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Final Rule: Direct Loan Origination Fee Reduction

FR part
IV
Attachments:
PublicationDate: 8/24/99
FRPart: IV
RegPartsAffected:
PageNumbers: 46251-46255
Summary: Final Rule: Direct Loan Origination Fee Reduction
CommentDueDate:

  
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[Federal Register: August 24, 1999 (Volume 64, Number 163)]
[Rules and Regulations]
[Page 46251-46255]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr24au99-18]


[[Page 46251]]

_______________________________________________________________________

Part IV





Department of Education





_______________________________________________________________________



34 CFR Part 685



William D. Ford Federal Direct Loan Program; Final Rule


[[Page 46252]]



DEPARTMENT OF EDUCATION

34 CFR Part 685

RIN 1840-AC68


William D. Ford Federal Direct Loan Program

AGENCY: Department of Education.

ACTION: Final regulations.

-----------------------------------------------------------------------

SUMMARY: The Secretary amends the regulations governing the William D.
Ford Federal Direct Loan (Direct Loan) Program. These amendments are a
result of recently enacted changes to the Higher Education Act of 1965,
as amended by the Higher Education Amendments of 1998. These final
regulations remove references to the phase-in of the Direct Loan
Program, update the loan interest rate formulas, and reflect the
Secretary's authority to charge reduced loan fees on Direct Subsidized
and Direct Unsubsidized Loans.

DATES: These regulations are effective August 24, 1999.

FOR FURTHER INFORMATION CONTACT:
Ms. Nicki Meoli, U.S. Department of Education, 400 Maryland Avenue,
SW., ROB-3, Room 3045, Washington, DC 20202-5346. Telephone: (202) 708-
8242. If you use a telecommunications device for the deaf (TDD), you
may call the Federal Information Relay Service (FIRS) at 1-800-877-
8339.
Individuals with disabilities may obtain this document in an
alternative format (e.g., Braille, large print, audiotape, or computer
diskette) on request to the contract person listed in the preceding
paragraph.

SUPPLEMENTARY INFORMATION: These regulations address changes made to
the Higher Education Amendments of 1998 (1998 Amendments) (Pub. L. 105-
244) that affect the Direct Loan Program. On June 16, 1999, the
Secretary published a notice of proposed rulemaking (NPRM) for the
Direct Loan Program in the Federal Register (64 FR 32358). In the
preamble to the NPRM, the Secretary discussed on pages 32359 and 32360
the following proposed changes:
<bullet> Amending Sec. 685.202(a) to include the interest rate
formulas that apply to Direct Subsidized, Direct Unsubsidized, and
Direct PLUS Loans that are first disbursed on or after October 1, 1998
and before July 1, 2003, and to Direct Consolidation Loans that are
first disbursed on or after July 1, 1998.
<bullet> Amending Sec. 685.202(c) to reflect that the Secretary
charges a loan fee on a Direct Subsidized or Direct Unsubsidized Loan
not to exceed four percent of the principal amount of the loan.
<bullet> Amending Sec. 685.211 to allow the Secretary to charge
borrowers reduced interest rates to encourage on-time loan repayment.
<bullet> Moving the school selection provisions in Sec. 685.401 to
Sec. 685.400 and removing Sec. 685.401 from the Direct Loan Program
regulations to delete all references to the phase-in of the Direct Loan
Program and the transition from the Federal Family Education Loan
(FFEL) Program to the Direct Loan Program.
The amendments to Secs. 685.202(a), 685.400, and 685.401 reflect
statutory changes that became effective on October 1, 1998, in
accordance with section 3 of the 1998 Amendments. The amendments to
Sec. 685.202(c) reflect the Secretary's interpretative rule with
respect to the 1998 Amendments that became effective upon its
announcement in the NPRM published on June 16, 1999.
In the preamble to the NPRM, the Secretary discussed amending
Sec. 685.211 to allow the Secretary to charge borrowers reduced
interest rates to encourage on-time loan repayment. This proposed
amendment is not included in these final regulations. Section 455(b)(7)
of the HEA includes certain requirements that must be met before final
regulations on this subject are published. For example, a report from
the Office of Management and Budget (OMB) on the cost neutrality of a
proposed repayment incentive must be submitted to Congress not less
than 60 days prior to publishing final regulations. At this time, the
OMB report has not been submitted to Congress. The Secretary will
publish final regulations for the repayment incentive provision once
the Department has complied with the applicable statutory requirements.

Analysis of Comments and Changes

In response to the Secretary's invitation in the NPRM, several
parties submitted comments on the proposed regulations. An analysis of
the comments and of the changes in the regulations since publication of
the NPRM follows.
We discuss substantive issues under the sections of the regulations
to which they pertain. Generally, we do not address technical and other
minor changes--and suggested changes the law does not authorize the
Secretary to make.

Interest Rates (Sec. 685.202(a)(3)(i)(E) and (ii)(D))

Comments: Commenters representing guaranty agencies, lenders, and
servicers in the FFEL Program submitted joint and individual comments
in which they requested that the Secretary provide further
clarification on the calculation of the interest rate on a Direct
Consolidation Loan for which the consolidation application is received
by the Secretary on or after February 1, 1999 and before July 1, 2003.
The commenters stated that there is confusion as to whether the Direct
Consolidation Loan interest rate calculation is the same as the
interest rate calculation for consolidation loans made under the FFEL
Program. The commenters also repeated the belief they stated during
negotiated rulemaking that the repayment period interest rate, rather
than the in-school, grace, or deferment period interest rate, always
should be used to calculate the weighted average interest rate on
consolidation loans made under the Direct Loan and FFEL programs.
Further, the commenters believe that Congress intended for the
repayment period interest rate to be used in all cases.
Discussion: As provided in section 455(b)(6)(D) of the HEA, the
interest rate on a Direct Consolidation Loan for which the
consolidation application is received by the Secretary on or after
February 1, 1999 and before July 1, 2003 is based on the weighted
average of the interest rates on the loans being consolidated, rounded
to the nearest higher one-eighth of one percent, not to exceed 8.25
percent. Section 427A(k)(4) of the HEA establishes the same interest
rate formula for consolidation loans made under the FFEL Program for
which the consolidation application is received by the lender on or
after October 1, 1998 and before July 1, 2003.
The Secretary believes that in both the Direct Loan and FFEL
programs, the weighted average interest rate should be calculated based
on the interest rates that apply to the loans being consolidated at the
time the loan holders complete the verification certificates. An
interest rate that is lower than the repayment period rate applies to
most subsidized and unsubsidized Direct Loan and FFEL program loans
during the in-school, grace, and deferment periods. If, for example, a
loan is in a grace period at the time the loan holder completes the
verification certificate, the lower grace period interest rate would be
used in the calculation of the weighted average interest rate on the
consolidation loan.
To do as the commenters have suggested and always use the repayment
period interest rate would mean that, in cases in which the loan being
consolidated is in an in-school, grace, or deferment period, the
weighted average

[[Page 46253]]

interest rate would be based on an interest rate that may never apply
to the loan and is speculative since it would not be known when that
loan would enter repayment. We know of no legal basis to support the
commenters' approach and do not agree that this was the intent of
Congress.
Change: None.

Loan Fees (Sec. 685.202(c)(1))

Comments: A number of commenters representing individual schools
and associations representing schools supported the Secretary's
proposed rule that would reflect the Secretary's authority to charge a
loan fee not to exceed four percent on a Direct Subsidized or Direct
Unsubsidized Loan. These commenters agreed with the Secretary's
interpretation of the statute as discussed in the NPRM.
A number of commenters representing guaranty agencies, lenders, and
services in the FFEL Program submitted joint and individual comments in
which they questioned the Secretary's legal authority for proposing to
amend the regulations to clarify that the Secretary may charge a loan
fee not to exceed four percent on a Direct Subsidized or a Direct
Unsubsidized Loan. The commenters argued that such a proposal was not
consistent with the HEA.
Discussion: The Secretary continues to believe that he has the
legal authority to charge a loan fee of less than four percent on the
same basis as lenders in the FFEL Program. The Secretary appreciates
the support provided by the commenters representing schools.
The loan fee in the Direct Loan Program is the equivalent of the
three percent loan origination fee and the one percent insurance
premium charged to borrowers in the FFEL Program. Prior to enactment of
the 1998 Amendments, the Secretary charged borrowers the full four
percent fee. This practice was generally consistent with the practice
in the FFEL Program. Some Lenders charged some borrowers less than the
full four percent but the HEA did not control this practice and lenders
had complete discretion to offer a lower fee to some borrowers and not
to others.
The 1998 Amendments made a significant change in the lender's
authority to charge a lower loan origination fee to some borrowers and
not others.
The 1998 Amendments made a significant change in the lender's
authority to charge a lower loan origination fee to some borrowers and
not others. The 1998 Amendments modified section 438(c)(2) of the HEA
to establish, for the first time, legally binding standards that must
be met for a lender to reduce loan origination fees charged to
borrowers in the FFEL Program. The HEA now requires lenders to provide
reduced loan origination fees to all borrowers or to borrowers who
demonstrate a greater financial need. The negotiated rulemaking
committee reached consensus on proposed regulations that established
national standards governing the reduction of loan fees. The creation
of these standards under the HEA make a reduced loan fee a term and
condition of the borrower's FFEL loans. A borrower now has a legal
basis to insist on equal treatment from the lender on loan fees,
including a lower fee, if the lender offers a lower fee to any other
borrowers.
Under section 455(a) of the HEA, Direct Loan Program loans made to
borrowers under the HEA ``shall have the same terms, conditions, and
benefits'' as FFEL Program loans unless otherwise specified. As
discussed above, the 1998 Amendments changed the HEA to modify the
terms, conditions, and benefits of FFEL Program loans in regard to the
charging of loan fees to borrowers. The Secretary believes that, under
section 455(a) of the HEA, Direct Loan borrowers are entitled to a
reduction in the loan fee under the same conditions as FFEL Program
borrowers. Thus, the Secretary will provide a lower loan fee in the
Direct Loan Program under the same conditions that govern a lender's
authority to charge a reduced loan fee in the FFEL Program.
Some commenters representing lenders, guaranty agencies, and
servicers in the FFEL Program argued that the authority to provide a
reduced loan fee does not apply to the Direct Loan Program because
section 455(c) of the HEA states that the Secretary ``shall'' charge a
loan fee of four percent. These commenters, however, ignore the fact
that their interpretation would cause a conflict between the language
in section 455(c) and the requirement in section 455(a) that loans made
under the Direct Loan Program ``shall'' have the same terms,
conditions, and benefits as loans made under the FFEL Program. The
commenters' interpretation would give borrowers in the FFEL Program a
reduced loan fee as a term of their loan, while denying the same
opportunity to borrowers in the Direct Loan Program. The Secretary is
required to interpret the statute as a whole to give meaning to all
statutory provisions. The Secretary's interpretation gives meaning to
the requirements in both sections 455(a) and 455(c). The Secretary also
notes that nothing in the 1998 Amendments or its legislative history
indicates that Congress intended to deny the opportunity for reduced
loan fees provided to FFEL Program borrowers to Direct Loan Program
borrowers. Accordingly, the Secretary declines to adopt the
interpretation proposed by these commenters.
In commenting on the proposed rule, some commenters argued that the
interpretation was inconsistent with prior interpretations of the word
``shall'' by the Secretary in other contexts. The examples provided by
these commenters are not inconsistent with the Secretary's proposed
rule in this case. In interpreting statutory language the Secretary is
required to interpret the statute as a whole. In other circumstances,
the Secretary has interpreted the word ``shall'' as denying any
discretion to the Secretary when the rest of the statute does not
support any other approach on a particular issue. As noted above,
however, in this case, the Secretary believes that the statute as a
whole supports the interpretation reflected in these regulations.
The commenters representing lenders, guaranty agencies, and
servicers in the FFEL Program also argued that the Secretary should
only implement a reduced loan fee in the Direct Loan Program when the
HEA is changed to provide for a reduced loan fee in both programs.
These comments, however, are based on a misunderstanding of the
Secretary's position. The proposed rule simply applies the same new
statutory provision governing reduced loan fees to borrowers in the
Direct Loan Program that now applies to borrowers in the FFEL Program
under section 438(c) (2) of the HEA. Thus, the Secretary's
interpretation and proposed rule results in equal treatment of
borrowers in both programs. In contrast, failing to apply the new rule
to the Direct Loan Program would deny Direct Loan borrowers an
opportunity for a reduced loan fee that is now guaranteed by statute in
the FFEL Program.
In addition, we note that any statutory reduction in the fee would
benefit the lender, not necessarily the borrower. The lender is
required to pay the fee in the FFEL Program to the Secretary and may
choose to pass the fee on to the borrower as permitted by section
438(b)(2) of the HEA. Competition in the FFEL Program has already led
many lenders to offer borrowers reduced loan fees, which in turn
reduces the lenders; revenues from those borrowers. Reducing the fee in
the statute would simply increase the lender's profits by reducing the
fee the lender is required to pay without necessarily reducing fees
charged to borrowers.
Change: None.

[[Page 46254]]

Executive Order 12866

We have reviewed these final regulations in accordance with
Executive Order 12866. Under the terms of this order, we have assessed
the potential costs and benefits of this regulatory action.
The potential costs associated with the final regulations are those
resulting from statutory requirements and those we have determined as
necessary for administering this program effectively and efficiently.
In assessing the potential costs and benefits--both quantitative
and qualitative--of these final regulations, we have determined that
the benefits of the regulations would justify the costs.
We have also determined that this regulatory action would not
unduly interfere with State, local, and tribal governments in the
exercise of their governmental functions.
We summarized the potential costs and benefits of these final
regulations in the preamble to the NPRM on page 32360.

Paperwork Reduction Act of 1995

These regulations do not contain any information collection
requirements.

Assessment of Educational Impact

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

Electronic Access to This Document

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Education documents published in the Federal Register, in text or Adobe
Portable Document Format (PDF) on the Internet at either of the
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http://ocfo.ed.gov/fedreg.htm
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Note: The official version of this document is the document
published in the Federal Register. Free Internet access to the
official edition of the Federal Register and the Code of Federal
Regulations is available on GPO Access at:

http://www.access.gpo.gov/nara/index.html

(Catalog of Federal Domestic Assistance Number 84.268 William D.
Ford Federal Direct Loan Program.)

List of Subjects in 34 CFR Part 685

Administrative practice and procedure, Colleges and universities,
Education, Loan programs-education, Student aid, Vocational education.

Dated: August 13, 1999.
Richard W. Riley,
Secretary of Education.
For the reasons discussed in the preamble, the Secretary amends
title 34 of the Code of Federal Regulations by amending part 685 as
follows:

PART 685--WILLIAM D. FORD FEDERAL DIRECT LOAN PROGRAM

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

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

2. Section 685.202 is amended by revising paragraphs (a) and (c)
(1) to read as follows:


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) Loans first disbursed before July 1,
1995. During all periods, 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) Loans first disbursed on or after July 1, 1995 and before July
1, 1998. (A) During the in-school, grace, and deferment periods. 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.
(B) During all other periods. 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.
(iii) Loans first disbursed on or after July 1, 1998. (A) During
the in-school, grace, and deferment periods. 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 1.7
percentage points, but does not exceed 8.25 percent.
(B) During all other periods. 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 2.3 percentage points,
but does not exceed 8.25 percent.
(2) Interest rate for Direct PLUS Loans. (i) Loans first disbursed
before July 1, 1998. During all periods, the interest rate 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.
(ii) Loans first disbursed on or after July 1, 1998. During all
periods, the interest rate 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 91-
day Treasury bills auctioned at the final auction held prior to that
June 1 plus 3.1 percentage points, but does not exceed 9 percent.
(3) Interest rate of Direct Consolidation Loans. (i) Interest rate
for Direct Subsidized Consolidation Loans and Direct Unsubsidized
Consolidation Loans. (A) Loans first disbursed before July 1, 1995. The
interest rate is the rate established for Direct Subsidized Loans and
Direct Unsubsidized Loans in paragraph (a)(1)(i) of this section.
(B) Loans first disbursed on or after July 1, 1995 and before July
1, 1998. The interest rate is the rate established for Direct
Subsidized Loans and Direct Unsubsidized Loans in paragraph (a)(1)(ii)
of this section.
(C) Loans for which the first disbursement is made on or after July
1, 1998 and prior to October 1, 1998, and loans for which the
disbursement is

[[Page 46255]]

made on or after October 1, 1998 for which the consolidation
application was received by the Secretary before October 1, 1998. The
interest rate is the rate established for District Subsidized Loans and
Direct Unsubsidized Loans in paragraph (a)(1)(iii) of this section.
(D) Loans for which the consolidation application is received by
the Secretary on or after October 1, 1998 and before February 1, 1999.
During all periods, 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 2.3 percentage points, but does
not exceed 8.25 percent.
(E) Loans for which the consolidation application is received by
the Secretary on or after February 1, 1999. During all periods, the
interest rate is based on the weighted average of the interest rates on
the loans being consolidated, rounded to the nearest higher one-eighth
of one percent, but does not exceed 8.25 percent.
(ii) Interest rate for Direct PLUS Consolidation Loans. (A) Loans
first disbursed before July 1, 1998. The interest rate is the rate
established for Direct PLUS Loans in paragraph (a)(2)(i) of this
section.
(B) Loans for which the first disbursement is made on or after July
1, 1998 and prior to October 1, 1998, and loans for which the
disbursement is made on or after October 1, 1998 for which the
consolidation application was received by the Secretary before October
1, 1998. The interest rate is the rate established for Direct PLUS
Loans in paragraph (a)(2)(ii) of this section.
(C) Loans for which the consolidation application is received by
the Secretary on or after October 1, 1998 and before February 1, 1999.
During all periods, 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 2.3 percentage points, but does
not exceed 8.25 percent.
(D) Loans for which the consolidation application is received by
the Secretary on or after February 1, 1999. During all periods, the
interest rate is based on the weighted average of the interest rates on
the loans being consolidated, rounded to the nearest higher one-eighth
of one percent, but does not exceed 8.25 percent.
* * * * *
(c) * * *
(1)(i) Charges a borrower a loan fee not to exceed four percent of
the principal amount of the loan on a Direct Subsidized or Direct
Unsubsidized Loan; and
(ii) Charges a borrower a loan fee of four percent of the principal
amount of the loan on a Direct PLUS Loan.
* * * * *
3. Section 685.400 is amended by adding a new paragraph (d) to read
as follows:


Sec. 685.400 School participation requirements.

* * * * *
(d) The Secretary selects schools to participate in the Direct Loan
Program from among those that apply to participate and meet the
requirements in paragraphs (a)(1), (b), and (c) of this section.


Sec. 685.401 [Removed]

4. Section 685.401 is removed and reserved.

[FR Doc. 99-21957 Filed 8-23-99; 8:45 am]
BILLING CODE 4000-01-M




]

Last Modified: 10/26/1999