[Federal Register Volume 72, Number 112 (Tuesday, June 12, 2007)]
[Proposed Rules]
[Pages 32410-32447]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-10826]



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Part II





Department of Education





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34 CFR Parts 674, 682, and 685



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

  Federal Register / Vol. 72 , No. 112 / Tuesday, June 12, 2007 / 
Proposed Rules  

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DEPARTMENT OF EDUCATION

34 CFR Parts 674, 682, and 685

[Docket ID ED-2007-OPE-0133]
RIN 1840-AC89


Federal Perkins Loan Program, Federal Family Education Loan 
Program, and William D. Ford Federal Direct Loan Program

AGENCY: Office of Postsecondary Education, Department of Education.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Secretary proposes to amend the Federal Perkins Loan 
(Perkins Loan) Program, Federal Family Education Loan (FFEL) Program, 
and William D. Ford Federal Direct Loan (Direct Loan) Program 
regulations. The Secretary is amending these regulations to strengthen 
and improve the administration of the loan programs authorized under 
Title IV of the Higher Education Act of 1965, as amended.

DATES: We must receive your comments on or before August 13, 2007.

ADDRESSES: Submit your comments through the Federal eRulemaking Portal 
or via postal mail, commercial delivery, or hand delivery. We will not 
accept comments by fax or by e-mail. Please submit your comments only 
one time, in order to ensure that we do not receive duplicate copies. 
In addition, please include the Docket ID at the top of your comments.
     Federal eRulemaking Portal: Go to http://www.regulations.gov, select ``Department of Education'' from the agency 
drop-down menu, then click ``Submit.'' In the Docket ID column, select 
ED-2007-OPE-0133 to add or view public comments and to view supporting 
and related materials available electronically. Information on using 
Regulations.gov, including instructions for submitting comments, 
accessing documents, and viewing the docket after the close of the 
comment period, is available through the site's ``User Tips'' link.
     Postal Mail, Commercial Delivery, or Hand Delivery. If you 
mail or deliver your comments about these proposed regulations, address 
them to Ms. Gail McLarnon, U.S. Department of Education, 1990 K Street, 
NW., room 8026, Washington, DC 20006-8542.

    Privacy Note: The Department's policy for comments received from 
members of the public (including those comments submitted by mail, 
commercial delivery, or hand delivery) is to make these submissions 
available for public viewing on the Federal eRulemaking Portal at 
http://www.regulations.gov. All submissions will be posted to the 
Federal eRulemaking Portal without change, including personal 
identifiers and contact information.


FOR FURTHER INFORMATION CONTACT: Ms. Gail McLarnon, U.S. Department of 
Education, 1990 K Street, NW., Washington, DC 20006-8542. Telephone: 
(202) 219-7048 or via the Internet: [email protected].
    If you use a telecommunications device for the deaf (TDD), you may 
call the Federal 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: 

Invitation To Comment

    We invite you to submit comments regarding these proposed 
regulations. To ensure that your comments have maximum effect in 
developing the final regulations, we urge you to identify clearly the 
specific section or sections of the proposed regulations that each of 
your comments addresses and to arrange your comments in the same order 
as the proposed regulations.
    We invite you to assist us in complying with the specific 
requirements of Executive Order 12866 and its overall requirement of 
reducing regulatory burden that might result from these proposed 
regulations. Please let us know of any further opportunities we should 
take to reduce potential costs or increase potential benefits while 
preserving the effective and efficient administration of the programs.
    During and after the comment period, you may inspect all public 
comments about these proposed regulations by accessing Regulations.gov. 
You may also inspect the comments, in person, in room 8026, 1990 K 
Street, NW., Washington, DC, between the hours of 8:30 a.m. and 4 p.m., 
Eastern time, Monday through Friday of each week except Federal 
holidays.

Assistance to Individuals With Disabilities in Reviewing the Rulemaking 
Record

    On request, we will supply an appropriate aid, such as a reader or 
print magnifier, to an individual with a disability who needs 
assistance to review the comments or other documents in the public 
rulemaking record for these proposed regulations. If you want to 
schedule an appointment for this type of aid, please contact the person 
listed under FOR FURTHER INFORMATION CONTACT.

Negotiated Rulemaking

    Section 492 of the Higher Education Act of 1965, as amended (HEA) 
requires the Secretary, before publishing any proposed regulations for 
programs authorized by Title IV of the HEA, to obtain public 
involvement in the development of the proposed regulations. After 
obtaining advice and recommendations from individuals and 
representatives of groups involved in the Federal student financial 
assistance programs, the Secretary must subject the proposed 
regulations to a negotiated rulemaking process. The proposed 
regulations that the Department publishes must conform to agreements 
resulting from that process unless the Secretary reopens the process or 
provides a written explanation to the participants in that process 
stating why the Secretary has decided to depart from the agreements. 
Further information on the negotiated rulemaking process can be found 
at: http://www.ed.gov/policy/highered/reg/hearulemaking/2007/nr.html.
    On August 18, 2006, the Department published a notice in the 
Federal Register (71 FR 47756) announcing our intent to establish up to 
four negotiated rulemaking committees to prepare proposed regulations. 
One committee would focus on issues related to the Academic 
Competitiveness Grant and National Science and Mathematics Access to 
Retain Talent (SMART) Grant programs. A second committee would address 
issues related to the Federal student loan programs. A third committee 
would address programmatic, institutional eligibility, and general 
provisions issues. Lastly, a fourth committee would address 
accreditation. The notice requested nominations of individuals for 
membership on the committees who could represent the interests of key 
stakeholder constituencies on each committee. The four committees met 
to develop proposed regulations over the course of several months, 
beginning in December 2006. This NPRM proposes regulations relating to 
the student loan programs that were discussed by the second committee 
mentioned in this paragraph (the ``Loans Committee'').
    The Department developed a list of proposed regulatory changes from 
advice and recommendations submitted by individuals and organizations 
in testimony submitted to the Department in a series of four public 
hearings held on:

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     September 19, 2006, at the University of California-
Berkeley in Berkeley, California.
     October 5, 2006, at the Loyola University in Chicago, 
Illinois.
     November 2, 2006, at the Royal Pacific Hotel Conference 
Center in Orlando, Florida.
     November 8, 2006, at the U.S. Department of Education in 
Washington, DC.
    In addition, the Department received written comments on possible 
regulatory changes submitted directly to the Department by interested 
parties and organizations. All regional meetings and a summary of all 
comments received orally and in writing are posted as background 
material in the docket and can also be accessed at http://www.ed.gov/policy/highered/reg/hearulemaking/2007/hearings.html. Staff within the 
Department also identified issues for discussion and negotiation. 
Lastly, because The Third Higher Education Extension Act of 2006, (Pub. 
L. 109-292), made changes to the law governing eligible lender trustee 
relationships as of September 30, 2006, the Department added this issue 
to the Loans Committee agenda.
    At its first meeting in December, 2006, the Loans Committee reached 
agreement on its protocols and proposed agenda. These protocols 
provided that the non-Federal negotiators would not represent the 
interests of stakeholder constituencies, but would instead participate 
in the negotiated rulemaking process based on each Committee member's 
experience and expertise in the Title IV, HEA loan programs.
    The members of the Loans Committee were:
     Jennifer Pae, United States Students Association, and Luke 
Swarthout (alternate), State PIRG (Public Interest Research Groups) 
Higher Education Project;
     Deanne Loonin and Alys Cohen (alternate) of the National 
Consumer Law Center.
     Darrel Hammon, Laramie Community College, and Kenneth 
Whitehurst (alternate), North Carolina Community Colleges.
     Pamela W. Fowler, University of Michigan, Patricia McClurg 
(alternate), University of Wyoming, and Sara Bauder (alternate), 
University of Maryland.
     Elizabeth Hicks, Massachusetts Institute of Technology, 
and Ellen Frishberg (alternate), Johns Hopkins University.
     Jeff Arthur, ECPI College of Technology, Robert Collins 
(alternate), Apollo Group, and Nancy Broff (alternate), Career College 
Association.
     Shari Crittendon, United Negro College Fund, and William 
``Buddy'' Blakey (alternate), William A. Blakey & Associates, PLLC.
     Scott Giles, Vermont Student Assistance Corporation, and 
Rachael Lohman (alternate), Pennsylvania Higher Education Assistance 
Agency.
     Tom Levandowski, Wachovia Corporation, and Lee Woods 
(alternate), Chase Education Finance.
     Phil Van Horn, Wyoming Student Loan Corporation, and 
Robert L. Zier (alternate), Indiana Secondary Market for Education 
Loans.
     Robert Sommer, Sallie Mae, and Wanda Hall (alternate), 
EdFinancial Services.
     Richard George, Great Lakes Higher Education Guaranty 
Corporation, and Gene Hutchins (alternate), New Jersey Higher Education 
Student Assistance Authority.
     Eileen O'Leary, Stonehill College, and Christine McGuire 
(alternate), Boston University.
     Alisa Abadinsky, University of Illinois at Chicago, and 
Karen Fooks (alternate), University of Florida.
     Dan Madzelan, U.S. Department of Education.

Ellen Frishberg of Johns Hopkins University resigned from the Committee 
after the third negotiated rulemaking session.
    During its meetings, the Loans Committee reviewed and discussed 
drafts of proposed regulations. It did not reach consensus on the 
proposed regulations in this NPRM. More information on the work of this 
committee can be found at: http://www.ed.gov/policy/highered/reg/hearulemaking/2007/loans.html.
    These regulations were further refined by the Task Force on Student 
Loans. The Secretary created this task force on April 24, 2007, to 
review issues within the student loan industry. The task force was 
comprised of representatives from several offices within the 
Department, including the Office of Postsecondary Education, Office of 
Federal Student Aid, Office of the General Counsel, Office of Budget 
Service, Office of Planning, Evaluation, and Policy Development, and 
Office of Inspector General. The task force submitted its 
recommendations regarding these regulations to the Secretary on May 9, 
2007.

Significant Proposed Regulations

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

Simplification of Deferment Process (Sec. Sec.  674.38, 682.210, 
682.210, 682.210, and 685.204)

    Statute: Sections 428(b)(1)(M), 455(f)(2), and 464(c)(2)(A) of the 
HEA authorize deferments for borrowers in the FFEL, Direct Loan, and 
Perkins Loan programs under certain circumstances. A FFEL, Direct Loan, 
or Perkins Loan borrower may receive a deferment during a period when 
the borrower is: Enrolled at least half-time in an institution of 
higher education; enrolled in an approved graduate fellowship program; 
enrolled in an approved rehabilitation training program; seeking and 
unable to find full-time employment; performing qualifying active duty 
military service; or experiencing an economic hardship.
    Current Regulations: Currently, a borrower who has loans held by 
one or more lenders must apply separately to each lender for a 
deferment in accordance with Sec. Sec.  674.38, 682.210, and 685.204 of 
the Department's regulations. Each lender is required to review the 
borrower's deferment request, and make its own determination of the 
borrower's eligibility for the deferment. There is an exception to this 
requirement for in-school deferments. Under Sec. Sec.  674.38(a)(2) and 
682.210(c)(1), a Perkins institution or a FFEL lender may grant an in-
school deferment based on information from the borrower's school, or 
student status information from another source. The Secretary also has 
this option in the Direct Loan Program under Sec.  
685.204(b)(1)(iii)(A)(3). When an in-school deferment is granted using 
this procedure, the institution, lender or Secretary must notify the 
borrower that the deferment has been granted, and provide the borrower 
an opportunity to decline the deferment.
    Proposed Regulations: The proposed regulations in Sec.  
682.210(s)(1)(iii) would allow FFEL lenders to grant graduate 
fellowship deferments, rehabilitation training program deferments, 
unemployment deferments, military service deferments, and economic 
hardship deferments based on information that another FFEL lender or 
the Department has granted the borrower a deferment for the same reason 
and the same time period. The proposed regulations in Sec.  
685.204(g)(2) would also permit the Department to grant a deferment on 
a Direct Loan based on deferment information from a

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FFEL Program lender. The proposed regulations in Sec.  674.38(a)(2) 
would permit schools in the Perkins Loan Program to grant deferments 
based on information from another Perkins Loan holder, FFEL lender, or 
the Department.
    Under the proposed regulations in Sec. Sec.  674.38(a)(3), 
682.210(s)(1)(iv) and 685.204(g)(3), Title IV, HEA loan holders will be 
able to rely in good faith on the deferment eligibility determinations 
of other lenders, including the Department. However, if a loan holder 
has evidence indicating that the borrower does not qualify for a 
deferment, the loan holder may not grant a deferment based on another 
holder's determination of deferment eligibility.
    In addition, the proposed regulations in Sec. Sec.  674.38(a)(6), 
682.210(i)(1) and (t)(7), and 685.204(g)(5) would allow a borrower's 
representative to apply for a military service deferment on behalf of 
the borrower. This change would apply to both the Armed Forces 
deferment available for loans made before July 1, 1993 and the current 
military service deferment.
    Reasons: The non-Federal negotiators recommended adding provisions 
to Sec.  682.210 of the regulations to allow FFEL lenders to grant 
deferments based on deferments granted by other lenders. They noted 
that this is allowable for in-school deferments and asked to extend 
this authority to other deferments. Under this proposal, the FFEL 
lender would determine borrower eligibility for the deferment by 
contacting the other lender or by checking the Department's National 
Student Loan Data System (NSLDS). The Department agreed to consider 
this addition to the regulations. In addition, the Department agreed 
with the negotiators to allow Perkins Loan schools to grant deferments 
based on a borrower's FFEL or Direct Loan deferment eligibility as 
reflected in the proposed changes to Sec.  674.38(a). However, since 
eligibility and documentation requirements for some Perkins Loan 
deferments are different from corresponding deferment requirements in 
the FFEL and Direct Loan programs, these proposed regulations would not 
allow FFEL lenders, or the Department for Direct Loans, to grant 
deferments based on a borrower receiving a deferment on his or her 
Perkins Loan.
    The proposed regulations limit this simplified deferment process to 
deferments that are available to a borrower who received a Title IV, 
HEA loan on or after July 1, 1993. The negotiators suggested that the 
new regulations should also apply to deferments that were available to 
a borrower who first received a Title IV, HEA loan prior to July 1, 
1993.
    However, the Department decided that the pre-July 1, 1993 
deferments are more complex and have more detailed qualifications than 
the current deferments. In addition, the older deferments are not the 
same for all types of loans. A borrower could qualify for a deferment 
on some of their loans but not others. The post-July 1, 1993 deferments 
are relatively uniform across the Title IV, HEA loan programs and 
across loan types. In light of these differences, the Department 
decided that the new policy should apply only to the deferments 
available on current loans.
    Some negotiators asked that the regulations include protection for 
lenders that grant a deferment in error based on another lender's 
determination of deferment eligibility. In response, the Department is 
proposing to add language to Sec. Sec.  674.38(a)(3), 682.210(s)(1)(iv) 
and 685.204(g)(3) stating that loan holders may rely in good faith on 
the deferment determination of another holder, but may not knowingly 
grant an ineligible borrower a deferment if the loan holder has 
information indicating that the borrower is not eligible.
    Some negotiators proposed that loan holders be allowed to grant a 
deferment unilaterally, without any contact from the borrower. The 
Department did not accept this proposal because, although a borrower 
may qualify for a deferment on all of his or her loans, the borrower 
may not necessarily want a deferment on all of his or her loans. Under 
the simplified process, the borrower would not have to submit a 
deferment application to each lender, but would still have to request 
the deferment, in writing, electronically or verbally.
    Some negotiators requested a change to the regulations that would 
allow a request for a military service deferment to be submitted by a 
representative of the borrower as well as the borrower. They noted that 
borrowers who qualify for these deferments may not be in a position to 
easily apply for them. The Department agreed that a special provision 
for these borrowers is warranted. The Department is proposing to amend 
the regulations in Sec. Sec.  674.38(a)(6), 682.210(i)(5) and (t)(7), 
and 685.204(g)(5) to allow a borrower's representative to apply for a 
military service deferment or an Armed Forces deferment on the 
borrower's behalf.
    The Department notes that granting a deferment under this 
simplified process is optional for lenders. A lender is not required to 
use this process when reviewing deferment requests.

Accurate and Complete Copy of a Death Certificate (Sec. Sec.  674.61, 
682.402, and 685.212)

    Statute: Sections 437(a) and (d) of the HEA provide for the 
discharge of a FFEL loan if the borrower, or a dependent on whose 
behalf a parent has borrowed, dies. This provision also applies to 
Direct Loans under section 455(a)(1) of the HEA. Section 464(c)(1)(F) 
provides for the discharge of a Perkins Loan if the borrower dies.
    Current Regulations: Current regulations in Sec. Sec.  674.61(a), 
682.402(b), and 685.212(a) state that if a Perkins, FFEL, or Direct 
Loan borrower dies, or if the student for whom a FFEL or Direct PLUS 
Loan was borrowed dies, the borrower's loan will be discharged based on 
an original or certified copy of the death certificate. Under 
exceptional circumstances, and on a case-by-case basis, a discharge due 
to the death of the borrower may be granted without an original or 
certified copy of the death certificate.
    Proposed Regulations: The Secretary proposes to amend Sec. Sec.  
674.61(a), 682.402(b), and 685.212(a) to allow the use of an accurate 
and complete photocopy of the original or certified copy of the 
borrower's death certificate, in addition to the original or certified 
copy of the death certificate, to support the discharge of a Title IV 
loan due to death.
    Reasons: The Secretary believes that allowing the use of an 
accurate and complete photocopy of the death certificate will decrease 
the burden for survivors of the deceased and for loan holders 
processing death discharges. We have also learned that, in some states, 
there are restrictions and additional costs related to getting an 
additional original or certified copy of the original death certificate 
to provide to loan holders. Under the proposed regulations, the lender 
may accept an accurate and complete photocopy of the death certificate. 
The Secretary chose not to allow the use of a fax or electronic version 
of the certificate because documents in those formats are more 
vulnerable to alteration.
    Under the proposed regulations a lender may rely on an ``accurate 
and complete photocopy'' of the original or certified copy of the death 
certificate to grant a discharge due to the death of the borrower. The 
intent of the proposed change is not to require an individual to 
provide an original or certified copy of the death certificate to the 
lender for the lender to photocopy, but rather to allow a lender to 
accept a photocopy of the original or certified copy of the death 
certificate as an accurate and complete

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copy of the original or certified copy, unless there is evidence that 
the copy is not an accurate and complete copy of the original or 
certified copy.
    Although other data sources such as NSLDS, the Social Security 
Administration's Death Master File, and documents such as a police 
report or court documents could possibly be used as a basis for 
discharging a loan due to death, the Department declined to expand the 
documentation requirements in order to guard against fraud and abuse in 
the discharge process.
    While the Department believes that it is difficult to alter an 
original or certified copy of an original death certificate because 
these documents are generally notarized or contain raised, government 
stamps validating the document's authenticity, we nonetheless solicit 
public comment on whether the use of a photocopy of an original or 
certified copy of an original death certificate could lead to fraud and 
abuse in the death discharge process. Specifically, we are interested 
in comments that identify how such fraud is likely to occur and ways to 
address this issue.

Total and Permanent Disability Discharge (Sec. Sec.  674.61, 682.402, 
and 685.213)

    Statute: Sections 437(a), 464(c)(1)(F), and 455(a)(1) of the HEA 
provide for a discharge of a borrower's FFEL, Perkins, or Direct Loan 
Program loan, respectively, if the borrower becomes totally and 
permanently disabled. A total and permanent disability is determined in 
accordance with regulations of the Secretary.
    Current Regulations: Sections 674.61(b), 682.402(c), and 685.213 of 
the Perkins, FFEL, and Direct Loan Program regulations, respectively, 
authorize the discharge of a loan if the borrower becomes totally and 
permanently disabled. Section 674.51 of the Perkins Loan Program 
regulations defines total and permanent disability, and Sec.  682.200 
defines totally and permanently disabled, for the purposes of the FFEL 
and Direct Loan Programs, as the condition of an individual who is 
unable to work and earn money because of an injury or illness that is 
expected to continue indefinitely or result in death.
    Under current regulations in Sec. Sec.  674.61(b), 682.402(c), and 
685.213, a Perkins, FFEL or Direct Loan borrower submits a discharge 
application to the loan holder. The application must include a 
physician's certification that the borrower is totally and permanently 
disabled as defined in Sec.  682.200 or has a total and permanent 
disability as defined in Sec. Sec.  674.51. To establish eligibility 
for the discharge, a borrower cannot have worked or earned money or 
received a Title IV loan at any time after the date of the borrower's 
total and permanent disability. The loan holder reviews the 
application, and upon making an initial determination that the borrower 
meets the definition and requirements for a total and permanent 
disability discharge, notifies the borrower that the loan has been 
assigned to the Department and that no payments are due to the lender. 
Under Sec.  685.213 of the current regulations, the Department is 
responsible for reviewing disability discharge applications submitted 
by Direct Loan borrowers.
    Upon assignment of the Perkins or FFEL Loan or receipt of a Direct 
Loan discharge application, the Department reviews the application. If 
the borrower meets the eligibility requirements for a discharge, the 
Department notifies the borrower that the loan has been placed in a 
three-year conditional discharge status and that no payments are due 
during that period. During the three-year conditional discharge period, 
the borrower's income from employment cannot exceed the poverty line 
for a family of two for any 12-month period, and the borrower cannot 
take out any additional Title IV loans. Under current regulations, in 
some cases, the three-year conditional period will already have elapsed 
if the borrower's total and permanent disability date is more than 
three years prior to the date the borrower applies for a discharge. In 
such cases, a final discharge decision is made immediately upon 
assignment of the account to the Department without any current income 
verification, as long as the borrower is otherwise eligible. Otherwise, 
if, at the end of the three-year conditional discharge period, the 
borrower still meets the discharge requirements, the Department makes a 
final determination of eligibility and discharges the loan. Under 
current regulations, any payments received by the loan holder or the 
institution after the date the loan is assigned to the Secretary or 
during the three-year conditional discharge period are forwarded to the 
Department for crediting to the borrower's account. When the Department 
makes a final determination to discharge the loan, the payments 
received on the loan after the date the loan was assigned to the 
Department are returned. If the borrower does not meet the eligibility 
requirements during the three-year conditional discharge period, 
collection activity resumes on the loan.
    Proposed Regulations: These proposed regulations would restructure 
the disability discharge regulations for the Perkins Loan, FFEL, and 
Direct Loan programs, Sec. Sec.  674.61(b), 682.402(c) and 685.213, 
respectively, to clarify the eligibility requirements for a final total 
and permanent disability discharge and better describe the discharge 
process. The Department is not changing the definition of total and 
permanent disability in Sec.  674.51 or the definition or totally and 
permanently disabled in Sec.  682.200.
    The proposed regulations would: (1) Add a new requirement in 
Sec. Sec.  674.61(b)(2)(i), 682.402(c)(2)(i) and 685.213(b)(1) that the 
borrower submit a discharge application to the loan holder within 90 
days of the date the physician certifies the borrower's application; 
(2) define the date of the borrower's total and permanent disability as 
the date the physician certifies the borrower's disability on the 
discharge application form in Sec. Sec.  674.61(b)(3)(ii), 
682.402(c)(3)(ii), and 685.213(c)(2); (3) require a prospective three 
year conditional discharge period to establish eligibility for a total 
and permanent disability discharge beginning on the date the Secretary 
makes an initial determination that the borrower is totally and 
permanently disabled, in Sec. Sec.  674.61(b)(3)(iii), 
682.402(c)(3)(iii) and 685.213(c)(3); and (4) provide that upon making 
a final determination of the borrower's total and permanent disability, 
the Secretary returns those payments made on the loan after the date 
the physician completed and certified the borrower's discharge on the 
loan discharge application in Sec. Sec.  674.61(b)(5), 
682.402(c)(4)(iii), 685.213(d)(3)(ii).
    Reasons: The Department is proposing to restructure the Perkins 
Loan, FFEL, and Direct Loan total permanent disability discharge 
regulations in Sec. Sec.  674.61(b), 682.402(c) and 685.213, 
respectively, to clarify the eligibility requirements and to better 
explain the application and eligibility process. Several negotiators 
argued that the process and eligibility requirements as currently 
written are difficult for borrowers to understand. For example, non-
Federal negotiators noted that the current regulations establish a 
different standard for eligibility for the period between the date of 
the physician's certification and the Secretary's initial determination 
of eligibility in comparison to the three-year conditional discharge 
period. The Department proposes to address these concerns by clearly 
listing the continuing eligibility requirements in Sec.  
674.61(b)(2)(iii) of the Perkins Loan Program regulations, Sec.  
682.402(c)(3) of the FFEL program regulations, and

[[Page 32414]]

Sec.  685.213(b)(2) of the Direct Loan program regulations and by 
requiring loan holders to disclose these eligibility requirements to 
borrowers. Some non-Federal negotiators also noted that even though 
collection activity is suspended after the borrower submits a discharge 
application, some borrowers continued to make payments on their loan 
because they were not aware of the suspension of collection activity. 
The Department is proposing to amend the regulations to require loan 
holders to inform borrowers that no further payments on the loan are 
due once the discharge application is sent to the Secretary for her 
initial eligibility determination.
    The proposed regulations in Sec. Sec.  674.61(b)(2)(i), 
684.402(c)(2)(i) and 685.213(b)(1) would require borrowers to submit 
the completed application for a total and permanent disability 
discharge to the loan holder within 90 days of the date the physician 
certifies the application. This requirement would help ensure that the 
Secretary has accurate and timely information on which to base her 
determination. Limiting the time period will also help borrowers avoid 
the possibility that they might inadvertently take an action that would 
disqualify them for a final discharge. The Department initially 
proposed a 30-day application submission requirement, but the 
Department was persuaded by the non-Federal negotiators that 90 days 
would provide a more appropriate standard for borrowers.
    Under the proposed regulations in Sec. Sec.  674.61(b)(3)(ii), 
682.402(c)(3)(ii), and 685.213(c)(2) if the Secretary makes an initial 
determination that the borrower qualifies for a discharge, the date of 
disability is the date the physician certifies the borrower's 
disability on the form. The proposed regulations also provide for a 
three-year prospective conditional discharge period to establish 
eligibility for a total and permanent disability discharge. The 
conditional discharge period begins on the date that the Secretary 
makes her initial determination that the borrower is totally and 
permanently disabled. Thus, the receipt of any Title IV, HEA loans, 
including consolidation loans, or income by the borrower before the 
date the physician certified the application form would not disqualify 
the borrower from receiving a final discharge. However, the borrower 
would have to meet the disability requirements for a three-year 
prospective period.
    The Department is proposing these changes because currently, in 
some cases, the three-year conditional discharge period has already 
elapsed before the borrower applies for a discharge and a final 
discharge is made immediately upon assignment of the account to the 
Department. This result is inconsistent with the original intent of the 
Department's regulations, which was to conform the discharge 
requirements to other Federal programs that only provide Federal 
benefits based on a disability after monitoring the applicant's 
condition. Further, there have been instances when borrowers have 
received otherwise disqualifying Title IV loans and earnings in excess 
of allowable levels after the date of application but also after the 
date of the borrower's retroactive final discharge. Under current 
regulations, the Secretary grants a final discharge in these 
circumstances. Some non-Federal negotiators did not agree with the 
Department's proposal that the borrower's disability date should be the 
date the physician certifies that the borrower is disabled on the 
discharge application form.
    Lastly, the Department is proposing changes to Sec. Sec.  
674.61(b)(5), 682.402(c)(4)(iii), and 685.213(d)(3)(ii) to provide that 
the Secretary, upon making a final determination of the borrower's 
total and permanent disability, will return payments made on the loan 
after the date the physician completed and certified the borrower's 
total and permanent disability on the loan discharge application. The 
non-Federal negotiators did not agree with the Department's position 
and stated that if a borrower successfully completed a three-year 
prospective discharge period, the borrower should receive a refund of 
prior payments made on the loan. The Department is proposing this 
change because it believes that not counting any loans or income 
received prior to the date the physician certifies the borrower's 
disability on the application and returning payments made by the 
borrower or on the borrower's behalf back to the date of disability 
provided by a physician would create two onset dates and create program 
integrity issues in the administration of the total and permanent 
disability discharge process. In addition, in administering the 
discharge process, the Department has found that, in many cases, 
certifying physicians have to rely solely on the individual's 
statements in determining a date of disability onset. In these 
situations, there may not be a strong medical basis for using that date 
as a date for establishing eligibility for Federal benefits. In light 
of this history, the Department believes that the best date to use as 
the eligibility date is the date the physician certified the 
application, since that process requires the physician to review the 
borrower's condition at that time rather than speculate as to the 
borrower's condition in the past.

NSLDS Reporting Requirements (Sec. Sec.  674.16, 682.208, 682.401, and 
682.414)

    Statute: Section 485B(e) of the HEA provides for the Secretary to 
prescribe by regulation standards and procedures that require all 
lenders and guaranty agencies to report information to the NSLDS on all 
aspects of Title IV loans in uniform formats in order to permit the 
direct comparison of data submitted by individual lenders, servicers, 
and guaranty agencies.
    Current Regulations: The current Perkins Loan Program and FFEL 
Program regulations do not reflect NSLDS reporting requirements. Under 
Sec.  682.401(b)(20), guaranty agencies are required to monitor student 
enrollment status of a FFEL Program borrower, or a student on whose 
behalf a parent has borrowed, and report to the current holder of the 
loan within 60 days any changes in the student's enrollment status that 
triggers the beginning of the borrower's grace period or the beginning 
or resumption of the borrower's immediate obligation to make scheduled 
payments.
    Current Sec.  682.414(b)(4) requires guaranty agencies to report 
information consisting of extracts from computer databases and supplied 
in the medium and the format prescribed in the Stafford and SLS, and 
PLUS Loan Tape Dump Procedures. The tape dumps, which are now obsolete, 
contained loan status information on guaranty agency loans.
    Proposed Regulations: The Secretary proposes in Sec.  674.16(j) of 
the Perkins Loan regulations, and Sec.  682.208(i) and Sec.  
682.414(b)(4) of the FFEL regulations to require institutions, lenders, 
and guaranty agencies to report enrollment and loan status information, 
or any other Title IV-loan-related data required by the Secretary, to 
the Secretary by a deadline established by the Secretary.
    The proposed changes to Sec.  682.401(b)(20) require a guaranty 
agency to report enrollment and loan status information on a FFEL 
Program borrower or student to the current holder of any loan within 30 
days of any changes to the student's enrollment status.
    Reasons: The proposed changes to Sec. Sec.  674.16(j), 682.208(i) 
and 682.414(b)(4) would provide for the establishment by the Secretary 
of NSLDS reporting timeframes to improve the timeliness and 
availability of

[[Page 32415]]

information important to administering the student loan programs. The 
Secretary also believes that the Department will be able to implement 
other proposed regulatory changes, such as simplification of the 
deferment granting process, more easily and more efficiently if timely 
and accurate information is more readily available in NSLDS.
    Some non-Federal negotiators requested that the proposed 
regulations require the Secretary to consult with program participants 
before determining the ``deadline dates established by the Secretary''. 
The Department declined to make this change to the proposed 
regulations, but noted that there are other opportunities for program 
participants to be involved in discussions about NSLDS reporting 
requirements and that it was unnecessary to require it in regulations. 
The Department is required to consult with the community under section 
432(e) of the HEA and will continue to discuss the issues and concerns 
of Title IV, HEA program participants related to NSLDS reporting 
through established workgroups and conference calls.
    Several negotiators noted that the Department's proposed reduction 
of the timeframe for a guaranty agency to report enrollment status to a 
lender from 60 days to 30 days might be disruptive and require systems 
changes for the various participants in the Title IV loan programs. A 
negotiator requested a longer time frame of at least 45 days. The 
Department acknowledges that the change to 30 days will have some 
impact on the guaranty agencies' and lenders' systems. However, the 
Department is concerned that a timeframe of 45 days or longer will mean 
that the information in the NSLDS is quickly out-of-date. The 
Department invites further comment and discussion on this timeframe and 
on any associated costs through this NPRM. Also, under the master 
calendar requirements contained in the HEA, if the Department finalizes 
these proposed regulations on or before November 1, 2007, this 
provision will be effective on July 1, 2008, which will provide 
sufficient time for system reprogramming.

Certification of Electronic Signatures on Master Promissory Notes 
(MPNs) Assigned to the Department (Sec. Sec.  674.19, 674.50, 682.409, 
and 682.414)

    Statute: Section 467(a) of the HEA authorizes the Secretary to 
collect assigned Perkins Loans under such terms and conditions as the 
Secretary may prescribe. Section 432(a) of the HEA authorizes the 
Secretary to prescribe regulations as necessary to carry out the 
purposes of the FFEL Program, including regulations to establish 
minimum standards with respect to sound management and accountability 
in the FFEL Program.
    Current Regulations: Currently the regulations for the Perkins Loan 
program and the FFEL Program do not include any requirements for 
institutions and lenders to create and maintain a record of their 
electronic signature process for promissory notes and MPNs.
    Proposed Regulations: The proposed changes in Sec.  674.19(e)(2) 
and (3) would require an institution to create and maintain a 
certification regarding the creation and maintenance of any 
electronically signed Perkins Loan promissory note or MPN in accordance 
with documentation requirements in proposed Sec.  674.50. Proposed 
changes to Sec.  674.19(e)(4)(ii) and Sec.  682.414(a)(5)(iv) would 
require an institution or the holder of a FFEL loan, respectively, to 
retain an original of an electronically signed Perkins Loan or FFEL 
Program MPN for 3 years after all loans on the MPN are satisfied. Under 
the proposed changes in Sec.  674.50(c)(12) and Sec.  682.414(a)(6), an 
institution, for assigned Perkins loans, or a guaranty agency and 
lender, for assigned FFEL loans, would be required to cooperate with 
the Secretary, upon request, in all matters necessary to enforce an 
assigned loan that was electronically signed. This cooperation would 
include providing testimony to ensure the admission of electronic 
records in legal proceedings and providing the Secretary with the 
certification regarding the creation and maintenance of electronically 
signed promissory notes. The proposed changes in Sec. Sec.  
674.50(c)(12)(iii) and 682.414(a)(6)(iii) also would require the 
institution, or the guaranty agency and lender, respectively, to 
respond within 10 business days, to any request by the Secretary for 
any record, affidavit, certification or other evidence needed to 
resolve any factual dispute in connection with an electronically signed 
promissory note that has been assigned to the Department. Lastly, 
proposed changes in Sec. Sec.  674.50(c)(12)(iv) and 682.414(a)(6)(iv) 
would require that an institution, or guaranty agency and lender, 
respectively, ensure that all parties entitled to access have full and 
complete access to the electronic records associated with an assigned 
Perkins or FFEL MPN, until all loans made on the MPN are satisfied.
    Proposed changes to Sec.  682.409(c)(4)(viii) of the FFEL Program 
regulations would require the guaranty agency to provide the Secretary 
with the name and location of the entity in possession of an original, 
electronically signed MPN that has been assigned to the Department.
    Reasons: MPNs are used in all of the Title IV, HEA Loan programs. 
MPNs, which can be used for up to a 10-year period, have no loan amount 
or loan period on the face of the note and can be signed 
electronically. The Department is amending Sec. Sec.  674.19 and 674.50 
of the Perkins Loan Program regulations and Sec. Sec.  682.409 and 
682.414 of the FFEL Program regulations to support the Department's 
efforts to enforce electronically-signed promissory notes that are 
assigned to the Department. These requirements will help ensure that 
the Department has the evidence to enforce the loan in cases in which a 
factual dispute or a legal challenge is raised in connection with the 
validity of the borrower's electronic signature and the MPN. In order 
to preserve the integrity of the Perkins and FFEL programs as well as 
the Federal fiscal interest, the Department believes it is essential 
that an institution or lender be able to guarantee the authenticity of 
a borrower's signature on loans assigned and collected by the 
Department.
    During the regulatory negotiations, the Department originally 
proposed to require in Sec.  682.406(a) that a lender submit a 
certification regarding the creation and maintenance of the electronic 
MPN or promissory note, including the lender's authentication and 
signature process, to the guaranty agency as part of the default claim 
process. The certification would have then been submitted to the 
Department when the guaranty agency assigned a FFEL loan under the 
mandatory assignment provisions in Sec.  682.409(c). The Department 
also originally proposed to amend Sec.  682.414(a)(ii) to require a 
guaranty agency to maintain a certification regarding the creation and 
maintenance of the lender's electronic MPN for each loan held by the 
agency.
    With respect to the Perkins Loan Program, the Department originally 
proposed similar new requirements that an institution maintain a 
certification regarding the creation and maintenance of the MPN in 
Sec.  674.19(d) and provide the certification to the Department, upon 
request, when assigning the loan in accordance with Sec.  674.50(c).
    Many non-Federal negotiators believed that the Department's 
original proposal was too burdensome.
    Some non-Federal negotiators submitted a counter-proposal to the 
Department that proposed placing the burden of creating and maintaining 
a certification of a lender's electronic signature process on the 
lender that

[[Page 32416]]

created the original electronic MPN. This counter-proposal was intended 
to be consistent with the lenders' current practices. The non-Federal 
negotiators from lending organizations reaffirmed that lenders will be 
in possession of and would deliver whatever the Department needs to 
enforce an electronically signed promissory note or MPN, including 
expert testimony in court cases.
    The Department returned to the final session of negotiations with 
revised proposed regulations in Sec.  682.414(a)(6) based on the 
counter-proposal submitted by some of the non-Federal negotiators. The 
non-Federal negotiators expressed their support for this proposal, but 
questioned many of the details. In particular, some non-Federal 
negotiators believed that it was redundant for the certification of a 
loan holder's electronic signature process to include a requirement 
that the lender document its borrower authentication process. However, 
the Department considers this requirement a vital part of the 
certification. Several non-Federal negotiators noted that the Perkins 
Loan Program regulations in Sec. Sec.  674.19(d) and 674.50(c) did not 
contain the same detailed requirements as Sec.  682.414(a)(6) regarding 
the contents of the certification. These proposed regulations include 
the same standards in both programs. Several non-Federal negotiators 
thought that the provisions in Sec.  674.50(c)(12)(iii) and Sec.  
682.414(a)(6)(iii) that require institutions, lenders and guaranty 
agencies to respond to requests for information from the Department 
within 10 business days would be too difficult to meet and asked the 
Department to use another standard. The Department notes, however, that 
10 business days is a significant period of time and that it is vital 
that the Department receive the information as quickly as possible when 
a borrower is contesting the validity of a debt. Lastly, several non-
Federal negotiators expressed concern about the requirement to retain 
an original electronically signed MPN for at least 7 years after all 
the loans made on the MPN have been satisfied. In issuing this NPRM, 
the Department has, after considering these concerns, decided to 
require that schools and lenders retain the original, electronically 
signed MPN for at least 3 years after all the loans made on the MPN 
have been satisfied. This record retention standard is needed to 
accommodate borrower challenges to an administrative wage garnishment 
or federal offset action taken by the Department to collect on assigned 
FFEL loans.
    The Department realizes that these proposed regulations for 
electronically signed documents may have an impact on the operations of 
lenders, guaranty agencies and institutions. The Department 
particularly invites comments on possible changes to these regulations 
to reduce that impact while ensuring the Department's ability to 
enforce loans.

Record Retention Requirements on Master Promissory Notes (MPNs) 
Assigned to the Department (Sec. Sec.  674.19, 674.50, 682.406, and 
682.409)

    Statute: Section 443(a) of the General Education Provisions Act 
(GEPA), 20 U.S. 1232f(a), provides that recipients of Federal funds 
under any applicable program must retain records of the amount and 
distribution of Federal funds to facilitate effective audits of the use 
of those funds. The GEPA generally applies to institutions that 
participate in the Title IV, HEA programs.
    Current Regulations: Current requirements related to the retention 
of loan disbursement records by institutions are in Sec.  
668.24(c)(1)(iv) and (e)(1) and require institutions to retain 
disbursement records, unless otherwise directed by the Secretary, for 
three years after the end of the award year for which the aid was 
awarded and disbursed. Section 674.50(c) does not currently include 
disbursement records as part of the documentation the Secretary may 
require an institution to submit when assigning a Perkins Loan to the 
Department.
    Section 682.414(a)(4)(ii) and (iii) requires a guaranty agency to 
ensure that a lender retains a record of each disbursement of loan 
proceeds to a borrower for not less than three years following the date 
the loan is repaid in full by the borrower, or for not less than five 
years following the date the lender receives payment in full from any 
other source. Section 682.414(a)(4)(iii) also provides that, in 
particular cases, the Secretary or the guaranty agency may require the 
retention of records beyond this minimum period. However, 
S682.409(c)(4) does not currently require a guaranty agency to submit a 
record of the lender's disbursements when assigning a loan to the 
Department.
    Proposed Regulations: The proposed changes in Sec.  674.19(e)(2)(i) 
and (e)(3)(i) would require an institution that participates in the 
Perkins Loan Program to retain records showing the date and amount of 
each disbursement of each loan made under an MPN. The institution also 
would be required to retain disbursement records for each loan made on 
an MPN until the loan is canceled, repaid, or otherwise satisfied. 
Proposed Sec.  674.50(c)(11) would require an institution to submit 
disbursement records on an assigned Perkins loan upon the Secretary's 
request. The proposed changes in Sec.  682.409(c)(4)(vii) would require 
a guaranty agency to submit the record of the lender's disbursement of 
loan funds to the school for delivery to the borrower when assigning a 
FFEL Loan to the Department.
    Reasons: The proposed changes to Sec. Sec.  674.19(e) and 674.50(c) 
of the Perkins Loan Program regulations that require the retention of 
MPN disbursement records by an institution and submission of such 
records, if requested by the Secretary, on Perkins Loans assigned to 
the Department would support enforcement and collection on the MPN. 
These regulatory changes would also facilitate the process of proving 
that a borrower benefited from the proceeds of the loan, if the 
borrower challenges the validity of the loan. The proposed addition of 
Sec.  682.409(c)(4)(vii), requiring a guaranty agency to submit a 
record of the lender's disbursement records upon assigning an FFEL loan 
to the Department, would accomplish the same enforcement goals.
    The Department's original proposal related to the retention of 
disbursement records in support of enforcement of FFEL loans assigned 
to the Department presented during the negotiations was different than 
the changes proposed here. The Department originally proposed to 
require schools to report to the lender the date and amount of each 
disbursement of FFEL loan funds to a borrower's account no later than 
30 days after delivery of the disbursement to the borrower. Under the 
Department's original proposal, lenders also would have been required 
to provide the record of a school's delivery of loan disbursements to a 
FFEL borrower as a condition for a guaranty agency to make a claim 
payment and receive reinsurance coverage. Lastly, the Department 
originally proposed to require that the guaranty agency, upon 
assignment of a FFEL loan to the Department, submit a record of the 
school's delivery of loan disbursements to the borrower.
    The Department's original proposal for the retention of MPN 
disbursement records on assigned Perkins Loans is reflected in these 
proposed regulations.
    Some non-Federal negotiators expressed concern about the burden 
associated with reporting and retaining voluminous amounts of 
disbursement data when only a limited amount of the data would actually 
be needed by the Department to enforce an assigned

[[Page 32417]]

Perkins or FFEL loan. Some non-Federal negotiators expressed concern 
that the new requirements could affect the payment of insurance and 
reinsurance claims in the FFEL program. Some of the non-Federal 
negotiators asserted that lenders, guaranty agencies, and schools could 
supply needed disbursement records to the Department without adding new 
regulations. Several non-Federal negotiators suggested that the 
Department use existing data systems, such as the NSLDS, to collect 
disbursement information, rather than requiring new record retention 
procedures.
    The Department carefully considered the concerns of these non-
Federal negotiators, and returned to the last session of negotiations 
with the proposed changes to the regulations on retention of 
disbursement records that are reflected in this NPRM. The Department 
decided that requiring the collection, retention, and submission of a 
school-based record documenting each disbursement of a FFEL loan might 
be too burdensome in light of the relatively few occasions that require 
the use of such records. The Department decided to continue to use the 
lender documentation of disbursements currently provided to the 
Department in the FFEL assignment process. The Department is proposing 
to codify this practice in Sec.  682.409(c)(4)(vii). However, the 
Department intends to monitor this process carefully and will require a 
guaranty agency or lender to return reinsurance, interest benefits and 
special allowance for any loan determined to be unenforceable due to 
the absence of disbursement records in accordance with Sec.  
682.406(a)(13). If the disbursement documentation is not available or 
reliable, the Department reserves its authority to reexamine this issue 
in the future.
    For institutions that participate in the Perkins Loan program, the 
Department is proposing new provisions requiring the retention of 
school-based disbursement records because the institution is the lender 
in the Perkins Loan Program. Moreover, because MPNs have been in use in 
the Perkins Loan Program for approximately three years, institutions 
have retained all disbursement records on Perkins MPNs under current 
record retention requirements in Sec.  668.24. The only new requirement 
for Perkins institutions will be that these disbursement records must 
be retained for at least three years after a Perkins Loan is satisfied 
and that these disbursement records be submitted to the Department on 
an assigned Perkins MPN, if requested by the Secretary.

Loan Counseling for Graduate or Professional Student PLUS Loan 
Borrowers (Sec. Sec.  682.603, 682.604(f), 682.604(g), 685.301, 
685.304(a), and 685.304(b))

    Statute: Under section 428B(a)(1) of the HEA, a graduate or 
professional student may borrow a PLUS Loan. However, section 
485(b)(1)(A) of the HEA specifically excludes PLUS Loan borrowers from 
the groups of borrowers for which exit counseling must be provided. The 
HEA does not address entrance counseling requirements for Stafford and 
PLUS Loan borrowers.
    Current Regulations: The current regulations in Sec. Sec.  
682.604(f) and (g) and 685.304(a) and (b) require entrance and exit 
counseling for Stafford Loan borrowers, but not for graduate or 
professional student PLUS Loan borrowers.
    Proposed Regulations: Proposed Sec.  682.604(f)(2) would require 
entrance counseling for graduate or professional student PLUS Loan 
borrowers. The proposed entrance counseling requirements for student 
PLUS Loan borrowers would vary, depending on whether the borrower has 
received a Stafford Loan prior to receipt of the PLUS Loan.
    Proposed Sec.  682.604(g) would also modify the exit counseling 
requirements for Stafford Loan borrowers. If the borrower has received 
a combination of Stafford Loans and PLUS Loans, the institution must 
provide average anticipated monthly repayment amount information based 
on the combination of different loan types the borrower has received in 
accordance with proposed Sec.  682.604(g)(2)(i).
    In addition, the proposed regulations in Sec.  682.603(d) would 
require institutions, as part of the process for certifying a FFEL 
Program Loan, to notify graduate or professional students who are 
applying for a PLUS Loan of their eligibility for a Stafford Loan. The 
proposed regulations require institutions to provide a comparison of 
the terms and conditions of a PLUS Loan and Stafford Loan, and ensure 
that prospective PLUS borrowers have an opportunity to request a 
Stafford Loan.
    The proposed regulations in Sec. Sec.  685.301(a)(3), 
685.304(a)(2), and 685.304(b)(4) would include comparable changes to 
the Direct Loan Program regulations with respect to graduate or 
professional student borrowers of Direct PLUS Loans.
    Reasons: The committee agreed that with the newly authorized 
availability of PLUS Loans to graduate and professional students, there 
is a need to revise the loan counseling requirements to account for 
graduate and professional student PLUS borrowers.
    Several negotiators pointed out that exit counseling is often more 
beneficial to student borrowers than entrance counseling, as exit 
counseling occurs at the time the loan is nearing repayment, and 
students are more focused on repaying the loan at that point. However, 
the statute specifically exempts PLUS borrowers from exit counseling 
requirements. Although the Department encourages schools to provide 
exit counseling to graduate and professional student PLUS borrowers, 
the Department cannot require schools to provide such counseling.
    One negotiator suggested that the Department require a school's 
Stafford Loan exit counseling include information related to the PLUS 
Loan if a Stafford Loan borrower also had a PLUS Loan. The Department 
determined that, in those cases, the exit counseling requirements for 
Stafford Loan borrowers could be modified to include information on 
PLUS Loans. Accordingly, that requirement is included in Sec. Sec.  
682.604(g)(2) and 685.304(b)(4) of the proposed regulations.
    The Department and the other negotiators agreed that borrowers who 
are eligible for both Stafford Loans and PLUS Loans should be given 
information on the relative merits of each loan type, and be given an 
opportunity to obtain a Stafford Loan prior to the borrower's receipt 
of a PLUS Loan. Therefore, the Department is proposing to require in 
Sec. Sec.  682.603(d) and 685.301(a) that the school provide a 
comparison of the terms and conditions of a PLUS Loan and a Stafford 
Loan prior to the graduate or professional student's receipt of a PLUS 
Loan, so the borrower has the opportunity to make the best decision in 
terms of which loan to accept.
    Several negotiators felt that the Department's initial proposal was 
too vague, and asked for more specificity regarding which terms and 
conditions should be highlighted for these borrowers. In response, the 
Department has added more specificity to Sec. Sec.  682.603(d)(1) and 
685.301(a)(3) of the proposed regulations.
    With regard to entrance counseling requirements for borrowers who 
have both Stafford and PLUS Loans, one negotiator asked if the proposed 
regulations would preclude a school from providing both Stafford and 
PLUS Loan entrance counseling at the same time. The Department 
responded that the proposed regulations would not preclude this 
practice.

[[Page 32418]]

    One negotiator pointed out that many graduate or professional 
student PLUS borrowers will have already received Stafford Loans as 
undergraduates, and therefore will have already received Stafford Loan 
entrance counseling. Since the entrance counseling information for both 
loan types is similar, this negotiator felt that it would be redundant 
to offer PLUS Loan entrance counseling to a borrower who was already 
received Stafford Loan entrance counseling. Other negotiators, however, 
argued that since the terms and conditions of the loans are different, 
additional counseling should be required. In light of this discussion, 
the Department is proposing to modify the entrance counseling 
requirements in Sec. Sec.  682.604(f)(2) and 685.304(a)(2) to require 
that different sets of information be provided to graduate or 
professional student PLUS borrowers who have already received Stafford 
Loans, and graduate or professional student PLUS borrowers who have not 
received Stafford Loans.

Maximum Loan Period (Sec. Sec.  682.401, 682.603, and 685.301)

    Statute: The HEA does not address the issue of maximum loan periods 
specifically.
    Current Regulations: Current regulations in Sec.  
682.401(b)(2)(ii)(C), Sec.  682.603(f)(2)(i), and Sec.  
685.301(a)(9)(ii)(A) provide that the loan period for a title IV, HEA 
program loan may not exceed 12 months.
    Proposed Regulations: Proposed Sec. Sec.  682.401(b)(2)(ii)(A), 
682.603(g)(2)(i), and 685.301(a)(10)(ii)(A) would eliminate the maximum 
12-month loan period for annual loan limits in the FFEL and Direct Loan 
programs and the 12 month period of loan guarantee in the FFEL Program.
    Reasons: The Secretary believes eliminating the 12 month limit on 
loan periods would give schools, lenders and students greater 
flexibility when rescheduling disbursements. This proposed change would 
allow institutions to certify a single loan for students in shorter 
non-term or nonstandard term programs and to provide greater 
flexibility in rescheduling disbursements for students who drop out and 
return within the permitted 180-day period.
    This issue was added to the rulemaking agenda at the request of 
some non-Federal negotiators. One proponent of the change noted that, 
on average, 17 percent of students have an academic program longer than 
a 12-month period, and by eliminating the maximum length of a loan 
period, the need to certify another loan to cover the remainder of the 
program would be eliminated. The negotiators noted that the proposed 
changes would not increase the amount of borrowing by students. In 
other words, annual loan limits would still be controlled by the 
institution's academic year in those instances where the academic year 
and loan period both exceed 12 months.
    The Secretary agrees with these negotiators that it would benefit 
the students and the FFEL and Direct Loan Programs to remove the 12 
month rule from the regulations.

Mandatory Assignment of Defaulted Perkins Loans. (Sec. Sec.  674.8 and 
674.50)

    Statute: To participate in the Perkins Loan Program, an institution 
of higher education enters into a Program Participation Agreement (PPA) 
with the Secretary under section 463 of the HEA. The HEA enumerates 
several provisions of the PPA. Section 463(a)(9) of the HEA allows for 
the addition of provisions to the PPA, agreed to by the institution and 
the Secretary, that may be necessary to protect the United States from 
unreasonable risk of loss.
    Current Regulations: The regulations governing the required 
contents of the PPA are in Sec.  674.8 of the Perkins Loan Program 
regulations. Under Sec.  674.8(d), the PPA includes a provision that 
the school may voluntarily assign a defaulted Perkins Loan to the 
Department if the school decides not to service or collect the loan or 
the loan is in default despite the school's due diligence in collecting 
the loan.
    Proposed Regulations: The proposed regulations in Sec.  674.8(d)(3) 
would provide that the PPA also include a provision under which the 
Department could require assignment of a Perkins Loan if the 
outstanding principal balance of the loan is $100 or more, the loan has 
been in default for seven or more years, and a payment has not been 
received on the loan in the preceding 12 months. The proposed 
regulations provide an exception to the mandatory assignment 
requirement if payments were not due on the loan in the preceding 12 
months because the loan was in an authorized deferment or forbearance 
period. Under proposed Sec.  674.50(e)(1) the Secretary would accept 
the assignment of a Perkins Loan without the borrower's Social Security 
Number if the Secretary has exercised her mandatory assignment 
authority under Sec.  674.8(d)(3).
    Reasons: The Department's records show that institutions are 
holding more than $400 million in uncollected Perkins Loans that have 
been in default for 5 years or more. Since Perkins Loans are comprised 
largely of Federal funds, these uncollected loans present an 
unreasonable risk of loss to the United States.
    The Department has collection tools, such as Federal benefit 
offsets, that are not available to the Perkins institutions. The 
Department has encouraged schools to voluntarily assign these old 
defaulted loans, so that the Department may employ these tools to 
collect on these loans. As part of this effort, the Department, in 
recent years, significantly streamlined the voluntary assignment 
process for Perkins Loans. Despite these efforts, the numbers and 
amounts of older defaulted Perkins Loans held by schools continues to 
grow.
    To address this problem, the Department proposes modifying the 
regulations governing the PPA to provide for mandatory assignment of 
older defaulted loans, at the request of the Secretary. One of the 
negotiators recommended, as an alternative to the proposed regulations, 
that the Department adopt a referral process, under which a school 
could refer a loan to the Department. The Department would collect on 
the loan and return the proceeds to the school, minus collection 
charges. Other negotiators proposed that if the Department required 
mandatory assignment of loans, the funds collected from those Perkins 
Loans should be re-allocated to Perkins schools.
    The Department did not accept these proposals. The Department 
previously used a referral program with very limited success. In 
addition, there is no system in place for re-allocation of net 
Department collections to Perkins institutions. Accordingly, the 
Department does not believe these proposals are in the Federal fiscal 
interest.
    One negotiator pointed out that the current assignment regulations 
require a Social Security Number for all assigned loans. This 
negotiator noted that, in the early years of the program, schools were 
not required to collect the Social Security Numbers of Perkins Loan 
borrowers. The negotiator feared that schools would be penalized if 
they were required to assign loans, only to have the assignments 
rejected for lack of a Social Security Number. The Department has 
addressed this concern in the proposed regulations by exempting 
mandatorily assigned Perkins Loans from the requirement that the 
institution provide a Social Security Number for all assigned loans.
    The Department initially proposed mandatory assignment of defaulted 
Perkins Loans if the outstanding balance of the loan is $50 or more and 
the loan has been in default for 5 years.

[[Page 32419]]

Negotiators offered a counter-proposal, requiring assignment if the 
account to be assigned is more than $1,000 in outstanding principal, 
and the borrower has not made a payment on the loan in 10 years, 
excluding authorized periods of deferment and forbearance, and 
excluding loans for which the school has obtained a judgment.
    The Department did not accept the counter-proposal because 
excluding all deferment and forbearance periods from the 10 years would 
push the loans eligible for mandatory assignment significantly beyond 
10 years in default. The Department believes that the proposed criteria 
would effectively rule out mandatory assignment of many of the loans 
that would most benefit from the Department's collection activities.
    However, the Department has modified its original proposal. In 
particular, the Department's proposed regulations would require a loan 
to be assigned if the account balance is $100 or more and it has been 
in default for at least 7 years. The revised proposal generally 
approximates the mandatory assignment requirements in the FFEL Program.

Reasonable Collection Costs (Sec.  674.45)

    Statute: Section 464A(b)(1) of the HEA provides for assessing 
against a borrower reasonable collection costs on a defaulted Title IV 
loan. The HEA does not define ``reasonable collection costs'' for 
purposes of the Perkins Loan Program.
    Current Regulations: Section 674.45(e) requires a school to assess 
collection costs against a borrower, based on either the actual costs 
incurred for those collection actions, or an average of the costs 
incurred for similar actions taken to collect loans in similar stages 
of delinquency. The current regulations do not cap collection costs 
that may be charged to the borrower, except, as described in Sec.  
674.39, in the case of a loan that has been successfully rehabilitated. 
Section 674.39(c)(1) caps collection costs on rehabilitated loans at 24 
percent, unless the borrower defaults on the rehabilitated loan. 
However, Sec.  674.47(e) establishes caps on the amount of unpaid 
collection costs that a school may charge to its Perkins Fund.
    Proposed Regulations: The proposed regulations in Sec.  
674.45(e)(3) would limit the amount of collection costs a school may 
assess against a Perkins Loan borrower to 30 percent of the total of 
the principal, interest, and late charges collected for first 
collection efforts; 40 percent of the total of the principal, interest, 
and late charges collected for second collection efforts; and, in cases 
of litigation, 40 percent of the total of the principal, interest, and 
late charges collected plus court costs. The proposed regulations 
specify that these caps on collection costs go into effect for 
collection agency placements made on or after July 1, 2008.
    Reasons: The lack of a cap on collection costs in the Perkins Loan 
Program has led to abuse, with some institutions charging collection 
costs of 60 percent or more. During the negotiations, the Department 
initially proposed capping Perkins Loan Program collection costs at 24 
percent, to match the limit already in place for Perkins loans that 
have been rehabilitated. Several negotiators contended that this cap 
was too low. They pointed out that Perkins Loans are often low-balance 
loans, but that they require the same efforts to collect as higher-
balance loans. This can lead to increased collection costs in the 
Perkins Loan Program.
    These negotiators also noted that most collection agencies charge 
on a contingency fee basis and that a percentage of the amount 
collected from the borrower goes to the collection agency. One 
negotiator asserted that a 24 percent collection cap would limit the 
amount that could be charged to the borrower to 19.3 percent, to allow 
for the collection agency to retain its fee, and to still make the 
Perkins Fund whole by recovering and returning to the Fund the entire 
amount owed by the borrower.
    The negotiators also pointed out that collection agency fees are 
market driven and competitive and that placing a cap on collection 
costs would increase the collection costs that would have to be 
absorbed by the Fund. This would have the effect of reducing the amount 
of Perkins Loans available to future borrowers.
    These negotiators also pointed out that litigation is required 
under certain circumstances in the Perkins Loan program. If schools 
must litigate to stay in compliance with the Perkins Loan regulations, 
but can only assess collection costs of 24 percent, this would deplete 
the Perkins Fund.
    Another negotiator argued that it would not be profitable for 
collection agencies to provide services to smaller schools under the 
proposed collection costs cap. This negotiator also contended that a 
low cap would reduce the effectiveness of the collection agencies.
    The Department asked negotiators to propose alternatives to the 
proposed 24 percent cap on collection costs. One negotiator stated that 
any cap on collection costs in the Perkins Loan Program would be 
unreasonable, because there are so many variables involved in 
collecting on a Perkins Loan.
    Some negotiators offered a counter-proposal that included a sliding 
scale for the cap on collection costs: For first collection efforts, 33 
percent of the unpaid balance; for second collection efforts, 40 
percent of the unpaid balance; for loans that have been litigated, 50 
percent plus court costs; for borrowers living abroad, 50 percent of 
the unpaid balance.
    The Department and other negotiators believe that a 50 percent cap 
is too high. However, the Department's proposed regulations do reflect 
an increase from the original proposal in light of the arguments and 
factors noted during the negotiations.

Child or Family Service Cancellation (Sec.  674.56)

    Statute: Under section 465(a)(2)(I) of the HEA, a Perkins Loan 
borrower may qualify for cancellation of the loan if the borrower is a 
full-time employee of a public or private nonprofit child or family 
service agency who is providing, or supervising the provision of, 
services to high-risk children who are from low-income communities, and 
the families of such children.
    Current Regulations: The current regulations for the child or 
family service discharge in Sec.  674.56(b) reflect the statutory 
language, without providing additional details on the eligibility 
criteria for a child or family service cancellation.
    Proposed Regulations: The proposed regulations in Sec.  674.56(b) 
expand on the current regulations and specify that, to qualify for a 
child or family service cancellation, a borrower who is a full-time, 
non-supervisory employee of a child or family service agency must be 
providing services directly and exclusively to high-risk children from 
low-income communities. In addition, the proposed regulations specify 
that if the employee provides services to the families of high-risk 
children from low-income communities, the services provided to the 
children's families must be secondary to the services provided to the 
high-risk children from low-income communities.
    Reasons: On October 20, 2005, the Department published Dear 
Colleague Letter (DCL) GEN-05-15, which clarified the Department's 
long-standing policy with regard to the eligibility criteria for a 
child or family service cancellation. The DCL specifies that a full-
time, non-supervisory employee of a public or private child or family 
service agency must be providing services directly and exclusively to 
high-risk children from low-income

[[Page 32420]]

communities to qualify for a child or family service cancellation. As 
noted in the DCL, many employees of a child or family service agency 
who do not work directly with high-risk children from low-income 
communities may provide services that indirectly benefit such children. 
Congress did not intend such borrowers to qualify for child or family 
service cancellations, unless the borrower is in a supervisory 
position, and is supervising staff members who work directly with high-
risk children from low-income communities. The NPRM would incorporate 
this guidance into the regulations in proposed Sec.  674.56(b).

Prohibited Inducements (Sec. Sec.  682.200 and 682.401)

    Statute: Section 435(d)(5) of the HEA provides that, after notice 
and an opportunity for a hearing, the Secretary may disqualify from 
participation in the FFEL Program any FFEL lender that provides 
inducements or engages in other prohibited activity to secure FFEL loan 
applications or sell other products. Those prohibited inducements and 
activities include: Offering, directly or indirectly, points, premiums, 
payments, or other inducements to any educational institution or 
individual to secure FFEL loan applications; conducting unsolicited 
mailings of student loan applications to individuals who have not 
borrowed previously from the lender; offering FFEL loans to a 
prospective borrower to induce the borrower to purchase an insurance 
policy or other product; or engaging in fraudulent or misleading 
advertising. A lender is not prohibited from providing assistance to 
schools that is comparable to the kinds of assistance that the 
Department provides to schools through the Direct Loan Program. In 
order to avoid confusion regarding the types of assistance a lender may 
provide to schools, the Department will identify and publish a list of 
services provided to schools through the Direct Loan Program on or 
before publication of final regulations. The most recent description of 
the kinds of assistance the Department provides to schools in the 
Direct Loan Program was published in a Notice of Proposed Rulemaking on 
August 10, 1999 (64 FR 43428, 43429-43430) and can be accessed at: 
http://www.ed.gov/legislation/FedRegister/proprule/1999-3/081099a.html.
    Similarly, section 428(b)(3) of the HEA restricts guaranty agencies 
from offering inducements or engaging in other prohibited activities to 
secure applicants for FFEL loans or to secure the designation of the 
guaranty agency as the insurer of particular loans. A guaranty agency 
is prohibited from: Offering, directly or indirectly, premiums, 
payments, or other inducements to any educational institution or its 
employees to secure FFEL loan applicants; or offering to a lender or 
its employees, agents, or independent contractors, any premiums, 
incentive payments, or other inducements to administer or market loans 
and secure designation as the guarantor or insurer of loans, (except 
for Unsubsidized Stafford loans and lender-of-last-resort loans). The 
guaranty agency is also prohibited from conducting unsolicited mailings 
of student loan applications to students or their parents unless the 
agency has previously guaranteed a FFEL Loan for the student or parent, 
and from conducting fraudulent or misleading advertising related to 
loan availability. A guaranty agency is not prohibited from providing 
assistance to schools that is comparable to the kinds of assistance the 
Department provides to schools through the Direct Loan Program.
    Current Regulations: Prohibited inducements and other impermissible 
activities by lenders are contained in the definition of lender in 34 
CFR Sec.  682.200(b). The regulations mirror the statutory provisions 
except to clarify that: (1) Assistance provided to schools that is 
comparable to that provided by the Secretary is limited to the kinds of 
assistance provided to schools under or in furtherance of the Direct 
Loan program; (2) unsolicited mailing of student loan application forms 
includes applications sent to the student and the student's parents; 
and (3) the prohibition against fraudulent and misleading advertising 
refers to advertising related to the lender's FFEL program activities. 
The comparable regulations for guaranty agencies are in 34 CFR 
682.401(e), which specifies that a guaranty agency may not offer, 
directly or indirectly, any premium, payment, or other inducement to an 
employee or student of a school, or any entity or individual affiliated 
with a school, to secure FFEL Loan applicants. The regulations provide 
examples of prohibited inducements of lenders by a guaranty agency and 
include: Compensating lenders or their representatives to secure loan 
applications for guarantee by the agency; performing functions that a 
lender would otherwise perform without appropriate compensation; 
providing equipment or supplies to lenders at below market cost or 
rental; and offering to pay a lender not holding loans guaranteed by 
the agency a fee for applications guaranteed by the agency. The current 
regulations also recognize the administrative and oversight functions 
of the guaranty agency by specifically excluding certain activities 
from the description of prohibited inducements. The regulations also 
prohibit guaranty agencies from sending unsolicited mailings to 
students in postsecondary and secondary schools and their parents 
unless the individual had borrowed previously using the agency's loan 
guarantee and conducting fraudulent or misleading advertising 
concerning loan availability.
    Proposed Regulations: The proposed regulations would incorporate, 
with some modifications, current interpretive and clarifying guidance 
on prohibited inducements and activities provided to lenders and 
guaranty agencies by the Department over the years since the provisions 
were added to the HEA. This guidance was contained in various DCLs 
issued by the Department and in responses to private letter inquiries 
from program participants. The most comprehensive DCL on this subject 
was issued in February 1989 (No. 89-L-129). The proposed regulations 
for both lenders and guaranty agencies adopt the format of that DCL to 
include a non-exhaustive list of examples of prohibited inducements and 
activities, and an exhaustive list of permissible activities. Under 
these proposed regulations, certain activities are identified as 
permissible, because the Department believes those activities are 
necessary for the lender or guaranty agency to fulfill its role in the 
administration of the FFEL Program. Consistent with the Department's 
longstanding policy in this area, the scope of permissible activities 
by guaranty agencies is broader than that for lenders in recognition of 
their administrative, training, outreach, and oversight roles in the 
FFEL program.
    Under paragraph (5)(i) of the definition of lender in Sec.  
682.200(b) of the proposed regulations, lenders would be prohibited 
from offering, directly or indirectly, any points, premiums, payments, 
or other benefits to any school or other party to secure FFEL loan 
applications or loan volume. The proposed regulations would add a 
definition of a school-affiliated organization to Sec.  682.200, to 
include alumni organizations, foundations, athletic organizations, and 
social, academic, and professional organizations. Prohibited payments 
and other benefits to prospective borrowers would include prizes or 
additional financial aid funds. The proposed regulations would also 
provide other examples of ``other benefits'' to a school

[[Page 32421]]

that would be prohibited, including: Access to a lender's other 
financial products, computer hardware, and payment of the cost of 
printing and distribution of college catalogs and other materials at 
less than market rate or at no cost.
    The proposed regulations would prohibit a lender from undertaking 
philanthropic activities, such as providing grants, scholarships, 
restricted gifts, or financial contributions to secure loan 
applications, loan volume, or placement on a school's preferred lender 
list. Lenders would also be prohibited from making payments or 
providing other benefits to a student at a school, or to a loan 
solicitor or sales representative who visits campuses, in exchange for 
loan applications secured from individual prospective borrowers. The 
proposed regulations would prohibit lenders from paying conference or 
training registration, transportation and lodging costs for employees 
of schools and school-affiliated organizations. The proposed 
regulations would further prohibit a lender's payment of any 
entertainment expenses related to lender-sponsored functions and 
activities for school and school-affiliated organization employees. 
Lenders would also be prohibited from providing staffing services to a 
school as a third-party servicer or otherwise to assist a school with 
financial aid related functions, on more than a short-term, non-
recurring emergency basis. The proposed regulations would also modify 
prior program guidance by prohibiting all payments of loan application 
referral or processing fees between lenders, (whether or not the lender 
receiving the payment participates in the FFEL Program), or between 
lenders and any other entity. The proposed regulations would not revise 
the current regulations governing the prohibition on lenders conducting 
unsolicited mailings, offering FFEL Loans to induce a borrower to 
purchase a life insurance policy or other product or service offered by 
the lender, and engaging in fraudulent or misleading advertising.
    The proposed regulations would permit a lender to undertake 
activities that are specifically permitted by the HEA. These activities 
include: Providing assistance to a school, as identified by the 
Secretary, that is comparable to the assistance provided by the 
Department to a school in the Direct Loan Program; offering reduced 
borrower loan origination fees; offering reduced borrower interest 
rates; paying Federal default fees that would otherwise be paid by the 
borrower; and purchasing loans from another loan holder at a premium. 
In addition, the proposed regulations would permit a lender to 
participate in a school's or guaranty agency's student financial aid 
and financial literacy outreach activities, as long as the lender does 
not promote its student loan or other services to the recipients or 
attendees and there is full disclosure of any lender sponsorship, 
including the development and printing of any materials. The proposed 
regulations would allow a lender to provide a toll-free telephone 
number and free data transmission services to schools that participate 
in the FFEL program with the lender and to the school's borrowers and 
prospective borrowers for the purpose of communications on FFEL Loans. 
The proposed regulations would permit a lender to continue to offer 
repayment incentive programs to borrowers under which the borrower 
receives or retains a benefit, such as a reduced interest rate or 
forgiveness of a certain amount of loan principal in exchange for the 
borrower making one or more scheduled payments. The proposed 
regulations would also permit a lender to sponsor meals, refreshments, 
and receptions to school officials or employees that are reasonable in 
cost and that are scheduled in conjunction with meeting or conference 
events if those functions are open to all meeting or conference 
attendees. The proposed regulations would also permit a lender to 
provide schools, school-affiliated organizations and borrowers items of 
nominal value that constitute a form of generalized marketing or are 
intended to create good will.
    Section 682.401 of the proposed regulations, which governs guaranty 
agency prohibited inducements and permitted activities, would generally 
mirror the proposed regulations for lenders. The proposed regulations 
would prohibit a guaranty agency from providing a school with prizes or 
additional financial aid funds under any Title IV, State or private 
program based on the school's voluntary or coerced agreement to 
participate in the guaranty agency's program or to provide a specified 
volume of loans, using the agency's loan guarantee. The proposed 
regulations would prohibit the payment of entertainment expenses, 
including expenses for private hospitality suites, tickets to shows or 
sporting events, meals, alcoholic beverages, and any lodging, rental, 
transportation or other gratuities related to any activity sponsored by 
the guaranty agency or a lender participating in the agency's program, 
for school employees or employees of school-affiliated organizations. 
The proposed regulations would prohibit a guaranty agency from 
undertaking philanthropic activities, including providing scholarships, 
grants, restricted gifts, or financial contributions in exchange for 
FFEL loan applications or application referrals, a specified volume or 
dollar amount of FFEL loans using the agency's loan guarantee, or the 
placement of a lender that uses the agency's loan guarantee on a 
school's list of recommended or suggested lenders. The proposed 
regulations would also prohibit a guaranty agency from providing 
staffing services to a school, including as a third-party servicer, 
other than on a short-term, non-recurring emergency basis to assist the 
school with financial aid-related functions. The proposed regulations 
would also prohibit a guaranty agency from assessing additional costs 
or denying benefits to a school or lender that would otherwise be 
provided by the agency because the school or lender declined to agree 
to participate in the agency's program or declined or failed to provide 
a certain volume of loan applications or loan volume for the agency's 
loan guarantee.
    Unlike the proposed regulations for participating lenders, the 
proposed regulations would allow a guaranty agency to provide meals and 
refreshments that are reasonable in cost and provided in connection 
with guaranteed agency-provided training for school and lender program 
participants and for elementary, secondary, and postsecondary school 
personnel and in conjunction with other workshops and forums 
customarily used by the guaranty agency to fulfill its responsibilities 
under the HEA. The proposed regulations also would permit a guaranty 
agency to pay travel and lodging costs that are reasonable as to cost, 
location and duration, to facilitate attendance of school staff in 
training programs and facility service tours that school staff would 
otherwise be unable to attend. Guaranty agencies would also be 
permitted to pay reasonable costs for school officials to participate 
on an agency's governing board, a standing official advisory committee, 
or in support of other official activities of an agency in accordance 
with proposed Sec.  682.401(e)(2)(iv). The proposed regulations also 
reflect the guaranty agency's ability under the HEA to pay Federal 
default fees on loans that would otherwise be paid by the borrowers and 
to undertake default aversion activities approved by the Secretary with 
certain guaranty agency funds. There are no proposed changes to the 
current regulations governing a guaranty

[[Page 32422]]

agency's direct or indirect payment of incentives or other inducements 
to lenders to secure the agency as an insurer of the lender's FFEL 
loans, or relating to the prohibitions against the unsolicited mailing 
or distribution of unsolicited loan applications to students in 
secondary or postsecondary schools and their parents and against 
fraudulent and misleading advertising concerning loan availability.
    The proposed regulations would also clarify and strengthen the 
Department's authority to enforce the rules related to improper 
inducements. There are three proposed changes in this area. First, the 
proposed regulations would amend Sec. Sec.  682.413(h), 682.705(c), and 
682.706(d) to provide that, in any formal action against a lender or 
guaranty agency based on a violation of the prohibited inducement 
provisions, once the Department's deciding official finds that the 
lender or guaranty agency provided or offered the payments or 
activities specified in the definition of lender in Sec.  682.200 or 
Sec.  682.401, the Secretary will apply a ``rebuttable presumption'' 
that the activities or payments were undertaken or made by the lender 
or guaranty agency to secure FFEL Loan applications or FFEL loan 
volume. The lender or guaranty agency will have a full opportunity to 
show that the activity or payment was made for reasons unrelated to 
securing loan applications or loan volume.
    Another proposed change in this area would add a new Sec.  
682.406(d) to specify that a guaranty agency may not make a claim 
payment from its Federal Fund to a lender or request a reinsurance 
payment from the Department on a loan if the lender offered or provided 
an improper inducement, as defined in the definition of lender in Sec.  
682.200(b), to a school or other party in connection with the making of 
the loan. This change would reflect the Department's long-standing 
policy that a loan made in violation of the prohibited inducement 
provisions is not eligible for federal subsidy payments.
    The final change in the area of enforcement related to inducements 
would clarify and expand the borrower's legal rights. Since 1994, the 
promissory notes and MPNs used in the FFEL Program have included a 
description of the borrower's rights under the Federal Trade 
Commission's (FTC's) Holder Rule as it applies to FFEL loans. Under the 
FTC's Holder Rule, if a loan is made by a for-profit school, or the 
borrower is referred to the lender by a for-profit school, any lender 
holding the borrower's loans is subject to all claims and defenses that 
the borrower could assert against the school with respect to the loan. 
Section 682.209(k) of the proposed regulations would expand the 
protections provided by the FTC's Holder Rule by essentially 
incorporating it into the regulations, applying it to all loans made 
under the FFEL Program and specifying that it applies if the lender 
making the loan offered or provided an improper inducement to the 
school or any other party in connection with the making of the loan.
    Reasons: The Department believes that more explicit regulatory 
requirements governing prohibited incentive payments and other 
inducements by lenders and guaranty agencies are needed to ensure FFEL 
Program integrity, reassure borrowers and taxpayers of that integrity, 
and enhance the Secretary's enforcement authority in this area. Current 
regulations are primarily limited to restating the statutory language 
currently in the HEA. The Department's interpretive and policy guidance 
in this area over the years has been issued in DCLs and in responses to 
private letter inquiries from program participants. The most 
comprehensive guidance on this subject was published as DCL 89-L-129/S-
55/G-157 in February 1989. The most recent guidance on prohibited 
school and lender relationships was published as DCL 95-G-278/L-178/S-
73 in March 1995. The Department believes that this guidance, and the 
general requirements of the law, may no longer be generally known and 
understood by lenders and other participants that have entered the FFEL 
industry in the last few years. Moreover, the FFEL Program has changed 
significantly since this prior guidance was issued. In recent years, 
the increased competition among FFEL lenders, particularly in the FFEL 
Consolidation Loan Program, has resulted in a number of lenders 
offering a variety of benefits to borrowers, schools, and school-
affiliated organizations. There has also been a rapid growth in private 
alternative loans marketed by many of the same lenders participating in 
the FFEL Program. Special relationships between schools and lenders 
have developed, jeopardizing a borrower's right to choose a FFEL lender 
and undermining the student financial aid administrator's role as an 
impartial and informed resource for students and parents working to 
fund postsecondary education.
    During the negotiated rulemaking discussions, several negotiators 
expressed concern about the impact that the proposed regulations might 
have on the numerous business arrangements between schools and 
financial institutions, and recommended that any regulations listing 
prohibited and permissible activities be based on a limited 
interpretation of the applicable statutory language. Another negotiator 
suggested that the regulations could have a ``chilling effect'' on 
school and lender relationships. A couple of negotiators argued that 
the intent of the statutory prohibition of lender and guaranty agency 
inducements was not to curtail competition for market share, but to 
prevent unnecessary borrowing that would not have occurred if not for 
the incentive, and that given the current FFEL annual loan limits and 
the cost of education, borrowers were borrowing due to high levels of 
unmet need rather than any incentives being provided. One negotiator 
argued that inducements to borrowers were a problem only if the 
inducement resulted in harm to the individual or raised credibility 
issues about the loan process.
    Other negotiators expressed the view that, because of improper 
inducements, borrowers were actively being ``steered'' by schools to 
particular lenders and argued that the credibility of the loan process 
was an issue that the Department needed to address. One negotiator 
contended that inducements to borrowers created unequal terms to 
borrowers in the FFEL Program and appeared to operate as ``redlining'' 
because the inducements were often based on school loan volume, the 
volume of large dollar loans, or a school's cohort default rate.
    A couple of negotiators recommended that, rather than attempting to 
identify an exhaustive list of inducements, the regulations should 
simply provide illustrative examples of acceptable relationships 
between schools and lenders, so that future program developments would 
not necessarily require a change to the regulations.
    Negotiators with expertise in guaranty agency operations asked the 
Department to make it clear that school involvement in, and guaranty 
agency financial support of, guaranty agency advisory committee 
activities would continue to be permissible because of the importance 
of those activities to FFEL Program administration. One of these 
negotiators also recommended that the list of permissible activities 
for guaranty agencies be expanded to permit additional training and 
outreach activities to avert defaults authorized under the HEA. Another 
of these negotiators asked that the regulations make a clear 
distinction between contractual, third-party servicer agreements 
between a guaranty agency and school that are paid at the market

[[Page 32423]]

rate, and the limited emergency assistance offered by lenders and 
guaranty agencies to schools at no cost or at less than a market rate. 
This same negotiator asked the Department to clarify that a guaranty 
agency or school's compliance with state administered programs or 
requirements did not present an inducement-related conflict.
    A couple of negotiators recommended that the Department clarify the 
nature of the emergency situation under which a lender or guaranty 
agency could offer assistance to a school in fulfilling its financial 
aid functions at little or no cost. The negotiators noted that the 
definition of an ``emergency'' is subjective, and should not excuse a 
school from complying with the requirement that it be administratively 
capable to participate in the Title IV programs, which includes 
retaining sufficient, trained staff during peak processing periods. 
They recommended that the Department specify that an ``emergency'' 
cannot be an annual or recurring event. The Department specifically 
solicits comments on whether an ``emergency'' should be limited to a 
State- or Federally-declared natural or national disaster that affects 
a school or whether an ``emergency'' should encompass broader 
circumstances.
    Several negotiators with expertise in lender and guaranty agency 
operations submitted counter-proposals to the Department's proposed 
regulatory language. These alternative proposals would have 
significantly expanded the lists of permissible activities for lenders 
and guaranty agencies. The Department did not accept these counter-
proposals because they would have allowed activities and payments that 
the Department believes are not appropriately performed by lenders and 
guaranty agencies. These alternative proposals would: Permit lenders to 
pay for meals and refreshments, lodging, and transportation costs for 
employees of schools and school-affiliated organizations equivalent to 
those permitted to be paid by guaranty agencies; incorporate into the 
regulations the detailed listing of comparable services provided by the 
Department to Direct Loan schools that was published in a Notice of 
Proposed Rulemaking on August 10, 1999 (64 FR 43428, 43429-43430); 
permit lenders to pay reasonable loan application ``referral'' fees to 
unaffiliated parties in addition to other lenders; expand permissible 
borrower repayment incentive programs to include loan forgiveness 
benefits for academic achievement and certain kinds of employment; and 
prohibit philanthropic giving by lenders and guaranty agencies in 
exchange for application referrals, or a specific volume or dollar 
amount of loans made, or placement on a school's list of recommended or 
suggested lenders. The proposal would also have incorporated into the 
regulations selected paragraphs from the Department's DCL 89-L-129/S-
55/G-157, February 1989.
    A couple of negotiators voiced concern about the impact of the 
proposed treatment of philanthropic giving by lenders on general 
philanthropic activities supporting postsecondary institutions by 
financial institutions.
    Several negotiators objected to the Department's proposal to 
include enforcement-related provisions in the proposed regulations. One 
negotiator stated that the ``rebuttable presumption'' language was 
problematic because the statutory language governing prohibited 
inducements requires a demonstration that the inducement was provided 
in exchange for loans or loan volume. The same negotiator stated that 
enforcement would be better enhanced by clear regulations that define 
terms and explain permissible and impermissible activities. Several 
negotiators also objected to the inclusion of the FTC Holder Rule 
provision into the proposed regulations. One negotiator argued that 
these proposed regulations converted what was a lender eligibility 
issue into a borrower right and put lenders at risk simply by being on 
a school's preferred lender list. The negotiator also stated that it 
would lead to nuisance litigation by borrowers. The negotiators 
questioned why an inducement infraction by a lender should lead to a 
loss of reinsurance and questioned the basis of the proposed provision 
that denied claim payment to a lender and reinsurance to the guaranty 
agency if it was determined that the loan was made based on an 
impermissible inducement.
    The Department believes that the proposed regulations adequately 
implement the statutory requirements in the HEA's prohibited inducement 
provisions and does not believe it will affect unrelated contracts or 
agreements between postsecondary institutions and financial 
institutions or general philanthropic giving by financial institutions. 
Some negotiators believed that borrowers are being inappropriately 
steered to various lenders through the use of inducements provided by 
lenders to schools and that these activities, if left unchecked, deny 
borrowers their choice of lender and undermine the credibility of the 
FFEL Program. The Secretary, through these proposed regulations, is 
enhancing the borrower's choice of lender and providing for the 
disclosure of appropriate information.
    The Department believes that the proposed regulations provide clear 
and detailed examples of prohibited inducements and improper activities 
based on previously published guidance with some modifications to 
reflect changes that have occurred in the FFEL program. The proposed 
regulations would retain the Department's long-standing policy 
distinction between permissible activities by lenders and guaranty 
agencies in recognition of their different roles in the FFEL program. 
The Department has not, however, authorized lenders or guaranty 
agencies to provide staff assistance to schools except in an emergency, 
which must be short-term and nonrecurring. As noted earlier, one 
negotiator asked the Department to provide a specific exemption from 
the inducement restrictions for State-established programs or 
requirements. However, such an exemption is not authorized under the 
HEA. The prohibition on improper inducements in sections 428(b)(3) and 
435(d)(5)(A) of the HEA applies to State guaranty agencies, lenders, 
and institutions, as well as to all other participants in the FFEL 
program. Based on these current statutory provisions, the Department 
recently sent letters to two State guaranty agencies noting that State 
authorized programs those agencies administer could create an improper 
inducement, because those programs potentially provide benefits to 
institutions that participate in the State guaranty agency's guarantee 
program and deny benefits to institutions that participate in other 
guaranty agencies' programs. The proposed regulations would reflect the 
continued prohibition of such programs in proposed section 
682.410(e)(1)(i)(B) and (e)(1)(ii).
    The proposed regulations would adopt a modified version of the 
Department's prior policy, under which ``reasonable'' application 
referral fees can be paid to a nonparticipating lender or to another 
participating FFEL lender by prohibiting all such payments to a lender 
or any other entity. The Department believes that there is no longer a 
need for payment of such fees in the current FFEL market and that 
lender payment of such fees to school-affiliated organizations and 
other unaffiliated parties are a significant problem in the FFEL 
Program. In addition, in an attempt to avoid the prohibition on 
inducements, lenders have tried to classify fees that are based on 
success in securing loan applications or the size and characteristics 
of loans

[[Page 32424]]

disbursed as ``referral'' or ``marketing'' fees. Compensation or fees 
based on the number of applications or the volume of loans made or 
disbursed are improper, regardless of label, under the Department's 
current and prior policy and would continue to be improper under these 
proposed regulations. Lenders are free, as they have been historically, 
to continue to contract for general marketing services, provided those 
services are not compensated based on the number of applications, or 
the volume of loans made or disbursed.
    The proposed regulations do not incorporate the list of services 
the Department provides to Direct Loan schools that was published in 
the August 10, 1999 notice of proposed rulemaking as was requested by 
some of the negotiators. As the Department made clear during the 
negotiated rulemaking discussions, the Department would not want to 
limit itself or the lending community by codifying a list of services 
that cannot be easily updated and therefore the proposed regulations 
allow the use of other forms of public announcement.
    The proposed regulations also would not expand the list of 
permissible lender repayment incentive programs that are based strictly 
on a borrower establishing a successful payment pattern in the 
repayment of a loan to include ``loan forgiveness'' based on academic 
achievement or employment in a particular field. The Department 
believes that repayment incentive programs do not represent a 
prohibited inducement if they are conditioned on the borrower's timely 
repayment of the loan and borrower receipt of the benefit is not 
coincidental to the loan origination process. The Department believes 
that the forms of loan forgiveness described by some of the negotiators 
would be an inducement offered by lenders to market FFEL loans.
    Finally, the Department believes that the addition of the 
enforcement provisions is necessary to clarify and strengthen the 
Department's authority to enforce the regulations related to the use of 
improper inducements. The proposed regulations will result in more 
effective and fair enforcement of these restrictions. In response to 
the negotiators' concerns about the placement of the rebuttable 
presumption provision outside the formal administrative penalty 
process, the Department revised the proposed regulations to incorporate 
that provision into the regulations that govern formal administrative 
proceedings and to clarify that the rebuttable presumption applies only 
when the Secretary takes a formal administrative action against a 
lender or guaranty agency. As the Department pointed out during the 
negotiated rulemaking discussion, violations of the prohibited 
inducement provisions are difficult for the Department to enforce. It 
is virtually impossible for the Department to prove the relationship 
between the parties when the documentation is under the control of the 
two parties and the Department cannot issue subpoenas to compel 
testimony. To enforce these provisions more effectively, the Department 
must be able to identify a connection between certain activities and 
loans. The Department believes that the adoption and use of a 
rebuttable presumption will improve the Department's ability to enforce 
the prohibition on improper inducements while protecting the 
appropriate due process rights of lenders and guaranty agencies.
    The Department's proposal to include violations of the prohibited 
inducement provisions in Sec.  682.406 as a condition of reinsurance 
codifies the Department's existing policy and practice when it 
documents violations of the prohibited inducement provisions.
    Finally, the Department believes that the proposed change to expand 
the protections provided by the FTC's Holder Rule by including a form 
of that rule in the proposed regulations will allow borrowers to assert 
any legal rights they may have if they have been harmed in a situation 
in which the lender has offered or provided an improper inducement. 
Moreover, by applying the FTC's Holder Rule to all loans, irrespective 
of the type of school attended by the borrower, the proposed 
regulations will ensure that all FFEL borrowers have the same legal 
rights.

Eligible Lender Trustees (ELTs) (Sec. Sec.  682.200 and 682.602)

    Statute: The Third Higher Education Extension Act of 2006 (HEA 
Extension Act) (Pub. L. 109-292) amended the definition of lender in 
section 435(d)(2) of the HEA to prohibit new ELT relationships and 
restrict existing ELT relationships by imposing limits on school or 
school-affiliated organizations that make or originate loans through an 
ELT in the FFEL Program.
    Current Regulations: The definition of lender currently in Sec.  
682.200 does not reflect these new restrictions on ELT relationships in 
the FFEL Program. The current regulations also do not contain a 
definition of school-affiliated organizations.
    Proposed Regulations: The changes in proposed Sec.  682.200 
implement the HEA Extension Act by amending the definition of lender in 
Sec.  682.200 to prohibit a FFEL lender from entering into a new ELT 
relationship with a school or a school-affiliated organization after 
September 30, 2006. ELT relationships in existence prior to that date 
would be allowed to continue with certain restrictions. The proposed 
regulations would also implement the HEA Extension Act by creating a 
new section (formerly reserved Sec.  682.602) that applies the same 
limits imposed on FFEL school lenders by the Higher Education 
Reconciliation Act (HERA) (Pub. L. 109-171) to school and school-
affiliated ELT arrangements entered into after January 1, 2007. Lastly, 
proposed Sec.  682.200 would define the term school-affiliated 
organization as any organization that is directly or indirectly related 
to a school and includes, but is not limited to alumni organizations, 
foundations, athletic organizations, and social, academic, and 
professional organizations.
    Reasons: We are proposing to amend the definition of lender in 
Sec.  682.200 and add new Sec.  682.602 to reflect the changes made to 
section 435(d)(2) of the HEA by the HEA Extension Act. Because the HEA 
Extension Act did not define ``school-affiliated organization,'' but 
included these organizations in imposing limits on ELT arrangements, we 
developed and are proposing to add a definition of this term to Sec.  
682.200 to add clarity to the regulations. During the negotiated 
rulemaking, several non-Federal negotiators expressed concern about the 
phrase ``directly or indirectly related to a school'' in the definition 
of school-affiliated organization. They felt that we should qualify 
this phrase to make it clear that the definition applies only to 
organizations that are under the common control and ownership of a 
school. The Department disagreed with this suggestion, because many 
organizations such as alumni and social organizations are clearly 
school-affiliated but may not be under the control and ownership of a 
school.

Frequency of Capitalization (Sec.  682.202)

    Statute: Section 428C(b)(4)(C)(ii)(III) of the HEA provides for the 
capitalization of interest on Consolidation Loans.
    Current Regulations: Under current Sec.  682.202(b)(3), a lender 
may capitalize unpaid interest as frequently as every quarter. 
Capitalization is also permitted when repayment is required to begin or 
resume.
    Proposed Regulations: Under proposed Sec.  682.202, the frequency 
of capitalization on Federal Consolidation Loans would be limited to 
quarterly, except that a lender could only capitalize unpaid interest 
that accrues

[[Page 32425]]

during an in-school deferment at the expiration of the deferment. These 
proposed regulations would be consistent with the current practice in 
the Direct Loan Program.
    Reasons: The proposed regulations would align the FFEL Program with 
the Direct Loan Program. Capitalization would take place when the 
borrower changes status at the end of a period of authorized in-school 
deferment.
    This change was proposed by non-Federal negotiators to protect 
borrowers that previously consolidated their loans while in an in-
school status to lock in low interest rates. Statutory provisions, 
subsequently repealed by the HERA, allowed in-school FFEL borrowers to 
request an early conversion to repayment status. Unlike Direct Loan 
borrowers, FFEL borrowers were not able to consolidate their loans 
while they were in an in-school status. By converting to repayment 
status, these borrowers could consolidate their loans. Consolidation 
Loans received by these borrowers were then immediately placed into in-
school deferments. The proposed regulations would limit when the 
interest on these loans could be capitalized.

Loan Discharge for False Certification as a Result of Identity Theft 
(Sec. Sec.  682.208, 682.211, 682.300, 682.302 and 682.411)

    Statute: Section 437(c) of the HEA authorizes a discharge of a FFEL 
Loan or a Direct Loan if the borrower's eligibility to borrow was 
falsely certified because the borrower was a victim of the crime of 
identity theft.
    Current Regulations: Section 682.402 of the FFEL Program 
regulations and Sec.  685.215 of the Direct Loan Program regulations 
authorize a discharge of a loan if the borrower's eligibility to borrow 
the loan was falsely certified because the borrower was the victim of 
the crime of identity theft. Section 682.402 requires that, before the 
borrower's obligation is discharged, the borrower must provide the loan 
holder a copy of a local, State, or Federal court verdict or judgment 
that conclusively determines that the individual who is named as the 
borrower of the loan was the victim of the crime of identity theft. A 
Direct Loan borrower must provide the Secretary the same documentation 
to establish eligibility for the discharge.
    Proposed Regulations: The proposed regulations do not include any 
changes to the eligibility requirements with which a borrower must 
comply to obtain a loan discharge as a result of the crime of identity 
theft. However, the proposed regulations Sec.  682.208 would allow a 
lender to suspend credit bureau reporting on a loan for 120 days while 
the lender investigates a borrower's claim that he or she is the victim 
of identity theft. The proposed regulations in Sec.  682.211 would 
allow a lender to grant a 120-day administrative forbearance to a 
borrower upon the lender's receipt of a valid identity theft report as 
defined under the Fair Credit Reporting Act (15 U.S.C. 1681a) or 
notification from a credit bureau of an allegation of identity theft 
while the lender determines the enforceability of the loan. Under the 
proposed changes in Sec. Sec.  682.208 and 682.211, the lender could no 
longer collect interest and special allowance payments on the loan if 
the lender determines that the loan is unenforceable. The proposed 
regulations would allow the lender a three-year period, however, to 
submit a claim if, within that time period, the lender receives from 
the borrower a local, State, or Federal court verdict of judgment 
conclusively proving that the borrower was the victim of the crime of 
identity. The proposed regulations in Sec. Sec.  682.300 and 682.302 
would clarify that the Secretary terminates the payment of interest 
benefits and special allowance on eligible FFEL Program Loans 
consistent with the changes we are proposing in Sec.  682.208. Lastly, 
proposed regulations in Sec.  682.411 would specify that the HEA does 
not preempt provisions of the Fair Credit Reporting Act that provide 
for the suspension of credit bureau reporting and collection on a loan 
after the lender receives a valid identity theft report or notification 
from a credit bureau.
    Reasons: Interim final regulations published on August 9, 2006 (71 
FR 64377) and final regulations published on November 1, 2006 (71 FR 
45665) implemented changes made to the HEA by the HERA to authorize a 
discharge of a FFEL or Direct Loan Program loan if the borrower's 
eligibility to borrow was falsely certified because the borrower was a 
victim of the crime of identity theft. Although some of the negotiators 
had concerns with these earlier regulations, the Department believes 
that the current regulations properly reflect the statutory provision 
and therefore did not propose any changes.
    Some non-Federal negotiators asked the Department to add 
regulations that would allow loan holders to take actions required by 
other Federal laws when they receive an allegation that a loan was 
certified due to a crime of identity theft. The Department agreed. The 
proposed regulations in Sec. Sec.  682.208 and 682.211 would allow for 
the suspension of credit bureau reporting and collection activity, 
respectively. The proposed regulations in Sec.  682.411 would allow 
lenders to comply with the Fair Credit Reporting Act and stop credit 
bureau reporting on delinquent loans while the lender investigates an 
alleged identity theft without violating the FFEL Program regulations.

Preferred Lender Lists (Sec. Sec.  682.212 and 682.401)

    Statute: Section 432(m) of the HEA requires the Secretary, in 
consultation with guaranty agencies, lenders, and other organizations 
involved in student financial assistance to develop common application 
forms and promissory notes, or MPNs for use in the FFEL Program. These 
forms must be formatted to require the applicant to clearly indicate a 
choice of lender. Under Section 479A(c) of the HEA, schools are 
authorized to refuse to certify, on a case-by-case basis, a statement 
that permits a student to receive a loan. The reason for the school's 
refusal must be documented and provided to the student in writing. In 
exercising this authority, a school may not discriminate against any 
borrower.
    Current Regulations: Many schools provide lists of preferred or 
recommended lenders to students and prospective borrowers. There are no 
current regulations that govern a school's use of such lists. Current 
Sec.  682.603(e) authorizes a school to refuse to certify a borrower's 
eligibility for a FFEL Loan but specifies that, in exercising that 
authority, a school must not engage in any pattern or practice that 
would result in denial of a borrower's access to loans on the basis of 
certain factors including the borrower's choice of a particular lender 
or guaranty agency.
    Proposed Regulations: Section 682.212(h)(1) of the proposed 
regulations specifies the requirements that a school must meet if it 
chooses to provide a list of recommended or preferred FFEL lenders for 
use by the school's students and their parents, and prohibits the use 
of a preferred lender list to deny or otherwise impede the borrower's 
choice of lender. Section 682.212(h)(1)(ii) of the proposed regulations 
would require a school using a preferred lender list to include on the 
list at least three lenders that are not affiliated with each other. 
Section 682.212(h)(1)(iii) of the proposed regulations would also 
prohibit a school from including lenders on the list that have offered, 
or been solicited by the school to offer, financial or other benefits 
to the school in exchange for placement on the list. The proposed 
regulations further provide, in Sec.  682.212(h)(2)(iii), that if a 
school has listed a lender on its preferred lender list and the lender 
offers specific

[[Page 32426]]

borrower benefits (such as lower fees or interest rates) to the 
school's borrowers, the school must ensure that the lender provides the 
same benefits to all borrowers at the school. Section 682.212(h)(2) of 
the proposed regulations would also require the school to disclose to 
prospective borrowers, as part of the list, the method and criteria the 
school used to select any lender that it recommends or suggests, to 
provide comparative information to prospective borrowers about interest 
rates and other benefits offered by the lenders, and to include a 
prominent statement, in any information related to its list of lenders, 
advising prospective borrowers that they are not required to use one of 
the school's recommended or suggested lenders. Section 682.212(h)(2)(v) 
of the proposed regulations would also prohibit a school from 
assigning, through award packaging or other methods, a lender to first-
time borrowers and from delaying certification of a borrower's loan 
eligibility to a lender because that particular lender is not on the 
school's preferred lender list. The proposed regulations would also 
revise Sec.  682.603(e) to further clarify that a school may never 
refuse or delay certification of a borrower's loan eligibility because 
of the borrower's choice of lender.
    Reasons: The Department believes that it is necessary at this time 
to establish rules to govern a school's optional use of a preferred 
lender list to preserve a borrower's right to choose a FFEL lender. 
These proposed regulations will help ensure that such lists are a 
source of useful, unbiased consumer information that can assist 
students and their parents in choosing a FFEL lender from the over 
3,000 lenders that participate in the FFEL Program.
    The Department has not previously regulated or restricted the use 
of lists of preferred or recommended lenders. With student loan 
defaults a national concern in the early 1990s, some schools began 
recommending to borrowers that they use lenders that the school 
believed provided high-quality customer service in loan origination and 
servicing, with the goal of preventing loan delinquency and default and 
its negative consequences for borrowers and schools. With the 
significant growth of loan volume in recent years, and increased 
competition among FFEL lenders, the focus of school selection of 
preferred lenders has shifted. Lenders began offering web-based and 
proprietary applications and electronic data transmission to reduce the 
administrative burden for schools and borrowers and the processing time 
necessary to secure a student loan. Increased competition among FFEL 
lenders has also led to a proliferation of student loan borrower 
benefits, such as reduced interest rates and fees. Given the growing 
complexity surrounding the FFEL program, students and parents have been 
relying extensively on financial aid administrators as a source of 
assistance to identify lenders that offer the best service and benefits 
to borrowers. The use of preferred lender lists and other consumer 
information related to the student loan process has played a useful 
role in assisting financial aid officers in dealing with the large 
volume of requests for information and assistance.
    There is increasing evidence, however, that the preferred lender 
lists maintained by many schools do not represent the result of 
unbiased research by the school to identify the lenders providing the 
best combination of service and benefits to borrowers. There has also 
been increasing evidence that some schools have been restricting the 
ability of borrowers to choose the lender of their FFEL Program loan. 
The Department has identified instances in which a school selected the 
lender for the borrower as part of the financial aid award packaging 
process, provided borrowers with an electronic link to only one lender 
after recommending a loan as part of the award package, identified only 
one lender as their preferred lender in their published financial aid 
information, or, if the school was an authorized FFEL Program lender, 
directed the aid administrator to use the school as the only lender. 
Some other schools have significantly delayed or declined to provide 
the necessary loan eligibility certification to a lender for a student 
or parent borrower because the lender was not on the school's preferred 
list or did not participate in the electronic processing system that 
the school used. When these situations were identified, and in response 
to student and parent complaints, the Department has investigated and 
addressed them on a case-by-case basis, and reminded the school of its 
legal responsibilities. Over the last three years, the Department has 
also used Department-sponsored meetings and other conferences to 
highlight inappropriate and, in some cases, illegal practices related 
to the use of preferred lender lists. Unfortunately, many of these 
practices have continued, despite the Department's efforts.
    Recent Department investigations have shown that, in some cases, a 
school's selection of a preferred or recommended lender was the result 
of a lender's offer of prohibited inducements that took the form of 
direct payments or other benefits to the school, its students, or its 
employees rather than the result of the school's effort to research and 
analyze the various lender offerings to its students. In 1995, the 
Department reminded schools of the prohibited inducement provisions in 
the law and the sanctions attached to them, and warned schools against 
such activities with both FFEL school lenders and non-school FFEL 
lenders (DCL 95-G-278). Despite these actions, the Department's Office 
of Inspector General reported to the Secretary in August 2003 that 
these relationships were becoming an increasing problem in the FFEL 
program, and recommended that the Secretary provide additional guidance 
to both schools and lenders. The continuing and growing concern about 
these relationships led the Secretary to decide to address preferred 
lender lists as part of this rulemaking process.
    These proposed regulations are similar to the proposals submitted 
by the Department to the negotiating committee during the negotiated 
rulemaking process. Some negotiators questioned the need to regulate in 
this area, stating that it would be highly intrusive and advising the 
Department that it would be better to address the use of preferred 
lender lists through training and enforcement as part of school reviews 
and audits. Another negotiator recommended that any proposed 
regulations on this topic be limited to schools that used a preferred 
lender list to actively impede a borrower's choice of lender. Some 
negotiators thought that the Secretary should consider prohibiting the 
use of preferred lender lists entirely while other negotiators endorsed 
the continued use of preferred lender lists as a helpful tool for both 
schools and prospective borrowers. Several negotiators expressed the 
view that regulations in this area would be administratively burdensome 
and could result in schools discontinuing the use of such lists. Some 
negotiators expressed concern that if schools discontinued using a 
preferred lender list, students would be subject to increased direct 
marketing from student loan lenders, which they viewed as 
counterproductive to the goal of educating students and parents about 
the student loan process.
    Some negotiators stated that the Department's proposed requirement 
of a minimum number of three lenders on any list was arbitrary. A 
couple of those negotiators expressed concern that some schools, 
particularly small schools, would have difficulty complying with

[[Page 32427]]

the requirement because only one lender was willing to make FFEL loans 
to students at the schools. A group of negotiators submitted a counter-
proposal to exempt schools from the requirement that a preferred lender 
list include at least three lenders if the school: Had less than 500 
borrowers entering repayment in a given year; had issued a request for 
proposal to lenders to which there were at least three responses; 
recommended a certain lender in accordance with State law; or was a 
Historically Black College or University or a Tribally-controlled 
College or University. One other negotiator strongly recommended that 
the Department require schools to provide information about their 
business dealings with each of the lenders on the preferred lender 
list. However, several school-based negotiators stated that such a 
requirement was administratively unfeasible and would not be helpful to 
students because there were generally many business arrangements 
between schools and financial institutions that were not related to the 
school's participation in the FFEL Loan Program and over which student 
financial aid personnel have no control. These same negotiators also 
objected to the Department's proposal that, in addition to disclosing 
the method and criteria used by the school to choose the lenders on the 
school's preferred lender list, the school be required to provide 
comparative information on the interest rates and other borrower 
benefits offered by those lenders. The school-based negotiators stated 
that this requirement would represent a significant administrative 
burden and that schools could not ensure the accuracy of the 
information on borrower-benefit offerings. Many negotiators objected to 
the Department's proposed prohibition against a school soliciting 
borrower benefits from a lender in exchange for the lender's placement 
on the school's preferred lender list. These negotiators argued that 
one of a school's primary reasons for providing a list of lenders was 
to identify lenders offering the best interest rates and borrower 
benefits possible for the school's borrowers, and believed that a 
school's efforts to negotiate better benefits for their borrowers 
should not be restricted.
    The Department's proposed regulations would require that any school 
list of recommended lenders contain at least three lenders to provide 
borrower choice. To further ensure that the listed lenders provide an 
actual choice for a borrower, the proposed regulations provide that the 
three lenders must not be affiliated with each other. The Department 
expects a school to collect and retain a statement certifying to this 
fact, upon which the school can rely, from each of the lenders they 
propose to include on their list. The Department is not proposing any 
exemption to the minimum of three lenders. The Department also believes 
that the disclosure of supporting information and data with the list is 
the most efficient and effective method to ensure that borrowers make 
informed consumer decisions. The Department understands that providing 
comparative interest rate and benefit information, in addition to 
describing the method and criteria used to select lenders for the list, 
will involve additional efforts for schools in preparing and providing 
a preferred lender list. To assist schools with this effort, the 
Department is developing a model format that a school may use to 
present this information. The Department will be sharing a draft of the 
model format with representatives of school, lending and guaranty 
agency communities as well as students and parents to solicit their 
thoughts and suggestions. The draft model format will then be revised 
and submitted for clearance to the Office of Management and Budget 
(OMB) as required by the Paperwork Reduction Act of 1995. This 
clearance process will afford additional opportunities for public 
comment on the draft model format. The Department plans to submit a 
model format form to OMB for its review when these proposed regulations 
are published in final form.
    The Department also agrees that schools should not be discouraged 
from negotiating with lenders for the best possible interest rates and 
borrower benefits for their borrowers. As a result, the proposed 
regulations, while continuing to prohibit a school's solicitation of 
payments and other benefits from a lender for the school or its 
employees in exchange for the lender's placement on the school's list, 
would not prohibit a school from soliciting lenders for borrower 
benefits in exchange for placement on the school's list.

Executive Order 12866

Regulatory Impact Analysis

    Under Executive Order 12866, the Secretary must determine whether 
the regulatory action is ``significant'' and therefore subject to the 
requirements of the Executive Order and subject to review by the OMB. 
Section 3(f) of Executive Order 12866 defines a ``significant 
regulatory action'' as an action likely to result in a rule that may 
(1) Have an annual effect on the economy of $100 million or more, or 
adversely affect a sector of the economy, productivity, competition, 
jobs, the environment, public health or safety, or State, local or 
tribal governments or communities in a material way (also referred to 
as an ``economically significant'' rule); (2) create serious 
inconsistency or otherwise interfere with an action taken or planned by 
another agency; (3) materially alter the budgetary impacts of 
entitlement grants, user fees, or loan programs or the rights and 
obligations of recipients thereof; or (4) raise novel legal or policy 
issues arising out of legal mandates, the President's priorities, or 
the principles set forth in the Executive order.
    Pursuant to the terms of the Executive order, it has been 
determined this proposed regulatory action will not have an annual 
effect on the economy of more than $100 million. Therefore, this action 
is not ``economically significant'' and subject to OMB review under 
section 3(f)(1) of Executive Order 12866. In accordance with the 
Executive order, the Secretary has assessed the potential costs and 
benefits of this regulatory action and has determined that the benefits 
justify the costs.

Need for Federal Regulatory Action

    These proposed regulations address a broad range of issues 
affecting students, borrowers, schools, lenders, guaranty agencies, 
secondary markets and third-party servicers participating in the FFEL, 
Direct Loan, and Perkins Loan programs. Prior to the start of 
negotiated rulemaking, through a notice in the Federal Register and 
four regional hearings, the Department solicited testimony and written 
comments from interested parties to identify those areas of the Title 
IV regulations that they felt needed to be revised. Areas identified 
during this process that are addressed by these proposed regulations 
include:
     Duplication of effort for loan holders and borrowers in 
the deferment granting process. The Department has proposed changes 
that allow Title IV loan holders to grant a deferment under a 
simplified process.
     Difficulty experienced by members of the armed forces when 
applying for a Title IV loan deferment. The Department has proposed 
changes that allow a borrower's representative to apply for an armed 
forces or military service deferment on behalf of the borrower.
     Confusion regarding the eligibility requirements that a 
Title IV loan borrower must meet to qualify for a total and permanent 
disability loan discharge. The Department has

[[Page 32428]]

proposed changes to clarify these requirements.
     Lack of entrance and exit counseling for graduate and 
professional PLUS Loan borrowers. The Department has proposed changes 
that require entrance counseling and modified exit counseling.
     Costs associated with capitalization on Federal 
Consolidation Loans for borrowers who consolidated while in an in-
school status. The Department has proposed changes to limit the 
frequency of capitalization on such loans.
    Based on its experience in administering the HEA, Title IV loan 
programs, staff with the Department also identified several issues for 
discussion and negotiation, including:
     Risk to the Federal fiscal interest associated with the 
total and permanent disability discharge on a Title IV loan. The 
Department has proposed changes to require a prospective three-year 
conditional discharge so that the applicant's condition can be 
monitored before the borrower receives a Federal benefit.
     Enforcement issues and risk to the Federal fiscal interest 
associated with electronically-signed MPNs that have been assigned to 
the Department. The Department has proposed changes that require loan 
holders to maintain a certification regarding the creation and 
maintenance of any electronically-signed promissory notes and that 
require loan holders to provide disbursement records should the 
Secretary need the records to enforce an assigned Title IV loan.
     Excessive collection costs charged to defaulted Perkins 
Loan borrowers. The Department has proposed changes that cap collection 
costs in the Perkins Loan Program.
     Unreasonable risk of loss to the United States associated 
with the more than $400 million in uncollected Perkins Loans that have 
been in default for 5 years or more. The Department has proposed 
changes that provide for mandatory assignment of older, defaulted 
Perkins loans at the request of the Secretary.
     Program integrity issues associated with prohibited 
incentive payments and other inducements by lenders and guaranty 
agencies. The Department has proposed changes that explicitly identify 
prohibited inducements and allowable activities.
     Abuse associated with the use of lists of preferred or 
recommended lenders. The Department has proposed changes that ensure 
such lists are a source of useful, unbiased consumer information that 
can assist students and their parents in choosing a FFEL lender.
    Lastly, regulations were required to implement The HEA Extension 
Act, which made changes to eligible lender trustee relationships as 
discussed earlier.

Regulatory Alternatives Considered

    A broad range of alternatives to the proposed regulations was 
considered as part of the negotiated rule-making process. These 
alternatives are reviewed in detail elsewhere in this preamble under 
the Reasons sections accompanying the discussion of each proposed 
regulatory provision.

Benefits

    Many of the proposed regulations codify existing sub-regulatory 
guidance or make relatively minor changes intended to establish 
consistent definitions or streamline program operations across the 
three Federal student loan programs. The Department believes the 
additional clarity and enhanced efficiency resulting from these changes 
represent benefits with little or no countervailing costs or additional 
burden.
    Benefits provided in these regulations include: The clarification 
of rules on preferred lender lists and prohibited inducements; 
simplification of the process for granting deferments; changes to the 
process of granting loan discharges that reduce burden for loan 
holders, protect borrowers from unnecessary collection activities, and 
simplify the application process; limits on the frequency with which 
FFEL lenders can capitalize interest on Consolidation Loans; limits on 
the amount of collection costs charged to defaulted Perkins Loan 
borrowers; and the mandatory assignment to the Department of 
longstanding defaulted Perkins Loan with limited recent collection 
activity. Of these proposed provisions, only the mandatory assignment 
of defaulted Perkins Loans has a substantial economic impact-although 
the single-year impact is less than the $100 million threshold.
    Preferred Lender and Prohibited Inducements: The proposed 
regulations include a number of provisions affecting the use of 
preferred lender lists and lender inducements. The use of preferred 
lender lists by schools is completely optional; while the Department 
encourages maximum disclosure of loan information to borrowers, a 
school can avoid the minimal costs associated with the disclosures 
required by the proposed regulations by simply opting not to have a 
preferred lender list. Accordingly, there are no mandated costs for 
these proposals.
    The student loan industry features high competition among loan 
providers, using an array of interest rate discounts and other borrower 
benefits to attract volume. By increasing the amount of information 
available to borrowers and clarifying permissible relationships between 
lenders and schools, the proposed provisions are expected to improve 
market transparency and remove transaction barriers for loan borrowers, 
improving market openness and efficiency for both borrowers and loan 
providers.
    The proposed regulations generally prohibit lenders and guaranty 
agencies from regularly providing schools with personnel and other 
support services for loan application and other processing activities. 
The provision of these services appears to have been a relatively 
standard practice in some institutional sectors. To the extent schools 
must now pay for this activity themselves, the regulations do not 
increase costs but rather shift costs from lenders to schools. The 
Department is interested in comments related to any potential burden 
associated with this provision. The HEA and implementing regulations 
currently require schools to maintain the administrative capability to 
operate Title IV programs. The proposed regulations are consistent with 
this requirement by prohibiting lenders and guaranty agencies from 
providing schools with personnel and other support services and 
activities in exchange for loan applications.
    Simplification of Deferment Process: In general, current 
regulations require each lender to determine a borrower's qualification 
for a deferment and require a borrower to initiate the application for 
a military service deferment. The proposed regulation allows a lender 
to use the determination of deferment eligibility made by another 
eligible lender and allows a borrower's representative to apply for a 
military service deferment. In both instances, no additional costs are 
incurred. In the deferment-granting process, a lender must still make a 
determination, but responsibility may be shifted among individual 
lenders. In cases in which a loan is transferred to a different lender 
in the middle of a deferment period, the new loan holder will not need 
to make a separate initial determination of eligibility. Similarly, 
under the proposed regulations, a single individual will still submit 
an application for military service deferment; the proposal merely 
allows individuals dispatched on active duty to designate a 
representative to submit their application.

[[Page 32429]]

    Changes to Loan Discharge Provisions: The proposed regulations 
streamline and simplify the process for applying for death and 
disability loan discharges and ensures regulations are internally 
consistent and in compliance with other statutes, including the Fair 
Credit Reporting Act. Under current regulations, applicants must submit 
an original or certified copy of the death certificate in order to 
receive a loan discharge; the proposed regulation would allow the use 
of an accurate and complete photocopy of the original or certified copy 
of the death certificate. The workload to the applicant is unchanged 
and no additional costs are incurred. The proposed regulations for the 
total and permanent disability discharges also standardize definitions 
and dates for the conditional discharge period and require additional 
disclosure of information to borrowers. The proposed regulations 
require lenders to notify borrowers that additional payments are not 
required after the date a discharge application has been submitted. As 
a lender must already submit the application to the Secretary, the cost 
of electronically notifying the borrower of the repayment requirement 
is negligible. Note: The proposed regulations do not change the 
borrower's repayment responsibility and do not affect the cash flows of 
the loan program.
    Reasonable Collection Costs on Defaulted Perkins Loans: The HEA and 
implementing regulations specify and limit the level of collection 
costs on defaulted loans payable by a borrower in the FFEL and Direct 
Loan programs; similar restrictions do not exist for the Perkins Loan 
Program. There have been several reports that some schools assess 
excessive collection costs to defaulted borrowers. The Department does 
not have data to support or deny this assertion and is interested in 
any comments or data on this issue. In the absence of data, the 
Department assumes there is no measurable difference between the 
collection cost rate charged borrowers in the overall Perkins Loans 
program and that of the other Federal student loan programs. Given this 
assumption, the regulations are estimated to have no measurable 
economic impact.
    Mandatory Assignment of Certain Defaulted Perkins Loans: As 
discussed elsewhere in this preamble, the proposed regulations would 
require institutions to assign to the Department any Perkins Loans that 
have been in default for 7 or more years and have not had any 
collection activity for at least 12 months. Department data indicate 
that Perkins Loan institutions hold more than $400 million in 
uncollected loans that have been in default for 5 years or more. Since 
Perkins Loans are made with a combination of Federal and institutional 
funds, these uncollected loans present an unreasonable risk of loss to 
the United States.
    The Department believes its use of collection tools such as Federal 
offset will substantially improve the recovery rate on these older 
loans, as Perkins institutions lack access to these tools. Accordingly, 
the Department has long encouraged voluntary assignment of these 
longstanding non-performing defaulted loans. Despite this 
encouragement, and notwithstanding substantial simplification of the 
voluntary assignment process, the number and outstanding balance of 
older, defaulted Perkins Loans have continued to increase.
    Perkins Loans are made from a capital fund held by schools, which 
generally includes 75 percent Federal funds and 25 percent 
institutional matching funds. As discussed below, the proposed 
regulations, once implemented, could increase collections on defaulted 
loans by $15 million over the next 10 years. Under the assignment 
process, 100 percent of these collections become Federal revenue. In 
the absence of the regulations, given the age of the loans and the 
inability of the schools to collect, the Department assumes there would 
be no Federal or institutional revenue. The proposed regulations 
therefore would have minimal economic impact on schools. The impact on 
borrowers is that the increased use of Federal tools will require 
borrowers to fulfill their obligation to repay their loans.
    To estimate the impact of this proposed change, the Department used 
a statistically representative sample from records in NSLDS to identify 
outstanding Perkins Loans that have been in default for at least 7 
years and for which the outstanding balance has not decreased in at 
least 12 months. The Department identified $23 million in outstanding 
Perkins Loans that meet these criteria and so would be subject to 
mandatory assignment. This portfolio increases approximately $1 million 
annually under current regulations. Historically, using the credit 
reform discounting method in which future collections are discounted to 
reflect a current year cost, the Department collects approximately 80 
percent of outstanding principal on loans held in-house. If the $23 
million of assignable Perkins Loans produced the same collection level, 
government revenues would increase, on a discounted basis, by $18 
million over the next approximately 10 years as borrowers repay their 
loans. This level of collection is unlikely as these borrowers have 
been out of repayment for many years. This amount was reduced by $3 
million to reflect the Department's standard collections costs. 
Accordingly, the Department estimates the proposed regulation will 
increase net collections and reduce Federal costs by $15 million.

Costs

    Because entities affected by these regulations already participate 
in the Title IV, HEA programs, these lenders, guaranty agencies, and 
schools must already have systems and procedures in place to meet 
program eligibility requirements. These regulations generally would 
require discrete changes in specific parameters associated with 
existing guidance--such as the provision of entrance counseling, the 
retention of records, or the submission of data to NSLDS--rather than 
wholly new requirements. Accordingly, entities wishing to continue to 
participate in the student aid programs have already absorbed most of 
the administrative costs related to implementing these proposed 
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. In 
assessing the potential impact of these proposed regulations, the 
Department recognizes that certain provisions--primarily the mandatory 
assignment of Perkins Loans and the addition of entrance counseling for 
graduate and professional PLUS Loan borrowers--will result in 
additional workload for staff at some institutions of higher education. 
(This additional workload is discussed in more detail under the 
Paperwork Reduction Act of 1995 section of this preamble.) Additional 
workload would normally be expected to result in estimated costs 
associated with either the hiring of additional employees or 
opportunity costs related to the reassignment of existing staff from 
other activities. In this case, however, these costs are not incurred 
because other provisions in the proposed regulations--primarily changes 
involving the maximum length of loan period--result in offsetting 
workload reductions that greatly outweigh the estimated additional 
burden. The Department estimates annual net burden for institutions of 
higher education related to the Title IV student loan programs will 
decrease by 180,000 hours as a result of the proposed regulations. 
While regulations related to

[[Page 32430]]

mandatory assignment result in a net increase in burden under the 
Perkins Loan Program, schools participating in the Perkins Loan Program 
also typically participate in either the FFEL or Direct Loan Program, 
both of which have net burden reductions that outweigh the increase 
under the Perkins Loan Program. In addition, the estimated annual 
burden for Perkins Loan Program participants will drop dramatically 
after the first year, during which institutions will need to assign all 
outstanding loans that currently meet the requirements for mandatory 
assignment. In subsequent years, the number of loans assigned will be 
limited to those that newly meet the requirements.
    The Department is particularly interested in comments on possible 
administrative burdens related to the proposed regulations. In a number 
of areas, such as certification of electronic signatures, preferred 
lenders, and prohibited inducements, non-Federal negotiators raised 
concerns about possible administrative burden associated with 
provisions included in these proposed regulations. Given the limited 
data available, however, the Department is particularly interested in 
comments and supporting information related to possible burden stemming 
from the proposed regulations. Estimates included in this notice will 
be reevaluated based on any information received during the public 
comment period.

Assumptions, Limitations, and Data Sources

    Estimates provided above reflect a baseline in which the proposed 
changes implemented in these regulations do not exist. In general, 
these estimates should be considered preliminary; they will be 
reevaluated in light of any comments or information received by the 
Department prior to the publication of the final regulations. The final 
regulations will incorporate this information in a more robust 
analysis.
    In developing these estimates, a wide range of data sources were 
used, including NSLDS data, 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. Data on administrative burden at participating schools, 
lenders, guaranty agencies, and third-party servicers are extremely 
limited; accordingly, as noted above, the Department is particularly 
interested in comments in this area.
    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 1 below, we 
have prepared an accounting statement showing the classification of the 
expenditures associated with the provisions of these proposed 
regulations. This table provides our best estimate of the changes in 
Federal student aid payments as a result of these proposed regulations. 
Savings are classified as transfers from program participants 
(borrowers in default).

   Table 1.--Accounting Statement: Classification of Estimated Savings
                              [In millions]
------------------------------------------------------------------------
                 Category                             Transfers
------------------------------------------------------------------------
Annualized Monetized Transfers............  $15.
From Whom To Whom?                          Defaulted Perkins Loan
                                             Borrowers to Federal
                                             Government.
------------------------------------------------------------------------

Clarity of the Regulations

    Executive Order 12866 and the Presidential memorandum ``Plain 
Language in Government Writing'' require each agency to write 
regulations that are easy to understand.
    The Secretary invites comments on how to make these proposed 
regulations easier to understand, including answers to questions such 
as the following:
     Are the requirements in the proposed regulations clearly 
stated?
     Do the proposed regulations contain technical terms or 
other wording that interferes with their clarity?
     Does the format of the proposed regulations (grouping and 
order of sections, use of headings, paragraphing, etc.) aid or reduce 
their clarity?
     Would the proposed regulations be easier to understand if 
we divided them into more (but shorter) sections? (A ``section'' is 
preceded by the symbol ``Sec.  '' and a numbered heading; for example, 
Sec.  682.209 Repayment of a loan.)
     Could the description of the proposed regulations in the 
Supplementary Information section of this preamble be more helpful in 
making the proposed regulations easier to understand? If so, how?
     What else could we do to make the proposed regulations 
easier to understand?
    To send any comments that concern how the Department could make 
these proposed regulations easier to understand, see the instructions 
in the ADDRESSES section of this preamble.

Regulatory Flexibility Act Certification

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

Paperwork Reduction Act of 1995

    Proposed Sec. Sec.  674.8, 674.16, 674.19, 674.38, 674.45, 674.50, 
674.61, 682.200, 682.208, 682.210, 682.211, 682.401, 682.402, 682.406, 
682.409, 682.411, 682.414, 682.602, 682.603, 682.604, 682.610, 685.204, 
685.212, 685.213, 685.215, 685.301, 685.304 contain information 
collection requirements. Under the Paperwork Reduction Act of 1995 (44 
U.S.C. 3507(d)), the Department of Education has submitted a copy of 
these sections to the Office of Management and Budget (OMB) for its 
review.

[[Page 32431]]

    Collection of Information: Perkins Loan Program, FFEL Program, and 
Direct Loan Program.

Sections 674.38, 682.210, and 685.204--Deferment

    The proposed regulations in Sec. Sec.  674.38 and 682.210 would 
allow FFEL lenders and schools that participate in the Perkins Loan 
Program to grant graduate fellowship deferments, rehabilitation 
training program deferments, unemployment deferments, economic hardship 
deferments and military service deferments based on information from 
another FFEL loan holder or from the Department. The proposed 
regulations in Sec.  685.204 would permit the Department to grant a 
deferment on a Direct Loan based on information from a FFEL loan 
holder. Finally, the proposed regulations would allow a representative 
of the borrower to apply for a military deferment on a Perkins, FFEL or 
Direct Loan on behalf of the borrower. The proposed regulations would 
affect borrowers seeking a deferment and loan holders and servicers. 
This proposed change represents a decrease in burden because borrowers 
with more than one loan would no longer be required to gather and 
supply documentation to each loan holder in order to establish 
eligibility for a deferment. Conversely, loan holders would be able to 
rely on the determination of eligibility by another holder based on 
that holder's receipt and review of required documentation from the 
borrower. We estimate that the proposed changes will decrease burden 
for borrowers and loan holders (and their servicers) by 9,383 hours and 
1,042 hours, respectively. Thus, we estimate a total burden reduction 
of 10,425 hours in OMB Control Numbers 1845-0019, 1845-0020, and 1845-
0021.
    The proposed change allowing a borrower's representative to apply 
for a military deferment on behalf of the borrower does not represent a 
change in burden. The deferment application and eligibility 
determination process would remain the same.

Sections 674.61, 682.402 and 685.212--Loan Discharge for Death

    The proposed regulations would allow the use of an accurate and 
complete copy of the original or certified copy of the death 
certificate, in addition to the original or a certified copy, to 
support the discharge of a borrower's or parent borrower's Title IV 
loan. This proposed change represents a decrease in burden for the 
survivor of the borrower and the loan holder (or its servicer) because 
each party will now have increased flexibility in gathering and 
reviewing documentation that supports a loan discharge based on the 
death of the borrower. We estimate that the proposed changes will 
decrease burden for borrowers' survivors and loan holders (and their 
servicers) by 3,410 hours and 2,273 hours, respectively. Thus, we 
estimate a total burden reduction of 5,683 hours. The proposed changes 
will be reflected in OMB Control Numbers 1845-0019, 1845-0020 and 1845-
0021.

Sections 674.61, 682.402, and 685.213--Total and Permanent Disability 
Discharge

    The proposed regulations restructure Sec. Sec.  674.61, 682.402 and 
685.213 to clarify the regulatory requirements for the total and 
permanent disability discharge process. The proposed changes require a 
borrower to complete a prospective conditional discharge period of 
three years from the date that the Secretary makes an initial 
determination that a borrower is totally and permanently disabled in 
order to qualify for the total and permanent disability discharge on 
his or her Perkins, FFEL or Direct Loan. Lastly, the proposed changes 
explicitly state that, in order to qualify for a discharge, the 
borrower must meet the definition of total and permanent disability 
under the Perkins Loan or Direct Loan regulations or the definition of 
totally and permanently disabled under the FFEL regulations and receive 
no further Title IV loans from the date the physician certifies the 
borrower's total and permanent disability on the discharge application. 
The proposed regulatory changes would affect Title IV borrowers seeking 
a total and permanent disability loan discharge, loan holders (and 
their servicers), and guaranty agencies.
    The proposed changes would not constitute an increase in burden for 
borrowers because the application process and the eligibility 
requirements have not changed. The proposed changes would also not 
constitute an increase in burden for loan holders and guaranty agencies 
because these entities are not responsible for monitoring the 
borrower's status during the prospective conditional discharge period 
or for making a final determination of the borrower's eligibility for 
discharge. Changes to the Permanent and Total Disability Loan Discharge 
Application Form would need to be made, however, to state that the 
conditional discharge period would be prospective from the date of the 
physician's certification of the borrower's disability on the form. The 
Total and Permanent Disability Discharge Application currently in use 
will expire on May 5, 2008. Final regulations implementing these 
provisions will be effective July 1, 2008. A revised Total and 
Permanent Disability Discharge Form associated with OMB Control Number 
1845-0065 will be submitted for OMB review by January 31, 2008 thereby 
ensuring that a newly-approved form will be available for a borrower's 
use by the time final regulations are effective.

Sections 674.16, 682.208, 682.401 and 682.414--NSLDS Reporting 
Requirements

    The proposed changes to Sec. Sec.  674.16, 682.208, 682.401 and 
682.414 require schools, lenders, and guaranty agencies to report 
enrollment and loan status information, or any other data required by 
the Secretary, to NSLDS by a deadline established by the Secretary. 
Requiring these entities to report information to NSLDS on a deadline 
established by the Secretary codifies existing Departmental practice 
and we believe that it will not result in an increase or decrease in 
burden; however we invite comments on this issue.
    The proposed changes in Sec.  682.401 that require a guaranty 
agency to report a borrower's enrollment status to the current holder 
of a loan within 30 days, instead of the existing 60-day timeframe, do 
not represent an increase in burden. Under current practice, 33 of the 
35 existing guaranty agencies participate in a free service provided by 
the National Student Clearinghouse Total Enrollment Reporting Process 
(TERP). TERP already provides enrollment information to lenders and 
lender servicers on behalf of the guaranty agency within a 30-day 
period. The remaining two guaranty agencies are expected to enroll with 
TERP by the end of the year.

Sections 674.19, 674.50, and 682.414--Certification of Electronic 
Signature on Title IV Loan Program Master Promissory Notes (MPNs) 
Assigned to the Department

    The proposed changes to Sec. Sec.  674.19, 674.50 and 682.414 
support the Department's efforts to enforce defaulted Perkins Loan or 
FFEL MPNs that are assigned to the Department by requiring that 
schools, lenders and guarantors create, maintain, and provide to the 
Secretary, upon request, an affidavit or certification regarding the 
creation and maintenance of electronic MPNs or promissory notes, 
including the authentication and signature process. The proposed 
changes in Sec. Sec.  674.19 and 682.414 would also require schools and 
the holder of the original electronically signed FFEL MPN to retain an 
original of an

[[Page 32432]]

electronically signed MPN, and associated loan records, for three years 
after all the loans made on the MPN are satisfied. The proposed changes 
in Sec. Sec.  674.50 and 682.414 would also require schools, lenders 
and guarantors to provide any record, affidavit or certification 
requested by the Secretary to resolve any factual dispute involving an 
electronically signed promissory note assigned to the Department, 
including testimony, if appropriate, to ensure admission of electronic 
loan records in litigation or legal proceedings to enforce a loan. The 
proposed changes would affect schools that participate in the Perkins 
Loan Program and FFEL lenders and guarantors.
    The proposed changes represent an increase in burden for schools 
and FFEL lenders and guarantors by requiring the development of 
certifications regarding the creation and maintenance of the records 
associated with electronically signed MPNs. The proposed changes 
represent a further increase in burden by requiring that schools and 
lenders retain an original electronically signed MPN or promissory note 
for three years after all the loans on the MPN are satisfied, even 
after the loans are assigned to the Department. We estimate that the 
proposed changes will increase burden for schools, FFEL lenders, and 
guarantors by 2 hours, 322 hours, and 36 hours, respectively, based on 
the total number of Perkins and FFEL loans referred for litigation for 
the 2006-2007 period. Thus we estimate the total annual burden increase 
to be 360 hours. The increase as a result in the proposed changes will 
be reflected in OMB Control Numbers 1845-0019 and 1845-0020.

Sections 674.19, 674.50, and 682.409--Retention of Disbursement Records 
Supporting MPNs

    The proposed changes to Sec. Sec.  674.19 and 674.50 would require 
institutions that participate in the Perkins Loan program to retain 
disbursement records for each loan made to a borrower on a MPN until 
all the loans on the MPN are satisfied. The proposed changes in Sec.  
674.50 would also require an institution to submit disbursement 
records, upon request, for each loan made to a borrower on a MPN that 
has been assigned to the Department should the Department need the 
records to enforce the loan. The proposed changes represent an increase 
in burden for schools that participate in the Perkins Loan Program. 
Although Perkins Loan institutions are currently required to retain 
disbursement records for three years under 34 CFR Sec.  668.24, the 
requirement to retain the disbursement records for three years after 
the loan is satisfied is new. The requirement that an institution 
submit disbursement records, upon request, as part of the assignment 
process, is also new. We estimate that the proposed changes will 
increase burden by a total of 22 hours annually. The increase in burden 
as a result of the proposed changes will be reflected in OMB Control 
Number 1845-0019.
    The proposed changes in Sec.  682.409 would require a guaranty 
agency to submit a record of the lender's disbursement of Stafford and 
PLUS loan funds to the school for delivery to the borrower for each 
loan assigned to the Department. (FFEL lenders are already required to 
retain disbursement records under Sec.  682.414(a)(4)(ii)). The 
proposed changes in Sec.  682.409 would also require a guaranty agency 
to provide to the Secretary the name and location of the entity in 
possession of originals of electronically signed MPNs that have been 
assigned to the Department. In reviewing the proposed changes to Sec.  
682.409, we reexamined the existing burden reflected in OMB Control 
Number 1845-0020 and noted that no burden is currently associated with 
the FFEL mandatory assignment process. The Department has determined 
that the FFEL mandatory assignment process required under Sec.  682.409 
represents 2,380 burden hours for each guaranty agency for a total 
annual burden of 83,333 hours, which will be reflected in OMB Control 
Number 1845-0020. The proposed changes, which codify existing 
assignment procedures, are included in these burden hour calculations.

Sections 682.208, 682.211, 682.300, 682.302, 682.402, 682.411, and 
685.215--Identity Theft

    Interim final regulations published in August 2006 and final 
regulations published in November 2006 provided for 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. We have decided against making changes to the 
regulations as published but are proposing regulations to provide 
lenders with relief from certain due diligence requirements on a loan 
when identity theft is alleged.
    We are proposing changes in Sec.  682.208 and Sec.  682.211 to 
allow lenders to temporarily suspend credit bureau reporting and to 
grant a 120-day administrative forbearance, respectively, on a loan 
certified as a result of alleged identity theft while the lender 
investigates the situation. We are proposing changes in Sec. Sec.  
682.300 and 682.302 to specify that the payment of interest and special 
allowance on eligible FFEL Program Loans must cease on the date the 
lender determines the loan is legally unenforceable based on the 
receipt of an identity theft report. Lastly, we are proposing changes 
in Sec.  682.411 to permit a lender to take steps in accordance with 
the Fair Credit Reporting Act when the lender receives notice of an 
alleged identity theft. The proposed changes affect borrowers, lenders 
and guarantors.
    The proposed changes are burden neutral. The Department's Inspector 
General has confirmed that very few Title IV student loans are falsely 
certified as the result of the crime of identity theft. The burden 
associated with the suspension of credit bureau reporting and the 
application of a 120-day administrative forbearance by the lender while 
investigating an alleged identity theft would be negligible given that 
so few loans are affected and the time-period under which these 
requirements are waived is so short.

Sections 682.603, 682.604, 685.301, and 685.304--Entrance Counseling 
for Graduate/Professional PLUS Borrowers

    The proposed changes to Sec. Sec.  682.603 and 685.301 would 
require institutions, as part of the process for certifying a FFEL Loan 
or originating a Direct Loan, to notify Graduate/Professional PLUS Loan 
student borrowers who are eligible for Stafford Loans of their 
eligibility for a Stafford Loan and of the terms and conditions of a 
Stafford Loan that are more beneficial to a borrower than the terms and 
conditions of a PLUS loan, and to give borrowers an opportunity to 
request a Stafford Loan at that time. The proposed changes in 
Sec. Sec.  682.604 and 685.304 would also establish a separate entrance 
counseling requirement for Graduate/Professional PLUS student 
borrowers. We estimate that the proposed changes will increase burden 
on an annual basis by an additional 79,992 hours for individual 
borrowers and by 2,719 hours for institutions of higher education, 
which will be reflected in OMB Control Number 1845-0020.

Sections 682.401, 682.603, and 685.301--Maximum Length of a Loan Period

    The proposed changes in Sec. Sec.  682.401, 682.603, and 685.301 
would eliminate the maximum 12-month loan period for annual loan limits 
in the FFEL and Direct Loan Programs and the 12-month period of loan 
guarantee in the FFEL program to allow institutions to certify a single 
loan for students in shorter non-

[[Page 32433]]

term or nonstandard term programs. The proposed changes would also 
provide greater flexibility in scheduling disbursements for students 
who drop out and return within the permitted 180-day period. The 
proposed changes affect schools and lenders.
    The proposed changes represent a decrease in burden because schools 
and lenders will be able to certify and disburse one loan, as opposed 
to two loans, when programs are longer than 12 months. We estimate a 
decrease of burden on schools and lenders by 358,375 hours for each 
group for an annual total reduction of 716,750 hours. As a result of 
these proposed changes, the decrease in burden will be reflected in OMB 
Control Numbers 1845-0020 and 1845-0021.

Sections 674.45--Reasonable Collection Costs in the Perkins Loan 
Program

    The proposed changes in Sec.  674.45 would limit the collection 
costs an institution may assess against a Perkins Loan borrower to 30 
percent of the total of the outstanding principal, interest, and late 
charges on the loan collected for first collection efforts, 40 percent 
for second and subsequent collection efforts, and 40 percent plus court 
costs for collection efforts resulting from litigation. The changes 
affect institutions that participate in the Perkins Loan Program and 
collection agencies.
    The changes do not represent a change in burden. Collection 
practices and procedures would not change; only the amount assessed 
against a defaulted borrower would change. Therefore, there is no 
additional burden associated with this provision.

Sections 674.8 and 674.50--Mandatory Assignment of Defaulted Perkins 
Loans

    The proposed changes to Sec. Sec.  674.8 and 674.50 would provide 
the Department with the authority to require assignment of a Perkins 
Loan if the outstanding principal balance on the loan is $100 or more, 
the loan has been in default for seven or more years, and a payment has 
not been received on the loan in the past 12 months. Institutions that 
participate in the Perkins Loan Program (and their servicers) would be 
affected by these changes.
    The proposed change allowing the Department to require the 
assignment of certain defaulted Perkins Loans represents an increase in 
burden because institutions would be required to prepare and submit for 
assignment to the Department loans that might not otherwise have been 
assigned. We estimate that the proposed changes will increase burden on 
schools (and their servicers) annually by a total of 95,393 hours. The 
increased burden associated with these proposed changes will be 
reflected in OMB Control Number 1845-0019.

Sections 682.200 and 682.602--Eligible Lender Trustee

    The proposed changes implement the HEA Extension Act by amending 
the definition of lender to prohibit a FFEL lender from entering into 
an eligible lender trustee (ELT) relationship with a school or a 
school-affiliated organization as of September 30, 2006, but allowing 
current relationships to continue. The proposed changes also add a new 
definition of school-affiliated organization, and add a new Sec.  
682.602 to apply most of the same restrictions that are imposed on FFEL 
school lenders by the HERA to school and school-affiliated ELT 
arrangements as of January 1, 2007. The entities affected by these 
proposed changes are lenders, ELTs, schools and school-affiliated 
organizations.
    The proposed changes impose limits and prohibit certain 
arrangements between schools and school-affiliated organizations and 
eligible lender trustees. The affected entities under the proposed 
regulations are schools and school-affiliated organizations. We 
estimate that burden will increase by 57,000 hours and 86,000 hours for 
schools and school-affiliated organizations, respectively, and we will 
include this burden in OMB control number 1845-0020.

Sections 682.212 and 682.603--Preferred Lender

    The proposed regulations in Sec.  682.212 would require that any 
school's list of recommended lenders contain at least three 
unaffiliated lenders to provide borrower choice. The Department expects 
a school to collect and retain a statement certifying to this fact, 
upon which the school can rely, from each of the lenders they propose 
to include on their list. The proposed regulations also require the 
disclosure of supporting information and data with the list as the most 
efficient and effective method to ensure that borrowers make informed 
consumer decisions. The provision of comparative interest rate and 
benefit information, in addition to describing the method and criteria 
used to select lenders for the list, will involve additional efforts 
for schools in preparing and providing a preferred lender list. We 
estimate that burden will increase by 141,625 hours for institutions of 
higher education. The increased burden associated with the proposed 
changes in Sec.  682.212 will be reflected under a new OMB Control 
Number upon publication of the NPRM.
    To assist schools with this effort, the Department is developing a 
model format that a school may use to present this information. The 
Department will be sharing a draft of the model format with 
representatives of school, lending and guaranty agency communities as 
well as students and parents to solicit their thoughts and suggestions. 
The draft model format will then be revised and submitted for clearance 
to OMB as required by the Paperwork Reduction Act of 1995. This 
clearance process will afford additional opportunities for public 
comment on the draft model format. The Department is not requesting 
comments on this form at this point, but will publish a separate notice 
in the Federal Register, with a 60-day request for public comment, to 
do so and will submit the form for OMB approval when these proposed 
regulations are published in final form.
    The proposed changes in Sec.  682.603 provide that a school must 
certify Stafford and PLUS loans expeditiously regardless of the lender 
chosen by the borrower, that a school cannot assign a lender to a 
first-time borrower, and that a school may not engage in practices that 
deny a borrower access to FFEL loans based on the borrower's selection 
of a lender or guaranty agency. These proposed changes do not change 
the certification process or the data collection requirements 
associated with the certification process.

Sections 682.200, 682.209, 682.401, and 682.406--Prohibited Inducements

    The proposed changes to Sec. Sec.  682.200 and 682.401 provide 
lists of prohibited activities in which lenders and guaranty agencies 
may not engage to secure loan applications or loan volume in the FFEL 
Program. The proposed regulations would also include lists of 
permissible activities in which lenders and guaranty agencies may 
engage as part of their roles as administrators of the FFEL program. 
The entities affected by these changes are lenders and guaranty 
agencies. The inclusion of a detailed list of prohibited and 
permissible activities in Sec. Sec.  682.200 and 682.401 largely 
codifies long-standing Department guidance and does not represent an 
increase in burden.
    The proposed changes in Sec.  682.209 would allow a borrower to 
assert any defense available under applicable State law against 
repayment of the loan if the lender making the loan offered or provided 
an improper inducement to the borrower's school. The entities affected 
by the proposed changes are borrowers, institutions, lenders, and

[[Page 32434]]

guaranty agencies. The proposed change does not represent a change in 
burden. This borrower defense against repayment is currently available 
to borrowers of FFEL Loans who attend a proprietary school. The 
proposed change extending this entitlement to FFEL Loan borrowers who 
attend other types of schools is a codification of the rights extended 
to such borrowers under State laws. Therefore, there is no burden 
associated with this change.
    The proposed changes in Sec.  682.406 provide that a guaranty 
agency may not make a claim payment on a loan if the lender offered or 
provided an improper inducement to the school, a borrower, or any other 
individual or entity. The entities affected by the proposed changes are 
lenders and guaranty agencies. The proposed change does not represent a 
change in burden. The forms and procedures associated with the claim 
filing process would remain unchanged.
    Consistent with the discussion above, the following chart describes 
the sections of the proposed regulations involving information 
collections, the information being collected, and the collections the 
Department will submit to the Office of Management and Budget for 
approval and public comment under the Paperwork Reduction Act.

------------------------------------------------------------------------
                                   Information
     Regulatory section            collection            Collection
------------------------------------------------------------------------
Sec.  Sec.   674.38, 682.210  This proposed         OMB 1845-0019, 1845-
 and 685.204.                  regulation allows a   0020 and 1845-0021.
                               loan holder to
                               grant deferments
                               based upon
                               information from
                               another holder,
                               rather than
                               requiring the
                               borrower to
                               resubmit deferment
                               documentation to
                               each holder
                               separately.
Sec.  Sec.   674.61, 682.402  Allows for the use    OMB 1845-0019, 1845-
 and 685.212.                  of an accurate and    0020 and 1845-0021.
                               complete copy of
                               the original or
                               certified copy of a
                               borrower's original
                               or certified copy
                               of the death
                               certificate to
                               support the
                               discharge of a
                               Title IV loan.
Sec.  Sec.   674.61, 682.402  A revised Total and   OMB 1845-0065.
 and 685.213.                  Permanent
                               Disability
                               Discharge Form will
                               be submitted to OMB
                               for review by
                               January 31, 2008
                               for review and
                               approval prior to
                               the effective date
                               of July 1, 2008.
Sec.  Sec.   674.19, 674.50,  Requires that         OMB 1845-0019 and
 and 682.414.                  schools, lenders      1845-0020.
                               and guarantors
                               create, maintain,
                               and provide an
                               affidavit or
                               certification, upon
                               request, regarding
                               the creation and
                               maintenance of
                               electronic MPNs or
                               promissory notes,
                               including the
                               authentication and
                               signature process.
Sec.  Sec.   674.19 and       Requires Perkins      OMB 1845-0019.
 674.50.                       loan participating
                               schools to retain
                               MPNs until all the
                               loans on the MPN
                               are satisfied.
Sec.  Sec.   682.603,         Requires Entrance     OMB 1845-0020 and
 682.604, 685.301 and          Counseling for all    1845-0021
 685.304.                      Grad PLUS loans.
Sec.  Sec.   682.401,         Eliminates the        OMB 1845-0020 and
 682.603 and 685.301.          maximum loan          1845-0021.
                               timeframe of 12
                               months..
Sec.  Sec.   674.8 and        Requires the          OMB 1845-0019.
 674.50.                       mandatory
                               assignment of
                               Perkins loans when
                               the outstanding
                               principal balance
                               on the loan is $100
                               or more, the loan
                               has been in default
                               7 or more years,
                               and a payment has
                               not been received
                               in the past 12
                               months.
Sec.  Sec.   682.200 and      Imposes the same      OMB 1845-0020.
 682.602.                      rules for FFEL
                               school lenders by
                               HERA to school and
                               school-affiliated
                               organization
                               arrangements.
682.212.....................  Requires              OMB 1845-XXXX This
                               institutions that     will be a new
                               use a preferred       collection. A
                               lenders list to       separate 60-day
                               provide information   Federal Register
                               on the method and     notice will be
                               criteria used to      published to
                               select the lenders    solicit comment on
                               on the list.          this form once it
                                                     is developed.
------------------------------------------------------------------------

    If you want to comment on the proposed information collection 
requirements, please send your comments to the Office of Information 
and Regulatory Affairs, OMB, Attention: Desk Officer for the U.S. 
Department of Education. Send these comments by e-mail to [email protected] or by fax to (202) 395-6974. Commenters need only 
submit comments via one submission medium. You may also send a copy of 
these comments to the Department contact named in the ADDRESSES section 
of this preamble.
    We consider your comments on these proposed collections of 
information in--
     Deciding whether the proposed collections are necessary 
for the proper performance of our functions, including whether the 
information will have practical use;
     Evaluating the accuracy of our estimate of the burden of 
the proposed collections, including the validity of our methodology and 
assumptions;
     Enhancing the quality, usefulness, and clarity of the 
information we collect; and
     Minimizing the burden on those who must respond. This 
includes exploring the use of appropriate automated, electronic, 
mechanical, or other technological collection techniques or other forms 
of information technology; e.g., permitting electronic submission of 
responses.
    OMB is required to make a decision concerning the collections of 
information contained in these proposed regulations between 30 and 60 
days after publication of this document in the Federal Register. 
Therefore, to ensure that OMB gives your comments full consideration, 
it is important that OMB receives the comments within 30 days of 
publication. This does not affect the deadline for your comments to us 
on the proposed regulations.

Intergovernmental Review

    These programs are not subject to Executive Order 12372 and the 
regulations in 34 CFR part 79.

Assessment of Educational Impact

    The Secretary particularly requests comments on whether these 
proposed regulations would require transmission of information that any 
other agency or

[[Page 32435]]

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.
    You may also view this document in PDF format at the following 
site: http://www.ifap.ed.gov.

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


(Catalog of Federal Domestic Assistance Number: 84.032 Federal 
Family Education Loan Program; 84.037 Federal Perkins Loan Program; 
and 84.268 William D. Ford Federal Direct Loan Program)

List of Subjects in 34 CFR Parts 674, 682 and 685

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

    Dated: May 31, 2007.
Margaret Spellings,
Secretary of Education.
    For the reasons discussed in the preamble, the Secretary proposes 
to amend parts 674, 682, and 685 of title 34 of the Code of Federal 
Regulations as follows:

PART 674--FEDERAL PERKINS LOAN PROGRAM

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

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

    2. Section 674.8 is amended by:
    A. In paragraph (d)(1), removing the words ``; or'' and adding in 
their place the punctuation ``.''.
    B. Adding a new paragraph (d)(3).
    The addition reads as follows:


Sec.  674.8  Program participation agreement.

* * * * *
    (d) * * *
    (3) The institution shall, at the request of the Secretary, assign 
its rights to a loan to the United States without recompense if--
    (i) The amount of outstanding principal is $100.00 or more;
    (ii) The loan has been in default, as defined in Sec.  674.5(c)(1), 
for seven or more years; and
    (iii) A payment has not been received on the loan in the preceding 
twelve months, unless payments were not due because the loan was in a 
period of authorized forbearance or deferment.
* * * * *
    3. Section 674.16 is amended by adding new paragraph (j) to read as 
follows:


Sec.  674.16  Making and disbursing loans.

* * * * *
    (j) The institution must report enrollment and loan status 
information, or any Title IV loan-related information required by the 
Secretary, to the Secretary by the deadline date established by the 
Secretary.
* * * * *
    4. Section 674.19 is amended by:
    A. Redesignating paragraphs (e)(2)(i) and (ii) as paragraphs 
(e)(2)(iii) and (iv).
    B. Adding new paragraphs (e)(2)(i) and (ii).
    C. Revising paragraph (e)(3).
    D. In paragraph (e)(4)(i), removing the words ``Master Promissory 
Note (MPN)'' and adding, in their place, the word ``MPN''.
    E. Revising paragraph (e)(4)(ii).
    The addition and revisions read as follows:


Sec.  674.19  Fiscal procedures and records.

* * * * *
    (e) * * *
    (2) * * *
    (i) An institution shall retain a record of disbursements for each 
loan made to a borrower on a Master Promissory Note (MPN). This record 
must show the date and amount of each disbursement.
    (ii) For any loan signed electronically, an institution must 
maintain an affidavit or certification regarding the creation and 
maintenance of the institution's electronic MPN or promissory note, 
including the institution's authentication and signature process in 
accordance with the requirements of Sec.  674.50(c)(12).
* * * * *
    (3) Period of retention of disbursement records, electronic 
authentication and signature records, and repayment records. (i) An 
institution shall retain disbursement and electronic authentication and 
signature records for each loan made using an MPN for at least three 
years from the date the loan is canceled, repaid, or otherwise 
satisfied.
    (ii) An institution shall retain repayment records, including 
cancellation and deferment requests for at least three years from the 
date on which a loan is assigned to the Secretary, canceled or repaid.
    (4) * * *
    (ii) If a promissory note was signed electronically, the 
institution must store it electronically and the promissory note must 
be retrievable in a coherent format. An original electronically signed 
MPN must be retained by the institution for 3 years after all the loans 
made on the MPN are satisfied.
* * * * *
    5. Section 674.38 is amended by:
    A. In paragraph (a)(1), removing the words ``(a)(2)'' and adding, 
in their place, the words ``(a)(5)''.
    B. Redesignating paragraphs (a)(2) and (a)(3) as paragraphs (a)(5) 
and (a)(7), respectively.
    C. Adding new paragraphs (a)(2), (a)(3), (a)(4), and (a)(6).
    The additions read as follows:


Sec.  674.38  Deferment procedures.

    (a) * * *
    (2) After receiving a borrower's written or verbal request, an 
institution may grant a deferment under Sec. Sec.  674.34(b)(1)(ii), 
674.34(b)(1)(iii), 674.34(b)(1)(iv), 674.34(d), 674.34(e), and 
674.34(h) if the institution is able to confirm that the borrower has 
received a deferment on another Perkins Loan, a FFEL Loan, or a Direct 
Loan for the same reason and the same time period. The institution may 
grant the deferment based on information from the other Perkins Loan 
holder, the FFEL Loan holder or the Secretary or from an authoritative 
electronic database maintained or authorized by the Secretary that 
supports eligibility for the deferment for the same reason and the same 
time period.
    (3) An institution may rely in good faith on the information it 
receives under paragraph (a)(2) of this section when determining a 
borrower's eligibility for a deferment unless the institution, as of 
the date of the determination, has information indicating that the 
borrower does not qualify for the deferment. An institution must 
resolve any discrepant information before granting a deferment under 
paragraph (a)(2) of this section.
    (4) An institution that grants a deferment under paragraph (a)(2) 
of this section must notify the borrower that the deferment has been 
granted and that the borrower has the option to cancel

[[Page 32436]]

the deferment and continue to make payments on the loan.
* * * * *
    (6) In the case of a military service deferment under Sec. Sec.  
674.34(h) and 674.35(c)(1), a borrower's representative may request the 
deferment on behalf of the borrower. An institution that grants a 
military service deferment based on a request from a borrower's 
representative must notify the borrower that the deferment has been 
granted and that the borrower has the option to cancel the deferment 
and continue to make payments on the loan. The institution may also 
notify the borrower's representative of the outcome of the deferment 
request.
* * * * *
    6. Section 674.45 is amended by:
    A. Redesignating paragraph (e)(3) as paragraph (e)(4).
    B. Adding new paragraph (e)(3).
    The addition reads as follows:


Sec.  674.45  Collection procedures.

* * * * *
    (e) * * *
    (3) For loans placed with a collection firm on or after July 1, 
2008, reasonable collection costs charged to the borrower may not 
exceed--
    (i) For first collection efforts, 30 percent of the amount of 
principal, interest, and late charges collected;
    (ii) For second and subsequent collection efforts, 40 percent of 
the amount of principal, interest, and late charges collected; and
    (iii) For collection efforts resulting from litigation, 40 percent 
of the amount of principal, interest, and late charges collected plus 
court costs.
* * * * *
    7. Section 674.50 is amended by:
    A. Adding new paragraphs (c)(11) and (12).
    B. In paragraph (e)(1), adding the words ``, unless the loan is 
submitted for assignment under paragraph 674.8(d)(3) of this section'' 
immediately after the word ``borrower''.
    The additions read as follows:


Sec.  674.50  Assignment of defaulted loans to the United States.

* * * * *
    (c) * * *
    (11) A record of disbursements for each loan made to a borrower on 
an MPN that shows the date and amount of each disbursement.
    (12)(i) Upon the Secretary's request with respect to a particular 
loan or loans assigned to the Secretary and evidenced by an 
electronically signed promissory note, the institution that created the 
original electronically signed promissory note must cooperate with the 
Secretary in all activities necessary to enforce the loan or loans. 
Such institution must provide--
    (A) An affidavit or certification regarding the creation and 
maintenance of the electronic records of the loan or loans in a form 
appropriate to ensure admissibility of the loan records in a legal 
proceeding. This certification may be executed in a single record for 
multiple loans provided that this record is reliably associated with 
the specific loans to which it pertains; and
    (B) Testimony by an authorized official or employee of the 
institution, if necessary, to ensure admission of the electronic 
records of the loan or loans in the litigation or legal proceeding to 
enforce the loan or loans.
    (ii) The certification in paragraph (c)(12)(i)(A) of this section 
must include, if requested by the Secretary--
    (A) A description of the steps followed by a borrower to execute 
the promissory note (such as a flowchart);
    (B) A copy of each screen as it would have appeared to the borrower 
of the loan or loans the Secretary is enforcing when that borrower 
signed the note electronically;
    (C) A description of the field edits and other security measures 
used to ensure integrity of the data submitted to the originator 
electronically;
    (D) A description of how the executed promissory note has been 
preserved to ensure that it has not been altered after it was executed;
    (E) Documentation supporting the institution's authentication and 
electronic signature process; and
    (F) All other documentary and technical evidence requested by the 
Secretary to support the validity or the authenticity of the 
electronically signed promissory note.
    (iii) The Secretary may request a record, affidavit, certification 
or evidence under paragraph (a)(6) of this section as needed to resolve 
any factual dispute involving a loan that has been assigned to the 
Secretary, including, but not limited to, a factual dispute raised in 
connection with litigation or any other legal proceeding, or as needed 
in connection with loans assigned to the Secretary that are included in 
a Title IV program audit sample, or for other similar purposes. The 
institution must respond to any request from the Secretary within 10 
business days.
    (iv) As long as any loan made to a borrower under an MPN created by 
an institution is not satisfied, the institution is responsible for 
ensuring that all parties entitled to access have full and complete 
access to the electronic loan record.
* * * * *
    8. Section 674.56 is amended by revising paragraph (b)(1) to read 
as follows:


Sec.  674.56  Employment cancellation--Federal Perkins loan, NDSL, and 
Defense loan.

* * * * *
    (b) * * *
    (1) An institution must cancel up to 100 percent of the outstanding 
balance on a borrower's Federal Perkins loan or NDSL made on or after 
July 23, 1992, for service as a full-time employee in a public or 
private nonprofit child or family service agency who is providing 
services directly and exclusively to high-risk children who are from 
low-income communities and the families of these children, or who is 
supervising the provision of services to high-risk children who are 
from low-income communities and the families of these children. To 
qualify for a child or family service cancellation, a non-supervisory 
employee of a child or family service agency must be providing services 
only to high-risk children from low-income communities and the families 
of these children. The employee must work directly with the high-risk 
children from low-income communities, and the services provided to the 
children's families must be secondary to the services provided to the 
children.
* * * * *
    9. Section 674.61 is amended by:
    A. Revising the second sentence in paragraph (a).
    B. Revising paragraphs (b), (c), and (d).
    The revisions read as follows:


Sec.  674.61  Discharge for death or disability.

    (a) * * * The institution must discharge the loan on the basis of 
an original or certified copy of the death certificate, or an accurate 
and complete photocopy of the original or certified copy of the death 
certificate. * * *
    (b) Total and permanent disability--(1) General. A borrower's 
Defense, NDSL, or Perkins loan is discharged if the borrower becomes 
totally and permanently disabled, as defined in Sec.  674.51(s), and 
satisfies the additional eligibility requirements contained in this 
section.
    (2) Discharge application process. (i) To qualify for discharge of 
a Defense, NDSL, or Perkins loan based on a total and permanent 
disability, a borrower must submit a discharge application approved by 
the Secretary to the institution that holds the loan. The application 
must contain a certification by a physician, who is a doctor of 
medicine or osteopathy legally authorized to practice in a State, that 
the

[[Page 32437]]

borrower is totally and permanently disabled as defined in Sec.  
674.51(s). The borrower must submit the application to the institution 
within 90 days of the date the physician certifies the application.
    (ii) If, after reviewing the borrower's application, the 
institution determines that the application is complete and supports 
the conclusion that the borrower is totally and permanently disabled, 
the institution must suspend collection activities and assign the loan 
to the Secretary.
    (iii) At the time the loan is assigned to the Secretary, the 
institution must notify the borrower that--
    (A) The loan has been assigned to the Secretary for determination 
of eligibility for a total and permanent disability discharge and that 
no payments are due on the loan; and
    (B) In order to remain eligible for the discharge from the date the 
physician completes and certifies the borrower's total and permanent 
disability on the application until the date the Secretary makes an 
initial eligibility determination--
    (1) The borrower cannot work and earn money or receive any new 
title IV loans; and
    (2) The borrower must, on any loan received prior to the date the 
physician completed and certified the application, ensure that the full 
amount of any title IV loan disbursement made to the borrower on or 
after the date the physician completed and certified the application is 
returned to the holder within 120 days of the disbursement date.
    (3) Secretary's initial eligibility determination. (i) The borrower 
must continue to meet the conditions in paragraph (b)(2)(iii)(B) of 
this section from the date the physician completes and certifies the 
borrower's total and permanent disability on the application until the 
date the Secretary makes an initial determination of the borrower's 
eligibility in accordance with paragraph (b)(3)(ii) of this section.
    (ii) If the Secretary determines that the certification provided by 
the borrower supports the conclusion that the borrower meets the 
criteria for a total and permanent disability discharge, the borrower 
is considered totally and permanently disabled as of the date the 
physician completes and certifies the borrower's application.
    (iii) Upon making an initial determination that the borrower is 
totally and permanently disabled as defined in Sec.  674.51(s), the 
Secretary notifies the borrower that the loan will be in a conditional 
discharge status for a period of up to three years, beginning on the 
date the Secretary makes the initial determination that the borrower is 
totally and permanently disabled. The notification to the borrower 
identifies the conditions of the conditional discharge period specified 
in paragraph (b)(4)(i) of this section.
    (iv) If the Secretary determines that the certification provided by 
the borrower does not support the conclusion that the borrower meets 
the criteria for a total and permanent disability discharge, the 
Secretary notifies the borrower that the application for a disability 
discharge has been denied, and that the loan is due and payable under 
the terms of the promissory note.
    (4) Eligibility requirements for a total and permanent disability 
discharge. (i) A borrower meets the eligibility criteria for a 
discharge of a loan based on a total and permanent disability if, 
during and at the end of the three-year conditional discharge period--
    (A) The borrower's annual earnings from employment do not exceed 
100 percent of the poverty line for a family of two, as determined in 
accordance with the Community Service Block Grant Act;
    (B) The borrower does not receive a new loan under the Perkins, 
FFEL or Direct Loan programs, except for a FFEL or Direct Consolidation 
Loan that does not include any loans that are in a conditional 
discharge status; and
    (C) The borrower ensures, on any loan received prior to the date 
the physician completed and certified the application, that the full 
amount of any title IV loan disbursement made on or after the date of 
the Secretary's initial eligibility determination is returned to the 
holder within 120 days of the disbursement date.
    (ii) During the conditional discharge period, the borrower or, if 
applicable, the borrower's representative--
    (A) Is not required to make any payments on the loan;
    (B) Is not considered past due or in default on the loan, unless 
the loan was past due or in default at the time the conditional 
discharge was granted;
    (C) Must promptly notify the Secretary of any changes in address or 
phone number;
    (D) Must promptly notify the Secretary if the borrower's annual 
earnings from employment exceed the amount specified in paragraph 
(b)(4)(i)(A) of this section; and
    (E) Must provide the Secretary, upon request, with additional 
documentation or information related to the borrower's eligibility for 
a discharge under this section.
    (iii) If, at any time during or at the end of the three-year 
conditional discharge period, the Secretary determines that the 
borrower does not continue to meet the eligibility requirements for a 
total and permanent disability discharge, the Secretary ends the 
conditional discharge period and resumes collection activity on the 
loan. The Secretary does not require the borrower to pay any interest 
that accrued on the loan from the date of the Secretary's initial 
eligibility determination described in paragraph (b)(3) of this section 
through the end of the conditional discharge period.
    (5) Payments received after the physician's certification of total 
and permanent disability. (i) If, after the date the physician 
completes and certifies the borrower's loan discharge application, the 
institution receives any payments from or on behalf of the borrower on 
or attributable to a loan that was assigned to the Secretary for 
determination of eligibility for a total and permanent disability 
discharge, the institution must forward those payments to the Secretary 
for crediting to the borrower's account.
    (ii) At the same time that the institution forwards the payment, it 
must notify the borrower that there is no obligation to make payments 
on the loan while it is conditionally discharged prior to a final 
determination of eligibility for a total and permanent disability 
discharge, unless the Secretary directs the borrower otherwise.
    (iii) When the Secretary makes a final determination to discharge 
the loan, the Secretary returns any payments received on the loan after 
the date the physician completed and certified the borrower's loan 
discharge application.
    (c) No Federal reimbursement. No Federal reimbursement is made to 
an institution for cancellation of loans due to death or disability.
    (d) Retroactive. Discharge for death applies retroactively to all 
Defense, NDSL, and Perkins loans.
* * * * *

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

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

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

    11. Section 682.200(b) is amended by:
    A. Amending the definition of Lender by revising paragraph (5) and 
adding paragraph (7).
    B. Adding a definition of School-affiliated organization.
    The revisions and additions read as follows:

[[Page 32438]]

Sec.  682.200  Definitions.

    (b) * * *
    Lender. * * *
    (5)(i) The term eligible lender does not include any lender that 
the Secretary determines, after notice and opportunity for a hearing 
before a designated Department official, has, directly or through an 
agent or contractor--
    (A) Except as provided in paragraph (5)(ii) of this definition, 
offered, directly or indirectly, points, premiums, payments, or other 
inducements to any school or other party to secure applications for 
FFEL loans or to secure FFEL loan volume. This includes but is not 
limited to--
    (1) Payments or offerings of other benefits, including prizes or 
additional financial aid funds, to a prospective borrower in exchange 
for applying for or accepting a FFEL loan from the lender;
    (2) Payments or other benefits to a school, any school-affiliated 
organization or to any individual in exchange for FFEL loan 
applications, or application referrals, or a specified volume or dollar 
amount of loans made, or placement on a school's list of recommended or 
suggested lenders;
    (3) Payments or other benefits provided to a student at a school 
who acts as the lender's representative to secure FFEL loan 
applications from individual prospective borrowers;
    (4) Payments or other benefits to a loan solicitor or sales 
representative of a lender who visits schools to solicit individual 
prospective borrowers to apply for FFEL loans from the lender;
    (5) Payment of referral or processing fees to another lender or any 
other party;
    (6) Payment of conference or training registration, transportation, 
and lodging costs for an employee of a school or school-affiliated 
organization;
    (7) Payment of entertainment expenses, including expenses for 
private hospitality suites, tickets to shows or sporting events, meals, 
alcoholic beverages, and any lodging, rental, transportation, and other 
gratuities related to lender-sponsored activities for employees of a 
school or a school-affiliated organization;
    (8) Undertaking philanthropic activities, including providing 
scholarships, grants, restricted gifts, or financial contributions in 
exchange for FFEL loan applications or application referrals, or a 
specified volume or dollar amount of FFEL loans made, or placement on a 
school's list of recommended or suggested lenders; and
    (9) Staffing services to a school as a third-party servicer or 
otherwise on more than a short-term, emergency basis, and which is non-
recurring, to assist a school with financial aid-related functions.
    (B) Conducted unsolicited mailings to a student or a student's 
parents of FFEL loan application forms, except to a student who 
previously has received a FFEL loan from the lender or to a student's 
parent who previously has received a FFEL loan from the lender;
    (C) Offered, directly or indirectly, a FFEL loan to a prospective 
borrower to induce the purchase of a policy of insurance or other 
product or service by the borrower or other person; or
    (D) Engaged in fraudulent or misleading advertising with respect to 
its FFEL loan activities.
    (ii) Notwithstanding paragraph (5)(i) of this definition, a lender, 
in carrying out its role in the FFEL program and in attempting to 
provide better service, may provide--
    (A) Assistance to a school that is comparable to the kinds of 
assistance provided to a school by the Secretary under the Direct Loan 
program, as identified by the Secretary in a public announcement, such 
as a notice in the Federal Register;
    (B) Support of and participation in a school's or a guaranty 
agency's student aid and financial literacy-related outreach 
activities, as long as the name of the entity that developed and paid 
for any materials is provided to the participants and the lender does 
not promote its student loan or other products;
    (C) Meals, refreshments, and receptions that are reasonable in cost 
and scheduled in conjunction with training, meeting, or conference 
events if those meals, refreshments, or receptions are open to all 
training, meeting, or conference attendees;
    (D) Toll-free telephone numbers for use by schools or others to 
obtain information about FFEL loans and free data transmission service 
for use by schools to electronically submit applicant loan processing 
information or student status confirmation data;
    (E) A reduced origination fee in accordance with Sec.  682.202(c);
    (F) A reduced interest rate as provided under the Act;
    (G) Payment of Federal default fees in accordance with the Act;
    (H) Purchase of a loan made by another lender at a premium;
    (I) Other benefits to a borrower under a repayment incentive 
program that requires, at a minimum, one or more scheduled payments to 
receive or retain the benefit; and
    (J) Items of nominal value to schools, school-affiliated 
organizations, and borrowers that are offered as a form of generalized 
marketing or advertising, or to create good will.
    (iii) For the purposes of paragraph (5) of this definition--
    (A) The term ``school-affiliated organization'' is defined in 
section 682.200.
    (B) The term ``applications'' includes the Free Application for 
Federal Student Aid (FAFSA), FFEL loan master promissory notes, and 
FFEL consolidation loan application and promissory notes.
    (C) The term ``other benefits'' includes, but is not limited to, 
preferential rates for or access to the lender's other financial 
products, computer hardware or non-loan processing or non-financial 
aid-related computer software at below market rental or purchase cost, 
and printing and distribution of college catalogs and other materials 
at reduced or no cost.
* * * * *
    (7) An eligible lender may not make or hold a loan as trustee for a 
school, or for a school-affiliated organization as defined in this 
section, unless on or before September 30, 2006--
    (i) The eligible lender was serving as trustee for the school or 
school-affiliated organization under a contract entered into and 
continuing in effect as of that date; and
    (ii) The eligible lender held at least one loan in trust on behalf 
of the school or school-affiliated organization on that date.
    (8) Effective January 1, 2007, and for loans first disbursed on or 
after that date under a trustee arrangement, an eligible lender 
operating as a trustee under a contract entered into on or before 
September 30, 2006, and which continues in effect with a school or a 
school-affiliated organization, must comply with the requirements of 
Sec.  682.601(a)(3), (a)(5), and (a)(7). * * *
    School-affiliated organization. A school-affiliated organization is 
any organization that is directly or indirectly related to a school and 
includes, but is not limited to, alumni organizations, foundations, 
athletic organizations, and social, academic, and professional 
organizations.
* * * * *
    12. Section 682.202 is amended by:
    A. In paragraph (b)(2) introductory text, adding the words, ``and 
(b)(5)'' immediately after the words ``(b)(4)''.
    B. Redesignating paragraph (b)(5) as paragraph (b)(6).
    C. Adding a new paragraph (b)(5).
    The addition reads as follows:


Sec.  682.202  Permissible charges by lenders to borrowers.

* * * * *

[[Page 32439]]

    (b) * * *
    (5) For Consolidation loans, the lender may capitalize interest as 
provided in paragraphs (b)(2) and (b)(3) of this section, except that 
the lender may capitalize the unpaid interest for a period of 
authorized in-school deferment only at the expiration of the deferment.
* * * * *
    13. Section 682.208 is amended by:
    A. Revising paragraph (a).
    B. Adding new paragraphs (b)(3) and (b)(4).
    C. Adding a new paragraph (i).
    The revisions and addition read as follows:


Sec.  682.208  Due diligence in servicing a loan.

    (a) The loan servicing process includes reporting to national 
credit bureaus, responding to borrower inquiries, establishing the 
terms of repayment, and reporting a borrower's enrollment and loan 
status information.
* * * * *
    (b) * * *
    (3) Upon receipt of a valid identity theft report as defined in 
section 603(q)(4) of the Fair Credit Reporting Act (15 U.S.C. 1681a) or 
notification from a credit bureau that information furnished by the 
lender is a result of an alleged identity theft as defined in Sec.  
682.402(e)(14), an eligible lender shall suspend credit bureau 
reporting for a period not to exceed 120 days while the lender 
determines the enforceability of a loan.
    (i) If the lender determines that a loan does not qualify for a 
discharge under Sec.  682.402(e)(1)(i)(C), but is nonetheless 
unenforceable, the lender must--
    (A) Notify the credit bureau of its determination; and
    (B) Comply with Sec. Sec.  682.300(b)(2)(ix) and 
682.302(d)(1)(viii).
    (ii) [Reserved]
    (4) If, within 3 years of the lender's receipt of an identity theft 
report, the lender receives from the borrower evidence specified in 
Sec.  682.402(e)(3)(v), the lender may submit a claim and receive 
interest subsidy and special allowance payments that would have accrued 
on the loan.
* * * * *
    (i) A lender shall report enrollment and loan status information, 
or any Title IV loan-related data required by the Secretary, to the 
guaranty agency or to the Secretary, as applicable, by the deadline 
date established by the Secretary.
* * * * *
    14. Section 682.209 is amended by adding new paragraph (k) to read 
as follows:


Sec.  682.209  Repayment of a loan.

* * * * *
    (k) Any lender holding a loan is subject to all claims and defenses 
that the borrower could assert against the school with respect to that 
loan if--
    (1) The loan was made by the school or a school-affiliated 
organization;
    (2) The lender who made the loan provided an improper inducement, 
as defined in paragraph (5)(i) of the definition of Lender in Sec.  
682.200(b), to the school or any other party in connection with the 
making of the loan;
    (3) The school refers borrowers to the lender; or
    (4) The school is affiliated with the lender by common control, 
contract, or business arrangement.
* * * * *
    15. Section 682.210 is amended by:
    A. In paragraph (i)(1), adding the words, ``or a borrower's 
representative'' immediately following the words ``a borrower''.
    B. Adding new paragraph (i)(5).
    C. In paragraph (s)(1), by redesignating the text following the 
heading as paragraph designation (s)(1)(i).
    D. Adding new paragraphs (s)(1)(ii), (s)(1)(iii), (s)(1)(iv), 
(s)(1)(v), (t)(7), and (t)(8).
    The additions read as follows:


Sec.  682.210  Deferment.

* * * * *
    (i) * * *
    (5) A lender that grants a military service deferment based on a 
request from a borrower's representative must notify the borrower that 
the deferment has been granted and that the borrower has the option to 
cancel the deferment and continue to make payments on the loan. The 
lender may also notify the borrower's representative of the outcome of 
the deferment request.
* * * * *
    (s) * * *
    (1) * * *
    (ii) As a condition for receiving a deferment, except for purposes 
of paragraph (s)(2) of this section, the borrower must request the 
deferment and provide the lender with all information and documents 
required to establish eligibility for the deferment.
    (iii) After receiving a borrower's written or verbal request, a 
lender may grant a deferment under paragraphs (s)(3) through (s)(6) of 
this section if the lender is able to confirm that the borrower has 
received a deferment on another FFEL loan or on a Direct Loan for the 
same reason and the same time period. The lender may grant the 
deferment based on information from the other FFEL loan holder or the 
Secretary or from an authoritative electronic database maintained or 
authorized by the Secretary that supports eligibility for the deferment 
for the same reason and the same time period.
    (iv) A lender may rely in good faith on the information it receives 
under paragraph (s)(1)(iii) of this section when determining a 
borrower's eligibility for a deferment unless the lender, as of the 
date of the determination, has information indicating that the borrower 
does not qualify for the deferment. A lender must resolve any 
discrepant information before granting a deferment under paragraph 
(s)(1)(iii) of this section.
    (v) A lender that grants a deferment under paragraph (s)(1)(iii) of 
this section must notify the borrower that the deferment has been 
granted and that the borrower has the option to pay interest that 
accrues on an unsubsidized FFEL loan or to cancel the deferment and 
continue to make payments on the loan.
* * * * *
    (t) * * *
    (7) To receive a military service deferment, the borrower, or the 
borrower's representative, must request the deferment and provide the 
lender with all information and documents required to establish 
eligibility for the deferment, except that a lender may grant a 
borrower a military service deferment under the procedures specified in 
paragraphs (s)(1)(iii) through (s)(1)(v) of this section.
    (8) A lender that grants a military service deferment based on a 
request from a borrower's representative must notify the borrower that 
the deferment has been granted and that the borrower has the option to 
cancel the deferment and continue to make payments on the loan. The 
lender may also notify the borrower's representative of the outcome of 
the deferment request.
* * * * *
    16. Section 682.211 is amended by:
    A. Redesignating paragraphs (f)(6), (f)(7), (f)(8), (f)(9), 
(f)(10), (f)(11) as paragraphs (f)(7), (f)(8), (f)(9), (f)(10), 
(f)(11), and (f)(12), respectively.
    B. Adding new paragraph (f)(6).
    The addition reads as follows:


Sec.  682.211  Forbearance.

* * * * *
    (f)(1) * * *
    (6) Upon receipt of a valid identity theft report as defined in 
section 603(q)(4) of the Fair Credit Reporting Act (15 U.S.C. 1681a) or 
notification from a credit bureau that information furnished by the 
lender is a result of an

[[Page 32440]]

alleged identity theft as defined in Sec.  682.402(e)(14), for a period 
not to exceed 120 days necessary for the lender to determine the 
enforceability of a loan. If the lender determines that the loan does 
not qualify for discharge under Sec.  682.402(e)(1)(i)(C), but is 
nonetheless unenforceable, the lender must comply with Sec. Sec.  
682.300(b)(2)(ix) and 682.302(d)(1)(viii).
* * * * *
    17. Section 682.212 is amended by:
    A. In paragraph (c) introductory text, removing the words ``the 
Student Loan Marketing Association,''.
    B. In paragraph (d), removing the words ``the Student Loan 
Marketing Association or''.
    C. Adding new paragraph (h).
    The addition reads as follows:


Sec.  682.212  Prohibited transactions.

* * * * *
    (h)(1) A school may, at its option, make available a list of 
recommended or suggested lenders, in print or any other medium or form, 
for use by the school's students or their parents, provided such list--
    (i) Is not used to deny or otherwise impede a borrower's choice of 
lender;
    (ii) Does not contain fewer than three lenders that are not 
affiliated with each other and that will make loans to borrowers or 
students attending the school; and
    (iii) Does not include lenders that have offered, or have been 
solicited by the school to offer, financial or other benefits to the 
school in exchange for inclusion on the list or any promise that a 
certain number of loan applications will be sent to the lender by the 
school or its students.
    (2) A school that provides or makes available a list of recommended 
or suggested lenders must--
    (i) Disclose to prospective borrowers, as part of the list, the 
method and criteria used by the school in selecting any lender that it 
recommends or suggests;
    (ii) Provide comparative information to prospective borrowers about 
interest rates and other benefits offered by the lenders;
    (iii) Ensure that any benefits offered to borrowers by the lenders 
are the same for all borrowers at the school;
    (iv) Include a prominent statement in any information related to 
its list of lenders, advising prospective borrowers that they are not 
required to use one of the school's recommended or suggested lenders;
    (v) For first-time borrowers, not assign, through award packaging 
or other methods, a borrower's loan to a particular lender; and
    (vi) Not cause unnecessary certification delays for borrowers who 
use a lender that has not been recommended or suggested by the school.
    (3) For the purposes of paragraph (h) of this section, a lender is 
affiliated with another lender if--
    (i) The lenders are under the ownership or control of the same 
entity or individuals;
    (ii) The lenders are wholly or partly owned subsidiaries of the 
same parent company;
    (iii) The directors, trustees, or general partners (or individuals 
exercising similar functions) of one of the lenders constitute a 
majority of the persons holding similar positions with the other 
lender; or
    (iv) One of the lenders is making loans on its own behalf and is 
also holding loans as a trustee lender for another entity.
* * * * *
    18. Section 682.300 is amended by:
    A. In paragraph (b)(2)(vii), removing the word ``or'' at the end of 
the paragraph.
    B. In paragraph (b)(2)(viii), removing the punctuation ``.'' at the 
end of the paragraph and adding, in its place, ``; or''.
    C. Adding new paragraph (b)(2)(ix).
    The addition reads as follows:


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

* * * * *
    (b) * * *
    (2) * * *
    (ix) The date on which the lender determines the loan is legally 
unenforceable based on the receipt of an identity theft report under 
Sec.  682.208(b)(3).
* * * * *
    19. Section 682.302 is amended by--
    A. In paragraph (d)(1)(vi)(B), removing the word ``or'' at the end 
of the paragraph.
    B. In paragraph (d)(1)(vii), by removing the punctuation ``.'' and 
adding, in its place, ``; or''.
    C. Adding new paragraph (d)(1)(viii).
    The addition reads as follows:


Sec.  682.302  Payment of special allowance on FFEL loans.

* * * * *
    (d) * * *
    (1) * * *
    (viii) The date on which the lender determines the loan is legally 
unenforceable based on the receipt of an identity theft report under 
Sec.  682.208(b)(3).
* * * * *
    20. Section 682.401 is amended by:
    A. In paragraph (b)(2)(ii)(A), removing the punctuation ``;'' at 
the end of the paragraph and adding, in its place, the words ``, as 
defined in 34 CFR 668.3; or''.
    B. Revising paragraph (b)(2)(ii)(B).
    C. Removing paragraph (b)(2)(ii)(C).
    D. In paragraph (b)(20) introductory text, removing the number 
``60'' and adding, in its place, the number ``30''.
    E. Revising paragraph (e).
    The revisions read as follows:


Sec.  682.401  Basic program agreement.

* * * * *
    (b) * * *
    (2) * * *
    (ii) * * *
    (B) A period attributable to the academic year that is not less 
than the period specified in paragraph (b)(2)(ii)(A) of this section, 
in which the student earns the amount of credit in the student's 
program of study required by the student's school as the amount 
necessary for the student to advance in academic standing as normally 
measured on an academic year basis (for example, from freshman to 
sophomore or, in the case of schools using clock hours, completion of 
at least 900 clock hours).
* * * * *
    (e) Prohibited activities. (1) A guaranty agency may not, directly 
or through an agent or contractor--
    (i) Except as provided in paragraph (e)(2) of this section, offer 
directly or indirectly from any fund or assets available to the 
guaranty agency, any premium, payment, or other inducement to any 
prospective borrower of a FFEL loan, or to a school or school-
affiliated organization or an employee of a school or school-affiliated 
organization, to secure applications for FFEL loans. This includes, but 
is not limited to--
    (A) Payments or offerings of other benefits, including prizes or 
additional financial aid funds, to a prospective borrower in exchange 
for processing a loan using the agency's loan guarantee;
    (B) Payments or other benefits, including prizes or additional 
financial aid funds under any title IV or State or private program, to 
a school or school-affiliated organization based on the school's or 
organization's voluntary or coerced agreement to use the guaranty 
agency for processing loans, or a specified volume of loans, using the 
agency's loan guarantee;
    (C) Payments or other benefits to a school or any school-affiliated 
organization, or to any individual in exchange for FFEL loan 
applications or application referrals, a specified volume or dollar 
amount of FFEL loans, or the

[[Page 32441]]

placement of a lender that uses the agency's loan guarantee on a 
school's list of recommended or suggested lenders;
    (D) Payment of entertainment expenses, including expenses for 
private hospitality suites, tickets to shows or sporting events, meals, 
alcoholic beverages, and any lodging, rental, transportation or other 
gratuities related to any activity sponsored by the guaranty agency or 
a lender participating in the agency's program, for school employees or 
employees of school-affiliated organizations;
    (E) Undertaking philanthropic activities, including providing 
scholarships, grants, restricted gifts, or financial contributions in 
exchange for FFEL loan applications or application referrals, a 
specified volume or dollar amount of FFEL loans using the agency's loan 
guarantee, or the placement of a lender that uses the agency's loan 
guarantee on a school's list of recommended or suggested lenders; and
    (F) Staffing services to a school as a third-party sevicer or 
otherwise on more than a short-term, emergency basis, which is non-
recurring, to assist the institution with financial aid-related 
functions.
    (ii) Assess additional costs or deny benefits otherwise provided to 
schools and lenders participating in the agency's program on the basis 
of the lender's or school's failure to agree to participate in the 
agency's program, or to provide a specified volume of loan applications 
or loan volume to the agency's program or to place a lender that uses 
the agency's loan guarantee on a school's list of recommended or 
suggested lenders.
    (iii) Offer, directly or indirectly, any premium, incentive 
payment, or other inducement to any lender, or any person acting as an 
agent, employee, or independent contractor of any lender or other 
guaranty agency to administer or market FFEL loans, other than 
unsubsidized Stafford loans or subsidized Stafford loans made under a 
guaranty agency's lender-of-last-resort program, in an effort to secure 
the guaranty agency as an insurer of FFEL loans. Examples of prohibited 
inducements include, but are not limited to--
    (A) Compensating lenders or their representatives for the purpose 
of securing loan applications for guarantee;
    (B) Performing functions normally performed by lenders without 
appropriate compensation;
    (C) Providing equipment or supplies to lenders at below market cost 
or rental; and
    (D) Offering to pay a lender that does not hold loans guaranteed by 
the agency a fee for each application forwarded for the agency's 
guarantee.
    (iv) Mail or otherwise distribute unsolicited loan applications to 
students enrolled in a secondary school or a postsecondary institution, 
or to parents of those students, unless the potential borrower has 
previously received loans insured by the guaranty agency.
    (v) Conduct fraudulent or misleading advertising concerning loan 
availability.
    (2) Notwithstanding paragraphs (e)(1)(i), (ii), and (iii) of this 
section, a guaranty agency is not prohibited from providing--
    (i) Assistance to a school that is comparable to that provided by 
the Secretary to a school under the Direct Loan Program, as identified 
by the Secretary in a public announcement, such as a notice in the 
Federal Register;
    (ii) Default aversion activities approved by the Secretary under 
section 422(h)(4)(B) of the Act;
    (iii) Meals and refreshments that are reasonable in cost and 
provided in connection with guaranty agency provided training of 
program participants and elementary, secondary, and postsecondary 
school personnel and with workshops and forums customarily used by the 
agency to fulfill its responsibilities under the Act;
    (iv) Meals, refreshments and receptions that are scheduled in 
conjunction with training, meeting, or conference events if those 
meals, refreshments, or receptions are open to all training, meeting, 
or conference attendees;
    (v) Travel and lodging costs that are reasonable as to cost, 
location, and duration to facilitate the attendance of school staff in 
training or service facility tours that they would otherwise not be 
able to undertake, or to participate in the activities of an agency's 
governing board, a standing official advisory committee, or in support 
of other official activities of the agency;
    (vi) Toll-free telephone numbers for use by schools or others to 
obtain information about FFEL loans and free data transmission services 
for use by schools to electronically submit applicant loan processing 
information or student status confirmation data;
    (vii) Payment of Federal default fees in accordance with the Act; 
and
    (viii) Items of nominal value to schools, school-affiliated 
organizations, and borrowers that are offered as a form of generalized 
marketing or advertising, or to create good will.
    (3) For the purposes of this section--
    (i) The term ``school-affiliated organization'' is defined in Sec.  
682.200.
    (ii) The term ``applications'' includes the FAFSA, FFEL loan master 
promissory notes, and FFEL consolidation loan application and 
promissory notes.
    (iii) The terms ``other benefits'' includes, but is not limited to, 
preferential rates for or access to a guaranty agency's products and 
services, computer hardware or non-loan processing or non-financial aid 
related computer software at below market rental or purchase cost, and 
the printing and distribution of college catalogs and other non-
counseling or non-student financial aid-related materials at reduced or 
not costs.
    (iv) The terms premium, incentive payment, and other inducement do 
not include services directly related to the enhancement of the 
administration of the FFEL Program the guaranty agency generally 
provides to lenders that participate in its program. However, the terms 
premium, incentive payment, and inducement do apply to other activities 
specifically intended to secure a lender's participation in the 
agency's program.
* * * * *
    21. Section 682.402 is amended by:
    A. Revising the first sentence in paragraph (b)(2).
    B. Revising the third sentence in paragraph (b)(3).
    C. Revising paragraph (c).
    D. In paragraph (e)(2)(iv), adding the words ``or inaccurate'' 
immediately after the word ``adverse''.
    The revisions read as follows:


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

* * * * *
    (b) * * *
    (2) A discharge of a loan based on the death of the borrower (or 
student in the case of a PLUS loan) must be based on an original or 
certified copy of the death certificate, or an accurate and complete 
photocopy of the original or certified copy of the death certificate. * 
* *
    (3) * * * If the lender is not able to obtain an original or 
certified copy of the death certificate, or an accurate and complete 
photocopy of the original or certified copy of the death certificate or 
other documentation acceptable to the guaranty agency, under the 
provisions of paragraph (b)(2) of this section, during the period of 
suspension, the lender must resume collection activity from the point 
that it had been discontinued. * * *
    (c)(1) Total and permanent disability. A borrower's loan is 
discharged if the

[[Page 32442]]

borrower becomes totally and permanently disabled, as defined in Sec.  
682.200(b), and satisfies the additional eligibility requirements 
contained in this section.
    (2) Discharge application process. After being notified by the 
borrower or the borrower's representative that the borrower claims to 
be totally and permanently disabled, the lender promptly requests that 
the borrower or the borrower's representative submit, on a form 
approved by the Secretary, a certification by a physician, who is a 
doctor of medicine or osteopathy legally authorized to practice in a 
State, that the borrower is totally and permanently disabled as defined 
in Sec.  682.200(b). The borrower must submit the application to the 
lender within 90 days of the date the physician certifies the 
application. If the lender and guaranty agency approve the discharge 
claim, under the procedures in paragraph (c)(5) of this section, the 
guaranty agency must assign the loan to the Secretary.
    (3) Secretary's initial eligibility determination. (i) During the 
period from the date the physician completes and certifies the 
borrower's total and permanent disability on the application until the 
Secretary makes an initial determination of the borrower's eligibility 
in accordance with paragraph (c)(3)(ii) of this section--
    (A) The borrower cannot work and earn money or receive any new 
title IV loans; and
    (B) The borrower must, on any loan received prior to the date the 
physician completed and certified the application, ensure that the full 
amount of any title IV loan disbursement made to the borrower on or 
after the date the physician completed and certified the application is 
returned to the holder within 120 days of the disbursement date.
    (ii) If the Secretary determines that the certification provided by 
the borrower supports the conclusion that the borrower meets the 
criteria for a total and permanent disability discharge, as defined in 
Sec.  682.200(b), the borrower is considered totally and permanently 
disabled as of the date the physician completes and certifies the 
borrower's application.
    (iii) Upon making an initial determination that the borrower is 
totally and permanently disabled as defined in Sec.  682.200(b), the 
Secretary suspends collection activity and notifies the borrower that 
the loan will be in a conditional discharge status for a period of up 
to three years. This notification identifies the conditions of the 
conditional discharge specified in paragraph (c)(4)(i) of this section. 
The conditional discharge period begins on the date the Secretary makes 
the initial determination that the borrower is totally and permanently 
disabled, as defined in Sec.  682.200(b).
    (iv) If the Secretary determines that the certification and 
information provided by the borrower do not support the conclusion that 
the borrower meets the criteria for a total and permanent disability 
discharge in paragraph (c)(4)(i) of this section, the Secretary 
notifies the borrower that the application for a disability discharge 
has been denied, and that the loan is due and payable to the Secretary 
under the terms of the promissory note.
    (4) Eligibility requirements for total and permanent disability 
discharge. (i) A borrower meets the eligibility criteria for a 
discharge of a loan based on total and permanent disability if, during 
and at the end of the three-year conditional discharge period--
    (A) The borrower's annual earnings from employment do not exceed 
100 percent of the poverty line for a family of two, as determined in 
accordance with the Community Service Block Grant Act;
    (B) The borrower does not receive a new loan under the Perkins, 
FFEL, or Direct Loan programs, except for a FFEL or Direct 
Consolidation Loan that does not include any loans that are in a 
conditional discharge status; and
    (C) The borrower ensures, on any loan received prior to the date 
the physician completed and certified the application, that the full 
amount of any title IV loan disbursement made on or after the date of 
the Secretary's initial eligibility determination is returned to the 
holder within 120 days of the disbursement date.
    (ii) During the conditional discharge period, the borrower or, if 
applicable, the borrower's representative--
    (A) Is not required to make any payments on the loan;
    (B) Is not considered delinquent or in default on the loan, unless 
the borrower was delinquent or in default at the time the conditional 
discharge was granted;
    (C) Must promptly notify the Secretary of any changes in address or 
phone number;
    (D) Must promptly notify the Secretary if the borrower's annual 
earnings from employment exceed the amount specified in paragraph 
(c)(4)(i)(A) of this section; and
    (E) Must provide the Secretary, upon request, with additional 
documentation or information related to the borrower's eligibility for 
discharge under this section.
    (iii) If the borrower satisfies the criteria for a total and 
permanent disability discharge during and at the end of the conditional 
discharge period, the balance of the loan is discharged at the end of 
the conditional discharge period and any payments received after the 
physician completed and certified the borrower's loan discharge 
application are returned.
    (iv) If, at any time during the three-year conditional discharge 
period, the borrower does not continue to meet the eligibility criteria 
for a total and permanent disability discharge, the Secretary ends the 
conditional discharge period and resumes collection activity on the 
loan. The Secretary does not require the borrower to pay any interest 
that accrued on the loan from the date of the initial determination 
described in paragraph (c)(3)(ii) of this section through the end of 
the conditional discharge period.
    (5) Lender and guaranty agency responsibilities. (i) After being 
notified by a borrower or a borrower's representative that the borrower 
claims to be totally and permanently disabled, the lender must continue 
collection activities until it receives either the certification of 
total and permanent disability from a physician or a letter from a 
physician stating that the certification has been requested and that 
additional time is needed to determine if the borrower is totally and 
permanently disabled, as defined in Sec.  682.200(b). Except as 
provided in paragraph (c)(5)(iii) of this section, after receiving the 
physician's certification or letter the lender may not attempt to 
collect from the borrower or any endorser.
    (ii) The lender must submit a disability claim to the guaranty 
agency if the borrower submits a certification by a physician and the 
lender makes a determination that the certification supports the 
conclusion that the borrower meets the criteria for a total and 
permanent disability discharge, as specified in paragraph (c)(4)(i) of 
this section.
    (iii) If the lender determines that a borrower who claims to be 
totally and permanently disabled is not totally and permanently 
disabled, as defined in Sec.  682.200(b), or if the lender does not 
receive the physician's certification of total and permanent disability 
within 60 days of the receipt of the physician's letter requesting 
additional time, as described in paragraph (c)(3) of this section, the 
lender must resume collection and is deemed to have exercised 
forbearance of payment of both principal and interest from the date 
collection activity was suspended. The lender may capitalize, in 
accordance

[[Page 32443]]

with Sec.  682.202(b), any interest accrued and not paid during that 
period.
    (iv) The guaranty agency must pay a claim submitted by the lender 
if the guaranty agency has reviewed the application and determined that 
it is complete and that it supports the conclusion that the borrower 
meets the criteria for a total and permanent disability discharge, as 
specified in paragraph (c)(4)(i) of this section.
    (v) If the guaranty agency does not pay the disability claim, the 
guaranty agency must return the claim to the lender with an explanation 
of the basis for the agency's denial of the claim. Upon receipt of the 
returned claim, the lender must notify the borrower that the 
application for a disability discharge has been denied, provide the 
basis for the denial, and inform the borrower that the lender will 
resume collection on the loan. The lender is deemed to have exercised 
forbearance of both principal and interest from the date collection 
activity was suspended until the first payment due date. The lender may 
capitalize, in accordance with Sec.  682.202(b), any interest accrued 
and not paid during that period.
    (vi) If the guaranty agency pays the disability claim, the lender 
must notify the borrower that--
    (A) The loan will be assigned to the Secretary for determination of 
eligibility for a total and permanent disability discharge and that no 
payments are due on the loan; and
    (B) To remain eligible for the discharge from the date the 
physician completes and certifies the borrower's total and permanent 
disability on the application until the Secretary makes an initial 
eligibility determination, the borrower--
    (1) Cannot work and earn money or receive any new title IV loans; 
and
    (2) Must ensure that the full amount of any title IV loan 
disbursement made to the borrower on or after the date the physician 
completed and certified the application is returned to the holder 
within 120 days of the disbursement date.
    (vii) After receiving a claim payment from the guaranty agency, the 
lender must forward to the guaranty agency any payments subsequently 
received from or on behalf of the borrower.
    (viii) The Secretary reimburses the guaranty agency for a 
disability claim paid to the lender after the agency pays the claim to 
the lender.
    (ix) The guaranty agency must assign the loan to the Secretary 
after the guaranty agency pays the disability claim.
* * * * *
    22. Section 682.406 is amended by adding new paragraph (d) to read 
as follows:


Sec.  682.406  Conditions for claim payments from the Federal Fund and 
for reinsurance coverage.

* * * * *
    (d) A guaranty agency may not make a claim payment from the Federal 
Fund or receive a reinsurance payment on a loan if the lender offered 
or provided an improper inducement as defined in paragraph (5)(i) of 
the definition of lender in Sec.  682.200(b).
    23. Section 682.409 is amended by adding new paragraphs (c)(4)(vii) 
and (viii).
    The additions read as follows:


Sec.  682.409  Mandatory assignment by guaranty agencies of defaulted 
loans to the Secretary.

* * * * *
    (c) * * *
    (4) * * *
    (vii) The record of the lender's disbursement of Stafford and PLUS 
loan funds to the school for delivery to the borrower.
    (viii) If the MPN or promissory note was signed electronically, the 
name and location of the entity in possession of the original 
electronic MPN or promissory note.
* * * * *
    24. Section 682.411 is amended by revising paragraph (o) as 
follows:


Sec.  682.411  Lender due diligence in collecting guaranty agency 
loans.

* * * * *
    (o) Preemption. The provisions of this section--
    (1) Preempt any State law, including State statutes, regulations, 
or rules, that would conflict with or hinder satisfaction of the 
requirements or frustrate the purposes of this section; and
    (2) Do not preempt provisions of the Fair Credit Reporting Act that 
provide relief to a borrower while the lender determines the legal 
enforceability of a loan when the lender receives a valid identity 
theft report or notification from a credit bureau that information 
furnished is a result of an alleged identity theft as defined in Sec.  
682.402(e)(14).
* * * * *
    25. Section 682.413 is amended by:
    A. Adding new paragraph (h).
    B. In the Note at the end of the section, removing the word 
``Note'' and adding, in its place, the words ``Note to Section 
682.413''.
    The addition reads as follows:


Sec.  682.413  Remedial actions.

* * * * *
    (h) In any action to require repayment of funds or to withhold 
funds from a guaranty agency, or to limit, suspend, or terminate a 
guaranty agency based on a violation of Sec.  682.401(e), if the 
Secretary finds that the guaranty agency provided or offered the 
payments or activities listed in Sec.  682.401(e)(1), the Secretary 
applies a rebuttable presumption that the payments or activities were 
offered or provided to secure applications for FFEL loans or to secure 
FFEL loan volume. To reverse the presumption, the guaranty agency must 
present evidence that the activities or payments were provided for a 
reason unrelated to securing applications for FFEL loans or securing 
FFEL loan volume.
* * * * *
    26. Section 682.414 is amended by:
    A. Adding new paragraph (a)(5)(iv).
    B. Adding new paragraph (a)(6).
    C. Revising paragraph (b)(4).
    The additions and revisions read as follows:


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

    (a) * * *
    (5) * * *
    (iv) If a lender made a loan based on an electronically signed MPN, 
the holder of the original electronically signed MPN must retain that 
original MPN for at least 3 years after all the loans made on the MPN 
have been satisfied.
    (6)(i) Upon the Secretary's request with respect to a particular 
loan or loans assigned to the Secretary and evidenced by an 
electronically signed promissory note, the guaranty agency and the 
lender that created the original electronically signed promissory note 
must cooperate with the Secretary in all activities necessary to 
enforce the loan or loans. The guaranty agency or lender must provide--
    (A) An affidavit or certification regarding the creation and 
maintenance of the electronic records of the loan or loans in a form 
appropriate to ensure admissibility of the loan records in a legal 
proceeding. This certification may be executed in a single record for 
multiple loans provided that this record is reliably associated with 
the specific loans to which it pertains; and
    (B) Testimony by an authorized official or employee of the guaranty 
agency or lender, if necessary to ensure admission of the electronic 
records of the loan or loans in the litigation or legal proceeding to 
enforce the loan or loans.

[[Page 32444]]

    (ii) The certification described in paragraph (a)(6)(i) of this 
section must include, if requested by the Secretary--
    (A) A description of the steps followed by a borrower to execute 
the promissory note (such as a flow chart);
    (B) A copy of each screen as it would have appeared to the borrower 
of the loan or loans the Secretary is enforcing when the borrower 
signed the note electronically;
    (C) A description of the field edits and other security measures 
used to ensure integrity of the data submitted to the originator 
electronically;
    (D) A description of how the executed promissory note has been 
preserved to ensure that is has not been altered after it was executed;
    (E) Documentation supporting the lender's authentication and 
electronic signature process; and
    (F) All other documentary and technical evidence requested by the 
Secretary to support the validity or the authenticity of the 
electronically signed promissory note.
    (iii) The Secretary may request a record, affidavit, certification 
or evidence under paragraph (a)(6) of this section as needed to resolve 
any factual dispute involving a loan that has been assigned to the 
Secretary including, but not limited to, a factual dispute raised in 
connection with litigation or any other legal proceeding, or as needed 
in connection with loans assigned to the Secretary that are included in 
a Title IV program audit sample, or for other similar purposes. The 
guaranty agency must respond to any request from the Secretary within 
10 business days.
    (iv) As long as any loan made to a borrower under a MPN created by 
the lender is not satisfied, the holder of the original electronically 
signed promissory note is responsible for ensuring that all parties 
entitled to access to the electronic loan record, including the 
guaranty agency and the Secretary, have full and complete access to the 
electronic loan record.
    (b) * * *
    (4) A report to the Secretary of the borrower's enrollment and loan 
status information, or any Title IV loan-related data required by the 
Secretary, by the deadline date established by the Secretary.
* * * * *
    27. Section 682.602 is added to read as follows:


Sec.  682.602  Rules for a school or school-affiliated organization 
that makes or originates loans through an eligible lender trustee.

    (a) A school or school-affiliated organization may not contract 
with an eligible lender to serve as trustee for the school or school-
affiliated organization unless--
    (1) The school or school-affiliated organization originated and 
continues or renews a contract made on or before September 30, 2006 
with the eligible lender; and
    (2) The eligible lender held at least one loan in trust on behalf 
of the school or school-affiliated organization on September 30, 2006.
    (b) Effective January 1, 2007, and for loans first disbursed on or 
after that date under a lender trustee arrangement that continues in 
effect after September 30, 2006--
    (1) A school in a trustee arrangement or affiliated with an 
organization involved in a trustee arrangement to originate loans must 
comply with the requirements of Sec.  682.601(a), except for paragraphs 
(a)(3), (a)(4), (a)(7), and (a)(9) of that section; and
    (2) A school-affiliated organization involved in a trustee 
arrangement to make loans must comply with the requirements of Sec.  
682.601(a)(5) and (a)(8).

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

    28. Section 682.603 is amended by:
    A. In paragraph (a), at the end of the last sentence, removing the 
words ``on the application by the student'' and adding, in their place, 
the words ``by the borrower and, in the case of a parent borrower of a 
PLUS loan, the student and the parent borrower''.
    B. In paragraph (b) introductory text, removing the words ``making 
application for the loan''.
    C. In paragraph (c), removing the reference ``paragraph (e) of this 
section'' and adding in its place, the reference ``paragraph (f) of 
this section''.
    D. Redesignating paragraphs (d), (e), (f), (g), (h), and (i) as 
paragraphs (e), (f), (g), (h), (i), and (j), respectively.
    E. Adding a new paragraph (d).
    F. In the introductory language in newly redesignated paragraph 
(e), removing the words `` application, or combination of loan 
applications,'' and adding, in their place, the words ``, or a 
combination of loans,''.
    G. In newly redesignated paragraph (e)(2) introductory text, adding 
the words ``for the period of enrollment'' after the word 
``attendance''.
    H. In newly redesignated paragraph (e)(2)(ii), adding the word 
``Subsidized'' immediately before the word ``Stafford'' and removing 
the words ``that is eligible for interest benefits'' immediately after 
the word ``loan''.
    I. Revising newly redesignated paragraph (f).
    J. In newly redesignated paragraph (g)(2)(i), removing the words 
``, not to exceed 12 months,''.
    The addition and revision read as follows:


Sec.  682.603  Certification by a participating school in connection 
with a loan application.

* * * * *
    (d) Before certifying a PLUS loan application for a graduate or 
professional student borrower, the school must determine the borrower's 
eligibility for a Stafford loan. If the borrower is eligible for a 
Stafford loan but has not requested the maximum Stafford loan amount 
for which the borrower is eligible, the school must--
    (1) Notify the graduate or professional student borrower of the 
maximum Stafford loan amount that he or she is eligible to receive and 
provide the borrower with a comparison of--
    (i) The maximum interest rate for a Stafford loan and the maximum 
interest rate for a PLUS loan;
    (ii) Periods when interest accrues on a Stafford loan and periods 
when interest accrues on a PLUS loan; and
    (iii) The point at which a Stafford loan enters repayment and the 
point at which a PLUS loan enters repayment; and
    (2) Give the graduate or professional student borrower the 
opportunity to request the maximum Stafford loan amount for which the 
borrower is eligible.
* * * * *
    (f) In certifying loans, a school--
    (1) May not refuse to certify, or delay certification, of a 
Stafford or PLUS loan based on the borrower's selection of a particular 
lender or guaranty agency;
    (2) May not, for first-time borrowers, assign through award 
packaging or other methods, a borrower's loan to a particular lender;
    (3) May refuse to certify a Stafford or PLUS loan or may reduce the 
borrower's determination of need for the loan if the reason for that 
action is documented and provided to the borrower in writing, provided 
that--
    (i) The determination is made on a case-by-case basis; and
    (ii) The documentation supporting the determination is retained in 
the student's file; and
    (4) May not, under paragraph (f)(1), (2), and (3) of this section, 
engage in any pattern or practice that results in a denial of a 
borrower's access to FFEL loans because of the borrower's race, sex, 
color, religion, national origin, age, handicapped status, income, or

[[Page 32445]]

selection of a particular lender or guaranty agency.
* * * * *
    29. Section 682.604 is amended by:
    A. Revising paragraph (f)(1).
    B. Redesignating paragraphs (f)(2), (f)(3), and (f)(4) as 
paragraphs (f)(5), (f)(6), and (f)(7), respectively.
    C. Adding new paragraphs (f)(2), (f)(3), and (f)(4).
    D. Revising newly redesignated paragraph (f)(5) introductory text.
    E. In newly redesignated paragraph (f)(5)(iv), removing the words, 
``of a Stafford loan''.
    F. In newly redesignated paragraph (f)(5)(v), adding the words ``, 
or student borrowers with Stafford and PLUS loans, depending on the 
types of loans the borrower has obtained,'' immediately after the words 
``Stafford loan borrowers''.
    G. In paragraph (g)(2)(i), removing the words ``Stafford or SLS 
loans'' and adding, in their place, ``Stafford loans, or student 
borrowers who have obtained Stafford and PLUS loans, depending on the 
types of loans the student borrower has obtained,''.
    The revision and additions read as follows:


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

* * * * *
    (f) Initial counseling. (1) A school must ensure that initial 
counseling is conducted with each Stafford Loan borrower prior to its 
release of the first disbursement unless the student borrower has 
received a prior Federal Stafford, Federal SLS, or Direct subsidized or 
unsubsidized loan.
    (2) A school must ensure that initial counseling is conducted with 
each graduate or professional student PLUS loan borrower prior to its 
release of the first disbursement, unless the student has received a 
prior Federal PLUS loan or Direct PLUS loan. The initial counseling 
must--
    (i) Inform the student borrower of sample monthly repayment amounts 
based on a range of student levels of indebtedness or on the average 
indebtedness of graduate or professional student PLUS loan borrowers, 
or student borrowers with Stafford and PLUS loans, depending on the 
types of loans the borrower has obtained, at the same school or in the 
same program of study at the same school;
    (ii) For a graduate or professional student who has received a 
prior Federal Stafford, or Direct subsidized or unsubsidized loan, 
provide the information specified in paragraph (d)(1)(i) through 
(d)(1)(iii) of this section; and
    (iii) For a graduate or professional student who has not received a 
prior Federal Stafford, or Direct subsidized or unsubsidized loan, 
provide the information specified in paragraph (f)(5)(i) through 
(f)(5)(iv) of this section.
    (3) Initial counseling must be conducted either in person, by 
audiovisual presentation, or by interactive electronic means.
    (4) A school must ensure that an individual with expertise in the 
title IV programs is reasonably available shortly after the counseling 
to answer the student borrower's questions regarding those programs. As 
an alternative, prior to releasing the proceeds of a loan in the case 
of a student borrower enrolled in a correspondence program or a student 
borrower enrolled in a study-abroad program that the home institution 
approves for credit, the counseling may be provided through written 
materials.
    (5) Initial counseling for Stafford Loan borrowers must--
* * * * *
    30. Section 682.705 is amended by adding new paragraph (c) to read 
as follows:


Sec.  682.705  Suspension proceedings.

* * * * *
    (c) In any action to suspend a lender based on a violation of the 
prohibitions in section 435(d)(5) of the Act, if the Secretary, the 
designated Department official, or hearing official finds that the 
lender provided or offered the payments or activities listed in 
paragraph (5)(i) of the definition of lender in Sec.  682.200(b), the 
Secretary or the official applies a rebuttable presumption that the 
payments or activities were offered or provided to secure applications 
for FFEL loans or to secure FFEL loan volume. To reverse the 
presumption, the lender must present evidence that the activities or 
payments were provided for a reason unrelated to securing applications 
for FFEL loans or securing FFEL loan volume.
    31. Section 682.706 is amended by adding new paragraph (d) to read 
as follows:


Sec.  682.706  Limitation or termination proceedings.

* * * * *
    (d) In any action to limit or terminate a lender's eligibility 
based on a violation of the prohibitions in section 435(d)(5) of the 
Act, if the Secretary, the designated Department official or hearing 
official finds that the lender provided or offered the payments or 
activities listed in paragraph (5)(i) of the definition of Lender in 
Sec.  682.200(b), the Secretary or the official applies a rebuttable 
presumption that the payments or activities were offered or provided to 
secure applications for FFEL loans. To reverse the presumption, the 
lender must present evidence that the activities or payments were 
provided for a reason unrelated to securing applications for FFEL loans 
or securing FFEL loan volume.
* * * * *

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

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

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

    33. Section 685.204 is amended by:
    A. In paragraph (b)(1)(iii)(A) introductory text, removing the 
words ``(b)(1)(i)'' and adding, in their place, the words 
``(b)(1)(i)(A)''.
    B. In paragraph (d)(1), removing the word ``the'' and adding, in 
its place, the word ``The''.
    C. In paragraph (d)(2), removing the word ``the'' and adding, in 
its place, the word ``The''.
    D. Adding new paragraph (g).
    The addition reads as follows:


Sec.  685.204  Deferments.

* * * * *
    (g)(1) To receive a deferment, except as provided under paragraph 
(b)(1)(i)(A) of this section, the borrower must request the deferment 
and provide the Secretary with all information and documents required 
to establish eligibility for the deferment. In the case of a deferment 
granted under paragraph (e)(1) of this section, a borrower's 
representative may request the deferment and provide the required 
information and documents on behalf of the borrower.
    (2) After receiving a borrower's written or verbal request, the 
Secretary may grant a deferment under paragraphs (b)(1)(i)(B), 
(b)(1)(i)(C), (b)(2)(i), (b)(3)(i), and (e)(1) of this section if the 
Secretary confirms that the borrower has received a deferment on a 
Perkins or FFEL Loan for the same reason and the same time period.
    (3) The Secretary relies in good faith on the information obtained 
under paragraph (g)(2) of this section when determining a borrower's 
eligibility for a deferment, unless the Secretary, as of the date of 
determination, has information indicating that the borrower does not 
qualify for the deferment. The Secretary resolves any discrepant 
information before granting a deferment under paragraph (g)(2) of this 
section.
    (4) If the Secretary grants a deferment under paragraph (g)(2) of 
this section, the Secretary notifies the borrower that

[[Page 32446]]

the deferment has been granted and that the borrower has the option to 
cancel the deferment and continue to make payments on the loan.
    (5) If the Secretary grants a military service deferment based on a 
request from a borrower's representative, the Secretary notifies the 
borrower that the deferment has been granted and that the borrower has 
the option to cancel the deferment and continue to make payments on the 
loan. The Secretary may also notify the borrower's representative of 
the outcome of the deferment request.
* * * * *
    34. Section 685.212 is amended by revising paragraph (a)(1) and (2) 
to read as follows:


Sec.  685.212  Discharge of a loan obligation.

    (a) * * * (1) If a borrower (or a student on whose behalf a parent 
borrowed a Direct PLUS Loan) dies, the Secretary discharges the 
obligation of the borrower and any endorser to make any further 
payments on the loan based on an original or certified copy of the 
borrower's (or student's in the case of a Direct PLUS loan obtained by 
a parent borrower) death certificate, or an accurate and complete 
photocopy of the original or certified copy of the borrower's (or 
student's in the case of a Direct PLUS loan obtained by a parent 
borrower) death certificate.
    (2) If an original or certified copy of the death certificate, or 
an accurate and complete photocopy of the original or certified copy of 
the death certificate is not available, the Secretary discharges the 
loan only if other reliable documentation establishes, to the 
Secretary's satisfaction, that the borrower (or student) has died. The 
Secretary discharges a loan based on documentation other than an 
original or certified copy of the death certificate, or an accurate and 
complete photocopy of the original or certified copy of the death 
certificate only under exceptional circumstances and on a case-by-case 
basis.
* * * * *
    35. Section 685.213 is revised to read as follows:


Sec.  685.213  Total and permanent disability.

    (a) General. A borrower's Direct Loan is discharged if the borrower 
becomes totally and permanently disabled, as defined in Sec.  
682.200(b), and satisfies the additional eligibility requirements 
contained in this section.
    (b) Discharge application process. (1) To qualify for a discharge 
of a Direct Loan based on a total and permanent disability, a borrower 
must submit to the Secretary a certification by a physician, who is a 
doctor of medicine or osteopathy legally authorized to practice in a 
State, that the borrower is totally and permanently disabled as defined 
in Sec.  682.200(b). The certification must be on a form approved by 
the Secretary. The borrower must submit the application to the 
Secretary within 90 days of the date the physician certifies the 
application.
    (2) Upon receipt of the borrower's application, the Secretary 
notifies the borrower that--
    (i) No payments are due on the loan; and
    (ii) The borrower, in order to remain eligible for the discharge 
from the date the physician completes and certifies the borrower's 
total and permanent disability on the application until the date the 
Secretary makes an initial eligibility determination--
    (A) Cannot work and earn money or receive any new title IV loans; 
and
    (B) Must, on any loan received prior to the date the physician 
completed and certified the application, ensure that the full amount of 
any title IV loan disbursement made to the borrower on or after the 
date the physician completed and certified the application is returned 
to the holder within 120 days of the disbursement date.
    (c) Initial determination of eligibility. (1) The borrower must 
continue to meet the conditions in paragraph (b)(2)(ii) of this section 
from the date the physician completes and certifies the borrower's 
total and permanent disability on the application until the Secretary 
makes an initial determination of the borrower's eligibility in 
accordance with paragraph (c)(2) of this section.
    (2) If, after reviewing the borrower's application, the Secretary 
determines that the certification provided by the borrower supports the 
conclusion that the borrower meets the criteria for a total and 
permanent disability discharge, the borrower is considered totally and 
permanently disabled as of the date the physician completes and 
certifies the borrower's application.
    (3) The Secretary suspends collection activity and notifies the 
borrower that the loan will be in a conditional discharge status for a 
period of up to three years upon making an initial determination that 
the borrower is totally and permanently disabled, as defined in Sec.  
682.200(b). This notification identifies the conditions of the 
conditional discharge period specified in paragraph (d)(1) of this 
section. The conditional discharge period begins on the date the 
Secretary makes the initial determination that the borrower is totally 
and permanently disabled.
    (4) If the Secretary determines that the certification provided by 
the borrower does not support the conclusion that the borrower meets 
the criteria for a total and permanent disability discharge, the 
Secretary notifies the borrower that the application for a disability 
discharge has been denied, and that the loan is due and payable under 
the terms of the promissory note.
    (d) Eligibility requirements for total and permanent disability. 
(1) A borrower meets the eligibility requirements for a total and 
permanent disability discharge if, during and at the end of the three-
year conditional discharge period--
    (A) The borrower's annual earnings from employment do not exceed 
100 percent of the poverty line for a family of two, as determined in 
accordance with the Community Service Block Grant Act;
    (B) The borrower does not receive a new loan under the Perkins, 
FFEL or Direct Loan programs, except for a FFEL or Direct Consolidation 
Loan that does not include any loans that are in a conditional 
discharge status; and
    (C) The borrower ensures, on any loan received prior to the date 
the physician completed and certified the application, that the full 
amount of any title IV loan disbursement made on or after the date of 
the Secretary's initial eligibility determination is returned to the 
holder within 120 days of the disbursement date.
    (2) During the conditional discharge period, the borrower or, if 
applicable, the borrower's representative--
    (A) Is not required to make any payments on the loan;
    (B) Is not considered past due or in default on the loan, unless 
the loan was past due or in default at the time the conditional 
discharge was granted;
    (C) Must promptly notify the Secretary of any changes in address or 
phone number;
    (D) Must promptly notify the Secretary if the borrower's annual 
earnings from employment exceed the amount specified in paragraph 
(d)(1)(A) of this section; and
    (E) Must provide the Secretary, upon request, with additional 
documentation or information related to the borrower's eligibility for 
a discharge under this section.
    (3) If the borrower continues to meet the eligibility requirements 
for a total and permanent disability discharge during and at the end of 
the three-year conditional discharge period, the Secretary--
    (i) Discharges the obligation of the borrower and any endorser to 
make any

[[Page 32447]]

further payments on the loan at the end of that period; and
    (ii) Returns any payments received after the date the physician 
completed and certified the borrower's loan discharge application.
    (4) If, at any time during or at the end of the three-year 
conditional discharge period, the borrower does not continue to meet 
the eligibility requirements for a total and permanent disability 
discharge, the Secretary resumes collection activity on the loan. The 
Secretary does not require the borrower to pay any interest that 
accrued on the loan from the date of the Secretary's initial 
determination described in paragraph (c)(2) of this section through the 
end of the conditional discharge period.
* * * * *
    36. Section 685.301 is amended by:
    A. In paragraph (a)(1), removing the words ``in the application by 
the student'' and adding, in their place, the words, ``by the borrower 
and, in the case of a parent PLUS loan borrower, the student and the 
parent borrower.''
    B. Redesignating paragraphs (a)(3), (a)(4), (a)(5), (a)(6), (a)(7), 
(a)(8), and (a)(9) as (a)(4), (a)(5), (a)(6), (a)(7), (a)(8), (a)(9), 
and (a)(10), respectively.
    C. Adding new paragraph (a)(3).
    D. Revising newly redesignated paragraph (a)(10)(ii)(A).
    The addition and revisions read as follows:


Sec.  685.301  Determining eligibility and loan amount.

    (a) * * *
    (3) Before originating a Direct PLUS Loan for a graduate or 
professional student borrower, the school must determine the borrower's 
eligibility for a Direct Subsidized and a Direct Unsubsidized Loan. If 
the borrower is eligible for a Direct Subsidized or Direct Unsubsidized 
Loan but has not requested the maximum Direct Subsidized or Direct 
Unsubsidized Loan amount for which the borrower is eligible, the school 
must--
    (i) Notify the graduate or professional student borrower of the 
maximum Direct Subsidized or Direct Unsubsidized Loan amount that he or 
she is eligible to receive and provide the borrower with a comparison 
of--
    (A) The maximum interest rate for a Direct Subsidized Loan and a 
Direct Unsubsidized Loan and the maximum interest rate for a Direct 
PLUS Loan;
    (B) Periods when interest accrues on a Direct Subsidized Loan and a 
Direct Unsubsidized Loan, and periods when interest accrues on a Direct 
PLUS Loan; and
    (C) The point at which a Direct Subsidized Loan and a Direct 
Unsubsidized Loan enters repayment, and the point at which a Direct 
PLUS Loan enters repayment; and
    (ii) Give the graduate or professional student borrower the 
opportunity to request the maximum Direct Subsidized or Direct 
Unsubsidized Loan amount for which the borrower is eligible.
* * * * *
    (10) * * *
    (ii) * * *
    (A) Generally an academic year, as defined by the school in 
accordance with 34 CFR 668.3, except that the school may use a longer 
period of time corresponding to the period to which the school applies 
the annual loan limits under Sec.  685.203; or
* * * * *
    37. Section 685.304 is amended by:
    A. In paragraph (a)(1) removing the words ``(a)(4)'' and adding, in 
their place, the words ``(a)(5)''.
    B. Redesignating paragraphs (a)(2), (a)(3), (a)(4), (a)(5), and 
(a)(6) as paragraphs (a)(3), (a)(4), (a)(5), (a)(6), and (a)(7), 
respectively.
    C. Adding a new paragraph (a)(2).
    D. Revising newly redesignated paragraph (a)(4) introductory text.
    E. In newly redesignated paragraph (a)(4)(iv) removing the words 
``Direct Unsubsidized Loan borrowers'' and adding, in their place, the 
words ``Direct Unsubsidized Loan borrowers, or student borrowers with 
Direct Subsidized, Direct Unsubsidized, and Direct PLUS Loans, 
depending on the types of loans the borrower has obtained,''.
    F. In newly redesignated paragraph (a)(5) introductory text, 
removing the words ``(a)(1)-(3)'' and adding, in their place, the words 
``(a)(1) through (4)''.
    G. In newly redesignated paragraph (a)(5)(i), removing the words 
``(a)(1)'' and adding, in their place, the words ``(a)(1) or (a)(2)'', 
and removing the words ``(a)(3)'' and adding in their place the words 
``(a)(4)''.
    H. In paragraph (b)(4)(i), removing the words ``Direct Subsidized 
Loan and Direct Unsubsidized Loan borrowers'' and adding, in their 
place, the words ``student borrowers who have obtained Direct 
Subsidized Loans and Direct Unsubsidized Loans, or student borrowers 
who have obtained Direct Subsidized, Direct Unsubsidized, and Direct 
PLUS Loans, depending on the types of loans the student borrower has 
obtained, for attendance''.
    The addition reads as follows:


Sec.  685.304  Counseling borrowers.

    (a) * * *
    (2) Except as provided in paragraph (a)(5) of this section, a 
school must ensure that initial counseling is conducted with each 
graduate or professional student Direct PLUS Loan borrower prior to 
making the first disbursement of the loan unless the student borrower 
has received a prior Direct PLUS Loan or Federal PLUS Loan. The initial 
counseling must--
    (i) Inform the student borrower of sample monthly repayment amounts 
based on a range of student levels or indebtedness or on the average 
indebtedness of graduate or professional student PLUS loan borrowers, 
or student borrowers with Direct PLUS Loans and Direct Subsidized Loans 
or Direct Unsubsidized Loans, depending on the types of loans the 
borrower has obtained, at the same school or in the same program of 
study at the same school;
    (ii) For a graduate or professional student who has received a 
prior Federal Stafford, or Direct Subsidized or Unsubsidized Loan 
provide the information specified in paragraph (a)(3)(i) of this 
section; and
    (iii) For a graduate or professional student who has not received a 
prior Federal Stafford, or Direct Subsidized or Direct Unsubsidized 
Loan, provide the information specified in paragraph (a)(4)(i) through 
(a)(4)(iv) of this section.
* * * * *
    (4) Initial counseling for Direct Subsidized Loan and Direct 
Unsubsidized Loan borrowers must--
* * * * *
 [FR Doc. E7-10826 Filed 6-11-07; 8:45 am]
BILLING CODE 4000-01-P