[Federal Register Volume 65, Number 149 (Wednesday, August 2, 2000)]
[Proposed Rules]
[Pages 47590-47616]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-19343]



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Part II





Department of Education





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34 CFR Part 668 et al.



Student Assistance General Provisions, Federal Family Education Loan 
Program, William D. Ford Federal Direct Loan Program, and Federal Pell 
Grant Program; Proposed Rule

  Federal Register / Vol. 65, No. 149 / Wednesday, August 2, 2000 / 
Proposed Rules  

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DEPARTMENT OF EDUCATION

34 CFR Parts 668, 682, 685, and 690

RIN 1845-AA17


Student Assistance General Provisions, Federal Family Education 
Loan Program, William D. Ford Federal Direct Loan Program, and Federal 
Pell Grant Program

AGENCY: Office of Postsecondary Education, Department of Education.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Secretary proposes to amend the Student Assistance General 
Provisions, Federal Family Education Loan (FFEL) Program, William D. 
Ford Federal Direct Loan (Direct Loan) Program, and Federal Pell Grant 
Program regulations. In these proposed regulations, the requirements 
for the loan default reduction and prevention measures would be moved 
to a new subpart and revised for clarity and consistency. The Secretary 
also proposes to make various substantive changes to these 
requirements.

DATES: We must receive your comments on or before September 18, 2000.

ADDRESSES: Address all comments about these proposed regulations to 
Kenneth Smith, U.S. Department of Education, P.O. Box 23272, 
Washington, DC 20026-3272. If you prefer to send your comments through 
the Internet, use the following address: [email protected]
    If you want to comment on the information collection requirements 
you must send your comments to the Office of Management and Budget at 
the address listed in the Paperwork Reduction Act section of this 
preamble. You may also send a copy of these comments to the Department 
representative named in this section.

FOR FURTHER INFORMATION CONTACT: Kenneth Smith. Telephone: (202) 708-
8242. If you use a telecommunications device for the deaf (TDD), you 
may call the Federal Information Relay Service (FIRS) at 1-800-877-
8339.
    Individuals with disabilities may obtain this document in an 
alternative format (e.g., Braille, large print, audiotape, or computer 
diskette) on request to the contact person listed under FOR FURTHER 
INFORMATION CONTACT.

SUPPLEMENTARY INFORMATION:

Invitation To Comment

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

Assistance to Individuals With Disabilities in Reviewing the Rulemaking 
Record

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

Negotiated Rulemaking

    Section 492 of the Higher Education Act of 1965, as amended (HEA), 
requires that, before publishing any proposed regulations for programs 
under Title IV of the HEA, the Secretary obtain public involvement in 
the development of the proposed regulations. After obtaining advice and 
recommendations, the Secretary must conduct a negotiated rulemaking 
process to develop the proposed regulations. All published proposed 
regulations must conform to agreements resulting from the negotiated 
rulemaking process unless the Secretary reopens the negotiated 
rulemaking process or provides a written explanation to the 
participants in that process why the Secretary has decided to depart 
from the agreements.
    To obtain public involvement in the development of the proposed 
regulations, we held listening sessions in Washington, D.C., Atlanta, 
Chicago, and San Francisco. Four half-day sessions were held on 
September 13 and 14, 1999, in Washington, D.C. In addition, we held 
three regional sessions in Atlanta on September 17, in Chicago on 
September 24, and in San Francisco on September 27, 1999. The Office of 
Student Financial Assistance's Customer Service Task Force also 
conducted listening sessions to obtain public involvement in the 
development of our regulations.
    We then published a notice in the Federal Register (64 FR 73458, 
December 30, 1999) to announce our intention to establish two 
negotiated rulemaking committees to draft proposed regulations 
affecting Title IV of the HEA. The notice requested nominations for 
participants from anyone who believed that his or her organization or 
group should participate in this negotiated rulemaking process. The 
notice announced that we would select participants for the process from 
the nominees of those organizations or groups. The notice also 
announced a tentative list of issues that each committee would 
negotiate.
    Once the two committees were established, they met to develop 
proposed regulations over the course of several months, beginning in 
February. The proposed regulations contained in this NPRM reflect the 
final consensus of Negotiating Committee I (committee), which was made 
up of the following members:

American Association of Collegiate Registrars and Admissions Officers
American Association of Cosmetology Schools
American Association of State Colleges and Universities (in coalition 
with American Association of Community Colleges)
American Council on Education
Career College Association
Coalition of Higher Education Assistance Organizations
Consumer Bankers Association
Education Finance Council
Education Loan Management Resources
Legal Services
National Association of College and University Business Officers
National Association of Independent Colleges and Universities
National Association of State Universities and Land-Grant Colleges
National Association of Student Financial Aid Administrators
National Association of Student Loan Administrators
National Council of Higher Education Loan Programs
National Direct Student Loan Coalition
Sallie Mae, Inc.
Student Loan Servicing Alliance
The College Fund/United Negro College Fund

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United States Department of Education
United States Student Association
US Public Interest Research Group
    As stated in the committee protocols, consensus means that there 
must be no dissent by any member in order for the committee to be 
considered to have reached agreement. Consensus was reached on all of 
the proposed regulations in this document, except for proposed 
Sec. 668.183(c)(1)(iii), which provides that certain loans being repaid 
under the Direct Loan Program's income contingent repayment plan are 
considered to be in default when calculating a proprietary, non-degree-
granting institution's cohort default rate.

Significant Proposed Regulations

    We group major issues according to subject, with appropriate 
sections of the proposed regulations referenced in parentheses. We 
discuss other substantive issues under the sections of the proposed 
regulations to which they pertain. Generally, we do not address 
proposed regulatory provisions that are technical or otherwise minor in 
effect.

Revising Cohort Default Rate Regulations for Clarity and Consistency 
(Subpart M of Part 668)

    Statute: The statutory provisions governing the calculation and 
appeals of cohort default rates and related sanctions in the FFEL and 
Direct Loan programs are provided in section 435 of the HEA.
    Current Regulations: Most of the current regulations for cohort 
default rates in the FFEL and Direct Loan programs are in Sec. 668.17.
    Proposed Regulations: We have moved the requirements in current 
Sec. 668.17 to a new subpart M of part 668 and revised their text. We 
have tried to make the regulations easier to read. To do this, the 
proposed regulations use short paragraphs and sentences, they use 
personal pronouns (``you'' and ``we''), and they are organized 
differently than the current regulations.
    The following general changes would also be made by these proposed 
regulations:
     Submission deadlines. Currently, the deadlines for 
challenges, requests for adjustments, and appeals vary, depending upon 
the particular action involved and the type of submission made. In the 
current regulations, some deadlines are measured in working days and 
others are measured in calendar days.
    We are proposing to make the deadlines for submitting challenges, 
requests for adjustments, and appeals as consistent as possible. 
Revisions to achieve this goal are made throughout the proposed 
regulations and summarized in the proposed Appendix A to subpart M of 
part 668.
    All deadlines in these proposed regulations are in calendar days. 
In general, an institution is allowed 15 calendar days to request 
records or pay a fee and is allowed 30 calendar days to submit its 
completed request for adjustment or appeal. The only exceptions to this 
general approach are in the draft cohort default rate process (during 
which an institution is allowed 45 calendar days to submit its 
challenge) and in relation to an economically disadvantaged appeal 
(during which an institution is allowed 30 calendar days to send us its 
management's written assertion and 60 calendar days to send us its 
completed appeal). Under the proposed regulations, a data manager is 
allowed 20 calendar days to respond to a request for records or for 
information.
     Electronic processing. These proposed regulations do not 
include explicit requirements for the electronic submission and 
processing of challenges, requests for adjustments, or appeals. Rather, 
wherever possible in revising these regulations, we have removed 
language that could be read as restricting our ability to implement 
efficient processes for issuing and adjudicating cohort default rates.
    Reasons: We are proposing to rewrite these regulations so that the 
requirements for cohort default rates are more clear and consistent. In 
addition to restructuring and revising the regulatory text, these 
proposed regulations provide complete information about administrative 
requirements and make submission deadlines more consistent. Explicit 
requirements are not provided for electronic processing requirements 
because they could limit flexibility and make it difficult for us to 
adapt to changes in technology.

Calculation of Cohort Default Rates for Proprietary, Non-degree-
granting Institutions (Sec. 668.183(c)(1)(iii))

    Current Regulations: Under current Secs. 668.17(e)(1)(ii) and 
668.17(f)(1)(ii), one of the reasons for considering a Direct Loan to 
be in default, for the purposes of calculating a proprietary, non-
degree-granting institution's cohort default rate, is that the loan has 
been repaid under the income contingent repayment plan for 360 days, 
with scheduled payments less than 15 dollars per month and less than 
the amount of interest accruing on the loan, before the end of the 
fiscal year (FY) following the cohort's fiscal year.
    Proposed Regulations: We are not proposing to change the current 
regulatory requirements. They are included in proposed 
Sec. 668.183(c)(1)(iii).
    Reasons: The inclusion of the current regulatory requirement in 
these proposed regulations was the subject of extensive discussion 
among the negotiators. Some non-Federal negotiators felt very strongly 
that this provision should be changed or dropped. We pointed out, 
however, that proposed Sec. 668.183(c)(1)(iii) did not make any 
substantive change in our current regulations and had been presented to 
the committee only as part of the overall restructuring of the 
regulations. Because these non-Federal negotiators continued to 
disagree strongly with proposed Sec. 668.183(c)(1)(iii), the committee 
agreed to exclude that provision in the call for consensus on the draft 
regulations.
    Several non-Federal negotiators objected to this provision because 
they felt that it unfairly targets non-degree-granting proprietary 
institutions. They asked that the special treatment of Direct Loans 
being repaid under the income contingent repayment plan be removed or 
be applied to all institutions, not to non-degree-granting proprietary 
institutions only. These negotiators argued that this provision could 
provide an incentive for institutions to counsel students to defer 
repayment, rather than encourage them to repay under the income 
contingent repayment plan, even if the student might benefit from 
repayment under this plan. These negotiators also argued that an 
institution has little control over whether a borrower will choose to 
repay under the income contingent repayment plan, and the institution 
should not be held responsible for that choice.
    We appreciate the negotiators' concerns but continue to believe 
that, without this provision, an institution could have a low cohort 
default rate even though a large proportion of its former students are 
making only minimal or no payments on their loans. We believe that 
situation is a potential area for abuse in the Direct Loan Program, and 
it is imperative to protect students and taxpayers from that potential 
abuse.
    We also continue to believe that this provision should apply to 
non-degree-granting proprietary institutions only. Our experience and 
data show that student borrowers at non-degree-granting proprietary 
institutions are at a higher risk of default than other student 
borrowers. Non-degree-granting proprietary institutions provide 
students with education or training needed to secure employment, and a

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borrower's repayment under income contingent repayment directly 
reflects the value of the education or training provided by that 
institution in the marketplace.

Determining Cohort Default Rates for Institutions That Have Undergone a 
Change in Status (Sec. 668.184)

    Statute: Under section 435(m)(3) of the HEA, the Secretary must 
prescribe regulations that will prevent an institution from evading the 
consequences of cohort default rates by branching, consolidating, 
changing ownership or control, or by similar devices.
    Current Regulations: Current Sec. 668.17(g)(2) provides general 
requirements for the application of cohort default rates or combined 
cohort default rates to an institution that has undergone a change in 
status.
    Proposed Regulations: Proposed Sec. 668.184 provides detailed 
requirements for determining an institution's cohort default rate 
following three types of institutional restructuring: an institution's 
acquisition of or merger into a separate institution, an institution's 
acquisition of a branch or location that was formerly part of a 
separate institution, or a spin-off of an institution's branch or 
location to become a separate, new institution.
    The requirements proposed for each of the three types of changes in 
status are summarized in the following paragraphs:
     Acquisition or merger of institutions. If an institution 
acquires another institution or a new institution is created by the 
merger of two or more institutions, the method for determining its 
cohort default rate depends on the date of the acquisition or merger 
and the date of publication of the cohort default rate:
    1. Cohort default rates published before the acquisition or merger. 
For cohort default rates that were published before the date of the 
change in status, the institution's cohort default rate is the rate 
that was calculated for the predecessor institution with the greatest 
total number of borrowers entering repayment in the two most recent 
cohorts that were used to calculate those cohort default rates.
    2. Cohort default rates published after the acquisition or merger. 
After the date of the acquisition or merger, the data for the 
institutions involved in the acquisition or merger would be combined, 
and the institution's cohort default rate would be calculated based on 
that combined data (in this preamble, this is referred to as a ``merged 
rate'').

    Example #1. On January 1, 2000, Institution A merges with 
Institution B to form Institution C. Data and cohort default rates 
for Institutions A, B, and C, for FY 1996 through FY 2001, are 
provided in the following table. (In the following table, the 
``Borrowers in Cohort'' rows identify the total number of borrowers 
in each institution's cohort for FY 1996 through FY 2001, and the 
``Borrowers in Default'' rows identify the total number of borrowers 
in each cohort who are considered to be in default for purposes of 
calculating a cohort default rate.)
[GRAPHIC] [TIFF OMITTED] TP02AU00.001

    Since Institution C was created by a merger of Institutions A and 
B, its data for borrowers in cohorts and in default are separated into 
``actual'' data and ``applied'' data. Institution C's ``actual'' data 
includes only the borrowers who received loans to attend Institution C. 
Its ``applied'' data and cohort default rates reflect the data for all 
institutions and the calculations used to determine Institution C's 
cohort default rate under proposed Sec. 668.184(b).
    Institution C was created on January 1, 2000. Since cohort default 
rates for a fiscal year are generally published before the end of the 
second subsequent fiscal year (FY 1996's cohort default rates are 
published before the end of FY 1998, FY 1997's cohort default rates are 
published before the end of FY 1999, etc.), Institution C was created 
after the

[[Page 47593]]

FY 1997 cohort default rates were published (around September 1999) and 
before the FY 1998 cohort default rates were published (around 
September 2000).
    As a result, under the proposed regulations, Institution C's cohort 
default rates would be calculated in the following manner:
    1. Cohort default rates published before the merger. For cohort 
default rates that were published before the merger (cohort default 
rates for FY 1997 and before), Institution C's cohort default rates 
will be the rates of its predecessor with the greatest total number of 
borrowers entering repayment in the two most recent cohorts that were 
used to calculate those cohort default rates (for FY 1996 and FY 1997). 
The total number of Institution A's borrowers for those 2 fiscal years 
is 127 (59 + 68 = 127), and the total number of Institution B's 
borrowers for those 2 fiscal years is 77 (35 + 42 = 77). Since the 
total for Institution A (127) is greater than the total for Institution 
B (77), Institution A's cohort default rates for FY 1997 and before 
apply to Institution C.
    2. Cohort default rates published after the merger. All of 
Institution C's cohort default rates that are published after the date 
of the merger (cohort default rates for FY 1998 and after) are 
calculated as merged rates. To calculate Institution C's merged rates 
for FY 1998 and each following fiscal year, totals are calculated for 
the number of borrowers and defaulted borrowers for Institutions A, B, 
and C in each fiscal year. For example, for FY 1998, totals are 
calculated for Institutions A, B, and C's ``Borrowers in Cohort'' (63 + 
40 + 0 = 103) and for their ``Borrowers in Default'' (9 + 3 + 0 = 12). 
Since the total number of borrowers in Institution C's merged cohort is 
greater than 30 (103), Institution C's merged rate for FY 1998 is 11.7 
percent (12 divided by 103 is 0.117). All of Institution C's subsequent 
cohort default rates are also calculated as merged rates.
     Acquisition of branches or locations. If an institution 
acquires a branch or a location from another institution, the method 
for determining its cohort default rate depends on the date of the 
acquisition and the date of publication of the cohort default rate:
    1. Cohort default rates published before the acquisition. For 
cohort default rates that were published before the date of the 
acquisition, the institution's cohort default rate is unchanged. 
However, the institution's cohort default rate would apply to both the 
institution and to the newly acquired branch or location.
    2. Three cohort default rates published immediately after the 
acquisition. For the three cohort default rates published after the 
date of the acquisition, the institution's cohort default rate is 
calculated as a merged rate. The calculations of the merged rates are 
based on the data for all of the borrowers at the institutions involved 
in the change in status, including all of their branches and locations. 
The cohort default rates for the institution from which the location or 
branch was acquired are not calculated as merged rates.
    3. Cohort default rates published after the third merged rate. 
After the institution's third merged rate, its cohort default rate is 
no longer calculated as a merged rate. Its subsequent cohort default 
rates no longer include the data for the other institution involved in 
the change in status.

    Example #2. On July 10, 2002, Institution B acquires a location 
from Institution A. Data and cohort default rates for Institutions A 
and B, for FY 1998 through FY 2003, are provided in the following 
table. (In the following table, the ``Borrowers in Cohort'' rows 
identify the total number of borrowers in each institution's cohort 
for FY 1998 through FY 2003, and the ``Borrowers in Default'' rows 
identify the total number of borrowers in each cohort who are 
considered to be in default for purposes of calculating a cohort 
default rate.)
[GRAPHIC] [TIFF OMITTED] TP02AU00.002

    Since Institution B acquired a location from Institution A, 
Institution B's data for ``borrowers in cohorts'' and ``borrowers in 
default'' are separated into ``actual'' data and ``applied'' data. 
Institution B's ``actual'' data includes only the borrowers who 
received loans to attend Institution B. Its ``applied'' data and cohort 
default rates reflect the data for both institutions and the 
calculations used to determine Institution B's cohort default rate 
under proposed Sec. 668.184(c).
    Institution B acquired the location from Institution A on July 10, 
2002. Since cohort default rates for a fiscal year are generally 
published before the

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end of the second subsequent fiscal year (FY 1996's cohort default 
rates are published before the end of FY 1998, FY 1997's cohort default 
rates are published before the end of FY 1999, etc.), Institution B 
acquired the location after the FY 1999 cohort default rates were 
published (around September 2001) and before the FY 2000 cohort default 
rates were published (around September 2002).
    As a result, under the proposed regulations, Institution B's cohort 
default rates would be calculated in the following manner:
    1. Cohort default rates published before the acquisition. For 
cohort default rates that were published before the acquisition (cohort 
default rates for FY 1999 and before), Institution B's cohort default 
rates are unchanged.
    2. Three cohort default rates published immediately after the 
acquisition. For the three cohort default rates published after the 
acquisition (FY 2000, FY 2001, and FY 2002), Institution B's cohort 
default rates are calculated as merged rates. To calculate Institution 
B's merged rates for FY 2000, FY 2001, and FY 2002, totals are 
calculated for the number of borrowers and defaulted borrowers for 
Institutions A and B in each fiscal year. For example, for FY 2001, 
totals are calculated for Institutions A and B's ``Borrowers in 
Cohort'' (154 + 98 = 252) and for their ``Borrowers in Default'' (20 + 
31 = 51). Since the total number of borrowers in Institution B's merged 
cohort is greater than 30, Institution B's merged rate for FY 2001 is 
20.2 percent (51 divided by 252 is 0.202).
    3. Cohort default rates published after the third merged rate. 
After Institution B's third merged rate (for FY 2002), its cohort 
default rate is no longer calculated as a merged rate. Institution B's 
cohort default rates for FY 2003 and later no longer include data from 
Institution A.
     Branches or locations becoming institutions. If a branch 
or location of an institution becomes a separate, new institution, the 
method for determining its cohort default rate depends on the date of 
the change in status and the date of publication of the cohort default 
rate:
    1. Cohort default rates published before the change in status. For 
cohort default rates that were published before the date of its change 
in status, the institution's cohort default rate is the same as the 
cohort default rate for its former parent institution.

    2. Three cohort default rates published immediately after the 
change in status. For the three cohort default rates published after 
the date of the change in status, the institution's cohort default rate 
is calculated as a merged rate. The calculations of the merged rates 
are based on the data for all of the borrowers at the institution and 
at its former parent institution, including all of their branches and 
locations. The cohort default rates for the former parent institution 
are not calculated as merged rates.
    3. Cohort default rates published after the third merged rate. 
After the institution's third merged rate, its cohort default rate is 
no longer calculated as a merged rate. Its subsequent cohort default 
rates no longer include the data for the former parent institution.
    Example #3. On October 5, 2000, a location of Institution A 
becomes a separate, new Institution B. Data and cohort default rates 
for Institutions A and B, for FY 1997 through FY 2002, are provided 
in the following table.
(In the following table, the ``Borrowers in Cohort'' rows identify the 
total number of borrowers in each institution's cohort for FY 1997 
through FY 2002, and the ``Borrowers in Default'' rows identify the 
total number of borrowers in each cohort who are considered to be in 
default for purposes of calculating a cohort default rate.)
[GRAPHIC] [TIFF OMITTED] TP02AU00.003

    Since Institution B has undergone a change in status, its data for 
``borrowers in cohorts'' and ``borrowers in default'' are separated 
into ``actual'' data and ``applied'' data. Institution B's ``actual'' 
data includes only the borrowers who received loans to attend 
Institution B. Its ``applied'' data and cohort default rates reflect 
the data for both institutions and the calculations used to determine 
Institution B's cohort default rate under proposed Sec. 668.184(d).
    Institution B became a new institution on October 5, 2000. Since 
cohort default rates for a fiscal year are generally published before 
the end of the second subsequent fiscal year (FY 1996's cohort default 
rates are published before the end of FY 1998, FY 1997's cohort default 
rates are published before the end of FY 1999, etc.), Institution B

[[Page 47595]]

became a new institution after the FY 1998 cohort default rates were 
published (around September 2000) and before the FY 1999 cohort default 
rates were published (around September 2001).
    As a result, under the proposed regulations, Institution B's cohort 
default rates would be calculated in the following manner:
    1. Cohort default rates published before the change in status. For 
cohort default rates that were published before Institution B became a 
new institution (cohort default rates for FY 1998 and before), 
Institution B's cohort default rates are the same as Institution A's.
    2. Three cohort default rates published immediately after the 
change in status. For the three cohort default rates published after 
the change in status (FY 1999, FY 2000, and FY 2001), Institution B's 
cohort default rates are calculated as merged rates. To calculate 
Institution B's merged rates for FY 1999, FY 2000, and FY 2001, totals 
are calculated for the number of borrowers and defaulted borrowers for 
Institutions A and B in each fiscal year. For example, for FY 2000, 
totals are calculated for Institutions A and B's ``Borrowers in 
Cohort'' (32+3=35) and for their ``Borrowers in Default'' (3+2=5). 
Since the total number of borrowers in Institution B's merged cohort is 
greater than 30 (35), Institution B's merged rate for FY 2000 is 14.3 
percent (5 divided by 35 is 0.143).
    3. Cohort default rates published after the third merged rate. 
After Institution B's third merged rate (for FY 2001), its cohort 
default rate is no longer calculated as a merged rate. Institution B's 
cohort default rates for FY 2002 and later no longer include data from 
Institution A.

    Example #4. Institution A, as described in the previous example 
(Example #3), has an FY 1996 cohort default rate of 32.0 percent. 
When applying prior cohort default rates under Sec. 668.184, 
Institution A's FY 1996 cohort default rate is applied to 
Institution B. Thus, Institution B's cohort default rates for FY 
1996 through FY 2002 are--

FY 1996: 32.0%
FY 1997: 25.7%
FY 1998: 30.3%
FY 1999: 7.3%
FY 2000: 14.3%
FY 2001: 18.4%
FY 2002: 6.5%

    Institution B has 3 consecutive cohort default rates of 25 percent 
or greater (for FY 1996, FY 1997, and FY 1998), but as we explain 
below, it is not necessarily subject to a loss of participation based 
on those cohort default rates.
    In example #3, Institution B became a separate, new institution on 
October 5, 2000. This was after the FY 1998 cohort default rates are 
published (around September 2000) and before the FY 1999 cohort default 
rates are published (around September 2001). Therefore all of the 
consecutive cohort default rates of 25 percent or greater were 
published before Institution B became a separate, new institution, and 
Institution A was notified of the loss of participation based on those 
cohort default rates before Institution B became a separate, new 
institution.
    Proposed Sec. 668.184 addresses only the determination of an 
institution's cohort default rates after a change in status. Any 
application of an institution's prior loss of eligibility to another 
institution under this subpart is subject to the criteria in proposed 
Sec. 668.188. In the preceding example, unless Institutions A and B 
meet the criteria described in Sec. 668.188, there would be no action 
against Institution B based on its FY 1996, FY 1997, and FY 1998 cohort 
default rates. However, if Institution B's cohort default rate for FY 
1999 had been 25 percent or greater (instead of 7.3 percent), 
Institution B would be subject to an action based on 3 consecutive 
cohort default rates of 25 percent or greater, under proposed 
Sec. 668.187.
    Reasons: Proposed Sec. 668.184 more clearly describes the manner in 
which an institution's cohort default rate is determined after a change 
in status and would reduce the possibility of an institution's evasion 
of the consequences of high cohort default rates.
    A separate proposed Sec. 668.188 also addresses the possibility of 
an institution's evasion of the consequences of high cohort default 
rates. That proposed section would apply a loss of eligibility that was 
previously imposed against one institution to another institution 
following a change in status. Changes proposed for Sec. 668.188 are 
discussed later in this preamble, under ``Preventing Evasion of the 
Consequences of Cohort Default Rates (Sec. 668.188).''

Participation Rate Index Challenges and Appeals (Secs. 668.185(c) and 
668.195)

    Statute: Under section 435(a)(6) of the HEA, an institution may 
challenge an anticipated loss of eligibility based on excessive cohort 
default rates, during the draft cohort default rate process, if its 
participation rate index is 0.0375 or less for any of the 3 most recent 
fiscal years for which it has received a cohort default rate. An 
institution's participation rate index for a fiscal year is derived by 
multiplying its cohort default rate for that fiscal year by the 
percentage of its students who received an FFEL or Direct Loan Program 
loan to attend it during a specified 12-month period.
    Current Regulations: Current Sec. 668.17(j)(4) simply tracks the 
statutory language. Under current Sec. 668.17(c)(1)(ii)(A), an 
institution may also appeal on the basis of its participation rate 
index during the official cohort default rate process.
    Proposed Regulations: The proposed regulations would make three 
changes to the current regulatory requirements:
     Eligibility. The proposed regulations would allow any 
institution subject to a loss of participation based on its cohort 
default rate (including institutions with cohort default rates greater 
than 40 percent) to submit a participation rate index challenge or 
appeal. Currently, only an institution subject to a loss of 
participation based on 3 consecutive cohort default rates of 25 percent 
or greater may appeal on this basis.
     Ceiling. The proposed regulations would use a 
participation rate index ceiling of 0.06015, rather than 0.0375, for 
institutions that are subject to a loss of participation based on 1 
cohort default rate over 40 percent.
     Average rates. The proposed regulations would allow an 
institution with fewer than 30 borrowers in its cohort for a fiscal 
year to choose to calculate its participation rate index for that 
fiscal year using either the data for that fiscal year alone or the 
data for the 3 fiscal years considered in calculating an average rate 
for the institution, under proposed Sec. 668.183(d)(2).
    Reasons:
     Eligibility. In the interests of consistency, we are 
proposing to allow an institution to submit a participation rate index 
challenge or appeal to avoid the consequences of a cohort default rate 
over 40 percent. Additional reasons for this change are discussed later 
in this preamble, under ``Use of Subpart G of Part 668 when an 
Institution's Cohort Default Rate Is Greater than 40 Percent 
(Sec. 668.187(a)(1)).''
     Ceiling. The proposed regulations include a higher 
participation rate index ceiling for institutions that are challenging 
or appealing a loss of eligibility based on 1 cohort default rate over 
40 percent because, without this higher ceiling, those institution 
would be held to a more restrictive standard than other institutions.
    An institution's participation rate index for a fiscal year is 
derived by multiplying its cohort default rate for that fiscal year by 
the percentage of its students who received an FFEL or Direct Loan 
Program loan to attend it

[[Page 47596]]

during a specified 12-month period. The statutory participation rate 
index ceiling of 0.0375, which applies to an institution that is 
challenging or appealing a loss of eligibility based on 3 consecutive 
cohort default rates of 25 percent or greater, is based on a maximum 
loan program participation rate of 15 percent. That is, an institution 
having the lowest default rate for which it could lose participation 
(25 percent) could meet the 0.0375 ceiling, and avoid the consequences 
of its three cohort default rates of 25 percent or greater, if 15 
percent, at most, of its students received loans (0.25 x 0.15=0.0375).
    If a participation rate index of 0.0375 was used for an institution 
that is subject to a loss of eligibility based on 1 cohort default rate 
over 40 percent, that institution would be subject to a participation 
rate index ceiling that reflected a loan program participation of, at 
most, about 9.35 percent of that institution's students 
(0.401 x 0.0935=0.0374935).
    Under the proposed regulations, an institution that is subject to a 
loss of eligibility based on 1 cohort default rate greater than 40 
percent would be able to submit a participation rate index challenge or 
appeal if its participation rate index for that cohort's fiscal year 
was equal to 0.06015 or less. That is, an institution having the lowest 
default rate for which it could lose participation (40.1 percent) could 
meet the 0.06015 ceiling if 15 percent, at most, of its students 
received loans (0.401 x 0.15=0.06015).
    We especially request comments on whether it is appropriate to use 
this higher participation rate index for an institution that is subject 
to a loss of participation based on 1 cohort default rate greater than 
40 percent, or whether it would be more appropriate to use the current 
participation rate index of 0.0375.
     Average rates. The draft cohort default rates that we 
provide to institutions are calculated using data for 1 fiscal year 
only. However, if an institution's cohort for a fiscal year includes 
fewer than 30 borrowers, its official cohort default rate will be 
calculated as an average rate, based on 3 years of data. Without the 
changes proposed for participation rate index challenges (which may be 
based on draft cohort default rates) and appeals (which are based on 
official cohort default rates), the proposed regulations might cause 
different participation rate indexes to be calculated for an 
institution during a challenge and an appeal.
    Use of Subpart G of Part 668 when an Institution's Cohort Default 
Rate Is Greater than 40 Percent (Sec. 668.187(a)(1)) Current 
Regulations: Under current Sec. 668.17(a)(2), we may initiate a 
proceeding under subpart G of part 668 to limit, suspend, or terminate 
an institution's participation in the Title IV, HEA programs if the 
institution's cohort default rate is greater than 40 percent for any 
fiscal year.
    Proposed Regulations: Proposed Sec. 668.187(a)(1) would impose a 
loss of participation in the FFEL and Direct Loan programs against an 
institution having a cohort default rate greater than 40 percent. No 
proceedings under subpart G of part 668 would be needed to impose this 
loss of participation. The loss would continue for the remainder of the 
fiscal year in which the institution is notified and for the next 2 
fiscal years.
    Reasons: The proposed regulations would make the consequences of 
excessive cohort default rates more consistent. Under the proposed 
regulations, an institution with a cohort default rate greater than 40 
percent and an institution with 3 consecutive cohort default rates of 
25 percent or greater would both lose eligibility for the FFEL and 
Direct Loan programs for the same amount of time. Under the proposed 
regulations, both types of institutions would also be subject to the 
same liability for loans made during the adjustment and appeals 
process, would be required to meet the same criteria to regain 
participation in the FFEL or Direct Loan programs, and would be 
permitted to maintain participation in Federal campus-based programs.
    Currently, an institution with a cohort default rate greater than 
40 percent may be subject to a loss of participation in all Title IV, 
HEA programs for an indefinite period of time. An institution with 3 
consecutive cohort default rates of 25 percent or greater can continue 
to participate in the Federal campus-based programs during the period 
that it is ineligible to participate in the FFEL, Direct Loan, and 
Federal Pell Grant programs, and it is then in a better position to re-
establish its eligibility for the loan and Federal Pell Grant programs 
when its period of ineligibility ends.
    During negotiated rulemaking, non-Federal negotiators voiced 
concerns about making the loss of participation ``automatic'' for an 
institution with a cohort default rate greater than 40 percent, rather 
than discretionary with the Secretary. This concern is addressed in 
these proposed regulations by providing essentially the same 
challenges, adjustments, and appeals for a loss of participation based 
on 1 cohort default rate greater than 40 percent as are available to an 
institution that is subject to a loss of participation based on 3 
consecutive cohort default rates of 25 percent or greater. Currently, 
an institution with a cohort default rate greater than 40 percent has 
fewer options for appeal than an institution with 3 consecutive cohort 
default rates of 25 percent or greater.
    During the negotiations, the Department agreed to treat 
institutions with 1 cohort default rate greater than 40 percent 
differently in one aspect of the appeals process, compared to 
institutions with 3 cohort default rates of 25 percent or greater. 
Generally, a loss of eligibility based on 3 consecutive cohort default 
rates of 25 percent or greater includes loss of participation in the 
FFEL, Direct Loan, and Federal Pell Grant programs. The Department 
agreed to propose that a loss of eligibility based on 1 cohort default 
rate greater than 40 percent would include loss of participation in the 
FFEL and Direct Loan programs only. It would not affect an 
institution's ability to participate in the Federal Pell Grant Program.
    Some non-Federal negotiators contended that institutions with 1 
cohort default rate greater than 40 percent should not be subject to a 
loss of participation in the Federal Pell Grant Program because they 
might not have an extended history of excessive rates. We agreed with 
the non-Federal negotiators. If the institution continues to have 
excessive cohort default rates, it will have 3 consecutive cohort 
default rates of 25 percent or greater and will be subject to a loss of 
participation in the Federal Pell Grant Program, along with an extended 
loss of participation in the FFEL and Direct Loan programs.

Use of Subpart G of Part 668 to End an Institution's Participation in 
the FFEL Program (Sec. 668.187(a)(2))

    Current Regulations: Under Sec. 668.17(a)(3), we may initiate a 
proceeding under subpart G of part 668 to limit, suspend, or terminate 
an institution's participation in the FFEL Program, if that 
institution's 3 most recent cohort default rates are 25 percent or 
greater and 1 or more Direct Loans were used to calculate any of those 
cohort default rates. However, under Sec. 668.17(b)(2) the same 
institution, with the same three cohort default rates, would be subject 
to a loss of eligibility in the Direct Loan Program, without a 
proceeding under subpart G of part 668.
    Proposed Regulations: We are proposing to end an institution's 
eligibility in the FFEL Program, under proposed Sec. 668.187(a)(2), 
without initiating a proceeding under subpart G

[[Page 47597]]

of part 668, regardless of the inclusion of Direct Loans in the 
institution's cohort default rates.
    Reasons: We believe that it is appropriate to try to provide 
consistent treatment for all institutions in this area. In every other 
requirement in Sec. 668.17, an institution that is subject to 
Sec. 668.17(a)(3) is treated the same as other institutions. Its 
ability to challenge, request an adjustment, or appeal the consequences 
of its cohort default rates is the same as any other institution 
subject to a loss of participation based on 3 consecutive cohort 
default rates of 25 percent or greater.

Preventing Evasion of the Consequences of Cohort Default Rates 
(Sec. 668.188)

    Statute: Under section 435(m)(3) of the HEA, the Secretary is 
directed to prescribe regulations that will prevent an institution from 
evading the consequences of cohort default rates by branching, 
consolidating, changing ownership or control, or by similar devices.
    Current Regulations: The current regulations, in Sec. 668.17(g)(2), 
provide general requirements for the application of cohort default 
rates or combined cohort default rates to an institution that has 
undergone a change in status. These requirements are intended, in part, 
to prevent an institution from evading the consequences of its cohort 
default rates.
    Proposed Regulations: Under proposed Sec. 668.188, a loss of 
participation to which an institution was subject, as the result of 1 
cohort default rate greater than 40 percent or 3 consecutive cohort 
default rates of 25 percent or greater, would be applied to another 
institution if all 4 of the following criteria are met:
    1. Loss of eligibility. Before any change in institutional 
structure or identity occurs, 1 of the 2 institutions is subject to a 
loss of participation as the result of 1 cohort default rate greater 
than 40 percent or 3 consecutive cohort default rates of 25 percent or 
greater.
    2. Change in structure or identity. Both institutions are parties 
to a transaction that results in a change of ownership, a change in 
control, a merger, a consolidation, an acquisition, a change of name, a 
change of address, any change that results in a location becoming a 
freestanding institution, a purchase or sale, a transfer of assets, an 
assignment, a change of identification number, a contract for services, 
an addition or closure of one or more locations or branches or 
educational programs, or any other change in whole or in part in 
institutional structure or identity.
    3. Offer program at substantially the same address. After the 
change in structure or identity, the currently eligible institution 
offers an educational program at substantially the same address as the 
ineligible institution.
    In general, an institution would be considered to be offering an 
educational program at ``substantially the same address'' as an 
ineligible institution if its site is the same as the ineligible 
institution's or its site is physically located close enough to the 
ineligible institution's site to demonstrate that the educational 
programs that it provides are intended to serve the same population.
    As examples, an institution may be considered to be offering an 
educational program at ``substantially the same address'' as an 
ineligible institution if its site is located across the street from 
the ineligible institution's site, on the same block as the ineligible 
institution's site, or in the same business complex as the ineligible 
institution's site. However, an institution may be located further away 
from an ineligible institution's site and still be considered to be 
offering an educational program at ``substantially the same address'' 
if its educational program is intended to serve the same population.
    4. Commonality of ownership or management. There is a commonality 
of ownership or management between the two institutions. The term 
``commonality of ownership or management'' is defined in proposed 
Sec. 668.188(b). In general, a commonality of ownership or management 
exists if the same person (an individual, corporation, or partnership) 
or members of that person's family, directly or indirectly, were or are 
managers at both institutions or were or are able to affect 
substantially both institutions' actions.
    If all four of these criteria are met, an institution is subject to 
the same loss of participation to which the ineligible institution is 
subject. The scope and the duration of the institution's loss of 
participation under Sec. 668.188 is the same as the scope and duration 
of the previously ineligible institution's loss of participation. That 
is, the institution loses its participation in the same programs as the 
previously ineligible institution and cannot reapply to participate in 
those programs until the date on which the previously ineligible 
institution can or would have been able to reapply. An institution 
would only be able to challenge, request an adjustment, or appeal a 
loss of participation that is applied to it under proposed Sec. 668.188 
under the same requirements that apply to the previously ineligible 
institution.
    The proposed regulations include an exception to the criteria 
concerning commonality of management. During a teach-out, the 
institution conducting the teach-out would be allowed 60 days to find 
replacements for the previous management and to notify us that any 
commonality of management has ended. If we determine, based on that 
notice, that the commonality of management has not ended, the 
institution would be allowed an additional 30 days to make the 
management changes that we request. As long as the institution 
conducting the teach-out complies with these requirements, we would not 
consider a commonality of management to exist, and the institution 
would not be subject to the previously ineligible institution's loss of 
eligibility. However, this teach-out exception applies only with 
respect to the commonality of management criteria. It does not apply to 
an institution conducting a teach-out if there is a commonality of 
ownership.
    In proposed Sec. 668.188(d), we encourage institutions to contact 
us if they anticipate a change in status described in Sec. 668.188. By 
contacting us, an institution can learn the consequences, if any, of a 
change in status before it occurs and can consider those consequences 
before implementing the change. If an institution contacts us and gives 
us the information we request, we will notify it of our initial 
determination of the anticipated change's effect on the institution's 
eligibility.
    In the following paragraphs, we provide four examples of the manner 
in which an institution's loss of participation would be applied to 
another institution under proposed Sec. 668.188:

    Example #1. We notify Institution A on September 25, 2001, that 
its cohort default rate for FY 1999 is 45 percent. After exhausting 
its administrative appeals, Institution A becomes ineligible to 
participate in the FFEL and Direct Loan programs on December 10, 
2001. On January 5, 2002, Institution A's owner sells it to 
Institution B, a corporation in which she holds a 25 percent 
ownership interest and that has a separate identification number for 
Federal student aid purposes. On the same day, Institution A's 
managers, students, staff, and equipment move across the street to a 
new building, and Institution B begins to provide educational 
programs in the new building.

    To determine whether Institution A's loss of eligibility will be 
applied to Institution B under the proposed regulations, each of the 
following four questions must be answered:
    1. Was the predecessor institution subject to a loss of eligibility 
before the change? Yes. Institution A was notified

[[Page 47598]]

of its loss of participation on September 25, 2001, and the change in 
structure occurred more than 3 months later, on January 5, 2002.
    2. Was there a change in structure or identity? Yes. As the result 
of a sale, Institution B took over Institution A's operations.
    3. Is the remaining institution providing an educational program at 
substantially the same address as the predecessor institution? Yes. 
Though the owner moved the site for the educational programs across the 
street, Institutions A and B provided an educational program at 
substantially the same address. They are located close to one another 
and are intended to serve the same population.
    4. Is there a commonality of ownership or management between both 
institutions? Yes. In this example, both a commonality of ownership and 
a commonality of management exist, and either of those, alone, would 
suffice to meet the criterion. Because the same individual was able to 
substantially affect the actions of Institutions A and B, there is a 
commonality of ownership between those institutions. Since there is no 
change in management, there is also a commonality of management between 
the two institutions.
    Since Institutions A and B meet all four of the criteria, the loss 
of eligibility to which Institution A was subject is applied to 
Institution B. Institution B is ineligible to participate in the FFEL 
and Direct Loan programs for the same period that would have been 
applied to Institution A, until October 1, 2003.

    Example #2. Institution A is notified on September 25, 2000, 
that its third consecutive cohort default rate is 25 percent or 
greater. After exhausting its administrative appeals, Institution A 
loses its ability to participate in the FFEL, Direct Loan, and 
Federal Pell Grant programs on January 15, 2001. Institution A 
closes 2 months later, and on March 20, 2001, Institution B begins 
providing a teach-out for Institution A's students, at the same 
site. Institutions A and B are not owned or controlled by the same 
person, either directly or indirectly, and do not have the same 
student aid identification number. Institution B replaces all of 
Institution A's managers and, within 60 days after the change, 
notifies us that it believes that any commonality of management has 
ended. We determine that the commonality of management has ended. 
While conducting the teach-out, Institution B enrolls new students 
and continues to provide educational programs at that site.

    To determine whether Institution A's loss of eligibility will be 
applied to Institution B, each of the following four questions must 
first be answered:
    1. Was the predecessor institution subject to a loss of eligibility 
before the change? Yes. Institution A was notified of its loss of 
participation on September 25, 2000, and the change in identity 
occurred on March 20, 2001, when Institution B began providing the 
teach-out for Institution A's students.
    2. Was there a change in structure or identity? Yes. As a result of 
Institution A's closure, Institution B took over what had previously 
been Institution A's operations.
    3. Is the remaining institution providing an educational program at 
substantially the same address as the predecessor institution? Yes. 
Institutions A and B provided the educational programs at the same 
site.
    4. Is there a commonality of ownership or management between both 
institutions? No. There is no indication that the same person, or 
members of that person's family, had the ability to affect the actions 
of both Institutions A and B. Though some of Institution A's managers 
continued to work at Institution B, they were replaced within 60 days, 
we were notified, and we determined that no commonality of management 
exists.
    Because there is no commonality of ownership or management, the 
loss of eligibility to which Institution A was subject is not applied 
to Institution B under Sec. 668.188.

    Example #3. Institution A provides educational programs for 
automobile repair. It is notified on September 27, 2000, that its 
third consecutive cohort default rate is 25 percent or greater. 
After exhausting its administrative appeals, Institution A becomes 
ineligible to participate in the FFEL, Direct Loan, and Federal Pell 
Grant programs on January 6, 2001. Two weeks later, on January 20, 
2001, the corporation that owns Institution A transfers the 
ownership of Institution A to a subsidiary company that owns and 
operates Institution B. The subsidiary company sells all of the 
equipment, replaces Institution A's managers and instructors, and 
begins providing Institution B's educational programs for airplane 
pilots at the former Institution A's site.

    To determine whether Institution A's loss of eligibility will be 
applied to Institution B, each of the following four questions must 
first be answered:
    1. Was the predecessor institution subject to a loss of eligibility 
before the change? Yes. Institution A was notified of its loss of 
participation on September 27, 2000. The ownership of Institution A was 
transferred almost 4 months later, on January 20, 2001.
    2. Was there a change in structure or identity? Yes. As a result of 
a transfer of assets, Institution A became part of Institution B.
    3. Is the remaining institution providing an educational program at 
substantially the same address as the predecessor institution? Yes. 
Institutions A and B provided the educational programs at the same 
site. The fact that the institutions provided different types of 
instruction at that site (automobile repair and airplane piloting) is 
not a factor in making this determination.
    4. Is there a commonality of ownership or management between both 
institutions? Yes. Because the same corporation owned both Institution 
A and the subsidiary company to which its ownership was transferred, it 
had the ability to affect substantially the actions of both 
Institutions A and B.
    Since Institutions A and B meet all four of the criteria, the loss 
of eligibility to which Institution A was subject is applied to 
Institution B: Institution B is ineligible to participate in the FFEL, 
Direct Loan, and Federal Pell Grant programs for the same period as 
Institution A.

    Example #4. Institution A provides instruction at three 
locations. Its cohort default rate for FY 1997 is 29 percent and for 
FY 1998 its cohort default rate is 32 percent. On April 30, 2001, 
after we notify it that its draft cohort default rate for FY 1999 is 
35 percent, Institution A closes one of its locations. On June 2, 
2001, Institution B buys the building in which Institution A 
provided educational programs at that closed location. Institutions 
A and B are not owned or controlled by the same person, either 
directly or indirectly, and Institution B does not employ any of the 
same managers previously employed at Institution A. On September 28, 
2001, we notify Institution A that its official cohort default rate 
for FY 1999 is 34 percent. After exhausting its administrative 
appeals, Institution A becomes ineligible to participate in the 
FFEL, Direct Loan, and Federal Pell Grant programs on December 12, 
2001.

    To determine whether Institution A's loss of eligibility will be 
applied to Institution B, each of the following four questions must 
first be answered:
    1. Was the predecessor institution subject to a loss of eligibility 
before the change? No. Institution B purchased the building from 
Institution A on June 2, 2001. Institution A was not notified of its 
loss of participation until almost 4 months later, on September 28, 
2001.
    2. Was there a change in structure or identity? Yes. Institution B 
purchased the building from Institution A. There was a transfer of 
assets.
    3. Is the remaining institution providing an educational program at 
substantially the same address as the predecessor institution? Yes. 
Institutions A and B provided the educational programs at the same 
site.
    4. Is there a commonality of ownership or management between both

[[Page 47599]]

institutions? No. None of Institution A's managers were employed by 
Institution B, and there is no indication that the same person, or 
members of that person's family, had the ability to affect the actions 
of both Institutions A and B.
    Since Institutions A and B do not meet all four of the criteria 
(only two of the criteria are met), the loss of eligibility to which 
Institution A was subject is not applied to Institution B.
    Reasons: The proposed regulations would revise the requirements to 
more clearly reflect the intent of the HEA and to reduce the 
possibility of evasion.
    The proposal to allow additional time for an institution conducting 
a teach-out to end a commonality of management is included in these 
proposed regulations to provide for an emergency situation in which an 
institution agrees to provide a teach-out for another institution's 
students but is unable to immediately replace all of the individuals 
who held a managerial role at that institution.
    Proposed Sec. 668.188 deals exclusively with the attribution of 
previously imposed sanctions. A separate proposed Sec. 668.184 also 
addresses the possibility of an institution's evasion of the 
consequences of high cohort default rates. That proposed section would 
provide requirements for determining how cohort default rates are 
calculated and attributed after a change in status. Changes proposed 
for Sec. 668.184 were discussed earlier in this preamble, under 
``Determining Cohort Default Rates for Institutions that Have Undergone 
a Change in Status (Sec. 668.184).''

Erroneous Data Appeals (Sec. 668.192)

    Statute: Section 435(a)(2) of the HEA allows an institution to 
appeal a loss of participation based on excessive cohort default rates 
if the institution demonstrates to the satisfaction of the Secretary 
that the calculation of its cohort default rate is not accurate and 
that a recalculation based on accurate data would reduce its cohort 
default rate below the applicable percentage.
    Current Regulations: Current Sec. 668.17(c)(1)(i) provides 
requirements for an erroneous data appeal that are consistent with 
statutory requirements. Under the current regulations, an institution 
may only submit an erroneous data appeal if it is subject to a loss of 
participation due to excessive cohort default rates.
    Proposed Regulations: In addition to continuing to provide for an 
erroneous data appeal by an institution that is subject to a loss of 
participation due to excessive cohort default rates, the proposed 
regulations would permit an institution that is provisionally certified 
under Sec. 668.16(m) to submit an erroneous data appeal.
    Reasons: During the negotiated rulemaking process, some non-Federal 
negotiators proposed that all institutions be allowed to submit 
erroneous data appeals. Alternatively, they proposed that any 
institution that is provisionally certified under Sec. 668.16(m) should 
be allowed to appeal on that basis. They argued that, without this 
change, an institution might not be able to appeal the accuracy of the 
data on which its cohort default rate is based. They also suggested 
that these institutions may have proof that data are incorrect but may 
be unable to get the data changed. In response to these comments, the 
Department explained that it is extremely costly to process erroneous 
data appeals, and that the Department does not have the resources to 
evaluate erroneous data appeals from all institutions. In recognition 
of these competing but valid concerns, the Department and the non-
Federal negotiators agreed to propose to allow institutions that are 
provisionally certified under Sec. 668.16(m) to submit erroneous data 
appeals. The proposed regulations would continue to allow institutions 
that are subject to loss of eligibility based on excessive cohort 
default rates to submit erroneous data appeals.

Loan Servicing Appeals (Sec. 668.193)

    Statute: Under section 435(a)(3) of the HEA, an institution may 
appeal the calculation of its cohort default rate on the basis of 
improper loan servicing or collection if the institution is subject to 
loss of eligibility due to excessive rates or if its most recent cohort 
default rate is 20 percent or greater.
    Current Regulations: Current Sec. 668.17(h) provides the 
requirements for a loan servicing appeal.
    Proposed Regulations: We are proposing to remove the 20 percent 
threshold and allow all institutions to appeal their most recent cohort 
default rate on the basis of improper loan servicing or collection.
    Reasons: The proposed regulations would allow more institutions to 
submit loan servicing appeals and would make the requirements for loan 
servicing appeals more consistent with the requirements for certain 
other appeals.

Eligibility for Economically Disadvantaged Appeals (668.194(b)(1)(ii))

    Statute: Under section 435(a)(4)(i)(II) of the HEA, one criterion 
that may be used to determine an institution's eligibility for an 
economically disadvantaged appeal is the percentage of the 
institution's students that have an adjusted gross income less than the 
poverty level. If the student is a dependent student, the student's 
parents' adjusted gross income is added to the student's adjusted gross 
income when determining whether the student's income is less than the 
poverty level.
    Current Regulations: Current Sec. 668.17(c)(1)(ii)(B)(2)(ii) tracks 
the language of the statute.
    Proposed Regulations: The proposed regulations address independent 
as well as dependent students. In addition to the current criteria for 
an economically disadvantaged appeal, if an independent student is 
married, the student's spouse's adjusted gross income is added to the 
student's adjusted gross income when determining whether the student's 
income is less than the poverty level.
    Reasons: When we published the current regulations, we 
inadvertently omitted the proposed requirement, which was included in 
previous regulations. We are proposing to restore the requirement in 
these proposed regulations because, without it, the calculation of an 
institution's low income rate during an economically disadvantaged 
appeal would not provide an accurate measure of its students' income 
levels.

Submitting Economically Disadvantaged Appeals (Sec. 668.194(f)(1))

    Current Regulations: Current Sec. 668.17(c)(7)(i)(A) requires an 
institution to notify us, within 30 days of receiving our notice that 
it is subject to a loss of eligibility, of its intent to submit an 
economically disadvantaged appeal. The institution submits all other 
materials within 60 days after receiving our notice.
    Proposed Regulations: Under the proposed regulations, if an 
institution intends to submit an economically disadvantaged appeal, it 
must send us its management's written assertion within 30 days after 
receiving our notice of its loss of eligibility. The institution 
submits the independent auditor's report within 60 days after receiving 
our notice.
    Reasons: During the negotiations, the Department proposed to 
require institutions to submit all the material for this type of appeal 
within 30 days after receiving our notice that they are subject to a 
loss of eligibility. Non-Federal negotiators voiced concerns that a 
time deadline of 30 days would not be adequate to allow an institution 
to find an independent auditor and for the independent auditor to 
provide an opinion. To address these concerns, the Federal and non-
Federal negotiators

[[Page 47600]]

agreed on the deadlines in the proposed regulations.

Average Rates Appeals (Sec. 668.196)

    Current Regulations: Under current Sec. 668.17(c)(1)(ii)(C), an 
institution that is subject to a loss of participation based on 3 
consecutive cohort default rates of 25 percent or greater may submit an 
average rates appeal if at least 2 of those cohort default rates were 
calculated as average rates and if those cohort default rates would 
have been less than 25 percent if calculated for the fiscal year alone.
    Proposed Regulations: In addition to the current regulations' 
criteria for an average rates appeal, the proposed regulations would 
allow an institution that is subject to loss of participation based on 
1 cohort default rate greater than 40 percent to submit an average 
rates appeal if that cohort default rate was calculated as an average 
rate, under proposed Sec. 668.183(d)(2). This proposal would allow an 
institution to appeal a loss of eligibility based on 1 fiscal year's 
cohort default rate greater than 40 percent if the institution's cohort 
for that fiscal year included fewer than 30 borrowers.
    Reasons: As discussed previously in this preamble, under ``Use of 
Subpart G of Part 668 when an Institution's Cohort Default Rate Is 
Greater than 40 Percent (Sec. 668.187(a)(1)),'' the proposed 
regulations would make requirements for cohort default rates more 
consistent. This change meets that goal.

Thirty-or-Fewer Borrowers Appeals (Sec. 668.197)

    Current Regulations: Under Sec. 668.17(c)(1)(ii)(D), an institution 
may appeal a loss of participation based on 3 consecutive cohort 
default rates of 25 percent or greater if the total number of its 
borrowers in the 3 most recent cohorts used to calculate those cohorts 
default rates is 30 or fewer.
    Proposed Regulations: The proposed regulations would allow any 
institution subject to a loss of participation based on its cohort 
default rate (including institutions with cohort default rates greater 
than 40 percent) to submit a thirty-or-fewer borrowers appeal.
    Reasons: The proposed regulations would make requirements for 
thirty-or-fewer borrowers appeals more consistent. Additional reasons 
for these proposed regulations are discussed previously in this 
preamble, under ``Use of Subpart G of Part 668 when an Institution's 
Cohort Default Rate Is Greater than 40 Percent (Sec. 668.187(a)(1)).''

Special Institutions (Sec. 668.198)

    Statute: Under section 435(a)(5) of the HEA, certain minority 
institutions (``special institutions'') that are subject to a loss of 
eligibility due to excessive cohort default rates may be excepted from 
that loss of eligibility if they submit default management plans that 
provide reasonable assurance that they will, by July 1, 2002, have 
cohort default rates that are less than 25 percent. To be excepted, the 
institution must also engage an independent third party to provide 
technical assistance and must submit evidence to the Secretary, on an 
annual basis, of cohort default rate improvement and of the default 
management plan's successful implementation.
    Current Regulations: If a special institution is in compliance with 
the current Sec. 668.17(k), it is exempt from a loss of eligibility 
based on 3 cohort default rates of 25 percent or greater. A special 
institution must send us information that demonstrates that it 
qualifies for the exception described in that paragraph by July 1, 
1999, and it must send us the information we need to determine whether 
it continues to qualify for that exemption by July 1, 2000 and 2001.
    Proposed Regulations: Under the proposed regulations, a special 
institution that is in compliance with Sec. 668.198 would be exempt 
from a loss of eligibility based on 3 cohort default rates of 25 
percent or greater or 1 cohort default rate greater than 40 percent. It 
would send us information to demonstrate that it qualifies for the 
exemption described in that paragraph by July 1 of the first 1-year 
period that begins after it receives our notice that it has lost 
eligibility, and it would send us the information we need to determine 
whether it continues to qualify for that exemption by July 1 of each 
subsequent 1-year period.
    Reasons: We are proposing to exempt certain special institutions 
from the consequences of 1 cohort default rate greater than 40 percent 
to provide a consistent application of the statutory exception. Also, 
since the language of the current requirement does not provide for 
cases in which an institution becomes eligible for this exception after 
July 1, 1999, we are proposing to revise and clarify that language.

Appendix D to Part 668, ``Default Reduction Measures''

    Current Regulations: Appendix D to part 668, ``Default Reduction 
Measures,'' describes measures that institutions may take to reduce 
their cohort default rates. The appendix is currently used only as an 
example of an acceptable default management plan, in 
Sec. 668.14(b)(15)(iii), and to help institutions improve the initial 
and exit counseling they provide to FFEL and Direct Loan program 
borrowers.
    Proposed Regulations: We are proposing to remove the current 
Appendix D to part 668.
    Reasons: The information that Appendix D to part 668 contains is 
outdated and is no longer used for the primary purposes for which it 
was developed. The information can be updated more efficiently outside 
the regulatory process.

Additional Concerns of Non-Federal Negotiators

    During the negotiated rulemaking process, non-Federal negotiators 
expressed concerns about a number of administrative processes that are 
not reflected in these proposed regulations, and asked us to explain 
these processes in this preamble. Our explanations are provided in the 
following paragraphs:
     Loan record detail reports for merged rates 
(Sec. 668.186). Proposed Sec. 668.186 describes how an institution 
receives its loan record detail report during the official cohort 
default rate process. In general, the loan record detail report 
contains the data used to calculate an institution's cohort default 
rate. However, if an institution's cohort default rate is calculated 
under proposed Sec. 668.184, by combining its data with another 
institution's data (in this preamble, this is referred to as a ``merged 
rate''), the institution will also need to receive the loan record 
detail report for the other institution during the official cohort 
default rate process.
    During negotiations, non-Federal negotiators asked us to explain in 
this preamble how an institution for which a merged rate is calculated 
would request additional loan record detail reports. An institution may 
do this in two ways. If an institution's cohort default rate is 
calculated as a merged rate because it acquired or merged with another 
institution (under Sec. 668.184(b)), it may use that previous 
institution's identification number to request that institution's data 
from the National Student Loan Data System (NSLDS). If the 
institution's cohort default rate is calculated as a merged rate 
because it has purchased a branch or location of another institution 
(under Sec. 668.184(c)) or because it was once a branch or location of 
another institution and is now a separate, new institution (under 
Sec. 668.184(d)), then the institution should contact us, and we will 
provide the relevant data to the institution.

[[Page 47601]]

     Deadline for publishing cohort default rates 
(Sec. 668.187(b)). The HEA directs the Secretary to issue cohort 
default rates by September 30 of each year. During the negotiated 
rulemaking process, non-Federal negotiators expressed a concern about 
the possible consequences for institutions if we issued cohort default 
rates after the statutory deadline and asked us to repeat the guidance 
on this issue that we included in a previous Notice of Proposed 
Rulemaking, published in the Federal Register on July 30, 1999 (64 FR 
41752).
    Under proposed Sec. 668.187(b), an institution's loss of 
participation in the FFEL, Direct Loan, and Federal Pell Grant 
programs, based on excessive cohort default rates, continues for the 
fiscal year in which we notify the institution that it is subject to 
the loss of eligibility and for the 2 succeeding fiscal years. Some 
non-Federal negotiators were concerned that institutions might be 
subject to an additional year of ineligibility if we issued cohort 
default rates after September 30.
    We expect to meet the goal of issuing cohort default rates by 
September 30 of each year. If, however, cohort default rates are not 
issued until after that date, an institution's loss of eligibility 
would continue only for the remainder of the fiscal year in which the 
cohort default rates are issued and for the following fiscal year. For 
example, if we issue cohort default rates for FY 1998 on October 2, 
2000, then a loss of eligibility that is based on an FY 1998 cohort 
default rate would continue only for the remainder of FY 2001 (the 
fiscal year in which the cohort default rates were issued) and to the 
end of FY 2002.
     Recalculating cohort default rates 
(Sec. 668.189(a)(1)). Under the proposed regulations, an institution's 
cohort default rate may be recalculated based on an uncorrected data 
adjustment, a new data adjustment, an erroneous data appeal, or a loan 
servicing appeal. During the official cohort default rate process, an 
institution may submit more than one type of adjustment or appeal, but 
all of its submissions are considered together before we make our final 
decision. For example, though an uncorrected data adjustment is not 
submitted under the same time deadlines as a new data adjustment, an 
erroneous data appeal, and a loan servicing appeal, we consider its 
results together with the results of any other adjustments and appeals 
when we determine an institution's cohort default rate.
    During negotiations, non-Federal negotiators asked us to explain in 
this preamble the effect of the recalculation of an institution's 
cohort default rate upon its eligibility for an average rates appeal 
(under Sec. 668.196) and a thirty-or-fewer borrowers appeal (under 
Sec. 668.197). If an institution's cohort default rate is recalculated 
under proposed Sec. 668.189(a)(1) and, as a result of that 
recalculation, the institution meets the criteria for an average rates 
appeal or for a thirty-or-fewer borrowers appeal, the institution does 
not lose eligibility under Sec. 668.187.
     Servicing of loans in income contingent repayment 
(Sec. 668.193). As noted previously in this preamble, under current 
Secs. 668.17(e)(1)(ii) and 668.17(f)(1)(ii), one of the reasons for 
considering a Direct Loan to be in default, for the purposes of 
calculating a proprietary, non-degree-granting institution's cohort 
default rate, is that the loan has been repaid under the income 
contingent repayment plan for 360 days, with scheduled payments less 
than 15 dollars per month and less than the amount of interest accruing 
on the loan, before the end of the fiscal year following the cohort's 
fiscal year. Under proposed Secs. 668.193(d)(1) and 668.193(f)(3), this 
type of default is excluded from consideration during a loan servicing 
appeal. Since these loans are being repaid by borrowers, they are not 
considered to be in default for purposes other than calculating cohort 
default rates. As a result, they cannot be evaluated meaningfully under 
the loan servicing or collection criteria in proposed Sec. 668.193(b).
    However, non-Federal negotiators were concerned about an 
institution's ability to dispute the servicing of a loan being repaid 
under the Direct Loan Program's income contingent repayment plan. 
Federal negotiators agreed to permit an institution to work with our 
Direct Loan Servicing Center to determine whether a loan's status is 
accurate, if the institution believes that a borrower has been 
incorrectly assigned to the income contingent repayment plan. 
Institutions will be able to do this as part of an incorrect data 
challenge (Sec. 668.185(b)), uncorrected data adjustment 
(Sec. 668.190), new data adjustment (Sec. 668.191), or erroneous data 
appeal (Sec. 668.192), as appropriate for the loan.
    In general, if a loan is considered to be in default for cohort 
default rate purposes as the result of a borrower's repayment under the 
income contingent repayment plan, the institution may, to the extent 
permitted by the Privacy Act of 1974 (5 U.S.C. 552a), request the 
loan's payment information from the Direct Loan Servicing Center and 
may use that payment information in pursuing a challenge or requesting 
an adjustment if it believes that the borrower was assigned to income 
contingent repayment incorrectly. Before receiving its draft cohort 
default rate, an institution may learn about a borrower's repayment 
under income contingent repayment by reviewing its repayment 
information report in NSLDS. A more detailed description of the 
procedures for disputing the servicing of a loan being repaid under 
income contingent repayment will be provided in the FY 1999 Draft 
Cohort Default Rate Guide.

Executive Order 12866

1. Potential Costs and Benefits

    Under Executive Order 12866, we have assessed the potential costs 
and benefits of this regulatory action.
    The potential costs associated with the proposed regulations are 
those resulting from statutory requirements and those we have 
determined as necessary for administering these programs effectively 
and efficiently. Elsewhere in this SUPPLEMENTARY INFORMATION section we 
identify and explain burdens specifically associated with information 
collection requirements. See the heading Paperwork Reduction Act of 
1995.
    These proposed regulations clarify and streamline provisions 
discussing institutional cohort default rates and their effect on 
eligibility to participate in the Title IV, HEA programs. The proposed 
regulations also make a number of procedural changes to the process by 
which institutions may challenge or appeal their cohort default rates. 
In assessing the potential costs and benefits--both quantitative and 
qualitative--of this regulatory action, we have determined that the 
benefits would justify the costs.
    We have also determined that this regulatory action would not 
unduly interfere with State, local, and tribal governments in the 
exercise of their governmental functions.

2. Clarity of the Regulations

    Executive Order 12866 and the President's Memorandum of June 1, 
1998 on ``Plain Language in Government Writing'' require each agency to 
write regulations that are easy to understand.
    The Secretary invites comments on how to make these proposed 
regulations easier to understand, including answers to questions such 
as the following:
     Are the requirements in the proposed regulations clearly 
stated?
     Do the proposed regulations contain technical terms or 
other wording that interferes with their clarity?

[[Page 47602]]

     Does the format of the proposed regulations (grouping and 
order of sections, use of headings, paragraphing, etc.) aid or reduce 
their clarity?
     Would the proposed regulations be easier to understand if 
we divided them into more (but shorter) sections? (A ``section'' is 
preceded by the symbol ``Sec. '' and a numbered heading; for example, 
Sec. 668.188 Preventing evasion of the consequences of cohort default 
rates.)
     Could the description of the proposed regulations in the 
SUPPLEMENTARY INFORMATION section of this preamble be more helpful in 
making the proposed regulations easier to understand? If so, how?
     What else could we do to make the proposed regulations 
easier to understand?
    Send any comments that concern how the Department could make these 
proposed regulations easier to understand to the person listed in the 
ADDRESSES section of the preamble.

Regulatory Flexibility Act Certification

    The Secretary certifies that these proposed regulations would not 
have a significant economic impact on a substantial number of small 
entities. These proposed regulations would affect institutions of 
higher education and guaranty agencies that participate in Title IV, 
HEA programs. The U.S. Small Business Administration (SBA) Size 
Standards define these institutions as ``small entities'' if they are 
for-profit or nonprofit institutions with total annual revenue below 
$5,000,000 or if they are institutions controlled by governmental 
entities with populations below 50,000.
    A relatively small number of the 6,000 institutions of higher 
education participating in the Title IV, HEA programs meet the SBA 
definition of ``small entities.'' Guaranty agencies are State and 
private nonprofit entities that act as agents of the Federal Government 
and, as such, are not considered small entities under the Regulatory 
Flexibility Act.
    These proposed regulations clarify and streamline provisions 
discussing institutional cohort default rates and their effect on 
eligibility to participate in the Title IV, HEA programs. The proposed 
regulations also make a number of procedural changes to the process by 
which institutions may challenge or appeal their cohort default rates. 
These proposed regulations would not have a significant economic impact 
on small entities.

Paperwork Reduction Act of 1995

    Proposed Secs. 668.181 through 668.198 contain information 
collection requirements. Under the Paperwork Reduction Act of 1995 (44 
U.S.C. 3507(d)), the Department of Education has submitted a copy of 
these sections to the Office of Management and Budget (OMB) for its 
review.
    Collection of Information: Student Assistance General Provisions--
Subpart M--Cohort default rates.
    The proposed regulations would make a number of changes affecting 
the information collections that institutions are required to submit 
during the cohort default rate process: an institution would be able to 
request an initial determination of the consequences of a change in 
status (Sec. 668.188); an institution conducting a teach-out after a 
change in status may need to notify us that a commonality of management 
has ended (Sec. 668.188); and more institutions would be eligible to 
submit erroneous data appeals (Sec. 668.192), loan servicing appeals 
(Sec. 668.193), participation rate index appeals (Sec. 668.195), 
average rates appeals (Sec. 668.196), and thirty-or-fewer borrower 
appeals (Sec. 668.197).
    Our current estimate for the maximum annual recordkeeping and 
reporting burden hours for the cohort default rate requirements is 
25,477 hours. We do not estimate that this number of burden hours will 
be increased as a result of these proposed regulations. We do not 
believe that the additional burden that may be imposed on institutions 
as a result of these proposed regulations will be substantial enough to 
merit an increase in our current estimate of the maximum number of 
burden hours.
    If you want to comment on the information collection requirements, 
please send your comments to the Office of Information and Regulatory 
Affairs, OMB, room 10235, New Executive Office Building, Washington, DC 
20503; Attention: Desk Officer for U.S. Department of Education. You 
may also send a copy of these comments to the Department representative 
named in the ADDRESSES section of this preamble.
    We consider your comments on these proposed collections of 
information in--
     Deciding whether the proposed collections are necessary 
for the proper performance of our functions, including whether the 
information will have practical use;
     Evaluating the accuracy of our estimate of the burden of 
the proposed collections, including the validity of our methodology and 
assumptions;
     Enhancing the quality, usefulness, and clarity of the 
information we collect; and
     Minimizing the burden on those who must respond. This 
includes exploring the use of appropriate automated, electronic, 
mechanical, or other technological collection techniques or other forms 
of information technology; e.g., permitting electronic submission of 
responses.
    OMB is required to make a decision concerning the collections of 
information contained in these proposed regulations between 30 and 60 
days after publication of this document in the Federal Register. 
Therefore, to ensure that OMB gives your comments full consideration, 
it is important that OMB receives your comments within 30 days of 
publication. This does not affect the deadline for your comments to us 
on the proposed regulations.

Intergovernmental Review

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

Assessment of Educational Impact

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

Electronic Access to This Document

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

http://ocfo.ed.gov/fedreg.htm
http://ifap.ed.gov/csb_html/fedlreg.htm

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

[[Page 47603]]

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 Leveraging Educational Assistance 
Partnership; and 84.268 William D. Ford Federal Direct Loan Program)

List of Subjects

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.

34 CFR Parts 682 and 685

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

34 CFR Part 690

    Colleges and universities, Education of disadvantaged, Grant 
programs-education, Reporting and recordkeeping requirements, Student 
aid.

    Dated: July 24, 2000.
Richard W. Riley,
Secretary of Education.
    For the reasons discussed in the preamble, the Secretary proposes 
to amend parts 668, 682, 685, and 690 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. In Sec. 668.14, paragraph (b)(15)(iii) is removed.
    3. Section 668.16 is amended--
    A. In paragraph (m)(1), by removing ``an FFEL Program cohort 
default rate, a Direct Loan cohort rate, or where applicable, a 
weighted average cohort rate'' and adding, in its place, ``a cohort 
default rate''.
    B. In paragraphs (m)(1)(i) and (m)(2)(ii), by removing 
``Sec. 668.17'' and adding, in its place, ``subpart M of this part''.
    4. Section 668.17 is removed and reserved.
    5. In Sec. 668.26, paragraph (a)(6) is amended by removing 
``Sec. 668.17(c)'' and adding, in its place, ``subpart M of this 
part''.
    6. In Sec. 668.46, paragraph (c)(7) is amended by removing 
``Appendix E to this part'', and adding, in its place, ``the Appendix A 
to this subpart''.
    7. Section 668.85 is amended--
    A. By revising paragraph (b)(1)(ii).
    B. In paragraph (b)(3), by removing the third sentence.


Sec. 668.85  Suspension proceedings.

* * * * *
    (b) * * *
    (1) * * *
    (ii) Specifies the proposed effective date of the suspension, which 
is at least 20 days after the date of mailing of the notice of intent;
* * * * *
    8. Section 668.86 is amended--
    A. By revising paragraph (b)(1)(ii).
    B. In paragraph (b)(3), by removing the third sentence.


Sec. 668.86  Limitation or termination proceedings.

* * * * *
    (b) * * *
    (1) * * *
    (ii) Specifies the proposed effective date of the limitation or 
termination, which is at least 20 days after the date of mailing of the 
notice of intent;
* * * * *
    9. In Sec. 668.90, paragraphs (a)(1)(iii)(D) and (a)(3)(iv) are 
removed; and paragraphs (a)(3)(v), (a)(3)(vi), and (a)(3)(vii) are 
redesignated as paragraphs (a)(3)(iv), (a)(3)(v), and (a)(3)(vi), 
respectively.
    10. In Sec. 668.171, paragraph (b)(1) is amended by removing 
``appendices F and G'' and adding, in its place, ``appendices A and B 
to this subpart''.
    11. Section 668.172 is amended--
    A. In the heading for paragraph (a), by removing ``Appendices F and 
G'', and adding, in its place, ``Appendices A and B''.
    B. In paragraph (a), by removing ``appendices F and G to this 
part'' and adding, in its place, ``appendices A and B to this 
subpart''.
    C. In paragraph (b), by removing ``appendix F'' and adding, in its 
place, ``appendix A''; and by removing ``appendix G'' and adding, in 
its place, ``appendix B''.
    12. A new subpart M is added to Part 668 to read as follows:

Subpart M--Cohort Default Rates

Sec.
668.181   Purpose of this subpart.
668.182   Definitions of terms used in this subpart.
668.183   Calculating and applying cohort default rates.
668.184   Determining cohort default rates for institutions that 
have undergone a change in status.
668.185   Draft cohort default rates and your ability to challenge 
before official cohort default rates are issued.
668.186   Notice of your official cohort default rate.
668.187   Consequences of cohort default rates on your ability to 
participate in Title IV, HEA programs.
668.188   Preventing evasion of the consequences of cohort default 
rates.
668.189   General requirements for adjusting official cohort default 
rates and for appealing their consequences.
668.190   Uncorrected data adjustments.
668.191   New data adjustments.
668.192   Erroneous data appeals.
668.193   Loan servicing appeals.
668.194   Economically disadvantaged appeals.
668.195   Participation rate index appeals.
668.196   Average rates appeals.
668.197   Thirty-or-fewer borrowers appeals.
668.198   Relief from the consequences of cohort default rates for 
special institutions.
Appendix A to Subpart M of Part 668--Summaries of eligibility and 
submission requirements for challenges, adjustments, and appeals
Appendix B to Subpart M of Part 668--Sample default management plan 
for special institutions to use when complying with Sec. 668.198


Sec. 668.181  Purpose of this subpart.

    Your cohort default rate is a measure we use to determine your 
eligibility to participate in various Title IV programs. We may also 
use it for determining your eligibility for exemptions, such as those 
for certain disbursement requirements under the FFEL or Direct Loan 
Programs. This subpart describes how cohort default rates are 
calculated, some of the consequences of cohort default rates, and how 
you may request changes to your cohort default rates or appeal their 
consequences. Under this subpart, you submit a ``challenge'' after you 
receive your draft cohort default rate, and you request an 
``adjustment'' or ``appeal'' after your official cohort default rate is 
published.

(Authority: 20 U.S.C. 1082, 1085, 1094, 1099c)


Sec. 668.182  Definitions of terms used in this subpart.

    We use the following definitions in this subpart:
    (a) Cohort. Your cohort is a group of borrowers used to determine 
your cohort default rate. The method for identifying the borrowers in a 
cohort is provided in Sec. 668.183(b).

[[Page 47604]]

    (b) Data manager. (1) For FFELP loans held by a guaranty agency or 
lender, the guaranty agency is the data manager.
    (2) For FFELP loans that we hold, we are the data manager.
    (3) For Direct Loan Program loans, the Direct Loan Servicer, as 
defined in 34 CFR 685.102, is the data manager.
    (c) Days. In this subpart, ``days'' means calendar days.
    (d) Default. A borrower is considered to be in default for cohort 
default rate purposes under the rules in Sec. 668.183(c).
    (e) Draft cohort default rate. Your draft cohort default rate is a 
rate we issue, for your review, before we issue your official cohort 
default rate. A draft cohort default rate is used only for the purposes 
described in Sec. 668.185.
    (f) Entering repayment. (1) Except as provided in paragraphs (f)(2) 
and (f)(3) of this section, loans are considered to enter repayment on 
the dates described in 34 CFR 682.200 (under the definition of 
``repayment period'') and in 34 CFR 685.207.
    (2) A Federal SLS loan is considered to enter repayment--
    (i) At the same time the borrower's Federal Stafford loan enters 
repayment, if the borrower received a Federal Stafford loan for the 
same period of enrollment, as defined in 34 CFR 682.200; or
    (ii) In all other cases, on the day after the student ceases to be 
enrolled at your institution on at least a half-time basis in an 
educational program leading to a degree, certificate, or other 
recognized educational credential.
    (3) For the purposes of this subpart, a loan is considered to enter 
repayment on the date that a borrower repays it in full, if that 
repayment--
    (i) Is made before the loan enters repayment under paragraphs 
(f)(1) or (f)(2) of this section; and
    (ii) Is not made to consolidate the loan under the Federal 
Consolidation Loan Program or the Federal Direct Consolidation Loan 
Program (as defined in 34 CFR 685.102).
    (g) Fiscal year. A fiscal year begins on October 1 and ends on the 
following September 30. A fiscal year is identified by the calendar 
year in which it ends.
    (h) Loan record detail report. The loan record detail report is a 
report that we produce. It contains the data used to calculate your 
draft or official cohort default rate.
    (i) Official cohort default rate. Your official cohort default rate 
is the cohort default rate that we publish for you under Sec. 668.186. 
Cohort default rates calculated under this subpart are not related in 
any way to cohort default rates that are calculated for the Federal 
Perkins Loan Program.
    (j) We. We are the Department, the Secretary, or the Secretary's 
designee.

(k) You. You are an institution.

(Authority: 20 U.S.C. 1082, 1085, 1094, 1099c)

Sec. 668.183  Calculating and applying cohort default rates.

    (a) General. This section describes the four steps that we follow 
to calculate and apply your cohort default rate for a fiscal year:
    (1) First, under paragraph (b) of this section, we identify the 
borrowers in your cohort for the fiscal year. If the total number of 
borrowers in that cohort is fewer than 30, we also identify the 
borrowers in your cohorts for the 2 most recent prior fiscal years.
    (2) Second, under paragraph (c) of this section, we identify the 
borrowers in the cohort (or cohorts) who are considered to be in 
default. If more than one cohort will be used to calculate your cohort 
default rate, we identify defaulted borrowers separately for each 
cohort.
    (3) Third, under paragraph (d) of this section, we calculate your 
cohort default rate.
    (4) Fourth, we apply your cohort default rate to all of your 
locations--
    (i) As you exist on the date you receive the notice of your 
official cohort default rate; and
    (ii) From the date on which you receive the notice of your official 
cohort default rate until you receive our notice that the cohort 
default rate no longer applies.
    (b) Identify the borrowers in a cohort. (1) Except as provided in 
paragraph (b)(2) of this section, your cohort for a fiscal year 
consists of all of your current and former students who, during that 
fiscal year, entered repayment on any Federal Stafford loan, Federal 
SLS loan, Direct Subsidized loan, or Direct Unsubsidized loan that they 
received to attend your institution.
    (2) If a student receives a Federal Stafford loan, Federal SLS 
loan, Direct Subsidized loan, or Direct Unsubsidized loan to attend 
your institution but consolidates that loan before it enters repayment, 
under the Federal Consolidation Loan Program or the Federal Direct 
Consolidation Loan Program (as defined in 34 CFR 685.102), the borrower 
is included in your cohort for the fiscal year in which the 
consolidation loan enters repayment.
    (3) A borrower may be included in more than one of your cohorts and 
may be included in the cohorts of more than one institution in the same 
fiscal year.
    (c) Identify the borrowers in a cohort who are in default. (1) 
Except as provided in paragraph (c)(2) of this section, for the 
purposes of this subpart a borrower in a cohort for a fiscal year is 
considered to be in default if--
    (i) Before the end of the following fiscal year, the borrower 
defaults on any FFELP loan that was used to include the borrower in the 
cohort or on any Federal Consolidation Loan Program loan that repaid a 
loan that was used to include the borrower in the cohort (however, a 
borrower is not considered to be in default unless a claim for 
insurance has been paid on the loan by a guaranty agency or by us);
    (ii) Before the end of the following fiscal year, the borrower 
fails to make an installment payment, when due, on any Direct Loan 
Program loan that was used to include the borrower in the cohort or on 
any Federal Direct Consolidation Loan Program loan that repaid a loan 
that was used to include the borrower in the cohort, and the borrower's 
failure persists for 360 days (or for 270 days, if the borrower's first 
day of delinquency was before October 7, 1998);
    (iii) You are a proprietary, non-degree-granting institution, and 
before the end of the following fiscal year, the borrower has been in 
repayment for 360 days, under the Direct Loan Program's income 
contingent repayment plan, on a loan used to include the borrower in 
your cohort (or that repaid a loan that was used to include the 
borrower in your cohort), with scheduled payments that are less than 15 
dollars per month and are less than the amount of interest accruing on 
the loan; or
    (iv) Before the end of the following fiscal year, you or your 
owner, agent, contractor, employee, or any other affiliated entity or 
individual make a payment to prevent a borrower's default on a loan 
that is used to include the borrower in that cohort.
    (2) A borrower is not considered to be in default based on a loan 
that is, before the end of the fiscal year immediately following the 
fiscal year in which it entered repayment--
    (i) Rehabilitated under 34 CFR 682.405 or 34 CFR 685.211(e); or
    (ii) No longer reinsured by us.
    (d) Calculate the cohort default rate. Except as provided in 
Sec. 668.184, if there are--
    (1) Thirty or more borrowers in your cohort for a fiscal year, your 
cohort default rate is the percentage that is derived by dividing--
    (i) The number of borrowers in the cohort who are in default, as 
determined under paragraph (c) of this section; by
    (ii) The number of borrowers in the cohort, as determined under 
paragraph (b) of this section.

[[Page 47605]]

    (2) Fewer than 30 borrowers in your cohort for a fiscal year, your 
cohort default rate is the percentage that is derived by dividing--
    (i) The total number of borrowers in that cohort and in the two 
most recent prior cohorts who are in default, as determined for each 
cohort under paragraph (c) of this section; by
    (ii) The total number of borrowers in that cohort and the two most 
recent prior cohorts, as determined for each cohort under paragraph (b) 
of this section.

(Authority: 20 U.S.C. 1082, 1085, 1094, 1099c)


Sec. 668.184  Determining cohort default rates for institutions that 
have undergone a change in status.

    (a) General. (1) If you undergo a change in status identified in 
this section, your cohort default rate is determined under this 
section.
    (2) In determining cohort default rates under this section, the 
date of a merger, acquisition, or other change in status is the date 
the change occurs.
    (3) If another institution's cohort default rate is applicable to 
you under this section, you may challenge, request an adjustment, or 
submit an appeal for the cohort default rate under the same 
requirements that would be applicable to the other institution under 
Secs. 668.185 and 668.189.
    (b) Acquisition or merger of institutions. If your institution 
acquires, or was created by the merger of, one or more institutions 
that participated independently in the Title IV, HEA programs 
immediately before the acquisition or merger--
    (1) For the cohort default rates published before the date of the 
acquisition or merger, your cohort default rates are the same as those 
of your predecessor that had the highest total number of borrowers 
entering repayment in the two most recent cohorts used to calculate 
those cohort default rates; and
    (2) Beginning with the first cohort default rate published after 
the date of the acquisition or merger, your cohort default rates are 
determined by including the applicable borrowers from each institution 
involved in the acquisition or merger in the calculation under 
Sec. 668.183.
    (c) Acquisition of branches or locations. If you acquire a branch 
or a location from another institution participating in the Title IV, 
HEA programs--
    (1) The cohort default rates published for you before the date of 
the change apply to you and to the newly acquired branch or location;
    (2) Beginning with the first cohort default rate published after 
the date of the change, your cohort default rates for the next 3 fiscal 
years are determined by including the applicable borrowers from your 
institution and the other institution (including all of its locations) 
in the calculation under Sec. 668.183;
    (3) After the period described in paragraph (c)(2) of this section, 
your cohort default rates do not include borrowers from the other 
institution in the calculation under Sec. 668.183; and
    (4) At all times, the cohort default rate for the institution from 
which you acquired the branch or location is not affected by this 
change in status.
    (d) Branches or locations becoming institutions. If you are a 
branch or location of an institution that is participating in the Title 
IV, HEA programs, and you become a separate, new institution for the 
purposes of participating in those programs--
    (1) The cohort default rates published before the date of the 
change for your former parent institution are also applicable to you;
    (2) Beginning with the first cohort default rate published after 
the date of the change, your cohort default rates for the next 3 fiscal 
years are determined by including the applicable borrowers from your 
institution and your former parent institution (including all of its 
locations) in the calculation under Sec. 668.183; and (3) After the 
period described in paragraph (d)(2) of this section, your cohort 
default rates do not include borrowers from your former parent 
institution in the calculation under Sec. 668.183.

(Authority: 20 U.S.C. 1082, 1085, 1094, 1099c)


Sec. 668.185  Draft cohort default rates and your ability to challenge 
before official cohort default rates are issued.

    (a) General. (1) We notify you of your draft cohort default rate 
before your official cohort default rate is calculated. Our notice 
includes the loan record detail report for the draft cohort default 
rate.
    (2) Regardless of the number of borrowers included in your cohort, 
your draft cohort default rate is always calculated using data for that 
fiscal year alone, using the method described in Sec. 668.183(d)(1).
    (3) Your draft cohort default rate and the loan record detail 
report are not considered public information and may not be otherwise 
voluntarily released by a data manager.
    (4) Any challenge you submit under this section and any response 
provided by a data manager must be in a format acceptable to us. This 
acceptable format is described in the ``Cohort Default Rate Guide'' 
that we provide to you. If your challenge does not comply with the 
requirements in the ``Cohort Default Rate Guide,'' we may deny your 
challenge.
    (b) Incorrect data challenges. (1) You may challenge the accuracy 
of the data included on the loan record detail report by sending a 
challenge to the relevant data manager, or data managers, within 45 
days after you receive the data. Your challenge must include--
    (i) A description of the information in the loan record detail 
report that you believe is incorrect; and
    (ii) Documentation that supports your contention that the data are 
incorrect.
    (2) Within 30 days after receiving your challenge, the data manager 
must send you and us a response that--
    (i) Addresses each of your allegations of error; and
    (ii) Includes the documentation that supports the data manager's 
position.
    (3) If your data manager concludes that draft data in the loan 
record detail report are incorrect, and we agree, we use the corrected 
data to calculate your cohort default rate.
    (4) If you fail to challenge the accuracy of data under this 
section, you cannot contest the accuracy of those data in an 
uncorrected data adjustment, under Sec. 668.190, or in an erroneous 
data appeal, under Sec. 668.192.
    (c) Participation rate index challenges. (1)(i) You may challenge 
an anticipated loss of eligibility under Sec. 668.187(a)(1), based on 
one cohort default rate over 40 percent, if your participation rate 
index for that cohort's fiscal year is equal to or less than 0.06015.
    (ii) You may challenge an anticipated loss of eligibility under 
Sec. 668.187(a)(2), based on 3 cohort default rates of 25 percent or 
greater, if your participation rate index is equal to or less than 
0.0375 for any of those 3 cohorts' fiscal years.
    (2) For a participation rate index challenge, your participation 
rate index is calculated as described in Sec. 668.195(b), except that--
    (i) The draft cohort default rate is considered to be your most 
recent cohort default rate; and
    (ii) If the cohort used to calculate your draft cohort default rate 
included fewer than 30 borrowers, you may calculate your participation 
rate index for that fiscal year using either your most recent draft 
cohort default rate or the average rate that would be calculated for 
that fiscal year, using the method described in Sec. 668.183(d)(2).
    (3) You must send your participation rate index challenge, 
including all

[[Page 47606]]

supporting documentation, to us within 45 days after you receive your 
draft cohort default rate.
    (4) We notify you of our determination on your participation rate 
index challenge before your official cohort default rate is published.
    (5) If we determine that you qualify for continued eligibility 
based on your participation rate index challenge, you will not lose 
eligibility under Sec. 668.187 when your next official cohort default 
rate is published. A successful challenge that is based on your draft 
cohort default rate does not excuse you from any other loss of 
eligibility. However, if your successful challenge of a loss of 
eligibility under paragraph (c)(1)(ii) of this section is based on a 
prior, official cohort default rate, and not on your draft cohort 
default rate, we also excuse you from any subsequent loss of 
eligibility, under Sec. 668.187(a)(2), that would be based on that 
official cohort default rate.

(Authority: 20 U.S.C. 1082, 1085, 1094, 1099c)


Sec. 668.186  Notice of your official cohort default rate.

    (a) We notify you of your cohort default rate after we calculate 
it. After we send our notice to you, we publish a list of cohort 
default rates for all institutions.
    (b) If your cohort default rate is 10 percent or more, we include a 
copy of the loan record detail report with the notice.
    (c) If your cohort default rate is less than 10 percent--
    (1) You may request a copy of the loan record detail reports that 
list loans included in your cohort default rate calculation; and
    (2) If you are requesting an adjustment or appealing under this 
subpart, your request for a copy of the loan record detail report or 
reports must be sent to us within 15 days after you receive the notice 
of your cohort default rate.

(Authority: 20 U.S.C. 1082, 1085, 1094, 1099c)


Sec. 668.187  Consequences of cohort default rates on your ability to 
participate in Title IV, HEA programs.

    (a) End of participation. (1) Except as provided in paragraph (f) 
of this section, you lose your eligibility to participate in the FFEL 
and Direct Loan programs 30 days after you receive our notice that your 
most recent cohort default rate is greater than 40 percent.
    (2) Except as provided in paragraphs (e) and (f) of this section, 
you lose your eligibility to participate in the FFEL, Direct Loan, and 
Federal Pell Grant programs 30 days after you receive our notice that 
your 3 most recent cohort default rates are each 25 percent or greater.
    (b) Length of period of ineligibility. Your loss of eligibility 
under this section continues--
    (1) For the remainder of the fiscal year in which we notify you 
that you are subject to a loss of eligibility; and
    (2) For the next 2 fiscal years.
    (c) Using a cohort default rate more than once. The use of a cohort 
default rate as a basis for a loss of eligibility under this section 
does not preclude its use as a basis for--
    (1) Any concurrent or subsequent loss of eligibility under this 
section; or
    (2) Any other action by us.
    (d) Special institutions. If you are a special institution that 
satisfies the requirements for continued eligibility under 
Sec. 668.198, you are not subject to any loss of eligibility under this 
section or to provisional certification under Sec. 668.16(m).
    (e) Continuing participation in Pell. If you are subject to a loss 
of eligibility under paragraph (a)(2) of this section, based on 3 
cohort default rates of 25 percent or greater, you may continue to 
participate in the Federal Pell Grant Program if we determine that 
you--
    (1) Were ineligible to participate in the FFEL and Direct Loan 
programs before October 7, 1998, and your eligibility was not 
reinstated;
    (2) Requested in writing, before October 7, 1998, to withdraw your 
participation in the FFEL and Direct Loan programs, and you were not 
later reinstated; or
    (3) Have not certified an FFELP loan or originated a Direct Loan 
Program loan on or after July 7, 1998.
    (f) Requests for adjustments and appeals. (1) A loss of eligibility 
under this section does not take effect while your request for 
adjustment or appeal, as listed in Sec. 668.189(a), is pending, 
provided your request for adjustment or appeal is complete, timely, 
accurate, and in the required format.
    (2) Eligibility continued under paragraph (f)(1) of this section 
ends if we determine that none of the requests for adjustments and 
appeals you have submitted qualify you for continued eligibility under 
Sec. 668.189. Loss of eligibility takes effect on the date that you 
receive notice of our determination on your last pending request for 
adjustment or appeal.
    (3) You do not lose eligibility under this section if we determine 
that your request for adjustment or appeal meets all requirements of 
this subpart and qualifies you for continued eligibility under 
Sec. 668.189.
    (4) To avoid liabilities you might otherwise incur under paragraph 
(g) of this section, you may choose to suspend your participation in 
the FFEL and Direct Loan programs during the adjustment or appeal 
process.
    (g) Liabilities during the adjustment or appeal process. If you 
continued to participate in the FFEL or Direct Loan Program under 
paragraph (f)(1) of this section, and we determine that none of your 
requests for adjustments or appeals qualify you for continued 
eligibility--
    (1) For any FFEL or Direct Loan Program loan that you certified and 
delivered or originated and disbursed more than 30 days after you 
received the notice of your cohort default rate, we estimate the amount 
of interest, special allowance, reinsurance, and any related or similar 
payments we make or are obligated to make on those loans;
    (2) We exclude from this estimate any amount attributable to funds 
that you delivered or disbursed more than 45 days after you submitted 
your completed appeal to us;
    (3) We notify you of the estimated amount; and
    (4) Within 45 days after you receive our notice of the estimated 
amount, you must pay us that amount, unless--
    (i) You file an appeal under the procedures established in subpart 
H of this part (for the purposes of subpart H of this part, our notice 
of the estimate is considered to be a final program review 
determination); or
    (ii) We permit a longer repayment period.
    (h) Regaining eligibility. If you lose your eligibility to 
participate in a program under this section, you may not participate in 
that program until--
    (1) The period described in paragraph (b) of this section has 
ended;
    (2) You pay any amount owed to us under this section or are meeting 
that obligation under an agreement acceptable to us;
    (3) You submit a new application for participation in the program;
    (4) We determine that you meet all of the participation 
requirements in effect at the time of your application; and
    (5) You and we enter into a new program participation agreement.

(Authority: 20 U.S.C. 1082, 1085, 1094, 1099c)


Sec. 668.188  Preventing evasion of the consequences of cohort default 
rates.

    (a) General. Unless you are a special institution complying with 
Sec. 668.198, you are subject to a loss of eligibility that has already 
been imposed against another institution under Sec. 668.187 if--
    (1) You and the ineligible institution are both parties to a 
transaction that

[[Page 47607]]

results in a change of ownership, a change in control, a merger, a 
consolidation, an acquisition, a change of name, a change of address, 
any change that results in a location becoming a freestanding 
institution, a purchase or sale, a transfer of assets, an assignment, a 
change of identification number, a contract for services, an addition 
or closure of one or more locations or branches or educational 
programs, or any other change in whole or in part in institutional 
structure or identity;
    (2) Following the change described in paragraph (a)(1) of this 
section, you offer an educational program at substantially the same 
address at which the ineligible institution had offered an educational 
program before the change; and
    (3) There is a commonality of ownership or management between you 
and the ineligible institution, as the ineligible institution existed 
before the change.
    (b) Commonality of ownership or management. For the purposes of 
this section, a commonality of ownership or management exists if, at 
each institution, the same person (as defined in 34 CFR 600.31) or 
members of that person's family, directly or indirectly--
    (1) Holds or held a managerial role; or
    (2) Has or had the ability to affect substantially the 
institution's actions, within the meaning of 34 CFR 600.21.
    (c) Teach-outs. Notwithstanding paragraph (b)(1) of this section, a 
commonality of management does not exist if you are conducting a teach-
out and--
    (1)(i) Within 60 days after the change described in this section, 
you send us the names of the managers for each facility undergoing the 
teach-out as it existed before the change and for each facility as it 
exists after you believe that the commonality of management has ended; 
and
    (ii) We determine that the commonality of management, as described 
in paragraph (b)(1) of this section, has ended; or
    (2)(i) Within 30 days after you receive our notice that we have 
denied your submission under paragraph (c)(1)(i) of this section, you 
make the management changes we request and send us a list of the names 
of the managers for each facility undergoing the teach-out as it exists 
after you make those changes; and
    (ii) We determine that the commonality of management, as described 
in paragraph (b)(1) of this section, has ended.
    (d) Initial determination. We encourage you to contact us before 
undergoing a change described in this section. If you contact us and 
provide the information we request, we will provide an initial 
determination of the anticipated change's effect on your eligibility.
    (e) Notice of accountability. (1) We notify you in writing if, in 
response to your notice or application filed under 34 CFR 600.20 or 
600.21, we determine that you are subject to a loss of eligibility, 
under paragraph (a) of this section, that has been imposed against 
another institution.
    (2) Our notice also advises you of the scope and duration of your 
loss of eligibility. The loss of eligibility applies to all of your 
locations from the date you receive our notice until the expiration of 
the period of ineligibility applicable to the other institution.
    (3) If you are subject to a loss of eligibility under this section 
that has already been imposed against another institution, you may only 
request an adjustment or submit an appeal for the loss of eligibility 
under the same requirements that would be applicable to the other 
institution under Sec. 668.189.

(Authority: 20 U.S.C. 1082, 1085, 1094, 1099c)


Sec. 668.189  General requirements for adjusting official cohort 
default rates and for appealing their consequences.

    (a) Remaining eligible. You do not lose eligibility under 
Sec. 668.187 if--
    (1) We recalculate your cohort default rate, and it is below the 
percentage threshold for the loss of eligibility as the result of--
    (i) An uncorrected data adjustment submitted under this section and 
Sec. 668.190;
    (ii) A new data adjustment submitted under this section and 
Sec. 668.191;
    (iii) An erroneous data appeal submitted under this section and 
Sec. 668.192; or
    (iv) A loan servicing appeal submitted under this section and 
Sec. 668.193; or
    (2) You meet the requirements for--
    (i) An economically disadvantaged appeal submitted under this 
section and Sec. 668.194;
    (ii) A participation rate index appeal submitted under this section 
and Sec. 668.195;
    (iii) An average rates appeal submitted under this section and 
Sec. 668.196; or
    (iv) A thirty-or-fewer borrowers appeal submitted under this 
section and Sec. 668.197.
    (b) Limitations on your ability to dispute your cohort default 
rate. (1) You may not dispute the calculation of a cohort default rate 
except as described in this subpart.
    (2) You may not request an adjustment or appeal a cohort default 
rate, under Sec. 668.190, Sec. 668.191, Sec. 668.192, or Sec. 668.193, 
more than once.
    (3) You may not request an adjustment or appeal a cohort default 
rate, under Sec. 668.190, Sec. 668.191, Sec. 668.192, or Sec. 668.193, 
if you previously lost your eligibility to participate in a Title IV, 
HEA program, under Sec. 668.187, based entirely or partially on that 
cohort default rate.
    (c) Content and format of requests for adjustments and appeals. We 
may deny your request for adjustment or appeal if it does not meet the 
following requirements:
    (1) All appeals, notices, requests, independent auditor's opinions, 
management's written assertions, and other correspondence that you are 
required to send under this subpart must be complete, timely, accurate, 
and in a format acceptable to us. This acceptable format is described 
in the ``Cohort Default Rate Guide'' that we provide to you.
    (2) Your completed request for adjustment or appeal must include--
    (i) All of the information necessary to substantiate your request 
for adjustment or appeal; and
    (ii) A certification by your chief executive officer, under penalty 
of perjury, that all the information you provide is true and correct.
    (d) Our copies of your correspondence. Whenever you are required by 
this subpart to correspond with a party other than us, you must send us 
a copy of your correspondence within the same time deadlines. However, 
you are not required to send us copies of documents that you received 
from us originally.
    (e) Requirements for data managers' responses. (1) Except as 
otherwise provided in this subpart, if this subpart requires a data 
manager to correspond with any party other than us, the data manager 
must send us a copy of the correspondence within the same time 
deadlines.
    (2) Any correspondence sent to us by a data manager under this 
subpart should be in a format acceptable to us.
    (f) Our decision on your request for adjustment or appeal. (1) We 
determine whether your request for an adjustment or appeal is in 
compliance with this subpart.
    (2) In making our decision for an adjustment, under Sec. 668.190 or 
Sec. 668.191, or an appeal, under Sec. 668.192 or Sec. 668.193--
    (i) We presume that the information provided to you by a data 
manager is correct unless you provide substantial evidence that shows 
the information is not correct; and

[[Page 47608]]

    (ii) If we determine that a data manager did not provide the 
necessary clarifying information or legible records in meeting the 
requirements of this subpart, we presume that the evidence that you 
provide to us is correct unless it is contradicted or otherwise proven 
to be incorrect by information we maintain.
    (3) Our decision is based on the materials you submit under this 
subpart. We do not provide an oral hearing.
    (4) We notify you of our decision--
    (i) If you request an adjustment or appeal because you are subject 
to a loss of eligibility under Sec. 668.187, within 45 days after we 
receive your completed request for an adjustment or appeal; or
    (ii) In all other cases, except for appeals submitted under 
Sec. 668.192(a) to avoid provisional certification, before we notify 
you of your next official cohort default rate.
    (5) You may not seek judicial review of our determination of a 
cohort default rate until we issue our decision on all pending requests 
for adjustments or appeals for that cohort default rate.

(Authority: 20 U.S.C. 1082, 1085, 1094, 1099c)


Sec. 668.190  Uncorrected data adjustments.

    (a) Eligibility. You may request an uncorrected data adjustment for 
your most recent cohort of borrowers, used to calculate your most 
recent official cohort default rate, if in response to your challenge 
under Sec. 668.185(b), a data manager agreed correctly to change the 
data, but the changes are not reflected in your official cohort default 
rate.
    (b) Deadlines for requesting an uncorrected data adjustment. (1) If 
the loan record detail report was not included with your official 
cohort default rate notice, you must request it within 15 days after 
you receive the notice of your official cohort default rate.
    (2) You must send us a request for an uncorrected data adjustment, 
including all supporting documentation, within 30 days after you 
receive your loan record detail report from us.
    (c) Determination. We recalculate your cohort default rate, based 
on the corrected data, if we determine that--
    (1) In response to your challenge under Sec. 668.185(b), a data 
manager agreed to change the data;
    (2) The changes described in paragraph (c)(1) of this section are 
not reflected in your official cohort default rate; and
    (3) We agree that the data are incorrect.

(Authority: 20 U.S.C. 1082, 1085, 1094, 1099c)


Sec. 668.191  New data adjustments.

    (a) Eligibility. You may request a new data adjustment for your 
most recent cohort of borrowers, used to calculate your most recent 
official cohort default rate, if--
    (1) A comparison of the loan record detail reports that we provide 
to you for the draft and official cohort default rates shows that the 
data have been newly included, excluded, or otherwise changed; and
    (2) You identify errors in the data described in paragraph (a)(1) 
of this section that are confirmed by the data manager.
    (b) Deadlines for requesting a new data adjustment. (1) If the loan 
record detail report was not included with your official cohort default 
rate notice, you must request it within 15 days after you receive the 
notice of your official cohort default rate.
    (2) You must send the relevant data manager, or data managers, and 
us a request for a new data adjustment, including all supporting 
documentation, within 15 days after you receive your loan record detail 
report from us.
    (3) Within 20 days after receiving your request for a new data 
adjustment, the data manager must send you and us a response that--
    (i) Addresses each of your allegations of error; and
    (ii) Includes the documentation used to support the data manager's 
position.
    (4) Within 15 days after receiving a guaranty agency's notice that 
we hold an FFELP loan about which you are inquiring, you must send us 
your request for a new data adjustment for that loan. We respond to 
your request under paragraph (b)(3) of this section.
    (5) Within 15 days after receiving incomplete or illegible records 
or data from a data manager, you must send a request for replacement 
records or clarification of data to the data manager and us.
    (6) Within 20 days after receiving your request for replacement 
records or clarification of data, the data manager must--
    (i) Replace the missing or illegible records;
    (ii) Provide clarifying information; or
    (iii) Notify you and us that no clarifying information or 
additional or improved records are available.
    (7) You must send us your completed request for a new data 
adjustment, including all supporting documentation--
    (i) Within 30 days after you receive the final data manager's 
response to your request or requests; or
    (ii) If you are also filing an erroneous data appeal or a loan 
servicing appeal, by the latest of the filing dates required in 
paragraph (b)(7)(i) of this section or in Sec. 668.192(b)(6)(i) or 
Sec. 668.193(c)(10)(i).
    (c) Determination. If we determine that incorrect data were used to 
calculate your cohort default rate, we recalculate your cohort default 
rate based on the correct data.

(Authority: 20 U.S.C. 1082, 1085, 1094, 1099c)


Sec. 668.192  Erroneous data appeals.

    (a) Eligibility. Except as provided in Sec. 668.189(b), you may 
appeal the calculation of a cohort default rate upon which a loss of 
eligibility, under Sec. 668.187, or provisional certification, under 
Sec. 668.16(m), is based if--
    (1) You dispute the accuracy of data that you previously challenged 
on the basis of incorrect data, under Sec. 668.185(b); or
    (2) A comparison of the loan record detail reports that we provide 
to you for the draft and official cohort default rates shows that the 
data have been newly included, excluded, or otherwise changed.
    (b) Deadlines for submitting an appeal. (1) You must send a request 
for verification of data errors to the relevant data manager, or data 
managers, and to us within 15 days after you receive the notice of your 
loss of eligibility or provisional certification. Your request must 
include a description of the information in the cohort default rate 
data that you believe is incorrect and all supporting documentation 
that demonstrates the error.
    (2) Within 20 days after receiving your request for verification of 
data errors, the data manager must send you and us a response that--
    (i) Addresses each of your allegations of error; and
    (ii) Includes the documentation used to support the data manager's 
position.
    (3) Within 15 days after receiving a guaranty agency's notice that 
we hold an FFELP loan about which you are inquiring, you must send us 
your request for verification of that loan's data errors. Your request 
must include a description of the information in the cohort default 
rate data that you believe is incorrect and all supporting 
documentation that demonstrates the error. We respond to your request 
under paragraph (b)(2) of this section.
    (4) Within 15 days after receiving incomplete or illegible records 
or data, you must send a request for replacement records or 
clarification of data to the data manager and us.
    (5) Within 20 days after receiving your request for replacement 
records or

[[Page 47609]]

clarification of data, the data manager must--
    (i) Replace the missing or illegible records;
    (ii) Provide clarifying information; or
    (iii) Notify you and us that no clarifying information or 
additional or improved records are available.
    (6) You must send your completed appeal to us, including all 
supporting documentation--
    (i) Within 30 days after you receive the final data manager's 
response to your request; or
    (ii) If you are also requesting a new data adjustment or filing a 
loan servicing appeal, by the latest of the filing dates required in 
paragraph (b)(6)(i) of this section or in Sec. 668.191(b)(7)(i) or 
Sec. 668.193(c)(10)(i).
    (c) Determination. If we determine that incorrect data were used to 
calculate your cohort default rate, we recalculate your cohort default 
rate based on the correct data.

(Authority: 20 U.S.C. 1082, 1085, 1094, 1099c)


Sec. 668.193  Loan servicing appeals.

    (a) Eligibility. Except as provided in Sec. 668.189(b), you may 
appeal, on the basis of improper loan servicing or collection, the 
calculation of--
    (1) Your most recent cohort default rate; or
    (2) Any cohort default rate upon which a loss of eligibility under 
Sec. 668.187 is based.
    (b) Improper loan servicing. For the purposes of this section, a 
default is considered to have been due to improper loan servicing or 
collection only if the borrower did not make a payment on the loan and 
you prove that the FFEL Program lender or the Direct Loan Servicer, as 
defined in 34 CFR 685.102, failed to perform one or more of the 
following activities, if that activity applies to the loan:
    (1) Send at least one letter (other than the final demand letter) 
urging the borrower to make payments on the loan;
    (2) Attempt at least one phone call to the borrower;
    (3) Send a final demand letter to the borrower;
    (4) For a Direct Loan Program loan only, document that skip tracing 
was performed if the Direct Loan Servicer determined that it did not 
have the borrower's current address; and
    (5) For an FFELP loan only--
    (i) Submit a request for preclaims or default aversion assistance 
to the guaranty agency; and
    (ii) Submit a certification or other documentation that skip 
tracing was performed to the guaranty agency.
    (c) Deadlines for submitting an appeal. (1) If the loan record 
detail report was not included with your official cohort default rate 
notice, you must request it within 15 days after you receive the notice 
of your official cohort default rate.
    (2) You must send a request for loan servicing records to the 
relevant data manager, or data managers, and to us within 15 days after 
you receive your loan record detail report from us. If the data manager 
is a guaranty agency, your request must include a copy of the list of 
students that we provided to you.
    (3) Within 20 days after receiving your request for loan servicing 
records, the data manager must--
    (i) Send you and us a list of the borrowers in your representative 
sample, as described in paragraph (d) of this section (the list must be 
in social security number order, and it must include the number of 
defaulted loans included in the cohort for each listed borrower);
    (ii) Send you and us a description of how your representative 
sample was chosen; and
    (iii) Either send you copies of the loan servicing records for the 
borrowers in your representative sample and send us a copy of its cover 
letter indicating that the records were sent, or send you and us a 
notice of the amount of its fee for providing copies of the loan 
servicing records.
    (4) The data manager may charge you a reasonable fee for providing 
copies of loan servicing records, but it may not charge more than $10 
per borrower file. If a data manager charges a fee, it is not required 
to send the documents to you until it receives your payment of the fee.
    (5) If the data manager charges a fee for providing copies of loan 
servicing records, you must send payment in full to the data manager 
within 15 days after you receive the notice of the fee.
    (6) If the data manager charges a fee for providing copies of loan 
servicing records, and--
    (i) You pay the fee in full and on time, the data manager must send 
you, within 20 days after it receives your payment, a copy of all loan 
servicing records for each loan in your representative sample (the 
copies are provided to you in hard copy format unless the data manager 
and you agree that another format may be used), and it must send us a 
copy of its cover letter indicating that the records were sent; or
    (ii) You do not pay the fee in full and on time, the data manager 
must notify you and us of your failure to pay the fee and that you have 
waived your right to challenge the calculation of your cohort default 
rate based on the data manager's records. We accept that determination 
unless you prove that it is incorrect.
    (7) Within 15 days after receiving a guaranty agency's notice that 
we hold an FFELP loan about which you are inquiring, you must send us 
your request for the loan servicing records for that loan. We respond 
to your request under paragraph (c)(3) of this section.
    (8) Within 15 days after receiving incomplete or illegible records, 
you must send a request for replacement records to the data manager and 
us.
    (9) Within 20 days after receiving your request for replacement 
records, the data manager must either--
    (i) Replace the missing or illegible records; or
    (ii) Notify you and us that no additional or improved copies are 
available.
    (10) You must send your appeal to us, including all supporting 
documentation--
    (i) Within 30 days after you receive the final data manager's 
response to your request for loan servicing records; or
    (ii) If you are also requesting a new data adjustment or filing an 
erroneous data appeal, by the latest of the filing dates required in 
paragraph (c)(10)(i) of this section or in Sec. 668.191(b)(7)(i) or 
Sec. 668.192(b)(6)(i).
    (d) Representative sample of records. (1) To select a 
representative sample of records, the data manager first identifies all 
of the borrowers for whom it is responsible and who had loans that were 
considered to be in default in the calculation of the cohort default 
rate you are appealing. However, for the purposes of this paragraph, 
the data manager does not identify a borrower as defaulted due to 
repayment under the Direct Loan Program's income contingent repayment 
plan, under Sec. 668.183(c)(1)(iii).
    (2) From the group of borrowers identified under paragraph (d)(1) 
of this section, the data manager identifies a sample that is large 
enough to derive an estimate, acceptable at a 95 percent confidence 
level with a plus or minus 5 percent confidence interval, for use in 
determining the number of borrowers who should be excluded from the 
calculation of the cohort default rate due to improper loan servicing 
or collection.
    (e) Loan servicing records. Loan servicing records are the 
collection and payment history records--
    (1) 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; or
    (2) Maintained by our Direct Loan Servicer that are used in 
determining your cohort default rate.

[[Page 47610]]

    (f) Determination. (1) We determine the number of loans, included 
in your representative sample of loan servicing records, that defaulted 
due to improper loan servicing or collection, as described in paragraph 
(b) of this section.
    (2) Based on our determination, we use a statistically valid 
methodology to exclude the corresponding percentage of borrowers from 
both the numerator and denominator of the calculation of your cohort 
default rate.
    (3) Our recalculation of your cohort default rate does not affect 
the number of borrowers who are considered to be in default due to 
payments made under the Direct Loan Program's income contingent 
repayment plan, under the criteria in Sec. 668.183(c)(1)(iii).

(Authority: 20 U.S.C. 1082, 1085, 1094, 1099c)


Sec. 668.194  Economically disadvantaged appeals.

    (a) Eligibility. As described in this section, you may appeal a 
notice of a loss of eligibility under Sec. 668.187 if an independent 
auditor's opinion certifies that your low income rate is two-thirds or 
more and--
    (1) You offer an associate, baccalaureate, graduate, or 
professional degree, and your completion rate is 70 percent or more; or
    (2) You do not offer an associate, baccalaureate, graduate, or 
professional degree, and your placement rate is 44 percent or more.
    (b) Low income rate. (1) Your low income rate is the percentage of 
your students, as described in paragraph (b)(2) of this section, who--
    (i) For an award year that overlaps the 12-month period selected 
under paragraph (b)(2) of this section, have an expected family 
contribution, as defined in 34 CFR 690.2, that is equal to or less than 
the largest expected family contribution that would allow a student to 
receive one-half of the maximum Federal Pell Grant award, regardless of 
the student's enrollment status or cost of attendance; or
    (ii) For a calendar year that overlaps the 12-month period selected 
under paragraph (b)(2) of this section, have an adjusted gross income 
that, when added to the adjusted gross income of the student's parents 
(if the student is a dependent student) or spouse (if the student is a 
married independent student), is less than the amount listed in the 
Department of Health and Human Services poverty guidelines for the size 
of the student's family unit.
    (2) The students who are used to determine your low income rate 
include only students who were enrolled on at least a half-time basis 
in an eligible program at your institution during any part of a 12-
month period that ended during the 6 months immediately preceding the 
cohort's fiscal year.
    (c) Completion rate. (1) Your completion rate is the percentage of 
your students, as described in paragraph (c)(2) of this section, who--
    (i) Completed the educational programs in which they were enrolled;
    (ii) Transferred from your institution to a higher level 
educational program;
    (iii) Remained enrolled and are making satisfactory progress toward 
completion of their educational programs at the end of the same 12-
month period used to calculate the low income rate; or
    (iv) Entered active duty in the Armed Forces of the United States 
within 1 year after their last date of attendance at your institution.
    (2) The students who are used to determine your completion rate 
include only regular students who were--
    (i) Initially enrolled on a full-time basis in an eligible program; 
and
    (ii) Originally scheduled to complete their programs during the 
same 12-month period used to calculate the low income rate.
    (d) Placement rate. (1) Except as provided in paragraph (d)(2) of 
this section, your placement rate is the percentage of your students, 
as described in paragraphs (d)(3) and (d)(4) of this section, who--
    (i) Are employed, in an occupation for which you provided training, 
on the date following 1 year after their last date of attendance at 
your institution;
    (ii) Were employed for at least 13 weeks, in an occupation for 
which you provided training, between the date they enrolled at your 
institution and the first date that is more than a year after their 
last date of attendance at your institution; or
    (iii) Entered active duty in the Armed Forces of the United States 
within 1 year after their last date of attendance at your institution.
    (2) For the purposes of this section, a former student is not 
considered to have been employed based on any employment by your 
institution.
    (3) The students who are used to determine your placement rate 
include only former students who--
    (i) Were initially enrolled in an eligible program on at least a 
half-time basis;
    (ii) Were originally scheduled, at the time of enrollment, to 
complete their educational programs during the same 12-month period 
used to calculate the low income rate; and
    (iii) Remained in the program beyond the point at which a student 
would have received a 100 percent tuition refund from you.
    (4) A student is not included in the calculation of your placement 
rate if that student, on the date that is 1 year after the student's 
originally scheduled completion date, remains enrolled in the same 
program and is making satisfactory progress.
    (e) Scheduled to complete. In calculating a completion or placement 
rate under this section, the date on which a student is originally 
scheduled to complete a program is based on--
    (1) For a student who is initially enrolled full-time, the amount 
of time specified in your enrollment contract, catalog, or other 
materials for completion of the program by a full-time student; or
    (2) For a student who is initially enrolled less than full-time, 
the amount of time that it would take the student to complete the 
program if the student remained at that level of enrollment throughout 
the program.
    (f) Deadline for submitting an appeal. (1) Within 30 days after you 
receive the notice of your loss of eligibility, you must send us your 
management's written assertion, as described in the Cohort Default Rate 
Guide.
    (2) Within 60 days after you receive the notice of your loss of 
eligibility, you must send us the independent auditor's opinion 
described in paragraph (g) of this section.
    (g) Independent auditor's opinion. (1) The independent auditor's 
opinion must state whether your management's written assertion, as you 
provided it to the auditor and to us, meets the requirements for an 
economically disadvantaged appeal and is fairly stated in all material 
respects.
    (2) The engagement that forms the basis of the independent 
auditor's opinion must be an examination-level compliance attestation 
engagement performed in accordance with--
    (i) 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
    (ii) Government Auditing Standards issued by the Comptroller 
General of the United States.
    (h) Determination. You do not lose eligibility under Sec. 668.187 
if--
    (1) Your independent auditor's opinion agrees that you meet the 
requirements for an economically disadvantaged appeal; and
    (2) We determine that the independent auditor's opinion and your 
management's written assertion--

[[Page 47611]]

    (i) Meet the requirements for an economically disadvantaged appeal; 
and
    (ii) Are not contradicted or otherwise proven to be incorrect by 
information we maintain, to an extent that would render the independent 
auditor's opinion unacceptable.

(Authority: 20 U.S.C. 1082, 1085, 1094, 1099c)


Sec. 668.195  Participation rate index appeals.

    (a) Eligibility. (1) You may appeal a notice of a loss of 
eligibility under Sec. 668.187(a)(1), based on one cohort default rate 
over 40 percent, if your participation rate index for that cohort's 
fiscal year is equal to or less than 0.06015.
    (2) You may appeal a notice of a loss of eligibility under 
Sec. 668.187(a)(2), based on 3 cohort default rates of 25 percent or 
greater, if your participation rate index is equal to or less than 
0.0375 for any of those 3 cohorts' fiscal years.
    (b) Calculating your participation rate index. (1) Except as 
provided in paragraph (b)(2) of this section, your participation rate 
index for a fiscal year is determined by multiplying your cohort 
default rate for that fiscal year by the percentage that is derived by 
dividing--
    (i) The number of students who received an FFELP or a Direct Loan 
Program loan to attend your institution during a period of enrollment, 
as defined in 34 CFR 682.200 or 685.102, that overlaps any part of a 
12-month period that ended during the 6 months immediately preceding 
the cohort's fiscal year, by
    (ii) The number of regular students who were enrolled at your 
institution on at least a half-time basis during any part of the same 
12-month period.
    (2) If your cohort default rate for a fiscal year is calculated as 
an average rate under Sec. 668.183(d)(2), you may calculate your 
participation rate index for that fiscal year using either that average 
rate or the cohort default rate that would be calculated for the fiscal 
year alone using the method described in Sec. 668.183(d)(1).
    (c) Deadline for submitting an appeal. You must send us your appeal 
under this section, including all supporting documentation, within 30 
days after you receive the notice of your loss of eligibility.
    (d) Determination. (1) You do not lose eligibility under 
Sec. 668.187 if we determine that you meet the requirements for a 
participation rate index appeal.
    (2) If we determine that your participation rate index for a fiscal 
year is equal to or less than 0.0375, under paragraph (d)(1) of this 
section, we also excuse you from any subsequent loss of eligibility 
under Sec. 668.187(a)(2) that would be based on the official cohort 
default rate for that fiscal year.

(Authority: 20 U.S.C. 1082, 1085, 1094, 1099c)


Sec. 668.196  Average rates appeals.

    (a) Eligibility. (1) You may appeal a notice of a loss of 
eligibility under Sec. 668.187(a)(1), based on one cohort default rate 
over 40 percent, if that cohort default rate is calculated as an 
average rate under Sec. 668.183(d)(2).
    (2) You may appeal a notice of a loss of eligibility under 
Sec. 668.187(a)(2), based on 3 cohort default rates of 25 percent or 
greater, if at least 2 of those cohort default rates--
    (i) Are calculated as average rates under Sec. 668.183(d)(2); and
    (ii) Would be less than 25 percent if calculated for the fiscal 
year alone using the method described in Sec. 668.183(d)(1).
    (b) Deadline for submitting an appeal. (1) Before notifying you of 
your official cohort default rate, we make an initial determination 
about whether you qualify for an average rates appeal. If we determine 
that you qualify, we notify you of that determination at the same time 
that we notify you of your official cohort default rate.
    (2) If you disagree with our initial determination, you must send 
us your average rates appeal, including all supporting documentation, 
within 30 days after you receive the notice of your loss of 
eligibility.
    (c) Determination. You do not lose eligibility under Sec. 668.187 
if we determine that you meet the requirements for an average rates 
appeal.

(Authority: 20 U.S.C. 1082, 1085, 1094, 1099c)


Sec. 668.197  Thirty-or-fewer borrowers appeals.

    (a) Eligibility. You may appeal a notice of a loss of eligibility 
under Sec. 668.187 if 30 or fewer borrowers, in total, are included in 
the 3 most recent cohorts of borrowers used to calculate your cohort 
default rates.
    (b) Deadline for submitting an appeal. (1) Before notifying you of 
your official cohort default rate, we make an initial determination 
about whether you qualify for a thirty-or-fewer borrowers appeal. If we 
determine that you qualify, we notify you of that determination at the 
same time that we notify you of your official cohort default rate.
    (2) If you disagree with our initial determination, you must send 
us your thirty-or-fewer borrowers appeal, including all supporting 
documentation, within 30 days after you receive the notice of your loss 
of eligibility.
    (c) Determination. You do not lose eligibility under Sec. 668.187 
if we determine that you meet the requirements for a thirty-or-fewer 
borrowers appeal.

(Authority: 20 U.S.C. 1082, 1085, 1094, 1099c)


Sec. 668.198  Relief from the consequences of cohort default rates for 
special institutions.

    (a) Eligibility. You are only eligible for relief from the 
consequences of cohort default rates under this section if you are a--
    (1) Historically black college or university as defined in section 
322(2) of the HEA;
    (2) Tribally controlled community college as defined in section 
2(a)(4) of the Tribally Controlled Community College Assistance Act of 
1978; or
    (3) Navajo community college under the Navajo Community College 
Act.
    (b) Applicability of requirements. We may determine that the loss 
of eligibility provisions in Sec. 668.187 and the prohibition against 
full certification in Sec. 668.16(m) do not apply to you for each 1-
year period beginning on July 1 of 1999, 2000, or 2001, if you meet the 
requirements in paragraph (a) of this section and you send us--
    (1) By July 1 of the first 1-year period that begins after you 
receive our notice of a loss of eligibility under Sec. 668.187--
    (i) A default management plan; and
    (ii) A certification that you have engaged an independent third 
party, as described in this section; and
    (2) By July 1 of each subsequent 1-year period--
    (i) Evidence that you have implemented your default management plan 
during the preceding 1-year period;
    (ii) Evidence that you have made substantial improvement in the 
preceding 1-year period in your cohort default rate; and
    (iii) A certification that you continue to engage an independent 
third party, as described in this section.
    (c) Default management plan. (1) Your default management plan must 
provide reasonable assurance that you will, no later than July 1, 2002, 
have a cohort default rate that is less than 25 percent. Measures that 
you must take to provide this assurance include but are not limited 
to--
    (i) Establishing a default management team by engaging your chief 
executive officer and relevant senior executive officials and enlisting 
the support of representatives from offices other than the financial 
aid office;
    (ii) Identifying and allocating the personnel, administrative, and 
financial

[[Page 47612]]

resources appropriate to implement the default management plan;
    (iii) Defining the roles and responsibilities of the independent 
third party;
    (iv) 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;
    (v) Establishing annual targets for reductions in your cohort 
default rate; and
    (vi) Establishing a process to ensure the accuracy of your cohort 
default rate.
    (2) We will determine whether your default management plan is 
acceptable, after considering your history, resources, dollars in 
default, and targets for default reduction in making this 
determination.
    (3) If we determine that your proposed default management plan is 
unacceptable, you must consult with us to develop a revised plan and 
submit the revised plan to us within 30 days after you receive our 
notice that your proposed plan is unacceptable.
    (4) If we determine, based on the evidence you submit under 
paragraph (b)(2) of this section, that your default management plan is 
no longer acceptable, you must develop a revised plan in consultation 
with us and submit the revised plan to us within 60 days after you 
receive our notice that your plan is no longer acceptable.
    (5) A sample default management plan is provided in appendix B to 
this subpart. The sample is included to illustrate components of an 
acceptable default management plan. Since institutions' family income 
profiles, student borrowing patterns, histories, resources, dollars in 
default, and targets for default reduction are different, you must 
consider your own, individual circumstances in developing and 
submitting your plan.
    (d) Independent third party. (1) An independent third party may be 
any individual or entity that--
    (i) Provides technical assistance in developing and implementing 
your default management plan; and
    (ii) Is not substantially controlled by a person who also exercises 
substantial control over your institution.
    (2) An independent third party need not be paid by you for its 
services.
    (3) The services of a lender, guaranty agency, or secondary market 
as an independent third party under this section are not considered to 
be inducements under 34 CFR 682.200 or 682.401(e).
    (e) Substantial improvement. (1) For the purposes of this section, 
your substantial improvement is determined based on--
    (i) A reduction in your most recent draft or official cohort 
default rate;
    (ii) An increase in the percentage of delinquent borrowers who 
avoid default by using deferments, forbearances, and job placement 
assistance;
    (iii) An increase in the academic persistence of student borrowers;
    (iv) An increase in the percentage of students pursuing graduate or 
professional study;
    (v) An increase in the percentage of borrowers for whom a current 
address is known;
    (vi) An increase in the percentage of delinquent borrowers that you 
contacted;
    (vii) The implementation of alternative financial aid award 
policies and development of financial resources that reduce the need 
for student borrowing; or
    (viii) An increase in the percentage of accurate and timely 
enrollment status changes that you submitted to the National Student 
Loan Data System (NSLDS) on the Student Status Confirmation Report 
(SSCR).
    (2) When making a determination of your substantial improvement, we 
consider your performance in light of--
    (i) Your history, resources, dollars in default, and targets for 
default reduction;
    (ii) Your level of effort in meeting the terms of your approved 
default management plan during the previous 1-year period; and
    (iii) Any other mitigating circumstance at your institution during 
the 1-year period.
    (f) Determination. (1) If we determine that you are in compliance 
with this section, the provisions of Secs. 668.187 and 668.16(m) do not 
apply to you for that 1-year period, beginning on July 1 of 1999, 2000, 
or 2001.
    (2) If we determine that you are not in compliance with this 
section, you are subject to the provisions of Secs. 668.187 and 
668.16(m). You lose your eligibility to participate in the FFEL, Direct 
Loan, and Federal Pell Grant programs on the date you receive our 
notice of the determination.

(Authority: 20 U.S.C. 1082, 1085, 1094, 1099c)

Appendix A to Subpart M of Part 668--Summaries of Eligibility and 
Submission Requirements for Challenges, Adjustments, and Appeals

I. Summary of Submission Eligibility

    Some types of appeals may be submitted only if you are subject 
to a loss of eligibility under Sec. 668.187 or to provisional 
certification under Sec. 668.16(m). These types of appeals are 
identified in the following table.

[[Page 47613]]

[GRAPHIC] [TIFF OMITTED] TP02AU00.004

II. Summary of Submission Deadlines

    The deadlines you must meet when submitting a challenge, 
requesting an adjustment, or appealing are summarized in the 
following table. The full, official requirements for these deadlines 
are in Sec. 668.189 and in the text cited in the table. Also, in the 
table--
    1. ``Days'' means the number of calendar days within which the 
action must be performed.
    2. Any timeframe that is directly connected by a line to the 
``Start'', at the top of the table, begins when you receive your 
draft cohort default rate, official cohort default rate, notice of 
loss of eligibility, or notice of provisional certification. All 
other timeframes begin when you receive the response to your pending 
request, except that--
    (i) If you are waiting for responses from more than one data 
manager, your next timeframe begins when you receive the final 
response from the last data manager; and
    (ii) If you do not need to perform an action, the starting date 
for your next timeframe is based on the last action that was 
actually performed. (Actions that aren't always required have dotted 
borders.)

[[Page 47614]]

[GRAPHIC] [TIFF OMITTED] TP02AU00.005


[[Page 47615]]



Appendix B to Subpart M of Part 668--Sample Default Management Plan 
for Special Institutions To Use When Complying With Sec. 668.198.

    This appendix is provided as a sample plan for those 
institutions developing a default management plan in accordance with 
Sec. 668.198. It describes some measures you may find helpful in 
reducing the number of students that default on federally funded 
loans. These are not the only measures you could implement when 
developing a default management plan. In developing a default 
management plan, you must consider your history, resources, dollars 
in default, and targets for default reduction to determine which 
activities will result in the most benefit to your students and to 
you.

I. Core Default Reduction Strategies (from Sec. 668.198(c)(1))

    1. Establish a default management team by engaging your chief 
executive officer and relevant senior executive officials 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 your rate.
    6. Establish a process to ensure the accuracy of your rate.

II. 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 
your institution by using activities such as skip tracing to locate 
the borrower.
    4. Track the borrower's delinquency status by obtaining reports 
from data managers and FFEL Program lenders.
    5. Enhance student loan repayments through counseling the 
borrower on loan repayment options and facilitating contact between 
the borrower and the data manager or FFEL Program lender.
    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.

III. 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.

IV. Statistics for Measuring Progress

    1. The number of students enrolled at your institution 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 who received default 
prevention counseling services each fiscal year.
    5. The average number of contacts that you or your agent had 
with a borrower who was in deferment or forbearance or in 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.

    13. Appendix A to Part 668 is removed.
    14. Appendix B to Part 668 is redesignated as Appendix A to Subpart 
B of Part 668.
    15. Appendix C to Part 668 is redesignated as Appendix B to Subpart 
B of Part 668.
    16. Appendix D to Part 668 is removed.
    17. Appendix E to Part 668 is redesignated as Appendix A to Subpart 
D of Part 668.
    18. Appendix F to Part 668 is redesignated as Appendix A to Subpart 
L of Part 668.
    19. Appendix G to Part 668 is redesignated as Appendix B to Subpart 
L of Part 668.
    20. Appendix H to Part 668 is removed.

PART 682--FEDERAL FAMILY EDUCATION LOAN (FFEL) PROGRAM

    21. The authority citation for part 682 continues to read as 
follows:

    Authority: 20 U.S.C. 1071 to 1087-2, unless otherwise noted.

    22. In Sec. 682.401, paragraph (b)(15) is revised to read as 
follows:


Sec. 682.401  Basic program agreement.

* * * * *
    (b) * * *
    (15) Guaranty agency verification of default data. A guaranty 
agency must meet the requirements and deadlines provided for it in 
subpart M of 34 CFR part 668 for the cohort default rate process.
* * * * *
    23. In Sec. 682.410, paragraph (c)(1)(i)(C) is revised to read as 
follows:


Sec. 682.410  Fiscal, administrative, and enforcement requirements.

* * * * *
    (c) * * *
    (1) * * *
    (i) * * *
    (C) Each participating school, located in a State for which the 
guaranty agency is the principal guaranty agency, that has a cohort 
default rate, as described in subpart M of 34 CFR part 668, for either 
of the 2 immediately preceding fiscal years, as defined in 34 CFR 
668.182, that exceeds 20 percent, unless the school is under a mandate 
from the Secretary under subpart M of 34 CFR part 668 to take specific 
default reduction measures or if the total dollar amount of loans 
entering repayment in each fiscal year on which the cohort default rate 
over 20 percent is based does not exceed $100,000; or
* * * * *
    24. In Sec. 682.601, paragraph (a)(6) is amended by removing 
``Sec. 668.17'' and adding, in its place, ``subpart M of 34 CFR part 
668''.
    25. In Sec. 682.603, paragraph (g) is amended by removing ``an FFEL 
cohort default rate, Direct Loan cohort rate, or weighted average 
cohort rate'' and adding, in its place, ``a cohort default rate''.
    26. Section 682.604 is amended--
    A. In paragraphs (c)(5)(i), (c)(5)(ii), (c)(10)(i)(B), and 
(c)(10)(ii), by removing ``an FFEL cohort default rate, Direct Loan 
Program cohort rate, or weighted average cohort rate'' and adding, in 
its place, ``a cohort default rate, calculated under subpart M of 34 
CFR part 668,''.
    B. By removing paragraph (f)(3).
    C. By redesignating paragraphs (f)(4) and (f)(5) as paragraphs 
(f)(3) and (f)(4), respectively.
    D. By removing paragraph (g)(3).
    E. By redesignating paragraphs (g)(4) and (g)(5) as paragraphs 
(g)(3) and (g)(4), respectively.

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

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

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

    28. Section 685.301 is amended--
    A. In paragraphs (b)(8)(i)(A)(2) and (b)(8)(i)(B), by removing ``a 
Direct Loan Program cohort rate, FFEL cohort

[[Page 47616]]

default rate, or weighted average cohort rate'' and adding, in its 
place, ``a cohort default rate, calculated under subpart M of 34 CFR 
part 668,''.
    B. In paragraph (b)(8)(ii), by removing ``an FFEL cohort default 
rate, Direct Loan cohort rate, or weighted average cohort rate'' and 
adding, in its place, ``a cohort default rate, calculated under subpart 
M of 34 CFR part 668,''.
    29. Section 685.303 is amended--
    A. In paragraphs (b)(4)(i)(A) and (b)(4)(i)(B), by removing ``a 
Direct Loan Program cohort rate, FFEL cohort default rate, or weighted 
average cohort rate'' and adding, in its place, ``a cohort default 
rate, calculated under subpart M of 34 CFR part 668,''.
    B. In paragraph (b)(4)(ii), by removing ``an FFEL cohort default 
rate, Direct Loan cohort rate, or weighted average cohort rate'', and 
adding, in its place, ``a cohort default rate, calculated under subpart 
M of 34 CFR part 668,''.
    30. Section 685.304 is amended--
    A. By removing paragraph (a)(4).
    B. By redesignating paragraphs (a)(5), (a)(6), and (a)(7) as 
paragraphs (a)(4), (a)(5), and (a)(6), respectively.
    C. By removing paragraph (b)(5).
    D. By redesignating paragraphs (b)(6) and (b)(7) as paragraphs 
(b)(5) and (b)(6), respectively.

PART 690--FEDERAL PELL GRANT PROGRAM

    31. The authority citation for part 690 continues to read as 
follows:

    Authority: 20 U.S.C. 1070a, unless otherwise noted.

    32. Section 690.7 is amended--
    A. In paragraph (c)(1), by removing ``34 CFR 668.17'' and adding, 
in its place, ``subpart M of 34 CFR part 668''.
    B. In paragraph (c)(2), by removing ``34 CFR 668.17(b)'' and 
adding, in its place, ``34 CFR 668.187''.

[FR Doc. 00-19343 Filed 8-1-00; 8:45 am]
BILLING CODE 4000-01-U