Federal Register: August 9, 2006

Volume 71, Number 153

[Rules and Regulations]

[Page 45665-45717]

[PDF version of document]

Part III


Department of Education





34 CFR Parts 600, 668, 673, et al.


Federal Student Aid Programs; Final Rule


[[Page 45666]]




DEPARTMENT OF EDUCATION

34 CFR Parts 600, 668, 673, 674, 675, 676, 682 and 685

RIN 1840-AC87


Federal Student Aid Programs

AGENCY: Office of Postsecondary Education, Department of Education.

ACTION: Interim final regulations; request for comments.



SUMMARY: The Secretary is amending the Federal Student Aid Program
regulations to implement the changes to the Higher Education Act of
1965, as amended (HEA), resulting from the Higher Education
Reconciliation Act of 2005 (HERA), Public Law No. 109-171, and other
recently enacted legislation. These interim final regulations reflect
the provisions of the HERA that affect students, borrowers and program
participants in the Federal student aid programs authorized under Title
IV of the HEA.
    Interim final regulations for the two new Title IV grant programs
created by the HERA, the Academic Competitiveness Grant Program and the
National Science and Mathematics Access to Retain Talent (SMART) Grant
Program, are being published in a separate notice in the Federal
Register.

DATES: Effective date: These interim final regulations are effective
September 8, 2006.
    Comment date: The Department must receive any comments on or before
September 8, 2006.
    Information collection compliance date: Affected parties do not
have to comply with the information collection requirements in Sections
600.7, 600.10, 668.3, 668.8, 668.10, 668.22, 668.173, 673.5, 674.34,
682.102, 682.200, 682.207, 682.209, 682.210, 682.211, 682.215, 682.305,
682.401, 682.402, 682.404, 682.405, 682.406, 682.410, 682.415, 682.601,
682.604, 685.102, 685.204, 685.208, 685.215, 685.217 and 685.220 until
the Department publishes in the Federal Register the control numbers
assigned by the Office of Management and Budget (OMB) to these
information collection requirements. Publication of the control numbers
notifies the public that OMB has approved these information collection
requirements under the Paperwork Reduction Act of 1995.

ADDRESSES: Address all comments about these interim final regulations
to: Gail McLarnon, U.S. Department of Education, P.O. Box 33185,
Washington, DC 20033-3185.
    If you prefer to deliver your comments by hand or by using a
courier service or commercial carrier, address your comments to: Gail
McLarnon, 1990 K Street, NW., room 8026, Washington, DC 20006-8542.
    If you prefer to send your comments through the Internet, you may
address them to us at: HERAComments@ed.gov. Or you may send them to us
at the U.S. Government Web site: http://www.regulations.gov. You must include the
term "HERA Interim Final Comments" in the subject line of your electronic message.

FOR FURTHER INFORMATION CONTACT: Ms. Gail McLarnon, U.S. Department of
Education, 1990 K Street, NW., 8th Floor, Washington, DC 20006.
Telephone: (202) 219-7048 or via the Internet at: Gail.McLarnon@ed.gov.
    If you use a telecommunications device for the deaf (TDD), you may
call the Federal Relay Service (FRS) at 1-800-877-8339.
    Individuals with disabilities may obtain this document in an
alternative format (e.g., Braille, large print, audiotape, or computer
diskette) on request to the contact person listed under FOR FURTHER
INFORMATION CONTACT.

SUPPLEMENTARY INFORMATION: These interim final regulations reflect most
of the changes made to the HEA by the HERA, enacted as part of the
Deficit Reduction Act of 2005 (Pub. L. 109-171), as well as some
changes made by other recently enacted legislation. The changes made by
the HERA include:
    
 An increase in certain FFEL and Direct Loan Program loan
limits,
    
 A reduction of origination fees in the FFEL and Direct
Loan Programs,
    
 The creation of a deferment for FFEL, Direct Loan and
Perkins Loan Program borrowers who serve on active duty military
service during times of war or national emergency, and a reduction of
subsidies paid to lenders,
    
 Changes to the definition of an academic year for programs
measured in clock hours,
    
 Changes and additions to provisions related to distance
education and direct assessment academic programs,
    
 Modifications to the regulations on the eligibility for
Title IV, HEA program assistance for students with convictions for
drug-related offenses, specifying that a student or parent who has not
repaid fraudulently obtained Title IV, HEA program funds is ineligible
for additional Title IV, program assistance,
    
 Changes to the requirements for the treatment of Title IV,
HEA program funds when a student withdraws, and
    
 The re-institution of the previously expired FFEL and
Direct Loan disbursement flexibilities provided to institutions with
low cohort default rates. Effective February 8, 2006, institutions with
official cohort default rates of less than 10 percent for each of the
three most recent years do not need to comply with the "30-day
disbursement delay" requirement for first time, first year students
nor with the multiple disbursement requirements if the loan period is
one term or four months or less.
    The HERA also modified several Title IV, HEA provisions that are
not addressed in these interim final regulations. The HERA made changes
to the rules governing Cost of Attendance calculations, the
determination of an applicant's dependency status, and the calculation
of an applicant's expected family contribution. In accordance with
section 478(a) of the HEA, the Secretary does not issue regulations in
this area.
    The HERA also modified and made permanent the provisions of the
Taxpayer-Teacher Protection Act of 2004 (Pub. L. 108-409) which (1)
changed the calculation of special allowance payments for certain FFEL
Program loans made with proceeds of tax-exempt obligations and (2)
increased teacher loan forgiveness amounts for FFEL and Direct Loan
borrowers teaching in certain areas.
    In addition to the changes mandated by the HERA, these interim
final regulations also incorporate the provisions of Pub. L. 107-139,
which changed the formula for calculating special allowance payments in
the FFEL Program for loans made on or after July 1, 2000 and set
interest rates for FFEL and Direct Loans first disbursed on or after
July 1, 2006 at fixed interest rates.
    These interim final regulations also incorporate the statutory
changes made to the HEA by the Pell Grant Hurricane and Disaster Relief
Act (Pub. L. 109-66) and the Student Grant Hurricane and Disaster
Relief Act (Pub. L. 109-67). These laws authorize the Secretary to
waive the requirement that a student repay a Title IV, HEA grant if the
student withdrew from an institution because of a major disaster. The
Secretary initially exercised this waiver authority through publication
of Dear Colleague Letter GEN-05-17 on November 9, 2005.
    These interim final regulations also incorporate the statutory
changes made to the HEA by The Emergency Supplemental Appropriations
Act for Defense, the Global War on Terror, and Hurricane Recovery, 2006
(Pub. L. 109-234). The Emergency Supplemental Appropriations Act
amended section 428C(b)(1)(A) of the HEA by repealing the single holder
rule with respect to

[[Page 45667]]

any FFEL Consolidation loan for which an application is received by an
eligible lender on or after June 15, 2006. This law also repealed
section 8009(a)(2) of the HERA and reinstated the current statutory
provisions under which a borrower may consolidate outstanding FFEL
Program loans into the Federal Direct Consolidation Loan Program.

Significant Regulations

    We discuss substantive issues under the sections of the regulations
to which they pertain. Generally, we do not address regulatory changes
that are technical or otherwise minor in effect.

Distance Education (Sec. Sec.  600.2, 600.7, 600.51, 668.8 and 668.38)

    Statute: Section 8020 of the HERA modified the institutional
eligibility requirements in section 102(a)(3) of the HEA that generally
make institutions offering more than 50 percent of their courses by
correspondence, or a combination of correspondence and
telecommunications, or enrolling 50 percent or more of their students
in correspondence courses, ineligible for Title IV, HEA program
assistance. The HERA also modified the student eligibility requirements
of section 484(l)(1) of the HEA, by removing telecommunications courses
from being considered as correspondence courses. Under the amended HEA,
courses offered by telecommunications that meet certain conditions are
no longer considered correspondence courses, and students enrolled in
telecommunications courses are no longer considered to be
correspondence students.
    The HERA also modified section 481(b) of the HEA to reflect certain
restrictions on the eligibility of programs that are offered by
telecommunications. Consistent with prior law, the institution,
including its distance education programs, must hold current
accreditation from an accrediting agency recognized by the Secretary
that has the evaluation of distance education in its scope of
recognition. However, under the HERA, programs offered by foreign
institutions that include instruction delivered by telecommunication
are not eligible.
    Current Regulations: The current regulations reflect the previous
statutory limitations on institutional and student eligibility based on
the percentage of correspondence courses offered by the institution and
the percentage of students enrolled in correspondence courses, and the
relation of telecommunications courses to correspondence courses.
    New Regulations: We have amended the regulations in Sec.  600.2 by
removing from the definition of correspondence course the paragraph
that describes the conditions under which a telecommunications course
is considered a correspondence course and by revising the definition of
telecommunications course. The definition of telecommunications course
now specifies that a telecommunications course is one that uses one or
a combination of technologies to deliver instruction to students who
are separated from the instructor and to support regular and
substantive interaction between these students and the instructor,
either synchronously or asynchronously. We have amended the regulations
relating to institutional ineligibility in Sec.  600.7 to delete the
references to telecommunications courses from the provisions relating
to calculation of the percentage of correspondence courses offered by
an institution. We also amended student eligibility regulations in
Sec.  668.38 to provide that students who are enrolled in certificate
programs offered through telecommunications are no longer considered to
be correspondence students. This change applies to institutions
regardless of the percentage of degree programs offered by the
institution.
    We have amended the eligible program regulations in Sec.  668.8 to
include programs that are offered in whole or in part through
telecommunications by domestic institutions and that are accredited by
an accrediting agency recognized by the Secretary for accreditation of
distance education. As in the past, the accrediting agency's scope of
recognition must include the accreditation of distance education.
Interpreting the HEA as amended by the HERA, we have also amended Sec.
668.8 and the regulations related to the eligibility of foreign schools
in Sec.  600.51 to specify that programs offered by foreign schools
through telecommunications or correspondence are not eligible programs.
Recognizing, however, that telecommunications technologies are
frequently used in conjunction with classroom instruction, we have
included a provision acknowledging that participating foreign schools
are free to use telecommunications technologies to supplement and
support instruction offered in the foreign classroom.
    Reasons: The interim final regulations in Sec.  600.7 will now
reflect the statutory changes modifying the current institutional
eligibility requirements which provide that institutions offering more
than 50 percent of their courses via correspondence, or a combination
of correspondence and telecommunications, or enrolling 50 percent or
more of their students in correspondence courses are ineligible to
participate in Title IV, HEA programs. Under the HERA, courses offered
by telecommunications are no longer considered correspondence courses,
and students enrolled in telecommunications courses are no longer
considered to be correspondence students. As a result, otherwise
eligible institutions that offer over 50 percent of their courses by
telecommunications, or have 50 percent or more of their regular
students enrolled in telecommunications courses, are now eligible to
participate in the Title IV, HEA programs. The 50 percent limitations
continue to apply to correspondence courses and students.
    Because of the different statutory treatment of telecommunications
and correspondence, we are changing the definition of
telecommunications course. We believe that it is critical to
differentiate between the two delivery modes. A definition of
telecommunications course that focused exclusively on technologies
could be erroneously interpreted to allow an institution to qualify for
full participation in Title IV, HEA programs upon introduction of minor
e-mail contact between students and a grader or instructional assistant
(who may or may not have subject matter expertise) into what is
essentially a correspondence course. Similarly, a course outline or
course notes posted to an Internet Web site might also meet the current
definition of a telecommunications course. Quality standards for
electronically-delivered education emphasize the importance of
interaction between the instructor and student. The amended definition
of a telecommunications course acknowledges the importance of
interactivity in electronically-delivered instruction and clearly
distinguishes telecommunications from correspondence.
    The interim final regulations in Sec.  668.8 also reflect the
statutory changes to the requirements for an eligible program to
include programs offered in whole or in part through telecommunications
by domestic institutions with appropriate accreditation. Because the
HEA provides that telecommunications programs offered by foreign
schools are not eligible programs, and the HEA provides that foreign
schools are schools "outside the United States," and since Congress
has not lifted the limitations

[[Page 45668]]

on the eligibility of foreign institutions that offer correspondence
study, we believe that Congress did not intend for correspondence
programs offered by foreign schools to be eligible programs. The
purpose of eligibility for foreign schools, which is to permit students
from the United States to experience life and education in foreign
countries, is not served through correspondence study.

Direct Assessment Programs (Sec. Sec.  600.2, 600.10, 600.21, 600.51,
668.8, and 668.10)

    Statute: Section 8020 of the HERA adds a new type of eligible
program to section 481(b) of the HEA--an instructional program that
uses direct assessment of student learning, or recognizes the direct
assessment of student learning by others, in lieu of measuring student
learning in credit hours or clock hours. The assessment must be
consistent with the institution's or program's accreditation. The HERA
also provides that the Secretary will determine initially whether each
program for which an institution proposes to use direct assessment is
an eligible program.
    Current Regulations: There are no current regulations that reflect
the use of direct assessment instead of credit hours or clock hours as
a measure of student learning.
    New Regulations: We have amended the regulations in Sec.  600.2 to
include in the definition of educational program the statutory language
describing direct assessment programs.
    In addition, we have amended the definition to provide that merely
giving credit for direct assessments does not constitute instruction.
We have also amended Sec.  668.8 to indicate that a direct assessment
program approved by the Secretary is considered an eligible program as
defined in Sec.  668.8.
    These interim final regulations also include a new Sec.  668.10,
that provides a definition of the term direct assessment programs and
discusses how key Title IV, HEA program requirements apply to direct
assessment programs. The section also includes the information that an
institution must submit for the Secretary to make an eligibility
determination of a direct assessment program.
    We have amended the regulations related to the eligibility of
foreign schools in Sec.  600.51 to specify that direct assessment
programs offered by foreign schools are not eligible programs. In
addition, we have amended Sec. Sec.  600.10(c)(2) and 600.21(a)(4) to
require that an institution must apply to the Secretary for approval
whenever it adds a direct assessment program.
    Reasons: In amending the HEA to provide for the Title IV
eligibility of programs using direct assessment, Congress specifically
used the term "instructional program" to clarify what types of
programs would be eligible. Thus, the statute requires that the program
include "instruction," as well as "assessment." To meet this
requirement, programs that measure student learning by direct
assessment must provide some means for students to supplement their
existing knowledge to pass the assessments. An institution that is
merely conducting direct assessments of a student's knowledge and
skills, without providing any resources to fill those gaps, is not
providing instruction.
    In new Sec.  668.10, we have adopted a definition of direct
assessment program that reflects common usage by assessment experts and
the accreditation community. In developing this definition, we
recognized that many of the key requirements of the Title IV, HEA
programs rely on both credit and clock hour measurements. By
definition, direct assessment programs do not use credit or clock hours
as a measure of student learning, but nothing in the HEA, as amended by
the HERA, exempts direct assessment programs from the other credit and
clock hour requirements. To apply the Title IV requirements to direct
assessment programs, it is necessary to determine the equivalent number
of credit or clock hours to the amount of student learning being
directly assessed.
    Because many of the statutory requirements for Title IV, HEA
program eligibility are stated in terms of time and/or credit or clock
hours, we determined that the time-based requirements can and must be
applied to direct assessment programs to ensure that students receive
comparable amounts of Title IV, HEA program assistance for comparable
work. This approach ensures that while one student in a direct
assessment program may acquire the knowledge and skills necessary to
pass assessments more quickly than does another student, and, as a
result, may progress more quickly through the program, both students
would receive the same amount of Title IV, HEA program assistance for
the same payment period. However, the student who remained in
attendance for more payment periods to complete the program because he
or she entered the program with less knowledge or learned at a slower
rate, might receive more Title IV, HEA program assistance based on the
additional payment periods he or she attended. Likewise, students in
direct assessment programs should receive no more Title IV, HEA program
assistance in an academic year than would students in credit and clock
hour programs that are comparable in terms of student learning. We
applied this approach throughout these interim final regulations.
    The statute requires an institution to apply to the Secretary to
have a direct assessment program determined to be an eligible program.
Section 668.10(b) specifies the information an institution must provide
in its application. We recognize that there is no single model for
direct assessment programs and therefore have provided that
institutions must provide detailed information about the approach they
are using. In addition, institutions must indicate equivalencies to
credit or clock hours in terms of instructional time, and to provide a
factual basis for the claim of equivalence. These equivalencies are
essential because, as mentioned previously, many applicable Title IV,
HEA program requirements use time and/or credit or clock hours.
    We also considered that some students would have acquired skills
and knowledge prior to their enrollment in the direct assessment
program. Title IV, HEA program funds are provided to help cover the
student's cost of obtaining an education. Accordingly, Title IV, HEA
program funds should be used only for learning that occurs after a
student has enrolled in an educational program. Therefore, we have
amended the regulations to require institutions to provide information
in the application for approval of a direct assessment program about
how they assess a student's knowledge upon entering the program.
    We recognized that institutions offering direct assessment programs
might use courses or learning materials developed by other entities,
such as training and professional development organizations and other
educational institutions, to assist students in preparing for the
assessments. We considered whether the use of outside resources could
be considered contracting out a portion of an educational program and
determined that it could be. Therefore, we included in the direct
assessment regulations a provision that exempts direct assessment
programs from the limitations of contracting for part of an educational
program.
    We considered whether remedial courses using direct assessment of
student learning in lieu of credit or clock hours could be supported
with Title IV, HEA program funds.
    We determined that remedial courses taken in preparation for
enrollment in a

[[Page 45669]]

direct assessment program could be paid for with Title IV, HEA program
funds only if they were offered in credit or clock hours. Our
conclusion is based on the fact that the HERA modified the definition
of eligible program to include direct assessment programs, but did not
change the fact that remedial coursework is not itself a program or
part of a program. We applied similar reasoning to instruction needed
for a professional credential or certification from a State that is
required for employment as a teacher in an elementary or secondary
school.
    The HERA specifies that the assessment an institution uses in its
direct assessment program must be consistent with the accreditation of
the institution or program. Foreign schools are not accredited by
nationally recognized accrediting agencies recognized by the Department
and accordingly cannot meet this program eligibility requirement. In
the future, the Secretary may consider developing eligibility criteria
that are comparable to the accreditation requirement to permit direct
assessment programs offered by foreign schools to qualify for Title IV,
HEA program eligibility.
    The discussion of regulatory alternatives considered in the
Regulatory Impact Analysis provides additional details on the factors
the Secretary considered in developing the direct assessment
regulations.

Academic Year (Sec.  668.3)

    Statute: Section 8020 of the HERA amended the definition of
academic year in section 481(a) of the HEA. The revised definition
requires a minimum of 30 weeks of instructional time for a program that
measures its program length in credit hours or a minimum of 26 weeks of
instructional time for a program that measures its program length in
clock hours, rather than a minimum length of 30 weeks of instructional
time for both credit hour and clock-hour programs.
    Current Regulations: The current regulations reflect the previous
statutory definition of an academic year requiring a minimum of 30
weeks of instructional time for all programs regardless of the way in
which the program was measured.
    New Regulations: Section 668.3(a) of the regulations has been
amended to reflect the change in the statutory definition of an
academic year. In addition, we have modified the definition so that
academic year is no longer defined as a period beginning on the first
day and ending on the last day of classes.
    Reasons: The regulations are modified to reflect the change made by
the HERA to the definition of an academic year. Because all programs
must define an academic year that conforms to the minimum requirements
even if the program itself is shorter than those minimum requirements,
we modified the definition so that an academic year is no longer
defined as a period of time that begins on the first day of classes and
ends on the last day of classes or examinations.

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

Program Applicability
    Statute: Section 8022 of the HERA amended section 484B(a)(3)(C)(i)
of the HEA to change the applicability of section 484B of the HEA
(commonly referred to as the Return of Title IV Funds requirements).
Under prior law, the Return of Title IV Funds rules applied to all
Title IV, HEA grant and loan assistance other than Federal Work Study
(FWS) funds. Under the HERA, the rules will now apply only to funds
from the Pell Grant, Federal Supplemental Educational Opportunity Grant
(FSEOG), FFEL, Direct Loan, and Perkins Loan programs, and to the new
Academic Competitiveness Grant (ACG) and National Science and
Mathematics Access to Retain Talent (SMART) Grant programs.
    Current Regulations: Section 668.22(a)(1) provides that the Return
of Title IV Funds requirements apply to all Title IV, HEA grant and
loan assistance disbursed or that could have been disbursed to a
withdrawn student, not including FWS or the non-Federal share of FSEOG
awards if an institution meets its FSEOG matching share by the
individual recipient method or the aggregate method.
    New Regulations: We have revised Sec.  668.22(a)(2) to reflect the
more limited applicability of the Return of Title IV Funds rules as
provided in the HERA. Under the revised regulations, an institution
must perform a Return of Title IV Funds calculation when a student who
withdraws was disbursed, or could have been disbursed, funds from the
following programs: Pell Grant, FSEOG, FFEL, Direct Loan, Perkins Loan,
ACG, or SMART Grant. The Return of Title IV Funds requirements do not
apply to funds from the Gaining Early Awareness and Readiness for
Undergraduate Program (GEAR UP), Student Support Services (SSS) or
Leveraging Educational Assistance Partnerships (LEAP) Programs. In
addition, the interim final regulations retain the exemption from the
Return of Title IV Funds rules for the non-Federal share of FSEOG
awards if an institution meets its FSEOG matching share by the
individual recipient method or the aggregate method.
    Reasons: These changes are made to implement the provisions of the
HERA. The current regulatory exemption from the Return of Title IV
Funds requirements of the non-Federal share of FSEOG awards is retained
as these funds are not considered Federal funds and, therefore, are not
subject to the Federal Return of Title IV Funds requirements.
Post-Withdrawal Disbursement Counseling
    Statute: Section 8022 of the HERA amended section 484B(a)(4) of the
HEA to require an institution to contact a borrower before making a
late disbursement or post-withdrawal disbursement of Title IV loan
funds. During this contact, the institution must confirm with the
borrower that the loan funds are still required by the student, or
parent in the case of a parent PLUS loan, and explain to the borrower
his or her obligation to repay the funds if disbursed. An institution
must document in the student's file the result of the contact and the
final determination made concerning the disbursement.
    Current Regulations: Current Sec.  668.22(a)(4)(i)(B) requires an
institution to provide a student, or parent in the case of a parent
PLUS loan, an opportunity to cancel some or all of a loan disbursement
credited to the student's account by providing notice to the student or
parent when the institution credits the account with Direct Loan, FFEL,
or Federal Perkins Loan program funds. In addition, Sec.
668.22(a)(4)(ii) provides that an institution must offer any amount of
a post-withdrawal disbursement (loan and grant) that is not credited to
the student's account to the student, or parent in the case of a parent
PLUS loan, as a direct disbursement.
    Current regulations do not require institutions to explain to
students, or parents for a parent PLUS loan, the obligation to repay
disbursed loan funds, nor do they specify the documentation an
institution must keep.
    New Regulations: The existing regulations, as redesignated in Sec.
668.22(a)(5), have been modified as a result of the changes made by the
HERA.
    While current regulations already require an institution to obtain
confirmation from a student, or parent

[[Page 45670]]

for a parent PLUS loan, before making a direct disbursement of loan or
grant funds from a post-withdrawal disbursement, the regulations have
been revised to make clear that an institution must now obtain this
confirmation before crediting a student's account with loan funds. As
in the past, an institution may credit a student's account with any
post-withdrawal disbursement of grant funds without confirmation from
the student.
    Thus, the interim final regulations require an institution to
include in the written notification it must provide to a student, or
parent for a parent PLUS loan, notice of any post-withdrawal
disbursement of loan funds that it wishes to credit to the student's
account. As currently required for direct disbursements of a post-
withdrawal disbursement, the notice must identify the type and amount
of the loan funds the institution wishes to credit to the student's
account, and explain that a student, or parent for a parent PLUS loan,
may accept or decline all or a portion of the funds. The notice must
also make clear that a student, or parent for a parent PLUS loan, may
not receive as a direct disbursement loan funds that the institution
wishes to credit to the student's account unless the institution agrees
to do so. If the student, or parent for a parent PLUS loan, does not
wish to accept some or all of the loan funds that the institution
wishes to credit to the student's account, the institution must not
disburse those funds. As required by the HERA, institutions are now
required to explain to the student, or parent for a parent PLUS loan,
the obligation to repay any loan funds accepted as a post-withdrawal
disbursement.
    The 14-day deadline (from the date the institution sent the
notification) for a student, or parent for a parent PLUS loan, to
accept some or all of a direct disbursement of a post-withdrawal
disbursement, now applies to confirmation of loan disbursements that an
institution wishes to credit to a student's account. The interim final
regulations permit an institution to establish a later deadline,
provided the later deadline applies to both confirmation of loan
disbursements to the student's account and to direct disbursements of a
post-withdrawal disbursement. In accordance with current regulations,
the institution's notice to the student, or parent for a parent PLUS
loan, must advise the student or parent of this deadline, making clear
that a late response to the notice is honored only at the institution's
discretion. Under the interim final regulations, an institution that
chooses to honor a late response must disburse all the funds accepted
by the student, or parent for a parent PLUS loan; for example, it
cannot credit loan funds to the student's account in accordance with
the student's request, but decline to disburse directly post-withdrawal
funds accepted by the student. As currently required when an
institution declines to honor a late response for direct disbursements
of a post-withdrawal disbursement, the interim final regulations
require an institution that declines to honor a late response accepting
loan funds to be credited to the student's account to inform the
student, or parent for a parent PLUS loan, in writing that it will not
be honoring the late response.
    As with current regulatory requirements for making a direct
disbursement of a post-withdrawal disbursement, an institution must
make a disbursement by crediting a student's account with a post-
withdrawal disbursement of loan funds within 120 days of the date of
the institution's determination that the student withdrew, as that term
is defined in Sec.  668.22(l)(3).
    Finally, new paragraph Sec.  668.22(a)(5)(iv) has been added to
codify the HERA requirement that an institution document in the
student's file the result of the contact and the final determination
made concerning a post-withdrawal disbursement of loan funds.
    Reasons: These changes are made to implement the provisions of the
HERA. We have modified the current regulations that require
confirmation of any post-withdrawal disbursements made as a direct
disbursement to reflect the new statutory requirements.
    A new regulatory provision requires the institution to make clear
in the written notice that a student, or parent for a parent PLUS loan,
may not receive as a direct disbursement loan funds that the
institution wishes to credit to the student's account, unless the
institution concurs. This reflects current requirements that permit an
institution to credit Title IV funds to a student's account before
disbursing any remaining amount to the student, or parent for a parent
PLUS loan.
    The Secretary has made other changes to the regulations with the
goal of easing implementation of the new requirements. The Secretary
believes it should not be the institution's decision to determine that
it is acceptable for a student to incur debt and/or use up Title IV,
HEA program eligibility to cover a debt to the institution, but not to
cover non-institutional educational expenses. That decision must be
left to the student, or parent for a parent PLUS loan. Thus,
institutions are required to use the same deadline for responses for
both types of confirmations and, if the institution acts on a late
response, it must honor all the confirmations in the response.
    In addition, the Secretary now permits an institution to establish
a deadline for confirmation responses beyond the 14-day minimum in
current regulations to ease institutional administrative burden. Some
institutions may desire to give all students and parents more time to
respond now that confirmation of disbursement is needed for crediting
the student's account with loan funds. Also, a later deadline may be
beneficial as a late confirmation response can now result in a student
owing a debt to the institution for unpaid charges on his or her
account.
Withdrawals From Clock Hour Programs
    Statute: The HERA changed section 484B(d)(2) of the HEA, to provide
that only scheduled hours, not completed hours, will be used to
determine the percentage of the payment period or period of enrollment
completed by a student withdrawing from a clock hour program. Prior to
this change, the law provided that scheduled hours, rather than
completed hours, were used only if the hours completed by the student
were equal to a percentage, determined by the Secretary in regulations,
of the hours scheduled to be completed when the student withdrew.
    The HERA made a conforming change to section 484B(a)(3)(B)(ii) to
make clear that a student withdrawing from a clock hour program earns
100 percent of his or her aid if the student's withdrawal date occurs
after the point when he or she was scheduled to complete 60 percent of
the scheduled hours in the payment period or period of enrollment.
    Current Regulations: The current regulations in Sec.
668.22(f)(1)(ii) use actual hours to determine the percentage of the
period completed by a student withdrawing from a clock hour program,
unless the student's actual hours of attendance were at least 70
percent of the hours the student was scheduled to have completed at the
time they withdrew. If so, scheduled hours are used.
    Section 668.22(e)(2)(ii)(B) of the current regulations provides
that a student earns 100 percent of his or her aid only if he or she
actually completed 60 percent or more of the hours in the payment
period or period of enrollment scheduled to be completed when he or she
withdrew.

[[Page 45671]]

    New Regulations: Section 668.22(f)(1)(ii) has been amended to
reflect the statutory change to section 484B(d)(2) requiring the use of
scheduled clock hours in all calculations of earned Title IV, HEA
program funds for students who withdraw from clock-hour programs. That
is, for a student withdrawing from a clock-hour program, the
"percentage of the payment period or period of enrollment completed"
is determined by dividing the total number of clock hours comprising
the period into the number of clock hours scheduled to be completed as
of the student's withdrawal date. In addition, the regulations have
been amended to require that the scheduled clock hours used for a
student must be those established by the institution prior to the
student's beginning class date for the payment period or period of
enrollment, and must have been established in accordance with any
requirements of the State or the institution's accrediting agency.
These hours must be consistent with the published materials describing
the institution's programs. However, if an institution modified the
scheduled hours in a student's program prior to his or her withdrawal,
and in accordance with any State or accrediting agency requirements,
the new scheduled hours must be used.
    New Sec.  668.22(e)(2)(ii)(B) implements the statutory change in
section 484B(a)(3)(B)(ii) by clarifying that a student withdrawing from
a clock-hour program earns 100 percent of his or her aid if the
student's withdrawal date is after the point when he or she was
scheduled to complete 60 percent of the scheduled hours in the payment
period or period of enrollment.
    Reasons: These changes are made to implement the provisions of the
HERA. To limit the possibility of abuse of this rule, the regulations
provide that the scheduled hours used must be those that are part of a
schedule that was established prior to a student's withdrawal, and must
meet any applicable State or accrediting agency standards.
Grant Overpayment Requirements
    Statute: Section 8022 of the HERA amended section 484B(b)(2)(C) of
the HEA to change the amount of a grant overpayment that must be repaid
by a student who withdraws from school. The amount of a grant
overpayment due from a student is limited to the amount by which the
original overpayment amount exceeds 50 percent of the total grant funds
received by the student for the payment period or period of enrollment.
In addition, the HERA amended the HEA to specify that a student does
not have to repay a grant overpayment of $50 or less for grant
overpayments resulting from the student's withdrawal.
    Current Regulations: The current regulations in Sec.
668.22(h)(3)(ii) provide that a student is not required to repay 50
percent of the withdrawn student's original grant overpayment amount.
    Under Sec.  668.35(e)(3), an otherwise eligible student maintains
eligibility and does not have to repay a Perkins Loan, FSEOG, or Pell
Grant overpayment of less than $25--resulting from withdrawal or
otherwise provided that the overpayment amount is not a remaining
balance nor a result of applying the overaward threshold for the
campus-based programs.
    New Regulations: Revised Sec.  668.22(h)(3) reflects the new
statutory limitation on the amount of a grant overpayment that a
student is required to return. To illustrate the effect of the new law,
we provide the following example: A student who received $2,000 in
Title IV, HEA grant funds for a payment period withdraws from school.
The institution uses the Return of Title IV Funds calculation and
determines that the student has an original grant overpayment of
$1,200. Under current regulations, the student would owe $600 (50
percent of the original overpayment amount of $1,200). Under the
interim final regulations, the student owes $200 (the amount by which
the original overpayment amount ($1,200) exceeds half of the total
grant funds received, ($1,000) or $1,200-$1,000. In this same scenario,
if the student's grant overpayment was originally $800, under current
regulations the student owes $400 (50 percent of $800). Under the
interim final regulations, the student owes nothing because the
overpayment amount ($800) is less than half of the total grant funds
received ($1,000).
    Section 668.22(h)(3) also reflects the statutory provision that a
student is not obligated to return a grant overpayment of $50 or less.
As a result, a grant overpayment of $50 or less will not make the
student ineligible to receive Title IV, HEA program assistance should
the student return to school. An institution is not required to attempt
recovery of that overpayment, report it to the Department's National
Student Loan Data System (NSLDS), or refer it to the Secretary.
Consistent with Sec.  668.35(e)(3), this new standard does not apply to
remaining grant overpayment balances; that is, a student must repay a
grant overpayment that has been reduced to $50 or less because of
payments made.
    A conforming change is also being made to Sec.  668.35(e) to make
it clear that the overpayment threshold and eligibility requirements of
Sec.  668.35(e) do not apply to an overpayment resulting from the
application of the Return of Title IV Funds requirements. The less-
than-$25 threshold and eligibility requirements specified in Sec.
668.35(e)(3) continue to apply to all other overpayments.
    Reasons: These changes are made to implement the provisions of the
HERA.
Waiver of Grant Overpayment for Students Affected by a Disaster
    Statute: The Pell Grant Hurricane and Disaster Relief Act (Pub. L.
109-66) and the Student Grant Hurricane and Disaster Relief Act (Pub.
L. 109-67) amended section 484B(b)(2) of the HEA to permit the
Secretary to waive a student's Title IV grant repayment if the student
withdrew from an institution because of a major disaster.
    Current Regulations: Current regulations do not address this issue.
    New Regulations: New Sec.  668.22(h)(5) incorporates the statutory
changes. The interim final regulations provide that the Secretary may
waive grant overpayment amounts for individuals whose withdrawal ended
within the award year during which the designation of a major disaster
area occurred, or the subsequent award year. On November 9, 2005, the
Secretary exercised this waiver authority through publication of Dear
Colleague Letter GEN-05-17. It is important to note that this waiver
authority applies to a grant overpayment due from a student and not to
the required return of unearned funds to a grant program by an
institution.
    Reasons: These changes are made to implement the provisions of the
Pell Grant Hurricane and Disaster Relief Act and the Student Grant
Hurricane and Disaster Relief Act. The interim final regulations apply
the waivers on an award year basis to reflect the fact that Pell and
FSEOG Grants are awarded on an award year basis.
Order of Return of Grant Funds
    Statute: Section 484B(b)(3)(B) of the HEA requires that unearned
Title IV, HEA grant funds be returned to awards under subpart 1 of part
A of the HEA (for the Pell Grant Program) before they are returned to
awards under subpart 3 of part A of the HEA (for the FSEOG Program).
Under prior law, the Pell Grant program was the only program in subpart
1 of part A of the HEA. The HERA has added the ACG and the

[[Page 45672]]

National SMART Grant programs to subpart 1 of part A of the HEA. As a
result, unearned funds must be returned to the Pell Grant, ACG and
National SMART Grant programs before they are returned to the FSEOG
program. The statute does not require that unearned funds be returned
to one subpart 1 program before another.
    Also, as noted previously, the HERA limited the application of the
Return of Title IV funds requirements to funds from the Pell Grant,
FSEOG, FFEL, Direct Loan, and Perkins Loan programs, as well as the new
ACG and National SMART Grant programs.
    Current Regulations: Section 668.22(i)(2) currently requires an
institution or student to return unearned funds to the grant programs
in the following order: (1) The Federal Pell Grant Program; (2) the
FSEOG Program; (3) other Title IV, HEA grant or loan assistance
programs.
    New Regulations: New Sec.  668.22(i)(2) reflects the addition of
the new ACG and National SMART Grant programs and requires that
unearned funds be returned to those programs before unearned funds are
returned to the FSEOG program. The interim final regulations also
specify an order of return for the three grant programs in subpart 1 of
part A of the HEA, requiring an institution or student to return
unearned funds to the subpart 1 grant programs in the following order:
(1) The Pell Grant Program; (2) the ACG Program, and (3) the National
SMART Grant Program. The interim final regulations no longer require an
institution to return funds to "other Title IV, HEA grant or loan
assistance programs."
    Reasons: These changes are made to implement the provisions of the
HERA. The interim final regulations specify that an institution or
student return unearned funds to the Pell Grant Program before they are
returned to the ACG or National SMART Grant programs because this
approach is the most beneficial for students. Returning funds to the
Pell Grant Program ensures that the student's eligibility for a Pell
Grant is maintained, which is beneficial should the student return to
school within the same award year and again seek an ACG or National
SMART Grant.
Return of Funds Within 45 Days
    Statute: Section 8022 of the HERA amended section 484B(b)(1) of the
HEA to add the requirement that an institution return unearned funds
for which it is responsible no later than 45 days from the
determination of a student's withdrawal.
    Current Regulations: Section 668.22(j) of the current regulations
requires an institution to return the unearned funds for which it is
responsible as soon as possible, but no later than 30 days after the
date of the institution's determination that the student withdrew.
    Section 668.173(b) establishes the specific criteria an institution
must meet to be in compliance with the 30-day deadline in Sec.
668.22(j).
    New Regulations: The interim final regulations in Sec.  668.22(j)
incorporate the HERA provision by changing the maximum amount of time
an institution has to return the unearned funds for which it is
responsible from 30 days to 45 days. The interim final regulations
continue to specify that an institution must return those funds as soon
as possible.
    We are also making conforming changes to Sec.  668.173(b) to extend
the deadlines specified in that regulation by 15 days. An institution
will be considered to have returned funds timely if the institution
does one of the following no later than 45 days (rather than the
current 30 days) after the date it determines that the student
withdrew: (1) Deposits or transfers the funds into the bank account it
is required to maintain; (2) initiates an electronic funds transfer
(EFT); (3) initiates an electronic transaction that informs the FFEL
lender to adjust the borrower's loan account for the amount returned;
or (4) issues a check. The institution is considered to have issued a
check timely if the institution's records show that the check was
issued no more than 45 days after the date the institution determined
that the student withdrew, or the date on the cancelled check shows
that the bank endorsed that check no more than 60 days (instead of the
current 45 days) after the date the institution determined that the
student withdrew.
    Reasons: These changes are made to implement the provisions of the
HERA. The interim final regulations retain the requirement that an
institution return funds for which it is responsible as soon as
possible. The return of funds by an institution may result in a
decrease in the amount of a Title IV loan that the student must repay
and reduces that interest that accrues on the loan. In addition, the
sooner funds are returned, the sooner an otherwise eligible student may
regain eligibility for those funds should the student return to school
within the same academic period.

Student Eligibility--General and Student Debts Under the HEA and to the
U.S. (Sec. Sec.  668.32, 668.35, 674.39, 682.405, and 685.211)

    Statute: Section 8021(a) of the HERA amended section 484(a) of the
HEA by adding a new student eligibility requirement. The new
requirement provides that students who have been convicted of, or have
pled nolo contendere or guilty to a crime involving fraud in obtaining
Title IV, HEA program assistance are not eligible for additional Title
IV assistance unless they have repaid the fraudulently obtained Title
IV, HEA program assistance funds to the Secretary or to the holder of a
loan made under the Title IV, HEA programs.
    Current Regulations: Current regulations do not address the Title
IV eligibility of students who have obtained Title IV, HEA Program
assistance through fraud.
    New Regulations: Sections 668.32 and 668.35 have been amended by
adding new paragraphs (m) and (i), respectively, to provide that a
student who has been convicted of or has pled nolo contendere or guilty
to a crime involving fraud in obtaining Title IV, HEA program
assistance is ineligible for additional assistance unless he or she has
repaid the fraudulently obtained Title IV, HEA program assistance funds
to the Secretary or to the holder of a loan made under the Title IV,
HEA programs. In addition, Sec.  682.401(b)(4) has been amended to
cross-reference the new Sec.  668.35(i).
    Sections 674.39(a), 682.405(a)(1), and 685.211(f) have been amended
to specify that a Perkins, FFEL, or Direct Loan Program loan that was
fraudulently obtained, and for which the borrower has been convicted
of, or has pled nolo contendere or guilty to, a crime involving
fraudulently obtained Title IV, HEA program assistance, is not eligible
for rehabilitation.
    Reasons: These regulations have been amended to reflect the changes
made by the HERA.

Conviction for Possession or Sale of Illegal Drugs (Sec.  668.40)

    Statute: Section 8021(c) of the HERA amended section 484(r) of the
HEA to modify the requirements regarding the suspension of eligibility
for students convicted of drug-related offenses. As amended, the HEA
now provides that a student becomes ineligible for Title IV, HEA
program assistance only if the conviction for a Federal or State
offense involving the possession or sale of a controlled substance is
for conduct that occurred during a period of enrollment

[[Page 45673]]

for which the student was receiving Title IV, HEA program assistance.
The period of ineligibility and provisions for regaining eligibility
were not changed by the HERA.
    Current Regulations: The current regulations reflect the previous
statutory requirements that provided that a student became ineligible
to receive Title IV, HEA program assistance if the student was
convicted of an offense involving the possession or sale of illegal
drugs without regard to when the offense occurred.
    New Regulations: Section 668.40(a)(1) has been revised to reflect
the statutory change to section 484(r) of the HEA that limits the loss
of student eligibility to students convicted of drug-related offenses
to offenses that occurred during a period of enrollment for which the
student was receiving Title IV, HEA program assistance.
    The revised student eligibility criterion applies to the 2006-2007
award year for the Pell Grant, ACG, National SMART Grant, and campus-
based programs and for periods of enrollment beginning on or after July
1, 2006 for the FFEL and Direct Loan Programs.
    The period of ineligibility remains unchanged and is triggered by
the date of the conviction. The provisions for regaining eligibility
also remain unchanged.
    Reasons: These regulations have been changed to reflect the changes
to the HEA made by the HERA.

Estimated Financial Assistance (Sec. Sec.  673.5, 673.6, 674.16,
675.26, 682.200 and 685.102)

    Statute: Section 8019 of the HERA added two new grant programs by
creating a new HEA section 401A and modified the definition of Other
Financial Assistance in HEA section 480(j). The two new grant programs
are considered other financial assistance under section 480(j) of the
HEA. In changing the definition of Other Financial Assistance, the HERA
added a new section to the definition that states, "Notwithstanding
paragraph (1) and section 472, assistance not received under this title
may be excluded from both estimated financial assistance and cost of
attendance, if that assistance is provided by a State and is designated
by such State to offset a specific component of the cost of attendance.
If that assistance is excluded from either estimated financial
assistance or cost of attendance, it shall be excluded from both."
    The Ronald W. Reagan National Defense Authorization Act for Fiscal
Year 2005 (Pub. L. 108-375) amended Title 10 of the United States Code
to add a new veterans' education benefit in chapter 1607. Veterans'
education benefits are considered other financial assistance under
section 480(j) of the HEA. These chapter 1607 benefits, which are known
as the Reserve Educational Assistance Program, benefit military
reservists called to active duty after September 11, 2001 and are
designated to pay for postsecondary education expenses.
    Current Regulations: The current regulations do not include the two
new grant programs, the change in the definition of Other Financial
Assistance, or the added veterans' educational benefit in the
regulatory definitions of resources and estimated financial assistance.
    New Regulations: We have amended Sec. Sec.  673.5, 682.200 and
685.102 to reflect the creation of the two new grant programs and the
new veterans' education benefit, as well as the modification of the
statutory definition of Other Financial Assistance. In addition, we
have made technical changes to clarify the existing regulatory
language, to standardize the definitions of resources and estimated
financial assistance used in Sec. Sec.  673.5(c), 673.6(a), 674.16(c),
675.26(a), 682.200(b) and 685.102(b), to adopt a single regulatory term
to describe other financial assistance, and to make conforming changes.
    Historically, the campus-based General Provisions have used the
term resources rather than estimated financial assistance in reference
to the same components. However, the statute repeatedly uses the term
estimated financial assistance, and we believe it is necessary to use
this term in the interim final regulations. Accordingly, the interim
final regulations in Sec. Sec.  673.6(a)(1), 674.16(c), 675.26(a)(4)
and 676.16(b) have been amended to change the defined term resources to
the defined term estimated financial assistance.
    We have also made some technical changes to the regulations. We
have modified the regulations to provide for the consistent use of
names for the different loan types for each of the loan programs. We
also clarified that the loans that can be used to replace the expected
family contribution (EFC) include non-federal, non-need-based loans
that come from private, state, or institutional sources. We have
revised the definition of estimated financial assistance in Sec. Sec.
682.200 and 685.102 of the FFEL and Direct Loan programs, respectively,
to reflect our longstanding policy that estimated financial assistance
includes "Any educational benefits paid because of enrollment in a
postsecondary education institution, or to cover postsecondary
education expenses" and by adding the same language to Sec.  673.5(c)
for the campus-based programs.
    We added non-need-based employment as an exclusion to the
definition of estimated financial assistance in Sec. Sec.  682.200 and
685.102 of the FFEL and Direct Loan program regulations, respectively.
    In Sec.  673.5 of the campus-based General Provisions, we made a
technical correction to clarify that fellowships and assistantships
must be counted as estimated financial assistance, except those
portions that are non-need-based employment. The current regulation
states that non-need-based employment is not considered estimated
financial assistance, but fellowships and assistantships may include
portions that are non-need-based employment, but are not labeled
separately as such. We made a technical change to Sec.  673.5 to
clarify the rules for the consideration of these fellowships and
assistantships.
    We added to the definition of estimated financial assistance in
Sec. Sec.  682.200(b) and 685.102(b) two items that are in the same
definition under Sec.  673.5(c). Those two items are insurance programs
for the student's education and fellowships and assistantships, except
non-need-based employment portions of such awards. This inclusion
ensures the three sections have similar language.
    Another technical change made for consistency was made in
Sec. Sec.  682.200(b) and 685.102(b) in which the word "AmeriCorps"
was added parenthetically following each instance of national service
education awards or post-service benefits paid under title I of the
National and Community Service Act of 1990 because that is the term
used in Sec.  673.5(c).
    Reasons: The regulations need to be changed to reflect the new
grant programs and the new veterans' educational benefits under 10
U.S.C. Chapter 1607. As a technical change, we have parenthetically
inserted the names of each of the chapters of eligible veterans'
education benefits listed to make it easier for the public to identify
these benefits. We also deleted the entries for programs that are
obsolete and updated the names of programs that have been changed. We
have also made technical changes to clarify the existing language and
standardize the definitions among the regulatory sections referencing
the definition of estimated financial assistance.

[[Page 45674]]

Military Deferment (Sec. Sec.  674.34, 682.210, and 685.204)

    Statute: Section 8007 of the HERA amended sections 428, 455, 464
and 481 of the HEA to create a new deferment for borrowers who are
serving on active duty in the U.S. Armed Forces, or who are performing
qualifying National Guard duty, during a war or other military
operation or national emergency. The deferment is effective July 1,
2006, for loans for which the first disbursement is made on or after
July 1, 2001.
    Current Regulations: The current deferment regulations do not
reflect this new deferment for military service. This new deferment is
different from the military service deferment available to Perkins
Loan, FFEL and Direct Loan Program borrowers who took out loans prior
to July 1, 1993.
    New Regulations: Section 674.34 of the Perkins regulations, Sec.
682.210 of the FFEL regulations, and Sec.  685.204 of the Direct Loan
regulations have been amended to reflect the new military service
deferment created by the HERA. The interim final regulations specify
the types of active duty service and National Guard service that
qualifies a borrower for the deferment, and define active duty,
military operation, and national emergency for purposes of a military
deferment. The types of qualifying service and the definitions are
provided in the HERA.
    A borrower may qualify for the military deferment if the first
disbursement of the borrower's Perkins, FFEL, or Direct Loan was made
on or after July 1, 2001. If the borrower has some loans disbursed
before July 1, 2001 and some loans disbursed on or after July 1, 2001,
the borrower may receive a military deferment for the loans disbursed
on or after July 1, 2001, but may not receive a military deferment on
the loans disbursed before July 1, 2001. The period of eligible
military service must have occurred after the borrower received the
loan. A borrower consolidating loans first disbursed on or after July
1, 2001, is eligible for the new deferment on the entire Consolidation
Loan only if all of the borrower's Title IV loans included in the
Consolidation Loan were first disbursed on or after July 1, 2001. The
HERA does not authorize a loan holder to refund payments made during a
period covered by a retroactive deferment.
    Reasons: The regulations are amended to reflect changes made by the
HERA.

FFEL and Direct Loan Program Changes

Graduate and Professional Student Eligibility for PLUS Loans
(Sec. Sec.  668.2, 682.102, 682.201, 685.102, 685.200, and 685.201)

    Statute: Section 8005 of the HERA amended section 428B of the HEA,
to provide that graduate and professional students are eligible for
PLUS Loans. In addition, section 8014 of the HERA added a new
eligibility requirement for PLUS Loan borrowers. Under this
requirement, a PLUS Loan borrower who has been convicted of, or pled
nolo contendere or guilty to, a crime involving fraud in obtaining
Title IV, HEA program funds must complete repayment of the fraudulently
obtained funds to be eligible to receive a PLUS loan.
    Current Regulations: Under the current regulations, only parents of
eligible students are eligible for PLUS Loans.
    New Regulations: The terms Federal Direct PLUS Program and Federal
PLUS Program are defined in Sec. Sec.  668.2 and 685.102 to include
graduate and professional students as eligible borrowers. Section
682.102 of the FFEL Program regulations and Sec.  685.201 of the Direct
Loan Program regulations have been amended to describe the application
process for graduate or professional students to obtain a PLUS loan.
Sections 682.201 of the FFEL Program regulations and 685.200 of the
Direct Loan Program regulations have been amended to specify that a
graduate or professional student PLUS borrower must meet the same
eligibility criteria as a student Stafford borrower. This includes the
new requirement in Sec.  668.32 that a student convicted of fraud in
obtaining Title IV, HEA program funds, or who has pled nolo contendere
or guilty to such a crime, must complete repayment of the fraudulently
obtained funds. In addition, the student PLUS borrower must have
received a determination of his or her annual loan maximum eligibility
under the Subsidized and Unsubsidized Stafford Loan program. A student
PLUS borrower, like a parent PLUS borrower, must not have an adverse
credit history to be eligible for a PLUS Loan.
    We have also amended Sec.  682.201(c) to reflect that a parent
borrower convicted of fraud in obtaining Title IV, HEA program funds,
or who has pled nolo contendere or guilty to such a crime, must
complete repayment of the fraudulently obtained funds in order to be
eligible for a PLUS loan.
    Reasons: The regulations are amended to reflect changes made by the
HERA.

Joint Consolidation Loans (Sec. Sec.  682.102, 682.201, and 685.220)

    Statute: Section 8009 of the HERA amended section 428C(a)(3)(C) of
the HEA by eliminating the ability of a married couple to jointly
consolidate their eligible student loans.
    Current Regulations: Current regulations permit a married couple to
consolidate their eligible student loans into a joint FFEL or Direct
Consolidation Loan.
    New Regulations: Sections 682.102(d), 682.201(c)(2), 682.201(e),
and 685.220(d)(2) have been modified to eliminate the possibility of
joint consolidation of loans by a married couple for applications
received on or after July 1, 2006.
    Reasons: These regulations are amended to reflect changes made by
the HERA.

Interest Rates (Sec. Sec.  682.202 and 685.202)

    Statute: Public Law 107-139 amended section 427A of the HEA to
establish fixed interest rates for FFEL and Direct Stafford and PLUS
loans first disbursed on or after July 1, 2006, at 6.8 percent for
Stafford loans and 7.9 percent for PLUS loans. The HERA did not change
these interest rates for Stafford loans or Direct PLUS loans but did
increase the interest rate for PLUS loans made under the FFEL Program
to 8.5 percent. For FFEL and Direct Consolidation loans, the interest
rate remains a fixed rate, calculated at the time the consolidation
loan is made, as the weighted average of interest rates on the loans
consolidated, rounded up to the nearest higher \1/8\th of 1 percent,
not to exceed 8.5 percent.
    Current regulations: Current regulations do not reflect the changed
interest rates on Stafford and PLUS loans made under the FFEL and
Direct Loan programs. Interest rates on FFEL and Direct Consolidation
loans are correctly reflected in the current regulations.
    New regulations: Sections 682.202 and 685.202 of the FFEL and
Direct Loan program regulations, respectively, have been amended to
reflect a fixed interest rate of 6.8 percent for Stafford Loans first
disbursed on or after July 1, 2006. The regulations have also been
amended to reflect a fixed interest rate of 8.5 and 7.9 percent,
respectively, for FFEL and Direct PLUS loans first disbursed on or
after July 1, 2006.
    Reasons: The regulations are amended to reflect changes made by
Public Law 107-139 and the HERA.

Origination Fees (Sec. Sec.  682.202 and 685.202)

    Statute: Section 8008(c) of the HERA amended section 438(c)(2) of
the HEA to

[[Page 45675]]

reduce and eventually eliminate the 3 percent origination fee that is
paid by FFEL Program lenders and that the lenders may charge to FFEL
Stafford Loan borrowers. Section 8008(c) of the HERA also amended
section 455(b)(8)(A) of the HEA to reduce the 4 percent origination fee
that may be charged to Stafford Loan borrowers in the Direct Loan
Program. The 4 percent Direct Stafford Loan origination fee is
equivalent to the combined 3 percent FFEL Stafford Loan origination fee
plus the 1 percent insurance premium (now the Federal default fee) that
is authorized in the FFEL Program. Origination fees currently charged
to FFEL and Direct PLUS loan borrowers are not changed by the HERA.
FFEL and Direct Consolidation Loan borrowers are also not charged
origination fees.
    Current Regulations: The current regulations authorize lenders in
the FFEL Program to charge borrowers an origination fee of up to 3
percent of the amount of a Stafford Loan and the Secretary to charge a
fee of up to 4 percent of the amount of a Direct Stafford Loan. Lenders
in the FFEL Program are required to pay the full amount of the
origination fee to the Secretary whether or not they charge the fee to
the borrower.
    New regulations: The FFEL Program regulations have been amended in
Sec.  682.202(c) to reduce origination fees as follows: Beginning with
loans for which the first disbursement of principal is made on or after
July 1, 2006, and before July 1, 2007, the maximum origination fee that
a lender may charge a borrower will be 2 percent. The maximum
origination fee that may be charged to an FFEL Stafford loan borrower
drops to 1.5 percent on July 1, 2007, 1.0 percent on July 1, 2008, and
0.5 percent on July 1, 2009. The lender must pay the specified maximum
fee for each period to the Secretary whether or not it is charged to
the borrower. The fee will be eliminated as of July 1, 2010.
    Section 685.202(c) of the Direct Loan Program regulations has been
amended to reduce origination fees as follows: Beginning with loans for
which the first disbursement of principal is made on or after February
8, 2006, and before July 1, 2007, the maximum origination fee that may
be charged to Direct Stafford Loan borrowers is 3 percent. The maximum
origination fee that may be charged drops to 2.5 percent on July 1,
2007, 2.0 percent on July 1, 2008, 1.5 percent on July 1, 2009, and 1.0
percent on July 1, 2010.
    Reasons: The regulations are amended to reflect the changes made by
the HERA.

Loan Limits (Sec. Sec.  682.204 and 685.203)

    Statute: Section 8005 of the HERA amended sections 425(a)(1)(A),
428(b)(1)(A), and 428H(d) of the HEA to increase loan limits for
certain Stafford Loan borrowers. The higher loan limits are effective
in the FFEL Program for loans certified on or after July 1, 2007, and,
in the Direct Loan Program, for loans originated on or after July 1,
2007. The HERA did not increase aggregate loan limits in either
program.
    Current Regulations: Under the current regulations, the base
subsidized/unsubsidized combined annual loan limit for first-year
undergraduates is $2,625 and $3,500 for second year undergraduates. For
graduate or professional students, the additional unsubsidized annual
loan limit is $10,000. For students who have obtained a baccalaureate
degree and are enrolled in coursework necessary for enrollment in a
graduate or professional program, the additional unsubsidized annual
loan limit is $5,000. For students who have obtained a baccalaureate
degree, and are enrolled in coursework necessary for a professional
credential or certification from a State required for employment as a
teacher in an elementary school, the additional unsubsidized loan limit
is $5,000.
    New Regulations: Under the interim final regulations, for FFEL
loans certified on or after July 1, 2007 and for Direct Loans
originated on or after July 1, 2007:
    
 For first-year undergraduates, the base subsidized/
unsubsidized combined annual loan limit is $3,500;
    
 For second year undergraduates, the base subsidized/
unsubsidized combined annual loan limit is $4,500;
    
 For graduate or professional students, the additional
unsubsidized annual loan limit is $12,000;
    
 For students who have obtained a baccalaureate degree and
are enrolled in coursework necessary for enrollment in a graduate or
professional program, the additional unsubsidized annual loan limit is
$7,000; and
    
 For students who have obtained a baccalaureate degree, and
are enrolled in coursework necessary for a professional credential or
certification from a State required for employment as a teacher in an
elementary school, the additional unsubsidized loan limit is $7,000.
    The HERA did not increase the base subsidized/unsubsidized combined
loan limits for third year and above undergraduate students and for
graduate students. The HERA also did not change the limits on the
additional amount of unsubsidized loans that are available to all
undergraduate students.
    Reasons: These regulations are amended to reflect changes made by
the HERA.

Elimination of Option of Early Entrance Into Repayment (Sec. Sec.
682.209 and 685.220)

    Statute: Section 8009 of the HERA amended sections 428(b)(7)(A),
428C(a)(3), and 428C(b)(5) to eliminate the ability of FFEL Stafford
Loan borrowers to request to enter repayment on their loans early.
Early conversion to repayment allows a borrower to consolidate FFEL
loans while still enrolled at least half-time.
    Section 8009 of the HERA also amended sections 455(a), 455(d), and
455(g) of the HEA to require that Direct Consolidation Loans have the
same terms and conditions as FFEL Consolidation Loans. For both FFEL
Stafford Loan and Direct Stafford Loan borrowers, the repayment period
is now defined as the period beginning 6 months and one day after the
date the student ceases to carry at least one-half the normal full-time
academic workload, as determined by the institution.
    Current Regulations: Section 682.209(a)(5) of the FFEL program
regulations permits FFEL Stafford Loan borrowers to request and be
granted a repayment schedule prior to the end of their grace period and
therefore enter repayment on their loans. Current Direct Loan
regulations in Sec.  685.220(d)(1)(ii)(A) permit borrowers in an in-
school period with loans made under both the FFEL program and the
Direct Loan program to obtain a Direct Consolidation loan. Also, under
Sec.  685.220(d)(1)(ii)(B), a borrower with FFEL loans only, in an in-
school period at a school participating in the Direct Loan program is
eligible to consolidate these loans into the Direct Loan program.
    New Regulations: To implement the HERA, section 682.209(a)(5) of
the FFEL regulations has been removed. FFEL Stafford Loan borrowers may
no longer request to enter repayment early on their loans. Section
685.220(d)(1)(ii)(A) of the Direct Loan regulations has been removed so
that Direct Stafford Loan borrowers are no longer able to consolidate
while in an in-school status.
    Reasons: The regulations were modified to reflect the changes made
by the HERA to the HEA.

Teacher Loan Forgiveness (Sec. Sec.  682.215 and 685.217)

    Statute: Section 8013(c) of the HERA eliminated the previous
termination date of October 1, 2005, for the increased teacher loan
forgiveness

[[Page 45676]]

amounts of up to $17,500 for highly-qualified teachers in certain
specialties as originally provided under the Taxpayer-Teacher
Protection Act of 2004 (TTPA). In addition, the HERA established an
alternative method for teachers in private non-profit schools to
qualify for the same forgiveness benefits as "highly qualified"
teachers in public schools.
    Current Regulations: Sections 682.215 and 685.217 of the FFEL and
Direct Loan Program regulations, respectively, do not reflect the
eligibility requirements for teacher loan forgiveness established in
the TTPA, the increased loan forgiveness amount that are available for
certain teachers, or the alternative method for teachers in private,
non-profit schools to qualify for teacher loan forgiveness.
    New Regulations: Sections 682.215 and 685.217 continue to reflect
the original eligibility requirements for teacher loan forgiveness, and
have been amended to reflect the eligibility requirements, and
increased forgiveness amounts, established by the TTPA and the HERA.
    A borrower whose five, consecutive, complete years of qualifying
teaching service began before October 30, 2004 may qualify for up to
$5,000 of teacher loan forgiveness under the original eligibility
criteria for teacher loan forgiveness.
    "Highly qualified" teachers whose teaching service begins on or
after October 30, 2004 may qualify for forgiveness of up to:
    
 $5,000 if the borrower taught full-time in an eligible
elementary or secondary school;
    
 $17,500 if the borrower taught mathematics or science on a
full-time basis in an eligible secondary school;
    
 $17,500 if the borrower taught as a special education
teacher on a full-time basis, the borrower's primary responsibility was
to provide special education to children with disabilities in either an
eligible elementary or secondary school, if the borrower's special
education training corresponded to the children's disabilities and the
borrower demonstrated knowledge and teaching skills in the content
areas of the elementary or secondary school curriculum that the
borrower is teaching.
    Highly qualified teachers whose teaching service began before
October 30, 2004, may also qualify for $17,500 of loan forgiveness if
they meet the applicable eligibility requirements. To qualify for loan
forgiveness based on being a "highly qualified" teacher, the borrower
must have been a "highly qualified" teacher for each of the five
consecutive years of teaching service.
    Teachers in private, non-profit schools who are exempt from State
certification requirements may qualify for the same forgiveness
benefits as "highly qualified" public school teachers, if the private
school teacher is otherwise eligible for teacher loan forgiveness and:
    
 The private school teacher is permitted to and does
satisfy rigorous subject knowledge and skills tests by taking
competency tests in applicable grade levels and subject areas;
    
 The competency tests taken by the private school teacher
are recognized by five or more States for the purposes of fulfilling
the highly qualified teacher requirements of the Elementary and
Secondary Education Act of 1965, as amended; and
    
 The private school teacher achieves a score on each test
that equals or exceeds the average passing score for those five States.
    Reasons: These regulations are amended to reflect changes made by
the TTPA and the HERA.

Loan Discharge for False Certification as a Result of Identity Theft
(Sec. Sec.  682.402 and 685.215)

    Statute: Section 8012 of the HERA amended section 437(c) of the HEA
to authorize a discharge of a FFEL or Direct Loan Program loan if the
borrower's eligibility to borrow was falsely certified because the
borrower was a victim of the crime of identity theft. This change is
effective July 1, 2006.
    Current Regulations: FFEL and Direct Loan Program regulations in
Sec. Sec.  682.402 and 685.215 do not explicitly authorize the
discharge of a FFEL or Direct Loan Program loan if the borrower's
eligibility was falsely certified because the borrower was the victim
of the crime of identity theft.
    New Regulations: Sections 682.402 and 685.215 of the FFEL and
Direct Loan Program regulations, respectively, have been amended to
authorize a discharge of an FFEL or Direct Loan Program loan if the
borrower's eligibility to receive the loan was falsely certified
because the borrower was a victim of the crime of identity theft. The
interim final regulations provide that the borrower's obligation is
discharged if the borrower provides the holder of a loan, or the
Secretary in the case of a Direct Loan, a copy of a local, State, or
Federal court verdict or judgment that conclusively determines that the
individual who is the named borrower of the loan was the victim of the
crime of identity theft, and the borrower demonstrates that the loan in
question was made as a result of that identity theft. Discharge relief
is available to the victim of the proven crime of identity theft,
whether or not the prosecution was based on, or expressly referred to,
the loan in question. If the conviction or judgment did not expressly
reference that loan, the individual must provide authentic examples of
his or her other identification credentials, and an explanation of
facts that demonstrate that this criminal conduct resulted in the
school certifying that individual's eligibility to borrow, and, as a
result, in the loan being made.
    In addition, because the statute authorizes discharge for
individuals who are victims of the crime of identity theft, the interim
final regulations provides relief only to individuals who did not
knowingly accept the benefit of the falsely-certified loan, and require
individuals who claim relief to certify that they did not, with
knowledge that the loan had been made, receive or accept the benefits
of the loan.
    Where discharge relief is provided to an injured borrower, or where
a borrower receives FFEL benefits based on providing false or erroneous
information, the HEA and the current regulations generally require the
Secretary and the guarantor, as applicable, to pursue claims against
the responsible party. Approval of an identity theft discharge claim
will rest on a judicial determination that a named individual committed
the crime of identity theft and at very least a presentation by the
victim of a persuasive statement showing that the identified
perpetrator was responsible for the loan obligation. The Secretary
interprets the enforcement language in section 437 of the HEA to
include enforcement action against the identified perpetrator of the
identity theft.
    By adding this discharge authority, the Secretary in no way
suggests that unless a crime of identity theft has been successfully
prosecuted, individuals are liable for a loan for which they did not
execute or authorize another to execute a promissory note, from which
they received no benefits, and which they have not ratified by later
conduct. To the contrary, a person is ordinarily not liable on an
instrument, such as a promissory note or check, unless that person
signed that instrument or authorized another to sign on his or her
behalf. Section 682.402(e)(1)(i)(B) of the FFEL Program regulations
provide that FFEL program benefits are payable to the holder of the
loan only where the lender obtained a legally-enforceable promissory
note to evidence the loan,

[[Page 45677]]

and Sec.  682.406(a)(1) provides that reinsurance may be received only
with respect to a claim on a legally-enforceable loan. Because a forged
promissory note is not an enforceable obligation of the named borrower,
FFEL Program benefits can not lawfully be claimed on a loan evidenced
by such a note, absent conduct by the individual named as borrower that
applicable law would regard as a ratification of knowing acceptance of
the loan by the individual.\1\ In Sec.  682.402(e)(1)(i)(B) of the FFEL
Program regulations that implement the discharge authority in section
437(c) of the HEA for false certification of eligibility to borrow, the
Secretary carved out a narrow exception to this rule to authorize both
discharge relief to individuals named as borrowers and reimbursement to
the loan holders if the loan application or promissory note had been
forged by the school. No regulation grants relief to those individuals
who demonstrate that their signatures were forged on the note, but who
cannot credibly assert that the forger was a person affiliated with the
school, because that relief is already available for those individuals
under the common law (and in many instances, State law) defense of
forgery. That defense has applied to FFEL Program loans as to any other
contracts, and therefore no regulations were needed, or are now needed,
to create relief from liability on a forged FFEL Program note.
---------------------------------------------------------------------------

    \1\ The Department applied this same principle in DCL 93-L-156,
July 1993, with respect to FFEL Program loans disbursed by checks on
which the borrower's endorsement had been forged.
---------------------------------------------------------------------------

    Moreover, the rights of the lender, and any subsequent holder, have
always been subject to the obligation of the lender to exercise due
diligence in making the loan in accordance with Sec.  682.206(a)(2). A
lender whose employee or agent either committed the crime of identity
theft of that individual, or knew at the time the loan was made of the
identity theft of that individual, has not relied in good faith on
representations made by the borrower or the school in the loan
application process, and is not held harmless under FFEL Program
regulations from the consequences of the making of a loan that is not
legally enforceable against the individual named as borrower. In this
instance, as with forged or unauthorized endorsements on disbursement
instruments or authorizations, the holders of the loan must refund to
the Secretary any FFEL Program benefits received on that loan.
    Reasons: The regulations are amended to reflect changes made by the
HERA.

Loan Rehabilitation Agreement (Sec. Sec.  682.405 and 685.211)

    Statute: Section 8014(h) of the HERA amended section 428F(a) of the
HEA to modify the requirements for a borrower to rehabilitate a
defaulted loan under the FFEL and Direct Loan Programs. Under the HERA,
a borrower will only need to make nine payments within 20 days of the
due date during a period of 10 consecutive months to rehabilitate a
defaulted loan(s). This change does not apply to the Federal Perkins
Loan Program.
    Current Regulations: Current regulations require a defaulted FFEL
or Direct Loan borrower to make 12 consecutive monthly payments on the
defaulted loan to rehabilitate the loan.
    New Regulations: Sections 682.405 and 685.211 of the FFEL and
Direct Loan Program regulations, respectively, have been amended to
provide that a borrower meets the requirements for rehabilitation if
that borrower makes at least nine of the ten payments required under a
monthly repayment, if each payment is received within 20 days of the
scheduled due date for that payment, and notwithstanding the 20-day
grace period otherwise applicable, if all nine of those payments are
received within a period of no more than 10 consecutive calendar months
that begins no earlier than the first scheduled due date of the nine
payments and ends no later than the scheduled due date in the tenth
month following that first due date. This change is effective on July
1, 2006. For a loan rehabilitation agreement that began prior to July
1, 2006, a guaranty agency may consider the borrower to have met the
new rehabilitation standard if at least one of the borrower's payments
is due to be made on or after July 1, 2006, even if that payment is
received prior to July 1, 2006, but within 20 days of the required due
date in July. The guaranty agency must treat all borrowers in this
situation equally. On defaulted loans held by the Department, we will
consider the borrower to have met the new rehabilitation standards if
the borrower makes payments as required under the existing agreement,
and at least one of the nine payments made by the borrower was due on
or after July 1, 2006, even if that specific payment was received prior
to July 1, 2006, but within 20 days of the July due date.
    Reasons: These regulations are amended to reflect changes made by
the HERA.
FFEL Program Changes

Single Holder Rule (Sec. Sec.  682.102 and 682.201)

    Statute: Section 7015 of The Emergency Supplemental Appropriations
Act for Defense, the Global War on Terror, and Hurricane Recovery, 2006
(Pub. L. 109-234) amended section 428C(b)(1)(A) of the HEA by repealing
the single holder rule with respect to any FFEL Consolidation Loan for
which an application is received by an eligible lender on or after June
15, 2006. The single holder rule required that a borrower with FFEL
loans held by a single lender could only consolidate his or her loans
with that lender.
    Current Regulations: Sections 682.102(d) and 682.201(d) provide
that a borrower who is applying for a Consolidation Loan must certify
that the lender making the Consolidation Loan holds at least one
outstanding loan that is being consolidated unless the borrower has
multiple holders of FFEL Program loans, or the borrower's single loan
holder declines to make a Consolidation Loan, or declines to make one
with income-sensitive repayment terms.
    New Regulations: Sections 682.102(d) and 682.201(d) have been
amended to remove these requirements.
    Reasons: The interim final regulations are necessary to reflect the
changes made to the HEA by The Emergency Supplemental Appropriations
Act for Defense, the Global War on Terror, and Hurricane Recovery,
2006.

Federal Default Fee (Sec. Sec.  682.202, 682.401 and 682.419)

    Statute: Effective for loans guaranteed on or after July 1, 2006,
section 8014 of the HERA amended section 428(b)(1)(H) of the HEA to
eliminate the optional 1 percent insurance premium fee that guaranty
agencies could charge to lenders and that lenders could charge to
borrowers and establishes a Federal default fee equal to 1 percent of
the principal amount of the loan. The default fee must be collected by
the guaranty agency and deposited into the Federal Fund held by a
guaranty agency under section 422A of the HEA. The default fee may be
deducted and collected by the lender from the proceeds of the loan and
paid to the guaranty agency or paid from other non-Federal sources. If
the fee is charged to the borrower, it must be deducted proportionally
from each disbursement of the loan proceeds.
    A guaranty agency must ensure that the proceeds of the Federal
default fee will not be used for incentive payments

[[Page 45678]]

to lenders. The Secretary is prohibited from waiving these provisions
for guaranty agencies that have Voluntary Flexible Agreements under
section 428A of the HEA.
    Current Regulations: Section Sec.  682.401(b)(10) of the current
regulations provides that a guaranty agency may charge the lender an
insurance premium equal to 1 percent of the principal balance of each
Stafford, SLS, or PLUS loan it guarantees. Under Sec.  682.202(d) of
the current regulations, a lender may pass the cost of the insurance
premium along to the borrower by deducting the amount of the premium
from the borrower's loan proceeds. Section 682.419(b) requires the
guaranty agency to deposit into its Federal Fund the total amount of
insurance premiums collected from lenders.
    New Regulations: Section 682.401(b)(10) has been amended to reflect
that insurance premiums will no longer be charged on Stafford or PLUS
loans guaranteed on or after July 1, 2006. The regulations have been
amended to reflect the new requirement for a Federal default fee. In
accordance with the HERA, the interim final regulations require, for
loans guaranteed on or after July 1, 2006, that the guaranty agency
must collect, from the borrower or from any non-Federal source, a
Federal default fee equal to one percent of the principal amount of the
loan. The guaranty agency must deposit the proceeds of the default fee
into its Federal Fund and ensure that the proceeds of such fees are not
used for incentive payments to lenders. Section 682.202 has also been
amended to provide that a lender may pass the cost of the Federal
default fee along to the borrower. If the borrower is charged the
Federal default fee, the amount of the default fee must be deducted
proportionately from each disbursement of the loan. The lender or
guaranty agency may also use other non-Federal sources to pay the
default fee that must be deposited into the agency's Federal Fund.
    Section 682.419, which regulates the guaranty agency Federal Fund,
has also been amended to require the guaranty agencies to deposit
Federal default fees into the Federal Fund and to use assets of the
Federal Fund as those assets relate to the Federal default fee only as
directed.
    Reasons: The regulations are modified to reflect the change made by
the HERA.

Loan Disbursement Through an Escrow Agent (Sec. Sec.  682.207 and
682.408)

    Statute: Section 8014(j) of the HERA amended section 428(i)(1) of
the HEA to reduce the amount of time before disbursement to the
borrower that a lender may transfer loan funds to an escrow agent.
Under the HERA, a lender may now transfer funds to the escrow agent no
more than 10 days prior to the date the funds are disbursed to the
borrower.
    Current Regulations: The current regulations permit lenders to
transfer funds to an escrow agent no more than 21 days prior to the
date the funds are disbursed to the borrower.
    New Regulations: The regulations in Sec. Sec.  682.207(b)(1)(iv)
and 682.408(c) have been amended to permit lenders to transfer funds to
an escrow agent no more than 10 days prior to the date the funds are
disbursed to the borrower.
    Reasons: The regulations were modified to reflect the changes made
by the HERA to the HEA in reducing this time period.

Due Diligence in Disbursing a Loan (Sec. Sec.  682.207 and 682.604)

    Statute: Section 8008 of the HERA amended section 428(b)(1)(N) of
the HEA to provide that, for U.S. students attending an eligible
foreign school, FFEL Stafford Program loans will be disbursed directly
to the borrower only if the foreign school requests this method. Prior
to the change, a disbursement could be made directly to a student
enrolled in a foreign school at the request of the student. No change
was made to the requirement that a disbursement be made directly to a
student enrolled in a study-abroad program that is approved for credit
by the student's home institution upon the request of the student.
However, for both borrowers enrolled at a foreign school and borrowers
enrolled in a study-abroad program, section 8008 of the HERA specifies
that a lender or guaranty agency must verify the borrower's enrollment
at the foreign school before making a disbursement of FFEL Stafford
funds directly to a borrower. Under section 428B of the HEA, a lender
may not make a disbursement of PLUS loan funds (including loan funds
for graduate and professional student PLUS borrowers) directly to the
borrower. These changes are effective for loans first disbursed on or
after July 1, 2006.
    Current Regulations: The current regulations in Sec.
682.207(b)(1)(v)(C) and (D) provide that, for both students enrolled in
an eligible foreign school and students enrolled in a study-abroad
program, FFEL Program loans are disbursed directly to the borrower by
the lender only upon the request of the student. Section
682.207(b)(1)(v)(E) requires a lender to notify the foreign school when
the lender makes a disbursement directly to a student enrolled at the
foreign school.
    New Regulations: Section 682.207 has been amended to reflect the
statutory change that provides that a lender may disburse FFEL Stafford
Loan funds directly to a U.S. student attending an eligible foreign
school only if the school requests this method. Without a request from
the school, lenders must disburse loan funds directly to an office of
the foreign school designated by the school to receive them. A foreign
school may make a single request to a lender to disburse all FFEL
Stafford Loans directly to eligible students who attend the foreign
school.
    In addition, the interim final regulations incorporate the HERA
change that provides that a lender may not make a direct disbursement
to a borrower enrolled at a foreign school or in a study-abroad program
until the lender or guaranty agency verifies the borrower's enrollment
at the foreign school. A guaranty agency or lender must verify
enrollment before each disbursement, including second and subsequent
disbursements, of a Stafford loan. If the lender or guaranty agency has
verified a borrower's enrollment, the lender must honor the student's
or school's request, as appropriate, that a direct disbursement be
made. As foreign schools may not participate in the Direct Loan Program
and Direct Loan funds are disbursed to the borrower in a study-abroad
program directly by the school, these provisions are not applicable to
the Direct Loan Program.
    In new paragraph 682.207(b)(2) we have listed the requirements a
lender or guaranty agency must follow to verify a student's enrollment
at a foreign school or enrollment in a study-abroad program. These
requirements are based on the guaranty agency program requirements in
Dear Colleague Letter (DCL) G-03-348 (August 2003). To verify
enrollment in a foreign school, a guaranty agency must confirm that the
foreign school the student is to attend is currently certified to
participate in the FFEL Program. To do this, the guaranty agency must
access the Department's Postsecondary Education Participants System
(PEPS) Database. As noted in DCL G-03-348, schools that have an
eligibility status of "Eligible/Loan Deferment" and a certification
status of "Not Certified" in the PEPS Database are eligible for FFEL
loan deferment purposes only. They are not certified to participate in
the FFEL programs and students attending those schools are not eligible
to receive FFEL program funds.
    After confirming that a school is certified to participate in the
FFEL

[[Page 45679]]

Program, the lender or guaranty agency must contact the foreign school
by telephone or e-mail to verify the borrower's enrollment at the
school.
    The interim final regulations have different standards for
verifying enrollment at a foreign school for a new student and for
verifying enrollment for a continuing student. For a new student, the
lender or guaranty agency must verify that the student has been
admitted to the foreign school. For a continuing student, the lender or
guaranty agency must verify that the student is still enrolled as
"enrolled" is defined in 34 CFR 668.2. Specifically, the lender or
guaranty agency must confirm that the student is admitted/enrolled for
the period for which the loan is intended at the enrollment status for
which the loan was certified. Finally, the lender or guaranty agency
must document the student's file with information on the contact.
    Similarly, for a student enrolled in a study-abroad program, the
lender or guaranty agency must contact the home institution by
telephone or e-mail to confirm the student's admission to the program,
for a new student, or continuing enrollment in the program, for a
continuing student, for the period for which the loan is intended at
the enrollment status for which the loan was certified.
    Guaranty agencies and lenders must coordinate their activities to
ensure that the requirements for verifying the borrower's enrollment
are met before any disbursement may be made.
    New paragraph Sec.  682.604(b) also incorporates the requirements
formerly found in Sec.  682.207(b)(1)(v)(E) for lender notification to
the foreign school when the lender makes a direct disbursement to a
student enrolled at a foreign school. The interim final regulations now
require lenders to notify the school when the lender makes a
disbursement directly to a student enrolled in a study-abroad program.
In the case of a student enrolled in a study-abroad program, the lender
must notify the home institution when the lender makes the disbursement
directly to the student. Section 682.604(b)(1) is amended to require
that, upon receipt of such a notice, a foreign school, or the home
institution for a student enrolled in a study-abroad program, must
immediately notify the lender if the student is no longer eligible to
receive the disbursement.
    Reasons: These changes are made to implement the provisions of the
HERA. To ensure proper implementation of the statutory changes, the
interim final regulations include procedures issued in DCL G-03-348.
    In the past, the Department's Office of the Inspector General and
the Government Accountability Office have found that FFEL funds have
been disbursed directly to students for attendance at foreign schools
that either did not exist, or that were not participating in the FFEL
Programs. To avoid this problem in the future, verification of a
student's enrollment at a foreign school must include confirmation of
the foreign school's certification to participate in the FFEL Programs,
as currently required by DCL G-03-348.
    As a lender may still make an FFEL disbursement directly to a
student in a study-abroad program at the student's request, these
regulations require that the lender or guaranty agency confirm the
student's enrollment in a study-abroad program with the student's home
institution prior to any disbursement of funds.
    Finally, for consistency in the verification of enrollment
procedures, we have extended the requirement that a lender notify a
foreign school when the lender makes a direct disbursement to a student
enrolled at the foreign school, to require the lender to notify the
home institution when it makes a direct disbursement to a student
enrolled in a study-abroad program. The change to Sec.  682.604(b)(1)
is made to make clear that an institution that is notified by the
lender of a disbursement directly to a borrower must inform the lender
if the student is no longer eligible. Under Sec.  682.610(c)(2), an
institution is already required to notify a guaranty agency or lender
if it discovers that a loan has been made to or on behalf of a student
who enrolled at that school, but who has ceased to be enrolled on at
least a half-time basis. However, Sec.  682.610(c) refers to the
submission of such information in terms of the submission of student
status confirmation reports (SSCRs). The new requirement makes clear
that all institutions, including those that now report data through the
Department's National Student Loan Data System instead of SSCRs, must
respond to a lender's notification of a direct disbursement if the
student is no longer eligible.
Forbearance (Sec.  682.211)
    Statute: Section 8014(e) of the HERA amended section 428(c)(3) of
the HEA to require that lenders confirm any non-written forbearance
agreement by recording the terms of the agreement in the borrower's
file.
    Current Regulations: The current regulations state that a lender
may grant forbearance if the lender and the borrower or endorser agree
to the terms of the forbearance and, unless the agreement was in
writing, the lender sends, within 30 days, a notice to the borrower or
endorser confirming the terms of the forbearance.
    New Regulations: Section 682.211(b)(1) of the FFEL Program
regulations has been amended to require a lender to record the terms of
the forbearance in the borrower's file. This change is effective for
agreements entered into or renegotiated with a borrower on or after
July 1, 2006.
    Reasons: The regulations are modified to reflect the change made by
the HERA.
Loans Disbursed Through an Escrow Agent (Sec.  682.300)
    Statute: Section 8014(j) of the HERA amended section 428(a)(3)(A)
of the HEA to provide that a lender may first receive interest subsidy
payments on loans disbursed by an escrow agent on behalf of the lender
three days prior to the first day of the period of enrollment, or if
the loan is disbursed after the first day of the period of enrollment,
three days after disbursement.
    Current Regulations: Current regulations do not include specific
rules for interest subsidy payments on loans disbursed by an escrow
agent.
    New Regulations: Section 682.300(c)(3) has been amended to provide
for the payment of interest subsidies on loans disbursed through an
escrow agent no sooner than three days prior to the first day of the
period of enrollment or, if the loan is disbursed after the first day
of the period of enrollment, three days after disbursement.
    Reasons: The regulations are modified to reflect the change made by
the HERA.

Special Allowance Rates for Loans First Disbursed on or After January
1, 2000 (Sec.  682.302)

    Statute: Prior to enactment of the HERA, section 438(b)(2)(I)(v) of
the HEA provided that special allowance payments (SAPs) were not paid
to lenders for any PLUS loans that were first disbursed on or after
January 1, 2000, unless a calculation using the bond equivalent rates
of certain 3-month commercial paper (financial) plus a spread of 3.1
percent, exceeded 9.0 percent. This provision of the HEA has been
struck by the HERA effective April 1, 2006, for claims that accrued on
or after that date.
    Current Regulations: Current regulations do not reflect the changes
made by the HERA.
    New Regulations: Section 682.302(c) of the regulations has been
amended to reflect the changes made by the HERA

[[Page 45680]]

regarding special allowance to provide for a special allowance payment
on PLUS loans that were first disbursed on or after January 1, 2000
beginning with payments made after July 1, 2006. This change
acknowledges that lenders began earning special allowance payments
April 1, 2006.
    Reasons: The regulations are modified to reflect the changes made
by the HERA.

Special Allowance Payments on Loans Funded by Tax-Exempt Obligations
(Sec.  682.302)

    Statute: Effective on February 8, 2006, the HERA made the special
allowance payment provisions of the Taxpayer-Teacher Protection Act of
2004 (TTPA) permanent by eliminating its January 1, 2006 sunset
provisions. The TTPA provided that upon the occurrence of specified
events after September 30, 2004 and before January 1, 2006, the special
allowance paid on loans made or purchased with funds from particular
sources derived by the holder from tax-exempt obligations originally
issued prior to October 1, 1993, would revert to the usual rates paid
on other loans, instead of the otherwise applicable rate of not less
than 9.5 percent minus the applicable interest rate. This change
affected loans that had qualified for the minimum 9.5 percent special
allowance rate, but were:
    1. Financed by a tax-exempt obligation that, after September 30,
2004, and before January 1, 2006, has matured or been refunded, retired
or defeased;
    2. Refinanced after September 30, 2004, and before January 1, 2006,
with funds obtained from a source other than those described in section
438(b)(2)(B)(v)(I) of the HEA; or
    3. Sold or transferred to any other holder after September 30,
2004, and before January 1, 2006.
    The HERA eliminated the ending dates on these limitations. In
addition, the HERA added two provisions that prohibit a loan from
acquiring eligibility for the 9.5 percent minimum special allowance
rates under 438(b)(2)(B) of the HEA. These new provisions state that
special allowance is computed at the normal, rather than the 9.5
percent minimum return rate for any loan:
    
 Made or purchased on or after February 8, 2006 (the date
of enactment of the HERA); or
    
 Not earning on February 8, 2006 a quarterly rate of
special allowance determined under section 438(b)(2)(B)(i) or (ii) of
the HEA.
    The HERA delays these new requirements for certain holders by
providing that they take effect later--substituting "December 31,
2010," for February 8, 2006--for a holder that:
    
 Was, as of February 8, 2006, and during the quarter for
which the special allowance is paid, a unit of State or local
government or a nonprofit private entity;
    
 Was, as of February 8, 2006, and during such quarter, not
owned or controlled by, or under common ownership or control with, a
for-profit entity; and
    
 Held, directly or through any subsidiary, affiliate, or
trustee, a total unpaid balance of principal equal to or less than $100
million on loans for which special allowances were paid under section
438(b)(2)(B) of the HEA in the most recent quarterly payment prior to
September 30, 2005.
    Current Regulations: Current regulations in Sec.  682.302(c)(3)
provide that special allowance rates for loans that were made or
purchased with funds obtained by the holder from the issuance of tax-
exempt obligations originally issued prior to October 1, 1993, or from
other sources listed there that were derived from those bond proceeds,
receive a special allowance at a rate that is generally one-half of the
rate established for other loans, but not less than 9.5 percent minus
the applicable interest rate on such loans and, in Sec.  682.302(e),
that the issuer of such obligations receives special allowance payments
on these loans at the usual rate if the issuer retires the tax-exempt
obligation or defeases it by means of yield-restricted obligations.
Current regulations refer to obligations "originally issued" before
or after specified dates, but do not define that term, which derives
directly from section 438(b)(2)(B) of the HEA. Current regulations do
not incorporate the Department's interpretation of the term
"originally issued" nor do they incorporate the Department's
longstanding interpretation of the statute and regulations as
applicable to the treatment of loans acquired from the tax-exempt
funding sources listed in the statute and in Sec.  682.302(c)(3)(i), if
the "originally issued" obligation is later refunded by a tax-exempt
refunding obligation.
    New Regulations: Section 682.302(e) has been amended and new
paragraph Sec.  682.302(f) has been added to reflect the provisions of
the HERA and, as pertinent, of the TTPA as described above and the
Department's interpretation of terms found in current regulations as
necessary for the proper implementation of provisions added by the HERA
and TTPA. In addition, Sec.  682.302(c) has been amended to incorporate
the various statutory changes in special allowance rate calculations.
    Reasons: The regulations are modified to reflect the changes made
by the HERA, and as necessary to reflect those changes, the changes
made by the TTPA and the interpretations by the Department of terms
found in current regulations affected by those enactments.

Interest Repayment From Lenders (Sec.  682.305)

    Statute: Section 8006(b) of the HERA amended section
438(b)(2)(C)(v) of the HEA to require payment by the lender of excess
interest received by the lender when the applicable interest rate on a
loan for any quarter exceeds the special allowance support level for
the loan.
    Under the HERA, excess interest is calculated each quarter by
subtracting the "special allowance support level" from the applicable
interest, multiplying the result by the average daily principal balance
of the loan (not including unearned interest added to principal) during
the quarter, and dividing by four.
    Current Regulations: Current regulations do not provide for the
recapture of excess interest by the Secretary.
    New Regulations: Section 682.305 of the regulations has been
amended by adding a new paragraph (d) that provides for the recovery of
excess interest from a lender in accordance with the provisions added
by the HERA.
    Section 682.305(d) requires the payment by a lender of excess
interest when the applicable interest rate on a loan for any quarter
exceeds the special allowance support level for the loan. This
requirement applies to loans for which the first disbursement of
principal is made on or after April 1, 2006, but does not apply with
respect to any special allowance payment made under section 438 of the
HEA before April 1, 2006. The Secretary will collect the excess
interest from lenders quarterly.
    The interim final regulations require that excess interest is
calculated each quarter by subtracting the special allowance support
level from the applicable interest rate, multiplying the result by the
average daily principal balance of the loan (not including unearned
interest added to principal) during the quarter and dividing by four.
For example, if the average daily principal balance of a loan was
$1,000, and the applicable interest rate and special allowance support
level were 6.8 percent and 5.8 percent, respectively, the excess
interest to be rebated would be: $1,000 x 1.0 percent/4 = $2.50.

[[Page 45681]]

    Reasons: The regulations are modified to reflect the changes made
by the HERA.
Lender Insurance (Sec.  682.401)
    Statute: Section 8014(a) of the HERA amended section 428(b)(1)(G)
of the HEA to require a guaranty agency to reduce the amount of
insurance to a lender to 97 percent of a loan's unpaid principal.
    Current Regulations: Section 682.401(b)(14)(ii) of the FFEL Program
regulations provides that a guaranty agency insures 98 percent of a
loan's unpaid principal.
    New Regulations: The regulations are amended by adding new
paragraph Sec.  682.401(b)(14)(iii) to require a guaranty agency to
insure 97 percent of the unpaid principal balance on loans first
disbursed on or after July 1, 2006.
    Reasons: The regulations are modified to reflect the change made by
the HERA.

Default Collection (Sec.  682.401)

    Statute: Section 8014(d) of the HERA amended section 428(c) of the
HEA to require each guaranty agency to ensure that consolidation loans
are not an excessive proportion of the agency's recoveries on defaulted
loans. In addition, under the HERA, if a borrower repays a defaulted
loan through a Federal Consolidation Loan on or after October 1, 2006,
a guaranty agency may not charge the borrower collection costs in an
amount in excess of 18.5 percent of the outstanding principal and
interest of the defaulted loan. Also on or after October 1, 2006, when
returning proceeds to the Secretary from the consolidation of a
defaulted loan, a guaranty agency that charged the borrower collection
costs must remit an amount that equals the lesser of the actual
collection costs charged or 8.5 percent of the outstanding principal
and interest of the loan. On or after October 1, 2009, when returning
proceeds to the Secretary from the consolidation of a defaulted loan
that is paid off with excess consolidation proceeds, a guaranty agency
must remit the entire collection cost charged. The HERA defines the
term excess consolidation proceeds to mean, for any Federal fiscal year
beginning on or after October 1, 2009, the amount of proceeds from the
consolidation of defaulted loans under the FFEL Program that exceed 45
percent of the agency's total collections on defaulted loans in that
Federal fiscal year.
    Current Regulations: Current regulations in Sec.  682.401(b)(27)
allow a guaranty agency to charge collection costs in an amount not to
exceed 18.5 percent of the outstanding principal and interest of a
defaulted FFEL Program loan that is repaid by a Federal Consolidation
loan. When returning the proceeds from the consolidation of a defaulted
loan to the Secretary, a guaranty agency may retain only the actual
amount of collection costs charged to the borrower on the loan repaid
by the consolidation loan (which may not exceed 18.5 percent).
    New Regulations: Section 682.401(b)(27) has been amended to reflect
the new statutory requirements regarding the consolidation of defaulted
FFEL loans and excess consolidation proceeds described above.
    Reasons: The regulations are modified to reflect the changes made
by the HERA.

College Access Initiative (Sec.  682.401)

    Statute: Section 8023 of the HERA amended section 485D of the HEA
to establish a new College Access Initiative. As part of the
Initiative, each guaranty agency must establish a plan to promote
access to postsecondary education. The HERA requires each guaranty
agency to provide the Secretary and the public with information on
access to a comprehensive listing of postsecondary education
opportunities, programs and publications available in the State or
States for which the agency is the designated guaranty agency. A
guaranty agency must also promote and publicize information for
students and traditionally underrepresented populations on how to plan,
prepare and pay for college. The guaranty agency must pay for these
activities from its Operating Fund or from remaining funds in
restricted accounts established pursuant to section 422(h)(4) of the
HEA. Finally, a guaranty agency must ensure that this information is
free and available in printed format by November 5, 2006.
    Current Regulations: Current regulations do not provide for the
College Access Initiative.
    New Regulations: Section 682.401 has been amended to reflect the
requirements of the College Access Initiative.
    Reasons: The regulations are modified to reflect the changes made
by the HERA.

Reinsurance Claims From Guaranty Agencies--Exempt Claims (Sec.
682.404)

    Statute: Section 8014(c) of the HERA amended section 428(c)(1) of
the HEA to provide that, for loans on which the first disbursement of
principal is made on or after July 1, 2006, a guaranty agency will
receive 100 percent insurance from the Department for exempt claims
under new section 428(c)(1)(G) of the HEA. The statute defines the term
exempt claims to mean claims with respect to loans for which it is
determined that the borrower (or student on whose behalf a parent has
borrowed), without the lender's or institution's knowledge at the time
the loan was made, provided false or erroneous information or took
actions that caused the borrower or the student to be ineligible for
all or a portion of the loan or for interest benefits on the loan. The
new statutory definition is the same definition used in Sec.
682.412(a).
    Current Regulations: Current regulations have addressed exempt
claims in Sec.  682.412(a). Under prior regulations these claims were
paid the regular reinsurance percentage.
    New Regulations: Section 682.404(a) has been amended to provide 100
percent reinsurance for exempt claims and to include the statutory
definition of exempt claims.
    Reasons: The regulations are modified to reflect the changes made
by the HERA.

Submission of Reinsurance Claims for Payment by the Secretary (Sec.
682.406)

    Statute: Section 8014(j) of the HERA amended section 428(c)(1) of
the HEA by reducing the amount of time a guaranty agency is allowed for
filing a reinsurance claim with the Department.
    Current Regulations: The current regulations allow guaranty
agencies 45 days following the date it paid a lender's claim to file a
reinsurance claim with the Department.
    New Regulations: The regulations in Sec.  682.406(a) have been
amended to allow guaranty agencies 30 days following the date a
lender's claim has been paid to file a reinsurance claim with the
Department.
    Reasons: The regulations were modified to reflect the changes made
by the HERA to the HEA in reducing this time period.

Wage Garnishment (Sec.  682.410)