbursements to
the borrower as permitted by 34 CFR Part 668.
(iv) If, prior to making any disbursement to a borrower, the
student temporarily ceases to be enrolled on at least a half-time
basis, the school may make a disbursement and any subsequent
disbursement to the student if the school determines and documents in
the student's file--
(A) That the student has resumed enrollment on at least a half-time
basis;
(B) The student's revised cost of attendance; and
(C) That the student continues to qualify for the entire amount of
the loan, notwithstanding any reduction in the student's cost of
attendance caused by the student's temporary cessation of enrollment on
at least a half-time basis.
(3) If a registered student withdraws or is expelled prior to the
first day of classes of the period of enrollment for which the loan is
made, or fails to attend school during that period, or if the school is
unable for any other reason to document that the student attended
school during that period, the school shall notify the Secretary,
within 30 days of the date described in Sec. 685.305(a), of the
student's withdrawal, expulsion, or failure to attend school, as
applicable, and return to the Secretary--
(i) Any loan proceeds credited by the school to the student's
account; and
(ii) The amount of payments made by the student to the school, to
the extent that they do not exceed the amount of any loan proceeds
disbursed by the school to the student.
(4) If a student is enrolled in the first year of an undergraduate
program of study and has not previously received a Federal Stafford,
Federal Supplemental Loans for Students, Direct Subsidized, or Direct
Unsubsidized Loan, a school may not disburse the proceeds of a Direct
Subsidized or Direct Unsubsidized Loan until 30 days after the first
day of the student's program of study.
(c) Processing of the proceeds of a Direct Loan. Schools shall
follow the procedures for disbursing funds in 34 CFR 668.165.
(d) Late disbursement. (1) For purposes of this paragraph, a
disbursement is late if the school delivers loan proceeds--
(i) After the loan period; or
(ii) Before the end of the loan period but after the student ceased
to be enrolled at the school on at least a half-time basis.
(2) Except as provided in paragraph (d)(4) of this section, a
school may not make any late disbursement beyond the 60th day after the
applicable condition in paragraph (d)(1) of this section.
(3) Notwithstanding paragraph (d)(4) of this section, a school may
not make--
(i) A late subsequent disbursement of a Direct Subsidized or Direct
Unsubsidized Loan to a borrower who has ceased to be enrolled on at
least a half-time basis unless the borrower has graduated or
successfully completed the period of enrollment for which the loan was
intended; or
(ii) Any late disbursement that, under 34 CFR Part 668, is
considered to be awarded for a period in which the student was not
enrolled on at least a half-time basis at the school.
(4) In exceptional circumstances, a school may make a disbursement
within 30 days after the period described in (d)(2) of this section. If
it does so, the school shall document the exceptional circumstances in
the student's file.
(e) Treatment of excess loan proceeds. Before the disbursement of
any Direct Subsidized or Direct Unsubsidized Loan proceeds, if a school
learns that the borrower will receive or has received financial aid for
the period of enrollment for which the loan was intended that exceeds
the amount of assistance for which the student is eligible, the school
shall reduce or eliminate the overaward by either--
(1) Using the student's Direct Unsubsidized, Direct PLUS, or State-
sponsored or another non-Federal loan to cover the expected family
contribution, if not already done; or
(2) Reducing one or more subsequent disbursements to eliminate the
overaward.
Sec. 685.304 Counseling borrowers.
(a) Initial counseling. (1) Except as provided in paragraph (a)(5)
of this section, a school shall conduct initial counseling prior to
making the first disbursement of the proceeds of a Direct Subsidized or
Direct Unsubsidized Loan to a borrower unless--
(i) The borrower is enrolled in a correspondence program or a
study-abroad program approved for credit at the home school; or
(ii) The borrower has received a prior Direct Subsidized, Direct
Unsubsidized, Federal Stafford, Federal Unsubsidized Stafford, or
Federal SLS Loan.
(2) The counseling must be in person, by audiovisual presentation,
or by computer-assisted technology. In each case, the school shall
ensure that an individual with knowledge of the title IV programs is
reasonably available shortly after the counseling to answer the
borrower's questions regarding those programs. In the case of a student
enrolled in a correspondence program or a study-abroad program approved
for credit at the home school, the school shall provide the borrower
with written counseling materials by mail prior to disbursing the loan
proceeds.
(3) In conducting the initial counseling, the school shall--
(i) Emphasize to the borrower the seriousness and importance of the
repayment obligation the borrower is assuming;
(ii) Describe in forceful terms the likely consequences of default,
including adverse credit reports, garnishment of wages, and litigation;
(iii) Provide the borrower with general information with respect to
the average indebtedness of students who have obtained Direct
Subsidized or Direct Unsubsidized Loans for attendance at that school
or in the borrower's program of study; and
(iv) Inform the student as to the average anticipated monthly
repayment for those students based on the average indebtedness provided
under paragraph (a)(3)(iii) of this section.
(4) Additional matters that the Secretary recommends that a school
include in the initial counseling session or materials are set forth in
Appendix D to 34 CFR Part 668.
(5) A school may adopt an alternative approach for initial
counseling as part of the school's quality assurance plan described in
Sec. 685.300(b)(9). If a school adopts an alternative approach, it is
not required to meet the requirements of paragraphs (a)(1)-(3) of this
section unless the Secretary determines that the alternative approach
is not adequate for the school. The alternative approach must--
(i) Ensure that each borrower subject to initial counseling under
paragraph (a)(1) of this section is provided written counseling
materials that contain the information described in paragraph (a)(3) of
this section;
(ii) Be designed to target those students who are most likely to
default on their repayment obligations and provide them more intensive
counseling and support services; and
(iii) Include performance measures that demonstrate the
effectiveness of the school's alternative approach. These performance
measures must include objective outcomes, such as levels of borrowing,
default rates, and withdrawal rates.
(b) Exit counseling. (1) A school shall conduct in-person exit
counseling with each Direct Subsidized or Direct Unsubsidized Loan
borrower shortly before the borrower ceases at least half-time study at
the school, except that--
(i) In the case of a correspondence program, the school shall
provide the borrower with written counseling materials by mail within
30 days after the borrower completes the program; and
(ii) If the borrower withdraws from school without the school's
prior knowledge or fails to attend an exit counseling session as
scheduled, the school shall mail written counseling materials to the
borrower at the borrower's last known address within 30 days after the
school learns that the borrower has withdrawn from school or failed to
attend the scheduled session.
(2) In conducting the exit counseling, the school shall--
(i) Inform the student of the average anticipated monthly repayment
amount based on the student's indebtedness;
(ii) Review for the borrower available repayment options including
the standard repayment, extended repayment, graduated repayment, and
income contingent repayment plans, and loan consolidation;
(iii) Provide options to the borrower concerning those debt-
management strategies that the school determines would facilitate
repayment by the borrower;
(iv) Explain to the borrower how to contact the party servicing the
student's Direct Loans;
(v) Meet the requirements described in paragraphs (a)(3) (i) and
(ii) of this section;
(vi) Review with the borrower the conditions under which the
borrower may defer repayment or obtain cancellation of a loan; and
(vii) Require the borrower to provide corrections to the school's
records concerning name, address, social security number, references,
and driver's license number and State of issuance, as well as the name
and address of the borrower's expected employer (if known). The school
shall provide this information to the Secretary within 60 days.
(3) Additional matters that the Secretary recommends that a school
include in the exit counseling session or materials are set forth in
Appendix D to 34 CFR Part 668.
(4) The school shall maintain in the student borrower's file
documentation substantiating the school's compliance with paragraphs
(a) and (b) of this section as to that borrower.
(Authority: 20 U.S.C. 1087a et seq.)
Sec. 685.305 Determining the date of a student's withdrawal.
(a) A school shall follow the procedures in 34 CFR 668.22(i) in
determining the student's date of withdrawal.
(b) The school shall use the date determined under paragraph (a) of
this section for the purpose of reporting to the Secretary the
student's date of withdrawal and for determining when a refund must be
paid under Sec. 685.306.
(Authority: 20 U.S.C. 1087a et seq.)
Sec. 685.306 Payment of a refund to the Secretary.
(a) General. By applying for a Direct Loan, a borrower authorizes
the school to pay directly to the Secretary that portion of a refund
from the school that is allocable to the loan. A school--
(1) Shall pay that portion of the student's refund that is
allocable to a Direct Loan to the Secretary; and
(2) Shall provide simultaneous written notice to the borrower if
the school pays a refund to the Secretary on behalf of that student.
(b) Determination, allocation, and payment of a refund. In
determining the portion of a student's refund that is allocable to a
Direct Loan, the school shall follow the procedures established in 34
CFR 668.22 for allocating and paying a refund that is due.
(Authority: 20 U.S.C. 1087a et seq.)
Sec. 685.307 Withdrawal procedure for schools participating in the
Direct Loan Program.
(a) A school participating in the Direct Loan Program may withdraw
from the program by providing written notice to the Secretary.
(b) A participating school that intends to withdraw from the Direct
Loan Program shall give at least 60 days notice to the Secretary.
(c) Unless the Secretary approves an earlier date, the withdrawal
is effective on the later of--
(1) 60 days after the school notifies the Secretary; or
(2) The date designated by the school.
(Authority: 20 U.S.C. 1087a et seq.)
Sec. 685.308 Remedial actions.
(a) General. The Secretary may require the repayment of funds and
the purchase of loans by the school if the Secretary determines that
the unenforceability of a loan or loans, or the disbursement of loan
amounts for which the borrower was ineligible, resulted in whole or in
part from--
(1) The school's violation of a Federal statute or regulation; or
(2) The school's negligent or willful false certification.
(b) In requiring a school to repay funds to the Secretary or to
purchase loans from the Secretary in connection with an audit or
program review, the Secretary follows the procedures described in 34
CFR part 668, subpart H.
(c) The Secretary may impose a fine or take an emergency action
against a school or limit, suspend, or terminate a school's
participation in the Direct Loan Program in accordance with 34 CFR part
668, subpart G.
(Authority: 20 U.S.C. 1087a et seq.)
Sec. 685.309 Administrative and fiscal control and fund accounting
requirements for schools participating in the Direct Loan Program.
(a) General. A participating school shall--
(1) Establish and maintain proper administrative and fiscal
procedures and all necessary records as set forth in this part and in
34 CFR part 668 in order to--
(i) Protect the rights of student and parent borrowers;
(ii) Protect the United States from unreasonable risk of loss; and
(iii) Comply with specific requirements in those regulations; and
(2) Submit all reports required by this part and 34 CFR part 668 to
the Secretary.
(b) Student status confirmation reports. A school shall--
(1) Upon receipt of a student status confirmation report from the
Secretary, complete and return that report to the Secretary within 30
days of receipt; and
(2) Unless it expects to submit its next student status
confirmation report to the Secretary within the next 60 days, notify
the Secretary within 30 days if it discovers that a Direct Subsidized,
Direct Unsubsidized, or Direct PLUS Loan has been made to or on behalf
of a student who--
(i) Enrolled at that school but has ceased to be enrolled on at
least a half-time basis;
(ii) Has been accepted for enrollment at that school but failed to
enroll on at least a half-time basis for the period for which the loan
was intended; or
(iii) Has changed his or her permanent address.
(3) The Secretary provides student status confirmation reports to a
school at least semi-annually.
(4) The Secretary may provide the student status confirmation
report in either paper or electronic format.
(c) Record retention requirements. Unless otherwise directed by the
Secretary, the school or its successors--
(1) Shall keep all records required under this part relating to a
student's eligibility and participation in the Direct Loan Program for
five years following the student's last day of attendance at the
school;
(2) Shall keep copies of any other reports and forms used by the
school for all other records relating to a school's participation in
the Federal Direct Stafford, Federal Direct Unsubsidized Stafford, or
Federal Direct PLUS Loan Programs for five years after completion;
(3) Shall keep all records involved in any loan, claim, or
expenditure questioned by a Federal audit until resolution of any audit
questions.
(4) In the event of the school's closure, termination, suspension,
or change in ownership resulting in a change of control as described in
34 CFR part 600, shall provide for the retention of the records and
reports required by this part and for access by the Secretary or the
Secretary's authorized representatives to those records and reports for
inspection and copying; and
(5) May keep files, records, and copies of reports in microform or
other media formats.
(d) Loan record requirements. In addition to the records required
by 34 CFR part 668, for each Direct Subsidized, Direct Unsubsidized,
and Direct PLUS Loan received under this part by or on behalf of its
students, a school shall maintain a copy of any application data
submitted to the Secretary and shall, upon request, produce a record
of--
(1) The amount of the loan and the loan period;
(2) The data in an individual student budget or the school's
itemized standard budget that were used in calculating the student's
estimated cost of attendance;
(3) The sources and amounts of financial assistance available to
the student that the school used in determining the student's estimated
financial assistance for the loan period in accordance with
Sec. 685.102;
(4) The amount of the student's tuition and fees paid for the loan
period and the date the student paid the tuition and fees;
(5) The amount and basis of its calculation of any refund paid to
or on behalf of a student;
(6) In the case of a Direct Subsidized Loan under Sec. 685.200, the
data used to determine the student's expected family contribution;
(7) In the case of a Direct Subsidized, Direct Unsubsidized, or
Direct PLUS Loan, the date of each disbursement of the loan.
(8) The information collected at the exit interview; and
(9) Any other matter for which a record would be required for the
school to be able to document its compliance with applicable
requirements with respect to the loan.
(e) Inspection requirements. Schools shall follow the inspection
requirements in 34 CFR 668.23(b).
(f) Information sharing. Upon request by the Secretary, a school
promptly shall provide the Secretary with any information the school
has regarding the last known address, surname, employer, and employer
address of a borrower who attends or has attended the school.
(g) Accounting requirements. (1) A school shall establish and
maintain on a current basis financial records that reflect all
transactions for the bank account as required by paragraph (h) of this
section.
(2) The school shall account for receiving and expending Direct
Loan Program funds in accordance with generally-accepted accounting
principles.
(h) Direct Loan Program bank account. Schools shall follow the
procedures for maintaining funds established in 34 CFR 668.164.
(i) Division of functions. Schools shall follow the procedures for
division of functions in 34 CFR 668.16(c).
(j) Limit on use of funds. Except for funds paid to a school under
section 452(b)(1) of the Act, funds received by a school under this
part may be used only to make Direct Loans to eligible borrowers and
may not be used or hypothecated for any other purpose.
(Authority: 20 U.S.C. 1087a et seq.)
Subpart D--School Participation and Loan Origination in the Direct
Loan Program
Sec. 685.400 School participation requirements for academic years
1996-1997 and beyond.
(a) (1) In order to qualify for initial participation in the Direct
Loan Program, a school must meet the eligibility requirements in
section 435(a) of the Act, including the requirement that it have a
cohort default rate of less than 25 percent for at least one of the
three most recent fiscal years for which data are available unless the
school is exempt from this requirement under section 435(a)(2)(C) of
the Act.
(2) In order to continue to participate in the Direct Loan Program,
a school must continue to meet the requirements of paragraph (a)(1) of
this section for years for which cohort default rate data represent the
years prior to the school's participation in the Direct Loan Program.
(b) In order to qualify for initial participation, the school must
not be subject to an emergency action or a proposed or final
limitation, suspension, or termination action under sections
428(b)(1)(T), 432(h), or 487(c) of the Act.
(c) If schools apply as a consortium, each school in the consortium
must meet the requirements in paragraphs (a) and (b) of this section.
(Authority: 20 U.S.C. 1087a et seq.)
Sec. 685.401 Selection criteria and process for academic years 1996-
1997 and beyond.
(a) The Secretary selects schools to participate in the Direct Loan
Program for an academic year beginning in 1996-1997 from among those
that apply to participate.
(b) In evaluating an application from an eligible school, the
Secretary--
(1) To the extent possible, selects schools that are reasonably
representative of the schools that are participating in the FFEL
Program in terms of anticipated loan volume, length of academic
program, control of the school, highest degree offered, size of student
enrollment, geographic location, annual loan volume, and default
experience; and
(2) In order to ensure an expeditious but orderly transition from
the FFEL Program to the Direct Loan Program, selects schools that the
Secretary believes will make the transition as smooth as possible.
(Authority: 20 U.S.C. 1087a et seq.)
Sec. 685.402 Criteria for schools to originate loans for academic
years 1996-1997 and beyond.
(a) Initial determination of origination status. (1) Standard
origination. Any school eligible to participate in the Direct Loan
Program under Sec. 685.400 is eligible to participate under standard
origination.
(2) School Origination. To be eligible to originate loans, a school
must meet the following criteria:
(i) Have participated in the Federal Perkins Loan Program, the
Federal Pell Grant Program, or, for a graduate and professional school,
a similar program for the three most recent years preceding the date of
application to participate in the Direct Loan Program.
(ii) If participating in the Federal Pell Grant Program, not be on
the reimbursement system of payment.
(iii) In the opinion of the Secretary, have had no severe
performance deficiencies for any of the programs under title IV of the
Act, including deficiencies demonstrated by the most recent audit or
program review.
(iv) Be financially responsible in accordance with the standards of
34 CFR 668.15.
(v) Be current on program and financial reports and audits required
under title IV of the Act for the 12-month period immediately preceding
the date of application to participate in the Direct Loan Program.
(vi) Be current on Federal cash transaction reports required under
title IV of the Act for the 12-month period immediately preceding the
date of application to participate in the Direct Loan Program and have
no final determination of cash on hand that exceeds immediate title IV
program needs.
(vii) Have no material findings in any of the annual financial
audits submitted for the three most recent years preceding the date of
application to participate in the Direct Loan Program.
(viii) Provide an assurance that the school has no delinquent
outstanding debts to the Federal Government, unless--
(A) Those debts are being repaid under or in accordance with a
repayment arrangement satisfactory to the Federal Government; or
(B) The Secretary determines that the existence or amount of the
debts has not been finally determined by the cognizant Federal agency.
(3) A school that meets the criteria to originate loans may
participate under school origination option 1 or 2 or under standard
origination.
(b) Change in origination status. (1) After the initial
determination of a school's origination status, the Secretary may allow
a school that does not qualify to originate loans under either
origination option 1 or origination option 2 to do so if the Secretary
determines that the school is fully capable of originating loans under
one of those options.
(2)(i) At any time after the initial determination of a school's
origination status, a school participating under origination option 2
may request to change to origination option 1 or standard origination,
and a school participating under origination option 1 may request to
change to standard origination.
(ii) The change in origination status becomes effective when the
school receives notice of the Secretary's approval, unless the
Secretary specifies a later date.
(3)(i) A school participating under origination option 1 may apply
to participate under option 2, and a school participating in standard
origination may apply to participate under either origination option 1
or 2 after one full year of participation in its initial origination
status.
(ii) Applications to participate under another origination option
are considered on an annual basis.
(iii) An application to participate under another origination
option is evaluated on the basis of criteria and performance standards
established by the Secretary, including but not limited to--
(A) Eligibility under paragraph (a)(2) of this section;
(B) Timely submission of accurate origination and disbursement
records;
(C) Successful completion of reconciliation on a monthly basis; and
(D) Timely submission of completed and signed promissory notes, if
applicable.
(iv) The change in origination status becomes effective when the
school receives notice of the Secretary's approval, unless the
Secretary specifies a later date.
(c) Secretarial determination of change in origination status. (1)
At any time after a school has been approved to originate loans, the
Secretary may require a school participating under origination option 2
to convert to option 1 or to standard origination and may require a
school participating under origination option 1 to convert to standard
origination.
(2) The Secretary may require a school to change origination status
if the Secretary determines that such a change is necessary to ensure
program integrity or if the school fails to meet the criteria and
performance standards established by the Secretary, including but not
limited to--
(i) For an origination option 1 school, eligibility under paragraph
(a)(2) of this section, the timely submission of completed and signed
promissory notes and accurate origination and disbursement records, and
the successful completion of reconciliation on a monthly basis; and
(ii) For an origination option 2 school, the criteria and
performance standards required of origination option 1 schools and
accurate and timely drawdown requests.
(3) The change in origination status becomes effective when the
school receives notice of the Secretary's approval, unless the
Secretary specifies a later date.
(d) Origination by consortia. A consortium of schools may
participate under origination options 1 or 2 only if all members of the
consortium are eligible to participate under paragraph (a)(2) of this
section. All provisions of this section that apply to an individual
school apply to a consortium.
(e) School determination of change of Servicer. (1) The Secretary
assigns one or more Servicers to work with a school to perform certain
functions relating to the origination and servicing of Direct Loans.
(2) A school may request the Secretary to designate a different
Servicer. Documentation of the unsatisfactory performance of the
school's current Servicer must accompany the request. The Servicer
requested must be one of those approved by the Secretary for
participation in the Direct Loan Program.
(3) The Secretary grants the request if the Secretary determines
that--
(i) The claim of unsatisfactory performance is accurate and
substantial; and
(ii) The Servicer requested by the school can accommodate such a
change.
(4) If the Secretary denies the school's request based on a
determination under paragraph (e)(3)(ii) of this section, the school
may request another Servicer.
(5) The change in Servicer is effective when the school receives
notice of the Secretary's approval, unless the Secretary specifies a
later date.
(Authority: 20 U.S.C. 1087a et seq.)
APPENDIX A--Income Contingent Repayment
Examples of the Calculation of Monthly Repayment Amounts
Example 1. A single borrower with $12,500 of Direct Loans and an
Adjusted Gross Income (AGI) of $25,000.
Step 1: Calculate the payback rate. Because the borrower's debt
is greater than $1,000, the payback rate is calculated on the basis
of the formula in Sec. 685.209(b)(2)(iii), as follows:
Subtract $1,000 from the total amount of the borrower's
Direct Loans: ($12,500-$1,000=$11,500).
Multiply the result by 0.000002:
($11,500 x 0.000002=0.023).
Add the result to 0.04: (0.04+0.023=0.063).
The result is the payback rate.
Step 2: Compare the calculated payback rate (0.063) to the
maximum payback rate (0.15). Because the calculated rate is less
than the maximum rate, the borrower's payback rate is 0.063.
Step 3: Calculate the annual repayment amount by multiplying the
borrower's AGI by the payback rate: ($25,000 x 0.063=$1,575).
Step 4: Calculate the monthly repayment amount by dividing the
annual repayment amount by 12 months: ($1,57512=$131.25).
Step 5: Calculate the borrower's discretionary income (AGI minus
HHS Poverty Guideline for a family of one):
($25,000-$7,360=$17,640).
Step 6: Multiply the borrower's discretionary income ($17,640)
by 20 percent: ($17,640 x .2=$3,528).
Step 7: Divide the amount calculated in Step 6 by 12 months:
($3,52812=$294).
Step 8: Compare the amount calculated in Step 4 ($131.25) with
the amount calculated in Step 7 ($294). The lower amount is the
formula amount. The formula amount is $131.25. The borrower's
monthly payment under the formula amount would be $131.25.
Step 9: Compare the monthly formula amount ($131.25) to the $15
floor repayment amount. Because the formula amount is greater than
the $15 floor, the borrower's monthly formula amount is $131.25.
Step 10: Compare the formula amount calculated in Step 9
($131.25) to the capped amount, which is the monthly amount the
borrower would repay under a 12-year standard amortization schedule.
If the interest rate is seven percent, the 12-year standard
amortization amount is approximately $10.28 for every $1,000 of
debt. In this example, since the borrower has $12,500 in debt, the
capped amount is approximately $128.50 ($10.28 x 12.5). Because the
formula amount ($131.25) exceeds the capped amount ($128.50), the
capped amount is the minimum monthly repayment. The borrower has the
option of paying the formula amount (or any higher amount).
Example 2. Married borrowers both repaying under the ICR plan
with a combined Adjusted Gross Income (AGI) of $30,000. The husband
has $5,000 of Direct Loans. The wife has $15,000 of Direct Loans.
The couple has two children.
Step 1: Calculate the husband's payback rate. Because his debt
is greater than $1,000, the payback rate is calculated on the basis
of the formula in Sec. 685.209(b)(2)(iii) as follows:
Subtract $1,000 from the amount of the husband's loans:
($5,000-$1,000=$4,000).
Multiply the result by 0.000002:
($4,000 x 0.000002=0.008).
Add the result to 0.04: (0.04+0.008=0.048).
The result is the husband's payback rate.
Step 2: Compare the husband's calculated payback rate (0.048) to
the maximum payback rate (0.15). Because the calculated rate is less
than the maximum rate, the husband's payback rate is 0.048.
Step 3: Calculate the husband's assumed AGI by multiplying the
couple's total AGI ($30,000) by the amount of the husband's loans
($5,000), divided by the total amount of the couple's debt
($20,000): ($30,000 x $5,000$20,000=$7,500).
Step 4: Calculate the husband's annual repayment amount by
multiplying the husband's assumed AGI ($7,500) by his payback rate
(0.048): ($7,500 x 0.048=$360).
Step 5: Calculate the husband's monthly repayment amount by
dividing his annual repayment amount by 12 months:
($36012=$30).
Step 6: Calculate the couple's discretionary income (AGI minus
HHS Poverty Guideline for a family of four):
($30,000-14,800=$15,200).
Step 7: Calculate the husband's portion of the couple's
discretionary income by multiplying the couple's discretionary
income ($15,200) by the amount of the husband's loans ($5,000)
divided by the total amount of the couple's debt ($20,000):
($15,200 x $5,000$20,000=$3,800).
Step 8: Multiply the husband's discretionary income by 20
percent: ($3,800 x .2=$760).
Step 9: Divide the amount calculated in Step 8 by 12 months:
($76012=$63.33).
Step 10: Compare the monthly amount calculated in Step 5 ($30)
with the monthly amount calculated in Step 9 ($63.33). The lower
amount is the formula amount. The formula amount is $30. If the
borrowers choose to repay the formula amount, the husband's payment
would be $30.
Step 11: Calculate the wife's payback rate. Because her debt is
greater than $1,000, the payback rate is calculated on the basis of
the formula in Sec. 685.209(b)(2)(iii) as follows:
Subtract $1,000 from the amount of the wife's loans:
($15,000-$1,000=$14,000).
Multiply the result by 0.000002:
($14,000 x 0.000002=0.028).
Add the result to 0.04: (0.04+0.028=0.068).
The result is the wife's payback rate.
Step 12: Compare the wife's calculated payback rate (0.068) to
the maximum payback rate (0.15). Because the calculated rate is less
than the maximum rate, the wife's payback rate is 0.068.
Step 13: Calculate the wife's assumed AGI by multiplying the
couple's total AGI ($30,000) by the amount of the wife's loans
($15,000), divided by the total amount of the couple's debt
($20,000): ($30,000 x $15,000$20,000=$22,500).
Step 14: Calculate the wife's annual repayment amount by
multiplying the wife's assumed AGI ($22,500) by her payback rate
(0.068): ($22,500 x 0.068=$1,530).
Step 15: Calculate the wife's monthly repayment amount by
dividing the annual repayment amount calculated in Step 14 ($1,530)
by 12 months: ($1,53012=$127.50).
Step 16: Calculate the wife's portion of the couple's
discretionary income by subtracting the husband's portion of the
couple's discretionary income calculated in Step 7 ($3,800) from the
couple's total discretionary income calculated in Step 6 ($15,200):
($15,200-$3,800=$11,400).
Step 17: Multiply the wife's discretionary income ($11,400) by
20 percent: ($11,400 x .2=$2,280).
Step 18: Divide the amount calculated in Step 17 by 12 months:
($2,28012=$190).
Step 19: Compare the monthly amount calculated in Step 15
($127.50) with the monthly amount calculated in Step 18 ($190). The
lower amount is the formula amount. The formula amount is $127.50.
If the borrowers choose to repay the formula amount, the wife's
payment would be $127.50.
Step 20: Calculate the couple's combined monthly formula amount
by adding the husband's monthly formula amount calculated in Step 10
($30) and the wife's monthly formula amount calculated in Step 19
($127.50): ($30+$127.50=$157.50).
Step 21: Compare the couple's combined monthly formula amount
($157.50) to the $15 floor repayment amount. Because the combined
formula amount is greater than the $15 floor, the couple's combined
monthly formula amount is $157.50.
Step 22: Compare the formula amount calculated in Step 21
($157.50) to the capped amount, which is the amount the couple would
repay under a 12-year standard amortization schedule. If the
interest rate is seven percent, the capped amount is approximately
$10.28 for every $1,000 of debt. In this example, since the couple
has $20,000 in debt, the capped amount is approximately $205.60
($10.28 x 20). Because the formula amount ($157.50) does not exceed
the capped amount ($205.60), the couple's combined monthly repayment
amount is the formula amount of $157.50.
BILLING CODE 4000-01-P
TR01DE94.000
TR01DE94.001
[FR Doc. 94-29260 Filed 11-30-94; 8:45 am]
BILLING CODE 4000-01-C