[Federal Register Volume 59, Number 80 (Tuesday, April 26, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-9851]
[[Page Unknown]]
[Federal Register: April 26, 1994]
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Part II
Department of Education
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34 CFR Part 685
Federal Direct Student Loan Program; Final Rule
DEPARTMENT OF EDUCATION
34 CFR Part 685
Federal Direct Student Loan Program
AGENCY: Department of Education.
ACTION: Announcement of criteria for loan origination--1995-1996
academic year.
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SUMMARY: The Secretary of Education issues criteria for the origination
of student loans by schools participating in the Federal Direct Student
Loan (Direct Loan) Program in the 1995-1996 academic year, which begins
July 1, 1995. This notice relates to the Federal Direct Stafford Loan
Program, the Federal Direct Unsubsidized Stafford Loan Program, and the
Federal Direct PLUS Program, collectively referred to as the Direct
Loan Program.
DATES: Effective Date: The criteria are effective June 10, 1994 or
later if the Congress takes certain adjournments. If you want to know
the effective date of these criteria, call or write the Department of
Education contact person.
Applicable Period: The criteria are applicable for the 1995-1996
academic year, which begins July 1, 1995. Criteria for loan origination
for the 1994-1995 academic year were published in the Federal Register
on September 10, 1993 (58 FR 47816). The standards, criteria, and
procedures governing other aspects of the Direct Loan Program for the
1994-1995 academic year only were published in the Federal Register as
34 CFR part 685 on January 4, 1994 (59 FR 472).
FOR FURTHER INFORMATION CONTACT: Lloyd Robertson, U.S. Department of
Education, 400 Maryland Avenue, SW., Washington, DC 20202-5162.
Telephone: (202) 708-8242. 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: The Student Loan Reform Act of 1993, enacted
on August 10, 1993, established the Direct Loan Program under the
Higher Education Act of 1965, as amended (HEA). See Subtitle A of the
Omnibus Budget Reconciliation Act of 1993 (Pub. L. 103-66). Under the
Direct Loan Program, loan capital is provided directly to student and
parent borrowers by the Federal Government rather than through private
lenders as in the Federal Family Education Loan Program.
Background
The statute directs the Secretary to exercise discretion in the
selection of schools so that the loans made under the Direct Loan
Program will represent 40 percent of the new student loan volume for
academic year 1995-1996, the second year of this program. The standards
for participation in the Direct Loan Program in the second year were
published in the Federal Register on February 17, 1994 (59 FR 8080).
The Secretary will select schools for the 1995-1996 academic year from
schools that respond to the February 17, 1994 invitation to participate
in the Direct Loan Program, as well as those eligible schools that
applied for the 1994-1995 academic year.
The criteria for originating loans in the second year of the Direct
Loan Program are issued in this announcement in final form. The program
regulations to implement other aspects of the Direct Loan Program in
the second year and subsequent academic years are being developed
through a negotiated rulemaking process. The Secretary anticipates
publishing final program regulations for the 1995-1996 academic year by
December 1, 1994.
While the criteria in this document were not developed through
negotiated rulemaking, the members of the Direct Student Loan
Regulations Negotiated Rulemaking Advisory Committee were consulted in
the development of the criteria at their February meeting.
Eligibility for Origination
In the 1995-1996 academic year, a school originating loans in the
Direct Loan Program will be in one of two levels of origination. The
Secretary has adopted the criteria in this document because they are
indicators of a school's ability to administer financial aid programs.
Under the criteria, a school may participate in the first level of
origination (Level 1) only if it has a demonstrated ability to fully
administer the Direct Loan program.
A school that meets all the criteria for Level 1 origination is
eligible to perform all originating functions. If a school does not
qualify for Level 1 origination, it is eligible to perform those
functions allowed in the second level of origination (Level 2), unless
it fails to meet one or more of the criteria required for that level.
A school that is eligible for Level 1 origination may choose to
participate in Level 2 origination or use the services of an
alternative originator. Similarly, a school eligible for Level 2
origination may choose to use the services of an alternative
originator.
The Secretary may exercise discretion and allow a school to
originate loans at a level for which it would not otherwise be eligible
if the Secretary determines that the school is fully capable of
originating loans at that level. The Secretary may also require a
school that meets the criteria for Level 2 origination to use the
services of an alternative originator if the extent to which the school
fails to meet certain other origination criteria merits such an action.
Functions Performed by Level 1 and Level 2 Originating Schools
Under the Direct Loan Program, schools and consortia that originate
loans must use software provided by the Secretary, or other software
based on specifications provided by the Secretary, to create a loan
origination record containing the basic information necessary to make a
loan. The software provided by the Secretary reformats the data
received from the Central Processing System and computes gross
disbursements, loan fees, and net disbursements on the basis of the
loan amounts entered by the school. The school must add data, such as
the type of loan, loan amount, and disbursement dates, and may
computer-generate the Stafford Promissory Note and Disclosure
(promissory note). A school may also transmit the information collected
by the school to the Direct Loan Program Servicer (Servicer) which,
upon request, prints promissory notes on behalf of the school and sends
them to the school.
A student who accepts a Direct Loan completes a promissory note and
returns it to the school; the school may not disburse Direct Loan funds
without a completed promissory note.
Functions Performed Only by Level 1 Originating Schools
A Level 1 originating school in the Direct Loan Program requests
and obtains loan funds from the Secretary using a process similar to
the process for drawing down funds for other Department of Education
(ED) programs. A Level 1 originating school transmits to ED a specific
Direct Loan funding request that is separate from its funding requests
for other programs and is based on immediate disbursement needs. Direct
Loan capital must be tracked separately and cannot be used for purposes
other than making Direct Loans. The electronic transfer of funds uses
the same delivery process as is used for the Federal Pell Grant
Program. After a request for funds is received, the Secretary uses the
Automated Clearinghouse (ACH) process through the Federal Reserve
Banking system to deposit funds in a school's designated bank account.
Currently, this process takes between 48 to 72 hours from the school's
request for funds until the school's receipt of funds.
After receiving funds from the Secretary, a school disburses funds
to students by issuing checks or by crediting their accounts at the
school. Before a school may disburse funds to a borrower, the school
must ensure that it has a completed and signed promissory note. The
funds received by a Level 1 originating school that are intended for
specific borrowers but not disbursed to those borrowers may be used to
fund other borrowers. After the first disbursement is made, the school
must record the actual disbursed amount and the date of the
disbursement in the loan origination record and transmit all completed
loan records and promissory notes (if not previously submitted) to the
Servicer. The school transmits subsequent disbursement data to the
Servicer as the disbursements occur.
Functions Performed by Level 2 Originating Schools
A Level 2 originating school is assisted in the management of funds
by the Servicer. The Servicer reviews the loan origination records and
promissory notes transmitted by the school before funds are disbursed.
The promissory notes must be correct and complete before funds can be
disbursed. The Servicer initiates the transfer of funds to the school
three days prior to the anticipated loan disbursement date on the basis
of loan origination records and the completed promissory notes. The
school receives a roster from the Servicer identifying each borrower,
the anticipated disbursement date and amount to be disbursed for each
borrower, and the total amount of funds received by the school. Through
the ACH process, the funds are sent to the school's bank within 48 to
72 hours following the initiation of the transfer of funds. The funds
received by a Level 2 originating school are intended for specific
borrowers and may not be used to fund other borrowers. Level 2
originating schools are responsible for reporting actual disbursement
data to the Servicer.
Schools That Use an Alternative Originator
The alternative originator manages both the promissory note and
funds management processes for schools that use the alternative
originator. These schools transmit the data necessary for the
alternative originator to generate the promissory note. The alternative
originator sends the promissory note to the borrower. The borrower must
complete the promissory note and send it back to the alternative
originator. The alternative originator reviews the promissory note
before funds are disbursed. The promissory note must be correct and
complete before funds can be disbursed. The alternative originator
initiates the transfer of funds to the school three days prior to the
anticipated loan disbursement date on the basis of the loan origination
records and the completed promissory notes. The school receives a
roster from the alternative originator identifying each borrower, the
anticipated disbursement date and amount to be disbursed for each
borrower, and the total amount of funds received by the school. Using
the ACH process, the funds are sent to the school's bank within 48 to
72 hours following the initiation of the transfer of funds. The funds
received by a school using the alternative originator are intended for
specific borrowers and may not be used to fund other borrowers. Schools
that use the alternative originator are responsible for reporting
actual disbursement data to the Servicer. In addition, the Secretary
may provide additional loan counseling to students at a school under
alternative origination.
Federal Direct Plus Loans
Federal Direct PLUS loans are made through a process similar to the
one used in the Federal PLUS loan program. The parent obtains an
Application and Promissory Note (promissory note) from the school and,
after completing the promissory note, sends it to the school. The
school completes the school section of the promissory note and forwards
it to the Servicer, where data from the note is key entered and a
credit check is performed. Alternatively, a school enters data from the
note using the software provided and electronically forwards this
information to the Servicer along with the paper copy of the promissory
note. In either case, the Servicer performs a credit check to determine
whether the parent has an adverse credit history and notifies the
school and the parent of the results. If the loan is approved, the
Servicer sends a disclosure statement to the parent. If the credit
check indicates an adverse credit history, the Servicer advises the
parent of available options; for example, the parent may obtain an
endorser without an adverse credit history. If the loan is approved and
the school is a Level 1 originating school, the school may draw down
money and disburse loan funds in the same manner as it would for other
loans made under the Direct Loan Program. If the school is not a Level
1 originating school, the Servicer electronically transmits the funding
request for the school based on the loan origination records and
promissory notes that the Servicer holds for that school.
Reconciliation of Records Performed by All Participating Schools
A school is required to reconcile cash and individual loan records
monthly. To reconcile cash, a school must provide documentation to the
Servicer that the total net disbursements minus cancellations, plus
return of excess cash, is equal to the amount of money the school has
drawn down during a one-month period. This process must be completed by
the end of the next month. For example, loan records and promissory
notes for all disbursements and cancellations made in July 1995 must be
transmitted to the Servicer by the end of August 1995. To reconcile
loan records, a school's records must match the records of the
Servicer. The software that is provided to participating schools is
designed to assist schools in this reconciliation process.
Administrative Fees
Level 1 originating schools will have greater responsibility than
Level 2 originating schools in the area of funds management. Because of
this greater responsibility, a Level 1 originating school will receive
a higher administrative fee than a Level 2 originating school. The HEA
does not allow a school that participates under alternative origination
to receive administrative fees.
Consortia
A consortium of schools in the Direct Loan Program interacts with
the Secretary in the same manner as other schools, except that the
communication between the Secretary and the schools in the consortium
is consolidated and channeled through a single point. Each school in a
consortium must sign the Direct Loan Program participation agreement
with the Secretary and is responsible for the information it supplies
through the consortium. If a consortium wishes to originate loans, each
school in the consortium must be eligible to originate. The consortium
will be eligible to originate at the most restrictive level any school
in the consortium is eligible to originate. For example, if one school
in a consortium is eligible to originate at the second level and the
other schools in the consortium are eligible to originate at the first
level, the consortium is eligible to originate only at the second level
of origination.
Criteria Chart
The following chart is provided to show, in a summary format, the
criteria for the different levels of origination. Any differences
between the language in the chart and the language in the criteria
announced in this document should be resolved in favor of the latter.
Criteria for Loan Origination.--1995-1996 Academic Year--an X Indicates
That the Criterion Must Be Met To Participate at the Indicated
Origination Level
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Original Original
Criteria level 1 level 2
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1. Be currently participating in the X
Federal Perkins Loan Program or the
Federal Pell Grant Program or, for a
graduate or professional school, a
similar program.
2. If participating in the Federal Perkins X
Loan Program, not have exceeded the
applicable maximum default rate under
section 462(g) of the HEA.
3. Have participated in at least one of X
the student financial assistance programs
under title IV of the HEA for the three
years immediately preceding July 1, 1995.
4. Not be provisionally certified to X
participate in programs under title IV of
the HEA.
5. Not be on the reimbursement system of X X
payment in the Federal Pell Grant Program.
6. Not have received notice that the X X
school is subject to an emergency action
or a proposed or final limitation,
suspension, or termination action under
the HEA.
7. Not, in the opinion of the Secretary, X X
have had severe performance deficiencies
for any of the programs under title IV of
the HEA.
8. If participating in the Federal Pell X
Grant Program, have submitted Student Aid
Reports on a timely basis.
9. Not be overdue on Federal cash X
transaction reports required under title
IV of the HEA.
10. Not be overdue on program or financial X
reports or audits required under title IV
of the HEA.
11. Provide an assurance that the school X
has no delinquent outstanding debts to
the Federal Government (subject to
certain exceptions).
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A school that does not meet the criteria to originate loans must
use the services of an alternative originator.
The Secretary may allow a school to originate loans at a level for
which it would not otherwise be eligible if the Secretary determines
that the school is fully capable of originating loans at that level.
The Secretary may also require a school that meets the criteria for the
second level of origination to use the services of an alternative
originator if the extent to which the school fails to meet other
criteria merits such an action. A consortium of schools may originate
loans at a level of origination for which all members of the consortium
are eligible.
Executive Order 12866
The contents of this announcement 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 the criteria in this
announcement.
The potential costs associated with the criteria in this
announcement are those resulting from statutory requirements and those
determined by the Secretary to be necessary for administering this
program effectively and efficiently. In assessing the potential costs
and benefits--both quantitative and qualitative--of these criteria the
Secretary has determined that the benefits of the criteria justify the
costs.
The Secretary has also determined that the criteria in this
announcement do not unduly interfere with State, local, and tribal
governments in the exercise of their governmental functions.
The criteria in this announcement are consistent with the
requirements of the HEA and promote the President's priorities.
Waiver of Rulemaking
It is the practice of the Secretary to offer interested parties the
opportunity to comment on proposed regulations. The Secretary has
consulted with the members of the Direct Student Loan Regulations
Negotiated Rulemaking Advisory Committee in the development of the
criteria in this announcement, and many of the comments of those
members have been adopted. However, the timely implementation of the
Direct Loan Program for the 1995-1996 academic year does not permit the
solicitation of further public comment on the criteria for origination
for that year.
To ensure successful implementation of the Direct Loan Program in
the second year, schools need to receive program and software training,
integrate Direct Loan Program materials into school publications, and
interface Direct Loan software and origination procedures with the
school's own systems and procedures. The Secretary believes that the
training of school personnel, the development and distribution of
materials, and the updating of Direct Loan systems and procedures must
begin by June 1994. These preparations require that the Secretary, as
soon as possible, initiate the school selection process and prescribe
the standards and procedures for the origination of loans by schools
that are considering whether to participate.
The increase from five percent of new student loan volume in the
first year of the program to 40 percent in the second year means that
the number of schools participating in the program in the second year
is likely to increase from 104 to over 2,000. In light of the
preparations required to accommodate the dramatic growth in the Direct
Loan Program in the 1995-1996 academic year, the Secretary finds that
the requirements for the second-year implementation of the program do
not permit the solicitation of further public comment on the criteria
for loan origination in that year. Therefore, the Secretary finds that
such a solicitation would be impracticable and contrary to the public
interest under 5 U.S.C. 553(b)(B).
Accordingly, under the authority of the Higher Education Act of
1965, as amended, the Secretary announces the criteria for loan
origination for the 1995-1996 academic year, as follows:
Criteria for Loan Origination--1995-1996 Academic Year
I. Origination
(a) To be eligible to participate in the first level of origination
of the Direct Loan Program, a school must meet the following criteria:
(1) Be currently participating in the Federal Perkins Loan Program
or the Federal Pell Grant Program or, for a graduate and professional
school, a similar program.
(2) If participating in the Federal Perkins Loan Program, not have
exceeded the applicable maximum default rate under section 462(g) of
the Higher Education Act (HEA) for the most recent fiscal year for
which data are available.
(3) Have participated in at least one of the student financial
assistance programs under title IV of the HEA for the three years
immediately preceding July 1, 1995.
(4) Not be provisionally certified to participate in programs under
title IV of the HEA.
(5) Not be on the reimbursement system of payment in the Federal
Pell Grant Program.
(6) Not have received notice that the school is subject to an
emergency action or a proposed or final limitation, suspension, or
termination action under section 428(b)(1)(T), 432(h), or 487(c) of the
HEA.
(7) Not, in the opinion of the Secretary, have had severe
performance deficiencies for any of the programs under title IV of the
HEA, including deficiencies demonstrated by audits or program reviews
submitted or conducted during the five calendar years immediately
preceding the date of application to participate in the Direct Loan
Program. These performance deficiencies may also include the school's
failure to fulfill its responsibilities as an originating school in the
program.
(8) If participating in the Federal Pell Grant Program, have
submitted Student Aid Reports on a timely basis.
(9) Not be overdue on Federal cash transaction reports required
under title IV of the HEA.
(10) Not be overdue on program or financial reports or audits
required under title IV of the HEA.
(11) Provide an assurance that the school has no delinquent
outstanding debts to the Federal Government, unless (i) those debts are
being repaid under or in accordance with a repayment arrangement
satisfactory to the Federal Government, or (ii) the Secretary
determines that the existence or amount of the debts has not been
finally determined by the cognizant Federal agency.
(b) To be eligible to participate in the second level of
origination, a school must meet the criteria in part I (a)(5), (6), and
(7) of this announcement.
II. Alternative Origination
A school participating in the Direct Loan Program that is not
eligible to originate loans under part I of this announcement must use
the services of an alternative originator.
III. Determination of Origination Status
The Secretary may allow a school to originate loans at a level for
which it would not otherwise be eligible if the Secretary determines
that the school is fully capable of originating loans at that level.
The Secretary may also require a school that meets the criteria for the
second level of origination to use the services of an alternative
originator if the extent to which the school fails to meet other
origination criteria merits such an action. A consortium of schools may
originate loans at a level of origination for which all members of the
consortium are eligible.
(Authority: 20 U.S.C. 1087a et seq)
Dated: April 14, 1994.
Richard W. Riley,
Secretary of Education.
(Catalog of Federal Domestic Assistance Number 84.268, Federal
Direct Student Loan Program)
[FR Doc. 94-9851 Filed 4-25-94; 8:45 am]
BILLING CODE 4000-01-P
