[Federal Register Volume 71, Number 211 (Wednesday, November 1, 2006)]
[Rules and Regulations]
[Pages 64378-64400]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-18183]



[[Page 64377]]

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Part III





Department of Education





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34 CFR Parts 668, 673, 682 and 685



 Federal Student Aid Programs; Final Rule

  Federal Register / Vol. 71, No. 211 / Wednesday, November 1, 2006 / 
Rules and Regulations  

[[Page 64378]]


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DEPARTMENT OF EDUCATION

34 CFR Parts 668, 673, 682 and 685

RIN 1840-AC87


Federal Student Aid Programs

AGENCY: Office of Postsecondary Education, Department of Education.

ACTION: Final regulations.

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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), Pub. L. 109-171, and other recently 
enacted legislation. These final regulations reflect the provisions of 
the HERA that affect students, borrowers, postsecondary educational 
institutions, lenders, and other program participants in the Federal 
student aid programs authorized under Title IV of the HEA.
    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 final regulations are effective December 
1, 2006.

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: On August 9, 2006, the Secretary published 
in the Federal Register interim final regulations with a request for 
comments (71 FR 45666) for the Federal student financial assistance 
programs. The interim final regulations were effective on September 8, 
2006, and implemented 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). 
The interim final regulations also implemented changes made to the HEA 
by: The Taxpayer-Teacher Protection Act of 2004 (Pub. L. 108-409); 
certain provisions of Pub. L. 107-139; the Pell Grant Hurricane and 
Disaster Relief Act (Pub. L. 109-66); the Student Grant Hurricane and 
Disaster Relief Act (Pub. L. 109-67); and the Emergency Supplemental 
Appropriations Act for Defense, the Global War on Terror, and Hurricane 
Recovery, 2006 (Pub. L. 109-234).
    The August 9, 2006, interim final regulations included a request 
for public comment. This document contains a discussion of the comments 
we received and revisions to the interim final regulations that we made 
as a result of these comments.
    In the interim final regulations, we stated that changes to the 
final regulations made after consideration of the public comments would 
be effective July 1, 2007. After considering the comments we received, 
we have decided not to make any substantive changes to the regulations. 
We have made some technical and conforming changes that were identified 
during the public comment period, but these technical changes are not 
subject to the delayed effective date under section 482 of the HEA, and 
therefore become effective 30 days after publication of these final 
regulations.

Analysis of Comments and Changes

    The changes to the interim final regulations included in this 
document were developed through the analysis of comments received on 
the interim final regulations published on August 9, 2006. We received 
55 comments on the interim final regulations.
    An analysis of the comments and of the changes in the regulations 
since publication of the interim final regulations follows. We group 
major issues according to subject, with appropriate sections of the 
regulations referenced in parentheses. Generally, we do not address 
technical and other minor changes and suggested changes the law does 
not authorize the Secretary to make. We also do not respond to comments 
pertaining to issues that were not within the scope of the interim 
final regulations.

Definition of Telecommunications Course (Sec.  600.2)

    Comments: A commenter representing accrediting agencies believed 
that the reference to ``regular and substantive interaction'' in the 
definition of telecommunications course was inconsistent with Congress' 
intent to permit institutions maximum flexibility in the development 
and application of curriculum, and placed an undue burden on 
accrediting agencies.
    Discussion: The Secretary does not agree. The regulations do not 
restrict the curricula institutions may offer or the delivery modes 
they may use. Instead, the regulations reflect the clear distinction in 
the HERA between telecommunications courses and correspondence courses. 
This distinction is necessary because the HERA eliminated the 
circumstances under which telecommunications courses are considered 
correspondence courses, and excluded telecommunications courses from 
the ``50 percent rule'' limitations on institutional eligibility for 
Title IV, HEA program assistance, while retaining them for 
correspondence courses. Because of the changes made by the HERA, it is 
necessary to clarify the regulatory definition to distinguish 
telecommunications courses from correspondence courses. We have defined 
the term telecommunications course to conform to the usage of that term 
by the higher education community. None of the commenters proposed 
alternative language.
    The revised definition of the term telecommunications course does 
not impose any new requirements on accrediting agencies. Since 1998, 
section 496(n)(3) of the HEA has required the Secretary to specifically 
designate whether recognized accrediting agencies have accreditation of 
distance education within the scope of their recognition. Since 1994, 
accrediting agencies have also been required under Sec.  
602.22(a)(2)(iii) to provide prior approval for an institution's 
addition of courses or programs that represent a significant departure 
in the method of delivery from those previously offered. The interim 
final regulations do not modify these requirements, or add any new 
ones.
    Changes: None.
    Comments: While supporting our effort to draw a clear distinction 
between telecommunications and correspondence courses, one commenter 
thought that the language in the definition of telecommunications 
course was not specific enough to determine how much interactivity was 
sufficient. The commenter suggested that the definition be revised to 
include interaction among students and that we clarify that ``regular'' 
interaction means ``not trivial'' rather than ``at specific 
intervals.''
    Discussion: The primary purpose of revising the definition of 
telecommunications course was to draw a clear distinction between 
telecommunications and correspondence courses. In drawing this

[[Page 64379]]

distinction, we wanted to avoid as much as possible dictating a 
particular teaching method. The Secretary believes that requiring 
interaction among students, as well as between students and the 
instructor, would preclude certain teaching methods, such as self-paced 
instruction.
    We disagree with the commenter on the meaning of ``regular'' 
interaction. We believe the phrase ``regular and substantive'' means 
that the interaction should both take place at regular intervals and 
not be trivial.
    Changes: None.
    Comments: Two commenters representing financial aid administrators 
supported the change in the definition of the term telecommunications 
course but asked whether instruction by video cassette or disc 
recording would be considered to be telecommunications coursework.
    Discussion: We believe that the definition of telecommunications 
course adequately addresses the issue raised in the comments. The 
regulations provide that instruction by video cassette or disc 
recording is telecommunications coursework when the course involves the 
use of other telecommunications technologies for regular and 
substantive interaction between students and instructor, and when the 
course is offered onsite in the same award year. Otherwise, the use of 
video cassettes or disc recording is considered a correspondence 
course.
    Changes: None.

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

    Comments: One commenter agreed that academic programs offered 
through any use of telecommunications or correspondence by foreign 
schools should not be eligible for Title IV, HEA program assistance.
    A few commenters did not believe that the HERA intended to deny 
eligibility under the Federal Family Education Loan (FFEL) Program to a 
student who physically attends a foreign school but takes a portion of 
his or her program through telecommunications classes. The commenters 
felt that it is unfair to bar from FFEL eligibility a student who could 
fulfill a program requirement only through telecommunications 
coursework because the class is not offered at the foreign school the 
student attends. One commenter suggested that U.S. military personnel 
deployed outside of the U.S. may need to take courses via 
telecommunications instruction as part of their program of study.
    The commenters recommended that the definition of an eligible 
program for a foreign school be modified to permit the inclusion of 
telecommunications courses. Specifically, the commenters suggested the 
definition be changed to include a program at a foreign school that 
requires on-site attendance in traditional classroom or lab settings in 
at least one class while permitting one or more additional 
telecommunications classes, while excluding a program at a foreign 
school that permits the student to attend courses solely via 
telecommunications instruction.
    Alternatively, the commenters suggested that the effective date of 
the regulations be changed to allow foreign schools to deliver second 
and subsequent disbursements of pending loans on or after July 1, 2006 
if the first disbursement was made prior to July 1, 2006.
    Discussion: The final regulations reflect the statutory 
requirements for an eligible program to include programs offered in 
whole or in part through telecommunications instruction by institutions 
in the United States with appropriate accreditation. The statute does 
not extend this eligibility to foreign schools and the Secretary does 
not have the authority to do so by regulation.
    In response to the comment regarding U.S. military personnel 
located abroad, it is the Secretary's understanding that such students 
do not usually attend foreign schools because they have access to 
programs offered by domestic institutions. Lastly, the effective date 
is established by the HERA and cannot be changed by regulation.
    Changes: None.

Academic Year (Sec.  668.3)

    Comments: One commenter suggested that the Secretary change the 
definition of an academic year so that institutions can use the same 
definition as they use for grade level in the Stafford Loan Program.
    Discussion: The definition of an academic year in Sec.  668.3 
reflects the statutory definition in section 481(a) of the HEA, and the 
Secretary cannot change that definition.
    Changes: None.

Direct Assessment Programs (Sec.  668.10)

    Comments: One commenter agreed that direct assessment programs 
offered at foreign schools should not be considered eligible for Title 
IV funding.
    Discussion: The Secretary appreciates the commenter's support.
    Changes: None.
    Comments: One commenter representing several higher education 
associations, and two commenters representing financial aid 
administrators, asked how the Department will evaluate satisfactory 
academic progress for direct assessment programs.
    Discussion: Students enrolled in direct assessment programs who are 
receiving Title IV HEA, program assistance must meet the same 
satisfactory academic progress requirements as do students attending 
other types of programs. However, since direct assessment programs may 
be designed in a variety of ways, we will determine how we will 
evaluate institutional compliance with satisfactory academic progress 
standards on a case-by-case basis as part of the initial eligibility 
review.
    Changes: None.
    Comments: One commenter thought that Sec.  668.10(a)(3) was 
intended to require an institution to develop a protocol for equating 
programs administered under direct assessment rules with clock hours 
for credit hour measurements, but that the text in the interim final 
regulations was unclear. The commenter suggested some revised language.
    Discussion: The commenter is correct about the intent of the 
regulations. We agree that the commenter's proposed revised language is 
clearer than the language in the interim final regulations.
    Changes: We have revised Sec.  668.10(a)(3) for clarity, but 
without changing the meaning.

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

Post-Withdrawal Disbursement Counseling
    Comments: Several commenters questioned why an institution must 
obtain the student's confirmation to apply loan funds to the student's 
account, but not to apply other Title IV program funds to that account. 
Several commenters questioned why an institution must obtain 
confirmation that a student wishes to receive grant funds as a direct 
disbursement. Commenters noted that the HERA provision that changed the 
post-withdrawal disbursement requirements addressed confirmation of 
receipt of loan funds, but not grant funds.
    Discussion: As in the past, Sec.  668.164(d)(1) and (d)(2) require 
an institution to obtain a student's authorization (or a parent's 
authorization in the case of a parent PLUS loan) to credit the 
student's account with any Title IV, HEA funds for charges other than 
tuition, fees, and room and board if the student contracts with the 
institution for other services.

[[Page 64380]]

An institution may obtain such an authorization from a student or 
parent at any time. The HERA added a new provision that goes beyond the 
pre-existing requirements in Sec.  668.164(d)(1) and (d)(2) to require 
an institution to obtain confirmation from a student (or a parent in 
the case of a parent PLUS Loan) before making any post-withdrawal 
disbursement of loan funds. This confirmation cannot be made until the 
need for the post-withdrawal disbursement has been determined, i.e., 
after the student withdraws. This change ensures that a student or a 
parent has an opportunity after the student's withdrawal to decline all 
or a part of the loan, thus eliminating or reducing his or her loan 
debt. The Secretary did not add a similar change to the regulations for 
grant funds because she believes the requirements of Sec.  
668.164(d)(1) and (d)(2) are sufficient to control the application of 
grant funds to a student's account.
    The requirement in Sec.  668.164(g)(3)(i) that an institution 
obtain confirmation that a student wishes to receive a post-withdrawal 
direct disbursement of grant funds is not new. Students are provided 
with an opportunity to refuse direct disbursements of grant funds so 
that they may preserve the amount of their grant eligibility if they 
return to school within the award year.
    Changes: None.
    Comments: Several commenters felt that the interim final 
regulations did not clearly explain how the requirements in Sec.  
668.22 are applied in concert with the regulations for making a late 
disbursement (Sec.  668.164(g)(3)) and for notifying a student, or 
parent (for a parent PLUS Loan), to provide that student or parent an 
opportunity to cancel a loan when the institution credits the student's 
account with FFEL, Direct Loan, or Perkins Loan program funds (Sec.  
668.165(a)(2)). Many commenters believed a conforming amendment was 
needed to clarify whether Sec.  668.165(a)(2) applies in the case of a 
post-withdrawal disbursement.
    Discussion: The new confirmation requirements do not apply to late 
disbursements made to students who did not withdraw. Section 
668.164(g)(3)(i) requires an institution to make any post-withdrawal 
disbursement due to a student who withdraws during a payment period or 
period of enrollment in accordance with the new post-withdrawal 
disbursement procedures. However, the new post-withdrawal disbursement 
requirements do not apply to late disbursements made to students who 
successfully complete the payment period or period of enrollment (Sec.  
668.164(g)(3)(ii)) or to students who do not withdraw, but cease to be 
enrolled as at least half-time students (Sec.  668.164(g)(3)(iii)).
    The commenters are correct that a conforming amendment to Sec.  
668.165(a)(2) is necessary. For students who withdraw and are due a 
post-withdrawal disbursement, the new post-withdrawal disbursement 
procedures in Sec.  668.22 supersede the provisions in Sec.  
668.165(a)(2) that require an institution to notify a student or parent 
of loan funds that are credited to a student's account. Because the new 
post-withdrawal disbursement procedures require an institution to 
obtain a student's confirmation (or a parent's confirmation in the case 
of a parent PLUS Loan), the institution does not have to notify the 
student or parent again when the institution credits the loan funds to 
the student's account after it receives the borrower's confirmation. 
The notification requirement in Sec.  668.165(a)(2) still applies in 
all other cases when an institution credits loan funds to a student's 
account.
    Changes: The Secretary has revised Sec.  668.165(a)(2) to make it 
clear that an institution is not required to notify a student or parent 
of loan funds that are credited to a student's account for students who 
withdraw and are due a post-withdrawal disbursement.
    Comments: Several commenters noted that requiring an institution to 
provide notification of the outcome of a post-withdrawal disbursement 
request ``electronically or in writing'' is redundant, because ``in 
writing'' means through conventional mailing methods or electronically.
    Discussion: The commenters are correct.
    Changes: The reference to electronic notification has been removed 
from Sec.  668.22(a)(5)(iii)(E).
Withdrawals From Clock Hour Programs
    Comments: One commenter supported the new regulatory provisions 
governing the Return of Title IV Funds in the case of clock hour 
programs. One commenter felt that the regulations should allow an 
institution to determine the percentage of aid earned by a student who 
withdraws and has completed more clock hours than he or she was 
scheduled to complete by using the completed hours, rather than the 
scheduled hours. The commenter noted that this was consistent with the 
previous policy for students withdrawing from clock-hour programs.
    Discussion: Prior to the enactment of the HERA, either completed 
hours or scheduled hours were used to determine earned aid for a 
student who withdrew from a clock-hour program. However, the HERA 
changed the law to allow the use of scheduled hours only.
    Changes: None.
Grant Overpayment Requirements
    Comments: One commenter suggested that the regulations be modified 
to clarify that the provision that a student is not required to return 
an original grant overpayment amount of $50 or less applies on a Title 
IV, HEA program-by-program basis.
    Discussion: The Secretary agrees with the commenter.
    Changes: Section 668.22(h)(3)(ii)(B) has been revised to make it 
clear that the provision that a student is not required to return an 
original grant overpayment amount of $50 or less applies on a Title IV, 
HEA program-by-program basis.
    Comments: Several commenters asked the Department to raise to $50 
the $25 de minimis amount for overpayments in the Academic 
Competitiveness Grant (ACG) and National SMART grant programs and other 
Title IV programs to match the de minimis grant overpayment amount for 
students who withdraw, which was raised to $50 by the HERA.
    Discussion: The Secretary does not agree that the amounts should 
correspond. The $25 de minimis standard used in the regulations is 
based upon the Department's determination of the amount that is cost 
effective for the Department to collect on outstanding balances owed to 
the Department. We are able to successfully pursue collections of $25 
or higher with Internal Revenue Service (IRS) offsets and other 
methods.
    Changes: None.
Waiver of Grant Overpayment for Students Affected by a Disaster
    Comments: One commenter felt that the regulatory language applying 
the waiver of grant overpayment for students affected by a disaster to 
students ``whose withdrawal ended within the award year during which 
the designation occurred or during the next succeeding award year'' was 
unclear. The commenter asked the Secretary to clarify that students 
remain eligible for the grant overpayment waiver even if they do not 
return to the same institution in the following year.
    Discussion: An otherwise eligible student qualifies for the waiver 
if he or she withdraws during the award year during which the major 
disaster designation occurred or during the next succeeding award year, 
if the student withdrew because of the major disaster.
    Changes: Section 668.22(h)(5)(iii) has been revised to clarify that 
the grant

[[Page 64381]]

overpayment waiver applies to students whose withdrawal due to a 
disaster occurred, rather than ended, within the award year during 
which the designation occurred or during the next succeeding award 
year.
Order of Return of Grant Funds
    Comments: One commenter felt that the regulations should be changed 
to make it clear that an institution will not have to return funds to 
both the ACG and National SMART Grant programs for the same withdrawal.
    Discussion: Because an institution may opt to use the period of 
enrollment, rather than the payment period, to perform a Return of 
Title IV Funds calculation for a student who withdraws from a non-
standard term or non-term program, it is possible, although highly 
unlikely, that both an ACG and a National SMART Grant could be 
disbursed (or scheduled to be disbursed) to a student for the same 
period. In such a case, funds from both the ACG and National SMART 
Grant programs may need to be returned for the same withdrawal.
    Changes: None.
Return of Funds Within 45 Days
    Comments: One commenter felt that the Secretary should extend the 
other deadlines under Sec.  668.22 from 30 days to 45 days to 
correspond to the extension of the maximum amount of time an 
institution has to return unearned funds for which it is responsible. 
The commenter felt this extension should also be applied to 
notifications to students for post-withdrawal disbursements and 
notifications to students of Title IV grant overpayments resulting from 
withdrawal. The commenter asserted that a uniform deadline makes sense 
because the same Return of Title IV Funds process leads up to all three 
requirements, and consistency would help ensure compliance.
    Discussion: Institutions have previously indicated that they needed 
an extension of the former 30-day return deadline to provide additional 
time to perform the administrative functions necessary to return the 
funds. The actual calculation of earned funds is not time consuming. 
The Secretary believes that providing institutions with over four weeks 
to enter information from their records and calculate the amount to be 
returned is more than sufficient.
    With regard to the request that the Secretary extend the 30-day 
deadlines for notifications to students, the Secretary does not believe 
it is in the best interest of students to extend these deadlines merely 
for consistency's sake. The Secretary believes that the sooner an 
institution attempts to contact these students, the more likely it is 
that the institution will reach the students.
    Changes: None.

Student Debts Under the HEA and to the U.S. (Sec.  668.35)

    Comments: Several commenters suggested that Sec.  668.35(e)(3), 
which governs the amount of an overpayment that renders a student 
ineligible for additional Title IV, HEA program assistance, be changed 
from $25 to $50 to be consistent with the new statutory requirement 
governing repayment of grant funds under the return of Title IV aid 
provisions.
    Discussion: The Secretary disagrees with the commenters. In 2002, 
we published final regulations to make the treatment of overpayments 
consistent in the Title IV, HEA programs, including incorporating the 
de minimis amount concept that applied to grant overpayments under the 
return to Title IV aid requirements. We decided to use the $25 de 
minimis standard for consistency and simplicity, and because it is cost 
effective. We do not believe it is appropriate to raise the de minimis 
amount applicable to overpayments when the Department has the tools and 
resources available to collect these amounts.
    However, as a result of the change in the minimum amount of a grant 
repayment for which a student is responsible under the return of Title 
IV aid provisions from $25 to $50, we are amending Sec.  668.35(e) to 
clarify that a student who owes a grant overpayment of $50 or less that 
is not a remaining balance and is a result of the return of Title IV 
aid calculation is eligible to receive additional Title IV, HEA program 
assistance.
    Changes: We have added a new paragraph (4) to Sec.  668.35(e) to 
clarify that a student who owes a grant overpayment of $50 or less 
under the circumstances explained above is eligible to receive 
additional Title IV, HEA program assistance.

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

    Comments: One commenter suggested that we add benefits paid under 
Section 903 of Pub. L. 96-342 (Educational Assistance Pilot Program) 
that is currently in the definition of estimated financial assistance 
in Sec. Sec.  682.200(b) and 685.102(b) to the definition of estimated 
financial assistance in Sec.  673.5(c). The commenter also suggested 
that we add language in Sec.  682.200(b)(1)(iv), which includes in the 
definition of estimated financial assistance benefits paid under the 
Veteran's Affairs Educational Assistance Pilot Program and language 
from Sec.  685.102(b)(2)(ii), which excludes from estimated financial 
assistance the amounts of Federal Perkins Loan and Federal Work-Study 
funds that the student has declined.
    Another commenter requested that the definition of estimated 
financial assistance in all three sections be modified to exclude any 
alternative or private loans not certified by the institution. This 
commenter suggested that only those loans that the institution is aware 
the student is receiving should be included in the definition of 
estimated financial assistance. An additional, similar comment was 
received suggesting that language be added to the definitions in all 
three sections to specifically state that only benefits that an 
institution is aware of must be considered estimated financial 
assistance.
    Discussion: Although the list of individual veterans' education 
benefits in each of the three sections that define estimated financial 
assistance is not all inclusive, the Secretary agrees with the first 
commenter that, for consistency, benefits paid under section 903 of 
Pub. L. 96-342 (Educational Assistance Pilot Program) should be 
included in Sec.  673.5(c). However, it would be redundant to 
specifically exclude from the definition of estimated financial 
assistance in Sec.  673.5(c) the amounts of Federal Perkins Loan and 
Federal Work-Study funds that the student has declined. Section Sec.  
673.5 defines the term estimated financial assistance for the purpose 
of determining eligibility for campus-based funds. It would not make 
sense to exclude campus-based funds declined by a student from the list 
of items used to determine that student's eligibility for those campus-
based funds. If a student declines funds from a campus-based program, 
the amount of those declined funds would not be used to determine 
eligibility for campus-based funds.
    With respect to the proposal to define estimated financial 
assistance as including only loans of which the institution is aware, 
we note that, under the administrative capability guidelines in Sec.  
668.16(b) and (f), an institution must have a mechanism in place for 
obtaining and reviewing all information it receives that has a bearing 
on a student's eligibility for Title IV, HEA assistance. The 
institution must communicate this information to the individual 
designated to administer the Title IV programs at the institution. In 
light of this requirement, we believe that it is unlikely that a 
student will be

[[Page 64382]]

receiving loans of which the institution is not aware.
    Changes: The definition of estimated financial assistance in Sec.  
673.5(c)(1)(ix) has been revised to include benefits paid under section 
903 of Pub. L. 96-342 (Educational Assistance Pilot Program). A 
technical change has also been made to correct the reference in Sec.  
685.102(b)(1)(ix) from ``paragraph (2)(iii)'' to ``paragraph (2)(iv)''.

Military Deferment (Sec. Sec.  674.34, 682.210(t), 682.211(i) and 
685.204)

    Comments: One commenter recommended that we extend eligibility for 
the new military deferment established by the HERA to Perkins Loans 
disbursed before July 1, 2001 if the borrower received at least one 
Perkins Loan first disbursed on or after July 1, 2001.
    Discussion: Section 8007(f) of the HERA specifies that the military 
deferment applies to loans ``for which the first disbursement is made 
on or after July 1, 2001.'' The Secretary does not have the authority 
to extend eligibility for the military deferment to loans for which the 
first disbursement was made before July 1, 2001.
    Changes: None.
    Comments: Some commenters asked if a qualified borrower who 
experiences multiple deployments could receive separate deferments for 
each of his or her eligible Perkins, FFEL and Direct Loan program 
loans, as long as each deferment period did not last longer than the 
three-year maximum.
    Discussion: The three-year maximum for the military deferment 
applies to each loan, not to the borrower. If a borrower receives a 
military deferment on a loan for three years, or receives multiple 
military deferments on a loan that add up to three years, that loan no 
longer qualifies for a military deferment. If the borrower goes back to 
school, obtains more Title IV loans, and then is called back to active 
duty, the new loans would qualify for up to three years of military 
deferment. However, the older loan that has already been in a military 
deferment for the three-year maximum would not qualify for a military 
deferment.
    Changes: None.
    Comments: Several commenters recommended that we confirm that a 
lender has the authority to grant a mandatory administrative 
forbearance, as provided for in Sec.  682.211(i), on a borrower's pre-
July 1, 2001 loans, if the borrower qualifies for a military deferment 
on loans that were first disbursed on or after July 1, 2001.
    Discussion: FFEL lenders are required to grant mandatory 
administrative forbearances when notified by the Secretary that 
exceptional circumstances exist, such as a local or national emergency 
or a military mobilization. Some borrowers may qualify for a military 
deferment on loans first disbursed on or after July 1, 2001 and also 
may qualify for a mandatory administrative forbearance on loans first 
disbursed before July 1, 2001. However, not all borrowers who qualify 
for a military deferment necessarily qualify for a mandatory 
administrative forbearance.
    Changes: None.
    Comments: Several commenters recommended that we change the name of 
the prior military deferment that is available to borrowers with loans 
made before July 1, 1993, to the ``Armed Forces deferment'', to avoid 
confusion with the new military deferment enacted by the HERA.
    Discussion: The FFEL and Direct Loan Public Service Deferment 
Request forms do not use the term ``military deferment'' to refer to 
the pre-July 1, 1993 military deferment mentioned in the comments. 
Instead, these forms refer to borrowers who are ``on active duty in the 
Armed Forces of the United States.'' These forms are the primary source 
of information to borrowers on the prior military deferment. 
Accordingly, we do not believe that there will be any significant 
confusion among borrowers. Moreover, we believe that re-naming the old 
military deferment in the regulations serves no purpose.
    Changes: None.

Perkins Loan Rehabilitation (Sec.  674.39)

    Comments: One commenter questioned the statutory basis for denying 
a borrower who has been convicted of, or has pled nolo contendere or 
guilty to, a crime involving fraud in obtaining the Perkins Loan the 
opportunity to rehabilitate the defaulted Perkins Loan. The commenter 
questioned the statutory basis for denying loan rehabilitation to such 
borrowers. The commenter also contended that institutions have no 
reasonable way of knowing whether a borrower has been convicted of, or 
has pled nolo contendere or guilty to, a crime involving fraud in 
obtaining a Perkins Loan.
    Discussion: Section 8021(a) of the HERA provides 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 not 
eligible for additional Title IV assistance unless he or she has repaid 
the fraudulently obtained Title IV aid. If a borrower were permitted to 
rehabilitate a fraudulently obtained Perkins Loan under Sec.  674.39 of 
the Perkins Loan program regulations, the borrower would regain 
eligibility for additional Title IV, HEA program assistance without 
having repaid the fraudulently obtained loan in full, as required by 
the HERA.
    We do not agree with the commenter's contention that an institution 
will not know if a borrower was found guilty of fraud. The institution 
would almost certainly be involved in any legal proceedings relating to 
a Perkins Loan that was fraudulently obtained from that institution.
    Changes: None.

Definition of Satisfactory Repayment Arrangement (Sec. Sec.  682.200 
and 685.102)

    Comments: Several commenters pointed out that the standard for an 
on-time payment for purposes of rehabilitating a loan is now different 
from the standard for an on-time payment for purposes of making 
satisfactory repayment arrangements on a defaulted loan to regain Title 
IV, HEA program assistance eligibility. Under the rehabilitation rules, 
an on-time payment is a payment made within 20 days of the due date. 
Under the satisfactory repayment arrangement rules, an on-time payment 
is a payment made within 15 days of the due date. Since some borrowers 
make satisfactory repayment arrangements and attempt loan 
rehabilitation concurrently, the commenters recommended using within 20 
days of the due date as the on-time standard for both purposes.
    Discussion: The making of six consecutive monthly payments under 
satisfactory repayment arrangements restores Title IV, HEA program 
assistance eligibility to a defaulted borrower. We believe that the 
standard for on-time payments for purposes of regaining eligibility for 
Title IV, HEA program assistance should be stricter than the standard 
for rehabilitation of a defaulted loan. In addition, the on-time 
payment standard for borrowers who are in a regular repayment status 
requires that the payments be made within 15 days of the due date. We 
do not believe that it is appropriate to provide a longer period for 
on-time payments for borrowers who are in default on their loans than 
for borrowers who are current on their loans. Borrowers in default 
should be held to an on-time standard that is at least as strict as the 
standard applied to current borrowers, not rewarded with extra time to 
make a payment. Finally, we note that Congress did not apply the 20-day 
standard adopted for the loan rehabilitation program to borrowers in 
other situations.

[[Page 64383]]

    Changes: None.

Eligible Borrower (Sec. Sec.  682.201 and 685.200)

    Comments: Two commenters recommended adding language to Sec. Sec.  
682.201 and 685.200 to provide that a student borrower is not eligible 
for Title IV, HEA program assistance unless the borrower has repaid any 
Title IV, HEA program assistance obtained by fraud, if the student has 
been convicted of, or has pled nolo contendere or guilty to, a crime 
involving fraud in obtaining Title IV, HEA program assistance. These 
commenters also recommended that we revise Sec.  682.201 to list the 
general eligibility requirements for all borrowers, and then the 
requirements that are specific to each loan type. The commenters felt 
that this approach would be more efficient and eliminate unnecessary 
redundancies.
    Discussion: The interim final regulations in Sec. Sec.  668.32(m) 
and 668.35(i) include the new eligibility provision that prohibits a 
student borrower from obtaining Title IV, HEA program assistance unless 
the borrower has repaid any Title IV, HEA program assistance obtained 
by fraud. Section 682.201(a) and (b) of the FFEL regulations stipulate 
that a Stafford Loan borrower and a student PLUS borrower, 
respectively, must meet the eligibility requirements in 34 CFR part 668 
to qualify for a Stafford Loan. Similar references to the eligibility 
requirements in 34 CFR part 668 are in Sec.  685.200(a)(1)(ii) and 
685.200(b)(1)(ii) of the Direct Loan regulations. We believe that it 
would be redundant to include the language regarding the student 
eligibility requirements already outlined in part 668 in Sec. Sec.  
682.201 and 685.200.
    We disagree with the suggestion that restructuring Sec.  682.201 
would be more efficient. In developing the interim final regulations, 
we determined that the most efficient and easily understandable way to 
incorporate the changes mandated by the HERA into Sec.  682.201 was to 
fit the changes into the existing structure of this section. We believe 
that it is easier to identify changes that we have made to a section if 
the overall structure of the section remains consistent with past 
versions of that section. Although some redundancy is unavoidable with 
this approach, we have reduced the redundancies through the use of 
cross-references.
    Changes: None.
    Comments: Several commenters noted that a student borrower may 
receive a Federal Direct Subsidized Stafford/Ford Loan or a Federal 
Direct Unsubsidized Stafford/Ford Loan and a FFEL Program Student PLUS 
Loan for the same period of enrollment. These commenters recommended 
revising the PLUS loan student eligibility requirements in both the 
FFEL and Direct Loan programs, to stipulate that a graduate or 
professional student's annual loan maximum eligibility for either a 
FFEL Stafford Loan or a Direct Stafford/Ford Loan, as applicable, must 
be determined before awarding the student a PLUS Loan.
    Discussion: The Secretary has previously issued guidance stating 
that a graduate or professional student's maximum annual Stafford Loan 
eligibility must be determined before the student applies for a PLUS 
Loan, although the student is not first required to borrower up to his 
or her maximum annual Stafford Loan limit before receiving a PLUS Loan. 
If a school participates in both the FFEL and Direct Loan programs, the 
school must determine the borrower's maximum annual Stafford Loan 
eligibility under the program the school is participating in for 
Stafford Loan purposes. We agree that this guidance should be 
incorporated in the regulations.
    Changes: We have revised Sec. Sec.  682.201(b)(3) and 
685.200(b)(1)(iv) to specify that a graduate or professional student's 
maximum annual Stafford Loan eligibility under either the Direct Loan 
or FFEL program must be determined before the student applies for a 
PLUS Loan.
    Comments: Two commenters recommended that Sec.  682.201(d)(1) be 
revised to stipulate that a borrower who obtained a loan by identity 
theft or some other illegitimate means, or who obtained a loan for 
which he or she was ineligible, may not consolidate that loan. In 
addition, these commenters recommended that these borrowers not be 
permitted to consolidate loans for which the borrower is eligible until 
the loans for which the borrower was ineligible have been paid in full. 
Several commenters noted that new Sec.  682.201(d)(2) states that a 
borrower may not consolidate a loan for which the borrower is wholly or 
partially responsible. Because our revision stipulating that a borrower 
who obtained a loan by identity theft or some other illegitimate means, 
or who obtained a loan for which he or she was ineligible, may not 
consolidate that loan was unclear, several commenters asked if the word 
``not'' was inadvertently dropped from this section.
    Discussion: Section 682.201(d)(2) of the interim final regulations 
should have read, ``A borrower may not consolidate a loan under this 
section for which the borrower is wholly or partially ineligible.'' 
This language mirrors the existing provisions in Sec.  685.211(e)(4) of 
the Direct Loan regulations. The revised Sec.  682.201(d)(2) precludes 
a borrower who obtained a Title IV loan by identity theft, fraud, or 
some other illegitimate means from consolidating the ineligible loan. 
However, we do not believe that the HERA prohibits a borrower who has 
obtained loans for which the borrower is ineligible from consolidating 
loans for which the borrower is eligible, and we do not believe we have 
the authority to impose such a restriction by regulation. We believe 
the revision to Sec.  682.201(d)(2) adequately addresses commenters' 
concerns and that revising Sec.  682.201(d)(1) is unnecessary.
    Changes: We have replaced ``responsible'' with ``ineligible'' in 
Sec.  682.201(d)(2).

Eligibility for a Direct Consolidation Loan (Sec. Sec.  682.201, 
685.100 and 685.220)

    Comments: Two commenters recommended that we amend the FFEL and 
Direct Loan program regulations to clarify that, in the case of a 
borrower who wishes to consolidate a Federal Consolidation Loan that 
has been submitted for default aversion into the Direct Loan Program, 
the borrower must be delinquent or in default on the Federal 
Consolidation Loan at the time the borrower applies for the Direct 
Consolidation Loan. The commenters believed that the current regulatory 
language would allow a borrower to consolidate a Federal Consolidation 
Loan on which the borrower is current on making payments into a Direct 
Consolidation Loan, if the Federal Consolidation Loan had been 
submitted for default aversion at some time in the past.
    Discussion: We agree that Federal Consolidation Loans that are 
currently delinquent or in default may be consolidated into a Direct 
Consolidation Loan. However, we do not believe that it is necessary to 
amend the current regulatory language in Sec. Sec.  682.201, 685.100 
and 685.220 to state this requirement more explicitly.
    Changes: None.
    Comments: Several commenters urged the Secretary to clarify that 
borrowers with defaulted Federal Consolidation Loans are eligible to 
consolidate into the Direct Loan Program, without including another 
eligible loan, for the purpose of obtaining an income contingent 
repayment (ICR) plan. Section 428C(a)(3)(B)(i)(IV) of the HEA provides 
this option for borrowers with delinquent Federal Consolidation Loans 
that have been submitted to the guaranty agency for default aversion. 
The commenters believed that this

[[Page 64384]]

provision of the law, which was added by the HERA, was intended to 
provide the ICR option to borrowers who are either seriously delinquent 
or in default on their Federal Consolidation Loans. They also noted 
that the statutory language does not distinguish between non-defaulted 
and defaulted borrowers, and that any default claim filing would have 
been preceded by a default aversion submission.
    Discussion: The commenters are correct in reading the regulations 
implementing the changes made to section 428C(a)(3)(B)(i)(IV) of the 
HEA to allow a borrower to consolidate a single defaulted Federal 
Consolidation Loan into the Direct Loan Program for the purpose of 
obtaining an ICR plan. We believe that the regulatory language is 
sufficiently clear and that it is not necessary to revise the 
regulations to state this more explicitly.
    An otherwise eligible borrower may also consolidate a single 
Federal Consolidation Loan into the Direct Loan Program for the purpose 
of obtaining an income contingent repayment plan if the borrower has 
filed an adversary complaint in a bankruptcy proceeding seeking to have 
the Federal Consolidation Loan discharged, regardless of whether that 
Federal Consolidation Loan is current, delinquent, or in default. A 
borrower who is seeking to have a Federal Consolidation Loan discharged 
in bankruptcy should be treated the same as a borrower whose loan has 
been submitted for default aversion. A borrower who seeks to have a 
loan discharged in bankruptcy is clearly stating his or her intent not 
to repay the loan, but the bankruptcy filing precludes the submission 
of a default aversion request. Offering the Direct Loan Program ICR 
option to such a borrower provides an alternative to having the loan 
discharged in bankruptcy.
    Changes: None.

Permissible Charges by Lenders to Borrowers (Sec.  682.202(a))

    Commments: One commenter urged the Department to develop and 
publish regulations to restrict a lender's ability to charge an FFEL 
Program borrower an interest rate that is less than the rate specified 
in the HEA and the program regulations. The commenter believes that the 
regulations should require lenders to charge all borrowers the same 
rate to stop lenders from using interest rates to discriminate between 
institutions and borrowers based on inequitable criteria or to 
eliminate competition in the student lending market.
    Discussion: Section 427A(l) of the HEA provides that nothing shall 
prohibit a lender from charging a borrower an interest rate less than 
the rate specified in the statute. Accordingly, we do not have the 
statutory authority to require lenders to charge all borrowers the same 
interest rate.
    Changes: None.

Insurance Premium and Federal Default Fees (Sec. Sec.  682.202(d)(2) 
and 682.401(b)(10))

    Comments: One commenter stated that the changes made to Sec. Sec.  
682.202(d)(2) and 682.401(b)(10) in the interim final regulations 
appear to eliminate the authority of a lender or guaranty agency, under 
Sec.  682.209(f)(4), to charge a guarantee fee to a borrower who is 
refinancing a fixed rate PLUS Loan or a Supplemental Loans for Students 
(SLS) Loan made prior to July 1, 1987 under Sec.  682.209(f)(1). The 
commenter believes that the HERA provisions that changed the optional 
insurance premium to a mandatory Federal default fee did not remove a 
lender's or guaranty agency's authority to charge a guarantee fee in 
these cases.
    Discussion: We agree that the HERA did not remove a lender's or 
guaranty agency's authority to charge a guarantee fee if a borrower 
refinances a fixed rate PLUS or SLS loan made prior to July 1, 1987. 
However, we believe the existing language in Sec.  682.209(f)(4), which 
specifically states that the refinancing lender may charge the borrower 
a guarantee fee in these circumstances, already addresses this issue.
    Changes: None.

Loan Disbursement Through an Escrow Agent (Sec. Sec.  682.207(b)(1)(iv) 
and 682.408(c))

    Comments: Many commenters noted that the discussion in the preamble 
of the interim final regulations related to the new 10-day deadline for 
a lender to pay funds to an escrow agent for disbursement to a school 
differed from the regulatory language and requested clarification. The 
commenters indicated that the preamble stated that the transfer of loan 
funds must take place no earlier than 10 days prior to disbursement to 
the borrower, while the regulations indicated that the 10 days referred 
to the transfer of the loan funds to the school prior to the school's 
delivery of the funds to the borrower. A couple of commenters indicated 
that an additional change was needed to Sec.  682.408(c)(2) to reflect 
the reduction from 21 to 10 days for disbursement through an escrow 
agent. Several commenters also recommended that Sec.  682.408(c) be 
revised to provide that an escrow agent, as the lender's agent, could 
disburse loan funds directly to a borrower in a study-abroad program at 
the borrower's request.
    Discussion: We agree with the commenters that there is a difference 
between the discussions of the 10-day period in the preamble and in the 
interim final regulations. The language in the interim final 
regulations that states that the escrow agent shall transmit loan 
proceeds received from a lender to a school not later than 10 days 
after the agent receives the funds from the lender accurately reflects 
our policy on this issue.
    A revision to Sec.  682.408(c)(2) reflecting the reduction from 21 
to 10 days for disbursement through an escrow agent is unnecessary. 
Paragraph (c)(2) of Sec.  682.408 was incorporated into new Sec.  
682.408(c) in the interim final regulations and the reduction from 21 
to 10 days for disbursement through an escrow agent is reflected in 
this new paragraph.
    We agree with the commenters who recommended that Sec.  682.408(c) 
be revised to provide that an escrow agent, as the lender's agent, 
could disburse loan funds directly to a borrower in a study-abroad 
program at the borrower's request.
    Changes: We have amended Sec.  682.408(c) to clarify that an escrow 
agent may disburse Stafford Loan proceeds directly to a borrower who is 
attending a study-abroad program and who requests a direct disbursement 
from the lender.

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

    Comments: Several commenters disagreed with our determination that 
PLUS Loan funds cannot be disbursed directly to a borrower enrolled in 
a study-abroad program or at a foreign school. The commenters believed 
that the ``same terms and conditions'' provision in section 428B(a)(2) 
of the HEA permits retention of the prior policy allowing direct 
disbursement of PLUS Loan funds. The commenters noted that, while the 
PLUS funds check must still be made co-payable to the institution and 
the borrower under 428B(c)(2) of the HEA, disbursing funds directly to 
a borrower to be endorsed and mailed to an institution may assist 
borrowers in paying for expenses while traveling to a foreign school.
    Discussion: Section 428B(a)(2) of the HEA does not authorize the 
Secretary to establish disbursement rules for PLUS Loans made to pay 
for attendance at foreign institutions or for students enrolled in 
study-abroad programs that

[[Page 64385]]

are different from the rules for other FFEL Loans for attendance at 
those institutions.
    Changes: None.
    Comments: One commenter suggested that the regulations in Sec.  
682.207(b)(1)(v)(C)(1) be revised to clarify that a lender or guaranty 
agency must verify a student's enrollment with the home institution, 
rather than with the foreign school, before making a direct 
disbursement to a student in a study-abroad program.
    Discussion: The Secretary agrees with the commenters.
    Changes: Section 682.207(b)(1)(v)(C)(1) has been revised to clarify 
that a lender or guaranty agency may make a disbursement directly to a 
student enrolled in a study-abroad program only after verification of 
the student's enrollment with the home institution.
    Comments: One commenter did not agree that a lender or guaranty 
agency should be required to verify that a continuing student is still 
enrolled at the enrollment status for which the loan was certified 
before making a disbursement of Stafford Loan funds directly to a 
student at a foreign school. The commenter noted that, although the 
preamble stated that the verification requirements in the regulations 
are based on those in Dear Colleague Letter (DCL) G-03-348, this 
requirement differs from that in the DCL, which simply required 
verification that the student was accepted for enrollment at the 
foreign school. The commenter felt that the institution should be 
responsible for notifying the lender if the borrower's enrollment 
status changed to less than half-time.
    A couple of commenters did not believe that the regulations should 
limit how a lender or guaranty agency may contact a foreign school or 
home institution to verify enrollment. The commenters felt that other 
forms of contact, in addition to contact by telephone or e-mail, such 
as facsimile, should be acceptable.
    One commenter was concerned that the regulations do not specify who 
at a foreign school may authorize a disbursement to be sent directly to 
a borrower. The commenter felt that this gap left the process open to 
abuse.
    Discussion: The intent of the statutory requirement is to require a 
confirmation that a student who is attending or plans to attend a 
foreign school is actually eligible to receive FFEL funds when those 
funds will not be sent to the school, but will be disbursed directly to 
a student. Therefore, we believe it is appropriate to require a lender 
or guaranty agency to confirm that a continuing student's enrollment 
(at least half-time) supports eligibility for the loan disbursement. As 
the commenter noted, a change in enrollment status would affect a 
student's eligibility for a loan only if the student has dropped below 
half-time enrollment. Therefore, the lender or guaranty agency need 
only confirm that the student is still enrolled at least half-time.
    Because of concerns with timeliness and security, the Secretary 
does not believe that all forms of contact are appropriate for the 
verification of enrollment. However, the Secretary does agree that 
contact by facsimile is acceptable.
    The Secretary agrees that not just any individual at a foreign 
school should be permitted to authorize a disbursement directly to a 
student. In DCL GEN-06-11, the Department asked foreign schools to use 
the modified institutional eligibility electronic application (EAPP) to 
enter the names of the individuals who are authorized by the school to 
certify FFEL Loan applications. The DCL noted that the Department 
expects guaranty agencies or lenders to contact these individuals, 
whose names will be accessible in the Department's Postsecondary 
Education Participants Systems (PEPS), to verify enrollment. To the 
extent that a foreign school notifies a guaranty agency or lender of 
other individuals who are authorized to provide this information, the 
guaranty agency or lender must verify the information with at least one 
of the persons entered by the school on the EAPP that those officials 
are authorized to act on behalf of the institution in administering the 
FFEL Program. To allow the Secretary the flexibility to change this 
process in response to possible systems changes, the Secretary does not 
believe that the procedures for this contact should be specified in the 
regulations. However, the Secretary has decided that the regulations 
should require guaranty agencies and lenders to contact foreign schools 
in accordance with any procedures specified by the Department.
    Changes: Section 682.207(b)(2)(i) has been revised to permit a 
lender or guaranty agency to contact a foreign school via facsimile to 
verify a student's enrollment. In addition, Sec.  682.207(b)(2)(i)(A) 
has been changed to require guaranty agencies and lenders to contact 
foreign schools in accordance with any procedures specified by the 
Secretary.

Parental Leave and Working Mother Deferments (Sec. Sec.  682.210(o) and 
(r) and 685.204(d)(2))

    Comments: Many commenters asked whether the deletion of section 
428(b)(7)(A)(ii) from the HEA by the HERA effectively eliminated the 
parental leave and working mother deferments for borrowers with loans 
disbursed before July 1, 1993. The commenters are concerned that these 
deferments will not be available to an otherwise eligible borrower 
because the borrower must waive up to one month of the borrower's grace 
period in order to meet the eligibility criteria for the deferment.
    Discussion: The requirement that a borrower waive at least one 
month of the grace period so the borrower may be certified as having 
been enrolled at least half time within the six-month period preceding 
the deferment start date in Sec.  682.210(o) applies only to the 
parental leave deferment. Deferments are a term and condition of the 
borrower's promissory note. The Congress, in making changes to the HEA 
historically, has not eliminated deferments already granted to a 
borrower as a term and condition of the borrower's loan, and it does 
not appear that Congress intended to do so in this case. Accordingly, 
otherwise eligible borrowers may continue to waive a month of the grace 
period, if necessary, in order to qualify for the parental leave 
deferment.
    Changes: None.

Forbearance (Sec.  682.211)

    Comments: Several commenters suggested that we eliminate Sec.  
682.211(h)(3) of the FFEL regulations because section 8014(e) of the 
HERA amended the HEA to remove the requirement that the terms of a 
mandatory forbearance be in writing.
    Discussion: While we agree that the HERA eliminated the requirement 
that the terms of a mandatory forbearance agreement be in writing, we 
also note that the HERA requires that the terms of a mandatory 
forbearance agreed to by the lender and the borrower or endorser be 
documented by a confirmation notice sent by the lender to the borrower/
endorser and by the lender recording the terms in the borrower's file. 
We believe that, with the exception of administrative forbearances in 
Sec.  682.211(f), the same procedures should apply to all the 
forbearances. The interim final regulations amended Sec.  682.211(b)(1) 
to reflect the new forbearance requirements. We believe that Sec.  
682.211(h)(3) should also be changed to reflect the new requirements 
that the lender send a notice to the

[[Page 64386]]

borrower/endorser and include a notation in the borrower's file 
confirming the forbearance rather than simply eliminating the 
requirement for a written forbearance agreement.
    Changes: We have amended Sec.  682.211(h)(3) to reflect these 
changes.

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

    Comments: One commenter noted that the use of the word ``either'' 
with regard to a borrower qualifying for teacher loan forgiveness based 
on teaching special education in ``either an eligible elementary or 
secondary school'' could be misinterpreted. The commenter recommended 
removing the word ``either'' to make it clear that a borrower could 
combine teaching service in an eligible elementary school and an 
eligible secondary school to qualify for teacher loan forgiveness as a 
highly qualified special education teacher.
    Discussion: Use of the word ``either'' was not intended to imply 
that service as a highly qualified special education teacher in an 
eligible elementary school and service as a highly qualified special 
education teacher in an eligible secondary school could not be combined 
to qualify a borrower for teacher loan forgiveness.
    Changes: We have removed the word ``either'' from Sec. Sec.  
682.215(c)(3)(ii)(B), 682.215(c)(4)(ii)(B), 685.217(c)(3)(ii)(B), and 
685.217(c)(4)(ii)(B).

Payment of Special Allowance on FFEL Loans (Sec.  682.302)

    Comments: One commenter asked us to clarify the effective date for 
the change made by the HERA to the calculation of special allowance 
payments for PLUS Loans.
    Discussion: As reflected in the interim final regulations, PLUS 
Loans made after January 1, 2000 are no longer subject to the minimum 9 
percent trigger for special allowance payments. In accordance with the 
effective date for the provision of the HERA that made this change, 
lenders will be paid special allowance on these loans for activity 
beginning April 1, 2006, which will be reflected on billing reports 
submitted to the Department after June 30, 2006.
    Changes: None.
    Comments: Some commenters, particularly from the FFEL industry, 
claimed that the regulations are impermissibly retroactive. In 
particular, these commenters claimed that the interim final regulations 
improperly applied the statutory changes made by the Taxpayer-Teacher 
Protection Act of 2004 (TTPA), and the HERA, to periods before those 
statutes became effective. The commenters pointed to the explanation of 
certain terms in Sec.  682.302(f) as an example of the changes that 
they felt were being improperly applied retroactively.
    Discussion: The changes made to Sec.  682.302 are not retroactive. 
Prior to the publication of the August 9 interim final regulations, the 
regulatory provisions in Sec.  682.302 had not been updated since 1994, 
except for a change to reflect the 1993 statutory amendment that 
eliminated the 9.5 percent minimum special allowance payment (SAP) rate 
on loans acquired with funds from a tax-exempt obligation originally 
issued on or after October 1, 1993. Thus, the prior regulations did not 
reflect guidance issued by the Department since 1993 to interpret the 
HEA and the regulations (DCL L-93-161 (November 1993), L-93-163 
(December 1993), and L-96-186 (March 1996), FP-05-01 and FP-06-01) or 
the changes made to those requirements by the TTPA or HERA.
    The regulations must reflect the rules for the special allowance 
eligibility of both loans for which SAP at the 9.5 percent minimum rate 
is now claimed and loans on which this rate may be claimed in the 
future. The TTPA placed significant restrictions on the eligibility of 
new loans for the 9.5 percent SAP, and the HERA significantly 
restricted whether additional loans could acquire eligibility. However, 
the eligibility of the great majority of loans on which a 9.5 percent 
SAP is now and will be claimed depends on, or may be affected by, 
transactions such as various refinancing transactions that occurred 
prior to the effective date of either the TTPA or HERA. The prior 
regulations did not state the consequences of some of those 
transactions, even though those consequences had been well settled, 
under the Department's interpretations of the law in effect when the 
transactions occurred. To clarify the requirements for 9.5 percent SAP 
eligibility, the interim final regulations first incorporate these 
interpretations, and then address changes made by the TTPA to the 
continued eligibility of these loans for 9.5 percent SAP, and by the 
HERA as to whether loans may acquire that eligibility.
    The interim final regulations include in Sec.  682.302(f) an 
explanation of certain terms (refinance and originally issued) that 
reflects Departmental interpretations and usage of those terms 
historically. Based on that usage, it is reasonable to conclude that 
the terms are already generally understood as explained in the 
regulations.
    The interim final regulations, as published on August 9, 2006, do 
no more than provide loan holders (and other interested parties) an 
orderly statement of the requirements for acquiring and continued 
eligibility for 9.5 percent SAP for all cohorts of loans, both as in 
effect before the 2004 and 2006 amendments to the HEA, and under the 
2004 and 2006 amendments to the HEA. The interim final regulations did 
not create or change the terms, conditions, and requirements for the 
eligibility for the 9.5 percent SAP from those which already existed 
under applicable law. To the extent that loan holders were in 
compliance with the requirements of: (1) The then-current regulations; 
(2) applicable prior Department interpretations of those regulations 
and the HEA; and (3) changes made by the TTPA and by the HERA, the 
billing status of loans was not changed with the publication of the 
interim final regulations.
    Changes: None.
    Comment: Several commenters claimed that Sec.  682.302(e)(2) and 
(3) improperly requires that a loan acquired with pre-October 1, 1993 
tax-exempt funding be ``financed continuously'' by tax-exempt financing 
to retain eligibility for SAP at the 9.5 percent minimum rate. Some 
believed that the interpretations on which the Department relied in 
adopting the interim final regulations had not been communicated to the 
public, or that the regulations went beyond merely updating existing 
regulations to reflect longstanding policy. Another commenter 
questioned whether the ``debt'' to which Sec.  682.302(e)(2)(i)(B) 
refers to as having been ``refinanced'' is a student loan or a bond.
    Discussion: The term ``financed continuously'', to which the 
comments refer, appears only in Sec.  682.302(e)(2). Section 
682.302(e)(2) describes the special allowance rate applicable to any 
loan acquired with funds from a source that makes the loan eligible for 
a SAP at the 9.5 percent minimum rate that has been refinanced. All 
loans that are initially eligible for a 9.5 percent SAP and have been 
refinanced can be divided into two mutually exclusive groups. The first 
group includes only those loans that have been refinanced exclusively 
and continuously from tax-exempt sources. The second group includes all 
loans not in the first group. The phrase ``financed continuously'' is 
used to describe the first group, not to exclude the second group from 
potential eligibility for SAP at the 9.5 percent minimum rate. The 
interim final regulations contained no provisions that limit continued 
eligibility for SAP at the 9.5 percent minimum rate only to loans in 
the first group--those loans continuously refinanced from tax-

[[Page 64387]]

exempt sources. Some loans in the second group also retain that 
eligibility after refinancing. The regulations add no condition on 9.5 
percent SAP eligibility that was not already contained in the statute 
or regulations.
    The regulations accurately reflect Department interpretations of 
applicable law that establish which SAP rate applied to loans 
refinanced using tax-exempt sources. The Department has had numerous 
discussions with program participants who have cited these 
interpretations and it is clear that the loan industry has been aware 
of the Department's interpretation of these terms. The regulations in 
Sec.  682.302(e)(2)(i)(A) and (B) describe the first group of 
refinanced loans--those continuously refinanced using tax-exempt 
sources--and state that such loans qualify for a SAP at the 9.5 percent 
minimum return rate.
    These regulations rest squarely on the Department's interpretation 
of the HEA as articulated in previous guidance issued in DCL 93-L-161 
(November 1993), p. 13; Dear Colleague Letter 93-L-163 (December 1993), 
p. 2. Under the Department's interpretation of the regulations included 
in the DCLs, loans that were eligible for the 9.5 percent SAP rate 
prior to a tax-exempt refinancing remained eligible after that 
refinancing. Because refinancing from tax-exempt sources does not alter 
eligibility of the loan for the 9.5 percent SAP rate, there is no need 
to distinguish between loans involved in a single tax-exempt 
refinancing and those involved in a series of tax-exempt refinancings. 
The regulations therefore include in this first group all loans that 
have been associated only with a tax-exempt refinancing, without regard 
to the number of those refinancings. The phrase ``financed continuously 
by tax-exempt obligations,'' in Sec.  682.302(e)(2)(i)(B)(2) simply 
describes loans associated exclusively with tax-exempt refinancing.
    The regulations do not exclude from eligibility for the 9.5 percent 
SAP loans affected by other refinancings. The Department's regulations 
in Sec.  682.302(e)(2)(ii) describe loans refinanced from sources other 
than qualified tax-exempt sources. This second group consists of two 
subgroups, which are distinguished by the treatment of the tax-exempt 
obligation affected by the refinancing. If the prior tax-exempt 
obligation is retired or deceased, SAP is payable at the taxable rate. 
This rule has been in effect since 1985. If the prior tax-exempt 
obligation has not been retired or defeased, SAP remains payable at the 
9.5 percent minimum return rate as discussed in DCL 96-L-186 (March 
1996).
    The regulations use the words ``a loan is refinanced'' to describe 
the refinancing of an individual student loan. The term ``refinance'' 
is commonly used as well to refer to the refunding of an outstanding 
bond or other financial obligation. The regulations in Sec.  
682.302(e)(2)(i) use the phrase to refer to a bond or other instrument 
issued to refund an existing bond or other obligation of the issuer.
    Changes: Section 682.302(e)(2) as revised in the interim final 
regulations effectively explains the applicability of the SAP rates and 
so it is not necessary for us to retain paragraph (c)(5) of Sec.  
682.302. Therefore, subparagraph (c)(5) is removed.
    Comments: One commenter objected to the explanation in Sec.  
682.302(f)(2) that a bond is considered to be ``originally issued'' 
when issued to obtain funds to make or acquire loans in which the 
Authority did not have an interest. This explanation, the commenter 
noted, would exclude a tax-exempt obligation issued to refund an 
existing taxable bond or to refinance loans already held by the 
Authority. The provision would thus disqualify from eligibility for the 
9.5 percent SAP loans acquired with proceeds of those obligations, even 
if they had been issued prior to October 1, 1993.
    Discussion: The provision addressing the phrase ``originally 
issued'' is used to explain how the October 1, 1993, deadline affects 
at least four different types of tax-exempt obligations: (a) 
Obligations used to obtain funds to make loans or acquire loans from 
third parties; (b) obligations that refund a pre-October 1, 1993, 
qualifying obligation or are part of a series of such refunding issues; 
(c) obligations used to refund a taxable obligation of the issuer; and 
(d) obligations used to obtain funds to acquire loans that the 
Authority made or purchased using funds from either a taxable 
obligation or a tax-exempt obligation issued on or after October 1, 
1993, but not to refund that obligation.
    The language in Sec.  682.302(f)(2) to which the commenter objects 
clearly applies to the ``new money'' issues, described in paragraph (a) 
above. However, we agree with the commenter that the language could be 
read to exclude from tax-exempt special allowance treatment loans 
acquired with funds from tax-exempt obligations described in paragraphs 
(c) and (d), even if the tax-exempt bond had been issued before October 
1, 1993. That result would be contrary to the position taken in the 
1985 regulations and contrary to our intent in using this particular 
language.\1\ We also believe that the language should be revised to 
make it clear that a tax-exempt refunding, or series of such 
refundings, of a tax-exempt obligation does not change the SAP status 
of loans made or purchased with funds obtained from the first such tax-
exempt obligation so refunded, as described in paragraph (b).
---------------------------------------------------------------------------

    \1\ The term purchase includes acquisition of an interest in a 
loan by means of a pledge of the loan, and the 1985 regulations 
implicitly interpret the term purchase as used in section 438 of the 
HEA to include acquisition of a loan by pledge, not merely 
acquisition from another party.
---------------------------------------------------------------------------

    Changes: The interim final regulations were intended to state, and 
not change, existing law. Accordingly, we have revised Sec.  682.302 to 
state, in new paragraph (f)(2)(i), that an obligation the proceeds of 
which are used to make or purchase loans, including by pledge as 
collateral for that obligation, is considered to be originally issued 
on the date it is issued. The limitation that loans are considered 
purchased only if the Authority has neither an existing legal or 
equitable interest in the loan is removed. Second, the regulation is 
revised to add a new paragraph (f)(2)(ii) to address specifically a 
tax-exempt obligation that refunds, initially or in a series of such 
refundings, a tax-exempt obligation the proceeds of which were used to 
make or purchase loans (one described in paragraph (f)(2)(i)). Such a 
tax-exempt refunding obligation is considered to be originally issued 
on the date on which the initial tax-exempt obligation, described in 
paragraph (f)(2)(i), was issued.

Basic Program Agreement (Sec.  682.401)

    Comments: One commenter requested that we revise Sec.  
682.401(b)(10)(iii) to clarify that a lender is required to charge an 
insurance premium or Federal default fee.
    Discussion: Sections 682.401(b)(10)(i)(A) and (B) clearly states, 
with the exception of a Consolidation Loan or SLS or PLUS Loan 
refinanced under Sec.  682.209(e) or (f), the requirements on the 
collection of insurance premiums and Federal default fees by a guaranty 
agency. Further clarification is unnecessary.
    Changes: None.
    Comments: Several commenters requested that a change be made to 
Sec.  682.401(b)(14) to reflect the payment to lenders of exempt, 
lender-of-last-resort, and other claims that may be paid at 100 percent 
insurance.
    Discussion: This section of the FFEL regulations outlines the basic 
program agreement between the guaranty agency and the Secretary. 
Specifically, Sec.  682.401(b)(14) outlines the guarantee

[[Page 64388]]

liability of the agency, which relates primarily to the payment of 
default claims. Although other kinds of claims may be paid on a loan, 
we do not believe that it would be appropriate to include these other 
claim types, none of which can be reasonably anticipated at the time of 
guarantee, in Sec.  682.401(b)(14).
    Changes: None.
    Comments: Several commenters stated that the HERA revised section 
428(c)(2) of the HEA to require guarantors to establish procedures to 
ensure that Consolidation Loans are not an excessive proportion of the 
guaranty agency's recoveries on defaulted loans, but objected to the 
inclusion in Sec.  682.401(b)(29) of the requirement that guarantors 
submit these procedures to the Secretary for approval.
    Discussion: We believe that if a guarantor is required by law to 
establish procedures to ensure that Consolidation Loans are not an 
excessive portion of the agency's recoveries on defaulted loans, then 
the Secretary has a fiscal responsibility to review and approve such 
procedures. The requirement to submit these procedures to the Secretary 
for approval is also authorized by Sec.  682.401(d)(2).
    Changes: None.

Identity Theft (Sec. Sec.  682.402 and 685.215)

    Comments: Many commenters expressed concern regarding the 
provisions of the interim final regulations that implement the HERA 
provisions relating to the discharge of an FFEL or Direct Loan that was 
falsely certified as the result of the crime of identity theft. Several 
commenters felt that a definition of identity theft based on the 
adjudication of a crime is too narrow and burdensome and that we should 
adopt the definition of identity theft used in the Fair Credit 
Reporting Act (FCRA) and by the Federal Trade Commission (FTC).
    Many commenters felt that tying a discharge of an FFEL or Direct 
Loan to a determination by a Federal, State or local court that the 
crime of identity theft had occurred, and requiring documentation of 
that fact, was unduly restrictive. The commenters believed that 
requiring victims whose cases are actually prosecuted to await the 
outcome of a judicial process for relief fails to provide discharges 
and reimbursements in a timely fashion and fails to offer victims of 
identity theft proper relief. Several commenters asked for 
clarification on how a loan would be discharged under the common law 
defense of forgery if a law enforcement agency does not pursue a 
perpetrator of identity theft. Finally, the commenters requested that 
we immediately adopt an explicit, reliable process that provides 
sufficient protection to bona fide victims of identity theft and that 
we also track cases of unresolved identity thefts within the 
Department.
    Several commenters did not agree with the requirement that a lender 
and guarantor demand payment on a discharged loan from the perpetrator 
and pursue collection action if payment in full is not received. These 
commenters urged the Department to allow guarantors either to subrogate 
loans discharged based on identity theft to the Department or refer the 
loans to the appropriate enforcement agencies for action.
    Several commenters stated that the provisions related to identity 
theft would be better placed in a discrete section of the regulations. 
They believe this approach would facilitate processing and reporting, 
and ensure that lenders, guarantors, and other program participants 
have access to comprehensive regulations in a single, identifiable 
section.
    Several commenters noted inconsistencies between the regulations 
and the preamble with respect to identity theft. These commenters state 
that the preamble erroneously suggested that the new regulations 
provide for reimbursement to the loan holder only when perpetrator is 
affiliated with the school. The commenters requested that preamble to 
the final regulations accurately describe the identity theft provisions 
in this regard.
    Discussion: The HERA amended the HEA to authorize a 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 HERA specifically provides for a loan discharge 
only when a ``crime'' of identity theft has occurred. For this reason, 
the interim final regulations provide relief only to the victim of a 
proven crime of identity theft.
    The purpose of the Fair and Accurate Credit Transactions Act (FACT) 
(which amended the FCRA) and similar legislation and the FTC rules is 
to enable individuals who believe that their identifying information 
has been misappropriated to alert parties who might extend credit to 
the thief based on that stolen identity information. The purpose of the 
identity theft provision in the HEA is different--to relieve borrowers 
and lenders from liability on loans that result from proven misuse of 
that information. Thus, the FACT Act requires credit reporting agencies 
to post ``fraud alerts'' on an individual's credit record to deter 
lenders from extending credit to a thief who uses the stolen identity 
information, and to block the reporting of any information on the 
record that the individual identifies as resulting from that identity 
theft. 16 U.S.C. Sec. Sec.  1681c-1, 1681c-2. There is little, if any, 
substantive difference between the FACT Act definition of ``identity 
theft'' in 16 U.S.C. Sec.  1681a(q)(3) and the descriptive definition 
used in the interim final regulations. Therefore, there is no reason to 
use the specific FACT Act definition.
    The commenters' claim that the regulations are unduly restrictive 
is contrary to American common law. As indicated in the preamble to the 
interim final regulations, under generally applicable laws, individuals 
who do not apply for loans, execute promissory notes for loans or 
knowingly accept the benefits of loan disbursements are not liable to 
repay those loans, even if their names were forged on the loan 
instrument. An individual who claims that his or her signature was 
forged is not required to delay asserting that claim until a criminal 
prosecution occurs and nothing in the Department's regulations require 
such a delay. An individual who claims that his or her signature was 
forged can assert that claim to oppose liability on a loan and the 
holder of the loan must evaluate and accept or reject that claim 
whether or not a criminal prosecution occurs.
    The regulations require the guaranty agency, not the lender, to 
demand payment from the perpetrator of the identity theft. Guaranty 
agencies must ordinarily use due diligence to collect FFEL Program 
loans and the perpetrator is liable for such a debt. In some instances, 
the Department may choose to take assignment of the debt. However, the 
regulations do not require a guaranty agency to take unusual or 
extraordinary steps to collect this debt.
    The comment that the regulations regarding identity theft discharge 
relief should be placed in a separate section does not explain why such 
treatment would improve clarity of the procedure. The provisions added 
in the interim final regulations implement a specific discharge 
provision added by the HERA to the other discharge relief available 
under section 437(c) of the HEA. The regulations are not intended to 
provide general guidance on handling claims that loan applications or 
promissory notes have been forged where the claim does not rest on a 
proven crime. Because each provision for discharge relief under section 
437(c) of the HEA offers relief to borrowers or purported borrowers by 
payment to the holder of the loan, it is logical to include

[[Page 64389]]

procedures for handling claims under the new discharge provision among 
the existing procedures for claims for other kinds of discharge relief.
    The comment suggesting that the Department adopt a process for 
tracking what it refers to as unresolved identity thefts does not 
appear to be practicable at this time. To the extent that this proposal 
is meant to deter lenders from extending new credit based on new false 
applications using the same individual's identity, the proposal 
duplicates the procedure already required under the FACT Act. Lenders 
must obtain a credit report in order to qualify an applicant for a PLUS 
Loan, and therefore, the alert option available under the FACT Act can 
be expected to provide effective prospective relief with respect to 
applications for PLUS Loans.
    Implementation of a system that would prospectively protect alleged 
victims of identity theft from misuse under all the student loan 
programs requires participation and input from many participants in the 
loan programs. Such a process may be both costly and complicated. The 
Department is open to considering practical proposals in the future.
    Finally, the commenter is correct that there are inconsistencies 
between the preamble to the interim final regulations and the interim 
final regulations, themselves, regarding reimbursement to the loan 
holder when the perpetrator of identity theft is affiliated with a 
school. As noted in the preamble to the interim final regulations, 
Sec.  682.402(e)(1)(i)(B) of the false certification discharge 
provisions has, since 1994, made discharge relief, with the 
accompanying reimbursement to the lender, available in instances in 
which an individual's signature was forged on a promissory note or loan 
application by the school. If the forgery is not committed by someone 
affiliated with a school, the purported borrower would not ordinarily 
be legally liable for the loan. However because the loan is not legally 
enforceable against the borrower, the loan does not qualify for any 
FFEL payments from the Department. The new identity theft provision in 
Sec.  682.402(e)(1)(i)(C) allows the lender to be reimbursed when the 
loan was made by reason of a crime of the theft of the identity of the 
purported borrower, without regard to whether the thief was affiliated 
with a school. The final regulations bar payment to the lender if the 
theft was committed by the lender or an agent of the lender. The 
preamble to the interim final regulations accurately stated these 
elements of the regulation. We will revise Sec.  682.402(e)(1)(iii)(A) 
to be consistent with the preamble discussion in the interim final 
regulations.
    While we believe that the interim final regulations are fully 
consistent with the HEA and other laws, we are sympathetic to the 
concerns of the commenters. We intend to include this issue on the 
agenda for a future negotiated rulemaking to possibly consider other 
approaches.
    Changes: Section 682.402(e)(1)(iii)(A) has been revised by adding 
the word ``not'' before the words ``pay reinsurance''.

Rehabilitation of Defaulted Loans (Sec.  682.405(a)(2)(i)(B))

    Comments: Several commenters stated that the regulations for 
rehabilitation of a defaulted loan do not account for borrowers who 
make only sporadic payments before beginning the required number of 
qualifying payments to rehabilitate the loan. They also claimed that 
the regulations did not reflect the 20-day grace period for a timely 
payment as provided in the statute.
    Discussion: We believe the regulations accurately reflect the HEA 
and Congressional intent. Borrowers must request, or in some fashion 
initiate, loan rehabilitation so that the period during which the 9 
qualifying payments must be made is clear for both the guaranty agency 
and the borrower.
    Additionally, a reasonable and affordable payment amount needs to 
be established, and the consequences of loan rehabilitation, such as 
the addition of collection costs to the rehabilitated loan amount, the 
post-rehabilitation payment period and the likely increased payment 
amount, need to be explained to the borrower. Although the borrower can 
now make 9 qualifying payments over a 10 consecutive month period to 
rehabilitate a defaulted loan, a borrower should not be encouraged to 
make late payments or to miss a monthly payment as part of a loan 
rehabilitation agreement.
    Changes: None.
    Comments: One commenter noted that the original Sec.  
682.405(b)(1)(ii) through (v) had been removed from the interim final 
regulations and asked if this was intentional.
    Discussion: We thank the commenter for bringing this inadvertent 
drafting error to our attention.
    Changes: We have reinserted these paragraphs and renumbered them 
accordingly.

Special Insurance and Reinsurance Rules (Sec.  682.415)

    Comments: Some commenters asked the Secretary to interpret the 
change in the HERA that reduced the insurance percentage paid to 
lenders and lender servicers that have been designated as ``exceptional 
performers'' not to apply to loans for which the first disbursement was 
made before October 1, 1993. These commenters noted that, prior to 
October 1, 1993, the HEA required guaranty agencies to provide 100 
percent insurance to lenders, but that rate was later reduced to 98 and 
97 percent. Until enactment of the HERA, however, lenders or lender 
servicers who were designated as exceptional performers received 100 
percent insurance on all claims. The HERA reduced the insurance for 
exceptional performers to 99 percent. The commenters argue that the 
HERA should not be interpreted to reduce the insurance on loans for 
which the first disbursement was made before October 1, 1993 to 99 
percent for exceptional performers. The commenters also argue that to 
interpret the HERA to apply to loans for which the first disbursement 
was made before October 1, 1993, would violate the lenders' contractual 
and Constitutional rights.
    Discussion: The Secretary does not agree with the commenters. The 
HERA amended section 428I(b)(1) of the HEA to provide that a lender or 
lender servicer designated for exceptional performance would receive 99 
percent insurance on ``all loans for which claims are submitted for 
payment by that eligible lender or servicer for the one-year period'' 
for which the lender or lender servicer has been designated. In making 
this change, Congress eliminated all references to 100 percent 
insurance for exceptional performers. Congress did not retain the 100 
percent insurance for any group of loans. Thus, there is no statutory 
basis for the Secretary to authorize 100 percent insurance on any 
claims submitted by an exceptional performer after the effective date 
of the HERA (July 1, 2006).
    The Secretary also does not agree that this change violates any 
contractual or constitutional rights of a lender. A lender chooses to 
apply for exceptional performer status because of the benefits it 
provides to the lender. A lender is not required to apply for such 
status or to retain such status after it has been granted. Moreover, 
Congress can modify the terms of the exceptional performer status or 
end it completely without any violation of a lender's rights. In the 
HERA, Congress chose to reduce the insurance coverage on loans held by 
exceptional performers that were made before October 1, 1993, 
apparently as a way of offsetting the overall costs of providing higher 
insurance coverage to

[[Page 64390]]

exceptional performer lenders and lender servicers than to others. A 
lender or lender servicer that has been designated as an exceptional 
performer can still receive 100 percent insurance on loans disbursed 
prior to October 1, 1993 by relinquishing its exceptional performer 
status. By relinquishing its exceptional performer status, however, it 
will be accepting a lower insurance rate on all other claims.
    Changes: None.

School as FFEL Lender (Sec.  682.601(a) and (b))

    Comments: Many commenters asked that we clarify the regulations 
regarding a school lender's use of proceeds from the sale or other 
disposition of loans for need-based grants. These same commenters 
questioned the difference between the items identified in the 
parenthetical phrase in Sec.  682.601(a)(8) and those identified as not 
considered ``reasonable and direct administrative expenses'' in Sec.  
682.601(b) and asked that these discrepancies be eliminated.
    One commenter requested that we identify the mandated costs of 
reduced origination fees and reduced interest rates as allowable, 
reasonable and direct administrative expenses for school lenders. A 
couple of commenters asked for guidelines on how a school lender should 
use loan proceeds for required need-based grants in a manner that would 
supplement, but not supplant non-Federal funds that would otherwise be 
used for need-based student grant programs. The commenters also noted 
that no definition of need-based grant was provided in the regulations. 
One of those same commenters also asked us to clarify that a school 
operating as a FFEL school lender would not be prohibited from 
providing assistance to its students, other than Stafford Loans, from 
institutional sources. Another commenter stated that required need-
based grants from loan proceeds should be based on the school lender's 
actual net loan proceeds from the prior year.
    One commenter suggested that Sec.  682.601(a)(9) be revised to 
clarify that the loans a school lender must make prior to April 1, 2006 
be FFEL program loans. Another commenter asked us to clarify whether a 
FFEL school lender was required to conduct a separate independent audit 
of its lender operation.
    Discussion: In reviewing the regulatory provisions that address the 
use of loan proceeds for need-based grants and allowable, reasonable 
and direct administrative expenses, we agree that further clarification 
is appropriate.
    We believe that certain FFEL school lender's mandated or required 
expenses can be characterized as programmatic expenses, but not as 
direct administrative expenses under the HEA. As a result, Sec.  
682.601(b) specifies that reasonable and direct administrative expenses 
do not include the costs associated with securing financing, the cost 
of offering reduced origination fees or reduced interest rates to 
borrowers, or the cost of offering reduced Federal default fees to 
borrowers. However, we have decided to permit a school lender to 
exclude the costs of other statutorily mandated or necessary 
programmatic expenses from the calculation of ``proceeds from the sale 
or other disposition of loans'' that must be used for need-based 
grants. The parenthetical phrase in Sec.  682.601(a)(8) addresses this 
exclusion. Certain optional costs, such as reduced Federal default 
fees, are not covered by the exclusion from loan proceeds or as a 
reasonable and direct administrative expense.
    A school that is also a FFEL Program lender should be able to 
demonstrate on an ongoing basis that there is no pattern or practice of 
reducing institutional funds available for use as non-Federal need-
based grants or scholarships as a result of the availability of lender 
produced funds that must also be used for need-based grants.
    An institution's continued commitment to use institutional as well 
as school lending-produced proceeds for this purpose will demonstrate 
that the school is supplementing, not supplanting, institutional funds 
committed to need-based grants and scholarships.
    We will not dictate a specific approach a school lender must use to 
determine its budget for need-based grants from lending-produced 
proceeds. The lender must be able to show clearly that all proceeds 
from the sources listed in Sec.  682.601(a)(8), except for those 
authorized to be used for reasonable and direct administrative expenses 
and other required programmatic costs that can be netted from proceeds, 
are used for need-based grants. We understand that award commitments 
are made in advance of the start of the school's academic year and that 
this period does not generally correspond with the school lender's 
fiscal year. Determining the pool of funds available for need-based 
grants based on the school lender's immediately preceding fiscal year's 
lending performance, with an additional factor for increased proceeds 
based on increased loan volume, if applicable, would appear to be a 
reasonable approach. ``Need,'' for purposes of need-based grants, is 
documented need for Title IV, HEA program purposes. The provisions 
governing FFEL school lenders do not prohibit the school from making 
other forms of student financial assistance available to its students.
    As provided in Sec.  682.601(a)(7) and discussed in the preamble of 
the interim final regulations, a FFEL school lender must submit a 
compliance audit as a lender in accordance with the requirements 
contained in Sec.  682.305(c)(2) for any fiscal year in which the 
school engages in activities as an eligible lender, beginning with the 
first fiscal year beginning on or after July 1, 2006. School lenders 
subject to the Single Audit Act, 31 U.S.C. 7502, will be required under 
Sec.  682.601(a)(7) to include its FFEL Program lending activities in 
the annual audit and to include information on those activities in the 
audit report, whether or not the lending activities or the student 
financial aid programs are considered a ``major program'' under the 
Single Audit Act. Other school lenders will have to arrange for a 
separate audit of their lending activities using the Lender Audit Guide 
available through the Department of Education's Office of Inspector 
General.
    In making the changes to clarify the audit requirements, we 
determined that Sec.  682.305(c)(2)(v) and (vi) included outdated 
references to other Departmental regulations and audit requirements. We 
have corrected the citations to the audit requirements for governmental 
entities in Sec.  682.305(c)(2)(v). We have also added nonprofit 
organizations to Sec.  682.305(c)(2)(v), because amendments to the 
Single Audit Act apply the same requirements to governmental entities 
and nonprofit organizations. We have removed the separate discussion of 
audit requirements for nonprofit organizations in Sec.  
682.305(c)(2)(vi) and replaced it with a cross-reference to the school 
lender audit requirements.
    Changes: The requirement that school lenders have an annual audit 
in Sec.  682.601(a)(7) has been amended to clarify that, in addition, a 
school lender subject to the Single Audit Act must in addition during 
years when the student financial aid cluster, as defined in OMB 
Circular A-133 Compliance Supplement, is not audited as a major 
program, also audit the school's lending activities as a major program 
under the Single Audit Act. This additional requirement is without 
regard to the amount of loans made. We have also made technical 
corrections to Sec.  682.305(c)(2) as discussed above.
    Section 682.601(a)(8) has been revised to remove the words ``which 
does not include providing origination fees or interest rates at less 
than the fee or rate

[[Page 64391]]

authorized under the provisions of the Act'' following the words 
``need-based grants'' and before ``; and''. A technical change has also 
been made to Sec.  682.601(a)(9) to reflect the requirement that an 
eligible school lender must have made one or more FFEL program loans on 
or before April 1, 2006.

Processing Loan Proceeds (Sec. Sec.  682.604 and 685.304)

    Comments: Several commenters recommended requiring entrance and 
exit counseling for graduate or professional students who borrow PLUS 
Loans. The commenters noted that a graduate or professional student 
PLUS borrower who has not also borrowed a Stafford Loan would never 
have had the benefit of Stafford Loan entrance or exit counseling. In 
addition, these commenters recommended that the exit counseling clarify 
the different repayment rules for PLUS loans and Stafford Loans. Two 
commenters suggested that graduate or professional students with both 
Stafford Loans and PLUS Loans could be exempted from the entrance 
counseling requirement for their PLUS Loans, because these borrowers 
would have already received entrance and exit counseling on their 
Stafford Loans.
    Discussion: The HEA exempts PLUS Loan borrowers from exit 
counseling requirements. Although the Secretary encourages institutions 
to provide exit counseling to graduate and professional student PLUS 
Loan borrowers, the Secretary does not have the authority to require 
such counseling by regulation.
    With regard to entrance counseling, FFEL lenders are already 
required, under Sec.  682.205, to provide extensive disclosure 
information to borrowers before disbursing a loan. This disclosure 
information, which can be provided through either the rights and 
responsibilities statement or a plain language disclosure sent to the 
borrower, includes an explanation of when repayment of the loan is 
required. Lenders are also required to provide a disclosure to 
borrowers prior to the loan going into repayment. This disclosure must 
include the borrower's repayment schedule, the due date of the first 
installment payment, and the number, amount, and frequency of payments. 
For Direct Loans, the Department provides essentially the same 
information to borrowers that FFEL lenders provide under Sec.  682.205. 
We believe that these disclosures are sufficient for the limited number 
of graduate or professional student PLUS borrowers who have not 
received Stafford Loan entrance counseling.
    Changes: None.
    Comments: One commenter requested that PLUS Loans be covered in the 
overaward language in Sec.  682.604(h) because graduate and 
professional students are now eligible PLUS Loan borrowers.
    Discussion: We agree with the commenter that the overaward language 
should be amended to include student PLUS Loans.
    Changes: Section 682.604(h) has been amended to reflect this 
change. We have also made the same change in Sec.  685.303(e) of the 
Direct Loan Program regulations.

Borrower Eligibility (Sec.  685.200)

    Comments: Several commenters recommended that we revise Sec.  
685.200(b)(1)(iv) to allow a student Direct PLUS Loan applicant who is 
determined to have an adverse credit history to receive a Direct PLUS 
Loan if the student obtains an endorser who does not have an adverse 
credit history. The commenters noted that the endorser option is 
available to student PLUS applicants in the FFEL Program.
    Discussion: We did not intend to deny student applicants for Direct 
PLUS Loans the option of obtaining an endorser.
    Changes: We have revised Sec.  685.200(b)(5) of the regulations to 
more clearly reflect that a student Direct PLUS Loan applicant who is 
determined to have an adverse credit history may receive a Direct PLUS 
Loan if he or she obtains an endorser who does not have an adverse 
credit history, or documents to the satisfaction of the Secretary that 
there are extenuating circumstances.

Charges for Which Direct Loan Borrowers Are Responsible (Sec.  685.202)

    Comments: Several commenters suggested that we revise Sec.  
685.202(a)(3) to provide that the portion of a Direct Consolidation 
Loan that is attributable to Health Education Assistance Loan Program 
(HEAL) loans is subject to the same interest rate provision that 
applies to Federal Consolidation Loans under Sec.  682.202(a)(4)(v). 
The commenters noted that section 455(a)(1) of the HEA, as amended by 
the HERA, requires Direct Consolidation Loans and Federal Consolidation 
Loans to have the same terms, conditions, and benefits, unless 
otherwise specified in Part D of the HEA.
    Discussion: The HERA amended the HEA to require that Direct 
Consolidation Loans have the same terms, conditions, and benefits as 
Federal Consolidation Loans, unless otherwise specified in the law. 
However, in this case, there is a specific interest rate provision for 
Direct Consolidation Loans in section 455(b)(7)(C) of the HEA, and that 
provision does not specify a different interest rate for the portion of 
a Direct Consolidation Loan that is attributable to HEAL Loans. 
Therefore, Direct Consolidation Loans are not subject to the provision 
that applies to Federal Consolidation Loans under section 428C(d)(2) of 
the HEA.
    Changes: None.

Repayment Plans (Sec.  685.208)

    Comments: Several commenters suggested that the HERA requires that 
the graduated and extended repayment plans do not require a borrower to 
repay the minimum amount allowed under statute. In addition, these 
commenters suggested that a borrower's monthly payments under these 
repayment plans must be at least the amount of interest and that we add 
a provision that would disallow single graduated payments that exceed 
three times any other graduated installment payment.
    Discussion: We agree that the minimum annual repayment rules should 
not apply to a graduated repayment plan. The HEA exempts graduated and 
income sensitive repayment plans from the minimum annual repayment 
provisions. The HEA does not exempt extended repayment plans from the 
minimum annual payment requirement. In addition, the FFEL Program 
regulations state that graduated and income sensitive repayment plans 
may have installments less than the minimum. However, the FFEL Program 
regulations do not provide for extended repayment plans to have 
installments less than the minimum annual payment amount. The final 
regulations provide that the 10-year graduated repayment plan and the 
extended repayment plan can have graduated payments.
    We do need to add to the regulations for the graduated repayment 
plan, for borrowers entering repayment on or after July 1, 2006, a 
provision that does not allow any single installment payment to be more 
than three times the amount of any other payment.
    Although the HEA does not specifically require that the payments 
must be at least the amount of interest, we agree that the regulations 
would be clearer by including a provision that monthly payments on all 
Direct Loan Program repayment plans must be at least the amount of the 
monthly accrued interest, except that the monthly payment amount under 
the Income Contingent and Alternative repayment plans may be less than 
the monthly accrued interest.

[[Page 64392]]

    Changes: We have revised Sec.  685.208(g)(3) and 685.208(h)(2) to 
provide that, under a graduated repayment schedule, a borrower's 
payments may be less than $50 a month and any single installment 
payment may not be more than three times the amount of any other 
installment payment.
    We have added a new paragraph (a)(2)(iv) in Sec.  685.220 of the 
Direct Loan repayment regulations to provide that monthly repayment 
plans, except Income Contingent and Alternative repayment plans, must 
be at least the amount of the monthly accrued interest.

Consolidation (Sec.  685.220)

    Comments: Several commenters recommended that we revise Sec.  
685.220(c)(1) to clarify that, if a Federal Consolidation Loan is 
consolidated into a Direct Consolidation Loan, only the portion of the 
Federal Consolidation Loan that qualified for an interest subsidy will 
be included in the subsidized portion of the new Direct Consolidation 
Loan. The commenters noted that in many cases, only a portion of a 
Federal Consolidation Loan qualifies for an interest subsidy.
    Discussion: We agree that the current regulatory language is 
unclear with respect to the treatment of Federal Consolidation Loans 
that are included in the subsidized portion of Direct Consolidation 
Loans.
    Changes: We have revised Sec.  685.220(c)(1) to clarify that only 
the portion of a Federal Consolidation Loan that qualified for an 
interest subsidy will be included in the subsidized portion of a Direct 
Consolidation Loan.
    Comments: Several commenters pointed out that Sec.  
685.220(d)(1)(ii)(E) and (F) prohibit a borrower from consolidating a 
loan that is subject to a judgment or an order for wage garnishment 
unless the judgment has been vacated or the wage garnishment order has 
been lifted at the time the borrower applies for a Direct Consolidation 
Loan. In contrast, the corresponding FFEL Program regulations in Sec.  
682.201(c) provide that a judgment or wage garnishment order must have 
been vacated or lifted at the time a Federal Consolidation Loan is 
made. The commenters recommended that we revise Sec.  685.220 to be 
consistent with the FFEL Program requirements related to the 
consolidation of loans subject to a judgment or wage garnishment.
    Discussion: We agree with the commenters that the Direct Loan 
Program regulations should make it clear that the judgment and wage 
garnishment eligibility requirements must be met at the time the Direct 
Consolidation Loan is made rather than at the time of the borrower's 
application for the loan.
    Changes: We have revised Sec.  685.220(d) to clarify that the 
eligibility requirements for consolidating a loan subject to a judgment 
or wage garnishment must be met at the time a Direct Consolidation Loan 
is made.
    Comments: To ensure that Direct Loan Program borrowers have the 
same options for resolving a default as FFEL Program borrowers, some 
commenters recommended that the Secretary clarify in the regulations 
that a borrower with a defaulted Direct Consolidation Loan remains 
eligible for loan rehabilitation with a repayment plan that provides 
for reasonable and affordable payments such as those available under an 
income contingent repayment plan. Other commenters recommended that the 
Secretary amend the Direct Loan Program regulations to allow a borrower 
to consolidate a defaulted Direct Consolidation Loan if the borrower 
first makes satisfactory repayment arrangements on the defaulted loan 
and includes at least one additional eligible loan in the 
consolidation.
    Discussion: There is nothing in the regulations that prohibits a 
borrower with a defaulted Direct Consolidation Loan from entering into 
an agreement to rehabilitate that loan under a repayment plan that 
provides for reasonable and affordable payments.
    We agree that the Direct Loan Program regulations, as currently 
written, might suggest that a borrower with a defaulted Direct 
Consolidation Loan is ineligible to consolidate that loan into a new 
Direct Consolidation Loan under any conditions. However, this was not 
our intent. A borrower with a defaulted Direct Consolidation Loan may 
consolidate that loan into a new Direct Consolidation Loan if the 
borrower includes at least one additional eligible loan in the 
consolidation, and meets the other eligibility requirements that apply 
to borrowers who wish to consolidate a defaulted loan.
    Changes: We have revised the regulations in Sec.  685.220(d)(1)(ii) 
to clarify that a borrower may consolidate a defaulted Direct 
Consolidation Loan if the borrower: (1) makes satisfactory repayment 
arrangements on the defaulted loan or agrees to repay the new Direct 
Consolidation Loan under the income contingent repayment plan; and (2) 
includes at least one additional eligible loan in the consolidation.

Agreements Between an Eligible School and the Secretary for 
Participation in the Direct Loan Program (Sec.  685.300)

    Comments: Several commenters recommended that we amend the 
regulations to reflect the Department's previous guidance that a school 
that awards Direct Subsidized Loans and Direct Unsubsidized Loans to 
its graduate or professional students through the Direct Loan Program 
may award PLUS Loans to its graduate or professional students through 
the FFEL Program, and that a school may also award Direct PLUS Loans to 
its graduate and professional students through the Direct Loan Program 
and Subsidized and Unsubsidized Federal Stafford Loans through the FFEL 
Program.
    Discussion: We agree that the Department's prior guidance should be 
incorporated in the regulations.
    Changes: We have revised Sec.  685.300(b)(8) to clarify that a 
school may award a PLUS Loan to a parent or to a graduate or 
professional student through either the Direct Loan Program or the FFEL 
Program, and a Stafford Loan through the other loan program to a 
dependent undergraduate or graduate or professional student borrower 
for the same period of enrollment. However, a school may not award the 
same type of loan (i.e., Stafford or PLUS) from different loan programs 
to the same student or parent borrower for the same period of 
enrollment.

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.

[[Page 64393]]

    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 final regulations are needed to implement recent amendments 
to the HEA that affect students, borrowers and program participants in 
the Federal student aid programs authorized under Title IV of the HEA.
    The Secretary has limited discretion in implementing most of these 
provisions. The majority of the changes included in these 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 
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 
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 stressed this consideration in the preamble to the interim 
final 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

[[Page 64394]]

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-June 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 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 
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 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 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.
    These estimates were derived from the Department's projections that 
show that loan volume will increase an estimated $3.2 billion in award 
year 2007-2008 and $11.6 billion from fiscal year 2006-2010 as a result 
of higher loan limits. Over the latter period, average loan amounts are 
estimated to increase by $184 for Stafford Loans and $156 for 
Unsubsidized Stafford Loans. The phased reduction of loan origination 
fees is estimated to reduce fees by $5.6 billion on 70,000 loans over 
award years 2006-2010.
    The expansion of distance education made possible by the 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. 
With an average grant of $2,306, 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. The 
Department included in these estimates that additional students made 
eligible for student aid would borrow $441 million in student loans 
over 2006-2010.
    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

[[Page 64395]]

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. These estimates assume over 32,000 
teachers will be eligible for additional forgiveness amounts, 
increasing the average amount forgiven for those borrowers by 
approximately $8,500, from $4,700 to $13,300. (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 
additional 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--demographic information from the National Center 
for Education Statistics' Schools and Staffing Survey.
    Lastly, the Department's estimates took into account the creation 
of a new deferment related to active-duty military service during a war 
or national emergency is estimated to reduce interest payments by an 
average of $1,500 for 21,000 borrowers.
    In addition to implementing expanded borrower benefits, these 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 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 the 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 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.
    The estimates were derived from changes to limit the payment of 
higher-than-standard special allowance on loans funded through tax-
exempt securities, balances eligible to receive the higher special 
allowance payments are estimated to decrease from $15.5 billion in FY 
2006 to $8.3 billion in FY 2010. While the recovery of excess interest 
subsidies produced no estimated savings under interest rate projections 
used for the FY 2007 President's Budget, this policy does save 
significant amounts under the probabilistic interest rate forecasting 
methodology used by the Congressional Budget Office and adopted by the 
Administration for the FY 2007 Mid-Session Review. These savings are 
not included in the estimate of total savings discussed above, as this 
was developed prior to the Mid-Session Review. Reducing lender 
insurance against default from 98 percent to 97 percent is estimated to 
decrease Federal payments by $37.5 million over FYs 2006-2010.
    Lastly, the 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. Under this provision, the Department estimates more 
Direct Loan borrowers who wish to obtain longer-than standard repayment 
plans will consolidate their loans. As a result, the estimated 
percentage of Stafford Loan borrowers in standard repayment will 
increase from 76 percent to 87 percent, while the percentage in 
graduated and extended repayment will decrease from 23 percent to 11 
percent.
    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 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. Only 14 of 35 agencies 
collected this fee in FY 2005; the mandatory imposition of the fee is 
estimated to add $1.5 billion to the balance of agency Federal Funds 
over 2006-2010.) 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 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

[[Page 64396]]

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 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 final regulations largely restate statutory 
requirements that would be self-implementing in the absence of 
regulatory action, cost estimates provided above reflect a pre-
statutory baseline in which the HERA and other statutory changes 
implemented in these regulations do not exist. Costs have been 
quantified for five years, as over time this has been a typical period 
between reauthorizations of the HEA.
    In developing these estimates, a wide range of data sources were 
used, including the NSLDS, 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 final regulations. 
This table provides our best estimate of the changes in Federal student 
aid payments as a result of these 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.
------------------------------------------------------------------------

Paperwork Reduction Act of 1995

    We received one comment on the Paperwork Reduction Act portion of 
the interim final regulations. The commenter disagreed with the 
Paperwork Reduction Act information collection burden analysis for the 
changes we made to Sec.  682.604. These changes implemented section 
8010 of the HERA to end the exemption from multiple disbursement 
requirements for eligible foreign institutions. Our analysis stated 
that, in the vast majority of cases, the lender or guaranty agency is 
already required to disburse a FFEL Program Loan in two installments as 
a regular business practice and that this change would produce no 
additional burden for foreign schools.
    The commenter stated that, while the requirement to disburse a loan 
in two installments is a regular business practice at U.S. 
institutions, prior to publication of the interim final regulations, it 
had not been true for foreign schools. The commenter stated that 
disbursing a loan in two installments is a new burden for foreign 
schools and for lenders and guaranty agencies that provide loans to 
their American students enrolled in foreign schools.
    As a result of public comment, we have reconsidered and recognized 
the burden associated with the elimination of the exemption of single 
disbursement of FFEL Loans to students attending foreign institutions. 
While there is additional burden associated with making two 
disbursements of a FFEL Loan for a student attending a foreign 
institution, the burden is primarily at the institution in the 
processing of an additional disbursement. Since the normal business 
process for a lender or guaranty agency includes making multiple 
disbursements of FFEL Loans, there is no significant additional burden 
to the lender or guaranty agency. These additional activities will 
increase burden hours by 20,000. A Paperwork Reduction Act submission 
for OMB Control Number 1845-0020, which covers the burden in Sec.  
682.604, has been submitted to OMB for approval.
    As noted in the interim final rules, the Department has been 
working with its major stakeholders to develop the forms and 
applications necessary to implement many of the provisions of this 
rulemaking activity. The Department plans to separately publish the 
required Federal Register notices for the collections of information 
associated with the following sections: active duty military 
(Sec. Sec.  674.34, 682.210, and 685.204), obtaining and repaying a 
loan (Sec.  682.102), identity theft (Sec.  682.402), and consolidation 
(Sec.  685.220).
    OMB has already approved the increased burden for the information 
collection requirements associated with the teacher loan forgiveness 
provisions (Sec. Sec.  682.215 and 685.217) under OMB Control Number 
1845-0059.

Assessment of Education Impact

    Based on our own review, we have determined that these final 
regulations do not require transmission of information that any other 
agency or authority of the United States gathers or makes available.

Electronic Access to This Document

    You may view this document, as well as all other Department of 
Education documents published in the Federal Register, in text or Adobe 
Portable Document Format (PDF) on the Internet at the following site: 
http://www.ed.gov/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

[[Page 64397]]

of Federal Regulations is available on GPO Access at: http://www.gpoaccess.gov/nara/index.html.

List of Subjects

34 CFR Part 668

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

34 CFR Part 673

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

34 CFR Parts 682 and 685

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

    Dated: October 25, 2006.
Margaret Spellings,
Secretary of Education.

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

PART 668--STUDENT ASSISTANCE GENERAL PROVISIONS

0
1. 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.


Sec.  668.2  [Amended]

0
2. Section 668.2 is amended in paragraph (b) in the first sentence of 
the definition of Federal PLUS program by adding the word ``dependent'' 
immediately after the words ``encourages the making of loans to parents 
of''.
0
3. Section 668.10 is amended by revising paragraph (a)(3) introductory 
text to read as follows:


Sec.  668.10  Direct assessment programs.

    (a) * * *
    (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 
establish a methodology to reasonably equate the direct assessment 
program (or the direct assessment portion of any program, as 
applicable) to credit or clock hours for the purpose of complying with 
applicable regulatory requirements. The institution must provide a 
factual basis satisfactory to the Secretary for its claim that the 
program or portion of the program is equivalent to a specific number of 
credit or clock hours.
* * * * *


Sec.  668.22  [Amended]

0
4. Section 668.22 is amended by:
0
A. In paragraph (a)(5)(iii)(E), removing the words ``electronically 
or''.
0
B. In paragraph (h)(3)(ii)(B), removing the word ``A'' and adding, in 
its place, the words ``With respect to any grant program, a''.
0
C. In paragraph (h)(5)(iii), removing the word ``ended'' and adding, in 
its place, the word ``occurred''.
0
5. Section 668.35 is amended by:
0
A. In paragraph (e)(2), removing the word ``or''.
0
B. In paragraph (e)(3), removing the punctuation ``.'' at the end of 
the paragraph and adding, in its place, the words ``; or''.
0
C. Adding a new paragraph (e)(4).
    The addition reads as follows:


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

* * * * *
    (e) * * *
    (4) The overpayment is an amount that a student is not required to 
return under the requirements of Sec.  668.22(h)(3)(ii)(B).
* * * * *


Sec.  668.164  [Amended]

0
6. Section 668.164 is amended in paragraph (g)(2)(i) by adding the word 
``parent'' immediately before the word ``PLUS''.
0
7. Section 668.165 is amended by revising the introductory text of 
paragraph (a)(2) to read as follows:


Sec.  668.165  Notices and authorizations.

    (a) * * *
    (2) Except in the case of a post-withdrawal disbursement made in 
accordance with 34 CFR 668.22(a)(5), if an institution credits a 
student's account at the institution with Direct Loan, FFEL, or Federal 
Perkins Loan Program funds, the institution must notify the student, or 
parent of--
* * * * *

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

0
8. 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.


Sec.  673.5  [Amended]

0
9. Section 673.5 is amended in paragraph (c)(1)(ix) by removing the 
word ``and'' immediately before the number ``1607'' and adding the 
words ``, and Section 903 of Public Law 96-342 (Educational Assistance 
Pilot Program)'' at the end of the paragraph.

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

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

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


Sec.  682.101  [Amended]

0
11. Section 682.101 is amended in paragraph (c) by removing the words 
``, or married couples each of whom have eligible loans under these 
programs'', in the third sentence.


Sec.  682.201  [Amended]

0
12. Section 682.201 is amended by:
0
A. In paragraph (b)(3), adding the words ``or under the Federal Direct 
Subsidized Stafford/Ford Loan Program and Federal Direct Unsubsidized 
Stafford/Ford Loan Program, as applicable'' immediately after the words 
``Unsubsidized Stafford Loan Program''.
0
B. In paragraph (c)(1)(vii), removing the parentheticals ``(b)(2)(ii)'' 
and adding, in their place, the parentheticals ``(c)(2)(ii)''.
0
C. In paragraph (c)(3), removing the parentheticals ``(b)(1)'' and 
adding, in their place, the parentheticals ``(c)(1)''.
0
D. In paragraph (d)(1)(i)(A)(3), removing the reference to ``Sec.  
682.209(a)(7)(viii)'' and adding, in its place, a reference to ``Sec.  
682.209(a)(6)(iii)''.
0
E. In paragraph (d)(2), removing the word ``responsible'' and adding, 
in its place, the word ``ineligible''.


Sec.  682.204  [Amended]

0
13. Section 682.204 is amended by:
0
A. In paragraph (a)(1)(i), removing the word ``certified'' and adding, 
in its place, the word ``disbursed''.
0
B. In paragraph (a)(1)(ii), removing the word ``certified'' and adding, 
in its place, the word ``disbursed''.

[[Page 64398]]

0
C. In paragraph (a)(1)(iii), removing the word ``certified'' and 
adding, in its place, the word ``disbursed''.
0
D. In paragraph (a)(2)(i), removing the word ``certified'' and adding, 
in its place, the word ``disbursed''.
0
E. In paragraph (a)(2)(ii), removing the word ``certified'' and adding, 
in its place, the word ``disbursed''.
0
F. In paragraph (d)(5), removing the word ``certified'' and adding, in 
its place, the word ``disbursed''.
0
G. In paragraph (d)(6)(ii), removing the word ``certified'' and adding, 
in its place, the word ``disbursed''.
0
H. In paragraph (d)(6)(iii), removing the word ``certified'' and 
adding, in its place, the word ``disbursed''.


Sec.  682.206  [Amended]

0
14. Section 682.206 is amended in paragraph (e)(3) by adding the words 
``, based on an application received prior to July 1, 2006,'' 
immediately before the word ``may''.
0
15. Section 682.207 is amended by:
0
A. In paragraph (b)(1)(v)(C)(1), adding the words ``with the home 
institution'' after the words ``verification of the student's 
enrollment''.
0
B. Revising paragraph (b)(2)(i)(A)(2).
0
C. Revising paragraph (b)(2)(i)(A)(3).
0
D. In paragraph (b)(2)(i)(B), adding the word ``, facsimile'' after the 
word ``telephone''.
0
E. In paragraph (b)(2)(iv) introductory text, removing the 
parentheticals ``(b)(1)(v)(D)(1)'' and adding, in their place, the 
parentheticals ``(b)(1)(v)(D)''.
    The revisions read as follows:


Sec.  682.207  Due diligence in disbursing a loan.

    (b) * * *
    (2) * * *
    (i) * * *
    (A) * * *
* * * * *
    (2) For a new student, contacting the foreign school the student is 
to attend in accordance with procedures specified by the Secretary, by 
telephone, e-mail or facsimile 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 in accordance with procedures specified by the 
Secretary, by telephone, e-mail or facsimile 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.
* * * * *


Sec.  682.209  [Amended]

0
16. Section 682.209 is amended by:
0
A. In paragraph (a)(6)(v)(B), removing the parentheticals 
``(a)(7)(viii)(C)'' and adding, in their place, the parentheticals 
``(a)(6)(viii)(C)''.
0
B. In paragraph (a)(7)(iv), removing the parentheticals ``(a)(8)(iii)'' 
and adding, in their place, the parentheticals, ``(a)(7)(iii)''.
0
17. Section 682.211 is amended by:
0
A. In paragraph (f)(6), removing the words ``in the case of parent a 
PLUS Loan'' and adding, in their place, the words ``on whose behalf a 
parent has borrowed a PLUS Loan''.
0
B. Revising paragraph (h)(3).
    The revision reads as follows:


Sec.  682.211  Forbearance.

* * * * *
    (h) * * *
    (3) Forbearance agreement. After the lender determines the 
borrower's or endorser's eligibility, and the lender and the borrower 
or endorser agree to the terms of the forbearance granted under this 
section, 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.
* * * * *


Sec.  682.215  [Amended]

0
18. Section 682.215 is amended by:
0
A. In paragraph (c)(3)(ii)(B), removing the word ``either''.
0
B. In paragraph (c)(4)(ii)(B), removing the word ``either''.

0
19. Section 682.302 is amended by:
0
A. Revising paragraph (c)(1)(iii)(B)(4).
0
B. In paragraph (c)(1)(iii)(B)(5), removing the cross-reference ``Sec.  
682.202(a)(2)(v)'' and adding, in its place, the cross-reference 
``Sec.  682.202(a)(2)(v)(A)''.
0
C. Removing paragraph (c)(5).
0
D. Revising paragraph (f) introductory text.
0
E. Revising paragraph (f)(2).
    The revision reads as follows:


Sec.  682.302  Payment of Special Allowance on FFEL loans.

* * * * *
    (c) * * *
    (1) * * *
    (iii) * * *
    (B) * * *
    (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 any 
quarter unless the rate determined under Sec.  682.202(a)(2)(v)(A) 
exceeds 9 percent;
    (f) For purposes of this section--
* * * * *
    (2) The date on which an obligation is considered to be 
``originally issued'' is determined under Sec.  682.302(f)(2)(i) or 
(ii), as applicable.
    (i) An obligation issued to obtain funds to make loans, or to 
purchase a legal or equitable interest in loans, including by pledge as 
collateral for that obligation, is considered to be originally issued 
on the date issued.
    (ii) A tax-exempt obligation that refunds, or is one of a series of 
tax-exempt refundings with respect to a tax-exempt obligation described 
in Sec.  682.302(f)(2)(i), is considered to be originally issued on the 
date on which the obligation described in Sec.  682.302(f)(2)(i) was 
issued.
* * * * *
0
20. Section 682.305 is amended by:
0
A. In paragraph (c)(2)(v), adding the words ``or a nonprofit 
organization'' after the words ``governmental entity'' and removing the 
words ``and 34 CFR, part 80, appendix G'' and adding in their place the 
words ``and 34 CFR Sec. Sec.  74.26 and 80.26, as applicable''.
0
B. Revising paragraph (c)(2)(vi).
0
C. In paragraph (d)(1), by adding the word ``rate'' immediately after 
the word ``interest'' the third time it appears in the sentence.
    The revisions read as follows:


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

* * * * *
    (c) * * *
    (2) * * *
    (vi) With regard to a school that makes or originates loans, the 
audit requirements are in 34 CFR Sec.  682.601(a)(7).
* * * * *


Sec.  682.401  [Amended]

0
21. Section 682.401 is amended in paragraph (b)(27)(iv) by removing the 
parentheticals ``(b)(27)(ii)(D)'' and adding, in their place, the 
parentheticals ``(b)(27)(v)''.


Sec.  682.402  [Amended]

0
22. Section 682.402 is amended by:
0
A. In paragraph (e), in the paragraph heading, removing the word 
``borrower'' and adding, in its place, the word ``borrow''.
0
B. In paragraph (e)(1)(iii)(A), adding the word ``not'' immediately 
before the word ``pay''.
0
23. Section 682.405 is amended by adding new paragraphs (b)(1)(iii) 
through (vii) to read as follows:


Sec.  682.405  Loan rehabilitation agreement.

* * * * *
    (b) * * *

[[Page 64399]]

    (1) * * *
    (iii) For the purposes of this section, the determination of 
reasonable and affordable must--
    (A) Include a consideration of the borrower's and spouse's 
disposable income and reasonable and necessary expenses including, but 
not limited to, housing, utilities, food, medical costs, work-related 
expenses, dependent care costs and other Title IV repayment;
    (B) Not be a required minimum payment amount, e.g. $50, if the 
agency determines that a smaller amount is reasonable and affordable 
based on the borrower's total financial circumstances. The agency must 
include documentation in the borrower's file of the basis for the 
determination if the monthly reasonable and affordable payment 
established under this section is less than $50 or the monthly accrued 
interest on the loan, whichever is greater. However, $50 may not be the 
minimum payment for a borrower if the agency determines that a smaller 
amount is reasonable and affordable; and
    (C) Be based on the documentation provided by the borrower or other 
sources including, but not be limited to--
    (1) Evidence of current income (e.g., proof of welfare benefits, 
Social Security benefits, child support, veterans' benefits, 
Supplemental Security Income, Workmen's Compensation, two most recent 
pay stubs, most recent copy of U.S. income tax return, State Department 
of Labor reports);
    (2) Evidence of current expenses (e.g., a copy of the borrower's 
monthly household budget, on a form provided by the guaranty agency); 
and
    (3) A statement of the unpaid balance on all FFEL loans held by 
other holders.
    (iv) The agency must include any payment made under Sec.  
682.401(b)(4) in determining whether the nine out of ten payments 
required under paragraph (b)(1) of this section have been made.
    (v) A borrower may request that the monthly payment amount be 
adjusted due to a change in the borrower's total financial 
circumstances only upon providing the documentation specified in 
paragraph (b)(1)(iii)(C) of this section.
    (vi) A guaranty agency must provide the borrower with a written 
statement confirming the borrower's reasonable and affordable payment 
amount, as determined by the agency, and explaining any other terms and 
conditions applicable to the required series of payments that must be 
made before a borrower's account can be considered for repurchase by an 
eligible lender. The statement must inform borrowers of the effects of 
having their loans rehabilitated (e.g., credit clearing, possibility of 
increased monthly payments). The statement must inform the borrower of 
the amount of the collection costs to be added to the unpaid principal 
at the time of the sale. The collection costs may not exceed 18.5 
percent of the unpaid principal and accrued interest at the time of the 
sale.
    (vii) A guaranty agency must provide the borrower with an 
opportunity to object to terms of the rehabilitation of the borrower's 
defaulted loan.
* * * * *


Sec.  682.408  [Amended]

0
24. Section 682.408 is amended in paragraph (c) by adding, after the 
words ``Sec.  682.207(b)(1)(ii) and (iv)'', the phrase ``, or Stafford 
Loan proceeds to a borrower in accordance with the requirements of 
Sec.  682.207(b)(1)(i) and (ii),''.
0
25. Section 682.601 is amended by:
0
A. Revising paragraph (a)(7).
0
B. Revising paragraph (a)(8).
0
C. In paragraph (a)(9), adding the words ``one or more FFEL program'' 
before the word ``loans''.
    The revisions read as follows:


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

    (a) * * *
    (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 an 
annual compliance audit that satisfies the following requirements:
    (i) With regard to a school that is a governmental entity or a 
nonprofit organization, the audit must be conducted in accordance with 
Sec.  682.305(c)(2)(v) and chapter 75 of title 31, United States Code, 
and in addition, during years when the student financial aid cluster 
(as defined in Office of Management and Budget Circular A-133, Appendix 
B, Compliance Supplement) is not audited as a ``Major Program'' (as 
defined under 31 U.S.C. 7501) must, without regard to the amount of 
loans made, include in such audit the school's lending activities as a 
Major Program.
    (ii) With regard to a school that is not a governmental entity or a 
nonprofit organization, the audit must be conducted annually in 
accordance with Sec.  682.305(c)(2)(i) through (iii);
    (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; and
* * * * *


Sec.  682.604  [Amended]

0
26. Section 682.604 is amended in the introductory text to paragraph 
(h) by removing the words ``or SLS'' and adding, in their place, ``, 
SLS or PLUS''.

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

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

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


Sec.  685.102  [Amended]

0
28. Section 685.102 is amended in the definition of Estimated Financial 
Assistance in paragraph (b)(1)(ix) by removing the parentheticals 
``(2)(iii)'' and adding, in their place, the parentheticals 
``(2)(iv)''.


Sec.  685.200  [Amended]

0
29. Section 685.200(b) is amended by:
0
A. Removing the paragraph (b)(1) designation.
0
B. Redesignating paragraphs (b)(1)(i), (ii), (iii), (iv), and (v) as 
paragraphs (b)(1), (2), (3), (4), and (5), respectively.
0
C. In newly redesignated paragraph (b)(4), removing the words ``and 
Stafford Ford/Loan Program; and'' and adding, in their place, the words 
``Stafford/Ford Loan Program or under the Federal Subsidized and 
Unsubsidized Stafford Loan Program, as applicable; and''.
0
D. In newly redesignated paragraph (b)(5), removing the words ``does 
not have an adverse credit history in accordance with'' and adding, in 
their place, the words ``meets the requirements of''.


Sec.  685.203  [Amended]

0
30. Section 685.203 is amended by:
0
A. In paragraph (a)(1)(i), removing the word ``originated'' and adding, 
in its place, the word ``disbursed''.
0
B. In paragraph (a)(1)(ii), removing the word ``originated'' and 
adding, in its place, the word ``disbursed''.
0
C. In paragraph (a)(1)(iii), removing the word ``originated'' and 
adding, in its place, the word ``disbursed''.
0
D. In paragraph (a)(2)(i), removing the word ``originated'' and adding, 
in its place, the word ``disbursed''.
0
E. In paragraph (a)(2)(ii), removing the word ``originated'' and 
adding, in its place, the word ``disbursed''.
0
F. In paragraph (c)(2)(v), removing the word ``originated'' and adding, 
in its place, the word ``disbursed''.

[[Page 64400]]

0
G. In paragraph (c)(2)(vi)(B), removing the word ``originated'' and 
adding, in its place, the word ``disbursed''.
0
H. In paragraph (c)(2)(vii), removing the word ``originated'' and 
adding, in its place, the word ``disbursed''.
0
31. Section 685.208 is amended as follows:
0
A. By adding a new paragraph (a)(2)(iv).
0
B. By revising paragraph (g)(3).
0
C. By revising paragraph (h)(2).


Sec.  685.208  Repayment plans.

    (a) * * *
    (2) * * *
    (iv) No scheduled payment may be less than the amount of interest 
accrued on the loan between monthly payments, except under the income 
contingent repayment plan or an alternative repayment plan.
    (g) * * *
    (3) A borrower's payments under this repayment plan may be less 
than $50 per month. No single payment under this plan will be more than 
three times greater than any other payment.
    (h) * * *
    (2) A borrower's payments under this repayment plan may be less 
than $50 per month. No single payment under this plan will be more than 
three times greater than any other payment.
* * * * *


Sec.  685.217  [Amended]

0
32. Section 685.217 is amended by:
0
A. In paragraph (c)(3)(ii)(B), removing the word ``either''.
0
B. In paragraph (c)(4)(ii)(B), removing the word ``either''.
0
33. Section 685.220 is amended by:
0
A. In paragraph (c)(1), removing the words ``and to'' immediately 
before the words ``Federal Consolidation Loans'' and adding, in their 
place, the words ``and attributable to the portion of'', and by 
removing the words ``if they are'' and adding, in their place, the 
words ``that is''.
0
B. In paragraph (d)(1) introductory text, removing the words ``, at the 
time the borrower applies for such a loan,''.
0
C. In paragraph (d)(1)(i) introductory text, removing the word ``The'' 
and adding, in its place, the words ``At the time the borrower applies 
for a Direct Consolidation Loan, the''.
0
D. In paragraph (d)(1)(ii) introductory text, adding the words ``At the 
time the borrower applies for the Direct Consolidation Loan,'' 
immediately before the words ``on the loans being consolidated,''.
0
E. In paragraph (d)(1)(ii)(A), removing the words ``six-month''.
0
F. In paragraph (d)(1)(ii)(D), removing the words ``Except as provided 
in paragraph (d)(4) of this section, in'' and adding, in their place, 
the word ``In''.
0
G. Redesignating paragraphs (d)(1)(iii) and (d)(1)(iv) as paragraphs 
(d)(1)(iv) and (d)(1)(v), respectively.
0
H. Adding a new paragraph (d)(1)(iii).
0
I. Removing paragraph (d)(4).
0
J. Redesignating paragraph (h)(1) as paragraph (h)(1)(i).
0
K. Redesignating paragraph (h)(2) as paragraph (h)(1)(ii).
0
L. Redesignating paragraph (h)(3) as paragraph (h)(2).
    The addition reads as follows:


Sec.  685.220  Consolidation.

* * * * *
    (d) * * *
    (1) * * *
    (iii) On the loans being consolidated, the borrower is--
    (A) Not subject to a judgment secured through litigation, unless 
the judgment has been vacated; or
    (B) Not subject to an order for wage garnishment under section 488A 
of the Act, unless the order has been lifted.
* * * * *

0
34. Section 685.300 is amended by revising paragraph (b)(8) to read as 
follows:


Sec.  685.300  Agreements between and eligible school and the Secretary 
for participation in the Direct Loan Program.

* * * * *
    (b) * * *
    (8) Provide that eligible students at the school and their parents 
may participate in the programs under part B of the Act at the 
discretion of the Secretary for the period during which the school 
participates in the Direct Loan Program under part D of the Act, except 
that--
    (i) A student may not receive a Direct Subsidized Loan and/or a 
Direct Unsubsidized Loan under part D of the Act and a subsidized and/
or unsubsidized Federal Stafford Loan under part B of the Act for the 
same period of enrollment;
    (ii) A graduate or professional student or a parent borrowing for 
the same dependent student may not receive a Direct PLUS Loan under 
part D of the Act and a Federal PLUS Loan under part B of the Act for 
the same period of enrollment;
* * * * *


Sec.  685.303  [Amended]

0
35. Section 685.303(e) introductory text is amended by removing the 
words ``or Direct Unsubsidized Loan'' and adding, in their place, the 
words ``, Direct Unsubsidized, or Direct PLUS Loan''.
* * * * *
 [FR Doc. E6-18183 Filed 10-31-06; 8:45 am]
BILLING CODE 4000-01-P