[Federal Register Volume 71, Number 153 (Wednesday, August 9, 2006)]
[Rules and Regulations]
[Pages 45666-45717]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-6696]



[[Page 45665]]

-----------------------------------------------------------------------

Part III





Department of Education





-----------------------------------------------------------------------



34 CFR Parts 600, 668, 673, et al.



Federal Student Aid Programs; Final Rule

  Federal Register / Vol. 71, No. 153 / Wednesday, August 9, 2006 / 
Rules and Regulations  

[[Page 45666]]


-----------------------------------------------------------------------

DEPARTMENT OF EDUCATION

34 CFR Parts 600, 668, 673, 674, 675, 676, 682 and 685

RIN 1840-AC87


Federal Student Aid Programs

AGENCY: Office of Postsecondary Education, Department of Education.

ACTION: Interim final regulations; request for comments.

-----------------------------------------------------------------------

SUMMARY: The Secretary is amending the Federal Student Aid Program 
regulations to implement the changes to the Higher Education Act of 
1965, as amended (HEA), resulting from the Higher Education 
Reconciliation Act of 2005 (HERA), Public Law No. 109-171, and other 
recently enacted legislation. These interim final regulations reflect 
the provisions of the HERA that affect students, borrowers and program 
participants in the Federal student aid programs authorized under Title 
IV of the HEA.
    Interim final regulations for the two new Title IV grant programs 
created by the HERA, the Academic Competitiveness Grant Program and the 
National Science and Mathematics Access to Retain Talent (SMART) Grant 
Program, are being published in a separate notice in the Federal 
Register.

DATES: Effective date: These interim final regulations are effective 
September 8, 2006.
    Comment date: The Department must receive any comments on or before 
September 8, 2006.
    Information collection compliance date: Affected parties do not 
have to comply with the information collection requirements in Sections 
600.7, 600.10, 668.3, 668.8, 668.10, 668.22, 668.173, 673.5, 674.34, 
682.102, 682.200, 682.207, 682.209, 682.210, 682.211, 682.215, 682.305, 
682.401, 682.402, 682.404, 682.405, 682.406, 682.410, 682.415, 682.601, 
682.604, 685.102, 685.204, 685.208, 685.215, 685.217 and 685.220 until 
the Department publishes in the Federal Register the control numbers 
assigned by the Office of Management and Budget (OMB) to these 
information collection requirements. Publication of the control numbers 
notifies the public that OMB has approved these information collection 
requirements under the Paperwork Reduction Act of 1995.

ADDRESSES: Address all comments about these interim final regulations 
to: Gail McLarnon, U.S. Department of Education, P.O. Box 33185, 
Washington, DC 20033-3185.
    If you prefer to deliver your comments by hand or by using a 
courier service or commercial carrier, address your comments to: Gail 
McLarnon, 1990 K Street, NW., room 8026, Washington, DC 20006-8542.
    If you prefer to send your comments through the Internet, you may 
address them to us at: [email protected]. Or you may send them to us 
at the U.S. Government Web site: http://www.regulations.gov. You must 
include the term ``HERA Interim Final Comments'' in the subject line of 
your electronic message.

FOR FURTHER INFORMATION CONTACT: 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 at: [email protected].
    If you use a telecommunications device for the deaf (TDD), you may 
call the Federal Relay Service (FRS) 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: These interim final regulations reflect most 
of the changes made to the HEA by the HERA, enacted as part of the 
Deficit Reduction Act of 2005 (Pub. L. 109-171), as well as some 
changes made by other recently enacted legislation. The changes made by 
the HERA include:
     An increase in certain FFEL and Direct Loan Program loan 
limits,
     A reduction of origination fees in the FFEL and Direct 
Loan Programs,
     The creation of a deferment for FFEL, Direct Loan and 
Perkins Loan Program borrowers who serve on active duty military 
service during times of war or national emergency, and a reduction of 
subsidies paid to lenders,
     Changes to the definition of an academic year for programs 
measured in clock hours,
     Changes and additions to provisions related to distance 
education and direct assessment academic programs,
     Modifications to the regulations on the eligibility for 
Title IV, HEA program assistance for students with convictions for 
drug-related offenses, specifying that a student or parent who has not 
repaid fraudulently obtained Title IV, HEA program funds is ineligible 
for additional Title IV, program assistance,
     Changes to the requirements for the treatment of Title IV, 
HEA program funds when a student withdraws, and
     The re-institution of the previously expired FFEL and 
Direct Loan disbursement flexibilities provided to institutions with 
low cohort default rates. Effective February 8, 2006, institutions with 
official cohort default rates of less than 10 percent for each of the 
three most recent years do not need to comply with the ``30-day 
disbursement delay'' requirement for first time, first year students 
nor with the multiple disbursement requirements if the loan period is 
one term or four months or less.
    The HERA also modified several Title IV, HEA provisions that are 
not addressed in these interim final regulations. The HERA made changes 
to the rules governing Cost of Attendance calculations, the 
determination of an applicant's dependency status, and the calculation 
of an applicant's expected family contribution. In accordance with 
section 478(a) of the HEA, the Secretary does not issue regulations in 
this area.
    The HERA also modified and made permanent the provisions of the 
Taxpayer-Teacher Protection Act of 2004 (Pub. L. 108-409) which (1) 
changed the calculation of special allowance payments for certain FFEL 
Program loans made with proceeds of tax-exempt obligations and (2) 
increased teacher loan forgiveness amounts for FFEL and Direct Loan 
borrowers teaching in certain areas.
    In addition to the changes mandated by the HERA, these interim 
final regulations also incorporate the provisions of Pub. L. 107-139, 
which changed the formula for calculating special allowance payments in 
the FFEL Program for loans made on or after July 1, 2000 and set 
interest rates for FFEL and Direct Loans first disbursed on or after 
July 1, 2006 at fixed interest rates.
    These interim final regulations also incorporate the statutory 
changes made to the HEA by the Pell Grant Hurricane and Disaster Relief 
Act (Pub. L. 109-66) and the Student Grant Hurricane and Disaster 
Relief Act (Pub. L. 109-67). These laws authorize the Secretary to 
waive the requirement that a student repay a Title IV, HEA grant if the 
student withdrew from an institution because of a major disaster. The 
Secretary initially exercised this waiver authority through publication 
of Dear Colleague Letter GEN-05-17 on November 9, 2005.
    These interim final regulations also incorporate the statutory 
changes made to the HEA by The Emergency Supplemental Appropriations 
Act for Defense, the Global War on Terror, and Hurricane Recovery, 2006 
(Pub. L. 109-234). The Emergency Supplemental Appropriations Act 
amended section 428C(b)(1)(A) of the HEA by repealing the single holder 
rule with respect to

[[Page 45667]]

any FFEL Consolidation loan for which an application is received by an 
eligible lender on or after June 15, 2006. This law also repealed 
section 8009(a)(2) of the HERA and reinstated the current statutory 
provisions under which a borrower may consolidate outstanding FFEL 
Program loans into the Federal Direct Consolidation Loan Program.

Significant Regulations

    We discuss substantive issues under the sections of the regulations 
to which they pertain. Generally, we do not address regulatory changes 
that are technical or otherwise minor in effect.

Distance Education (Sec. Sec.  600.2, 600.7, 600.51, 668.8 and 668.38)

    Statute: Section 8020 of the HERA modified the institutional 
eligibility requirements in section 102(a)(3) of the HEA that generally 
make institutions offering more than 50 percent of their courses by 
correspondence, or a combination of correspondence and 
telecommunications, or enrolling 50 percent or more of their students 
in correspondence courses, ineligible for Title IV, HEA program 
assistance. The HERA also modified the student eligibility requirements 
of section 484(l)(1) of the HEA, by removing telecommunications courses 
from being considered as correspondence courses. Under the amended HEA, 
courses offered by telecommunications that meet certain conditions are 
no longer considered correspondence courses, and students enrolled in 
telecommunications courses are no longer considered to be 
correspondence students.
    The HERA also modified section 481(b) of the HEA to reflect certain 
restrictions on the eligibility of programs that are offered by 
telecommunications. Consistent with prior law, the institution, 
including its distance education programs, must hold current 
accreditation from an accrediting agency recognized by the Secretary 
that has the evaluation of distance education in its scope of 
recognition. However, under the HERA, programs offered by foreign 
institutions that include instruction delivered by telecommunication 
are not eligible.
    Current Regulations: The current regulations reflect the previous 
statutory limitations on institutional and student eligibility based on 
the percentage of correspondence courses offered by the institution and 
the percentage of students enrolled in correspondence courses, and the 
relation of telecommunications courses to correspondence courses.
    New Regulations: We have amended the regulations in Sec.  600.2 by 
removing from the definition of correspondence course the paragraph 
that describes the conditions under which a telecommunications course 
is considered a correspondence course and by revising the definition of 
telecommunications course. The definition of telecommunications course 
now specifies that a telecommunications course is one that uses one or 
a combination of technologies to deliver instruction to students who 
are separated from the instructor and to support regular and 
substantive interaction between these students and the instructor, 
either synchronously or asynchronously. We have amended the regulations 
relating to institutional ineligibility in Sec.  600.7 to delete the 
references to telecommunications courses from the provisions relating 
to calculation of the percentage of correspondence courses offered by 
an institution. We also amended student eligibility regulations in 
Sec.  668.38 to provide that students who are enrolled in certificate 
programs offered through telecommunications are no longer considered to 
be correspondence students. This change applies to institutions 
regardless of the percentage of degree programs offered by the 
institution.
    We have amended the eligible program regulations in Sec.  668.8 to 
include programs that are offered in whole or in part through 
telecommunications by domestic institutions and that are accredited by 
an accrediting agency recognized by the Secretary for accreditation of 
distance education. As in the past, the accrediting agency's scope of 
recognition must include the accreditation of distance education. 
Interpreting the HEA as amended by the HERA, we have also amended Sec.  
668.8 and the regulations related to the eligibility of foreign schools 
in Sec.  600.51 to specify that programs offered by foreign schools 
through telecommunications or correspondence are not eligible programs. 
Recognizing, however, that telecommunications technologies are 
frequently used in conjunction with classroom instruction, we have 
included a provision acknowledging that participating foreign schools 
are free to use telecommunications technologies to supplement and 
support instruction offered in the foreign classroom.
    Reasons: The interim final regulations in Sec.  600.7 will now 
reflect the statutory changes modifying the current institutional 
eligibility requirements which provide that institutions offering more 
than 50 percent of their courses via correspondence, or a combination 
of correspondence and telecommunications, or enrolling 50 percent or 
more of their students in correspondence courses are ineligible to 
participate in Title IV, HEA programs. Under the HERA, courses offered 
by telecommunications are no longer considered correspondence courses, 
and students enrolled in telecommunications courses are no longer 
considered to be correspondence students. As a result, otherwise 
eligible institutions that offer over 50 percent of their courses by 
telecommunications, or have 50 percent or more of their regular 
students enrolled in telecommunications courses, are now eligible to 
participate in the Title IV, HEA programs. The 50 percent limitations 
continue to apply to correspondence courses and students.
    Because of the different statutory treatment of telecommunications 
and correspondence, we are changing the definition of 
telecommunications course. We believe that it is critical to 
differentiate between the two delivery modes. A definition of 
telecommunications course that focused exclusively on technologies 
could be erroneously interpreted to allow an institution to qualify for 
full participation in Title IV, HEA programs upon introduction of minor 
e-mail contact between students and a grader or instructional assistant 
(who may or may not have subject matter expertise) into what is 
essentially a correspondence course. Similarly, a course outline or 
course notes posted to an Internet Web site might also meet the current 
definition of a telecommunications course. Quality standards for 
electronically-delivered education emphasize the importance of 
interaction between the instructor and student. The amended definition 
of a telecommunications course acknowledges the importance of 
interactivity in electronically-delivered instruction and clearly 
distinguishes telecommunications from correspondence.
    The interim final regulations in Sec.  668.8 also reflect the 
statutory changes to the requirements for an eligible program to 
include programs offered in whole or in part through telecommunications 
by domestic institutions with appropriate accreditation. Because the 
HEA provides that telecommunications programs offered by foreign 
schools are not eligible programs, and the HEA provides that foreign 
schools are schools ``outside the United States,'' and since Congress 
has not lifted the limitations

[[Page 45668]]

on the eligibility of foreign institutions that offer correspondence 
study, we believe that Congress did not intend for correspondence 
programs offered by foreign schools to be eligible programs. The 
purpose of eligibility for foreign schools, which is to permit students 
from the United States to experience life and education in foreign 
countries, is not served through correspondence study.

Direct Assessment Programs (Sec. Sec.  600.2, 600.10, 600.21, 600.51, 
668.8, and 668.10)

    Statute: Section 8020 of the HERA adds a new type of eligible 
program to section 481(b) of the HEA--an instructional program that 
uses direct assessment of student learning, or recognizes the direct 
assessment of student learning by others, in lieu of measuring student 
learning in credit hours or clock hours. The assessment must be 
consistent with the institution's or program's accreditation. The HERA 
also provides that the Secretary will determine initially whether each 
program for which an institution proposes to use direct assessment is 
an eligible program.
    Current Regulations: There are no current regulations that reflect 
the use of direct assessment instead of credit hours or clock hours as 
a measure of student learning.
    New Regulations: We have amended the regulations in Sec.  600.2 to 
include in the definition of educational program the statutory language 
describing direct assessment programs.
    In addition, we have amended the definition to provide that merely 
giving credit for direct assessments does not constitute instruction. 
We have also amended Sec.  668.8 to indicate that a direct assessment 
program approved by the Secretary is considered an eligible program as 
defined in Sec.  668.8.
    These interim final regulations also include a new Sec.  668.10, 
that provides a definition of the term direct assessment programs and 
discusses how key Title IV, HEA program requirements apply to direct 
assessment programs. The section also includes the information that an 
institution must submit for the Secretary to make an eligibility 
determination of a direct assessment program.
    We have amended the regulations related to the eligibility of 
foreign schools in Sec.  600.51 to specify that direct assessment 
programs offered by foreign schools are not eligible programs. In 
addition, we have amended Sec. Sec.  600.10(c)(2) and 600.21(a)(4) to 
require that an institution must apply to the Secretary for approval 
whenever it adds a direct assessment program.
    Reasons: In amending the HEA to provide for the Title IV 
eligibility of programs using direct assessment, Congress specifically 
used the term ``instructional program'' to clarify what types of 
programs would be eligible. Thus, the statute requires that the program 
include ``instruction,'' as well as ``assessment.'' To meet this 
requirement, programs that measure student learning by direct 
assessment must provide some means for students to supplement their 
existing knowledge to pass the assessments. An institution that is 
merely conducting direct assessments of a student's knowledge and 
skills, without providing any resources to fill those gaps, is not 
providing instruction.
    In new Sec.  668.10, we have adopted a definition of direct 
assessment program that reflects common usage by assessment experts and 
the accreditation community. In developing this definition, we 
recognized that many of the key requirements of the Title IV, HEA 
programs rely on both credit and clock hour measurements. By 
definition, direct assessment programs do not use credit or clock hours 
as a measure of student learning, but nothing in the HEA, as amended by 
the HERA, exempts direct assessment programs from the other credit and 
clock hour requirements. To apply the Title IV requirements to direct 
assessment programs, it is necessary to determine the equivalent number 
of credit or clock hours to the amount of student learning being 
directly assessed.
    Because many of the statutory requirements for Title IV, HEA 
program eligibility are stated in terms of time and/or credit or clock 
hours, we determined that the time-based requirements can and must be 
applied to direct assessment programs to ensure that students receive 
comparable amounts of Title IV, HEA program assistance for comparable 
work. This approach ensures that while one student in a direct 
assessment program may acquire the knowledge and skills necessary to 
pass assessments more quickly than does another student, and, as a 
result, may progress more quickly through the program, both students 
would receive the same amount of Title IV, HEA program assistance for 
the same payment period. However, the student who remained in 
attendance for more payment periods to complete the program because he 
or she entered the program with less knowledge or learned at a slower 
rate, might receive more Title IV, HEA program assistance based on the 
additional payment periods he or she attended. Likewise, students in 
direct assessment programs should receive no more Title IV, HEA program 
assistance in an academic year than would students in credit and clock 
hour programs that are comparable in terms of student learning. We 
applied this approach throughout these interim final regulations.
    The statute requires an institution to apply to the Secretary to 
have a direct assessment program determined to be an eligible program. 
Section 668.10(b) specifies the information an institution must provide 
in its application. We recognize that there is no single model for 
direct assessment programs and therefore have provided that 
institutions must provide detailed information about the approach they 
are using. In addition, institutions must indicate equivalencies to 
credit or clock hours in terms of instructional time, and to provide a 
factual basis for the claim of equivalence. These equivalencies are 
essential because, as mentioned previously, many applicable Title IV, 
HEA program requirements use time and/or credit or clock hours.
    We also considered that some students would have acquired skills 
and knowledge prior to their enrollment in the direct assessment 
program. Title IV, HEA program funds are provided to help cover the 
student's cost of obtaining an education. Accordingly, Title IV, HEA 
program funds should be used only for learning that occurs after a 
student has enrolled in an educational program. Therefore, we have 
amended the regulations to require institutions to provide information 
in the application for approval of a direct assessment program about 
how they assess a student's knowledge upon entering the program.
    We recognized that institutions offering direct assessment programs 
might use courses or learning materials developed by other entities, 
such as training and professional development organizations and other 
educational institutions, to assist students in preparing for the 
assessments. We considered whether the use of outside resources could 
be considered contracting out a portion of an educational program and 
determined that it could be. Therefore, we included in the direct 
assessment regulations a provision that exempts direct assessment 
programs from the limitations of contracting for part of an educational 
program.
    We considered whether remedial courses using direct assessment of 
student learning in lieu of credit or clock hours could be supported 
with Title IV, HEA program funds.
    We determined that remedial courses taken in preparation for 
enrollment in a

[[Page 45669]]

direct assessment program could be paid for with Title IV, HEA program 
funds only if they were offered in credit or clock hours. Our 
conclusion is based on the fact that the HERA modified the definition 
of eligible program to include direct assessment programs, but did not 
change the fact that remedial coursework is not itself a program or 
part of a program. We applied similar reasoning to instruction needed 
for a professional credential or certification from a State that is 
required for employment as a teacher in an elementary or secondary 
school.
    The HERA specifies that the assessment an institution uses in its 
direct assessment program must be consistent with the accreditation of 
the institution or program. Foreign schools are not accredited by 
nationally recognized accrediting agencies recognized by the Department 
and accordingly cannot meet this program eligibility requirement. In 
the future, the Secretary may consider developing eligibility criteria 
that are comparable to the accreditation requirement to permit direct 
assessment programs offered by foreign schools to qualify for Title IV, 
HEA program eligibility.
    The discussion of regulatory alternatives considered in the 
Regulatory Impact Analysis provides additional details on the factors 
the Secretary considered in developing the direct assessment 
regulations.

Academic Year (Sec.  668.3)

    Statute: Section 8020 of the HERA amended the definition of 
academic year in section 481(a) of the HEA. The revised definition 
requires a minimum of 30 weeks of instructional time for a program that 
measures its program length in credit hours or a minimum of 26 weeks of 
instructional time for a program that measures its program length in 
clock hours, rather than a minimum length of 30 weeks of instructional 
time for both credit hour and clock-hour programs.
    Current Regulations: The current regulations reflect the previous 
statutory definition of an academic year requiring a minimum of 30 
weeks of instructional time for all programs regardless of the way in 
which the program was measured.
    New Regulations: Section 668.3(a) of the regulations has been 
amended to reflect the change in the statutory definition of an 
academic year. In addition, we have modified the definition so that 
academic year is no longer defined as a period beginning on the first 
day and ending on the last day of classes.
    Reasons: The regulations are modified to reflect the change made by 
the HERA to the definition of an academic year. Because all programs 
must define an academic year that conforms to the minimum requirements 
even if the program itself is shorter than those minimum requirements, 
we modified the definition so that an academic year is no longer 
defined as a period of time that begins on the first day of classes and 
ends on the last day of classes or examinations.

Treatment of Title IV Funds When a Student Withdraws (Sec. Sec.  
668.22, 668.35, and 668.173)

Program Applicability
    Statute: Section 8022 of the HERA amended section 484B(a)(3)(C)(i) 
of the HEA to change the applicability of section 484B of the HEA 
(commonly referred to as the Return of Title IV Funds requirements). 
Under prior law, the Return of Title IV Funds rules applied to all 
Title IV, HEA grant and loan assistance other than Federal Work Study 
(FWS) funds. Under the HERA, the rules will now apply only to funds 
from the Pell Grant, Federal Supplemental Educational Opportunity Grant 
(FSEOG), FFEL, Direct Loan, and Perkins Loan programs, and to the new 
Academic Competitiveness Grant (ACG) and National Science and 
Mathematics Access to Retain Talent (SMART) Grant programs.
    Current Regulations: Section 668.22(a)(1) provides that the Return 
of Title IV Funds requirements apply to all Title IV, HEA grant and 
loan assistance disbursed or that could have been disbursed to a 
withdrawn student, not including FWS or the non-Federal share of FSEOG 
awards if an institution meets its FSEOG matching share by the 
individual recipient method or the aggregate method.
    New Regulations: We have revised Sec.  668.22(a)(2) to reflect the 
more limited applicability of the Return of Title IV Funds rules as 
provided in the HERA. Under the revised regulations, an institution 
must perform a Return of Title IV Funds calculation when a student who 
withdraws was disbursed, or could have been disbursed, funds from the 
following programs: Pell Grant, FSEOG, FFEL, Direct Loan, Perkins Loan, 
ACG, or SMART Grant. The Return of Title IV Funds requirements do not 
apply to funds from the Gaining Early Awareness and Readiness for 
Undergraduate Program (GEAR UP), Student Support Services (SSS) or 
Leveraging Educational Assistance Partnerships (LEAP) Programs. In 
addition, the interim final regulations retain the exemption from the 
Return of Title IV Funds rules for the non-Federal share of FSEOG 
awards if an institution meets its FSEOG matching share by the 
individual recipient method or the aggregate method.
    Reasons: These changes are made to implement the provisions of the 
HERA. The current regulatory exemption from the Return of Title IV 
Funds requirements of the non-Federal share of FSEOG awards is retained 
as these funds are not considered Federal funds and, therefore, are not 
subject to the Federal Return of Title IV Funds requirements.
Post-Withdrawal Disbursement Counseling
    Statute: Section 8022 of the HERA amended section 484B(a)(4) of the 
HEA to require an institution to contact a borrower before making a 
late disbursement or post-withdrawal disbursement of Title IV loan 
funds. During this contact, the institution must confirm with the 
borrower that the loan funds are still required by the student, or 
parent in the case of a parent PLUS loan, and explain to the borrower 
his or her obligation to repay the funds if disbursed. An institution 
must document in the student's file the result of the contact and the 
final determination made concerning the disbursement.
    Current Regulations: Current Sec.  668.22(a)(4)(i)(B) requires an 
institution to provide a student, or parent in the case of a parent 
PLUS loan, an opportunity to cancel some or all of a loan disbursement 
credited to the student's account by providing notice to the student or 
parent when the institution credits the account with Direct Loan, FFEL, 
or Federal Perkins Loan program funds. In addition, Sec.  
668.22(a)(4)(ii) provides that an institution must offer any amount of 
a post-withdrawal disbursement (loan and grant) that is not credited to 
the student's account to the student, or parent in the case of a parent 
PLUS loan, as a direct disbursement.
    Current regulations do not require institutions to explain to 
students, or parents for a parent PLUS loan, the obligation to repay 
disbursed loan funds, nor do they specify the documentation an 
institution must keep.
    New Regulations: The existing regulations, as redesignated in Sec.  
668.22(a)(5), have been modified as a result of the changes made by the 
HERA.
    While current regulations already require an institution to obtain 
confirmation from a student, or parent

[[Page 45670]]

for a parent PLUS loan, before making a direct disbursement of loan or 
grant funds from a post-withdrawal disbursement, the regulations have 
been revised to make clear that an institution must now obtain this 
confirmation before crediting a student's account with loan funds. As 
in the past, an institution may credit a student's account with any 
post-withdrawal disbursement of grant funds without confirmation from 
the student.
    Thus, the interim final regulations require an institution to 
include in the written notification it must provide to a student, or 
parent for a parent PLUS loan, notice of any post-withdrawal 
disbursement of loan funds that it wishes to credit to the student's 
account. As currently required for direct disbursements of a post-
withdrawal disbursement, the notice must identify the type and amount 
of the loan funds the institution wishes to credit to the student's 
account, and explain that a student, or parent for a parent PLUS loan, 
may accept or decline all or a portion of the funds. The notice must 
also make clear that a student, or parent for a parent PLUS loan, may 
not receive as a direct disbursement loan funds that the institution 
wishes to credit to the student's account unless the institution agrees 
to do so. If the student, or parent for a parent PLUS loan, does not 
wish to accept some or all of the loan funds that the institution 
wishes to credit to the student's account, the institution must not 
disburse those funds. As required by the HERA, institutions are now 
required to explain to the student, or parent for a parent PLUS loan, 
the obligation to repay any loan funds accepted as a post-withdrawal 
disbursement.
    The 14-day deadline (from the date the institution sent the 
notification) for a student, or parent for a parent PLUS loan, to 
accept some or all of a direct disbursement of a post-withdrawal 
disbursement, now applies to confirmation of loan disbursements that an 
institution wishes to credit to a student's account. The interim final 
regulations permit an institution to establish a later deadline, 
provided the later deadline applies to both confirmation of loan 
disbursements to the student's account and to direct disbursements of a 
post-withdrawal disbursement. In accordance with current regulations, 
the institution's notice to the student, or parent for a parent PLUS 
loan, must advise the student or parent of this deadline, making clear 
that a late response to the notice is honored only at the institution's 
discretion. Under the interim final regulations, an institution that 
chooses to honor a late response must disburse all the funds accepted 
by the student, or parent for a parent PLUS loan; for example, it 
cannot credit loan funds to the student's account in accordance with 
the student's request, but decline to disburse directly post-withdrawal 
funds accepted by the student. As currently required when an 
institution declines to honor a late response for direct disbursements 
of a post-withdrawal disbursement, the interim final regulations 
require an institution that declines to honor a late response accepting 
loan funds to be credited to the student's account to inform the 
student, or parent for a parent PLUS loan, in writing that it will not 
be honoring the late response.
    As with current regulatory requirements for making a direct 
disbursement of a post-withdrawal disbursement, an institution must 
make a disbursement by crediting a student's account with a post-
withdrawal disbursement of loan funds within 120 days of the date of 
the institution's determination that the student withdrew, as that term 
is defined in Sec.  668.22(l)(3).
    Finally, new paragraph Sec.  668.22(a)(5)(iv) has been added to 
codify the HERA requirement that an institution document in the 
student's file the result of the contact and the final determination 
made concerning a post-withdrawal disbursement of loan funds.
    Reasons: These changes are made to implement the provisions of the 
HERA. We have modified the current regulations that require 
confirmation of any post-withdrawal disbursements made as a direct 
disbursement to reflect the new statutory requirements.
    A new regulatory provision requires the institution to make clear 
in the written notice that a student, or parent for a parent PLUS loan, 
may not receive as a direct disbursement loan funds that the 
institution wishes to credit to the student's account, unless the 
institution concurs. This reflects current requirements that permit an 
institution to credit Title IV funds to a student's account before 
disbursing any remaining amount to the student, or parent for a parent 
PLUS loan.
    The Secretary has made other changes to the regulations with the 
goal of easing implementation of the new requirements. The Secretary 
believes it should not be the institution's decision to determine that 
it is acceptable for a student to incur debt and/or use up Title IV, 
HEA program eligibility to cover a debt to the institution, but not to 
cover non-institutional educational expenses. That decision must be 
left to the student, or parent for a parent PLUS loan. Thus, 
institutions are required to use the same deadline for responses for 
both types of confirmations and, if the institution acts on a late 
response, it must honor all the confirmations in the response.
    In addition, the Secretary now permits an institution to establish 
a deadline for confirmation responses beyond the 14-day minimum in 
current regulations to ease institutional administrative burden. Some 
institutions may desire to give all students and parents more time to 
respond now that confirmation of disbursement is needed for crediting 
the student's account with loan funds. Also, a later deadline may be 
beneficial as a late confirmation response can now result in a student 
owing a debt to the institution for unpaid charges on his or her 
account.
Withdrawals From Clock Hour Programs
    Statute: The HERA changed section 484B(d)(2) of the HEA, to provide 
that only scheduled hours, not completed hours, will be used to 
determine the percentage of the payment period or period of enrollment 
completed by a student withdrawing from a clock hour program. Prior to 
this change, the law provided that scheduled hours, rather than 
completed hours, were used only if the hours completed by the student 
were equal to a percentage, determined by the Secretary in regulations, 
of the hours scheduled to be completed when the student withdrew.
    The HERA made a conforming change to section 484B(a)(3)(B)(ii) to 
make clear that a student withdrawing from a clock hour program earns 
100 percent of his or her aid if the student's withdrawal date occurs 
after the point when he or she was scheduled to complete 60 percent of 
the scheduled hours in the payment period or period of enrollment.
    Current Regulations: The current regulations in Sec.  
668.22(f)(1)(ii) use actual hours to determine the percentage of the 
period completed by a student withdrawing from a clock hour program, 
unless the student's actual hours of attendance were at least 70 
percent of the hours the student was scheduled to have completed at the 
time they withdrew. If so, scheduled hours are used.
    Section 668.22(e)(2)(ii)(B) of the current regulations provides 
that a student earns 100 percent of his or her aid only if he or she 
actually completed 60 percent or more of the hours in the payment 
period or period of enrollment scheduled to be completed when he or she 
withdrew.

[[Page 45671]]

    New Regulations: Section 668.22(f)(1)(ii) has been amended to 
reflect the statutory change to section 484B(d)(2) requiring the use of 
scheduled clock hours in all calculations of earned Title IV, HEA 
program funds for students who withdraw from clock-hour programs. That 
is, for a student withdrawing from a clock-hour program, the 
``percentage of the payment period or period of enrollment completed'' 
is determined by dividing the total number of clock hours comprising 
the period into the number of clock hours scheduled to be completed as 
of the student's withdrawal date. In addition, the regulations have 
been amended to require that the scheduled clock hours used for a 
student must be those established by the institution prior to the 
student's beginning class date for the payment period or period of 
enrollment, and must have been established in accordance with any 
requirements of the State or the institution's accrediting agency. 
These hours must be consistent with the published materials describing 
the institution's programs. However, if an institution modified the 
scheduled hours in a student's program prior to his or her withdrawal, 
and in accordance with any State or accrediting agency requirements, 
the new scheduled hours must be used.
    New Sec.  668.22(e)(2)(ii)(B) implements the statutory change in 
section 484B(a)(3)(B)(ii) by clarifying that a student withdrawing from 
a clock-hour program earns 100 percent of his or her aid if the 
student's withdrawal date is after the point when he or she was 
scheduled to complete 60 percent of the scheduled hours in the payment 
period or period of enrollment.
    Reasons: These changes are made to implement the provisions of the 
HERA. To limit the possibility of abuse of this rule, the regulations 
provide that the scheduled hours used must be those that are part of a 
schedule that was established prior to a student's withdrawal, and must 
meet any applicable State or accrediting agency standards.
Grant Overpayment Requirements
    Statute: Section 8022 of the HERA amended section 484B(b)(2)(C) of 
the HEA to change the amount of a grant overpayment that must be repaid 
by a student who withdraws from school. The amount of a grant 
overpayment due from a student is limited to the amount by which the 
original overpayment amount exceeds 50 percent of the total grant funds 
received by the student for the payment period or period of enrollment. 
In addition, the HERA amended the HEA to specify that a student does 
not have to repay a grant overpayment of $50 or less for grant 
overpayments resulting from the student's withdrawal.
    Current Regulations: The current regulations in Sec.  
668.22(h)(3)(ii) provide that a student is not required to repay 50 
percent of the withdrawn student's original grant overpayment amount.
    Under Sec.  668.35(e)(3), an otherwise eligible student maintains 
eligibility and does not have to repay a Perkins Loan, FSEOG, or Pell 
Grant overpayment of less than $25--resulting from withdrawal or 
otherwise provided that the overpayment amount is not a remaining 
balance nor a result of applying the overaward threshold for the 
campus-based programs.
    New Regulations: Revised Sec.  668.22(h)(3) reflects the new 
statutory limitation on the amount of a grant overpayment that a 
student is required to return. To illustrate the effect of the new law, 
we provide the following example: A student who received $2,000 in 
Title IV, HEA grant funds for a payment period withdraws from school. 
The institution uses the Return of Title IV Funds calculation and 
determines that the student has an original grant overpayment of 
$1,200. Under current regulations, the student would owe $600 (50 
percent of the original overpayment amount of $1,200). Under the 
interim final regulations, the student owes $200 (the amount by which 
the original overpayment amount ($1,200) exceeds half of the total 
grant funds received, ($1,000) or $1,200-$1,000. In this same scenario, 
if the student's grant overpayment was originally $800, under current 
regulations the student owes $400 (50 percent of $800). Under the 
interim final regulations, the student owes nothing because the 
overpayment amount ($800) is less than half of the total grant funds 
received ($1,000).
    Section 668.22(h)(3) also reflects the statutory provision that a 
student is not obligated to return a grant overpayment of $50 or less. 
As a result, a grant overpayment of $50 or less will not make the 
student ineligible to receive Title IV, HEA program assistance should 
the student return to school. An institution is not required to attempt 
recovery of that overpayment, report it to the Department's National 
Student Loan Data System (NSLDS), or refer it to the Secretary. 
Consistent with Sec.  668.35(e)(3), this new standard does not apply to 
remaining grant overpayment balances; that is, a student must repay a 
grant overpayment that has been reduced to $50 or less because of 
payments made.
    A conforming change is also being made to Sec.  668.35(e) to make 
it clear that the overpayment threshold and eligibility requirements of 
Sec.  668.35(e) do not apply to an overpayment resulting from the 
application of the Return of Title IV Funds requirements. The less-
than-$25 threshold and eligibility requirements specified in Sec.  
668.35(e)(3) continue to apply to all other overpayments.
    Reasons: These changes are made to implement the provisions of the 
HERA.
Waiver of Grant Overpayment for Students Affected by a Disaster
    Statute: The Pell Grant Hurricane and Disaster Relief Act (Pub. L. 
109-66) and the Student Grant Hurricane and Disaster Relief Act (Pub. 
L. 109-67) amended section 484B(b)(2) of the HEA to permit the 
Secretary to waive a student's Title IV grant repayment if the student 
withdrew from an institution because of a major disaster.
    Current Regulations: Current regulations do not address this issue.
    New Regulations: New Sec.  668.22(h)(5) incorporates the statutory 
changes. The interim final regulations provide that the Secretary may 
waive grant overpayment amounts for individuals whose withdrawal ended 
within the award year during which the designation of a major disaster 
area occurred, or the subsequent award year. On November 9, 2005, the 
Secretary exercised this waiver authority through publication of Dear 
Colleague Letter GEN-05-17. It is important to note that this waiver 
authority applies to a grant overpayment due from a student and not to 
the required return of unearned funds to a grant program by an 
institution.
    Reasons: These changes are made to implement the provisions of the 
Pell Grant Hurricane and Disaster Relief Act and the Student Grant 
Hurricane and Disaster Relief Act. The interim final regulations apply 
the waivers on an award year basis to reflect the fact that Pell and 
FSEOG Grants are awarded on an award year basis.
Order of Return of Grant Funds
    Statute: Section 484B(b)(3)(B) of the HEA requires that unearned 
Title IV, HEA grant funds be returned to awards under subpart 1 of part 
A of the HEA (for the Pell Grant Program) before they are returned to 
awards under subpart 3 of part A of the HEA (for the FSEOG Program). 
Under prior law, the Pell Grant program was the only program in subpart 
1 of part A of the HEA. The HERA has added the ACG and the

[[Page 45672]]

National SMART Grant programs to subpart 1 of part A of the HEA. As a 
result, unearned funds must be returned to the Pell Grant, ACG and 
National SMART Grant programs before they are returned to the FSEOG 
program. The statute does not require that unearned funds be returned 
to one subpart 1 program before another.
    Also, as noted previously, the HERA limited the application of the 
Return of Title IV funds requirements to funds from the Pell Grant, 
FSEOG, FFEL, Direct Loan, and Perkins Loan programs, as well as the new 
ACG and National SMART Grant programs.
    Current Regulations: Section 668.22(i)(2) currently requires an 
institution or student to return unearned funds to the grant programs 
in the following order: (1) The Federal Pell Grant Program; (2) the 
FSEOG Program; (3) other Title IV, HEA grant or loan assistance 
programs.
    New Regulations: New Sec.  668.22(i)(2) reflects the addition of 
the new ACG and National SMART Grant programs and requires that 
unearned funds be returned to those programs before unearned funds are 
returned to the FSEOG program. The interim final regulations also 
specify an order of return for the three grant programs in subpart 1 of 
part A of the HEA, requiring an institution or student to return 
unearned funds to the subpart 1 grant programs in the following order: 
(1) The Pell Grant Program; (2) the ACG Program, and (3) the National 
SMART Grant Program. The interim final regulations no longer require an 
institution to return funds to ``other Title IV, HEA grant or loan 
assistance programs.''
    Reasons: These changes are made to implement the provisions of the 
HERA. The interim final regulations specify that an institution or 
student return unearned funds to the Pell Grant Program before they are 
returned to the ACG or National SMART Grant programs because this 
approach is the most beneficial for students. Returning funds to the 
Pell Grant Program ensures that the student's eligibility for a Pell 
Grant is maintained, which is beneficial should the student return to 
school within the same award year and again seek an ACG or National 
SMART Grant.
Return of Funds Within 45 Days
    Statute: Section 8022 of the HERA amended section 484B(b)(1) of the 
HEA to add the requirement that an institution return unearned funds 
for which it is responsible no later than 45 days from the 
determination of a student's withdrawal.
    Current Regulations: Section 668.22(j) of the current regulations 
requires an institution to return the 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.
    Section 668.173(b) establishes the specific criteria an institution 
must meet to be in compliance with the 30-day deadline in Sec.  
668.22(j).
    New Regulations: The interim final regulations in Sec.  668.22(j) 
incorporate the HERA provision by changing the maximum amount of time 
an institution has to return the unearned funds for which it is 
responsible from 30 days to 45 days. The interim final regulations 
continue to specify that an institution must return those funds as soon 
as possible.
    We are also making conforming changes to Sec.  668.173(b) to extend 
the deadlines specified in that regulation by 15 days. An institution 
will be considered to have returned funds timely if the institution 
does one of the following no later than 45 days (rather than the 
current 30 days) after the date it determines that the student 
withdrew: (1) Deposits or transfers the funds into the bank account it 
is required to maintain; (2) initiates an electronic funds transfer 
(EFT); (3) initiates an electronic transaction that informs the FFEL 
lender to adjust the borrower's loan account for the amount returned; 
or (4) issues a check. The institution is considered to have issued a 
check timely if the institution's records show that the check was 
issued no more than 45 days after the date the institution determined 
that the student withdrew, or the date on the cancelled check shows 
that the bank endorsed that check no more than 60 days (instead of the 
current 45 days) after the date the institution determined that the 
student withdrew.
    Reasons: These changes are made to implement the provisions of the 
HERA. The interim final regulations retain the requirement that an 
institution return funds for which it is responsible as soon as 
possible. The return of funds by an institution may result in a 
decrease in the amount of a Title IV loan that the student must repay 
and reduces that interest that accrues on the loan. In addition, the 
sooner funds are returned, the sooner an otherwise eligible student may 
regain eligibility for those funds should the student return to school 
within the same academic period.

Student Eligibility--General and Student Debts Under the HEA and to the 
U.S. (Sec. Sec.  668.32, 668.35, 674.39, 682.405, and 685.211)

    Statute: Section 8021(a) of the HERA amended section 484(a) of the 
HEA by adding a new student eligibility requirement. The new 
requirement provides that students who have been convicted of, or have 
pled nolo contendere or guilty to a crime involving fraud in obtaining 
Title IV, HEA program assistance are not eligible for additional Title 
IV assistance unless they have repaid the fraudulently obtained Title 
IV, HEA program assistance funds to the Secretary or to the holder of a 
loan made under the Title IV, HEA programs.
    Current Regulations: Current regulations do not address the Title 
IV eligibility of students who have obtained Title IV, HEA Program 
assistance through fraud.
    New Regulations: Sections 668.32 and 668.35 have been amended by 
adding new paragraphs (m) and (i), respectively, to provide that a 
student who has been convicted of or has pled nolo contendere or guilty 
to a crime involving fraud in obtaining Title IV, HEA program 
assistance is ineligible for additional assistance unless he or she has 
repaid the fraudulently obtained Title IV, HEA program assistance funds 
to the Secretary or to the holder of a loan made under the Title IV, 
HEA programs. In addition, Sec.  682.401(b)(4) has been amended to 
cross-reference the new Sec.  668.35(i).
    Sections 674.39(a), 682.405(a)(1), and 685.211(f) have been amended 
to specify that a Perkins, FFEL, or Direct Loan Program loan that was 
fraudulently obtained, and for which the borrower has been convicted 
of, or has pled nolo contendere or guilty to, a crime involving 
fraudulently obtained Title IV, HEA program assistance, is not eligible 
for rehabilitation.
    Reasons: These regulations have been amended to reflect the changes 
made by the HERA.

Conviction for Possession or Sale of Illegal Drugs (Sec.  668.40)

    Statute: Section 8021(c) of the HERA amended section 484(r) of the 
HEA to modify the requirements regarding the suspension of eligibility 
for students convicted of drug-related offenses. As amended, the HEA 
now provides that a student becomes ineligible for Title IV, HEA 
program assistance only if the conviction for a Federal or State 
offense involving the possession or sale of a controlled substance is 
for conduct that occurred during a period of enrollment

[[Page 45673]]

for which the student was receiving Title IV, HEA program assistance. 
The period of ineligibility and provisions for regaining eligibility 
were not changed by the HERA.
    Current Regulations: The current regulations reflect the previous 
statutory requirements that provided that a student became ineligible 
to receive Title IV, HEA program assistance if the student was 
convicted of an offense involving the possession or sale of illegal 
drugs without regard to when the offense occurred.
    New Regulations: Section 668.40(a)(1) has been revised to reflect 
the statutory change to section 484(r) of the HEA that limits the loss 
of student eligibility to students convicted of drug-related offenses 
to offenses that occurred during a period of enrollment for which the 
student was receiving Title IV, HEA program assistance.
    The revised student eligibility criterion applies to the 2006-2007 
award year for the Pell Grant, ACG, National SMART Grant, and campus-
based programs and for periods of enrollment beginning on or after July 
1, 2006 for the FFEL and Direct Loan Programs.
    The period of ineligibility remains unchanged and is triggered by 
the date of the conviction. The provisions for regaining eligibility 
also remain unchanged.
    Reasons: These regulations have been changed to reflect the changes 
to the HEA made by the HERA.

Estimated Financial Assistance (Sec. Sec.  673.5, 673.6, 674.16, 
675.26, 682.200 and 685.102)

    Statute: Section 8019 of the HERA added two new grant programs by 
creating a new HEA section 401A and modified the definition of Other 
Financial Assistance in HEA section 480(j). The two new grant programs 
are considered other financial assistance under section 480(j) of the 
HEA. In changing the definition of Other Financial Assistance, the HERA 
added a new section to the definition that states, ``Notwithstanding 
paragraph (1) and section 472, assistance not received under this title 
may be excluded from both estimated financial assistance and cost of 
attendance, if that assistance is provided by a State and is designated 
by such State to offset a specific component of the cost of attendance. 
If that assistance is excluded from either estimated financial 
assistance or cost of attendance, it shall be excluded from both.''
    The Ronald W. Reagan National Defense Authorization Act for Fiscal 
Year 2005 (Pub. L. 108-375) amended Title 10 of the United States Code 
to add a new veterans' education benefit in chapter 1607. Veterans' 
education benefits are considered other financial assistance under 
section 480(j) of the HEA. These chapter 1607 benefits, which are known 
as the Reserve Educational Assistance Program, benefit military 
reservists called to active duty after September 11, 2001 and are 
designated to pay for postsecondary education expenses.
    Current Regulations: The current regulations do not include the two 
new grant programs, the change in the definition of Other Financial 
Assistance, or the added veterans' educational benefit in the 
regulatory definitions of resources and estimated financial assistance.
    New Regulations: We have amended Sec. Sec.  673.5, 682.200 and 
685.102 to reflect the creation of the two new grant programs and the 
new veterans' education benefit, as well as the modification of the 
statutory definition of Other Financial Assistance. In addition, we 
have made technical changes to clarify the existing regulatory 
language, to standardize the definitions of resources and estimated 
financial assistance used in Sec. Sec.  673.5(c), 673.6(a), 674.16(c), 
675.26(a), 682.200(b) and 685.102(b), to adopt a single regulatory term 
to describe other financial assistance, and to make conforming changes.
    Historically, the campus-based General Provisions have used the 
term resources rather than estimated financial assistance in reference 
to the same components. However, the statute repeatedly uses the term 
estimated financial assistance, and we believe it is necessary to use 
this term in the interim final regulations. Accordingly, the interim 
final regulations in Sec. Sec.  673.6(a)(1), 674.16(c), 675.26(a)(4) 
and 676.16(b) have been amended to change the defined term resources to 
the defined term estimated financial assistance.
    We have also made some technical changes to the regulations. We 
have modified the regulations to provide for the consistent use of 
names for the different loan types for each of the loan programs. We 
also clarified that the loans that can be used to replace the expected 
family contribution (EFC) include non-federal, non-need-based loans 
that come from private, state, or institutional sources. We have 
revised the definition of estimated financial assistance in Sec. Sec.  
682.200 and 685.102 of the FFEL and Direct Loan programs, respectively, 
to reflect our longstanding policy that estimated financial assistance 
includes ``Any educational benefits paid because of enrollment in a 
postsecondary education institution, or to cover postsecondary 
education expenses'' and by adding the same language to Sec.  673.5(c) 
for the campus-based programs.
    We added non-need-based employment as an exclusion to the 
definition of estimated financial assistance in Sec. Sec.  682.200 and 
685.102 of the FFEL and Direct Loan program regulations, respectively.
    In Sec.  673.5 of the campus-based General Provisions, we made a 
technical correction to clarify that fellowships and assistantships 
must be counted as estimated financial assistance, except those 
portions that are non-need-based employment. The current regulation 
states that non-need-based employment is not considered estimated 
financial assistance, but fellowships and assistantships may include 
portions that are non-need-based employment, but are not labeled 
separately as such. We made a technical change to Sec.  673.5 to 
clarify the rules for the consideration of these fellowships and 
assistantships.
    We added to the definition of estimated financial assistance in 
Sec. Sec.  682.200(b) and 685.102(b) two items that are in the same 
definition under Sec.  673.5(c). Those two items are insurance programs 
for the student's education and fellowships and assistantships, except 
non-need-based employment portions of such awards. This inclusion 
ensures the three sections have similar language.
    Another technical change made for consistency was made in 
Sec. Sec.  682.200(b) and 685.102(b) in which the word ``AmeriCorps'' 
was added parenthetically following each instance of national service 
education awards or post-service benefits paid under title I of the 
National and Community Service Act of 1990 because that is the term 
used in Sec.  673.5(c).
    Reasons: The regulations need to be changed to reflect the new 
grant programs and the new veterans' educational benefits under 10 
U.S.C. Chapter 1607. As a technical change, we have parenthetically 
inserted the names of each of the chapters of eligible veterans' 
education benefits listed to make it easier for the public to identify 
these benefits. We also deleted the entries for programs that are 
obsolete and updated the names of programs that have been changed. We 
have also made technical changes to clarify the existing language and 
standardize the definitions among the regulatory sections referencing 
the definition of estimated financial assistance.

[[Page 45674]]

Military Deferment (Sec. Sec.  674.34, 682.210, and 685.204)

    Statute: Section 8007 of the HERA amended sections 428, 455, 464 
and 481 of the HEA to create a new deferment for borrowers who are 
serving on active duty in the U.S. Armed Forces, or who are performing 
qualifying National Guard duty, during a war or other military 
operation or national emergency. The deferment is effective July 1, 
2006, for loans for which the first disbursement is made on or after 
July 1, 2001.
    Current Regulations: The current deferment regulations do not 
reflect this new deferment for military service. This new deferment is 
different from the military service deferment available to Perkins 
Loan, FFEL and Direct Loan Program borrowers who took out loans prior 
to July 1, 1993.
    New Regulations: Section 674.34 of the Perkins regulations, Sec.  
682.210 of the FFEL regulations, and Sec.  685.204 of the Direct Loan 
regulations have been amended to reflect the new military service 
deferment created by the HERA. The interim final regulations specify 
the types of active duty service and National Guard service that 
qualifies a borrower for the deferment, and define active duty, 
military operation, and national emergency for purposes of a military 
deferment. The types of qualifying service and the definitions are 
provided in the HERA.
    A borrower may qualify for the military deferment if the first 
disbursement of the borrower's Perkins, FFEL, or Direct Loan was made 
on or after July 1, 2001. If the borrower has some loans disbursed 
before July 1, 2001 and some loans disbursed on or after July 1, 2001, 
the borrower may receive a military deferment for the loans disbursed 
on or after July 1, 2001, but may not receive a military deferment on 
the loans disbursed before July 1, 2001. The period of eligible 
military service must have occurred after the borrower received the 
loan. A borrower consolidating loans first disbursed on or after July 
1, 2001, is eligible for the new deferment on the entire Consolidation 
Loan only if all of the borrower's Title IV loans included in the 
Consolidation Loan were first disbursed on or after July 1, 2001. The 
HERA does not authorize a loan holder to refund payments made during a 
period covered by a retroactive deferment.
    Reasons: The regulations are amended to reflect changes made by the 
HERA.

FFEL and Direct Loan Program Changes

Graduate and Professional Student Eligibility for PLUS Loans 
(Sec. Sec.  668.2, 682.102, 682.201, 685.102, 685.200, and 685.201)

    Statute: Section 8005 of the HERA amended section 428B of the HEA, 
to provide that graduate and professional students are eligible for 
PLUS Loans. In addition, section 8014 of the HERA added a new 
eligibility requirement for PLUS Loan borrowers. Under this 
requirement, a PLUS Loan borrower who has been convicted of, or pled 
nolo contendere or guilty to, a crime involving fraud in obtaining 
Title IV, HEA program funds must complete repayment of the fraudulently 
obtained funds to be eligible to receive a PLUS loan.
    Current Regulations: Under the current regulations, only parents of 
eligible students are eligible for PLUS Loans.
    New Regulations: The terms Federal Direct PLUS Program and Federal 
PLUS Program are defined in Sec. Sec.  668.2 and 685.102 to include 
graduate and professional students as eligible borrowers. Section 
682.102 of the FFEL Program regulations and Sec.  685.201 of the Direct 
Loan Program regulations have been amended to describe the application 
process for graduate or professional students to obtain a PLUS loan. 
Sections 682.201 of the FFEL Program regulations and 685.200 of the 
Direct Loan Program regulations have been amended to specify that a 
graduate or professional student PLUS borrower must meet the same 
eligibility criteria as a student Stafford borrower. This includes the 
new requirement in Sec.  668.32 that a student convicted of fraud in 
obtaining Title IV, HEA program funds, or who has pled nolo contendere 
or guilty to such a crime, must complete repayment of the fraudulently 
obtained funds. In addition, the student PLUS borrower must have 
received a determination of his or her annual loan maximum eligibility 
under the Subsidized and Unsubsidized Stafford Loan program. A student 
PLUS borrower, like a parent PLUS borrower, must not have an adverse 
credit history to be eligible for a PLUS Loan.
    We have also amended Sec.  682.201(c) to reflect that a parent 
borrower convicted of fraud in obtaining Title IV, HEA program funds, 
or who has pled nolo contendere or guilty to such a crime, must 
complete repayment of the fraudulently obtained funds in order to be 
eligible for a PLUS loan.
    Reasons: The regulations are amended to reflect changes made by the 
HERA.

Joint Consolidation Loans (Sec. Sec.  682.102, 682.201, and 685.220)

    Statute: Section 8009 of the HERA amended section 428C(a)(3)(C) of 
the HEA by eliminating the ability of a married couple to jointly 
consolidate their eligible student loans.
    Current Regulations: Current regulations permit a married couple to 
consolidate their eligible student loans into a joint FFEL or Direct 
Consolidation Loan.
    New Regulations: Sections 682.102(d), 682.201(c)(2), 682.201(e), 
and 685.220(d)(2) have been modified to eliminate the possibility of 
joint consolidation of loans by a married couple for applications 
received on or after July 1, 2006.
    Reasons: These regulations are amended to reflect changes made by 
the HERA.

Interest Rates (Sec. Sec.  682.202 and 685.202)

    Statute: Public Law 107-139 amended section 427A of the HEA to 
establish fixed interest rates for FFEL and Direct Stafford and PLUS 
loans first disbursed on or after July 1, 2006, at 6.8 percent for 
Stafford loans and 7.9 percent for PLUS loans. The HERA did not change 
these interest rates for Stafford loans or Direct PLUS loans but did 
increase the interest rate for PLUS loans made under the FFEL Program 
to 8.5 percent. For FFEL and Direct Consolidation loans, the interest 
rate remains a fixed rate, calculated at the time the consolidation 
loan is made, as the weighted average of interest rates on the loans 
consolidated, rounded up to the nearest higher \1/8\th of 1 percent, 
not to exceed 8.5 percent.
    Current regulations: Current regulations do not reflect the changed 
interest rates on Stafford and PLUS loans made under the FFEL and 
Direct Loan programs. Interest rates on FFEL and Direct Consolidation 
loans are correctly reflected in the current regulations.
    New regulations: Sections 682.202 and 685.202 of the FFEL and 
Direct Loan program regulations, respectively, have been amended to 
reflect a fixed interest rate of 6.8 percent for Stafford Loans first 
disbursed on or after July 1, 2006. The regulations have also been 
amended to reflect a fixed interest rate of 8.5 and 7.9 percent, 
respectively, for FFEL and Direct PLUS loans first disbursed on or 
after July 1, 2006.
    Reasons: The regulations are amended to reflect changes made by 
Public Law 107-139 and the HERA.

Origination Fees (Sec. Sec.  682.202 and 685.202)

    Statute: Section 8008(c) of the HERA amended section 438(c)(2) of 
the HEA to

[[Page 45675]]

reduce and eventually eliminate the 3 percent origination fee that is 
paid by FFEL Program lenders and that the lenders may charge to FFEL 
Stafford Loan borrowers. Section 8008(c) of the HERA also amended 
section 455(b)(8)(A) of the HEA to reduce the 4 percent origination fee 
that may be charged to Stafford Loan borrowers in the Direct Loan 
Program. The 4 percent Direct Stafford Loan origination fee is 
equivalent to the combined 3 percent FFEL Stafford Loan origination fee 
plus the 1 percent insurance premium (now the Federal default fee) that 
is authorized in the FFEL Program. Origination fees currently charged 
to FFEL and Direct PLUS loan borrowers are not changed by the HERA. 
FFEL and Direct Consolidation Loan borrowers are also not charged 
origination fees.
    Current Regulations: The current regulations authorize lenders in 
the FFEL Program to charge borrowers an origination fee of up to 3 
percent of the amount of a Stafford Loan and the Secretary to charge a 
fee of up to 4 percent of the amount of a Direct Stafford Loan. Lenders 
in the FFEL Program are required to pay the full amount of the 
origination fee to the Secretary whether or not they charge the fee to 
the borrower.
    New regulations: The FFEL Program regulations have been amended in 
Sec.  682.202(c) to reduce origination fees as follows: Beginning with 
loans for which the first disbursement of principal is made on or after 
July 1, 2006, and before July 1, 2007, the maximum origination fee that 
a lender may charge a borrower will be 2 percent. The maximum 
origination fee that may be charged to an FFEL Stafford loan borrower 
drops to 1.5 percent on July 1, 2007, 1.0 percent on July 1, 2008, and 
0.5 percent on July 1, 2009. The lender must pay the specified maximum 
fee for each period to the Secretary whether or not it is charged to 
the borrower. The fee will be eliminated as of July 1, 2010.
    Section 685.202(c) of the Direct Loan Program regulations has been 
amended to reduce origination fees as follows: Beginning with loans for 
which the first disbursement of principal is made on or after February 
8, 2006, and before July 1, 2007, the maximum origination fee that may 
be charged to Direct Stafford Loan borrowers is 3 percent. The maximum 
origination fee that may be charged drops to 2.5 percent on July 1, 
2007, 2.0 percent on July 1, 2008, 1.5 percent on July 1, 2009, and 1.0 
percent on July 1, 2010.
    Reasons: The regulations are amended to reflect the changes made by 
the HERA.

Loan Limits (Sec. Sec.  682.204 and 685.203)

    Statute: Section 8005 of the HERA amended sections 425(a)(1)(A), 
428(b)(1)(A), and 428H(d) of the HEA to increase loan limits for 
certain Stafford Loan borrowers. The higher loan limits are effective 
in the FFEL Program for loans certified on or after July 1, 2007, and, 
in the Direct Loan Program, for loans originated on or after July 1, 
2007. The HERA did not increase aggregate loan limits in either 
program.
    Current Regulations: Under the current regulations, the base 
subsidized/unsubsidized combined annual loan limit for first-year 
undergraduates is $2,625 and $3,500 for second year undergraduates. For 
graduate or professional students, the additional unsubsidized annual 
loan limit is $10,000. For students who have obtained a baccalaureate 
degree and are enrolled in coursework necessary for enrollment in a 
graduate or professional program, the additional unsubsidized annual 
loan limit is $5,000. For students who have obtained a baccalaureate 
degree, and are enrolled in coursework necessary for a professional 
credential or certification from a State required for employment as a 
teacher in an elementary school, the additional unsubsidized loan limit 
is $5,000.
    New Regulations: Under the interim final regulations, for FFEL 
loans certified on or after July 1, 2007 and for Direct Loans 
originated on or after July 1, 2007:
     For first-year undergraduates, the base subsidized/
unsubsidized combined annual loan limit is $3,500;
     For second year undergraduates, the base subsidized/
unsubsidized combined annual loan limit is $4,500;
     For graduate or professional students, the additional 
unsubsidized annual loan limit is $12,000;
     For students who have obtained a baccalaureate degree and 
are enrolled in coursework necessary for enrollment in a graduate or 
professional program, the additional unsubsidized annual loan limit is 
$7,000; and
     For students who have obtained a baccalaureate degree, and 
are enrolled in coursework necessary for a professional credential or 
certification from a State required for employment as a teacher in an 
elementary school, the additional unsubsidized loan limit is $7,000.
    The HERA did not increase the base subsidized/unsubsidized combined 
loan limits for third year and above undergraduate students and for 
graduate students. The HERA also did not change the limits on the 
additional amount of unsubsidized loans that are available to all 
undergraduate students.
    Reasons: These regulations are amended to reflect changes made by 
the HERA.

Elimination of Option of Early Entrance Into Repayment (Sec. Sec.  
682.209 and 685.220)

    Statute: Section 8009 of the HERA amended sections 428(b)(7)(A), 
428C(a)(3), and 428C(b)(5) to eliminate the ability of FFEL Stafford 
Loan borrowers to request to enter repayment on their loans early. 
Early conversion to repayment allows a borrower to consolidate FFEL 
loans while still enrolled at least half-time.
    Section 8009 of the HERA also amended sections 455(a), 455(d), and 
455(g) of the HEA to require that Direct Consolidation Loans have the 
same terms and conditions as FFEL Consolidation Loans. For both FFEL 
Stafford Loan and Direct Stafford Loan borrowers, the repayment period 
is now defined as the period beginning 6 months and one day after the 
date the student ceases to carry at least one-half the normal full-time 
academic workload, as determined by the institution.
    Current Regulations: Section 682.209(a)(5) of the FFEL program 
regulations permits FFEL Stafford Loan borrowers to request and be 
granted a repayment schedule prior to the end of their grace period and 
therefore enter repayment on their loans. Current Direct Loan 
regulations in Sec.  685.220(d)(1)(ii)(A) permit borrowers in an in-
school period with loans made under both the FFEL program and the 
Direct Loan program to obtain a Direct Consolidation loan. Also, under 
Sec.  685.220(d)(1)(ii)(B), a borrower with FFEL loans only, in an in-
school period at a school participating in the Direct Loan program is 
eligible to consolidate these loans into the Direct Loan program.
    New Regulations: To implement the HERA, section 682.209(a)(5) of 
the FFEL regulations has been removed. FFEL Stafford Loan borrowers may 
no longer request to enter repayment early on their loans. Section 
685.220(d)(1)(ii)(A) of the Direct Loan regulations has been removed so 
that Direct Stafford Loan borrowers are no longer able to consolidate 
while in an in-school status.
    Reasons: The regulations were modified to reflect the changes made 
by the HERA to the HEA.

Teacher Loan Forgiveness (Sec. Sec.  682.215 and 685.217)

    Statute: Section 8013(c) of the HERA eliminated the previous 
termination date of October 1, 2005, for the increased teacher loan 
forgiveness

[[Page 45676]]

amounts of up to $17,500 for highly-qualified teachers in certain 
specialties as originally provided under the Taxpayer-Teacher 
Protection Act of 2004 (TTPA). In addition, the HERA established an 
alternative method for teachers in private non-profit schools to 
qualify for the same forgiveness benefits as ``highly qualified'' 
teachers in public schools.
    Current Regulations: Sections 682.215 and 685.217 of the FFEL and 
Direct Loan Program regulations, respectively, do not reflect the 
eligibility requirements for teacher loan forgiveness established in 
the TTPA, the increased loan forgiveness amount that are available for 
certain teachers, or the alternative method for teachers in private, 
non-profit schools to qualify for teacher loan forgiveness.
    New Regulations: Sections 682.215 and 685.217 continue to reflect 
the original eligibility requirements for teacher loan forgiveness, and 
have been amended to reflect the eligibility requirements, and 
increased forgiveness amounts, established by the TTPA and the HERA.
    A borrower whose five, consecutive, complete years of qualifying 
teaching service began before October 30, 2004 may qualify for up to 
$5,000 of teacher loan forgiveness under the original eligibility 
criteria for teacher loan forgiveness.
    ``Highly qualified'' teachers whose teaching service begins on or 
after October 30, 2004 may qualify for forgiveness of up to:
     $5,000 if the borrower taught full-time in an eligible 
elementary or secondary school;
     $17,500 if the borrower taught mathematics or science on a 
full-time basis in an eligible secondary school;
     $17,500 if the borrower taught as a special education 
teacher on a full-time basis, the borrower's primary responsibility was 
to provide special education to children with disabilities in either an 
eligible elementary or secondary school, if the borrower's special 
education training corresponded to the children's disabilities and the 
borrower demonstrated knowledge and teaching skills in the content 
areas of the elementary or secondary school curriculum that the 
borrower is teaching.
    Highly qualified teachers whose teaching service began before 
October 30, 2004, may also qualify for $17,500 of loan forgiveness if 
they meet the applicable eligibility requirements. To qualify for loan 
forgiveness based on being a ``highly qualified'' teacher, the borrower 
must have been a ``highly qualified'' teacher for each of the five 
consecutive years of teaching service.
    Teachers in private, non-profit schools who are exempt from State 
certification requirements may qualify for the same forgiveness 
benefits as ``highly qualified'' public school teachers, if the private 
school teacher is otherwise eligible for teacher loan forgiveness and:
     The private school teacher is permitted to and does 
satisfy rigorous subject knowledge and skills tests by taking 
competency tests in applicable grade levels and subject areas;
     The competency tests taken by the private school teacher 
are recognized by five or more States for the purposes of fulfilling 
the highly qualified teacher requirements of the Elementary and 
Secondary Education Act of 1965, as amended; and
     The private school teacher achieves a score on each test 
that equals or exceeds the average passing score for those five States.
    Reasons: These regulations are amended to reflect changes made by 
the TTPA and the HERA.

Loan Discharge for False Certification as a Result of Identity Theft 
(Sec. Sec.  682.402 and 685.215)

    Statute: Section 8012 of the HERA amended section 437(c) of the HEA 
to authorize a discharge of a FFEL or Direct Loan Program loan if the 
borrower's eligibility to borrow was falsely certified because the 
borrower was a victim of the crime of identity theft. This change is 
effective July 1, 2006.
    Current Regulations: FFEL and Direct Loan Program regulations in 
Sec. Sec.  682.402 and 685.215 do not explicitly authorize the 
discharge of a FFEL or Direct Loan Program loan if the borrower's 
eligibility was falsely certified because the borrower was the victim 
of the crime of identity theft.
    New Regulations: Sections 682.402 and 685.215 of the FFEL and 
Direct Loan Program regulations, respectively, have been amended to 
authorize a discharge of an FFEL or Direct Loan Program loan if the 
borrower's eligibility to receive the loan was falsely certified 
because the borrower was a victim of the crime of identity theft. The 
interim final regulations provide that the borrower's obligation is 
discharged if the borrower provides the holder of a loan, or the 
Secretary in the case of a Direct Loan, a copy of a local, State, or 
Federal court verdict or judgment that conclusively determines that the 
individual who is the named borrower of the loan was the victim of the 
crime of identity theft, and the borrower demonstrates that the loan in 
question was made as a result of that identity theft. Discharge relief 
is available to the victim of the proven crime of identity theft, 
whether or not the prosecution was based on, or expressly referred to, 
the loan in question. If the conviction or judgment did not expressly 
reference that loan, the individual must provide authentic examples of 
his or her other identification credentials, and an explanation of 
facts that demonstrate that this criminal conduct resulted in the 
school certifying that individual's eligibility to borrow, and, as a 
result, in the loan being made.
    In addition, because the statute authorizes discharge for 
individuals who are victims of the crime of identity theft, the interim 
final regulations provides relief only to individuals who did not 
knowingly accept the benefit of the falsely-certified loan, and require 
individuals who claim relief to certify that they did not, with 
knowledge that the loan had been made, receive or accept the benefits 
of the loan.
    Where discharge relief is provided to an injured borrower, or where 
a borrower receives FFEL benefits based on providing false or erroneous 
information, the HEA and the current regulations generally require the 
Secretary and the guarantor, as applicable, to pursue claims against 
the responsible party. Approval of an identity theft discharge claim 
will rest on a judicial determination that a named individual committed 
the crime of identity theft and at very least a presentation by the 
victim of a persuasive statement showing that the identified 
perpetrator was responsible for the loan obligation. The Secretary 
interprets the enforcement language in section 437 of the HEA to 
include enforcement action against the identified perpetrator of the 
identity theft.
    By adding this discharge authority, the Secretary in no way 
suggests that unless a crime of identity theft has been successfully 
prosecuted, individuals are liable for a loan for which they did not 
execute or authorize another to execute a promissory note, from which 
they received no benefits, and which they have not ratified by later 
conduct. To the contrary, a person is ordinarily not liable on an 
instrument, such as a promissory note or check, unless that person 
signed that instrument or authorized another to sign on his or her 
behalf. Section 682.402(e)(1)(i)(B) of the FFEL Program regulations 
provide that FFEL program benefits are payable to the holder of the 
loan only where the lender obtained a legally-enforceable promissory 
note to evidence the loan,

[[Page 45677]]

and Sec.  682.406(a)(1) provides that reinsurance may be received only 
with respect to a claim on a legally-enforceable loan. Because a forged 
promissory note is not an enforceable obligation of the named borrower, 
FFEL Program benefits can not lawfully be claimed on a loan evidenced 
by such a note, absent conduct by the individual named as borrower that 
applicable law would regard as a ratification of knowing acceptance of 
the loan by the individual.\1\ In Sec.  682.402(e)(1)(i)(B) of the FFEL 
Program regulations that implement the discharge authority in section 
437(c) of the HEA for false certification of eligibility to borrow, the 
Secretary carved out a narrow exception to this rule to authorize both 
discharge relief to individuals named as borrowers and reimbursement to 
the loan holders if the loan application or promissory note had been 
forged by the school. No regulation grants relief to those individuals 
who demonstrate that their signatures were forged on the note, but who 
cannot credibly assert that the forger was a person affiliated with the 
school, because that relief is already available for those individuals 
under the common law (and in many instances, State law) defense of 
forgery. That defense has applied to FFEL Program loans as to any other 
contracts, and therefore no regulations were needed, or are now needed, 
to create relief from liability on a forged FFEL Program note.
---------------------------------------------------------------------------

    \1\ The Department applied this same principle in DCL 93-L-156, 
July 1993, with respect to FFEL Program loans disbursed by checks on 
which the borrower's endorsement had been forged.
---------------------------------------------------------------------------

    Moreover, the rights of the lender, and any subsequent holder, have 
always been subject to the obligation of the lender to exercise due 
diligence in making the loan in accordance with Sec.  682.206(a)(2). A 
lender whose employee or agent either committed the crime of identity 
theft of that individual, or knew at the time the loan was made of the 
identity theft of that individual, has not relied in good faith on 
representations made by the borrower or the school in the loan 
application process, and is not held harmless under FFEL Program 
regulations from the consequences of the making of a loan that is not 
legally enforceable against the individual named as borrower. In this 
instance, as with forged or unauthorized endorsements on disbursement 
instruments or authorizations, the holders of the loan must refund to 
the Secretary any FFEL Program benefits received on that loan.
    Reasons: The regulations are amended to reflect changes made by the 
HERA.

Loan Rehabilitation Agreement (Sec. Sec.  682.405 and 685.211)

    Statute: Section 8014(h) of the HERA amended section 428F(a) of the 
HEA to modify the requirements for a borrower to rehabilitate a 
defaulted loan under the FFEL and Direct Loan Programs. Under the HERA, 
a borrower will only need to make nine payments within 20 days of the 
due date during a period of 10 consecutive months to rehabilitate a 
defaulted loan(s). This change does not apply to the Federal Perkins 
Loan Program.
    Current Regulations: Current regulations require a defaulted FFEL 
or Direct Loan borrower to make 12 consecutive monthly payments on the 
defaulted loan to rehabilitate the loan.
    New Regulations: Sections 682.405 and 685.211 of the FFEL and 
Direct Loan Program regulations, respectively, have been amended to 
provide that a borrower meets the requirements for rehabilitation if 
that borrower makes at least nine of the ten payments required under a 
monthly repayment, if each payment is received within 20 days of the 
scheduled due date for that payment, and notwithstanding the 20-day 
grace period otherwise applicable, if all nine of those payments are 
received within a period of no more than 10 consecutive calendar months 
that begins no earlier than the first scheduled due date of the nine 
payments and ends no later than the scheduled due date in the tenth 
month following that first due date. This change is effective on July 
1, 2006. For a loan rehabilitation agreement that began prior to July 
1, 2006, a guaranty agency may consider the borrower to have met the 
new rehabilitation standard if at least one of the borrower's payments 
is due to be made on or after July 1, 2006, even if that payment is 
received prior to July 1, 2006, but within 20 days of the required due 
date in July. The guaranty agency must treat all borrowers in this 
situation equally. On defaulted loans held by the Department, we will 
consider the borrower to have met the new rehabilitation standards if 
the borrower makes payments as required under the existing agreement, 
and at least one of the nine payments made by the borrower was due on 
or after July 1, 2006, even if that specific payment was received prior 
to July 1, 2006, but within 20 days of the July due date.
    Reasons: These regulations are amended to reflect changes made by 
the HERA.
FFEL Program Changes

Single Holder Rule (Sec. Sec.  682.102 and 682.201)

    Statute: Section 7015 of The Emergency Supplemental Appropriations 
Act for Defense, the Global War on Terror, and Hurricane Recovery, 2006 
(Pub. L. 109-234) amended section 428C(b)(1)(A) of the HEA by repealing 
the single holder rule with respect to any FFEL Consolidation Loan for 
which an application is received by an eligible lender on or after June 
15, 2006. The single holder rule required that a borrower with FFEL 
loans held by a single lender could only consolidate his or her loans 
with that lender.
    Current Regulations: Sections 682.102(d) and 682.201(d) provide 
that a borrower who is applying for a Consolidation Loan must certify 
that the lender making the Consolidation Loan holds at least one 
outstanding loan that is being consolidated unless the borrower has 
multiple holders of FFEL Program loans, or the borrower's single loan 
holder declines to make a Consolidation Loan, or declines to make one 
with income-sensitive repayment terms.
    New Regulations: Sections 682.102(d) and 682.201(d) have been 
amended to remove these requirements.
    Reasons: The interim final regulations are necessary to reflect the 
changes made to the HEA by The Emergency Supplemental Appropriations 
Act for Defense, the Global War on Terror, and Hurricane Recovery, 
2006.

Federal Default Fee (Sec. Sec.  682.202, 682.401 and 682.419)

    Statute: Effective for loans guaranteed on or after July 1, 2006, 
section 8014 of the HERA amended section 428(b)(1)(H) of the HEA to 
eliminate the optional 1 percent insurance premium fee that guaranty 
agencies could charge to lenders and that lenders could charge to 
borrowers and establishes a Federal default fee equal to 1 percent of 
the principal amount of the loan. The default fee must be collected by 
the guaranty agency and deposited into the Federal Fund held by a 
guaranty agency under section 422A of the HEA. The default fee may be 
deducted and collected by the lender from the proceeds of the loan and 
paid to the guaranty agency or paid from other non-Federal sources. If 
the fee is charged to the borrower, it must be deducted proportionally 
from each disbursement of the loan proceeds.
    A guaranty agency must ensure that the proceeds of the Federal 
default fee will not be used for incentive payments

[[Page 45678]]

to lenders. The Secretary is prohibited from waiving these provisions 
for guaranty agencies that have Voluntary Flexible Agreements under 
section 428A of the HEA.
    Current Regulations: Section Sec.  682.401(b)(10) of the current 
regulations provides that a guaranty agency may charge the lender an 
insurance premium equal to 1 percent of the principal balance of each 
Stafford, SLS, or PLUS loan it guarantees. Under Sec.  682.202(d) of 
the current regulations, a lender may pass the cost of the insurance 
premium along to the borrower by deducting the amount of the premium 
from the borrower's loan proceeds. Section 682.419(b) requires the 
guaranty agency to deposit into its Federal Fund the total amount of 
insurance premiums collected from lenders.
    New Regulations: Section 682.401(b)(10) has been amended to reflect 
that insurance premiums will no longer be charged on Stafford or PLUS 
loans guaranteed on or after July 1, 2006. The regulations have been 
amended to reflect the new requirement for a Federal default fee. In 
accordance with the HERA, the interim final regulations require, for 
loans guaranteed on or after July 1, 2006, that the guaranty agency 
must collect, from the borrower or from any non-Federal source, a 
Federal default fee equal to one percent of the principal amount of the 
loan. The guaranty agency must deposit the proceeds of the default fee 
into its Federal Fund and ensure that the proceeds of such fees are not 
used for incentive payments to lenders. Section 682.202 has also been 
amended to provide that a lender may pass the cost of the Federal 
default fee along to the borrower. If the borrower is charged the 
Federal default fee, the amount of the default fee must be deducted 
proportionately from each disbursement of the loan. The lender or 
guaranty agency may also use other non-Federal sources to pay the 
default fee that must be deposited into the agency's Federal Fund.
    Section 682.419, which regulates the guaranty agency Federal Fund, 
has also been amended to require the guaranty agencies to deposit 
Federal default fees into the Federal Fund and to use assets of the 
Federal Fund as those assets relate to the Federal default fee only as 
directed.
    Reasons: The regulations are modified to reflect the change made by 
the HERA.

Loan Disbursement Through an Escrow Agent (Sec. Sec.  682.207 and 
682.408)

    Statute: Section 8014(j) of the HERA amended section 428(i)(1) of 
the HEA to reduce the amount of time before disbursement to the 
borrower that a lender may transfer loan funds to an escrow agent. 
Under the HERA, a lender may now transfer funds to the escrow agent no 
more than 10 days prior to the date the funds are disbursed to the 
borrower.
    Current Regulations: The current regulations permit lenders to 
transfer funds to an escrow agent no more than 21 days prior to the 
date the funds are disbursed to the borrower.
    New Regulations: The regulations in Sec. Sec.  682.207(b)(1)(iv) 
and 682.408(c) have been amended to permit lenders to transfer funds to 
an escrow agent no more than 10 days prior to the date the funds are 
disbursed to the borrower.
    Reasons: The regulations were modified to reflect the changes made 
by the HERA to the HEA in reducing this time period.

Due Diligence in Disbursing a Loan (Sec. Sec.  682.207 and 682.604)

    Statute: Section 8008 of the HERA amended section 428(b)(1)(N) of 
the HEA to provide that, for U.S. students attending an eligible 
foreign school, FFEL Stafford Program loans will be disbursed directly 
to the borrower only if the foreign school requests this method. Prior 
to the change, a disbursement could be made directly to a student 
enrolled in a foreign school at the request of the student. No change 
was made to the requirement that a disbursement be made directly to a 
student enrolled in a study-abroad program that is approved for credit 
by the student's home institution upon the request of the student. 
However, for both borrowers enrolled at a foreign school and borrowers 
enrolled in a study-abroad program, section 8008 of the HERA specifies 
that a lender or guaranty agency must verify the borrower's enrollment 
at the foreign school before making a disbursement of FFEL Stafford 
funds directly to a borrower. Under section 428B of the HEA, a lender 
may not make a disbursement of PLUS loan funds (including loan funds 
for graduate and professional student PLUS borrowers) directly to the 
borrower. These changes are effective for loans first disbursed on or 
after July 1, 2006.
    Current Regulations: The current regulations in Sec.  
682.207(b)(1)(v)(C) and (D) provide that, for both students enrolled in 
an eligible foreign school and students enrolled in a study-abroad 
program, FFEL Program loans are disbursed directly to the borrower by 
the lender only upon the request of the student. Section 
682.207(b)(1)(v)(E) requires a lender to notify the foreign school when 
the lender makes a disbursement directly to a student enrolled at the 
foreign school.
    New Regulations: Section 682.207 has been amended to reflect the 
statutory change that provides that a lender may disburse FFEL Stafford 
Loan funds directly to a U.S. student attending an eligible foreign 
school only if the school requests this method. Without a request from 
the school, lenders must disburse loan funds directly to an office of 
the foreign school designated by the school to receive them. A foreign 
school may make a single request to a lender to disburse all FFEL 
Stafford Loans directly to eligible students who attend the foreign 
school.
    In addition, the interim final regulations incorporate the HERA 
change that provides that a lender may not make a direct disbursement 
to a borrower enrolled at a foreign school or in a study-abroad program 
until the lender or guaranty agency verifies the borrower's enrollment 
at the foreign school. A guaranty agency or lender must verify 
enrollment before each disbursement, including second and subsequent 
disbursements, of a Stafford loan. If the lender or guaranty agency has 
verified a borrower's enrollment, the lender must honor the student's 
or school's request, as appropriate, that a direct disbursement be 
made. As foreign schools may not participate in the Direct Loan Program 
and Direct Loan funds are disbursed to the borrower in a study-abroad 
program directly by the school, these provisions are not applicable to 
the Direct Loan Program.
    In new paragraph 682.207(b)(2) we have listed the requirements a 
lender or guaranty agency must follow to verify a student's enrollment 
at a foreign school or enrollment in a study-abroad program. These 
requirements are based on the guaranty agency program requirements in 
Dear Colleague Letter (DCL) G-03-348 (August 2003). To verify 
enrollment in a foreign school, a guaranty agency must confirm that the 
foreign school the student is to attend is currently certified to 
participate in the FFEL Program. To do this, the guaranty agency must 
access the Department's Postsecondary Education Participants System 
(PEPS) Database. As noted in DCL G-03-348, schools that have an 
eligibility status of ``Eligible/Loan Deferment'' and a certification 
status of ``Not Certified'' in the PEPS Database are eligible for FFEL 
loan deferment purposes only. They are not certified to participate in 
the FFEL programs and students attending those schools are not eligible 
to receive FFEL program funds.
    After confirming that a school is certified to participate in the 
FFEL

[[Page 45679]]

Program, the lender or guaranty agency must contact the foreign school 
by telephone or e-mail to verify the borrower's enrollment at the 
school.
    The interim final regulations have different standards for 
verifying enrollment at a foreign school for a new student and for 
verifying enrollment for a continuing student. For a new student, the 
lender or guaranty agency must verify that the student has been 
admitted to the foreign school. For a continuing student, the lender or 
guaranty agency must verify that the student is still enrolled as 
``enrolled'' is defined in 34 CFR 668.2. Specifically, the lender or 
guaranty agency must confirm that the student is admitted/enrolled for 
the period for which the loan is intended at the enrollment status for 
which the loan was certified. Finally, the lender or guaranty agency 
must document the student's file with information on the contact.
    Similarly, for a student enrolled in a study-abroad program, the 
lender or guaranty agency must contact the home institution by 
telephone or e-mail to confirm the student's admission to the program, 
for a new student, or continuing enrollment in the program, for a 
continuing student, for the period for which the loan is intended at 
the enrollment status for which the loan was certified.
    Guaranty agencies and lenders must coordinate their activities to 
ensure that the requirements for verifying the borrower's enrollment 
are met before any disbursement may be made.
    New paragraph Sec.  682.604(b) also incorporates the requirements 
formerly found in Sec.  682.207(b)(1)(v)(E) for lender notification to 
the foreign school when the lender makes a direct disbursement to a 
student enrolled at a foreign school. The interim final regulations now 
require lenders to notify the school when the lender makes a 
disbursement directly to a student enrolled in a study-abroad program. 
In the case of a student enrolled in a study-abroad program, the lender 
must notify the home institution when the lender makes the disbursement 
directly to the student. Section 682.604(b)(1) is amended to require 
that, upon receipt of such a notice, a foreign school, or the home 
institution for a student enrolled in a study-abroad program, must 
immediately notify the lender if the student is no longer eligible to 
receive the disbursement.
    Reasons: These changes are made to implement the provisions of the 
HERA. To ensure proper implementation of the statutory changes, the 
interim final regulations include procedures issued in DCL G-03-348.
    In the past, the Department's Office of the Inspector General and 
the Government Accountability Office have found that FFEL funds have 
been disbursed directly to students for attendance at foreign schools 
that either did not exist, or that were not participating in the FFEL 
Programs. To avoid this problem in the future, verification of a 
student's enrollment at a foreign school must include confirmation of 
the foreign school's certification to participate in the FFEL Programs, 
as currently required by DCL G-03-348.
    As a lender may still make an FFEL disbursement directly to a 
student in a study-abroad program at the student's request, these 
regulations require that the lender or guaranty agency confirm the 
student's enrollment in a study-abroad program with the student's home 
institution prior to any disbursement of funds.
    Finally, for consistency in the verification of enrollment 
procedures, we have extended the requirement that a lender notify a 
foreign school when the lender makes a direct disbursement to a student 
enrolled at the foreign school, to require the lender to notify the 
home institution when it makes a direct disbursement to a student 
enrolled in a study-abroad program. The change to Sec.  682.604(b)(1) 
is made to make clear that an institution that is notified by the 
lender of a disbursement directly to a borrower must inform the lender 
if the student is no longer eligible. Under Sec.  682.610(c)(2), an 
institution is already required to notify a guaranty agency or lender 
if it discovers that a loan has been made to or on behalf of a student 
who enrolled at that school, but who has ceased to be enrolled on at 
least a half-time basis. However, Sec.  682.610(c) refers to the 
submission of such information in terms of the submission of student 
status confirmation reports (SSCRs). The new requirement makes clear 
that all institutions, including those that now report data through the 
Department's National Student Loan Data System instead of SSCRs, must 
respond to a lender's notification of a direct disbursement if the 
student is no longer eligible.
Forbearance (Sec.  682.211)
    Statute: Section 8014(e) of the HERA amended section 428(c)(3) of 
the HEA to require that lenders confirm any non-written forbearance 
agreement by recording the terms of the agreement in the borrower's 
file.
    Current Regulations: The current regulations state that a lender 
may grant forbearance if 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.
    New Regulations: Section 682.211(b)(1) of the FFEL Program 
regulations has been amended to require a lender to record the terms of 
the forbearance in the borrower's file. This change is effective for 
agreements entered into or renegotiated with a borrower on or after 
July 1, 2006.
    Reasons: The regulations are modified to reflect the change made by 
the HERA.
Loans Disbursed Through an Escrow Agent (Sec.  682.300)
    Statute: Section 8014(j) of the HERA amended section 428(a)(3)(A) 
of the HEA to provide that a lender may first receive interest subsidy 
payments on loans disbursed by an escrow agent on behalf of the lender 
three days prior to the first day of the period of enrollment, or if 
the loan is disbursed after the first day of the period of enrollment, 
three days after disbursement.
    Current Regulations: Current regulations do not include specific 
rules for interest subsidy payments on loans disbursed by an escrow 
agent.
    New Regulations: Section 682.300(c)(3) has been amended to provide 
for the payment of interest subsidies on loans disbursed through an 
escrow agent no sooner than three days prior to the first day of the 
period of enrollment or, if the loan is disbursed after the first day 
of the period of enrollment, three days after disbursement.
    Reasons: The regulations are modified to reflect the change made by 
the HERA.

Special Allowance Rates for Loans First Disbursed on or After January 
1, 2000 (Sec.  682.302)

    Statute: Prior to enactment of the HERA, section 438(b)(2)(I)(v) of 
the HEA provided that special allowance payments (SAPs) were not paid 
to lenders for any PLUS loans that were first disbursed on or after 
January 1, 2000, unless a calculation using the bond equivalent rates 
of certain 3-month commercial paper (financial) plus a spread of 3.1 
percent, exceeded 9.0 percent. This provision of the HEA has been 
struck by the HERA effective April 1, 2006, for claims that accrued on 
or after that date.
    Current Regulations: Current regulations do not reflect the changes 
made by the HERA.
    New Regulations: Section 682.302(c) of the regulations has been 
amended to reflect the changes made by the HERA

[[Page 45680]]

regarding special allowance to provide for a special allowance payment 
on PLUS loans that were first disbursed on or after January 1, 2000 
beginning with payments made after July 1, 2006. This change 
acknowledges that lenders began earning special allowance payments 
April 1, 2006.
    Reasons: The regulations are modified to reflect the changes made 
by the HERA.

Special Allowance Payments on Loans Funded by Tax-Exempt Obligations 
(Sec.  682.302)

    Statute: Effective on February 8, 2006, the HERA made the special 
allowance payment provisions of the Taxpayer-Teacher Protection Act of 
2004 (TTPA) permanent by eliminating its January 1, 2006 sunset 
provisions. The TTPA provided that upon the occurrence of specified 
events after September 30, 2004 and before January 1, 2006, the special 
allowance paid on loans made or purchased with funds from particular 
sources derived by the holder from tax-exempt obligations originally 
issued prior to October 1, 1993, would revert to the usual rates paid 
on other loans, instead of the otherwise applicable rate of not less 
than 9.5 percent minus the applicable interest rate. This change 
affected loans that had qualified for the minimum 9.5 percent special 
allowance rate, but were:
    1. Financed by a tax-exempt obligation that, after September 30, 
2004, and before January 1, 2006, has matured or been refunded, retired 
or defeased;
    2. Refinanced after September 30, 2004, and before January 1, 2006, 
with funds obtained from a source other than those described in section 
438(b)(2)(B)(v)(I) of the HEA; or
    3. Sold or transferred to any other holder after September 30, 
2004, and before January 1, 2006.
    The HERA eliminated the ending dates on these limitations. In 
addition, the HERA added two provisions that prohibit a loan from 
acquiring eligibility for the 9.5 percent minimum special allowance 
rates under 438(b)(2)(B) of the HEA. These new provisions state that 
special allowance is computed at the normal, rather than the 9.5 
percent minimum return rate for any loan:
     Made or purchased on or after February 8, 2006 (the date 
of enactment of the HERA); or
     Not earning on February 8, 2006 a quarterly rate of 
special allowance determined under section 438(b)(2)(B)(i) or (ii) of 
the HEA.
    The HERA delays these new requirements for certain holders by 
providing that they take effect later--substituting ``December 31, 
2010,'' for February 8, 2006--for a holder that:
     Was, as of February 8, 2006, and during the quarter for 
which the special allowance is paid, a unit of State or local 
government or a nonprofit private entity;
     Was, as of February 8, 2006, and during such quarter, not 
owned or controlled by, or under common ownership or control with, a 
for-profit entity; and
     Held, directly or through any subsidiary, affiliate, or 
trustee, a total unpaid balance of principal equal to or less than $100 
million on loans for which special allowances were paid under section 
438(b)(2)(B) of the HEA in the most recent quarterly payment prior to 
September 30, 2005.
    Current Regulations: Current regulations in Sec.  682.302(c)(3) 
provide that special allowance rates for loans that were made or 
purchased with funds obtained by the holder from the issuance of tax-
exempt obligations originally issued prior to October 1, 1993, or from 
other sources listed there that were derived from those bond proceeds, 
receive a special allowance at a rate that is generally one-half of the 
rate established for other loans, but not less than 9.5 percent minus 
the applicable interest rate on such loans and, in Sec.  682.302(e), 
that the issuer of such obligations receives special allowance payments 
on these loans at the usual rate if the issuer retires the tax-exempt 
obligation or defeases it by means of yield-restricted obligations. 
Current regulations refer to obligations ``originally issued'' before 
or after specified dates, but do not define that term, which derives 
directly from section 438(b)(2)(B) of the HEA. Current regulations do 
not incorporate the Department's interpretation of the term 
``originally issued'' nor do they incorporate the Department's 
longstanding interpretation of the statute and regulations as 
applicable to the treatment of loans acquired from the tax-exempt 
funding sources listed in the statute and in Sec.  682.302(c)(3)(i), if 
the ``originally issued'' obligation is later refunded by a tax-exempt 
refunding obligation.
    New Regulations: Section 682.302(e) has been amended and new 
paragraph Sec.  682.302(f) has been added to reflect the provisions of 
the HERA and, as pertinent, of the TTPA as described above and the 
Department's interpretation of terms found in current regulations as 
necessary for the proper implementation of provisions added by the HERA 
and TTPA. In addition, Sec.  682.302(c) has been amended to incorporate 
the various statutory changes in special allowance rate calculations.
    Reasons: The regulations are modified to reflect the changes made 
by the HERA, and as necessary to reflect those changes, the changes 
made by the TTPA and the interpretations by the Department of terms 
found in current regulations affected by those enactments.

Interest Repayment From Lenders (Sec.  682.305)

    Statute: Section 8006(b) of the HERA amended section 
438(b)(2)(C)(v) of the HEA to require payment by the lender of excess 
interest received by the lender when the applicable interest rate on a 
loan for any quarter exceeds the special allowance support level for 
the loan.
    Under the HERA, excess interest is calculated each quarter by 
subtracting the ``special allowance support level'' from the applicable 
interest, multiplying the result by the average daily principal balance 
of the loan (not including unearned interest added to principal) during 
the quarter, and dividing by four.
    Current Regulations: Current regulations do not provide for the 
recapture of excess interest by the Secretary.
    New Regulations: Section 682.305 of the regulations has been 
amended by adding a new paragraph (d) that provides for the recovery of 
excess interest from a lender in accordance with the provisions added 
by the HERA.
    Section 682.305(d) requires the payment by a lender of excess 
interest when the applicable interest rate on a loan for any quarter 
exceeds the special allowance support level for the loan. This 
requirement applies to loans for which the first disbursement of 
principal is made on or after April 1, 2006, but does not apply with 
respect to any special allowance payment made under section 438 of the 
HEA before April 1, 2006. The Secretary will collect the excess 
interest from lenders quarterly.
    The interim final regulations require that excess interest is 
calculated each quarter by subtracting the special allowance support 
level from the applicable interest rate, multiplying the result by the 
average daily principal balance of the loan (not including unearned 
interest added to principal) during the quarter and dividing by four. 
For example, if the average daily principal balance of a loan was 
$1,000, and the applicable interest rate and special allowance support 
level were 6.8 percent and 5.8 percent, respectively, the excess 
interest to be rebated would be: $1,000 x 1.0 percent/4 = $2.50.

[[Page 45681]]

    Reasons: The regulations are modified to reflect the changes made 
by the HERA.
Lender Insurance (Sec.  682.401)
    Statute: Section 8014(a) of the HERA amended section 428(b)(1)(G) 
of the HEA to require a guaranty agency to reduce the amount of 
insurance to a lender to 97 percent of a loan's unpaid principal.
    Current Regulations: Section 682.401(b)(14)(ii) of the FFEL Program 
regulations provides that a guaranty agency insures 98 percent of a 
loan's unpaid principal.
    New Regulations: The regulations are amended by adding new 
paragraph Sec.  682.401(b)(14)(iii) to require a guaranty agency to 
insure 97 percent of the unpaid principal balance on loans first 
disbursed on or after July 1, 2006.
    Reasons: The regulations are modified to reflect the change made by 
the HERA.

Default Collection (Sec.  682.401)

    Statute: Section 8014(d) of the HERA amended section 428(c) of the 
HEA to require each guaranty agency to ensure that consolidation loans 
are not an excessive proportion of the agency's recoveries on defaulted 
loans. In addition, under the HERA, if a borrower repays a defaulted 
loan through a Federal Consolidation Loan on or after October 1, 2006, 
a guaranty agency may not charge the borrower collection costs in an 
amount in excess of 18.5 percent of the outstanding principal and 
interest of the defaulted loan. Also on or after October 1, 2006, when 
returning proceeds to the Secretary from the consolidation of a 
defaulted loan, a guaranty agency that charged the borrower collection 
costs must remit an amount that equals the lesser of the actual 
collection costs charged or 8.5 percent of the outstanding principal 
and interest of the loan. On or after October 1, 2009, when returning 
proceeds to the Secretary from the consolidation of a defaulted loan 
that is paid off with excess consolidation proceeds, a guaranty agency 
must remit the entire collection cost charged. The HERA defines the 
term excess consolidation proceeds to mean, for any Federal fiscal year 
beginning on or after October 1, 2009, the amount of proceeds from the 
consolidation of defaulted loans under the FFEL Program that exceed 45 
percent of the agency's total collections on defaulted loans in that 
Federal fiscal year.
    Current Regulations: Current regulations in Sec.  682.401(b)(27) 
allow a guaranty agency to charge collection costs in an amount not to 
exceed 18.5 percent of the outstanding principal and interest of a 
defaulted FFEL Program loan that is repaid by a Federal Consolidation 
loan. When returning the proceeds from the consolidation of a defaulted 
loan to the Secretary, a guaranty agency may retain only the actual 
amount of collection costs charged to the borrower on the loan repaid 
by the consolidation loan (which may not exceed 18.5 percent).
    New Regulations: Section 682.401(b)(27) has been amended to reflect 
the new statutory requirements regarding the consolidation of defaulted 
FFEL loans and excess consolidation proceeds described above.
    Reasons: The regulations are modified to reflect the changes made 
by the HERA.

College Access Initiative (Sec.  682.401)

    Statute: Section 8023 of the HERA amended section 485D of the HEA 
to establish a new College Access Initiative. As part of the 
Initiative, each guaranty agency must establish a plan to promote 
access to postsecondary education. The HERA requires each guaranty 
agency to provide the Secretary and the public with information on 
access to a comprehensive listing of postsecondary education 
opportunities, programs and publications available in the State or 
States for which the agency is the designated guaranty agency. A 
guaranty agency must also promote and publicize information for 
students and traditionally underrepresented populations on how to plan, 
prepare and pay for college. The guaranty agency must pay for these 
activities from its Operating Fund or from remaining funds in 
restricted accounts established pursuant to section 422(h)(4) of the 
HEA. Finally, a guaranty agency must ensure that this information is 
free and available in printed format by November 5, 2006.
    Current Regulations: Current regulations do not provide for the 
College Access Initiative.
    New Regulations: Section 682.401 has been amended to reflect the 
requirements of the College Access Initiative.
    Reasons: The regulations are modified to reflect the changes made 
by the HERA.

Reinsurance Claims From Guaranty Agencies--Exempt Claims (Sec.  
682.404)

    Statute: Section 8014(c) of the HERA amended section 428(c)(1) of 
the HEA to provide that, for loans on which the first disbursement of 
principal is made on or after July 1, 2006, a guaranty agency will 
receive 100 percent insurance from the Department for exempt claims 
under new section 428(c)(1)(G) of the HEA. The statute defines the term 
exempt claims to mean claims with respect to loans for which it is 
determined that the borrower (or student on whose behalf a parent has 
borrowed), without the lender's or institution's knowledge at the time 
the loan was made, provided false or erroneous information or took 
actions that caused the borrower or the student to be ineligible for 
all or a portion of the loan or for interest benefits on the loan. The 
new statutory definition is the same definition used in Sec.  
682.412(a).
    Current Regulations: Current regulations have addressed exempt 
claims in Sec.  682.412(a). Under prior regulations these claims were 
paid the regular reinsurance percentage.
    New Regulations: Section 682.404(a) has been amended to provide 100 
percent reinsurance for exempt claims and to include the statutory 
definition of exempt claims.
    Reasons: The regulations are modified to reflect the changes made 
by the HERA.

Submission of Reinsurance Claims for Payment by the Secretary (Sec.  
682.406)

    Statute: Section 8014(j) of the HERA amended section 428(c)(1) of 
the HEA by reducing the amount of time a guaranty agency is allowed for 
filing a reinsurance claim with the Department.
    Current Regulations: The current regulations allow guaranty 
agencies 45 days following the date it paid a lender's claim to file a 
reinsurance claim with the Department.
    New Regulations: The regulations in Sec.  682.406(a) have been 
amended to allow guaranty agencies 30 days following the date a 
lender's claim has been paid to file a reinsurance claim with the 
Department.
    Reasons: The regulations were modified to reflect the changes made 
by the HERA to the HEA in reducing this time period.

Wage Garnishment (Sec.  682.410)

    Statute: Section 8024 of the HERA amended section 488A(a)(1) of the 
HEA to increase the amount of a borrower's disposable pay that can be 
garnished from 10 percent to 15 percent effective July 1, 2006.
    Current Regulations: Currently, the regulations allow a borrower's 
disposable pay to be garnished at a rate of 10 percent.
    New Regulations: Section 682.410(b)(9)(i)(A) has been amended to 
allow a borrower's wages to be garnished in an amount that does not 
exceed 15 percent of the borrower's disposable pay. If a guaranty 
agency

[[Page 45682]]

decides to increase the withholding rate for a borrower already being 
garnished at the lesser rate based on a garnishment proceeding pre-
dating July 1, 2006, the agency must notify the borrower that: (1) He 
or she can obtain a hearing upon request if he or she objects to the 
increased withholding amount on the basis of undue hardship; and (2) a 
borrower who has new information not presented at the initial 
garnishment hearing may request a reconsideration of the existence or 
amount of the debt.
    In general, a guaranty agency must follow the procedures in Sec.  
682.410(b)(9) for sending notices to borrowers and employers and for 
scheduling a hearing for a borrower who chooses to have one.
    Reasons: The regulations were revised to reflect changes made by 
the HERA.

Exceptional Performers (Sec.  682.415)

    Statute: Section 8014 of the HERA amended section 428(I) of the HEA 
to decrease from 100 percent to 99 percent the insurance percentage 
paid to lenders or lender servicers who are designated as exceptional 
performers.
    Current Regulations: Section 682.415(a)(1) of the FFEL Program 
regulations provides for reimbursement of 100 percent of the unpaid 
principal and interest.
    New Regulations: Section 682.415(a)(1) is amended to provide for 
reimbursement to a loan holder of 99 percent of the unpaid principal 
and interest for default claims submitted to a guaranty agency on or 
after July 1, 2006.
    Reasons: The regulations are modified to reflect the change made by 
the HERA.

School as Lender (Sec.  682.601)

    Statute: Section 8011 of the HERA amends section 435(d)(2) of the 
HEA by replacing the existing school-as-lender requirements with a new 
set of requirements. In addition, to be a school lender, a school must 
have met the school-as-lender requirements as they existed on February 
7, 2006 and must have made FFEL loans as a lender on or before April 1, 
2006.
    Current Regulations: Section 682.601 of the FFEL Program 
regulations reflects the school-as-lender requirements as they existed 
on February 7, 2006. The current regulations stipulate the requirements 
for establishing loan denial by a commercial lender, and the 
requirements for qualifying for a waiver of the 50 percent lending 
limit.
    New Regulations: Section 682.601 is amended by replacing the 
existing school-as-lender requirements with the school-as-lender 
requirements established by the HERA. Under the new regulations, a 
school lender must have met the requirements in effect as of February 
7, 2006, and must have made loans on or before April 1, 2006. In 
addition, the school must not:
     Be a home study school;
     Make a loan to any undergraduate student;
     Make a loan other than Federal Stafford loan to a graduate 
or professional student; or
     Make a loan to a borrower who is not enrolled at the 
school.
    The school must:
     Employ at least one person whose full-time 
responsibilities are limited to the administration of the programs of 
financial aid for students attending that school;
     Award any contract for financing, servicing, or 
administration of FFEL loans on a competitive basis;
     Offer loans with an origination fee and/or interest rate 
that is less than the applicable statutory fee or rate for any loan 
first disbursed on or after July 1, 2006;
     Maintain a cohort default rate that is not greater than 10 
percent;
     Submit an annual lender compliance audit, in accordance 
with the requirements of 34 CFR 682.305(c)(2), to the Department for 
any fiscal year beginning on or after July 1, 2006, in which the school 
engages in activities as an eligible lender; and
     Use any special allowance payments, interest payments from 
borrowers, interest subsidy payments from the Department, and any 
proceeds from the sale or other disposition of loans (exclusive of 
return of principal, any financing costs incurred by the school to 
acquire funds to make the loans, and the cost of charging origination 
fees or interest rates at less than the fees or rates authorized under 
the HEA) for need-based grants. However, school lenders may use a 
portion of these payments or proceeds for reasonable and direct 
administrative expenses. Such expenses are those that are incurred by 
the school that are directly related to the school's performance of an 
administrative requirement in the FFEL Program, and do not include the 
cost the school pays to obtain funding, the cost of paying Federal 
default fees on behalf of borrowers, or the cost of providing 
origination fees or interest rates at less than the fee or rate 
authorized under the provisions of the Act.
     Funds for need-based grants must supplement, not supplant, 
non-federal funds the school would otherwise use for need-based grants.
    Because schools may no longer make loans to undergraduate students, 
the requirements for establishing loan denial from another lender and 
for qualifying for a waiver of the 50 percent lending limit on making 
loans to undergraduates have been removed from the regulations.
    The HERA modified the existing requirements for audits of school 
lenders. The new requirements will apply to audits of lending 
activities for any fiscal year beginning on or after July 1, 2006. All 
school lenders are required to submit a lender compliance audit without 
regard to the amount of loans the lender makes or holds. The Department 
will be issuing further guidelines for the lender compliance audits 
that must be submitted by school lenders. School lenders subject to the 
Single Audit Act, 31 U.S.C. 7502, will be required to include the 
lending activities in the annual audit and to include information on 
those activities in the audit report. Other school lenders will have to 
arrange for a separate audit of their lending activities. School 
lenders must submit audits for fiscal years beginning before July 1, 
2006, in accordance with current requirements.
    Reasons: The regulations include rules for determining how schools 
may use the proceeds of loan making activities for need based grants 
and reasonable and direct administrative costs. These rules reflect the 
Secretary's interpretation of the new statutory language added by the 
HERA.

Disbursement Exemptions for Foreign Schools (Sec.  682.604)

    Statute: Section 8010 of the HERA amended sections 428G(a)(3), 
(b)(1), and (e) of the HEA to end the exemption from the multiple 
disbursement requirements for eligible foreign institutions.
    Current Regulations: Section 682.604(c) of the FFEL Program 
regulations reflects the previous statutory provision exempting 
eligible foreign institutions from the multiple disbursement 
requirements in section 428G of the HEA.
    New Regulations: The regulations in Sec.  682.604(c) have been 
amended to remove the exemption from the multiple disbursement 
requirements for eligible foreign institutions.
    Reasons: The regulations were modified to reflect the changes made 
by the HERA to the HEA.
Direct Loan Program Changes

Repayment Plans (Sec.  685.208)

    Statute: Section 8008(b) of the HERA amended section 455(d)(1) of 
the HEA to provide the same repayment plans in the Direct Loan program 
as in the FFEL program (except for income contingent repayment).

[[Page 45683]]

    Current Regulations: Section 685.208 of the Direct Loan Program 
regulations permits a Direct Loan borrower to choose between the 
standard, extended, graduated, income contingent, and if appropriate, 
an alternative repayment plan as determined by the Secretary. 
Implementation of the HERA does not require any changes to the 
standard, income contingent, or alternative repayment plan regulations.
    Under the extended repayment plan, a borrower makes fixed monthly 
payments over a period of time that varies with the total amount of the 
borrower's loans. Under the graduated repayment plan a borrower makes 
payments at two or more levels within a period of time determined by 
the amount of the borrower's loans. The repayment schedule used for 
these two repayment plans is as follows. If the total amount of the 
borrower's Direct Loans is:
     Less than $10,000, the borrower must repay the loans 
within 12 years of entering repayment;
     Greater than or equal to $10,000 but less than $20,000, 
the borrower must repay the loans within 15 years of entering 
repayment;
     Greater than or equal to $20,000 but less than $40,000, 
the borrower must repay the loans within 20 years of entering 
repayment;
     Greater than or equal to $40,000 but less than $60,000, 
the borrower must repay the loans within 25 years of entering 
repayment; and
     Greater than or equal to $60,000, the borrower must repay 
the loans within 30 years of entering repayment.
    New Regulations: Section 685.208 has been modified to conform the 
terms of the extended and graduated repayment plans offered in the 
Direct Loan program to reflect the similar repayment plans available in 
the FFEL Program. Under the graduated repayment plan a borrower is 
required to repay a loan in full over a fixed period of time not to 
exceed ten years. Borrowers with outstanding loans totaling more than 
$30,000 that had no outstanding principal or interest balances on a 
Direct Loan program loan as of October 7, 1998, or on the date the 
borrower obtains a Direct Loan program loan after October 7, 1998, are 
eligible for the extended repayment plan. Under this plan, borrowers 
are required to repay either a fixed annual or graduated repayment 
amount over a period of time not to exceed 25 years.
    Changes were also made to the repayment plans available to Direct 
Consolidation Loan borrowers to reflect the terms of the similar 
repayment plans in the FFEL program. Under the revised regulations, 
Direct Loan borrowers must repay their loans under the following 
schedule. If the sum of the amount of the consolidation loan and the 
unpaid balance on other student loans to the applicant:
     Is less than $7,500, the borrower must repay the 
consolidation loan in not more than 10 years;
     Is equal to or greater than $7,500 but less than $10,000, 
the borrower must repay the consolidation loan in not more than 12 
years;
     Is equal to or greater than $10,000 but less than $20,000, 
the borrower must repay the consolidation loan in not more than 15 
years;
     Is equal to or greater than $20,000 but less than $40,000, 
the borrower must repay the consolidation loan in not more than 20 
years;
     Is equal to or greater than $40,000 but less than $60,000, 
the borrower must repay the consolidation loan in not more than 25 
years; or
     Is equal to or greater than $60,000, the borrower must 
repay the consolidation loan in not more than 30 years.
    Conforming amendments were also made to Sec.  685.220(2)(i) 
regarding the repayment of Direct Consolidation loans.
    Reasons: The regulations were modified to reflect the changes made 
to the HEA by the HERA.

Eligibility of a FFEL Borrower for a Federal Direct Consolidation Loan 
(Sec. Sec.  685.100 and 685.220)

    Statute: Section 8009 of the HERA amended section 428C(a)(3)(B)(i) 
of the HEA and added a provision providing limited eligibility for a 
Direct Consolidation Loan to certain FFEL Consolidation Loan borrowers.
    Current Regulations: The current regulations allow borrowers with 
FFEL Consolidation Loans to obtain a Direct Consolidation Loan if they 
are unable to obtain a FFEL Consolidation Loan with income-sensitive 
repayment terms acceptable to the borrower.
    New Regulations: The interim final regulations implement the HERA 
and modify Sec. Sec.  685.100(c) and 685.220(d) to provide that a 
borrower with a FFEL Consolidation Loan is eligible to receive a Direct 
Consolidation Loan if the loan has been submitted to the guaranty 
agency by the lender for default aversion, and the borrower wants to 
consolidate the FFEL Consolidation Loan into the Direct Loan Program 
for the purpose of obtaining an income contingent repayment plan.
    Reasons: The regulations were modified to reflect changes made by 
the HERA to the HEA.

Federal Direct Consolidation Loans (Sec. Sec.  685.102 and 685.220)

    Statute: Section 8009 of the HERA amended section 455(a) of the HEA 
to designate that Federal Direct Consolidation Loans have the same 
terms, conditions, and benefits as FFEL Consolidation Loans, except as 
otherwise provided in the HEA. Previously, the HEA did not require 
Federal Direct Consolidation Loans to have the same terms and 
conditions as FFEL Consolidation Loans.
    Current Regulations: Under current regulations, the Federal Direct 
Consolidation Loan Program does not have the same terms, conditions and 
benefits as the FFEL Consolidation Loan Program.
    New Regulations: To ensure that Direct Consolidation Loans and FFEL 
Consolidation Loans have the same terms, conditions and benefits 
(except as otherwise provided in the HEA), the definition of Federal 
Direct Consolidation Loan Program in Sec.  685.102 has been revised. 
The prior regulations established three types of Direct Consolidation 
Loans. Under the interim final regulations, there is only a single 
Direct Consolidation Loan, but it may include up to three separate 
components representing subsidized, unsubsidized, and PLUS loans that 
were repaid by the consolidation loan. This more accurately reflects 
operational processes and is consistent with processes in the FFEL 
Program. We have also revised the definition to reflect that effective 
for consolidation applications received on or after July 1, 2006, a 
borrower may not consolidate loans that are in an in-school status. In 
addition, the regulations in Sec.  685.220 have been changed to 
eliminate the provision that provided for an interest subsidy on Direct 
Subsidized Consolidation Loans during in-school and grace periods.
    Reasons: The regulations were revised to reflect changes made by 
the HERA.

Borrowers Subject to a Judgment or Wage Garnishment (Sec.  685.220)

    Statute: Section 8009 of the HERA amended section 455(a)(1), (2), 
and (g) of the HEA to conform the program borrower eligibility 
requirements and the terms of Federal Direct Consolidation loans to 
those of FFEL Consolidation loans.
    Current Regulations: Generally, the borrower eligibility 
requirements for these two programs are similar. However, the Direct 
Consolidation Loan program has allowed borrowers to obtain a Direct 
Consolidation Loan while the borrower is in school. In addition, the 
two programs have had

[[Page 45684]]

different rules for borrowers with loans on which a judgment has been 
obtained. The regulations for both programs also provide for certain 
situations in which a borrower may add loans to an existing 
consolidation loan or obtain a subsequent Consolidation Loan.
    New Regulations: Section 685.220(d) of the Federal Direct 
Consolidation Loan regulations have been amended to reflect program 
borrower eligibility requirements that have been in the FFEL Program 
for loans on which a judgment has been obtained and for which wage 
garnishment has been initiated.
    Reasons: The regulations were modified to reflect the changes made 
by the HERA.

Reconsolidation in the Direct Loan Program (Sec.  685.220)

    Statute: Section 8009 of the HERA modified section 455(g) of the 
HEA to require borrowers seeking a Direct Consolidation loan to meet 
the same eligibility criteria as borrowers seeking a FFEL Consolidation 
Loan. One of these criteria provides that an FFEL borrower's 
eligibility to consolidate is terminated upon receipt of a FFEL 
Consolidation loan, except that an individual who receives eligible 
student loans after the date of receipt of the consolidation loan may 
receive a subsequent consolidation loan.
    Current Regulations: The current regulations permit Direct Loan 
borrowers to reconsolidate a Direct Consolidation loan into a new 
Direct Loan Consolidation loan without including any additional loans.
    New Regulations: The regulations in Sec.  685.220 have been 
modified by adding new paragraph (d)(2), which requires a Direct Loan 
borrower seeking to include an existing Direct Consolidation loan in a 
new Direct Consolidation loan to include at least one additional 
eligible loan for consolidation.
    Reasons: The regulations were modified to reflect the changes made 
by the HERA to the HEA.

Executive Order 12866

Regulatory Impact Analysis

    Under Executive Order 12866, the Secretary must determine whether 
this regulatory action is ``significant'' and therefore subject to the 
requirements of the Executive order and subject to review by the OMB. 
Section 3(f) of Executive Order 12866 defines a ``significant 
regulatory action'' as an action likely to result in a rule that may 
(1) have an annual effect on the economy of $100 million or more, or 
adversely affect a sector of the economy, productivity, competition, 
jobs, the environment, public health or safety, or State, local or 
tribal governments or communities in a material way (also referred to 
as an ``economically significant'' rule); (2) create serious 
inconsistency or otherwise interfere with an action taken or planned by 
another agency; (3) materially alter the budgetary impacts of 
entitlement grants, user fees, or loan programs or the rights and 
obligations of recipients thereof; or (4) raise novel legal or policy 
issues arising out of legal mandates, the President's priorities, or 
the principles set forth in the Executive order.
    Pursuant to the terms of the Executive order, it has been 
determined this regulatory action will have an annual effect on the 
economy of more than $100 million. Therefore, this action is 
``economically significant'' and subject to OMB review under section 
3(f)(1) of Executive Order 12866. The Secretary accordingly has 
assessed the potential costs and benefits of this regulatory action and 
has determined the benefits justify the costs.

Need for Federal Regulatory Action

    These interim final regulations are needed to implement provisions 
of the HERA that affect students, borrowers and program participants in 
the Federal student aid programs authorized under Title IV of the HEA.
    These interim final regulations also implement provisions of the 
HERA that modify and make permanent the provisions of the Taxpayer-
Teacher Protection Act of 2004 (Pub. L. 108-409). This Act changed the 
calculation of special allowance payments for certain FFEL Program 
loans made with proceeds of tax-exempt obligations and increased 
teacher loan forgiveness amounts for FFEL and Direct Loan borrowers 
teaching in certain areas.
    These interim final regulations are also needed to incorporate into 
the regulations the provisions of Public Law 107-139, which changed the 
formula for calculating special allowance payments in the FFEL Program 
for loans made on or after July 1, 2000 and set interest rates for FFEL 
and Direct Loans first disbursed on or after July 1, 2006 at fixed 
interest rates.
    These interim final regulations are also needed to implement the 
statutory changes made to the HEA by the Pell Grant Hurricane and 
Disaster Relief Act (Pub. L. 109-66) and the Student Grant Hurricane 
and Disaster Relief Act (Pub. L. 109-67). These laws authorize the 
Secretary to waive the requirement that a student repay a Title IV, HEA 
grant if the student withdrew from an institution because of a major 
disaster.
    These interim final regulations also change the Department's 
regulations to reflect changes made to the HEA by the Emergency 
Supplemental Appropriations Act for Defense, the Global War on Terror, 
and Hurricane Recovery, 2006 (Pub. L. 109-234). The Supplemental 
Appropriations Act amended section 428C(b)(1)(A) of the HEA to 
eliminate the single holder rule with respect to any FFEL Consolidation 
Loan for which an application is received by an eligible lender on or 
after June 15, 2006. This Act also repealed section 8009(a)(2) of the 
HERA and added back to the HEA the previous statutory conditions under 
which a borrower may consolidate outstanding FFEL Program loans into 
the Federal Direct Consolidation Loan Program.
    The Secretary has limited discretion in implementing most of the 
HERA provisions. The majority of the changes included in these interim 
final regulations simply modify the Department's regulations to reflect 
statutory changes made by the HERA and the other laws mentioned 
earlier. These statutory provisions are either already effective or 
will be effective shortly.
    The Secretary has exercised limited discretion in implementing the 
HERA provisions in the following areas:
     Direct Assessment: The HERA extends eligibility for Title 
IV, HEA programs to instructional programs using or recognizing the use 
by others of direct assessment of student learning;
     Identity Theft: The HERA authorizes a discharge of a FFEL 
or Direct Loan Program loan if the borrower's eligibility to borrow was 
falsely certified because the borrower was a victim of the crime of 
identity theft; and
     Special Allowance Payments: The HERA modifies the 
conditions under which a loan holder qualifies for special allowance 
interest benefits related to PLUS loans the first disbursement of which 
was made on or after January 1, 2000.
    The following section addresses the alternatives that the Secretary 
considered in implementing these discretionary portions of the HERA 
provisions.

Regulatory Alternatives Considered

    Direct Assessment Alternatives: In developing the direct assessment 
regulations, the Secretary drew upon the Department's experience with 
Western Governors University (WGU), the only institution currently 
participating in the Title IV student financial assistance programs 
that uses direct assessment, in lieu of credit or clock hours, as a

[[Page 45685]]

measure of student learning. WGU became an eligible institution by 
participating in the Distance Education Demonstration Program.
    The Secretary looked at how the Title IV student financial aid 
rules had been applied in both the nonterm and non-standard term models 
employed by WGU and identified basic principles on which to base the 
regulations. One principle is that institutions that use direct 
assessment would need to develop equivalencies in credit or clock hours 
in terms of instructional time for the amount of student learning being 
assessed. This was necessary because many applicable Title IV, HEA 
program requirements use time and/or credit or clock hours to measure 
things other than student learning. In addition, institutions would 
have to define enrollment status, payment periods, and satisfactory 
academic progress.
    A second principle is tied to the statutory language that 
characterizes direct assessment programs as instructional programs. The 
Secretary determined that institutions must provide a means for 
students to fill in the gaps in their knowledge and that Title IV, HEA 
program funds should only be used to pay for learning that occurs while 
the student is enrolled in the program.
    The Secretary considered what should constitute ``instruction'' in 
a direct assessment program. The word ``instruction'' is not 
specifically defined in the Department's regulations and, in its 
ordinary meaning the word connotes teaching. There are several other 
ways, however, in which an institution might assist students to prepare 
for assessments. The Secretary considered whether the definition of 
instructional time in Sec.  668.8(b)(3), which is used for other types 
of programs, could be used for direct assessment programs and 
determined that the definition was not sufficiently broad to be used in 
this context.
    The Secretary recognized that institutions offering direct 
assessment programs might use courses or learning materials developed 
by other entities, such as training and professional development 
organizations and other educational institutions, to assist students in 
preparing for the assessments. The Secretary considered whether the use 
of outside resources could be considered contracting out a portion of 
an educational program and determined that it could be. Therefore, the 
Secretary included in the direct assessment regulations a provision 
that exempts direct assessment programs from the limitations on 
contracting for part of an educational program.
    Identity Theft Alternatives: Section 8012 of the HERA authorizes a 
discharge of a FFEL or Direct Loan Program loan under section 437(c) of 
the HEA if the eligibility of the borrower was falsely certified as a 
result of the crime of identity theft. In developing regulations to 
implement section 8012, we sought to reflect the statutory language 
that requires the Department to discharge the borrower's responsibility 
to repay the loan when a ``crime of identity theft'' has occurred. The 
interim final regulations require that to receive a discharge on a 
loan, an individual must provide the holder of the loan, a copy of a 
local, State, or Federal court verdict or judgment that conclusively 
determines that the individual who is the named borrower of the loan 
was the victim of the crime of identity theft. We adopted this standard 
as an inexpensive and reliable way to implement the new discharge 
provision. If the perpetrator of an identity theft is never prosecuted, 
and no judicial determination that a crime occurred is rendered, a 
borrower can still be relieved of any responsibility to repay the loan 
under the common law (and in many instances, State law) defense of 
forgery. We stress this consideration in the preamble to the 
regulations.
    One alternative we considered was to authorize a discharge for 
``identity theft'' based on representations from the individual, much 
as is now done for closed school discharge relief, that the crime of 
identity theft had been committed, and that the claimant was the victim 
of that criminal act. We rejected this alternative as costly, 
unworkable, and unnecessary to provide relief to the individuals who 
may be victims of this crime. Under this alternative, the claimant and/
or the lender would be required to submit evidence needed to establish 
whether conduct has occurred that would constitute the crime of 
identity theft. That evidence may be voluminous, difficult to obtain, 
and would likely include witness testimony. Amassing and transmitting 
that evidence would be difficult and costly for lenders and claimants. 
Furthermore, determining whether a crime has been committed requires 
discerning the identity of the perpetrator and determining the state of 
mind of that person. Neither the Department nor the guaranty agency is 
authorized to determine whether that evidence shows that a crime has 
been committed. That determination is routinely and reliably made 
through the judicial process, which is designed to perform this 
function. Moreover, there is no need to ignore the judicial process in 
order to give relief to those individuals who did not in fact take out 
the loans for which they are listed as borrowers. Under State statutes 
and common law, individuals whose signatures have been forged on loan 
documents are not liable for those debts. Individuals who show that 
their signatures have been forged on loan documents, and that they 
neither authorized nor received a loan made in their name, are not held 
liable by the Department. For these reasons, we rejected the 
alternative that would entail an extra-judicial proof of a crime. 
Instead, we simply require the claimant to submit a copy of a judicial 
verdict that identity theft was committed.
    Special Allowance Payment Alternatives: The Department considered a 
number of alternatives related to the effective date for implementation 
of Section 8006 of the HERA, which eliminates the limitation that 
special allowance payments on PLUS loans for which the first 
disbursement was made on or after January 1, 2000, only be paid if the 
formula for determining the borrower interest rate produces a rate that 
exceeds the statutory maximum borrower rate of 9 percent.
    The first alternative was to make this provision retroactive to 
January 1, 2000, an approach that would result in substantial 
additional special allowance payments to many PLUS loan holders. 
Although this option was suggested by some members of the student loan 
industry, the Department determined that this approach was inconsistent 
with the statute.
    Other alternatives considered reflected differing interpretations 
of the provision's effective date. Section 8006 states that 
``amendments made by this subsection shall not apply with respect to 
any special allowance payment made under section 438 of the Higher 
Education Act of 1965 (20 U.S.C. 1087-1) before April 1, 2006.'' Since 
special allowance payments are made on a quarterly basis, the 
Department had to determine whether the statute's intent was to remove 
the limitation on PLUS special allowance payments for the quarter of 
January-March 2006--the first quarter for which bills would be 
submitted, verified, and paid after April 1, 2006 or for the quarter of 
April-July 2006, the first full quarter after the HERA's enactment. The 
Department estimated Federal costs would increase by $53 million if the 
limitation was removed for the January-March quarter. This estimate was 
based on data on special allowance rates and balances for the affected 
quarter. After a careful

[[Page 45686]]

review of the statutory language, the Department determined that the 
statute's likely intent was to remove the limitation for the January 
March 2006 quarter, since this was the first quarter for which payments 
would be made after April 1, 2006. The interim final regulations 
reflect this determination.

Benefits

    Given the breadth of these regulations, the discussion of benefits 
and costs will be limited in most cases to provisions with an economic 
impact of $100 million or more in any one year. By facilitating the 
implementation of changes made in the HERA and other recent student 
aid-related statutes, these interim final regulations will support the 
provision of a broad range of student benefits. In general, these 
benefits reduce the costs of higher education to students, increase the 
amount of Federal student aid or increase the number of students 
eligible for Federal student aid. The economic benefits of any specific 
change are difficult to discern, as they have direct benefit to the 
individual aid recipient and broader societal benefits resulting from 
the economic impact and tax-paying potential of a well-educated 
population. Research indicates that reductions in the cost of higher 
education are correlated to increased student enrollment, retention, 
and completion. The U.S. Census Bureau has found people with a 
bachelor's degree realize as much as 75 percent higher lifetime 
earnings than those whose education is limited to a high school degree. 
(``The Big Payoff: Educational Attainment and Synthetic Estimates of 
Work-Life Earnings,'' July 2002.)
    Specific benefits provided to student borrowers in these interim 
final regulations include increases in certain FFEL and Direct Loan 
Program loan limits; reduced origination fees in the FFEL and Direct 
Loan Programs; broadened eligibility for PLUS loans to include graduate 
and professional students; expanded access to distance education 
programs; permanently expanded loan forgiveness for highly qualified 
math, science, and special education teachers at low-income schools; 
and a new deferment for FFEL, Direct Loan and Perkins Loan Program 
borrowers who serve on active duty military service during times of war 
or national emergency. These benefits are projected to increase Federal 
outlays by $5.2 billion for loans originated in FY 2006-2010. This 
estimate was developed using projected interest rate, loan volume, and 
borrower demographic data used in preparing the FY 2007 President's 
Budget. Projected loan volume and borrower data are based on trend 
analyses of actual program activity, primarily drawn from the National 
Student Loan Data System (NSLDS) and other Department systems.
    The expansion of distance education made possible by the 
regulation's changes to the ``50 percent rule'' and the definition of 
correspondence courses will allow institutions to more aggressively 
pursue new communication technologies to provide students significantly 
greater flexibility in the scheduling and location of academic 
programs. The Department estimates this expanded flexibility will 
increase the pool of students eligible for Federal student aid by 
30,000 students a year in 2006 and 2007, of whom 17,000 per year will 
be eligible to receive a Pell Grant. These additional Pell Grant 
recipients will receive an estimated $196 million in Pell Grant aid 
over 2006-2010. This estimate is based on a trend analysis of Pell 
Grant program data and projections of institutional and program 
eligibility for Federal student aid derived through the use of 
accreditation data.
    Lastly, the regulation's teacher loan forgiveness provisions offer 
incentives to help address longstanding national and regional 
elementary and secondary school staffing problems. Many studies (Boe, 
Bobbitt, & Cook, 1997; Grissmer & Kirby, 1992; Murnane et al., 1991; 
Rumberger, 1987; and extensive research prepared for the National 
Commission on Mathematics and Science Teaching) have found math, 
science, and special education to be fields with especially high 
turnover and those predicted most likely to suffer shortages. More than 
tripling the teacher loan forgiveness amount--from $5,000 to $17,500--
for qualifying teachers in these fields should offer a powerful 
incentive for recruitment and retention, especially given the 
additional eligibility requirement that recipients teach for five 
consecutive years before receiving the benefit. The Department 
estimates this expanded benefit will increase Federal loan subsidy 
costs in the FFEL and Direct Loan programs by $825 million for loans 
originated in 2007-2010. (The additional benefits were available for 
loans made in 2006 as a result of the Taxpayer-Teacher Protection Act 
of 2004, so for the purposes of this analysis benefits have only been 
considered for 2007 and beyond.) This estimate was developed using 
projected interest rate, loan volume, and borrower demographic data 
used in preparing the FY 2007 President's Budget. Estimates of borrower 
eligibility were based on program data--primarily from NSLDS--and 
demographic information from the National Center for Education 
Statistics' Schools and Staffing Survey.
    In addition to implementing expanded borrower benefits, these 
interim final regulations also implement a number of provisions 
intended to improve the cost-effectiveness and efficiency of the FFEL 
and Direct Loan programs, streamline program operations for 
participating institutions, and standardize loan terms and conditions 
across the two programs. These changes are estimated to reduce Federal 
outlays by $7.0 billion for loans made in FY 2006-2010, freeing up 
resources for other urgent requirements. This estimate was also 
developed using projected interest rate, loan volume, and borrower 
demographic data used in preparing the FY 2007 President's Budget. 
Projected loan volume, guaranty agency and lender information, and 
borrower data are based on trend analyses of actual program activity, 
primarily drawn from the National Student Loan Data System (NSLDS) and 
other Department systems.
    Provisions intended to enhance loan program efficiency include a 
number of changes intended to promote risk-sharing by FFEL participants 
through reduced program subsidies, including: Restrictions on higher-
than-standard special allowance payments for loans funded through tax-
exempt securities; provisions under which the Department will recover 
excess interest paid to loan holders when student interest payments 
exceed the special allowance level set in statute; and a reduction in 
loan holder's insurance against default from 98 percent to 97 percent 
of a loan's principle and accrued interest. Given the broad 
availability of FFEL program loans--over 4,000 lenders provided more 
than $43 billion in new loans and an additional $53 billion in 
consolidation loans in FY 2005--these changes are not expected to 
reduce student and parent access to loan capital.
    The student loan industry features high competition among loan 
providers, using an array of interest rate discounts and other borrower 
benefits to attract volume. The overwhelming majority of student loans 
are sold by the originating lender in the secondary market. The impact 
on individual lenders of HERA provisions reducing Federal subsidies are 
inestimable; a substitution of subsidies for student interest rate cuts 
may occur or the secondary market price of securitized loans may be 
revalued. Given the high level of government guaranty on these loans, 
as well as the guaranteed rate of return, continued access to loan 
capital for all

[[Page 45687]]

borrowers should be assured. The impact on individual loan holders may 
be mitigated by investment and tax considerations from their investment 
portfolios as a whole. Higher borrower loan limits and standardized 
repayment terms may increase long-term interest income to some loan 
holders under these regulations.
    Lastly, the interim final regulations include a number of 
provisions intended to standardize terms and conditions and broaden 
borrower choices, particularly for consolidation loans. These changes 
include the repeal of the single holder rule, which limits the ability 
of FFEL borrowers whose loans are held by a single holder to 
consolidate with other lenders, and the standardization of graduated 
and extended repayment plans--previously different for Direct Loans and 
FFEL--on the FFEL model. The repeal of the single holder rule should 
give all borrowers access to interest rate discounts and other benefits 
available through the highly competitive consolidation loan market. The 
standardization of repayment plan terms will eliminate a possible 
source of confusion for borrowers and promote equity across the two 
loan programs. These provisions also are expected to improve market 
transparency and remove transaction barriers for loan borrowers, 
improving market openness and efficiency for both borrowers and loan 
providers.

Costs

    These interim final regulations include a number of provisions that 
will impose increased costs on some borrowers, such as an increase in 
the loan interest rate for FFEL PLUS borrowers, the elimination of in-
school and joint consolidation loans, and the mandatory imposition of 
the previously optional 1 percent guaranty agency default insurance 
premium. (At the same time, these provisions will reduce the Federal 
costs of these programs and, in the case of the guaranty fee, improve 
the financial stability of guaranty agencies.) Prior to the HERA, these 
provisions allowed loan providers or guaranty agencies to discriminate 
among borrowers through the unequal distribution of borrower costs. 
While some borrowers may lose unearned benefits through these statutory 
and regulatory changes, market equitability and transparency are 
improved.
    These interim final regulations also authorize the Secretary to 
waive a student's Title IV grant repayment if the student withdrew from 
an institution of higher education because of a major disaster as 
declared by the President in accordance with the Robert T. Stafford 
Disaster Relief and Emergency Assistance Act. The Secretary will 
exercise this waiver authority on a case-by-case basis after 
determining that a major disaster has significantly affected recipients 
of Title IV grant aid.
    Because entities affected by these regulations already participate 
in the Title IV, HEA programs, these lenders, guaranty agencies, and 
schools must have already established systems and procedures in place 
to meet program eligibility requirements. These regulations generally 
involve discrete changes in specific parameters associated with 
existing guidance--such as changes in origination fees, loan limits, or 
reinsurance percentages--rather than wholly new requirements. 
Accordingly, institutions wishing to continue to participate in the 
student aid programs have already absorbed most of the administrative 
costs related to implementing these interim final regulations. Marginal 
costs over this baseline are primarily related to one-time system 
changes that, while possibly significant in some cases, are an 
unavoidable cost of continued program participation. The Department is 
particularly interested in comments on possible administrative burdens 
related to these system or process changes.

Assumptions, Limitations, and Data Sources

    Because these interim final regulations largely restate statutory 
requirements that would be self-implementing in the absence of 
regulatory action, cost estimates provided above reflect a prestatutory 
baseline in which the HERA and other statutory changes implemented in 
this regulation do not exist. In general, these estimates should be 
considered preliminary; they will be reevaluated in the final rule, 
based on comments received and additional program data that may be 
available at that time. Costs have been quantified for five years, as 
over time this has been a typical period between reauthorizations of 
the Higher Education Act.
    In developing these estimates, a wide range of data sources were 
used, including the National Student Loan Data System, operational and 
financial data from Department of Education systems, and data from a 
range of surveys conducted by the National Center for Education 
Statistics such as the 2004 National Postsecondary Student Aid Survey, 
the 1994 National Education Longitudinal Study, and the 1996 Beginning 
Postsecondary Student Survey.
    Elsewhere in this SUPPLEMENTARY INFORMATION section we identify and 
explain burdens specifically associated with information collection 
requirements. See the heading Paperwork Reduction Act of 1995.

Accounting Statement

    As required by OMB Circular A-4 (available at http://www.Whitehouse.gov/omb/Circulars/a004/a-4.pdf), in Table 2 below, we 
have prepared an accounting statement showing the classification of the 
expenditures associated with the provisions of these interim final 
regulations. This table provides our best estimate of the changes in 
Federal student aid payments as a result of these interim final 
regulations. Expenditures are classified as transfers to postsecondary 
students; savings are classified as transfers from program participants 
(lenders, guaranty agencies).

Table 2.--Accounting Statement: Classification of Estimated Expenditures
                              [In millions]
------------------------------------------------------------------------
                Category                            Transfers
------------------------------------------------------------------------
Annualized Monetized Transfers.........  $976.
From Whom To Whom?.....................  Federal Government To
                                          Postsecondary Students;
                                          Student Aid Program
                                          Participants to Federal
                                          Government.
------------------------------------------------------------------------

Waiver of Proposed Rulemaking

    Under the Administrative Procedure Act (5 U.S.C. 553), the 
Department is generally required to publish a notice of proposed 
rulemaking and provide the public with an opportunity to comment on 
proposed regulations prior to issuing a final rule. In addition, all 
Department regulations for programs authorized

[[Page 45688]]

under title IV of the HEA are subject to the negotiated rulemaking 
requirements of section 492 of the HEA.\2\ However, both the APA and 
HEA provide for exemptions from these rulemaking requirements. The APA 
provides that an agency is not required to conduct notice-and-comment 
rulemaking when the agency for good cause finds that notice and comment 
are impracticable, unnecessary or contrary to the public interest. 
Similarly, section 492 of the HEA provides that the Secretary is not 
required to conduct negotiated rulemaking for a title IV, HEA program 
regulation if the Secretary determines that applying that requirement 
is impracticable, unnecessary or contrary to the public interest within 
the meaning of the HEA.
---------------------------------------------------------------------------

    \2\ Section 492 provides specifically that any regulations 
issued for the title IV, HEA programs shall be subject to negotiated 
rulemaking to obtain the advice of and recommendations from 
individuals and groups involved in the student financial assistance 
programs.
---------------------------------------------------------------------------

    Although these regulations are subject to the APA's notice-and-
comment and the HEA's negotiated rulemaking requirements, the Secretary 
has determined that it is unnecessary and impracticable to either 
conduct negotiated rulemaking or notice-and-comment rulemaking on these 
regulations. Most of the changes made by the HERA were effective no 
later than July 1, 2006. To ensure proper implementation of these 
statutory changes, they need to be reflected in the Department's 
regulations. Waiver of rulemaking under the impracticability exemption 
in the APA and HEA is warranted because it would not be possible for 
the Department to comply with the APA's and HEA's rulemaking mandates 
and execute its statutory duties under the HERA.\3\
---------------------------------------------------------------------------

    \3\ See Riverbend Farms, Inc. v. Madigan, 958 F.2d 1479, 1484, 
n.2 (9th cir. 1992). The term ``impracticable'' has also been 
described as meaning ``a situation in which the due and required 
execution of the agency functions would be unavoidably prevented by 
its undertaking rulemaking proceedings. Zhang v. Slattery, 55 F.3d 
732, 746 (2d Cir. 1995) citing National Nutiritional Foods Ass'n v. 
Kennedy, 572 F.2d 377, 385 (2d Cir. 1978) citing S. Rep. No. 752, 
79th Cong., 1st Sess. (1945).
---------------------------------------------------------------------------

    Even on an extremely expedited timeline, the Department could not 
have feasibly conduct negotiated or notice-and-comment rulemaking and 
then promulgated these regulations before the provisions of the HERA 
became effective on July 1, 2006. Negotiated rulemaking requires the 
Department to solicit nominations for negotiators to participate in the 
negotiated rulemaking sessions, select a committee of negotiators, 
conduct a series of negotiating sessions, publish a notice of proposed 
rulemaking, review public comments, and issue final regulations. 
Normally this process would take at least 12 months and possibly 
longer. The Department cannot both implement the provisions in the HERA 
and conduct negotiated or notice-and-comment rulemaking.
    In addition, most of the changes included in these regulations 
simply modify the Department's regulations to reflect statutory changes 
made by the HERA. These statutory provisions are either already 
effective or will be effective within a short period of time. The 
Secretary does not have discretion in implementing these changes. Thus, 
negotiated rulemaking and notice-and-comment rulemaking are 
unnecessary.
    Other changes in these regulations make technical corrections, 
remove obsolete regulatory provisions or references or align related 
regulatory provisions as required by the HERA and other laws. These 
latter changes do not establish or affect substantive policy. 
Negotiated rulemaking and notice-and-comment rulemaking on these 
provisions is unnecessary.
    Therefore, under 5 U.S.C. 553(b)(B), the Secretary has determined 
that conducting notice-and-comment rulemaking is unnecessary and 
impracticable. For the same reasons, the Secretary has determined, 
under section 492(b)(2) of the Higher Education Act of 1965, as 
amended, that these regulations should not be subject to negotiated 
rulemaking.
    These regulations are final and in effect as published, thirty days 
after publication in the Federal Register. Although the Department is 
adopting these regulations on an interim final basis, the Department 
requests public comment on these regulations. After full consideration 
of public comments, the Secretary will publish final regulations with 
any necessary changes to be effective July 1, 2007.
    As discussed above, all Department regulations for programs 
authorized under the title IV, HEA programs are subject to the 
negotiated rulemaking requirements of section 492 of the HEA. In 
addition, section 482 of the HEA requires that any title IV regulations 
that have not been published in final form by November 1 prior to the 
start of an award year cannot become effective until the beginning of 
the second award year following the November 1 date.
    Therefore, the Secretary has determined that although it may be 
feasible to conduct notice-and-comment rulemaking for the regulations 
that would be effective July 1, 2007, it would be impracticable to 
conduct negotiated rulemaking to implement the provisions of the HERA 
contained in these interim final regulations.

Regulatory Flexibility Act Certification

    The Secretary certifies that these regulations will not have a 
significant economic impact on a substantial number of small entities.

Paperwork Reduction Act of 1995

    Sections 600.7, 600.10, 668.3, 668.8, 668.10, 668.22, 668.173, 
673.5, 674.34, 682.102, 682.200, 682.207, 682.209, 682.210, 682.211, 
682.215, 682.305, 682.401, 682.402, 682.404, 682.405, 682.406, 682.410, 
682.415, 682.601, 682.604, 685.102, 685.204, 685.208, 685.215, 685.217 
and 685.220 contain information collection requirements. As required by 
the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)), the Department 
of Education is required to submit a copy of these sections to the 
Office of Management and Budget (OMB) for its review. In many cases, 
the burden associated with the above provisions is associated with 
forms and applications currently approved for use under existing OMB 
control numbers. The Department will revise the existing information 
collection packages for the following sections: Sec. Sec.  674.34, 
682.102, 682.210, 682.402, 685.204, and 685.220. The Department is 
working with its major stakeholders to develop the forms and 
applications necessary to implement these provisions and will submit 
these revised packages for OMB review soon after publication of the 
interim final regulations and solicit comment at that time.
    The Department plans to submit a full information collection 
package for OMB review to account for the burden associated with 
Sec. Sec.  682.207 and 682.401 upon publication of these interim final 
regulations. We invite comments on these information collection 
sections at this time.
    Lastly, the Department has increased the burden hours for the 
existing OMB-approved collections associated with Sec. Sec.  682.215 
and 685.217 to account for the increased burden. OMB approved this 
burden increase on June 16, 2006.
    Collection of Information: 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 Program; Federal Family 
Education Loan Program; and William D. Ford Federal Direct Loan 
Program.

[[Page 45689]]

Sections 600.7 and 600.10--Modification of the 50 Percent Rules

    The definition of ``telecommunications course'' is revised, and the 
references to telecommunications courses pertaining to calculating the 
percentage of correspondence courses offered by an institution are 
deleted so that an otherwise eligible institution that offers over 50 
percent of its courses by telecommunications is now eligible to 
participate in the title IV, HEA programs. However, institutions that 
offer over 50 percent of their courses through correspondence, and 
foreign institutions that provide any of their programs by 
telecommunications or correspondence, continue to be ineligible to 
participate. There is no burden associated with the change in the 
definition of telecommunications course.

Section 668.3--Academic Year

    The definition of academic year is amended to reduce from 30 to 26 
the number of weeks of instructional time for a program that measures 
its length in clock hours. There is no burden associated with the 
reduction in the number of weeks of instructional time.

Section 668.8--Eligible Program

    An otherwise eligible program that is offered in whole or in part 
through telecommunications is an eligible program for title IV, HEA 
program purposes. The eligible telecommunications program must be 
offered by an institution in the United States. The institution must 
have been evaluated and determined to have the capability to 
effectively deliver distance education programs by an accrediting 
agency or association. The accrediting agencies are currently reviewing 
telecommunications programs consistent with the scope of their 
authority. Therefore there is no additional burden associated with this 
provision.

Section 668.10--Direct Assessment Programs

    The interim final regulations provide that ``direct assessment 
programs'' are eligible programs for Title IV purposes. A direct 
assessment program is an instruction program that, in lieu of credit 
hours or clock hours as a measure of student learning, utilizes direct 
assessment of student learning, or recognizes the direct assessment of 
student learning by other measures. This assessment must be consistent 
with the accreditation of the institution or program utilizing the 
results of the assessment.
    In the short-term, we expect no additional burden to be associated 
with direct assessment programs. We are currently aware of only one 
institution that utilizes such programs. Therefore, this section is not 
subject to the Paperwork Reduction Act of 1995.

Sections 668.22 and 668.173--Treatment of Title IV Funds When a Student 
Withdraws

    Under these interim final regulations, the following provisions 
apply to title IV, HEA program funds when a student withdraws:
     The amount of a grant overpayment due from a student is 
limited to the amount by which the original grant overpayment amount 
exceeds half of the total title IV grant funds received by the student.
     When the original amount of a student's title IV grant 
overpayment amount is $50 or less, it is considered ``de minimis'' and 
does not have to be repaid or reported.
     An institution must contact a withdrawn student prior to 
making a post-withdrawal disbursement of a title IV loan. The 
institution must explain the obligation to repay the loan funds, if the 
post-withdrawal disbursement is accepted by the borrower. If the 
borrower's acceptance of the post-withdrawal disbursement is received 
by the institution after the deadline date for the return of the 
acceptance of the disbursement, and the institution chooses not to make 
the post-withdrawal disbursement, the institution is required to notify 
the borrower of the institution's action.
     Only scheduled hours, not completed hours, are used to 
determine the percentage of the period completed by a student 
withdrawing from a clock hour program.
     A student withdrawing from a clock hour program earns 100 
percent of his or her aid if the student's withdrawal date occurs after 
the point when he or she was scheduled to complete 60 percent of the 
scheduled hours in the payment period or period of enrollment.
     An institution must return unearned funds no later than 45 
days after a student withdraws.
     An institution may grant more than one leave of absence.
     The return of title IV funds provisions no longer apply to 
LEAP, SLEAP, GEAR UP and Student Support Services funds.
    The burden associated with the requirement that an institution must 
contact and counsel a withdrawn student before making a late 
disbursement is offset by the requirements that simplify and facilitate 
the return of title IV program funds. Consequently, these changes do 
not increase burden.

Sections 673.5 and 682.200--Estimated Financial Assistance

    Under the interim final regulations, the term ``resources'' is 
changed to estimated financial assistance for the purposes of the 
Federal Perkins Loan program, the Federal Work-Study program, and the 
FSEOG program. The term estimated financial assistance has also been 
modified to include the two new grant programs created by the HERA, and 
the new chapter 1607 veterans education benefits established under the 
Ronald W. Reagan National Defense Authorization Act for 2005. The 
interim final regulations also make technical changes to help clarify 
the existing regulatory language and to standardize the similar 
definitions used in the Federal Perkins Loan program, the Federal Work-
Study programs, the FSEOG program, and the FFEL and Direct Loan 
programs. There is no burden associated with these provisions.

Section 674.34, 682.210, and 685.204--Active Duty Military Deferments

    A new military deferment is established for FFEL, Direct and 
Perkins Loan Program borrowers who are serving on active duty, or are 
performing qualifying National Guard duty during a war or other 
military operation or national emergency. The addition of a new 
deferment will increase the burden hours associated with two existing 
OMB Control Numbers, 1845-0005--FFEL Deferment Requests and 1845-0011--
Direct Loan Program Deferment Request Forms. These forms will be 
submitted for OMB review by November 2006. Until new forms are 
approved, borrowers may submit documentation to the loan holder 
demonstrating their eligibility for the new deferment.

Section 682.102--Obtaining and Repaying a Loan

    Under the interim final regulations, this section is amended to 
repeal the single holder rule and to add graduate and professional 
students as eligible borrowers of a PLUS Loan. Repeal of the single 
holder rule will allow borrowers to apply to any eligible lender when 
consolidating their loans and will not increase or decrease the actual 
burden associated with obtaining a Consolidation Loan. The burden 
associated with the addition of the new graduate/professional PLUS 
Program will be reflected in the collection of information under 
modified OMB

[[Page 45690]]

Control Numbers 1845-0068--Federal Direct PLUS Loan Application and MPN 
and Endorser Addendum and 1845-0069--Federal PLUS Loan Application and 
MPN, endorser Addendum and School Certification. Borrowers may use 
these temporary forms until revised forms are submitted for OMB review. 
That submission will occur no later than October 2006.

Section 682.207--Due Diligence in Disbursing a Loan for Attendance at a 
Foreign School

    The Department currently has the paperwork requirements in this 
section approved under OMB control number 1845-0020 which will be 
modified to reflect the burden associated with this provision. For a 
U.S. student attending an eligible foreign institution, FFEL program 
funds may be disbursed directly to the student only if the institution 
requests this method. For a student enrolled at a foreign institution, 
and a student enrolled in a study-abroad program, the lender must 
verify the student's enrollment at the foreign school before making a 
direct disbursement of FFEL funds. These new requirements represent an 
increased burden that will be reflected in OMB Control No. 1845-0020.

Section 682.209--Repayment of a Loan

    An FFEL Stafford loan borrower may no longer request to enter 
repayment early on her loans. There is no additional burden associated 
with this provision.

Section 682.211--Forbearance

    Under these interim final regulations, a lender must confirm any 
non-written forbearance agreement by recording the terms of the 
agreement in the borrower's file. There is no additional burden 
associated with this provision as the current regulations already 
permit this practice under OMB Control Number 1845-0020.

Section 682.215 and 685.217--Teacher Loan Forgiveness

    Under these interim final regulations, increased teacher loan 
forgiveness in the amount of $17,500 is made permanent for teachers in 
certain specialties as originally authorized by the Taxpayer-Teacher 
Protection Act (TTPA) of 2004. The regulations also provide that 
teachers in private non-profit schools may qualify for the same 
forgiveness benefits if they are ``highly qualified.'' The current 
teacher loan forgiveness form, as currently approved by OMB under 
Control Number 1845-0059, reflects all of the new teacher loan 
forgiveness requirements of the TTPA with the exception of criteria for 
teachers in a private non-profit school. The current form will be 
revised to reflect the new criteria, but we expect no additional burden 
because most applicants for forgiveness are employed in public 
elementary and secondary schools, not private non-profit schools.

Section 682.305--Procedures for Payment of Interest and Special 
Allowance

    These interim final regulations require the repayment by a lender 
of excess interest paid by the Department when the applicable interest 
rate on a loan for any quarter exceeds the special allowance support 
level for the loan. The Secretary will collect the excess interest from 
lenders quarterly. This change represents no increase in burden. The 
Secretary will make the calculation of excess interest owed by a 
lender. The lender will pay excess interest to the Secretary under 
existing processes.

Section 682.401--Basic Program Agreement

    The HERA establishes a new College Access Initiative for guaranty 
agencies to create and carry out a plan to promote access to 
postsecondary education for each State. While most of the agencies and/
or other State government entities already offer this information, we 
expect this requirement will affect the 35 existing guaranty agencies 
by 100 hours each, creating a total burden of 3500 hours. The 
Department will amend OMB Control Number 1845-0020--Federal Family 
Education Loan Program Regulations to reflect this increase in burden 
hours.
    The following other provisions are being amended but will not 
produce additional burden. The amount of lender insurance paid to 
lenders as reimbursement for defaulted loans will decrease. This will 
not require additional burden since it is merely a change in the 
percentage used in the calculation of the payment to the lender. Each 
guaranty agency must now establish procedures to ensure that 
consolidation loans are not an excessive proportion of its recoveries 
on defaulted loans. In addition, a guaranty agency must now remit to 
the Secretary 8.5% of the collection costs it recovers from the 
borrower or, if the amount of the proceeds from the consolidation of 
defaulted loans exceeds 45 percent of the agency's total collections on 
defaulted loans in that Federal fiscal year, all of the collection 
costs recovered by payment from the consolidation loan. Remitting part 
or all of the collection costs will not result in additional burden to 
the guaranty agency since it is already calculated for other purposes. 
The interim final regulations eliminate the current, optional 1 percent 
insurance premium fee that guaranty agencies may charge the lender, and 
replace it with a mandatory 1 percent Federal default fee deducted and 
collected from the proceeds of the loan or from other non-federal 
sources. This will not result in additional burden since the prior fee 
calculation is eliminated and the new fee replaces it.

Sections 682.402 and 685.215--Identity Theft

    Under these interim final regulations, the regulations have been 
amended to authorize discharge of a FFEL or Direct Loan Program loan if 
the borrower's eligibility was falsely certified because the borrower 
was a victim of the crime of identity theft. The regulations provide 
that the borrower's obligation is discharged if the borrower provides 
the holder of a loan, or the Secretary in the case of a Direct Loan, a 
copy of a local, State, or Federal court verdict or judgment that 
conclusively determines that the individual who is the named borrower 
was the victim of the crime of identity theft. If the judgment or 
conviction did not expressly reference that loan, the individual must 
provide authentic examples of his other identification credentials, and 
an explanation of facts that demonstrate that this criminal conduct 
resulted in the school certifying that individual's eligibility to 
borrow, and, as a result, in the loan being made.
    The additions do not change the burden hours associated with this 
section of the regulations. The burden associated with the new 
requirements will be accounted for under OMB Control Number 1845-0015--
FFEL, Direct Loan and Perkins Loan Discharge Applications. These forms 
will be submitted for OMB review by December 2006. Until new forms are 
approved, borrowers may submit documentation to the loan holder 
demonstrating their eligibility for the discharge.

Section 682.404--Federal Reinsurance Agreement

    Under these interim final regulations, for loans on which the first 
disbursement of principal is made on or after July 1, 2006, a guaranty 
agency will receive 100 percent reinsurance from the Department on 
``exempt claims.'' The interim final regulation simply increases the 
amount of reinsurance paid to guaranty agencies on these claims. This 
provision does not increase burden because payment of these claims

[[Page 45691]]

is already part of the process under which the Secretary pays 
reinsurance to the guaranty agencies.

Section 682.405--Rehabilitation of a Defaulted Loan

    The regulations have been amended to require a FFEL borrower to 
make 9 payments within 20 days of the due date during a period of 10 
consecutive months to rehabilitate a defaulted loan. Previously, the 
regulations required the borrower to make 12 consecutive on-time 
monthly payments. The new requirement that the borrower make fewer 
payments will not change the burden associated with the rehabilitation 
of a defaulted FFEL loan. The requirements that a borrower must request 
rehabilitation, and that a guaranty agency must attempt to secure a 
lender to purchase the loan after it has been successfully 
rehabilitated, remain unchanged.

Section 682.406--Conditions for Claim Payments From the Federal Fund 
and Reinsurance Coverage

    The amount of time a guaranty agency is allowed for filing a 
reinsurance claim with the Department is reduced from 45 days to 30 
days. However, the process under which the guaranty agency is required 
to submit a reinsurance claim is unchanged. Consequently, there is no 
change in burden.

Section 682.410--Fiscal, Administrative and Enforcement Procedures

    The amount of a borrower's disposable pay that can be garnished is 
increased from 10 to 15 percent effective July 1, 2006. There is no 
burden associated with this change because it has no impact on the 
manner in which any borrower's wages are currently garnished.

Section 682.415--Special Insurance and Reinsurance

    The insurance percentage applicable to lenders or lenders servicers 
who are designated as exceptional performers is decreased from 100 
percent to 99 percent. There is no burden associated with this change. 
All other factors of reimbursement remain the same.

Section 682.601--School-as-Lender

    The current regulations are replaced with an expanded set of 
requirements for participation as a school-as-lender. The primary 
requirement to be designated a school-as-lender is that the institution 
met the requirements in effect as of February 7, 2006, and made loans 
on or before April 1, 2006. There is no additional burden for 
institutions since the new requirements are based on data already 
collected by the institution, reports that are already required, and/or 
procedures of standard use at institutions.

Section 682.604--Processing Loan Proceeds and Counseling the Borrower

    The exemption from the multiple disbursement requirements for 
eligible foreign institutions is removed. Lenders and guaranty agencies 
are now required to disburse the proceeds of a loan in two or more 
installments, neither of which exceeds one-half of the loan. This 
change will not increase burden. In the vast majority of cases, the 
lender or guaranty agency is already required to disburse a loan in two 
installments as a regular business practice under the requirements of 
the HEA and the FFEL Program regulations.

Section 685.220--Consolidation

    Under these interim final regulations, the borrower eligibility 
requirements of the FFEL and Federal Direct Consolidation Loan programs 
are harmonized to eliminate program differences and to reflect the 
repeal of section 8009(a)(2) of the HERA, which restricted the 
conditions under which a FFEL borrower could obtain a Federal 
Consolidation Loan. The burden associated with the collection of 
information will be reflected in the modified OMB Control Number 1845-
0036--FFEL Consolidation Loan Application and Promissory Note and OMB 
Control Number 1845-0053--Federal Direct Consolidation Loan Program 
Application Documents.
    If you want to comment on the information collection requirements, 
please send your comments to the Office of Information and Regulatory 
Affairs, OMB, room 10235, New Executive Office Building, Washington, DC 
20503; Attention: Desk Officer for U.S. Department of Education. You 
may also send a copy of these comments to the Department representative 
named in the FOR FURTHER INFORMATION CONTACT section of this preamble.
    We consider your comments on these proposed collections of 
information in--
     Deciding whether the proposed collections are necessary 
for the proper performance of our functions, including whether the 
information will have practical use;
     Evaluating the accuracy of our estimate of the burden of 
the proposed collections, including the validity of our methodology and 
assumptions;
     Enhancing the quality, usefulness, and clarity of the 
information we collect; and
     Minimizing the burden on those who must respond. This 
includes exploring the use of appropriate automated, electronic, 
mechanical, or other technological collection techniques or other forms 
of information technology; e.g., permitting electronic submission of 
responses.
    OMB is required to make a decision concerning the collection of 
information contained in these interim final regulations between 30 and 
60 days after publication of this document in the Federal Register. 
Therefore, to ensure that OMB gives your comments full consideration, 
it is important that OMB receives the comments within 30 days of 
publication.

Assessment of Educational Impact

    Based on our own review, we have determined that these interim 
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/news/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.


    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.gpoaccess.gov/nara/index.html.

(Catalog of Federal Domestic Assistance Numbers: 84.032 Federal 
Family Education Loan Program; 84.038 Federal Perkins Loan Program; 
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, 675 and 676

    Administrative practice and procedure, Colleges and universities, 
Consumer protection, Education, Employment, Grant programs--education, 
Loan programs--education,

[[Page 45692]]

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.

    Dated: August 1, 2006.
Margaret Spellings,
Secretary of Education.

0
For the reasons discussed in the preamble, the Secretary amends parts 
600, 668, 673, 674, 675, 676, 682, and 685 of title 34 of the Code of 
Federal Regulations as follows:

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

0
1. The authority citation for part 600 continues to read as follows:

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

0
2. Section 600.2 is amended by:
0
A. In the definition of Correspondence course, removing paragraph (3) 
and redesignating paragraph (4) as paragraph (3);
0
B. Adding a definition of Direct assessment program;
0
C. Revising the definitions of Educational program and 
Telecommunications course.
    The revisions and addition read as follows:


Sec.  600.2  Definitions.

* * * * *
    Direct assessment program: A program as described in 34 CFR 668.10.
    Educational program: (1) A legally authorized postsecondary program 
of organized instruction or study that:
    (i) Leads to an academic, professional, or vocational degree, or 
certificate, or other recognized educational credential; and
    (ii) May, in lieu of credit hours or clock hours as a measure of 
student learning, utilize direct assessment of student learning, or 
recognize the direct assessment of student learning by others, if such 
assessment is consistent with the accreditation of the institution or 
program utilizing the results of the assessment and with the provisions 
of Sec.  668.10.
    (2) The Secretary does not consider that an institution provides an 
educational program if the institution does not provide instruction 
itself (including a course of independent study) but merely gives 
credit for one or more of the following: Instruction provided by other 
institutions or schools; examinations or direct assessments provided by 
agencies or organizations; or other accomplishments such as ``life 
experience.''
    * * *
    Telecommunications course: A course offered principally through the 
use of one or a combination of technologies including television, 
audio, or computer transmission through open broadcast, closed circuit, 
cable, microwave, or satellite; audio conferencing; computer 
conferencing; or video cassettes or discs to deliver instruction to 
students who are separated from the instructor and to support regular 
and substantive interaction between these students and the instructor, 
either synchronously or asynchronously. The term does not include a 
course that is delivered using video cassettes or disc recordings 
unless that course is delivered to students physically attending 
classes at the institution providing the course during the same award 
year. If the course does not qualify as a telecommunications course, it 
is considered to be a correspondence course.
* * * * *

0
3. Section 600.7 is amended by:
0
A. Removing paragraph (b)(1).
0
B. Redesignating paragraphs (b)(2) and (b)(3) as paragraphs (b)(1) and 
(b)(2), respectively;
0
C. Revising the heading of the newly redesignated paragraph (b)(1) to 
read as set forth below;
0
D. In the newly redesignated paragraph (b)(2)(i), removing the words 
``section 521(4)(C)'' and adding in their place the words ``section 
3(3)(C)'' and adding at the end of the sentence the words ``of 1995.''


Sec.  600.7  Conditions of institutional ineligibility.

* * * * *
    (b)* * *
    (1) Calculating the number of correspondence courses. * * *
* * * * *


Sec.  600.10  [Amended]

0
4. Section 600.10(c)(2) is amended by adding the words ``except as 
provided in 34 CFR 668.10'' after the words ``eligible program of that 
institution''.


Sec.  600.21  [Amended]

0
5. Section 600.21(a)(4) is amended by adding at the beginning of the 
paragraph, the words ``Except as provided in 34 CFR 668.10,''.

0
6. Section 600.51 is amended by adding a new paragraph (d) to read as 
follows:


Sec.  600.51  Purpose and scope.

* * * * *
    (d)(1) A program offered by a foreign school through any use of a 
telecommunications course, correspondence course, or direct assessment 
program is not an eligible program;
    (2) Correspondence course has the meaning given in Sec.  600.2;
    (3) Direct assessment program has the meaning given in Sec.  
668.10(a)(1) of this chapter;
    (4) Telecommunications course is a course offered through any one 
or a combination of the technologies listed in the definition of 
telecommunications course in Sec.  600.2, except that 
telecommunications technologies may be used to supplement and support 
instruction that is offered in a classroom located in the foreign 
country where the students and instructor are physically present.
* * * * *

PART 668--STUDENT ASSISTANCE GENERAL PROVISIONS

0
7. The authority citation for part 668 continues to read as follows:

    Authority: 20 U.S.C. 1001, 1002, 1003, 1085, 1091b, 1092, 1094, 
1099c, and 1099c-1, unless otherwise noted.


0
8. Section 668.2(b) is amended by removing the word ``parent'' from the 
definition of Federal Consolidation Loan Program and by revising the 
definitions of Federal Direct PLUS Program and Federal PLUS program. 
The authority citations for these definitions remain unchanged.
    The revisions read as follows:


Sec.  668.2  General definitions.

* * * * *
    (b) * * *
    Federal Direct PLUS Program: A loan program authorized by title IV, 
Part D of the HEA that is one of the components of the Direct Loan 
Program. The Federal Direct PLUS Program provides loans to parents of 
dependent students attending schools that participate in the Direct 
Loan Program. The Federal Direct PLUS Program also provides loans to 
graduate or professional students attending schools that participate in 
the Direct Loan Program. The borrower is responsible for the interest 
that accrues during any period.
* * * * *
    Federal PLUS program: The loan program authorized by Title IV-B,

[[Page 45693]]

section 428B, of the HEA, that encourages the making of loans to 
parents of undergraduate students. Before October 17, 1986, the PLUS 
Program also provided for making loans to graduate, professional, and 
independent undergraduate students. Before July 1, 1993, the PLUS 
Program also provided for making loans to parents of dependent graduate 
students. Beginning July 1, 2006, the PLUS Program provides for making 
loans to graduate and professional students.
* * * * *

0
9. Section 668.3 is amended by revising paragraph (a) to read as 
follows:


Sec.  668.3  Academic year.

    (a) General. Except as provided in paragraph (c) of this section, 
an academic year for a program of study must include--
    (1)(i) For a program offered in credit hours, a minimum of 30 weeks 
of instructional time; or
    (ii) For a program offered in clock hours, a minimum of 26 weeks of 
instructional time; and
    (2) For an undergraduate educational program, an amount of 
instructional time whereby 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.
* * * * *

0
10. Section 668.8 is amended by adding new paragraphs (m) and (n) to 
read as follows:


Sec.  668.8  Eligible program.

* * * * *
    (m) An otherwise eligible program that is offered in whole or in 
part through telecommunications is eligible for title IV, HEA program 
purposes if the program is offered by an institution, other than a 
foreign institution, that has been evaluated and is accredited for its 
effective delivery of distance education programs by an accrediting 
agency or association that--
    (1) Is recognized by the Secretary under subpart 2 of part H of the 
HEA; and
    (2) Has accreditation of distance education within the scope of its 
recognition.
    (n) For title IV, HEA program purposes, the term eligible program 
includes a direct assessment program approved by the Secretary under 34 
CFR 668.10.
* * * * *

0
11. New Section 668.10 is added to read as follows:


Sec.  668.10  Direct assessment programs.

    (a)(1) A direct assessment program is an instructional program 
that, in lieu of credit hours or clock hours as a measure of student 
learning, utilizes direct assessment of student learning, or recognizes 
the direct assessment of student learning by others. The assessment 
must be consistent with the accreditation of the institution or program 
utilizing the results of the assessment.
    (2) Direct assessment of student learning means a measure by the 
institution of what a student knows and can do in terms of the body of 
knowledge making up the educational program. These measures provide 
evidence that a student has command of a specific subject, content 
area, or skill or that the student demonstrates a specific quality such 
as creativity, analysis or synthesis associated with the subject matter 
of the program. Examples of direct measures include projects, papers, 
examinations, presentations, performances, and portfolios.
    (3) All regulatory requirements in this chapter that refer to 
credit or clock hours as a measurement apply to direct assessment 
programs. Because a direct assessment program does not utilize credit 
or clock hours as a measure of student learning, an institution must 
determine the number of credit or clock hours that the program (or 
portion of the program, as applicable) is equivalent to in credit hours 
or clock hours in order to demonstrate compliance with the regulatory 
requirements in this chapter. The institution must provide a factual 
basis satisfactory to the Secretary for its claim that the program is 
equivalent to a specific number of credit or clock hours.
    (i) An academic year in a direct assessment program is a period of 
instructional time that consists of a minimum of 30 weeks of 
instructional time during which, for an undergraduate educational 
program, a full-time student is expected to complete the equivalent of 
at least 24 semester or trimester credit hours, 36 quarter credit hours 
or 900 clock hours.
    (ii) A payment period in a direct assessment program for which 
equivalence in credit hours has been established must be determined 
under the requirements in Sec.  668.4(a) or (b), as applicable, using 
the academic year determined in accordance with paragraph (a)(3)(i) of 
this section (or the portion of that academic year comprising or 
remaining in the program). A payment period in a direct assessment 
program for which equivalence in clock hours has been established must 
be determined under the requirements in Sec.  668.4(c), using the 
academic year determined in accordance with paragraph (a)(3)(i) of this 
section (or the portion of that academic year comprising or remaining 
in the program).
    (iii) A week of instructional time in a direct assessment program 
is any seven-day period in which at least one day of educational 
activity occurs. Educational activity in a direct assessment program 
includes regularly scheduled learning sessions, faculty-guided 
independent study, consultations with a faculty mentor, development of 
an academic action plan addressed to competencies identified by the 
institution, or, in combination with any of the foregoing, assessments. 
It does not include credit for ``life experience''.
    (iv) A full-time student in a direct assessment program is an 
enrolled student who is carrying a full-time academic workload as 
determined by the institution under a standard applicable to all 
students enrolled in the program. However, for an undergraduate 
student, the institution's minimum standard must equal or exceed the 
minimum full-time requirements specified in the definition of full-time 
student in Sec.  668.2 based on the credit or clock hour equivalency 
established by the institution for the direct assessment program.
    (v) A half-time student in a direct assessment program is an 
enrolled student who is carrying half of the academic workload of a 
full-time student in that program.
    (vi) A three-quarter-time student in a direct assessment program is 
an enrolled student who is carrying three-quarters of the academic 
workload of a full-time student in that program.
    (b) An institution that offers a direct assessment program must 
apply to the Secretary to have that program determined to be an 
eligible program for title IV, HEA program purposes. The institution's 
application must provide information satisfactory to the Secretary that 
includes--
    (1) A description of the educational program, including the 
educational credential offered (degree level or certificate) and the 
field of study;
    (2) A description of how the assessment of student learning is 
done;
    (3) A description of how the direct assessment program is 
structured, including information about how and when the institution 
determines on an individual basis what each student enrolled in the 
program needs to learn;
    (4) A description of how the institution assists students in 
gaining the knowledge needed to pass the assessments;

[[Page 45694]]

    (5) The number of semester or quarter credit hours, or clock hours, 
that are equivalent to the amount of student learning being directly 
assessed for the certificate or degree, as required by paragraph (b)(3) 
of this section;
    (6) The methodology the institution uses to determine the number of 
credit or clock hours to which the program is equivalent;
    (7) The methodology the institution uses to determine the number of 
credit or clock hours to which the portion of a program an individual 
student will need to complete is equivalent;
    (8) Documentation from the institution's accrediting agency 
indicating that the agency has evaluated the institution's offering of 
direct assessment program(s) and has included the program(s) in the 
institution's grant of accreditation;
    (9) Documentation from the accrediting agency or relevant state 
licensing body indicating agreement with the institution's claim of the 
direct assessment program's equivalence in terms of credit or clock 
hours; and
    (10) Any other information the Secretary may require to determine 
whether to approve the institution's application.
    (c) To be an eligible program, a direct assessment program must 
meet the requirements in Sec.  668.8 including, if applicable, minimum 
program length and qualitative factors.
    (d) Notwithstanding paragraphs (a) through (c) of this section, no 
program offered by a foreign institution that involves direct 
assessment will be considered to be an eligible program under Sec.  
668.8.
    (e) A direct assessment program may use learning resources (e.g., 
courses or portions of courses) that are provided by entities other 
than the institution providing the direct assessment program without 
regard to the limitations on contracting for part of an educational 
program in Sec.  668.5(c)(3).
    (f) Title IV, HEA program funds may be used only for learning that 
results from instruction provided, or overseen, by the institution, not 
for the portion of the program that the student has demonstrated 
mastery of prior to enrollment in the program or tests of learning that 
are not associated with educational activities overseen by the 
institution.
    (g) Title IV, HEA program eligibility with respect to direct 
assessment programs is limited to direct assessment programs approved 
by the Secretary. Title IV, HEA program funds may not be used for--
    (1) the course of study described in Sec.  668.32(a)(1)(ii) and 
(iii) if offered by direct assessment, or
    (2) remedial coursework described in Sec.  668.20 offered by direct 
assessment. However, remedial instruction that is offered in credit or 
clock hours in conjunction with a direct assessment program is eligible 
for title IV, HEA program funds.
    (h) The Secretary's approval of a direct assessment program expires 
on the date that the institution changes one or more aspects of the 
program described in the institution's application submitted under 
paragraph (b) of this section. To maintain program eligibility, the 
institution must obtain prior approval from the Secretary through 
reapplication under paragraph (b) of this section that sets forth the 
revisions proposed.


Sec.  668.15  [Amended]

0
12. Section 668.15 is amended by:
0
A. In paragraph (d)(1)(i)(C) removing the parentheticals ``(j)(4)'' and 
adding, in their place, the parenthetical ``(j)''.
0
B. In paragraph (d)(1)(ii)(B) removing the figure ``Sec.  668.22(h)'' 
and adding, in its place, the figure ``Sec.  668.22(i)''.

0
13. Section 668.22 is amended by:
0
A. Revising paragraph (a)(1).
0
B. Redesignating paragraphs (a)(2), (a)(3), and (a)(4) as paragraphs 
(a)(3), (a)(4), and (a)(5), respectively.
0
C. Adding a new paragraph (a)(2).
0
D. In newly redesignated paragraph (a)(4) removing the parenthetical 
``(a)(4)'' and adding, in its place, the parenthetical ``(a)(5)''.
0
E. Revising newly redesignated paragraph (a)(5).
0
F. Revising paragraph (e)(2).
0
G. Revising paragraph (f)(1)(ii).
0
H. In paragraph (h)(3) in the introductory text, adding the word 
``parent'' after the words ``funds due to a''.
0
I. Revising paragraph (h)(3)(ii).
0
J. Adding a new paragraph (h)(5).
0
K. Revising paragraph (i)(2).
0
L. In paragraph (j)(1), removing the figure ``30'' and adding, in its 
place, the figure ``45''.
    The revisions and additions read as follows:


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

    (a) General. (1) When a recipient of title IV grant or loan 
assistance withdraws from an institution during a payment period or 
period of enrollment in which the recipient began attendance, the 
institution must determine the amount of title IV grant or loan 
assistance that the student earned as of the student's withdrawal date 
in accordance with paragraph (e) of this section.
    (2) For purposes of this section, ``title IV grant or loan 
assistance'' includes only assistance from the Federal Perkins Loan, 
Direct Loan, FFEL, Federal Pell Grant, Academic Competitiveness Grant, 
National SMART Grant, and FSEOG programs, not including the non-Federal 
share of FSEOG awards if an institution meets its FSEOG matching share 
by the individual recipient method or the aggregate method.
* * * * *
    (5)(i) A post-withdrawal disbursement must be made from available 
grant funds before available loan funds.
    (ii)(A) If outstanding charges exist on the student's account, the 
institution may credit the student's account up to the amount of 
outstanding charges with all or a portion of any--
    (1) Grant funds that make up the post-withdrawal disbursement in 
accordance with Sec.  668.164(d)(1) and (d)(2); and
    (2) Loan funds that make up the post-withdrawal disbursement in 
accordance with Sec.  668.164(d)(1), (d)(2) and (d)(3) only after 
obtaining confirmation from the student or parent, in the case of a 
parent PLUS loan, that they still wish to have the loan funds disbursed 
in accordance with paragraph (a)(5)(iii) of this section.
    (B)(1) The institution must offer to disburse directly to a 
student, or parent in the case of a parent PLUS loan, any amount of a 
post-withdrawal disbursement that is not credited to the student's 
account, or for which the institution is not required to obtain 
confirmation to credit to the student's account, to the student, or the 
parent in the case of a parent PLUS loan, in accordance with paragraph 
(a)(5)(iii) of this section.
    (2) The institution must make a direct disbursement of any grant or 
loan funds that make up the post-withdrawal disbursement only after 
obtaining the student's, or parent's in the case of a parent PLUS loan, 
confirmation that they still wish to have the grant or loan funds 
disbursed in accordance with paragraph (a)(5)(iii).
    (iii)(A) The institution must provide within 30 days of the date of 
the institution's determination that the student withdrew, as defined 
in paragraph (l)(3) of this section, a written notification to the 
student, or parent in the case of parent PLUS loan, that--
    (1) Requests confirmation of any post-withdrawal disbursement of 
loan funds that the institution wishes to credit to the student's 
account in accordance with paragraph (a)(5)(ii)(A)(2),

[[Page 45695]]

identifying the type and amount of those loan funds and explaining that 
a student, or parent in the case of a parent PLUS loan, may accept or 
decline some or all of those funds;
    (2) Requests confirmation of any post-withdrawal disbursement of 
grant or loan funds that the student, or parent in the case of a parent 
PLUS loan, can receive as a direct disbursement, identifying the type 
and amount of these title IV funds and explaining that the student, or 
parent in the case of a parent PLUS loan, may accept or decline some or 
all of those funds;
    (3.) Explains that a student, or parent in the case of a parent 
PLUS loan, who does not confirm that a post-withdrawal disbursement of 
loan funds may be credited to the student's account may not receive any 
of those loan funds as a direct disbursement unless the institution 
concurs;
    (4) Explains the obligation of the student, or parent in the case 
of a parent PLUS loan, to repay any loan funds he or she chooses to 
have disbursed; and
    (5) Advises the student, or parent in the case of a parent PLUS 
loan, that no post-withdrawal disbursement will be made, unless the 
institution chooses to make a post-withdrawal disbursement based on a 
late response in accordance with paragraph (a)(5)(iii)(C) of this 
section, if the student or parent in the case of a parent PLUS loan, 
does not respond within 14 days of the date that the institution sent 
the notification, or a later deadline set by the institution.
    (B) The deadline for a student, or parent in the case of a parent 
PLUS loan, to accept a post-withdrawal disbursement under paragraph 
(a)(5)(iii)(A)(4) must be the same for both a confirmation of a direct 
disbursement of the post-withdrawal disbursement and a confirmation of 
a post-withdrawal disbursement of loan funds to be credited to the 
student's account;
    (C) If the student, or parent in the case of a parent PLUS loan, 
submits a timely response that confirms that they wish to receive all 
or a portion of a direct disbursement of the post-withdrawal 
disbursement, or confirms that a post-withdrawal disbursement of loan 
funds may be credited to the student's account, the institution must 
disburse the funds in the manner specified by the student, or parent in 
the case of a parent PLUS loan, within 120 days of the date of the 
institution's determination that the student withdrew, as defined in 
paragraph (l)(3) of this section.
    (D) If a student, or parent in the case of a parent PLUS loan, 
submits a late response to the institution's notice requesting 
confirmation, the institution may make the post-withdrawal disbursement 
as instructed by the student, or parent in the case of a parent PLUS 
loan (provided the institution disburses all the funds accepted by the 
student, or parent in the case of a parent PLUS loan), or decline to do 
so.
    (E) If a student, or parent in the case of a parent PLUS loan, 
submits a late response to the institution and the institution does not 
choose to make the post-withdrawal disbursement, the institution must 
inform the student, or parent in the case of a parent PLUS loan, 
electronically or in writing of the outcome of the post-withdrawal 
disbursement request.
    (F) If the student, or parent in the case of a parent PLUS loan, 
does not respond to the institution's notice, no portion of the post-
withdrawal disbursement of loan funds that the institution wishes to 
credit to the student's account, nor any portion that would be 
disbursed directly to the student, or parent in the case of a parent 
PLUS loan, may be disbursed.
    (iv) An institution must document in the student's file the result 
of any notification made in accordance with paragraph (a)(5)(iii) of 
this section of the student's right to cancel all or a portion of loan 
funds or of the student's right to accept or decline loan funds, and 
the final determination made concerning the disbursement.
* * * * *
    (e) * * *
    (2) Percentage earned. The percentage of title IV grant or loan 
assistance that has been earned by the student is--
    (i) Equal to the percentage of the payment period or period of 
enrollment that the student completed (as determined in accordance with 
paragraph (f) of this section) as of the student's withdrawal date, if 
this date occurs on or before--
    (A) Completion of 60 percent of the payment period or period of 
enrollment for a program that is measured in credit hours; or
    (B) Sixty percent of the clock hours scheduled to be completed for 
the payment period or period of enrollment for a program that is 
measured in clock hours; or
    (ii) 100 percent, if the student's withdrawal date occurs after--
    (A) Completion of 60 percent of the payment period or period of 
enrollment for a program that is measured in credit hours; or
    (B) Sixty percent of the clock hours scheduled to be completed for 
the payment period or period of enrollment for a program measured in 
clock hours.
* * * * *
    (f) * * *
    (1) * * *
    (ii)(A) In the case of a program that is measured in clock hours, 
by dividing the total number of clock hours in the payment period or 
period of enrollment into the number of clock hours scheduled to be 
completed as of the student's withdrawal date.
    (B) The scheduled clock hours used must be those established by the 
institution prior to the student's beginning class date for the payment 
period or period of enrollment and must be consistent with the 
published materials describing the institution's programs, unless the 
schedule was modified prior to the student's withdrawal.
    (C) The schedule must have been established in accordance with 
requirements of the accrediting agency and the State licensing agency, 
if such standards exist.
* * * * *
    (h) * * *
    (3) * * *
    (ii) Any title IV grant program as an overpayment of the grant; 
however, a student is not required to return the following--
    (A) The portion of a grant overpayment amount that is equal to or 
less than 50 percent of the total grant assistance that was disbursed 
(and that could have been disbursed, as defined in paragraph (l)(1) of 
this section) to the student for the payment period or period of 
enrollment.
    (B) A grant overpayment amount, as determined after application of 
paragraph (h)(3)(ii)(A) of this section, of 50 dollars or less that is 
not a remaining balance.
* * * * *
    (5) The Secretary may waive grant overpayment amounts that students 
are required to return under this section if the withdrawals on which 
the returns are based are withdrawals by students--
    (i) Who were residing in, employed in, or attending an institution 
of higher education that is located in an area in which the President 
has declared that a major disaster exists, in accordance with section 
401 of the Robert T. Stafford Disaster Relief and Emergency Assistance 
Act (42 U.S.C. 5170);
    (ii) Whose attendance was interrupted because of the impact of the 
disaster on the student or institution; and
    (iii) Whose withdrawal ended within the award year during which the 
designation occurred or during the next succeeding award year.
* * * * *
    (i) * * *
    (2) Remaining funds. If unearned funds remain to be returned after

[[Page 45696]]

repayment of all outstanding loan amounts, the remaining excess must be 
credited to any amount awarded for the payment period or period of 
enrollment for which a return of funds is required in the following 
order:
    (i) Federal Pell Grants.
    (ii) Academic Competitiveness Grants.
    (iii) National SMART Grants.
    (iv) FSEOG Program aid.
* * * * *

0
14. Section 668.32 is amended by:
0
A. In paragraph (k)(7), removing the word ``and'' after the punctuation 
``;'' at the end of the paragraph.
0
B. In paragraph (l), removing the punctuation ``.'' at the end of the 
paragraph and adding, in its place, the words ``; and''.
0
C. Adding a new paragraph (m).
    The addition reads as follows:


Sec.  668.32  Student eligibility--general.

* * * * *
    (m) In the case of a student who has been convicted of, or has pled 
nolo contendere or guilty to, a crime involving fraud in obtaining 
title IV, HEA program assistance, has completed the repayment of such 
assistance to:
    (1) The Secretary; or
    (2) The holder, in the case of a title IV, HEA program loan.
* * * * *

0
15. Section 668.35 is amended by:
0
A. Revising the introductory text in paragraph (e).
0
B. In paragraph (h)(2)(ii), removing the punctuation ``.'' at the end 
of the paragraph and adding, in its place, the words ``; and''.
0
C. Adding new paragraph (i).
    The revisions and additions read as follows:


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

* * * * *
    (e) Except as provided in 34 CFR 668.22(h), 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--
* * * * *
    (i) In the case of a student who has been convicted of, or has pled 
nolo contendere or guilty to a crime involving fraud in obtaining title 
IV, HEA program assistance, has completed the repayment of such 
assistance to:
    (1) The Secretary; or
    (2) The holder, in the case of a title IV, HEA program loan.
* * * * *

0
16. Section 668.38 is amended by:
0
A. Removing paragraph (b)(3); and
0
B. Revising paragraphs (b)(1) and (b)(2).
    The revisions read as follows:


Sec.  668.38  Enrollment in telecommunications and correspondence 
courses.

* * * * *
    (b) * * *
    (1) For purposes of this section, a student enrolled in a 
telecommunications course at an institution of higher education is not 
enrolled in a correspondence course.
    (2) For purposes of paragraph (b)(1) of this section, an 
institution of higher education is one that is not an institute or 
school described in section 3(3)(C) of the Carl D. Perkins Vocational 
and Applied Technology Act of 1995.
* * * * *

0
17. Section 668.40(a)(1) is revised to read as follows:


Sec.  668.40  Conviction for possession or sale of illegal drugs.

    (a)(1) A student is ineligible to receive title IV, HEA program 
funds, for the period described in paragraph (b) of this section, if 
the student has been convicted of an offense under any Federal or State 
law involving the possession or sale of illegal drugs for conduct that 
occurred during a period of enrollment for which the student was 
receiving title IV, HEA program funds. However, the student may regain 
eligibility before that time period expires under the conditions 
described in paragraph (c) of this section.
* * * * *


Sec.  668.164  [Amended]

0
18. Section 668.164 is amended by, in paragraph (g)(3)(i), removing the 
parentheticals ``(a)(4)'' and adding, in their place, the 
parentheticals ``(a)(5)'' and removing the parentheticals ``(a)(3)'' 
and adding, in their place the parentheticals ``(a)(4)''.

0
19. Section 668.173 is amended by revising paragraph (b) to read as 
follows:


Sec.  668.173  Refund reserve standards.

* * * * *
    (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 program funds timely if--
    (1) The institution deposits or transfers the funds into the bank 
account it maintains under Sec.  668.163 no later than 45 days after 
the date it determines that the student withdrew;
    (2) The institution initiates an electronic funds transfer (EFT) no 
later than 45 days after the date it determines that the student 
withdrew;
    (3) The institution initiates an electronic transaction, no later 
than 45 days after the date it determines that the student withdrew, 
that informs a FFEL lender to adjust the borrower's loan account for 
the amount returned; or
    (4) The institution issues a check no later than 45 days after the 
date it determines that the student withdrew. An institution does not 
satisfy this requirement if--
    (i) The institution's records show that the check was issued more 
than 45 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 60 
days after the date the institution determined that the student 
withdrew.
* * * * *

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

0
20. 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.

0
21. Section 673.5 is amended by revising paragraphs (a), (b), (c) and 
(d) to read as follows:


Sec.  673.5  Overaward.

    (a) Overaward prohibited--(1) Federal Perkins Loan and FSEOG 
Programs. An institution may only award or disburse a Federal Perkins 
loan or an FSEOG to a student if that loan or the FSEOG, combined with 
the other estimated financial assistance the student receives, does not 
exceed the student's financial need.
    (2) FWS Program. An institution may only award FWS employment to a 
student if the award, combined with the other estimated financial 
assistance the student receives, does not exceed the student's 
financial need.
    (b) Awarding and disbursement. (1) When awarding and disbursing a 
Federal Perkins loan or an FSEOG or awarding FWS employment to a 
student, the institution shall take into account those amounts of 
estimated financial assistance it--
    (i) Can reasonably anticipate at the time it awards Federal Perkins 
Loan funds, an FSEOG, or FWS funds to the student;
    (ii) Makes available to its students; or

[[Page 45697]]

    (iii) Otherwise knows about.
    (2) If a student receives amounts of estimated financial assistance 
at any time during the award period that were not considered in 
calculating the Federal Perkins Loan amount or the FWS or FSEOG award, 
and the total amount of estimated financial assistance including the 
loan, the FSEOG, or the prospective FWS wages exceeds the student's 
need, the overaward is the amount that exceeds need.
    (c) Estimated financial assistance. (1) Except as provided in 
paragraphs (c)(2) and (c)(3) of this section, the Secretary considers 
that ``estimated financial assistance'' includes, but is not limited 
to, any--
    (i) Funds a student is entitled to receive from a Federal Pell 
Grant;
    (ii) William D. Ford Federal Direct Loans;
    (iii) Federal Family Education Loans;
    (iv) Long-term need-based loans, including Federal Perkins loans;
    (v) Grants, including FSEOGs, State grants, Academic 
Competitiveness Grants, National SMART Grants, and ROTC subsistence 
allowances;
    (vi) Scholarships, including athletic scholarships and ROTC 
scholarships;
    (vii) Waivers of tuition and fees;
    (viii) Fellowships or assistantships, except non-need-based 
employment portions of such awards;
    (ix) Veterans educational benefits paid under Chapters 30 
(Montgomery GI Bill-Active Duty), 31 (Vocational Rehabilitation and 
Employment Program), 32 (Veterans' Educational Assistance Program), and 
35 (Dependents' Educational Assistance Program) of title 38 of the 
United States Code, and Chapters 31 (National Call to Service), 1606 
(Montgomery GI Bill-Selected Reserve), and 1607 (Reserve Educational 
Assistance Program) of title 10 of the United States Code;
    (x) National service education awards or post-service benefits paid 
for the cost of attendance under title I of the National and Community 
Service Act of 1990 (AmeriCorps);
    (xi) Net earnings from need-based employment;
    (xii) Insurance programs for the student's education; and
    (xiii) Any educational benefits paid because of enrollment in a 
postsecondary education institution, or to cover postsecondary 
education expenses.
    (2) The Secretary does not consider as estimated financial 
assistance--
    (i) Any portion of the estimated financial assistance described in 
paragraph (c)(1) of this section that is included in the calculation of 
the student's expected family contribution (EFC);
    (ii) Earnings from non-need-based employment;
    (iii) Those amounts used to replace EFC, including the amounts of 
any unsubsidized Federal Stafford or Direct Loans, Federal PLUS or 
Federal Direct PLUS Loans, and non-federal non-need-based loans, 
including private, state-sponsored, and institutional loans. However, 
if the sum of the loan amounts received that are being used to replace 
the student's EFC actually exceed the EFC, the excess amount must be 
treated as estimated financial assistance; and
    (iv) Assistance not received under this part if that assistance is 
designated to offset all or a portion of a specific component of the 
cost of attendance and that amount is excluded from the cost of 
attendance as well. If that assistance is excluded from either 
estimated financial assistance or cost of attendance, that amount must 
be excluded from both.
    (3) The institution may also exclude as estimated financial 
assistance any portion of a subsidized Federal Stafford or Direct Loan 
that is equal to or less than the amount of a student's veterans 
education benefits paid under Chapter 30 of title 38 of the United 
States Code (Montgomery GI Bill--Active Duty) and national service 
education awards or post service benefits paid for the cost of 
attendance under title I of the National and Community Service Act of 
1990 (AmeriCorps).
    (d) Treatment of estimated financial assistance in excess of need--
General. An institution shall take the following steps if it learns 
that a student has received additional amounts of estimated financial 
assistance not included in the calculation of Federal Perkins Loan, 
FWS, or FSEOG eligibility that would result in the student's total 
amount of estimated financial assistance exceeding his or her financial 
need by more than $300:
    (1) The institution shall decide whether the student has increased 
financial need that was unanticipated when it awarded financial aid to 
the student. If the student demonstrates increased financial need and 
the total amount of estimated financial assistance does not exceed this 
increased need by more than $300, no further action is necessary.
    (2) If the student's total amount of estimated financial assistance 
still exceeds his or her need by more than $300, as recalculated 
pursuant to paragraph (d)(1) of this section, the institution shall 
cancel any undisbursed loan or grant (other than a Federal Pell Grant).
    (3) Federal Perkins loan and FSEOG overpayment. If the student's 
total amount of estimated financial assistance still exceeds his or her 
need by more than $300, after the institution takes the steps required 
in paragraphs (d)(1) and (2) of this section, the institution shall 
consider the amount by which the estimated financial assistance amount 
exceeds the student's financial need by more than $300 as an 
overpayment.
* * * * *

0
22. Section 673.6 is amended by revising paragraph (a) to read as 
follows:


Sec.  673.6  Coordination with BIA grants.

    (a) Coordination of BIA grants with Federal Perkins loans, FWS 
awards, or FSEOGs. To determine the amount of a Federal Perkins loan, 
FWS compensation, or an FSEOG for a student who is also eligible for a 
Bureau of Indian Affairs (BIA) education grant, an institution shall 
prepare a package of student aid--
    (1) From estimated financial assistance other than the BIA 
education grant the student has received or is expected to receive; and
    (2) That is consistent in type and amount with packages prepared 
for students in similar circumstances who are not eligible for a BIA 
education grant.
* * * * *

PART 674--FEDERAL PERKINS LOAN PROGRAM

0
23. 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.


Sec.  674.9  [Amended]

0
24. Section 674.9 is amended in paragraph (a) by removing the words 
``34 CFR 668.32'' and adding, in its place, the words ``34 CFR part 
668''.

0
25. Section 674.16 is amended by revising paragraph (c) to read as 
follows:


Sec.  674.16  Making and disbursing loans.

* * * * *
    (c) If a student incurs uneven costs or estimated financial 
assistance amounts during an academic year and needs additional funds 
in a particular payment period, the institution may disburse loan funds 
to the student for those uneven costs.
* * * * *

0
26. Section 674.34 is amended by:
0
A. In paragraph (a), adding the words ``paragraphs (b), (c), (d), (e), 
(f), and (g) of'' immediately after the words ``described in''.
0
B. Redesignating paragraphs (h) and (i) as paragraphs (i) and (j), 
respectively.
0
C. Adding a new paragraph (h).

[[Page 45698]]

0
D. In newly redesignated paragraph (i), removing the word ``and'' 
immediately after the parenthetical ``(f)'', adding the words ``, and 
(h)'' immediately after the parenthetical ``(g),'' and removing the 
words ``paragraph (i)'' and adding, in their place, the words 
``paragraph (j)''.
0
E. In newly redesignated paragraph (j), removing the word ``and'' 
immediately after the parenthetical ``(f)'', and adding the words ``, 
and (h)'' immediately after the parenthetical ``(g)''.
0
F. The addition reads as follows:


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

* * * * *
    (h)(1) The borrower need not pay principal and interest does not 
accrue on a Federal Perkins Loan made on or after July 1, 2001, for any 
period not to exceed 3 years during which the borrower is--
    (i) Serving on active duty during a war or other military operation 
or national emergency; or
    (ii) Performing qualifying National Guard duty during a war or 
other military operation or national emergency.
    (2) Serving on active duty during a war or other military operation 
or national emergency means service by an individual who is--
    (i) A Reserve of an Armed Force ordered to active duty under 10 
U.S.C. 12301(a), 12301(g), 12302, 12304, or 12306;
    (ii) A retired member of an Armed Force ordered to active duty 
under 10 U.S.C. 688 for service in connection with a war or other 
military operation or national emergency, regardless of the location at 
which such active duty service is performed; or
    (iii) Any other member of an Armed Force on active duty in 
connection with such emergency or subsequent actions or conditions who 
has been assigned to a duty station at a location other than the 
location at which the member is normally assigned.
    (3) Qualifying National Guard duty during a war or other operation 
or national emergency means service as a member of the National Guard 
on full-time National Guard duty, as defined in 10 U.S.C. 101(d)(5), 
under a call to active service authorized by the President or the 
Secretary of Defense for a period of more than 30 consecutive days 
under 32 U.S.C. 502(f) in connection with a war, other military 
operation, or national emergency declared by the President and 
supported by Federal funds.
    (4) As used in this section--
    (i) Active duty means active duty as defined in 10 U.S.C. 101(d)(1) 
except that it does not include active duty for training or attendance 
at a service school;
    (ii) Military operation means a contingency operation as defined in 
10 U.S.C. 101(a)(13); and
    (iii) National emergency means the national emergency by reason of 
certain terrorist attacks declared by the President on September 14, 
2001, or subsequent national emergencies declared by the President by 
reason of terrorist attacks.
    (5) These provisions do not authorize the refunding of any payments 
made by or on behalf of a borrower during a period for which the 
borrower qualified for a military service deferment.
* * * * *


Sec.  674.39  [Amended]

0
27. Section 674.39 is amended in paragraph (a) by adding the words ``or 
loans obtained by fraud for which the borrower has been convicted of, 
or has pled nolo contendere or guilty to, a crime involving fraud in 
obtaining title IV, HEA program assistance.'' after the word 
``secured''.

PART 675--FEDERAL WORK STUDY PROGRAM

0
28. The authority citation for part 675 continues to read as follows:

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


0
29. Section 675.26 is amended by revising paragraph (a)(4) to read as 
follows:


Sec.  675.26  FWS Federal share limitations.

    (a) * * *
    (4) An institution may not use FWS funds to pay a student after he 
or she has, in addition to other estimated financial assistance, earned 
$300 or more over his or her financial need.
* * * * *

PART 676--FEDERAL SUPPLEMENTAL EDUCATIONAL OPPORTUNITY GRANT 
PROGRAM

0
30. The authority citation for part 676 continues to read as follows:

    Authority: 20 U.S.C. 1070b-1070b-3, unless otherwise noted.

0
31. Section 676.16 is amended by revising paragraph (b) to read as 
follows:


Sec.  676.16  Payment of an FSEOG.

* * * * *
    (b) If a student incurs uneven cost or estimated financial 
assistance amounts during an academic year and needs additional funds 
in a particular payment period, the institution may pay FSEOG funds to 
the student for those uneven costs.
* * * * *

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

0
32. The authority citation for part 682 continues to read as follows:

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


0
33. Section 682.100 is amended in paragraph (a)(3), by adding a 
sentence to the end of the paragraph to read as follows:


Sec.  682.100  The Federal Family Education Loan program.

* * * * *
    (3) * * * The PLUS Program also provides for making loans to 
graduate and professional students on or after July 1, 2006.
* * * * *
0
34. Section 682.101 is amended in paragraph (c) by adding a sentence to 
the end of the paragraph to read as follows:


Sec.  682.101  Participation in the FFEL programs.

* * * * *
    (c) * * * The PLUS Program also provides for making loans to 
graduate and professional students on or after July 1, 2006.
* * * * *
0
35. Section 682.102 is amended by:
0
A. In paragraph (a), by removing the words ``or contacting'' and 
adding, in their place, the words ``and contacting''.
0
B. Revising paragraphs (c) and (d).
0
C. In paragraph (e)(1), in the third sentence removing the words ``The 
borrower's obligation to repay a PLUS Loan'' and adding, in their 
place, the words ``A parent borrower's obligation to repay a PLUS 
loan''.
    The revision reads as follows:


Sec.  682.102  Obtaining and repaying a loan.

* * * * *
    (c) PLUS loan application. (1) For a parent to obtain a PLUS loan, 
the parent completes an application and submits it to the school for 
certification. After the school certifies the application, the 
application is submitted to a participating lender. If the lender 
decides to make the loan, the lender obtains a loan guarantee from a 
guaranty agency or the Secretary. Prior to loan disbursement, the 
parent completes a PLUS MPN, unless the parent has previously completed 
a PLUS MPN that the lender may use for the new loan.
    (2) For a graduate or professional student to obtain a PLUS loan, 
the

[[Page 45699]]

student applies for a PLUS Loan by completing a Free Application for 
Federal Student Aid (FAFSA) and contacting the school, lender or 
guarantor. The school determines and certifies the student's 
eligibility for the PLUS loan. After the school certifies the 
application, the application is submitted to a participating lender. If 
the lender decides to make the loan, the lender obtains a loan 
guarantee from a guaranty agency or the Secretary. Prior to loan 
disbursement, the student completes a PLUS MPN, unless the student has 
previously completed a PLUS MPN that the lender may use for the new 
loan.
    (d) Consolidation loan application. Generally, to obtain a 
Consolidation loan, a borrower completes an application and submits it 
to a lender participating in the Consolidation Loan Program. If the 
lender decides to make the loan, the lender obtains a loan guarantee 
from a guaranty agency or the Secretary.
* * * * *

0
36. Section 682.200(b) is amended by revising the definition of 
estimated financial assistance to read as follows:


Sec.  682.200  Definitions

* * * * *
    (b) * * *
    Estimated financial assistance. (1) The estimated amount of 
assistance for a period of enrollment that a student (or a parent on 
behalf of a student) will receive from Federal, State, institutional, 
or other sources, such as, scholarships, grants, the net earnings from 
need-based employment, or loans, including but not limited to--
    (i) Except as provided in paragraph (2)(iii) of this definition, 
national service education awards or post-service benefits under title 
I of the National and Community Service Act of 1990 (AmeriCorps) and 
veterans' educational benefits paid under chapters 30 (Montgomery GI 
Bill--Active Duty), 31 (Vocational Rehabilitation and Employment 
Program), 32 (Veterans' Educational Assistance Program, and 35 
(Dependents' Educational Assistance Program) of title 38 of the United 
States Code;
    (ii) Educational benefits paid under Chapters 31 (National Call to 
Service), 1606 (Montgomery GI Bill-Selected Reserve), and 1607 (Reserve 
Educational Assistance Program) of Title 10 of the United States Code;
    (iii) Reserve Officer Training Corps (ROTC) scholarships and 
subsistence allowances awarded under Chapter 2 of Title 10 and Chapter 
2 of Title 37 of the United States Code;
    (iv) Benefits paid under Pub. L. 96-342, section 903: Educational 
Assistance Pilot Program;
    (v) Any educational benefits paid because of enrollment in a 
postsecondary education institution, or to cover postsecondary 
education expenses;
    (vi) Fellowships or assistantships, except non-need-based 
employment portions of such awards;
    (vii) Insurance programs for the student's education; and
    (viii) The estimated amount of other Federal student financial aid, 
including but not limited to a Federal Pell Grant, Academic 
Competitiveness Grant, National SMART Grant, campus-based aid, and the 
gross amount (including fees) of subsidized and unsubsidized Federal 
Stafford Loans or subsidized and unsubsidized Federal Direct Stafford/
Ford Loans, and Federal PLUS or Federal Direct PLUS Loans.
    (2) Estimated financial assistance does not include--(i) Those 
amounts used to replace the expected family contribution, including the 
amounts of any unsubsidized Federal Stafford or Federal Direct 
Stafford/Ford Loans, Federal PLUS or Federal Direct PLUS Loans, and 
non-federal non-need-based loans, including private, state-sponsored, 
and institutional loans. However, if the sum of the loan amounts 
received that are being used to replace the student's EFC exceed the 
EFC, the excess amount is treated as estimated financial assistance;
    (ii) Federal Perkins loan and Federal Work-Study funds that the 
student has declined;
    (iii) For the purpose of determining eligibility for a subsidized 
Stafford loan, veterans' educational benefits paid under chapter 30 of 
title 38 of the United States Code (Montgomery GI Bill--Active Duty) 
and national service education awards or post-service benefits under 
title I of the National and Community Service Act of 1990 (AmeriCorps);
    (iv) Any portion of the estimated financial assistance described in 
paragraph (1) of this definition that is included in the calculation of 
the student's expected family contribution (EFC);
    (v) Non-need-based employment earnings; and
    (vi) Assistance not received under this title, if that assistance 
is designated to offset all or a portion of a specific amount of the 
cost of attendance and that component is excluded from the cost of 
attendance as well. If that assistance is excluded from either 
estimated financial assistance or cost of attendance, it must be 
excluded from both.
* * * * *

0
37. Section 682.201 is amended by:
0
A. In paragraph (a), revising the paragraph heading to read as set 
forth below.
0
B. Removing paragraph (e).
0
C. Redesignating paragraphs (b), (c), and (d) as paragraphs (c), (d), 
and (e), respectively.
0
D. Adding a new paragraph (b).
0
E. In newly redesignated paragraph (c), revising the paragraph heading 
to read as set forth below and adding a new paragraph (c)(1)(viii).
0
F. In newly redesignated paragraph (d)(1)(i)(B), removing the word 
``or''.
0
G. Adding new paragraph (d)(1)(i)(D).
0
H. In newly redesignated paragraph (d)(1)(ii), adding the word ``and'' 
after the punctuation ``;''.
0
I. In newly redesignated paragraph (d)(1)(iii), removing the words ``; 
and'' and inserting, in their place, the punctuation ``.''.
0
J. In newly redesignated paragraph (d), removing paragraphs 
(d)(1)(iv)(A) and (B).
0
K. Revising newly redesignated paragraph (d)(2).
0
L. In newly redesignated paragraph (e)(2), adding the words ``before 
or'' immediately after the words ``eligible loan'' and removing the 
word ``and''.
0
M. In newly redesignated paragraph (e)(3), removing the word ``only'', 
removing the punctuation ``.'' and adding in its place the punctuation 
``;'', and adding the word ``and'' immediately after the punctuation 
``;''.
0
N. Adding a new paragraph (e)(4).
    The additions read as follows:


Sec.  682.201  Eligible borrowers.

    (a) Student Stafford borrower. * * *
* * * * *
    (b) Student PLUS borrower. A graduate or professional student who 
is enrolled or accepted for enrollment on at least a half-time basis at 
a participating school is eligible to receive a PLUS Loan on or after 
July 1, 2006, if the student--
    (1) Meets the requirements for an eligible student under 34 CFR 
668;
    (2) Meets the requirements of paragraphs (a)(4), (a)(5), (a)(6), 
(a)(7), (a)(8), and (a)(9) of this section, if applicable;
    (3) Has received a determination of his or her annual loan maximum 
eligibility under the Federal Subsidized and Unsubsidized Stafford Loan 
Program; and
    (4) Does not have an adverse credit history in accordance with 
paragraphs (c)(2)(i) through (c)(2)(v) of this section,

[[Page 45700]]

or obtains an endorser who has been determined not to have an adverse 
credit history, as provided for in paragraph (c)(1)(vii) of this 
section.
* * * * *
    (c) Parent PLUS borrower.
    (1) * * *
    (viii) Has completed repayment of any title IV, HEA program 
assistance obtained by fraud, if the parent has been convicted of, or 
has pled nolo contendere or guilty to, a crime involving fraud in 
obtaining title IV, HEA program assistance.
* * * * *
    (d) * * *
    (1) * * *
    (i) * * *
    (D) Not in default status resulting from a claim filed under Sec.  
682.412.
* * * * *
    (2) A borrower may not consolidate a loan under this section for 
which the borrower is wholly or partially responsible.
    (e) * * *
    (4) If the consolidation loan has been submitted to the guaranty 
agency for default aversion, the borrower may obtain a subsequent 
consolidation loan under the Federal Direct Consolidation Loan Program 
for purposes of obtaining an income contingent repayment plan.
* * * * *

0
38. Section 682.202 is amended by:
0
A. In paragraph (a)(1)(viii), by adding after the words ``July 1, 
1998,'' the words `` and prior to July 1, 2006,''.
0
B. Adding a new paragraph (a)(1)(ix).
0
C. In paragraph (a)(2)(vi)(A), adding after the words ``July 1, 2001,'' 
the words ``and prior to July 1, 2006,''.
0
D. Adding a new paragraph (a)(2)(vii).
0
E. Revising paragraph (c)(1).
0
F. Revising paragraph (d).
    The revisions and additions read as follows:


Sec.  682.202  Permissible charges by lenders to borrowers.

    (a) * * *
    (1) * * *
    (ix) For a Stafford loan for which the first disbursement is made 
on or after July 1, 2006, the interest rate is 6.8 percent.
    (2) * * *
    (vii) For a PLUS loan first disbursed on or after July 1, 2006, the 
interest rate is 8.5 percent.
* * * * *
    (c) Fees for FFEL Program loans. (1)(i) For Stafford loans first 
disbursed prior to July 1, 2006, a lender may charge a borrower an 
origination fee not to exceed 3 percent of the principal amount of the 
loan.
    (ii) For Stafford loans first disbursed on or after July 1, 2006, 
but before July 1, 2007, a lender may charge a borrower an origination 
fee not to exceed 2 percent of the principal amount of the loan.
    (iii) For Stafford loans first disbursed on or after July 1, 2007, 
but before July 1, 2008, a lender may charge a borrower an origination 
fee not to exceed 1.5 percent of the principal amount of the loan.
    (iv) For Stafford loans first disbursed on or after July 1, 2008, 
but before July 1, 2009, a lender may charge a borrower an origination 
fee not to exceed 1 percent of the principal amount of the loan.
    (v) For Stafford loans first disbursed on or after July 1, 2009, 
but before July 1, 2010, a lender may charge a borrower an origination 
fee not to exceed .5 percent of the principal amount of the loan.
    (vi) For Stafford loans first disbursed on or after July 1, 2010, a 
lender may not charge a borrower an origination fee.
    (vii) Except as provided in paragraph (c)(2) of this section, a 
lender must charge all borrowers the same origination fee.
* * * * *
    (d) Insurance premium and Federal default fee.
    (1) For loans guaranteed prior to July 1, 2006, a lender may charge 
the borrower the amount of the insurance premium paid by the lender to 
the guarantor (up to 1 percent of the principal amount of the loan) if 
that charge is provided for in the promissory note.
    (2) For loans guaranteed on or after July 1, 2006, other than an 
SLS or PLUS loan refinanced under Sec.  682.209(e) or (f), a lender may 
charge the borrower the amount of the Federal default fee paid by the 
lender to the guarantor (up to 1 percent of the principal amount of the 
loan) if that charge is provided for in the promissory note.
    (3) If the borrower is charged the insurance premium or the Federal 
default fee, the amount charged must be deducted proportionately from 
each disbursement of the borrower's loan proceeds, if the loan is 
disbursed in more than one installment.
    (4) The lender shall refund the insurance premium or Federal 
default fee paid by the borrower in accordance with the circumstances 
and procedures applicable to the return of origination fees, as 
described in paragraph (c)(7) of this section.
* * * * *


Sec.  682.204  [Amended]

0
39. Section 682.204 is amended by:
0
A. In paragraph (a)(1)(i), adding the words ``, or, for a loan 
certified on or after July 1, 2007, $3,500,'' immediately after the 
figure ``$2,625''.
0
B. In paragraph (a)(1)(ii), adding the words ``, or, for a loan 
certified on or after July 1, 2007, $3,500,'' immediately after the 
figure ``$2,625''.
0
C. In paragraph (a)(1)(iii), adding the words ``, or, for a loan 
certified on or after July 1, 2007, $3,500'' immediately after the 
figure ``$2,625''.
0
D. In paragraph (a)(2)(i), adding the words ``, or, for a loan 
certified on or after July 1, 2007, $4,500,'' immediately after the 
figure ``$3,500''.
0
E. In paragraph (a)(2)(ii), adding the words ``, or, for a loan 
certified on or after July 1, 2007, $4,500,'' immediately after the 
figure ``$3,500''.
0
F. In paragraph (d)(5), adding the words ``, or, for a loan certified 
on or after July 1, 2007, $12,000.'' immediately after the figure 
``$10,000''.
0
G. In paragraph (d)(6)(ii), adding the words ``, or, for a loan 
certified on or after July 1, 2007, $7,000,'' immediately after the 
figure ``$5,000''.
0
H. In paragraph (d)(6)(iii), adding the words ``, or, for a loan 
certified on or after July 1, 2007, $7,000.'' immediately after the 
figure ``$5,000''.
0
I. In paragraph (h), removing the words ``that parents may borrow on 
behalf of each dependent student'' and adding, in their place, the 
words ``that a parent or student may borrow''.

0
40. Section 682.205 is amended by revising paragraph (a)(2)(xix) to 
read as follows:


Sec.  682.205  Disclosure requirements for lenders.

    (a) * * *
    (2) * * *
    (xix) In the case of a Stafford or student PLUS loan, a statement 
that the loan proceeds will be transmitted to the school for delivery 
to the borrower;
* * * * *

0
41. Section 682.207 is amended by:
0
A. In paragraph (b)(1)(iv), removing the figure ``21'' and adding, in 
its place, the figure ``10''.
0
B. Revising paragraph (b)(1)(v)(B), (C), and (D), and removing 
paragraph (b)(1)(v)(E).
0
C. Redesignating paragraph (b)(2) as paragraph (b)(3).
0
D. Adding new paragraph (b)(2).
    The revisions and addition read as follows:


Sec.  682.207  Due diligence in disbursing a loan.

    (b) * * *
    (1) * * *
    (v) * * *
    (B) In the case of a Federal PLUS loan --
    (1) By electronic funds transfer or master check from the lender in

[[Page 45701]]

accordance with the disbursement schedule provided by the school to an 
account maintained in accordance with Sec.  668.163 by the school as 
trustee for the lender. A disbursement made by electronic funds 
transfer or master check must be accompanied by a list of the names, 
social security numbers, and loan amounts for the parent or student 
borrowers who are receiving a portion of the disbursement and the names 
and social security numbers of the students on whose behalf the parents 
are borrowing parent PLUS loans.
    (2) By a check from the lender that is made co-payable to the 
institution and the parent borrower, for a parent PLUS loan, or student 
borrower, for a student PLUS loan, directly to the institution of 
higher education.
    (C) In the case of a student enrolled in a study-abroad program 
approved for credit at the home institution in which the student is 
enrolled, if the student requests--
    (1) A Stafford loan directly to the student only after verification 
of the student's enrollment by the lender or guaranty agency; or
    (2) To the home institution if the borrower provides a power-of-
attorney to an individual not affiliated with the institution to 
endorse the check or complete an electronic funds transfer 
authorization.
    (D) In the case of a student enrolled in an eligible foreign 
school, if the foreign school requests, a Stafford loan directly to the 
student only after verification of the student's enrollment by the 
lender or guaranty agency.
* * * * *
    (2)(i) A lender or guaranty agency must verify a borrower's 
enrollment at the foreign school, or a borrower's enrollment in a 
study-abroad program, prior to each disbursement of Stafford loan funds 
directly to a student by--
    (A) For a student enrolled at a foreign school--
    (1) The guaranty agency accessing the Department's Postsecondary 
Education Participants System (PEPS) Database (or any successor system) 
and confirming that the foreign school the student is to attend is 
certified to participate in the FFEL program.
    (2) For a new student, contacting the foreign school the student is 
to attend by telephone or e-mail to verify the student's admission to 
the foreign school for the period for which the loan is intended at the 
enrollment status for which the loan was certified.
    (3) For a continuing student, contacting the foreign school the 
student is to attend by telephone or e-mail to verify that the student 
is still enrolled at the foreign school for the period for which the 
loan is intended at the enrollment status for which the loan was 
certified.
    (B) For a student enrolled in a study-abroad program, contacting 
the home institution in which the student is enrolled by telephone or 
e-mail to verify--
    (1) For a new student, the student's admission to the study-abroad 
program for the period for which the loan is intended at the enrollment 
status for which the loan is certified.
    (2) For a continuing student, that the student is still enrolled in 
the study-abroad program for the period for which the loan is intended 
at the enrollment status for which the loan is certified.
    (ii) The lender or guaranty agency that is verifying enrollment at 
the institution the student is to attend must maintain the following 
information in the student's file:
    (A) The name and telephone number of the school representative 
contacted;
    (B) The date of the contact;
    (C) The enrollment period;
    (D) Whether enrollment was verified at the enrollment status for 
which the loan was certified; and
    (E) Any other pertinent information received from the school.
    (iii) Guaranty agencies and lenders must coordinate their 
activities to ensure that the requirements of this paragraph are met 
prior to making any direct disbursement to a student.
    (iv) If a lender disburses a Stafford loan directly to the borrower 
for attendance at an eligible foreign school, or to a borrower enrolled 
in a study-abroad program approved for credit at the home institution, 
as provided in paragraphs (b)(1)(v)(C)(1) and (b)(1)(v)(D)(1) of this 
section, the lender must, at the time of disbursement, notify the 
foreign school, for a borrower attending a foreign school, or the home 
institution in which the student is enrolled, for a borrower enrolled 
in a study-abroad program, of--
    (A) The name and social security number of the student;
    (B) The type of loan;
    (C) The amount of the disbursement, including the amount of any 
fees assessed the borrower;
    (D) The date of the disbursement; and
    (E) The name, address, telephone and fax number or electronic 
address of the lender, servicer, or guaranty agency to which any 
inquiries should be addressed.
* * * * *


Sec.  682.208  [Amended]

0
42. Section 682.208 is amended by:
0
A. In paragraph (c)(2), adding the words ``or a student PLUS loan 
borrower'' immediately after the words ``Stafford loan borrower''.
0
B. In paragraph (d)(2), adding the words ``, as authorized and if 
practicable,'' immediately after ``repayment schedule''.
0
C. In paragraph (f)(1) introductory text, adding the words ``has been 
convicted of, or has pled nolo contendere or guilty to, a crime 
involving fraud in obtaining title IV, HEA program assistance,'' 
immediately after the word ``borrowed,''.


Sec.  682.209  [Amended]

0
43. Section 682.209 is amended by:
0
A. In paragraph (a)(3)(i) introductory text, removing the words 
``paragraphs (a)(4) and (5)'' and adding, in their place, the words 
``paragraph (a)(4)''.
0
B. Removing paragraph (a)(5) and redesignating paragraphs (a)(6) 
through (a)(9) as paragraphs (a)(5) through (a)(8), respectively.
0
C. In newly-redesignated paragraph (a)(6)(v), removing the 
parentheticals ``(a)(7)(vi)'' and adding, in their place, the 
parentheticals ``(a)(6)(vi)''.
0
D. In newly-redesignated paragraphs (a)(6)(vii)(A)(2) and 
(a)(6)(viii)(A)(2), removing the parentheticals ``(a)(7)(i)'' and 
adding, in their place, the parentheticals ``(a)(6)(i)''.
0
E. In newly-redesignated paragraph (a)(6)(viii)(E), removing the 
parentheticals ``(a)(8)'' and adding, in their place, the 
parentheticals ``(a)(7)''.
0
F. In newly-redesignated paragraph (a)(7)(i), removing the 
parentheticals ``(a)(7)(ix)'' and adding, in their place, the 
parentheticals ``(a)(6)(ix)''.
0
G. In newly-designated paragraph (a)(7)(i), removing the parentheticals 
``(a)(8)(ii)'' and adding, in their place, the parentheticals 
``(a)(7)(ii)''.
0
H. In paragraph (e)(2)(ii), removing the parentheticals ``(a)(8)(i)'' 
and adding, in their place, the parentheticals ``(a)(7)(i)''.
0
I. In paragraph (e)(3), adding the words ``or Federal default fee'' 
after the word ``premium''.
0
J. In paragraph (f)(2)(ii), removing the parentheticals ``(a)(8)(i)'' 
and adding, in their place, the parentheticals ``(a)(7)(i)''.

0
44. Section 682.210 is amended by adding a new paragraph (t) to read as 
follows:


Sec.  682.210  Deferment.

* * * * *
    (t) Military service deferments for loans for which the first 
disbursement is made on or after July, 1, 2001--(1) A borrower who 
receives an FFEL Program loan first disbursed on or after July 1,

[[Page 45702]]

2001, may receive a military service deferment for such loans for any 
period not to exceed 3 years during which the borrower is--
    (i) Serving on active duty during a war or other military operation 
or national emergency; or
    (ii) Performing qualifying National Guard duty during a war or 
other military operation or national emergency.
    (2) Serving on active duty during a war or other military operation 
or national emergency means service by an individual who is--
    (i) A Reserve of an Armed Force ordered to active duty under 10 
U.S.C. 12301(a), 12301(g), 12302, 12304 or 12306;
    (ii) A retired member of an Armed Force ordered to active duty 
under 10 U.S.C. 688 for service in connection with a war or other 
military operation or national emergency, regardless of the location at 
which such active duty service is performed; or
    (iii) Any other member of an Armed Force on active duty in 
connection with such emergency or subsequent actions or conditions who 
has been assigned to a duty station at a location other than the 
location at which member is normally assigned.
    (3) Qualifying National Guard duty during a war or other operation 
or national emergency means service as a member of the National Guard 
on full-time National Guard duty, as defined in 10 U.S.C. 101(d)(5), 
under a call to active service authorized by the President or the 
Secretary of Defense for a period of more than 30 consecutive days 
under 32 U.S.C. 502(f) in connection with a war, other military 
operation, or national emergency declared by the President and 
supported by Federal funds.
    (4) Payments made by or on behalf of a borrower during a period for 
which the borrower qualified for a military service deferment are not 
refunded.
    (5) A borrower is eligible for a military service deferment on a 
Federal Consolidation Loan only if the borrower meets the conditions 
described in this section and all of the title IV loans included in the 
Consolidation Loan were first disbursed on or after July 1, 2001.
    (6) As used in this section--
    (i) Active duty means active duty as defined in 10 U.S.C. 101(d)(1) 
except that it does not include active duty for training or attendance 
at a service school;
    (ii) Military operation means a contingency operation as defined in 
10 U.S.C. 101(a)(13); and
    (iii) National emergency means the national emergency by reason of 
certain terrorist attacks declared by the President on September 14, 
2001, or subsequent national emergencies declared by the President by 
reason of terrorist attacks.
* * * * *

0
45. Section 682.211 is amended by:
0
A. Revising paragraph (b)(1).
0
B. In paragraph (f)(6) adding the word ``parent'' immediately after the 
words ``in the case of''.
    The revisions read as follows:


Sec.  682.211  Forbearance

* * * * *
    (b) * * *
    (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 and records the terms of the forbearance 
in the borrower's file; or
* * * * *

0
46. Section 682.215 is amended by:
0
A. Revising paragraph (a).
0
B. In paragraph (b), adding, in alphabetical order, a new definition 
for Highly qualified.
0
C. Revising paragraph (c)(1)(iii).
0
D. Revising paragraph (c)(3).
0
E. Revising paragraph (c)(4).
0
F. Redesignating paragraphs (c)(5), (c)(6), (c)(7), (c)(8), and (c)(9) 
as paragraphs (c)(7), (c)(8), (c)(9), (c)(10), and (c)(11), 
respectively.
0
G. Adding a new paragraph (c)(5).
0
H. Adding a new paragraph (c)(6).
0
I. Removing the parentheticals ``(c)(5)'' and adding, in their place, 
the parentheticals ``(c)(7)'' in newly redesignated paragraph (c)(8).
0
J. Revising paragraph (d)(1).
0
K. Revising paragraph (d)(2).
0
L. In paragraph (f)(3)(ii), removing the figure ``$5,000'' and adding, 
in its place, the figure ``$17,500''.
0
M. In paragraph (f)(3)(ii), removing the parentheticals ``(c)(9)'' and 
adding, in its place, the parentheticals ``(c)(11)''.
0
N. In paragraph (g), adding the words ``, or up to $17,500,'' 
immediately after the figure ``$5,000''.
    The revisions and additions read as follows:


Sec.  682.215  Teacher loan forgiveness program.

    (a) General. The teacher loan forgiveness program is intended to 
encourage individuals to enter and continue in the teaching profession. 
For new borrowers, the Secretary repays the amount specified in this 
paragraph on the borrower's subsidized and unsubsidized Federal 
Stafford Loans, Direct Subsidized Loans, Direct Unsubsidized Loans, and 
in certain cases, Federal Consolidation Loans or Direct Consolidation 
Loans. The forgiveness program is only available to a borrower who has 
no outstanding loan balance under the FFEL Program or the Direct Loan 
Program on October 1, 1998 or who has no outstanding loan balance on 
the date he or she obtains a loan after October 1, 1998. The borrower 
must have been employed as a full-time teacher for five consecutive 
complete academic years, at least one of which was after the 1997-1998 
academic year, in certain eligible elementary or secondary schools that 
serve low-income families. All borrowers eligible for teacher loan 
forgiveness may receive loan forgiveness of up to a combined total of 
$5,000 on the borrower's eligible FFEL and Direct Loan Program loans. 
If the borrower taught for five consecutive years as a highly qualified 
mathematics or science teacher in an eligible secondary school or as a 
special education teacher in an eligible elementary or secondary 
school, the borrower may receive loan forgiveness of up to a combined 
total of $17,500 on the borrower's eligible FFEL and Direct Loan 
Program loans. The loan for which the borrower is seeking forgiveness 
must have been made prior to the end of the borrower's fifth year of 
qualifying teaching service.
* * * * *
    (b) * * *
    Highly qualified means highly qualified as defined in section 9101 
of the Elementary and Secondary Education Act of 1965, as amended.
* * * * *
    (c) * * *
    (1) * * *
    (iii) Is listed in the Annual Directory of Designated Low-Income 
Schools for Teacher Cancellation Benefits. If this directory is not 
available before May 1 of any year, the previous year's directory may 
be used. The Secretary considers all elementary and secondary schools 
operated by the Bureau of Indian Affairs (BIA) or operated on Indian 
reservations by Indian tribal groups under contract with the BIA to 
qualify as schools serving low-income students.
* * * * *
    (3) In the case of a borrower whose five consecutive complete years 
of qualifying teaching service began before October 30, 2004, the 
borrower--
    (i) May receive up to $5,000 of loan forgiveness if the borrower--
    (A) Demonstrated knowledge and teaching skills in reading, writing,

[[Page 45703]]

mathematics, and other areas of the elementary school curriculum, as 
certified by the chief administrative officer of the eligible 
elementary school in which the borrower was employed; or
    (B) Taught in a subject area that is relevant to the borrower's 
academic major as certified by the chief administrative officer of the 
eligible secondary school in which the borrower was employed.
    (ii) May receive up to $17,500 of loan forgiveness if the 
borrower--
    (A) Taught mathematics or science on a full-time basis in an 
eligible secondary school and was a highly qualified mathematics or 
science teacher; or
    (B) Taught as a special education teacher on a full-time basis to 
children with disabilities in either an eligible elementary or 
secondary school and was a highly qualified special education teacher 
whose special education training corresponded to the children's 
disabilities and who has demonstrated knowledge and teaching skills in 
the content areas of the elementary or secondary school curriculum.
    (4) In the case of a borrower whose five consecutive years of 
qualifying teaching service began on or after October 30, 2004, the 
borrower--
    (i) May receive up to $5,000 of loan forgiveness if the borrower 
taught full time in an eligible elementary or secondary school and was 
a highly qualified elementary or secondary school teacher.
    (ii) May receive up to $17,500 of loan forgiveness if the 
borrower--
    (A) Taught mathematics or science on a full-time basis in an 
eligible secondary school and was a highly qualified mathematics or 
science teacher; or
    (B) Taught as a special education teacher on a full-time basis to 
children with disabilities in either an eligible elementary or 
secondary school and was a highly qualified special education teacher 
whose special education training corresponded to the children's 
disabilities and who has demonstrated knowledge and teaching skills in 
the content areas of the elementary or secondary school curriculum.
    (5) To qualify for loan forgiveness as a highly qualified teacher, 
the teacher must have been a highly qualified teacher for all five 
years of eligible teaching service.
    (6) For teacher loan forgiveness applications received by the loan 
holder on or after July 1, 2006, a teacher in a private, non-profit 
elementary or secondary school who is exempt from State certification 
requirements (unless otherwise applicable under State law) may qualify 
for loan forgiveness under paragraphs (c)(3)(ii) or (c)(4) of this 
section if--
    (i) The private school teacher is permitted to and does satisfy 
rigorous subject knowledge and skills tests by taking competency tests 
in applicable grade levels and subject areas;
    (ii) The competency tests are recognized by 5 or more States for 
the purposes of fulfilling the highly qualified teacher requirements 
under section 9101 of the Elementary and Secondary Education Act of 
1965; and
    (iii) The private school teacher achieves a score on each test that 
equals or exceeds the average passing score for those 5 states.
* * * * *
    (d) Forgiveness amount. (1) A qualified borrower is eligible for 
forgiveness of up to $5,000, or up to $17,500 if the borrower meets the 
requirements of paragraphs (c)(3)(ii) or (c)(4)(ii) of this section. 
The forgiveness amount is deducted from the aggregate amount of the 
borrower's subsidized or unsubsidized Federal Stafford or Federal 
Consolidation Loan obligation that is outstanding after the borrower 
completes his or her fifth consecutive complete academic year of 
teaching as described in paragraph (c) of this section. Only the 
outstanding portion of the consolidation loan that was used to repay an 
eligible subsidized or unsubsidized Federal Stafford Loan, an eligible 
Direct Subsidized Loan, or an eligible Direct Unsubsidized Loan 
qualifies for loan forgiveness under this section.
    (2) A borrower may not receive more than a total of $5,000, or 
$17,500 if the borrower meets the requirements of paragraphs (c)(3)(ii) 
or (c)(4)(ii) of this section, in loan forgiveness for outstanding 
principal and accrued interest under both this section and under 
section 34 CFR 685.217.
* * * * *

0
47. Section 682.300 is amended by:
0
A. In paragraph (c)(3)(i), removing the word ``or'' at the end of the 
paragraph.
0
B. In paragraph (c)(3)(ii), removing the punctuation ``.'' and adding, 
in its place, the words ``; or''.
0
C. Adding new paragraph (c)(3)(iii).
    The addition reads as follows:


Sec.  682.300  Payment of interest benefits on Stafford and 
Consolidation Loans.

* * * * *
    (c) * * *
    (3) * * *
    (iii) In the case of a loan disbursed through an escrow agent, 3 
days prior to the first day of the period of enrollment or, if the loan 
is disbursed after the first day of the period of enrollment, 3 days 
after disbursement.
* * * * *

0
48. Section 682.302 is amended by:
0
A. Revising paragraph (b)(1).
0
B. In paragraph (b)(2), adding the words ``or on or after January 1, 
2000 for any period prior to April 1, 2006,'' after the words ``on or 
after July 1, 1998''.
0
C. Revising paragraph (c).
0
D. Revising paragraph (e).
0
E. Adding a new paragraph (f).
    The revisions and addition read as follows:


Sec.  682.302  Payment of special allowance on FFEL Loans.

* * * * *
    (b) * * *
    (1) Except for non-subsidized Federal Stafford loans disbursed on 
or after October 1, 1981, for periods of enrollment beginning prior to 
October 1, 1992, or as provided in paragraphs (b)(2), (b)(3), or (e)(1) 
of this section, FFEL loans that otherwise meet program requirements 
are eligible for special allowance payments.
* * * * *
    (c) Rate. (1) Except as provided in paragraph (c)(2), (c)(3), or 
(e) of this section, the special allowance rate for an eligible loan 
during a 3-month period is calculated by--
    (i) Determining the average of the bond equivalent rates of--
    (A) The quotes of the 3-month commercial paper (financial) rates in 
effect for each of the days in such quarter as reported by the Federal 
Reserve in Publication H-15 (or its successor) for such 3-month period 
for a loan for which the first disbursement is made on or after January 
1, 2000; or
    (B) The 91-day Treasury bills auctioned during the 3-month period 
for a loan for which the first disbursement is made prior to January 1, 
2000;
    (ii) Subtracting the applicable interest rate for that loan;
    (iii) Adding--
    (A)(1) 2.34 percent to the resulting percentage for a Federal 
Stafford loan for which the first disbursement is made on or after 
January 1, 2000;
    (2) 2.64 percent to the resulting percentage for a Federal PLUS 
loan for which the first disbursement is made on or after January 1, 
2000;
    (3) 2.64 percent to the resulting percentage for a Federal 
Consolidation Loan that was made based on an application received by 
the lender on or after January 1, 2000;
    (4) 1.74 percent to the resulting percentage for a Federal Stafford 
loan for which the first disbursement is made on or after January 1, 
2000 during the

[[Page 45704]]

borrower's in-school, grace, and authorized period of deferment;
    (5) 2.8 percent to the resulting percentage for a Federal Stafford 
loan for which the first disbursement is made on or after July 1, 1998 
and prior to January 1, 2000;
    (6) 2.2 percent to the resulting percentage for a Federal Stafford 
loan for which the first disbursement is made on or after July 1, 1998 
and prior to January 1, 2000, during the borrower's in-school, grace, 
and authorized period of deferment;
    (7) 2.5 percent to the resulting percentage for a Federal Stafford 
loan for which the first disbursement is made on or after July 1, 1995 
and prior to July 1, 1998 for interest that accrues during the 
borrower's in-school, grace, and authorized period of deferment;
    (B) 3.1 percent to the resulting percentage for--
    (1) A Federal Stafford Loan made on or after October 1, 1992 and 
prior to July 1, 1998, except as provided in paragraph 
(c)(1)(iii)(A)(7) of this section;
    (2) A Federal SLS Loan made on or after October 1, 1992;
    (3) A Federal PLUS Loan made on or after October 1, 1992 and prior 
to July 1, 1998;
    (4) A Federal PLUS loan made on or after July 1, 1998 and prior to 
October 1, 1998, except that no special allowance shall be paid during 
any quarter unless the average of the 91-day Treasury bills auctioned 
during that quarter, plus 3.1 percent, exceeds the rate determined 
under Sec.  682.202(a)(2)(v);
    (5) A Federal PLUS loan made on or after October 1, 1998 and prior 
to January 1, 2000, except that no special allowance shall be paid 
during any quarter unless the rate determined under Sec.  
682.202(a)(2)(v) exceeds 9 percent;
    (6) A Federal Consolidation Loan for which the application was 
received by the lender prior to January 1, 2000, except that no special 
allowance shall be paid during any quarter on a loan for which the 
application was received on or after October 1, 1998 unless the average 
of the bond equivalent rate of the 91-day Treasury bills auctioned 
during that quarter, plus 3.1 percent, exceeds the rate determined 
under Section 682.202(a)(4)(iv);
    (C) 3.25 percent to the resulting percentage, for a loan made on or 
after November 16, 1986, but prior to October 1, 1992;
    (D) 3.25 percent to the resulting percentage, for a loan made on or 
after October 17, 1986 but prior to November 16, 1986, for a period of 
enrollment beginning on or after November 16, 1986;
    (E) 3.5 percent to the resulting percentage, for a loan made prior 
to October 17, 1986, or a loan described in paragraph (c)(2) of this 
section; or
    (F) 3.5 percent to the resulting percentage, for a loan made on or 
after October 17, 1986 but prior to November 16, 1986, for a period of 
enrollment beginning prior to November 16, 1986;
    (iv) Rounding the result upward to the nearest one-eighth of 1 
percent, for a loan made prior to October 1, 1981; and
    (v) Dividing the resulting percentage by 4.
    (2) The special allowance rate determined under paragraph 
(c)(1)(iii)(E) of this section applies to loans made or purchased from 
funds obtained from the issuance of an obligation of the--
    (i) Maine Educational Loan Marketing Corporation to the Student 
Loan Marketing Association pursuant to an agreement entered into on 
January 31, 1984; or
    (ii) South Carolina Student Loan Corporation to the South Carolina 
National Bank pursuant to an agreement entered into on July 30, 1986.
    (3)(i) Subject to paragraphs (c)(3)(iii), (c)(3)(iv), and (e) of 
this section, the special allowance rate is that provided in paragraph 
(c)(3)(ii) of this section for a loan made or guaranteed on or after 
October 1, 1980 that was made or purchased with funds obtained by the 
holder from--
    (A) The proceeds of tax-exempt obligations originally issued prior 
to October 1, 1993;
    (B) Collections or payments by a guarantor on a loan that was made 
or purchased with funds obtained by the holder from obligations 
described in paragraph (c)(3)(i)(A) of this section;
    (C) Interest benefits or special allowance payments on a loan that 
was made or purchased with funds obtained by the holder from 
obligations described in paragraph (c)(3)(i)(A) of this section;
    (D) The sale of a loan that was made or purchased with funds 
obtained by the holders from obligations described in paragraph 
(c)(3)(i)(A) of this section; or
    (E) The investment of the proceeds of obligations described in 
paragraph (c)(3)(i)(A) of this section.
    (ii) The special allowance rate for a loan described in paragraph 
(c)(3)(i) is one-half of the rate calculated under paragraph (c)(1) of 
this section, except that in applying paragraph (c)(1)(iii), 3.5 
percent is substituted for the percentages specified therein.
    (iii) The special allowance rate applicable to loans described in 
paragraph (c)(3)(i) of this section that are made prior to October 1, 
1992, may not be less than--
    (A) 2.5 percent per year on eligible loans for which the applicable 
interest rate is 7 percent;
    (B) 1.5 percent per year on eligible loans for which the applicable 
interest rate is 8 percent; or
    (C) One-half of 1 percent per year on eligible loans for which the 
applicable rate is 9 percent.
    (iv) The special allowance rate applicable to loans described in 
paragraph (c)(3)(i) of this section that are made on or after October 
1, 1992, may not be less than 9.5 percent minus the applicable interest 
rate.
    (4) Loans made or purchased with funds obtained by the holder from 
the issuance of tax-exempt obligations originally issued on or after 
October 1, 1993, and loans made with funds derived from default 
reimbursement collections, interest, or other income related to 
eligible loans made or purchased with those tax-exempt funds, do not 
qualify for the minimum special allowance rate specified in paragraph 
(c)(3)(iii) or (iv) of this section, and are not subject to the 50 
percent limitation on the maximum rate otherwise applicable to loans 
made with tax-exempt funds.
    (5) For purposes of paragraphs (c)(3) and (c)(4), a loan is 
purchased with funds described in those paragraphs when the loan is 
refinanced in consideration of those funds.
* * * * *
    (e) Limits on special allowance payments on loans made or purchased 
with funds derived from tax-exempt obligations.
    (1) General. (i) The Secretary pays a special allowance on a loan 
described in paragraph (c)(3) or (c)(4) of this section that is held by 
or on behalf of an Authority only if the loan meets the requirements of 
Sec.  682.800.
    (ii) The Secretary pays a special allowance at the rate prescribed 
in paragraph (c)(1) or (c)(3) of this section on a loan described in 
paragraph (c)(3)(i) of this section that is held by or on behalf of an 
Authority in accordance with paragraphs (e)(2) through (e)(5) of this 
section, as applicable. References to ``loan'' or ``loans'' in 
paragraphs (e)(2) through (e)(5) include only loans described in 
paragraph (c)(3)(i).
    (2) Effect of Refinancing on Special Allowance Payments. Except as 
provided in paragraphs (e)(3) through (e)(5) of this section--
    (i) The Secretary pays a special allowance at the rate prescribed 
in paragraph (c)(3) of this section to an Authority that holds a legal 
or equitable

[[Page 45705]]

interest in the loan that is pledged or otherwise transferred in 
consideration of--
    (A) Funds listed in paragraph (c)(3)(i) of this section;
    (B) Proceeds of a tax-exempt refunding obligation that refinances a 
debt that--
    (1) Was first incurred pursuant to a tax-exempt obligation 
originally issued prior to October 1, 1993;
    (2) Has been financed continuously by tax-exempt obligation.
    (ii) The Secretary pays a special allowance to an Authority that 
holds a legal or equitable interest in the loan that is pledged or 
otherwise transferred in consideration of funds other than those 
specified in paragraph (e)(2)(i) of this section either--
    (A) At the rate prescribed in paragraph (c)(1) of this section, 
if--
    (1) The prior tax-exempt obligation is retired; or
    (2) The prior tax-exempt obligation is defeased by means of 
obligations that the Authority certifies in writing to the Secretary 
bears a yield that does not exceed the yield restrictions of section 
148 of the Internal Revenue Code and the regulations thereunder, or
    (B) At the rate prescribed in paragraph (c)(3) of this section.
    (3) Loans affected by transactions or events after September 30, 
2004. The Secretary pays a special allowance to an Authority at the 
rate prescribed in paragraph (c)(1) of this section if, after September 
30, 2004--
    (i) The loan is refinanced with funds other than those listed in 
paragraph (e)(2)(i) of this section;
    (ii) The loan is sold or transferred to any other holder; or
    (iii)(A) The loan is financed by a tax-exempt obligation included 
in the sources in paragraph (e)(2)(i), and
    (B) That obligation matures, is refunded, is defeased, or is 
retired, whichever occurs earliest.
    (4) Loans Affected by Transactions After February 7, 2006. Except 
as provided in paragraph (e)(5) of this section, the Secretary pays a 
special allowance at the rate prescribed in paragraph (c)(1) of this 
section on any loan--
    (i) That was made or purchased on or after February 8, 2006, or
    (ii) That was not earning, on February 8, 2006, a quarterly rate of 
special allowance determined under paragraph (c)(3) of this section.
    (5) Loans affected by transactions after December 30, 2010. (i) The 
Secretary pays a special allowance to a holder described in paragraph 
(e)(5)(ii) of this section at the rate prescribed in paragraph (c)(3) 
of this section only on a loan--
    (A) That was made or purchased prior to December 31, 2010, or
    (B) That was earning, before December 31, 2010, a quarterly rate of 
special allowance determined under paragraph (c)(3) of this section.
    (ii) A holder for purposes of this paragraph is an entity that--
    (A) On February 8, 2006 and during the quarter for which special 
allowance is determined under this paragraph--
    (1) Is a unit of State or local government or a private nonprofit 
entity, and
    (2) Is not owned or controlled by, or under common ownership or 
control by, a for-profit entity; and
    (B) In the most recent quarterly special allowance payment prior to 
September 30, 2005, held, directly or through any subsidiary, 
affiliate, or trustee, a total unpaid balance of principal of 
$100,000,000 or less for which special allowance was determined and 
paid under paragraph (c)(3) of this section.
    (f) As used in this section--
    (1) A tax-exempt obligation is an obligation the income of which is 
exempt from taxation under the Internal Revenue Code of 1986 (26 
U.S.C.);
    (2) An obligation is originally issued at the time that an 
Authority issues the obligation to obtain funds to make loans or to 
purchase loans that an Authority does not hold or have any interest in;
    (3) A loan is refinanced when an Authority that has pledged the 
loan as collateral for an obligation of that Authority retains an 
interest in the loan, but causes the loan to be released from the lien 
of that obligation and pledged as collateral for a different obligation 
of that Authority.
    (4) References to an Authority include a successor entity that may 
not qualify as an Authority under Sec.  682.200(b).
* * * * *

0
49. Section 682.305 is amended by:
0
A. In paragraph (a)(3)(i)(A)(2), removing the punctuation ``.'' at the 
end of the paragraph and adding, in its place, the words ``; and''.
0
B. Adding a new paragraph (a)(3)(i)(A)(3).
0
C. Revising paragraph (c)(1).
0
D. Adding a new paragraph (d).
    The revisions and additions read as follows:


Sec.  682.305  Procedures for payment of interest benefits and special 
allowance and collection of origination and loan fees.

    (a) * * *
    (3)(i)(A) * * *
    (3) The amount of excess interest, as calculated in accordance with 
paragraph (d) of this section.
* * * * *
    (c) Independent audits. (1) A lender (other than a school lender) 
originating or holding more than $5 million in FFEL loans during its 
fiscal year, and a school lender under Sec.  682.601 that originates or 
holds any FFEL loans during its fiscal year, must submit an independent 
annual compliance audit for that year, conducted by a qualified 
independent organization or person. The Secretary may, following 
written notice, suspend the payment of interest benefits and special 
allowance to a lender that does not submit its audit within the time 
period prescribed in paragraph (c)(2) or this section.
* * * * *
    (d) Recovery of excess interest paid by the Secretary.
    (1) For any loan for which the first disbursement of principal is 
made on or after April 1, 2006, the Secretary collects the amount of 
excess interest paid to a lender on a quarterly basis when the 
applicable interest rate on a loan for each quarter exceeds the special 
allowance support level in paragraph (d)(2) of this section for the 
loan. Excess interest is calculated and recovered each quarter by 
subtracting the special allowance support level from the applicable 
interest, multiplying the result by the average daily principal balance 
of the loan (not including unearned interest added to principal) during 
the quarter, and dividing by four.
    (2) The term special allowance support level means a number 
expressed as a percentage equal to the sum of--
    (i) The average of the bond equivalent rates of the quotes of the 
3-month commercial paper (financial) rates in effect for each of the 
days in such quarter as reported by the Federal Reserve in Publication 
H-15 (or its successor) for such 3-month period; plus
    (ii) 2.34 percent for a Federal Stafford loan in repayment;
    (iii) 1.74 percent for a Federal Stafford loan during the in-
school, grace, and deferment periods; or
    (iv) 2.64 percent for a Federal PLUS or Consolidation Loan.
* * * * *

0
50. Section 682.401 is amended by:
0
A. In paragraph (b)(3)(i), removing the word ``SLS'' and inserting, in 
its place, the words ``PLUS Loan''.
0
B. Amending the first sentence of paragraph (b)(4) by adding the words 
``and Sec.  668.35(i) for a borrower who fraudulently obtained title 
IV, HEA program assistance'' after the word ``obtained''.
0
C. In paragraph (b)(4)(iv), removing the figure ``six'' and inserting, 
in its place, the figure ``three''.

[[Page 45706]]

0
D. In paragraph (b)(5)(ii) introductory text, by inserting the word 
``parent'' before the word ``PLUS''.
0
E. Revising paragraphs (b)(10)(i), (ii), (iii), (iv), (v), (vi) 
introductory text, (vi)(A), and (vi)(B) introductory text.
0
F. In paragraph (b)(14)(i), removing the word ``and''.
0
G. In paragraph (b)(14)(ii), removing the punctuation ``.'' and adding 
the words ``and before July 1, 2006; and'' immediately after the date 
``October 1, 1993''.
0
H. Adding a new paragraph (b)(14)(iii).
0
I. In paragraph (b)(19)(i)(F), by adding the words ``unpaid refunds, 
identity theft'' after the word ``certification,''.
0
J. Revising paragraph (b)(27).
0
K. Adding a new paragraph (b)(29).
0
L. Adding a new paragraph (f).
    The revisions and additions read as follows:


Sec.  682.401  Basic program agreement.

* * * * *
    (b) * * *
    (10) Insurance premiums and Federal default fees. (i) Except for a 
Consolidation Loan or SLS or PLUS loans refinanced under Sec.  682.209 
(e) or (f), a guaranty agency:
    (A) May charge the lender an insurance premium for Stafford, SLS, 
or PLUS loans it guarantees prior to July 1, 2006; and
    (B) Must collect, either from the lender or by payment from any 
other non-Federal source, a Federal default fee for any Stafford or 
PLUS loans it guarantees on or after July 1, 2006, to be deposited into 
the Federal Fund under Sec.  682.419.
    (ii) The guaranty agency may not use the Federal default fee for 
incentive payments to lenders, and may only use the insurance premium 
or the Federal default fee for costs incurred in guaranteeing loans or 
in the administration of the agency's loan guarantee program, as 
specified in Sec.  682.410(a)(2) or Sec.  682.419(c).
    (iii) If a lender charges the borrower an insurance premium or 
Federal default fee, the lender must deduct the charge proportionately 
from each disbursement of the borrower's loan proceeds.
    (iv) The amount of the insurance premium or Federal default fee, as 
applicable--
    (A) May not exceed 3 percent of the principal balance for a loan 
disbursed on or before June 30, 1994;
    (B) May not exceed 1 percent of the principal balance for a loan 
disbursed on or after July 1, 1994;
    (C) Shall be 1 percent of the principal balance of a loan 
guaranteed on or after July 1, 2006.
    (v) If the circumstances specified in paragraph (vi) exist, the 
guaranty agency shall refund to the lender any insurance premium or 
Federal default fee paid by the lender.
    (vi) The lender shall refund to the borrower by a credit against 
the borrower's loan balance the insurance premium or Federal default 
fee paid by the borrower on a loan under the following circumstances:
    (A) The insurance premium or Federal default fee attributable to 
each disbursement of a loan must be refunded if the loan check is 
returned uncashed to the lender.
    (B) The insurance premium or Federal default fee, or an appropriate 
prorated amount of the premium or fee, must be refunded by application 
to the borrower's loan balance if--
* * * * *
    (14) * * *
    (iii) Not more than 97 percent of the unpaid principal balance of 
each loan guaranteed for loans first disbursed on or after July 1, 
2006.
* * * * *
    (27) Consolidation of defaulted FFEL loans.
    (i) A guaranty agency may charge collection costs in an amount not 
to exceed 18.5 percent of the outstanding principal and interest on a 
defaulted FFEL Program loan that is paid off by a Federal Consolidation 
loan.
    (ii) Prior to October 1, 2006, when returning the proceeds from the 
consolidation of a defaulted loan to the Secretary, a guaranty agency 
may only retain the amount charged to the borrower pursuant to this 
paragraph.
    (iii) On or after October 1, 2006, when returning proceeds to the 
Secretary from the consolidation of a defaulted loan, a guaranty agency 
that charged the borrower collection costs must remit an amount that 
equals the lesser of the actual collection costs charged or 8.5 percent 
of the outstanding principal and interest of the loan.
    (iv) On or after October 1, 2009, when returning proceeds to the 
Secretary from the consolidation of a defaulted loan that is paid off 
with excess consolidation proceeds as defined in paragraph 
(b)(27)(ii)(D) of this section, a guaranty agency must remit the entire 
amount of collection costs repaid through the consolidation loan 
pursuant to paragraph (b)(27)(ii) of this section.
    (v) The term excess consolidation proceeds means, for any Federal 
fiscal year beginning on or after October 1, 2009, the amount of 
Consolidation Loan proceeds received for defaulted loans under the FFEL 
Program that exceed 45 percent of the agency's total collections on 
defaulted loans in that Federal fiscal year.
* * * * *
    (29) Plans to Reduce Consolidation of defaulted loans. A guaranty 
agency shall establish and submit to the Secretary for approval, 
procedures to ensure that consolidation loans are not an excessive 
proportion of the guaranty agency's recoveries on defaulted loans.
* * * * *
    (f) College Access Initiative. (1) A guaranty agency shall 
establish a plan to promote access to postsecondary education by--
    (i) Providing the Secretary and the public with information on 
Internet web links and a comprehensive listing of postsecondary 
education opportunities, programs, publications and other services 
available in the State, or States for which the guaranty agency serves 
as the designated guaranty agency;
    (ii) Promoting and publicizing information for students and 
traditionally underrepresented populations on college planning, career 
preparation, and paying for college in coordination with other entities 
that provide or distribute such information in the State, or States for 
which the guaranty agency serves as the designated guaranty agency;
    (2) The activities required by this section may be funded from the 
guaranty agency's Operating Fund in accordance with Sec.  
682.423(c)(1)(vii) or from funds remaining in restricted accounts 
established pursuant to section 422(h)(4) of the HEA.
    (3) The guaranty agency shall ensure that the information required 
by this subsection is available to the public by November 5, 2006 and 
is--
    (i) Free of charge; and
    (ii) Available in print.
* * * * *

0
51. Section 682.402 is amended by:
0
A. Amending paragraph (a)(4) by removing the words ``paragraphs 
(e)(1)(ii)'' and, inserting in their place, the words ``paragraph 
(e)(1)(ii) or (iii)''.
0
B. Revising paragraph (e)(1)(i) introductory text.
0
C. Adding a new paragraph (e)(1)(i)(C).
0
D. Adding a new paragraph (e)(1)(iii).
0
E. Redesignating paragraphs (e)(3)(v) and (e)(3)(vi) as paragraphs 
(e)(3)(vi) and (e)(3)(vii), respectively.
0
F. Adding a new paragraph (e)(3)(v).
0
G. In the heading of paragraph (e)(7), adding the words ``that he or 
she was a victim of the crime of identity theft'' after the word 
``note.''
0
H. In paragraph (e)(7)(ii)(C)(2), removing the punctuation ``.'', and 
adding, in its place, the words ``; and''.

[[Page 45707]]

0
I. In paragraph (e)(7)(ii), adding a new paragraph (e)(7)(ii)(D).
0
J. In the heading of the paragraph (e)(9), adding the words ``that he 
or she was a victim of the crime of identity theft,'' after the word 
``note,''.
0
K. In paragraph (e)(9)(ii)(B), removing the word ``and''.
0
L. In paragraph (e)(9)(ii)(C), removing the punctuation ``.'', and 
adding, in its place, the words ``; and''.
0
M. In paragraph (e)(9)(ii), adding a new paragraph (e)(9)(ii)(D).
0
N. Redesignating paragraph (e)(14) as paragraph (e)(15).
0
O. Adding a new paragraph (e)(14).
    The revisions and additions read as follows:


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

* * * * *
    (e) False certification by a school of a student's eligibility to 
borrower and unauthorized disbursements. 
    (1) General. (i) The Secretary reimburses the holder of a loan 
received by a borrower on or after January 1, 1986, and discharges a 
current or former borrower's obligation with respect to the loan in 
accordance with the provisions of paragraph (e) of this section, if the 
borrower's (or the student for whom a parent received a PLUS loan) 
eligibility to receive the loan was falsely certified by an eligible 
school. On or after July 1, 2006, the Secretary reimburses the holder 
of a loan, and discharges a borrower's obligation with respect to the 
loan in accordance with the provisions of paragraph (e) of this 
section, if the borrower's eligibility to receive the loan was falsely 
certified as a result of a crime of identity theft. For purposes of a 
false certification discharge, the term ``borrower'' includes all 
endorsers on a loan. A student's or other individual's eligibility to 
borrow shall be considered to have been falsely certified by the school 
if the school--
* * * * *
    (C) Certified the eligibility of an individual for an FFEL Program 
loan as a result of the crime of identity theft committed against the 
individual, as that crime is defined in Sec.  682.402(e)(14).
* * * * *
    (iii) If a loan was made as a result of the crime of identity theft 
that was committed by an employee or agent of the lender, or if at the 
time the loan was made, an employee or agent of the lender knew of the 
identity theft of the individual named as the borrower--
    (A) The Secretary does pay reinsurance, and does not reimburse the 
holder, for any amount disbursed on the loan; and
    (B) Any amounts received by a holder as interest benefits and 
special allowance payments with respect to the loan must be refunded to 
the Secretary, as provided in paragraphs (e)(8)(ii)(B)(4) and 
(e)(10)(ii)(D) of this section.
* * * * *
    (3) * * *
    (v) In the case of an individual who is requesting a discharge of a 
loan because the individual's eligibility was falsely certified as a 
result of a crime of identity theft committed against the individual--
    (A) Certify that the individual did not sign the promissory note, 
or that any other means of identification used to obtain the loan was 
used without the authorization of the individual claiming relief;
    (B) Certify that the individual did not receive or benefit from the 
proceeds of the loan with knowledge that the loan had been made without 
the authorization of the individual;
    (C) Provide a copy of a local, State, or Federal court verdict or 
judgment that conclusively determines that the individual who is named 
as the borrower of the loan was the victim of a crime of identify 
theft;
    (D) If the judicial determination of the crime does not expressly 
state that the loan was obtained as a result of the crime, provide--
    (1) Authentic specimens of the signature of the individual, as 
provided in paragraph (e)(3)(iii)(B), or other means of identification 
of the individual, as applicable, corresponding to the means of 
identification falsely used to obtain the loan; and
    (2) A statement of facts that demonstrate, to the satisfaction of 
the Secretary, that eligibility for the loan in question was falsely 
certified as a result of the crime of identity theft committed against 
that individual.
* * * * *
    (7) * * *
    (ii) * * *
    (D) Within 30 days, demand payment in full from the perpetrator of 
the identity theft committed against the individual, and if payment is 
not received, pursue collection action thereafter against the 
perpetrator.
* * * * *
    (9) * * *
    (ii) * * *
    (D) Within 30 days, demand payment in full from the perpetrator of 
the identity theft committed against the individual, and if payment is 
not received, pursue collection action thereafter against the 
perpetrator.
* * * * *
    (14) Identity theft. (i) The unauthorized use of the identifying 
information of another individual that is punishable under 18 U.S.C. 
1028, 1029, or 1030, or substantially comparable State or local law.
    (ii) Identifying information includes, but is not limited to--
    (A) Name, Social Security number, date of birth, official State or 
government issued driver's license or identification number, alien 
registration number, government passport number, and employer or 
taxpayer identification number;
    (B) Unique biometric data, such as fingerprints, voiceprint, retina 
or iris image, or unique physical representation;
    (C) Unique electronic identification number, address, or routing 
code; or
    (D) Telecommunication identifying information or access device (as 
defined in 18 U.S.C. 1029(e)).
* * * * *

0
52. Section 682.404 is amended by:
0
A. Redesignating paragraph (a)(1)(iii)(D) as paragraph (a)(1)(iii)(E).
0
B. Adding a new paragraph (a)(1)(iii)(D).
0
C. Adding a new paragraph (a)(2)(iii).
    The additions read as follows:


Sec.  682.404  Federal reinsurance agreement.

    (a) * * *
    (1) * * *
    (iii) * * *
    (D) For loans that meet the definition of exempt claims in 
paragraph (a)(2)(iii) of this section;
    (2) * * *
    (iii) Exempt claims means claims with respect to loans for which it 
is determined that the borrower (or student on whose behalf a parent 
has borrowed), without the lender's or the institution's knowledge at 
the time the loan was made, provided false or erroneous information or 
took actions that caused the borrower or the student to be ineligible 
for all of a portion of the loan or for interest benefits on the loan.
* * * * *

0
53. Section 682.405 is amended by:
0
A. Revising paragraphs (a)(1) and (2).
0
B. Revising paragraph (b)(1).
0
C. Redesignating paragraphs (b)(2) and (b)(3) as paragraphs (b)(3) and 
(b)(4), respectively.
0
D. In newly redesignated paragraph (b)(4), removing the words ``12 
consecutive'' both times they appear and adding, in their place, the 
figure ``9''.
0
E. Add new paragraph (b)(2).
    The revisions read as follows:


Sec.  682.405  Loan rehabilitation agreement.

    (a) General. (1) A guaranty agency that has a basic program 
agreement must

[[Page 45708]]

enter into a loan rehabilitation agreement with the Secretary. The 
guaranty agency must establish a loan rehabilitation program for all 
borrowers with an enforceable promissory note for the purpose of 
rehabilitating defaulted loans, except for loans for which a judgment 
has been obtained, loans on which a default claim was filed under Sec.  
682.412, and loans on which the borrower has been convicted of, or has 
pled nolo contendere or guilty to, a crime involving fraud in obtaining 
title IV, HEA program assistance, so that the loan may be purchased, if 
practicable, by an eligible lender and removed from default status.
    (2) A loan is considered to be rehabilitated only after--
    (i) The borrower has made and the guaranty agency has received nine 
of the ten payments required under a monthly repayment agreement.
    (A) Each of which payments is--
    (1) Made voluntarily;
    (2) In the full amount required; and
    (3) Received within 20 days of the due date for the payment, and
    (B) All nine payments are received within a 10-month period that 
begins with the month in which the first required due date falls and 
ends with the ninth consecutive calendar month following that month, 
and
    (ii) The loan has been sold to an eligible lender.
    (b) * * *
    (1) A borrower may request rehabilitation of the borrower's 
defaulted loan held by the guaranty agency. In order to be eligible for 
rehabilitation of the loan, the borrower must voluntarily make at least 
nine of the ten payments required under a monthly repayment agreement.
    (i) Each of which payment is--
    (A) Made voluntarily,
    (B) In the full amount required, and
    (C) Received within 20 days of the due date for the payment, and
    (ii) All nine payments are received within a ten-month period that 
begins with the month in which the first required due date falls and 
ends with the ninth consecutive calendar month following that month.
    (2) For the purposes of this section, payment in the full amount 
required means payment of an amount that is reasonable and affordable, 
based on the borrower's total financial circumstances, as agreed to by 
the borrower and the agency. 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. A guaranty agency must attempt to secure a lender to 
purchase the loan at the end of the 9- or 10-month payment period as 
applicable.


Sec.  682.406  [Amended]

0
54. Section 682.406 is amended in paragraph (a)(9) by removing the 
figure ``45'' and adding, in its place, the figure ``30''.

0
55. Section 682.408 is amended by revising paragraph (c) to read as 
follows:


Sec.  682.408  Loan disbursement through an escrow agent.

* * * * *
    (c) Transmittal of FFEL loan proceeds by an escrow agent. The 
escrow agent shall transmit Stafford and PLUS loan proceeds received 
from a lender under this section to a school in accordance with the 
requirements of Sec.  682.207(b)(1)(ii) and (iv) not later than 10 days 
after the agent receives the funds from the lender.
* * * * *


Sec.  682.410  [Amended]

0
56. Section 682.410 is amended by:
0
A. In paragraph (a)(1)(i), adding the words ``and Federal default 
fees'' after the word ``premiums''.
0
B. In paragraph (a)(2)(vi), adding the words ``and Federal default 
fees'' after the word ``premiums''.
0
C. In paragraph (b)(9)(i)(A), removing the figure ``10'' and adding, in 
its place, the figure ``15''.

0
57. Section 682.415 is amended by revising paragraph (a)(1) to read as 
follows:


Sec.  682.415  Special insurance and reinsurance rules.

    (a)(1) A lender or lender servicer (as an agent for an eligible 
lender) designated for exceptional performance under paragraph (b) of 
this section shall receive reimbursement at the applicable rate under 
paragraphs (a)(1)(i) or (a)(1)(ii) of this section on all claims 
submitted for insurance during the 12-month period following the date 
the lender or lender servicer and appropriate guaranty agencies receive 
notification of the designation of the eligible lender or lender 
servicer under paragraph (b) of this section. A guaranty agency or a 
guaranty agency servicer (as an agent for a guaranty agency) designated 
for exceptional performance under paragraph (c) of this section shall 
receive the applicable reinsurance rate under section 428(c)(1) of the 
Act on all claims submitted for payments by the guaranty agency or 
guaranty agency servicer during the 12-month period following the date 
the guaranty agency receives notification of its designation, or its 
servicer's designation, under paragraph (c) of this section. A notice 
of designation for exceptional performance under this section is deemed 
to have been received by the lender, servicer, or guaranty agency no 
later than 3 days after the date the notice is mailed, unless the 
lender, servicer, or guaranty agency is able to prove otherwise. A 
lender or lender servicer designated for exceptional performance shall 
receive reimbursement at the rate of--
    (i) 100 percent of the unpaid principal and interest for default 
claims submitted to the guaranty agency for payment before July 1, 
2006; and
    (ii) 99 percent of the unpaid principal and interest for default 
claims submitted to the guaranty agency for payment on or after July 1, 
2006.
* * * * *


Sec.  682.419  [Amended]

0
58. Section 682.419 is amended by:
0
A. In paragraph (b)(2), adding the words ``or Federal default fees'' 
after the word ``premiums''.
0
B. In paragraph (c)(7), by adding the words ``or Federal default fees'' 
after the word ``premiums''.

0
59. Section 682.601 is revised to read as follows:


Sec.  682.601  Rules for a school that makes or originates loans.

    (a) General. To make or originate loans under the FFEL program, a 
school--
    (1) Must employ at least one person whose full-time 
responsibilities are limited to the administration of programs of 
financial aid for students attending the school;
    (2) Must not be a home study school;
    (3) Must not--
    (i) Make a loan to any undergraduate student;
    (ii) Make a loan other than a Federal Stafford loan to a graduate 
or professional student; or
    (iii) Make a loan to a borrower who is not enrolled at that school;
    (4) Must award any contract for financing, servicing, or 
administration of FFEL loans on a competitive basis;
    (5) Must offer loans that carry an origination fee or an interest 
rate, or both, that are less than the fee or rate authorized under the 
provisions of the Act;
    (6) Must not have a cohort default rate, as calculated under 
subpart M of 34 CFR part 668, greater than 10 percent;
    (7) Must, for any fiscal year beginning on or after July 1, 2006 in 
which the school engages in activities as an eligible lender, submit a 
compliance audit conducted in accordance with the requirements of 34 
CFR 682.305(c)(2);

[[Page 45709]]

    (8) Must use any proceeds from special allowance payments and 
interest payments from borrowers, interest subsidy payments, and any 
proceeds from the sale or other disposition of loans (exclusive of 
return of principal, any financing costs incurred by the school to 
acquire funds to make the loans, and the cost of charging origination 
fees or interest rates at less than the fees or rates authorized under 
the HEA) for need-based grants which does not include providing 
origination fees or interest rates at less than the fee or rate 
authorized under the provisions of the Act; and
    (9) Must have met the requirements to be an eligible lender as of 
February 7, 2006, and must have made loans on or before April 1, 2006.
    (b) An eligible school lender may use a portion of the proceeds 
described in paragraph (a)(8) of this section for reasonable and direct 
administrative expenses. Reasonable and direct administrative expenses 
are those that are incurred by the school and are directly related to 
the school's performance of actions required of the school under the 
Act or the regulations in this part. Reasonable and direct 
administrative expenses do not include financing and similar costs such 
as costs paid by the school to obtain funding to make FFEL loans, the 
cost of paying Federal default fees on behalf of borrowers, or the cost 
of providing origination fees or interest rates at less than the fee or 
rate authorized under the provisions of the Act.
    (c) An eligible school lender must ensure that the proceeds 
described in paragraph (a)(8) of this section are used to supplement, 
and not to supplant, non-Federal funds that would otherwise be used for 
need-based grant programs.

(Authority: 20 U.S.C. 1077, 1078-1, 1078-2, 1078-3, 1082, 1085)


Sec.  682.603  [Amended]

0
60. Section 682.603 is amended, in paragraph (h), by adding the word 
``parent'' immediately after the words ``in the case of a''.
* * * * *

0
61. Section 682.604 is amended by:
0
A. In paragraph (c)(3) introductory text, adding the word ``parent'' 
immediately after the words ``in the case of''.
0
B. Revising paragraph (b)(1).
0
C. In paragraph (c)(2)(i), removing the words ``Sec.  
682.207(b)(1)(v)(C)(1) and (D)(1)'' and adding, in their place, the 
words ``Sec.  682.207(b)(1)(v)(C)(1) and (D)''.
0
D. In paragraphs (c)(5)(i) and (c)(10)(i)(B), adding the word ``or'' 
after the punctuation ``;''.
0
E. In paragraphs (c)(5)(ii) and (c)(10)(ii), removing the words ``; 
or'' and adding, in their place, the punctuation ``.''.
0
F. Removing paragraphs (c)(5)(iii) and (c)(10)(iii).
0
G. In paragraph (h) introductory text, removing the words ``, or in the 
case of a student attending a foreign school,''.
    The revision reads as follows:


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

* * * * *
    (b) Releasing loan proceeds. (1)(i) Except as provided in Sec.  
682.207(b)(1)(v)(C)(1) and (D), the proceeds of a Stafford or PLUS loan 
disbursed using electronic transfer of funds must be sent directly to 
the school by the lender.
    (ii) Upon notification by a lender under Sec.  682.207(b)(2)(iv) 
that it has disbursed a loan directly to a borrower as provided under 
Sec.  682.207(b)(1)(v)(C)(1) and (D), the institution must immediately 
notify the lender if the student is no longer eligible to receive the 
disbursement.
* * * * *

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

0
62. The authority citation for part 685 continues to read as follows:

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

0
63. Section 685.100 is amended by:
0
A. In paragraph (a)(3), adding the words ``and to graduate or 
professional students'' immediately after the words ``dependent 
students.''
0
B. Revising paragraph (c)(2).
    The revision reads as follows:


Sec.  685.100  The William D. Ford Federal Direct Loan Program.

* * * * *
    (c) * * *
    (2) A borrower with a loan made under the Federal Family Education 
Loan Program who--
    (i) Is not able to obtain a Federal Consolidation Loan;
    (ii) Is not able to obtain a Federal Consolidation Loan with 
income-sensitive repayment terms that are satisfactory to the borrower; 
or
    (iii) Has a Federal Consolidation Loan that has been submitted by 
the lender to the guaranty agency for default aversion, and wishes to 
consolidate the Federal Consolidation Loan into the Direct Loan Program 
for the purpose of obtaining an income contingent repayment plan.
* * * * *

0
64. Section 685.101 is amended by revising paragraph (b) to read as 
follows:


Sec.  685.101  Participation in the Direct Loan Program.

* * * * *
    (b) An eligible undergraduate student who is enrolled at a school 
participating in the Direct Loan Program may borrow under the Federal 
Direct Stafford/Ford Loan and Federal Direct Unsubsidized Stafford/Ford 
Loan Programs. An eligible graduate or professional student enrolled at 
a school participating in the Direct Loan Program may borrow under the 
Federal Direct Stafford/Ford Loan, Federal Direct Unsubsidized 
Stafford/Ford Loan, and Federal Direct PLUS Programs. An eligible 
parent of an eligible dependent student enrolled at a school 
participating in the Direct Loan Program may borrow under the Federal 
Direct PLUS Program.
* * * * *

0
65. Section 685.102(b) is amended by:
0
A. Revising the definition of estimated financial assistance.
0
B. Revising the definition of Federal Direct Consolidation Loan 
Program.
0
C. Revising the definition of Federal Direct PLUS Program.
0
D. In paragraph (2) of the definition of Satisfactory repayment 
arrangement, removing the reference to ``685.220(d)(1)(ii)(E)'' and 
adding, in its place, a reference to ``685.220(d)(1)(ii)(C)''.
    The revisions read as follows:


Sec.  685.102  Definitions.

* * * * *
    (b) * * *
    Estimated financial assistance. (1) The estimated amount of 
assistance for a period of enrollment that a student (or a parent on 
behalf of a student) will receive from Federal, State, institutional, 
or other sources, such as scholarships, grants, net earnings from need-
based employment, or loans, including but not limited to--
    (i) Except as provided in paragraph (2)(iv) of this definition, 
veterans' educational benefits paid under chapters 30 (Montgomery GI 
Bill--Active Duty), 31 (Vocational Rehabilitation and Employment 
Program), 32 (Veterans' Educational Assistance Program), and 35 
(Dependents' Educational Assistance Program) of title 38 of the United 
States Code;
    (ii) Educational benefits paid under chapters 31 (National Call to 
Service), 1606 (Montgomery GI Bill--Selected Reserve), and 1607 
(Reserve Educational Assistance Program) of title 10 of the United 
States Code;

[[Page 45710]]

    (iii) Reserve Officer Training Corps (ROTC) scholarships and 
subsistence allowances awarded under chapter 2 of title 10 and chapter 
2 of title 37 of the United States Code;
    (iv) Benefits paid under Public Law 96-342, section 903: 
Educational Assistance Pilot Program;
    (v) Any educational benefits paid because of enrollment in a 
postsecondary education institution, or to cover postsecondary 
education expenses;
    (vi) Fellowships or assistantships, except non-need-based 
employment portions of such awards;
    (vii) Insurance programs for the student's education;
    (viii) The estimated amount of other Federal student financial aid, 
including but not limited to a Federal Pell Grant, Academic 
Competitiveness Grant, National SMART Grant, campus-based aid, and the 
gross amount (including fees) of subsidized and unsubsidized Federal 
Stafford Loans or subsidized and unsubsidized Direct Stafford Loans and 
Federal PLUS or Direct PLUS Loans; and
    (ix) Except as provided in paragraph (2)(iii) of this definition, 
national service education awards or post-service benefits under title 
I of the National and Community Service Act of 1990 (AmeriCorps).
    (2) Estimated financial assistance does not include--
    (i) Those amounts used to replace the expected family contribution 
(EFC), including the amounts of any unsubsidized Federal Stafford Loans 
or Direct Stafford Loans, Federal PLUS or Direct PLUS Loans, and non-
federal non-need-based loans, including private, state-sponsored, and 
institutional loans. However, if the sum of the loan amounts received 
that are being used to replace the student's EFC exceed the EFC, the 
excess amount must be treated as estimated financial assistance;
    (ii) Federal Perkins loan and Federal Work-Study funds that the 
student has declined;
    (iii) Non-need-based employment earnings;
    (iv) For the purpose of determining eligibility for a Direct 
Subsidized Loan, veterans' educational benefits paid under chapter 30 
of title 38 of the United States Code (Montgomery GI Bill--Active Duty) 
and national service education awards or post-service benefits under 
title I of the National and Community Service Act of 1990 (AmeriCorps);
    (v) Any portion of the estimated financial assistance described in 
paragraph (1) of this definition that is included in the calculation of 
the student's EFC; and
    (vi) Assistance not received under this part if that assistance is 
designated to offset all or a portion of a specific amount of the cost 
of attendance and that component is excluded from the cost of 
attendance as well. If that assistance is excluded from either 
estimated financial assistance or cost of attendance, it must be 
excluded from both.
* * * * *
    Federal Direct Consolidation Loan Program: (1) A loan program 
authorized by title IV, part D of the Act that provides loans to 
borrowers who consolidate certain Federal educational loan(s), and one 
of the components of the Direct Loan Program. Loans made under this 
program are referred to as Direct Consolidation Loans.
    (2) The term ``Direct Subsidized Consolidation Loan'' refers to the 
portion of a Direct Consolidation Loan attributable to certain 
subsidized title IV education loans that were repaid by the 
consolidation loan. Interest is not charged to the borrower during 
deferment periods, or, for a borrower whose consolidation application 
was received before July 1, 2006, during in-school and grace periods.
    (3) The term ``Direct Unsubsidized Consolidation Loan'' refers to 
the portion of a Direct Consolidation Loan attributable to unsubsidized 
title IV education loans, certain subsidized title IV education loans, 
and certain other Federal education loans that were repaid by the 
consolidation loan. The borrower is responsible for the interest that 
accrues during any period.
    (4) The term ``Direct PLUS Consolidation Loan'' refers to the 
portion of a Direct Consolidation Loan attributable to Direct PLUS 
Loans, Direct PLUS Consolidation Loans, Federal PLUS Loans, and Parent 
Loans for Undergraduate Students that were repaid by the consolidation 
loan. The borrower is responsible for the interest that accrues during 
any period.
* * * * *
    Federal Direct PLUS Program: A loan program authorized by title IV, 
Part D of the Act that is one of the components of the Federal Direct 
Loan Program. The Federal Direct PLUS Program provides loans to parents 
of dependent students attending schools that participate in the Direct 
Loan Program. The Federal Direct PLUS Program also provides loans to 
graduate or professional students attending schools that participate in 
the Direct Loan Program. The borrower is responsible for the interest 
that accrues during any period. Loans made under this program are 
referred to as Direct PLUS Loans.
* * * * *

0
66. Section 685.200 is amended by:
0
A. In paragraph (a), revising the paragraph heading to read as set 
forth below.
0
B. Redesignating paragraphs (b), (c), and (d) as paragraphs (c), (d), 
and (e), respectively.
0
C. Adding a new paragraph (b).
0
D. In newly redesignated paragraph (c), revising the paragraph heading 
to read as set forth below and adding a new paragraph (c)(3).
0
E. In newly redesignated paragraph (c)(1)(vii)(B) introductory text, 
removing the reference to ``(b)(1)(vii)(A)'' and adding, in its place, 
a reference to ``(c)(1)(vii)(A)''.
0
F. In newly redesignated paragraph (c)(1)(vii)(C), removing the 
reference to ``(b)(1)(vii)(A)'' adding, in its place, a reference to 
``(c)(1)(vii)(A)''.
0
G. In newly redesignated paragraph (c)(2), removing the reference to 
``(b)(1)'' and adding, in its place, a reference to ``(c)(1)''.
0
H. In newly redesignated paragraph (d), by removing the reference to 
``685.220(d)(1)(ii)(F)'' and adding, in its place, a reference to 
``685.220(d)(1)(ii)(D)''.
0
I. Revising newly redesignated paragraph (e).
    The additions read as follows:


Sec.  685.200  Borrower eligibility.

    (a) Student Direct Subsidized or Direct Unsubsidized borrower.
* * * * *
    (b) Student PLUS borrower. (1) A graduate or professional student 
is eligible to receive a Direct PLUS Loan originated on or after July 
1, 2006, if the student meets the following requirements--
    (i) The student is enrolled, or accepted for enrollment, on at 
least a half-time basis in a school that participates in the Direct 
Loan Program.
    (ii) The student meets the requirements for an eligible student 
under 34 CFR part 668.
    (iii) The student meets the requirements of paragraphs (a)(1)(iv) 
and (a)(1)(v) of this section, if applicable.
    (iv) The student has received a determination of his or her annual 
loan maximum eligibility under the Federal Direct Stafford/Ford Loan 
Program and the Federal Direct Unsubsidized and Stafford/Ford Loan 
Program; and
    (v) The student does not have an adverse credit history in 
accordance with paragraph (c)(1)(vii) of this section.
* * * * *

[[Page 45711]]

    (c) Parent PLUS borrower.
* * * * *
    (3) Has completed repayment of any title IV, HEA program assistance 
obtained by fraud, if the parent has been convicted of, or has pled 
nolo contendere or guilty to, a crime involving fraud in obtaining 
title IV, HEA program assistance.
* * * * *
    (e) Use of loan proceeds to replace expected family contribution. 
The amount of a Direct Unsubsidized Loan, a Direct PLUS loan, or a non-
federal non-need based loan, including a private, state-sponsored, or 
institution loan, obtained for a loan period may be used to replace the 
expected family contribution for that loan period.
* * * * *

0
67. Section 685.201 is amended by revising paragraph (b) to read as 
follows:


Sec.  685.201  Obtaining a loan.

* * * * *
    (b) Application for a Direct PLUS Loan. (1) For a parent to obtain 
a Direct PLUS Loan, the parent must complete the Direct PLUS MPN and 
submit it to the school at which the student is enrolled.
    (2) For a graduate or professional student to apply for a Direct 
PLUS Loan, the student must complete a Free Application for Federal 
Student Aid and submit it in accordance with instructions in the 
application. The graduate or professional student must also complete 
the PLUS MPN and submit it to the school.
    (3) For either a parent or student PLUS borrower, as applicable, 
the school must complete its portion of the PLUS MPN and submit it to 
the Servicer, which makes a determination as to whether the parent or 
graduate or professional student has an adverse credit history. Unless 
a school's agreement with the Secretary specifies otherwise, the school 
must perform the following functions: A school participating under 
school origination option 2 must draw down funds and disburse the 
funds. For a school participating under school origination option 1 or 
standard origination, the Servicer initiates the drawdown of funds, and 
the school disburses the funds.
* * * * *

0
68. Section 685.202 is amended by:
0
A. In the heading of paragraph (a)(1)(iii), adding the words ``and 
before July 1, 2006'' immediately after the words ``July 1, 1998''.
0
B. Adding a new paragraph (a)(1)(iv).
0
C. In the heading of paragraph (a)(2)(ii), adding the words ``and 
before July 1, 2006'' after the words ``July 1, 1998''.
0
D. Adding a new paragraph (a)(2)(iii).
0
E. In paragraph (b)(2), adding the words ``under the regulations that 
were in effect for consolidation applications received before July 1, 
2006'' after the words ``grace period''.
0
F. In paragraph (b)(3), removing the reference to ``685.208(g)(5)'' and 
adding, in its place, a reference to ``85.208(l)(5)''.
0
G. In paragraph (b)(4), removing the reference to ``685.208(g)(5)'' and 
adding, in its place, a reference to ``685.208(l)(5)''.
0
H. Revising paragraph (c)(1).
    The revisions and additions read as follows:


Sec.  685.202  Charges for which Direct Loan Program borrowers are 
responsible.

    (a) * * *
    (1) * * *
    (iv) Loans first disbursed on or after July 1, 2006. The interest 
rate is 6.8 percent.
    (2) * * *
    (iii) Loans first disbursed on or after July 1, 2006. The interest 
rate is 7.9 percent.
    (c) * * *
    (1)(i) For a Direct Subsidized or Direct Unsubsidized loan first 
disbursed prior to February 8, 2006, charges a borrower a loan fee not 
to exceed 4 percent of the principal amount of the loan;
    (ii) For a Direct Subsidized or Direct Unsubsidized loan first 
disbursed on or after February 8, 2006, but before July 1, 2007, 
charges a borrower a loan fee not to exceed 3 percent of the principal 
amount of the loan;
    (iii) For a Direct Subsidized or Direct Unsubsidized loan first 
disbursed on or after July 1, 2007, but before July 1, 2008, charges a 
borrower a loan fee not to exceed 2.5 percent of the principal amount 
of the loan;
    (iv) For a Direct Subsidized or Direct Unsubsidized loan first 
disbursed on or after July 1, 2008, but before July 1, 2009, charges 
the borrower a loan fee not to exceed 2 percent of the principal amount 
of the loan;
    (v) For a Direct Subsidized or Direct Unsubsidized loan first 
disbursed on or after July 1, 2009, but before July 1, 2010, charges 
the borrower a loan fee not to exceed 1.5 percent of the principal 
amount of the loan;
    (vi) For a Direct Subsidized or Direct Unsubsidized loan first 
disbursed on or after July 1, 2010, charges the borrower a loan fee not 
to exceed 1 percent of the principal amount of the loan; and
    (vii) Charges a borrower a loan fee of four percent of the 
principal amount of the loan on a Direct PLUS loan.
* * * * *


Sec.  685.203  [Amended]

0
69. Section 685.203 is amended by:
0
A. In paragraph (a)(1)(i), adding the words ``, or, for a loan 
originated on or after July 1, 2007, $3,500,'' immediately after the 
figure ``$2,625''.
0
B. In paragraph (a)(1)(ii), adding the words ``, or, for a loan 
originated on or after July 1, 2007, $3,500,'' immediately after the 
figure ``$2,625''.
0
C. In paragraph (a)(1)(iii), adding the words ``, or, for a loan 
originated on or after July 1, 2007, $3,500'' immediately after the 
figure ``$2,625''.
0
D. In paragraph (a)(2)(i), adding the words ``, or, for a loan 
originated on or after July 1, 2007, $4,500,'' immediately after the 
figure ``$3,500''.
0
E. In paragraph (a)(2)(ii), adding the words ``, or, for a loan 
originated on or after July 1, 2007, $4,500,'' immediately after the 
figure ``$3,500''.
0
F. In paragraph (c)(2)(v), adding the words ``, or, for a loan 
originated on or after July 1, 2007, $12,000.'' immediately after the 
figure ``$10,000''.
0
G. In paragraph (c)(2)(vi)(B), adding the words ``, or, for a loan 
originated on or after July 1, 2007, $7,000,'' immediately after the 
figure ``$5,000''.
0
H. In paragraph (c)(2)(vii), adding the words ``, or, for a loan 
originated on or after July 1, 2007, $7,000.'' immediately after the 
figure ``$5,000''.
0
I. In paragraph (f), adding the words ``, or that a graduate or 
professional student may borrow,'' immediately after the words 
``dependent student'' and removing the words ``that student'' and 
adding, in their place, the words ``the student''.
0
J. In paragraph (g), adding the words ``, or that a graduate or 
professional student may borrow,'' immediately after the words 
``dependent student''.

0
70. Section 685.204 is amended by:
0
A. In paragraph (a)(1), removing the words ``paragraph (b)'' and 
adding, in their place, the words ``paragraphs (b) and (e)''.
0
B. In paragraph (a)(2), removing the words ``paragraph (b)'' and 
adding, in their place, the words ``paragraphs (b) and (e)''.
0
C. In paragraph (b), removing the parenthetical ``(e)'' and adding, in 
its place, the parenthetical ``(f)''.
0
D. Redesignating paragraph (e) as paragraph (f).
0
E. In paragraph (d)(1), removing the words ``paragraph (b)'' and 
adding, in their place, the words ``paragraphs (b) and (e)''.
0
F. Adding a new paragraph (e).
    The addition reads as follows:


Sec.  685.204  Deferment.

* * * * *

[[Page 45712]]

    (e)(1) A borrower who receives a Direct Loan Program loan first 
disbursed on or after July 1, 2001, may receive a military service 
deferment for such loan for any period not to exceed 3 years during 
which the borrower is--
    (i) Serving on active duty during a war or other military operation 
or national emergency; or
    (ii) Performing qualifying National Guard duty during a war or 
other military operation or national emergency.
    (2) Serving on active duty during a war or other military operation 
or national emergency means service by an individual who is--
    (i) A Reserve of an Armed Force ordered to active duty under 10 
U.S.C. 12301(a), 12301(g), 12302, 12304, or 12306;
    (ii) A retired member of an Armed Force ordered to active duty 
under 10 U.S.C. 688 for service in connection with a war or other 
military operation or national emergency, regardless of the location at 
which such active duty service is performed; or
    (iii) Any other member of an Armed Force on active duty in 
connection with such emergency or subsequent actions or conditions who 
has been assigned to a duty station at a location other than the 
location at which the member is normally assigned.
    (3) Qualifying National Guard duty during a war or other operation 
or national emergency means service as a member of the National Guard 
on full-time National Guard duty, as defined in 10 U.S.C. 101(d)(5) 
under a call to active service authorized by the President or the 
Secretary of Defense for a period of more than 30 consecutive days 
under 32 U.S.C. 502(f) in connection with a war, other military 
operation, or national emergency declared by the President and 
supported by Federal funds.
    (4) These provisions do not authorize the refunding of any payments 
made by or on behalf of a borrower during a period for which the 
borrower qualified for a military service deferment.
    (5) A borrower is eligible for a military service deferment on a 
Direct Consolidation Loan only if the borrower meets the conditions 
described in this section and all of the title IV loans included in the 
Consolidation Loan were first disbursed on or after July 1, 2001.
    (6) As used in this section--
    (i) Active duty means active duty as defined in 10 U.S.C. 101(d)(1) 
except that it does not include active duty for training or attendance 
at a service school;
    (ii) Military operation means a contingency operation as defined in 
10 U.S.C. 101(a)(13); and
    (iii) National emergency means the national emergency by reason of 
certain terrorist attacks declared by the President on September 14, 
2001, or subsequent national emergencies declared by the President by 
reason of terrorist attacks.
* * * * *


Sec.  685.205  [Amended]

0
71. Section 685.205 is amended in paragraph (b)(5) by adding the words 
``obtained by a parent borrower'' after the words ``Direct PLUS Loan''.

0
72. Section 685.207 is amended by revising paragraphs (e)(2) and (3).
    The revisions read as follows:


Sec.  685.207  Obligation to repay.

* * * * *
    (e) * * *
    (2) In the case of a borrower whose consolidation application was 
received before July 1, 2006, a borrower who obtains a Direct 
Subsidized Consolidation Loan during an in-school period will be 
subject to the repayment provisions in paragraph (b) of this section.
    (3) In the case of a borrower whose consolidation application was 
received before July 1, 2006, a borrower who obtains a Direct 
Unsubsidized Consolidation Loan during an in-school period will be 
subject to the repayment provisions in paragraph (c) of this section.
* * * * *

0
73. Section 685.208 is revised to read as follows:


Sec.  685.208  Repayment plans.

    (a) General. (1) Borrowers who entered repayment before July 1, 
2006. (i) A borrower may repay a Direct Subsidized Loan, a Direct 
Unsubsidized Loan, a Direct Subsidized Consolidation Loan, or a Direct 
Unsubsidized Consolidation Loan under the standard repayment plan, the 
extended repayment plan, the graduated repayment plan, or the income 
contingent repayment plan, in accordance with paragraphs (b), (d), (f), 
and (k) of this section, respectively.
    (ii) A borrower may repay a Direct PLUS Loan or a Direct PLUS 
Consolidation Loan under the standard repayment plan, the extended 
repayment plan, or the graduated repayment plan, in accordance with 
paragraphs (b), (d), and (f) of this section, respectively.
    (2) Borrowers entering repayment on or after July 1, 2006. (i) A 
borrower may repay a Direct Subsidized Loan or a Direct Unsubsidized 
Loan under the standard repayment plan, the extended repayment plan, 
the graduated repayment plan, or the income contingent repayment plan, 
in accordance with paragraphs (b), (e), (g), and (k) of this section, 
respectively.
    (ii) A borrower may repay a Direct PLUS Loan under the standard 
repayment plan, the extended repayment plan, or the graduated repayment 
plan, in accordance with paragraphs (b), (e), and (g) of this section, 
respectively.
    (iii) A borrower may repay a Direct Consolidation Loan under the 
standard repayment plan, the extended repayment plan, the graduated 
repayment plan, or the income contingent repayment plan, in accordance 
with paragraphs (c), (e), (h), and (k) of this section, respectively.
    (3) The Secretary may provide an alternative repayment plan in 
accordance with paragraph (l) of this section.
    (4) All Direct Loans obtained by one borrower must be repaid 
together under the same repayment plan, except that--
    (i) A borrower of a Direct PLUS Loan may repay the Direct PLUS Loan 
separately from other Direct Loans obtained by the borrower; and
    (ii) A borrower of a Direct PLUS Consolidation Loan that entered 
repayment before July 1, 2006 may repay the Direct PLUS Consolidation 
Loan separately from other Direct Loans obtained by that borrower.
    (5) The repayment period for any of the repayment plans described 
in this section does not include periods of authorized deferment or 
forbearance.
    (b) Standard repayment plan for all Direct Subsidized Loan, Direct 
Unsubsidized Loan, and Direct PLUS Loan borrowers, regardless of when 
they entered repayment, and for Direct Consolidation Loan borrowers who 
entered repayment before July 1, 2006. (1) Under this repayment plan, a 
borrower must repay a loan in full within ten years from the date the 
loan entered repayment by making fixed monthly payments.
    (2) A borrower's payments under this repayment plan are at least 
$50 per month, except that a borrower's final payment may be less than 
$50.
    (3) The number of payments or the fixed monthly repayment amount 
may be adjusted to reflect changes in the variable interest rate 
identified in Sec.  685.202(a).
    (c) Standard repayment plan for Direct Consolidation Loan borrowers 
entering repayment on or after July 1, 2006.

[[Page 45713]]

    (1) Under this repayment plan, a borrower must repay a loan in full 
by making fixed monthly payments over a repayment period that varies 
with the total amount of the borrower's student loans, as described in 
paragraph (j) of this section.
    (2) A borrower's payments under this repayment plan are at least 
$50 per month, except that a borrower's final payment may be less than 
$50.
    (d) Extended repayment plan for all Direct Loan borrowers who 
entered repayment before July 1, 2006.
    (1) Under this repayment plan, a borrower must repay a loan in full 
by making fixed monthly payments within an extended period of time that 
varies with the total amount of the borrower's loans, as described in 
paragraph (i) of this section.
    (2) A borrower makes fixed monthly payments of at least $50, except 
that a borrower's final payment may be less than $50.
    (3) The number of payments or the fixed monthly repayment amount 
may be adjusted to reflect changes in the variable interest rate 
identified in Sec.  685.202(a).
    (e) Extended repayment plan for all Direct Loan borrowers entering 
repayment on or after July 1, 2006.
    (1) Under this repayment plan, a new borrower with more than 
$30,000 in outstanding Direct Loans accumulated on or after October 7, 
1998 must repay either a fixed annual or graduated repayment amount 
over a period not to exceed 25 years from the date the loan entered 
repayment. For this repayment plan, a new borrower is defined as an 
individual who has no outstanding principal or interest balance on a 
Direct Loan as of October 7, 1998, or on the date the borrower obtains 
a Direct Loan on or after October 7, 1998.
    (2) A borrower's payments under this plan are at least $50 per 
month, and will be more if necessary to repay the loan within the 
required time period.
    (3) The number of payments or the monthly repayment amount may be 
adjusted to reflect changes in the variable interest rate identified in 
Sec.  685.202(a).
    (f) Graduated repayment plan for all Direct Loan borrowers who 
entered repayment before July 1, 2006.
    (1) Under this repayment plan, a borrower must repay a loan in full 
by making payments at two or more levels within a period of time that 
varies with the total amount of the borrower's loans, as described in 
paragraph (i) of this section.
    (2) The number of payments or the monthly repayment amount may be 
adjusted to reflect changes in the variable interest rate identified in 
Sec.  685.202(a).
    (3) No scheduled payment under this repayment plan may be less than 
the amount of interest accrued on the loan between monthly payments, 
less than 50 percent of the payment amount that would be required under 
the standard repayment plan described in paragraph (b) of this section, 
or more than 150 percent of the payment amount that would be required 
under the standard repayment plan described in paragraph (b) of this 
section.
    (g) Graduated repayment plan for Direct Subsidized Loan, Direct 
Unsubsidized Loan, and Direct PLUS Loan borrowers entering repayment on 
or after July 1, 2006.
    (1) Under this repayment plan, a borrower must repay a loan in full 
by making payments at two or more levels over a period of time not to 
exceed ten years from the date the loan entered repayment.
    (2) The number of payments or the monthly repayment amount may be 
adjusted to reflect changes in the variable interest rate identified in 
Sec.  685.202(a).
    (3) A borrower's payments under this repayment plan are at least 
$50 per month, except that a borrower's final payment may be less than 
$50. No single payment under this plan will be more than three times 
greater than any other payment.
    (h) Graduated repayment plan for Direct Consolidation Loan 
borrowers entering repayment on or after July 1, 2006.
    (1) Under this repayment plan, a borrower must repay a loan in full 
by making monthly payments that gradually increase in stages over the 
course of a repayment period that varies with the total amount of the 
borrower's student loans, as described in paragraph (j) of this 
section.
    (2) A borrower's payments under this repayment plan are at least 
$50 per month, except that a borrower's final payment may be less than 
$50.
    (i) Repayment period for the extended and graduated plans described 
in paragraphs (d) and (f) of this section, respectively. Under these 
repayment plans, if the total amount of the borrower's Direct Loans 
is--
    (1) Less than $10,000, the borrower must repay the loans within 12 
years of entering repayment;
    (2) Greater than or equal to $10,000 but less than $20,000, the 
borrower must repay the loans within 15 years of entering repayment;
    (3) Greater than or equal to $20,000 but less than $40,000, the 
borrower must repay the loans within 20 years of entering repayment;
    (4) Greater than or equal to $40,000 but less than $60,000, the 
borrower must repay the loans within 25 years of entering repayment; 
and
    (5) Greater than or equal to $60,000, the borrower must repay the 
loans within 30 years of entering repayment.
    (j) Repayment period for the standard and graduated repayment plans 
described in paragraphs (c) and (h) of this section, respectively. 
Under these repayment plans, if the total amount of the Direct 
Consolidation Loan and the borrower's other student loans, as defined 
in Sec.  685.220(i), is--
    (1) Less then $7,500, the borrower must repay the Consolidation 
Loan within 10 years of entering repayment;
    (2) Equal to or greater than $7,500 but less than $10,000, the 
borrower must repay the Consolidation Loan within 12 years of entering 
repayment;
    (3) Equal to or greater than $10,000 but less than $20,000, the 
borrower must repay the Consolidation Loan within 15 years of entering 
repayment;
    (4) Equal to or greater than $20,000 but less than $40,000, the 
borrower must repay the Consolidation Loan within 20 years of entering 
repayment;
    (5) Equal to or greater than $40,000 but less than $60,000, the 
borrower must repay the Consolidation Loan within 25 years of entering 
repayment; and
    (6) Equal to or greater than $60,000, the borrower must repay the 
Consolidation Loan within 30 years of entering repayment.
    (k) Income contingent repayment plan. (1) Under the income 
contingent repayment plan, a borrower's monthly repayment amount is 
generally based on the total amount of the borrower's Direct Loans, 
family size, and Adjusted Gross Income (AGI) reported by the borrower 
for the most recent year for which the Secretary has obtained income 
information. The borrower's AGI includes the income of the borrower's 
spouse. A borrower must make payments on a loan until the loan is 
repaid in full or until the loan has been in repayment through the end 
of the income contingent repayment period.
    (2) The regulations in effect at the time a borrower enters 
repayment and selects the income contingent repayment plan or changes 
into the income contingent repayment plan from another plan govern the 
method for determining the borrower's monthly repayment amount for all 
of the borrower's Direct Loans, unless--
    (i) The Secretary amends the regulations relating to a borrower's

[[Page 45714]]

monthly repayment amount under the income contingent repayment plan; 
and
    (ii) The borrower submits a written request that the amended 
regulations apply to the repayment of the borrower's Direct Loans.
    (3) Provisions governing the income contingent repayment plan are 
in Sec.  685.209.
    (l) Alternative repayment. (1) The Secretary may provide an 
alternative repayment plan for a borrower who demonstrates to the 
Secretary's satisfaction that the terms and conditions of the repayment 
plans specified in paragraphs (b) through (h) of this section are not 
adequate to accommodate the borrower's exceptional circumstances.
    (2) The Secretary may require a borrower to provide evidence of the 
borrower's exceptional circumstances before permitting the borrower to 
repay a loan under an alternative repayment plan.
    (3) If the Secretary agrees to permit a borrower to repay a loan 
under an alternative repayment plan, the Secretary notifies the 
borrower in writing of the terms of the plan. After the borrower 
receives notification of the terms of the plan, the borrower may accept 
the plan or choose another repayment plan.
    (4) A borrower must repay a loan under an alternative repayment 
plan within 30 years of the date the loan entered repayment, not 
including periods of deferment and forbearance.
    (5) If the amount of a borrower's monthly payment under an 
alternative repayment plan is less than the accrued interest on the 
loan, the unpaid interest is capitalized until the outstanding 
principal amount is 10 percent greater than the original principal 
amount. After the outstanding principal amount is 10 percent greater 
than the original principal amount, interest continues to accrue but is 
not capitalized. For purposes of this paragraph, the original principal 
amount is the amount owed by the borrower when the borrower enters 
repayment.

(Authority: 20 U.S.C. 1087a et seq.)


0
74. Section 685.209 is amended by revising paragraph (c)(4)(ii) to read 
as follows:


Sec.  685.209  Income contingent repayment plan.

* * * * *
    (c) * * *
    (4) * * *
    (ii)(A) The repayment period includes--
    (1) Periods in which the borrower makes payments under the standard 
repayment plan described in Sec.  685.208(b); and
    (2) If the repayment period is not more than 12 years, periods in 
which the borrower makes payments under the extended repayment plans 
described in Sec.  685.208(d) and (e), or the standard repayment plan 
described in Sec.  685.208(c).
    (B) The repayment period does not include--
    (1) Periods in which the borrower makes payments under the 
graduated repayment plans described in Sec.  685.208(f), Sec.  
685.208(g) and Sec.  685.208(h);
    (2) Periods in which the borrower makes payments under an 
alternative repayment plan;
    (3) Periods of authorized deferment or forbearance; or
    (4) Periods in which the borrower makes payments under the extended 
repayment plans described in Sec.  685.208(d) and
    (e) in which payments are based on a repayment period that is 
longer than 12 years.
* * * * *

0
75. Section 685.211 is amended by:
0
A. Revising paragraph (d)(3)(ii).
0
B. In paragraph (e)(1) introductory text, adding the words ``, has been 
convicted of, or has pled nolo contendere or guilty to, a crime 
involving fraud in obtaining title IV, HEA program funds,'' after the 
word ``information''.
0
C. In paragraph (f)(1), in the first sentence, removing the words 
``twelve consecutive, on-time,'' and adding, in their place, the words 
``nine voluntary,'' and adding the words ``within 20 days of the due 
date during ten consecutive months'' after the word ``payments''.
0
D. Adding a new paragraph (f)(3).
    The additions and revisions read as follows:


Sec.  685.211  Miscellaneous repayment provisions.

* * * * *
    (d) * * *
    (3) * * *
    (ii) If a borrower defaults on a Direct Subsidized Loan, a Direct 
Unsubsidized Loan, or a Direct Consolidation Loan, the Secretary may 
designate the income contingent repayment plan for the borrower.
    (f) * * *
    (3) A Direct Loan obtained by fraud for which the borrower has been 
convicted of, or has pled nolo contendere or guilty to, a crime 
involving fraud in obtaining title IV, HEA program assistance may not 
be rehabilitated.
* * * * *


Sec.  685.212  [Amended]

0
76. Section 685.212 is amended by:
0
A. In paragraph (a)(1), in the second parenthetical, adding the words 
``obtained by a parent borrower'' after the words ``Direct PLUS loan''.
0
B. In paragraph (h), adding the words ``, or up to $17,500,'' after the 
figure ``$5,000''.

0
77. Section 685.215 is amended by:
0
A. Adding a new paragraph (a)(1)(iv).
0
B. In paragraph (c) introductory text, in the last sentence, by 
removing the parenthetical ``(5)'' and, in its place, adding the 
parenthetical ``(6)''.
0
C. Redesignating paragraphs (c)(4), (c)(5), and (c)(6) as paragraphs 
(c)(5), (c)(6), and (c)(7), respectively.
0
D. Adding a new paragraph (c)(4).
    The additions read as follows:


Sec.  685.215  Discharge for false certification of student eligibility 
or unauthorized payment.

    (a) * * *
    (1) * * *
    (iv) Certified the individual's eligibility for a Direct Loan as a 
result of the crime of identity theft committed against the individual, 
as that crime is defined in Sec.  682.402(e)(14).
    (c) * * *
    (4) Identity theft. In the case of an individual whose eligibility 
to borrow was falsely certified because he or she was a victim of the 
crime of identity theft and is requesting a discharge, the individual 
shall--
    (i) Certify that the individual did not sign the promissory note, 
or that any other means of identification used to obtain the loan was 
used without the authorization of the individual claiming relief;
    (ii) Certify that the individual did not receive or benefit from 
the proceeds of the loan with knowledge that the loan had been made 
without the authorization of the individual;
    (iii) Provide a copy of a local, State, or Federal court verdict or 
judgment that conclusively determines that the individual who is named 
as the borrower of the loan was the victim of a crime of identity 
theft; and
    (iv) If the judicial determination of the crime does not expressly 
state that the loan was obtained as a result of the crime of identity 
theft, provide--
    (A) Authentic specimens of the signature of the individual, as 
provided in paragraph (c)(2)(ii), or of other means of identification 
of the individual, as applicable, corresponding to the means of 
identification falsely used to obtain the loan; and
    (B) A statement of facts that demonstrate, to the satisfaction of 
the Secretary, that eligibility for the loan in

[[Page 45715]]

question was falsely certified as a result of the crime of identity 
theft committed against that individual.
* * * * *

0
78. Section 685.217 is amended by:
0
A. Revising paragraph (a).
0
B. In paragraph (b), adding, in alphabetical order, a new definition 
for ``Highly qualified''.
0
C. Revising paragraph (c)(1)(iii).
0
D. Revising paragraph (c)(3).
0
E. Revising paragraph (c)(4).
0
F. Redesignating paragraphs (c)(5), (c)(6), (c)(7), (c)(8), and (c)(9) 
as paragraphs (c)(7), (c)(8), (c)(9), (c)(10), and (c)(11), 
respectively.
0
G. Adding a new paragraph (c)(5).
0
H. Adding a new paragraph (c)(6).
0
I. Removing the parentheticals ``(c)(5)'' and adding, in their place, 
the parentheticals ``(c)(7)'' in redesignated paragraph (c)(8).
0
J. Revising paragraph (d)(1).
0
K. Revising paragraph (d)(2).
    The revisions and additions read as follows:


Sec.  685.217  Teacher loan forgiveness program.

    (a) General. The teacher loan forgiveness program is intended to 
encourage individuals to enter and continue in the teaching profession. 
For new borrowers, the Secretary repays the amount specified in this 
paragraph on the borrower's subsidized and unsubsidized Federal 
Stafford Loans, Direct Subsidized Loans, Direct Unsubsidized Loans, and 
in certain cases, Federal Consolidation Loans or Direct Consolidation 
Loans. The forgiveness program is only available to a borrower who has 
no outstanding loan balance under the FFEL Program or the Direct Loan 
Program on October 1, 1998 or who has no outstanding loan balance on 
the date he or she obtains a loan after October 1, 1998. The borrower 
must have been employed as a full-time teacher for five consecutive 
complete academic years, at least one of which was after the 1997-1998 
academic year, in certain eligible elementary or secondary schools that 
serve low-income families. All borrowers eligible for teacher loan 
forgiveness may receive loan forgiveness of up to a combined total of 
$5,000 on the borrower's eligible FFEL and Direct Loan Program loans. 
If the borrower taught for five consecutive years as a highly qualified 
mathematics or science teacher in an eligible secondary school, or as a 
highly qualified special education teacher in an eligible elementary or 
secondary school, the borrower may receive loan forgiveness of up to a 
combined total of $17,500 on the borrower's eligible FFEL and Direct 
Loan Program loans. The loan for which the borrower is seeking 
forgiveness must have been made prior to the end of the borrower's 
fifth year of qualifying teaching service.
    (b) * * *
    Highly qualified means highly qualified as defined in section 9101 
of the Elementary and Secondary Education Act of 1965, as amended.
* * * * *
    (c) * * *
    (1) * * *
    (iii) Is listed in the Annual Directory of Designated Low-Income 
Schools for Teacher Cancellation Benefits. If this directory is not 
available before May 1 of any year, the previous year's directory may 
be used. The Secretary considers all elementary and secondary schools 
operated by the Bureau of Indian Affairs (BIA) or operated on Indian 
reservations by Indian tribal groups under contract with the BIA to 
qualify as schools serving low-income students.
* * * * *
    (3) In the case of a borrower whose five consecutive complete years 
of qualifying teaching service began before October 30, 2004, the 
borrower--
    (i) May receive up to $5,000 of loan forgiveness if the borrower--
    (A) Demonstrated knowledge and teaching skills in reading, writing, 
mathematics, and other areas of the elementary school curriculum, as 
certified by the chief administrative officer of the eligible 
elementary school in which the borrower was employed; or
    (B) Taught in a subject area that is relevant to the borrower's 
academic major as certified by the chief administrative officer of the 
eligible secondary school in which the borrower was employed.
    (ii) May receive up to $17,500 of loan forgiveness if the 
borrower--
    (A) Taught mathematics or science on a full-time basis in an 
eligible secondary school and was a highly qualified mathematics or 
science teacher; or
    (B) Taught as a special education teacher on a full-time basis to 
children with disabilities in either an eligible elementary or 
secondary school and was a highly qualified special education teacher 
whose special education training corresponded to the children's 
disabilities and who has demonstrated knowledge and teaching skills in 
the content areas of the elementary or secondary school curriculum.
    (4) In the case of a borrower whose five consecutive years of 
qualifying teaching service began on or after October 30, 2004, the 
borrower--
    (i) May receive up to $5,000 of loan forgiveness if the borrower 
taught full time in an eligible elementary or secondary school and was 
a highly qualified elementary or secondary school teacher.
    (ii) May receive up to $17,500 of loan forgiveness if the 
borrower--
    (A) Taught mathematics or science on a full-time basis in an 
eligible secondary school and was a highly qualified mathematics or 
science teacher; or
    (B) Taught as a special education teacher on a full-time basis to 
children with disabilities in either an eligible elementary or 
secondary school and was a highly qualified special education teacher 
whose special education training corresponded to the children's 
disabilities and who has demonstrated knowledge and teaching skills in 
the content areas of the elementary or secondary school curriculum.
    (5) To qualify for loan forgiveness as a highly qualified teacher, 
the teacher must have been a highly qualified teacher for all five 
years of eligible teaching service.
    (6) For teacher loan forgiveness applications received by the 
Secretary on or after July 1, 2006, a teacher in a private, non-profit 
elementary or secondary school who is exempt from State certification 
requirements unless otherwise applicable under State law may qualify 
for loan forgiveness under paragraphs (c)(3)(ii) or (c)(4) of this 
section if--
    (i) The private school teacher is permitted to and does satisfy 
rigorous subject knowledge and skills tests by taking competency tests 
in applicable grade levels and subject areas;
    (ii) The competency tests are recognized by 5 or more States for 
the purposes of fulfilling the highly qualified teacher requirements 
under section 9101 of the Elementary and Secondary Education Act of 
1965; and
    (iii) The private school teacher achieves a score on each test that 
equals or exceeds the average passing score for those 5 states.
* * * * *
    (d) Forgiveness amount. (1) A qualified borrower is eligible for 
forgiveness of up to $5,000, or up to $17,500 if the borrower meets the 
requirements of paragraphs (c)(3)(ii) or (c)(4)(ii) of this section. 
The forgiveness amount is deducted from the aggregate amount of the 
borrower's Direct Subsidized Loan or Direct Unsubsidized Loan or Direct 
Consolidation Loan obligation that is outstanding after the borrower 
completes his or her fifth consecutive complete academic year of 
teaching as described in paragraph (c) of this section. Only the 
outstanding portion of the Direct Consolidation Loan

[[Page 45716]]

that was used to repay an eligible subsidized or unsubsidized Federal 
Stafford Loan, an eligible Direct Subsidized Loan, or an eligible 
Direct Unsubsidized Loan qualifies for loan forgiveness under this 
section.
    (2) A borrower may not receive more than a total of $5,000, or 
$17,500 if the borrower meets the requirements of paragraphs (c)(3)(ii) 
or (c)(4)(ii) of this section, in loan forgiveness for outstanding 
principal and accrued interest under both this section and under 
section 34 CFR 682.215.
* * * * *

0
79. Section 685.220 is amended by:
0
A. In paragraph (a), revising the first sentence to read as set forth 
below.
0
B. Revising paragraphs (c) and (d).
0
C. In paragraph (e), in the first sentence, removing the words ``or 
borrowers'' and removing, in its entirety, the second sentence.
0
D. In paragraph (f)(1)(iii), removing the words ``and may impose 
reasonable limits on collection costs paid to the holder''.
0
E. Revising paragraphs (h) and (i).
0
F. In paragraph (l) introductory text, adding the words ``in accordance 
with the regulations that were in effect for consolidation applications 
received prior to July 1, 2006'' after the word ``borrowers''.
    The revisions read as follows:


Sec.  685.220  Consolidation.

    (a) Direct Consolidation Loans. A borrower may consolidate 
education loans made under certain Federal programs into a Direct 
Consolidation Loan. * * *
* * * * *
    (c) Subsidized, unsubsidized, and PLUS components of Direct 
Consolidation Loans. (1) The portion of a Direct Consolidation Loan 
attributable to the loans identified in paragraphs (b)(1) through (5) 
of this section, and to Federal Consolidation Loans under paragraph 
(b)(15) of this section if they are eligible for interest benefits 
during a deferment period under Section 428C(b)(4)(C) of the Act, is 
referred to as a Direct Subsidized Consolidation Loan.
    (2) Except as provided in paragraph (c)(1) of this section, the 
portion of a Direct Consolidation Loan attributable to the loans 
identified in paragraphs (b)(6) through (8) and (b)(13) through (21) of 
this section is referred to as a Direct Unsubsidized Consolidation 
Loan.
    (3) The portion of a Direct Consolidation Loan attributable to the 
loans identified in paragraphs (b)(9) through (12) of this section is 
referred to as a Direct PLUS Consolidation Loan.
    (d) Eligibility for a Direct Consolidation Loan. (1) A borrower may 
obtain a Direct Consolidation Loan if, at the time the borrower applies 
for such a loan, the borrower meets the following requirements:
    (i) The borrower either--
    (A) Has an outstanding balance on a Direct Loan; or
    (B) Has an outstanding balance on an FFEL loan and--
    (1) The borrower is unable to obtain a FFEL consolidation loan;
    (2) The borrower is unable to obtain a FFEL consolidation loan with 
income-sensitive repayment terms acceptable to the borrower; or
    (3) The borrower has an FFEL Consolidation Loan that has been 
submitted to the guaranty agency by the lender for default aversion, 
and the borrower wants to consolidate the FFEL Consolidation Loan into 
the Direct Loan Program for the purpose of obtaining an income 
contingent repayment plan.
    (ii) On the loans being consolidated, the borrower is--
    (A) In a six-month grace period;
    (B) In a repayment period but not in default;
    (C) In default but has made satisfactory repayment arrangements, as 
defined in applicable program regulations, on the defaulted loan; or
    (D) Except as provided in paragraph (d)(4) of this section, in 
default but agrees to repay the consolidation loan under the income 
contingent repayment plan described in Sec.  685.208(k) and signs the 
consent form described in Sec.  685.209(d)(5).
    (E) Not subject to a judgment secured through litigation, unless 
the judgment has been vacated; or
    (F) Not subject to an order for wage garnishment under section 488A 
of the Act, unless the order has been lifted.
    (iii) The borrower certifies that no other application to 
consolidate any of the borrower's loans listed in paragraph (b) of this 
section is pending with any other lender.
    (iv) The borrower agrees to notify the Secretary of any change in 
address.
    (2) A borrower may not consolidate a Direct Consolidation Loan into 
a new consolidation loan under this section or under Sec.  682.201(c) 
unless at least one additional eligible loan is included in the 
consolidation.
    (3) Eligible loans received before or after the date a Direct 
Consolidation Loan is made may be added to a subsequent Direct 
Consolidation Loan.
    (4) A borrower may not consolidate a defaulted Direct Consolidation 
Loan.
* * * * *
    (h) Repayment plans. A borrower may choose a repayment plan for a 
Direct Consolidation Loan in accordance with Sec.  685.208, except that 
a borrower who became eligible to consolidate a defaulted loan under 
paragraph (d)(1)(ii)(D) of this section must repay the consolidation 
loan under the income contingent repayment plan unless--
    (1) The borrower was required to and did make a payment under the 
income contingent repayment plan in each of the prior three (3) months; 
or
    (2) The borrower was not required to make payments but made three 
reasonable and affordable payments in each of the prior three (3) 
months; and
    (3) The borrower makes and the Secretary approves a request to 
change plans.
    (i) Repayment period. (1) Except as noted in paragraph (i)(4) of 
this section, the repayment period for a Direct Consolidation Loan 
begins on the day the loan is disbursed.
    (2)(i) Borrowers who entered repayment before July 1, 2006. The 
Secretary determines the repayment period under Sec.  685.208(i) on the 
basis of the outstanding balances on all of the borrower's loans that 
are eligible for consolidation and the balances on other education 
loans except as provided in paragraphs (i)(3)(i), (ii), and (iii) of 
this section.
    (ii) Borrowers entering repayment on or after July 1, 2006. The 
Secretary determines the repayment period under Sec.  685.208(j) on the 
basis of the outstanding balances on all of the borrower's loans that 
are eligible for consolidation and the balances on other education 
loans except as provided in paragraphs (i)(3)(i) and (ii) of this 
section.
    (3)(i) The total amount of outstanding balances on the other 
education loans used to determine the repayment period under Sec. Sec.  
685.208(i) and (j) may not exceed the amount of the Direct 
Consolidation Loan.
    (ii) The borrower may not be in default on the other education loan 
unless the borrower has made satisfactory repayment arrangements with 
the holder of the loan.
    (iii) The lender of the other educational loan may not be an 
individual.
    (4) Borrowers whose consolidation application was received before 
July 1, 2006. A Direct Consolidation Loan receives a grace period if it 
includes a Direct Loan or FFEL Program loan for which the borrower is 
in an in-school period at the time of consolidation. The repayment 
period begins the day after the grace period ends.
* * * * *

[[Page 45717]]


0
80. Section 682.301 is amended by revising paragraph (b)(8)(ii) to read 
as follows:


Sec.  685.301  Origination of a loan by a Direct Loan Program school.

* * * * *
    (b) * * *
    (8) * * *
    (ii) Paragraphs (b)(8)(i)(A) and (B) of this section do not apply 
to any loans originated by the school beginning 30 days after the date 
the school receives notification from the Secretary of a cohort default 
rate, calculated under subpart M of 34 CFR part 668, that causes the 
school to no longer meet the qualifications outlined in paragraph (A) 
or (B), as applicable.
* * * * *

0
81. Section 685.303 is amended by:
0
A. In paragraph (b)(2)(i), by adding the words ``obtained by a parent 
borrower'' after the words ``PLUS loan''.
0
B. By revising paragraph (b)(4)(ii).
    The revisions read as follows:


Sec.  685.303  Processing loan proceeds.

* * * * *
    (b) * * *
    (4) * * *
    (ii) Paragraphs (b)(4)(i)(A) and (B) of this section do not apply 
to any loans originated by the school beginning 30 days after the date 
the school receives notification from the Secretary of a cohort default 
rate, calculated under subpart M of 34 CFR part 668, that causes the 
school to no longer meet the qualifications outlined in paragraph (A) 
or (B), as applicable.
* * * * *
[FR Doc. 06-6696 Filed 8-8-06; 8:45 am]
BILLING CODE 4000-01-P