[Federal Register Volume 64, Number 146 (Friday, July 30, 1999)]
[Proposed Rules]
[Pages 41752-41763]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-19518]



[[Page 41751]]

_______________________________________________________________________

Part VII





Department of Education





_______________________________________________________________________



34 CFR Part 668



Student Assistance General Provisions; Proposed Rule

  Federal Register / Vol. 64, No. 146 / Friday, July 30, 1999 / 
Proposed Rules  

[[Page 41752]]


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DEPARTMENT OF EDUCATION

34 CFR Part 668

RIN 1845-AA04


Student Assistance General Provisions

AGENCY: Department of Education.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Secretary proposes to amend the loan default reduction and 
prevention measures in the Student Assistance General Provisions 
regulations in 34 CFR part 668. This notice of proposed rulemaking 
(NPRM) reflects changes made by the Higher Education Amendments of 1998 
to the Higher Education Act of 1965, as amended (HEA).

DATES: We must receive your comments on or before September 15, 1999.

ADDRESSES: Address all comments about these proposed regulations to 
Kenneth Smith, U.S. Department of Education, P.O. Box 23272, 
Washington, DC 20026-3272. If you prefer to send your comments through 
the Internet, use the following address: [email protected]
    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: Kenneth Smith. Telephone: (202) 708-
8242. If you use a telecommunications device for the deaf (TDD), you 
may call the Federal Information Relay Service (FIRS) at 1-800-877-
8339.
    Individuals with disabilities may obtain this document in an 
alternate format (e.g., Braille, large print, audiotape, or computer 
diskette) on request to the contact person listed in the preceding 
paragraph.

SUPPLEMENTARY INFORMATION:

Invitation To Comment

    We invite you to submit comments regarding these proposed 
regulations. To ensure that your comments have maximum effect in 
developing the final regulations, we urge you to identify clearly the 
specific section or sections of the proposed regulations that each of 
your comments addresses and to arrange your comments in the same order 
as the proposed regulations.
    We invite you to assist us in complying with the specific 
requirements of Executive Order 12866 and its overall requirement of 
reducing regulatory burden that might result from these proposed 
regulations. Please let us know of any further opportunities we should 
take to reduce potential costs or increase potential benefits while 
preserving the effective and efficient administration of the programs.
    During and after the comment period, you may inspect all public 
comments about these proposed regulations in room 3045, Regional Office 
Building 3, 7th and D Streets, SW., Washington, DC, between the hours 
of 8:30 a.m. and 4:00 p.m., Eastern time, Monday through Friday of each 
week except Federal holidays.

Assistance to Individuals With Disabilities in Reviewing the 
Rulemaking Record

    On request, we will supply an appropriate aid, such as a reader or 
print magnifier, to an individual with a disability who needs 
assistance to review the comments or other documents in the public 
rulemaking docket for these proposed regulations. If you want to 
schedule an appointment for this type of aid, you may call (202) 205-
8113 or (202) 260-9895. If you use a TDD, you may call the Federal 
Information Relay Service at 1-800-877-8339.

Background

    The Higher Education Amendments of 1998 (Pub. L. 105-244, enacted 
October 7, 1998, and referred to in this NPRM as the ``1998 
Amendments'') changed some requirements relating to the calculation of 
a school's Federal Family Education Loan (FFEL) Program cohort default 
rate, William D. Ford Federal Direct Loan (Direct Loan) Program cohort 
rate, or weighted average cohort rate. The Secretary is proposing to 
revise 34 CFR 668.17 of the Student Assistance General Provisions 
regulations to reflect these changes.

Negotiated Rulemaking Process

    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, DC, Chicago, and Los Angeles, and 
we posted transcripts of those hearings to the Department's Information 
for Financial Aid Professionals' website (http://ifap.ed.gov).
    We then published a second notice in the Federal Register (63 FR 
71206, December 23, 1998) to announce the Department's intention to 
establish four negotiated rulemaking committees to draft proposed 
regulations implementing Title IV of the HEA. The notice announced the 
organizations or groups believed to represent the interests that should 
participate in the negotiated rulemaking process and announced that the 
Department would select participants for the process from nominees of 
those organizations or groups. We requested nominations for additional 
participants from anyone who believed that the organizations or groups 
listed did not adequately represent the list of interests outlined in 
section 492 of the HEA. Once the four committees were established, they 
met to develop proposed regulations over the course of several months, 
beginning in January.
    The proposed regulations contained in this NPRM reflect the final 
consensus of the negotiating committee, which was made up of the 
following members:

American Association of Community Colleges
American Association of Cosmetology Schools
American Association of State Colleges and Universities

[[Page 41753]]

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 Financial 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 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
US Public Interest Research Group

    As stated in the 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

Proposed Regulatory Changes

    To help readers understand the proposed regulatory changes, we 
believe it is appropriate to provide a brief description of the 
processes available for schools to challenge or appeal their FFEL 
Program cohort default rates, Direct Loan Program cohort rates, or 
weighted average cohort rates. To avoid confusion in this NPRM, we use 
the word ``rate'' by itself to refer to FFEL Program cohort default 
rates, Direct Loan Program cohort rates, and weighted average cohort 
rates. We use the complete term if we are referring to another type of 
``rate'': an ``economically disadvantaged rate,'' a ``completion 
rate,'' a ``placement rate,'' or a ``participation rate.''
    Each school receives only one of the three types of rates each 
year: an FFEL Program cohort default rate, a Direct Loan Program cohort 
rate, or a weighted average cohort rate. However, unless specifically 
stated in the regulations, the rules and processes for submitting 
appeals and making challenges apply regardless of which rate a school 
receives. For example, under the proposed regulations, a school must 
notify us within 30 calendar days of its intent to appeal a rate on the 
grounds of exceptional mitigating circumstances, regardless of whether 
the school's rate is an FFEL Program cohort default rate, a Direct Loan 
Program cohort rate, or a weighted average cohort rate.
    The rate process begins when we send draft rates to schools 
participating in the FFEL or Direct Loan Program. The rates are 
accompanied by supporting data, giving detailed information on the 
loans included in the calculation of the rate. A school may challenge 
the calculation of a draft rate by following the process outlined in 
the regulations. In this NPRM we refer to this process as the 
``challenge'' process.
    After the completion of the draft rate challenge process, we notify 
each school of its official rate and publish a listing of all the 
rates. This NPRM refers to these rates as ``published rates.'' A school 
may file an appeal of any sanctions resulting from published rates by 
following the procedures outlined in the regulations. We refer to the 
process for contesting published rates as an ``appeal.''
    A discussion of each substantive proposed change follows.

1. Challenges and Adjustments to Inaccurate Data Used to Calculate FFEL 
Cohort Default Rates, Direct Loan Program Cohort Rates, or Weighted 
Average Cohort Rates (Secs. 668.17(a)(1) and 668.17(j))

    Why are changes proposed?
    Amendments to section 428G of the HEA provide reduced 
administrative requirements for schools with FFEL Program cohort 
default rates, Direct Loan Program cohort rates, or weighted average 
cohort rates that are less than 5 or 10 percent. To help implement 
these new provisions, we are proposing to change the process that 
schools use to identify and challenge incorrect data.
    Before describing the proposed changes, we will describe the 
current process used to identify and challenge incorrect data.
    If a school is not subject to loss of participation, how does it 
currently correct data used to calculate its rate?
    The current process for correcting data has two steps:
     Challenging draft data. Any school may challenge the 
accuracy of any data used to calculate its draft rate. We send 
supporting data to schools with draft rates of 20 percent or more, and 
any school that does not receive supporting data may request it. The 
supporting data reflect the basis for the calculation of a school's 
rate. A school compares the information in the supporting data with its 
own records and with information obtained from outside sources to 
identify possible inaccuracies. A school must challenge any inaccurate 
draft data within 30 calendar days of receiving the supporting data.
     Adjustments to published rates. We send supporting data to 
schools with published rates of 20 percent or more. Any school that 
does not receive supporting data may request it. If corrections 
identified during the draft challenge process are not reflected in a 
school's published rate, the school may request that its rate be 
adjusted to reflect those corrections. Adjustment requests must be made 
within 10 working days of receiving the supporting data. A school may 
not request an adjustment that is based on data that were changed or 
added after the draft rate was calculated. Between the calculation of 
the draft and official rates, data may be corrected, changed, or added 
by a guaranty agency (for FFEL loans) or the Direct Loan Servicing 
Center (for Direct Loans).
    How would this process be changed under these proposed regulations?
    The proposed regulations would retain the two current steps, with 
the following improvements:
     Challenging draft data. We would provide supporting data 
to all schools when we notify the schools of their draft rates, and we 
would lengthen the period during which a school may challenge the 
accuracy of its draft rate from 30 to 45 calendar days.
     Adjustments to published rates. We would provide 
supporting data with the notification of published rates sent to all 
schools having rates of 10 percent or more. Schools with rates lower 
than 10 percent would be able to request supporting data separately.
    Will there be other changes to this process?
    Yes, we will also make some administrative changes to the process 
for reviewing and challenging rates. Since these are administrative 
changes, they are not included in these proposed regulations.
    The most significant administrative changes will be to the process 
for requesting adjustments to a published rate. The period during which 
a school may request an adjustment to its published rate will be 
extended from 10 working days to 30 calendar days. Also, upon receiving 
its published rate, a school will be able to request an adjustment to 
any incorrect new data

[[Page 41754]]

that were included after the draft rate was calculated. This ``new data 
adjustment'' will be available to schools beginning with receipt of FY 
1998 rates, which will be released before September 30, 2000. This new 
administrative process will be explained more fully in the FY 1998 
Official Cohort Default Rate Guide, which will be sent to a school with 
the notification of its published rate for FY 1998.
    We will also make the following additional administrative 
improvements to this process:
     Electronic supporting data. We will make supporting data 
available to schools upon request in an electronic format. This will 
help schools prepare their challenges and appeals more quickly and with 
less work. We plan to begin this service with the publication of rates 
for FY 1998. Initially, it is unlikely that we will be able to send 
electronic data with the notifications of the rates themselves. 
Instead, we plan to make electronic data available to requesting 
schools after the notifications are issued, and for subsequent draft 
and published rates.
     Real-time data. Schools will be able to view, year-round, 
the loan repayment and default data that will be used to calculate 
their rates. By having access to this ``real-time'' data, schools will 
be able to identify errors and to correct them, by working with the 
data's provider, on a schedule that is compatible with the schools' 
ongoing workload. We plan to begin this service by the end of 1999.

2. Deadline for Publishing Rates (Sec. 668.17(b)(3))

    What happens if the deadline is missed?
    The 1998 Amendments adds a new section 435(m)(4)(D) to the HEA, 
which directs the Secretary to issue cohort default rates by September 
30 each year. During the negotiated rulemaking process, some 
negotiators expressed a concern about the possible consequences for 
schools if we issued rates after that date. Under section 435(a)(2) of 
the HEA, a school's loss of participation in the loan programs based on 
excessive rates continues for the fiscal year (FY) for which the 
determination of the loss is made and for the 2 succeeding fiscal 
years. Some negotiators were concerned that schools might be subject to 
an additional year of ineligibility if we issued rates after September 
30.
    The committee discussed an example in which a determination issued 
before this year's deadline of September 30, 1999, would subject a 
school to loss of participation for the remainder of this fiscal year 
(FY 1999) and for the 2 following fiscal years (FY 2000 and FY 2001). 
By contrast, if the determination was issued after September 30, 1999, 
the committee asked whether the school would be subject to loss of 
participation for the remainder of that fiscal year (FY 2000) and for 
the 2 following fiscal years (FY 2001 and FY 2002).
    The Department expects to meet the goal of issuing rates by 
September 30 each year. If, however, rates are not issued until after 
that date, a school's loss of eligibility in that case would continue 
only for the remainder of the fiscal year in which the rates are issued 
and for the following fiscal year. As this procedure would be 
administrative, it is not reflected in these proposed regulations.

3. Loss of Pell Eligibility (Sec. 668.17(b)(4))

    How does a school's rate affect its eligibility to participate in 
the Pell program?
    These provisions reflect amendments to section 401(j) of the HEA. 
Under the amendments, a school becomes ineligible to participate in the 
Federal Pell Grant Program when it becomes ineligible to participate in 
the FFEL or Direct Loan Program due to excessive rates. A school that 
was not participating in the FFEL or Direct Loan Program on October 7, 
1998 (the date on which the 1998 Amendments was enacted), is not 
subject to this provision unless it subsequently participates in either 
of those programs.
    What criteria would be used to determine that a school was not 
participating in the FFEL or Direct Loan Program on or after October 7, 
1998?
    Under the proposed regulations, a school would not be considered to 
have been participating in the FFEL or Direct Loan Program on or after 
October 7, 1998, if the school--
     Was ineligible to participate in those programs before 
October 7, 1998, and the school did not regain eligibility;
     Requested in writing, before October 7, 1998, to withdraw 
its participation in those programs and did not subsequently re-apply 
to participate; or
     Has not certified an FFEL loan or originated a Direct Loan 
on or after July 7, 1998.
    The deadline date of July 7, 1998, was selected as a compromise and 
agreed to by the committee. The Department believes this date is 
appropriate because it provides some protection for a school that had 
stopped certifying or originating loans, intending to end its 
participation in these loan programs, but had not sent a written 
request to withdraw its participation. At the same time, we also 
believe that this date is appropriate because it provides a sufficient 
period of time before the date of enactment to verify the school's 
intent not to participate.

4. Liability for Unsuccessful Appeals (Secs. 668.17(b)(5)(ii) and 
668.17(b)(6))

    What liability would a school assume for loans made while appealing 
a loss of participation?
    These provisions reflect amendments to section 435(a)(2)(A) of the 
HEA that are intended to reduce the likelihood of frivolous appeals by 
schools that are subject to loss of eligibility due to excessive rates. 
A school that certifies and delivers FFEL Program loans or originates 
and disburses Direct Loan Program loans during its appeal would be 
required to reimburse the Secretary for an amount equal to the amount 
of interest, special allowance, reinsurance, and any related or similar 
payments the Secretary makes, or will be obligated to make, on those 
loans.
    How will the Department determine a school's liability for loans 
made during an unsuccessful appeal?
    We intend to determine a school's liability using the Department's 
``Estimated Loss Formula.'' We currently use this formula to calculate 
schools' liabilities in other circumstances related to the loan 
programs. In this instance, the formula would use the school's most 
recent published rate to estimate the principal amount of the loans 
that would be expected to default. In addition, the formula would be 
used to estimate costs to the Secretary for interest, special 
allowance, and other losses on these loans, using timeframes 
appropriate for the type of school.
    For example, an estimate of a 2-year public school's liability 
would be based on average timeframes for 2-year public schools. To 
calculate an estimate of the--
     Interest subsidy, the Department would project the 
interest that would accrue on the total principal amount of the 
subsidized student loans, during the average number of days, for a 2-
year public school, between the date the loans were disbursed and the 
date they entered repayment.
     Special allowance, the Department would project the 
special allowance that would accrue on the total principal amount of 
the subsidized and unsubsidized student loans and PLUS loans, during 
the average number of days, for a 2-year public school, between the 
date the loans enter repayment and either the date they default or the 
date on which they are paid in full.

[[Page 41755]]

    How could a school appeal its loss of participation without 
incurring a liability?
    Any school may stop certifying and delivering FFEL Program loans or 
originating and disbursing Direct Loan Program loans by ending its 
participation in the program. Also, under the proposed regulations, a 
school could prevent the possibility of incurring a liability during an 
appeal by temporarily not certifying and delivering FFEL Program loans 
and originating and disbursing Direct Loan Program loans during the 
appeal. This suspension would be at the discretion of the school, and 
the school would not be required to notify or seek the approval of the 
Secretary.

5. Participation Rate Index (Secs. 668.17(c)(1)(ii)(A) and 
668.17(j)(4))

    What changes would be made to a school's ability to appeal on the 
basis of its participation rate index (PRI)?
    The proposed regulations reflect the provisions of section 
435(a)(6) of the HEA. These provisions are similar in many respects to 
the Department's regulatory requirements for an appeal on the basis of 
a school's PRI under 34 CFR 668.17(c)(1)(ii)(A). However, unlike those 
regulatory requirements, under which a school files a PRI appeal after 
it receives its published rate, the 1998 Amendments provides for a PRI 
challenge that is made after a school receives its draft rate. Also, 
the provisions of the 1998 Amendments allow a school to base its PRI 
calculation on the fiscal year of the school's draft rate or either of 
its two most recent published rates, rather than the school's most 
recent published rate only.
    What if a school's published rate isn't the same as its draft rate, 
and the newly published rate would make its PRI lower than 0.0375?
    The proposed regulations retain the opportunity for a school to 
appeal its published rate on the basis of a PRI lower than 0.0375. (The 
process that occurs after the draft rate is a ``challenge,'' but the 
process that occurs after the published rate is an ``appeal.'') Because 
a school's draft rate is not always the same as its published rate, 
there may be cases in which a school's challenge based on its draft 
rate would be denied, but an appeal based on the school's published 
rate would be accepted.
    For example, a school with a draft rate of 38 percent and with 10 
percent of its students receiving loans would have a PRI of .0380 (0.38 
multiplied by 0.10 is .0380). Since the school's PRI would be greater 
than .0375, its challenge would be denied. However, if the school's 
published rate were calculated 1 percent lower, as 37 percent, the same 
school would then have a PRI of .0370 (0.37 multiplied by 0.10 is 
.0370). Since this PRI meets the criterion, the school's appeal would 
be accepted.
    Once a school's PRI challenge or appeal is accepted, would the 
school need to challenge or appeal again the following year?
    A school's successful PRI challenge to the draft rate or appeal of 
the published rate would not apply to a future loss of participation 
unless the rate upon which the challenge or appeal was originally based 
was a rate that could also be used as a basis for the subsequent 
challenge or appeal. For example, a school that is subject to a loss of 
participation based on its rates for FY 1999, FY 1998, and FY 1997 may 
challenge or appeal the loss using a PRI based on any of the following 
rates:

----------------------------------------------------------------------------------------------------------------
                                                                             PRI based on rate for...
                       Upon receipt of...                        -----------------------------------------------
                                                                      FY 1999         FY 1998         FY 1997
----------------------------------------------------------------------------------------------------------------
Draft rate......................................................           Draft       Published       Published
Published rate..................................................       Published       Published       Published
----------------------------------------------------------------------------------------------------------------

    The school files a successful challenge or appeal but is again 
subject to loss of participation the following year, based on its rates 
for FY 2000, FY 1999, and FY 1998. At that time, the school may 
challenge or appeal using a PRI based on any of the following rates:

----------------------------------------------------------------------------------------------------------------
                                                                             PRI based on rate for...
                       Upon receipt of...                        -----------------------------------------------
                                                                      FY 2000         FY 1999         FY 1998
----------------------------------------------------------------------------------------------------------------
Draft rate......................................................           Draft       Published       Published
Published rate..................................................       Published       Published       Published
----------------------------------------------------------------------------------------------------------------

The only rates that appear in both tables are the school's published 
rates for FY 1999 and FY 1998. If the school's successful original 
challenge or appeal was based on the--
     Published rate for FY 1999 or FY 1998, then the school 
would not need to file another challenge or appeal in order to continue 
participating.
     Draft rate for FY 1999 or the published rate for FY 1997, 
then the school would need to file another successful PRI, or other 
type of appeal, in order to continue participating.

6. Mitigating Circumstances Appeals (Secs. 668.17(c)(1)(ii)(B) and 
668.17(c)(7))

    What changes would there be to appeals made on the basis of 
mitigating circumstances?
    These provisions reflect the amendments to section 435(a)(2)(A)(ii) 
of the HEA and add the provisions of new section 435(a)(4) of the HEA. 
The amended and new provisions are similar to the current regulatory 
requirements for an appeal due to mitigating circumstances (see 34 CFR 
668.17(c)(1)(ii)(B)). However, the 1998 Amendments makes several 
substantive modifications to the regulatory requirements:
     The criterion based on a school's economically 
disadvantaged rate is reduced from a minimum of 70 percent to a minimum 
of two-thirds.
     The criterion based on a school's placement rate is 
reduced from a minimum of 50 percent to a minimum of 44 percent.
     The groups of students used in the calculations that 
determine the school's appeal are re-defined.
     An independent auditor must agree, in a written opinion 
included with the appeal, that the school meets the appeal's criteria.

[[Page 41756]]

    How would the modified requirement for an independent auditor's 
opinion be implemented under the proposed regulations?
    The following process is proposed to incorporate the modified 
requirement for an auditor's opinion:
     Within 30 days of being notified that its participation 
will end due to excessive FFEL Program cohort default rates, Direct 
Loan Program cohort rates, or weighted average cohort rates, or that a 
prior loss of participation will be extended, the school must notify us 
that it is appealing under these provisions.
     Within 60 days of being notified that its participation 
will end due to excessive rates, or that a prior loss of participation 
will be extended, the school must send us the independent auditor's 
report. The report must include the school's written assertions and be 
in a format prescribed by us.
     We consider the auditor's report and compare the 
assertions in the report with the information we maintain.
     If the independent auditor's opinion supports the school's 
position, and the report's documentation or our data do not contradict 
the opinion, then the appeal is approved.
     If the independent auditor's opinion does not support the 
school's assertion, or if the report's documentation or our data 
contradict the opinion, the appeal is denied.
    We rely upon the opinion of the independent auditor in determining 
whether a school meets the mitigating circumstance criteria. However, 
it would not be appropriate for us to decide that a school meets the 
criteria if an auditor's opinion is contradicted by data in the report 
itself or by data that we maintain.
    As agreed during negotiated rulemaking, the data that we would use 
to evaluate a report's acceptability would be limited to data that the 
school has supplied to us for other reasons or data that is otherwise 
available to the school. For example, when making a determination, we 
may compare data in the report to the data maintained in the Federal 
Pell Grant Program payment systems, the National Student Loan Data 
System (NSLDS), the Integrated Postsecondary Education Data System 
(IPEDS), or other data sources.
    We would not typically investigate a school's assertions in making 
our determination. For example, we would not routinely contact the 
employers of the school's former students to gather additional 
information to use in evaluating their placement rate assertions. If 
improprieties are suspected in a school's appeal, an investigation 
would be pursued under other legal authority.
    How would the groups of students used to calculate economically 
disadvantaged, completion, and placement rates be re-defined?
    The 1998 Amendments changes the definitions of the groups of 
students used to calculate economically disadvantaged rates, completion 
rates, and placement rates:
     A student is considered economically disadvantaged if the 
student is eligible to receive a Federal Pell Grant award that is at 
least equal to one-half the maximum Federal Pell Grant award for which 
the student would be eligible based on the student's enrollment status. 
The previous regulatory criterion considered a student with an expected 
family contribution (EFC) of zero to be economically disadvantaged.
     A student is considered to have completed a program or to 
have been placed if the student enters active duty in the Armed Forces 
of the United States.
    Additional changes are included in these proposed regulations. 
Currently, the economically disadvantaged rates, completion rates, and 
placement rates used to determine a school's eligibility for this type 
of appeal are calculated as percentages of all of the school's regular 
students. The proposed regulations limit the groups of students for 
whom the percentages are calculated to include only students who are 
enrolled in programs eligible for Title IV aid.
    This change is proposed at the request of some of the non-Federal 
negotiators, in consideration of the types of student records needed by 
a school to calculate its eligibility for this appeal and of the 
likelihood that these records may not be maintained by schools for 
students who were not enrolled in Title IV eligible programs. We 
especially request comments on the benefit or harm that this proposed 
change might cause schools.

7. Other Mitigating Circumstances Appeals (Secs. 668.17(c)(1)(ii)(A), 
(C), and (D))

    Why are additional mitigating circumstances proposed?
    These provisions are based on the authority given to the Secretary 
under new section 435(a)(2)(iii) of the HEA. Under this section, the 
Secretary may identify mitigating circumstances, in addition to those 
identified in the HEA, that make the consequences of FFEL Program 
cohort default rates, Direct Loan Program cohort rates, or weighted 
average cohort rates inequitable. Schools meeting the criteria for 
these additional mitigating circumstances may be allowed to continue 
participating in the FFEL and Direct Loan programs.
    What additional mitigating circumstances are proposed?
    The proposed regulations include the following additional 
mitigating circumstances for a school to use in appealing a loss of 
participation based on three consecutive rates of 25 percent or 
greater:
     A successful appeal, based on a school's participation 
rate index, that is made upon receipt of the school's published rate 
rather than its draft rate. The proposed regulations retain and modify 
previous regulatory requirements. (See the previous discussion of 
``Participation Rate Index.'')
     The total number of a school's borrowers entering 
repayment in the 3 most recent fiscal years for which data are 
available is 30 or fewer. For example, if the number of a school's 
borrowers entering repayment in FY 1996 was 6, in FY 1997 was 10, and 
in FY 1998 was 8, then the total number of a school's borrowers 
entering repayment during those 3 fiscal years is 24 (6+10+8=24). The 
school in the example would be eligible for an appeal of a loss of 
participation based on the rates for those 3 fiscal years, because the 
total number of its borrowers entering repayment (24) is 30 or fewer.
    This additional mitigating circumstance was developed by the 
committee and based on the reasoning that schools that make very few 
loans only pose a minimal financial risk to the taxpayers. The 
aggregate amount of the funds used to make these few loans is small. 
The committee was of the view that it was inequitable to subject these 
schools to loss of participation in the FFEL and Direct Loan programs, 
and especially to loss of participation in the Federal Pell Grant 
Program.
     At least two of the three rates upon which a school's loss 
of participation is based are calculated as ``average'' rates 
(``average'' rates are calculated for schools with fewer than 30 
borrowers in a fiscal year, on the basis of combined data for 3 fiscal 
years) and would be less than 25 percent if calculated using data 
specific to each fiscal year.
    As an example of this appeal, data for a sample school are provided 
below:

[[Page 41757]]



----------------------------------------------------------------------------------------------------------------
                                                                                           Rate based on . . .
                                                                                       -------------------------
                             FY                                 Students     Default     3 years of   1 year of
                                                                                            data         data
                                                                                         (percent)    (percent)
----------------------------------------------------------------------------------------------------------------
FY 1994.....................................................           25            7  ...........         28.0
FY 1995.....................................................           25            6  ...........         24.0
FY 1996.....................................................           25           10         30.7         40.0
FY 1997.....................................................           25            4         26.7         16.0
FY 1998.....................................................           25            5         25.3         20.0
----------------------------------------------------------------------------------------------------------------

In the example, a school's rates for FY 1996, FY 1997, and FY 1998, as 
calculated under 34 CFR 668.17(d)(1)(i)(B) (in the ``3 Years of Data'' 
column), are 30.7 percent, 26.7 percent, and 25.3 percent. Since 
calculations for FY 1997 and FY 1998, using data unique to each of 
those fiscal years (in the ``1 Year of Data'' column), are both less 
than 25 percent, the school in the example would meet the criteria for 
this mitigating circumstance.
    The proposed regulations include this mitigating circumstance 
because we believe such an approach is consistent with the legislative 
intent of section 435(m)(1)(C) of the HEA, which provides for the 
calculation of ``average'' rates, the rates that are applicable to 
schools with fewer than 30 borrowers entering repayment during a fiscal 
year. In providing for a calculation based on an ``average'' rate, we 
believe that the legislative intent of the HEA is to reduce the effects 
of volatile rates on schools with fewer than 30 borrowers entering 
repayment in a fiscal year. However, as shown in the preceding example, 
using an ``average'' rate may have the opposite effect in some cases: 
data for a single fiscal year (in the example, FY 1996) may raise a 
school's subsequent rates and, absent this proposed mitigating 
circumstance, could cause the school to lose its eligibility to 
participate.

8. Definition of ``Default'' (Secs. 668.17(e), 668.17(f), and 
668.17(h)(2)(iii))

    Why are changes to the definition of ``default'' included in these 
proposed regulations?
    These provisions would conform 34 CFR 668.17 to an amendment to 
section 435(l) of the HEA, which changes the definition of ``default'' 
from 180 days to 270 days for borrowers who first became delinquent on 
or after October 7, 1998.
    How would the change in the definition of ``default'' affect a 
school's rate?
    For purposes of calculating a school's rate, an FFEL Program 
borrower is generally considered to be in default if a claim for 
insurance is paid on the borrower's loan before the end of the fiscal 
year that immediately follows the fiscal year in which the loan entered 
repayment. For Direct Loan Program loans, specific timeframes are 
included in regulations to determine whether a Direct Loan is 
considered to be in default for purposes of the Direct Loan Program 
cohort rate or weighted average cohort rate.
    Since there is generally a 90-day delay between the date that an 
FFEL Program loan defaults and the date that an insurance claim is 
paid, a corresponding 90-day period is provided in the timeframe used 
for Direct Loans. Thus, since the timeframe for considering a borrower 
in default on an FFEL Program loan is changing from 270 days to 360 
days, the proposed regulations would change, from 270 days to 360 
days--
     The number of days of delinquency after which a borrower 
would be considered in default on a Direct Loan, if the borrower's 
delinquency began on or after October 7, 1998; and
     The number of days of repayment on a Direct Loan, under 
the income-contingent repayment plan, after which a borrower would be 
included in a school's rate under Sec. 668.17 (e) or (f).

9. Loan Servicing Calculation (Sec. 668.17(h)(2)(ii))

    What changes would there be to the calculation of a school's rate 
after a loan servicing appeal?
    These provisions reflect amendments to section 435(m)(1)(B) of the 
HEA. The section specifies that a loan is removed from both the 
numerator and denominator of a rate's calculation if the loan is 
determined to have been improperly serviced or collected. This is not a 
change from the current method used to calculate a school's rate for 
this purpose. The new language in the proposed regulations is included 
only to reflect the changes to the statute.

10. Definition of ``Loan Servicing Records'' (Secs. 668.17(h)(3)(ii)(B) 
and 668.17(h)(3)(iii)(B))

    Why is the definition of ``loan servicing records'' changing?
    These provisions reflect amendments to section 435(a)(3) of the 
HEA. The section clarifies the definition of the loan servicing records 
that guaranty agencies and the Direct Loan Servicer provide to schools 
during appeals on the basis of improper loan servicing or collection.
    How would the definition of ``loan servicing records'' change?
    The definition of ``loan servicing records'' would remain 
essentially the same for both the FFEL and Direct Loan programs:
     FFEL Program loan servicing records are the collection and 
payment history records used by a guaranty agency to determine whether 
to pay a claim on a defaulted loan.
     Direct Loan Program loan servicing records are the 
collection and payment history records that we use to determine a 
school's Direct Loan Program cohort rate or weighted average cohort 
rate.
    These revisions do not reflect a change in our current procedures. 
The proposed regulations provide clarification to reflect more closely 
the language in the 1998 Amendments.

11. Special Institutions (Sec. 668.17(k) and Appendix H)

    How would a special institution's eligibility to participate be 
affected by the proposed regulations?
    These provisions reflect amendments to section 435(a)(2)(C) of the 
HEA and add the provisions of the new section 435(a)(5) of the HEA. The 
1998 Amendments extends, from July 1, 1998, to July 1, 1999, the date 
on which the consequences of excessive rates are applicable to 
historically black colleges or universities, tribally controlled 
community colleges, and Navajo community colleges. In certain cases, 
the Secretary may treat one of these special institutions that is 
subject to loss of participation due to excessive rates as an eligible 
institution during the 1-year periods beginning on July 1, 1999, 2000, 
and 2001. The proposed regulations include the requirements under which 
these schools may maintain eligibility during the 1-year periods.
    During negotiations, the committee had extensive discussions about 
the amount of procedural detail needed in these regulations for special 
institutions. The Department's initial position was that these 
regulations should provide only the most general requirements, so

[[Page 41758]]

that the process would be flexible enough to account for changes in 
circumstances and for experiences gained in administering the 
requirements. Negotiators for special institutions were of the view 
that it was more important to emphasize the consequences of the 
requirements and to ensure stricter, more consistent requirements 
throughout the process, so that schools could devote appropriate 
resources to the task of reducing rates and would not be subject to 
changing requirements. The committee came to consensus on this proposed 
draft.
    We note that proposed Sec. 668.17(k)(2)(iii) and the introduction 
to proposed Appendix H use the word ``should'' rather than the word 
``must,'' which is used throughout the rest of this NPRM. The word 
``should'' was included by agreement during the negotiated rulemaking 
process, and we chose not to change it at this stage of the process. 
Although the meaning of this word may differ in different 
circumstances, we want to emphasize that the term ``should'' in this 
particular case is intended to mean ``must,'' and commenters should use 
this interpretation in developing their comments. We intend to change 
this section in the final regulations to use the word ``must,'' instead 
of ``should,'' unless commenters indicate a substantial reason to keep 
the word ``should.''

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 determined to be 
necessary for the effective and efficient administration of the Title 
IV programs.
    In assessing the potential costs and benefits of this regulatory 
action--both quantitative and qualitative--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 subject to 
negotiated rulemaking, the costs and benefits of the various 
requirements were discussed thoroughly by 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. 668.17 Default reduction and prevention measures.)
     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 
ADDRESS 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. Entities affected by these regulations are institutions of 
higher education that participate in the title IV, HEA programs and 
individual recipients of title IV, HEA program funds. Institutions 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, or entities controlled by governmental 
entities with populations of 50,000 or less. Individuals are not 
considered small entities for this purpose. These proposed regulations, 
which generally reduce operational burden and offer institutions 
additional ways to maintain their eligibility to participate in the 
Title IV aid programs, would not have a significant economic impact on 
small institutions.
    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

    Section 668.17 contains an information collection requirement. 
Under the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)), the 
Department of Education has submitted a copy of this section to the 
Office of Management and Budget (OMB) for its review.
    Collection of Information: Student Assistance General Provisions--
668.17--Default reduction and prevention measures.
    Under the proposed regulations, a historically black college or 
university, tribally controlled community college, or Navajo community 
college may continue to participate in the FFEL or Direct Loan Program 
even though it is subject to loss of participation due to excessive 
rates. This continued participation may only occur during the 1-year 
periods beginning on July 1, 1999, 2000, and 2001, and depends upon the 
Secretary's determination of the school's compliance with the proposed 
regulations.
    To make this determination, we need to collect information from 
schools. Each school is required to submit a default management plan on 
or before July 1, 1999. On or before July 1, 2000 and 2001, each school 
is required to submit evidence of the implementation of its plan and of 
improvement in the preceding 1-year period. Some schools may be 
required to submit revised default management plans.
    Fourteen schools submitted this collection in 1999. We estimate 
that 8 schools will submit this collection in 2000 and 4 schools will 
submit this collection in 2001. We estimate a burden of 200 hours per 
school to create/revise a default management plan, and an additional 
burden of 200 hours per school to submit evidence of their plan's 
implementation and of improvement in the preceding 1-year period.
    As calculated in the table below, the annual burden is estimated to 
be 2534 hours:

[[Page 41759]]



----------------------------------------------------------------------------------------------------------------
                                                                             Default      Evidence
                                                                            plan hours     hours     Total hours
                            Year                               Number of   (Schools  x  (Schools  x    (Default
                                                                schools      200 hrs)     200 hrs)      plan +
                                                                                                      evidence)
----------------------------------------------------------------------------------------------------------------
1999........................................................           14         2800          N/A         2800
2000........................................................            8         1600         1600         3200
2001........................................................            4          800          800         1600
                                                                                                    ------------
    Total (2800+3200+1600) =................................  ...........  ...........  ...........         7600
    Average (Total/3) =.....................................  ...........  ...........  ...........         2534
----------------------------------------------------------------------------------------------------------------

    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 this proposed collection of 
information in--
     Deciding whether the proposed collection is 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 collection, 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 collection 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 your comments within 30 days of 
publication. This does not affect the deadline for your comments to us 
on the proposed regulations.

Intergovernmental Review

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

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 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 the first 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 Numbers: 84.007 Federal 
Supplemental Educational Opportunity Grant Program; 84.032 Federal 
Family Education Loan Program; 84.032 Federal PLUS Program; 84.032 
Federal Supplemental Loans for Students Program; 84.033 Federal 
Work-Study Program; 84.038 Federal Perkins Loan Program; 84.063 
Federal Pell Grant Program; 84.069 State Student Incentive Grant 
Program; 84.226 Income Contingent Loan Program; and 84.268 William 
D. Ford Federal Direct Loan Program)

List of Subjects in 34 CFR Part 668

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

    Dated: July 27, 1999.
Richard W. Riley,
Secretary of Education.

    For the reasons discussed in the preamble, the Secretary proposes 
to amend part 668 of title 34 of the Code of Federal Regulations as 
follows:

PART 668--STUDENT ASSISTANCE GENERAL PROVISIONS

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

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

    2. Section 668.17 is amended to read as follows by--
    A. Revising paragraph (a)(1).
    B. In the introductory language for paragraph (b)(3), removing the 
word ``institution's'' and adding, in its place, ``institution whose''; 
removing the word ``respectively''; and removing the words ``section 
and continuing'' and adding, in their place, ``section. The loss of 
participation continues''.
    C. Revising paragraphs (b)(4) through (b)(6).
    D. In the introductory text for paragraph (c)(1), after ``except 
that an institution may submit an appeal under'', removing the word 
``section'' and adding, in its place, ``paragraph''; removing the words 
``the information required by paragraph (c)(7) may be submitted in 
accordance with that paragraph'' and adding, in their place, ``an 
institution submits an appeal under paragraph (c)(1)(ii)(B) of this 
section in accordance with paragraph (c)(7) of this section''; and 
removing the sentence, ``The additional 30-day period specified

[[Page 41760]]

in paragraph (c)(7) of this section is an extension for the submission 
of the auditor's statement only and does not affect the date by which 
the appeal data must be submitted.''
    E. Revising paragraphs (c)(1)(ii), (c)(2), and (c)(7).
    F. In paragraphs (e)(1)(ii)(A), (e)(1)(ii)(B), (f)(1)(ii)(A), and 
(f)(1)(ii)(B), removing the number ``270'' and adding, in its place, 
``360''.
    G. In paragraphs (e)(3) and (f)(3), removing ``270 days'' and 
adding, in its place, ``360 days (or for 270 days, if the borrower's 
delinquency began before October 7, 1998)''.
    H. In paragraph (h)(2)(ii), adding, at the end of the paragraph, 
``In excluding loans from the calculations of these rates, the 
Secretary removes them from both the number of students who entered 
repayment and the number of students who defaulted.''
    I. In paragraph (h)(2)(iii), removing the number ``270'' and 
adding, in its place, ``360''.
    J. In the introductory language for paragraph (h)(3)(ii)(B), 
removing the words ``with a representative sample'' and adding, in 
their place, ``with access, for a reasonable period of time not to 
exceed 30 days, to a representative sample''; and removing the words 
``records submitted by the lender to the guaranty agency to support the 
lender's submission of a default claim and included in the claim file'' 
and adding, in their place, ``collection and payment history records 
provided to the guaranty agency by the lender and used by the guaranty 
agency in determining whether to pay a claim on a defaulted loan''.
    K. In the introductory language for paragraph (h)(3)(iii)(B), 
removing the words ``with a representative sample'' and adding, in 
their place, ``with access, for a reasonable period of time not to 
exceed 30 days, to a representative sample''; and removing the words 
``records maintained by the Department's Direct Loan Servicer with 
respect to the servicing and collecting of delinquent loans prior to 
the default'' and adding, in their place, ``collection and payment 
history records maintained by the Department's Direct Loan Servicer 
that are used in determining an institution's Direct Loan Program 
cohort rate or weighted average cohort rate''.
    L. Revising paragraph (j)(1)(ii).
    M. Removing paragraph (j)(1)(iii).
    N. Redesignating paragraphs (j)(2), (j)(3), (j)(4), (j)(5), and 
(j)(7) as paragraphs (j)(3)(i), (j)(3)(ii), (j)(3)(iii), (j)(3)(iv), 
and (j)(3)(v), respectively.
    O. Redesignating paragraph (j)(6) as (j)(2).
    P. In the redesignated paragraph (j)(2), removing the cross-
reference ``(h)(1)'' and adding, in its place, ``(j)(1)''.
    Q. In the redesignated paragraph (j)(3)(i), removing the number 
``30'' and adding, in its place, ``45''.
    R. In the redesignated paragraph (j)(3)(ii), removing the citation 
``(h)(2)'' and adding, in its place, ``(j)(3)(i)''.
    S. In the redesignated paragraph (j)(3)(v), removing the citation 
``(d)(1)'' and adding, in its place, ``(c)(1)(i)''; removing the word 
``preliminary'' and adding, in its place, ``draft''; and removing the 
citation ``(h)'' and adding, in its place, ``(j)(3)''.
    T. Adding a new paragraph (j)(4).
    U. Adding a new paragraph (k).


Sec. 668.17  Default reduction and prevention measures.

    (a) * * *
    (1)(i) If the Secretary calculates an FFEL Program cohort default 
rate, Direct Loan Program cohort rate, or weighted average cohort rate 
for an institution, the Secretary notifies the institution of that 
rate.
    (ii) If an institution has an FFEL Program cohort default rate, 
Direct Loan Program cohort rate, or weighted average cohort rate of 10 
percent or more, the Secretary includes a copy of the supporting data 
used in the calculation of the rate with the notice of the rate.
    (iii) An institution with an FFEL Program cohort default rate, 
Direct Loan Program cohort rate, or weighted average cohort rate of 
less than 10 percent may request a copy of the supporting data used in 
the calculation of the rate. The institution's request must be sent to 
the Secretary within 10 working days of receiving the Secretary's 
notice. Upon receiving the institution's request, the Secretary sends a 
copy of the data to the institution.
* * * * *
    (b) * * *
    (4) If an institution loses eligibility to participate in the FFEL 
or Direct Loan Program under this section, it also loses eligibility to 
participate in the Federal Pell Grant Program for the same period of 
time, except that the institution may continue to participate in the 
Federal Pell Grant Program if the Secretary determines that the 
institution--
    (i) Was ineligible to participate in the FFEL and Direct Loan 
programs before October 7, 1998, and the institution's eligibility was 
not reinstated;
    (ii) Requested in writing, before October 7, 1998, to withdraw its 
participation in the FFEL and Direct Loan programs, and the institution 
did not subsequently re-apply to participate; or
    (iii) Has not certified an FFEL loan or originated a Direct Loan on 
or after July 7, 1998.
    (5) An institution whose participation in the FFEL, Direct Loan, or 
Federal Pell Grant Program ends under paragraph (a)(3), (b)(1), (b)(2), 
or (b)(4) of this section may not participate in that program until the 
institution--
    (i) Demonstrates to the Secretary that it meets all requirements 
for participation in the FFEL, Direct Loan, or Federal Pell Grant 
Program;
    (ii) Has paid any amount owed to the Secretary under paragraph 
(b)(6)(ii)(B) of this section or is meeting that obligation under an 
agreement satisfactory to the Secretary; and
    (iii) Executes a new agreement with the Secretary for participation 
in that program following the period described in paragraph (b)(3) of 
this section.
    (6)(i) An institution may, notwithstanding 34 CFR 668.26, continue 
to participate in the FFEL, Direct Loan, and Federal Pell Grant 
programs until the Secretary issues a decision on the institution's 
appeal if the Secretary receives an appeal that is complete, accurate, 
and timely in accordance with paragraph (c) of this section; or it may 
suspend its participation during the appeal.
    (ii) If an institution continues to participate in the FFEL or 
Direct Loan Program under paragraph (b)(6)(i) of this section, and the 
institution's appeal of its loss of participation is unsuccessful--
    (A) The Secretary estimates the amount of interest, special 
allowance, reinsurance, and any related or similar payments made by the 
Secretary (or which the Secretary is obligated to make) on any FFEL or 
Direct Loan Program loan for which the institution certified and 
delivered or originated and disbursed funds during the period in which 
the institution would have been otherwise ineligible to certify and 
deliver or originate and disburse those funds, if it had not appealed;
    (B) The Secretary excludes from the estimate calculated under 
paragraph (b)(6)(ii)(A) of this section any amount that is attributable 
to funds delivered or disbursed by the institution more than 45 
calendar days after the date on which the institution submitted its 
completed appeal to the Secretary; and
    (C) The institution must pay the Secretary the amount estimated 
under paragraph (b)(6)(ii) of this section within 45 days of the date 
of the Secretary's notification, unless--
    (1) The institution files an appeal under the procedures 
established in subpart H of this part; or

[[Page 41761]]

    (2) The Secretary permits a longer repayment period.
    (iii) An institution may also continue to participate in the FFEL 
Program or Direct Loan Program if it is in compliance with paragraph 
(k) of this section.
    (c) * * *
    (1) * * *
    (ii) The institution meets one of the following exceptional 
mitigating circumstances:
    (A)(1) The institution's participation rate index, as determined 
under paragraph (c)(1)(ii)(A)(2) of this section, is equal to or less 
than 0.0375 for any of the 3 most recent fiscal years for which data 
are available.
    (2) For the purpose of (c)(1)(ii)(A)(1) of this section, an 
institution's participation rate index for a fiscal year is determined 
by multiplying its FFEL Program cohort default rate, Direct Loan 
Program cohort rate, or weighted average cohort rate for that fiscal 
year by the percentage of its regular students, as defined in 34 CFR 
600.2, who--
    (i) Were enrolled on at least a half-time basis during any part of 
a 12-month period ending during the 6 months immediately preceding the 
fiscal year for which the cohort of borrowers (used to calculate the 
institution's FFEL Program cohort default rate, Direct Loan Program 
cohort rate, or weighted average cohort rate) is determined; and
    (ii) Received an FFEL or Direct Loan for attendance at the 
institution for a loan period that coincides with any part of the same 
12-month period.
    (B)(1) If in the opinion of an independent auditor, as submitted 
under paragraph (c)(7) of this section, the institution's economically 
disadvantaged rate is two-thirds or more, as determined under paragraph 
(c)(1)(ii)(B)(2) of this section; and
    (i) If it offers an associate, baccalaureate, graduate or 
professional degree, the institution's completion rate is 70 percent or 
more, as determined under paragraph (c)(1)(ii)(B)(3) of this section; 
or
    (ii) If it does not offer an associate, baccalaureate, graduate or 
professional degree, the institution's placement rate is 44 percent or 
more, as determined under paragraph (c)(1)(ii)(B)(4) of this section.
    (2) For the purpose of (c)(1)(ii)(B)(1) of this section, an 
institution's economically disadvantaged rate is the percentage of its 
students, enrolled on at least a half-time basis in an eligible program 
at the institution during any part of a 12-month period that ended 
during the 6 months immediately preceding the fiscal year for which the 
cohort of borrowers (used to calculate the institution's FFEL Program 
cohort default rate, Direct Loan Program cohort rate, or weighted 
average cohort rate) is determined, who--
    (i) Are eligible to receive a Federal Pell Grant award of at least 
one-half the maximum Federal Pell Grant award for which the student 
would be eligible based on the student's enrollment status; or
    (ii) Have an adjusted gross income that, if added to the adjusted 
gross income of the student's parents (unless the student is an 
independent student), is less than the poverty level as determined by 
the Department of Health and Human Services.
    (3) For the purpose of (c)(1)(ii)(B)(1) of this section, an 
institution's completion rate is the percentage of its regular 
students, initially enrolled on a full-time basis in an eligible 
program and scheduled to complete their programs, as described in 
paragraph (c)(2) of this section, during the same 12-month period used 
to determine its economically disadvantaged rate under paragraph 
(c)(1)(ii)(B)(2) of this section, who--
    (i) Completed the educational programs in which they were enrolled;
    (ii) Transferred from the institution to a higher level educational 
program;
    (iii) Remained enrolled and making satisfactory progress toward 
completion of the student's educational programs at the end of the 12-
month period; or
    (iv) Entered active duty in the Armed Forces of the United States 
within 1 year after their last day of attendance at the institution.
    (4)(i) Except as provided in paragraph (c)(1)(ii)(B)(4)(ii) of this 
section, for the purpose of (c)(1)(ii)(B)(1) of this section, an 
institution's placement rate is the percentage of its former students, 
as described in paragraph (c)(1)(ii)(B)(4)(iii) of this section, who 
are employed, in an occupation for which the institution provided 
training, on the date following 1 year after their last date of 
attendance at the institution; were employed, in an occupation for 
which the institution provided training, for at least 13 weeks before 
the date following 1 year after their last date of attendance at the 
institution; or entered active duty in the Armed Forces of the United 
States within 1 year after their last date of attendance at the 
institution.
    (ii) If a former student's employer is the institution, the student 
is not considered employed for the purposes of paragraph (c)(1)(ii)(B) 
of this section.
    (iii) The former students who are used to determine an 
institution's placement rate under paragraph (c)(1)(ii)(B)(4) of this 
section include only students who were initially enrolled in eligible 
programs on at least a half-time basis; were originally scheduled, at 
the time of enrollment, to complete their educational programs during 
the same 12-month period used to determine the institution's 
economically disadvantaged rate under paragraph (c)(1)(ii)(B)(2) of 
this section; and remained in the program beyond the point at which a 
student would have received a 100 percent tuition refund from the 
institution. A student is not included in the calculation of the 
placement rate if that student, on the date that is 1 year after the 
student's scheduled completion date, remains enrolled in the same 
program at the institution and is making satisfactory progress.
    (C) At least two of the rates that result in a loss of eligibility 
under paragraph (a)(3), (b)(1), or (b)(2) of this section--
    (1) Are calculated using data for the 3 most recent fiscal years, 
pursuant to paragraph (d)(1)(i)(B), (e)(1)(i)(B), (e)(1)(ii)(B), 
(f)(1)(i)(B), or (f)(1)(ii)(B) of this section; and
    (2) Would be less than 25 percent if calculated using data for only 
the fiscal year for which the institution received its rate, pursuant 
to paragraph (d)(1)(i)(A), (e)(1)(i)(A), (e)(1)(ii)(A), (f)(1)(i)(A), 
or (f)(1)(ii)(A) of this section, respectively.
    (D) During the 3 most recent fiscal years for which the Secretary 
has determined the institution's rate, a total of thirty or fewer 
borrowers entered repayment on a loan or loans included in a 
calculation of the institution's rate.
    (2) For the purposes of the completion rate and placement rate 
described in paragraphs (c)(1)(ii)(B)(3) and (4) of this section, a 
student is scheduled to complete an educational program on the date on 
which--
    (i) If the student is initially enrolled full-time, the student 
will have been enrolled in the program for the amount of time specified 
in the institution's enrollment contract, catalog, or other materials, 
for completion of the program by a full-time student; or
    (ii) If the student is initially enrolled less than full-time, the 
student will have been enrolled in the program for the amount of time 
that it would take the student to complete the program if the student 
remained enrolled at that level of enrollment throughout the program.
* * * * *
    (7)(i) An institution that appeals on the grounds that it meets the 
exceptional mitigating circumstances criteria in paragraph 
(c)(1)(ii)(B) of this section must submit to the Secretary--
    (A) Within 30 calendar days of the date that it was notified of its 
loss of

[[Page 41762]]

participation, notice of its intent to appeal under that paragraph, in 
a format prescribed by the Secretary; and
    (B) Within 60 calendar days of the date that it was notified of its 
loss of participation, the independent auditor's compliance attestation 
report, as described in paragraph (c)(7)(ii) of this section, including 
the specific institution's management's written assertions for which 
the independent auditor opines, all in a format prescribed by the 
Secretary.
    (ii)(A) The report of the independent auditor, required for an 
institution's appeal under paragraph (c)(1)(ii)(B) of this section, 
must state whether, in the auditor's opinion, the institution's 
management's assertion met the exceptional mitigating circumstances 
criteria specified in paragraph (c)(1)(ii)(B) of this section, as 
provided to the auditor to examine, and is fairly stated in all 
material respects.
    (B) The engagement that forms the basis of the independent 
auditor's opinion must be an examination-level compliance attestation 
engagement performed in accordance with the American Institute of 
Certified Public Accountant's (AICPA) Statement on Standards for 
Attestation Engagements, Compliance Attestation (AICPA, Professional 
Standards, vol. 1, AT sec. 500), as amended, and Government Auditing 
Standards issued by the Comptroller General of the United States.
    (iii) The Secretary denies an institution's appeal under paragraph 
(c)(1)(ii)(B) of this section if--
    (A) The independent auditor does not opine that the institution 
meets the criteria for the appeal; or
    (B) The Secretary determines that the independent auditor's report 
or institution's management's assertion described in paragraph 
(c)(7)(i) of this section--
    (1) Demonstrates that the independent auditor's report or 
examination does not meet the requirements of this section; or
    (2) Is contradicted or otherwise refuted, to an extent that would 
render the auditor's report unacceptable, by information maintained by 
the Secretary.
* * * * *
    (j) * * *
    (1) * * *
    (ii) The Secretary's notice to an institution of its draft cohort 
default rate includes a copy of the supporting data used in the 
calculation of that draft rate.
* * * * *
    (4)(i) Within 30 calendar days of receiving the draft default rate 
information from the Secretary, an institution may challenge an 
anticipated loss of participation under (a)(3), (b)(1), or (b)(2) of 
this section using the criteria in Sec. 668.17(c)(1)(ii)(A).
    (ii) In meeting the requirements of Sec. 668.17(c)(1)(ii)(A) during 
a challenge under this paragraph, the institution's draft rate is 
considered to be its most recent rate.
    (iii) The Secretary notifies an institution of the determination on 
its challenge before the institution's FFEL Program cohort default 
rate, Direct Loan Program cohort rate, or weighted average cohort rate 
is published.
    (k) Special institutions. (1) Applicability of requirements. For 
each 1-year period beginning on July 1 of 1999, 2000, or 2001, the 
Secretary may determine that the provisions of paragraph (a)(3), 
(b)(1), or (b)(2) of this section and the provisions of 34 CFR 
668.16(m) do not apply to a historically black college or university 
within the meaning of section 322(2) of the HEA, a tribally controlled 
community college within the meaning of section 2(a)(4) of the Tribally 
Controlled Community College Assistance Act of 1978, or a Navajo 
community college under the Navajo Community College Act if the 
institution submits to the Secretary--
    (i) By July 1, 1999--
    (A) A default management plan; and
    (B) A certification that the institution has engaged an independent 
third party, as described in paragraph (k)(3) of this section; and
    (ii) By July 1, 2000 and 2001--
    (A) Evidence that it has implemented its default management plan 
during the preceding 1-year period;
    (B) Evidence that it has made substantial improvement in the 
preceding 1-year period in the institution's FFEL Program cohort 
default rate, Direct Loan Program cohort rate, or weighted average 
cohort rate; and
    (C) A certification that it continues to engage an independent 
third party, as described in paragraph (k)(3) of this section.
    (2) Default management plan. (i) An institution's default 
management plan must provide reasonable assurance that it will, no 
later than July 1, 2002, have an FFEL Program cohort default rate, 
Direct Loan Program cohort rate, or weighted average cohort rate that 
is less than 25 percent. Measures that an institution must take to 
provide this assurance include but are not limited to--
    (A) Establishing a default management team by engaging the chief 
executive officer and relevant senior executive officials of the 
institution and enlisting the support of representatives from offices 
other than the financial aid office;
    (B) Identifying and allocating the personnel, administrative, and 
financial resources appropriate to implement the default management 
plan;
    (C) Defining the roles and responsibilities of the independent 
third party;
    (D) Defining evaluation methods and establishing a data collection 
system for measuring and verifying relevant default management 
statistics, including a statistical analysis of the borrowers who 
default on their loans;
    (E) Establishing annual targets for reductions in the institution's 
rate; and
    (F) Establishing a process to ensure the accuracy of the 
institution's rate.
    (ii) An institution's default management plan must be acceptable to 
the Secretary, after consideration of that institution's history, 
resources, dollars in default, and targets for default reduction.
    (iii) If the Secretary determines that an institution's proposed 
default management plan is unacceptable, the institution should consult 
with the Secretary to develop a revised plan, and the institution must 
submit the revised plan to the Secretary within 30 calendar days of 
notice from the Secretary that the plan is unacceptable.
    (iv) If the Secretary determines, based on evidence submitted under 
paragraph (k)(1)(ii) of this section, that an institution's default 
management plan is no longer acceptable, the institution must develop a 
revised plan in consultation with the Secretary, and it must submit the 
revised plan to the Secretary within 60 calendar days of notice from 
the Secretary.
    (v) A sample default management plan is provided in appendix H to 
this part. The sample is included to illustrate additional components 
of an acceptable default management plan. Because institutions' family 
income profiles, student borrowing patterns, histories, resources, 
dollars in default, and targets for default reduction are different, an 
institution must consider its own, individual circumstances in 
developing and submitting its plan.
    (3) Independent third party. (i) An independent third party may be 
any individual or entity that--
    (A) Provides technical assistance in developing and implementing 
the institution's default management plan; and
    (B) Is not substantially controlled by a person who also exercises 
substantial control over the institution.
    (ii) An independent third party need not be paid by the institution 
for its services.

[[Page 41763]]

    (iii) The services of a lender, guaranty agency, or secondary 
market as an independent third party under paragraph (k) of this 
section are not considered to be inducements under Sec. 682.200 or 
Sec. 682.401(e).
    (4) Substantial improvement.
    (i) For purposes of this section, an institution's substantial 
improvement is determined based upon--
    (A) A reduction in the institution's most recent draft or published 
FFEL Program cohort default rate, Direct Loan Program cohort rate, or 
weighted average cohort rate;
    (B) An increase in the percentage of delinquent borrowers who avoid 
default by using deferments, forbearances, and job placement 
assistance;
    (C) An increase in the academic persistence of student borrowers;
    (D) An increase in the percentage of students pursuing graduate or 
professional study;
    (E) An increase in the percentage of borrowers for whom a current 
address is known;
    (F) An increase in the percentage of delinquent borrowers contacted 
by the institution;
    (G) The implementation of alternative financial aid award policies 
and development of financial resources that reduce the need for student 
borrowing; or
    (H) An increase in the percentage of accurate and timely enrollment 
status changes submitted by the institution to the National Student 
Loan Data System (NSLDS) on the Student Status Confirmation Report 
(SSCR).
    (ii) When making a determination of an institution's substantial 
improvement, the Secretary considers the institution's performance in 
light of--
    (A) Its history, resources, dollars in default, targets for default 
reduction;
    (B) Its level of effort in meeting the terms of its approved 
default management plan during the previous 1-year period; and
    (C) Any other mitigating circumstance at the institution during the 
1-year period.
    (5) Secretary's determination. (i) If the Secretary determines that 
an institution is in compliance with paragraph (k) of this section, 
then the provisions of paragraph (a)(3), (b)(1), or (b)(2) of this 
section and the provisions of 34 CFR 668.16(m) do not apply to the 
institution for that 1-year period, beginning on July 1 of 1999, 2000, 
or 2001.
    (ii) If the Secretary determines that an institution is not in 
compliance with paragraph (k) of this section, the institution is 
subject to the provisions of paragraph (a)(3), (b)(1), or (b)(2) of 
this section and the provisions of 34 CFR 668.16(m). The institution's 
participation in the FFEL and Direct Loan programs ends on the date 
that the institution receives notice of the Secretary's determination.
    3. A new appendix H is added to part 668 to read as follows:

Appendix H to Part 668--Default Management Plans for Special 
Institutions

    This appendix is provided as a sample plan for those schools 
developing a default management plan in accordance with 34 CFR 
668.17(k). It describes some measures schools may find helpful in 
reducing the number of students that default on federally funded 
loans. These are not the only measures a school could implement when 
developing a default management plan. In developing a default 
management plan, each school should consider its own history, 
resources, dollars in default, and targets for default reduction to 
determine which activities will result in the most benefit to the 
students and the school.

Core Default Reduction Strategies (from Sec. 668.17(k)(2)(i))

    (1) Establish a default management team by engaging the chief 
executive officer and relevant senior executive officials of the 
school and enlisting the support of representatives from offices 
other than the financial aid office.
    (2) Identify and allocate the personnel, administrative, and 
financial resources appropriate to implement the default management 
plan.
    (3) Define the roles and responsibilities of the independent 
third party.
    (4) Define evaluation methods and establish a data collection 
system for measuring and verifying relevant default management 
statistics, including a statistical analysis of the borrowers who 
default on their loans.
    (5) Establish annual targets for reductions in the school's 
rate.
    (6) Establish a process to ensure the accuracy of the school's 
rate.

Additional Default Reduction Strategies

    (1) Enhance the borrower's understanding of his or her loan 
repayment responsibilities through counseling and debt management 
activities.
    (2) Enhance the enrollment retention and academic persistence of 
borrowers through counseling and academic assistance.
    (3) Maintain contact with the borrower after he or she leaves 
the school by using activities such as skip-tracing to locate the 
borrower.
    (4) Track the borrower's delinquency status by obtaining reports 
from lenders and guaranty agencies for FFEL Program loans and from 
the Secretary for Direct Loan Program loans.
    (5) Enhance student loan repayments through counseling the 
borrower on loan repayment options and facilitating contact between 
the borrower and lender for FFEL Program loans and the borrower and 
the Secretary for Direct Loan Program loans.
    (6) Assist a borrower who is experiencing difficulty in finding 
employment through career counseling, job placement assistance, and 
facilitating unemployment deferments.
    (7) Identify and implement alternative financial aid award 
policies and develop alternative financial resources that will 
reduce the need for student borrowing in the first 2 years of 
academic study.
    (8) Familiarize the parent, or other adult relative or guardian, 
with the student's debt profile, repayment obligations, and loan 
status by increasing, whenever possible, the communication and 
contact with the parent or adult relative or guardian.

Defining the Roles and Responsibilities of Independent Third Party

    (1) Specifically define the role of the independent third party.
    (2) Specify the scope of work to be performed by the independent 
third party.
    (3) Tie the receipt of payments, if required, to the performance 
of specific tasks.
    (4) Assure that all the required work is satisfactorily 
completed.

Statistics for Measuring Progress

    (1) The number of students enrolled at the school during each 
fiscal year.
    (2) The average amount borrowed by a student each fiscal year.
    (3) The number of borrowers scheduled to enter repayment each 
fiscal year.
    (4) The number of enrolled borrowers that received default 
prevention counseling services each fiscal year.
    (5) The average number of contacts the school or its agent had 
with a borrower who was in deferment/forbearance or repayment status 
during each fiscal year.
    (6) The number of borrowers at least 60 days delinquent each 
fiscal year.
    (7) The number of borrowers who defaulted in each fiscal year.
    (8) The type, frequency, and results of activities performed in 
accordance with the default management plan.

[FR Doc. 99-19518 Filed 7-29-99; 8:45 am]
BILLING CODE 4000-01-U