[Federal Register Volume 67, Number 212 (Friday, November 1, 2002)]
[Rules and Regulations]
[Pages 67048-67083]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-27627]



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Part III





Department of Education





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34 CFR Parts 600, 668, et al.



Federal Student Aid Programs; Final Rule

  Federal Register / Vol. 67, No. 212 / Friday, November 1, 2002 / 
Rules and Regulations  

[[Page 67048]]


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DEPARTMENT OF EDUCATION

34 CFR Parts 600, 668, 673, 674, 675, 682, 685, 690, and 694

RIN 1845-AA23


Federal Student Aid Programs

AGENCY: Office of Postsecondary Education, Department of Education.

ACTION: Final regulations.

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SUMMARY: The Secretary amends the Institutional Eligibility Under the 
Higher Education Act of 1965, as Amended; Student Assistance General 
Provisions; General Provisions for the Federal Perkins Loan Program, 
Federal Work-Study Program, and Federal Supplemental Educational 
Opportunity Grant Program; Federal Perkins Loan (Perkins Loan) Program; 
Federal Work-Study (FWS) Programs; Federal Family Education Loan (FFEL) 
Program; William D. Ford Federal Direct Loan (Direct Loan) Program; 
Federal Pell Grant Program; and Gaining Early Awareness and Readiness 
for Undergraduate Programs (GEAR UP) regulations. The Secretary is 
amending these regulations to reduce administrative burden for program 
participants, and to provide them with greater flexibility to serve 
students and borrowers.

DATES: Effective Date: Except for the amendment to section 694.10, 
these regulations are effective July 1, 2003. The amendment to section 
694.10 becomes effective December 2, 2002.
    Implementation Date: The Secretary has determined, in accordance 
with section 482(c)(2)(A) of the Higher Education Act of 1965, as 
amended (HEA) (20 U.S.C. 1089(c)(2)(A)), that institutions, lenders, 
guaranty agencies, and state grant agencies that administer Title IV, 
HEA programs may, at their discretion, choose to implement all of the 
provisions of these final rules on or after November 1, 2002. For 
further information, see ``Implementation Date of These Regulations'' 
under the SUPPLEMENTARY INFORMATION section of this preamble.

FOR FURTHER INFORMATION CONTACT: For provisions related to the Title IV 
loan programs (Perkins Loan Program, FFEL Program, and Direct Loan 
Program): Ms. Gail McLarnon, U.S. Department of Education, 1990 K 
Street, NW, (8th Floor) Washington, DC 20006, Telephone: (202) 219-7048 
or via the Internet: [email protected].
    For other provisions: Ms. Wendy Macias, U.S. Department of 
Education, 1990 K Street, NW, (8th Floor), Washington, DC, 20006, 
Telephone: (202) 502-7526 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: On August 6, 2002, and August 8, 2002, the 
Secretary published in the Federal Register two separate notices of 
proposed rulemaking (NPRMs) (67 FR 51036 and 67 FR 51718, respectively) 
for the Federal student assistance programs authorized by Title IV of 
the HEA. This document contains the final regulations for the rules 
that were proposed in both of these NPRMs.
    The August 6, 2002 NPRM included proposed rules for the Student 
Assistance General Provisions, Perkins Loan Program, FFEL Program, and 
Direct Loan Program regulations.
    In the preamble to the August 6, 2002 NPRM, the Secretary discussed 
on pages 51037 through 51046 the major changes proposed to improve the 
Federal student assistance programs. These included the following:
    [sbull] Amending Sec.  668.35 to state the conditions under which a 
borrower who is subject to a judgment obtained on a Title IV loan may 
regain eligibility for additional Title IV student financial 
assistance. [page 51037]
    [sbull] Amending Sec. Sec.  674.39, 682.405, and 685.211 to exclude 
from rehabilitation defaulted Perkins Loan, FFEL, and Direct Loan 
program loans on which a judgment has been obtained. [page 51037]
    [sbull] Amending Sec. Sec.  674.19, 682.402, and 682.414 to clarify 
the record retention requirements for promissory notes under the 
Perkins Loan and FFEL programs. [page 51038]
    [sbull] Amending Sec. Sec.  674.34, 682.210, and, by reference, 
685.204, to modify the way loan holders in the Perkins Loan, FFEL, and 
Direct Loan programs calculate Federal postsecondary educational loan 
debt for purposes of determining a borrower's eligibility for an 
economic hardship deferment. [page 51039]
    [sbull] Amending Sec. Sec.  674.42, 682.604, and 685.304 to clarify 
that entities other than the institution may provide initial and exit 
loan counseling on the institution's behalf and to provide consistency 
in the information that must be disclosed to borrowers. [page 51039]
    [sbull] Amending Sec. Sec.  682.204 and 685.203 to clarify loan 
limits for separate stand-alone programs in the FFEL and Direct Loan 
programs. [page 51039]
    [sbull] Amending Sec.  682.210 and, by reference, Sec.  685.204 to 
make it easier for borrowers in the FFEL and Direct Loan programs to 
certify eligibility for an unemployment deferment. [page 51040]
    [sbull] Amending Sec. Sec.  682.402, 685.212, and 685.220 to expand 
the instances where FFEL and Direct Loan program borrowers can have a 
portion of a consolidation loan discharged. [page 51040]
    [sbull] Amending Sec. Sec.  674.2 and 674.16 to provide for the use 
of a Master Promissory Note (MPN) in the Perkins Loan Program. [page 
51041]
    [sbull] Amending Sec. Sec.  674.9 and 674.47 to modify the low-
balance write-off options for institutions that participate in the 
Perkins Loan Program. [page 51042]
    [sbull] Amending Sec.  674.17 to clarify that when an institution 
participating in the Perkins Loan Program closes, or otherwise leaves 
the program, that institution must assign its outstanding loans to the 
Secretary and liquidate its Perkins Loan fund according to the 
Secretary's instructions. [page 51042]
    [sbull] Amending Sec. Sec.  674.33 and 674.42 to clarify the 
conditions under which an institution must coordinate minimum repayment 
options when a Perkins Loan borrower has received loans from more than 
one institution. [page 51042]
    [sbull] Amending Sec.  674.42 to provide flexibility to 
institutions that participate in the Perkins Loan Program in providing 
copies of promissory notes to borrowers. [page 51042]
    [sbull] Amending Sec.  674.43 to provide institutions increased 
flexibility in assessing late fees in the Perkins Loan Program. [page 
51043]
    [sbull] Amending Sec.  674.45 to clarify when an institution that 
participates in the Perkins Loan Program must report a defaulted 
account to a national credit bureau. [page 51043]
    [sbull] Amending Sec.  674.46 to simplify the requirements for an 
institution that participates in the Perkins Loan Program to determine 
if it should initiate litigation against a defaulted borrower. [page 
51043]
    [sbull] Amending Sec.  674.50 to provide consistency within the 
regulations for the assignment to the Secretary of Perkins loans. [page 
51043]
    [sbull] Amending Sec.  682.200 to revise the definition of lender 
to clarify the treatment of loans held by trustee lenders. [page 51044]
    [sbull] Amending Sec.  682.209 to allow an FFEL lender to establish 
a borrower's first payment due date up to 60 days after the borrower 
enters repayment, to provide increased flexibility to FFEL

[[Page 67049]]

lenders when they receive updates to a borrower's enrollment status 
from an institution, and to provide a simplified method for a borrower 
in the FFEL Program to ask a lender to increase the length of the 
repayment period. [page 51044]
    [sbull] Amending Sec.  682.211 to simplify the process by which a 
lender and a borrower in the FFEL Program may agree to a discretionary 
forbearance. [page 51044]
    [sbull] Amending Sec.  682.402 to clarify that a State guaranty 
agency is not required to file a proof of claim in a bankruptcy filing 
and may instruct lenders not to file a proof of claim if filing a proof 
of claim would waive the State's sovereign immunity. [page 51045]
    [sbull] Amending Sec.  682.402 to provide that a guaranty agency 
may take up to 90 days to review a total and permanent disability 
discharge claim under the FFEL Program. [page 51045]
    [sbull] Amending Sec. Sec.  668.183 and 668.193 to revise, for 
purposes of calculating an institution's cohort default rate, the 
definition of a defaulted loan. [page 51045]
    [sbull] Amending Sec.  685.102 to modify the provisions governing 
the expiration of a Master Promissory Note in the Direct Loan Program. 
[page 51046]
    The August 8, 2002 NPRM included proposed rules for the 
Institutional Eligibility Under the Higher Education Act of 1965, as 
Amended; Student Assistance General Provisions; General Provisions for 
the Federal Perkins Loan Program, Federal Work-Study Program, and 
Federal Supplemental Educational Opportunity Grant Program; FWS 
Programs; FFEL Program; Direct Loan Program; Federal Pell Grant 
Program; and GEAR UP regulations.
    In the preamble to the August 8, 2002 NPRM, the Secretary discussed 
on pages 51720 through 51733 the major changes proposed to improve the 
Federal student assistance programs. These included the following:
    [sbull] Amending Sec.  600.8 to reflect that the statutory 
provision that a branch campus must be in existence for two years 
before seeking to be designated as a main campus applies only to 
proprietary institutions of higher education and postsecondary 
vocational institutions. [page 51720]
    [sbull] Amending Sec. Sec.  600.21, 600.31, and 668.174 to provide 
clarification and additional flexibility to the change of ownership 
provisions by expanding the definition of family members and broadening 
the transactions that are not considered to be a change of ownership. 
[page 51720]
    [sbull] Amending Sec. Sec.  668.2, 668.3, and 668.8 to remove the 
so-called ``12-hour'' rule that defined a week of instructional time 
for credit hour nonterm and nonstandard term educational programs. 
[page 51720]
    [sbull] Amending Sec. Sec.  668.4, 682.603, 685.301, and 690.75 to 
revise the definition of payment period for credit hour nonterm 
educational programs and to clarify the definition of a payment period 
when a student withdraws and then returns to school. [page 51721]
    [sbull] Amending Sec.  668.14 to clarify the statutory program 
participation agreement provision concerning incentive payment 
restrictions. [page 51722]
    [sbull] Amending Sec.  668.22 to clarify when an institution is 
considered to be one that is required to take attendance for purposes 
of determining a student's last date of attendance. [page 51725]
    [sbull] Amending Sec.  668.22 to simplify the definition of a leave 
of absence and to allow for multiple leaves of absence not to exceed 
180 days in any 12-month period. [page 51726]
    [sbull] Amending Sec. Sec.  668.35, 673.5, and 690.79 to provide 
consistent requirements for handling Title IV overpayments, including a 
provision under which, in most cases, a student who owes an overpayment 
of a Title IV grant or loan of less than $25 does not lose eligibility 
for additional Title IV aid. [page 51726]
    [sbull] Amending Sec. Sec.  668.32 and 668.151 to eliminate the 
provision that limits the duration of a passing score on an approved 
ability-to-benefit (ATB) test to 12 months before a student initially 
receives Title IV aid. [page 51728]
    [sbull] Amending Sec.  668.164 to clarify when an institution is 
required to make a late disbursement and to provide increased 
flexibility for an institution to make a late disbursement to a 
student. [page 51728]
    [sbull] Amending Sec.  668.165 to eliminate the requirement that an 
institution must confirm the receipt of a notice sent electronically to 
a student or parent. [page 51730]
    [sbull] Amending Sec. Sec.  668.171 and 668.173 to establish clear 
requirements for returning unearned Title IV program funds and the 
conditions under which an institution must submit a letter of credit if 
it does not return those funds in a timely manner. [page 51730]
    [sbull] Amending Sec. Sec.  675.2 and 675.21 to provide greater 
flexibility for the employment of FWS students by proprietary 
institutions. [page 51731]
    [sbull] Amending Sec.  694.10 to remove language in the GEAR UP 
regulations related to the packaging of GEAR UP scholarships by 
institutions. [page 51732]
    We strongly encourage the reader to refer to the preambles of both 
the August 6, 2002, and August 8, 2002, NPRMs for a full discussion of 
the topics proposed in those NPRMs and finalized in this document.
    These final regulations contain a few changes from the NPRMs. We 
fully explain these changes in the Analysis of Comments and Changes 
elsewhere in this preamble.

Implementation Date of These Regulations

    Section 482(c) of the HEA requires that regulations affecting 
programs under Title IV of the HEA be published in final form by 
November 1 prior to the start of the award year (July 1) to which they 
apply. However, that section also permits the Secretary to designate 
any regulation as one that an entity subject to the regulation may 
choose to implement earlier and the conditions under which the entity 
may implement the provisions early.

    Note: Section 482 does not apply to the GEAR UP program (34 CFR 
part 694).

    In response to our request in the NPRMs for suggestions on which 
provisions the Secretary should designate for early implementation, 
most of the commenters supported making all of the provisions available 
for early implementation at the discretion of the regulated entity. 
Therefore, consistent with the intent of this regulatory effort to 
reduce burden and to provide greater flexibility, the Secretary is 
using the authority granted him under section 482(c) to designate all 
of the regulations subject to that section included in this document 
for early implementation at the discretion of each institution, lender, 
guaranty agency, or state agency, as appropriate.
    In accordance with the authority provided by section 482(c) of the 
HEA, the Secretary has determined that for some provisions, there are 
conditions that must be met in order for an institution, lender, 
guaranty agency, or state agency, as appropriate, to implement those 
provisions early. The conditions are--
    Provision: Sections 674.34 and 682.210 that modify the formula used 
by Title IV loan holders when calculating a borrower's eligibility for 
an economic hardship deferment.
    Condition: Until the Secretary has announced the approval of 
revised deferment forms, loan holders must provide alternative methods 
by which borrowers provide them with the loan detail information needed 
to perform the calculation using the modified formula.

[[Page 67050]]

    Provision: Section 682.210 that modifies the information that a 
borrower must provide to a loan holder when requesting an unemployment 
deferment.
    Condition: Until the Secretary has announced the approval of a 
revised deferment form, loan holders must provide alternative methods 
by which borrowers certify their eligibility for an unemployment 
deferment under the revised rules.
    Provision: Sections 674.2 and 674.16 that provide for a Master 
Promissory Note (MPN) in the Federal Perkins Loan Program.
    Condition: Implementation cannot occur until the Secretary has 
announced the approval of the Perkins MPN.
    Provision: Section 668.22 that clarifies when an institution is 
considered to be one that is required to take attendance.
    Condition: An institution must apply these provisions to all 
students who withdraw on or after the institution's implementation of 
these regulations.
    Provision: Section 668.22 that provides increased flexibility in 
the granting of leaves of absence under the Return of Title IV Funds 
regulations.
    Condition: An institution must apply these provisions to all 
students who are granted a leave of absence on or after the 
institution's implementation of these regulations.

Analysis of Comments and Changes

    The regulations in this document were developed through the use of 
negotiated rulemaking. Section 492 of the HEA requires that, before 
publishing any proposed regulations to implement programs under Title 
IV of the HEA, the Secretary obtain public involvement in the 
development of the proposed regulations. After obtaining advice and 
recommendations, the Secretary must conduct a negotiated rulemaking 
process to develop the proposed regulations. All proposed regulations 
must conform to agreements resulting from the negotiated rulemaking 
process unless the Secretary reopens that process or explains any 
departure from the agreements to the negotiated rulemaking 
participants.
    These regulations were published in proposed form on August 6, 
2002, and on August 8, 2002, following the completion of the negotiated 
rulemaking process. The Secretary invited comments on the proposed 
regulations by October 7 for both NPRMs. We received 32 comments on the 
August 6, 2002 NPRM and 55 comments on the August 8, 2002 NPRM. In 
addition to their general support of our efforts to simplify the 
regulations and to reduce regulatory burden on students, borrowers, 
institutions, lenders, and guaranty agencies, the overwhelming majority 
of the commenters on both NPRMs also expressed support for the 
individual proposals included in the NPRMs.
    We also received several comments on changes in the negotiated 
rulemaking process. Most of the commenters expressed appreciation to 
the Department of Education (Department) for the new scope and 
structure of the negotiated rulemaking process. Some commenters, 
however, felt that the Department should have included representatives 
of certain other organizations in the negotiations, but did not 
question the constituencies identified. Other commenters expressed the 
view that the Department should have excluded--and should exclude from 
future negotiations--individuals or groups that failed to negotiate in 
good faith and blocked consensus. We note that all organizations had an 
opportunity to submit institutional nominees and to form coalitions 
within the constituency groups identified and all nominations were 
carefully considered to achieve a balanced product. In creating the 
negotiating committees, the Department encouraged nominations of 
individuals from coalitions of individuals and organizations 
representing the constituencies. Moreover, the Department encouraged 
nominations of individuals who are actively involved in administering 
the Federal student financial assistance programs or whose interests 
are significantly affected by the regulations. We, and most of the 
commenters, believe that the Department was successful in assuring that 
individuals directly involved in administering the Federal student 
financial assistance programs appropriately represented the 
constituencies. In structuring future negotiations, however, the 
Department will take the comments received into consideration.
    An analysis of the comments and of the changes in the regulations 
since publication of the NPRMs follows. We group major issues according 
to subject, with appropriate sections of the regulations referenced in 
parentheses. Generally, we do not address technical and other minor 
changes--and suggested changes the law does not authorize the Secretary 
to make.

Change of Ownership (Sections 600.21, 600.31, and 668.174)

    Comments: One commenter requested that the preamble discussion 
clarify that a transfer by an owner to a family member does not require 
the family member acquiring the institution to have previously worked 
there.
    Discussion: The commenter is correct that the exception does not 
require a family member of the owner to have worked at the institution.
    Changes: None.

Definition of Academic Year--``12-Hour Rule'' (Sections 668.2, 668.3, 
and 668.8)

    Comments: Most of the comments we received supported the proposed 
change that would eliminate the so-called ``12-hour'' rule for 
determining a week of instructional time for credit hour nonterm and 
nonstandard term educational programs. Most commenters were very 
supportive of the proposal to use a single standard for all educational 
programs by extending the current ``one-day'' rule used for term-based 
and clock hour programs to credit hour nonterm and nonstandard term 
programs. One commenter specifically noted that the 12-hour rule acted 
as an impediment to increasing access to higher education. Others noted 
that the 12-hour rule was at odds with the educational advantages that 
flexible program calendars and formats, including web-based programs, 
provide to working adults. Two commenters noted that the Web-based 
Education Commission, chartered by the Higher Education Amendments of 
1998, called for the elimination of the 12-hour rule. Another commenter 
noted that the House of Representatives' Committee on Education and the 
Workforce called the 12-hour rule ``outdated and obsolete.'' Finally, a 
commenter, in support of the proposed change, agreed that the 12-hour 
rule sometimes results in disparities in the amount of Title IV, HEA 
program funding that students receive for the same amount of academic 
credit.
    Discussion: We appreciate the commenters' support.
    Changes: None.
    Comments: A number of commenters expressed concern with the 
proposal or requested that we not proceed with this change to the 
regulations. None of these commenters suggested alternatives or 
modifications to the proposal that was included in the NPRM.
    Several commenters suggested that the issue should await the 
reauthorization of the HEA, so that Congress could consider it in 
conjunction with other issues related to distance and other 
nontraditional modes of instruction. One commenter noted that an 
independent study of the use of the credit hour in postsecondary 
education was being undertaken and that the results of that study could 
help inform Congress on this and related issues. One commenter 
specifically

[[Page 67051]]

stated that Congress should address issues of cost of attendance and 
disbursement schedules for students enrolled in nontraditional 
programs.
    Discussion: We created the one-day rule and the 12-hour rule to 
implement the statutory condition that an academic year consist of at 
least 30 weeks of instructional time. We believe that the 12-hour rule 
had many unintended consequences and believe that one single standard 
is preferable for the reasons we stated in the preamble to the August 
8, 2002 NPRM. Since the original establishment of the rule was a 
regulatory action, we believe that it does not require any legislative 
action. Therefore, we see no need to wait for Congress to deal with 
this issue in the next reauthorization of the HEA. This change will 
allow Title IV, HEA program eligibility to be determined on the same 
basis regardless of how a student's academic program is structured. 
Thus it provides for consistent and equitable treatment for individuals 
seeking a postsecondary education. We note that nothing prevents 
Congress from taking further action on this or any other issue. 
Finally, we do not see the change to the one-day rule from the 12-hour 
rule as having any effect on how Congress should address issues of cost 
of attendance and disbursements in nontraditional programs.
    Changes: None.
    Comments: One commenter suggested that changing from the 12-hour 
rule to the one-day rule would add a new category of eligible programs, 
and therefore a new group of eligible students who would compete with 
students in more traditional programs for scarce Title IV grant 
funding.
    Discussion: We disagree with the commenter. Programs that 
previously were covered by the 12-hour rule were eligible to 
participate in the Title IV, HEA programs. Therefore, we do not believe 
that this change will result in an increased number of students 
receiving Title IV assistance. Under the one-day rule, students 
enrolled in those programs would be able to receive the same amount of 
assistance that students in term-based programs currently do.
    Changes: None.
    Comments: A few commenters disagreed with the proposal to eliminate 
the 12-hour rule, based upon their view that, while not perfect, the 
requirement that a nonterm or nonstandard term academic program include 
at least 12 hours of instruction per week provides some assurance that 
the program provides sufficient educational content to make the 
student's and taxpayer's investment worthwhile. One commenter 
questioned whether educational quality can be measured by time, 
particularly given new technological delivery systems. However, the 
commenter felt that it would be inappropriate to eliminate the 12-hour 
rule at this time because matters of educational quantity/quality need 
further study. One commenter, representing several consumer law 
advocacy organizations, opposed the elimination of the 12-hour rule, 
suggesting that it currently provides a quantitative method to measure 
the quality of an academic program. The commenter also stated that the 
proposed change would encourage some institutions to reduce program 
content without a commensurate reduction in tuition and other charges.
    Discussion: We disagree with the commenter that the 12-hour rule 
provided any assurance that institutions would provide a minimum 
quantity of education to warrant support under the Title IV, HEA 
programs. Hours of regularly scheduled instruction are not the 
exclusive measure of the quantity of education provided in a 
postsecondary educational program. For example, in certain educational 
programs, research papers and projects may make up a considerable 
portion of that program, and the work associated with carrying out 
those papers and projects would not be considered as instructional 
hours under the 12-hour rule or the one-day rule. We believe that the 
one-day rule is adequate for programs offered in traditional terms and 
have no evidence to suggest that it is inadequate for programs offered 
in nonstandard terms and nonterms.
    The 12-hour rule was established to measure educational quantity, 
not educational quality. It was established to implement the statutory 
requirement that an academic year for Title IV, HEA program purposes 
had to contain at least 30 weeks of instructional time, which in turn 
was enacted for the purpose of determining how much Title IV, HEA 
program funds a student could receive. As we noted in the preamble to 
the August 8, 2002 NPRM, we believe that there are adequate safeguards 
in place to ensure program integrity, such as the changes to the 
definition of a payment period made by this final rule, the clock-hour/
credit-hour conversion regulations, and program monitoring by 
accrediting agencies. Finally, we are aware of no evidence that the 
proposed change would encourage some institutions to reduce program 
content.
    Changes: None.
    Comments: One commenter suggested that our statement in the 
preamble to the August 8, 2002 NPRM that the clock-hour/credit-hour 
conversion regulations provide adequate safeguards is questionable 
since those requirements do not apply to programs that are two years or 
longer in length and lead to a degree. The commenter stated the belief 
that the existence of what was perceived to be ``low-content degree 
programs'' offered by for-profit institutions demonstrates that the 
clock-hour/credit-hour conversion is not as valuable as we had stated.
    Discussion: We disagree with the commenter because, based upon our 
experience with the clock/credit hour conversion controversy, the 
problems that needed to be addressed were found in short-term 
vocational programs, not in associate and higher degree programs. 
Moreover, we have no evidence that any institutions have reduced 
educational content in educational programs that lead to associate and 
higher degrees.
    Changes: None.
    Comments: A commenter representing accrediting agencies asked for 
clarification as to whether the change from the 12-hour rule to the 
one-day rule will impose any additional responsibilities on those 
agencies or on the process by which the Secretary recognizes 
accrediting agencies.
    Discussion: No additional regulatory requirements are being placed 
on accrediting agencies as a result of this change.
    Changes: None.
    Comments: Two commenters requested specific clarification as to 
what exactly constituted a day of instruction. One of those commenters 
asked how much time during each day must actually be spent on 
instruction. The other commenter asked specifically how one day would 
be counted for a program offered on-line. That same commenter suggested 
that we make it clear that the one-day rule did not have to be met on a 
week-by-week basis, but could be met on average. That is, the requisite 
number of days must be met over the course of the program.
    Discussion: We do not believe it is appropriate for the Department 
to limit institutional flexibility by establishing a rigid definition 
of how many hours of instructional time must be included in order for a 
day to be considered a day of instruction. We agree with the commenter 
who suggested that the measure should be whether the institution can 
demonstrate that the activities that make up a day of instruction are 
reasonable in both content and time. We also will rely upon the 
determination of the relevant accrediting agency in this regard.
    We disagree with the commenter who suggested that the one-day rule 
did not

[[Page 67052]]

require one day each week but could be met by the program having an 
average of one day per week over the course of the program. The basis 
for the one-day rule is the requirement contained in section 481 of the 
HEA that states that an academic year must contain at least 30 weeks of 
instructional time. The one-day rule simply defines a week of 
instructional time as one that includes at least one day of instruction 
or examinations. The regulations make it clear that a week is a 
consecutive seven-day period. Therefore, a week in which there is not 
at least one day of instruction or examination cannot be counted as one 
of the 30 weeks of instructional time required by the statute. In order 
for a program to meet the 30 weeks of instructional time requirement, 
it must include at least 30 separate weeks in which at least one day of 
instruction or examination occurs.
    Changes: None.

Payment Periods (Sections 668.4, 682.603, 685.301, and 690.75)

    Comments: One commenter was uncertain whether the proposal to 
require a payment period to be made up of both the requisite number 
(usually half) of credit hours in an academic year or program, and the 
requisite number (usually half) of weeks in the academic year or 
program was to be applied to both credit-hour programs with terms and 
credit-hour programs without terms.
    Discussion: The proposal applies only to credit-hour programs 
without terms.
    Changes: None.
    Comments: A number of commenters supported the Department's 
proposal that students who withdraw from an institution during a 
payment period and then return within 180 days to the same program 
remain in the same payment period. But one commenter wondered what 
would happen when the student returns, and thus the resumption of the 
payment period, was in a different award year. The commenter suggested 
that, if some of the funds for the payment period were to be paid from 
a different (new) award year, they should be a percentage of the aid 
that would have been scheduled for that payment period in the new award 
year, equal to the percentage of the original payment period amount 
that was not disbursed or returned from the initial period of 
attendance.
    Discussion: A student who was originally enrolled in a payment 
period that began, and was scheduled to end, in one award year could 
return after the end of that award year (June 30). However, the intent 
of these regulations is that such a student is considered, upon his or 
her return, to be in the same payment period. Therefore, any Title IV 
program funds that will be disbursed to the student should be paid from 
the original award year regardless of whether the resumption of the 
payment period is in a new award year. Generally, the original payment 
for the payment period would have come from the earlier award year and 
any new disbursements would be from that same year. Of course, if the 
original payment period had been a crossover payment period (one that 
was originally scheduled to begin in one award year and end in the 
following award year) and the institution had paid (or planned to pay) 
the student from the second award year, then the resumption of the 
payment period and any required disbursements would remain in the 
second award year.
    Finally, even if the student's absence and subsequent return causes 
more than six months of the recalculated payment period to fall into 
the second award year, we will still consider that the institution's 
original decision to place the payment period in the first award year 
remains valid based on the fact that, at the time of that original 
choice, less than six months of the payment period was scheduled to 
fall into the second award year.
    Changes: None.
    Comments: With regard to the student's withdrawal and subsequent 
return (within 180 days) to the same program, one commenter asked 
whether, if aid had not been disbursed during the original enrollment, 
credits earned for the entire payment period, both those enrolled in 
before the withdrawal and those enrolled in after the return, could be 
included in determining payment eligibility.
    Discussion: The regulation addressing the situation in which a 
student withdraws from a program and then returns to that program 
within 180 days applies only to clock-hour programs and credit-hour 
programs without terms. For those programs, the regulations define a 
payment period in a way that generally requires the clock-hours or 
credit-hours in one payment period to be completed before the next 
payment period begins. Further, students in those payment periods are 
generally paid for one-half of the program or academic year, as 
appropriate, at a time. Thus, regardless of whether the student had 
already been paid for a certain number of clock- or credit-hours before 
the student's withdrawal, upon the student's subsequent return to the 
same program within 180 days, the institution would not be adding hours 
to the payment period, but would simply be keeping the student in the 
same payment period (consisting of the same number of clock- or credit-
hours) he or she was in before withdrawing. Then, upon completion of 
the hours (and weeks for a credit-hour without terms program) in that 
payment period, the student would advance to the next payment period.
    Changes: None.
    Comments: A number of commenters asked how a Return of Title IV 
Funds calculation would be performed if a student withdrew from a 
program during a payment period and returned to that program within 180 
days, and then withdrew a second time during that same payment period.
    Discussion: When a student withdraws (the first time) without 
completing the payment period, a Return of Title IV Funds calculation 
is performed. If the student returns to the program within 180 days of 
his or her initial withdrawal, the student is put back into the same 
payment period he or she withdrew from, and any Title IV funds that the 
student or institution returned to the Title IV programs or to a lender 
for that payment period as a result of the earlier withdrawal are 
restored to the student. If the student then withdraws from the 
institution again during that same payment period, a new Return of 
Title IV Funds calculation, based on the second withdrawal date, would 
be performed using the full payment period and the full amount of Title 
IV aid for the payment period.
    Changes: None.
    Comments: One commenter raised general questions about the way 
payment periods are determined for programs that measure progress in 
credit hours but do not use terms. The commenter suggested that there 
should not be any rigid rules for such programs, but that the 
institution should have flexibility in determining the length and 
timing of a student's payment period based upon the program length and 
a student's enrollment pattern.
    Discussion: The changes proposed in the August 8, 2002 NPRM and 
finalized in this document do not address the entire concept of payment 
periods, but instead only relate to two issues: (1) For nonterm credit 
hour programs, requiring a payment period to include, in addition to 
half the number of credits in the academic year, program, or remainder 
of the program, also half the number of weeks in that period, and (2) 
guidance on the treatment for a student who withdraws from a clock-hour 
or credit-hour nonterm program, and then returns to school.
    Therefore, since a more comprehensive review of payment

[[Page 67053]]

periods was not included in either the negotiated rulemaking process 
that led to the August 8, 2002 NPRM or in the proposal presented in the 
NPRM, we do not believe that it would be appropriate to make additional 
changes to the payment period regulations at this time.
    Changes: None.
    Comments: One commenter asked whether an institution should remove 
costs for the period that the student was out of school in those cases 
where the student withdrew from an institution and returned within 180 
days, and was worried that if that were done the student might not 
qualify for the original loan amount once he returned to the 
institution.
    Discussion: The cost of attendance would be the costs associated 
with the original period before the student withdrew. Once the student 
has withdrawn and then returned to the same program within a 180-day 
period, the regulation states that the student remains in the same 
payment period. The cost of attendance for such a student returning to 
the same program within 180 days must reflect the original educational 
costs associated with the payment period from which the student 
withdrew.
    Changes: None.
    Comments: One commenter suggested that if a student withdraws but 
returns to the institution during the period in which the institution 
is required to return funds under the Return of Title IV Funds 
calculation, the institution would not have to return any funds or 
notify the lender of the enrollment change. In essence, the student 
would be retroactively granted a leave of absence.
    Discussion: If a student returns to the institution before the 
Title IV funds are returned, the institution is not required to return 
the funds. However, Sec.  668.22(j) requires an institution to return 
unearned funds for which it is responsible as soon as possible, but no 
later than 30 days after the date of the institution's determination 
that the student withdrew. Therefore, an institution is expected to 
begin the Return of Title IV Funds process immediately upon its 
determination that a student has withdrawn.
    Changes: None.
    Comments: One commenter stated that it was his understanding that 
students who withdraw and return after 180 days, or transfer to new 
programs within any timeframe, have their payment periods restarted, 
and that this meant that these students would not have to complete the 
credits that they were already paid for before they could receive 
additional student aid payments.
    Discussion: The regulation addresses the determination of payment 
periods for students who have withdrawn and either returned to the same 
program after 180 days, or returned to another program within any 
timeframe. The regulation specifies that students who have withdrawn 
and either returned to the same program after 180 days, or returned to 
another program within any timeframe start a new payment period. 
However, a student's eligibility for additional Title IV funds may be 
subject to a variety of limitations associated with the aid the student 
received during the most recent period of attendance. For example, in 
the Federal Pell Grant Program, a student may never receive more than 
the student's scheduled annual award. In the FFEL Program, there are 
limitations imposed by annual loan limits, the existence of crossover 
loan periods, and overlapping award years.
    Changes: None.
    Comments: A couple of commenters asked for further clarification of 
the payment period provisions as they relate to the Return of Title IV 
Funds provisions and various Title IV program provisions.
    Discussion: We will provide additional clarification on the 
applicability of these changes through appropriate Department 
publications after publication of these final regulations.
    Changes: None.

Program Participation Agreement (Section 668.14)

    Comments: The vast majority of commenters supported the proposal 
that came out of the negotiated rulemaking sessions to establish safe 
harbors that institutions could use to avoid the statutory prohibition 
against making incentive payments to recruiters and other covered 
personnel.
    Discussion: None.
    Changes: None.
    Comments: Some commenters opposed any change to the current 
regulations dealing with incentive compensation. They believed that the 
proposed regulations were not authorized under section 487(a)(20) of 
the HEA, were ambiguous, and were burdensome to institutions.
    Discussion: We disagree with the commenters. With regard to the 
first point, we believe that the regulations lawfully implement section 
487(a)(20) of the HEA. As indicated in the preamble to the proposed 
regulations, the Congress recognized that if given a strictly literal 
interpretation, section 487(a)(20) of the HEA could be interpreted to 
cover almost every compensation arrangement involving a student's 
ultimate admission to a postsecondary institution. As a result, when 
enacting section 487(a)(20) of the HEA in 1992, the conference report 
resolving the different House and Senate versions of the Higher 
Education Amendments of 1992 indicated that the statutory words 
``directly'' and ``indirectly'' in section 487(a)(20) of the HEA did 
not imply that institutions could not base salaries or salary increases 
on merit. Thus, Congress recognized that the scope of section 
487(a)(20) of the HEA had limits, even though that section precluded 
incentive payments based directly or indirectly on success in securing 
enrollments.
    Consistent with this clarification of legislative intent, we based 
the proposed safe harbors on a ``purposive reading'' of section 
487(a)(20) of the HEA. This purposive reading is based upon our view 
that Congress enacted this provision with the purpose of preventing an 
institution from providing incentives to its staff to enroll 
unqualified students.
    In viewing the scope of section 487(a)(20) of the HEA through this 
purposive reading, we determined that various payment arrangements 
constituted legitimate business practices that did not support the 
enrollment of unqualified students and therefore did not fall within 
the scope of section 487(a)(20) of the HEA. Making these determinations 
is within the scope of the Secretary's authority of interpreting the 
statutory provisions he is charged with administering.
    With regard to the commenters' other two points, we agree with the 
vast majority of commenters that, rather than being ambiguous, the safe 
harbors clarify the current law for most institutions by setting forth 
specific payment arrangements that an institution may carry out that 
have been determined not to violate the incentive compensation 
prohibition in section 487(a)(20) of the HEA. Moreover, no burden is 
placed upon an institution that uses a payment arrangement set forth in 
one of the safe harbors.
    Changes: None.
    Comments: The commenters who felt that the regulations were not 
authorized under section 487(a)(20) of the HEA also felt that any 
change to the current regulations would allow unscrupulous institutions 
to engage in the kinds of improper recruiting activities that gave rise 
to section 487(a)(20) of the HEA. They also felt that there was no 
demonstrated need for any change to the current regulations covering 
the

[[Page 67054]]

incentive compensation prohibition, and that any change should be made 
through legislation during the next HEA reauthorization.
    Discussion: We believe that the primary purpose of the regulatory 
safe harbors is to provide guidance to institutions so they may adopt 
compensation arrangements that do not run afoul of the incentive 
compensation prohibition contained in section 487(a)(20) of the HEA. 
The safe harbors are based on comments we received from institutions 
during the FED UP initiative that requested that we provide clearer and 
more detailed guidance regarding this topic, suggestions by 
negotiators, and numerous questions we have received from institutions 
during the last eight years. We believe that institutions need this 
guidance now, and therefore it is neither necessary nor desirable to 
wait to make changes legislatively during the next HEA reauthorization.
    Finally, we do not agree with the commenters that the safe harbors 
will allow unscrupulous institutions to engage in the kinds of improper 
recruiting activities that took place during the 1980s and early 1990s. 
As the commenters noted, during that period, institutions would recruit 
ability-to-benefit students who were not qualified to enroll in their 
institutions and keep the Title IV, HEA program funds those students 
received. That result is no longer possible today.
    The incentive compensation prohibition is only one of the remedies 
that Congress has enacted to preclude such results. First, most of 
those unscrupulous institutions were terminated from participating in 
the Title IV, HEA programs because of their high cohort default rates. 
Second, there is a strengthened ability-to-benefit process that walls 
off institutions from the process and has higher standards of judging a 
student's ability-to-benefit. Third, if an institution enrolls 
unqualified students who then drop out, the institution may only keep 
Title IV, HEA program funds that the student has earned and must return 
unearned funds under the Return of Title IV Funds rules set forth in 
Sec.  668.22. Fourth, under the default rate termination provisions, 
the institution would put its continuing eligibility to participate in 
the Title IV loan programs in jeopardy if their unqualified students 
fail to repay their loans. Finally, an institution could have its 
eligibility terminated if it misrepresents its programs to students.
    Changes: None.
    Comments: A commenter asked about the interrelationship between the 
various safe harbors.
    Discussion: The 12 safe harbors are divided into two categories. 
The first category relates to whether a particular compensation payment 
is an incentive payment. The first safe harbor addresses this category 
by describing the conditions under which an institution may pay 
compensation without that compensation being considered an incentive 
payment.
    The second category relates to the conditions under which an 
institution may make an incentive payment to an individual or entity 
that could be construed as based upon securing enrollments. The 
remaining 11 safe harbors address this category by describing the 
conditions under which such a payment may be made. These 11 safe 
harbors reflect our view that the individuals and activities described 
in a safe harbor are not covered by the statutory prohibition.
    With regard to the latter 11 safe harbors, if an incentive payment 
arrangement falls within any one safe harbor, that payment arrangement 
is not covered by the statutory prohibition.
    Changes: None.
    Comments: Several commenters suggested that the Secretary include 
additional safe harbors in the final regulations and provided examples 
of safe harbors that they would like to see added.
    Discussion: We proposed 12 safe harbors based upon the suggestions 
of the negotiators and questions we received regarding the incentive 
compensation prohibition. We intended that these safe harbors be clear 
and uncomplicated. As a result, we believe that institutions can use 
these safe harbors as a workable framework to determine if their 
payment arrangements violate the incentive compensation prohibition.
    Changes: None.
    Comments: A commenter suggested that we discuss the penalties that 
apply if an institution violates the incentive compensation 
prohibition.
    Discussion: We believe that a discussion of the penalties for 
violating the incentive compensation prohibition are outside the scope 
of this exercise in developing final regulations for the provision.
    Changes: None.
    Comments: A commenter indicated that the safe harbors should 
specifically indicate that an institution could pay an incentive 
payment to a person or entity that was in the safe harbor.
    Discussion: The last 11 safe harbors describe situations under 
which an institution can make an incentive payment to an individual or 
entity based upon success in securing enrollments. Therefore, it is not 
necessary to include that statement in each safe harbor. For this very 
reason, as noted below, we will eliminate the restriction in the last 
sentence in the ``clerical pre-enrollment'' safe harbor, Sec.  
668.14(b)(22)(ii)(F).
    Changes: See discussion under Pre-Enrollment Activities.

Adjustments to Employee Compensation (Section 668.14(b)(22)(ii)(A))

    Comments: Many commenters approved of our determination set forth 
in the first safe harbor that fixed compensation could include up to 
two adjustments in a twelve-month period as long as no adjustment is 
based solely on success in securing enrollments. Some commenters 
believed that two adjustments were too many; that two adjustments 
during a 12-month period was a loophole that institutions could use to 
bundle their bonuses and pay them as a salary adjustment.
    Discussion: We believe that defining fixed compensation to include 
up to two pay adjustments during a 12-month period is not inconsistent 
with standard business practice, particularly as this safe harbor 
includes pay adjustments to an individual for any reason, including 
promotions.
    Changes: None.
    Comments: Almost all commenters approved our determination that one 
cost of living increase that is paid to all or substantially all 
employees would not count as one of the two allowable adjustments. One 
commenter asked the effect of an employer policy that withheld cost-of-
living increases to poorly performing employees. Another pointed out 
that employers treat full-time employees differently from part-time 
employees, and suggested that cost of living increases that are paid to 
all or substantially all full-time employees not count as an adjustment 
in the safe harbor.
    Discussion: We believe that if an employer has a written policy 
that indicates that cost of living increases are denied to poorly 
performing employees, that policy would not disqualify cost of living 
increases from being treated in the manner described in this safe 
harbor unless such a written policy has the effect of no longer 
applying the cost of living increase to ``all or substantially all'' 
employees, and other relevant factors reveal the increase to be tied to 
student recruitment and not within any of the prescribed safe harbors.
    We agree with the commenters that employers often treat full-time 
employees differently from part-time employees, and therefore agree 
with the

[[Page 67055]]

commenters' suggestion that cost-of-living increases that are given to 
all or substantially all of an institution's full-time employees would 
not be considered a compensation adjustment.
    Changes: Section 668.14(b)(22)(ii)(A) is changed to reflect that 
cost of living increases that are given to all or substantially all of 
an institution's full-time employees will not be considered a 
compensation adjustment.
    Comments: Many commenters noted that salary adjustments could not 
be based solely on the number of students recruited, admitted, 
enrolled, or awarded financial aid, and asked whether the term 
``solely'' was being used in its dictionary definition. If it was not, 
the commenters suggested a definition.
    Discussion: In this safe harbor, the word ``solely'' is being used 
in its dictionary definition.
    Changes: None.
    Comments: Commenters raised a series of questions concerning 
various aspects of fixed compensation, including how overtime should be 
treated, how employee benefits should be treated, and the effect under 
this safe harbor if some of an institution's employees are unionized 
and others are not.
    Discussion: With regard to overtime and benefits, if the basic 
compensation of an employee would not be an incentive payment, neither 
would overtime pay required under the Federal Labor Standards Act. 
Generally, the fact that some of an institution's employees are 
unionized and others are not should have no bearing on this safe 
harbor.
    Changes: None.
    Comments: One commenter asked about activities that recruiters 
could perform that would not be considered recruitment.
    Discussion: There are a myriad of non-recruitment activities that a 
recruiter may engage in on a day-to-day basis, but we do not believe 
that it is practical nor necessary to provide an exhaustive list for 
purposes of this discussion.
    Changes: None.

Enrollment in Programs That Are Not Eligible for Title IV, HEA 
Assistance (Section 668.14(b)(22)(ii)(B))

    Comments: Some commenters objected to this safe harbor, because 
they believed that the Secretary had no authority to establish it 
because section 487(a)(20) of the HEA does not cover incentive payments 
to enroll students in educational programs that are not eligible 
programs under the Title IV, HEA programs. Another commenter objected 
to the safe harbor because it would encourage institutions to promote 
private loans.
    Discussion: We disagree with the commenters. The safe harbor is 
authorized, as well as appropriate, because it informs institutions of 
the scope of the coverage of the incentive compensation prohibition of 
section 487(a)(20) of the HEA. Moreover, we believe that this safe 
harbor will have no bearing on whether institutions promote private 
loan programs to students attending ineligible programs.
    Changes: None.

Contracts With Employers (Section 668.14(b)(22)(ii)(C))

    Comments: Most commenters supported this safe harbor. The 
commenters recognized that the underlying rationale for the safe harbor 
was that an employer should have a significant stake in the education 
being offered its employees under a contract with an institution that 
uses a recruiter who receives an incentive payment. However, several 
commenters objected to the conditions that employers under this safe 
harbor had to satisfy. In particular, they objected to the conditions 
that an employer had to pay at least 50 percent of the tuition and fees 
charged its employees, and that recruiters have no contact with the 
employees. Some commenters recommended that these conditions be 
eliminated; that the employer/employee relationship itself provided a 
sufficient stake in the education being offered. Some commenters 
indicated that the percentage of tuition and fees that an employer had 
to pay should be a smaller percentage, while others indicated that the 
employer's stake in the education being offered could be demonstrated 
by other criteria. One commenter noted that literally no one could 
satisfy this safe harbor because a recruiter had to contact an employee 
in order to negotiate the contract. Another commenter recommended that 
Title IV, HEA program funds could not be used to pay the portion of the 
tuition and fees not paid by the employer.
    Discussion: This safe harbor represents that, in general, business-
to-business marketing of employer-provided education is not covered by 
the incentive compensation prohibition. However, not all business-to-
business transactions are paid in the same manner, such as the 
straightforward payment by a company to an institution to educate its 
employees. This safe harbor deals with an iteration of that scheme; the 
payment of employees' tuition and fee charges by the employer under a 
contract arranged by an institution's recruiter who is paid an 
incentive.
    In this safe harbor, the Secretary believes that the 50 percent 
requirement is a simple, straightforward standard to assure that an 
employer has a significant financial stake in the outcome of the 
education provided to its employees. This standard was supported by a 
majority of the negotiators. Therefore, we disagree with the commenters 
who suggested that this safe harbor be changed to allow an employer to 
pay less than 50 percent of its employees' tuition and fee charges.
    With regard to the alternatives suggested by commenters, we believe 
that they are too complicated for a safe harbor. With regard to 
recruiter contact with employees, the contact that is prohibited does 
not include the contact necessary to obtain the contract.
    Changes: None.

Profit-Sharing or Bonus Payments (Section 668.14(b)(22)(ii)(D))

    Comments: Most commenters supported this safe harbor. However, one 
commenter objected to it because the commenter considered that the safe 
harbor could be manipulated. Several commenters pointed out that the 
safe harbor allowed a profit sharing plan to be limited to employees in 
an ``organizational level'' at an institution rather than the 
institution as a whole, and asked whether an organizational level in a 
multi-school institution could be one of the institutions. Other 
commenters suggested that the definition of ``profit'' be defined as 
``total profit resulting when total costs are subtracted from total 
revenue at the institution.'' One commenter noted that while the 
regulatory safe harbor required that profit sharing or bonus payments 
be provided to all or substantially all of an institution's full-time 
employees, the preamble indicated that such payments had to be 
substantially the same amount, or based upon the same percentage of 
salary. The commenter recommended that the preamble requirement be 
eliminated as unnecessary. Moreover, if this condition is to be 
retained, the commenter proposed that percentage increases, like dollar 
increases, should also be substantially the same to all covered 
employees.
    Discussion: We do not agree with the commenter who indicated that 
this safe harbor could be manipulated to provide incentive payments to 
recruiters under the guise of profit sharing because the payments must 
be made to all or substantially all of the full-time employees at one 
or more organizational level at the institution. In response to

[[Page 67056]]

comments relating to organizational level, we believe an 
``organizational level'' at a multi-school institution would be one of 
the institutions.
    We do not believe that it is necessary to define the term 
``profit'' in this safe harbor as it is a commonly used business term 
that needs no explanation.
    With regard to the last comment, we agree that a safe harbor should 
be in the regulation itself rather than in the preamble. Contrary to 
the commenter's suggestion, we believe that the safe harbor for bonuses 
and profit sharing should require that the payments to employees be 
substantially the same amount or the same percentage of salary. We do 
not, however, see the need to allow percentage increases to be 
substantially the same. We believe that this safe harbor already 
provides significant flexibility particularly since institutions can 
provide different percentages of compensation based on employees' 
organizational levels.
    Changes: Section 668.14(b)(22)(ii)(D) is changed to reflect that 
the safe harbor only applies if the profit sharing or bonus payment is 
substantially the same amount or the same percentage of salary or 
wages.

Compensation Based Upon Completion of Program (Section 
668.14(b)(22)(ii)(E))

    Comments: Most commenters supported this safe harbor. However, 
several objected to it on the grounds that completion of an educational 
program is not a valid measure when the quality of an institution's 
programs is poor. One commenter, quoting from our preamble statement of 
April 24, 1994, when the current regulation was published, objected to 
the use of retention as a safe harbor, and also objected to the one-
year retention period as too short.
    Discussion: As previously indicated, we believe that the purpose of 
the incentive compensation prohibition is to prevent institutions from 
enrolling unqualified students. We note that other legislative and 
regulatory requirements are designed to weed out institutions with poor 
quality programs. We agree with most of the commenters that a student 
who successfully completes an educational program in which he or she 
was enrolled means, for this purpose, that the student was qualified to 
attend the institution.
    With regard to retention, we believe that the successful completion 
of 24 semester or trimester credit hours, 36 quarter credit hours, or 
900 clock hours of instruction also means that the student was 
qualified to enroll at the institution. Moreover, as a general matter, 
retention and completion of programs by students is a positive result 
that should be encouraged.
    Changes: None.
    Comments: Several commenters requested that the measure of whether 
a student completes one year of a program should be time rather than 
credits earned. One commenter asked whether all the required credits or 
hours had to be earned at the institution, or could they include 
transfer credits, life experience credit, or credits earned through 
tests. Another commenter asked whether the student had to earn one 
academic year of credit within the institution's satisfactory progress 
standard, and another asked whether the 30 weeks of instructional time 
element of the definition of an ``academic year'' was included in this 
safe harbor. A commenter indicated that the safe harbor should indicate 
that retention for one year is a minimum requirement and institutions 
are free to establish longer periods. Finally, one commenter asked 
whether a recruiter could get paid a bonus for each year the student 
successfully completes, so that the recruiter can theoretically receive 
four years of bonuses for a student enrolled in a four-year program.
    Discussion: We believe that the appropriate method of measuring 
whether a student completes one academic year is by determining that 
the student has earned one academic year of credit rather than by not 
dropping out during a 12-month period. Therefore, we do not agree with 
the commenters' suggestions to substitute time for credits earned. To 
answer the questions raised by the other commenters: All the credits 
have to be earned at the institution as a result of taking courses at 
that institution; we have not applied the 30 weeks of instructional 
time element of the definition of an ``academic year'' to this safe 
harbor. Thus, this safe harbor applies when a student earns, for 
example, 24 semester credits no matter how short or long a time that 
takes.
    We agree with the commenter that the one-year retention condition 
requirement is a minimum. Finally, if an institution so chooses, it may 
pay a recruiter a bonus for each academic year a student completes and 
not be in violation.
    Changes: Section 668.14(b)(22)(ii)(E) is changed to reflect that 
the one academic year's worth of credit or hours must be earned at the 
institution.

Pre-Enrollment Activities (Section 668.14(b)(22)(ii)(F))

    Comments: Most commenters supported this safe harbor. Some 
commenters objected to the requirement that the pre-enrollment activity 
had to be clerical in nature, with some noting that the clerical 
requirement was not in the proposed safe harbor itself, but was in the 
preamble discussion of the safe harbor. Some commenters concluded that 
the safe harbor described an individual rather than an activity, and 
based upon that interpretation, the commenters were concerned that 
recruiters could not be paid a bonus based upon their performance of 
pre-enrollment activities.
    Some commenters requested that the list of pre-enrollment 
activities be expanded, and other commenters objected to the 
characterization that soliciting students for interviews is a 
recruitment activity rather than a pre-enrollment activity. Other 
commenters asked whether institutions could purchase leads to potential 
students for a flat fee from a third party under this safe harbor.
    Discussion: We believe that one of the most important criterion for 
inclusion in this safe harbor is the clerical nature of the pre-
enrollment activities that are being performed. Limiting pre-enrollment 
activities to rote clerical activities helps to draw the line between 
recruiting and pre-enrollment activity. Therefore, we will incorporate 
this requirement into the regulations.
    We disagree with the characterization that this safe harbor 
describes an individual rather than an activity. However, by the very 
job description, a recruiter's job is to recruit. Therefore, as a 
practical matter, it would be very difficult for an institution to 
document that it was paying a bonus based upon enrollments to a 
recruiter solely for clerical pre-enrollment activities.
    We are not going to expand the list of acceptable clerical pre-
enrollment activities because no list will be all-inclusive, and we 
believe that institutions can determine whether activities qualify as 
clerical pre-enrollment activities based upon the current examples. 
Contrary to the commenter's conclusion, we believe that soliciting 
students for interviews is a core recruiting activity. Finally, 
although we believe that buying leads from third parties for a flat fee 
is not a clerical pre-enrollment activity under this safe harbor, we 
believe that the activity is not covered under the incentive 
compensation prohibition. Buying leads from third parties for a flat 
fee is not providing a commission, bonus, or other incentive payment 
based directly or indirectly on success in securing enrollments.
    Changes: Section 668.14(b)(22)(ii)(F) is changed to add the 
requirement that pre-enrollment activities must be clerical in nature, 
and, for the reasons

[[Page 67057]]

stated earlier in connection with the general comments, we are deleting 
the requirement that compensation is not based upon the number of 
people actually enrolled.

Managerial and Supervisory Employees (Section 668.14(b)(22)(ii)(G))

    Comments: One commenter objected to this safe harbor because the 
commenter believed that managers of recruiters and other covered 
persons should not be covered by the incentive compensation 
prohibition, and therefore should be included in this safe harbor. 
Other commenters objected to the preamble discussion of this safe 
harbor, where we indicated that an individual's occasional direct 
contact with students in the recruiting process would not turn that 
individual into a recruiter, because it would not necessarily be easy 
to determine whether an individual's involvement was occasional.
    Discussion: As indicated in the preamble to the proposed 
regulations, we believe that direct supervisors of recruiters and other 
covered persons should be excluded from this safe harbor because their 
actions have a direct and immediate effect on the recruiters and other 
covered persons.
    Changes: None.

Token Gifts (Section 668.14(b)(22)(ii)(H))

    Comments: One commenter appreciated the increase in the cost of 
token gifts allowed under this safe harbor, indicating that it would 
eliminate concerns at many institutions.
    Discussion: None.
    Changes: None.

Profit Distributions (Section 668.14(b)(22)(ii)(I))

    Comments: One commenter objected to this safe harbor because some 
institutions could treat revenue as profits.
    Discussion: We disagree with the commenter because institutions 
participating in the Title IV, HEA programs must submit compliance 
audits and financial statement audits, and such audits would uncover 
this practice.
    Changes: None.

Internet-Based Activities (Section 668.14(b)(22)(ii)(J))

    Comments: Almost all commenters supported this safe harbor. One 
commenter agreed that the Internet is a communications medium much like 
the U.S. mail and direct mail solicitations. The commenter noted, 
however, that compensation arrangements between institutions and direct 
mail servicers are typically not based upon enrollments, and therefore 
suggested that the Internet safe harbor exclude compensation 
arrangements that are based upon enrollments.
    Discussion: We disagree with the commenter. We believe that the use 
of the Internet is outside the scope of the incentive compensation 
prohibition, and, as indicated earlier, the point of the last 11 safe 
harbors is that they describe situations that would not violate the 
incentive compensation prohibition to make incentive payments to 
recruiters and other covered individuals based on enrollments. However, 
to highlight that the Internet is frequently used to refer prospective 
students to institutions, we are including that activity in the safe 
harbor.
    Changes: Section 668.14(b)(22)(ii)(J) is changed to add referring 
prospective students to the institution as a described safe harbor.

Payments to Third Parties for Non-Recruitment Activities (Section 
668.14(b)(22)(ii)(K))

    Comments: One commenter requested that we clarify that recruiting 
activities do not include advertising or marketing.
    Discussion: We agree with the commenter that if an institution pays 
a third party for marketing and advertising, those contracted services 
are not considered recruiting.
    Changes: None.

Payments to Third Parties for Recruitment Activities (Section 
668.14(b)(22)(ii)(L))

    Comments: Several commenters specifically indicated their support 
for this safe harbor. Several others objected to it because they 
believed that it violated the spirit of the incentive compensation 
prohibition as well as the literal language of that provision.
    Discussion: With regard to the reasons given by the commenters who 
objected to the safe harbor, as we stated in the preamble to the August 
8, 2002 NPRM, we believe that Congress did not intend to limit an 
institution's ability to contract with outside entities for 
recruitment, admissions, enrollment, or financial aid services if the 
outside entity adheres to the same limitations that apply to 
institutions. Payments made by an institution to a third party would 
not violate the incentive payment restrictions as long as the 
individuals performing any activities related to recruitment, 
admissions, enrollment, or financial aid were compensated in a way that 
would otherwise be permissible under the standards in this section for 
covered employees of the institution.
    Changes: None.

Institutions Required To Take Attendance (Section 668.22)

    Comments: One commenter did not believe that an institution that is 
required to take attendance by an outside entity for a limited time for 
census purposes should automatically qualify as an institution that is 
required to take attendance for purposes of the Return of Title IV 
Funds calculation. The commenter indicated that census records may not 
be appropriate for determining a student's withdrawal date. As such, 
the commenter suggested that the length of a limited period of census 
taking does not matter. Rather, if the institution's policy does not 
result in a student being withdrawn as a result of the census data, the 
institution should not be considered one that is required to take 
attendance for the census period.
    The commenter asked for clarification regarding the procedures that 
must be followed after the end of the period of required attendance 
taking.
    Discussion: Census taking was merely an example of a reason why an 
institution might be required to take attendance by an outside entity 
for a limited period of time. As stated in the preamble to the August 
8, 2002 NPRM, if the outside entity determines that the institution is 
required to take attendance for any period, for any purpose, including 
census purposes, then the institution is considered to be one that is 
required to take attendance for that period of time. We would like to 
emphasize that the change to the regulations related to determining 
whether an institution is one that is required to take attendance, 
specifically revises Sec.  668.22(b)(3)(i) to state that it is such an 
institution only if the outside entity has determined that the 
institution is required to take attendance. Thus, if an outside entity 
that imposes census taking requirements does not consider its 
requirements to require an institution to take attendance continuously 
for the limited period of time, the institution would be considered an 
institution that is not required to take attendance for that period for 
Title IV purposes. The exception that the preamble addressed was that 
even if the outside entity considers a one-day census activity to be 
required attendance taking, we would not consider the institution to be 
one that is required to take attendance.
    Unless an institution demonstrates that a withdrawn student who is 
not in attendance at the end of a limited period of required attendance 
taking attended after the limited period, the student's

[[Page 67058]]

withdrawal date would be determined according to the requirements for 
an institution that is required to take attendance. That is, the 
student's withdrawal date would be the last date of academic attendance 
as determined by the institution from its attendance records. If the 
institution demonstrates that the student attended past the end of the 
limited period, the student's withdrawal date is determined in 
accordance with the requirements for an institution that is not 
required to take attendance. So, for a student who has attended past 
the limited period and unofficially withdrew, the student's withdrawal 
date is the midpoint of the payment period or period of enrollment. 
Consistent with the policy for documenting a student's last date of 
attendance at an academically-related activity, an institution is not 
required to take attendance to demonstrate a student's attendance past 
the end of the limited period of attendance taking.
    Changes: None.

Leaves of Absence (Section 668.22)

    Comments: One commenter requested that we repeat the discussion in 
the August 8, 2002 NPRM on allowing multiple leaves of absence as long 
as the sum of the leaves does not exceed 180 days within any 12-month 
period and the requirement that an institution must require the student 
to submit a written reason for his or her request for an approved leave 
of absence.
    Discussion: The commenter is correct that the proposed change does 
mean that an institution can approve more than one leave of absence for 
a student as long as the total of all leaves for that student does not 
exceed 180 days in a 12-month period. The commenter is also correct 
that the new regulations require the student to submit a written reason 
for the request for the leave of absence. We refer the reader to the 
more extensive discussion on these matters that was included in the 
August 8, 2002 NPRM beginning on page 51726.
    Changes: None.
    Comments: One commenter agreed with our position that a student 
should be able to return to an institution from an approved leave of 
absence and repeat coursework as long as there are no additional 
institutional charges.
    Discussion: We clarified in the NPRM that a student may resume his 
or her academic program at a point earlier than the point where the 
academic program was suspended temporarily through an approved leave of 
absence. Under this guidance, both the student and the institution 
enjoy greater flexibility to deal with student academic needs. However, 
since the regulations provide that an institution may not impose 
additional charges when the approved leave of absence ends and the 
student resumes his or her program of study, a student who returns for 
the purpose of repeating prior coursework may not be assessed 
additional charges by the institution.
    Changes: None.
    Comments: One commenter noted that, especially for nonterm 
programs, there are a variety of reasons (most frequently scheduling 
problems) that prevent students from simply restarting their coursework 
at the same place they stopped. Particularly if the nonterm program 
offers its course in a series of modules, a returning student might 
choose to re-enter into a different course in a different module within 
the same program. The commenter suggested that students in nonterm 
programs be exempt from the requirement that, after returning from an 
approved leave of absence, they must return to the same point in the 
coursework that they were at the time the leave of absence began.
    Discussion: Currently, Sec.  668.22(d)(1)(viii) requires that when 
a student returns from a leave of absence, the student must be 
permitted to complete the coursework he or she began prior to the leave 
of absence. This is because the concept of an approved leave of absence 
is that the payment period in which the student was originally enrolled 
in has been temporarily suspended due to the leave of absence. Upon the 
student's return, the student simply resumes or continues the same 
payment period and coursework and is not eligible for additional Title 
IV program assistance until the payment period has been completed.
    For term-based programs, where the payment period is the term, a 
student returning from a leave of absence must complete the term in 
order to complete the payment period and be eligible to receive a 
second or subsequent disbursement. In addition, as noted earlier, upon 
return from a leave of absence the student cannot be assessed any 
additional charges. Therefore, we think it very unlikely that a student 
enrolled in a term-based program could ever participate in the leave of 
absence process included as part of the Return of Title IV Funds 
requirements.
    However, for nonterm-based programs, the regulations in Sec.  
668.4, as finalized by this document, provide that the payment period 
is the period of time it takes a student to complete both half the 
number of credits and half the number of weeks of the academic year, 
program or remainder of the program, as appropriate. For clock-hour 
programs, the payment period is the period of time it takes a student 
to complete half the number of clock hours in the program. Therefore, 
whether the student returns to the point in the same course as when the 
leave of absence began, or the student starts in a new course within 
the program (without additional institutional charges), once half the 
required credits are earned and half the number of weeks are completed 
or, for a clock-hour program, half the number of clock hours are 
completed, the student has completed the payment period for which the 
student was previously paid Title IV funds. If otherwise eligible, the 
student may receive a second or subsequent disbursement of Title IV 
program funds. Thus, we agree with the commenter that flexibility in 
this area could be provided to students and institutions when the 
program is offered on a nonterm basis.
    Changes: Section 668.22(d)(1)(vii) is revised to provide that for a 
clock-hour program or a nonterm credit-hour program, the student need 
not complete the exact same coursework he or she began prior to the 
leave.
    Comments: One commenter suggested that we modify the proposed rule 
to allow an institution to offer the student a full tuition credit 
towards the course the student chooses to re-enter as a mechanism to 
comply with the requirement that the institution not assess the student 
any additional charges upon return from an approved leave of absence.
    Discussion: As we understand the commenter's suggestion, we do not 
see a need to modify the regulations. We believe that the commenter's 
proposal would meet the requirement that a student returning from an 
approved leave of absence not be assessed any additional institutional 
charges for completing the payment period.
    Changes: None.

Expiration of Ability To Benefit Tests (Sections 668.32 and 668.151)

    Comments: While there was general support for the removal of the 
12-month limitation on the acceptability of an ability to benefit (ATB) 
passing score, one commenter expressed concern about the exception that 
``home-schooled'' students are not required to have passed the GED or 
an ATB test before becoming eligible for Title IV, HEA program 
assistance.
    Discussion: We appreciate the support for the elimination of the 
12-month limitation of ATB passing scores. Section 484(d)(3) of the HEA 
provides that, as an alternative to a high school diploma, a student 
who has completed a secondary school education in a home

[[Page 67059]]

school setting that is treated as a home school or private school under 
State law meets the applicable standard to be eligible for Title IV, 
HEA program assistance without the need for such a student to have 
passed the GED or an ATB test.
    Changes: None.

Overpayments (Sections 668.35, 673.5, and 690.79)

    Comments: One commenter indicated that the de minimis standard of 
less than $25 for student original overpayment amounts is too low and 
should be increased to at least $100. Further, the commenter stated 
that excluding from the application of the de minimis standard 
situations in which the amount owed by the student was the result of an 
original overpayment amount that was paid down to less than $25, or was 
the result of the application of the $300 campus-based overaward 
threshold, makes the regulation too complicated for efficient program 
administration.
    Discussion: The less than $25 de minimis standard used in the 
regulations is based upon an amount that is cost effective for the 
Department to collect. We are able to successfully pursue collections 
of $25 or higher with Internal Revenue Service (IRS) offsets, as well 
as with other methods. As to the second comment, the regulations 
exclude two instances in which the de minimis amount provisions do not 
apply. In the case where the original overpayment amount was $25 or 
more, but has been reduced to less than $25, the student is still 
responsible for fully paying that remaining balance. Without this 
exclusion, students would be encouraged not to pay the last $24.99 of 
their overpayment. In the other case, a student is responsible for 
paying the balance of the overpayment, even if it is less than $25, 
when the overpayment is a result of applying the $300 campus-based 
overaward threshold to an FSEOG or Federal Perkins Loan overaward. 
Without this second exclusion, we would be creating a new campus-based 
overaward threshold of $324.99. There is no basis in the statute for 
changing the campus-based overaward threshold beyond $300.
    Changes: None.
    Comments: One commenter recommended that, in addition to applying 
the less than $25 de minimis amount to original overpayments owed by a 
student, the regulations provide the same treatment to an institution 
when it is liable for an overpayment. That is, the commenter suggested 
that an institution not be required to return an original overpayment 
that is less than $25. The commenter believed that the requirement for 
an institution to return small amounts is administratively burdensome 
to the institution and is not cost effective.
    Discussion: The purpose of having the less than $25 de minimis 
amount for student original overpayments is to allow needy students to 
continue to be eligible for Title IV aid when their overpayment 
obligation is a small amount. The overpayment amounts that an 
institution owes do not impact a student's eligibility. However, the 
regulatory change that we are making for student original overpayment 
amounts that are less than $25 provides for a consistent application 
across the Title IV programs, reduces the burden on needy students, and 
reduces the burden for institutions in the recording and collection of 
a small student debt.
    Changes: None.
    Comments: One commenter suggested that the language in the 
regulations requiring the institution to provide written notice of an 
FSEOG or Federal Pell Grant overpayment to the student be clarified. 
The commenter suggested that the regulations state that an institution 
is not required to send the written notice if the institution pays the 
overpayment on the student's behalf from its own funds, because there 
is no reason for the student to register a formal objection to an 
overpayment determination with the institution.
    Discussion: The written notice requirement for overpayments does 
not apply unless the student owes an overpayment that is outstanding. 
If the institution already paid the overpayment on the student's behalf 
from its own funds, the institution would not have to send the written 
notice to the student because there is no overpayment to collect.
    Changes: None.

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

    Comments: One commenter objected to the addition of language in 
Sec.  668.35(b) that allows a Perkins Loan borrower against whom a 
judgment has been obtained to regain eligibility for further Title IV 
student aid by making satisfactory repayment arrangements. The 
commenter noted that seeking a judgment against a defaulted Perkins 
Loan borrower is a last resort that involves considerable time and 
money and that a judgment is pursued only after a Perkins institution 
has exhausted all other means of collecting the defaulted loan. The 
commenter stated that extending further Title IV student financial 
assistance to such a borrower is against the taxpayers' best interests 
and that the only option that should be offered to a defaulted borrower 
against whom a judgment has been obtained is to pay the judgment amount 
in full.
    Discussion: The proposal to allow a borrower who is subject to a 
judgment to regain eligibility for Title IV program assistance reflects 
the concerns expressed by the negotiators that, under the original 
proposal presented to the negotiators, borrowers subject to a judgment 
would not only be excluded from the benefits of rehabilitation, but 
would also be unable to regain eligibility for Title IV aid. The 
negotiators felt that denying access to additional student financial 
assistance to a borrower who makes an agreement with the loan holder to 
repay the loan was excessively harsh and had the potential to 
effectively prohibit the borrower from furthering his or her education, 
securing employment, and being better able to repay student loan 
obligations.
    The new regulations in Sec.  668.35(b) provide institutions and 
guarantors with significant flexibility to recover judgment debts by 
allowing the loan holder to determine the conditions that the judgment 
debtor must satisfy to regain eligibility for additional Title IV aid. 
For example, if, in a particular case, payment in full is the only 
repayment arrangement that is satisfactory to the holder, then a 
borrower who is subject to a judgment must pay the loan in full. 
Alternatively, should the holder agree to repayment arrangements with 
the judgment debtor, the holder is free to determine the number and 
amount of payments necessary to restore eligibility for further Title 
IV aid, as long as those arrangements include the borrower making at 
least six consecutive monthly payments.
    Changes: None.
    Comments: Some commenters noted that proposed language in Sec.  
682.405(b)(1), which defines ``voluntary'' payments for the purpose of 
loan rehabilitation, excluded payments made ``after a judgment has been 
entered on a loan.'' (The commenters incorrectly believed that this 
proposed change was the basis for excluding judgment borrowers from 
rehabilitation.) The commenters further noted that the proposed 
regulations in Sec.  668.35(b) provided that a borrower who is subject 
to a judgment may reestablish Title IV eligibility if the borrower pays 
the debt in full or makes at least six payments under arrangements 
satisfactory to the judgment holder, but that the proposed regulation 
did not require that such payments be ``voluntary.'' Lastly, the

[[Page 67060]]

commenters noted that the FFEL Program definition of ``satisfactory 
repayment arrangements'' in Sec.  682.200(b) defines the term 
``voluntary payments'' differently than it is defined in Sec.  
682.405(b)(1) of the FFEL Program regulations. While the commenters 
supported the proposed language in Sec.  668.35(b) to provide a 
mechanism for judgment borrowers to regain Title IV eligibility, the 
commenters believed the interplay between this provision and the 
provisions within the FFEL Program regulations requiring differing 
``voluntary'' payments is confusing and that clarification was needed.
    Several commenters representing institutions that participate in 
the Perkins Loan Program also noted that proposed Sec.  668.35(b) is 
inconsistent with Sec.  674.9(j) of the Perkins Loan Program 
regulations, in that the Perkins regulations require a defaulted 
Perkins Loan borrower subject to a judgment to make ``voluntary'' 
payments to reestablish eligibility for a Federal Perkins Loan. 
(Sections 674.9(j)(1) and (2) define ``voluntary'' payments as 
``payments made directly by the borrower, including payments made over 
and above payments made pursuant to a judgment * * * and do not include 
payments obtained pursuant to a judgment.'') In contrast, the 
commenters noted that proposed Sec.  668.35(b) did not require that 
payments to reestablish Title IV eligibility be voluntary.
    The commenters suggested that we revise the FFEL regulations 
defining ``satisfactory repayment arrangement'' to clarify that a 
borrower against whom a judgment has been obtained can reestablish 
Title IV eligibility under Sec.  668.35(b). With regard to the Perkins 
Loan program, the commenters suggested that we either revise proposed 
Sec.  668.35(b) to reference the Perkins Loan program definition of 
``satisfactory repayment arrangement'' or remove the reference to 
``voluntary'' payments in Sec.  674.9 for the purpose of regaining 
eligibility for a Perkins Loan.
    Discussion: We disagree with the commenters' assumption that the 
basis for excluding borrowers subject to a judgment from loan 
rehabilitation is that payments on a judgment are not considered 
``voluntary.'' The preamble of the August 6, 2002 NPRM, beginning at 67 
FR 51036, has a full discussion of the reasons we proposed to exclude 
borrowers subject to a judgment from the opportunity for loan 
rehabilitation. We agree with the commenters, however, that the 
interplay of provisions defining ``voluntary'' in the Perkins Loan and 
the FFEL program regulations and their relationship with proposed Sec.  
668.35(b) is confusing.
    We believe that the best resolution is to modify proposed Sec.  
668.35(b) to add the word ``voluntary,'' with a definition, to the 
description of the monthly payments that a borrower who is subject to a 
judgment must make before regaining eligibility for additional Title IV 
aid. We believe that the definition of ``voluntary payments,'' in the 
definition of ``satisfactory repayment arrangement'' in Sec.  
682.200(b) of the FFEL Program regulations is the most appropriate 
definition to use. Accordingly, we will define ``voluntary'' in Sec.  
668.35(b) as ``payments made directly by the borrower, not including 
payments obtained by Federal offset, garnishment, or income or asset 
execution.'' We would emphasize that a payment on a judgment is 
considered a ``voluntary'' payment under this definition if the 
borrower who is subject to the judgment makes a payment directly to the 
judgment holder and that there is no requirement that the payment be 
over and above the payment required on the judgment.
    We also believe that the definition of ``voluntary'' in Sec.  
674.9(j)(1) and (2) and in the Direct Loan Program definition of 
``satisfactory repayment arrangement'' in Sec.  685.102(b) should be 
changed to reflect the definition of ``voluntary'' in Sec.  682.200(b).
    Changes: We have added the requirement that payments made pursuant 
to Sec.  668.35(b) must be voluntary payments, along with a definition 
of ``voluntary.'' We have also amended the definition of ``voluntary'' 
in Sec. Sec.  674.9(j) and 685.102(b) to reflect the definition of 
``voluntary'' in current Sec.  682.200(b).
    Comments: Several commenters requested that we revise the rules 
governing a guaranty agency's basic program agreement with the 
Secretary in Sec.  682.401(b)(4), as they relate to reinstatement of 
borrower eligibility, to add a reference to proposed language in Sec.  
668.35(b) that allows a borrower who is subject to a judgment to 
reestablish eligibility for Title IV, HEA program assistance. The 
commenters believed that since loan rehabilitation would no longer be 
an option for a borrower with a loan on which a judgment has been 
obtained, a clarifying change was needed to exempt these borrowers from 
the FFEL Program rules governing reinstatement of borrower eligibility.
    Discussion: We agree that the addition of a reference in Sec.  
682.401(b)(4), stating that reinstatement of Title IV eligibility for a 
borrower with a defaulted loan on which a judgment has been obtained is 
governed by Sec.  668.35(b), would add clarity.
    Changes: We have made the suggested change to Sec.  682.401(b)(4).
    Comments: Several commenters supported the proposed regulations 
that excluded from rehabilitation defaulted Title IV loans on which a 
judgment has been obtained.
    Discussion: None.
    Changes: None.
    Comments: One commenter stated that rehabilitation of loans subject 
to a judgment has served as a beneficial and successful tool to 
encourage borrowers to repay their loans and objected to the proposed 
changes that excluded from rehabilitation defaulted loans on which a 
judgment has been obtained. The commenter stated that many borrowers 
default at an early age without realizing the serious and long-lasting 
consequences of their failure to repay their loan and that eliminating 
the option of rehabilitation denies borrowers subject to a judgment the 
ability to improve their credit history.
    Discussion: The negotiators reached consensus that the effort and 
expense associated with rehabilitating loans subject to a judgment 
outweighed the value of rehabilitation of judgment debts as a 
collection tool. However, as we pointed out in the August 6, 2002, 
NPRM, while the new regulations exclude a loan on which a judgment has 
been obtained from rehabilitation, a loan holder may, at its option, 
enter into an agreement with such a borrower to offer some of the 
benefits of rehabilitation while maximizing recovery of the debt. 
Moreover, we also proposed new language in Sec.  668.35(b) to ensure 
that a borrower subject to a judgment may reestablish eligibility for 
further Title IV, HEA program assistance.
    Changes: None.
    Comments: Several commenters requested that we revise Sec.  
682.405(b)(1) to specify that the definition of the term voluntary in 
that section applies only to loan rehabilitation. The commenters felt 
that we introduced ambiguity with regard to the meaning of voluntary 
payments by placing language in the August 6, 2002 NPRM preamble 
describing proposed changes to Sec.  682.405(b)(1) in the same 
paragraph as language describing reinstatement of Title IV eligibility. 
The commenters also suggested revising this paragraph to exclude 
payments obtained by state offset from the definition of voluntary 
payments for the purpose of loan rehabilitation.
    Discussion: Although we regret any confusion that resulted from the 
placement of preamble language

[[Page 67061]]

describing proposed changes to Sec.  682.405(b)(1) in the same 
paragraph as language describing reinstatement of Title IV eligibility, 
we do not see the need for a clarification that the term voluntary, as 
defined in Sec.  682.405(b)(1), applies only to that section. The 
proposed language, by its placement within Sec.  682.405, makes it 
clear that the definition of voluntary applies only to that section. We 
also disagree with the suggestion to revise this paragraph to add that 
payments made by state offset are excluded from the definition of 
voluntary payments for the purposes of loan rehabilitation because 
making such a change is more than a technical change to the regulations 
and was not subject to negotiated rulemaking.
    Changes: None.
    Comments: One commenter felt strongly that the regulations should 
specifically state that judgment holders may enter into an agreement 
with the judgment debtor that would allow the holder to provide many of 
the same benefits offered under loan rehabilitation programs. The 
commenter asked if the proposed addition of language in Sec.  
668.35(b), which allows a judgment borrower the opportunity to 
reestablish Title IV eligibility by making repayment arrangements that 
are satisfactory to the holder of the debt, gives the holder of a 
judgment the authority to enter into agreements with judgment borrowers 
that would provide borrowers with some of the benefits of 
rehabilitation.
    Discussion: In many cases, the terms of a court judgment make the 
entire obligation due and payable in full immediately, and any payment 
arrangements that arise between the parties to satisfy the judgment is 
solely by agreement between the debtor and the judgment holder. We do 
not see the need to specify in regulation the authority already held by 
a judgment holder to enter into such agreements with a judgment debtor.
    The new regulations in Sec.  668.35(b) simply extend to a borrower 
who is subject to a judgment the opportunity to reestablish eligibility 
for Title IV student financial assistance. As stated earlier, the 
negotiators were concerned that borrowers who were subject to a 
judgment would no longer be entitled to rehabilitate their loans and 
would be left without any recourse if the borrower wished to return to 
school and needed additional financial aid. We note that a borrower who 
is subject to a judgment will reestablish Title IV eligibility as part 
of an agreement between the debtor and judgment holder, if the holder 
chooses to enter into such an agreement. However, the authority to 
enter into such an agreement stems from the nature of the judgment 
debt, not from this regulatory provision.
    Changes: None.
    Comments: Several commenters asked us to clarify what types of 
benefits a holder can provide to a borrower with a Title IV loan that 
is subject to a judgment pursuant to an agreement outside of the 
holder's loan rehabilitation program. The commenters were concerned 
that loan holders would not have the authority to offer removal of the 
borrower's negative credit history under such an agreement under the 
Fair Credit Reporting Act and loan program credit bureau reporting 
regulations. Several commenters wanted us to address the status of a 
loan on which a judgment has been obtained, both from the standpoint of 
the borrower and the judgment holder, once the borrower has reached an 
agreement with the judgment holder. One commenter asked us to clarify 
how long a borrower has to repay the loan and what interest rate would 
apply in cases when the borrower signs a new note under an arrangement 
between the borrower and the judgment holder.
    Discussion: The holder of a Title IV loan that is subject to a 
judgment has the option, but is not required, to enter into an 
agreement with the borrower in which the holder agrees to offer some 
benefits. We expect any agreement between a borrower subject to a 
judgment and the judgment holder to require the debtor to make at least 
six consecutive, voluntary monthly payments, the minimum standard 
contained in Sec.  668.35(b) for a judgment borrower to reestablish 
Title IV eligibility. A judgment holder is also free to require other, 
more stringent repayment arrangements it considers appropriate. The 
benefits the judgment holder may offer the borrower as part of an 
agreement to resolve a judgment include the return of Title IV 
eligibility and removal of a borrower's negative credit history. 
Alternatively, the holder may offer to vacate the judgment and allow 
the borrower to sign a new promissory note after the borrower complies 
with the conditions of the agreement. However, it is up to the holder 
of the judgment to consider any legal and practical restrictions on its 
ability to offer the borrower certain benefits, such as credit report 
changes.
    In accordance with general legal principles and our longstanding 
policy, a judgment debt on a Title IV loan is considered a Title IV 
loan obligation. An agreement between a loan holder and a borrower to 
resolve a judgment does not change the character of the debt. 
Accordingly, if the holder vacates the judgment as part of such an 
agreement, the borrower's rights and responsibilities would be those of 
a defaulted Title IV borrower and would include the opportunity to 
enter into a formal regulatory rehabilitation agreement with the loan 
holder. The holder would be subject to the requirements and benefits 
associated with holding a defaulted Title IV loan. The interest rate 
and repayment options would be those available under the original 
promissory note.
    Changes: None.
    Comments: One commenter stated that the regulations addressing 
rehabilitation of loans, although now revised to exclude loans reduced 
to judgment, still may imply that the Secretary considers defaulted 
borrowers to be able to seek rehabilitation even after the Secretary 
has referred a loan to the Department of Justice for collection 
litigation. The commenter considered this implication unfounded as a 
matter of law, contrary to the interests of the loan programs and the 
Federal government, and urged the Secretary to clarify the proposed 
regulations to specify that neither the statute nor the regulations 
allow borrowers to rehabilitate loans that have been referred to the 
Department of Justice for litigation.
    Discussion: We believe that the HEA and the Federal Claims 
Collection Standards adequately address this concern and that a 
regulatory change is unnecessary. A rehabilitation agreement is a form 
of repayment arrangement; after a Federal agency has referred a debt 
owed the agency to the Department of Justice for litigation, the 
Federal Claims Collection Standards provide that the Department of 
Justice has ``exclusive jurisdiction'' over the debt, and the agency is 
no longer authorized to determine repayment terms for that debt (31 CFR 
904.1(b)). Moreover, sections 432(a)(2) and 468(3) of the HEA state 
explicitly that the Secretary's broad power to enforce Title IV HEA 
loans remains subject to the full authority of the Attorney General to 
conduct litigation to collect those loans. The HEA both directs the 
institution, the guarantor, or the Secretary to offer the borrower in 
default an opportunity for rehabilitation of the loan, and directs that 
the Secretary's authority to arrange repayment terms ends where 
responsibility for enforcement of the debt passes to the Department of 
Justice. The Secretary therefore interprets the HEA itself to limit the 
defaulted borrower's ability to seek rehabilitation of a Title IV loan 
only to the period during which the loan is held by the Secretary. The 
option to rehabilitate a

[[Page 67062]]

defaulted loan therefore lapses once the debt is referred to the 
Department of Justice.
    Changes: None.
    Comments: Two commenters recommended that borrowers subject to a 
judgment, who have begun the rehabilitation process but not completed 
the payment stream before final regulations are effective, be permitted 
to complete the rehabilitation process.
    Discussion: If a holder has agreed to allow a judgment borrower to 
attempt rehabilitation of his or her loan prior to the effective date 
of these final regulations, we expect the loan holder to honor such an 
agreement. However, if the judgment borrower misses any of the required 
payments, the holder is not required to allow the borrower another 
attempt at rehabilitation.
    Changes: None.
    Comments: One commenter asked if the holder of an institutional 
loan subject to a judgment has the option to enter into an agreement 
with the borrower and offer to remove the borrower's negative credit 
history under the proposed regulations.
    Discussion: The terms and conditions of non-Federal loans are not 
subject to the regulations that apply to the Title IV loan programs.
    Changes: None.

Late Disbursements (Section 668.164)

    Comments: Several commenters objected to the proposal that an 
institution would be required to obtain the Secretary's approval in 
order to make late disbursements more than 120 days after the student 
was no longer eligible. Most of these commenters believed that we 
should continue the current practice of allowing guaranty agencies to 
approve late disbursements of FFEL Program funds. Two commenters stated 
that deciding to make a late disbursement was similar to professional 
judgment and argued that institutions should be permitted to make these 
disbursements without obtaining our approval.
    Discussion: While we appreciate the willingness of guaranty 
agencies to approve requests for late disbursements that are not made 
within the 120-day timeframe, we continue to believe that we should 
review and approve such disbursement requests. These rules (and 
previous late disbursement rules) provide an exception to the general 
rule that a student must be enrolled and eligible to receive Title IV 
student aid. If a disbursement is not made while a student is enrolled 
and eligible, an institution now has, regardless of the reason and 
without any approval, 120 days to make that disbursement. Beyond that, 
from both a policy and operations perspective, we need to be aware of 
the frequency and circumstances under which this exception is used. In 
addition, we believe it is more efficient, and more equitable to 
students and institutions, to direct all late disbursement requests 
requiring approval (those after the 120-day timeframe) to one party for 
review, particularly for requests that deal with funds from more than 
one Title IV program. To facilitate the process, before the effective 
date for these regulations, the Department plans to establish a process 
by which institutions will submit their request. In its request, an 
institution will provide the name of the student (or parent in the case 
of a PLUS loan), the type and amount of Title IV aid to be disbursed, 
and a description of the circumstances that resulted in the 
disbursement not being made, including why the disbursement was not 
made and was not the fault of the student or parent. After we review 
the request, we will promptly inform the institution of our decision or 
if necessary, request additional information. If the request is 
approved, the institution can, consistent with the requirements of the 
funding source (i.e., FFEL lender or guaranty agency) make the late 
disbursement. We expect the institution to maintain documentation of 
its request and the Department's response to that request.
    Changes: None.
    Comments: One commenter did not agree with the proposal that an 
institution would be required to offer a late disbursement to a student 
who had completed a payment period or period of enrollment. The 
commenter contended that in many such cases the student would not owe 
the institution any money or would not be likely to have other 
remaining costs, thereby eliminating the need for the late 
disbursement. For this reason, the commenter was concerned that 
requiring an institution to make a late disbursement of a loan would 
needlessly increase a student's debt. Instead, the commenter suggested 
that an institution should have sole discretion in determining whether 
a late disbursement was necessary.
    Discussion: As we explained in the August 8, 2002 NPRM, because the 
student earned the funds for the period completed, it is up to the 
student, not the institution, to decide whether he or she needs the 
funds. Consequently, an institution must offer the late disbursement to 
the student and must make that disbursement if the student accepts the 
offer. If an institution believes a late disbursement is not needed or 
is concerned that a late disbursement of a loan may increase the risk 
of default, we encourage the institution to advise the student about 
how the disbursement may affect his or her eligibility for additional 
Title IV aid and caution the student about loan debt. An institution 
may do this in the offer it makes to the student.
    Changes: None.
    Comments: Many commenters supported the proposal eliminating the 
requirement that, for a student to qualify for late disbursement, an 
institution must have a valid SAR/ISIR for that student on or before 
the date the student became ineligible.
    Discussion: We appreciate the support for a proposal that makes it 
easier for a student to qualify for a late disbursement and easier for 
an institution to document that the student qualified. However, as we 
noted in the NPRM, an institution must still have a valid SAR/ISIR to 
make a late disbursement of a Federal Pell Grant. In this regard, two 
changes are necessary.
    Changes: Two conforming changes are necessary. First, we have made 
a conforming change to 668.22(a)(4)(ii)(B) to increase from 90 to 120 
days the amount of time within which an institution must disburse a 
post-withdrawal disbursement. Second, we have made a conforming change 
to Sec.  690.61(b) to exempt a student, who now otherwise qualifies for 
a late disbursement, from the requirement that the student submit a 
valid SAR/ISIR to the institution while the student is enrolled (the 
student now qualifies, in part, when the Department processes a SAR/
ISIR with a valid EFC). As a result of this conforming change, the 
deadline date for receiving a valid SAR/ISIR in Sec.  690.61(b)(2) no 
longer applies to a late disbursement of a Federal Pell Grant. Rather, 
the deadline date provisions for receiving a valid SAR/ISIR for the 
purpose of making a late disbursement of a Federal Pell Grant are now 
included as part of Sec.  668.164(g)(4).

Notices and Authorizations (Section 668.165)

    Comments: Many commenters supported the proposed change that would 
eliminate the requirement that an institution confirm receipt by a 
student of a notice sent electronically that Title IV loan funds were 
credited to a student's account.
    Discussion: We are appreciative of the commenters' support.
    Changes: None.

[[Page 67063]]

Timely Return of Funds (Sections 668.171 and 668.173)

    Comments: Two commenters opposed the proposal under which an 
institution would have to return unearned Title IV program funds no 
later than 30 days after the institution determines that a student 
withdrew. The commenters stated that the process of determining which 
students unofficially withdrew, and the subsequent calculation of the 
amount of unearned funds, often takes longer than the 30-day period 
allowed for returning the funds.
    Discussion: We did not propose any changes to the 30-day timeframe 
for returning unearned Title IV program funds, as currently provided in 
Sec.  668.22. The proposed changes focused solely on establishing clear 
requirements for returning unearned Title IV funds within the existing 
30-day timeframe and the consequences if that timeframe is not met. 
Consequently, we decline to accept the commenters' proposal.
    Changes: None.
    Comments: A few commenters objected to the 45-day proposal for 
returning unearned funds by check, arguing it would be unreasonable to 
hold an institution responsible for the time it takes the Secretary or 
an FFEL Program lender to cash a check. One of these commenters 
believed that we should not impose any requirements along these lines, 
unless there is a deliberate pattern of delaying the return of unearned 
funds.
    Discussion: The Department or an FFEL lender (or its agent) will 
usually receive a check mailed by an institution within three to five 
days. Within the next day or two, that check is endorsed by the bank 
used by the Department or lender, resulting in a typical timeframe of 
four to seven days. Even if this process takes twice as long, an 
institution would still satisfy the requirements that unearned funds 
were returned in a timely manner (an institution must issue the check 
no later than 30 days after it determines the student withdrew, and the 
check must have been endorsed by the bank used by the Department or 
lender no later than 45 days after that date). Moreover, the 
regulations provide that if an institution can show that something 
unusual happened that delayed the delivery or receipt of a particular 
check, we will not hold the institution responsible.
    Changes: None.
    Comments: One commenter stated that the date on the back of the 
check is not necessarily the date it was received by an FFEL lender. To 
clarify the rule, the commenter suggested that we define the clearance 
date as the date the check clears the lender's or Department's bank 
account.
    Discussion: In proposing this provision, we intended to describe 
the first date that appears on a cancelled check. In this regard, the 
Federal Reserve banking regulations under 12 CFR part 229, appendix D, 
require a depository bank (in this case, the bank used by the 
Department or FFEL lender) to evidence that it received a check by 
endorsing that check. Under those regulations, the bank's endorsement 
must include the routing number, the name of the bank, and the 
endorsement date. We agree to revise the regulations to clarify that 
the endorsement date is the date used to determine whether an 
institution returned unearned funds by check in a timely manner.
    Changes: Section 668.173(b)(4)(ii) is revised to provide that if a 
check is used to return unearned funds, it must be endorsed by the bank 
used by the Department or FFEL Program lender no later than 45 days 
after the institution's determination that a student withdrew.
    Comments: One commenter suggested another method of returning 
unearned funds. In cases where an institution needs Title IV program 
funds to make disbursements to additional eligible students, the 
institution should be permitted to use unearned funds of withdrawn 
students to make those disbursements instead of depositing or 
transferring those funds into the institution's Federal account.
    Discussion: An institution that maintains a separate Federal bank 
account must deposit to that account, or transfer from its operating 
account to its Federal account, the amount of unearned program funds, 
as determined under Sec.  668.22. The date the institution makes that 
deposit or transfer is the date used to determine whether the 
institution returned the funds within the 30-day timeframe permitted in 
the regulations. After that, the institution can use the unearned funds 
to make disbursements to other eligible students, provided those funds 
were originally received from the Department or from an FFEL lender 
under a process that allows the institution to use the unearned funds 
for this purpose.
    However, unless the Department requires an institution to use a 
separate account, the institution may use its operating account for 
Title IV purposes. In this case, the institution must designate that 
account as its Federal bank account, as required under Sec.  
668.163(a), and have an auditable system of records showing that the 
funds have been allocated properly and returned in a timely manner. 
Absent a clear audit trail, the Department can require the institution 
to begin maintaining Title IV funds in a separate bank account.
    Moreover, the institution has a fiduciary responsibility to 
segregate Federal funds from all other funds and to ensure that Federal 
funds are used only for the benefit of eligible students. Absent a 
separate Federal bank account, the institution must ensure that its 
accounting records clearly reflect that it segregates Federal funds. 
Under no circumstances may the institution use Federal funds for any 
other purpose, such as paying operating expenses, collateralizing or 
otherwise securing a loan, or earning interest or generating revenue in 
a manner that risks the loss of Federal funds or subjects Federal funds 
to liens or other attachments (such as would be the case with certain 
overnight investment arrangements or sweeps). Clearly, carrying out 
these fiduciary duties limits the ways the institution can otherwise 
manage cash in its operating account, simply because that account 
contains Federal funds.
    In any event, we consider an institution that maintains (co-
mingles) Federal Title IV, HEA program funds and general operating 
funds in the same bank account to satisfy the requirement under Sec.  
668.173(b)(1) that it return unearned funds on a timely basis if (1) 
the institution maintains subsidiary ledgers of each type of funds co-
mingled in that account that clearly show how and when those funds were 
used and reconciled to its general ledger, (2) the subsidiary ledgers 
for each Federal program provide a detailed audit trail on a student-
by-student basis that reconciles to the amount of Federal Title IV, HEA 
program funds received and disbursed by the institution, and (3) the 
institution updates the relevant subsidiary ledger accounts in its 
general ledger no later than 30 days after it determines that the 
student withdrew. More specifically, the return of an unearned funds 
transaction should be recorded as a debit to the Federal program fund 
subsidiary ledger account and credit to the institution's operating 
fund subsidiary ledger account. The date of the return is the date this 
transaction is posted to the institution's general ledger.
    Changes: None.
    Comments: One commenter felt that the letter of credit trigger 
should be changed from a finding that an institution has not returned 
unearned funds for ``10 percent or more'' of the sampled students, to a 
finding that an institution has not returned unearned funds for ``more 
than 10 percent'' of the sampled students. The commenter noted that a 
``more than 10 percent''

[[Page 67064]]

trigger would be consistent with the Department's Program Review Guide 
and the Department's School Site Review Guide for Guaranty Agencies, 
which use a trigger of ``greater than 10 percent'' as an indication of 
a possible significant problem.
    Discussion: We agree that the triggers should be consistent.
    Changes: Section 668.173(d)(3)(iv) has been changed to require a 
letter of credit upon a finding that an institution has not returned 
unearned funds for more than 10 percent of the sampled students.

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

    Comments: Many commenters supported the proposal to adopt a Master 
Promissory Note (MPN) in the Federal Perkins Loan Program. These 
commenters believe that the MPN will simplify the loan process by 
eliminating the need for institutions to prepare, and students to sign, 
a promissory note each award year. They also stated that uniformity 
across the Title IV loan program regulations, where possible, is 
beneficial for institutions and borrowers.
    One commenter representing several institutions participating in 
the Perkins Loan Program expressed concern about setting conditions 
under which an MPN would automatically expire. The commenter stated 
that there is no apparent reason for establishing arbitrary timeframes 
by which an MPN will automatically expire since participating 
institutions do not need to coordinate with a third party. The 
commenter believed that these timeframes would diminish the 
streamlining benefits of the MPN in the Perkins Loan Program and create 
additional burden on institutions because they would be required to 
ensure that funds are not advanced against an expired MPN.
    Discussion: We appreciate the overwhelming support for an MPN in 
the Perkins Loan Program and agree with those commenters that 
consistency across the Title IV loan programs is beneficial to both 
institutions and borrowers. We disagree with the commenter who objected 
to the time limits on the use of an MPN. Because a Perkins Loan 
borrower will be signing the MPN only once, we believe it is necessary 
to have time limits on the use of the MPN to achieve an appropriate 
balance between consumer protection and simplification of the loan 
process. Further, we are not aware of any public or private loan 
program that has open-ended promissory notes. In addition, the 
expiration date provisions are consistent with the expiration date 
provisions for FFEL and Direct Loan MPNs, and ensure that borrowers 
across all three Title IV loan programs are treated consistently. We do 
not believe that these time limits diminish the benefit of an MPN or 
cause any additional workload for institutions.
    Changes: None.

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

    Comments: Several commenters supported the proposed regulations in 
Sec.  674.47(g) and (h) to allow institutions to write off accounts of 
less than $25, or less than $50, if the borrower has been billed for at 
least two years. These commenters also supported the provisions that 
would make it clear that a borrower whose balance has been written off 
is relieved of all repayment obligations. One commenter representing 
several Perkins Loan institutions recommended modifying the proposed 
language under Sec.  674.47(h)(1)(ii) that would permit institutions to 
write off an account with a balance of less than $50 if the borrower 
has been billed for this balance for at least two years. The commenter 
recommended that the language be modified so that institutions would 
not be required, given the minimal amount owed, to keep accounts with 
balances of less than $50 open for two years before being able to write 
off these accounts. The commenter pointed out that institutions that 
outsource the servicing of their loans could pay nearly 50 percent of 
the value of the loan in servicing costs alone over that two-year 
period.
    Discussion: We appreciate the commenters' support for the increased 
write-off authority. However, we disagree with the commenter who 
recommended modifying the proposed language in Sec.  674.47(h) so that 
institutions would not be required to bill the borrower for two years 
before writing off accounts with balances of less than $50. We believe 
that the proposed language ensures program integrity and financing. The 
proposed language balances the need to maintain program integrity by 
attempting to make the institution's Perkins revolving fund whole with 
the need to provide institutions greater flexibility in servicing their 
Perkins loan portfolio. The failure to collect on these funds could 
affect the future level of the Perkins Loan Fund and the availability 
of loans for future borrowers. Institutions that outsource the 
servicing of their loans could possibly reduce servicing costs 
associated with these loans by recalling these accounts and performing 
the required collection action on their own. As stated in the preamble 
to the August 6, 2002 NPRM, we also believe that the changes approved 
by the negotiating committee will reduce costs and administrative 
burden on Perkins Loan institutions.
    Changes: None.

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

    Comments: Some commenters indicated that it would be simpler to 
state in Sec.  682.414(a)(5)(ii) that an electronically signed 
promissory note must be stored ``electronically and it must be 
retrievable in a coherent format'' rather than using a cross-reference 
to 34 CFR 668.24(d)(3)(i) through (iv).
    Discussion: We agree that it would be simpler if FFEL Program 
requirements were stated directly in the FFEL regulations to the extent 
practicable. Additionally, after reviewing the provisions in Sec.  
668.24(d)(3)(i)-(iv), we do not believe that they clearly address the 
maintenance of electronically signed documents.
    Changes: We have revised Sec.  682.414(a)(5)(ii) to replace the 
cross-reference with the language recommended by the commenters. For 
consistency, a comparable change also has been made in the Federal 
Perkins Loan regulations at 34 CFR 674.19(e)(4)(ii).

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

    Comments: One commenter representing several institutions 
participating in the Perkins Loan Program noted that the proposed 
regulations in Sec.  674.42(b) did not use the term ``institution'' 
consistently throughout the section. Instead, both the terms 
``institution'' and ``school'' were used in the section.
    Discussion: We appreciate the commenter pointing out that the term 
``institution'' was not used consistently in Sec.  674.42(b) and agree 
that the section should be revised accordingly.
    Changes: We have revised Sec.  674.42(b) by changing references to 
``school'' to ``institution'' or ``the institution'' as appropriate.
    Comments: One commenter representing financial aid administrators 
noted that the proposed language in Sec. Sec.  682.605(f)(2)(v) and 
685.304(a)(3)(iv) did not offer the option of basing the sample monthly 
repayment amounts that must be provided to FFEL and Direct Loan 
borrowers as part of initial counseling on the average indebtedness of 
borrowers with FFEL or Direct Loan

[[Page 67065]]

program loans for attendance in the borrower's program of study at the 
institution. The commenter believed that since this option is available 
under the corresponding exit counseling provisions it should also be 
available under the initial counseling provisions. The commenter noted 
that some institutions that have graduate programs or short-term 
programs may want to exercise the option of providing sample monthly 
repayment amounts based on a borrower's program of study and that 
adding the option would not impose an additional regulatory requirement 
on institutions because it would not be mandatory.
    Discussion: We agree with the commenter that it is important to 
offer in initial counseling the option of basing sample monthly 
repayment amounts on the average indebtedness of borrowers with FFEL or 
Direct Loan program loans for attendance in the borrower's program of 
study at the institution. The final regulations reflect that this 
option is available to institutions and to parties that provide initial 
counseling for institutions.
    In reviewing the preamble to the August 6, 2002 NPRM and the 
proposed regulations, we discovered that our preamble discussion of the 
new requirement that sample monthly repayment amounts be provided to 
borrowers as part of initial counseling was inaccurate. Specifically, 
the preamble to the August 6, 2002 NPRM stated that this was a new exit 
counseling requirement under the FFEL Program. However, the proposed 
regulations reflected a new initial counseling requirement under the 
FFEL Program. We would like to take this opportunity to accurately 
explain the change.
    The proposed regulations did not include any changes to the current 
exit counseling provisions in the Perkins, FFEL, and Direct Loan 
programs that require borrowers to be informed of average anticipated 
monthly repayment amounts. As part of exit counseling, Perkins, FFEL, 
and Direct Loan borrowers must be informed of the average anticipated 
monthly repayment amount based either on the borrower's indebtedness or 
on the average indebtedness of other borrowers who have obtained 
Perkins, FFEL, or Direct Loan program loans for attendance at the 
borrower's institution or in the borrower's program of study at the 
institution.
    The proposed regulations did add to the FFEL Program's initial 
counseling regulations a provision requiring that sample monthly 
repayment amounts be provided to borrowers. The proposed regulations 
also modified an already existing repayment-related provision in the 
Direct Loan Program initial counseling regulations to mirror the new 
FFEL Program provision. As a result, the new initial counseling 
regulations require that FFEL and Direct Loan borrowers be informed of 
sample monthly repayment amounts. In both programs, the sample monthly 
repayment amounts may be based either on a range of student levels of 
indebtedness or on the average indebtedness of other borrowers.
    Changes: We have changed Sec. Sec.  682.604(f)(2)(v) and 
685.304(a)(3)(iv) to reflect that sample monthly repayment amounts may 
be based on the average indebtedness of borrowers with FFEL or Direct 
Loan program loans for attendance in the borrower's program of study at 
the institution.
    Comments: One commenter representing an institution expressed 
opposition to the provision in the proposed FFEL and Direct Loan 
program exit counseling regulations that requires a borrower to 
provide, as part of exit counseling updated personal information, as 
well as information about the borrower's expected permanent address, 
the address of the borrower's next of kin, and the name and address of 
the borrower's expected employer. The commenter stated that the 
regulations should not place on an institution (or a party that 
provides exit counseling for an institution) the burden of requiring a 
borrower to provide this information. Specifically, the commenter noted 
that some of the information may not be known to a borrower at the time 
exit counseling occurs and would make it difficult for an institution 
to enforce this requirement. The commenter requested that we revise the 
proposed regulations to state that exit counseling must ``request'' 
rather than ``require'' that a borrower provide the specified 
information.
    Discussion: The exit counseling provision to which the commenter 
referred has been longstanding in the Perkins, FFEL, and Direct Loan 
programs and is based on section 485(b)(2) of the HEA. We are not aware 
of any problems in this area and decline to accept the commenter's 
suggested change to the regulatory language. However, we would like to 
assure the commenter that neither the statute nor the regulations 
requires a borrower to provide information that is not known to the 
borrower at the time exit counseling occurs.
    Changes: None.
    Comments: None.
    Discussion: In reviewing the new requirement that exit counseling 
provide Perkins, FFEL, and Direct Loan borrowers with information about 
the availability of the Department's National Student Loan Data System 
(NSLDS), we realized that there may be questions about the information 
that is expected to be provided to borrowers. As agreed during 
negotiated rulemaking, it is important for borrowers to be informed 
that they may access NSLDS to review information about all of their 
Title IV loans. To achieve this goal, borrowers must be informed of the 
existence of NSLDS and of the fact that information about their Title 
IV loans is stored in NSLDS. We do not want to be prescriptive in this 
area. However, we believe it would be helpful to provide borrowers with 
the address for the NSLDS Web site and the toll-free phone number that 
borrowers may call if they do not have Internet access. The address for 
the NSLDS Web site is http://www.nslds.ed.gov/. The toll-free phone 
number that borrowers may call is 1-800-4-FED-AID.
    Changes: None.

Perkins Loan--Credit Bureau Reporting (Section 674.45)

    Comments: One commenter representing several Perkins Loan 
institutions agreed with the goal of clarifying when a borrower's 
default status is to be reported to a national credit bureau, but 
believed that the proposed change does not achieve that result. The 
commenter recommended modifying the proposed language in Sec.  
674.45(a)(1) to clarify that an institution must report the account as 
in default, ``if the institution has not already done so'' since such 
reporting typically occurs in advance of the collection procedures 
being initiated. The commenter further recommended removing the words 
``before beginning collection procedures'' from Sec.  674.43(f) to 
provide additional clarification.
    Discussion: We do not agree with the commenter's suggested changes 
to the proposed language because we believe that such a change would 
give the false impression that reporting default status information to 
a national credit bureau for the first time is appropriate when done 
before beginning collection procedures. Institutions are required by 
the HEA to report to credit bureaus beginning when the loan is 
disbursed and to report information concerning the repayment and 
collection of any loan as soon as that loan is more than 30 days past 
due.
    Changes: None.

[[Page 67066]]

Perkins Loan--Litigation (Section 674.46)

    Comments: Several commenters supported the proposal to increase 
from $200 to $500 the amount that the Perkins Loan institution must use 
to determine if it must litigate. However, a few commenters pointed out 
that it was not cost effective to litigate accounts of $500 or less and 
recommended that the minimum dollar amount be increased to $1000. One 
commenter urged the Secretary to remove the two-year timeframe for 
reviewing accounts for litigation and eliminate the minimum dollar 
threshold because the institution is in the best position to make the 
assessment as to whether it is cost effective to litigate. This 
commenter pointed out that due to the institutional investment in the 
Perkins Loan Program and the inherent interest in recovering these 
funds, the Secretary should take every opportunity to eliminate 
unnecessary regulations that result in greater expense but do not yield 
greater debt recovery. The commenter felt that the proposed regulations 
requiring a two-year review and increasing the minimum threshold amount 
to $500 was a step in the right direction, but was not enough.
    Discussion: We appreciate the support from most of the commenters. 
However, we do not accept the recommendations for changes made by some 
of the commenters. The preamble language contained in the NPRM 
accurately describes the basis on which a consensus was reached on this 
issue by the negotiators. As indicated in the preamble language, the 
decision to increase the litigation threshold amount from $200 to $500 
was based upon average Perkins loan balance data and our view that the 
majority of these accounts should remain subject to litigation. In 
addition, we continue to believe that requiring a review once every two 
years ensures that these overdue accounts will remain subject to 
litigation. Failure to litigate on these overdue accounts in a 
relatively timely manner could result in the reduction of an 
institution's revolving fund, thereby decreasing the number of loans 
awarded to needy students.
    Changes: None.

Federal Work-Study at For-Profit Institutions (Sections 675.2 and 
675.21)

    Comments: One commenter requested clarification on one of the 
revisions made to the definition of ``student services.'' One of the 
examples added to the definition of student services was assisting 
instructors in curriculum-related activities. The commenter recommended 
that the language in the regulation or the preamble clarify that this 
means that a student may be employed under the FWS Program as a 
teaching assistant.
    Discussion: The amended definition of ``student services'' added 
more examples of acceptable jobs in which a proprietary institution may 
employ students on campus to work for the institution itself. The 
example of assisting instructors in curriculum-related activities was 
added to highlight that an FWS student is considered to be providing a 
student service when he or she is assisting an instructor in the lab or 
in other work that is related to the instructor's official academic 
duties at the proprietary institution. This change does allow a student 
to serve as a teaching assistant. However, an FWS student may not be 
hired to be an instructor at a proprietary institution, while remaining 
a FWS student.
    Changes: None.
    Comments: One commenter requested clarification on whether services 
provided to the institution's former students meets the definition of 
student services. The commenter stated that FWS students should be able 
to be employed in areas such as job placement and default management 
services in which the services are available to former students as well 
as to current students.
    Discussion: Student services are those services that provide a 
benefit, either directly or indirectly, to students. Students are 
persons enrolled or accepted for enrollment at the institution. An FWS 
student whose job is to provide services only to the institution's 
former students would not be considered to be providing a student 
service because the service is not for currently enrolled students. 
However, if a student's FWS job involved providing services to both 
current students and to former students, the job would be considered 
one that provides student services. As an example, an FWS student is 
employed in the job placement office providing assistance in finding 
potential employers and helping prepare resumes for current students as 
well as for alumni of the institution. Because the FWS student is 
providing these services to current students, the fact that he or she 
is also helping alumni does not mean that the FWS student is not 
providing a student service. On the other hand, if an institution has a 
default management counselor job in which the employee assists only 
former students of the institution, the requirement that the job be one 
that provides student services would not be met because the service is 
not being provided to currently enrolled students.
    Changes: None.

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

    Comments: One commenter stated that he did not understand what 
types of abuses the new loan limit regulations are intended to address. 
However, the commenter felt strongly that if a program requires a 
student to complete two years of prerequisite coursework in order to be 
admitted, then the student should be considered a third-year student 
upon admission to that program.
    Discussion: As we explained in the preamble to the proposed 
regulations, the new regulations clarify that an institution may not 
link separate, stand-alone programs to allow students to qualify for 
higher annual loan limits than they would otherwise be eligible to 
receive based on the length of the program. As an example, we noted 
that an institution may not allow students in one-year program ``B'' to 
borrow at the second-year loan level based on the fact that they were 
required to have previously completed one-year program ``A'' as a 
prerequisite for admission to program ``B''. Since program ``B'' is 
only one academic year in length, students enrolled in that program are 
restricted to first-year annual loan limits.
    We remind the commenter that the new regulations do not affect the 
existing provisions in Sec. Sec.  682.204 and 685.203, which allow 
undergraduate borrowers who enroll in programs that require prior 
completion of an associate or baccalaureate degree to borrow at the 
higher annual loan limits for third-year undergraduates. In addition, 
as we noted in the preamble to the proposed regulations, the new 
regulations do not restrict an institution from determining a student's 
grade level based on the number of hours earned at another institution 
that are applicable to the student's program at the new institution.
    Changes: None.
    Comments: One commenter requested that the loan limit regulations 
be revised to clearly state that second-year annual loan limits apply 
when prorating a loan for a student who is enrolled in the final period 
of study of a program that is more than one academic year in length, 
but less than two academic years in length. The commenter further 
recommended that the final regulations clarify the role of the 
Secretary's ``Eligibility and Certification Approval Report'' (ECAR) in 
determining whether a program is longer than one academic year in 
length for annual loan limit

[[Page 67067]]

purposes. The commenter noted that there has been some confusion as to 
whether first- or second-year annual loan limits apply for the final 
portion of programs that are longer than one academic year, but shorter 
than two academic years, because the section of the ECAR that 
identifies the highest educational program offered by an institution 
categorizes these programs as ``one year'' programs. The commenter 
believed that second-year annual loan limits should apply after a 
student has completed the first academic year of such a program, 
regardless of how the program is classified on the ECAR.
    Discussion: The commenter is correct in understanding that a 
student who has completed the first academic year of a program that is 
more than one academic year in length, but less than two academic years 
in length, may receive a prorated loan at the second-year level for the 
final portion of the program. As noted below, the current regulations 
clearly support the understanding of the commenter. The proposed 
changes do not affect these provisions.
    The current annual loan limit regulations in the FFEL and Direct 
Loan programs provide for second-year annual loan limits in the 
situation described by the commenter. Sections 682.204(a)(2)(ii), 
682.204(d)(2)(ii), 685.203(a)(2)(ii), and 685.203(c)(2)(ii)(B) specify 
a prorated annual loan limit at the second-year undergraduate level for 
students who have completed the first year of study of a program and 
are in a remaining portion of the program that is less than one 
academic year in length. While the ECAR contains the information that 
forms the basis of an institution's approval to participate in the 
Title IV, HEA programs, including the highest level of program offered, 
annual loan limits are not strictly determined by the ECAR, but rather 
on the actual length of the academic program.
    Changes: None.

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

    Comments: Some commenters recommended that the unemployment 
deferment regulations be revised in Sec.  682.210(h)(3)(iv) to state 
that a borrower is not required to ``certify'' his or her search for 
full-time employment. The commenters noted that Sec.  682.210(h)(2) 
uses the term ``certify'' rather than ``describe'' and believed these 
two regulatory provisions should use the same terminology.
    Discussion: We agree that a borrower requesting a period of initial 
deferment is not required to describe his or her search for full-time 
employment at the time the deferment is granted. After examining the 
regulations, however, we have determined that the effect of recent 
regulatory changes and the proposed changes to this section of the 
regulations has caused the entire first sentence of Sec.  
682.210(h)(3)(iv), in which the commenter requested the change, to be 
duplicative and unnecessary.
    Changes: We have deleted the first sentence of proposed Sec.  
682.210(h)(3)(iv) from these final regulations.
    Comments: One commenter believed that it is no longer appropriate 
to require a ``written certification'' in Sec.  682.210(h)(4) because 
Sec.  682.210(h)(2) permits an alternative equivalent as approved by 
the Secretary. The commenter recommended that the word ``written'' be 
deleted from Sec.  682.210(h)(4).
    Discussion: The commenter's rationale for the deletion appears to 
be based on the presumption that the alternative equivalent form of 
borrower certification approved by the Secretary would not be in 
writing, therefore the requirement for a written certification in Sec.  
682.210(h)(4) should be modified accordingly. However, the regulatory 
provision permits both requirements to exist simultaneously independent 
of each other; a written certification and another that applies to an 
equivalent form of borrower certification approved by the Secretary. 
Even if the Secretary were to approve an equivalent that would not need 
to be in writing, that does not mean that the other requirement for a 
written certification needs to be undone. We believe it is clearer to 
amend Sec.  682.210(h)(4) to reflect an alternate approved form of 
certification.
    Changes: We have amended Sec.  682.210(h)(4) to include reference 
to an approved equivalent.

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

    Comments: One commenter representing a guaranty agency recommended 
that the new provisions in Sec. Sec.  682.402, 685.212, and 685.220 
related to discharges of consolidation loans apply only to 
consolidation loans made on or after July 1, 2003. The commenter 
believed that they should not apply to consolidation loans made before 
July 1, 2003, since it would be very difficult for program participants 
to identify previous underlying loans that might qualify for discharge 
under the new regulations.
    The commenter also asked how a lender would file a claim when only 
one of the borrowers of a joint consolidation loan qualifies for a loan 
discharge under the new provisions. The commenter suggested that such 
claims should be handled in a manner similar to the procedures for 
unpaid refund discharge claims.
    Finally, the commenter asked how a guaranty agency would assign a 
portion of a joint consolidation loan to the Secretary--and who would 
hold the promissory note--when a preliminary determination has been 
made that one of the borrowers is totally and permanently disabled. The 
commenter recommended that the entire joint consolidation loan be 
assigned to the Secretary, instead of ``splitting'' the loan and 
assigning only the potentially dischargeable portion.
    Discussion: As we explained in the preamble to the August 6, 2002 
NPRM, we suggested the changes related to consolidation loan discharges 
because we believed that borrowers should be permitted to receive 
discharges that they would have qualified for if they had not 
consolidated their loans. We did not intend to provide the new benefits 
only to borrowers who receive consolidation loans in the future. 
Moreover, there was never any suggestion made during the negotiated 
rulemaking that discharge eligibility should be limited based on the 
date the consolidation loan was made, or the date the discharge 
condition was met. Accordingly, a consolidation loan borrower may 
qualify for a discharge under the new provisions regardless of when the 
consolidation loan was made or when the discharge condition was met, 
provided that the borrower still has an outstanding balance on the 
consolidation loan at the time of the borrower's discharge request. 
However, a borrower who would have qualified for a discharge of a 
consolidation loan under the new regulations may not apply for a 
discharge of a loan that has already been paid in full.
    We would also like to note that we do not plan to attempt, nor do 
we expect guaranty agencies to attempt, to identify borrowers who were 
not eligible to receive loan discharges in the past, but who might 
qualify under the new regulations. However, we will work with 
interested parties to determine how to make information about the new 
consolidation loan benefits available to the public.
    With regard to filing claims when only one of the borrowers of a 
joint consolidation loan qualifies for loan discharge under the new 
provisions, the procedures would be the same as the procedures for 
filing claims when a joint consolidation loan is partially discharged 
under current regulations

[[Page 67068]]

due to school closure, false certification, or unpaid refund.
    The assignment of joint consolidation loans to the Secretary when 
one of the borrowers may qualify for a total and permanent disability 
discharge involves operational issues that are not regulated. We will 
work with lenders, servicers and guaranty agencies to address the 
issues raised by the commenter.
    Changes: None.
    Comments: None.
    Discussion: We have determined that the language in the proposed 
regulations on loan discharge for consolidation loans did not clearly 
reflect our intentions. In the case of a discharge of a consolidation 
loan based on the death of the student for whom the parent had obtained 
a PLUS loan that was included in the consolidation loan, or the death 
or total and permanent disability of one of the borrowers of a joint 
consolidation loan, the borrower or the borrower's estate should 
receive the same discharge benefit that they would have received if the 
loan(s) had not been consolidated. Current loan discharge regulations 
in both the FFEL and Direct Loan programs provide that any payments 
received after the date of a borrower's (or dependent student's) death 
or after the date that a borrower became totally and permanently 
disabled are returned to the borrower or the borrower's estate. In the 
case of a consolidation loan, loan holders should return payments to 
the borrower or the borrower's estate only if there is no remaining 
balance on the consolidation loan after the discharge. Otherwise, 
payments received after the date the discharge condition was met should 
be reapplied to reduce the remaining outstanding balance of the 
consolidation loan. Payments received after the date the discharge 
condition was met should be reflected in the discharge amount, 
regardless of how that amount is determined. However, the proposed 
regulatory language might have suggested that the amount discharged is 
limited to the applicable portion of the current outstanding balance of 
the loan, and does not include a refund or reapplication of payments 
received after the date that the borrower met the eligibility 
requirements for the discharge.
    Changes: We have revised Sec. Sec.  682.402(a)(2), 685.212(a)(3), 
685.220(l)(3)(i), and 685.220(l)(3)(ii) to reflect that the amount 
discharged is an amount equal to the applicable portion of the 
outstanding balance of the consolidation loan as of the date that the 
borrower met the eligibility requirements for the discharge.
    Comments: Several commenters recommended that we add language to 
Sec.  682.402(a)(2) clarifying that in the case of a joint 
consolidation loan that is partially discharged due to the death or 
total and permanent disability of one of the borrowers, neither that 
borrower nor that borrower's estate is any longer jointly and severally 
liable for repayment of the remaining portion of the consolidation 
loan. One commenter proposed the addition of similar language, but also 
recommended that the information in Sec.  682.402(a)(2) related to the 
discharge amount be removed from that paragraph and placed in Sec.  
682.402(h), which covers the payment of discharge claims by a guaranty 
agency. That commenter recommended that Sec.  682.402(a)(2) be revised 
to include only general discharge information.
    Discussion: In the case of discharges involving the death of one of 
the borrowers of a joint consolidation loan, the suggested additional 
language is unnecessary. A borrower's joint and several liability for 
repayment of the balance of the joint consolidation loan ends upon the 
borrower's death, and an existing provision in Sec.  682.402(b)(4) 
prohibits lenders from attempting to collect on a loan from the 
borrower's estate or from any endorser after making a determination 
that the borrower has died. The same policy applies in the Direct Loan 
Program.
    The commenters are not correct in assuming that a total and 
permanent disability discharge of a portion of a joint consolidation 
loan eliminates joint and several liability for the remaining balance 
of the loan for either of the borrowers. In the case of a partial 
discharge of a joint consolidation loan for a reason other than the 
death of one of the borrowers, both borrowers remain jointly and 
severally liable for the remaining balance of the loan. For example, 
under current regulations, a joint consolidation loan may be partially 
discharged if one of the borrowers meets the eligibility requirements 
for discharge based on school closure, false certification, or an 
unpaid refund. However, both borrowers on the joint consolidation loan 
are still jointly and severally liable for the amount of the loan that 
remains after the discharge has been granted. Under the new 
regulations, this will also be true if a joint consolidation loan is 
partially discharged based on the total and permanent disability of one 
of the borrowers. That is, each borrower will remain jointly and 
severally liable for repayment of the remaining portion of the 
consolidation loan.
    With regard to the suggestion that information on the discharge 
amount be moved from Sec.  682.402(a)(2) to Sec.  682.402(h), we 
understand the rationale for the commenter's recommendation. However, 
we believe that this information is presented more clearly and 
concisely in Sec.  682.402(a)(2).
    Changes: None.
    Comments: Several commenters suggested that we restore language 
that was deleted from redesignated Sec.  682.402(a)(3) in the proposed 
regulations. Specifically, they proposed that the words ``or a 
Consolidation loan was obtained by a married couple,'' be restored 
after the word ``co-makers''. The commenters believed that the deleted 
language ensures that when only one of the borrowers of a co-made PLUS 
loan or joint consolidation loan meets the requirements for loan 
discharge based on death, total and permanent disability, or 
bankruptcy, the other borrower remains obligated to repay the portion 
of the loan that is not discharged.
    One commenter made a similar recommendation for revising 
redesignated Sec.  682.402(a)(3) to specifically state that if one of 
the borrowers of a co-made PLUS loan or one of the borrowers of a joint 
consolidation loan dies or becomes totally and permanently disabled, 
the other borrower remains obligated to repay the remaining balance of 
the loan. The commenter further noted that the proposed regulations did 
not address bankruptcy situations, and recommended additional language 
for redesignated Sec.  682.402(a)(3) specifying that if the loan 
obligation of one of the borrowers of a co-made PLUS loan or joint 
consolidation loan is stayed by a bankruptcy filing or discharged in 
bankruptcy, but the other borrower's obligation is not stayed or 
discharged, the other borrower remains obligated to repay the remaining 
balance of the loan.
    Discussion: The commenters suggest that the new loan discharge 
provisions apply to both joint consolidation loans and PLUS loans 
obtained jointly by two parents as co-makers. That is incorrect. The 
proposed regulations that resulted from the negotiated rulemaking 
sessions apply only to joint consolidation loans, not to co-made PLUS 
loans.
    Restoring the language that was deleted from redesignated Sec.  
682.402(a)(3) would not have the effect of ensuring that the other 
borrower is responsible for repaying the remaining portion of a 
partially discharged joint consolidation loan, as suggested by the 
commenters. In the current regulations, Sec.  682.402(a)(2) 
(redesignated Sec.  682.402(a)(3)) prohibits partial discharges of both 
joint consolidation loans and PLUS loans obtained by two parents as co-
makers if one of the two

[[Page 67069]]

borrowers dies or becomes totally and permanently disabled, has 
collection of his or her loan obligation stayed by a bankruptcy filing, 
or has that obligation discharged in bankruptcy, but the other borrower 
does not qualify for any type of discharge. In such cases, current 
regulations provide that the other borrower is responsible for repaying 
the entire loan. The new regulations provide for the partial discharge 
of a joint consolidation loan--but not a PLUS loan obtained by two 
parents as co-makers--if one of the borrowers dies or becomes totally 
and permanently disabled. To allow for this new provision, it was 
necessary to remove the reference to joint consolidation loans from 
redesignated Sec.  682.402(a)(3). If the language of the current 
regulations were restored, there would be a conflict with the new 
provisions related to discharges of joint consolidation loans.
    We do not believe that it is necessary to explicitly state in the 
regulations that when a joint consolidation loan is partially 
discharged as a result of the death of one of the borrowers, the other 
borrower remains responsible for repaying the outstanding balance of 
the loan. We also do not believe that it is necessary to state in the 
regulations that, as explained elsewhere in this preamble, each 
borrower of a joint consolidation loan remains jointly and severally 
liable for repayment of the remaining balance of the loan if the loan 
is partially discharged based on the total and permanent disability of 
one of the borrowers.
    The new provisions related to the discharge of joint consolidation 
loans do not specifically address the discharge of joint consolidation 
loans due to bankruptcy, since our regulations do not determine whether 
one or both of the borrowers of a joint consolidation loan is relieved 
of any repayment obligation as the result of a bankruptcy filing. Such 
determinations are made by a bankruptcy court in accordance with the 
Bankruptcy Code.
    Changes: None.
    Comments: Several commenters recommended that, based on the new 
regulations which allow partial discharges of joint consolidation loans 
based on the death or total and permanent disability of one of the 
borrowers, we make a conforming change to Sec.  682.402(k)(2)(iii) by 
eliminating language that provides, in the case of claims for 
reimbursement on joint consolidation loans, for the Secretary to 
reimburse a guaranty agency only if each of the co-makers of the loan 
has died or become totally and permanently disabled. Some commenters 
also suggested additional technical changes to this paragraph to 
reflect the fact that under the current total and permanent disability 
discharge regulations, a guaranty agency does not make the 
determination that a borrower is totally and permanently disabled.
    Discussion: We agree that most of the changes suggested by the 
commenters are appropriate. However, the commenters' proposed 
conforming change to Sec.  682.402(k)(2)(iii) would retain current 
language specifying that in the case of a bankruptcy claim, both co-
makers of a joint consolidation loan must file a petition for relief in 
bankruptcy in order for a guaranty agency to be reimbursed. As 
explained elsewhere in this preamble, the new provisions for the 
discharge of joint consolidation loan do not address bankruptcy, since 
our regulations do not determine whether a borrower who has filed for 
bankruptcy is relieved of the obligation to repay a loan. For the same 
reason, we do not believe that it is appropriate for Sec.  
682.402(k)(2)(iii) to specify that both co-makers of a joint 
consolidation loan must file for bankruptcy.
    Changes: We have revised Sec.  682.402(k)(2)(iii) by removing 
language that provides for reimbursement by the Secretary only if each 
of the co-makers of a joint consolidation loan has died or become 
totally and permanently disabled. We have also removed the reference to 
determination of a borrower's total and permanent disability by the 
guaranty agency.
    Comments: One commenter objected to the proposed changes related to 
consolidation loan discharges in Sec. Sec.  685.212(a)(3) and 
685.220(l)(3) on the basis that comparable provisions were not proposed 
for the FFEL Program. The commenter believed that the proposed changes 
would give an unfair advantage to Direct Loan borrowers, and felt that 
the new consolidation loan discharge benefits should be made available 
to FFEL Program borrowers as well.
    Discussion: We disagree with the commenter. The August 6, 2002 NPRM 
included proposed changes in Sec. Sec.  682.402(a)(2) and 682.402(b)(6) 
of the FFEL Program regulations that provide the same benefits as the 
proposed changes in Sec.  685.212(a)(3) and 685.220(l)(3) of the Direct 
Loan Program regulations.
    Changes: None.

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

    Comments: None.
    Discussion: In reviewing the proposed regulations, we realized that 
the Direct Loan MPN expiration date provision based on a borrower 
providing written notice that no further loans may be made under an MPN 
was not stated correctly. Instead of referring to a written notice that 
no further loans may be ``made,'' the proposed regulations referred to 
a written notice that no further loans may be ``disbursed.'' To be 
technically correct, the regulations need to refer to a written notice 
that no further loans may be made.
    Changes: We have revised Sec.  685.102(b)(3)(i) in the definition 
of Master Promissory Note (MPN) to refer to a written notice that no 
further loans may be made.

GEAR UP Program (Section 694.10)

    Comments: One commenter requested clarification on whether GEAR UP 
funds may be used to replace a student's expected family contribution 
(EFC).
    Discussion: Section 404E(c) of the HEA provides that a GEAR UP 
scholarship ``* * * shall not be considered for purpose of awarding 
Federal grant assistance under this title, except that in no case shall 
the total amount of student financial assistance awarded to a student 
under this title exceed such student's total cost of attendance.'' 
Thus, a GEAR UP scholarship can be awarded without considering the 
student's EFC as long as the total Title IV aid, including the GEAR UP 
scholarship, does not exceed the student's cost of attendance. Also, 
when awarding other Title IV grants, a GEAR UP scholarship is not to be 
considered. The combination of these two provisions means, in effect, 
that a GEAR UP scholarship may be used to replace EFC for Title IV 
grants, including FSEOG. However, when awarding FWS, Federal Perkins 
Loans, and subsidized FFEL or Direct Loans to a student who is 
receiving a GEAR UP scholarship, GEAR UP funds may not be used to 
replace the EFC.
    Changes: None.

Executive Order 12866

    We have reviewed these final regulations in accordance with 
Executive Order 12866. Under the terms of the order we have assessed 
the potential costs and benefits of this regulatory action.
    The potential costs associated with the final regulations are those 
resulting from statutory requirements and those we have determined to 
be necessary for administering these programs effectively and 
efficiently.
    In assessing the potential costs and benefits--both quantitative 
and qualitative--of these final regulations, we have determined that 
the benefits of the regulations justify the costs.

[[Page 67070]]

    We have also determined that this regulatory action does not unduly 
interfere with State, local, and tribal governments in the exercise of 
their governmental functions.

Summary of Potential Costs and Benefits

    We summarized the potential costs and benefits of these final 
regulations in the preamble to the August 6, 2002, NPRM (67 FR 51046) 
and in the preamble to the August 8, 2002, NPRM (67 FR 51733).

Paperwork Reduction Act of 1995

    We received no comments on the Paperwork Reduction Act portion of 
the rule. The Paperwork Reduction Act of 1995 does not require you to 
respond to a collection of information unless it displays a valid OMB 
control number. OMB has approved the information collection request and 
assigned the following numbers to the collections of information in 
these final regulations:

Section 600.21 1845-0012
Section 600.31 1845-0012
Section 668.22 1845-0022
Section 668.165 1845-0038
Section 668.173 1845-0022
Section 668.183 1845-0022
Section 668.193 1845-0022
Section 673.5 1845-0019
Section 674.16 1845-0019
Section 674.19 1845-0019
Section 674.33 1845-0019
Section 674.34 1845-0019
Section 674.39 1845-0023
Section 674.42 1845-0023
Section 674.43 1845-0023
Section 674.45 1845-0023
Section 674.47 1845-0023
Section 674.50 1845-0019
Section 682.200 1845-0020
Section 682.209 1845-0020
Section 682.210 1845-0020
Section 682.211 1845-0020
Section 682.402 1845-0020
Section 682.405 1845-0020
Section 682.414 1845-0020
Section 682.604 1845-0020
Section 685.212 1845-0021
Section 685.220 1845-0021
Section 685.304 1845-0021

Assessment of Educational Impact

    In the NPRM we requested comments on whether the proposed 
regulations would require transmission of information that any other 
agency or authority of the United States gathers or makes available.
    Based on the response to the NPRM and on our review, we have 
determined that these final regulations do not require transmission of 
information that any other agency or authority of the United States 
gathers or makes available.

Electronic Access to This Document

    You may view this document, as well as all other Department of 
Education documents published in the Federal Register, in text or Adobe 
Portable Document Format (PDF) on the Internet at the following site: 
http://www.ed.gov/legislation/FedRegister.
    To use PDF you must have Adobe Acrobat Reader, which is available 
free at this site. If you have questions about using PDF, call the U.S. 
Government Printing Office (GPO), toll free, at 1-888-293-6498; or in 
the Washington, DC, area at (202) 512-1530.
    You may also view this document in PDF at the following 
site:ifap.ed.gov.

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

(Catalog of Federal Domestic Assistance Numbers: 84.007 Federal 
Supplemental Educational Opportunity Grant Program; 84.032 Federal 
Family Education Loan Program; 84.033 Federal Work-Study Program; 
84.038 Federal Perkins Loan Program; 84.063 Federal Pell Grant 
Program; and 84.268 William D. Ford Federal Direct Loan Program)

List of Subjects

34 CFR Parts 600 and 668

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

34 CFR Parts 673 and 675

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

34 CFR Parts 674, 682, and 685

    Administrative Practice and Procedure, Colleges and universities, 
Education, Loans program--education, Reporting and recordkeeping 
requirements, Student aid, Vocational education.

34 CFR Part 690

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

34 CFR Part 694

    Colleges and universities, Elementary and secondary education, 
Grant programs--education, Reporting and recordkeeping requirements, 
Student aid.

    Dated: October 23, 2002.
Rod Paige,
Secretary of Education.

    For the reasons discussed in the preamble, the Secretary amends 
parts 600, 668, 673, 674, 675, 682, 685, 690, and 694 of title 34 of 
the Code of Federal Regulations as follows:

PART 600--INSTITUTIONAL ELIGIBILITY UNDER THE HIGHER EDUCATION ACT 
OF 1965, AS AMENDED

    1. The authority citation for part 600 is revised to read as 
follows:

    Authority: 20 U.S.C. 1001, 1002, 1003, 1088, 1091, 1094, 1099b, 
and 1099c, unless otherwise noted.


Sec.  600.8  [Amended]

    2. Section 600.8 is amended by adding ``proprietary institution of 
higher education or a postsecondary vocational'' after ``eligible''.

    3. Section 600.21 is amended:
    A. By revising paragraph (f);
    B. By revising the Office of Management and Budget control number.
    The revisions read as follows:


Sec.  600.21  Updating application information.

* * * * *
    (f) Definition. A family member includes a person's--
    (1) Parent or stepparent, sibling or step-sibling, spouse, child or 
stepchild, or grandchild or step-grandchild;
    (2) Spouse's parent or stepparent, sibling or step-sibling, child 
or stepchild, or grandchild or step-grandchild;
    (3) Child's spouse; and
    (4) Sibling's spouse.

(Approved by the Office of Management and Budget under control 
number 1845-0012)


    4. Section 600.31 is amended:
    A. By revising paragraph (e);
    B. By revising the Office of Management and Budget control number.
    The revisions read as follows:


Sec.  600.31  Change in ownership resulting in a change in control for 
private nonprofit, private for-profit and public institutions.

* * * * *
    (e) Excluded transactions. A change in ownership and control 
reported under Sec.  600.21 and otherwise subject to this section does 
not include a transfer of ownership and control of all or part of an 
owner's equity or partnership interest in an institution, the

[[Page 67071]]

institution's parent corporation, or other legal entity that has signed 
the institution's Program Participation Agreement--
    (1) From an owner to a ``family member'' of that owner as defined 
in Sec.  600.21(f); or
    (2) Upon the retirement or death of the owner, to a person with an 
ownership interest in the institution who has been involved in 
management of the institution for at least two years preceding the 
transfer and who has established and retained the ownership interest 
for at least two years prior to the transfer.

(Approved by the Office of Management and Budget under control 
number 1845-0012)

PART 668--STUDENT ASSISTANCE GENERAL PROVISIONS

    5. 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.


Sec.  668.2  [Amended]

    6. Section 668.2(b) is amended by removing the definition of 
``Academic year''.

    7. Section 668.3 is revised to read as follows:


Sec.  668.3  Academic year.

    (a) General. Except as provided in paragraph (c) of this section, 
an academic year is a period that begins on the first day of classes 
and ends on the last day of classes or examinations during which--
    (1) An institution provides a minimum of 30 weeks of instructional 
time; and
    (2) For an undergraduate educational program, a full-time student 
is expected to complete at least--
    (i) Twenty-four semester or trimester credit hours or 36 quarter 
credit hours for a program measured in credit hours; or
    (ii) 900 clock hours for a program measured in clock hours.
    (b) Definitions. For purposes of paragraph (a) of this section--
    (1) A week is a consecutive seven-day period;
    (2) A week of instructional time is any week in which at least one 
day of regularly scheduled instruction or examinations occurs or, after 
the last scheduled day of classes for a term or payment period, at 
least one day of study for final examinations occurs; and
    (3) Instructional time does not include any vacation periods, 
homework, or periods of orientation or counseling.
    (c) Reduction in the length of an academic year.
    (1) Upon the written request of an institution, the Secretary may 
approve, for good cause, an academic year of 26 through 29 weeks of 
instructional time for educational programs offered by the institution 
if the institution offers a two-year program leading to an associate 
degree or a four-year program leading to a baccalaureate degree.
    (2) An institution's written request must--
    (i) Identify each educational program for which the institution 
requests a reduction, and the requested number of weeks of 
instructional time for that program;
    (ii) Demonstrate good cause for the requested reductions; and
    (iii) Include any other information that the Secretary may require 
to determine whether to grant the request.
    (3)(i) The Secretary approves the request of an eligible 
institution for a reduction in the length of its academic year if the 
institution has demonstrated good cause for granting the request and 
the institution's accrediting agency and State licensing agency have 
approved the request.
    (ii) If the Secretary approves the request, the approval terminates 
when the institution's program participation agreement expires. The 
institution may request an extension of that approval as part of the 
recertification process.

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

(Authority: 20 U.S.C. 1088)



    8. Section 668.4 is revised to read as follows:


Sec.  668.4  Payment period.

    (a) Payment periods for an eligible program that measures progress 
in credit hours and has academic terms. For a student enrolled in an 
eligible program that measures progress in credit hours and has 
academic terms, the payment period is the academic term.
    (b) Payment periods for an eligible program that measures progress 
in credit hours and does not have academic terms. (1) For a student 
enrolled in an eligible program that is one academic year or less in 
length--
    (i) The first payment period is the period of time in which the 
student completes half the number of credit hours in the program and 
half the number of weeks in the program; and
    (ii) The second payment period is the period of time in which the 
student completes the program.
    (2) For a student enrolled in an eligible program that is more than 
one academic year in length--
    (i) For the first academic year and any subsequent full academic 
year--
    (A) The first payment period is the period of time in which the 
student completes half the number of credit hours in the academic year 
and half the number of weeks in the academic year; and
    (B) The second payment period is the period of time in which the 
student completes the academic year.
    (ii) For any remaining portion of an eligible program that is more 
than one-half an academic year but less than a full academic year in 
length--
    (A) The first payment period is the period of time in which the 
student completes half the number of credit hours in the remaining 
portion of the program and half the number of weeks remaining in the 
program; and
    (B) The second payment period is the period of time in which the 
student completes the remainder of the program.
    (iii) For any remaining portion of an eligible program that is not 
more than half an academic year, the payment period is the remainder of 
the program.
    (3) For purposes of paragraphs (b)(1) and (b)(2) of this section, 
if an institution is unable to determine when a student has completed 
half of the credit hours in a program, academic year, or remainder of a 
program; the student is considered to begin the second payment period 
of the program, academic year, or remainder of a program at the later 
of--
    (i) The date, as determined by the institution, on which the 
student has completed half of the academic coursework in the program, 
academic year, or remainder of the program; or
    (ii) The calendar midpoint between the first and last scheduled 
days of class of the program, academic year, or remainder of the 
program.
    (c) Payment periods for an eligible program that measures progress 
in clock hours. (1) For a student enrolled in an eligible program that 
is one academic year or less in length--
    (i) The first payment period is the period of time in which the 
student completes half the number of clock hours in the program; and
    (ii) The second payment period is the period of time in which the 
student completes the program.
    (2) For a student enrolled in an eligible program that is more than 
one academic year in length--
    (i) For the first academic year and any subsequent full academic 
year--
    (A) The first payment period is the period of time in which the 
student completes half the number of clock hours in the academic year; 
and

[[Page 67072]]

    (B) The second payment period is the period of time in which the 
student completes the academic year.
    (ii) For any remaining portion of an eligible program that is more 
than one-half an academic year but less than a full academic year in 
length--
    (A) The first payment period is the period of time in which the 
student completes half the number of clock hours in the remaining 
portion of the program; and
    (B) The second payment period is the period of time in which the 
student completes the remainder of the program.
    (iii) For any remaining portion of an eligible program that is not 
more than one half of an academic year, the payment period is the 
remainder of the program.
    (d) Number of payment periods. Notwithstanding paragraphs (b) and 
(c) of this section, an institution may choose to have more than two 
payment periods. If an institution so chooses, the regulations in 
paragraphs (b) and (c) of this section are modified to reflect the 
increased number of payment periods. For example, if an institution 
chooses to have three payment periods in an academic year in a program 
that measures progress in credit hours but does not have academic 
terms, each payment period must correspond to one-third of the academic 
year measured in both credit hours and weeks of instruction.
    (e) Re-entry within 180 days. If a student withdraws from a program 
described in paragraph (b) or (c) of this section during a payment 
period and then reenters the same program within 180 days, the student 
remains in that same payment period when he or she returns and, subject 
to conditions established by the Secretary or by the FFEL lender or 
guaranty agency, is eligible to receive any title IV, HEA program funds 
for which he or she was eligible prior to withdrawal, including funds 
that were returned by the institution or student under the provisions 
of Sec.  668.22.
    (f) Re-entry after 180 days or transfer. (1) Subject to the 
conditions of paragraph (f)(2) of this section, an institution 
calculates new payment periods for the remainder of a student's program 
based on paragraphs (b) through (d) of this section, for a student who 
withdraws from a program described in paragraph (b) or (c) of this 
section, and--
    (i) Reenters that program after 180 days,
    (ii) Transfers into another program at the same institution within 
any time period, or
    (iii) Transfers into a program at another institution within any 
time period.
    (2) For a student described in paragraph (f)(1) of this section--
    (i) For the purpose of calculating payment periods only, the length 
of the program is the number of credit hours and the number of weeks, 
or the number of clock hours, that the student has remaining in the 
program he or she enters or reenters; and
    (ii) If the remaining hours, and weeks if applicable, constitute 
one-half of an academic year or less, the remaining hours constitute 
one payment period.

(Authority: 20 U.S.C. 1070 et seq.)



    9. Section 668.8 is amended by:
    A. Revising paragraph (b)(3).
    B. Removing paragraph (b)(4).
    The revision reads as follows:


Sec.  668.8  Eligible program.

* * * * *
    (b) * * *
    (3)(i) The Secretary considers that an institution provides one 
week of instructional time in an academic program during any week the 
institution provides at least one day of regularly scheduled 
instruction or examinations, or, after the last scheduled day of 
classes for a term or a payment period, at least one day of study for 
final examinations.
    (ii) Instructional time does not include any vacation periods, 
homework, or periods of orientation or counseling.
* * * * *

    10. Section 668.14(b)(22) is revised to read as follows:


Sec.  668.14  Program participation agreement.

* * * * *
    (b) * * *
    (22)(i) It will not provide any commission, bonus, or other 
incentive payment based directly or indirectly upon success in securing 
enrollments or financial aid to any person or entity engaged in any 
student recruiting or admission activities or in making decisions 
regarding the awarding of title IV, HEA program funds, except that this 
limitation does not apply to the recruitment of foreign students 
residing in foreign countries who are not eligible to receive title IV, 
HEA program funds.
    (ii) Activities and arrangements that an institution may carry out 
without violating the provisions of paragraph (b)(22)(i) of this 
section include, but are not limited to:
    (A) The payment of fixed compensation, such as a fixed annual 
salary or a fixed hourly wage, as long as that compensation is not 
adjusted up or down more than twice during any twelve month period, and 
any adjustment is not based solely on the number of students recruited, 
admitted, enrolled, or awarded financial aid. For this purpose, an 
increase in fixed compensation resulting from a cost of living increase 
that is paid to all or substantially all full-time employees is not 
considered an adjustment.
    (B) Compensation to recruiters based upon their recruitment of 
students who enroll only in programs that are not eligible for title 
IV, HEA program funds.
    (C) Compensation to recruiters who arrange contracts between the 
institution and an employer under which the employer's employees enroll 
in the institution, and the employer pays, directly or by 
reimbursement, 50 percent or more of the tuition and fees charged to 
its employees; provided that the compensation is not based upon the 
number of employees who enroll in the institution, or the revenue they 
generate, and the recruiters have no contact with the employees.
    (D) Compensation paid as part of a profit-sharing or bonus plan, as 
long as those payments are substantially the same amount or the same 
percentage of salary or wages, and made to all or substantially all of 
the institution's full-time professional and administrative staff. Such 
payments can be limited to all, or substantially all of the full-time 
employees at one or more organizational level at the institution, 
except that an organizational level may not consist predominantly of 
recruiters, admissions staff, or financial aid staff.
    (E) Compensation that is based upon students successfully 
completing their educational programs, or one academic year of their 
educational programs, whichever is shorter. For this purpose, 
successful completion of an academic year means that the student has 
earned at least 24 semester or trimester credit hours or 36 quarter 
credit hours, or has successfully completed at least 900 clock hours of 
instruction at the institution.
    (F) Compensation paid to employees who perform clerical ``pre-
enrollment'' activities, such as answering telephone calls, referring 
inquiries, or distributing institutional materials.
    (G) Compensation to managerial or supervisory employees who do not 
directly manage or supervise employees who are directly involved in 
recruiting or admissions activities, or the awarding of title IV, HEA 
program funds.
    (H) The awarding of token gifts to the institution's students or 
alumni, provided that the gifts are not in the form of money, no more 
than one gift is provided annually to an individual, and

[[Page 67073]]

the cost of the gift is not more than $100.
    (I) Profit distributions proportionately based upon an individual's 
ownership interest in the institution.
    (J) Compensation paid for Internet-based recruitment and admission 
activities that provide information about the institution to 
prospective students, refer prospective students to the institution, or 
permit prospective students to apply for admission on-line.
    (K) Payments to third parties, including tuition sharing 
arrangements, that deliver various services to the institution, 
provided that none of the services involve recruiting or admission 
activities, or the awarding of title IV, HEA program funds.
    (L) Payments to third parties, including tuition sharing 
arrangements, that deliver various services to the institution, even if 
one of the services involves recruiting or admission activities or the 
awarding of title IV, HEA program funds, provided that the individuals 
performing the recruitment or admission activities, or the awarding of 
title IV, HEA program funds, are not compensated in a manner that would 
be impermissible under paragraph (b)(22) of this section.
* * * * *

    11. Section 668.22 is amended by:
    A. In paragraph (a)(3), removing ``Sec.  668.164(g)(2)'' and 
adding, in its place, ``Sec.  668.164(g)''.
    B. In paragraph (a)(4)(ii)(B), removing ``90'' and adding, in its 
place, ``120''.
    C. Revising paragraph (b)(3)(i).
    D. Revising paragraph (d)(1)(vi).
    E. Removing paragraph (d)(1)(vii).
    F. Redesignating paragraphs (d)(1)(viii) and (d)(1)(ix) as 
paragraphs (d)(1)(vii) and (d)(1)(viii), respectively, and revising the 
newly designated paragraph (d)(1)(vii).
    G. Removing paragraph (d)(2).
    H. Redesignating paragraphs (d)(3) and (d)(4) as paragraphs (d)(2) 
and (d)(3), respectively.
    I. Removing ``on'' and adding, in its place, ``at'' in newly 
redesignated paragraph (d)(2).
    J. Removing ``are'' and adding, in its place, ``is'' in newly 
redesignated paragraph (d)(3)(i).
    K. Adding ``, that includes the reason for the request,'' after 
``request'' in the first sentence in newly redesignated paragraph 
(d)(3)(iii)(B).
    L. Adding ``The timeframe for returning funds is further described 
in Sec.  668.173(b).'' at the end of paragraph (j)(1).
    The revisions and additions read as follows:


Sec.  668.22  Treatment of title IV funds when a student withdraws.

* * * * *
    (b) * * *
    (3)(i) An institution is required to take attendance if an outside 
entity (such as the institution's accrediting agency or a State agency) 
has a requirement, as determined by the entity, that the institution 
take attendance.
* * * * *
    (d) * * *
    (1) * * *
    (vi) The number of days in the approved leave of absence, when 
added to the number of days in all other approved leaves of absence, 
does not exceed 180 days in any 12-month period;
    (vii) Except for a clock hour or nonterm credit hour program, upon 
the student's return from the leave of absence, the student is 
permitted to complete the coursework he or she began prior to the leave 
of absence; and
* * * * *


Sec.  668.32  [Amended]

    12. Section 668.32(e)(2) is amended by removing ``within 12 months 
before the date the student initially receives title IV, HEA program 
assistance,''.

    13. 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 
paragraphs (d), (e), (f), (g), and (h) respectively.
    C. By adding new paragraphs (b) and (c).
    D. By revising newly redesignated paragraph (e).
    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, voluntary monthly payments 
under those arrangements. Voluntary payments are those payments made 
directly by the borrower, and do not include payments obtained by 
Federal offset, garnishment, or income or asset execution.
    (c) A student who reestablishes eligibility under either paragraph 
(a)(2) of this section or paragraph (b)(2) of this section may not 
reestablish eligibility again under either of those paragraphs.
* * * * *
    (e) A student who receives an overpayment under the Federal Perkins 
Loan Program, or under a title IV, HEA grant program may nevertheless 
be eligible to receive title IV, HEA program assistance if--
    (1) The student pays the overpayment in full;
    (2) The student makes arrangements satisfactory to the holder of 
the overpayment debt to pay the overpayment; or
    (3) The overpayment amount is less than $25 and is neither a 
remaining balance nor a result of the application of the overaward 
threshold in 34 CFR 673.5(d).
* * * * *


Sec.  668.151  [Amended]

    14. Section 668.151(a)(2) is amended by adding the words ``it 
received from an approved test publisher or assessment center'' after 
``an approved test''.

    15. Section 668.164(g) is revised to read as follows:


Sec.  668.164  Disbursing funds.

* * * * *
    (g) Late disbursements. (1) Ineligible student. For purposes of 
this paragraph, an otherwise eligible student becomes ineligible to 
receive title IV, HEA program funds on the date that--
    (i) For a loan under the FFEL and Direct Loan programs, the student 
is no longer enrolled at the institution as at least a half-time 
student for the period of enrollment for which the loan was intended; 
or
    (ii) For an award under the Federal Pell Grant, FSEOG, and Federal 
Perkins Loan programs, the student is no longer enrolled at the 
institution for the award year.
    (2) Conditions for a late disbursement. Except as limited under 
paragraph (g)(4) of this section, a student who becomes ineligible (or 
the student's parent in the case of a PLUS loan) qualifies for a late 
disbursement if, before the date the student became ineligible--
    (i) Except in the case of a PLUS loan, the Secretary processed a 
SAR or ISIR with an official expected family contribution; and
    (ii) (A) For a loan under the FFEL or Direct Loan programs, the 
institution certified or originated the loan; or

[[Page 67074]]

    (B) For an award under the Federal Perkins Loan or FSEOG programs, 
the institution made that award to the student.
    (3) Making a late disbursement. Provided that the conditions 
described in paragraph (g)(2) of this section are satisfied--
    (i) If the student withdrew from the institution during a payment 
period or period of enrollment, the institution must make any post-
withdrawal disbursement required under Sec.  668.22(a)(3) in accordance 
with the provisions of Sec.  668.22(a)(4);
    (ii) If the student successfully completed the payment period or 
period of enrollment, the institution must provide the student (or 
parent) the opportunity to receive the amount of title IV, HEA program 
funds that the student (or parent) was eligible to receive while the 
student was enrolled at the institution. For a late disbursement in 
this circumstance, the institution may credit the student's account to 
pay for current and allowable charges as described in paragraph (d) of 
this section, but must pay or offer any remaining amount to the student 
or parent; or
    (iii) If the student did not withdraw but ceased to be enrolled as 
at least a half-time student, the institution may make the late 
disbursement of a loan under the FFEL or Direct Loan programs to pay 
for educational costs that the institution determines the student 
incurred for the period in which the student was eligible.
    (4) Limitations. (i) Generally, an institution may not make a late 
disbursement later than 120 days after the date of the institution's 
determination that the student withdrew, as provided under Sec.  
668.22, or, for a student who did not withdraw, 120 days after the date 
the student otherwise became ineligible. On an exception basis, and 
with the approval of the Secretary, an institution may make a late 
disbursement after the applicable 120-day period, if the reason the 
late disbursement was not made within the 120-day period was not the 
fault of the student.
    (ii) An institution may not make a second or subsequent late 
disbursement of a loan under the FFEL or Direct Loan programs unless 
the student successfully completed the period of enrollment for which 
the loan was intended.
    (iii) An institution may not make a late disbursement of a loan 
under the FFEL or Direct Loan programs if the student was a first-year, 
first-time borrower unless the student completed the first 30 days of 
his or her program of study. This limitation does not apply if the 
institution is exempt from the 30-day delayed disbursement requirements 
under Sec.  682.604(c)(5)(i), (ii), or (iii) or Sec.  
685.303(b)(4)(i)(A), (B), or (C) of this chapter.
    (iv) An institution may not make a late disbursement of a Federal 
Pell Grant unless it received a valid SAR or a valid ISIR for the 
student by the deadline date established by the Secretary in a notice 
published in the Federal Register.

    16. Section 668.165 is amended:
    A. By revising paragraph (a)(3);
    B. By revising the Office of Management and Budget control number.
    The revisions read as follows:


Sec.  668.165  Notices and authorizations.

    (a) * * *
    (3) The institution must send the notice described in paragraph 
(a)(2) of this section in writing no earlier than 30 days before, and 
no later than 30 days after, crediting the student's account at the 
institution.
* * * * *

(Approved by the Office of Management and Budget under control 
number 1845-0038)


Sec.  668.171  [Amended]

    17. Section 668.171(b) is amended by:
    A. Removing ``refunds'' and adding, in its place, ``returns of 
unearned title IV HEA program funds'' in paragraph (b)(2).
    B. Removing ``and the payment of post-withdrawal disbursements 
under Sec.  668.22'' in paragraph (b)(4)(i).

    18. Section 668.173 is amended by:
    A. Revising paragraphs (a) through (c).
    B. Redesignating paragraph (d) as paragraph (f).
    C. Adding new paragraphs (d) and (e).
    D. Adding an Office of Management and Budget control number.
    The revisions and additions read as follows:


Sec.  668.173  Refund reserve standards.

    (a) General. The Secretary considers that an institution has 
sufficient cash reserves, as required under Sec.  668.171(b)(2), if the 
institution--
    (1) Satisfies the requirements for a public institution under Sec.  
668.171(c)(1);
    (2) Is located in a State that has a tuition recovery fund approved 
by the Secretary and the institution contributes to that fund; or
    (3) Returns, in a timely manner as described in paragraph (b) of 
this section, unearned title IV, HEA program funds that it is 
responsible for returning under the provisions of Sec.  668.22 for a 
student that withdrew from the institution.
    (b) Timely return of title IV, HEA program funds. In accordance 
with procedures established by the Secretary or FFEL Program lender, an 
institution returns unearned title IV, HEA funds timely if--
    (1) The institution deposits or transfers the funds into the bank 
account it maintains under Sec.  668.163 no later than 30 days after 
the date it determines that the student withdrew;
    (2) The institution initiates an electronic funds transfer (EFT) no 
later than 30 days after the date it determines that the student 
withdrew;
    (3) The institution initiates an electronic transaction, no later 
than 30 days after the date it determines that the student withdrew, 
that informs an FFEL lender to adjust the borrower's loan account for 
the amount returned; or
    (4) The institution issues a check no later than 30 days after the 
date it determines that the student withdrew. However, the Secretary 
considers that the institution did not satisfy this requirement if--
    (i) The institution's records show that the check was issued more 
than 30 days after the date the institution determined that the student 
withdrew; or
    (ii) The date on the cancelled check shows that the bank used by 
the Secretary or FFEL Program lender endorsed that check more than 45 
days after the date the institution determined that the student 
withdrew.
    (c) Compliance thresholds. (1) An institution does not comply with 
the reserve standard under Sec.  668.173(a)(3) if, in a compliance 
audit conducted under Sec.  668.23, an audit conducted by the Office of 
the Inspector General, or a program review conducted by the Department 
or guaranty agency, the auditor or reviewer finds--
    (i) In the sample of student records audited or reviewed that the 
institution did not return unearned title IV, HEA program funds within 
the timeframes described in paragraph (b) of this section for 5% or 
more of the students in the sample. (For purposes of determining this 
percentage, the sample includes only students for whom the institution 
was required to return unearned funds during its most recently 
completed fiscal year.); or
    (ii) A material weakness or reportable condition in the 
institution's report on internal controls relating to the return of 
unearned title IV, HEA program funds.
    (2) The Secretary does not consider an institution to be out of 
compliance with the reserve standard under Sec.  668.173(a)(3) if the 
institution is cited in any audit or review report because it did not 
return unearned funds in a timely manner for one or two students,

[[Page 67075]]

or for less than 5% of the students in the sample referred to in 
paragraph (c)(1)(i) of this section.
    (d) Letter of credit. (1) Except as provided under paragraph (e)(1) 
of this section, an institution that can satisfy the reserve standard 
only under paragraph (a)(3) of this section, must submit an irrevocable 
letter of credit acceptable and payable to the Secretary if a finding 
in an audit or review shows that the institution exceeded the 
compliance thresholds in paragraph (c) of this section for either of 
its two most recently completed fiscal years.
    (2) The amount of the letter of credit required under paragraph 
(d)(1) of this section is 25 percent of the total amount of unearned 
title IV, HEA program funds that the institution was required to return 
under Sec.  668.22 during the institution's most recently completed 
fiscal year.
    (3) An institution that is subject to paragraph (d)(1) of this 
section must submit to the Secretary a letter of credit no later than 
30 days after the earlier of the date that--
    (i) The institution is required to submit its compliance audit;
    (ii) The Office of the Inspector General issues a final audit 
report;
    (iii) The designated department official issues a final program 
review determination;
    (iv) The Department issues a preliminary program review report or 
draft audit report, or a guaranty agency issues a preliminary report 
showing that the institution did not return unearned funds for more 
than 10% of the sampled students; or
    (v) The Secretary sends a written notice to the institution 
requesting the letter of credit that explains why the institution has 
failed to return unearned funds in a timely manner.
    (e) Exceptions. With regard to the letter of credit described in 
paragraph (d) of this section--
    (1) An institution does not have to submit the letter of credit if 
the amount calculated under paragraph (d)(2) of this section is less 
than $5,000 and the institution can demonstrate that it has cash 
reserves of at least $5,000 available at all times.
    (2) An institution may delay submitting the letter of credit and 
request the Secretary to reconsider a finding made in its most recent 
audit or review report that it failed to return unearned title IV, HEA 
program funds in a timely manner if--
    (i)(A) The institution submits documents showing that the unearned 
title IV, HEA program funds were not returned in a timely manner solely 
because of exceptional circumstances beyond the institution's control 
and that the institution would not have exceeded the compliance 
thresholds under paragraph (c)(1) of this section had it not been for 
these exceptional circumstances; or
    (B) The institution submits documents showing that it did not fail 
to make timely refunds as provided under paragraphs (b) and (c) of this 
section; and
    (ii) The institution's request, along with the documents described 
in paragraph (e)(2)(i) of this section, is submitted to the Secretary 
no later than the date it would otherwise be required to submit a 
letter of credit under paragraph (d)(3).
    (3) If the Secretary denies the institution's request under 
paragraph (e)(2) of this section, the Secretary notifies the 
institution of the date it must submit the letter of credit.
* * * * *

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


    19. Section 668.174(c)(4) is revised to read as follows:


Sec.  668.174  Past performance.

* * * * *
    (c) * * *
    (4) ``Family member'' is defined in Sec.  600.21(f) of this 
chapter.


Sec.  668.183  [Amended]

    20. 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 paragraph (c)(1)(iii).


Sec.  668.193  [Amended]

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

PART 673--GENERAL PROVISIONS FOR THE FEDERAL PERKINS LOAN PROGRAM, 
FEDERAL WORK-STUDY PROGRAM, AND FEDERAL SUPPLEMENTAL EDUCATIONAL 
OPPORTUNITY GRANT PROGRAM

    22. The authority citation for part 673 continues to read as 
follows:

    Authority: 20 U.S.C. 421-429, 1070b-1070b-3, and 1087aa-1087ii; 
42 U.S.C. 2751-2756b, unless otherwise noted.


    23. Section 673.5(f) is revised to read as follows:


Sec.  673.5  Overaward.

* * * * *
    (f) Liability for and recovery of Federal Perkins loans and FSEOG 
overpayments. (1) Except as provided in paragraphs (f)(2) and (f)(3) of 
this section, a student is liable for any Federal Perkins loan or FSEOG 
overpayment made to him or her. An FSEOG overpayment for purposes of 
this paragraph does not include the non-Federal share of an FSEOG award 
if an institution meets its FSEOG matching share by the individual 
recipient method or the aggregate method.
    (2) The institution is liable for a Federal Perkins loan or FSEOG 
overpayment if the overpayment occurred because the institution failed 
to follow the procedures in this part or 34 CFR parts 668, 674, or 676. 
The institution shall restore an amount equal to the overpayment and 
any administrative cost allowance claimed on that amount to its loan 
fund for a Federal Perkins loan overpayment or to its FSEOG account for 
an FSEOG overpayment.
    (3) A student is not liable for, and the institution is not 
required to attempt recovery of, a Federal Perkins loan or FSEOG 
overpayment, nor is the institution required to refer an FSEOG 
overpayment to the Secretary, if the overpayment--
    (i) Is less than $25; and
    (ii) Is neither a remaining balance nor a result of the application 
of the overaward threshold in paragraph (d) of this section.
    (4)(i) Except as provided in paragraph (f)(3) of this section, if 
an institution makes a Federal Perkins loan or FSEOG overpayment for 
which it is not liable, it shall promptly send a written notice to the 
student requesting repayment of the overpayment amount. The notice must 
state that failure to make that repayment, or to make arrangements 
satisfactory to the holder of the overpayment debt to pay the 
overpayment, makes the student ineligible for further title IV, HEA 
program funds until final resolution of the overpayment.
    (ii) If a student objects to the institution's Federal Perkins loan 
or FSEOG overpayment determination on the grounds that it is erroneous, 
the institution shall consider any information provided by the student 
and determine whether the objection is warranted.
    (5) Except as provided in paragraph (f)(3) of this section, if a 
student fails to repay an FSEOG overpayment or make arrangements 
satisfactory to the holder of the overpayment debt to repay the FSEOG 
overpayment after the institution has taken the action required by 
paragraph (f)(4) of this section, the institution must refer the FSEOG 
overpayment to the Secretary for

[[Page 67076]]

collection purposes in accordance with procedures required by the 
Secretary. After referring the FSEOG overpayment to the Secretary under 
this section, the institution need make no further effort to recover 
the overpayment.

PART 674--FEDERAL PERKINS LOAN PROGRAM

    24. 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.


    25. 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.
* * * * *

    26. Section 674.9 is amended:
    A. By removing paragraph (g).
    B. By redesignating paragraphs (h), (i), (j), (k) and (l) as 
paragraphs (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''.
    D. By revising newly redesignated paragraph (j).
    The revision reads as follows:


Sec.  674.9  Student eligibility.

* * * * *
    (j) In the case of a borrower who is in default on a Federal 
Perkins Loan, NDSL or Defense loan, satisfies one of the conditions 
contained in Sec.  674.5(c)(3)(i) or (ii) except that--
    (1) For purposes of this section, voluntary payments made by the 
borrower under paragraph (i) of this section are those payments made 
directly by the borrower; and
    (2) Voluntary payments do not include payments obtained by Federal 
offset, garnishment, or income or asset execution.
* * * * *

    27. 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 a Master Promissory Note (MPN), the 
institution's ability to make additional loans based on that 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]

    28. 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 newly 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''.
    E. In paragraph (b), by removing ``transfers'' and adding, in its 
place, ``assigns''.
    F. By removing paragraphs (c), (d), and (e).

    29. 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) If a promissory note was signed electronically, the 
institution must store it electronically and the promissory note must 
be retrievable in a coherent format.
    (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.

    30. Section 674.33(b) is amended:
    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 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.
* * * * *

    31. Section 674.34 is amended:
    A. In paragraph (e)(4), by removing ``(e)(9)'' and adding, in its 
place, ``(e)(10)''.
    B. In paragraph (e)(5), by adding ``as determined under paragraph 
(e)(10) of this section'' after the first occurrence of ``burden''.
    C. By revising paragraph (e)(10).
    The revision reads as follows:


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

* * * * *
    (e) * * *
    (10) In determining a borrower's Federal education debt burden 
under paragraphs (e)(4) and (e)(5) of this section, the institution 
shall--
    (i) If the Federal postsecondary education loan is scheduled to be 
repaid

[[Page 67077]]

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]

    32. Section 674.39(a) is amended:
    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).

    33. 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 school'' and adding, 
in its place, ``the institution''.
    E. By revising paragraph (b)(2)(iii).
    F. In paragraph (b)(2)(v), by removing ``in forceful terms''.
    G. In paragraph (b)(2)(vi), by removing ``school'' and adding, in 
its place, ``institution''.
    H. In paragraph (b)(2)(vii), by removing ``with'' and adding, in 
its place, ``for''.
    I. 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.
    J. 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''.
    K. By adding a new paragraph (b)(2)(x).
    L. By removing paragraph (b)(3).
    M. By redesignating paragraphs (b)(4) and (b)(5) as paragraphs 
(b)(3) and (b)(4), respectively.
    N. By revising newly redesignated paragraph (b)(3).
    O. In newly redesignated paragraph (b)(4), by removing ``school's'' 
and adding, in its place, ``institution's''.
    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 institution approves for credit, the 
borrower may be provided with written counseling material by mail 
within 30 days after the borrower completes the program. If a borrower 
withdraws from the institution without the institution's prior 
knowledge or fails to complete an exit counseling session as required, 
the institution must ensure that exit counseling is provided through 
either interactive electronic means or by mailing counseling materials 
to the borrower at the borrower's last known address within 30 days 
after learning that the borrower has withdrawn from the institution 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, the institution must take reasonable steps to ensure that each 
student borrower receives the counseling materials, and participates in 
and completes the exit counseling.
* * * * *


Sec.  674.43  [Amended]

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


Sec.  674.45  [Amended]

    35. 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]

    36. 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''.

    37. 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 of 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]

    38. 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 the 
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 675--FEDERAL WORK-STUDY PROGRAMS

    39. The authority citation for part 675 continues to read as 
follows:

    Authority: 42 U.S.C. 2751-2756b, unless otherwise noted.


[[Page 67078]]



    40. Section 675.2(b) is amended by revising the definition of 
``Student services'' to read as follows:


Sec.  675.2  Definitions.

* * * * *
    (b) * * *
    Student services: Services that are offered to students that may 
include, but are not limited to, financial aid, library, peer guidance 
counseling, job placement, assisting an instructor with curriculum-
related activities, security, and social, health, and tutorial 
services. Student services do not have to be direct or involve personal 
interaction with students. For purposes of this definition, facility 
maintenance, cleaning, purchasing, and public relations are never 
considered student services.
* * * * *

    41. Section 675.21(b)(2)(i) is revised to read as follows:


Sec.  675.21  Institutional employment.

* * * * *
    (b) * * *
    (2) * * *
    (i) Involve the provision of student services as defined in Sec.  
675.2(b) that are directly related to the work-study student's training 
or education;
* * * * *

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

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

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


    43. Section 682.200(b) is amended:
    A. By adding a sentence at the end of paragraph (2)(ii) of the 
definition of ``Lender'' 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. In the definition of ``Master promissory note (MPN)'', by 
changing ``Master promissory note (MPN)'' to ``Master Promissory Note 
(MPN)''.

    44. Section 682.204 is amended:
    A. By adding new paragraphs (a)(8), (a)(9), (d)(7), and (d)(8).
    B. In paragraph (l) by removing ``34 CFR 668.2'' and adding, in its 
place, ``34 CFR 668.3''.
    The additions 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.
* * * * *

    45. 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 a 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.
* * * * *

    46. 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 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) 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, or an approved equivalent, 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--

[[Page 67079]]

    (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.
* * * * *

    47. 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's 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.  682.401  [Amended]

    48. Section 682.401 is amended by adding a sentence after the 
heading of paragraph (b)(4) to read as follows: ``Except as provided in 
Sec.  668.35(b) for a borrower with a defaulted loan on which a 
judgment has been obtained, reinstatement of Title IV eligibility for a 
borrower with a defaulted loan must be in accordance with this 
paragraph (b)(4).''

    49. 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).
    J. Revising paragraph (k)(2)(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, as of the date the borrower died or became totally and 
permanently disabled, 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 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

[[Page 67080]]

    (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.
* * * * *
    (k) * * *
    (2) * * *
    (iii) In the case of a Consolidation loan, the borrower (or one of 
the co-makers) has died, is determined to be totally and permanently 
disabled under Sec.  682.402(c), or has filed the petition for relief 
in bankruptcy within the maximum repayment period described in Sec.  
682.209(h)(2), exclusive of periods of deferment or periods of 
forbearance granted by the lender that extended the maximum repayment 
period;
* * * * *

    50. 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. * * *
* * * * *

    51. 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 electronically and it must be 
retrievable in a coherent format.
* * * * *


Sec.  682.603  [Amended]

    52. Sections 682.603(f)(1)(ii)(B) and (f)(2)(i) are amended by 
removing ``34 CFR 668.2'' and adding, in its place, ``34 CFR 668.3''.

    53. 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 or in the 
same program of study at the same school.
    (3) If initial counseling is conducted through interactive 
electronic means, the 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 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

[[Page 67081]]

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

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

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

    55. Section 685.102(b) is amended:
    A. By revising the definition of ``Master promissory note (MPN)''.
    B. In the second sentence of paragraph (3) in the definition of 
``Satisfactory repayment arrangement'', by removing ``, regardless of 
whether there is a judgment against the borrower,''; and by removing 
``income tax'' and adding, in its place, ``Federal''.
    The revision reads 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 made;
    (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.
* * * * *

    56. 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).
    C. By adding in paragraph (h) ``, as defined in 34 CFR 668.3'' 
after ``year''.
    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.
* * * * *

    57. Section 685.211(f) is revised to read as follows:


Sec.  685.211  Miscellaneous repayment provisions.

* * * * *
    (f) Rehabilitation of defaulted loans. (1) A defaulted Direct Loan, 
except for a loan on which a judgment has been obtained, is 
rehabilitated if the borrower makes 12 consecutive, on-time, 
reasonable, and affordable monthly payments. The amount of such a 
payment is determined on the basis of the borrower's total financial 
circumstances. If a defaulted loan is rehabilitated, the Secretary 
instructs any credit bureau to which the default was reported to remove 
the default from the borrower's credit history.
    (2) A defaulted Direct Loan on which a judgment has been obtained 
may not be rehabilitated.

    58. Section 685.212 is amended by adding a new paragraph (a)(3) to 
read as follows:


Sec.  685.212  Discharge of a loan obligation.

    (a) * * *

[[Page 67082]]

    (3) In the case of a Direct PLUS Consolidation Loan that repaid a 
Direct PLUS Loan or a Federal PLUS Loan obtained on behalf of a student 
who dies, the Secretary discharges an amount equal to the portion of 
the outstanding balance of the consolidation loan, as of the date of 
the student's death, attributable to that Direct PLUS Loan or Federal 
PLUS Loan.
* * * * *

    59. Section 685.220(l)(3) is revised to read as follows:


Sec.  685.220  Consolidation.

* * * * *
    (l) * * *
    (3) Discharge. (i) If a borrower dies and the Secretary receives 
the documentation described in Sec.  685.212(a), the Secretary 
discharges an amount equal to the portion of the outstanding balance of 
the consolidation loan, as of the date of the borrower's death, 
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 
an amount equal to the portion of the outstanding balance of the 
consolidation loan, as of the date the borrower became totally and 
permanently disabled, 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.


Sec.  685.301  [Amended]

    60. Sections 685.301(a)(9)(i)(B)(2) and (a)(9)(ii)(A) are amended 
by removing ``34 CFR 668.2'' and adding, in its place, ``34 CFR 
668.3''.

    61. 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 paragraph (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 student 
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 or in the same program of study at 
the same school; and
    (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 and 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

[[Page 67083]]

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.
* * * * *

PART 690--FEDERAL PELL GRANT PROGRAM

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

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


Sec.  690.61  [Amended]

    63. In paragraph (b) by removing ``34 CFR 668.60,'' and adding, in 
its place, ``the verification provisions of Sec.  668.60 and the late 
disbursement provisions of Sec.  668.164(g) of this chapter,''.

    64. Section 690.75(a) is revised to read as follows:


Sec.  690.75  Determination of eligibility for payment.

    (a) For each payment period, an institution may pay a Federal Pell 
Grant to an eligible student only after it determines that the 
student--
    (1) Qualifies as an eligible student under 34 CFR Part 668, Subpart 
C;
    (2) Is enrolled in an eligible program as an undergraduate student; 
and
    (3) If enrolled in a credit hour program without terms or a clock 
hour program, has completed the payment period as defined in Sec.  
668.4 for which he or she has been paid a Federal Pell Grant.
* * * * *

    65. Section 690.79 is revised to read as follows:


Sec.  690.79  Liability for and recovery of Federal Pell Grant 
overpayments.

    (a)(1) Except as provided in paragraphs (a)(2) and (a)(3) of this 
section, a student is liable for any Federal Pell Grant overpayment 
made to him or her.
    (2) The institution is liable for a Federal Pell Grant overpayment 
if the overpayment occurred because the institution failed to follow 
the procedures set forth in this part or 34 CFR Part 668. The 
institution must restore an amount equal to the overpayment to its 
Federal Pell Grant account.
    (3) A student is not liable for, and the institution is not 
required to attempt recovery of or refer to the Secretary, a Federal 
Pell Grant overpayment if the amount of the overpayment is less than 
$25 and is not a remaining balance.
    (b)(1) Except as provided in paragraph (a)(3) of this section, if 
an institution makes a Federal Pell Grant overpayment for which it is 
not liable, it must promptly send a written notice to the student 
requesting repayment of the overpayment amount. The notice must state 
that failure to make that repayment, or to make arrangements 
satisfactory to the holder of the overpayment debt to repay the 
overpayment, makes the student ineligible for further title IV, HEA 
program funds until final resolution of the Federal Pell Grant 
overpayment.
    (2) If a student objects to the institution's Federal Pell Grant 
overpayment determination on the grounds that it is erroneous, the 
institution must consider any information provided by the student and 
determine whether the objection is warranted.
    (c) Except as provided in paragraph (a)(3) of this section, if the 
student fails to repay a Federal Pell Grant overpayment or make 
arrangements satisfactory to the holder of the overpayment debt to 
repay the Federal Pell Grant overpayment, after the institution has 
taken the action required by paragraph (b) of this section, the 
institution must refer the overpayment to the Secretary for collection 
purposes in accordance with procedures required by the Secretary. After 
referring the Federal Pell Grant overpayment to the Secretary under 
this section, the institution need make no further efforts to recover 
the overpayment.

(Authority: 20 U.S.C. 1070a)

PART 694--GAINING EARLY AWARENESS AND READINESS FOR UNDERGRADUATE 
PROGRAMS (GEAR UP)

    66. The authority citation for part 694 continues to read as 
follows:

    Authority: 20 U.S.C. 1070a-21 to 1070a-28.


    67. Section 694.10(e) is revised to read as follows:


Sec.  694.10  What are the requirements for awards under the program's 
scholarship component under section 404E of the HEA?

* * * * *
    (e) Other grant assistance. A GEAR UP scholarship may not be 
considered in the determination of a student's eligibility for other 
grant assistance provided under title IV of the HEA.

[FR Doc. 02-27627 Filed 10-31-02; 8:45 am]
BILLING CODE 4000-01-P