[Federal Register Volume 64, Number 145 (Thursday, July 29, 1999)]
[Proposed Rules]
[Pages 41232-41249]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-19230]



[[Page 41231]]

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Part III





Department of Education





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34 CFR Part 674



Federal Perkins Loan Program; Proposed Rule

  Federal Register / Vol. 64, No. 145 / Thursday, July 29, 1999 / 
Proposed Rules  

[[Page 41232]]


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DEPARTMENT OF EDUCATION

34 CFR Part 674

RIN 1840-AC70


Federal Perkins Loan Program

AGENCY: Department of Education.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Secretary proposes to amend the Federal Perkins Loan 
Program regulations. These proposed regulations are needed to implement 
the changes to the Higher Education Act of 1965, as amended (the HEA), 
resulting from the Higher Education Amendments of 1998 (the 1998 
Amendments). The proposed regulations reflect the provisions of the 
1998 Amendments that affect the institutions that participate in, and 
borrowers who have loans made under, the Federal Perkins Loan Program. 
These proposed regulations would expand borrower benefits under the 
Federal Perkins Loan program by increasing loan limits, expanding 
borrower eligibility for deferments and cancellations, establishing a 
loan rehabilitation program for borrowers in default on their Federal 
Perkins Loans, establishing an incentive repayment program, and 
providing a closed school discharge.

DATES: We must receive your comments by September 15, 1999.

ADDRESSES: Address all comments about these proposed regulations to Ms. 
Gail McLarnon, Program Specialist, Policy Development Division, Office 
of Student Financial Assistance, U.S. Department of Education, 400 
Maryland Avenue, SW., Room 3042, Regional Office Building 3, 
Washington, DC 20202-5449. If you prefer to send your comments through 
the Internet, use the following address: [email protected]
    If you want to comment on the information collection requirements 
you must send your comments to the Office of Management and Budget at 
the address listed in the Paperwork Reduction Act section of this 
preamble. You may also send a copy of these comments to the Department 
representative named in this section.

FOR FURTHER INFORMATION CONTACT: Ms. Gail McLarnon, Program Specialist, 
U.S. Department of Education, 400 Maryland Avenue, SW., Room 3045, 
Regional Office Building 3, Washington, DC 20202-5449. Telephone: (202) 
708-8242. If you use a telecommunications device for the deaf (TDD), 
you may call the Federal Information Relay Service 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, D.C., 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 Federal 
Information Relay Service at 1-800-877-8339.

General

Background

    On October 7, 1998, President Clinton signed into law the Higher 
Education Amendments of 1998 (the 1998 Amendments), Pub. L. 105-244, 
that amended the Higher Education Act of 1965, as amended (the HEA). 
This notice of proposed rulemaking (NPRM) addresses the changes that 
affect the Federal Perkins Loan Program.

Negotiated Rulemaking

    Section 492 of the HEA requires that, before publishing any 
proposed regulations to implement programs under Title IV of the Act, 
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, D.C., 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

[[Page 41233]]

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, they met to develop 
proposed regulations over the course of several months, beginning in 
January.
    Proposed regulations contained in this NPRM reflect the final 
consensus of negotiating Committee II, which was made up of the 
following members:
     American Association of Community Colleges.
     American Association of Cosmetology Schools.
     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 for 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 Council of Higher Education Loan 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 means that there must be no 
dissent by any member in order for the committee to be considered to 
have reached agreement. Consensus was reached on all of the proposed 
regulations in this document.
    The Secretary will publish a technical correction package at a 
later date that replaces all references to ``Direct Loan'' in the 
Federal Perkins Loan Program and Student Assistance General Provisions 
regulations with ``National Direct Student Loan Program'' or the 
acronym ``NDSL.'' The negotiators agreed that such a change would 
eliminate confusion between the National Direct Student Loan Program 
and the William D. Ford Federal Direct Student Loan Program.

Summary of Proposed Regulatory Changes

    We propose to amend the following sections of the regulations:

Section 674.2  Definitions

    We propose to amend Sec. 674.2 by adding a definition of the term 
``satisfactory repayment arrangement'' in accordance with changes made 
to the 1998 Amendments. The 1998 Amendments define ``satisfactory 
repayment arrangements'' as the return of Title IV HEA eligibility to a 
defaulted Federal Perkins Loan borrower, to the extent the borrower is 
otherwise eligible, if the borrower makes six on-time, consecutive, 
monthly payment of amounts owed on the loan. As specified in the 1998 
Amendments, the proposed regulations would authorize the restoration of 
the borrower's Title IV eligibility only once on a defaulted Federal 
Perkins loan.

Section 674.5  Federal Perkins Loan Program Default Rate and Penalties

    Effective with the 2000-2001 award year, the 1998 Amendments 
eliminate the requirement that an institution file a default reduction 
plan with the Secretary if the institution's cohort default rate equals 
or exceeds 15 percent. The 1998 Amendments also eliminate the series of 
graduated default penalties imposed on institutions with cohort default 
rates that equal or exceed 20, 25, or 30 percent or more in favor of 
one default penalty of zero if an institution's cohort default rate 
equals or exceeds 25 percent. A default rate penalty of zero eliminates 
an institution's Federal Capital Contribution. We are proposing to 
amend Sec. 674.5 to reflect these changes.
    For award years that precede award year 2000-2001, the 1998 
Amendments also contain a provision that exempts an institution from 
the default reduction plan filing requirement if the institution has 
less than 100 students who have Federal Perkins Loans in that academic 
year and a cohort default rate that is equal to or greater than 15 
percent but less than 20 percent. The negotiators agreed not to develop 
proposed regulations that reflect this change because the final 
regulations that implement this provision would be outdated immediately 
upon taking effect on July 1, 2000. However, because the 1998 
Amendments were enacted on October 7, 1998, the Secretary will not 
require an institution that meets the statutory criteria to file a 
default reduction plan for award years 1998-99 and 1999-2000.
    The proposed regulations would further amend this section to 
reflect a new default penalty established by the 1998 Amendments that 
terminates the eligibility to participate in the Federal Perkins Loan 
Program if an institution has a cohort default rate of 50 percent or 
higher for the three most recent years for which data are available. An 
institution would be ineligible to participate for the award year in 
which the determination is made and the two succeeding award years. 
Under the proposed regulations, the new ineligibility default penalty 
would become effective with the cohort default rate calculated as of 
June 30, 2001. The negotiating committee agreed that the cohort default 
rate calculated as of this date will represent the last of the three 
most recent years of available cohort default rate data used by the 
Secretary to make a determination of ineligibility. Thus, the cohort 
default rates calculated as of June 30, 2001, June 30, 2000, and June 
30, 1999 would be the three years used by the Department to make the 
initial determination of ineligibility under the proposed regulations.
    The proposed regulations would allow an institution to appeal a 
determination of ineligibility, within 30 days of notification by the 
Secretary, based on an inaccurate calculation of its cohort default 
rate if a recalculation using corrected data would reduce the 
institution's cohort default rate to below 50 percent for any of the 
three award years used to make the determination. This appeal is 
discussed more fully in the next paragraph. An institution may also 
appeal if, on average, 10 or fewer borrowers enter repayment for the 
three most recent award years used to make a determination of 
ineligibility. For example, an institution might have 5 borrowers 
entering repayment in the first year, 15 borrowers entering repayment 
in the second year and 10 borrowers entering repayment in the third 
year, for an average of 10 borrowers entering repayment per year over 
the three-year period used to make an eligibility determination. The 
Secretary has 45 days to issue a decision following the institution's 
timely submission of a complete and accurate

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appeal, during which time the institution may continue to participate 
in the program. If an institution's appeal is denied by the Secretary, 
the institution must liquidate its revolving student loan fund in 
accordance with section 466A of the HEA and assign any outstanding 
loans to the Secretary in accordance with Sec. 674.50 of the Federal 
Perkins Loan Program regulations.
    In the Federal Perkins Loan Program, an institution's cohort 
default rate is calculated based on data submitted to the Secretary by 
the institution on its Fiscal Operations Report and through the edit 
process used by the institution to adjust the data on its Fiscal 
Operations Report. We recognize that in order to appeal a notice of 
ineligibility based on an inaccurate calculation of this data, the 
institution must correct its own data submission. We consider the 
complete and timely re-submission of corrected data, both in writing 
and through the edit process, to be the mechanism an institution uses 
to affect an appeal. The negotiating Committee agreed that this 
procedure provided adequate due process since the school submits the 
actual data used to calculate its Federal Perkins Loan Program cohort 
default data.
    We recognize that the process used to calculate an institution's 
cohort default rate is unique to the Federal Perkins Loan Program. If, 
at any time in the future, the National Student Loan Data System 
(NSLDS) or another method is used to calculate an institution's Federal 
Perkins Loan Program cohort default rate, we will revisit and revise 
accordingly the regulations that govern the appeal process under this 
section.
    We are also proposing to amend this section of the regulations to 
reflect provisions in the 1998 Amendments that allow an institution to 
exclude loans from its cohort default rate calculation. These 
exclusions include loans on which the borrower has voluntarily made six 
consecutive payments, voluntarily made all payments currently due, 
repaid the loan in full, received a deferment or forbearance based on a 
condition that predates the borrower reaching a 240/270-day past due 
status, or rehabilitates the loan after becoming 240/270 past due. The 
proposed regulations would also allow an institution to remove a loan 
that is canceled due to death or permanent and total disability, 
discharged in bankruptcy, forgiven due to a closed school situation, or 
repaid in full under the compromise repayment provisions contained in 
Sec. 674.33(e) of the Federal Perkins Loan program regulations.
    The 1998 Amendments require that the payments a borrower makes when 
making six consecutive payments or bringing the loan current be 
``voluntary'' payments in order for a school to exclude the borrower 
from its cohort default rate calculation. In order to clarify the 
proposed regulations and avoid confusion when a school calculates its 
cohort default rate, we are proposing that ``voluntary'' payments 
exclude payments obtained by income tax offset, wage garnishment, 
income or asset execution, or pursuant to a judgment. Generally, 
payments obtained by these methods are automatically deducted from the 
borrower's tax return, wages or assets and the borrower has no control 
or choice in the payment process. Payments made pursuant to a judgment, 
although not always automatic, are payments made as the result of a 
court order and represent last resort due diligence efforts on the part 
of the school to obtain payment from the borrower. For this reason, the 
negotiators agreed that payments obtained by judgment also should not 
be considered voluntary for the purposes of calculating the Federal 
Perkins Loan Program cohort default rate.
    We are also proposing to add the requirement that the six 
consecutive voluntary payments that a borrower makes on a defaulted 
loan be ``monthly'' payments in order for a school to remove that 
borrower from its cohort default rate calculation. We are proposing the 
addition of the word monthly to provide consistency in interpreting the 
timeframe in which the payments must be made. We are also proposing to 
require monthly payments to maintain regulatory consistency in this 
area. The Federal Perkins Loan Program regulations, as currently 
written, allow schools to remove a borrower from its cohort default 
rate calculation if the borrower has made six, consecutive, monthly 
payments on a defaulted loan.
    In accordance with the 1998 Amendments, the proposed regulations 
would eliminate an institution's authority to exclude improperly 
serviced loans from its cohort default rate.
    Lastly, the paragraphs in this section that describe satisfactory 
arrangements to repay the loan and loan rehabilitation have been 
deleted and relocated for administrative ease. The 1998 Amendments 
modified the definition of satisfactory repayment arrangements and 
authorized a loan rehabilitation program in the Federal Perkins Loan 
Program. These provisions are reflected in Secs. 674.2 and 674.39 of 
the proposed regulations.

Section 674.6  Default Reduction Plan

    For award year 2000-2001 and succeeding award years, the 1998 
Amendments eliminate the requirement that an institution with a cohort 
default rate that equals or exceeds 15 percent establish and implement 
a default reduction plan. Therefore, we are proposing to remove the 
default reduction plan provisions contained in Sec. 674.6 from the 
Federal Perkins Loan Program regulations.

Section 674.7  Expanded Lending Option

    Effective October 1, 1998, the 1998 Amendments eliminated the 
Expanded Lending Option in the Federal Perkins Loan Program. This 
option previously allowed participating institutions to lend at higher 
limits after depositing an Institutional Capital Contribution equal to 
100 percent of their Federal Capital Contribution into their Perkins 
Loan Revolving Fund. The proposed regulations would eliminate the 
expanded lending option provisions in Sec. 674.7 to reflect this 
statutory change.

Section 674.9  Student Eligibility

    The 1998 Amendments authorize the use of the same criteria that 
remove a borrower from an institution's cohort default rate in 
Sec. 674.5 to re-establish a borrower's eligibility for additional 
Federal Perkins Loans. Accordingly, we are proposing to revise 
Sec. 674.9 by adding a new paragraph that re-establishes a borrower's 
eligibility for a Perkins Loan if the borrower voluntarily makes six 
consecutive monthly payments, voluntarily makes all payments currently 
due, repays the loan in full, receives a deferment or forbearance based 
on a condition that predates the borrower reaching a 240/270-day past 
due status, or rehabilitates the loan after becoming 240/270 days past 
due. A borrower's eligibility for a Perkins Loan is also re-established 
if the borrower's loan is discharged due to permanent and total 
disability, discharged in bankruptcy, forgiven due to a closed school 
situation, or repaid in full in accordance with Sec. 674.33 of the 
Federal Perkins Loan Program regulations.
    For the purpose of a borrower re-establishing eligibility for a 
Perkins Loan under this section, the proposed regulations would define 
``voluntary'' payments as those payments made directly by the borrower, 
including payments made over and above a payment made pursuant to a 
judgment. We are proposing to define payments made over and above the 
payments required on a judgment as voluntary

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because the borrower is freely choosing to make a payment of this 
nature. Payments made over and above those required on a judgement are 
not automatic nor are they required. The negotiators agreed that a 
borrower who opts to make payments over and above payments made 
pursuant to a judgment is making a good faith effort to repay the debt 
and should not lose the benefit of Federal Perkins Loan eligibility.
    For the purpose of re-establishing a borrower's eligibility for a 
Federal Perkins Loan, the proposed definition of voluntary payments 
excludes payments made under the following conditions because a 
borrower has no control or choice in making these types of payments:
     Payments obtained by income tax offset.
     Payments obtained through wage garnishment.
     Payments obtained through income or asset execution.
     Payments made pursuant to a judgment.

Section 674.12  Loan maximums

    The 1998 Amendments increase annual maximum loan amounts and 
increase the aggregate maximum loan amounts allowable for an eligible 
student to the levels formerly authorized for schools that participated 
in the Expanded Lending Option. The proposed regulations reflect the 
following increased annual loan limits for all eligible borrowers: 
$4,000 for a student who has not successfully completed a program of 
undergraduate education and $6,000 for a graduate or professional 
student. The proposed regulations would require that aggregate loan 
limits not exceed $40,000 for graduate and professional students, 
$20,000 for a student who has successfully completed two years of a 
program of education leading to a bachelor's degree but who has not 
completed his or her degree work, and $8,000 in the case of students 
who have not completed the first two years of undergraduate work.
    During the negotiated rulemaking discussions on this section, the 
Committee discussed whether this proposed change would create the 
potential for the inadvertent overaward of Federal Perkins Loans in 
excess of the new statutory aggregate maximum of $8,000, especially on 
loans made on or about the date of enactment. Loan maximums in effect 
prior to enactment of the 1998 Amendments did not tie aggregate loan 
limits to the completion of two years of undergraduate education. We 
are aware of this potential problem and will not require resolution of 
an overaward made prior to the publication of this proposed regulation 
if a Federal Perkins Loan borrower was inadvertently awarded an amount 
in excess of the new statutory aggregate maximum of $8,000 and did not 
complete two years of undergraduate work.
    The 1998 Amendments also changed the definition of aggregate loan 
limits to include only unpaid principal as is the case in the Federal 
Family Education Loan and Federal Direct Loan Programs. This change 
allows a borrower who has borrowed the maximum cumulative amount as an 
undergraduate or professional student to re-establish eligibility for 
further Perkins loans up to the principal amount the borrower has 
repaid. Our proposed amendments to Sec. 674.12 of the regulations 
reflect this change as well.

Section 674.16  Making and Disbursing Loans

    The proposed regulations would amend this section, in accordance 
with the 1998 Amendments, to clarify the credit bureau reporting 
requirements with which an institution must comply after making and 
disbursing a Federal Perkins Loan. The proposed regulations would amend 
Sec. 674.16 to require that an institution report to at least one 
national credit bureau information concerning the repayment and 
collection of the loan until the loan is paid in full, including the 
date the loan was repaid, canceled or discharged for any reason. The 
proposed regulations would also add a new paragraph that requires an 
institution to report promptly any changes to information previously 
reported on a loan to the same credit bureaus to which the information 
was previously reported. The negotiators agreed that reporting a change 
of information on a loan to the same credit bureaus to which it was 
previously reported was an important protection for the borrower should 
the school decide to contract with a different credit bureau at a later 
date. Reporting changes of information on a loan to the same credit 
bureaus provides a consistent picture of the borrower's credit history 
and eliminates the risk that negative credit history might remain on 
the borrower's record when, in fact, it should have been removed or 
updated.

Section 674.31  Promissory Note

    The proposed regulations would amend Sec. 674.31, in accordance 
with the 1998 Amendments, to exclude from a Federal Perkins Loan 
Program borrower's initial grace period any period, not to exceed three 
years, during which a borrower who is a member of the Armed Forces 
reserve component is called or ordered to active duty for a period of 
more than 30 days. The proposed regulations would require that any 
single excluded period may not exceed three years and must include the 
time necessary for the borrower to resume enrollment at the next 
available regular enrollment period. We are also proposing that any 
borrower in a grace period when called or ordered to active duty be 
entitled to another full six or nine-month grace period upon completion 
of the excluded period of service.
    Discussion of this provision at the negotiated rulemaking sessions 
focused on the valuable service that these borrowers are providing to 
our country as members of the Armed Forces reserve component and the 
care that must be taken not to penalize borrowers returning from active 
duty. In this regard, we would like to clarify that the time period in 
which a borrower must re-enroll in the ``next available enrollment 
period'' after returning from active duty service in the Armed Forces 
may be longer for some borrowers than others, especially if the 
borrower is pursuing a non-traditional program. Additionally, the 
possibility exists that borrowers may not re-enroll in the same program 
in which they were enrolled at the time they were called to active 
duty. It was the consensus of the negotiating team that the proposed 
regulations should provide flexibility in the administration of these 
aspects of a borrower's grace period.
    The proposed regulations would also amend Sec. 674.31 by requiring 
an institution to disclose to at least one national credit bureau the 
amount of the loan made to the borrower, along with other relevant 
information, so as to not restrict an institution from reporting to 
more than one credit bureau should the institution desire to do so. 
Previously, this section required an institution to report to any one 
national credit bureau.

Section 674.33  Repayment

    The proposed regulations would amend Sec. 674.33 to reflect a new 
provision of the 1998 Amendments that authorizes an institution to 
establish an incentive repayment program to reduce defaults and 
replenish its Federal Perkins Loan revolving fund. The proposed 
regulations would authorize an institution to offer a reduction of no 
more than one percent of the interest rate on a loan on which the 
borrower has made 48 consecutive, monthly payments; a discount of no 
more than five percent on the balance owed on a loan if the borrower 
pays in full prior to the end of the repayment period; and,

[[Page 41236]]

with the Secretary's approval, any other incentive an institution 
determines will reduce defaults and replenish its fund. The proposed 
regulations reflect the requirement in the 1998 Amendments that an 
institution not use Federal funds, including Federal funds from its 
Federal Perkins Loan revolving fund, or institutional funds from the 
fund to pay for any repayment incentive. In this regard, the proposed 
regulations require an institution to reimburse its Fund, on at least a 
quarterly basis, for any money lost to its Fund that otherwise would 
have been paid by the borrower if the borrower had not received the 
repayment incentive. The negotiators agreed that unless a school 
reimburses its Federal Perkins Loan revolving fund for the money lost 
to incentives, funding for future Federal Perkins Loan borrowers might 
be jeopardized.
    The proposed regulations would also amend Sec. 674.33 by adding a 
new section that implements a closed school discharge for Federal 
Perkins Loan borrowers as authorized by the 1998 Amendments. Prior to 
passage of the 1998 Amendments, the Secretary lacked the statutory 
authority to discharge a Federal Perkins Loan due to a closed school 
situation. The proposed regulations would authorize the holder of the 
loan to discharge a borrower's total liability on any loan made under 
the Federal Perkins Loan Program on or after January 1, 1986, if the 
borrower is unable to complete the program of study in which the 
borrower is enrolled due to the institution's closure. The proposed 
regulations would require that the borrower be reimbursed for any 
amounts the borrower paid on a discharged loan either voluntarily or 
through enforced collection. A borrower who has defaulted on a loan 
that is discharged is no longer considered to be in default and is 
eligible to receive further Title IV aid. The holder of the loan is 
required to report the discharge of the loan to all credit bureaus to 
which the status of the loan was previously reported.
    Program regulations that authorize the discharge of a loan made 
under both the Federal Direct Student Loan (Direct Loan) and Federal 
Family Education Loan (FFEL) Program have been in effect since July 1, 
1995. The proposed regulations include closed school discharge 
provisions for the Federal Perkins Loan Program that are based largely 
on the regulations in existence for these programs.
    The proposed regulations would authorize a closed school discharge 
by either the Secretary or the institution. This reflects the 
possibility that an institution may continue to hold a loan that is 
eligible for a closed school discharge due to the closure of a location 
or branch campus of the school, and not the closure of the school 
itself. However, in order to protect the borrower, the proposed 
regulations would require a school that denies a borrower's request for 
a closed school discharge to submit the materials that support such a 
determination for review and an independent determination of the 
dischargeability of the loan by the Secretary.
    The proposed regulations would also allow the Secretary to 
discharge a loan based on a school closure without an application from 
the borrower. The Secretary may discharge a loan without an application 
if it were determined that the borrower qualified for and received a 
discharge on his or her FFEL or Direct Loan and was unable to secure a 
discharge on his or her Federal Perkins Loan only because the Secretary 
lacked the statutory authority. The proposed regulations would also 
authorize the Secretary to discharge a Federal Perkins Loan without an 
application from the borrower based on information in the Secretary's 
possession that qualified the borrower for a discharge.
    Lastly, the proposed regulations contain a provision that would 
disallow a closed school discharge if the borrower secured his or her 
Federal Perkins Loan through fraudulent means as determined by the 
ruling of a court or an administrative tribunal. The negotiators agreed 
that the discharge of a fraudulently obtained loan would constitute an 
inappropriate use of federal tax dollars and compromise the integrity 
of the Federal Perkins Loan Program.

Section 674.34  Deferment of Repayment--Federal Perkins Loans, Direct 
Loans and Defense Loans

    The proposed regulations would amend Sec. 674.34, in accordance 
with changes made in the Amendments, to extend the deferment benefits 
described in this section to all borrowers with loans made before July 
1, 1993, regardless of the terms of the borrower's promissory note. 
Current regulations authorize the deferments in this section only for 
an eligible borrower with a loan made on or after July 1, 1993. The 
extension of the deferments in this section to borrowers with a loan 
made before July 1, 1993, is effective October 7, 1998.
    The proposed amendments to this section would also authorize a 
deferment for any borrower with a loan made under the program, 
including National Direct and Defense Loans, during any period in which 
the borrower is engaged in service that subsequently qualifies the 
borrower for cancellation of his or her loan. Prior to passage of the 
1998 Amendments, if the borrower had a loan under the Federal Perkins 
Loan Program that was made before July 1, 1993, the borrower was 
eligible for a postponement of his or her repayment while doing service 
that qualified the borrower for cancellation. Because all borrowers are 
now eligible for a deferment in anticipation of cancellation, the 
postponement provisions in Sec. 674.39 would be removed. Deferments in 
anticipation of cancellation authorized by this section may not be 
granted retroactively to cover any period of time prior to October 7, 
1998.

Section 674.39  Loan rehabilitation

    The 1998 Amendments authorize institutions that participate in the 
Federal Perkins Loan Program to establish a loan rehabilitation program 
for all defaulted Federal Perkins Loan borrowers. The proposed 
regulations in Sec. 674.39 would define rehabilitation as the making of 
an on-time, monthly payment, as defined by the institution, each month 
for twelve consecutive months by the defaulted borrower. As specified 
in the 1998 Amendments, a borrower may rehabilitate a loan only once. 
The proposed regulations would require an institution to notify a 
defaulted borrower of the option and consequences of rehabilitating a 
defaulted loan. The consequences of rehabilitating a defaulted loan 
include returning the borrower to regular repayment status, treating 
the first payment made under the twelve consecutive payments as the 
first payment in a new ten-year repayment period, and instructing any 
credit bureau to which the default was reported to remove the default 
from the borrower's credit history.
    The proposed regulations would limit collection costs that can be 
assessed a borrower on a rehabilitated loan to 24 percent. However, the 
proposed regulations would also allow an institution to charge any 
collection costs that exceed 24 percent on a rehabilitated loan, and 
that may not be passed along to the borrower, to their Federal Perkins 
Loan Revolving Fund until July 1, 2002. This would give institutions a 
chance to renegotiate contracts and service agreements with third-party 
collection agencies that currently provide for higher collection 
percentages.
    There was much discussion among the negotiators regarding the limit 
on collection costs that can be charged to the borrower of a 
rehabilitated Federal Perkins loan. A proposal to limit the

[[Page 41237]]

collection costs that may be charged to a Federal Perkins Loan borrower 
on a rehabilitated loan to 18.5 percent, in order to be consistent with 
the FFEL and Federal Direct Loan Programs, did not receive the full 
support of the negotiators. Several negotiators noted that a Federal 
Perkins Loan borrower might have accrued collection costs in excess of 
18.5 percent on a rehabilitated loan, and that institutions would have 
to cover the spread between an 18.5 percent cap and actual collection 
costs incurred. Several negotiators suggested that the competitive 
marketplace should determine the collection costs assessed to the 
borrower, not an arbitrary cap, and that collection agencies would not 
agree to contract with schools, especially small schools with low 
volume business, for such a low fee. However, other negotiators felt 
that borrowers faced with added marketplace collection costs of 30 to 
40 percent when repaying a loan are pushed to the extreme financially. 
Also, several negotiators felt that, to the extent feasible, collection 
costs assessed on rehabilitated loans should be consistent across the 
Title IV loan programs. FFEL and Federal Direct Loan borrowers are not 
subject to further collection costs beyond the maximum 18.5 percent 
after rehabilitating their loan.
    Several negotiators noted that in the FFEL and Federal Direct Loan 
programs, collection costs that are charged to a borrower are included 
in the ``new outstanding principal balance'' of the loan after it has 
been rehabilitated and returned to current status. That is, the 
collection costs of up to 18.5 percent are capitalized. This results in 
an actual higher charge to the borrower as he or she repays the new, 
higher balance, over time and with interest charged on the full amount. 
They noted that capitalizing an 18.5 percent collection cost on an FFEL 
or Federal Direct Loan is equal to assessing approximately a 24 percent 
fee on a Federal Perkins Loan, since collection costs are not 
capitalized in the Federal Perkins Loan Program. A proposal to limit 
the collection costs to 24 percent did not yield immediate consensus. 
However, negotiators reviewed data and confirmed that a capitalized 
18.5 percent collection cost on an FFEL and Federal Direct Loan 
increases the balance of the loan, which in turn increases the amount 
of interest that accrues on that balance over the repayment of the 
loan. The difference in the borrower's monthly payment needed to cover 
both the collection cost and the interest accruing on an increased 
principal balance, yields an amount equal to 24 percent of the original 
principal and interest due on the loan after it has rehabilitated.
    For example, on an FFEL or Federal Direct Loan with an outstanding 
balance of $1,000 after rehabilitation, capitalizing an 18.5 percent 
collection cost will add an additional $185.00 to the loan, yielding a 
new outstanding balance of $1,185.00. The borrower's payment will 
increase by $.46 per month over the life of the loan because of the 
added $185.00. Over 10 years, the borrower makes 120 payments. The 
extra $55.20 (120 monthly payments  x  $.46) added to the original 
$185.00 in collection costs that were added to the loan balance 
(capitalized) means that the borrower will repay $240.00 in collection 
costs over the life of the rehabilitated loan. Therefore, the 
negotiators felt that a cap of 24 percent on the collection costs that 
may be charged on a rehabilitated Federal Perkins Loan was comparable 
to the 18.5 percent cap on FFEL and Federal Direct Loans. They reached 
consensus on the 24 percent cap with the understanding that, as the 
example presented illustrates:
     No further collection costs are assessed the borrower. 
That is, payments are not treated on a ``fee on fee'' basis which is 
often used by collection agencies.
     The uncapitalized collection costs of 24 percent of the 
principal and interest due after the loan is rehabilitated is treated 
as a separate cost.
     The borrower's monthly payment reflects an amount that 
spreads the collection costs over the life of the loan.
    Finally, the proposed regulations would return the benefits and 
privileges of the promissory note to the rehabilitated borrower as they 
applied prior to the borrower's default and authorizes institutions to 
offer flexible repayment options following the borrower's return to 
regular repayment status. This flexibility was noted in the regulation 
to assure schools that they can work with rehabilitated borrowers to 
establish realistic repayment plans in order to avoid a return to a 
default status.

Section 674.41  Due Diligence--General Requirements

    The 1998 Amendments provide for the establishment of a Student Loan 
Ombudsman's office in order to provide timely assistance to borrowers 
with loans made under Title IV of the HEA. The 1998 Amendments also 
require that information about the availability and functions of the 
Ombudsman be made available to all borrowers in the Title IV student 
loan programs. The proposed regulations would amend Sec. 674.41 to 
comply with this new requirement. The proposed regulations would 
require that institutions participating in the Federal Perkins Loan 
Program, as part of the general due diligence requirements, provide the 
borrower with information on the availability of the Student Loan 
Ombudsman's office if the borrower disputes the terms of the loan in 
writing and the institution does not resolve the dispute.

Section 674.42  Contact With the Borrower

    The 1998 Amendments modified section 486(b) of the HEA by 
eliminating the requirement that institutions conduct exit counseling 
individually or in groups and by encouraging institutions to use 
electronic means in providing personalized exit counseling. The 
proposed regulations in Sec. 674.42 would facilitate these changes and 
make exit counseling requirements in the Federal Perkins Loan Program 
consistent with those in the Federal Direct Loan and the Federal Family 
Education Loan Programs.
    Specifically, the proposed regulations would reorganize this 
section by first describing the disclosures that an institution is 
required to make to a Federal Perkins Loan borrower under section 
463A(b) of the HEA, either as part of the promissory note or in another 
written statement provided to the borrower. The disclosure requirements 
have not changed. However, the proposed regulations would provide that 
the institution must make these disclosures either shortly before the 
borrower ceases at least half-time study at the institution, during the 
exit interview, or immediately by mail, if the borrower enters 
repayment without the institution's knowledge. As currently written, 
the regulations stipulate that the institution must make these 
disclosures during exit counseling.
    The proposed regulations would require an institution to provide 
exit counseling to each borrower either in person, by audiovisual 
presentation, or by interactive electronic means before the student 
ceases at least half-time study. The proposed regulations would provide 
alternative written and electronic counseling options for borrowers 
engaged in study-abroad or correspondence study, and for borrowers who 
have left school without the institution's knowledge. In conducting 
exit counseling, the proposed regulations would require that an 
institution inform the borrower of the anticipated monthly repayment 
amount, review repayment options, suggest debt

[[Page 41238]]

management strategies, emphasize the seriousness of the repayment 
obligation and the consequences of default, review deferment and 
cancellation benefits of the loan, require the borrower to provide 
corrections to the institution's records, and review with the borrower 
information on the availability of the Student Loan Ombudsman's office. 
They would also propose that institutions that provide exit counseling 
by electronic means take reasonable steps to ensure that each borrower 
receives the counseling materials and actively participates in and 
completes the exit counseling. If, for example, a school sends 
counseling materials by electronic mail or other electronic means, not 
including the U.S. mail, the school must obtain documentation through 
return receipt or some other mechanism that the student received the 
materials and completed them.
    Lastly, in order to facilitate the use of electronic exit 
counseling, the proposed regulations would eliminate the requirements 
that a school, as part of exit counseling, have the borrower sign a 
copy of the repayment schedule and provide a copy of the signed 
repayment schedule and the signed promissory note to the borrower. The 
institution would still have to provide the borrower with a copy of the 
borrower's repayment schedule and the promissory note as part of the 
disclosure requirements listed in Sec. 674.42(a).

Section 674.45  Collection Procedures

    The 1998 Amendments clarify an institution's credit bureau 
reporting responsibilities by requiring that a school promptly disclose 
changes to any information it has reported on a borrower's Federal 
Perkins Loan. As currently written, Sec. 674.45 requires a school to 
report changes on a defaulted loan to the same credit bureau to which 
it originally reported the default. Section 674.45 also currently 
requires an institution to respond within one month of its receipt to 
any inquiry from any credit bureau regarding the information reported 
on the loan amount. In order to prevent the borrower from suffering the 
negative consequences that may result from the existence of an 
inaccurate credit history, the proposed regulation amends the 
collection procedures in Sec. 674.45 to require that an institution 
report changes to the account status of a defaulted loan to any 
national credit bureau to which it reported the default. The regulation 
also proposes, in accordance with provisions in the Fair Credit 
Reporting Act, that an institution be required to resolve, within 30 
days of its receipt, any inquiry from any credit bureau that disputes 
the completeness or accuracy of information reported on the loan. This 
would protect the borrower from the negative impact of a protracted 
resolution in disputes involving the accuracy of his or her credit 
history.
    The 1998 Amendments require an institution to disseminate 
information regarding the Student Loan Ombudsman to borrowers who are 
unable to resolve a dispute over the terms of their loan with the loan 
holder. A new paragraph is proposed for Sec. 674.45 that would require 
an institution, as part of the collection activities contained in this 
section, to provide the borrower with information on the availability 
of the Student Loan Ombudsman's office.

Section 674.47  Costs Chargeable to the Fund

    The proposed regulations would amend Sec. 674.47, in accordance 
with the loan rehabilitation provisions in Sec. 674.39 of the proposed 
regulations. The proposed change would authorize an institution, until 
July 1, 2002, to charge its Fund for any collection costs assessed on a 
rehabilitated loan that are in excess of the 24 percent maximum limit 
that may be passed along to the borrower. This authority is necessary 
to give institutions time to renegotiate contracts with collection 
agencies if current contracts call for the assessment of collection 
fees in excess of 24 percent of outstanding principal, interest and 
late fees due on defaulted loans.

Section 674.49  Bankruptcy of Borrower

    The proposed regulations would amend Sec. 674.49 in order to 
reflect changes made to section 523(a)(8) of title 11 of the United 
States Bankruptcy Code by the Amendments. Effective October 8, 1998, 
the 1998 Amendments eliminated a borrower's ability to have a student 
loan automatically discharged due to bankruptcy if the loan has been in 
repayment for seven years or more. The proposed regulations would also 
clarify that the seven-year repayment period on bankruptcies filed 
before October 8, 1998, excludes any applicable suspension of the 
repayment period as defined by 34 CFR 682.402(m) of the Federal Family 
Education Loan Program regulations. Lastly, the proposed regulations 
would amend this section to require institutions to use due diligence 
and assert any defense consistent with its status under applicable law 
to avoid discharge of a Federal Perkins Loan in a bankruptcy 
proceeding.

Section 674.52  Cancellation Procedures

    The proposed regulations would amend this section to clarify that a 
borrower whose defaulted loan has not been accelerated may qualify for 
any cancellation authorized by section 465 of the HEA and Subpart D of 
the Federal Perkins Loan Program regulations by complying with the 
requirements of this section. In current regulations, the wording in 
this paragraph erroneously states that borrowers whose defaulted loans 
have not been accelerated could qualify only for teaching, volunteer, 
or military service cancellations by complying with the requirements of 
this section.
    The proposed regulations also would amend paragraph (d) of this 
section to clarify that a Federal Perkins loan, Direct loan or Defense 
loan borrower's deferment under Sec. 674.34(c) runs concurrently with 
any period for which cancellation under Secs. 674.53-674.60 is granted.

Section 674.53  Teacher cancellation--Federal Perkins, Direct and 
Defense Loans.

    Effective October 7, 1998, the 1998 Amendments extended the Federal 
Perkins Loan Program cancellation benefits in section 465(a)(2) of the 
HEA to all borrowers with outstanding loan balances who perform 
qualifying service regardless of when the loans were made or any 
contrary provisions of the borrowers' promissory notes. Prior to the 
addition of this language to the HEA, the benefits were based upon when 
the loan was made and the provisions of the borrower's promissory note. 
The proposed regulations would amend Sec. 674.53 to extend the 
following teaching cancellation benefits to all borrowers, regardless 
of when their loan was made or the terms of the borrower's promissory 
note:
     teaching in a low-income school,
     full-time teaching in special education, and
     full-time teaching in fields of expertise.
    These teaching benefits would be extended to any borrower with an 
outstanding loan balance on a Federal Perkins, Direct or Defense loan 
made prior to July 23, 1992, for teaching service performed on or after 
October 7, 1998, if the cancellation benefits provided under this 
section are not included in the borrower's promissory note. We would 
like to emphasize that cancellation benefits may not be granted 
retroactively for teaching service performed prior to October 7, 1998.

[[Page 41239]]

Section 674.56  Employment Cancellation--Federal Perkins Loan, Direct 
and Defense Loans

    The 1998 Amendments amended the HEA to extend all cancellations in 
section 465(a)(2) to all borrowers with outstanding balances as of 
October 7, 1998. The proposed regulations would amend Sec. 674.56 to 
extend the following cancellation benefits to all borrowers with an 
outstanding balance on Federal Perkins, Direct or Defense loans made 
before July 23, 1992, for employment in these areas on or after October 
7, 1998, regardless of when their loan was made or the terms of the 
borrower's promissory note:
     full-time employment as a nurse or medical technician,
     full-time employment in a public or private nonprofit 
child or family service agency, and
     full-time employment as a qualified professional provider 
of early intervention services.
    Only periods of qualifying service performed on or after October 7, 
1998, are eligible for cancellation benefits if the borrower was not 
previously eligible due to the date the loan was made.

Section 674.57  Cancellation for Law Enforcement or Corrections Officer 
Service--Federal Perkins, Direct and Defense Loans

    The proposed regulations would amend Sec. 674.57 to extend the 
cancellation for full-time service as a law enforcement or corrections 
officer for an eligible employing agency to any borrower with an 
outstanding loan balance on a Federal Perkins, Direct or Defense loan 
made prior to November 29, 1990, for law enforcement or correction 
officer service performed on or after October 7, 1998, in accordance 
with changes to the HEA by the Amendments. Cancellation benefits may 
not be granted retroactively for qualifying service performed before 
October 7, 1998.

Section 674.58  Cancellation for Service in a Head Start Program

    The proposed regulations would amend Sec. 674.58 to extend 
cancellation for service as a full-time staff member in a ``Head 
Start'' program to any borrower with an outstanding balance on a 
Defense loan for service performed on or after October 7, 1998, in 
accordance with changes made to the HEA by the Amendments. Federal 
Perkins and Direct loan borrowers have always been eligible for this 
cancellation and would not be affected by this regulatory change.

Section 674.60  Cancellation for Volunteer Service--Perkins Loans, 
Direct Loans and Defense Loans

    The proposed regulations would amend Sec. 674.60 to extend 
cancellation for service as a volunteer under The Peace Corps Act or 
The Domestic Volunteer Service Act of 1973, to any Direct loan borrower 
with a loan made on or after October 7, 1998, and any borrower with an 
outstanding balance on a Direct or Defense loan for service as a 
volunteer under the above Acts performed on or after October 7, 1998, 
if the cancellation benefits provided under this section are not 
included in the borrower's promissory note, in accordance with the 
Amendments.

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. There is a detailed discussion of the cost implications 
associated with the rehabilitation of a Federal Perkins Loan under the 
heading Sec. 674.39  Loan rehabilitation in the preamble of this NPRM.
    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.
    We note that, as these proposed regulations were subjected to 
negotiated rulemaking, the costs and benefits of the various 
requirements were discussed thoroughly by the negotiators. The 
resultant consensus reached on a particular requirement generally 
reflected agreement on the best possible approach to that requirement 
in terms of cost and benefit.
    To assist the Department in complying with the specific 
requirements of Executive Order 12866, the Secretary invites comments 
on whether there may be further opportunities to reduce any potential 
costs or to increase any potential benefits resulting from these 
proposed regulations without impeding the effective and efficient 
administration of the title IV, HEA programs.
2. Clarity of the Regulations
    Executive Order 12866 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. 674.41  Due diligence--general requirements.)
     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.

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.
    The parties affected by these proposed regulations are institutions 
of higher education that participate in the Federal Perkins Loan 
Program, and individual Federal Perkins Loan borrowers. Federal Perkins 
Loan borrowers are not considered small entities under the Regulatory 
Flexibility Act. Institutions of higher education are defined as small 
entities, according to the U.S. Small Business Administration, if they 
are: for-profit or nonprofit entities with total revenue of $5,000,000 
or less; and entities controlled by governmental entities with 
populations of 50,000 or less. Of the institutions of higher education 
that participate in the Federal Perkins Loan program, approximately 12 
percent would be considered small entities under the definition. Those 
small institutions receive approximately three percent of new Federal 
Capital Contributions.

[[Page 41240]]

    These proposed regulations would not impose a significant economic 
impact on a substantial number of small entities. The proposed 
regulations would expand borrower benefits, and provide additional 
flexibility in the administration of the Federal Perkins Loan Program 
to both large and small institutions without requiring significant 
changes to current institutional system operations.
    The Secretary invites comments from small institutions as to 
whether the proposed changes would have a significant economic impact 
on them.

Paperwork Reduction Act of 1995

    Sections 674.6, 674.16, 674.31, 674.33, 674.34, 674.39, 674.41, 
674.42, 674.45, 674.47, and 674.49 contain information collection 
requirements. Under the Paperwork Reduction Act of 1995 (44 U.S.C. 
3507(d)), the Department of Education has submitted a copy of these 
sections to the Office of Management and Budget (OMB) for its review.
Collection of Information: Federal Perkins Loan Program
    Section 674.6  Default reduction plan. The Department currently has 
this section approved under OMB control number 1840-0535. The 
Amendments eliminated the requirement that institutions with a cohort 
default rate that equals or exceeds 15 percent submit a default 
reduction plan to the Secretary. Therefore, we are proposing to remove 
the required default reduction plan measures from the regulations. The 
total annual recordkeeping and reporting burden hours for Sec. 674.6 
equals 579 hours. The proposed regulation will therefore eliminate 579 
hours from the 12,719 total recordkeeping and burden hours contained in 
the information collection requirements under OMB control number 1840-
0535.
    Section 674.16  Making and disbursing loans. The Department 
currently has this section approved under OMB control number 1840-0535. 
We are proposing to clarify the credit bureau reporting requirements 
with which a school must comply when making and disbursing loans in 
accordance with the changes made to the HEA by the Amendments. Because 
credit bureau reporting is considered to be a normal business practice 
in the administration of the Federal Perkins Loan program, there is no 
additional burden associated with this section.
    Section 674.31  Promissory Note. The Department currently has this 
section approved under OMB control number 1840-0535. We are proposing 
to exclude any period during which a borrower who is a member of the 
reserve component of the Armed Forces is called or ordered to active 
duty for a period of more than 30 days from the borrower's initial 
grace period. This exclusion will be contained in the terms of the 
borrower's Federal Perkins Loan promissory note. Because institutional 
use of the Secretary's promissory note in the Federal Perkins Loan 
program is considered part of normal business practice in administering 
the Federal Perkins Loan program, there are no burden hours calculated 
for this section. We are also proposing to require an institution to 
disclose to at least one national credit bureau the amount of the loan 
made to the borrower, along with other relevant information. 
Previously, the institution was required to report to ``any'' national 
credit bureau. This proposed change does not increase or decrease the 
frequency or amount of credit bureau reporting required by an 
institution. Additionally, credit bureau reporting is considered to be 
a normal business practice associated with the administration of the 
Federal Perkins Loan program and no burden hours are associated with 
this section.
    Section 674.33  Repayment. The Department currently has this 
section approved under OMB control number 1840-0535. We are proposing 
to authorize institutions to establish repayment incentives for 
borrowers by reducing by no more than 1 percent the interest rate on a 
loan on which the borrower has made 48 consecutive, monthly repayments; 
discounting by no more than 5 percent the balance owed on a loan which 
the borrower pays in full prior to the end of the repayment period; or, 
by offering any other incentive, with the Secretary's approval, that 
the institution determines will reduce defaults and replenish its 
revolving fund. The establishment of repayment incentives is not 
mandatory nor are institutions required to notify borrowers of the 
existence of repayment incentives. Institutions are currently required 
to retain a repayment history on each Federal Perkins Loan borrower 
that includes the frequency, timeliness, and number of repayments made 
by the borrower under the information collection requirements contained 
in Sec. 674.19 and currently approved under OMB control number 1840-
0073. Because institutions are already collecting the information 
needed to implement repayment incentives, there is no change to the 
information collection contained in this section.
    We are also proposing a closed school discharge in this section for 
Federal Perkins Loan borrowers who did not complete the program of 
study for which the loan was made because the school at which the 
borrower was enrolled closed. This proposed change is retroactive to 
loans made on or after January 1, 1986. The proposed regulations would 
allow for a closed school discharge by an institution, as well as the 
Secretary. The proposed regulations would authorize the Secretary to 
discharge a loan based on a school closure without an application from 
the borrower if the borrower qualified for and received a discharge on 
his or her FFEL or Federal Direct Loan and was unable to secure a 
discharge on his or her Federal Perkins Loan only because the Secretary 
lacked the statutory authority. The proposed regulations would also 
authorize the Secretary to discharge a Federal Perkins Loan without an 
application from the borrower based on information in the Secretary's 
possession that qualifies the borrower for a discharge. The proposed 
regulations would also provide for an application process in the case 
of loans that the Secretary cannot discharge based on the above two 
criteria. Under the proposed regulations, the information the borrower 
is asked to provide in order to obtain the discharge of a debt based on 
the closure of a school is consistent with the information required 
under the application process currently in place for the FFEL and 
Federal Direct Loan programs. However, the application used in the FFEL 
and Federal Direct Loan Program does not currently apply to the 
discharge of loans made under the Federal Perkins Loan program. The 
current form will require revision or, alternately, a new form will be 
developed for the Federal Perkins Loan Program. Until such time as we 
are able to develop an application for borrowers seeking a closed 
school discharge of a Federal Perkins Loan, we cannot accurately 
project the number of burden hours contained in this section, although 
we expect the completion of such a form to be no more burdensome to 
applicants than the form used in the FFEL and Federal Direct Loan 
Programs. The burden hours associated with completing the closed school 
discharge form in the FFEL and Direct Loan Programs is currently 30 
minutes or .5 hours per response.
    Section 674.34  Deferment of repayment--Federal Perkins Loans, 
Direct Loans and Defense Loans. The Department currently has this 
section approved under OMB control number 1840-0535. We are proposing, 
in accordance with the Amendments, to extend the deferment benefits in 
this

[[Page 41241]]

section to borrowers who were formerly ineligible because of when their 
loans were made or the terms of their promissory notes. This change 
offers greater flexibility to both the borrower and the institution in 
defining the circumstances in which a deferment of repayment is 
appropriate. This proposed change does not affect the deferment process 
nor does it change the eligibility requirements with which a borrower 
must comply. Therefore, this provision would not add burden hours to 
the current information collection requirements associated with this 
section.
    Section 674.39  Loan Rehabilitation. The Department currently has 
this section approved under OMB control number 1840-0535. We are 
proposing a new section that requires an institution to establish a 
loan rehabilitation program. A loan is considered rehabilitated when 
the borrower makes an on-time, monthly payment, as determined by the 
institution, each month for twelve consecutive months. The institution 
must notify a defaulted borrower of the option and consequences of 
rehabilitating a loan under these proposed regulations. Once the loan 
is rehabilitated, the borrower is returned to regular repayment status, 
the first payment made under the 12 consecutive payments is treated as 
the first payment under a new 10-year repayment period and any adverse 
credit bureau history related to the default is removed from the 
borrower's credit report. Under Sec. 674.16 and Sec. 674.42 of current 
and proposed regulations, respectively, institutions are required to 
disclose to the borrower the definition of default and the consequences 
of defaulting on a Federal Perkins Loan, along with information on any 
cost that may be assessed to the borrower in the collection of the 
loan, including late charges and collection costs. The institution is 
required to provide this information in writing as part of the written 
application material, as part of the promissory note or on a separate 
written form before making and disbursing a Federal Perkins Loan to the 
borrower. The institution is again required to disclose information on 
the consequences of default to the borrower before he or she ceases at 
least half-time study at the institution, during the exit interview or 
immediately, in writing, if the borrower enters repayment without the 
institution's knowledge. There is ample opportunity for a school to 
disclose information to the borrower regarding the availability and 
consequences of loan rehabilitation when making the disclosures 
currently required under Sec. 674.16 and Sec. 674.42. Disclosures made 
under Sec. 674.16 are considered part of normal business practice under 
OMB control number 1840-0535. Further calculation of burden hours under 
Sec. 674.42 for providing notice of the option and consequences of 
rehabilitation would duplicate hours already calculated and cleared 
under OMB 1840-0535 that account for the disclosures that an 
institution is currently required to make that section. Because any 
burden associated with notifying a borrower of the option and 
consequences of rehabilitation is burden associated with or accounted 
for under other sections of the regulations, there are no new burden 
hours contained in this section.
    Section 674.41  Due diligence--general requirements. The Department 
is adding this section as a new section approved under OMB control 
number 1840-0581. The proposed regulation would require institutions to 
provide a Federal Perkins Loan Program borrower with information on the 
availability of the Student Loan Ombudsman's office if the borrower 
disputes the terms of the loan in writing and the institution does not 
resolve the dispute. A total of 1,049,216 Federal Perkins Loan 
borrowers were in repayment as of June 30, 1998. The Department 
estimates that 5,246 (.5 percent) borrowers in repayment may require 
information on the availability of the Student Loan Ombudsman's office 
after failing to resolve a dispute regarding the terms of the loan with 
the institution. The Department further estimates that providing 
information on the availability of the Student Loan Ombudsman's office 
will average 5 minutes per response. The 437 hours and 10 minutes of 
burden associated with this section.
    Section 674.42  Contact with the borrower. The Department currently 
has this section approved under OMB control number 1840-0581. The 
proposed regulation reorders the provisions in Sec. 674.42 by moving 
the disclosure requirements with which an institution must comply under 
section 463A(b) of the HEA, either as part of the promissory note or in 
another written statement, to paragraph Sec. 674.42(a). The disclosures 
have not changed. However, the proposed regulations give a school 
additional flexibility in the timing of the disclosures. Therefore, the 
information collection requirements remain unchanged for this section.
    In accordance with the Amendments, this proposed change also 
authorizes an institution to use electronic means to facilitate exit 
counseling in the Federal Perkins Loan program. Previously, an 
institution was required to offer the borrower exit counseling in 
person or in groups. Exit counseling provisions are contained in 
Sec. 674.42(b) of the proposed regulation. The proposed regulation 
provides consistency across the title IV, HEA loan programs in 
describing the disclosures that an institution is required to make 
during exit counseling. Because the authority to use electronic means 
in offering exit counseling does not change the nature of the 
information disseminated, there are no additional information 
collections that result from this change.
    Lastly, in order to facilitate the use of electronic exit 
counseling, we are proposing regulations that would eliminate the 
requirement that a school, as part of exit counseling, have the 
borrower sign a copy of the repayment schedule and provide a copy of 
the signed repayment schedule and the signed promissory note to the 
borrower. However, because an institution must still provide the 
borrower with a copy of the borrower's repayment schedule and the 
promissory note as part of the disclosures required by Sec. 674.42(a) 
of this section, the information collection burden contained in this 
section does not change.
    Section 674.45  Collection procedures. The Department currently has 
this section approved under OMB control number 1840-0581. We are 
proposing to clarify that an institution must report any changes 
regarding a defaulted borrower to any national credit bureau to which 
it reported the default. The institution must also resolve, within 30 
days of its receipt, any inquiry from any credit bureau that disputes 
the completeness or accuracy of information reported on the loan. 
Institutions are currently reporting information to credit bureaus that 
reflect the recent changes made to the HEA by the Amendments. The 
Amendments merely codify standard business practice as it relates to 
credit bureau reporting. This provision does not change the information 
collection contained in this section. We are also proposing that as 
part of the collection activities provided for in this section, the 
institution provide the borrower with information on the availability 
of the Student Loan Ombudsman. The information collection contained in 
this section takes into account more intensive efforts an institution 
must make to recover amounts owed from defaulted borrowers. Information 
on the availability of the Student Loan Ombudsman is easily 
incorporated into the existing due diligence efforts required of 
institutions. Any further calculation of burden hours for this

[[Page 41242]]

requirement would duplicate hours already calculated and cleared under 
OMB 1840-0581.
    Section 674.47  Costs chargeable to the Fund. The Department has 
this section approved under OMB control number 1840-0581. We are 
proposing to amend this section, in accordance with the loan 
rehabilitation provisions in Sec. 674.39 of the proposed regulations. 
The proposed change would authorize an institution, until July 1, 2002, 
to charge its Fund for any collection costs assessed on a rehabilitated 
loan that are in excess of the maximum 24 percent limit that may be 
passed along to the borrower. This authority spares an institution any 
out-of-pocket expense that it may incur in complying with the terms of 
existing contracts with collection agencies that call for collection 
fees in excess of 24 percent. The proposed regulation would provide a 
transition period during which an institution could, in the normal 
course of business, renegotiate or renew existing contracts in order to 
accommodate the 24 percent limit on collection costs. The proposed 
regulations authorizing an institution to charge collection costs in 
excess of 24 percent to its Fund does not substantially change the 
information collection contained in this section.
    Section 674.49  Bankruptcy of borrower. The Department currently 
has this section approved under OMB control number 1840-0581. We are 
proposing to amend this section in order to reflect changes made to the 
U.S. Bankruptcy Code that eliminate the automatic discharge of a 
student loan if the loan was in repayment for seven years or more. The 
fact that a federal student loan cannot be automatically discharged in 
a bankruptcy filing does not change the due diligence efforts required 
of an institution in collecting on a loan, defaulted or otherwise. The 
institution's collection responsibilities remain as a matter of normal 
business practice and the proposed regulations would not change the 
information collection contained in this section.
    If you want to comment on the information collection requirements, 
please send your comments 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. You 
may also send a copy of these comments to the Department representative 
named in the ADDRESSES section of this preamble.
    We consider your comments on these proposed collections of 
information in--
     Deciding whether the proposed collections are necessary 
for the proper performance of our functions, including whether the 
information will have practical use;
     Evaluating the accuracy of our estimate of the burden of 
the proposed collections, including the validity of our methodology and 
assumptions;
     Enhancing the quality, usefulness, and clarity of the 
information we collect; and
     Minimizing the burden on those who must respond. This 
includes exploring the use of appropriate automated, electronic, 
mechanical, or other technological collection techniques or other forms 
of information technology; e.g., permitting electronic submission of 
responses.
    OMB is required to make a decision concerning the collections of 
information contained in these proposed regulations between 30 and 60 
days after publication of this document in the Federal Register. 
Therefore, to ensure that OMB gives your comments full consideration, 
it is important that OMB receives the comments within 30 days of 
publication. This does not affect the deadline for your comments to us 
on the proposed regulations.

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 the following sites:

http://ocfo.ed.gov/fedreg.htm
http://ifap.ed.gov/csb__
html/fedlreg.htm
http://www.ed.gov/legislation/HEA/rulemaking

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, DC., 
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: 84.037 Federal 
Perkins Loan Program)

List of Subjects in 34 CFR Part 674

    Loan programs--education, Student aid, Reporting and recordkeeping 
requirements.

    Dated: July 12, 1999.
Richard W. Riley,
Secretary of Education.

    For the reasons stated in the preamble, the Secretary proposes to 
amend part 674 of title 34 of the Code of Federal Regulations as 
follows:

PART 674--FEDERAL PERKINS LOAN PROGRAM

    1. The authority citation for part 674 continues to read as 
follows:

    Authority: 20 U.S.C. 1087aa-1087ii and 20 U.S.C. 421-429, unless 
otherwise noted.

    2. Section 674.2(b) is amended by adding, in alphabetical order, 
the following definition:


Sec. 674.2  Definitions.

* * * * *
    (b) * * *
    Satisfactory repayment arrangement: For purposes of regaining 
eligibility for grant, loan, or work assistance under Title IV of the 
HEA, to the extent that the borrower is otherwise eligible, the making 
of six (6) on-time, consecutive, monthly payments on a defaulted loan. 
A borrower may obtain the benefit of this paragraph with respect to 
renewed eligibility once on a defaulted loan.
* * * * *
    3. Section 674.5 is amended as follows:
    A. By revising paragraphs (a)(1) and (a)(2).
    B. By removing paragraphs (a)(3) and (a)(4).
    C. By removing paragraph (b)(2) and redesignating paragraph (b)(3) 
as paragraph (b)(2).
    D. By removing paragraph (c)(4); and redesignating paragraph 
(c)(3)(ii) as paragraph (c)(4) and by removing ``; and'' at the end of 
the sentence in the new paragraph (c)(4) and adding, in its place, a 
period; and by revising paragraph (c)(3).
    E. By removing paragraphs (e) and (f).


Sec. 674.5  Federal Perkins Loan Program cohort default rate and 
penalties.

    (a) * * *
    (1) FCC reduction. If the institution's cohort default rate equals 
or exceeds 25 percent, the institution's FCC is reduced to zero.
    (2) Ineligibility. For award year 2000-2001 and succeeding award 
years, an institution with a cohort default rate

[[Page 41243]]

that equals or exceeds 50 percent for each of the three most recent 
years for which cohort default rate data are available is ineligible to 
participate in the Federal Perkins Loan Program. Following a review of 
that data and upon notification by the Secretary, an institution is 
ineligible to participate for the award year in which the determination 
is made and the two succeeding award years. An institution may appeal a 
notification of ineligibility from the Secretary within 30 days of its 
receipt.
    (i) Appeal procedures.--(A) Inaccurate calculation. An institution 
may appeal a notice of ineligibility based upon the submission of 
erroneous data by the institution, the correction of which would result 
in a recalculation that reduces the institution's cohort default rate 
to below 50 percent for any of the three award years used to make a 
determination of ineligibility. The Secretary considers the edit 
process, by which an institution adjusts the cohort default rate data 
that it submits to the Secretary on its Fiscal Operations Report, to 
constitute the procedure to appeal a determination of ineligibility 
based on a claim of erroneous data.
    (B) Small number of borrowers entering repayment. An institution 
may appeal a notice of ineligibility if, on average, 10 or fewer 
borrowers enter repayment for the three most recent award years used by 
the Secretary to make a determination of ineligibility.
    (C) Decision of the Secretary. The Secretary issues a decision on 
an appeal within 45 days of the institution's submission of a complete, 
accurate, and timely appeal. An institution may continue to participate 
in the program until the Secretary issues a decision on the 
institution's appeal.
    (ii) Liquidation of an institution's Perkins Loan portfolio. Within 
90 days of receiving a notification of ineligibility or, if the 
institution appeals, within 90 days of the Secretary's decision to deny 
the appeal, the institution must--
    (A) Liquidate its revolving student loan fund by making a capital 
distribution of the liquid assets of the Fund according to section 
466(c) of the HEA; and
    (B) Assign any outstanding loans in the institution's portfolio to 
the Secretary in accordance with Sec. 674.50.
    (iii) Effective date. The provisions of paragraph (a)(2) of this 
section are effective beginning with the cohort default rate calculated 
as of June 30, 2001.
* * * * *
    (c) * * *
* * * * *
    (3)(i) In determining the number of borrowers who default before 
the end of the following award year, a loan is excluded if the borrower 
has--
    (A) Voluntarily made six consecutive monthly payments;
    (B) Voluntarily made all payments currently due;
    (C) Repaid the full amount due, including any interest, late fees, 
and collection costs that have accrued on the loan;
    (D) Received a deferment or forbearance based on a condition that 
predates the borrower reaching a 240- or 270-day past due status; or
    (E) Rehabilitated the loan after becoming 240- or 270-days past 
due.
    (ii) A loan is considered canceled and also excluded from an 
institution's cohort default rate calculation if the loan is--
    (A) Discharged due to death or permanent and total disability;
    (B) Discharged in bankruptcy;
    (C) Discharged due to a closed school; or
    (D) Repaid in full in accordance with Sec. 674.33(e).
    (iii) For the purpose of this section, funds obtained by income tax 
offset, garnishment, income or asset execution, or pursuant to a 
judgment are not considered voluntary.
* * * * *


674.6  [Removed and Reserved]

    4. Section 674.6 is removed and reserved.


674.7  [Removed and Reserved]

    5. Section 674.7 is removed and reserved.
    6. Section 674.9 is amended by redesignating paragraph (i) as 
paragraph (j) and adding new paragraph (i) to read as follows:


Sec. 674.9  Student eligibility.

* * * * *
    (i) In the case of a borrower who is in default on a Federal 
Perkins Loan, NDSL or Defense loan, satisfies one of the conditions 
contained in Sec. 674.5(c)(3)(i) or (ii) except that--
    (1) For the purposes of this section, voluntary payments made by 
the borrower under paragraph (i) of this section are those payments 
made directly by the borrower, including payments made over and above 
payments made pursuant to a judgment; and
    (2) Voluntary payments do not include payments obtained by income 
tax offset, garnishment, income or asset execution or pursuant to a 
judgment.
* * * * *
    7. Section 674.12 is amended by revising paragraphs (a), (b) and 
(d) to read as follows:


Sec. 674.12  Loan maximums.

    (a) The maximum annual amount of Federal Perkins Loans and Direct 
Loans an eligible student may borrow is--
    (1) $4,000 for a student who is enrolled in a program of 
undergraduate education; and
    (2) $6,000 for a graduate or professional student.
    (b) The aggregate unpaid principal amount of all Federal Perkins 
Loans and Direct Loans received by an eligible student may not exceed--
    (1) $20,000 for a student who has successfully completed two years 
of a program leading to a bachelor's degree but who has not received 
the degree;
    (2) $40,000 for a graduate or professional student; and
    (3) $8,000 for any other student.
* * * * *
    (d) For each student, the maximum annual amounts described in 
paragraphs (a) and (c) of this section, and the aggregate maximum 
amounts described in paragraphs (b) and (c) of this section, include 
any amounts borrowed previously by the student under title IV, part E 
of the HEA at any institution.
* * * * *
    8. Section 674.16 is amended by revising paragraph (i) to read as 
follows:


Sec. 674.16  Making and disbursing loans.

* * * * *
    (i)(1) An institution must report to at least one national credit 
bureau--
    (i) The amount and the date of each disbursement;
    (ii) Information concerning the repayment and collection of the 
loan until the loan is paid in full; and
    (iii) The date the loan was repaid, canceled or discharged for any 
reason.
    (2) An institution must promptly report any changes to information 
previously reported on a loan to the same credit bureaus to which the 
information was previously reported.
* * * * *
    9. Section 674.31(b)(2)(i) is amended by redesignating paragraphs 
(C) and (D) as (D) and (E), respectively; by adding new paragraph 
(b)(2)(i)(C); and by revising paragraph (b)(10)(i) to read as follows:


Sec. 674.31  Promissory note.

* * * * *
    (b) * * *
    (2) * * *
    (i) * * *
    (C) For purposes of establishing the beginning of the repayment 
period for Direct or Perkins loans, the 6- and 9-

[[Page 41244]]

month grace periods referenced in paragraph (b)(2)(i) of this section 
exclude any period during which a borrower who is a member of a reserve 
component of the Armed Forces named in section 10101 of Title 10, 
United States Code is called or ordered to active duty for a period of 
more than 30 days. Any single excluded period may not exceed three 
years and includes the time necessary for the borrower to resume 
enrollment at the next available regular enrollment period. Any Direct 
or Perkins loan borrower who is in a grace period when called or 
ordered to active duty as specified above is entitled to a new 6- or 9-
month grace period upon completion of the excluded period.
* * * * *
    (10) * * *
    (i) The institution must disclose to at least one national credit 
bureau the amount of the loan made to the borrower, along with other 
relevant information.
* * * * *
    10. Section 674.33 is amended by adding new paragraphs (f) and (g) 
to read as follows:


Sec. 674.33  Repayment.

* * * * *
    (f) Incentive repayment program. (1) An institution may establish 
the following repayment incentives:
    (i) A reduction of no more than one percent of the interest rate on 
a loan on which the borrower has made 48 consecutive, monthly 
repayments.
    (ii) A discount of no more than five percent on the balance owed on 
a loan which the borrower pays in full prior to the end of the 
repayment period.
    (iii) With the Secretary's approval, any other incentive the 
institution determines will reduce defaults and replenish its Fund.
    (2) Limitation on the use of funds. (i) The institution must 
reimburse its Fund, on at least a quarterly basis, for interest lost to 
its Fund that otherwise would have been paid by the borrower as a 
result of establishing a repayment incentive under paragraph (f)(1)(i) 
and (ii) of this section.
    (ii) An institution may not use Federal funds, including Federal 
funds from the student loan fund, or institutional funds from the 
student loan fund to pay for any repayment incentive authorized by this 
section.
    (g) Closed school discharge. (1) General. (i) The holder of an NDSL 
or a Federal Perkins Loan discharges the borrower's (and any 
endorser's) obligation to repay the loan if the borrower did not 
complete the program of study for which the loan was made because the 
school at which the borrower was enrolled closed.
    (ii) For the purposes of this section--
    (A) A school's closure date is the date that the school ceases to 
provide educational instruction in all programs, as determined by the 
Secretary;
    (B) ``School'' means a school's main campus or any location or 
branch of the main campus; and
    (C) The ``holder'' means the Secretary or the school that holds the 
loan.
    (2) Relief pursuant to discharge. (i) Discharge under this section 
relieves the borrower of any past or present obligation to repay the 
loan and any accrued interest or collection costs with respect to the 
loan.
    (ii) The discharge of a loan under this section qualifies the 
borrower for reimbursement of amounts paid voluntarily or through 
enforced collection on the loan.
    (iii) A borrower who has defaulted on a loan discharged under this 
section is not considered to be in default on the loan after discharge, 
and such a borrower is eligible to receive assistance under programs 
authorized by title IV of the HEA.
    (iv) The Secretary or the school, if the school holds the loan, 
reports the discharge of a loan under this section to all credit 
bureaus to which the status of the loan was previously reported.
    (3) Determination of borrower qualification for discharge by the 
Secretary. The Secretary may discharge the borrower's obligation to 
repay an NDSL or Federal Perkins Loan without an application if the 
Secretary determines that--
    (i) The borrower qualified for and received a discharge on a loan 
pursuant to 34 CFR 682.402(d) (Federal Family Education Loan Program) 
or 34 CFR 685.213 (Federal Direct Loan Program), and was unable to 
receive a discharge on an NDSL or Federal Perkins Loan because the 
Secretary lacked the statutory authority to discharge the loan, or
    (ii) Based on information in the Secretary's possession, the 
borrower qualifies for a discharge.
    (4) Borrower qualification for discharge. Except as provided in 
paragraph (g)(3) of this section, in order to qualify for discharge of 
an NDSL or Federal Perkins Loan, a borrower must submit to the holder 
of the loan a written request and sworn statement, and the factual 
assertions in the statement must be true. The statement need not be 
notarized but must be made by the borrower under penalty of perjury. In 
the statement the borrower must--
    (i) State that the borrower--
    (A) Received the proceeds of a loan to attend a school;
    (B) Did not complete the program of study at that school because 
the school closed while the student was enrolled, or the student 
withdrew from the school not more than 90 days before the school closed 
(or longer in exceptional circumstances); and
    (C) Did not complete and is not in the process of completing the 
program of study through a teachout at another school as defined in 34 
CFR 602.2 and administered in accordance with 34 CFR 602.207(b)(6), by 
transferring academic credit earned at the closed school to another 
school, or by any other comparable means.
    (ii) State whether the borrower has made a claim with respect to 
the school's closing with any third party, such as the holder of a 
performance bond or a tuition recovery program, and, if so, the amount 
of any payment received by the borrower or credited to the borrower's 
loan obligation; and
    (iii) State that the borrower--
    (A) Agrees to provide to the holder of the loan upon request other 
documentation reasonably available to the borrower that demonstrates 
that the borrower meets the qualifications for discharge under this 
section; and
    (B) Agrees to cooperate with the Secretary, in the case of a 
discharged loan held by the Secretary, in enforcement actions in 
accordance with paragraph (g)(6) of this section and to transfer any 
right to recovery against a third party to the Secretary in accordance 
with paragraph (g)(7) of this section.
    (5) Fraudulently obtained loans. A borrower who secured a loan 
through fraudulent means, as determined by the ruling of a court or an 
administrative tribunal of competent jurisdiction, is ineligible for a 
discharge under this section.
    (6) Cooperation by borrower in enforcement actions.
    (i) In order to obtain a discharge under this section, a borrower 
must cooperate with the Secretary in any judicial or administrative 
proceeding brought by the Secretary to recover amounts discharged or to 
take other enforcement action with respect to the conduct on which the 
discharge was based. At the request of the Secretary and upon the 
Secretary's tendering to the borrower the fees and costs that are 
customarily provided in litigation to reimburse witnesses, the borrower 
must--
    (A) Provide testimony regarding any representation made by the 
borrower to support a request for discharge;

[[Page 41245]]

    (B) Provide any documents reasonably available to the borrower with 
respect to those representations; and
    (C) If required by the Secretary, provide a sworn statement 
regarding those documents and representations.
    (ii) The holder denies the request for a discharge or revokes the 
discharge of a borrower who--
    (A) Fails to provide the testimony, documents, or a sworn statement 
required under paragraph (g)(6)(i) of this section; or
    (B) Provides testimony, documents, or a sworn statement that does 
not support the material representations made by the borrower to obtain 
the discharge.
    (7) Transfer to the Secretary of borrower's right of recovery 
against third parties. (i) In the case of a loan held by the Secretary, 
upon discharge under this section, the borrower is deemed to have 
assigned to and relinquished in favor of the Secretary any right to a 
loan refund (up to the amount discharged) that the borrower may have by 
contract or applicable law with respect to the loan or the enrollment 
agreement for the program for which the loan was received, against the 
school, its principals, its affiliates and their successors, its 
sureties, and any private fund, including the portion of a public fund 
that represents funds received from a private party.
    (ii) The provisions of this section apply notwithstanding any 
provision of State law that would otherwise restrict transfer of those 
rights by the borrower, limit or prevent a transferee from exercising 
those rights, or establish procedures or a scheme of distribution that 
would prejudice the Secretary's ability to recover on those rights.
    (iii) Nothing in this section limits or forecloses the borrower's 
right to pursue legal and equitable relief regarding disputes arising 
from matters unrelated to the discharged NDSL or Federal Perkins Loan.
    (8) Discharge procedures. (i) After confirming the date of a 
school's closure, the holder of the loan identifies any NDSL or Federal 
Perkins Loan borrower who appears to have been enrolled at the school 
on the school closure date or to have withdrawn not more than 90 days 
prior to the closure date.
    (ii) If the borrower's current address is known, the holder of the 
loan mails the borrower a discharge application and an explanation of 
the qualifications and procedures for obtaining a discharge. The holder 
of the loan also promptly suspends any efforts to collect from the 
borrower on any affected loan. The holder of the loan may continue to 
receive borrower payments.
    (iii) In the case of a loan held by the Secretary, if the 
borrower's current address is unknown, the Secretary attempts to locate 
the borrower and determine the borrower's potential eligibility for a 
discharge under this section by consulting with representatives of the 
closed school or representatives of the closed school's third-party 
billing and collection servicers, the school's licensing agency, the 
school accrediting agency, and other appropriate parties. If the 
Secretary learns the new address of a borrower, the Secretary mails to 
the borrower a discharge application and explanation and suspends 
collection, as described in paragraph (g)(8)(ii) of this section.
    (iv) In the case of a loan held by the school, if the borrower's 
current address is unknown, the school attempts to locate the borrower 
and determine the borrower's potential eligibility for a discharge 
under this section by taking steps required to locate the borrower 
under Sec. 674.44.
    (v) If the borrower fails to submit the written request and sworn 
statement described in paragraph (g)(4) of this section within 60 days 
of the holder of the loan's mailing the discharge application, the 
holder of the loan resumes collection and grants forbearance of 
principal and interest for the period during which collection activity 
was suspended.
    (vi) If the holder of the loan determines that a borrower who 
requests a discharge meets the qualifications for a discharge, the 
holder of the loan notifies the borrower in writing of that 
determination.
    (vii) In the case of a loan held by the Secretary, if the Secretary 
determines that a borrower who requests a discharge does not meet the 
qualifications for a discharge, the Secretary notifies that borrower, 
in writing, of that determination and the reasons for the 
determination.
    (viii) In the case of a loan held by a school, if the school 
determines that a borrower who requests a discharge does not meet the 
qualifications for discharge, the school submits that determination and 
all supporting materials to the Secretary for approval. The Secretary 
reviews the materials, makes an independent determination, and notifies 
the borrower in writing of the determination and the reasons for the 
determination.
    (ix) In the case of a loan held by an school and discharged by 
either the school or the Secretary, the school must reimburse its Fund 
for the entire amount of any outstanding principal and interest on the 
loan, and any collection costs charged to the Fund as a result of 
collection efforts on a discharged loan. The school must also reimburse 
the borrower for any amount of principal, interest, late charges or 
collection costs the borrower paid on a loan discharged under this 
section.
* * * * *
    11. Section 674.34 is amended by revising the section heading; and 
revising paragraphs (a) and (c) to read as follows:


Sec. 674.34  Deferment of repayment--Federal Perkins loans, Direct 
loans and Defense loans.

    (a) The borrower may defer making a scheduled installment repayment 
on a Federal Perkins loan, a Direct loan, or a Defense loan, regardless 
of contrary provisions of the borrower's promissory note and regardless 
of the date the loan was made, during periods described in this 
section.
* * * * *
    (c) The borrower of a Federal Perkins loan, a Direct loan, or a 
Defense loan need not repay principal, and interest does not accrue, 
for any period during which the borrower is engaged in service 
described in Secs. 674.53, 674.54, 674.55, 674.56, 674.57, 674.58, 
674.59, and 674.60.
* * * * *
    12. Section 674.39 is revised to read as follows:


Sec. 674.39  Loan rehabilitation.

    (a) Each institution must establish a loan rehabilitation program 
for all borrowers for the purpose of rehabilitating defaulted loans 
made under this part. The institution's loan rehabilitation program 
must provide that--
    (1) A defaulted borrower is notified of the option and consequences 
of rehabilitating a loan; and
    (2) A loan is rehabilitated if the borrower makes an on-time, 
monthly payment, as determined by the institution, each month for 
twelve consecutive months.
    (b) Within 30 days of receiving the borrower's last on-time, 
consecutive, monthly payment, the institution must--
    (1) Return the borrower to regular repayment status;
    (2) Treat the first payment made under the 12 consecutive payments 
as the first payment under the 10-year repayment maximum; and
    (3) Instruct any credit bureau to which the default was reported to 
remove the default from the borrower's credit history.
    (c) Collection costs on a rehabilitated loan--

[[Page 41246]]

    (1) If charged to the borrower, may not exceed 24 percent of the 
unpaid principal and accrued interest; and
    (2) That exceed the amounts specified in paragraph (c)(1) of this 
section may be charged to an institution's Fund until July 1, 2002, in 
accordance with Sec. 674.47(e)(5).
    (d) After rehabilitating a defaulted loan and returning to regular 
repayment status, the borrower regains all of the benefits and 
privileges of the promissory note as applied prior to the borrower's 
default on the loan. Nothing in this paragraph prohibits an institution 
from offering the borrower flexible repayment options following the 
borrower's return to regular repayment status on a rehabilitated loan.
    (e) The borrower may rehabilitate a defaulted loan only one time.
* * * * *
    13. Section 674.41 is amended by adding a new paragraph (a)(3) to 
read as follows:


Sec. 674.41  Due diligence--general requirements.

    (a) * * *
* * * * *
    (3) Provide the borrower with information on the availability of 
the Student Loan Ombudsman's office if the borrower disputes the terms 
of the loan in writing and the institution does not resolve the 
dispute.
* * * * *
    14. Section 674.42 is amended by redesignating paragraph (b) as 
paragraph (c), revising paragraph (a) and adding a new paragraph (b) to 
read as follows:


Sec. 674.42  Contact with the borrower.

    (a) Disclosure of repayment information. The institution must 
disclose the following information in a written statement provided to 
the borrower either shortly before the borrower ceases at least half-
time study at the institution or during the exit interview. If the 
borrower enters the repayment period without the institution's 
knowledge, the institution must provide the required disclosures to the 
borrower in writing immediately upon discovering that the borrower has 
entered the repayment period. The institution must disclose the 
following information--
    (1) The name and address of the institution to which the debt is 
owed and the name and address of the official or servicing agent to 
whom communications should be sent.
    (2) The name and address of the party to which payments should be 
sent.
    (3) The estimated balance owed by the borrower on the date on which 
the repayment period is scheduled to begin.
    (4) The stated interest rate on the loan.
    (5) The repayment schedule for all loans covered by the disclosure 
including the date the first installment payment is due, and the 
number, amount, and frequency of required payments.
    (6) An explanation of any special options the borrower may have for 
loan consolidation or other refinancing of the loan, and a statement 
that the borrower has the right to prepay all or part of the loan at 
any time without penalty.
    (7) A description of the charges imposed for failure of the 
borrower to pay all or part of an installment when due.
    (8) A description of any charges that may be imposed as a 
consequence of default, such as liability for expenses reasonably 
incurred in attempts by the Secretary or the institution to collect on 
the loan.
    (9) The total interest charges which the borrower will pay on the 
loan pursuant to the projected repayment schedule.
    (10) A copy of the borrower's signed promissory note.
    (b) Exit interview. (1) An institution must conduct exit counseling 
with each borrower either in person, by audiovisual presentation, or by 
interactive electronic means. The institution must conduct this 
counseling shortly before the borrower ceases at least half-time study 
at the institution. As an alternative, in the case of a student 
enrolled in a correspondence program or a study-abroad program that the 
school approves for credit, the school may provide written counseling 
materials by mail within 30 days after the borrower completes the 
program. If the borrower withdraws from school without the school's 
prior knowledge or fails to complete an exit counseling session as 
required, the school must provide exit counseling through either 
interactive electronic means or by mailing counseling material to the 
borrower at the borrower's last known address within 30 days after 
learning that the borrower has withdrawn from school or failed to 
complete exit counseling as required.
    (2) In conducting the exit counseling, the school must--
    (i) Inform the student as to the average anticipated monthly 
repayment amount based on the student's indebtedness or on the average 
indebtedness of students who have obtained Perkins loans for attendance 
at that school or in the borrower's program of study;
    (ii) Review for the borrower available repayment options (e.g. loan 
consolidation and refinancing);
    (iii) Suggest to the borrower debt-management strategies that the 
school determines would best assist repayment by the borrower;
    (iv) Emphasize to the borrower the seriousness and importance of 
the repayment obligation the borrower is assuming;
    (v) Describe in forceful terms the likely consequences of default, 
including adverse credit reports and litigation;
    (vi) Emphasize that the borrower is obligated to repay the full 
amount of the loan even if the borrower has not completed the program, 
is unable to obtain employment upon completion, or is otherwise 
dissatisfied with or does not receive the educational or other services 
that the borrower purchased from the school;
    (vii) Review with the borrower the conditions under which the 
borrower may defer repayment or obtain partial cancellation of a loan;
    (viii) Require the borrower to provide corrections to the 
institution's records concerning name, address, social security number, 
references, and driver's license number, the borrower's expected 
permanent address, the address of the borrower's next of kin, as well 
as the name and address of the borrower's expected employer; and
    (ix) Review with the borrower information on the availability of 
the Student Loan Ombudsman's office.
    (3) Additional matters that the Secretary recommends that a school 
include in the exit counseling session or materials set forth in 
appendix D to 34 CFR part 668.
    (4) An institution that conducts exit counseling through 
interactive electronic means must take reasonable steps to ensure that 
each student borrower receives the counseling materials, and 
participates in and completes the exit counseling.
    (5) The institution must maintain documentation substantiating the 
school's compliance with this section for each borrower.
* * * * *
    15. Section 674.45 is amended by revising paragraph (b) and adding 
a new paragraph (h) to read as follows:


Sec. 674.45  Collection procedures.

* * * * *
    (b)(1) An institution must report to any national credit bureau to 
which it reported the default, according to the reporting procedures of 
the national credit bureau, any changes to the account status of the 
loan.

[[Page 41247]]

    (2) The institution must resolve within 30 days of its receipt, any 
inquiry from any credit bureau that disputes the completeness or 
accuracy of information reported on the loan.
* * * * *
    (h) As part of the collection activities provided for in this 
section, the institution must provide the borrower with information on 
the availability of the Student Loan Ombudsman's office.
* * * * *
    16. Section 674.47 is amended by redesignating paragraphs (e)(5) 
and (e)(6) as (e)(6), and (e)(7), respectively, and by adding new 
paragraph (e)(5) to read as follows:


Sec. 674.47  Costs chargeable to the Fund.

* * * * *
    (e) * * *
    (5) Until July 1, 2002 on loans rehabilitated pursuant to 
Sec. 674.39, amounts that exceed the amounts specified in 
Sec. 674.39(c)(1) but are less than--
    (i) 30 percent if the loan was rehabilitated while in a first 
collection effort; or
    (ii) 40 percent if the loan was rehabilitated while in a second 
collection effort.
* * * * *
    17. Section 674.49 is amended as follows:
    A. By redesignating paragraphs (f)(2)(ii)(A) and (f)(2)(ii)(B) as 
paragraphs (f)(2)(ii)(B) and (f)(2)(ii)(C), respectively; and adding a 
new paragraph (f)(2)(ii)(A).
    B. By redesignating paragraphs (f)(3)(ii)(A) and (f)(3)(ii)(B) as 
paragraphs (f)(3)(ii)(B) and (f)(3)(ii)(C), respectively; and adding a 
new paragraph (f)(3)(ii)(A).
    C. By revising paragraphs (c)(1), (c)(2) and (c)(3); paragraph 
(e)(4)(i); newly redesignated paragraphs (f)(2)(ii)(B) and 
(f)(3)(ii)(B); and paragraph (g).


Sec. 674.49  Bankruptcy of borrower.

* * * * *
    (c) * * *
    (1) The institution must use diligence and may assert any defense 
consistent with its status under applicable law to avoid discharge of 
the loan. The institution must follow the procedures in this paragraph 
to respond to a complaint for a determination of dischargeability under 
11 U.S.C. 523(a)(8) on the ground that repayment of the loan would 
impose an undue hardship on the borrower and his or her dependents, 
unless discharge would be more effectively opposed by avoiding that 
action.
    (2) If the petition for relief in bankruptcy was filed before 
October 8, 1998 and more than seven years of the repayment period on 
the loan (excluding any applicable suspension of the repayment period 
defined in 34 CFR 682.402(m)) have passed before the borrower filed the 
petition, the institution may not oppose a determination of 
dischargeability requested under 11 U.S.C. 523(a)(8)(B) on the ground 
of undue hardship.
    (3) In any other case, the institution must determine, on the basis 
of reasonably available information, whether repayment of the loan 
under either the current repayment schedule or any adjusted schedule 
authorized under subpart B or D of this part would impose an undue 
hardship on the borrower and his or her dependents.
* * * * *
    (e) * * *
* * * * *
    (4)(i) The institution must monitor the borrower's compliance with 
the requirements of the plan confirmed by the court. If the institution 
determines that the debtor has not made the payments required under the 
plan, or has filed a request for a ``hardship discharge'' under 11 
U.S.C. 1328(b), the institution must determine from its own records and 
information derived from documents filed with the court--
* * * * *
    (f) * * *
    (2) * * *
    (ii)(A) The petition for relief was filed before October 8, 1998;
    (B) The loan entered the repayment period more than seven years 
(excluding any applicable suspension of the repayment period as defined 
by 34 CFR 682.402(m)), and
    (3) * * *
    (ii)(A) The petition for relief was filed before October 8, 1998;
    (B) The loan entered the repayment period more than seven years 
(excluding any application suspension of the repayment period as 
defined by 34 CFR 682.402(m)) before the filing of the petition, and
* * * * *
    (g) Termination of collection and write-off. (1) An institution 
must terminate all collection action and write off a loan if it 
receives a general order of discharge--
    (i) In a bankruptcy in which the borrower filed for relief before 
October 8, 1998, if the loan entered the repayment period more than 
seven years (exclusive of any applicable suspension of the repayment 
period defined by 34 CFR 682.402(m)) from the date on which a petition 
for relief was filed; or
    (ii) In any other case, a judgment that repayment of the debt would 
constitute an undue hardship and that the debt is therefore 
dischargeable.
    (2) If an institution receives a repayment from a borrower after a 
loan has been discharged, it must deposit that payment in its Fund.
* * * * *
    18. Section 674.52 is amended by revising paragraphs (c)(1) and (d) 
to read as follows:


Sec. 674.52  Cancellation procedures.

* * * * *
    (c) Cancellation of a defaulted loan. (1) Except with regard to 
cancellation on account of the death or disability of the borrower, a 
borrower whose defaulted loan has not been accelerated may qualify for 
a cancellation by complying with the requirements of paragraph (a) of 
this section.
* * * * *
    (d) The Secretary considers a Perkins loan, Direct loan or Defense 
loan borrower's loan deferment under Sec. 674.34(c) to run concurrently 
with any period for which cancellation under Secs. 674.53, 674.54, 
674.55, 674.56, 674.57, 674.58, 674.59, and 674.60 is granted.
* * * * *
    19. Section 674.53 is amended by redesignating paragraphs (a)(2), 
(a)(3), (a)(4), (a)(5), and (a)(6) as (a)(3), (a)(4), (a)(5), (a)(6), 
and (a)(7), respectively; by revising the heading of the section; by 
adding a new paragraph (a)(2); by revising paragraph (a)(1), paragraph 
(b), and paragraph (c) to read as follows:


Sec. 674.53  Teacher cancellation--Federal Perkins, Direct and Defense 
loans.

    (a)(1) Cancellation for full-time teaching in an elementary or 
secondary school serving low-income students.
    (i) An institution must cancel up to 100 percent of the outstanding 
loan balance on a Federal Perkins loan or a Direct loan made on or 
after July 23, 1992, for full-time teaching in a public or other 
nonprofit elementary or secondary school.
    (ii) An institution must cancel up to 100 percent of the 
outstanding loan balance on a Federal Perkins, Direct or Defense loan 
made prior to July 23, 1992, for teaching service performed on or after 
October 7, 1998, if the cancellation benefits provided under this 
section are not included in the terms of the borrower's promissory 
note.
    (2) The borrower must be teaching full-time in a public or other 
nonprofit elementary or secondary school that--
    (i) Is in a school district that qualified for funds, in that year, 
under title I of the Elementary and Secondary Education Act of 1995, as 
amended; and

[[Page 41248]]

    (ii) Has been selected by the Secretary based on a determination 
that more than 30 percent of the school's total enrollment is made up 
of title I children.
    (b) Cancellation for full-time teaching in special education. (1) 
An institution must cancel up to 100 percent of the outstanding balance 
on a borrower's Federal Perkins loan or Direct loan made on or after 
July 23, 1992, for the borrower's service as a full-time special 
education teacher of infants, toddlers, children, or youth with 
disabilities, in a public or other nonprofit elementary or secondary 
school system.
    (2) An institution must cancel up to 100 percent of the outstanding 
loan balance on a Federal Perkins, Direct or Defense loan made prior to 
July 23, 1992, for teaching service performed on or after October 7, 
1998, if the cancellation benefits provided under this section are not 
included in the terms of the borrower's promissory note.
* * * * *
    (c) Cancellation for full-time teaching in fields of expertise. (1) 
An institution must cancel up to 100 percent of the outstanding balance 
on a borrower's Federal Perkins loan or Direct loan made on or after 
July 23, 1992, for full-time teaching in mathematics, science, foreign 
languages, bilingual education, or any other field of expertise where 
the State education agency determines that there is a shortage of 
qualified teachers.
    (2) An institution must cancel up to 100 percent of the outstanding 
loan balance on a Federal Perkins, Direct or Defense loan made prior to 
July 23, 1992, for teaching service performed on or after October 7, 
1998, if the cancellation benefits provided under this section are not 
included in the terms of the borrower's promissory note.
* * * * *
    20. Section 674.56 is amended by revising the section heading and 
paragraphs (a), (b) and (c) to read as follows:


Sec. 674.56  Employment cancellation--Federal Perkins, Direct and 
Defense loans.

    (a) Cancellation for full-time employment as a nurse or medical 
technician. (1) An institution must cancel up to 100 percent of the 
outstanding balance on a borrower's Federal Perkins or Direct loan made 
on or after July 23, 1992, for full-time employment as a nurse or 
medical technician providing health care services.
    (2) An institution must cancel up to 100 percent of the outstanding 
balance on a Federal Perkins, Direct or Defense loan made prior to July 
23, 1992, for full-time service as a nurse or medical technician 
performed on or after October 7, 1998, if the cancellation benefits 
provided under this section are not included in the borrower's 
promissory note.
    (b) Cancellation for full-time employment in a public or private 
nonprofit child or family service agency. (1) An institution must 
cancel up to 100 percent of the outstanding balance on a borrower's 
Federal Perkins or Direct loan made on or after July 23, 1992, for 
service as a full-time employee in a public or private nonprofit child 
or family service agency who is providing, or supervising the provision 
of, services to high-risk children who are from low-income communities 
and the families of such children.
    (2) An institution must cancel up to 100 percent of the outstanding 
loan balance on a Federal Perkins, Direct or Defense loan made prior to 
July 23, 1992, for employment in a child or family service agency on or 
after October 7, 1998, if the cancellation benefits provided under this 
section are not included in the terms of the borrower's promissory 
note.
    (c) Cancellation for service as a qualified professional provider 
of early intervention services. (1) An institution must cancel up to 
100 percent of the outstanding balance on a borrower's Federal Perkins 
or Direct loan made on or after July 23, 1992, for the borrower's 
service as a full-time qualified professional provider of early 
intervention services in a public or other nonprofit program under 
public supervision by the lead agency as authorized in section 
676(b)(9) of the Individual with Disabilities Act.
    (2) An institution must cancel up to 100 percent of the outstanding 
loan balance on a Federal Perkins, Direct or Defense loan made prior to 
July 23, 1992 for early intervention service performed on or after 
October 7, 1998, if the cancellation benefits provided under this 
section are not included in the terms of the borrower's promissory 
note.
* * * * *
    21. Section 674.57 is amended by redesignating paragraphs (a)(2), 
(a)(3), (a)(4), (a)(5), (a)(6), and (a)(7) as (a)(3), (a)(4), (a)(5), 
(a)(6), (a)(7), and (a)(8), respectively; by revising the section 
heading and paragraph (a)(1); and adding a new paragraph (a)(2) to read 
as follows:


Sec. 674.57  Cancellation for law enforcement or corrections officer 
service--Federal Perkins, Direct and Defense loans.

    (a)(1) An institution must cancel up to 100 percent of the 
outstanding balance on a borrower's Federal Perkins or Direct Loan made 
on or after November 29, 1990, for full-time service as a law 
enforcement or corrections officer for an eligible employing agency.
    (2) An institution must cancel up to 100 percent of the outstanding 
loan balance on a Federal Perkins, Direct or Defense loan made prior to 
November 29, 1990, for law enforcement or correction officer service 
performed on or after October 7, 1998, if the cancellation benefits 
provided under this section are not included in the terms of the 
borrower's promissory note.
* * * * *
    22. Section 674.58 is amended by revising paragraph (a) to read as 
follows:


Sec. 674.58  Cancellation for service in a Head Start Program.

    (a)(1) An institution must cancel up to 100 percent of the 
outstanding balance on a borrower's Direct or Federal Perkins loan, for 
service as a full-time staff member in a ``Head Start'' program.
    (2) An institution must cancel up to 100 percent of the outstanding 
balance on a Defense loan for service as a full-time staff member in a 
``Head Start'' program performed on or after October 7, 1998, if the 
cancellation benefits provided under this section are not included in 
the terms of the borrower's promissory note.
    (3) The Head Start program in which the borrower serves must 
operate for a complete academic year, or its equivalent.
    (4) In order to qualify for cancellation, the borrower's salary may 
not exceed the salary of a comparable employee working in the local 
educational agency of the area served by the local Head Start program.
* * * * *
    23. Section 674.60 is amended by revising the section heading and 
paragraph (a) to read as follows:


Sec. 674.60  Cancellation for volunteer service--Perkins loans, Direct 
loans and Defense loans.

    (a)(1) An institution must cancel up to 70 percent of the 
outstanding balance on a Perkins loan, and 70 percent of the 
outstanding balance of an NDSL made on or after October 7, 1998, for 
service as a volunteer under The Peace Corps Act or The Domestic 
Volunteer Service Act of 1973 (ACTION programs).
    (2) An institution must cancel up to 70 percent of the outstanding 
balance on a Direct or Defense loan for service as a volunteer under 
The Peace Corps Act or The Domestic Volunteer Service Act of 1973 
(ACTION programs) performed on or after October 7, 1998, if the 
cancellation benefits provided under

[[Page 41249]]

this section are not included in the terms of the borrower's promissory 
note.
* * * * *
[FR Doc. 99-19230 Filed 7-28-99; 8:45 am]
BILLING CODE 4000-01-U