[Federal Register Volume 64, Number 115 (Wednesday, June 16, 1999)]
[Proposed Rules]
[Pages 32358-32362]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-15278]



[[Page 32357]]

_______________________________________________________________________

Part IV





Department of Education





_______________________________________________________________________



34 CFR Part 685



William D. Ford Federal Direct Loan Program; Proposed Rule

  Federal Register / Vol. 64, No. 115 / Wednesday, June 16, 1999 / 
Proposed Rules  

[[Page 32358]]



DEPARTMENT OF EDUCATION

34 CFR Part 685

RIN 1840-AC68


William D. Ford Federal Direct Loan Program

AGENCY: Department of Education.

ACTION: Notice of proposed rulemaking.

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

SUMMARY: The Secretary proposes to amend the regulations governing the 
William D. Ford Federal Direct Loan (Direct Loan) Program. These 
amendments are a result of recently enacted changes to the Higher 
Education Act of 1965 (HEA) made by the Higher Education Amendments of 
1998 (1998 Amendments). The proposed regulations would amend the 
current regulations to: remove references to the phase-in of the Direct 
Loan Program, update the loan interest rate formulas, and reflect the 
Secretary's authority to charge reduced loan fees on Direct Subsidized 
and Direct Unsubsidized Loans and to charge reduced interest rates to 
encourage on-time loan repayment.

DATES: We must receive your comments on or before July 30, 1999.

ADDRESSES: Address all comments about these proposed regulations to Ms. 
Nicki Meoli, U.S. Department of Education, P.O. Box 23272, Washington, 
DC 20026-3272. If you prefer to send your comments through the 
Internet, use the following address: [email protected]

FOR FURTHER INFORMATION CONTACT: Ms. Nicki Meoli, U.S. Department of 
Education, 400 Maryland Avenue, SW., ROB-3, Room 3045, Washington, DC 
20202-5346. Telephone: (202) 708-8242. If you use a telecommunications 
device for the deaf (TDD), you may call the Federal Information Relay 
Service (FIRS) at 1-800-877-8339.
    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

    We invite you to submit comments regarding these proposed 
regulations. To ensure that your comments have maximum effect in 
developing the final regulations, we urge you to identify clearly the 
specific section or sections of the proposed regulations that each of 
your comments addresses and to arrange your comments in the same order 
as the proposed regulations.
    We invite you to assist us in complying with the specific 
requirements of Executive Order 12866 and its overall requirement of 
reducing regulatory burden that might result from these proposed 
regulations. Please let us know of any further opportunities we should 
take to reduce potential costs or increase potential benefits while 
preserving the effective and efficient administration of the program.
    During and after the comment period, you may inspect all public 
comments about these proposed regulations 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.

Assistance to Individuals With Disabilities in Reviewing the 
Rulemaking Record

    On request, we will supply 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. If you want to 
schedule an appointment for this type of aid, you may call (202) 205-
8113 or (202) 260-9895. If you use a TDD, you may call the FIRS at 1-
800-877-8339.

General

Background

    On October 7, 1998, President Clinton signed into law the 1998 
Amendments (Pub. L. 105-244) that amended the HEA. Among the many 
important provisions of the new law was the reauthorization of the 
Title IV Student Financial Assistance Programs. The 1998 Amendments 
also contained a number of changes to the Title IV programs. This 
notice of proposed rulemaking (NPRM) addresses changes that affect the 
Direct Loan Program.

Negotiated Rulemaking

    Section 492 of the HEA requires that, before publishing any 
proposed regulations to implement programs under Title IV of the HEA, 
the Secretary obtain public involvement in the development of the 
proposed regulations. After obtaining advice and recommendations, the 
Secretary must conduct a negotiated rulemaking process to develop the 
proposed regulations. All published proposed regulations must conform 
to agreements resulting from the negotiated rulemaking process unless 
the Secretary reopens the negotiated rulemaking process or provides a 
written explanation to the participants in that process why the 
Secretary has decided to depart from the agreements.
    To obtain public involvement in the development of the proposed 
regulations, we published a notice in the Federal Register (63 FR 
59922, November 6, 1998) requesting advice and recommendations from 
interested parties concerning what regulations were necessary to 
implement Title IV of the HEA. We also invited advice and 
recommendations concerning which regulated issues should be subjected 
to a negotiated rulemaking process. We further requested advice and 
recommendations concerning ways to prioritize the numerous issues in 
Title IV, in order to meet statutory deadlines. Additionally, we 
requested advice and recommendations concerning how to conduct the 
negotiated rulemaking process, given the time available and the number 
of regulations that needed to be developed.
    In addition to soliciting written comments, we held three public 
hearings and several informal meetings to give interested parties an 
opportunity to share advice and recommendations with the Department. 
The hearings were held in Washington, DC, Chicago, and Los Angeles, and 
we posted transcripts of those hearings to the Department's Information 
for Financial Aid Professionals' website (http://www.ifap.ed.gov).
    We then published a second notice in the Federal Register (63 FR 
71206, December 23, 1998) to announce the Department's intention to 
establish four negotiated rulemaking committees to draft proposed 
regulations implementing Title IV of the HEA. The notice announced the 
organizations or groups believed to represent the interests that should 
participate in the negotiated rulemaking process and announced that the 
Department would select participants for the process from nominees of 
those organizations or groups. We requested nominations for additional 
participants from anyone who believed that the organizations or groups 
listed did not adequately represent the list of interests outlined in 
section 492 of the HEA. Once the four committees were established, each 
negotiating committee met to develop proposed regulations, for several 
days each month, from January through May.
    The proposed regulations contained in this NPRM reflect the final 
consensus of the negotiating committee, which was made up of the 
following members:

American Association of Community Colleges.
American Association of Cosmetology Schools.

[[Page 32359]]

American Association of State Colleges and Universities.
American Council on Education.
Career College Association.
Coalition of Associations of Schools of the Health Professions.
Coalition of Higher Education Assistance Organizations.
Consumer Bankers Association.
Education Finance Council.
Education Loan Management Resources.
Legal Services Counsel (a coalition).
National Association of College and University Business Officers.
National Association of Equal Opportunity in Higher Education.
National Association of Graduate/Professional Students.
National Association of Independent Colleges and Universities.
National Association of State Student Grant and Aid Programs.
National Association of State Universities and Land-Grant Colleges.
National Association of Student Financial Aid Administrators.
National Association of Student Loan Administrators.
National Council of Higher Education Loan Programs.
National Direct Student Loan Coalition.
Sallie Mae, Inc.
Student Loan Servicing Alliance.
The College Board.
The College Fund/United Negro College Fund.
United States Department of Education.
United States Student Association.
U.S. Public Interest Research Group.
    Under committee protocols, consensus meant that there was no 
dissent by any member of the committee. Thus, the proposed regulations 
in this document have been agreed to by each of the organizations and 
groups listed as members of the committee.

Proposed Regulatory Changes

Section 685.202

Interest Rates and Loan Fees

Interest Rates

    The proposed regulations would implement changes to section 455(b) 
of the HEA that affect the interest rates charged on Direct Loan 
Program loans.
    The interest rate formulas that apply to Direct Subsidized, Direct 
Unsubsidized, and Direct PLUS Loans that are first disbursed on or 
after October 1, 1998 and before July 1, 2003 are as follows:

----------------------------------------------------------------------------------------------------------------
                                                                                                   But will not
                 For                             During                 The interest rate is          exceed
                                                                                                     (percent)
----------------------------------------------------------------------------------------------------------------
Direct Subsidized, Direct             Repayment...................  91-day Treasury bill rate +             8.25
 Unsubsidized.                                                       2.3.
                                      In-School Grace Deferment...  91-day Treasury bill rate +             8.25
                                                                     1.7.
Direct PLUS.........................  All Periods.................  91-day Treasury bill rate +                9
                                                                     3.1.
----------------------------------------------------------------------------------------------------------------

    The interest rate formulas that apply to Direct Consolidation Loans 
that are first disbursed on or after July 1, 1998 are as follows:

----------------------------------------------------------------------------------------------------------------
                                                              The interest rate on the  The interest rate on the
 For a direct consolidation loan             During           student loan portions is    PLUS loan portion is
----------------------------------------------------------------------------------------------------------------
Application received before 10/1/  Repayment................  91-day Treasury bill      91-day Treasury bill
 98 and first disbursement on or                               rate + 2.3 (Will not      rate + 3.1 (Will not
 after 7/1/98.                                                 exceed 8.25%).            exceed 9%).
                                   In-School Grace Deferment  91-day Treasury bill      91-day Treasury bill
                                                               rate + 1.7 (Will not      rate + 3.1 (Will not
                                                               exceed 8.25%).            exceed 9%).
Application received between 10/1/ All Periods..............  91-day Treasury bill      91-day Treasury bill
 98 and 1/31/99.                                               rate + 2.3 (Will not      rate + 2.3 (Will not
                                                               exceed 8.25%).            exceed 8.25%).
Application received on or after   All Periods..............  Weighted average of       Weighted average of
 2/1/99 and before 7/1/2003.                                   interest rates on loans   interest rates on loans
                                                               being consolidated,       being consolidated,
                                                               rounded to nearest        rounded to nearest
                                                               higher one-eighth of      higher one-eighth of
                                                               one percent (Will not     one percent (Will not
                                                               exceed 8.25%).            exceed 8.25%).
----------------------------------------------------------------------------------------------------------------

Loan Fees

    The Secretary proposes to amend Sec. 685.202(c) to clarify that the 
Secretary charges a loan fee on a Direct Subsidized or Direct 
Unsubsidized Loan not to exceed four percent of the principal amount of 
the loan. The Secretary interprets the 1998 Amendments as authorizing 
him to charge a reduced loan fee to all Direct Subsidized and Direct 
Unsubsidized Loan borrowers and to provide a reduction for borrowers 
demonstrating greater financial need. This authority is consistent with 
the authority provided to lenders in the FFEL Program under section 
438(c)(2) of the HEA. The Secretary notes that the authority to charge 
a reduced fee in both the FFEL Program and the Direct Loan Program does 
not apply to PLUS loans in either program.
    While the negotiators reached consensus on all of the proposed 
regulations included in this NPRM, some negotiators expressed a belief 
that the HEA requires the Secretary to charge a loan fee equal to four 
percent of the principal amount of the loan on a Direct Subsidized or 
Direct Unsubsidized Loan. As discussed below, however, the Secretary 
and some other negotiators believe that the Secretary does have the 
authority to charge reduced loan fees.
    FFEL Program lenders are required to pay the Secretary a loan 
origination fee equal to three percent on all Stafford loans. Prior to 
enactment of the 1998 Amendments, on Unsubsidized Stafford Loans 
lenders were required to pass on the fee to the borrower, but lenders 
were not required to pass on the fee to Subsidized Stafford Loan 
borrowers. In addition, prior to enactment of the 1998 Amendments, 
there were no statutory or regulatory provisions controlling a lender's 
decision to offer a reduced loan origination fee. The 1998 Amendments 
now establish conditions under which a lender may charge reduced loan 
origination fees to some or all Stafford loan borrowers, thus making 
the lower fee a term or condition of the loan. In addition to the 
lender origination fee, guaranty agencies are authorized to charge a 
one-percent guarantee fee to borrowers. Similarly, prior to enactment 
of the 1998 Amendments, the Direct Loan Program charged a loan fee 
equivalent to the amount of the loan origination fee and the guarantee 
fee charged to FFEL Stafford Loan

[[Page 32360]]

borrowers. Generally, these practices resulted in consistent treatment 
of borrowers. However, depending on which loans they received and 
whether their particular lender or guaranty agency chose to offer them 
a reduced fee on their loan, some FFEL Stafford Loan borrowers paid 
lower fees.
    To promote consistent benefits to borrowers, the 1998 Amendments, 
for the first time, established certain standards that must be met in 
order for lenders to reduce loan origination fees in the FFEL Program. 
The HEA now requires lenders to provide reduced loan origination fees 
to all borrowers or to borrowers who demonstrate a greater financial 
need. Proposed regulations implementing these standards were agreed to 
during the negotiations and will be published shortly. With these 
standards, all similarly situated borrowers with loans from a specific 
lender will be treated equally.
    Nothing in the 1998 Amendments or its legislative history indicate 
that Congress intended to deny the benefits of reduced loan fees to 
borrowers in the Direct Loan Program. In fact, Congress retained the 
provision that borrowers in the Direct Loan Program should receive the 
same terms, conditions, and benefits on their loans as borrowers of 
similar loans in the FFEL Program unless specifically provided for 
otherwise. The Secretary believes that the 1998 Amendments created a 
new statutory basis for borrowers to insist on equal treatment from 
their lender on loan fees, including a lower fee if the lender chooses 
to offer a lower loan fee to at least some borrowers. The Secretary 
does not believe that Congress affirmatively intended to deny this 
benefit to Direct Loan borrowers. Accordingly, the Secretary believes 
that the HEA permits him to charge reduced loan fees to borrowers in 
the Direct Loan Program.
    In accordance with 5 U.S.C. 553(b)(A), this preamble announces the 
Secretary's interpretative rule that he can charge reduced loan fees in 
the Direct Loan Program consistent with the lenders' authority to do so 
in the FFEL Program. The provision contained in this NPRM is consistent 
with the Secretary's interpretative rule. The Secretary will consider 
the public comments received on this proposed provision and determine 
whether any changes should be reflected in the final rule.

Section 685.211

Repayment Incentives
    The proposed regulations would implement a change to section 455(b) 
of the HEA, which authorizes the Secretary to charge borrowers reduced 
interest rates to encourage on-time loan repayment. The repayment 
incentives that the Secretary offers to Direct Loan borrowers must be 
cost-neutral and in the best financial interests of the federal 
government.
    The proposed regulations provide the Secretary with the flexibility 
needed to offer additional or different repayment incentives in 
response to changes in economic conditions or to the Direct Loan 
Program statute. As written, the language mirrors the authority of 
lenders and guaranty agencies in the FFEL Program to offer benefits to 
borrowers.
    Shortly, the Secretary will charge a reduced interest rate to those 
borrowers repaying by means of automated account debiting. Borrowers 
repaying via automated debiting of their personal checking, savings, or 
other type of account at a financial institution will receive a 
reduction in the interest being charged on their Direct Loans. The 
Secretary has determined that the reduced interest charge will be cost-
neutral and has so advised the Office of Management and Budget, which 
is now conducting its own review consistent with section 455(b) of the 
HEA.

Sections 685.400 and 685.401

School Participation Requirements
    The proposed regulations would implement changes to section 453(b) 
of the HEA by deleting all references to the phase-in of the Direct 
Loan Program and the transition from the FFEL Program to the Direct 
Loan Program. The proposed regulations move the school selection 
provisions to Sec. 685.400 and remove Sec. 685.401 from the Direct Loan 
Program regulations.

Executive Order 12866

1. Potential Costs and Benefits

    Under Executive Order 12866, we have assessed the potential costs 
and benefits of this regulatory action.
    The potential costs associated with the proposed regulations are 
those resulting from statutory requirements and those we have 
determined as necessary for administering this program effectively and 
efficiently.
    In assessing the potential costs and benefits--both quantitative 
and qualitative--of this regulatory action, we have determined that the 
benefits would justify the costs.
    We have also determined that this regulatory action would not 
unduly interfere with State, local, and tribal governments in the 
exercise of their governmental functions.
Summary of Potential Costs and Benefits
    Proposals implementing the statutory change in borrower interest 
rates have been estimated to increase costs to the Federal Government 
by $147 million over five years. Costs increase under this change 
because interest rates charged to Direct Loan borrowers--and 
corresponding repayments to the Federal Government--are reduced. The 
change represents a significant economic benefit to Direct Loan 
borrowers.
    There are no Federal costs associated with the proposed regulations 
allowing the Secretary to offer reduced borrower interest rates as 
incentives to encourage on-time repayment. The HEA requires that any 
such incentives be cost-neutral. The Secretary intends to use this 
authority to charge a reduced interest rate to borrowers repaying by 
means of automated account debiting; this reduction will be structured 
to ensure its cost-neutrality.

2. Clarity of the Regulations

    Executive Order 12866 and the President's Memorandum of June 1, 
1998 on ``Plain Language in Government Writing'' require 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:
     Are the requirements in the proposed regulations clearly 
stated?
     Do the proposed regulations contain technical terms or 
other wording that interferes with their clarity?
     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 
we divided them into more (but shorter) sections? (A ``section'' is 
preceded by the symbol ``Sec. '' and a numbered heading; for example, 
Sec. 685.211 Miscellaneous repayment provisions.)
     Could the description of the proposed regulations in the 
SUPPLEMENTARY INFORMATION section of this preamble be more helpful in 
making the proposed regulations easier to understand? If so, how?
     What else could we do to make the proposed regulations 
easier to understand?
    Send any comments that concern how the Department could make these 
proposed regulations easier to understand to the person listed in the 
ADDRESSES section of the preamble.

[[Page 32361]]

Regulatory Flexibility Act Certification

    The Secretary certifies that these proposed regulations would not 
have a significant economic impact on a substantial number of small 
entities. None of the parties affected by these proposed regulations--
individual Direct Loan borrowers--would be considered small entities 
for the purposes of the Regulatory Flexibility Act.

Paperwork Reduction Act of 1995

    These proposed regulations do not contain any information 
collection requirements.

Assessment of Educational Impact

    The Secretary particularly requests comments on whether these 
proposed regulations would require transmission of information that any 
other agency or authority of the United States gathers or makes 
available.

Electronic Access to This Document

    You may view this document, as well as other Department of 
Education documents published in the Federal Register, in text or Adobe 
Portable Document Format (PDF) on the Internet at either of the 
following sites:

http://ocfo.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 previous sites. If you 
have questions about using the PDF, call the U.S. Government Printing 
Office (GPO) toll free at 1-888-293-6498; or in the Washington, D.C. 
area, at (202) 512-1530.

    Note: The official version of this document is the document 
published in the Federal Register. Free Internet access to the 
official edition of the Federal Register and the Code of Federal 
Regulations is available on GPO Access at: http://
www.access.gpo.gov/nara/index.html

(Catalog of Federal Domestic Assistance Number 84.268 William D. 
Ford Federal Direct Loan Program)

List of Subjects in 34 CFR Part 685

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

    Dated: June 10, 1999.
Richard W. Riley,
Secretary of Education.
    For the reasons stated in the preamble, the Secretary proposes to 
amend title 34 of the Code of Federal Regulations by revising Part 685 
to read as follows:

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

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

    Authority: 20 U.S.C. 1087 et seq., unless otherwise noted.

    2. Section 685.202 is amended by revising paragraphs (a) and (c)(1) 
to read as follows:


Sec. 685.202  Charges for which Direct Loan Program borrowers are 
responsible.

    (a) Interest--(1) Interest rate for Direct Subsidized Loans and 
Direct Unsubsidized Loans. (i) Loans first disbursed before July 1, 
1995. During all periods, the interest rate during any twelve-month 
period beginning on July 1 and ending on June 30 is determined on the 
June 1 immediately preceding that period. The interest rate is equal to 
the bond equivalent rate of 91-day Treasury bills auctioned at the 
final auction held prior to that June 1 plus 3.1 percentage points, but 
does not exceed 8.25 percent.
    (ii) Loans first disbursed on or after July 1, 1995 and before July 
1, 1998. 
    (A) During the in-school, grace, and deferment periods. The 
interest rate during any twelve-month period beginning on July 1 and 
ending on June 30 is determined on the June 1 immediately preceding 
that period. The interest rate is equal to the bond equivalent rate of 
91-day Treasury bills auctioned at the final auction held prior to that 
June 1 plus 2.5 percentage points, but does not exceed 8.25 percent.
    (B) During all other periods. The interest rate during any twelve-
month period beginning on July 1 and ending on June 30 is determined on 
the June 1 immediately preceding that period. The interest rate is 
equal to the bond equivalent rate of 91-day Treasury bills auctioned at 
the final auction held prior to that June 1 plus 3.1 percentage points, 
but does not exceed 8.25 percent.
    (iii) Loans first disbursed on or after July 1, 1998.
    (A) During the in-school, grace, and deferment periods. The 
interest rate during any twelve-month period beginning on July 1 and 
ending on June 30 is determined on the June 1 immediately preceding 
that period. The interest rate is equal to the bond equivalent rate of 
91-day Treasury bills auctioned at the final auction held prior to that 
June 1 plus 1.7 percentage points, but does not exceed 8.25 percent.
    (B) During all other periods. The interest rate during any twelve-
month period beginning on July 1 and ending on June 30 is determined on 
the June 1 immediately preceding that period. The interest rate is 
equal to the bond equivalent rate of 91-day Treasury bills auctioned at 
the final auction held prior to that June 1 plus 2.3 percentage points, 
but does not exceed 8.25 percent.
    (2) Interest rate for Direct PLUS Loans. (i) Loans first disbursed 
before July 1, 1998. During all periods, the interest rate during any 
twelve-month period beginning on July 1 and ending on June 30 is 
determined on the June 1 preceding that period. The interest rate is 
equal to the bond equivalent rate of 52-week Treasury bills auctioned 
at the final auction held prior to that June 1 plus 3.1 percentage 
points, but does not exceed 9 percent.
    (ii) Loans first disbursed on or after July 1, 1998. During all 
periods, the interest rate during any twelve-month period beginning on 
July 1 and ending on June 30 is determined on the June 1 preceding that 
period. The interest rate is equal to the bond equivalent rate of 91-
day Treasury bills auctioned at the final auction held prior to that 
June 1 plus 3.1 percentage points, but does not exceed 9 percent.
    (3) Interest rate for Direct Consolidation Loans.
    (i) Interest rate for Direct Subsidized Consolidation Loans and 
Direct Unsubsidized Consolidation Loans.
    (A) Loans first disbursed before July 1, 1995. The interest rate is 
the rate established for Direct Subsidized Loans and Direct 
Unsubsidized Loans in paragraph (a)(1)(i) of this section.
    (B) Loans first disbursed on or after July 1, 1995 and before July 
1, 1998. The interest rate is the rate established for Direct 
Subsidized Loans and Direct Unsubsidized Loans in paragraph (a)(1)(ii) 
of this section.
    (C) Loans for which the consolidation application is received by 
the Secretary before October 1, 1998 and for which the first 
disbursement is made on or after July 1, 1998. The interest rate is the 
rate established for Direct Subsidized Loans and Direct Unsubsidized 
Loans in paragraph (a)(1)(iii) of this section.
    (D) Loans for which the consolidation application is received by 
the Secretary on or after October 1, 1998 and before February 1, 1999. 
During all periods, the interest rate during any twelve-month period 
beginning on July 1 and ending on June 30 is determined on the June 1 
immediately preceding that period. The interest rate is equal to the 
bond equivalent rate of 91-day Treasury bills auctioned at the final 
auction held prior to that June 1 plus 2.3 percentage points, but does 
not exceed 8.25 percent.

[[Page 32362]]

    (E) Loans for which the consolidation application is received by 
the Secretary on or after February 1, 1999. During all periods, the 
interest rate is based on the weighted average of the interest rates on 
the loans being consolidated, rounded to the nearest higher one-eighth 
of one percent, but does not exceed 8.25 percent.
    (ii) Interest rate for Direct PLUS Consolidation Loans. 
    (A) Loans first disbursed before July 1, 1998. The interest rate is 
the rate established for Direct PLUS Loans in paragraph (a)(2)(i) of 
this section.
    (B) Loans for which the consolidation application is received by 
the Secretary before October 1, 1998 and for which the first 
disbursement is made on or after July 1, 1998. The interest rate is the 
rate established for Direct PLUS Loans in paragraph (a)(2)(ii) of this 
section.
    (C) Loans for which the consolidation application is received by 
the Secretary on or after October 1, 1998 and before February 1, 1999. 
During all periods, the interest rate during any twelve-month period 
beginning on July 1 and ending on June 30 is determined on the June 1 
immediately preceding that period. The interest rate is equal to the 
bond equivalent rate of 91-day Treasury bills auctioned at the final 
auction held prior to that June 1 plus 2.3 percentage points, but does 
not exceed 8.25 percent.
    (D) Loans for which the consolidation application is received by 
the Secretary on or after February 1, 1999. During all periods, the 
interest rate is based on the weighted average of the interest rates on 
the loans being consolidated, rounded to the nearest higher one-eighth 
of one percent, but does not exceed 8.25 percent.
    (4) Interest rate reductions. The Secretary may reduce the interest 
rate on a Direct Loan as provided in Sec. 685.211(b).
* * * * *
    (c) * * *
    (1)(i) Charges a borrower a loan fee not to exceed four percent of 
the principal amount of the loan on a Direct Subsidized or Direct 
Unsubsidized Loan; or
    (ii) Charges a borrower a loan fee of four percent of the principal 
amount of the loan on a Direct PLUS Loan.
* * * * *
    3. Section 685.211 is amended by redesignating paragraphs (b), (c), 
(d), and (e) as paragraphs (c), (d), (e), and (f), respectively; by 
adding a new paragraph (b); by revising the first sentence of newly 
redesignated paragraph (e)(2); and by revising newly redesignated 
paragraph (e)(3) to read as follows:


Sec. 685.211  Miscellaneous repayment provisions.

* * * * *
    (b) Repayment incentives. To encourage on-time repayment, the 
Secretary may reduce the interest rate for a borrower who repays a loan 
under a system or on a schedule that meets requirements specified by 
the Secretary.
* * * * *
    (e) * * *
    (2) If the Secretary makes the determination described in paragraph 
(e)(1) of this section, the Secretary sends an ineligible borrower a 
demand letter that requires the borrower to repay some or all of a 
loan, as appropriate. * * *
    (3) If a borrower fails to comply with the demand letter described 
in paragraph (e)(2) of this section, the borrower is in default on the 
entire loan.
* * * * *
    4. Section 685.400 is amended by adding a new paragraph (d) to read 
as follows:


Sec. 685.400  School participation requirements.

* * * * *
    (d) The Secretary selects schools to participate in the Direct Loan 
Program from among those that apply to participate and meet the 
requirements in paragraphs (a)(1), (b), and (c) of this section.


Sec. 685.401  [Removed and Reserved]

    5. Section 685.401 is removed and reserved.

[FR Doc. 99-15278 Filed 6-15-99; 8:45 am]
BILLING CODE 4000-01-P