[Federal Register Volume 63, Number 133 (Monday, July 13, 1998)]
[Proposed Rules]
[Pages 37714-37720]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-18514]



[[Page 37713]]

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Part IV





Department of Education





_______________________________________________________________________



34 CFR Part 668



Student Assistance General Provisions; Proposed Rule

  Federal Register / Vol. 63, No. 133 / Monday, July 13, 1998 / 
Proposed Rules  

[[Page 37714]]


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DEPARTMENT OF EDUCATION

34 CFR Part 668

RIN 1840-AC52


Student Assistance General Provisions

AGENCY: Office of Postsecondary Education, Department of Education.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Secretary proposes to amend the Student Assistance General 
Provisions regulations, 34 CFR part 668, to permit a school to appeal 
its Direct Loan Program cohort rate or weighted average cohort rate on 
the basis of improper servicing or collection of the Direct Loans 
included in that rate. The Secretary also proposes to clarify when a 
school's rate is considered final.

DATES: Comments must be received by the Department on or before 
September 11, 1998.

ADDRESSES: All comments concerning these proposed regulations should be 
addressed to Kenneth Smith, U.S. Department of Education, P.O. Box 
23272, Washington, DC 20026-3272. Comments may also be sent through the 
Internet to: [email protected].
    Comments that concern information collection requirements must be 
sent to the Office of Management and Budget at the address listed in 
the Paperwork Reduction Act section of this preamble. A copy of those 
comments may also be sent to the Department representative named in 
this section.

FOR FURTHER INFORMATION CONTACT: Kenneth Smith, U.S. Department of 
Education, 600 Independence Avenue, SW., ROB-3, Room 3045, Washington, 
DC 20202. Telephone: (202) 708-8242. Individuals who use a 
telecommunications device for the deaf (TDD) may call the Federal 
Information Relay Service (FIRS) at 1-800-877-8339 between 8 a.m. and 8 
p.m., Eastern time, Monday through Friday.
    Individuals with disabilities may obtain this document in an 
alternate format (e.g., Braille, large print, audiotape, or computer 
diskette) on request to the contact person listed in the preceding 
paragraph.

SUPPLEMENTARY INFORMATION:

Invitation to Comment

    Interested persons are invited to submit comments and 
recommendations regarding these proposed regulations.
    To ensure that public comments have maximum effect in developing 
the final regulations, the Department urges commenters to identify 
clearly the specific section or sections of the proposed regulations 
that each comment addresses and to arrange comments in the same order 
as the proposed regulations.
    All comments submitted in response to these proposed regulations 
will be available for public inspection, during and after the comment 
period, in Room 3045, Regional Office Building 3, 7th and D Streets, 
SW., Washington, DC, between the hours of 8:30 a.m. and 4:00 p.m., 
Eastern time, Monday through Friday of each week except Federal 
holidays.
    On request the Department supplies an appropriate aid, such as a 
reader or print magnifier, to an individual with a disability who needs 
assistance to review the comments or other documents in the public 
rulemaking docket for these proposed regulations. An individual with a 
disability who wants to schedule an appointment for this type of aid 
may call (202) 205-8113 or (202) 260-9895. An individual who uses a TDD 
may call the Federal Information Relay Service at 1-800-877-8339, 
between 8 a.m. and 8 p.m., Eastern time, Monday through Friday.
    To assist the Department in complying with the specific 
requirements of Executive Order 12866 and its overall requirement of 
reducing regulatory burden, the Secretary invites comments on whether 
there may be further opportunities to reduce any regulatory burdens 
found in these proposed regulations.

General

    On December 1, 1995, the Secretary published final regulations (60 
FR 61760) that modified the regulations relating to the default 
reduction initiative in the Federal Family Education Loan (FFEL) 
Program and implemented default reduction measures in the William D. 
Ford Federal Direct Loan (Direct Loan) Program. Those regulations 
established the formula for the calculation of rates for schools that 
participate in the Direct Loan Program and revised the appeal 
procedures and criteria for schools that were subject to a loss of 
eligibility to participate in the FFEL Program or the Direct Loan 
Program due to high FFEL Program cohort default rates, Direct Loan 
Program cohort rates, or weighted average cohort rates.
    The Secretary is proposing to amend the appeal procedures and 
criteria in these regulations. A discussion of each proposed change is 
provided below.

Section 668.17(h)  Loan Servicing Appeals

    Under the Department's regulations, a school may challenge its FFEL 
Program cohort default rate or weighted average cohort rate on the 
basis of the improper servicing or collection of the FFEL loans 
included in the calculation of that rate. However, a school may not 
challenge a Direct Loan Program cohort rate or a weighted average 
cohort rate on the basis of the improper servicing or collection of the 
Direct Loans included in the calculation of the rate. The procedures 
and criteria for loan servicing appeals were made different for the two 
programs because the historical and structural problems of the FFEL 
Program did not exist in the new Direct Loan Program.
    As discussed in the preamble to the final regulations published on 
December 1, 1995, Congress' decision to provide schools with an FFEL 
Program loan servicing appeal was based, in large measure, on a number 
of incidents in which large FFEL Program lenders had failed to comply 
with the Department's loan servicing requirements. The lenders' failure 
to satisfy FFEL Program loan servicing requirements had a demonstrable 
effect on cohort default rates (see 60 FR 61769). However, the detailed 
loan servicing regulations in the FFEL Program do not exist in the 
Direct Loan Program. Instead, loan servicing in the Direct Loan Program 
is controlled by contracts between the Department and its Direct Loan 
Servicers.
    Nevertheless, to promote parity between the FFEL Program and the 
Direct Loan Program, the Secretary is proposing to permit a school to 
appeal its Direct Loan Program cohort rate or weighted average cohort 
rate on the basis of the improper servicing or collection of defaulted 
Direct Loans included in that rate. Just as for an FFEL Program loan 
servicing appeal, this type of appeal would only be available to a 
school--
     With a Direct Loan Program cohort rate or weighted average 
cohort rate that equals or exceeds 20 percent for the most recent year 
in which data are available; or
     That becomes subject to a loss of eligibility due to rates 
that equal or exceed 25 percent for 3 consecutive years.
    While the Secretary continues to believe that the structure and 
controls inherent in the Direct Loan Program should ensure that Direct 
Loans are properly serviced and collected, establishing appeal 
provisions for the Direct Loan Program that are similar to those 
available in the FFEL Program will address concerns that some schools 
have raised about this difference between the two programs.
    The procedures for a school's loan servicing challenge in the 
Direct Loan

[[Page 37715]]

Program would correspond to those for a school challenging its FFEL 
Program cohort default rate on a similar basis. A summary of the 
proposed appeals process follows:
     Within 10 working days of receiving notification from the 
Secretary that its Direct Loan Program cohort rate or weighted average 
cohort rate equals or exceeds 20 percent for the most recent year or 
that it is subject to loss of participation in the loan programs based 
on its rate, the school notifies the Secretary, in writing, that it is 
appealing the calculation of its rate based on allegations of improper 
loan servicing or collection.
     Within 15 working days of receiving the school's notice, 
the Secretary determines the size of the representative sample of loan 
servicing and collection records to be reviewed and notifies the school 
of the amount of the fee that it must pay to the Secretary for copying 
and providing the documents. Under the proposed regulations, the 
Secretary may charge a fee of up to $10 per borrower file in the 
sample. The Secretary intends to charge a fee of $10 per borrower file.
     Within 15 working days of receiving the notice of the fee, 
the school must pay the fee to the Secretary. If payment is not 
received from the school within the required timeframe, the records 
will not be provided and the school will have waived its right to 
challenge the rate.
     Upon timely receipt of the fee, and within the timelines 
provided in the proposed regulations, the Secretary provides the school 
with a representative sample of the loan servicing and collection 
records relating to borrowers whose Direct Loans were included in the 
school's rate.
     After receiving the relevant loan servicing and collection 
records from the Secretary (for Direct Loan Program loans included in a 
rate) and from the appropriate guaranty agency (for FFEL Program loans 
included in a rate), the school has 30 calendar days to file its appeal 
with the Secretary.
     If the school is also filing an appeal based upon 
allegations that inaccurate data were used to calculate the rate, under 
Sec. 668.17(c)(1)(i)(A), the school may delay submitting its loan 
servicing appeal until the appeal under Sec. 668.17(c)(1)(i)(A) is 
submitted to the Secretary.
    Due to fundamental differences between the FFEL and Direct Loan 
programs, the proposed regulations for appeals based on loan servicing 
and collection in the Direct Loan Program are not exactly the same as 
the FFEL Program regulations. One of the most significant differences 
is in the scope of an appeal. For both FFEL and Direct Loans, under 
Sec. 668.17(h)(3)(v)(B), if the Secretary finds that evidence presented 
by the school shows that some loans included in the sample reviewed by 
the school should be excluded from the calculation of the rate, the 
Secretary reduces the rate to reflect the percentage of defaulted loans 
in the sample that should be excluded.
    In the FFEL Program, the proportional reduction applies to all of 
the FFEL loans included in the school's rate, because an FFEL Program 
cohort default rate is a percentage rate of the students whose loans 
are in default. However, for some schools, the Direct Loan Program 
cohort rate is not limited to the percentage rate of students whose 
loans are in default. For proprietary non-degree-granting institutions, 
it may also include the percentage rate of borrowers repaying Direct 
Loans under the income-contingent repayment (ICR) plan who have 
scheduled payments of less than $15 per month, when those amounts 
result in negative amortization for a period of 270 days or more (see 
Secs. 668.17(e)(1)(ii) and 668.17(f)(1)(ii)).
    If borrowers are included in a school's Direct Loan Program cohort 
rate because they are repaying under the ICR plan, rather than because 
their loans are in default, the improper loan servicing and collection 
criteria do not apply. For example, the Direct Loan Servicer would not 
mail a final demand letter to a borrower who is making payments under 
the ICR plan and is not in default. Therefore, as reflected in the 
proposed Sec. 668.17(h)(2)(iii), the proportional reduction of the rate 
would apply only to borrowers with defaulted loans who were included in 
a school's rate, not to any borrowers who have been included because 
they made certain payments under the ICR plan.
    The most significant remaining differences between the requirements 
for a loan servicing appeal in the FFEL Program and those proposed for 
the Direct Loan Program are the following:
     For FFEL, the regulations in Sec. 668.17(h)(3)(ii) require 
a school to include in its notice of appeal to the guaranty agency a 
list of the students included in its rate. No similar requirement is 
provided for Direct Loans because the Department already has that 
information.
     When sending the school a list of the loans and a 
description of how the sample of loans was chosen, a guaranty agency is 
required, in Sec. 668.17(h)(3)(ii)(B)(5), to send a copy of the list to 
the Secretary. No corresponding action is provided for the Direct Loan 
Program because it would be redundant.
     In Sec. 668.17(h)(3)(ii)(B)(6), a guaranty agency is 
required to notify a school that has failed to pay a fee that the 
school has apparently waived its right to challenge the calculation of 
its rate with regard to the loans guaranteed by that agency. The 
guaranty agency also notifies the Secretary. The Secretary then 
determines whether the guaranty agency's conclusion was correct. No 
similar provision is needed for Direct Loans because the Secretary 
issues the original notification of the waiver determination.
     For FFEL, a school is required in Sec. 668.17(h)(3)(iv)(C) 
to send the Secretary a copy of the lists provided to it by the 
guaranty agencies when it is filing an appeal. No similar list is 
required for Direct Loans because the Department will have the 
information that it provided to the institution.
     Section Sec. 668.17(h)(3)(viii)(C) provides that a 
lender's failure to submit a request for preclaims assistance to the 
guaranty agency, if required, is a factor in determining whether a 
default on an FFEL Program loan may be considered to have been due to 
improper servicing or collection. No similar factor is included for 
Direct Loans because no similar process exists for the Direct Loan 
Servicer. The Direct Loan Servicer services the loan until its transfer 
to the Department's Debt Collection Service at 271 days of delinquency, 
the date on which the loan is considered, under Sec. 668.17(e)(3), to 
be in default for rate calculations purposes.
    The revisions in this NPRM would provide the regulatory changes 
needed to properly reflect the proposed changes to the appeal process 
for Direct Loans. The proposed regulations would not revise the current 
regulations for an FFEL Program appeal on the basis of improper 
servicing or collection.
    Official rates for fiscal year (FY) 1996 are scheduled to be issued 
later this year. The Secretary intends to allow a school to appeal its 
official Direct Loan Program cohort rate or weighted average cohort 
rate for FY 1996 on the basis of the improper servicing or collection 
of the Direct Loans included in the rate as defaulted loans. This type 
of appeal would be available only to schools with rates of 20 percent 
or greater and to schools that are subject to loss of participation in 
the loan programs based on their rates.

Section 668.17(i)  Finality of a School's Rate

    Under Sec. 668.17(a)(2), a school with an FFEL Program cohort 
default rate, Direct Loan Program cohort rate, or a weighted

[[Page 37716]]

average cohort rate that is over 40 percent for the most recent fiscal 
year for which rates have been calculated may be subject to an action 
to limit, suspend, or terminate its participation in all of the Federal 
student financial aid programs authorized by Title IV of the Higher 
Education Act of 1965, as amended (HEA). If the Secretary initiates 
such an action, the school may appeal under 34 CFR part 668, Subpart G.
    The Secretary has found, however, that some schools with a rate 
over 40 percent do not challenge the rate when they are notified. 
Rather, these schools wait to challenge the calculation of that rate 
until they have 3 consecutive years of rates over 25 percent. As a 
result, the administrative review process provided under Subpart G is 
delayed while the school's new appeal is evaluated. The Secretary 
believes that some schools wait to appeal in these circumstances solely 
to delay a final determination of the limitation, suspension, or 
termination action. Because a school may continue to make loans while 
the appeal process is pending, any unnecessary delay increases the 
likelihood of program abuse.
    It was not the intent of the Secretary to permit this type of 
delay--which may last a year or more--between the date a school is 
notified of its rate and the resolution of the school's appeal of a 
sanction resulting from the rate. The Secretary proposes to address the 
problem of unnecessary delays in Subpart G proceedings by providing 
that once the Secretary initiates a proposed limitation, suspension, or 
termination action under Sec. 668.17(a)(2), based on the school's rate, 
the school may not challenge that rate.
    A school that initiates an appeal of a rate over 40 percent in a 
timely manner, within 10 working days of the date that the school is 
notified of the rate, would not be affected by this revision. The 
Secretary does not initiate an action under Sec. 668.17(a)(2) during 
the period in which a school may file a timely appeal of its rate. 
Also, if a school does file a timely appeal, the Secretary does not 
initiate an action under Sec. 668.17(a)(2) until a determination has 
been made on the appeal. Note that current provisions in Sec. 668.17(i) 
are not changed other than to number paragraphs and to update 
references to types of rates; the only substantive change to the 
current Sec. 668.17(i) is in the proposed Sec. 668.17(i)(3).
    The proposed revision would help the Department, guaranty agencies, 
and institutions to research appeals more efficiently and to resolve 
appeals and limitation, suspension, and termination actions promptly. 
Ensuring timely appeals and resolutions is particularly important 
because schools remain eligible to participate in the FFEL and Direct 
Loan programs until the appeal process is complete.

Executive Order 12866

Clarity of the Regulations

    Executive Order 12866 requires each agency to write regulations 
that are easy to understand.
    The Secretary invites comments on how to make these proposed 
regulations easier to understand, including answers to questions such 
as the following: (1) Are the requirements in the proposed regulations 
clearly stated? (2) Do the proposed regulations contain technical terms 
or other wording that interferes with their clarity? (3) Does the 
format of the proposed regulations (grouping and order of sections, use 
of headings, paragraphing, etc.) aid or reduce their clarity? Would the 
proposed regulations be easier to understand if they were divided into 
more (but shorter) sections? (A ``section'' is preceded by the symbol 
``Sec. '' and a numbered heading; for example, Sec. 668.17 Default 
reduction and prevention measures.) (4) Is the description of the 
proposed regulations in the ``Supplementary Information'' section of 
this preamble helpful in understanding the proposed regulations? How 
could this description be more helpful in making the proposed 
regulations easier to understand? (5) What else could the Department do 
to make the proposed regulations easier to understand?
    A copy of any comments that concern how the Department could make 
these proposed regulations easier to understand should be sent to 
Stanley M. Cohen, Regulations Quality Officer, U.S. Department of 
Education, 600 Independence Avenue, SW. (room 5121, FB-10), Washington, 
DC 20202-2241.

Regulatory Flexibility Act Certification

    The Secretary has determined that these proposed regulations would 
not have a significant adverse economic impact on a substantial number 
of small entities. A Preliminary Regulatory Flexibility Analysis (PRFA) 
was performed. The provision that extends the appeals of improper loan 
servicing to Direct Loans will provide a positive benefit to schools. 
The provision on the finality of appeals was analyzed in more detail. 
The PRFA determined that the number of small and large entities 
experiencing adverse economic impacts from the appeal finality 
provisions is expected to be between one and eight per year, which is 
not a substantial number.

Estimate of the Number of Entities Experiencing Adverse Economic 
Impacts From Finality of Appeal Provision

    Although no school has successfully used the delaying tactic these 
regulations would prohibit, 2 schools could have used this tactic for 
fiscal year 1994 rates, and it is possible that up to 16 schools could 
use this tactic for fiscal year 1995 rates. There is no reason to 
believe that this will apply to more schools in the future. Thus, the 
estimate of the number of small and large entities to which these 
regulations would apply is between 2 and 16 each year. In the year when 
two schools could have used this delaying tactic, one school 
unsuccessfully attempted to employ it or half of the eligible schools. 
The PRFA estimates that about half of the schools to which these 
regulations would apply will attempt to employ this delaying tactic, or 
between one and eight per year. Thus, the number of small and large 
entities to which these regulations would impose adverse economic 
impacts is small and not considered a substantial number.

Estimate of the Adverse Economic Impacts of Finality of Appeal 
Provision

    One school attempted to use this delaying tactic, but that appeal 
was denied on technical grounds. Had that school been successful, the 
economic impact would have been to delay the school's removal from the 
Title IV programs for an estimated six months. During those six months, 
the school was estimated to have potentially earned an additional 
$135,000 in Title IV revenue. Using a 5 percent profit rate, which is 
typical for proprietary schools participating in Title IV programs, the 
adverse economic impact on this school would have been to lose about 
$6,750 in profit. The PRFA did not address whether this was a 
significant economic impact, since it was previously determined that a 
full Regulatory Flexibility analysis was not required because of the 
small number of entities to which these regulations would apply.
    The Secretary particularly invites comments on the impact of these 
proposed regulations on small entities.

Paperwork Reduction Act of 1995

    Section 668.17 contains information collection requirements. As 
required by the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)), 
the Department of Education has submitted a copy of this section to the 
Office of Management and Budget (OMB) for its review.

[[Page 37717]]

    Collection of Information: Student Assistance General Provisions--
668.17--Default reduction and prevention measures.
    The Secretary proposes to provide schools the opportunity to 
challenge Direct Loan Program cohort rates or weighted average cohort 
rates on the basis of allegations of improper loan servicing or 
collection of the Direct Loans included in that rate as defaulted 
loans. Annual public reporting burden for the portion of this 
collection of information that is attributable to Sec. 668.17(h) 
remains unchanged and is estimated to average 128 hours per response 
for 160 non-degree-granting school respondents, 96 hours per response 
for 20 degree-granting school respondents, and 16 hours per response 
for 20 low borrower school respondents, including the time for 
reviewing instructions, searching existing data sources, gathering and 
maintaining the data needed, and completing and reviewing the 
collection of information. The collection's total estimated annual 
recordkeeping and reporting burden hours for this section equals 22,720 
hours.
    There is no change to the current burden for this collection 
because neither the estimated number of respondents nor the amount of 
time needed to respond is expected to change. At the time that previous 
regulations were published, no rates had been issued that included 
Direct Loans; all schools received rates that included only FFEL loans. 
A school appealing its rate due to improper loan servicing or 
collection, under these proposed regulations, would have been subject 
to the same requirements for the appeal of its FFEL Program cohort 
default rate.
    Organizations and individuals desiring to submit comments on the 
information collection requirements should direct them to the Office of 
Information and Regulatory Affairs, OMB, Room 10235, New Executive 
Office Building, Washington, DC 20503; Attention: Desk Officer for U.S. 
Department of Education.
    The Department considers comments by the public on this proposed 
collection of information in--
     Evaluating whether the proposed collection of information 
is necessary for the proper performance of the functions of the 
Department, including whether the information will have practical use;
     Evaluating the accuracy of the Department's estimate of 
the burden of the proposed collection of information, including the 
validity of the methodology and assumptions used;
     Enhancing the quality, usefulness, and clarity of the 
information to be collected; and
     Minimizing the burden of the collection of information on 
those who are to respond, including through the use of appropriate 
automated, electronic, mechanical, or other technological collection 
techniques of other forms of information technology; e.g., permitting 
electronic submission of responses.
    OMB is required to make a decision concerning the collection of 
information contained in these proposed regulations between 30 and 60 
days after publication of this document in the Federal Register. 
Therefore, a comment to OMB is best assured of having its full effect 
if OMB receives it within 30 days of publication. This does not affect 
the deadline for the public to comment to the Department on the 
proposed regulations.

Intergovernmental Review

    The Federal Supplemental Educational Opportunity Grant Program and 
the State Student Incentive Grant Program are subject to the 
requirements of Executive Order 12372 and the regulations in 34 CFR 
part 79. The objective of the Executive order is to foster an 
intergovernmental partnership and a strengthened federalism by relying 
on processes developed by State and local governments for coordination 
and review of proposed Federal financial assistance.
    In accordance with this order, this document is intended to provide 
early notification of the Department's specific plans and actions for 
these programs.
    The Federal Family Education Loan, Federal Supplemental Loans for 
Students, Federal Work-Study, Federal Perkins Loan, Federal Pell Grant, 
Income Contingent Loan, and William D. Ford Federal Direct Loan 
programs are not subject to the requirements of Executive Order 12372 
and the regulations in 34 CFR part 79.

Assessment of Educational Impact

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

Electronic Access to This Document

    Anyone may view this document, as well as other Department of 
Education documents published in the Federal Register, in text or 
portable document format (pdf) on the World Wide Web at the following 
sites:

http://ifap.ed.gov/csb__html/fedlreg.htm
http://gcs.ed.gov/fedreg.htm
http://www.ed.gov/news.html

    To use the pdf you must have the Adobe Acrobat Reader Program with 
Search, which is available free at either of the second and third of 
the previously listed sites. If you have questions about using the pdf, 
call the U.S. Government Printing Office toll free at 1-888-293-6498.
    Anyone may also view these documents in text copy only on an 
electronic bulletin board of the Department. Telephone: (202) 219-1511 
or, toll free, 1-800-222-4922.
    The documents are located under Option G--
Files/Announcements, Bulletins and Press Releases.

    Note: The official version of this document is the document 
published in the Federal Register.

List of Subjects in 34 CFR Part 668

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

    Dated: July 7, 1998.
Richard W. Riley,
Secretary of Education.

(Catalog of Federal Domestic Assistance Numbers: 84.007: Federal 
Supplemental Educational Opportunity Grant Program; 84.032: Federal 
Family Education Loan Program; 84.032: Federal PLUS Program; 84.032: 
Federal Supplemental Loans for Students Program; 84.033: Federal 
Work-Study Program; 84.038: Federal Perkins Loan Program; 84.063: 
Federal Pell Grant Program; 84.069: State Student Incentive Grant 
Program; 84.226: Income Contingent Loan Program; and 84.268: William 
D. Ford Federal Direct Loan Program)
    The Secretary proposes to amend Part 668 of Title 34 of the Code of 
Federal Regulations as follows:

PART 668--STUDENT ASSISTANCE GENERAL PROVISIONS

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

    Authority: 20 U.S.C. 1085, 1088, 1091, 1092, 1094, 1099c, and 
1141, unless otherwise noted.

    2. Section 668.17 is amended by revising the heading, and 
paragraphs (h) and (i) to read as follows:


Sec. 668.17  Default reduction and prevention measures.

* * * * *
    (h) Appeal based on allegations of improper loan servicing or 
collection--

[[Page 37718]]

(1) General. An institution that is subject to loss of participation in 
the FFEL Program or the Direct Loan Program under paragraph (a)(3), 
(b)(1), or (b)(2) of this section or that has been notified by the 
Secretary that its FFEL Program cohort default rate, Direct Loan 
Program cohort rate, or weighted average cohort rate equals or exceeds 
20 percent for the most recent year for which data are available may 
include in its appeal of that loss or rate a challenge based on 
allegations of improper loan servicing or collection. This challenge 
may be raised in addition to other challenges permitted under this 
section.
    (2) Standard of review. (i) An appeal based on allegations of 
improper loan servicing or collection must be submitted to the 
Secretary in accordance with the requirements of this paragraph.
    (ii) The Secretary excludes any loans from the FFEL Program cohort 
default rate, Direct Loan Program cohort rate, or weighted average 
cohort rate calculation that, due to improper servicing or collection, 
would, as demonstrated by the evidence submitted in support of the 
institution's timely appeal to the Secretary, result in an inaccurate 
or incomplete calculation of that rate.
    (iii) For the purposes of this paragraph, a Direct Loan that has 
been included in a Direct Loan Program cohort rate, under paragraph 
(e)(1)(ii) of this section, or a weighted average cohort rate, under 
paragraph (f)(1)(ii) of this section, because it has been in repayment 
under the income-contingent repayment plan for 270 days, with scheduled 
payments that are less than $15 per month and with those payments 
resulting in negative amortization, is not considered to have been 
included in that rate as a defaulted loan. An institution's appeal 
under this paragraph does not affect the inclusion of these loans in an 
institution's rate.
    (3) Procedures. The following procedures apply to appeals from FFEL 
Program cohort default rates, Direct Loan Program cohort rates, and 
weighted average cohort rates issued by the Secretary:
    (i) Notice of rate. Upon receiving notice from the Secretary that 
the institution's FFEL Program cohort default rate, Direct Loan Program 
cohort rate, or weighted average cohort rate exceeds the thresholds 
specified in paragraph (a)(3), (b)(1), or (b)(2) of this section or 
that its most recent rate equals or exceeds 20 percent, the institution 
may appeal the calculation of that rate based on allegations of 
improper loan servicing or collection. The Secretary's notice includes 
a list of all borrowers included in the calculation of the 
institution's rate.
    (ii) Appeals for FFEL Program loans. (A) To initiate an appeal 
under this paragraph for FFEL Program loans included in the 
institution's rate, the institution must notify, in writing, the 
Secretary and each guaranty agency that guaranteed loans included in 
the institution's FFEL Program cohort default rate or weighted average 
cohort rate that it is appealing the calculation of that rate. The 
notification must be received by the guaranty agency and the Secretary 
within 10 working days of the date the institution received the 
Secretary's notification. The institution's notification to the 
guaranty agency must include a copy of the list of students provided by 
the Secretary to the institution.
    (B) Within 15 working days of receiving the notification from an 
institution subject to loss of participation in the FFEL or Direct Loan 
programs under paragraph (a)(3), (b)(1), or (b)(2) of this section, or 
within 30 calendar days of receiving that notification from any other 
institution that may file a challenge to its FFEL Program cohort 
default rate or weighted average cohort rate under this paragraph, the 
guaranty agency shall provide the institution with a representative 
sample of the loan servicing and collection records relating to 
borrowers whose loans were guaranteed by the guaranty agency and that 
were included as defaulted loans in the calculation of the 
institution's rate. For purposes of this section, the term loan 
servicing and collection records refers only to the records submitted 
by the lender to the guaranty agency to support the lender's submission 
of a default claim and included in the claim file. In selecting the 
representative sample of records, the guaranty agency shall use the 
following procedures:
    (1) The guaranty agency shall list in social security number order 
all loans made to borrowers for attendance at the institution and 
guaranteed by the guaranty agency and included as defaulted loans in 
the calculation of the FFEL Program cohort default rate or weighted 
average cohort rate that is being challenged by the institution.
    (2) From the population of loans identified by the guaranty agency, 
the guaranty agency shall identify a sample of the loans. The sample 
must be of a size such that the universe estimate derived from the 
sample is acceptable at a 95 percent confidence level with a plus or 
minus 5 percent confidence interval. The sampling procedure must result 
in a determination of the number of FFEL Program loans that should be 
excluded from the calculation of the FFEL Program cohort default rate 
or weighted average cohort rate under this paragraph.
    (3) The guaranty agency shall provide a copy of all servicing and 
collection records relating to each loan in the sample to the 
institution in hard copy format unless the guaranty agency and 
institution agree that all or some of the records may be provided in 
another format.
    (4) The guaranty agency may charge the institution a reasonable fee 
for copying and providing the documents, not to exceed $10 per borrower 
file.
    (5) After compiling the servicing and collection records for the 
loans in the sample, the guaranty agency shall send the records, a list 
of the loans included in the sample, and a description of how the 
sample was chosen to the institution. The guaranty agency shall also 
send a copy of the list of the loans included in the sample, listed in 
order by social security number, and the description of how the sample 
was chosen to the Secretary at the same time the material is sent to 
the institution.
    (6) If the guaranty agency charges the institution a fee for 
copying and providing the documents under paragraph (h)(3)(ii)(B)(4) of 
this section, the guaranty agency is not required to provide the 
documents to the institution until payment is received by the agency. 
If payment of a fee is required, the guaranty agency shall notify the 
institution, in writing, within 15 working days of receipt of the 
institution's request, of the amount of the fee. If the guaranty agency 
does not receive payment of the fee from the institution within 15 
working days of the date the institution receives notice of the fee, 
the institution shall be considered to have waived its right to 
challenge the calculation of its FFEL Program cohort default rate or 
weighted average cohort rate based on allegations of improper loan 
servicing or collection in regard to the loans guaranteed by that 
guaranty agency. The guaranty agency shall notify the institution and 
the Secretary, in writing, that the institution has failed to pay the 
fee and has apparently waived its right to challenge the calculation of 
its rate for this purpose. The Secretary determines that an institution 
that does not pay the required fee to the guaranty agency has not met 
its burden of proof in regard to the loans insured by that guaranty 
agency unless the institution proves that the agency's conclusion that 
the institution waived its appeal is incorrect.
    (iii) Appeals for Direct Loan Program loans. (A) To initiate an 
appeal under

[[Page 37719]]

this paragraph for Direct Loans included in the institution's rate, the 
institution must notify the Secretary, in writing, that it is appealing 
the calculation of its Direct Loan Program cohort rate or weighted 
average cohort rate. The notification must be received by the Secretary 
within 10 working days of the date the institution received the 
Secretary's notification.
    (B) Within 15 working days of receiving the notification from an 
institution subject to loss of participation in the FFEL or Direct Loan 
Program under paragraph (a)(3), (b)(1), or (b)(2) of this section, or 
within 30 calendar days of receiving that notification from any other 
institution that may file a challenge to its Direct Loan Program cohort 
rate or weighted average cohort rate under this paragraph, the 
Secretary provides the institution with a representative sample of the 
loan servicing and collection records relating to borrowers whose 
Direct Loans were included as defaulted loans in the calculation of the 
institution's rate. For purposes of this section, the term ``loan 
servicing and collection records'' refers only to the records 
maintained by the Department's Direct Loan Servicer with respect to the 
servicing and collecting of delinquent loans prior to the default. In 
selecting the representative sample of records, the Secretary uses the 
following procedures:
    (1) The Secretary lists in social security number order all Direct 
Loans made to borrowers for attendance at the institution and included 
as defaulted loans in the calculation of the Direct Loan Program cohort 
rate or weighted average cohort rate that is being challenged by the 
institution.
    (2) From the population of loans identified by the Secretary, the 
Secretary identifies a sample of the loans. The sample is of a size 
such that the universe estimate derived from the sample is acceptable 
at a 95 percent confidence level with a plus or minus 5 percent 
confidence interval. The sampling procedure must result in a 
determination of the number of Direct Loans included in the rate as 
defaulted loans that should be excluded from the calculation of the 
Direct Loan Program cohort rate or weighted average cohort rate under 
this paragraph.
    (3) The Secretary provides a copy of all servicing and collection 
records relating to each loan in the sample to the institution in hard 
copy format unless the Secretary and institution agree that all or some 
of the records may be provided in another format.
    (4) The Secretary may charge the institution a reasonable fee for 
copying and providing the documents, not to exceed $10 per borrower 
file.
    (5) After compiling the servicing and collection records for the 
loans in the sample, the Secretary sends the records, a list of the 
loans included in the sample, and a description of how the sample was 
chosen to the institution.
    (6) If the Secretary charges the institution a fee for copying and 
providing the documents under paragraph (h)(3)(iii)(B)(4) of this 
section, the Secretary does not provide the documents to the 
institution until payment is received by the Secretary. If payment of a 
fee is required, the Secretary notifies the institution, in writing, 
within 15 working days of receipt of the institution's request, of the 
amount of the fee. If the Secretary does not receive payment of the fee 
from the institution within 15 working days of the date the institution 
receives notice of the fee, the institution shall be considered to have 
waived its right to challenge the calculation of its Direct Loan 
Program cohort rate or weighted average cohort rate based on 
allegations of improper loan servicing or collection in regard to the 
Direct Loans included in that rate. The Secretary shall notify the 
institution, in writing, that the institution has failed to pay the fee 
and has waived its right to challenge the calculation of its rate on 
the basis of those allegations.
    (iv) Procedures for filing an appeal. After receiving the relevant 
loan servicing and collection records from the Secretary (for defaulted 
Direct Loan Program loans included in a Direct Loan Program cohort rate 
or weighted average cohort rate) and from all of the guaranty agencies 
that insured loans included in the institution's FFEL Program cohort 
default rate or weighted average cohort rate calculation (for defaulted 
FFEL Program loans included in a rate), the institution has 30 calendar 
days to file its appeal with the Secretary. An appeal is considered 
filed when it is received by the Secretary. If the institution is also 
filing an appeal under paragraph (c)(1)(i) of this section, the 
institution may delay submitting its appeal under this paragraph until 
the appeal under paragraph (c)(1)(i) of this section is submitted to 
the Secretary. As part of the appeal, the institution shall submit the 
following information to the Secretary:
    (A) A list of the loans that the institution alleges would, due to 
improper loan servicing or collection, result in an inaccurate or 
incomplete calculation of the rate.
    (B) Copies of all of the loan servicing or collection records and 
any other evidence relating to a loan that the institution believes has 
been subject to improper servicing or collection. The records must be 
in hard copy or microfiche format.
    (C) For FFEL Program loans, a copy of the lists provided by the 
guaranty agencies under paragraph (h)(3)(ii)(B) of this section.
    (D) An explanation of how the alleged improper servicing or 
collection resulted in an inaccurate or incomplete calculation of the 
institution's rate.
    (E) A summary of the institution's appeal listing the following:
    (1) For FFEL Program cohort default rates, the number of loans 
insured by each guaranty agency that were included as defaulted loans 
in the calculation of the institution's rate and the number of loans 
that would be excluded from the calculation of that rate by application 
of the results of the review of the sample of loans provided to the 
institution to the population of loans for each guaranty agency.
    (2) For Direct Loan Program cohort rates, the number of Direct 
Loans that were included as defaulted loans in the calculation of the 
institution's rate and the number of loans that would be excluded from 
the calculation of that rate by application of the results of the 
review of the sample of loans provided to the institution to the 
population of loans serviced by the Secretary.
    (3) For weighted average cohort rates----
    (i) The number of FFEL Program loans insured by each guaranty 
agency that were included as defaulted loans in the calculation of the 
institution's rate and the number of loans that would be excluded from 
the calculation of that rate by application of the results of the 
review of the sample of loans provided to the institution to the 
population of loans for each guaranty agency; and
    (ii) The number of Direct Loans that were included as defaulted 
loans in the calculation of the institution's rate and the number of 
loans that would be excluded from the calculation of that rate by 
application of the results of the review of the sample of loans 
provided to the institution to the population of loans serviced by the 
Secretary.
    (F) A certification by an authorized official of the institution 
that all information provided by the institution in the appeal is true 
and correct.
    (v) Decision. The Secretary or the Secretary's designee reviews the 
information submitted by the institution and issues a decision.
    (A) In making a decision under this paragraph, the Secretary 
presumes that the information provided to the institution by the 
guaranty agency or Secretary under paragraphs (h)(3)(ii)(B)

[[Page 37720]]

and (iii)(B) of this section is correct unless the institution provides 
substantial evidence showing that the information is not correct.
    (B) If the Secretary finds that the evidence presented by the 
institution shows that some of the loans included in the sample of loan 
records reviewed by the institution should be excluded from calculation 
of the FFEL Program cohort default rate, Direct Loan Program cohort 
rate, or weighted average cohort rate under paragraph (h)(2) of this 
section, the Secretary reduces the institution's rate, in accordance 
with a statistically valid methodology, to reflect the percentage of 
defaulted loans in the sample that should be excluded.
    (vi) Notification. The Secretary notifies the institution, in 
writing, of the decision.
    (vii) Seeking judicial review. An institution may not seek judicial 
review of the Secretary's determination of the institution's FFEL 
Program cohort default rate, Direct Loan Program cohort rate, or 
weighted average cohort rate until the Secretary or the Secretary's 
designee issues the decision under paragraph (h)(3)(v) of this section.
    (viii) Improper loan servicing or collection criteria. For purposes 
of this paragraph, a default is considered to have been due to improper 
servicing or collection only if the borrower did not make a payment on 
the loan and the institution proves that the lender (for an FFEL 
Program loan) or the Direct Loan Servicer (for a Direct Loan Program 
loan) failed to perform one or more of the following activities, if 
that activity was required:
    (A) Send at least one letter (other than the final demand letter) 
urging the borrower or endorser to make payments on the loan.
    (B) Attempt at least one phone call to the borrower or endorser.
    (C) For an FFEL Program loan, submit a request for preclaims 
assistance to the guaranty agency.
    (D) Send a final demand letter to the borrower.
    (E)(1) For an FFEL Program loan, submit a certification (or other 
evidence) that skip tracing was performed; or
    (2) For a Direct Loan Program loan, document that skip tracing was 
performed.
    (i) Effect of decision. (1) An institution may challenge the 
calculation of an FFEL Program cohort default rate, Direct Loan Program 
cohort rate, or weighted average cohort rate under this section no more 
than once. The Secretary's determination of an institution's appeal of 
the calculation of such a rate is binding on any future appeal by the 
institution.
    (2) An institution that fails to challenge the calculation of an 
FFEL Program cohort default rate, Direct Loan Program cohort rate, or 
weighted average cohort rate under this section within 10 working days 
of receiving notice of the determination of that rate is prohibited 
from challenging that rate in any other proceeding before the 
Department.
    (3) If the Secretary has initiated an action under paragraph (a)(2) 
of this section, the institution may not challenge the calculation of 
the FFEL Program cohort default rate, Direct Loan Program cohort rate, 
or weighted average cohort rate on which the action is based.
* * * * *
[FR Doc. 98-18514 Filed 7-10-98; 8:45 am]
BILLING CODE 4000-01-P