[Federal Register Volume 64, Number 208 (Thursday, October 28, 1999)]
[Rules and Regulations]
[Pages 58298-58315]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-28168]



[[Page 58297]]

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Part VII





Department of Education





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34 CFR Part 674



Federal Perkins Loan Program; Final Rule

  Federal Register / Vol. 64, No. 208 / Thursday, October 28, 1999 / 
Rules and Regulations  

[[Page 58298]]



DEPARTMENT OF EDUCATION

34 CFR Part 674

RIN 1845-AA05


Federal Perkins Loan Program

AGENCY: Department of Education.

ACTION: Final regulations.

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SUMMARY: The Secretary amends the Federal Perkins Loan Program 
regulations. The regulations implement changes to the Higher Education 
Act of 1965, as amended (HEA), resulting from the Higher Education 
Amendments of 1998 (1998 Amendments). These final 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 final regulations 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: Effective Date: These regulations are effective July 1, 2000.
    Implementation Date: The Secretary has determined, in accordance 
with section 482(c)(2)(A) of the HEA, that institutions that 
participate in the Federal Perkins Loan Program may, at their 
discretion, choose to implement the provisions of Secs. 674.2, 
674.5(c), 674.9, 674.16, 674.33(f), 674.41, 674.42, and 674.45 in these 
final regulations, on or after October 28, 1999. For further 
information see ``Implementation Date of These Regulations'' under the 
SUPPLEMENTARY INFORMATION: Section of this preamble.

FOR FURTHER INFORMATION CONTACT: Gail McLarnon, Program Specialist, 
Program Development Division, Office of Student Financial Assistance, 
400 Maryland Avenue, SW, ROB-3, Room 3045, Washington, D.C. 20202-5449. 
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 
alternative format (e.g., Braille, large print, audiotape, or computer 
diskette) on request to the contact person listed in the preceding 
paragraph.

SUPPLEMENTARY INFORMATION: These regulations implement the Higher 
Education Amendments of 1998 (Pub. L. 105-244), enacted October 7, 
1998.
    On July 29, 1999, the Secretary published a notice of proposed 
rulemaking (NPRM) for the Federal Perkins Loan Program regulations in 
the Federal Register (64 FR 41231). In the preamble to the NPRM, the 
Secretary discussed the following major proposed changes:
    Amending Sec. 674.2 to add a definition of the term ``satisfactory 
repayment arrangements'' (page 41233).
    Amending Sec. 674.5 to establish, effective with award year 2000-
2001, a default penalty of zero Federal Capital Contribution for 
institutions with a cohort default rate of 25 percent or higher and a 
new default penalty that terminates the eligibility of an institution 
to participate in the Federal Perkins Loan Program if the institution 
has a cohort default rate of 50 percent or higher for the three most 
recent years for which data are available. The Secretary also discussed 
amending Sec. 674.5 to allow an institution to exclude certain loans 
from its cohort default rate calculation (pages 41233-41234).
    Removing and reserving Sec. 674.7 in accordance with the 
elimination of the Expanded Lending Option.
    Amending Sec. 674.9 to authorize the use of the same criteria that 
remove a borrower from an institution's cohort default rate to re-
establish a borrower's eligibility for additional Federal Perkins Loans 
(pages 41234-41235).
    Amending Sec. 674.12 to increase annual maximum loan amounts and 
increase the aggregate maximum loan amounts allowable for an eligible 
student to levels formerly authorized under the Expanded Lending Option 
(page 41235).
    Amending Secs. 674.16, 674.31, and 674.45 to update and clarify 
credit bureau reporting requirements with which an institution must 
comply (page 41235 and page 41238).
    Amending Sec. 674.31 to exclude from a borrower's initial grace 
period any period, not to exceed three years, during which a borrower 
who is a member of an Armed Forces reserve component is called or 
ordered to active duty (page 41235).
    Amending Sec. 674.33 to authorize institutions to establish an 
incentive repayment program to reduce defaults and replenish their 
Federal Perkins Loan revolving fund. Also amending Sec. 674.33 to 
establish a closed school discharge for Federal Perkins Loan borrowers 
who are unable to complete their programs of study due to an 
institution's closure (pages 41235-41236).
    Amending Sec. 674.34 to extend the deferment benefits in this 
section to all borrowers regardless of the terms of the borrower's 
promissory note or when the loan was made (page 41236).
    Amending Sec. 674.39 to require institutions to establish a loan 
rehabilitation program for all defaulted Federal Perkins Loan borrowers 
(pages 41236-41237).
    Amending Secs. 674.41, 674.42 and 674.45 to require that 
institutions participating in the Federal Perkins Loan Program provide 
borrowers with information on the availability of the Student Loan 
Ombudsman's office (pages 41237-41238).
    Amending Sec. 674.42 to facilitate the use of electronic means in 
providing personalized exit counseling 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 (pages 41237-41238).
    Amending Sec. 674.47 to authorize an institution, until July 1, 
2002, to charge its revolving 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 (page 41238).
    Amending Sec. 674.49 to reflect changes made to section 523(a)(8) 
of the Bankruptcy Code that eliminate a borrower's ability to have a 
student loan discharged on the ground that the loan has been in 
repayment for seven years or more (page 41238).
    Amending Secs. 674.53, 674.56, 674.57, 674.58, and 674.60 to extend 
the cancellation benefits authorized by these sections, for eligible 
service performed on or after October 7, 1998, to all borrowers with a 
loan made under the Federal Perkins Loan program regardless of the date 
the loan was made or the terms of the borrower's promissory note (pages 
41238-41239).

Implementation Date of These Regulations

    Section 482(c) of the Higher Education Act of 1965, as amended (20 
U.S.C. 1089(c)) requires that regulations affecting programs under 
title IV of the Act be published in final form by November 1 prior to 
the start of the award year in which they apply. However, that section 
also permits the Secretary to designate any regulation as one that an 
entity subject to the regulation may choose to implement earlier. If 
the Secretary designates a regulation for early implementation, he may 
specify when and under what conditions the entity may implement it. 
Under this authority, the Secretary has

[[Page 58299]]

designated the following regulations for early implementation:
    Section 674.2--Upon publication, institutions may implement the 
``satisfactory repayment arrangements'' as defined in this provision.
    Section 674.5(c)(3)--Upon publication, institutions may exclude 
certain loans from its cohort default rate calculation.
    Section 674.9--Upon publication, institutions may use the criterion 
that removes a borrower from its cohort default rate to re-establish a 
borrower's eligibility for Perkins Loans.
    Sections 674.16, 674.31 and 674.45--Upon publication, institutions 
may implement the credit bureau reporting requirements contained in 
these sections.
    Section 674.33(f)--Upon publication, institutions may implement 
incentive repayment programs.
    Sections 674.41, 674.42 and 674.45--Upon publication, institutions 
may provide borrowers with information on the availability of the 
Student Loan Ombudsman's office.
    These final regulations contain changes from the NPRM that are 
explained in the Analysis of Comments and Changes that follow.

Analysis of Comments and Changes

    The regulations in this document were developed through the use of 
negotiated rulemaking. Section 492 of the Higher Education Act 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 proposed regulations 
must conform to agreements resulting from the negotiated rulemaking 
process unless the Secretary reopens that process or explains any 
departure from the agreements to the negotiated rulemaking 
participants.
    These regulations were published in proposed form on July 29, 1999, 
in conformance with the consensus of the negotiated rulemaking 
committee. Under the committee's protocols, consensus meant that no 
member of the committee dissented from the agreed-upon language. The 
Secretary invited comments on the proposed regulations by September 15, 
1999, and several comments were received. An analysis of the comments 
and of the changes in the proposed regulations follows.
    We discuss substantive issues under the sections of the regulations 
to which they pertain. Generally, we do not address technical and other 
minor changes--and suggested changes the law does not authorize the 
Secretary to make.

General Comment

    Comment: We received 28 comments on the Federal Perkins Loan 
Program NPRM published July 29, 1999. The comments were generally 
supportive. However, one commenter stated that any changes made by the 
Secretary in the Federal Perkins Loan program final regulations that 
represent a substantive departure from the proposed regulations 
published on July 29, 1999, would be viewed as a failure to honor the 
consensus reached by Committee II, a violation of the good faith with 
which members of Committee II engaged in negotiated rulemaking and 
would be detrimental to future negotiations.
    Discussion: The 1998 Amendments amended section 492 of the HEA to 
require that all Title IV proposed regulations be subject to the 
negotiated rulemaking process. While this change requires the Secretary 
to publish proposed regulations that conform to agreements resulting 
from a negotiated rulemaking process, the 1998 Amendments did not 
change the process by which final regulations are promulgated. All 
proposed regulations continue to be subject to a public comment period, 
as required by the Administrative Procedure Act, and may be changed as 
a result of our full and careful consideration of the comments we 
receive from the public on an NPRM, regardless of agreements reached on 
proposed regulations during the negotiated rulemaking process.

Section 674.2  Definitions

    Comment: One commenter expressed the view that the proposed 
definition of ``satisfactory repayment arrangements,'' which requires 
the borrower to make six on-time, consecutive, monthly payments on a 
defaulted loan to re-establish Title IV HEA eligibility, should specify 
how an institution determines the amount of the six monthly payments 
the borrower must make.
    Discussion: The concept of satisfactory repayment arrangements is 
not new to the Federal Perkins Loan Program. The Federal Perkins Loan 
program regulations have contained a definition of satisfactory 
repayment arrangements since July 1, 1995. The regulatory definition 
required that a defaulted borrower either repay the loan in full, or 
execute a new written repayment agreement and make one payment each 
month for six consecutive months to re-establish title IV eligibility. 
We disagree that the regulations should specify how an institution 
determines the amount of the six monthly payments the borrower must 
make to re-establish Title IV eligibility. However, it has been our 
long-standing interpretation that the institution would calculate the 
amount due for each of the six payments consistent with an overall 
payment schedule that would allow the borrower to satisfy the 
outstanding balance on the loan in the time remaining in the original 
10-year repayment period. The new written repayment agreement 
facilitated this calculation.
    A similar definition of satisfactory repayment arrangements was 
codified in law by the 1998 Amendments but does not contain the 
requirement that the borrower execute a new written repayment agreement 
when making satisfactory repayment arrangements. Regardless of that 
fact, it remains our interpretation that in determining the amount of 
the six payments a borrower must make to re-establish Title IV 
eligibility, an institution must calculate a payment amount consistent 
with a payment schedule that satisfies the total amount due on the loan 
within the time remaining in the original ten-year repayment period, 
especially absent statutory language in the 1998 Amendments that 
specifies that the monthly payment amount as determined by the 
institution be reasonable and affordable based on the borrower's total 
financial circumstances, as is the case in the Federal Family Education 
Loan (FFEL) and the William D. Ford Federal Direct Loan (Direct Loan) 
programs. We believe the definition of satisfactory repayment 
arrangements, as proposed, is the best reflection of both the statute 
and our long-standing interpretation of the payment amount required by 
a borrower.
    Changes: None.

Section 674.5  Federal Perkins Loan Program cohort default rate and 
penalties

    Comment: One commenter objected to the elimination of the 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. The commenter felt that this change creates a 
disincentive for institutions to collect on defaulted loans.
    Discussion: We appreciate the commenter's concern. However, the 
elimination of the graduated default penalties is required by the 1998

[[Page 58300]]

Amendments. The final regulations reflect this statutory change.
    Changes: None.
    Comment: We received several comments regarding Sec. 674.5(a)(2), 
which reflects a new default penalty that terminates an institution's 
eligibility to participate in the Federal Perkins Loan Program if it 
has a cohort default rate of 50 percent or higher for the three most 
recent years for which data are available. One commenter recommended 
that we specify in regulation that an institution's cohort default rate 
must equal or exceed 50 percent for each of the three most recent 
``consecutive'' years for which cohort default data is available. One 
commenter suggested that the regulation clearly state that an 
institution does not lose eligibility to participate in the Federal 
Perkins Loan program if, upon appealing a determination of 
ineligibility, any one of the three rates used to make that 
determination is found to be below 50 percent. Lastly, one commenter 
suggested that we clarify in the regulations that an institution loses 
its eligibility to participate only in the Federal Perkins Loan program 
if its Perkins Loan cohort default rates meet the criteria set forth in 
this section.
    Discussion: We do not agree that the word ``consecutive'' should be 
added to the regulatory language. Although the regulations do not 
contain the word ``consecutive'' in describing the three years of 
cohort default data that will be used by the Secretary to make a 
determination of ineligibility, it is our intent to use consecutive 
year cohort default rate data as long as it is available. However, we 
believe that a requirement that we use consecutive year data could 
prevent the Department from making a determination of ineligibility, 
thus thwarting legislative intent, if either the Department or an 
institution is unable to calculate an institution's cohort default rate 
in any given year because of unforeseen circumstances. We believe that 
language requiring the use of an institution's cohort default rate data 
for each of the three most recent years for which data are available 
better reflects statutory intent.
    As to the request for clarification regarding the appeals process 
and the loss of Federal Perkins Loan program eligibility, the language 
in Sec. 674.5(a)(2)(i)(A) clearly states that an institution will not 
lose eligibility if, as a result of an appeal, any one of the three 
cohort rates used to make a determination of ineligibility is below 50 
percent. We also note that the language in Sec. 674.5(a)(2) also 
clearly states that an institution loses eligibility to participate 
only in the Federal Perkins Loan program.
    Changes: None.
    Comment: Two commenters objected to the elimination of the 
provision allowing an institution to exclude improperly serviced loans 
from its cohort default rate.
    Discussion: The elimination of this provision reflects a 1998 
Amendments change. This provision had the perverse effect of rewarding 
an institution for its, or its servicer's, lack of due diligence in 
servicing and collecting its Perkins Loans by allowing the institution 
to remove defaulted borrowers from its cohort default rate.
    Changes: None.
    Comment: We received several comments regarding the exclusion of 
borrowers from an institution's cohort default rate in 
Sec. 674.5(c)(3)(i). One commenter suggested that borrowers who are 
considered paid-in-full as a result of a small balance write-off of 
their loan under Sec. 674.47(h) be referenced in 
Sec. 674.5(c)(3)(i)(C). One commenter urged us to add language allowing 
a school to exclude from its cohort default rate calculation all 
borrowers who have filed for bankruptcy and are in a stay of 
collection. Lastly, one commenter suggested that Sec. 674.5(c)(3)(i)(D) 
be clarified to state that the borrower's status must be less than 240- 
or 270-days past due as a result of receiving a deferment or 
forbearance.
    Discussion: We agree that adding a reference to borrowers whose 
loans have been written off under Sec. 674.47(h) would add clarity to 
the regulations. However, we believe this addition is more 
appropriately added in Sec. 674.5(c)(3)(ii)(D).
    We disagree with the commenter who believes that all borrowers who 
have filed for bankruptcy and are in a stay of collections should be 
excluded from an institution's cohort default rate calculation. During 
the required stay of collection, a loan is considered to be in a 
suspended status. It does not continue to age, although interest 
continues to accrue for which the borrower is responsible. If a 
borrower files a bankruptcy petition that includes a defaulted Perkins 
loan that has not reached a 240- or 270-day past due status, the loan 
will retain its pre-240-or 270-day status and will be excluded from the 
calculation of a school's cohort rate until the bankruptcy proceeding 
has concluded. If the borrower includes a defaulted loan that is more 
than 240 or 270 days past due, the loan will retain its more than 240- 
or 270-day past due status and be included in the calculation of the 
school's cohort default rate. While we realize that an institution is 
unable to contact the borrower during a stay of collections, we believe 
that the time to work those accounts and perform the due diligence 
necessary to return the borrower to repayment is before the borrower 
becomes 240 or 270 days past due.
    We do not agree that additional language specifying that a 
deferment or forbearance must bring the borrower to a pre-240- or 270-
day status is necessary. As currently drafted, the regulations allow 
the institution to exclude a borrower from its cohort calculation if 
the borrower has ``received a deferment or forbearance based on a 
condition that predates the borrower reaching a 240- or 270-day past 
due status.'' The addition of language specifying that the deferment or 
forbearance has brought the borrower to a pre-240- or 270-day status is 
unnecessary.
    Changes: A reference to loans repaid in full in accordance with 
Sec. 674.47(h) has been added to Sec. 674.5(c)(3)(ii)(D).
    Comment: Several commenters objected to the proposal that payments 
obtained through income tax offset, wage garnishment, income or asset 
execution, or pursuant to a judgment should not be considered voluntary 
payments for the purpose of removing borrowers from an institution's 
cohort default rate calculation if the borrower voluntarily makes six 
consecutive payments or voluntarily makes all payments currently due. 
One commenter stated that our definition of voluntary payments is 
unnecessarily harsh and that all payments, regardless of how they are 
made, should be considered voluntary. One commenter noted that a 
borrower's payments are not guaranteed by a judgment--a school must 
still work the account to ensure that payments are made. The commenter 
also noted that many borrowers consider payments obtained through 
income tax offset to take the place of regularly scheduled payments 
that the borrower is already making on their own.
    Discussion: We disagree that payments obtained through income tax 
offset, garnishment, income or asset execution, or pursuant to a 
judgment should be considered voluntary payments made by the borrower 
in order to remove a borrower whose loans are brought current or who 
has made six consecutive monthly payments from an institution's cohort 
default rate calculation. Generally, payments obtained by these methods 
are automatically deducted from the borrower's Federal or state tax 
refund,

[[Page 58301]]

wages, or assets and the borrower has no control or choice in the 
payment process. We continue to believe that the initiation of court 
action to obtain payment on a defaulted loan represents last resort due 
diligence efforts on the part of the school. Payments obtained through 
this process would not have been obtained otherwise and cannot be 
considered voluntary. While we recognize that a school may have to work 
to collect the payments due on some judgment accounts, the required 
payments are nonetheless made as a result of a court order. Further, 
borrowers have no control over a payment applied to their defaulted 
loan as a result of income tax offset regardless of the fact that the 
borrower may already be making payments.
    Changes: None.

Section 674.9  Student Eligibility

    Comment: One commenter felt strongly that restoring eligibility for 
a Federal Perkins Loan to a borrower who meets any of the criteria that 
would remove him or her from an institution's cohort default rate 
calculation is bad public policy.
    Discussion: Although the return of Federal Perkins Loan eligibility 
to a borrower who meets any of the criteria that remove him or her from 
an institution's cohort default rate calculation represents a 
significant departure from past policy, this is a statutory requirement 
enacted as part of the 1998 Amendments.
    Changes: None.
    Comment: One commenter strongly supported our definition of 
``voluntary'' payments for the purpose of a borrower re-establishing 
eligibility for a Perkins Loan under this section.
    Discussion: We appreciate the support of the commenter and believe 
it is an important condition to re-establishing eligibility.
    Changes: None.
    Comment: One commenter suggested that we quantify in 
Sec. 674.9(i)(1) what amount a payment made ``over and above'' a 
payment made pursuant to a judgment must be to qualify as a voluntary 
payment when a school enters into a repayment agreement with the 
borrower on a judgment. For example, if a school has entered into an 
agreement with a borrower that requires $50 monthly payments to satisfy 
a judgment, what payment amount ``over and above'' the $50 payment 
would a borrower be required to make in order for his or her payment to 
be considered voluntary? The commenter believed that specific language 
would clarify the conditions a borrower must satisfy to re-establish 
eligibility.
    Discussion: We do not believe that further clarification of the 
definition of voluntary payment for the purpose of re-establishing a 
defaulted borrower's eligibility for Federal Perkins Loans is 
necessary. However, a payment that is generally equal to the payment 
the borrower is required to make pursuant the judgment will satisfy the 
definition of voluntary in this section. We believe an approach that 
treats borrowers consistently and precludes situations in which one 
borrower might be required to make small payments while another 
borrower might be required to make large payments over and above 
payments made pursuant to a judgment is an important consideration when 
re-establishing eligibility.
    In almost all cases, the terms of a judgment make the whole 
obligation due in full immediately, and any monthly payment arrangement 
that arises is solely by agreement between the borrower and the school. 
In some cases, the borrower and the school negotiate a repayment 
arrangement that is subsequently incorporated in a consent judgment. A 
school is free to agree to any monthly payment that it considers 
reasonable in such an agreed judgment or in a repayment agreement to 
satisfy a judgment. Therefore, we would consider payments over and 
above the amount owed under the judgment itself or the repayment 
agreement already reached to satisfy that judgment to be voluntary 
payments for purposes of reestablishing eligibility for new student 
aid. This level of payment not only represents a good faith effort on 
the part of the borrower to repay the debt in a manner that is neither 
required nor automatic, but also represents a good faith effort on the 
part of the school to replenish its revolving fund and responsibly 
administer the Federal Perkins Loan Program.
    Using the above example, if a school has entered into an agreement 
with a borrower that requires $50 monthly payments on a judgment, we 
would consider a borrower that makes payments of at least $50 to be 
making voluntary payments.
    Changes: None.
    Comment: One commenter objected to having one definition of 
``voluntary'' payments for re-establishing a borrower's eligibility for 
Federal Perkins Loans and another definition of ``voluntary'' payments 
in order to determine which borrowers can be excluded from an 
institution's cohort default rate. The commenter felt that the 
definition of voluntary payments should be consistent within the 
program regulations.
    Discussion: We disagree that the definition of ``voluntary'' 
payments must be consistent within the program regulations. Denying a 
borrower access to additional student financial assistance has far more 
serious consequences than excluding that borrower from an institution's 
cohort default rate. The negotiators agreed that cutting off a 
borrower's access to Federal Perkins Loans had the potential to 
prohibit the borrower from furthering his or her education, securing 
employment and honoring his or her student loan obligations. The 
negotiators also agreed that a borrower who made payments over and 
above the payments made on a judgment was making a good faith effort to 
repay the debt and that those efforts should be recognized.
    Changes: None.
    Comment: One commenter felt that language restricting the 
definition of ``voluntary'' payments to those payments made directly by 
the borrower was too restrictive and that payments made on behalf of 
the borrower should be included as well.
    Discussion: We disagree with the commenter that payments made on 
behalf of the borrower should be included in the definition of 
voluntary payments for the purpose of re-establishing a defaulted 
borrower's eligibility for Federal Perkins Loans. Payments made on 
behalf of the borrower are not payments made directly by the borrower 
and are payments over which the borrower has no control or choice. 
Payments made in this manner cannot be considered voluntary in this 
context.
    Changes: None.

Section 674.12  Loan Maximums

    Comment: All of the comments we received on the new increased loan 
maximums and the use of the aggregate unpaid balance in determining a 
borrower's eligibility for additional loans under the Federal Perkins 
Loan Program were supportive.
    Changes: None.

Section 674.16  Making and disbursing loans

    Comment: Several commenters supported language in this section that 
requires an institution to report to at least one national credit 
bureau information concerning the repayment and collection of the loan 
until the loan is paid in full. One commenter believed that it would be 
a violation of the Fair Credit Reporting Act (FCRA), however, for an 
institution to report on the loan until it is paid in full. Several 
commenters urged the Secretary to work

[[Page 58302]]

with the Federal Trade Commission to amend the FCRA to require consumer 
reporting agencies to make reports containing credit information 
regarding the status of a borrower's Federal Perkins Loan until the 
loan is paid in full rather than for seven years as currently required 
under the FCRA.
    Discussion: The general requirement that an institution report on 
the status of the loan to a consumer reporting agency until it is paid 
in full is not a new requirement under section 463 of the HEA. The 1998 
Amendments did change this section of the HEA and codified many of the 
credit bureau reporting requirements that institutions have been 
required to perform for some time. We should also note that it is not 
now, and has not been, a violation of the FCRA for a consumer reporting 
agency to accept and disseminate information on a loan until the loan 
is paid in full; it was, prior to the 1998 Amendments to section 463, a 
violation of the FCRA for a consumer reporting agency to make reports 
for certain purposes that contain adverse information on accounts for 
more than seven years from the date of the adverse event reported. (The 
1998 Amendments to section 463 the HEA give credit reporting agencies 
the option to make reports containing adverse credit information until 
the loan is paid in full; they do not require it.)
    We will pursue opportunities to work with the Federal Trade 
Commission as they arise to amend the FCRA in ways that support and 
strengthen the repayment of Title IV student loans.
    Changes: None.

Section 674.31  Promissory Note

    Comment: One commenter noted that the promissory note used in the 
Federal Perkins Loan Program does not reflect the new provision in this 
section that excludes 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 from the borrower's initial 
grace period. The commenter requests that we clarify our intentions 
with regard to the development of a new Federal Perkins Loan promissory 
note.
    Discussion: We appreciate the commenter's concern regarding the 
development of a promissory note that contains terms and conditions 
that reflect the changes made to the HEA by the 1998 Amendments. We 
plan to develop, as soon as possible after the publication of final 
regulations, an addendum to the Federal Perkins Loan program promissory 
note now in use that reflects the new provisions of the 1998 
Amendments. The development of a new promissory note will follow. Until 
an addendum or a new note is developed, however, we would note that 
institutions must comply with the changes made to the HEA by the 1998 
Amendments and that the promissory notes contained in CB-96-8 and CB-
93-9 are legally valid documents.
    Changes: None.

Section 674.33  Repayment

(Note: In this and other sections of the regulations in Part 674, 
the holder of a loan may be the Secretary or a non-Federal party. In 
these cases, requirements are written in the present indicative, 
rather than using the word ``must.'' However, we intend these 
provisions to be mandatory, regardless of who holds the loan.)

    Comment: Several commenters objected to the requirement that the 
institution reimburse its revolving fund for any money lost to its fund 
that otherwise would have been paid by the borrower if the borrower had 
not received one of the repayment incentive discounts described in this 
section. The commenters felt that the Secretary should pay for 
incentive repayment discounts or that the revolving fund should absorb 
the cost of any incentive repayment that an institution may extend to 
its borrowers.
    Discussion: The 1998 Amendments prohibit an institution from using 
Federal funds, including Federal funds from an institution's revolving 
fund, or institutional funds from the revolving fund to pay for any 
repayment incentive.
    Changes: None.
    Comment: One commenter, while supporting repayment incentives in 
general, believed that the regulations should allow an institution to 
factor in administrative savings in reimbursing its revolving fund for 
any money lost due to incentive repayment discounts that otherwise 
would have been paid by the borrower. The commenter felt that the 
purpose of repayment incentives is to encourage prompt repayments 
without increasing, and perhaps even lowering, the administrative costs 
to the revolving fund.
    Discussion: We appreciate the commenter's desire to reflect the 
administrative savings generated by borrowers who pay the loan in full 
prior to the end of the repayment period or who make regular 
consecutive payments for 48 months, thereby offsetting an institution's 
required reimbursement of money lost to its revolving fund. However, we 
believe it would take a statutory change to reflect those savings in 
the regulations.
    Changes: None.
    Comment: One commenter felt that offering repayment incentives to 
borrowers who repay their loans in a timely fashion does nothing to 
help needy borrowers, the intended beneficiaries of the Federal Perkins 
Loan program, who may be struggling to repay their loans.
    Discussion: While we appreciate the concerns expressed by the 
commenter regarding borrowers who may be struggling to repay their 
Federal Perkins Loan, the provision allowing institutions to offer 
incentive repayment discounts to borrowers who repay their loans timely 
is statutory and voluntary on the institution's part. Additionally, we 
believe that incentives encourage borrowers to repay in full, or to 
begin or maintain repayment on a regular basis, thereby replenishing an 
institution's revolving fund and making more money available to the 
needy individuals for whom Federal Perkins Loans are intended.
    Changes: None.

Section 674.34  Deferment of repayment--Federal Perkins loans, National 
Direct Student loans and Defense loans

    Comment: One commenter suggested that the final regulations be 
revised to extend the Federal Perkins Loan program deferments contained 
in statute prior to July 1, 1993 to borrowers who are currently 
eligible only for the deferments contained in section 464(c)(2)(A) of 
the HEA. The commenter believed that making this change would simplify 
the deferment process for borrowers and institutions and reduce the 
amount of paperwork that the deferment process requires.
    Discussion: We are sympathetic to the commenter's suggestion. 
However, we are unable to revise the regulations to expand the 
deferments available to Federal Perkins Loan borrowers because it is 
beyond the scope of the 1998 Amendments change to the HEA and would 
require additional statutory change.
    Changes: None.

Section 674.39  Loan Rehabilitation

    Comment: We received many comments on the new loan rehabilitation 
provisions in this section. Many commenters questioned aspects of loan 
rehabilitation that are required by statute. Other commenters asked 
only for clarification regarding the rehabilitation process without 
objecting to or requesting revisions to the regulations.
    Discussion: We cannot address requests for revisions to the 
proposed regulations that are inconsistent with

[[Page 58303]]

the statute. We believe it is helpful to review the aspects of loan 
rehabilitation in the Perkins Loan Program that relate to borrower 
benefits and institutional responsibilities that are required by law, 
and therefore cannot be changed.
    Under the 1998 Amendments, a defaulted loan is considered 
rehabilitated if ``the borrower of a loan made under this part who has 
defaulted on the loan'' makes the required 12 payments. Accordingly, 
loan rehabilitation is available to all defaulted borrowers with a loan 
made under the Federal Perkins Loan Program. If a borrower requests 
loan rehabilitation, the institution or its servicer must allow the 
borrower to rehabilitate his or her loan. This also applies to 
defaulted loans that an institution has placed with a collection 
agency. However, the borrower may only rehabilitate a defaulted loan 
once. Because the statute specifically refers to a stream of 12 
payments as determined by the institution, the institution must work 
with the borrower to determine a payment amount that is appropriate. 
The statute does not require a signed rehabilitation agreement.
    In accordance with the 1998 Amendments, once the loan is 
rehabilitated (after the 12th payment has been made), the institution 
or its servicer must request that any credit bureau to which the 
defaulted loan was reported remove the default from the borrower's 
credit history. The borrower is brought current and is no longer 
considered to be delinquent or in default. Removing the default is 
consistent with the requirements of the Fair Credit Reporting Act 
(FCRA), which requires that an institution correct and update the 
information it furnishes to a credit reporting agency. In this case, 
the institution would be updating the borrower's credit history to 
reflect the rehabilitation of the loan. The FCRA also requires credit 
reporting agencies to have reasonable procedures in place to accept 
updated or corrected information.
    Once the loan is rehabilitated, the borrower is subject to the 
terms, conditions, benefits and privileges of the borrower's original 
promissory note. This includes eligibility for deferments, forbearance, 
cancellations, and flexible repayment options. The borrower is also 
subject to the same responsibilities under the note, which include, but 
are not limited to, making regular payments and informing the school or 
servicer of an address change or the need for flexible repayment 
arrangements. We sum up this status by saying the borrower is returned 
to regular repayment status in Sec. 674.39(b)(1) of the regulations.
    Finally, in accordance with the 1998 Amendments, a borrower who has 
rehabilitated his or her loan re-establishes eligibility for Title IV 
student financial assistance, as long as the borrower is otherwise 
eligible.
    Changes: None.
    Comment: One commenter requested clarification regarding when an 
institution must notify a defaulted borrower of the option and 
consequences of rehabilitating the loan. The commenter also asked us to 
specifically state what the consequences of loan rehabilitation are in 
the Federal Perkins Loan Program.
    Discussion: An institution has several opportunities under the 
requirements in Subpart C-Due Diligence of the Federal Perkins Loan 
Program to notify a defaulted borrower of his or her option to 
rehabilitate. We will not regulate prescriptively in this area and will 
leave the timing of that notification to the institution. Clearly, 
however, once a borrower has begun to miss payments, the billing 
procedures in Sec. 674.43 require an institution to contact the 
borrower to demand payment. A notification of the option and the 
consequences of loan rehabilitation can be included as part of any or 
all of these payment demands. We believe that this notification should 
be made no later than the final demand for payment required by 
Sec. 674.43(d). Further, notification regarding the option and 
consequences of loan rehabilitation should also be provided during the 
more intensive efforts an institution, or its servicer, makes to 
recover amounts owed on a defaulted loan under Sec. 674.45. Regardless 
of the timing of the notification and regardless of whether the 
institution is servicing the loan or a billing or collection agency is 
servicing the loan, the borrower may request rehabilitation of his or 
her defaulted loan at any time. Additionally, although the proposed 
regulations require that an institution notify only a defaulted 
borrower, institutions are encouraged to include information regarding 
loan rehabilitation as part of the disclosures regarding the definition 
and consequences of default required when making and disbursing a loan 
under Sec. 674.16(a)(1)(x) and when conducting exit counseling under 
Sec. 674.42(b)(2)(v).
    The consequences of rehabilitating a defaulted loan of which the 
borrower should be advised 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 repayment period of 
up to 10 years, instructing any credit bureau to which the default was 
reported to remove the default from the borrower's credit history, and 
the re-establishment of the borrower's eligibility for Title IV student 
financial assistance, provided that the borrower is otherwise eligible.
    Changes: None.
    Comment: Several commenters requested clarification regarding 
whether or not a borrower must request loan rehabilitation. One 
commenter suggested that we revise the regulations to require that the 
borrower contact the institution prior to the first of the twelve 
payments so that the institution can work with the borrower to assure 
their successful rehabilitation.
    Discussion: We agree that a borrower must notify the institution of 
his or her desire to rehabilitate a defaulted loan and believe this is 
implicitly stated in the regulations in describing rehabilitation as 
the making of 12 consecutive on-time, consecutive, monthly payments 
``as determined by the institution.'' However, in order to avoid 
confusion and add clarity to this section, we have amended the 
regulations to require a request from the borrower. We note, however, 
that we are not specifying that the borrower's request be written nor 
that the borrower's request precede the 12 consecutive on-time, monthly 
payments.
    Changes: We are adding the phrase ``and the borrower requests 
rehabilitation,'' to Sec. 674.39(a)(2).
    Comment: One commenter requested clarification regarding whether a 
revised repayment schedule is required for a rehabilitated loan.
    Discussion: We will not specify in regulations that an institution 
must prepare a revised repayment agreement for a rehabilitated 
borrower. However, institutions are required under Sec. 674.39(b)(2) to 
treat the first payment made under the 12 consecutive payments as the 
first payment under a new repayment period of up to 10 years. Servicing 
a rehabilitated loan in a manner consistent with program regulations 
would appear to necessitate a revised repayment agreement to ensure a 
borrower's successful repayment. We believe that a new revised 
repayment agreement is probably in the best interests of both the 
school and the borrower.
    Changes: None.
    Comment: One commenter requested clarification regarding when an 
institution may begin counting payments made by a borrower toward the 
rehabilitation of the borrower's defaulted loan. The commenter asked if 
only payments made on or after the

[[Page 58304]]

effective date of the final regulations (July 1, 2000) may be counted 
toward the 12 payments the borrower is required to make in order to 
rehabilitate a defaulted loan or if payments made before the effective 
date of the final regulations may be counted toward the rehabilitation.
    Discussion: An institution may count payments made before July 1, 
2000, toward the 12 on-time, monthly payments the borrower must make to 
rehabilitate a defaulted Federal Perkins Loan as long as at least one 
of the 12 payments is made on or after the July 1, 2000, effective date 
of the final regulations.
    Changes: None.
    Comment: One commenter recommended that we revise the regulations 
to prohibit a borrower from rehabilitating a defaulted Federal Perkins 
Loan on which a judgment has been rendered because the judgment has 
taken the place of the original promissory note as the debt instrument.
    Discussion: We disagree that the regulations should be revised to 
prohibit borrowers from rehabilitating a defaulted loan on which a 
judgment has been rendered. We interpret section 464(h) of the HEA to 
require that a rehabilitation program must be available to all 
defaulted borrowers even if the institution has secured a judgment 
against the borrower. This is consistent with the statutory 
interpretation of loan rehabilitation in both the FFEL and Federal 
Direct Loan Programs. However, we share the commenter's concern that 
the promissory note already signed by the borrower in these cases no 
longer embodies that borrower's obligations with respect to the debt. 
Therefore, the borrower of a defaulted loan on which a judgment has 
been entered must sign a new promissory note that incorporates 
outstanding principal after making the 12 on-time, consecutive, monthly 
payments required by rehabilitation. In addition to the amount of the 
new promissory note, the borrower is responsible for interest and late 
charges that accrued while the borrower was in default. The borrower is 
also subject to the same 24 percent limit on collection costs once the 
loan has been rehabilitated.
    Changes: We have amended Sec. 674.39 by adding a new paragraph 
(a)(3) to require a defaulted borrower to sign a new promissory note if 
the institution has a judgment against the borrower.
    Comment: Several commenters objected to extending a new ten-year 
repayment period to rehabilitated borrowers because it would delay the 
replenishment of the institution's revolving fund and is inequitable to 
other Federal Perkins Loan borrowers. One commenter recommended that a 
borrower be required to repay the outstanding balance on a 
rehabilitated loan in the remaining time left in the borrower's 
original ten-year repayment period. Further, this commenter felt that 
if the borrower's original ten-year repayment period had elapsed, the 
borrower should be required to repay the defaulted loan in full in the 
twelve payments that constitute rehabilitation.
    Discussion: The point of rehabilitation is to return the borrower 
to regular repayment on a defaulted loan to ensure successful payment 
in full. We do not believe that rehabilitating a borrower's loan only 
to encourage redefault by establishing an unreasonable repayment 
schedule is within the intent of the rehabilitation program. Further, a 
successful post-rehabilitation payment returns money to an 
institution's revolving fund and reduces costs associated with default 
collections. The extension of a new repayment period of up to 10 years, 
which assumes minimum monthly payments in some cases, is also 
consistent with the rehabilitation provisions in the Federal Family 
Education Loan and the Federal Direct Loan Programs.
    Changes: None.
    Comment: One commenter asked whether an institution may shorten a 
rehabilitated borrower's repayment period by requiring a minimum 
monthly payment.
    Discussion: An institution may require a borrower to pay a minimum 
monthly payment on a rehabilitated loan only if the institution 
required a minimum monthly payment under the borrower's original 
promissory note and the payment amount due on the rehabilitated loan is 
less than the minimum monthly payment. This does not preclude the 
borrower and the institution from agreeing to a monthly repayment 
amount on a rehabilitated loan that repays the loan in less than 10 
years if the institution did not exercise the minimum monthly payment 
option in the original note. As stated earlier, a new repayment period 
of up to 10 years, assuming a minimum monthly payment in some cases, is 
extended to a rehabilitated borrower to ensure that the borrower 
successfully rehabilitates the loan.
    Changes: None.
    Comment: One commenter supported the provision returning the 
benefits and privileges of the original promissory note to the 
rehabilitated borrower, but believed that the regulations should 
reflect the borrower's eligibility only for the remaining balance of 
those privileges under the statutory maximums contained in the HEA. For 
example, if a borrower had received one year of forbearance before 
rehabilitating the loan, the borrower would be eligible for only two 
years of forbearance after rehabilitation.
    Discussion: We agree that the borrower is eligible only for the 
statutory maximums on benefits available under the original promissory 
note and that language reflecting this change would improve the clarity 
of the regulations.
    Changes: Section 674.39(d) has been changed to specify that the 
borrower regains eligibility for the balance of benefits and privileges 
available under the original promissory note.
    Comment: Several commenters requested clarification regarding 
whether an institution must require the return of a rehabilitated loan 
from a collection agency after receipt of the required 12 consecutive 
monthly payment amounts.
    One commenter, noting the borrower's return to regular repayment 
status, the return of all of the benefits and privileges of the 
original promissory note, and the borrower's ability to request 
flexible repayment options, stated that collection agencies typically 
focus only on collecting the total amount of any debt placed with it 
and not on servicing loans in regular repayment status. The commenter 
stated that the return of these benefits would suggest the return of 
the account to the institution.
    Discussion: The issue of whether a loan may remain with a 
collection agency after rehabilitation was discussed during negotiated 
rulemaking. Committee II reached consensus on the rehabilitation 
provisions in this section with the understanding that an institution 
may allow a rehabilitated loan to remain with a collection agency.
    The institution is responsible for insuring that any third party 
servicer with which it contracts is in compliance with required 
statutory and regulatory program requirements, which would include the 
requirements of rehabilitation in the Federal Perkins Loan program. If 
the institution chooses to leave the rehabilitated account with a 
collection agency, the collection agency must provide the rehabilitated 
borrower with all of the benefits associated with loan rehabilitation 
and required by this section. An institution may leave a rehabilitated 
loan with a collection agency only if that agency is capable of 
providing the following services in a manner consistent with program 
regulations:
     billing the borrower (Sec. 674.43);

[[Page 58305]]

     processing deferment and cancellation requests 
(Secs. 674.34, 674.35, 674.36, 674.37, 674.38 and Subpart D-Loan 
Cancellation);
     providing flexible repayment arrangements in accordance 
with the terms of the promissory note (Sec. 674.33);
     providing any notice or disclosure required under the 
program regulations (Subpart C-Due Diligence); and
     providing any other statutory or regulatory benefit to 
which the borrower is entitled.
    If the collection agency is unable to provide a rehabilitated 
borrower with the benefits of rehabilitation, the institution must 
remove the account from the agency.
    Changes: None.
    Comment: Many commenters objected to the provision limiting 
collection costs that can be charged to the borrower on a rehabilitated 
loan to 24 percent of the unpaid principal and accrued interest.
    Several commenters believed that it will be problematic to 
renegotiate contracts with collection agencies and that the terms of 
collection agency contracts should be flexible and subject only to 
negotiation between the school and the collection agency. They believed 
that the 24 percent cap on collection costs that can be passed on to a 
rehabilitated borrower will limit the number of collection agencies an 
institution is able to contract with to those collection agencies that 
charge lower rates as opposed to those that are best at recovering 
debts, thereby limiting the ability of an institution to maximize the 
return of funds to its revolving fund.
    Several commenters stated that accounting for collection costs that 
are different depending on the type of loan on which they are assessed 
is burdensome, confusing and time-consuming. The commenters questioned 
why rehabilitated loans should be treated differently than other 
Federal Perkins Loans since, under the terms of their promissory notes, 
all borrowers are responsible for reasonable collection costs incurred 
by an institution in collecting the loan.
    Discussion: We disagree that the renegotiation of collection agency 
contracts will be problematic and that schools will be limited in their 
choice of collection agencies to those that charge lower fees as 
opposed of those that are best at collecting debts. We believe that the 
marketplace will generate competition among collection agencies and 
that collection agencies will adapt their rates and their servicing 
practices to those rates and practices required to service 
rehabilitated loans. We also believe that a borrower is more likely to 
continue paying on his or her loan once the loan is rehabilitated and 
that these payments will replenish an institution's revolving fund, not 
deplete it.
    We further believe that collection costs on a rehabilitated loan 
should be reduced once the borrower has successfully rehabilitated a 
defaulted loan. A rehabilitated borrower has re-established eligibility 
for Title IV student financial assistance, is once again entitled to 
all of the benefits and privileges available under the promissory note 
and, most importantly, is no longer considered to be in default on the 
loan. We believe that to assess collection costs on a loan in good 
standing at a rate higher than the 24 percent maximum is excessive.
    Lastly, a reduction in the collection costs that can be charged to 
a rehabilitated borrower was intensely debated during the negotiated 
rulemaking process. Committee II reached consensus on a collection cost 
cap of 24 percent. This rate is consistent with the reduction of 
collection costs that may be charged to a rehabilitated borrower in the 
FFEL and Federal Direct Loan Programs, adjusted to allow for the fact 
that collection costs cannot be capitalized in the Federal Perkins Loan 
program as they are in the FFEL and Direct Loan programs.
    Changes: None.
    Comment: Two commenters, while not objecting to the proposed 
regulations agreed to by the negotiators that cap the collection costs 
that can be charged to a rehabilitated borrower at 24 percent, 
expressed concern that the preamble language in the NPRM does not 
accurately reflect current Federal policy contained in 34 CFR 30.60 on 
assessing collection costs to defaulted borrowers. The commenters 
stated that institutions and their servicers would be forced to incur 
significant expenses in reprogramming and redesigning current systems 
and procedures to comply with a process that required them to calculate 
a 24 percent cap on collection costs on the unpaid principal and 
accrued interest remaining on the loan at the time it is rehabilitated.
    The commenters also expressed concern that the NPRM preamble 
language states that payments on a rehabilitated loan cannot be treated 
on a ``fee-on-fee,'' basis which is a widely accepted method for 
determining collection costs on delinquent debtors. The commenters 
expressed confidence, however, that institutions and servicers could 
utilize current systems and procedures, along with the fee-on-fee 
method of determining collection costs, in such a way as to not exceed 
the 24 percent cap on rehabilitated loans.
    Conversely, three commenters suggested that the text of the 
preamble discussion be included in the final regulations. They believed 
that this would provide clarity to the regulations and guard against 
the possibility that a rehabilitated borrower would be charged in 
excess of the 24 percent cap on collection costs after the loan has 
been successfully rehabilitated.
    Discussion: The preamble language contained in the NPRM accurately 
describes the basis on which consensus was reached on the 24 percent 
cap on collection costs that may be charged on a rehabilitated Federal 
Perkins Loan. Default-related collection costs of up to 18.5 percent 
are passed along to the borrower of a rehabilitated FFEL or Federal 
Direct Loan, are capitalized, and become part of the rehabilitated 
principal on which interest accrues after rehabilitation. As a result, 
an FFEL or Federal Direct Loan borrower ultimately pays post-
rehabilitation collection costs of approximately 24 percent over the 
remaining life of the loan. In order to treat rehabilitated borrowers 
consistently across the Title IV loan programs, the negotiators agreed 
to a generally comparable 24 percent cap on collection costs on a 
rehabilitated Federal Perkins Loan, acknowledging that because 
collection costs in the Federal Perkins Loan Program cannot be 
capitalized they must be treated as a separate cost. The use of current 
Federal policy contained in 34 CFR 30.60 when assessing collection 
costs on a rehabilitated Federal Perkins loan was not specifically 
discussed. However, several negotiators were very concerned that the 24 
percent cap on collection costs on a rehabilitated Federal Perkins loan 
would be exceeded depending on how the payments from the borrower were 
applied.
    An institution, or its servicer, charges a commission on each 
payment the borrower makes on a defaulted loan using the formula in 34 
CFR 30.60(a)(1). The formula does not take into account interest that 
continues to accrue on the outstanding balance of a defaulted loan as 
it is paid down. However, because a rehabilitated loan is no longer 
considered to be in default, interest must be a factor when applying 
payments to a rehabilitated loan. Therefore, if an institution or its 
servicer uses the formula contained in 34 CFR 30.60, it must ensure 
that when the commissions retained on payments received from the 
borrower on a rehabilitated loan reach an amount equal to 24 percent of 
the original principal and accrued interest that

[[Page 58306]]

remained on the loan after the borrower made the 12 payments, no more 
costs may be calculated or assessed against the borrower.
    We agree that clarifying the regulations to guard against the 
possibility that a rehabilitated borrower will be charged collection 
costs in excess of the 24 percent cap is appropriate. An institution, 
or its servicer, must consider the interest that accrues on the 
outstanding balance of the rehabilitated loan over the length of the 
post-rehabilitation repayment period to ensure that collection costs of 
no more than 24 percent of the unpaid principal and accrued interest as 
of the date following application of the twelfth payment are paid by 
the borrower.
    Changes: Section 674.39(c)(1) has been changed to specify that 
collection costs, if charged to the borrower, may not exceed 24 percent 
of the unpaid principal and accrued interest as of the date following 
application of the twelfth payment.
    Comment: One commenter believed that the regulations should be 
revised to allow an institution to charge collection costs not paid by 
the borrower on a rehabilitated loan to its revolving fund if the 
borrower subsequently redefaults.
    Discussion: We disagree that the regulations should be revised to 
allow an institution to charge its revolving fund for collection costs 
not paid by the borrower if the borrower subsequently redefaults. If 
the borrower redefaults on a rehabilitated loan, the borrower would be 
responsible for paying any reasonable collection costs incurred by the 
institution in attempting to collect the debt. We would note that if a 
rehabilitated loan is being serviced by a collection agency, 
Sec. 674.48(e) of the Federal Perkins Loan Program regulations requires 
an institution to recall the loan and place it with a different 
collection agency if the loan redefaults. Section 674.48(b) prohibits 
an institution from using a billing service (which are the duties 
assumed by the collection agency upon the successful rehabilitation of 
a loan) and a collection agency that is owned or controlled by the same 
entity.
    Changes: None.

Section 674.41  Due Diligence--General requirements

    Comment: Several commenters objected to the requirement that, as 
part of an institution's general due diligence activities, it 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. The 
commenters felt there was no need for a Student Loan Ombudsman's 
office, that it would be an unnecessary expense and that it would be a 
bureaucratic intrusion between the institution and the borrower. We 
received similar objections to the addition of language in Secs. 674.42 
and 674.45 that requires an institution to inform borrower's of the 
availability of the Student Loan Ombudsman's office.
    Discussion: The 1998 Amendments require the Department of Education 
to appoint a Student Loan Ombudsman who must receive, review and 
attempt to resolve informally complaints from borrowers regarding the 
terms of their loans. Although there is no specific statutory 
requirement that institutions or other loan participants disseminate 
information regarding the availability of the Student Loan Ombudsman to 
borrowers, the negotiators for Committees I and II agreed that as our 
partners in student loan administration, it made sense for loan 
participants, as well as the Department, to provide borrowers with 
information on the Student Loan Ombudsman's office. The negotiators 
agreed that adding a provision on the availability of this service to 
Sec. 674.41, as well as to Secs. 674.42 and 674.45, will increase 
borrower awareness and greatly enhance successful repayment of student 
loans and reduce defaults.
    Changes: None
    Comment: Several commenters expressed concern that the proposed 
regulations did not address what kind of information an institution 
must provide to borrowers when complying with the requirement to inform 
them about the availability of the Student Loan Ombudsman's office. One 
commenter felt that the proposed regulations should be revised to 
require institutions to provide the borrower with information on the 
availability of the Student Loan Ombudsman's office only as that 
information is provided to institutions by the Secretary.
    Discussion: The proposed regulations require that an institution 
provide the borrower with information about the availability of the 
Student Loan Ombudsman's office. This information is meant to convey to 
the borrower that, if the borrower is unable to resolve a dispute with 
the loan holder, another avenue of redress is available. An institution 
may comply with this requirement by providing the borrower with the 
Ombudsman's website address or mailing address at the Department of 
Education. The Student Loan Ombudsman's website address is http://
www.sfahelp.ed.gov.
    Changes: None.

Section 674.42  Contact with the borrower

    Comment: One commenter applauded our initiative to allow for loan 
counseling through interactive electronic means but objected to the 
requirement that the institution obtain through return receipt or some 
other mechanism documentation that the student received and completed 
the materials when electronic exit counseling is used. The commenter 
believed that obtaining return receipt that the student received and 
completed electronic exit counseling was too high a standard of 
compliance for institutions to meet and suggested that we adopt the 
receipt standards of the U.S. Postal Service, which are that if mail is 
not returned to the sender, it can be considered delivered.
    Discussion: We disagree that obtaining documentation that the 
borrower has received and completed exit counseling, either through 
return receipt or some other mechanism, is too high a standard to 
require when an institution provides exit counseling electronically. 
Institutions were previously required to provide exit counseling to 
their borrowers either in person or in a group to ensure that borrowers 
received and completed exit counseling. We believe that providing exit 
counseling electronically should be viewed as comparable to providing 
in person counseling and should provide the same assurances.
    The standards of the U.S. Postal service provide that if mail is 
not returned to the sender, it can be considered delivered. Because 
there is currently no similar standard for electronic mail, we believe 
that it is in the best interest of borrowers to require an institution 
to take reasonable steps to ensure that each student borrower receives 
the counseling materials and participates in and completes interactive 
electronic exit counseling given the current available technology.
    Changes: None.
    Comment: One commenter supported the requirement that an 
institution provide a borrower with an explanation of any options the 
borrower might have to consolidate or refinance his or her loan during 
exit counseling. However, the commenter suggested that we require 
institutions to inform Federal Perkins Loan borrowers that the interest 
rate on a consolidation loan may be higher than the 5 percent interest 
rate on their Federal Perkins loan.
    Discussion: Because Federal Perkins loan borrowers lose eligibility 
for cancellation benefits and are charged a different rate of interest 
upon

[[Page 58307]]

consolidating their Perkins loans, we agree that disclosing the 
consequences of consolidating a Federal Perkins loan will help 
borrowers make an informed decision.
    Change: Section 674.42(b)(2)(ii) has been amended to require an 
institution to inform borrowers about the consequences of consolidating 
a Federal Perkins Loan.
    Comment: One commenter stated that the provision requiring schools 
to provide borrowers with ``additional matters that the Secretary 
recommends that a school include in the exit counseling or materials 
set forth in Appendix D to 34 CFR 668'' be deleted. The commenter 
believes that such a requirement is unnecessary especially given the 
elimination of default reduction plans in the Federal Perkins Loan 
Program.
    Discussion: We disagree that this provision should be deleted. 
Including additional information recommended by the Secretary or 
materials in Appendix D in exit counseling is an option, not a 
requirement. We believe that Appendix D is a useful resource to 
institutions when counseling borrowers on default avoidance.
    Changes: None.

Section 674.47  Costs chargeable to the fund

    Comment: One commenter expressed concern that institutions may be 
unable to renegotiate collection agency contracts by July 1, 2002 that 
comply with the requirement that no more than 24 percent of the unpaid 
principal and accrued interest remaining on the loan at the time the 
loan is rehabilitated can be assessed a borrower in collection costs. 
The commenter requested that we include an explicit commitment in the 
preamble of the final regulations to revisit this issue if the majority 
of institutions are unable to renegotiate contracts to account for the 
24 percent collection costs cap.
    Discussion: We believe that because this will be a general program 
requirement, the market will expand to meet institutional needs. 
Further, we believe it is inappropriate for us to commit to a 
regulatory change outside of the negotiated rulemaking process required 
by the 1998 Amendments. However, we will carefully consider this 
provision in the future as part of our ongoing regulatory review.
    Changes: None.

Section 674.49  Bankruptcy of borrower

    Comment: One commenter submitted a detailed analysis of Sec. 674.49 
and suggested substantive changes to this section of the regulations. 
These suggested changes included eliminating paragraph (b), which 
requires an institution to file a proof of claim in a bankruptcy; 
eliminating paragraph (e), which outlines an institution's 
responsibilities when a borrower files a Chapter 13 bankruptcy; and, 
clarifying paragraph (g)(1)(i), which deals with termination of 
collection and write-off of the loan under certain circumstances.
    Discussion: We appreciate the analysis of Sec. 674.49 submitted by 
the commenter. However, we did not propose to amend this section other 
than to:
     Reflect the change to the bankruptcy code that eliminates 
a borrower's ability to discharge a loan in bankruptcy on the basis of 
the loan being in repayment for more than seven years, and require all 
borrowers who seek discharge of a Perkins loan to prove undue hardship;
     Clarify that the seven year repayment period on 
bankruptcies filed before October 8, 1998, excludes applicable 
suspensions of the repayment period; and
     Insert language stating that the institution must use 
diligence and may assert any defense consistent with its status under 
applicable law to avoid the discharge of the loan.
    While this section may undoubtedly deserve closer scrutiny, we do 
not believe it is appropriate to make the changes suggested by the 
commenter outside of the negotiating rulemaking process.
    Changes: None.
    Comment: One commenter suggested that we delete Sec. 674.49(4)(i), 
which requires an institution to monitor the borrower's compliance with 
the requirements of a Chapter 13 repayment plan, and to take certain 
steps if the borrower has not made payments or has requested a hardship 
discharge on the debt. The commenter asserted that the institution has 
no legal grounds to monitor the borrower unless the institution 
appoints a trustee.
    Discussion: The code expressly directs that a trustee be appointed 
for every Chapter 13 proceeding and authorizes any ``party in 
interest'' or ``creditors'' to move for any of a number of reasons to 
have a Chapter 13 proceeding dismissed or converted to a Chapter 7, 11 
U.S.C. 1302, 1307(c). Because the comment has no basis in the law, we 
disagree with the commenter's suggestion that we delete this paragraph 
from the regulations. The proposed changes to this paragraph reflect 
only the deletion of language that referred to loans held by an 
institution that had been in repayment for more than seven years. We 
believe that any further changes in this section of the regulation 
should be undertaken only as part of negotiated rulemaking process.
    Changes: None.
    Comment: One commenter noted an inconsistency between the preamble 
discussion on Sec. 674.49(c)(1) and the proposed regulatory language. 
Specifically, the preamble states that ``the proposed regulations would 
amend this section to `require' institutions to use due diligence and 
assert any defense consistent with its status.'' The actual regulatory 
language states that ``the institution must use diligence and `may' 
assert any defense consistent with its status.'' The commenter 
requested that we correct the preamble in the NPRM.
    Discussion: Any inconsistency between the preamble and the proposed 
regulatory language was not intended. Recently, some State institutions 
have responded to undue hardship complaints by asserting that sovereign 
immunity barred relief on these claims in bankruptcy proceedings. We 
intend the proposed amendment to make clear that every institution must 
use due diligence to oppose discharge, but that State institutions may 
do so--if they wish--by asserting sovereign immunity as a defense to an 
undue hardship complaint. Unfortunately, some courts misconstrue 
Department regulations to bar State institutions from asserting 
sovereign immunity in these circumstances. We intend this amendment as 
an authoritative explanation of the meaning of the Federal Perkins Loan 
regulations and Program Participation Agreement on this due diligence 
obligation.
    Changes: None.

Section 674.54  Teacher cancellation--Federal Perkins loans and Direct 
loans made before July 23, 1992

    Comment: One commenter suggested that we consider removing and 
reserving Sec. 674.54 of the Federal Perkins Loan Program regulations 
because it is redundant with Sec. 674.53. (Section 674.54 authorizes 
teaching cancellation benefits for Federal Perkins Loans and Direct 
Loans made before July 23, 1992. All borrowers with loans made before 
July 23, 1992 are eligible for all of the cancellation provisions 
contained in Sec. 674.53.)
    Discussion: We agree that Sec. 674.54 is redundant and should be 
removed and reserved. We note that borrowers who teach handicapped 
students and receive cancellation benefits under Sec. 674.54(b) remain 
eligible for cancellation under Sec. 674.53(b)--Full time teaching in 
special education.
    Changes: Section 674.54 is removed and reserved.

[[Page 58308]]

Executive Order 12866

    We have reviewed these final regulations in accordance with 
Executive Order 12866. Under the terms of the order we have assessed 
the potential costs and benefits of this regulatory action.
    The potential costs associated with the final regulations are those 
resulting from statutory requirements and those we have determined to 
be necessary for administering this program effectively and 
efficiently.
    In assessing the potential costs and benefits--both quantitative 
and qualitative--of these final regulations, we have determined that 
the benefits of the regulations justify the costs.
    We have also determined that this regulatory action does not unduly 
interfere with State, local, and tribal governments in the exercise of 
their governmental functions.

Paperwork Reduction Act of 1995

    The Paperwork Reduction Act of the 1995 does not require you to 
respond to a collection of information unless it displays a valid OMB 
control number. We display the valid OMB control numbers assigned to 
the collections of information in these final regulations at the end of 
the affected sections of the regulations.

Intergovernmental Review

    This program is subject to the requirements of Executive Order 
12372 and the regulations in 34 CFR part 79. The objective of the 
Executive Order is to foster an intergovernmental partnership and a 
strengthened federalism by relying on processes developed by State and 
local governments for coordination and review of proposed Federal 
financial assistance.
    In accordance with the order, we intend this document to provide 
early notification of the Department's specific plans and actions for 
this program.

Assessment of Educational Impact

    In the NPRM we requested comments on whether the proposed 
regulations would require transmission of information that any other 
agency or authority of the United States gathers or makes available.
    Based on the response to the NPRM and on our review, we have 
determined that these final regulations do not 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 review this document in text or Adobe Portable Document 
Format (PDF) on the Internet at the following sites:

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

    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, D.C., area at (202) 512-1530.

    Note: The official version of this document is the document 
published in the Federal Register. Free Internet access to the 
official edition of the Federal Register and the Code of Federal 
Regulations is available on GPO Access at:

http://www.access.gpo.gov/nara/index.html

(Catalog of Federal Domestic Assistance Number: 84.037 Federal 
Perkins Loan Program)

List of Subjects in 34 CFR Part 674

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

    Dated: October 20, 1999.
Richard W. Riley,
Secretary of Education.

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, a 
definition of ``satisfactory repayment arrangement,'' to read as 
follows:


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 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, or the remainder of 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

[[Page 58309]]

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 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) or 
Sec. 674(h).
    (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.
* * * * *


Sec. 674.9  [Removed and Reserved]

    4. Section 674.6 is removed and reserved.


Sec. 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 a 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 refund 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) and the 
Office of Management and Budget control number 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.

(Approved by the Office of Management and Budget under control 
number 1845-0019)
* * * * *
    9. Section 674.31 is amended by redesignating paragraphs (b)(2)(i) 
(C) and (D) as (D) and (E), respectively; by adding new paragraph 
(b)(2)(i)(C); by revising paragraph (b)(10)(i); and by revising the 
Office of Management and Budget control number 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-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 in 
this paragraph 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.
* * * * *
(Approved by the Office of Management and Budget under control 
number 1845-0019)

    10. Section 674.33 is amended by adding new paragraphs (f) and (g); 
and by revising the Office of Management and Budget Control number to 
read as follows:


Sec. 674.33  Repayment.

* * * * *
    (f)(1) Incentive repayment program. 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

[[Page 58310]]

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 money lost to 
its Fund that otherwise would have been paid by the borrower as a 
result of establishing a repayment incentive under paragraphs 
(f)(1)(i), (ii) and (iii) 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 have been 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 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;
    (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

[[Page 58311]]

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 a 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 a 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.
* * * * *
(Approved by the Office of Management and Budget under control 
number 1845-0019)

    11. Section 674.34 is amended by revising the section heading; 
revising paragraphs (a) and (c); and adding the Office of Management 
and Budget control number 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.
* * * * *
(Approved by the Office of Management and Budget under control 
number 1845-0019)

    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 and the borrower requests rehabilitation; and
    (3) A borrower who wishes to rehabilitate a loan on which a 
judgment has been entered must sign a new promissory note after 
rehabilitating the loan.
    (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--
    (1) If charged to the borrower, may not exceed 24 percent of the 
unpaid principal and accrued interest as of the date following 
application of the twelfth payment; 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 the balance 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.

(Approved by the Office of Management and Budget under control 
number 1845-0019)

    13. Section 674.41 is amended by adding a new paragraph (a)(3); and 
by

[[Page 58312]]

adding the Office of Management and Budget control number 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.
* * * * *
(Approved by the Office of Management and Budget under control 
number 1845-0023).

    14. Section 674.42 is amended by redesignating paragraph (b) as 
paragraph (c), revising paragraph (a), adding a new paragraph (b), and 
revising the Office of Management and Budget control number 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, including the consequences of 
consolidating a Federal Perkins Loan);
    (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 are 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.
* * * * *
(Approved by the Office of Management and Budget under control 
number 1845-0023)

    15. Section 674.45 is amended by revising paragraph (b), by adding 
a new paragraph (h), and by revising the Office of Management and 
Budget control number 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.
    (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.
* * * * *
(Approved by the Office of Management and Budget under control 
number 1845-0023)


[[Page 58313]]


    16. Section 674.47 is amended by redesignating paragraphs (e)(5) 
and (e)(6) as (e)(6) and (e)(7), respectively, by adding new paragraph 
(e)(5), and by revising the Office of Management and Budget control 
number 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.
* * * * *
(Approved by the Office of Management and Budget under control 
number 1845-0023)

    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). By revising paragraphs (c)(1), (c)(2) and 
(c)(3);
    C. Revising paragraph (e)(4)(i) introductory text; newly 
redesignated paragraphs (f)(2)(ii)(B) and (f)(3)(ii)(B); and paragraph 
(g).
    D. By revising the Office of Management and Budget control number.


Sec. 674.49  Bankruptcy of borrower.

* * * * *
    (c) * * *
    (1) The institution must use due 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.
* * * * *
(Approved by the Office of Management and Budget under control 
number 1845-0023)

    18. Section 674.52 is amended by revising paragraphs (c)(1) and 
(d); and by revising the Office of Management and Budget control number 
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) Concurrent deferment period. 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.
* * * * *
(Approved by the Office of Management and Budget under control 
number 1845-0019)

    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 paragraphs (a)(1), (b), and 
(c) to read as follows:


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

    (a) Cancellation for full-time teaching in an elementary or 
secondary school serving low-income students.
    (1)(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--

[[Page 58314]]

    (i) Is in a school district that qualified for funds, in that year, 
under title I of the Elementary and Secondary Education Act of 1965, as 
amended; and
    (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.
* * * * *


Sec. 674.54  [Removed and Reserved]

    20. Section 674.54 is removed and reserved.
    21. 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 these 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.
* * * * *
    22. 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.
* * * * *
    23. 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.
* * * * *
    24. 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

[[Page 58315]]

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 this section are not included 
in the terms of the borrower's promissory note.
* * * * *


Sec. 674.8, 674.10, 674.19, 674.20, 674.35, 674.36, 674.38,674.50, 
674.61  [Amended]

    25. Sections 674.8, 674.10, 674.19, 674.20, 674.35, 674.36, 674.38, 
674.50, and 674.61 are amended by revising the Office of Management and 
Budget control number to read ``1845-0019''.
    26. Sections 674.13 is amended by adding the Office of Management 
and Budget control number before the authority citation.


Sec. 674.13  Reimbursement to the Fund.

* * * * *
(Approved by the Office of Management and Budget under control 
number 1845-0019)

    27. Section 674.37 is amended by adding the Office of Management 
and Budget control number before the authority citation.


Sec. 674.37  Deferment of repayment--Direct loans made before October 
1, 1980 and Defense loans.

* * * * *
(Approved by the Office of Management and Budget under control 
number 1845-0019)


Sec. 674.43, 674.48  [Amended]

    28. Sections 674.43 and 674.48 are amended by revising the Office 
of Management and Budget control number to read ``1845-0023''.

[FR Doc. 99-28168 Filed 10-27-99; 8:45 am]
BILLING CODE 4000-01-P