[Federal Register Volume 67, Number 151 (Tuesday, August 6, 2002)]
[Proposed Rules]
[Pages 51036-51056]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-19521]



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Part IV





Department of Education





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34 CFR Part 668 et al.



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

  Federal Register / Vol. 67, No. 151 / Tuesday, August 6, 2002 / 
Proposed Rules  

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DEPARTMENT OF EDUCATION

34 CFR Parts 668, 674, 682, and 685

RIN 1845-AA23


Student Assistance General Provisions, Federal Perkins Loan 
Program, Federal Family Education Loan Program, and William D. Ford 
Federal Direct Loan 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 Perkins Loan (Perkins Loan) Program, Federal Family 
Education Loan (FFEL) Program, and William D. Ford Federal Direct Loan 
(Direct Loan) Program regulations. The Secretary is amending these 
regulations to reduce administrative burden for program participants, 
to provide benefits to students and borrowers, and to protect 
taxpayers' interests.

DATES: We must receive your comments on or before October 7, 2002.

ADDRESSES: Address all comments about these proposed regulations to Ms. 
Gail McLarnon, U.S. Department of Education, P.O. Box 33076, 
Washington, DC 20033-3076. We encourage commenters to use e-mail 
because paper mail in the Washington area may be subject to delay, but 
please use one method only to provide your comments. If you comment via 
e-mail, we will send a return e-mail acknowledging our receipt of your 
comments. If you choose to send your comments through the Internet, use 
the following address: [email protected]
    You must include the term ``Team I Loan Issues'' in the subject 
line of your electronic message.
    If you want to comment on the information collection requirements, 
you must send your comments to the Office of Management and Budget at 
the address listed in the Paperwork Reduction Act section of this 
preamble. You may also send a copy of these comments to the Department 
representative named in this section.

FOR FURTHER INFORMATION CONTACT: Ms. Gail McLarnon, Telephone: (202) 
219-7048 or via the Internet: [email protected].
    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 they are discussed in the Significant Proposed Regulations section 
of this document.
    Section 482(c)(1) of the Higher Education Act of 1965, as amended 
(HEA) provides that in order for a regulatory change to be effective 
for the start of an award year on July 1, it must have been published 
in final form in the Federal Register no later than the preceding 
November 1. The Secretary's intent is to publish final rules resulting 
from this NPRM by November 1, 2002, making the new rules effective on 
July 1, 2003. However, section 482(c)(2) of the HEA allows the 
Secretary to designate regulatory provisions that an entity subject to 
the provision may, at its option, choose to implement earlier. 
Therefore, we are seeking suggestions on which of the proposed 
regulatory provisions in this NPRM, if finalized, should be so 
designated.
    We also 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 at 1990 K Street, NW (8th 
Floor), Washington, DC, between the hours of 8:30 a.m. and 4 p.m., 
Eastern time, Monday through Friday of each week except Federal 
holidays. If you want to schedule an appointment to inspect the public 
comments, please contact the person listed under FOR FURTHER 
INFORMATION CONTACT.

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, please contact the person 
listed under FOR FURTHER INFORMATION CONTACT.

Negotiated Rulemaking

    Section 492 of the HEA requires the Secretary, before publishing 
any proposed regulations for programs authorized by Title IV of the 
HEA, to obtain public involvement in the development of the proposed 
regulations. After obtaining advice and recommendations from 
individuals and representatives of groups involved in the Federal 
student financial assistance programs, the Secretary must subject all 
proposed regulations to a negotiated rulemaking process. All proposed 
regulations that the Department publishes must conform to agreements 
resulting from that process unless the Secretary reopens the process or 
provides a written explanation to the participants in that process 
stating why the Secretary has decided to depart from the agreements.
    We developed a list of proposed regulatory changes from advice and 
recommendations submitted by individuals and organizations in response 
to a May 24, 2001, request for recommendations on improving the Title 
IV student assistance programs from Representative Howard P. ``Buck'' 
McKeon and Representative Patsy Mink, the Chairman and Ranking Member, 
respectively, of the Subcommittee on 21st Century Competitiveness of 
the Education and the Workforce Committee of the U.S. House of 
Representatives.
    On December 5, 2001, we published a notice in the Federal Register 
(66 FR 63203) announcing our intent to establish two negotiated 
rulemaking committees to develop proposed regulations. One committee 
(Committee I) would address issues related to the Title IV student loan 
programs. The other committee (Committee II) would address all other 
Title IV student aid issues. The notice requested nominations of 
individuals for membership on the committees who represented key 
stakeholder constituencies that are involved in the student financial 
assistance programs, with preference given to individuals who are 
actively involved in administering the Federal student financial 
assistance programs or whose interests are significantly affected by 
the regulations. In the notice, we identified the constituencies with 
interests that are

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significantly affected by the subject matter of the negotiated 
rulemaking and announced that we expected that representatives of each 
of those constituencies would likely be selected as members of one, or 
both, committees. This Notice of Proposed Rulemaking (NPRM) is the 
result of the deliberations of Committee I.
    The members of Committee I were:
     Corye Barbour and Ellynne Bannon (alternate), representing 
students, including the United States Student Association and the State 
PIRGs (Public Interest Research Groups) Higher Education Project;
     Deanne Loonin and Amy Marshall (alternate), representing 
legal assistance organizations that represent students; including the 
National Consumer Law Center and Community Legal Services;
     Irv Bodofsky and Virginia Foster (alternate), representing 
financial aid administrators at institutions of higher education; 
including the National Association of Student Financial Aid 
Administrators;
     Alisa Abadinsky and Laurie Quarles (alternate), 
representing business officers and bursars at institutions of higher 
education, and institutional servicers; including the Coalition of 
Higher Education Assistance Organizations and the National Association 
of College and University Business Officers;
     Reginald T. Cureton and William ``Buddy'' Blakey 
(alternate), representing institutions of higher education eligible to 
receive assistance from programs authorized under Titles III and V of 
the HEA; including the United Negro College Fund and the National 
Association for Equal Opportunity in Higher Education;
     George Chin and Patricia Smith (alternate), representing 
four-year public institutions of higher education; including the 
American Association of State Colleges and Universities;
     William Schilling and Maureen R. Budetti (alternate), 
representing private, non profit institutions of higher educations; 
including the National Association of Independent Colleges and 
Universities and the Association of American Jesuit Colleges and 
Universities;
     Ray Testa and Nancy Broff (alternate), representing for-
profit postsecondary institutions; including the American Association 
of Cosmetology Schools and the Career College Association;
     Scott Miller and Elise Nowikowski (alternate), 
representing guaranty agencies and guaranty agency servicers; including 
the National Council of Higher Education Loan Programs, the Student 
Loan Servicing Alliance, the Guaranty Agency CEO Caucus, the National 
Association of Student Loan Administrators, Sallie Mae (USA Education, 
Inc.), and the National Association of State Scholarship and Grant 
Programs;
     Jane Stewart and Gail Somerville (alternate), representing 
lenders, secondary markets, and loan servicers; including the Consumer 
Bankers Association, the Education Finance Council, the Student Loan 
Servicing Alliance, the National Council of Higher Education Loan 
Programs, ELM Resources, and Sallie Mae;
     Dan Madzelan, representing the U.S. Department of 
Education.
    At its first meeting, Committee I reached agreement on its 
protocols and agenda. During later meetings, the Committee reviewed and 
discussed drafts of proposed regulations. The Committee met over the 
course of several months, beginning in January 2002.
    In addition to the proposed regulations discussed under the section 
of this document called Significant Proposed Regulations, Committee I 
discussed other issues related to the administration of the Title IV 
loan programs. One of these issues, which related to late disbursements 
of Title IV aid, was referred with recommendations to Committee II for 
disposition. Another issue that would have changed the regulation that 
provides that any single installment payment in a graduated or income 
sensitive repayment schedule cannot be more than three times greater 
than any other payment could not be addressed since there would be 
significant budgetary implications to the suggested change. One of the 
principles that the Secretary placed around this regulatory process was 
that no proposed change could have cost implications.
    In order for the committee to have reached consensus, no member of 
the committee could dissent on the proposed regulations.
    Consensus was reached by the members of Committee I on all of the 
proposed regulations in this document.

Significant Proposed Regulations

    The following discussion of the proposed regulations begins with 
changes that affect more than one of the Title IV student loan 
programs.
    This is followed by separate discussions of changes that affect 
only one of the three programs--the Perkins Loan Program, the FFEL 
Program, and the Direct Loan Program. Generally, we do not address 
proposed regulatory provisions that are technical or otherwise minor in 
effect.

Perkins Loan Program, FFEL Program, and Direct Loan Program Changes

Rehabilitation of Defaulted Loans (Sections 668.35, 674.39, 682.405, 
and 685.211)

    Current Regulations: Section 668.35 of the current regulations 
allows a borrower who is in default on a Title IV loan to regain 
eligibility for additional Title IV assistance by either repaying the 
loan in full or by making arrangements to repay the loan that are 
satisfactory to the holder of the loan and in accordance with the 
individual Title IV loan program regulations. In addition, the borrower 
must, as part of those satisfactory arrangements, make at least six 
consecutive monthly payments. The regulations do not explicitly address 
defaulted loans on which a judgment has been obtained by a Perkins 
school lender, a guaranty agency, or by the Department.
    Sections 674.39 and 682.405 of the current regulations require 
schools and guaranty agencies to make a loan rehabilitation program 
available to all defaulted Perkins, and FFEL borrowers, respectively, 
as required by the HEA. Section 685.211 implements the rehabilitation 
program for the Direct Loan Program. Sections 674.39 and 682.405 of the 
regulations also require a borrower who wishes to rehabilitate a loan 
on which a judgment has been obtained to sign a new promissory note. We 
also apply this requirement when rehabilitating a defaulted Direct 
Loan.
    Suggested Change: Many schools that participate in the Perkins Loan 
Program suggested that rehabilitation should not be available to a 
borrower who had a Perkins Loan on which a judgment has been obtained. 
As a result of this suggestion, we included this issue on the 
negotiated rulemaking agenda and expanded the discussion to include the 
FFEL and Direct Loan programs.
    Those schools that suggested the change for the Perkins Loan 
program and the negotiators representing their interests argued that 
requiring schools to offer rehabilitation to borrowers against whom 
they have secured a judgment is not in the best interests of the 
Perkins Loan Program. They noted that Perkins schools are required by 
the regulations to litigate in certain circumstances to collect a 
defaulted loan. They stated that the considerable amount of effort and 
financial resources spent on litigation to obtain a judgment is wasted 
when the school is later required to vacate that judgment upon receipt 
of the borrower's 12 consecutive monthly payments, as part of a 
rehabilitation plan. They also noted that by the time a school is 
required to

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commence litigation and obtain a judgment on a defaulted loan, the 
borrower has had ample opportunity to rehabilitate the defaulted loan. 
Those negotiators pointed out that vacating the judgment also results 
in additional court and legal fees and jeopardizes future collection 
efforts and litigation if the borrower subsequently re-defaults. 
Finally, they noted that the judgment obtained as the result of 
litigation was the enforceable debt instrument, and therefore the 
borrower arguably was not entitled to the benefit of rehabilitation 
under the original promissory note.
    Proposed Regulations: We are proposing to amend Secs. 674.39(a), 
682.405(a)(1), and 685.211(f) of the regulations to exclude from 
rehabilitation defaulted Perkins, FFEL, and Direct Loan program loans 
on which a judgment has been obtained. In doing so, we are also 
proposing conforming changes to remove the requirements in 
Secs. 674.39(a)(3) and 682.405(a)(4) relating to rehabilitation of a 
loan on which a judgment has been issued.
    We are also proposing to amend Sec. 668.35 by adding a paragraph 
that allows a borrower who is subject to a judgment to re-establish 
eligibility for Title IV, HEA program assistance by repaying the debt 
in full, or by making repayment arrangements that are satisfactory to 
the holder of the debt and that include at least six consecutive 
monthly payments. We also propose to add a new paragraph to 
Sec. 668.35, which provides that a student may reestablish eligibility 
under the provisions of Sec. 668.35 only once. Finally, we are 
proposing to revise Sec. 682.405(b)(1) to clarify that voluntary 
payments do not include payments made after a judgment has been 
obtained on a loan.
    Reason: During the discussion of the suggested change to the 
regulations, several negotiators expressed interest in amending the 
regulations to make rehabilitation of a loan on which a judgment has 
been obtained optional for the loan holder because they saw instances 
where providing some of the benefits of rehabilitation to certain 
borrowers could increase debt recovery and allow borrowers to rectify 
the past default. We noted that there was no statutory basis for 
providing a loan holder the option of offering rehabilitation to some 
borrowers against whom the holder had a judgment and not to others. 
However, we suggested that there were options that holders could 
consider to permit them to work with borrowers against whom they had a 
judgment in ways that could increase collections on defaulted loans and 
provide borrowers in default with some benefits as an incentive to make 
payments on their debt.
    Prior to this rulemaking process, the regulations allowed borrowers 
against whom a judgment has been issued on a Title IV loan the same 
opportunity for rehabilitation of the loan as any other defaulted 
borrower. However, after considering the negative effects of this 
policy cited by the Perkins schools, we noted that neither of the 
statutory sections creating the rehabilitation program (Section 428F of 
the HEA for the FFEL and the Direct Loan programs and section 464(h) of 
the HEA for the Perkins Loan Program) specifically require that 
rehabilitation be offered to borrowers against whom there is a 
judgment. We also considered statistical information we received from 
some Perkins Loan lenders showing that rehabilitation was not generally 
effective for borrowers against whom the lender had obtained judgments. 
Based on these considerations we decided that it was appropriate to 
change the regulations to provide more flexibility to schools and other 
loan holders in developing repayment arrangements with individual 
debtors, by eliminating loans on which a judgment has been obtained 
from the scope of the rehabilitation programs.
    Although the proposed regulations exclude a loan on which a 
judgment has been obtained from being rehabilitated, the proposed 
regulations would provide that a loan holder may, at its option, enter 
into an agreement with a borrower against whom it had obtained a 
judgment. For example, an agreement could include a commitment from the 
holder that if the borrower made 12 consecutive monthly payments and 
then signed a new promissory note, the holder would vacate the judgment 
and request that the default be removed from the debtor's credit 
history. Under such an agreement, the borrower in default would receive 
many of the benefits of rehabilitation but, as opposed to the current 
regulations, the loan holder would have more flexibility to define the 
terms of the repayment agreement and to maximize the recovery of the 
debt from the defaulted borrower.
    Some negotiators were concerned that borrowers with a judgment 
against them would not only be excluded from the benefits of 
rehabilitation, but would also be unable to receive other benefits of 
the Title IV programs. In particular, these negotiators were concerned 
that the borrower against whom there is a judgment would be unable to 
regain eligibility for additional Title IV aid, and would be ineligible 
for the discharge of the loan obligation under various statutory 
provisions unless the judgment had been fully satisfied.
    In the case of a borrower regaining eligibility, the proposed 
changes to Sec. 668.35 allow a borrower who is subject to a judgment 
obtained on a defaulted Title IV loan the opportunity to regain 
eligibility. However, we propose to modify the current rules under 
which a judgment debtor may regain eligibility to provide schools and 
guarantors with greater flexibility to recover loans on which a 
judgment has been obtained. The negotiators agreed on new provisions 
that allow the loan holder to determine what terms must be satisfied 
for a judgment debtor to regain eligibility for Title IV aid, as long 
as those arrangements include the making of at least six consecutive 
monthly payments.
    On the issue of other benefits, we explained to the negotiators 
that these proposed regulations address rehabilitation and eligibility 
for additional Title IV aid and not any other aspect of the programs. 
Accordingly, the proposed regulations would not affect a borrower's 
eligibility for other Title IV loan benefits.
    After these clarifications were made, the negotiators reached 
agreement on the proposed changes.

Retention of Promissory Notes (Sections 674.19, 682.402, and 682.414)

    Current Regulations: The FFEL Program regulations include a 
provision that allows lenders and guaranty agencies to store a 
promissory note electronically only under certain circumstances. There 
is no corresponding regulation in the Perkins Loan Program.
    Suggested Change: FFEL loan holders requested clarification of the 
technical change that was made to the regulations in June 2001 that was 
related to the retention of promissory notes that were signed 
electronically. We suggested that the Perkins Loan regulations should 
also include a provision concerning the retention of promissory notes 
that were signed electronically.
    Proposed Regulations: The proposed regulations state that if a 
promissory note was signed electronically it must be stored 
electronically in accordance with the record retention requirements of 
Sec. 668.24(d)(3)(i) through (iv).
    Reason: The committee agreed to the proposed change to the FFEL 
Program regulations to make clear that promissory notes that were 
signed electronically must be maintained electronically in accordance 
with the record retention requirements of 34 CFR 668.24(d)(3)(i) 
through (iv). The committee also agreed to add similar

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language to the Perkins Loan Program regulations.

Economic Hardship Deferments (Sections 674.34, 682.210, and by 
Reference 685.204)

    Current Regulations: Some borrowers of loans made under the FFEL, 
Direct Loan, or Perkins Loan programs are eligible to receive a 
deferment of the obligation to make payments for up to three years if 
the borrower is unable to make payments because of an economic 
hardship. Under current regulations, borrowers may qualify for an 
economic hardship deferment if they have an educational debt to income 
ratio that is higher than a specified percentage. When calculating a 
borrower's educational debt burden, the loan holder must consider the 
borrower's monthly payments on all Federal postsecondary education 
loans. Current regulations for all three Title IV student loan programs 
require that the monthly payment amount be based on what the payment 
would be if the borrower were repaying the loan over a 10 year period 
from the date the borrower entered repayment, regardless of the length 
of the borrower's actual repayment schedule or the borrower's actual 
monthly payment amount.
    Suggested Change: Initially, we suggested that the regulations be 
changed so that the borrower's actual monthly payment amount would be 
used to determine eligibility for an economic hardship deferment. This 
change was suggested because many Perkins Loan borrowers repay their 
loans in less than 10 years. Using a 10-year repayment schedule results 
in a monthly payment amount that is less than what the borrower is 
actually paying each month, and as a result, the borrower may not 
qualify for an economic hardship deferment. During the committee's 
preliminary discussion of this suggested change, a non-Federal 
negotiator suggested that corresponding changes be made to the 
regulations governing economic hardship deferments in the FFEL and 
Direct Loan programs.
    Proposed Regulations: The proposed regulations would change the 
monthly payment amount that loan holders must use to calculate a 
Perkins, FFEL, or Direct Loan program borrower's monthly educational 
loan payment burden in determining whether the borrower qualifies for 
an economic hardship deferment. Specifically, the proposed regulations 
would require a school for the Perkins Loan Program, an FFEL Program 
loan holder, or the Secretary to use the borrower's actual monthly 
payment amount if the loan is scheduled to be repaid in 10 years or 
less, or a monthly payment amount based on a 10-year repayment schedule 
if the borrower's actual repayment schedule is more than 10 years.
    Reason: The proposed regulations would allow a borrower to receive 
an economic hardship deferment more easily. Borrowers in all three 
programs whose repayment schedules are less than 10 years in length 
would no longer be penalized by the required use of a monthly payment 
amount that is less than their actual monthly payment amount. The FFEL 
and Direct Loan programs provide for repayment plans of more than 10 
years. FFEL and Direct Loan borrowers whose repayment schedules are 
more than 10 years in length would continue to benefit by having the 
monthly payment amount based on a 10-year repayment schedule.

Initial and Exit Counseling (Sections 674.42, 682.604, and 685.304)

    Current Regulations: Current regulations require that schools 
provide initial counseling to students who are borrowing under the FFEL 
or Direct Loan programs for the first time. While the Perkins Loan 
Program does not have specific initial counseling regulations, Perkins 
schools are required to provide certain information to borrowers prior 
to making the first disbursement of a loan. The regulations also 
require schools to provide exit counseling to students who have 
borrowed from any of the three Title IV student loan programs. Further, 
someone familiar with the Title IV student aid programs must be 
reasonably available to answer the borrowers' questions following both 
entrance and exit counseling.
    The current Perkins, FFEL, and Direct Loan program counseling 
regulations require that schools provide the counseling to borrowers at 
specific times and under specific conditions. The current regulations 
also specify information that must be disclosed to borrowers through 
the counseling.
    Suggested Change: It was suggested that the Perkins Loan, FFEL, and 
Direct Loan program counseling regulations be revised to clarify that a 
party other than a school may provide counseling to borrowers on a 
school's behalf. This change was suggested to make the regulations 
consistent with longstanding Departmental guidance that allows a school 
to arrange for another party to provide counseling to the school's 
borrowers as long as the school ensured that the counseling was 
provided and that it included all of the necessary information. It was 
also suggested that the current Perkins Loan, FFEL, and Direct Loan 
program counseling regulations be revised so that the information that 
must be disclosed to borrowers through counseling would be consistent 
across all three programs.
    Proposed Regulations: The proposed regulations would clarify that, 
for initial counseling under the FFEL and Direct Loan programs and for 
exit counseling under all three loan programs, the school need not 
provide the counseling but must ensure that it is provided, that it 
includes all of the required information, and that someone familiar 
with the Title IV student aid programs be available to answer students' 
questions following the counseling.
    We are not proposing changes to the Perkins Loan Program 
regulations governing the information that a school must provide to a 
borrower prior to making the first disbursement of a loan.
    As suggested, the proposed regulations would establish consistency 
across all three programs in the information that is required to be 
covered during counseling. When reviewing the counseling regulations 
for consistency, the committee noted that while the current Direct Loan 
Program regulations require the disclosure of average and anticipated 
indebtedness information, the FFEL Program regulations do not. After 
discussing the feasibility of schools providing this information, we 
modified the Direct Loan language to require only disclosure of average 
anticipated repayment amounts and added the same language to the FFEL 
regulations.
    We also proposed that schools provide borrowers with information 
about the availability of the Department's National Student Loan Data 
System (NSLDS).
    Reason: The proposed changes were made to reflect our long-standing 
guidance that a party other than the school may provide counseling to 
borrowers on a school's behalf. We modified the Direct Loan regulations 
and added to the FFEL regulations the requirement that schools, during 
exit counseling, provide borrowers with information about average 
monthly repayment amounts so that the borrowers will be better informed 
about their upcoming student loan repayment obligations.
    Finally, the negotiators agreed that it is important for borrowers 
to be informed that they may access NSLDS to review information about 
all of their Title IV student loans.

FFEL and Direct Loan--Loan Limits (Sections 682.204 and 685.203)

    Current Regulations: The current FFEL and Direct Loan program 
regulations specify maximum annual

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loan limits for undergraduate students based on the number of years of 
an undergraduate program that the student has successfully completed.
    Suggested Change: In light of questions that have arisen over the 
past several years, we proposed that the regulations clarify that a 
school may not link separate, stand-alone programs to allow students to 
be eligible for higher annual loan limits.
    Proposed Regulations: The proposed regulations would specify that a 
student who is enrolled in a program that is one academic year or less 
in length is subject to the annual loan limits that apply to first-year 
undergraduates, and that a student who is enrolled in a program that is 
more than one academic year in length is subject to the first- and 
second-year annual loan limits for the first two years of that program. 
For example, if a school offers programs ``A'' and ``B,'' each of which 
is one academic year in length, and the school requires students to 
have completed program ``A'' as a prerequisite for admission into 
program ``B,'' students may not borrow at the second-year undergraduate 
level for program ``B'' based on the fact that they successfully 
completed program ``A.'' Similarly, if a school offers a program that 
is two academic years in length, and requires students to have 
completed a separate one-year program as a prerequisite for admission 
into the two-year program, it may not consider the first and second 
years of that program to be the second and third years of an 
undergraduate program for loan limit purposes.
    These proposed regulations do not affect the special statutory rule 
reflected in Secs. 682.204 and 685.203 that allows a borrower, who has 
received an associate or baccalaureate degree and who enrolls in a new 
program for which such a degree is required, to borrow up to the higher 
annual loan limits that apply to borrowers who have successfully 
completed the first and second years of an undergraduate program. The 
proposed regulations also do not restrict an institution from 
determining the number of years a borrower has completed based on hours 
earned at another institution that are applicable to the program at the 
new institution.
    Reason: For program integrity reasons, we believe that it is 
important to clearly state that, except as provided in the HEA, a 
school may not allow a student to qualify for higher annual loan limits 
based on prior completion of one or more years of study in a program 
other than the one in which the student is currently enrolled.

FFEL--Unemployment Deferment (Sections 682.210 and by reference 
685.204)

    Current Regulations: For any unemployment deferment period beyond 
the initial period granted by the lender, the FFEL regulations, and by 
reference the Direct Loan regulations, require a borrower who does not 
qualify for an unemployment deferment based on evidence of eligibility 
for unemployment benefits to provide the lender with a written 
certification describing the borrower's diligent search for full-time 
employment during the preceding six months. The regulations require the 
borrower to submit specific information about these attempts to gain 
employment, including the name of the employer contacted and the 
employer's address and telephone number or other information acceptable 
to the holder, showing that the borrower made at least six diligent 
attempts to gain employment. For both initial and subsequent deferment 
requests, the regulations further require that a borrower who does not 
qualify based on evidence of eligibility for unemployment benefits 
affirm in a written certification that he or she has registered with a 
public or private employment agency, if one is within a 50-mile radius 
of the borrower's permanent or temporary address, and provide the 
agency's name, address, and the date the borrower registered with the 
agency.
    Suggested Change: FFEL Program participants suggested revising the 
regulations governing unemployment deferments to simplify the process 
for those borrowers who do not qualify based on their eligibility for 
unemployment benefits. They stated that the regulations should be 
changed to simplify the information required to support the borrower's 
written certification that he or she has searched for full-time 
employment. They believed that allowing the borrower to certify to the 
diligent employment search and registration with an employment agency 
without providing additional information about the specific contacts 
was sufficient, given that the borrower's application for the deferment 
was certified under penalty of perjury. They also believed that this 
streamlined process was consistent with the fact that, given 
technological changes, a search for employment may be conducted in 
different ways and may not always involve direct contact with a 
particular person at an employer.
    The negotiators representing FFEL Program lenders, servicers, and 
guarantors suggested eliminating the requirement for a written 
certification from the borrower confirming his or her diligent search 
for full-time employment. They supported their request by citing 
changes in the procedures used to apply for State unemployment benefits 
which now include certain oral and automated processes.
    With regard to the certification of registration with an employment 
agency, the non-federal negotiators suggested that the 50-mile radius 
be based on where the borrower is currently residing rather than the 
borrower's permanent or other address that may no longer be relevant to 
the borrower's job search.
    Proposed Regulations: The proposed regulations would provide that a 
borrower may qualify for an unemployment deferment beyond the initial 
unemployment deferment period by providing a written certification, or 
an equivalent as approved by the Secretary, that the borrower has made 
at least six diligent attempts during the preceding six-month period to 
secure full-time employment, without providing the details of those 
contacts. Similarly, the proposed regulations would allow the borrower 
to certify, if required, that he or she has registered with a local 
employment agency without providing the details of the registration. 
Finally, the proposed regulations also provide that the 50-mile radius 
requirement for registration with an employment agency be based on the 
borrower's current address.
    As we have previously stated, as a general rule, the term ``written 
certification'' also includes electronically submitted certifications. 
Given technological or other developments, the Secretary may, in the 
future, approve other methods of submission that are equivalent to a 
written certification as long as such methods protect the integrity of 
the programs.
    Reason: The negotiators believed that these proposed changes to the 
unemployment deferment regulations were appropriate for the reasons 
discussed above.

FFEL and Direct Loan--Consolidation Loan Benefits (Sections 682.402, 
685.212, and 685.220)

    Current Regulations: Under current regulations in the FFEL and 
Direct Loan programs, if a borrower meets the requirements for a loan 
discharge based on school closure, false certification, or unpaid 
refund on one or more of the loans that were repaid by a consolidation 
loan, but does not qualify for discharge on other loans that were

[[Page 51041]]

consolidated, the borrower may receive a partial discharge of the 
consolidation loan. However, the current regulations do not allow a 
borrower to receive a partial discharge of a consolidation loan based 
on a total and permanent disability. To receive a discharge of a 
consolidation loan based upon a total and permanent disability, the 
borrower must meet the conditions for a total and permanent disability 
discharge on all of the loans that were consolidated.
    The current regulations provide for the discharge of a PLUS loan if 
the student on whose behalf the loan was obtained dies. However, if a 
parent borrower consolidates a PLUS loan and the student for whom that 
loan was obtained dies, a discharge of the portion of the consolidation 
loan attributable to that PLUS loan is not available.
    In general, the current FFEL and Direct Loan program regulations 
provide for discharge of a joint consolidation loan only if each 
borrower meets the requirements for a loan discharge. There is an 
exception to this rule only for discharges based on school closure, 
false certification, or an unpaid refund. If one borrower meets the 
requirements for one of those discharges on a loan that was 
consolidated into a joint consolidation loan, but the other borrower 
does not qualify for any type of discharge, the regulations provide for 
a partial discharge of the joint consolidation loan.
    Suggested Change: Some FFEL Program participants suggested that the 
regulations be modified to allow for the partial discharge of a 
consolidation loan if a borrower meets the requirements for discharge 
due to total and permanent disability on one or more, but not all, of 
the loans that were consolidated.
    It was also suggested that the regulations be changed so that a 
parent borrower would qualify for a partial discharge of a 
consolidation loan if the consolidation loan repaid a PLUS loan 
obtained for a student who died.
    We also suggested that the provisions for partial discharge of a 
joint consolidation loan be extended to cover cases in which one of the 
borrowers dies or becomes totally and permanently disabled, but the 
other borrower does not qualify for any type of discharge.
    Proposed Regulations: The proposed regulations would specify that, 
if a consolidation loan repaid a PLUS loan obtained for a student who 
died, the portion of the consolidation loan attributable to that PLUS 
loan will be discharged. They would also provide for the discharge of 
the applicable portion of a joint consolidation loan if one of the 
borrowers dies or becomes totally and permanently disabled.
    The proposed changes to Sec. 685.220(l) of the Direct Loan Program 
regulations include new language stating that a joint Direct 
Consolidation Loan may be partially discharged if one of the borrowers 
qualifies for forgiveness under the teacher loan forgiveness program. 
The proposed change to the Direct Loan regulations would merely clarify 
current policy and provide for a more complete set of cross-references 
to the loan discharge types covered in Sec. 685.212 of the regulations. 
Because the construction of the FFEL regulations currently provides for 
the partial discharge of a joint consolidation loan in this situation a 
change is not needed in the FFEL regulations.
    Reasons: We declined to accept the suggested change that would 
allow for the partial discharge of a consolidation loan based on a 
total and permanent disability when a borrower meets the requirements 
for discharge on some, but not all, of the loans that were 
consolidated. The only way that some, but not all, of a borrower's 
consolidated loans could be eligible for a disability discharge would 
be if the ineligible loans were made after the date the borrower became 
totally and permanently disabled. This means that the borrower was no 
longer totally and permanently disabled and therefore not eligible for 
a discharge on any of the loans. The other negotiators agreed with our 
decision. We suggested the other changes described above because we 
believe that borrowers should be permitted to receive discharges that 
they would have qualified for if they had not consolidated their loans. 
The proposed changes are consistent with current regulations that allow 
partial discharge of consolidation loans due to school closure, false 
certification, and unpaid refunds.

Perkins Loan Program Changes

Federal Perkins Loan--Master Promissory Note (Sections 674.2 and 
674.16)

    Current Regulations: In Sec. 674.2, the term ``Making of a loan'' 
is defined as when the borrower signs a promissory note for each award 
year and the institution makes the first disbursement of loan funds 
under that promissory note for that award year. The regulations do not 
define or provide for the use of a Master Promissory Note (MPN) in the 
Perkins Loan Program.
    Under Sec. 674.16(d)(2), the institution must obtain the borrower's 
signature on a promissory note for each award year before disbursing 
loan funds to the borrower under that note for that award year.
    Suggested Change: To provide for the use of an MPN in the Federal 
Perkins Loan Program, we suggested that revisions were needed to the 
current definition of ``Making of a loan'' and that the regulations 
needed a specific definition of the term ``Master Promissory Note 
(MPN)''.
    In addition, Sec. 674.16(d)(2) needs to be amended to eliminate the 
regulatory requirement that a Perkins Loan borrower sign a promissory 
note for each award year. Finally, the regulations need to clearly 
state the conditions under which the ability of an institution to make 
Perkins loans under an MPN expires.
    Proposed Regulations: The proposed regulations would modify the 
definition of ``Making a loan'' and add a definition for the term 
``Master Promissory Note (MPN)''. They would also modify the 
requirements of Sec. 674.16(d)(2) to be consistent with the use of an 
MPN in the Perkins Loan Program.
    Proposed Sec. 674.16 would require the institution to ensure that 
each loan is supported by a legally enforceable promissory note while 
eliminating the requirement for a new note for each award year. In 
addition, a new paragraph would be added to this section to state the 
conditions under which the Perkins Loan MPN would expire.
    Reason: The adoption of an MPN in the Perkins Loan Program will 
simplify the loan process by eliminating the need for institutions to 
prepare, and students to sign, a promissory note each award year. The 
use of the MPN will reduce burden on both students and institutions and 
will ensure consistency across the three Title IV loan programs. The 
proposed changes to the Perkins Loan Program regulations are based on 
existing regulations for MPNs in the FFEL and Direct Loan programs.
    During the negotiations, the negotiator representing State PIRGs 
expressed concern that the implementation of an MPN in the Perkins 
program might result in a student incurring additional debt without his 
or her knowledge. After additional discussion, that negotiator chose, 
with respect to this issue, to invoke the provision of the committee's 
protocols that allows one coalition partner to dissent on an issue 
while the rest of the coalition consents to it. Therefore, our 
suggestion to introduce an MPN in the Perkins Loan Program and the 
proposed supporting regulatory changes were both endorsed by the 
negotiating committee.

[[Page 51042]]

Federal Perkins Loan--Write-Offs (Sections 674.9 and 674.47)

    Current Regulations: Current regulations in Sec. 674.9 require a 
borrower who has a Perkins Loan, a National Direct Student Loan, 
(NDSL), or a National Defense Student Loan written off to reaffirm that 
debt in order to receive a new Perkins Loan. Reaffirmation is not 
required if the amount written off is $25 or less.
    Current Sec. 674.47(g) provides that an institution may cease 
collection activity on a defaulted account with a balance of less than 
$25 if the borrower has been billed for this balance in accordance with 
the regulations. The regulations further state that an institution may 
cease collection activity on a defaulted account with a balance of less 
than $200 if the institution has carried out the due diligence 
procedures required by the regulations and if the account has had no 
payment activity for at least four years. Under current Sec. 674.47(h), 
an institution may write off an account with a balance of less than $5.
    Suggested Change: Members of organizations representing Perkins 
Loan schools suggested that the current $5 Perkins ``write-off'' limit 
be raised to at least $25.
    Proposed Regulations: The proposed regulations would amend 
Sec. 674.47 (g) and (h) to provide increased flexibility to schools to 
write-off a low balance on a Perkins Loan account. Specifically, the 
proposed changes maintain the current provision that a school may cease 
collection activity on a defaulted Perkins Loan account of less than 
$200 if, for a period of four years, the institution has complied with 
the due diligence procedures of subpart C of the Perkins Loan 
regulations and the borrower has not made any payments or otherwise 
agreed to repay the loan.
    The proposed changes would also allow an institution to write off 
account balances of less than $25, and if the borrower has been billed 
for at least two years, balances of less than $50.
    The proposed regulation would also add new language making it clear 
that a borrower whose balance has been written off is relieved of all 
repayment obligations. Finally, a conforming change is proposed that 
would remove the requirement that a borrower must reaffirm a loan that 
was previously written off.
    Reason: We believe that the changes approved by the negotiating 
committee will reduce costs and administrative burden at Perkins Loans 
schools.

Perkins Loan--Transfer of Loan Fund (Section 674.17)

    Current Regulations: When an institution responsible for a Perkins 
Loan fund closes or ceases to participate in the Perkins Loan Program, 
it must take specific steps to protect the outstanding loans and the 
Federal interest in the loan fund. Under the current regulations, one 
of the options available to such an institution is to transfer any 
outstanding loans to another institution if directed to do so by the 
Secretary.
    Suggested Change: We suggested that the regulations be changed to 
eliminate the option of the Secretary to direct a Perkins Loan 
institution to transfer its outstanding loans to another institution. 
We have determined that this is not an appropriate action to take if a 
Perkins Loan institution closes, or otherwise ends its participation in 
the program.
    Proposed Regulations: The proposed change to Sec. 674.17 would 
eliminate the provision allowing an institution to transfer its Perkins 
loan portfolio to another institution at the direction of the 
Secretary.
    Reason: Several years ago, the Secretary administratively 
discontinued the practice of directing an institution that closes or 
otherwise ends its participation in the Perkins Loan Program to 
transfer its outstanding Perkins loans to another institution. The 
proposed change to the regulations will reflect that policy and clarify 
that assignment of Perkins loans to the Secretary is the only option 
available.

Federal Perkins Loan--Borrower Repayment (Sections 674.33 and 674.42)

    Current Regulations: The current regulations require an institution 
that chooses to implement the minimum monthly payment option for a 
Perkins loan borrower to coordinate that minimum monthly payment with 
any other institution from which the borrower has received Perkins 
loans.
    Suggested Change: Organizations that represent schools that 
participate in the Perkins Loan Program suggested that the regulations 
be modified to specify that an institution is required to coordinate 
minimum monthly repayment amounts with other institutions only if the 
borrower requests such coordination.
    Proposed Regulations: Under Sec. 674.33 of the proposed 
regulations, an institution would be required to coordinate a 
borrower's monthly payments with other institutions only if the 
borrower informs the institution that he or she wants the minimum 
monthly repayment determination to be based on payments due to other 
institutions.
    We are also proposing to amend Sec. 674.42 to require the 
institution to inform borrowers during exit counseling that they 
request coordination of monthly payments.
    Reason: Many institutions participating in the Perkins Loan Program 
are not able to coordinate a borrower's minimum monthly payment amount 
with other institutions because they are unaware that the borrower has 
other Perkins loan debt. To address this concern, the negotiators 
agreed to require an institution to coordinate minimum monthly 
repayments with other institutions only if the borrower requests such 
coordination.
    To ensure that borrowers who have loans at other institutions are 
aware that they must ask the institution to coordinate with other 
institutions in establishing the minimum payment amount, the proposed 
regulations would add a requirement in Sec. 674.42 that institutions 
inform borrowers of the minimum repayment coordination provision.

Perkins Loan--Copies of Promissory Notes (Section 674.42)

    Current Regulations: The Perkins Loan Program regulations provide 
that institutions must disclose critical repayment information to a 
Perkins loan borrower in a written statement either before the borrower 
ceases at least half-time study or during the exit interview. As part 
of the disclosure requirements, the institution must provide the 
borrower with a copy of the borrower's signed promissory note.
    Suggested Change: Organizations that represent Perkins Loan schools 
suggested that the regulations be revised to require an institution to 
provide a copy of the signed promissory note to the borrower only at 
the borrower's request.
    Proposed Regulations: The proposed regulations would eliminate the 
requirement that the school provide the borrower with a copy of his or 
her signed promissory note. Instead, the institution would be required, 
as part of its repayment information disclosure or during the exit 
interview, to inform each borrower that a copy of the promissory note 
will be provided upon request and provide each borrower with contact 
information that will allow the borrower to make such a request.
    Reason: Many institutions give borrowers a copy of their signed 
promissory notes before the borrowers leave school, often when the note 
is first signed. The proposed change decreases the cost and burden of 
providing duplicate promissory notes for the school but preserves the 
borrower's

[[Page 51043]]

right to easily secure a copy of the signed promissory note.

Perkins Loan--Late Charges (Section 674.43)

    Current Regulations: For Perkins Loans made for periods of 
enrollment beginning on or after January 1, 1986, institutions are 
required to impose a late charge if a borrower's payment is overdue.
    Suggested Change: Organizations representing schools participating 
in the Perkins Loan Program suggested that the assessment of late 
charges in the Perkins Loan Program should be made optional for the 
school rather than mandatory.
    Proposed Regulations: The proposed regulations would amend 
Sec. 674.43(b)(2) by allowing the school the option of assessing late 
charges in the Perkins Loan Program. Consistent with current 
regulations, an institution that adopts a policy of assessing late 
charges would be required to impose them on all borrowers with overdue 
payments. The rules for the calculation and application of late charges 
would remain as specified in the regulations at Sec. 674.43(b)(2)(iii).
    Reason: Making the assessment of late charges optional would allow 
the charge to serve as a more effective collection tool and would 
reduce administrative burden on institutions.

Perkins Loan--Credit Bureau Reporting (Section 674.45)

    Current Regulations: The current regulations under Sec. 674.16 
require an institution to report to at least one national credit bureau 
the amount and disbursement date of a loan and information concerning 
the repayment and collection of the loan until the loan is paid in 
full. This requirement must be disclosed to the borrower under 
Sec. 674.31. Further, Sec. 674.45(a)(1) requires an institution to 
report a defaulted loan account to a national credit bureau when a 
borrower has not responded satisfactorily to the final demand letter or 
the following telephone contact.
    Suggested Change: Committee members representing Perkins Loan 
schools suggested that the regulations clarify when a borrower's 
default status is to be reported to a national credit bureau.
    Proposed Regulations: We are proposing to revise the provisions 
governing credit bureau reporting in Sec. 674.45(a)(1) to clarify that 
the institution must report an account as being in default to a 
national credit bureau as part of the collection procedures it is 
required to follow when a defaulted borrower does not respond 
satisfactorily to the institution's billing procedures under 
Sec. 674.43.
    Reason: Some negotiators felt that the current regulations did not 
clearly state when a borrower's default must be reported to a national 
credit bureau. The proposed change is intended to eliminate any 
confusion that exists from the current regulations.

Perkins Loan--Litigation (Section 674.46)

    Current Regulations: Current regulations require institutions to 
review accounts for litigation at least annually if certain collection 
efforts set forth in Sec. 674.45 do not result in repayment of the 
loan. The regulations require the school to, among other things, assess 
whether the total amount owed, including the outstanding principal, 
interest, collection costs and late charges, on all the borrower's 
Perkins loans at the institution is more than $200 and whether it would 
be cost effective for the institution to litigate the account and sue 
the borrower. If the institution determines, based upon its annual 
review, that the required conditions are met, it must sue to recover 
the debt and all litigation costs from the borrower.
    Institutions may bring suit against a defaulted borrower even if 
the conditions included in the regulation are not met.
    Suggested Change: Schools participating in the Perkins Loan Program 
requested that they be allowed more discretion when reviewing overdue 
accounts for litigation, and that the current litigation threshold 
amount be raised from $200 to $1000.
    Proposed Regulations: Two specific changes are proposed for 
Sec. 674.46. The first change would require institutions to review 
accounts for litigation once every two years, rather than every year. 
The second change would increase from $200 to $500 the amount that the 
institution must use to determine if it must litigate.
    Reason: The proposal to review accounts for litigation less 
frequently than annually was recommended by some non-Federal 
negotiators to reduce the costs and administrative burden associated 
with conducting these reviews. These non-Federal negotiators stated 
that their experience shows that two of the factors used to support a 
decision to litigate, the borrower's assets and income, do not 
significantly change in the short time between annual reviews.
    Several non-Federal negotiators stated that given the costs of 
litigation, it is not cost-effective to pursue small dollar accounts 
and recommended that the minimum dollar amount be increased to $700. 
Other negotiators recommended raising the litigation threshold to 
$1000. Based upon average loan balance data from NSLDS and our concern 
that the majority of these accounts should remain subject to litigation 
as the final due diligence effort, the negotiators agreed to increase 
the litigation threshold amount from $200 to $500.

Perkins Loan--Assignment of Loans (Section 674.50)

    Current Regulations: Current regulations provide that the Secretary 
does not accept assignment of a loan if the loan has been cancelled due 
to the death or total and permanent disability of the borrower. They 
also require an institution to reimburse its Perkins Loan fund for the 
entire portion of the outstanding balance on a loan that has been 
determined by the Secretary to be unenforceable because of an act or 
omission of the institution or its-agent.
    Suggested Change: The regulations need to be revised to be 
consistent with the regulatory requirement that an institution assign a 
Perkins Loan to the Secretary if the institution has made a preliminary 
determination that the borrower may qualify for a discharge based on a 
total and permanent disability. This change conforms the rules on 
assignment with the revised procedures for handling applications for 
discharges based on total and permanent disability which became 
effective July 1, 2002.
    In addition, the regulations must be modified to conform to earlier 
changes that, instead of requiring reimbursement from an institution 
for loans deemed to be unenforceable, provide that the Secretary may 
require reimbursement.
    Proposed Regulations: The proposed regulations would eliminate the 
provision in Sec. 674.50(e)(4) that states that the Secretary does not 
accept assignments in cases where the loan was cancelled due to death 
or total and permanent disability. The proposed change to 
Sec. 674.50(g)(2) would make it optional for the Secretary to require 
an institution to reimburse the Perkins Loan fund if an assigned loan 
is unenforceable because of an act or omission by the institution.
    Reason: Effective July 1, 2002, under the new disability discharge 
requirements, when a Perkins Loan school makes a preliminary 
determination that a borrower is eligible for a discharge of his or her 
loan obligation, it must assign the loan to the Secretary for further 
action. The proposed change would also delete references to the 
assignment of loans after the institution has discharged the

[[Page 51044]]

loan due to death. By definition, once a loan has been discharged 
because of the borrower's death, there is no loan to assign.
    The proposed change to Sec. 674.50(g) conforms to an earlier change 
made in Sec. 674.13, which provides the Secretary with the discretion 
to determine the circumstances under which reimbursement to the 
institution's Perkins Loan fund would be appropriate.

FFEL Program Changes

FFEL--Definition of Lender (Section 682.200)

    Current Regulations: The current definition of lender in the FFEL 
Program regulations reflects the statutory restriction that a bank, 
savings and loan, or credit union which acts as a lender in the program 
not have the making or holding of student loans as its primary consumer 
credit function. The regulations provide that to be an eligible lender, 
a bank, savings and loan, or credit union may not hold FFEL Program 
loans at any time that total more than one-half of its combined 
consumer credit loan portfolio. In the case of a bank holding company, 
the company's wholly-owned subsidiaries as a group may not hold FFEL 
Program loans at any time that total more than one-half of the 
subsidiaries' combined consumer credit loan portfolios.
    Suggested Change: Organizations representing FFEL lenders suggested 
that the definition of the term ``lender'' be revised to make clear 
that loans held in trust are not considered part of the trustee 
lender's consumer credit loan function in determining whether the 
lender has exceeded the limit of one-half of the lender's combined 
consumer credit loan portfolio. In addition, in a report titled 
``Trustee Arrangements Serve Useful Purposes in Student Loan Market'' 
(GAO/HEHS-00-170) issued in September 2000, the General Accounting 
Office (GAO) recommended that we clarify how loans held by a trustee 
are treated for purposes of the limit on the percentage of a lender's 
consumer credit loan portfolio may be in student loans. The GAO report 
did not recommend a particular approach but only recommended that we 
clarify the application of the rule.
    Proposed Regulations: The proposed regulations would add a new 
sentence to the definition of eligible lender that specifies that loans 
held in trust by a trustee lender are not part of the trustee lender's 
consumer credit loan function.
    Reason: This change to the regulations is proposed so that eligible 
lenders will not be discouraged from serving as trustees for other 
lenders. A lender's trust department is generally separate from its own 
student loan department and its other consumer credit functions. Based 
on this factor, we have determined that including loans held in trust 
in the calculation of a lender's consumer credit loan portfolio may not 
give an accurate picture of the extent of the lender's consumer credit 
function that is represented by the lender's own student loan business. 
Loans held in trust will be considered instead to be part of the 
consumer credit function of the beneficial holder of the trust.

FFEL--Repayment Requirements (Section 682.209)

    Current Regulations: Section 682.209 of the FFEL regulations 
provides that a lender must establish a first payment due date for a 
Stafford Loan that is not later than 45 days after the borrower's 
repayment period begins. It also provides that a lender must determine 
the beginning of the repayment period by using the date that the 
borrower was no longer enrolled in school, usually as provided by the 
school. Finally, the regulations provide that a borrower may orally 
request a repayment period that is less than the minimum 5-year period 
provided by the HEA, but may only extend the repayment period back to 
the minimum 5-year period only by a written notice to the lender.
    Suggested Change: FFEL loan holders suggested that Sec. 682.209 be 
amended in three ways. First they suggested that lenders be allowed to 
establish a first payment due date for a Stafford Loan that is not 
later than 60 days after the borrower's repayment period begins, rather 
than not later than 45 days after the borrower enters repayment. 
Second, they wanted the regulations to be changed to reflect non-
regulatory guidance issued by the Department that provided that a 
lender would not be required to recalculate the start of the borrower's 
repayment period based on a new enrollment status date received from a 
school if the new date is in the same month and year as the date 
previously reported by the school. Finally, they suggested that the 
regulatory requirement that a borrower's notice to the loan holder to 
change a shorter repayment period to the minimum 5-year period be in 
writing be removed.
    Proposed Regulations: The proposed regulations would change the 
lender's timeframe for establishing a first payment due date for a 
Stafford Loan borrower who enters initial repayment or reenters 
repayment at the conclusion of a deferment or forbearance, from 45 days 
to 60 days after the borrower's repayment begins or resumes.
    The proposed regulations would also codify existing Departmental 
guidance by providing that if a lender receives a revised enrollment 
status date from a school after it has already provided the borrower 
with required repayment disclosures, and the new date is within the 
same month and year as the one previously reported, it may use the 
previously reported date.
    Finally, the proposed regulations would remove the requirement that 
a borrower who previously asked to repay a loan in less than five years 
provide a written notice to the lender if the borrower now wishes to 
extend the repayment to a minimum of five years.
    Reason: FFEL Program lenders and servicers requested the change in 
the lender's deadline to establish the first payment due date for 
Stafford Loan borrowers to provide consistency with similar timeframes 
that are currently in the regulations for other loans. Consistency in 
these timeframes reduces system complexity and administrative costs and 
provides borrowers with additional time after entering repayment to 
make the first scheduled payment.
    FFEL participants cited existing Departmental guidance as the basis 
for their request that they be allowed to use a previously reported 
enrollment status change date if a new date reported by a school is 
within the same month and year. While their proposal would have allowed 
the use of the first date without regard to whether the lender had 
provided the borrower with repayment materials, the negotiators 
ultimately agreed to the proposal with the limitation that the lender 
could ignore the revised date submitted by the school only if it had 
already provided the borrower with the repayment disclosure materials.
    Finally, to facilitate a borrower's ability to revise his or her 
repayment schedule quickly and easily from the less than five-year 
minimum repayment that the borrower previously requested and agreed to, 
the negotiators supported dropping the requirement that the borrower 
notify the lender in writing.

FFEL--Forbearance (Section 682.211)

    Current Regulations: The lender and the borrower (or endorser, if 
applicable) must agree in writing to the terms of a discretionary 
forbearance and to some mandatory forbearances. If a forbearance 
involves the postponement of all payments, the lender must notify the 
borrower or endorser at least once every 3 months to remind the 
borrower or endorser of the continuing obligation to repay the loan. 
One of the discretionary

[[Page 51045]]

administrative forbearances that lenders may grant is for a period of 
up to 3 months for a borrower who is affected by a natural disaster.
    Suggested Change: Members of the FFEL community requested that the 
regulations be changed, to the extent permitted by the statute, to 
eliminate the requirement that the borrower or endorser agree in 
writing to the terms of the forbearance. They also asked that the 
frequency of notice to a borrower in forbearance be decreased from once 
every three months to once every six months. Finally, some FFEL 
participants requested that the regulations be changed to permit a 
lender, without the Secretary's approval, to grant a discretionary 
forbearance for a period of up to three months to a borrower whose 
ability to make payments has been adversely affected by a local or 
national emergency.
    Proposed Regulations: The proposed regulations would allow a lender 
to grant a discretionary forbearance without a written agreement. If 
the agreement is not in writing, the lender must send the borrower or 
endorser a notice confirming the terms of the forbearance agreement 
within 30 days of the agreement.
    The proposed regulations would also reduce the frequency with which 
a lender must contact a borrower who has been granted a forbearance 
from once every three months to once every six months. In addition, the 
proposed regulations would specify that the information the lender 
provides to the borrower about the status of the debt must include: A 
statement that the borrower continues to have the outstanding 
obligation to repay the loan, the amount of the unpaid principal 
balance and any unpaid interest that has accrued on the loan, the fact 
that interest will accrue on the loan for the full term of the 
forbearance, and the fact that the borrower may discontinue the 
forbearance at any time.
    Finally, the proposed regulations would authorize the lender to 
grant a discretionary administrative forbearance if the borrower's 
ability to repay is adversely impacted by a natural disaster, a local 
or national emergency as declared by the appropriate government agency, 
or a military mobilization.
    Reason: The negotiators agreed that a lender should be able to 
address the needs of borrowers who are having difficulty making 
payments by granting forbearances without a written forbearance 
agreement, perhaps as part of a telephone conversation with the 
borrower. However, because a forbearance agreement amends the repayment 
terms of the loan, and in some cases could result in increased costs to 
the borrower, an oral agreement must be followed with a written notice 
to the borrower or endorser outlining the terms of the forbearance. 
That notice must be provided within 30 days of the oral agreement.
    The negotiators also agreed to change the time between required 
lender contacts with borrowers in a forbearance from three to six 
months as long as there also was a requirement that the notification(s) 
to the borrower include the information noted above.
    To ensure that lenders can react quickly during natural disasters, 
local or national emergencies, and military mobilizations to 
temporarily relieve borrowers of their repayment obligations without 
having to contact them first, the proposed regulations would authorize 
lenders to grant a discretionary administrative forbearance to 
borrowers for a limited three-month period until lenders can contact 
the borrowers and determine their ability to resume repayment.

FFEL--Sovereign Immunity (Section 682.402)

    Current Regulations: When an FFEL lender receives notice that a 
borrower has filed a bankruptcy petition, it must, unless instructed 
otherwise by the guaranty agency, file a proof of claim with the court 
within a specified timeframe. Similarly, a guaranty agency is required 
to file a proof of claim on loans it holds.
    Suggested Change: To ensure that the regulations do not interfere 
with a state guaranty agency's right to effectively invoke sovereign 
immunity as a defense to adversary proceedings seeking discharge or 
other relief brought in bankruptcy court on loans it holds or has 
guaranteed, we suggested that the regulations be amended to clearly 
provide such protection by clarifying that the agency may invoke its 
rights and may also instruct its lenders not to file a proof of claim.
    Proposed Regulations: The proposed regulation would provide that a 
guaranty agency that is a State agency and does not assign to other 
guaranty agencies loans affected by bankruptcy filings is not required 
to file a proof of claim on loans it holds and may instruct lenders not 
to file proof of claims on loans that it guaranteed.
    Reason: A State guaranty agency that has the protection of 
sovereign immunity should not be required to take actions, including 
either filing a proof of claim or accepting assignment of a proof of 
claim filed by another party, that may be viewed as waiving its 
sovereign immunity from suit in bankruptcy court. To avoid such 
contentions, a State guaranty agency should be allowed to instruct its 
lenders not to file claims.
    A State guaranty agency that transfers to another guaranty agency 
any loans that it already holds as defaulted loans or any loans on 
which it has received a bankruptcy claim on the other hand, does not 
need this added protection. The strong public interest in recovering 
from the borrower any payments made available in the bankruptcy 
proceeding requires that this proposed change apply only to those State 
guaranty agencies that do not transfer to another guarantor any loans 
affected by a bankruptcy filing.

FFEL--Agency Review of Disability Claims (Section 682.402)

    Current Regulations: A guaranty agency must pay an approved claim 
that is based upon a death, disability, or bankruptcy discharge within 
45 days of receipt of the claim from the lender, and a claim that is 
based upon a closed school or false certification discharge within 90 
days.
    Suggested Change: A number of guaranty agencies suggested that 
agencies needed additional time to carefully review a claim submitted 
by a lender for a discharge based upon the total and permanent 
disability of the borrower. They commended that the regulations be 
changed to allow the agency up to 90 days to make the determination 
and, if approved, pay the claim to the lender.
    Proposed Regulations: The proposed regulations would increase the 
time period in which a guaranty agency must pay a claim to a lender for 
a disability discharge from 45 days to 90 days.
    Reason: The committee agreed with the suggestion for the reason 
stated above.

Direct Loan Program Changes

Definition of Default for Cohort Default Rate Calculations (Sections 
668.183 and 668.193)

    Current Regulations: When calculating a school's cohort default 
rate under the FFEL and Direct Loan programs, the denominator includes 
those borrowers whose loans entered repayment in the applicable fiscal 
year. Generally, the numerator includes borrowers from the denominator 
who defaulted on one or more loans before the end of the following 
fiscal year. However, the current regulations provide that certain non-
defaulted Direct Loan borrowers also be included in the numerator. 
Specifically, the

[[Page 51046]]

regulations require the inclusion in the numerator of any borrower who 
received a Direct Loan from a proprietary, non-degree granting 
institution who has been repaying under the Direct Loan Program's 
income contingent repayment (ICR) plan for 360 days with scheduled 
payments less than 15 dollars per month and less than the amount of 
interest accruing on the loan.
    Suggested Change: During the development of the negotiated 
rulemaking agenda, a non-Federal negotiator suggested changing the 
regulations to eliminate the current provision that includes in the 
numerator of the cohort default rate calculation the group of Direct 
Loan ICR borrowers discussed above. The non-Federal negotiator 
contended that the current regulations are unreasonable because they 
could result in a proprietary, non-degree-granting institution losing 
its eligibility to participate in the Title IV programs due to a cohort 
default rate based in part on borrowers who had met their repayment 
obligations and had not defaulted on their loans.
    Proposed Regulations: The proposed regulations would make the 
suggested change. Borrowers included in a proprietary, non-degree-
granting institution's cohort who have been repaying their loans under 
the Direct Loan Program's 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, would not be considered to 
be in default when calculating the institution's cohort default rate.
    If the proposed regulations become final, the first official cohort 
default rates that would reflect the change would be the official rates 
for the 2001 fiscal year (FY 01) that the Secretary must publish by 
September 30, 2003. Therefore, to ensure consistency between the draft 
FY 01 cohort default rates and the official FY 01 cohort default rates, 
the Secretary plans to base the draft FY 01 cohort default rate 
calculation on the provisions of the revised regulations.
    Reason: The change to the regulations that removes certain Direct 
Loan ICR borrowers from the numerator of a for-profit non-degree 
institution's cohort default rate calculation is proposed because such 
borrowers entered into ICR for a variety of valid reasons and are not 
in default. Thus, they should not be included in the calculation of an 
institution's cohort default rate.

Direct Loans--Expiration of Master Promissory Note (Section 685.102)

    Current Regulations: Under current regulations, a Direct Loan 
Program Master Promissory Note (MPN) expires on the earliest of (1) the 
date the Secretary or the school receives the borrower's written notice 
that no additional loans may be disbursed under the MPN, (2) one year 
after the date of the first anticipated disbursement if no disbursement 
is made during that 12-month period, or (3) ten years after the date of 
the first anticipated disbursement.
    Suggested Change: We suggested changing the current MPN expiration 
date rules so that instead of being based on the first anticipated 
disbursement date, the expiration date would be based on the signature 
or receipt date of the MPN.
    Proposed Regulations: The proposed regulations would retain the 
current expiration date provisions for Direct Loan Program MPNs that 
are processed by the Secretary before July 1, 2003, and would establish 
new expiration date provisions for MPNs that are processed by the 
Secretary on or after July 1, 2003. Under the proposed provisions for 
MPNs that are processed by the Secretary on or after July 1, 2003, a 
Direct Loan Program MPN would expire on the earliest of (1) the date 
the Secretary or the school receives the borrower's written notice that 
no additional loans may be disbursed under the MPN, (2) one year after 
the date the borrower signed the MPN or the date the Secretary receives 
the MPN if no disbursements are made under that MPN, or (3) ten years 
after the date the borrower signed the MPN or the date the Secretary 
receives the MPN.
    Reason: The implementation of the Common Origination and 
Disbursement (COD) System for processing Direct Loans provides the 
opportunity to make the Direct Loan Program MPN expiration date 
provisions more consistent with corresponding provisions under the FFEL 
Program. The FFEL Program provisions base the expiration date on the 
signature or receipt date of the MPN. The proposed change is also 
consistent with the MPN expiration date provisions for the Perkins Loan 
Program that are being proposed in this NPRM.

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 to be 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.
    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. Summary of potential costs 
and benefits
    The Secretary is amending these regulations to reduce 
administrative burden for program participants, provide benefits to 
students and borrowers, and to protect the taxpayers' interests. The 
proposed regulations are fully described elsewhere in this preamble. 
The Department of Education has estimated that the proposed regulations 
would have no effect on Federal costs over FY 2002-2006.
2. Clarity of the Regulations
    Executive Order 12866 and the Presidential Memorandum on ``Plain 
Language in Government Writing'' require each agency to write 
regulations that are easy to understand. The Secretary invites comments 
on how to make these proposed regulations easier to understand, 
including answers to questions such as the following:
     Are the requirements in the proposed regulations clearly 
stated?
     Do the proposed regulations contain technical terms or 
other wording that interferes with their clarity?
     Does the format of the proposed regulations (grouping and 
order of sections, use of headings, paragraphing, etc.) aid or reduce 
their clarity?
     Would the proposed regulations be easier to understand if 
we divided them into more (but shorter) sections? (A ``section'' is 
preceded by the symbol ``Sec. '' and a numbered heading; for example, 
Sec. 682.209 Repayment of a loan.
     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?

[[Page 51047]]

    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, lenders, and guaranty agencies that participate in 
Title IV, HEA programs, and individual students and loan borrowers. The 
U.S. Small Business Administration (SBA) Size Standards define for-
profit or nonprofit institutions with total annual revenue below 
$5,000,000 or institutions controlled by governmental entities with 
populations below 50,000, and lenders with total assets under $100 
million, as ``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. Individuals are also not defined as ``small entities'' 
under the Regulatory Flexibility Act.
    A significant percentage of the over 4,000 lenders participating in 
the FFEL program meet the definition of ``small entities.'' While these 
lenders and a number of institutions of higher education fall within 
the SBA size guidelines, the proposed regulations do not impose 
significant new costs on these entities.
    The Secretary invites comments from small institutions and lenders 
as to whether they believe the proposed changes would have a 
significant economic impact on them and, if so, requests evidence to 
support that belief.

Paperwork Reduction Act of 1995

    Sections 668.183, 668.193, 674.16, 674.19, 674.33, 674.34, 674.39, 
674.42, 674.43, 674.45, 674.47, 674.50, 682.200, 682.209, 682.210, 
682.211, 682.402, 682.405, 682.414, 682.604, 685.212, 685.220, and 
685.304 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, 
Federal Perkins Loan Program, Federal Family Education Loan Program, 
and William D. Ford Federal Direct Loan Program.

Sections 668.183 and 668.193--Definition of Default for Cohort Default 
Rate Calculations

    The proposed regulations eliminate the current provision that 
includes in the numerator of the cohort default rate calculation for a 
proprietary, non-degree-granting institution certain Direct Loan 
borrowers who are repaying under the income contingent repayment plan. 
There is no change in the burden hours associated with the affected 
sections of the regulations as a result of this proposed change because 
we calculate cohort default rates.

Section 674.16--Master Promissory Note

    To provide for the use of a Master Promissory Note (MPN) in the 
Perkins Loan Program, we have proposed eliminating the regulatory 
requirement that a Perkins borrower sign a promissory note for each 
award year. The adoption of an MPN in the Perkins Loan Program will 
simplify the loan process by eliminating the need for institutions to 
prepare, and students to sign, a promissory note each award year. 
Because institutional use of the Secretary's promissory note in the 
Federal Perkins Loan program is considered part of normal business 
practice in administering the Federal Perkins Loan program, there are 
no burden hours calculated for this section.

Section 674.19--Retention of Promissory Notes

    The proposed regulation provides that if a promissory note was 
signed electronically it must be stored electronically in accordance 
with the record retention requirements of 34 CFR 668.24(d)(3)(i) 
through (iv). The proposed change would not affect the process for 
retaining records in the Federal Perkins Loan Program. Therefore, this 
provision would not add burden hours associated with this section.

Sections 674.33 and 674.42--Borrower Repayment

    Current regulations would be modified to specify that an 
institution's responsibility to coordinate minimum monthly repayment 
amounts with other institutions begins only when the borrower requests 
such coordination. Because the coordination of minimum monthly accounts 
is considered to be a normal business practice in the administration of 
the Federal Perkins Loan Program, the proposed regulation would not 
affect the burden hours associated with this section.

Section 674.34--Economic Hardship Deferment

    Under the proposed regulations for economic hardship deferments, 
the amount of the borrower's monthly payment on a Federal postsecondary 
education debt scheduled to be repaid in 10 years or less would be the 
actual monthly payment amount, instead of, as under current 
regulations, a derived amount produced by converting repayment periods 
of less than 10 years to standard 10-year repayment periods. These 
changes do not change the burden hours associated with this section of 
the regulations because they are sufficiently covered by the current 
burden estimate for the section.

Section 674.39--Rehabilitation of Defaulted Loans

    The proposed regulations would prohibit rehabilitation of loans on 
which a judgment has been obtained. As a result, institutions would be 
partially relieved of the current regulatory burden associated with 
obtaining a newly signed promissory note from the borrower after 
rehabilitating a loan on which a judgment has been obtained. In 
addition, an institution would no longer be required to instruct the 
credit bureau to remove the default from the borrower's credit history. 
We estimate that 592,000 Perkins Loan borrowers are currently in 
default. An estimated 5,920 (or 1%) of these borrowers have loans on 
which a judgment has been obtained. We estimate that it takes 
approximately 10 minutes (.167 hours) per rehabilitated loan for the 
institution to have the borrower sign a new promissory note and to 
instruct the credit bureau to remove the default from the borrower's 
credit history. Therefore, the proposed change will result in a burden 
reduction of 989 hours.

Section 674.42--Copies of Promissory Notes

    The proposed regulations would remove the requirement that an 
institution provide to each borrower at the exit interview a copy of 
the borrower's signed promissory note. Instead, institutions would only 
be required to provide contact information that will allow a borrower 
to request and receive a copy of the borrower's signed promissory note. 
The proposed change would reduce burden for institutions because they 
would no longer be required to provide a copy of the promissory note to 
all borrowers. Under current regulations, an estimated 600,000 copies 
of promissory notes were provided to borrowers at an estimated time of 
1 minute (.017 hours) per copy.

[[Page 51048]]

We expect that under the proposed regulations only about 10 percent of 
the borrowers will request copies of their notes. Therefore, the 
proposed change would result in 540,000 fewer notes needing to be 
distributed with a burden reduction of 9,180 hours.

Section 674.42--Exit Counseling

    The proposed regulations revise the Perkins counseling regulations 
to clarify that a party other than a school may provide counseling to 
borrowers on a school's behalf. There is no change in the burden hours 
associated with this section of the regulations as a result of this 
proposed change because the current burden estimate reflects the 
counseling that must be provided to borrowers regardless of whether a 
school, or a party on behalf of a school, provides the counseling.
    The proposed regulations also revise the information that must be 
disclosed to borrowers through counseling to be consistent with the 
Direct Loan and FFEL program counseling regulations. These revisions 
include new information that must be disclosed to borrowers through 
counseling. The revisions and additions do not change the burden hours 
associated with this section of the regulations because they are 
sufficiently covered by the current burden estimate for the section.

Section 674.43--Late Charges

    The proposed regulations would amend Sec. 674.43(b)(2) by making 
the institution's assessment of late charges optional in the Federal 
Perkins Loan Program. An institution that adopts a policy of assessing 
late charges would be required to assess them to all borrowers with 
overdue payments. The proposed regulation would reduce burden hours in 
this section because some institutions will choose not to adopt a 
policy of assessing late charges and, therefore, would not be required 
to respond to borrower inquires and complaints concerning the 
imposition of those charges. There are currently an estimated 2000 
institutions that participate in the Federal Perkins Loan Program. We 
estimate that 200 (or 10%) of these institutions will choose not to 
assess late charges. We approximate that, on average each of those 
institutions spends one hour per month (12 hours per year) 
communicating with borrowers about the late charge. As a result, the 
proposed change would result in a burden reduction of 2400 hours.

Section 674.45--Credit Bureau Reporting

    The proposed provisions governing credit bureau reporting in 
Sec. 674.45(a)(1) would be revised to clarify that the institution 
would report an account as being in default to a national credit bureau 
as part of the collection procedures that follow the billing procedures 
in Sec. 674.43.
    Because credit bureau reporting is considered to be a normal 
business practice in the administration of the Federal Perkins Loan 
Program, the proposed regulation would not affect the burden hours 
associated with this section.

Section 674.47--Write-offs

    The proposed regulations would allow an institution to write-off 
account balances of less than $25 and, if the borrower has been billed 
for at least two years, balances of less than $50. The proposed 
regulations would also add new language making it clear that a borrower 
whose balance has been written off is relieved of all repayment 
obligations. The proposed regulations would reduce burden for 
institutions because they would no longer be required to pursue 
collection of defaulted accounts with low balances. We estimate that 
592,000 Perkins Loan borrowers are currently in default. An estimated 
5920 (or 1%) of these borrowers would be eligible for write-off under 
the proposed regulations. We estimate that performing collection 
procedures on an overdue account takes 1 hour (1.00 hours) per 
borrower. Therefore, the proposed change will result in a burden 
reduction of 5,920 hours.

Section 674.50--Assignment of Loans

    Two changes have been proposed for this section. The first change 
would conform the regulations to the requirement that an institution 
assign a loan to the Department when it makes a preliminary 
determination that the borrower qualifies for a total and permanent 
disability discharge on the loan. The second change conforms to an 
earlier change made in Sec. 674.13, which provides the Secretary with 
the discretion to determine the circumstances under which reimbursement 
to the institution's Federal Perkins Loan fund would be appropriate. 
Because the proposed amendments in this section are technical 
conforming changes to earlier regulatory changes, we have determined 
that there are no burden hours associated with this section.

Section 682.200--Definitions

    The proposed regulations would revise the definition of Lender to 
clarify that loans held in trust are not considered part of a trustee 
lender's consumer credit function in determining whether the lender has 
exceeded the limit of one-half of the lender's combined consumer credit 
loan portfolio. The revision to the definition does not change the 
burden hours associated with this section of the regulations because 
there is no burden currently associated with this provision.

Section 682.209--Repayment of a Loan

    The proposed regulations would reduce burden on lenders by 
permitting them to establish first payment due dates for Stafford loan 
borrowers within 60 days following certain events instead of within 45 
days under current requirements. As a result of these proposed 
regulations, the Stafford loan repayment due dates would be the same as 
those generally permitted for the PLUS and Consolidation loan programs, 
although the starting dates that trigger the 60-day deadline are 
different in the three programs. Since lenders would, under the 
proposed rule, simply re-set their computer systems and send out the 
same number of billings, there is no significant burden reduction as a 
result of this change.

Sections 682.210 and by Reference, 685.204--Deferment

    The proposed regulations would affect the ability of borrowers to 
qualify for unemployment and economic hardship deferments. Current 
regulations require certain borrowers to provide job-search 
documentation to the lender. The proposed regulations would permit 
those borrowers to qualify for an unemployment deferment without 
providing specific details of their job searches.
    For economic hardship deferments, the amount of the borrower's 
monthly payment on a Federal postsecondary education debt scheduled to 
be repaid in 10 years or less would be the actual monthly payment 
amount, instead of, as under current regulations, a derived amount 
produced by converting repayment periods of less than 10 years to a 
standard 10-year calculation. Because those derived amounts are 
generally lower than the actual monthly repayment amounts and will no 
longer be used if a borrower's loans are scheduled to be repaid in 10 
years or less, more borrowers should qualify for economic hardship 
deferments.
    These revisions do not change the burden hours associated with this

[[Page 51049]]

section of the regulations because the burden associated with the 
current requirement is associated with the forms that borrowers use to 
request unemployment and economic hardship deferments.

Section 682.211--Forbearance

    The proposed regulations would decrease the required frequency of 
lender contacts with certain borrowers in forbearance from once every 3 
months to once every 6 months. However, to compensate for this less 
frequent communication, the lender would be required to enhance some of 
the information it provides to the borrower about the status of the 
borrower's loan balance. Taken together, these two changes appear to 
cancel each other out and result in no net increase in burden to the 
lender.

Section 682.402--Death, Disability, Closed School, False Certification, 
Unpaid Refunds, and Bankruptcy Payments

    The proposed regulations would provide that a guaranty agency that 
is a state agency is not required to file a proof of claim and it may 
instruct lenders not to file proof of claims on loans that it 
guaranteed.
    The proposed regulations would change the timeframe in which a 
guaranty agency must pay a claim to a lender for a disability discharge 
from 45 days to 90 days.
    These revisions do not change the burden hours associated with this 
section of the regulations.

Section 682.405--Loan Rehabilitation Agreement

    The proposed regulations would prohibit rehabilitation of loans on 
which a judgment has been obtained. Because guaranty agencies would no 
longer permit the rehabilitation of these debts, lenders and guaranty 
agencies would be relieved of the current regulatory burden associated 
with obtaining a newly signed promissory note from the borrower prior 
to the sale of a rehabilitated judgment debt. However, this change does 
not impact the burden hours associated with this section of the 
regulations because there is no burden currently associated with this 
provision.

Section 682.414--Records, Reports, and Inspection Requirement for 
Guaranty Agency Programs

    The proposed regulations state that if a promissory note was signed 
electronically it must be stored electronically in accordance with 
record retention requirements of 34 CFR 668.24. This revision is a 
clarification of current regulations, and has no effect on the burden 
hours associated with this section.

Section 682.604--Processing the Borrower's Loan Proceeds and Counseling 
Borrowers

    The proposed changes would update the counseling requirements to 
ensure consistency among the FFEL, Perkins, and Direct Loan programs, 
and would clarify that parties other than the school may provide the 
counseling. There is no change in the burden hours because the current 
burden hour estimate reflects counseling that must be provided to 
borrowers regardless of whether the counseling is provided by the 
school itself, or a party on behalf of the school.

Section 685.212--Discharge of a Loan Obligation and Section 685.220 --
Consolidation

    The proposed regulations specify that if a Direct Consolidation 
Loan includes a PLUS loan obtained for a student who died, the portion 
of the Direct Consolidation Loan attributable to that PLUS loan is 
discharged. The proposed regulations also provide for the discharge of 
the applicable portion of a Direct Consolidation Loan that is obtained 
jointly by two married borrowers if one of the borrowers dies or 
becomes totally and permanently disabled. There is no change in the 
burden hours associated with the affected sections of the regulations 
as a result of these proposed changes because the slight increase in 
the number of borrowers who will be eligible to apply for these 
benefits is sufficiently covered by the current burden estimates for 
the affected sections.

Section 685.304--Counseling Borrowers

    The proposed regulations revise the counseling regulations to 
clarify that a party other than a school may provide counseling to 
borrowers on a school's behalf. This proposed change makes the 
regulations consistent with longstanding guidance that has allowed 
another party to provide counseling for a school, as long as the school 
ensured that the counseling was provided and included all of the 
necessary information. There is no change in the burden hours 
associated with this section of the regulations as a result of this 
proposed change because the current burden estimate reflects the 
counseling that must be provided to borrowers regardless of whether a 
school or a party on behalf of a school provides the counseling.
    The proposed regulations also revise the information that must be 
disclosed to borrowers through counseling to be consistent with the 
Perkins Loan and FFEL program counseling regulations. These revisions 
include two new pieces of information that must be disclosed to 
borrowers through counseling. The revisions to the disclosure 
requirements do not change the burden hours associated with this 
section of the regulations because they are sufficiently covered by the 
current burden estimate for the section.
    If you want to comment on the information collection requirements, 
please send your comments to the Office of Information and Regulatory 
Affairs, OMB, room 10235, New Executive Office Building, Washington, DC 
20503; Attention: Desk Officer for U.S. Department of Education. You 
may also send a copy of these comments to the Department representative 
named in the ADDRESSES section of this preamble.
    We consider your comments on these proposed collections of 
information in--
     Deciding whether the proposed collections are necessary 
for the proper performance of our functions, including whether the 
information will have practical use;
     Evaluating the accuracy of our estimate of the burden of 
the proposed collections, including the validity of our methodology and 
assumptions;
     Enhancing the quality, usefulness, and clarity of the 
information we collect; and
     Minimizing the burden on those who must respond. This 
includes exploring the use of appropriate automated, electronic, 
mechanical, or other technological collection techniques or other forms 
of information technology; e.g., permitting electronic submission of 
responses.
    OMB is required to make a decision concerning the collections of 
information contained in these proposed regulations between 30 and 60 
days after publication of this document in the Federal Register. 
Therefore, to ensure that OMB gives your comments full consideration, 
it is important that OMB receives the comments within 30 days of 
publication. This does not affect the deadline for your comments to us 
on the proposed regulations.

Assessment of Educational Impact

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

[[Page 51050]]

Electronic Access to This Document

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    Note: The official version of this document is the document 
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(Catalog of Federal Domestic Assistance Number: 84.032 Federal 
Family Education Loan Program; 84.037 Federal Perkins Loan Program; 
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 674, 682 and 685

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

    Dated: July 25, 2002.
Rod Paige,
Secretary of Education.
    For the reasons discussed in the preamble, the Secretary proposes 
to amend parts 668, 674, 682, and 685 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. 1001, 1002, 1003, 1085, 1091, 1091b, 1092, 
1094, 1099c, and 1099c-1, unless otherwise noted.

    2. Section 668.35 is amended:
    A. In paragraph (a)(2), by adding new introductory text.
    B. By redesignating paragraphs (b), (c), (d), (e), and (f) as (d), 
(e), (f), (g), and (h) respectively.
    C. By adding new paragraphs (b) and (c).
    The revision and additions read as follows:


Sec. 668.35  Student debts under the HEA and to the U.S.

    (a) * * *
    (2) Except as limited by paragraph (c) of this section--
* * * * *
    (b) A student who is subject to a judgment for failure to repay a 
loan made under a title IV, HEA loan program may nevertheless be 
eligible to receive title IV, HEA program assistance if the student--
    (1) Repays the debt in full; or
    (2) Except as limited by paragraph (c) of this section--
    (i) Makes repayment arrangements that are satisfactory to the 
holder of the debt; and
    (ii) Makes at least six consecutive monthly payments under those 
arrangements.
    (c) A student may reestablish eligibility under paragraph (a)(2) or 
(b)(2) of this section only once. For example, a student who 
reestablishes eligibility under paragraph (a)(2) may not reestablish 
eligibility under paragraph (b)(2).
* * * * *


Sec. 668.183  [Amended]

    3. Section 668.183(c)(1) is amended as follows:
    A. In paragraph (c)(1)(ii), by adding ``or'' after the semi-colon.
    B. By removing paragraph (c)(1)(iii).
    C. By redesignating paragraph (c)(1)(iv) as (c)(1)(iii).


Sec. 668.193  [Amended]

    4. Section 668.193 is amended:
    A. In paragraph (d)(1), by removing the last sentence.
    B. By removing paragraph (f)(3).

PART 674--FEDERAL PERKINS LOAN PROGRAM

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

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

    6. Section 674.2(b) is amended:
    A. By revising the definition of ``Making of a loan''.
    B. By adding, in alphabetical order, a new definition of ``Master 
Promissory Note (MPN)''.
    The revision and addition read as follows:


Sec. 674.2  Definitions.

* * * * *
    (b) * * *
    Making of a loan: When the institution makes the first disbursement 
of a loan to a student for an award year.
    Master Promissory Note (MPN): A promissory note under which the 
borrower may receive loans for a single award year or multiple award 
years.
* * * * *


Sec. 674.9  [Amended]

    7. Section 674.9 is amended:
    A. By removing paragraph (g).
    B. By redesignating paragraphs (h), (i), (j), (k) and (l) as (g), 
(h),(i), (j) and (k) respectively.
    C. In newly redesignated paragraph (g)(3), by removing ``(h)(1) and 
(h)(2)'' and adding, in its place, ``(g)(1) and (g)(2)''; and by 
removing the period at the end of the last sentence and adding, in its 
place, a ``; and''.
    8. Section 674.16 is amended:
    A. By revising paragraph (d)(2).
    B. By adding a new paragraph (d)(3).
    The revision and addition read as follows:


Sec. 674.16  Making and disbursing loans.

* * * * *
    (d) * * *
    (2) The institution shall ensure that each loan is supported by a 
legally enforceable promissory note as proof of the borrower's 
indebtedness.
    (3) If the institution uses the Master Promissory Note (MPN), the 
institution's ability to make additional loans based on an MPN will 
automatically expire upon the earliest of--
    (i) The date the institution receives written notification from the 
borrower requesting that the MPN no longer be used as the basis for 
additional loans;
    (ii) Twelve months after the date the borrower signed the MPN if no 
disbursements are made by the institution under that MPN; or
    (iii) Ten years from the date the borrower signed the MPN or the 
date the institution receives the MPN, except that a remaining portion 
of a loan may be disbursed after this date.
* * * * *


Sec. 674.17  [Amended]

    9. Section 674.17 is amended:
    A. In paragraph (a), by removing in the introductory text ``one or 
more of''.
    B. By removing paragraph (a)(2).
    C. By redesignating paragraph (a)(3) as paragraph (a)(2).
    D. In redesignated paragraph (a)(2), by removing ``transfer'' and 
adding, in its place, ``assignment''; and by removing ``Department of 
Education'' and adding, in its place, ``United States''.

[[Page 51051]]

    E. In paragraph (b), by removing ``transfers'' and adding, in its 
place, sbull I11``assigns''.
    F. By removing paragraphs (c), (d), and (e).
    10. Section 674.19(e)(4) is revised to read as follows:


Sec. 674.19  Fiscal procedures and records.

* * * * *
    (e) * * *
    (4) Manner of retention of promissory notes and repayment 
schedules. An institution shall keep the original promissory notes and 
repayment schedules until the loans are satisfied. If required to 
release original documents in order to enforce the loan, the 
institution must retain certified true copies of those documents.
    (i) An institution shall keep the original paper promissory note or 
original paper Master Promissory Note (MPN) and repayment schedules in 
a locked, fireproof container.
    (ii) The institution shall retain a promissory note that was signed 
by the borrower electronically in accordance with 34 CFR 
668.24(d)(3)(i) through (iv).
    (iii) After the loan obligation is satisfied, the institution shall 
return the original or a true and exact copy of the note marked ``paid 
in full'' to the borrower, or otherwise notify the borrower in writing 
that the loan is paid in full, and retain a copy for the prescribed 
period.
    (iv) An institution shall maintain separately its records 
pertaining to cancellations of Defense, NDSL, and Federal Perkins 
Loans.
    (v) Only authorized personnel may have access to the loan 
documents.
    11. Section 674.33(b) is amended as follows:
    A. By revising the introductory text following the heading in 
paragraph (b)(2).
    B. By revising the text following the heading of paragraph (b)(3).
    The revisions read as follows:


Sec. 674.33  Repayment.

* * * * *
    (b) * * *
    (2) * * * If a borrower has received loans from more than one 
institution and has notified the institution that he or she wants the 
minimum monthly payment determination to be based on payments due to 
other institutions, the following rules apply:
* * * * *
    (3) * * * If the borrower has notified the institution that he or 
she wants the minimum monthly payment determination to be based on 
payments due to the other institutions, and if the total monthly 
repayment is less than $30 and the monthly repayment on a Defense loan 
is less than $15 a month, the amount attributed to the Defense loan may 
not exceed $15 a month.
* * * * *
    12. Section 674.34(e)(10) is revised to read as follows:


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

* * * * *
    (e) * * *
    (10) In determining a borrower's eligibility for an economic 
hardship deferment under paragraph (e)(5) of this section, the 
institution shall--
    (i) If the Federal postsecondary education loan is scheduled to be 
repaid in 10 years or less, use the actual monthly payment amount (or a 
proportional share if the payments are due less frequently than 
monthly); or
    (ii) If the Federal postsecondary education loan is scheduled to be 
repaid in more than 10 years, use a monthly payment amount (or a 
proportional share if the payments are due less frequently than 
monthly) that would have been due on the loan if the loan had been 
scheduled to be repaid in 10 years.
* * * * *


Sec. 674.39  [Amended]

    13. Section 674.39(a) is amended as follows:
    A. In the first sentence of the introductory text in paragraph (a), 
by adding ``, except for loans for which a judgment has been secured'' 
after ``part''.
    B. In paragraph (a)(2), by removing ``; and'' and adding, in its 
place, a period.
    C. By removing paragraph (a)(3).
    14. Section 674.42 is amended:
    A. By revising paragraph (a)(10).
    B. By adding a new paragraph (a)(11).
    C. By revising paragraph (b)(1) and the introductory text in 
paragraph (b)(2).
    D. In paragraph (b)(2)(i), by removing ``that'' and adding, in its 
place, ``the''.
    E. By revising paragraph (b)(2)(iii).
    F. In paragraph (b)(2)(v), by removing ``in forceful terms''.
    G. In paragraph (b)(2)(vii), by removing ``with'' and adding, in 
its place, ``for''.
    H. In paragraph (b)(2)(viii), by removing ``corrections to the 
institution's records'' and adding, in its place, ``current 
information''; and by removing ``and'' following the semi-colon.
    I. In paragraph (b)(2)(ix), by removing ``with'' and adding, in its 
place, ``for''; and by removing the period and adding, in its place, 
``; and''.
    J. By adding a new paragraph (b)(2)(x).
    K. By removing paragraph (b)(3).
    L. By redesignating paragraphs (b)(4) and (b)(5) as (b)(3) and 
(b)(4) respectively.
    M. By revising newly redesignated paragraph (b)(3).
    The revisions and additions read as follows:


Sec. 674.42  Contact with the borrower.

    (a) * * *
    (10) The contact information of a party who, upon request of the 
borrower, will provide the borrower with a copy of his or her signed 
promissory note.
    (11) An explanation that if a borrower is required to make minimum 
monthly repayments, and the borrower has received loans from more than 
one institution, the borrower must notify the institution if he or she 
wants the minimum monthly payment determination to be based on payments 
due to other institutions.
    (b) * * * (1) An institution must ensure that exit counseling is 
conducted with each borrower either in person, by audiovisual 
presentation, or by interactive electronic means. The institution must 
ensure that exit counseling is conducted shortly before the borrower 
ceases at least half-time study at the institution. As an alternative, 
in the case of a student enrolled in a correspondence program or a 
study-abroad program that the school approves for credit, the school 
may provide written counseling material by mail within 30 days after 
the borrower completes the program. If the borrower withdraws from 
school without the school's prior knowledge or fails to complete an 
exit counseling session as required, the school must ensure that exit 
counseling is provided through either interactive electronic means or 
by mailing counseling material to the borrower at the borrower's last 
known address within 30 days after learning that the borrower has 
withdrawn from school or failed to complete exit counseling as 
required.
    (2) The exit counseling must--
* * * * *
    (iii) Suggest to the borrower debt-management strategies that would 
facilitate repayment;
* * * * *
    (x) Inform the borrower of the availability of title IV loan 
information in the National Student Loan Data System (NSLDS).
    (3) If exit counseling is conducted through interactive electronic 
means, a school must take reasonable steps to ensure that each student 
borrower receives the counseling materials, and

[[Page 51052]]

participates in and completes the exit counseling.
* * * * *


Sec. 674.43  [Amended]

    15. Section 674.43(b)(2) is amended in the introductory text by 
removing ``shall'' and adding, in its place, ``may''.


Sec. 674.45  [Amended]

    16. Section 674.45(a)(1) is amended by removing ``defaulted 
account'' and adding, in its place, ``account as being in default''.


Sec. 674.46  [Amended]

    17. Section 674.46(a)is amended as follows:
    A. In the introductory text of paragraph (a)(1), by removing 
``annually'' and adding, in its place, ``once every two years''.
    B. In paragraph (a)(1)(i), by removing ``$200'' and adding, in its 
place, ``$500''.
    18. Section 674.47 is amended:
    A. By removing paragraph (g)(1).
    B. By redesignating paragraphs (g)(2), (g)(2)(i), and (g)(2) (ii) 
as paragraph (g) introductory text, paragraph (g)(1), and paragraph 
(g)(2) respectively.
    C. In newly redesignated paragraph (g)(1), by removing the last 
``the'' and adding, in its place, ``this''.
    D. In the paragraph (h) heading, by removing ``of less than $5''.
    E. By revising paragraph (h)(1).
    F. By adding a new paragraph (h)(3).
    The revision and addition read as follows:


Sec. 674.47  Costs chargeable to the Fund.

* * * * *
    (h) * * *
    (1) Notwithstanding any other provision in this subpart, an 
institution may write off an account, including outstanding principal, 
accrued interest, collection costs, and late charges, with a balance 
of--
    (i) Less than $25; or
    (ii) Less than $50 if, for a period of at least 2 years, the 
borrower has been billed for this balance in accordance with 
Sec. 674.43(a).
* * * * *
    (3) When the institution writes off an account, the borrower is 
relieved of all repayment obligations.


Sec. 674.50  [Amended]

    19. Section 674.50 is amended:
    A. In paragraph (e)(2)(ii), by adding ``or'' after the semicolon.
    B. In paragraph (e)(3), by deleting ``; or'' at the end of 
paragraph and adding, in its place, a period.
    C. By removing paragraph (e)(4).
    D. In paragraph (g)(2), by adding ``Secretary may require the'' 
after ``The''; and by removing ``shall'' and adding, in its place, 
``to''.

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

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

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


Sec. 682.200  [Amended]

    21. Section 682.200(b) is amended:
    A. By adding a sentence at the end of the definition of ``Lender'' 
in paragraph (b)(2)(ii) to read as follows: ``For purposes of this 
paragraph, loans held in trust by a trustee lender are not considered 
part of the trustee lender's consumer credit function.''
    B. Revise the definition of ``Master promissory note (MPN)'' to 
read ``Master Promissory Note (MPN)''.
    22. Section 682.204 is amended by adding new paragraphs (a)(8), 
(a)(9), (d)(7), and (d)(8) to read as follows:


Sec. 682.204  Maximum loan amounts.

    (a) * * *
    (8) Except as provided in paragraph (a)(4) of this section, an 
undergraduate student who is enrolled in a program that is one academic 
year or less in length may not borrow an amount for any academic year 
of study that exceeds the amounts in paragraph (a)(1) of this section.
    (9) Except as provided in paragraph (a)(4) of this section--
    (i) An undergraduate student who is enrolled in a program that is 
more than one academic year in length and who has not successfully 
completed the first year of that program may not borrow an amount for 
any academic year of study that exceeds the amounts in paragraph (a)(1) 
of this section.
    (ii) An undergraduate student who is enrolled in a program that is 
more than one academic year in length and who has successfully 
completed the first year of that program, but has not successfully 
completed the second year of the program, may not borrow an amount for 
any academic year of study that exceeds the amounts in paragraph (a)(2) 
of this section.
* * * * *
    (d) * * *
    (7) Except as provided in paragraph (d)(4) of this section, an 
undergraduate student who is enrolled in a program that is one academic 
year or less in length may not borrow an amount for any academic year 
of study that exceeds the amounts in paragraph (d)(1) of this section.
    (8) Except as provided in paragraph (d)(4) of this section--
    (i) An undergraduate student who is enrolled in a program that is 
more than one academic year in length and who has not successfully 
completed the first year of that program may not borrow an amount for 
any academic year of study that exceeds the amounts in paragraph (d)(1) 
of this section.
    (ii) An undergraduate student who is enrolled in a program that is 
more than one academic year in length and who has successfully 
completed the first year of that program, but has not successfully 
completed the second year of the program, may not borrow an amount for 
any academic year of study that exceeds the amounts in paragraph (d)(2) 
of this section.
* * * * *
    23. Section 682.209(a) is amended by:
    A. Removing the number ``45'' each time it appears in paragraphs 
(a)(3)(ii), (A), (a)(3)(ii)(B), and (a)(3)(ii)(C), and adding, in its 
place, the number ``60''.
    B. Adding a new paragraph (a)(3)(iii).
    C. Revising the last sentence in paragraph (a)(8)(iv).
    The revisions and addition read as follows:


Sec. 682.209  Repayment of a loan.

    (a) * * *
    (3) * * *
    (iii) When determining the date that the student was no longer 
enrolled on at least a half-time basis, the lender must use a new date 
it receives from the school, unless the lender has already disclosed 
repayment terms to the borrower and the new date is within the same 
month and year as the most recent date reported to the lender.
* * * * *
    (8) * * *
    (iv) * * * Subject to paragraph (a)(8)(iii) of this section, a 
borrower who makes such a request may notify the lender at any time to 
extend the repayment period to a minimum of 5 years.
* * * * *
    24. Section 682.210 is amended by revising paragraphs (h)(2), 
(h)(3)(iv), (h)(4), (s)(6)(vii), and (s)(6)(ix) to read as follows:


Sec. 682.210  Deferment.

* * * * *
    (h) * * *
* * * * *
    (2) A borrower also qualifies for an unemployment deferment by 
providing to the lender a written certification, or an equivalent as 
approved by the Secretary, that--
    (i) The borrower has registered with a public or private employment 
agency, if one is available to the borrower within

[[Page 51053]]

a 50-mile radius of the borrower's current address; and
    (ii) For all requests beyond the initial request, the borrower has 
made at least six diligent attempts during the preceding 6-month period 
to secure full-time employment.
    (3) * * *
* * * * *
    (iv) A borrower requesting an initial period of unemployment 
deferment is not required to describe his or her search for full-time 
employment at the time the deferment is granted. The initial period of 
unemployment deferment may be granted for a period of unemployment 
beginning up to 6 months before the date the lender receives the 
borrower's request, and may be granted for up to 6 months after that 
date.
    (4) A lender may not grant an unemployment deferment beyond the 
date that is 6 months after the date the borrower provides evidence of 
the borrower's eligibility for unemployment insurance benefits under 
paragraph (h)(1) of this section or the date the borrower provides the 
written certification under paragraph (h)(2) of this section.
* * * * *
    (s) * * *
    (6) * * *
* * * * *
    (vii) In determining a borrower's Federal education debt burden for 
purposes of an economic hardship deferment under paragraphs (s)(6)(iv) 
and
    (v) of this section, the lender shall--
    (A) If the Federal postsecondary education loan is scheduled to be 
repaid in 10 years or less, use the actual monthly payment amount (or a 
proportional share if the payments are due less frequently than 
monthly);
    (B) If the Federal postsecondary education loan is scheduled to be 
repaid in more than 10 years, use a monthly payment amount (or a 
proportional share if the payments are due less frequently than 
monthly) that would have been due on the loan if the loan had been 
scheduled to be repaid in 10 years; and
    (C) Require the borrower to provide evidence that would enable the 
lender to determine the amount of the monthly payments that would have 
been owed by the borrower during the deferment period.
* * * * *
    (ix) To qualify for a subsequent period of deferment that begins 
less than one year after the end of a period of deferment under 
paragraphs (s)(6)(iii) through (v) of this section, the lender must 
require the borrower to submit evidence showing the amount of the 
borrower's monthly income or a copy of the borrower's most recently 
filed Federal income tax return.
* * * * *
    25. Section 682.211 is amended by:
    A. Revising paragraphs (b), (c), and (e).
    B. Amending the introductory text of paragraph (f) by adding the 
words ``or would be due'' after the word ``overdue''.
    C. Amending paragraph (f)(2) by removing the reference to paragraph 
``(f)(10)'' and adding, in its place, ``(f)(11)''.
    D. Revising paragraph (f)(11).
    E. Redesignating paragraph (h)(3) as paragraph (h)(4).
    F. Adding a new paragraph (h)(3).
    The revisions and addition read as follows:


Sec. 682.211  Forbearance.

* * * * *
    (b) A lender may grant forbearance if--
    (1) The lender and the borrower or endorser agree to the terms of 
the forbearance and, unless the agreement was in writing, the lender 
sends, within 30 days, a notice to the borrower or endorser confirming 
the terms of the forbearance; or
    (2) In the case of forbearance of interest during a period of 
deferment, if the lender informs the borrower at the time the deferment 
is granted that interest payments are to be forborne.
    (c) A lender may grant forbearance for a period of up to one year 
at a time if both the borrower or endorser and an authorized official 
of the lender agree to the terms of the forbearance. If the lender and 
the borrower or endorser agree to the terms orally, the lender must 
notify the borrower or endorser of the terms within 30 days of that 
agreement.
* * * * *
    (e) Except in the case of forbearance of interest payments during a 
deferment period if a forbearance involves the postponement of all 
payments, the lender must contact the borrower or endorser at least 
once every six months during the period of forbearance to inform the 
borrower or endorser of--
    (1) The outstanding obligation to repay;
    (2) The amount of the unpaid principal balance and any unpaid 
interest that has accrued on the loan;
    (3) The fact that interest will accrue on the loan for the full 
term of the forbearance; and
    (4) The borrower or endorser's option to discontinue the 
forbearance at any time.
    (f) * * *
    (11) For a period not to exceed 3 months when the lender determines 
that a borrower's ability to make payments has been adversely affected 
by a natural disaster, a local or national emergency as declared by the 
appropriate government agency, or a military mobilization.
* * * * *
    (h) * * *
    (3) Written agreement. The terms of the forbearance must be agreed 
to in writing--
    (i) By the lender and the borrower for a forbearance under 
paragraphs (h)(1) or (h)(2)(ii)(A) of this section; or
    (ii) By the lender and the borrower or endorser for a forbearance 
under paragraph (h)(2)(i) of this section.
* * * * *


Sec. 682.402  [Amended]

    26. Section 682.402 is amended by:
    A. Redesignating paragraphs (a)(2) through (a)(4) as paragraphs 
(a)(3) through (a)(5), respectively.
    B. Adding a new paragraph (a)(2).
    C. Amending newly redesignated paragraph (a)(3) by removing the 
words ``or a Consolidation loan was obtained by a married couple,''.
    D. Amending newly redesignated paragraph (a)(5)(iii) by removing 
the reference to paragraph ``(a)(4)(i) or (ii)'' and adding, in its 
place, ``(a)(5)(i) or (ii)''.
    E. Adding a new paragraph (b)(6).
    F. Revising paragraph (f)(4).
    G. Revising paragraph (g)(1)(i).
    H. Revising paragraph (h)(1)(i).
    I. Revising paragraph (h)(3)(iii).
    The revisions and additions read as follows:


Sec. 682.402  Death, disability, closed school, false certification, 
unpaid refunds, and bankruptcy payments.

    (a) * * *
    (2) If a Consolidation loan was obtained jointly by a married 
couple, the amount of the Consolidation loan that is discharged if one 
of the borrowers dies or becomes totally and permanently disabled is 
equal to the portion of the outstanding balance of the Consolidation 
loan attributable to any of that borrower's loans that would have been 
eligible for discharge.
* * * * *
    (b) * * *
    (6) In the case of a Federal Consolidation Loan that includes a 
Federal PLUS or Direct PLUS loan borrowed for a dependent who has died, 
the obligation of the borrower or any

[[Page 51054]]

endorser to make any further payments on the portion of the outstanding 
balance of the Consolidation Loan attributable to the Federal PLUS or 
Direct PLUS loan is discharged as of the date of the dependent's death.
* * * * *
    (f) * * *
    (4) Proof of claim. (i) Except as provided in paragraph (f)(4)(ii) 
of this section, the holder of the loan shall file a proof of claim 
with the bankruptcy court within--
    (A) 30 days after the holder receives a notice of first meeting of 
creditors unless, in the case of a proceeding under chapter 7, the 
notice states that the borrower has no assets; or
    (B) 30 days after the holder receives a notice from the court 
stating that a chapter 7 no-asset case has been converted to an asset 
case.
    (ii) A guaranty agency that is a state guaranty agency, and on that 
basis may assert immunity from suit in bankruptcy court, and that does 
not assign any loans affected by a bankruptcy filing to another 
guaranty agency--
    (A) Is not required to file a proof of claim on a loan already held 
by the guaranty agency; and
    (B) May direct lenders not to file proofs of claim on loans 
guaranteed by that agency.
* * * * *
    (g) * * *
    (1) * * *
    (i) The original or a true and exact copy of the promissory note.
* * * * *
    (h) * * *
    (1) * * *
    (i) The guaranty agency shall review a death, disability, 
bankruptcy, closed school, or false certification claim promptly and 
shall pay the lender on an approved claim the amount of loss in 
accordance with paragraphs (h)(2) and (h)(3) of this section--
    (A) Not later than 45 days after the claim was filed by the lender 
for death and bankruptcy claims; and
    (B) Not later than 90 days after the claim was filed by the lender 
for disability, closed school, or false certification claims.
* * * * *
    (3) * * *
    (iii) During the period required by the guaranty agency to approve 
the claim and to authorize payment or to return the claim to the lender 
for additional documentation not to exceed--
    (A) 45 days for death or bankruptcy claims; or
    (B) 90 days for disability, closed school, or false certification 
claims.
* * * * *
    27. Section 682.405 is amended by:
    A. Adding the words ``, except for loans for which a judgment has 
been obtained,'' after ``defaulted loans'' in paragraph (a)(1).
    B. Removing paragraph (a)(4).
    C. Revising the fifth sentence in paragraph (b)(1).
    The revision reads as follows:


Sec. 682.405  Loan rehabilitation agreement.

* * * * *
    (b) * * *
    (1) * * * Voluntary payments are those made directly by the 
borrower, and do not include payments obtained by Federal offset, 
garnishment, income or asset execution, or after a judgment has been 
entered on a loan. * * *
* * * * *
    28. Section 682.414 is amended by revising paragraph (a)(5)(ii) to 
read as follows:


Sec. 682.414  Records, reports, and inspection requirements for 
guaranty agency programs.

    (a) * * *
    (5) * * *
    (ii) If a promissory note was signed electronically, the guaranty 
agency or lender must store it in accordance with 34 CFR 
668.24(d)(3)(i) through (iv).
* * * * *
    29. Section 682.604 is amended by:
    A. Revising paragraph (f)(1).
    B. Revising the introductory text of paragraph (f)(2).
    C. Revising paragraph (f)(2)(iii).
    D. In paragraph (f)(2)(iv), removing the period and adding, in its 
place, ``; and''.
    E. Adding a new paragraph (f)(2)(v).
    F. Revising paragraph (f)(3).
    G. Revising paragraph (g)(1).
    H. Revising paragraph (g)(2).
    I. Revising paragraph (g)(3).
    The revisions and addition read as follows:


Sec. 682.604  Processing the borrower's loan proceeds and counseling 
borrowers.

* * * * *
    (f) * * *
    (1) A school must ensure that initial counseling is conducted with 
each Stafford loan borrower either in person, by audiovisual 
presentation, or by interactive electronic means prior to its release 
of the first disbursement, unless the student borrower has received a 
prior Federal Stafford, Federal SLS, or Direct subsidized or 
unsubsidized loan. A school must ensure that an individual with 
expertise in the title IV programs is reasonably available shortly 
after the counseling to answer the student borrower's questions 
regarding those programs. As an alternative, in the case of a student 
borrower enrolled in a correspondence program or a student borrower 
enrolled in a study-abroad program that the home institution approves 
for credit, the counseling may be provided through written materials, 
prior to releasing those loan proceeds.
    (2) The initial counseling must--
* * * * *
    (iii) Describe the likely consequences of default, including 
adverse credit reports, Federal offset, and litigation;
* * * * *
    (v) Inform the student borrower of sample monthly repayment amounts 
based on a range of student levels of indebtedness or on the average 
indebtedness of Stafford loan borrowers at the same school.
    (3) If initial counseling is conducted through interactive 
electronic means, a school must take reasonable steps to ensure that 
each student borrower receives the counseling materials, and 
participates in and completes the initial counseling.
* * * * *
    (g) * * *
    (1) A school must ensure that exit counseling is conducted with 
each Stafford loan borrower either in person, by audiovisual 
presentation, or by interactive electronic means. In each case, the 
school must ensure that this counseling is conducted shortly before the 
student borrower ceases at least half-time study at the school, and 
that an individual with expertise in the title IV programs is 
reasonably available shortly after the counseling to answer the student 
borrower's questions. As an alternative, in the case of a student 
borrower enrolled in a correspondence program or a study-abroad program 
that the home institution approves for credit, written counseling 
materials may be provided by mail within 30 days after the student 
borrower completes the program. If a student borrower withdraws from 
school without the school's prior knowledge or fails to complete an 
exit counseling session as required, the school must ensure that exit 
counseling is provided through either interactive electronic means or 
by mailing written counseling materials to the student borrower at the 
student borrower's last known address within 30 days after learning 
that the student borrower has withdrawn from school or failed to 
complete the exit counseling as required.
    (2) The exit counseling must--
    (i) Inform the student borrower of the average anticipated monthly 
repayment amount based on the student borrower's indebtedness or on the 
average indebtedness of student borrowers who

[[Page 51055]]

have obtained Stafford or SLS loans for attendance at the same school 
or in the same program of study at the same school;
    (ii) Review for the student borrower available repayment options, 
including standard, graduated, extended, and income-sensitive repayment 
plans and loan consolidation;
    (iii) Suggest to the student borrower debt-management strategies 
that would facilitate repayment;
    (iv) Include the matters described in paragraph (f)(2) of this 
section;
    (v) Review for the student borrower the conditions under which the 
student borrower may defer or forbear repayment or obtain a full or 
partial discharge of a loan;
    (vi) Require the student borrower to provide current information 
concerning name, address, social security number, references, and 
driver's license number and State of issuance, as well as the student 
borrower's expected permanent address, the address of the student 
borrower's next of kin, and the name and address of the student 
borrower's expected employer (if known). The school must ensure that 
this information is provided to the guaranty agency or agencies listed 
in the student borrower's records within 60 days after the student 
borrower provides the information;
    (vii) Review for the student borrower information on the 
availability of the Student Loan Ombudsman's office; and
    (viii) Inform the student borrower of the availability of title IV 
loan information in the National Student Loan Data System (NSLDS).
    (3) If exit counseling is conducted by electronic interactive 
means, the school must take reasonable steps to ensure that each 
student borrower receives the counseling materials, and participates in 
and completes the counseling.
* * * * *

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

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

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

    31. Section 685.102(b) is amended by revising the definition of 
``Master Promissory Note (MPN)'' to read as follows:


Sec. 685.102  Definitions.

* * * * *
    (b) * * *
    Master Promissory Note (MPN): (1) A promissory note under which the 
borrower may receive loans for a single academic year or multiple 
academic years.
    (2) For MPNs processed by the Secretary before July 1, 2003, loans 
may no longer be made under an MPN after the earliest of--
    (i) The date the Secretary or the school receives the borrower's 
written notice that no further loans may be disbursed;
    (ii) One year after the date of the borrower's first anticipated 
disbursement if no disbursement is made during that twelve-month 
period; or
    (iii) Ten years after the date of the first anticipated 
disbursement, except that a remaining portion of a loan may be 
disbursed after this date.
    (3) For MPNs processed by the Secretary on or after July 1, 2003, 
loans may no longer be made under an MPN after the earliest of--
    (i) The date the Secretary or the school receives the borrower's 
written notice that no further loans may be disbursed;
    (ii) One year after the date the borrower signed the MPN or the 
date the Secretary receives the MPN, if no disbursements are made under 
that
    MPN; or
    (iii) Ten years after the date the borrower signed the MPN or the 
date the Secretary receives the MPN, except that a remaining portion of 
a loan may be disbursed after this date.
* * * * *
    32. Section 685.203 is amended:
    A. By adding new paragraphs (a)(8) and (a)(9).
    B. By adding new paragraphs (c)(2)(viii) and (c)(2)(ix).
    The additions read as follows:


Sec. 685.203  Loan limits.

    (a) * * *
    (8) Except as provided in paragraph (a)(4) of this section, an 
undergraduate student who is enrolled in a program that is one academic 
year or less in length may not borrow an amount for any academic year 
of study that exceeds the amounts in paragraph (a)(1) of this section.
    (9) Except as provided in paragraph (a)(4) of this section--
    (i) An undergraduate student who is enrolled in a program that is 
more than one academic year in length and who has not successfully 
completed the first year of that program may not borrow an amount for 
any academic year of study that exceeds the amounts in paragraph (a)(1) 
of this section.
    (ii) An undergraduate student who is enrolled in a program that is 
more than one academic year in length and who has successfully 
completed the first year of that program, but has not successfully 
completed the second year of the program, may not borrow an amount for 
any academic year of study that exceeds the amounts in paragraph (a)(2) 
of this section.
* * * * *
    (c) * * *
    (2) * * *
    (viii) Except as provided in paragraph (c)(2)(iv) of this section, 
an undergraduate student who is enrolled in a program that is one 
academic year or less in length may not borrow an amount for any 
academic year of study that exceeds the amounts in paragraph (c)(2)(i) 
of this section.
    (ix) Except as provided in paragraph (c)(2)(iv) of this section--
    (A) An undergraduate student who is enrolled in a program that is 
more than one academic year in length and who has not successfully 
completed the first year of that program may not borrow an amount for 
any academic year of study that exceeds the amounts in paragraph 
(c)(2)(i) of this section.
    (B) An undergraduate student who is enrolled in a program that is 
more than one academic year in length and who has successfully 
completed the first year of that program, but has not successfully 
completed the second year of the program, may not borrow an amount for 
any academic year of study that exceeds the amounts in paragraph 
(c)(2)(ii) of this section.
* * * * *


Sec. 685.211  [Amended]

    33. Section 685.211(f) is amended by adding, in the first sentence 
after the paragraph heading, ``, except for a loan on which a judgment 
has been obtained,'' after ``Loan''.
    34. Section 685.212(a) is amended by adding a new paragraph (3) to 
read as follows:


Sec. 685.212  Discharge of a loan obligation.

    (a) * * *
    (3) In the case of a Direct PLUS Consolidation Loan, the Secretary 
discharges the portion of the outstanding balance of the consolidation 
loan attributable to any Direct PLUS Loan or Federal PLUS Loan that was 
obtained on behalf of a student who dies and that was repaid by the 
consolidation loan.
* * * * *
    35. Section 685.220(l)(3) is revised to read as follows:


Sec. 685.220  Consolidation.

* * * * *
    (1) * * *
    (3) Discharge. (i) If a borrower dies and the Secretary receives 
the documentation described in Sec. 685.212(a), the Secretary 
discharges

[[Page 51056]]

the portion of the outstanding balance of the consolidation loan 
attributable to any of that borrower's loans that were repaid by the 
consolidation loan.
    (ii) If a borrower meets the requirements for total and permanent 
disability discharge under Sec. 685.212(b), the Secretary discharges 
the portion of the outstanding balance of the consolidation loan 
attributable to any of that borrower's loans that were repaid by the 
consolidation loan.
    (iii) If a borrower meets the requirements for discharge under 
Sec. 685.212(d), (e), or (f) on a loan that was consolidated into a 
joint Direct Consolidation Loan, the Secretary discharges the portion 
of the consolidation loan equal to the amount of the loan that would be 
eligible for discharge under the provisions of Sec. 685.212(d), (e), or 
(f) as applicable, and that was repaid by the consolidation loan.
    (iv) If a borrower meets the requirements for loan forgiveness 
under Sec. 685.212(h) on a loan that was consolidated into a joint 
Direct Consolidation Loan, the Secretary repays the portion of the 
outstanding balance of the consolidation loan attributable to the loan 
that would be eligible for forgiveness under the provisions of 
Sec. 685.212(h), and that was repaid by the consolidation loan.
    36. Section 685.304 is amended:
    A. By revising paragraphs (a)(1), (a)(2), (a)(3), and (a)(5).
    B. In paragraph (b)(1), by removing ``conduct'' and adding, in its 
place, ``ensure that''; by adding ``is conducted'' after 
``counseling''; and by adding ``Loan'' after ``Subsidized''.
    C. In paragraph (b)(2), by adding, in the first sentence, ``exit'' 
after ``The''; by removing, in the second sentence, ``knowledge of'' 
and adding, in its place, ``expertise in''; by removing, in the last 
sentence, ``the school may provide''; and by adding, in the last 
sentence, ``may be provided'' after the second occurrence of 
``borrower''.
    D. In paragraph (b)(3), by removing ``school must provide''; and by 
adding ``must be provided'' after the second occurrence of 
``counseling''.
    E. By revising paragraph (b)(4).
    F. By revising paragraph (b)(5).
    G. By redesignating paragraph (b)(6) as (b)(7).
    H. By adding a new paragraph (b)(6).
    The revisions and addition read as follows:


Sec. 685.304  Counseling borrowers.

    (a) * * * (1) Except as provided in paragraph (a)(4) of this 
section, a school must ensure that initial counseling is conducted with 
each Direct Subsidized Loan or Direct Unsubsidized Loan borrower prior 
to making the first disbursement of the proceeds of a loan to a student 
borrower unless the student borrower has received a prior Direct 
Subsidized, Direct Unsubsidized, Federal Stafford, or Federal SLS Loan.
    (2) The initial counseling must be in person, by audiovisual 
presentation, or by interactive electronic means. In each case, the 
school must ensure that an individual with expertise in the title IV 
programs is reasonably available shortly after the counseling to answer 
the student borrower's questions. As an alternative, in the case of a 
student borrower enrolled in a correspondence program or a study-abroad 
program approved for credit at the home institution, the student 
borrower may be provided with written counseling materials before the 
loan proceeds are disbursed.
    (3) The initial counseling must--
    (i) Explain the use of a Master Promissory Note (MPN);
    (ii) Emphasize to the borrower the seriousness and importance of 
the repayment obligation the student borrower is assuming;
    (iii) Describe the likely consequences of default, including 
adverse credit reports, garnishment of wages, Federal offset, and 
litigation;
    (iv) Inform the student borrower of sample monthly repayment 
amounts based on a range of student levels of indebtedness or on the 
average indebtedness of Direct Subsidized Loan and Direct Unsubsidized 
Loan borrowers at the same school;
    (v) Emphasize that the student borrower is obligated to repay the 
full amount of the loan even if the student borrower does not complete 
the program, is unable to obtain employment upon completion, or is 
otherwise dissatisfied with or does not receive the educational or 
other services that the student borrower purchased from the school.
* * * * *
    (5) If initial counseling is conducted through interactive 
electronic means, a school must take reasonable steps to ensure that 
each student borrower receives the counseling materials, and 
participates in and completes the initial counseling.
* * * * *
    (b) * * *
    (4) The exit counseling must--
    (i) Inform the student borrower of the average anticipated monthly 
repayment amount based on the student borrower's indebtedness or on the 
average indebtedness of Direct Subsidized Loan or Direct Unsubsidized 
Loan borrowers at the same school or in the same program of study at 
the same school;
    (ii) Review for the student borrower available repayment options 
including the standard repayment, extended repayment, graduated 
repayment, and income contingent repayment plans, and loan 
consolidation;
    (iii) Suggest to the student borrower debt-management strategies 
that would facilitate repayment;
    (iv) Explain to the student borrower how to contact the party 
servicing the student borrower's Direct Loans;
    (v) Meet the requirements described in paragraphs (a)(3)(i), (ii), 
(iii), and (v) of this section;
    (vi) Review for the student borrower the conditions under which the 
student borrower may defer or forbear repayment or obtain a full or 
partial discharge of a loan;
    (vii) Review for the student borrower information on the 
availability of the Department's Student Loan Ombudsman's office;
    (viii) Inform the student borrower of the availability of title IV 
loan information in the National Student Loan Data System (NSLDS); and
    (ix) Require the student borrower to provide current information 
concerning name, address, social security number, references, and 
driver's license number and State of issuance, as well as the student 
borrower's expected permanent address, the address of the student 
borrower's next of kin, and the name and address of the student 
borrower's expected employer (if known).
    (5) The school must ensure that the information required in 
paragraph (b)(4)(ix) of this section is provided to the Secretary 
within 60 days after the student borrower provides the information.
    (6) If exit counseling is conducted through interactive electronic 
means, a school must take reasonable steps to ensure that each student 
borrower receives the counseling materials, and participates in and 
completes the exit counseling.
* * * * *
[FR Doc. 02-19521 Filed 8-5-02; 8:45 am]
BILLING CODE 4000-01-U