[Federal Register Volume 72, Number 211 (Thursday, November 1, 2007)]
[Rules and Regulations]
[Pages 61960-62011]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 07-5332]



[[Page 61959]]

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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; Final Rule

  Federal Register / Vol. 72, No. 211 / Thursday, November 1, 2007 / 
Rules and Regulations  

[[Page 61960]]


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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: Final regulations.

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SUMMARY: The Secretary amends 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 (HEA).

DATES: Effective Date: These regulations are effective July 1, 2008.
    Implementation Date: The Secretary has determined, in accordance 
with section 482(c)(2)(A) of the HEA (20 U.S.C. 1089(c)(2)(A)), that 
institutions, lenders, guaranty agencies, and loan servicers that 
administer Title IV, HEA programs may, at their discretion, choose to 
implement Sec. Sec.  674.38, 674.45, 674.61, 682.202, 682.208, 682.210, 
682.211, 682.401, 682.603, 682.604, 685.204, 685.212, 685.301, and 
685.304 of these final regulations on or after November 1, 2007. For 
further information, see the section entitled Implementation Date of 
These Regulations in the SUPPLEMENTARY INFORMATION section of this 
preamble.

FOR FURTHER INFORMATION CONTACT: For information related to 
Simplification of the Deferment Process, Loan Counseling for Graduate 
or Professional Student PLUS Loan Borrowers, Mandatory Assignment of 
Defaulted Perkins Loans, Reasonable Collection Costs, and Child or 
Family Service Cancellation, Brian Smith. Telephone: (202) 502-7551 or 
via Internet: [email protected].
    For information related to Accurate and Complete Copy of a Death 
Certificate, NSLDS Reporting Requirements, Maximum Loan Period, and 
Frequency of Capitalization, Nikki Harris. Telephone: (202) 219-7050 or 
via Internet: [email protected].
    For information related to Total and Permanent Disability, 
Certification of Electronic Signatures on Master Promissory Notes 
(MPNs) Assigned to the Department, Record Retention Requirements on 
MPNs Assigned to the Department, Eligible Lender Trustees, and Loan 
Discharge for False Certification as a Result of Identity Theft, Gail 
McLarnon. Telephone: (202) 219-7048 or via Internet: 
[email protected].
    For information related to Prohibited Inducements and Preferred 
Lender Lists, Pamela Moran. Telephone: (202) 502-7732 or via 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 any of the contact persons listed in this 
section.

SUPPLEMENTARY INFORMATION: On June 12, 2007, the Secretary published a 
notice of proposed rulemaking (NPRM) for the Perkins Loan, FFEL and 
Direct Loan Programs in the Federal Register (72 FR 32410).
    In the preamble to the NPRM, the Secretary discussed on pages 32411 
through 32427 the major changes proposed in that document to strengthen 
and improve the administration of the loan programs authorized under 
Title IV of the HEA. These include the following:
     Amending Sec. Sec.  674.38, 682.210, and 685.204 to allow 
institutions that participate in the Perkins Loan Program, FFEL 
lenders, and the Secretary to grant a deferment under certain 
circumstances to a borrower if another FFEL lender or the Department 
has granted the borrower a deferment for the same reason and time 
period.
     Amending Sec. Sec.  674.38, 682.210, and 685.204 to allow 
a Perkins, FFEL or Direct Loan borrower's representative to apply for 
an armed forces or military service deferment on behalf of the 
borrower.
     Amending Sec. Sec.  674.61, 682.402, and 685.212 to allow 
the use of an accurate and complete photocopy of an original or 
certified copy of the death certificate, in addition to the original or 
a certified copy of the death certificate, to support the discharge of 
a Title IV loan due to death.
     Amending Sec. Sec.  674.61, 682.402, and 685.213 to 
restructure the regulations governing the discharge of a Perkins, FFEL 
or Direct Loan based on the borrower's total and permanent disability 
to clarify and provide additional explanation of the eligibility 
requirements.
     Amending Sec. Sec.  674.61, 682.402, and 685.213 to 
provide for a prospective conditional discharge period to establish 
eligibility for a total and permanent disability discharge that is up 
to three years in length and begins on the date that the Secretary 
makes the initial determination that the borrower is totally and 
permanently disabled.
     Amending Sec. Sec.  674.16, 682.208, and 682.414 to 
require institutions, lenders, and guaranty agencies to report 
enrollment and loan status information, or any other Title IV-related 
data required by the Secretary, to the Secretary by the deadline 
established by the Secretary.
     Amending Sec. Sec.  674.19, 674.50, and 682.414 to require 
an institution or lender to maintain the original electronic promissory 
note, plus a certification and other supporting information, regarding 
the creation and maintenance of any electronically-signed Perkins Loan 
or FFEL promissory note or Master Promissory Note (MPN) and provide 
this certification to the Department, upon request, should it be needed 
to enforce an assigned loan. Institutions and lenders are required to 
maintain the electronic promissory note and supporting documentation 
for at least three years after all loan obligations evidenced by the 
note are satisfied.
     Amending Sec. Sec.  674.19 and 674.50 to 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 for at least three years from the date the loan is 
canceled, repaid or otherwise satisfied and require the institution to 
submit disbursement records on an assigned Perkins Loan, upon request, 
should the Secretary need the records to enforce the loan.
     Amending Sec.  682.409 to 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
     Amending Sec. Sec.  682.604 and 685.304 to require 
entrance counseling for graduate or professional student PLUS Loan 
borrowers and modify the exit counseling requirements for Stafford Loan 
borrowers who have also received PLUS Loans.
     Amending Sec. Sec.  682.401, 682.603, and 685.301 to 
eliminate the maximum 12-month loan period for annual loan limits in 
the FFEL and Direct Loan programs.
     Amending Sec. Sec.  674.8 to permit the Secretary 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

[[Page 61961]]

not been received on the loan in the preceding 12 months, unless 
payments were not due because the loan was in a period of authorized 
forbearance or deferment.
     Amending Sec.  674.45 to limit the amount of collection 
costs a school may assess against a Perkins Loan borrower to 30 percent 
for first collection efforts; 40 percent for second collection efforts; 
and, in cases of litigation, 40 percent plus court costs.
     Amending Sec.  674.56 to clarify the eligibility 
requirements for a Perkins Loan borrower to qualify for a child or 
family service cancellation.
     Amending Sec. Sec.  682.200 and 682.401 to incorporate 
into the regulations specific rules for lenders and guaranty agencies 
on prohibited inducements and activities and permissible activities in 
accordance with the recommendations of the Department's Task Force on 
these issues.
     Amending Sec. Sec.  682.200 and 682.602 to reflect the 
provisions of The Third Higher Education Extension Act of 2006, Public 
Law 109-202, that prohibit a FFEL lender from entering into a new 
eligible lender trustee (ELT) relationship with a school or a school-
affiliated organization as of September 30, 2006, but allowing such 
relationships in existence prior to that date to continue with certain 
restrictions.
     Amending Sec.  682.202 to provide that a lender may only 
capitalize unpaid interest on a Federal Consolidation Loan that accrues 
during an in-school deferment at the expiration of the deferment.
     Amending Sec. Sec.  682.208, 682.211, 682.300, 682.302, 
and 682.411 regarding loan discharge for false certification as a 
result of identity theft.
     Amending Sec. Sec.  682.212 and 682.401 to specify 
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 prohibit the use of a preferred lender list to 
deny a borrower the right to use a FFEL lender not included on a 
school's list.
    In addition to the changes that strengthen and improve the 
administration of the loan programs authorized under HEA, these final 
regulations also incorporate certain statutory changes made to the HEA 
by the College Cost Reduction and Access Act (CCRAA) (Pub. L. 110-84). 
These changes are:
     Amending Sec. Sec.  674.34, 682.210, and 685.204 to extend 
the military deferment to all Title IV borrowers regardless of when 
their loans were made, eliminate the 3-year limit on the military 
deferment and add a 180-day period of deferment following the 
borrower's demobilization as of October 1, 2007.
     Amending Sec. Sec.  674.34, 682.210, and 685.204 to 
authorize a 13-month deferment following conclusion of their military 
service for certain members of the Armed Forces who were enrolled in a 
program of instruction at an eligible institution at the time, or 
within 6 months prior to the time the borrower was called to active 
duty as of October 1, 2007.
     Amending Sec. Sec.  674.34 and 682.210 to revise the 
definition of economic hardship to allow a borrower to earn 150 percent 
of the poverty line applicable to the borrower's family size as of 
October 1, 2007.
     Amending Sec. Sec.  682.202 and 685.202 to reduce interest 
rates on subsidized Stafford loans made to undergraduate students as of 
July 1, 2008.
     Amending Sec.  682.302 to reduce special allowance 
payments for loans first disbursed on or after October 1, 2007 and 
establish different rates for eligible not-for-profit lenders and other 
lenders.
     Amending Sec.  682.305 to increase the loan fee a lender 
must pay to the Secretary from 0.50 to 1.0 percent of the principal 
amount of the loan for loans first disbursed on or after October 1, 
2007.
     Amending Sec.  682.404 to reduce the percentage of 
collections that a guaranty agency may retain from 23 to 16 percent and 
to decrease account maintenance fees paid to guaranty agencies from 
0.10 to 0.06 percent as of October 1, 2007.
     Removing Sec.  682.415 to eliminate the ``exceptional 
performer'' status as of October 1, 2007.

Because these amendments implement changes to the HEA made by the 
CCRAA, we do not discuss them in the Analysis of Comments and Changes 
section.

Waiver of Proposed Rulemaking--Regulations Implementing the CCRAA

    Under the Administrative Procedure Act (5 U.S.C. 553), the 
Department is generally required to publish a notice of proposed 
rulemaking and provide the public with an opportunity to comment on 
proposed regulations prior to issuing final regulations. In addition, 
all Department regulations for programs authorized under Title IV of 
the HEA are subject to the negotiated rulemaking requirements of 
section 492 of the HEA. However, both the APA and HEA provide for 
exemptions from these rulemaking requirements. The APA provides that an 
agency is not required to conduct notice-and-comment rulemaking when 
the agency for good cause finds that notice and comment are 
impracticable, unnecessary or contrary to the public interest. 
Similarly, section 492 of the HEA provides that the Secretary is not 
required to conduct negotiated rulemaking for Title IV, HEA program 
regulations if the Secretary determines that applying that requirement 
is impracticable, unnecessary or contrary to the public interest within 
the meaning of the HEA.
    Although the regulations implementing CCRAA are subject to the 
APA's notice-and-comment and the HEA's negotiated rulemaking 
requirements, the Secretary has determined that it is unnecessary to 
conduct negotiated rulemaking or notice-and-comment rulemaking on these 
regulations. These amendments simply modify the Department's 
regulations to reflect statutory changes made by the CCRAA, and these 
statutory changes are either already effective or will be effective 
within a short period of time. The Secretary does not have discretion 
in whether or how to implement these changes. Accordingly, negotiated 
rulemaking and notice-and-comment rulemaking are unnecessary.
    There are no significant differences between the NPRM and these 
final regulations resulting from public comments.

Implementation Date of These Regulations

    Section 482(c) of the HEA requires that regulations affecting 
programs under Title IV of the HEA be published in final form by 
November 1 prior to the start of the award year (July 1) to which they 
apply. However, that section also permits the Secretary to designate 
any regulation as one that an entity subject to the regulation may 
choose to implement earlier and the conditions under which the entity 
may implement the provisions early.
    Consistent with the intent of this regulatory effort to strengthen 
and improve the administration of the loan programs authorized under 
Title IV of the HEA, the Secretary is using the authority granted her 
under section 482(c) to designate certain provisions of the 
regulations, identified in the following paragraph, for early 
implementation at the discretion of each institution, lender, guaranty 
agency, or servicer, as appropriate.
    In accordance with the authority provided by section 482(c) of the 
HEA, the Secretary has determined that for some provisions there are 
conditions that must be met in order for an institution, lender, 
guaranty agency, or servicer, as appropriate, to implement

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those provisions early. The provisions subject to early implementation 
and the conditions are--
    Provision: Sections 674.38, 682.210, and 685.204 that simplify the 
deferment granting process and allow a borrower's representative to 
request a military service deferment or an Armed Forces deferment.
    Condition: None.
    Provision: Sections 674.61, 682.402, and 685.212 that allow the use 
of an accurate and complete photocopy of the original or certified copy 
of the borrower's death certificate to support the discharge of a Title 
IV loan due to death.
    Condition: None.
    Provision: Sections 682.603, 682.604, 685.301, and 685.304 that 
require entrance counseling requirements and modify exit counseling for 
graduate or professional student PLUS borrowers.
    Condition: None.
    Provision: Section 674.45 that limits the amount of collection 
costs a school may assess against a Perkins Loan borrower.
    Condition: None.
    Provision: Section 682.202 that limits the frequency of 
capitalization on Federal Consolidation loans to quarterly, except that 
a lender may only capitalize unpaid interest that accrues during an in-
school deferment at the expiration of the deferment.
    Condition: None.
    Provision: Sections 682.208 and 682.211, which allow a lender to 
suspend credit bureau reporting for 120 days and grant borrowers a 120-
day forbearance on a loan while the lender investigates a false 
certification as a result of an alleged identity theft.
    Condition: None.

Analysis of Comments and Changes

    In response to the Secretary's invitation in the NPRM published on 
June 12, 2007, 241 parties submitted comments on the proposed 
regulations. An analysis of the comments and the changes in the 
regulations since publication of the NPRM and as a result of public 
comment follows.
    We group major issues according to subject, with appropriate 
sections of the regulations referenced in parentheses. We discuss other 
substantive issues under the sections of the regulations to which they 
pertain. Generally, we do not address technical and other minor 
changes--and suggested changes the law does not authorize the Secretary 
to make. We also do not address comments pertaining to issues that were 
not within the scope of the NPRM.

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

    Comments: Commenters were generally supportive of our proposal to 
simplify the deferment process. Some commenters, however, had 
suggestions for modifications.
    The proposed regulations would allow a borrower's representative to 
request a military service or Armed Forces deferment on behalf of the 
borrower. Some commenters recommended that we define ``borrower's 
representative'' for purposes of a military service or Armed Forces 
deferment. However, several other commenters did not think it was 
necessary to define ``borrower's representative.''
    One commenter recommended that the Department revise the 
regulations to require (rather than just allow) lenders to grant 
military service deferments to eligible borrowers based upon a request 
from the borrower's representative.
    With regard to the simplified deferment granting procedures, some 
commenters recommended that we require, rather than allow, lenders to 
grant deferments under the proposed procedures.
    One commenter noted that interest does not accrue on subsidized 
FFEL or Direct Loans, or on Perkins Loans, during deferment periods and 
recommended that borrowers with these types of loans not be required to 
make an initial deferment request.
    One commenter recommended that the notification of a deferment to a 
borrower of unsubsidized loans include information on the cost of the 
deferment.
    One commenter recommended that we adopt a comparable simplified 
forbearance process for schools that participate in the Perkins Loan 
Program. This commenter felt that Perkins Loan schools should be able 
to grant forbearances based on a forbearance granted on a borrower's 
FFEL or Direct Loan. This commenter also requested that we allow 
borrowers in the Perkins Loan Program to verbally request a forbearance 
on their loans.
    Several commenters recommended that we modify the regulations to 
permit a lender to grant a deferment ``during'' the same time period as 
a deferment granted by another lender. This would allow the deferment 
dates of a deferment granted by one lender to be part of the deferment 
period granted by another lender. The commenter noted that the dates of 
the deferment periods may not be exactly the same based on the status 
of the loans held by each of the lenders and the applicability of the 
deferments to the separate loans.
    Discussion: The Department agrees with the commenters who 
recommended that we not define the term ``borrower's representative'' 
for purposes of a military service or Armed Forces deferment. A 
borrower's representative would be a member of the borrower's family, 
or another reliable source. We do not think it is necessary to regulate 
a specific definition of the term ``borrower's representative.'' We 
believe allowing flexibility in this regard will be especially helpful 
to borrowers called to active duty and stationed overseas in areas of 
conflict. Defining ``borrower's representative'' could unnecessarily 
limit access to this benefit for those most deserving of it. Commenters 
also overwhelmingly supported our decision not to define the term 
``borrower's representative.''
    We also agree with the recommendation that lenders should be 
required to accept a military service or Armed Forces deferment request 
from a borrower's representative. We believe that the proposed 
regulations would require lenders to accept such deferment requests and 
we have not changed that language.
    However, we believe the simplified process that applies to other 
types of deferments should be optional for lenders. While many lenders 
may welcome the simplified deferment requirements as a convenience, 
other lenders may prefer to grant deferments based on their own review 
of a borrower's deferment documentation. We intend that these amended 
regulations will provide lenders with flexibility in structuring their 
processes for granting deferment requests; we do not want to 
unnecessarily limit their flexibility.
    We disagree with the suggestion that lenders be allowed to grant 
deferments to borrowers with subsidized loans or Perkins Loans without 
a request from the borrower. We believe that the borrower who is 
ultimately liable for the loan should be responsible for deciding 
whether to request a deferment.
    We disagree with the recommendation that schools participating in 
the Perkins Loan Program be allowed to grant forbearances based on 
forbearances granted on the borrower's FFEL Program loans. The 
mandatory forbearance requirements in the FFEL Program differ from the 
forbearance requirements in the Perkins Loan Program. Additionally, 
given that Perkins schools have wide flexibility in granting 
forbearances in the Perkins Loan Program, the Department sees no value 
in allowing schools to base Perkins forbearances on

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forbearances granted in the FFEL Program.
    We also disagree with the recommendation that we allow deferments 
to be granted ``during'' the same time period as another deferment 
under the simplified procedures. If the applicability of the deferment 
and the status of the separate loans is not the same, the simplified 
deferment process cannot be used because the loan holder would need to 
obtain separate documentation verifying the eligibility of the borrower 
based on different dates.
    Changes: None.

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

    Comments: Many commenters supported the proposed changes in 
Sec. Sec.  674.61, 682.402, and 685.212 to allow loan holders to use an 
accurate and complete photocopy of a death certificate to discharge a 
Title IV loan due to the death of a borrower. The commenters agreed 
that this approach will reduce the cost of securing additional original 
or certified copies of a death certificate for the surviving family 
members and decrease burden for loan holders.
    Several commenters suggested that the language in Sec. Sec.  
674.61, 682.402, and 685.212 be revised to allow a loan holder to use 
other data sources to grant a loan discharge based on the death of the 
borrower, such as official court documents, the National Student Loan 
Data System (NSLDS), or the Social Security Administration's (SSA's) 
Death Master File. Two commenters suggested that the Department allow 
loan holders to use NSLDS to ``look back'' and discharge loans for a 
deceased borrower that were not included in an original discharge due 
to the death of the borrower.
    Discussion: During the negotiations concerning these regulations, 
some non-Federal negotiators asked the Department to expand the types 
of documentation that could be used to support a request for a 
discharge based on the death of the borrower. Specifically, these 
negotiators asked that they be allowed to base discharges on 
documentation from NSLDS, SSA's Master Death file or court documents. 
We declined to adopt these proposals in order to guard against fraud 
and abuse in the discharge process. The SSA has publicly acknowledged 
that its Master Death file contains inaccuracies. For that reason, we 
do not consider the file to be appropriate for use in granting a death 
discharge and continue to believe that we should not expand the types 
of documentation for program integrity reasons.
    The Department agrees that using NSLDS to identify the loans of a 
deceased borrower that were not included in a discharge based on the 
death of the borrower is worth exploring; however, for program 
integrity reasons we do not agree that NSLDS information alone should 
be the basis for discharging loans that were not included in the 
original discharge. The Department will give further consideration to 
the commenters' suggestion but declines to adopt the suggestion in 
these final regulations.
    Change: None.
    Comments: While supporting the Department's efforts to decrease the 
burden on families applying for a discharge, one commenter expressed 
concern that fraudulent photocopies would be used to secure a discharge 
based on the death of the borrower, thus threatening the integrity of 
the Title IV loan programs. Another commenter recommended that the 
Secretary conduct a study of how the process for granting requests for 
discharges based on the death of the borrower will work before issuing 
final regulations allowing use of a photocopy.
    Discussion: We appreciate the commenter's concern about the 
possible use of fraudulent photocopies of death certificates and will 
closely monitor the use of this documentation. We do not believe a 
study is necessary at this time. An official death certificate is very 
difficult to alter and we expect loan holders to be vigilant when using 
a photocopy as the basis for a death discharge. To ensure the integrity 
of the Title IV loan programs, the granting of a discharge of a Title 
IV loan based on the accurate and complete photocopy of an original or 
certified copy of the original death certificate is still at the 
discretion of lenders and the Secretary.
    Change: None.

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

    Comment: Many commenters supported our proposals to restructure the 
regulations in Sec. Sec.  674.61, 682.402, and 685.213 to clarify the 
eligibility requirements a borrower must meet to receive a total and 
permanent disability loan discharge and to provide for a similar 
process across the three loan programs. Several commenters also 
supported the requirement for a three-year conditional discharge period 
beginning on the date the Secretary makes an initial determination that 
the borrower is totally and permanently disabled.
    Discussion: We appreciate the commenters' support. Upon further 
internal review, we believe that the Perkins Loan Program regulations 
could be clearer with respect to the information that an institution 
must provide to a borrower upon receipt of the borrower's discharge 
application.
    Changes: The Department has made changes to Sec.  674.61(b)(2) of 
the Perkins Loan Program regulations to provide a more detailed 
description of the information that must be provided to a borrower upon 
the institution's receipt of an application for a discharge.
    Comment: Several commenters supported the proposal in Sec. Sec.  
674.61(b)(2)(i), 682.402(c)(2), and 685.213(b)(1) requiring a borrower 
seeking a total and permanent disability discharge to submit the 
completed application within 90 days of the date the physician 
certifies the application, thus ensuring that the loan holder has 
timely and accurate information on which to base a preliminary 
determination about the borrower's eligibility for the discharge. 
However, other commenters believed that the 90-day time limit would be 
insufficient for a borrower who may be incapable of managing his or her 
affairs or unable to put together the paperwork necessary to submit the 
application. The commenters also stated that the proposed time limit 
would not accommodate delays in the process that are out of the 
borrower's control. The commenters suggested that the Secretary make 
exceptions to the 90-day time limit to accommodate extenuating 
circumstances so that borrowers will not be required to obtain a new 
physician certification if the borrower misses the 90-day time limit. 
One commenter suggested that we adopt a 180-day time limit for 
submission of the discharge application.
    Discussion: The Department continues to believe that the 
requirement in Sec. Sec.  674.61(b)(2)(i), 682.402(c)(2), and 
685.213(b)(1) that borrowers 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 is appropriate 
and reasonable. Allowing exceptions based on extenuating circumstances 
or allowing a 180-day time limit would not ensure that the Secretary 
has accurate and timely information on which to base her determination 
on the borrower's application. Allowing exceptions or a longer time 
limit would also open up the possibility that a borrower might 
inadvertently take action that would disqualify the borrower for a 
final discharge.
    Changes: None.

[[Page 61964]]

    Comment: Several commenters noted that the proposed regulations do 
not provide for a 60-day administrative forbearance that is provided to 
a borrower under the current FFEL regulations for completion and 
submission of the discharge application form. The commenters were 
concerned that the omission of the forbearance would increase 
delinquency on borrower accounts and penalize the borrower. One 
commenter recommended that we require lenders to suspend collection 
activity and provide a forbearance to a borrower who is attempting to 
complete a discharge application as well as during any period while the 
application is pending.
    Discussion: Section 682.402(c)(5) of the proposed regulations 
allows a lender to grant a borrower a forbearance of payment of both 
principal and interest 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 to 
complete and certify the borrower's discharge application. Under Sec.  
674.33(d)(5) of the Perkins Loan Program regulations, an institution is 
required to forbear payment on a loan for any acceptable reason. In the 
Direct Loan Program, Sec.  685.205(b)(5) specifically allows the 
Secretary to grant a borrower an administrative forbearance for the 
period of time it takes the borrower to submit appropriate 
documentation indicating that the borrower has become totally and 
permanently disabled. Given that these provisions provide a borrower 
with significant access to forbearance while obtaining a physician's 
certification and completing the discharge application, the Department 
believes that requiring the cessation of collection activity is 
unnecessary until the loan holder actually receives the discharge 
application.
    Changes: None.
    Comment: Several commenters stated that we should continue our 
current practice of using the date the borrower became totally and 
permanently disabled instead of the date the physician certifies the 
borrower's disability on the application as we proposed in Sec. Sec.  
674.61(b)(3)(ii), 682.402(c)(3)(ii), and 685.213(c)(2) as the date to 
establish the borrower's eligibility for a discharge. The commenters 
claimed that using the date the physician certifies the application as 
the date the borrower became totally and permanently disabled is 
arbitrary and contradicts statutory intent that disabled borrowers 
receive immediate relief as of the date the borrower becomes totally 
and permanently disabled.
    Several commenters stated that many borrowers do not realize they 
have the ability to obtain a discharge of their student loans and as a 
result do not apply for a total and permanent disability discharge 
until several years after becoming disabled. These commenters expressed 
concern that using the date the physician certifies the borrower's 
application as the disability date combined with a prospective 
conditional discharge period would subject these borrowers to a long 
delay in receiving the discharge.
    One commenter stated that, in the FFEL Program, using a date 
identified by a physician as the borrower's disability date ensures 
that only one date of disability appears on all applications and forms 
received by the Secretary when the borrower has multiple loans. The 
commenter believes that under the proposed changes to the disability 
discharge process, the start date of the three-year conditional 
discharge period for a borrower who has multiple loans may vary for 
each loan because loans can be assigned to the Secretary at different 
times in the discharge process based on when the borrower submits 
documentation to each lender when the lender files the claim with the 
guarantor, and when the guarantor reviews and pays the claim.
    Several commenters questioned the Department's contention that 
certifying physicians rely solely on a borrower's statements in 
determining the borrower's date of disability and that there may not be 
strong medical evidence for using a different date to establish 
eligibility for Federal benefits. The commenters did not believe that 
it was appropriate for the Department to assume that a physician's 
diagnostic methodology is flawed.
    Discussion: Sections 437(a) and 464(c)(1)(F) of the HEA provide for 
the discharge of a borrower's Title IV loans if the borrower becomes 
totally and permanently disabled as determined in accordance with 
regulations of the Secretary. As discussed in the preamble to the NPRM, 
the Department proposed these regulatory changes to eliminate the 
possibility that a final discharge would be made immediately upon 
assignment of the account to the Department. We believe this result is 
inconsistent with the intent of these regulations, which is to conform 
the discharge requirements to those of other Federal programs that only 
provide for Federal benefits after appropriate monitoring of the 
applicant's condition.
    The Department believes that borrowers are sufficiently informed 
about the availability of a total and permanent disability discharge. 
The promissory notes used in the Title IV loan programs notify 
borrowers of the possibility to have the loan discharged if the 
borrower becomes totally and permanently disabled. Information on the 
discharge is also available on the Department's Web site and in 
numerous Department publications as well as in information from other 
program participants. Although a borrower may experience a delay before 
receiving a total and permanent disability discharge under these 
regulations, we wish to emphasize again our belief that the provision 
of Federal benefits should be made only after there is sufficient 
monitoring of the applicant's condition.
    We do not agree that using a date identified by a physician as the 
borrower's disability date instead of the date the physician certifies 
the borrower's disability on the discharge application means that a 
borrower with multiple loans assigned to the Department has only one 
date of disability. The Department addresses this and similar issues 
frequently under the current total and permanent disability discharge 
process and resolves discrepancies in disability dates on assigned 
loans by consulting with the physician that certified the borrower's 
application. The Department expects to continue this approach to 
resolve discrepancies under the new process and does not believe the 
regulations need to specifically address issues related to processing 
an application.
    Lastly, the Department does not agree that the concern we expressed 
in the NPRM that there may not be strong medical evidence to support 
using the borrower's disability date assumes a flawed diagnostic 
methodology on the part of the certifying physician. As we stated in 
the preamble to the NPRM, we believe that the best date to use as the 
eligibility date is the date the physician certified the application 
because that process requires the physician to review the borrower's 
condition at that time, rather than speculate about the borrower's 
condition in the past.
    Changes: None.
    Comment: Several commenters disagreed with the Secretary's opinion 
that a three-year prospective conditional discharge period would help 
prevent fraud and abuse in the Title IV loan programs by allowing the 
Secretary to monitor a borrower's status before granting a discharge. 
The commenters stated that whether the conditional discharge period is 
prospective or retroactive is irrelevant as long as the Secretary has 
access to a physician's

[[Page 61965]]

certification confirming that the borrower meets the eligibility 
requirements for a disability discharge.
    Several commenters also disagreed with the Department's statement 
in the preamble to the NPRM that there have been instances when 
borrowers have received otherwise disqualifying Title IV loans and 
earnings in excess of allowable levels after the date of the borrower's 
disability discharge application but also after the date of the 
borrower's retroactive final discharge. The commenters cited an 
analysis of a sample of total and permanent disability cases that they 
claimed did not support the Secretary's view.
    Several commenters acknowledged the need to protect the integrity 
of the Title IV programs in regard to disability discharges and stated 
that reliance on a single physician's certification or determination of 
permanent disability may encourage fraud and abuse in the discharge 
process.
    Discussion: In a Final Audit Report published in November 2005, the 
Department's Inspector General concluded that the current, three-year 
conditional discharge period was ineffective for ensuring that a 
borrower is totally and permanently disabled because it does not always 
allow the Department to examine the borrower's current earnings and 
loan information. As a result, a borrower who is not currently disabled 
could receive a disability discharge even though the borrower has 
received current disqualifying income or loans. The Inspector General's 
Audit Report noted that approximately 54 percent of the borrowers who 
received disability discharges applied for the discharge more than 
three years after the disability. As a result, for the discharges 
approved by the Department from July 1, 2002, through June 30, 2004, 
approximately 54 percent (2,593 borrowers) were based on a three-year 
period during which there was no examination of the borrower's current 
income. The Inspector General examined current income information that 
was available for a limited number of these borrowers who had submitted 
a Free Application for Federal Student Aid (FAFSA) and found that a 
number of borrowers who claimed to be totally and permanently disabled 
also reported current income over the limit for a disability discharge. 
As a result the Inspector General recommended that the Department 
revise the regulations to ensure that current income and Title IV loan 
information is considered when determining whether a borrower is 
totally and permanently disabled.
    The proposed regulations address the Inspector General's concerns 
and we believe they will discourage fraud and abuse in the disability 
discharge process. To further ensure against the possibility of fraud 
and abuse, we have added a provision to the Perkins, FFEL and Direct 
Loan Program regulations specifically reflecting the Secretary's 
authority to require a borrower to submit additional medical evidence 
if the Secretary determines that the borrower's application does not 
conclusively prove that the borrower is disabled. As part of this 
review, the Secretary may arrange for an additional review of the 
borrower's condition by an independent physician at no expense to the 
applicant.
    Changes: We have amended Sec. Sec.  674.61(b)(4), 682.402(c)(4), 
and 685.213(d) to provide that the Secretary reserves the right to 
require additional medical evidence of a borrower's total and permanent 
and disability as well as an additional review of the borrower's 
condition by an independent physician at the Secretary's expense.
    Comment: Many commenters disagreed with the Department's proposal 
in Sec. Sec.  674.61(b)(5), 682.402(c)(4)(iii), and 685.213(d)(3)(ii) 
that only payments made on the loan after the date the physician 
certifies the borrower's total and permanent disability discharge 
application would be returned to the borrower. The commenters claimed 
this proposal would harm borrowers who do not obtain a timely 
certification of disability or who continue to make payments to keep 
from defaulting or becoming delinquent on their loans. One commenter 
recommended that repayments be refunded back to the date certified by 
the physician even if a prospective conditional discharge period is 
required.
    One commenter recommended that no payments previously made on a 
loan be returned to a borrower if the borrower receives a final 
discharge based on a total and permanent disability.
    One commenter requested that we clarify to whom the Secretary 
returns payments after a final determination of the borrower's total 
and permanent disability is made in Sec.  674.61(b)(5)(iii).
    Discussion: As stated in the preamble to the NPRM, the Department 
proposed this change to be consistent with the decision to rely on the 
date the physician certifies the borrower's disability on the 
application and to maintain program integrity in the administration of 
the discharge process. Under these regulations, the borrower's 
disability date is the date the physician certifies the borrower's 
discharge application. In this situation, there is no basis for 
returning payments made by the borrower, or on the borrower's behalf, 
before that date. However, it is appropriate to return any payments 
made by or on behalf of the borrower after that date.
    Lastly, the Secretary returns any payments to the individual who 
made the payments after a final determination of the borrower's total 
and permanent disability is made. We agree that the regulations should 
reflect this fact.
    Changes: Sections 674.61(b)(5)(iii), 682.402(c)(4)(iii), and 
685.213(d)(3)(ii) have been changed to reflect that any payments made 
after the date that the physician certified the borrower's application 
for a disability discharge will be sent to the person who made the 
payment after the final discharge is issued.
    Comment: Several commenters felt that the prospective three-year 
conditional discharge period should begin on the date the physician 
certifies the borrower's total and permanent disability discharge 
application rather than on the date the Secretary makes an initial 
determination that the borrower is totally and permanently disabled. 
The commenters stated that using the date the Secretary makes the 
initial determination would be unfair to borrowers. The commenters also 
believed that using the date the Secretary initially determines that a 
borrower is disabled weakens the Secretary's incentive to make 
expeditious decisions on disability discharge applications and 
increases the likelihood that a borrower might inadvertently take an 
action that would disqualify him or her for a final discharge. One 
commenter recommended that the final regulations set a time limit for 
the Department to make a determination of a borrower's initial 
eligibility for a disability discharge.
    Discussion: The Department has considered the comments and has 
decided that beginning the prospective three-year conditional discharge 
period on the date the physician certifies the borrower's total and 
permanent disability discharge application rather than on the date the 
Secretary makes an initial determination that the borrower is totally 
and permanently disabled is appropriate and will not increase the 
opportunity for fraud in the disability discharge process.
    Changes: We have revised Sec. Sec.  674.61(b)(3)(i), 
682.402(c)(3)(i), and 685.213(c)(2) to provide that the three-year 
conditional discharge period begins on the date the physician certifies 
the

[[Page 61966]]

borrower's total and permanent disability discharge application.
    Comment: Several commenters requested that we apply the same 
eligibility standards that apply during the conditional discharge 
period (which prohibit the receipt of any additional Title IV loans and 
allow a borrower to earn no more than 100 percent of the poverty line 
for a family of two, as determined in accordance with the Community 
Service Block Grant Act) to the period between the date the borrower 
obtains a physician's certification and the date the Secretary makes 
her initial determination that the borrower is totally and permanently 
disabled. The commenters believed that applying different eligibility 
requirements at different stages in the process would confuse borrowers 
and jeopardize their ability to qualify for a discharge.
    Discussion: The Department has considered the comments and agrees 
that applying the same eligibility standards beginning on the date the 
borrower obtains the physician's certification on the total and 
permanent disability discharge application and continuing those 
standards throughout the prospective three-year conditional discharge 
would reduce the complexity of the process without creating an 
opportunity for fraud.
    Changes: We have revised Sec. Sec.  674.61(b)(4)(i), 
682.402(c)(4)(i), and 685.213(d)(1) to provide that a borrower may not 
receive any Title IV loans or earn more than 100 percent of the poverty 
line for a family of two, as determined in accordance with the 
Community Service Block Grant Act, beginning on the date the physician 
certifies the borrower's discharge application and throughout the 
prospective three-year conditional discharge period.
    Comment: One commenter requested that the proposed regulations be 
clarified to define the term ``new Title IV loan'' to exclude 
subsequent disbursements of a prior loan.
    Discussion: The Department does not believe that such a change is 
necessary. The regulations in Sec. Sec.  674.61(b)(2)(iv)(C)(2) and 
(3), 682.402(c)(4)(i)(B) and (C), and 685.213(b)(2)(ii)(A) and (B) 
already differentiate between new loans and subsequent disbursements of 
prior loans.
    Changes: None.
    Comment: One commenter requested that the effective dates and 
trigger dates in the proposed regulations be carefully evaluated so 
that borrowers who are in the process of having discharge forms 
certified are not subject to the new requirements. Another commenter 
requested that the effective date of any new regulations governing the 
disability discharge process be based on the approval date of a new 
Federal form to eliminate processing confusion and inadvertent delays 
for applicants.
    Discussion: The Department anticipates that both the new total and 
permanent disability discharge applications and the final regulations 
that govern the process will be effective on July 1, 2008, for 
borrowers who apply for a discharge on or after that date. Borrowers 
who are in the process of having discharge forms certified as of that 
date will not be subject to the new regulations.
    Changes: None.
    Comment: One commenter suggested the Secretary return Perkins Loan 
accounts to the school that assigned them if the Secretary determines 
that the borrower is not totally and permanently disabled. The 
commenter stated that if such accounts were returned to the school, the 
school's Perkins Loan revolving fund would benefit from any repayments 
made when the school resumes collection.
    Discussion: The current assignment process in Sec.  674.50 of the 
Perkins Loan Program regulations requires that, upon accepting 
assignment of a loan, the Secretary acquire all rights, title, and 
interest of the institution in that loan. Returning an assigned Perkins 
Loan account to the school if the Secretary determines that a borrower 
is not totally and permanently disabled would add administrative burden 
to the process and is inconsistent with current regulatory requirements 
in Sec.  674.50(f)(1).
    Changes: None.
    Comment: One commenter suggested that if the Secretary makes an 
initial determination that the borrower's disability is not total and 
permanent, the borrower should not only resume repayment but should 
also be required to repay all amounts that would have been due during 
the cessation of collection on the loan while the application was being 
processed by the loan holder and the Secretary.
    Discussion: The Department believes that to require a borrower to 
repay all amounts that would have been due during the cessation of 
collection on the loan while the application is being processed would 
unnecessarily discourage borrowers who might qualify for a discharge 
from applying.
    Changes: None.
    Comment: One commenter felt that the Department should consider 
disability determinations made by other Federal agencies such as the 
SSA or the Veteran's Administration (VA) in determining whether 
borrowers are eligible for a disability discharge on their Title IV 
loans.
    Discussion: The Department has previously considered the idea of 
applying the disability standards used by other Federal agencies to 
borrowers seeking a discharge of their Title IV loans. However, the 
definition of total and permanent disability used in the Department's 
discharge process is appropriately more demanding than that used by SSA 
and the VA. Those agencies use regular medical reviews of applicants 
over a number of years to ensure that the applicants remain eligible 
for benefits. In those programs, an individual loses benefits if they 
are no longer disabled. In contrast, the Department is providing a 
significant benefit to an individual on a one-time basis without any 
opportunity to conduct future reviews to determine if the individual is 
actually disabled. The Secretary believes that the process established 
in these regulations provides an appropriate process that will ensure 
that only appropriate discharges are granted.
    Changes: None.

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

    Comment: Many commenters did not agree with proposed Sec.  
682.401(b)(20), which would change the timeframe in which guarantors 
must report certain student enrollment data to the current loan holder 
from 60 days to 30 days. The commenters believed that this change would 
not accommodate timely reporting in months that have 31 days. Other 
commenters stated that guarantors currently report information to NSLDS 
at least monthly and that changing the requirement for guarantors to 
report enrollment information to lenders to 30 days would not improve 
the timeliness of information. One commenter believed that the 
Secretary did not appropriately consider all the other established 
reporting periods and deadlines when developing this proposal, and that 
new NSLDS reporting requirements will unnecessarily burden schools with 
additional reporting.
    One commenter asked how the Department intends to categorize 
Perkins Loan data that are reported to NSLDS under the new regulations. 
The commenter noted that historically schools categorized and reported 
Perkins Loans based on the terms and conditions of the loan and 
reported disbursements made under these categories as one loan made 
over a period of years. A school would create a new category of Perkins 
Loan when

[[Page 61967]]

the terms and conditions of Perkins Loans were affected by statutory 
changes. The commenter believed that reporting Perkins Loans as 
separate loans each award year would dramatically increase the number 
of loans reported to NSLDS and increase burden and costs associated 
with NSLDS reporting. The commenter noted that new NSLDS reporting 
criteria would increase the number of Perkins Loan account records and 
associated costs of reporting with no benefit to the institution or 
borrowers.
    Three commenters stated that the language in paragraph (j) of 
proposed Sec.  674.16 fails to reflect the intent of Section 485B of 
the HEA which specifically provides that the development of NSLDS 
reporting timeframes be accomplished according to mutually agreeable 
solutions based on consultation with guaranty agencies, lenders and 
institutions. The commenters stated that the Department has not devoted 
sufficient effort to conducting a meaningful dialogue and information 
exchange with institutions about reporting needs for research and 
policy analysis purposes.
    Several other commenters suggested that there should be weekly 
updates to NSLDS instead of the suggested 30 days and believed that 
guaranty agencies, servicers, students, and schools would benefit from 
having more accurate and timely information in NSLDS.
    Discussion: The Secretary believes that the new NSLDS reporting 
timeframes will improve the timeliness and availability of information 
important to managing the student loan program. The Secretary also 
believes that the proposed regulatory changes, such as the 
simplification of the deferment granting process, will be easier and 
more efficiently implemented if timely and accurate information is more 
readily available in NSLDS.
    The Department appreciates the commenters' concerns about the cost 
associated with increased reporting of Perkins Loans. Although the 
costs incurred by institutions to make the systems changes necessary to 
comply with new NSLDS reporting requirements are difficult to estimate, 
we believe that requiring institutions to report Perkins Loans on an 
award year basis, as FFEL and Direct Loan Program loans are reported, 
will increase the quality and integrity of Perkins Loan data and allow 
the Department to make meaningful comparisons between the Title IV loan 
programs for research and budgeting purposes. We also believe that 
reporting Perkins Loans on an award year basis will provide borrowers 
with a more accurate picture of their total indebtedness.
    The Department regularly consults with program participants in 
setting NSLDS reporting requirements in established workgroups that 
meet several times a year. We believe the regulations reflect this 
consultative process.
    With regard to the commenter who suggested that there should be 
weekly updates to NSLDS instead of the suggested 30-day timeframe, 
entities that wish to report to NSLDS on a weekly basis are able to so 
under current protocols. We decline to require weekly reporting 
requirements for all entities at this time, however, because we believe 
that small institutions would find such a standard difficult to manage.
    The Secretary agrees with commenters that the 30-day reporting 
timeframe does not leave guarantors adequate time to report data to the 
current loan holder in months that have 31 days.
    Changes: We have changed the reporting timeframe in Sec.  
682.401(b)(20) to 35 days.

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

    Comment: One commenter agreed that proper execution and retention 
of electronic loan records is necessary for program integrity reasons. 
Several other commenters stated that the proposed changes in Sec.  
674.19(e)(2)(ii) requiring a school participating in the Perkins Loan 
Program to develop and maintain a certification of its electronic 
signature process were overly broad, would discourage schools from 
using electronic notes, and would impose burdensome new record-keeping 
requirements. Other commenters stated that institutional compliance 
with these new requirements would be difficult unless the Department 
clearly defines these new requirements and provides schools with a 
``safe harbor'' of minimum compliance standards for Perkins Loans 
already signed electronically by borrowers. The commenters stated that 
the burden of complying with Sec.  674.50(c)(12)(i) for institutions 
would be difficult to justify given the few borrowers who might dispute 
the validity of the electronic signature at some future date.
    Several commenters stated that the requirement in Sec.  
674.50(c)(12)(ii)(B) that a school's certification include screen shots 
as they would have appeared to the borrower is impractical and 
unnecessary and asked that this requirement be eliminated.
    Discussion: The Department believes that the requirements in Sec.  
674.19(e)(2) that an institution create and maintain a certification 
regarding the creation and maintenance of electronically signed Perkins 
Loan promissory notes or MPNs in accordance with Sec.  674.50(c)(12) 
ensures that the school and the Department have the evidence to enforce 
an assigned loan if a challenge or factual dispute arises in connection 
with the validity of the borrower's electronic signature. Schools are 
required to take legal action to collect on a defaulted Perkins Loan in 
accordance with Sec.  674.46 of the Perkins Loan Program regulations. 
If a legal challenge to the validity of an electronic signature should 
arise in the course of litigating a defaulted Perkins Loan, a school 
will be in a much stronger legal position to prove that the borrower 
signed the loan and benefited from the proceeds of the loan. The need 
to ensure the integrity of the Perkins Loan Program justifies 
establishing electronic signature safeguards. Perkins Loan schools 
should generally not be incurring new costs or burden related to the 
certification of electronic signatures on promissory notes. In July of 
2001, the Department published its Standards for Electronic Signature 
in Electronic Student Loan Transactions (Standards) to facilitate the 
development of electronic processes under the Electronic Signatures in 
Global and National Commerce Act (E-Sign Act). These Standards provided 
guidance to FFEL Program lenders and guaranty agencies, and to schools 
in their role as lenders under the Perkins Loan Program, regarding the 
use of electronic signatures in conducting student loan transactions, 
including using electronic promissory notes. At that time, we informed 
loan holders and institutions in the FFEL or Perkins Loan Program that 
if their processes for electronic signature and related records did not 
satisfy the Standards and the loan was held by a court to be 
unenforceable based on those processes, the Secretary would determine 
on a case-by-case basis whether Federal benefits would be denied, in 
the case of the FFEL Program, or whether a school would be required to 
reimburse its Perkins Loan Fund, in the case of the Perkins Loan 
Program. If, as we assume, Perkins Loan holders are complying with the 
Standards, added burden or cost should not be an issue. The regulations 
in Sec.  674.50(c)(12) that describe what the certification must 
include are already very specific and detailed and a ``safe harbor'' is 
unnecessary. The only provision of these regulations that is not 
specific is

[[Page 61968]]

Sec.  674.50(c)(12)(ii)(F), which requires the certification to include 
``all other documentation and technical evidence requested by the 
Secretary to support the validity or the authenticity of the 
electronically signed promissory note.'' This provision is not intended 
to be overly burdensome on schools. This provision is intended to cover 
whatever documentation a school has that is not already listed in Sec.  
674.50(c)(12)(ii)(A) through (E).
    Lastly, the Department does not agree with the commenters' 
suggestion that inclusion of screen shots as they would have appeared 
to the borrower is impractical or unnecessary. The inclusion of screen 
shots in the certification is a critical part of the process to ensure 
that the promissory note is a valid, legal document, that the terms and 
conditions of the loan were properly represented to the borrower, and 
that the borrower was fully aware of the fact he or she was receiving a 
loan.
    Changes: None.
    Comment: One commenter suggested that the Department require each 
institution that participates in the Perkins Loan Program to designate 
an ``E-Sign Contact Person'' on its FISAP submission to enable 
institutions to meet documentation requests from the Secretary in a 
timely manner.
    Discussion: The Department believes this suggestion has merit and 
will consider implementing this proposal administratively. However, no 
change to the regulations is necessary.
    Changes: None.
    Comment: Many commenters stated that the 10-business day deadline 
required by Sec. Sec.  674.50(c)(12)(iii) and 682.414(a)(6)(iii) within 
which Perkins Loan and FFEL loan holders must respond to a request for 
evidence that may be needed to resolve a dispute with a borrower on a 
loan assigned from the Secretary was too short. One commenter 
recommended a 10-business day standard only if the request relates to 
pending litigation and an alternative, 30-day standard if the request 
is not related to litigation. One commenter recommended delaying 
implementation of the 10-business day deadline by one year to give 
institutions the opportunity to put in place the systems, policies, and 
capability to comply and produce the requested documentation. One 
commenter suggested adopting a 15-business day deadline with an option 
to appeal if the institution faces a special situation. Another 
commenter suggested a 25-business day deadline. One commenter requested 
that the Secretary withdraw this proposal completely.
    Discussion: The Department does not believe that a 10-business day 
deadline to respond to requests from the Secretary for evidence needed 
to resolve a dispute involving an electronically-signed loan that has 
been assigned to the Secretary is burdensome. The Department believes 
that 10 business days provides sufficient time for loan holders. The 
Secretary believes that a timely response to a request for information 
is essential to proper enforcement of a promissory note, especially 
when a borrower is contesting the validity of an electronic signature 
and that challenge involves court proceedings or court-imposed 
deadlines. Finally, we believe that delaying implementation of this 
deadline or not imposing any deadline would threaten the integrity of 
the FFEL and Perkins Loan Programs.
    Changes: None.
    Comment: Several commenters expressed concern regarding the 
provision in proposed Sec.  674.50(c)(12)(i)(B), under which the 
Department would require a Perkins Loan holder to provide testimony to 
ensure the admission of electronic records in a legal proceeding. These 
commenters requested that the Department clarify that the institution 
will not be responsible for any expenses related to this requirement.
    Discussion: Section 489 of the HEA and 34 CFR Sec.  673.7 of the 
General Provisions regulations for the Federal Perkins Loan, Federal 
Work Study, and Federal Supplemental Educational Opportunity Grant 
Programs provide for an administrative cost allowance that an 
institution may use to offset its cost of administering the campus-
based programs, including the costs related to the provision of 
testimony.
    Changes: None.
    Comment: One commenter requested that the Department revise Sec.  
682.409(c)(4)(viii), which would require a 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. The commenter asked that we change this provision to give 
guaranty agencies the option of providing the Secretary the name and 
location of the entity that created the original MPN or promissory note 
in response to the Secretary's request. The commenter believed this 
approach would provide flexibility for loan holders to continue to 
track the entity that created the original electronically signed MPN, 
while providing flexibility for new technological changes that may 
allow subsequent holders to obtain possession of an original electronic 
MPN record. This commenter also recommended a change in Sec.  
682.414(a)(6)(i) to allow the ``entity'' that created or the ``entity 
in possession'' of an original electronically signed promissory note 
respond to a request for information from the Secretary rather than the 
guaranty agency or lender that created the note for the same reason.
    Discussion: We disagree with the commenter that allowing a guaranty 
agency the option of providing the Secretary with the name and location 
of the entity that created the original MPN or promissory note meets 
the Department's needs. We also disagree that the ``entity'' that 
created or that is in possession of the original electronically signed 
promissory note would be the more appropriate party to respond to a 
request for information from the Department. If the Department needs 
the original, electronically signed MPN, it should be a simple matter 
for a guaranty agency to provide the name and location of the entity 
that possesses the document. Moreover, the lender and guaranty agency 
are the program participants that have the legal obligation to maintain 
program records and cooperate with the Secretary to enforce loan 
obligations.
    Changes: None.
    Comment: One commenter supported the provisions in Sec. Sec.  
674.19(e)(4)(ii) and 682.414(a)(5)(iv) requiring loan holders to retain 
an original of an electronically-signed MPN for three years until all 
the loans on the MPN are satisfied but requested clarification in the 
regulations as to the meaning of the term ``satisfied.''
    Discussion: The FFEL, Perkins and Direct Loan Program regulations 
already define when a loan is ``satisfied.'' In all three programs, a 
loan is ``satisfied'' if the loan has been canceled, repaid in full or 
discharged in full. In the Perkins Loan Program, a loan is also 
considered ``satisfied'' if the loan has been repaid in full in 
accordance with an institution's authority to compromise on the 
repayment of a defaulted loan in accordance with Sec.  674.33(e) or the 
institution writes off the loan in accordance with Sec.  674.47(h). 
Accordingly, we do not believe any further clarification in the 
regulations is needed.
    Changes: None.
    Comment: One commenter stated that the proposed regulations 
requiring a FFEL Program loan holder to retain an original of an 
electronically-signed MPN for three years after all the loans are 
satisfied is unmanageable. This commenter recommended that FFEL Program 
lenders be required to submit

[[Page 61969]]

electronic signature certifications and authentication records to the 
guarantor at the time a claim is submitted. The commenter believed that 
this approach would ensure that certification and authentication 
records are available and submitted consistently and promptly with each 
loan the guarantor assigns to the Department.
    Discussion: The Department carefully considered this approach 
during negotiated rulemaking, but after considering comments made 
during that process, we determined that, at this time, it would not be 
necessary to require FFEL Program lenders to submit electronic 
signature certifications and authentication records to the guarantor at 
the time a claim is submitted. Instead, consistent with our 
understanding of how paper notes are being handled in the student loan 
industry, we have adopted the framework contained in these final 
regulations, which puts the responsibility for managing the electronic 
promissory notes and ensuring their continued enforceability on the 
lenders and guaranty agencies that created them.
    Changes: None.
    Comment: One commenter recommended that the Department adopt the 
accessibility standards of section 101(d) of the E-Sign Act, which 
requires that electronic records ``remain accessible to all persons who 
are entitled to access * * * in a form that is capable of being 
accurately reproduced for later reference'' rather than the standard in 
proposed Sec.  682.414(a)(6)(iv), which requires a guaranty agency to 
provide the Secretary with ``full and complete access'' to electronic 
loan records. The commenter believed that the standard as currently 
proposed is burdensome and ambiguous. The commenter also requested a 
change in terminology in Sec.  682.414(a)(6)(iv) that would require the 
``entity in possession'' of the original electronically signed 
promissory note rather than the holder be responsible for ensuring 
access to electronic loan records.
    Discussion: The Department disagrees that using the accessibility 
standards of section 101(d) of the E-Sign Act rather than the standard 
in proposed Sec.  682.414(a)(6)(iv) is appropriate and believes that 
the term ``full and complete access'' is clear and straight forward. 
The Department also does not agree with the suggestion that we 
substitute the term ``entity in possession'' of the original 
electronically signed for ``holder'' in Sec.  682.414(a)(6)(iv). We 
believe the term ``entity'' is too vague for the purposes of these 
regulations.
    Changes: None.
    Comment: Several commenters suggested that the Department modify 
the regulations to include a provision that would end the requirement 
for certification of electronic signatures on MPNs after five years to 
evaluate the impact of the provisions on schools that participate in 
the Perkins Loan Program.
    Discussion: The Department does not believe it is necessary or 
advisable to ``sunset'' the provisions requiring the certification of 
electronic signature on MPNs after five years. These requirements are 
essential to the integrity of the Title IV loan programs and the 
Department's ability to enforce electronically-signed, assigned 
promissory notes. Additionally, the Department can evaluate the impact 
of these regulations without establishing a sunset date for these 
provisions.
    Changes: None.
    Comment: Several commenters requested that we establish a 
prospective effective date for the provisions requiring the 
certification of electronically-signed notes that includes only 
promissory notes signed on or after the effective date of the final 
regulations to allow program participants sufficient lead time to 
implement the changes.
    Discussion: The Department does not agree that these requirements 
should only apply to electronically-signed promissory notes made on or 
after July 1, 2008. As stated above in response to another comment, in 
July of 2001, the Department published Standards to facilitate the 
development of electronic processes under the E-Sign Act. We assume 
that FFEL Loan and Perkins Loan holders are complying with those 
standards and, therefore, should be ready to comply with these new 
requirements on July 1, 2008.
    Changes: None.

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

    Comment: One commenter suggested that the Department collect the 
Perkins Loan Program MPN and the records showing the date and amount of 
each disbursement of Perkins Loan Program funds at the time the loan is 
assigned to the Department and require an institution to respond to 
requests for information on an assigned loan for three years following 
assignment, rather than require the institution to retain the MPNs and 
disbursement records. The commenter believed that this approach would 
reduce burden and prevent data corruption or archiving problems for 
Perkins Loan Program institutions and would allow the Department 
immediate access to MPNs and disbursement records if the records were 
needed to enforce the loan.
    Discussion: The current Perkins Loan Program assignment procedures 
outlined in Dear Colleague Letter CB-06-12 (August 1, 2006) require a 
school to submit the original or a certified true copy of the 
promissory note upon assignment of the loan to the Department. The 
requirement in Sec.  674.19(e)(4)(ii) that an institution retain an 
original electronically signed MPN for three years after all the loans 
made on the MPN are satisfied applies to loans that have not been 
assigned to the Department. The regulations in Sec.  674.50(c)(11) 
allow the Secretary to request a record of disbursements for each loan 
made to a borrower on an MPN that shows the date and amount of each 
disbursement on a Perkins Loan that has been assigned to the 
Department. If a school wishes to submit the disbursement records to 
the Department when assigning a Perkins Loan, the school may do so.
    Changes: None.
    Comment: Several commenters asked that the Department implement a 
process to notify a Perkins Loan Program school when an assigned loan 
has been satisfied so that the school does not incur additional cost 
and burden when determining when it can destroy documentation 
supporting its electronic authentication and signature process and 
disbursement records.
    One commenter suggested that the Department provide schools the 
option to retain documentation supporting the school's electronic 
signature process and disbursement records for at least three years 
after the loan is assigned to the Secretary, rather than when the loan 
is satisfied, so that schools would know exactly when the three-year 
period begins and ends.
    Discussion: The Department believes that implementing a process to 
notify a school participating in the Perkins Loan Program that an 
assigned loan has been satisfied has merit and will explore the 
possibility for implementing such a process. Such a process, however, 
does not need to be reflected in the regulations.
    The Department continues to believe that it is vital for a school 
to retain disbursement records and documentation supporting its 
authentication and electronic signature process for at least three 
years from the date the loan is canceled, repaid or otherwise satisfied 
so that the Department has access to the documents if needed to enforce 
an assigned loan and to ensure the continued integrity of the Perkins 
Loan Program.

[[Page 61970]]

    Changes: None.
    Comment: Several commenters stated that the new record retention 
provisions requiring schools participating in the Perkins Loan Program 
to 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 were 
unduly burdensome.
    The commenters requested that instead of retaining a copy of each 
screen shot as it would have appeared to the borrower, the Department 
should require institutions to retain a ``description'' of each screen 
shot. The commenter also stated that requiring schools to retain ``all 
other documentary and technical evidence supporting the validity and 
authenticity of an electronically-signed note'' was so open-ended that 
schools would be forced to retain all material on the chance that the 
Department might request it at some future date.
    Discussion: As discussed earlier in this section, the Department 
believes that the retention of records will make it easier for the 
Department or the school to prove that a borrower benefited from the 
proceeds of a loan and will preserve program integrity. Moreover, we do 
not believe this requirement is overly burdensome or costly because it 
is consistent with the Department's current requirements and record 
storage experience. When the MPN was implemented in the Perkins Loan 
Program, schools were advised in Dear Colleague Letter CB-03-14 to 
retain documentation to support a borrower's loan transactions should 
the school need to enforce a loan made under a Perkins MPN. When the 
Perkins Loan Program MPN was updated and reissued in June of 2006, 
schools were specifically directed in Dear Colleague Letter CB-06-10 to 
retain disbursement records to support a borrower's loan transactions. 
This guidance, together with the record retention provisions in 34 CFR 
668.24 that require a school to retain disbursement records for three 
years after the disbursement is made, ensures that schools should be in 
possession of the required records already. Further, existing 
Assignment Procedures in Dear Colleague Letter CB-06-12 specifically 
require schools to retain disbursement records on assigned loans made 
under an MPN until the loan is paid-in-full or otherwise satisfied and 
submit those records if requested to do so by the Department. As we 
stated in response to an earlier comment, screen shots are part of the 
loan making process and also provide evidence that a borrower who 
signed an MPN or promissory note electronically was aware that he or 
she was receiving a loan. It is the Department's experience that 
electronic storage of records supporting Title IV loans transactions 
are generally cost efficient.
    Changes: None.
    Comment: One commenter requested that the Department confirm that 
an institution is only required to retain the documentation and 
templates that apply to electronically-signed MPNs signed for a 
specified time period during which the institution's process remained 
unchanged, and that it will not be necessary for institutions to retain 
this documentation on a loan-by-loan basis.
    Discussion: The commenter is correct that an institution is 
required to retain the documentation and templates that apply to all of 
an institution's electronically-signed MPNs for discrete periods of 
time. We wish to emphasize that should any aspect of an institution's 
electronic signature process change, the institution must document the 
new process in the affidavit or certification required by Sec.  
674.50(c)(12).
    Changes: None.
    Comment: One commenter requested that we clarify what would 
constitute an ``original'' electronically-signed MPN under the proposed 
Perkins Loan record retention requirements. The commenter stated that 
if an ``original'' electronically-signed MPN means that a school can 
print a copy of the signed MPN, the Department should not use the word 
``original.'' However, if the Department's intent is to require a 
school to produce something more than a paper copy of the MPN, the 
commenter requested that the Secretary provide schools and servicers 
additional time to ensure their ability to meet the new requirements 
before the regulations take effect.
    Discussion: An institution or its servicers should have a system 
designed so that the signed electronic record is designated as the 
``authoritative'' copy of the promissory note and must be able to 
reproduce an electronically signed promissory note, when printed or 
viewed, as accurately as if it were a paper record. The institution or 
its servicer should enable the viewing or printing of electronic 
records using commonly available operating systems and hardware. 
Designation of the electronic note created by the institution as the 
``original'' is a useful means for designating the electronic note that 
the institution must retain under these regulations.
    Changes: None.
    Comment: One commenter asked that we clarify whether the 
requirement to retain documentation of the ``date and amount of each 
disbursement'' of Perkins Loan Program funds referred to records 
reflecting the date the money was applied to a borrower's account or to 
records showing the date the funds were awarded. Another commenter 
requested clarification on the timeframe under which an institution 
would be required to submit Perkins Loan disbursement records.
    Discussion: The requirement to retain documentation of the ``date 
and amount of each disbursement'' of loan funds refers to the amount 
and date that Perkins Loan Program funds were applied to a borrower's 
account. An institution may, but is not required to, submit 
disbursement records to the Department when it assigns a Perkins Loan. 
If an institution does not submit the disbursement records to the 
Secretary when assigning a Perkins Loan, it must retain the records for 
three years from the date the loan is canceled, repaid, or otherwise 
satisfied in case the Secretary needs the records to enforce the loan.
    Changes: None.
    Comment: Several commenters stated that guarantors are not 
currently required to collect the record of the lender's disbursement 
of Stafford and PLUS loan funds to a school for delivery to the 
borrower as part of the claims process nor are they required to submit 
loan disbursement data under the current process for assigning loans to 
the Secretary. For these reasons, the commenters stated that 
disbursement records may not be readily available for submission in the 
FFEL mandatory assignment process as required by proposed Sec.  
682.409(c)(4)(vii). The commenters requested that the Department 
implement any new guaranty agency reporting obligation prospectively 
for new Stafford and PLUS loans made under an MPN on and after July 1, 
2008 to give sufficient lead time to guarantors and lenders to 
establish the processes to support this new requirement. Another 
commenter, again citing the lack of availability of disbursement 
records through the claims process, recommended that the Secretary 
require the submission of the record reflecting the date of guarantee 
instead and only for loans that are under investigation by the 
Secretary.
    Discussion: The Department's longstanding regulations in Sec.  
682.414(a)(4)(ii)(D) have directed guaranty agencies to require a 
participating lender to maintain current, complete, and accurate 
records of each loan that it holds, including but not limited to, a 
copy of a record of each disbursement of loan proceeds. Although these 
records are not collected

[[Page 61971]]

as part of the claims process, these records must be retained in 
accordance with Sec.  682.414(a)(4)(ii)(D). For this reason, the 
Department sees no reason to implement these new regulations 
prospectively and is confident that guaranty agencies and lenders can 
implement a process that provides for the submission of disbursement 
records as part of the mandatory assignment process before the 
regulations become effective on July 1, 2008.
    Changes: None.
    Comment: Several commenters suggested that we revise the provision 
in Sec.  682.414(a)(5)(iv) requiring a lender to retain an original 
electronically signed Stafford or PLUS MPN for three years after all 
loans made under the MPN are satisfied to require the ``entity in 
possession'' of the original electronically signed MPN, rather than the 
``holder,'' to retain the note for a period ending on the earlier of 20 
years from the date of signature or the date all the loans on the MPN 
have been satisfied. The commenters stated that this change would 
address cases when a loan is assigned to another party, such as the 
guarantor or Secretary, and the lender has no way of knowing when all 
the loans under the MPN are satisfied. The commenter stated that this 
change would also address the fact that the life span of record 
retention technology has a practical limit.
    Discussion: As stated in response to comments discussed earlier, 
the Department believes using the term ``entity'' in the context of 
Sec.  682.414 is too vague. The intent of the regulations is to create 
a legal obligation on the lender and guaranty agency that created the 
promissory note to cooperate with the Secretary.
    Changes: None.

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

    Comments: Overall, commenters were supportive of the proposed 
changes to the loan counseling regulations, but some commenters had 
questions or concerns regarding the proposed changes.
    One commenter asked if the notification requirements specified in 
Sec.  682.603(d) would be met if the information listed were provided 
to borrowers through the school's financial aid award letter process.
    Several commenters noted that the proposed regulations would 
require schools to provide one set of initial counseling materials to 
student PLUS borrowers who have received prior Stafford Loans and 
another set of initial counseling materials to student PLUS borrowers 
who have not received prior Stafford Loans. The commenters acknowledged 
that establishing less comprehensive initial counseling requirements 
for student PLUS borrowers who have already received Stafford Loan 
initial counseling was intended to minimize burden on schools. However, 
these commenters stated that separate initial counseling requirements 
would actually be more burdensome. For some schools, separating student 
PLUS borrowers into different categories for initial counseling 
purposes would be more cumbersome than providing the same initial 
counseling to all student PLUS borrowers.
    Several commenters noted that proposed Sec.  682.604(f) is 
disjointed and hard to follow. These commenters recommended 
restructuring Sec.  682.604(f).
    Discussion: The regulations do not specify a method a school must 
use to notify a student PLUS Loan borrower of the student's eligibility 
for a Stafford Loan, the different terms and conditions of PLUS and 
Stafford loans, and the opportunity to request a Stafford Loan instead 
of a PLUS Loan. The regulations only specify that this information must 
be provided to the student before the loan is certified, in the case of 
a FFEL Loan (see Sec.  682.603(d)), or before the loan is originated, 
in the case of a Direct Loan (see Sec.  685.301(a)(3)). If the 
financial aid award letter includes the required information, and is 
provided to the student before the loan is certified or originated, it 
would meet the requirements of Sec.  682.603(d) or Sec.  685.301(a)(3), 
as the case may be.
    Many schools no longer provide in-person loan counseling, and 
instead use electronic, interactive counseling programs. Often these 
electronic, interactive counseling programs are developed by guaranty 
agencies and provided to schools. We believe that the benefits of a 
more informed borrower, particularly for graduate and professional PLUS 
borrowers who have access to significantly increased loan amounts, 
outweigh the costs of providing the additional loan counseling. In 
addition, schools are not required to provide separate counseling for 
student PLUS borrowers. Schools are not required to develop separate 
initial counseling materials for student PLUS borrowers with prior 
Stafford Loans and student PLUS borrowers without prior Stafford Loans. 
The regulations only specify minimum initial counseling requirements. 
Schools must provide certain information to PLUS borrowers who have 
received prior Stafford loans, and must provide certain information to 
PLUS borrowers who have not received prior Stafford Loans. The 
regulations do not prohibit schools from exceeding the minimum initial 
counseling requirements. If a school finds that providing comprehensive 
initial counseling to all student PLUS borrowers is more cost effective 
than providing the limited counseling required by the regulations, a 
school may provide the comprehensive counseling to all student PLUS 
borrowers.
    We agree with the commenters' recommendations regarding the 
restructuring of Sec.  682.604(f).
    Changes: We have restructured Sec.  682.604(f). Revised Sec.  
682.402(f) begins with a discussion of initial counseling requirements 
for Stafford Loan borrowers, then discusses initial counseling 
requirements for student PLUS Loan borrowers, and ends with a 
discussion of general initial counseling requirements.

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

    Comment: Commenters were in unanimous support of the Secretary's 
proposal to 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 Programs. One commenter noted that the 
regulatory change would require loan origination systems changes. 
Another commenter noted that the change would require the removal of a 
system edit used by some guaranty agencies to monitor school loan 
certification. This commenter asked the Secretary to confirm that this 
regulatory change would have no impact on a school's reporting to 
NSLDS.
    One commenter asked the Secretary to further clarify in the 
preamble to these final regulations the relationship of the longer loan 
period to loan limits and the definition of academic year. Another 
commenter asked that we clarify in the preamble that the intent of the 
regulations is to avoid potential misunderstandings among schools that 
might lead to the application of a single Stafford annual loan limit 
for a period spanning multiple academic years.
    Discussion: The Secretary appreciates the commenters' support. The 
Secretary understands that this regulatory change may require lenders 
and guaranty agencies to make changes in their loan origination 
systems. The Secretary believes that the effective date of the 
regulations under the master calendar provisions of the HEA provides 
sufficient time for these changes to be made.

[[Page 61972]]

    The intent of the regulations generally is not to allow schools to 
certify a single Stafford annual loan limit for a period spanning 
multiple years, although borrowers attending non-term and certain 
nonstandard term programs on a less-than-full-time basis may have loan 
periods that span more than the period associated with an academic year 
for a full-time student. Schools are still expected to monitor annual 
loan limit progression by the school's academic year, which must meet 
at least the minimum standards defined in 34 CFR 668.3. Annual loan 
limits continue to apply to the academic year or the period of time 
necessary for a student to progress to the next grade level as 
referenced in Sec.  682.401(b)(2)(ii). Unless a school uses standard 
terms and is authorized to certify loans by the term, most loan 
certifications will also continue to be for the academic year according 
to the school's defined Title IV academic year.
    The proposed changes to Sec. Sec.  682.401, 682.603, and 685.301 
are intended to allow a school to certify a single loan for students in 
shorter, non-term or nonstandard term programs (for example, a 15 month 
program when the school's Title IV academic year encompasses 10 
months). The change will also provide greater flexibility in 
rescheduling loan disbursements for students in non-term and certain 
nonstandard term programs who are progressing academically in their 
programs more slowly than anticipated, or who drop out and return 
within the permitted 180-day period to retain Title IV disbursements. 
The Secretary clarifies that this change has no impact on school 
reporting to the Department's NSLDS.
    Change: None.

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

Justification for Mandatory Assignment
    Comments: A large number of schools commented on this proposal, 
challenging the Department's justification for requiring mandatory 
assignment of defaulted Perkins Loans. These schools acknowledged that 
the Department has collection methods unavailable to the schools, but 
noted that schools have collection methods, such as withholding 
transcripts and placing administrative holds on services, that the 
Department does not have.
    Many of these schools identified the amount of outstanding Perkins 
Loan balances they would lose upon implementation of these regulations. 
These schools argued that the loss of potential collections on these 
loans removes an income source for their Perkins Loan Fund, and reduces 
the number of Perkins Loans available to future borrowers. These 
commenters pointed out that there has been no Federal Capital 
Contribution (FCC) in the Perkins Loan Program in recent years, and 
asserted that the mandatory assignment proposal would further deplete a 
school's Perkins Loan Fund.
    These schools also identified their recovery rates on Perkins Loans 
they hold that are in default for seven or more years. They based their 
calculations on the outstanding amounts on these loans, and the amounts 
collected in the preceding three years. Recovery rates reported by the 
commenters ranged from a low of seven percent to a high of 79 percent. 
The schools argued that the Department has not demonstrated that it has 
a higher recovery rate on defaulted Perkins Loans than the schools.
    Discussion: The Department acknowledges that schools have 
collection tools that are unavailable to the Department. However, the 
low recovery rates reported by many schools indicate that these tools 
are not generally effective. The mandatory assignment requirements will 
have little impact on schools that do use these tools effectively to 
collect on defaulted loans. If even one payment is received on a 
defaulted loan in the year prior to the Department requiring 
assignment, the loan would not be eligible for mandatory assignment. In 
addition, it is our experience that many schools maintain holds on 
transcripts and other administrative services after they assign Perkins 
Loans to the Department. We expect that schools will continue this 
practice for mandatorily assigned loans. The Department's estimated 
savings resulting from mandatory assignment are provided in the 
Accounting Statement in Table 1 of the Regulatory Impact Analysis.
    The Department is aware of the large amount of aged, defaulted 
Perkins Loans held by schools with little or no collection activity. As 
noted in the preamble to the NPRM, our records show that schools are 
holding more than $400,000,000 in such loans. The commenters' 
submissions identifying the amounts of Perkins Loan funds schools may 
lose under the regulations illustrate the magnitude of the problem. The 
data showing large amounts of old defaulted Perkins Loans which schools 
have been unable to collect supports requiring mandatory assignment.
    With respect to the Department's recovery rates, defaulted Perkins 
Loans that are assigned to the Department under the current voluntary 
assignment procedures are assigned for such reasons as hardship, 
incarceration, refusal to pay, and the school's inability to locate the 
borrower. Schools are required to undertake first-year and second-year 
collection efforts before assigning Perkins Loans to the Department, 
although schools may dispense with the second-year collection efforts 
and assign a loan to the Department after the first year collection 
efforts have failed. Thus, the defaulted Perkins Loans that are 
assigned to the Department through voluntary assignment are loans that 
schools consider uncollectible.
    The Department's analysis of its recovery rate on these defaulted 
Perkins Loans shows that, as of August 30, 2007, the Department's 
recovery rate is:
     53.90 percent for loans assigned to us in 2002.
     45.90 percent for loans assigned to us in 2003.
     36.02 percent for loans assigned to us in 2004.
    The recovery rates show increased collections on defaulted Perkins 
Loans the longer the Department holds the loans. We believe the 
Department's recovery rate on defaulted Perkins Loans compares 
favorably to the schools' self-reported recovery rates. Therefore, we 
strongly believe that requiring assignment of these loans to the 
Department, as described in these regulations, is in the best interests 
of the taxpayers and the government.
    Changes: None.

Alternatives to Mandatory Assignment

    Comments: Several commenters suggested alternatives to the 
mandatory assignment proposal. Some commenters suggested that the 
Secretary re-institute a version of the referral program that existed 
in the 1980s. Under a referral program, schools could voluntarily 
assign loans to the Department; the Department would collect on the 
loans, and would return a portion of the collections to the school that 
assigned the loan. Other commenters suggested a variation of the 
referral program under which the Department would return funds not to 
individual schools, but to the Perkins Loan Program generally. Under 
this proposal, the amounts the Department collects on assigned loans 
would be re-allocated to schools participating in the Perkins Loan 
Program, using the standard allocation formula.
    Commenters recommended streamlining the voluntary assignment 
process, improving the Default Reduction Assistance Program (DRAP), and 
re-instituting the IRS Skiptracing

[[Page 61973]]

Service, as alternatives to mandatory assignment.
    Discussion: As discussed in the preamble to the NPRM, the referral 
program the Department administered in the 1980s was not a success. We 
continue to believe, and the commenters did not provide us with any 
basis for modifying our position, that a revival of that program would 
not be in the Federal fiscal interest.
    With regard to the proposals for a streamlined voluntary assignment 
process and for re-instituting the IRS Skiptracing Service, we note 
that the Department has already streamlined the voluntary assignment 
process significantly. We have reduced the supporting documentation 
required for assignment, simplified the assignment form, and 
implemented a process allowing for the submission of assignment 
packages in groups. However, these changes have not significantly 
increased the number of voluntarily assigned Perkins Loans.
    The commenter requesting that we improve DRAP did not indicate what 
the perceived deficiencies of that program are, or make any specific 
recommendations for improvements. DRAP is intended as a final effort to 
prevent a loan that is about to go into default from going into 
default. Any improvements to DRAP would have little impact on loans 
that have been in default for seven or more years.
    The Department is renewing its computer-matching agreement with the 
Internal Revenue Service to re-institute the IRS Skiptracing Service. 
Schools and guaranty agencies that have an approved Safeguard Report 
will be able to access the Student Aid Internet Gateway (SAIG) to 
request and receive data through their mailboxes. The Department is 
currently working to make this service available to guaranty agencies 
and schools. Announcements on the availability of the IRS Skiptracing 
Service will be posted to the Department's Information for Financial 
Aid Professionals (IFAP) Web site. To the extent that the IRS 
Skiptracing Service is helpful to schools in locating borrowers of 
defaulted Perkins Loans, it should reduce the number of loans that will 
meet the criteria for mandatory assignment. We will also consider 
improving the DRAP program in the future.
    Changes: None.

Criteria for Mandatory Assignment

    Comments: Many commenters suggested that if the Department requires 
mandatory assignment of Perkins Loans, it should modify the criteria 
for mandatory assignment. Generally, commenters recommended increasing 
the outstanding loan balance and the number of years in default that 
would trigger assignment from $100 to $1,000 and from seven years to 
ten years, respectively. Commenters argued that a ten-year period of 
default made sense, because the maximum repayment period for a Perkins 
Loan is ten years. One commenter claimed that many defaulted borrowers 
are willing and able to repay their defaulted loans after five to ten 
years in default. The commenter asserted that a borrower who has been 
in default for this length of time is often in a position to take out a 
mortgage on a home or to obtain a loan for some other large purchase. 
Such a borrower would seek to repay defaulted Perkins Loans to improve 
his or her credit report. Another commenter stated that this often 
occurs after 15 years in default.
    Several commenters recommended that we exempt schools with low 
default rates from the mandatory assignment requirements. Commenters 
also recommended that accounts on which the schools have acquired a 
judgment against the borrower be exempted. The commenters noted that 
schools spend a significant amount of time and effort securing 
judgments on loans and stated that it was not fair to require schools 
to assign judgment accounts. One school noted that a judgment may 
include both private loans and Perkins Loans, making it difficult for 
the school to separate the Perkins Loan from the private debt for 
assignment purposes.
    Finally, a large number of commenters noted that if the Department 
required assignment of all loans that meet the criteria for assignment 
in the proposed regulations, it would result in a huge inventory of 
assignments. The Department would have difficulty absorbing such a 
large influx of assigned loans. These commenters recommended that the 
Department begin mandatory assignment with loans that are 15 years past 
due, and gradually move towards loans that are seven years past due.
    Discussion: In the preamble to the NPRM, we discussed in 
considerable detail different alternatives for requiring the assignment 
of defaulted Perkins Loans to the Department.
    Rather than attempting to pinpoint a specific time when borrowers 
tend to be motivated to pay off their defaulted loans, the Department 
proposed to model the Perkins Loan mandatory assignment requirements on 
the mandatory assignment requirements in the FFEL Program. Under the 
mandatory assignment process in the FFEL Program, a FFEL Loan is in 
default for a little over six years before it is assigned to the 
Department. Based on that precedent, in these final regulations, the 
Department has adopted a standard of seven years for Perkins Loans.
    Similarly, the standard of a balance of $100 or more on a loan 
before mandatory assignment will be required is consistent with the 
requirement for mandatory assignment of FFEL loans. We continue to 
believe that these standards are reasonable.
    We do not agree with the proposal to exempt schools with low cohort 
default rates from the mandatory assignment requirement. Cohort default 
rates are based on collections in the first three years after a loan 
enters repayment status. Cohort default rates do not measure a school's 
success at collecting on loans that have been in default for several 
years and are not relevant to the loans that will be subject to 
mandatory assignment. While it may be correct that schools with low 
cohort default rates have fewer loans in default for seven years or 
more than schools with higher cohort default rates, this fact does not 
support a conclusion that the schools with low cohort default rates are 
successful at collecting on loans that have been default for seven 
years or more.
    The Department also disagrees with the recommendation that loans on 
which the school has secured a judgment be exempted from mandatory 
assignment. Securing a judgment on an account is a helpful collection 
tool, but it does not ensure that the borrower will make payments on 
the debt. We acknowledge that Perkins Loans that have been merged into 
judgments may need to be handled differently than regular Perkins Loans 
for purposes of mandatory assignment. The Department will develop 
procedures for the assignment of judgment accounts as the Department 
operationalizes the mandatory assignment process.
    We agree with the recommendation by many commenters that we phase-
in mandatory assignment. The regulations establish the minimum criteria 
for mandatory assignment. The regulations do not preclude the 
Department from phasing-in mandatory assignment by starting the process 
with loans that have been in default for more than the seven-year 
minimum. Phasing-in mandatory assignment will ease disruption to both 
the schools and the Department.
    Changes: None.

Legal Basis for Mandatory Assignment in the Perkins Loan Program

    Comments: Some commenters questioned the Department's legal

[[Page 61974]]

authority to require the assignment of Perkins Loans, arguing that 
section 463(a)(4)(A) of the HEA provides for mandatory assignment in 
certain limited circumstances and precludes the Secretary from 
requiring mandatory assignment in other circumstances.
    Discussion: Section 463(a)(9) of the HEA authorizes the Secretary 
to add provisions to the program participation agreement for schools 
where the Secretary has determined that the provision is necessary to 
protect the United States from unreasonable risk of loss. For the 
reasons discussed in the NPRM and these final regulations, the 
Secretary has determined that the mandatory assignment regulations as 
proposed, which will allow the Secretary to require participating 
schools to assign defaulted loans that meet the criteria in the 
regulations, are necessary to protect the United States from 
unreasonable risk of loss. The sections of the HEA cited by the 
commenters do not prevent the Secretary from exercising her authority 
under section 463(a)(9) of the HEA.
    Changes: None.

Reasonable Collection Costs (Sec.  674.45)

Collection Cost Caps
    Comments: Several commenters stated that the proposed caps on the 
collection costs that may be charged to borrowers in the Perkins Loan 
Program are too high, and should be reduced. Generally, these 
commenters recommended reducing the cap to 24 percent, which would be 
consistent with the cap on collection costs in the FFEL Program.
    One commenter stated that the proposed regulations would not 
sufficiently limit collection costs. This commenter noted that the 
Perkins Loan Program is intended to benefit needy students. The 
commenter argued that it is reasonable to expect that a portion of low-
income borrowers receiving Perkins Loans would have difficulty repaying 
these loans. These borrowers are often the ones least likely to be 
aware of their repayment options, and most likely to get caught in a 
spiral of increasing collection costs. As collection costs are added to 
the loan, the outstanding balance increases so rapidly that the ability 
to pay off the loan becomes further and further out of reach.
    This commenter also challenged the fee-on-fee method of assessing 
collection costs. Under the fee-on-fee method, collection agencies that 
charge contingency fees charge a ``make whole rate'' to borrowers. The 
commenter asserted that many States prohibit or limit the use of make 
whole rates for other types of consumer debt, and the Department should 
do likewise for Perkins Loans.
    Other commenters, who believed the collection cost caps are too 
low, supported the use of a make whole rate, and asked the Department 
not to abandon this approach for the Perkins Loan Program.
    Several commenters recommended increasing the collection cost caps. 
Generally, these commenters recommended increasing the collection cost 
caps to:
     33 percent for first collection efforts.
     40 percent for second collection efforts.
     50 percent for collection efforts arising out of 
litigation.
     50 percent for collection efforts against borrowers living 
abroad.
    Several commenters who recommended increasing or eliminating the 
collection cost caps argued that the proposed caps will make it 
financially difficult for schools to collect on defaulted Perkins 
Loans. These commenters said that schools will have to pay more for 
collections than they can charge to the students. As a result, schools 
would charge the difference to the Perkins Loan Fund, thus depleting 
the Fund. The amount of funds that could then be lent out to future 
students would be reduced. In response to these comments, other 
commenters noted that the purpose of assessing collection costs against 
a borrower is not to create an income stream for schools' Perkins Loan 
Funds.
    Several commenters also argued that the quality of collection 
efforts will suffer under the proposed collection cost caps.
    Discussion: The Department declines to adopt the commenters' 
recommendation to reduce the collection cost caps to the same level as 
those in the FFEL Program. Perkins Loans are low-balance loans compared 
to FFEL loans, but the cost of collection is about the same. Because 
the return on collecting Perkins Loans is smaller than the return on 
collecting FFEL loans, we believe that higher collection cost caps are 
warranted in the Perkins Loan Program. The Department also disagrees 
with the commenters' recommendations for increasing the collection cost 
caps. We believe that the caps as proposed strike a fair balance 
between the concerns of borrowers and the concerns of the Perkins Loan 
Program schools and collection agencies.
    With regard to contingency fees, the Department is not abandoning 
the make whole rate for Perkins Loan collections. The Department does 
not regulate the establishment of fees in a contract between a Perkins 
Loan Program school and a collection agency. However, institutional 
contracts must provide for the recovery to the Perkins Loan Fund of the 
outstanding balance of the loan. Since a collection agency incurs 
additional expenses associated with collecting these amounts, the 
school may authorize the collection agency to also recover these 
expenses from the borrower.
    Collection agencies frequently charge contingency fees to 
borrowers. The Department's rule on assessing collection costs on a 
contingency fee basis to an individual who owes a debt to the 
Department is in 34 CFR 30.60 and is commonly referred to as the fee-
on-fee method. While this method of assessing collection costs is not 
required in the Perkins Loan Program, many schools and servicers use it 
because it makes the Fund whole. The make whole rate is the amount by 
which the borrower's debt is multiplied to determine the amount that 
the collection agency needs to collect to recover 100 percent of the 
outstanding balance.
    Thus, a collection cost cap of 30 percent means that, for loans 
collected on a contingency fee basis, the actual collection costs 
charged to the borrower must be less than 30 percent.
    We expect that when these regulations take effect, collection 
agencies that collect on Perkins Loans will adjust their contingency 
fees to comply with the new regulatory requirements. Collection 
agencies that charge a make whole rate to borrowers will have to take 
that into account when adjusting their contingency fees.
    Some schools argue that they have little choice but to agree to 
high contingency fees when they negotiate contracts with collection 
agencies. Given the inability of many schools to secure favorable terms 
with collection agencies collecting on Perkins Loans, the Department 
believes that the most effective way to reduce these collection costs 
in the Perkins Loan Program is to mandate collection cost limits.
    We agree with the commenters who argued that the purpose of 
assessing collection costs is not to create an income stream for a 
school's Perkins Loan Fund. Additionally, Sec.  674.47(e)(3) and (4) 
limits the amount of unpaid collection costs that a school may charge 
to the Fund to 30 percent for first collection efforts, and 40 percent 
for second collection efforts. These limits match the limits on 
collection costs that may be charged to borrowers established in the 
final regulations.
    Changes: None.

[[Page 61975]]

Additional Concerns

    Comments: Several commenters raised additional concerns with regard 
to the proposed caps, or recommended modifications to the proposed 
regulations. One commenter recommended restricting the amount of 
collection charges that may be charged to a borrower from average costs 
to actual costs. This commenter stated that allowing agencies to assess 
average costs against a borrower is unfair, since the actual collection 
cost incurred with respect to a particular borrower may be lower than 
the average costs that the borrower is charged.
    Some commenters recommended applying the caps only to collection 
costs incurred by collection agencies on a contingency fee basis, not 
on the costs incurred by schools for their own internal collection 
efforts. These commenters argued that the unreasonably high collection 
costs seen in the Perkins Loan Program are due to collection agency 
contingency fees, not collection activities carried out by Perkins Loan 
Program schools.
    Other commenters recommended that the cap on litigated loans be 
removed, and be replaced by an amount defined by the court.
    Another commenter argued that informing borrowers of the new 
collection cost caps would be administratively burdensome.
    Another commenter said the regulations would be inconsistent with 
Sec.  674.45(e), which requires schools to assess all reasonable 
collection costs to borrowers.
    Discussion: Allowing schools to charge only actual costs to the 
borrower is unworkable and inconsistent with standard collection 
practices on student loans and other debts. Requiring lenders to 
identify specific actual costs for every borrower that the lender 
collects on would be administratively burdensome and not cost 
effective.
    We do not see any justification for applying the caps only to 
collection costs incurred by collection agencies. From a borrower's 
perspective, collection costs are collection costs. It makes little 
difference whether the costs were incurred by a collection agency or by 
the school.
    With regard to litigated loans, a court may remove all collection 
charges from a loan as part of a judgment. The regulations establishing 
collection cost caps on loans that are litigated do not preclude a 
court from lowering the collection charges or eliminating the 
collection charges altogether when the court issues a judgment.
    The regulations do not impose a requirement that schools notify 
borrowers of the collection cost caps. Collection costs also are not 
among the items that a school must discuss during its exit interviews 
with borrowers.
    Finally, the regulations do not conflict with the reasonable 
collection costs provisions in the existing regulations. As amended by 
these final regulations, Sec.  674.45 defines ``reasonable collection 
costs'' chargeable to the borrower as costs within the proposed caps.
    Changes: None.

Child or Family Service Cancellation (Sec.  674.56)

    Comment: Commenters were overwhelmingly supportive of the proposed 
clarifications to Sec.  674.56, regarding cancellation of loans for 
individuals working in the child or family service areas. However, two 
commenters had questions about this provision.
    To qualify for a child or family service cancellation, among other 
requirements, an otherwise eligible borrower must be employed full-time 
by a child or family service agency. One commenter asked if employment 
by a child or family service agency would disqualify an attorney for 
the cancellation, because the agency, rather than the children the 
agency serves, is considered to be the attorney's client.
    A second commenter noted that the child or family service 
cancellation would be one of the hardest cancellations in the Perkins 
Loan Program to qualify for, and asked if that was the intent of 
Congress when the law was passed.
    Discussion: An attorney who is an employee of a child or family 
service agency must meet the same eligibility requirements as any other 
non-supervisory employee of a child or family service agency to qualify 
for the loan cancellation. The attorney must provide services directly 
and exclusively to high-risk children from low-income communities.
    The determination of whether a borrower qualifies for a discharge 
is made on a case-by-case basis and would require consideration of the 
attorney's specific responsibilities. However, in general, if the 
attorney represents the agency in court, the attorney is not providing 
services directly to the child.
    If the attorney represents children in court such as in the role of 
a guardian ad litem, the attorney would be considered to be providing 
services directly to the child. If the other eligibility criteria for 
the cancellation are met, the attorney would qualify for a child or 
family service cancellation.
    With respect to the comment about the difficulty of qualifying for 
this cancellation, section 465(a)(2)(I) of the HEA, which establishes 
the child or family service cancellation, is very narrowly written. The 
statute requires employment at a certain type of agency and the 
provision of services to a specific population. The borrower must 
provide services to children who are both ``high-risk'' and come from 
``low-income communities.'' Section 469(a) and (b) of the HEA defines 
both of these terms. The final regulations are consistent with the 
statutory language.
    Changes: None.

Prohibited Inducements (Sec. Sec.  682.200 and 682.401)

    Comment: Many commenters endorsed the Secretary's efforts to 
clarify the regulations on improper inducements and improve enforcement 
of the law, but disagreed with various aspects of the proposed 
regulations. Several commenters thought the proposed regulations were 
not sufficiently strict. Several U.S. Senators commended the Secretary 
on the proposed regulations, particularly the use of the rebuttable 
presumption to more effectively enforce the anti-inducement 
requirements. Several commenters thought that the Department's lack of 
oversight and enforcement of current requirements was a bigger problem 
than the content of the regulations. One association representing 
school business officers cautioned against the unintended consequences 
of the proposed regulations and expressed concern that the regulations 
could affect the wide range of relationships between colleges and 
universities and financial institutions. That commenter also noted that 
financial institutions were very heavily engaged in philanthropic 
endeavors in higher education and expressed concern that any perceived 
risk to the lender could result in those needed dollars being invested 
elsewhere.
    One commenter saw no basis for having different rules for lenders 
and guaranty agencies in regard to prohibited inducements.
    Discussion: The Secretary thanks the commenters for their support 
and comments on this very complex and urgent issue affecting the FFEL 
Program. The Secretary believes that this regulatory effort will result 
in clearer regulatory guidelines for schools, lenders, and guaranty 
agencies participating in the FFEL program. The detailed provisions in 
the form of permissible and impermissible activities that govern the 
interaction between lenders, guaranty agencies, and schools will assist 
these parties in avoiding

[[Page 61976]]

violations of the law. The increased regulatory clarity and specificity 
will also improve the Secretary's ability to enforce the law in this 
area. Student and parents served by the program, and the taxpayers that 
support it, will have renewed trust in the integrity and transparency 
of the loan process. Students and parents will clearly understand that 
they have a choice of lender and can exercise that choice. Absent 
questionable payments and activities between schools and lenders, 
students and parents will view a school's financial aid office once 
again as an unbiased source of information on the FFEL loan process and 
on the factors a prospective borrower should consider in selecting a 
lender. Borrowers will be more likely to receive clear comparisons 
between the benefits offered under the Federal student loan programs 
and under private education loan programs without concern that 
prohibited payments or other forms of assistance by a lender to a 
school will influence a school's counseling such that a borrower 
receives a loan with less favorable terms and conditions.
    The Secretary understands commenters' concerns about unintended 
consequences for other contractual services performed for schools by 
financial institutions and their affiliates, and on philanthropic 
giving to higher education. However, she believes that contracted 
services between financial institutions and schools in non-student aid 
related areas will not be affected by these regulations as long as the 
arrangements are negotiated in good faith and are not undertaken to 
secure FFEL loan applications or limit a borrower's choice of lender. 
Likewise, the Secretary believes that financial institutions will 
continue to provide philanthropic support to institutions. These 
philanthropic relationships need not change as long as they have not 
been undertaken to secure FFEL loan applications or limit a borrower's 
choice of lender. She feels confident that schools and financial 
institutions will take all the prudent steps necessary to ensure that 
there are no conflicts of interest between the financial institution's 
role as a FFEL lender and its philanthropic support of higher 
education.
    Finally, the Department believes that the regulations properly 
treat guaranty agencies and lenders differently for purposes of 
improper inducements. Guaranty agencies are responsible for lender and 
school oversight and training, default prevention, outreach and 
financial literacy, and lender claim review and payment and the 
regulations need to recognize the important roles these agencies play 
in these areas. In contrast, under the HEA, the lender's roles are to 
provide loans for eligible borrowers and collect those loans in 
accordance with the Secretary's regulations.
    Changes: None.
    Comment: Some commenters recommended that the Department clarify in 
the final regulations that State laws relating to the inducement 
practices of lenders, schools and loan guarantors within the FFEL 
Program are preempted.
    Discussion: The Department appreciates the commenters' concerns 
about potential State law conflicts with the Department's inducement-
related regulations. It is well settled that any State law that 
conflicts with or ``stands as an obstacle to the accomplishment and 
execution of the full purposes and objectives'' of a Federal law is 
preempted. Hillsborough County, Fla. v. Automated Med. Laboratories, 
Inc., 471 U.S. 707, 713 (1985). Moreover, ``[f]ederal regulations have 
no less pre-emptive effect than federal statutes.'' Fid. Fed. Sav. & 
Loan Ass'n v. de la Cuesta, 458 U.S. 141, 153 (1982). Accordingly, 
State statutes, regulations, or rules that conflict with or hinder the 
accomplishment and execution of the Department's rulemaking relating to 
inducement practices are preempted. We anticipate future negotiated 
rulemaking to implement the CCRAA and expect to include this issue 
among those considered for rulemaking at that time.
    Changes: None.

Use of a Rebuttable Presumption (Sec. Sec.  682.413, 682.705(c), and 
682.706(d))

    Comment: A number of commenters representing students and other 
members of the public supported the proposal to strengthen the 
Secretary's enforcement of the prohibition on improper inducements in 
the FFEL Program.
    Many commenters representing various FFEL Program participants 
objected to the Secretary's proposal to adopt a rebuttable presumption 
in administrative actions against lenders or guaranty agencies 
involving violations of the prohibited inducement provisions. One of 
these commenters argued that the use of a rebuttable presumption was 
inconsistent with the statutory requirement that the Secretary 
determine that an inducement was offered in order to secure loan 
applications. The commenter argued that the HEA includes a broad 
definition of a prohibited inducement and, as a result, a number of 
activities would automatically be presumed by the Department to be a 
violation under the rebuttable presumption approach.
    Other loan industry commenters stated that the adoption of a 
rebuttable presumption was unnecessary given the Department's existing 
authority to gather information through reviews and audits conducted by 
the Office of Federal Student Aid and the Office of Inspector General. 
These commenters claimed that the use of a rebuttable presumption is 
inconsistent with procedural due process rights and urged that the 
proposal be withdrawn. These commenters argued that, if the presumption 
is retained, the regulations must require the Department to have a 
factual basis supporting the finding of an improper inducement before 
commencing any proceeding that could result in the lender's limitation, 
suspension, or termination from the FFEL Program. The commenters also 
urged that if retained in the regulations, the presumption be applied 
only with respect to activities occurring prospectively from the 
general effective date of the regulations.
    Discussion: The Secretary thanks the commenters who supported the 
proposed regulations.
    The Secretary has carefully considered the legal arguments 
presented by the lenders, guaranty agencies and their supporters. 
However, contrary to those arguments, it is well established that the 
Secretary has broad authority to establish appropriate regulations and 
procedures for resolving administrative cases under the HEA, including 
rules for consideration of evidence and determining the burden of 
proof. 20 U.S.C. 1082(a)(1); USA Group Services v. Riley, 82 F.3d 708 
(7th Cir. 1996); Career College Ass'n. v. Riley, 74 F.3d 1265 (D.C. 
Cir. 1996). The establishment of a rebuttable presumption is within 
that legal authority. Moreover, the commenters have misinterpreted the 
effect of a rebuttable presumption. The rebuttable presumption does not 
eliminate the Secretary's obligation to make a finding that an 
inducement was provided in exchange for loan applications. Instead, 
under these procedures, once the Department establishes that a lender 
or guaranty agency engaged in one of the activities established in 
these regulations as creating an improper inducement, the lender or 
guaranty agency then has the opportunity and obligation to show that 
its purpose for engaging in the activity was unrelated to securing loan 
applications. The Secretary is still required to make the ultimate 
finding that the lender or guaranty agency offered an improper

[[Page 61977]]

inducement and that the inducement was provided to secure loan 
applications.
    The Secretary's list of improper inducements included in Sec.  
682.401(d) that are presumed to be offered to secure loan applications 
is based on our experience in administering the FFEL Program since the 
publication of Dear Colleague Letter 89-L-129 in February 1989, which 
addressed improper inducements. Moreover, recent reviews, 
investigations and reports by the Department's Office of Inspector 
General, the Comptroller General, Congress and various State Attorneys 
General have consistently shown that lenders undertake the activities 
listed in the regulations to secure FFEL Program loan applications. For 
example, a recent Congressional report documented how a lender that 
wanted to make loans to students at schools where the lender had not 
previously made loans began providing services and benefits to the 
schools. The report quotes directly from internal lender and school 
documents clearly indicating that the lender performed these activities 
for the purpose of gaining more loan volume at the schools, and in 
fact, the lender was successful. In contrast, none of the recent public 
reports, investigations, testimony and settlement agreements or any of 
the comments on the proposed regulations suggest that lenders provided 
services and benefits to schools for any purpose other than to secure 
loan applicants.
    With this background, it is appropriate for the Secretary to place 
the burden on the lender or guaranty agency to explain its purpose in 
providing benefits or services to schools. Moreover, in the great 
majority of cases, the evidence of intent will be directly and solely 
under the control of the lender or guaranty agency. Accordingly, the 
Secretary has determined that it is appropriate and consistent with due 
process to require the lender or guaranty to have the obligation to 
present that evidence and explain its purpose.
    Some of the commenters asked the Secretary to exempt from the 
improper inducement provisions the situation in which a State guaranty 
agency or an affiliated lender is performing services for small 
institutions in accordance with its responsibilities under State law. 
The Secretary notes that, as described by these commenters, the 
provision of these services may have a purpose (compliance with State 
law) other than securing loan applications. This example shows the 
appropriateness of placing the burden of explanation on the party most 
likely to have evidence of that purpose.
    The Secretary also notes that the rebuttable presumption will only 
be applied after the Department has previously gathered information 
from the lender and the lender has had an opportunity to provide an 
alternative explanation for its actions. The Secretary intends to apply 
the rebuttable presumption only in those situations where there is 
significant evidence that the lender or guaranty agency offered or 
provided the payments or activities to secure FFEL loan applications or 
FFEL loan volume. Since the rebuttable presumption is a rule of 
procedure and does not affect any substantive rights or obligations, 
there is no basis for the delayed effective date suggested by some 
commenters.
    Changes: None.

Application of the Federal Trade Commission (FTC) Holder Rule (Sec.  
682.209(k))

    Comment: Several commenters representing FFEL Program loan industry 
participants opposed our proposal to apply the principles of the 
Federal Trade Commission's (FTC's) Holder Rule to all FFEL Program 
loans. These commenters argued that implementation of this proposal 
will result in significant costs and administrative burden to FFEL 
Program participants who will be required to defend meritless legal 
claims brought by borrowers challenging their student loan debts. The 
commenters urged the Secretary to withdraw the proposal and conduct 
further studies to identify a sufficient factual basis identifying harm 
to the FFEL Program that necessitates a regulatory solution of this 
nature. The commenters believe that any harm intended to be addressed 
by the proposal is far outweighed by the costs of the proposal. The 
commenters also believe that the proposal effectively creates a private 
right of action for borrowers in clear disregard of case law that holds 
that there is no private right of action under the HEA. The commenters 
noted that the application of this rule could leave a State court in a 
position to interpret the Federal inducement regulations to determine 
whether the Department's version of the FTC Holder Rule applies. The 
commenters indicated that if the Secretary adopts this proposal the 
regulations should provide that the claims and defenses that a borrower 
may assert against a lender are limited to claims or defenses that the 
borrower could assert against the school, and that the borrower's 
recovery may not exceed the amount paid on the loan. The commenters 
indicated that the Secretary should also clarify that the mere 
existence of a preferred or recommended lender relationship with a 
school does not trigger application of this Rule.
    Other commenters representing consumer and student organizations, 
and the office of a State attorney general agreed with the Secretary's 
proposal to adopt and apply the principles of the FTC Holder Rule to 
the FFEL Program. The commenters argued, however, that our proposed 
regulations should mirror the FTC Holder Rule in two important areas. 
The commenters recommended that the regulations be modified to provide 
that all subsequent holders of a FFEL loan, not just the immediate 
holder of the loan, are subject to potential claims, and that the full 
range of FTC claims and defenses apply, not just those related to the 
loan.
    Discussion: We thank those commenters who supported the proposal to 
incorporate the principles of the FTC Holder Rule into the regulations 
of the FFEL Program. However, we do not agree with the suggestion from 
many of those commenters that the Department adopt the specific 
language of the FTC's own rule. When the Department first incorporated 
the terms of the FTC Holder Rule into the FFEL Program promissory 
notes, we made necessary and appropriate modifications to the language 
of the FTC Holder Rule to correspond to the requirements and 
regulations of the FFEL Program. The Secretary is incorporating that 
existing language into these regulations to ensure that they apply to 
all borrowers in the FFEL Program, no matter what type of school the 
borrower attends. Accordingly, the Secretary does not believe that a 
direct incorporation of the FTC Holder Rule into the FFEL Program 
regulations is appropriate.
    The Secretary does not agree with those commenters who generally 
opposed the inclusion of the principles of the FTC Holder Rule into the 
FFEL Program regulations. The Secretary believes that this change will 
eliminate the current difference in legal rights between borrowers 
attending for-profit institutions (who are covered by the FTC Holder 
Rule under the FTC's own authority and the FFEL Program promissory 
note) and those attending non-profit institutions. That distinction 
arose not because of any education-based policy distinction, but solely 
because the FTC Holder Rule governed only for-profit institutions with 
specified lender relationships. Moreover, this change is consistent 
with a long line of court decisions that found

[[Page 61978]]

that the HEA does not preempt State laws that allow borrowers to raise 
State law claims as a defense against collection of a FFEL Program loan 
unless particular State laws actually conflict with the objectives of 
the HEA. Armstrong v. Accrediting Council for Continuing Educ. & 
Training, Inc., 168 F.3d 1362 (D.C. Cir. 1999), cert. denied, 528 U.S. 
1173 (2000). Courts have also concluded that the lack of a private 
right of action does not preclude the use of violations of the HEA as 
evidence of the violation of State laws. College Loan Corp. v. SLM 
Corp., 396 F.3d 588, 598-599 (4th Cir. 2005); Cliff v. Payco American 
Credit, Inc., 365 F.3d 1113, 1127-1130 (11th Cir. 2004). Lastly, 
contrary to the commenters' claims, we do not anticipate a significant 
increase in risk or costs to lenders. The principles of the FTC Holder 
Rule have been in the FFEL Program promissory note and applied to loans 
for attendance at for-profit schools since 1994. The Secretary is not 
aware of any significant litigation based on this language since that 
time and the commenters did not present any facts supporting their 
claims.
    Given that the FTC Holder Rule has applied to some student loan 
borrowers for more than a decade and that the commenters did not 
present any support based on that experience for their claim that 
including this provision will increase costs, we do not accept the 
recommendation for further studies.
    We do not believe it is necessary to clarify the effect that a 
preferred or recommended lender relationship would have on application 
of the regulation. The regulation is consistent with the language that 
has been in the FFEL Program promissory notes and the FTC Holder Rule 
itself in providing that the borrower may assert the actions of the 
school as a defense against the lender if the school refers borrowers 
to the lender.
    Changes: None.

Exhaustive List of Permissible Activities (Sec. Sec.  682.200(b) and 
682.401(e)(2))

    Comment: Many loan industry commenters objected to the inclusion in 
the regulations of an ``exhaustive'' list of permissible inducement 
activities for lenders and guaranty agencies, while including a non-
exhaustive, illustrative list of prohibited inducement activities. The 
commenters requested that both lists be illustrative in nature. The 
commenters stated that the exhaustive nature of the list of permissible 
activities fails to recognize the dynamic nature of the marketplace and 
the continual innovation in product delivery and services that result 
from private sector competition. The commenters believe that it is 
impossible to prescribe a finite list of permissible activities today 
that will provide effective guidance for activities developed in the 
future. The commenters noted that the Secretary declined for this same 
reason to provide a definitive list of types of assistance to schools 
that is comparable to the assistance that the Department provides to 
schools that participate in the Direct Loan Program and in which 
lenders and guaranty agencies may engage without providing an improper 
inducement. These commenters recommended that the Secretary follow that 
same approach with the proposed list of inducement-related permissible 
activities.
    Discussion: The Secretary disagrees with the commenters. She 
believes that greater clarity is achieved for program participants if a 
clear and definitive list of permissible activities is provided. She 
also believes that this approach enhances the Department's ability to 
enforce the restrictions on improper inducements. The permissible 
activities listed represent the only ones the Secretary has approved at 
the current time. The Secretary understands, however, that both 
statutory changes and the evolution of business practices may require 
consideration of additional permissible activities in the future. 
Therefore, similar to the approach for notifying lenders and guaranty 
agencies of approved activities that are comparable to those provided 
by the Secretary under the Direct Loan Program, the Secretary will 
notify lenders and guaranty agencies, through a public announcement, 
such as a notice in the Federal Register, of any additional permissible 
activities that lenders and guaranty agencies may be authorized to 
undertake.
    Changes: We have revised the definition of lender in Sec.  
682.200(b) and revised Sec.  682.401(e)(2) to provide for the 
identification and approval by the Secretary of other permissible 
services through a public announcement, such as a notice published in 
the Federal Register.

Payments to Individuals and Lender Referral and Processing Fees (Sec.  
682.200(b))

    Comment: Several loan industry commenters claimed that the preamble 
of the NPRM was incorrect in stating that ``Compensation or fees based 
on the numbers 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.'' The commenters stated that the Department had previously 
allowed lenders to pay marketing compensation based on the number of 
applications received, but not based on the number of applications that 
resulted in funded loans. The commenters asked that the Secretary 
clarify that this interpretation continues to apply until the effective 
date of the final regulations, and that any change in policy be 
applicable to activities occurring on or after July 1, 2008.
    The commenters also requested that the reference in the regulation 
to prohibited payments to ``any individual'' in paragraph (5)(i)(A)(2) 
of the definition of lender in Sec.  682.200(b) be removed and replaced 
with ``any employee of a school or school-affiliated organization'' to 
clarify the group to which the prohibitions apply. The commenters 
further requested that the reference to ``processing'' fees be removed 
in paragraph (5)(i)(A)(5) of the definition of lender in Sec.  
682.200(b) because use of this term could be interpreted as prohibiting 
longstanding commercial contractual relationships with third-party 
servicers and other parties that provide anti-money laundering and 
PATRIOT Act screening, electronic signature processing, loan 
origination services, loan disbursement services, and escrow agent 
services to lenders and guaranty agencies.
    The loan industry commenters also argued that the regulations would 
effectively prevent some small non-participating lenders from meeting 
their Community Reinvestment Act requirements through the student loan 
program.
    Discussion: The commenters did not correctly describe the 
Department's prior policy guidance regarding application referral 
programs between lenders and marketing arrangements between lenders and 
other parties. The Department's policy on marketing and referral fees 
was specified in Dear Colleague Letter 89-L-129 (February 1989). The 
Dear Colleague Letter stated that any fee paid for loan applications 
under a lender referral program or marketing arrangement would be 
considered a prohibited inducement if the amount exceeded reasonable 
compensation for the referring lender's or party's processing of loan 
applications and advertising. Under this policy, the Department 
approved or did not object if the compensation paid was reasonable 
compensation for processing of loan applications and advertising. The 
permitted reasonable compensation could be based on applications 
referred but not on loans funded or disbursed. This policy statement 
remains in effect

[[Page 61979]]

until the effective date of these regulations.
    The Secretary disagrees that reference to ``individuals'' should be 
struck from paragraph (5)(i)(A)(2) of the definition of lender in Sec.  
682.200(b). Section 435(d)(5) of the HEA effectively defines an 
improper inducement as a payment or other inducements ``to any 
educational institution or individual'' to secure loan applications. 
The Secretary has never interpreted the reference to ``individuals'' as 
limited to employees of a school or a school-affiliated organization.
    The Secretary notes that the reference to ``processing'' in 
paragraph (5)(i)(A)(5) of the definition of lender in Sec.  682.200(b) 
was intended to convey, consistent with the Department's longstanding 
guidance, that the referring party was being compensated for some level 
of administrative work in processing the application, not just for 
forwarding the application to the originating lender. However, the 
Department understands that the term ``processing'' may be confusing 
and has clarified the language for purposes of the provision.
    The Secretary believes that the payment of these referral fees 
should be treated as an improper inducement for several reasons. The 
growth of national lenders and banking means that the payment of 
referral fees paid to non-participating lenders is no longer necessary 
to ensure nationwide borrower access to the FFEL Program. Moreover, 
most referral fee arrangements identified by the Department do not 
involve small local lending institutions, but involve payments by large 
lenders to school-related organizations. Finally, we note that with the 
adoption of the MPN and expanded eligibility standards, there is no 
longer any distinction between applications received and loans made, so 
there is no reason for distinguishing between them based on these 
different standards.
    The Secretary further believes that payment of referral fees has 
eroded the integrity of the FFEL Program. Many of these fees are being 
paid to school-affiliated organizations that have access to certain 
personal information of students and alumni and are held in a certain 
level of esteem by students, alumni, and their parents. We believe that 
these arrangements and payments represent a conflict of interest for 
the organization and the school with which it is affiliated because the 
arrangement is interpreted as an endorsement of the lender by the 
organization and the school. Additionally, these fees do not appear to 
be paid to compensate the referring party for any administrative work 
done in processing the application, thus making them a prohibited 
inducement under the Department's standing interpretive guidance. The 
Department is also aware that such fees are being paid to individuals 
and organizations that are not under contract to any lender or its 
affiliate in an eligible lender trustee arrangement, and that operate 
as independent brokers collecting FFEL applications and marketing them 
to various FFEL lenders for the highest fee per application.
    Finally, in response to the comments about small lenders who have 
referred borrowers in exchange for fees to satisfy other legal 
obligations, we note that the purpose of the FFEL Program is to provide 
loans for student and parent borrowers, not to provide an opportunity 
for lenders who do not participate in the program to meet other legal 
requirements. We expect that these lenders will find other appropriate 
ways to meet those requirements.
    Changes: Paragraph (5)(i)(A)(5) of the definition of lender in 
Sec.  682.200(b) has been modified to clarify that prohibited 
``processing'' fees do not include fees paid to meet the requirements 
of other Federal or State laws.

Definition of School-Affiliated Organization (Sec.  682.200)

    Comment: Many commenters objected to the proposed definition of a 
school-affiliated organization, which applies to lender and guaranty 
agency prohibited inducement activities outlined in Sec. Sec.  
682.200(b) and 682.401(e). The commenters indicated that the definition 
was overly broad and unworkable. One commenter from a school was 
concerned that the regulatory changes would restrict these 
organizations from promoting special arrangements and that it will 
limit student services through these organizations. The commenters also 
indicated that the broad definition could include national membership 
organizations, school trade organizations and other associations that 
have no ability to establish and administer school policies or control 
school activities. The commenters also believe that the definition is 
so broad that it could be applied to cover school credit unions or 
bookstores that are privately owned but located on or near a campus, or 
that include a reference to the school in their name. The commenters 
recommended that the definition be limited to only include those 
organizations that are part of the school structure even if they are 
separate legal entities. The commenters believe that those 
organizations that have a de minimus or peripheral connection to the 
school, and whose activities are organized and conducted separate and 
distinct from the school, should not be covered by the definition.
    Discussion: The Secretary believes that special FFEL student loan 
marketing or other student loan arrangements with organizations that 
are affiliated with a school undermine program integrity, and have been 
used to limit borrowers' choice of FFEL lenders. The Department 
believes that the definition of school-affiliated organization needs to 
be broad to protect borrowers and the program generally. The definition 
is intended to include both organizations that exist only by virtue of 
the school's existence, whether inside or outside of the school's 
structure and control, and other organizations not dependent upon the 
school's existence, which provide financial and vocational services to 
the school's students, employees, or alumni. However, we stress that 
payments or inducements provided to school-affiliated organizations are 
only improper if they are undertaken to secure loan applications or 
loan volume. This regulation does not affect contractual arrangements 
between the school-affiliated organizations and financial institutions 
to provide other non-student loan related services. The Secretary fails 
to see a basis for the organizations identified by the commenters to be 
engaged in the marketing or making of FFEL Program loans.
    Changes: None.

Loan Forgiveness Benefits (Sec. Sec.  682.200(b) and 682.401(e))

    Comment: Many commenters from schools, lenders, guaranty agencies, 
and State-designated secondary markets objected to the proposal to 
treat a lender's or guaranty agency's loan forgiveness programs as an 
improper inducement unless loan forgiveness is provided under a 
repayment incentive program that requires satisfactory payment 
performance by the borrower to receive or retain the benefit. Some loan 
industry commenters stated that this limitation on guaranty agencies 
and private lenders was contrary to the HEA. They requested that the 
Department clarify that borrower benefit programs or other loan 
forgiveness or assistance programs for students for service, academic 
achievement, disaster assistance, or other targeted activities continue 
to be allowed. Several commenters representing not-for-profit State and 
State-affiliated guarantors and secondary markets noted that existing

[[Page 61980]]

State targeted and administered loan forgiveness programs for teachers, 
nurses, and members of the armed forces could be considered prohibited 
inducements. The commenters believe such a result impinges on State 
sovereignty and is contrary to the Department's regulatory view that 
guaranty agencies have responsibility for outreach to students and 
parents. The commenters noted that these public service loan 
forgiveness programs are not part of guaranty agency marketing 
campaigns for applications and request that they be considered a 
permissible activity by a guaranty agency or State secondary market.
    Discussion: The Secretary acknowledges that FFEL Program lenders 
are authorized under statute to offer borrowers reduced fees and 
interest rates. The regulations specifically acknowledge that these 
benefits are not considered improper inducements under Sec.  
682.200(b)(5)(ii). The Secretary also acknowledges that the HEA 
specifically provides for loan discharges for certain targeted forms of 
employment and public service.
    With this provision, however, the Secretary is attempting to 
distinguish appropriate forms of repayment assistance that may be 
provided to borrowers by lenders and guaranty agencies that would not 
be considered an improper inducement from those that are clearly 
provided in order for the lender to secure loan applications. The 
regulation incorporates the standard for incentive and reward programs 
for successful borrower repayment that the Secretary has previously 
applied. In this regard, the Secretary has previously found that 
repayment incentive programs do not provide an improper inducement if 
they provide up-front rebates that are applied to the borrower's 
account at or shortly after loan disbursement and that the borrower 
retains if he or she establishes a satisfactory repayment pattern, or 
provide a similar reduction in loan principal earned on the same basis 
after the borrower enters repayment. These programs do not involve cash 
payments to borrowers. These regulations are consistent with this 
standard.
    The Secretary thanks the commenters for informing her of the many 
public service oriented loan forgiveness programs that have been 
initiated, some of which are State-mandated or State-approved. The 
Secretary is convinced that these programs are not used generally for 
marketing purposes and agrees that these programs should not be 
considered an improper inducement as long as they are not marketed to 
secure loan applications or loan guarantees.
    Changes: We have revised the definition of lender in Sec.  
682.200(b) and revised Sec.  682.401(e)(2) to include as permissible 
activities loan forgiveness programs for public service and other 
targeted purposes approved by the Secretary, provided the benefits are 
not marketed to secure loan applications or loan guarantees.

Service on Lender and Guaranty Agency Advisory Boards and Payment of 
Related Costs (Sec. Sec.  682.200(b) and 682.401(e)(2)(v))

    Comment: Several commenters objected to our proposal to treat as an 
improper inducement, arrangements in which employees of school and 
school-affiliated organizations serve on lender advisory committees, 
while allowing these employees to serve on a guaranty agency's 
governing board or official advisory board. The commenters stated that 
the lender advisory committee meetings provide meaningful opportunities 
for lenders and schools to exchange information that benefit borrowers. 
The commenters argued that uncompensated service of this nature should 
be permissible, but that reasonable travel costs should be covered to 
be consistent with the treatment of guaranty agencies. Another 
commenter representing a lender noted that the regulations did not 
contain any explicit prohibition on school employees serving on a 
lender advisory board, or of paid consulting arrangements between 
lenders and school employees, and that this represented a loophole in 
the regulations. This commenter also said the Department should not 
allow school-affiliated organization employees to serve on guaranty 
agency advisory boards, or allow agencies to pay for travel and lodging 
costs to facilitate school staff service on an advisory board, 
attendance at training sessions, or tours of the guaranty agency's 
service facility. The commenter believes this treatment creates an 
avenue for guaranty agencies to provide these benefits on behalf of 
their lender partners and that a guaranty agency's financial support 
should be limited to meals and refreshments at training conferences.
    Discussion: The Secretary notes that the absence of a specific 
provision permitting school and school-affiliated organization employee 
service on lender advisory boards, comparable to what is provided for 
service on guaranty agency advisory boards, means that any compensation 
for this service is considered to be an improper inducement if provided 
to secure loan applications. The Secretary disagrees with the 
commenters who recommended that school and school-affiliated 
organization employees be permitted to continue service on lender 
advisory boards, on a paid or unpaid basis, and with travel and lodging 
expenses paid by the lender. Recent investigations have shown that many 
of these meetings have largely been designed as expense-paid vacations 
for the school employees in support of continued or increased loan 
volume for that FFEL lender from the school. The Secretary believes 
that these board meetings are not necessary to the proper 
administration of the FFEL Program.
    Unlike lenders, guaranty agencies are responsible for lender and 
school oversight, school and lender training, default aversion 
services, lender claim review and approval, and outreach services to 
students, parents, and schools in their respective areas of service. 
The Secretary believes that school employee service on a guaranty 
agency's board, if used effectively, can be important for those aspects 
of FFEL program administration for which the agency is responsible. In 
addition, in its role in providing training on the Title IV student aid 
programs, the agency is in a good position to identify the training 
needs of staff at schools that may not have sufficient resources to 
provide or pay for needed training, regardless of whether the school 
participates in the FFEL Program. Moreover, under Sec.  682.423, a 
guaranty agency is authorized to use its Operating Fund for school and 
lender training. The Secretary believes, therefore, that it is 
appropriate for a guaranty agency to cover the travel and lodging costs 
of school staff if the agency identifies, on a limited, case-by case 
basis, that those individuals would otherwise be unable to attend 
needed training, provide needed service on the agency's governing or 
advisory board, or on another of the agency's formal working 
committees.
    Changes: For purposes of clarity, we have modified paragraph 
(5)(i)(A)(6) of the definition of lender to specifically prohibit a 
lender from soliciting school employees to serve on a lender's advisory 
board and paying costs related to this service.

Lender and Guaranty Agency Sponsored Meals, Refreshments, and 
Receptions at Meetings and Conferences (Sec. Sec.  682.200(b) and 
682.401(e)(2)(iii))

    Comment: One commenter representing a lender objected to our 
proposal to allow lenders and guaranty agencies to continue to sponsor 
meals, refreshments, and receptions that are reasonable in cost for 
school officials or employees in connection with meetings

[[Page 61981]]

and conferences. The commenter believes that permitting these 
activities will allow abuses that have received negative media 
attention to continue because there are no defined parameters provided 
in the regulations about what is ``reasonable'' or what constitutes a 
``reception.'' The commenter recommended that these activities be 
prohibited.
    Discussion: The Secretary believes that sponsorship by a lender or 
guaranty agency of meals, refreshments, and receptions at conferences 
and other training meetings that are open to all attendees at a 
conference or meeting do not represent an inducement of the individual 
attendees or their schools to secure loan applications or loan 
guarantees for the sponsoring lender or guarantor. This form of 
sponsorship is a form of generalized marketing that is not prohibited 
under the law. These arrangements also assist in reducing the cost of 
needed training conferences and meetings for individual attendees. In 
using the term ``reception,'' the Secretary does not envision private 
parties of lender-selected groups of conference attendees, or of school 
or school-affiliated organization employees. Instead, the Secretary 
expects that the receptions permitted under the regulations will be 
general gatherings that are open to all conference or meeting 
attendees, are held in conjunction with the conference or meeting, and 
are generally held at the conference site. The Secretary believes this 
kind of reception provides attendees with an appropriate opportunity 
for information sharing on the training being conducted.
    By ``reasonable cost,'' the Secretary anticipates that conference 
managers and sponsoring lenders and guaranty agencies will adhere to 
the ``prudent person test'' under which the cost per person for the 
sponsored event does not exceed the cost that would be incurred by a 
prudent person under the circumstances at the time the decision was 
made to incur the cost. The burden of proof will be on conference 
managers and sponsors to show that the costs are consistent with the 
normal per person cost of such events.
    The Secretary also notes that she neglected to specify in Sec.  
682.401(e)(2)(v) that such meals, refreshments, and receptions 
sponsored by a guaranty agency must be ``reasonable in cost,'' and has 
added that condition to the regulations.
    Changes: Section 682.401(e)(2)(iv) has been modified to require 
that guaranty agency-sponsored meals, refreshments, and receptions be 
``reasonable in cost.''

Lender and Guaranty Agency Performance of School-Based Functions as a 
Contractual Third-Party Servicer, With Appropriate Compensation, and to 
Participating Foreign Schools (Sec. Sec.  682.200(b) and 
682.401(e)(1)(i)(F))

    Comment: Many commenters representing lenders, lender servicers, 
and guaranty agencies objected to the provision in the proposed 
regulations that would prohibit a lender or guaranty agency from 
performing functions on behalf of a school except on a short-term, non-
recurring, emergency basis. The commenters noted that this provision 
represents a change from longstanding Department policy that allowed a 
guaranty agency or lender to perform functions on behalf of a school as 
long as the services were performed with appropriate compensation. The 
commenters also note that regulations governing third-party servicers 
in 34 CFR Sec.  668.2 do not include these same restrictions and permit 
any individual or organization to enter into a contract with a school 
to administer any aspect of the school's Title IV programs. The 
commenters indicated implementing this regulation would force FFEL 
Program participants to immediately cease performing certain activities 
that benefit schools and their borrowers. Several commenters from small 
schools claimed that if they could not contract with their State 
guaranty agency as a third-party servicer to administer certain aspects 
of the FFEL Program, they would be forced to procure services from less 
well-informed, less reliable, and more costly third-party servicers.
    Some lender and guaranty agency commenters noted that the 
limitation on lenders and guaranty agencies providing staffing services 
to schools will result in the elimination of previously Department-
sanctioned and directed eligibility determination services provided to 
eligible foreign schools at the school's request. The commenters 
recommended that the Secretary provide an exception in the regulations 
to allow these services to continue.
    A national association stated that the proposed regulations did not 
explicitly allow lenders and guaranty agencies to perform student loan 
entrance and exit counseling activities, and expressed concern that the 
Department would be effectively prohibiting lenders, guaranty agencies, 
and secondary market lenders from supporting or participating in 
educational outreach and financial literacy efforts. Another national 
organization asked that the regulations explicitly permit lenders and 
guaranty agencies to provide staff training, computer support, and 
printing and distribution of financial aid-related information, and to 
perform other school functions with appropriate compensation.
    A commenter representing a national consumer organization and 
national student associations recommended that the Department impose a 
blanket prohibition on lenders providing assistance to schools to 
perform school-based financial aid duties, noting that many schools had 
already agreed to this restriction under voluntary agreements with 
state attorney generals. Several U.S. Senators strongly urged the 
Secretary to prohibit all lender or guaranty agency performance of 
school financial aid-related functions, even on an emergency basis, 
because these activities promoted particular lenders and created a 
serious loophole in the regulations.
    Discussion: The Secretary understands these regulations represent a 
change from prior Department policy. As the commenters noted, under the 
Department's prior policy guidance, lenders and guaranty agencies would 
not be considered to be providing an improper inducement if they 
performed or assisted a school with certain Title IV student aid 
functions, particularly FFEL Program loan functions, as long as they 
were appropriately compensated for their services or they performed 
them under contract as a school third-party servicer. Recent 
investigations have shown, however, that lenders and guaranty agencies 
generally provided staff or services to schools almost exclusively to 
maintain or increase loan volume from the schools. In some cases, staff 
paid by a lender essentially took over a school's responsibility for 
advising students and parents without disclosing to the students and 
parents that the staff members worked for the lender, not the school. 
The Secretary believes that lender and guaranty agency staffing for 
schools has created a serious conflict of interest for schools in their 
critical counseling role with students and parents, and has 
significantly contributed to limiting a borrower's choice of lender at 
some schools. The limitations imposed by the new regulations include 
restrictions on lender and guaranty agency conduct of or participation 
in required in-person, school-based initial and exit counseling with 
FFEL borrowers. It does not, however, limit a lender's support of or 
participation in a school's or a guaranty agency's student aid and 
financial literacy-related outreach activities, as that is permitted 
under paragraph (5)(ii)(B) of the definition of lender in Sec.  
682.200(b). Similarly, the final regulations are being modified to 
clarify

[[Page 61982]]

that a guaranty agency can continue its student aid and financial 
literacy-related outreach activities.
    The Secretary agrees that, under the proposed regulations, a 
guaranty agency or lender would be unable to continue to provide loan 
eligibility and certification services for participating foreign 
schools at the school's request. The Secretary has previously directed 
guaranty agencies to provide these services to ensure that eligible 
borrowers can successfully secure FFEL loans to attend certain eligible 
foreign schools. The Secretary did not intend to interfere with this 
activity and has modified the regulations accordingly.
    The Secretary disagrees with the suggestion that we define all 
forms of lender or guaranty agency staffing to perform school-based 
student loan functions as an improper inducement. The Secretary 
believes that these services should be allowed in limited situations as 
described in the regulations.
    Changes: We have modified the definition of lender in Sec.  
682.200(b) and have modified Sec.  682.401(e) to allow lenders and 
guaranty agencies to perform, as a Secretary-delegated function, 
eligibility and loan certification functions if requested by a 
participating foreign school. We have modified Sec.  682.200 to exclude 
in-person, school-required initial and exit counseling from those 
student aid and financial-literacy related outreach activities that a 
lender can participate in and support. Section 682.401(e)(2) of the 
regulations has also been modified to clarify that a guaranty agency 
can continue its student aid and financial literacy-related outreach 
activities with schools, students, and parents, excluding in-person, 
school-required initial and exit counseling.

Services to Schools and Students Under Other State or Federal Education 
Programs or by a State Agency FFEL Lender (Sec. Sec.  682.200(b) and 
682.401(e))

    Comment: One commenter from a non-profit agency that serves as a 
guaranty agency and lender in the FFEL Program, and also participates 
in and administers other Federal and State education programs, asked 
the Secretary to clearly state that guaranty agencies and lenders are 
not prohibited from continuing to meet their obligations under other 
Federal and State education laws as long as the activities under those 
programs are not tied to expectations regarding loan applications or 
loan volume. The commenter stated that many of these other Federal and 
State programs encourage or direct agencies or lenders to partner with 
students and schools. Another commenter from an agency that serves as a 
State lender expressed concern that the proposed regulations would 
adversely impact the agency's ability to provide the full array of 
services it is mandated to carry out under State law. The commenter 
believes that the agency will no longer be able to develop and produce 
publications that promote higher education in the State and provide 
financial literacy training or to be actively engaged with the State 
university in early outreach and awareness programs. The commenter 
predicts the regulations will have a chilling effect on school 
participation in State grant and loan programs by prohibiting the 
inclusion of State grants and loans in eligible students' financial aid 
packages. The commenter believes the rationale for the new regulations 
is not applicable to a State agency lender that is controlled by the 
State and governed by State ethics laws. The commenter asked that the 
regulations be modified to recognize differences between State programs 
that are funded and delivered within a branch of State government and 
other programs.
    Discussion: The Secretary agrees with the first commenter. The 
Secretary is aware that some State agencies and higher education 
commissions act as guaranty agencies and secondary markets and also 
administer other Federal and State education programs that are not 
related to FFEL Program loans. Some of the other programs in which 
these agencies are involved include State grant, scholarship and loan 
forgiveness programs and the Federal GEAR-UP and Talent Search 
Programs. The Secretary strongly supports the work of these agencies in 
administering these other Federal and State programs and clarifies that 
such an agency may continue to meets its obligations under other 
Federal and State education laws provided the agency does not use its 
role in these programs to secure loan applications or loan volume for a 
lender or guaranty agency.
    In response to the other commenter, the Secretary reiterates that 
section 435(d)(5) of the HEA governing prohibited inducements by 
lenders does not make any distinction between various types of FFEL 
lenders. Therefore we are unable to provide for the distinctions 
requested by the commenter in these regulations. The regulatory 
restrictions on improper inducements apply equally to for-profit and 
State-designated FFEL lenders. The Secretary notes, however, that the 
provisions in paragraph (5)(ii)(B) of the definition of lender in Sec.  
682.200(b) provide that a lender's support of and participation in a 
school's student aid and financial literacy-related outreach activities 
are permissible, as long as the name of the entity that developed and 
paid for the materials is provided to the participants and the lender 
does not promote its student loan or other products.
    Changes: None.

Definition of ``Emergency Basis'' for Lender and Guaranty Agency Short-
Term, Non-Recurring, Emergency Staffing Services to FFEL Schools 
(Sec. Sec.  682.200(b) and 682.401(e)(3))

    Comment: In response to the Secretary's specific solicitation of 
comments on whether an emergency should be limited to State- or 
Federally-declared national or natural disasters, some commenters 
agreed with this limitation. One commenter indicated that the emergency 
should be limited to a declared natural disaster because that was 
clearly a circumstance outside the school's control. The commenter 
believes that a school should be prepared to deal with worker 
absenteeism and seasonal application volume. Many other commenters 
believe that there may be more localized disasters creating emergencies 
for a specific school (for instance, a building on campus may burn or 
hazardous materials may be discovered, resulting in the closure of the 
financial aid office) than those that are declared by a state or 
federal official. The commenters also stated that an office or campus 
might be suddenly limited by illness, death, accidents, sudden 
employment changes, system conversions or technical failures, and other 
unforeseen circumstances that would result in a potential breakdown of 
financial aid services to students and their parents. The commenters 
recommended that broader, non-recurring unforeseen conditions or events 
be encompassed by an emergency, either in the regulations or in the 
preamble.
    Discussion: The Secretary thanks the commenters for their 
suggestions. The Secretary agrees that defining emergency basis to 
include only a Federally-declared national disaster or a State- or 
Federally-declared natural disaster may not address more localized 
disasters or emergencies that may affect a specific school and 
interrupt the flow of FFEL loan services to students and parents on 
that campus. The Secretary does not agree, however, that an emergency 
should include staff absenteeism or employment changes, fluctuations in 
seasonal loan volume, planned systems conversions, or other similar 
circumstances. The Secretary

[[Page 61983]]

expects schools to be ready to handle such circumstances as part of 
being administratively capable of participating in the Federal student 
financial aid programs.
    Change: Paragraph (b)(5)(iii) of the definition of lender in 
Sec. Sec.  682.200 and the provisions in Sec.  682.401(e)(3) have been 
modified to include a definition of emergency basis. For the purpose of 
a lender or guaranty agency providing short-term, non-recurring 
emergency staffing services to a school, this term means a State-or 
Federally-declared natural disaster, a Federally-declared national 
disaster, and other localized disasters and emergencies identified by 
the Secretary.

Definition of ``Other Benefits'' for Purposes of Prohibited Points, 
Premiums, Payments, and Other Inducements to Any School or Other Party 
(Sec. Sec.  682.200(b) and 682.401(e)(3)(iii))

    Comment: Several commenters objected to the proposal to define 
``other benefits'' to include as an improper inducement ``preferential 
rates for or access to the lender's other financial products.'' The 
commenters claim that this will deter lenders from providing 
competitive rates and fees to borrowers on private education loans. The 
commenters note that under the preferred lender list provisions in 
Sec.  682.212(h) of the proposed regulations, schools are not 
prohibited from negotiating with lenders to secure the best borrower 
benefits on FFEL loans in identifying lenders for the school's 
preferred lender list. The commenters believe that a school should also 
be able to negotiate for the most beneficial private education loan 
benefits for its students from a lender that offers both private 
education and FFEL loans without the lender risking sanctions by the 
Department.
    Discussion: The Secretary disagrees with the commenters. In many 
cases, a lender's placement on a school's FFEL preferred lender list or 
its promotion as the school's recommended FFEL lender was based on an 
agreement to provide the school access to the lender's private 
education loan program or to provide more beneficial loan terms on 
those private education loans. A lender who provides private education 
loans to a school's students at competitive rates may do so as long as 
the lender does not offer or provide those benefits in exchange for 
FFEL loan applications, FFEL application referrals, a specified volume 
or dollar amount of FFEL loans, or placement on the school's list of 
recommended or suggested lenders.
    Changes: None.

Benefits Based on Participation in a Guaranty Agency's Program (Sec.  
682.401(e)(1)(i)(B), 682.401(e)(1)(ii), and 682.401(e)(1)(iii))

    Comment: Some guaranty agency commenters expressed concern about 
the language in Sec.  682.401(e)(1)(ii), which prohibits a guaranty 
agency from assessing additional costs or denying benefits to schools 
and lenders based on the school's or lender's decision not to 
participate in the agency's loan guaranty program or failure to provide 
a specified volume of FFEL Program loans to the agency, or a school's 
failure to place a lender that uses the agency's loan guarantee on the 
school's preferred lender list. The commenters believe this provision 
was intended to align with the requirements of Sec.  
682.401(e)(1)(i)(B), which prohibit a guaranty agency from making 
payments to a school based on the school's voluntary or coerced 
agreement to participate in the agency's program. The commenters 
believe, however, that the requirements of proposed Sec.  
682.401(e)(1)(ii) are overly broad and will prevent a guaranty agency 
from limiting its services to FFEL Program participants. The commenters 
stated that the regulations appear to require a guaranty agency to 
provide benefits, products, and services to all schools and lenders 
even if they do not participate in the agency's loan guaranty program. 
The commenters also asked the Secretary to clarify in the preamble to 
the regulations that Sec.  682.401(e)(1)(iii) does not prohibit the 
continuation of cooperative arrangements between guaranty agencies, 
such as the Common Manual, Mapping Your Future, and the Common Review 
Initiative that create economies of scale or greater efficiencies for 
schools or lenders with which those guarantors participate.
    Discussion: The commenters are correct that the requirements of 
Sec.  682.401(e)(1)(i)(B) and 682.401(e)(1)(ii) were intended to 
complement each other. Section 682.401(e)(1)(i)(B) and 
682.401(e)(1)(iii), addresses prohibited incentive payments by guaranty 
agencies to schools and lenders to secure loan volume. Section 
682.401(e)(1)(ii) addresses the practice in which guaranty agencies 
denied schools and lenders benefits or assessed schools and lenders 
additional costs if they failed, among other things, to participate in 
the agency's program or provide a specified volume of loan applications 
or loan volume. The Department has become increasingly aware of these 
types of activities over the last several years, and the Secretary 
believes that if these activities were undertaken by a guaranty agency 
to secure loan volume, the activities would properly be considered a 
prohibited inducement. In one case, a guaranty agency that had 
previously provided certain funds to support student aid administration 
to all schools in its State, including non-FFEL participating schools, 
announced that it would stop paying those funds to schools that did not 
agree to participate in the agency's FFEL loan guaranty program. In 
another instance, a guaranty agency was directed to change its policy 
and charge costs related to the administration of a State program to 
those schools that did not participate with the guaranty agency and 
generate loan volume for that agency after previously not charging 
costs to any schools. In another case, scholarship funds from the 
guaranty agency's Operating Fund were to be provided only to schools 
that participated in the agency's FFEL Program and provided a certain 
FFEL loan volume to the guaranty agency. Finally, in another situation, 
a lender was notified by a guaranty agency that certain costs for 
guaranty agency-provided services to the agency's lenders would be 
based on the lender's success or failure in delivering a certain volume 
of loan guarantees to the guaranty agency. The Secretary believes that 
under certain circumstances, the denial of benefits or the assessment 
of additional costs based on participation in a guaranty agency's 
program, or loan volume provided to the agency, could represent a 
prohibited inducement. The Secretary believes that this provision 
accurately reflects the scope of possible guaranty agency activities 
that should be viewed as improper inducements.
    The Secretary clarifies that Sec.  682.401(e)(1)(iii) does not 
require guaranty agencies to discontinue the cited cooperative 
arrangements they have undertaken with each other, some with the 
express approval of the Secretary. Other cooperative activities that 
the guaranty agencies wish to undertake to achieve economies of scale 
or that they believe will generate cost efficiencies should be 
discussed with the Department before being undertaken.
    Changes: None.

Prohibited Inducements and Lender Claim Payments (Sec.  682.406)

    Comment: Several lender, lender servicer, and guaranty agency 
commenters indicated that proposed Sec.  682.406(d), which would 
prohibit a guaranty agency from paying a lender's claim or receiving 
Federal reinsurance on a loan for which a lender offered or provided an 
improper inducement,

[[Page 61984]]

appeared to impose a duty on the guarantor to determine whether such 
improper activity took place as part of normal claim review and 
processing prior to claim payment. The commenters agree that if there 
was proof of this type of violation, the claim should not be honored, 
but believe the regulation, as proposed, would be unmanageable. The 
commenters believe that if a guarantor took such action, it would 
effectively be denying the lender payment of Federal benefits without 
procedural due process protections that would allow the lender to show 
that the challenged activity did not occur or was permissible. The 
commenters recommended that the regulations be revised to provide that 
the guaranty agency should deny claim payment only when it was notified 
by the Secretary of the lender's violation of the prohibited inducement 
provisions and of the population of affected loans.
    Discussion: The Secretary agrees that, generally, a guaranty agency 
will not be expected to deny a claim payment to a lender unless the 
Secretary has notified the guaranty agency that the lender has provided 
improper inducements. However, the Secretary expects guaranty agencies 
to include improper inducements as a subject in their oversight of 
lenders and to deny claims if the agency determines that the lender has 
provided improper inducements.
    Changes: The regulations in Sec.  682.406(d) have been modified to 
reflect that a guaranty agency may not deny a claim payment unless the 
agency determines or is notified by the Secretary that the lender 
offered or provided an improper inducement.

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

    Comment: Several commenters supported the proposed changes 
implementing The Third Higher Education Extension Act of 2006 (HEA 
Extension Act) (Pub. L. 109-292) that: Prohibit new ELT relationships 
between lenders and schools or school-affiliated organizations; 
restrict existing ELT relationships; and define the term school-
affiliated organization.
    Discussion: The Secretary appreciates the commenters' support.
    Changes: None.
    Comment: Several commenters stated that the definition of school-
affiliated organization in Sec.  682.200, in particular the inclusion 
of the words ``directly or indirectly related to a school,'' was overly 
broad and would inappropriately include organizations that are not part 
of the school's organizational structure and over which the school has 
no control. The commenters urged the Secretary to revise the definition 
to exclude organizations such as foundations, membership associations, 
and financial institutions.
    Discussion: We continue to believe that many organizations, such as 
foundations and alumni and social organizations, are clearly school-
affiliated even if the organization is not under a school's ownership 
or control. The intent of the HEA Extension Act was to eliminate or 
significantly restrict ELT relationships between a lender and a school 
or a school-affiliated organization. The proposed definition of school-
affiliated organization is consistent with this goal.
    Changes: None.
    Comment: One commenter stated that the effective date of the 
proposed regulations should be no earlier than July 1, 2008, the 
effective date of the final regulations, rather than the effective 
dates in the HEA Extension Act. The commenter indicated that holding 
schools accountable for their actions retroactive to the effective 
dates in the HEA Extension Act, when those dates were not yet reflected 
in the FFEL Program regulations, was unfair.
    Discussion: The effective dates in the HEA Extension Act with 
respect to ELT relationships are statutory and the Secretary does not 
have the authority to change those dates.
    Changes: None.
    Comment: Several commenters believed the inclusion of the cross-
reference to Sec.  682.601(a)(3) in Sec.  682.602(b)(1) was incorrect 
and asked the Secretary to remove it.
    Discussion: The commenters are correct that the cross-reference to 
Sec.  682.601(a)(3) in this section was included in error.
    Changes: Section 682.602(b)(1) has been revised to remove the 
cross-reference to ``(a)(3).''

Frequency of Capitalization (Sec.  682.202)

    Comments: All of the commenters agreed with the Secretary's 
proposal to allow capitalization of unpaid interest that accrues during 
an in-school deferment only at the expiration of the deferment. Several 
commenters stated that this regulation would level the playing field 
between the FFEL and Direct Loan programs. One commenter requested that 
the Department consider establishing a prospective effective date and a 
triggering date for deferments granted on or after July 1, 2008. The 
commenter believed that many servicers and loan holders might have 
difficulty implementing the systems changes necessary to implement the 
new capitalization rules in the middle of a deferment.
    Discussion: The Secretary appreciates the commenters' support. The 
Secretary does not believe that a prospective effective date is needed 
to implement the capitalization rules. The Secretary recognizes that 
systems changes will be necessary to implement this change in the 
capitalization rules, but we believe that servicers and loan holders 
have ample time to make these changes before the effective date of July 
1, 2008.
    Changes: None.

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

    Comment: Many commenters supported the proposed regulatory changes 
to allow a lender to suspend credit bureau reporting for 120 days and 
to grant a 120-day administrative forbearance to a borrower while 
investigating an alleged identity theft upon receipt of a valid 
identity theft report (as defined under the Fair Credit Reporting Act 
(15 U.S.C. 1681a)) from a borrower or notification from a credit 
bureau. However, many commenters did not believe that the proposed 
changes provided meaningful relief to the victims of identity theft or 
lenders because the Department did not propose changes to the 
requirement that an individual must obtain a local, State or Federal 
judicial determination that conclusively determines that the individual 
who is the named borrower of the loan was the victim of the ``crime'' 
of identity theft. Unless this requirement is met, a FFEL or Direct 
Loan Program loan cannot be discharged as falsely certified due to the 
crime of identity theft. The commenters suggested that we change the 
interpretation of section 437(c) of the HEA and allow a discharge of a 
loan falsely certified due to the crime of identity theft based on the 
requirements contained in the Fair and Accurate Credit Transactions Act 
(FACT Act). Other commenters believed that the Department is properly 
interpreting section 437(c) of the HEA and that the statutory language 
authorizing a loan discharge for a false certification arising from the 
crime of identity theft needs to be changed.
    Discussion: During the negotiated rulemaking process, the 
Department carefully considered whether there was any basis for 
adopting a different standard on which to grant a discharge based on 
the crime of identity theft but we determined that current regulations 
properly reflect section 437(c) of the HEA by protecting both victims 
of the crime of identity theft and the Federal fiscal interest. 
Further, we believe that the changes to the regulations in

[[Page 61985]]

Sec. Sec.  682.208 and 682.211 that will allow for the suspension of 
credit bureau reporting and collection activity provide relief to 
borrowers while allowing lenders to comply with the Fair Credit 
Reporting Act without violating the FFEL Program regulations. We wish 
to emphasize that the individual who is the named borrower on a FFEL or 
Direct Loan that was falsely certified as a result of the crime of 
identity theft is not liable for a loan that borrower did not execute 
or authorize another to execute on the borrower's behalf, whether or 
not the loan is discharged based on a crime of identity theft. An 
individual who can demonstrate that his or her signature was forged on 
a FFEL or Direct Loan note is relieved of the debt under common law and 
State laws against forgery.
    Changes: None.
    Comment: One commenter requested that the Department retroactively 
apply the proposed changes to Sec. Sec.  682.208 and 682.211 that allow 
for the suspension of credit bureau reporting and collection activity 
to July 1, 2006, the effective date of the identity theft discharge 
authorized by the Higher Education Reconciliation Act of 2005 (Pub. L. 
109-171). The commenter stated that lenders may have already ceased 
credit bureau reporting and due diligence on loans to meet FACT Act 
requirements prior to the publication of the regulations, and 
subsequently determined that the loan remains enforceable against the 
borrower. According to the commenter, a retroactive application of 
these provisions would provide a safe harbor for such lenders.
    Discussion: While we do not believe retroactive implementation of 
the provisions allowing for the suspension of credit bureau reporting 
and collection activity is necessary, we will take into consideration 
any due diligence conflicts created by the different requirements in 
the HEA and the FACT Act in enforcement actions related to the 
treatment of borrowers who may have been victims of the crime of 
identity theft.
    Changes: None.
    Comment: Several commenters objected to the requirement in the 
current regulations in Sec.  682.402(e)(3)(v)(C) that a person claiming 
a discharge must produce a judicial determination that conclusively 
determines that a FFEL or Direct Loan was falsely certified due to the 
crime of identity theft committed by a specific individual named in the 
determination. These commenters viewed this requirement as imposing an 
unnecessary burden for victims of identity theft. These commenters 
urged the Department to change the requirement that discharge relief be 
provided only if a judgment or verdict has been entered because, in 
their view, that requirement prevents individuals who have been 
victimized by identity theft from obtaining relief. Other commenters 
urged the Department to adopt the definition of identity theft in the 
FACT Act, and conform discharge relief to the procedures and standards 
adopted in that law.
    Another commenter noted the difficulty in pursuing the perpetrator 
of the crime in instances in which the judicial determination does not 
identify that individual. The commenter cited a recently-filed claim 
based on a suit filed by the lender against a putative borrower, who 
denied executing the loan documents. The court issued a decision in 
which it found that the putative borrower had not applied for the loan 
and was not obligated to repay it. However, the court further opined 
that the putative borrower was the victim of the crime of identity 
theft, committed by unnamed individuals. The commenter noted that it 
was unable to comply with regulatory requirements to pursue collection 
action against the perpetrator if the judicial determination on which 
the claim rests does not identify the perpetrator. Some commenters 
suggested that we change the regulations to permit discharge relief in 
instances in which the court does not find that an identified 
individual was the perpetrator of the identity theft.
    Discussion: FFEL Program regulations in Sec. Sec.  682.206(d), 
682.300(b)(2)(vii), 682.402(a)(4), and 682.406(a)(1) and (a)(10) 
provide that--with very limited exceptions--FFEL Program benefits are 
payable only if the holder has a legally-enforceable promissory note to 
evidence the loan. Because a forged promissory note is ordinarily not 
an enforceable obligation of the putative borrower, a party holding a 
forged note cannot claim FFEL Program benefits on that loan. The view 
that the discharge relief option should be extended to lenders for 
legally unenforceable loans ignores the basic requirement that the 
lender must hold a legally-enforceable loan. The supposition that 
victims of identity theft face continued enforcement by lenders assumes 
that lenders ignore credible proof that individuals did not obtain the 
debts in dispute. The Department does not consider that supposition to 
be well-founded, and the commenter's view that lowering the standards 
for discharge relief is needed to relieve victims of the burden of 
loans they did not receive is groundless.
    As explained in the preamble to the interim final regulations 
issued by the Department on August 9, 2006, 71 FR 45666, 45676-45677, 
long before either the FACT Act or the identity theft discharge 
amendment to the HEA, common law that applied to all loan transactions 
made clear that individuals who neither executed loan agreements nor 
accepted the benefits of the loan were not liable for the loan. 
Putative borrowers therefore faced continued enforcement action only if 
the holders of the loans either disbelieved the individuals, or 
disregarded well-established law. Statutory relief was not needed to 
protect from liability those individuals who made persuasive claims 
that they neither signed the note nor accepted the loan benefits. 
Statutory relief was not appropriate for individuals who did not 
persuasively demonstrate that they had neither signed the loan 
agreement nor accepted benefits of the loan. The regulation rests on 
these premises.
    The FACT Act addresses different concerns than does the discharge 
provision in these regulations. Specifically, the FACT Act seeks to 
provide protections for borrowers after the crime of identity theft has 
already been perpetrated. More specifically, although a victim of 
identity theft is not liable for the loan, an impersonator could 
attempt to obtain more credit from other lenders in the name of the 
victimized individual. Individuals whose identification credentials 
have been used by an impersonator face substantial difficulty in 
preventing the impersonator from continuing to obtain credit in the 
name of the individual. The FACT Act does not direct creditors to cease 
attempts to collect loans that the lenders determined to be 
unenforceable under generally applicable common law, as suggested by 
the commenter. Rather, the FACT Act allows the complaining individual 
to alert potential lenders--through the credit bureaus--to the identity 
theft, and requires lenders to investigate disputes raised by the 
consumer either directly with the creditor or through the credit 
bureau, to report the results of that investigation to the bureau in a 
timely manner, and to correct, if necessary, information the lender had 
previously furnished to the bureau. There is no reason for the 
Department to adopt in our discharge regulations FACT Act procedures 
that are designed not to determine whether the crime of identity theft 
occurred, but to prevent future thefts and restore a credit history 
damaged by recognized past thefts.
    Section 682.402(e)(3)(v)(C) of the FFEL Program regulations 
requires the applicant for relief to base the claim on a judicial 
decision that ``conclusively

[[Page 61986]]

determines'' that the crime of identity theft caused the loan to be 
made. As stated in the preamble to the interim final regulations 
published on August 9, 2006, determining that a crime has been 
committed necessarily requires discerning the identity of the 
perpetrator and determining the state of mind of that person in the 
conduct at issue. (71 FR at 45685) Therefore, approval of an identity 
theft discharge claim must necessarily rest on a judicial determination 
that a named individual committed the crime of identity theft. (71 FR 
at 45676)
    The comment is well taken that a judicial ruling specifying that a 
crime has been committed by an unnamed perpetrator makes this objective 
impossible. In the case cited by the commenter, a court concluded that 
the putative borrower did not in fact sign, and did not authorize any 
other person to sign, the promissory note. The court logically 
concluded that the putative borrower was not liable for the loan. 
However, the court then opined that this unauthorized signature 
constituted a crime of identity theft by an unidentified individual. 
This ruling cannot support a discharge claim because the ruling in fact 
did not conclusively determine that a crime occurred. To determine that 
a crime has been committed, a court must conclude that the elements of 
a crime have been proven--either beyond a reasonable doubt, in a 
criminal proceeding, or by a preponderance of the evidence, in a civil 
suit.\1\ A ruling that an unidentified individual not only lacked 
authority to sign the note, but also did so with the state of mind 
required to commit a crime, is nothing more than speculation. The 
regulations require that the judicial ruling on which the claim rests 
be one that conclusively determines that a crime was committed in order 
to ensure that relief is provided to the lender only where the ruling 
identifies the perpetrator so that this individual can be held 
accountable and required to repay. A ruling that an unnamed individual 
perpetrated the crime gives the guarantor or the Department no basis on 
which to pursue the individual responsible for the identity theft.
---------------------------------------------------------------------------

    \1\ The Department recognized that the elements of the crime of 
identity theft might be proven in a civil proceeding, such as a 
divorce proceeding, but to a lesser standard of proof than required 
for a criminal conviction.
---------------------------------------------------------------------------

    Changes: The Department has modified Sec.  682.402(e)(3)(iv)(C) to 
clarify that, for purposes of the discharge, a local, State or Federal 
judicial determination is one that conclusively determines that a FFEL 
or Direct Loan was falsely certified due to the crime of identity theft 
only if the decision identifies the perpetrator of the crime.
    Comment: One commenter suggested that we change the regulations to 
require a lender to cease collection activity and refund interest and 
special allowance payments received on a loan determined to be 
unenforceable after the investigation of an alleged identity theft even 
in cases where the individual named as the borrower did not submit a 
valid identity theft report as defined under the Fair Credit Reporting 
Act (15 U.S.C. 1681a).
    Discussion: If a lender determines that a loan is unenforceable 
after the investigation of an alleged identity theft, even in cases 
where the individual named as the borrower did not submit a valid 
identity theft report, a lender is already required to refund interest 
and special allowance payments received on a loan under Sec.  
682.406(a)(1).
    Changes: None.
    Comment: One commenter recommended that we modify the regulations 
to provide that, if a lender's investigation of the borrower's claim of 
a false certification of a loan due to the crime of identity theft 
yields evidence that the loan is enforceable and the borrower later 
defaults, the lender must provide the evidence upon which the lender 
relied to determine that the loan was the legal obligation of the named 
borrower.
    Discussion: The Department believes that, in cases where a lender's 
investigation of an alleged identity theft yields evidence that a loan 
is enforceable against the named borrower who subsequently defaults, a 
lender is already required to provide the evidence used to make that 
enforceability determination under Sec.  682.406(a)(3). This provision 
requires that a lender provide an accurate collection history and an 
accurate payment history to the guaranty agency with the default claim 
filed on the loan showing that the lender exercised due diligence in 
collecting the loan.
    Changes: None.

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

General
    Comment: Several commenters supported the Secretary's efforts to 
ensure the integrity of the student loan programs and the transparency 
in the loan process so that borrowers are assured of their choice of 
lender. Several U.S. Senators commended the Secretary for including 
clear and detailed provisions on prohibited inducements and preferred 
lender lists in the regulations. On the other hand, several commenters 
representing schools, lenders, guaranty agencies, student loan 
servicers, and associations urged the Secretary to withhold publication 
of final regulations governing preferred lender lists and prohibited 
inducements in light of the possibility that Congress may pass 
legislation in these areas. These commenters believe that, if the 
legislation is enacted, the final regulations might be out of date 
before they can become effective and, as a result, program participants 
may be confused.
    Discussion: The Secretary takes the oversight of the Title IV 
student loan programs very seriously and continues to believe, as she 
did when she began the negotiated rulemaking process in 2006, that 
these are urgent issues that require aggressive action to expedite 
reform in advance of any Congressional action. Recent investigations 
and reports show that problems with preferred lender lists are serious 
and continuing and need to be addressed. These regulations will help 
end unethical or questionable practices in the student loan programs 
and help maintain trust and integrity in the process.
    The Secretary understands that for schools that opt to continue to 
use preferred lender lists there will be some additional administrative 
burden associated with providing additional disclosures on the method 
and criteria used by the school to select its preferred lenders, 
compiling and disclosing comparative information on the lenders' 
borrower benefits, and updating the preferred lender list. She believes 
that the benefits to prospective borrowers in regulating the use of 
preferred lender lists to ensure that borrowers are aware they have a 
choice of lender and can exercise that choice, and that they are 
provided with adequate consumer information to make informed decisions 
on a choice of FFEL lender, outweigh the burden on schools associated 
with regulating this process.
    The Secretary is committed to working closely with participants in 
the student financial aid programs to implement the regulations and 
provide any clarifying guidance that may be necessitated by future 
legislation in these areas.
    Changes: None.

Preferred Lender Lists (Sec.  682.212)

Use of Preferred Lender Lists
    Comment: One commenter representing a school stated that the use of 
preferred lender lists represented the wave of the future, but stated 
that lenders should be required to

[[Page 61987]]

standardize the presentation of details of their loans to permit 
comparison of loans by borrowers and families. Another school commenter 
suggested that all schools should be required to have a lender list, 
including schools participating in the Direct Loan Program. One 
commenter representing a lender recommended that the use of preferred 
lender lists be banned because such lists are the foundation of the 
conflicts of interest in the student loan programs and undermine 
program integrity. This commenter stated that school influence over a 
student's choice of lender limits borrower choice and competition for 
more beneficial loan terms while creating a flow of easy loan volume 
for a lender. This commenter believes that as long as preferred lender 
lists exist, lenders will exploit every regulatory regime that the 
Department devises for placement on a school's list. Another commenter 
representing a lender stated that the Department should not formally 
authorize preferred lender lists in regulations when they are not 
authorized in statute and conflict with the statutory provision 
supporting a borrower's choice of lender.
    Discussion: The Secretary continues to believe that a school's use 
of a preferred lender list that is based on the school's unbiased 
research to identify the lenders providing the best combination of 
services and benefits to borrowers at that school may help students and 
their parents in navigating the increasingly complex FFEL Program. 
There is no statutory prohibition against the use of such lists, as 
long as the school does not use the list to limit the borrower's choice 
of lender.
    Many schools began using preferred lender lists because of their 
concern about student loan defaults and the negative consequences for 
the borrowers and the school. Many schools continue to use preferred 
lender lists to identify lenders that provide high-quality customer 
service and loan servicing to prevent delinquency and default. We also 
believe that students and parents increasingly rely upon financial aid 
offices for information and assistance in dealing with the number of 
FFEL lenders and the proliferation of marketing of student loan 
borrower benefits. Preferred lender lists and other consumer 
information on the student loan process can play a useful role in 
assisting financial aid officers in dealing with the large volume of 
requests for information and assistance, and in informing borrower 
choice. As long as preferred lender lists are properly researched and 
constructed in compliance with the regulations, we believe such lists 
can serve as a source of unbiased information that facilitates rather 
than limits informed borrower choice.
    The Secretary does not agree that schools participating in the 
Direct Loan Program should be required to use preferred lender lists. A 
school participating in the Direct Loan Program is authorized under the 
HEA to participate exclusively in that program and is therefore not 
subject to the requirements of section 432(m) of the HEA that require a 
FFEL borrower be provided with his or her choice of FFEL lender.
    Changes: None.

Number of Preferred Lenders (Sec.  682.212(h)(1))

    Comment: Several commenters representing schools and associations 
objected to the proposed requirement that a preferred lender list 
include at least three lenders. Some of these commenters found the 
required minimum number of three arbitrary and capricious. These 
commenters argued that this requirement may prevent some schools with 
low FFEL volume, or tribally-controlled or historically black 
institutions and other schools with little choice in lenders for their 
students, from using a preferred lender list. One of these commenters 
stated that it would be better to simply establish preferred lender 
criteria and ensure that all lenders selected, regardless of number, 
met the established criteria. Another commenter recommended an 
exemption for a school if fewer than 150 borrowers entered repayment 
based on the school's most recent cohort default rate data. A few 
commenters argued that a school should be given a chance to justify its 
use of a list of one or two preferred or recommended FFEL lender(s). 
One large university requested an exemption from the three-lender 
requirement based on the use of an open-bid or similar process if the 
school demonstrates that the arrangement provides the best benefits for 
the school's students. This school argued that strict adherence to the 
three lender requirement should not result in the school being forced 
to include lenders on its list that offer mediocre benefits.
    Commenters representing lenders stated that a minimum of three 
lenders was too few. One of these commenters stated that, with more 
than 3,000 lenders in the FFEL Program, three lenders did not offer 
adequate choices to borrowers and suggested that the Department should 
require 10 to 12 lenders. The commenter also suggested that all lenders 
meeting the school's established criteria, which must be developed and 
disclosed, should be included on the list. Another commenter 
recommended that any institution wishing to provide student loan 
information to its students should be required to provide an annual 
listing of all lenders willing to make loans to the school's students 
along with their loan terms. Another commenter requested that the 
regulations specify that the requirement for a minimum number of 
required lenders be applied to each preferred lender list maintained by 
a school because many schools maintain more than one preferred lender 
list (i.e., separate undergraduate, graduate/professional, medical 
school, law school, private loan listings).
    Discussion: A school is not required to develop or use a list of 
preferred or recommended lenders. The regulations establish minimum 
standards to preserve borrower choice for those schools that choose to 
develop and use such a list. The Secretary continues to believe that 
three, unaffiliated lenders is the appropriate minimum number of 
lenders necessary to preserve borrower choice. We also encourage 
schools to consider including all lenders that meet the school's 
selection criteria on a preferred lender list. A school that chooses 
not to recommend lenders, or that has not been able to identify more 
than one lender to make loans to its students or parents, is not 
prohibited from providing, upon the student's or parent's request, the 
name of lenders that have made loans to the school's students and 
parents in the past as long as a lender has not provided prohibited 
inducements to the school to secure those loans. In providing this 
information, the school must make it clear that it is not endorsing 
that lender and that the borrower can choose to use any FFEL lender 
that will make loans to the borrower for attendance at that school.
    Finally, the Secretary believes that it is sufficiently clear in 
the regulations that the requirements for use of a preferred lender 
list apply to any such list a school develops and maintains if the 
school uses multiple preferred lender lists of FFEL lenders.
    Changes: None.
Updating Preferred Lender Lists
    Comment: A couple of commenters noted that the proposed regulations 
did not include a requirement that a school update its preferred lender 
list and the required disclosure information with any particular 
frequency. One of the commenters recommended that the regulations 
specify that a school must update its list at least annually.
    Discussion: The Secretary agrees with the commenters that the list 
and its

[[Page 61988]]

accompanying disclosures are only useful to borrowers if the 
information is current and that the regulations should require updates 
on a regular basis.
    Changes: The regulations in Sec.  682.212(h)(2) have been modified 
to require that a school must update its preferred lender list and the 
accompanying information at least annually.

Lenders Selected by Schools (Sec.  682.212(h)(1))

Borrower Benefits Offered
    Comment: One commenter representing a lender noted that the 
proposed regulations would not require that the lenders selected by the 
school for its preferred lender list offer the best loan terms for the 
borrower and recommended that this requirement be explicit in the 
regulations. Another commenter representing a school noted that the 
regulations allow a school to negotiate with a lender for the best 
benefits for the school's borrowers, but expressed concern that the 
negotiated benefits will be unfair and inequitable from a national 
perspective because the best benefits will go to borrowers at large 
schools with large enrollments.
    Discussion: Although the Secretary anticipates that financial 
benefits offered by a lender to the school's student and parent 
borrowers will be a key factor in a school's evaluation of lenders for 
its preferred lender list, she does not believe it should be the only 
factor that the school can consider. It is appropriate for a school to 
consider the quality of a lender's customer service in loan origination 
and loan servicing, its effectiveness in providing consumer 
information, counseling and debt management services, and its 
delinquency and default prevention efforts. Schools may face sanctions 
if their cohort default rates exceed certain levels, so a lender's 
effectiveness in working with borrowers to ensure that loans are repaid 
may be a legitimate consideration for some schools. The Secretary does 
not intend to dictate the method or criteria a school may use in 
selecting lenders for its list beyond the regulatory limits. She 
believes that the requirement that the school disclose the method and 
criteria used for lender selection will allow students and their 
families to evaluate the school's basis for recommending a lender and 
to make an informed decision as to the advisability of using one of the 
school's preferred lenders or choosing another FFEL lender.
    The Secretary understands the commenter's concern about inequitable 
benefits in the FFEL Program. However, except with respect to loan 
origination fees, the HEA does not specify the manner in which lenders 
may offer lower costs and benefits to students provided the lenders do 
not discriminate on a legally prohibited basis. Additionally, the 
manner in which some State-designated and affiliated lenders provide 
borrower benefits is limited under State law.
    Changes: None.

Affiliated Lenders (Sec.  682.212(h)(1)(ii) and (h)(3))

    Comment: A commenter representing a lender stated that requiring 
lenders to simply certify to a school that they are not affiliated with 
other lenders on the school's list is meaningless unless there is a 
penalty for an incorrect certification. The commenter recommended that 
the regulations provide for a monetary penalty for a lender's 
misrepresentation of its affiliations. The same commenter stated that 
lenders, in addition to certifying their affiliations, should be 
required to disclose to borrowers whether they sell their loans. The 
commenter believes that this additional disclosure would more fully 
inform the borrower's choice of lender.
    Several commenters representing lenders, guaranty agencies, and 
loan servicers indicated that the definition of ``affiliated lender'' 
should not include a reference to eligible lender trustees. The 
commenters argued that a lender's actions as an originating lender are 
unrelated to its actions as a lender trustee. They noted that the 
lender's own lending program and the lending program operated under the 
trust agreement are separately administered and controlled and 
generally involve different loan delivery services, pricing discounts, 
and borrower benefits. The commenters believe that the Department's 
goals of encouraging consumer choice and competition will be undercut 
if an originating lender is considered an affiliate of another 
originating lender or party on the basis of the third-party trust 
arrangement.
    Many commenters representing schools, school-based associations, 
lenders, guaranty agencies, and loan servicers recommended that 
``affiliated lenders'' for the purpose of preferred lender lists be 
defined as lenders that are under common ownership and control. Some of 
these commenters noted that this approach would be consistent with 
legislation pending in Congress. Many of these commenters also 
expressed concern about the scope of the Department's definition of an 
affiliated lender. The commenters wanted assurance that the Department 
would not define the term ``affiliate'' to include parties engaged in 
post-disbursement forward purchase agreements, loan portfolio sales, 
post-disbursement loan servicing, and secondary market activity. A 
consumer advocate argued that the definition should not include 
relationships that involve only post-disbursement servicing or 
secondary market activity because this would create a burden on schools 
because they could not be expected to know about or monitor 
arrangements like forward purchase agreements.
    Discussion: The Secretary disagrees that it is necessary or 
appropriate to include specific monetary penalties in the regulations 
related to a lender's certification of its affiliates to schools. This 
section of the regulations governs school, not lender, activities, in 
the development of a school's preferred lender list. Further, the 
Secretary has sufficient existing statutory and regulatory authority to 
sanction a lender for any misrepresentations to the school.
    The Secretary agrees with the commenters that a lender's function 
and responsibilities as a trustee in a third-party trustee relationship 
are separate and distinct from its function as an originating lender. 
We believe, therefore, that ensuring a borrower's choice among lenders 
will be protected if ``affiliation'' for purposes of a preferred lender 
list is limited to affiliates that are under common ownership and 
control. The Secretary also wishes to clarify that the Department does 
not interpret the lender affiliation provision to include entities that 
are involved in post-disbursement activities, which a school has no 
ability to monitor or control.
    Changes: The regulations have been modified to delete Sec.  
682.212(h)(3)(iv) and the reference to lenders serving as trustees.

School Solicitations and Lender Status (Sec.  682.212(h)(1)(iii))

    Comment: Some commenters representing lenders requested that the 
Secretary clarify in the regulations that a school's solicitation of an 
improper benefit from a lender that is not acted upon by the lender 
would not disqualify the lender for inclusion on the school's preferred 
lender list.
    The commenters also requested that the regulations directly 
reference the prohibited inducements listed in Sec.  682.200 to prevent 
a lender from being publicly accused of an impropriety when it is no 
more than an unsubstantiated accusation or perception.

[[Page 61989]]

    Discussion: This provision of the regulations governs schools' 
actions in developing and using a preferred lender list. The focus is 
on a school's improper solicitation of certain benefits and a school's 
acceptance of a lender's improper offer and the relationship of those 
school actions to the school's preferred lender list. As a result, the 
Secretary does not believe it is necessary to include any specific 
reference to the prohibited inducement provisions that govern lender 
and guaranty agency activities in this section of the regulations. The 
Secretary reiterates that a lender that does not act upon a school's 
solicitation is not disqualified from being included on a school's 
preferred lender list and agrees that this should be more clearly 
stated in the regulations.
    Changes: Section 682.212(h)(1)(iii) has been modified to clarify 
that a preferred lender list developed for use by a school must ``not 
include lenders that have offered, or have offered in response to a 
solicitation by the school'' financial and other benefits to the school 
in exchange for inclusion on the school's preferred lender list.

Financial and Other Benefits Offered for Preferred Lender Status (Sec.  
682.212(h)(1)(iii))

    Comment: One commenter representing a lender asked that we clarify 
the provision that prohibits a lender from being included on a school's 
preferred lender list if the lender has offered ``financial or other 
benefits'' to the school in exchange for placement on the school's 
preferred lender list or loan volume for the lender. The commenter 
suggested that we modify this provision to exempt those benefits to a 
school that would be permitted under paragraph (5)(ii) of the 
definition of lender in Sec.  682.200(b) of the regulations. Another 
commenter representing a school-based association argued that the 
phrase ``other benefits'' was vague.
    Discussion: The Secretary agrees that under paragraph (5)(ii) of 
the definition of lender in Sec.  682.200(b) of the regulations, 
lenders will be permitted to engage in certain activities that will 
provide benefits to a school and its students without violating the 
prohibition on improper inducements. The Secretary believes, however, 
that those activities and benefits, though permissible, should never be 
a factor in a school's decision to place a lender on the school's 
preferred lender list. We believe that inserting the exemption clause 
recommended by the commenter into this provision would improperly 
suggest that these activities, rather than the best borrower benefits, 
can be a factor in the school's selection of its preferred lenders. We 
do not agree that the term ``other benefits'' is vague. The definition 
of this term in the regulations provides sufficient detail about the 
types of benefits that are covered by this regulation.
    Changes: None.

List Requirements (Sec.  682.212(h)(2))

Method and Criteria (Sec.  682.212(h)(2)(i))

    Comment: Many commenters agreed with the Secretary's proposal that 
schools electing to use a preferred lender list be required to disclose 
the method and criteria used to select the lenders on the list. The 
commenters believe that this information will result in a transparent 
process that prospective borrowers can trust and provide them with the 
necessary information to make an informed decision about which lender 
to use.
    Discussion: The Secretary thanks the commenters for their support 
of the requirement that schools participating in the FFEL Program 
disclose the method and criteria for developing their preferred lender 
lists.
    Changes: None.

Required Comparative Information (Sec.  682.212(h)(2)(ii))

    Comment: Several commenters objected to the requirement that a 
school provide comparative information about the loans offered by 
lenders on the preferred lender list on the grounds that it would be 
too administratively burdensome, particularly if it included 
information on private education loans. Some commenters expressed 
concern that the requirements would be so burdensome and fraught with 
controversy that schools would stop providing such lists, which they 
believe are useful for borrowers. An association representing financial 
aid administrators expressed appreciation for the Department's plan to 
develop a model format to help schools collect information from lenders 
to help develop the school's lender list. They suggested that lenders 
be required to disclose the percentage of borrowers who actually 
receive lender-provided borrower benefits. One school commenter stated 
that the Secretary should develop and endorse tools to help 
institutions compare and evaluate education loan programs. Another 
school commenter recommended that the Secretary establish a 
clearinghouse of information on all lenders and their loan offerings. 
One commenter recommended that the school only be required to maintain 
lender contact information to enable borrowers to contact lenders 
directly for information. Another commenter stated that the regulations 
lacked specifics about what information must be provided, how it was to 
be made available, and whether it was to be provided to all applicants 
for admission, whether accepted or not, and recommended that the 
requirement be deleted or limited to a specific number of national or 
competitive lenders.
    Discussion: The Secretary thanks those commenters who expressed 
support for the Secretary's plans to develop a suggested model format 
for schools to use to collect and distribute required comparative 
lender benefit information. She believes that the requirement that 
schools choosing to develop and maintain preferred lender lists provide 
comparative lender information coupled with the requirement that a 
school disclose its method and criteria for lender selection is the 
only way to restore trust and integrity to the process and to retain 
the use of preferred lender lists in the FFEL Program. If adopted by 
all schools using preferred lender lists, the model format will provide 
a standardized format for collecting and presenting lender information. 
The form will be subject to public comment under the Paperwork 
Reduction Act of 1995, and the Secretary will invite comments on the 
proposed contents, format, and use of the form as part of that public 
comment period.
    Because schools are able to negotiate with lenders for the best 
loan terms for their students, and FFEL lenders are free to offer 
different benefits by school, and even by program of study, the 
Secretary believes it would be infeasible for the Department to develop 
the kind of clearinghouse one commenter suggested.
    Changes: None.

Same Borrower Benefits for All Borrowers at the School (Sec.  
682.212(h)(2)(iii))

    Comment: Many commenters representing schools, school associations, 
lenders and State secondary markets, and guaranty agencies strongly 
recommended that the Secretary reconsider the proposed requirement that 
a school ensure than any lender included on its preferred lender list 
offer the same benefits to all borrowers at the school. Many of the 
commenters stated that benefit programs are often tailored to different 
groups of students in particular programs of study with different debt 
levels and believe that the flexibility to offer differing program 
benefits to assist borrowers in

[[Page 61990]]

managing debt levels should be preserved. Some of these commenters 
believe that this requirement conflicts with a lender's statutory 
authority to offer reduced interest rates and fees. They also believe 
that this provision goes beyond the statutory scope of the non-
discrimination provisions in sections 421(a)(2) and 438(c) of the HEA. 
Several commenters representing guaranty agencies and State-designated 
and State-affiliated lenders, some using tax exempt financing, noted 
that they were restricted by law to providing benefits only to 
residents of the States they serve. These commenters believe that the 
implementation of a blanket requirement would result in increased costs 
to borrowers. The commenters requested that the Secretary consider, at 
a minimum, exempting non-profit, State-affiliated lenders from this 
requirement.
    Discussion: The Secretary disagrees that the proposed requirement 
exceeds her statutory authority. She appreciates, however, that the 
unintended consequence of such a requirement could be a loss of 
borrower benefits for some borrowers. She agrees that this result would 
be inconsistent with allowing a school using a preferred lender list to 
negotiate with lenders to ensure the best borrower benefits for its 
students. The Secretary expects that a lender making loans at a school 
for which it provides different benefits by program, debt level, State 
restriction, etc., will provide this information to the school for the 
school's use in providing comparative information to borrowers.
    Changes: The regulations have been modified to remove paragraph 
(iii) from Sec.  682.212(h)(2).

School Loan Certification and Unnecessary Delays (Sec. Sec.  
682.212(h)(2)(vi) and 682.603(f))

    Comment: Commenters strongly supported the requirement that a 
borrower's choice of lender not be effectively denied by a school's 
delay in completing the borrower's loan eligibility certification. One 
commenter representing a lender requested that the Secretary clarify 
the meaning of unnecessary delay by specifying that a refusal to 
process, or an intentional delay in processing, a certification because 
a lender does not participate in the electronic processing system that 
the school uses is impermissible. A school commenter asked that the 
regulations provide schools some flexibility without viewing it as a 
delay. The commenter asked the Secretary to recognize that a school's 
certification processing times may differ if the borrower chooses a 
lender that does not participate in the school's electronic processes 
without the school being considered to have purposely impeded a 
borrower's choice of lender.
    Discussion: First, we believe it is necessary to clarify that the 
requirements of revised Sec.  682.603(f) apply to all FFEL 
participating schools even if the school does not use a preferred 
lender list. The HEA provides for a borrower's choice of FFEL lender. A 
school cannot abridge that choice through its administrative processes 
or its designation of preferred lenders and guaranty agencies.
    Second, a school may not decline to provide a loan certification, 
or significantly delay a loan certification, because the lender does 
not use the electronic process or platform the school uses. The 
Secretary understands however, that, under those circumstances, a 
school may have to complete a manual certification that may require 
more processing time than would an electronic certification. However, 
the borrower's request must be honored by the school as expeditiously 
as possible without imposing unnecessary administrative hurdles on the 
borrower or the lender. Schools are reminded that their administrative 
practices in loan certification are subject to review and audit. The 
Secretary encourages schools and lenders to work together on behalf of 
borrowers to expand their electronic capabilities and platforms to 
maximize borrower choice and minimize loan certification processing 
times. If a school is aware that the lender the borrower has selected 
has elected not to make loans to the school's students in the past, the 
school is free to advise the borrower of that fact and encourage the 
borrower to confirm with the lender whether it will make a loan to the 
borrower so that the borrower will not be delayed in securing loan 
funds.
    Changes: None.

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 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 final regulatory action will have an annual effect on 
the economy of more than $100 million. Therefore, this action is 
``economically significant'' and subject to OMB review under section 
3(f)(1) of Executive Order 12866. 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. (Absent the provisions required to implement the CCRAA, these 
regulations would not be considered ``economically significant.'')

Need for Federal Regulatory Action

    These 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 final regulations include:
     Duplication of effort for loan holders and borrowers in 
the deferment granting process. The final regulations 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 final regulations 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 final regulations clarify these 
requirements.
     Lack of entrance and exit counseling for graduate and 
professional PLUS Loan borrowers. The final

[[Page 61991]]

regulations 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 final regulations 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 final 
regulations 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 final regulations require loan holders to maintain 
a certification regarding the creation and maintenance of any 
electronically-signed promissory notes and 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 final regulations 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 a significant number of years. The final 
regulations 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 final regulations explicitly identify prohibited 
inducements and allowable activities.
     Abuse associated with the use of lists of preferred or 
recommended lenders. The final regulations 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 and the CCRAA.

Regulatory Alternatives Considered

    A broad range of alternatives to the regulations was considered as 
part of the negotiated rulemaking process. These alternatives were 
reviewed in detail in the preamble to the NPRM under the Reasons 
sections accompanying the discussion of each proposed regulatory 
provision. To the extent they were addressed in response to comments 
received on the NPRM, alternatives are also considered elsewhere in the 
preamble to these final regulations under the Discussion sections 
related to each provision. No alternatives were considered for the 
provisions related to the implementation of the CCRAA, as these were 
limited to areas where the statute set out explicit parameters that are 
not subject to regulatory discretion.

Benefits

    As discussed in more detail in the preamble to the NPRM, many of 
the regulations not related to the CCRAA 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 non-CCRAA 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, and protection of borrowers from unnecessary 
collection activities. Other changes include simplification of the 
deferment 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 Loans with limited recent collection activity.
    Of the proposed provisions not related to the CCRAA, 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. Two commenters questioned the assertion that the 
economic impact of this provision is below the threshold, noting ``the 
Department believes that there are $400 million in Perkins Loans that 
have been in default more than five years. Although the proposed 
regulation would impose mandatory assignment on loans in default more 
than seven years, not five, it seems clear that the $100 million 
threshold will be breached.'' The $400 million figure cited by the 
commenters was included in the NPRM to give a sense of the scale of the 
overall portfolio of defaulted Perkins Loans. As noted elsewhere in the 
NPRM, the Department estimated the amount of outstanding loans 
currently subject to the proposed provision, those in default for at 
least seven years and for which the outstanding balance has not 
decreased in at least 12 months, at $23 million, substantially below 
the $100 million threshold. 72 FR 32429. Department estimates for 
subsequent years indicate this amount would grow by approximately $1 
million annually under current regulations, again well below the 
threshold.
    Many of the regulatory provisions related to the implementation of 
the CCRAA result in significantly lower Federal costs through a 
reduction in net payments to lenders and guaranty agencies 
participating in the FFEL Program. The Department estimates that these 
provisions will reduce Federal costs by $23.3 billion over fiscal years 
2007-2012. Student lenders compete vigorously for loan volume by 
offering borrowers reduced interest rates and fees while at the same 
time earning rates of return significantly above the consumer lending 
industry average. The CCRAA-related changes in these regulations may 
lead some lenders to reconfigure their marketing, servicing, and profit 
expectations to accommodate lower Federal subsidies. The Department's 
preliminary analysis indicates both large and small lenders will still 
be able to structure their operations to generate a reasonable rate of 
return.
    The CCRAA reduced special allowance payments for loans first 
disbursed on or after October 1, 2007 and established different rates 
for eligible not-for-profit lenders and other lenders. The Department 
estimates these changes will reduce Federal costs by $14.7 billion over 
2007-2012. Over this period, the Department estimates lenders will 
originate 83.7 million loans for a total of $625.6 billion. In general, 
the Department does not collect data on the for-profit status of 
participating lenders. Under current law, not-for-profit lenders 
qualify for a special allowance differential for loans financed through 
tax-exempt securities. The Department assumes the 39 lenders qualifying 
for tax-exempt special allowance reflect the universe of not-for-profit 
lenders in the FFEL program. The total outstanding portfolio for these 
lenders at the end of 2006 was $40 billion, or 12.41 percent of the 
total outstanding portfolio of $325 billion. This rate has been 
relatively constant over time and across loan types; it is

[[Page 61992]]

assumed to remain stable throughout the forecasted period. Recent 
analysis by Fitch Ratings, An Education in Student Lending, reports the 
student loan yield for three large lenders, representing 50 percent of 
the market in 2006, as between 7.16 percent and 7.99 percent, with a 
net student loan spread between 1.64 percent and 1.84 percent. This is 
significantly above the comparable spread for consumer loans. The 
reduced special allowance payments under the CCRAA will reduce these 
yields but are not anticipated to have a significant adverse effect on 
large or small lenders.
    The CCRAA reduced the rate guaranty agencies may retain on most 
default collections from 23 percent to 16 percent on collections after 
October 1, 2007. The Department estimates this change will reduce 
Federal costs by $2.2 billion over 2007-2012, half of which is at the 
time of enactment as adjustments to loans currently outstanding. 
Guaranty agencies use different tools to collect defaulted loans; each 
approach has its own retention rate. The three main rates are: The new 
16 percent rate reflected in this regulation for regular default 
collections; 10 percent on specialized collections, such as the pay-off 
of defaulted balances through the origination of a new consolidation 
loan; and 0 percent on loans collected through the offset of tax 
returns by the Internal Revenue Service and similar activities. The 
collection categories affected by the CCRAA represent less than a 
quarter of default collections by guaranty agencies. For 2008, the 
Department projects it will retain 94.82 percent of all default 
collections made by guaranty agencies, an increase from 92.17 percent 
in 2007.
    The CCRAA decreases account maintenance fees paid to guaranty 
agencies from 0.10 percent to 0.06 percent of original principal 
balance outstanding on which guarantees were issued, effective October 
1, 2007. The Department estimates that this change will reduce Federal 
costs by $2.6 billion over 2007-2012, $1 billion of which is at the 
time of enactment as adjustments to loans currently outstanding.
    The CCRAA eliminated, effective October 1, 2007, the ``exceptional 
performer'' designation under which lenders and loan servicers 
qualified for higher than standard insurance against loan default. The 
Department estimates this change, which applies to any invoice the 
Department receives after October 1, 2007, will reduce Federal costs by 
$1.2 billion over 2007-2012. In 2007, 90 percent of loans were serviced 
by a servicer receiving the higher insurance rate. As with the other 
changes reducing payments to lenders, the Department expects some 
lenders may reconfigure their marketing, servicing, and profit 
expectations to accommodate lower Federal subsidies.
    The CCRAA increased the loan fee a lender must pay to the Secretary 
from 0.50 to 1.0 percent of the principal amount of the loan for loans 
first disbursed on or after October 1, 2007. The Department estimates 
this change will reduce Federal costs by $2.6 billion over 2007-2012. 
The fee is payable on all new loan originations except PLUS loans 
originated through the auction mechanism created by the CCRAA. Student 
lenders compete vigorously for loan volume by offering borrowers 
reduced interest rates and fees while at the same time earning rates of 
return significantly above the consumer lending industry average. The 
increased fee, whether alone or in tandem with other changes in the 
CCRAA, may lead some lenders to reconfigure their marketing, servicing, 
and profit expectations to accommodate lower Federal subsidies. The 
Department's preliminary analysis indicates both large and small 
lenders will still be able to structure their operations to generate a 
reasonable rate of return.

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. The non-CCRAA regulations in this 
package 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 regulations. Marginal costs over this baseline are 
primarily related to one-time system changes, which in some cases could 
be significant. In assessing the potential impact of the proposed non-
CCRAA regulations, the Department recognizes that certain provisions, 
primarily those requiring the assignment of Perkins Loans and 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 the NPRM.) 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. As noted in the NPRM, however, in this case, these 
costs would be offset by other provisions in the regulations, primarily 
those involving changes to the maximum length of loan period, which 
result in workload reductions that greatly outweigh the estimated 
additional burden.
    In weighing the costs and benefits of these regulations, the 
Department considered a range of possible outcomes, many of which were 
raised during the negotiated rulemaking discussions. (The following 
summarizes these considerations for a number of provisions; a more 
complete discussion for all provisions is available in the Reasons 
sections of the NPRM.) For prohibited inducements, for example, several 
negotiators expressed concern that the proposed regulations might have 
a negative impact on the numerous business arrangements between schools 
and financial institutions or reduce philanthropic giving to 
institutions of higher education; others suggested the regulations 
could have a ``chilling effect'' on school and lender relationships. 
Conversely, other negotiators expressed the view that eliminating 
improper inducements would end the practice of schools actively 
``steering'' borrowers to particular lenders and limit the appearance 
of ``redlining'' by lenders targeting benefits on certain classes of 
borrowers, greatly enhancing the credibility of the loan process.
    On balance, the Department believes that these 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 
regulations, is enhancing the borrower's choice of lender and providing 
for the disclosure of appropriate information.
    In the area of preferred lender lists, some negotiators questioned 
the need to regulate in this area, fearing that the provisions would be 
administratively

[[Page 61993]]

burdensome and could result in schools discontinuing the use of such 
lists. The non-Federal 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. At the same time, some raised 
the possibility that school workload would increase in the absence of 
preferred lender lists, as students and parents would seek more 
information directly from the school about choosing a lender. Non-
Federal negotiators also objected to our proposal that schools choosing 
to continue use of preferred lender lists be required to not only 
disclose the method and criteria used by the school to choose the 
lenders on the school's preferred lender list, but also provide 
comparative information on the interest rates and other borrower 
benefits offered by those lenders. The non-Federal negotiators believed 
that this would represent a significant administrative burden and that 
schools could not ensure the accuracy of the information on borrower-
benefit offerings.
    The Department believes the disclosure of supporting information 
and data with the list of preferred lenders 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.
    In general, the Department believes these provisions will produce 
the general benefits of greater borrower choice and information and 
enhanced faith in the integrity and transparency of the loan program. 
While it is possible that some institutions will incur significant 
costs, we believe we have provided opportunities, such as the model 
form, to minimize these costs and that, on balance, the costs are 
outweighed by the likely benefits.
    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 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, do not 
prohibit a school from soliciting lenders for borrower benefits in 
exchange for placement on the school's list.
    The regulatory provisions related to the CCRAA expand benefits to 
borrowers in a number of areas--primarily through the reduction of 
interest rates on Stafford Loans--that significantly increase Federal 
costs. The Department estimates that these provisions will increase 
Federal costs by $5.9 billion over fiscal years 2007-2012. These 
provisions will either reduce costs for student loan borrowers or offer 
new or extended benefits during periods of military service or economic 
hardship for over 25 million loans and as many as 22 million borrowers 
over fiscal years 2007-2012.
    The CCRAA reduced interest rates on subsidized Stafford loans made 
to undergraduate students effective July 1, 2008. Rates are reduced 
from 6.8 percent to 6.0 percent for loans originated between July 1, 
2008, and June 30, 2009; to 5.6 percent for the year beginning July 1, 
2009; to 4.5 percent for the year beginning July 1, 2010; and to 3.4 
percent for the year beginning July 1, 2011. (The rate returns to 6.8 
percent for subsequent years.) The Department estimates that this 
change will increase Federal costs by $5.9 billion over 2007-2012. On 
the average Stafford Loan of $3,180, a borrower would repay $4,391 over 
a 10-year repayment period at a 6.8 percent annual rate. Under the 
CCRAA, borrowers will save $155 over 10 years ($1.29 per monthly 
payment) for loans originated in award year 2008-2009, rising to a $608 
savings over 10 years ($5.07 per payment) for loans originated in award 
year 2011. Total savings for a borrower taking out an average loan in 
each year would be $1,393 over 10 years on borrowing of $12,733, or 
roughly 1 percent a year. The average student borrows roughly $9,000 in 
Stafford Loans over their time in school; their savings would be less.
    The CCRAA revised the definition of economic hardship for the 
purpose of qualifying for a student loan deferment. The Department 
estimates that this change will have minimal effect on Federal costs. 
Previously, borrowers were eligible for a loan deferment if they earned 
100 percent of the poverty line for a family of two or if their Federal 
educational debt burden exceeded 20 percent of adjusted gross income if 
the difference between the adjusted gross income minus the debt burden 
is less than 220 percent of the poverty line for a family of two. 
Effective October 1, 2007, the CCRAA eliminates the debt burden 
provision for all borrowers and ties the income criteria to 150 percent 
of the poverty line applicable to the borrower's family size. Removing 
the debt burden test restricts eligibility for the economic hardship 
deferment while relaxing the family income criteria increases 
eligibility. The Department only collects income data on borrowers 
choosing the income-contingent repayment option, who represent roughly 
15 percent of the outstanding portfolio. Using this group as a proxy 
for the total population in repayment, the Department estimates the 
changes in the CCRAA counteract one another, resulting in roughly one-
third of borrowers meeting the eligibility requirements before and 
after the statutory change. A substantial portion of borrowers who 
qualify for economic hardship never apply for the deferment.
    The CCRAA extends the military deferment to all Title IV borrowers 
regardless of when their loans were made, eliminates the 3-year limit 
on the military deferment and adds a 180-day period of deferment 
following the borrower's demobilization effective October 1, 2007. The 
law also authorizes a 13-month deferment following conclusion of their 
military service for certain members of the Armed Forces who were 
enrolled in a program of instruction at an eligible institution at the 
time, or within 6 months prior to the time the borrower was called to 
active duty effective October 1, 2007. Using figures provided by the 
Congressional Budget Office, the Department of Defense, and the 
Department's National Postsecondary Student Aid Survey, the Department 
estimates there will be 12,000 active duty military personnel with 
outstanding loans out of a total of 216,000 deployed in 2007, 
decreasing to 3,100 out of 55,000 in 2011. These borrowers have 
outstanding debt of $49 million in 2007. Assuming 15 months of 
deployment and the appropriate new additional new post-deployment 
deferments, the Department estimates the interest subsidy provided to 
these borrowers would be $17 million over 2007-2012.

Assumptions, Limitations, and Data Sources

    Estimates provided above reflect a baseline in which the changes 
implemented in these regulations do not exist. As part of the 
regulatory impact analysis included in the NPRM, the Department 
requested comments or information from the public for consideration in 
assessing its preliminary estimates. No such comments or information 
related to data used in the preliminary estimates were

[[Page 61994]]

received during the comment period. In the absence of such information, 
and given that internal reviews have revealed no problems or 
significant new information, the estimates included in the NPRM should 
be considered final.
    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.
    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 regulations. This 
table provides our best estimate of transfers related to changes in 
Federal student aid payments as a result of these final regulations. 
Estimated transfers of -$2,914 million reflect annualized savings, 
discounted at 7 percent, related to -$13,889 million in net savings as 
estimated using traditional credit reform scoring conventions. 
Alternatively, if transfers are discounted at 3 percent, annualized 
transfers would equal -$2,906 million in estimated net savings of -
$15,743 million. Expenditures are classified as transfers to 
postsecondary students; savings are classified as transfers from 
program participants (lenders, guaranty agencies).

   Table 1.--Accounting Statement: Classification of Estimated Savings
                              [In millions]
------------------------------------------------------------------------
                Category                            Transfers
------------------------------------------------------------------------
Annualized Monetized Transfers.........  -$2,914
From Whom To Whom?.....................  Federal Government To
                                          Postsecondary Students;
                                          Student Aid Program
                                          Participants to Federal
                                          Government.
------------------------------------------------------------------------

Regulatory Flexibility Act Certification

    The Secretary certifies that these regulations will not have a 
significant economic impact on a substantial number of small entities. 
These regulations 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 non-CCRAA regulations do not impose significant new 
costs on these entities. The CCRAA-related provisions do not affect 
schools, but would have an impact on small lenders. As noted above in 
the Regulatory Impact Analysis, while these regulations may lead some 
small lenders to reconfigure their marketing, servicing, and profit 
expectations to accommodate lower Federal subsidies, the Department's 
preliminary analysis indicates these lenders will still be able to 
structure their operations to generate a reasonable rate of return.
    In the NPRM the Secretary invited 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, requested evidence to 
support that belief. Other than the comments discussed in the Analysis 
of Comments and Changes section regarding the mandatory assignment of 
Perkins Loans, we did not receive comments or evidence on this subject.
    In addition to the provisions contained in the NPRM, these 
regulations contain provisions implementing non-discretionary 
provisions of the CCRAA. As discussed elsewhere in the preamble under 
the section entitled Waiver of Proposed Rulemaking--Regulations 
Implementing the CCRAA, the Secretary has determined for good cause 
shown that it is unnecessary to conduct notice-and-comment rulemaking 
pursuant to the APA on the regulations implementing the changes to 
these regulations resulting from the CCRAA. Specifically, these 
amendments simply modify the Department's regulations to reflect 
statutory changes made by the CCRAA, and these statutory changes are 
either already effective or will be effective within a short period of 
time. The Secretary does not have the discretion in whether or how to 
implement these changes. Accordingly, given that notice-and-comment 
rulemaking under the APA is not necessary for the regulations 
implementing the CCRAA, the provisions of the Regulatory Flexibility 
Act do not apply to those regulations.

Paperwork Reduction Act of 1995

    These regulations contain information collection requirements that 
were reviewed in connection with the NPRM. The Department received no 
comments on the Paperwork Reduction Act portion of the NPRM. However, 
we are requesting further comment on information collection, OMB 
Control Number 1845-0019, consistent with an increase in burden related 
to the provisions in Sec.  674.16(j).
    Section 674.16(j) requires institutions that participate in the 
Perkins Loan Program to report enrollment and loan status information, 
or any Title IV related information required by the Secretary, to the 
Secretary by the deadline date established by the Secretary. As we 
mentioned in the preamble to the NPRM, the Department regularly 
discusses issues relating to NSLDS reporting of Title IV, HEA program 
participants through established workgroups and conference calls with 
Title IV, HEA program participants. These workgroups provided advice on 
the changes that have been made to the form requiring schools to report 
Perkins Loan data to NSLDS in a manner that is consistent with the way 
data on FFEL Loans and

[[Page 61995]]

Direct Loans are reported. These reporting changes will increase burden 
for Perkins Loan Program schools and will be associated with Sec.  
674.16(j) in the resubmission of OMB Control Number 1845-0019.
    Additionally, the Department has determined that consistent with 
the provisions of Sec.  682.604(c)(1), the requirement that guaranty 
agencies provide the name and location of the entity in possession of 
the original electronic Master Promissory Note (MPN) will entail a one-
time increase in burden to make the appropriate software changes that 
will collect these data. The guaranty agencies are affected by these 
changes and their estimated burden will increase by 1,260 hours as 
reflected in OMB Control Number 1845-0020.
    The Department has determined that, consistent with the provisions 
of Sec.  674.16(j), the reporting of the borrower's academic year level 
for each Perkins borrower will increase the total burden by 11,340 
total hours. Of that total burden hour increase, the following affected 
entities are estimated to have: 4,309 additional hours attributable to 
public institutions; 6,010 additional hours attributable to private 
institutions; and 1,021 additional hours attributable to for-profit 
institutions.
    In regard to other information collection requirements described in 
the NPRM, the Paperwork Reduction Act of 1995 does not require a 
response to a collection of information unless it displays a valid OMB 
control number. We display the valid OMB control numbers assigned to 
the collections of information in these final regulations at the end of 
the affected sections of the regulations.
    These final regulations also incorporate statutory changes made to 
the HEA by the CCRAA (Pub. L. 110-84). As discussed below, final 
regulations in Sec. Sec.  674.34, 682.210, 682.305, 682.404, 682.415, 
and 685.204 contain information collection requirements. Under the 
Paperwork Reduction Act of 1995, the Department is requesting further 
comment on information collections, OMB Control Number 1845-0019, 1845-
0020, and 1845-0021 consistent with the burden associated with the 
addition of these provisions in the final regulations.
    Collection of Information: Perkins Loan Program, FFEL Program, and 
Direct Loan Program.

Sections 674.34, 682.210, and 685.204 (Deferment)

    The final regulations in Sec. Sec.  674.34, 682.210, and 685.204 
extend the military deferment to all Title IV borrowers regardless of 
when their loans were made, eliminate the 3-year limit on the military 
deferment and add a 180-day period of deferment following the 
borrower's demobilization effective October 1, 2007. The changes made 
by the final regulations will allow more borrowers to establish 
eligibility for a military deferment and therefore represents an 
increase in burden for loan holders and borrowers. We estimate the 
changes will increase burden for borrowers and loan holders (and their 
servicers) by 1,000 hours and 500 hours, respectively. Thus we estimate 
a total burden increase of 1,500 hours in OMB Control Number 1845-0080.
    The final regulations in Sec. Sec.  674.34, 682.210, and 685.204 
also provide for a 13-month deferment following de-activation of 
certain members of the Armed Forces who were enrolled, or enrolled 
within 6 months of being called to active duty effective July 1, 2008. 
The changes authorize a new deferment and therefore an increase in 
burden. We estimate that the changes will increase burden for borrowers 
and loan holders (and their servicers) by 650 hours and 350 hours, 
respectively. Thus, we estimate a total burden increase of 1,000 hours, 
and which will be reflected in a new OMB Collection under a newly 
designated OMB Control Number. A revised Military Deferment Request 
Form associated with these OMB Control Numbers will be submitted for 
OMB review by January 30, 2008.
    Lastly, the final regulations in Sec.  674.34 and Sec.  682.210 
revise the definition of economic hardship to increase allowable income 
for a borrower to establish eligibility for the economic hardship to 
150 percent of the poverty line applicable to the borrower's family 
size. This change in eligibility requirements will allow more borrowers 
to establish eligibility for an economic hardship deferment and 
represents an increase in burden. We estimate that the changes will 
increase burden for borrowers and loan holders (and their servicers) by 
650 hours and 350 hours, respectively. Thus, we estimate a total burden 
increase of 1,000 hours in OMB Control Numbers 1845-0005 and 1845-0011. 
A revised Deferment Request Form associated with these OMB Control 
Numbers will be submitted for OMB review by December 10, 2007.

Section 682.305 (Procedures for Payment of Interest Benefits and 
Special Allowance and Collection of Origination and Loan Fees)

    Final regulations in Sec.  682.305 increase the loan fee a lender 
must pay to the Secretary from .50 to 1.0 percent of the principal 
amount of the loan for loans first disbursed on or after October 1, 
2007. The changes do not represent a change in burden. Collection 
practices and procedures would not change; only the amount the lender 
must pay would change. Therefore, there is no additional burden 
associated with this provision.

Section 682.404 (Federal Reinsurance Agreement)

    Final regulations in Sec.  682.404 reduce the percentage of 
collections that a guaranty agency may retain from 23 to 16 percent and 
decrease account maintenance fees paid to guaranty agencies from 0.10 
to 0.06 percent effective October 1, 2007. The changes do not represent 
a change in burden. Collection practices and fee payment procedures 
will not change; only the percentage of collections retained and the 
amount of fees paid would change. Therefore, there is no additional 
burden associated with this provision.

Section 682.415 (Special Insurance and Reinsurance Rules)

    The final regulations eliminate the ``exceptional performer'' 
status and application procedures in Sec.  682.415. This change 
represents a decrease in burden. We estimate that the changes will 
decrease burden for lenders (and their servicers) by 2,880 hours in OMB 
Control Number 1845-0020.

Assessment of Educational Impact

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

Electronic Access to This Document

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

    Note: The official version of this document is the document 
published in the Federal

[[Page 61996]]

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

(Catalog of Federal Domestic Assistance 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, and Vocational education.

    Dated: October 23, 2007.
Margaret Spellings,
Secretary of Education.

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

PART 674--FEDERAL PERKINS LOAN PROGRAM

0
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.


0
2. Section 674.8 is amended by:
0
A. In paragraph (d)(1), removing the words ``; or'' and adding in their 
place the punctuation ``.''.
0
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.
* * * * *


0
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.
* * * * *


0
4. Section 674.19 is amended by:
0
A. Redesignating paragraph (e)(2)(i) as paragraph (e)(2)(iii).
0
B. Adding new paragraph (e)(2)(i).
0
C. Revising paragraph (e)(2)(ii).
0
D. Revising paragraph (e)(3).
0
E. In paragraph (e)(4)(i), removing the words ``Master Promissory Note 
(MPN)'' and adding, in their place, the word ``MPN''.
0
F. 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.
* * * * *


0
5.Section 674.34 is amended by:
0
A. Revising paragraph (e)(3)(ii).
0
B. In paragraph (h)(1), adding the words ``, an NDSL, or a Defense 
Loan'' after the words ``a Federal Perkins Loan'', removing the words 
``made on or after July 1, 2001'', and removing the words ``not to 
exceed 3 years''.

0
C. Adding a new paragraph (h)(6).
0
D. Redesignating paragraphs (i) and (j) as paragraphs (j) and (k), 
respectively.
0
E. Adding a new paragraph (i).
0
F. In newly redesignated paragraph (j), removing the words ``and (h)'', 
and adding in their place, the words ``(h) and (i)''.
    The additions and revision read as follows:


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

    (e) * * *
    (3) * * *
    (ii) An amount equal to 150 percent of the poverty line applicable 
to the borrower's family size, as determined in accordance with section 
673(2) of the Community Service Block Grant Act.
* * * * *
    (h) * * *
    (6) The deferment period ends 180 days after the demobilization 
date for the service described in paragraphs (h)(1)(i) and (h)(1)(ii) 
of this section.
* * * * *
    (i)(1) A borrower of a Federal Perkins loan, an NDSL, or a Defense 
loan who is called to active duty military service need not pay 
principal and interest does not accrue for up to 13 months following 
the conclusion of the borrower's active duty military service if--
    (i) The borrower is a member of the National Guard or other reserve 
component of the Armed Forces of the United States or a member of such 
forces in retired status; and
    (ii) The borrower was enrolled in a program of instruction at an 
eligible institution at the time, or within six months prior to the 
time, the borrower was called to active duty.
    (2) As used in paragraph (i)(1) of this section, ``Active duty'' 
means active duty as defined in section 101(d)(1) of title 10, United 
States Code, except--
    (i) Active duty includes active State duty for members of the 
National Guard; and
    (ii) Active duty does not include active duty for training or 
attendance at a service school.
    (3) If the borrower returns to enrolled student status during the 
13-month deferment period, the deferment expires at the time the 
borrower returns to enrolled student status.
* * * * *


0
6. Section 674.38 is amended by:
0
A. In paragraph (a)(1), removing the words ``(a)(2)'' and adding, in 
their place, the words ``(a)(5)''.

[[Page 61997]]

0
B. Redesignating paragraphs (a)(2) and (a)(3) as paragraphs (a)(5) and 
(a)(7), respectively.
0
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), 674.34(h), 
and 674.34(i) 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 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.

* * * * *

0
7. Section 674.45 is amended by:
0
A. Redesignating paragraph (e)(3) as paragraph (e)(4).
0
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.

* * * * *

0
8. Section 674.50 is amended by:
0
A. Adding new paragraphs (c)(11) and (12).
0
B. In paragraph (e)(1), adding the words ``, unless the loan is 
submitted for assignment under 674.8(d)(3)'' 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 affidavit or 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 affidavit or 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 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 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 a MPN created by 
an institution is not satisfied, the institution is responsible for 
ensuring that all parties entitled to access to the electronic loan 
record, including the Secretary, have full and complete access to the 
electronic loan record.
* * * * *


0
9. 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) Cancellation for full-time employment in a public or private 
nonprofit child or family service agency. (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

[[Page 61998]]

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.
* * * * *


0
10. Section 674.61 is amended by:
0
A. Revising the second sentence in paragraph (a).
0
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.
    (ii) 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 borrower is totally and permanently 
disabled as defined in Sec.  674.51(s).
    (iii) The borrower must submit the application to the institution 
within 90 days of the date the physician certifies the application.
    (iv) Upon receiving the borrower's complete application, the 
institution must suspend collection activity on the loan and inform the 
borrower that--
    (A) The institution will review the application and assign the loan 
to the Secretary for an eligibility determination if the institution 
determines that the certification supports the conclusion that the 
borrower is totally and permanently disabled, as defined in Sec.  
674.51(s);
    (B) The institution will resume collection on the loan if the 
institution determines that the certification does not support the 
conclusion that the borrower is not totally and permanently disabled; 
and
    (C) If the institution concludes that the certification and other 
evidence submitted by the borrower supports the borrower's eligibility 
for a total and permanent disability discharge, to remain eligible for 
the final discharge, the borrower must, from the date the physician 
completes and certifies the borrower's total and permanent disability 
on the application until the date the borrower receives a final 
disability discharge--
    (1) Not receive annual earnings from employment that exceed 100 
percent of the poverty line for a family of two, as determined in 
accordance with the Community Service Block Grant Act;
    (2) 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 on which the borrower is seeking a discharge; and
    (3) 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.
    (v) 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 assign the loan to the Secretary.
    (vi) At the time the loan is assigned to the Secretary, the 
institution must notify the borrower that 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.
    (3) Secretary's initial eligibility determination. (i) If the 
Secretary determines 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 physician 
certified the borrower's total and permanent disability on the 
discharge application. The notification to the borrower identifies the 
conditions of the conditional discharge period specified in paragraph 
(b)(2)(iv)(C) of this section.
    (ii) 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 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 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, from 
the date the physician certifies the borrower's discharge application, 
through 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 that the full amount of any title IV loan 
disbursement received after the date the physician completed and 
certified the application 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)(2)(ii)(C)(1) 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 criteria for a total 
and

[[Page 61999]]

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.
    (iv) The Secretary reserves the right to require the borrower to 
submit additional medical evidence if the Secretary determines that the 
borrower's application does not conclusively prove that the borrower is 
disabled. As part of this review, or at any time during the application 
process or during or at the end of the conditional discharge period, 
the Secretary may arrange for an additional review of the borrower's 
condition by an independent physician at no expense to the applicant.
    (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 to the person who made the payments on the loan.
    (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

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

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


0
12. Section 682.200(b) is amended by:
0
A. Revising paragraph (5) of the definition of Lender.
0
B. Adding new paragraphs (7) and (8) to the definition of Lender.
0
C. Adding a definition of School-affiliated organization.
    The revisions and additions read as follows:


Sec.  682.200  Definitions.

    (b) * * *
    Lender. (1) * * *
    (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, 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 to another lender or any other party of referral fees 
or processing fees, except those processing fees necessary to comply 
with Federal or State law;
    (6) Solicitation of an employee of a school or school-affiliated 
organization to serve on a lender's advisory board or committee and/or 
payment of costs incurred on behalf of an employee of a school or 
school-affiliated organization to serve on a lender's advisory board or 
committee;
    (7) Payment of conference or training registration, transportation, 
and lodging costs for an employee of a school or school-affiliated 
organization;
    (8) 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;
    (9) 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
    (10) Staffing services to a school, except for services provided to 
participating foreign schools at the direction of the Secretary, 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, excluding in-person school-required initial or exit 
counseling, 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

[[Page 62000]]

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 or under a loan forgiveness program for 
public service or other targeted purposes approved by the Secretary, 
provided these benefits are not marketed to secure loan applications or 
loan guarantees;
    (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; and
    (K) Other services as identified and approved by the Secretary 
through a public announcement, such as a notice in the Federal 
Register.
    (iii) For the purposes of paragraph (5) of this definition--
    (A) The term ``school-affiliated organization'' is defined in Sec.  
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.
    (D) The term ``emergency basis'' for the purpose of staffing 
services to a school under paragraph (i)(A)(10) of this section means a 
state- or Federally-declared natural disaster, a Federally-declared 
national disaster, and other localized disasters and emergencies 
identified by the Secretary.
* * * * *
    (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) As of 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.
* * * * *


0
13. Section 682.202 is amended by:
0
A. Adding new paragraph (a)(1)(x).

0
B. In paragraph (b)(2), adding the words, ``and (b)(5)'' immediately 
after the words ``(b)(4)''.
0
C. Redesignating paragraph (b)(5) as paragraph (b)(6).
0
D. Adding a new paragraph (b)(5).
    The addition reads as follows:


Sec.  682.202  Permissible charges by lenders to borrowers.

* * * * *
    (a) * * *
    (1) * * *
    (x) For a subsidized Stafford loan made to an undergraduate student 
for which the first disbursement is made on or after:
    (A) July 1, 2006 and before July 1, 2008, the interest rate is 6.8 
percent on the unpaid principal balance of the loan.
    (B) July 1, 2008 and before July 1, 2009, the interest rate is 6 
percent on the unpaid principal balance of the loan.
    (C) July 1, 2009 and before July 1, 2010, the interest rate is 5.6 
percent on the unpaid principal balance of the loan.
    (D) July 1, 2010 and before July 1, 2011, the interest rate is 4.5 
percent on the unpaid principal balance of the loan.
    (E) July 1, 2011 and before July 2012, the interest rate is 3.4 
percent on the unpaid balance of the loan.
* * * * *
    (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.
* * * * *


0
14. Section 682.208 is amended by:
0
A. Revising paragraph (a).
0
B. Adding new paragraphs (b)(3) and (b)(4).
0
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

[[Page 62001]]

deadline date established by the Secretary.
* * * * *

0
15. 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 described 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.
* * * * *

0
16. Section 682.210 is amended by:
0
A. In paragraph (i)(1), adding the words, ``or a borrower's 
representative'' immediately following the words ``a borrower''.
0
B. Adding new paragraph (i)(5).
0
C. In paragraph (s), adding, immediately following the words ``(1) 
General.'', the paragraph designation ``(i)''.
0
D. Adding new paragraphs (s)(1)(ii), (s)(1)(iii), (s)(1)(iv), and 
(s)(1)(v).
0
E. Revising paragraph (s)(6)(iii)(B).
0
F. In paragraph (t), removing from the heading the words ``for loans 
for which the first disbursement is made on or after July 1, 2001''.
0
G. In paragraph (t)(1), removing the words ``first disbursed on or 
after July 1, 2001'', and removing the words ``not to exceed 3 years''.
0
H. Removing paragraph (t)(5).
0
I. Redesignating paragraphs (t)(2), (t)(3), and (t)(4), as paragraphs 
(t)(3), (t)(4), and (t)(5), respectively.
0
J. Adding new paragraphs (t)(2), (t)(7), and (t)(8).
0
K. Adding new paragraph (u).
0
L. Adding a new parenthetical phrase after new paragraph (u).
    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.
* * * * *
    (6) * * *
    (iii) * * *
    (B) An amount equal to 150 percent of the poverty line applicable 
to the borrower's family size, as determined in accordance with section 
673(2) of the Community Service Block Grant Act.
    (t) * * *
    (2) The deferment period ends 180 days after the demobilization 
date for the service described in paragraph (t)(1)(i) and (t)(1)(ii) of 
this section.
* * * * *
    (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.
    (u) Military active duty student deferment. (1) A borrower who 
receives an FFEL Program loan is entitled to receive a military active 
duty student deferment for 13 months following the conclusion of the 
borrower's active duty military service if--
    (i) The borrower is a member of the National Guard or other reserve 
component of the Armed Forces of the United States or a member of such 
forces in retired status; and
    (ii) The borrower was enrolled in a program of instruction at an 
eligible institution at the time, or within six months prior to the 
time, the borrower was called to active duty.
    (2) As used in paragraph (u)(1) of this section, ``Active duty'' 
means active duty as defined in section 101(d)(1) of title 10, United 
States Code, except--
    (i) Active duty includes active State duty for members of the 
National Guard; and
    (ii) Active duty does not include active duty for training or 
attendance at a service school.
    (3) If the borrower returns to enrolled student status during the 
13-month deferment period, the deferment expires at the time the 
borrower returns to enrolled student status.
    (4) To receive a military active duty student deferment, the 
borrower 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 active 
duty student deferment under the procedures specified in paragraphs 
(s)(1)(iii) through (s)(1)(v) of this section. (Approved by the Office 
of Management and Budget under control number 1845-0020)
* * * * *


0
17. Section 682.211 is amended by:
0
A. Redesignating paragraphs (f)(6), (f)(7), (f)(8), (f)(9), (f)(10), 
and (f)(11) as

[[Page 62002]]

paragraphs (f)(7), (f)(8), (f)(9), (f)(10), (f)(11), and (f)(12), 
respectively.
0
B. Adding new paragraph (f)(6).
    The addition reads as follows:


Sec.  682.211  Forbearance.

* * * * *
    (f) * * *
    (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 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 the 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).
* * * * *

0
18. Section 682.212 is amended by:
0
A. In paragraph (c), removing the words ``the Student Loan Marketing 
Association,''.
0
B. In paragraph (d), removing the words ``the Student Loan Marketing 
Association or''.
0
C. Adding new paragraph (h).
0
D. Adding a parenthetical phrase after 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 offered 
in response to a solicitation by the school, 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) 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;
    (iv) For first-time borrowers, not assign, through award packaging 
or other methods, a borrower's loan to a particular lender;
    (v) Not cause unnecessary certification delays for borrowers who 
use a lender that has not been recommended or suggested by the school; 
and
    (vi) Update any list of recommended or suggested lenders and any 
information accompanying such a list no less often than annually.
    (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; or
    (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. (Approved by the Office of Management and Budget under control 
number 1845-0020)
* * * * *


0
19. Section 682.300 is amended by:
0
A. In paragraph (b)(2)(vii), removing the word ``or'' at the end of the 
paragraph.
0
B. In paragraph (b)(2)(viii), removing the punctuation ``.'' at the end 
of the paragraph and adding, in its place, ``; or''.
0
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).
* * * * *


0
20. Section 682.302 is amended by:
0
A. In paragraph (d)(1)(vi)(B), removing the word ``or'' at the end of 
the paragraph.
0
B. In paragraph (d)(1)(vii), by removing the punctuation ``.'' and 
adding, in its place, ``; or''.
0
C. Adding new paragraph (d)(1)(viii).
0
D. Redesignating paragraph (f) as paragraph (g).
0
E. Adding new paragraph (f).
    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).
* * * * *
    (f) Special allowance rates for loans made on or after October 1, 
2007. With respect to any loan for which the first disbursement of 
principal is made on or after October 1, 2007, the special allowance 
rate for an eligible loan during a 3-month period is calculated 
according to the formulas described in paragraphs (f)(1) and (f)(2) of 
this section.
    (1) Except as provided in paragraph (f)(2) of this section, the 
special allowance formula shall be computed by--
    (i) Determining the average of the bond equivalent rates of the 
quotes of the 3-month commercial paper (financial) rates in effect for 
each of the days in such quarter as reported by the Federal Reserve in 
Publication H-15 (or its successor) for such 3-month period;
    (ii) Subtracting the applicable interest rate for that loan;
    (iii) Adding--
    (A) 1.79 percent to the resulting percentage for a Federal Stafford 
loan;
    (B) 1.19 percent to the resulting percentage for a Federal Stafford 
Loan during the borrower's in-school period, grace period and 
authorized period of deferment;
    (C) 1.79 percent to the resulting percentage for a Federal PLUS 
loan; and
    (D) 2.09 percent to the resulting percentage for a Federal 
Consolidation loan; and
    (iv) Dividing the resulting percentage by 4.
    (2) For loans held by an eligible not-for-profit holder as defined 
in paragraph (f)(3) of this section, the special allowance formula 
shall be computed by--
    (i) Determining the average of the bond equivalent rates of the 
quotes of the 3-month commercial paper (financial) rates in effect for 
each of the days in such quarter as reported by the Federal Reserve in 
Publication H-15 (or its successor) for such 3-month period;
    (ii) Subtracting the applicable interest rate for that loan;

[[Page 62003]]

    (iii) Adding--
    (A) 1.94 percent to the resulting percentage for a Federal Stafford 
loan;
    (B) 1.34 percent to the resulting percentage for a Federal Stafford 
Loan during the borrower's in-school period, grace period and 
authorized period of deferment;
    (C) 1.94 percent to the resulting percentage for a Federal PLUS 
loan; and
    (D) 2.24 percent to the resulting percentage for a Federal 
Consolidation loan; and
    (iv) Dividing the resulting percentage by 4.
    (3)(i) For purposes of this section, the term ``eligible not-for-
profit holder'' means an eligible lender under section 435(d) of the 
Act (except for a school) that is--
    (A) A State, or a political subdivision, authority, agency, or 
other instrumentality thereof, including such entities that are 
eligible to issue bonds described in 26 CFR 1.103-1, or section 144(b) 
of the Internal Revenue Code of 1986;
    (B) An entity described in section 150(d)(2) of the Internal 
Revenue Code of 1986 that has not made the election described in 
section 150(d)(3) of that Code;
    (C) An entity described in section 501(c)(3) of the Internal 
Revenue Code of 1986; or
    (D) A trustee acting as an eligible lender on behalf of a State, 
political subdivision, authority, agency, instrumentality, or other 
entity described in subparagraph (f)(3)(i)(A), (B), or (C) of this 
section.
    (ii) An entity that otherwise qualifies under paragraph (f)(3) of 
this section shall not be considered an eligible not-for-profit holder 
unless such lender--
    (A) Was, on the date of the enactment of the College Cost Reduction 
and Access Act, acting as an eligible lender; or
    (B) Is a trustee acting as an eligible lender on behalf of an 
entity described in paragraph (f)(3)(ii)(A) of this section.
    (iii) No political subdivision, authority, agency, instrumentality, 
or other entity described in paragraph (f)(3)(i)(A), (B), or (C) of 
this section shall be an eligible not-for-profit holder if the entity 
is owned or controlled, in whole or in part, by a for-profit entity.
    (iv) No State, political subdivision, authority, agency, 
instrumentality, or other entity described in paragraph (f)(3)(i)(A), 
(B), or (C) of this section shall be an eligible not-for-profit holder 
with respect to any loan, or income from any loan, unless the State, 
political subdivision, authority, agency, instrumentality, or other 
entity described in paragraph (f)(3)(i)(A), (B), or (C) of this section 
is the sole owner of the beneficial interest in such loan and the 
income from such loan.
    (v) A trustee described in paragraph (f)(3)(i)(D) of this section 
shall not receive compensation as consideration for acting as an 
eligible lender on behalf of an entity described in paragraph 
(f)(3)(i)(A), (B), or (C) of this section in excess of reasonable and 
customary fees.
    (vi) For purposes of this paragraph, an otherwise eligible not-for-
profit holder shall not--
    (A) Be deemed to be owned or controlled, in whole or in part, by a 
for-profit entity; or
    (B) Lose its status as the sole owner of a beneficial interest in a 
loan and the income from a loan by granting a security interest in, or 
otherwise pledging as collateral, such loan, or the income from such 
loan, to secure a debt obligation in the operation of an arrangement 
described in paragraph (f)(3)(i)(D) of this section.
    (4) In the case of a loan for which the special allowance payment 
is calculated under paragraph (f)(2) of this section and that is sold 
by the eligible not-for-profit holder holding the loan to an entity 
that is not an eligible not-for-profit holder, the special allowance 
payment for such loan shall, beginning on the date of the sale, no 
longer be calculated under paragraph (f)(2) and shall be calculated 
under paragraph (f)(1) of this section instead.
* * * * *

0
21. Section 682.305 is amended by:
0
A. Redesignating paragraph (a)(3)(ii) as paragraph (a)(3)(ii)(A).
0
B. Adding new paragraph (a)(3)(ii)(B).
    The addition reads as follows:


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

    (a) * * *
    (3) * * *
    (ii) * * *
    (B) For any FFEL loan made on or after October 1, 2007, a lender 
shall pay the Secretary a loan fee equal to 1.0 percent of the 
principal amount of the loan.
* * * * *


0
22. Section 682.401 is amended by:
0
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''.
0
B. Revising paragraph (b)(2)(ii)(B).
0
C. Removing paragraph (b)(2)(ii)(C).
0
D. In paragraph (b)(20), removing the number ``60'' and adding, in its 
place, the number ``35''.
0
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 an 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 to provide 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 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;
    (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

[[Page 62004]]

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) 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, except for services provided to 
participating foreign schools at the direction of the Secretary, as a 
third-party servicer 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 paragraph (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) Student aid and financial-literacy related outreach 
activities, excluding in-person school-required initial and exit 
counseling, as long as the name of the entity that developed and paid 
for any materials is provided to participants and the guaranty agency 
does not promote its student loan or other products; but a guaranty 
agency may promote benefits provided under other Federal or State 
programs administered by the guaranty agency;
    (iv) 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;
    (v) 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;
    (vi) 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;
    (vii) 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;
    (viii) Payment of Federal default fees in accordance with the Act;
    (ix) 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;
    (x) Loan forgiveness programs for public service and other targeted 
purposes approved by the Secretary, provided the programs are not 
marketed to secure loan applications or loan guarantees; and
    (xi) Other services as identified and approved by the Secretary 
through a public announcement, such as a notice in the Federal 
Register.
    (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 that 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.
    (v) The term ``emergency basis'' for the purpose of staffing 
services to a school under paragraph (e)(1)(i)(F) of this section means 
a State- or Federally-declared natural disaster, a Federally-declared 
national disaster, and other localized disasters and emergencies 
identified by the Secretary.
* * * * *


0
23. Section 682.402 is amended by:
0
A. Revising the first sentence in paragraph (b)(2).
0
B. Revising the third sentence in paragraph (b)(3).
0
C. Revising paragraph (c).

0
D. In paragraph (e)(2)(iv), adding the words ``or inaccurate'' 
immediately after the word ``adverse''.
0
E. In paragraph (e)(3)(v)(C), adding the words ``by a perpetrator named 
in the verdict or judgment'' at the end of the paragraph.
    The revisions read as follows:

[[Page 62005]]

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 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 a discharge 
application to the lender, on a form approved by the Secretary. 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 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) 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, 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.
    (ii) Upon making an initial determination that the borrower is 
totally and permanently disabled as defined in Sec.  682.200(b), the 
Secretary notifies the borrower that the loan will be in a conditional 
discharge status for a period of up to three years and that no payments 
are due on the loan. The notification to the borrower 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 physician certified on the application that the borrower 
is totally and permanently disabled, as defined in Sec.  682.200(b).
    (iii) 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 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, from 
the date the physician certifies the borrower's application, through 
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 that the full amount of any title IV loan 
disbursement on any loan received prior to the date the physician 
completed and certified the application 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 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 
(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 
a 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 to the person who made the payments on the 
loan.
    (iv) 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 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 Secretary's initial 
eligibility determination described in paragraph (c)(3)(i) of this 
section through the end of the conditional discharge period.
    (v) The Secretary reserves the right to require the borrower to 
submit additional medical evidence if the Secretary determines that the 
borrower's application does not conclusively prove that the borrower is 
disabled. As part of this review or at any time during the application 
process or during or at the end of the conditional discharge period, 
the Secretary may arrange for an additional review of the borrower's 
condition by an independent physician at no expense to the applicant.
    (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

[[Page 62006]]

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)(5)(i) 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 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 borrower receives a final 
disability discharge, the borrower--
    (1) Cannot have annual earnings from employment that exceed 100 
percent of the poverty line for a family of two, as determined in 
accordance with the Community Services Block Grant;
    (2) Cannot receive any new Title IV loans except for a FFEL or 
Direct Consolidation Loan that does not include any loans on which the 
borrower is seeking a discharge; and
    (3) 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.
* * * * *

0
24. Section 682.404 is amended by:
0
A. Adding new paragraph (g)(1)(ii)(E).
0
B. Revising paragraph (i).
    The addition and revision read as follows:


Sec.  682.404  Federal reinsurance agreement.

* * * * *
    (g) * * *
    (1) * * *
    (ii) * * *
    (E) 16 percent of borrower payments received on or after October 1, 
2007.
* * * * *
    (i) Account Maintenance Fee. A guaranty agency is paid an account 
maintenance fee based on the original principal amount of outstanding 
FFEL Program loans insured by the agency. For fiscal years 1999 and 
2000, the fee is 0.12 percent of the original principal amount of 
outstanding loans. For fiscal years 2000 through 2007, the fee is 0.10 
percent of the original principal amount of outstanding loans. After 
fiscal year 2007, the fee is 0.06 percent of the original principal 
amount of outstanding loans.
* * * * *

0
25. 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 agency 
determines or is notified by the Secretary that the lender offered or 
provided an improper inducement as described in paragraph (5)(i) of the 
definition of lender in Sec.  682.200(b).
* * * * *

0
26. Section 682.409 is amended by adding new paragraphs (c)(4)(vii) and 
(c)(4)(viii) to 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.
* * * * *

0
27. 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).
* * * * *

0
28. Section 682.413 is amended by:
0
A. Adding new paragraph (h).
0
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

[[Page 62007]]

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.
* * * * *

0
29. Section 682.414 is amended by:
0
A. Adding new paragraph (a)(5)(iv).
0
B. Adding new paragraph (a)(6).
0
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 affidavit or 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.
    (ii) The affidavit or certification described in paragraph 
(a)(6)(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 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 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.
* * * * *


Sec.  682.415  [Removed and Reserved]

0
30. Section 682.415 is removed and reserved.

0
31. 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) As of 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)(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) except for paragraphs (a)(1), (a)(2), (a)(3), (a)(4), 
(a)(6), (a)(7), and (a)(9) of that section.

(Approved by the Office of Management and Budget under control 
number 1845-0020)

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


0
32. Section 682.603 is amended by:

0
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''.
0
B. In paragraph (b), removing the words ``making application for the 
loan''.
0
C. Redesignating paragraphs (d), (e), (f), (g), (h), and (i) as 
paragraphs (e), (f), (g), (h), (i), and (j), respectively.
0
D. Adding a new paragraph (d).
0
E. 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,''.
0
F. In newly redesignated paragraph (e)(2), adding the words ``for the 
period of enrollment'' after the word ``attendance''.
0
G. In newly redesignated paragraph (e)(2)(ii), adding the word 
``Subsidized'' immediately before the word ``Stafford'' and removing 
the words ``that is eligible

[[Page 62008]]

for interest benefits'' immediately after the word ``loan''.
0
H. Revising newly redesignated paragraph (f).
0
I. 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 
selection of a particular lender or guaranty agency.
* * * * *

0
33. Section 682.604 is amended by:
0
A. Revising paragraph (f)(1).
0
B. Redesignating paragraphs (f)(2), (f)(3), and (f)(4) as paragraphs 
(f)(5), (f)(6), and (f)(7), respectively.
0
C. Adding new paragraphs (f)(2), (f)(3), and (f)(4).
0
D. In newly redesignated paragraph (f)(5), removing the words ``The 
initial counseling must'' and adding, in their place, the words 
``Initial counseling for Stafford Loan borrowers must''.
0
E. In newly redesignated paragraph (f)(5)(iv), removing the words, ``of 
a Stafford loan''.
0
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''.
0
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. The initial counseling must--
    (i) Explain the use of a Master Promissory Note;
    (ii) Emphasize to the student borrower the seriousness and 
importance of the repayment obligation the student borrower is 
assuming;
    (iii) Describe the likely consequences of default, including 
adverse credit reports, Federal offset, and litigation;
    (iv) In the case of a student borrower (other than a borrower of a 
loan made or originated by the school), emphasize that the student 
borrower is obligated to repay the full amount of the loan even if the 
student borrower does not complete the program, is unable to obtain 
employment upon completion of the program, or is otherwise dissatisfied 
with or does not receive the educational or other services that the 
student borrower purchased from the school; and
    (v) Inform the student borrower of sample monthly repayment amounts 
based on a range of student levels of indebtedness or on the average 
indebtedness of Stafford loan borrowers, 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.
    (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 Sec.  682.603(d)(1)(i) through 
Sec.  682.603(d)(1)(iii); 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)(1)(i) through 
(f)(1)(iv) of this section.
    (3) Initial counseling must be conducted either in person, by 
audiovisual presentation, or by interactive electronic means. If 
initial counseling is conducted through interactive electronic means, 
the school must take reasonable steps to ensure that each student 
borrower receives the counseling materials, and participates in and 
completes the initial counseling.
    (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) A school must maintain documentation substantiating the

[[Page 62009]]

school's compliance with this section for each student borrower.
* * * * *

0
34. 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.

* * * * *

0
35. 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 described 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

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

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


0
37. Section 685.202 is amended by adding new paragraph (a)(1)(v) to 
read as follows:


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

    (a) * * *
    (1) * * *
    (v) For a subsidized Stafford loan made to an undergraduate student 
for which the first disbursement is made on or after:
    (A) July 1, 2006 and before July 1, 2008, the interest rate is 6.8 
percent on the unpaid principal balance of the loan.
    (B) July 1, 2008 and before July 1, 2009, the interest rate is 6 
percent on the unpaid principal balance of the loan.
    (C) July 1, 2009 and before July 1, 2010, the interest rate is 5.6 
percent on the unpaid principal balance of the loan.
    (D) July 1, 2010 and before July 1, 2011, the interest rate is 4.5 
percent on the unpaid principal balance of the loan.
    (E) July 1, 2011 and before July 2012, the interest rate is 3.4 
percent on the unpaid balance of the loan.
* * * * *

0
38. Section 685.204 is amended by:
0
A. In paragraph (b), removing the parenthetical ``(f)'', and adding in 
its place, the parenthetical ``(g)''.
0
B. In paragraph (b)(1)(iii)(A), removing the words ``(b)(1)(i)'' and 
adding, in their place, the words ``(b)(1)(i)(A)''.
0
C. In paragraph (d)(1), removing the word ``the'' and adding, in its 
place, the word ``The''.
0
D. In paragraph (d)(2), removing the word ``the'' and adding, in its 
place, the word ``The''.
0
E. In paragraph (e)(1), removing the words ``first disbursed on or 
after July 1, 2001'' and removing the words ``not to exceed 3 years''.
0
F. Removing paragraph (e)(5).
0
G. Redesignating paragraphs (e)(2), (e)(3), and (e)(4), as paragraphs 
(e)(3), (e)(4), and (e)(5), respectively.
0
H. Adding a new paragraph (e)(2).
0
I. Redesignating paragraph (f) as paragraph (g).
0
J. Adding new paragraph (f).
0
K. Adding new paragraph (h).
    The additions read as follows:


Sec.  685.204  Deferments.

* * * * *
    (e) * * *
    (2) The deferment period ends 180 days after the demobilization 
date for the service described in paragraphs (e)(1)(i) and (e)(1)(ii) 
of this section.
* * * * *
    (f)(1) A borrower who receives a Direct Loan Program loan is 
entitled to receive a military active duty student deferment for 13 
months following the conclusion of the borrower's active duty military 
service if--
    (i) The borrower is a member of the National Guard or other reserve 
component of the Armed Forces of the United States or a member of such 
forces in retired status; and
    (ii) The borrower was enrolled in a program of instruction at an 
eligible institution at the time, or within six months prior to the 
time, the borrower was called to active duty.
    (2) As used in paragraph (f)(1) of this section, ``Active duty'' 
means active duty as defined in section 101(d)(1) of title 10, United 
States Code, except--
    (i) Active duty includes active State duty for members of the 
National Guard; and
    (ii) Active duty does not include active duty for training or 
attendance at a service school.
    (3) If the borrower returns to enrolled student status during the 
13-month deferment period, the deferment expires at the time the 
borrower returns to enrolled student status.
* * * * *
    (h)(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), (e)(1), and (f)(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 (h)(2) of this section when determining a borrower's 
eligibility for a deferment, unless the Secretary, as of the date of 
the 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 (h)(2) of this 
section.
    (4) If the Secretary grants a deferment under paragraph (h)(2) of 
this section, 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.

[[Page 62010]]

    (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.
* * * * *

0
39. 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) Death. (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.
* * * * *

0
40. 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 a discharge application to the Secretary on a form approved 
by the Secretary. 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 borrower is totally and permanently 
disabled as defined in Sec.  682.200(b). 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 
borrower receives a final disability discharge--
    (A) Not receive annual earnings from employment that exceed 100 
percent of the poverty line for a family of two, as determined in 
accordance with the Community Service Block Grant Act;
    (B) 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 on which the borrower is seeking a discharge; and
    (C) Must ensure that the full amount of any Title IV loan 
disbursement on any loan received prior to 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) 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, 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.
    (2) Upon making an initial determination that the borrower is 
totally and permanently disabled, as defined in Sec.  682.200(b), the 
Secretary notifies the borrower that the loan will be in a conditional 
discharge status for a period of up to three years and that no payments 
are due on the loan. The notification to the borrower 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 physician certifies on the application that the borrower is 
totally and permanently disabled, as defined in Sec.  682.200(b).
    (3) 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 in 
paragraph (d)(1) 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.
    (d) Eligibility requirements for a total and permanent disability 
discharge. (1) A borrower meets the eligibility requirements for a 
discharge of a loan based on total and permanent disability if, from 
the date the physician certified the borrower's discharge application, 
through the end of the three-year conditional discharge period--
    (i) 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;
    (ii) 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
    (iii) The borrower ensures that the full amount of any Title IV 
loan disbursement on any loan received prior to the date the physician 
completed and certified the application 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--
    (i) Is not required to make any payments on the loan;
    (ii) Is not considered delinquent or in default on the loan, unless 
the loan was past due or in default at the time the conditional 
discharge was granted;
    (iii) Must promptly notify the Secretary of any changes in address 
or phone number;
    (iv) Must promptly notify the Secretary if the borrower's annual 
earnings from employment exceed the amount specified in paragraph 
(d)(1)(i) of this section; and
    (v) 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 satisfies the criteria 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 further payments on the loan at the end of that period; and
    (ii) Returns any payments received after the date the physician 
completed

[[Page 62011]]

and certified the borrower's loan discharge application to the person 
who made the payments on the loan.
    (4) 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 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 Secretary's initial 
eligibility determination described in paragraph (c)(2) of this section 
through the end of the conditional discharge period.
    (5) The Secretary reserves the right to require the borrower to 
submit additional medical evidence if the Secretary determines that the 
borrower's application does not conclusively prove that the borrower is 
disabled. As part of this review or at any time during the application 
process or during or at the end of the conditional discharge period, 
the Secretary may arrange for an additional review of the borrower's 
condition by an independent physician at no expense to the applicant.

    (Approved by the Office of Management and Budget under control 
number 1845-0021)

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


0
41. Section 685.301 is amended by:
0
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.''
0
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.
0
C. Adding new paragraph (a)(3).
0
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
* * * * *

0
42. Section 685.304 is amended by:
0
A. In paragraph (a)(1) removing the words ``(a)(4)'' and adding, in 
their place, the words ``(a)(5)''.
0
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.
0
C. Adding a new paragraph (a)(2).
0
D. In newly redesignated paragraph (a)(4) removing the words ``The 
initial counseling must'' and adding, in their place, the words 
``Initial counseling for Direct Subsidized Loan and Direct Unsubsidized 
Loan borrowers must''.
0
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,''.
0
F. In newly redesignated paragraph (a)(5), removing the words ``(a)(1)-
(3)'' and adding, in their place, the words ``(a)(1)-(4)''.
0
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)''.
0
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 Sec.  685.301(a)(3)(i)(A) through 
Sec.  685.301(a)(3)(i)(C); 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)(iii) and paragraph (a)(4)(v) of this section.
* * * * *
[FR Doc. 07-5332 Filed 10-31-07; 8:45 am]
BILLING CODE 4000-01-P