[Federal Register Volume 59, Number 159 (Thursday, August 18, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-19733]
[[Page Unknown]]
[Federal Register: August 18, 1994]
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Part II
Department of Education
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34 CFR Part 685
Federal Direct Student Loan Program; Proposed Rule
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DEPARTMENT OF EDUCATION
34 CFR Part 685
Federal Direct Student Loan Program
RIN 1840-AC05
AGENCY: Department of Education.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Secretary of Education proposes to amend the Federal
Direct Student Loan (Direct Loan) Program regulatory policies and
procedures which apply to loans under the Federal Direct Stafford Loan
Program, the Federal Direct Unsubsidized Stafford Loan Program, the
Federal Direct PLUS Program, and the Federal Direct Consolidation Loan
Program, collectively referred to as the Direct Loan Program. These
proposed regulatory policies and procedures would streamline the loan
application and disbursement processes, provide ease in school
administration of the loans, ensure program integrity, and protect the
Federal fiscal interest.
DATES: Comments must be received on or before October 3, 1994.
ADDRESSES: All comments concerning these proposed regulations should be
addressed to Ms. Rachel Edelstein, U.S. Department of Education, 400
Maryland Avenue SW. (Room 4100, ROB-3), Washington, DC 20202-5257.
(Internet address: direct loans@ed.gov). All comments will be available
for public review on the Department's Direct Loan bulletin board. The
access number for the bulletin board for individuals with
communications software and modems is 1-800-429-9933. In addition,
Internet users may access the bulletin board by using the TCP/IP
telenet command facility at the above Internet address.
A copy of any comments that concern information collection
requirements should also be sent to the Office of Management and Budget
at the address listed in the Paperwork Reduction Act section of this
preamble.
FOR FURTHER INFORMATION CONTACT: Ms. Rachel Edelstein, telephone: (202)
708-9406. (Internet address: direct loans@ed.gov). Individuals who use
a telecommunications device for the deaf (TDD) may call the Federal
Information Relay Service (FIRS) at 1-800-877-8339 between 8 a.m. and 8
p.m., Eastern time, Monday through Friday.
SUPPLEMENTARY INFORMATION:
Background
The Student Loan Reform Act of 1993, enacted on August 10, 1993,
established the Direct Loan Program under the Higher Education Act of
1965, as amended (HEA). See Subtitle A of the Omnibus Budget
Reconciliation Act of 1993 (Pub. L. 103-66). Under the Direct Loan
Program, loan capital is provided directly to student and parent
borrowers by the Federal Government rather than through private
lenders.
The Direct Loan Program provides borrowers with a streamlined
application process, flexible repayment options, and a simplified
collection process. Direct Loan Program student borrowers apply for a
loan at the same time that they apply for other title IV student
financial assistance. No additional forms are required. Further, under
the Direct Loan Program borrowers will be eligible for a variety of new
repayment plans, including an extended repayment plan, a graduated
repayment plan with an extended term, an income contingent repayment
plan, and an alternative repayment plan. These repayment plans allow
borrowers to tailor their loan repayment to their individual
circumstances. The new repayment plans also give borrowers the
opportunity to enter into lower-paying service careers while making
reasonable payments on their educational debt. The income contingent
repayment plan will reduce the incidence of default, because borrowers
are required to repay only what they can reasonably afford. In
addition, repayment procedures will be easier for borrowers under the
Direct Loan Program than under the Federal Family Education Loan (FFEL)
Program because the borrower will interact with only one servicer at a
time throughout the life of the loan, rather than with multiple loan
holders.
The HEA directed the Secretary to consult with members of the
higher education community and to publish a notice of standards,
criteria, and procedures for the program's first year (July 1, 1994 to
June 30, 1995) in lieu of issuing regulations using the Department's
usual procedures. In compliance with that requirement, the Secretary
published three sets of rules for the first year. The first of these
rules was published on September 10, 1993, and contained standards for
school participation and loan origination criteria. The second was
published on January 4, 1994, and included most of the policies and
procedures relating to schools and borrowers in the Direct Loan
Program. The third set of rules was published on July 1, 1994, and
governed the repayment plans available to Direct Loan borrowers,
including an income contingent repayment plan, and standards and
procedures relating to Federal Direct Consolidation Loans.
The HEA also directed the Secretary, to the extent practicable, to
develop proposed rules for the Direct Loan Program through a negotiated
rulemaking process for the second and subsequent years of the program
(1995-1996 and beyond). With two exceptions, negotiated rulemaking was
used to develop these proposed rules. The standards for school
participation in the Direct Loan Program for the 1995-1996 academic
year, which were published on February 17, 1994, and the criteria
schools would need to meet to originate student loans in the Direct
Loan Program in the 1995-1996 academic year, which were published on
April 26, 1994, were discussed with members of the Direct Student Loan
Regulations Negotiated Rulemaking Advisory Committee. In many cases,
the results of those discussions were incorporated into those standards
and criteria. The timely implementation of the Direct Loan Program for
the 1995-1996 academic year did not permit the solicitation of further
comment on those rules, and they were published in final form.
The negotiated rulemaking process for the development of this
notice of proposed rulemaking began in January of 1994. The Direct
Student Loan Regulations Negotiated Rulemaking Advisory Committee (the
negotiators) met for several days each month from January through June
and for one day in July. The goal of the negotiations was to reach
consensus on a full notice of proposed rulemaking (NPRM) with consensus
being defined as an absence of dissent from any of the negotiators.
While consensus on an NPRM was not attained, substantive agreement was
reached on most of the issues addressed by the regulations.
Provisions Proposed
These proposed regulations include policies and procedures
necessary for borrowers and schools to participate in the Direct Loan
Program for the 1995-1996 and subsequent academic years, including
provisions relating to repayment of Direct Loans. Provisions relating
to school participation and loan origination in this document are
proposed for the 1996-1997 and subsequent academic years.
The policies and procedures in these proposed regulations have been
selected to promote the statutory mandate that the Secretary make loans
under the Direct Loan Program available to all eligible students
attending participating institutions and their parents. For the 1996-
1997 academic year, the Secretary estimates that 50 percent of all new
loans made under the Department of Education's two major student loan
programs will be made to students and their parents participating in
the Direct Loan Program. Thus, over three million recipients will
benefit from this program during the 1996-1997 academic year, and
millions more will benefit in future years. Due to the size and
importance of this program, the proposed regulatory policies and
procedures in this document have been chosen because they would
streamline the loan application and disbursement processes, provide
ease in school administration of the loans, ensure program integrity,
and protect the Federal fiscal interest. Meeting Summaries of each
meeting of the Direct Student Loan Regulations Negotiated Rulemaking
Advisory Committee contain a fuller description of the considerations
that were taken into account in the preparation of these proposed
regulations. Copies of the Meeting Summaries will be available for
public inspection with the comments submitted in response to the
proposed rules.
In certain sections where Direct Loan provisions are different from
(FFEL) Program provisions, the Secretary will propose comparable
changes to FFEL Program regulations in a separate Notice of Proposed
Rulemaking to be published shortly. Anticipated changes to the FFEL
program are noted in the following discussion. The Secretary expects
that the comment period end dates and effective dates for the final
FFEL Program and Direct Loan Program regulations will coincide.
Summary of Contents
Subpart A--Purpose and Scope
Sec. 685.100 The Federal Direct Student Loan Program.
This section contains a general description of the program and
lists the following components of the Federal Direct Student Loan
Program:
(1) The Federal Direct Stafford Loan Program;
(2) The Federal Direct Unsubsidized Stafford Loan Program;
(3) The Federal Direct PLUS Loan Program; and
(4) The Federal Direct Consolidation Loan Program.
Sec. Section 685.101 Participation in the Direct Loan Program.
This section authorizes colleges, universities, graduate and
professional schools, vocational, and proprietary schools selected by
the Secretary to participate in the Direct Loan Program and allows the
Secretary to permit a school to participate in both the FFEL Program
and the Direct Loan Program simultaneously. A school may participate in
both loan programs under such terms as it determines would best serve
the needs of its students, subject to the agreement of the Secretary.
For example, a school could make the Direct Loan Program available to
its first-time borrowers only and the FFEL Program available to its
other students, or it could choose to participate in the Federal Direct
Stafford Loan Program, the Federal Direct Unsubsidized Stafford Loan
Program, and the Federal PLUS Program. In the latter example, a student
could receive a Direct Loan while the student's parent could receive an
FFEL loan.
Sec. Section 685.102 Definitions.
This section identifies the definitions in this notice of proposed
rulemaking that are found in other Department regulations, i.e., in the
Student Assistance General Provisions regulations (34 CFR Part 668), in
the Institutional Eligibility regulations (34 CFR Part 600), and in the
FFEL Program regulations (34 CFR Part 682), and also defines terms that
are specific to these proposed rules. In several of these definitions
the Secretary has incorporated revisions suggested by one or more of
the negotiators.
Under the proposed definition of the term ``estimated financial
assistance'', Federal Perkins Loan Program and Federal Work-Study
Program aid that the student does not accept is not considered
estimated financial assistance. Some negotiators criticized this
proposal on the ground that it takes discretion away from the financial
aid administrator. However, the financial aid administrator retains
discretion in certifying the loan application. Under
Sec. 685.301(a)(5), an aid administrator may reduce the borrower's
determination of need on a case-by-case basis, including a case in
which a reduction in need is warranted even though the borrower has
declined campus-based aid; the reason for the reduction must be
documented in the student's file. The negotiators did not reach
agreement on the definition for ``estimated financial assistance''.
The definition for ``repayment period'', contained in the
regulations for the first year of the program, has been deleted from
these proposed regulations because information that was provided in
that definition (on which the negotiators disagreed) is included in
other provisions.
The definition of the term ``estimated cost of attendance'' in the
first-year regulations has also been deleted from these proposed
regulations and will likewise be proposed to be deleted from FFEL
Program regulations. A definition of this term will be proposed in
forthcoming General Provisions regulations.
Sec. 685.103--Applicability of Subparts
This section states in general terms the content of each subpart of
this notice of proposed rulemaking. Subpart A addresses the purpose and
scope of the document. Subpart B addresses borrower provisions. Subpart
C addresses school requirements. Subpart D contains standards for the
participation of schools in the program and the criteria for
determining a school's role in the loan origination process.
Subpart B--Borrower Provisions
Sec. 685.200 Borrower Eligibility.
This section lists the eligibility requirements for a student
borrower in paragraph (a) and for a parent borrower in paragraph (b).
Currently, a borrower whose previous loan was cancelled due to total
and permanent disability is not eligible for a new loan unless he or
she reaffirms the prior debt and receives a certification from a
physician that the borrower's condition has improved. Based on comments
from a number of the negotiators, these proposed regulations would
eliminate those requirements. The borrower would need to obtain a
certification from a physician that the borrower is able to engage in
substantial gainful activity (but not that the borrower's condition has
improved). The Secretary intends to propose identical changes for the
FFEL Program. The Secretary invites comments on how to define
``substantial gainful activity'' for this purpose. The negotiators did
not reach agreement on the requirement in Sec. 685.200(a)(1)(iv)(A)
that a student reaffirm previous loans that were discharged in
bankruptcy to qualify for a Direct Loan or on the requirement in
Sec. 685.200(b)(7)(i)(C) that a parent document extenuating
circumstances if he or she has an adverse credit history and wants to
receive a Direct PLUS Loan.
This section also requires, in paragraph (c), that a borrower who
is currently in default on a FFEL loan or a Direct Loan must make
satisfactory repayment arrangements on the defaulted loan to be
eligible to borrow under the Direct Loan Program. This requirement does
not apply to defaulted borrowers who consolidate their loans and agree
to repay under the income contingent repayment plan. Finally, paragraph
(d) lists the loans that may be used to replace a student's expected
family contribution.
Sec. 685.201. Obtaining a Loan.
Paragraph (a) of this section describes the requirement for a
student who wishes to obtain a Direct Student Loan to complete a Free
Application for Federal Student Aid and the school's responsibility to
perform certain functions to process that loan application. A school's
responsibilities are differentiated depending on the procedures it
follows to originate loans, or whether it uses the services of an
alternative originator. Paragraph (b) describes the process a parent
borrower uses to apply for a Direct PLUS Loan and also describes the
school's responsibilities according to the procedures it follows to
originate or assist in the origination of PLUS Loans. Paragraph (c)
describes the process for obtaining a Direct Consolidation Loan. The
negotiators did not reach agreement on the application procedures for a
Direct Consolidation Loan in Sec. 685.201(c).
Sec. 685.202 Charges for Which Direct Loan Program Borrowers are
Responsible.
This section specifies the charges that a borrower may incur in the
Direct Loan Program. The loan interest rates applicable to various
types of loans are listed in paragraph (a), and the rules on when
unpaid interest is capitalized are detailed in paragraph (b). Based on
comments from many of the negotiators, the Secretary has specified when
the capitalization of interest will occur. Interest on a Direct
Unsubsidized Loan will not be capitalized until the borrower enters
repayment. If a borrower is in a deferment period on a Direct
Unsubsidized Loan, or in a forbearance period on any loan, the
Secretary will capitalize interest that has accrued at the expiration
of the deferment or forbearance. If a borrower has agreed to make
payments of interest when payments of principal are not due and becomes
past due on those interest payments, the Secretary will capitalize the
unpaid interest, after notification to the borrower, in order to keep
that borrower from defaulting on those interest payments. Finally, with
certain exceptions referred to in Sec. 685.202(b)(5), if a borrower is
making payments on a loan that do not cover all of the accruing
interest, the Secretary will capitalize the remaining interest on an
annual basis.
Loan fees, late charges, and collection charges (both before and
after default) are addressed in paragraphs (c), (d), and (e) of this
section, respectively. The section specifies the Secretary's authority
to assess certain charges but does not require the Secretary to do so.
The maximum fees and charges that could be charged in the Direct Loan
Program are the same as those authorized for the FFEL Program. The
negotiators did not reach agreement on late charges and collection
charges in Sec. 685.202 (d) and (e).
Sec. 685.203 Loan Limits.
This section contains the statutory loan limits, both annual and
aggregate amounts (and prorated amounts for programs that are less than
an academic year), for various classes of students and for the various
Direct Loans. The amount available for a Direct Subsidized Loan to an
undergraduate student in the first year of his or her program is
determined by the length of the program in comparison to the academic
year. An undergraduate student in subsequent years of his or her
program is eligible for increasingly higher loan amounts, but those
amounts are prorated for that portion of the program less than an
academic year in length that remains after the student completes one or
more academic years of study. For example, an undergraduate student in
the second year of his or her program has a loan limit of $3,500 for an
academic year of study. However, if that student has less than a full
academic year of study remaining in the program, that loan limit would
be prorated based on the number of hours for which the student enrolls
(see Secs. 685.203(a) (2), (3) and 685.301(a)(4)(ii)). If this borrower
needed nine semester hours but was enrolled for 12 semester hours
(which is one-half of an academic year) the borrower would qualify for
a $1,750 loan.
Students may also be eligible to borrow Direct Unsubsidized Loans.
The loan limits are the same as for Direct Subsidized Loans, minus the
amount of any Direct Subsidized Loan amount borrowed. For example, if
the limit is $3,500 and the borrower received a $2,000 Direct
Subsidized Loan, that borrower may receive a $1,500 Direct Unsubsidized
Loan. Independent, graduate and professional students, and certain
dependent students may borrow additional amounts of Direct Unsubsidized
Loans.
Paragraphs (d) and (e) describe the aggregate loan limits for
Direct Subsidized and Direct Unsubsidized Loans. The aggregate amount a
dependent undergraduate could receive under these programs is $23,000;
an independent undergraduate could receive $46,000. A graduate student
could receive $138,500, including any loans for undergraduate study.
Paragraphs (f) and (g) discuss loan limits for PLUS Loan borrowers. For
both annual and aggregate PLUS limits, the total amount of the loan may
not exceed the cost of attendance minus other estimated financial
assistance for that student.
Sec. 685.204 Deferment.
This section lists the conditions under which a Direct Loan Program
borrower is eligible for deferment of payments. For Direct
Unsubsidized, Direct Subsidized, and Direct PLUS Loans, the conditions
for deferment are limited to the conditions listed in the statute for
Direct Loans. However, the statute provides the Secretary with latitude
in setting the terms, conditions, and benefits (including deferment
provisions) for Federal Direct Consolidation Loans. In order to
establish comparable deferment provisions under both the Direct Loan
and FFEL Programs, the proposed regulations provide that Direct Loan
borrowers with outstanding FFEL loans as of June 30, 1993, who
consolidate their FFEL loans or their Direct Loans, or both, into a
Direct Consolidation Loan are eligible for deferments under the
provisions that were in effect prior to the recent reauthorization of
the Higher Education Act. Thus, these borrowers maintain the same
deferment benefits for which they would have been eligible under the
FFEL Program and are eligible for the deferments that are available to
other Direct Loan borrowers if they consolidate into the Direct Loan
Program.
A Direct Loan borrower is eligible for an economic hardship
deferment under the same standards that apply under the FFEL Program.
This deferment is available for periods of up to one year at a time
that, collectively, do not exceed three years if the borrower (1) Has
been granted an economic hardship deferment under either the FFEL or
the Federal Perkins Loan Programs; (2) is receiving payment under a
Federal or State public assistance program; (3) is working full-time
and earning a total monthly gross income that does not exceed the
greater of the minimum wage or the poverty level for a family of two;
or (4) is not receiving total monthly gross income that exceeds twice
the minimum wage or the poverty level for a family of two, and, after
deducting monthly payments on Federal postsecondary loans, the
remaining amount does not exceed the minimum wage or the poverty level
for a family of two. See Sec. 682.210(s)(6) of the FFEL Program
regulations.
Sec. 685.205 Forbearance.
This section defines forbearance (the temporary cessation of
payments, an extension of time for making payments, or making smaller
payments than originally scheduled) and lists the reasons for which the
Secretary grants forbearance. Paragraph (a) lists five reasons for
which the borrower may request forbearance: (1) The borrower's
inability to make payments; (2) payment of principal is being deferred
and payment of interest is not subsidized; (3) certain medical and
dental internships and residencies; (4) national service under the
National and Community Service Trust Act of 1993; and (5) title IV loan
payment amounts are equal to or greater than 20 percent of total
monthly gross income. The borrower must provide documentation to
support the request for forbearance.
The Secretary grants administrative forbearance in a number of
circumstances, examples of which are listed in paragraph (b).
Documentation from the borrower is not required for administrative
forbearance.
Sec. 685.206 Borrower responsibilities and defenses.
Paragraph (a) of this section lists the information a borrower must
provide in order to start the origination process for a Direct Loan.
Paragraph (b) requires the borrower to notify the Secretary of changes
in certain personal information, such as name and address. Paragraph
(c) describes certain defenses a borrower may raise against repayment.
A Direct Loan borrower may request that the Secretary exercise his
long-standing authority to relieve the borrower of his or her
obligation to repay a loan on the basis of an act or omission of the
borrower's school. This paragraph lists several types of proceedings
(including but not limited to a tax refund offset proceeding, a wage
garnishment proceeding, a salary offset proceeding (for Federal
employees), and a credit bureau reporting proceeding) in which a
borrower may assert a defense. Paragraph (c) also states the relief
that the Secretary grants to the borrower (beyond relief from the
obligation to repay the loan) if the defense against repayment is
successful. The paragraph further states that the Secretary may
initiate an appropriate proceeding to require the school to pay the
amount of the loan to which a successful defense applies. Under the
proposed rules, the Secretary does not initiate such a proceeding after
the period during which the school is required to retain records unless
the school receives actual notice of the borrower's claim during that
period.
This proposed rule relating to borrower defenses to repayment of a
loan is intended to be effective for the 1995-1996 academic year only.
After the publication of this proposed rule, the Secretary will work
with interested parties to develop regulations for borrower defenses
that would apply to both the Direct Loan Program and the FFEL Program.
When published in final form, the new regulations would apply to the
1996-1997 and subsequent academic years.
Sections 685.207-685.211
During negotiations concerning repayment provisions, the Department
and the community each made major compromises and reached agreement on
many repayment issues in, but not all of the terms of, Secs. 685.207
through 685.211. The Department incorporated many of the suggestions
made by the negotiators relating to the repayment provisions, including
extending the number of years of repayment under the graduated
repayment plan and making extensive changes to the income contingent
repayment plan (ICRP).
The Secretary believes that these repayment plans, as proposed,
provide a broad array of options that allow borrowers to repay their
loans in the ways that best suit their needs. Moreover, borrowers can
change repayment plans as their financial circumstances change. The
Secretary has determined that the proposed repayment plans are cost-
neutral for the Federal government; that is, the repayment plans as a
whole would not exceed the cost of the standard repayment plan. Under
the ICRP, the Secretary proposes that interest no longer be capitalized
once the principal loan balance reaches one and one-half times the
amount owed by the borrower when the borrower enters repayment. This
proposal would allow borrowers who cannot make loan payments in some
years because of low incomes, but can repay in other years when their
incomes are higher, to do so while limiting the increase in the amount
owed due to capitalization. The Secretary seeks comments from the
public relating to the repayment provisions, especially the ICRP. The
Secretary believes that the proposed rules in the ICRP would provide
students at various income levels the opportunity to obtain further
education and choose career paths without being limited by the amount
of their student loan debt. The plan would also ensure that borrowers
repay their loans if they are able to do so.
The Secretary particularly seeks comments on whether the proposed
percentage of income required to be paid under the ICRP is too high and
on whether the proposed length of the repayment periods should be
longer. The Secretary also seeks comments on the limits on
capitalization and the repayment amounts for low-income borrowers. The
Secretary intends to review the ICRP formula for borrowers whose first
Direct Loan is entering repayment each year and make any necessary
changes based on the experience of the program.
Sec. Section 685.207 Obligation to repay.
This section contains provisions relating to a borrower's
obligation to repay a Direct Loan that generally parallel provisions
applicable to the FFEL program. On the basis of consultations with
members of the higher education community, the Secretary has included
clarifying provisions concerning (1) the collection costs for which a
borrower is responsible (in paragraph (a)) and (2) the borrower's
obligations upon re-enrolling in school after a loan has entered
repayment (in paragraph (b)(1)).
Sec. Section 685.208 Repayment Plans.
This section describes the various repayment plans available to
Direct Loan borrowers under section 455(d)(1) of the HEA. These
repayment plans offer borrowers flexible alternatives and allow
borrowers to determine the type of repayment that best suits their
individual financial situations. Although the negotiators did not reach
agreement on this section, it reflects many suggestions made by
negotiators. The Secretary requests comments on the proposed provisions
of the repayment plans.
To simplify the administration of the program, paragraph (a)(4)
requires that all Direct Loans obtained by a borrower be repaid
together under the same repayment plan. The sole exception to this
requirement is that Direct PLUS Loans (which are the only loans that
may not be repaid under the income contingent repayment plan) may be
repaid separately.
The features of the standard repayment plan, described in paragraph
(b), are comparable to the standard repayment plan under the FFEL
Program. Generally, a borrower must repay the loan by making fixed
monthly payments for ten years. Under the extended repayment plan
described in paragraph (c), a borrower must repay the loan by making
fixed monthly payments within an extended period of time of 12 to 30
years that varies with the borrower's debt level. The repayment period
under this plan is the same as the period for repayment of a
consolidation loan under the FFEL Program.
Under the graduated repayment plan described in paragraph (d), a
borrower must repay the loan by making monthly payments at two or more
levels within the same period of time as under the extended repayment
plan. The Secretary believes that making the repayment period under the
graduated repayment plan equal to the repayment period under the
extended payment plan offers flexibility and enables a borrower to
assess the relative benefits of the various repayment plans. This
section provides that the Secretary may adjust the number of payments
or the monthly payment amount under the standard, extended, and
graduated repayment plans to reflect changes in the variable interest
rate identified in Sec. 685.202(a).
The income contingent repayment plan is summarized in paragraph (f)
and described in detail in Sec. 685.209 and Appendix A. Under this
plan, a borrower may choose to repay Direct Loans in one of two ways
described in Sec. 685.209. A borrower's monthly repayment amount
generally varies with the Adjusted Gross Income (AGI) reported by the
borrower, the amount of the borrower's Direct Loan debt, and family
size. However, a borrower would have the option of never making a
monthly repayment under ICRP that is greater than the amount the
borrower would repay over 12 years using standard amortization.
Specific provisions in Sec. 685.209 apply in the case of a married
couple who wish to repay their Direct Loans jointly. Payments under the
income contingent repayment plan increase progressively with debt to
discourage excessive borrowing and to ensure that most borrowers repay
their loans within the 25-year period allowed by the statute. The
borrower is not required to repay any amount that remains outstanding
at the end of the repayment period. Under current tax law, any amount
not repaid is considered taxable income.
The Secretary intends to review periodically the method for
calculating monthly repayment amounts under the income contingent
repayment plan. However, if the Secretary amends the regulations
governing that method, the regulations in effect when a borrower's
first Direct Loan enters repayment determine the monthly repayment
amount for all the borrower's Direct Loans unless the borrower requests
otherwise.
The alternative repayment plan provisions in paragraph (g)
implement the Secretary's statutory authority to provide an alternative
plan, on a case-by-case basis, to a borrower who can demonstrate that
none of the other available plans can accommodate the borrower's
exceptional circumstances.
Under these proposed regulations, PLUS borrowers are eligible for
repayment periods of up to 30 years under the extended and graduated
repayment plans, depending on their debt levels. The Secretary requests
comments concerning whether the 30-year repayment period is appropriate
for PLUS borrowers or whether the maximum repayment periods for these
borrowers should be shorter.
Sec. 685.209 Income contingent repayment plan.
This section contains provisions governing the two options
available for repayment of Direct Loans under the income contingent
repayment plan (ICRP). The ICRP is designed to be attractive to a broad
range of borrowers. Although the negotiators did not reach agreement on
this section, it reflects many of their suggestions. The plan provides
reasonable monthly repayment amounts for borrowers with varying amounts
of debt and income and ensures that most borrowers repay their loans in
a reasonable amount of time. The plan also addresses excessive
borrowing through a payback rate that rises as debt increases. Examples
of the calculation of monthly repayment amounts under both options,
together with a table showing the repayment amounts for borrowers at
various income and debt levels, are included in Appendix A to the
regulations. Borrowers may change between the two ICRP options one time
each year. There are no limits on the number of times a borrower who is
not in default may switch among repayment plans.
Option 1. Calculation of the monthly payment under Option 1 of the
ICRP is described in paragraph (b). In general, the borrower's annual
repayment obligation is the borrower's AGI multiplied by a ``payback
rate'' that is based on the borrower's debt. The monthly payment is the
annual repayment obligation divided by 12, minus an adjustment for
family size. The ``payback rate'' varies from four to 15 percent,
calculated as described in paragraph (b)(2). The family size adjustment
is seven dollars per dependent for up to five dependents. If the
calculated monthly payment is less than $25, the borrower is not
required to make a payment. When a borrower is not required to make a
payment or the payment does not fully cover interest, any unpaid
interest on the principal accrues and is capitalized until the
limitation on capitalization of interest is reached.
Option 2. Calculation of the monthly payment under Option 2 of the
ICRP is described in paragraph (c). In general, under this option, a
borrower's monthly payment is the same as under Option 1 except that no
payment exceeds the monthly amount the borrower would repay over 12
years using standard amortization. If a borrower chooses this option:
(1) The borrower's payments do not exceed the 12-year standard
amortization amount regardless of the borrower's income; (2) the
borrower's repayment period may be extended beyond the repayment period
under Option 1 (but not beyond the 25-year maximum repayment period
described in Sec. 685.209(d)(2)(i); and (3) interest accrues throughout
the repayment period and is capitalized until the limitation on
capitalization of interest is reached.
Joint repayment by married borrowers. This section includes
provisions for joint repayment of Direct Loans by married borrowers. A
step-by-step calculation of a combined amount is included as Example 2
in Appendix A.
Repayment period. Provisions governing the repayment period under
the ICRP are contained in paragraph (d)(2). The maximum period is 25
years, excluding periods of authorized deferment and forbearance under
Secs. 685.204 and 685.205, respectively, and periods in which the
borrower made payments under another repayment plan. The Secretary
believes the exclusion of repayment periods under other plans is needed
to prevent abuses through which a borrower might be able to avoid
repaying a portion of the loan by shifting from one plan to another as
the borrower's income changed.
If a borrower repays more than one loan under the ICRP and the
loans enter repayment at different times, a separate repayment period
for each loan begins when the loan enters repayment. This approach
ensures that no loan will be repaid under the ICRP for more than 25
years. If multiple loans enter repayment at the same time, a single
repayment period applies.
To encourage borrowers to begin repaying their loans and to limit
negative amortization at the beginning of the repayment period, a
borrower must make monthly payments of accrued interest until the
Secretary calculates the borrower's monthly payment on the basis of the
borrower's income. A borrower who is unable to make monthly payments of
accrued interest or qualify for a deferment under Sec. 685.204 may
request forbearance under Sec. 685.205 or may request an alternative
repayment plan under Sec. 685.208(g).
Limit on capitalization of interest. The Secretary believes that
the proposed limit on the amount of interest that is added to principal
(the capitalization of interest) reflects an appropriate balance
between ensuring that a borrower repays, if he or she can, and
extending the opportunity for students to invest in themselves. This
limit on capitalization is desirable to prevent an excessive increase
in a borrower's debt when the borrower's income is insufficient to
cover accruing interest, while maintaining the program's cost-
neutrality for the Federal government. Paragraph (d)(3) permits
capitalization of unpaid interest until the outstanding principal
amount increases to one and one-half times the amount owed by the
borrower when the borrower enters repayment. Thereafter, unpaid
interest accrues but is not capitalized. For example, if a Direct
Unsubsidized Loan borrower owes $10,000 upon entering repayment (after
interest that accrued during the in-school period is capitalized),
interest will no longer be capitalized if the borrower's principal
balance increases to $15,000.
Consent to disclosure of tax return information. In order to repay
a Direct Loan under the ICRP, a borrower must consent, on a form
provided by the Secretary, to the disclosure of certain tax return
information by the Internal Revenue Service to agents of the Secretary
for purposes of calculating a monthly repayment amount and servicing
and collecting a loan. The information subject to disclosure is
taxpayer identity information as defined in 26 U.S.C. 6103(b)(6)
(including such information as name, address, and social security
number), tax filing status, and AGI. Paragraph (d)(5) describes the
procedures for providing written consent and requires that consent be
provided for a period of five years. If a borrower selects the ICRP but
fails to provide or renew consent, or withdraws consent without
selecting a different repayment plan, the Secretary designates the ten-
year standard repayment plan for the borrower.
Sec. 685.210 Choice of Repayment Plan.
This section governs a borrower's initial selection of a repayment
plan and the borrower's ability to change plans thereafter. Before a
Direct Loan enters repayment, the Secretary sends the borrower a
description of the available repayment plans and requests the borrower
to select one. If the borrower does not select a plan within 45 days,
the Secretary designates the standard repayment plan for the borrower.
To accommodate the many changes in life circumstances that a
borrower may experience over the life of a loan, the Secretary has
placed no limit on the number of times a borrower may change plans,
other than limits on a borrower who is repaying a defaulted loan under
the ICRP. Such a borrower must demonstrate a consistent pattern of
repayment and obtain the Secretary's approval before changing repayment
plans. Under Sec. 685.209(a)(2), a borrower may change options under
the ICRP no more frequently than once a year.
A borrower may change to the ICRP at any time, but may not change
to any other plan if that plan has a maximum repayment period of less
than the period the loan has already been in repayment. For example, a
borrower who makes payments for 12 years under the extended repayment
plan may not change to the standard repayment plan, which has a ten-
year repayment period. The repayment period under the new plan is
calculated from the date the loan initially entered repayment, except
in the case of the ICRP (see Sec. 685.209(d)(2)). Thus, a borrower who
repays a loan under the extended repayment plan for three years and
then changes to the standard repayment plan has seven more years to
repay the loan. The negotiators did not reach agreement on this
section.
Sec. 685.211 Miscellaneous Repayment Provisions.
This section governs an assortment of topics relating to the
repayment of Direct Loans. Paragraph (a) permits a borrower to prepay
all or part of a loan at any time and states how a prepayment is
applied. Negotiators disagreed, in particular, on the order in which
the Secretary applies payments to accrued charges and collection costs,
outstanding interest, and outstanding principal on loans in
Sec. 685.211(a)(1). Paragraph (b) states how the Secretary applies a
refund due to a borrower from a school and provides that the Secretary
notifies the borrower of the refund. Paragraph (c) describes the
effects of a borrower's default on a Direct Loan. Paragraph (d) sets
out the standards by which the Secretary determines that a borrower is
ineligible for some or all of a Direct Loan and describes how the
Secretary seeks repayment of the loan. Paragraph (e) contains the
conditions under which a defaulted Direct Loan is rehabilitated and
states that the Secretary then instructs any credit bureau to which the
default was reported to remove the default from the borrower's credit
history.
Sec. 685.212 Discharge of a Loan Obligation.
This section provides for the Secretary's discharge of the
obligation of a borrower and any endorser to repay a loan if (1) the
borrower (or the student on whose behalf a parent borrowed) has died;
(2) the borrower has become totally and permanently disabled, as
described in paragraph (b); (3) the borrower's obligation to repay is
discharged in bankruptcy; (4) the borrower meets the criteria in
Sec. 685.213, relating to closed schools; or (5) the borrower meets the
criteria in Sec. 685.214, relating to false certification or
unauthorized disbursement.
Sec. 685.213 Closed School Discharge.
This section provides for the discharge of the obligation of a
borrower and any endorser to repay a loan if the borrower (or student
on whose behalf the parent borrowed) did not complete the program of
study for which the loan was made because the school closed. The
provisions of this section are modeled on provisions for the FFEL
Program published on April 29, 1994 (59 FR 22462), in order to provide
borrowers with comparable protection under both programs. The
qualifications for discharge under this section are set out in
paragraphs (c) through (e). Among other requirements, a borrower must
cooperate with the Secretary in any judicial or administrative
proceeding to recover amounts discharged or to take related enforcement
action. The Secretary will request only the reasonable cooperation of
the borrower. Negotiators disagreed, in particular, on the requirement
for a student to have withdrawn from a school within 90 days (or longer
in exceptional circumstances) of the school's closure in order for the
student to qualify for a closed-school discharge of his or her loan in
Sec. 685.213(c)(1)(ii). The discharge procedures used by the Secretary
are described in paragraph (f).
Sec. 685.214 Discharge for False Certification of Student Eligibility
or Unauthorized Payment.
This section provides for the discharge of the obligation of a
borrower and any endorser to repay a loan if (1) a school falsely
certifies the loan eligibility of the borrower (or the student on whose
behalf a parent borrowed), or (2) the school endorsed the borrower's
loan check or signed the borrower's authorization for electronic funds
transfer without authorization. The provisions of this section are
modeled on the April 29, 1994 FFEL Program provisions. During
negotiations, some negotiators expressed concern that
Sec. 685.214(a)(1) could be read to encourage loans to students who
could not meet the basic requirements for employment in the occupation
for which they were being trained. To address this concern, a new
paragraph (a)(1)(iii) has been added. The Secretary emphasizes (1) that
this paragraph is not intended to affect the application of any Federal
or State statute that prohibits discrimination, including the Americans
with Disabilities Act (42 U.S.C. 12101 et seq), and (2) that this
section pertains to the discharge of a borrower's obligation to repay a
Direct Loan and does not address school liability.
The qualifications for discharge under this section are set out in
paragraph (c) and include the requirements in Sec. 685.213 relating to
cooperation with the Secretary in enforcement actions and transfers to
the Secretary of any rights to a loan refund.
The Secretary will request only the reasonable cooperation of the
borrower. The discharge procedures used by the Secretary are described
in paragraph (d). The negotiators disagreed on the eligibility of a
student for loan discharge due to false certification or unauthorized
payment by the school under Sec. 685.214.
Sec. 685.215 Consolidation.
This section contains provisions governing the consolidation of
certain Federal education loans into Federal Direct Consolidation
Loans.
Eligible loans. The types of loans that may be consolidated under
this section are listed in paragraph (b) and include all loans made
under the Federal Family Education Loan (FFEL) Program, the Direct Loan
Program, and the Federal Perkins Loans Program, as well as certain
loans made under the Public Health Service Act. The Secretary has
included consolidation loans made under the FFEL Program to permit
virtually all FFEL borrowers to participate in the income contingent
repayment plan that is available only under the Direct Loan Program.
Types of Federal Direct Consolidation Loans. There are three types
of Federal Direct Consolidation Loans--subsidized, PLUS, and
unsubsidized consolidation loans. The loans that may be consolidated
into each type of consolidation loan are listed in paragraph (c).
Subsidized consolidation loans allow borrowers to continue to be free
of the obligation to pay interest during authorized periods of
deferment. PLUS consolidation loans are available for loans made to
parents on behalf of students. Unsubsidized consolidation loans are
available for all other eligible types of loans.
Borrower eligibility. The eligibility requirements that a borrower
must meet to obtain a Federal Direct Consolidation Loan are stated in
paragraph (d). In the second year of the program, a borrower attending
a Direct Loan school will be able to consolidate both FFEL and Direct
Loan Program loans during the in-school period. If a borrower does so,
the borrower receives a six-month grace period on the Direct
Consolidation Loan. Direct Loan borrowers and FFEL loan borrowers may
consolidate their loans under the Direct Loan Program if they meet the
requirements of paragraph (d). With the exception of provisions taken
from statute concerning FFEL loans that may be consolidated into a
Direct Loan, most of the requirements parallel requirements for the
FFEL Program.
The Secretary has included provisions that prevent consolidation by
(1) a borrower who is in default, unless the borrower has made
satisfactory arrangements to repay the defaulted loan or agrees to
repay the consolidation loan under the ICRP; and (2) a PLUS loan
borrower with an adverse credit history at the time of consolidation,
unless the borrower obtains an endorser or provides evidence of
extenuating circumstances. Married borrowers may consolidate their
loans jointly if they agree to be held jointly and severally liable on
the consolidation loan and meet the other requirements of paragraph
(d)(2).
Loan application and origination. A single application for one or
more consolidation loans is permitted under paragraph (e). That
paragraph also permits a borrower to add eligible loans upon request
within 180 days after the date of the consolidation loan's origination.
Provisions in paragraph (f) govern origination of consolidation loans.
Paragraph (f)(1) provides that, in making a consolidation loan, the
Secretary pays the holder of a consolidated loan the amount necessary
to discharge the loan. The amount paid to the holder of a loan not in
default is the amount of the unpaid principal, accrued interest, and
allowable charges. In the case of a loan that is in default, and on
which the holder may have submitted a claim for reinsurance, the
Secretary is considering how to determine the appropriate amount to be
paid to discharge the loan and invites comments on the question.
In addition, regarding defaulted loans that are consolidated into a
Direct Consolidation Loan, paragraph (f)(1) limits collection costs for
which the borrower is responsible to no more than those authorized
under the FFEL Program (currently 18\1/2\ percent of the consolidated
loan). This paragraph also provides that the Secretary may establish
new lower reasonable limits on the amount of collection costs paid to
the holder of the defaulted loan, such as the actual cost incurred by
the note holder. The Secretary specifically invites comments on how
reasonable limits on these costs should be established.
Interest rates. The Secretary has decided to apply to Federal
Direct Consolidation Loans the same variable interest rates that apply
to other Direct Loans. The Secretary believes these rates will be
beneficial to most borrowers.
Repayment and refunds. As provided in paragraph (h), a borrower may
repay a Federal Direct Consolidation Loan under any of the Direct Loan
repayment plans, except that certain restrictions apply to defaulted
borrowers, and the ICRP is not available to a PLUS consolidation loan
borrower. The Secretary has included the exception for PLUS borrowers
to provide consistency with the statutory prohibition against repayment
of Direct Loans by parents under the ICRP. The provisions of paragraphs
(i) and (j), relating to repayment periods and repayment schedules,
respectively, are taken from the FFEL Program, as are provisions in
paragraph (k), relating to a lender's obligations upon receiving a
refund from a school on a loan that has been consolidated.
Joint consolidation loans. If two married borrowers obtain a joint
consolidation loan, special provisions apply under paragraph (l). This
paragraph provides that both borrowers must meet the requirements of
the applicable section in order to obtain a deferment under
Sec. 685.204 or forbearance under Sec. 685.205. To obtain a discharge
under Sec. 685.212, each spouse must qualify for one of the types of
discharge described in that section. The Secretary discharges a portion
of the loan if one spouse meets the requirements of Sec. 685.212 (d) or
(e).
Subpart C--Requirements, Standards, and Payments for Direct Loan
Program Schools
Sec. 685.300 Agreements between an eligible school and the secretary
for participation in the direct loan program.
Paragraph (a) of this section states the requirements for a school
to participate in the Direct Loan Program. First, the school must meet
the requirements for eligibility under the HEA and applicable
regulations. Second, the school must enter into a written program
participation agreement with the Secretary. Under the agreement, the
school agrees to comply with the HEA and applicable regulations, and
paragraph (b) lists several specific provisions of the program
participation agreement. Paragraph (c) states the requirement that a
school or a consortium of schools enter into a supplemental agreement
if the school or consortium originates loans in the Direct Loan
Program.
Sec. 685.301 Certification of a loan by a Direct Loan Program school.
This section states the requirement that a school participating in
the Direct Loan Program provide accurate information to the Secretary
in connection with the origination of a loan and details other
provisions relating to the determination of borrower eligibility and
loan amount. Paragraph (b) addresses the procedures the school must
follow in disbursing the loan. Paragraph (c) requires that a school
that originates a loan provide a promissory note to the Secretary.
Sec. 685.302 Schedule requirements for courses of study by
correspondence.
This section contains requirements relating to the enrollment
status of students in schools that offer programs of study by
correspondence, including the requirement that the school establish a
schedule for the submission of lessons and provide it to prospective
students.
Sec. 685.303 Processing loan proceeds and counseling borrowers.
This section establishes requirements for a school's processing a
borrower's Direct Loan and counseling borrowers. The purpose of this
section is stated in paragraph (a). Standards regarding the timing,
amount, and procedures for the disbursement of funds to a borrower are
set out in paragraphs (b) through (d). These standards vary according
to the type of school, year of the borrower's program of study, and the
school's mode of origination. Paragraph (b)(3) states the obligations
of a school when a student does not attend school during the loan
period.
A number of the restrictions that are proposed in this section,
such as the limitation that a school may not credit a student's account
more than 21 days prior to the first day of the period of enrollment,
or that the school may not pay the student directly more than 10 days
prior to the first day of the period of enrollment, are limitations
that currently exist in the administration of the other title IV
programs. The negotiators did not reach agreement on the requirements
in Sec. 685.303(c)(1)(i) and (iii) that a school credit a student's
account and make available the remaining proceeds to the borrower in a
specified number of days.
While these procedures are being proposed in this document for the
Direct Loan Program, the Secretary intends to study these and other
related ``cash management'' issues (e.g., excess cash and allowable
charges to a student's account) further. In the near future, the
Secretary intends to propose a set of regulations that addresses cash
management issues in all title IV programs and that will replace the
proposals in this document.
Paragraph (c)(3) of this section provides that a school, as a
fiduciary for the benefit of the student, may retain loan proceeds for
the student in order to assist that student in managing loan funds. The
school need not hold the funds in a separate bank account. Rather, the
school may maintain these funds in a separately-designated subsidiary
account under its general bank account. Funds in this account must be
restricted for use by students. The Secretary intends to propose
comparable changes for the FFEL Program.
Paragraph (d) specifies the requirements for late disbursements. In
general, a school may not make any late disbursement beyond the 60th
day after the loan period, or after the student ceases to be enrolled
at the school on at least a half-time basis, as applicable. However, a
school may make a disbursement within 30 days after the applicable
period in documented exceptional circumstances, such as a student's
serious, unexpected illness. The Secretary intends to propose a
comparable provision for the FFEL Program. Negotiators did not reach
agreement on the restrictions on late disbursements in Sec. 685.303(d).
Counseling requirements for schools are found in paragraphs (e) and
(f) of this section. The procedures to be used and the information to
be provided by the school to the student for both initial and exit
counseling are specified in detail. The Secretary will provide
materials to schools to assist them in providing entrance and exit
counseling. These proposed regulations require that schools provide
entrance counseling to most first-time borrowers. They do not require
entrance counseling for transfer students who have already borrowed
under the FFEL or Direct Loan Program. The procedures and information
relating to the exit counseling are, for the most part, required by
section 485(b) of the HEA. However, the initial counseling requirements
are not specified by the statute. The Secretary proposes to allow
schools to follow the initial counseling requirements in these
regulations or to develop an alternative plan for initial counseling as
part of their quality assurance plans. Under an alternative plan for
initial counseling, the school must ensure that most first-time
borrowers receive written counseling materials. An alternative plan
must also be designed to target students most likely to default and
provide them more intensive counseling and support services. Finally,
such a plan must include performance indicators, e.g., the effect of
the plan on the number of students in default.
The Secretary specifically invites comments on alternative
approaches to initial counseling and what performance indicators should
be used to evaluate alternative approaches. The Secretary intends to
develop performance standards to be used in evaluating success in
initial counseling. When those standards are established, the Secretary
may require schools to use them as part of their quality assurance
plans. The Secretary may review a school's alternative plan at any time
and may require the school to change from its alternative plan to the
procedures provided under this section. The Secretary intends to
propose comparable changes for initial counseling requirements in the
FFEL Program. In addition, the Secretary may provide additional loan
counseling to Direct Loan borrowers. The negotiators did not reach
agreement on the provisions on initial counseling in Sec. 685.303(e).
Finally, paragraph (g) contains requirements that apply to schools
in the treatment of excess loan proceeds.
Sec. 685.304 Determining the date of a student's withdrawal.
This section states that, for purposes of the Direct Loan Program,
a school must determine the date of a student's withdrawal by following
the procedures in 34 CFR 668.22(i).
Those procedures govern such a determination for all of the title
IV student assistance programs and indicate that a student's withdrawal
date generally is the date the student notifies the school of his or
her withdrawal, or the date specified by the student, whichever is
later. However, if the student drops out without notifying the school
or takes an approved leave of absence, the last recorded date of class
attendance becomes the withdrawal date. For students in correspondence
courses, the date the student submitted his or her last lesson
generally becomes the student's withdrawal date.
A school is required to determine a student's withdrawal date
within 30 days of the expiration of the student's period of enrollment,
academic year, or educational program, whichever is earliest.
Sec. 685.305 Payment of a refund to the secretary.
Paragraph (a) of this section states that, by applying for a Direct
Loan, a borrower authorizes the school to pay that portion of the
borrower's refund that is allocable to a Direct Loan to the Secretary.
The school is required to do that and to notify the borrower when it
does. Paragraph (b) states that, in determining the portion of the
refund that is allocable to a Direct Loan, the school must follow the
procedures in 34 CFR 668.22. Those procedures list the order in which a
refund must be applied to the various title IV programs, and state that
a school shall pay a refund within 30 days of the student's withdrawal
date if the student officially withdraws or is expelled. If the student
unofficially drops out, the school must pay the refund within 30 days
of the date the school determines the student dropped out, the
expiration of the academic term in which the student withdrew, or the
expiration of the period of enrollment for which the student has been
charged, whichever is earliest. The negotiators did not reach agreement
on refund procedures in Sec. 685.305(b).
Sec. 685.306 Withdrawal procedure for schools participating in the
Direct Loan Program.
This section allows a school to withdraw from the Direct Loan
Program by giving 60 days written notice to the Secretary. The
effective date of such a withdrawal is the later of 60 days after the
school provides that notice or the date set by the school, unless the
Secretary approves an earlier date.
Sec. 685.307 Remedial actions.
This section describes the remedial actions that the Secretary may
take against a school for violation of applicable Federal statutory or
regulatory requirements. Paragraph (a) states the circumstances under
which the school may be required to repay funds and purchase loans made
to its students. Paragraph (b) references the procedures in 34 CFR part
668, Subpart H, which the Secretary follows in requiring the repayment
of funds and the purchase of loans in connection with an audit or
program review. Paragraph (c) states that the Secretary may impose a
fine or take an emergency action against a school or limit, suspend, or
terminate a school's participation in the Direct Loan Program using the
procedures in 34 CFR part 668, subpart G.
Sec. 685.308 Administrative and fiscal control and fund accounting
requirements for schools participating in the Direct Loan Program.
Paragraph (a) of this section requires a participating school to
maintain proper administrative and fiscal procedures and records as set
forth in the Direct Loan Program regulations and in 34 CFR part 668,
and to submit all reports required by those regulations. Paragraph (b)
details the procedures a school must follow in filing its student
status confirmation reports with the Secretary, including the time
constraints associated with those reports. A school will receive these
reports in either paper or electronic format from the Secretary at
least semi-annually. However, beginning with the 1995-1996 academic
year, the Secretary will offer schools the option of receiving these
reports as often as every 60 days.
The length of time that a school is required to keep records is set
forth in paragraph (c), as is the school's responsibility to provide
for the retention of those records (and access to them) in the event of
such changes in the school's status as closure, loss of eligibility, or
change in ownership. The school may keep these records in a number of
machine readable formats.
The specific loan record requirements for the program are set forth
in paragraph (d). The general inspection requirements, including the
types of access required, for these loan records (and all other
required records) are addressed in paragraph (e). Paragraph (f)
requires the school to provide to the Secretary, upon request, certain
information, such as the borrower's name and address, and to notify the
Secretary of a borrower's change in permanent address when such a
change is discovered.
Paragraph (g) requires the school to establish certain accounting
records, maintained in accordance with generally-accepted accounting
principles, and paragraph (h) requires the school to establish a
separate account as trustee for the Secretary and the borrower for
Direct Loan Program funds. Any interest earned on those funds must be
returned to the Secretary.
Paragraph (i) states that a school is required to divide the
functions of authorizing payment and disbursing funds to borrowers
between different offices. Paragraph (j) states that Direct Loan
Program funds may be used only to make Direct Loans to eligible
borrowers; however, funds received under section 452(b)(1) of the HEA
may be used to offset the costs of loan origination.
Subpart D--School Participation and Loan Origination in the Direct Loan
Program
Sec. 685.400 School participation requirements for academic year 1996-
1997 and beyond.
On February 17, 1994, the Secretary published standards for
participation in the Direct Loan Program for the academic year
beginning July 1, 1995. Under those standards, a school must: (1) Meet
the eligibility requirements in section 435(a) of the HEA and (2) have
a cohort default rate of less than 25 percent for one of the two most
recent years for which default rates are available at the time of the
first selection decision following its application (subject to waiver
in certain circumstances).
The Secretary is proposing to modify the standards for
participation for the academic years beginning July 1, 1996. The
Secretary proposes that a school must meet the following standards: (1)
Meet the eligibility requirements in section 435(a) of the HEA,
including the statutory requirement relating to default rates and (2)
not be subject to an emergency action or a proposed or final
limitation, suspension, or termination action under sections
428(b)(1)(T), 432(h), or 487(c) of the HEA. The second standard applies
to initial eligibility to participate. Once a school is participating,
it will not automatically become ineligible due to a proposed or final
limitation, suspension, or termination action.
The Secretary proposes these standards for two reasons. First, the
Secretary believes that the benefits of the Direct Loan Program should
not be available to a school that has lost its eligibility to
participate in the FFEL Program. Second, it would not be sound business
practice to admit a school into the Direct Loan Program when evidence
exists that the school has had problems administering another Federal
student aid program.
Sec. 685.401 Selection criteria and process for academic years 1996-
1997 and beyond.
The Secretary proposes two goals for selecting schools to
participate in the Direct Loan Program. The first goal is that, to the
extent possible, selected schools should be reasonably representative
of the schools participating in the FFEL Program on the basis of
several listed characteristics. The second goal is that in order to
ensure an expeditious but orderly transition from the FFEL Program to
the Direct Loan Program, selected schools should make the transition as
smooth as possible.
Sec. 685.402 Criteria for schools to originate loans for academic
years 1996-1997 and beyond.
This section sets out the initial criteria participating schools
must meet to originate loans. Three types of origination are defined in
Subpart A: Standard origination, school origination option 1, and
school origination option 2. A discussion of these types of origination
follows.
The Department contracts with organizations to assist schools in
the origination and servicing of Direct Loans. While these entities may
perform both origination and servicing functions, in the proposed
regulations they are referred to as ``alternative originators'' when
they perform origination functions for schools and as ``servicers''
when they perform servicing functions.
Under standard origination, an alternative originator provides a
number of services to participating schools. The alternative originator
manages both the promissory note and funds management processes for
these schools. The alternative originator generates the promissory note
based on data transmitted by the school. The alternative originator
also sends the promissory note to the borrower and subsequently
initiates the transfer of funds to the school prior to the anticipated
loan disbursement date.
Under school origination option 1, a participating school is
assisted by the Servicer primarily in the management of funds. Under
this option, a school is responsible for transmitting completed and
signed promissory notes to the Servicer. The Servicer initiates the
transfer of funds to the school prior to the anticipated loan
disbursement date.
Under school origination option 2, a participating school is
responsible for funds management as well as promissory note functions.
Under this option, a school is responsible for transmitting completed
and signed promissory notes to the Servicer. An option 2 school also
requests and obtains loan funds from the Secretary using a process
similar to the process for drawing down funds for other Department of
Education programs. An option 2 school transmits to the Secretary a
specific Direct Loan funding request that is separate from its funding
requests for other programs and is based on immediate disbursement
needs. Direct Loan capital is tracked separately and cannot be used for
purposes other than making Direct Loans. The funds received by an
option 2 school that are intended for specific borrowers but are not
disbursed to those borrowers may be used for other borrowers. After the
first disbursement is made, the school records the actual disbursed
amount and the date of the disbursement in the loan origination record
and transmits the completed record and promissory note (if not
previously submitted) to the Servicer.
Schools participating under origination option 2 will have greater
funds management responsibility than schools participating under
origination option 1. Because of this greater responsibility, a school
participating under option 2 will receive a higher administrative fee
for each borrower than a school participating under option 1.
Similarly, schools participating in Direct Loans under options 1 and 2
perform more promissory note functions than schools participating under
standard origination. The HEA does not allow schools participating
under standard origination to receive administrative fees.
Schools choosing to participate in the Direct Loan Program under
either option 1 or 2 will have more control over funds management or
promissory note functions, or both, than schools participating under
standard origination. However, these options also require schools to
assume greater responsibility than those participating in standard
origination. Therefore, some schools may choose to participate under
standard origination even if they qualify to participate under option 1
or 2. Because of the greater responsibility that schools assume under
option 1 or 2, paragraph (a) establishes stricter criteria for
originating schools than for schools participating in standard
origination. The criteria are intended to be predictive of an
institution's ability to perform the necessary functions to operate as
an originator; therefore, many of the criteria pertain to the financial
operations of institutions.
Paragraph (a)(2)(iii) requires that originating schools, in the
Secretary's opinion, have no severe performance deficiencies for any of
the programs under title IV of the HEA, including deficiencies
demonstrated by the most recent audit or program review. The Secretary
will consider whether performance deficiencies demonstrated in audits
or program reviews would affect the school's ability to comply with
origination requirements. Examples of severe performance deficiencies
that may disqualify a school from origination include, but are not
limited to, the school's failure to make title IV refunds,
falsification of student records or financial data, improperly
disbursed loans resulting in a significant liability to the school,
misuse of title IV funds, and failure to meet relevant regulatory
standards of administrative capability (such as failure to maintain
adequate fiscal records of title IV disbursements). In determining
whether schools have severe title IV performance deficiencies, the
Secretary will allow schools to demonstrate that past problems have
been corrected.
Paragraph (a)(2)(v) states that to be eligible to participate under
option 1 or 2, a school must be current on program and financial
reports and audits required under title IV of the HEA for the 12-month
period immediately preceding its application to participate in the
program. Program reports referred to here would include the
Institutional Payment Summary (IPS) and the Fiscal Operations Report
and Application to Participate (FISAP). Similarly, paragraph (a)(2)(vi)
states that, to be eligible to participate under option 1 or 2, a
school must be current on Federal cash transaction reports required
under title IV for the same 12-month period. These reports include the
ED Payment Management System Form 272.
Paragraph (b)(1) permits the Secretary, on a case-by-case basis, to
allow a school to originate loans under option 1 or 2 notwithstanding
its failure to meet the criteria. Paragraph (b)(2)(i) provides that a
school may request to change from option 2 to option 1 or to standard
origination, or from option 1 to standard origination, at any time.
This provision allows schools that choose to decrease their
administrative responsibilities to take advantage of additional
assistance from the Servicer or the alternative originator. In
addition, paragraph (b)(3) provides that, after one full year of
participation in its initial origination status, a school that wishes
to increase its administrative responsibilities may apply to move from
option 1 to option 2, or from standard origination to option 1 or 2. In
reviewing these applications, the Secretary intends to apply criteria
and performance standards, including those enumerated in paragraph
(b)(3)(iii).
Paragraph (c) provides that, at any time after the determination of
a school's initial origination status, the Secretary may require a
school to change its origination status if such a change is necessary
to ensure program integrity or if the school fails to meet criteria and
performance standards established by the Secretary. The Secretary may
require a school to convert from origination option 2 to option 1 or
standard origination, or from origination option 1 to standard
origination.
In evaluating a school's origination performance, the Secretary
intends to consider the eligibility criteria listed in
Sec. 685.402(a)(2) and additional performance measures. To establish
additional performance measures, the Secretary requests input from the
community, particularly from schools participating in the Direct Loan
Program in academic year 1994-1995. For all schools, the Secretary is
considering developing standards based upon such considerations as the
percentage of errors on origination and disbursement records, as well
as the timeliness of the submission of such documents. For option 1 and
2 schools, the Secretary is considering additional performance
standards based upon the percentage of errors on promissory notes and
the timeliness of the submission of these documents. For option 2
schools, the Secretary is considering developing quantitative measures
of funds management performance, based on the amount of a school's
excess cash and the timeliness and accuracy of a school's drawdown
request.
Paragraph (e) of this section provides that a school may request a
change in the Servicer performing origination or servicing functions.
The Secretary would grant a school's request if the Secretary
determined that the school's claim of unsatisfactory performance by its
current Servicer was accurate and substantial and the change could be
accommodated by the Servicer requested by the school. Examples of a
substantial claim include a pattern of failure to process promissory
notes in a timely manner, significant and repeated errors in handling
and reviewing school transmissions of student data, repeated late
billing of borrowers, inability to process payments in a timely
fashion, and inability to track the status of borrower accounts. The
Secretary recognizes that high quality servicing will be a key factor
in the success of the Direct Loan Program. Therefore, the Secretary is
committed to promoting high-quality servicing and to including
institutional choice in servicing arrangements if institutions receive
unsatisfactory Servicer performance. To meet these goals, the Secretary
intends to encourage competition among servicers. To that end, the
Secretary will solicit proposals and attempt to award contracts to more
servicers than would be immediately necessary to handle servicing
volumes. This will allow the flexibility necessary to terminate
contracts due to poor performance. The origination contractor will be
encouraged to propose methods that will allow for similar competition
among subcontractors or origination sites.
Executive Order 12866
1. Assessment of Costs and Benefits
These proposed regulations have been reviewed in accordance with
Executive Order 12866. Under the terms of the order the Secretary has
assessed the potential costs and benefits of this proposed regulatory
action.
The potential costs associated with the proposed regulations are
those resulting from statutory requirements and those determined by the
Secretary to be necessary for administering the title IV, HEA programs
effectively and efficiently. Burdens specifically associated with
information collection requirements, if any, are explained elsewhere in
this preamble under the heading of Paperwork Reduction Act of 1980.
In assessing the potential costs and benefits--both quantitative
and qualitative--of these proposed regulations, the Secretary has
determined that the benefits of the proposed regulations justify the
costs. A further discussion of the benefits and costs of the proposed
regulations is contained in the summary of the provisions proposed.
The Secretary has also determined that this regulatory action does
not unduly interfere with State, local, and tribal governments in the
exercise of their governmental functions.
To assist the Department in complying with the specific
requirements of Executive Order 12866, the Secretary invites comment on
whether there may be further opportunities to reduce any potential
costs or increase 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 requires each agency to write regulations
that are easy to understand.
The Secretary invites comments on how to make these regulations
easier to understand, including answers to questions such as the
following: (1) Are the requirements in the regulations clearly stated?
(2) Do the regulations contain technical terms or other wording that
interferes with their clarity? (3) Does the format of the regulations
(grouping and order of sections, use of headings, paragraphing, etc.)
aid or reduce their clarity? Would the regulations be easier to
understand if they were divided into more (but shorter) sections? (A
``section'' is preceded by the symbol ``Sec. '' and a numbered heading;
for example, Sec. 685.200 Borrower eligibility.) (4) Is the description
of the proposed regulations in the ``Supplementary Information''
section of this preamble helpful in the understanding of the proposed
regulations? How could this description be more helpful in making the
proposed regulations easier to understand? (5) What else could the
Department do to make the regulations easier to understand?
A copy of any comments that concern whether these proposed
regulations are easy to understand should also be sent to Stanley
Cohen, Regulations Quality Officer, U.S. Department of Education, 400
Maryland Avenue, SW., (Room 5125 FOB-6), Washington, DC 20202-2241.
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 small entities that would be affected by these
regulations are institutions of higher education. Many provisions of
the proposed regulations repeat statutory requirements. Certain
reporting, recordkeeping, and compliance requirements are imposed by
the regulations. However, these requirements are modeled on existing
regulations for other Federal student financial aid programs.
Institutions of higher education are therefore familiar with these
requirements, and the regulations would not have a significant
additional impact on these institutions.
Paperwork Reduction Act of 1980
Sections 685.204, 685.206, 685.209, 685.213, 685.214, 685.215,
685.301, 685.302, 685.303, 685.308 and 685.401 contain information
collection requirements. As required by the Paperwork Reduction Act of
1980, the Department of Education will submit a copy of these proposed
regulations to the Office of Management and Budget (OMB) for its
review. (44 U.S.C. 3504(h))
These proposed regulations affect students who apply for Federal
student financial assistance authorized by title IV of the Higher
Education Act of 1965, as amended, and postsecondary institutions
administering the Direct Loan Program. Annual public reporting burden
for this collection of information is estimated to average 29 minutes
for each of the estimated 2,483,906 individuals providing information
regarding eligibility for a loan, deferment, income-contingent
repayment, or a Direct Consolidation Loan (or 1,200,554 hours total)
and 12 minutes for a postsecondary institution for each of the
estimated 4,068,121 responses relating to postsecondary institutions'
administration of a student loan program (or 813,624 hours total)
including the time for reviewing instructions, searching existing data
sources, gathering and maintaining the data needed, and completing and
reviewing the collection of information.
Organizations and individuals desiring to submit comments on the
information collection requirements should direct them to the Office of
Information Regulatory Affairs, OMB, Room 10235, New Executive Office
Building, Washington, DC 20503; Attention: Daniel J. Chenok.
Invitation to Comment
Interested persons are invited to submit comments and
recommendations regarding these proposed regulations. All comments
submitted in response to these proposed regulations will be available
for public inspection, during and after the comment period, in room
4624, Regional Office Building 3, 7th and D Streets, SW., Washington,
DC, between the hours of 8:30 a.m. and 4 p.m., Monday through Friday of
each week except Federal holidays.
To expedite ED's review and response, comments should be identified
by specific sections of the NPRM and presented sequentially.
Assessment of Educational Impact
The Secretary particularly requests comments on whether the
proposed regulations in this document would require transmission of
information that is being gathered by or is available from any other
agency or authority of the United States.
List of Subjects in 34 CFR Part 685
Administrative practice and procedure, Colleges and universities,
Education, Loan programs-education, Reporting and recordkeeping
requirements, Student aid, Vocational education.
(Catalog of Federal Domestic Assistance Number 84.268, Federal
Direct Student Loan Program)
Dated: August 1, 1994.
Richard W. Riley,
Secretary of Education.
The Secretary proposes to revise part 685 of title 34 of the Code
of Federal Regulations to read as follows:
PART 685--FEDERAL DIRECT STUDENT LOAN PROGRAM
Subpart A--Purpose and Scope
Sec.
685.100 The Federal Direct Student Loan Program.
685.101 Participation in the Direct Loan Program.
685.102 Definitions.
685.103 Applicability of subparts.
Subpart B--Borrower Provisions
685.200 Borrower eligibility.
685.201 Obtaining a loan.
685.202 Charges for which Direct Loan Program borrowers are
responsible.
685.203 Loan limits.
685.204 Deferment.
685.205 Forbearance.
685.206 Borrower responsibilities and defenses.
685.207 Obligation to repay.
685.208 Repayment plans.
685.209 Income contingent repayment plan.
685.210 Choice of repayment plan.
685.211 Miscellaneous repayment provisions.
685.212 Discharge of a loan obligation.
685.213 Closed school discharge.
685.214 Discharge for false certification of student eligibility or
unauthorized payment.
685.215 Consolidation.
Subpart C--Requirements, Standards, and Payments for Direct Loan
Program Schools
685.300 Agreements between an eligible school and the Secretary for
participation in the Direct Loan Program.
685.301 Certification of a loan by a Direct Loan Program school.
685.302 Schedule requirements for courses of study by
correspondence.
685.303 Processing loan proceeds and counseling borrowers.
685.304 Determining the date of a student's withdrawal.
685.305 Payment of a refund to the Secretary.
685.306 Withdrawal procedure for schools participating in the
Direct Loan Program.
685.307 Remedial actions.
685.308 Administrative and fiscal control and fund accounting
requirements for schools participating in the Direct Loan Program.
Subpart D--School Participation and Loan Origination in the Direct Loan
Program
685.400 School participation requirements for academic years 1996-
1997 and beyond.
685.401 Selection criteria and process for academic years 1996-1997
and beyond.
685.402 Criteria for schools to originate loans for academic years
1996-1997 and beyond.
Appendix A--Income Contingent Repayment Examples of the Calculation of
Monthly Repayment Amounts
Authority: 20 U.S.C. 1087a et seq.
Subpart A--Purpose and Scope
Sec. 685.100 The Federal Direct Student Loan Program.
(a) Under the Federal Direct Student Loan Program (Direct Loan
Program), the Secretary makes loans to enable a student or parent to
pay the costs of the student's attendance at a postsecondary school.
This part governs the Federal Direct Stafford Loan Program, the Federal
Direct Unsubsidized Stafford Loan Program, the Federal Direct PLUS
Program, and the Federal Direct Consolidation Loan Program. The
Secretary makes loans under the following program components:
(1) Federal Direct Stafford Loan Program, which provides loans to
undergraduate, graduate, and professional students. The Secretary
subsidizes the interest while the borrower is in an in-school, grace,
or deferment period.
(2) Federal Direct Unsubsidized Stafford Loan Program, which
provides loans to undergraduate, graduate and professional students.
The borrower is responsible for the interest that accrues during any
period.
(3) Federal Direct PLUS Program, which provides loans to parents of
dependent students. The borrower is responsible for the interest that
accrues during any period.
(4) Federal Direct Consolidation Loan Program, which provides loans
to borrowers to consolidate certain Federal educational loans.
(b) The Secretary makes a Direct Subsidized Loan, a Direct
Unsubsidized Loan, or a Direct PLUS Loan only to a student or a parent
of a student enrolled in a school that has been selected by the
Secretary to participate in the Direct Loan Program.
(c) The Secretary makes a Direct Consolidation Loan only to--
(1) A borrower with a loan made under the Direct Loan Program; or
(2) A borrower with a loan made under the Federal Family Education
Loan Program who is not able to receive--
(i) A Federal Consolidation Loan; or
(ii) A Federal Consolidation Loan with income-sensitive repayment
terms that are satisfactory to the borrower.
(Authority: 20 U.S.C. 1087a et seq.)
Sec. 685.101 Participation in the Direct Loan Program.
(a)(1) Colleges, universities, graduate and professional schools,
vocational, and proprietary schools selected by the Secretary may
participate in the Direct Loan Program. Participation in the Direct
Loan Program enables an eligible student or parent to obtain a loan to
pay for the student's cost of attendance at the school.
(2) The Secretary may permit a school to participate in both the
Federal Family Education Loan (FFEL) Program, as defined in 34 CFR Part
600, and the Direct Loan Program. A school permitted to participate in
both the FFEL Program and the Direct Loan Program may certify loan
applications under the FFEL Program according to the terms of its
agreement with the Secretary.
(b) An eligible student who is enrolled at a school participating
in the Direct Loan Program may borrow under the Federal Direct Stafford
Loan and Federal Direct Unsubsidized Stafford Loan Programs. An
eligible parent of an eligible dependent student enrolled at a school
participating in the Direct Loan Program may borrow under the Federal
Direct PLUS Program.
(Authority: 20 U.S.C. 1087a et seq.)
Sec. 685.102 Definitions.
(a)(1) The following definitions are set forth in the Student
Assistance General Provisions, 34 CFR Part 668:
Academic year
Campus-based programs
Dependent student
Eligible program
Eligible student
Enrolled
Federal Consolidation Loan Program
Federal Direct Student Loan Program (Direct Loan Program)
Federal Pell Grant Program
Federal Perkins Loan Program
Federal PLUS Program
Federal State Student Incentive Grant Program
Federal Supplemental Educational Opportunity Grant Program
Federal Work-Study Program
Independent student
One-third of an academic year
Parent
State
Two-thirds of an academic year
U.S. citizen or national
(2) The following definitions are set forth in the regulations for
Institutional Eligibility under the Higher Education Act of 1965, as
amended, 34 CFR Part 600:
Accredited
Clock hour
Educational program
Eligible institution
Federal Family Education Loan (FFEL) Program
Institution of higher education
Nationally recognized accrediting agency or association
Preaccredited
Program of study by correspondence
Secretary
(3) The following definitions are set forth in the regulations for
the Federal Family Education Loan Program (FFEL) Program, 34 CFR Part
682:
Act
Endorser
Expected family contribution
Federal Insured Student Loan (FISL) Program
Federal Stafford Loan Program
Foreign school
Full-time student
Graduate or professional student
Guaranty agency
Holder
Legal guardian
Lender
Totally and permanently disabled
Undergraduate student
(b) The following definitions also apply to this part:
Alternative originator: An entity under contract with the Secretary
that originates Direct Loans to students and parents of students who
attend a Direct Loan Program school that does not originate loans.
Consortium: For purposes of this part, a consortium is a group of
two or more schools that interacts with the Secretary in the same
manner as other schools, except that the communication between the
Secretary and the schools is channeled through a single point. Each
school in a consortium shall sign a Direct Loan Program participation
agreement with the Secretary and be responsible for the information it
supplies through the consortium.
Default: The failure of a borrower and endorser, if any, to make an
installment payment when due, or to meet other terms of the promissory
note, if the Secretary finds it reasonable to conclude that the
borrower and endorser, if any, no longer intend to honor the obligation
to repay, provided that this failure persists for--
(1) 180 days for a loan repayable in monthly installments; or
(2) 240 days for a loan repayable in less frequent installments.
Disbursement: (1) Except for a Direct Consolidation Loan, the
delivery by a school of an installment of a loan to a borrower. The
disbursement date is the earliest date when the proceeds are applied to
a student's account or when the proceeds are made available to the
borrower.
(2) For a Direct Consolidation Loan, disbursement is the payment by
the Secretary to the holder or holders of the underlying loans and
occurs when the Direct Consolidation Loan is made.
Estimated financial assistance: (1) The estimated amount of
assistance that a student will receive from Federal, State,
institutional, or other sources for a period of enrollment. Types of
assistance include scholarships, grants, financial need-based
employment, or loans, such as--
(i) Benefits paid under section 156 of title 42 of the United
States Code (formerly Social Security Benefits);
(ii) Veterans' educational benefits paid under chapters 30, 31, 32,
and 35 of title 38 of the United States Code;
(iii) Educational benefits paid under chapters 106 and 107 of title
10 of the United States Code (Selected Reserve Educational Assistance
Program);
(iv) Reserve Officer Training Corps (ROTC) scholarships and
subsistence allowances awarded under chapter 2 of title 10 and chapter
2 of title 37 of the United States Code;
(v) Benefits paid under Public Law 97-376, section 156: Restored
Entitlement Program for Survivors (or Quayle benefits);
(vi) Benefits paid under Public Law 96-342, section 903:
Educational Assistance Pilot Program;
(vii) Any educational benefits paid because of enrollment in a
postsecondary education institution;
(viii) The estimated amount of other Federal student financial aid,
including but not limited to a Direct Subsidized Loan, a Direct
Unsubsidized Loan, a Federal Pell Grant, and campus-based aid;
(ix) In the case of a Direct PLUS Loan, the estimated amount of
other Federal student financial aid, including but not limited to, a
Direct Subsidized Loan, a Direct Unsubsidized Loan, a Federal Pell
Grant, and campus-based aid; and
(x) If the student is applying for a loan to cover expenses
incurred within the same enrollment period as that for which a prior
Federal or non-Federal student loan was received, the amount of loan
proceeds withheld by the Secretary, lender, or guaranty agency making
or insuring the loan if those costs were included in computing the
borrower's estimated cost of attendance for the prior loan.
(2) Estimated financial assistance does not include--
(i) Those amounts used to replace the expected family contribution,
including--
(A) Direct PLUS Loan amounts;
(B) Direct Unsubsidized Loan amounts; and
(C) Non-Federal loan amounts; and
(ii) Federal Perkins loan and Federal Work-Study funds that the
student has declined.
Federal Direct Consolidation Loan Program: A loan program
authorized by title IV, part D of the Act that provides loans to
borrowers who consolidate certain Federal educational loans, and one of
the components of the Direct Loan Program. Loans made under this
program are referred to as Direct Consolidation Loans. There are three
types of Direct Consolidation Loans:
(1) Direct Subsidized Consolidation Loans. Subsidized title IV
education loans may be consolidated into a Direct Subsidized
Consolidation Loan. Interest is not charged to the borrower during in-
school and deferment periods.
(2) Direct Unsubsidized Consolidation Loans. Certain Federal
education loans may be consolidated into a Direct Unsubsidized
Consolidation Loan. The borrower is responsible for the interest that
accrues during any period.
(3) Direct PLUS Consolidation Loans. Parent Loans for Undergraduate
Students, Federal PLUS, Direct PLUS, and Direct PLUS Consolidation
Loans may be consolidated into a Direct PLUS Consolidation Loan. The
borrower is responsible for the interest that accrues during any
period.
Federal Direct PLUS Program: A loan program authorized by title IV,
part D of the Act that provides loans to parents of dependent students
attending schools that participate in the Direct Loan Program, and one
of the components of the Direct Loan Program. The borrower is
responsible for the interest that accrues during any period. Loans made
under this program are referred to as Direct PLUS Loans.
Federal Direct Stafford Loan Program: A loan program authorized by
title IV, part D of the Act that provides loans to undergraduate,
graduate, and professional students attending Direct Loan Program
schools, and one of the components of the Direct Loan Program. The
Secretary subsidizes the interest while the borrower is in an in-
school, grace, or deferment period. Loans made under this program are
referred to as Direct Subsidized Loans.
Federal Direct Unsubsidized Stafford Loan Program: A loan program
authorized by title IV, part D of the Act that provides loans to
undergraduate, graduate, and professional students attending Direct
Loan Program schools, and one of the components of the Direct Loan
Program. The borrower is responsible for the interest that accrues
during any period. Loans made under this program are referred to as
Direct Unsubsidized Loans.
Grace period: A six-month period that begins on the day after a
Direct Loan Program borrower ceases to be enrolled as at least a half-
time student at an eligible institution and ends on the day before the
repayment period begins.
Half-time student: A student who is not a full-time student and who
is enrolled in a school participating in the FFEL Program or the Direct
Loan Program and is carrying an academic workload that is at least one-
half the workload of a full-time student, as determined by the school.
A student enrolled solely in an eligible program of study by
correspondence is considered a half-time student.
Interest rate: The annual interest rate that is charged on a loan,
under title IV, part D of the Act.
Loan fee: A fee, payable by the borrower, that is used to help
defray the costs of the Direct Loan Program.
Period of enrollment: The period for which a Direct Subsidized,
Direct Unsubsidized, or Direct PLUS Loan is intended. The period of
enrollment must coincide with one or more academic terms established by
the school (such as semester, trimester, quarter, academic year, and
length of the program of study), for which institutional charges are
generally assessed. The period of enrollment is also referred to in
this part as the loan period.
Satisfactory repayment arrangement. The making of six consecutive,
voluntary, on-time, full monthly payments on a defaulted loan to regain
further eligibility for student aid under title IV of the Act. The
required monthly payment amount may not be more than is reasonable and
affordable based on the borrower's total financial circumstances. ``On-
time'' means a payment made within 15 days of the scheduled due date,
and voluntary payments are those payments made directly by the
borrower, regardless of whether there is a judgment against the
borrower, and do not include payments obtained by income tax offset,
garnishment, or income or asset execution.
School origination option 1: The process by which a school creates
a loan origination record, transmits the record to the Servicer,
prepares the promissory note, obtains a completed and signed promissory
note from a borrower, transmits the promissory note to the Servicer,
receives the funds electronically, disburses a loan to a borrower,
creates a disbursement record, transmits the disbursement record to the
Servicer, and reconciles on a monthly basis. The Servicer initiates the
drawdown of funds for schools participating in school origination
option 1.
School origination option 2: The process by which a school creates
a loan origination record, transmits the record to the Servicer,
prepares the promissory note, obtains a completed and signed promissory
note from a borrower, transmits the promissory note to the Servicer,
determines funding needs, initiates the drawdown of funds, receives the
funds electronically, disburses a loan to a borrower, creates a
disbursement record, transmits the disbursement record to the Servicer,
and reconciles on a monthly basis.
Servicer: An entity that has contracted with the Secretary to act
as the Secretary's agent in providing services relating to the
origination or servicing of Direct Loans.
Standard origination: The process by which a school creates a loan
origination record, transmits the record to the alternative originator,
receives the funds electronically, disburses funds, creates a
disbursement record, transmits the disbursement record to the
alternative originator, and reconciles on a monthly basis. The
alternative originator prepares the promissory note, obtains a
completed and signed promissory note from a borrower, and initiates the
drawdown of funds for schools participating in standard origination.
(Authority: 20 U.S.C. 1087a et seq.)
Sec. 685.103 Applicability of subparts.
(a) Subpart A contains general provisions regarding the purpose and
scope of the Direct Loan Program.
(b) Subpart B contains provisions regarding borrowers in the Direct
Loan Program.
(c) Subpart C contains certain requirements regarding schools in
the Direct Loan Program.
(d) Subpart D contains provisions regarding school eligibility for
participation and origination in the Direct Loan Program.
(Authority: 20 U.S.C. 1087a et seq.)
Subpart B--Borrower Provisions
Sec. 685.200 Borrower eligibility.
(a) Student borrower. (1) A student is eligible to receive a Direct
Subsidized Loan, a Direct Unsubsidized Loan, or a combination of these
loans, if the student meets the following requirements:
(i) The student is enrolled in a school that participates in the
Direct Loan Program.
(ii) The student meets the requirements for an eligible student
under 34 CFR Part 668.
(iii) In the case of an undergraduate student who seeks a Direct
Subsidized Loan or a Direct Unsubsidized Loan at a school that
participates in the Federal Pell Grant Program, the student has
received a determination of Federal Pell Grant eligibility for the
period of enrollment for which the loan is sought.
(iv)(A) The student reaffirms any FFEL Program or Direct Loan
Program debt that previously was discharged in bankruptcy.
(B) For purposes of paragraph (a)(1)(iv)(A) of this section, a
reaffirmation is an acknowledgement of the loan by the borrower in a
legally binding manner. The acknowledgement may include, but is not
limited to, the borrower's--
(1) Signing a new promissory note or repayment schedule; or
(2) Making a payment on the loan.
(v) In the case of a borrower whose previous loan was cancelled due
to total and permanent disability, the student--
(A) Obtains a certification from a physician that the borrower is
able to engage in substantial gainful activity; and
(B) Signs a statement acknowledging that the Direct Loan the
borrower receives cannot be cancelled in the future on the basis of any
impairment present when the new loan is made, unless that impairment
substantially deteriorates.
(vi) In the case of any student who seeks a loan but does not have
a certificate of graduation from a school providing secondary education
or the recognized equivalent of such a certificate, the student--
(A) Has passed an independently administered examination approved
by the Secretary; or
(B) Has been determined to have the ability to benefit from the
program in accordance with a State process approved by the Secretary.
(2)(i) A Direct Subsidized Loan borrower must demonstrate financial
need in accordance with title IV, part F of the Act.
(ii) The Secretary considers a member of a religious order, group,
community, society, agency, or other organization who is pursuing a
course of study at an institution of higher education to have no
financial need if that organization--
(A) Has as its primary objective the promotion of ideals and
beliefs regarding a Supreme Being;
(B) Requires its members to forego monetary or other support
substantially beyond the support it provides; and
(C)(1) Directs the member to pursue the course of study; or
(2) Provides subsistence support to its members.
(b) Parent borrower. A parent is eligible to receive a Direct PLUS
Loan if the parent meets the following requirements:
(1) The parent is borrowing to pay for the educational costs of a
dependent undergraduate student who meets the requirements for an
eligible student under 34 CFR Part 668.
(2) The parent provides his or her and the student's social
security number.
(3) The parent meets the requirements pertaining to citizenship and
residency that apply to the student under 34 CFR 668.7.
(4) The parent meets the requirements concerning defaults and
overpayments that apply to the student in 34 CFR 668.7.
(5) The parent complies with the requirements for submission of a
Statement of Educational Purpose that apply to the student under 34 CFR
Part 668, except for the completion of a Statement of Selective Service
Registration Status.
(6) The parent meets the requirements that apply to a student under
paragraphs (a)(1)(iv) and (v) of this section.
(7)(i) The parent--
(A) Does not have an adverse credit history;
(B) Has an adverse credit history but has obtained an endorser who
does not have an adverse credit history; or
(C) Has an adverse credit history but documents to the satisfaction
of the Secretary that extenuating circumstances exist.
(ii) For purposes of paragraph (b)(7)(i) of this section, an
adverse credit history means that as of the date of the credit report,
the applicant--
(A) Is 90 or more days delinquent on any debt; or
(B) Has been the subject of a default determination, bankruptcy
discharge, foreclosure, repossession, tax lien, wage garnishment, or
write-off of a debt under title IV of the Act during the five years
preceding the date of the credit report.
(c) Defaulted FFEL Program and Direct Loan borrowers. Except as
noted in Sec. 685.215(d)(1)(ii)(E), in the case of a student or parent
borrower who is currently in default on an FFEL Program or a Direct
Loan Program Loan, the borrower shall make satisfactory repayment
arrangements on the defaulted loan. The definition of a satisfactory
repayment arrangement is provided in 34 CFR 685.102.
(d) Use of loan proceeds to replace expected family contribution. A
borrower may use the amount of a Direct Unsubsidized Loan, a Direct
PLUS Loan, a State-sponsored loan, or another non-Federal loan obtained
for a loan period to replace the expected family contribution for that
loan period.
(Authority: 20 U.S.C. 1087a et seq.)
Sec. 685.201 Obtaining a loan.
(a) Application for a Direct Subsidized Loan or a Direct
Unsubsidized Loan. (1) To obtain a Direct Subsidized Loan or a Direct
Unsubsidized Loan, a student shall complete a Free Application for
Federal Student Aid and submit it in accordance with instructions in
the application.
(2) If the student is eligible for a Direct Subsidized Loan or a
Direct Unsubsidized Loan, the school in which the student is enrolled
shall perform the following functions:
(i) A school participating under school origination option 2 shall
create a loan origination record, obtain a completed promissory note
from the student, draw down funds, and disburse the funds.
(ii) A school participating under school origination option 1 shall
create a loan origination record, obtain a completed promissory note
from the student, and transmit the record and promissory note to the
Servicer. The Servicer initiates the drawdown of funds, and the school
disburses the funds.
(iii) If the student is attending a school participating under
standard origination, the school shall create a loan origination record
and transmit the record to the alternative originator, which prepares
the promissory note and sends it to the student and receives the
completed promissory note from the student. The Servicer initiates the
drawdown of funds, and the school disburses the funds.
(b) Application for a Direct PLUS Loan. To obtain a Direct PLUS
Loan, the parent shall complete the application/promissory note and
submit it to the school at which the student is enrolled. The school
shall complete its portion of the application/promissory note and
submit it to the Servicer, which makes a determination as to whether
the parent has an adverse credit history. A school participating under
school origination option 2 shall draw down funds and disburse the
funds. For a school participating under school origination option 1 or
standard origination, the Servicer initiates the drawdown of funds, and
the school disburses the funds.
(c) Application for a Direct Consolidation Loan. (1) To obtain a
Direct Consolidation Loan, the applicant shall complete the
application/promissory note and submit it to the Servicer. The
application/promissory note sets forth the terms and conditions of the
Direct Consolidation Loan and informs the applicant how to contact the
Servicer. The Servicer answers questions regarding the process of
applying for a Direct Consolidation Loan and provides information about
the terms and conditions of both Direct Consolidation Loans and the
types of loans that may be consolidated.
(2) Once the applicant has submitted the completed application/
promissory note to the Servicer, the Secretary makes the Direct
Consolidation Loan under the procedures specified in Sec. 685.215.
(Authority: 20 U.S.C. 1087a et seq., 1091a)
Sec. 685.202 Charges for which Direct Loan Program borrowers are
responsible.
(a) Interest--(1) Interest rate for Direct Subsidized Loans and
Direct Unsubsidized Loans. (i) For Direct Subsidized Loans and Direct
Unsubsidized Loans in repayment, the interest rate during any twelve-
month period beginning on July 1 and ending on June 30 is determined on
the June 1 immediately preceding that period. The interest rate is
equal to the bond equivalent rate of 91-day Treasury bills auctioned at
the final auction held prior to that June 1 plus 3.1 percentage points,
but does not exceed 8.25 percent.
(ii) For Direct Subsidized Loans and Direct Unsubsidized Loans
prior to the beginning of the repayment period or during the period of
deferment under Sec. 685.204, the interest rate during any twelve-month
period beginning on July 1 and ending on June 30, is determined on the
June 1 immediately preceding that period. The interest rate is equal to
the bond equivalent rate of 91-day Treasury bills auctioned at the
final auction held prior to that June 1; plus 2.5 percentage points,
but does not exceed 8.25 percent.
(2) Interest rate for the Direct PLUS Loans. The interest rate on a
Direct PLUS Loan during any twelve-month period beginning on July 1 and
ending on June 30 is determined on the June 1 preceding that period.
The interest rate is equal to the bond equivalent rate of 52-week
Treasury bills auctioned at the final auction held prior to that June 1
plus 3.1 percentage points, but does not exceed 9 percent.
(b) Capitalization. (1) The Secretary may add accrued interest to
the borrower's unpaid principal balance. This increase in the principal
balance of a loan is called ``capitalization.''
(2) For a Direct Unsubsidized Loan, the Secretary capitalizes the
interest that accrues on the loan when the borrower enters repayment.
(3) For a Direct Loan not eligible for interest subsidies during
periods of deferment, and for all Direct Loans during periods of
forbearance, the Secretary capitalizes the interest that has accrued on
the loan upon the expiration of the deferment or forbearance.
(4) If a borrower is in a period of deferment, forbearance, or the
in-school or grace period on a Direct Loan and agrees to monthly or
quarterly payments of interest, the Secretary notifies the borrower
that the borrower's failure to resolve any delinquency constitutes the
borrower's consent to capitalization of delinquent interest and all
interest that accrues through the remainder of that period. The
Secretary capitalizes the interest that has accrued on the loan upon
the expiration of that period.
(5) Except as provided in Sec. 685.209(d)(3) and in the case of a
Direct Unsubsidized Loan borrower who has not entered repayment, is in
deferment, or in forbearance, the Secretary annually capitalizes
interest payable by the borrower when the borrower does not make
payments sufficient to cover the interest that has accrued on the loan.
(c) Loan fee for Direct Subsidized, Direct Unsubsidized, and Direct
PLUS Loans. The Secretary--
(1) Charges a borrower a loan fee of four percent of the principal
amount of the loan on a Direct Subsidized, Direct Unsubsidized, or
Direct PLUS Loan;
(2) Deducts the loan fee from the proceeds of the loan;
(3) In the case of a loan disbursed in multiple installments,
deducts a pro rated portion of the fee from each disbursement; and
(4) Applies to a borrower's loan balance the portion of the loan
fee previously deducted from the loan that is attributable to a
disbursement of the loan that is repaid within 120 days of disbursement
or that should have been repaid within that period by the school.
(d) Late charge. (1) The Secretary may require the borrower to pay
a late charge of up to six cents for each dollar of each installment or
portion thereof that is late under the circumstances described in
paragraph (d)(2) of this section.
(2) The late charge may be assessed if the borrower fails to pay
all or a portion of a required installment payment within 30 days after
it is due.
(e) (1) Collection charges before default. Notwithstanding any
provision of State law, the Secretary may require that the borrower or
any endorser pay costs incurred by the Secretary or the Secretary's
agents in collecting installments not paid when due. These charges do
not include routine collection costs associated with preparing letters
or notices or with making personal contacts with the borrower (e.g.,
local and long-distance telephone calls).
(2) Collection charges after default. If a borrower defaults on a
Direct Loan, the Secretary assesses collection costs on the basis of 34
CFR 30.60.
(Authority: 20 U.S.C. 1087a et seq., 1091a)
Sec. 685.203 Loan limits.
(a) Direct Subsidized Loans. (1) In the case of an undergraduate
student who has not successfully completed the first year of a program
of undergraduate education, the total amount the student may borrow for
any academic year of study under the Federal Direct Stafford Loan
Program in combination with the Federal Stafford Loan Program may not
exceed the following:
(i) $2,625 for a program of study of at least a full academic year
in length.
(ii) $1,750 for a program of study of at least two-thirds but less
than a full academic year in length.
(iii) $875 for a program of study of at least one-third but less
than two-thirds of an academic year in length.
(2) In the case of an undergraduate student who has successfully
completed the first year of an undergraduate program but has not
successfully completed the second year of an undergraduate program, the
total amount the student may borrow for any academic year of study
under the Federal Direct Stafford Loan Program in combination with the
Federal Stafford Loan Program may not exceed the following:
(i) $3,500 for a program of study of at least a full academic year
in length.
(ii) If the student is enrolled in a program of study with less
than a full academic year remaining, an amount that bears the same
ratio to $3,500 as the number of semester, trimester, quarter, or clock
hours for which the student enrolls bears to one academic year.
(3) In the case of an undergraduate student who has successfully
completed the first and second year of a program of study of
undergraduate education but has not successfully completed the
remainder of the program, or in the case of a student in a program who
has an associate or baccalaureate degree which is required for
admission into the program, the total amount the student may borrow for
any academic year of study under the Federal Direct Stafford Loan
Program in combination with the Federal Stafford Loan Program may not
exceed the following:
(i) $5,500 for a program of study of at least an academic year in
length.
(ii) For a student enrolled in a program of study with less than a
full academic year remaining, an amount that bears the same ratio to
$5,500 as the number of semester, trimester, quarter, or clock hours
for which the student enrolls bears to one academic year.
(4) In the case of a graduate or professional student, the total
amount the student may borrow for any academic year of study under the
Federal Direct Stafford Loan Program in combination with the Federal
Stafford Loan Program may not exceed $8,500.
(b) Direct Unsubsidized Loans. The total amount a student may
borrow under any period of study for the Federal Direct Unsubsidized
Loan Program and the Federal Unsubsidized Stafford Loan Program is the
same as the amount determined under paragraph (a) of this section, less
any amount received under the Federal Direct Stafford Loan Program or
the Federal Stafford Loan Program.
(c) Additional eligibility for Direct Unsubsidized Loans. (1)(i) An
independent undergraduate student, graduate or professional student,
and certain dependent undergraduate students may borrow amounts under
the Federal Direct Unsubsidized Loan Program in addition to any amount
borrowed under paragraph (b) of this section.
(ii) In order for a dependent undergraduate student to receive this
additional loan amount, the financial aid administrator must determine
that the student's parents likely will be precluded by exceptional
circumstances from borrowing under the Federal Direct PLUS Program or
the Federal PLUS Program and the student's family is otherwise unable
to provide the student's expected family contribution. The financial
aid administrator shall base the determination on a review of the
family financial information provided by the student and consideration
of the student's debt burden and shall document the determination in
the school's file.
(iii) ``Exceptional circumstances'' under paragraph (c)(1)(ii) of
this section include but are not limited to circumstances in which the
student's parent receives only public assistance or disability
benefits, the parent is incarcerated, the parent has an adverse credit
history, or the parent's whereabouts are unknown. A parent's refusal to
borrow a Federal PLUS Loan or Direct PLUS Loan does not constitute
``exceptional circumstances.''
(2) The additional amount that a student described in paragraph
(c)(1)(i) of this section may borrow under the Federal Direct
Unsubsidized Loan Program and the Federal Unsubsidized Stafford Loan
Program, for any academic year of study may not exceed the following:
(i) In the case of a student who has not successfully completed the
first and second year of a program of undergraduate education--
(A) $4,000 for enrollment in a program of study of at least a full
academic year in length;
(B) $2,500 for enrollment in a program of study of at least two-
thirds but less than a full academic year in length; and
(C) $1,500 for enrollment in a program of study of at least one-
third but less than two-thirds of an academic year in length.
(ii) In the case of a student who has successfully completed the
first and second year of an undergraduate program but has not completed
the remainder of the program of study--
(A) For a student enrolled in a program of study of at least a full
academic year, $5,000; and
(B) For a student enrolled in a program of study with less than a
full academic year remaining, an amount that bears the same ratio to
$5,000 as the number of semester, trimester, quarter, or clock hours
for which the student enrolls bears to one academic year.
(iii) In the case of a graduate or professional student, $10,000.
(d) Federal Direct Stafford Loan Program and Federal Stafford Loan
Program aggregate limits. The aggregate unpaid principal amount of all
Direct Subsidized Loans and Federal Stafford Loans made to a student
may not exceed the following:
(1) $23,000 in the case of any student who has not successfully
completed a program of study at the undergraduate level.
(2) $65,500 in the case of a graduate or professional student,
including loans for undergraduate study.
(e) Aggregate limits for unsubsidized loans. The total amount of
Direct Unsubsidized Loans, Federal Unsubsidized Stafford Loans, and
Federal SLS Loans may not exceed the following:
(1) For a dependent undergraduate student, $23,000 minus any Direct
Subsidized Loan and Federal Stafford Loan amounts, unless the student
qualifies under paragraph (c) of this section for additional
eligibility or qualified for that additional eligibility under the
Federal SLS Program.
(2) For an independent undergraduate or a dependent undergraduate
who qualifies for additional eligibility under paragraph (c) of this
section or qualified for this additional eligibility under the Federal
SLS Program, $46,000 minus any Direct Subsidized Loan and Federal
Stafford Loan amounts.
(3) For a graduate or professional student, $138,500 including any
loans for undergraduate study, minus any Direct Subsidized Loan,
Federal Stafford Loan, and SLS Program loan amounts.
(f) Direct PLUS Loans annual limit. The total amount of all Direct
PLUS Loans that a parent or parents may borrow on behalf of each
dependent student for any academic year of study may not exceed the
cost of attendance minus other estimated financial assistance for that
student.
(g) Direct PLUS Loans aggregate limit. The total amount of all
Direct PLUS Loans that a parent or parents may borrow on behalf of each
dependent student for enrollment in an eligible program of study may
not exceed the student's cost of attendance minus other estimated
financial assistance for that student for the entire period of
enrollment.
(h) Loan limit period. The annual loan limits apply to an academic
year.
(i) Treatment of Direct Consolidation Loans and Federal
Consolidation Loans. The percentage of the outstanding balance on
Direct Consolidation Loans or Federal Consolidation Loans counted
against a borrower's aggregate loan limits is calculated as follows:
(1) For Direct Subsidized Loans, the percentage equals the
percentage of the original amount of the Direct Consolidation Loan or
Federal Consolidation Loan attributable to the Direct Subsidized and
Federal Stafford Loans.
(2) For Direct Unsubsidized Loans, the percentage equals the
percentage of the original amount of the Direct Consolidation Loan or
Federal Consolidation Loan attributable to the Direct Unsubsidized,
SLS, and Federal Unsubsidized Stafford Loans.
(j) Maximum loan amounts. In no case may a Direct Subsidized,
Direct Unsubsidized, or Direct PLUS Loan amount exceed the student's
estimated cost of attendance for the period of enrollment for which the
loan is intended, less--
(1) The student's estimated financial assistance for that period;
and
(2) In the case of a Direct Subsidized Loan, the borrower's
expected family contribution for that period.
(Authority: 20 U.S.C. 1087a et seq.)
Sec. 685.204 Deferment.
(a)(1) A Direct Loan borrower whose loan is eligible for interest
subsidies and who meets the requirements described in paragraph (b) of
this section is eligible for a deferment during which periodic
installments of principal and interest need not be paid.
(2) A Direct Loan borrower whose loan is not eligible for interest
subsidies and who meets the requirements described in paragraph (b) of
this section is eligible for a deferment during which periodic
installments of principal need not be paid but interest does accrue and
is capitalized or paid by the borrower.
(b) Except as provided in paragraph (d) of this section, a Direct
Loan borrower is eligible for a deferment during any period during
which the borrower meets any of the following requirements:
(1)(i) The borrower--
(A) Is carrying at least one-half the normal full-time work load
for the course of study that the borrower is pursuing, as determined by
the eligible school the borrower is attending;
(B) Is pursuing a course of study pursuant to a graduate fellowship
program approved by the Secretary; or
(C) Is pursuing a rehabilitation training program, approved by the
Secretary, for individuals with disabilities; and
(ii) The borrower is not serving in a medical internship or
residency program, except for a residency program in dentistry.
(2)(i) The borrower is seeking and unable to find full-time
employment.
(ii) For purposes of paragraph (b)(2)(i) of this section, the
Secretary determines whether a borrower is eligible for a deferment due
to the inability to find full-time employment using the standards and
procedures set forth in 34 CFR 682.210(h) with references to the lender
understood to mean the Secretary.
(3)(i) The borrower has experienced or will experience an economic
hardship.
(ii) For purposes of paragraph (b)(3)(i) of this section, the
Secretary determines whether a borrower is eligible for a deferment due
to an economic hardship using the standards and procedures set forth in
34 CFR 682.210(s)(6) with references to the lender understood to mean
the Secretary.
(c) No deferment under paragraphs (b)(2) or (3) of this section may
exceed three years.
(d) If, at the time of consolidation, a Direct Consolidation Loan
borrower has an outstanding balance on an FFEL Program loan that was
made prior to July 1, 1993, the borrower is eligible for a deferment
during--
(1) The periods described in paragraph (b) of this section; and
(2) The periods described in 34 CFR 682.210(b), including those
periods that apply to a ``new borrower'' as that term is defined in 34
CFR 682.210(b)(7).
(Authority: 20 U.S.C. 1087a et seq.)
Sec. 685.205 Forbearance.
(a) General. ``Forbearance'' means permitting the temporary
cessation of payments, allowing an extension of time for making
payments, or temporarily accepting smaller payments than previously
scheduled. The borrower has the option to choose the form of
forbearance. If payments of interest are forborne, they are
capitalized. The Secretary grants forbearance if the borrower or
endorser intends to repay the loan but requests forbearance and
provides sufficient documentation to support this request, and--
(1) The Secretary determines that, due to poor health or other
acceptable reasons, the borrower or endorser is currently unable to
make scheduled payments;
(2) The borrower's payments of principal are deferred under
Sec. 685.204 and the Secretary does not subsidize the interest benefits
on behalf of the borrower.
(3) The borrower is in a medical or dental internship or residency
that must be successfully completed before the borrower may begin
professional practice or service, or the borrower is serving in a
medical or dental internship or residency program leading to a degree
or certificate awarded by an institution of higher education, a
hospital, or a health care facility that offers postgraduate training;
(4) The borrower is serving in a national service position for
which the borrower or endorser is receiving a national service
educational award under the National and Community Service Trust Act of
1993; or
(5) For not more than three years, the borrower or endorser--
(i) Is currently obligated to make payments on loans under title IV
of the Act; and
(ii) The sum of these payments each month (or a proportional share
if the payments are due less frequently than monthly) is equal to or
greater than 20 percent of the borrower or endorser's total monthly
gross income.
(b) Administrative forbearance. In certain circumstances, the
Secretary grants forbearance without requiring documentation from the
borrower. These circumstances include but are not limited to--
(1) A properly granted period of deferment for which the Secretary
learns the borrower did not qualify;
(2) The period for which payments are overdue at the beginning of
an authorized deferment period;
(3) The period beginning when the borrower entered repayment until
the first payment due date was established;
(4) The period prior to a borrower's filing of a bankruptcy
petition;
(5) A period after the Secretary receives reliable information
indicating that the borrower (or the student in the case of a Direct
PLUS Loan) has died, or the borrower has become totally and permanently
disabled, until the Secretary receives documentation of death or total
and permanent disability;
(6) Periods necessary for the Secretary to determine the borrower's
eligibility for discharge--
(i) Under Sec. 685.213;
(ii) Under Sec. 685.214; or
(iii) Due to the borrower's or endorser's (if applicable)
bankruptcy;
(7) A period of up to three years in cases where the effect of a
variable interest rate on a fixed-amount or graduated repayment
schedule causes the extension of the maximum repayment term; or
(8) A period in the event of a national military mobilization or
other local or national emergency.
(c) Period of forbearance. (1) The Secretary grants forbearance for
a period of up to one year.
(2) The forbearance is renewable, upon request of the borrower, for
the duration of the period in which the borrower meets the condition
required for the forbearance.
(Authority: 20 U.S.C. 1087a et seq.)
Sec. 685.206 Borrower responsibilities and defenses.
(a) The borrower shall give the school the following information as
part of the origination process for a Direct Subsidized, Direct
Unsubsidized, or Direct PLUS Loan:
(1) A statement, as described in 34 CFR Part 668, that the loan
will be used for the cost of the student's attendance.
(2) Information demonstrating that the borrower is eligible for the
loan.
(3) Information concerning the outstanding FFEL Program and Direct
Loan Program loans of the borrower and, for a parent borrower, of the
student, including any Federal Consolidation Loan or Direct
Consolidation Loan.
(4) A statement authorizing the school to release to the Secretary
information relevant to the student's eligibility to borrow or to have
a parent borrow on the student's behalf (e.g., the student's enrollment
status, financial assistance, and employment records).
(b)(1) The borrower shall promptly notify the Secretary of any
change of name, address, student status to less than half-time,
employer, or employer's address; and
(2) The borrower shall promptly notify the school of any change in
address during enrollment.
(c) Borrower defenses. (1) In any proceeding to collect on a Direct
Loan, the borrower may assert as a defense against repayment, any act
or omission of the school attended by the student that would give rise
to a cause of action against the school under applicable State law.
These proceedings include, but are not limited to, the following:
(i) Tax refund offset proceedings under 34 CFR 30.33.
(ii) Wage garnishment proceedings under section 488A of the Act.
(iii) Salary offset proceedings for Federal employees under 34 CFR
Part 31.
(iv) Credit bureau reporting proceedings under 31 U.S.C. 3711(f).
(2) If the borrower's defense against repayment is successful, the
Secretary notifies the borrower that the borrower is relieved of the
obligation to repay all or part of the loan and associated costs and
fees that the borrower would otherwise be obligated to pay. The
Secretary affords the borrower such further relief as the Secretary
determines is appropriate under the circumstances. Further relief may
include, but is not limited to, the following:
(i) Reimbursing the borrower for amounts paid toward the loan
voluntarily or through enforced collection.
(ii) Determining that the borrower is not in default on the loan
and is eligible to receive assistance under title IV of the Act.
(iii) Updating reports to credit bureaus to which the Secretary
previously made adverse credit reports with regard to the borrower's
Direct Loan.
(3) The Secretary may initiate an appropriate proceeding to require
the school whose act or omission resulted in the borrower's successful
defense against repayment of a Direct Loan to pay to the Secretary the
amount of the loan to which the defense applies. However, the Secretary
does not initiate such a proceeding after the period for the retention
of records described in Sec. 685.308(c) unless the school received
actual notice of the claim during that period.
(Authority: 20 U.S.C. 1087a et seq.)
Sec. 685.207 Obligation to repay.
(a) Obligation of repayment in general. (1) A borrower is obligated
to repay the full amount of a Direct Loan, including the principal
balance, fees, any collection costs charged under Sec. 685.202(e), and
any interest not subsidized by the Secretary, unless the borrower is
relieved of the obligation to repay as provided in this part.
(2) The borrower's repayment of a Direct Loan may also be subject
to the deferment provisions in Sec. 685.204, the forbearance provisions
in Sec. 685.205, and the discharge provisions in Sec. 685.212.
(b) Direct Subsidized Loan repayment. (1) During the period in
which a borrower is enrolled at an eligible school on at least a half-
time basis, the borrower is in an ``in-school'' period and is not
required to make payments on a Direct Subsidized Loan unless--
(i) The loan entered repayment before the in-school period began;
and
(ii) The borrower has not been granted a deferment under
Sec. 685.204.
(2)(i) When a borrower ceases to be enrolled at an eligible school
on at least a half-time basis, a six-month grace period begins, unless
the grace period has been previously exhausted.
(ii) During a grace period, the borrower is not required to make
payments on a Direct Subsidized Loan.
(3) A borrower is not obligated to pay interest on a Direct
Subsidized Loan for in-school or grace periods unless the borrower is
required to make payments on the loan during those periods under
paragraph (b)(1) of this section.
(4) The repayment period for a Direct Subsidized Loan begins the
day after the grace period ends. A borrower is obligated to repay the
loan under paragraph (a) of this section during the repayment period.
(c) Direct Unsubsidized Loan repayment. (1) During the period in
which a borrower is enrolled at an eligible school on at least a half-
time basis, the borrower is in an ``in-school'' period and is not
required to make payments of principal on a Direct Unsubsidized Loan
unless--
(i) The loan entered repayment before the in-school period began;
and
(ii) The borrower has not been granted a deferment under
Sec. 685.204.
(2)(i) When a borrower ceases to be enrolled at an eligible school
on at least a half-time basis, a six-month grace period begins, unless
the grace period has been previously exhausted.
(ii) During a grace period, the borrower is not required to make
any principal payments on a Direct Unsubsidized Loan.
(3) A borrower is responsible for the interest that accrues on a
Direct Unsubsidized Loan during in-school and grace periods. Interest
that accrues may be capitalized or paid by the borrower.
(4) The repayment period for a Direct Unsubsidized Loan begins the
day after the grace period ends. A borrower is obligated to repay the
loan under paragraph (a) of this section during the repayment period.
(d) Direct PLUS Loan repayment. The repayment period for a Direct
PLUS Loan begins on the day the loan is fully disbursed. Interest
begins to accrue on the day the first installment is disbursed. A
borrower is obligated to repay the loan under paragraph (a) of this
section during the repayment period.
(e) Direct Consolidation Loan repayment. The repayment period for a
Direct Consolidation Loan begins and interest begins to accrue on the
day the loan is disbursed. The borrower is obligated to repay the loan
under paragraph (a) of this section during the repayment period.
(Authority: 20 U.S.C. 1087a et seq.)
Sec. 685.208 Repayment plans.
(a) General. (1) A borrower may repay a Direct Subsidized Loan, a
Direct Unsubsidized Loan, a Direct Subsidized Consolidation Loan, or a
Direct Unsubsidized Consolidation Loan under the standard repayment
plan, the extended repayment plan, the graduated repayment plan, or the
income contingent repayment plan.
(2) A borrower may repay a Direct PLUS Loan or a Direct PLUS
Consolidation Loan under the standard repayment plan, the extended
repayment plan, or the graduated repayment plan.
(3) The Secretary may provide an alternative repayment plan in
accordance with paragraph (g) of this section.
(4) All Direct Loans obtained by one borrower must be repaid
together under the same repayment plan, except that a borrower of a
Direct PLUS Loan or a Direct PLUS Consolidation Loan may repay the
Direct PLUS Loan or the Direct PLUS Consolidation Loan separately from
other Direct Loans obtained by that borrower.
(b) Standard repayment plan. (1) Under the standard repayment plan,
a borrower shall repay a loan in full within ten years from the date
the loan entered repayment by making fixed monthly payments.
(2) Periods of authorized deferment or forbearance are not included
in the ten-year repayment period.
(3) A borrower's payments under the standard repayment plan are at
least $50 per month, except that a borrower's final payment may be less
than $50.
(4) The number of payments or the fixed monthly repayment amount
may be adjusted to reflect changes in the variable interest rate
identified in Sec. 685.202(a).
(c) Extended repayment plan. (1) Under the extended repayment plan,
a borrower shall repay a loan in full by making fixed monthly payments
within an extended period of time that varies with the total amount of
the borrower's loans, as described in paragraph (e) of this section.
(2) Periods of deferment and forbearance are not included in the
number of years of repayment.
(3) A borrower makes fixed monthly payments of at least $50, except
that a borrower's final payment may be less than $50.
(4) The number of payments or the fixed monthly repayment amount
may be adjusted to reflect changes in the variable interest rate
identified in Sec. 685.202(a).
(d) Graduated repayment plan. (1) Under the graduated repayment
plan, a borrower shall repay a loan in full by making payments at two
or more levels within a period of time that varies with the total
amount of the borrower's loans, as described in paragraph (e) of this
section.
(2) Periods of deferment and forbearance are not included in the
number of years of repayment.
(3) The number of payments or the monthly repayment amount may be
adjusted to reflect changes in the variable interest rate identified in
Sec. 685.202(a).
(4) No scheduled payment under the graduated repayment plan may be
less than the amount of interest accrued on the loan between monthly
payments, less than 50% of the payment amount that would be required
under the standard repayment plan, or more than 150% of the payment
amount that would be required under the standard repayment plan.
(e) Repayment period for the extended and graduated plans. Under
the extended and graduated repayment plans, if the total amount of the
borrower's Direct Loans is--
(1) Less than $10,000, the borrower shall repay the loans within 12
years of entering repayment;
(2) Greater than or equal to $10,000 but less than $20,000, the
borrower shall repay the loans within 15 years of entering repayment;
(3) Greater than or equal to $20,000 but less than $40,000, the
borrower shall repay the loans within 20 years of entering repayment;
(4) Greater than or equal to $40,000 but less than $60,000, the
borrower shall repay the loans within 25 years of entering repayment;
and
(5) Greater than or equal to $60,000, the borrower shall repay the
loans within 30 years of entering repayment.
(f) Income contingent repayment plan. (1) Under the income
contingent repayment plan, a borrower's monthly repayment amount is
generally based on the total amount of the borrower's (and, in some
circumstances, the borrower's spouse's) Direct Loans, family size, and
Adjusted Gross Income (AGI) reported by the borrower for the most
recent year for which the Secretary has obtained income information. In
the case of a married borrower who files a joint Federal income tax
return and is not repaying loans jointly with a spouse under
Sec. 685.209(a)(4), the borrower's AGI includes the income of the
borrower's spouse. A borrower shall make payments on a loan until the
loan is repaid in full or until the loan has been in repayment through
the end of the income contingent repayment period.
(2) The regulations in effect at the time a borrower's first Direct
Loan enters repayment govern the method for determining the borrower's
monthly repayment amount for all of the borrower's Direct Loans,
unless--
(i) The Secretary amends the regulations relating to a borrower's
monthly repayment amount under the income contingent repayment plan;
and
(ii) The borrower submits a written request that the amended
regulations apply to the repayment of the borrower's Direct Loans.
(3) Provisions governing the income contingent repayment plan are
set out in Sec. 685.209.
(g) Alternative repayment. (1) The Secretary may provide an
alternative repayment plan for a borrower who demonstrates to the
Secretary's satisfaction that the terms and conditions of the repayment
plans specified in paragraphs (b) through (f) of this section are not
adequate to accommodate the borrower's exceptional circumstances.
(2) The Secretary may require a borrower to provide evidence of the
borrower's exceptional circumstances before permitting the borrower to
repay a loan under an alternative repayment plan.
(3) If the Secretary agrees to permit a borrower to repay a loan
under an alternative repayment plan, the Secretary notifies the
borrower in writing of the terms of the plan. After the borrower
receives notification of the terms of the plan, the borrower may accept
the plan or choose another repayment plan.
(4) If a borrower's payment under the alternative repayment plan is
less than the accrued interest on the loan, the unpaid interest is
added to the principal balance of the loan.
(Authority: 20 U.S.C. 1087a et seq.)
Sec. 685.209 Income contingent repayment plan.
(a)(1) Under the income contingent repayment plan described in
Sec. 685.208(f), a borrower may choose to repay Direct Loans in one of
two ways. The borrower's options are described in paragraphs (b) and
(c) of this section.
(2) A borrower may change options under the income contingent
repayment plan by notifying the Secretary in writing. However, a
borrower may change options no more frequently than once a year. The
Secretary annually provides the borrower with estimates of monthly
payment amounts under each option.
(3) The Secretary may determine that special circumstances, such as
a loss of employment by the borrower or the borrower's spouse, warrant
an adjustment to the borrower's repayment obligations.
(4) Married borrowers may repay their loans jointly if they meet
the following requirements:
(i) Each spouse is repaying a Direct Loan under the same option of
the income contingent repayment plan.
(ii) The spouses filed a joint Federal income tax return for the
most recent year for which the Secretary has obtained income
information.
(iii) The spouses submit a written request that includes their
names and social security numbers to the Secretary.
(5) Examples of the calculation of the monthly repayment amounts
under both options of the income contingent repayment plan and a table
that shows monthly repayment amounts for borrowers at various income
and debt levels under both options are included in Appendix A to this
part.
(b) Option 1.--(1) General. (i) In general, under Option 1, a
borrower shall make monthly payments calculated using a percentage of
the borrower's Adjusted Gross Income (AGI) called the ``payback rate.''
The payback rate is based upon the total amount of the borrower's
Direct Loans, as described under paragraph (b)(2) of this section. The
minimum payback rate is four percent, and the maximum rate is 15
percent.
(ii) If a borrower provides documentation acceptable to the
Secretary that the borrower has one or more dependents other than the
borrower's spouse, the Secretary subtracts from the borrower's monthly
payment a family size adjustment of seven dollars per dependent for up
to five dependents.
(iii) A borrower's monthly payment is equal to the borrower's AGI
multiplied by the payback rate, divided by 12 months, minus the family
size adjustment amount. However, if the monthly repayment amount is
less than $25, the borrower is not required to make a payment.
(2) Payback rate. (i) A borrower's payback rate is based upon the
borrower's Direct Loan debt when the borrower's first loan enters
repayment and does not change unless the borrower obtains another
Direct Loan or the borrower and the borrower's spouse obtain approval
to repay their loans jointly under paragraph (a)(4) of this section. If
the borrower obtains another Direct Loan, a new payback rate for all of
the borrower's Direct Loans is calculated on the basis of the combined
amounts of the loans when the loans entered repayment.
(ii) If the total amount of a borrower's Direct Loans is less than
or equal to $1,000, the payback rate is four percent. If the total
amount of a borrower's Direct Loans is greater than $1,000, the payback
rate is four percent plus an additional percent that begins at zero and
increases at a rate of 0.2 percent for each additional $1,000 borrowed
up to a maximum payback rate of 15 percent.
(iii) More specifically, if the total amount of a borrower's Direct
Loans is greater than $1,000, the payback rate is the lesser of 0.15 or
the following: 0.04 + (debt-1,000) (0.000002).
(3) Exception for certain married borrowers. The combined monthly
payment amount for married borrowers who repay their loans jointly
under paragraph (a)(4) of this section is the total of the individual
monthly payment amounts for each borrower calculated under paragraph
(b)(1)(iii) of this section. The amount of a borrower's individual
monthly payment amount is applied to that borrower's debt. The payback
rate for each borrower is calculated separately on the basis of the
amount of the borrower's Direct Loans. For purposes of this paragraph,
the Secretary assumes that the AGI for each borrower is proportionate
to the relative size of the borrower's individual debt and subtracts
one half of the applicable family size adjustment from each borrower's
monthly payment amount. If the combined monthly repayment amount is
less than $25, the borrowers are not required to make a payment.
(c) Option 2. (1) In general, under Option 2, a borrower shall make
monthly payments as calculated under Option 1, except that no monthly
payment exceeds the amount the borrower would repay over 12 years using
standard amortization. The Secretary calculates the 12-year standard
amortization amount on the basis of the interest rate in effect when
the borrower chooses Option 2. The amount a borrower would repay over
12 years using standard amortization is determined without any family
size adjustment or minimum monthly repayment amount.
(2) More specifically, if a borrower chooses Option 2 under the
income contingent repayment plan--
(i) The borrower's payments do not exceed the 12-year standard
amortization amount regardless of the borrower's income;
(ii) The borrower's repayment period may be extended beyond the
repayment period under Option 1 (but not beyond the 25-year maximum
period described in Sec. 685.209(d)(2)(i)); and
(iii) Interest accrues throughout the repayment period and is
capitalized until the limitation on capitalization of interest in
paragraph (d)(3) of this section is reached.
(3) Exception for certain married borrowers. The combined monthly
payment amount for married borrowers who repay their loans jointly
under paragraph (a)(4) of this section is the total of the individual
monthly payment amounts for each borrower calculated under paragraph
(b)(1)(iii) of this section, unless the combined amount exceeds the 12-
year standard amortization amount. If the combined amount exceeds the
12-year standard amortization amount, the couple pays the 12-year
standard amortization amount, and the amount applied to each borrower's
debt is determined by calculating the 12-year standard amortization
amount for that borrower's debt.
(d) Other features of the income contingent repayment plan. (1)
Alternative documentation of income. If a borrower's AGI is not
available or if, in the Secretary's opinion, the borrower's reported
AGI does not reasonably reflect the borrower's current income, the
Secretary may use other documentation of income provided by the
borrower to calculate the borrower's monthly repayment amount.
(2) Repayment period. (i) The maximum repayment period under the
income contingent repayment plan is 25 years.
(ii) The repayment period does not include periods in which the
borrower makes payments under the standard, extended, graduated, or
alternative repayment plan or periods of authorized deferment or
forbearance.
(iii) If a borrower repays more than one loan under the income
contingent repayment plan, a separate repayment period for each loan
begins when that loan enters repayment.
(iv) If a borrower has not repaid a loan in full at the end of the
25-year repayment period under the income contingent repayment plan,
the Secretary cancels the unpaid portion of the loan.
(v) At the beginning of the repayment period, a borrower shall make
monthly payments of the amount of interest that accrues on the
borrower's Direct Loans until the Secretary calculates the borrower's
monthly repayment amount on the basis of the borrower's income.
(3) Limitation on capitalization of interest. If the amount of a
borrower's monthly payment is less than the accrued interest, the
unpaid interest is capitalized until the outstanding principal amount
increases to one and one-half times the original principal amount.
After the outstanding principal amount reaches one and one-half times
the original amount, interest continues to accrue but is not
capitalized. For purposes of this paragraph, the original amount is the
amount owed by the borrower when the borrower enters repayment.
(4) Notification of terms and conditions. When a borrower selects
or is required by the Secretary to repay a loan under the income
contingent repayment plan, the Secretary notifies the borrower of the
terms and conditions of the plan, including--
(i) That the Internal Revenue Service will disclose certain tax
return information to the Secretary or the Secretary's agents; and
(ii) That if the borrower believes that special circumstances
warrant an adjustment to the borrower's repayment obligations, as
described in Sec. 685.209(a)(3), the borrower may contact the Secretary
and obtain the Secretary's determination as to whether an adjustment is
appropriate.
(5) Consent to disclosure of tax return information. (i) A borrower
shall provide written consent to the disclosure of certain tax return
information by the Internal Revenue Service (IRS) to agents of the
Secretary for purposes of calculating a monthly repayment amount and
servicing and collecting a loan under the income contingent repayment
plan. The borrower shall provide consent by signing a consent form,
developed consistent with 26 CFR 301.6103(c)-1 and provided to the
borrower by the Secretary, and shall return the signed form to the
Secretary.
(ii) The borrower shall consent to disclosure of the borrower's
taxpayer identity information as defined in 26 U.S.C. 6103(b)(6), tax
filing status, and AGI.
(iii) The borrower shall provide consent for a period of five years
from the date the borrower signs the consent form. The Secretary
provides the borrower a new consent form before that period expires.
The IRS does not disclose tax return information after the IRS has
processed a borrower's withdrawal of consent.
(iv) The Secretary designates the standard repayment plan for a
borrower who selects the income contingent repayment plan but--
(A) Fails to provide the required written consent;
(B) Fails to renew written consent upon the expiration of the five-
year period for consent; or
(C) Withdraws consent and does not select another repayment plan.
(v) If a borrower defaults and the Secretary designates the income
contingent repayment plan for the borrower but the borrower fails to
provide the required written consent, the Secretary consults with the
borrower prior to establishing a repayment plan for the borrower.
(Authority: 20 U.S.C. 1087a et seq.)
Sec. 685.210 Choice of repayment plan.
(a) Initial selection of a repayment plan. (1) Before a Direct Loan
enters into repayment, the Secretary provides the borrower a
description of the available repayment plans and requests the borrower
to select one. A borrower may select a repayment plan before the loan
enters repayment by notifying the Secretary of the borrower's selection
in writing.
(2) If a borrower does not select a repayment plan within 45 days
after the Secretary provides the borrower with a description of
available repayment plans, the Secretary designates the standard
repayment plan described in Sec. 685.208(b) for the borrower.
(b) Changing repayment plans. (1) A borrower may change repayment
plans at any time after the loan has entered repayment by notifying the
Secretary in writing. However, a borrower who is repaying a defaulted
loan under the income contingent repayment plan under
Sec. 685.211(c)(3)(ii) may not change to another repayment plan
unless--
(i) The borrower was required to and did make a payment under the
income contingent repayment plan in each of the prior six months; and
(ii) The borrower makes and the Secretary approves a request to
change plans.
(2)(i) A borrower may not change to a repayment plan that has a
maximum repayment period of less than the number of years the loan has
already been in repayment, except that a borrower may change to the
income contingent repayment plan at any time.
(ii) If a borrower changes plans, the repayment period is the
period provided for under the borrower's new repayment plan, calculated
from the date the loan initially entered repayment. However, if a
borrower changes to the income contingent repayment plan, the repayment
period is calculated as described in Sec. 685.209(d)(2).
(Authority: 20 U.S.C. 1087a et seq.)
Sec. 685.211 Miscellaneous repayment provisions.
(a) Payment application and prepayment. (1) The Secretary applies
any payment first to any accrued charges and collection costs, then to
any outstanding interest, and then to outstanding principal.
(2) A borrower may prepay all or part of a loan at any time without
penalty. If a borrower pays any amount in excess of the amount due, the
excess amount is a prepayment.
(3) If a prepayment equals or exceeds the monthly repayment amount
under the borrower's repayment plan, the Secretary--
(i) Applies the prepaid amount according to paragraph (a)(1) of
this section;
(ii) Advances the due date of the next payment unless the borrower
requests otherwise; and
(iii) Notifies the borrower of any revised due date for the next
payment.
(4) If a prepayment is less than the monthly repayment amount, the
Secretary applies the prepayment according to paragraph (a)(1) of this
section.
(b) Refunds from schools. The Secretary applies any refund due to a
borrower that the Secretary receives from a school under Sec. 668.22
against the borrower's outstanding principal and notifies the borrower
of the refund.
(c) Default--(1) Acceleration. If a borrower defaults on a Direct
Loan, the entire unpaid balance and accrued interest are immediately
due and payable.
(2) Collection charges. If a borrower defaults on a Direct Loan,
the Secretary assesses collection charges in accordance with
Sec. 685.202(e).
(3) Collection of a defaulted loan. (i) The Secretary may take any
action authorized by law to collect a defaulted Direct Loan including,
but not limited to, filing a lawsuit against the borrower, reporting
the default to national credit bureaus, requesting the Internal Revenue
Service to offset the borrower's Federal income tax refund, and
garnishing the borrower's wages.
(ii) If a borrower defaults on a Direct Stafford Loan, a Direct
Unsubsidized Stafford Loan, a Direct Unsubsidized Consolidation Loan or
a Direct Subsidized Consolidation Loan, the Secretary may designate the
income contingent repayment plan for the borrower.
(d) Ineligible borrowers. (1) The Secretary determines that a
borrower is ineligible if, at the time the loan was made and without
the school's or the Secretary's knowledge, the borrower (or the student
on whose behalf a parent borrowed) provided false or erroneous
information or took actions that caused the borrower or student--
(i) To receive a loan for which the borrower is wholly or partially
ineligible;
(ii) To receive interest benefits for which the borrower was
ineligible; or
(iii) To receive loan proceeds for a period of enrollment for which
the borrower was not eligible.
(2) If the Secretary makes the determination described in paragraph
(d)(1) of this section, the Secretary sends an ineligible borrower a
demand letter that requires the borrower to repay some or all of a
loan, as appropriate. The demand letter requires that within 30 days of
the borrower's receipt of the letter, the borrower repay any principal
amount for which the borrower is ineligible and any accrued interest,
including interest subsidized by the Secretary, through the previous
quarter.
(3) If a borrower fails to comply with the demand letter described
in paragraph (d)(2) of this section, the borrower is in default.
(4) A borrower may not consolidate a loan under Sec. 685.215 for
which the borrower is wholly or partially ineligible.
(e) Rehabilitation of defaulted loans. A defaulted Direct Loan is
rehabilitated if the borrower makes 12 consecutive on-time, reasonable,
and affordable monthly payments. The amount of such a payment is
determined on the basis of the borrower's total financial
circumstances. If a defaulted loan is rehabilitated, the Secretary
instructs any credit bureau to which the default was reported to remove
the default from the borrower's credit history.
(Authority: 20 U.S.C. 1087a et seq.)
Sec. 685.212 Discharge of a loan obligation.
(a) Death. If the Secretary receives acceptable documentation that
a borrower (or the student on whose behalf a parent borrowed) has died,
the Secretary discharges the obligation of the borrower and any
endorser to make any further payments on the loan.
(b) Total and permanent disability. If the Secretary receives
acceptable documentation that a borrower has become totally and
permanently disabled, the Secretary discharges the obligation of the
borrower and any endorser to make any further payments on the loan. A
borrower is not considered totally and permanently disabled based on a
condition that existed at the time the borrower applied for the loan
unless the borrower's condition substantially deteriorated after the
loan was made so as to render the borrower totally and permanently
disabled.
(c) Bankruptcy. If a borrower's obligation to repay a loan is
discharged in bankruptcy, the Secretary does not require the borrower
or any endorser to make any further payments on the loan.
(d) Closed schools. If a borrower meets the requirements in
Sec. 685.213, the Secretary discharges the obligation of the borrower
and any endorser to make any further payments on the loan.
(e) False certification and unauthorized disbursement. If a
borrower meets the requirements in Sec. 685.214, the Secretary
discharges the obligation of the borrower and any endorser to make any
further payments on the loan.
(f) Payments received after eligibility for discharge. The
Secretary returns to the sender or, for a discharge based on death, the
borrower's estate, those payments received after the requirements for
discharge have been met.
(g) Loan forgiveness demonstration program. If funds are
appropriated for the loan forgiveness demonstration program authorized
by section 428J of the Act, the Secretary follows the procedures and
applies the standards in 34 CFR 682.215 for borrowers under the Direct
Loan Program.
(Authority: 20 U.S.C. 1087a et seq.)
Sec. 685.213 Closed school discharge.
(a) General. (1) The Secretary discharges the borrower's (and any
endorser's) obligation to repay a Direct Loan in accordance with the
provisions of this section if the borrower (or the student on whose
behalf a parent borrowed) did not complete the program of study for
which the loan was made because the school at which the borrower (or
student) was enrolled closed, as described in paragraph (c) of this
section.
(2) For purposes of this section--
(i) A school's closure date is the date that the school ceases to
provide educational instruction in all programs, as determined by the
Secretary; and
(ii) ``School'' means a school's main campus or any location or
branch of the main campus.
(b) Relief pursuant to discharge. (1) Discharge under this section
relieves the borrower of any past or present obligation to repay the
loan and any accrued charges or collection costs with respect to the
loan.
(2) The discharge of a loan under this section qualifies the
borrower for reimbursement of amounts paid voluntarily or through
enforced collection on the loan.
(3) The Secretary does not regard a borrower who has defaulted on a
loan discharged under this section as in default on the loan after
discharge, and such a borrower is eligible to receive assistance under
programs authorized by title IV of the Act.
(4) The Secretary reports the discharge of a loan under this
section to all credit reporting agencies to which the Secretary
previously reported the status of the loan.
(c) Borrower qualification for discharge. In order to qualify for
discharge of a loan under this section, a borrower shall submit to the
Secretary 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 shall--
(1) State that the borrower (or the student on whose behalf a
parent borrowed)--
(i) Received the proceeds of a loan to attend a school;
(ii) 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
(iii) Did not complete the program of study through a teach-out at
another school or by transferring academic credits or hours earned at
the closed school to another school;
(2) State whether the borrower (or student) 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 student) or
credited to the borrower's loan obligation; and
(3) State that the borrower (or student)--
(i) Agrees to provide to the Secretary upon request other
documentation reasonably available to the borrower that demonstrates
that the borrower meets the qualifications for discharge under this
section; and
(ii) Agrees to cooperate with the Secretary in enforcement actions
in accordance with paragraph (d) of this section and to transfer any
right to recovery against a third party to the Secretary in accordance
with paragraph (e) of this section.
(d) Cooperation by borrower in enforcement actions. (1) In order to
obtain a discharge under this section, a borrower shall cooperate with
the Secretary in any judicial or administrative proceeding brought by
the Secretary to recover for 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 shall--
(i) Provide testimony regarding any representation made by the
borrower to support a request for discharge;
(ii) Produce any documents reasonably available to the borrower
with respect to those representations; and
(iii) If required by the Secretary, provide a sworn statement
regarding those documents and representations.
(2) The Secretary denies the request for a discharge or revokes the
discharge of a borrower who--
(i) Fails to provide the testimony, documents, or a sworn statement
required under paragraph (d)(1) of this section; or
(ii) Provides testimony, documents, or a sworn statement that does
not support the material representations made by the borrower to obtain
the discharge.
(e) Transfer to the Secretary of borrower's right of recovery
against third parties. (1) 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 (or student) 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.
(2) The provisions of this section apply notwithstanding any
provision of State law that would otherwise restrict transfer of those
rights by the borrower (or student), 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.
(3) Nothing in this section limits or forecloses the borrower's (or
student's) right to pursue legal and equitable relief regarding
disputes arising from matters unrelated to the discharged Direct Loan.
(f) Discharge procedures. (1) After confirming the date of a
school's closure, the Secretary identifies any Direct Loan borrower (or
student on whose behalf a parent borrowed) 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.
(2) If the borrower's current address is known, the Secretary mails
the borrower a discharge application and an explanation of the
qualifications and procedures for obtaining a discharge. The Secretary
also promptly suspends any efforts to collect from the borrower on any
affected loan. The Secretary may continue to receive borrower payments.
(3) If the borrower's current address is unknown, the Secretary
attempts to locate the borrower and determines the borrower's potential
eligibility for a discharge under this section by consulting with
representatives of the closed school, the school's licensing agency,
the school's 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 (f)(2) of this section.
(4) If a borrower fails to submit the written request and sworn
statement described in paragraph (c) of this section within 60 days of
the Secretary's mailing the discharge application, the Secretary
resumes collection and grants forbearance of principal and interest for
the period in which collection activity was suspended. The Secretary
may capitalize any interest accrued and not paid during that period.
(5) If the Secretary determines that a borrower who requests a
discharge meets the qualifications for a discharge, the Secretary
notifies the borrower in writing of that determination.
(6) 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.
(Authority: 20 U.S.C. 1087a et seq.)
Sec. 685.214 Discharge for false certification of student eligibility
or unauthorized payment.
(a) Basis for discharge--(1) False certification. The Secretary
discharges a borrower's (and any endorser's) obligation to repay a
Direct Loan in accordance with the provisions of this section if a
school falsely certifies the eligibility of the borrower (or the
student on whose behalf a parent borrowed) to receive the loan. The
Secretary considers a student's eligibility to borrow to have been
falsely certified by the school if the school--
(i) Certified the student's eligibility for a Direct Loan on the
basis of ability to benefit from its training and the student did not
meet the eligibility requirements described in 34 CFR part 668 and
section 484(d) of the Act, as applicable;
(ii) Signed the borrower's name on the loan application or
promissory note without the borrower's authorization; or
(iii) Certified the eligibility of a student who, because of a
physical or mental condition, age, criminal record, or other reason
accepted by the Secretary, would not meet the requirements for
employment (in the student's State of residence when the loan was
certified) in the occupation for which the training program supported
by the loan was intended.
(2) Unauthorized payment. The Secretary discharges a borrower's
(and any endorser's) obligation to repay a Direct Loan if the school,
without the borrower's authorization, endorsed the borrower's loan
check or signed the borrower's authorization for electronic funds
transfer, unless the proceeds of the loan were delivered to the student
or applied to charges owed by the student to the school.
(b) Relief pursuant to discharge. (1) Discharge for false
certification under paragraph (a)(1) of this section relieves the
borrower of any past or present obligation to repay the loan and any
accrued charges and collection costs with respect to the loan.
(2) Discharge for unauthorized payment under paragraph (a)(2) of
this section relieves the borrower of the obligation to repay the
amount of the payment discharged.
(3) The discharge under this section qualifies the borrower for
reimbursement of amounts paid voluntarily or through enforced
collection on the discharged loan or payment.
(4) The Secretary does not regard a borrower who has defaulted on a
loan discharged under this section as in default on the loan after
discharge, and such a borrower is eligible to receive assistance under
programs authorized by title IV of the Act.
(5) The Secretary reports the discharge under this section to all
credit reporting agencies to which the Secretary previously reported
the status of the loan.
(c) Borrower qualification for discharge. In order to qualify for
discharge under this section, the borrower shall submit to the
Secretary a written request and a 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 shall meet the requirements in paragraphs
(c) (1) through (5) of this section.
(1) Ability to benefit. In the case of a borrower requesting a
discharge based on the school's defective testing of the student's
ability to benefit, the borrower shall state that the borrower (or the
student on whose behalf a parent borrowed)--
(i) Received a disbursement of a loan to attend a school;
(ii) Received a Direct Loan at that school on the basis of an
ability to benefit from the school's training and did not meet the
eligibility requirements described in 34 CFR Part 668 and section
484(d) of the Act, as applicable; and
(iii) Either--
(A) Withdrew from the school and did not find employment in the
occupation for which the training program was intended; or
(B) Completed the training program for which the loan was made,
attempted to obtain employment in the occupation for which the program
was intended, and was not able to find employment in that occupation or
obtained employment in that occupation only after receiving additional
training that was not provided by the school that certified the loan.
(2) Unauthorized loan. In the case of a borrower requesting a
discharge because the school signed the borrower's name on the loan
application or promissory note without the borrower's authorization,
the borrower shall--
(i) State that he or she did not sign the document in question or
authorize the school to do so; and
(ii) Provide five different specimens of his or her signature, two
of which must be within one year before or after the date of the
contested signature.
(3) Unauthorized payment. In the case of a borrower requesting a
discharge because the school, without the borrower's authorization,
endorsed the borrower's loan check or signed the borrower's
authorization for electronic funds transfer, the borrower shall--
(i) State that he or she did not endorse the loan check or sign the
authorization for electronic funds transfer or authorize the school to
do so;
(ii) Provide five different specimens of his or her signature, two
of which must be within one year before or after the date of the
contested signature;
(iii) State that the proceeds of the contested disbursement were
not delivered to the student or applied to charges owed by the student
to the school.
(4) Claim to third party. The borrower shall state whether the
borrower (or student) has made a claim with respect to the school's
false certification or unauthorized payment 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 student)
or credited to the borrower's loan obligation.
(5) Cooperation with Secretary. The borrower shall state that the
borrower (or student)--
(i) Agrees to provide to the Secretary upon request other
documentation reasonably available to the borrower that demonstrates
that the borrower meets the qualifications for discharge under this
section; and
(ii) Agrees to cooperate with the Secretary in enforcement actions
as described in Sec. 685.213(d) and to transfer any right to recovery
against a third party to the Secretary as described in Sec. 685.213(e).
(d) Discharge procedures. (1) If the Secretary determines that a
borrower's Direct Loan may be eligible for a discharge under this
section, the Secretary mails the borrower a disclosure application and
an explanation of the qualifications and procedures for obtaining a
discharge. The Secretary also promptly suspends any efforts to collect
from the borrower on any affected loan. The Secretary may continue to
receive borrower payments.
(2) If the borrower fails to submit the written request and sworn
statement described in paragraph (c) of this section within 60 days of
the Secretary's mailing the disclosure application, the Secretary
resumes collection and grants forbearance of principal and interest for
the period in which collection activity was suspended. The Secretary
may capitalize any interest accrued and not paid during that period.
(3) If the borrower submits the written request and sworn statement
described in paragraph (c) of the section, the Secretary determines
whether to grant a request for discharge under this section by
reviewing the request and sworn statement in light of information
available from the Secretary's records and from other sources,
including guaranty agencies, State authorities, and cognizant
accrediting associations.
(4) If the Secretary determines that the borrower meets the
applicable requirements for a discharge under paragraph (c) of this
section, the Secretary notifies the borrower in writing of that
determination.
(5) If the Secretary determines that the borrower does not qualify
for a discharge, the Secretary notifies the borrower in writing of that
determination and the reasons for the determination.
(Authority: 20 U.S.C. 1087a et seq.)
Sec. 685.215 Consolidation.
(a) Direct Consolidation Loans. A borrower may consolidate one or
more education loans made under certain Federal programs into one or
more Direct Consolidation Loans. Loans consolidated into a Direct
Consolidation Loan are discharged when the Direct Consolidation Loan is
originated.
(b) Loans eligible for consolidation. The following loans may be
consolidated into a Direct Consolidation Loan:
(1) Federal Stafford Loans.
(2) Guaranteed Student Loans.
(3) Federal Insured Student Loans (FISL).
(4) Direct Subsidized Loans.
(5) Direct Subsidized Consolidation Loans.
(6) Federal Perkins Loans.
(7) National Direct Student Loans (NDSL).
(8) National Defense Student Loans (NDSL).
(9) Federal PLUS Loans.
(10) Parent Loans for Undergraduate Students (PLUS).
(11) Direct PLUS Loans.
(12) Direct PLUS Consolidation Loans.
(13) Federal Unsubsidized Stafford Loans.
(14) Federal Supplemental Loans for Students (SLS).
(15) Federal Consolidation Loans.
(16) Direct Unsubsidized Loans.
(17) Direct Unsubsidized Consolidation Loans.
(18) Auxiliary Loans to Assist Students (ALAS).
(19) Health Professions Student Loans (HPSL).
(20) Health Education Assistance Loans (HEAL).
(21) Other loans made under subpart II of part A of title VII of
the Public Health Service Act.
(c) Types of Direct Consolidation Loans. (1) The loans identified
in paragraphs (b)(1) through (8) of this section may be consolidated
into a Direct Subsidized Consolidation Loan.
(2) The loans identified in paragraphs (b)(9) through (12) of this
section may be consolidated into a Direct PLUS Consolidation Loan.
(3) The loans identified in paragraphs (b)(13) through (21) of this
section may be consolidated into a Direct Unsubsidized Consolidation
Loan.
(d) Eligibility for a Direct Consolidation Loan. (1) A borrower may
obtain a Direct Consolidation Loan if, at the time the borrower applies
for such a loan, the borrower meets the following requirements:
(i) The borrower either--
(A) Has an outstanding balance on a Direct Loan; or
(B) Has an outstanding balance on an FFEL loan and asserts either--
(1) That the borrower is unable to obtain an FFEL consolidation
loan; or
(2) That the borrower is unable to obtain an FFEL consolidation
loan with income-sensitive repayment terms acceptable to the borrower
and is eligible for the income contingent repayment plan under the
Direct Loan Program.
(ii) On the loans being consolidated, the borrower is--
(A) In an in-school period and seeks to consolidate loans made
under both the FFEL Program and the Direct Loan Program;
(B) In a six-month grace period;
(C) In a repayment period but not in default;
(D) In default but has made satisfactory arrangements to repay the
defaulted loan; or
(E) In default but agrees to repay the consolidation loan under the
income contingent repayment plan described in Sec. 685.208(f) and signs
the consent form described in Sec. 685.209(d)(5).
(iii) The borrower certifies that no other application to
consolidate any of the borrower's loans listed in paragraph (b) of this
section is pending with any other lender.
(iv) The borrower agrees to notify the Secretary of any change in
address.
(v) In the case of a Direct PLUS Consolidation Loan--
(A) The borrower may not have an adverse credit history as defined
in Sec. 685.200(b)(7)(ii); or
(B) If the borrower has such an adverse credit history, the
borrower shall obtain an endorser for the consolidation loan who does
not have an adverse credit history or provide documentation
satisfactory to the Secretary that extenuating circumstances relating
to the borrower's credit history exist.
(2) Two married borrowers may consolidate their loans together if
they meet the following requirements:
(i) At least one spouse meets the requirements of paragraph
(d)(1)(i) of this section.
(ii) Both spouses meet the requirements of paragraphs (d)(1)(ii)
through (v) of this section.
(iii) Each spouse agrees to be held jointly and severally liable
for the repayment of the total amount of the consolidation loan and to
repay the loan regardless of any change in marital status.
(e) Application for a Direct Consolidation Loan. To obtain a Direct
Consolidation Loan, a borrower or borrowers shall submit a completed
application to the Secretary. A single application may be used for one
or more consolidation loans. A borrower may add eligible loans to a
Direct Consolidation Loan by submitting a request to the Secretary
within 180 days after the date on which the Direct Consolidation Loan
is originated.
(f) Origination of a consolidation loan. (1) If the Secretary
approves an application for a consolidation loan, the Secretary pays to
each holder of a loan selected for consolidation the amount necessary
to discharge the loan. For a loan that is in default, the Secretary
limits collection costs that may be charged to the borrower to no more
than those authorized under the FFEL Program and may impose reasonable
limits on collection costs paid to the holder.
(2) Upon receipt of the proceeds of a Direct Consolidation Loan,
the holder of a consolidated loan shall promptly apply the proceeds to
fully discharge the borrower's obligation on the consolidated loan. The
holder of a consolidated loan shall notify the borrower that the loan
has been paid in full.
(3) The principal balance of a Direct Consolidation Loan is equal
to the sum of the amounts paid to the holders of the consolidated
loans.
(4) If the amount paid by the Secretary to the holder of a
consolidated loan exceeds the amount needed to discharge that loan, the
holder of the consolidated loan shall promptly refund the excess amount
to the Secretary to be credited against the outstanding balance of the
Direct Consolidation Loan.
(5) If the amount paid by the Secretary to the holder of the
consolidated loan is insufficient to discharge that loan, the holder
shall notify the Secretary in writing of the remaining amount due on
the loan. The Secretary promptly pays the remaining amount due.
(g) Interest rate. The interest rate on a Direct Subsidized
Consolidation Loan or a Direct Unsubsidized Consolidation Loan is the
rate established for Direct Subsidized Loans and Direct Unsubsidized
Loans under Sec. 685.202(a)(1). The interest rate on a Direct PLUS
Consolidation Loan is the rate established for Direct PLUS Loans under
Sec. 685.202(a)(2).
(h) Repayment plans. A borrower may repay a Direct Consolidation
Loan under any of the repayment plans described in Sec. 685.208, except
that--
(1) A borrower may not repay a Direct PLUS Consolidation Loan under
the income contingent repayment plan; and
(2) A borrower who became eligible to consolidate a defaulted loan
under paragraph (d)(1)(ii)(E) of this section shall repay the
consolidation loan under the income contingent repayment plan unless--
(i) The borrower was required to and did make a payment under the
income contingent repayment plan in each of the prior six months; and
(ii) The borrower makes and the Secretary approves a request to
change plans.
(i) Repayment period. (1) Except as noted in paragraph (i)(4) of
this section, the repayment period for a Direct Consolidation Loan
begins on the day the loan is disbursed.
(2) Under the extended or graduated repayment plan, the Secretary
determines the repayment period under Sec. 685.208(e) on the basis of
the outstanding balances on all of the borrower's loans that are
eligible for consolidation and the balances on other education loans
except as provided in paragraph (i)(3) of this section.
(3)(i) The total amount of outstanding balances on the other
education loans used to determine the repayment period under the
graduated or extended repayment plan may not exceed the amount of the
Direct Consolidation Loan.
(ii) The borrower may not be in default on the other education loan
unless the borrower has made satisfactory repayment arrangements with
the holder of the loan.
(iii) The lender of the other educational loan may not be an
individual.
(4) A Direct Consolidation Loan receives a grace period if it
includes a Direct Loan or FFEL Program loan for which the borrower is
in an in-school period at the time of consolidation. The repayment
period begins the day after the grace period ends.
(j) Repayment schedule. (1) The Secretary provides a borrower of a
Direct Consolidation Loan a repayment schedule before the borrower's
first payment is due. The repayment schedule identifies the borrower's
monthly repayment amount under the repayment plan selected.
(2) If a borrower adds an eligible loan to the consolidation loan
under paragraph (e) of this section, the Secretary makes appropriate
adjustments to the borrower's monthly repayment amount and repayment
period.
(k) Refunds received from schools. If a lender receives a refund
from a school on a loan that has been consolidated into a Direct
Consolidation Loan, the lender shall transmit the refund and an
explanation of the source of the refund to the Secretary within 30 days
of receipt.
(l) Special provisions for joint consolidation loans. The
provisions of paragraphs (l) (1) through (3) of this section apply to a
Direct Consolidation Loan obtained by two married borrowers.
(1) Deferment. To obtain a deferment on a joint Direct
Consolidation Loan under Sec. 685.204, both borrowers shall meet the
requirements of that section.
(2) Forbearance. To obtain forbearance on a joint Direct
Consolidation Loan under Sec. 685.205, both borrowers shall meet the
requirements of that section.
(3) Discharge. (i) To obtain a discharge of a joint Direct
Consolidation Loan under Sec. 685.212, each borrower shall meet the
requirements for one of the types of discharge described in that
section.
(ii) If a borrower meets the requirements for discharge under
Sec. 685.212 (d) or (e) on a loan that was consolidated into a joint
Direct Consolidation Loan and the borrower's spouse does not meet the
requirements for any type of discharge described in Sec. 685.212, the
Secretary discharges a portion of the consolidation loan equal to the
amount of the loan that would have been eligible for discharge under
the provisions of Sec. 685.212 (d) or (e), as applicable.
(Authority: 20 U.S.C. 1078-8, 1087a et seq.)
SUBPART C--REQUIREMENTS, STANDARDS, AND PAYMENTS FOR DIRECT LOAN
PROGRAM SCHOOLS
Sec. 685.300 Agreements between an eligible school and the Secretary
for participation in the Direct Loan Program.
(a) General. (1) Participation of a school in the Direct Loan
Program means that eligible students at the school may receive Direct
Loans. To participate in the Direct Loan Program, a school shall--
(i) Demonstrate to the satisfaction of the Secretary that the
school meets the requirements for eligibility under the Act and
applicable regulations; and
(ii) Enter into a written program participation agreement with the
Secretary.
(2) The chief executive officer of the school shall sign the
program participation agreement on behalf of the school.
(b) Program participation agreement. In the program participation
agreement, the school shall promise to comply with the Act and
applicable regulations and shall agree to--
(1) Identify eligible students who seek student financial
assistance at the institution in accordance with section 484 of the
Act;
(2) Estimate the need of each of these students as required by part
F of the Act for an academic year. For purposes of estimating need, a
Direct Unsubsidized Loan, a Direct PLUS Loan, or any loan obtained
under any State-sponsored or private loan program may be used to offset
the expected family contribution of the student for that year;
(3) Certify that the amount of the loan for any student under part
D of the Act is not in excess of the annual limit applicable for that
loan program and that the amount of the loan, in combination with
previous loans received by the borrower, is not in excess of the
aggregate limit for that loan program;
(4) Set forth a schedule for disbursement of the proceeds of the
loan in installments, consistent with the requirements of section 428G
of the Act;
(5) Provide timely and accurate information to the Secretary for
the servicing and collecting of loans--
(i) Concerning the status of student borrowers (and students on
whose behalf parents borrow) while these students are in attendance at
the school;
(ii) Upon request by the Secretary, concerning any new information
of which the school becomes aware for these students (or their parents)
after the student leaves the school; and
(iii) Concerning student eligibility and need, for the alternative
origination of loans to eligible students and parents in accordance
with part D of the Act;
(6) Provide assurances that the school will comply with
requirements established by the Secretary relating to student loan
information with respect to loans made under the Direct Loan Program;
(7) Provide that the school will accept responsibility and
financial liability stemming from its failure to perform its functions
pursuant to the agreement;
(8) Provide that eligible students at the school and their parents
may participate in the programs under part B of the Act at the
discretion of the Secretary for the period during which the school
participates in the Direct Loan Program under part D of the Act, except
that a student may not receive loans under both part D of the Act and
part B of the Act for the same period of enrollment and a parent
(borrowing for the same student) may not receive loans under both part
D of the Act and part B of the Act for the same period of enrollment;
(9) Provide for the implementation of a quality assurance system,
as established by the Secretary and developed in consultation with the
school, to ensure that the school is complying with program
requirements and meeting program objectives;
(10) Provide that the school will not charge any fees of any kind,
however described, to student or parent borrowers for origination
activities or the provision of any information necessary for a student
or parent to receive a loan under part D of the Act or any benefits
associated with such a loan; and
(11) Comply with other provisions that the Secretary determines are
necessary to protect the interests of the United States and to promote
the purposes of part D of the Act.
(c) Origination. (1) If a school or consortium originates loans in
the Direct Loan Program, it shall enter into a supplemental agreement
that--
(i) Provides that the school or consortium will originate loans to
eligible students and parents in accordance with part D of the Act ;
and
(ii) Provides that the note or evidence of obligation on the loan
is the property of the Secretary.
(2) The chief executive officer of the school shall sign the
supplemental agreement on behalf of the school.
(Authority: 20 U.S.C. 1087a et seq., 1094)
Sec. 685.301 Certification of a loan by a Direct Loan Program school.
(a) Determining eligibility and loan amount. (1) A school
participating in the Direct Loan Program shall ensure that any
information it provides to the Secretary in connection with loan
origination is complete and accurate. Except as provided in 34 CFR Part
668, subpart E, a school may rely in good faith upon statements made in
the application by the student.
(2) A school shall provide to the Secretary borrower information
that includes but is not limited to--
(i) The borrower's eligibility for a loan, as determined in
accordance with Secs. 685.200 and 685.203;
(ii) The student's loan amount; and
(iii) The anticipated and actual disbursement date or dates and
disbursement amounts of the loan proceeds.
(3) A school may not certify a Direct Subsidized, Direct
Unsubsidized, or Direct PLUS Loan, or a combination of loans, for an
amount that--
(i) The school has reason to know would result in the borrower
exceeding the annual or maximum loan amounts in Sec. 685.203; or
(ii) Exceeds the student's estimated cost of attendance less--
(A) The student's estimated financial assistance for that period;
and
(B) In the case of a Direct Subsidized Loan, the borrower's
expected family contribution for that period.
(4)(i) A school determines a Direct Subsidized or Direct
Unsubsidized Loan amount in accordance with Sec. 685.203 and the
definitions in 34 CFR 668.2 for the proration of loan amounts required
for undergraduate students.
(ii) When prorating a loan amount for a student enrolled in a
program of study with less than a full academic year remaining, the
school need not recalculate the amount of the loan if the number of
hours for which an eligible student is enrolled changes after the
school certifies the loan.
(5) A school may refuse to certify a Direct Subsidized, Direct
Unsubsidized, or Direct PLUS Loan or may reduce the borrower's
determination of need for the loan if the reason for that action is
documented and provided to the student in writing, and if--
(i) The determination is made on a case-by-case basis;
(ii) The documentation supporting the determination is retained in
the student's file; and
(iii) The school does not engage in any pattern or practice that
results in a denial of a borrower's access to Direct Loans because of
the borrower's race, gender, color, religion, national origin, age,
disability status, or income.
(6) A school may not assess a fee for the completion or
certification of any Direct Loan Program forms or information.
(b) Determining disbursement dates and amounts. (1) Before
disbursing a loan, a school that originates loans shall determine that
all information required by the loan application and promissory note
has been provided by the borrower and, if applicable, the student.
(2) Except as provided in paragraph (b)(3) of this section, a
school shall establish disbursement dates for any Direct Loan made for
a period of enrollment as follows:
(i) Except as provided in paragraph (b)(2)(iv) of this section,
disbursements must be in two or more installments.
(ii) No installment may exceed one-half the loan.
(iii) At least one-half of the loan period must elapse before the
second installment is disbursed except as necessary to permit the
second installment to be disbursed at the beginning of the next
semester, quarter, or similar division of the loan period.
(iv) If at least one-half of the loan period has elapsed when the
first disbursement is made, the loan may be disbursed in a single
installment.
(3) A school that is not in a State is not required to establish
disbursement dates under paragraph (b)(2) of this section.
(c) Promissory note handling. (1) The Secretary provides promissory
notes for use in the Direct Loan Program. A school may not modify, or
make any additions to, the promissory note without the Secretary's
prior written approval.
(2) A school that originates a loan shall provide to the Secretary
an executed, legally enforceable promissory note as proof of the
borrower's indebtedness.
(Authority: 20 U.S.C. 1087a et seq.)
Sec. 685.302 Schedule requirements for courses of study by
correspondence.
(a) This section contains requirements relating to the enrollment
status of students in schools that offer programs of study by
correspondence.
(b) A school that offers a course of study by correspondence shall
establish a schedule for submission of lessons by its students and
provide it to a prospective student prior to the student's enrollment.
(c) The school shall include in its schedule--
(1) A due date for each lesson in the course;
(2) A description of the options, if any, available to the student
for altering the sequence of lesson submissions from the sequence in
which they are otherwise required to be submitted;
(3) The date by which the course is to be completed; and
(4) The date by which any resident training must begin, the
location of any resident training, and the period of time within which
that resident training must be completed.
(Authority: 20 U.S.C. 1087a et seq.)
Sec. 685.303 Processing loan proceeds and counseling borrowers.
(a) Purpose. This section establishes rules governing a school's
processing of a borrower's Direct Subsidized, Direct Unsubsidized, or
Direct PLUS Loan proceeds, and for counseling borrowers. The school
shall also comply with any rules for processing loan proceeds contained
in 34 CFR Part 668.
(b) General.--(1)(i) A school that initiates the drawdown of funds.
A school may not disburse loan proceeds to a borrower unless the school
has obtained an executed, legally enforceable promissory note from the
borrower.
(ii) A school that does not initiate the drawdown of funds. A
school may disburse loan proceeds only to a borrower for whom the
school has received funds from the Secretary.
(2)(i) Except in the case of a late disbursement under paragraph
(d) of this section, or as provided in paragraph (b)(2)(iii) of this
section, a school may disburse loan proceeds only to a student whom the
school determines has continuously maintained eligibility in accordance
with the provisions of Sec. 685.200 from the beginning of the loan
period described in the promissory note.
(ii) If, after a school makes the first disbursement to a borrower,
the student becomes ineligible due solely to the school's loss of
eligibility to participate in the title IV programs or the Direct Loan
Program, the school may make subsequent disbursements to the borrower
as permitted by 34 CFR Part 668.
(iii) If, prior to making any disbursement to a borrower, the
student temporarily ceases to be enrolled on at least a half-time
basis, the school may make a disbursement and any subsequent
disbursement to the student if the school determines and documents in
the student's file--
(A) That the student has resumed enrollment on at least a half-time
basis;
(B) The student's revised cost of attendance; and
(C) That the student continues to qualify for the entire amount of
the loan, notwithstanding any reduction in the student's cost of
attendance caused by the student's temporary cessation of enrollment on
at least a half-time basis.
(3) If a registered student withdraws or is expelled prior to the
first day of classes of the period of enrollment for which the loan is
made, or fails to attend school during that period, or if the school is
unable for any other reason to document that the student attended
school during that period, the school shall notify the Secretary,
within 30 days of the date described in Sec. 685.304(a), of the
student's withdrawal, expulsion, or failure to attend school, as
applicable, and return to the Secretary--
(i) Any loan proceeds credited by the school to the student's
account; and
(ii) The amount of payments made by the student to the school, to
the extent that they do not exceed the amount of any loan proceeds
disbursed by the school to the student.
(4) If a student is enrolled in the first year of an undergraduate
program of study and has not previously received a Federal Stafford,
Federal Supplemental Loans for Students, Direct Subsidized, or Direct
Unsubsidized Loan, a school may not disburse the proceeds of a Direct
Subsidized or Direct Unsubsidized Loan until 30 days after the first
day of the student's program of study.
(c) Processing of the proceeds of a Direct Loan.--(1) Schools that
use student accounts. After a student has registered, a school that
uses student accounts shall--
(i) Credit the amount of the loan proceeds to the student's account
not more than 21 days prior to the first day of the period of
enrollment;
(ii) Notify the borrower in writing that it has so credited that
account; and
(iii) Make available to the borrower the remaining loan proceeds.
The school shall make remaining loan proceeds available to the borrower
no sooner than 10 days before the first day of the period of enrollment
and no later than 45 days after disbursement. For purposes of this
paragraph, the ``remaining loan proceeds'' means those proceeds that
remain after the allowable charges owed to the school by the student
have been satisfied.
(2) Schools that do not use student accounts. After a student has
registered, a school that does not use student accounts shall, no
sooner than 10 days before the first day of the period of enrollment,
disburse the loan to the borrower.
(3) Proceeds held for the benefit of a student. Upon the written
request of the student, the school, as a fiduciary for the benefit of
the student, may hold loan proceeds in order to assist the student in
managing his or her loan funds for the remainder of the academic year.
The school shall maintain these funds in a separate account established
solely for the purpose of holding students' funds and may not commingle
them with other funds or use them for any other purpose.
(d) Late disbursement. (1) For purposes of this paragraph, a
disbursement is late if the school delivers loan proceeds--
(i) After the loan period; or
(ii) Before the end of the loan period but after the student ceased
to be enrolled at the school on at least a half-time basis.
(2) Except as provided in paragraph (d)(4) of this section, a
school may not make any late disbursement beyond the 60th day after the
applicable condition in paragraph (d)(1) of this section.
(3) Notwithstanding paragraph (d)(4) of this section, a school may
not make--
(i) A late subsequent disbursement of a Direct Subsidized or Direct
Unsubsidized Loan to a borrower who has ceased to be enrolled on at
least a half-time basis unless the borrower has graduated or
successfully completed the period of enrollment for which the loan was
intended; or
(ii) Any late disbursement that, under 34 CFR Part 668, is
considered to be awarded for a period in which the student was not
enrolled on at least a half-time basis at the school.
(4) In exceptional circumstances, a school may make a disbursement
within 30 days after the period described in (d)(2) of this section. If
it does so, the school shall document the exceptional circumstances in
the student's file.
(e) Initial counseling. (1) Except as provided in paragraph (e)(5)
of this section, a school shall conduct initial counseling prior to
making the first disbursement of the proceeds of a Direct Subsidized or
Direct Unsubsidized Loan to a borrower unless--
(i) The borrower enrolled in a correspondence program or a study-
abroad program approved for credit at the home school; or
(ii) The borrower has received a prior Direct Subsidized, Direct
Unsubsidized, Federal Stafford, Federal Unsubsidized Stafford, or
Federal SLS Loan.
(2) The counseling must be in person, by audiovisual presentation,
or by computer-assisted technology. In each case, the school shall
ensure that an individual with knowledge of the title IV programs is
reasonably available shortly after the counseling to answer the
borrower's questions regarding those programs. In the case of a student
enrolled in a correspondence program or a study-abroad program approved
for credit at the home school, the school shall provide the borrower
with written counseling materials by mail prior to disbursing the loan
proceeds.
(3) In conducting the initial counseling, the school shall--
(i) Emphasize to the borrower the seriousness and importance of the
repayment obligation the borrower is assuming;
(ii) Describe in forceful terms the likely consequences of default,
including adverse credit reports, garnishment of wages, and litigation;
(iii) Provide the borrower with general information with respect to
the average indebtedness of students who have obtained Direct
Subsidized or Direct Unsubsidized Loans for attendance at that school
or in the borrower's program of study; and
(iv) Inform the student as to the average anticipated monthly
repayment for those students based on the average indebtedness provided
under paragraph (e)(2)(iii) of this section.
(4) Additional matters that the Secretary recommends that a school
include in the initial counseling session or materials are set forth in
Appendix D to 34 CFR Part 668.
(5) A school may adopt an alternative approach for initial
counseling as part of the school's quality assurance plan described in
Sec. 685.300(b)(9). If a school adopts an alternative approach, it is
not required to meet the requirements of paragraphs (e)(1)-(3) of this
section unless the Secretary determines that the alternative approach
is not adequate. The alternative approach must--
(i) Ensure that each borrower subject to initial counseling under
paragraph (e)(1) of this section receives written counseling materials
that contain the information described in paragraph (e)(3) of this
section;
(ii) Be designed to target those students who are most likely to
default on their repayment obligations and provide them more intensive
counseling and support services; and
(iii) Include performance measures that demonstrate the
effectiveness of the school's alternative approach.
(f) Exit counseling. (1) A school shall conduct in-person exit
counseling with each Direct Subsidized or Direct Unsubsidized Loan
borrower shortly before the borrower ceases at least half-time study at
the school, except that--
(i) In the case of a correspondence program, the school shall
provide the borrower with written counseling materials by mail within
30 days after the borrower completes the program; and
(ii) If the borrower withdraws from school without the school's
prior knowledge or fails to attend an exit counseling session as
scheduled, the school shall mail written counseling materials to the
borrower at the borrower's last known address within 30 days after the
school learns that the borrower has withdrawn from school or failed to
attend the scheduled session.
(2) In conducting the exit counseling, the school shall--
(i) Inform the student of the average anticipated monthly repayment
amount based on the student's indebtedness;
(ii) Review for the borrower available repayment options including
the standard repayment, extended repayment, graduated repayment, and
income contingent repayment plans, and loan consolidation);
(iii) Provide options to the borrower concerning those debt-
management strategies that the school determines would facilitate
repayment by the borrower;
(iv) Explain to the borrower how to contact the party servicing the
student's Direct Loans;
(v) Meet the requirements described in paragraphs (e)(3) (i) and
(ii) of this section;
(vi) Review with the borrower the conditions under which the
borrower may defer repayment or obtain cancellation of a loan; and
(vii) Require the borrower to provide corrections to the school's
records concerning name, address, social security number, references,
and driver's license number, as well as the name and address of the
borrower's expected employer (if known). The school shall provide this
information to the Secretary within 60 days.
(3) Additional matters that the Secretary recommends that a school
include in the exit counseling session or materials are set forth in
Appendix D to 34 CFR Part 668.
(4) The school shall maintain in the student borrower's file
documentation substantiating the school's compliance with paragraphs
(e) and (f) of this section as to that borrower.
(g) Treatment of excess loan proceeds. Before the disbursement of
any Direct Subsidized or Direct Unsubsidized Loan proceeds, if a school
learns that the borrower will receive or has received financial aid for
the period of enrollment for which the loan was intended that exceeds
the amount of assistance for which the student is eligible, the school
shall reduce or eliminate the overaward by either--
(1) Using the student's Direct Unsubsidized, Direct PLUS, or State-
sponsored or another non-Federal loan to cover the expected family
contribution, if not already done; or
(2) Reducing one or more subsequent disbursements to eliminate the
overaward.
(Authority: 20 U.S.C. 1087a et seq.)
Sec. 685.304 Determining the date of a student's withdrawal.
(a) A school shall follow the procedures in 34 CFR 668.22(i) in
determining the student's date of withdrawal.
(b) The school shall use the date determined under paragraph (a) of
this section for the purpose of reporting to the Secretary the
student's date of withdrawal and for determining when a refund must be
paid under Sec. 685.305.
(Authority: 20 U.S.C. 1087a et seq.)
Sec. 685.305 Payment of a refund to the Secretary.
(a) General. By applying for a Direct Loan, a borrower authorizes
the school to pay directly to the Secretary that portion of a refund
from the school that is allocable to the loan. A school--
(1) Shall pay that portion of the student's refund that is
allocable to a Direct Loan to the Secretary; and
(2) Shall provide simultaneous written notice to the borrower if
the school pays a refund to the Secretary on behalf of that student.
(b) Determination, allocation, and payment of a refund. In
determining the portion of a student's refund that is allocable to a
Direct Loan, the school shall follow the procedures established in 34
CFR 668.22 for allocating and paying a refund that is due.
(Authority: 20 U.S.C. 1087a et seq.)
Sec. 685.306 Withdrawal procedure for schools participating in the
Direct Loan Program.
(a) A school participating in the Direct Loan Program may withdraw
from the program by providing written notice to the Secretary.
(b) A participating school that intends to withdraw from the Direct
Loan Program shall give at least 60 days notice to the Secretary.
(c) Unless the Secretary approves an earlier date, the withdrawal
is effective on the later of--
(1) 60 days after the school notifies the Secretary; or
(2) The date designated by the school.
(Authority: 20 U.S.C. 1087a et seq.)
Sec. 685.307 Remedial actions.
(a) General. The Secretary may require the repayment of funds and
the purchase of loans by the school if the Secretary determines that
the unenforceability of a loan or loans, or the disbursement of loan
amounts for which the borrower was ineligible, resulted in whole or in
part from--
(1) The school's violation of a Federal statute or regulation; or
(2) The school's negligent or willful false certification.
(b) In requiring a school to repay funds to the Secretary or to
purchase loans from the Secretary in connection with an audit or
program review, the Secretary follows the procedures described in 34
CFR Part 668, Subpart H.
(c) The Secretary may impose a fine or take an emergency action
against a school or limit, suspend, or terminate a school's
participation in the Direct Loan Program in accordance with 34 CFR Part
668, Subpart G.
(Authority: 20 U.S.C. 1087a et seq.)
Sec. 685.308 Administrative and fiscal control and fund accounting
requirements for schools participating in the Direct Loan Program.
(a) General. A participating school shall--
(1) Establish and maintain proper administrative and fiscal
procedures and all necessary records as set forth in this part and in
34 CFR Part 668 in order to--
(i) Protect the rights of student and parent borrowers;
(ii) Protect the United States from unreasonable risk of loss; and
(iii) Comply with specific requirements in those regulations; and
(2) Submit all reports required by this part and 34 CFR Part 668 to
the Secretary.
(b) Student status confirmation reports. A school shall--
(1) Upon receipt of a student status confirmation report from the
Secretary, complete and return that report to the Secretary within 30
days of receipt; and
(2) Unless it expects to submit its next student status
confirmation report to the Secretary within the next 60 days, notify
the Secretary within 30 days if it discovers that a Direct Subsidized,
Direct Unsubsidized, or Direct PLUS Loan has been made to or on behalf
of a student who--
(i) Enrolled at that school but has ceased to be enrolled on at
least a half-time basis; or
(ii) Has been accepted for enrollment at that school but failed to
enroll on at least a half-time basis for the period for which the loan
was intended.
(3) The Secretary provides student status confirmation reports to a
school at least semi-annually.
(4) The Secretary may provide the student status confirmation
report in either paper or electronic format.
(c) Record retention requirements. Unless otherwise directed by the
Secretary, the school or its successors--
(1) Shall keep all records required under this part for five years
following the student's last day of attendance at the school;
(2) Shall keep copies of reports and other forms used by the school
relating to the Federal Direct Stafford, Federal Direct Unsubsidized
Stafford, or Federal Direct PLUS Loan Programs for five years after
completion;
(3) Shall keep all records involved in any loan, claim, or
expenditure questioned by a Federal audit until resolution of any audit
questions.
(4) In the event of the school's closure, termination, suspension,
or change in ownership resulting in a change of control as described in
34 CFR Part 600, shall provide for the retention of the records and
reports required by this part and for access by the Secretary or the
Secretary's authorized representatives to those records and reports for
inspection and copying; and
(5) May keep files, records, and copies of reports in microform or
other media formats.
(d) Loan record requirements. In addition to the records required
by 34 CFR Part 668, for each Direct Subsidized, Direct Unsubsidized,
and Direct PLUS Loan received under this part by or on behalf of its
students, a school shall maintain a copy of any application data
submitted to the Secretary and shall, upon request, produce a record
of--
(1) The amount of the loan and the loan period;
(2) The data in an individual student budget or the school's
itemized standard budget that were used in calculating the student's
estimated cost of attendance;
(3) The sources and amounts of financial assistance available to
the student that the school used in determining the student's estimated
financial assistance for the loan period in accordance with
Sec. 685.102;
(4) The amount of the student's tuition and fees paid for the loan
period and the date the student paid the tuition and fees;
(5) The amount and basis of its calculation of any refund paid to
or on behalf of a student;
(6) In the case of a Direct Subsidized Loan under Sec. 685.200, the
data used to determine the student's expected family contribution;
(7) In the case of a Direct Subsidized, Direct Unsubsidized, or
Direct PLUS Loan, the date of each disbursement of the loan.
(8) The information collected at the exit interview; and
(9) Any other matter for which a record would be required for the
school to be able to document its compliance with applicable
requirements with respect to the loan.
(e) Inspection requirements. Upon request, a school or its agent
shall cooperate with an independent auditor, the Secretary, the
Department of Education Office of Inspector General, and the
Comptroller General of the United States, or their authorized
representatives, in the conduct of audits, investigations, and program
reviews authorized by law. This cooperation must include--
(1) Providing timely access for examination and copying of the
records (including computerized records) required by the applicable
regulations and to any other pertinent books, documents, papers,
computer programs, and records; and
(2) Providing reasonable access to school personnel associated with
the school's administration of the programs under title IV of the Act
for the purpose of obtaining information relating to the school's
administration of the programs under title IV of the Act. In providing
reasonable access, the school may not--
(i) Refuse to supply any information regarding the school's
administration of the programs under title IV of the Act deemed
relevant by the Secretary;
(ii) Refuse to permit interviews with those personnel without the
presence of representatives of the school's management; and
(iii) Refuse to permit interviews with school personnel unless they
are recorded by the school.
(f) Information sharing. (1) Upon request by the Secretary, a
school promptly shall provide the Secretary with any information the
school has regarding the last known address, surname, employer, and
employer address of a borrower who attends or has attended the school.
(2) If the school discovers that a student who is enrolled and who
has received a Direct Subsidized or Direct Unsubsidized Loan has
changed his or her permanent address, the school shall notify the
Secretary.
(g) Accounting requirements. (1) A school shall establish and
maintain on a current basis financial records that reflect all
transactions for the bank account specified in paragraph (h)(1) of this
section. The school shall establish and maintain general ledger control
accounts and related subsidiary accounts that identify each program
transaction and separately account for those transactions.
(2) The school shall account for receiving and expending Direct
Loan Program funds in accordance with generally-accepted accounting
principles.
(h) Direct Loan Program bank account. (1) The school shall
establish and maintain a bank account as trustee for the Secretary and
the borrower for Direct Loan Program funds. The school shall notify the
bank in writing that the Direct Loan Program account contains Federal
funds. In addition, the school shall ensure that the word ``Federal''
is in the name of the school's Direct Loan Program account. Unless the
Secretary requires otherwise, the school's Direct Loan Program account
need not be a separate bank account.
(2) Any interest earned on Direct Loan Program funds deposited in
the school's account is considered Federal funds and must be returned
to the Secretary.
(i) Division of functions. A school shall divide the functions of
authorizing payments and disbursing funds to borrowers so that no
single office has responsibility for both functions under the Direct
Loan Program.
(j) Limit on use of funds. Except for funds paid to a school under
section 452(b)(1) of the Act, funds received by a school under this
part may be used only to make Direct Loans to eligible borrowers and
may not be used or hypothecated for any other purpose.
(Authority: 20 U.S.C. 1087a et seq.)
Subpart D--School Participation and Loan Origination in the Direct
Loan Program
Sec. 685.400 School participation requirements for academic years
1996-1997 and beyond.
(a) In order to participate in the Direct Loan Program, a school
must meet the eligibility requirements in section 435(a) of the Act,
including the requirement that it have a cohort default rate of less
than 25 percent for at least one of the three most recent fiscal years
for which data are available unless the school is exempt from this
requirement under section 435(a)(3)(C).
(b) In order to qualify for initial participation, the school must
not be subject to an emergency action or a proposed or final
limitation, suspension, or termination action under sections
428(b)(1)(T), 432(h), or 487(c) of the Act.
(c) If schools apply as a consortium, each school in the consortium
must meet the requirements in paragraphs (a) and (b) of this section.
(Authority: 20 U.S.C. 1087a et seq.)
Sec. 685.401 Selection criteria and process for academic years 1996-
1997 and beyond.
(a) The Secretary selects schools to participate in the Direct Loan
Program for an academic year beginning in 1996-1997 from among those
that apply to participate.
(b) In evaluating an application from an eligible school, the
Secretary--
(1) To the extent possible, selects schools that are reasonably
representative of the schools that are participating in the FFEL
Program in terms of anticipated loan volume, length of academic
program, control of the school, highest degree offered, size of student
enrollment, geographic location, annual loan volume, and default
experience; and
(2) In order to ensure an expeditious but orderly transition from
the FFEL Program to the Direct Loan Program, selects schools that the
Secretary believes will make the transition as smooth as possible.
(Authority: 20 U.S.C. 1087a et seq.)
Sec. 685.402 Criteria for schools to originate loans for academic
years 1996-1997 and beyond.
(a) Initial determination of origination status. (1) Standard
origination. Any school eligible to participate in the Direct Loan
Program under Sec. 685.400 is eligible to participate under standard
origination.
(2) School Origination. To be eligible to originate loans, a school
must meet the following criteria:
(i) Have participated in the Federal Perkins Loan Program or the
Federal Pell Grant Program or, for a graduate and professional school,
a similar program for the three most recent years preceding the date of
application to participate in the Direct Loan Program.
(ii) If participating in the Federal Pell Grant Program, not be on
the reimbursement system of payment.
(iii) In the opinion of the Secretary, have had no severe
performance deficiencies for any of the programs under title IV of the
Act, including deficiencies demonstrated by the most recent audit or
program review.
(iv) Be financially responsible in accordance with the standards of
34 CFR 668.15.
(v) Be current on program and financial reports and audits required
under title IV of the Act for the 12-month period immediately preceding
the date of application to participate in the Direct Loan Program.
(vi) Be current on Federal cash transaction reports required under
title IV of the Act for the 12-month period immediately preceding the
date of application to participate in the Direct Loan Program and have
no final determination of cash on hand that exceeds immediate title IV
program needs.
(vii) Have no material findings in any of the annual financial
audits submitted for the three most recent years preceding the date of
application to participate in the Direct Loan Program.
(viii) Provide an assurance that the school has no delinquent
outstanding debts to the Federal Government, unless--
(A) Those debts are being repaid under or in accordance with a
repayment arrangement satisfactory to the Federal Government; or
(B) The Secretary determines that the existence or amount of the
debts has not been finally determined by the cognizant Federal agency.
(3) A school that meets the criteria to originate loans may
participate under school origination option 1 or 2 or under standard
origination.
(b) Change in origination status. (1) After the initial
determination of a school's origination status, the Secretary may allow
a school that does not qualify to originate loans under either
origination option 1 or origination option 2 to do so if the Secretary
determines that the school is fully capable of originating loans under
one of those options.
(2)(i) At any time after the initial determination of a school's
origination status, a school participating under origination option 2
may request to change to origination option 1 or standard origination,
and a school participating under origination option 1 may request to
change to standard origination.
(ii) The change in origination status becomes effective when the
school receives notice of the Secretary's approval, unless the
Secretary specifies a later date.
(3)(i) A school participating under origination option 1 may apply
to participate under option 2, and a school participating in standard
origination may apply to participate under either origination option 1
or 2 after one full year of participation in its initial origination
status.
(ii) Applications to participate under another origination option
are considered on an annual basis.
(iii) An application to participate under another origination
option is evaluated on the basis of criteria and performance standards
established by the Secretary, including but not limited to--
(A) Eligibility under paragraph (a)(2) of this section;
(B) Timely submission of accurate origination and disbursement
records;
(C) Successful completion of reconciliation on a monthly basis; and
(D) Timely submission of completed and signed promissory notes, if
applicable.
(iv) The change in origination status becomes effective when the
school receives notice of the Secretary's approval, unless the
Secretary specifies a later date.
(c) Secretarial determination of change in origination status. (1)
At any time after a school has been approved to originate loans, the
Secretary may require a school participating under origination option 2
to convert to option 1 or to standard origination and may require a
school participating under origination option 1 to convert to standard
origination.
(2) The Secretary may require a school to change origination status
if the Secretary determines that such a change is necessary to ensure
program integrity or if the school fails to meet the criteria and
performance standards established by the Secretary, including but not
limited to--
(i) For an origination option 1 school, eligibility under paragraph
(a)(2) of this section, the timely submission of completed and signed
promissory notes and accurate origination and disbursement records, and
the successful completion of reconciliation on a monthly basis; and
(ii) For an origination option 2 school, the criteria and
performance standards required of origination option 1 schools and
accurate and timely drawdown requests.
(3) The change in origination status becomes effective when the
school receives notice of the Secretary's approval, unless the
Secretary specifies a later date.
(d) Origination by consortia. A consortium of schools may
participate under origination options 1 or 2 only if all members of the
consortium are eligible to participate under paragraph (a)(2) of this
section. All provisions of this section that apply to an individual
school apply to a consortium.
(e) School determination of change of Servicer. (1) The Secretary
assigns one or more Servicers to work with a school to perform certain
functions relating to the origination and servicing of Direct Loans.
(2) A school may request the Secretary to designate a different
Servicer. Documentation of the unsatisfactory performance of the
school's current Servicer must accompany the request. The Servicer
requested must be one of those approved by the Secretary for
participation in the Direct Loan Program.
(3) The Secretary grants the request if the Secretary determines
that--
(i) The claim of unsatisfactory performance is accurate and
substantial; and
(ii) The Servicer requested by the school can accommodate such a
change.
(4) If the Secretary denies the school's request based on a
determination under paragraph (e)(3)(ii) of this section, the school
may request another Servicer.
(5) The change in Servicer is effective when the school receives
notice of the Secretary's approval, unless the Secretary specifies a
later date.
(Authority: 20 U.S.C. 1087a et seq.)
Appendix A--Income Contingent Repayment
Examples of the Calculation of Monthly Repayment Amounts
Example 1. A single borrower with $12,500 of Direct Loans and an
Adjusted Gross Income (AGI) of $25,000.
Step 1: Under either Option 1 or Option 2, calculate the payback
rate. Because the borrower's debt is greater than $1,000, the
payback rate is calculated on the basis of the formula in
Sec. 685.209(b)(2)(iii), as follows:
Subtract $1,000 from the total amount of the borrower's
Direct Loans: ($12,500--$1,000 = $11,500).
Multiply the result by 0.000002: ($11,500 x 0.000002 =
0.023).
Add the result to 0.04: (0.04 + 0.023 = 0.063).
The result is the payback rate.
Step 2: Compare the calculated payback rate (0.063) to the
maximum payback rate (0.15). Because the calculated rate is less
than the maximum rate, the borrower's payback rate is 0.063.
Step 3: Calculate the annual repayment amount by multiplying the
borrower's AGI by the payback rate: ($25,000 x 0.063 = $1,575).
Step 4: Calculate the monthly repayment amount by dividing the
annual repayment amount by 12 months: ($1,575 12 =
$131.25).
Step 5: Compare the calculated monthly repayment amount
($131.25) to the $25 minimum repayment amount. Because the
calculated amount is greater than the minimum amount, the borrower's
monthly repayment amount is $131.25 under Option 1.
Step 6: If the borrower has chosen Option 2, compare the monthly
repayment amount under Option 1 ($131.25) to the amount the borrower
would repay under a 12-year standard amortization. The Secretary
calculates the 12-year standard amortization amount using the
interest rate in effect when the borrower chose Option 2. If the
interest rate was seven percent, the 12-year standard amortization
amount is approximately $10.28 for every $1,000 of debt. In this
example, the 12-year standard amortization amount is approximately
$128.50 ($10.28 x 12.5). Because the monthly payment calculated
under Option 1 ($131.25) exceeds the 12-year standard amortization
amount ($128.50), the borrower's monthly repayment amount is $128.50
under Option 2.
Example 2: Married borrowers with a combined Adjusted Gross
Income (AGI) of $30,000. The husband has $5,000 of Direct Loans. The
wife has $15,000 of Direct Loans. The couple has two dependents.
Step 1: Under either Option 1 or Option 2, calculate the
husband's payback rate. Because his debt is greater than $1,000, the
payback rate is calculated on the basis of the formula in
Sec. 685.209(b)(2)(iii) as follows:
Subtract $1,000 from the amount of the husband's loans:
($5,000--$1,000 = $4,000).
Multiply the result by 0.000002: ($4,000 x 0.000002 =
0.008).
Add the result to 0.04: (0.04+0.008=0.048).
The result is the husband's payback rate.
Step 2: Compare the husband's calculated payback rate (0.048) to
the maximum payback rate (0.15). Because the calculated rate is less
than the maximum rate, the husband's payback rate is 0.048.
Step 3: Calculate the husband's assumed AGI by multiplying the
couple's total AGI ($30,000) by the amount of the husband's loans
($5,000), divided by the total amount of the couple's debt
($20,000): ($30,000 x $5,000$20,000=$7,500).
Step 4: Calculate the husband's annual repayment amount by
multiplying the husband's assumed AGI ($7,500) by his payback rate
(0.048): ($7,500 x 0.048=$360).
Step 5: Divide the annual repayment amount by 12 months:
($36012=$30).
Step 6: Calculate the couple's total family size adjustment
amount by multiplying the number of dependents (2) by $7:
(2 x $7=$14).
Step 7: Calculate the couple's' individual family size
adjustment amounts by dividing the total family size adjustment
($14) by 2: ($142=$7).
Step 8: Calculate the husband's monthly repayment amount by
subtracting his family size adjustment amount ($7) from the amount
calculated in Step 5 ($30): ($30-$7=$23).
Step 9: Calculate the wife's payback rate. Because her debt is
greater than $1,000, the payback rate is calculated on the basis of
the formula in Sec. 685.209(b)(2)(iii) as follows:
Subtract $1,000 from the amount of the wife's loans:
($15,000-$1,000=$14,000).
Multiply the result by 0.000002:
($14,000 x 0.000002=0.028).
Add the result to 0.04: (0.04+0.028=0.068).
The result is the wife's payback rate.
Step 10: Compare the wife's calculated payback rate (0.068) to
the maximum payback rate (0.15). Because the calculated rate is less
than the maximum rate, the wife's payback rate is 0.068.
Step 11: Calculate the wife's assumed AGI by multiplying the
couple's total AGI ($30,000) by the amount of the wife's loans
($15,000), divided by the total amount of the couple's debt
($20,000): ($30,000 x $15,000$20,000=$22,500).
Step 12: Calculate the wife's annual repayment amount by
multiplying the wife's assumed AGI ($22,500) by her payback rate
(0.068): ($22,500 x 0.068=$1,530).
Step 13: Divide the annual repayment amount by 12 months:
($1,53012=$127.50).
Step 14: Calculate the wife's monthly repayment amount by
subtracting her family size adjustment amount calculated in Step 7
($7) from the amount calculated in Step 13 ($127.50):
($127.50-$7=$120.50).
Step 15: Calculate the couple's combined monthly repayment
amount by adding the husband's monthly repayment amount calculated
in Step 8 ($23) and the wife's monthly repayment amount calculated
in Step 14 ($120.50): ($23+$120.50=$143.50).
Step 16: Compare the couple's combined monthly repayment amount
($143.50) to the $25 minimum repayment amount. Because the
calculated amount is greater than the minimum amount, the couple's
combined monthly repayment amount is $143.50 under Option 1.
Step 17: If the couple has chosen Option 2, compare the combined
monthly repayment amount under Option 1 ($143.50) to the amount the
couple would repay under a 12-year standard amortization. The
Secretary calculates the 12-year standard amortization amount using
the interest rate in effect when the couple chose Option 2. If the
interest rate was seven percent, the 12-year standard amortization
amount is approximately $10.28 for every $1,000 of debt. In this
example, the 12-year standard amortization amount is approximately
$205.60 ($10.28 x 20). Because the monthly payment calculated under
Option 1 ($143.50) does not exceed the 12-year standard amortization
amount ($205.60), the couple's combined monthly repayment amount is
$143.50 under Option 2.
BILLING CODE 4000-01-P
TP18AU94.000
[FR Doc. 94-19733 Filed 8-17-94; 8:45 am]
BILLING CODE 4000-01-C
