William D. Ford Federal Direct Loan Program; Final Rule

Background

The Student Loan Reform Act of 1993, enacted on August 10, 1993, established the Direct Loan Program under the Higher Education Act of 1965, as amended (HEA). See Subtitle A of the Omnibus Budget Reconciliation Act (OBRA) of 1993 (Pub. L. 103-66). The Improving America's Schools Act of 1994 (Pub. L. 103-382) also amended the HEA in areas that affect the Direct Loan Program. These amendments are reflected in these final regulations. OBRA directed the Secretary, to the extent practicable, to develop proposed rules for the Direct Loan Program through a negotiated rulemaking process for the second and subsequent years of the program (1995-1996 and beyond). These final regulations are a product of the extensive negotiating rulemaking sessions that were used to develop the proposed rule. On August 18, 1994, the Secretary published a notice of proposed rulemaking (NPRM) for part 685 in the Federal Register. This NPRM included a discussion of the major issues concerning the proposed rule and will not be repeated here. The following section summarizes the major revisions to the proposed rule.

Substantive Revisions to the Proposed Rule

Section 685.100 The William D. Ford Federal Direct Loan Program

• The Secretary has modified the final regulations to reflect recent statutory amendments. The program formerly known as the ``Federal Direct Student Loan Program'' has been renamed the ``William D. Ford Federal Direct Loan Program.'' Also, the ``Federal Direct Stafford Loan Program'' and the ``Federal Direct Unsubsidized Stafford Loan Program'' have been renamed the ``Federal Direct Stafford/Ford Loan Program'' and the ``Federal Direct Unsubsidized Stafford/Ford Loan Program,'' respectively.

Section 685.102 Definitions

• The definition of ``satisfactory repayment arrangement'' has been modified for the purpose of consolidating a defaulted loan into a Direct Consolidation Loan. The definition requires making three, instead of six, monthly payments.

Section 685.202 Charges for Which Direct Loan Program Borrowers Are Responsible

• The Secretary has added wording to clarify that interest may be capitalized when a borrower defaults on a Direct Loan.

Section 685.204 Deferment

• The regulations have been revised to reflect recent amendments to the HEA that allow a Direct Loan borrower who has an outstanding balance on an FFEL Program loan made prior to July 1, 1993 to be eligible for any deferment available to FFEL borrowers that was in effect on July 22, 1992. The HEA amendments also expanded the definition of an economic hardship for purposes of obtaining a deferment. This change applies to all borrowers. The definition now includes a borrower who works full-time and has educational debt burden equal to or greater than 20 percent of the borrower's adjusted gross income (AGI), and the difference between AGI and educational debt burden is less than 220 percent of the greater of the annual earnings of an individual earning the minimum wage or the poverty line for a family of two.

Section 685.207 Obligation To Repay

• The Secretary has specified the time at which a grace period begins for students enrolled in correspondence programs.

Section 685.208 Repayment Plans

• The Secretary has established the maximum repayment period allowable under the alternative repayment plan at 30 years. Further, under the alternative plan, interest that accrues and is not paid will be capitalized annually until the outstanding principal is 10 percent greater than the original principal amount.

Section 685.209 Income Contingent Repayment Plan

• The Secretary has significantly modified the income contingent repayment (ICR) plan provisions to address concerns of commenters. The Secretary is lowering the limit on interest capitalization that may occur when interest accrues, but is not paid, from 50 percent greater than the original principal amount to 10 percent greater than the original principal amount. Also, monthly payments will be limited to 20 percent of discretionary income (AGI minus the poverty level appropriate to the family size). This change eliminates the need for the previous family size offset of $7 and provides a new cap on the amount of income assessed. The Secretary is including years of repayment under the 10-year standard repayment plan and the 12-year extended repayment plan as years eligible for determining the 25-year period for loan forgiveness. The monthly repayment amount below which no payment is required under the formula calculation is $15. Under the 12-year standard amortization cap, the minimum payment is $15 (that is, a borrower must pay at least $15 each month). The 12-year standard amortization cap calculation has been modified to provide for the recalculation of the cap following periods of negative amortization because these periods result in an increase in the outstanding loan balance. The payback rate for married borrowers paying jointly under ICR will be calculated on the outstanding debt at the time the borrowers are approved for joint repayment. For borrowers repaying jointly, payments will be applied to interest on both accounts prior to principal reduction in either.

Section 685.210 Choice of Repayment Plans

• The Secretary has reduced from six to three the number of monthly payments that must be made before a borrower, who is required to repay a defaulted loan under the ICR plan, may switch to another repayment plan. Further, if the borrower's scheduled payment under the ICR plan is zero, the borrower has the option of paying three ``reasonable and affordable'' payments in order to meet the condition to switch to another plan.

Section 685.211 Miscellaneous Repayment Provisions

• The Secretary has added language to clarify that if a borrower is ineligible for a portion of the loan and does not comply with the repayment demand letter, the borrower is considered to be in default on the entire loan. Further, the borrower will have 30 days from the date the letter is mailed to repay the loan.

Section 685.215 Consolidation

• The Secretary has clarified that Federal Consolidation Loans eligible for interest benefits during a period of deferment under section 428C(b)(4)(C) of the HEA may be consolidated into a Direct Subsidized Consolidation Loan. Further, the regulations provide that a borrower attending a Direct Loan school may consolidate during the in- school period, even if the borrower does not have a Direct Loan. A provision has been added that allows, at the discretion of the Secretary, consolidation of loans where a judgment has been obtained against the borrower. The Secretary has clarified that holders of loans being consolidated must provide certification of the amount owed within 10 business days of receipt of the request. The regulations also have been revised to reflect recent amendments to the HEA that provide that loans made under subpart II of part B of title VIII of the Public Health Service Act may be consolidated into a Direct Unsubsidized Consolidation Loan.

Section 685.303 Processing Loan Proceeds

• The Secretary has added wording to clarify that disbursements to students who delay their start of attendance is permitted. For the student financial aid programs, the Secretary has consolidated and standardized many of the procedures a school must follow when it is disbursing funds. The relevant provisions have been removed from these final regulations and are now set forth in 34 CFR Part 668.

Section 685.304 Counseling Borrowers

• The Secretary has clarified that, within an institution's quality assurance plan, the performance measures used to demonstrate the effectiveness of a school's alternative approach to initial counseling must include objective outcomes, such as withdrawal rates. The Secretary has added a requirement that borrowers provide State of issuance information concerning their driver's license.

Section 685.309 Administrative and Fiscal Control and Fund Accounting Requirements for Schools Participating in the Direct Loan Program

• The regulations have been amended to require schools to report a borrower's change of permanent address on the school's student status confirmation report. For the student financial aid programs, the Secretary has consolidated and standardized many of the procedures a school must follow when it is maintaining funds. The relevant provisions have been removed from these final regulations and are now set forth in 34 CFR Part 668.

Section 685.400 School Participation Requirements for Academic Years 1996-1997 and Beyond

• The Secretary has clarified the provision that a school must meet the eligibility requirement in section 435(a) of the HEA, which includes having a cohort default rate of less than 25 percent during one of the three most recent fiscal years for which data are available. This eligibility requirement will be enforced for two years after a school enters the Direct Loan Program (that is, through the last full year of a school's participation in the FFEL program).

Analysis of Comments and Changes

In response to the Secretary's invitation in the NPRM, 98 parties submitted comments on the proposed regulations. An analysis of the comments and the changes follows. Following a general discussion of the changes, major issues are discussed. The major issues are grouped according to subject, with references to the appropriate sections of the regulations. Other substantive issues are discussed under the section of the regulations to which they pertain. Technical and other minor changes, and suggested changes the Secretary is not legally authorized to make under the applicable statutory authority, generally are not addressed.

General Discussion of Loan Repayment

The Secretary, in consultation with members of the higher education community through negotiated rulemaking and in response to public comment on the August 18, 1994, Notice of Proposed Rulemaking (NPRM), has designed an income contingent repayment (ICR) plan (or ``Pay-As- You-Can'' plan) in which the borrower will repay monthly a small percentage of his or her income, adjusted for the borrower's debt level. By giving borrowers the opportunity to repay student loans over time as a small percentage of their incomes, this plan provides a number of important benefits for the borrower. ICR reduces the financial burden of student loan repayment and gives borrowers the opportunity to accept lower-paid employment, including public service positions, for a few years or an entire working career. It also provides borrowers the chance to start a business or meet other family responsibilities. The Secretary is especially sensitive to the demands on family finances faced by the lowest-income borrowers. ICR borrowers will pay between 4 and 15 percent of their annual adjusted gross income (AGI), except that monthly payments are limited to 20 percent of discretionary income (AGI minus the poverty level appropriate to the family size). Under the formula calculation, borrowers are not required to make a monthly payment if the calculated amount is less than $15. Borrowers also can choose to limit their monthly ICR obligations to the amount calculated based on a fixed-payment, 12-year repayment schedule. The ICR plan permits high-debt borrowers to repay their loans in a reasonable time period and avoids a ``marriage penalty'' for two-debt households. The Secretary will continue to conduct analyses of the ICR plan to ensure that the formula meets the needs of borrowers and protects the interest of the Federal taxpayer. Further, the Secretary is committed to providing comprehensive, easy to understand counseling materials to borrowers before they choose the ICR plan. If the Secretary changes the formula once borrowers are paying under the ICR plan, borrowers will have the option to change to the the new formula. The Secretary will notify borrowers of changes in the formula to ensure that they have enough information to decide whether to remain under the old or change to the new formula. Under the ICR plan, some borrowers may make monthly payments that are insufficient to cover the interest due on their loans. However, the Secretary will encourage borrowers who are eligible for subsidized periods of deferment (including an economic hardship deferment) to use them because interest does not accrue on subsidized loans during these periods (up to three years). When interest does accrue, the Secretary is limiting the capitalization of unpaid interest to an amount that is just ten percent of the borrower's original debt, rather than 50 percent as proposed in the NPRM. This protects borrowers from compounding interest charges while ensuring that those who have sufficient long-term resources to repay their loans do so. By minimizing individual debt burden, this plan not only allows borrowers to choose from the full range of employment opportunities, but also reduces the incidence, and therefore the cost, of default. Some borrowers in the ICR plan may not earn sufficient income to fully repay their loans within the statutory 25-year time period. In this event, the Secretary will forgive any outstanding loan balance (principal plus interest) that is unpaid after 25 years. The Secretary is including years in repayment under both the 10-year standard plan and the 12-year extended plan as years eligible to count toward the 25 years for ICR loan forgiveness, because payments in these plans are at least equal to, and very often larger than, those required under ICR. Under current laws, the Internal Revenue Service regards the outstanding loan balance forgiven after 25 years in the ICR plan as taxable income. The Secretary is committed to exploring vigorously a change to current law to provide ICR borrowers complete forgiveness of any unpaid loan balance that remains outstanding at the end of the ICR repayment period. In addition to the ICR plan, the Secretary is providing borrowers with other flexible repayment options. The graduated repayment plan allows borrowers to repay their loans by making small payments at the beginning of their repayment periods, when their incomes are likely to be lower, and larger payments in later years. These borrowers will repay their loans in 12 to 30 years based on individual debt levels. The extended repayment plan provides for fixed but smaller monthly payments over a 12 to 30 year period, again based on individual debt levels. Borrowers will also still be able to choose the fixed-payment, 10-year repayment plan that currently is the most commonly used plan. Irrespective of the plan selected, borrowers may prepay without penalty all or part of their loans at any time. Moreover, borrowers can switch among repayment plans whenever they wish to do so. Section 685.209 (ICR plan) contains provisions governing the two monthly payment calculations, namely the formula amount and the capped amount, available for repayment of Direct Loans under the ICR plan. Borrowers may choose to repay either the formula amount or the capped amount. (See Appendix A for detailed examples illustrating, for single borrowers and for married borrowers who are repaying under the ICR plan, the calculations of the formula and capped monthly repayment amounts.) Formula Amount. Calculation of the ICR formula monthly payment amount is described in paragraph (b) of this section. In general, the borrower's annual repayment obligation is the borrower's AGI multiplied by a ``payback rate'' that is based on the borrower's debt. The monthly payment is the annual repayment obligation divided by 12. The ``payback rate'' varies from four to 15 percent, calculated as described in paragraph (b)(2). The payment amount cannot exceed 20 percent of discretionary income (AGI minus the annual poverty level appropriate to the family size) divided by 12. If the calculated monthly payment is less than $15, the borrower is not required to make a payment. When a borrower is not required to make a payment, interest on the principal accrues and will be capitalized until the limitation on capitalization is reached. Capped Amount. Calculation of the capped monthly payment amount is described in paragraph (c), and equals the monthly amount the borrower would repay over 12 years using standard amortization schedules. If the formula amount exceeds the capped amount, the borrower may choose to pay the capped amount. If the borrower chooses to pay the capped amount, the borrower's repayment period may be longer than if the borrower chooses to pay the higher formula amount. Joint repayment by married borrowers. This section includes provisions for joint income contingent repayment of Direct Loans by married borrowers. Negative amortization is minimized by attributing joint repayments first to the interest due on each spouse's account and then to principal. A step-by-step calculation of a combined repayment amount is included as Example 2 in Appendix A. Repayment period. Provisions governing the repayment period under ICR are contained in paragraph (d)(2). The maximum period is 25 years, excluding periods of authorized deferment and forbearance under Secs. 685.204 and 685.205, respectively, and periods in which the borrower made payments under a repayment plan other than the 10-year standard or 12-year extended plans. The Secretary believes the exclusion of repayment periods under all other extended and graduated plans is needed to prevent potential borrower repayment abuses. If a borrower repays more than one loan under ICR and the loans enter repayment at different times, a separate repayment period for each loan begins when the loan enters repayment. This approach ensures that no loan will be repaid under ICR for more than 25 years. If loans enter repayment at the same time, a single repayment period applies. To encourage borrowers to begin repaying their loans and to limit negative amortization at the beginning of the repayment period, a borrower must make monthly payments of accrued interest until the Secretary calculates the borrower's monthly payment on the basis of the borrower's income. A borrower who is unable to make monthly payments of accrued interest or is unable to qualify for a deferment under Sec. 685.204, may request forbearance under Sec. 685.205. Limit on capitalization of interest. The Secretary believes a limit on the amount of interest that is added to principal (the capitalization of interest) is desirable to prevent an excessive increase in a borrower's debt burden when the borrower's income is insufficient to cover accruing interest. Paragraph (d)(3) permits capitalization of unpaid interest until the outstanding principal amount is 10 percent greater than the original principal amount, a decrease from the 50 percent proposed in the NPRM. Thereafter, unpaid interest accrues but is not capitalized. Consent to disclosure of tax return information. In order to repay a Direct Loan under ICR, a borrower must consent, on a form provided by the Secretary, to the disclosure of certain tax return information by the Internal Revenue Service to agents of the Secretary for purposes of calculating a monthly repayment amount and servicing and collecting a loan. The information subject to disclosure is taxpayer identity information as defined in 26 U.S.C. 6103(b)(6) (including such information as name, address, and social security number), tax filing status, and AGI. Paragraph (d)(5) describes the procedures for providing written consent and requires that consent be provided for a period of five years. If a borrower selects ICR but fails to provide or renew consent, or withdraws consent without selecting a different repayment plan, the Secretary designates the 10-year standard repayment plan for the borrower.

General Discussion of Other Comments

Regulating Internal Procedures

A number of commenters suggested that the regulations include more specific requirements relating to the Secretary's internal procedures for implementing the Direct Loan Program. For example, some commenters suggested that the Secretary regulate the collection efforts that will be used to collect from defaulted borrowers. In a number of cases, the commenters suggested that the Secretary should include specific time deadlines for actions by the Secretary in connection with the Direct Loan program. The commenters pointed out that the FFEL regulations frequently include specific time deadlines on actions by guaranty agencies and lenders and suggested that the Direct Loan rules should provide similar requirements on the Secretary. In these regulations, the Secretary has tried to provide sufficient information for the public to understand the rules governing the program without adding unnecessary complexity to the regulations. The Secretary is not required to issue regulations that are intended to regulate internal agency processes but do not affect the substantive or procedural rights of program participants. Therefore, the Secretary has not included regulations governing such processes as when specific loan collection efforts will be taken against defaulted borrowers. A borrower does not have a substantive right to receive a letter at a specific time. In addition, the Secretary has not included in these regulations other rules governing the Department's actions which already have binding effect. For instance, the Department's regulations at 34 CFR Part 30 include specific procedural protections available to a borrower before the Department reports a debt to a credit bureau. 34 CFR 30.35. Moreover, other laws and rules (such as, in certain instances, the Fair Debt Collection Practices Act) govern various aspects of the Secretary's implementation of the Direct Loan Program. The Secretary will comply with those laws and rules to the extent they are applicable to the Direct Loan Program, but the specifics of those requirements do not have to be reflected in these regulations. The Secretary does not agree with the commenters' suggestion that the time deadlines binding guaranty agencies and lenders in the FFEL Program should apply to the Secretary in the Direct Loan Program. The time requirements in the FFEL Program are designed to protect the Federal taxpayer by ensuring that lenders and guaranty agencies which receive Federal funds meet certain requirements before those benefits are paid. The same goal does not exist in the Direct Loan Program. However, the Secretary is fully committed to timely communications with borrowers and schools.

Cash Management Provisions

To reduce regulatory burden on schools, some sections concerning cash management issues have been removed from these final regulations and cross-references to the new subpart K of the Student Assistance General Provisions regulations have been made. In this new subpart, the Secretary has consolidated most of the current cash management requirements in the title IV, HEA program regulations, codified existing cash management policies and procedures currently specified in subregulatory guidance, and amended some existing requirements to promote sound cash management practices by schools. Comments to the NPRM regarding the cash management issues now addressed in subpart K were forwarded for full consideration in the development of those final regulations. The changes concerning cash management provisions made to these final regulations include:

Section 685.102 Definitions

In paragraph (a)(1), the definition for ``disburse'' was added to the list of definitions which are set forth in the Student Assistance General Provisions, 34 CFR Part 668. Additionally, in paragraph (b), the definition for ``disbursement'' has been removed since the definition for ``disburse'' is set forth in 34 CFR 668.162.

Section 685.303 Processing Loan Proceeds

Paragraph (c) has been amended to delete language in this section and to cross reference section 34 CFR 668.165, which establishes the procedures a school must follow when disbursing funds.

Section 685.309 (Proposed 685.308) Administrative and fiscal control and fund accounting requirements for schools participating in the Direct Loan Program

Paragraph (g) has been amended to delete language in this section and to cross reference 34 CFR 668.164. Paragraph (h) also has been amended to delete language in this section and to cross reference 34 CFR 668.164, which establishes the procedures a school must follow for maintaining funds.

Inspection Requirements and Division of Functions Provisions

Paragraph (e) of Sec. 685.309 (proposed Sec. 685.308) has been amended to delete language in this section and to cross reference more comprehensive provisions in 34 CFR 668.23(b). Paragraph (i) of Sec. 685.309 also has been amended to delete this language and to cross reference more comprehensive provisions contained in 34 CFR 668.16(c).

Bankruptcy Provisions

The Secretary is not including proposed Sec. 685.200(a)(1)(iv) in this final rule because that provision would have required reaffirmation of a loan that had been discharged in bankruptcy as a prerequisite to further eligibility to participate in the Direct Loan Program. This requirement is no longer permissible by operation of law pursuant to amendments to 11 U.S.C. section 525 made by section 313 of the Bankruptcy Reform Act of 1994, P.L. 103-394. These amendments took effect on October 22, 1994, the date of enactment. Section 525 as amended prohibits denial of a loan or loan guarantee based on bankruptcy discharge, but does not prohibit consideration of that fact in determining the future creditworthiness of a loan applicant. Consistent with the new law, these regulations provide that a bankruptcy discharge may evidence an adverse credit history, as a result of which the PLUS Loan applicant must furnish an explanation of that event or secure a credit-worthy endorser.

Discussion of Major Issues

Section 685.100 The William D. Ford Federal Direct Loan Program

Section 685.100(a)(1)

Comments: None. Discussion: Recent amendments to the HEA were included in the Improving America's Schools Act of 1994 and enacted into law on October 20, 1994. These changes provide that the name of the program authorized by Part D of the HEA shall be referred to as the ``William D. Ford Federal Direct Loan Program.'' Thus, the ``Federal Direct Student Loan Program'' has been renamed the ``William D. Ford Federal Direct Loan Program.'' However, the program still will be cited as the ``Direct Loan Program'' within these regulations. Further, the loan program previously referred to as the ``Federal Direct Stafford Loan Program'' has been renamed the ``Federal Direct Stafford/Ford Loan Program'' and loans made under this program will continue to be cited as ``Direct Subsidized Loans.'' The loan program previously referred to as the ``Federal Direct Unsubsidized Stafford Loan Program'' has been renamed the ``Federal Direct Unsubsidized Stafford/Ford Loan Program'' and loans made under this program will continue to be cited as ``Direct Unsubsidized Loans.'' Changes: Section 685.100 reflects programmatic name changes, including the ``William D. Ford Federal Direct Loan Program,'' formerly known as the ``Federal Direct Student Loan Program;'' the ``Federal Direct Stafford/Ford Loan Program,'' formerly known as the''Federal Direct Stafford Loan Program;'' and the ``Federal Direct Unsubsidized Stafford/Ford Loan Program,'' formerly known as the ``Federal Direct Unsubsidized Stafford Loan Program.''

Sections 685.100(a)(1) and 685.100(a)(4)

Comments: Commenters believed that Sec. 685.100(a)(1) should specify that interest is paid on a Direct Subsidized Loan by the Secretary only if that student is eligible for these interest payments on the loan. These commenters also stated that Sec. 685.100(a)(4), concerning consolidation loans, should be modified to state the party responsible for interest payment during periods of in-school, grace, or deferment status of the borrower. Discussion: The Secretary believes that the regulations provide sufficient distinction between Direct Subsidized and Direct Unsubsidized loans. Section 685.215 clearly distinguishes between Direct Subsidized and Direct Unsubsidized Consolidation Loans. Changes: None.

Section 685.100(b)

Comments: Many commenters stated that in the FFEL Program regulations, 34 CFR 682.100, Federal loans such as Stafford, SLS, PLUS, and Consolidation Loans do not incorporate the term ``Federal'' in their names. However, within the Direct Loan Program and General Provisions regulations, the term ``Federal'' is used when describing these loans. These commenters stated that the wording must be consistent throughout all Department regulations. Discussion: The Secretary notes the comments regarding use of program names. Changes: The Secretary intends to make future modifications to the FFEL regulations to ensure consistency in use of program names.

Section 685.101 Participation in the Direct Loan Program

Section 685.101(a)(2)

Comments: Many commenters supported the provision allowing schools to participate simultaneously in both the Direct Loan and FFEL Programs. However, some of these commenters recommended that an institution, not the Secretary, determine its level of participation in the two programs. These commenters expressed concern that the NPRM would limit an institution's choice by subjecting an institution's participation in both programs to the Secretary's approval. Discussion: The language contained in Sec. 685.101(a)(2) allows an institution the choice of determining its level of participation in the Direct Loan Program. During the first year of the Direct Loan Program, some schools have chosen to participate in both programs and no school's requested level of participation was denied or modified by the Secretary. However, the Secretary will continue to retain the authority to approve such participation to ensure a smooth transition from the FFEL Program to the Direct Loan Program. Changes: None.

Section 685.102 Definitions

Section 685.102(a)(1)

Comments: A commenter noted an apparent inconsistency in the law regarding stepparents that limits the loan assistance available to a dependent student. The commenter believed that because the law requires that, in certain circumstances, the income of stepparents must be used to calculate the expected family contribution, the Secretary should explicitly provide that stepparents would be eligible to obtain Direct PLUS loans. The commenter asked that the Secretary provide clarification. Discussion: A ``parent'' is defined in 34 CFR 668.2(b) as a student's natural or adoptive mother or father, or a student's legal guardian who has been appointed by a court and who is specifically required by the court to use his or her own resources to support the student. A stepparent cannot be a student's natural mother or father, but may be a student's adoptive mother or father, or the student's legal guardian. However, if the stepparent is not legally considered to be the student's adoptive mother or father, or the student's legal guardian, the stepparent is not an eligible borrower in either the Direct or FFEL PLUS Program for that student. Changes: None.

Section 685.102(b)

Comments: One commenter noted that the Direct Loan Program regulations varied from the FFEL Program requirement of three ``reasonable and affordable'' payments for borrowers to be eligible to consolidate defaulted loans. Discussion: The Secretary agrees with the commenter that the terms for defaulted FFEL and Direct Loan borrowers who wish to obtain a consolidation loan should be the same. For the sake of consistency, defaulted borrowers who do not wish to repay under ICR will be required to make three payments prior to consolidation. Similarly, the Secretary intends that borrowers who do not make any payments prior to consolidation should be allowed to change out of the ICR plan after making three payments. Changes: The definition of ``satisfactory repayment arrangement'' in Sec. 685.102(b) is revised to provide that three consecutive, voluntary, full monthly payments on a defaulted loan satisfy the requirements of ``satisfactory repayment arrangements'' for the purposes of consolidation. Section 685.210(b)(1)(i) is revised to require a defaulted ICR borrower to make three monthly payments in order to change to another repayment plan. Section 685.210(b)(1)(ii) is added to provide that a defaulted ICR borrower who is not required to make payments must actually make three reasonable and affordable payments in order to change to another Direct Loan repayment plan. Comments: A number of commenters requested a clarification of the definition of ``consortium''. Commenters noted that the definition states that for schools in a consortium, the communication is between the Secretary and a single point. Commenters asked whether ``the communication'' refers to all contracts, policy information and compliance reports or to borrower-specific loan information only. Discussion: All electronic communication will be through the main contact in the consortium agreement; the Secretary may send other communication materials directly to individual institutions within the consortium. As noted in the definition, each school must sign a participation agreement with the Secretary, and is held responsible for the administration of the Program. Changes: The definition of ``consortium'' is amended to clarify that the electronic communication between the Secretary and the schools in a consortium is channeled through a single point. Comments: Commenters pointed out that the definition of estimated financial assistance is not comparable to the definition in the FFEL Program regulations. Discussion: The Secretary agrees that the definition of estimated financial assistance in the FFEL Program regulations differs from the language in the Direct Loan NPRM. Therefore, the Secretary has made revisions to this section in both these regulations and the FFEL final regulations to simplify and clarify the definition of estimated financial assistance. Changes: The introductory paragraph of the definition of estimated financial assistance has been revised; paragraphs (i), (ix) and (x) have been deleted; and paragraph (viii) has been revised.

685.200 Borrower Eligibility

Section 685.200(a)

Comments: Many commenters suggested that the Secretary should clarify if a borrower must apply for a Direct Subsidized Loan before he or she may apply, and be determined eligible for, a Direct Unsubsidized Loan. Also, the commenters suggested that the Department clarify that a borrower with need for less than $200 should not be required to apply for a Direct Subsidized Loan. Discussion: The Secretary does not have the authority to set a minimum borrowing amount on a Direct Subsidized Loan, nor does the Secretary have the authority to require a borrower to apply for a Direct Subsidized loan before the borrower applies for a Direct Unsubsidized loan. It should be noted, however, that a student applies for both Direct Subsidized and Unsubsidized Loans by completing the Free Application for Federal Student Aid. Based on that application, a school determines student eligibility for a Direct Subsidized Loan prior to determining any Direct Unsubsidized Loan amount. Further, an institution may establish a minimum loan amount. Changes: None.

Section 685.200(b)(7)

Comments: Many commenters suggested that the Secretary require a parent with an adverse credit history to document extenuating circumstances to establish eligibility for the loan, even if the borrower obtained an endorser who did not have an adverse credit history. The commenters argued that if this requirement were not included in the final regulations, many Direct PLUS Loans would go into default. Discussion: The Secretary agrees with the commenters that a borrower who has an adverse credit history may have an increased risk of defaulting on a loan than a borrower without an adverse credit history. However, the Secretary does not believe that documenting extenuating circumstances with respect to a borrower's adverse credit history is the only way to reduce such risk. The Secretary believes that requiring a borrower with an adverse credit history to obtain an endorser who does not have an adverse credit history is an effective way to reduce the incidence of default. In the event that the borrower defaults, the endorser would be required to repay the loan. Therefore, the Secretary is providing a borrower with an adverse credit history two options to establish eligibility for a Direct PLUS Loan: (1) document to the satisfaction of the Secretary that extenuating circumstances exist, or (2) obtain an endorser who does not have an adverse credit history. This provision is the same as the applicable FFEL Program regulation.

Section 685.200(c)

Comments: Several commenters suggested that the regulations address eligibility of defaulted FFEL, Direct Loan, and Perkins borrowers. Discussion: The Direct Loan Program regulations are comparable to the FFEL Program regulations, which also do not address the eligibility of defaulted Perkins borrowers (see 34 CFR 682.201(a)). The eligibility of defaulted Perkins borrowers is addressed in 34 CFR 668.7(e) of the General Provisions regulations. Changes: None.

Section 685.201 Obtaining a Loan

Section 685.201 General

Comments: Many commenters suggested that the Secretary disclose to the borrower upon disbursement of the loan, borrower-specific terms such as loan fees retained, net balance, interest rate, total debt, as well as the name, address and phone number of the Direct Loan Servicing Center. Discussion: The Secretary agrees with the commenters that it is important that a borrower receive such information with respect to his or her debt when a loan is disbursed, and makes such a disclosure with each disbursement. Changes: None.

Section 685.202 Charges for Which Direct Loan Program Borrowers Are Responsible

Section 685.202(e)

Comments: Some commenters expressed concern that the collection formula prescribed by 34 CFR 30.60 results in unreasonable collection fees. The commenters suggested that the Department limit collection costs to those costs actually incurred, provided those charges are reasonable. Discussion: The Secretary does not agree with the commenters that the collection costs prescribed by 34 CFR 30.60 are unreasonable. This regulation, which uses a formula to determine average collection costs, is consistent with the Federal Claims Collection Standards, 4 CFR Part 101, et seq. Those standards require the Secretary to recover his costs in collecting a delinquent debt. The Department does not charge a borrower the actual costs incurred in collecting his or her loan. These costs may not only exceed the thresholds prescribed by 34 CFR 30.60, but in the case of certain low balance loans, may be greater than the outstanding balance of the loan. The Secretary believes that the formula provided by 34 CFR 30.60 provides a reasonable measure of collection costs that should be charged on a defaulted loan. Changes: None. Comments: Commenters noted that the fees charged to borrowers under Sec. 685.202(e) must be the same as those charged under the FFEL Program. Discussion: The maximum fees and charges that can be charged in the Direct Loan Program are the same as those authorized for the FFEL Program. Changes: None.

Section 685.203 Loan Limits

Sections 685.203(a)-(c)

Comments: Many commenters suggested that the Secretary permit a school to use a student's satisfactory academic progress to determine if a student's loan amount should be prorated. Many of the commenters argued that determining if proration is needed is unreasonably complicated. Many of the commenters argued that satisfactory academic progress is an appropriate means to measure if a student needs additional time to complete an educational program and suggested that a financial aid administrator be given the authority to use satisfactory academic progress to determine if loan proration is necessary. Other commenters suggested that a school should be permitted to use other means, such as the number of weeks of enrollment or the number of credit hours in the student's loan period to determine if loan proration is necessary. Discussion: The Secretary does not have the authority to permit a school to use a student's satisfactory academic progress or any means other than those expressly provided by the statute, which are reflected in the regulations, to determine if a student's loan should be prorated. Changes: None.

Section 685.204 Deferment

Section 685.204(b)(3)

Comments: Two commenters suggested that the Secretary provide automatic economic hardship deferments to borrowers who chose the ICR option and argued that ICR borrowers should not be required to apply for the economic hardship deferment. The commenters suggested that the economic hardship deferment be granted on the basis of ICR income figures. Discussion: The Secretary reminds the commenters that the provisions on economic hardship apply to all borrowers regardless of which plan they choose and that the Secretary is committed to providing all borrowers with timely information regarding deferment eligibility. However, because the Secretary has additional information about ICR borrowers, he will facilitate the process regarding economic hardship for these borrowers. Based on income and debt information (data elements necessary to calculate the ICR amount) for ICR borrowers, the Secretary will counsel borrowers and, through the dissemination of informational materials, will make deferment options clear to these borrowers. Due to statutory differences between the information used for the ICR plan and the economic hardship deferment provisions, it is not possible for the Secretary to make ``automatic'' deferment eligibility determinations. Changes: None. Comments: A commenter suggested that the Secretary include in the final regulations the definition of economic hardship that was included in the notice of proposed rulemaking for the FFEL Program published in the Federal Register on March 24, 1994 (59 FR 14047). Under the proposed rule, a borrower would be considered to be experiencing an economic hardship if the borrower is earning no more than either four times the minimum wage rate or the poverty level and whose payments on Federal educational loans are at least 20 percent of the borrower's monthly disposable income. The commenter also suggested that the Secretary extend the eligibility for in-school deferment to medical interns or residents. Discussion: The Secretary believes that the expansion of economic hardship as requested by the commenter could make a borrower eligible for an economic hardship deferment when he or she is not experiencing any financial difficulties. The HEA has been amended by the Improving America's Schools Act of 1994 to expand the definition of economic hardship to apply to a borrower who is working full-time and has a Federal education debt burden that equals or exceeds 20 percent of such borrower's adjusted gross income, and the difference between the borrower's adjusted gross income and his or her Federal education debt burden is less than 220 percent of the greater of the annual earnings of an individual earning the minimum wage or the income official poverty line applicable to a family of two. This provision is applicable to all borrowers under the Direct Loan Program. Further, the statute does not provide in-school deferment eligibility to medical residents and interns. Changes: The definition of economic hardship has been expanded to incorporate the statutory change. A change has been included in the FFEL Program regulations. Section 685.204(b)(3)(ii) references the applicable FFEL Program provision.

Section 685.204(d)

Comments: A commenter suggested that the Secretary extend the eligibility to medical students to defer repayment on Direct Loans if they received FFEL Program loans prior to July 1, 1993. Discussion: At the time the NPRM was published, the Secretary did not have the authority to permit a Direct Loan borrower to defer repayment based on criteria applicable to FFEL Program loan borrowers who borrowed before July 1, 1993. However, on October 20, 1994, the Higher Education Act of 1965 was amended by the Improving America's Schools Act of 1994, to provide that a Direct Loan borrower who has an outstanding balance on an FFEL Program loan made prior to July 1, 1993 is eligible for any deferment available to FFEL Program borrowers that were in effect on July 22, 1992. Changes: A change has been made. The regulations have been amended to provide that a Direct Loan borrower who has an outstanding FFEL Program loan made prior to July 1, 1993 is eligible for all the deferments available to FFEL Program borrowers in addition to the deferments available to Direct Loan borrowers.

Section 685.204(e)

Comments: A number of commenters objected to the Secretary's proposal to permit a borrower who consolidates FFEL Program loans into a Direct Consolidation Loan to defer repayment on the Consolidation Loan under all the deferment conditions available to Direct Loan borrowers in addition to all of the deferment conditions available under the FFEL Program (even if the borrower was not previously eligible for all of the deferments under the FFEL Program). Many commenters stated that the deferment conditions should be identical for the Direct Loan and FFEL Programs. Many other commenters agreed with the Secretary's proposal to provide the same deferments to borrowers as they have under the FFEL Program in addition to the Direct Loan Program deferments because it maximizes the deferments available to the borrower. Discussion: The Congress specifically exempted the Federal Direct Consolidation Loan Program from having parallel terms, conditions, and benefits as consolidation loans under the FFEL Program. The Secretary has exercised his authority to set the terms, conditions, and benefits for Direct Consolidation Loans to provide that a borrower will be eligible for any deferment benefits for which he or she would have been eligible under the FFEL Program, and be eligible for deferments available to other Direct Loan borrowers. The Secretary believes that it is appropriate to maximize the deferment benefits for which a borrower may be eligible when he has the authority to do so. Further, as a result of a recent statutory amendment, these deferment benefits are the same as those provided by Congress for borrowers under the Direct Subsidized, Direct Unsubsidized, and Direct PLUS Loans. The Secretary does not have the authority to expand the deferment conditions available to borrowers who consolidate loans under the FFEL Program. Changes: None.

Section 685.205 Forbearance

Section 685.205(a)

Comments: One commenter suggested that if a borrower fails to designate a form of forbearance, the Secretary should grant cessation of payments. Discussion: The Secretary believes there is no need to prescribe a default to a particular form of forbearance to address cases where borrowers fail to designate the form of forbearance they prefer. The borrower will be required to contact the Direct Loan Servicing Center in order to obtain a forbearance. The Servicing Center will provide the borrower with adequate information to ensure that the borrower understands his or her options under forbearance. Furthermore, the Servicing Center will be very flexible on a month to month basis. The Servicing Center will accept zero payments, partial payments, or interest only payments from any borrower in forbearance; the borrower will be able to choose to pay or not to pay on a monthly basis. Changes: None. Comments: Some commenters suggested that the Secretary specify in the regulations that a borrower may receive a forbearance if he or she is serving in a position that would qualify for loan forgiveness under 34 CFR 682.215. Discussion: The Secretary agrees with the commenters that a borrower is eligible to forbear repayment of a Direct Loan if he or she qualifies for loan forgiveness under 34 CFR 682.215. Changes: A change has been made. A new paragraph (5) has been added to Sec. 685.205(a) that allows a borrower under the Direct Loan Program to forbear if he or she is serving in a position that qualifies for loan forgiveness under 34 CFR 682.215.

Section 685.206 Borrower Responsibilities and Defenses

Section 685.206(b)(1)

Comments: A commenter suggested that the proposed requirement for a borrower to notify the Secretary of a change of address be removed. The commenter was concerned that disadvantaged persons could easily fail to comply with the requirement because they are confronted with many requirements to report various types of information to many different agencies. Another commenter proposed that paragraph (b)(1) be revised to eliminate duplication and unrealistic expectations by requiring an enrolled borrower to report changes in name, address, employer, and employer's address to the school instead of the Secretary, and to require the borrower to report address changes to the Secretary after he or she is no longer enrolled. The commenter also suggested that there is no need for the borrower to report changes in enrollment status to the school, because the school already has this information. Discussion: The Secretary would not be able to effectively collect loans without current information concerning a borrower's name, address, employment, and student status. For this reason, it is imperative that the borrower (who is the best source of this information) ensure that the Secretary is informed of changes. Requiring students to notify their schools of any changes in address promotes rapid exchange of information, particularly in instances where a borrower drops out of school or drops below half time enrollment. This rapid exchange of information ensures that the borrower receives prompt exit counseling and guidance on entering repayment well before the first payment is due, and facilitates a school's calculation and return of a refund, if any. At some institutions, there is a delay between the time a student changes enrollment status and the time that this information is made available to the financial aid office. Changes: None.

Section 685.206(c)

Comments: Several commenters supported the proposed language relating to borrower defenses because it strikes a reasonable balance between the needs of students and institutions. Commenters stated that it is important that a system be established to assure that valid claims are processed, frivolous claims are screened out, and schools are protected from liability if a delay in bringing the claim reduces the school's ability to access evidence opposing the claim. Discussion: The Secretary believes that the proposed regulations provide an adequate system for adjudicating claims by borrowers that have a defense against repayment of a loan based on the acts or omissions of the school. The Secretary notes that the regulations identify formal proceedings in which borrowers may raise the acts or omissions of the school as a defense against collection of the loan. The Secretary does not believe that these proceedings will be used by borrowers to raise frivolous appeals. Moreover, schools are further protected from frivolous claims by the requirement that the Secretary initiate a second proceeding to enforce a liability against the school. Changes: None. Comments: One commenter stated that the Department should recognize that defenses against collection of a loan based on abuses by schools must be preserved. Another commenter suggested that further clarification is needed to determine what is meant by the reference to an act or omission by the school that would give rise to a cause of action under state law. The commenter suggests that this language encourages spurious attempts by borrowers to assert claims against an institution. Discussion: The proposed regulations reflect the Secretary's view that an act or omission of the school may, under certain circumstances, be a defense against collection of a loan. The Secretary believes that the reference in the regulation to ``an act or omission of the school that would give rise to a cause of action under state law'' provides an acceptable interim standard for resolving claims in this area. In the preamble to the proposed rules, the Secretary committed to working with interested parties to develop revised regulations for borrower defenses that would provide further detailed guidance in this area. Changes: None. Comments: A number of commenters who participate in the FFEL Program stated that they were concerned that institutional exposure to potential liability in the FFEL Program could be increased as the Department attempts to address an alleged problem of higher potential institutional liability in the Direct Loan Program. These commenters also stated that schools with no history of abuse should not be subject to increased regulation as the Direct Loan Program is implemented. Discussion: The commenters' claim that schools may be subject to greater liabilities in the Direct Loan Program than in the FFEL Program is inaccurate. Schools in both programs face essentially the same risk of liability. Similarly, the commenters' suggestion that the Direct Loan Program will result in increased regulation of schools is incorrect. In fact, these final regulations, in many cases, reduce the burdens on schools, and the Secretary is applying many of these changes to the FFEL Program as appropriate. Changes: None. Comments: Some commenters supported the Secretary's announcement in the preamble to work with interested parties to develop regulations for borrower defenses that would apply to both the Direct Loan Program and the FFEL Program. These commenters urged the Secretary to structure the discussions under a negotiated rulemaking process and identified particular representatives for the process. Some of these commenters suggested that the Secretary issue rules for both programs in this area by December 1, 1994 to take effect on July 1, 1995. Discussion: In the preamble to the NPRM, the Secretary stated that he would work with interested parties to develop further regulations for borrower defenses. The Secretary has not yet determined what process will be used for the development of those regulations. However, the Secretary will ensure that interested parties are invited to participate in the process. As the preamble also noted, however, the regulations that will be developed will apply to the 1996-97 and subsequent academic years. The Secretary concluded that there was not sufficient time to consult with interested parties and issue final regulations by December 1, 1994. Changes: None. Comments: One commenter requested clarification of the effective date of the various borrower defense provisions in the regulations. The commenter recommended that the regulations in effect at the time the defense is raised be deemed the operative regulations. Discussion: The Secretary believes that the issue of the effective date of the borrower defense provisions should be resolved during the process for developing final borrower defense provisions for both the FFEL Program and the Direct Loan Program. Until final borrower defense provisions are issued, the Secretary intends to apply the regulations in effect at the time the borrower asserts the defense against repayment. Changes: None. Comments: One commenter stated that the FFEL Program promissory note only permits a borrower to assert a defense against repayment of a loan received for attendance at a ``for profit'' school that has a business relationship with the lender and suggested that the same rule should apply to the Direct Loan Program. Discussion: The comment reflects a misunderstanding of the language in the FFEL Program's common promissory note. That promissory note includes a provision that reflects the requirements of the Federal Trade Commission's ``Holder Rule''. The FTC only regulates ``for profit'' entities and the promissory note provision reflects that limitation. However, the promissory note also specifically provides that applicable State law may provide for certain borrower rights, remedies and defenses in addition to those stated in the note. Thus, contrary to the commenter's suggestion, the promissory note does not prohibit borrowers from asserting a defense against repayment of a loan received for attendance at a not-for-profit school. Changes: None.

Section 685.207 Obligation to Repay

Section 685.207(a)(1)

Comments: Another commenter wanted assurance that fees and collection costs charged under the Direct Loan Program would be adequate to ensure ``aggressive collection of FDSLP loans''. Discussion: The Secretary will implement effective collection procedures. Similarly, the Secretary intends to assess collection fees in accordance with the guidelines provided in the regulations, which are the same as for the FFEL Program. Changes: None.

Section 685.207(b)(4)

Comments: One commenter suggested that Sec. 685.207(b)(4) be revised to state that, in the event that the effective interest rate increases and causes an increase in the repayment period or fixed monthly payment amount, the Secretary will advise the borrower of the change and notify the borrower of the right to select a different repayment plan. Discussion: Prior to entering repayment, borrowers will be given information on all the repayment plans available under the Direct Loan Program; information provided will include information on possible changes in interest rates and possible resulting changes in the number of payments or fixed monthly amount of payments. Borrowers will be notified of changes in interest rates and the impact of the changes on an annual basis. On the notification, a borrower will be instructed that he or she may opt to repay at the new increased or decreased monthly repayment amount, or choose to take no action. If the borrower does not opt to repay the adjusted monthly payment amount, the term of the loan will automatically be adjusted. Changes: None.

Section 685.207(b)-(d)

Comments: Several commenters requested that the regulations provide specific time frames for the first payment due date on Direct Subsidized Loans, Direct Unsubsidized Loans, and Direct PLUS Loans. Commenters suggested that Direct Subsidized Loans and PLUS Loans require a first payment due date of 60 days following the first day that the repayment period begins and that Direct Unsubsidized Loans require a first payment due date of 45 days following the first day that the repayment period begins. Other commenters recommended establishing due dates of 45 days following the first day that the repayment period begins for Direct Subsidized and Direct Unsubsidized Loans. Discussion: Under the Direct Loan Program, the Servicing Center notifies the borrower when the first payment is due; this date may vary for individual borrowers, depending upon when the borrower enters repayment in the Servicing Center's billing cycle. Payments will typically be due within 60 days from the date the borrower enters repayment. Such obligations are ``regulated'' by contract terms with the Direct Loan servicing entities, rather than in federal regulations, because the Secretary is not obligated under the due diligence requirements that require first payment due dates for lenders. Changes: None.

Section 685.207(c)(3)

Comments: A commenter suggested that Sec. 685.207(c)(3) should be revised to clarify that interest begins to accrue on a Direct Unsubsidized Loan on the day the first installment is disbursed. This revision would make this section consistent with Sec. 685.207(d) that specifies when interest begins to accrue on a Direct PLUS Loan. Discussion: The commenter is correct in noting that interest begins to accrue on a Direct Unsubsidized Loan on the day the first installment is disbursed. Changes: A sentence has been added to Sec. 685.207(c)(3) stating that interest begins to accrue on the day the first installment is disbursed.

Section 685.207(f)

Comments: A number of commenters also noted that the regulations should clarify the time at which a grace period begins for students enrolled in correspondence programs. Discussion: The commenters are correct in noting that the NPRM did not clarify the time at which a grace period begins for students enrolled in correspondence programs. Changes: Section 685.207(f) has been added to specify the time at which a grace period begins for students enrolled in correspondence programs.

Section 685.208 Repayment Plans

Comments: Some commenters believe that FFEL repayment options should be expanded. Several commenters suggested that the Secretary meet with the FFEL community to explore how FFEL repayment options might be expanded. Discussion: The HEA establishes the repayment plans available under the Direct Loan and FFEL Programs. Under FFEL, Consolidation loan borrowers are able to receive extended repayment plans (repayment periods that are longer than 10 years) if they qualify on the basis of outstanding loan balances; however, in all other instances, the statute restricts FFEL Program loans to 10-year terms, excluding periods of deferment and forbearance. Changes: None. Comments: Several commenters stated that the loan repayment options seem complex and should be simplified. Some of these commenters believed that it may be possible to eliminate some of the repayment plans. Other commenters supported the number of repayment plans offered and supported the ability of borrowers to switch repayment plans as needed. Discussion: The HEA authorizes four repayment plans for the Direct Loan Program: the standard, graduated, extended, and ICR plans. Additionally, the HEA authorizes the Secretary to create alternative repayment plans on a case-by-case basis if the other plans do not meet a borrower's needs. The Secretary believes that this range of repayment plans is very important and will allow borrowers to choose how to best repay based on their personal financial circumstances. As required by law, this regulation establishes the specific rules for these repayment plans. The Secretary will provide explanatory materials to borrowers that will clearly explain the differences among the repayment plans in easy to understand terms. Changes: None Comments: A number of commenters also suggested comparability with FFEL by modifying Sec. 685.208(b)(4), (c)(4), and (d)(3) to state that a forbearance will be granted to a borrower for a period of up to three in years accordance with Sec. 685.205(b)(7). Discussion: Section 685.205(b)(7) provides for forbearance for a period of up to three years in cases where the effect of a variable interest rate on a fixed-amount or graduated repayment schedule causes the extension of the maximum repayment term. This provision applies to standard, extended, and graduated repayment plans. Changes: None.

Section 685.208(a)

Comments: Some commenters expressed concern that Direct Loan borrowers will not be given adequate counseling about repayment options and consolidation loans. In particular, the commenters were concerned that students may choose the ICR plan without understanding the consequences of interest accrual if their payments are smaller than the interest that accrued. Discussion: The Secretary believes that providing clear information to borrowers on repayment and consolidation options is essential to the success of the Direct Loan program. In section 685.304(b), schools are required to conduct in-person exit counseling for Direct Loan borrowers. Schools are also required to provide information on repayment options, including ICR and loan consolidation, as part of their exit counseling to borrowers. In the Direct Loan Program, borrower counseling begins immediately and is a continuous process. The Secretary, through the Direct Loan Servicing Center, will send a letter to the student after each disbursement. Borrowers with Direct Unsubsidized Loans will receive quarterly statements while they are in school, before repayment begins. In addition, the Department has developed an exit counseling video, exit counseling brochure, and repayment brochure to inform borrowers about loan repayment options prior to entering repayment. Further, every borrower will receive individualized counseling materials explaining the four repayment plans and showing how much the borrower would repay monthly and over the life of the loan. While in repayment, borrowers will receive an annual statement informing them of applicable interest rates and advising them to consider a different repayment plan if their circumstances have changed. The Servicing Center will act as a single point of contact for borrowers in repayment in the Direct Loan Program. The Secretary has obtained and will continue to welcome input from members of the higher education community in the development of borrower information materials. Changes: None. Comments: One commenter recommended that the Secretary allow PLUS borrowers with loans for two or more children to choose a different repayment option for each child's loans. Discussion: For purposes of program simplicity, the Secretary has decided that all PLUS loans obtained by one borrower must be repaid under one plan. If a parent has a cash flow problem, the borrower can easily switch to another repayment option that will reduce current payments. Changes: None. Comments: One commenter asked how the Secretary would calculate repayment periods if a borrower obtains a Direct Consolidation Loan consisting of a Direct PLUS Consolidation Loan and a Direct Subsidized and/or Direct Unsubsidized Consolidation Loan, and pays these loans under different repayment plans. The commenter wanted to know if the aggregate loan balance, or the separate loan balances for the PLUS and other loans would be used to determine the length of the repayment period for each loan's payment plan. Discussion: The commenter is correct in noting that a borrower may choose to repay Direct PLUS Loans separately from student loans. If the borrower chooses to repay either the PLUS or student loans under the graduated or extended plans, the Secretary would use the aggregate balance of all loans to calculate the repayment periods for each of the components of the Direct Consolidation Loan. This policy is consistent with the policy in Sec. 685.215(i)(2), which states that the repayment periods for graduated and extended repayment plans on consolidation loans will be calculated on the basis of all education loans, including certain loans that are not eligible for consolidation. However, if the borrower chooses to repay the student loans under the ICR plan, only those loans repaid under ICR will be used to calculate the payback rate. Changes: None.

Sections 685.208(b)(3) and (c)(3)

Comments: A number of commenters noted that Sec. 685.208(b)(3) and 685.208(c)(3) should be revised to reference an annual payment of $600, rather than a monthly minimum payment of $50, in order to be consistent with the wording of the statute and to ensure comparability to FFEL regulations. Discussion: A $50 minimum payment amount is equivalent to a $600 annual minimum repayment. The difference in language does not reflect a difference in the terms of the two loan programs. Changes: None.

Section 685.208(d)

Comments: Some commenters suggested offering to borrowers a series of graduated payment options with terms that are tied to the size of the borrowers' debt. These commenters recommended that the maximum repayment period for the graduated repayment plan be shortened to 15 years. Discussion: The Secretary believes that the terms of the graduated repayment plan should be tied to the size of the borrower's debt and has designed a graduated repayment plan in which the borrower's term increases as the borrower's debt increases. For purposes of simplicity, the Secretary believes that the repayment periods for the graduated and extended plans should be identical. Also, these terms are similar to those available under the FFEL Consolidation Program. As is always the case, a borrower may repay a loan more rapidly than required without any penalty. Changes: None.

Section 685.208(e)

Comments: In response to the Secretary's request for comments as to whether 30-year repayment terms are appropriate for PLUS borrowers, two commenters recommended that 30-year repayment periods be available to PLUS borrowers. Discussion: The Secretary will continue to offer 30-year repayment terms to PLUS borrowers who have debt levels sufficient to qualify for the 30-year repayment terms under the extended and graduated repayment plans. Changes: None.

Section 685.208(f)(1)

Comments: One commenter noted that the section of the preamble to the NPRM discussing the provisions for the ICR plan does not include that income information from the borrower's spouse is a variable that affects a borrower's monthly payment amount. Discussion: As required by law, the Secretary uses a borrower's adjusted gross income (AGI) to calculate the borrower's monthly payment. If the borrower files a joint income tax return with a spouse, the spouse's income is included in the AGI and, therefore, in the calculation of the borrower's monthly payment. If the borrower files separately, the spouse's income is not included in the borrower's AGI and, therefore, is not included in the calculation of the monthly repayment amount. Changes: None.

Section 685.208(f)(2)

Comments: Two commenters suggested that the Secretary eliminate the language under this section that requires borrowers to remain subject to repayment regulations in effect when the borrower's initial loan enters repayment; these commenters stated that borrowers should be able to benefit from changes in the regulations. Discussion: Under Sec. 685.208(f)(2), borrowers are not required to remain under the ICR regulations enforced when the borrower's initial loan enters repayment. Rather, borrowers have the option of requesting that the ICR repayment terms of the amended regulations apply to their loans. The Secretary will not automatically apply changes in the ICR formula to all borrowers. The Secretary will provide clear information to borrowers concerning the ICR formula changes, so the borrower can make an informed decision. This policy provides borrowers with protection from significant formula changes; at the same time, this policy offers borrowers the flexibility to choose a formula change, if the borrower determines that such a change would be beneficial. Changes: None.

Section 685.208(g)

Comments: Commenters recommended that the alternative repayment plan should provide loan forgiveness after 25 years of repayment and should limit the amount of capitalization of interest. One commenter suggested that proposed Sec. 685.208(g)(4) be modified to state that the frequency of capitalization under an alternative repayment plan (when a borrower's payment amount does not cover accrued interest) is annual in order to clarify the Secretary's intent. The commenters supported the idea of alternative repayment as a ``safety net'' for those borrowers who are unable to afford payment under any other repayment plan. Several commenters requested additional information on the alternative repayment plan, such as the types of borrowers who might qualify for this plan. One commenter requested information concerning how a borrower would demonstrate that the terms of the other repayment plans are not adequate to meet that borrower's needs. Discussion: As authorized by the HEA, loan cessation is only available under the ICR plan. Borrowers who wish to receive the benefits of loan cessation should choose the ICR plan. However, the Secretary has determined that the amount of capitalization permitted under the alternative repayment plan should be consistent with the policy on ICR. The Secretary also has established a maximum 30-year repayment term under alternative repayment. The Secretary will determine which borrowers qualify for an alternative repayment plan on a case-by-case basis. Types of documentation requested would include pay stubs and other documentation of any income, as well as documentation of financial obligations, such as medical bills. This option provides another choice to borrowers who are unable to make payments under other options. Changes: Section 685.208(g) is amended by adding a new paragraph (4) to provide that borrowers must repay a loan under the alternative repayment plan within 30 years of entering repayment. Section 685.208(g)(5) is amended to provide that unpaid interest is capitalized until the outstanding principal amount is 10 percent greater than the original principal balance. Once this 10 percent limit is reached, interest continues to accrue but is not capitalized. Comments: Commenters requested that language be added to this section requiring that the borrower make a choice of repayment plans within 45 days of notification, consistent with Sec. 685.210(a)(2). Discussion: The Secretary anticipates that the number and variety of established repayment plans will address the needs of most borrowers. During exit counseling, borrowers will be informed that if the available repayment plans do not meet their needs, they should contact the Direct Loan Servicing Center. The Direct Loan Servicing Center will arrange alternative repayment plans for borrowers if the available plans do not meet their individual needs. Therefore, the process for selection of alternative repayment plans is different from the selection of the other repayment plans and there is no need for the suggested change. Upon further consideration, the Secretary believes that the 45 day requirement is not necessary for any borrowers. This is because borrowers will be given several opportunities rather than one, including following exit counseling and grace period, if any, to select a repayment plan. If a borrower does not select a repayment plan prior to entering repayment, the Secretary designates the standard repayment plan. Changes: Section 685.210(a)(2) has been revised so that borrowers are no longer required to select their repayment plans within 45 days of receiving notification.

Section 685.209 Income Contingent Repayment Plan

Comments: Many commenters suggested that the Department delay implementation of the ICR plan until problems identified by the higher education community have been resolved. Discussion: The Secretary has incorporated several changes into the ICR plan that address the major concerns expressed by some in the higher education community. The Secretary believes that the ICR plan is well designed and provides choice to borrowers given their personal circumstances. For example, the Secretary is limiting payments to 20 percent of discretionary income (AGI minus the poverty level appropriate to the family size). This change reduces payments for the lowest income borrowers. Also, the Secretary is lowering the limit on interest capitalization from 50 percent to 10 percent of the original debt. This change limits increases in debt accumulation and protects borrowers from compounding interest charges. Furthermore, the Secretary is including years of repayment under the 10-year standard plan and the 12-year extended plan as years eligible for loan forgiveness under income contingency. This allows borrowers to count those years of repayment in which they paid at least as much as they would have under income contingency toward the 25 years in repayment required for loan forgiveness. Finally, the Secretary will vigorously explore the elimination of the current Federal income tax liability on any unpaid loan balance that remains outstanding at the end of the 25-year ICR period. This change would eliminate large payments at year 25 that borrowers might not be able to afford. Changes: None. Comments: One commenter stressed that the Secretary must make borrowers aware of the potential tax liability resulting from cancellation after 25 years of repayment. Discussion: Counseling materials prepared by the Secretary emphasize the possibility of a tax liability resulting from cancellation of a Direct Loan debt after 25 years because under current law, such forgiveness is taxable. The Secretary will vigorously encourage the elimination of the Federal income tax liability on any outstanding loan balance that remains at the end of the 25-year ICR period. The Secretary appreciates that taxation of loan forgiveness could affect the benefit a borrower receives by choosing to repay his or her Direct Loans under income contingency. For a full discussion of issues concerning counseling, see comments and discussion under section 685.208. Changes: None Comments: One commenter stated that low-income borrowers are more likely to default on their loans than other borrowers, but under ICR, these borrowers will make low or no monthly payments, thus minimizing defaults. As a result, institutions will not be triggered for a review by a State Postsecondary Review Entity (SPRE) due to high default rates. Discussion: The Secretary expects the volume of defaults to decline with the implementation of the ICR plan because ICR payments are designed to be affordable for all borrowers, and the primary reason for default is that borrowers cannot afford the level of payments expected under existing repayment plans. In addition, defaults are expected to decline because all Direct Loans will be held by the Secretary, and borrowers will always know where to call with questions or problems and where to send their checks. Borrowers who are not required to and do not make payments under ICR will not be considered defaulters. However, if a borrower is in ICR and does not make required scheduled payments, a default will occur. An institution's default rate is not the only criterion that can trigger a SPRE review. The Secretary expects that the availability of ICR will facilitate loan repayment and will reduce the validity of default rates as a measure of institutional performance. The Secretary intends to monitor several objective performance measures for schools participating in the Direct Loan Program. The Secretary believes that such a performance-based approach will increase the accountability and integrity of the Direct Loan Program. Changes: None.

Section 685.209(a)(2)

Comments: One commenter recommended that the Secretary meet the requirement of annually providing the borrower with estimates of monthly payment amounts under ICR by including this information on or with the annual statement. The commenter further recommended that the Secretary provide the borrower with a sufficient period of time to review this information and elect a new repayment amount. Discussion: The Secretary agrees that borrowers must be provided with complete information to enable them to make informed decisions regarding the options available within the ICR plan--the formula amount or the capped amount--and will ensure that this information is covered in borrower counseling sessions and included in relevant materials. The Secretary has specified a single condition--one change each year--with respect to choosing one of the two ICR amounts. The rule as written provides borrowers with as much time as needed to review all applicable information prior to changing ICR options. Changes: None.

Section 685.209(a)(4)(i)

Comments: One commenter asked whether spouses who wish to repay jointly under ICR and currently are not repaying under the same ICR option have to wait a year to change options. Discussion: No. Repaying under the same ICR option is a necessary condition for joint repayment by married borrowers because it would be impossible to calculate a joint repayment amount otherwise. The Secretary does not consider changing to joint repayment to be the same as a change in option. Changes: None.

Section 685.209(b)

Comments: Several commenters argued that ICR would allow borrowers to make low payments over a long period of time, therefore increasing the costs of student borrowing. Discussion: Borrowers will be given written information and counseling explaining the difference in total interest they would pay under the various repayment options. For some borrowers, it may be an advantage to make smaller payments over a longer period of time, even though it may ultimately result in higher interest payments. For other borrowers, it may be advantageous to repay their loans more quickly. The Secretary is offering borrowers the opportunity to tailor their payments to their personal financial circumstances. Borrowers will have the opportunity to consider career goals, education choices, and other life plans in making repayment decisions. Borrowers can always prepay without penalty or change repayment plans at any time if their financial situation changes over time. Changes: None. Comments: One commenter asked why deferments and forbearances would not address the problems of negative amortization that occurs under ICR. Discussion: Borrowers who are eligible to defer repayment of their Direct Subsidized loans will avoid negative amortization during the deferment period. However, interest continues to accrue for Direct Unsubsidized loan borrowers during deferment periods and for all borrowers during forbearance periods. If the borrower fails to pay the interest due during these periods, negative amortization will occur. Changes: None. Comments: Several commenters suggested providing more flexibility in the percentage-of-income cap, currently set at 15 percent of AGI. One commenter suggested that the cap could be modified to take into account the substantially smaller amount of available income at lower AGI levels. A variable percentage of income cap could be implemented as part of the formula. However, another commenter specifically supported the 15 percent limit on the amount of the AGI that would be required to be paid for educational loans. Discussion: The Secretary agrees that borrowers at lower AGI levels must dedicate a higher percentage of their incomes to subsistence spending, including food, shelter, and clothing. Hence, these borrowers have less income available for servicing their student loan debt. However, the Secretary believes that the commenters' concerns can best be addressed by keeping the maximum payback rate at 15 percent of AGI but limiting the monthly payment amount to 20 percent of discretionary income (AGI minus the poverty level based on family size). Changes: A change has been made. Section 685.209(b)(1)(ii) has been amended to include a maximum payment amount equal to 20 percent of the borrower's discretionary income. Discretionary income is defined as AGI minus the current poverty income level appropriate to the borrower's family size, as published by the U.S. Department of Health and Human Services.

Section 685.209(b)(1)

Comments: One commenter recommended that the regulations provide an index to update the $7.00 family-size offset. Discussion: The Secretary has eliminated the $7.00 per month payment deduction for each dependent and replaced it with a maximum payment amount equal to 20 percent of discretionary income. Discretionary income is based on the poverty income level appropriate to the borrower's family size, as published by the U.S. Department of Health and Human Services. These poverty guidelines are updated annually to reflect changes in the cost of living. Changes: A change has been made. The reference to the $7.00 monthly payment deduction in Sec. 685.209(b)(1)(ii) has been deleted. Comments: One commenter suggested that ICR repayment amounts should not be based solely on the reported AGI of a borrower. This commenter suggests that AGI is not always an accurate indicator of a borrower's ability to repay a loan. Discussion: The HEA requires the Secretary to use AGI of the borrower (and the borrower's spouse if the borrower is married and filed a joint return) in determining repayment under the ICR (see 455(e) of the HEA). However, the statute also provides that if AGI is unavailable or does not reasonably reflect the borrower's current income, the Secretary may use other documentation of income. The regulations provide for alternative documentation of income (see Sec. 689.209(d)). If the Secretary receives information that suggests that the borrower's AGI does not reflect the borrower's current income, the Secretary will request that the borrower send additional documentation. The Secretary will use this information to adjust the borrower's repayment obligation if circumstances warrant such an adjustment (see Sec. 685.209(a)(3)). Changes: None. Comments: Several commenters noted that due to a small change in income, a borrower's payment under ICR would go from $0 to $25. Several commenters suggested that defaults could be caused by this increase. Several commenters suggested the payment be ``phased in'' rather than initially set at $25. Two commenters suggested establishing a targeted income offset rather than a $25 floor. One of these commenters suggested subtracting the $25 payment over a range of low incomes, such as up to 200% of the poverty level (about $25,000 for a family of 3). This commenter argued that the $25 floor may create a disincentive for people on welfare to work. One commenter argued against permitting zero payments in cases where the borrower's required payment is below an established minimum amount. This commenter stated that required payments that are less than $25 will ensure that the borrower remains aware of the debt and will facilitate long-term collectibility of the loans. Discussion: The Secretary shares the commenters' concerns with regard to the effect of implementing a $25 ICR floor payment. The change to these regulations that incorporates a maximum payment amount equal to 20 percent of discretionary income essentially accomplishes the same result as a ``phased in'' floor amount or a targeted income offset. In fact, the maximum payment amount is based on poverty income which is consistent with the comment that the floor payment should be more sensitive to borrowers at lower income levels. Further, the Secretary notes that a loan servicing system that routinely collects very small scheduled payment amounts is less cost- efficient. Consequently, the Secretary will retain the concept of a floor, but will reduce this amount from $25 to $15 to address commenter's concerns. Changes: A change has been made. Section 685.209(b)(1)(ii) specifies a monthly payment amount of zero if the calculated payment amount is less than $15.

Section 685.209(b)(2)

Comments: Many commenters suggested that the ICR formula proposed by the Department requires monthly payments that are too high for low- income borrowers and too low for other borrowers. These commenters argued that low-income borrowers would not be given a viable alternative to default, while middle-income borrowers would repay over too long a period of time. One commenter suggested that the ICR formula be redesigned to meet the needs of low-income borrowers, because they believed that none of the repayment options would be reasonable for these borrowers. Several commenters noted that payments required of low-income borrowers would increase too dramatically with increased income. Several commenters suggested specific changes to the ICR formula. One commenter suggested the Secretary redesign the calculation formula to produce more graduated repayment amounts at the lower income levels. Another commenter suggested that the Secretary apply the payback rate to income over a threshold amount, such as the tax filing status. Another commenter noted that the formula ``severed'' the monthly repayment amounts on student loans from the applicable interest rates. One commenter suggested reducing the flat rate of the formula from 4 percent to 3 percent, and increasing the debt-differentiation factor from .2 percent to .3 percent, which would effectively reduce payments for low-income borrowers and increase payments for middle- and upper- income borrowers. A second commenter argued for a higher rate of repayment than the one proposed because an increase in market interest rates would result in sharply increased costs of income contingency. Another commenter supported the existing formula. Discussion: The Secretary believes that each borrower is best able to determine the repayment plan (standard, graduated, extended or ICR) that accommodates his or her own financial circumstance. He reminds commenters that the ICR plan is not mandatory because borrowers choose the plan that best suits their needs and can change plans over time. Further, the Secretary believes that the ICR plan has been well designed to meet the needs of a wide range of borrowers including those borrowers who experience short-term or extended periods of low income. The Secretary also notes that under the ICR formula, payments will change with income. Any ICR borrower whose income increases dramatically can choose to pay the formula amount in which loan payments increase when income increases. Borrowers who choose to repay the formula amount will retire their debts more quickly. Additionally, any borrower can switch to another repayment plan at any time or prepay without penalty. The Secretary has incorporated a maximum payment amount, 20 percent of discretionary income, to ameliorate the effects of the 15 percent- of-income limit for low-income borrowers. The effect of this change is similar to the effect of modifying the ICR algorithm to provide more graduated repayment amounts at lower income levels. Also, the Secretary investigated applying the payback rate to income above a threshold amount. In order to remain within program cost limits, this change would need to be coupled with a higher initial payback rate to minimize costs to the taxpayer of the ICR plan. This approach, assessing income above a threshold at a higher rate, was rejected by the non-Federal negotiators who helped develop the first-year ICR rule and who preferred a lower initial payback rate. The Secretary believes that he has addressed the commenters' concerns with respect to payments required from low-income borrowers by incorporating the 20 percent cap on discretionary income. The Secretary notes that applicable borrower interest rates are incorporated in the ICR payment cap calculation (the 12-year standard amortization amount). Finally, the Secretary reminds the commenters that the statute specifies a maximum borrower interest rate of 8.25 percent, and that ICR borrowers may prepay their loans or change payment plans without penalty if they wish to lower the absolute cost of their loans. Changes: None. Comments: Several commenters suggested that the Secretary should consider income and debt in calculating the payback rate, in order to be more sensitive to debt at low-income levels. As a related matter, several commenters noted that the Secretary's proposal creates different repayment obligations for borrowers with identical income. Discussion: The Secretary believes that including an income variable, in addition to the debt variable, in the payback rate calculation unnecessarily complicates the ICR formula. The borrower's income level is taken into account when income is multiplied by the payback rate to determine the borrower's payment amount. Establishing a maximum payment amount equal to 20 percent of discretionary income further adjusts for income. This change to Sec. 685.209(b)(1)(i) has been previously described. Debt differentiation in the payback rate is important to discourage excessive borrowing and to be sure that high debt borrowers who can repay do so. The Secretary notes that under the other repayment plans--standard, extended and graduated--borrowers with identical incomes would have different repayment obligations if their debts were different. Changes: None. Comments: One commenter was concerned that the payback rate does not take a borrower's non-Federal debt into account. Discussion: The payback rate is based on the loans the borrower is repaying under the ICR plan. Borrowers cannot consolidate non-Federal loans into a Direct Loan. Therefore, the Secretary believes that non- Federal debt should not be used to determine the payback rate. However, the Secretary notes that the flexibility offered by the ICR plan for Federal education debt can help ease the borrower's overall debt burden. Changes: None.

Section 685.209(b)(3)

Comments: Several commenters argued that, to improve the repayment plan for married borrowers repaying jointly, the Secretary should apply payments to interest on both accounts before principal reduction takes place in either, which would help avoid negative amortization. This same commenter suggested that, because married borrowers may not be in the same repayment cohorts, their payback rate should be calculated based on their outstanding principal, rather than initial debt. Discussion: For borrowers repaying jointly under ICR, the Secretary agrees that payments should be applied to interest on both accounts before principal reduction takes place in either. The Secretary also agrees that the payback rate should be calculated based on outstanding debt rather than initial debt. Changes: A change has been made. Sections 685.209(b)(3) has been amended to clarify that, for borrowers repaying jointly under ICR, payments will be applied to interest on both accounts prior to principal reduction in either. Section 685.209(b)(3) is also amended to clarify that the payback rate for a married borrower paying jointly under ICR will be calculated on the outstanding debt at the time the borrower was approved for joint repayment.

Section 685.209(c)

Comments: Several commenters stated that the cap on repayments imposed by the 12-year amortization level on the ICR capped amount was not sensitive enough to income. One commenter recommended using an 8- year cap, if the Secretary provides an income-adjustment factor (see discussion concerning sensitivity to income), or a 10-year cap, if the formula includes no adjustment for income. Another commenter supported the recommendation for a 10-year cap for the ICR capped amount. Discussion: The Secretary included the 12-year amortization cap in the ICR plan to provide borrowers whose incomes are higher with the option to limit the amounts of their monthly payments. Consequently, the Secretary agrees that the 12-year cap extends payments for middle- and upper-income borrowers with low or medium loan balances and disagrees that it accelerates repayment for high-income, high-debt borrowers. In fact, the 12-year cap extends repayment for any borrower who chooses this option because his or her payment under the ICR formula calculation option would be higher. Further, the Secretary agrees that borrowers with the same debt who choose to repay the capped amount pay the same amount regardless of income, but reminds commenters that these borrowers can choose to pay off their loans more quickly by repaying the ICR formula amount or switching to another plan. To limit the extent to which repayment is extended, the Secretary is modifying the calculation of the 12-year amortization cap. The cap will be increased when the outstanding balance of the loan increases (that is, following periods of negative amortization). The Secretary established the fixed-payment, 12-year amortization schedule for the ICR cap amount because this repayment term is consistent with the minimum repayment periods available under the other two non-standard repayment plans (graduated and extended). Changes: A change has been made. Section 685.209(c) includes a technical correction to the manner in which the 12-year payment cap amount is computed. After each period of negative amortization, that is, when the outstanding balance of the loan has increased, the 12-year amortization amount will be calculated using the higher outstanding loan amount. The payment cap will always be calculated on fixed- payment, 12-year amortization schedules. A change in presentation has also been made. References to option 1 and option 2 are deleted. Instead, two calculations are presented that incorporate the calculations previously described under options 1 and 2. Section 685.209(b) describes the formula amount, which is based on income, and Sec. 685.209(c) describes the capped amount, which is based on 12-year standard amortization schedules. The Secretary intends to present both amounts to a borrower repaying under ICR, explaining that the borrower may choose to repay either amount. Section 685.209(c) has been modified to require a minimum monthly capped amount of $15. The detailed examples in Appendix A have also been modified to take into account these changes.

Section 685.209(d)(1)

Comments: Several commenters suggested that the Secretary provide examples of alternative documentation of income, in cases where a borrower's AGI is not available or where the AGI does not reasonably reflect the borrower's current income. Discussion: Such documentation could include pay statements from employers, documentation of income received by the borrower from other parties, and, if no other documentation is available, certification statements of income from the borrower. Changes: None.

Section 685.209(d)(2)

Comments: One commenter suggested that years in which an ICR borrower receives an economic hardship deferment or a forbearance (granted because the borrower was unable to make payments) should be counted towards the maximum 25 years of repayment. The commenter argued that excluding periods of forbearance and deferment from the 25-year period treats a borrower who is required to make zero payments more favorably than a borrower who chooses an economic hardship deferment, because the borrower making zero payments would be allowed to count this period towards the 25 years under ICR while a borrower in deferment or forbearance would not. Discussion: Under section 428(b)(7) of the HEA, the maximum years in repayment in the FFEL Program exclude periods of deferment and forbearance. Direct Loans have the same terms, conditions and benefits as FFEL Program loans, unless otherwise specified (see section 455(a)(1)); therefore, the Secretary excludes periods of forbearance and deferment from the 25 years of repayment under ICR. The economic hardship deferment is beneficial to borrowers who have subsidized loans. Borrowers required to make zero payments who are eligible for an economic hardship deferment are not responsible for paying the interest on the loan during the deferment period. If a borrower chooses not to take the deferment, the borrower's interest will accrue throughout the period that the borrower makes zero payments. Changes: None. Comments: Several commenters suggested that years in repayment in other repayment plans should be counted towards the maximum 25-year repayment period under the ICR plan. One commenter suggested that years under which borrowers repay under standard or 12-year extended repayment plans should count toward the 25-year ICR period. Discussion: If all borrowers were allowed to count years in repayment under other plans toward the maximum 25-year period under ICR, the potential exists for certain borrowers to switch repayment plans when their incomes fluctuate to avoid repayment of their loans. However, the Secretary agrees that under the standard repayment plan and the 12-year extended repayment plan, borrowers would pay larger amounts than they would under the ICR option and could not usually avoid repaying their loans by switching repayment plans. Changes: A change has been made. Section 685.209(d)(2)(ii) has been revised to provide that years spent in standard repayment and 12-year extended repayment will count towards the maximum 25-year repayment period under ICR. Comments: Several commenters noted that under current tax law, any debt forgiven under the ICR plan would be treated as taxable income. Many of the commenters requested a commitment from the Secretary to try to revise current law. Discussion: The Secretary will work vigorously to develop a legislative proposal to eliminate the Federal income tax liability on any outstanding loan balance that remains at the end of the 25-year repayment period. Changes: None. Comments: Several commenters urged the Secretary to shorten the 25- year forgiveness period under ICR, especially for low-income borrowers and borrowers who opt for public service jobs. Discussion: The Secretary is reluctant to shorten the 25-year loan forgiveness period for some borrowers because this approach would require the Secretary to determine which occupations and/or borrowers are most suited for this special consideration. The Secretary believes that each borrower is responsible for his or her own debt, and that the 25-year maximum repayment period generally encompasses the time period during which borrowers are most likely to experience widely fluctuating incomes. Although the statute permits contracting the 25-year forgiveness period, the Secretary believes that his interpretation of the statutory 25-year forgiveness rule is consistent with Congressional intent. Changes: None. Comments: One commenter recommended that the Secretary indicate how long interest-only payments may be required until the Secretary calculates a borrower's monthly repayment amount on the basis of the borrower's income. The commenter further recommended that the regulations permit the borrower to be eligible for forbearance, or alternative repayment, if the borrower is unable to meet the interest payments during this period. Discussion: The Secretary included this provision to ensure that borrowers who choose the ICR plan make loan payments for the short period of time between the expiration of the grace period and the verification of the borrower's reported income by the Internal Revenue Service. Borrowers under any repayment plan are eligible to forbear repayment if they are willing but unable to make scheduled payments. Changes: None.

Section 685.209(d)(3)

Comments: Numerous commenters recommended that the Secretary lower the level at which interest is no longer capitalized on loans paid under the ICR plan. Several commenters suggested that the Secretary lower the ceiling on capitalization from 150 percent of principal to 110 percent or 105 percent. Many other commenters suggested that the Secretary charge only simple interest on loans being repaid under the ICR plan. Several commenters suggested that the Department limit the level of capitalization for borrowers serving in the public interest. Discussion: The Secretary agrees that the interest capitalization limit should be lowered from the current 150 percent of principal. The Secretary is reluctant to limit interest capitalization for certain borrowers and not for others. This approach would require the Secretary to determine which occupations and/or borrowers are most suited for such special consideration. The Secretary believes that the purpose of the ICR program is best served by the broadest possible application of the benefit of lower interest capitalization. Consequently, the Secretary is reducing the interest capitalization limit to the extent it can be accomplished within current program cost constraints. Changes: A change has been made. Section 685.209(d)(3) states that unpaid interest is capitalized until the outstanding principal amount is 10 percent greater than the original amount. Comments: For purposes of limiting capitalization, one commenter asked how a borrower's original balance would be calculated if the borrower enters repayment, makes some principal repayments, then returns to school and borrows more. Discussion: The loan amount used for purposes of calculating the interest capitalization limit for any Direct Loan borrower who obtains additional loans after commencing repayment is the sum of the outstanding amounts on all loans in repayment at the time the borrower re-enters repayment. Changes: None.

Section 685.209(d)(5)

Comments: One commenter asked the Secretary to specify the conditions under which defaulted borrowers will be placed in ICR. Another commenter suggested that this section assumes that all defaulters will be placed in ICR, unless the defaulter fails to provide written consent to disclosure of tax return information. Discussion: The Secretary will maintain maximum flexibility in determining which borrowers will be required to repay under ICR. The Secretary believes that it is important to consider a borrower's individual circumstances to determine whether it is in the best interest of the borrower to repay under the ICR plan. Changes: None.

Section 685.210 Choice of Repayment Plan

Section 685.210(a)(1)

Comments: Commenters argued that this section should be modified to incorporate timing requirements applicable to the FFEL Program. Discussion: The Secretary will satisfy the statutory obligations to provide required repayment information on a timely basis to each individual borrower and will provide materials that clearly explain a borrower's repayment options. Borrowers will be informed of their repayment obligations and their repayment options during exit counseling and during the grace period. The Secretary believes that it is unnecessary to specify the number of days prior to repayment that disclosure must occur. Changes: None. Comments: Many commenters supported the borrower's choice of repayment plans; one commenter asserted that the Direct Loan repayment plans should be made available to all borrowers who wish to participate. Discussion: All Direct Loan borrowers, except Direct PLUS borrowers and certain defaulted borrowers, will have the choice of any repayment plans. FFEL borrowers who cannot obtain a FFEL Consolidation Loan or a FFEL Consolidation Loan with satisfactory income-sensitive terms will also be able to consolidate into Direct Loans and choose a repayment plan available through the Direct Loan Program. Changes: None.

Section 685.210(b)(2)(i)

Comment: A commenter asked why the Secretary has prohibited borrowers who have been repaying under certain plans for longer than ten years from switching to the standard repayment plan in order to accelerate payments. Discussion: To simplify the repayment procedures, the Secretary will calculate repayment periods under all repayment plans, other than ICR, from the time the borrower enters repayment. Therefore, after a borrower has been repaying for ten years, the borrower will be unable to switch to the standard repayment plan, which provides only 10 years to repay the loan. If borrowers wish to accelerate their payments, they can always prepay without penalty. Changes: None.

Section 685.211 Miscellaneous Repayment Provisions

Section 685.211(a)(3)

Comment: A commenter suggested that Sec. 685.211(a) be rewritten to allow borrowers to allocate prepayments to principal. The commenter suggested that Sec. 685.211(a) provide that payments are applied first to interest, then principal, then to charges such as late fees, and then to collection costs. Other commenters supported the application of payments first to any accrued charges and collection costs. Some of these commenters requested a corresponding modification to FFEL requirements to make them comparable to the Direct Loan payment and prepayment application provisions set forth in Sec. 685.211(a)(3). Discussion: The provisions for prepayment were agreed upon during negotiated rulemaking and establish consistent guidelines for the equitable treatment of all Direct Loan borrowers. Changes: None.

Section 685.211(c)(3)

Comment: Some commenters suggested that the Department prescribe administrative procedures for challenging the past-due status or legal enforceability of a Direct Loan prior to making a report to a credit bureau and prior to offsetting the borrower's debt. Discussion: The Secretary agrees with the commenters that a notification must be provided to the borrower before the Secretary may report the debt to a credit bureau or take offset action against the borrower to recover the debt. The Secretary will provide this notification to such borrowers. The Secretary does not believe a change in the regulations is necessary. Changes: None.

Section 685.211(d)(2)

Comments: One commenter suggested that Section 685.211(d)(2) should be modified in accordance with Sec. 682.412 of the FFEL Program regulations to assign a specific start date to the 30-day period during which a borrower must repay an ineligible loan. The regulation currently states that the 30-day period begins when a borrower receives a final demand notification, but this commenter asserts that the Secretary would be unaware of the date on which the borrower received such notification. Discussion: The commenter is correct in noting that the Secretary would be unaware of the day that a borrower receives notification. However, the Secretary could easily track when the notification is mailed. Changes: Section 685.211(d)(2) is modified to state that the borrower must repay the loan within 30 days after the demand letter is mailed.

Section 685.211(d)(3)

Comment: One commenter suggested adding language to Sec. 685.211(d)(3) to provide that if a portion of a loan is determined ineligible and that portion is not repaid within 30 days, the borrower is considered in default on the entire loan, not just the portion of the loan determined ineligible. Discussion: The commenter is correct in noting that if a borrower is ineligible for a portion of a loan and does not comply with the demand letter described in Sec. 685.211(d)(2), the borrower is considered to be in default on the entire loan, not just the portion of the loan determined ineligible. Changes: Section 685.211(d)(3) is modified to state the borrower is in default on the entire loan.

Section 685.211(e)

Comments: A commenter wanted clarification in 685.211(e) on what constitutes a reasonable and affordable monthly payment. Discussion: The Secretary will obtain information from the borrower concerning the borrower's income, student loan debt, and other payment obligations and will use this information to determine what the borrower can reasonably afford to pay. Changes: None.

Section 685.212 Discharge of a Loan Obligation

Sections 685.212 (a) and (b)

Comment: Several commenters objected to the fact that the proposed regulations provide no definition of ``acceptable documentation'' as the phrase appears in Sec. 685.212 (a) and (b). The commenters noted that this phrase is defined in the FFEL Program regulations. Discussion: The Secretary is not required to regulate the forms of documentation that the Secretary will accept for discharge. However, the Secretary intends to use forms of documentation that are similar to those prescribed in the FFEL Program. Changes: None.

Section 685.212(c)

Comment: Several commenters noted that Sec. 685.212(c) does not prescribe the steps that must be taken, continued, or suspended during the pendency of a bankruptcy proceeding. These commenters noted that the FFEL Program regulations provide an extensive outline of the steps which must be taken. Discussion: The Secretary is not required to regulate himself in this situation. The Secretary is not under the same requirements as lenders and guarantors in the FFEL Program. Changes: None.

Sections 685.212 (d) and (e)

Comment: One commenter noted that Sec. 685.212 (d) and (e) should clarify that payments made prior to loan discharge will be refunded to the borrower whose loan has been discharged due to closed school or false certification issues. Discussion: The commenter is reminded that Sec. 685.213(b)(2) and Sec. 685.214(b)(3) provide that a borrower will be reimbursed for amounts paid voluntarily or through enforced collection on the loan. Changes: None.

Section 685.212(f)

Comments: One commenter suggested comparability with FFEL requirements by adding language to Sec. 685.212(f) to state that payments are returned to the borrower after a lender is notified of the borrower's condition, not (as currently stated) after the requirements for discharge have been met by a borrower. Another commenter requested comparability to FFEL requirements by asserting that a definition of ``acceptable documentation'' is necessary. Discussion: Although the commenter is correct in noting that the wording is slightly different, the policy reflected in the FFEL and Direct Loan Program regulations is the same. Changes: None.

Section 685.213 Closed School Discharge

Comments: Some commenters recommended that the regulation include time frames for the Secretary's actions. Discussion: The Secretary is committed to ensuring that borrowers receive a timely response. Changes: None. Comments: One commenter requested that the Secretary clarify that the part of a consolidation loan that reflects a loan that would have been discharged before consolidation would also be discharged. Discussion: The Secretary agrees with the commenter that a borrower's consolidation loan should be credited for the amount of the closed school loan discharge that would have been applicable to the borrower's loan before the consolidation. Section 685.213 (b)(1) provides that the borrower will be relieved of any past or present obligation to repay the loan and would be reimbursed for amounts paid on the loan. This provision is the same as the regulation for the FFEL Program. Changes: None.

Section 685.213(c)

Comments: Some commenters stated that requiring sworn statements and other affirmative action from borrowers puts unnecessary barriers to relief and is likely to result in eligible borrowers not obtaining the discharge. One commenter stated that the Secretary and guaranty agencies should take affirmative steps to assure that relief is available. Another commenter recommended that the Secretary should simply discharge the loan if the existing records indicate that the borrower was eligible for the discharge. Discussion: The Secretary believes that the requirement for a sworn statement by the borrower is necessary to protect the interests of the taxpayer. Much of the information provided in the sworn statement is not otherwise available to the Secretary, and the Secretary cannot usually determine if the borrower is eligible for discharge based solely on existing records. The Secretary also believes that it is appropriate to require the borrower to take affirmative action and provide evidence supporting his or her eligibility for the discharge. Changes: None.

Section 685.213(c)(1)(ii)

Comments: One commenter recommended that the regulations be revised to provide a discharge to borrowers enrolled in a program the school ceased to offer within 180 days of the closure. Discussion: The Secretary believes that the regulatory provision allowing borrowers who withdraw within 90 days prior to a school's closing is sufficient. Section 437(c)(1) of the HEA authorizes the Secretary to discharge a borrower's liability on a loan if the borrower does not complete a program due to the school's closure. The regulation reflects this statutory focus on the date of the school's closure rather than on the date the school ceases to offer a certain program. Changes: None.

Section 685.213(c)(1)(iii)

Comments: One commenter recommended that the regulations provide a definition of a teach-out as referring only to arrangements in which the borrower receives all the instruction promised at no additional charge at an institution geographically close to the closing school and under an arrangement approved by the State licensing body. Discussion: The Secretary believes that a prescriptive regulatory definition of ``teach-out'' is unnecessary. A student who chooses to complete his or her program through a teach-out has received value from the loan and does not need a loan discharge. Changes: None.

Section 685.213(d)(1)

Comments: One commenter recommended that paragraph (d)(1) be modified to require the borrower to cooperate with ``reasonable requests'' for cooperation by the Secretary, and to cooperate with the Secretary to the extent practicable. Discussion: The use of the word ``cooperate'' in the regulations reflects the Secretary's intention to work with the borrower toward a common goal. This provision outlines what is expected of the borrower and references documents ``reasonably available'' to the borrower. Changes: None.

Section 685.213(d)(2)

Comments: One commenter recommended that paragraph (d)(2) be modified to permit the Secretary to revoke a loan discharge only if the discharge was based upon a material, false statement by the borrower made with fraudulent intent to receive a benefit the borrower would not otherwise be entitled to receive, or if the borrower willfully fails to cooperate with a reasonable request to support the Secretary's efforts to recover from the school or its principals. Discussion: To protect the Federal fiscal interest, the Secretary believes that it is appropriate to revoke or deny a discharge for a borrower who fails to support the representations made to receive that benefit. Changes: None.

Section 685.213(e)

Comments: Two commenters objected to the provision requiring a borrower to transfer the borrower's right to recover against state tuition recovery funds for the amount of a discharged loan. Another commenter also recommended deletion of paragraph (e)(3) because it could be construed to limit the borrower's rights. Discussion: The Secretary believes that the authority in section 437(c)(2) of the HEA permitting the assignment to the Secretary of the borrower's right to recover a loan refund from the school, its affiliates or principals, clearly applies as well to the recovery of refunds from private funds which support the schools. A private fund is generally funded by the types of schools who present the greatest risk of liability or by parties who are associated with those schools. Under these conditions, the Secretary believes that the HEA intends that the Secretary shall have a legal claim to a refund from these funds. The Secretary also does not agree with the suggestion that the reference to the borrower's assignment of claims with respect to the enrollment agreement and paragraph (e)(3) should be deleted. The Secretary does not believe that these provisions will be read to surrender the borrowers' rights beyond the limited scope required to receive the loan discharge. Changes: None.

Section 685.213(f)

Comments: One commenter recommended that the regulations be modified to specifically provide that, after a loan is discharged, the Secretary will send the borrower the original promissory note marked ``canceled'' or ``satisfied in full'' and a notice that the credit agencies have been informed of the cancellation. Another commenter noted that the regulations do not address the removal of the adverse credit history from the borrower's credit report. Discussion: A loan that is discharged is considered ``paid in full'' and the Secretary will notify the borrower that the borrower's loan obligation has been satisfied. In addition, Sec. 685.213(b)(4) provides that the Secretary will provide notice of the discharge to all credit reporting agencies which were notified of the status of the loan. The Secretary believes that these steps will provide the protection for the borrowers requested by the commenters. Changes: None. Comments: One commenter recommended that the regulations be modified to include recent guidance provided in the FFEL Program regarding borrowers who are initially determined eligible for discharge based on a school closure date that is later determined inaccurate. Discussion: The Secretary believes that the guidance referred to by the commenters does not need to be in regulation. However, borrowers in both the FFEL Program and the Direct Loan Program will generally be treated the same for purposes of the loan discharge provision. Changes: None. Comments: One commenter suggested that the regulation provide for the resumption of collection activities and specify the treatment of payments of principal and interest due during the period in which collection of the loan is suspended. Discussion: Section 685.213(f)(4) of the regulations provides the information requested by the commenter. Changes: None.

Section 685.214 Discharge for False Certification of Student Eligibility or Unauthorized Payment

Comments: One commenter suggested that the discharge also be applied to the amount of a Consolidation loan that reflects a loan that would have been eligible for discharge except that it had been consolidated. Discussion: The Secretary agrees with the commenter that a borrower's Consolidation loan should be credited for the amount of the false certification loan discharge that would have been applicable to the borrower's loan before the consolidation. Section 685.214(b)(1) provides that the borrower would be relieved of any past or present obligation to repay the loan and would be reimbursed for amounts paid on the loan. The regulation is the same as the regulation for the FFEL Program. Changes: None. Comments: One commenter argued that the Secretary should be more receptive to remedying abuses where the ability to benefit is lacking. The commenter was particularly concerned about borrowers who become employed in their general area of study but at lower level positions than they expected when they signed up for training. The commenter claimed that false certification was intended to address these problems. Discussion: Section 437(c) of the HEA provides for discharge of a loan only when the school falsely certifies the student's eligibility to borrow. It is not intended to address every instance of alleged school malfeasance. In particular, section 437(c) is not intended to provide a loan discharge for all the borrowers who believe that they have not obtained the employment that they believe was promised. The Secretary does not endorse or guarantee the quality of education offered by schools participating in the Title IV programs. The Secretary does not approve the school's curriculum or practices, except as they relate to operation of the Title IV programs. Accordingly, student borrowers have the responsibility of any consumer to evaluate the services that will be provided by the school in light of the expense. Changes: None. Comments: One commenter claimed that the Secretary's approach to the discharge for false certification is overly restrictive and not consistent with the statutory language. The commenter recommended that the regulation should not limit the type of false certification that could result in a discharge. Discussion: Section 437(c) of the HEA has a limited scope. It provides for discharge of a loan for a borrower when the school has falsely certified the student's eligibility to borrow. The Secretary believes that the regulations properly reflect the limited scope of the statute. Changes: None. Comments: One commenter suggested that the regulation be revised to apply the time limits applicable to guaranty agencies under the similar provision in the FFEL Program to the Secretary. Discussion: The Secretary is committed to ensuring that borrowers receive a timely response but regulatory time frames are not necessary. In the FFEL Program, however, the Secretary is regulating the activities of third parties and regulatory time frames are needed to ensure that those parties fulfill their programmatic responsibilities. Changes: None.

Section 685.214(a)(1)(iii)

Comments: One commenter objected to the provision that a borrower would be eligible for a loan discharge if the school certified the student's eligibility for a loan and the student had a physical or mental condition, age or criminal record that prevents the borrower from satisfying the physical or legal requirements for employment in the occupation for which the borrower received training. The commenter suggested that the school could, under certain circumstances, violate the Americans with Disabilities Act (ADA). The commenter suggested that if the State standard violated the ADA, the school could be sued by the student for refusing to certify the loan application, or could face action by the Department if the loan was certified. Discussion: As noted in the preamble to the NPRM, 59 FR 42651- 42652, paragraph (a)(1)(iii) is not intended to affect the application of any Federal or State statute (including the ADA) that prohibits discrimination. The Secretary does not expect that schools will be held liable for certifying any loan application that they are required to certify by another law. However, the Secretary does not believe that a change in the regulations, as suggested by the commenter, is needed. Changes: None. Comments: One commenter suggested that the language pertaining to the false certification of the eligibility of a student who does not meet the basic requirements for employment is unclear particularly when applied to four year and degree granting institutions. The commenter stated that the school does not have access to the information mentioned in the regulation and cannot be expected to have knowledge of the potential occupations and requirements for employment for students who pursue the academic programs in a university. The commenter argued that this language would encourage students to raise illegitimate claims against schools. Discussion: The regulatory language is limited and designed to address those situations in which the school proposed to train the student for an occupation with specific requirements for employment. The Secretary does not anticipate that this regulation will apply to many students pursuing academic programs in a university. Changes: None.

Section 685.214(c)(1)

Comments: One commenter argued that a borrower should be able to receive a loan discharge if the borrower did not have the ability to benefit from the training, even if the borrower got a job for which he received training. Discussion: The Secretary believes that the ability of a student to obtain employment in the occupation for which the student's program provided training is evidence that the student was able to benefit from the education received, even if the school initially failed to test or improperly tested the student's ability to benefit from the training. Changes: None. Comments: One commenter suggested that the regulations be modified to require the borrower to make a reasonable effort to secure employment in the field in which the program was intended before a discharge can be granted. Discussion: The Secretary agrees with the commenter's suggestion. The requirement that the borrower make a reasonable attempt to obtain employment in the occupation for which the program was intended is included in the FFEL Program regulations at 34 CFR 682.402(e)(3)(ii)(C) and should be incorporated into the Direct Loan program. Changes: Section 685.214(c)(1)(iii)(B) has been changed to require the borrower to provide a statement acknowledging that he or she made reasonable attempts to obtain employment in the occupation for which the program was intended. Changes: None.

Section 685.214(c)(5)

Comments: One commenter recommended that this subsection be modified to only require the borrower to cooperate with ``reasonable requests'' for cooperation by the Secretary, and to cooperate with the Secretary to the extent practicable. Discussion: The use of the word ``cooperate'' in the regulations reflects the Secretary's intention to work with the borrower toward a common goal and does not need to be restricted. The section references the provision of documents ``reasonably available'' to the borrower. Changes: None.

Section 685.214(d)(4)

Comments: One commenter recommended that the regulations be modified to specifically provide that, after a loan is discharged, the Secretary will send to the borrower the original promissory note marked ``canceled'' or ``satisfied in full'' and a notice that the credit agencies have been informed of the cancellation. Another commenter noted that the regulations do not address the removal of the adverse credit history from the borrower's credit report. Discussion: A loan that is discharged is considered ``paid in full'' and the Secretary will notify the borrower that the borrower's loan obligation has been satisfied. In addition, Sec. 685.214(b)(5) provides that the Secretary will provide notice of the discharge to all credit reporting agencies which were notified of the status of the loan. The Secretary believes that these steps will provide the protection for the borrowers requested by the commenters. Changes: None.

Section 685.215 Consolidation

Comments: Some commenters noted that the terms of Direct Consolidation Loans with respect to deferment eligibility and interest rates are not identical to the terms of FFEL Consolidation Loans. Some commenters supported the differences because the differences benefit borrowers. Other commenters wanted Direct Consolidation Loans to have the same terms as FFEL Consolidation Loans. Discussion: Section 455(g) of the HEA indicates that the Secretary has discretion in establishing the terms and conditions of the Federal Direct Consolidation Loan Program. The Secretary has established a Direct Consolidation Loan Program that maximizes benefits to the borrower and complies with statutory guidance. The Secretary does not have the authority to extend these provisions to borrowers of FFEL Consolidation Loans. Changes: None. Comments: Some commenters requested the Secretary to allow Direct Loans to be consolidated into FFEL Consolidation Loans so that borrowers can choose their servicer. Discussion: The statute prohibits the consolidation of Direct Loans into FFEL Program loans. Moreover, the commenter's claim that borrowers have a choice of servicer in the FFEL Program is inaccurate. Borrowers under the FFEL Program are frequently not able to choose their servicers; rather, the servicing of their loans is determined by who holds the notes, which are often sold on the secondary market without any borrower consultation. Sections 685.402(e)(2) and (3) state that a school participating in the Direct Loan Program may request that the Secretary designate a different Servicer for reasons of unsatisfactory performance. Thus, a change of Servicer will be possible under the Direct Loan Program. Changes: None. Comments: Some commenters noted that the Department should refund fees paid by a lender or guarantor on an FFEL Program loan that is subsequently consolidated into the Direct Loan Program. Discussion: The Secretary does not agree with the commenters that the Secretary should rebate any fees charged to a lender or guaranty agency when an FFEL Program loan is consolidated into a Direct Consolidation Loan. A lender or guaranty agency is required by statute to pay such fees to the Secretary. The Secretary does not have the authority to return fees to a lender or guaranty agency. Changes: None.

Section 685.215(b)

Comments: None. Discussion: The categories of loans eligible for consolidation under the Direct Loan Program have been expanded to include loans made under subpart II of part B of title VIII of the Public Health Service Act. This change is the result of recent amendments to the HEA contained in the Improving America's Schools Act of 1994, which was enacted into law on October 20, 1994. Changes: Section 685.215(b) has been revised to include loans made under subpart II of part B of title VIII of the Public Health Service Act in the list of loans that may be consolidated into a Direct Unsubsidized Consolidation Loan.

Section 685.215(c)(3)

Comments: Some commenters stated that a subsidized FFEL Consolidation Loan should qualify for inclusion into a Direct Subsidized, rather than Direct Unsubsidized, Consolidation Loan. Further, Sec. 685.215(b)(15) should reflect this change since Sec. 685.102 states that a ``subsidized Title IV education loan may be consolidated into a Direct Subsidized Consolidation Loan'' and a subsidized FFEL Consolidation Loan is a title IV loan. Other commenters noted that there is no statutory authority to include HEAL loans in Federal Direct Consolidation Loans, since the reference to HEAL loans is stated in section 428C(d) of the statute and section 455(g) states that Direct Loan consolidation borrowers may include in their consolidation loans only those loans described in section 428C(a)(4). One commenter stated that subsidized Health and Human Services loans should be eligible for inclusion in Direct Subsidized Consolidation Loans, rather than unsubsidized ones as currently regulated. Some commenters believed that there is no statutory authority for the Direct Loan Program to consolidate FFEL consolidation loans, because the statute states that loan eligibility under 428C of the HEA terminates when a consolidation loan is received. Discussion: The Secretary agrees with the commenters that a subsidized FFEL Consolidation Loan should be included in a Direct Subsidized Consolidation Loan. Subsidized HHS Loans will not qualify for subsidy under the HEA Programs because the loans are not subsidized by the Secretary but by another Federal agency. With regard to the statutory authority to consolidate HEAL Program loans, the commenters are correct in noting that the authority to consolidate HEAL loans is found in section 428C(d). Section 428C(d)(4) authorizes the Secretary to publish regulations to facilitate carrying out the goal of consolidating HEAL loans. The Secretary believes that the provision for the consolidation of HEAL loans should be extended to the Direct Loan Program. The regulatory provision for consolidating HEAL loans under Direct Loans is consistent with the statutory authority in 428C(d)(4). Changes: Section 685.215(c)(3) is amended to clarify that Federal Consolidation Loans may be consolidated into a Direct Subsidized Consolidation Loan, if they are eligible for interest benefits during a deferment period under section 428(b)(4)(C).

Section 685.215(d)(1)(i)(B)

Comments: Some commenters suggested that documentation be required to prove that a borrower is unable to obtain a Federal Consolidation Loan, or one with income-sensitive terms satisfactory to the borrower. Others suggested that the phrase ``*** acceptable to the borrower'' be deleted since it gives broad discretion to any FFEL borrower, eligible for ICR under Direct Loans, to apply for a Direct Consolidation Loan. Discussion: On the Direct Loan Consolidation Application and Promissory Note, the borrower certifies that he or she meets the eligibility criteria to consolidate under the Direct Loan Program. The Secretary believes that this certification is sufficient documentation and that requiring further documentation would be unnecessarily burdensome. The phrase ``acceptable to the borrower'' is statutory. Changes: None.

Section 685.215(d)(1)(ii)(B)

Comments: Some commenters stated that the statute does not authorize Direct Consolidation Loans to be made available to students during in-school status. Other commenters supported in-school consolidation because they believed that extending the eligibility of a student to consolidate his or her loans under the Direct Loan program while he or she is still in school enhances the flexibility of the repayment options available to students. Discussion: The statute permits the Secretary to allow loan consolidation under the Direct Loan Program while a borrower is enrolled in school. Section 455(g) of the HEA states that Direct Consolidation Loans are established ``only under such terms and conditions as the Secretary shall establish pursuant to section 457(a)(1) or regulations promulgated under this part''. Thus, the Secretary has discretion in setting the terms, conditions, and benefits for Direct Consolidation Loans. Section 455(a) of the statute does not require consolidation loans under the Direct Loan program to have terms, conditions, and benefits parallel to consolidation loans made under the FFEL Program. Changes: The final regulations have added a new paragraph to Sec. 685.215(d)(1). FFEL borrowers will be allowed to consolidate their FFEL loans during the in-school period, even if they have no Direct Loans, as long as they are attending schools that participate in the Direct Loan Program. The Secretary believes that this will allow for maximum program flexibility. Also, there will be a number of benefits available to each borrower as a result of in-school consolidation. For example, borrowers of unsubsidized loans will be able to make interest payments to just one holder of the loan(s). The convenience of repayment will be enhanced, because it will not be necessary for FFEL borrowers to enter repayment under the FFEL Program and then switch to Direct Loans in order to obtain the repayment options available under the new program.

Section 685.215(d)(1)(v)(B)

Comments: In section 685.215(d)(1)(v)(B), several commenters noted that the regulations do not state that the absence of a credit history should not be construed as an adverse credit history. Discussion: The Secretary agrees that the absence of a credit history should not be construed as an adverse credit history. Changes: Section 685.200(b)(7) is amended to provide that an absence of credit history is not an adverse credit history.

Section 685.215(d)(1)(vi)

Comments: None. Discussion: The NPRM essentially provided for unlimited consolidation of Direct Loans. This meant that a borrower could default on a Direct Consolidation Loan and simply consolidate again. The credit report each time would be updated to show that the underlying loan had been paid in full (although it would still be listed as a default). Each default would also result in the capitalization of collection costs and any outstanding interest and fees, thereby increasing the borrower's debt substantially. To prevent potential abuse of the consolidation eligibility provisions, the Secretary will restrict consolidation of a defaulted Direct Loan. Changes: Paragraph (vi) has been added to section 685.215(d)(1) to permit borrowers to consolidate a defaulted Direct Loan only with the approval of the Secretary.

Section 685.215(d)(1)(vii)

Comments: Although not specifically addressed in the NPRM, some commenters wanted to exclude from Direct Loan Consolidation those FFEL loans where judgment actions have been taken against the borrower. Discussion: The Secretary has decided to proceed cautiously with the consolidation of loans where judgment actions have been taken against the borrower. Consolidation of judgments will be allowed only when the consolidation of such loans is in the Federal fiscal interest. The Secretary recognizes that obtaining a judgment is the most costly step in the debt collection process. Further, judgments are generally not obtained unless the borrowers' income or assets show they have the ability to pay. In light of these actions, the Secretary does not believe it is in the best interest of the Direct Loan and FFEL Programs to establish a rule that a borrower owing on a judgment is entitled to consolidate. Therefore, the Secretary has decided to allow consolidation of judgments into Direct Loans only if the judgment holder agrees to the purchase and the Secretary determines that the consolidation is in the Federal fiscal interest. Changes: Section 685.215(d) has been amended to provide for the consolidation of judgments at the discretion of the Secretary.

Section 685.215(f)(1)

Comments: None. Discussion: The timely processing of consolidation loans is an essential component of debt management for some borrowers and of quality loan servicing for all consolidation loan applicants. For these reasons, the Secretary has modified this section to require the holder of a loan that is being consolidated to complete and return the loan certification request within a specified period of time. Changes: A new paragraph (i) has been added to section 685.215(f)(1) that requires holders of loans that are being consolidated to process the loan verification certificate within 10 business days of receipt of the form. Comments: Some commenters requested the deletion of provisions regarding the Secretary's authority to impose reasonable limits on collection costs paid to the holder of a defaulted loan that is being consolidated. Discussion: When a defaulted loan is consolidated, the holder of the defaulted loan is no longer required to collect on the defaulted loan. Instead, the underlying loan is fully discharged and the collection costs are capitalized, increasing the student's debt. If collection costs were not limited, the full amount of the collection costs would be charged to the borrower, even though the amount of collection activity and costs incurred on the part of the defaulted loan holder would be substantially reduced. The Secretary does not believe that borrowers should be required to pay these full defaulted loan costs or that agencies should receive compensation for services that are not rendered. The Secretary realizes that there are certain expenses that have been incurred by the holder of a defaulted loan being consolidated, but these costs are not the full amount of the collection costs originally applied to the borrower's account. For these reasons, the Secretary reserves the right to impose reasonable limits on collection costs paid to the holder of the loan. The regulation also places a limit on collection costs to be charged by restricting these costs to ``no more than those authorized under the FFEL Program''. Changes: None.

Section 685.215(h)

Comments: Some commenters stated that Direct Consolidation Loans should not be used to encourage FFEL borrowers to pay under the ICR plan. Others believe that FFEL borrowers must evidence need for ICR, and pay only under that plan, if applying for Direct Consolidation Loans. Discussion: Participation in the Direct Loan Program is voluntary and borrowers may choose any of the four repayment plans after consolidation. Section 428C(b)(5) of the statute allows borrowers who do not have a Direct Loan to consolidate into Direct Loans if they meet certain conditions. The statute further allows the resulting Direct Consolidation Loan to be repaid under any repayment provision allowed under the Direct Loan statute. The Secretary believes that providing borrowers with a choice of repayment options is in the best interest of the borrower, and that repayment options, including ICR, should be available broadly. Changes: None.

Section 685.215(j)(2)

Comments: One commenter noted that the Department must redisclose new loan amount and term information to a borrower when an additional loan has been included in the borrower's Direct Consolidation Loan during the allowable 180-day period and recommended that this language be added to Sec. 685.215(j)(2). Another commenter suggested that the Secretary should clarify that a redisclosure will be provided to the borrower if there is any additional amount of money needed to discharge a loan being consolidated into a Direct Consolidation Loan. Discussion: The Secretary will redisclose the new loan amount and term information (if adjusted), when a loan is added to a Direct Consolidation Loan within the allowable 180-day period. However, it is not necessary or appropriate for the Secretary to include this requirement that applies only to the Secretary in regulations. Further, mechanisms such as contract terms with contractors and other Federal regulations control these requirements. Changes: None.

Section 685.215(k)

Comments: Many commenters suggested that the Secretary state in the regulations that a borrower will be notified when the Secretary receives a refund from a school on a loan that has been discharged through consolidation, and that such refund has been applied to the borrower's account. Discussion: The Secretary agrees with the commenters that a borrower should be notified when the Secretary receives a refund and applies it to the borrower's account. The Secretary will provide the borrower such notification and does not believe that a change in the regulations is necessary. Changes: None.

Section 685.215(l)(3)(ii)

Comments: Some commenters stated that Sec. 685.215(l)(3)(ii) should be expanded to state that if one of the borrowers of a joint (spousal) Direct Consolidation Loan qualifies for discharge of a loan, that borrower's portion of the joint loan will be discharged for any of the reasons listed in Sec. 685.212. Furthermore, these discharge provisions should be extended to joint FFEL Consolidation Loans. Discussion: Discharge of a loan under the closed school and false certification provisions in Sec. 685.212(d) and (e) are loan-specific. This means that the loan is discharged because the loan meets a condition for discharge, rather than the borrower meeting a condition for discharge. The conditions listed in Sec. 685.212(a), (b), and (c) (death, total and permanent disability, and bankruptcy) are borrower- specific rather than loan-specific. In these situations, both spouses must meet a condition for the loan to be forgiven under a joint Direct Consolidation Loan because both spouses are borrowers of the loan. Changes: None.

Section 685.301 Certification of a Loan by a Direct Loan Program School

Comments: A number of commenters pointed out that the proposed requirements for the multiple disbursement of a loan would apply even when the loan period corresponds to a single academic term. One commenter suggested consolidating all procedures and requirements concerning disbursements into a single section of the regulations. The commenters criticized the proposed regulations for failing to comply with the intent of section 455(j)(2) of the HEA, which requires the Secretary to establish periods for paying loan proceeds that are consistent with the payment periods used under the Federal Pell Grant Program. Discussion: Section 454(a)(1)(D) of the statute clearly requires that a school participating in the Direct Loan Program set a schedule for the disbursement of loan proceeds in installments, following the requirements of section 428G of the statute. Section 428G requires multiple disbursements even if a student is enrolled for only one term. Section 455(j)(2), which requires the establishment of payment periods consistent with the Pell Grant Program, is not inconsistent with section 454(a)(1)(D). Within such payment periods, schools are still required to disburse loans in multiple installments if a student is enrolled for only one term. The Secretary is committed to seeking legislative changes to reduce the burden on schools with respect to this requirement under both the Direct Loan and FFEL Programs. The Secretary also agrees that procedures and requirements concerning disbursements for all title IV programs be consolidated into one section of the regulations. To the extent allowed under the statute for the various programs, the Secretary has consolidated requirements in subpart K of the Student Assistance General Provisions regulations. Changes: Paragraph (c) has been amended to delete language concerning disbursement procedures and to cross reference new procedures in Sec. 668.164 in the Student Assistance General Provisions.

Section 685.303 Processing Loan Proceeds

Section 685.303(b)(2)(i)

Comments: Two commenters believed that the proposed requirement that a school confirm a student's enrollment status before making each disbursement is burdensome for schools and suggested adopting the procedures of the Federal Pell Grant and Campus-based programs concerning when and how to confirm the enrollment status of students. Three commenters suggested adding a provision in paragraph (b)(2) similar to the one under the FFEL programs permitting disbursements to a student who delays the start of attendance for up to 30 days. Discussion: The requirement to confirm enrollment status prior to making a disbursement under the Direct Loan Program is the same as the requirement for all other title IV programs. The Secretary has not established a stricter requirement for the Direct Loan Program. The Secretary agrees with the commenters that disbursements to students who delay the start of attendance are permitted. Changes: Section 685.303(b)(2) has been modified to permit disbursements to students who delay their start of attendance.

Section 685.303(b)(3)(ii)

Comments: A commenter suggested that paragraph (b)(3)(ii) be revised to permit the return to the Secretary of the gross amount of a loan, rather than the net amount, in the event of a registered student's withdrawal or other failure to begin attendance before the first day of classes. Discussion: It is not necessary for the school to return the gross amount of the loan if the student fails to attend during the period of enrollment. In this situation, the loan is canceled and the student is not charged the loan fee, so the net disbursement amount would be sufficient to fully discharge the borrower's obligation. Changes: None.

Section 685.303(b)(4)

Comments: A commenter urged the elimination of the proposed requirement for a 30-day delayed disbursement for a first-year student who is a first-time recipient under the FFEL and Direct Loan programs. Discussion: The requirement that a disbursement for a first-year student who is a first-time recipient under the FFEL and Direct Loan programs be delayed for 30 days is a statutory requirement. Changes: None.

Section 685.303(d)

Comments: Several commenters supported the flexibility in the proposed late disbursement procedures and urged that the procedures be adopted in the FFEL program. One commenter suggested that the 30-day extension in paragraph (d)(4) for a late disbursement in exceptional circumstances be increased to 60 days and adopted for the FFEL programs. Two commenters asked that there be unlimited time provided for late disbursements in exceptional circumstances if the delays are not caused by a borrower, and that the same provision be adopted for the FFEL program. Discussion: For exceptional circumstances, the late disbursement provision allows a disbursement up to 90 days after a student ceases to be enrolled on at least a half-time basis or after the end of the loan period. The Secretary is convinced that three-months time is both reasonable and sufficient to resolve any outstanding loan issues and to make a disbursement. The late disbursement provisions for the FFEL Program are being modified to match the guidelines in the Direct Loan Program. Changes: None.

Section 685.303(e) (Proposed 685.303(g))

Comments: A commenter suggested that a school be permitted to reduce the amount of a disbursement already made in the event that the reduction of one or more subsequent disbursements would not eliminate an overaward. Discussion: If an overaward occurs that cannot be reduced by subsequent disbursements, no adjustment to the loan for the amount that has already been disbursed is required. However, a school may reduce the loan if it chooses to do so. Changes: None.

Section 685.304 (Proposed 685.303) Counseling Borrowers

Comments: Some commenters recommended strengthening the counseling requirements for schools in the Direct Loan Program and asked that the Department provide additional support for institutions' counseling efforts by providing funds for schools to hire counselors or creating a comprehensive training program for school counselors. Some commenters suggested that the Department provide software to institutions that would allow counselors to compute different repayment scenarios for individual borrowers during exit interviews. One commenter recommended that the Department require one-on-one counseling of borrowers who wish to participate in the ICR Program. Discussion: The Department of Education conducted a national training session by means of a video conference in November 1994, to assist schools in preparing for and conducting exit counseling under the Direct Loan Program. The Secretary will continue to use innovative technologies in providing support to institutions, including the development of PC-based software for schools and borrowers. In addition, the Department has developed an exit counseling video, exit counseling brochure, and repayment brochure for borrowers. The Secretary has worked closely with the financial aid community to develop strong counseling materials and he will continue to solicit input from members of the higher education community in the development of borrower information materials. The Direct Loan Servicing Center, accessible via a toll-free number, is equipped with software that generates different repayment scenarios for an individual borrower. The Direct Loan Servicing Center will provide this individualized information to all borrowers prior to the time they enter repayment. Schools may choose to distribute the individualized information to borrowers during the exit interview or have the Servicing Center mail the materials directly to the borrower. The Secretary believes that the existing provisions for exit counseling to borrowers are sufficient and that a requirement of one-on-one counseling is unnecessary and would be burdensome for institutions. Changes: None.

Section 685.304(a) (Proposed 685.303(e))

Comments: A number of commenters recommended that initial counseling should advise the borrower of the obligation to repay the loan even if the borrower does not complete the program, is unable to obtain employment upon completion, or is otherwise dissatisfied with the services that the borrower purchased from the school. Discussion: Borrowers receive a statement of borrower's rights and responsibilities which includes this information during the loan origination process. Changes: None. Comments: A commenter suggested that borrowers need counseling before they sign the promissory note and have a legal obligation to repay, rather than ``prior to making the first disbursement,'' as the regulation requires. Discussion: Entrance counseling materials, as well as the promissory note provide borrowers with substantial information about their legal obligation to repay the loan prior to making the first disbursement. Requiring schools to provide additional counseling to borrowers prior to signing a promissory note would impose a substantial administrative burden and would not likely result in significant behavioral changes. Changes: None. Comments: A commenter urged the Secretary to provide additional loan counseling to borrowers whose schools participate under standard origination, because these schools may not meet the same eligibility criteria as schools that participate under school origination. Discussion: All schools meet the same eligibility criteria to participate in the Direct Loan Program. The criteria to originate loans measure primarily the fiscal and administrative capabilities of an institution and, as such, are separate from the institutional eligibility criteria. The fact that a school is required to participate or chooses to participate at a certain level of origination, is not necessarily indicative of the institution's ability to counsel borrowers. The Secretary, of course, retains the authority to provide additional counseling to any Direct Loan borrower. Changes: None.

Section 685.304(a)(1)(ii) (Proposed 685.303(e)(1)(ii))

Comments: A commenter suggested that the Department require counseling for each borrower new to the institution, rather than only borrowers who have never received a student loan. Discussion: The Secretary believes that borrowers who have received initial loan counseling at one institution should not be required to attend initial counseling again. The primary purpose of initial counseling is to inform the borrower of the obligation to repay and to provide information about the average indebtedness and average monthly payments the borrower is likely to face. Changes: None.

Section 685.304(a)(3)(iii) (Proposed 685.303(e)(3)(iii)

Comments: A commenter recommended that borrowers be counseled about average indebtedness under both the FFEL and Direct Loan programs since statistics for Direct Loans will not be immediately available. Discussion: The Secretary recognizes that information about total indebtedness under Direct Loans will be incomplete during the first years of the program. However, this provision does not preclude schools from providing information about average indebtedness of these students under the FFEL program. Changes: None.

Section 685.304(a)(3)(iv) (Proposed 685.303(e)(3)(iv))

Comments: A commenter recommended that the anticipated monthly repayment amount schools are required to provide to students in initial counseling should be based upon the standard repayment plan. Discussion: Because the Direct Loan Program provides borrowers with a variety of repayment options, schools must counsel students about the availability of these options. The Secretary does not believe the Department should require schools to counsel students based on the standard repayment plan only. The entrance materials developed by the Secretary for use by Direct Loan schools provide information about repayment under the four different repayment plans. Materials will include information on the monthly payment amounts, as well as estimated total costs over the full repayment period. Changes: None.

Section 685.304(a)(5) (Proposed 685.303(e)(5))

Comments: Many commenters supported the Secretary's efforts to allow alternative procedures for initial loan counseling. Some commenters said the Department should not provide specific guidance on what the alternative counseling procedures should include. Discussion: The Secretary believes that allowing an alternative approach to initial counseling provides schools with an appropriate level of flexibility in determining how to inform borrowers of their loan responsibilities. The regulation still requires that schools following an alternative approach provide certain information in written form to all first-time borrowers. Changes: None. Comments: One commenter suggested that schools using an alternative approach should be exempt from the Department's requirement that schools maintain a record of compliance in each borrowers' file. Discussion: Schools using the alternative approach are still required to provide certain written information to all first-time borrowers. The Department will continue to require schools to maintain a record of compliance. Since schools are given substantial flexibility in determining how to conduct the counseling, the Secretary considers recordkeeping to be a critical component of measuring the effectiveness of the school's alternative approach. Changes: None. Comments: One commenter supported the alternative approach, but suggested that the Department should not let all schools participate. Schools with excessive default rates or schools with significant numbers of students who speak English as a second language should not be allowed to adopt an alternative approach to initial counseling. Discussion: Institutions have argued that they are in the best position to determine the unique counseling needs of their student bodies and therefore, should be able to develop a counseling approach designed to meet their institutional needs. For this reason, the Secretary is providing schools with the authority to design innovative counseling plans and to develop programs to reduce default. However, the Secretary agrees that the alternative approach may not be appropriate for all schools, and reserves the right to prohibit a particular school from using an alternative approach. Changes: The following phrase has been added to the end of the first paragraph of Sec. 685.304(a)(5): ``For this school.'' Comments: A few commenters suggested the following measures as appropriate performance indicators to be used in demonstrating the effectiveness of a school's alternative approach: Default rates, verified placement rates for vocational programs, verified licensing exam pass rates for vocational programs that require licensure. Discussion: The Secretary believes that performance indicators used to demonstrate the effectiveness of a school's alternative approach must be objective outcome measures. Appropriate performance indicators may include such measures as levels of borrowing, default rates, and withdrawal rates. Changes: The following sentence has been added to the end of Sec. 685.304(a)(5)(iii): ``These performance measures must include objective outcomes, such as levels of borrowing, default rates, and withdrawal rates.''

Section 685.304(b)(1)(i) (Proposed 685.303(f)(1)(i))

Comments: One commenter recommended that borrowers enrolled in a program of study abroad be excluded from the requirement for in-person exit counseling. Discussion: Unlike the initial counseling provisions, exit counseling is required by section 485(b) of the HEA. The only borrowers exempted from exit counseling in the statute are those borrowers who leave an institution without the prior knowledge of the institution. In this case, the institution must provide the exit counseling information to the student in writing. Changes: None.

Section 685.305 (Proposed Section 685.304) Determining the Date of a Student's Withdrawal

Comments: Most commenters who commented on this section supported it. One commenter suggested that, to be consistent with the FFEL Programs, a student on an approved leave of absence should be treated as an enrolled student for purposes of a deferment. Discussion: The Secretary agrees that there should be consistent treatment of leaves of absence among all the title IV, HEA programs. The Secretary has modified the Student Assistance General Provisions regulations that would provide for that consistent treatment. Changes: None.

Section 685.307 (Proposed Section 685.306) Withdrawal Procedure for Schools Participating in the Direct Loan Program

Comment: Many commenters asked the Secretary to specifically state in the regulations that a school that withdraws its participation in the Direct Loan Program will not be limited from participating in the FFEL Program. Discussion: The Secretary agrees with the commenters that a school that withdraws from the Direct Loan Program should not be limited from participating in the FFEL Program because of that withdrawal. A school that participates in the Direct Loan Program may still be eligible to participate in the FFEL Program pursuant to its title IV participation agreement. However, this regulation applies only to a school's participation in the Direct Loan Program. Changes: None.

Section 685.309 (Proposed Section 685.308) Administrative and Fiscal Control and Fund Accounting Requirements for Schools Participating in the Direct Loan Program

Comments: A number of commenters supported the provisions of this section. Two commenters requested the Secretary to clarify that paragraph (c)(1) of this section pertains to the retention of records relating to a student's participation in the Direct Loan Program and paragraph (c)(2) pertains to the retention of all other records relating to a school's participation in the Direct Loan Program. A commenter was concerned that permitting a school to maintain records in a format other than original paper copies might create difficulties in litigation or enforcement efforts. A number of commenters suggested that the requirement in paragraph (d) to maintain loan records include information on a student's job placement, if known. Several commenters believed that information concerning permanent address changes should be provided upon request to the Secretary within 30 days, consistent with a similar requirement under the regulations for the FFEL programs. Discussion: The Secretary agrees that paragraph (c)(1) and (2) of this section need clarification. With respect to the retention of records in microfilm or other format, the Secretary acknowledges that the alteration of some original documents could escape detection if a school does not maintain the originals. However, the maintenance of records in formats other than paper is generally legally accepted. The Secretary considers the benefits of offering convenience and a reduced burden to schools through the option allowed under this provision to outweigh the risk of fraud resulting from the use of these record storage formats. The requirement to collect information concerning a student's expected employer job placement is contained in 685.304(b), and the maintenance of this information is covered under section 685.309(c)(1). The Secretary agrees with the commenters that the Secretary needs to have information about permanent address changes without serious delay. In order to simplify the notification process and to provide an adequate timeframe for providing the required information, the Secretary believes schools should be able to notify the Secretary of a change in a borrower's permanent address through the student status confirmation report. Changes: Paragraph (c)(1) is revised to make clear that required records concerning a student's eligibility for or receipt of a loan under this part must be maintained for at least five years after the student's last day of attendance. Paragraph (c)(2) is revised to make clear that copies of any other required report and form for the programs under this part must be maintained for at least five years after the completion of the report or form. Paragraph (b)(iii) has been added to require schools to report to the Secretary a change in a borrower's permanent address through the student status confirmation report.

Section 685.400 School Participation Requirements for Academic Years 1996-1997 and Beyond

Comments: A commenter suggested that the Secretary create a new section of the regulations to prescribe conditions and procedures by which schools participating in school origination can recover permissible administrative costs. Discussion: The Secretary does not intend to regulate the conditions and procedures related to receiving reimbursement for loan origination at the present time. This information will be provided to schools on an annual basis. Information related to costs (or savings) incurred by schools that originate Direct Loans and the impact that borrower volume has on those costs is being collected during the first and subsequent years of the Direct Loan Program. Until solid data become available to establish administrative fee guidelines, the Secretary will retain the authority to look at programmatic information as it becomes available and to set fee guidelines that will best promote sound program development. Changes: None. Comments: A commenter suggested that schools already participating in the Quality Assurance Program should be exempt from the regulations specifying criteria for school participation in the Direct Loan Program. Discussion: The Secretary disagrees with the commenter. Eligibility criteria deemed significant under the Quality Assurance Program may differ somewhat from the eligibility and selection requirements developed to fit the needs and goals of the Direct Loan Program. Changes: None.

Section 685.400(a)

Comments: A commenter suggested that the default rate criteria in section 685.400(a) be modified to take into account only the rates from the two most recent, rather than the three most recent, fiscal years. Other commenters supported the use of the statutory default rate criteria already specified in the NPRM. Discussion: The Secretary agrees with the commenters that support the use of the statutory default rate criteria for determining eligibility to participate in the Direct Loan Program. Establishing stringent criteria to participate in the Direct Loan protects the Federal fiscal interest and promotes program integrity. The Secretary will continue to use FFEL default rate information to determine eligibility to participate in the Direct Loan Program for those years that a school participated in the FFEL Program that were prior to a school's participation in the Direct Loan Program. Changes: Section 685.400(a) has been modified to provide that to continue to be eligible to participate in the Direct Loan Program, a school must have a cohort default rate of less than 25 percent for at least one of the three most recent fiscal years for which data are available and that are prior to a school's participation in the Direct Loan Program.

Section 685.400(b)

Comments: A commenter requested that schools subject to a proposed or final limitation, suspension, or termination action be considered on a case-by-case basis for participation in the Direct Loan Program. Other commenters supported the initial participation requirement that schools not be subject to a proposed or final limitation, suspension, or termination action. One commenter believed that schools already participating in the program should not be allowed to continue participation if subject to a proposed or final limitation, suspension, or termination action. Discussion: While interested in program flexibility, the Secretary also believes that participation requirements must be sufficiently stringent to ensure that participating schools can adequately perform functions necessary for administration of the Direct Loan Program. The Secretary believes that the benefits of this new program should not be made available to a school that has lost its eligibility to participate in the FFEL Program. In his opinion, this would not constitute sound administration. However, if a school initially qualifies for participation and is later subject to a limitation, suspension, or termination action, the result of that action will dictate whether the school can continue to participate in the Direct Loan Program. Changes: None.

Section 685.401 Selection Criteria and Process for Academic Years 1996-1997 and Beyond

Comments: Commenters requested that the Secretary clarify the means used to evaluate whether a school can assist in a ``smooth'' transition to the implementation of the new Direct Loan Program. A commenter stated that the statutory requirement that Direct Loan schools be representative of FFEL participants should be clarified as the main criterion for selection. Discussion: The selection criterion that allows the Secretary to select schools to ensure an expeditious but orderly transition from the FFEL Program to the Direct Loan Program is necessary because there is no cap on the number of schools that can participate in the Direct Loans in 1996-97. Instead, the statute waives the cap when demand exceeds the statutory goal of 50 percent of total loan volume for that year. Besides representativeness of schools, the Secretary needs to consider such factors as the stability of the FFEL market and the Department's operational capacity to handle a larger loan volume. Changes: None.

Section 685.402 Criteria for Schools To Originate Loans for Academic Year 1996-1997 and Beyond

Section 685.402(a)

Comments: Some commenters believed that additional performance measures should be used to determine a school's eligibility for school origination levels 1 and 2. For example, they suggested evaluating a school on measures such as lack of timeliness or accuracy in drawdown requests, and maintaining excess cash in school accounts. A commenter suggested that the regulation should be modified to state that the Secretary may, rather than will, consider for participation schools with past performance deficiencies which have been corrected. This commenter also suggested that schools be appraised on ability to pay student refunds, and that this criterion should be added after Sec. 685.402(a)(2)(viii). Discussion: The Department is developing comprehensive performance measures to evaluate school origination performance. These measures will incorporate input from the financial aid community, as was indicated in the preamble to the NPRM. The Secretary appreciates the suggestions made by various commenters on this issue and wishes to note that the specific measures mentioned by these commenters (timeliness and accuracy of drawdown requests, not maintaining excess cash, ability to make title IV refunds in an accurate and timely manner) had already been given as examples of sufficient performance standards in both the NPRM preamble and Sec. 685.402(c)(2). The Secretary intends to establish operational guidelines for the timely submission of disbursement records (sections 685.402(b)(3)(iii)(B) and 685.402(c)(2)(i)). The Secretary does not propose to prescribe this submission timeframe in regulations; however, if timely submission of disbursement records becomes a problem, the Secretary intends to propose regulations addressing the submission of disbursement records. In addition, the Secretary is committed to maintaining stringent origination criteria for each level. It should be noted that a school that does not make timely refunds would be cited in a program review and/or audit, and would not meet criteria in Secs. 685.402(a)(2)(iii) and 685.402(a)(2)(vii). Changes: None.

Section 685.402(c)

Comments: Many commenters supported the provision allowing voluntary origination level changes. One commenter wanted the Department to provide a school whose origination status is changed by the Secretary the reason for that change in status so the school has an opportunity to respond to the Secretary's concerns. Some commenters believed that Sec. 685.402(c) should be modified to include feedback from borrowers concerning whether a school is adequately performing its origination functions. This would enable the Secretary to more accurately determine whether to assign a school to a different origination level. Discussion: The Secretary will disclose the reasons for a change in origination level to the school. The Secretary will base such a decision on an accurate and fair analysis of each school's ability to perform the required functions associated with its level of origination. The Secretary will consider seriously any feedback provided by students on the school's performance. The reasons for a required change should already be known to the school, because the Secretary will have provided technical assistance to any school that is not performing well. There will be opportunities for a school to improve performance before such an action is taken by the Secretary. Therefore, his decision regarding change in status shall be final. However, as stated in Sec. 685.402(b)(3)(ii), applications to participate under another origination option are considered on an annual basis. This measure ensures program flexibility within reasonable limits. Changes: None.

Section 685.402(e)

Comment: Some commenters objected to the requirement that the Secretary retain the authority to approve or disapprove a change in servicer by schools participating in the Direct Loan Program. Other commenters believed it would be appropriate for the Secretary to employ a third party to determine if a change in servicer is warranted. Discussion: The Secretary believes that a school should have the opportunity to change its servicer. However, the Secretary does not believe that it is in the best interests of the program to permit uncontrolled changes in school servicers. The Secretary believes that it is only necessary for a school to change servicers when the servicer is not performing satisfactorily. The Secretary will grant the school's request if the Secretary determines that the servicer is not performing satisfactorily and that the servicer selected by the school is able to accommodate the school's needs. Changes: None.

Waiver of Proposed Rulemaking

In addition to the changes made to part 685 based on public comment on the notice of proposed rulemaking, the Secretary has revised the regulations to include changes made by the Improving America's Schools Act of 1994 (Pub. L. 103-382), enacted subsequent to publication of the notice of proposed rulemaking. It is the practice of the Secretary to offer interested parties the opportunity to comment on proposed regulations in accordance with the Administrative Procedure Act, 5 U.S.C. 553. However, since these changes merely incorporate statutory changes into the regulations, public comment could have no effect. Therefore, the Secretary has determined pursuant to 5 U.S.C. 553(b)(B) that public comment on the regulations is unnecessary and contrary to the public interest.

Executive Order 12866

These final regulations have been reviewed in accordance with Executive Order 12866. Under the terms of the order the Secretary has assessed the potential costs and benefits of this regulatory action. The potential costs associated with these regulations are those resulting from statutory requirements and those determined by the Secretary to be necessary for administering the Title IV, HEA programs effectively and efficiently. In assessing the potential costs and benefits--both quantitative and qualitative--of these proposed regulations, the Secretary has determined that the benefits of these regulations justify the costs. The Secretary has also determined that this regulatory action does not unduly interfere with State, local, and tribal governments in the exercise of their governmental functions.

Paperwork Reduction Act of 1980

Sections 685.204, 685.206, 685.209, 685.213, 685.214, 685.215, 685.301, 685.302, 685.303, 685.309 and 685.401 contain information collection requirements. As required by the Paperwork Reduction Act of 1980, the Department of Education will submit a copy of these proposed regulations to the Office of Management and Budget (OMB) for its review. (44 U.S.C. 3504(h)) These regulations affect students who apply for Federal student financial assistance authorized by title IV of the Higher Education Act of 1965, as amended, and postsecondary institutions administering the Direct Loan Program. Annual public reporting burden for this collection of information is estimated to average 29 minutes for each of the estimated 2,321,583 individuals providing information regarding eligibility for a loan, deferment, income contingent repayment, or a Direct Consolidation Loan (or 1,122,098 hours total) and 12 minutes for a postsecondary institution for each of the estimated 4,068,121 responses relating to postsecondary institutions' administration of a student loan program (or 813,624 hours total) including the time for reviewing instructions, searching existing data sources, gathering and maintaining the data needed, and completing and reviewing the collection of information. Organizations and individuals desiring to submit comments on the information collection requirements should direct them to the Office of Information Regulatory Affairs, OMB, Room 10235, New Executive Office Building, Washington, D.C. 20503; Attention: Daniel J. Chenok.

Assessment of Educational Impact

In the NPRM, the Secretary requested comments on whether the proposed regulations would require transmission of information that is being gathered by, or is available from, any other agency or authority of the United States. Based on the response to the proposed rules and on its own review, the Department has determined that the regulations in this document do not require transmission of information that is being gathered by, or is available from, any other agency or authority of the United States.

List of Subjects in 34 CFR Part 685

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

(Catalog of Federal Domestic Assistance Numbers: 84.268, William D. Ford Federal Direct Loan Program)

Dated: November 22, 1994. Richard W. Riley, Secretary of Education.

The Secretary revises part 685 of title 34 of the Code of Federal Regulations to read as follows:

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

Subpart A--Purpose and Scope

Sec. 685.100 The William D. Ford Federal Direct Loan Program. 685.101 Participation in the Direct Loan Program. 685.102 Definitions. 685.103 Applicability of subparts.

Subpart B--Borrower Provisions

685.200 Borrower eligibility. 685.201 Obtaining a loan. 685.202 Charges for which Direct Loan Program borrowers are responsible. 685.203 Loan limits. 685.204 Deferment. 685.205 Forbearance. 685.206 Borrower responsibilities and defenses. 685.207 Obligation to repay. 685.208 Repayment plans. 685.209 Income contingent repayment plan. 685.210 Choice of repayment plan. 685.211 Miscellaneous repayment provisions. 685.212 Discharge of a loan obligation. 685.213 Closed school discharge. 685.214 Discharge for false certification of student eligibility or unauthorized payment. 685.215 Consolidation. Subpart C--Requirements, Standards, and Payments for Direct Loan Program Schools 685.300 Agreements between an eligible school and the Secretary for participation in the Direct Loan Program. 685.301 Certification of a loan by a Direct Loan Program school. 685.302 Schedule requirements for courses of study by correspondence. 685.303 Processing loan proceeds 685.304 Counseling Borrowers 685.305 Determining the date of a student's withdrawal. 685.306 Payment of a refund to the Secretary. 685.307 Withdrawal procedure for schools participating in the Direct Loan Program. 685.308 Remedial actions. 685.309 Administrative and fiscal control and fund accounting requirements for schools participating in the Direct Loan Program. Subpart D--School Participation and Loan Origination in the Direct Loan Program 685.400 School participation requirements for academic years 1996- 1997 and beyond. 685.401 Selection criteria and process for academic years 1996-1997 and beyond. 685.402 Criteria for schools to originate loans for academic years 1996-1997 and beyond.

Appendix A--Income Contingent Repayment Examples of the Calculation of Monthly Repayment Amounts

Authority: 20 U.S.C. 1078a et seq.

Subpart A--Purpose and Scope

Sec. 685.100 The William D. Ford Federal Direct Loan Program.

(a) Under the William D. Ford Federal Direct Loan (Direct Loan) Program (formerly known as the Federal Direct Student Loan Program), the Secretary makes loans to enable a student or parent to pay the costs of the student's attendance at a postsecondary school. This part governs the Federal Direct Stafford/Ford Loan Program, the Federal Direct Unsubsidized Stafford/Ford Loan Program, the Federal Direct PLUS Program, and the Federal Direct Consolidation Loan Program. The Secretary makes loans under the following program components: (1) Federal Direct Stafford/Ford Loan Program (formerly known as the Federal Direct Stafford Loan Program), which provides loans to undergraduate, graduate, and professional students. The Secretary subsidizes the interest while the borrower is in an in-school, grace, or deferment period. (2) Federal Direct Unsubsidized Stafford/Ford Loan Program (formerly known as the Federal Direct Unsubsidized Stafford Loan Program), which provides loans to undergraduate, graduate and professional students. The borrower is responsible for the interest that accrues during any period. (3) Federal Direct PLUS Program, which provides loans to parents of dependent students. The borrower is responsible for the interest that accrues during any period. (4) Federal Direct Consolidation Loan Program, which provides loans to borrowers to consolidate certain Federal educational loans. (b) The Secretary makes a Direct Subsidized Loan, a Direct Unsubsidized Loan, or a Direct PLUS Loan only to a student or a parent of a student enrolled in a school that has been selected by the Secretary to participate in the Direct Loan Program. (c) The Secretary makes a Direct Consolidation Loan only to-- (1) A borrower with a loan made under the Direct Loan Program; or (2) A borrower with a loan made under the Federal Family Education Loan Program who is not able to receive-- (i) A Federal Consolidation Loan; or (ii) A Federal Consolidation Loan with income-sensitive repayment terms that are satisfactory to the borrower.

(Authority: 20 U.S.C. 1087a et seq.)

Sec. 685.101 Participation in the Direct Loan Program.

(a)(1) Colleges, universities, graduate and professional schools, vocational schools, and proprietary schools selected by the Secretary may participate in the Direct Loan Program. Participation in the Direct Loan Program enables an eligible student or parent to obtain a loan to pay for the student's cost of attendance at the school. (2) The Secretary may permit a school to participate in both the Federal Family Education Loan (FFEL) Program, as defined in 34 CFR Part 600, and the Direct Loan Program. A school permitted to participate in both the FFEL Program and the Direct Loan Program may certify loan applications under the FFEL Program according to the terms of its agreement with the Secretary. (b) An eligible student who is enrolled at a school participating in the Direct Loan Program may borrow under the Federal Direct Stafford/Ford Loan and Federal Direct Unsubsidized Stafford/Ford Loan Programs. An eligible parent of an eligible dependent student enrolled at a school participating in the Direct Loan Program may borrow under the Federal Direct PLUS Program.

(Authority: 20 U.S.C. 1087a et seq.)

Sec. 685.102 Definitions.

(a)(1) The following definitions are set forth in the Student Assistance General Provisions, 34 CFR Part 668:

Academic year Campus-based programs Dependent student Disburse Eligible program Eligible student Enrolled Federal Consolidation Loan Program Federal Direct Student Loan Program (Direct Loan Program) Federal Pell Grant Program Federal Perkins Loan Program Federal PLUS Program Federal State Student Incentive Grant Program Federal Supplemental Educational Opportunity Grant Program Federal Work-Study Program Independent student One-third of an academic year Parent State Two-thirds of an academic year U.S. citizen or national

(2) The following definitions are set forth in the regulations for Institutional Eligibility under the Higher Education Act of 1965, as amended, 34 CFR Part 600:

Accredited Clock hour Educational program Eligible institution Federal Family Education Loan (FFEL) Program Institution of higher education Nationally recognized accrediting agency or association Preaccredited Program of study by correspondence Secretary

(3) The following definitions are set forth in the regulations for the Federal Family Education Loan Program (FFEL) Program, 34 CFR Part 682:

Act Endorser Expected family contribution Federal Insured Student Loan (FISL) Program Federal Stafford Loan Program Foreign school Full-time student Graduate or professional student Guaranty agency Holder Legal guardian Lender Totally and permanently disabled Undergraduate student

(b) The following definitions also apply to this part: Alternative originator: An entity under contract with the Secretary that originates Direct Loans to students and parents of students who attend a Direct Loan Program school that does not originate loans. Consortium: For purposes of this part, a consortium is a group of two or more schools that interacts with the Secretary in the same manner as other schools, except that the electronic communication between the Secretary and the schools is channeled through a single point. Each school in a consortium shall sign a Direct Loan Program participation agreement with the Secretary and be responsible for the information it supplies through the consortium. Default: The failure of a borrower and endorser, if any, to make an installment payment when due, or to meet other terms of the promissory note, if the Secretary finds it reasonable to conclude that the borrower and endorser, if any, no longer intend to honor the obligation to repay, provided that this failure persists for 180 days. Estimated financial assistance: (1) The estimated amount of assistance for a period of enrollment that a student (or a parent on behalf of a student) will receive from Federal, State, institutional, or other sources, such as scholarships, grants, financial need-based employment, or loans, including but not limited to-- (i) Veterans' educational benefits paid under chapters 30, 31, 32, and 35 of title 38 of the United States Code; (ii) Educational benefits paid under chapters 106 and 107 of title 10 of the United States Code (Selected Reserve Educational Assistance Program); (iii) Reserve Officer Training Corps (ROTC) scholarships and subsistence allowances awarded under chapter 2 of title 10 and chapter 2 of title 37 of the United States Code; (iv) Benefits paid under Public Law 97-376, section 156: Restored Entitlement Program for Survivors (or Quayle benefits); (v) Benefits paid under Public Law 96-342, section 903: Educational Assistance Pilot Program; (vi) Any educational benefits paid because of enrollment in a postsecondary education institution; (vii) The estimated amount of other Federal student financial aid, including but not limited to a Federal Pell Grant, campus-based aid, and the gross amount (including fees) of a Direct Subsidized, Direct Unsubsidized, and Direct PLUS Loan. (2) Estimated financial assistance does not include-- (i) Those amounts used to replace the expected family contribution, including-- (A) Direct PLUS Loan amounts; (B) Direct Unsubsidized Loan amounts; and (C) Non-Federal loan amounts; and (ii) Federal Perkins loan and Federal Work-Study funds that the student has declined. Federal Direct Consolidation Loan Program: A loan program authorized by title IV, part D of the Act that provides loans to borrowers who consolidate certain Federal educational loan(s), and one of the components of the Direct Loan Program. Loans made under this program are referred to as Direct Consolidation Loans. There are three types of Direct Consolidation Loans: (1) Direct Subsidized Consolidation Loans. Subsidized title IV education loans may be consolidated into a Direct Subsidized Consolidation Loan. Interest is not charged to the borrower during in- school and deferment periods. (2) Direct Unsubsidized Consolidation Loans. Certain Federal education loans may be consolidated into a Direct Unsubsidized Consolidation Loan. The borrower is responsible for the interest that accrues during any period. (3) Direct PLUS Consolidation Loans. Parent Loans for Undergraduate Students, Federal PLUS, Direct PLUS, and Direct PLUS Consolidation Loans may be consolidated into a Direct PLUS Consolidation Loan. The borrower is responsible for the interest that accrues during any period. Federal Direct PLUS Program: A loan program authorized by title IV, part D of the Act that provides loans to parents of dependent students attending schools that participate in the Direct Loan Program, and one of the components of the Direct Loan Program. The borrower is responsible for the interest that accrues during any period. Loans made under this program are referred to as Direct PLUS Loans. Federal Direct Stafford/Ford Loan Program: A loan program authorized by title IV, part D of the Act that provides loans to undergraduate, graduate, and professional students attending Direct Loan Program schools, and one of the components of the Direct Loan Program. The Secretary subsidizes the interest while the borrower is in an in-school, grace, or deferment period. Loans made under this program are referred to as Direct Subsidized Loans. Federal Direct Unsubsidized Stafford/Ford Loan Program: A loan program authorized by title IV, part D of the Act that provides loans to undergraduate, graduate, and professional students attending Direct Loan Program schools, and one of the components of the Direct Loan Program. The borrower is responsible for the interest that accrues during any period. Loans made under this program are referred to as Direct Unsubsidized Loans. Grace period: A six-month period that begins on the day after a Direct Loan Program borrower ceases to be enrolled as at least a half- time student at an eligible institution and ends on the day before the repayment period begins. Half-time student: A student who is not a full-time student and who is enrolled in a school participating in the FFEL Program or the Direct Loan Program and is carrying an academic workload that is at least one- half the workload of a full-time student, as determined by the school. A student enrolled solely in an eligible program of study by correspondence is considered a half-time student. Interest rate: The annual interest rate that is charged on a loan, under title IV, part D of the Act. Loan fee: A fee, payable by the borrower, that is used to help defray the costs of the Direct Loan Program. Period of enrollment: The period for which a Direct Subsidized, Direct Unsubsidized, or Direct PLUS Loan is intended. The period of enrollment must coincide with one or more academic terms established by the school (such as semester, trimester, quarter, academic year, and length of the program of study), for which institutional charges are generally assessed. The period of enrollment is also referred to in this part as the loan period. Satisfactory repayment arrangement. (1) For the purpose of regaining eligibility under section 428F(b) of the HEA, the making of six consecutive, voluntary, on-time, full monthly payments on a defaulted loan. (2) For the purpose of consolidating a defaulted loan under 34 CFR 685.215(d)(1)(ii)(E), the making of three consecutive, voluntary, on- time, full monthly payments on a defaulted loan. (3) The required monthly payment amount may not be more than is reasonable and affordable based on the borrower's total financial circumstances. ``On-time'' means a payment made within 15 days of the scheduled due date, and voluntary payments are those payments made directly by the borrower, regardless of whether there is a judgment against the borrower, and do not include payments obtained by income tax offset, garnishment, or income or asset execution. School origination option 1: The process by which a school creates a loan origination record, transmits the record to the Servicer, prepares the promissory note, obtains a completed and signed promissory note from a borrower, transmits the promissory note to the Servicer, receives the funds electronically, disburses a loan to a borrower, creates a disbursement record, transmits the disbursement record to the Servicer, and reconciles on a monthly basis. The Servicer initiates the drawdown of funds for schools participating in school origination option 1. School origination option 2: The process by which a school creates a loan origination record, transmits the record to the Servicer, prepares the promissory note, obtains a completed and signed promissory note from a borrower, transmits the promissory note to the Servicer, determines funding needs, initiates the drawdown of funds, receives the funds electronically, disburses a loan to a borrower, creates a disbursement record, transmits the disbursement record to the Servicer, and reconciles on a monthly basis. Servicer: An entity that has contracted with the Secretary to act as the Secretary's agent in providing services relating to the origination or servicing of Direct Loans. Standard origination: The process by which a school creates a loan origination record, transmits the record to the alternative originator, receives the funds electronically, disburses funds, creates a disbursement record, transmits the disbursement record to the alternative originator, and reconciles on a monthly basis. The alternative originator prepares the promissory note, obtains a completed and signed promissory note from a borrower, and initiates the drawdown of funds for schools participating in standard origination.

(Authority: 20 U.S.C. 1087a et seq.)

Sec. 685.103 Applicability of subparts.

(a) Subpart A contains general provisions regarding the purpose and scope of the Direct Loan Program. (b) Subpart B contains provisions regarding borrowers in the Direct Loan Program. (c) Subpart C contains certain requirements regarding schools in the Direct Loan Program. (d) Subpart D contains provisions regarding school eligibility for participation and origination in the Direct Loan Program.

(Authority: 20 U.S.C. 1087a et seq.)

Subpart B--Borrower Provisions

Sec. 685.200 Borrower eligibility.

(a) Student borrower. (1) A student is eligible to receive a Direct Subsidized Loan, a Direct Unsubsidized Loan, or a combination of these loans, if the student meets the following requirements: (i) The student is enrolled in a school that participates in the Direct Loan Program. (ii) The student meets the requirements for an eligible student under 34 CFR Part 668. (iii) In the case of an undergraduate student who seeks a Direct Subsidized Loan or a Direct Unsubsidized Loan at a school that participates in the Federal Pell Grant Program, the student has received a determination of Federal Pell Grant eligibility for the period of enrollment for which the loan is sought. (iv) In the case of a borrower whose previous loan was cancelled due to total and permanent disability, the student-- (A) Obtains a certification from a physician that the borrower is able to engage in substantial gainful activity; and (B) Signs a statement acknowledging that the Direct Loan the borrower receives cannot be cancelled in the future on the basis of any impairment present when the new loan is made, unless that impairment substantially deteriorates. (v) In the case of any student who seeks a loan but does not have a certificate of graduation from a school providing secondary education or the recognized equivalent of such a certificate, the student meets the requirements under 34 CFR 668.7(b). (2)(i) A Direct Subsidized Loan borrower must demonstrate financial need in accordance with title IV, part F of the Act. (ii) The Secretary considers a member of a religious order, group, community, society, agency, or other organization who is pursuing a course of study at an institution of higher education to have no financial need if that organization-- (A) Has as its primary objective the promotion of ideals and beliefs regarding a Supreme Being; (B) Requires its members to forego monetary or other support substantially beyond the support it provides; and (C)(1) Directs the member to pursue the course of study; or (2) Provides subsistence support to its members. (b) Parent borrower. A parent is eligible to receive a Direct PLUS Loan if the parent meets the following requirements: (1) The parent is borrowing to pay for the educational costs of a dependent undergraduate student who meets the requirements for an eligible student under 34 CFR Part 668. (2) The parent provides his or her and the student's social security number. (3) The parent meets the requirements pertaining to citizenship and residency that apply to the student under 34 CFR 668.7. (4) The parent meets the requirements concerning defaults and overpayments that apply to the student in 34 CFR 668.7. (5) The parent complies with the requirements for submission of a Statement of Educational Purpose that apply to the student under 34 CFR Part 668, except for the completion of a Statement of Selective Service Registration Status. (6) The parent meets the requirements that apply to a student under paragraph (a)(1)(iv) of this section. (7)(i) The parent-- (A) Does not have an adverse credit history; (B) Has an adverse credit history but has obtained an endorser who does not have an adverse credit history; or (C) Has an adverse credit history but documents to the satisfaction of the Secretary that extenuating circumstances exist. (ii) For purposes of paragraph (b)(7)(i) of this section, an adverse credit history means that as of the date of the credit report, the applicant-- (A) Is 90 or more days delinquent on any debt; or (B) Has been the subject of a default determination, bankruptcy discharge, foreclosure, repossession, tax lien, wage garnishment, or write-off of a debt under title IV of the Act during the five years preceding the date of the credit report. (iii) For the purposes of (b)(7)(i) of this section, the Secretary does not consider the absence of a credit history is as an adverse credit history and does not deny a Direct PLUS loan on that basis. (c) Defaulted FFEL Program and Direct Loan borrowers. Except as noted in Sec. 685.215(d)(1)(ii)(E), in the case of a student or parent borrower who is currently in default on an FFEL Program or a Direct Loan Program Loan, the borrower shall make satisfactory repayment arrangements on the defaulted loan. The definition of a satisfactory repayment arrangement is provided in 34 CFR 685.102. (d) Use of loan proceeds to replace expected family contribution. The amount of a Direct Unsubsidized Loan, a Direct PLUS Loan, a State- sponsored loan, or another non-Federal loan obtained for a loan period may be used to replace the expected family contribution for that loan period.

(Authority: 20 U.S.C. 1087a et seq.)

Sec. 685.201 Obtaining a loan.

(a) Application for a Direct Subsidized Loan or a Direct Unsubsidized Loan. (1) To obtain a Direct Subsidized Loan or a Direct Unsubsidized Loan, a student shall complete a Free Application for Federal Student Aid and submit it in accordance with instructions in the application. (2) If the student is eligible for a Direct Subsidized Loan or a Direct Unsubsidized Loan, the school in which the student is enrolled shall perform the following functions: (i) A school participating under school origination option 2 shall create a loan origination record, obtain a completed promissory note from the student, draw down funds, and disburse the funds. (ii) A school participating under school origination option 1 shall create a loan origination record, obtain a completed promissory note from the student, and transmit the record and promissory note to the Servicer. The Servicer initiates the drawdown of funds, and the school disburses the funds. (iii) If the student is attending a school participating under standard origination, the school shall create a loan origination record and transmit the record to the alternative originator, which prepares the promissory note and sends it to the student and receives the completed promissory note from the student. The Servicer initiates the drawdown of funds, and the school disburses the funds. (b) Application for a Direct PLUS Loan. To obtain a Direct PLUS Loan, the parent shall complete the application and promissory note and submit it to the school at which the student is enrolled. The school shall complete its portion of the application and promissory note and submit it to the Servicer, which makes a determination as to whether the parent has an adverse credit history. A school participating under school origination option 2 shall draw down funds and disburse the funds. For a school participating under school origination option 1 or standard origination, the Servicer initiates the drawdown of funds, and the school disburses the funds. (c) Application for a Direct Consolidation Loan. (1) To obtain a Direct Consolidation Loan, the applicant shall complete the application and promissory note and submit it to the Servicer. The application and promissory note set forth the terms and conditions of the Direct Consolidation Loan and inform the applicant how to contact the Servicer. The Servicer answers questions regarding the process of applying for a Direct Consolidation Loan and provides information about the terms and conditions of both Direct Consolidation Loans and the types of loans that may be consolidated. (2) Once the applicant has submitted the completed application and promissory note to the Servicer, the Secretary makes the Direct Consolidation Loan under the procedures specified in Sec. 685.215.

(Authority: 20 U.S.C. 1087a et seq., 1091a)

Sec. 685.202 Charges for which Direct Loan Program borrowers are responsible.

(a) Interest. (1) Interest rate for Direct Subsidized Loans and Direct Unsubsidized Loans. (i) For Direct Subsidized Loans and Direct Unsubsidized Loans in repayment, the interest rate during any twelve- month period beginning on July 1 and ending on June 30 is determined on the June 1 immediately preceding that period. The interest rate is equal to the bond equivalent rate of 91-day Treasury bills auctioned at the final auction held prior to that June 1 plus 3.1 percentage points, but does not exceed 8.25 percent. (ii) For Direct Subsidized Loans and Direct Unsubsidized Loans prior to the beginning of the repayment period or during the period of deferment under Sec. 685.204, the interest rate during any twelve-month period beginning on July 1 and ending on June 30 is determined on the June 1 immediately preceding that period. The interest rate is equal to the bond equivalent rate of 91-day Treasury bills auctioned at the final auction held prior to that June 1 plus 2.5 percentage points, but does not exceed 8.25 percent. (2) Interest rate for the Direct PLUS Loans. The interest rate on a Direct PLUS Loan during any twelve-month period beginning on July 1 and ending on June 30 is determined on the June 1 preceding that period. The interest rate is equal to the bond equivalent rate of 52-week Treasury bills auctioned at the final auction held prior to that June 1 plus 3.1 percentage points, but does not exceed 9 percent. (b) Capitalization. (1) The Secretary may add accrued interest to the borrower's unpaid principal balance. This increase in the principal balance of a loan is called ``capitalization.'' (2) For a Direct Unsubsidized Loan, the Secretary capitalizes the interest that accrues on the loan when the borrower enters repayment. (3) For a Direct Loan not eligible for interest subsidies during periods of deferment, and for all Direct Loans during periods of forbearance, the Secretary capitalizes the interest that has accrued on the loan upon the expiration of the deferment or forbearance. (4) Except as provided in paragraph (b)(3) of this section and in Sec. 685.208(g)(5), and Sec. 685.209(d)(3), the Secretary annually capitalizes interest payable by the borrower when the borrower is paying under the alternative or income contingent repayment plans and the borrower's scheduled payments do not cover the interest that has accrued on the loan. (5) The Secretary may capitalize interest payable by the borrower when the borrower defaults on the loan. (c) Loan fee for Direct Subsidized, Direct Unsubsidized, and Direct PLUS Loans. The Secretary-- (1) Charges a borrower a loan fee of four percent of the principal amount of the loan on a Direct Subsidized, Direct Unsubsidized, or Direct PLUS Loan; (2) Deducts the loan fee from the proceeds of the loan; (3) In the case of a loan disbursed in multiple installments, deducts a pro rated portion of the fee from each disbursement; and (4) Applies to a borrower's loan balance the portion of the loan fee previously deducted from the loan that is attributable to a disbursement of the loan that is repaid within 120 days of disbursement or that should have been repaid within that period by the school. (d) Late charge. (1) The Secretary may require the borrower to pay a late charge of up to six cents for each dollar of each installment or portion thereof that is late under the circumstances described in paragraph (d)(2) of this section. (2) The late charge may be assessed if the borrower fails to pay all or a portion of a required installment payment within 30 days after it is due. (e)(1) Collection charges before default. Notwithstanding any provision of State law, the Secretary may require that the borrower or any endorser pay costs incurred by the Secretary or the Secretary's agents in collecting installments not paid when due. These charges do not include routine collection costs associated with preparing letters or notices or with making personal contacts with the borrower (e.g., local and long-distance telephone calls). (2) Collection charges after default. If a borrower defaults on a Direct Loan, the Secretary assesses collection costs on the basis of 34 CFR 30.60.

(Authority: 20 U.S.C. 1087a et seq., 1091a)

Sec. 685.203 Loan limits.

(a) Direct Subsidized Loans. (1) In the case of an undergraduate student who has not successfully completed the first year of a program of undergraduate education, the total amount the student may borrow for any academic year of study under the Federal Direct Stafford/Ford Loan Program in combination with the Federal Stafford Loan Program may not exceed the following: (i) $2,625 for a program of study of at least a full academic year in length. (ii) $1,750 for a program of study of at least two-thirds but less than a full academic year in length. (iii) $875 for a program of study of at least one-third but less than two-thirds of an academic year in length. (2) In the case of an undergraduate student who has successfully completed the first year of an undergraduate program but has not successfully completed the second year of an undergraduate program, the total amount the student may borrow for any academic year of study under the Federal Direct Stafford/Ford Loan Program in combination with the Federal Stafford Loan Program may not exceed the following: (i) $3,500 for a program of study of at least a full academic year in length. (ii) If the student is enrolled in a program of study with less than a full academic year remaining, an amount that bears the same ratio to $3,500 as the number of semester, trimester, quarter, or clock hours for which the student enrolls bears to one academic year. (3) In the case of an undergraduate student who has successfully completed the first and second years of a program of study of undergraduate education but has not successfully completed the remainder of the program, or in the case of a student in a program who has an associate or baccalaureate degree which is required for admission into the program, the total amount the student may borrow for any academic year of study under the Federal Direct Stafford/Ford Loan Program in combination with the Federal Stafford Loan Program may not exceed the following: (i) $5,500 for a program of study of at least an academic year in length. (ii) For a student enrolled in a program of study with less than a full academic year remaining, an amount that bears the same ratio to $5,500 as the number of semester, trimester, quarter, or clock hours for which the student enrolls bears to one academic year. (4) In the case of a graduate or professional student, the total amount the student may borrow for any academic year of study under the Federal Direct Stafford/Ford Loan Program in combination with the Federal Stafford Loan Program may not exceed $8,500. (b) Direct Unsubsidized Loans. The total amount a student may borrow under any period of study for the Federal Direct Unsubsidized Loan Program and the Federal Unsubsidized Stafford/Ford Loan Program is the same as the amount determined under paragraph (a) of this section, less any amount received under the Federal Direct Stafford/Ford Loan Program or the Federal Stafford Loan Program. (c) Additional eligibility for Direct Unsubsidized Loans. (1)(i) An independent undergraduate student, graduate or professional student, and certain dependent undergraduate students may borrow amounts under the Federal Direct Unsubsidized Loan Program in addition to any amount borrowed under paragraph (b) of this section. (ii) In order for a dependent undergraduate student to receive this additional loan amount, the financial aid administrator must determine that the student's parent likely will be precluded by exceptional circumstances from borrowing under the Federal Direct PLUS Program or the Federal PLUS Program and the student's family is otherwise unable to provide the student's expected family contribution. The financial aid administrator shall base the determination on a review of the family financial information provided by the student and consideration of the student's debt burden and shall document the determination in the school's file. (iii) ``Exceptional circumstances'' under paragraph (c)(1)(ii) of this section include but are not limited to circumstances in which the student's parent receives only public assistance or disability benefits, the parent is incarcerated, the parent has an adverse credit history, or the parent's whereabouts are unknown. A parent's refusal to borrow a Federal PLUS Loan or Direct PLUS Loan does not constitute ``exceptional circumstances.'' (2) The additional amount that a student described in paragraph (c)(1)(i) of this section may borrow under the Federal Direct Unsubsidized Stafford/Ford Loan Program and the Federal Unsubsidized Stafford Loan Program for any academic year of study may not exceed the following: (i) In the case of a student who has not successfully completed the first and second year of a program of undergraduate education-- (A) $4,000 for enrollment in a program of study of at least a full academic year in length; (B) $2,500 for enrollment in a program of study of at least two- thirds but less than a full academic year in length; and (C) $1,500 for enrollment in a program of study of at least one- third but less than two-thirds of an academic year in length. (ii) In the case of a student who has successfully completed the first and second year of an undergraduate program but has not completed the remainder of the program of study-- (A) For a student enrolled in a program of study of at least a full academic year, $5,000; and (B) For a student enrolled in a program of study with less than a full academic year remaining, an amount that bears the same ratio to $5,000 as the number of semester, trimester, quarter, or clock hours for which the student enrolls bears to one academic year. (iii) In the case of a graduate or professional student, $10,000. (d) Federal Direct Stafford/Ford Loan Program and Federal Stafford Loan Program aggregate limits. The aggregate unpaid principal amount of all Direct Subsidized Loans and Federal Stafford Loans made to a student may not exceed the following: (1) $23,000 in the case of any student who has not successfully completed a program of study at the undergraduate level. (2) $65,500 in the case of a graduate or professional student, including loans for undergraduate study. (e) Aggregate limits for unsubsidized loans. The total amount of Direct Unsubsidized Loans, Federal Unsubsidized Stafford Loans, and Federal SLS Loans may not exceed the following: (1) For a dependent undergraduate student, $23,000 minus any Direct Subsidized Loan and Federal Stafford Loan amounts, unless the student qualifies under paragraph (c) of this section for additional eligibility or qualified for that additional eligibility under the Federal SLS Program. (2) For an independent undergraduate or a dependent undergraduate who qualifies for additional eligibility under paragraph (c) of this section or qualified for this additional eligibility under the Federal SLS Program, $46,000 minus any Direct Subsidized Loan and Federal Stafford Loan amounts. (3) For a graduate or professional student, $138,500 including any loans for undergraduate study, minus any Direct Subsidized Loan, Federal Stafford Loan, and Federal SLS Program loan amounts. (f) Direct PLUS Loans annual limit. The total amount of all Direct PLUS Loans that a parent or parents may borrow on behalf of each dependent student for any academic year of study may not exceed the cost of attendance minus other estimated financial assistance for that student. (g) Direct PLUS Loans aggregate limit. The total amount of all Direct PLUS Loans that a parent or parents may borrow on behalf of each dependent student for enrollment in an eligible program of study may not exceed the student's cost of attendance minus other estimated financial assistance for that student for the entire period of enrollment. (h) Loan limit period. The annual loan limits apply to an academic year. (i) Treatment of Direct Consolidation Loans and Federal Consolidation Loans. The percentage of the outstanding balance on Direct Consolidation Loans or Federal Consolidation Loans counted against a borrower's aggregate loan limits is calculated as follows: (1) For Direct Subsidized Loans, the percentage equals the percentage of the original amount of the Direct Consolidation Loan or Federal Consolidation Loan attributable to the Direct Subsidized and Federal Stafford Loans. (2) For Direct Unsubsidized Loans, the percentage equals the percentage of the original amount of the Direct Consolidation Loan or Federal Consolidation Loan attributable to the Direct Unsubsidized, Federal SLS, and Federal Unsubsidized Stafford Loans. (j) Maximum loan amounts. In no case may a Direct Subsidized, Direct Unsubsidized, or Direct PLUS Loan amount exceed the student's estimated cost of attendance for the period of enrollment for which the loan is intended, less-- (1) The student's estimated financial assistance for that period; and (2) In the case of a Direct Subsidized Loan, the borrower's expected family contribution for that period.

(Authority: 20 U.S.C. 1087a et seq.)

Sec. 685.204 Deferment.

(a)(1) A Direct Loan borrower whose loan is eligible for interest subsidies and who meets the requirements described in paragraph (b) of this section is eligible for a deferment during which periodic installments of principal and interest need not be paid. (2) A Direct Loan borrower whose loan is not eligible for interest subsidies and who meets the requirements described in paragraph (b) of this section is eligible for a deferment during which periodic installments of principal need not be paid but interest does accrue and is capitalized or paid by the borrower. (b) Except as provided in paragraph (d) of this section, a Direct Loan borrower is eligible for a deferment during any period during which the borrower meets any of the following requirements: (1)(i) The borrower-- (A) Is carrying at least one-half the normal full-time work load for the course of study that the borrower is pursuing, as determined by the eligible school the borrower is attending; (B) Is pursuing a course of study pursuant to a graduate fellowship program approved by the Secretary; or (C) Is pursuing a rehabilitation training program, approved by the Secretary, for individuals with disabilities; and (ii) The borrower is not serving in a medical internship or residency program, except for a residency program in dentistry. (2)(i) The borrower is seeking and unable to find full-time employment. (ii) For purposes of paragraph (b)(2)(i) of this section, the Secretary determines whether a borrower is eligible for a deferment due to the inability to find full-time employment using the standards and procedures set forth in 34 CFR 682.210(h) with references to the lender understood to mean the Secretary. (3)(i) The borrower has experienced or will experience an economic hardship. (ii) For purposes of paragraph (b)(3)(i) of this section, the Secretary determines whether a borrower is eligible for a deferment due to an economic hardship using the standards and procedures set forth in 34 CFR 682.210(s)(6) with references to the lender understood to mean the Secretary. (c) No deferment under paragraphs (b) (2) or (3) of this section may exceed three years. (d) If, at the time of application for a Direct Loan, a borrower has an outstanding balance of principal or interest owing on any FFEL Program loan that was made, insured, or guaranteed prior to July 1, 1993, the borrower is eligible for a deferment during-- (1) the periods described in paragraph (b) of this section; and (2) the periods described in 34 CFR 682.210(b), including those periods that apply to a ``new borrower'' as that term is defined in 34 CFR 682.210(b)(7).

(Authority: 20 U.S.C. 1087a et seq.)

Sec. 685.205 Forbearance.

(a) General. ``Forbearance'' means permitting the temporary cessation of payments, allowing an extension of time for making payments, or temporarily accepting smaller payments than previously scheduled. The borrower has the option to choose the form of forbearance. If payments of interest are forborne, they are capitalized. The Secretary grants forbearance if the borrower or endorser intends to repay the loan but requests forbearance and provides sufficient documentation to support this request, and-- (1) The Secretary determines that, due to poor health or other acceptable reasons, the borrower or endorser is currently unable to make scheduled payments; (2) The borrower's payments of principal are deferred under Sec. 685.204 and the Secretary does not subsidize the interest benefits on behalf of the borrower. (3) The borrower is in a medical or dental internship or residency that must be successfully completed before the borrower may begin professional practice or service, or the borrower is serving in a medical or dental internship or residency program leading to a degree or certificate awarded by an institution of higher education, a hospital, or a health care facility that offers postgraduate training; (4) The borrower is serving in a national service position for which the borrower or endorser is receiving a national service educational award under the National and Community Service Trust Act of 1993; (5) The borrower is eligible for loan forgiveness under the Federal Stafford Loan Forgiveness Demonstration Program, if the program is funded, for performing the type of service described in Sec. 682.215(b); or (6) For not more than three years during which the borrower or endorser-- (i) Is currently obligated to make payments on loans under title IV of the Act; and (ii) The sum of these payments each month (or a proportional share if the payments are due less frequently than monthly) is equal to or greater than 20 percent of the borrower's or endorser's total monthly gross income. (b) Administrative forbearance. In certain circumstances, the Secretary grants forbearance without requiring documentation from the borrower. These circumstances include but are not limited to-- (1) A properly granted period of deferment for which the Secretary learns the borrower did not qualify; (2) The period for which payments are overdue at the beginning of an authorized deferment period; (3) The period beginning when the borrower entered repayment until the first payment due date was established; (4) The period prior to a borrower's filing of a bankruptcy petition; (5) A period after the Secretary receives reliable information indicating that the borrower (or the student in the case of a Direct PLUS Loan) has died, or the borrower has become totally and permanently disabled, until the Secretary receives documentation of death or total and permanent disability; (6) Periods necessary for the Secretary to determine the borrower's eligibility for discharge-- (i) Under Sec. 685.213; (ii) Under Sec. 685.214; or (iii) Due to the borrower's or endorser's (if applicable) bankruptcy; (7) A period of up to three years in cases where the effect of a variable interest rate on a fixed-amount or graduated repayment schedule causes the extension of the maximum repayment term; or (8) A period during which the Secretary has authorized forbearance due to a national military mobilization or other local or national emergency. (c) Period of forbearance. (1) The Secretary grants forbearance for a period of up to one year. (2) The forbearance is renewable, upon request of the borrower, for the duration of the period in which the borrower meets the condition required for the forbearance.

(Authority: 20 U.S.C. 1087a et seq.)

Sec. 685.206 Borrower responsibilities and defenses.

(a) The borrower shall give the school the following information as part of the origination process for a Direct Subsidized, Direct Unsubsidized, or Direct PLUS Loan: (1) A statement, as described in 34 CFR Part 668, that the loan will be used for the cost of the student's attendance. (2) Information demonstrating that the borrower is eligible for the loan. (3) Information concerning the outstanding FFEL Program and Direct Loan Program loans of the borrower and, for a parent borrower, of the student, including any Federal Consolidation Loan or Direct Consolidation Loan. (4) A statement authorizing the school to release to the Secretary information relevant to the student's eligibility to borrow or to have a parent borrow on the student's behalf (e.g., the student's enrollment status, financial assistance, and employment records). (b)(1) The borrower shall promptly notify the Secretary of any change of name, address, student status to less than half-time, employer, or employer's address; and (2) The borrower shall promptly notify the school of any change in address during enrollment. (c) Borrower defenses. (1) In any proceeding to collect on a Direct Loan, the borrower may assert as a defense against repayment, any act or omission of the school attended by the student that would give rise to a cause of action against the school under applicable State law. These proceedings include, but are not limited to, the following: (i) Tax refund offset proceedings under 34 CFR 30.33. (ii) Wage garnishment proceedings under section 488A of the Act. (iii) Salary offset proceedings for Federal employees under 34 CFR Part 31. (iv) Credit bureau reporting proceedings under 31 U.S.C. 3711(f). (2) If the borrower's defense against repayment is successful, the Secretary notifies the borrower that the borrower is relieved of the obligation to repay all or part of the loan and associated costs and fees that the borrower would otherwise be obligated to pay. The Secretary affords the borrower such further relief as the Secretary determines is appropriate under the circumstances. Further relief may include, but is not limited to, the following: (i) Reimbursing the borrower for amounts paid toward the loan voluntarily or through enforced collection. (ii) Determining that the borrower is not in default on the loan and is eligible to receive assistance under title IV of the Act. (iii) Updating reports to credit bureaus to which the Secretary previously made adverse credit reports with regard to the borrower's Direct Loan. (3) The Secretary may initiate an appropriate proceeding to require the school whose act or omission resulted in the borrower's successful defense against repayment of a Direct Loan to pay to the Secretary the amount of the loan to which the defense applies. However, the Secretary does not initiate such a proceeding after the period for the retention of records described in Sec. 685.309(c) unless the school received actual notice of the claim during that period.

(Authority: 20 U.S.C. 1087a et seq.)

Sec. 685.207 Obligation to repay.

(a) Obligation of repayment in general. (1) A borrower is obligated to repay the full amount of a Direct Loan, including the principal balance, fees, any collection costs charged under Sec. 685.202(e), and any interest not subsidized by the Secretary, unless the borrower is relieved of the obligation to repay as provided in this part. (2) The borrower's repayment of a Direct Loan may also be subject to the deferment provisions in Sec. 685.204, the forbearance provisions in Sec. 685.205, and the discharge provisions in Sec. 685.212. (b) Direct Subsidized Loan repayment. (1) During the period in which a borrower is enrolled at an eligible school on at least a half- time basis, the borrower is in an ``in-school'' period and is not required to make payments on a Direct Subsidized Loan unless-- (i) The loan entered repayment before the in-school period began; and (ii) The borrower has not been granted a deferment under Sec. 685.204. (2)(i) When a borrower ceases to be enrolled at an eligible school on at least a half-time basis, a six-month grace period begins, unless the grace period has been previously exhausted. (ii) During a grace period, the borrower is not required to make payments on a Direct Subsidized Loan. (3) A borrower is not obligated to pay interest on a Direct Subsidized Loan for in-school or grace periods unless the borrower is required to make payments on the loan during those periods under paragraph (b)(1) of this section. (4) The repayment period for a Direct Subsidized Loan begins the day after the grace period ends. A borrower is obligated to repay the loan under paragraph (a) of this section during the repayment period. (c) Direct Unsubsidized Loan repayment. (1) During the period in which a borrower is enrolled at an eligible school on at least a half- time basis, the borrower is in an ``in-school'' period and is not required to make payments of principal on a Direct Unsubsidized Loan unless-- (i) The loan entered repayment before the in-school period began; and (ii) The borrower has not been granted a deferment under Sec. 685.204. (2)(i) When a borrower ceases to be enrolled at an eligible school on at least a half-time basis, a six-month grace period begins, unless the grace period has been previously exhausted. (ii) During a grace period, the borrower is not required to make any principal payments on a Direct Unsubsidized Loan. (3) A borrower is responsible for the interest that accrues on a Direct Unsubsidized Loan during in-school and grace periods. Interest begins to accrue on the day the first installment is disbursed. Interest that accrues may be capitalized or paid by the borrower. (4) The repayment period for a Direct Unsubsidized Loan begins the day after the grace period ends. A borrower is obligated to repay the loan under paragraph (a) of this section during the repayment period. (d) Direct PLUS Loan repayment. The repayment period for a Direct PLUS Loan begins on the day the loan is fully disbursed. Interest begins to accrue on the day the first installment is disbursed. A borrower is obligated to repay the loan under paragraph (a) of this section during the repayment period. (e) Direct Consolidation Loan repayment. (1) Except as provided in paragraphs (e)(2) and (e)(3) of this section, the repayment period for a Direct Consolidation Loan begins and interest begins to accrue on the day the loan is made. The borrower is obligated to repay the loan under paragraph (a) of this section during the repayment period. (2) A borrower who obtains a Direct Subsidized Consolidation Loan during an in-school period will be subject to the repayment provisions in paragraph (b) of this section. (3) A borrower who obtains a Direct Unsubsidized Consolidation Loan during an in-school period will be subject to the repayment provisions in paragraph (c) of this section. (f) Determining the date on which the grace period begins for a borrower in a correspondence program. For a borrower of a Direct Subsidized or Direct Unsubsidized Loan who is a correspondence student, the grace period begins on the earliest of the date-- (1) The borrower completes the program; (2) The borrower falls 60 days behind the due date for submission of a scheduled assignment, according to the schedule required in Sec. 685.302. However, a school may grant the borrower one restoration to in-school status if the borrower fails to submit a lesson within this 60-day period after the due date for submission of a particular assignment if, within the 60-day period, the borrower declares, in writing, an intention to continue in the program and an understanding that the required lessons must be submitted on time; or (3) That is 60 days following the latest allowable date established by the school for completing the program under the schedule required under Sec. 685.302.

(Authority: 20 U.S.C. 1087a et seq.)

Sec. 685.208 Repayment plans.

(a) General. (1) A borrower may repay a Direct Subsidized Loan, a Direct Unsubsidized Loan, a Direct Subsidized Consolidation Loan, or a Direct Unsubsidized Consolidation Loan under the standard repayment plan, the extended repayment plan, the graduated repayment plan, or the income contingent repayment plan. (2) A borrower may repay a Direct PLUS Loan or a Direct PLUS Consolidation Loan under the standard repayment plan, the extended repayment plan, or the graduated repayment plan. (3) The Secretary may provide an alternative repayment plan in accordance with paragraph (g) of this section. (4) All Direct Loans obtained by one borrower must be repaid together under the same repayment plan, except that a borrower of a Direct PLUS Loan or a Direct PLUS Consolidation Loan may repay the Direct PLUS Loan or the Direct PLUS Consolidation Loan separately from other Direct Loans obtained by that borrower. (b) Standard repayment plan. (1) Under the standard repayment plan, a borrower shall repay a loan in full within ten years from the date the loan entered repayment by making fixed monthly payments. (2) Periods of authorized deferment or forbearance are not included in the ten-year repayment period. (3) A borrower's payments under the standard repayment plan are at least $50 per month, except that a borrower's final payment may be less than $50. (4) The number of payments or the fixed monthly repayment amount may be adjusted to reflect changes in the variable interest rate identified in Sec. 685.202(a). (c) Extended repayment plan. (1) Under the extended repayment plan, a borrower shall repay a loan in full by making fixed monthly payments within an extended period of time that varies with the total amount of the borrower's loans, as described in paragraph (e) of this section. (2) Periods of deferment and forbearance are not included in the number of years of repayment. (3) A borrower makes fixed monthly payments of at least $50, except that a borrower's final payment may be less than $50. (4) The number of payments or the fixed monthly repayment amount may be adjusted to reflect changes in the variable interest rate identified in Sec. 685.202(a). (d) Graduated repayment plan. (1) Under the graduated repayment plan, a borrower shall repay a loan in full by making payments at two or more levels within a period of time that varies with the total amount of the borrower's loans, as described in paragraph (e) of this section. (2) Periods of deferment and forbearance are not included in the number of years of repayment. (3) The number of payments or the monthly repayment amount may be adjusted to reflect changes in the variable interest rate identified in Sec. 685.202(a). (4) No scheduled payment under the graduated repayment plan may be less than the amount of interest accrued on the loan between monthly payments, less than 50 percent of the payment amount that would be required under the standard repayment plan, or more than 150 percent of the payment amount that would be required under the standard repayment plan. (e) Repayment period for the extended and graduated plans. Under the extended and graduated repayment plans, if the total amount of the borrower's Direct Loans is-- (1) Less than $10,000, the borrower shall repay the loans within 12 years of entering repayment; (2) Greater than or equal to $10,000 but less than $20,000, the borrower shall repay the loans within 15 years of entering repayment; (3) Greater than or equal to $20,000 but less than $40,000, the borrower shall repay the loans within 20 years of entering repayment; (4) Greater than or equal to $40,000 but less than $60,000, the borrower shall repay the loans within 25 years of entering repayment; and (5) Greater than or equal to $60,000, the borrower shall repay the loans within 30 years of entering repayment. (f) Income contingent repayment plan. (1) Under the income contingent repayment plan, a borrower's monthly repayment amount is generally based on the total amount of the borrower's (and, in some circumstances, the borrower's spouse's) Direct Loans, family size, and Adjusted Gross Income (AGI) reported by the borrower for the most recent year for which the Secretary has obtained income information. In the case of a married borrower who files a joint Federal income tax return, the borrower's AGI includes the income of the borrower's spouse. A borrower shall make payments on a loan until the loan is repaid in full or until the loan has been in repayment through the end of the income contingent repayment period. (2) The regulations in effect at the time a borrower's first Direct Loan enters repayment govern the method for determining the borrower's monthly repayment amount for all of the borrower's Direct Loans, unless-- (i) The Secretary amends the regulations relating to a borrower's monthly repayment amount under the income contingent repayment plan; and (ii) The borrower submits a written request that the amended regulations apply to the repayment of the borrower's Direct Loans. (3) Provisions governing the income contingent repayment plan are set out in Sec. 685.209. (g) Alternative repayment. (1) The Secretary may provide an alternative repayment plan for a borrower who demonstrates to the Secretary's satisfaction that the terms and conditions of the repayment plans specified in paragraphs (b) through (f) of this section are not adequate to accommodate the borrower's exceptional circumstances. (2) The Secretary may require a borrower to provide evidence of the borrower's exceptional circumstances before permitting the borrower to repay a loan under an alternative repayment plan. (3) If the Secretary agrees to permit a borrower to repay a loan under an alternative repayment plan, the Secretary notifies the borrower in writing of the terms of the plan. After the borrower receives notification of the terms of the plan, the borrower may accept the plan or choose another repayment plan. (4) A borrower shall repay a loan under an alternative repayment plan within 30 years of the date the loan entered repayment, not including periods of deferment and forbearance. (5) If the amount of a borrower's monthly payment under an alternative repayment plan is less than the accrued interest on the loan, the unpaid interest is capitalized until the outstanding principal amount is 10 percent greater than the original principal amount. After the outstanding principal amount is 10 percent greater than the original principal amount, interest continues to accrue but is not capitalized. For purposes of this paragraph, the original principal amount is the amount owed by the borrower when the borrower enters repayment.

(Authority: 20 U.S.C. 1087a et seq.)

Sec. 685.209 Income contingent repayment plan.

(a) General. (1) Under the income contingent repayment plan described in Sec. 685.208(f), a borrower may choose to repay under the formula described in paragraph (b) or may choose to have payments capped as described in paragraph (c). The amount calculated under paragraph (b) is called the ``formula amount,'' and the amount calculated under paragraph (c) is called the ``capped amount.'' (2) Borrowers may choose to repay either the formula amount or the capped amount when they enter repayment and may change between the options one time each year. (3) The Secretary may determine that special circumstances, such as a loss of employment by the borrower or the borrower's spouse, warrant an adjustment to the borrower's repayment obligations. (4) Married borrowers may repay their loans jointly if they meet the following requirements: (i) The spouses have both chosen either the formula amount or the capped amount. (ii) The spouses filed a joint Federal income tax return for the most recent year for which the Secretary has obtained income information. (iii) The spouses submit a written request to the Secretary that includes their names and social security numbers. (5) Examples of the calculation of monthly repayment amounts and tables that shows monthly repayment amounts for borrowers at various income and debt levels are included in Appendix A to this part. (b) Formula amount. (1) General. (i) If a borrower chooses to pay the formula amount under the income contingent repayment plan, the borrower generally makes monthly payments that are calculated using a percentage of the borrower's Adjusted Gross Income (AGI) called the ``payback rate.'' (ii) A borrower's monthly payment is equal to the borrower's AGI multiplied by the payback rate, divided by 12 months. However, a borrower's monthly payment is never larger than 20 percent of the borrower's discretionary income as defined in paragraph (b)(1)(iii) of this section, divided by 12 months. Additionally, if the monthly repayment amount is less than $15, the borrower is not required to make a payment. (iii) For purposes of this section, discretionary income is defined as a borrower's AGI minus the amount of the ``HHS Poverty Guideline for all States (except Alaska and Hawaii) and the District of Columbia'' as published by the United States Department of Health and Human Services on an annual basis.1 If a borrower provides documentation acceptable to the Secretary that the borrower has more than one person in the borrower's family, the Secretary applies the HHS Poverty Guideline for the borrower's family size. ---------------------------------------------------------------------------

\1\The HHS Poverty Guidelines are available from the Office of the Assistant Secretary for Planning and Evaluation, Department of Health and Human Services (HHS), Room 438F, Humphrey Building, 200 Independence Avenue, S.W., Washington, D.C. 20201. ---------------------------------------------------------------------------

(2) Payback rate. (i) A borrower's payback rate is based upon the borrower's Direct Loan debt when the borrower's first loan enters repayment and does not change unless the borrower obtains another Direct Loan or the borrower and the borrower's spouse obtain approval to repay their loans jointly under paragraph (a)(4) of this section. If the borrower obtains another Direct Loan, a new payback rate for all of the borrower's Direct Loans is calculated on the basis of the combined amounts of the loans when the last loan enters repayment. If the borrower and the borrower's spouse repay the loans jointly, the provisions under (b)(3) apply. (ii) If the total amount of a borrower's Direct Loans is less than or equal to $1,000, the payback rate is four percent. If the total amount of a borrower's Direct Loans is greater than $1,000, the payback rate is four percent plus an additional percent that begins at zero and increases at a rate of 0.2 percent for each additional $1,000 borrowed up to a maximum payback rate of 15 percent. (iii) More specifically, if the total amount of a borrower's Direct Loans is greater than $1,000, the payback rate is the lesser of 0.15 or the following: 0.04 + (debt - 1,000) (0.000002). (3) Exception for certain married borrowers. (i) The combined monthly payment amount for married borrowers who repay their loans jointly under paragraph (a)(4) of this section and who repay the formula amount is the total of the individual monthly payment amounts for each borrower calculated under paragraph (b)(1)(ii) of this section. (ii) The payback rate for each borrower is calculated separately on the basis of the amount of the outstanding debt on the borrower's Direct Loans at the time the borrower enters into joint repayment with the borrower's spouse. For purposes of this paragraph, the Secretary assumes that the AGI for each borrower is proportionate to the relative size of the borrower's individual debt. (iii) For purposes of determining whether a borrower's payment amount is larger than 20 percent of the borrower's discretionary income under paragraph (b)(1)(ii), a portion of the appropriate HHS Poverty Guideline for the borrowers' family size is applied to each borrower in proportion to the relative size of the individual borrower's debts. (iv) If the combined monthly repayment amount is less than $15, the borrowers are not required to make a payment. (v) The amount of a borrower's individual monthly payment is applied to the borrower's debt, except that the Secretary credits joint payments toward interest accrued on any loan before any payment is credited to principal. (c) Capped amount. (1) General If a borrower's monthly payments calculated under the formula amount as determined in paragraph (b) are greater than the capped amount calculated under paragraph (c)(2), the borrower may choose to repay the capped amount. (2) Calculation of the capped amount. (i) The capped amount is the amount that a borrower would repay monthly over 12 years using standard amortization or $15, whichever is greater. (ii) The amount of the cap is recalculated on an annual basis to include changes in the variable rate. (iii) After periods in which a borrower makes payments that are less than interest accrued on the loan, the amount of the cap is recalculated. If the new cap is larger than the existing cap, the new cap is applied. If the new cap is smaller than or equal to the existing cap, the existing cap is applied. (3) Exception to the calculation of the capped amount for certain married borrowers. The capped amount for married borrowers who repay jointly under paragraph (a)(4) of this section is the same amount as calculated under paragraph (c)(2) of this section except that the amount is based on the combined Direct Loan debt of the borrowers. (d) Other features of the income contingent repayment plan. (1) Alternative documentation of income. If a borrower's AGI is not available or if, in the Secretary's opinion, the borrower's reported AGI does not reasonably reflect the borrower's current income, the Secretary may use other documentation of income provided by the borrower to calculate the borrower's monthly repayment amount. (2) Repayment period. (i) The maximum repayment period under the income contingent repayment plan is 25 years. (ii) The repayment period includes periods in which the borrower makes payments under the standard repayment plan and under extended repayment plans in which payments are based on a repayment period that is up to 12 years. The repayment period does not include periods in which the borrower makes payments under the graduated and alternative repayment plans or periods of authorized deferment or forbearance. The repayment period also does not include periods in which the borrower makes payments under an extended repayment plan in which payments are based on a repayment period that is longer than 12 years. (iii) If a borrower repays more than one loan under the income contingent repayment plan, a separate repayment period for each loan begins when that loan enters repayment. (iv) If a borrower has not repaid a loan in full at the end of the 25-year repayment period under the income contingent repayment plan, the Secretary cancels the unpaid portion of the loan. (v) At the beginning of the repayment period under the income contingent repayment plan, a borrower shall make monthly payments of the amount of interest that accrues on the borrower's Direct Loans until the Secretary calculates the borrower's monthly repayment amount on the basis of the borrower's income. (3) Limitation on capitalization of interest. If the amount of a borrower's monthly payment is less than the accrued interest, the unpaid interest is capitalized until the outstanding principal amount is ten percent greater than the original principal amount. After the outstanding principal amount is ten percent greater than the original amount, interest continues to accrue but is not capitalized. For purposes of this paragraph, the original amount is the amount owed by the borrower when the borrower enters repayment. (4) Notification of terms and conditions. When a borrower elects or is required by the Secretary to repay a loan under the income contingent repayment plan, the Secretary notifies the borrower of the terms and conditions of the plan, including-- (i) That the Internal Revenue Service will disclose certain tax return information to the Secretary or the Secretary's agents; and (ii) That if the borrower believes that special circumstances warrant an adjustment to the borrower's repayment obligations, as described in Sec. 685.209(a)(3), the borrower may contact the Secretary and obtain the Secretary's determination as to whether an adjustment is appropriate. (5) Consent to disclosure of tax return information. (i) A borrower shall provide written consent to the disclosure of certain tax return information by the Internal Revenue Service (IRS) to agents of the Secretary for purposes of calculating a monthly repayment amount and servicing and collecting a loan under the income contingent repayment plan. The borrower shall provide consent by signing a consent form, developed consistent with 26 CFR 301.6103(c)-1 and provided to the borrower by the Secretary, and shall return the signed form to the Secretary. (ii) The borrower shall consent to disclosure of the borrower's taxpayer identity information as defined in 26 U.S.C. 6103(b)(6), tax filing status, and AGI. (iii) The borrower shall provide consent for a period of five years from the date the borrower signs the consent form. The Secretary provides the borrower a new consent form before that period expires. The IRS does not disclose tax return information after the IRS has processed a borrower's withdrawal of consent. (iv) The Secretary designates the standard repayment plan for a borrower who selects the income contingent repayment plan but-- (A) Fails to provide the required written consent; (B) Fails to renew written consent upon the expiration of the five- year period for consent; or (C) Withdraws consent and does not select another repayment plan. (v) If a borrower defaults and the Secretary designates the income contingent repayment plan for the borrower but the borrower fails to provide the required written consent, the Secretary mails a notice to the borrower establishing a repayment schedule for the borrower.

(Authority: 20 U.S.C. 1087a et seq.)

Sec. 685.210 Choice of repayment plan.

(a) Initial selection of a repayment plan. (1) Before a Direct Loan enters into repayment, the Secretary provides the borrower a description of the available repayment plans and requests the borrower to select one. A borrower may select a repayment plan before the loan enters repayment by notifying the Secretary of the borrower's selection in writing. (2) If a borrower does not select a repayment plan, the Secretary designates the standard repayment plan described in Sec. 685.208(b) for the borrower. (b) Changing repayment plans. (1) A borrower may change repayment plans at any time after the loan has entered repayment by notifying the Secretary. However, a borrower who is repaying a defaulted loan under the income contingent repayment plan under Sec. 685.211(c)(3)(ii) may not change to another repayment plan unless-- (i) The borrower was required to and did make a payment under the income contingent repayment plan in each of the prior three (3) months; or (ii) The borrower was not required to make payments but made three reasonable and affordable payments in each of the prior three months; and (iii) The borrower makes and the Secretary approves a request to change plans. (2)(i) A borrower may not change to a repayment plan that has a maximum repayment period of less than the number of years the loan has already been in repayment, except that a borrower may change to the income contingent repayment plan at any time. (ii) If a borrower changes plans, the repayment period is the period provided under the borrower's new repayment plan, calculated from the date the loan initially entered repayment. However, if a borrower changes to the income contingent repayment plan, the repayment period is calculated as described in Sec. 685.209(d)(2).

(Authority: 20 U.S.C. 1087a et seq.)

Sec. 685.211 Miscellaneous repayment provisions.

(a) Payment application and prepayment. (1) The Secretary applies any payment first to any accrued charges and collection costs, then to any outstanding interest, and then to outstanding principal. (2) A borrower may prepay all or part of a loan at any time without penalty. If a borrower pays any amount in excess of the amount due, the excess amount is a prepayment. (3) If a prepayment equals or exceeds the monthly repayment amount under the borrower's repayment plan, the Secretary-- (i) Applies the prepaid amount according to paragraph (a)(1) of this section; (ii) Advances the due date of the next payment unless the borrower requests otherwise; and (iii) Notifies the borrower of any revised due date for the next payment. (4) If a prepayment is less than the monthly repayment amount, the Secretary applies the prepayment according to paragraph (a)(1) of this section. (b) Refunds from schools. The Secretary applies any refund due to a borrower that the Secretary receives from a school under Sec. 668.22 against the borrower's outstanding principal and notifies the borrower of the refund. (c) Default. (1) Acceleration. If a borrower defaults on a Direct Loan, the entire unpaid balance and accrued interest are immediately due and payable. (2) Collection charges. If a borrower defaults on a Direct Loan, the Secretary assesses collection charges in accordance with Sec. 685.202(e). (3) Collection of a defaulted loan. (i) The Secretary may take any action authorized by law to collect a defaulted Direct Loan including, but not limited to, filing a lawsuit against the borrower, reporting the default to national credit bureaus, requesting the Internal Revenue Service to offset the borrower's Federal income tax refund, and garnishing the borrower's wages. (ii) If a borrower defaults on a Direct Subsidized Loan, a Direct Unsubsidized Loan, a Direct Unsubsidized Consolidation Loan or a Direct Subsidized Consolidation Loan, the Secretary may designate the income contingent repayment plan for the borrower. (d) Ineligible borrowers. (1) The Secretary determines that a borrower is ineligible if, at the time the loan was made and without the school's or the Secretary's knowledge, the borrower (or the student on whose behalf a parent borrowed) provided false or erroneous information or took actions that caused the borrower or student-- (i) To receive a loan for which the borrower is wholly or partially ineligible; (ii) To receive interest benefits for which the borrower was ineligible; or (iii) To receive loan proceeds for a period of enrollment for which the borrower was not eligible. (2) If the Secretary makes the determination described in paragraph (d)(1) of this section, the Secretary sends an ineligible borrower a demand letter that requires the borrower to repay some or all of a loan, as appropriate. The demand letter requires that within 30 days from the date the letter is mailed, the borrower repay any principal amount for which the borrower is ineligible and any accrued interest, including interest subsidized by the Secretary, through the previous quarter. (3) If a borrower fails to comply with the demand letter described in paragraph (d)(2) of this section, the borrower is in default on the entire loan. (4) A borrower may not consolidate a loan under Sec. 685.215 for which the borrower is wholly or partially ineligible. (e) Rehabilitation of defaulted loans. A defaulted Direct Loan is rehabilitated if the borrower makes 12 consecutive on-time, reasonable, and affordable monthly payments. The amount of such a payment is determined on the basis of the borrower's total financial circumstances. If a defaulted loan is rehabilitated, the Secretary instructs any credit bureau to which the default was reported to remove the default from the borrower's credit history.

(Authority: 20 U.S.C. 1087a et seq.)

Sec. 685.212 Discharge of a loan obligation.

(a) Death. If the Secretary receives acceptable documentation that a borrower (or the student on whose behalf a parent borrowed) has died, the Secretary discharges the obligation of the borrower and any endorser to make any further payments on the loan. (b) Total and permanent disability. If the Secretary receives acceptable documentation that a borrower has become totally and permanently disabled, the Secretary discharges the obligation of the borrower and any endorser to make any further payments on the loan. A borrower is not considered totally and permanently disabled based on a condition that existed at the time the borrower applied for the loan unless the borrower's condition substantially deteriorated after the loan was made so as to render the borrower totally and permanently disabled. (c) Bankruptcy. If a borrower's obligation to repay a loan is discharged in bankruptcy, the Secretary does not require the borrower or any endorser to make any further payments on the loan. (d) Closed schools. If a borrower meets the requirements in Sec. 685.213, the Secretary discharges the obligation of the borrower and any endorser to make any further payments on the loan. (e) False certification and unauthorized disbursement. If a borrower meets the requirements in Sec. 685.214, the Secretary discharges the obligation of the borrower and any endorser to make any further payments on the loan. (f) Payments received after eligibility for discharge. The Secretary returns to the sender, or, for a discharge based on death, the borrower's estate, those payments received after the requirements for discharge have been met. (g) Loan forgiveness demonstration program. If funds are appropriated for the loan forgiveness demonstration program authorized by section 428J of the Act, the Secretary follows the procedures and applies the standards in 34 CFR 682.215 for borrowers under the Direct Loan Program.

(Authority: 20 U.S.C. 1087a et seq.)

Sec. 685.213 Closed school discharge.

(a) General. (1) The Secretary discharges the borrower's (and any endorser's) obligation to repay a Direct Loan in accordance with the provisions of this section if the borrower (or the student on whose behalf a parent borrowed) did not complete the program of study for which the loan was made because the school at which the borrower (or student) was enrolled closed, as described in paragraph (c) of this section. (2) For purposes of this section-- (i) A school's closure date is the date that the school ceases to provide educational instruction in all programs, as determined by the Secretary; and (ii) ``School'' means a school's main campus or any location or branch of the main campus. (b) Relief pursuant to discharge. (1) Discharge under this section relieves the borrower of any past or present obligation to repay the loan and any accrued charges or collection costs with respect to the loan. (2) The discharge of a loan under this section qualifies the borrower for reimbursement of amounts paid voluntarily or through enforced collection on the loan. (3) The Secretary does not regard a borrower who has defaulted on a loan discharged under this section as in default on the loan after discharge, and such a borrower is eligible to receive assistance under programs authorized by title IV of the Act. (4) The Secretary reports the discharge of a loan under this section to all credit reporting agencies to which the Secretary previously reported the status of the loan. (c) Borrower qualification for discharge. In order to qualify for discharge of a loan under this section, a borrower shall submit to the Secretary a written request and sworn statement, and the factual assertions in the statement must be true. The statement need not be notarized but must be made by the borrower under penalty of perjury. In the statement, the borrower shall-- (1) State that the borrower (or the student on whose behalf a parent borrowed)-- (i) Received the proceeds of a loan to attend a school; (ii) Did not complete the program of study at that school because the school closed while the student was enrolled, or the student withdrew from the school not more than 90 days before the school closed (or longer in exceptional circumstances); and (iii) Did not complete the program of study through a teach-out at another school or by transferring academic credits or hours earned at the closed school to another school; (2) State whether the borrower (or student) has made a claim with respect to the school's closing with any third party, such as the holder of a performance bond or a tuition recovery program, and, if so, the amount of any payment received by the borrower (or student) or credited to the borrower's loan obligation; and (3) State that the borrower (or student)-- (i) Agrees to provide to the Secretary upon request other documentation reasonably available to the borrower that demonstrates that the borrower meets the qualifications for discharge under this section; and (ii) Agrees to cooperate with the Secretary in enforcement actions in accordance with paragraph (d) of this section and to transfer any right to recovery against a third party to the Secretary in accordance with paragraph (e) of this section. (d) Cooperation by borrower in enforcement actions. (1) In order to obtain a discharge under this section, a borrower shall cooperate with the Secretary in any judicial or administrative proceeding brought by the Secretary to recover amounts discharged or to take other enforcement action with respect to the conduct on which the discharge was based. At the request of the Secretary and upon the Secretary's tendering to the borrower the fees and costs that are customarily provided in litigation to reimburse witnesses, the borrower shall-- (i) Provide testimony regarding any representation made by the borrower to support a request for discharge; (ii) Produce any documents reasonably available to the borrower with respect to those representations; and (iii) If required by the Secretary, provide a sworn statement regarding those documents and representations. (2) The Secretary denies the request for a discharge or revokes the discharge of a borrower who-- (i) Fails to provide the testimony, documents, or a sworn statement required under paragraph (d)(1) of this section; or (ii) Provides testimony, documents, or a sworn statement that does not support the material representations made by the borrower to obtain the discharge. (e) Transfer to the Secretary of borrower's right of recovery against third parties. (1) Upon discharge under this section, the borrower is deemed to have assigned to and relinquished in favor of the Secretary any right to a loan refund (up to the amount discharged) that the borrower (or student) may have by contract or applicable law with respect to the loan or the enrollment agreement for the program for which the loan was received, against the school, its principals, its affiliates and their successors, its sureties, and any private fund, including the portion of a public fund that represents funds received from a private party. (2) The provisions of this section apply notwithstanding any provision of State law that would otherwise restrict transfer of those rights by the borrower (or student), limit or prevent a transferee from exercising those rights, or establish procedures or a scheme of distribution that would prejudice the Secretary's ability to recover on those rights. (3) Nothing in this section limits or forecloses the borrower's (or student's) right to pursue legal and equitable relief regarding disputes arising from matters unrelated to the discharged Direct Loan. (f) Discharge procedures. (1) After confirming the date of a school's closure, the Secretary identifies any Direct Loan borrower (or student on whose behalf a parent borrowed) who appears to have been enrolled at the school on the school closure date or to have withdrawn not more than 90 days prior to the closure date. (2) If the borrower's current address is known, the Secretary mails the borrower a discharge application and an explanation of the qualifications and procedures for obtaining a discharge. The Secretary also promptly suspends any efforts to collect from the borrower on any affected loan. The Secretary may continue to receive borrower payments. (3) If the borrower's current address is unknown, the Secretary attempts to locate the borrower and determines the borrower's potential eligibility for a discharge under this section by consulting with representatives of the closed school, the school's licensing agency, the school's accrediting agency, and other appropriate parties. If the Secretary learns the new address of a borrower, the Secretary mails to the borrower a discharge application and explanation and suspends collection, as described in paragraph (f)(2) of this section. (4) If a borrower fails to submit the written request and sworn statement described in paragraph (c) of this section within 60 days of the Secretary's mailing the discharge application, the Secretary resumes collection and grants forbearance of principal and interest for the period in which collection activity was suspended. The Secretary may capitalize any interest accrued and not paid during that period. (5) If the Secretary determines that a borrower who requests a discharge meets the qualifications for a discharge, the Secretary notifies the borrower in writing of that determination. (6) If the Secretary determines that a borrower who requests a discharge does not meet the qualifications for a discharge, the Secretary notifies that borrower in writing of that determination and the reasons for the determination.

(Authority: 20 U.S.C. 1087a et seq.)

Sec. 685.214 Discharge for false certification of student eligibility or unauthorized payment.

(a) Basis for discharge. (1) False certification. The Secretary discharges a borrower's (and any endorser's) obligation to repay a Direct Loan in accordance with the provisions of this section if a school falsely certifies the eligibility of the borrower (or the student on whose behalf a parent borrowed) to receive the loan. The Secretary considers a student's eligibility to borrow to have been falsely certified by the school if the school-- (i) Certified the student's eligibility for a Direct Loan on the basis of ability to benefit from its training and the student did not meet the eligibility requirements described in 34 CFR part 668 and section 484(d) of the Act, as applicable; (ii) Signed the borrower's name on the loan application or promissory note without the borrower's authorization; or (iii) Certified the eligibility of a student who, because of a physical or mental condition, age, criminal record, or other reason accepted by the Secretary, would not meet the requirements for employment (in the student's State of residence when the loan was certified) in the occupation for which the training program supported by the loan was intended. (2) Unauthorized payment. The Secretary discharges a borrower's (and any endorser's) obligation to repay a Direct Loan if the school, without the borrower's authorization, endorsed the borrower's loan check or signed the borrower's authorization for electronic funds transfer, unless the proceeds of the loan were delivered to the student or applied to charges owed by the student to the school. (b) Relief pursuant to discharge. (1) Discharge for false certification under paragraph (a)(1) of this section relieves the borrower of any past or present obligation to repay the loan and any accrued charges and collection costs with respect to the loan. (2) Discharge for unauthorized payment under paragraph (a)(2) of this section relieves the borrower of the obligation to repay the amount of the payment discharged. (3) The discharge under this section qualifies the borrower for reimbursement of amounts paid voluntarily or through enforced collection on the discharged loan or payment. (4) The Secretary does not regard a borrower who has defaulted on a loan discharged under this section as in default on the loan after discharge, and such a borrower is eligible to receive assistance under programs authorized by title IV of the Act. (5) The Secretary reports the discharge under this section to all credit reporting agencies to which the Secretary previously reported the status of the loan. (c) Borrower qualification for discharge. In order to qualify for discharge under this section, the borrower shall submit to the Secretary a written request and a sworn statement, and the factual assertions in the statement must be true. The statement need not be notarized but must be made by the borrower under penalty of perjury. In the statement, the borrower shall meet the requirements in paragraphs (c) (1) through (5) of this section. (1) Ability to benefit. In the case of a borrower requesting a discharge based on the school's defective testing of the student's ability to benefit, the borrower shall state that the borrower (or the student on whose behalf a parent borrowed)-- (i) Received a disbursement of a loan to attend a school; (ii) Received a Direct Loan at that school on the basis of an ability to benefit from the school's training and did not meet the eligibility requirements described in 34 CFR Part 668 and section 484(d) of the Act, as applicable; and (iii) Either-- (A) Withdrew from the school and did not find employment in the occupation for which the training program was intended; or (B) Completed the training program for which the loan was made, made reasonable attempts to obtain employment in the occupation for which the program was intended, and was not able to find employment in that occupation or obtained employment in that occupation only after receiving additional training that was not provided by the school that certified the loan. (2) Unauthorized loan. In the case of a borrower requesting a discharge because the school signed the borrower's name on the loan application or promissory note without the borrower's authorization, the borrower shall-- (i) State that he or she did not sign the document in question or authorize the school to do so; and (ii) Provide five different specimens of his or her signature, two of which must be within one year before or after the date of the contested signature. (3) Unauthorized payment. In the case of a borrower requesting a discharge because the school, without the borrower's authorization, endorsed the borrower's loan check or signed the borrower's authorization for electronic funds transfer, the borrower shall-- (i) State that he or she did not endorse the loan check or sign the authorization for electronic funds transfer or authorize the school to do so; (ii) Provide five different specimens of his or her signature, two of which must be within one year before or after the date of the contested signature; (iii) State that the proceeds of the contested disbursement were not delivered to the student or applied to charges owed by the student to the school. (4) Claim to third party. The borrower shall state whether the borrower (or student) has made a claim with respect to the school's false certification or unauthorized payment with any third party, such as the holder of a performance bond or a tuition recovery program, and, if so, the amount of any payment received by the borrower (or student) or credited to the borrower's loan obligation. (5) Cooperation with Secretary. The borrower shall state that the borrower (or student)-- (i) Agrees to provide to the Secretary upon request other documentation reasonably available to the borrower that demonstrates that the borrower meets the qualifications for discharge under this section; and (ii) Agrees to cooperate with the Secretary in enforcement actions as described in Sec. 685.213(d) and to transfer any right to recovery against a third party to the Secretary as described in Sec. 685.213(e). (d) Discharge procedures. (1) If the Secretary determines that a borrower's Direct Loan may be eligible for a discharge under this section, the Secretary mails the borrower a disclosure application and an explanation of the qualifications and procedures for obtaining a discharge. The Secretary also promptly suspends any efforts to collect from the borrower on any affected loan. The Secretary may continue to receive borrower payments. (2) If the borrower fails to submit the written request and sworn statement described in paragraph (c) of this section within 60 days of the Secretary's mailing the disclosure application, the Secretary resumes collection and grants forbearance of principal and interest for the period in which collection activity was suspended. The Secretary may capitalize any interest accrued and not paid during that period. (3) If the borrower submits the written request and sworn statement described in paragraph (c) of the section, the Secretary determines whether to grant a request for discharge under this section by reviewing the request and sworn statement in light of information available from the Secretary's records and from other sources, including guaranty agencies, State authorities, and cognizant accrediting associations. (4) If the Secretary determines that the borrower meets the applicable requirements for a discharge under paragraph (c) of this section, the Secretary notifies the borrower in writing of that determination. (5) If the Secretary determines that the borrower does not qualify for a discharge, the Secretary notifies the borrower in writing of that determination and the reasons for the determination.

(Authority: 20 U.S.C. 1087a et seq.)

Sec. 685.215 Consolidation.

(a) Direct Consolidation Loans. A borrower may consolidate one or more education loans made under certain Federal programs into one or more Direct Consolidation Loans. Loans consolidated into a Direct Consolidation Loan are discharged when the Direct Consolidation Loan is originated. (b) Loans eligible for consolidation. The following loans may be consolidated into a Direct Consolidation Loan: (1) Federal Stafford Loans. (2) Guaranteed Student Loans. (3) Federal Insured Student Loans (FISL). (4) Direct Subsidized Loans. (5) Direct Subsidized Consolidation Loans. (6) Federal Perkins Loans. (7) National Direct Student Loans (NDSL). (8) National Defense Student Loans (NDSL). (9) Federal PLUS Loans. (10) Parent Loans for Undergraduate Students (PLUS). (11) Direct PLUS Loans. (12) Direct PLUS Consolidation Loans. (13) Federal Unsubsidized Stafford Loans. (14) Federal Supplemental Loans for Students (SLS). (15) Federal Consolidation Loans. (16) Direct Unsubsidized Loans. (17) Direct Unsubsidized Consolidation Loans. (18) Auxiliary Loans to Assist Students (ALAS). (19) Health Professions Student Loans (HPSL). (20) Health Education Assistance Loans (HEAL). (21) Other loans made under subpart II of part A of title VII of the Public Health Service Act. (22) Loans made under subpart II of part B of title VIII of the Public Health Service Act. (c) Types of Direct Consolidation Loans. (1) The loans identified in paragraphs (b)(1) through (8) of this section may be consolidated into a Direct Subsidized Consolidation Loan. (2) The loans identified in paragraphs (b)(9) through (12) of this section may be consolidated into a Direct PLUS Consolidation Loan. (3) The loans identified in paragraphs (b)(13) through (22) of this section may be consolidated into a Direct Unsubsidized Consolidation Loan. In addition, Federal Consolidation Loans under (b)(15) of this section may be consolidated into a Direct Subsidized Consolidation Loan, if they are eligible for interest benefits during a deferment period under Section 428C(b)(4)(C) of the Act. (d) Eligibility for a Direct Consolidation Loan. (1) A borrower may obtain a Direct Consolidation Loan if, at the time the borrower applies for such a loan, the borrower meets the following requirements: (i) The borrower either-- (A) Has an outstanding balance on a Direct Loan; or (B) Has an outstanding balance on an FFEL loan and asserts either-- (1) That the borrower is unable to obtain an FFEL consolidation loan; or (2) That the borrower is unable to obtain an FFEL consolidation loan with income-sensitive repayment terms acceptable to the borrower and is eligible for the income contingent repayment plan under the Direct Loan Program. (ii) On the loans being consolidated, the borrower is-- (A) In an in-school period and seeks to consolidate loans made under both the FFEL Program and the Direct Loan Program; (B) In an in-school period at a school participating in the Direct Loan Program and seeks to consolidate loans made under the FFEL Program; (C) In a six-month grace period; (D) In a repayment period but not in default; (E) In default but has made satisfactory arrangements to repay the defaulted loan; or (F) In default but agrees to repay the consolidation loan under the income contingent repayment plan described in Sec. 685.208(f) and signs the consent form described in Sec. 685.209(d)(5). (iii) The borrower certifies that no other application to consolidate any of the borrower's loans listed in paragraph (b) of this section is pending with any other lender. (iv) The borrower agrees to notify the Secretary of any change in address. (v) In the case of a Direct PLUS Consolidation Loan-- (A) The borrower may not have an adverse credit history as defined in Sec. 685.200(b)(7)(ii); or (B) If the borrower has such an adverse credit history, the borrower shall obtain an endorser for the consolidation loan who does not have an adverse credit history or provide documentation satisfactory to the Secretary that extenuating circumstances relating to the borrower's credit history exist. (vi) In the case of a defaulted Direct Consolidation Loan, the borrower obtains the approval of the Secretary. (vii) In the case of a loan on which the holder has obtained a judgment, the borrower obtains the approval of the Secretary. (2) Two married borrowers may consolidate their loans together if they meet the following requirements: (i) At least one spouse meets the requirements of paragraphs (d)(1)(i) and (d)(1)(v) of this section. (ii) Both spouses meet the requirements of paragraphs (d)(1) (ii) through (d)(1)(iv) of this section. (iii) Each spouse agrees to be held jointly and severally liable for the repayment of the total amount of the consolidation loan and to repay the loan regardless of any change in marital status. (e) Application for a Direct Consolidation Loan. To obtain a Direct Consolidation Loan, a borrower or borrowers shall submit a completed application to the Secretary. A single application may be used for one or more consolidation loans. A borrower may add eligible loans to a Direct Consolidation Loan by submitting a request to the Secretary within 180 days after the date on which the Direct Consolidation Loan is originated. (f) Origination of a consolidation loan. (1)(i) The holder of a loan that a borrower wishes to consolidate into a Direct Loan shall complete and return the Secretary's request for certification of the amount owed within 10 business days of receipt or, if it is unable to provide the certification, provide to the Secretary a written explanation of the reasons for its inability to provide the certification. (ii) If the Secretary approves an application for a consolidation loan, the Secretary pays to each holder of a loan selected for consolidation the amount necessary to discharge the loan. (iii) For a loan that is in default, the Secretary limits collection costs that may be charged to the borrower to no more than those authorized under the FFEL Program and may impose reasonable limits on collection costs paid to the holder. (2) Upon receipt of the proceeds of a Direct Consolidation Loan, the holder of a consolidated loan shall promptly apply the proceeds to fully discharge the borrower's obligation on the consolidated loan. The holder of a consolidated loan shall notify the borrower that the loan has been paid in full. (3) The principal balance of a Direct Consolidation Loan is equal to the sum of the amounts paid to the holders of the consolidated loans. (4) If the amount paid by the Secretary to the holder of a consolidated loan exceeds the amount needed to discharge that loan, the holder of the consolidated loan shall promptly refund the excess amount to the Secretary to be credited against the outstanding balance of the Direct Consolidation Loan. (5) If the amount paid by the Secretary to the holder of the consolidated loan is insufficient to discharge that loan, the holder shall notify the Secretary in writing of the remaining amount due on the loan. The Secretary promptly pays the remaining amount due. (g) Interest rate. The interest rate on a Direct Subsidized Consolidation Loan or a Direct Unsubsidized Consolidation Loan is the rate established for Direct Subsidized Loans and Direct Unsubsidized Loans under Sec. 685.202(a)(1). The interest rate on a Direct PLUS Consolidation Loan is the rate established for Direct PLUS Loans under Sec. 685.202(a)(2). (h) Repayment plans. A borrower may repay a Direct Consolidation Loan under any of the repayment plans described in Sec. 685.208, except that-- (1) A borrower may not repay a Direct PLUS Consolidation Loan under the income contingent repayment plan; and (2) A borrower who became eligible to consolidate a defaulted loan under paragraph (d)(1)(ii)(E) of this section shall repay the consolidation loan under the income contingent repayment plan unless-- (i) The borrower was required to and did make a payment under the income contingent repayment plan in each of the prior three (3) months; or (ii) The borrower was not required to make payments but made three reasonable and affordable payments in each of the prior three (3) months; and (iii) The borrower makes and the Secretary approves a request to change plans. (i) Repayment period. (1) Except as noted in paragraph (i)(4) of this section, the repayment period for a Direct Consolidation Loan begins on the day the loan is disbursed. (2) Under the extended or graduated repayment plan, the Secretary determines the repayment period under Sec. 685.208(e) on the basis of the outstanding balances on all of the borrower's loans that are eligible for consolidation and the balances on other education loans except as provided in paragraph (i)(3) of this section. (3)(i) The total amount of outstanding balances on the other education loans used to determine the repayment period under the graduated or extended repayment plan may not exceed the amount of the Direct Consolidation Loan. (ii) The borrower may not be in default on the other education loan unless the borrower has made satisfactory repayment arrangements with the holder of the loan. (iii) The lender of the other educational loan may not be an individual. (4) A Direct Consolidation Loan receives a grace period if it includes a Direct Loan or FFEL Program loan for which the borrower is in an in-school period at the time of consolidation. The repayment period begins the day after the grace period ends. (j) Repayment schedule. (1) The Secretary provides a borrower of a Direct Consolidation Loan a repayment schedule before the borrower's first payment is due. The repayment schedule identifies the borrower's monthly repayment amount under the repayment plan selected. (2) If a borrower adds an eligible loan to the consolidation loan under paragraph (e) of this section, the Secretary makes appropriate adjustments to the borrower's monthly repayment amount and repayment period. (k) Refunds received from schools. If a lender receives a refund from a school on a loan that has been consolidated into a Direct Consolidation Loan, the lender shall transmit the refund and an explanation of the source of the refund to the Secretary within 30 days of receipt. (l) Special provisions for joint consolidation loans. The provisions of paragraphs (l)(1) through (3) of this section apply to a Direct Consolidation Loan obtained by two married borrowers. (1) Deferment. To obtain a deferment on a joint Direct Consolidation Loan under Sec. 685.204, both borrowers shall meet the requirements of that section. (2) Forbearance. To obtain forbearance on a joint Direct Consolidation Loan under Sec. 685.205, both borrowers shall meet the requirements of that section. (3) Discharge. (i) To obtain a discharge of a joint Direct Consolidation Loan under Sec. 685.212, each borrower shall meet the requirements for one of the types of discharge described in that section. (ii) If a borrower meets the requirements for discharge under Sec. 685.212(d) or (e) on a loan that was consolidated into a joint Direct Consolidation Loan and the borrower's spouse does not meet the requirements for any type of discharge described in Sec. 685.212, the Secretary discharges a portion of the consolidation loan equal to the amount of the loan that would have been eligible for discharge under the provisions of Sec. 685.212(d) or (e), as applicable.

(Authority: 20 U.S.C. 1078-8, 1087a et seq.)

Subpart C--Requirements, Standards, and Payments for Direct Loan Program Schools

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

(a) General. (1) Participation of a school in the Direct Loan Program means that eligible students at the school may receive Direct Loans. To participate in the Direct Loan Program, a school shall-- (i) Demonstrate to the satisfaction of the Secretary that the school meets the requirements for eligibility under the Act and applicable regulations; and (ii) Enter into a written program participation agreement with the Secretary. (2) The chief executive officer of the school shall sign the program participation agreement on behalf of the school. (b) Program participation agreement. In the program participation agreement, the school shall promise to comply with the Act and applicable regulations and shall agree to-- (1) Identify eligible students who seek student financial assistance at the institution in accordance with section 484 of the Act; (2) Estimate the need of each of these students as required by part F of the Act for an academic year. For purposes of estimating need, a Direct Unsubsidized Loan, a Direct PLUS Loan, or any loan obtained under any State-sponsored or private loan program may be used to offset the expected family contribution of the student for that year; (3) Certify that the amount of the loan for any student under part D of the Act is not in excess of the annual limit applicable for that loan program and that the amount of the loan, in combination with previous loans received by the borrower, is not in excess of the aggregate limit for that loan program; (4) Set forth a schedule for disbursement of the proceeds of the loan in installments, consistent with the requirements of section 428G of the Act; (5) Provide timely and accurate information to the Secretary for the servicing and collecting of loans-- (i) Concerning the status of student borrowers (and students on whose behalf parents borrow) while these students are in attendance at the school; (ii) Upon request by the Secretary, concerning any new information of which the school becomes aware for these students (or their parents) after the student leaves the school; and (iii) Concerning student eligibility and need, for the alternative origination of loans to eligible students and parents in accordance with part D of the Act; (6) Provide assurances that the school will comply with requirements established by the Secretary relating to student loan information with respect to loans made under the Direct Loan Program; (7) Provide that the school will accept responsibility and financial liability stemming from its failure to perform its functions pursuant to the agreement; (8) Provide that eligible students at the school and their parents may participate in the programs under part B of the Act at the discretion of the Secretary for the period during which the school participates in the Direct Loan Program under part D of the Act, except that a student may not receive loans under both part D of the Act and part B of the Act for the same period of enrollment and a parent (borrowing for the same student) may not receive loans under both part D of the Act and part B of the Act for the same period of enrollment; (9) Provide for the implementation of a quality assurance system, as established by the Secretary and developed in consultation with the school, to ensure that the school is complying with program requirements and meeting program objectives; (10) Provide that the school will not charge any fees of any kind, however described, to student or parent borrowers for origination activities or the provision of any information necessary for a student or parent to receive a loan under part D of the Act or any benefits associated with such a loan; and (11) Comply with other provisions that the Secretary determines are necessary to protect the interests of the United States and to promote the purposes of part D of the Act. (c) Origination. (1) If a school or consortium originates loans in the Direct Loan Program, it shall enter into a supplemental agreement that-- (i) Provides that the school or consortium will originate loans to eligible students and parents in accordance with part D of the Act; and (ii) Provides that the note or evidence of obligation on the loan is the property of the Secretary. (2) The chief executive officer of the school shall sign the supplemental agreement on behalf of the school.

(Authority: 20 U.S.C. 1087a et seq., 1094)

Sec. 685.301 Certification of a loan by a Direct Loan Program school.

(a) Determining eligibility and loan amount. (1) A school participating in the Direct Loan Program shall ensure that any information it provides to the Secretary in connection with loan origination is complete and accurate. Except as provided in 34 CFR Part 668, subpart E, a school may rely in good faith upon statements made in the application by the student. (2) A school shall provide to the Secretary borrower information that includes but is not limited to-- (i) The borrower's eligibility for a loan, as determined in accordance with Sec. 685.200 and Sec. 685.203; (ii) The student's loan amount; and (iii) The anticipated and actual disbursement date or dates and disbursement amounts of the loan proceeds. (3) A school may not certify a Direct Subsidized, Direct Unsubsidized, or Direct PLUS Loan, or a combination of loans, for an amount that-- (i) The school has reason to know would result in the borrower exceeding the annual or maximum loan amounts in Sec. 685.203; or (ii) Exceeds the student's estimated cost of attendance less-- (A) The student's estimated financial assistance for that period; and (B) In the case of a Direct Subsidized Loan, the borrower's expected family contribution for that period. (4)(i) A school determines a Direct Subsidized or Direct Unsubsidized Loan amount in accordance with Sec. 685.203 and the definitions in 34 CFR 668.2 for the proration of loan amounts required for undergraduate students. (ii) When prorating a loan amount for a student enrolled in a program of study with less than a full academic year remaining, the school need not recalculate the amount of the loan if the number of hours for which an eligible student is enrolled changes after the school certifies the loan. (5) A school may refuse to certify a Direct Subsidized, Direct Unsubsidized, or Direct PLUS Loan or may reduce the borrower's determination of need for the loan if the reason for that action is documented and provided to the student in writing, and if-- (i) The determination is made on a case-by-case basis; (ii) The documentation supporting the determination is retained in the student's file; and (iii) The school does not engage in any pattern or practice that results in a denial of a borrower's access to Direct Loans because of the borrower's race, gender, color, religion, national origin, age, disability status, or income. (6) A school may not assess a fee for the completion or certification of any Direct Loan Program forms or information. (b) Determining disbursement dates and amounts. (1) Before disbursing a loan, a school that originates loans shall determine that all information required by the loan application and promissory note has been provided by the borrower and, if applicable, the student. (2) Except as provided in paragraph (b)(3) of this section, a school shall establish disbursement dates for any Direct Loan made for a period of enrollment as follows: (i) Except as provided in paragraph (b)(2)(iv) of this section, disbursements must be in two or more installments. (ii) No installment may exceed one-half the loan. (iii) At least one-half of the loan period must elapse before the second installment is disbursed except as necessary to permit the second installment to be disbursed at the beginning of the next semester, quarter, or similar division of the loan period. (iv) If at least one-half of the loan period has elapsed when the first disbursement is made, the loan may be disbursed in a single installment. (3) A school that is not in a State is not required to establish disbursement dates under paragraph (b)(2) of this section. (c) Promissory note handling. (1) The Secretary provides promissory notes for use in the Direct Loan Program. A school may not modify, or make any additions to, the promissory note without the Secretary's prior written approval. (2) A school that originates a loan shall provide to the Secretary an executed, legally enforceable promissory note as proof of the borrower's indebtedness.

(Authority: 20 U.S.C. 1087a et seq.)

Sec. 685.302 Schedule requirements for courses of study by correspondence.

(a) This section contains requirements relating to the enrollment status of students in schools that offer programs of study by correspondence. (b) A school that offers a course of study by correspondence shall establish a schedule for submission of lessons by its students and provide it to a prospective student prior to the student's enrollment. (c) The school shall include in its schedule-- (1) A due date for each lesson in the course; (2) A description of the options, if any, available to the student for altering the sequence of lesson submissions from the sequence in which they are otherwise required to be submitted; (3) The date by which the course is to be completed; and (4) The date by which any resident training must begin, the location of any resident training, and the period of time within which that resident training must be completed.

(Authority: 20 U.S.C. 1087a et seq.)

Sec. 685.303 Processing loan proceeds.

(a) Purpose. This section establishes rules governing a school's processing of a borrower's Direct Subsidized, Direct Unsubsidized, or Direct PLUS Loan proceeds. The school shall also comply with any rules for processing loan proceeds contained in 34 CFR Part 668. (b) General. (1)(i) A school that initiates the drawdown of funds. A school may not disburse loan proceeds to a borrower unless the school has obtained an executed, legally enforceable promissory note from the borrower. (ii) A school that does not initiate the drawdown of funds. A school may disburse loan proceeds only to a borrower for whom the school has received funds from the Secretary. (2)(i) Except in the case of a late disbursement under paragraph (d) of this section, or as provided in paragraph (b)(2)(iii) of this section, a school may disburse loan proceeds only to a student whom the school determines has continuously maintained eligibility in accordance with the provisions of Sec. 685.200 from the beginning of the loan period described in the promissory note. (ii) In the event a student delays attending school for a period of time, the school may consider that student to have maintained eligibility for the loan from the first day of the period of enrollment. However, the school must comply with the requirements under paragraph (b)(3) of this section. (iii) If, after a school makes the first disbursement to a borrower, the student becomes ineligible due solely to the school's loss of eligibility to participate in the title IV programs or the Direct Loan Program, the school may make subsequent disbursements to the borrower as permitted by 34 CFR Part 668. (iv) If, prior to making any disbursement to a borrower, the student temporarily ceases to be enrolled on at least a half-time basis, the school may make a disbursement and any subsequent disbursement to the student if the school determines and documents in the student's file-- (A) That the student has resumed enrollment on at least a half-time basis; (B) The student's revised cost of attendance; and (C) That the student continues to qualify for the entire amount of the loan, notwithstanding any reduction in the student's cost of attendance caused by the student's temporary cessation of enrollment on at least a half-time basis. (3) If a registered student withdraws or is expelled prior to the first day of classes of the period of enrollment for which the loan is made, or fails to attend school during that period, or if the school is unable for any other reason to document that the student attended school during that period, the school shall notify the Secretary, within 30 days of the date described in Sec. 685.305(a), of the student's withdrawal, expulsion, or failure to attend school, as applicable, and return to the Secretary-- (i) Any loan proceeds credited by the school to the student's account; and (ii) The amount of payments made by the student to the school, to the extent that they do not exceed the amount of any loan proceeds disbursed by the school to the student. (4) If a student is enrolled in the first year of an undergraduate program of study and has not previously received a Federal Stafford, Federal Supplemental Loans for Students, Direct Subsidized, or Direct Unsubsidized Loan, a school may not disburse the proceeds of a Direct Subsidized or Direct Unsubsidized Loan until 30 days after the first day of the student's program of study. (c) Processing of the proceeds of a Direct Loan. Schools shall follow the procedures for disbursing funds in 34 CFR 668.165. (d) Late disbursement. (1) For purposes of this paragraph, a disbursement is late if the school delivers loan proceeds-- (i) After the loan period; or (ii) Before the end of the loan period but after the student ceased to be enrolled at the school on at least a half-time basis. (2) Except as provided in paragraph (d)(4) of this section, a school may not make any late disbursement beyond the 60th day after the applicable condition in paragraph (d)(1) of this section. (3) Notwithstanding paragraph (d)(4) of this section, a school may not make-- (i) A late subsequent disbursement of a Direct Subsidized or Direct Unsubsidized Loan to a borrower who has ceased to be enrolled on at least a half-time basis unless the borrower has graduated or successfully completed the period of enrollment for which the loan was intended; or (ii) Any late disbursement that, under 34 CFR Part 668, is considered to be awarded for a period in which the student was not enrolled on at least a half-time basis at the school. (4) In exceptional circumstances, a school may make a disbursement within 30 days after the period described in (d)(2) of this section. If it does so, the school shall document the exceptional circumstances in the student's file. (e) Treatment of excess loan proceeds. Before the disbursement of any Direct Subsidized or Direct Unsubsidized Loan proceeds, if a school learns that the borrower will receive or has received financial aid for the period of enrollment for which the loan was intended that exceeds the amount of assistance for which the student is eligible, the school shall reduce or eliminate the overaward by either-- (1) Using the student's Direct Unsubsidized, Direct PLUS, or State- sponsored or another non-Federal loan to cover the expected family contribution, if not already done; or (2) Reducing one or more subsequent disbursements to eliminate the overaward.

Sec. 685.304 Counseling borrowers.

(a) Initial counseling. (1) Except as provided in paragraph (a)(5) of this section, a school shall conduct initial counseling prior to making the first disbursement of the proceeds of a Direct Subsidized or Direct Unsubsidized Loan to a borrower unless-- (i) The borrower is enrolled in a correspondence program or a study-abroad program approved for credit at the home school; or (ii) The borrower has received a prior Direct Subsidized, Direct Unsubsidized, Federal Stafford, Federal Unsubsidized Stafford, or Federal SLS Loan. (2) The counseling must be in person, by audiovisual presentation, or by computer-assisted technology. In each case, the school shall ensure that an individual with knowledge of the title IV programs is reasonably available shortly after the counseling to answer the borrower's questions regarding those programs. In the case of a student enrolled in a correspondence program or a study-abroad program approved for credit at the home school, the school shall provide the borrower with written counseling materials by mail prior to disbursing the loan proceeds. (3) In conducting the initial counseling, the school shall-- (i) Emphasize to the borrower the seriousness and importance of the repayment obligation the borrower is assuming; (ii) Describe in forceful terms the likely consequences of default, including adverse credit reports, garnishment of wages, and litigation; (iii) Provide the borrower with general information with respect to the average indebtedness of students who have obtained Direct Subsidized or Direct Unsubsidized Loans for attendance at that school or in the borrower's program of study; and (iv) Inform the student as to the average anticipated monthly repayment for those students based on the average indebtedness provided under paragraph (a)(3)(iii) of this section. (4) Additional matters that the Secretary recommends that a school include in the initial counseling session or materials are set forth in Appendix D to 34 CFR Part 668. (5) A school may adopt an alternative approach for initial counseling as part of the school's quality assurance plan described in Sec. 685.300(b)(9). If a school adopts an alternative approach, it is not required to meet the requirements of paragraphs (a)(1)-(3) of this section unless the Secretary determines that the alternative approach is not adequate for the school. The alternative approach must-- (i) Ensure that each borrower subject to initial counseling under paragraph (a)(1) of this section is provided written counseling materials that contain the information described in paragraph (a)(3) of this section; (ii) Be designed to target those students who are most likely to default on their repayment obligations and provide them more intensive counseling and support services; and (iii) Include performance measures that demonstrate the effectiveness of the school's alternative approach. These performance measures must include objective outcomes, such as levels of borrowing, default rates, and withdrawal rates. (b) Exit counseling. (1) A school shall conduct in-person exit counseling with each Direct Subsidized or Direct Unsubsidized Loan borrower shortly before the borrower ceases at least half-time study at the school, except that-- (i) In the case of a correspondence program, the school shall provide the borrower with written counseling materials by mail within 30 days after the borrower completes the program; and (ii) If the borrower withdraws from school without the school's prior knowledge or fails to attend an exit counseling session as scheduled, the school shall mail written counseling materials to the borrower at the borrower's last known address within 30 days after the school learns that the borrower has withdrawn from school or failed to attend the scheduled session. (2) In conducting the exit counseling, the school shall-- (i) Inform the student of the average anticipated monthly repayment amount based on the student's indebtedness; (ii) Review for the borrower available repayment options including the standard repayment, extended repayment, graduated repayment, and income contingent repayment plans, and loan consolidation; (iii) Provide options to the borrower concerning those debt- management strategies that the school determines would facilitate repayment by the borrower; (iv) Explain to the borrower how to contact the party servicing the student's Direct Loans; (v) Meet the requirements described in paragraphs (a)(3) (i) and (ii) of this section; (vi) Review with the borrower the conditions under which the borrower may defer repayment or obtain cancellation of a loan; and (vii) Require the borrower to provide corrections to the school's records concerning name, address, social security number, references, and driver's license number and State of issuance, as well as the name and address of the borrower's expected employer (if known). The school shall provide this information to the Secretary within 60 days. (3) Additional matters that the Secretary recommends that a school include in the exit counseling session or materials are set forth in Appendix D to 34 CFR Part 668. (4) The school shall maintain in the student borrower's file documentation substantiating the school's compliance with paragraphs (a) and (b) of this section as to that borrower.

(Authority: 20 U.S.C. 1087a et seq.)

Sec. 685.305 Determining the date of a student's withdrawal.

(a) A school shall follow the procedures in 34 CFR 668.22(i) in determining the student's date of withdrawal. (b) The school shall use the date determined under paragraph (a) of this section for the purpose of reporting to the Secretary the student's date of withdrawal and for determining when a refund must be paid under Sec. 685.306.

(Authority: 20 U.S.C. 1087a et seq.)

Sec. 685.306 Payment of a refund to the Secretary.

(a) General. By applying for a Direct Loan, a borrower authorizes the school to pay directly to the Secretary that portion of a refund from the school that is allocable to the loan. A school-- (1) Shall pay that portion of the student's refund that is allocable to a Direct Loan to the Secretary; and (2) Shall provide simultaneous written notice to the borrower if the school pays a refund to the Secretary on behalf of that student. (b) Determination, allocation, and payment of a refund. In determining the portion of a student's refund that is allocable to a Direct Loan, the school shall follow the procedures established in 34 CFR 668.22 for allocating and paying a refund that is due.

(Authority: 20 U.S.C. 1087a et seq.)

Sec. 685.307 Withdrawal procedure for schools participating in the Direct Loan Program.

(a) A school participating in the Direct Loan Program may withdraw from the program by providing written notice to the Secretary. (b) A participating school that intends to withdraw from the Direct Loan Program shall give at least 60 days notice to the Secretary. (c) Unless the Secretary approves an earlier date, the withdrawal is effective on the later of-- (1) 60 days after the school notifies the Secretary; or (2) The date designated by the school.

(Authority: 20 U.S.C. 1087a et seq.)

Sec. 685.308 Remedial actions.

(a) General. The Secretary may require the repayment of funds and the purchase of loans by the school if the Secretary determines that the unenforceability of a loan or loans, or the disbursement of loan amounts for which the borrower was ineligible, resulted in whole or in part from-- (1) The school's violation of a Federal statute or regulation; or (2) The school's negligent or willful false certification. (b) In requiring a school to repay funds to the Secretary or to purchase loans from the Secretary in connection with an audit or program review, the Secretary follows the procedures described in 34 CFR part 668, subpart H. (c) The Secretary may impose a fine or take an emergency action against a school or limit, suspend, or terminate a school's participation in the Direct Loan Program in accordance with 34 CFR part 668, subpart G.

(Authority: 20 U.S.C. 1087a et seq.)

Sec. 685.309 Administrative and fiscal control and fund accounting requirements for schools participating in the Direct Loan Program.

(a) General. A participating school shall-- (1) Establish and maintain proper administrative and fiscal procedures and all necessary records as set forth in this part and in 34 CFR part 668 in order to-- (i) Protect the rights of student and parent borrowers; (ii) Protect the United States from unreasonable risk of loss; and (iii) Comply with specific requirements in those regulations; and (2) Submit all reports required by this part and 34 CFR part 668 to the Secretary. (b) Student status confirmation reports. A school shall-- (1) Upon receipt of a student status confirmation report from the Secretary, complete and return that report to the Secretary within 30 days of receipt; and (2) Unless it expects to submit its next student status confirmation report to the Secretary within the next 60 days, notify the Secretary within 30 days if it discovers that a Direct Subsidized, Direct Unsubsidized, or Direct PLUS Loan has been made to or on behalf of a student who-- (i) Enrolled at that school but has ceased to be enrolled on at least a half-time basis; (ii) Has been accepted for enrollment at that school but failed to enroll on at least a half-time basis for the period for which the loan was intended; or (iii) Has changed his or her permanent address. (3) The Secretary provides student status confirmation reports to a school at least semi-annually. (4) The Secretary may provide the student status confirmation report in either paper or electronic format. (c) Record retention requirements. Unless otherwise directed by the Secretary, the school or its successors-- (1) Shall keep all records required under this part relating to a student's eligibility and participation in the Direct Loan Program for five years following the student's last day of attendance at the school; (2) Shall keep copies of any other reports and forms used by the school for all other records relating to a school's participation in the Federal Direct Stafford, Federal Direct Unsubsidized Stafford, or Federal Direct PLUS Loan Programs for five years after completion; (3) Shall keep all records involved in any loan, claim, or expenditure questioned by a Federal audit until resolution of any audit questions. (4) In the event of the school's closure, termination, suspension, or change in ownership resulting in a change of control as described in 34 CFR part 600, shall provide for the retention of the records and reports required by this part and for access by the Secretary or the Secretary's authorized representatives to those records and reports for inspection and copying; and (5) May keep files, records, and copies of reports in microform or other media formats. (d) Loan record requirements. In addition to the records required by 34 CFR part 668, for each Direct Subsidized, Direct Unsubsidized, and Direct PLUS Loan received under this part by or on behalf of its students, a school shall maintain a copy of any application data submitted to the Secretary and shall, upon request, produce a record of-- (1) The amount of the loan and the loan period; (2) The data in an individual student budget or the school's itemized standard budget that were used in calculating the student's estimated cost of attendance; (3) The sources and amounts of financial assistance available to the student that the school used in determining the student's estimated financial assistance for the loan period in accordance with Sec. 685.102; (4) The amount of the student's tuition and fees paid for the loan period and the date the student paid the tuition and fees; (5) The amount and basis of its calculation of any refund paid to or on behalf of a student; (6) In the case of a Direct Subsidized Loan under Sec. 685.200, the data used to determine the student's expected family contribution; (7) In the case of a Direct Subsidized, Direct Unsubsidized, or Direct PLUS Loan, the date of each disbursement of the loan. (8) The information collected at the exit interview; and (9) Any other matter for which a record would be required for the school to be able to document its compliance with applicable requirements with respect to the loan. (e) Inspection requirements. Schools shall follow the inspection requirements in 34 CFR 668.23(b). (f) Information sharing. Upon request by the Secretary, a school promptly shall provide the Secretary with any information the school has regarding the last known address, surname, employer, and employer address of a borrower who attends or has attended the school. (g) Accounting requirements. (1) A school shall establish and maintain on a current basis financial records that reflect all transactions for the bank account as required by paragraph (h) of this section. (2) The school shall account for receiving and expending Direct Loan Program funds in accordance with generally-accepted accounting principles. (h) Direct Loan Program bank account. Schools shall follow the procedures for maintaining funds established in 34 CFR 668.164. (i) Division of functions. Schools shall follow the procedures for division of functions in 34 CFR 668.16(c). (j) Limit on use of funds. Except for funds paid to a school under section 452(b)(1) of the Act, funds received by a school under this part may be used only to make Direct Loans to eligible borrowers and may not be used or hypothecated for any other purpose.

(Authority: 20 U.S.C. 1087a et seq.)

Subpart D--School Participation and Loan Origination in the Direct Loan Program

Sec. 685.400 School participation requirements for academic years 1996-1997 and beyond.

(a) (1) In order to qualify for initial participation in the Direct Loan Program, a school must meet the eligibility requirements in section 435(a) of the Act, including the requirement that it have a cohort default rate of less than 25 percent for at least one of the three most recent fiscal years for which data are available unless the school is exempt from this requirement under section 435(a)(2)(C) of the Act. (2) In order to continue to participate in the Direct Loan Program, a school must continue to meet the requirements of paragraph (a)(1) of this section for years for which cohort default rate data represent the years prior to the school's participation in the Direct Loan Program. (b) In order to qualify for initial participation, the school must not be subject to an emergency action or a proposed or final limitation, suspension, or termination action under sections 428(b)(1)(T), 432(h), or 487(c) of the Act. (c) If schools apply as a consortium, each school in the consortium must meet the requirements in paragraphs (a) and (b) of this section.

(Authority: 20 U.S.C. 1087a et seq.)

Sec. 685.401 Selection criteria and process for academic years 1996- 1997 and beyond.

(a) The Secretary selects schools to participate in the Direct Loan Program for an academic year beginning in 1996-1997 from among those that apply to participate. (b) In evaluating an application from an eligible school, the Secretary-- (1) To the extent possible, selects schools that are reasonably representative of the schools that are participating in the FFEL Program in terms of anticipated loan volume, length of academic program, control of the school, highest degree offered, size of student enrollment, geographic location, annual loan volume, and default experience; and (2) In order to ensure an expeditious but orderly transition from the FFEL Program to the Direct Loan Program, selects schools that the Secretary believes will make the transition as smooth as possible.

(Authority: 20 U.S.C. 1087a et seq.)

Sec. 685.402 Criteria for schools to originate loans for academic years 1996-1997 and beyond.

(a) Initial determination of origination status. (1) Standard origination. Any school eligible to participate in the Direct Loan Program under Sec. 685.400 is eligible to participate under standard origination. (2) School Origination. To be eligible to originate loans, a school must meet the following criteria: (i) Have participated in the Federal Perkins Loan Program, the Federal Pell Grant Program, or, for a graduate and professional school, a similar program for the three most recent years preceding the date of application to participate in the Direct Loan Program. (ii) If participating in the Federal Pell Grant Program, not be on the reimbursement system of payment. (iii) In the opinion of the Secretary, have had no severe performance deficiencies for any of the programs under title IV of the Act, including deficiencies demonstrated by the most recent audit or program review. (iv) Be financially responsible in accordance with the standards of 34 CFR 668.15. (v) Be current on program and financial reports and audits required under title IV of the Act for the 12-month period immediately preceding the date of application to participate in the Direct Loan Program. (vi) Be current on Federal cash transaction reports required under title IV of the Act for the 12-month period immediately preceding the date of application to participate in the Direct Loan Program and have no final determination of cash on hand that exceeds immediate title IV program needs. (vii) Have no material findings in any of the annual financial audits submitted for the three most recent years preceding the date of application to participate in the Direct Loan Program. (viii) Provide an assurance that the school has no delinquent outstanding debts to the Federal Government, unless-- (A) Those debts are being repaid under or in accordance with a repayment arrangement satisfactory to the Federal Government; or (B) The Secretary determines that the existence or amount of the debts has not been finally determined by the cognizant Federal agency. (3) A school that meets the criteria to originate loans may participate under school origination option 1 or 2 or under standard origination. (b) Change in origination status. (1) After the initial determination of a school's origination status, the Secretary may allow a school that does not qualify to originate loans under either origination option 1 or origination option 2 to do so if the Secretary determines that the school is fully capable of originating loans under one of those options. (2)(i) At any time after the initial determination of a school's origination status, a school participating under origination option 2 may request to change to origination option 1 or standard origination, and a school participating under origination option 1 may request to change to standard origination. (ii) The change in origination status becomes effective when the school receives notice of the Secretary's approval, unless the Secretary specifies a later date. (3)(i) A school participating under origination option 1 may apply to participate under option 2, and a school participating in standard origination may apply to participate under either origination option 1 or 2 after one full year of participation in its initial origination status. (ii) Applications to participate under another origination option are considered on an annual basis. (iii) An application to participate under another origination option is evaluated on the basis of criteria and performance standards established by the Secretary, including but not limited to-- (A) Eligibility under paragraph (a)(2) of this section; (B) Timely submission of accurate origination and disbursement records; (C) Successful completion of reconciliation on a monthly basis; and (D) Timely submission of completed and signed promissory notes, if applicable. (iv) The change in origination status becomes effective when the school receives notice of the Secretary's approval, unless the Secretary specifies a later date. (c) Secretarial determination of change in origination status. (1) At any time after a school has been approved to originate loans, the Secretary may require a school participating under origination option 2 to convert to option 1 or to standard origination and may require a school participating under origination option 1 to convert to standard origination. (2) The Secretary may require a school to change origination status if the Secretary determines that such a change is necessary to ensure program integrity or if the school fails to meet the criteria and performance standards established by the Secretary, including but not limited to-- (i) For an origination option 1 school, eligibility under paragraph (a)(2) of this section, the timely submission of completed and signed promissory notes and accurate origination and disbursement records, and the successful completion of reconciliation on a monthly basis; and (ii) For an origination option 2 school, the criteria and performance standards required of origination option 1 schools and accurate and timely drawdown requests. (3) The change in origination status becomes effective when the school receives notice of the Secretary's approval, unless the Secretary specifies a later date. (d) Origination by consortia. A consortium of schools may participate under origination options 1 or 2 only if all members of the consortium are eligible to participate under paragraph (a)(2) of this section. All provisions of this section that apply to an individual school apply to a consortium. (e) School determination of change of Servicer. (1) The Secretary assigns one or more Servicers to work with a school to perform certain functions relating to the origination and servicing of Direct Loans. (2) A school may request the Secretary to designate a different Servicer. Documentation of the unsatisfactory performance of the school's current Servicer must accompany the request. The Servicer requested must be one of those approved by the Secretary for participation in the Direct Loan Program. (3) The Secretary grants the request if the Secretary determines that-- (i) The claim of unsatisfactory performance is accurate and substantial; and (ii) The Servicer requested by the school can accommodate such a change. (4) If the Secretary denies the school's request based on a determination under paragraph (e)(3)(ii) of this section, the school may request another Servicer. (5) The change in Servicer is effective when the school receives notice of the Secretary's approval, unless the Secretary specifies a later date.

(Authority: 20 U.S.C. 1087a et seq.)

APPENDIX A--Income Contingent Repayment

Examples of the Calculation of Monthly Repayment Amounts

Example 1. A single borrower with $12,500 of Direct Loans and an Adjusted Gross Income (AGI) of $25,000. Step 1: Calculate the payback rate. Because the borrower's debt is greater than $1,000, the payback rate is calculated on the basis of the formula in Sec. 685.209(b)(2)(iii), as follows: • Subtract $1,000 from the total amount of the borrower's Direct Loans: ($12,500-$1,000=$11,500). • Multiply the result by 0.000002: ($11,500 x 0.000002=0.023). • Add the result to 0.04: (0.04+0.023=0.063). • The result is the payback rate. Step 2: Compare the calculated payback rate (0.063) to the maximum payback rate (0.15). Because the calculated rate is less than the maximum rate, the borrower's payback rate is 0.063. Step 3: Calculate the annual repayment amount by multiplying the borrower's AGI by the payback rate: ($25,000 x 0.063=$1,575). Step 4: Calculate the monthly repayment amount by dividing the annual repayment amount by 12 months: ($1,57512=$131.25). Step 5: Calculate the borrower's discretionary income (AGI minus HHS Poverty Guideline for a family of one): ($25,000-$7,360=$17,640). Step 6: Multiply the borrower's discretionary income ($17,640) by 20 percent: ($17,640 x .2=$3,528). Step 7: Divide the amount calculated in Step 6 by 12 months: ($3,52812=$294). Step 8: Compare the amount calculated in Step 4 ($131.25) with the amount calculated in Step 7 ($294). The lower amount is the formula amount. The formula amount is $131.25. The borrower's monthly payment under the formula amount would be $131.25. Step 9: Compare the monthly formula amount ($131.25) to the $15 floor repayment amount. Because the formula amount is greater than the $15 floor, the borrower's monthly formula amount is $131.25. Step 10: Compare the formula amount calculated in Step 9 ($131.25) to the capped amount, which is the monthly amount the borrower would repay under a 12-year standard amortization schedule. If the interest rate is seven percent, the 12-year standard amortization amount is approximately $10.28 for every $1,000 of debt. In this example, since the borrower has $12,500 in debt, the capped amount is approximately $128.50 ($10.28 x 12.5). Because the formula amount ($131.25) exceeds the capped amount ($128.50), the capped amount is the minimum monthly repayment. The borrower has the option of paying the formula amount (or any higher amount). Example 2. Married borrowers both repaying under the ICR plan with a combined Adjusted Gross Income (AGI) of $30,000. The husband has $5,000 of Direct Loans. The wife has $15,000 of Direct Loans. The couple has two children. Step 1: Calculate the husband's payback rate. Because his debt is greater than $1,000, the payback rate is calculated on the basis of the formula in Sec. 685.209(b)(2)(iii) as follows: • Subtract $1,000 from the amount of the husband's loans: ($5,000-$1,000=$4,000). • Multiply the result by 0.000002: ($4,000 x 0.000002=0.008). • Add the result to 0.04: (0.04+0.008=0.048). • The result is the husband's payback rate. Step 2: Compare the husband's calculated payback rate (0.048) to the maximum payback rate (0.15). Because the calculated rate is less than the maximum rate, the husband's payback rate is 0.048. Step 3: Calculate the husband's assumed AGI by multiplying the couple's total AGI ($30,000) by the amount of the husband's loans ($5,000), divided by the total amount of the couple's debt ($20,000): ($30,000 x $5,000$20,000=$7,500). Step 4: Calculate the husband's annual repayment amount by multiplying the husband's assumed AGI ($7,500) by his payback rate (0.048): ($7,500 x 0.048=$360). Step 5: Calculate the husband's monthly repayment amount by dividing his annual repayment amount by 12 months: ($36012=$30). Step 6: Calculate the couple's discretionary income (AGI minus HHS Poverty Guideline for a family of four): ($30,000-14,800=$15,200). Step 7: Calculate the husband's portion of the couple's discretionary income by multiplying the couple's discretionary income ($15,200) by the amount of the husband's loans ($5,000) divided by the total amount of the couple's debt ($20,000): ($15,200 x $5,000$20,000=$3,800). Step 8: Multiply the husband's discretionary income by 20 percent: ($3,800 x .2=$760). Step 9: Divide the amount calculated in Step 8 by 12 months: ($76012=$63.33). Step 10: Compare the monthly amount calculated in Step 5 ($30) with the monthly amount calculated in Step 9 ($63.33). The lower amount is the formula amount. The formula amount is $30. If the borrowers choose to repay the formula amount, the husband's payment would be $30. Step 11: Calculate the wife's payback rate. Because her debt is greater than $1,000, the payback rate is calculated on the basis of the formula in Sec. 685.209(b)(2)(iii) as follows: • Subtract $1,000 from the amount of the wife's loans: ($15,000-$1,000=$14,000). • Multiply the result by 0.000002: ($14,000 x 0.000002=0.028). • Add the result to 0.04: (0.04+0.028=0.068). • The result is the wife's payback rate. Step 12: Compare the wife's calculated payback rate (0.068) to the maximum payback rate (0.15). Because the calculated rate is less than the maximum rate, the wife's payback rate is 0.068. Step 13: Calculate the wife's assumed AGI by multiplying the couple's total AGI ($30,000) by the amount of the wife's loans ($15,000), divided by the total amount of the couple's debt ($20,000): ($30,000 x $15,000$20,000=$22,500). Step 14: Calculate the wife's annual repayment amount by multiplying the wife's assumed AGI ($22,500) by her payback rate (0.068): ($22,500 x 0.068=$1,530). Step 15: Calculate the wife's monthly repayment amount by dividing the annual repayment amount calculated in Step 14 ($1,530) by 12 months: ($1,53012=$127.50). Step 16: Calculate the wife's portion of the couple's discretionary income by subtracting the husband's portion of the couple's discretionary income calculated in Step 7 ($3,800) from the couple's total discretionary income calculated in Step 6 ($15,200): ($15,200-$3,800=$11,400). Step 17: Multiply the wife's discretionary income ($11,400) by 20 percent: ($11,400 x .2=$2,280). Step 18: Divide the amount calculated in Step 17 by 12 months: ($2,28012=$190). Step 19: Compare the monthly amount calculated in Step 15 ($127.50) with the monthly amount calculated in Step 18 ($190). The lower amount is the formula amount. The formula amount is $127.50. If the borrowers choose to repay the formula amount, the wife's payment would be $127.50. Step 20: Calculate the couple's combined monthly formula amount by adding the husband's monthly formula amount calculated in Step 10 ($30) and the wife's monthly formula amount calculated in Step 19 ($127.50): ($30+$127.50=$157.50). Step 21: Compare the couple's combined monthly formula amount ($157.50) to the $15 floor repayment amount. Because the combined formula amount is greater than the $15 floor, the couple's combined monthly formula amount is $157.50. Step 22: Compare the formula amount calculated in Step 21 ($157.50) to the capped amount, which is the amount the couple would repay under a 12-year standard amortization schedule. If the interest rate is seven percent, the capped amount is approximately $10.28 for every $1,000 of debt. In this example, since the couple has $20,000 in debt, the capped amount is approximately $205.60 ($10.28 x 20). Because the formula amount ($157.50) does not exceed the capped amount ($205.60), the couple's combined monthly repayment amount is the formula amount of $157.50.

BILLING CODE 4000-01-P

TR01DE94.000

TR01DE94.001

[FR Doc. 94-29260 Filed 11-30-94; 8:45 am] BILLING CODE 4000-01-C