[Federal Register Volume 60, Number 183 (Thursday, September 21, 1995)]
[Proposed Rules]
[Pages 49178-49191]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-23470]




[[Page 49177]]

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Part XIV





Department of Education





_______________________________________________________________________



34 CFR Part 668



Student Assistance General Provisions; Proposed Rule

  Federal Register / Vol. 60, No. 183 / Thursday, September 21, 1995 / 
Proposed Rules   

[[Page 49178]]


DEPARTMENT OF EDUCATION

34 CFR Part 668

RIN 1840-AC17


Student Assistance General Provisions

AGENCY: Department of Education.

ACTION: Notice of proposed rulemaking.

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

SUMMARY: The Secretary proposes to amend the Student Assistance General 
Provisions (General Provisions) regulations. The General Provisions 
regulations govern elements common to all the Federal Student Financial 
Aid programs authorized by Title IV of the Higher Education Act of 
1965, as amended (HEA) (hereafter Title IV Programs). These amendments 
would modify the Secretary's Federal Family Education Loan (FFEL) 
Program default reduction initiative and implement default prevention 
measures in the William D. Ford Federal Direct Loan (Direct Loan) 
Program. These regulations would streamline the Secretary's ability to 
take limitation, suspension, and termination (L,S, and T) action 
against an institution and would prevent an institution from evading 
the consequences of a high FFEL Program cohort default rate, Direct 
Loan Program cohort rate, or weighted average cohort rate.

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

ADDRESSES: All comments concerning these proposed regulations should be 
addressed to Mr. Douglas Laine, Program Specialist, Direct Loan Policy 
Group, Policy Development Division, U.S. Department of Education, P.O. 
Box 23272, Washington, DC 20026-3272. Comments may also be sent through 
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: Mr. Douglas Laine, Program Specialist, 
Direct Loan Policy Group, Policy Development Division, U.S. Department 
of Education, 600 Independence Avenue, SW, room 3045, Regional Office 
Building 3, Washington, DC 20202-5400, 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 is proposing to revise 34 CFR part 668 to enhance the 
Secretary's FFEL Program default reduction initiative and provide 
additional default prevention measures in the Direct Loan Program. The 
Secretary first published regulations to begin the FFEL Program default 
reduction initiative on June 5, 1989. This gave the Department the 
authority to take action to limit, suspend or terminate an 
institution's participation in the Title IV programs based on a high 
FFEL Program cohort default rate. The June 5, 1989 regulations provided 
that the Department may take L, S, and T action against an institution 
if it has an FFEL Program cohort default rate that exceeds 40 percent.
    On July 19, 1991, the Secretary further expanded the default 
reduction initiative to reflect new legislation that made an 
institution ineligible to participate in the FFEL Program if that 
institution had a high FFEL Program cohort default rate for three 
consecutive years, unless the institution could demonstrate to the 
Secretary that exceptional mitigating circumstances would make the loss 
of eligibility inequitable. Currently, under that legislation, an 
institution is subject to the loss of eligibility if it has an FFEL 
Program cohort default rate that equals or exceeds 25 percent for three 
consecutive fiscal years. Under the exceptional mitigating 
circumstances criteria in the Department's regulations, an institution 
may appeal this loss of eligibility if it can demonstrate to the 
satisfaction of the Secretary that it has a completion and placement 
rate of at least 66.6 percent, and either less than 15 percent of its 
students borrow under the FFEL Program or at least 66.6 percent of its 
students come from economically disadvantaged backgrounds.
    The Direct Loan Program was authorized by the Omnibus Budget 
Reconciliation Act of 1993 (Pub. L. 103-66) with the first loans made 
in July 1994. When the Direct Loan Program was authorized, the statute 
mandating the calculation of FFEL Program cohort default rates was not 
revised to include Direct Loan Program loans. Moreover, the statute 
authorizing the Direct Loan Program does not specifically require the 
Secretary to calculate a similar rate for institutions that participate 
in the Direct Loan Program or contain a specific provision under which 
an institution would lose its eligibility to participate in the Direct 
Loan Program based on a default rate. The Secretary has determined, 
however, that it is appropriate to establish a measurement similar to 
the FFEL cohort default rate in the Direct Loan Program. Therefore, the 
Secretary is proposing in regulations to define a measurement similar 
to the FFEL Program cohort default rate under the Direct Loan Program, 
a ``cohort rate'' for Direct Loans, and to establish similar 
institutional eligibility requirements based on the repayment of Direct 
Loans by the institution's former students. The Secretary is proposing 
this change because FFEL Program cohort default rates have been a 
useful measure of institutional performance and have provided the 
Secretary an effective means to reduce defaults by removing high 
default institutions from participation in the FFEL Program. The 
potential loss of eligibility to participate in the FFEL Program based 
on high FFEL Program cohort default rates provides a powerful incentive 
for institutions to keep their FFEL Program cohort default rates low. 
This has resulted in increased protection for students and taxpayers, 
and has improved the integrity of the FFEL Program.
    As in the FFEL Program, the Secretary proposes that exceptional 
mitigating circumstances be taken into consideration in determining 
whether an institution may continue to participate in the Direct Loan 
Program on the basis of its cohort rate. Further, the Secretary is 
proposing to modify the regulations for the FFEL Program to simplify 
the cohort default rate appeal process and to establish fair and 
reasonable measures for exceptional mitigating circumstances, while 
reducing the substantial burden on institutions and the Department that 
exists under the current regulations. Exceptional mitigating 
circumstances under the Direct Loan and FFEL Programs would be the 
same.
    Finally, to make the L, S, and T process more effective, the 
Secretary is proposing to streamline the current L, S, and T procedures 
and to limit the grounds on which the institution may appeal when the 
L, S, or T action is warranted by high default rates. The current L, S, 
and T procedures are exceedingly lengthy and have not effectively 
protected students and Federal taxpayers from institutions 

[[Page 49179]]
whose high FFEL Program cohort default rates are evidence of abuse of 
the Title IV programs. Additionally, the Secretary is proposing to 
prescribe timeframes that would reduce the amount of time an L, S, and 
T action would take to complete. Finally, the Secretary is proposing to 
remove the ``Appendix D defense'' which contains measures for an 
institution to follow to help the institution to reduce its cohort 
default rate. The Secretary believes that the measures included in the 
Appendix D defense, while effective for helping an institution reduce 
its default rate, do not support the continuation of a high FFEL 
Program cohort default rate institution's participation in the Title IV 
programs. The Secretary is proposing that the only means by which an 
institution may successfully appeal an L, S, and T action against its 
participation in the Title IV programs is to demonstrate to the hearing 
officer that its FFEL Program cohort default rate, Direct Loan Program 
cohort rate, or if applicable, weighted average cohort rate, is 
inaccurate, and that a correct recalculation of the rate would result 
in the institution having a rate that is beneath the thresholds that 
make the institution subject to L, S, and T action.

Proposed Regulatory Changes

    Due to the complex nature of these proposed regulations, a chart is 
provided in each major section of the preamble that provides an 
overview of the proposed changes.

Section 668.17  Default Reduction and Prevention Measures

    L, S, and T Authority. The proposed regulations would provide the 
Secretary with the authority to take L, S, and T action against an 
institution if it has an FFEL Program cohort default rate, a Direct 
Loan Program cohort rate, or, if applicable, a weighted average cohort 
rate that is greater than 40 percent for a fiscal year. The Secretary 
is proposing this 40 percent threshold to make his authority to take L, 
S, and T action against an institution participating in the Direct Loan 
Program comparable with such authority under the FFEL Program.
    The proposed regulations would also provide the Secretary with the 
authority to take L, S, and T action against an institution's 
participation in the FFEL Program if it has any combination of an FFEL 
Program cohort default rate, Direct Loan Program cohort rate, or, if 
applicable, a weighted average cohort rate that equals or exceeds 25 
percent for three consecutive fiscal years. Having a combination of 
these rates for three consecutive fiscal years is analogous to having 
FFEL Program cohort default rates that exceed the thresholds for three 
consecutive years. The Secretary is proposing this measure to prevent 
an institution that would not be eligible to participate in the Direct 
Loan Program based on consecutively high Direct Loan Program cohort 
rates or weighted average cohort rates from participating in the FFEL 
Program. The Secretary believes that this action is consistent with the 
statutory requirement that institutions with consecutively high default 
rates lose their eligibility to participate in the FFEL Program.

                                  Action Taken Against Schools by Type of Rate                                  
----------------------------------------------------------------------------------------------------------------
                   Type of rate                      Direct loan program schools        FFEL program schools    
----------------------------------------------------------------------------------------------------------------
40+ percent FFEL Program cohort default rate,       L, S, and T for Title IV.....  L, S, and T for Title IV.    
 Direct Loan Program cohort rate, or weighted                                                                   
 average cohort rate for one year.                                                                              
25 percent or greater Direct Loan Program cohort    Loss of eligibility for        L, S, and T for FFEL Program.
 rate for three consecutive years.                   Direct Loan Program.                                       
25 percent or greater weighted average cohort rate  Loss of eligibility for        L, S, and T for FFEL Program.
 for three consecutive years.                        Direct Loan Program.                                       
----------------------------------------------------------------------------------------------------------------

    Direct Loan Program cohort rate and weighted average cohort rate. 
The Secretary proposes to calculate a Direct Loan Program cohort rate 
or weighted average cohort rate to use as a measure to determine if an 
institution should remain eligible to participate in the Direct Loan 
Program. The Secretary is proposing to use different formulas to 
calculate these rates for different sectors of institutions.
    For a public institution, private nonprofit institution, or degree-
granting proprietary institution, the Secretary proposes to calculate a 
Direct Loan Program cohort rate or weighted average cohort rate based 
on the number of an institution's current and former students who enter 
repayment on a Direct Loan in a fiscal year and who, by the end of the 
following fiscal year, are in default on those loans. This is the same 
formula the Secretary is required by section 435(a) of the HEA to use 
to calculate cohort default rates under the FFEL Program.
    For non-degree-granting proprietary institutions, the Secretary is 
proposing to calculate Direct Loan Program cohort rates or weighted 
average cohort rates based on the percentage of students who enter 
repayment in a fiscal year and who, by the end of the following fiscal 
year, are either in default or are in repayment under the income 
contingent repayment (ICR) plan, and have scheduled monthly payments 
that are less than $15 per month, and that payment is less than the 
interest that is accruing on the loan (i.e., in negative amortization).
    If there are both FFEL Program and Direct Loan Program loans 
entering repayment in the institution's cohort, the Secretary will 
calculate a weighted average cohort rate for the institution. As in the 
FFEL Program, the Secretary will base the Direct Loan Program cohort 
rate or weighted average cohort rate on borrowers, not loans. For 
example, if a student enters repayment on both FFEL Program and Direct 
Loan Program loans so as to be in the same cohort, the student will be 
counted only once in the calculation used to calculate the rate. 
However, an institution will continue to have an FFEL Program cohort 
default rate as long as it has former students entering repayment on 
FFEL Program loans. Such an institution will continue to be subject to 
loss of eligibility to participate in the FFEL Program or be subject to 
L, S, and T action based on its FFEL Program cohort default rate.
    A ``weighted average'' cohort rate is calculated by taking the 
percentage of students who entered repayment on FFEL Program and Direct 
Loan Program loans in a fiscal year received for attendance at the 
institution (or on the portion of a loan made under the Federal Direct 
Consolidation Loan or Federal Consolidation Loan Programs that is used 
to repay those loans), who are in default before the end of the fiscal 
year immediately following the year in which they entered repayment, 
and, for non-degree-granting institutions, are in repayment under the 
income contingent 

[[Page 49180]]
repayment plan at the end of that following fiscal year and have 
scheduled payments that are less than $15 per month and that payment 
results in negative amortization.

                                      Borrowers Included in Types of Rates                                      
----------------------------------------------------------------------------------------------------------------
       Type of institution                    Type of rate             Defaulted borrowers      ICR component   
----------------------------------------------------------------------------------------------------------------
Public, private-nonprofit, and     FFEL Program Cohort Default Rate.  Yes.................  No.                 
 degree-granting proprietary                                                                                    
 institutions.                                                                                                  
                                   Direct Loan Program Cohort Rate..  Yes.................  No.                 
                                   Weighted Average Cohort Rate.....  Yes.................  No.                 
Non-Degree-Granting Proprietary    FFEL Program Cohort Default Rate.  Yes.................  No.                 
 Institutions.                                                                                                  
                                   Direct Loan Program Cohort Rate..  Yes.................  Yes.                
                                   Weighted Average Cohort Rate.....  Yes.................  Yes.                
----------------------------------------------------------------------------------------------------------------

    If an institution has less than 30 former students entering 
repayment in a fiscal year on Direct Loan and FFEL Program loans 
received at that institution, the Secretary will calculate the 
institution's Direct Loan Program cohort rate or weighted average 
cohort rate for that fiscal year based on the institution's former 
students who enter repayment on their Direct Loans or FFEL Program 
loans over the three most recent fiscal years.
    A loan will be considered in default for purposes of a Direct Loan 
Program cohort rate or weighted average cohort rate for all 
institutions if a borrower or endorser has failed to make an 
installment payment when due provided that this failure has persisted 
for 270 days. The Secretary has chosen 270 days because this closely 
approximates the date a default claim is paid under the FFEL Program. 
The date a default claim is paid by a guaranty agency is used as the 
date the loan defaults for FFEL Program cohort default rates. A loan 
will not be considered in default if, after going into default, the 
borrower has made 12 consecutive on-time monthly payments under 34 CFR 
685.211(e) on the loan before the end of the fiscal year following the 
fiscal year the loan entered repayment.
    The Secretary has chosen to include a minimum payment component in 
defining the Direct Loan Program cohort rate and weighted average 
cohort rate for non-degree-granting proprietary institutions for 
several reasons. The Secretary believes that this is an appropriate 
performance-based measure to assess a borrower's ability to repay a 
student loan and the institution's quality of training. The Secretary 
is concerned that without such a measure an institution could have a 
low Direct Loan Program cohort rate or weighted average cohort rate 
when its former students are only making minimal payments on their 
loans. The Secretary believes that this measure is needed to prevent an 
institution from effectively avoiding the effects of its failure to 
provide appropriate training by encouraging its students to repay their 
loans under the ICR plan. Under the ICR plan, a borrower with a low 
income may have scheduled monthly payments that are very low or zero. 
The $15 payment rate was chosen because it is the approximate amount a 
borrower would have to pay if his or her income is at the poverty level 
as determined by the Department of Health and Human Services. The 
Secretary believes that if a sufficient proportion of borrower incomes 
is so low that the scheduled monthly payments for those borrowers under 
the ICR program are less than $15 per month and those payment amounts 
result in negative amortization, this is generally evidence that the 
institution has not provided those borrowers with the education or 
training needed to obtain gainful employment that can provide the 
borrowers with sufficient incomes to repay the student loans incurred 
to attend the institution. The Secretary believes that such loans would 
likely go into default if the ICR plan were not available. The negative 
amortization factor was included with the $15 dollar payment in order 
to exclude from the default calculation borrowers with incomes much 
higher than the poverty level who have small debts. The Secretary is 
proposing to use the minimum payment rate for non-degree-granting 
proprietary institutions because these institutions are in business to 
provide students with education or training needed to secure 
employment. A borrower's repayment schedule under the ICR plan will 
directly reflect the value of the education or training provided by the 
institution in the marketplace. Further, the former student borrowers 
of non-degree-granting proprietary institutions are at the highest risk 
of default among all the sectors of institutions and the Secretary 
believes that for this reason, the use of the ICR plan by former 
students of these institutions be closely monitored.
    The Secretary invites public comment regarding the use of the 
minimum payment under the ICR plan that may be used for the Direct Loan 
Program cohort rate for certain sectors of institutions. In addition, 
the Secretary is interested in knowing if the public believes the 
Secretary should implement measures to prevent an institution from 
evading the proposed rules under which a Direct Loan Program cohort 
rate and weighted average cohort rate are calculated for non-degree-
granting proprietary institutions if such an institution switched to a 
non-profit status. The Secretary is also interested in receiving public 
comment regarding other possible measures that may be used to determine 
if an institution should be able to continue to participate in the 
Direct Loan Program or FFEL Program. The Secretary is especially 
interested in public comment on the following possible alternative 
measures to determine if an institution should continue to participate 
in the Direct Loan Program: (1) A percentage of Direct Loan borrowers 
paying under the ICR plan whose scheduled payments are less than the 
amount of interest that accrues monthly on their loans, i.e., in 
negative amortization, and (2) a percentage of the institution's former 
students who are making payments under the ICR plan whose income is 
less than a certain amount, such as $15,000 (because income is a major 
factor in calculating monthly payments under the ICR plan).
    The Secretary is also interested in public comment regarding a 
measure for borrowers for whom payment has been deferred for an 
extended period of time under the economic hardship or 

[[Page 49181]]
unemployment deferment or forbearance. The Secretary is considering 
using such a measurement to trigger L, S, and T action against an 
institution participating in the FFEL and Direct Loan programs if a 
high percentage of its former students have forborne repayment on their 
loans or have deferred repayment on their loans for an extended period 
of time because of unemployment or economic hardship. Similar to the 
Secretary's concern that institutions may attempt to evade the 
consequences of a high Direct Loan Program cohort rate or weighted 
average cohort rate by encouraging students to use the ICR plan, the 
Secretary is concerned that institutions are evading the consequences 
of a high FFEL Program cohort default rate by encouraging and assisting 
a high percentage of their former students to obtain deferments or 
forbearance solely for the purpose of keeping their loans out of 
default until the period the Department uses to calculate FFEL Program 
cohort default rate has elapsed. Because a deferment or forbearance 
generally lasts for one year, an institution generally needs to assist 
a former student to obtain only one deferment or forbearance to ensure 
that the former student does not default during the period the 
Department uses to calculate the FFEL Program cohort default rate. 
Finally, the Secretary specifically requests comment regarding how a 
borrower who has a scheduled ICR payment of less than $15 and who would 
qualify for the economic hardship deferment should be treated in the 
Direct Loan Program cohort rate or weighted average cohort rate 
calculation.
    Loss of eligibility to continue to participate in the Direct Loan 
Program. An institution with any combination of an FFEL Program cohort 
default rate, a Direct Loan Program cohort rate, or a weighted average 
cohort rate calculated by the Secretary that is equal to or greater 
than 25 percent for three consecutive fiscal years would cease to be 
eligible to participate in the Direct Loan Program beginning 30 days 
from the date it receives notification of the loss of eligibility 
unless it can demonstrate to the satisfaction of the Secretary that 
exceptional mitigating circumstances would make the loss of eligibility 
inequitable. The Secretary will place such an institution on 
reimbursement until the 30th day following the institution's receipt of 
the notification of the loss of eligibility or, if the institution 
appeals, until the appeal is decided. Once the institution's appeal is 
decided, the Secretary will take the institution off reimbursement only 
if the appeal is successful. If the appeal is denied, the institution 
will not be eligible to participate in the Direct Loan Program for the 
remainder of the current fiscal year plus the following two fiscal 
years.

                               Eligibility Status of Institutions With High Rates                               
----------------------------------------------------------------------------------------------------------------
                   Type of rate                          Direct loan program                FFEL program        
----------------------------------------------------------------------------------------------------------------
25 percent or greater FFEL Program cohort default   Loss of eligibility for        Loss of eligibility for the  
 rate for three consecutive years.                   Direct Loan Program.           FFEL Program.               
25 percent or greater Direct Loan Program cohort    Loss of eligibility for        L,S, and T for FFEL Program  
 rate for three consecutive years.                   Direct Loan Program.           only.                       
25 percent or greater weighted average cohort rate  Loss of eligibility for        L,S, and T for FFEL Program  
 for three consecutive years.                        Direct Loan Program.           only.                       
----------------------------------------------------------------------------------------------------------------

    The Secretary has chosen to eliminate institutions from the Direct 
Loan Program based on high cohort rates for several reasons. First, the 
Secretary believes it is imperative that institutions that would have 
high FFEL Program cohort default rates not be able to evade the 
consequences of that rate by participating in the Direct Loan Program, 
which currently has no default rate definition. Second, the Secretary 
is firmly committed to protecting students and Federal taxpayers from 
unscrupulous institutions that participate heavily in the loan programs 
but do not provide quality educational services to their students. The 
sanctions the Secretary is authorized to impose under the HEA and 
regulations on institutions that participate in the FFEL Program have 
proven to be a successful way to protect students, the Federal 
taxpayer, and the integrity of the loan programs. Therefore, the 
Secretary is proposing these regulations to provide him with the 
authority to take similar actions against institutions that have a high 
percentage of students that do not repay their Direct Loan Program 
loans.
    The Secretary does not have the authority to amend or add to the 
definition of the FFEL Program cohort default rate because that 
definition is specifically mandated in statute. The Secretary is, 
therefore, prohibited from adding to the FFEL Program cohort default 
rate a component that measures a minimum payment amount. The Secretary 
also does not have the authority to immediately terminate an 
institution's eligibility to participate in the FFEL Program if it has 
a Direct Loan Program cohort rate or weighted average cohort rate that 
equals or exceeds 25 percent for three consecutive years. This means 
that an institution could have an FFEL Program cohort default rate of 
25 percent or more for two years and a Direct Loan Program cohort rate 
of 25 percent for one year and remain eligible for the FFEL Program 
after it has lost its eligibility to participate in the Direct Loan 
Program. In this case, the Secretary will take L, S, and T action 
against the institution's participation in the FFEL Program.
    Under these proposed rules, if an institution's former students 
enter repayment under both the FFEL Program and the Direct Loan Program 
in a fiscal year, the Secretary would calculate a weighted average 
cohort rate to determine if an institution would lose its eligibility 
to participate in the Direct Loan Program. The Secretary will continue 
to use only FFEL Program loans to calculate an FFEL Program cohort 
default rate for that institution which will trigger a statutory loss 
of eligibility to participate in the FFEL Program. True equity between 
the Direct Loan and FFEL programs on this issue would require a 
statutory change that gives the Secretary authority to establish, in 
regulations, institutional eligibility requirements for the FFEL 
Program similar to the statutory authority for the Direct Loan Program, 
thus allowing him to move quickly to terminate any institution's 
participation in the FFEL Program when that institution's FFEL Program 
cohort default rate, Direct Loan cohort rate, or weighted average 
cohort rate warrants an action. The loss of eligibility provision in 
section 435 (a) of the HEA does not authorize the Secretary to make an 
institution ineligible to participate in the FFEL Program if it has 
Direct Loan Program cohort rates or weighted average cohort rates that 
exceed 25 percent for three consecutive years. However, under these 
regulations, the 

[[Page 49182]]
Secretary will consider excessive Direct Loan Program cohort rates or 
weighted average cohort rates as a basis to take L, S, and T action 
against an institution's participation in the FFEL Program.
    In addition to establishing this strict eligibility requirement 
under the Direct Loan Program, the Secretary will provide Direct Loan 
institutions with certain tools to help manage and reduce their Direct 
Loan Program cohort default rates. While the Secretary believes that 
the repayment plans available under the Direct Loan Program, coupled 
with the frequent borrower contact maintained by the Department's loan 
servicing efforts, will result in fewer defaults than in the FFEL 
Program, the Secretary is committed to developing, and making available 
to institutions, tools that will enable them to work effectively with 
borrowers to prevent defaults. These tools will include reports on 
delinquent borrowers, access to borrower information on the toll-free 
servicing telephone number, and free loan counseling materials for use 
during both entrance and exit interviews with borrowers. The Secretary 
invites public comment on the types and frequency of assistance that 
institutions need to help prevent Direct Loan defaults.
    Exceptional Mitigating Circumstances. The Secretary proposes to 
modify the exceptional mitigating circumstances and the appeal process 
under which an institution may appeal the statutory loss of its 
eligibility to participate in the FFEL Program and the proposed loss of 
its eligibility to participate in the Direct Loan Program. Exceptional 
mitigating circumstances would be the same for both the Direct Loan and 
FFEL Programs. The Secretary believes that the current standards for 
exceptional mitigating circumstances are burdensome on an institution 
and administratively difficult for the Department to administer. For 
these reasons, the Secretary is proposing to change the exceptional 
mitigating circumstances and require that any appeal based on an 
exceptional mitigating circumstance be verified by an independent 
auditor prior to its submission to the Secretary. Under the proposed 
rules, any of the following criteria may be used as exceptional 
mitigating circumstances:

Exceptional Mitigating Circumstances

    1. Participation Rate Index equal to or less than 0.0375 (Rate 
times percentage of students participating in the FFEL or Direct Loan 
programs)
    2. 70 percent or greater completion rate and 70 percent or more 
students come from economically disadvantaged backgrounds, for public 
or private-nonprofit institutions.
    3. 50 percent or greater placement rate and 70 percent or more 
students come from economically disadvantaged backgrounds, for 
proprietary institutions.
     Participation rate index: The participation rate index is 
a new criterion based on an institution's FFEL Program cohort default 
rate, Direct Loan Program cohort rate, or weighted average cohort rate 
and the percent of an institution's students who were enrolled on at 
least a half-time basis that borrow under the FFEL or Direct Loan 
programs. This rate would be calculated by multiplying the 
institution's FFEL Program cohort default rate, Direct Loan Program 
cohort rate, or, if applicable, its weighted average cohort rate by the 
percent of the institution's students who were enrolled on at least a 
half-time basis that borrowed under that loan program during a 12-month 
period that ended during the six months immediately preceding the 
fiscal year used to determine the cohort of borrowers for the 
institution's rate. If this product is equal to or less than 0.0375, 
the institution would meet an exceptional mitigating circumstance. The 
Secretary has chosen 0.0375 as the participation rate index standard 
because, under the current mitigating circumstances, a borrower 
participation rate of 15 percent or less is acceptable as part of one 
of the exceptional mitigating circumstances. A cohort default rate of 
25 percent for three consecutive years was the minimum rate that would 
trigger loss of eligibility. The Secretary has formulated the 0.0375 
participation rate index criterion based on these percentages; 
0.25 x 0.15=0.0375. Therefore the Secretary is proposing to use 0.0375 
as the index.
    For example, under this formula, an institution with an FFEL 
Program cohort default rate of 28 percent and a student borrower 
participation rate of 13 percent would be able to continue to 
participate in the FFEL program because 0.28 x 0.13=0.0364, which is 
less than 0.0375. The participation rate index criterion may be used by 
any institution that has an FFEL Program cohort default rate, Direct 
Loan Program cohort rate, or, if applicable, a weighted average cohort 
rate of less than 40 percent for the most recent fiscal year. In order 
to appeal under this criterion, an institution would only need to 
submit to the Secretary a statement certifying the number of its 
students who were enrolled on at least a half-time basis during a 12-
month period that has ended during the six months immediately preceding 
the fiscal year used to determine the cohort of borrowers for the 
institution's borrower participation rate, and the number of those 
students that borrowed under the FFEL Program or Direct Loan Program, 
along with identifying information for those borrowers so they may be 
verified by the Secretary. In particular, the institution would need to 
provide the Secretary with the name, address, and social security 
number of each of those students. This will help the Department to 
verify this information through the National Student Loan Data System.
     Economically disadvantaged background rate and completion 
or placement rate: This exceptional mitigating circumstance criterion 
is derived from the current criteria which use completion rates, 
placement rates and the percent of the institution's students from 
economically disadvantaged backgrounds. Under this proposed rule, an 
institution would meet this exceptional mitigating circumstance if it 
can demonstrate that 70 percent or more of its student population, over 
a 12-month period that ended during the six months immediately 
preceding the fiscal year used to determine the cohort of borrowers for 
the institution's FFEL Program cohort default rate, Direct Loan Program 
cohort rate, or weighted average cohort rate, came from an economically 
disadvantaged background, and either:
    (1) For a public or private nonprofit institution, 70 percent of 
its students who were enrolled on at least a half-time basis, and were 
originally scheduled to complete their programs during a 12-month 
period that has ended during the six months immediately preceding the 
fiscal year used to determine the cohort of borrowers in the 
institution's rate, have completed their programs; or
    (2) For a proprietary institution, 50 percent of its students 
originally scheduled to complete the programs during a 12-month period 
that has ended during the six months immediately preceding the fiscal 
year used to determine the cohort of borrowers used to calculate the 
institution's rate are currently employed, or were employed for at 
least 13 weeks, in an occupation related to the training they received, 
or are enrolled in a higher level educational program at another 
institution, or were enrolled such an institution for at least 13 
weeks, for which the appealing institution's educational program 
provided substantial preparation.
    For purposes of the completion rate and placement rate, a student 
is originally scheduled, at the time of 

[[Page 49183]]
enrollment, to complete the educational program on the date when the 
student will have been enrolled in the program for the amount of time 
normally required to complete the program. The ``amount of time 
normally required to complete the program'' is the period of time 
specified in the institution's enrollment contract, catalog, or other 
materials, for completion of the program by a full-time student, or the 
period of time between the date of enrollment and the anticipated 
graduation date appearing on the student's loan application, if any, 
whichever is less.
    For purposes of the completion rate, a student is considered to 
have completed the program if the student received a degree, 
certificate, or other recognized educational credential from the 
institution, transferred to a higher level educational program at 
another institution, or remained enrolled and was making satisfactory 
academic progress toward completion of the educational program.
    The Secretary has chosen a 50 percent placement rate based on the 
completion rate and placement rate standards that are used to determine 
if certain programs are eligible for purposes of the FFEL Program. See 
section 481(e) of the HEA. This section mandates that such a program 
have a verified completion rate of at least 70 percent and a verified 
placement rate of 70 percent. The 50 percent threshold is derived from 
these two percentages. If an institution has a 70 percent completion 
rate and 70 percent of those students obtain employment in a relevant 
occupation, the institution will have a 49 percent placement rate under 
the proposed placement rate. The Secretary has chosen 50 percent 
because he believes an institution should exceed this threshold to be 
considered under an exceptional mitigating circumstance.
    For purposes of the placement rate, a former student is considered 
placed if the student is employed or had been employed for at least 13 
weeks following his or her last day of attendance at the institution, 
or enrolled in a higher level educational program at another 
institution for which the appealing institution's educational program 
provided substantial preparation.
    The Secretary is proposing to remove the 15 percent or less student 
loan borrower rate as well as the 66.6 percent completion rate and 66.6 
placement rate as an exceptional mitigating circumstance. In place of 
the loan borrower rate, the Secretary is proposing to add the 
participation rate index criterion because he believes that, when an 
institution has such a small percent of its students borrow under the 
Direct Loan or FFEL Programs, borrower behavior may not reflect the 
quality of education at the institution. An appeal under this criterion 
is limited to institutions that have a Direct Loan Program cohort rate, 
an FFEL Program cohort default rate, or, if applicable, a weighted 
average cohort rate, that is less than 40 percent for a fiscal year. 
When more than 40 percent of all students at an institution are not 
repaying their loans, even if this percentage is based on a small 
proportion of the student body, the Secretary considers the institution 
to represent a significant financial risk for the taxpayers. Further, 
the Secretary believes that future student borrowers at the institution 
should be protected from the risks associated with borrowing Federal 
loans to pay for attending the institution.
    Under the current exceptional mitigating circumstances, an 
institution can appeal if it has a completion rate of 66.6 percent or 
more, a placement rate of 66.6 percent or more, and if 66.6 percent or 
more of its students came from an economically disadvantaged 
background. The proposed regulations would make an appeal less 
burdensome to institutions because it would examine the completion, 
placement, and economically disadvantaged rates of the institution's 
former students over a shorter period of time. These modifications will 
also make the students who are included in the completion, placement 
and economically disadvantaged rates more representative of the 
borrowers included in the cohort used to determine the institution's 
FFEL Program cohort default rate, Direct Loan Program cohort rate, or 
weighted average cohort rate. Although the formula used for calculating 
the completion rate and student population from economically 
disadvantaged backgrounds is essentially the same, the institution 
would only need to review students who attended the institution (or for 
the completion rate, those students who were scheduled to complete 
their programs), during the 12-month period that preceded the fiscal 
year used to determine the cohort for the institution's FFEL Program 
cohort default rate, Direct Loan Program cohort rate, or weighted 
average cohort rate. The current regulations require an institution to 
review students over a 24-month period.
    The Secretary is also proposing to modify the placement rate 
criterion for appeals to make it available only to proprietary 
institutions of higher education. The proposed placement rate will be 
measured by using the percent of the institution's former students who 
were scheduled to complete their programs, during a 12-month period 
that ended during the six months immediately preceding the fiscal year 
used to determine the cohort of borrowers for the institution's FFEL 
Program cohort default rate, Direct Loan Program cohort rate, or 
weighted average cohort rate, who either received a job in an 
occupation related to the training they received for at least 13 weeks 
or transferred to a higher level educational program. The current 
regulations base the placement rate on only those students who complete 
their educational programs in a recent 24-month period chosen by the 
institution. The Secretary has decided to use the students who were 
scheduled to graduate during the 12-month period preceding the fiscal 
year in which the cohort is determined for the institution's rate 
because it will be more representative of the former students in that 
cohort. The Secretary also believes that the calculation of a 
completion rate in this fashion is more equitable for proprietary 
institutions because students receiving training to obtain employment 
in a particular field may gain such employment before they complete 
their programs.
    The Secretary is also proposing to revise the appeal procedures to 
make them easier for the institutions as well as the Department to 
manage while maintaining program integrity to ensure speedy resolution 
of appeals. Under the current appeal process, to remain eligible to 
participate in the FFEL Program during an appeal process, an 
institution is required to notify the Secretary within seven days 
following its receipt of its notification of the loss of eligibility 
that it intends to appeal the loss. The institution must then submit 
all the required information to support its appeal within 30 calendar 
days following the notification of loss of eligibility. The Secretary 
is proposing to remove from the regulations the requirement that the 
institution notify the Secretary in writing within the seven days that 
it intends to appeal in order to remain eligible during the appeal.
    The Secretary is also proposing to remove the requirement that an 
institution notify the Secretary that it has requested verification of 
its FFEL Program cohort default rate data from the relevant guaranty 
agencies. Under the proposed regulations, an institution would remain 
eligible to participate in the FFEL Program or Direct Loan Program 
during the appeal if it submits a complete and accurate appeal, under 
the guidelines for exceptional mitigating 

[[Page 49184]]
circumstances or inaccurate data, within 30 days from the date it is 
notified by the Secretary that it is no longer eligible to participate 
in the FFEL Program or Direct Loan Program.
    Under the current regulations, if an institution requests 
verification of the data used to determine its cohort default rate from 
a guaranty agency, the institution remains eligible to participate in 
the FFEL Program until the guaranty agency verifies the data. Under the 
proposed rules, an institution would not remain eligible to participate 
beyond the 30-day period if the Secretary has not received the verified 
data by the 30th day following the notification of loss of eligibility. 
The Secretary believes that the new procedures for issuance and review 
of draft FFEL Program cohort default rates, that allow an institution 
to review the draft rates for error prior to the issuance of the 
official rates, will significantly improve the accuracy of the official 
FFEL Program cohort default rate. The Secretary will provide Direct 
Loan Program institutions with Direct Loan Program cohort rates, or if 
applicable, weighted average cohort rates, a similar opportunity to 
review the data used to determine those rates to ensure that they are 
accurate before the rates are made official. An institution should be 
able to resolve any additional discrepancies it believes exist in the 
FFEL Program cohort default rate, Direct Loan cohort rate, or weighted 
average cohort rate within 30 days.

Exceptional Mitigating Circumstances Appeal Process

     Institution receives notice that its participation in the 
FFEL or Direct Loan program will end in 30 days unless the institution 
appeals.
     The institution must submit a complete written appeal 
within 30 days after receiving the notice of loss of eligibility. An 
appeal will not be accepted after the 30th day.
     The Secretary issues a final decision on the institution's 
appeal within 45 days after receiving the appeal.
     No oral hearing is provided.

Subpart G--Fine, Limitation, Suspension, and Termination Proceedings

    The proposed rules would provide the Secretary with the authority 
to take L, S, and T action against an institution that has a Direct 
Loan Program cohort rate or weighted average cohort rate that is 
greater than 40 percent for a fiscal year. The Secretary believes that 
such an authority is needed to protect students and taxpayers from 
abuse of the Direct Loan Program. The Secretary has chosen a 40 percent 
Direct Loan Program cohort rate to parallel the 40 percent default rate 
threshold that triggers L, S, and T action against an institution that 
participates in the FFEL Program under 34 CFR 668.17(a)(1). Further, 
under the proposed rules, the Secretary could initiate an L, S, or T 
action against an institution's participation in the FFEL Program if it 
has a combination of an FFEL Program cohort default rate, Direct Loan 
Program cohort rate, or, if applicable, weighted average cohort rate 
that equals or exceeds 25 percent for three consecutive years. For 
example, an L, S, and T action could be taken against the institution 
if it has an FFEL Program cohort default rate that equals or exceeds 25 
percent for one fiscal year, and a weighted average cohort rate for 
each of the two following fiscal years that equals or exceeds 25 
percent. Such an institution is not subject to statutory loss of 
eligibility to participate in the FFEL Program. The Secretary is 
proposing this provision to prevent an institution that has lost its 
eligibility to participate in the Direct Loan Program, or attempts to 
evade a potential loss of eligibility to participate in the Direct Loan 
Program, from participating in the FFEL Program. The Secretary believes 
that such an institution presents an unreasonable risk to students and 
the Federal taxpayer. Under the proposed rules, the Secretary will 
cease any L, S, and T action against an institution's participation in 
the FFEL Program if that institution successfully appeals its loss of 
eligibility to participate in the Direct Loan Program under exceptional 
mitigating circumstances.
    The Secretary is also proposing to revise the procedures and 
appeals for an L, S, and T action he may initiate when an institution 
has an FFEL Program cohort default rate, Direct Loan Program cohort 
rate, or, if applicable, a weighted average cohort rate above 40 
percent for a fiscal year or a combination of an FFEL Program cohort 
default rate, Direct Loan Program cohort rate or weighted average 
cohort rate that equals or exceeds 25 percent for three consecutive 
fiscal years. Under these revised procedures, an institution would have 
30 days to notify the designated department official that it intends to 
appeal the L, S, or T; otherwise the action would become effective on 
the 31st day. If the institution intends to appeal, it may request a 
hearing or it may send written material to the designated department 
official within 30 days after it receives notice of the Secretary's 
intent to initiate L, S, or T action. If a hearing is requested, the 
hearing officer must schedule a hearing within 15 days of the date the 
institution notifies the designated department official that it 
requests the hearing.
    The designated department official or the hearing officer may only 
consider the accuracy of the institution's FFEL Program cohort default 
rate, Direct Loan Program cohort rate, or, if applicable, the weighted 
average cohort rate to determine if the L, S, or T action should be 
upheld or dismissed. In light of the extensive process for determining 
default rates, the institution will have the burden of proving that the 
calculation of the rate was wrong. The Secretary believes it is 
appropriate to presume that the rates are accurate unless the 
institution can present clear and convincing evidence that the rate 
identified in the notice of intent is not final (i.e., the default rate 
appeal is pending) or does not accurately reflect the final rate 
determined by the Department. The designated department official or the 
hearing officer shall issue a final determination to uphold or dismiss 
the L, S, or T action within 30 days after the date the written 
material is received by the designated department official or the date 
the hearing is concluded, whichever is later.
    In addition to streamlining the L, S, and T process, the Secretary 
is proposing to eliminate Appendix D as a defense from L, S, and T 
action. Appendix D was created to protect institutions from the 
consequences of L, S, and T action while they took action to reduce 
their FFEL Program cohort default rates. The Secretary believes that 
institutions have had ample time to exercise the measures provided in 
this section to reduce their FFEL Program cohort default rates and keep 
them low. The Secretary does not believe that the implementation of 
default reduction measures by an institution justifies the continued 
participation of a high default institution in the Title IV programs. 
However, the Secretary encourages institutions to continue to implement 
these measures to keep their default rates low.

Streamlined L, S, and T Procedures

     Institution receives notice stating that the L, S, or T 
action will be effective in 30 days unless the institution requests a 
hearing.
     Institution must request the hearing prior to the 
effective date.
     The hearing will be scheduled within 15-20 days after the 
request is received. 

[[Page 49185]]

     The institution may appeal the proposed action only on the 
basis of the accuracy of the rate.
     The L, S, and T action is effective 30 days after the 
hearing if the hearing officer decides the action is warranted.

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 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. 668.17 Default Reduction and Prevention Measures) (4) 
Is the description of the proposed regulations in the ``Supplementary 
Information'' section of this preamble helpful in the understanding of 
the proposed regulations? How could this description be more helpful in 
making the proposed regulations easier to understand? (5) What else 
could the Department do to make the regulations easier to understand?
    A copy of any comments that concern whether these proposed 
regulations are easy to understand should also be sent to Stanley 
Cohen, Regulations Quality Officer, U.S. Department of Education, 600 
Independence Avenue, SW., (Room 5100 FB-10), Washington, D.C. 20202.

Regulatory Flexibility Act Certification

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

Paperwork Reduction Act of 1995

    Section 668.17 contains information collection requirements. 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: Exceptional Mitigating Circumstances 
Appeals
    The Student Assistance General Provisions regulations codify the 
procedures and the exceptional mitigating circumstances criteria under 
which an institution may appeal a loss of eligibility to participate in 
the FFEL Program or Direct Loan Program. The information to be 
collected may include one of the following: (1) For the participation 
rate index, the number of an institution's students enrolled on at 
least a half-time basis who enrolled in the appealing institution 
during a 12-month period and the number of those students who borrowed 
under the FFEL and Direct Loan programs during that 12-month period and 
the name, address and social security number of those students; (2) for 
the completion rate, the number of an institution's students who were 
scheduled to complete their programs in a 12-month period and the name, 
address and social security number and, if applicable, the name of the 
institution and program to which the student transferred, for each of 
those students who actually completed; (3) for the placement rate, the 
number of students who were scheduled to complete their programs during 
a 12-month period and the name, address, social security number, job 
title, dates during which the student was employed, and the employer's 
name and address for all those students who obtained employment in an 
occupation related to the education or training received. The 
Department needs and uses the information to determine whether the 
institution may continue to participate in the FFEL or Direct Loan 
programs.
    All information is to be collected and reported only once and only 
if the institution has a FFEL Program cohort default rate, Direct Loan 
Program cohort rate or weighted average cohort rate that equals or 
exceeds 25 percent for three consecutive fiscal years. Annual public 
reporting and recordkeeping burden contained in the collection of 
information proposed in these regulations is estimated to be 80 hours 
per response for 200 respondents (total annual reporting and 
recordkeeping burden equals 16,000 hours) including the time for 
reviewing instructions, searching existing data sources, gathering and 
maintaining the data needed, completing and reviewing collection of 
information, and submitting materials.
    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 

[[Page 49186]]
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 
3045, Regional Office Building 3, 7th and D Streets, SW., Washington, 
DC, between the hours of 8:30 a.m. and 4 p.m., Monday through Friday of 
each week except federal holidays.

Assessment of Educational Impact

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

List of Subjects in 34 CFR Part 668

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

    Dated: September 14, 1995.
Richard W. Riley,
Secretary of Education.
(Catalog of Federal Domestic Assistance Numbers: 84.007 Supplemental 
Educational Opportunity Grant Program; 84.032 Stafford Loan Program; 
84.032 PLUS Program; 84.032 Supplemental Loans for Students Program; 
84.033 College Work-Study Program; 84.038 Perkins Loan Program; 
84.063 Pell Grant Program; 84.069 State Student Incentive Grant 
Program; and 84.226 Income Contingent Loan Program)

    The Secretary proposes to amend part 668 of title 34 of the Code of 
Federal Regulations as follows:

PART 668--STUDENT ASSISTANCE GENERAL PROVISIONS

    1. The authority citation for part 668 continues to read as 
follows:

    Authority: 20 U.S.C. 1085, 1088, 1091, 1092, 1094, and 1148, 
unless otherwise noted.

    2. Section 668.17 is amended by redesignating paragraphs (f), (g), 
and (h) as paragraphs (g), (h) and (i) respectively, and revising 
paragraphs (a) through (f) to read as follows:


Sec. 668.17  Default reduction and prevention measures.

    (a) Default rates. (1) If the FFEL Program cohort default rate, 
Direct Loan Program cohort rate, or if applicable, weighted average 
cohort rate for an institution exceeds 20 percent for any fiscal year, 
the Secretary notifies the institution of that rate.
    (2) The Secretary may initiate a proceeding under subpart G of this 
part to limit, suspend, or terminate the participation of an 
institution in the Title IV, HEA programs, if--
    (i) For an institution whose former students enter repayment only 
on FFEL Program loans in a fiscal year, the FFEL Program cohort default 
rate for that institution exceeds 40 percent for that fiscal year;
    (ii) For an institution whose former students enter repayment only 
on Direct Loan Program loans in a fiscal year, the Direct Loan Program 
cohort rate for that institution exceeds 40 percent for that fiscal 
year; or
    (iii) For an institution that has both FFEL Program and Direct Loan 
Program loans entering repayment in the same fiscal year, the weighted 
average cohort rate for that institution exceeds 40 percent for that 
fiscal year.
    (3) Unless an institution is subject to loss of eligibility to 
participate in the FFEL Program under paragraph (b)(1) of this section, 
the Secretary initiates a proceeding under subpart G of this part to 
limit, suspend, or terminate an institution's participation in the FFEL 
Program if the institution, for three consecutive fiscal years, has a 
combination of--
    (i) An FFEL Program cohort default rate that is equal to or greater 
than 25 percent if only FFEL loans enter repayment in that cohort;
    (ii) A Direct Loan Program cohort rate that is equal to or greater 
than 25 percent if only Direct Loan Program loans enter repayment in 
that cohort; or
    (iii) A weighted average cohort rate that is equal to or greater 
than 25 percent if both FFEL Program and Direct Loan Program loans 
enter repayment in that cohort.
    (4) The Secretary may require an institution that meets the 
criteria under paragraph (a)(2) of this section to submit to the 
Secretary, within a timeframe determined by the Secretary, any 
reasonable information to help the Secretary make a preliminary 
determination as to what action should be taken against the 
institution.
    (5) The Secretary will cease any limitation, suspension, or 
termination action against an institution under paragraph (a)(3) of 
this section if the institution satisfactorily demonstrates to the 
Secretary that, pursuant to a timely submitted appeal under paragraph 
(b)(6) of this section, the institution meets one of the exceptional 
mitigating circumstances under paragraph (c)(1)(ii) of this section.
    (b) End of participation. (1) Except as provided in paragraph 
(b)(6) of this section, an institution's participation in the FFEL 
Program ends 30 days after the date the institution receives 
notification from the Secretary that its FFEL Program cohort default 
rate for each of the three most recent fiscal years for which the 
Secretary has determined the institution's rate, is equal to or greater 
than 25 percent.
    (2) Except as provided in paragraph (b)(6) of this section, an 
institution's participation in the Direct Loan Program ends 30 days 
after the date the institution receives notification from the Secretary 
that for each of the three most recent fiscal years the institution has 
any combination of--
    (i) An FFEL Program cohort default rate that is equal to or greater 
than 25 percent if only FFEL Program loans enter repayment in that 
cohort;
    (ii) A Direct Loan Program cohort rate that is equal to or greater 
than 25 percent if only Direct Loan Program loans enter repayment in 
that cohort; or
    (iii) A weighted average cohort rate that is equal to or greater 
than 25 percent if both FFEL Program and Direct Loan Program loans 
enter repayment in that cohort.
    (3) Except as provided in paragraph (b)(6) of this section, an 
institution whose participation in the FFEL Program or Direct Loan 
Program ends under paragraph (b)(1) or (2) of this section respectively 
may not participate in that program on or after the 30th day after the 
date it receives notification from the Secretary that its FFEL Program 
cohort default rate, Direct Loan Program cohort rate, or, if 
applicable, weighted average cohort rate exceeds the thresholds 
specified in paragraph (b)(1) or (2) of this section and continuing--
    (i) For the remainder of the fiscal year in which the Secretary 
determines that 

[[Page 49187]]
the institution's participation has ended under paragraph (b)(1) or (2) 
of this section; and
    (ii) For the two subsequent fiscal years.
    (4) An institution whose participation in the FFEL Program or 
Direct Loan Program ends under paragraph (b)(1) or (2) of this section 
may not participate in that program until the institution satisfies the 
Secretary that the institution meets all requirements for participation 
in the FFEL Program or Direct Loan Program and executes a new agreement 
with the Secretary for participation in that program following the 
period described in paragraph (b)(3) of this section.
    (5) Until July 1, 1998, the provisions of paragraph (b)(1) or (2) 
of this section and the provisions of Sec. 668.16(m) do not apply to a 
historically black college or university within the meaning of section 
322(2) of the HEA, a tribally controlled community college within the 
meaning of section 2(a)(4) of the Tribally Controlled Community College 
Assistance Act of 1978, or a Navajo community college under the Navajo 
Community College Act.
    (6) An institution may, notwithstanding Sec. 668.26, continue to 
participate in the FFEL Program or Direct Loan Program, if the 
Secretary receives an appeal that is complete, accurate, and timely in 
accordance with paragraph (c) of this section.
    (c) Appeal procedures. (1) An institution may appeal the loss of 
participation in the FFEL Program or Direct Loan Program under 
paragraph (b)(1) or (2) of this section by submitting an appeal in 
writing to the Secretary that must be received by the 30th calendar day 
following the date the institution receives notification of the end of 
participation. The institution may appeal on the grounds that--
    (i)(A) The calculation of the institution's FFEL Program cohort 
default rate, Direct Loan Program cohort rate, or, if applicable, 
weighted average cohort rate, for any of the three fiscal years 
relevant to the end of participation is not accurate; and
    (B) A recalculation of the institution's FFEL Program cohort 
default rate, Direct Loan Program cohort rate, or weighted average 
cohort rate, with corrected data verified by the cognizant guaranty 
agency or agencies for the FFEL Program loans, or the Secretary for 
Direct Loan Program loans would produce an FFEL Program cohort default 
rate, a Direct Loan Program cohort rate, or weighted average cohort 
rate for any of those fiscal years that is below the threshold 
percentage specified in paragraph (b) (1) or (2) of this section; or
    (ii) The institution meets one of the following exceptional 
mitigating circumstances:
    (A) The institution has a participation rate index of 0.0375 or 
less. The participation rate index is determined by multiplying the 
institution's FFEL Program cohort default rate, Direct Loan Program 
cohort rate or, if applicable, weighted average cohort rate, by the 
percentage of the institution's students who were enrolled on at least 
a half-time basis who received a loan made under either the FFEL 
Program or Direct Loan Program, for a 12-month period that has ended 
during the six months immediately preceding the fiscal year for which 
the cohort of borrowers used to calculate the institution's rate is 
determined.
    (B) For a 12-month period that has ended during the six months 
immediately preceding the fiscal year for which the cohort of borrowers 
used to calculate the institution's rate is determined, 70 percent or 
more of the institution's students who are enrolled on at least a half-
time basis are individuals from disadvantaged economic backgrounds, as 
established by documentary evidence submitted by the institution. Such 
evidence must relate to either qualification by those students for an 
expected family contribution (EFC) of zero for any award year that 
generally coincides with the 12-month period, or attribution to those 
students of an adjusted gross income of the student and his or her 
parents or spouse, if applicable, reported for any award year that 
generally coincides with the 12-month period, of less than the poverty 
level, as determined under criteria established by the Department of 
Health and Human Services.
    (1) For a public or private nonprofit institution, 70 percent or 
more of the institution's students who were initially enrolled on a 
full-time basis, and were scheduled to complete their programs during a 
12-month period that has ended during the six months immediately 
preceding the fiscal year for which the cohort of borrowers used to 
calculate the institution's rate is determined, completed the 
educational programs in which they were enrolled. This rate is 
calculated by comparing the number of students who were classified as 
full-time at their initial enrollment in the institution and were 
originally scheduled, at the time of enrollment, to complete their 
programs within the relevant 12 month period, with the number of these 
students who received a degree, certificate, or other recognized 
educational credential from the institution; transferred from the 
institution to a higher level educational program at another 
institution for which the prior program provided substantial 
preparation; or, at the end of the 12-month period, remained enrolled 
and were making satisfactory academic progress toward completion of 
their educational programs; or
    (2) For a proprietary institution, the institution had a placement 
rate of 50 percent or more with respect to its former students who were 
enrolled in a program to receive a degree, certificate, or other 
recognized educational credential from the institution, and who 
remained in the program beyond the point the students would have 
received a 100 percent tuition refund from the institution. This rate 
is based on those students who were scheduled to complete their 
educational programs during the 12-month period ending prior to the 
fiscal year for which the cohort for the institution's rate is 
determined. This rate is calculated by determining the percentage of 
all those students who, based on evidence submitted by the institution, 
are, on the date the institution submits the appeal, employed, or had 
been employed for at least 13 weeks following their last day of 
attendance at the institution, in the occupation for which the 
institution provided training, or are enrolled, or had been enrolled 
for at least 13 weeks following receipt of the credential from the 
institution, in a higher level educational program at another 
institution for which the prior educational program provided 
substantial preparation.
    (2) For purposes of the completion rate and placement rate 
described in paragraph (c)(1)(ii)(B) (1) and (2) of this section, a 
student is originally scheduled, at the time of enrollment, to complete 
the educational program on the date when the student will have been 
enrolled in the program for the amount of time normally required to 
complete the program. The ``amount of time normally required to 
complete the program'' is the period of time specified in the 
institution's enrollment contract, catalog, or other materials, for 
completion of the program by a full-time student, or the period of time 
between the original date of enrollment and the anticipated graduation 
date appearing on the student's loan application, if any, whichever is 
less.
    (3) The Secretary issues a decision on the institution's appeal 
within 45 days after the institution submits a complete appeal that 
addresses the applicable criteria in paragraph (c)(1)(i) or (ii) of 
this section to the Secretary.
    (4) The Secretary's decision is based on the consideration of 
written material 

[[Page 49188]]
submitted by the institution. No oral hearing is provided.
    (5) The Secretary withdraws the notification of loss of 
participation in the FFEL Program or Direct Loan Program sent to an 
institution under paragraph (b)(1) or (2) of this section, if he 
determines that the institution's appeal satisfies one of the grounds 
specified in paragraph (c)(1)(i) or (ii) of this section.
    (6) An institution must include in its appeal a certification by 
the institution's chief executive officer that all information provided 
by the institution in support of its appeal is true and correct.
    (7) An institution that appeals on the grounds that it meets the 
exceptional mitigating circumstances criteria contained in paragraph 
(c)(1)(ii) of this section must include in its appeal the following 
information:
    (i) A written statement from an independent auditor that the 
information contained in the appeal is complete, accurate and 
determined in accordance with the requirements of this section;
    (ii) For purposes of the participation index under paragraph 
(c)(1)(ii)(A) of this section--
    (A) A statement indicating the number of students who were enrolled 
on at least a half-time basis at the institution in the relevant 12-
month period; and

    (B) The name, address, and social security number of each of the 
institution's current and former students who received Federal 
Stafford, Federal SLS, or Direct Loan Program loans during that 12-
month period.
    (iii) For purposes of the institution's percentage of students 
coming from disadvantaged economic backgrounds under paragraph 
(c)(1)(ii)(B) of this section:
    (A) The number of students who were enrolled on at least a half-
time basis at the institution in the relevant 12-month period; and
    (B)(1) If EFC is used to determine if a student comes from an 
economically disadvantaged background, the name, address, and social 
security number, of each student with an EFC of zero, for an award year 
that, in whole or part, coincides with the relevant 12-month period, 
who was enrolled on at least a half-time basis at the institution in 
the relevant 12-month period; or
    (2) If poverty level income as determined by the Department of 
Health and Human Services is used to measure an economically 
disadvantaged background, the name, address, and social security number 
of each student with an adjusted gross income, or attribution to that 
student of an adjusted gross income of that student and his or her 
parents or spouse, if applicable, reported for the most recent calendar 
year that is less than the poverty level, and documentation of that 
income.
    (iv) For purposes of the completion rate under paragraph 
(c)(1)(ii)(B)(1) of this section--
    (A) The number of students who were initially enrolled on a full-
time basis at the institution and were scheduled to complete their 
programs in the relevant 12-month period;
    (B) For each of those former students who received a degree, 
certificate, or other recognized educational credential from the 
institution, the student's name, address, and social security number;
    (C) For each of those former students who transferred to a higher 
level educational program at another institution, the name, address, 
social security number of the student, and the name and address of the 
institution to which the student transferred and the name of the higher 
level program; and
    (D) For each of those students who remained enrolled and was making 
satisfactory academic progress toward completion of the educational 
program, the student's name, address, and social security number.
    (v) For purposes of the placement rate under paragraph 
(c)(1)(ii)(B)(2) of this section--
    (A) The number of students who were scheduled to receive a degree, 
certificate, or other recognized educational credential at the 
institution during the relevant 12 month period who remained enrolled 
beyond the point in the program in which he or she would receive a 100 
percent tuition refund from the institution;
    (B) For each of those former students who is employed or had been 
employed for at least 13 weeks following his or her last day of 
attendance at the institution, the student's name, address, and social 
security number, the employer's name and address, the student's job 
title, and the dates the student was so employed; and
    (C) For each of those former students who enrolled in a higher 
level educational program at another institution for which the 
appealing institution's educational program provided substantial 
preparation, the former student's name, address, and social security 
number, the subsequent institution's name and address, the name of the 
educational program, and the dates the former student was so enrolled.
    (d) Definitions. The following definitions apply to this section 
and Sec. 668.90:
    (1)(i) For purposes of the FFEL Program, except as provided in 
paragraph (e)(1)(ii) of this section, the term FFEL Program cohort 
default rate means--
    (A) For any fiscal year in which 30 or more current and former 
students at the institution enter repayment on Federal Stafford loans 
or Federal SLS loans (or on the portion of a loan made under the 
Federal Consolidation Loan Program that is used to repay such loans) 
received for attendance at the institution, the percentage of those 
current and former students who enter repayment in that fiscal year on 
those loans who default before the end of the following fiscal year; or
    (B) For any fiscal year in which fewer than 30 of the institution's 
current and former students enter repayment on Federal Stafford loans 
or Federal SLS loans (or on the portion of a loan made under the 
Federal Consolidation Loan Program that is used to repay such loans) 
received for attendance at the institution, the percentage of those 
current and former students who entered repayment on such loans in any 
of the three most recent fiscal years, who default before the end of 
the fiscal year immediately following the year in which they entered 
repayment.
    (C) In determining the number of students who default before the 
end of that following fiscal year, the Secretary includes only loans 
for which the Secretary or a guaranty agency has paid claims for 
insurance.
    (ii)(A) In the case of a student who has attended and borrowed at 
more than one institution, the student (and his or her subsequent 
repayment or default) is attributed to each institution for attendance 
at which the student received a loan that entered repayment in the 
fiscal year.
    (B) A loan on which a payment is made by the institution, its 
owner, agent, contractor, employee, or any other affiliated entity or 
individual, in order to avoid default by the borrower, is considered as 
in default for purposes of this definition.
    (C) Any loan that has been rehabilitated under section 428F of the 
HEA before the end of that following fiscal year is not considered as 
in default for purposes of this definition.
    (D) For the purposes of this definition, an SLS loan made in 
accordance with section 428A of the HEA (or a loan made under the 
Federal Consolidation Loan Program, a portion of which is used to repay 
a Federal SLS loan) shall not be considered to enter repayment 

[[Page 49189]]
until after the borrower has ceased to be enrolled in an educational 
program leading to a degree, certificate, or other recognized 
educational credential at the participating institution on at least a 
half-time basis (as determined by the institution) and ceased to be in 
a period of forbearance or deferment based on such enrollment. Each 
eligible lender of a loan made under section 428A (or a loan made under 
the Federal Consolidation Loan Program, a portion of which is used to 
repay a Federal SLS loan) of the HEA shall provide the guaranty agency 
with the information necessary to determine when the loan entered 
repayment for purposes of this definition, and the guaranty agency 
shall provide that information to the Secretary.
    (iii)(A) An FFEL Program cohort default rate of an institution 
applies to all locations of the institution as the institution exists 
on the first day of the fiscal year for which the rate is calculated.
    (B) An FFEL Program cohort default rate of an institution applies 
to all locations of the institution from the date the institution is 
notified of that rate until the institution is notified by the 
Secretary that the rate no longer applies.
    (iv)(A) For an institution that changes its status from that of a 
location of one institution to that of a free-standing institution, the 
Secretary determines the FFEL Program cohort default rate based on the 
institution's status as of October 1 of the fiscal year for which an 
FFEL Program cohort default rate is being calculated.
    (B) For an institution that changes its status from that of a free-
standing institution to that of a location of another institution, the 
Secretary determines the FFEL Program cohort default rate based on the 
combined number of students who enter repayment during the applicable 
fiscal year and the combined number of students who default during the 
applicable fiscal years from both the former free-standing institution 
and the other institution. This FFEL Program cohort default rate 
applies to the new, consolidated institution and all of its current 
locations.
    (C) For free-standing institutions that merge to form a new, 
consolidated institution, the Secretary determines the FFEL Program 
cohort default rate based on the combined number of students who enter 
repayment during the applicable fiscal year and the combined number of 
students who default during the applicable fiscal years from all of the 
institutions that are merging. This FFEL Program cohort default rate 
applies to the new consolidated institution.
    (D) For a location of one institution that becomes a location of 
another institution, the Secretary determines the FFEL Program cohort 
default rate based on the combined number of students who enter 
repayment during the applicable fiscal year and the number of students 
who default during the applicable fiscal years from both of the 
institutions in their entirety, not limited solely to the respective 
locations.
    (2) Fiscal year means the period from and including October 1 of a 
calendar year through and including September 30 of the following 
calendar year.
    (e)(1) Direct Loan Program cohort rate. For purposes of the Direct 
Loan Program, the Secretary calculates Direct Loan Program cohort rates 
using the following formulas:
    (i) For public institutions, private nonprofit institutions, or 
proprietary degree granting institutions--
    (A) For any fiscal year in which 30 or more current and former 
students at the institution enter repayment on a Direct Loan Program 
loan (or on the portion of a loan made under the Federal Direct 
Consolidation Loan Program that is used to repay those loans) received 
for attendance at the institution, the percentage of those current and 
former students who enter repayment in that fiscal year on those loans 
who are in default before the end of the following fiscal year; or
    (B) For any fiscal year in which fewer than 30 of the institution's 
current and former students enter repayment on a Direct Loan Program 
loan (or on the portion of a loan made under the Federal Direct 
Consolidation Loan Program that is used to repay those loans) received 
for attendance at the institution, the percentage of those current and 
former students who entered repayment on those loans in any of the 
three most recent fiscal years, who are in default before the end of 
the fiscal year immediately following the year in which they entered 
repayment.
    (ii) For proprietary non-degree granting institutions--
    (A) For any fiscal year in which 30 or more current and former 
students at the institution enter repayment on a Direct Loan Program 
loan (or on the portion of a loan made under the Federal Direct 
Consolidation Loan Program that is used to repay those loans) received 
for attendance at the institution, the percentage of those current and 
former students who enter repayment in that fiscal year on those loans 
who are in default before the end of the following fiscal year, or are 
in repayment under the income-contingent repayment plan at the end of 
that following fiscal year whose scheduled payments are less than 15 
dollars per month and that payment results in negative amortization; or
    (B) For any fiscal year in which fewer than 30 of the institution's 
current and former students enter repayment on a Direct Loan Program 
loan (or on the portion of a loan made under the Federal Direct 
Consolidation Loan Program that is used to repay those loans) received 
for attendance at the institution, the percentage of those current and 
former students who entered repayment on those loans in the three most 
recent fiscal years, who are in default before the end of the fiscal 
year immediately following the year in which they entered repayment, or 
are in repayment under the income contingent repayment plan at the end 
of that following fiscal year and whose scheduled payments are less 
than 15 dollars per month and that payment results in negative 
amortization.
    (2) In the case of a student who has attended and borrowed at more 
than one institution, the student (and his or her subsequent repayment 
or default) is attributed to each institution for attendance at which 
the student received a loan that entered repayment in the fiscal year.
    (3) A loan on which a payment is made by the institution, its 
owner, agent, contractor, employee, or any other affiliated entity or 
individual, in order to avoid default by the borrower, is considered as 
in default for purposes of this definition.
    (4) Any loan on which the borrower has made 12 consecutive monthly 
on-time payments under 34 CFR 685.211(e) before the end of that 
following fiscal year is not considered as in default for purposes of 
this definition.
    (5) A Direct Loan Program cohort rate of an institution applies to 
all locations of the institution as the institution exists on the first 
day of the fiscal year for which the rate is calculated.
    (6) A Direct Loan Program cohort rate of an institution applies to 
all locations of the institution from the date the institution is 
notified of that rate until the institution is notified by the 
Secretary that the rate no longer applies.
    (7) For an institution that changes its status from that of a 
location of one institution to that of a free-standing institution, the 
Secretary determines the Direct Loan Program cohort rate based on the 
institution's status as of October 1 of the fiscal year for which the 
rate is being calculated.
    (8) For an institution that changes its status from that of a free-
standing institution to that of a location of another institution, the 
Secretary determines the Direct Loan Program cohort rate based on the 
combined 

[[Page 49190]]
number of students who enter repayment during the applicable fiscal 
year from both the former free-standing institution and the other 
institution. This Direct Loan Program cohort rate applies to the new, 
consolidated institution and all of its current locations.
    (9) For free-standing institutions that merge to form a new, 
consolidated institution, the Secretary determines the Direct Loan 
Program cohort rate based on the combined number of students who enter 
repayment during the applicable fiscal year from all of the 
institutions that are merging. This Direct Loan Program cohort rate 
applies to the new consolidated institution.
    (10) For a location of one institution that becomes a location of 
another institution, the Secretary determines the Direct Loan Program 
cohort rate based on the combined number of students who enter 
repayment during the applicable fiscal year from both of the 
institutions in their entirety, not limited solely to the respective 
locations.
    (11) Fiscal year means the period from and including October 1 of a 
calendar year through and including September 30 of the following 
calendar year.
    (12) For purposes of an institution's Direct Loan cohort rate, a 
Direct Loan Program loan is considered in default when the borrower's 
or endorser's failure to make an installment payment when due has 
persisted for 270 days.
    (f)(1) Weighted average cohort rate. For purposes of an institution 
that has former students entering repayment in a fiscal year on both 
Direct Loan Program and FFEL Program, the Secretary calculates a 
weighted average cohort rate using the following formulas;
    (i) For public institutions, private nonprofit institutions, or 
proprietary degree granting institutions--
    (A) For any fiscal year in which 30 or more current and former 
students at the institution enter repayment on an FFEL Program or 
Direct Loan Program loan (or on the portion of a loan made under the 
Federal Consolidation Loan Program or Federal Direct Consolidation Loan 
Program that is used to repay those loans) received for attendance at 
the institution, the percentage of those current and former students 
who enter repayment in that fiscal year on those loans who are in 
default before the end of the following fiscal year; and
    (B) For any fiscal year in which fewer than 30 of the institution's 
current and former students enter repayment on an FFEL Program or 
Direct Loan Program loan (or on the portion of a loan made under the 
Federal Consolidation Loan Program or Federal Direct Consolidation Loan 
Program that is used to repay such loans) received for attendance at 
the institution, the percentage of those current and former students 
who entered repayment on such loans in the three most recent fiscal 
years, who are in default before the end of the fiscal year immediately 
following the year in which they entered repayment.
    (ii) For proprietary non-degree granting institutions--
    (A) For any fiscal year in which 30 or more current and former 
students at the institution enter repayment on an FFEL Program or 
Direct Loan Program loan (or on the portion of a loan made under the 
Federal Consolidation Loan or Federal Direct Consolidation Loan Program 
that is used to repay those loans) received for attendance at the 
institution, the percentage of those current and former students who 
enter repayment in that fiscal year on such loans who are in default 
before the end of the following fiscal year, or are in repayment under 
the income-contingent repayment plan at the end of that following 
fiscal year and whose scheduled payments are less than 15 dollars per 
month and that payment results in negative amortization; or
    (B) For any fiscal year in which fewer than 30 of the institution's 
current and former students enter repayment on an FFEL Program or 
Direct Loan Program loan (or on the portion of a loan made under the 
Federal Consolidation Loan Program or Federal Direct Consolidation Loan 
Program that is used to repay those loans) received for attendance at 
the institution, the percentage of those current and former students 
who entered repayment on those loans in any of the three most recent 
fiscal years, who are in default before the end of the fiscal year 
immediately following the year in which they entered repayment or are 
in repayment under the income contingent repayment plan at the end of 
that following fiscal year whose scheduled payments are less than 15 
dollars per month and that payment results in negative amortization.
    (2) In the case of a student who has attended and borrowed at more 
than one institution, the student (and his or her subsequent repayment 
or default) is attributed to each institution for attendance at which 
the student received a loan that entered repayment in the fiscal year.
    (3) A loan on which a payment is made by the institution, its 
owner, agent, contractor, employee, or any other affiliated entity or 
individual, in order to avoid default by the borrower, is considered as 
in default for purposes of this definition.
    (4) Any Direct Loan Program loan on which the borrower has made 12 
consecutive monthly on-time payments under 34 CFR 685.211(e) or has an 
FFEL Program loan that has been rehabilitated under section 428F of the 
HEA before the end of that following fiscal year is not considered as 
in default for purposes of this definition.
    (5) A weighted average cohort rate of an institution applies to all 
locations of the institution as the institution exists on the first day 
of the fiscal year for which the rate is calculated.
    (6) A weighted average cohort rate of an institution applies to all 
locations of the institution from the date the institution is notified 
of that rate until the institution is notified by the Secretary that 
the rate no longer applies.
    (7) For an institution that changes its status from that of a 
location of one institution to that of a free-standing institution, the 
Secretary determines the weighted average cohort rate based on the 
institution's status as of October 1 of the fiscal year for which the 
rate is being calculated.
    (8) For an institution that changes its status from that of a free-
standing institution to that of a location of another institution, the 
Secretary determines the weighted average cohort rate based on the 
combined number of students who enter repayment during the applicable 
fiscal year from both the former free-standing institution and the 
other institution. This weighted average cohort rate applies to the 
new, consolidated institution and all of its current locations.
    (9) For free-standing institutions that merge to form a new, 
consolidated institution, the Secretary determines the weighted average 
cohort rate based on the combined number of students who enter 
repayment during the applicable fiscal year from all of the 
institutions that are merging. This weighted average cohort rate 
applies to the new consolidated institution.
    (10) For a location of one institution that becomes a location of 
another institution, the Secretary determines the weighted average 
cohort rate based on the combined number of students who enter 
repayment during the applicable fiscal year from both of the 
institutions in their entirety, not limited solely to the respective 
locations.
    (11) Fiscal year means the period from and including October 1 of a 
calendar year through and including September 30 of the following 
calendar year.
    (12) For purposes of an institution's weighted average cohort rate 
cohort rate, a Direct Loan Program loan is considered in default when a 
borrower's or endorser's failure to make an installment payment when 
due has persisted for 270 days. 

[[Page 49191]]

    3. Section 668.85 is amended by revising paragraph (b)(1)(ii) and 
revising paragraph (b)(3) to read as follows:


Sec. 668.85  Suspension proceedings.

* * * * *
    (b)(1) * * *
    (ii)(A) Specifies the proposed effective date of the suspension, 
which is at least 20 days after the date of mailing of the notice of 
intent; or
    (B) In the case of a suspension action taken due to the 
institution's FFEL Program cohort default rate, Direct Loan Program 
cohort rate, or, if applicable, weighted average cohort rate, the 
proposed effective date of the suspension is no more than 30 days after 
the date of the mailing of the notice of intent.
* * * * *
    (3) If the institution or servicer requests a hearing by the time 
specified in paragraph (b)(1)(iii) of this section, the designated 
department official sets the date and place. The date is at least 15 
days after the designated department official receives the request. In 
the case of a hearing for an institution subject to suspension action 
because of its FFEL Program cohort default rate, Direct Loan Program 
cohort rate, or, if applicable, weighted average cohort rate, the 
hearing is set no later than 20 days after the date the designated 
department official receives the request. The suspension does not take 
place until after the requested hearing is held.
* * * * *
    4. Section 668.86 is amended by revising paragraph (b)(1)(ii) and 
revising paragraph (b)(3) to read as follows:


Sec. 668.86  Limitation or termination proceedings.

* * * * *
    (b)(1) * * *
    (ii)(A) Specifies the proposed effective date of the limitation or 
termination, which is at least 20 days after the date of mailing of the 
notice of intent; or
    (B) In the case of a limitation or termination action based on an 
institution's FFEL Program cohort default rate, Direct Loan Program 
cohort rate, or, if applicable, weighted average cohort rate, the 
proposed effective date of the termination is no more than 30 days 
after the date of the mailing of the notice of intent.
* * * * *
    (3) If the institution or servicer requests a hearing by the time 
specified in paragraph (b)(1)(iii) of this section, the designated 
department official sets the date and place. The date is at least 15 
days after the designated department official receives the request. In 
the case of a hearing for an institution subject to limitation or 
termination action because of its FFEL Program cohort default rate, 
Direct Loan Program cohort rate, or, if applicable, weighted average 
cohort rate, the hearing is set no later than 20 days after the date 
the designated department official receives the request. The limitation 
or termination does not take place until after the requested hearing is 
held.
* * * * *
    5. Section 668.90 is amended by adding a new paragraph 
(a)(1)(iii)(D), and revising paragraph (a)(3)(iv) to read as follows:


Sec. 668.90  Initial and final decisions.

* * * * *
    (a)(1) * * *
    (iii) * * *
    (D) For hearings regarding the limitation, suspension, or 
termination of an institution based on an institution's FFEL Program 
cohort default rate, Direct Loan Program cohort rate, or, if 
applicable, weighted average cohort rate, the 30th day after the 
conclusion of the hearing.
* * * * *
    (3) * * *
    (iv) In a limitation, suspension, or termination proceeding 
commenced on the grounds described in Sec. 668.17(a)(1), if the hearing 
official finds that an institution's FFEL Program cohort default rate, 
Direct Loan Program cohort rate, or, if applicable, weighted average 
cohort rate meets the conditions specified in Sec. 668.17(a)(1) for 
initiation of limitation, suspension, or termination proceedings, the 
hearing official also finds that the sanction sought by the designated 
department official is warranted, except that the hearing official 
finds that no sanction is warranted if the institution presents clear 
and convincing evidence demonstrating that its FFEL Program cohort 
default rate, Direct Loan Program cohort rate, or weighted average 
cohort rate is not final or does not accurately reflect the final rate 
determined by the Department and that the correct rate would result in 
the institution having an FFEL Program cohort default rate, Direct Loan 
Program cohort rate, or weighted average cohort rate that is beneath 
the thresholds that make the institution subject to limitation, 
suspension, or termination action.

(Authority: 20 U.S.C. 1082, 1085, 1094, 1099c)

[FR Doc. 95-23470 Filed 9-20-95; 8:45 am]
BILLING CODE 4000-01-P