[Federal Register Volume 64, Number 145 (Thursday, July 29, 1999)]
[Proposed Rules]
[Pages 41232-41249]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-19230]
[[Page 41231]]
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Part III
Department of Education
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34 CFR Part 674
Federal Perkins Loan Program; Proposed Rule
Federal Register / Vol. 64, No. 145 / Thursday, July 29, 1999 /
Proposed Rules
[[Page 41232]]
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DEPARTMENT OF EDUCATION
34 CFR Part 674
RIN 1840-AC70
Federal Perkins Loan Program
AGENCY: Department of Education.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Secretary proposes to amend the Federal Perkins Loan
Program regulations. These proposed regulations are needed to implement
the changes to the Higher Education Act of 1965, as amended (the HEA),
resulting from the Higher Education Amendments of 1998 (the 1998
Amendments). The proposed regulations reflect the provisions of the
1998 Amendments that affect the institutions that participate in, and
borrowers who have loans made under, the Federal Perkins Loan Program.
These proposed regulations would expand borrower benefits under the
Federal Perkins Loan program by increasing loan limits, expanding
borrower eligibility for deferments and cancellations, establishing a
loan rehabilitation program for borrowers in default on their Federal
Perkins Loans, establishing an incentive repayment program, and
providing a closed school discharge.
DATES: We must receive your comments by September 15, 1999.
ADDRESSES: Address all comments about these proposed regulations to Ms.
Gail McLarnon, Program Specialist, Policy Development Division, Office
of Student Financial Assistance, U.S. Department of Education, 400
Maryland Avenue, SW., Room 3042, Regional Office Building 3,
Washington, DC 20202-5449. If you prefer to send your comments through
the Internet, use the following address: perkinsnprm@ed.gov
If you want to comment on the information collection requirements
you must send your comments to the Office of Management and Budget at
the address listed in the Paperwork Reduction Act section of this
preamble. You may also send a copy of these comments to the Department
representative named in this section.
FOR FURTHER INFORMATION CONTACT: Ms. Gail McLarnon, Program Specialist,
U.S. Department of Education, 400 Maryland Avenue, SW., Room 3045,
Regional Office Building 3, Washington, DC 20202-5449. Telephone: (202)
708-8242. If you use a telecommunications device for the deaf (TDD),
you may call the Federal Information Relay Service at 1-800-877-8339.
Individuals with disabilities may obtain this document in an
alternate format (e.g., Braille, large print, audiotape, or computer
diskette) on request to the contact person listed in the preceding
paragraph.
SUPPLEMENTARY INFORMATION:
Invitation to Comment
We invite you to submit comments regarding these proposed
regulations. To ensure that your comments have maximum effect in
developing the final regulations, we urge you to identify clearly the
specific section or sections of the proposed regulations that each of
your comments addresses and to arrange your comments in the same order
as the proposed regulations.
We invite you to assist us in complying with the specific
requirements of Executive Order 12866 and its overall requirement of
reducing regulatory burden that might result from these proposed
regulations. Please let us know of any further opportunities we should
take to reduce potential costs or increase potential benefits while
preserving the effective and efficient administration of the program.
During and after the comment period, you may inspect all public
comments about these proposed regulations in Room 3045, Regional Office
Building 3, 7th and D Streets, SW., Washington, D.C., between the hours
of 8:30 a.m. and 4:00 p.m., Eastern time, Monday through Friday, of
each week except Federal holidays.
Assistance to Individuals With Disabilities in Reviewing the
Rulemaking Record
On request, we will supply an appropriate aid, such as a reader or
print magnifier, to an individual with a disability who needs
assistance to review the comments or other documents in the public
rulemaking docket for these proposed regulations. If you want to
schedule an appointment for this type of aid, you may call (202) 205-
8113 or (202) 260-9895. If you use a TDD, you may call the Federal
Information Relay Service at 1-800-877-8339.
General
Background
On October 7, 1998, President Clinton signed into law the Higher
Education Amendments of 1998 (the 1998 Amendments), Pub. L. 105-244,
that amended the Higher Education Act of 1965, as amended (the HEA).
This notice of proposed rulemaking (NPRM) addresses the changes that
affect the Federal Perkins Loan Program.
Negotiated Rulemaking
Section 492 of the HEA requires that, before publishing any
proposed regulations to implement programs under Title IV of the Act,
the Secretary obtain public involvement in the development of the
proposed regulations. After obtaining advice and recommendations, the
Secretary must conduct a negotiated rulemaking process to develop the
proposed regulations. All published proposed regulations must conform
to agreements resulting from the negotiated rulemaking process unless
the Secretary reopens the negotiated rulemaking process or provides a
written explanation to the participants in that process why the
Secretary has decided to depart from the agreements.
To obtain public involvement in the development of the proposed
regulations, we published a notice in the Federal Register (63 FR
59922, November 6, 1998) requesting advice and recommendations from
interested parties concerning what regulations were necessary to
implement Title IV of the HEA. We also invited advice and
recommendations concerning which regulated issues should be subjected
to a negotiated rulemaking process. We further requested advice and
recommendations concerning ways to prioritize the numerous issues in
Title IV, in order to meet statutory deadlines. Additionally, we
requested advice and recommendations concerning how to conduct the
negotiated rulemaking process, given the time available and the number
of regulations that needed to be developed.
In addition to soliciting written comments, we held three public
hearings and several informal meetings to give interested parties an
opportunity to share advice and recommendations with the Department.
The hearings were held in Washington, D.C., Chicago, and Los Angeles,
and we posted transcripts of those hearings to the Department's
Information for Financial Aid Professionals' website (http://
www.ifap.ed.gov).
We then published a second notice in the Federal Register (63 FR
71206, December 23, 1998) to announce the Department's intention to
establish four negotiated rulemaking committees to draft proposed
regulations implementing Title IV of the HEA. The notice announced the
organizations or groups believed to represent the interests that should
participate in the negotiated rulemaking process and announced that the
Department would select participants for the process from nominees of
those organizations or
[[Page 41233]]
groups. We requested nominations for additional participants from
anyone who believed that the organizations or groups listed did not
adequately represent the list of interests outlined in section 492 of
the HEA. Once the four committees were established, they met to develop
proposed regulations over the course of several months, beginning in
January.
Proposed regulations contained in this NPRM reflect the final
consensus of negotiating Committee II, which was made up of the
following members:
American Association of Community Colleges.
American Association of Cosmetology Schools.
American Association of State Colleges and Universities.
American Council on Education.
Career College Association.
Coalition of Associations of Schools of the Health
Professions.
Coalition of Higher Education Assistance Organizations.
Consumer Bankers Association.
Education Finance Council.
Education Loan Management Resources.
Legal Services Counsel (a coalition).
National Association of College and University Business
Officers.
National Association for Equal Opportunity in Higher
Education.
National Association of Graduate/Professional Students.
National Association of Independent Colleges and
Universities.
National Association of State Student Grant and Aid
Programs/National Council of Higher Education Loan Programs.
National Association of State Universities and Land-Grant
Colleges.
National Association of Student Financial Aid
Administrators.
National Association of Student Loan Administrators.
National Council of Higher Education Loan Programs.
National Direct Student Loan Coalition.
Sallie Mae, Inc.
Student Loan Servicing Alliance.
The College Board.
The College Fund/United Negro College Fund.
United States Department of Education.
United States Student Association.
U.S. Public Interest Research Group.
Under committee protocols, consensus means that there must be no
dissent by any member in order for the committee to be considered to
have reached agreement. Consensus was reached on all of the proposed
regulations in this document.
The Secretary will publish a technical correction package at a
later date that replaces all references to ``Direct Loan'' in the
Federal Perkins Loan Program and Student Assistance General Provisions
regulations with ``National Direct Student Loan Program'' or the
acronym ``NDSL.'' The negotiators agreed that such a change would
eliminate confusion between the National Direct Student Loan Program
and the William D. Ford Federal Direct Student Loan Program.
Summary of Proposed Regulatory Changes
We propose to amend the following sections of the regulations:
Section 674.2 Definitions
We propose to amend Sec. 674.2 by adding a definition of the term
``satisfactory repayment arrangement'' in accordance with changes made
to the 1998 Amendments. The 1998 Amendments define ``satisfactory
repayment arrangements'' as the return of Title IV HEA eligibility to a
defaulted Federal Perkins Loan borrower, to the extent the borrower is
otherwise eligible, if the borrower makes six on-time, consecutive,
monthly payment of amounts owed on the loan. As specified in the 1998
Amendments, the proposed regulations would authorize the restoration of
the borrower's Title IV eligibility only once on a defaulted Federal
Perkins loan.
Section 674.5 Federal Perkins Loan Program Default Rate and Penalties
Effective with the 2000-2001 award year, the 1998 Amendments
eliminate the requirement that an institution file a default reduction
plan with the Secretary if the institution's cohort default rate equals
or exceeds 15 percent. The 1998 Amendments also eliminate the series of
graduated default penalties imposed on institutions with cohort default
rates that equal or exceed 20, 25, or 30 percent or more in favor of
one default penalty of zero if an institution's cohort default rate
equals or exceeds 25 percent. A default rate penalty of zero eliminates
an institution's Federal Capital Contribution. We are proposing to
amend Sec. 674.5 to reflect these changes.
For award years that precede award year 2000-2001, the 1998
Amendments also contain a provision that exempts an institution from
the default reduction plan filing requirement if the institution has
less than 100 students who have Federal Perkins Loans in that academic
year and a cohort default rate that is equal to or greater than 15
percent but less than 20 percent. The negotiators agreed not to develop
proposed regulations that reflect this change because the final
regulations that implement this provision would be outdated immediately
upon taking effect on July 1, 2000. However, because the 1998
Amendments were enacted on October 7, 1998, the Secretary will not
require an institution that meets the statutory criteria to file a
default reduction plan for award years 1998-99 and 1999-2000.
The proposed regulations would further amend this section to
reflect a new default penalty established by the 1998 Amendments that
terminates the eligibility to participate in the Federal Perkins Loan
Program if an institution has a cohort default rate of 50 percent or
higher for the three most recent years for which data are available. An
institution would be ineligible to participate for the award year in
which the determination is made and the two succeeding award years.
Under the proposed regulations, the new ineligibility default penalty
would become effective with the cohort default rate calculated as of
June 30, 2001. The negotiating committee agreed that the cohort default
rate calculated as of this date will represent the last of the three
most recent years of available cohort default rate data used by the
Secretary to make a determination of ineligibility. Thus, the cohort
default rates calculated as of June 30, 2001, June 30, 2000, and June
30, 1999 would be the three years used by the Department to make the
initial determination of ineligibility under the proposed regulations.
The proposed regulations would allow an institution to appeal a
determination of ineligibility, within 30 days of notification by the
Secretary, based on an inaccurate calculation of its cohort default
rate if a recalculation using corrected data would reduce the
institution's cohort default rate to below 50 percent for any of the
three award years used to make the determination. This appeal is
discussed more fully in the next paragraph. An institution may also
appeal if, on average, 10 or fewer borrowers enter repayment for the
three most recent award years used to make a determination of
ineligibility. For example, an institution might have 5 borrowers
entering repayment in the first year, 15 borrowers entering repayment
in the second year and 10 borrowers entering repayment in the third
year, for an average of 10 borrowers entering repayment per year over
the three-year period used to make an eligibility determination. The
Secretary has 45 days to issue a decision following the institution's
timely submission of a complete and accurate
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appeal, during which time the institution may continue to participate
in the program. If an institution's appeal is denied by the Secretary,
the institution must liquidate its revolving student loan fund in
accordance with section 466A of the HEA and assign any outstanding
loans to the Secretary in accordance with Sec. 674.50 of the Federal
Perkins Loan Program regulations.
In the Federal Perkins Loan Program, an institution's cohort
default rate is calculated based on data submitted to the Secretary by
the institution on its Fiscal Operations Report and through the edit
process used by the institution to adjust the data on its Fiscal
Operations Report. We recognize that in order to appeal a notice of
ineligibility based on an inaccurate calculation of this data, the
institution must correct its own data submission. We consider the
complete and timely re-submission of corrected data, both in writing
and through the edit process, to be the mechanism an institution uses
to affect an appeal. The negotiating Committee agreed that this
procedure provided adequate due process since the school submits the
actual data used to calculate its Federal Perkins Loan Program cohort
default data.
We recognize that the process used to calculate an institution's
cohort default rate is unique to the Federal Perkins Loan Program. If,
at any time in the future, the National Student Loan Data System
(NSLDS) or another method is used to calculate an institution's Federal
Perkins Loan Program cohort default rate, we will revisit and revise
accordingly the regulations that govern the appeal process under this
section.
We are also proposing to amend this section of the regulations to
reflect provisions in the 1998 Amendments that allow an institution to
exclude loans from its cohort default rate calculation. These
exclusions include loans on which the borrower has voluntarily made six
consecutive payments, voluntarily made all payments currently due,
repaid the loan in full, received a deferment or forbearance based on a
condition that predates the borrower reaching a 240/270-day past due
status, or rehabilitates the loan after becoming 240/270 past due. The
proposed regulations would also allow an institution to remove a loan
that is canceled due to death or permanent and total disability,
discharged in bankruptcy, forgiven due to a closed school situation, or
repaid in full under the compromise repayment provisions contained in
Sec. 674.33(e) of the Federal Perkins Loan program regulations.
The 1998 Amendments require that the payments a borrower makes when
making six consecutive payments or bringing the loan current be
``voluntary'' payments in order for a school to exclude the borrower
from its cohort default rate calculation. In order to clarify the
proposed regulations and avoid confusion when a school calculates its
cohort default rate, we are proposing that ``voluntary'' payments
exclude payments obtained by income tax offset, wage garnishment,
income or asset execution, or pursuant to a judgment. Generally,
payments obtained by these methods are automatically deducted from the
borrower's tax return, wages or assets and the borrower has no control
or choice in the payment process. Payments made pursuant to a judgment,
although not always automatic, are payments made as the result of a
court order and represent last resort due diligence efforts on the part
of the school to obtain payment from the borrower. For this reason, the
negotiators agreed that payments obtained by judgment also should not
be considered voluntary for the purposes of calculating the Federal
Perkins Loan Program cohort default rate.
We are also proposing to add the requirement that the six
consecutive voluntary payments that a borrower makes on a defaulted
loan be ``monthly'' payments in order for a school to remove that
borrower from its cohort default rate calculation. We are proposing the
addition of the word monthly to provide consistency in interpreting the
timeframe in which the payments must be made. We are also proposing to
require monthly payments to maintain regulatory consistency in this
area. The Federal Perkins Loan Program regulations, as currently
written, allow schools to remove a borrower from its cohort default
rate calculation if the borrower has made six, consecutive, monthly
payments on a defaulted loan.
In accordance with the 1998 Amendments, the proposed regulations
would eliminate an institution's authority to exclude improperly
serviced loans from its cohort default rate.
Lastly, the paragraphs in this section that describe satisfactory
arrangements to repay the loan and loan rehabilitation have been
deleted and relocated for administrative ease. The 1998 Amendments
modified the definition of satisfactory repayment arrangements and
authorized a loan rehabilitation program in the Federal Perkins Loan
Program. These provisions are reflected in Secs. 674.2 and 674.39 of
the proposed regulations.
Section 674.6 Default Reduction Plan
For award year 2000-2001 and succeeding award years, the 1998
Amendments eliminate the requirement that an institution with a cohort
default rate that equals or exceeds 15 percent establish and implement
a default reduction plan. Therefore, we are proposing to remove the
default reduction plan provisions contained in Sec. 674.6 from the
Federal Perkins Loan Program regulations.
Section 674.7 Expanded Lending Option
Effective October 1, 1998, the 1998 Amendments eliminated the
Expanded Lending Option in the Federal Perkins Loan Program. This
option previously allowed participating institutions to lend at higher
limits after depositing an Institutional Capital Contribution equal to
100 percent of their Federal Capital Contribution into their Perkins
Loan Revolving Fund. The proposed regulations would eliminate the
expanded lending option provisions in Sec. 674.7 to reflect this
statutory change.
Section 674.9 Student Eligibility
The 1998 Amendments authorize the use of the same criteria that
remove a borrower from an institution's cohort default rate in
Sec. 674.5 to re-establish a borrower's eligibility for additional
Federal Perkins Loans. Accordingly, we are proposing to revise
Sec. 674.9 by adding a new paragraph that re-establishes a borrower's
eligibility for a Perkins Loan if the borrower voluntarily makes six
consecutive monthly payments, voluntarily makes all payments currently
due, repays the loan in full, receives a deferment or forbearance based
on a condition that predates the borrower reaching a 240/270-day past
due status, or rehabilitates the loan after becoming 240/270 days past
due. A borrower's eligibility for a Perkins Loan is also re-established
if the borrower's loan is discharged due to permanent and total
disability, discharged in bankruptcy, forgiven due to a closed school
situation, or repaid in full in accordance with Sec. 674.33 of the
Federal Perkins Loan Program regulations.
For the purpose of a borrower re-establishing eligibility for a
Perkins Loan under this section, the proposed regulations would define
``voluntary'' payments as those payments made directly by the borrower,
including payments made over and above a payment made pursuant to a
judgment. We are proposing to define payments made over and above the
payments required on a judgment as voluntary
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because the borrower is freely choosing to make a payment of this
nature. Payments made over and above those required on a judgement are
not automatic nor are they required. The negotiators agreed that a
borrower who opts to make payments over and above payments made
pursuant to a judgment is making a good faith effort to repay the debt
and should not lose the benefit of Federal Perkins Loan eligibility.
For the purpose of re-establishing a borrower's eligibility for a
Federal Perkins Loan, the proposed definition of voluntary payments
excludes payments made under the following conditions because a
borrower has no control or choice in making these types of payments:
Payments obtained by income tax offset.
Payments obtained through wage garnishment.
Payments obtained through income or asset execution.
Payments made pursuant to a judgment.
Section 674.12 Loan maximums
The 1998 Amendments increase annual maximum loan amounts and
increase the aggregate maximum loan amounts allowable for an eligible
student to the levels formerly authorized for schools that participated
in the Expanded Lending Option. The proposed regulations reflect the
following increased annual loan limits for all eligible borrowers:
$4,000 for a student who has not successfully completed a program of
undergraduate education and $6,000 for a graduate or professional
student. The proposed regulations would require that aggregate loan
limits not exceed $40,000 for graduate and professional students,
$20,000 for a student who has successfully completed two years of a
program of education leading to a bachelor's degree but who has not
completed his or her degree work, and $8,000 in the case of students
who have not completed the first two years of undergraduate work.
During the negotiated rulemaking discussions on this section, the
Committee discussed whether this proposed change would create the
potential for the inadvertent overaward of Federal Perkins Loans in
excess of the new statutory aggregate maximum of $8,000, especially on
loans made on or about the date of enactment. Loan maximums in effect
prior to enactment of the 1998 Amendments did not tie aggregate loan
limits to the completion of two years of undergraduate education. We
are aware of this potential problem and will not require resolution of
an overaward made prior to the publication of this proposed regulation
if a Federal Perkins Loan borrower was inadvertently awarded an amount
in excess of the new statutory aggregate maximum of $8,000 and did not
complete two years of undergraduate work.
The 1998 Amendments also changed the definition of aggregate loan
limits to include only unpaid principal as is the case in the Federal
Family Education Loan and Federal Direct Loan Programs. This change
allows a borrower who has borrowed the maximum cumulative amount as an
undergraduate or professional student to re-establish eligibility for
further Perkins loans up to the principal amount the borrower has
repaid. Our proposed amendments to Sec. 674.12 of the regulations
reflect this change as well.
Section 674.16 Making and Disbursing Loans
The proposed regulations would amend this section, in accordance
with the 1998 Amendments, to clarify the credit bureau reporting
requirements with which an institution must comply after making and
disbursing a Federal Perkins Loan. The proposed regulations would amend
Sec. 674.16 to require that an institution report to at least one
national credit bureau information concerning the repayment and
collection of the loan until the loan is paid in full, including the
date the loan was repaid, canceled or discharged for any reason. The
proposed regulations would also add a new paragraph that requires an
institution to report promptly any changes to information previously
reported on a loan to the same credit bureaus to which the information
was previously reported. The negotiators agreed that reporting a change
of information on a loan to the same credit bureaus to which it was
previously reported was an important protection for the borrower should
the school decide to contract with a different credit bureau at a later
date. Reporting changes of information on a loan to the same credit
bureaus provides a consistent picture of the borrower's credit history
and eliminates the risk that negative credit history might remain on
the borrower's record when, in fact, it should have been removed or
updated.
Section 674.31 Promissory Note
The proposed regulations would amend Sec. 674.31, in accordance
with the 1998 Amendments, to exclude from a Federal Perkins Loan
Program borrower's initial grace period any period, not to exceed three
years, during which a borrower who is a member of the Armed Forces
reserve component is called or ordered to active duty for a period of
more than 30 days. The proposed regulations would require that any
single excluded period may not exceed three years and must include the
time necessary for the borrower to resume enrollment at the next
available regular enrollment period. We are also proposing that any
borrower in a grace period when called or ordered to active duty be
entitled to another full six or nine-month grace period upon completion
of the excluded period of service.
Discussion of this provision at the negotiated rulemaking sessions
focused on the valuable service that these borrowers are providing to
our country as members of the Armed Forces reserve component and the
care that must be taken not to penalize borrowers returning from active
duty. In this regard, we would like to clarify that the time period in
which a borrower must re-enroll in the ``next available enrollment
period'' after returning from active duty service in the Armed Forces
may be longer for some borrowers than others, especially if the
borrower is pursuing a non-traditional program. Additionally, the
possibility exists that borrowers may not re-enroll in the same program
in which they were enrolled at the time they were called to active
duty. It was the consensus of the negotiating team that the proposed
regulations should provide flexibility in the administration of these
aspects of a borrower's grace period.
The proposed regulations would also amend Sec. 674.31 by requiring
an institution to disclose to at least one national credit bureau the
amount of the loan made to the borrower, along with other relevant
information, so as to not restrict an institution from reporting to
more than one credit bureau should the institution desire to do so.
Previously, this section required an institution to report to any one
national credit bureau.
Section 674.33 Repayment
The proposed regulations would amend Sec. 674.33 to reflect a new
provision of the 1998 Amendments that authorizes an institution to
establish an incentive repayment program to reduce defaults and
replenish its Federal Perkins Loan revolving fund. The proposed
regulations would authorize an institution to offer a reduction of no
more than one percent of the interest rate on a loan on which the
borrower has made 48 consecutive, monthly payments; a discount of no
more than five percent on the balance owed on a loan if the borrower
pays in full prior to the end of the repayment period; and,
[[Page 41236]]
with the Secretary's approval, any other incentive an institution
determines will reduce defaults and replenish its fund. The proposed
regulations reflect the requirement in the 1998 Amendments that an
institution not use Federal funds, including Federal funds from its
Federal Perkins Loan revolving fund, or institutional funds from the
fund to pay for any repayment incentive. In this regard, the proposed
regulations require an institution to reimburse its Fund, on at least a
quarterly basis, for any money lost to its Fund that otherwise would
have been paid by the borrower if the borrower had not received the
repayment incentive. The negotiators agreed that unless a school
reimburses its Federal Perkins Loan revolving fund for the money lost
to incentives, funding for future Federal Perkins Loan borrowers might
be jeopardized.
The proposed regulations would also amend Sec. 674.33 by adding a
new section that implements a closed school discharge for Federal
Perkins Loan borrowers as authorized by the 1998 Amendments. Prior to
passage of the 1998 Amendments, the Secretary lacked the statutory
authority to discharge a Federal Perkins Loan due to a closed school
situation. The proposed regulations would authorize the holder of the
loan to discharge a borrower's total liability on any loan made under
the Federal Perkins Loan Program on or after January 1, 1986, if the
borrower is unable to complete the program of study in which the
borrower is enrolled due to the institution's closure. The proposed
regulations would require that the borrower be reimbursed for any
amounts the borrower paid on a discharged loan either voluntarily or
through enforced collection. A borrower who has defaulted on a loan
that is discharged is no longer considered to be in default and is
eligible to receive further Title IV aid. The holder of the loan is
required to report the discharge of the loan to all credit bureaus to
which the status of the loan was previously reported.
Program regulations that authorize the discharge of a loan made
under both the Federal Direct Student Loan (Direct Loan) and Federal
Family Education Loan (FFEL) Program have been in effect since July 1,
1995. The proposed regulations include closed school discharge
provisions for the Federal Perkins Loan Program that are based largely
on the regulations in existence for these programs.
The proposed regulations would authorize a closed school discharge
by either the Secretary or the institution. This reflects the
possibility that an institution may continue to hold a loan that is
eligible for a closed school discharge due to the closure of a location
or branch campus of the school, and not the closure of the school
itself. However, in order to protect the borrower, the proposed
regulations would require a school that denies a borrower's request for
a closed school discharge to submit the materials that support such a
determination for review and an independent determination of the
dischargeability of the loan by the Secretary.
The proposed regulations would also allow the Secretary to
discharge a loan based on a school closure without an application from
the borrower. The Secretary may discharge a loan without an application
if it were determined that the borrower qualified for and received a
discharge on his or her FFEL or Direct Loan and was unable to secure a
discharge on his or her Federal Perkins Loan only because the Secretary
lacked the statutory authority. The proposed regulations would also
authorize the Secretary to discharge a Federal Perkins Loan without an
application from the borrower based on information in the Secretary's
possession that qualified the borrower for a discharge.
Lastly, the proposed regulations contain a provision that would
disallow a closed school discharge if the borrower secured his or her
Federal Perkins Loan through fraudulent means as determined by the
ruling of a court or an administrative tribunal. The negotiators agreed
that the discharge of a fraudulently obtained loan would constitute an
inappropriate use of federal tax dollars and compromise the integrity
of the Federal Perkins Loan Program.
Section 674.34 Deferment of Repayment--Federal Perkins Loans, Direct
Loans and Defense Loans
The proposed regulations would amend Sec. 674.34, in accordance
with changes made in the Amendments, to extend the deferment benefits
described in this section to all borrowers with loans made before July
1, 1993, regardless of the terms of the borrower's promissory note.
Current regulations authorize the deferments in this section only for
an eligible borrower with a loan made on or after July 1, 1993. The
extension of the deferments in this section to borrowers with a loan
made before July 1, 1993, is effective October 7, 1998.
The proposed amendments to this section would also authorize a
deferment for any borrower with a loan made under the program,
including National Direct and Defense Loans, during any period in which
the borrower is engaged in service that subsequently qualifies the
borrower for cancellation of his or her loan. Prior to passage of the
1998 Amendments, if the borrower had a loan under the Federal Perkins
Loan Program that was made before July 1, 1993, the borrower was
eligible for a postponement of his or her repayment while doing service
that qualified the borrower for cancellation. Because all borrowers are
now eligible for a deferment in anticipation of cancellation, the
postponement provisions in Sec. 674.39 would be removed. Deferments in
anticipation of cancellation authorized by this section may not be
granted retroactively to cover any period of time prior to October 7,
1998.
Section 674.39 Loan rehabilitation
The 1998 Amendments authorize institutions that participate in the
Federal Perkins Loan Program to establish a loan rehabilitation program
for all defaulted Federal Perkins Loan borrowers. The proposed
regulations in Sec. 674.39 would define rehabilitation as the making of
an on-time, monthly payment, as defined by the institution, each month
for twelve consecutive months by the defaulted borrower. As specified
in the 1998 Amendments, a borrower may rehabilitate a loan only once.
The proposed regulations would require an institution to notify a
defaulted borrower of the option and consequences of rehabilitating a
defaulted loan. The consequences of rehabilitating a defaulted loan
include returning the borrower to regular repayment status, treating
the first payment made under the twelve consecutive payments as the
first payment in a new ten-year repayment period, and instructing any
credit bureau to which the default was reported to remove the default
from the borrower's credit history.
The proposed regulations would limit collection costs that can be
assessed a borrower on a rehabilitated loan to 24 percent. However, the
proposed regulations would also allow an institution to charge any
collection costs that exceed 24 percent on a rehabilitated loan, and
that may not be passed along to the borrower, to their Federal Perkins
Loan Revolving Fund until July 1, 2002. This would give institutions a
chance to renegotiate contracts and service agreements with third-party
collection agencies that currently provide for higher collection
percentages.
There was much discussion among the negotiators regarding the limit
on collection costs that can be charged to the borrower of a
rehabilitated Federal Perkins loan. A proposal to limit the
[[Page 41237]]
collection costs that may be charged to a Federal Perkins Loan borrower
on a rehabilitated loan to 18.5 percent, in order to be consistent with
the FFEL and Federal Direct Loan Programs, did not receive the full
support of the negotiators. Several negotiators noted that a Federal
Perkins Loan borrower might have accrued collection costs in excess of
18.5 percent on a rehabilitated loan, and that institutions would have
to cover the spread between an 18.5 percent cap and actual collection
costs incurred. Several negotiators suggested that the competitive
marketplace should determine the collection costs assessed to the
borrower, not an arbitrary cap, and that collection agencies would not
agree to contract with schools, especially small schools with low
volume business, for such a low fee. However, other negotiators felt
that borrowers faced with added marketplace collection costs of 30 to
40 percent when repaying a loan are pushed to the extreme financially.
Also, several negotiators felt that, to the extent feasible, collection
costs assessed on rehabilitated loans should be consistent across the
Title IV loan programs. FFEL and Federal Direct Loan borrowers are not
subject to further collection costs beyond the maximum 18.5 percent
after rehabilitating their loan.
Several negotiators noted that in the FFEL and Federal Direct Loan
programs, collection costs that are charged to a borrower are included
in the ``new outstanding principal balance'' of the loan after it has
been rehabilitated and returned to current status. That is, the
collection costs of up to 18.5 percent are capitalized. This results in
an actual higher charge to the borrower as he or she repays the new,
higher balance, over time and with interest charged on the full amount.
They noted that capitalizing an 18.5 percent collection cost on an FFEL
or Federal Direct Loan is equal to assessing approximately a 24 percent
fee on a Federal Perkins Loan, since collection costs are not
capitalized in the Federal Perkins Loan Program. A proposal to limit
the collection costs to 24 percent did not yield immediate consensus.
However, negotiators reviewed data and confirmed that a capitalized
18.5 percent collection cost on an FFEL and Federal Direct Loan
increases the balance of the loan, which in turn increases the amount
of interest that accrues on that balance over the repayment of the
loan. The difference in the borrower's monthly payment needed to cover
both the collection cost and the interest accruing on an increased
principal balance, yields an amount equal to 24 percent of the original
principal and interest due on the loan after it has rehabilitated.
For example, on an FFEL or Federal Direct Loan with an outstanding
balance of $1,000 after rehabilitation, capitalizing an 18.5 percent
collection cost will add an additional $185.00 to the loan, yielding a
new outstanding balance of $1,185.00. The borrower's payment will
increase by $.46 per month over the life of the loan because of the
added $185.00. Over 10 years, the borrower makes 120 payments. The
extra $55.20 (120 monthly payments x $.46) added to the original
$185.00 in collection costs that were added to the loan balance
(capitalized) means that the borrower will repay $240.00 in collection
costs over the life of the rehabilitated loan. Therefore, the
negotiators felt that a cap of 24 percent on the collection costs that
may be charged on a rehabilitated Federal Perkins Loan was comparable
to the 18.5 percent cap on FFEL and Federal Direct Loans. They reached
consensus on the 24 percent cap with the understanding that, as the
example presented illustrates:
No further collection costs are assessed the borrower.
That is, payments are not treated on a ``fee on fee'' basis which is
often used by collection agencies.
The uncapitalized collection costs of 24 percent of the
principal and interest due after the loan is rehabilitated is treated
as a separate cost.
The borrower's monthly payment reflects an amount that
spreads the collection costs over the life of the loan.
Finally, the proposed regulations would return the benefits and
privileges of the promissory note to the rehabilitated borrower as they
applied prior to the borrower's default and authorizes institutions to
offer flexible repayment options following the borrower's return to
regular repayment status. This flexibility was noted in the regulation
to assure schools that they can work with rehabilitated borrowers to
establish realistic repayment plans in order to avoid a return to a
default status.
Section 674.41 Due Diligence--General Requirements
The 1998 Amendments provide for the establishment of a Student Loan
Ombudsman's office in order to provide timely assistance to borrowers
with loans made under Title IV of the HEA. The 1998 Amendments also
require that information about the availability and functions of the
Ombudsman be made available to all borrowers in the Title IV student
loan programs. The proposed regulations would amend Sec. 674.41 to
comply with this new requirement. The proposed regulations would
require that institutions participating in the Federal Perkins Loan
Program, as part of the general due diligence requirements, provide the
borrower with information on the availability of the Student Loan
Ombudsman's office if the borrower disputes the terms of the loan in
writing and the institution does not resolve the dispute.
Section 674.42 Contact With the Borrower
The 1998 Amendments modified section 486(b) of the HEA by
eliminating the requirement that institutions conduct exit counseling
individually or in groups and by encouraging institutions to use
electronic means in providing personalized exit counseling. The
proposed regulations in Sec. 674.42 would facilitate these changes and
make exit counseling requirements in the Federal Perkins Loan Program
consistent with those in the Federal Direct Loan and the Federal Family
Education Loan Programs.
Specifically, the proposed regulations would reorganize this
section by first describing the disclosures that an institution is
required to make to a Federal Perkins Loan borrower under section
463A(b) of the HEA, either as part of the promissory note or in another
written statement provided to the borrower. The disclosure requirements
have not changed. However, the proposed regulations would provide that
the institution must make these disclosures either shortly before the
borrower ceases at least half-time study at the institution, during the
exit interview, or immediately by mail, if the borrower enters
repayment without the institution's knowledge. As currently written,
the regulations stipulate that the institution must make these
disclosures during exit counseling.
The proposed regulations would require an institution to provide
exit counseling to each borrower either in person, by audiovisual
presentation, or by interactive electronic means before the student
ceases at least half-time study. The proposed regulations would provide
alternative written and electronic counseling options for borrowers
engaged in study-abroad or correspondence study, and for borrowers who
have left school without the institution's knowledge. In conducting
exit counseling, the proposed regulations would require that an
institution inform the borrower of the anticipated monthly repayment
amount, review repayment options, suggest debt
[[Page 41238]]
management strategies, emphasize the seriousness of the repayment
obligation and the consequences of default, review deferment and
cancellation benefits of the loan, require the borrower to provide
corrections to the institution's records, and review with the borrower
information on the availability of the Student Loan Ombudsman's office.
They would also propose that institutions that provide exit counseling
by electronic means take reasonable steps to ensure that each borrower
receives the counseling materials and actively participates in and
completes the exit counseling. If, for example, a school sends
counseling materials by electronic mail or other electronic means, not
including the U.S. mail, the school must obtain documentation through
return receipt or some other mechanism that the student received the
materials and completed them.
Lastly, in order to facilitate the use of electronic exit
counseling, the proposed regulations would eliminate the requirements
that a school, as part of exit counseling, have the borrower sign a
copy of the repayment schedule and provide a copy of the signed
repayment schedule and the signed promissory note to the borrower. The
institution would still have to provide the borrower with a copy of the
borrower's repayment schedule and the promissory note as part of the
disclosure requirements listed in Sec. 674.42(a).
Section 674.45 Collection Procedures
The 1998 Amendments clarify an institution's credit bureau
reporting responsibilities by requiring that a school promptly disclose
changes to any information it has reported on a borrower's Federal
Perkins Loan. As currently written, Sec. 674.45 requires a school to
report changes on a defaulted loan to the same credit bureau to which
it originally reported the default. Section 674.45 also currently
requires an institution to respond within one month of its receipt to
any inquiry from any credit bureau regarding the information reported
on the loan amount. In order to prevent the borrower from suffering the
negative consequences that may result from the existence of an
inaccurate credit history, the proposed regulation amends the
collection procedures in Sec. 674.45 to require that an institution
report changes to the account status of a defaulted loan to any
national credit bureau to which it reported the default. The regulation
also proposes, in accordance with provisions in the Fair Credit
Reporting Act, that an institution be required to resolve, within 30
days of its receipt, any inquiry from any credit bureau that disputes
the completeness or accuracy of information reported on the loan. This
would protect the borrower from the negative impact of a protracted
resolution in disputes involving the accuracy of his or her credit
history.
The 1998 Amendments require an institution to disseminate
information regarding the Student Loan Ombudsman to borrowers who are
unable to resolve a dispute over the terms of their loan with the loan
holder. A new paragraph is proposed for Sec. 674.45 that would require
an institution, as part of the collection activities contained in this
section, to provide the borrower with information on the availability
of the Student Loan Ombudsman's office.
Section 674.47 Costs Chargeable to the Fund
The proposed regulations would amend Sec. 674.47, in accordance
with the loan rehabilitation provisions in Sec. 674.39 of the proposed
regulations. The proposed change would authorize an institution, until
July 1, 2002, to charge its Fund for any collection costs assessed on a
rehabilitated loan that are in excess of the 24 percent maximum limit
that may be passed along to the borrower. This authority is necessary
to give institutions time to renegotiate contracts with collection
agencies if current contracts call for the assessment of collection
fees in excess of 24 percent of outstanding principal, interest and
late fees due on defaulted loans.
Section 674.49 Bankruptcy of Borrower
The proposed regulations would amend Sec. 674.49 in order to
reflect changes made to section 523(a)(8) of title 11 of the United
States Bankruptcy Code by the Amendments. Effective October 8, 1998,
the 1998 Amendments eliminated a borrower's ability to have a student
loan automatically discharged due to bankruptcy if the loan has been in
repayment for seven years or more. The proposed regulations would also
clarify that the seven-year repayment period on bankruptcies filed
before October 8, 1998, excludes any applicable suspension of the
repayment period as defined by 34 CFR 682.402(m) of the Federal Family
Education Loan Program regulations. Lastly, the proposed regulations
would amend this section to require institutions to use due diligence
and assert any defense consistent with its status under applicable law
to avoid discharge of a Federal Perkins Loan in a bankruptcy
proceeding.
Section 674.52 Cancellation Procedures
The proposed regulations would amend this section to clarify that a
borrower whose defaulted loan has not been accelerated may qualify for
any cancellation authorized by section 465 of the HEA and Subpart D of
the Federal Perkins Loan Program regulations by complying with the
requirements of this section. In current regulations, the wording in
this paragraph erroneously states that borrowers whose defaulted loans
have not been accelerated could qualify only for teaching, volunteer,
or military service cancellations by complying with the requirements of
this section.
The proposed regulations also would amend paragraph (d) of this
section to clarify that a Federal Perkins loan, Direct loan or Defense
loan borrower's deferment under Sec. 674.34(c) runs concurrently with
any period for which cancellation under Secs. 674.53-674.60 is granted.
Section 674.53 Teacher cancellation--Federal Perkins, Direct and
Defense Loans.
Effective October 7, 1998, the 1998 Amendments extended the Federal
Perkins Loan Program cancellation benefits in section 465(a)(2) of the
HEA to all borrowers with outstanding loan balances who perform
qualifying service regardless of when the loans were made or any
contrary provisions of the borrowers' promissory notes. Prior to the
addition of this language to the HEA, the benefits were based upon when
the loan was made and the provisions of the borrower's promissory note.
The proposed regulations would amend Sec. 674.53 to extend the
following teaching cancellation benefits to all borrowers, regardless
of when their loan was made or the terms of the borrower's promissory
note:
teaching in a low-income school,
full-time teaching in special education, and
full-time teaching in fields of expertise.
These teaching benefits would be extended to any borrower with an
outstanding loan balance on a Federal Perkins, Direct or Defense loan
made prior to July 23, 1992, for teaching service performed on or after
October 7, 1998, if the cancellation benefits provided under this
section are not included in the borrower's promissory note. We would
like to emphasize that cancellation benefits may not be granted
retroactively for teaching service performed prior to October 7, 1998.
[[Page 41239]]
Section 674.56 Employment Cancellation--Federal Perkins Loan, Direct
and Defense Loans
The 1998 Amendments amended the HEA to extend all cancellations in
section 465(a)(2) to all borrowers with outstanding balances as of
October 7, 1998. The proposed regulations would amend Sec. 674.56 to
extend the following cancellation benefits to all borrowers with an
outstanding balance on Federal Perkins, Direct or Defense loans made
before July 23, 1992, for employment in these areas on or after October
7, 1998, regardless of when their loan was made or the terms of the
borrower's promissory note:
full-time employment as a nurse or medical technician,
full-time employment in a public or private nonprofit
child or family service agency, and
full-time employment as a qualified professional provider
of early intervention services.
Only periods of qualifying service performed on or after October 7,
1998, are eligible for cancellation benefits if the borrower was not
previously eligible due to the date the loan was made.
Section 674.57 Cancellation for Law Enforcement or Corrections Officer
Service--Federal Perkins, Direct and Defense Loans
The proposed regulations would amend Sec. 674.57 to extend the
cancellation for full-time service as a law enforcement or corrections
officer for an eligible employing agency to any borrower with an
outstanding loan balance on a Federal Perkins, Direct or Defense loan
made prior to November 29, 1990, for law enforcement or correction
officer service performed on or after October 7, 1998, in accordance
with changes to the HEA by the Amendments. Cancellation benefits may
not be granted retroactively for qualifying service performed before
October 7, 1998.
Section 674.58 Cancellation for Service in a Head Start Program
The proposed regulations would amend Sec. 674.58 to extend
cancellation for service as a full-time staff member in a ``Head
Start'' program to any borrower with an outstanding balance on a
Defense loan for service performed on or after October 7, 1998, in
accordance with changes made to the HEA by the Amendments. Federal
Perkins and Direct loan borrowers have always been eligible for this
cancellation and would not be affected by this regulatory change.
Section 674.60 Cancellation for Volunteer Service--Perkins Loans,
Direct Loans and Defense Loans
The proposed regulations would amend Sec. 674.60 to extend
cancellation for service as a volunteer under The Peace Corps Act or
The Domestic Volunteer Service Act of 1973, to any Direct loan borrower
with a loan made on or after October 7, 1998, and any borrower with an
outstanding balance on a Direct or Defense loan for service as a
volunteer under the above Acts performed on or after October 7, 1998,
if the cancellation benefits provided under this section are not
included in the borrower's promissory note, in accordance with the
Amendments.
Executive Order 12866
1. Potential Costs and Benefits
Under Executive Order 12866, we have assessed the potential costs
and benefits of this regulatory action.
The potential costs associated with the proposed regulations are
those resulting from statutory requirements and those we have
determined as necessary for administering this program effectively and
efficiently. There is a detailed discussion of the cost implications
associated with the rehabilitation of a Federal Perkins Loan under the
heading Sec. 674.39 Loan rehabilitation in the preamble of this NPRM.
In assessing the potential costs and benefits--both quantitative
and qualitative--of this regulatory action, we have determined that the
benefits would justify the costs.
We have also determined that this regulatory action would not
unduly interfere with State, local, and tribal governments in the
exercise of their governmental functions.
We note that, as these proposed regulations were subjected to
negotiated rulemaking, the costs and benefits of the various
requirements were discussed thoroughly by the negotiators. The
resultant consensus reached on a particular requirement generally
reflected agreement on the best possible approach to that requirement
in terms of cost and benefit.
To assist the Department in complying with the specific
requirements of Executive Order 12866, the Secretary invites comments
on whether there may be further opportunities to reduce any potential
costs or to increase any potential benefits resulting from these
proposed regulations without impeding the effective and efficient
administration of the title IV, HEA programs.
2. Clarity of the Regulations
Executive Order 12866 and the President's Memorandum of June 1,
1998 on ``Plain Language in Government Writing'' require each agency to
write regulations that are easy to understand.
The Secretary invites comments on how to make these proposed
regulations easier to understand, including answers to questions such
as the following:
Are the requirements in the proposed regulations clearly
stated?
Do the proposed regulations contain technical terms or
other wording that interferes with their clarity?
Does the format of the proposed regulations (grouping and
order of sections, use of headings, paragraphing, etc.) aid or reduce
their clarity?
Would the proposed regulations be easier to understand if
we divided them into more (but shorter) sections? (A ``section'' is
preceded by the symbol ``Sec. '' and a numbered heading; for example,
Sec. 674.41 Due diligence--general requirements.)
Could the description of the proposed regulations in the
SUPPLEMENTARY INFORMATION section of this preamble be more helpful in
making the proposed regulations easier to understand? If so, how?
What else could we do to make the proposed regulations
easier to understand?
Send any comments that concern how the Department could
make these proposed regulations easier to understand to the person
listed in the ADDRESSES section of the preamble.
Regulatory Flexibility Act Certification
The Secretary certifies that these proposed regulations would not
have a significant economic impact on a substantial number of small
entities.
The parties affected by these proposed regulations are institutions
of higher education that participate in the Federal Perkins Loan
Program, and individual Federal Perkins Loan borrowers. Federal Perkins
Loan borrowers are not considered small entities under the Regulatory
Flexibility Act. Institutions of higher education are defined as small
entities, according to the U.S. Small Business Administration, if they
are: for-profit or nonprofit entities with total revenue of $5,000,000
or less; and entities controlled by governmental entities with
populations of 50,000 or less. Of the institutions of higher education
that participate in the Federal Perkins Loan program, approximately 12
percent would be considered small entities under the definition. Those
small institutions receive approximately three percent of new Federal
Capital Contributions.
[[Page 41240]]
These proposed regulations would not impose a significant economic
impact on a substantial number of small entities. The proposed
regulations would expand borrower benefits, and provide additional
flexibility in the administration of the Federal Perkins Loan Program
to both large and small institutions without requiring significant
changes to current institutional system operations.
The Secretary invites comments from small institutions as to
whether the proposed changes would have a significant economic impact
on them.
Paperwork Reduction Act of 1995
Sections 674.6, 674.16, 674.31, 674.33, 674.34, 674.39, 674.41,
674.42, 674.45, 674.47, and 674.49 contain information collection
requirements. Under the Paperwork Reduction Act of 1995 (44 U.S.C.
3507(d)), the Department of Education has submitted a copy of these
sections to the Office of Management and Budget (OMB) for its review.
Collection of Information: Federal Perkins Loan Program
Section 674.6 Default reduction plan. The Department currently has
this section approved under OMB control number 1840-0535. The
Amendments eliminated the requirement that institutions with a cohort
default rate that equals or exceeds 15 percent submit a default
reduction plan to the Secretary. Therefore, we are proposing to remove
the required default reduction plan measures from the regulations. The
total annual recordkeeping and reporting burden hours for Sec. 674.6
equals 579 hours. The proposed regulation will therefore eliminate 579
hours from the 12,719 total recordkeeping and burden hours contained in
the information collection requirements under OMB control number 1840-
0535.
Section 674.16 Making and disbursing loans. The Department
currently has this section approved under OMB control number 1840-0535.
We are proposing to clarify the credit bureau reporting requirements
with which a school must comply when making and disbursing loans in
accordance with the changes made to the HEA by the Amendments. Because
credit bureau reporting is considered to be a normal business practice
in the administration of the Federal Perkins Loan program, there is no
additional burden associated with this section.
Section 674.31 Promissory Note. The Department currently has this
section approved under OMB control number 1840-0535. We are proposing
to exclude any period during which a borrower who is a member of the
reserve component of the Armed Forces is called or ordered to active
duty for a period of more than 30 days from the borrower's initial
grace period. This exclusion will be contained in the terms of the
borrower's Federal Perkins Loan promissory note. Because institutional
use of the Secretary's promissory note in the Federal Perkins Loan
program is considered part of normal business practice in administering
the Federal Perkins Loan program, there are no burden hours calculated
for this section. We are also proposing to require an institution to
disclose to at least one national credit bureau the amount of the loan
made to the borrower, along with other relevant information.
Previously, the institution was required to report to ``any'' national
credit bureau. This proposed change does not increase or decrease the
frequency or amount of credit bureau reporting required by an
institution. Additionally, credit bureau reporting is considered to be
a normal business practice associated with the administration of the
Federal Perkins Loan program and no burden hours are associated with
this section.
Section 674.33 Repayment. The Department currently has this
section approved under OMB control number 1840-0535. We are proposing
to authorize institutions to establish repayment incentives for
borrowers by reducing by no more than 1 percent the interest rate on a
loan on which the borrower has made 48 consecutive, monthly repayments;
discounting by no more than 5 percent the balance owed on a loan which
the borrower pays in full prior to the end of the repayment period; or,
by offering any other incentive, with the Secretary's approval, that
the institution determines will reduce defaults and replenish its
revolving fund. The establishment of repayment incentives is not
mandatory nor are institutions required to notify borrowers of the
existence of repayment incentives. Institutions are currently required
to retain a repayment history on each Federal Perkins Loan borrower
that includes the frequency, timeliness, and number of repayments made
by the borrower under the information collection requirements contained
in Sec. 674.19 and currently approved under OMB control number 1840-
0073. Because institutions are already collecting the information
needed to implement repayment incentives, there is no change to the
information collection contained in this section.
We are also proposing a closed school discharge in this section for
Federal Perkins Loan borrowers who did not complete the program of
study for which the loan was made because the school at which the
borrower was enrolled closed. This proposed change is retroactive to
loans made on or after January 1, 1986. The proposed regulations would
allow for a closed school discharge by an institution, as well as the
Secretary. The proposed regulations would authorize the Secretary to
discharge a loan based on a school closure without an application from
the borrower if the borrower qualified for and received a discharge on
his or her FFEL or Federal Direct Loan and was unable to secure a
discharge on his or her Federal Perkins Loan only because the Secretary
lacked the statutory authority. The proposed regulations would also
authorize the Secretary to discharge a Federal Perkins Loan without an
application from the borrower based on information in the Secretary's
possession that qualifies the borrower for a discharge. The proposed
regulations would also provide for an application process in the case
of loans that the Secretary cannot discharge based on the above two
criteria. Under the proposed regulations, the information the borrower
is asked to provide in order to obtain the discharge of a debt based on
the closure of a school is consistent with the information required
under the application process currently in place for the FFEL and
Federal Direct Loan programs. However, the application used in the FFEL
and Federal Direct Loan Program does not currently apply to the
discharge of loans made under the Federal Perkins Loan program. The
current form will require revision or, alternately, a new form will be
developed for the Federal Perkins Loan Program. Until such time as we
are able to develop an application for borrowers seeking a closed
school discharge of a Federal Perkins Loan, we cannot accurately
project the number of burden hours contained in this section, although
we expect the completion of such a form to be no more burdensome to
applicants than the form used in the FFEL and Federal Direct Loan
Programs. The burden hours associated with completing the closed school
discharge form in the FFEL and Direct Loan Programs is currently 30
minutes or .5 hours per response.
Section 674.34 Deferment of repayment--Federal Perkins Loans,
Direct Loans and Defense Loans. The Department currently has this
section approved under OMB control number 1840-0535. We are proposing,
in accordance with the Amendments, to extend the deferment benefits in
this
[[Page 41241]]
section to borrowers who were formerly ineligible because of when their
loans were made or the terms of their promissory notes. This change
offers greater flexibility to both the borrower and the institution in
defining the circumstances in which a deferment of repayment is
appropriate. This proposed change does not affect the deferment process
nor does it change the eligibility requirements with which a borrower
must comply. Therefore, this provision would not add burden hours to
the current information collection requirements associated with this
section.
Section 674.39 Loan Rehabilitation. The Department currently has
this section approved under OMB control number 1840-0535. We are
proposing a new section that requires an institution to establish a
loan rehabilitation program. A loan is considered rehabilitated when
the borrower makes an on-time, monthly payment, as determined by the
institution, each month for twelve consecutive months. The institution
must notify a defaulted borrower of the option and consequences of
rehabilitating a loan under these proposed regulations. Once the loan
is rehabilitated, the borrower is returned to regular repayment status,
the first payment made under the 12 consecutive payments is treated as
the first payment under a new 10-year repayment period and any adverse
credit bureau history related to the default is removed from the
borrower's credit report. Under Sec. 674.16 and Sec. 674.42 of current
and proposed regulations, respectively, institutions are required to
disclose to the borrower the definition of default and the consequences
of defaulting on a Federal Perkins Loan, along with information on any
cost that may be assessed to the borrower in the collection of the
loan, including late charges and collection costs. The institution is
required to provide this information in writing as part of the written
application material, as part of the promissory note or on a separate
written form before making and disbursing a Federal Perkins Loan to the
borrower. The institution is again required to disclose information on
the consequences of default to the borrower before he or she ceases at
least half-time study at the institution, during the exit interview or
immediately, in writing, if the borrower enters repayment without the
institution's knowledge. There is ample opportunity for a school to
disclose information to the borrower regarding the availability and
consequences of loan rehabilitation when making the disclosures
currently required under Sec. 674.16 and Sec. 674.42. Disclosures made
under Sec. 674.16 are considered part of normal business practice under
OMB control number 1840-0535. Further calculation of burden hours under
Sec. 674.42 for providing notice of the option and consequences of
rehabilitation would duplicate hours already calculated and cleared
under OMB 1840-0535 that account for the disclosures that an
institution is currently required to make that section. Because any
burden associated with notifying a borrower of the option and
consequences of rehabilitation is burden associated with or accounted
for under other sections of the regulations, there are no new burden
hours contained in this section.
Section 674.41 Due diligence--general requirements. The Department
is adding this section as a new section approved under OMB control
number 1840-0581. The proposed regulation would require institutions to
provide a Federal Perkins Loan Program borrower with information on the
availability of the Student Loan Ombudsman's office if the borrower
disputes the terms of the loan in writing and the institution does not
resolve the dispute. A total of 1,049,216 Federal Perkins Loan
borrowers were in repayment as of June 30, 1998. The Department
estimates that 5,246 (.5 percent) borrowers in repayment may require
information on the availability of the Student Loan Ombudsman's office
after failing to resolve a dispute regarding the terms of the loan with
the institution. The Department further estimates that providing
information on the availability of the Student Loan Ombudsman's office
will average 5 minutes per response. The 437 hours and 10 minutes of
burden associated with this section.
Section 674.42 Contact with the borrower. The Department currently
has this section approved under OMB control number 1840-0581. The
proposed regulation reorders the provisions in Sec. 674.42 by moving
the disclosure requirements with which an institution must comply under
section 463A(b) of the HEA, either as part of the promissory note or in
another written statement, to paragraph Sec. 674.42(a). The disclosures
have not changed. However, the proposed regulations give a school
additional flexibility in the timing of the disclosures. Therefore, the
information collection requirements remain unchanged for this section.
In accordance with the Amendments, this proposed change also
authorizes an institution to use electronic means to facilitate exit
counseling in the Federal Perkins Loan program. Previously, an
institution was required to offer the borrower exit counseling in
person or in groups. Exit counseling provisions are contained in
Sec. 674.42(b) of the proposed regulation. The proposed regulation
provides consistency across the title IV, HEA loan programs in
describing the disclosures that an institution is required to make
during exit counseling. Because the authority to use electronic means
in offering exit counseling does not change the nature of the
information disseminated, there are no additional information
collections that result from this change.
Lastly, in order to facilitate the use of electronic exit
counseling, we are proposing regulations that would eliminate the
requirement that a school, as part of exit counseling, have the
borrower sign a copy of the repayment schedule and provide a copy of
the signed repayment schedule and the signed promissory note to the
borrower. However, because an institution must still provide the
borrower with a copy of the borrower's repayment schedule and the
promissory note as part of the disclosures required by Sec. 674.42(a)
of this section, the information collection burden contained in this
section does not change.
Section 674.45 Collection procedures. The Department currently has
this section approved under OMB control number 1840-0581. We are
proposing to clarify that an institution must report any changes
regarding a defaulted borrower to any national credit bureau to which
it reported the default. The institution must also resolve, within 30
days of its receipt, any inquiry from any credit bureau that disputes
the completeness or accuracy of information reported on the loan.
Institutions are currently reporting information to credit bureaus that
reflect the recent changes made to the HEA by the Amendments. The
Amendments merely codify standard business practice as it relates to
credit bureau reporting. This provision does not change the information
collection contained in this section. We are also proposing that as
part of the collection activities provided for in this section, the
institution provide the borrower with information on the availability
of the Student Loan Ombudsman. The information collection contained in
this section takes into account more intensive efforts an institution
must make to recover amounts owed from defaulted borrowers. Information
on the availability of the Student Loan Ombudsman is easily
incorporated into the existing due diligence efforts required of
institutions. Any further calculation of burden hours for this
[[Page 41242]]
requirement would duplicate hours already calculated and cleared under
OMB 1840-0581.
Section 674.47 Costs chargeable to the Fund. The Department has
this section approved under OMB control number 1840-0581. We are
proposing to amend this section, in accordance with the loan
rehabilitation provisions in Sec. 674.39 of the proposed regulations.
The proposed change would authorize an institution, until July 1, 2002,
to charge its Fund for any collection costs assessed on a rehabilitated
loan that are in excess of the maximum 24 percent limit that may be
passed along to the borrower. This authority spares an institution any
out-of-pocket expense that it may incur in complying with the terms of
existing contracts with collection agencies that call for collection
fees in excess of 24 percent. The proposed regulation would provide a
transition period during which an institution could, in the normal
course of business, renegotiate or renew existing contracts in order to
accommodate the 24 percent limit on collection costs. The proposed
regulations authorizing an institution to charge collection costs in
excess of 24 percent to its Fund does not substantially change the
information collection contained in this section.
Section 674.49 Bankruptcy of borrower. The Department currently
has this section approved under OMB control number 1840-0581. We are
proposing to amend this section in order to reflect changes made to the
U.S. Bankruptcy Code that eliminate the automatic discharge of a
student loan if the loan was in repayment for seven years or more. The
fact that a federal student loan cannot be automatically discharged in
a bankruptcy filing does not change the due diligence efforts required
of an institution in collecting on a loan, defaulted or otherwise. The
institution's collection responsibilities remain as a matter of normal
business practice and the proposed regulations would not change the
information collection contained in this section.
If you want to comment on the information collection requirements,
please send your comments to the Office of Information and Regulatory
Affairs, OMB, room 10235, New Executive Office Building, Washington, DC
20503; Attention: Desk Officer for U.S. Department of Education. You
may also send a copy of these comments to the Department representative
named in the ADDRESSES section of this preamble.
We consider your comments on these proposed collections of
information in--
Deciding whether the proposed collections are necessary
for the proper performance of our functions, including whether the
information will have practical use;
Evaluating the accuracy of our estimate of the burden of
the proposed collections, including the validity of our methodology and
assumptions;
Enhancing the quality, usefulness, and clarity of the
information we collect; and
Minimizing the burden on those who must respond. This
includes exploring the use of appropriate automated, electronic,
mechanical, or other technological collection techniques or other forms
of information technology; e.g., permitting electronic submission of
responses.
OMB is required to make a decision concerning the collections of
information contained in these proposed regulations between 30 and 60
days after publication of this document in the Federal Register.
Therefore, to ensure that OMB gives your comments full consideration,
it is important that OMB receives the comments within 30 days of
publication. This does not affect the deadline for your comments to us
on the proposed regulations.
Assessment of Educational Impact
The Secretary particularly requests comments on whether these
proposed regulations would 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 other Department of
Education documents published in the Federal Register, in text or Adobe
Portable Document Format (PDF) on the Internet at the following sites:
http://ocfo.ed.gov/fedreg.htm
http://ifap.ed.gov/csb__
html/fedlreg.htm
http://www.ed.gov/legislation/HEA/rulemaking
To use the PDF you must have the Adobe Acrobat Reader Program with
Search, which is available free at either of the previous sites. If you
have questions about using the PDF, call the U.S. Government Printing
Office (GPO), toll free, at 1-888-293-6498; or in the Washington, DC.,
area at (202) 512-1530.
Note: The official version of this document is the document
published in the Federal Register. Free Internet access to the
official edition of the Federal Register and the Code of Federal
Regulations is available on GPO Access at: http://
www.access.gpo.gov/nara/index.html
(Catalog of Federal Domestic Assistance Number: 84.037 Federal
Perkins Loan Program)
List of Subjects in 34 CFR Part 674
Loan programs--education, Student aid, Reporting and recordkeeping
requirements.
Dated: July 12, 1999.
Richard W. Riley,
Secretary of Education.
For the reasons stated in the preamble, the Secretary proposes to
amend part 674 of title 34 of the Code of Federal Regulations as
follows:
PART 674--FEDERAL PERKINS LOAN PROGRAM
1. The authority citation for part 674 continues to read as
follows:
Authority: 20 U.S.C. 1087aa-1087ii and 20 U.S.C. 421-429, unless
otherwise noted.
2. Section 674.2(b) is amended by adding, in alphabetical order,
the following definition:
Sec. 674.2 Definitions.
* * * * *
(b) * * *
Satisfactory repayment arrangement: For purposes of regaining
eligibility for grant, loan, or work assistance under Title IV of the
HEA, to the extent that the borrower is otherwise eligible, the making
of six (6) on-time, consecutive, monthly payments on a defaulted loan.
A borrower may obtain the benefit of this paragraph with respect to
renewed eligibility once on a defaulted loan.
* * * * *
3. Section 674.5 is amended as follows:
A. By revising paragraphs (a)(1) and (a)(2).
B. By removing paragraphs (a)(3) and (a)(4).
C. By removing paragraph (b)(2) and redesignating paragraph (b)(3)
as paragraph (b)(2).
D. By removing paragraph (c)(4); and redesignating paragraph
(c)(3)(ii) as paragraph (c)(4) and by removing ``; and'' at the end of
the sentence in the new paragraph (c)(4) and adding, in its place, a
period; and by revising paragraph (c)(3).
E. By removing paragraphs (e) and (f).
Sec. 674.5 Federal Perkins Loan Program cohort default rate and
penalties.
(a) * * *
(1) FCC reduction. If the institution's cohort default rate equals
or exceeds 25 percent, the institution's FCC is reduced to zero.
(2) Ineligibility. For award year 2000-2001 and succeeding award
years, an institution with a cohort default rate
[[Page 41243]]
that equals or exceeds 50 percent for each of the three most recent
years for which cohort default rate data are available is ineligible to
participate in the Federal Perkins Loan Program. Following a review of
that data and upon notification by the Secretary, an institution is
ineligible to participate for the award year in which the determination
is made and the two succeeding award years. An institution may appeal a
notification of ineligibility from the Secretary within 30 days of its
receipt.
(i) Appeal procedures.--(A) Inaccurate calculation. An institution
may appeal a notice of ineligibility based upon the submission of
erroneous data by the institution, the correction of which would result
in a recalculation that reduces the institution's cohort default rate
to below 50 percent for any of the three award years used to make a
determination of ineligibility. The Secretary considers the edit
process, by which an institution adjusts the cohort default rate data
that it submits to the Secretary on its Fiscal Operations Report, to
constitute the procedure to appeal a determination of ineligibility
based on a claim of erroneous data.
(B) Small number of borrowers entering repayment. An institution
may appeal a notice of ineligibility if, on average, 10 or fewer
borrowers enter repayment for the three most recent award years used by
the Secretary to make a determination of ineligibility.
(C) Decision of the Secretary. The Secretary issues a decision on
an appeal within 45 days of the institution's submission of a complete,
accurate, and timely appeal. An institution may continue to participate
in the program until the Secretary issues a decision on the
institution's appeal.
(ii) Liquidation of an institution's Perkins Loan portfolio. Within
90 days of receiving a notification of ineligibility or, if the
institution appeals, within 90 days of the Secretary's decision to deny
the appeal, the institution must--
(A) Liquidate its revolving student loan fund by making a capital
distribution of the liquid assets of the Fund according to section
466(c) of the HEA; and
(B) Assign any outstanding loans in the institution's portfolio to
the Secretary in accordance with Sec. 674.50.
(iii) Effective date. The provisions of paragraph (a)(2) of this
section are effective beginning with the cohort default rate calculated
as of June 30, 2001.
* * * * *
(c) * * *
* * * * *
(3)(i) In determining the number of borrowers who default before
the end of the following award year, a loan is excluded if the borrower
has--
(A) Voluntarily made six consecutive monthly payments;
(B) Voluntarily made all payments currently due;
(C) Repaid the full amount due, including any interest, late fees,
and collection costs that have accrued on the loan;
(D) Received a deferment or forbearance based on a condition that
predates the borrower reaching a 240- or 270-day past due status; or
(E) Rehabilitated the loan after becoming 240- or 270-days past
due.
(ii) A loan is considered canceled and also excluded from an
institution's cohort default rate calculation if the loan is--
(A) Discharged due to death or permanent and total disability;
(B) Discharged in bankruptcy;
(C) Discharged due to a closed school; or
(D) Repaid in full in accordance with Sec. 674.33(e).
(iii) For the purpose of this section, funds obtained by income tax
offset, garnishment, income or asset execution, or pursuant to a
judgment are not considered voluntary.
* * * * *
674.6 [Removed and Reserved]
4. Section 674.6 is removed and reserved.
674.7 [Removed and Reserved]
5. Section 674.7 is removed and reserved.
6. Section 674.9 is amended by redesignating paragraph (i) as
paragraph (j) and adding new paragraph (i) to read as follows:
Sec. 674.9 Student eligibility.
* * * * *
(i) In the case of a borrower who is in default on a Federal
Perkins Loan, NDSL or Defense loan, satisfies one of the conditions
contained in Sec. 674.5(c)(3)(i) or (ii) except that--
(1) For the purposes of this section, voluntary payments made by
the borrower under paragraph (i) of this section are those payments
made directly by the borrower, including payments made over and above
payments made pursuant to a judgment; and
(2) Voluntary payments do not include payments obtained by income
tax offset, garnishment, income or asset execution or pursuant to a
judgment.
* * * * *
7. Section 674.12 is amended by revising paragraphs (a), (b) and
(d) to read as follows:
Sec. 674.12 Loan maximums.
(a) The maximum annual amount of Federal Perkins Loans and Direct
Loans an eligible student may borrow is--
(1) $4,000 for a student who is enrolled in a program of
undergraduate education; and
(2) $6,000 for a graduate or professional student.
(b) The aggregate unpaid principal amount of all Federal Perkins
Loans and Direct Loans received by an eligible student may not exceed--
(1) $20,000 for a student who has successfully completed two years
of a program leading to a bachelor's degree but who has not received
the degree;
(2) $40,000 for a graduate or professional student; and
(3) $8,000 for any other student.
* * * * *
(d) For each student, the maximum annual amounts described in
paragraphs (a) and (c) of this section, and the aggregate maximum
amounts described in paragraphs (b) and (c) of this section, include
any amounts borrowed previously by the student under title IV, part E
of the HEA at any institution.
* * * * *
8. Section 674.16 is amended by revising paragraph (i) to read as
follows:
Sec. 674.16 Making and disbursing loans.
* * * * *
(i)(1) An institution must report to at least one national credit
bureau--
(i) The amount and the date of each disbursement;
(ii) Information concerning the repayment and collection of the
loan until the loan is paid in full; and
(iii) The date the loan was repaid, canceled or discharged for any
reason.
(2) An institution must promptly report any changes to information
previously reported on a loan to the same credit bureaus to which the
information was previously reported.
* * * * *
9. Section 674.31(b)(2)(i) is amended by redesignating paragraphs
(C) and (D) as (D) and (E), respectively; by adding new paragraph
(b)(2)(i)(C); and by revising paragraph (b)(10)(i) to read as follows:
Sec. 674.31 Promissory note.
* * * * *
(b) * * *
(2) * * *
(i) * * *
(C) For purposes of establishing the beginning of the repayment
period for Direct or Perkins loans, the 6- and 9-
[[Page 41244]]
month grace periods referenced in paragraph (b)(2)(i) of this section
exclude any period during which a borrower who is a member of a reserve
component of the Armed Forces named in section 10101 of Title 10,
United States Code is called or ordered to active duty for a period of
more than 30 days. Any single excluded period may not exceed three
years and includes the time necessary for the borrower to resume
enrollment at the next available regular enrollment period. Any Direct
or Perkins loan borrower who is in a grace period when called or
ordered to active duty as specified above is entitled to a new 6- or 9-
month grace period upon completion of the excluded period.
* * * * *
(10) * * *
(i) The institution must disclose to at least one national credit
bureau the amount of the loan made to the borrower, along with other
relevant information.
* * * * *
10. Section 674.33 is amended by adding new paragraphs (f) and (g)
to read as follows:
Sec. 674.33 Repayment.
* * * * *
(f) Incentive repayment program. (1) An institution may establish
the following repayment incentives:
(i) A reduction of no more than one percent of the interest rate on
a loan on which the borrower has made 48 consecutive, monthly
repayments.
(ii) A discount of no more than five percent on the balance owed on
a loan which the borrower pays in full prior to the end of the
repayment period.
(iii) With the Secretary's approval, any other incentive the
institution determines will reduce defaults and replenish its Fund.
(2) Limitation on the use of funds. (i) The institution must
reimburse its Fund, on at least a quarterly basis, for interest lost to
its Fund that otherwise would have been paid by the borrower as a
result of establishing a repayment incentive under paragraph (f)(1)(i)
and (ii) of this section.
(ii) An institution may not use Federal funds, including Federal
funds from the student loan fund, or institutional funds from the
student loan fund to pay for any repayment incentive authorized by this
section.
(g) Closed school discharge. (1) General. (i) The holder of an NDSL
or a Federal Perkins Loan discharges the borrower's (and any
endorser's) obligation to repay the loan if the borrower did not
complete the program of study for which the loan was made because the
school at which the borrower was enrolled closed.
(ii) For the purposes of this section--
(A) A school's closure date is the date that the school ceases to
provide educational instruction in all programs, as determined by the
Secretary;
(B) ``School'' means a school's main campus or any location or
branch of the main campus; and
(C) The ``holder'' means the Secretary or the school that holds the
loan.
(2) Relief pursuant to discharge. (i) Discharge under this section
relieves the borrower of any past or present obligation to repay the
loan and any accrued interest or collection costs with respect to the
loan.
(ii) The discharge of a loan under this section qualifies the
borrower for reimbursement of amounts paid voluntarily or through
enforced collection on the loan.
(iii) A borrower who has defaulted on a loan discharged under this
section is not considered to be in default on the loan after discharge,
and such a borrower is eligible to receive assistance under programs
authorized by title IV of the HEA.
(iv) The Secretary or the school, if the school holds the loan,
reports the discharge of a loan under this section to all credit
bureaus to which the status of the loan was previously reported.
(3) Determination of borrower qualification for discharge by the
Secretary. The Secretary may discharge the borrower's obligation to
repay an NDSL or Federal Perkins Loan without an application if the
Secretary determines that--
(i) The borrower qualified for and received a discharge on a loan
pursuant to 34 CFR 682.402(d) (Federal Family Education Loan Program)
or 34 CFR 685.213 (Federal Direct Loan Program), and was unable to
receive a discharge on an NDSL or Federal Perkins Loan because the
Secretary lacked the statutory authority to discharge the loan, or
(ii) Based on information in the Secretary's possession, the
borrower qualifies for a discharge.
(4) Borrower qualification for discharge. Except as provided in
paragraph (g)(3) of this section, in order to qualify for discharge of
an NDSL or Federal Perkins Loan, a borrower must submit to the holder
of the loan a written request and sworn statement, and the factual
assertions in the statement must be true. The statement need not be
notarized but must be made by the borrower under penalty of perjury. In
the statement the borrower must--
(i) State that the borrower--
(A) Received the proceeds of a loan to attend a school;
(B) Did not complete the program of study at that school because
the school closed while the student was enrolled, or the student
withdrew from the school not more than 90 days before the school closed
(or longer in exceptional circumstances); and
(C) Did not complete and is not in the process of completing the
program of study through a teachout at another school as defined in 34
CFR 602.2 and administered in accordance with 34 CFR 602.207(b)(6), by
transferring academic credit earned at the closed school to another
school, or by any other comparable means.
(ii) State whether the borrower has made a claim with respect to
the school's closing with any third party, such as the holder of a
performance bond or a tuition recovery program, and, if so, the amount
of any payment received by the borrower or credited to the borrower's
loan obligation; and
(iii) State that the borrower--
(A) Agrees to provide to the holder of the loan upon request other
documentation reasonably available to the borrower that demonstrates
that the borrower meets the qualifications for discharge under this
section; and
(B) Agrees to cooperate with the Secretary, in the case of a
discharged loan held by the Secretary, in enforcement actions in
accordance with paragraph (g)(6) of this section and to transfer any
right to recovery against a third party to the Secretary in accordance
with paragraph (g)(7) of this section.
(5) Fraudulently obtained loans. A borrower who secured a loan
through fraudulent means, as determined by the ruling of a court or an
administrative tribunal of competent jurisdiction, is ineligible for a
discharge under this section.
(6) Cooperation by borrower in enforcement actions.
(i) In order to obtain a discharge under this section, a borrower
must cooperate with the Secretary in any judicial or administrative
proceeding brought by the Secretary to recover amounts discharged or to
take other enforcement action with respect to the conduct on which the
discharge was based. At the request of the Secretary and upon the
Secretary's tendering to the borrower the fees and costs that are
customarily provided in litigation to reimburse witnesses, the borrower
must--
(A) Provide testimony regarding any representation made by the
borrower to support a request for discharge;
[[Page 41245]]
(B) Provide any documents reasonably available to the borrower with
respect to those representations; and
(C) If required by the Secretary, provide a sworn statement
regarding those documents and representations.
(ii) The holder denies the request for a discharge or revokes the
discharge of a borrower who--
(A) Fails to provide the testimony, documents, or a sworn statement
required under paragraph (g)(6)(i) of this section; or
(B) Provides testimony, documents, or a sworn statement that does
not support the material representations made by the borrower to obtain
the discharge.
(7) Transfer to the Secretary of borrower's right of recovery
against third parties. (i) In the case of a loan held by the Secretary,
upon discharge under this section, the borrower is deemed to have
assigned to and relinquished in favor of the Secretary any right to a
loan refund (up to the amount discharged) that the borrower may have by
contract or applicable law with respect to the loan or the enrollment
agreement for the program for which the loan was received, against the
school, its principals, its affiliates and their successors, its
sureties, and any private fund, including the portion of a public fund
that represents funds received from a private party.
(ii) The provisions of this section apply notwithstanding any
provision of State law that would otherwise restrict transfer of those
rights by the borrower, limit or prevent a transferee from exercising
those rights, or establish procedures or a scheme of distribution that
would prejudice the Secretary's ability to recover on those rights.
(iii) Nothing in this section limits or forecloses the borrower's
right to pursue legal and equitable relief regarding disputes arising
from matters unrelated to the discharged NDSL or Federal Perkins Loan.
(8) Discharge procedures. (i) After confirming the date of a
school's closure, the holder of the loan identifies any NDSL or Federal
Perkins Loan borrower who appears to have been enrolled at the school
on the school closure date or to have withdrawn not more than 90 days
prior to the closure date.
(ii) If the borrower's current address is known, the holder of the
loan mails the borrower a discharge application and an explanation of
the qualifications and procedures for obtaining a discharge. The holder
of the loan also promptly suspends any efforts to collect from the
borrower on any affected loan. The holder of the loan may continue to
receive borrower payments.
(iii) In the case of a loan held by the Secretary, if the
borrower's current address is unknown, the Secretary attempts to locate
the borrower and determine the borrower's potential eligibility for a
discharge under this section by consulting with representatives of the
closed school or representatives of the closed school's third-party
billing and collection servicers, the school's licensing agency, the
school accrediting agency, and other appropriate parties. If the
Secretary learns the new address of a borrower, the Secretary mails to
the borrower a discharge application and explanation and suspends
collection, as described in paragraph (g)(8)(ii) of this section.
(iv) In the case of a loan held by the school, if the borrower's
current address is unknown, the school attempts to locate the borrower
and determine the borrower's potential eligibility for a discharge
under this section by taking steps required to locate the borrower
under Sec. 674.44.
(v) If the borrower fails to submit the written request and sworn
statement described in paragraph (g)(4) of this section within 60 days
of the holder of the loan's mailing the discharge application, the
holder of the loan resumes collection and grants forbearance of
principal and interest for the period during which collection activity
was suspended.
(vi) If the holder of the loan determines that a borrower who
requests a discharge meets the qualifications for a discharge, the
holder of the loan notifies the borrower in writing of that
determination.
(vii) In the case of a loan held by the Secretary, if the Secretary
determines that a borrower who requests a discharge does not meet the
qualifications for a discharge, the Secretary notifies that borrower,
in writing, of that determination and the reasons for the
determination.
(viii) In the case of a loan held by a school, if the school
determines that a borrower who requests a discharge does not meet the
qualifications for discharge, the school submits that determination and
all supporting materials to the Secretary for approval. The Secretary
reviews the materials, makes an independent determination, and notifies
the borrower in writing of the determination and the reasons for the
determination.
(ix) In the case of a loan held by an school and discharged by
either the school or the Secretary, the school must reimburse its Fund
for the entire amount of any outstanding principal and interest on the
loan, and any collection costs charged to the Fund as a result of
collection efforts on a discharged loan. The school must also reimburse
the borrower for any amount of principal, interest, late charges or
collection costs the borrower paid on a loan discharged under this
section.
* * * * *
11. Section 674.34 is amended by revising the section heading; and
revising paragraphs (a) and (c) to read as follows:
Sec. 674.34 Deferment of repayment--Federal Perkins loans, Direct
loans and Defense loans.
(a) The borrower may defer making a scheduled installment repayment
on a Federal Perkins loan, a Direct loan, or a Defense loan, regardless
of contrary provisions of the borrower's promissory note and regardless
of the date the loan was made, during periods described in this
section.
* * * * *
(c) The borrower of a Federal Perkins loan, a Direct loan, or a
Defense loan need not repay principal, and interest does not accrue,
for any period during which the borrower is engaged in service
described in Secs. 674.53, 674.54, 674.55, 674.56, 674.57, 674.58,
674.59, and 674.60.
* * * * *
12. Section 674.39 is revised to read as follows:
Sec. 674.39 Loan rehabilitation.
(a) Each institution must establish a loan rehabilitation program
for all borrowers for the purpose of rehabilitating defaulted loans
made under this part. The institution's loan rehabilitation program
must provide that--
(1) A defaulted borrower is notified of the option and consequences
of rehabilitating a loan; and
(2) A loan is rehabilitated if the borrower makes an on-time,
monthly payment, as determined by the institution, each month for
twelve consecutive months.
(b) Within 30 days of receiving the borrower's last on-time,
consecutive, monthly payment, the institution must--
(1) Return the borrower to regular repayment status;
(2) Treat the first payment made under the 12 consecutive payments
as the first payment under the 10-year repayment maximum; and
(3) Instruct any credit bureau to which the default was reported to
remove the default from the borrower's credit history.
(c) Collection costs on a rehabilitated loan--
[[Page 41246]]
(1) If charged to the borrower, may not exceed 24 percent of the
unpaid principal and accrued interest; and
(2) That exceed the amounts specified in paragraph (c)(1) of this
section may be charged to an institution's Fund until July 1, 2002, in
accordance with Sec. 674.47(e)(5).
(d) After rehabilitating a defaulted loan and returning to regular
repayment status, the borrower regains all of the benefits and
privileges of the promissory note as applied prior to the borrower's
default on the loan. Nothing in this paragraph prohibits an institution
from offering the borrower flexible repayment options following the
borrower's return to regular repayment status on a rehabilitated loan.
(e) The borrower may rehabilitate a defaulted loan only one time.
* * * * *
13. Section 674.41 is amended by adding a new paragraph (a)(3) to
read as follows:
Sec. 674.41 Due diligence--general requirements.
(a) * * *
* * * * *
(3) Provide the borrower with information on the availability of
the Student Loan Ombudsman's office if the borrower disputes the terms
of the loan in writing and the institution does not resolve the
dispute.
* * * * *
14. Section 674.42 is amended by redesignating paragraph (b) as
paragraph (c), revising paragraph (a) and adding a new paragraph (b) to
read as follows:
Sec. 674.42 Contact with the borrower.
(a) Disclosure of repayment information. The institution must
disclose the following information in a written statement provided to
the borrower either shortly before the borrower ceases at least half-
time study at the institution or during the exit interview. If the
borrower enters the repayment period without the institution's
knowledge, the institution must provide the required disclosures to the
borrower in writing immediately upon discovering that the borrower has
entered the repayment period. The institution must disclose the
following information--
(1) The name and address of the institution to which the debt is
owed and the name and address of the official or servicing agent to
whom communications should be sent.
(2) The name and address of the party to which payments should be
sent.
(3) The estimated balance owed by the borrower on the date on which
the repayment period is scheduled to begin.
(4) The stated interest rate on the loan.
(5) The repayment schedule for all loans covered by the disclosure
including the date the first installment payment is due, and the
number, amount, and frequency of required payments.
(6) An explanation of any special options the borrower may have for
loan consolidation or other refinancing of the loan, and a statement
that the borrower has the right to prepay all or part of the loan at
any time without penalty.
(7) A description of the charges imposed for failure of the
borrower to pay all or part of an installment when due.
(8) A description of any charges that may be imposed as a
consequence of default, such as liability for expenses reasonably
incurred in attempts by the Secretary or the institution to collect on
the loan.
(9) The total interest charges which the borrower will pay on the
loan pursuant to the projected repayment schedule.
(10) A copy of the borrower's signed promissory note.
(b) Exit interview. (1) An institution must conduct exit counseling
with each borrower either in person, by audiovisual presentation, or by
interactive electronic means. The institution must conduct this
counseling shortly before the borrower ceases at least half-time study
at the institution. As an alternative, in the case of a student
enrolled in a correspondence program or a study-abroad program that the
school approves for credit, the school may provide written counseling
materials by mail within 30 days after the borrower completes the
program. If the borrower withdraws from school without the school's
prior knowledge or fails to complete an exit counseling session as
required, the school must provide exit counseling through either
interactive electronic means or by mailing counseling material to the
borrower at the borrower's last known address within 30 days after
learning that the borrower has withdrawn from school or failed to
complete exit counseling as required.
(2) In conducting the exit counseling, the school must--
(i) Inform the student as to the average anticipated monthly
repayment amount based on the student's indebtedness or on the average
indebtedness of students who have obtained Perkins loans for attendance
at that school or in the borrower's program of study;
(ii) Review for the borrower available repayment options (e.g. loan
consolidation and refinancing);
(iii) Suggest to the borrower debt-management strategies that the
school determines would best assist repayment by the borrower;
(iv) Emphasize to the borrower the seriousness and importance of
the repayment obligation the borrower is assuming;
(v) Describe in forceful terms the likely consequences of default,
including adverse credit reports and litigation;
(vi) Emphasize that the borrower is obligated to repay the full
amount of the loan even if the borrower has not completed the program,
is unable to obtain employment upon completion, or is otherwise
dissatisfied with or does not receive the educational or other services
that the borrower purchased from the school;
(vii) Review with the borrower the conditions under which the
borrower may defer repayment or obtain partial cancellation of a loan;
(viii) Require the borrower to provide corrections to the
institution's records concerning name, address, social security number,
references, and driver's license number, the borrower's expected
permanent address, the address of the borrower's next of kin, as well
as the name and address of the borrower's expected employer; and
(ix) Review with the borrower information on the availability of
the Student Loan Ombudsman's office.
(3) Additional matters that the Secretary recommends that a school
include in the exit counseling session or materials set forth in
appendix D to 34 CFR part 668.
(4) An institution that conducts exit counseling through
interactive electronic means must take reasonable steps to ensure that
each student borrower receives the counseling materials, and
participates in and completes the exit counseling.
(5) The institution must maintain documentation substantiating the
school's compliance with this section for each borrower.
* * * * *
15. Section 674.45 is amended by revising paragraph (b) and adding
a new paragraph (h) to read as follows:
Sec. 674.45 Collection procedures.
* * * * *
(b)(1) An institution must report to any national credit bureau to
which it reported the default, according to the reporting procedures of
the national credit bureau, any changes to the account status of the
loan.
[[Page 41247]]
(2) The institution must resolve within 30 days of its receipt, any
inquiry from any credit bureau that disputes the completeness or
accuracy of information reported on the loan.
* * * * *
(h) As part of the collection activities provided for in this
section, the institution must provide the borrower with information on
the availability of the Student Loan Ombudsman's office.
* * * * *
16. Section 674.47 is amended by redesignating paragraphs (e)(5)
and (e)(6) as (e)(6), and (e)(7), respectively, and by adding new
paragraph (e)(5) to read as follows:
Sec. 674.47 Costs chargeable to the Fund.
* * * * *
(e) * * *
(5) Until July 1, 2002 on loans rehabilitated pursuant to
Sec. 674.39, amounts that exceed the amounts specified in
Sec. 674.39(c)(1) but are less than--
(i) 30 percent if the loan was rehabilitated while in a first
collection effort; or
(ii) 40 percent if the loan was rehabilitated while in a second
collection effort.
* * * * *
17. Section 674.49 is amended as follows:
A. By redesignating paragraphs (f)(2)(ii)(A) and (f)(2)(ii)(B) as
paragraphs (f)(2)(ii)(B) and (f)(2)(ii)(C), respectively; and adding a
new paragraph (f)(2)(ii)(A).
B. By redesignating paragraphs (f)(3)(ii)(A) and (f)(3)(ii)(B) as
paragraphs (f)(3)(ii)(B) and (f)(3)(ii)(C), respectively; and adding a
new paragraph (f)(3)(ii)(A).
C. By revising paragraphs (c)(1), (c)(2) and (c)(3); paragraph
(e)(4)(i); newly redesignated paragraphs (f)(2)(ii)(B) and
(f)(3)(ii)(B); and paragraph (g).
Sec. 674.49 Bankruptcy of borrower.
* * * * *
(c) * * *
(1) The institution must use diligence and may assert any defense
consistent with its status under applicable law to avoid discharge of
the loan. The institution must follow the procedures in this paragraph
to respond to a complaint for a determination of dischargeability under
11 U.S.C. 523(a)(8) on the ground that repayment of the loan would
impose an undue hardship on the borrower and his or her dependents,
unless discharge would be more effectively opposed by avoiding that
action.
(2) If the petition for relief in bankruptcy was filed before
October 8, 1998 and more than seven years of the repayment period on
the loan (excluding any applicable suspension of the repayment period
defined in 34 CFR 682.402(m)) have passed before the borrower filed the
petition, the institution may not oppose a determination of
dischargeability requested under 11 U.S.C. 523(a)(8)(B) on the ground
of undue hardship.
(3) In any other case, the institution must determine, on the basis
of reasonably available information, whether repayment of the loan
under either the current repayment schedule or any adjusted schedule
authorized under subpart B or D of this part would impose an undue
hardship on the borrower and his or her dependents.
* * * * *
(e) * * *
* * * * *
(4)(i) The institution must monitor the borrower's compliance with
the requirements of the plan confirmed by the court. If the institution
determines that the debtor has not made the payments required under the
plan, or has filed a request for a ``hardship discharge'' under 11
U.S.C. 1328(b), the institution must determine from its own records and
information derived from documents filed with the court--
* * * * *
(f) * * *
(2) * * *
(ii)(A) The petition for relief was filed before October 8, 1998;
(B) The loan entered the repayment period more than seven years
(excluding any applicable suspension of the repayment period as defined
by 34 CFR 682.402(m)), and
(3) * * *
(ii)(A) The petition for relief was filed before October 8, 1998;
(B) The loan entered the repayment period more than seven years
(excluding any application suspension of the repayment period as
defined by 34 CFR 682.402(m)) before the filing of the petition, and
* * * * *
(g) Termination of collection and write-off. (1) An institution
must terminate all collection action and write off a loan if it
receives a general order of discharge--
(i) In a bankruptcy in which the borrower filed for relief before
October 8, 1998, if the loan entered the repayment period more than
seven years (exclusive of any applicable suspension of the repayment
period defined by 34 CFR 682.402(m)) from the date on which a petition
for relief was filed; or
(ii) In any other case, a judgment that repayment of the debt would
constitute an undue hardship and that the debt is therefore
dischargeable.
(2) If an institution receives a repayment from a borrower after a
loan has been discharged, it must deposit that payment in its Fund.
* * * * *
18. Section 674.52 is amended by revising paragraphs (c)(1) and (d)
to read as follows:
Sec. 674.52 Cancellation procedures.
* * * * *
(c) Cancellation of a defaulted loan. (1) Except with regard to
cancellation on account of the death or disability of the borrower, a
borrower whose defaulted loan has not been accelerated may qualify for
a cancellation by complying with the requirements of paragraph (a) of
this section.
* * * * *
(d) The Secretary considers a Perkins loan, Direct loan or Defense
loan borrower's loan deferment under Sec. 674.34(c) to run concurrently
with any period for which cancellation under Secs. 674.53, 674.54,
674.55, 674.56, 674.57, 674.58, 674.59, and 674.60 is granted.
* * * * *
19. Section 674.53 is amended by redesignating paragraphs (a)(2),
(a)(3), (a)(4), (a)(5), and (a)(6) as (a)(3), (a)(4), (a)(5), (a)(6),
and (a)(7), respectively; by revising the heading of the section; by
adding a new paragraph (a)(2); by revising paragraph (a)(1), paragraph
(b), and paragraph (c) to read as follows:
Sec. 674.53 Teacher cancellation--Federal Perkins, Direct and Defense
loans.
(a)(1) Cancellation for full-time teaching in an elementary or
secondary school serving low-income students.
(i) An institution must cancel up to 100 percent of the outstanding
loan balance on a Federal Perkins loan or a Direct loan made on or
after July 23, 1992, for full-time teaching in a public or other
nonprofit elementary or secondary school.
(ii) An institution must cancel up to 100 percent of the
outstanding loan balance on a Federal Perkins, Direct or Defense loan
made prior to July 23, 1992, for teaching service performed on or after
October 7, 1998, if the cancellation benefits provided under this
section are not included in the terms of the borrower's promissory
note.
(2) The borrower must be teaching full-time in a public or other
nonprofit elementary or secondary school that--
(i) Is in a school district that qualified for funds, in that year,
under title I of the Elementary and Secondary Education Act of 1995, as
amended; and
[[Page 41248]]
(ii) Has been selected by the Secretary based on a determination
that more than 30 percent of the school's total enrollment is made up
of title I children.
(b) Cancellation for full-time teaching in special education. (1)
An institution must cancel up to 100 percent of the outstanding balance
on a borrower's Federal Perkins loan or Direct loan made on or after
July 23, 1992, for the borrower's service as a full-time special
education teacher of infants, toddlers, children, or youth with
disabilities, in a public or other nonprofit elementary or secondary
school system.
(2) An institution must cancel up to 100 percent of the outstanding
loan balance on a Federal Perkins, Direct or Defense loan made prior to
July 23, 1992, for teaching service performed on or after October 7,
1998, if the cancellation benefits provided under this section are not
included in the terms of the borrower's promissory note.
* * * * *
(c) Cancellation for full-time teaching in fields of expertise. (1)
An institution must cancel up to 100 percent of the outstanding balance
on a borrower's Federal Perkins loan or Direct loan made on or after
July 23, 1992, for full-time teaching in mathematics, science, foreign
languages, bilingual education, or any other field of expertise where
the State education agency determines that there is a shortage of
qualified teachers.
(2) An institution must cancel up to 100 percent of the outstanding
loan balance on a Federal Perkins, Direct or Defense loan made prior to
July 23, 1992, for teaching service performed on or after October 7,
1998, if the cancellation benefits provided under this section are not
included in the terms of the borrower's promissory note.
* * * * *
20. Section 674.56 is amended by revising the section heading and
paragraphs (a), (b) and (c) to read as follows:
Sec. 674.56 Employment cancellation--Federal Perkins, Direct and
Defense loans.
(a) Cancellation for full-time employment as a nurse or medical
technician. (1) An institution must cancel up to 100 percent of the
outstanding balance on a borrower's Federal Perkins or Direct loan made
on or after July 23, 1992, for full-time employment as a nurse or
medical technician providing health care services.
(2) An institution must cancel up to 100 percent of the outstanding
balance on a Federal Perkins, Direct or Defense loan made prior to July
23, 1992, for full-time service as a nurse or medical technician
performed on or after October 7, 1998, if the cancellation benefits
provided under this section are not included in the borrower's
promissory note.
(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 or Direct loan made on or after July 23, 1992, for
service as a full-time employee in a public or private nonprofit child
or family service agency who is providing, or supervising the provision
of, services to high-risk children who are from low-income communities
and the families of such children.
(2) An institution must cancel up to 100 percent of the outstanding
loan balance on a Federal Perkins, Direct or Defense loan made prior to
July 23, 1992, for employment in a child or family service agency on or
after October 7, 1998, if the cancellation benefits provided under this
section are not included in the terms of the borrower's promissory
note.
(c) Cancellation for service as a qualified professional provider
of early intervention services. (1) An institution must cancel up to
100 percent of the outstanding balance on a borrower's Federal Perkins
or Direct loan made on or after July 23, 1992, for the borrower's
service as a full-time qualified professional provider of early
intervention services in a public or other nonprofit program under
public supervision by the lead agency as authorized in section
676(b)(9) of the Individual with Disabilities Act.
(2) An institution must cancel up to 100 percent of the outstanding
loan balance on a Federal Perkins, Direct or Defense loan made prior to
July 23, 1992 for early intervention service performed on or after
October 7, 1998, if the cancellation benefits provided under this
section are not included in the terms of the borrower's promissory
note.
* * * * *
21. Section 674.57 is amended by redesignating paragraphs (a)(2),
(a)(3), (a)(4), (a)(5), (a)(6), and (a)(7) as (a)(3), (a)(4), (a)(5),
(a)(6), (a)(7), and (a)(8), respectively; by revising the section
heading and paragraph (a)(1); and adding a new paragraph (a)(2) to read
as follows:
Sec. 674.57 Cancellation for law enforcement or corrections officer
service--Federal Perkins, Direct and Defense loans.
(a)(1) An institution must cancel up to 100 percent of the
outstanding balance on a borrower's Federal Perkins or Direct Loan made
on or after November 29, 1990, for full-time service as a law
enforcement or corrections officer for an eligible employing agency.
(2) An institution must cancel up to 100 percent of the outstanding
loan balance on a Federal Perkins, Direct or Defense loan made prior to
November 29, 1990, for law enforcement or correction officer service
performed on or after October 7, 1998, if the cancellation benefits
provided under this section are not included in the terms of the
borrower's promissory note.
* * * * *
22. Section 674.58 is amended by revising paragraph (a) to read as
follows:
Sec. 674.58 Cancellation for service in a Head Start Program.
(a)(1) An institution must cancel up to 100 percent of the
outstanding balance on a borrower's Direct or Federal Perkins loan, for
service as a full-time staff member in a ``Head Start'' program.
(2) An institution must cancel up to 100 percent of the outstanding
balance on a Defense loan for service as a full-time staff member in a
``Head Start'' program performed on or after October 7, 1998, if the
cancellation benefits provided under this section are not included in
the terms of the borrower's promissory note.
(3) The Head Start program in which the borrower serves must
operate for a complete academic year, or its equivalent.
(4) In order to qualify for cancellation, the borrower's salary may
not exceed the salary of a comparable employee working in the local
educational agency of the area served by the local Head Start program.
* * * * *
23. Section 674.60 is amended by revising the section heading and
paragraph (a) to read as follows:
Sec. 674.60 Cancellation for volunteer service--Perkins loans, Direct
loans and Defense loans.
(a)(1) An institution must cancel up to 70 percent of the
outstanding balance on a Perkins loan, and 70 percent of the
outstanding balance of an NDSL made on or after October 7, 1998, for
service as a volunteer under The Peace Corps Act or The Domestic
Volunteer Service Act of 1973 (ACTION programs).
(2) An institution must cancel up to 70 percent of the outstanding
balance on a Direct or Defense loan for service as a volunteer under
The Peace Corps Act or The Domestic Volunteer Service Act of 1973
(ACTION programs) performed on or after October 7, 1998, if the
cancellation benefits provided under
[[Page 41249]]
this section are not included in the terms of the borrower's promissory
note.
* * * * *
[FR Doc. 99-19230 Filed 7-28-99; 8:45 am]
BILLING CODE 4000-01-U
