[Federal Register Volume 64, Number 210 (Monday, November 1, 1999)]
[Rules and Regulations]
[Pages 58974-58984]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-28274]



[[Page 58973]]

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Part IV





Department of Education





_______________________________________________________________________



34 CFR Part 668



Student Assistance General Provisions; Final Rule

  Federal Register / Vol. 64, No. 210 / Monday, November 1, 1999 / 
Rules and Regulations  

[[Page 58974]]



DEPARTMENT OF EDUCATION

34 CFR Part 668

RIN 1845-AA04


Student Assistance General Provisions

AGENCY: Department of Education.

ACTION: Final regulations.

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SUMMARY: The Secretary amends the loan default reduction and prevention 
measures in the Student Assistance General Provisions regulations in 34 
CFR part 668. These regulations reflect changes made by the Higher 
Education Amendments of 1998 to the Higher Education Act of 1965, as 
amended (HEA).

DATES: These regulations are effective July 1, 2000.

FOR FURTHER INFORMATION CONTACT: Kenneth Smith, U.S. Department of 
Education, 400 Maryland Avenue, SW., ROB-3, room 3045, Washington, DC 
20202-5447. 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: The Higher Education Amendments of 1998 
(Pub. L. 105-244, enacted October 7, 1998, and referred to in the 
preamble to these final regulations as the ``1998 Amendments'') changed 
some requirements relating to the calculation of a school's Federal 
Family Education Loan (FFEL) Program cohort default rate, William D. 
Ford Federal Direct Loan (Direct Loan) Program cohort rate, or weighted 
average cohort rate. The Secretary is revising 34 CFR 668.17 of the 
Student Assistance General Provisions regulations to reflect these 
changes.
    On July 30, 1999, we published a notice of proposed rulemaking 
(NPRM) for the Student Assistance General Provisions in the Federal 
Register (64 FR 41752). In the preamble to the NPRM, we discussed on 
pages 41753 through 41758 the major changes proposed in that document 
for the loan default reduction and prevention measures in the Student 
Assistance General Provisions:
     Amending Sec. 668.17(a)(1) and 668.17(j) to change the 
process that schools use to identify and challenge or request an 
adjustment to incorrect data.
     Amending Sec. 668.17(b)(4) to reflect the amendment to the 
HEA that makes a school ineligible to participate in the Federal Pell 
Grant Program when it becomes ineligible to participate in the FFEL or 
Direct Loan Program due to excessive rates.
     Amending Sec. 668.17(b)(5)(ii) and 668.17(b)(6) to 
implement the statutory amendments that make a school liable for the 
loans it certifies and delivers or originates and disburses while it is 
appealing a loss of participation.
     Amending Sec. 668.17(c)(1)(ii)(A) and 668.17(j)(4) to 
reflect the statutory changes that modify the requirements for a 
school's appeal on the basis of its participation rate index (PRI).
     Amending Sec. 668.17(c)(1)(ii)(B) and 668.17(c)(7) to 
reflect the amendments that modify requirements for a school's 
mitigating circumstances appeal based on its economically disadvantaged 
rate and completion or placement rate.
     Adding Sec. 668.17(c)(1)(ii)(C) and (D) to permit a school 
to appeal its loss of participation on the basis of two new mitigating 
circumstances.
     Amending Sec. 668.17(e), 668.17(f), and 668.17(h)(2)(iii) 
to conform to statutory changes in the definition of ``default.''
     Adding Sec. 668.17(k) and Appendix H to implement the 
statutory changes relating to the treatment of special institutions.
    Except for minor editorial and technical revisions and revisions 
that provide clarification, there are no differences between the NPRM 
and these final regulations. As in the NPRM, to avoid confusion in the 
preamble to these final regulations, we use the word ``rate'' by itself 
to refer to an FFEL Program cohort default rate, Direct Loan Program 
cohort rate, or weighted average cohort rate. We use the complete term 
if we are referring to another type of ``rate'': an ``economically 
disadvantaged rate,'' a ``completion rate,'' a ``placement rate,'' or a 
``participation rate.''

Discussion of Student Financial Assistance Regulations Development 
Process

    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 30, 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 23 comments were received. An analysis of the comments 
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 in the proposed regulations, and we do not respond to 
comments suggesting changes that the Secretary is not authorized by law 
to make.

Analysis of Comments and Changes

General

    Comments: In general, the commenters supported the proposed 
regulations and appreciated the Department's responsiveness to the 
student aid community.
    Discussion: We appreciate the commenters' support for the proposed 
regulations and the work of the members of the negotiated rulemaking 
committee that resulted in the proposed regulations.
    Changes: None.

Challenges and Adjustments to Inaccurate Data Used To Calculate Rates 
(Sec. 668.17(a)(1) and 668.17(j))

    Comments: The commenters supported the proposed changes to the 
process for a school to challenge its draft data, especially the 
extension of the time limit for schools to submit the challenge, from 
30 to 45 days. One commenter, while applauding the proposed change, 
recommended extending the time limit further, to 60 days. The commenter 
reasoned that this extension is necessary because the data review 
process usually takes place when schools are beginning their processing 
for the next academic year and when their State reports are due. The 
commenter also reasoned that the extension was necessary because 
formatting or other software changes may be needed to accommodate the 
electronic supporting data.
    Several other commenters noted that the proposed regulations did 
not include a change to the 30-day timeframe under which a guaranty

[[Page 58975]]

agency must respond to a school's challenge. The commenters reasoned 
that new benefits associated with low cohort default rates may increase 
the number of challenges to draft rates and that it may be difficult 
for guaranty agencies to respond to challenges within the current 30-
day timeframe. Commenters asked us to revise the regulations to allow 
the Secretary to extend a guaranty agency's response period if there 
are extenuating circumstances, acceptable to the Secretary, that will 
impair the agency's ability to respond within the required timeframe.
    Discussion: Because of statutory requirements for the issuance and 
review of draft data and the issuance of final rates by September 30, 
the time period for the draft data review process is necessarily short. 
Extending the period for schools to challenge their draft rates from 30 
to 45 days will further shorten the period. Under the process included 
in the regulations, schools must challenge their draft rates within 45 
days, and guaranty agencies will have 30 days to respond to those 
challenges. An additional 2 months are needed for the guaranty agencies 
to submit corrected data to the National Student Loan Data System 
(NSLDS). At least two submission cycles are needed to ensure that NSLDS 
data has been updated and that any rejected data is corrected. In 
addition, we use this 2-month period to review guaranty agencies' 
responses to schools.
    We intend to issue draft rates by late March. Final rates must be 
calculated by late August to ensure that they are published by 
September 30. Thus, the timeframes for the review process are very 
tight, and we do not believe it is possible to further extend the 
deadlines for individual actions. Allowing an option to extend 
timeframes for guaranty agencies on a case-by-case basis is not a 
workable alternative. Delayed responses from one or two guaranty 
agencies could significantly affect the accuracy of many schools' 
rates.
    Changes: None.
    Comments: In the preamble to the NPRM, the Department announced 
administrative changes to the process used by a school to request an 
adjustment to a published rate: supporting data will be provided to 
more schools with their published rates, a school will have more time 
to request an adjustment, and a school will be able to request an 
adjustment of the data used to calculate its published rate that was 
not used to calculate its draft rate (``new data''). Commenters 
generally expressed appreciation for all of these changes. Several 
commenters asked for clarification in the preamble to these final 
regulations concerning the types of adjustments to new data that a 
school would be able to request.
    Discussion: The ``new data adjustment,'' which will be available to 
schools beginning with receipt of the fiscal year (FY) 1998 published 
rates, will be used only to adjust rates based on incorrect new data. 
``New data'' are data that were reported one way in the draft rate and 
a different way in the published rate. Schools may not use this process 
to correct data that were used to calculate their draft rates: a school 
must have challenged its draft rate to correct the data on which the 
draft rate was based.
    For example, if a borrower was included in the denominator of the 
calculation of a school's draft rate but was not included in the 
calculation of its final rate, the school may use a new data adjustment 
to correct the data that resulted in the removal of the borrower, 
incorrectly, from the calculation of the published rate. However, if a 
borrower was not included in both the draft and published rates, the 
school may not use a new data adjustment to correct data that resulted 
in the borrower's exclusion from its published rate.
    Changes: None.
    Comments: The NPRM's preamble announced other administrative 
changes to the process used to challenge and adjust rates. These 
changes included making supporting data available to schools in an 
electronic format and allowing schools to view, year round, ``real-
time'' loan repayment and default data that will be used to calculate 
their rates. These changes will affect the process for both draft and 
published rates and will be implemented under the timelines announced 
in the preamble to the NPRM.
    Several commenters asked for clarification in this preamble 
concerning the process for providing electronic supporting data and 
real-time data. Two commenters recommended that we make electronic data 
available to all schools and guaranty agencies, in a format compatible 
with schools' software, and that eventually we provide electronic data 
automatically to all schools. Commenters recommended that we provide 
real-time data via a system to which schools currently have access, and 
they suggested the use of the National Student Loan Data System (NSLDS) 
for this purpose. The commenters reasoned that these provisions would 
reduce the administrative and financial burden for schools.
    Discussion: We intend to meet the implementation timeframes 
described in the preamble to the NPRM for providing supporting data to 
schools electronically and for providing data on a real-time basis. 
After those deadlines are met, we expect eventually to provide 
supporting data electronically to all schools and to guaranty agencies. 
We are also working with schools to ensure that the format of the 
electronic supporting data is compatible with schools' computer 
hardware and software. In addition, we plan to provide real-time data 
to schools via NSLDS.
    Changes: None.

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

    Comments: In the preamble to the NPRM, we addressed the concerns 
expressed by some non-Federal negotiators during negotiated rulemaking 
about the possible consequences of our issuing rates after the date 
required by statute, September 30 of a year. Four commenters noted that 
the Department's guidance is not currently included in regulations or 
other guidance issued by the Department and recommended that the 
guidance be provided more formally. Two commenters reasoned that, 
without this formal guidance, a school's eligibility may be challenged 
by a party critical of the guidance. Commenters recommended that the 
guidance be provided in the Student Financial Aid Handbook and in the 
Cohort Default Rate Guide. One commenter recommended including the 
guidance in regulations.
    Discussion: We have already published the Department's view of the 
effect of a later publication of rates in the FY 1997 Official Cohort 
Default Rate Guide and in the 1999-2000 Student Financial Aid Handbook. 
It is not appropriate or necessary to include this guidance in 
regulations because the Department intends to meet the statutory 
requirements and publish rates by September 30 of each year.
    Changes: None.

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

    Comments: One commenter stated that the compromise reached during 
negotiated rulemaking was fair in allowing a school with excessive 
rates to continue participating in the Federal Pell Grant Program if it 
had not certified an FFEL loan or originated a Direct Loan on or after 
July 7, 1998. Several commenters asked us to clarify in this preamble 
whether a school could meet this criteria if it delivered FFEL funds or 
disbursed Direct Loan funds after July

[[Page 58976]]

7, 1998, for a loan certified or originated before that date.
    Another commenter recommended removing this provision entirely. The 
commenter reasoned that, as the process to develop the statute was 
lengthy, schools had adequate time to withdraw formally from the FFEL 
and Direct Loan programs before its enactment. The commenter believed 
that the basis provided for including this provision was speculative 
and that its inclusion in regulations would lead to the loss of Federal 
funds.
    Discussion: Under Sec. 668.17(b)(4)(iii), a school with excessive 
rates would be allowed to continue participating in the Federal Pell 
Grant Program if it has not certified an FFEL loan or originated a 
Direct Loan on or after July 7, 1998. Because this criterion is 
specific to the certification or origination of loans, a school's 
delivery or disbursement of funds after July 7, 1998, for a loan that 
was certified or originated before that date does not affect a school's 
satisfaction of the criterion.
    We do not agree with the recommendation that the provision allowing 
continued participation in the Federal Pell Grant Program be removed 
from the regulations. The Department is satisfied that there were cases 
in which schools that intended to withdraw from the FFEL or the Direct 
Loan Program were not aware that they needed to notify the Department 
in writing and instead simply stopped certifying or originating loans. 
The Department believes that these schools should not lose the 
opportunity to participate in the Federal Pell Grant Program based on 
their rates.
    Changes: None.
    Comments: One commenter recommended that a school be allowed to 
continue participating in the Federal Pell Grant Program, despite loss 
of participation in the FFEL or Direct Loan Program due to excessive 
rates, if the school: (1) Is in good standing with the community and 
its accreditation organization, (2) was not aware of the provisions in 
the 1998 Amendments for loss of eligibility to participate in the 
Federal Pell Grant Program, and (3) returns all FFEL Program and Direct 
Loan Program funds received after the date of enactment of the 1998 
Amendments. The commenter reasoned that this provision would allow 
schools to continue participating in the Federal Pell Grant Program and 
providing an education to needy students.
    Discussion: The commenter's recommendations are inconsistent with 
statutory requirements. The HEA provides only two exceptions to the 
loss of participation in the Federal Pell Grant Program based on 
excessive rates: (1) The school did not have the opportunity to appeal 
its rate under the appropriate regulations, and (2) the school did not 
participate in the FFEL or Direct Loan Program on or after the date of 
enactment.
    Changes: None.

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

    Comments: Several commenters asked for clarification of the 
regulations for establishing a school's liability on loans made during 
an unsuccessful appeal. In particular, the commenters requested that we 
provide further explanation of--
    (1) Whether the liability determination would apply to schools that 
are subject to loss of participation based on three rates over 25 
percent, for schools with one rate over 40 percent, or for special 
institutions that are continuing to participate by complying with the 
requirements of Sec. 668.17(k);
    (2) The formula that will be used to calculate a school's 
liability;
    (3) The beginning and ending date of the period during which a 
school would be liable;
    (4) Whether a school that suspends its participation to avoid a 
liability may resume its participation 45 days after the submission of 
its completed appeal, without incurring a liability, if we have not 
made a determination on the appeal; and
    (5) Whether the repayment terms for a liability will be flexible 
enough to ensure a school's repayment without causing serious financial 
problems for the school and its students.
    Discussion: Responses to each of the commenters' issues follow:
    (1) The liability for loans made during the appeal process only 
applies to a school with rates of 25 percent or more for 3 consecutive 
years that is subject to an action under Sec. 668.17 (a)(3), (b)(1), or 
(b)(2). The 1998 Amendments do not require a similar liability 
determination for a school subject to termination from all of the Title 
IV programs based on a rate over 40 percent. In addition, a special 
institution would only be subject to this type of liability if it is 
not in compliance with Sec. 668.17(k) and its rates for the 3 most 
recent fiscal years are 25 percent or more. If a special institution is 
in compliance with Sec. 668.17(k), and thus not subject to an action 
under Sec. 668.17 (a)(3), (b)(1), or (b)(3), it may challenge its rate 
without incurring a potential liability.
    (2) A more detailed description of the estimated loss formula is 
available to the public on the Internet at the following site: http://
ifap.ed.gov/csb__html/procmemo.htm.
    The current guidance on the estimated loss formula is provided on 
that site, under ``Procedure Memos Sorted by Memo Number,'' in IRB Memo 
92-3, which is listed as ``I92-3.''
    (3) The period during which a school would be liable begins 30 
calendar days after it receives its published rate and ends on the 45th 
calendar day after the school submits its completed appeal.
    (4) The final regulations have been changed to clarify that a 
school's suspension of its participation need not continue longer than 
45 days after it submits its completed appeal to the Department. Like 
other schools, a school that suspends its participation would not incur 
this type of liability for funds delivered or disbursed more than 45 
calendar days after it submits its completed appeal to the Department.
    (5) We will consider a school's request for more time to repay a 
liability, over a period greater than the 45 days allowed in the 
regulations, on a case-by-case basis. A determination to extend a 
school's repayment period may include a consideration of the school's 
circumstances, its students' circumstances, and the best method to 
ensure that funds are recovered.
    Changes: We have revised Sec. 668.17(b)(6) to clarify that, if a 
school suspends its participation in order to avoid a liability, the 
suspension may end 45 days after the school submits its completed 
appeal. We have also revised the regulations to clarify that a school 
is subject to a potential liability for loans certified and delivered 
or originated and disbursed during the appeal process if the school is 
subject to an action under Sec. 668.17(a)(3), (b)(1), or (b)(2).
    Comments: One commenter stated that the use of the Department's 
``Estimated Loss Formula'' to determine a school's liability for loans 
made during an unsuccessful appeal, as described in the NPRM, 
exaggerates the potential loss to the Government and would make appeals 
prohibitively expensive. The commenter stated that the intent of 
Congress was to focus on the amount of interest and special allowance 
for loans made during the appeals period, rather than on the amounts 
calculated under the ``Estimated Loss Formula.'' The commenter did not 
believe that the issue is adequately addressed by allowing a school to 
avoid a liability by suspending its participation.
    Discussion: Under the amendments to section 435(a)(2)(A) of the 
HEA, a school's liability is not limited to the amount of the interest 
and special allowance on the loans made during its appeal. Rather, the 
HEA requires an institution to pay ``an amount equal to

[[Page 58977]]

the amount of interest, special allowance, reinsurance, and any related 
payments.'' Thus, the amount of the Government's costs for reinsurance 
and any related payments must be included in the calculation of the 
school's liability.
    We also do not agree that the Department's ``Estimated Loss 
Formula'' exaggerates potential losses to the Government. As described 
in the NPRM, the formula uses the school's most recent published rate 
to estimate the principal amount of the loans that would be expected to 
default and estimates the costs that will be incurred for interest, 
special allowance, and other losses on the loans. These amounts are 
equivalent to the amounts that the HEA requires a school to pay. The 
formula is used by the Department to calculate schools' liabilities in 
other, similar circumstances, and it has proven to be a reliable and 
supportable measure of potential losses to the government.
    Assessing a liability does not make appeals prohibitively expensive 
because any school may avoid a liability by suspending its 
participation in the loan program or programs during the appeal 
process. If a school has confidence in the basis for its appeal, it 
will be able to continue to participate during the appeal process with 
the same confidence. The regulations ensure that the school, rather 
than the Government, assumes the risk for the cost of the loans made 
during an unsuccessful appeal.
    Changes: None.
    Comments: The proposed Sec. 668.17(b)(6)(ii)(C)(1) would permit a 
school to appeal, under subpart H of 34 CFR part 668, a liability 
calculated for loans made during an unsuccessful appeal. As the 
provisions in subpart H are used by schools to appeal final audit and 
program review determinations, one commenter asked for clarification of 
the procedures that a school would use to file this type of appeal. The 
commenter did not understand how or why subpart H could be used to 
appeal the calculation of this liability.
    Discussion: In appealing a calculation of a liability for loans 
under these regulations, under subpart H, the calculation will be 
treated as a program review determination.
    Changes: We have revised Sec. 668.17(b)(6)(ii)(C)(1) to clarify the 
procedures for the appeal of a liability.

Participation Rate Index (PRI) (Sec. 668.17(c)(1)(ii)(A) and 
668.17(j)(4))

    Comments: None.
    Discussion: On further review, we have determined that the language 
in Sec. 668.17(c)(1)(ii)(A)(2), explaining the method for calculating a 
PRI, could be misinterpreted. We have modified the language to avoid 
confusion. The new language does not change the substance of the 
calculation.
    Changes: We have revised Sec. 668.17(c)(1)(ii)(A)(2) to more 
clearly describe the calculation of a school's PRI for a fiscal year.
    Comments: Several commenters recommended that the regulations be 
revised to clarify the procedures that may be used by schools to 
challenge an anticipated loss of participation, on the basis of a 
participation rate index (PRI), during the draft rate process. The 
commenters stated that the proximity of the proposed regulations in 
Sec. 668.17(j)(4) to the provisions for a challenge of incorrect data 
may cause confusion. They were especially concerned that schools may 
send their PRI challenges to guaranty agencies, rather than to the 
Department.
    Discussion: Though the two paragraphs contain separate 
requirements, we agree that their proximity in the regulations could 
cause some confusion.
    Changes: We have revised Sec. 668.17(j)(4) to distinguish more 
clearly between the procedures and requirements for a challenge of 
inaccurate data and those for a PRI challenge.
    Comments: One commenter asked us to clarify the consequences of a 
school's successful PRI appeal based on a draft rate, if the school's 
published rate for the same fiscal year would not result in a 
successful PRI appeal. Another commenter noted that under the proposed 
regulations, if a school successfully challenges an anticipated loss of 
participation during the draft rate process, the school would have to 
appeal again the following year to continue participating, even if the 
draft rate upon which the school based its original challenge is equal 
to or higher than the same fiscal year's published rate. The commenter 
stated that this type of second appeal is unnecessarily burdensome and 
recommended that it be required only if the draft rate upon which a 
school bases its PRI challenge is lower than the published rate.
    Discussion: Since a PRI challenge or appeal may be based on the PRI 
for any of the 3 most recent fiscal years for which data are available, 
the same PRI may be a criterion for a school's challenge or appeal in 
more than one year. A school that successfully challenges or appeals a 
loss of participation, based on its PRI, does not need to challenge or 
appeal again in a subsequent year as long as the same, successful PRI 
could be used as a basis for the subsequent appeal. An example is 
provided in the preamble to the NPRM.
    If a school's PRI challenge based on a draft rate is successful, 
and the school's published rate for the same fiscal year would not 
result in a successful appeal, the school has still successfully 
challenged its loss of participation for that year. However, when rates 
are published the following year, the prior, successful PRI challenge, 
based on a draft rate, cannot be used to continue the school's 
participation, because a prior year's draft rate is not a basis for a 
challenge or appeal of a school's current loss of participation.
    We agree with the comment suggesting that we should not require a 
school to appeal a second time if it successfully appealed the previous 
year on the basis of a PRI calculated using its draft rate and its 
published rate for the same fiscal year was equal to or lower than its 
draft rate. In that case, there is no need for the school to submit 
another appeal because we already have enough information to determine 
that the school's appeal would be successful.
    The administrative procedure used to make the determination that 
the school's appeal would be successful will be similar to the 
procedure used for the new mitigating circumstances appeals provided in 
Sec. 668.17(c)(1)(ii)(C) and (D). There is no need to include this 
procedure in the regulations. If information we maintain can be used to 
determine that a school's PRI appeal would be successful, we will 
calculate the results and notify the school. In addition to the 
circumstances noted by the commenter, this calculation would also be 
performed if a school's challenge during the draft rate process is 
unsuccessful, its published rate for the same fiscal year is lower than 
its draft rate, and an appeal based on the published rate would be 
successful. In that case, we would also calculate the results of the 
school's PRI appeal and notify the school.
    Changes: None.

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

    Comments: Previously, the economically disadvantaged rates, 
completion rates, and placement rates used to determine a school's 
mitigating circumstances appeal were calculated as percentages of all 
of the school's regular students. The NPRM proposed to limit the groups 
of students for whom the percentages are calculated to include only 
students who are enrolled in programs eligible for Title IV aid. This 
change was requested by some of the negotiators during negotiated 
rulemaking because they believed it was

[[Page 58978]]

unlikely that the records needed to determine a school's economically 
disadvantaged rate would be available for students not in Title IV 
eligible programs.
    In general, commenters supported this change. They reasoned that if 
the change were not made, it would be difficult for schools to obtain 
the information necessary to determine eligibility for this type of 
appeal. One commenter stated that this change was also appropriate 
because it focused on the completion and placement outcomes for 
students attending classes supported by Title IV funds.
    Several other commenters suggested that only the economically 
disadvantaged rate should be based on students enrolled in programs 
eligible for Title IV aid and that a school should have an option to 
base its completion rate or placement rate on either its regular 
students or on the students in Title IV eligible programs. They 
reasoned that, as the same problem with records does not apply to 
completion and placement rates, giving a school this option may provide 
a small degree of assistance for schools to satisfy the criteria for a 
successful appeal and to continue to serve economically disadvantaged 
students.
    Discussion: All of the commenters' suggestions were considered and 
rejected during the negotiated rulemaking process. As one commenter 
noted, one of the reasons for restricting the calculation to students 
in Title IV eligible programs was that, in doing so, the calculation 
would be restricted to the loan programs that are actually serving the 
low-income population. Basing the economically disadvantaged rate and 
the completion and placement rates on different populations would not 
ensure that the benefit shown in the school's completion or placement 
rate was actually received by economically disadvantaged students.
    Changes: None.
    Comments: One commenter asked for clarification concerning our 
intent to explain to a school the reasons that we have determined an 
independent auditor's report or an institution's management's assertion 
to be ``contradicted or otherwise refuted.'' Another commenter 
recommended that we define ``independent auditor'' in these final 
regulations and that we include provisions for rejecting an auditor's 
certification that a school meets the criteria for the appeal if the 
facts demonstrate that the auditor's opinion is fraudulent or 
inaccurate. The commenter also recommended that we use more than just 
the information we maintain when making a determination on an appeal. 
The commenter recommended that these final regulations be revised to 
allow us to routinely obtain information for making our determinations, 
reasoning that limiting ourselves to the information that we maintain 
invites abuses and that we have no reason to believe that auditors will 
always act honestly and truthfully.
    Discussion: If a school's appeal is not accepted because we 
determine an independent auditor's report or an institution's 
management's assertion to be ``contradicted or otherwise refuted'' by 
the information we maintain, the reasons for our determination will be 
explained in the notification we send to the school.
    We agree with the commenter's recommendation that a definition of 
``independent auditor'' should be referenced in these regulations. 
``Independent auditor'' is already defined in Sec. 668.23(a)(1), and we 
have incorporated that definition into this section of the regulations.
    The additional requirements that the commenter recommends to 
prevent fraud or inaccuracies are not needed.
    The proposed regulations allow us to deny an institution's appeal 
if we determine that the independent auditor's report does not meet the 
requirements of Sec. 668.17 or that it is contradicted or otherwise 
refuted by information that we maintain. The standards for the 
engagement that forms the basis for an independent auditor's opinion, 
in Sec. 668.17(c)(7)(ii)(B), include criteria that address an auditor's 
proficiency and independence. Also, as we noted in the NPRM's preamble, 
if improprieties are suspected in a school's appeal, an investigation 
could be pursued under other legal authority.
    We also do not agree with the commenter's recommendation that we 
routinely obtain information to evaluate the validity of the auditor's 
certification for these appeals. As we discussed in the preamble to the 
NPRM, it would be inappropriate for us to ignore information we 
maintain or any contradictions in the data of an independent auditor's 
report when deciding whether a school meets the appeal's criteria. 
However, we believe that it would be inconsistent with congressional 
intent for us to routinely duplicate the work of an independent auditor 
by conducting investigations to gather additional information.
    Changes: We have revised Sec. 668.17(c)(1)(ii)(B)(1) to incorporate 
the definition of ``independent auditor'' from Sec. 668.23.

Other Mitigating Circumstances Appeals (Sec. 668.17(c)(1)(ii)(C) and 
(D))

    Comments: Many commenters strongly supported the two new mitigating 
circumstances that were included in the NPRM, which will allow schools 
to appeal based on the total number of borrowers in the 3 most recent 
fiscal years and will allow schools with ``average'' rates to appeal 
based on the rate for a single fiscal year only. The commenters stated 
that these new mitigating circumstances are a significant improvement 
toward eliminating sanctions based on statistically insignificant 
percentages and that they represent movement in a positive direction 
toward reducing unnecessary regulatory penalties. Commenters asked that 
the Secretary revisit these and other issues related to schools' rates 
in future negotiations.
    One commenter noted that, under the 1998 Amendments, the Secretary 
is required to conduct a study of the effectiveness of rates for 
certain schools at which a small percentage of students receive loans. 
The commenter asked the Department to further address these schools' 
circumstances after conducting the required study. The commenter felt 
that this is necessary because a school's excessive rates may cause it 
to suffer from public criticism or to be placed on a provisional 
certification status, regardless of its being allowed to continue its 
participation in the Title IV programs as the result of a successful 
appeal.
    Discussion: We appreciate the commenters' support for the proposed 
regulations, and their interest in this issue and in the study of the 
effectiveness of rates. We will consider these issues and the results 
of the study during the ongoing review of the regulations for the Title 
IV programs.
    Changes: None.
    Comments: Several commenters stated that the language in the 
preamble to the NPRM and in the proposed regulations was in error when 
it used the phrase ``30 or fewer.'' They noted that an average rate, as 
described in Sec. 668.17(d), (e), and (f), is calculated for a school 
with ``fewer than 30'' borrowers entering repayment in that fiscal 
year. The commenters asked us to correct the language in the NPRM.
    Discussion: There is no error. The phrases ``30 or fewer'' and 
``fewer than 30,'' as used in the preamble to the NPRM and in the 
proposed regulations, apply to separate, unrelated requirements. As the 
commenters note, an ``average'' rate is calculated for a school with 
``fewer than 30'' borrowers entering repayment during a fiscal year.

[[Page 58979]]

However, the proposed regulations would add a new mitigating 
circumstance that allows a school to appeal its loss of participation 
if the total number of its borrowers entering repayment in the 3 most 
recent fiscal years for which data are available is ``30 or fewer.'' 
The former standard is used in determining how a school's rate is 
calculated. The latter standard is used in determining a school's 
eligibility to appeal a loss of participation. However, we do recognize 
the value of making terms in these regulations consistent, and we will 
reconsider this issue during the ongoing review of the regulations for 
the Title IV programs.
    Changes: None.

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

    Comments: Several commenters were concerned that readers might be 
confused by the NPRM's explanation of the date on which a loan is 
considered to be in default for the purpose of calculating a rate. They 
stated that some readers might believe, based on the preamble's 
language, that the actual definition of ``default'' for an FFEL Program 
loan was changing from 270 days of delinquency to 360 days and asked us 
to provide clarification in the preamble to these final regulations.
    Discussion: The 1998 Amendments changed the definition of a default 
on an FFEL or a Direct Loan Program loan from 180 days to 270 days past 
due for a loan that is repayable in monthly installments and from 240 
days to 330 days past due for loans repayable in less frequent 
installments. The definition of ``default'' that is used in Sec. 668.17 
for the purpose of calculating rates is based on this general 
definition. It is not the same as the definition provided in the 
statute for the date of a borrower's default.
    For the purposes of calculating an FFEL Program cohort default 
rate, a default is generally considered to have occurred on the date 
that a claim for insurance is paid on the loan by a guaranty agency. 
Since there is generally a 90-day period between the date that a 
borrower defaults and the date that an insurance claim is paid, an FFEL 
Program loan would not normally be considered in default for the 
purposes of calculating a school's rate until it is at least 360 days 
past due (270 days + 90 days = 360 days). For consistency, because 
Direct Loans do not go through a claims payment process, these final 
regulations change from 270 to 360 the number of days past due after 
which a Direct Loan borrower is considered in default for purposes of 
calculating a school's rate.
    Changes: None.
    Comments: Several commenters expressed concerns about the impact of 
the change in the definition of ``default,'' from 180 days to 270 days, 
upon the calculation of a school's rate. The commenters were concerned 
that, using the current method to calculate rates, the change in the 
timeframe may remove a significant number of defaulted borrowers from 
the calculation of rates, decreasing their consistency and accuracy as 
a reflection of the borrowing history of a school and affecting the 
effectiveness of default prevention activities conducted by schools. 
Some commenters stated that it is appropriate for the Department to 
consider the impact of the change in the definition of ``default'' on 
schools' rates and to communicate its intentions concerning anticipated 
future changes, if any, to the calculation of rates. One commenter 
asked the Department to devise a calculation that would address the 
lengthened default period.
    Discussion: The calculation of a school's rate is defined in 
section 435(m) of the HEA.
    Changes: None.

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

    Comments: One commenter stated that historically black colleges or 
universities, tribally controlled community colleges, and Navajo 
community colleges (``special institutions'') have already had an 
adequate length of time to reduce their rates to acceptable levels. The 
commenter objected to continuing a double standard and asked to either 
eliminate the provisions that allow special institutions with excessive 
rates to continue to participate or to apply the same criteria to all 
schools with excessive rates.
    Another commenter questioned the creation of a new Appendix H when 
Appendix D of 34 CFR part 668 already addresses default management 
plans. The commenter suggested that, since Appendix D needs to be 
updated, the two appendices should be combined, updated, and applied to 
all schools. The commenter also asked that regulations specify whether 
a special institution would be subject to loss of participation in the 
Federal Pell Grant Program if it is not in compliance with 
Sec. 668.17(k).
    Discussion: The provisions that provide a different treatment for 
special institutions with excessive rates are statutory and cannot be 
changed by regulations. Also, it is not necessary to specify in 
Sec. 668.17(k) that a school is subject to loss of participation in the 
Federal Pell Grant Program if it is not in compliance with that 
paragraph. If any school is subject to a loss of participation in the 
FFEL or Direct Loan Program under Sec. 668.17, it is also subject to 
loss of participation in the Federal Pell Grant Program if it meets the 
criteria in Sec. 668.17(b)(4).
    The requirements reflected in Sec. 668.17(k) are limited to a 3-
year transition period, after which the consequences of excessive rates 
will become fully applicable to special institutions. As other schools 
do not have the same transition period, these criteria are not 
appropriate for them.
    Finally, we believe it would be inappropriate to revise, in these 
final regulations, the current Appendix D to include some or all of the 
guidance in Appendix H, because the revision would go beyond the scope 
of the proposed regulations. However, the updates to Appendix D 
suggested by the commenter will be considered during the ongoing review 
of the regulations for the Title IV programs.
    Changes: None.
    Comments: The criteria for determining whether a special 
institution has made substantial improvement are listed in paragraphs 
(A) through (H) of Sec. 668.17(k)(4)(i). One commenter stated that 
while it is appropriate to use either paragraph (A) or (B), by itself, 
to determine a school's substantial improvement, the commenter did not 
believe that any of the remaining criteria, alone, would adequately 
reduce a school's rate. The commenter suggested that, if a school 
cannot show that it has met the criterion in either paragraph (A) or 
(B), a school should be required to meet more than one of the remaining 
criteria in order for the Secretary to determine that the school has 
made substantial improvement.
    The commenter also suggested the following changes to Appendix H: 
(1) to include, under ``Core Default Reduction Strategies,'' the design 
of procedures to reduce a school's rate by identifying and implementing 
alternative financial aid award policies and developing alternative 
financial resources; (2) to provide for monthly, rather than annual, 
targets for reductions in a school's rate; (3) to make item 7 the first 
item under ``Additional Default Reduction Strategies,'' reasoning that 
this item is the most effective long-term solution; (4) to remove item 
1 under ``Statistics for Measuring Progress;'' and (5) to provide for 
the tracking of sub-categories of borrowers under items 2 and 7 under 
``Additional Default Reduction Strategies.'' The commenter felt that 
these changes would assist schools in identifying potential problems 
and

[[Page 58980]]

reacting to them more quickly and effectively.
    Discussion: The requirements in Sec. 668.17(k) and the sample plan 
in Appendix H are provided to ensure that a school that is subject to 
those provisions will, no later than July 1, 2002, have a rate that is 
less than 25 percent. To regulate the requirements in more detail, as 
the commenter suggests, or to provide more detailed guidance in the 
sample plan in Appendix H, may tend to limit a school's choices and 
make a school less able to devote its resources effectively to the task 
at hand. Each school needs the flexibility to implement a plan that 
addresses its individual circumstances.
    The same flexibility is needed in making a determination of a 
school's substantial improvement under Sec. 668.17(k)(4)(i). The 
criteria in that paragraph are the bases for a determination of 
substantial improvement, but the criteria will be applied to schools as 
appropriate to their individual circumstances, as described in 
Sec. 668.17(k)(4)(ii). If a school's performance under any one of the 
criteria is adequate to determine that it has made substantial 
improvement, there is no reason to require the school to meet another 
criterion under that paragraph.
    Changes: None.

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 these programs 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.
    We summarized the potential costs and benefits of these final 
regulations in the preamble to the NPRM (64 FR 41752).

Paperwork Reduction Act of 1995

    The Paperwork Reduction Act of 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 number assigned to the 
collection of information in these final regulations at the end of the 
affected section of the regulations.

Intergovernmental Review

    The Federal Supplemental Educational Opportunity Grant Program and 
the State Student Incentive Grant Program are subject to Executive 
Order 12372 and the regulations in 34 CFR part 79. 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 our specific plans and actions for these 
programs.
    The Federal Family Education Loan, Federal Supplemental Loans for 
Students, Federal Work-Study, Federal Perkins Loan, Federal Pell Grant, 
Income Contingent Loan, and William D. Ford Federal Direct Loan 
programs are not subject to Executive Order 12372 and the regulations 
in 34 CFR part 79.

Assessment of Educational Impact

    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 view this document in text or Adobe Portable Document 
Format (PDF) on the Internet at the following sites:

http://ocfo.ed.gov/fedreg.htm
http://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, DC, area at (202) 512-1530.

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

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

List of Subjects in 34 CFR Part 668

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

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

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

PART 668--STUDENT ASSISTANCE GENERAL PROVISIONS

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

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

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

[[Page 58981]]

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


Sec. 668.17  Default reduction and prevention measures.

    (a) * * *
    (1)(i) If the Secretary calculates an FFEL Program cohort default 
rate, Direct Loan Program cohort rate, or weighted average cohort rate 
for an institution, the Secretary notifies the institution of that 
rate.
    (ii) If an institution has an FFEL Program cohort default rate, 
Direct Loan Program cohort rate, or weighted average cohort rate of 10 
percent or more, the Secretary includes a copy of the supporting data 
used in the calculation of the rate with the notice of the rate.
    (iii) An institution with an FFEL Program cohort default rate, 
Direct Loan Program cohort rate, or weighted average cohort rate of 
less than 10 percent may request a copy of the supporting data used in 
the calculation of the rate. The institution's request must be sent to 
the Secretary within 10 working days of receiving the Secretary's 
notice. Upon receiving the institution's request, the Secretary sends a 
copy of the data to the institution.
* * * * *
    (b) * * *
    (4) If an institution loses eligibility to participate in the FFEL 
or Direct Loan Program under this section, it also loses eligibility to 
participate in the Federal Pell Grant Program for the same period of 
time, except that the institution may continue to participate in the 
Federal Pell Grant Program if the Secretary determines that the 
institution--
    (i) Was ineligible to participate in the FFEL and Direct Loan 
programs before October 7, 1998, and the institution's eligibility was 
not reinstated;
    (ii) Requested in writing, before October 7, 1998, to withdraw its 
participation in the FFEL and Direct Loan programs, and the institution 
did not subsequently re-apply to participate; or
    (iii) Has not certified an FFEL loan or originated a Direct Loan on 
or after July 7, 1998.
    (5) An institution whose participation in the FFEL, Direct Loan, or 
Federal Pell Grant Program ends under paragraph (a)(3), (b)(1), (b)(2), 
or (b)(4) of this section may not participate in that program until the 
institution--
    (i) Demonstrates to the Secretary that it meets all requirements 
for participation in the FFEL, Direct Loan, or Federal Pell Grant 
Program;
    (ii) Has paid any amount owed to the Secretary under paragraph 
(b)(6)(ii) of this section or is meeting that obligation under an 
agreement satisfactory to the Secretary; and
    (iii) Executes a new agreement with the Secretary for participation 
in that program following the period described in paragraph (b)(3) of 
this section.
    (6)(i) An institution may, notwithstanding Sec. 668.26, continue to 
participate in the FFEL, Direct Loan, and Federal Pell Grant programs 
until the Secretary issues a decision on the institution's appeal if 
the Secretary receives an appeal that is complete, accurate, and timely 
in accordance with paragraph (c) of this section.
    (ii) If an institution subject to an action under paragraph (a)(3), 
(b)(1), or (b)(2) of this section files a complete, accurate, and 
timely appeal under paragraph (c) of this section and the institution's 
appeal is unsuccessful--
    (A) The Secretary estimates the amount of interest, special 
allowance, reinsurance, and any related or similar payments made by the 
Secretary (or which the Secretary is obligated to make) on any FFEL or 
Direct Loan Program loan for which the institution certified and 
delivered or originated and disbursed funds more than 30 calendar days 
after the date the institution received its most recent notification 
under paragraph (a)(1)(i) of this section;
    (B) The Secretary excludes from the estimate calculated under 
paragraph (b)(6)(ii)(A) of this section any amount that is attributable 
to funds delivered or disbursed by the institution more than 45 
calendar days after the date on which the institution submitted its 
completed appeal to the Secretary; and
    (C) The institution must pay the Secretary the amount estimated 
under paragraph (b)(6)(ii) of this section within 45 days of the date 
of the Secretary's notification, unless--
    (1) The institution files an appeal under the procedures 
established in subpart H of this part, for which the calculation of the 
institution's liability

[[Page 58982]]

is considered a final program review determination; or
    (2) The Secretary permits a longer repayment period.
    (iii) An institution may suspend its participation in the FFEL or 
Direct Loan Program during the period in which it would otherwise be 
subject to a liability under paragraph (b)(6)(ii) of this section.
    (iv) An institution may also continue to participate in the FFEL 
Program or Direct Loan Program if it is in compliance with paragraph 
(k) of this section.
    (c) * * *
    (1) * * *
    (ii) The institution meets one of the following exceptional 
mitigating circumstances:
    (A)(1) The institution's participation rate index, as determined 
under paragraph (c)(1)(ii)(A)(2) of this section, is equal to or less 
than 0.0375 for any of the 3 most recent fiscal years for which data 
are available.
    (2) For the purpose of paragraph (c)(1)(ii)(A)(1) of this section, 
an institution's participation rate index for a fiscal year is 
determined by multiplying its FFEL Program cohort default rate, Direct 
Loan Program cohort rate, or weighted average cohort rate for that 
fiscal year by the percentage that is calculated by dividing--
    (i) The number of students who received an FFEL or Direct Loan to 
attend the institution during a loan period that coincided with any 
part of a 12-month period that ended during the 6 months immediately 
preceding that fiscal year; by
    (ii) The number of regular students, as defined in 34 CFR 600.2, 
who were enrolled at the institution on at least a half-time basis 
during any part of the same 12-month period.
    (B)(1) The report of an independent auditor (as defined in 
Sec. 668.23(a)(1)), submitted under paragraph (c)(7) of this section, 
certifies that the institution's economically disadvantaged rate is 
two-thirds or more, as determined under paragraph (c)(1)(ii)(B)(2) of 
this section, and--
    (i) If the institution offers an associate, baccalaureate, graduate 
or professional degree, the institution's completion rate is 70 percent 
or more, as determined under paragraph (c)(1)(ii)(B)(3) of this 
section; or
    (ii) If the institution does not offer an associate, baccalaureate, 
graduate or professional degree, the institution's placement rate is 44 
percent or more, as determined under paragraph (c)(1)(ii)(B)(4) of this 
section.
    (2) For the purpose of paragraph (c)(1)(ii)(B)(1) of this section, 
an institution's economically disadvantaged rate is the percentage of 
its students, enrolled on at least a half-time basis in an eligible 
program at the institution during any part of a 12-month period that 
ended during the 6 months immediately preceding the fiscal year for 
which the cohort of borrowers (used to calculate the institution's FFEL 
Program cohort default rate, Direct Loan Program cohort rate, or 
weighted average cohort rate) is determined, who--
    (i) Are eligible to receive a Federal Pell Grant award of at least 
one-half the maximum Federal Pell Grant award for which the student 
would be eligible based on the student's enrollment status; or
    (ii) Have an adjusted gross income that, if added to the adjusted 
gross income of the student's parents (unless the student is an 
independent student), is less than the poverty level as determined by 
the Department of Health and Human Services.
    (3) For the purpose of paragraph (c)(1)(ii)(B)(1) of this section, 
an institution's completion rate is the percentage of its regular 
students, initially enrolled on a full-time basis in an eligible 
program and scheduled to complete their programs, as described in 
paragraph (c)(2) of this section, during the same 12-month period used 
to determine its economically disadvantaged rate under paragraph 
(c)(1)(ii)(B)(2) of this section, who--
    (i) Completed the educational programs in which they were enrolled;
    (ii) Transferred from the institution to a higher level educational 
program;
    (iii) Remained enrolled and making satisfactory progress toward 
completion of the student's educational programs at the end of the 12-
month period; or
    (iv) Entered active duty in the Armed Forces of the United States 
within 1 year after their last day of attendance at the institution.
    (4)(i) Except as provided in paragraph (c)(1)(ii)(B)(4)(ii) of this 
section, for the purpose of paragraph (c)(1)(ii)(B)(1) of this section, 
an institution's placement rate is the percentage of its former 
students, as described in paragraph (c)(1)(ii)(B)(4)(iii) of this 
section, who are employed, in an occupation for which the institution 
provided training, on the date following 1 year after their last date 
of attendance at the institution; were employed, in an occupation for 
which the institution provided training, for at least 13 weeks before 
the date following 1 year after their last date of attendance at the 
institution; or entered active duty in the Armed Forces of the United 
States within 1 year after their last date of attendance at the 
institution.
    (ii) If a former student's employer is the institution, the student 
is not considered employed for the purposes of paragraph (c)(1)(ii)(B) 
of this section.
    (iii) The former students who are used to determine an 
institution's placement rate under paragraph (c)(1)(ii)(B)(4) of this 
section include only students who were initially enrolled in eligible 
programs on at least a half-time basis; were originally scheduled, at 
the time of enrollment, to complete their educational programs during 
the same 12-month period used to determine the institution's 
economically disadvantaged rate under paragraph (c)(1)(ii)(B)(2) of 
this section; and remained in the program beyond the point at which a 
student would have received a 100 percent tuition refund from the 
institution. A student is not included in the calculation of the 
placement rate if that student, on the date that is 1 year after the 
student's scheduled completion date, remains enrolled in the same 
program at the institution and is making satisfactory progress.
    (C) At least two of the rates that result in a loss of eligibility 
under paragraph (a)(3), (b)(1), or (b)(2) of this section--
    (1) Are calculated using data for the 3 most recent fiscal years, 
pursuant to paragraph (d)(1)(i)(B), (e)(1)(i)(B), (e)(1)(ii)(B), 
(f)(1)(i)(B), or (f)(1)(ii)(B) of this section; and
    (2) Would be less than 25 percent if calculated using data for only 
the fiscal year for which the institution received its rate, pursuant 
to paragraph (d)(1)(i)(A), (e)(1)(i)(A), (e)(1)(ii)(A), (f)(1)(i)(A), 
or (f)(1)(ii)(A) of this section, respectively.
    (D) During the 3 most recent fiscal years for which the Secretary 
has determined the institution's rate, a total of 30 or fewer borrowers 
entered repayment on a loan or loans included in a calculation of the 
institution's rate.
    (2) For the purposes of the completion rate and placement rate 
described in paragraphs (c)(1)(ii)(B)(3) and (4) of this section, a 
student is scheduled to complete an educational program on the date on 
which--
    (i) If the student is initially enrolled full-time, the student 
will have been enrolled in the program for the amount of time specified 
in the institution's enrollment contract, catalog, or other materials, 
for completion of the program by a full-time student; or
    (ii) If the student is initially enrolled less than full-time, the 
student will have been enrolled in the program for the amount of time 
that it would take the student to complete the program if the

[[Page 58983]]

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

[[Page 58984]]

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

(Approved by the Office of Management and Budget under control 
number 1845-0022)

3. A new appendix H is added to part 668 to read as follows:

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

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

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

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

Additional Default Reduction Strategies

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

Defining the Roles and Responsibilities of Independent Third Party

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

Statistics for Measuring Progress

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

[FR Doc. 99-28274 Filed 10-29-99; 8:45 am]
BILLING CODE 4000-01-U