Final Rule

Wednesday,
November 1, 2006

Part III

Department of
Education

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34 CFR Parts 668, 673, 682 and 685
Federal Student Aid Programs; Final Rule

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Federal Register / Vol. 71, No. 211 / Wednesday, November 1, 2006 / Rules and Regulations

DEPARTMENT OF EDUCATION
34 CFR Parts 668, 673, 682 and 685
RIN 1840–AC87

Federal Student Aid Programs
Office of Postsecondary
Education, Department of Education.
ACTION: Final regulations.
AGENCY:

SUMMARY: The Secretary is amending the
Federal Student Aid Program
regulations to implement the changes to
the Higher Education Act of 1965, as
amended (HEA), resulting from the
Higher Education Reconciliation Act of
2005 (HERA), Pub. L. 109–171, and
other recently enacted legislation. These
final regulations reflect the provisions of
the HERA that affect students,
borrowers, postsecondary educational
institutions, lenders, and other program
participants in the Federal student aid
programs authorized under Title IV of
the HEA.
Final regulations for the two new
Title IV grant programs created by the
HERA, the Academic Competitiveness
Grant Program and the National Science
and Mathematics Access to Retain
Talent (SMART) Grant Program, are
being published in a separate notice in
the Federal Register.
DATES: Effective Date: These final
regulations are effective December 1,
2006.

Ms.
Gail McLarnon, U.S. Department of
Education, 1990 K Street, NW., 8th
Floor, Washington, DC 20006.
Telephone: (202) 219–7048 or via the
Internet at: [email protected].
If you use a telecommunications
device for the deaf (TDD), you may call
the Federal Relay Service (FRS) 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
under FOR FURTHER INFORMATION
CONTACT.
SUPPLEMENTARY INFORMATION: On August
9, 2006, the Secretary published in the
Federal Register interim final
regulations with a request for comments
(71 FR 45666) for the Federal student
financial assistance programs. The
interim final regulations were effective
on September 8, 2006, and implemented
most of the changes made to the HEA
by the HERA, enacted as part of the
Deficit Reduction Act of 2005 (Pub. L.
109–171). The interim final regulations
also implemented changes made to the
HEA by: The Taxpayer-Teacher

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FOR FURTHER INFORMATION CONTACT:

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Protection Act of 2004 (Pub. L. 108–
409); certain provisions of Pub. L. 107–
139; the Pell Grant Hurricane and
Disaster Relief Act (Pub. L. 109–66); the
Student Grant Hurricane and Disaster
Relief Act (Pub. L. 109–67); and the
Emergency Supplemental
Appropriations Act for Defense, the
Global War on Terror, and Hurricane
Recovery, 2006 (Pub. L. 109–234).
The August 9, 2006, interim final
regulations included a request for public
comment. This document contains a
discussion of the comments we received
and revisions to the interim final
regulations that we made as a result of
these comments.
In the interim final regulations, we
stated that changes to the final
regulations made after consideration of
the public comments would be effective
July 1, 2007. After considering the
comments we received, we have
decided not to make any substantive
changes to the regulations. We have
made some technical and conforming
changes that were identified during the
public comment period, but these
technical changes are not subject to the
delayed effective date under section 482
of the HEA, and therefore become
effective 30 days after publication of
these final regulations.
Analysis of Comments and Changes
The changes to the interim final
regulations included in this document
were developed through the analysis of
comments received on the interim final
regulations published on August 9,
2006. We received 55 comments on the
interim final regulations.
An analysis of the comments and of
the changes in the regulations since
publication of the interim final
regulations follows. We group major
issues according to subject, with
appropriate sections of the regulations
referenced in parentheses. Generally, we
do not address technical and other
minor changes and suggested changes
the law does not authorize the Secretary
to make. We also do not respond to
comments pertaining to issues that were
not within the scope of the interim final
regulations.
Definition of Telecommunications
Course (§ 600.2)
Comments: A commenter representing
accrediting agencies believed that the
reference to ‘‘regular and substantive
interaction’’ in the definition of
telecommunications course was
inconsistent with Congress’ intent to
permit institutions maximum flexibility
in the development and application of
curriculum, and placed an undue
burden on accrediting agencies.

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Discussion: The Secretary does not
agree. The regulations do not restrict the
curricula institutions may offer or the
delivery modes they may use. Instead,
the regulations reflect the clear
distinction in the HERA between
telecommunications courses and
correspondence courses. This
distinction is necessary because the
HERA eliminated the circumstances
under which telecommunications
courses are considered correspondence
courses, and excluded
telecommunications courses from the
‘‘50 percent rule’’ limitations on
institutional eligibility for Title IV, HEA
program assistance, while retaining
them for correspondence courses.
Because of the changes made by the
HERA, it is necessary to clarify the
regulatory definition to distinguish
telecommunications courses from
correspondence courses. We have
defined the term telecommunications
course to conform to the usage of that
term by the higher education
community. None of the commenters
proposed alternative language.
The revised definition of the term
telecommunications course does not
impose any new requirements on
accrediting agencies. Since 1998,
section 496(n)(3) of the HEA has
required the Secretary to specifically
designate whether recognized
accrediting agencies have accreditation
of distance education within the scope
of their recognition. Since 1994,
accrediting agencies have also been
required under § 602.22(a)(2)(iii) to
provide prior approval for an
institution’s addition of courses or
programs that represent a significant
departure in the method of delivery
from those previously offered. The
interim final regulations do not modify
these requirements, or add any new
ones.
Changes: None.
Comments: While supporting our
effort to draw a clear distinction
between telecommunications and
correspondence courses, one commenter
thought that the language in the
definition of telecommunications course
was not specific enough to determine
how much interactivity was sufficient.
The commenter suggested that the
definition be revised to include
interaction among students and that we
clarify that ‘‘regular’’ interaction means
‘‘not trivial’’ rather than ‘‘at specific
intervals.’’
Discussion: The primary purpose of
revising the definition of
telecommunications course was to draw
a clear distinction between
telecommunications and
correspondence courses. In drawing this

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distinction, we wanted to avoid as much
as possible dictating a particular
teaching method. The Secretary believes
that requiring interaction among
students, as well as between students
and the instructor, would preclude
certain teaching methods, such as selfpaced instruction.
We disagree with the commenter on
the meaning of ‘‘regular’’ interaction.
We believe the phrase ‘‘regular and
substantive’’ means that the interaction
should both take place at regular
intervals and not be trivial.
Changes: None.
Comments: Two commenters
representing financial aid
administrators supported the change in
the definition of the term
telecommunications course but asked
whether instruction by video cassette or
disc recording would be considered to
be telecommunications coursework.
Discussion: We believe that the
definition of telecommunications course
adequately addresses the issue raised in
the comments. The regulations provide
that instruction by video cassette or disc
recording is telecommunications
coursework when the course involves
the use of other telecommunications
technologies for regular and substantive
interaction between students and
instructor, and when the course is
offered onsite in the same award year.
Otherwise, the use of video cassettes or
disc recording is considered a
correspondence course.
Changes: None.
Distance Education (§§ 600.2, 600.7,
600.51, 668.8 and 668.38)
Comments: One commenter agreed
that academic programs offered through
any use of telecommunications or
correspondence by foreign schools
should not be eligible for Title IV, HEA
program assistance.
A few commenters did not believe
that the HERA intended to deny
eligibility under the Federal Family
Education Loan (FFEL) Program to a
student who physically attends a foreign
school but takes a portion of his or her
program through telecommunications
classes. The commenters felt that it is
unfair to bar from FFEL eligibility a
student who could fulfill a program
requirement only through
telecommunications coursework
because the class is not offered at the
foreign school the student attends. One
commenter suggested that U.S. military
personnel deployed outside of the U.S.
may need to take courses via
telecommunications instruction as part
of their program of study.
The commenters recommended that
the definition of an eligible program for

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a foreign school be modified to permit
the inclusion of telecommunications
courses. Specifically, the commenters
suggested the definition be changed to
include a program at a foreign school
that requires on-site attendance in
traditional classroom or lab settings in
at least one class while permitting one
or more additional telecommunications
classes, while excluding a program at a
foreign school that permits the student
to attend courses solely via
telecommunications instruction.
Alternatively, the commenters
suggested that the effective date of the
regulations be changed to allow foreign
schools to deliver second and
subsequent disbursements of pending
loans on or after July 1, 2006 if the first
disbursement was made prior to July 1,
2006.
Discussion: The final regulations
reflect the statutory requirements for an
eligible program to include programs
offered in whole or in part through
telecommunications instruction by
institutions in the United States with
appropriate accreditation. The statute
does not extend this eligibility to foreign
schools and the Secretary does not have
the authority to do so by regulation.
In response to the comment regarding
U.S. military personnel located abroad,
it is the Secretary’s understanding that
such students do not usually attend
foreign schools because they have
access to programs offered by domestic
institutions. Lastly, the effective date is
established by the HERA and cannot be
changed by regulation.
Changes: None.

Department will evaluate satisfactory
academic progress for direct assessment
programs.
Discussion: Students enrolled in
direct assessment programs who are
receiving Title IV HEA, program
assistance must meet the same
satisfactory academic progress
requirements as do students attending
other types of programs. However, since
direct assessment programs may be
designed in a variety of ways, we will
determine how we will evaluate
institutional compliance with
satisfactory academic progress standards
on a case-by-case basis as part of the
initial eligibility review.
Changes: None.
Comments: One commenter thought
that § 668.10(a)(3) was intended to
require an institution to develop a
protocol for equating programs
administered under direct assessment
rules with clock hours for credit hour
measurements, but that the text in the
interim final regulations was unclear.
The commenter suggested some revised
language.
Discussion: The commenter is correct
about the intent of the regulations. We
agree that the commenter’s proposed
revised language is clearer than the
language in the interim final
regulations.
Changes: We have revised
§ 668.10(a)(3) for clarity, but without
changing the meaning.

Academic Year (§ 668.3)
Comments: One commenter suggested
that the Secretary change the definition
of an academic year so that institutions
can use the same definition as they use
for grade level in the Stafford Loan
Program.
Discussion: The definition of an
academic year in § 668.3 reflects the
statutory definition in section 481(a) of
the HEA, and the Secretary cannot
change that definition.
Changes: None.

Post-Withdrawal Disbursement
Counseling

Direct Assessment Programs (§ 668.10)
Comments: One commenter agreed
that direct assessment programs offered
at foreign schools should not be
considered eligible for Title IV funding.
Discussion: The Secretary appreciates
the commenter’s support.
Changes: None.
Comments: One commenter
representing several higher education
associations, and two commenters
representing financial aid
administrators, asked how the

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Treatment of Title IV Funds When a
Student Withdraws (§§ 668.22, 668.35,
and 668.173)

Comments: Several commenters
questioned why an institution must
obtain the student’s confirmation to
apply loan funds to the student’s
account, but not to apply other Title IV
program funds to that account. Several
commenters questioned why an
institution must obtain confirmation
that a student wishes to receive grant
funds as a direct disbursement.
Commenters noted that the HERA
provision that changed the postwithdrawal disbursement requirements
addressed confirmation of receipt of
loan funds, but not grant funds.
Discussion: As in the past,
§ 668.164(d)(1) and (d)(2) require an
institution to obtain a student’s
authorization (or a parent’s
authorization in the case of a parent
PLUS loan) to credit the student’s
account with any Title IV, HEA funds
for charges other than tuition, fees, and
room and board if the student contracts
with the institution for other services.

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An institution may obtain such an
authorization from a student or parent at
any time. The HERA added a new
provision that goes beyond the preexisting requirements in § 668.164(d)(1)
and (d)(2) to require an institution to
obtain confirmation from a student (or
a parent in the case of a parent PLUS
Loan) before making any postwithdrawal disbursement of loan funds.
This confirmation cannot be made until
the need for the post-withdrawal
disbursement has been determined, i.e.,
after the student withdraws. This
change ensures that a student or a
parent has an opportunity after the
student’s withdrawal to decline all or a
part of the loan, thus eliminating or
reducing his or her loan debt. The
Secretary did not add a similar change
to the regulations for grant funds
because she believes the requirements of
§ 668.164(d)(1) and (d)(2) are sufficient
to control the application of grant funds
to a student’s account.
The requirement in § 668.164(g)(3)(i)
that an institution obtain confirmation
that a student wishes to receive a postwithdrawal direct disbursement of grant
funds is not new. Students are provided
with an opportunity to refuse direct
disbursements of grant funds so that
they may preserve the amount of their
grant eligibility if they return to school
within the award year.
Changes: None.
Comments: Several commenters felt
that the interim final regulations did not
clearly explain how the requirements in
§ 668.22 are applied in concert with the
regulations for making a late
disbursement (§ 668.164(g)(3)) and for
notifying a student, or parent (for a
parent PLUS Loan), to provide that
student or parent an opportunity to
cancel a loan when the institution
credits the student’s account with FFEL,
Direct Loan, or Perkins Loan program
funds (§ 668.165(a)(2)). Many
commenters believed a conforming
amendment was needed to clarify
whether § 668.165(a)(2) applies in the
case of a post-withdrawal disbursement.
Discussion: The new confirmation
requirements do not apply to late
disbursements made to students who
did not withdraw. Section
668.164(g)(3)(i) requires an institution to
make any post-withdrawal
disbursement due to a student who
withdraws during a payment period or
period of enrollment in accordance with
the new post-withdrawal disbursement
procedures. However, the new postwithdrawal disbursement requirements
do not apply to late disbursements made
to students who successfully complete
the payment period or period of
enrollment (§ 668.164(g)(3)(ii)) or to

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students who do not withdraw, but
cease to be enrolled as at least half-time
students (§ 668.164(g)(3)(iii)).
The commenters are correct that a
conforming amendment to
§ 668.165(a)(2) is necessary. For
students who withdraw and are due a
post-withdrawal disbursement, the new
post-withdrawal disbursement
procedures in § 668.22 supersede the
provisions in § 668.165(a)(2) that require
an institution to notify a student or
parent of loan funds that are credited to
a student’s account. Because the new
post-withdrawal disbursement
procedures require an institution to
obtain a student’s confirmation (or a
parent’s confirmation in the case of a
parent PLUS Loan), the institution does
not have to notify the student or parent
again when the institution credits the
loan funds to the student’s account after
it receives the borrower’s confirmation.
The notification requirement in
§ 668.165(a)(2) still applies in all other
cases when an institution credits loan
funds to a student’s account.
Changes: The Secretary has revised
§ 668.165(a)(2) to make it clear that an
institution is not required to notify a
student or parent of loan funds that are
credited to a student’s account for
students who withdraw and are due a
post-withdrawal disbursement.
Comments: Several commenters noted
that requiring an institution to provide
notification of the outcome of a postwithdrawal disbursement request
‘‘electronically or in writing’’ is
redundant, because ‘‘in writing’’ means
through conventional mailing methods
or electronically.
Discussion: The commenters are
correct.
Changes: The reference to electronic
notification has been removed from
§ 668.22(a)(5)(iii)(E).
Withdrawals From Clock Hour Programs
Comments: One commenter
supported the new regulatory provisions
governing the Return of Title IV Funds
in the case of clock hour programs. One
commenter felt that the regulations
should allow an institution to determine
the percentage of aid earned by a
student who withdraws and has
completed more clock hours than he or
she was scheduled to complete by using
the completed hours, rather than the
scheduled hours. The commenter noted
that this was consistent with the
previous policy for students
withdrawing from clock-hour programs.
Discussion: Prior to the enactment of
the HERA, either completed hours or
scheduled hours were used to determine
earned aid for a student who withdrew
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the HERA changed the law to allow the
use of scheduled hours only.
Changes: None.
Grant Overpayment Requirements
Comments: One commenter suggested
that the regulations be modified to
clarify that the provision that a student
is not required to return an original
grant overpayment amount of $50 or
less applies on a Title IV, HEA programby-program basis.
Discussion: The Secretary agrees with
the commenter.
Changes: Section 668.22(h)(3)(ii)(B)
has been revised to make it clear that
the provision that a student is not
required to return an original grant
overpayment amount of $50 or less
applies on a Title IV, HEA program-byprogram basis.
Comments: Several commenters asked
the Department to raise to $50 the $25
de minimis amount for overpayments in
the Academic Competitiveness Grant
(ACG) and National SMART grant
programs and other Title IV programs to
match the de minimis grant
overpayment amount for students who
withdraw, which was raised to $50 by
the HERA.
Discussion: The Secretary does not
agree that the amounts should
correspond. The $25 de minimis
standard used in the regulations is
based upon the Department’s
determination of the amount that is cost
effective for the Department to collect
on outstanding balances owed to the
Department. We are able to successfully
pursue collections of $25 or higher with
Internal Revenue Service (IRS) offsets
and other methods.
Changes: None.
Waiver of Grant Overpayment for
Students Affected by a Disaster
Comments: One commenter felt that
the regulatory language applying the
waiver of grant overpayment for
students affected by a disaster to
students ‘‘whose withdrawal ended
within the award year during which the
designation occurred or during the next
succeeding award year’’ was unclear.
The commenter asked the Secretary to
clarify that students remain eligible for
the grant overpayment waiver even if
they do not return to the same
institution in the following year.
Discussion: An otherwise eligible
student qualifies for the waiver if he or
she withdraws during the award year
during which the major disaster
designation occurred or during the next
succeeding award year, if the student
withdrew because of the major disaster.
Changes: Section 668.22(h)(5)(iii) has
been revised to clarify that the grant

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overpayment waiver applies to students
whose withdrawal due to a disaster
occurred, rather than ended, within the
award year during which the
designation occurred or during the next
succeeding award year.

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Order of Return of Grant Funds
Comments: One commenter felt that
the regulations should be changed to
make it clear that an institution will not
have to return funds to both the ACG
and National SMART Grant programs
for the same withdrawal.
Discussion: Because an institution
may opt to use the period of enrollment,
rather than the payment period, to
perform a Return of Title IV Funds
calculation for a student who withdraws
from a non-standard term or non-term
program, it is possible, although highly
unlikely, that both an ACG and a
National SMART Grant could be
disbursed (or scheduled to be disbursed)
to a student for the same period. In such
a case, funds from both the ACG and
National SMART Grant programs may
need to be returned for the same
withdrawal.
Changes: None.
Return of Funds Within 45 Days
Comments: One commenter felt that
the Secretary should extend the other
deadlines under § 668.22 from 30 days
to 45 days to correspond to the
extension of the maximum amount of
time an institution has to return
unearned funds for which it is
responsible. The commenter felt this
extension should also be applied to
notifications to students for postwithdrawal disbursements and
notifications to students of Title IV grant
overpayments resulting from
withdrawal. The commenter asserted
that a uniform deadline makes sense
because the same Return of Title IV
Funds process leads up to all three
requirements, and consistency would
help ensure compliance.
Discussion: Institutions have
previously indicated that they needed
an extension of the former 30-day return
deadline to provide additional time to
perform the administrative functions
necessary to return the funds. The
actual calculation of earned funds is not
time consuming. The Secretary believes
that providing institutions with over
four weeks to enter information from
their records and calculate the amount
to be returned is more than sufficient.
With regard to the request that the
Secretary extend the 30-day deadlines
for notifications to students, the
Secretary does not believe it is in the
best interest of students to extend these
deadlines merely for consistency’s sake.

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assistance benefits paid under the
Veteran’s Affairs Educational Assistance
Pilot Program and language from
§ 685.102(b)(2)(ii), which excludes from
estimated financial assistance the
Student Debts Under the HEA and to the amounts of Federal Perkins Loan and
Federal Work-Study funds that the
U.S. (§ 668.35)
student has declined.
Comments: Several commenters
Another commenter requested that
suggested that § 668.35(e)(3), which
the definition of estimated financial
governs the amount of an overpayment
assistance in all three sections be
that renders a student ineligible for
modified to exclude any alternative or
additional Title IV, HEA program
private loans not certified by the
assistance, be changed from $25 to $50
institution. This commenter suggested
to be consistent with the new statutory
that only those loans that the institution
requirement governing repayment of
is aware the student is receiving should
grant funds under the return of Title IV
be included in the definition of
aid provisions.
estimated financial assistance. An
Discussion: The Secretary disagrees
additional, similar comment was
with the commenters. In 2002, we
received suggesting that language be
published final regulations to make the
added to the definitions in all three
treatment of overpayments consistent in sections to specifically state that only
the Title IV, HEA programs, including
benefits that an institution is aware of
incorporating the de minimis amount
must be considered estimated financial
concept that applied to grant
assistance.
overpayments under the return to Title
Discussion: Although the list of
IV aid requirements. We decided to use
individual veterans’ education benefits
the $25 de minimis standard for
in each of the three sections that define
consistency and simplicity, and because estimated financial assistance is not all
it is cost effective. We do not believe it
inclusive, the Secretary agrees with the
first commenter that, for consistency,
is appropriate to raise the de minimis
benefits paid under section 903 of Pub.
amount applicable to overpayments
L. 96–342 (Educational Assistance Pilot
when the Department has the tools and
Program) should be included in
resources available to collect these
§ 673.5(c). However, it would be
amounts.
However, as a result of the change in
redundant to specifically exclude from
the minimum amount of a grant
the definition of estimated financial
repayment for which a student is
assistance in § 673.5(c) the amounts of
Federal Perkins Loan and Federal Workresponsible under the return of Title IV
Study funds that the student has
aid provisions from $25 to $50, we are
declined. Section § 673.5 defines the
amending § 668.35(e) to clarify that a
term estimated financial assistance for
student who owes a grant overpayment
the purpose of determining eligibility
of $50 or less that is not a remaining
for campus-based funds. It would not
balance and is a result of the return of
make sense to exclude campus-based
Title IV aid calculation is eligible to
funds declined by a student from the list
receive additional Title IV, HEA
of items used to determine that
program assistance.
student’s eligibility for those campusChanges: We have added a new
based funds. If a student declines funds
paragraph (4) to § 668.35(e) to clarify
from a campus-based program, the
that a student who owes a grant
amount of those declined funds would
overpayment of $50 or less under the
not be used to determine eligibility for
circumstances explained above is
campus-based funds.
eligible to receive additional Title IV,
With respect to the proposal to define
HEA program assistance.
estimated financial assistance as
Estimated Financial Assistance
including only loans of which the
(§§ 673.5, 682.200, and 685.102)
institution is aware, we note that, under
Comments: One commenter suggested the administrative capability guidelines
that we add benefits paid under Section in § 668.16(b) and (f), an institution
must have a mechanism in place for
903 of Pub. L. 96–342 (Educational
obtaining and reviewing all information
Assistance Pilot Program) that is
it receives that has a bearing on a
currently in the definition of estimated
student’s eligibility for Title IV, HEA
financial assistance in §§ 682.200(b)
assistance. The institution must
and 685.102(b) to the definition of
communicate this information to the
estimated financial assistance in
individual designated to administer the
§ 673.5(c). The commenter also
Title IV programs at the institution. In
suggested that we add language in
light of this requirement, we believe that
§ 682.200(b)(1)(iv), which includes in
it is unlikely that a student will be
the definition of estimated financial
The Secretary believes that the sooner
an institution attempts to contact these
students, the more likely it is that the
institution will reach the students.
Changes: None.

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receiving loans of which the institution
is not aware.
Changes: The definition of estimated
financial assistance in § 673.5(c)(1)(ix)
has been revised to include benefits
paid under section 903 of Pub. L. 96–
342 (Educational Assistance Pilot
Program). A technical change has also
been made to correct the reference in
§ 685.102(b)(1)(ix) from ‘‘paragraph
(2)(iii)’’ to ‘‘paragraph (2)(iv)’’.
Military Deferment (§§ 674.34,
682.210(t), 682.211(i) and 685.204)
Comments: One commenter
recommended that we extend eligibility
for the new military deferment
established by the HERA to Perkins
Loans disbursed before July 1, 2001 if
the borrower received at least one
Perkins Loan first disbursed on or after
July 1, 2001.
Discussion: Section 8007(f) of the
HERA specifies that the military
deferment applies to loans ‘‘for which
the first disbursement is made on or
after July 1, 2001.’’ The Secretary does
not have the authority to extend
eligibility for the military deferment to
loans for which the first disbursement
was made before July 1, 2001.
Changes: None.
Comments: Some commenters asked
if a qualified borrower who experiences
multiple deployments could receive
separate deferments for each of his or
her eligible Perkins, FFEL and Direct
Loan program loans, as long as each
deferment period did not last longer
than the three-year maximum.
Discussion: The three-year maximum
for the military deferment applies to
each loan, not to the borrower. If a
borrower receives a military deferment
on a loan for three years, or receives
multiple military deferments on a loan
that add up to three years, that loan no
longer qualifies for a military deferment.
If the borrower goes back to school,
obtains more Title IV loans, and then is
called back to active duty, the new loans
would qualify for up to three years of
military deferment. However, the older
loan that has already been in a military
deferment for the three-year maximum
would not qualify for a military
deferment.
Changes: None.
Comments: Several commenters
recommended that we confirm that a
lender has the authority to grant a
mandatory administrative forbearance,
as provided for in § 682.211(i), on a
borrower’s pre-July 1, 2001 loans, if the
borrower qualifies for a military
deferment on loans that were first
disbursed on or after July 1, 2001.
Discussion: FFEL lenders are required
to grant mandatory administrative

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forbearances when notified by the
Secretary that exceptional
circumstances exist, such as a local or
national emergency or a military
mobilization. Some borrowers may
qualify for a military deferment on loans
first disbursed on or after July 1, 2001
and also may qualify for a mandatory
administrative forbearance on loans first
disbursed before July 1, 2001. However,
not all borrowers who qualify for a
military deferment necessarily qualify
for a mandatory administrative
forbearance.
Changes: None.
Comments: Several commenters
recommended that we change the name
of the prior military deferment that is
available to borrowers with loans made
before July 1, 1993, to the ‘‘Armed
Forces deferment’’, to avoid confusion
with the new military deferment
enacted by the HERA.
Discussion: The FFEL and Direct Loan
Public Service Deferment Request forms
do not use the term ‘‘military
deferment’’ to refer to the pre-July 1,
1993 military deferment mentioned in
the comments. Instead, these forms refer
to borrowers who are ‘‘on active duty in
the Armed Forces of the United States.’’
These forms are the primary source of
information to borrowers on the prior
military deferment. Accordingly, we do
not believe that there will be any
significant confusion among borrowers.
Moreover, we believe that re-naming the
old military deferment in the
regulations serves no purpose.
Changes: None.
Perkins Loan Rehabilitation (§ 674.39)
Comments: One commenter
questioned the statutory basis for
denying a borrower who has been
convicted of, or has pled nolo
contendere or guilty to, a crime
involving fraud in obtaining the Perkins
Loan the opportunity to rehabilitate the
defaulted Perkins Loan. The commenter
questioned the statutory basis for
denying loan rehabilitation to such
borrowers. The commenter also
contended that institutions have no
reasonable way of knowing whether a
borrower has been convicted of, or has
pled nolo contendere or guilty to, a
crime involving fraud in obtaining a
Perkins Loan.
Discussion: Section 8021(a) of the
HERA provides that a student who has
been convicted of, or has pled nolo
contendere or guilty to a crime
involving fraud in obtaining Title IV,
HEA program assistance is not eligible
for additional Title IV assistance unless
he or she has repaid the fraudulently
obtained Title IV aid. If a borrower were
permitted to rehabilitate a fraudulently

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obtained Perkins Loan under § 674.39 of
the Perkins Loan program regulations,
the borrower would regain eligibility for
additional Title IV, HEA program
assistance without having repaid the
fraudulently obtained loan in full, as
required by the HERA.
We do not agree with the commenter’s
contention that an institution will not
know if a borrower was found guilty of
fraud. The institution would almost
certainly be involved in any legal
proceedings relating to a Perkins Loan
that was fraudulently obtained from that
institution.
Changes: None.
Definition of Satisfactory Repayment
Arrangement (§§ 682.200 and 685.102)
Comments: Several commenters
pointed out that the standard for an ontime payment for purposes of
rehabilitating a loan is now different
from the standard for an on-time
payment for purposes of making
satisfactory repayment arrangements on
a defaulted loan to regain Title IV, HEA
program assistance eligibility. Under the
rehabilitation rules, an on-time payment
is a payment made within 20 days of the
due date. Under the satisfactory
repayment arrangement rules, an ontime payment is a payment made within
15 days of the due date. Since some
borrowers make satisfactory repayment
arrangements and attempt loan
rehabilitation concurrently, the
commenters recommended using within
20 days of the due date as the on-time
standard for both purposes.
Discussion: The making of six
consecutive monthly payments under
satisfactory repayment arrangements
restores Title IV, HEA program
assistance eligibility to a defaulted
borrower. We believe that the standard
for on-time payments for purposes of
regaining eligibility for Title IV, HEA
program assistance should be stricter
than the standard for rehabilitation of a
defaulted loan. In addition, the on-time
payment standard for borrowers who are
in a regular repayment status requires
that the payments be made within 15
days of the due date. We do not believe
that it is appropriate to provide a longer
period for on-time payments for
borrowers who are in default on their
loans than for borrowers who are
current on their loans. Borrowers in
default should be held to an on-time
standard that is at least as strict as the
standard applied to current borrowers,
not rewarded with extra time to make a
payment. Finally, we note that Congress
did not apply the 20-day standard
adopted for the loan rehabilitation
program to borrowers in other
situations.

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Changes: None.
Eligible Borrower (§§ 682.201 and
685.200)
Comments: Two commenters
recommended adding language to
§§ 682.201 and 685.200 to provide that
a student borrower is not eligible for
Title IV, HEA program assistance unless
the borrower has repaid any Title IV,
HEA program assistance obtained by
fraud, if the student has been convicted
of, or has pled nolo contendere or guilty
to, a crime involving fraud in obtaining
Title IV, HEA program assistance. These
commenters also recommended that we
revise § 682.201 to list the general
eligibility requirements for all
borrowers, and then the requirements
that are specific to each loan type. The
commenters felt that this approach
would be more efficient and eliminate
unnecessary redundancies.
Discussion: The interim final
regulations in §§ 668.32(m) and
668.35(i) include the new eligibility
provision that prohibits a student
borrower from obtaining Title IV, HEA
program assistance unless the borrower
has repaid any Title IV, HEA program
assistance obtained by fraud. Section
682.201(a) and (b) of the FFEL
regulations stipulate that a Stafford
Loan borrower and a student PLUS
borrower, respectively, must meet the
eligibility requirements in 34 CFR part
668 to qualify for a Stafford Loan.
Similar references to the eligibility
requirements in 34 CFR part 668 are in
§ 685.200(a)(1)(ii) and 685.200(b)(1)(ii)
of the Direct Loan regulations. We
believe that it would be redundant to
include the language regarding the
student eligibility requirements already
outlined in part 668 in §§ 682.201 and
685.200.
We disagree with the suggestion that
restructuring § 682.201 would be more
efficient. In developing the interim final
regulations, we determined that the
most efficient and easily understandable
way to incorporate the changes
mandated by the HERA into § 682.201
was to fit the changes into the existing
structure of this section. We believe that
it is easier to identify changes that we
have made to a section if the overall
structure of the section remains
consistent with past versions of that
section. Although some redundancy is
unavoidable with this approach, we
have reduced the redundancies through
the use of cross-references.
Changes: None.
Comments: Several commenters noted
that a student borrower may receive a
Federal Direct Subsidized Stafford/Ford
Loan or a Federal Direct Unsubsidized
Stafford/Ford Loan and a FFEL Program

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Student PLUS Loan for the same period
of enrollment. These commenters
recommended revising the PLUS loan
student eligibility requirements in both
the FFEL and Direct Loan programs, to
stipulate that a graduate or professional
student’s annual loan maximum
eligibility for either a FFEL Stafford
Loan or a Direct Stafford/Ford Loan, as
applicable, must be determined before
awarding the student a PLUS Loan.
Discussion: The Secretary has
previously issued guidance stating that
a graduate or professional student’s
maximum annual Stafford Loan
eligibility must be determined before
the student applies for a PLUS Loan,
although the student is not first required
to borrower up to his or her maximum
annual Stafford Loan limit before
receiving a PLUS Loan. If a school
participates in both the FFEL and Direct
Loan programs, the school must
determine the borrower’s maximum
annual Stafford Loan eligibility under
the program the school is participating
in for Stafford Loan purposes. We agree
that this guidance should be
incorporated in the regulations.
Changes: We have revised
§§ 682.201(b)(3) and 685.200(b)(1)(iv) to
specify that a graduate or professional
student’s maximum annual Stafford
Loan eligibility under either the Direct
Loan or FFEL program must be
determined before the student applies
for a PLUS Loan.
Comments: Two commenters
recommended that § 682.201(d)(1) be
revised to stipulate that a borrower who
obtained a loan by identity theft or some
other illegitimate means, or who
obtained a loan for which he or she was
ineligible, may not consolidate that
loan. In addition, these commenters
recommended that these borrowers not
be permitted to consolidate loans for
which the borrower is eligible until the
loans for which the borrower was
ineligible have been paid in full. Several
commenters noted that new
§ 682.201(d)(2) states that a borrower
may not consolidate a loan for which
the borrower is wholly or partially
responsible. Because our revision
stipulating that a borrower who
obtained a loan by identity theft or some
other illegitimate means, or who
obtained a loan for which he or she was
ineligible, may not consolidate that loan
was unclear, several commenters asked
if the word ‘‘not’’ was inadvertently
dropped from this section.
Discussion: Section 682.201(d)(2) of
the interim final regulations should
have read, ‘‘A borrower may not
consolidate a loan under this section for
which the borrower is wholly or
partially ineligible.’’ This language

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64383

mirrors the existing provisions in
§ 685.211(e)(4) of the Direct Loan
regulations. The revised § 682.201(d)(2)
precludes a borrower who obtained a
Title IV loan by identity theft, fraud, or
some other illegitimate means from
consolidating the ineligible loan.
However, we do not believe that the
HERA prohibits a borrower who has
obtained loans for which the borrower
is ineligible from consolidating loans for
which the borrower is eligible, and we
do not believe we have the authority to
impose such a restriction by regulation.
We believe the revision to
§ 682.201(d)(2) adequately addresses
commenters’ concerns and that revising
§ 682.201(d)(1) is unnecessary.
Changes: We have replaced
‘‘responsible’’ with ‘‘ineligible’’ in
§ 682.201(d)(2).
Eligibility for a Direct Consolidation
Loan (§§ 682.201, 685.100 and 685.220)
Comments: Two commenters
recommended that we amend the FFEL
and Direct Loan program regulations to
clarify that, in the case of a borrower
who wishes to consolidate a Federal
Consolidation Loan that has been
submitted for default aversion into the
Direct Loan Program, the borrower must
be delinquent or in default on the
Federal Consolidation Loan at the time
the borrower applies for the Direct
Consolidation Loan. The commenters
believed that the current regulatory
language would allow a borrower to
consolidate a Federal Consolidation
Loan on which the borrower is current
on making payments into a Direct
Consolidation Loan, if the Federal
Consolidation Loan had been submitted
for default aversion at some time in the
past.
Discussion: We agree that Federal
Consolidation Loans that are currently
delinquent or in default may be
consolidated into a Direct Consolidation
Loan. However, we do not believe that
it is necessary to amend the current
regulatory language in §§ 682.201,
685.100 and 685.220 to state this
requirement more explicitly.
Changes: None.
Comments: Several commenters urged
the Secretary to clarify that borrowers
with defaulted Federal Consolidation
Loans are eligible to consolidate into the
Direct Loan Program, without including
another eligible loan, for the purpose of
obtaining an income contingent
repayment (ICR) plan. Section
428C(a)(3)(B)(i)(IV) of the HEA provides
this option for borrowers with
delinquent Federal Consolidation Loans
that have been submitted to the
guaranty agency for default aversion.
The commenters believed that this

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provision of the law, which was added
by the HERA, was intended to provide
the ICR option to borrowers who are
either seriously delinquent or in default
on their Federal Consolidation Loans.
They also noted that the statutory
language does not distinguish between
non-defaulted and defaulted borrowers,
and that any default claim filing would
have been preceded by a default
aversion submission.
Discussion: The commenters are
correct in reading the regulations
implementing the changes made to
section 428C(a)(3)(B)(i)(IV) of the HEA
to allow a borrower to consolidate a
single defaulted Federal Consolidation
Loan into the Direct Loan Program for
the purpose of obtaining an ICR plan.
We believe that the regulatory language
is sufficiently clear and that it is not
necessary to revise the regulations to
state this more explicitly.
An otherwise eligible borrower may
also consolidate a single Federal
Consolidation Loan into the Direct Loan
Program for the purpose of obtaining an
income contingent repayment plan if
the borrower has filed an adversary
complaint in a bankruptcy proceeding
seeking to have the Federal
Consolidation Loan discharged,
regardless of whether that Federal
Consolidation Loan is current,
delinquent, or in default. A borrower
who is seeking to have a Federal
Consolidation Loan discharged in
bankruptcy should be treated the same
as a borrower whose loan has been
submitted for default aversion. A
borrower who seeks to have a loan
discharged in bankruptcy is clearly
stating his or her intent not to repay the
loan, but the bankruptcy filing
precludes the submission of a default
aversion request. Offering the Direct
Loan Program ICR option to such a
borrower provides an alternative to
having the loan discharged in
bankruptcy.
Changes: None.
Permissible Charges by Lenders to
Borrowers (§ 682.202(a))
Commments: One commenter urged
the Department to develop and publish
regulations to restrict a lender’s ability
to charge an FFEL Program borrower an
interest rate that is less than the rate
specified in the HEA and the program
regulations. The commenter believes
that the regulations should require
lenders to charge all borrowers the same
rate to stop lenders from using interest
rates to discriminate between
institutions and borrowers based on
inequitable criteria or to eliminate
competition in the student lending
market.

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Discussion: Section 427A(l) of the
HEA provides that nothing shall
prohibit a lender from charging a
borrower an interest rate less than the
rate specified in the statute.
Accordingly, we do not have the
statutory authority to require lenders to
charge all borrowers the same interest
rate.
Changes: None.
Insurance Premium and Federal Default
Fees (§§ 682.202(d)(2) and
682.401(b)(10))
Comments: One commenter stated
that the changes made to
§§ 682.202(d)(2) and 682.401(b)(10) in
the interim final regulations appear to
eliminate the authority of a lender or
guaranty agency, under § 682.209(f)(4),
to charge a guarantee fee to a borrower
who is refinancing a fixed rate PLUS
Loan or a Supplemental Loans for
Students (SLS) Loan made prior to July
1, 1987 under § 682.209(f)(1). The
commenter believes that the HERA
provisions that changed the optional
insurance premium to a mandatory
Federal default fee did not remove a
lender’s or guaranty agency’s authority
to charge a guarantee fee in these cases.
Discussion: We agree that the HERA
did not remove a lender’s or guaranty
agency’s authority to charge a guarantee
fee if a borrower refinances a fixed rate
PLUS or SLS loan made prior to July 1,
1987. However, we believe the existing
language in § 682.209(f)(4), which
specifically states that the refinancing
lender may charge the borrower a
guarantee fee in these circumstances,
already addresses this issue.
Changes: None.
Loan Disbursement Through an Escrow
Agent (§§ 682.207(b)(1)(iv) and
682.408(c))
Comments: Many commenters noted
that the discussion in the preamble of
the interim final regulations related to
the new 10-day deadline for a lender to
pay funds to an escrow agent for
disbursement to a school differed from
the regulatory language and requested
clarification. The commenters indicated
that the preamble stated that the transfer
of loan funds must take place no earlier
than 10 days prior to disbursement to
the borrower, while the regulations
indicated that the 10 days referred to the
transfer of the loan funds to the school
prior to the school’s delivery of the
funds to the borrower. A couple of
commenters indicated that an additional
change was needed to § 682.408(c)(2) to
reflect the reduction from 21 to 10 days
for disbursement through an escrow
agent. Several commenters also
recommended that § 682.408(c) be

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revised to provide that an escrow agent,
as the lender’s agent, could disburse
loan funds directly to a borrower in a
study-abroad program at the borrower’s
request.
Discussion: We agree with the
commenters that there is a difference
between the discussions of the 10-day
period in the preamble and in the
interim final regulations. The language
in the interim final regulations that
states that the escrow agent shall
transmit loan proceeds received from a
lender to a school not later than 10 days
after the agent receives the funds from
the lender accurately reflects our policy
on this issue.
A revision to § 682.408(c)(2) reflecting
the reduction from 21 to 10 days for
disbursement through an escrow agent
is unnecessary. Paragraph (c)(2) of
§ 682.408 was incorporated into new
§ 682.408(c) in the interim final
regulations and the reduction from 21 to
10 days for disbursement through an
escrow agent is reflected in this new
paragraph.
We agree with the commenters who
recommended that § 682.408(c) be
revised to provide that an escrow agent,
as the lender’s agent, could disburse
loan funds directly to a borrower in a
study-abroad program at the borrower’s
request.
Changes: We have amended
§ 682.408(c) to clarify that an escrow
agent may disburse Stafford Loan
proceeds directly to a borrower who is
attending a study-abroad program and
who requests a direct disbursement
from the lender.
Due Diligence in Disbursing a Loan
(§§ 682.207 and 682.604)
Comments: Several commenters
disagreed with our determination that
PLUS Loan funds cannot be disbursed
directly to a borrower enrolled in a
study-abroad program or at a foreign
school. The commenters believed that
the ‘‘same terms and conditions’’
provision in section 428B(a)(2) of the
HEA permits retention of the prior
policy allowing direct disbursement of
PLUS Loan funds. The commenters
noted that, while the PLUS funds check
must still be made co-payable to the
institution and the borrower under
428B(c)(2) of the HEA, disbursing funds
directly to a borrower to be endorsed
and mailed to an institution may assist
borrowers in paying for expenses while
traveling to a foreign school.
Discussion: Section 428B(a)(2) of the
HEA does not authorize the Secretary to
establish disbursement rules for PLUS
Loans made to pay for attendance at
foreign institutions or for students
enrolled in study-abroad programs that

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are different from the rules for other
FFEL Loans for attendance at those
institutions.
Changes: None.
Comments: One commenter suggested
that the regulations in
§ 682.207(b)(1)(v)(C)(1) be revised to
clarify that a lender or guaranty agency
must verify a student’s enrollment with
the home institution, rather than with
the foreign school, before making a
direct disbursement to a student in a
study-abroad program.
Discussion: The Secretary agrees with
the commenters.
Changes: Section
682.207(b)(1)(v)(C)(1) has been revised
to clarify that a lender or guaranty
agency may make a disbursement
directly to a student enrolled in a studyabroad program only after verification of
the student’s enrollment with the home
institution.
Comments: One commenter did not
agree that a lender or guaranty agency
should be required to verify that a
continuing student is still enrolled at
the enrollment status for which the loan
was certified before making a
disbursement of Stafford Loan funds
directly to a student at a foreign school.
The commenter noted that, although the
preamble stated that the verification
requirements in the regulations are
based on those in Dear Colleague Letter
(DCL) G–03–348, this requirement
differs from that in the DCL, which
simply required verification that the
student was accepted for enrollment at
the foreign school. The commenter felt
that the institution should be
responsible for notifying the lender if
the borrower’s enrollment status
changed to less than half-time.
A couple of commenters did not
believe that the regulations should limit
how a lender or guaranty agency may
contact a foreign school or home
institution to verify enrollment. The
commenters felt that other forms of
contact, in addition to contact by
telephone or e-mail, such as facsimile,
should be acceptable.
One commenter was concerned that
the regulations do not specify who at a
foreign school may authorize a
disbursement to be sent directly to a
borrower. The commenter felt that this
gap left the process open to abuse.
Discussion: The intent of the statutory
requirement is to require a confirmation
that a student who is attending or plans
to attend a foreign school is actually
eligible to receive FFEL funds when
those funds will not be sent to the
school, but will be disbursed directly to
a student. Therefore, we believe it is
appropriate to require a lender or
guaranty agency to confirm that a

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continuing student’s enrollment (at least
half-time) supports eligibility for the
loan disbursement. As the commenter
noted, a change in enrollment status
would affect a student’s eligibility for a
loan only if the student has dropped
below half-time enrollment. Therefore,
the lender or guaranty agency need only
confirm that the student is still enrolled
at least half-time.
Because of concerns with timeliness
and security, the Secretary does not
believe that all forms of contact are
appropriate for the verification of
enrollment. However, the Secretary does
agree that contact by facsimile is
acceptable.
The Secretary agrees that not just any
individual at a foreign school should be
permitted to authorize a disbursement
directly to a student. In DCL GEN–06–
11, the Department asked foreign
schools to use the modified institutional
eligibility electronic application (EAPP)
to enter the names of the individuals
who are authorized by the school to
certify FFEL Loan applications. The
DCL noted that the Department expects
guaranty agencies or lenders to contact
these individuals, whose names will be
accessible in the Department’s
Postsecondary Education Participants
Systems (PEPS), to verify enrollment. To
the extent that a foreign school notifies
a guaranty agency or lender of other
individuals who are authorized to
provide this information, the guaranty
agency or lender must verify the
information with at least one of the
persons entered by the school on the
EAPP that those officials are authorized
to act on behalf of the institution in
administering the FFEL Program. To
allow the Secretary the flexibility to
change this process in response to
possible systems changes, the Secretary
does not believe that the procedures for
this contact should be specified in the
regulations. However, the Secretary has
decided that the regulations should
require guaranty agencies and lenders to
contact foreign schools in accordance
with any procedures specified by the
Department.
Changes: Section 682.207(b)(2)(i) has
been revised to permit a lender or
guaranty agency to contact a foreign
school via facsimile to verify a student’s
enrollment. In addition,
§ 682.207(b)(2)(i)(A) has been changed
to require guaranty agencies and lenders
to contact foreign schools in accordance
with any procedures specified by the
Secretary.

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Parental Leave and Working Mother
Deferments (§§ 682.210(o) and (r) and
685.204(d)(2))
Comments: Many commenters asked
whether the deletion of section
428(b)(7)(A)(ii) from the HEA by the
HERA effectively eliminated the
parental leave and working mother
deferments for borrowers with loans
disbursed before July 1, 1993. The
commenters are concerned that these
deferments will not be available to an
otherwise eligible borrower because the
borrower must waive up to one month
of the borrower’s grace period in order
to meet the eligibility criteria for the
deferment.
Discussion: The requirement that a
borrower waive at least one month of
the grace period so the borrower may be
certified as having been enrolled at least
half time within the six-month period
preceding the deferment start date in
§ 682.210(o) applies only to the parental
leave deferment. Deferments are a term
and condition of the borrower’s
promissory note. The Congress, in
making changes to the HEA historically,
has not eliminated deferments already
granted to a borrower as a term and
condition of the borrower’s loan, and it
does not appear that Congress intended
to do so in this case. Accordingly,
otherwise eligible borrowers may
continue to waive a month of the grace
period, if necessary, in order to qualify
for the parental leave deferment.
Changes: None.
Forbearance (§ 682.211)
Comments: Several commenters
suggested that we eliminate
§ 682.211(h)(3) of the FFEL regulations
because section 8014(e) of the HERA
amended the HEA to remove the
requirement that the terms of a
mandatory forbearance be in writing.
Discussion: While we agree that the
HERA eliminated the requirement that
the terms of a mandatory forbearance
agreement be in writing, we also note
that the HERA requires that the terms of
a mandatory forbearance agreed to by
the lender and the borrower or endorser
be documented by a confirmation notice
sent by the lender to the borrower/
endorser and by the lender recording
the terms in the borrower’s file. We
believe that, with the exception of
administrative forbearances in
§ 682.211(f), the same procedures
should apply to all the forbearances.
The interim final regulations amended
§ 682.211(b)(1) to reflect the new
forbearance requirements. We believe
that § 682.211(h)(3) should also be
changed to reflect the new requirements
that the lender send a notice to the

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borrower/endorser and include a
notation in the borrower’s file
confirming the forbearance rather than
simply eliminating the requirement for
a written forbearance agreement.
Changes: We have amended
§ 682.211(h)(3) to reflect these changes.

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Teacher Loan Forgiveness (§§ 682.215(c)
and 685.217(c))
Comments: One commenter noted
that the use of the word ‘‘either’’ with
regard to a borrower qualifying for
teacher loan forgiveness based on
teaching special education in ‘‘either an
eligible elementary or secondary
school’’ could be misinterpreted. The
commenter recommended removing the
word ‘‘either’’ to make it clear that a
borrower could combine teaching
service in an eligible elementary school
and an eligible secondary school to
qualify for teacher loan forgiveness as a
highly qualified special education
teacher.
Discussion: Use of the word ‘‘either’’
was not intended to imply that service
as a highly qualified special education
teacher in an eligible elementary school
and service as a highly qualified special
education teacher in an eligible
secondary school could not be
combined to qualify a borrower for
teacher loan forgiveness.
Changes: We have removed the word
‘‘either’’ from §§ 682.215(c)(3)(ii)(B),
682.215(c)(4)(ii)(B), 685.217(c)(3)(ii)(B),
and 685.217(c)(4)(ii)(B).
Payment of Special Allowance on FFEL
Loans (§ 682.302)
Comments: One commenter asked us
to clarify the effective date for the
change made by the HERA to the
calculation of special allowance
payments for PLUS Loans.
Discussion: As reflected in the interim
final regulations, PLUS Loans made
after January 1, 2000 are no longer
subject to the minimum 9 percent
trigger for special allowance payments.
In accordance with the effective date for
the provision of the HERA that made
this change, lenders will be paid special
allowance on these loans for activity
beginning April 1, 2006, which will be
reflected on billing reports submitted to
the Department after June 30, 2006.
Changes: None.
Comments: Some commenters,
particularly from the FFEL industry,
claimed that the regulations are
impermissibly retroactive. In particular,
these commenters claimed that the
interim final regulations improperly
applied the statutory changes made by
the Taxpayer-Teacher Protection Act of
2004 (TTPA), and the HERA, to periods
before those statutes became effective.

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The commenters pointed to the
explanation of certain terms in
§ 682.302(f) as an example of the
changes that they felt were being
improperly applied retroactively.
Discussion: The changes made to
§ 682.302 are not retroactive. Prior to the
publication of the August 9 interim final
regulations, the regulatory provisions in
§ 682.302 had not been updated since
1994, except for a change to reflect the
1993 statutory amendment that
eliminated the 9.5 percent minimum
special allowance payment (SAP) rate
on loans acquired with funds from a taxexempt obligation originally issued on
or after October 1, 1993. Thus, the prior
regulations did not reflect guidance
issued by the Department since 1993 to
interpret the HEA and the regulations
(DCL L–93–161 (November 1993), L–93–
163 (December 1993), and L–96–186
(March 1996), FP–05–01 and FP–06–01)
or the changes made to those
requirements by the TTPA or HERA.
The regulations must reflect the rules
for the special allowance eligibility of
both loans for which SAP at the 9.5
percent minimum rate is now claimed
and loans on which this rate may be
claimed in the future. The TTPA placed
significant restrictions on the eligibility
of new loans for the 9.5 percent SAP,
and the HERA significantly restricted
whether additional loans could acquire
eligibility. However, the eligibility of
the great majority of loans on which a
9.5 percent SAP is now and will be
claimed depends on, or may be affected
by, transactions such as various
refinancing transactions that occurred
prior to the effective date of either the
TTPA or HERA. The prior regulations
did not state the consequences of some
of those transactions, even though those
consequences had been well settled,
under the Department’s interpretations
of the law in effect when the
transactions occurred. To clarify the
requirements for 9.5 percent SAP
eligibility, the interim final regulations
first incorporate these interpretations,
and then address changes made by the
TTPA to the continued eligibility of
these loans for 9.5 percent SAP, and by
the HERA as to whether loans may
acquire that eligibility.
The interim final regulations include
in § 682.302(f) an explanation of certain
terms (refinance and originally issued)
that reflects Departmental
interpretations and usage of those terms
historically. Based on that usage, it is
reasonable to conclude that the terms
are already generally understood as
explained in the regulations.
The interim final regulations, as
published on August 9, 2006, do no
more than provide loan holders (and

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other interested parties) an orderly
statement of the requirements for
acquiring and continued eligibility for
9.5 percent SAP for all cohorts of loans,
both as in effect before the 2004 and
2006 amendments to the HEA, and
under the 2004 and 2006 amendments
to the HEA. The interim final
regulations did not create or change the
terms, conditions, and requirements for
the eligibility for the 9.5 percent SAP
from those which already existed under
applicable law. To the extent that loan
holders were in compliance with the
requirements of: (1) The then-current
regulations; (2) applicable prior
Department interpretations of those
regulations and the HEA; and (3)
changes made by the TTPA and by the
HERA, the billing status of loans was
not changed with the publication of the
interim final regulations.
Changes: None.
Comment: Several commenters
claimed that § 682.302(e)(2) and (3)
improperly requires that a loan acquired
with pre-October 1, 1993 tax-exempt
funding be ‘‘financed continuously’’ by
tax-exempt financing to retain eligibility
for SAP at the 9.5 percent minimum
rate. Some believed that the
interpretations on which the
Department relied in adopting the
interim final regulations had not been
communicated to the public, or that the
regulations went beyond merely
updating existing regulations to reflect
longstanding policy. Another
commenter questioned whether the
‘‘debt’’ to which § 682.302(e)(2)(i)(B)
refers to as having been ‘‘refinanced’’ is
a student loan or a bond.
Discussion: The term ‘‘financed
continuously’’, to which the comments
refer, appears only in § 682.302(e)(2).
Section 682.302(e)(2) describes the
special allowance rate applicable to any
loan acquired with funds from a source
that makes the loan eligible for a SAP
at the 9.5 percent minimum rate that has
been refinanced. All loans that are
initially eligible for a 9.5 percent SAP
and have been refinanced can be
divided into two mutually exclusive
groups. The first group includes only
those loans that have been refinanced
exclusively and continuously from taxexempt sources. The second group
includes all loans not in the first group.
The phrase ‘‘financed continuously’’ is
used to describe the first group, not to
exclude the second group from potential
eligibility for SAP at the 9.5 percent
minimum rate. The interim final
regulations contained no provisions that
limit continued eligibility for SAP at the
9.5 percent minimum rate only to loans
in the first group—those loans
continuously refinanced from tax-

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exempt sources. Some loans in the
second group also retain that eligibility
after refinancing. The regulations add
no condition on 9.5 percent SAP
eligibility that was not already
contained in the statute or regulations.
The regulations accurately reflect
Department interpretations of applicable
law that establish which SAP rate
applied to loans refinanced using taxexempt sources. The Department has
had numerous discussions with
program participants who have cited
these interpretations and it is clear that
the loan industry has been aware of the
Department’s interpretation of these
terms. The regulations in
§ 682.302(e)(2)(i)(A) and (B) describe the
first group of refinanced loans—those
continuously refinanced using taxexempt sources—and state that such
loans qualify for a SAP at the 9.5
percent minimum return rate.
These regulations rest squarely on the
Department’s interpretation of the HEA
as articulated in previous guidance
issued in DCL 93–L–161 (November
1993), p. 13; Dear Colleague Letter 93–
L–163 (December 1993), p. 2. Under the
Department’s interpretation of the
regulations included in the DCLs, loans
that were eligible for the 9.5 percent
SAP rate prior to a tax-exempt
refinancing remained eligible after that
refinancing. Because refinancing from
tax-exempt sources does not alter
eligibility of the loan for the 9.5 percent
SAP rate, there is no need to distinguish
between loans involved in a single taxexempt refinancing and those involved
in a series of tax-exempt refinancings.
The regulations therefore include in this
first group all loans that have been
associated only with a tax-exempt
refinancing, without regard to the
number of those refinancings. The
phrase ‘‘financed continuously by taxexempt obligations,’’ in
§ 682.302(e)(2)(i)(B)(2) simply describes
loans associated exclusively with taxexempt refinancing.
The regulations do not exclude from
eligibility for the 9.5 percent SAP loans
affected by other refinancings. The
Department’s regulations in
§ 682.302(e)(2)(ii) describe loans
refinanced from sources other than
qualified tax-exempt sources. This
second group consists of two subgroups,
which are distinguished by the
treatment of the tax-exempt obligation
affected by the refinancing. If the prior
tax-exempt obligation is retired or
deceased, SAP is payable at the taxable
rate. This rule has been in effect since
1985. If the prior tax-exempt obligation
has not been retired or defeased, SAP
remains payable at the 9.5 percent

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minimum return rate as discussed in
DCL 96–L–186 (March 1996).
The regulations use the words ‘‘a loan
is refinanced’’ to describe the
refinancing of an individual student
loan. The term ‘‘refinance’’ is commonly
used as well to refer to the refunding of
an outstanding bond or other financial
obligation. The regulations in
§ 682.302(e)(2)(i) use the phrase to refer
to a bond or other instrument issued to
refund an existing bond or other
obligation of the issuer.
Changes: Section 682.302(e)(2) as
revised in the interim final regulations
effectively explains the applicability of
the SAP rates and so it is not necessary
for us to retain paragraph (c)(5) of
§ 682.302. Therefore, subparagraph
(c)(5) is removed.
Comments: One commenter objected
to the explanation in § 682.302(f)(2) that
a bond is considered to be ‘‘originally
issued’’ when issued to obtain funds to
make or acquire loans in which the
Authority did not have an interest. This
explanation, the commenter noted,
would exclude a tax-exempt obligation
issued to refund an existing taxable
bond or to refinance loans already held
by the Authority. The provision would
thus disqualify from eligibility for the
9.5 percent SAP loans acquired with
proceeds of those obligations, even if
they had been issued prior to October 1,
1993.
Discussion: The provision addressing
the phrase ‘‘originally issued’’ is used to
explain how the October 1, 1993,
deadline affects at least four different
types of tax-exempt obligations: (a)
Obligations used to obtain funds to
make loans or acquire loans from third
parties; (b) obligations that refund a preOctober 1, 1993, qualifying obligation or
are part of a series of such refunding
issues; (c) obligations used to refund a
taxable obligation of the issuer; and (d)
obligations used to obtain funds to
acquire loans that the Authority made or
purchased using funds from either a
taxable obligation or a tax-exempt
obligation issued on or after October 1,
1993, but not to refund that obligation.
The language in § 682.302(f)(2) to
which the commenter objects clearly
applies to the ‘‘new money’’ issues,
described in paragraph (a) above.
However, we agree with the commenter
that the language could be read to
exclude from tax-exempt special
allowance treatment loans acquired
with funds from tax-exempt obligations
described in paragraphs (c) and (d),
even if the tax-exempt bond had been
issued before October 1, 1993. That
result would be contrary to the position
taken in the 1985 regulations and
contrary to our intent in using this

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particular language.1 We also believe
that the language should be revised to
make it clear that a tax-exempt
refunding, or series of such refundings,
of a tax-exempt obligation does not
change the SAP status of loans made or
purchased with funds obtained from the
first such tax-exempt obligation so
refunded, as described in paragraph (b).
Changes: The interim final regulations
were intended to state, and not change,
existing law. Accordingly, we have
revised § 682.302 to state, in new
paragraph (f)(2)(i), that an obligation the
proceeds of which are used to make or
purchase loans, including by pledge as
collateral for that obligation, is
considered to be originally issued on the
date it is issued. The limitation that
loans are considered purchased only if
the Authority has neither an existing
legal or equitable interest in the loan is
removed. Second, the regulation is
revised to add a new paragraph (f)(2)(ii)
to address specifically a tax-exempt
obligation that refunds, initially or in a
series of such refundings, a tax-exempt
obligation the proceeds of which were
used to make or purchase loans (one
described in paragraph (f)(2)(i)). Such a
tax-exempt refunding obligation is
considered to be originally issued on the
date on which the initial tax-exempt
obligation, described in paragraph
(f)(2)(i), was issued.
Basic Program Agreement (§ 682.401)
Comments: One commenter requested
that we revise § 682.401(b)(10)(iii) to
clarify that a lender is required to charge
an insurance premium or Federal
default fee.
Discussion: Sections
682.401(b)(10)(i)(A) and (B) clearly
states, with the exception of a
Consolidation Loan or SLS or PLUS
Loan refinanced under § 682.209(e) or
(f), the requirements on the collection of
insurance premiums and Federal default
fees by a guaranty agency. Further
clarification is unnecessary.
Changes: None.
Comments: Several commenters
requested that a change be made to
§ 682.401(b)(14) to reflect the payment
to lenders of exempt, lender-of-lastresort, and other claims that may be
paid at 100 percent insurance.
Discussion: This section of the FFEL
regulations outlines the basic program
agreement between the guaranty agency
and the Secretary. Specifically,
§ 682.401(b)(14) outlines the guarantee
1 The term purchase includes acquisition of an
interest in a loan by means of a pledge of the loan,
and the 1985 regulations implicitly interpret the
term purchase as used in section 438 of the HEA
to include acquisition of a loan by pledge, not
merely acquisition from another party.

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liability of the agency, which relates
primarily to the payment of default
claims. Although other kinds of claims
may be paid on a loan, we do not
believe that it would be appropriate to
include these other claim types, none of
which can be reasonably anticipated at
the time of guarantee, in
§ 682.401(b)(14).
Changes: None.
Comments: Several commenters
stated that the HERA revised section
428(c)(2) of the HEA to require
guarantors to establish procedures to
ensure that Consolidation Loans are not
an excessive proportion of the guaranty
agency’s recoveries on defaulted loans,
but objected to the inclusion in
§ 682.401(b)(29) of the requirement that
guarantors submit these procedures to
the Secretary for approval.
Discussion: We believe that if a
guarantor is required by law to establish
procedures to ensure that Consolidation
Loans are not an excessive portion of
the agency’s recoveries on defaulted
loans, then the Secretary has a fiscal
responsibility to review and approve
such procedures. The requirement to
submit these procedures to the Secretary
for approval is also authorized by
§ 682.401(d)(2).
Changes: None.
Identity Theft (§§ 682.402 and 685.215)
Comments: Many commenters
expressed concern regarding the
provisions of the interim final
regulations that implement the HERA
provisions relating to the discharge of
an FFEL or Direct Loan that was falsely
certified as the result of the crime of
identity theft. Several commenters felt
that a definition of identity theft based
on the adjudication of a crime is too
narrow and burdensome and that we
should adopt the definition of identity
theft used in the Fair Credit Reporting
Act (FCRA) and by the Federal Trade
Commission (FTC).
Many commenters felt that tying a
discharge of an FFEL or Direct Loan to
a determination by a Federal, State or
local court that the crime of identity
theft had occurred, and requiring
documentation of that fact, was unduly
restrictive. The commenters believed
that requiring victims whose cases are
actually prosecuted to await the
outcome of a judicial process for relief
fails to provide discharges and
reimbursements in a timely fashion and
fails to offer victims of identity theft
proper relief. Several commenters asked
for clarification on how a loan would be
discharged under the common law
defense of forgery if a law enforcement
agency does not pursue a perpetrator of
identity theft. Finally, the commenters

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requested that we immediately adopt an
explicit, reliable process that provides
sufficient protection to bona fide
victims of identity theft and that we also
track cases of unresolved identity thefts
within the Department.
Several commenters did not agree
with the requirement that a lender and
guarantor demand payment on a
discharged loan from the perpetrator
and pursue collection action if payment
in full is not received. These
commenters urged the Department to
allow guarantors either to subrogate
loans discharged based on identity theft
to the Department or refer the loans to
the appropriate enforcement agencies
for action.
Several commenters stated that the
provisions related to identity theft
would be better placed in a discrete
section of the regulations. They believe
this approach would facilitate
processing and reporting, and ensure
that lenders, guarantors, and other
program participants have access to
comprehensive regulations in a single,
identifiable section.
Several commenters noted
inconsistencies between the regulations
and the preamble with respect to
identity theft. These commenters state
that the preamble erroneously suggested
that the new regulations provide for
reimbursement to the loan holder only
when perpetrator is affiliated with the
school. The commenters requested that
preamble to the final regulations
accurately describe the identity theft
provisions in this regard.
Discussion: The HERA amended the
HEA to authorize a discharge of a FFEL
or Direct Loan Program loan if the
borrower’s eligibility was falsely
certified because the borrower was a
victim of the ‘‘crime’’ of identity theft.
The HERA specifically provides for a
loan discharge only when a ‘‘crime’’ of
identity theft has occurred. For this
reason, the interim final regulations
provide relief only to the victim of a
proven crime of identity theft.
The purpose of the Fair and Accurate
Credit Transactions Act (FACT) (which
amended the FCRA) and similar
legislation and the FTC rules is to
enable individuals who believe that
their identifying information has been
misappropriated to alert parties who
might extend credit to the thief based on
that stolen identity information. The
purpose of the identity theft provision
in the HEA is different—to relieve
borrowers and lenders from liability on
loans that result from proven misuse of
that information. Thus, the FACT Act
requires credit reporting agencies to
post ‘‘fraud alerts’’ on an individual’s
credit record to deter lenders from

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extending credit to a thief who uses the
stolen identity information, and to block
the reporting of any information on the
record that the individual identifies as
resulting from that identity theft. 16
U.S.C. §§ 1681c–1, 1681c–2. There is
little, if any, substantive difference
between the FACT Act definition of
‘‘identity theft’’ in 16 U.S.C.
§ 1681a(q)(3) and the descriptive
definition used in the interim final
regulations. Therefore, there is no
reason to use the specific FACT Act
definition.
The commenters’ claim that the
regulations are unduly restrictive is
contrary to American common law. As
indicated in the preamble to the interim
final regulations, under generally
applicable laws, individuals who do not
apply for loans, execute promissory
notes for loans or knowingly accept the
benefits of loan disbursements are not
liable to repay those loans, even if their
names were forged on the loan
instrument. An individual who claims
that his or her signature was forged is
not required to delay asserting that
claim until a criminal prosecution
occurs and nothing in the Department’s
regulations require such a delay. An
individual who claims that his or her
signature was forged can assert that
claim to oppose liability on a loan and
the holder of the loan must evaluate and
accept or reject that claim whether or
not a criminal prosecution occurs.
The regulations require the guaranty
agency, not the lender, to demand
payment from the perpetrator of the
identity theft. Guaranty agencies must
ordinarily use due diligence to collect
FFEL Program loans and the perpetrator
is liable for such a debt. In some
instances, the Department may choose
to take assignment of the debt. However,
the regulations do not require a guaranty
agency to take unusual or extraordinary
steps to collect this debt.
The comment that the regulations
regarding identity theft discharge relief
should be placed in a separate section
does not explain why such treatment
would improve clarity of the procedure.
The provisions added in the interim
final regulations implement a specific
discharge provision added by the HERA
to the other discharge relief available
under section 437(c) of the HEA. The
regulations are not intended to provide
general guidance on handling claims
that loan applications or promissory
notes have been forged where the claim
does not rest on a proven crime.
Because each provision for discharge
relief under section 437(c) of the HEA
offers relief to borrowers or purported
borrowers by payment to the holder of
the loan, it is logical to include

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procedures for handling claims under
the new discharge provision among the
existing procedures for claims for other
kinds of discharge relief.
The comment suggesting that the
Department adopt a process for tracking
what it refers to as unresolved identity
thefts does not appear to be practicable
at this time. To the extent that this
proposal is meant to deter lenders from
extending new credit based on new false
applications using the same individual’s
identity, the proposal duplicates the
procedure already required under the
FACT Act. Lenders must obtain a credit
report in order to qualify an applicant
for a PLUS Loan, and therefore, the alert
option available under the FACT Act
can be expected to provide effective
prospective relief with respect to
applications for PLUS Loans.
Implementation of a system that
would prospectively protect alleged
victims of identity theft from misuse
under all the student loan programs
requires participation and input from
many participants in the loan programs.
Such a process may be both costly and
complicated. The Department is open to
considering practical proposals in the
future.
Finally, the commenter is correct that
there are inconsistencies between the
preamble to the interim final regulations
and the interim final regulations,
themselves, regarding reimbursement to
the loan holder when the perpetrator of
identity theft is affiliated with a school.
As noted in the preamble to the interim
final regulations, § 682.402(e)(1)(i)(B) of
the false certification discharge
provisions has, since 1994, made
discharge relief, with the accompanying
reimbursement to the lender, available
in instances in which an individual’s
signature was forged on a promissory
note or loan application by the school.
If the forgery is not committed by
someone affiliated with a school, the
purported borrower would not
ordinarily be legally liable for the loan.
However because the loan is not legally
enforceable against the borrower, the
loan does not qualify for any FFEL
payments from the Department. The
new identity theft provision in
§ 682.402(e)(1)(i)(C) allows the lender to
be reimbursed when the loan was made
by reason of a crime of the theft of the
identity of the purported borrower,
without regard to whether the thief was
affiliated with a school. The final
regulations bar payment to the lender if
the theft was committed by the lender
or an agent of the lender. The preamble
to the interim final regulations
accurately stated these elements of the
regulation. We will revise
§ 682.402(e)(1)(iii)(A) to be consistent

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with the preamble discussion in the
interim final regulations.
While we believe that the interim
final regulations are fully consistent
with the HEA and other laws, we are
sympathetic to the concerns of the
commenters. We intend to include this
issue on the agenda for a future
negotiated rulemaking to possibly
consider other approaches.
Changes: Section 682.402(e)(1)(iii)(A)
has been revised by adding the word
‘‘not’’ before the words ‘‘pay
reinsurance’’.
Rehabilitation of Defaulted Loans
(§ 682.405(a)(2)(i)(B))
Comments: Several commenters
stated that the regulations for
rehabilitation of a defaulted loan do not
account for borrowers who make only
sporadic payments before beginning the
required number of qualifying payments
to rehabilitate the loan. They also
claimed that the regulations did not
reflect the 20-day grace period for a
timely payment as provided in the
statute.
Discussion: We believe the regulations
accurately reflect the HEA and
Congressional intent. Borrowers must
request, or in some fashion initiate, loan
rehabilitation so that the period during
which the 9 qualifying payments must
be made is clear for both the guaranty
agency and the borrower.
Additionally, a reasonable and
affordable payment amount needs to be
established, and the consequences of
loan rehabilitation, such as the addition
of collection costs to the rehabilitated
loan amount, the post-rehabilitation
payment period and the likely increased
payment amount, need to be explained
to the borrower. Although the borrower
can now make 9 qualifying payments
over a 10 consecutive month period to
rehabilitate a defaulted loan, a borrower
should not be encouraged to make late
payments or to miss a monthly payment
as part of a loan rehabilitation
agreement.
Changes: None.
Comments: One commenter noted
that the original § 682.405(b)(1)(ii)
through (v) had been removed from the
interim final regulations and asked if
this was intentional.
Discussion: We thank the commenter
for bringing this inadvertent drafting
error to our attention.
Changes: We have reinserted these
paragraphs and renumbered them
accordingly.
Special Insurance and Reinsurance
Rules (§ 682.415)
Comments: Some commenters asked
the Secretary to interpret the change in

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the HERA that reduced the insurance
percentage paid to lenders and lender
servicers that have been designated as
‘‘exceptional performers’’ not to apply
to loans for which the first disbursement
was made before October 1, 1993. These
commenters noted that, prior to October
1, 1993, the HEA required guaranty
agencies to provide 100 percent
insurance to lenders, but that rate was
later reduced to 98 and 97 percent. Until
enactment of the HERA, however,
lenders or lender servicers who were
designated as exceptional performers
received 100 percent insurance on all
claims. The HERA reduced the
insurance for exceptional performers to
99 percent. The commenters argue that
the HERA should not be interpreted to
reduce the insurance on loans for which
the first disbursement was made before
October 1, 1993 to 99 percent for
exceptional performers. The
commenters also argue that to interpret
the HERA to apply to loans for which
the first disbursement was made before
October 1, 1993, would violate the
lenders’ contractual and Constitutional
rights.
Discussion: The Secretary does not
agree with the commenters. The HERA
amended section 428I(b)(1) of the HEA
to provide that a lender or lender
servicer designated for exceptional
performance would receive 99 percent
insurance on ‘‘all loans for which claims
are submitted for payment by that
eligible lender or servicer for the oneyear period’’ for which the lender or
lender servicer has been designated. In
making this change, Congress
eliminated all references to 100 percent
insurance for exceptional performers.
Congress did not retain the 100 percent
insurance for any group of loans. Thus,
there is no statutory basis for the
Secretary to authorize 100 percent
insurance on any claims submitted by
an exceptional performer after the
effective date of the HERA (July 1,
2006).
The Secretary also does not agree that
this change violates any contractual or
constitutional rights of a lender. A
lender chooses to apply for exceptional
performer status because of the benefits
it provides to the lender. A lender is not
required to apply for such status or to
retain such status after it has been
granted. Moreover, Congress can modify
the terms of the exceptional performer
status or end it completely without any
violation of a lender’s rights. In the
HERA, Congress chose to reduce the
insurance coverage on loans held by
exceptional performers that were made
before October 1, 1993, apparently as a
way of offsetting the overall costs of
providing higher insurance coverage to

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exceptional performer lenders and
lender servicers than to others. A lender
or lender servicer that has been
designated as an exceptional performer
can still receive 100 percent insurance
on loans disbursed prior to October 1,
1993 by relinquishing its exceptional
performer status. By relinquishing its
exceptional performer status, however,
it will be accepting a lower insurance
rate on all other claims.
Changes: None.
School as FFEL Lender (§ 682.601(a)
and (b))
Comments: Many commenters asked
that we clarify the regulations regarding
a school lender’s use of proceeds from
the sale or other disposition of loans for
need-based grants. These same
commenters questioned the difference
between the items identified in the
parenthetical phrase in § 682.601(a)(8)
and those identified as not considered
‘‘reasonable and direct administrative
expenses’’ in § 682.601(b) and asked
that these discrepancies be eliminated.
One commenter requested that we
identify the mandated costs of reduced
origination fees and reduced interest
rates as allowable, reasonable and direct
administrative expenses for school
lenders. A couple of commenters asked
for guidelines on how a school lender
should use loan proceeds for required
need-based grants in a manner that
would supplement, but not supplant
non-Federal funds that would otherwise
be used for need-based student grant
programs. The commenters also noted
that no definition of need-based grant
was provided in the regulations. One of
those same commenters also asked us to
clarify that a school operating as a FFEL
school lender would not be prohibited
from providing assistance to its
students, other than Stafford Loans,
from institutional sources. Another
commenter stated that required needbased grants from loan proceeds should
be based on the school lender’s actual
net loan proceeds from the prior year.
One commenter suggested that
§ 682.601(a)(9) be revised to clarify that
the loans a school lender must make
prior to April 1, 2006 be FFEL program
loans. Another commenter asked us to
clarify whether a FFEL school lender
was required to conduct a separate
independent audit of its lender
operation.
Discussion: In reviewing the
regulatory provisions that address the
use of loan proceeds for need-based
grants and allowable, reasonable and
direct administrative expenses, we agree
that further clarification is appropriate.
We believe that certain FFEL school
lender’s mandated or required expenses

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can be characterized as programmatic
expenses, but not as direct
administrative expenses under the HEA.
As a result, § 682.601(b) specifies that
reasonable and direct administrative
expenses do not include the costs
associated with securing financing, the
cost of offering reduced origination fees
or reduced interest rates to borrowers, or
the cost of offering reduced Federal
default fees to borrowers. However, we
have decided to permit a school lender
to exclude the costs of other statutorily
mandated or necessary programmatic
expenses from the calculation of
‘‘proceeds from the sale or other
disposition of loans’’ that must be used
for need-based grants. The parenthetical
phrase in § 682.601(a)(8) addresses this
exclusion. Certain optional costs, such
as reduced Federal default fees, are not
covered by the exclusion from loan
proceeds or as a reasonable and direct
administrative expense.
A school that is also a FFEL Program
lender should be able to demonstrate on
an ongoing basis that there is no pattern
or practice of reducing institutional
funds available for use as non-Federal
need-based grants or scholarships as a
result of the availability of lender
produced funds that must also be used
for need-based grants.
An institution’s continued
commitment to use institutional as well
as school lending-produced proceeds for
this purpose will demonstrate that the
school is supplementing, not
supplanting, institutional funds
committed to need-based grants and
scholarships.
We will not dictate a specific
approach a school lender must use to
determine its budget for need-based
grants from lending-produced proceeds.
The lender must be able to show clearly
that all proceeds from the sources listed
in § 682.601(a)(8), except for those
authorized to be used for reasonable and
direct administrative expenses and
other required programmatic costs that
can be netted from proceeds, are used
for need-based grants. We understand
that award commitments are made in
advance of the start of the school’s
academic year and that this period does
not generally correspond with the
school lender’s fiscal year. Determining
the pool of funds available for needbased grants based on the school
lender’s immediately preceding fiscal
year’s lending performance, with an
additional factor for increased proceeds
based on increased loan volume, if
applicable, would appear to be a
reasonable approach. ‘‘Need,’’ for
purposes of need-based grants, is
documented need for Title IV, HEA
program purposes. The provisions

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governing FFEL school lenders do not
prohibit the school from making other
forms of student financial assistance
available to its students.
As provided in § 682.601(a)(7) and
discussed in the preamble of the interim
final regulations, a FFEL school lender
must submit a compliance audit as a
lender in accordance with the
requirements contained in
§ 682.305(c)(2) for any fiscal year in
which the school engages in activities as
an eligible lender, beginning with the
first fiscal year beginning on or after
July 1, 2006. School lenders subject to
the Single Audit Act, 31 U.S.C. 7502,
will be required under § 682.601(a)(7) to
include its FFEL Program lending
activities in the annual audit and to
include information on those activities
in the audit report, whether or not the
lending activities or the student
financial aid programs are considered a
‘‘major program’’ under the Single Audit
Act. Other school lenders will have to
arrange for a separate audit of their
lending activities using the Lender
Audit Guide available through the
Department of Education’s Office of
Inspector General.
In making the changes to clarify the
audit requirements, we determined that
§ 682.305(c)(2)(v) and (vi) included
outdated references to other
Departmental regulations and audit
requirements. We have corrected the
citations to the audit requirements for
governmental entities in
§ 682.305(c)(2)(v). We have also added
nonprofit organizations to
§ 682.305(c)(2)(v), because amendments
to the Single Audit Act apply the same
requirements to governmental entities
and nonprofit organizations. We have
removed the separate discussion of
audit requirements for nonprofit
organizations in § 682.305(c)(2)(vi) and
replaced it with a cross-reference to the
school lender audit requirements.
Changes: The requirement that school
lenders have an annual audit in
§ 682.601(a)(7) has been amended to
clarify that, in addition, a school lender
subject to the Single Audit Act must in
addition during years when the student
financial aid cluster, as defined in OMB
Circular A–133 Compliance
Supplement, is not audited as a major
program, also audit the school’s lending
activities as a major program under the
Single Audit Act. This additional
requirement is without regard to the
amount of loans made. We have also
made technical corrections to
§ 682.305(c)(2) as discussed above.
Section 682.601(a)(8) has been revised
to remove the words ‘‘which does not
include providing origination fees or
interest rates at less than the fee or rate

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authorized under the provisions of the
Act’’ following the words ‘‘need-based
grants’’ and before ‘‘; and’’. A technical
change has also been made to
§ 682.601(a)(9) to reflect the requirement
that an eligible school lender must have
made one or more FFEL program loans
on or before April 1, 2006.
Processing Loan Proceeds (§§ 682.604
and 685.304)
Comments: Several commenters
recommended requiring entrance and
exit counseling for graduate or
professional students who borrow PLUS
Loans. The commenters noted that a
graduate or professional student PLUS
borrower who has not also borrowed a
Stafford Loan would never have had the
benefit of Stafford Loan entrance or exit
counseling. In addition, these
commenters recommended that the exit
counseling clarify the different
repayment rules for PLUS loans and
Stafford Loans. Two commenters
suggested that graduate or professional
students with both Stafford Loans and
PLUS Loans could be exempted from
the entrance counseling requirement for
their PLUS Loans, because these
borrowers would have already received
entrance and exit counseling on their
Stafford Loans.
Discussion: The HEA exempts PLUS
Loan borrowers from exit counseling
requirements. Although the Secretary
encourages institutions to provide exit
counseling to graduate and professional
student PLUS Loan borrowers, the
Secretary does not have the authority to
require such counseling by regulation.
With regard to entrance counseling,
FFEL lenders are already required,
under § 682.205, to provide extensive
disclosure information to borrowers
before disbursing a loan. This disclosure
information, which can be provided
through either the rights and
responsibilities statement or a plain
language disclosure sent to the
borrower, includes an explanation of
when repayment of the loan is required.
Lenders are also required to provide a
disclosure to borrowers prior to the loan
going into repayment. This disclosure
must include the borrower’s repayment
schedule, the due date of the first
installment payment, and the number,
amount, and frequency of payments. For
Direct Loans, the Department provides
essentially the same information to
borrowers that FFEL lenders provide
under § 682.205. We believe that these
disclosures are sufficient for the limited
number of graduate or professional
student PLUS borrowers who have not
received Stafford Loan entrance
counseling.
Changes: None.

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Comments: One commenter requested
that PLUS Loans be covered in the
overaward language in § 682.604(h)
because graduate and professional
students are now eligible PLUS Loan
borrowers.
Discussion: We agree with the
commenter that the overaward language
should be amended to include student
PLUS Loans.
Changes: Section 682.604(h) has been
amended to reflect this change. We have
also made the same change in
§ 685.303(e) of the Direct Loan Program
regulations.
Borrower Eligibility (§ 685.200)
Comments: Several commenters
recommended that we revise
§ 685.200(b)(1)(iv) to allow a student
Direct PLUS Loan applicant who is
determined to have an adverse credit
history to receive a Direct PLUS Loan if
the student obtains an endorser who
does not have an adverse credit history.
The commenters noted that the endorser
option is available to student PLUS
applicants in the FFEL Program.
Discussion: We did not intend to deny
student applicants for Direct PLUS
Loans the option of obtaining an
endorser.
Changes: We have revised
§ 685.200(b)(5) of the regulations to
more clearly reflect that a student Direct
PLUS Loan applicant who is determined
to have an adverse credit history may
receive a Direct PLUS Loan if he or she
obtains an endorser who does not have
an adverse credit history, or documents
to the satisfaction of the Secretary that
there are extenuating circumstances.
Charges for Which Direct Loan
Borrowers Are Responsible (§ 685.202)
Comments: Several commenters
suggested that we revise § 685.202(a)(3)
to provide that the portion of a Direct
Consolidation Loan that is attributable
to Health Education Assistance Loan
Program (HEAL) loans is subject to the
same interest rate provision that applies
to Federal Consolidation Loans under
§ 682.202(a)(4)(v). The commenters
noted that section 455(a)(1) of the HEA,
as amended by the HERA, requires
Direct Consolidation Loans and Federal
Consolidation Loans to have the same
terms, conditions, and benefits, unless
otherwise specified in Part D of the
HEA.
Discussion: The HERA amended the
HEA to require that Direct
Consolidation Loans have the same
terms, conditions, and benefits as
Federal Consolidation Loans, unless
otherwise specified in the law.
However, in this case, there is a specific
interest rate provision for Direct

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Consolidation Loans in section
455(b)(7)(C) of the HEA, and that
provision does not specify a different
interest rate for the portion of a Direct
Consolidation Loan that is attributable
to HEAL Loans. Therefore, Direct
Consolidation Loans are not subject to
the provision that applies to Federal
Consolidation Loans under section
428C(d)(2) of the HEA.
Changes: None.
Repayment Plans (§ 685.208)
Comments: Several commenters
suggested that the HERA requires that
the graduated and extended repayment
plans do not require a borrower to repay
the minimum amount allowed under
statute. In addition, these commenters
suggested that a borrower’s monthly
payments under these repayment plans
must be at least the amount of interest
and that we add a provision that would
disallow single graduated payments that
exceed three times any other graduated
installment payment.
Discussion: We agree that the
minimum annual repayment rules
should not apply to a graduated
repayment plan. The HEA exempts
graduated and income sensitive
repayment plans from the minimum
annual repayment provisions. The HEA
does not exempt extended repayment
plans from the minimum annual
payment requirement. In addition, the
FFEL Program regulations state that
graduated and income sensitive
repayment plans may have installments
less than the minimum. However, the
FFEL Program regulations do not
provide for extended repayment plans
to have installments less than the
minimum annual payment amount. The
final regulations provide that the 10year graduated repayment plan and the
extended repayment plan can have
graduated payments.
We do need to add to the regulations
for the graduated repayment plan, for
borrowers entering repayment on or
after July 1, 2006, a provision that does
not allow any single installment
payment to be more than three times the
amount of any other payment.
Although the HEA does not
specifically require that the payments
must be at least the amount of interest,
we agree that the regulations would be
clearer by including a provision that
monthly payments on all Direct Loan
Program repayment plans must be at
least the amount of the monthly accrued
interest, except that the monthly
payment amount under the Income
Contingent and Alternative repayment
plans may be less than the monthly
accrued interest.

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Changes: We have revised
§ 685.208(g)(3) and 685.208(h)(2) to
provide that, under a graduated
repayment schedule, a borrower’s
payments may be less than $50 a month
and any single installment payment may
not be more than three times the amount
of any other installment payment.
We have added a new paragraph
(a)(2)(iv) in § 685.220 of the Direct Loan
repayment regulations to provide that
monthly repayment plans, except
Income Contingent and Alternative
repayment plans, must be at least the
amount of the monthly accrued interest.
Consolidation (§ 685.220)
Comments: Several commenters
recommended that we revise
§ 685.220(c)(1) to clarify that, if a
Federal Consolidation Loan is
consolidated into a Direct Consolidation
Loan, only the portion of the Federal
Consolidation Loan that qualified for an
interest subsidy will be included in the
subsidized portion of the new Direct
Consolidation Loan. The commenters
noted that in many cases, only a portion
of a Federal Consolidation Loan
qualifies for an interest subsidy.
Discussion: We agree that the current
regulatory language is unclear with
respect to the treatment of Federal
Consolidation Loans that are included
in the subsidized portion of Direct
Consolidation Loans.
Changes: We have revised
§ 685.220(c)(1) to clarify that only the
portion of a Federal Consolidation Loan
that qualified for an interest subsidy
will be included in the subsidized
portion of a Direct Consolidation Loan.
Comments: Several commenters
pointed out that § 685.220(d)(1)(ii)(E)
and (F) prohibit a borrower from
consolidating a loan that is subject to a
judgment or an order for wage
garnishment unless the judgment has
been vacated or the wage garnishment
order has been lifted at the time the
borrower applies for a Direct
Consolidation Loan. In contrast, the
corresponding FFEL Program
regulations in § 682.201(c) provide that
a judgment or wage garnishment order
must have been vacated or lifted at the
time a Federal Consolidation Loan is
made. The commenters recommended
that we revise § 685.220 to be consistent
with the FFEL Program requirements
related to the consolidation of loans
subject to a judgment or wage
garnishment.
Discussion: We agree with the
commenters that the Direct Loan
Program regulations should make it
clear that the judgment and wage
garnishment eligibility requirements
must be met at the time the Direct

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Consolidation Loan is made rather than
at the time of the borrower’s application
for the loan.
Changes: We have revised
§ 685.220(d) to clarify that the eligibility
requirements for consolidating a loan
subject to a judgment or wage
garnishment must be met at the time a
Direct Consolidation Loan is made.
Comments: To ensure that Direct Loan
Program borrowers have the same
options for resolving a default as FFEL
Program borrowers, some commenters
recommended that the Secretary clarify
in the regulations that a borrower with
a defaulted Direct Consolidation Loan
remains eligible for loan rehabilitation
with a repayment plan that provides for
reasonable and affordable payments
such as those available under an income
contingent repayment plan. Other
commenters recommended that the
Secretary amend the Direct Loan
Program regulations to allow a borrower
to consolidate a defaulted Direct
Consolidation Loan if the borrower first
makes satisfactory repayment
arrangements on the defaulted loan and
includes at least one additional eligible
loan in the consolidation.
Discussion: There is nothing in the
regulations that prohibits a borrower
with a defaulted Direct Consolidation
Loan from entering into an agreement to
rehabilitate that loan under a repayment
plan that provides for reasonable and
affordable payments.
We agree that the Direct Loan Program
regulations, as currently written, might
suggest that a borrower with a defaulted
Direct Consolidation Loan is ineligible
to consolidate that loan into a new
Direct Consolidation Loan under any
conditions. However, this was not our
intent. A borrower with a defaulted
Direct Consolidation Loan may
consolidate that loan into a new Direct
Consolidation Loan if the borrower
includes at least one additional eligible
loan in the consolidation, and meets the
other eligibility requirements that apply
to borrowers who wish to consolidate a
defaulted loan.
Changes: We have revised the
regulations in § 685.220(d)(1)(ii) to
clarify that a borrower may consolidate
a defaulted Direct Consolidation Loan if
the borrower: (1) makes satisfactory
repayment arrangements on the
defaulted loan or agrees to repay the
new Direct Consolidation Loan under
the income contingent repayment plan;
and (2) includes at least one additional
eligible loan in the consolidation.

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Agreements Between an Eligible School
and the Secretary for Participation in
the Direct Loan Program (§ 685.300)
Comments: Several commenters
recommended that we amend the
regulations to reflect the Department’s
previous guidance that a school that
awards Direct Subsidized Loans and
Direct Unsubsidized Loans to its
graduate or professional students
through the Direct Loan Program may
award PLUS Loans to its graduate or
professional students through the FFEL
Program, and that a school may also
award Direct PLUS Loans to its graduate
and professional students through the
Direct Loan Program and Subsidized
and Unsubsidized Federal Stafford
Loans through the FFEL Program.
Discussion: We agree that the
Department’s prior guidance should be
incorporated in the regulations.
Changes: We have revised
§ 685.300(b)(8) to clarify that a school
may award a PLUS Loan to a parent or
to a graduate or professional student
through either the Direct Loan Program
or the FFEL Program, and a Stafford
Loan through the other loan program to
a dependent undergraduate or graduate
or professional student borrower for the
same period of enrollment. However, a
school may not award the same type of
loan (i.e., Stafford or PLUS) from
different loan programs to the same
student or parent borrower for the same
period of enrollment.
Executive Order 12866
Regulatory Impact Analysis
Under Executive Order 12866, the
Secretary must determine whether this
regulatory action is ‘‘significant’’ and
therefore subject to the requirements of
the Executive order and subject to
review by the OMB. Section 3(f) of
Executive Order 12866 defines a
‘‘significant regulatory action’’ as an
action likely to result in a rule that may
(1) have an annual effect on the
economy of $100 million or more, or
adversely affect a sector of the economy,
productivity, competition, jobs, the
environment, public health or safety, or
State, local or tribal governments or
communities in a material way (also
referred to as an ‘‘economically
significant’’ rule); (2) create serious
inconsistency or otherwise interfere
with an action taken or planned by
another agency; (3) materially alter the
budgetary impacts of entitlement grants,
user fees, or loan programs or the rights
and obligations of recipients thereof; or
(4) raise novel legal or policy issues
arising out of legal mandates, the
President’s priorities, or the principles
set forth in the Executive order.

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Pursuant to the terms of the Executive
order, it has been determined this
regulatory action will have an annual
effect on the economy of more than
$100 million. Therefore, this action is
‘‘economically significant’’ and subject
to OMB review under section 3(f)(1) of
Executive Order 12866. The Secretary
accordingly has assessed the potential
costs and benefits of this regulatory
action and has determined the benefits
justify the costs.

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Need for Federal Regulatory Action
These final regulations are needed to
implement recent amendments to the
HEA that affect students, borrowers and
program participants in the Federal
student aid programs authorized under
Title IV of the HEA.
The Secretary has limited discretion
in implementing most of these
provisions. The majority of the changes
included in these final regulations
simply modify the Department’s
regulations to reflect statutory changes
made by the HERA and the other laws
mentioned earlier. These statutory
provisions are either already effective or
will be effective shortly.
The Secretary has exercised limited
discretion in implementing the HERA
provisions in the following areas:
• Direct Assessment: The HERA
extends eligibility for Title IV, HEA
programs to instructional programs
using or recognizing the use by others
of direct assessment of student learning;
• Identity Theft: The HERA
authorizes a discharge of a FFEL or
Direct Loan Program loan if the
borrower’s eligibility to borrow was
falsely certified because the borrower
was a victim of the crime of identity
theft; and
• Special Allowance Payments: The
HERA modifies the conditions under
which a loan holder qualifies for special
allowance interest benefits related to
PLUS loans the first disbursement of
which was made on or after January 1,
2000.
The following section addresses the
alternatives that the Secretary
considered in implementing these
discretionary portions of the HERA
provisions.
Regulatory Alternatives Considered
Direct Assessment Alternatives: In
developing the direct assessment
regulations, the Secretary drew upon the
Department’s experience with Western
Governors University (WGU), the only
institution currently participating in the
Title IV student financial assistance
programs that uses direct assessment, in
lieu of credit or clock hours, as a
measure of student learning. WGU

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became an eligible institution by
participating in the Distance Education
Demonstration Program.
The Secretary looked at how the Title
IV student financial aid rules had been
applied in both the nonterm and nonstandard term models employed by
WGU and identified basic principles on
which to base the regulations. One
principle is that institutions that use
direct assessment would need to
develop equivalencies in credit or clock
hours in terms of instructional time for
the amount of student learning being
assessed. This was necessary because
many applicable Title IV, HEA program
requirements use time and/or credit or
clock hours to measure things other
than student learning. In addition,
institutions would have to define
enrollment status, payment periods, and
satisfactory academic progress.
A second principle is tied to the
statutory language that characterizes
direct assessment programs as
instructional programs. The Secretary
determined that institutions must
provide a means for students to fill in
the gaps in their knowledge and that
Title IV, HEA program funds should
only be used to pay for learning that
occurs while the student is enrolled in
the program.
The Secretary considered what should
constitute ‘‘instruction’’ in a direct
assessment program. The word
‘‘instruction’’ is not specifically defined
in the Department’s regulations and, in
its ordinary meaning the word connotes
teaching. There are several other ways,
however, in which an institution might
assist students to prepare for
assessments. The Secretary considered
whether the definition of instructional
time in § 668.8(b)(3), which is used for
other types of programs, could be used
for direct assessment programs and
determined that the definition was not
sufficiently broad to be used in this
context.
The Secretary recognized that
institutions offering direct assessment
programs might use courses or learning
materials developed by other entities,
such as training and professional
development organizations and other
educational institutions, to assist
students in preparing for the
assessments. The Secretary considered
whether the use of outside resources
could be considered contracting out a
portion of an educational program and
determined that it could be. Therefore,
the Secretary included in the direct
assessment regulations a provision that
exempts direct assessment programs
from the limitations on contracting for
part of an educational program.

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Identity Theft Alternatives: Section
8012 of the HERA authorizes a
discharge of a FFEL or Direct Loan
Program loan under section 437(c) of the
HEA if the eligibility of the borrower
was falsely certified as a result of the
crime of identity theft. In developing
regulations to implement section 8012,
we sought to reflect the statutory
language that requires the Department to
discharge the borrower’s responsibility
to repay the loan when a ‘‘crime of
identity theft’’ has occurred. The final
regulations require that to receive a
discharge on a loan, an individual must
provide the holder of the loan, a copy
of a local, State, or Federal court verdict
or judgment that conclusively
determines that the individual who is
the named borrower of the loan was the
victim of the crime of identity theft. We
adopted this standard as an inexpensive
and reliable way to implement the new
discharge provision. If the perpetrator of
an identity theft is never prosecuted,
and no judicial determination that a
crime occurred is rendered, a borrower
can still be relieved of any
responsibility to repay the loan under
the common law (and in many
instances, State law) defense of forgery.
We stressed this consideration in the
preamble to the interim final
regulations.
One alternative we considered was to
authorize a discharge for ‘‘identity
theft’’ based on representations from the
individual, much as is now done for
closed school discharge relief, that the
crime of identity theft had been
committed, and that the claimant was
the victim of that criminal act. We
rejected this alternative as costly,
unworkable, and unnecessary to provide
relief to the individuals who may be
victims of this crime. Under this
alternative, the claimant and/or the
lender would be required to submit
evidence needed to establish whether
conduct has occurred that would
constitute the crime of identity theft.
That evidence may be voluminous,
difficult to obtain, and would likely
include witness testimony. Amassing
and transmitting that evidence would be
difficult and costly for lenders and
claimants. Furthermore, determining
whether a crime has been committed
requires discerning the identity of the
perpetrator and determining the state of
mind of that person. Neither the
Department nor the guaranty agency is
authorized to determine whether that
evidence shows that a crime has been
committed. That determination is
routinely and reliably made through the
judicial process, which is designed to
perform this function. Moreover, there

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is no need to ignore the judicial process
in order to give relief to those
individuals who did not in fact take out
the loans for which they are listed as
borrowers. Under State statutes and
common law, individuals whose
signatures have been forged on loan
documents are not liable for those debts.
Individuals who show that their
signatures have been forged on loan
documents, and that they neither
authorized nor received a loan made in
their name, are not held liable by the
Department. For these reasons, we
rejected the alternative that would entail
an extra-judicial proof of a crime.
Instead, we simply require the claimant
to submit a copy of a judicial verdict
that identity theft was committed.
Special Allowance Payment
Alternatives: The Department
considered a number of alternatives
related to the effective date for
implementation of section 8006 of the
HERA, which eliminates the limitation
that special allowance payments on
PLUS Loans for which the first
disbursement was made on or after
January 1, 2000, only be paid if the
formula for determining the borrower
interest rate produces a rate that exceeds
the statutory maximum borrower rate of
9 percent.
The first alternative was to make this
provision retroactive to January 1, 2000,
an approach that would result in
substantial additional special allowance
payments to many PLUS Loan holders.
Although this option was suggested by
some members of the student loan
industry, the Department determined
that this approach was inconsistent with
the statute.
Other alternatives considered
reflected differing interpretations of the
provision’s effective date. Section 8006
states that ‘‘amendments made by this
subsection shall not apply with respect
to any special allowance payment made
under section 438 of the Higher
Education Act of 1965 (20 U.S.C. 1087–
1) before April 1, 2006.’’ Since special
allowance payments are made on a
quarterly basis, the Department had to
determine whether the statute’s intent
was to remove the limitation on PLUS
special allowance payments for the
quarter of January–March 2006—the
first quarter for which bills would be
submitted, verified, and paid after April
1, 2006 or for the quarter of April–June
2006, the first full quarter after the
HERA’s enactment. The Department
estimated Federal costs would increase
by $53 million if the limitation was
removed for the January–March quarter.
This estimate was based on data on
special allowance rates and balances for
the affected quarter. After a careful

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review of the statutory language, the
Department determined that the
statute’s likely intent was to remove the
limitation for the January–March 2006
quarter, since this was the first quarter
for which payments would be made
after April 1, 2006. The final regulations
reflect this determination.
Benefits
Given the breadth of these
regulations, the discussion of benefits
and costs will be limited in most cases
to provisions with an economic impact
of $100 million or more in any one year.
By facilitating the implementation of
changes made in the HERA and other
recent student aid-related statutes, these
final regulations will support the
provision of a broad range of student
benefits. In general, these benefits
reduce the costs of higher education to
students, increase the amount of Federal
student aid or increase the number of
students eligible for Federal student aid.
The economic benefits of any specific
change are difficult to discern, as they
have direct benefit to the individual aid
recipient and broader societal benefits
resulting from the economic impact and
tax-paying potential of a well-educated
population. Research indicates that
reductions in the cost of higher
education are correlated to increased
student enrollment, retention, and
completion. The U.S. Census Bureau
has found people with a bachelor’s
degree realize as much as 75 percent
higher lifetime earnings than those
whose education is limited to a high
school degree. (‘‘The Big Payoff:
Educational Attainment and Synthetic
Estimates of Work-Life Earnings,’’ July
2002.)
Specific benefits provided to student
borrowers in these final regulations
include increases in certain FFEL and
Direct Loan Program loan limits;
reduced origination fees in the FFEL
and Direct Loan Programs; broadened
eligibility for PLUS Loans to include
graduate and professional students;
expanded access to distance education
programs; permanently expanded loan
forgiveness for highly qualified math,
science, and special education teachers
at low-income schools; and a new
deferment for FFEL, Direct Loan and
Perkins Loan Program borrowers who
serve on active duty military service
during times of war or national
emergency. These benefits are projected
to increase Federal outlays by $5.2
billion for loans originated in FY 2006–
2010. This estimate was developed
using projected interest rate, loan
volume, and borrower demographic data
used in preparing the FY 2007
President’s Budget. Projected loan

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volume and borrower data are based on
trend analyses of actual program
activity, primarily drawn from the
National Student Loan Data System
(NSLDS) and other Department systems.
These estimates were derived from
the Department’s projections that show
that loan volume will increase an
estimated $3.2 billion in award year
2007–2008 and $11.6 billion from fiscal
year 2006–2010 as a result of higher
loan limits. Over the latter period,
average loan amounts are estimated to
increase by $184 for Stafford Loans and
$156 for Unsubsidized Stafford Loans.
The phased reduction of loan
origination fees is estimated to reduce
fees by $5.6 billion on 70,000 loans over
award years 2006–2010.
The expansion of distance education
made possible by the changes to the ‘‘50
percent rule’’ and the definition of
correspondence courses will allow
institutions to more aggressively pursue
new communication technologies to
provide students significantly greater
flexibility in the scheduling and
location of academic programs. The
Department estimates this expanded
flexibility will increase the pool of
students eligible for Federal student aid
by 30,000 students a year in 2006 and
2007, of whom 17,000 per year will be
eligible to receive a Pell Grant. With an
average grant of $2,306, these additional
Pell Grant recipients will receive an
estimated $196 million in Pell Grant aid
over 2006–2010. This estimate is based
on a trend analysis of Pell Grant
program data and projections of
institutional and program eligibility for
Federal student aid derived through the
use of accreditation data. The
Department included in these estimates
that additional students made eligible
for student aid would borrow $441
million in student loans over 2006–
2010.
The regulation’s teacher loan
forgiveness provisions offer incentives
to help address longstanding national
and regional elementary and secondary
school staffing problems. Many studies
(Boe, Bobbitt, & Cook, 1997; Grissmer &
Kirby, 1992; Murnane et al. , 1991;
Rumberger, 1987) and extensive
research prepared for the National
Commission on Mathematics and
Science Teaching) have found math,
science, and special education to be
fields with especially high turnover and
those predicted most likely to suffer
shortages. More than tripling the teacher
loan forgiveness amount—from $5,000
to $17,500—for qualifying teachers in
these fields should offer a powerful
incentive for recruitment and retention,
especially given the additional
eligibility requirement that recipients

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teach for five consecutive years before
receiving the benefit. The Department
estimates this expanded benefit will
increase Federal loan subsidy costs in
the FFEL and Direct Loan programs by
$825 million for loans originated in
2007–2010. These estimates assume
over 32,000 teachers will be eligible for
additional forgiveness amounts,
increasing the average amount forgiven
for those borrowers by approximately
$8,500, from $4,700 to $13,300. (The
additional benefits were available for
loans made in 2006 as a result of the
Taxpayer-Teacher Protection Act of
2004, so for the purposes of this analysis
additional benefits have only been
considered for 2007 and beyond.) This
estimate was developed using projected
interest rate, loan volume, and borrower
demographic data used in preparing the
FY 2007 President’s Budget. Estimates
of borrower eligibility were based on
program data—primarily from NSLDS—
demographic information from the
National Center for Education Statistics’
Schools and Staffing Survey.
Lastly, the Department’s estimates
took into account the creation of a new
deferment related to active-duty military
service during a war or national
emergency is estimated to reduce
interest payments by an average of
$1,500 for 21,000 borrowers.
In addition to implementing
expanded borrower benefits, these final
regulations also implement a number of
provisions intended to improve the costeffectiveness and efficiency of the FFEL
and Direct Loan programs, streamline
program operations for participating
institutions, and standardize loan terms
and conditions across the two programs.
These changes are estimated to reduce
Federal outlays by $7.0 billion for loans
made in FY 2006–2010, freeing up
resources for other urgent requirements.
This estimate was also developed using
projected interest rate, loan volume, and
borrower demographic data used in
preparing the FY 2007 President’s
Budget. Projected loan volume, guaranty
agency and lender information, and
borrower data are based on trend
analyses of actual program activity,
primarily drawn from NSLDS and other
Department systems.
Provisions intended to enhance loan
program efficiency include a number of
changes intended to promote risksharing by FFEL participants through
reduced program subsidies, including:
restrictions on higher-than-standard
special allowance payments for loans
funded through tax-exempt securities;
provisions under which the Department
will recover excess interest paid to loan
holders when student interest payments
exceed the special allowance level set in

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the statute; and a reduction in loan
holder’s insurance against default from
98 percent to 97 percent of a loan’s
principle and accrued interest. Given
the broad availability of FFEL program
loans—over 4,000 lenders provided
more than $43 billion in new loans and
an additional $53 billion in
consolidation loans in FY 2005—these
changes are not expected to reduce
student and parent access to loan
capital.
The student loan industry features
high competition among loan providers,
using an array of interest rate discounts
and other borrower benefits to attract
volume. The overwhelming majority of
student loans are sold by the originating
lender in the secondary market. The
impact on individual lenders of HERA
provisions reducing Federal subsidies
are inestimable; a substitution of
subsidies for student interest rate cuts
may occur or the secondary market
price of securitized loans may be
revalued. Given the high level of
government guaranty on these loans, as
well as the guaranteed rate of return,
continued access to loan capital for all
borrowers should be assured. The
impact on individual loan holders may
be mitigated by investment and tax
considerations from their investment
portfolios as a whole. Higher borrower
loan limits and standardized repayment
terms may increase long-term interest
income to some loan holders under
these regulations.
The estimates were derived from
changes to limit the payment of higherthan-standard special allowance on
loans funded through tax-exempt
securities, balances eligible to receive
the higher special allowance payments
are estimated to decrease from $15.5
billion in FY 2006 to $8.3 billion in FY
2010. While the recovery of excess
interest subsidies produced no
estimated savings under interest rate
projections used for the FY 2007
President’s Budget, this policy does save
significant amounts under the
probabilistic interest rate forecasting
methodology used by the Congressional
Budget Office and adopted by the
Administration for the FY 2007 MidSession Review. These savings are not
included in the estimate of total savings
discussed above, as this was developed
prior to the Mid-Session Review.
Reducing lender insurance against
default from 98 percent to 97 percent is
estimated to decrease Federal payments
by $37.5 million over FYs 2006–2010.
Lastly, the final regulations include a
number of provisions intended to
standardize terms and conditions and
broaden borrower choices, particularly
for consolidation loans. These changes

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64395

include the repeal of the single holder
rule, which limits the ability of FFEL
borrowers whose loans are held by a
single holder to consolidate with other
lenders, and the standardization of
graduated and extended repayment
plans—previously different for Direct
Loans and FFEL—on the FFEL model.
The repeal of the single holder rule
should give all borrowers access to
interest rate discounts and other
benefits available through the highly
competitive consolidation loan market.
The standardization of repayment plan
terms will eliminate a possible source of
confusion for borrowers and promote
equity across the two loan programs.
Under this provision, the Department
estimates more Direct Loan borrowers
who wish to obtain longer-than standard
repayment plans will consolidate their
loans. As a result, the estimated
percentage of Stafford Loan borrowers
in standard repayment will increase
from 76 percent to 87 percent, while the
percentage in graduated and extended
repayment will decrease from 23
percent to 11 percent.
These provisions also are expected to
improve market transparency and
remove transaction barriers for loan
borrowers, improving market openness
and efficiency for both borrowers and
loan providers.
Costs
These final regulations include a
number of provisions that will impose
increased costs on some borrowers, such
as an increase in the loan interest rate
for FFEL PLUS borrowers, the
elimination of in-school and joint
consolidation loans, and the mandatory
imposition of the previously optional 1
percent guaranty agency default
insurance premium. (At the same time,
these provisions will reduce the Federal
costs of these programs and, in the case
of the guaranty fee, improve the
financial stability of guaranty agencies.
Only 14 of 35 agencies collected this fee
in FY 2005; the mandatory imposition
of the fee is estimated to add $1.5
billion to the balance of agency Federal
Funds over 2006–2010.) Prior to the
HERA, these provisions allowed loan
providers or guaranty agencies to
discriminate among borrowers through
the unequal distribution of borrower
costs. While some borrowers may lose
unearned benefits through these
statutory and regulatory changes, market
equitability and transparency are
improved.
These final regulations also authorize
the Secretary to waive a student’s Title
IV grant repayment if the student
withdrew from an institution of higher
education because of a major disaster as

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declared by the President in accordance
with the Robert T. Stafford Disaster
Relief and Emergency Assistance Act.
The Secretary will exercise this waiver
authority on a case-by-case basis after
determining that a major disaster has
significantly affected recipients of Title
IV grant aid.
Because entities affected by these
regulations already participate in the
Title IV, HEA programs, these lenders,
guaranty agencies, and schools must
have already established systems and
procedures in place to meet program
eligibility requirements. These
regulations generally involve discrete
changes in specific parameters
associated with existing guidance—such
as changes in origination fees, loan
limits, or reinsurance percentages—
rather than wholly new requirements.
Accordingly, institutions wishing to
continue to participate in the student
aid programs have already absorbed
most of the administrative costs related
to implementing these final regulations.
Marginal costs over this baseline are
primarily related to one-time system
changes that, while possibly significant
in some cases, are an unavoidable cost
of continued program participation. The
Department is particularly interested in
comments on possible administrative
burdens related to these system or
process changes.

Accounting Statement

Assumptions, Limitations, and Data
Sources

We received one comment on the
Paperwork Reduction Act portion of the
interim final regulations. The
commenter disagreed with the
Paperwork Reduction Act information
collection burden analysis for the
changes we made to § 682.604. These
changes implemented section 8010 of
the HERA to end the exemption from
multiple disbursement requirements for
eligible foreign institutions. Our
analysis stated that, in the vast majority
of cases, the lender or guaranty agency
is already required to disburse a FFEL
Program Loan in two installments as a
regular business practice and that this
change would produce no additional
burden for foreign schools.
The commenter stated that, while the
requirement to disburse a loan in two
installments is a regular business
practice at U.S. institutions, prior to
publication of the interim final
regulations, it had not been true for
foreign schools. The commenter stated
that disbursing a loan in two
installments is a new burden for foreign
schools and for lenders and guaranty
agencies that provide loans to their
American students enrolled in foreign
schools.
As a result of public comment, we
have reconsidered and recognized the

Because these final regulations largely
restate statutory requirements that
would be self-implementing in the
absence of regulatory action, cost
estimates provided above reflect a prestatutory baseline in which the HERA
and other statutory changes
implemented in these regulations do not
exist. Costs have been quantified for five
years, as over time this has been a
typical period between reauthorizations
of the HEA.
In developing these estimates, a wide
range of data sources were used,
including the NSLDS, operational and
financial data from Department of
Education systems, and data from a
range of surveys conducted by the
National Center for Education Statistics
such as the 2004 National
Postsecondary Student Aid Survey, the
1994 National Education Longitudinal
Study, and the 1996 Beginning
Postsecondary Student Survey.
Elsewhere in this SUPPLEMENTARY
INFORMATION section we identify and
explain burdens specifically associated
with information collection
requirements. See the heading
Paperwork Reduction Act of 1995.

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As required by OMB Circular A–4
(available at http://
www.Whitehouse.gov/omb/Circulars/
a004/a-4.pdf), in Table 2 below, we
have prepared an accounting statement
showing the classification of the
expenditures associated with the
provisions of these final regulations.
This table provides our best estimate of
the changes in Federal student aid
payments as a result of these final
regulations. Expenditures are classified
as transfers to postsecondary students;
savings are classified as transfers from
program participants (lenders, guaranty
agencies).

TABLE 2.—ACCOUNTING STATEMENT:
CLASSIFICATION OF ESTIMATED EXPENDITURES
[In millions]
Category
Annualized Monetized
Transfers.
From Whom To
Whom?

Transfers
$976.
Federal Government
to Postsecondary
Students;
Student Aid Program
Participants to Federal Government.

Paperwork Reduction Act of 1995

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burden associated with the elimination
of the exemption of single disbursement
of FFEL Loans to students attending
foreign institutions. While there is
additional burden associated with
making two disbursements of a FFEL
Loan for a student attending a foreign
institution, the burden is primarily at
the institution in the processing of an
additional disbursement. Since the
normal business process for a lender or
guaranty agency includes making
multiple disbursements of FFEL Loans,
there is no significant additional burden
to the lender or guaranty agency. These
additional activities will increase
burden hours by 20,000. A Paperwork
Reduction Act submission for OMB
Control Number 1845–0020, which
covers the burden in § 682.604, has been
submitted to OMB for approval.
As noted in the interim final rules, the
Department has been working with its
major stakeholders to develop the forms
and applications necessary to
implement many of the provisions of
this rulemaking activity. The
Department plans to separately publish
the required Federal Register notices for
the collections of information associated
with the following sections: active duty
military (§§ 674.34, 682.210, and
685.204), obtaining and repaying a loan
(§ 682.102), identity theft (§ 682.402),
and consolidation (§ 685.220).
OMB has already approved the
increased burden for the information
collection requirements associated with
the teacher loan forgiveness provisions
(§§ 682.215 and 685.217) under OMB
Control Number 1845–0059.
Assessment of Education Impact
Based on our own 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 view this document, as well
as all other Department of Education
documents published in the Federal
Register, in text or Adobe Portable
Document Format (PDF) on the Internet
at the following site: http://www.ed.gov/
news/Fedregister.
To use PDF you must have Adobe
Acrobat Reader, which is available free
at this site. If you have questions about
using PDF, call the U.S. Government
Printing Office (GPO), toll free, at 1–
888–293–6498; or in the Washington,
DC, area at (202) 512–1530.
Note: The official version of this document
is the document published in the Federal
Register. Free Internet access to the official
edition of the Federal Register and the Code

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Federal Register / Vol. 71, No. 211 / Wednesday, November 1, 2006 / Rules and Regulations
of Federal Regulations is available on GPO
Access at: http://www.gpoaccess.gov/nara/
index.html.

List of Subjects
34 CFR Part 668
Administrative practice and
procedure, Colleges and universities,
Consumer protection, Education, Grant
programs—education, Loan programs—
education, Reporting and recordkeeping
requirements, Student aid, Vocational
education.
34 CFR Part 673
Administrative practice and
procedure, Colleges and universities,
Consumer protection, Education,
Employment, Grant programs—
education, Loan programs—education,
Reporting and recordkeeping
requirements, Student aid, Vocational
education.
34 CFR Parts 682 and 685
Administrative practice and
procedure, Colleges and universities,
Education, Loans program—education,
Reporting and recordkeeping
requirements, Student aid, Vocational
education.
Dated: October 25, 2006.
Margaret Spellings,
Secretary of Education.

For the reasons discussed in the
preamble, the Secretary amends parts
668, 673, 674, 682, and 685 of title 34
of the Code of Federal Regulations as
follows:

■

1. The authority citation for part 668
continues to read as follows:

Authority: 20 U.S.C. 1001, 1002, 1003,
1085, 1091b, 1092, 1094, 1099c, and 1099c–
1, unless otherwise noted.

sroberts on PROD1PC70 with RULES

Direct assessment programs.

(a) * * *
(3) All regulatory requirements in this
chapter that refer to credit or clock
hours as a measurement apply to direct
assessment programs. Because a direct
assessment program does not utilize

17:45 Oct 31, 2006

*
*
*
*
(e) * * *
(4) The overpayment is an amount
that a student is not required to return
under the requirements of
§ 668.22(h)(3)(ii)(B).
*
*
*
*
*
§ 668.164

[Amended]

6. Section 668.164 is amended in
paragraph (g)(2)(i) by adding the word
‘‘parent’’ immediately before the word
‘‘PLUS’’.
■ 7. Section 668.165 is amended by
revising the introductory text of
paragraph (a)(2) to read as follows:
■

[Amended]

2. Section 668.2 is amended in
paragraph (b) in the first sentence of the
definition of Federal PLUS program by
adding the word ‘‘dependent’’
immediately after the words
‘‘encourages the making of loans to
parents of’’.
■ 3. Section 668.10 is amended by
revising paragraph (a)(3) introductory
text to read as follows:
■

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[Amended]

4. Section 668.22 is amended by:
■ A. In paragraph (a)(5)(iii)(E), removing
the words ‘‘electronically or’’.
■ B. In paragraph (h)(3)(ii)(B), removing
the word ‘‘A’’ and adding, in its place,
the words ‘‘With respect to any grant
program, a’’.
■ C. In paragraph (h)(5)(iii), removing
the word ‘‘ended’’ and adding, in its
place, the word ‘‘occurred’’.
■ 5. Section 668.35 is amended by:
■ A. In paragraph (e)(2), removing the
word ‘‘or’’.
■ B. In paragraph (e)(3), removing the
punctuation ‘‘.’’ at the end of the
paragraph and adding, in its place, the
words ‘‘; or’’.
■ C. Adding a new paragraph (e)(4).
The addition reads as follows:
■

*

■

§ 668.10

§ 668.22

§ 668.35 Student debts under the HEA and
to the U.S.

PART 668—STUDENT ASSISTANCE
GENERAL PROVISIONS

§ 668.2

credit or clock hours as a measure of
student learning, an institution must
establish a methodology to reasonably
equate the direct assessment program
(or the direct assessment portion of any
program, as applicable) to credit or
clock hours for the purpose of
complying with applicable regulatory
requirements. The institution must
provide a factual basis satisfactory to the
Secretary for its claim that the program
or portion of the program is equivalent
to a specific number of credit or clock
hours.
*
*
*
*
*

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§ 668.165

Notices and authorizations.

(a) * * *
(2) Except in the case of a postwithdrawal disbursement made in
accordance with 34 CFR 668.22(a)(5), if
an institution credits a student’s
account at the institution with Direct
Loan, FFEL, or Federal Perkins Loan
Program funds, the institution must
notify the student, or parent of—
*
*
*
*
*

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64397

PART 673—GENERAL PROVISIONS
FOR THE FEDERAL PERKINS LOAN
PROGRAM, FEDERAL WORK-STUDY
PROGRAM, AND FEDERAL
SUPPLEMENTAL EDUCATIONAL
OPPORTUNITY GRANT PROGRAM
8. The authority citation for part 673
continues to read as follows:

■

Authority: 20 U.S.C. 421–429, 1070b–
1070b–3, and 1087aa–1087ii; 42 U.S.C. 2751–
2756b, unless otherwise noted.
§ 673.5

[Amended]

9. Section 673.5 is amended in
paragraph (c)(1)(ix) by removing the
word ‘‘and’’ immediately before the
number ‘‘1607’’ and adding the words ‘‘,
and Section 903 of Public Law 96–342
(Educational Assistance Pilot Program)’’
at the end of the paragraph.
■

PART 682—FEDERAL FAMILY
EDUCATION LOAN (FFEL) PROGRAM
10. The authority citation for part 682
continues to read as follows:

■

Authority: 20 U.S.C. 1071 to 1087–2,
unless otherwise noted.
§ 682.101

[Amended]

11. Section 682.101 is amended in
paragraph (c) by removing the words ‘‘,
or married couples each of whom have
eligible loans under these programs’’, in
the third sentence.

■

§ 682.201

[Amended]

12. Section 682.201 is amended by:
A. In paragraph (b)(3), adding the
words ‘‘or under the Federal Direct
Subsidized Stafford/Ford Loan Program
and Federal Direct Unsubsidized
Stafford/Ford Loan Program, as
applicable’’ immediately after the words
‘‘Unsubsidized Stafford Loan Program’’.
■ B. In paragraph (c)(1)(vii), removing
the parentheticals ‘‘(b)(2)(ii)’’ and
adding, in their place, the parentheticals
‘‘(c)(2)(ii)’’.
■ C. In paragraph (c)(3), removing the
parentheticals ‘‘(b)(1)’’ and adding, in
their place, the parentheticals ‘‘(c)(1)’’.
■ D. In paragraph (d)(1)(i)(A)(3),
removing the reference to
‘‘§ 682.209(a)(7)(viii)’’ and adding, in its
place, a reference to
‘‘§ 682.209(a)(6)(iii)’’.
■ E. In paragraph (d)(2), removing the
word ‘‘responsible’’ and adding, in its
place, the word ‘‘ineligible’’.
■
■

§ 682.204

[Amended]

13. Section 682.204 is amended by:
A. In paragraph (a)(1)(i), removing the
word ‘‘certified’’ and adding, in its
place, the word ‘‘disbursed’’.
■ B. In paragraph (a)(1)(ii), removing the
word ‘‘certified’’ and adding, in its
place, the word ‘‘disbursed’’.
■
■

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Federal Register / Vol. 71, No. 211 / Wednesday, November 1, 2006 / Rules and Regulations
[Amended]

16. Section 682.209 is amended by:
A. In paragraph (a)(6)(v)(B), removing
the parentheticals ‘‘(a)(7)(viii)(C)’’ and
adding, in their place, the parentheticals
‘‘(a)(6)(viii)(C)’’.
■ B. In paragraph (a)(7)(iv), removing
the parentheticals ‘‘(a)(8)(iii)’’ and
adding, in their place, the
parentheticals, ‘‘(a)(7)(iii)’’.
■ 17. Section 682.211 is amended by:
■ A. In paragraph (f)(6), removing the
words ‘‘in the case of parent a PLUS
Loan’’ and adding, in their place, the
words ‘‘on whose behalf a parent has
borrowed a PLUS Loan’’.
■ B. Revising paragraph (h)(3).
The revision reads as follows:

§ 682.206

§ 682.211

[Amended]

14. Section 682.206 is amended in
paragraph (e)(3) by adding the words ‘‘,
based on an application received prior
to July 1, 2006,’’ immediately before the
word ‘‘may’’.
■ 15. Section 682.207 is amended by:
■ A. In paragraph (b)(1)(v)(C)(1), adding
the words ‘‘with the home institution’’
after the words ‘‘verification of the
student’s enrollment’’.
■ B. Revising paragraph (b)(2)(i)(A)(2).
■ C. Revising paragraph (b)(2)(i)(A)(3).
■ D. In paragraph (b)(2)(i)(B), adding the
word ‘‘, facsimile’’ after the word
‘‘telephone’’.
■ E. In paragraph (b)(2)(iv) introductory
text, removing the parentheticals
‘‘(b)(1)(v)(D)(1)’’ and adding, in their
place, the parentheticals ‘‘(b)(1)(v)(D)’’.
The revisions read as follows:
■

§ 682.207
loan.

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§ 682.209

C. In paragraph (a)(1)(iii), removing
the word ‘‘certified’’ and adding, in its
place, the word ‘‘disbursed’’.
■ D. In paragraph (a)(2)(i), removing the
word ‘‘certified’’ and adding, in its
place, the word ‘‘disbursed’’.
■ E. In paragraph (a)(2)(ii), removing the
word ‘‘certified’’ and adding, in its
place, the word ‘‘disbursed’’.
■ F. In paragraph (d)(5), removing the
word ‘‘certified’’ and adding, in its
place, the word ‘‘disbursed’’.
■ G. In paragraph (d)(6)(ii), removing
the word ‘‘certified’’ and adding, in its
place, the word ‘‘disbursed’’.
■ H. In paragraph (d)(6)(iii), removing
the word ‘‘certified’’ and adding, in its
place, the word ‘‘disbursed’’.
■

Due diligence in disbursing a

(b) * * *
(2) * * *
(i) * * *
(A) * * *
*
*
*
*
*
(2) For a new student, contacting the
foreign school the student is to attend in
accordance with procedures specified
by the Secretary, by telephone, e-mail or
facsimile to verify the student’s
admission to the foreign school for the
period for which the loan is intended at
the enrollment status for which the loan
was certified.
(3) For a continuing student,
contacting the foreign school the
student is to attend in accordance with
procedures specified by the Secretary,
by telephone, e-mail or facsimile to
verify that the student is still enrolled
at the foreign school for the period for
which the loan is intended at the
enrollment status for which the loan
was certified.
*
*
*
*
*

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■
■

Forbearance.

*

*
*
*
*
(h) * * *
(3) Forbearance agreement. After the
lender determines the borrower’s or
endorser’s eligibility, and the lender and
the borrower or endorser agree to the
terms of the forbearance granted under
this section, the lender sends, within 30
days, a notice to the borrower or
endorser confirming the terms of the
forbearance and records the terms of the
forbearance in the borrower’s file.
*
*
*
*
*
§ 682.215

[Amended]

18. Section 682.215 is amended by:
A. In paragraph (c)(3)(ii)(B), removing
the word ‘‘either’’.
■ B. In paragraph (c)(4)(ii)(B), removing
the word ‘‘either’’.
■ 19. Section 682.302 is amended by:
■ A. Revising paragraph (c)(1)(iii)(B)(4).
■ B. In paragraph (c)(1)(iii)(B)(5),
removing the cross-reference
‘‘§ 682.202(a)(2)(v)’’ and adding, in its
place, the cross-reference
‘‘§ 682.202(a)(2)(v)(A)’’.
■ C. Removing paragraph (c)(5).
■ D. Revising paragraph (f) introductory
text.
■ E. Revising paragraph (f)(2).
The revision reads as follows:
■
■

§ 682.302 Payment of Special Allowance
on FFEL loans.

*

*
*
*
*
(c) * * *
(1) * * *
(iii) * * *
(B) * * *
(4) A Federal PLUS Loan made on or
after July 1, 1998 and prior to October
1, 1998, except that no special
allowance shall be paid any quarter
unless the rate determined under
§ 682.202(a)(2)(v)(A) exceeds 9 percent;
(f) For purposes of this section—
*
*
*
*
*

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(2) The date on which an obligation
is considered to be ‘‘originally issued’’
is determined under § 682.302(f)(2)(i) or
(ii), as applicable.
(i) An obligation issued to obtain
funds to make loans, or to purchase a
legal or equitable interest in loans,
including by pledge as collateral for that
obligation, is considered to be originally
issued on the date issued.
(ii) A tax-exempt obligation that
refunds, or is one of a series of taxexempt refundings with respect to a taxexempt obligation described in
§ 682.302(f)(2)(i), is considered to be
originally issued on the date on which
the obligation described in
§ 682.302(f)(2)(i) was issued.
*
*
*
*
*
■ 20. Section 682.305 is amended by:
■ A. In paragraph (c)(2)(v), adding the
words ‘‘or a nonprofit organization’’
after the words ‘‘governmental entity’’
and removing the words ‘‘and 34 CFR,
part 80, appendix G’’ and adding in
their place the words ‘‘and 34 CFR
§§ 74.26 and 80.26, as applicable’’.
■ B. Revising paragraph (c)(2)(vi).
■ C. In paragraph (d)(1), by adding the
word ‘‘rate’’ immediately after the word
‘‘interest’’ the third time it appears in
the sentence.
The revisions read as follows:
§ 682.305 Procedures for payment of
interest benefits and special allowance and
collection of loan origination fees.

*

*
*
*
*
(c) * * *
(2) * * *
(vi) With regard to a school that
makes or originates loans, the audit
requirements are in 34 CFR
§ 682.601(a)(7).
*
*
*
*
*
§ 682.401

[Amended]

21. Section 682.401 is amended in
paragraph (b)(27)(iv) by removing the
parentheticals ‘‘(b)(27)(ii)(D)’’ and
adding, in their place, the parentheticals
‘‘(b)(27)(v)’’.

■

§ 682.402

[Amended]

22. Section 682.402 is amended by:
A. In paragraph (e), in the paragraph
heading, removing the word ‘‘borrower’’
and adding, in its place, the word
‘‘borrow’’.
■ B. In paragraph (e)(1)(iii)(A), adding
the word ‘‘not’’ immediately before the
word ‘‘pay’’.
■ 23. Section 682.405 is amended by
adding new paragraphs (b)(1)(iii)
through (vii) to read as follows:
■
■

§ 682.405

*

Loan rehabilitation agreement.

*
*
(b) * * *

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*

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Federal Register / Vol. 71, No. 211 / Wednesday, November 1, 2006 / Rules and Regulations
(1) * * *
(iii) For the purposes of this section,
the determination of reasonable and
affordable must—
(A) Include a consideration of the
borrower’s and spouse’s disposable
income and reasonable and necessary
expenses including, but not limited to,
housing, utilities, food, medical costs,
work-related expenses, dependent care
costs and other Title IV repayment;
(B) Not be a required minimum
payment amount, e.g. $50, if the agency
determines that a smaller amount is
reasonable and affordable based on the
borrower’s total financial circumstances.
The agency must include
documentation in the borrower’s file of
the basis for the determination if the
monthly reasonable and affordable
payment established under this section
is less than $50 or the monthly accrued
interest on the loan, whichever is
greater. However, $50 may not be the
minimum payment for a borrower if the
agency determines that a smaller
amount is reasonable and affordable;
and
(C) Be based on the documentation
provided by the borrower or other
sources including, but not be limited
to—
(1) Evidence of current income (e.g.,
proof of welfare benefits, Social Security
benefits, child support, veterans’
benefits, Supplemental Security Income,
Workmen’s Compensation, two most
recent pay stubs, most recent copy of
U.S. income tax return, State
Department of Labor reports);
(2) Evidence of current expenses (e.g.,
a copy of the borrower’s monthly
household budget, on a form provided
by the guaranty agency); and
(3) A statement of the unpaid balance
on all FFEL loans held by other holders.
(iv) The agency must include any
payment made under § 682.401(b)(4) in
determining whether the nine out of ten
payments required under paragraph
(b)(1) of this section have been made.
(v) A borrower may request that the
monthly payment amount be adjusted
due to a change in the borrower’s total
financial circumstances only upon
providing the documentation specified
in paragraph (b)(1)(iii)(C) of this section.
(vi) A guaranty agency must provide
the borrower with a written statement
confirming the borrower’s reasonable
and affordable payment amount, as
determined by the agency, and
explaining any other terms and
conditions applicable to the required
series of payments that must be made
before a borrower’s account can be
considered for repurchase by an eligible
lender. The statement must inform
borrowers of the effects of having their

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64399

loans rehabilitated (e.g., credit clearing,
possibility of increased monthly
payments). The statement must inform
the borrower of the amount of the
collection costs to be added to the
unpaid principal at the time of the sale.
The collection costs may not exceed
18.5 percent of the unpaid principal and
accrued interest at the time of the sale.
(vii) A guaranty agency must provide
the borrower with an opportunity to
object to terms of the rehabilitation of
the borrower’s defaulted loan.
*
*
*
*
*

PART 685—WILLIAM D. FORD
FEDERAL DIRECT LOAN PROGRAM

§ 682.408

■

[Amended]

24. Section 682.408 is amended in
paragraph (c) by adding, after the words
‘‘§ 682.207(b)(1)(ii) and (iv)’’, the phrase
‘‘, or Stafford Loan proceeds to a
borrower in accordance with the
requirements of § 682.207(b)(1)(i) and
(ii),’’.
■ 25. Section 682.601 is amended by:
■ A. Revising paragraph (a)(7).
■ B. Revising paragraph (a)(8).
■ C. In paragraph (a)(9), adding the
words ‘‘one or more FFEL program’’
before the word ‘‘loans’’.
The revisions read as follows:
■

§ 682.601 Rules for a school that makes or
originates loans.

(a) * * *
(7) Must, for any fiscal year beginning
on or after July 1, 2006 in which the
school engages in activities as an
eligible lender, submit an annual
compliance audit that satisfies the
following requirements:
(i) With regard to a school that is a
governmental entity or a nonprofit
organization, the audit must be
conducted in accordance with
§ 682.305(c)(2)(v) and chapter 75 of title
31, United States Code, and in addition,
during years when the student financial
aid cluster (as defined in Office of
Management and Budget Circular
A–133, Appendix B, Compliance
Supplement) is not audited as a ‘‘Major
Program’’ (as defined under 31 U.S.C.
7501) must, without regard to the
amount of loans made, include in such
audit the school’s lending activities as a
Major Program.
(ii) With regard to a school that is not
a governmental entity or a nonprofit
organization, the audit must be
conducted annually in accordance with
§ 682.305(c)(2)(i) through (iii);
(8) Must use any proceeds from
special allowance payments and interest
payments from borrowers, interest
subsidy payments, and any proceeds
from the sale or other disposition of
loans (exclusive of return of principal,
any financing costs incurred by the
school to acquire funds to make the

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loans, and the cost of charging
origination fees or interest rates at less
than the fees or rates authorized under
the HEA) for need-based grants; and
*
*
*
*
*
§ 682.604

[Amended]

26. Section 682.604 is amended in the
introductory text to paragraph (h) by
removing the words ‘‘or SLS’’ and
adding, in their place, ‘‘, SLS or PLUS’’.

■

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

Authority: 20 U.S.C. 1087a et seq., unless
otherwise noted.
§ 685.102

[Amended]

28. Section 685.102 is amended in the
definition of Estimated Financial
Assistance in paragraph (b)(1)(ix) by
removing the parentheticals ‘‘(2)(iii)’’
and adding, in their place, the
parentheticals ‘‘(2)(iv)’’.

■

§ 685.200

[Amended]

29. Section 685.200(b) is amended by:
A. Removing the paragraph (b)(1)
designation.
■ B. Redesignating paragraphs (b)(1)(i),
(ii), (iii), (iv), and (v) as paragraphs
(b)(1), (2), (3), (4), and (5), respectively.
■ C. In newly redesignated paragraph
(b)(4), removing the words ‘‘and Stafford
Ford/Loan Program; and’’ and adding,
in their place, the words ‘‘Stafford/Ford
Loan Program or under the Federal
Subsidized and Unsubsidized Stafford
Loan Program, as applicable; and’’.
■ D. In newly redesignated paragraph
(b)(5), removing the words ‘‘does not
have an adverse credit history in
accordance with’’ and adding, in their
place, the words ‘‘meets the
requirements of’’.
■
■

§ 685.203

[Amended]

30. Section 685.203 is amended by:
A. In paragraph (a)(1)(i), removing the
word ‘‘originated’’ and adding, in its
place, the word ‘‘disbursed’’.
■ B. In paragraph (a)(1)(ii), removing the
word ‘‘originated’’ and adding, in its
place, the word ‘‘disbursed’’.
■ C. In paragraph (a)(1)(iii), removing
the word ‘‘originated’’ and adding, in its
place, the word ‘‘disbursed’’.
■ D. In paragraph (a)(2)(i), removing the
word ‘‘originated’’ and adding, in its
place, the word ‘‘disbursed’’.
■ E. In paragraph (a)(2)(ii), removing the
word ‘‘originated’’ and adding, in its
place, the word ‘‘disbursed’’.
■ F. In paragraph (c)(2)(v), removing the
word ‘‘originated’’ and adding, in its
place, the word ‘‘disbursed’’.
■
■

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Federal Register / Vol. 71, No. 211 / Wednesday, November 1, 2006 / Rules and Regulations

G. In paragraph (c)(2)(vi)(B), removing
the word ‘‘originated’’ and adding, in its
place, the word ‘‘disbursed’’.
■ H. In paragraph (c)(2)(vii), removing
the word ‘‘originated’’ and adding, in its
place, the word ‘‘disbursed’’.
■ 31. Section 685.208 is amended as
follows:
■ A. By adding a new paragraph
(a)(2)(iv).
■ B. By revising paragraph (g)(3).
■ C. By revising paragraph (h)(2).
■

§ 685.208

Repayment plans.

(a) * * *
(2) * * *
(iv) No scheduled payment may be
less than the amount of interest accrued
on the loan between monthly payments,
except under the income contingent
repayment plan or an alternative
repayment plan.
(g) * * *
(3) A borrower’s payments under this
repayment plan may be less than $50
per month. No single payment under
this plan will be more than three times
greater than any other payment.
(h) * * *
(2) A borrower’s payments under this
repayment plan may be less than $50
per month. No single payment under
this plan will be more than three times
greater than any other payment.
*
*
*
*
*
§ 685.217

§ 685.220

[Amended]

32. Section 685.217 is amended by:
A. In paragraph (c)(3)(ii)(B), removing
the word ‘‘either’’.
■ B. In paragraph (c)(4)(ii)(B), removing
the word ‘‘either’’.
■ 33. Section 685.220 is amended by:
■ A. In paragraph (c)(1), removing the
words ‘‘and to’’ immediately before the
words ‘‘Federal Consolidation Loans’’
and adding, in their place, the words
‘‘and attributable to the portion of’’, and

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Consolidation.

*

■
■

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by removing the words ‘‘if they are’’ and
adding, in their place, the words ‘‘that
is’’.
■ B. In paragraph (d)(1) introductory
text, removing the words ‘‘, at the time
the borrower applies for such a loan,’’.
■ C. In paragraph (d)(1)(i) introductory
text, removing the word ‘‘The’’ and
adding, in its place, the words ‘‘At the
time the borrower applies for a Direct
Consolidation Loan, the’’.
■ D. In paragraph (d)(1)(ii) introductory
text, adding the words ‘‘At the time the
borrower applies for the Direct
Consolidation Loan,’’ immediately
before the words ‘‘on the loans being
consolidated,’’.
■ E. In paragraph (d)(1)(ii)(A), removing
the words ‘‘six-month’’.
■ F. In paragraph (d)(1)(ii)(D), removing
the words ‘‘Except as provided in
paragraph (d)(4) of this section, in’’ and
adding, in their place, the word ‘‘In’’.
■ G. Redesignating paragraphs (d)(1)(iii)
and (d)(1)(iv) as paragraphs (d)(1)(iv)
and (d)(1)(v), respectively.
■ H. Adding a new paragraph (d)(1)(iii).
■ I. Removing paragraph (d)(4).
■ J. Redesignating paragraph (h)(1) as
paragraph (h)(1)(i).
■ K. Redesignating paragraph (h)(2) as
paragraph (h)(1)(ii).
■ L. Redesignating paragraph (h)(3) as
paragraph (h)(2).
The addition reads as follows:

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*
*
*
*
(d) * * *
(1) * * *
(iii) On the loans being consolidated,
the borrower is—
(A) Not subject to a judgment secured
through litigation, unless the judgment
has been vacated; or
(B) Not subject to an order for wage
garnishment under section 488A of the
Act, unless the order has been lifted.
*
*
*
*
*

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34. Section 685.300 is amended by
revising paragraph (b)(8) to read as
follows:

■

§ 685.300 Agreements between and
eligible school and the Secretary for
participation in the Direct Loan Program.

*

*
*
*
*
(b) * * *
(8) Provide that eligible students at
the school and their parents may
participate in the programs under part B
of the Act at the discretion of the
Secretary for the period during which
the school participates in the Direct
Loan Program under part D of the Act,
except that—
(i) A student may not receive a Direct
Subsidized Loan and/or a Direct
Unsubsidized Loan under part D of the
Act and a subsidized and/or
unsubsidized Federal Stafford Loan
under part B of the Act for the same
period of enrollment;
(ii) A graduate or professional student
or a parent borrowing for the same
dependent student may not receive a
Direct PLUS Loan under part D of the
Act and a Federal PLUS Loan under part
B of the Act for the same period of
enrollment;
*
*
*
*
*
§ 685.303

[Amended]

35. Section 685.303(e) introductory
text is amended by removing the words
‘‘or Direct Unsubsidized Loan’’ and
adding, in their place, the words ‘‘,
Direct Unsubsidized, or Direct PLUS
Loan’’.
*
*
*
*
*

■

[FR Doc. E6–18183 Filed 10–31–06; 8:45 am]
BILLING CODE 4000–01–P

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