[Federal Register Volume 60, Number 231 (Friday, December 1, 1995)]
[Rules and Regulations]
[Pages 61760-61774]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-29206]




[[Page 61759]]

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Part IV





Department of Education





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34 CFR Part 668



Student Assistance General Provisions; Final Rule

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

[[Page 61760]]


DEPARTMENT OF EDUCATION

34 CFR Part 668

RIN 1840-AC17


Student Assistance General Provisions

AGENCY: Department of Education.

ACTION: Final Regulations.

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

SUMMARY: The Secretary amends the Student Assistance General Provisions 
(General Provisions) regulations. The General Provisions regulations 
govern elements common to all of 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 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 also streamline the limitation, suspension, and termination 
(L, S, and T) actions against an institution and 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.

EFFECTIVE DATE: These regulations take effect July 1, 1996. However, 
affected parties do not have to comply with the information collection 
requirements in Sec. 668.17 until the Department of Education publishes 
in the Federal Register the control number assigned by the Office of 
Management and Budget (OMB) to these information collection 
requirements. Publication of the control number notifies the public 
that OMB has approved these collection requirements under the Paperwork 
Reduction Act of 1995.

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: On September 21, 1995, the Secretary 
published a Notice of Proposed Rulemaking (NPRM) for part 668 in the 
Federal Register (60 FR 49178). The NPRM included a discussion of the 
major issues surrounding the proposed changes which 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 changes can be found:
    The Secretary proposed 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 institutional eligibility 
requirements, based on the repayment of Direct Loans by the 
institution's former students, that are similar to those in the FFEL 
Program (pages 49179-49181).
    Further, the Secretary proposed that a Direct Loan institution with 
an excessive Direct Loan Program cohort rate or weighted average cohort 
rate be permitted to avoid a loss of participation by showing the 
existence of exceptional mitigating circumstances (pages 49182-49184).
    The Secretary proposed to modify the cohort default rate appeal 
process and the exceptional mitigating circumstances under which an 
institution may appeal its statutory loss of eligibility to participate 
in the FFEL Program on the basis of its cohort default rate (page 
49184).
    Finally, the Secretary proposed to streamline the current L, S, and 
T procedures and to limit the grounds on which a hearing officer may 
decide when an L, S, and T action is unwarranted (pages 49182-49185).
    The Secretary has combined in a separate new paragraph the 
provisions that were contained in Sec. 668.17(d)(1) (iii) and (iv), (e) 
(5) through (11), and (f) (5) through (10). These paragraphs 
established an institution's FFEL Program cohort default rate, Direct 
Loan Program cohort rate, and weighted average cohort rate, 
respectively, when an institution changes status during a fiscal year. 
A change of status occurs, for example, when an institution merges with 
another institution or a branch of an institution joins a free-standing 
institution. These provisions have been consolidated into a new 
paragraph (g).

Substantive Changes to the NPRM

    The following discussion reflects substantive changes made to the 
NPRM in the final regulations. The provisions are discussed in the 
order in which they appear in the proposed rules.

Section 668.17  Default Reduction and Prevention Measures

Participation Rate Index Formula

    A change has been made to the formula used to determine the 
percentage of an institution's students who borrow under the FFEL or 
Direct Loan programs for calculating the participation rate index under 
Sec. 668.17(c)(1)(ii)(A). The proposed rules provided that an 
institution would base the percentage of its students that borrow under 
the FFEL or Direct Loan programs on the number of students enrolled at 
least half-time at the institution.
    The final rules have been changed to provide that an institution 
must base the percentage of its students that borrow under the FFEL or 
Direct Loan programs on the number of its ``regular students'' enrolled 
at least half-time. A ``regular student'' is a student who is enrolled 
or accepted for enrollment at an institution for the purpose of 
obtaining a degree, certificate, or other recognized educational 
credential offered by that institution. This definition is contained in 
34 CFR 600.2.

Economically Disadvantaged Rate Formula

    A change has been made to the formula used to determine the 
percentage of an institution's students who come from economically 
disadvantaged backgrounds under Sec. 668.17(c)(1)(ii)(B). The proposed 
rules provided that the percentage of an institution's students coming 
from economically disadvantaged backgrounds would be based on all of 
the institution's students.
    The final rules have been changed to provide that the percentage of 
an institution's students that come from disadvantaged economic 
backgrounds must be based on the institution's regular students.

Placement Rate Formula

    A number of changes have been made to the formula used to calculate 
an institution's placement rate under Sec. 668.17(c)(1)(ii)(B)(2). The 
formula contained in the proposed rules considered a former student who 
was initially enrolled full-time as successfully placed if, on the date 
the institution submits the appeal, the former student:
    (1) is employed, or had been employed for at least 13 weeks, 
following his or her last day of attendance at the institution; or
    (2) is enrolled or was enrolled for at least 13 weeks in a higher 
level program at another institution for which the institution's 
program provided substantial preparation.
    The placement rate calculation has been revised to provide that: 
(a) only former regular students who were initially enrolled at least 
half-time be 

[[Page 61761]]
considered in the placement rate; and (b) a student will be considered 
as successfully placed by the institution if the former student:
    (1) has been employed in an occupation for which the institution's 
program provided training for at least 13 weeks within the 12-month 
period after the date of the student's last day of attendance; or
    (2) is employed in an occupation for which the institution's 
program provided training on the day after 12 months following the date 
of the student's last day of attendance.
    The final regulations provide that a student who is still enrolled 
in the institution on the day after 12 months after the date of the 
student's last day of attendance and is making satisfactory academic 
progress in the program in which he or she was initially scheduled to 
complete is excluded from the cohort of students used to determine the 
institution's placement rate. The proposed rules would have included 
such students in the placement rate.
    Further, under the final regulations, a student or former student 
may not be considered successfully placed if the institution is the 
student's or former student's employer.
    Finally, the final regulations provide that, in calculating the 
placement rate formula under Sec. 668.17(c)(2), a student who is 
initially enrolled at least half-time, but less than full-time, will be 
considered to be scheduled to complete his or her program during the 
amount of time normally it would take that student to complete the 
program based on his or her initial enrollment.

Completion Rate Formula

    A change has been made to the formula used to calculate an 
institution's completion rate under Sec. 668.17(c)(1)(ii)(B)(1). The 
formula contained in the proposed rules would have based the 
institution's completion rate on all initially enrolled full-time 
students. The final rules have been amended to base the institution's 
completion rate on all initially enrolled full-time regular students.

Submission of Appeal Information

    A change has been made to Sec. 668.17(c)(1)(ii) to provide that an 
appeal on the basis of exceptional mitigating circumstances must be 
submitted to the Secretary in a format prescribed by the Secretary and 
must include data elements requested by the Secretary. The proposed 
rules identified specific detailed information an institution would 
have to provide in an appeal. The Secretary has removed this detailed 
information from the final regulations. Instead, the final regulations 
provide that any information an institution submits regarding an appeal 
must:
     be submitted in a format prescribed by the Secretary, and
     include information the Secretary has determined is 
necessary to evaluate the appeal.
    The Secretary expects that institutions will be provided with the 
format in which the appeal must be submitted and the data elements that 
must be included when the institution is notified of its cohort default 
rate data in accordance with Sec. 668.17(i).
    The information that the Secretary may require in an appeal may 
include, but is not necessarily limited to, information relating to 
student enrollment, loan periods, expected family contributions (EFC), 
adjusted gross incomes, withdrawal dates, graduation dates, transfers, 
job placement, employer information, job titles, and dates employed. 
This information is the same information currently required of 
institutions submitting appeals. Institutions will likely be familiar 
with these data items since the Official Default Rate Guide (formerly 
Enclosure B), which is provided to institutions along with their cohort 
default rates, lists these data elements. The Secretary does not expect 
these items to change substantially.
    Section 668.17(c)(6) of the final regulations has been revised to 
require the chief executive officer of an institution to certify, under 
penalty of perjury, that the appeal information is true and correct.

Completion and Placement Rate Appeals

    In Sec. 668.17(c)(1)(ii)(B), a change has been made to an 
institution's right to appeal using the exceptional mitigating 
circumstances appeal based on both the percentage of an institution's 
students that come from disadvantaged economic backgrounds and the 
institution's completion rate or placement rate. The proposed rules 
limited the exceptional mitigating circumstance appeal that included 
the completion rate to public and private nonprofit institutions, and 
limited the exceptional mitigating circumstances appeal that included 
the placement rate to proprietary institutions.
    The final regulations have been revised to require degree-granting 
proprietary institutions as well as public or private nonprofit degree-
granting institutions, to appeal using the completion rate component, 
whereas nondegree-granting institutions, public, private nonprofit, or 
proprietary, may only appeal based on the placement rate component.

Guaranty Agency Verification of Data

    The final regulations have been changed in Sec. 668.17(c)(8) to 
provide that an institution will not lose its eligibility to 
participate in the FFEL or Direct Loan programs during the appeal 
process if a guaranty agency does not respond in a timely manner to the 
institution's timely request to verify data included in the 
institution's FFEL Program cohort default rate that the institution 
believes is inaccurate. The proposed rules had provided that an 
institution would lose its eligibility to continue to participate in 
the appeal process if it did not submit all of its appeal information 
to the Secretary within 30 days following notification of the loss of 
eligibility.
    Section 668.17(c)(1) now requires an institution that appeals on 
the basis of inaccurate data to inform the Secretary that it is 
appealing on this basis at the same time it submits its request to 
verify its FFEL Program cohort default rate data to the guaranty 
agency. Further, an institution must provide its verified data to the 
Secretary within five working days after it receives that data from the 
guaranty agency.

Independent Audit of Appeals

    The final regulations have been changed in Sec. 668.17(c)(7) to 
provide that an institution choosing to appeal its loss of eligibility 
on the basis of exceptional mitigating circumstances must provide a 
statement from an independent auditor that verifies the information 
included in the appeal within 60 days following the institution's 
notification of the loss of eligibility. The proposed rules provided 
that this information be submitted by the 30th day following 
notification of the loss of eligibility. The final rules continue to 
require that the rest of the appeal be submitted by that 30th day.
    Further, the regulations have been amended to provide more specific 
guidance concerning the methodology that must be used by an independent 
auditor to determine if the information contained in the appeal is 
correct.

Data Period

    The final regulations have been changed in Sec. 668.17(c)(1)(ii)(B) 
to clarify that the 12-month period used to determine the percentage of 
the institution's student body that comes from disadvantaged economic 
backgrounds must be the same 12-month period the institution uses to 
determine its placement rate or completion rate. The proposed rules 
were read to allow the institution the option to choose a different 12-
month 

[[Page 61762]]
period for the placement rate or completion rate than the one used for 
the percentage of the institution's student body that comes from 
disadvantaged economic backgrounds.

Direct Loan Program Cohort Rate and Weighted Average Cohort Rate

    The final regulations have been changed in Secs. 668.17(e)(1)(ii) 
and 668.17(f)(1)(ii) to provide that a Direct Loan borrower who is in 
the income-contingent repayment (ICR) plan on his or her loan and, for 
270 days, had scheduled monthly payments that are less than $15 and 
less than the interest that is accruing on the loan each month will be 
included in an institution's Direct Loan Program cohort rate or 
weighted average cohort rate. Under the proposed rules, such a borrower 
would be included in the Direct Loan Program cohort rate or weighted 
average cohort rate only if such conditions existed at the end of the 
fiscal year following the fiscal year the borrower entered repayment on 
the loan.

L, S, and T

    The final regulations have been revised in Sec. 668.17(a)(5) so 
that the Secretary will cease any L, S, and T action taken against an 
institution solely on the basis of its FFEL Program cohort default 
rate, Direct Loan Program cohort rate, or weighted average cohort rate 
if the institution successfully appeals under the exceptional 
mitigating circumstances. The proposed rules provided that the 
Secretary would withdraw an L, S, and T action against an institution's 
participation only in the FFEL Program if the institution successfully 
appeals under exceptional mitigating circumstances.
    The final regulations have been revised in Sec. 668.17(c)(1)(ii)(A) 
to provide that an institution with an FFEL Program cohort default 
rate, Direct Loan Program cohort rate, or weighted average cohort rate 
that exceeds 40 percent will not be eligible to appeal a loss of 
eligibility to participate in the FFEL or Direct Loan programs under 
the participation rate index.

Analysis of Comments and Changes

    In response to the Secretary's invitation in the NPRM, 150 parties 
submitted comments on the proposed regulations. An analysis of the 
comments and the changes follows. Major issues are grouped according to 
subject, with references to the appropriate sections of the regulation. 
Technical and other minor changes, and suggested changes the Secretary 
is not legally authorized to make under the applicable statutory 
authority, generally are not addressed.

General

    Comments: Many commenters argued that the HEA requires that these 
regulations be subject to a negotiated rulemaking process.
    Discussion: The Secretary does not agree with the commenters. 
Section 457 of the HEA requires the Secretary, to the extent 
practicable, to promulgate regulations that implement the provisions of 
Part D of the HEA (which authorizes the Direct Loan Program) through a 
negotiated rulemaking process. Although these rules will affect Direct 
Loan institutions, these regulations do not directly implement any 
provisions contained in Part D of the HEA. The HEA does not require the 
Secretary to institute a negotiated rulemaking process for every 
regulation that has an affect on the Direct Loan Program. Moreover, the 
HEA does not require negotiated rulemaking for amendments to existing 
regulations. In any case, it was not practicable to conduct negotiated 
rulemaking for these amendments.
    Changes: None.
    Comments: Many commenters believed that the comment period for this 
proposed rule was too short, especially due to the fact that the 
Secretary published six proposed rules during the same week. The 
commenters indicated that it would be more appropriate for the 
Secretary to provide a longer comment period to allow them to provide 
more complete responses to the proposed rules.
    Discussion: In the six sets of proposed rules mentioned above, the 
Secretary proposed numerous improvements and necessary changes to the 
Student Financial Assistance Programs. The ``Master Calendar'' 
provisions contained in section 482 of the HEA require that regulations 
be published in final form by December 1 prior to the start of the 
award year for which they will become effective. Because of the 
importance of implementing these changes and improvements for the award 
year beginning July 1, 1996, the Secretary established a comment period 
that allows publication of these final regulations by December 1, 1995, 
as required by the ``Master Calendar'' timeframe. The Secretary always 
endeavors to provide as long a comment period as possible.
    Changes: None.
    Comment: A number of commenters representing proprietary 
institutions questioned the Secretary's decision to distinguish between 
non-degree-granting proprietary and public or private nonprofit 
institutions for purposes of calculating Direct Loan Program cohort 
rates and weighted average cohort rates. These commenters argued that 
there was no basis for this distinction because proprietary 
institutions offer the same programs as public institutions (such as 
community colleges), which offer job training in a broader educational 
context. These commenters criticized the proposal to include in the 
cohort default rate calculation for proprietary non-degree granting 
institutions, Direct Loans repaid through an ICR plan under which the 
borrower makes payments less than $15 a month and that payment results 
in negative amortization. Other commenters representing other types of 
educational institutions supported the distinctions included in the 
draft regulations.
    Discussion: The Secretary believes it is appropriate to distinguish 
between different types of institutions in calculating cohort default 
rates. First, numerous reports by congressional committees (including 
the Senate's Permanent Subcommittee on Investigations) and the General 
Accounting Office, as well as the Department's own reviews of 
individual institutions, have concluded that many proprietary 
institutions (particularly non-degree-granting institutions) use 
promises of job training and placement to entice students to enroll and 
then the institutions fail to provide worthwhile services. Second, 
those commenters who urged the Secretary not to distinguish between 
different types of institutions are asking the Secretary to ignore the 
overwhelming evidence that student loan default rates (and the 
associated costs to students and taxpayers) are much higher in the 
proprietary sector than in any other sector of higher education. For 
example, among the institutions for whom cohort default rates were 
calculated for Fiscal Year 1992 (which are the most recent final rates 
available), 444 institutions were subject to loss of FFEL eligibility 
for the first time based on default rates over 25 percent for the three 
most recent fiscal years. Of those institutions, 396 (89 percent) were 
proprietary institutions. Similarly, of the 205 institutions whose loss 
of eligibility was extended based on excessive default rates, 186 (91 
percent) were proprietary; and of the 376 institutions subject to 
limitation, suspension or termination from participation in all Title 
IV programs based on excessive default rates, 324 (86 percent) were 
proprietary. Propreitary institutions represented 44 percent of all 
institutions for whom 

[[Page 61763]]
cohort default rates were calculated based on students and former 
students entering repayment on FFEL Program loans in fiscal year 1992.
    Further, the Fiscal Year 1992 data show that proprietary 
institutions had default rates of 30.2 percent, twice the national 
average for all institutions, and that public two-year institutions had 
rates of 14.5 percent. These data do not support the commenters' 
arguments that public institutions that offer vocational programs 
similar to those offered by many proprietary institutions should be 
treated the same as proprietaries for purposes of calculating Direct 
Loan Program cohort rates or weighted average cohort rates.
    In analyzing this information, the Secretary has concluded that 
non-degree-granting proprietary institutions present a particular risk 
to students and taxpayers. The Secretary believes that these 
institutions would have a particular incentive to encourage their 
student borrowers to request an ICR plan in an attempt to mask their 
failure to provide worthwhile training, which results in employment 
that only allows a borrower to make minimal loan payments while falling 
further behind on the loan through negative amortization.
    Changes: None.
    Comments: Many commenters responded to the Secretary's invitation 
to comment regarding whether the Secretary should implement measures to 
prevent an institution from evading the proposed rule under which a 
Direct Loan Program cohort rate and weighted average cohort rate are 
calculated for non-degree-granting proprietary institutions using an 
ICR component if such an institution switched to a nonprofit status. 
The commenters felt that the current Internal Revenue Service 
requirements to establish nonprofit status are sufficiently rigorous, 
costly, and lengthy so as to prevent an institution from switching from 
profit to nonprofit status to avoid the consequences of a high default 
rate. Commenters argued that this type of decision would more likely be 
made for business reasons rather than for the purpose of evading 
regulatory requirements.
    Discussion: The Secretary has carefully evaluated the comments 
received on this issue and believes that further consideration is 
warranted prior to implementing any regulatory or procedural changes 
that would prevent an institution from switching from profit to 
nonprofit status to avoid the consequences of a high default rate.
    Changes: None.
    Comments: Many commenters responded to the Secretary's request for 
public comment regarding adding a measure to the default rate 
definition for borrowers for whom payment has been deferred for an 
extended period of time under the economic hardship or unemployment 
deferments, or a forbearance. The commenters argued that including 
borrowers whose payments had been deferred for an extended period of 
time in the default rate definition results in ``punishing'' an 
institution for informing students of their rights to defer or forbear 
payments in certain circumstances. Further, some commenters argued that 
the benefits to students of avoiding defaults through the use of 
deferments and forbearance would outweigh the potential for abuse by 
unscrupulous institutions that might try to artificially lower their 
default rates.
    Discussion: The Secretary agrees with the commenters that the use 
of deferments and forbearances benefit students by preventing defaults. 
The Secretary believes that this issue warrants further consideration 
prior to implementing any changes. The Secretary will continue to 
monitor the use of deferments and forbearances in both the Direct Loan 
and FFEL Programs to determine if further action is needed.
    Changes: None.
    Comments: Many commenters suggested that if the Secretary was 
planning to provide Direct Loan Program institutions with tools, such 
as reports on delinquent borrowers, access to borrower information on a 
toll-free servicing telephone number, and free loan counseling 
materials for entrance and exit counseling, to help it reduce its 
default rate, similar tools should be provided to the FFEL Program 
institutions. The commenters stated that the Secretary has obligations 
to help reduce default rates in the FFEL Program.
    Discussion: The Secretary assures these commenters that he is 
equally concerned about reducing defaults in both the FFEL and Direct 
Loan programs and agrees that it is in the best interests of 
institutions, borrowers, and taxpayers to help reduce the incidence of 
student loan defaults by providing institutions with default prevention 
tools. The HEA and the FFEL Program regulations provide FFEL 
institutions with numerous tools to reduce their default rates. The 
Secretary, guaranty agencies, and various institutional associations 
have offered institutions training opportunities and information 
designed to reduce FFEL Program cohort default rates. Direct Loan 
institutions will be treated similarly. Some commenters suggested 
specific measures that could be taken to assist institutions in 
reducing defaults. The Secretary will carefully consider these 
suggestions to enhance default prevention techniques in both the FFEL 
and Direct Loan programs.
    Changes: None.

Section 668.17(a)(1)

    Comments: Many commenters were concerned that the language in 
Sec. 668.17(a)(1) implies that an institution will not be notified of 
its FFEL Program cohort default rate, Direct Loan Program cohort rate, 
or weighted average cohort rate if that rate is equal to or less than 
20 percent. The commenters suggested that all institutions should be 
notified of their FFEL Program cohort default rates, Direct Loan 
Program cohort rates, or weighted average cohort rates.
    Discussion: The Secretary notes that this language is in current 
regulations and was originally included in an NPRM published on 
February 28, 1994 (59 FR 9526, 9572) and that no commenters raised 
questions about this provision. The Secretary has traditionally 
provided default rate notices to all institutions and all institutions 
receive their default rate prior to publication under 34 CFR 
668.17(j)(1) (ii) and (iii). However, it is most important that 
institutions with rates over 20 percent receive notice of their final 
rates since it is these institutions that may face sanctions based on 
their rate. The Secretary originally provided that only institutions 
with rates over 20 percent would be guaranteed to receive a notice 
because of the possibility that future budget reductions would require 
cuts in this area. The Secretary agrees with the commenters that, 
whenever feasible, all institutions should be notified of their FFEL 
Program cohort default rates, Direct Loan Program cohort rates, or 
weighted average cohort rates. The Secretary plans to notify all 
institutions of their rates.
    Changes: None.

Section 668.17(a)(2)

    Comments: Many commenters suggested that the Secretary should not 
take L, S, and T action against an institution that is appealing its 
loss of eligibility to participate in the FFEL or Direct Loan programs 
under exceptional mitigating circumstances until a final decision is 
made on the appeal. The commenters reasoned that it is unfair to 
eliminate an institution from participating in all of the Title IV 
programs before the institution has had a chance to prove to the 
Secretary that exceptional mitigating circumstances 

[[Page 61764]]
justify the institution's continued participation in the FFEL or Direct 
Loan programs. Other institutions argued that it would be unfair to 
take L, S, and T action against an institution before the institution 
has had a chance to demonstrate to the Secretary that its rate is not 
accurate and that a recalculated rate would be equal to or less than 40 
percent.
    Other commenters suggested that the Secretary should not initiate 
an L, S, and T action against an institution that has few participants 
in the FFEL or Direct Loan programs.
    Discussion: First, the Secretary notes that the initiation of an L, 
S, and T action is discretionary. The Secretary does not plan to 
initiate such action against an institution unless the FFEL Program 
cohort default rate, Direct Loan Program cohort rate, or weighted 
average cohort rate on which the action is based is final. Moreover, 
institutions are further protected since the hearing officer will find 
that the action is not warranted if the rate is not final. The 
Secretary believes that these provisions will ensure that an 
institution will not be harmed from action taken against it on the 
basis of a cohort default rate that is not final.
    The Secretary does not agree with the commenters that an 
institution should be exempt from L, S, and T action until an 
institution's appeal under exceptional mitigating circumstances is 
decided. However, the Secretary does agree with the commenters that if 
an institution successfully appeals its loss of eligibility based on 
its FFEL Program cohort default rate, Direct Loan Program cohort rate, 
or weighted average cohort rate on the basis of exceptional mitigating 
circumstances, any L, S, and T action taken solely on the basis of that 
cohort rate should be withdrawn.
    With respect to the commenter's concerns that an institution with 
few participants in the FFEL and Direct Loan programs should be exempt 
from L, S, and T action, the Secretary would like to assure the 
commenters that he does not intend to take L, S, and T action against 
an institution if that institution has less than five students 
borrowing under the FFEL and Direct Loan programs.
    Changes: The final regulations have been revised in 
Sec. 668.17(a)(5) so that the Secretary will cease any L, S, and T 
action taken against an institution solely on the basis of its FFEL 
Program cohort default rate, Direct Loan Program cohort rate, or 
weighted average cohort rate if the institution successfully appeals 
under the exceptional mitigating circumstances.
    Comments: Many commenters believed that the Secretary should take 
L, S, and T action against an institution's participation in the Direct 
Loan Program if that institution has FFEL Program cohort default rates 
that are equal to or exceed 25 percent for three consecutive fiscal 
years. The commenters believed that this change is needed for 
comparability in the FFEL and Direct Loan programs, because the 
Secretary is proposing to take L, S, and T action against an 
institution's participation 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 fiscal years.
    Discussion: The Secretary does not agree with the commenters that a 
change is needed for purposes of comparability between the FFEL and 
Direct Loan programs. The statute provides the Secretary the authority 
to establish institutional participation requirements for the Direct 
Loan Program. Under the current Direct Loan Program regulations in 34 
CFR 685.400, an institution is not eligible to continue to participate 
in the Direct Loan Program if it has an FFEL Program cohort default 
rate that equals or exceeds 25 percent for three consecutive fiscal 
years. The Secretary does not have the authority to establish similar 
institutional participation requirements for FFEL Program institutions. 
Therefore, the Secretary believes that the regulations already address 
the commenter's concerns.
    Changes: None.

Section 668.17(c)

    Comments: Many commenters suggested that the 30-day timeframe under 
which an institution may appeal a loss of eligibility under inaccurate 
data or exceptional mitigating circumstances be extended. The 
commenters argued that 30 days did not provide enough time to compile 
the data needed to support an appeal under exceptional mitigating 
circumstances, nor did it provide a guaranty agency enough time to 
verify any inaccurate data in the institution's rate. Many commenters 
also suggested that the proposed requirement to have an appeal under 
exceptional mitigating circumstances verified by an independent auditor 
would not be possible within the 30-day timeframe.
    Discussion: The 30-day timeframe to appeal under exceptional 
mitigating circumstances or inaccurate data is mandated by section 
435(a)(2) of the HEA. The Secretary does not have the authority to 
extend this timeframe. The Secretary believes that an institution and a 
guaranty agency should, in most cases, be able to comply with the 30-
day timeframe, particularly in light of the draft cohort default rate 
review process.
    However, the Secretary realizes that there may be exceptional cases 
in which a guaranty agency fails to respond to an institution in a 
timely manner. Therefore, the Secretary has decided to retain the 
current regulations and permit an institution to continue to 
participate in the FFEL Program during the appeal process when a 
guaranty agency's failure to respond to an institution's timely request 
results in the appeal being submitted later than 30-day deadline, 
provided the institution notifies the Secretary that it is appealing 
its FFEL Program cohort default rate data at the same time it requests 
verification of its cohort default rate data from the relevant guaranty 
agency(ies). An institution will be required to submit its verified 
data to the Secretary within five working days from the date it 
receives the verified data from such guaranty agency(ies).
    Based on the comments received, the Secretary appreciates that an 
institution may have difficulty obtaining an independent auditor's 
verification of the information that must be submitted in the appeal 
within the 30-day timeframe. However, the Secretary believes that this 
verification is necessary. The Secretary has been persuaded that a 60-
day timeframe would be more appropriate for submission of the 
independent auditor's verification. The institution must submit the 
appeal data within 30 days; only the auditor's attestation may be 
submitted after the 30-day deadline.
    Changes: The final regulations have been amended in 
Sec. 668.17(c)(8) to provide that an institution may continue to 
participate in the FFEL Program if that institution fails to submit an 
appeal based on inaccurate data by the 30-day deadline if that failure 
is the result of a guaranty agency's failure to respond to the 
institution's timely request for verification of its FFEL Program 
cohort default rate data. The final regulations have also been amended 
in Sec. 668.17(c)(7) to provide that the independent auditor's 
verification of the information in the appeal must be submitted to the 
Secretary within 60 days after the institution is notified that it will 
lose its eligibility to participate in the FFEL or Direct Loan 
programs.
    Comments: Many commenters suggested that an independent auditor 
should be able to verify the accuracy of the information submitted in 
an exceptional mitigating circumstances appeal based on a sample. The 
commenters indicated that this would 

[[Page 61765]]
greatly assist them in meeting the appeal deadlines, as well as reduce 
the cost of an appeal.
    Discussion: The Secretary believes that the verification process 
should be the same for all institutions. Further, the Secretary 
believes that requiring an independent auditor's statement on 
management's assertions in accordance with the Standards for 
Attestation Engagement #3 would ensure consistency and allow a sample 
as an acceptable means for an independent auditor to verify the 
information submitted in an appeal based on exceptional mitigating 
circumstances.
    Changes: The final regulations have been amended in 
Sec. 668.17(c)(7) to provide that an independent auditor must provide a 
statement on management's assertions that the information contained in 
the appeal is complete, accurate, and determined in accordance with the 
requirements of Sec. 668.17. The examination level engagement must be 
performed in accordance with the Statement on Standards for Attestation 
Engagements #3. This authorizes an independent auditor to do whatever 
testing of management's assertions that the auditor feels is necessary. 
Sampling may be an acceptable technique for an auditor to use under 
this situation.
    Comments: Some commenters suggested that the chief executive 
officer of an institution be required to certify under penalty of 
perjury that the information submitted in an appeal is true and 
correct.
    Discussion: The Secretary agrees with the commenters. The Secretary 
believes that this additional certification is appropriate to help 
ensure that the information submitted in an appeal is correct. The 
Secretary's experience in reviewing such appeals based on exceptional 
mitigating circumstances has demonstrated that some institutions have 
submitted false or erroneous information in their appeals.
    Changes: The final regulations have been changed in 
Sec. 668.17(c)(6) to provide that an institution's chief executive 
officer must certify under penalty of perjury that the information 
included in the appeal is true and correct.

Section 668.17(c)(1)(ii)(A)

    Comments: Many commenters suggested that the institution's 
participation rate index and the determination of the percent of 
students coming from disadvantaged economic backgrounds should be 
calculated based on the number of regular students at the institution 
rather than all the students enrolled at the institution. The 
commenters argued that, for purposes of the economically disadvantaged 
rate, it would be difficult to determine if a student who was not a 
regular student had an EFC of zero if that student did not apply for a 
Pell Grant or if the student was not eligible for a Pell Grant. 
Further, many of the commenters indicated that they do not maintain 
data relating to students who are not regular students, therefore, it 
would be difficult to provide data regarding such students in an 
appeal.
    Discussion: The Secretary is willing to accommodate the commenters' 
concerns to the fullest extent possible and to minimize any burden 
associated with preparing an exceptional mitigating circumstances 
appeal when these changes do not undermine the integrity of the appeal 
process. The Secretary understands that it may be problematic for some 
institutions to obtain EFC data or other data relevant to an appeal for 
a student who is not a regular student. The Secretary believes that 
using data for regular students will provide an accurate assessment of 
an institution's students with economically disadvantaged backgrounds.
    Also, the Secretary believes that it is appropriate to base the 
institution's participation rate index on the percentage of the 
institution's students who are eligible for loans and who actually 
borrow under the FFEL or Direct Loan programs. The Secretary agrees 
that the inclusion of students who are not eligible for loans would not 
contribute to a meaningful indicator of the percentage of an 
institution's students who participate in the loan programs.
    Changes: The Secretary has amended the formula in 
Sec. 668.17(c)(1)(ii)(A) for the participation rate index to base the 
index on regular students enrolled at least half-time at the 
institution. The Secretary has also amended the formula in 
Sec. 668.17(c)(1)(ii)(B) for determining the percent of an 
institution's students that come from economically disadvantaged 
backgrounds to be based on regular students at the institution.
    Comments: Many commenters objected to the Secretary's statement in 
the preamble of the proposed rule that only institutions with FFEL 
Program cohort default rates, Direct Loan Program cohort rates, or 
weighted average cohort rates equal to or less than 40 percent would be 
eligible to appeal under the participation rate index. The commenters 
argued that an institution with a high default rate but an extremely 
low percentage of students that borrow under the FFEL or Direct Loan 
programs was not abusing the loan programs. Commenters also argued that 
the establishment of the participation rate index would only help 
institutions with exceedingly low participation rates and, thus, would 
help very few institutions. For example, one commenter pointed out that 
an institution could have a 50 percent FFEL Program cohort default rate 
if, over three consecutive fiscal years, only two borrowers entered 
repayment and one of those borrowers defaulted.
    Discussion: The Secretary does not agree with the commenters that 
an institution with an FFEL Program cohort default rate, Direct Loan 
Program cohort rate, or weighted average cohort rate, that exceeds 40 
percent, but a participation rate index that is equal to or less than 
0.0375 has such a low percentage of borrowers that it is likely the 
institution is not abusing the loan programs. An institution with a 
large number of students and a low student loan participation rate 
could still have a significant number of defaulters if the 
participation rate index were used without the 40 percent cap. For 
example, an institution with 10,000 students could have a low 
participation rate of 7 percent, which would equal 700 students. If 50 
percent of these students defaulted in a given cohort that would 
represent 350 students. This would result in a participation rate index 
of 0.035. The Secretary considers this number of students to be 
significant. Further, given that the lowest annual loan limit is 
$2,625, 325 student defaults could represent hundreds of thousands of 
dollars in loss to the Federal government and U.S. taxpayers. The 
Secretary believes that it would represent an unreasonable risk to 
students and Federal taxpayers to permit such an institution to remain 
eligible to participate in the FFEL or Direct Loan programs.
    Changes: The Secretary has added a provision to the final 
regulations in Sec. 668.17(c)(1)(ii)(A) that prohibits an institution 
from appealing a loss of eligibility to participate in the FFEL or 
Direct Loan programs under the participation rate index criterion if 
that institution has an FFEL Program cohort default rate, Direct Loan 
Program cohort rate, or weighted average cohort rate, that exceeds 40 
percent.

Section 668.17(c)(1)(ii)(B)

    Comments: Many commenters argued that the 70 percent threshold of 
an institution's students coming from disadvantaged economic 
backgrounds is too high. Many commenters cited a study that 
demonstrated that only 21.6 percent of postsecondary students received 
Pell Grants. The commenters believed that due to such a low national 

[[Page 61766]]
percentage of postsecondary students receiving Pell Grants, the 70 
percent threshold would be too high for an institution to meet.
    Many commenters also argued that the 70 percent completion rate 
threshold component of an exceptional mitigating circumstances appeal 
is too high. The commenters argued that it is inappropriate for the 
Secretary to require institutions with longer programs to meet a 
completion rate threshold that is required by the HEA for a program of 
study that is less than 600 hours in length. The commenters pointed out 
that institutions offering longer programs of study most likely would 
not meet this standard.
    Discussion: The Secretary does not agree with the commenters that 
either of these thresholds is too high. The study referenced by the 
commenters is based on the percentage of Pell Grant recipients across 
all postsecondary institutions. This study does not appear to be 
relevant to institutions that generally have high cohort default rates. 
Based on the Secretary's experience in processing exceptional 
mitigating circumstances appeals, many institutions will not have any 
difficulty meeting this threshold. Almost every institution that has 
applied under the exceptional mitigating circumstances provisions has 
met the requirement that two-thirds of its students are economically 
disadvantaged. Further, previous appeals show that the postsecondary 
institutions most likely to have high FFEL Program cohort default rates 
are institutions that have higher percentages of low-income students 
than those institutions with low default rates. Because the Secretary's 
experience in reviewing exceptional mitigating circumstances appeals 
has proven that many institutions can meet this standard, the Secretary 
does not believe that a 70 percent threshold is too high.
    In regard to the completion rate threshold, the 70 percent 
completion rate standard that a short-term program must meet in order 
to participate in the FFEL Program is a minimum eligibility standard. 
This standard is unrelated to the institution's FFEL Program cohort 
default rate. The Secretary has chosen a 70 percent completion rate 
threshold as a component of an exceptional mitigating circumstance 
because he believes that an institution that has a high FFEL Program 
cohort default rate, Direct Loan Program cohort rate, or weighted 
average cohort rate must be able to demonstrate that it is properly 
serving a large majority of its students, as evidenced by their 
completion of their academic program, despite having consecutively high 
default rates. The Secretary reminds the commenters that the purpose of 
exceptional mitigating circumstances is to allow institutions to 
continue to participate in the loan programs even though more than one 
out of every four students who receive loans have defaulted and that 
has occurred for at least three years. To protect both students and 
taxpayers, only institutions that can truly demonstrate unusual 
circumstances should be allowed to continue to participate in the loan 
programs.
    Changes: None.
    Comments: A number of commenters suggested that the completion rate 
component of the exceptional mitigating circumstances be revised to 
mirror the proposed Student-Right-to-Know regulations regarding 
completion rates. These commenters urged the Secretary to issue 
regulations with as much consistency as possible.
    Discussion: The Secretary is committed to reducing regulatory 
burden and providing consistency in program requirements wherever 
possible. The Secretary does not believe that using completion rates as 
calculated under the Student-Right-to-Know provisions is appropriate at 
this time for establishing exceptional mitigating circumstances for 
institutions with high cohort default rates. This is because the 
requirements of Student-Right-to-Know include certain statutory 
exclusions, specific timeframes, and definitions of which students are 
included in the calculation. Further, the Student-Right-to-Know 
provisions offer institutions flexibility in determining their 
completion rates, which are not appropriate for an institution that is 
appealing its loss of eligibility due to high FFEL Program cohort 
default rates, Direct Loan Program cohort rates, or weighted average 
cohort rates.
    Changes: None.
    Comments: Many commenters suggested that the completion rate and 
placement rate formulas be amended to include only students who were 
regular students. The commenters agreed that an institution would be 
unfairly penalized if its completion or placement rate included 
students who initially enrolled in the institution without the 
intention of obtaining a degree or certificate.
    Discussion: After careful consideration of the many comments 
received on this issue, the Secretary has determined that an 
institution's completion or placement rate should not include students 
who are not enrolled for the purpose of obtaining a degree or 
certificate. The Secretary believes that an institution should not be 
held responsible for the completion or placement of a student who did 
not enroll in the institution with the intent to complete a degree or 
certificate program.
    Change: The completion rate and placement rate formulas in section 
668.17(c)(1)(ii)(B) (1) and (2) have been changed. The final 
regulations provide that the placement and completion rates will be 
based on the percentage of an institution's students who initially 
enrolled as regular students.
    Comments: Many commenters suggested that the placement rate should 
only include students who have actually completed their training at the 
institution. These commenters do not think it is reasonable for an 
institution to be responsible for the placement of students who do not 
complete their educational programs. Other commenters suggested that 
the Secretary should provide a five percent allowance in the placement 
rate for former students at the institution who are not able to work 
due to an injury or pregnancy.
    Many commenters also suggested that the Secretary should change the 
placement rate calculation to permit a student who has obtained 
employment in an occupation for which the training is intended while 
the student is still enrolled in the institution's program to be 
considered successfully placed. The commenters indicated that this 
often occurs with part-time students who work and go to school at the 
same time. The commenters do not believe that it is fair to exclude 
such a student from the placement rate calculation.
    Discussion: The Secretary expects that a high percentage of an 
institution's students will receive a job related to the training or 
educational program undertaken at the institution. The formula under 
which the placement rate is calculated provides that an institution 
will meet this standard if only 50 percent of the institution's 
students receive employment in an occupation that is related to the 
training they receive. For an institution that is appealing a loss of 
eligibility to participate in the FFEL or Direct Loan programs on the 
basis that it places an exceptionally high percentage of its students, 
the Secretary believes that a 50 percent placement rate is reasonable.
    Further, the Secretary does not agree that only students who 
complete their programs should be included in the placement rate 
calculation. The Secretary believes that the placement rate formula as 
written in the proposed rule does not need to provide any extra 
allowance for an institution's former 

[[Page 61767]]
students who do not complete the program or are unable to work.
    However, the Secretary agrees with the commenters who suggested 
that a student who obtains employment in an occupation related to the 
training he or she is receiving while enrolled at the institution 
should not be excluded from the former students an institution may 
consider as successfully placed. The Secretary realizes that students 
are often able to obtain employment in a field for which they are 
receiving training while they are still enrolled. This provision was 
included in the NPRM. However, an institution may not consider a 
student as successfully placed if the institution is the student's or 
former student's employer.
    Changes: None.
    Comments: None.
    Discussion: In reviewing the comments received on the placement 
rate calculation, the Secretary concluded that it is unnecessary to 
include a student who transferred to a higher level program of study as 
successfully placed. The Secretary believes that this is unnecessary 
because the institutions that may appeal under this criteria will not 
be offering programs that prepare its students for higher level 
programs.
    The Secretary further believes that in order to demonstrate the 
effectiveness of the training an institution provides, with respect to 
students obtaining employment, the Secretary has limited the timeframe 
during which a student or former student must have received employment, 
or have been employed for at least 13 weeks, in order to be considered 
successfully placed. Under the proposed rules, a former student would 
be considered as successfully placed if that student had been employed 
for at least 13 weeks between his or her last date of attendance and 
the date the institution submits the appeal, which could generally 
occur at least two-years after the student left the institution.
    Changes: The Secretary has removed from the final regulations a 
provision contained in Sec. 668.17(c)(1)(ii)(B)(2) of the proposed rule 
that provided that a former student of an institution may be considered 
successfully placed if that former student transfers to a higher level 
program at another institution. The final regulations provide that a 
student or former student may be considered as successfully placed only 
if the student or former student was employed in an occupation related 
to the training for at least 13 weeks before, or was employed on, the 
day after 12 months following the date of the student's last day of 
attendance.
    Comments: Many commenters also suggested that students enrolled 
less than full-time should not be counted in the placement rate 
calculation. The commenters suggested that students enrolled less than 
full-time are less likely to complete their programs than full-time 
students.
    Discussion: The Secretary does not agree with the commenters that 
students enrolled less than full-time should be excluded from the 
institution's placement rate. The Secretary believes that the inclusion 
of regular students who are enrolled on at least a half-time basis will 
provide the most complete portrait of the success of an institution's 
programs. The final regulations have been changed to provide that the 
placement rate calculation will be based on an institution's regular 
students who are initially enrolled on at least a half-time basis. This 
change is addressed in a previous comment.
    Changes: None
    Comments: Many commenters suggested that the Secretary should 
clarify in the regulations what constitutes a week of employment. The 
commenters indicated that the requirement that a student be employed 
for 13 weeks was too vague. The commenters wanted to know if there was 
a minimum number of days or hours during the week a student must be 
employed in order to constitute a week of employment.
    Discussion: The Secretary does not agree with the commenters. The 
Secretary's experience in working with institutions regarding the 
placement rate element of an exceptional mitigating circumstances 
appeal has shown that this issue has not been an area of confusion nor 
have institutions needed clarification of this issue. Further, the 
Secretary does not believe that it is necessary to define in 
regulations what constitutes a week of employment.
    Changes: None.
    Comments: Many commenters objected to limiting the use of the 
completion rate component of the exceptional mitigating circumstances 
to public and private nonprofit institutions and limiting the use of 
the placement rate component to proprietary institutions. Many 
commenters indicated that it is more appropriate for a public 
vocational institution to appeal a potential loss of eligibility to 
participate in the FFEL or Direct Loan programs under the placement 
rate component. The commenters indicated that because these 
institutions provide training for their students to receive employment 
in specific occupations, they would more likely be able to meet the 
placement rate threshold.
    Other commenters suggested that proprietary institutions of higher 
education that offer associate or baccalaureate degrees should be able 
to appeal under the exceptional mitigating circumstances criteria that 
include the completion rate component. These commenters argued that it 
is inappropriate to distinguish the educational programs at these 
institutions from their public and private nonprofit institution 
counterparts.
    Many commenters suggested that an institution should be able to 
appeal under any of the exceptional mitigating circumstances.
    Discussion: The Secretary disagrees with the commenters that an 
institution should be able to appeal under either the placement rate or 
completion rate components of the exceptional mitigating circumstances. 
The Secretary believes that it is appropriate for an institution to 
appeal under a criterion that is designed to measure the performance of 
its programs. The Secretary agrees with the commenters that the type of 
program offered by an institution should determine whether that 
institution should be able to appeal under the exceptional mitigating 
circumstances appeal that includes the placement rate or completion 
rate components. Placement rate is an appropriate measure for those 
institutions that are non-degree-granting, whereas completion rate is a 
more appropriate and relevant measure for institutions that offer 
degrees.
    Changes: The final regulations have been amended in 
Sec. 668.17(c)(1)(ii)(B) to permit only a non-degree-granting 
institution, whether it is a public, private nonprofit, or proprietary 
institution, to appeal under the exceptional mitigating circumstances 
criterion that includes the placement rate component. The final 
regulations have also been amended to permit only a degree-granting 
institution, regardless of whether it is a public, private nonprofit, 
or proprietary institution, to appeal under the exceptional mitigating 
circumstances criterion that includes the completion rate component.
    Comments: Many commenters objected to some of the data elements 
that must be submitted to substantiate the percentage of an 
institution's students that come from disadvantaged economic 
backgrounds. Many commenters believed that the addresses of such 
students were not necessary.
    Discussion: The Secretary is interested in minimizing the burden 
associated with an appeal and is reexamining the data elements that 
will be required in an appeal to ensure that 

[[Page 61768]]
information is requested only if it is essential to the appeal and only 
if it is not available to the Secretary in existing databases. The 
Secretary will notify institutions of the specific information that 
must be included in the appeal in the ``Pre-Publication Review 
Booklet'' that is sent to institutions when the Secretary provides the 
institution the opportunity to review its draft FFEL Program cohort 
default rate data. This information will also be contained in the 
``Official Cohort Default Rate Guide'' which is issued to an 
institution when the Secretary provides notification of loss of 
eligibility based on a final FFEL Program cohort default rate, Direct 
Loan Program cohort rate, or weighted average cohort rate.
    The Secretary expects to require institutions to submit 
substantially the same information that is currently requested in the 
Official Default Rate Guide.
    Changes: The Secretary has removed from the regulations the 
specific description of the information an institution must submit in 
an appeal. These information submission requirements were contained in 
the proposed rules in sections 668.17(c)(7) (ii) through (v). The 
Secretary will inform an institution of the information that is 
necessary to appeal a loss of eligibility when the Secretary provides 
an institution the opportunity to verify its cohort default rate data 
and when he notifies the institution of its final rate.

Section 668.17(d)

    Comments: Many commenters suggested that the Secretary should amend 
the date an SLS loan enters repayment. The commenters suggested that 
the Secretary should establish in regulations, provisions that would 
define when an SLS loan enters repayment if that loan is ``linked'' to 
a Stafford loan.
    Discussion: For purposes of calculating an FFEL Program cohort 
default rate, Congress has mandated the parameters for establishing the 
date an SLS loan enters repayment. Those parameters are also contained 
in the regulations in section 668.17(d)(1)(ii)(D). Consistent with the 
parameters established by Congress, the Secretary regularly provides 
guaranty agencies and institutions with the rules for the application 
of the definition of the date an SLS loan enters repayment for purposes 
of an FFEL Program cohort default rate. Institutions are now apprised 
of the rules at least twice annually through the ``Pre-Publication 
Booklet'' for cohort default rates and the ``Official Cohort Default 
Rate Guide.''
    The Secretary has found the dissemination of the rules for the 
application of the definition of the date an SLS loan enters repayment 
through the ``Pre-Publication Booklet'' and the ``Official Cohort 
Default Rate Guide'' provides sufficient notice to the institutions, 
while simultaneously allowing the definition to be refined as needed 
based on upon Congressional changes to the definition and changes in 
the information collecting capacity of the Department. The Secretary 
further believes that it is also appropriate to disseminate the rules 
for linking SLS loans to Stafford loans through the ``Pre-Publication 
Booklet'' and the ``Official Cohort Default Rate Guide.''
    Changes: None

Sections 668.17(e)(1)(ii) and (f)(1)(ii)

    Comments: Many commenters objected to the Secretary's inclusion in 
a Direct Loan Program cohort rate or weighted average cohort rate a 
loan that is in repayment under the ICR plan if the borrower's 
scheduled payments on that loan are less than 15 dollars and that 15 
dollar payment is less than the interest that is accruing on the loan 
each month. The commenters argued that it is inappropriate to consider 
a loan that is not even delinquent as in default for purposes of an 
institution's Direct Loan Program cohort rate or weighted average 
cohort rate. Many commenters pointed out that most of the borrowers 
that choose ICR will be entry-level employees and will start out with 
low incomes that may result in the borrower having scheduled payments 
of 15 dollars or less, which may be less than the interest that is 
accruing on the loans. The commenters suggested that this would 
unfairly penalize institutions since ICR is a legitimate payment option 
for all students and an institution cannot control a borrower's 
selection of a repayment plan.
    A commenter pointed out that, under the proposed rules, if a 
borrower enters into ICR at the end of the fiscal year and that 
borrower's monthly payment is 15 dollars and that payment is less than 
the interest that is accruing on the loan, the borrower would be 
included in the institution's Direct Loan Program cohort rate or 
weighted average cohort rate. The commenter indicated that it would be 
more appropriate to include such a borrower in an institution's rate if 
that borrower was in ICR and had scheduled payments of less than $15 
that are less than the interest accruing on the loan for 270 days; this 
would more closely mirror a default.
    Discussion: The Secretary appreciates the commenters' concerns that 
many of the borrowers who choose ICR will be entry level employees and 
will likely have low payments. However, the Secretary believes that 
even entry level employees who have received a quality education or 
training from an institution will be able to obtain employment that 
will provide them with enough income to pay back at least the interest 
that is accruing on their loans each month.
    The Secretary also appreciates the commenters' concerns regarding 
the inclusion of a loan in an institution's Direct Loan Program cohort 
rate or weighted average cohort rate that may not even be delinquent. 
However, the Secretary believes that this is an appropriate 
performance-based measure to assess both a borrower's ability to repay 
a student loan and an 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 a large proportion of its former students are making only minimal 
or no payments on their loans. The Secretary is concerned that this is 
a potential area for abuse in the Direct Loan Program and believes that 
it is imperative to protect students and taxpayers from such abuse.
    The Secretary agrees with the commenter that, to more closely 
approximate a default, a borrower should have been, by the end of the 
fiscal year following the fiscal year the loan entered repayment, for 
at least 270 days, in repayment under the ICR plan with scheduled 
payments that were less than 15 dollars per month and those payments 
result in negative amortization.
    Changes: The final regulations have been revised to provide that a 
loan that is in the ICR plan will not be included in a Direct Loan 
Program cohort rate or weighted average cohort rate unless, for at 
least 270 days, the scheduled monthly payments on that loan have been 
$15 dollars or less and that payment is less than the monthly interest 
accruing on the loan.

Section 668.17(f)

    Comments: Many commenters did not understand how the proposed 
weighted average cohort rate would be calculated when the institution 
had a borrower enter repayment on both a Direct Loan and FFEL Program 
loan in a fiscal year. The commenters believed that the Secretary 
should clarify the formula.
    Discussion: The weighted average cohort rate is determined by 
comparing the number of borrowers, both FFEL and Direct Loan, who enter 
repayment in a fiscal year against those borrowers who default before 
the end of the following 

[[Page 61769]]
fiscal year. Each borrower and each default is counted only once even 
if a borrower has both FFEL and Direct Loan program loans entering 
repayment in a fiscal year. This has been the Secretary's practice when 
a borrower with multiple FFEL Program loans enters repayment on those 
loans in a fiscal year. The Secretary does not believe that the 
regulations need to be clarified in this area.
    Changes: None.

Section 668.17(h)

    Comments: Many commenters suggested that institutions should be 
able to appeal their Direct Loan Program cohort rates or weighted 
average cohort rates on the basis of improper servicing. The commenters 
argued that the appeal criteria should be parallel to the FFEL Program. 
In addition the commenters believed that a loan that is improperly 
serviced should not be included in an institution's Direct Loan Program 
cohort rate or weighted average cohort rate and that an institution 
should be given a chance to verify that such a loan is not included in 
its rate.
    Discussion: In the FFEL Program, Congress chose to provide high 
default rate institutions with an appeal from the loss of eligibility 
to participate in that program based on loan servicing. That decision 
was based, in large measure, on the existence of detailed Departmental 
regulations governing loan servicing by lenders and a number of 
instances in which large lenders failed to comply with those 
requirements with a demonstrable effect on institutional default rates. 
In the Direct Loan Program, those detailed servicing rules do not 
exist; instead, loan servicing is controlled by contracts between the 
Department and its contractors. Moreover, there is no history of abuse 
in the Direct Loan Program and the Department's contractors do not have 
the same incentive or opportunity to hide non-compliance as FFEL 
Program lenders. Accordingly, the Secretary does not believe it is 
appropriate or necessary to provide a loan servicing appeal for a 
Direct Loan Program cohort rate or weighted average cohort rate.
    Changes: None.

Section 668.90

    Comments: Many commenters objected to the removal of an 
institution's ability to demonstrate that it has diligently 
administered the provisions contained in appendix D of the Student 
Assistance General Provisions regulations as a defense to loss of 
eligibility. The commenters argued that the measures contained in 
appendix D have been proven effective in reducing defaults. Other 
commenters suggested that the use of appendix D as the only defense to 
an L, S, and T action provides a very powerful incentive to an 
institution that has a high cohort default rate to take action to 
reduce its default rate.
    Discussion: The Secretary agrees with the commenters that the 
measures contained in appendix D, if diligently implemented by an 
institution, are effective in reducing the incidence of default. 
However, many of the most effective measures in appendix D have become 
specific regulatory requirements for most institutions. Moreover, the 
Secretary's experience has shown that the reviews of claims of appendix 
D compliance are very time-consuming and rarely helpful. In fact, the 
Secretary believes that the removal of the use of appendix D as a 
defense will provide a more powerful incentive for an institution to 
try to keep its cohort default rate, Direct Loan Program cohort rate, 
or weighted average cohort rate low.
    Changes: None.

Executive Order 12866

    These regulations have been reviewed in accordance with Executive 
Order 12866. Under the terms of the order the Secretary has assessed 
the potential costs and benefits of this regulatory action.
    The potential costs associated with the regulations are those 
resulting from statutory requirements and those determined by the 
Secretary to be necessary for administering the title IV, HEA programs 
effectively and efficiently.
    In assessing the potential costs and benefits, both quantitative 
and qualitative, the Secretary has determined that the benefits of the 
regulations justify the costs.
    The Secretary has also determined that this regulatory action does 
not unduly interfere with State, local, or tribal governments in the 
exercise of their governmental functions.

Summary of Potential Costs and Benefits

    The potential costs and benefits of these final regulations are 
discussed elsewhere in this preamble under the following heading: 
Analysis of Comments and Changes.

Assessment of Educational Impact

    In the NPRM published on September 21, 1995, the Secretary 
requested comment 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.
    Based on the response to the proposed rules and 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 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.

(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; 84.268, William 
D. Ford Federal Direct Loan Program)

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

    The Secretary amends 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 (h), (i) and (j) respectively, revising 
paragraphs (a) through (e), and adding new paragraphs (f) and (g) 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 the institution has an 
FFEL Program cohort default rate, Direct Loan Program cohort rate, or a 
weighted average cohort rate that exceeds 40 percent for any fiscal 
year. 

[[Page 61770]]

    (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 each of the three most recent 
consecutive fiscal years, has any combination of an FFEL Program cohort 
default rate, a Direct Loan Program cohort rate, or weighted average 
cohort rate that is equal to or greater than 25 percent.
    (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 ceases any limitation, suspension, or termination 
action against an institution under this paragraph if the institution 
satisfactorily demonstrates to the Secretary that, pursuant to an 
appeal that is complete and timely submitted under paragraph (c) of 
this section, the institution meets one of the exceptional mitigating 
circumstances under paragraph (c)(1)(ii)(B) 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 calendar 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 calendar 
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 an FFEL Program cohort default rate, 
Direct Loan Program cohort rate, or weighted average cohort rate that 
is equal to or greater than 25 percent.
    (3) Except as provided in paragraph (b)(6) of this section, an 
institution's 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 calendar 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 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 34 CFR 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 34 CFR 668.26, continue to 
participate in the FFEL Program or Direct Loan Program until the 
Secretary issues a decision on the institution's appeal 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 by the 30th calendar day following the date 
the institution receives notification of the end of participation. An 
appeal or any portion of an appeal under this section will not be 
accepted after the 30th calendar day following the date the institution 
receives notification from the Secretary that it has lost its 
eligibility to participate in the FFEL or Direct Loan programs, except 
that an institution may submit an appeal under section (c)(1)(i) of 
this section later than the 30th calendar day if the appeal is 
submitted in accordance with paragraph (c)(8) and the information 
required by paragraph (c)(7) may be submitted in accordance with that 
paragraph. The appeal must include all information required by the 
Secretary to substantiate the appeal and all information must be 
submitted in a format prescribed by the Secretary. The additional 30-
day period specified in paragraph (c)(7) of this section is an 
extension for the submission of the auditor's statement only and does 
not affect the date by which the appeal data must be submitted. An 
institution that is eligible for an extension under paragraph (c)(8) of 
this section must submit all required data within five working days 
following the agency's response to the institution's request for 
verification of data. 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 weighted average cohort rate, by the percentage of the 
institution's regular students, as defined in 34 CFR 600.2, 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. An institution that has an FFEL Program cohort default 
rate, Direct Loan Program cohort rate, or weighted average cohort rate 
that exceeds 40 percent may not appeal its loss of eligibility under 
paragraphs (b) (1) or (2) of this section on the basis of its 
participation rate index.
    (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 

[[Page 61771]]
determined, 70 percent or more of the institution's regular students, 
as defined in 34 CFR 600.2, 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; and,
    (1) For a degree-granting institution, 70 percent or more of the 
institution's regular students who were initially enrolled on a full-
time basis and were scheduled to complete their programs during the 
same 12-month period the institution has chosen to determine the 
percentage of its students that come from disadvantaged economic 
backgrounds under paragraph (c)(1)(ii)(B) of this section, completed 
the educational programs in which they were enrolled. This rate is 
calculated by comparing the number of regular 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 from the institution; transferred 
from the institution to a higher level educational program; 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 non-degree-granting institution, the institution had a 
placement rate of 50 percent or more with respect to its former regular 
students who remained in the program beyond the point the students 
would have received a 100 percent tuition refund from the institution. 
A student or former student may not be considered successfully placed 
if the institution is the student's or former student's employer. This 
rate is based on those regular students who were initially enrolled on 
at least a half-time basis and were originally scheduled, at the time 
of enrollment, to complete their educational programs during the same 
12-month period the institution has chosen to determine the percentage 
of its students that come from disadvantaged economic backgrounds under 
paragraph (c)(1)(ii)(B) of this section. This rate does not include 
those students who are still enrolled and making satisfactory progress 
in the educational programs in which they were originally enrolled on 
the date following 12 months after the date of the student's last day 
of attendance. This rate is calculated by determining the percentage of 
all those former regular students who;
    (i) are employed in an occupation for which the institution 
provided training on the date following 12 months after the date of 
their last day of attendance at the institution; or
    (ii) were employed in an occupation for which the institution 
provided training for at least 13 weeks before the date following 12 
months after the date of their last day of attendance at the 
institution.
    (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'' for a student who is initially enrolled full-
time 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. The ``amount of 
time normally required to complete the program'' for a student who is 
initially enrolled less than full-time is the amount of time it would 
take that student to complete the program if the student remained 
enrolled at that level of enrollment.
    (3) The Secretary issues a decision on the institution's appeal 
within 45 calendar 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 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 
exceptional mitigating circumstances specified in paragraph (c)(1) (i) 
or (ii) of this section.
    (6) An institution must include in its appeal a certification, 
under penalty of perjury, 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 an opinion from 
an independent auditor on management's assertions that the information 
contained in the appeal is complete, accurate, and determined in 
accordance with the requirements of this section. The examination level 
engagement will be performed in accordance with Statement on Standards 
for Attestation Engagements #3. This opinion must be received by the 
Secretary within 60 days following the date the institution receives 
notification of its loss of eligibility under paragraph (b) of this 
section.
    (8) An institution that appeals under paragraph (c)(1)(i) of this 
section will not lose its eligibility to continue to participate during 
the appeal process due to a guaranty agency's failure to comply with 34 
CFR 682.401(b)(14) which requires the agency to respond to an 
institution's request for verification of data within 15 working days, 
provided the institution:
    (i) requested such verification within 10 working days from the 
date it received notification of its loss of eligibility under 
paragraph (b) of this section; and
    (ii) provided a copy of the request for verification of data to the 
Secretary at the same time it requested such verification by the 
relevant guaranty agency(ies).
    (d) FFEL Program Cohort Default Rate. (1)(i) For purposes of the 
FFEL Program, except as provided in paragraph (d)(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 or 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 
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 

[[Page 61772]]
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 or 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 any of the three most recent fiscal years, 
who default before the end of the fiscal year immediately following the 
fiscal 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, and Direct Consolidation Loan Program loans that repaid FFEL 
Program loans that entered default.
    (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 or Direct Consolidation Loan 
Program, a portion of which is used to repay a Federal SLS loan) shall 
not be considered to enter repayment 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.
    (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) Direct Loan Program cohort rate. (1) For purposes of the Direct 
Loan Program, except as provided in paragraph (e)(2) of this section, 
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 who, 
before the end of that following fiscal year, have, for 270 days, been 
in repayment under the income-contingent repayment plan with scheduled 
payments that are less than 15 dollars per month and those payments 
result 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 
who, before the end of that following fiscal year, have for 270 days, 
been in repayment under the income-contingent repayment plan with 
scheduled payments that are less than 15 dollars per month and those 
payments result in negative amortization.
    (2)(i) 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.
    (ii) 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.
    (iii) 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.
    (3) 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 loans, except as provided under 
paragraph (f)(2) of this section, 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 

[[Page 61773]]
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 who, before the end of 
that following fiscal year, have for 270 days: been in repayment under 
the income-contingent repayment plan with scheduled payments that are 
less than 15 dollars per month and those payments result 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 who, 
before the end of that following fiscal year, have for 270 days: been 
in repayment under the income-contingent repayment plan with scheduled 
payments that are less than 15 dollars per month and those payments 
result in negative amortization.
    (2)(i) 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.
    (ii) 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.
    (iii) 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.
    (3) For purposes of an institution's weighted average 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.
    (g) Applicability of Rates to Institutions. (1)(i) An FFEL Program 
cohort default rate, Direct Loan Program cohort rate, or 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.
    (ii) An FFEL Program cohort default rate, Direct Loan Program 
cohort rate, or 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.
    (2)(i) 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, Direct Loan 
Program cohort rate, or 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.
    (ii) 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, Direct 
Loan Program cohort rate, or weighted average cohort 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 rate applies to the new, consolidated 
institution and all of its current locations.
    (iii) For free-standing institutions that merge to form a new, 
consolidated institution, the Secretary determines the FFEL Program 
cohort default rate, Direct Loan Program cohort rate, or weighted 
average cohort 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 rate applies to the new 
consolidated institution.
    (iv) For a location of one institution that becomes a location of 
another institution, the Secretary determines the FFEL Program cohort 
default rate, Direct Loan Program cohort rate, or weighted average 
cohort 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.
    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.
* * * * * 

[[Page 61774]]

    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) (2) and (3), 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) (2) and (3) 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 the FFEL Program cohort default rate, Direct Loan Program cohort 
rate, or weighted average cohort rate on which the proposed action is 
based is not 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. 95-29206 Filed 11-30-95; 8:45 am]
BILLING CODE 4000-01-P