[Federal Register Volume 60, Number 182 (Wednesday, September 20, 1995)]
[Proposed Rules]
[Pages 48858-48861]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-23300]




[[Page 48857]]

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Part VIII





Department of Education





_______________________________________________________________________



34 CFR Part 685



William D. Ford Federal Direct Loan Program; Proposed Rule

  Federal Register / Vol. 60, No. 182 / Wednesday, September 20, 1995 / 
Proposed Rules  

[[Page 48858]]


DEPARTMENT OF EDUCATION

34 CFR Part 685

RIN 1840-AC22


William D. Ford Federal Direct Loan Program

AGENCY: Department of Education.

ACTION: Notice of proposed rulemaking.

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

SUMMARY: The Secretary of Education proposes to amend the William D. 
Ford Federal Direct Loan (Direct Loan) Program regulations. The 
proposed regulations would apply to loans under the Federal Direct 
Stafford/Ford Loan (Direct Subsidized Loan) Program, the Federal Direct 
Unsubsidized Stafford/Ford Loan (Direct Unsubsidized Loan) Program, the 
Federal Direct PLUS Loan (Direct PLUS Loan) Program, and the Federal 
Direct Consolidation Loan (Direct Consolidation Loan) Program, 
collectively referred to as the Direct Loan Program. These proposed 
regulations would provide schools with more flexibility in performing 
origination functions, and clarify the date of loan origination. These 
proposed regulations also would set timelines for the submission of 
promissory notes, disbursement records, and origination records. 
Finally, the regulations being proposed would address the repayment 
plans available for the consolidation of a single Federal Family 
Education (FFEL) Loan Program loan into the Direct Loan Program.

DATES: Comments on the proposed regulations must be received on or 
before October 31, 1995.

ADDRESSES: All comments concerning these proposed regulations should be 
addressed to Ms. Katrina Ingalls, U.S. Department of Education, P.O. 
Box 23272, Washington, DC 20026-3272. Comments may also be sent via the 
internet to: [email protected].
    To ensure that public comments have maximum effect in developing 
the final regulations, the Department urges that each comment clearly 
identify the specific section or sections of the regulations that the 
comment addresses and that comments be in the same order as the 
regulations.
    Comments that concern information collection requirements must be 
sent to the Office of Management and Budget at the address listed in 
the Paperwork Reduction Act section of this preamble. A copy of those 
comments may also be sent to the Department representative named in the 
preceding paragraph.

FOR FURTHER INFORMATION CONTACT: Ms. Katrina Ingalls. 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 Secretary proposes to amend the Direct Loan Program regulations 
(34 CFR Part 685), to improve the program based on experience gained 
during the first year of operation. These regulations propose 
programmatic changes that the Secretary believes would improve services 
to student and parent borrowers, increase institutional flexibility, 
and enhance the Department's administrative and fiscal oversight 
capabilities.
    The Secretary proposes to revise the current definitions of school 
origination option 1, school origination option 2, and standard 
origination found in Sec. 685.102 to increase program flexibility for 
schools and the Secretary. Under the proposed rules, with the approval 
of the Secretary, schools would be permitted to customize the 
origination process based on individual needs.
    These proposed regulations would also clarify the date on which a 
Direct Loan is originated. For schools originating under school 
origination option 1 or option 2, the date of loan origination would be 
the earlier of: The date the promissory note is printed or the date the 
origination record is accepted by the Secretary. For a school that 
participates under standard origination, the date of loan origination 
would be the date the origination record is accepted by the Secretary. 
Beginning with the 1996-1997 loan year, originating schools will be 
able to generate a print date on the promissory note. This print date 
on the promissory note is a new step intended to establish an 
alternative method to document the loan origination date. This change 
will increase program flexibility. If a school originates a loan and 
prints the promissory note showing the print date and the student's 
eligibility changes before the loan origination record is transmitted 
to the Secretary, the school may make a disbursement to the borrower 
following the late disbursement guidelines. This change promotes 
flexibility in processing loans near the end of a student's period of 
enrollment.
    As a result of administering the program for one year, the 
Secretary is convinced that services to borrowers would be 
substantially improved by requiring the timely submission of certain 
program data by schools to the Direct Loan Servicer. In particular, it 
is imperative that borrowers receive disclosure information and loan 
servicing information shortly after the loan is disbursed. Further, 
Direct PLUS Loan borrowers enter repayment when the loan is fully 
disbursed and the Department must receive disbursement information in a 
timely manner in order to establish repayment terms. Therefore, in 
these regulations, the Secretary proposes to require schools to submit 
origination records, promissory notes, and disbursement records (both 
initial and subsequent), to the Direct Loan Servicer no later than 30 
days following the disbursement of a Direct Loan. Further, this change 
would also serve to improve the Department's administrative and fiscal 
oversight capabilities of the program.
    While program experience now indicates that establishing firm 
deadlines for the submission of origination records, promissory notes, 
and disbursement records is necessary, the Secretary is sensitive to 
the potential need for flexibility in this area. During the first year 
of a school's participation in the Direct Loan Program, the school must 
make changes to its administrative functions, implement new computer 
systems, and become familiar with Direct Loan Program requirements. At 
times, the transition to Direct Loans may seem complex to these 
schools, particularly in the initial stages of the transition. The 
Secretary assures schools that, during their first year of 
participation in the Direct Loan Program, these obstacles will be 
considered in determining the Secretary's position regarding an 
institution's compliance with program regulations. However, the 
proposed regulation to require schools to submit origination records, 
promissory notes, and initial and subsequent disbursement records to 
the Direct Loan Servicer no later than 30 days following the 
disbursement of a Direct Loan is particularly critical at the end of 
the Federal fiscal year (September 30th). To ensure program integrity 
and facilitate audit review, the Secretary will require that all 
documents for loans made during a fiscal year be submitted no later 
than 30 days following the end of the Federal fiscal year.
    The Secretary is proposing to revise the repayment plan regulations 
to reflect the Secretary's current operational practice regarding the 
repayment plans available to a FFEL Program loan borrower consolidating 
only one FFEL Program loan into the Direct Loan Program. Under the 
proposed regulations, borrowers who consolidate only one FFEL Program 
loan into the 

[[Page 48859]]
Direct Loan Program would be required to initially choose a repayment 
plan other than the standard repayment plan.
    The Secretary is considering establishing requirements for foreign 
school participation in the Direct Loan Program. Due to the nature of 
the Direct Loan Program, the Secretary believes that additional fiscal 
oversight and administrative requirements may be warranted for foreign 
schools. The Direct Loan Program is unique among the financial aid 
programs with respect to its funds disbursement processes and 
requirements. Because there is no authorized limit to the amount of 
funds that schools may draw down in the Direct Loan Program, the 
Department must rigorously oversee the funds disbursement process. To 
prevent potential program abuse, the Secretary is committed to the 
careful monitoring of the drawdown of funds to schools and then 
disbursement to students. To minimize potential risks to borrowers and 
taxpayers, the Secretary is considering additional school participation 
requirements for those foreign schools interested in participating in 
the Direct Loan Program. Therefore, the Secretary solicits comments and 
supporting arguments on what, if any, additional standards should be 
established for foreign schools that participate in the Direct Loan 
Program. The Secretary invites comments and supporting arguments on the 
potential financial risks, as well as benefits of admitting foreign 
schools into the Direct Loan Program. Finally, the Secretary requests 
comments and supporting statements concerning the potential losses or 
benefits to students related to foreign school participation in the 
Direct Loan Program.

Proposed Regulatory Changes

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

Section 685.102  Definitions

    School origination option 1, School origination option 2, and 
Standard origination: The Secretary proposes to modify the definition 
of the specific functions that a school must perform for school 
origination option 1, school origination option 2 and standard 
origination. While the functions for the three levels would generally 
remain unchanged, in certain circumstances schools would have some 
flexibility in selecting the functions they would perform. Any request 
to modify the functions must be approved by the Secretary. Further, the 
regulations would specify that the Secretary has the authority to 
modify the functions a school performs to best meet the needs of the 
program.

Section 685.201  Obtaining a Loan

    Paragraphs (a)(2) and (b) of this section, which describe the 
school's responsibility to perform certain functions to process a 
Direct Loan, would be modified to provide the flexibility needed by 
schools to allow them, with the concurrence of the Secretary, to tailor 
the process to accommodate their individual needs.

Section 685.208  Repayment Plans

    For purposes of consolidating one FFEL Program loan into a Federal 
Direct Consolidation Loan, the Secretary proposes to modify the 
available repayment plan options. Borrowers consolidating one FFEL 
Program loan would not be permitted to initially choose the standard 
repayment plan; however, they could choose the extended, graduated, or 
income contingent repayment plan. This proposed change appears in 
Sec. 685.208(a)(1) and (2), and Sec. 685.215(h)(2).

Section 685.210  Choice of Repayment Plans

    In Sec. 685.210(a), a new paragraph would be added advising the 
borrower that the Secretary will designate the extended repayment plan 
if a FFEL Program loan borrower consolidating only one FFEL Program 
loan into the Direct Loan Program does not select a repayment plan.

Section 685.215  Consolidation

    The Secretary proposes that Sec. 685.215(h), which discusses 
repayment plans available to borrowers of Direct Consolidation Loans, 
be amended by adding a new paragraph. This new paragraph would provide 
that, for purposes of consolidating only one FFEL Program loan into a 
Federal Direct Consolidation Loan, borrowers may not initially choose 
the standard repayment plan.

Section 685.301  Origination of a Loan by a Direct Loan Program School

    The Secretary proposes to add a new paragraph to this section to 
clarify the date of origination. A school may only originate a loan 
while the student meets the borrower eligibility requirements. Through 
the origination process, a school certifies a borrower's eligibility 
for a loan, the loan amount, and anticipated disbursement dates. The 
proposed rule provides that the date of loan origination would be the 
earlier of the date that the school prints the promissory note or the 
date that the origination record is accepted by the Secretary.
    The Secretary also proposes to amend the regulations to require 
schools to submit the promissory note, disbursement record (original 
and subsequent), and origination record no later than 30 days of the 
date of disbursement of loan funds. Requiring the timely submission of 
program data would result in improved services to borrowers and would 
also enhance the Department's administrative and fiscal oversight 
capabilities.

Executive Order 12866

1. Assessment of Costs and Benefits
    These proposed regulations have been reviewed in accordance with 
Executive Order 12866. Under the terms of the order the Secretary has 
assessed the potential costs and benefits of this proposed regulatory 
action.
    The potential costs associated with the proposed regulations are 
those resulting from statutory requirements and those determined by the 
Secretary to be necessary for administering the Title IV, HEA programs 
effectively and efficiently. Burdens specifically associated with 
information collection requirements, if any, are explained elsewhere in 
this preamble under the heading of Paperwork Reduction Act of 1995.
    In assessing the potential costs and benefits--both quantitative 
and qualitative--of these proposed regulations, the Secretary has 
determined that the benefits of the proposed regulations justify the 
costs.
    The Secretary has also determined that this regulatory action does 
not unduly interfere with State, local, and tribal governments in the 
exercise of their governmental functions.
    To assist the Department in complying with the specific 
requirements of Executive Order 12866, the Secretary invites comment on 
whether there may be further opportunities to reduce any potential 
costs or increase potential benefits resulting from these proposed 
regulations without impeding the effective and efficient administration 
of the Title IV, HEA programs.
2. Clarity of the Regulations
    Executive Order 12866 requires each agency to write regulations 
that are easy to understand.
    The Secretary invites comments on how to make these regulations 
easier to understand, including answers to questions such as the 
following: (1) Are the requirements in the regulations 

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clearly stated? (2) Do the regulations contain technical terms or other 
wording that interferes with their clarity? (3) Does the format of the 
regulations (grouping and order of sections, use of headings, 
paragraphing, etc.) aid or reduce their clarity? Would the regulations 
be easier to understand if they were divided into more (but shorter) 
sections? (A ``section'' is preceded by the symbol ``Sec. '' and a 
numbered heading; for example, Sec. 685.215 Consolidation.) (4) Is the 
description of the proposed regulations in the ``Supplementary 
Information'' section of this preamble helpful in the understanding of 
the proposed regulations? How could this description be more helpful in 
making the proposed regulations easier to understand? (5) What else 
could the Department do to make the regulations easier to understand?
    A copy of any comments that concern whether these proposed 
regulations are easy to understand should also be sent to Stanley 
Cohen, Regulations Quality Officer, U.S. Department of Education, 600 
Independence Avenue, SW., (Room 5100 FB-10), Washington, DC 20202-2241.

Regulatory Flexibility Act Certification

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

Paperwork Reduction Act of 1995

    Section 685.301 contains an information collection requirement. As 
required by the Paperwork Reduction Act of 1995, (44 U.S.C. 3507(d)), 
the Department of Education has submitted a copy of this section to the 
Office of Management and Budget (OMB) for its review.
    Collection of information: Reporting loan origination and 
disbursement records, and submitting promissory notes.
    The Department collects information regarding Direct Loan Program 
loan origination. These regulations require postsecondary institutions 
participating in the Direct Loan Program to submit student and parent 
loan origination records, promissory notes, and disbursement records to 
the Secretary within 30 days of disbursement. Direct Loan Program loans 
are usually made once each academic year to eligible parent and student 
borrowers. Promissory notes and origination records are submitted once 
for each loan; funds are disbursed in at least two installments. This 
Loan origination information is needed to establish that a legally-
enforceable loan exists and to service and collect that loan.
    Annual reporting burden for this collection of information is 
estimated to average 0.3 burden hours for each of the projected 
1,986,857 loans. The total annual reporting burden equals 59,606 hours.
    Organizations and individuals desiring to submit comments on the 
information collection requirements should direct them to the Office of 
Information and Regulatory Affairs, OMB, Room 10235, New Executive 
Office Building, Washington, DC 20503; Attention: Desk Officer for U.S. 
Department of Education.
    The Department considers comments by the public on this proposed 
collection of information in--
     Evaluating whether the proposed collection of information 
is necessary for the proper performance of the functions of the 
Department, including whether the information will have practical use;
     Evaluating the accuracy of the Department's estimate of 
the burden of the proposed collection of information, including the 
validity of the methodology and assumptions used;
     Enhancing the quality, usefulness, and clarity of the 
information to be collected; and
     Minimizing the burden of the collection of information on 
those who are to respond, including through the use of appropriate 
automated, electronic, mechanical, or other technological collection 
techniques or other forms of information technology; e.g., permitting 
electronic submission of responses.
    OMB is required to make a decision concerning the collection of 
information contained in these proposed regulations between 30 and 60 
days after publication of this document in the Federal Register. 
Therefore, a comment to OMB is best assured of having its full effect 
if OMB receives it within 30 days of publication. This does not affect 
the deadline for the public to comment to the Department on the 
proposed regulations.

Invitation to Comment

    Interested persons are invited to submit comments and 
recommendations regarding these proposed regulations. All comments 
submitted in response to these proposed regulations will be available 
for public inspection, during and after the comment period, in room 
3053, Regional Office Building 3, 7th and D Streets, SW., Washington, 
DC, between the hours of 8:30 a.m. and 4 p.m., Monday through Friday of 
each week except Federal holidays.

Assessment of Educational Impact

    The Secretary requests 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.

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 Number: 84.268, William D. 
Ford Federal Direct Loan Program)

    Dated: September 13, 1995.
Richard W. Riley,
Secretary of Education.
    The Secretary proposes to amend part 685 of title 34 of the Code of 
Federal Regulations to read as follows:

PART 685--WILLIAM D. FORD FEDERAL DIRECT LOAN PROGRAM

    1. The authority citation for part 685 continues to read as 
follows:

    Authority: 20 U.S.C. 1078a et seq., unless otherwise noted.

    2. Section 685.102, paragraph (b) is amended by revising the 
definitions of ``School origination option 1,'' ``School origination 
option 2,'' and ``Standard origination.''


Sec. 685.102  Definitions.

* * * * *
    (b) * * *
    School origination option 1: In general, under this status the 
school performs the following functions: 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. The 
Secretary may 

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modify the functions performed by a particular school.
    School origination option 2: In general, under this status the 
school performs the following functions: 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. The Secretary may modify the functions 
performed by a particular school.
* * * * *
    Standard origination: In general, under this status the school 
performs the following functions: creates a loan origination record, 
transmits the record to the Secretary, receives funds electronically, 
disburses funds, creates a disbursement record, transmits the 
disbursement record to the Secretary, and reconciles on a monthly 
basis. The Secretary 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. The 
Secretary may modify the functions performed by a particular school.

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

    3. Section 685.201 is amended by revising paragraph 
(a)(2)introductory text, and paragraph (b) to read as follows:


Sec. 685.201  Obtaining a loan.

    (a) * * *
    (2) If the student is eligible for a Direct Subsidized Loan or a 
Direct Unsubsidized Loan, the Secretary or the school in which the 
student is enrolled shall perform specific functions. Unless a school's 
agreement with the Secretary specifies otherwise, the school shall 
perform the following functions:
* * * * *
    (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. Unless a school's agreement 
with the Secretary specifies otherwise, the school shall perform the 
following functions: 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.
* * * * *
(Authority: 20 U.S.C. 1087 a et seq., 1091a)

    4. Section 685.208 is amended by revising paragraphs (a)(1) and 
(a)(2) to read as follows:


Sec. 685.208  Repayment plans.

    (a) General. (1) Except as provided in Sec. 685.215, 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) Except as provided in Sec. 685.215, 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.
* * * * *
(Authority: 20 U.S.C. 1087a et seq.)

    5. Section 685.210 is amended by revising paragraph (a)(2) and by 
adding a new paragraph (a)(3) to read as follows:


Sec. 685.210  Choice of repayment plan.

    (a) * * *
    (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, unless the borrower is consolidating only one FFEL 
Program loan.
    (3) If a borrower consolidating only one FFEL Program loan into the 
Direct Loan Program does not initially select a repayment plan offered 
by the Secretary, the Secretary will designate the extended repayment 
plan described in Sec. 685.208(c) for the borrower.
* * * * *
(Authority: 20 U.S.C. 1087a et seq.)

    6. Section 685.215 is amended by revising paragraph (h)(1), 
redesignating paragraph (h)(2) as paragraph (h)(3) and adding a new 
paragraph (h)(2) to read as follows:


Sec. 685.215  Consolidation.

* * * * *
    (h) * * *
    (1) A borrower may not repay a Direct PLUS Consolidation Loan under 
the income contingent repayment plan;
    (2) A borrower consolidating only one FFEL Program loan into the 
Direct Loan Program may not initially select the standard repayment 
plan (described in Sec. 685.208(b).
* * * * *
    7. Section 685.301 is amended by redesignating paragraphs (a)(5) 
and (a)(6) as paragraph (a)(6)and (a)(7), respectively, adding a new 
paragraph (a)(5) and by adding a new paragraph (d) to read as follows:


Sec. 685.301  Origination of a loan by a Direct Loan Program school.

    (a) * * *
    (5) The date of loan origination is the earlier of--
    (i) The date the promissory note is printed; or
    (ii) The date the origination record is accepted by the Secretary.
* * * * *
    (d) Reporting to the Secretary. (1) A school that originates a loan 
must submit the promissory note, loan origination record, and initial 
and subsequent disbursement record to the Secretary no later than 30 
days following the date of disbursement. A school must submit the loan 
origination record and disbursement record to the Secretary no later 
than 30 days following the date of disbursement for each subsequent 
disbursement.
    (2) A school that participates under standard origination must 
submit the initial and subsequent disbursement record to the Secretary 
no later than 30 days following the date of disbursement. A school must 
submit the disbursement record to the Secretary no later than 30 days 
following the date of disbursement for each subsequent disbursement.

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

[FR Doc. 95-23300 Filed 9-19-95; 8:45 am]
BILLING CODE 4000-01-P