[Federal Register Volume 60, Number 231 (Friday, December 1, 1995)]
[Rules and Regulations]
[Pages 61750-61757]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-29179]




[[Page 61749]]

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Part III





Department of Education





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34 CFR Part 682



Federal Family Education Loan Program; Final Rule

  Federal Register / Vol. 60, No. 231 / Friday, December 1, 1995 / 
Rules and Regulations   

[[Page 61750]]


DEPARTMENT OF EDUCATION

34 CFR Part 682

RIN 1840-AC21


Federal Family Education Loan Program

AGENCY: Department of Education.

ACTION: Final regulations.

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SUMMARY: The Secretary amends the regulations governing the Federal 
Family Education Loan (FFEL) Program. The FFEL regulations govern the 
Federal Stafford Loan Program, the Federal Supplemental Loans for 
Students (Federal SLS) Program, the Federal PLUS Program, and the 
Federal Consolidation Loan Program, collectively referred to as the 
Federal Family Education Loan Program. The Federal Stafford Loan, the 
Federal SLS, the Federal PLUS and the Federal Consolidation Loan 
programs are hereinafter referred to as the Stafford, SLS, PLUS and 
Consolidation Loan programs. The Secretary is making changes to the 
FFEL Program regulations to conform the FFEL program regulations with 
regulations and policies in effect in the William D. Ford Federal 
Direct Student Loan Program, hereinafter referred to as the Direct Loan 
Program.

EFFECTIVE DATE: These regulations take effect on July 1, 1996. However, 
affected parties do not have to comply with the information collection 
requirements in sections 682.207, 682.209, 682.210, 682.211, 682.401, 
682.412, 682.603, 682.604, and 682.605 until after the information 
collection requirements contained in these sections have been approved 
by the Office of Management and Budget under the Paperwork Reduction 
Act of 1995.

FOR FURTHER INFORMATION CONTACT: Patricia Newcombe, FFELP Policy 
Section Chief, or Barbara Bauman, FFELP Program Specialist, Loans 
Branch, Policy Development Division, Policy, Training, and Analysis 
Service, U.S. Department of Education, 600 Independence Avenue, S.W. 
(room 3053, ROB-3), Washington, DC 20202-5449. Telephone: (202) 708-
8242. Individuals who use a telecommunications device for the deaf 
(TDD) may call the Federal Information Relay Service (FIRS) at 1-800-
877-8339 between 8 a.m. and 8 p.m., Eastern time, Monday through 
Friday.

SUPPLEMENTARY INFORMATION:

Background

    The Secretary is amending 34 CFR Part 682 of the Department's 
regulations to adopt certain policies and procedures that have been 
used in the Direct Loan Program.
    On September 21, 1995, the Secretary published a Notice of Proposed 
Rulemaking (NPRM) in the Federal Register (60 FR 49130) proposing 
changes to the FFEL regulations to conform with certain regulations and 
policies in the Direct Loan program, wherever possible, to provide a 
consistent approach in both programs. Many of the proposed changes 
included in the NPRM were identified by commenters in response to an 
earlier NPRM, published on October 7, 1994, also intended to conform 
the two loan programs, but were outside the scope of the proposals in 
that NPRM. In the final regulations published on November 29, 1994, the 
Secretary promised to evaluate the merits and implications of these 
additional proposals and include some of them in future regulations. 
These final regulations reflect many of those proposals. These 
regulations contain clarifying changes to certain existing provisions 
of the FFEL program regulations.
    The NPRM published for Part 682 in the Federal Register on 
September 21, 1995 (59 FR 49130-49131) included a discussion of the 
major issues surrounding the proposed changes, and the discussion will 
not be repeated here. The following list summarizes those issues and 
identifies the pages of the preamble to the NPRM on which a discussion 
of those issues may be found:
     Clarification of the definition of satisfactory repayment 
arrangements for a borrower to renew eligibility for Title IV student 
financial assistance (page 49130);
     Borrower eligibility for a FFEL Consolidation loan for a 
borrower in default status (page 49130);
     Codification of the existing FFEL policy to allow a loan 
to be disbursed in a single installment under certain circumstances 
(page 49130);
     Clarification of late disbursement provisions under 
documented exceptional circumstances in sections 682.207(d)(2)(iii) and 
682.604(e)(3) through amendments to those provisions (page 49130);
     Lender application of borrower loan payments and treatment 
of prepayments (page 49130);
     Clarification of deferment eligibility for a borrower in 
default status (page 49131);
     Extension of administrative forbearance to a borrower who 
ends an authorized deferment period in delinquent status (page 49131);
     Treatment of loan insurance premiums when a school refunds 
a loan or a portion thereof to a lender on behalf of a borrower (page 
49131);
     Treatment of payments received after loan discharge (page 
49131);
     Minor changes to provisions governing school loan 
certification (page 49131); and
     Technical changes to conform provisions governing a 
school's determination of a borrower's withdrawal with the refund 
provisions of section 668.22(j) (page 49131).

Substantive Revisions to the Notice of Proposed Rulemaking

Section 682.207  Due Diligence in Disbursing a Loan

    The final regulations reflect an additional provision that allows a 
single installment containing more than one loan disbursement to be 
made prior to the midpoint of the loan period if the date of the 
scheduled disbursement coincides with the beginning of the next 
scheduled term for which the school has requested a disbursement as 
provided for under law.

Section 682.209  Payment Application and Prepayment

    The final regulations allow a lender to use a statement included in 
the borrower's monthly billing statement or coupon book, in lieu of a 
separate notice, to inform a borrower who submits full payments in 
excess of the scheduled payment amount (without instructions to the 
lender) regarding how those payments will be credited to the borrower's 
account and how that crediting affects the borrower's next scheduled 
due date for payment.

Section 682.211  Forbearance

    The Secretary has changed the regulations to authorize lenders to 
grant administrative forbearance to borrowers to cover any period of 
delinquency that may exist after the close of a period of mandatory 
forbearance, in addition to the close of an authorized deferment 
period.

Section 682.607  Payment of a Refund to a Lender

    The final regulations include a change to section 682.607(c)(1) to 
clarify the interaction between sections 682.605 and 682.607 and 
668.22(j) of the General Provisions regulations.

Analysis of Comments and Changes

    In response to the Secretary's invitation in the NPRM, 40 parties 
submitted comments on the proposed regulations. An analysis of the 
comments and of the changes in the regulations since publication of the 
NPRM follows. 

[[Page 61751]]

    Substantive issues are discussed under the section of the 
regulations to which they pertain. Technical and other minor changes--
and suggested changes the Secretary is not legally authorized to make 
under the applicable statutory authority--are generally not addressed.

General

    Comments: Similar to the comments received in response to the 
October 7, 1994 NPRM to conform the FFEL and Direct Loan programs, some 
commenters suggested changes to the FFEL program regulations that were 
not included in the NPRM. Some of the changes had nothing to do with 
conforming the two loan programs. For example, one commenter suggested 
that the Secretary revise the provisions in section 682.411(c) to 
change the time frame within which a lender must send the first notice 
of delinquency to a borrower. Some of the commenters repeated the 
suggestions made in response to the October 7, 1994 NPRM to conform the 
Direct Loan program regulations to the FFEL program regulations by 
incorporating into the Direct Loan regulations the various requirements 
in the FFEL regulations for documenting deferment and forbearance 
eligibility, tracking deferments with statutory time maximums, and 
backdating the start of deferment eligibility. Additionally, these 
commenters recommended that FFEL regulations be revised to provide an 
extended repayment option to FFEL borrowers, and to eliminate the 
regulatory requirement in section 682.209(a)(6)(ii) that if a borrower 
chooses a graduated or income-sensitive repayment schedule, the lender 
may not provide the borrower with a repayment schedule that contains 
any single installment that is more than three times greater than any 
other installment.
    Discussion: The Secretary does not believe that he currently has 
the statutory authority to provide through regulations additional 
repayment options for FFEL borrowers. Because of the constraints 
presented by the statutory 10-year maximum time frame for repayment of 
most FFEL program loans, the Secretary also does not believe that it is 
advisable from a consumer protection standpoint to delete the provision 
that restricts a lender's ability to establish a repayment schedule 
that would provide for payments that are three times or more what the 
borrower's normally scheduled payment would be. The Secretary does not 
believe that an FFEL borrower is well served by establishing a 
graduated or income-sensitive repayment schedule that provides low 
payments initially only to lead to balloon payments that the borrower 
is unable to meet later in the repayment period despite the use of 
authorized forbearance. The Secretary also wishes to reiterate what he 
said in the November 29, 1994 final regulations in response to 
commenters who indicated that they believed the Secretary is required 
to make the regulations and processes in the Direct Loan program 
strictly conform to the FFEL regulations. The Secretary continues to 
disagree with these commenters. There is no legal requirement that the 
Secretary issue regulations to regulate internal agency processes in 
the Direct Loan Program. The Department continues to assure FFEL 
program participants that policies and procedures in the administration 
of the Direct Loan program are consistent with FFEL regulatory 
requirements to the extent practicable. Moreover, the Secretary is 
committed to continuing to examine areas that affect substantive or 
procedural rights of program participants that may require additional 
regulations to ensure conformity between the programs. In regard to the 
proposal to change the time frame for a lender to send the first notice 
of delinquency to a borrower, the Secretary does not consider this 
recommendation appropriate for this regulations package because it has 
nothing to do with conformity between the FFEL and Direct Loan 
programs. However, the Secretary will consider this proposal for future 
regulations.

Section 682.200  Definitions

    Comments: Most commenters agreed with the Secretary's decision to 
clarify that a borrower may make satisfactory repayment arrangements on 
a defaulted FFEL debt for purposes of regaining Title IV eligibility 
only once. A couple of commenters urged the Secretary to allow a lender 
to make documented exceptions to this requirement. Many commenters 
recommended that the Secretary retain the terms ``consecutive'' and 
``voluntary'' in current regulations to describe the series of full 
monthly payments a borrower must make to regain eligibility. The 
commenters believe it is necessary to clarify that a borrower cannot 
regain eligibility through a lump sum payment and that payments secured 
through involuntary means, such as wage garnishment or litigation, do 
not count as one of the six required payments. Several commenters also 
wanted the Secretary to clarify that the restriction on a borrower in 
default status regaining Title IV eligibility only once did not apply 
to that borrower's ability to make payments sufficient to move out of 
default status on a loan.
    Discussion: The Secretary agrees with the commenters that retaining 
the terms ``consecutive'' and ``voluntary'' to describe the full 
payments that must be made by the borrower to regain eligibility for 
Title IV student assistance is essential for the reasons suggested by 
the commenters. These terms were dropped from the NPRM proposal 
inadvertently. The Secretary does not agree with the recommendation 
that the regulations should be revised to authorize lenders to allow a 
borrower to renew eligibility more than one time under certain 
circumstances. This one-time restriction is statutory. The Secretary 
wishes to clarify that this one-time restriction on regaining 
eligibility in no way restricts the same borrower from bringing a loan 
out of default status more than once.
    Changes: A change has been made. The terms ``consecutive'' and 
``voluntary'' have been reinserted into the definition to modify the 
consecutive full payments that must be made by the borrower to regain 
eligibility.

Section 682.201  Eligible Borrowers

    Comments: Many commenters did not support the proposal to allow a 
borrower to include a defaulted loan in an FFEL Consolidation loan 
simply by agreeing to repay the Consolidation loan under an income-
sensitive repayment plan rather than by making the currently required 
series of three consecutive payments on the defaulted loan. The 
commenters also felt strongly that the similar borrower option that 
exists in the Direct Loan program should be deleted from regulations. 
These commenters believe that such a borrower should be required to 
make actual payments on the defaulted loan to demonstrate an intent and 
ability to repay the loan before the borrower is granted an additional 
extension of federal credit in the form of a Consolidation Loan and, 
possibly, additional Title IV student assistance to return to school. 
These commenters also believe that this policy encourages the ``gaming 
of the [student loan] system'' by allowing a borrower who has already 
defaulted on one or more loans to avoid making any payments on any 
Title IV student loan debt for a considerable period of time if the 
borrower returns to school. One of these commenters pointed out that if 
such a borrower cannot afford to make the three ``reasonable and 
affordable'' payments on the defaulted debt, they would be equally 
unable and unlikely to make scheduled payments on the Consolidation 
loan. A couple of other commenters recommended that the regulations be 
revised to retain the three 

[[Page 61752]]
payment requirement, with the lender authorized to waive the 
requirement based on documented exceptional circumstances if the 
borrower demonstrates a willingness and ability to repay the 
Consolidation loan. Some commenters supported the provision as proposed 
in order to maintain parity between the FFEL and Direct Loan programs, 
but some of those commenters questioned how the holder of the loan 
would know or be able to verify that a borrower has agreed to repay the 
loan under an income-sensitive repayment plan.
    Discussion: The Secretary acknowledges the commenters' concerns 
regarding providing this option to borrowers already in default on an 
FFEL program loan. However, the Secretary believes that a significant 
number of borrowers in the past have defaulted because they could not 
afford to make required loan payments. When a borrower consolidates a 
defaulted loan or loans under an income-sensitive repayment plan (or, 
in the Direct Loan program, under an income-contingent repayment plan) 
the amount the borrower will be required to repay will be one the 
borrower can afford. The Secretary believes that an income-sensitive 
payment amount coupled with the extended repayment period generally 
available in the FFEL Consolidation loan program, significantly lessens 
the risk that the borrower will default again. The Secretary also does 
not believe that three consecutive monthly ``reasonable and 
affordable'' payments from the borrower, which could be as low, for 
example, as $2 per month, necessarily is a more significant indicator 
of whether a borrower will default on the new Consolidation loan. It is 
correct that borrowers paying off defaulted loans through loan 
consolidation regain immediate eligibility for additional Title IV 
student assistance and perhaps represent a slightly greater risk of 
default on an even larger debt load. However, this risk was created 
when Congress amended the HEA to allow borrowers to repay defaulted 
loans through a Consolidation loan. The Secretary's decision to allow 
defaulted borrowers to receive a Consolidation loan by agreeing to 
repay the loan through an income-sensitive repayment arrangement does 
not significantly increase that risk, and in fact, is likely to reduce 
defaults. The Secretary believes that borrowers consolidating their 
defaulted loans and regaining eligibility for Title IV student 
assistance in order to obtain additional education or training are 
worth the risk if this second chance leads to gainful employment that 
will ultimately translate into greater returns to the FFEL program and 
the federal taxpayers.
    Mindful of the unease with which many in the student aid community 
view this conforming change in FFEL regulations, the Secretary is 
committed to monitoring the repayment records of these borrowers 
through the use of the National Student Loan Data System over the next 
few years. If the repayment patterns of such borrowers in the FFEL and 
Direct Loan programs reach an unacceptable level of repeat defaults by 
these borrowers, the Secretary will reconsider this policy in the FFEL 
and Direct Loan programs.
    With regard to the question about how a loan holder asked to 
provide a certification to the consolidating lender is to know or 
verify that the borrower has agreed to an income-sensitive repayment 
plan option, the Secretary notes that it is the obligation of the 
consolidating lender to determine if the borrower qualifies for the 
consolidation loan. The consolidating lender will have to determine 
whether the borrower has chosen an income-sensitive repayment plan or 
needs to make the required monthly payments to the holder of the 
defaulted loan. The Secretary also wishes to remind those commenters 
who expressed concern about this approach that lenders in the FFEL 
program always have the option not to make an FFEL Consolidation loan.
    Changes: None.

Section 682.207  Due Diligence in Disbursing a Loan

Section 682.207(c)(4)
    Comments: All of the commenters agreed with the proposal to codify 
into the FFEL regulations the existing policy that allows a lender to 
include more than one disbursement of a multiply-disbursed loan in the 
same installment scheduled to be sent to the school if the midpoint of 
the loan period has expired when the first disbursement is scheduled to 
be made. Several commenters, however, asked that the provision be 
revised to reflect the exception provided in the law for term-based 
schools that allows a second or subsequent disbursement to be made 
prior to the mid-point of the loan period if that is necessary to 
coincide with the school's next scheduled term. The commenters pointed 
out that the proposed rule would prevent a term-based school from 
receiving two disbursements in a single installment if the start of the 
next scheduled term was before the mid-point of the loan period. 
Another commenter asked that the phrase ``for which the loan was made'' 
be inserted after the phrase ``loan period'' to clarify what the 
midpoint is based on.
    Discussion: The Secretary agrees with the commenters that these 
revisions to the proposed provision are warranted.
    Changes: Section 682.207(c)(4) has been revised to provide that 
such a single installment can be made on the earlier of the mid-point 
of the loan period for which the loan was made or the beginning of the 
school's next scheduled term.
Section 682.207(d)(4)
    Comments: All the commenters endorsed the clarifying changes made 
to the late disbursement provisions in section 682.207(d)(4) and 
corresponding changes made in section 682.604. One commenter suggested 
an additional change to section 682.207(d)(2)(iii) to clarify that a 
lender is not required to wait for notification from the school but may 
presume that exceptional circumstances exist when making a disbursement 
from the 61st day through the 90th day after the date the student 
ceased enrollment on at least a half-time basis or the expiration date 
of the period of enrollment for which the loan was intended. Upon 
receipt of the disbursement, the school would be required to determine 
and document in the student's file that exceptional circumstances 
existed and deliver the loan proceeds or return the disbursement to the 
lender.
    Discussion: The Secretary agrees that this further clarification is 
useful. The Secretary believes these procedures for lender and school 
handling of a late disbursement during this period will be simple and 
efficient for both the lender and school.
    Changes: Section 682.207(d)(2)(iii) has been revised to reflect the 
respective lender and school responsibilities and processes for 
handling late disbursements during the last 30 days of the 90-day 
period during which late disbursements may be made.

Section 682.209(b)  Payment Application and Prepayment

    Comments: One commenter recommended an additional change to section 
682.209(b)(1) to clarify that a lender has the option to apply any 
payment to late charges, collection costs, outstanding interest, and 
outstanding principal in whatever order the lender chooses. The 
commenter believes that the provision, as currently written, requires 
application of payments first to late charges and collection costs, 
then to outstanding interest, and finally to outstanding 

[[Page 61753]]
principal. Most commenters supported the reduction (from three to one) 
in section 682.209(b)(2)(ii) of the number of full excess payments a 
lender must receive before the lender, absent instructions from the 
borrower, is authorized to interpret the borrower's intent on the 
handling of the prepayment and to apply them to future installment 
payments on the loan. Some commenters, however, objected to changing 
what had been a lender option in the handling of prepayments submitted 
without borrower instructions to a requirement that the lender treat 
them as intended for future installments. These commenters believe that 
the lender is in the best position to review the borrower's repayment 
pattern and to determine the borrower's intentions in making multiple 
payments. Several commenters also noted that they interpreted the 
prepayment provision of (b)(2)(ii) to apply to multiple partial 
payments made by the borrower that the lender accumulates as well as 
additional full payments. Other commenters recommended clarifying that 
a lender's determination of whether a prepayment amount equals one or 
more full scheduled payments should be made only after late charges and 
collection costs have been paid. These same commenters also requested 
that an additional sentence be added to (b)(2)(ii) to clarify that the 
required notice to the borrower that the borrower's due date has been 
advanced did not apply to borrowers making prepayments while they are 
in an in-school, grace, deferment, or forbearance period because they 
do not have a scheduled due date to which a future payment would be 
applied. Many commenters disagreed strongly with the requirement in 
(b)(2)(ii) that a lender provide the borrower with a notice informing 
the borrower that the payments have been applied to future installments 
and reminding the borrower of the repayment obligation and the next 
scheduled due date. The commenters believe that this requirement is 
overly prescriptive and burdensome to lenders and that it is 
unnecessary to routinely notify the borrower that the due date has been 
advanced. They also believe that a separate notification of this nature 
outside the normal billing process is confusing to borrowers, 
especially if the lender is generating them routinely to a borrower who 
continues to submit additional full payments without instructions for 
their handling. Many of these commenters recommended that a lender be 
provided the alternative of providing this information through the use 
of the billing statement or coupon book rather than providing a 
separate notification after the funds have been applied as the 
regulation proposes. They indicated that borrower coupon books and 
billing statements are already being used to provide this kind of 
information.
    Discussion: The Secretary disagrees with the one commenter that 
recommended that the payment application instruction in (b)(1) should 
be modified to clarify that a lender may apply payments in any order to 
late charges, collection costs, outstanding accrued interest and 
principal. The language on payment application was modified, at the 
request of lenders, in the FFEL regulations published on December 18, 
1992 to clarify that a lender had the option to apply payments or 
prepayments to outstanding late charges, collection costs, and 
outstanding accrued interest before applying the remainder to 
principal. The Secretary believes that the provision as currently 
written provides lenders with the necessary flexibility in applying 
payments and is consistent with how the Secretary is applying payments 
in the Direct Loan Program.
    The Secretary also disagrees that the treatment of additional full 
payments submitted without instructions from the borrower for their 
handling (e.g., multiple payment coupons enclosed with the check, a 
written note on the billing statement or other written instructions, or 
oral instructions to the lender documented in the borrower's file) 
should be at the option of the lender. The Secretary now believes that, 
absent the borrower's instruction, the most responsible approach to 
handling additional full payments, and the likely intent of the 
borrower in the majority of cases, is to apply that amount to future 
installment payments on the loan and to advance the borrower's next 
scheduled due date. In many instances, this approach will protect a 
borrower who has submitted a large prepayment to cover a period when he 
or she will not be available to make the normally scheduled payments 
from entering a delinquent status. Mandating this treatment of such 
prepayments by lenders also provides for a consistent, standardized 
approach for all borrowers and is consistent with the Secretary's 
treatment of additional full payments submitted without borrower 
instructions in the Direct Loan program. The Secretary also wishes to 
clarify that some commenters' interpretation that the provisions in 
(b)(2)(ii) apply to accumulated partial payments received over time 
from the borrower without instructions is incorrect. The Secretary 
believes that a lender should only interpret that the borrower's 
intent, absent instructions, is to apply the excess payments to future 
installments if the prepayment amount submitted is at least one 
additional full payment. The Secretary does not believe that this is 
generally the borrower's intent when a borrower submits small 
additional amounts in excess of the scheduled payment amount. The 
Secretary expects these partial payment amounts, unless a lender 
receives specific instructions from the borrower directing the lender 
to accumulate them and eventually apply them to a future installment, 
to be applied to outstanding principal (unless the borrower has 
outstanding late or collection charges or outstanding accrued interest 
to which the lender wishes to apply the partial payment before applying 
the remainder to principal, as provided for under (b)(1) of this 
section) with no advancement of the borrower's next scheduled due date. 
The Secretary agrees that the determination of whether the excess 
payment amount is sufficient to require the handling specified in 
(b)(2)(ii) should be made after any late or collection charges and 
outstanding interest are taken care of but does not believe that this 
needs to be clarified in the regulations. The Secretary has made it 
clear that the payment application provisions in (b)(1) apply to all 
payments, including prepayments, so the Secretary believes any further 
clarification in the regulations is unnecessary. The Secretary agrees 
with the many commenters who recommended that the Secretary allow the 
use of payment coupons and billing statements as alternatives to the 
borrower notification required in (b)(2)(ii), provided the borrower is 
effectively notified of the lender's handling of the excess payment 
amounts and the advancement of the borrower's next scheduled due date. 
The Secretary also agrees that notification of the advancement of the 
payment due date is inappropriate for borrowers who make prepayments 
without instructions during in-school, grace, deferment, and 
forbearance periods when no payments are due.
    Changes: The regulations have been revised in section 
682.209(b)(2)(ii) to allow a lender to use a billing statement or a 
payment coupon book to provide information to the borrower on how the 
lender will treat additional full payment amounts if the borrower 
submits one or more additional payments without instructions to the 
lender as to their handling. The Secretary believes that a 

[[Page 61754]]
prominent standard statement on each billing statement or in the 
payment coupon book informing the borrower that the lender will apply 
the payments to future installments and will advance the borrower's 
next scheduled payment due date consistent with the number of 
additional full payments received is comparable to the separate 
notification the lender may send after receipt of such additional 
payments. A sentence has also been added to this provision to clarify 
that information related to advancing the borrower's scheduled payment 
due date need not be provided if the borrower makes the prepayment 
during an in-school, grace, deferment, or forbearance period.

Section 682.210  Deferment

    Comments: Many commenters objected to the proposed clarifying 
language that would restrict a defaulted borrower's eligibility for 
deferment, as a result of arrangements made with the holder of the 
loan, to the period up to the lender's filing of a default claim with 
the guaranty agency. Many of these commenters felt strongly that a 
lender should have the maximum flexibility in working with a borrower, 
at least up until the default claim is paid by the guaranty agency, to 
avert the claim payment, the point at which the borrower is subject to 
adverse consequences of the default and the default becomes a cost to 
the federal government. These commenters felt this more restrictive 
language would severely hamper supplemental preclaims assistance 
efforts of guaranty agencies that take place during this period. A 
couple of these commenters recommended that the clarifying language be 
revised to allow a lender to retrieve a loan from a guaranty agency 
even after default claim payment if satisfactory arrangements can be 
made with the borrower. One commenter recommended that the provision be 
revised to provide that a borrower is not eligible for deferment after 
default unless the borrower's eligibility for the deferment began prior 
to the default or, if that is not the case, unless the borrower makes 
satisfactory repayment arrangements with the lender prior to guaranty 
agency payment of the default claim. Another commenter recommended that 
language be included in this provision that clarifies that a lender's 
granting of a deferment after the filing of the default claim is at the 
lender's discretion. Several commenters recommended eliminating the 
word ``repayment'' from the phrase ``satisfactory repayment 
arrangements'' in order to clarify that the payment arrangements made 
with the holder for the purposes of this provision need only be 
acceptable to the holder, as opposed to meeting the statutory 
requirement for a borrower who is in default to regain eligibility for 
additional Title IV student assistance. Another commenter recommended 
that the Secretary retain the current regulatory language because the 
commenter interprets the provision as allowing a borrower in default to 
be entitled to a deferment if satisfactory repayment arrangements are 
made with the holder, regardless of whether the holder is a lender, a 
guaranty agency, or the Secretary.
    Discussion: The Secretary believes that clarification of this 
provision is necessary because, as currently written, it suggests that 
a borrower who has defaulted on the repayment of a loan and whose loan 
is held by a guaranty agency or the Secretary can become eligible for 
deferment of repayment on that loan by making satisfactory repayment 
arrangements as that term is defined for regaining eligibility for 
Title IV student assistance. This has never been the Secretary's 
interpretation of the law with regard to deferment eligibility. The HEA 
excludes defaulted borrowers from certain program benefits, a major one 
of these being deferments. However, through this regulatory provision, 
lenders have always had the ability, at their option, to make payment 
arrangements with a borrower even after 180 days of delinquency in 
order to avert a default claim. After a guaranty agency has paid a 
claim, however, a borrower can regain eligibility for deferment on that 
loan only through loan rehabilitation or lender repurchase of that 
loan. A borrower who makes satisfactory repayment arrangements with a 
guaranty agency to regain eligibility for Title IV student assistance, 
as provided for under section 428F(b) of the HEA, does not regain 
deferment eligibility on that defaulted loan that remains with the 
agency. Borrowers are expected to continue to make payments on that 
loan after the six required payments necessary to regain eligibility, 
but guaranty agencies are strongly encouraged to provide forbearance to 
such borrowers on the loan during the borrower's in-school period. Only 
if the loan is successfully rehabilitated or a lender repurchase is 
arranged does the borrower regain deferment eligibility. After 
consideration of the comments, the Secretary has decided that lenders 
and guaranty agencies should be allowed to work with defaulted 
borrowers to avert default claim payment through the granting of 
deferments and other administrative methods provided in the FFEL 
program until the guaranty agency pays the claim. This provides 
borrowers with ample opportunity to avert the consequences of default. 
The Secretary does not believe this provision should apply after 
default claim payment unless the lender determines the default claim 
was filed in error and recalls the loan from the agency. At the point a 
default claim is paid, Federal taxpayer funds have been used to repay 
the borrower's debt and the guaranty agency has lost the use of that 
money for other program purposes. The Secretary agrees that the phrase 
``satisfactory repayment arrangements'' needs to be modified to avoid 
any misinterpretation of what is required for purposes of this 
provision. The term satisfactory repayment arrangements, as currently 
defined, is intended to apply only to the requirements a defaulted 
borrower must meet to regain Title IV eligibility. For purposes of this 
provision, the arrangements must only be acceptable to the lender and 
are left to the lender and borrower to work out. The Secretary also 
agrees that a lender's acceptance of payments or granting of deferments 
or forbearance as part of satisfactory arrangements to avert a default 
claim payment at the post-180 or post-240 day stage of delinquency are 
strongly encouraged, but optional on the part of the lender.
    Changes: A change has been made. This provision of the regulations 
has been revised to provide for deferment eligibility of a defaulted 
borrower up to the payment of a default claim on the loan if the lender 
agrees to make payment arrangements with the borrower. The phrase 
``satisfactory repayment arrangements'' has been revised to read 
``payment arrangements acceptable to the lender.''

Section 682.211  Forbearance

    Comments: All commenters agreed with the Secretary's proposal to 
allow lenders to apply an administrative forbearance in situations when 
a borrower ends a period of deferment in a delinquent status. Many 
commenters also recommended that the provision be expanded to include 
those borrowers ending a period of mandatory forbearance in a 
delinquent status. Another commenter recommended the addition of the 
phrase ``until the next due date is established in accordance with 
section 682.209(a)(3)(ii)(B)'' at the end of the provision.
    Discussion: The Secretary agrees with the commenters.
    Changes: A change has been made to include borrowers who have ended 
a period of mandatory forbearance in a delinquent status and the 
recommended 

[[Page 61755]]
phrase related to next payment due date has been added.

Section 682.401(b)(10)(vi)(B)  Basic Program Agreement

    Comments: Several commenters requested clarification as to whether 
the amount of the insurance premium to be returned was to be 
proportional in instances where a school refunds a portion of a loan 
that is less than a full disbursement to a lender, and the lender must 
refund the insurance premium to the borrower. Many commenters requested 
that the phrase ``a portion of the loan'' be replaced with the phrase 
``full disbursement of the loan'' to reflect the fact that the 
Secretary was maintaining his existing policy that such a refund is 
necessary only if at least a full disbursement of the loan is returned. 
Another commenter requested that the regulations be revised to be 
consistent with the Direct Loan program by requiring that the refund of 
the insurance premium be applied to the borrower's loan balance rather 
than be refunded to the borrower. Other commenters suggested that the 
phrase ``within 120 days of disbursement'' be inserted to clarify the 
timeframe during which the refund of the insurance premium must be 
done.
    Discussion: The Secretary clarifies that the lender should pro-rate 
the insurance premium fee. The Secretary also agrees that the refunds 
of the insurance premium should be refunded through application to the 
borrower's account, not a cash refund to the borrower. The Secretary 
does not agree that reference to ``within 120 days of disbursement'' 
should be inserted in section 682.401(b)(10)(vi)(B)(1) because the 
Secretary believes that the timing of the school's refund to the lender 
on behalf of the student should not prevent the borrower from receiving 
the benefit of the refund of the insurance premium.
    Changes: The regulations have been revised to reflect that a 
proportional amount of the insurance premium should be refunded if the 
refund is less than the amount of a loan disbursement and that a refund 
for this purpose is an application against the borrower's loan account 
by the lender.

Section 682.402 (l)(1)  Death, Disability, Closed School, False 
Certification and Bankruptcy Discharge

    Comments: Many commenters agreed with the concept of the proposed 
regulations but requested that the regulations be revised to clarify 
that all payments should be returned to the sender, as is the case in 
the Direct Loan program, and that any notification of no further 
obligation to repay a loan discharged in bankruptcy or loan cancelled 
due to the borrower's total and permanent disability should be sent to 
the borrower. Many comments also recommended that the regulations be 
revised to provide that the lender return payments received only after 
the guaranty agency has paid the claim. The commenters were concerned 
that until the agency has reviewed and made a determination on the 
lender's claim, it is risky to refund payments.
    Discussion: The Secretary agrees with the commenters that lenders 
and guaranty agencies should return payments on all discharged loans to 
the sender consistent with the handling of discharges in the Direct 
Loan program. However, the notification that there is no further 
obligation to repay the loan should always be directed to the borrower. 
The Secretary also agrees that payments received on discharged loans 
should not be returned until the discharge claim is paid by the 
guaranty agency.
    Changes: The regulations have been revised to reflect the 
commenters' recommendations.

Section 682.412(c)  Consequences of the Failure of a Borrower or 
Student To Establish Eligibility

    Comments: Most commenters supported the Secretary's clarification 
to allow a borrower 30 days from the date a final demand letter is 
mailed by the lender to repay a loan amount that the borrower was 
ineligible to receive. One commenter disagreed with the proposal, 
stating that in a large agency it may be impossible to verify the date 
the letter is mailed unless the borrower retains the envelope with the 
post office cancellation stamp on it.
    Discussion: The Secretary notes that lenders and guaranty agencies 
are currently required to maintain records establishing the dates 
certain collection notices are mailed (as required by 34 CFR 
682.410(b)(1)(vi) and 682.411). Therefore, the Secretary believes that 
lenders will be able to determine when a letter is mailed for this 
purpose. The Secretary is concerned by the commenter's claim that large 
agencies are not tracking these dates and will evaluate whether reviews 
of lender operations in this area are necessary.
    Changes: None.

Section 682.603  Certification by a Participating School in Connection 
With a Loan Application

    Comments: All commenters agreed with the Secretary's proposal that 
in loan proration situations where a student is enrolled in a program 
of study with less than a full academic year remaining, the school will 
not be required to recalculate the amount of the loan if the number of 
hours for which an eligible student is enrolled changes after the 
school certifies the loan. One commenter suggested the insertion of the 
phrase ``or the student in the case of a PLUS loan'' in section 
682.603(g) of the regulations because the commenter was concerned that 
in the case of the PLUS loan, the school would likely assess the 
dependent student any fee since they would be unable to assess the 
parent borrower.
    Discussion: The Secretary agrees with the minor technical 
correction to section 682.603(g).
    Change: The phrase recommended by the commenter has been inserted 
in section 682.603(g).

Section 682.605  Determining the Date of a Student's Withdrawal

    Comments: All the commenters agreed with the Secretary's proposal 
to reinsert into the regulations the guidance on determining the date 
of a student's withdrawal in the case of a summer period of 
nonenrollment (``summer break'') that had been inadvertently deleted 
from the regulations. One commenter suggested the provision be revised 
to reference the fact that the summer break could include summer terms 
during which the school offers classes, but most students are generally 
not required to attend. One commenter recommended that the ``summer 
break'' approach be extended to other periods of nonenrollment during 
the regular academic year. Several commenters also pointed out that an 
earlier revision of the regulations in section 682.607(c), governing 
the school's timeframe for making a refund to a lender for a student 
who has withdrawn, could create, in the case of unofficial withdrawals, 
unintended potential liability for schools. The commenters recommended 
that the 60 days for a timely refund be based on the date the school 
determines that a student has unofficially withdrawn as it was 
formerly, not the date of withdrawal, which may have taken place weeks, 
if not months, before the school determines the student has dropped 
out. The commenters also suggested that section 682.607(c)(1) also be 
revised to clarify what constitutes timely payment to the lender under 
the ``summer break'' language of section 682.605.
    Discussion: The Secretary does not agree that the approach to 
determining student withdrawal following a period of summer 
nonenrollment should be more broadly applied to other periods of 
nonenrollment during the academic 

[[Page 61756]]
year. Since this information is used to convert a borrower to repayment 
in a timely manner, the Secretary believes it is not generally 
appropriate, except in connection with a summer period, to delay the 
school's determination of student withdrawal. The Secretary agrees that 
the summer period of nonenrollment can include summer terms during 
which the school offers classes, but most students are generally not 
expected to attend. The Secretary also agrees that the technical 
changes to section 682.607(c)(1) are needed for successful coordination 
between section 668.22(j) of the General Provisions regulations and 
sections 682.605 and .607 of the FFEL program regulations.
    Change: None.

Assessment of Educational Impact

    In the NPRM, the Secretary requested comments on whether the 
proposed regulations would require transmission of information that is 
being gathered by or is available from any other agency or authority of 
the United States.
    Based on the response to the proposed rules and on its own review, 
the Department has determined that the regulations in this document do 
not require transmission of information that is being gathered by or is 
available from any other agency or authority of the United States.

List of Subjects in 34 CFR Part 682

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

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

    Dated: November 24, 1995.
Richard W. Riley,
Secretary of Education.

    The Secretary amends Part 682 of Title 34 of the Code of Federal 
Regulations as follows:

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

    1. The authority citation for Part 682 continues to read as 
follows:

    Authority: 20 U.S.C. 1071 to 1087-2, unless otherwise noted.


Sec. 682.200  [Amended]

    2. Section 682.200, paragraph (b) is amended by revising the 
definition of ``Satisfactory repayment arrangement'' by adding at the 
end of the paragraph (1), ``A borrower may only obtain the benefit of 
this paragraph with respect to renewed eligibility once.'' and by 
removing in paragraph (2) the reference to ``34 CFR 
682.201(c)(iii)(C)'' and adding, in its place, ``34 CFR 
682.201(c)(1)(iii)(C).''
    3. Section 682.201 is amended by revising paragraph (c)(1)(iii)(C) 
to read as follows:


Sec. 682.201  Eligible borrowers.

* * * * *
    (c) * * *
    (1) * * *
    (iii) * * *
    (C) In a default status and has either made satisfactory repayment 
arrangements as defined in section 682.200(b)(2) or has agreed to repay 
the consolidation loan under the income-sensitive repayment plan 
described in Sec. 682.209(a)(6)(viii).
* * * * *
    4. Section 682.207 is amended by revising paragraph (c) 
introductory text; adding a new paragraph (c)(4) and revising 
paragraphs (d)(1) and (d)(2)(iii) to read as follows:


Sec. 682.207  Due diligence in disbursing a loan.

* * * * *
    (c) A lender shall disburse any Stafford or PLUS loan as follows:
* * * * *
    (4) If the first disbursement of a loan is scheduled to be made on 
the date of the second scheduled disbursement, the loan may be 
disbursed in a single installment. This date may be on the earlier of--
    (i) The midpoint of the loan period for which the loan was made; or
    (ii) A date which coincides with the beginning of the next 
scheduled term as provided for in the exception clause of paragraph 
(c)(3) of this section.
    (d)(1) A lender may disburse loan proceeds after the student has 
ceased to be enrolled on at least a half-time basis or after the 
expiration date of the period of enrollment for which the loan was 
intended, in accordance with paragraphs (d) (2) and (3) of this 
section.
    (2) * * *
    (iii) In exceptional circumstances within 30 days after the period 
described in paragraph (d)(2)(ii) of this section. Between the 61st and 
up through the 90th day, a lender may presume that exceptional 
circumstances exist and make the disbursement. The school shall review 
the borrower's circumstances and either determine that exceptional 
circumstances exist or return the loan proceeds to the lender. The 
school shall document the exceptional circumstances in the student's 
file.
* * * * *
    5. Section 682.209 is amended by revising paragraph (b) to read as 
follows:


Sec. 682.209  Repayment of a loan.

* * * * *
    (b) Payment application and prepayment. (1) The lender may credit 
the entire payment amount first to any late charges accrued or 
collection costs and then to any outstanding interest and then to 
outstanding principal.
    (2)(i) The borrower may prepay the whole or any part of a loan at 
any time without penalty.
    (ii) If the prepayment amount equals or exceeds the monthly payment 
amount under the repayment schedule established for the loan, the 
lender shall apply the prepayment to future installments by advancing 
the next payment due date, unless the borrower requests otherwise. The 
lender must either inform the borrower in advance using a prominent 
statement in the borrower coupon book or billing statement that any 
additional full payment amounts submitted without instructions to the 
lender as to their handling will be applied to future scheduled 
payments with the borrower's next scheduled payment due date advanced 
consistent with the number of additional payments received, or provide 
a notification to the borrower after the payments are received 
informing the borrower that the payments have been so applied and the 
date of the borrower's next scheduled payment due date. Information 
related to next scheduled payment due date need not be provided to 
borrower's making such prepayments while in an in-school, grace, 
deferment, or forbearance period when payments are not due.
* * * * *
    6. Section 682.210 is amended by revising paragraph (a)(8) to read 
as follows:


Sec. 682.210  Deferment.

    (a) * * *
    (8) A borrower whose loan is in default is not eligible for a 
deferment, unless the borrower has made payment arrangements acceptable 
to the lender prior to the payment of a default claim by a guaranty 
agency.
* * * * *
    7. Section 682.211 is amended by adding a new paragraph (f)(9) to 
read as follows:


Sec. 682.211  Forbearance.

* * * * *
    (f) * * *
    (9) For a period of delinquency that may remain after a borrower 
ends a period of deferment or mandatory 

[[Page 61757]]
forbearance until the next due date is established in accordance with 
Sec. 682.209(a)(3)(ii)(B).
* * * * *
    8. Section 682.401(b)(10)(vi)(B), is revised to read as follows:


Sec. 682.401  Basic program agreement.

* * * * *
    (b) * * *
    (10) * * *
    (vi) * * *
    (B) The premium or an appropriate prorated amount of the premium 
must be refunded by application to the borrower's account if--
    (1) The loan or a portion of a loan is returned by the school to 
the lender;
    (2) Within 120 days of disbursement, the loan is repaid in full;
    (3) Within 120 days of disbursement, the loan check has not been 
negotiated; or
    (4) Within 120 days of disbursement, the loan proceeds disbursed by 
electronic funds transfer or master check in accordance with 
Sec. 682.207(b)(1)(ii) (B) and (C) have not been released from the 
restricted account maintained by the school.
* * * * *
    9. Section 682.402 is amended by revising paragraph (c)(3) and by 
revising paragraphs (l)(1) and (l)(2) as set forth below; by amending 
paragraph (l)(3) by replacing the reference to ``(l)(2)'' with 
``(l)(1).''


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

* * * * *
    (c) * * *
    (3) After being notified that the guaranty agency has paid a 
disability discharge claim, the lender shall return to the sender any 
payments received by the lender after the date that the borrower became 
totally and permanently disabled as certified by the physician. At the 
same time that the lender returns the payment, it shall notify the 
borrower that there is no obligation to repay a loan discharged on the 
basis of disability.
* * * * *
    (l) * * *
    (1) If the guaranty agency receives any payments from or on behalf 
of the borrower on or attributable to a loan that has been discharged 
in bankruptcy on which the Secretary previously paid a bankruptcy 
claim, the guaranty agency shall return 100 percent of these payments 
to the sender. The guaranty agency shall promptly return, to the 
sender, any payment on a cancelled or discharged loan made by the 
sender and received after the Secretary pays a closed school or false 
certification claim. At the same time that the agency returns the 
payment, it shall notify the borrower that there is no obligation to 
repay a loan discharged on the basis of death, disability, bankruptcy, 
false certification, or closing of the school.
    (2) The guaranty agency shall remit to the Secretary all payments 
received from a tuition recovery fund, performance bond, or other third 
party with respect to a loan on which the Secretary previously paid a 
closed school or false certification claim.
* * * * *
    10. Section 682.412 is amended by revising paragraph (c) to read as 
follows:


Sec. 682.412  Consequences of the failure of a borrower or student to 
establish eligibility.

* * * * *
    (c) In the final demand letter transmitted under paragraph (a) of 
this section, the lender shall demand that within 30 days from the date 
the letter is mailed the borrower repay in full any principal amount 
for which the borrower is ineligible and any accrued interest, 
including interest and all special allowance paid by the Secretary.
* * * * *
    11. Section 682.603 is amended by adding a new paragraph (f)(4) and 
by revising paragraph (g) to read as follows:


Sec. 682.603  Certification by a participating school in connection 
with a loan application.

* * * * *
    (f) * * *
    (4) In prorating a loan amount for a student enrolled in a program 
of study with less than a full academic year remaining, the school need 
not recalculate the amount of the loan if the number of hours for which 
an eligible student is enrolled changes after the school certifies the 
loan.
    (g) A school may not assess the borrower, or the student in the 
case of a PLUS loan, a fee for the completion or certification of any 
FFEL Program form or information or for providing any information 
necessary for a student or parent to receive a loan under part B of the 
Act or any benefits associated with such a loan.
    12. Section 682.604 is amended by removing paragraph (e)(3), 
redesignating paragraph (e)(4) as paragraph (e)(3), in redesignated 
paragraph (e)(3), in the introductory text, remove ``the lender or 
guaranty agency has not informed the school that it prohibits a late 
disbursement as permitted by Sec. 682.207(d)(2)(i), and if''.
    13. Section 682.605 is revised to read as follows:


Sec. 682.605  Determining the date of a student's withdrawal.

    (a) Except in the case of a student who does not return for the 
next scheduled term following a summer break, which includes any summer 
term(s) in which classes are offered but students are not generally 
required to attend, a school shall follow the procedures in 34 CFR 
668.22(j) for determining the student's date of withdrawal. In the case 
of a student who does not return from a summer break, the school must 
follow the procedures in 34 CFR 668.22(j) except that the school shall 
determine the student's withdrawal date no later than 30 days after the 
first day of the next scheduled term.
    (b) The school shall use the withdrawal date determined under 34 
CFR 668.22(j) for the purpose of reporting to the lender the date that 
the student has withdrawn from the school.
    (c) For the purpose of a school's reporting to a lender, a 
student's withdrawal date is the month, day and year of the withdrawal 
date.
* * * * *
    14. Section 682.607(c) is revised to read as follows:


Sec. 682.607  Payment of a refund to a lender.

* * * * *
    (c) Timely payment. A school shall pay a refund that is due--
    (1) Within 60 days of the date that the student officially 
withdraws, is expelled, or the institution determines that a student 
has unofficially withdrawn, as determined in accordance with 34 CFR 
668.22(j) and Sec. 682.605.
    (2) In the case of a student who does not return to school at the 
expiration of an approved leave of absence under 34 CFR 668.22(j), 
within 30 days of the earlier of the date of expiration of the leave of 
absence or the date the student notifies the institution that the 
student will not be returning to the institution after the expiration 
of an approved leave of absence.
* * * * *
[FR Doc. 95-29179 Filed 11-30-95; 8:45 am]
BILLING CODE 4000-01-P