[Federal Register Volume 60, Number 231 (Friday, December 1, 1995)]
[Rules and Regulations]
[Pages 61790-61794]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-29126]
[[Page 61789]]
_______________________________________________________________________
Part VI
Department of Education
_______________________________________________________________________
34 CFR Part 685
William D. Ford Federal Direct Loan Program; Final Rule
Federal Register / Vol. 60, No. 231 / Friday, December 1, 1995 /
Rules and Regulations
[[Page 61790]]
DEPARTMENT OF EDUCATION
34 CFR Part 685
RIN 1840-AC22
William D. Ford Federal Direct Loan Program
AGENCY: Department of Education.
ACTION: Final regulations.
-----------------------------------------------------------------------
SUMMARY: The Secretary of Education amends the William D. Ford Federal
Direct Loan (Direct Loan) Program regulations. The regulations apply to
loans under the Federal Direct Stafford/Ford Loan (Direct Subsidized
Loan) Program, the Federal Direct Unsubsidized Stafford/Ford Loan
(Direct Unsubsidized Loan) Program, the Federal Direct PLUS Loan
(Direct PLUS Loan) Program, and the Federal Direct Consolidation Loan
(Direct Consolidation Loan) Program, collectively referred to as the
Direct Loan Program. These regulations provide schools with more
flexibility in performing origination functions, and clarify the date
of loan origination. Further, these regulations set timelines for the
submission of promissory notes, disbursement records, and origination
records.
EFFECTIVE DATE: These regulations take effect July 1, 1996.
FOR FURTHER INFORMATION CONTACT: Ms. Katrina Ingalls, Program
Specialist, Direct Loan Policy Group, Policy Development Division, U.S.
Department of Education, Room 3053, ROB-3, 600 Independence Avenue,
SW., Washington, DC 20202-5400. Telephone: (202) 708-9406. Individuals
who use a telecommunications device for the deaf (TDD) may call the
Federal Information Relay Service (FIRS) at 1-800-877-8339 between 8
a.m. and 8 p.m., Eastern time, Monday through Friday.
SUPPLEMENTARY INFORMATION:
Background
The Secretary is amending the Direct Loan Program regulations to
improve the program based on experience gained during the first year of
operation. These amended regulations reflect programmatic changes that
the Secretary believes will improve services to student and parent
borrowers, increase institutional flexibility, and enhance the
Department's administrative and fiscal oversight capabilities.
On September 20, 1995, the Secretary published the proposed amended
regulations in a notice of proposed rulemaking (NPRM) for part 685 in
the Federal Register (60 FR 48858). The major issues surrounding the
proposed changes were discussed in the NPRM and thus will not be
repeated here.
The following section summarizes the two revisions to the proposed
rule.
Substantive Revisions to the Proposed Rule
Section 685.215(h)(2) Repayment Plans
The NPRM proposed to revise the repayment plan regulations to
reflect the Secretary's current operational practice regarding
repayment plan selection for certain Direct Consolidation Loan
borrowers. Under the NPRM, borrowers who consolidate only one FFEL
Program loan into the Direct Loan Program would be required to select
initially a repayment plan other than the standard repayment plan. The
Secretary has determined that this restriction will not be included in
the final regulations.
Section 685.301 Origination of a Loan by a Direct Loan Program School
The NPRM proposed that the date of loan origination be the earlier
of the date the promissory note is printed or the date the origination
record is accepted by the Secretary. The Secretary has revised
Sec. 685.301(a)(5) to provide that the date of loan origination is the
date the school creates the electronic loan origination record for a
borrower. Beginning with the 1996-1997 academic year, enhanced loan
origination software will record the date of origination permanently on
the borrower's loan file when the borrower's origination record is
created by the school. Modifying the Direct Loan school software to
record automatically the date the school creates the origination record
will ensure that a school is able to document clearly the date that it
certified the borrower's eligibility for the loan, the loan amount, and
anticipated disbursement dates. The date the electronic origination
record is created occurs earlier in loan processing than either
printing the promissory note or the origination record being accepted
by the Secretary. This change will result in improved service to
schools by automatically generating the information necessary to
document the origination process and will improve services to borrowers
by promoting flexibility in processing loans.
Analysis of Comments and Changes
In response to the Secretary's invitation in the NPRM, ten parties
submitted comments on the proposed regulations. An analysis of the
comments appears below, beginning with a general discussion of the
comments received concerning the length of the comment period. This is
followed by a general discussion of the comments received regarding the
Secretary's consideration of establishing foreign school participation
requirements for the Direct Loan Program.
A discussion of the major issues that generated comments follows.
The major issues are grouped according to subject, with references to
the appropriate sections of the regulations. Technical and other minor
changes, and suggested changes the Secretary is not legally authorized
to make under the applicable statutory authority, generally are not
addressed.
General Discussion of Length of Comment Period
Several commenters argued that the comment period was too short,
especially considering that the Department published six NPRMs, all
with comment periods ending at approximately the same time.
In the six NPRMs referred to above, the Secretary proposed numerous
improvements and necessary changes to the Student Financial Assistance
Programs. The ``Master Calendar'' provisions contained in section 482
of the Higher Education Act of 1965 (HEA) require that regulations be
published in final form by December 1 prior to the start of the award
year for which they will become effective. Because of the importance of
implementing these changes and improvements for the award year
beginning July 1, 1996, the Secretary established a comment period that
would allow publication of these final regulations by December 1, 1995,
consistent with the ``Master Calendar'' timeframe. The Secretary always
endeavors to provide as long a comment period as possible.
General Discussion of Foreign School Participation Comments
In the preamble of the NPRM, the Secretary asked for comments and
supporting arguments on:
What, if any, additional standards should be established
for foreign schools that participate in the Direct Loan Program;
Potential financial risks as well as benefits of admitting
foreign schools into the Direct Loan Program; and
Potential losses or benefits to students related to
foreign school participation in the Direct Loan Program.
One foreign school responded to the Secretary's invitation for
comments. This school expressed enthusiasm about the Direct Loan
Program because it
[[Page 61791]]
views potential participation as a way to solve some of the problems
the school is currently experiencing in receiving loan funds under the
FFEL Program. The commenter supported foreign school participation in
the Direct Loan Program.
Further, the commenter suggested that the Secretary should not
group all foreign schools together for purposes of participation in the
Direct Loan Program and recommended that a separate category be
established for schools that are located outside of the U.S. but are
U.S. accredited. It is the school's opinion that this group would
present a lower potential financial risk for the Federal Government
since these schools maintain a U.S. Admissions Office and a U.S. dollar
bank account. This commenter also pointed out the importance of making
sure that foreign schools have trained individuals processing loans for
their students.
Another commenter felt that it was premature to consider foreign
school participation in the Direct Loan Program and recommended that
processing system changes be implemented prior to allowing foreign
school participation.
A third commenter recommended that foreign schools be allowed to
participate, but not allowed to originate loans. This commenter
suggested that foreign schools be required to use an alternative
originator. This suggestion was made based on the commenter's opinion
that all foreign schools are not uniform in their ability to administer
the Title IV programs.
The Secretary understands and appreciates the issues raised by
these commenters. As discussed in the NPRM, the Secretary is aware
that, due to the nature of the Direct Loan Program, additional fiscal
oversight and administrative requirements are warranted for
participating foreign schools. The Direct Loan Program is unique among
the financial aid programs with respect to its funds disbursement
processes and requirements. Because there is no authorized limit to the
amount of funds that schools may draw down in the Direct Loan Program,
the Department must rigorously oversee the funds disbursement process.
To prevent potential program abuse, the Secretary is committed to the
careful monitoring of the drawdown of funds to schools and the
disbursement to students.
Based on the comments received, the Secretary has determined that
the issue of foreign school participation in the Direct Loan Program
warrants further consideration. Therefore, no specific provisions
related to foreign school participation are included in these
regulations.
Discussion of Major Issues
Section 685.102 Definitions
School Origination Option 1, School Origination Option 2, and Standard
Origination
Section 685.102(b)
Comments: Several commenters responded to the proposed revisions of
the current definitions of school origination option 1, school
origination option 2, and standard origination. These commenters viewed
these changes as a positive step that would allow institutions greater
flexibility to have the origination process modified based on the their
unique capabilities and individual needs.
Several other commenters did not support the proposed change. These
commenters argued that the Secretary should not amend the ``origination
requirements.''
Discussion: It appeared from the comments that there may be some
confusion regarding the proposed change. The Secretary is not changing
the origination criteria, nor is the Secretary redesignating the
functions performed at a given level of origination. The purpose of
this amendment is to allow a school the flexibility to ask the
Secretary to perform a function that the school must, under current
regulation, perform, at a given origination level. If the Secretary
approves the school's request, the Secretary will perform the
functions, but the school would not be required to change its
origination level.
For example, during the 1996-1997 academic year, an origination
option 2 level school is fully qualified to perform all loan
origination functions and to draw down loan funds. If a school wanted
to ask the Secretary to handle the promissory note functions, but still
wanted to be able to draw down funds (for which the school is fully
qualified), current regulations would not allow this option. The
proposed change would allow the Secretary to establish this type of
individual agreement with the school.
The proposed regulatory amendment would not undermine the integrity
of the program or the Secretary's ability to provide sound oversight.
Furthermore, the change is consistent with the Secretary's current
initiative to promote regulatory flexibility and reduce unnecessary
burden on institutions. The Secretary is confident that this regulatory
change allows schools to customize the origination process in a manner
that would be beneficial for schools, as well as the Direct Loan
Program.
Change: For clarity, the word ``status'' has been changed to
``options'' in each of the definitions.
Comments: A number of commenters recommended that any revisions to
the origination criteria be established through negotiated rulemaking.
These commenters noted that the existing origination criteria were
developed through extensive negotiated rulemaking.
Discussion: Section 457 of the HEA requires the Secretary to
conduct negotiated rulemaking for the Direct Loan Program only to the
extent practicable. This section does not require negotiated rulemaking
for amendments to existing regulations. Further, the Secretary does not
believe that it is practicable to conduct negotiated rulemaking for
amendments to these regulations. Negotiated rulemaking is a lengthy
process that would have prevented implementation of the revised
definitions of school origination option 1, school origination option
2, and standard origination for the 1996/1997 academic year. For these
amendments, the Secretary has decided not to use the negotiated
rulemaking process to solicit input from the higher education
community. In the Secretary's opinion, these changes are a positive
step that allow institutions the flexibility to modify the origination
process based on their individual needs and capabilities. Because this
is an improvement over the existing process, schools should be able to
benefit from these regulatory revisions as soon as possible. The
majority of the commenters supported the Secretary's proposal to revise
these definitions of origination criteria.
Changes: None.
Section 685.208 Repayment Plans, Section 685.210 Choice of Repayment
Plans, and Section 685.215 Consolidation
Comments: None of the commenters supported these proposed
amendments. One commenter argued that borrowers with one FFEL Program
loan should not be precluded from initially consolidating into the
Direct Loan Program using the standard repayment plan. The commenter
felt that a borrower's repayment options should not be limited by the
number of loans the borrower wishes to consolidate. The commenter also
asserted that, if the standard repayment plan offered the best terms
for that Direct Consolidation Loan borrower, that option should be
available to the borrower.
[[Page 61792]]
Discussion: The Departmental practice of requiring borrowers who
consolidate only one FFEL Program loan into the Direct Loan Program to
initially select a repayment plan other than the standard repayment
plan had been implemented in response to the concerns of the FFEL
community. However, none of the commenters wrote in support of this
provision. Further, the only specific comment addressing this proposal
was received from a member of the FFEL community, and that commenter
urged the Secretary to delete this provision.
Change: Proposed amendments to Secs. 685.208, 685.210 and 685.215
have been removed.
Section 685.301 Origination of a Loan by a Direct Loan Program School
Section 685.301(a)(5) Determining Eligibility and Loan Amount
Comments: Several commenters supported the amendment to clarify the
date of loan origination. One commenter objected to the Secretary's
clarification of the date of loan origination for the Direct Loan
Program. This commenter felt that both the Direct Loan and FFEL
Programs should establish the same definition for the ``date of
origination.'' If this is not possible, the commenter suggested the
Secretary create another term for ``the date of origination'' in the
Direct Loan Program to avoid possible confusion among Direct Loan and
FFEL Program participants.
Discussion: It is important to establish clearly the date of
origination, because a school may only originate a loan while the
borrower meets the eligibility requirements. The NPRM proposed that the
date of loan origination be the earlier of the date the promissory note
is printed or the date the origination record is accepted by the
Secretary. Beginning with the 1996-1997 academic year, enhanced loan
origination software will record the date of origination permanently on
the borrower's loan file when the borrower's origination record is
created by the school. Modifying the Direct Loan school software to
record automatically the date the school creates the origination record
will ensure that the school is able to document clearly the date that
it certified a borrower's eligibility for a loan, the loan amount, and
anticipated disbursement dates. Further, because the electronic
origination record is created earlier in loan processing than either
printing the promissory note or the origination record being accepted
by the Secretary, this change will result in improved service to both
schools and borrowers. Service to schools is improved because the
information necessary to document the origination process is
automatically generated in the student's electronic file; service to
borrowers is improved by promoting flexibility in processing loans.
The Secretary is making every effort to ensure conformity between
the Direct Loan and the FFEL Programs whenever possible. However, there
is no definition of ``date of origination'' in the FFEL Program.
Further, the programs operate differently and it is impossible to
attain absolute conformity between the programs in all aspects. For
example, loan origination in the Direct Loan Program is similar to
certification of the loan application in the FFEL Program but because
of the inherent operational differences between the program, the two
events are not necessarily identical. In the FFEL Program, school
officials certify borrower information on a combined application and
promissory note. In the Direct Loan Program, the application process is
separate from certification of loan information. Therefore, Direct Loan
eligibility is certified by means of the electronic origination record
and a written statement provided by the school after submitting the
origination record. On the origination record, a school certifies a
borrower's eligibility, the loan amount, and the anticipated
disbursement dates. Due to these operational differences, it is not
appropriate to have the same provision in both loan programs. Further,
because very few schools participate in both the Direct Loan and FFEL
Programs, the Secretary does not believe that this terminology will
cause confusion.
The Secretary wants to clarify that the use of the phrase ``date of
loan origination'' in the Direct Loan Program is intended for
operational purposes only and does not constitute a commitment on the
part of the Federal Government to make a loan. This distinction is
important to avoid possible confusion with the use of the term
``origination'' for Federal budgetary purposes.
Changes: The regulation has been revised to reflect that the date
of loan origination is the date a school creates an electronic loan
origination record.
Section 685.301(d) Reporting to the Secretary
Comments: Three commenters felt that the requirement for schools to
submit the promissory note, disbursement record, and origination record
no later than 30 days following the date of disbursement of loan funds
was too restrictive. One of these commenters asked the Secretary to
reconsider this timeline because the 30-day deadline would be too
burdensome to adhere to in light of other program requirements, such as
reconciliation reporting requirements. Another of these commenters
suggested that the timeline be extended to 45 days to aid financial aid
administrators during their demanding Fall season. This commenter felt
that the extra 15 days would make a significant difference in the
management of financial aid processes.
Several other commenters strongly endorsed the 30-day reporting
requirement. They argued that if schools are required to submit these
documents to the Secretary quickly, borrowers will be better served.
Additionally, these commenters felt this requirement would result in
the reconciliation processing working more smoothly and occurring on a
more timely basis--ultimately leading to better fiscal control over
federal funds.
One commenter recommended that regulations be added to limit a
school's ability to draw down funds until the school had reconciled the
funds it had already disbursed. Another commenter recommended that,
even though the commenter supported the 30-day reporting requirement,
the Secretary should grant schools a brief extension if this
requirement presents unanticipated compliance difficulties.
Discussion: The Secretary disagrees with the commenters that assert
that this requirement is too restrictive and overly burdensome for the
schools. In previous guidance, the Department has advised all Direct
Loan schools that they should reconcile and submit all loan origination
records, promissory notes, and disbursement records on a monthly basis
[see the April 26, 1994, Announcement of Criteria for Loan
Origination--1995-1996 Academic Year (59 FR 21804) and Chapter 7 of the
Direct Loan School Guide]. This requirement is needed to ensure that
borrowers receive disbursement disclosure information and loan
servicing information shortly after the loan is disbursed. Further,
Direct PLUS Loan borrowers enter repayment when the loan is fully
disbursed and the Department must receive disbursement information in a
timely manner in order to establish repayment terms. Requiring the
timely submission of program data by schools to the Direct Loan
Servicer will enhance the Department's administrative and fiscal
oversight capabilities and will help ensure that up-to-date data are
maintained in the National Student Loan Data System.
After a year of experience in administering the Direct Loan
Program,
[[Page 61793]]
the Secretary is convinced that services to borrowers would be
substantially improved by requiring schools to submit the promissory
note, disbursement record, and origination record no later than 30 days
following the date of disbursement of loan funds. The implementation of
this 30-day requirement is in the best interest of federal taxpayers as
well as Direct Loan schools. Furthermore, the timely submission of
origination records, promissory notes, and initial and subsequent
disbursement records is particularly critical at the end of the Federal
fiscal year (September 30).
Ultimately, the result of this requirement will be that borrowers
will have fewer questions and problems in the initial phase of the loan
process. Also, schools will benefit from this change because schools
that do not report disbursements in a timely manner appear to have
excess cash even when they have properly disbursed funds to borrowers
in compliance with the cash management regulations. The Secretary is
confident that the 30-day reporting requirement will help the
reconciliation process to work more smoothly and on a more timely
basis, ultimately leading to better fiscal control over federal funds
and improved services to borrowers.
The Secretary understands that, particularly for Direct Loan
schools during their first year of participation in the program, the
Department may initially need to extend reasonable lenience when
enforcing this requirement. These schools may need additional time or
assistance until they become familiar with the Direct Loan processes
and procedures. Furthermore, the Secretary has already committed to
current program participants that the Secretary will assist any schools
having difficulty in complying with this requirement. The Secretary is
ready to provide technical support to schools and is willing to review
a school's on-site operations, if requested, to make suggestions
regarding changes that will enable the school to meet this requirement.
Based on the comments received on this issue, it appears that some
commenters are confused about when a borrower receives the disclosure
of loan information in the Direct Loan Program. Every Direct Loan
borrower receives disclosure information on the Direct Loan promissory
note prior to disbursement. The disclosure that is mailed from the
Direct Loan Servicing Center following any disbursement is in addition
to the initial disclosure.
Changes: None.
Executive Order 12866
These final regulations have been reviewed in accordance with
Executive Order 12866. Under the terms of the order the Secretary has
assessed the potential costs and benefits of this regulatory action.
The potential costs associated with the final regulations are those
resulting from statutory requirements and those determined by the
Secretary as necessary for administering this program effectively and
efficiently.
In assessing the potential costs and benefits--both quantitative
and qualitative--of these final regulations, the Secretary has
determined that the benefits of the regulations justify the costs.
The Secretary has also determined that this regulatory action does
not unduly interfere with State, local, and tribal governments in the
exercise of their governmental functions.
Summary of Potential Costs and Benefits
The potential costs and benefits of these final regulations are
discussed elsewhere in this preamble under the following heading:
Analysis of Comments and Changes.
Assessment of Educational Impact
In the NPRM, the Secretary requested comments on whether the
proposed regulations would require transmission of information that is
being gathered by, or is available from, any other agency or authority
of the United States.
Based on the response to the proposed rules and on its own review,
the Department has determined that the regulations in this document do
not require transmission of information that is being gathered by, or
is available from, any other agency or authority of the United States.
List of Subjects in 34 CFR Part 685
Administrative practice and procedure, Colleges and universities,
Education, Loan programs-education, Reporting and recordkeeping
requirements, Student aid, Vocational education.
(Catalog of Federal Domestic Assistance Numbers: 84.268, William D.
Ford Federal Direct Loan Program)
Dated: November 22, 1995.
Richard W. Riley,
Secretary of Education.
The Secretary amends part 685 of title 34 of the Code of Federal
Regulations to read as follows:
PART 685--WILLIAM D. FORD FEDERAL DIRECT LOAN PROGRAM
1. The authority citation for Part 685 continues to read as
follows:
Authority: 20 U.S.C. 1087a et seq., unless otherwise noted.
2. Section 685.102, paragraph (b) is amended by revising the
definition of ``School origination option 1,'' ``School origination
option 2,'' and ``Standard origination.''
Sec. 685.102 Definitions.
* * * * *
(b) * * *
School origination option 1: In general, under this option the
school performs the following functions: creates a loan origination
record, transmits the record to the Servicer, prepares the promissory
note, obtains a completed and signed promissory note from a borrower,
transmits the promissory note to the Servicer, receives the funds
electronically, disburses a loan to a borrower, creates a disbursement
record, transmits the disbursement record to the Servicer, and
reconciles on a monthly basis. The Servicer initiates the drawdown of
funds for schools participating in school origination option 1. The
Secretary may modify the functions performed by a particular school.
School origination option 2: In general, under this option the
school performs the following functions: creates a loan origination
record, transmits the record to the Servicer, prepares the promissory
note, obtains a completed and signed promissory note from a borrower,
transmits the promissory note to the Servicer, determines funding
needs, initiates the drawdown of funds, receives the funds
electronically, disburses a loan to a borrower, creates a disbursement
record, transmits the disbursement record to the Servicer, and
reconciles on a monthly basis. The Secretary may modify the functions
performed by a particular school.
* * * * *
Standard origination: In general, under this option the school
performs the following functions: creates a loan origination record,
transmits the record to the Servicer, receives funds electronically,
disburses funds, creates a disbursement record, transmits the
disbursement record to the Servicer, and reconciles on a monthly basis.
The Servicer prepares the promissory note, obtains a completed and
signed promissory note from a borrower, and initiates the drawdown of
funds for schools participating in standard
[[Page 61794]]
origination. The Secretary may modify the functions performed by a
particular school.
(Authority: 20 U.S.C. 1087a et seq.)
3. Section 685.201 is amended by revising paragraph (a)(2)
introductory text, and paragraph (b) to read as follows:
Sec. 685.201 Obtaining a loan.
(a) * * *
(2) If the student is eligible for a Direct Subsidized Loan or a
Direct Unsubsidized Loan, the Secretary or the school in which the
student is enrolled shall perform specific functions. Unless a school's
agreement with the Secretary specifies otherwise, the school shall
perform the following functions:
* * * * *
(b) Application for a Direct PLUS Loan. To obtain a Direct PLUS
Loan, the parent shall complete the application and promissory note and
submit it to the school at which the student is enrolled. The school
shall complete its portion of the application and promissory note and
submit it to the Servicer, which makes a determination as to whether
the parent has an adverse credit history. Unless a school's agreement
with the Secretary specifies otherwise, the school shall perform the
following functions: A school participating under school origination
option 2 shall draw down funds and disburse the funds. For a school
participating under school origination option 1 or standard
origination, the Servicer initiates the drawdown of funds, and the
school disburses the funds.
* * * * *
(Authority: 20 U.S.C. 1087a et seq., 1091a)
4. Section 685.301 is amended by redesignating paragraphs (a)(5)
and (a)(6) as paragraphs (a)(6) and (a)(7), respectively, adding a new
paragraph (a)(5) and by adding a new paragraph (d) to read as follows:
Sec. 685.301 Origination of a loan by a Direct Loan Program school.
(a) * * *
(5) The date of loan origination is the date a school creates the
electronic loan origination record.
* * * * *
(d) Reporting to the Secretary. (1) A school that originates a loan
must submit the promissory note, loan origination record, and initial
and subsequent disbursement records to the Secretary no later than 30
days following the date of disbursement. A school must submit the loan
origination record and disbursement record to the Secretary no later
than 30 days following the date of disbursement for each subsequent
disbursement.
(2) A school that participates under standard origination must
submit the initial and subsequent disbursement record to the Secretary
no later than 30 days following the date of disbursement. A school must
submit the disbursement record to the Secretary no later than 30 days
following the date of disbursement for each subsequent disbursement.
(Authority: 20 U.S.C. 1087a et seq.)
(Approved by the Office of Management and Budget under Control
Number 1840-0672)
[FR Doc. 95-29126 Filed 11-30-95; 8:45 am]
BILLING CODE 4000-01-P
