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Final Rule: Federal Perkins Loan Program

FR part
VII
Attachments:
PublicationDate: 10/28/99
FRPart: VII
RegPartsAffected:
PageNumbers: 58297-58315
Summary: Final Rule: Federal Perkins Loan Program
CommentDueDate:

  
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[


[Federal Register: October 28, 1999 (Volume 64, Number 208)]
[Rules and Regulations]
[Page 58297-58315]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28oc99-15]


[[Page 58297]]

_______________________________________________________________________

Part VII





Department of Education





_______________________________________________________________________



34 CFR Part 674



Federal Perkins Loan Program; Final Rule


[[Page 58298]]



DEPARTMENT OF EDUCATION

34 CFR Part 674

RIN 1845-AA05


Federal Perkins Loan Program

AGENCY: Department of Education.

ACTION: Final regulations.

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

SUMMARY: The Secretary amends the Federal Perkins Loan Program
regulations. The regulations implement changes to the Higher Education
Act of 1965, as amended (HEA), resulting from the Higher Education
Amendments of 1998 (1998 Amendments). These final regulations reflect
the provisions of the 1998 Amendments that affect the institutions that
participate in, and borrowers who have loans made under, the Federal
Perkins Loan Program. These final regulations expand borrower benefits
under the Federal Perkins Loan program by increasing loan limits,
expanding borrower eligibility for deferments and cancellations,
establishing a loan rehabilitation program for borrowers in default on
their Federal Perkins Loans, establishing an incentive repayment
program, and providing a closed school discharge.

DATES: Effective Date: These regulations are effective July 1, 2000.
Implementation Date: The Secretary has determined, in accordance
with section 482(c)(2)(A) of the HEA, that institutions that
participate in the Federal Perkins Loan Program may, at their
discretion, choose to implement the provisions of Secs. 674.2,
674.5(c), 674.9, 674.16, 674.33(f), 674.41, 674.42, and 674.45 in these
final regulations, on or after October 28, 1999. For further
information see ``Implementation Date of These Regulations'' under the
SUPPLEMENTARY INFORMATION: Section of this preamble.

FOR FURTHER INFORMATION CONTACT: Gail McLarnon, Program Specialist,
Program Development Division, Office of Student Financial Assistance,
400 Maryland Avenue, SW, ROB-3, Room 3045, Washington, D.C. 20202-5449.
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 contact person listed in the preceding
paragraph.

SUPPLEMENTARY INFORMATION: These regulations implement the Higher
Education Amendments of 1998 (Pub. L. 105-244), enacted October 7,
1998.
On July 29, 1999, the Secretary published a notice of proposed
rulemaking (NPRM) for the Federal Perkins Loan Program regulations in
the Federal Register (64 FR 41231). In the preamble to the NPRM, the
Secretary discussed the following major proposed changes:
Amending Sec. 674.2 to add a definition of the term ``satisfactory
repayment arrangements'' (page 41233).
Amending Sec. 674.5 to establish, effective with award year 2000-
2001, a default penalty of zero Federal Capital Contribution for
institutions with a cohort default rate of 25 percent or higher and a
new default penalty that terminates the eligibility of an institution
to participate in the Federal Perkins Loan Program if the institution
has a cohort default rate of 50 percent or higher for the three most
recent years for which data are available. The Secretary also discussed
amending Sec. 674.5 to allow an institution to exclude certain loans
from its cohort default rate calculation (pages 41233-41234).
Removing and reserving Sec. 674.7 in accordance with the
elimination of the Expanded Lending Option.
Amending Sec. 674.9 to authorize the use of the same criteria that
remove a borrower from an institution's cohort default rate to re-
establish a borrower's eligibility for additional Federal Perkins Loans
(pages 41234-41235).
Amending Sec. 674.12 to increase annual maximum loan amounts and
increase the aggregate maximum loan amounts allowable for an eligible
student to levels formerly authorized under the Expanded Lending Option
(page 41235).
Amending Secs. 674.16, 674.31, and 674.45 to update and clarify
credit bureau reporting requirements with which an institution must
comply (page 41235 and page 41238).
Amending Sec. 674.31 to exclude from a borrower's initial grace
period any period, not to exceed three years, during which a borrower
who is a member of an Armed Forces reserve component is called or
ordered to active duty (page 41235).
Amending Sec. 674.33 to authorize institutions to establish an
incentive repayment program to reduce defaults and replenish their
Federal Perkins Loan revolving fund. Also amending Sec. 674.33 to
establish a closed school discharge for Federal Perkins Loan borrowers
who are unable to complete their programs of study due to an
institution's closure (pages 41235-41236).
Amending Sec. 674.34 to extend the deferment benefits in this
section to all borrowers regardless of the terms of the borrower's
promissory note or when the loan was made (page 41236).
Amending Sec. 674.39 to require institutions to establish a loan
rehabilitation program for all defaulted Federal Perkins Loan borrowers
(pages 41236-41237).
Amending Secs. 674.41, 674.42 and 674.45 to require that
institutions participating in the Federal Perkins Loan Program provide
borrowers with information on the availability of the Student Loan
Ombudsman's office (pages 41237-41238).
Amending Sec. 674.42 to facilitate the use of electronic means in
providing personalized exit counseling and make exit counseling
requirements in the Federal Perkins Loan Program consistent with those
in the Federal Direct Loan and the Federal Family Education Loan
Programs (pages 41237-41238).
Amending Sec. 674.47 to authorize an institution, until July 1,
2002, to charge its revolving fund for any collection costs assessed on
a rehabilitated loan that are in excess of the 24 percent maximum limit
that may be passed along to the borrower (page 41238).
Amending Sec. 674.49 to reflect changes made to section 523(a)(8)
of the Bankruptcy Code that eliminate a borrower's ability to have a
student loan discharged on the ground that the loan has been in
repayment for seven years or more (page 41238).
Amending Secs. 674.53, 674.56, 674.57, 674.58, and 674.60 to extend
the cancellation benefits authorized by these sections, for eligible
service performed on or after October 7, 1998, to all borrowers with a
loan made under the Federal Perkins Loan program regardless of the date
the loan was made or the terms of the borrower's promissory note (pages
41238-41239).

Implementation Date of These Regulations

Section 482(c) of the Higher Education Act of 1965, as amended (20
U.S.C. 1089(c)) requires that regulations affecting programs under
title IV of the Act be published in final form by November 1 prior to
the start of the award year in which they apply. However, that section
also permits the Secretary to designate any regulation as one that an
entity subject to the regulation may choose to implement earlier. If
the Secretary designates a regulation for early implementation, he may
specify when and under what conditions the entity may implement it.
Under this authority, the Secretary has

[[Page 58299]]

designated the following regulations for early implementation:
Section 674.2--Upon publication, institutions may implement the
``satisfactory repayment arrangements'' as defined in this provision.
Section 674.5(c)(3)--Upon publication, institutions may exclude
certain loans from its cohort default rate calculation.
Section 674.9--Upon publication, institutions may use the criterion
that removes a borrower from its cohort default rate to re-establish a
borrower's eligibility for Perkins Loans.
Sections 674.16, 674.31 and 674.45--Upon publication, institutions
may implement the credit bureau reporting requirements contained in
these sections.
Section 674.33(f)--Upon publication, institutions may implement
incentive repayment programs.
Sections 674.41, 674.42 and 674.45--Upon publication, institutions
may provide borrowers with information on the availability of the
Student Loan Ombudsman's office.
These final regulations contain changes from the NPRM that are
explained in the Analysis of Comments and Changes that follow.

Analysis of Comments and Changes

The regulations in this document were developed through the use of
negotiated rulemaking. Section 492 of the Higher Education Act requires
that, before publishing any proposed regulations to implement programs
under Title IV of the Act, the Secretary obtain public involvement in
the development of the proposed regulations. After obtaining advice and
recommendations, the Secretary must conduct a negotiated rulemaking
process to develop the proposed regulations. All proposed regulations
must conform to agreements resulting from the negotiated rulemaking
process unless the Secretary reopens that process or explains any
departure from the agreements to the negotiated rulemaking
participants.
These regulations were published in proposed form on July 29, 1999,
in conformance with the consensus of the negotiated rulemaking
committee. Under the committee's protocols, consensus meant that no
member of the committee dissented from the agreed-upon language. The
Secretary invited comments on the proposed regulations by September 15,
1999, and several comments were received. An analysis of the comments
and of the changes in the proposed regulations 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.

General Comment

Comment: We received 28 comments on the Federal Perkins Loan
Program NPRM published July 29, 1999. The comments were generally
supportive. However, one commenter stated that any changes made by the
Secretary in the Federal Perkins Loan program final regulations that
represent a substantive departure from the proposed regulations
published on July 29, 1999, would be viewed as a failure to honor the
consensus reached by Committee II, a violation of the good faith with
which members of Committee II engaged in negotiated rulemaking and
would be detrimental to future negotiations.
Discussion: The 1998 Amendments amended section 492 of the HEA to
require that all Title IV proposed regulations be subject to the
negotiated rulemaking process. While this change requires the Secretary
to publish proposed regulations that conform to agreements resulting
from a negotiated rulemaking process, the 1998 Amendments did not
change the process by which final regulations are promulgated. All
proposed regulations continue to be subject to a public comment period,
as required by the Administrative Procedure Act, and may be changed as
a result of our full and careful consideration of the comments we
receive from the public on an NPRM, regardless of agreements reached on
proposed regulations during the negotiated rulemaking process.

Section 674.2 Definitions

Comment: One commenter expressed the view that the proposed
definition of ``satisfactory repayment arrangements,'' which requires
the borrower to make six on-time, consecutive, monthly payments on a
defaulted loan to re-establish Title IV HEA eligibility, should specify
how an institution determines the amount of the six monthly payments
the borrower must make.
Discussion: The concept of satisfactory repayment arrangements is
not new to the Federal Perkins Loan Program. The Federal Perkins Loan
program regulations have contained a definition of satisfactory
repayment arrangements since July 1, 1995. The regulatory definition
required that a defaulted borrower either repay the loan in full, or
execute a new written repayment agreement and make one payment each
month for six consecutive months to re-establish title IV eligibility.
We disagree that the regulations should specify how an institution
determines the amount of the six monthly payments the borrower must
make to re-establish Title IV eligibility. However, it has been our
long-standing interpretation that the institution would calculate the
amount due for each of the six payments consistent with an overall
payment schedule that would allow the borrower to satisfy the
outstanding balance on the loan in the time remaining in the original
10-year repayment period. The new written repayment agreement
facilitated this calculation.
A similar definition of satisfactory repayment arrangements was
codified in law by the 1998 Amendments but does not contain the
requirement that the borrower execute a new written repayment agreement
when making satisfactory repayment arrangements. Regardless of that
fact, it remains our interpretation that in determining the amount of
the six payments a borrower must make to re-establish Title IV
eligibility, an institution must calculate a payment amount consistent
with a payment schedule that satisfies the total amount due on the loan
within the time remaining in the original ten-year repayment period,
especially absent statutory language in the 1998 Amendments that
specifies that the monthly payment amount as determined by the
institution be reasonable and affordable based on the borrower's total
financial circumstances, as is the case in the Federal Family Education
Loan (FFEL) and the William D. Ford Federal Direct Loan (Direct Loan)
programs. We believe the definition of satisfactory repayment
arrangements, as proposed, is the best reflection of both the statute
and our long-standing interpretation of the payment amount required by
a borrower.
Changes: None.

Section 674.5 Federal Perkins Loan Program cohort default rate and
penalties

Comment: One commenter objected to the elimination of the graduated
default penalties imposed on institutions with cohort default rates
that equal or exceed 20, 25, or 30 percent or more in favor of one
default penalty of zero if an institution's cohort default rate equals
or exceeds 25 percent. The commenter felt that this change creates a
disincentive for institutions to collect on defaulted loans.
Discussion: We appreciate the commenter's concern. However, the
elimination of the graduated default penalties is required by the 1998

[[Page 58300]]

Amendments. The final regulations reflect this statutory change.
Changes: None.
Comment: We received several comments regarding Sec. 674.5(a)(2),
which reflects a new default penalty that terminates an institution's
eligibility to participate in the Federal Perkins Loan Program if it
has a cohort default rate of 50 percent or higher for the three most
recent years for which data are available. One commenter recommended
that we specify in regulation that an institution's cohort default rate
must equal or exceed 50 percent for each of the three most recent
``consecutive'' years for which cohort default data is available. One
commenter suggested that the regulation clearly state that an
institution does not lose eligibility to participate in the Federal
Perkins Loan program if, upon appealing a determination of
ineligibility, any one of the three rates used to make that
determination is found to be below 50 percent. Lastly, one commenter
suggested that we clarify in the regulations that an institution loses
its eligibility to participate only in the Federal Perkins Loan program
if its Perkins Loan cohort default rates meet the criteria set forth in
this section.
Discussion: We do not agree that the word ``consecutive'' should be
added to the regulatory language. Although the regulations do not
contain the word ``consecutive'' in describing the three years of
cohort default data that will be used by the Secretary to make a
determination of ineligibility, it is our intent to use consecutive
year cohort default rate data as long as it is available. However, we
believe that a requirement that we use consecutive year data could
prevent the Department from making a determination of ineligibility,
thus thwarting legislative intent, if either the Department or an
institution is unable to calculate an institution's cohort default rate
in any given year because of unforeseen circumstances. We believe that
language requiring the use of an institution's cohort default rate data
for each of the three most recent years for which data are available
better reflects statutory intent.
As to the request for clarification regarding the appeals process
and the loss of Federal Perkins Loan program eligibility, the language
in Sec. 674.5(a)(2)(i)(A) clearly states that an institution will not
lose eligibility if, as a result of an appeal, any one of the three
cohort rates used to make a determination of ineligibility is below 50
percent. We also note that the language in Sec. 674.5(a)(2) also
clearly states that an institution loses eligibility to participate
only in the Federal Perkins Loan program.
Changes: None.
Comment: Two commenters objected to the elimination of the
provision allowing an institution to exclude improperly serviced loans
from its cohort default rate.
Discussion: The elimination of this provision reflects a 1998
Amendments change. This provision had the perverse effect of rewarding
an institution for its, or its servicer's, lack of due diligence in
servicing and collecting its Perkins Loans by allowing the institution
to remove defaulted borrowers from its cohort default rate.
Changes: None.
Comment: We received several comments regarding the exclusion of
borrowers from an institution's cohort default rate in
Sec. 674.5(c)(3)(i). One commenter suggested that borrowers who are
considered paid-in-full as a result of a small balance write-off of
their loan under Sec. 674.47(h) be referenced in
Sec. 674.5(c)(3)(i)(C). One commenter urged us to add language allowing
a school to exclude from its cohort default rate calculation all
borrowers who have filed for bankruptcy and are in a stay of
collection. Lastly, one commenter suggested that Sec. 674.5(c)(3)(i)(D)
be clarified to state that the borrower's status must be less than 240-
or 270-days past due as a result of receiving a deferment or
forbearance.
Discussion: We agree that adding a reference to borrowers whose
loans have been written off under Sec. 674.47(h) would add clarity to
the regulations. However, we believe this addition is more
appropriately added in Sec. 674.5(c)(3)(ii)(D).
We disagree with the commenter who believes that all borrowers who
have filed for bankruptcy and are in a stay of collections should be
excluded from an institution's cohort default rate calculation. During
the required stay of collection, a loan is considered to be in a
suspended status. It does not continue to age, although interest
continues to accrue for which the borrower is responsible. If a
borrower files a bankruptcy petition that includes a defaulted Perkins
loan that has not reached a 240- or 270-day past due status, the loan
will retain its pre-240-or 270-day status and will be excluded from the
calculation of a school's cohort rate until the bankruptcy proceeding
has concluded. If the borrower includes a defaulted loan that is more
than 240 or 270 days past due, the loan will retain its more than 240-
or 270-day past due status and be included in the calculation of the
school's cohort default rate. While we realize that an institution is
unable to contact the borrower during a stay of collections, we believe
that the time to work those accounts and perform the due diligence
necessary to return the borrower to repayment is before the borrower
becomes 240 or 270 days past due.
We do not agree that additional language specifying that a
deferment or forbearance must bring the borrower to a pre-240- or 270-
day status is necessary. As currently drafted, the regulations allow
the institution to exclude a borrower from its cohort calculation if
the borrower has ``received a deferment or forbearance based on a
condition that predates the borrower reaching a 240- or 270-day past
due status.'' The addition of language specifying that the deferment or
forbearance has brought the borrower to a pre-240- or 270-day status is
unnecessary.
Changes: A reference to loans repaid in full in accordance with
Sec. 674.47(h) has been added to Sec. 674.5(c)(3)(ii)(D).
Comment: Several commenters objected to the proposal that payments
obtained through income tax offset, wage garnishment, income or asset
execution, or pursuant to a judgment should not be considered voluntary
payments for the purpose of removing borrowers from an institution's
cohort default rate calculation if the borrower voluntarily makes six
consecutive payments or voluntarily makes all payments currently due.
One commenter stated that our definition of voluntary payments is
unnecessarily harsh and that all payments, regardless of how they are
made, should be considered voluntary. One commenter noted that a
borrower's payments are not guaranteed by a judgment--a school must
still work the account to ensure that payments are made. The commenter
also noted that many borrowers consider payments obtained through
income tax offset to take the place of regularly scheduled payments
that the borrower is already making on their own.
Discussion: We disagree that payments obtained through income tax
offset, garnishment, income or asset execution, or pursuant to a
judgment should be considered voluntary payments made by the borrower
in order to remove a borrower whose loans are brought current or who
has made six consecutive monthly payments from an institution's cohort
default rate calculation. Generally, payments obtained by these methods
are automatically deducted from the borrower's Federal or state tax
refund,

[[Page 58301]]

wages, or assets and the borrower has no control or choice in the
payment process. We continue to believe that the initiation of court
action to obtain payment on a defaulted loan represents last resort due
diligence efforts on the part of the school. Payments obtained through
this process would not have been obtained otherwise and cannot be
considered voluntary. While we recognize that a school may have to work
to collect the payments due on some judgment accounts, the required
payments are nonetheless made as a result of a court order. Further,
borrowers have no control over a payment applied to their defaulted
loan as a result of income tax offset regardless of the fact that the
borrower may already be making payments.
Changes: None.

Section 674.9 Student Eligibility

Comment: One commenter felt strongly that restoring eligibility for
a Federal Perkins Loan to a borrower who meets any of the criteria that
would remove him or her from an institution's cohort default rate
calculation is bad public policy.
Discussion: Although the return of Federal Perkins Loan eligibility
to a borrower who meets any of the criteria that remove him or her from
an institution's cohort default rate calculation represents a
significant departure from past policy, this is a statutory requirement
enacted as part of the 1998 Amendments.
Changes: None.
Comment: One commenter strongly supported our definition of
``voluntary'' payments for the purpose of a borrower re-establishing
eligibility for a Perkins Loan under this section.
Discussion: We appreciate the support of the commenter and believe
it is an important condition to re-establishing eligibility.
Changes: None.
Comment: One commenter suggested that we quantify in
Sec. 674.9(i)(1) what amount a payment made ``over and above'' a
payment made pursuant to a judgment must be to qualify as a voluntary
payment when a school enters into a repayment agreement with the
borrower on a judgment. For example, if a school has entered into an
agreement with a borrower that requires $50 monthly payments to satisfy
a judgment, what payment amount ``over and above'' the $50 payment
would a borrower be required to make in order for his or her payment to
be considered voluntary? The commenter believed that specific language
would clarify the conditions a borrower must satisfy to re-establish
eligibility.
Discussion: We do not believe that further clarification of the
definition of voluntary payment for the purpose of re-establishing a
defaulted borrower's eligibility for Federal Perkins Loans is
necessary. However, a payment that is generally equal to the payment
the borrower is required to make pursuant the judgment will satisfy the
definition of voluntary in this section. We believe an approach that
treats borrowers consistently and precludes situations in which one
borrower might be required to make small payments while another
borrower might be required to make large payments over and above
payments made pursuant to a judgment is an important consideration when
re-establishing eligibility.
In almost all cases, the terms of a judgment make the whole
obligation due in full immediately, and any monthly payment arrangement
that arises is solely by agreement between the borrower and the school.
In some cases, the borrower and the school negotiate a repayment
arrangement that is subsequently incorporated in a consent judgment. A
school is free to agree to any monthly payment that it considers
reasonable in such an agreed judgment or in a repayment agreement to
satisfy a judgment. Therefore, we would consider payments over and
above the amount owed under the judgment itself or the repayment
agreement already reached to satisfy that judgment to be voluntary
payments for purposes of reestablishing eligibility for new student
aid. This level of payment not only represents a good faith effort on
the part of the borrower to repay the debt in a manner that is neither
required nor automatic, but also represents a good faith effort on the
part of the school to replenish its revolving fund and responsibly
administer the Federal Perkins Loan Program.
Using the above example, if a school has entered into an agreement
with a borrower that requires $50 monthly payments on a judgment, we
would consider a borrower that makes payments of at least $50 to be
making voluntary payments.
Changes: None.
Comment: One commenter objected to having one definition of
``voluntary'' payments for re-establishing a borrower's eligibility for
Federal Perkins Loans and another definition of ``voluntary'' payments
in order to determine which borrowers can be excluded from an
institution's cohort default rate. The commenter felt that the
definition of voluntary payments should be consistent within the
program regulations.
Discussion: We disagree that the definition of ``voluntary''
payments must be consistent within the program regulations. Denying a
borrower access to additional student financial assistance has far more
serious consequences than excluding that borrower from an institution's
cohort default rate. The negotiators agreed that cutting off a
borrower's access to Federal Perkins Loans had the potential to
prohibit the borrower from furthering his or her education, securing
employment and honoring his or her student loan obligations. The
negotiators also agreed that a borrower who made payments over and
above the payments made on a judgment was making a good faith effort to
repay the debt and that those efforts should be recognized.
Changes: None.
Comment: One commenter felt that language restricting the
definition of ``voluntary'' payments to those payments made directly by
the borrower was too restrictive and that payments made on behalf of
the borrower should be included as well.
Discussion: We disagree with the commenter that payments made on
behalf of the borrower should be included in the definition of
voluntary payments for the purpose of re-establishing a defaulted
borrower's eligibility for Federal Perkins Loans. Payments made on
behalf of the borrower are not payments made directly by the borrower
and are payments over which the borrower has no control or choice.
Payments made in this manner cannot be considered voluntary in this
context.
Changes: None.

Section 674.12 Loan Maximums

Comment: All of the comments we received on the new increased loan
maximums and the use of the aggregate unpaid balance in determining a
borrower's eligibility for additional loans under the Federal Perkins
Loan Program were supportive.
Changes: None.

Section 674.16 Making and disbursing loans

Comment: Several commenters supported language in this section that
requires an institution to report to at least one national credit
bureau information concerning the repayment and collection of the loan
until the loan is paid in full. One commenter believed that it would be
a violation of the Fair Credit Reporting Act (FCRA), however, for an
institution to report on the loan until it is paid in full. Several
commenters urged the Secretary to work

[[Page 58302]]

with the Federal Trade Commission to amend the FCRA to require consumer
reporting agencies to make reports containing credit information
regarding the status of a borrower's Federal Perkins Loan until the
loan is paid in full rather than for seven years as currently required
under the FCRA.
Discussion: The general requirement that an institution report on
the status of the loan to a consumer reporting agency until it is paid
in full is not a new requirement under section 463 of the HEA. The 1998
Amendments did change this section of the HEA and codified many of the
credit bureau reporting requirements that institutions have been
required to perform for some time. We should also note that it is not
now, and has not been, a violation of the FCRA for a consumer reporting
agency to accept and disseminate information on a loan until the loan
is paid in full; it was, prior to the 1998 Amendments to section 463, a
violation of the FCRA for a consumer reporting agency to make reports
for certain purposes that contain adverse information on accounts for
more than seven years from the date of the adverse event reported. (The
1998 Amendments to section 463 the HEA give credit reporting agencies
the option to make reports containing adverse credit information until
the loan is paid in full; they do not require it.)
We will pursue opportunities to work with the Federal Trade
Commission as they arise to amend the FCRA in ways that support and
strengthen the repayment of Title IV student loans.
Changes: None.

Section 674.31 Promissory Note

Comment: One commenter noted that the promissory note used in the
Federal Perkins Loan Program does not reflect the new provision in this
section that excludes any period during which a borrower who is a
member of a reserve component of the Armed Forces named in section
10101 of Title 10, United States Code is called or ordered to active
duty for a period of more than 30 days from the borrower's initial
grace period. The commenter requests that we clarify our intentions
with regard to the development of a new Federal Perkins Loan promissory
note.
Discussion: We appreciate the commenter's concern regarding the
development of a promissory note that contains terms and conditions
that reflect the changes made to the HEA by the 1998 Amendments. We
plan to develop, as soon as possible after the publication of final
regulations, an addendum to the Federal Perkins Loan program promissory
note now in use that reflects the new provisions of the 1998
Amendments. The development of a new promissory note will follow. Until
an addendum or a new note is developed, however, we would note that
institutions must comply with the changes made to the HEA by the 1998
Amendments and that the promissory notes contained in CB-96-8 and CB-
93-9 are legally valid documents.
Changes: None.

Section 674.33 Repayment

(Note: In this and other sections of the regulations in Part 674,
the holder of a loan may be the Secretary or a non-Federal party. In
these cases, requirements are written in the present indicative,
rather than using the word ``must.'' However, we intend these
provisions to be mandatory, regardless of who holds the loan.)

Comment: Several commenters objected to the requirement that the
institution reimburse its revolving fund for any money lost to its fund
that otherwise would have been paid by the borrower if the borrower had
not received one of the repayment incentive discounts described in this
section. The commenters felt that the Secretary should pay for
incentive repayment discounts or that the revolving fund should absorb
the cost of any incentive repayment that an institution may extend to
its borrowers.
Discussion: The 1998 Amendments prohibit an institution from using
Federal funds, including Federal funds from an institution's revolving
fund, or institutional funds from the revolving fund to pay for any
repayment incentive.
Changes: None.
Comment: One commenter, while supporting repayment incentives in
general, believed that the regulations should allow an institution to
factor in administrative savings in reimbursing its revolving fund for
any money lost due to incentive repayment discounts that otherwise
would have been paid by the borrower. The commenter felt that the
purpose of repayment incentives is to encourage prompt repayments
without increasing, and perhaps even lowering, the administrative costs
to the revolving fund.
Discussion: We appreciate the commenter's desire to reflect the
administrative savings generated by borrowers who pay the loan in full
prior to the end of the repayment period or who make regular
consecutive payments for 48 months, thereby offsetting an institution's
required reimbursement of money lost to its revolving fund. However, we
believe it would take a statutory change to reflect those savings in
the regulations.
Changes: None.
Comment: One commenter felt that offering repayment incentives to
borrowers who repay their loans in a timely fashion does nothing to
help needy borrowers, the intended beneficiaries of the Federal Perkins
Loan program, who may be struggling to repay their loans.
Discussion: While we appreciate the concerns expressed by the
commenter regarding borrowers who may be struggling to repay their
Federal Perkins Loan, the provision allowing institutions to offer
incentive repayment discounts to borrowers who repay their loans timely
is statutory and voluntary on the institution's part. Additionally, we
believe that incentives encourage borrowers to repay in full, or to
begin or maintain repayment on a regular basis, thereby replenishing an
institution's revolving fund and making more money available to the
needy individuals for whom Federal Perkins Loans are intended.
Changes: None.

Section 674.34 Deferment of repayment--Federal Perkins loans, National
Direct Student loans and Defense loans

Comment: One commenter suggested that the final regulations be
revised to extend the Federal Perkins Loan program deferments contained
in statute prior to July 1, 1993 to borrowers who are currently
eligible only for the deferments contained in section 464(c)(2)(A) of
the HEA. The commenter believed that making this change would simplify
the deferment process for borrowers and institutions and reduce the
amount of paperwork that the deferment process requires.
Discussion: We are sympathetic to the commenter's suggestion.
However, we are unable to revise the regulations to expand the
deferments available to Federal Perkins Loan borrowers because it is
beyond the scope of the 1998 Amendments change to the HEA and would
require additional statutory change.
Changes: None.

Section 674.39 Loan Rehabilitation

Comment: We received many comments on the new loan rehabilitation
provisions in this section. Many commenters questioned aspects of loan
rehabilitation that are required by statute. Other commenters asked
only for clarification regarding the rehabilitation process without
objecting to or requesting revisions to the regulations.
Discussion: We cannot address requests for revisions to the
proposed regulations that are inconsistent with

[[Page 58303]]

the statute. We believe it is helpful to review the aspects of loan
rehabilitation in the Perkins Loan Program that relate to borrower
benefits and institutional responsibilities that are required by law,
and therefore cannot be changed.
Under the 1998 Amendments, a defaulted loan is considered
rehabilitated if ``the borrower of a loan made under this part who has
defaulted on the loan'' makes the required 12 payments. Accordingly,
loan rehabilitation is available to all defaulted borrowers with a loan
made under the Federal Perkins Loan Program. If a borrower requests
loan rehabilitation, the institution or its servicer must allow the
borrower to rehabilitate his or her loan. This also applies to
defaulted loans that an institution has placed with a collection
agency. However, the borrower may only rehabilitate a defaulted loan
once. Because the statute specifically refers to a stream of 12
payments as determined by the institution, the institution must work
with the borrower to determine a payment amount that is appropriate.
The statute does not require a signed rehabilitation agreement.
In accordance with the 1998 Amendments, once the loan is
rehabilitated (after the 12th payment has been made), the institution
or its servicer must request that any credit bureau to which the
defaulted loan was reported remove the default from the borrower's
credit history. The borrower is brought current and is no longer
considered to be delinquent or in default. Removing the default is
consistent with the requirements of the Fair Credit Reporting Act
(FCRA), which requires that an institution correct and update the
information it furnishes to a credit reporting agency. In this case,
the institution would be updating the borrower's credit history to
reflect the rehabilitation of the loan. The FCRA also requires credit
reporting agencies to have reasonable procedures in place to accept
updated or corrected information.
Once the loan is rehabilitated, the borrower is subject to the
terms, conditions, benefits and privileges of the borrower's original
promissory note. This includes eligibility for deferments, forbearance,
cancellations, and flexible repayment options. The borrower is also
subject to the same responsibilities under the note, which include, but
are not limited to, making regular payments and informing the school or
servicer of an address change or the need for flexible repayment
arrangements. We sum up this status by saying the borrower is returned
to regular repayment status in Sec. 674.39(b)(1) of the regulations.
Finally, in accordance with the 1998 Amendments, a borrower who has
rehabilitated his or her loan re-establishes eligibility for Title IV
student financial assistance, as long as the borrower is otherwise
eligible.
Changes: None.
Comment: One commenter requested clarification regarding when an
institution must notify a defaulted borrower of the option and
consequences of rehabilitating the loan. The commenter also asked us to
specifically state what the consequences of loan rehabilitation are in
the Federal Perkins Loan Program.
Discussion: An institution has several opportunities under the
requirements in Subpart C-Due Diligence of the Federal Perkins Loan
Program to notify a defaulted borrower of his or her option to
rehabilitate. We will not regulate prescriptively in this area and will
leave the timing of that notification to the institution. Clearly,
however, once a borrower has begun to miss payments, the billing
procedures in Sec. 674.43 require an institution to contact the
borrower to demand payment. A notification of the option and the
consequences of loan rehabilitation can be included as part of any or
all of these payment demands. We believe that this notification should
be made no later than the final demand for payment required by
Sec. 674.43(d). Further, notification regarding the option and
consequences of loan rehabilitation should also be provided during the
more intensive efforts an institution, or its servicer, makes to
recover amounts owed on a defaulted loan under Sec. 674.45. Regardless
of the timing of the notification and regardless of whether the
institution is servicing the loan or a billing or collection agency is
servicing the loan, the borrower may request rehabilitation of his or
her defaulted loan at any time. Additionally, although the proposed
regulations require that an institution notify only a defaulted
borrower, institutions are encouraged to include information regarding
loan rehabilitation as part of the disclosures regarding the definition
and consequences of default required when making and disbursing a loan
under Sec. 674.16(a)(1)(x) and when conducting exit counseling under
Sec. 674.42(b)(2)(v).
The consequences of rehabilitating a defaulted loan of which the
borrower should be advised include returning the borrower to regular
repayment status, treating the first payment made under the twelve
consecutive payments as the first payment in a new repayment period of
up to 10 years, instructing any credit bureau to which the default was
reported to remove the default from the borrower's credit history, and
the re-establishment of the borrower's eligibility for Title IV student
financial assistance, provided that the borrower is otherwise eligible.
Changes: None.
Comment: Several commenters requested clarification regarding
whether or not a borrower must request loan rehabilitation. One
commenter suggested that we revise the regulations to require that the
borrower contact the institution prior to the first of the twelve
payments so that the institution can work with the borrower to assure
their successful rehabilitation.
Discussion: We agree that a borrower must notify the institution of
his or her desire to rehabilitate a defaulted loan and believe this is
implicitly stated in the regulations in describing rehabilitation as
the making of 12 consecutive on-time, consecutive, monthly payments
``as determined by the institution.'' However, in order to avoid
confusion and add clarity to this section, we have amended the
regulations to require a request from the borrower. We note, however,
that we are not specifying that the borrower's request be written nor
that the borrower's request precede the 12 consecutive on-time, monthly
payments.
Changes: We are adding the phrase ``and the borrower requests
rehabilitation,'' to Sec. 674.39(a)(2).
Comment: One commenter requested clarification regarding whether a
revised repayment schedule is required for a rehabilitated loan.
Discussion: We will not specify in regulations that an institution
must prepare a revised repayment agreement for a rehabilitated
borrower. However, institutions are required under Sec. 674.39(b)(2) to
treat the first payment made under the 12 consecutive payments as the
first payment under a new repayment period of up to 10 years. Servicing
a rehabilitated loan in a manner consistent with program regulations
would appear to necessitate a revised repayment agreement to ensure a
borrower's successful repayment. We believe that a new revised
repayment agreement is probably in the best interests of both the
school and the borrower.
Changes: None.
Comment: One commenter requested clarification regarding when an
institution may begin counting payments made by a borrower toward the
rehabilitation of the borrower's defaulted loan. The commenter asked if
only payments made on or after the

[[Page 58304]]

effective date of the final regulations (July 1, 2000) may be counted
toward the 12 payments the borrower is required to make in order to
rehabilitate a defaulted loan or if payments made before the effective
date of the final regulations may be counted toward the rehabilitation.
Discussion: An institution may count payments made before July 1,
2000, toward the 12 on-time, monthly payments the borrower must make to
rehabilitate a defaulted Federal Perkins Loan as long as at least one
of the 12 payments is made on or after the July 1, 2000, effective date
of the final regulations.
Changes: None.
Comment: One commenter recommended that we revise the regulations
to prohibit a borrower from rehabilitating a defaulted Federal Perkins
Loan on which a judgment has been rendered because the judgment has
taken the place of the original promissory note as the debt instrument.
Discussion: We disagree that the regulations should be revised to
prohibit borrowers from rehabilitating a defaulted loan on which a
judgment has been rendered. We interpret section 464(h) of the HEA to
require that a rehabilitation program must be available to all
defaulted borrowers even if the institution has secured a judgment
against the borrower. This is consistent with the statutory
interpretation of loan rehabilitation in both the FFEL and Federal
Direct Loan Programs. However, we share the commenter's concern that
the promissory note already signed by the borrower in these cases no
longer embodies that borrower's obligations with respect to the debt.
Therefore, the borrower of a defaulted loan on which a judgment has
been entered must sign a new promissory note that incorporates
outstanding principal after making the 12 on-time, consecutive, monthly
payments required by rehabilitation. In addition to the amount of the
new promissory note, the borrower is responsible for interest and late
charges that accrued while the borrower was in default. The borrower is
also subject to the same 24 percent limit on collection costs once the
loan has been rehabilitated.
Changes: We have amended Sec. 674.39 by adding a new paragraph
(a)(3) to require a defaulted borrower to sign a new promissory note if
the institution has a judgment against the borrower.
Comment: Several commenters objected to extending a new ten-year
repayment period to rehabilitated borrowers because it would delay the
replenishment of the institution's revolving fund and is inequitable to
other Federal Perkins Loan borrowers. One commenter recommended that a
borrower be required to repay the outstanding balance on a
rehabilitated loan in the remaining time left in the borrower's
original ten-year repayment period. Further, this commenter felt that
if the borrower's original ten-year repayment period had elapsed, the
borrower should be required to repay the defaulted loan in full in the
twelve payments that constitute rehabilitation.
Discussion: The point of rehabilitation is to return the borrower
to regular repayment on a defaulted loan to ensure successful payment
in full. We do not believe that rehabilitating a borrower's loan only
to encourage redefault by establishing an unreasonable repayment
schedule is within the intent of the rehabilitation program. Further, a
successful post-rehabilitation payment returns money to an
institution's revolving fund and reduces costs associated with default
collections. The extension of a new repayment period of up to 10 years,
which assumes minimum monthly payments in some cases, is also
consistent with the rehabilitation provisions in the Federal Family
Education Loan and the Federal Direct Loan Programs.
Changes: None.
Comment: One commenter asked whether an institution may shorten a
rehabilitated borrower's repayment period by requiring a minimum
monthly payment.
Discussion: An institution may require a borrower to pay a minimum
monthly payment on a rehabilitated loan only if the institution
required a minimum monthly payment under the borrower's original
promissory note and the payment amount due on the rehabilitated loan is
less than the minimum monthly payment. This does not preclude the
borrower and the institution from agreeing to a monthly repayment
amount on a rehabilitated loan that repays the loan in less than 10
years if the institution did not exercise the minimum monthly payment
option in the original note. As stated earlier, a new repayment period
of up to 10 years, assuming a minimum monthly payment in some cases, is
extended to a rehabilitated borrower to ensure that the borrower
successfully rehabilitates the loan.
Changes: None.
Comment: One commenter supported the provision returning the
benefits and privileges of the original promissory note to the
rehabilitated borrower, but believed that the regulations should
reflect the borrower's eligibility only for the remaining balance of
those privileges under the statutory maximums contained in the HEA. For
example, if a borrower had received one year of forbearance before
rehabilitating the loan, the borrower would be eligible for only two
years of forbearance after rehabilitation.
Discussion: We agree that the borrower is eligible only for the
statutory maximums on benefits available under the original promissory
note and that language reflecting this change would improve the clarity
of the regulations.
Changes: Section 674.39(d) has been changed to specify that the
borrower regains eligibility for the balance of benefits and privileges
available under the original promissory note.
Comment: Several commenters requested clarification regarding
whether an institution must require the return of a rehabilitated loan
from a collection agency after receipt of the required 12 consecutive
monthly payment amounts.
One commenter, noting the borrower's return to regular repayment
status, the return of all of the benefits and privileges of the
original promissory note, and the borrower's ability to request
flexible repayment options, stated that collection agencies typically
focus only on collecting the total amount of any debt placed with it
and not on servicing loans in regular repayment status. The commenter
stated that the return of these benefits would suggest the return of
the account to the institution.
Discussion: The issue of whether a loan may remain with a
collection agency after rehabilitation was discussed during negotiated
rulemaking. Committee II reached consensus on the rehabilitation
provisions in this section with the understanding that an institution
may allow a rehabilitated loan to remain with a collection agency.
The institution is responsible for insuring that any third party
servicer with which it contracts is in compliance with required
statutory and regulatory program requirements, which would include the
requirements of rehabilitation in the Federal Perkins Loan program. If
the institution chooses to leave the rehabilitated account with a
collection agency, the collection agency must provide the rehabilitated
borrower with all of the benefits associated with loan rehabilitation
and required by this section. An institution may leave a rehabilitated
loan with a collection agency only if that agency is capable of
providing the following services in a manner consistent with program
regulations:
billing the borrower (Sec. 674.43);

[[Page 58305]]

processing deferment and cancellation requests
(Secs. 674.34, 674.35, 674.36, 674.37, 674.38 and Subpart D-Loan
Cancellation);
providing flexible repayment arrangements in accordance
with the terms of the promissory note (Sec. 674.33);
providing any notice or disclosure required under the
program regulations (Subpart C-Due Diligence); and
providing any other statutory or regulatory benefit to
which the borrower is entitled.
If the collection agency is unable to provide a rehabilitated
borrower with the benefits of rehabilitation, the institution must
remove the account from the agency.
Changes: None.
Comment: Many commenters objected to the provision limiting
collection costs that can be charged to the borrower on a rehabilitated
loan to 24 percent of the unpaid principal and accrued interest.
Several commenters believed that it will be problematic to
renegotiate contracts with collection agencies and that the terms of
collection agency contracts should be flexible and subject only to
negotiation between the school and the collection agency. They believed
that the 24 percent cap on collection costs that can be passed on to a
rehabilitated borrower will limit the number of collection agencies an
institution is able to contract with to those collection agencies that
charge lower rates as opposed to those that are best at recovering
debts, thereby limiting the ability of an institution to maximize the
return of funds to its revolving fund.
Several commenters stated that accounting for collection costs that
are different depending on the type of loan on which they are assessed
is burdensome, confusing and time-consuming. The commenters questioned
why rehabilitated loans should be treated differently than other
Federal Perkins Loans since, under the terms of their promissory notes,
all borrowers are responsible for reasonable collection costs incurred
by an institution in collecting the loan.
Discussion: We disagree that the renegotiation of collection agency
contracts will be problematic and that schools will be limited in their
choice of collection agencies to those that charge lower fees as
opposed of those that are best at collecting debts. We believe that the
marketplace will generate competition among collection agencies and
that collection agencies will adapt their rates and their servicing
practices to those rates and practices required to service
rehabilitated loans. We also believe that a borrower is more likely to
continue paying on his or her loan once the loan is rehabilitated and
that these payments will replenish an institution's revolving fund, not
deplete it.
We further believe that collection costs on a rehabilitated loan
should be reduced once the borrower has successfully rehabilitated a
defaulted loan. A rehabilitated borrower has re-established eligibility
for Title IV student financial assistance, is once again entitled to
all of the benefits and privileges available under the promissory note
and, most importantly, is no longer considered to be in default on the
loan. We believe that to assess collection costs on a loan in good
standing at a rate higher than the 24 percent maximum is excessive.
Lastly, a reduction in the collection costs that can be charged to
a rehabilitated borrower was intensely debated during the negotiated
rulemaking process. Committee II reached consensus on a collection cost
cap of 24 percent. This rate is consistent with the reduction of
collection costs that may be charged to a rehabilitated borrower in the
FFEL and Federal Direct Loan Programs, adjusted to allow for the fact
that collection costs cannot be capitalized in the Federal Perkins Loan
program as they are in the FFEL and Direct Loan programs.
Changes: None.
Comment: Two commenters, while not objecting to the proposed
regulations agreed to by the negotiators that cap the collection costs
that can be charged to a rehabilitated borrower at 24 percent,
expressed concern that the preamble language in the NPRM does not
accurately reflect current Federal policy contained in 34 CFR 30.60 on
assessing collection costs to defaulted borrowers. The commenters
stated that institutions and their servicers would be forced to incur
significant expenses in reprogramming and redesigning current systems
and procedures to comply with a process that required them to calculate
a 24 percent cap on collection costs on the unpaid principal and
accrued interest remaining on the loan at the time it is rehabilitated.
The commenters also expressed concern that the NPRM preamble
language states that payments on a rehabilitated loan cannot be treated
on a ``fee-on-fee,'' basis which is a widely accepted method for
determining collection costs on delinquent debtors. The commenters
expressed confidence, however, that institutions and servicers could
utilize current systems and procedures, along with the fee-on-fee
method of determining collection costs, in such a way as to not exceed
the 24 percent cap on rehabilitated loans.
Conversely, three commenters suggested that the text of the
preamble discussion be included in the final regulations. They believed
that this would provide clarity to the regulations and guard against
the possibility that a rehabilitated borrower would be charged in
excess of the 24 percent cap on collection costs after the loan has
been successfully rehabilitated.
Discussion: The preamble language contained in the NPRM accurately
describes the basis on which consensus was reached on the 24 percent
cap on collection costs that may be charged on a rehabilitated Federal
Perkins Loan. Default-related collection costs of up to 18.5 percent
are passed along to the borrower of a rehabilitated FFEL or Federal
Direct Loan, are capitalized, and become part of the rehabilitated
principal on which interest accrues after rehabilitation. As a result,
an FFEL or Federal Direct Loan borrower ultimately pays post-
rehabilitation collection costs of approximately 24 percent over the
remaining life of the loan. In order to treat rehabilitated borrowers
consistently across the Title IV loan programs, the negotiators agreed
to a generally comparable 24 percent cap on collection costs on a
rehabilitated Federal Perkins Loan, acknowledging that because
collection costs in the Federal Perkins Loan Program cannot be
capitalized they must be treated as a separate cost. The use of current
Federal policy contained in 34 CFR 30.60 when assessing collection
costs on a rehabilitated Federal Perkins loan was not specifically
discussed. However, several negotiators were very concerned that the 24
percent cap on collection costs on a rehabilitated Federal Perkins loan
would be exceeded depending on how the payments from the borrower were
applied.
An institution, or its servicer, charges a commission on each
payment the borrower makes on a defaulted loan using the formula in 34
CFR 30.60(a)(1). The formula does not take into account interest that
continues to accrue on the outstanding balance of a defaulted loan as
it is paid down. However, because a rehabilitated loan is no longer
considered to be in default, interest must be a factor when applying
payments to a rehabilitated loan. Therefore, if an institution or its
servicer uses the formula contained in 34 CFR 30.60, it must ensure
that when the commissions retained on payments received from the
borrower on a rehabilitated loan reach an amount equal to 24 percent of
the original principal and accrued interest that

[[Page 58306]]

remained on the loan after the borrower made the 12 payments, no more
costs may be calculated or assessed against the borrower.
We agree that clarifying the regulations to guard against the
possibility that a rehabilitated borrower will be charged collection
costs in excess of the 24 percent cap is appropriate. An institution,
or its servicer, must consider the interest that accrues on the
outstanding balance of the rehabilitated loan over the length of the
post-rehabilitation repayment period to ensure that collection costs of
no more than 24 percent of the unpaid principal and accrued interest as
of the date following application of the twelfth payment are paid by
the borrower.
Changes: Section 674.39(c)(1) has been changed to specify that
collection costs, if charged to the borrower, may not exceed 24 percent
of the unpaid principal and accrued interest as of the date following
application of the twelfth payment.
Comment: One commenter believed that the regulations should be
revised to allow an institution to charge collection costs not paid by
the borrower on a rehabilitated loan to its revolving fund if the
borrower subsequently redefaults.
Discussion: We disagree that the regulations should be revised to
allow an institution to charge its revolving fund for collection costs
not paid by the borrower if the borrower subsequently redefaults. If
the borrower redefaults on a rehabilitated loan, the borrower would be
responsible for paying any reasonable collection costs incurred by the
institution in attempting to collect the debt. We would note that if a
rehabilitated loan is being serviced by a collection agency,
Sec. 674.48(e) of the Federal Perkins Loan Program regulations requires
an institution to recall the loan and place it with a different
collection agency if the loan redefaults. Section 674.48(b) prohibits
an institution from using a billing service (which are the duties
assumed by the collection agency upon the successful rehabilitation of
a loan) and a collection agency that is owned or controlled by the same
entity.
Changes: None.

Section 674.41 Due Diligence--General requirements

Comment: Several commenters objected to the requirement that, as
part of an institution's general due diligence activities, it provide
the borrower with information on the availability of the Student Loan
Ombudsman's office if the borrower disputes the terms of the loan in
writing and the institution does not resolve the dispute. The
commenters felt there was no need for a Student Loan Ombudsman's
office, that it would be an unnecessary expense and that it would be a
bureaucratic intrusion between the institution and the borrower. We
received similar objections to the addition of language in Secs. 674.42
and 674.45 that requires an institution to inform borrower's of the
availability of the Student Loan Ombudsman's office.
Discussion: The 1998 Amendments require the Department of Education
to appoint a Student Loan Ombudsman who must receive, review and
attempt to resolve informally complaints from borrowers regarding the
terms of their loans. Although there is no specific statutory
requirement that institutions or other loan participants disseminate
information regarding the availability of the Student Loan Ombudsman to
borrowers, the negotiators for Committees I and II agreed that as our
partners in student loan administration, it made sense for loan
participants, as well as the Department, to provide borrowers with
information on the Student Loan Ombudsman's office. The negotiators
agreed that adding a provision on the availability of this service to
Sec. 674.41, as well as to Secs. 674.42 and 674.45, will increase
borrower awareness and greatly enhance successful repayment of student
loans and reduce defaults.
Changes: None
Comment: Several commenters expressed concern that the proposed
regulations did not address what kind of information an institution
must provide to borrowers when complying with the requirement to inform
them about the availability of the Student Loan Ombudsman's office. One
commenter felt that the proposed regulations should be revised to
require institutions to provide the borrower with information on the
availability of the Student Loan Ombudsman's office only as that
information is provided to institutions by the Secretary.
Discussion: The proposed regulations require that an institution
provide the borrower with information about the availability of the
Student Loan Ombudsman's office. This information is meant to convey to
the borrower that, if the borrower is unable to resolve a dispute with
the loan holder, another avenue of redress is available. An institution
may comply with this requirement by providing the borrower with the
Ombudsman's website address or mailing address at the Department of
Education. The Student Loan Ombudsman's website address is http://
www.sfahelp.ed.gov.
Changes: None.

Section 674.42 Contact with the borrower

Comment: One commenter applauded our initiative to allow for loan
counseling through interactive electronic means but objected to the
requirement that the institution obtain through return receipt or some
other mechanism documentation that the student received and completed
the materials when electronic exit counseling is used. The commenter
believed that obtaining return receipt that the student received and
completed electronic exit counseling was too high a standard of
compliance for institutions to meet and suggested that we adopt the
receipt standards of the U.S. Postal Service, which are that if mail is
not returned to the sender, it can be considered delivered.
Discussion: We disagree that obtaining documentation that the
borrower has received and completed exit counseling, either through
return receipt or some other mechanism, is too high a standard to
require when an institution provides exit counseling electronically.
Institutions were previously required to provide exit counseling to
their borrowers either in person or in a group to ensure that borrowers
received and completed exit counseling. We believe that providing exit
counseling electronically should be viewed as comparable to providing
in person counseling and should provide the same assurances.
The standards of the U.S. Postal service provide that if mail is
not returned to the sender, it can be considered delivered. Because
there is currently no similar standard for electronic mail, we believe
that it is in the best interest of borrowers to require an institution
to take reasonable steps to ensure that each student borrower receives
the counseling materials and participates in and completes interactive
electronic exit counseling given the current available technology.
Changes: None.
Comment: One commenter supported the requirement that an
institution provide a borrower with an explanation of any options the
borrower might have to consolidate or refinance his or her loan during
exit counseling. However, the commenter suggested that we require
institutions to inform Federal Perkins Loan borrowers that the interest
rate on a consolidation loan may be higher than the 5 percent interest
rate on their Federal Perkins loan.
Discussion: Because Federal Perkins loan borrowers lose eligibility
for cancellation benefits and are charged a different rate of interest
upon

[[Page 58307]]

consolidating their Perkins loans, we agree that disclosing the
consequences of consolidating a Federal Perkins loan will help
borrowers make an informed decision.
Change: Section 674.42(b)(2)(ii) has been amended to require an
institution to inform borrowers about the consequences of consolidating
a Federal Perkins Loan.
Comment: One commenter stated that the provision requiring schools
to provide borrowers with ``additional matters that the Secretary
recommends that a school include in the exit counseling or materials
set forth in Appendix D to 34 CFR 668'' be deleted. The commenter
believes that such a requirement is unnecessary especially given the
elimination of default reduction plans in the Federal Perkins Loan
Program.
Discussion: We disagree that this provision should be deleted.
Including additional information recommended by the Secretary or
materials in Appendix D in exit counseling is an option, not a
requirement. We believe that Appendix D is a useful resource to
institutions when counseling borrowers on default avoidance.
Changes: None.

Section 674.47 Costs chargeable to the fund

Comment: One commenter expressed concern that institutions may be
unable to renegotiate collection agency contracts by July 1, 2002 that
comply with the requirement that no more than 24 percent of the unpaid
principal and accrued interest remaining on the loan at the time the
loan is rehabilitated can be assessed a borrower in collection costs.
The commenter requested that we include an explicit commitment in the
preamble of the final regulations to revisit this issue if the majority
of institutions are unable to renegotiate contracts to account for the
24 percent collection costs cap.
Discussion: We believe that because this will be a general program
requirement, the market will expand to meet institutional needs.
Further, we believe it is inappropriate for us to commit to a
regulatory change outside of the negotiated rulemaking process required
by the 1998 Amendments. However, we will carefully consider this
provision in the future as part of our ongoing regulatory review.
Changes: None.

Section 674.49 Bankruptcy of borrower

Comment: One commenter submitted a detailed analysis of Sec. 674.49
and suggested substantive changes to this section of the regulations.
These suggested changes included eliminating paragraph (b), which
requires an institution to file a proof of claim in a bankruptcy;
eliminating paragraph (e), which outlines an institution's
responsibilities when a borrower files a Chapter 13 bankruptcy; and,
clarifying paragraph (g)(1)(i), which deals with termination of
collection and write-off of the loan under certain circumstances.
Discussion: We appreciate the analysis of Sec. 674.49 submitted by
the commenter. However, we did not propose to amend this section other
than to:
Reflect the change to the bankruptcy code that eliminates
a borrower's ability to discharge a loan in bankruptcy on the basis of
the loan being in repayment for more than seven years, and require all
borrowers who seek discharge of a Perkins loan to prove undue hardship;
Clarify that the seven year repayment period on
bankruptcies filed before October 8, 1998, excludes applicable
suspensions of the repayment period; and
Insert language stating that the institution must use
diligence and may assert any defense consistent with its status under
applicable law to avoid the discharge of the loan.
While this section may undoubtedly deserve closer scrutiny, we do
not believe it is appropriate to make the changes suggested by the
commenter outside of the negotiating rulemaking process.
Changes: None.
Comment: One commenter suggested that we delete Sec. 674.49(4)(i),
which requires an institution to monitor the borrower's compliance with
the requirements of a Chapter 13 repayment plan, and to take certain
steps if the borrower has not made payments or has requested a hardship
discharge on the debt. The commenter asserted that the institution has
no legal grounds to monitor the borrower unless the institution
appoints a trustee.
Discussion: The code expressly directs that a trustee be appointed
for every Chapter 13 proceeding and authorizes any ``party in
interest'' or ``creditors'' to move for any of a number of reasons to
have a Chapter 13 proceeding dismissed or converted to a Chapter 7, 11
U.S.C. 1302, 1307(c). Because the comment has no basis in the law, we
disagree with the commenter's suggestion that we delete this paragraph
from the regulations. The proposed changes to this paragraph reflect
only the deletion of language that referred to loans held by an
institution that had been in repayment for more than seven years. We
believe that any further changes in this section of the regulation
should be undertaken only as part of negotiated rulemaking process.
Changes: None.
Comment: One commenter noted an inconsistency between the preamble
discussion on Sec. 674.49(c)(1) and the proposed regulatory language.
Specifically, the preamble states that ``the proposed regulations would
amend this section to `require' institutions to use due diligence and
assert any defense consistent with its status.'' The actual regulatory
language states that ``the institution must use diligence and `may'
assert any defense consistent with its status.'' The commenter
requested that we correct the preamble in the NPRM.
Discussion: Any inconsistency between the preamble and the proposed
regulatory language was not intended. Recently, some State institutions
have responded to undue hardship complaints by asserting that sovereign
immunity barred relief on these claims in bankruptcy proceedings. We
intend the proposed amendment to make clear that every institution must
use due diligence to oppose discharge, but that State institutions may
do so--if they wish--by asserting sovereign immunity as a defense to an
undue hardship complaint. Unfortunately, some courts misconstrue
Department regulations to bar State institutions from asserting
sovereign immunity in these circumstances. We intend this amendment as
an authoritative explanation of the meaning of the Federal Perkins Loan
regulations and Program Participation Agreement on this due diligence
obligation.
Changes: None.

Section 674.54 Teacher cancellation--Federal Perkins loans and Direct
loans made before July 23, 1992

Comment: One commenter suggested that we consider removing and
reserving Sec. 674.54 of the Federal Perkins Loan Program regulations
because it is redundant with Sec. 674.53. (Section 674.54 authorizes
teaching cancellation benefits for Federal Perkins Loans and Direct
Loans made before July 23, 1992. All borrowers with loans made before
July 23, 1992 are eligible for all of the cancellation provisions
contained in Sec. 674.53.)
Discussion: We agree that Sec. 674.54 is redundant and should be
removed and reserved. We note that borrowers who teach handicapped
students and receive cancellation benefits under Sec. 674.54(b) remain
eligible for cancellation under Sec. 674.53(b)--Full time teaching in
special education.
Changes: Section 674.54 is removed and reserved.

[[Page 58308]]

Executive Order 12866

We have reviewed these final regulations in accordance with
Executive Order 12866. Under the terms of the 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 to
be 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 justify the costs.
We have also determined that this regulatory action does not unduly
interfere with State, local, and tribal governments in the exercise of
their governmental functions.

Paperwork Reduction Act of 1995

The Paperwork Reduction Act of the 1995 does not require you to
respond to a collection of information unless it displays a valid OMB
control number. We display the valid OMB control numbers assigned to
the collections of information in these final regulations at the end of
the affected sections of the regulations.

Intergovernmental Review

This program is subject to the requirements of Executive Order
12372 and the regulations in 34 CFR part 79. The objective of the
Executive Order is to foster an intergovernmental partnership and a
strengthened federalism by relying on processes developed by State and
local governments for coordination and review of proposed Federal
financial assistance.
In accordance with the order, we intend this document to provide
early notification of the Department's specific plans and actions for
this program.

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

You may review this document in text or Adobe Portable Document
Format (PDF) on the Internet at the following sites:

http://ocfo.ed.gov/fedreg.htm
http://www.ed.gov/legislation/HEA/rulemaking/
http://ifap.ed.gov/csb__html/fedlreg.htm

To use the PDF you must have the Adobe Acrobat Reader Program with
Search, which is available free at the first of the previous sites. If
you have questions about using the PDF, call the U.S. Government
Printing Office (GPO), toll free, at 1-888-293-6498; or in the
Washington, D.C., area at (202) 512-1530.

Note: The official version of this document is the document
published in the Federal Register. Free Internet access to the
official edition of the Federal Register and the Code of Federal
Regulations is available on GPO Access at:

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

(Catalog of Federal Domestic Assistance Number: 84.037 Federal
Perkins Loan Program)

List of Subjects in 34 CFR Part 674

Loan programs--education, Student aid, Reporting and recordkeeping
requirements.

Dated: October 20, 1999.
Richard W. Riley,
Secretary of Education.

PART 674--FEDERAL PERKINS LOAN PROGRAM

1. The authority citation for part 674 continues to read as
follows:

Authority: 20 U.S.C. 1087aa-1087ii and 20 U.S.C. 421-429, unless
otherwise noted.

2. Section 674.2(b) is amended by adding, in alphabetical order, a
definition of ``satisfactory repayment arrangement,'' to read as
follows:


Sec. 674.2 Definitions.

* * * * *
(b) * * *
Satisfactory repayment arrangement: For purposes of regaining
eligibility for grant, loan, or work assistance under Title IV of the
HEA, to the extent that the borrower is otherwise eligible, the making
of six (6) on-time, consecutive, monthly payments on a defaulted loan.
A borrower may obtain the benefit of this paragraph with respect to
renewed eligibility once on a defaulted loan.
* * * * *
3. Section 674.5 is amended as follows:
A. By revising paragraphs (a)(1) and (a)(2).
B. By removing paragraphs (a)(3) and (a)(4).
C. By removing paragraph (b)(2) and redesignating paragraph (b)(3)
as paragraph (b)(2).
D. By removing paragraph (c)(4); and redesignating paragraph
(c)(3)(ii) as paragraph (c)(4) and by removing ``; and'' at the end of
the sentence in the new paragraph (c)(4) and adding, in its place, a
period; and by revising paragraph (c)(3).
E. By removing paragraphs (e) and (f).


Sec. 674.5 Federal Perkins Loan Program cohort default rate and
penalties.

(a) * * *
(1) FCC reduction. If the institution's cohort default rate equals
or exceeds 25 percent, the institution's FCC is reduced to zero.
(2) Ineligibility. For award year 2000-2001 and succeeding award
years, an institution with a cohort default rate that equals or exceeds
50 percent for each of the three most recent years for which cohort
default rate data are available is ineligible to participate in the
Federal Perkins Loan Program. Following a review of that data and upon
notification by the Secretary, an institution is ineligible to
participate for the award year, or the remainder of the award year, in
which the determination is made and the two succeeding award years. An
institution may appeal a notification of ineligibility from the
Secretary within 30 days of its receipt.
(i) Appeal procedures.
(A) Inaccurate calculation. An institution may appeal a notice of
ineligibility based upon the submission of erroneous data by the
institution, the correction of which would result in a recalculation
that reduces the institution's cohort default rate to below 50 percent
for any of the three award years used to make a determination of
ineligibility. The Secretary considers the edit process, by which an
institution adjusts the cohort default rate data that it submits to the
Secretary on its Fiscal Operations Report, to constitute the procedure
to appeal a determination of ineligibility based on a claim of
erroneous data.
(B) Small number of borrowers entering repayment. An institution
may appeal a notice of ineligibility if, on average, 10 or fewer
borrowers enter repayment for the three most recent award years used by
the Secretary to make a determination of ineligibility.
(C) Decision of the Secretary. The Secretary issues a decision on
an appeal within 45 days of the institution's submission of a complete,
accurate, and timely appeal. An institution may continue to participate
in the program

[[Page 58309]]

until the Secretary issues a decision on the institution's appeal.
(ii) Liquidation of an institution's Perkins Loan portfolio. Within
90 days of receiving a notification of ineligibility or, if the
institution appeals, within 90 days of the Secretary's decision to deny
the appeal, the institution must--
(A) Liquidate its revolving student loan fund by making a capital
distribution of the liquid assets of the Fund according to section
466(c) of the HEA; and
(B) Assign any outstanding loans in the institution's portfolio to
the Secretary in accordance with Sec. 674.50.
(iii) Effective date. The provisions of paragraph (a)(2) of this
section are effective with the cohort default rate calculated as of
June 30, 2001.
* * * * *
(c) * * *
(3)(i) In determining the number of borrowers who default before
the end of the following award year, a loan is excluded if the borrower
has--
(A) Voluntarily made six consecutive monthly payments;
(B) Voluntarily made all payments currently due;
(C) Repaid the full amount due, including any interest, late fees,
and collection costs that have accrued on the loan;
(D) Received a deferment or forbearance based on a condition that
predates the borrower reaching a 240- or 270-day past due status; or
(E) Rehabilitated the loan after becoming 240- or 270-days past
due.
(ii) A loan is considered canceled and also excluded from an
institution's cohort default rate calculation if the loan is--
(A) Discharged due to death or permanent and total disability;
(B) Discharged in bankruptcy;
(C) Discharged due to a closed school; or
(D) Repaid in full in accordance with Sec. 674.33(e) or
Sec. 674(h).
(iii) For the purpose of this section, funds obtained by income tax
offset, garnishment, income or asset execution, or pursuant to a
judgment are not considered voluntary.
* * * * *


Sec. 674.9 [Removed and Reserved]

4. Section 674.6 is removed and reserved.


Sec. 674.7 [Removed and Reserved]

5. Section 674.7 is removed and reserved.
6. Section 674.9 is amended by redesignating paragraph (i) as
paragraph (j) and adding a new paragraph (i) to read as follows:


Sec. 674.9 Student eligibility.

* * * * *
(i) In the case of a borrower who is in default on a Federal
Perkins Loan, NDSL or Defense loan, satisfies one of the conditions
contained in Sec. 674.5(c)(3)(i) or (ii) except that--
(1) For the purposes of this section, voluntary payments made by
the borrower under paragraph (i) of this section are those payments
made directly by the borrower, including payments made over and above
payments made pursuant to a judgment; and
(2) Voluntary payments do not include payments obtained by income
tax refund offset, garnishment, income or asset execution, or pursuant
to a judgment.
* * * * *
7. Section 674.12 is amended by revising paragraphs (a), (b), and
(d) to read as follows:


Sec. 674.12 Loan maximums.

(a) The maximum annual amount of Federal Perkins Loans and Direct
Loans an eligible student may borrow is--
(1) $4,000 for a student who is enrolled in a program of
undergraduate education; and
(2) $6,000 for a graduate or professional student.
(b) The aggregate unpaid principal amount of all Federal Perkins
Loans and Direct Loans received by an eligible student may not exceed--
(1) $20,000 for a student who has successfully completed two years
of a program leading to a bachelor's degree but who has not received
the degree;
(2) $40,000 for a graduate or professional student; and
(3) $8,000 for any other student.
* * * * *
(d) For each student, the maximum annual amounts described in
paragraphs (a) and (c) of this section, and the aggregate maximum
amounts described in paragraphs (b) and (c) of this section, include
any amounts borrowed previously by the student under title IV, part E
of the HEA at any institution.
* * * * *
8. Section 674.16 is amended by revising paragraph (i) and the
Office of Management and Budget control number to read as follows:


Sec. 674.16 Making and disbursing loans.

* * * * *
(i)(1) An institution must report to at least one national credit
bureau--
(i) The amount and the date of each disbursement;
(ii) Information concerning the repayment and collection of the
loan until the loan is paid in full; and
(iii) The date the loan was repaid, canceled, or discharged for any
reason.
(2) An institution must promptly report any changes to information
previously reported on a loan to the same credit bureaus to which the
information was previously reported.

(Approved by the Office of Management and Budget under control
number 1845-0019)
* * * * *
9. Section 674.31 is amended by redesignating paragraphs (b)(2)(i)
(C) and (D) as (D) and (E), respectively; by adding new paragraph
(b)(2)(i)(C); by revising paragraph (b)(10)(i); and by revising the
Office of Management and Budget control number to read as follows:


Sec. 674.31 Promissory note.

* * * * *
(b) * * *
(2) * * *
(i) * * *
(C) For purposes of establishing the beginning of the repayment
period for Direct or Perkins loans, the 6- and 9-month grace periods
referenced in paragraph (b)(2)(i) of this section exclude any period
during which a borrower who is a member of a reserve component of the
Armed Forces named in section 10101 of Title 10, United States Code is
called or ordered to active duty for a period of more than 30 days. Any
single excluded period may not exceed three years and includes the time
necessary for the borrower to resume enrollment at the next available
regular enrollment period. Any Direct or Perkins loan borrower who is
in a grace period when called or ordered to active duty as specified in
this paragraph is entitled to a new 6- or 9-month grace period upon
completion of the excluded period.
* * * * *
(10) * * *
(i) The institution must disclose to at least one national credit
bureau the amount of the loan made to the borrower, along with other
relevant information.
* * * * *
(Approved by the Office of Management and Budget under control
number 1845-0019)

10. Section 674.33 is amended by adding new paragraphs (f) and (g);
and by revising the Office of Management and Budget Control number to
read as follows:


Sec. 674.33 Repayment.

* * * * *
(f)(1) Incentive repayment program. An institution may establish
the following repayment incentives:
(i) A reduction of no more than one percent of the interest rate on
a loan on

[[Page 58310]]

which the borrower has made 48 consecutive, monthly repayments.
(ii) A discount of no more than five percent on the balance owed on
a loan which the borrower pays in full prior to the end of the
repayment period.
(iii) With the Secretary's approval, any other incentive the
institution determines will reduce defaults and replenish its Fund.
(2) Limitation on the use of funds. (i) The institution must
reimburse its Fund, on at least a quarterly basis, for money lost to
its Fund that otherwise would have been paid by the borrower as a
result of establishing a repayment incentive under paragraphs
(f)(1)(i), (ii) and (iii) of this section.
(ii) An institution may not use Federal funds, including Federal
funds from the student loan fund, or institutional funds from the
student loan fund to pay for any repayment incentive authorized by this
section.
(g) Closed school discharge. (1) General. (i) The holder of an NDSL
or a Federal Perkins Loan discharges the borrower's (and any
endorser's) obligation to repay the loan if the borrower did not
complete the program of study for which the loan was made because the
school at which the borrower was enrolled closed.
(ii) For the purposes of this section--
(A) A school's closure date is the date that the school ceases to
provide educational instruction in all programs, as determined by the
Secretary;
(B) ``School'' means a school's main campus or any location or
branch of the main campus; and
(C) The ``holder'' means the Secretary or the school that holds the
loan.
(2) Relief pursuant to discharge. (i) Discharge under this section
relieves the borrower of any past or present obligation to repay the
loan and any accrued interest or collection costs with respect to the
loan.
(ii) The discharge of a loan under this section qualifies the
borrower for reimbursement of amounts paid voluntarily or through
enforced collection on the loan.
(iii) A borrower who has defaulted on a loan discharged under this
section is not considered to have been in default on the loan after
discharge, and such a borrower is eligible to receive assistance under
programs authorized by title IV of the HEA.
(iv) The Secretary or the school, if the school holds the loan,
reports the discharge of a loan under this section to all credit
bureaus to which the status of the loan was previously reported.
(3) Determination of borrower qualification for discharge by the
Secretary. The Secretary may discharge the borrower's obligation to
repay an NDSL or Federal Perkins Loan without an application if the
Secretary determines that--
(i) The borrower qualified for and received a discharge on a loan
pursuant to 34 CFR 682.402(d) (Federal Family Education Loan Program)
or 34 CFR 685.213 (Federal Direct Loan Program), and was unable to
receive a discharge on an NDSL or Federal Perkins Loan because the
Secretary lacked the statutory authority to discharge the loan; or
(ii) Based on information in the Secretary's possession, the
borrower qualifies for a discharge.
(4) Borrower qualification for discharge. Except as provided in
paragraph (g)(3) of this section, in order to qualify for discharge of
an NDSL or Federal Perkins Loan, a borrower must submit to the holder
of the loan a written request and sworn statement, and the factual
assertions in the statement must be true. The statement need not be
notarized but must be made by the borrower under penalty of perjury. In
the statement the borrower must--
(i) State that the borrower--
(A) Received the proceeds of a loan to attend a school;
(B) Did not complete the program of study at that school because
the school closed while the student was enrolled, or the student
withdrew from the school not more than 90 days before the school closed
(or longer in exceptional circumstances); and
(C) Did not complete and is not in the process of completing the
program of study through a teachout at another school as defined in 34
CFR 602.2 and administered in accordance with 34 CFR 602.207(b)(6), by
transferring academic credit earned at the closed school to another
school, or by any other comparable means;
(ii) State whether the borrower has made a claim with respect to
the school's closing with any third party, such as the holder of a
performance bond or a tuition recovery program, and, if so, the amount
of any payment received by the borrower or credited to the borrower's
loan obligation; and
(iii) State that the borrower--
(A) Agrees to provide to the holder of the loan upon request other
documentation reasonably available to the borrower that demonstrates
that the borrower meets the qualifications for discharge under this
section; and
(B) Agrees to cooperate with the Secretary in enforcement actions
in accordance with paragraph (g)(6) of this section and to transfer any
right to recovery against a third party to the Secretary in accordance
with paragraph (g)(7) of this section.
(5) Fraudulently obtained loans. A borrower who secured a loan
through fraudulent means, as determined by the ruling of a court or an
administrative tribunal of competent jurisdiction, is ineligible for a
discharge under this section.
(6) Cooperation by borrower in enforcement actions.
(i) In order to obtain a discharge under this section, a borrower
must cooperate with the Secretary in any judicial or administrative
proceeding brought by the Secretary to recover amounts discharged or to
take other enforcement action with respect to the conduct on which the
discharge was based. At the request of the Secretary and upon the
Secretary's tendering to the borrower the fees and costs that are
customarily provided in litigation to reimburse witnesses, the borrower
must--
(A) Provide testimony regarding any representation made by the
borrower to support a request for discharge;
(B) Provide any documents reasonably available to the borrower with
respect to those representations; and
(C) If required by the Secretary, provide a sworn statement
regarding those documents and representations.
(ii) The holder denies the request for a discharge or revokes the
discharge of a borrower who--
(A) Fails to provide the testimony, documents, or a sworn statement
required under paragraph (g)(6)(i) of this section; or
(B) Provides testimony, documents, or a sworn statement that does
not support the material representations made by the borrower to obtain
the discharge.
(7) Transfer to the Secretary of borrower's right of recovery
against third parties. (i) In the case of a loan held by the Secretary,
upon discharge under this section, the borrower is deemed to have
assigned to and relinquished in favor of the Secretary any right to a
loan refund (up to the amount discharged) that the borrower may have by
contract or applicable law with respect to the loan or the enrollment
agreement for the program for which the loan was received, against the
school, its principals, its affiliates and their successors, its
sureties, and any private fund, including the portion of a public fund
that represents funds received from a private party.
(ii) The provisions of this section apply notwithstanding any
provision of State law that would otherwise restrict transfer of those
rights by the borrower, limit or prevent a transferee from exercising
those rights, or establish

[[Page 58311]]

procedures or a scheme of distribution that would prejudice the
Secretary's ability to recover on those rights.
(iii) Nothing in this section limits or forecloses the borrower's
right to pursue legal and equitable relief regarding disputes arising
from matters unrelated to the discharged NDSL or Federal Perkins Loan.
(8) Discharge procedures. (i) After confirming the date of a
school's closure, the holder of the loan identifies any NDSL or Federal
Perkins Loan borrower who appears to have been enrolled at the school
on the school closure date or to have withdrawn not more than 90 days
prior to the closure date.
(ii) If the borrower's current address is known, the holder of the
loan mails the borrower a discharge application and an explanation of
the qualifications and procedures for obtaining a discharge. The holder
of the loan also promptly suspends any efforts to collect from the
borrower on any affected loan. The holder of the loan may continue to
receive borrower payments.
(iii) In the case of a loan held by the Secretary, if the
borrower's current address is unknown, the Secretary attempts to locate
the borrower and determine the borrower's potential eligibility for a
discharge under this section by consulting with representatives of the
closed school or representatives of the closed school's third-party
billing and collection servicers, the school's licensing agency, the
school accrediting agency, and other appropriate parties. If the
Secretary learns the new address of a borrower, the Secretary mails to
the borrower a discharge application and explanation and suspends
collection, as described in paragraph (g)(8)(ii) of this section.
(iv) In the case of a loan held by a school, if the borrower's
current address is unknown, the school attempts to locate the borrower
and determine the borrower's potential eligibility for a discharge
under this section by taking steps required to locate the borrower
under Sec. 674.44.
(v) If the borrower fails to submit the written request and sworn
statement described in paragraph (g)(4) of this section within 60 days
of the holder of the loan's mailing the discharge application, the
holder of the loan resumes collection and grants forbearance of
principal and interest for the period during which collection activity
was suspended.
(vi) If the holder of the loan determines that a borrower who
requests a discharge meets the qualifications for a discharge, the
holder of the loan notifies the borrower in writing of that
determination.
(vii) In the case of a loan held by the Secretary, if the Secretary
determines that a borrower who requests a discharge does not meet the
qualifications for a discharge, the Secretary notifies that borrower,
in writing, of that determination and the reasons for the
determination.
(viii) In the case of a loan held by a school, if the school
determines that a borrower who requests a discharge does not meet the
qualifications for discharge, the school submits that determination and
all supporting materials to the Secretary for approval. The Secretary
reviews the materials, makes an independent determination, and notifies
the borrower in writing of the determination and the reasons for the
determination.
(ix) In the case of a loan held by a school and discharged by
either the school or the Secretary, the school must reimburse its Fund
for the entire amount of any outstanding principal and interest on the
loan, and any collection costs charged to the Fund as a result of
collection efforts on a discharged loan. The school must also reimburse
the borrower for any amount of principal, interest, late charges or
collection costs the borrower paid on a loan discharged under this
section.
* * * * *
(Approved by the Office of Management and Budget under control
number 1845-0019)

11. Section 674.34 is amended by revising the section heading;
revising paragraphs (a) and (c); and adding the Office of Management
and Budget control number to read as follows:


Sec. 674.34 Deferment of repayment--Federal Perkins loans, Direct
loans and Defense loans.

(a) The borrower may defer making a scheduled installment repayment
on a Federal Perkins loan, a Direct loan, or a Defense loan, regardless
of contrary provisions of the borrower's promissory note and regardless
of the date the loan was made, during periods described in this
section.
* * * * *
(c) The borrower of a Federal Perkins loan, a Direct loan, or a
Defense loan need not repay principal, and interest does not accrue,
for any period during which the borrower is engaged in service
described in Secs. 674.53, 674.54, 674.55, 674.56, 674.57, 674.58,
674.59, and 674.60.
* * * * *
(Approved by the Office of Management and Budget under control
number 1845-0019)

12. Section 674.39 is revised to read as follows:


Sec. 674.39 Loan rehabilitation.

(a) Each institution must establish a loan rehabilitation program
for all borrowers for the purpose of rehabilitating defaulted loans
made under this part. The institution's loan rehabilitation program
must provide that--
(1) A defaulted borrower is notified of the option and consequences
of rehabilitating a loan; and
(2) A loan is rehabilitated if the borrower makes an on-time,
monthly payment, as determined by the institution, each month for
twelve consecutive months and the borrower requests rehabilitation; and
(3) A borrower who wishes to rehabilitate a loan on which a
judgment has been entered must sign a new promissory note after
rehabilitating the loan.
(b) Within 30 days of receiving the borrower's last on-time,
consecutive, monthly payment, the institution must--
(1) Return the borrower to regular repayment status;
(2) Treat the first payment made under the 12 consecutive payments
as the first payment under the 10-year repayment maximum; and
(3) Instruct any credit bureau to which the default was reported to
remove the default from the borrower's credit history.
(c) Collection costs on a rehabilitated loan--
(1) If charged to the borrower, may not exceed 24 percent of the
unpaid principal and accrued interest as of the date following
application of the twelfth payment; and
(2) That exceed the amounts specified in paragraph (c)(1) of this
section may be charged to an institution's Fund until July 1, 2002 in
accordance with Sec. 674.47(e)(5).
(d) After rehabilitating a defaulted loan and returning to regular
repayment status, the borrower regains the balance of the benefits and
privileges of the promissory note as applied prior to the borrower's
default on the loan. Nothing in this paragraph prohibits an institution
from offering the borrower flexible repayment options following the
borrower's return to regular repayment status on a rehabilitated loan.
(e) The borrower may rehabilitate a defaulted loan only one time.

(Approved by the Office of Management and Budget under control
number 1845-0019)

13. Section 674.41 is amended by adding a new paragraph (a)(3); and
by

[[Page 58312]]

adding the Office of Management and Budget control number to read as
follows:


Sec. 674.41 Due diligence--general requirements.

(a) * * *
* * * * *
(3) Provide the borrower with information on the availability of
the Student Loan Ombudsman's office if the borrower disputes the terms
of the loan in writing and the institution does not resolve the
dispute.
* * * * *
(Approved by the Office of Management and Budget under control
number 1845-0023).

14. Section 674.42 is amended by redesignating paragraph (b) as
paragraph (c), revising paragraph (a), adding a new paragraph (b), and
revising the Office of Management and Budget control number to read as
follows:


Sec. 674.42 Contact with the borrower.

(a) Disclosure of repayment information. The institution must
disclose the following information in a written statement provided to
the borrower either shortly before the borrower ceases at least half-
time study at the institution or during the exit interview. If the
borrower enters the repayment period without the institution's
knowledge, the institution must provide the required disclosures to the
borrower in writing immediately upon discovering that the borrower has
entered the repayment period. The institution must disclose the
following information:
(1) The name and address of the institution to which the debt is
owed and the name and address of the official or servicing agent to
whom communications should be sent.
(2) The name and address of the party to which payments should be
sent.
(3) The estimated balance owed by the borrower on the date on which
the repayment period is scheduled to begin.
(4) The stated interest rate on the loan.
(5) The repayment schedule for all loans covered by the disclosure
including the date the first installment payment is due, and the
number, amount, and frequency of required payments.
(6) An explanation of any special options the borrower may have for
loan consolidation or other refinancing of the loan, and a statement
that the borrower has the right to prepay all or part of the loan at
any time without penalty.
(7) A description of the charges imposed for failure of the
borrower to pay all or part of an installment when due.
(8) A description of any charges that may be imposed as a
consequence of default, such as liability for expenses reasonably
incurred in attempts by the Secretary or the institution to collect on
the loan.
(9) The total interest charges which the borrower will pay on the
loan pursuant to the projected repayment schedule.
(10) A copy of the borrower's signed promissory note.
(b) Exit interview. (1) An institution must conduct exit counseling
with each borrower either in person, by audiovisual presentation, or by
interactive electronic means. The institution must conduct this
counseling shortly before the borrower ceases at least half-time study
at the institution. As an alternative, in the case of a student
enrolled in a correspondence program or a study-abroad program that the
school approves for credit, the school may provide written counseling
materials by mail within 30 days after the borrower completes the
program. If the borrower withdraws from school without the school's
prior knowledge or fails to complete an exit counseling session as
required, the school must provide exit counseling through either
interactive electronic means or by mailing counseling material to the
borrower at the borrower's last known address within 30 days after
learning that the borrower has withdrawn from school or failed to
complete exit counseling as required.
(2) In conducting the exit counseling, the school must--
(i) Inform the student as to the average anticipated monthly
repayment amount based on the student's indebtedness or on the average
indebtedness of students who have obtained Perkins loans for attendance
at that school or in the borrower's program of study;
(ii) Review for the borrower available repayment options (e.g. loan
consolidation and refinancing, including the consequences of
consolidating a Federal Perkins Loan);
(iii) Suggest to the borrower debt-management strategies that the
school determines would best assist repayment by the borrower;
(iv) Emphasize to the borrower the seriousness and importance of
the repayment obligation the borrower is assuming;
(v) Describe in forceful terms the likely consequences of default,
including adverse credit reports and litigation;
(vi) Emphasize that the borrower is obligated to repay the full
amount of the loan even if the borrower has not completed the program,
is unable to obtain employment upon completion, or is otherwise
dissatisfied with or does not receive the educational or other services
that the borrower purchased from the school;
(vii) Review with the borrower the conditions under which the
borrower may defer repayment or obtain partial cancellation of a loan;
(viii) Require the borrower to provide corrections to the
institution's records concerning name, address, social security number,
references, and driver's license number, the borrower's expected
permanent address, the address of the borrower's next of kin, as well
as the name and address of the borrower's expected employer; and
(ix) Review with the borrower information on the availability of
the Student Loan Ombudsman's office.
(3) Additional matters that the Secretary recommends that a school
include in the exit counseling session or materials are in appendix D
to 34 CFR part 668.
(4) An institution that conducts exit counseling through
interactive electronic means must take reasonable steps to ensure that
each student borrower receives the counseling materials and
participates in and completes the exit counseling.
(5) The institution must maintain documentation substantiating the
school's compliance with this section for each borrower.
* * * * *
(Approved by the Office of Management and Budget under control
number 1845-0023)

15. Section 674.45 is amended by revising paragraph (b), by adding
a new paragraph (h), and by revising the Office of Management and
Budget control number to read as follows:


Sec. 674.45 Collection procedures.

* * * * *
(b)(1) An institution must report to any national credit bureau to
which it reported the default, according to the reporting procedures of
the national credit bureau, any changes to the account status of the
loan.
(2) The institution must resolve, within 30 days of its receipt,
any inquiry from any credit bureau that disputes the completeness or
accuracy of information reported on the loan.
* * * * *
(h) As part of the collection activities provided for in this
section, the institution must provide the borrower with information on
the availability of the Student Loan Ombudsman's office.
* * * * *
(Approved by the Office of Management and Budget under control
number 1845-0023)


[[Page 58313]]


16. Section 674.47 is amended by redesignating paragraphs (e)(5)
and (e)(6) as (e)(6) and (e)(7), respectively, by adding new paragraph
(e)(5), and by revising the Office of Management and Budget control
number to read as follows:


Sec. 674.47 Costs chargeable to the Fund.

* * * * *
(e) * * *
(5) Until July 1, 2002 on loans rehabilitated pursuant to
Sec. 674.39, amounts that exceed the amounts specified in
Sec. 674.39(c)(1) but are less than--
(i) 30 percent if the loan was rehabilitated while in a first
collection effort; or
(ii) 40 percent if the loan was rehabilitated while in a second
collection effort.
* * * * *
(Approved by the Office of Management and Budget under control
number 1845-0023)

17. Section 674.49 is amended as follows:
A. By redesignating paragraphs (f)(2)(ii)(A) and (f)(2)(ii)(B) as
paragraphs (f)(2)(ii)(B) and (f)(2)(ii)(C), respectively; and adding a
new paragraph (f)(2)(ii)(A).
B. By redesignating paragraphs (f)(3)(ii)(A) and (f)(3)(ii)(B) as
paragraphs (f)(3)(ii)(B) and (f)(3)(ii)(C), respectively; and adding a
new paragraph (f)(3)(ii)(A). By revising paragraphs (c)(1), (c)(2) and
(c)(3);
C. Revising paragraph (e)(4)(i) introductory text; newly
redesignated paragraphs (f)(2)(ii)(B) and (f)(3)(ii)(B); and paragraph
(g).
D. By revising the Office of Management and Budget control number.


Sec. 674.49 Bankruptcy of borrower.

* * * * *
(c) * * *
(1) The institution must use due diligence and may assert any
defense consistent with its status under applicable law to avoid
discharge of the loan. The institution must follow the procedures in
this paragraph to respond to a complaint for a determination of
dischargeability under 11 U.S.C. 523(a)(8) on the ground that repayment
of the loan would impose an undue hardship on the borrower and his or
her dependents, unless discharge would be more effectively opposed by
avoiding that action.
(2) If the petition for relief in bankruptcy was filed before
October 8, 1998 and more than seven years of the repayment period on
the loan (excluding any applicable suspension of the repayment period
defined in 34 CFR 682.402(m)) have passed before the borrower filed the
petition, the institution may not oppose a determination of
dischargeability requested under 11 U.S.C. 523(a)(8)(B) on the ground
of undue hardship.
(3) In any other case, the institution must determine, on the basis
of reasonably available information, whether repayment of the loan
under either the current repayment schedule or any adjusted schedule
authorized under subpart B or D of this part would impose an undue
hardship on the borrower and his or her dependents.
* * * * *
(e) * * *
* * * * *
(4)(i) The institution must monitor the borrower's compliance with
the requirements of the plan confirmed by the court. If the institution
determines that the debtor has not made the payments required under the
plan, or has filed a request for a ``hardship discharge'' under 11
U.S.C. 1328(b), the institution must determine from its own records and
information derived from documents filed with the court--
* * * * *
(f) * * *
(2) * * *
(ii)(A) The petition for relief was filed before October 8, 1998;
(B) The loan entered the repayment period more than seven years
(excluding any applicable suspension of the repayment period as defined
by 34 CFR 682.402(m), and
* * * * *
(3) * * *
(ii)(A) The petition for relief was filed before October 8, 1998;
(B) The loan entered the repayment period more than seven years
(excluding any application suspension of the repayment period as
defined by 34 CFR 682.402(m) before the filing of the petition; and
* * * * *
(g) Termination of collection and write-off. (1) An institution
must terminate all collection action and write off a loan if it
receives a general order of discharge--
(i) In a bankruptcy in which the borrower filed for relief before
October 8, 1998, if the loan entered the repayment period more than
seven years (exclusive of any applicable suspension of the repayment
period defined by 34 CFR 682.402(m)) from the date on which a petition
for relief was filed; or
(ii) In any other case, a judgment that repayment of the debt would
constitute an undue hardship and that the debt is therefore
dischargeable.
(2) If an institution receives a repayment from a borrower after a
loan has been discharged, it must deposit that payment in its Fund.
* * * * *
(Approved by the Office of Management and Budget under control
number 1845-0023)

18. Section 674.52 is amended by revising paragraphs (c)(1) and
(d); and by revising the Office of Management and Budget control number
to read as follows:


Sec. 674.52 Cancellation procedures.

* * * * *
(c) Cancellation of a defaulted loan. (1) Except with regard to
cancellation on account of the death or disability of the borrower, a
borrower whose defaulted loan has not been accelerated may qualify for
a cancellation by complying with the requirements of paragraph (a) of
this section.
* * * * *
(d) Concurrent deferment period. The Secretary considers a Perkins
Loan, Direct Loan or Defense Loan borrower's loan deferment under
Sec. 674.34(c) to run concurrently with any period for which
cancellation under Secs. 674.53, 674.54, 674.55, 674.56, 674.57,
674.58, 674.59, and 674.60 is granted.
* * * * *
(Approved by the Office of Management and Budget under control
number 1845-0019)

19. Section 674.53 is amended by redesignating paragraphs (a)(2),
(a)(3), (a)(4), (a)(5), and (a)(6) as (a)(3), (a)(4), (a)(5), (a)(6),
and (a)(7), respectively; by revising the heading of the section; by
adding a new paragraph (a)(2); by revising paragraphs (a)(1), (b), and
(c) to read as follows:


Sec. 674.53 Teacher cancellation--Federal Perkins, Direct and Defense
loans.

(a) Cancellation for full-time teaching in an elementary or
secondary school serving low-income students.
(1)(i) An institution must cancel up to 100 percent of the
outstanding loan balance on a Federal Perkins loan or a Direct loan
made on or after July 23, 1992, for full-time teaching in a public or
other nonprofit elementary or secondary school.
(ii) An institution must cancel up to 100 percent of the
outstanding loan balance on a Federal Perkins, Direct or Defense loan
made prior to July 23, 1992, for teaching service performed on or after
October 7, 1998, if the cancellation benefits provided under this
section are not included in the terms of the borrower's promissory
note.
(2) The borrower must be teaching full-time in a public or other
nonprofit elementary or secondary school that--

[[Page 58314]]

(i) Is in a school district that qualified for funds, in that year,
under title I of the Elementary and Secondary Education Act of 1965, as
amended; and
(ii) Has been selected by the Secretary based on a determination
that more than 30 percent of the school's total enrollment is made up
of title I children.
* * * * *
(b) Cancellation for full-time teaching in special education. (1)
An institution must cancel up to 100 percent of the outstanding balance
on a borrower's Federal Perkins loan or Direct loan made on or after
July 23, 1992, for the borrower's service as a full-time special
education teacher of infants, toddlers, children, or youth with
disabilities, in a public or other nonprofit elementary or secondary
school system.
(2) An institution must cancel up to 100 percent of the outstanding
loan balance on a Federal Perkins, Direct or Defense loan made prior to
July 23, 1992, for teaching service performed on or after October 7,
1998, if the cancellation benefits provided under this section are not
included in the terms of the borrower's promissory note.
(c) Cancellation for full-time teaching in fields of expertise. (1)
An institution must cancel up to 100 percent of the outstanding balance
on a borrower's Federal Perkins loan or Direct loan made on or after
July 23, 1992, for full-time teaching in mathematics, science, foreign
languages, bilingual education, or any other field of expertise where
the State education agency determines that there is a shortage of
qualified teachers.
(2) An institution must cancel up to 100 percent of the outstanding
loan balance on a Federal Perkins, Direct or Defense loan made prior to
July 23, 1992, for teaching service performed on or after October 7,
1998, if the cancellation benefits provided under this section are not
included in the terms of the borrower's promissory note.
* * * * *


Sec. 674.54 [Removed and Reserved]

20. Section 674.54 is removed and reserved.
21. Section 674.56 is amended by revising the section heading and
paragraphs (a), (b), and (c) to read as follows:


Sec. 674.56 Employment cancellation--Federal Perkins, Direct and
Defense loans.

(a) Cancellation for full-time employment as a nurse or medical
technician. (1) An institution must cancel up to 100 percent of the
outstanding balance on a borrower's Federal Perkins or Direct loan made
on or after July 23, 1992, for full-time employment as a nurse or
medical technician providing health care services.
(2) An institution must cancel up to 100 percent of the outstanding
balance on a Federal Perkins, Direct or Defense loan made prior to July
23, 1992, for full-time service as a nurse or medical technician
performed on or after October 7, 1998, if the cancellation benefits
provided under this section are not included in the borrower's
promissory note.
(b) Cancellation for full-time employment in a public or private
nonprofit child or family service agency. (1) An institution must
cancel up to 100 percent of the outstanding balance on a borrower's
Federal Perkins or Direct loan made on or after July 23, 1992, for
service as a full-time employee in a public or private nonprofit child
or family service agency who is providing, or supervising the provision
of, services to high-risk children who are from low-income communities
and the families of these children.
(2) An institution must cancel up to 100 percent of the outstanding
loan balance on a Federal Perkins, Direct or Defense loan made prior to
July 23, 1992, for employment in a child or family service agency on or
after October 7, 1998, if the cancellation benefits provided under this
section are not included in the terms of the borrower's promissory
note.
(c) Cancellation for service as a qualified professional provider
of early intervention services. (1) An institution must cancel up to
100 percent of the outstanding balance on a borrower's Federal Perkins
or Direct loan made on or after July 23, 1992, for the borrower's
service as a full-time qualified professional provider of early
intervention services in a public or other nonprofit program under
public supervision by the lead agency as authorized in section
676(b)(9) of the Individual with Disabilities Act.
(2) An institution must cancel up to 100 percent of the outstanding
loan balance on a Federal Perkins, Direct or Defense loan made prior to
July 23, 1992 for early intervention service performed on or after
October 7, 1998, if the cancellation benefits provided under this
section are not included in the terms of the borrower's promissory
note.
* * * * *
22. Section 674.57 is amended by redesignating paragraphs (a)(2),
(a)(3), (a)(4), (a)(5), (a)(6), and (a)(7) as (a)(3), (a)(4), (a)(5),
(a)(6), (a)(7), and (a)(8), respectively; by revising the section
heading and paragraph (a)(1); and adding a new paragraph (a)(2) to read
as follows:


Sec. 674.57 Cancellation for law enforcement or corrections officer
service--Federal Perkins, Direct and Defense loans.

(a)(1) An institution must cancel up to 100 percent of the
outstanding balance on a borrower's Federal Perkins or Direct Loan made
on or after November 29, 1990, for full-time service as a law
enforcement or corrections officer for an eligible employing agency.
(2) An institution must cancel up to 100 percent of the outstanding
loan balance on a Federal Perkins, Direct or Defense loan made prior to
November 29, 1990, for law enforcement or correction officer service
performed on or after October 7, 1998, if the cancellation benefits
provided under this section are not included in the terms of the
borrower's promissory note.
* * * * *
23. Section 674.58 is amended by revising paragraph (a) to read as
follows:


Sec. 674.58 Cancellation for service in a Head Start Program.

(a)(1) An institution must cancel up to 100 percent of the
outstanding balance on a borrower's Direct or Federal Perkins loan, for
service as a full-time staff member in a Head Start program.
(2) An institution must cancel up to 100 percent of the outstanding
balance on a Defense loan for service as a full-time staff member in a
Head Start program performed on or after October 7, 1998, if the
cancellation benefits provided under this section are not included in
the terms of the borrower's promissory note.
(3) The Head Start program in which the borrower serves must
operate for a complete academic year, or its equivalent.
(4) In order to qualify for cancellation, the borrower's salary may
not exceed the salary of a comparable employee working in the local
educational agency of the area served by the local Head Start program.
* * * * *
24. Section 674.60 is amended by revising the section heading and
paragraph (a) to read as follows:


Sec. 674.60 Cancellation for volunteer service--Perkins loans, Direct
loans and Defense loans.

(a)(1) An institution must cancel up to 70 percent of the
outstanding balance on a Perkins loan, and 70 percent of the
outstanding balance of an NDSL made on or after October 7, 1998, for
service as a volunteer under The Peace Corps Act or The Domestic
Volunteer Service Act of 1973 (ACTION programs).
(2) An institution must cancel up to 70 percent of the outstanding
balance on a Direct or Defense loan for service as

[[Page 58315]]

a volunteer under The Peace Corps Act or The Domestic Volunteer Service
Act of 1973 (ACTION programs) performed on or after October 7, 1998, if
the cancellation benefits provided under this section are not included
in the terms of the borrower's promissory note.
* * * * *


Sec. 674.8, 674.10, 674.19, 674.20, 674.35, 674.36, 674.38,674.50,
674.61 [Amended]

25. Sections 674.8, 674.10, 674.19, 674.20, 674.35, 674.36, 674.38,
674.50, and 674.61 are amended by revising the Office of Management and
Budget control number to read ``1845-0019''.
26. Sections 674.13 is amended by adding the Office of Management
and Budget control number before the authority citation.


Sec. 674.13 Reimbursement to the Fund.

* * * * *
(Approved by the Office of Management and Budget under control
number 1845-0019)

27. Section 674.37 is amended by adding the Office of Management
and Budget control number before the authority citation.


Sec. 674.37 Deferment of repayment--Direct loans made before October
1, 1980 and Defense loans.

* * * * *
(Approved by the Office of Management and Budget under control
number 1845-0019)


Sec. 674.43, 674.48 [Amended]

28. Sections 674.43 and 674.48 are amended by revising the Office
of Management and Budget control number to read ``1845-0023''.

[FR Doc. 99-28168 Filed 10-27-99; 8:45 am]
BILLING CODE 4000-01-P




]

Last Modified: 10/27/1999