FR Doc 07-5332
[Federal Register: November 1, 2007 (Volume 72, Number 211)]
[Rules and Regulations]
[Page 61959-62011]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr01no07-10]
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Part II
Department of Education
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34 CFR Parts 674, 682 and 685
Federal Perkins Loan Program, Federal Family Education Loan Program,
and William D. Ford Federal Direct Loan Program; Final Rule
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DEPARTMENT OF EDUCATION
34 CFR Parts 674, 682 and 685
[Docket ID ED-2007-OPE-0133]
RIN 1840-AC89
Federal Perkins Loan Program, Federal Family Education Loan
Program, and William D. Ford Federal Direct Loan Program
AGENCY: Office of Postsecondary Education, Department of Education.
ACTION: Final regulations.
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SUMMARY: The Secretary amends the Federal Perkins Loan (Perkins Loan)
Program, Federal Family Education Loan (FFEL) Program, and William D.
Ford Federal Direct Loan (Direct Loan) Program regulations. The
Secretary is amending these regulations to strengthen and improve the
administration of the loan programs authorized under Title IV of the
Higher Education Act of 1965, as amended (HEA).
DATES: Effective Date: These regulations are effective July 1, 2008.
Implementation Date: The Secretary has determined, in accordance
with section 482(c)(2)(A) of the HEA (20 U.S.C. 1089(c)(2)(A)), that
institutions, lenders, guaranty agencies, and loan servicers that
administer Title IV, HEA programs may, at their discretion, choose to
implement Sec. Sec. 674.38, 674.45, 674.61, 682.202, 682.208, 682.210,
682.211, 682.401, 682.603, 682.604, 685.204, 685.212, 685.301, and
685.304 of these final regulations on or after November 1, 2007. For
further information, see the section entitled Implementation Date of
These Regulations in the SUPPLEMENTARY INFORMATION section of this
preamble.
FOR FURTHER INFORMATION CONTACT: For information related to
Simplification of the Deferment Process, Loan Counseling for Graduate
or Professional Student PLUS Loan Borrowers, Mandatory Assignment of
Defaulted Perkins Loans, Reasonable Collection Costs, and Child or
Family Service Cancellation, Brian Smith. Telephone: (202) 502-7551 or
via Internet: brian.smith@ed.gov.
For information related to Accurate and Complete Copy of a Death
Certificate, NSLDS Reporting Requirements, Maximum Loan Period, and
Frequency of Capitalization, Nikki Harris. Telephone: (202) 219-7050 or
via Internet: nikki.harris@ed.gov.
For information related to Total and Permanent Disability,
Certification of Electronic Signatures on Master Promissory Notes
(MPNs) Assigned to the Department, Record Retention Requirements on
MPNs Assigned to the Department, Eligible Lender Trustees, and Loan
Discharge for False Certification as a Result of Identity Theft, Gail
McLarnon. Telephone: (202) 219-7048 or via Internet:
gail.mclarnon@ed.gov.
For information related to Prohibited Inducements and Preferred
Lender Lists, Pamela Moran. Telephone: (202) 502-7732 or via Internet:
pamela.moran@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 any of the contact persons listed in this
section.
SUPPLEMENTARY INFORMATION: On June 12, 2007, the Secretary published a
notice of proposed rulemaking (NPRM) for the Perkins Loan, FFEL and
Direct Loan Programs in the Federal Register (72 FR 32410).
In the preamble to the NPRM, the Secretary discussed on pages 32411
through 32427 the major changes proposed in that document to strengthen
and improve the administration of the loan programs authorized under
Title IV of the HEA. These include the following:
Amending Sec. Sec. 674.38, 682.210, and 685.204 to allow
institutions that participate in the Perkins Loan Program, FFEL
lenders, and the Secretary to grant a deferment under certain
circumstances to a borrower if another FFEL lender or the Department
has granted the borrower a deferment for the same reason and time
period.
Amending Sec. Sec. 674.38, 682.210, and 685.204 to allow
a Perkins, FFEL or Direct Loan borrower's representative to apply for
an armed forces or military service deferment on behalf of the
borrower.
Amending Sec. Sec. 674.61, 682.402, and 685.212 to allow
the use of an accurate and complete photocopy of an original or
certified copy of the death certificate, in addition to the original or
a certified copy of the death certificate, to support the discharge of
a Title IV loan due to death.
Amending Sec. Sec. 674.61, 682.402, and 685.213 to
restructure the regulations governing the discharge of a Perkins, FFEL
or Direct Loan based on the borrower's total and permanent disability
to clarify and provide additional explanation of the eligibility
requirements.
Amending Sec. Sec. 674.61, 682.402, and 685.213 to
provide for a prospective conditional discharge period to establish
eligibility for a total and permanent disability discharge that is up
to three years in length and begins on the date that the Secretary
makes the initial determination that the borrower is totally and
permanently disabled.
Amending Sec. Sec. 674.16, 682.208, and 682.414 to
require institutions, lenders, and guaranty agencies to report
enrollment and loan status information, or any other Title IV-related
data required by the Secretary, to the Secretary by the deadline
established by the Secretary.
Amending Sec. Sec. 674.19, 674.50, and 682.414 to require
an institution or lender to maintain the original electronic promissory
note, plus a certification and other supporting information, regarding
the creation and maintenance of any electronically-signed Perkins Loan
or FFEL promissory note or Master Promissory Note (MPN) and provide
this certification to the Department, upon request, should it be needed
to enforce an assigned loan. Institutions and lenders are required to
maintain the electronic promissory note and supporting documentation
for at least three years after all loan obligations evidenced by the
note are satisfied.
Amending Sec. Sec. 674.19 and 674.50 to require an
institution that participates in the Perkins Loan Program to retain
records showing the date and amount of each disbursement of each loan
made under an MPN for at least three years from the date the loan is
canceled, repaid or otherwise satisfied and require the institution to
submit disbursement records on an assigned Perkins Loan, upon request,
should the Secretary need the records to enforce the loan.
Amending Sec. 682.409 to require a guaranty agency to
submit the record of the lender's disbursement of loan funds to the
school for delivery to the borrower when assigning a FFEL loan to the
Department
Amending Sec. Sec. 682.604 and 685.304 to require
entrance counseling for graduate or professional student PLUS Loan
borrowers and modify the exit counseling requirements for Stafford Loan
borrowers who have also received PLUS Loans.
Amending Sec. Sec. 682.401, 682.603, and 685.301 to
eliminate the maximum 12-month loan period for annual loan limits in
the FFEL and Direct Loan programs.
Amending Sec. Sec. 674.8 to permit the Secretary to
require assignment of a Perkins Loan if the outstanding principal
balance on the loan is $100 or more, the loan has been in default for
seven or more years, and a payment has
[[Page 61961]]
not been received on the loan in the preceding 12 months, unless
payments were not due because the loan was in a period of authorized
forbearance or deferment.
Amending Sec. 674.45 to limit the amount of collection
costs a school may assess against a Perkins Loan borrower to 30 percent
for first collection efforts; 40 percent for second collection efforts;
and, in cases of litigation, 40 percent plus court costs.
Amending Sec. 674.56 to clarify the eligibility
requirements for a Perkins Loan borrower to qualify for a child or
family service cancellation.
Amending Sec. Sec. 682.200 and 682.401 to incorporate
into the regulations specific rules for lenders and guaranty agencies
on prohibited inducements and activities and permissible activities in
accordance with the recommendations of the Department's Task Force on
these issues.
Amending Sec. Sec. 682.200 and 682.602 to reflect the
provisions of The Third Higher Education Extension Act of 2006, Public
Law 109-202, that prohibit a FFEL lender from entering into a new
eligible lender trustee (ELT) relationship with a school or a school-
affiliated organization as of September 30, 2006, but allowing such
relationships in existence prior to that date to continue with certain
restrictions.
Amending Sec. 682.202 to provide that a lender may only
capitalize unpaid interest on a Federal Consolidation Loan that accrues
during an in-school deferment at the expiration of the deferment.
Amending Sec. Sec. 682.208, 682.211, 682.300, 682.302,
and 682.411 regarding loan discharge for false certification as a
result of identity theft.
Amending Sec. Sec. 682.212 and 682.401 to specify
requirements that a school must meet if it chooses to provide a list of
recommended or preferred FFEL lenders for use by the school's students
and their parents, and prohibit the use of a preferred lender list to
deny a borrower the right to use a FFEL lender not included on a
school's list.
In addition to the changes that strengthen and improve the
administration of the loan programs authorized under HEA, these final
regulations also incorporate certain statutory changes made to the HEA
by the College Cost Reduction and Access Act (CCRAA) (Pub. L. 110-84).
These changes are:
Amending Sec. Sec. 674.34, 682.210, and 685.204 to extend
the military deferment to all Title IV borrowers regardless of when
their loans were made, eliminate the 3-year limit on the military
deferment and add a 180-day period of deferment following the
borrower's demobilization as of October 1, 2007.
Amending Sec. Sec. 674.34, 682.210, and 685.204 to
authorize a 13-month deferment following conclusion of their military
service for certain members of the Armed Forces who were enrolled in a
program of instruction at an eligible institution at the time, or
within 6 months prior to the time the borrower was called to active
duty as of October 1, 2007.
Amending Sec. Sec. 674.34 and 682.210 to revise the
definition of economic hardship to allow a borrower to earn 150 percent
of the poverty line applicable to the borrower's family size as of
October 1, 2007.
Amending Sec. Sec. 682.202 and 685.202 to reduce interest
rates on subsidized Stafford loans made to undergraduate students as of
July 1, 2008.
Amending Sec. 682.302 to reduce special allowance
payments for loans first disbursed on or after October 1, 2007 and
establish different rates for eligible not-for-profit lenders and other
lenders.
Amending Sec. 682.305 to increase the loan fee a lender
must pay to the Secretary from 0.50 to 1.0 percent of the principal
amount of the loan for loans first disbursed on or after October 1,
2007.
Amending Sec. 682.404 to reduce the percentage of
collections that a guaranty agency may retain from 23 to 16 percent and
to decrease account maintenance fees paid to guaranty agencies from
0.10 to 0.06 percent as of October 1, 2007.
Removing Sec. 682.415 to eliminate the ``exceptional
performer'' status as of October 1, 2007.
Because these amendments implement changes to the HEA made by the
CCRAA, we do not discuss them in the Analysis of Comments and Changes
section.
Waiver of Proposed Rulemaking--Regulations Implementing the CCRAA
Under the Administrative Procedure Act (5 U.S.C. 553), the
Department is generally required to publish a notice of proposed
rulemaking and provide the public with an opportunity to comment on
proposed regulations prior to issuing final regulations. In addition,
all Department regulations for programs authorized under Title IV of
the HEA are subject to the negotiated rulemaking requirements of
section 492 of the HEA. However, both the APA and HEA provide for
exemptions from these rulemaking requirements. The APA provides that an
agency is not required to conduct notice-and-comment rulemaking when
the agency for good cause finds that notice and comment are
impracticable, unnecessary or contrary to the public interest.
Similarly, section 492 of the HEA provides that the Secretary is not
required to conduct negotiated rulemaking for Title IV, HEA program
regulations if the Secretary determines that applying that requirement
is impracticable, unnecessary or contrary to the public interest within
the meaning of the HEA.
Although the regulations implementing CCRAA are subject to the
APA's notice-and-comment and the HEA's negotiated rulemaking
requirements, the Secretary has determined that it is unnecessary to
conduct negotiated rulemaking or notice-and-comment rulemaking on these
regulations. These amendments simply modify the Department's
regulations to reflect statutory changes made by the CCRAA, and these
statutory changes are either already effective or will be effective
within a short period of time. The Secretary does not have discretion
in whether or how to implement these changes. Accordingly, negotiated
rulemaking and notice-and-comment rulemaking are unnecessary.
There are no significant differences between the NPRM and these
final regulations resulting from public comments.
Implementation Date of These Regulations
Section 482(c) of the HEA requires that regulations affecting
programs under Title IV of the HEA be published in final form by
November 1 prior to the start of the award year (July 1) to which they
apply. However, that section also permits the Secretary to designate
any regulation as one that an entity subject to the regulation may
choose to implement earlier and the conditions under which the entity
may implement the provisions early.
Consistent with the intent of this regulatory effort to strengthen
and improve the administration of the loan programs authorized under
Title IV of the HEA, the Secretary is using the authority granted her
under section 482(c) to designate certain provisions of the
regulations, identified in the following paragraph, for early
implementation at the discretion of each institution, lender, guaranty
agency, or servicer, as appropriate.
In accordance with the authority provided by section 482(c) of the
HEA, the Secretary has determined that for some provisions there are
conditions that must be met in order for an institution, lender,
guaranty agency, or servicer, as appropriate, to implement
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those provisions early. The provisions subject to early implementation
and the conditions are--
Provision: Sections 674.38, 682.210, and 685.204 that simplify the
deferment granting process and allow a borrower's representative to
request a military service deferment or an Armed Forces deferment.
Condition: None.
Provision: Sections 674.61, 682.402, and 685.212 that allow the use
of an accurate and complete photocopy of the original or certified copy
of the borrower's death certificate to support the discharge of a Title
IV loan due to death.
Condition: None.
Provision: Sections 682.603, 682.604, 685.301, and 685.304 that
require entrance counseling requirements and modify exit counseling for
graduate or professional student PLUS borrowers.
Condition: None.
Provision: Section 674.45 that limits the amount of collection
costs a school may assess against a Perkins Loan borrower.
Condition: None.
Provision: Section 682.202 that limits the frequency of
capitalization on Federal Consolidation loans to quarterly, except that
a lender may only capitalize unpaid interest that accrues during an in-
school deferment at the expiration of the deferment.
Condition: None.
Provision: Sections 682.208 and 682.211, which allow a lender to
suspend credit bureau reporting for 120 days and grant borrowers a 120-
day forbearance on a loan while the lender investigates a false
certification as a result of an alleged identity theft.
Condition: None.
Analysis of Comments and Changes
In response to the Secretary's invitation in the NPRM published on
June 12, 2007, 241 parties submitted comments on the proposed
regulations. An analysis of the comments and the changes in the
regulations since publication of the NPRM and as a result of public
comment follows.
We group major issues according to subject, with appropriate
sections of the regulations referenced in parentheses. We discuss other
substantive issues under the sections of the regulations to which they
pertain. Generally, we do not address technical and other minor
changes--and suggested changes the law does not authorize the Secretary
to make. We also do not address comments pertaining to issues that were
not within the scope of the NPRM.
Simplification of Deferment Process (Sec. 674.38, 682.210, and
685.204)
Comments: Commenters were generally supportive of our proposal to
simplify the deferment process. Some commenters, however, had
suggestions for modifications.
The proposed regulations would allow a borrower's representative to
request a military service or Armed Forces deferment on behalf of the
borrower. Some commenters recommended that we define ``borrower's
representative'' for purposes of a military service or Armed Forces
deferment. However, several other commenters did not think it was
necessary to define ``borrower's representative.''
One commenter recommended that the Department revise the
regulations to require (rather than just allow) lenders to grant
military service deferments to eligible borrowers based upon a request
from the borrower's representative.
With regard to the simplified deferment granting procedures, some
commenters recommended that we require, rather than allow, lenders to
grant deferments under the proposed procedures.
One commenter noted that interest does not accrue on subsidized
FFEL or Direct Loans, or on Perkins Loans, during deferment periods and
recommended that borrowers with these types of loans not be required to
make an initial deferment request.
One commenter recommended that the notification of a deferment to a
borrower of unsubsidized loans include information on the cost of the
deferment.
One commenter recommended that we adopt a comparable simplified
forbearance process for schools that participate in the Perkins Loan
Program. This commenter felt that Perkins Loan schools should be able
to grant forbearances based on a forbearance granted on a borrower's
FFEL or Direct Loan. This commenter also requested that we allow
borrowers in the Perkins Loan Program to verbally request a forbearance
on their loans.
Several commenters recommended that we modify the regulations to
permit a lender to grant a deferment ``during'' the same time period as
a deferment granted by another lender. This would allow the deferment
dates of a deferment granted by one lender to be part of the deferment
period granted by another lender. The commenter noted that the dates of
the deferment periods may not be exactly the same based on the status
of the loans held by each of the lenders and the applicability of the
deferments to the separate loans.
Discussion: The Department agrees with the commenters who
recommended that we not define the term ``borrower's representative''
for purposes of a military service or Armed Forces deferment. A
borrower's representative would be a member of the borrower's family,
or another reliable source. We do not think it is necessary to regulate
a specific definition of the term ``borrower's representative.'' We
believe allowing flexibility in this regard will be especially helpful
to borrowers called to active duty and stationed overseas in areas of
conflict. Defining ``borrower's representative'' could unnecessarily
limit access to this benefit for those most deserving of it. Commenters
also overwhelmingly supported our decision not to define the term
``borrower's representative.''
We also agree with the recommendation that lenders should be
required to accept a military service or Armed Forces deferment request
from a borrower's representative. We believe that the proposed
regulations would require lenders to accept such deferment requests and
we have not changed that language.
However, we believe the simplified process that applies to other
types of deferments should be optional for lenders. While many lenders
may welcome the simplified deferment requirements as a convenience,
other lenders may prefer to grant deferments based on their own review
of a borrower's deferment documentation. We intend that these amended
regulations will provide lenders with flexibility in structuring their
processes for granting deferment requests; we do not want to
unnecessarily limit their flexibility.
We disagree with the suggestion that lenders be allowed to grant
deferments to borrowers with subsidized loans or Perkins Loans without
a request from the borrower. We believe that the borrower who is
ultimately liable for the loan should be responsible for deciding
whether to request a deferment.
We disagree with the recommendation that schools participating in
the Perkins Loan Program be allowed to grant forbearances based on
forbearances granted on the borrower's FFEL Program loans. The
mandatory forbearance requirements in the FFEL Program differ from the
forbearance requirements in the Perkins Loan Program. Additionally,
given that Perkins schools have wide flexibility in granting
forbearances in the Perkins Loan Program, the Department sees no value
in allowing schools to base Perkins forbearances on
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forbearances granted in the FFEL Program.
We also disagree with the recommendation that we allow deferments
to be granted ``during'' the same time period as another deferment
under the simplified procedures. If the applicability of the deferment
and the status of the separate loans is not the same, the simplified
deferment process cannot be used because the loan holder would need to
obtain separate documentation verifying the eligibility of the borrower
based on different dates.
Changes: None.
Accurate and Complete Copy of a Death Certificate (Sec. Sec. 674.61,
682.402 and 685.212)
Comments: Many commenters supported the proposed changes in
Sec. Sec. 674.61, 682.402, and 685.212 to allow loan holders to use an
accurate and complete photocopy of a death certificate to discharge a
Title IV loan due to the death of a borrower. The commenters agreed
that this approach will reduce the cost of securing additional original
or certified copies of a death certificate for the surviving family
members and decrease burden for loan holders.
Several commenters suggested that the language in Sec. Sec.
674.61, 682.402, and 685.212 be revised to allow a loan holder to use
other data sources to grant a loan discharge based on the death of the
borrower, such as official court documents, the National Student Loan
Data System (NSLDS), or the Social Security Administration's (SSA's)
Death Master File. Two commenters suggested that the Department allow
loan holders to use NSLDS to ``look back'' and discharge loans for a
deceased borrower that were not included in an original discharge due
to the death of the borrower.
Discussion: During the negotiations concerning these regulations,
some non-Federal negotiators asked the Department to expand the types
of documentation that could be used to support a request for a
discharge based on the death of the borrower. Specifically, these
negotiators asked that they be allowed to base discharges on
documentation from NSLDS, SSA's Master Death file or court documents.
We declined to adopt these proposals in order to guard against fraud
and abuse in the discharge process. The SSA has publicly acknowledged
that its Master Death file contains inaccuracies. For that reason, we
do not consider the file to be appropriate for use in granting a death
discharge and continue to believe that we should not expand the types
of documentation for program integrity reasons.
The Department agrees that using NSLDS to identify the loans of a
deceased borrower that were not included in a discharge based on the
death of the borrower is worth exploring; however, for program
integrity reasons we do not agree that NSLDS information alone should
be the basis for discharging loans that were not included in the
original discharge. The Department will give further consideration to
the commenters' suggestion but declines to adopt the suggestion in
these final regulations.
Change: None.
Comments: While supporting the Department's efforts to decrease the
burden on families applying for a discharge, one commenter expressed
concern that fraudulent photocopies would be used to secure a discharge
based on the death of the borrower, thus threatening the integrity of
the Title IV loan programs. Another commenter recommended that the
Secretary conduct a study of how the process for granting requests for
discharges based on the death of the borrower will work before issuing
final regulations allowing use of a photocopy.
Discussion: We appreciate the commenter's concern about the
possible use of fraudulent photocopies of death certificates and will
closely monitor the use of this documentation. We do not believe a
study is necessary at this time. An official death certificate is very
difficult to alter and we expect loan holders to be vigilant when using
a photocopy as the basis for a death discharge. To ensure the integrity
of the Title IV loan programs, the granting of a discharge of a Title
IV loan based on the accurate and complete photocopy of an original or
certified copy of the original death certificate is still at the
discretion of lenders and the Secretary.
Change: None.
Total and Permanent Disability Discharge (Sec. Sec. 674.61, 682.402,
and 685.213)
Comment: Many commenters supported our proposals to restructure the
regulations in Sec. Sec. 674.61, 682.402, and 685.213 to clarify the
eligibility requirements a borrower must meet to receive a total and
permanent disability loan discharge and to provide for a similar
process across the three loan programs. Several commenters also
supported the requirement for a three-year conditional discharge period
beginning on the date the Secretary makes an initial determination that
the borrower is totally and permanently disabled.
Discussion: We appreciate the commenters' support. Upon further
internal review, we believe that the Perkins Loan Program regulations
could be clearer with respect to the information that an institution
must provide to a borrower upon receipt of the borrower's discharge
application.
Changes: The Department has made changes to Sec. 674.61(b)(2) of
the Perkins Loan Program regulations to provide a more detailed
description of the information that must be provided to a borrower upon
the institution's receipt of an application for a discharge.
Comment: Several commenters supported the proposal in Sec. Sec.
674.61(b)(2)(i), 682.402(c)(2), and 685.213(b)(1) requiring a borrower
seeking a total and permanent disability discharge to submit the
completed application within 90 days of the date the physician
certifies the application, thus ensuring that the loan holder has
timely and accurate information on which to base a preliminary
determination about the borrower's eligibility for the discharge.
However, other commenters believed that the 90-day time limit would be
insufficient for a borrower who may be incapable of managing his or her
affairs or unable to put together the paperwork necessary to submit the
application. The commenters also stated that the proposed time limit
would not accommodate delays in the process that are out of the
borrower's control. The commenters suggested that the Secretary make
exceptions to the 90-day time limit to accommodate extenuating
circumstances so that borrowers will not be required to obtain a new
physician certification if the borrower misses the 90-day time limit.
One commenter suggested that we adopt a 180-day time limit for
submission of the discharge application.
Discussion: The Department continues to believe that the
requirement in Sec. Sec. 674.61(b)(2)(i), 682.402(c)(2), and
685.213(b)(1) that borrowers submit the completed application for a
total and permanent disability discharge to the loan holder within 90
days of the date the physician certifies the application is appropriate
and reasonable. Allowing exceptions based on extenuating circumstances
or allowing a 180-day time limit would not ensure that the Secretary
has accurate and timely information on which to base her determination
on the borrower's application. Allowing exceptions or a longer time
limit would also open up the possibility that a borrower might
inadvertently take action that would disqualify the borrower for a
final discharge.
Changes: None.
[[Page 61964]]
Comment: Several commenters noted that the proposed regulations do
not provide for a 60-day administrative forbearance that is provided to
a borrower under the current FFEL regulations for completion and
submission of the discharge application form. The commenters were
concerned that the omission of the forbearance would increase
delinquency on borrower accounts and penalize the borrower. One
commenter recommended that we require lenders to suspend collection
activity and provide a forbearance to a borrower who is attempting to
complete a discharge application as well as during any period while the
application is pending.
Discussion: Section 682.402(c)(5) of the proposed regulations
allows a lender to grant a borrower a forbearance of payment of both
principal and interest if the lender does not receive the physician's
certification of total and permanent disability within 60 days of the
receipt of the physician's letter requesting additional time to
complete and certify the borrower's discharge application. Under Sec.
674.33(d)(5) of the Perkins Loan Program regulations, an institution is
required to forbear payment on a loan for any acceptable reason. In the
Direct Loan Program, Sec. 685.205(b)(5) specifically allows the
Secretary to grant a borrower an administrative forbearance for the
period of time it takes the borrower to submit appropriate
documentation indicating that the borrower has become totally and
permanently disabled. Given that these provisions provide a borrower
with significant access to forbearance while obtaining a physician's
certification and completing the discharge application, the Department
believes that requiring the cessation of collection activity is
unnecessary until the loan holder actually receives the discharge
application.
Changes: None.
Comment: Several commenters stated that we should continue our
current practice of using the date the borrower became totally and
permanently disabled instead of the date the physician certifies the
borrower's disability on the application as we proposed in Sec. Sec.
674.61(b)(3)(ii), 682.402(c)(3)(ii), and 685.213(c)(2) as the date to
establish the borrower's eligibility for a discharge. The commenters
claimed that using the date the physician certifies the application as
the date the borrower became totally and permanently disabled is
arbitrary and contradicts statutory intent that disabled borrowers
receive immediate relief as of the date the borrower becomes totally
and permanently disabled.
Several commenters stated that many borrowers do not realize they
have the ability to obtain a discharge of their student loans and as a
result do not apply for a total and permanent disability discharge
until several years after becoming disabled. These commenters expressed
concern that using the date the physician certifies the borrower's
application as the disability date combined with a prospective
conditional discharge period would subject these borrowers to a long
delay in receiving the discharge.
One commenter stated that, in the FFEL Program, using a date
identified by a physician as the borrower's disability date ensures
that only one date of disability appears on all applications and forms
received by the Secretary when the borrower has multiple loans. The
commenter believes that under the proposed changes to the disability
discharge process, the start date of the three-year conditional
discharge period for a borrower who has multiple loans may vary for
each loan because loans can be assigned to the Secretary at different
times in the discharge process based on when the borrower submits
documentation to each lender when the lender files the claim with the
guarantor, and when the guarantor reviews and pays the claim.
Several commenters questioned the Department's contention that
certifying physicians rely solely on a borrower's statements in
determining the borrower's date of disability and that there may not be
strong medical evidence for using a different date to establish
eligibility for Federal benefits. The commenters did not believe that
it was appropriate for the Department to assume that a physician's
diagnostic methodology is flawed.
Discussion: Sections 437(a) and 464(c)(1)(F) of the HEA provide for
the discharge of a borrower's Title IV loans if the borrower becomes
totally and permanently disabled as determined in accordance with
regulations of the Secretary. As discussed in the preamble to the NPRM,
the Department proposed these regulatory changes to eliminate the
possibility that a final discharge would be made immediately upon
assignment of the account to the Department. We believe this result is
inconsistent with the intent of these regulations, which is to conform
the discharge requirements to those of other Federal programs that only
provide for Federal benefits after appropriate monitoring of the
applicant's condition.
The Department believes that borrowers are sufficiently informed
about the availability of a total and permanent disability discharge.
The promissory notes used in the Title IV loan programs notify
borrowers of the possibility to have the loan discharged if the
borrower becomes totally and permanently disabled. Information on the
discharge is also available on the Department's Web site and in
numerous Department publications as well as in information from other
program participants. Although a borrower may experience a delay before
receiving a total and permanent disability discharge under these
regulations, we wish to emphasize again our belief that the provision
of Federal benefits should be made only after there is sufficient
monitoring of the applicant's condition.
We do not agree that using a date identified by a physician as the
borrower's disability date instead of the date the physician certifies
the borrower's disability on the discharge application means that a
borrower with multiple loans assigned to the Department has only one
date of disability. The Department addresses this and similar issues
frequently under the current total and permanent disability discharge
process and resolves discrepancies in disability dates on assigned
loans by consulting with the physician that certified the borrower's
application. The Department expects to continue this approach to
resolve discrepancies under the new process and does not believe the
regulations need to specifically address issues related to processing
an application.
Lastly, the Department does not agree that the concern we expressed
in the NPRM that there may not be strong medical evidence to support
using the borrower's disability date assumes a flawed diagnostic
methodology on the part of the certifying physician. As we stated in
the preamble to the NPRM, we believe that the best date to use as the
eligibility date is the date the physician certified the application
because that process requires the physician to review the borrower's
condition at that time, rather than speculate about the borrower's
condition in the past.
Changes: None.
Comment: Several commenters disagreed with the Secretary's opinion
that a three-year prospective conditional discharge period would help
prevent fraud and abuse in the Title IV loan programs by allowing the
Secretary to monitor a borrower's status before granting a discharge.
The commenters stated that whether the conditional discharge period is
prospective or retroactive is irrelevant as long as the Secretary has
access to a physician's
[[Page 61965]]
certification confirming that the borrower meets the eligibility
requirements for a disability discharge.
Several commenters also disagreed with the Department's statement
in the preamble to the NPRM that there have been instances when
borrowers have received otherwise disqualifying Title IV loans and
earnings in excess of allowable levels after the date of the borrower's
disability discharge application but also after the date of the
borrower's retroactive final discharge. The commenters cited an
analysis of a sample of total and permanent disability cases that they
claimed did not support the Secretary's view.
Several commenters acknowledged the need to protect the integrity
of the Title IV programs in regard to disability discharges and stated
that reliance on a single physician's certification or determination of
permanent disability may encourage fraud and abuse in the discharge
process.
Discussion: In a Final Audit Report published in November 2005, the
Department's Inspector General concluded that the current, three-year
conditional discharge period was ineffective for ensuring that a
borrower is totally and permanently disabled because it does not always
allow the Department to examine the borrower's current earnings and
loan information. As a result, a borrower who is not currently disabled
could receive a disability discharge even though the borrower has
received current disqualifying income or loans. The Inspector General's
Audit Report noted that approximately 54 percent of the borrowers who
received disability discharges applied for the discharge more than
three years after the disability. As a result, for the discharges
approved by the Department from July 1, 2002, through June 30, 2004,
approximately 54 percent (2,593 borrowers) were based on a three-year
period during which there was no examination of the borrower's current
income. The Inspector General examined current income information that
was available for a limited number of these borrowers who had submitted
a Free Application for Federal Student Aid (FAFSA) and found that a
number of borrowers who claimed to be totally and permanently disabled
also reported current income over the limit for a disability discharge.
As a result the Inspector General recommended that the Department
revise the regulations to ensure that current income and Title IV loan
information is considered when determining whether a borrower is
totally and permanently disabled.
The proposed regulations address the Inspector General's concerns
and we believe they will discourage fraud and abuse in the disability
discharge process. To further ensure against the possibility of fraud
and abuse, we have added a provision to the Perkins, FFEL and Direct
Loan Program regulations specifically reflecting the Secretary's
authority to require a borrower to submit additional medical evidence
if the Secretary determines that the borrower's application does not
conclusively prove that the borrower is disabled. As part of this
review, the Secretary may arrange for an additional review of the
borrower's condition by an independent physician at no expense to the
applicant.
Changes: We have amended Sec. Sec. 674.61(b)(4), 682.402(c)(4),
and 685.213(d) to provide that the Secretary reserves the right to
require additional medical evidence of a borrower's total and permanent
and disability as well as an additional review of the borrower's
condition by an independent physician at the Secretary's expense.
Comment: Many commenters disagreed with the Department's proposal
in Sec. Sec. 674.61(b)(5), 682.402(c)(4)(iii), and 685.213(d)(3)(ii)
that only payments made on the loan after the date the physician
certifies the borrower's total and permanent disability discharge
application would be returned to the borrower. The commenters claimed
this proposal would harm borrowers who do not obtain a timely
certification of disability or who continue to make payments to keep
from defaulting or becoming delinquent on their loans. One commenter
recommended that repayments be refunded back to the date certified by
the physician even if a prospective conditional discharge period is
required.
One commenter recommended that no payments previously made on a
loan be returned to a borrower if the borrower receives a final
discharge based on a total and permanent disability.
One commenter requested that we clarify to whom the Secretary
returns payments after a final determination of the borrower's total
and permanent disability is made in Sec. 674.61(b)(5)(iii).
Discussion: As stated in the preamble to the NPRM, the Department
proposed this change to be consistent with the decision to rely on the
date the physician certifies the borrower's disability on the
application and to maintain program integrity in the administration of
the discharge process. Under these regulations, the borrower's
disability date is the date the physician certifies the borrower's
discharge application. In this situation, there is no basis for
returning payments made by the borrower, or on the borrower's behalf,
before that date. However, it is appropriate to return any payments
made by or on behalf of the borrower after that date.
Lastly, the Secretary returns any payments to the individual who
made the payments after a final determination of the borrower's total
and permanent disability is made. We agree that the regulations should
reflect this fact.
Changes: Sections 674.61(b)(5)(iii), 682.402(c)(4)(iii), and
685.213(d)(3)(ii) have been changed to reflect that any payments made
after the date that the physician certified the borrower's application
for a disability discharge will be sent to the person who made the
payment after the final discharge is issued.
Comment: Several commenters felt that the prospective three-year
conditional discharge period should begin on the date the physician
certifies the borrower's total and permanent disability discharge
application rather than on the date the Secretary makes an initial
determination that the borrower is totally and permanently disabled.
The commenters stated that using the date the Secretary makes the
initial determination would be unfair to borrowers. The commenters also
believed that using the date the Secretary initially determines that a
borrower is disabled weakens the Secretary's incentive to make
expeditious decisions on disability discharge applications and
increases the likelihood that a borrower might inadvertently take an
action that would disqualify him or her for a final discharge. One
commenter recommended that the final regulations set a time limit for
the Department to make a determination of a borrower's initial
eligibility for a disability discharge.
Discussion: The Department has considered the comments and has
decided that beginning the prospective three-year conditional discharge
period on the date the physician certifies the borrower's total and
permanent disability discharge application rather than on the date the
Secretary makes an initial determination that the borrower is totally
and permanently disabled is appropriate and will not increase the
opportunity for fraud in the disability discharge process.
Changes: We have revised Sec. Sec. 674.61(b)(3)(i),
682.402(c)(3)(i), and 685.213(c)(2) to provide that the three-year
conditional discharge period begins on the date the physician certifies
the
[[Page 61966]]
borrower's total and permanent disability discharge application.
Comment: Several commenters requested that we apply the same
eligibility standards that apply during the conditional discharge
period (which prohibit the receipt of any additional Title IV loans and
allow a borrower to earn no more than 100 percent of the poverty line
for a family of two, as determined in accordance with the Community
Service Block Grant Act) to the period between the date the borrower
obtains a physician's certification and the date the Secretary makes
her initial determination that the borrower is totally and permanently
disabled. The commenters believed that applying different eligibility
requirements at different stages in the process would confuse borrowers
and jeopardize their ability to qualify for a discharge.
Discussion: The Department has considered the comments and agrees
that applying the same eligibility standards beginning on the date the
borrower obtains the physician's certification on the total and
permanent disability discharge application and continuing those
standards throughout the prospective three-year conditional discharge
would reduce the complexity of the process without creating an
opportunity for fraud.
Changes: We have revised Sec. Sec. 674.61(b)(4)(i),
682.402(c)(4)(i), and 685.213(d)(1) to provide that a borrower may not
receive any Title IV loans or earn more than 100 percent of the poverty
line for a family of two, as determined in accordance with the
Community Service Block Grant Act, beginning on the date the physician
certifies the borrower's discharge application and throughout the
prospective three-year conditional discharge period.
Comment: One commenter requested that the proposed regulations be
clarified to define the term ``new Title IV loan'' to exclude
subsequent disbursements of a prior loan.
Discussion: The Department does not believe that such a change is
necessary. The regulations in Sec. Sec. 674.61(b)(2)(iv)(C)(2) and
(3), 682.402(c)(4)(i)(B) and (C), and 685.213(b)(2)(ii)(A) and (B)
already differentiate between new loans and subsequent disbursements of
prior loans.
Changes: None.
Comment: One commenter requested that the effective dates and
trigger dates in the proposed regulations be carefully evaluated so
that borrowers who are in the process of having discharge forms
certified are not subject to the new requirements. Another commenter
requested that the effective date of any new regulations governing the
disability discharge process be based on the approval date of a new
Federal form to eliminate processing confusion and inadvertent delays
for applicants.
Discussion: The Department anticipates that both the new total and
permanent disability discharge applications and the final regulations
that govern the process will be effective on July 1, 2008, for
borrowers who apply for a discharge on or after that date. Borrowers
who are in the process of having discharge forms certified as of that
date will not be subject to the new regulations.
Changes: None.
Comment: One commenter suggested the Secretary return Perkins Loan
accounts to the school that assigned them if the Secretary determines
that the borrower is not totally and permanently disabled. The
commenter stated that if such accounts were returned to the school, the
school's Perkins Loan revolving fund would benefit from any repayments
made when the school resumes collection.
Discussion: The current assignment process in Sec. 674.50 of the
Perkins Loan Program regulations requires that, upon accepting
assignment of a loan, the Secretary acquire all rights, title, and
interest of the institution in that loan. Returning an assigned Perkins
Loan account to the school if the Secretary determines that a borrower
is not totally and permanently disabled would add administrative burden
to the process and is inconsistent with current regulatory requirements
in Sec. 674.50(f)(1).
Changes: None.
Comment: One commenter suggested that if the Secretary makes an
initial determination that the borrower's disability is not total and
permanent, the borrower should not only resume repayment but should
also be required to repay all amounts that would have been due during
the cessation of collection on the loan while the application was being
processed by the loan holder and the Secretary.
Discussion: The Department believes that to require a borrower to
repay all amounts that would have been due during the cessation of
collection on the loan while the application is being processed would
unnecessarily discourage borrowers who might qualify for a discharge
from applying.
Changes: None.
Comment: One commenter felt that the Department should consider
disability determinations made by other Federal agencies such as the
SSA or the Veteran's Administration (VA) in determining whether
borrowers are eligible for a disability discharge on their Title IV
loans.
Discussion: The Department has previously considered the idea of
applying the disability standards used by other Federal agencies to
borrowers seeking a discharge of their Title IV loans. However, the
definition of total and permanent disability used in the Department's
discharge process is appropriately more demanding than that used by SSA
and the VA. Those agencies use regular medical reviews of applicants
over a number of years to ensure that the applicants remain eligible
for benefits. In those programs, an individual loses benefits if they
are no longer disabled. In contrast, the Department is providing a
significant benefit to an individual on a one-time basis without any
opportunity to conduct future reviews to determine if the individual is
actually disabled. The Secretary believes that the process established
in these regulations provides an appropriate process that will ensure
that only appropriate discharges are granted.
Changes: None.
NSLDS Reporting (Sec. Sec. 674.16, 682.208, 682.401, and 682.414)
Comment: Many commenters did not agree with proposed Sec.
682.401(b)(20), which would change the timeframe in which guarantors
must report certain student enrollment data to the current loan holder
from 60 days to 30 days. The commenters believed that this change would
not accommodate timely reporting in months that have 31 days. Other
commenters stated that guarantors currently report information to NSLDS
at least monthly and that changing the requirement for guarantors to
report enrollment information to lenders to 30 days would not improve
the timeliness of information. One commenter believed that the
Secretary did not appropriately consider all the other established
reporting periods and deadlines when developing this proposal, and that
new NSLDS reporting requirements will unnecessarily burden schools with
additional reporting.
One commenter asked how the Department intends to categorize
Perkins Loan data that are reported to NSLDS under the new regulations.
The commenter noted that historically schools categorized and reported
Perkins Loans based on the terms and conditions of the loan and
reported disbursements made under these categories as one loan made
over a period of years. A school would create a new category of Perkins
Loan when
[[Page 61967]]
the terms and conditions of Perkins Loans were affected by statutory
changes. The commenter believed that reporting Perkins Loans as
separate loans each award year would dramatically increase the number
of loans reported to NSLDS and increase burden and costs associated
with NSLDS reporting. The commenter noted that new NSLDS reporting
criteria would increase the number of Perkins Loan account records and
associated costs of reporting with no benefit to the institution or
borrowers.
Three commenters stated that the language in paragraph (j) of
proposed Sec. 674.16 fails to reflect the intent of Section 485B of
the HEA which specifically provides that the development of NSLDS
reporting timeframes be accomplished according to mutually agreeable
solutions based on consultation with guaranty agencies, lenders and
institutions. The commenters stated that the Department has not devoted
sufficient effort to conducting a meaningful dialogue and information
exchange with institutions about reporting needs for research and
policy analysis purposes.
Several other commenters suggested that there should be weekly
updates to NSLDS instead of the suggested 30 days and believed that
guaranty agencies, servicers, students, and schools would benefit from
having more accurate and timely information in NSLDS.
Discussion: The Secretary believes that the new NSLDS reporting
timeframes will improve the timeliness and availability of information
important to managing the student loan program. The Secretary also
believes that the proposed regulatory changes, such as the
simplification of the deferment granting process, will be easier and
more efficiently implemented if timely and accurate information is more
readily available in NSLDS.
The Department appreciates the commenters' concerns about the cost
associated with increased reporting of Perkins Loans. Although the
costs incurred by institutions to make the systems changes necessary to
comply with new NSLDS reporting requirements are difficult to estimate,
we believe that requiring institutions to report Perkins Loans on an
award year basis, as FFEL and Direct Loan Program loans are reported,
will increase the quality and integrity of Perkins Loan data and allow
the Department to make meaningful comparisons between the Title IV loan
programs for research and budgeting purposes. We also believe that
reporting Perkins Loans on an award year basis will provide borrowers
with a more accurate picture of their total indebtedness.
The Department regularly consults with program participants in
setting NSLDS reporting requirements in established workgroups that
meet several times a year. We believe the regulations reflect this
consultative process.
With regard to the commenter who suggested that there should be
weekly updates to NSLDS instead of the suggested 30-day timeframe,
entities that wish to report to NSLDS on a weekly basis are able to so
under current protocols. We decline to require weekly reporting
requirements for all entities at this time, however, because we believe
that small institutions would find such a standard difficult to manage.
The Secretary agrees with commenters that the 30-day reporting
timeframe does not leave guarantors adequate time to report data to the
current loan holder in months that have 31 days.
Changes: We have changed the reporting timeframe in Sec.
682.401(b)(20) to 35 days.
Certification of Electronic Signatures on Master Promissory Notes
(MPNs) Assigned to the Department (Sec. Sec. 674.19, 674.50, 682.409,
and 682.414)
Comment: One commenter agreed that proper execution and retention
of electronic loan records is necessary for program integrity reasons.
Several other commenters stated that the proposed changes in Sec.
674.19(e)(2)(ii) requiring a school participating in the Perkins Loan
Program to develop and maintain a certification of its electronic
signature process were overly broad, would discourage schools from
using electronic notes, and would impose burdensome new record-keeping
requirements. Other commenters stated that institutional compliance
with these new requirements would be difficult unless the Department
clearly defines these new requirements and provides schools with a
``safe harbor'' of minimum compliance standards for Perkins Loans
already signed electronically by borrowers. The commenters stated that
the burden of complying with Sec. 674.50(c)(12)(i) for institutions
would be difficult to justify given the few borrowers who might dispute
the validity of the electronic signature at some future date.
Several commenters stated that the requirement in Sec.
674.50(c)(12)(ii)(B) that a school's certification include screen shots
as they would have appeared to the borrower is impractical and
unnecessary and asked that this requirement be eliminated.
Discussion: The Department believes that the requirements in Sec.
674.19(e)(2) that an institution create and maintain a certification
regarding the creation and maintenance of electronically signed Perkins
Loan promissory notes or MPNs in accordance with Sec. 674.50(c)(12)
ensures that the school and the Department have the evidence to enforce
an assigned loan if a challenge or factual dispute arises in connection
with the validity of the borrower's electronic signature. Schools are
required to take legal action to collect on a defaulted Perkins Loan in
accordance with Sec. 674.46 of the Perkins Loan Program regulations.
If a legal challenge to the validity of an electronic signature should
arise in the course of litigating a defaulted Perkins Loan, a school
will be in a much stronger legal position to prove that the borrower
signed the loan and benefited from the proceeds of the loan. The need
to ensure the integrity of the Perkins Loan Program justifies
establishing electronic signature safeguards. Perkins Loan schools
should generally not be incurring new costs or burden related to the
certification of electronic signatures on promissory notes. In July of
2001, the Department published its Standards for Electronic Signature
in Electronic Student Loan Transactions (Standards) to facilitate the
development of electronic processes under the Electronic Signatures in
Global and National Commerce Act (E-Sign Act). These Standards provided
guidance to FFEL Program lenders and guaranty agencies, and to schools
in their role as lenders under the Perkins Loan Program, regarding the
use of electronic signatures in conducting student loan transactions,
including using electronic promissory notes. At that time, we informed
loan holders and institutions in the FFEL or Perkins Loan Program that
if their processes for electronic signature and related records did not
satisfy the Standards and the loan was held by a court to be
unenforceable based on those processes, the Secretary would determine
on a case-by-case basis whether Federal benefits would be denied, in
the case of the FFEL Program, or whether a school would be required to
reimburse its Perkins Loan Fund, in the case of the Perkins Loan
Program. If, as we assume, Perkins Loan holders are complying with the
Standards, added burden or cost should not be an issue. The regulations
in Sec. 674.50(c)(12) that describe what the certification must
include are already very specific and detailed and a ``safe harbor'' is
unnecessary. The only provision of these regulations that is not
specific is
[[Page 61968]]
Sec. 674.50(c)(12)(ii)(F), which requires the certification to include
``all other documentation and technical evidence requested by the
Secretary to support the validity or the authenticity of the
electronically signed promissory note.'' This provision is not intended
to be overly burdensome on schools. This provision is intended to cover
whatever documentation a school has that is not already listed in Sec.
674.50(c)(12)(ii)(A) through (E).
Lastly, the Department does not agree with the commenters'
suggestion that inclusion of screen shots as they would have appeared
to the borrower is impractical or unnecessary. The inclusion of screen
shots in the certification is a critical part of the process to ensure
that the promissory note is a valid, legal document, that the terms and
conditions of the loan were properly represented to the borrower, and
that the borrower was fully aware of the fact he or she was receiving a
loan.
Changes: None.
Comment: One commenter suggested that the Department require each
institution that participates in the Perkins Loan Program to designate
an ``E-Sign Contact Person'' on its FISAP submission to enable
institutions to meet documentation requests from the Secretary in a
timely manner.
Discussion: The Department believes this suggestion has merit and
will consider implementing this proposal administratively. However, no
change to the regulations is necessary.
Changes: None.
Comment: Many commenters stated that the 10-business day deadline
required by Sec. Sec. 674.50(c)(12)(iii) and 682.414(a)(6)(iii) within
which Perkins Loan and FFEL loan holders must respond to a request for
evidence that may be needed to resolve a dispute with a borrower on a
loan assigned from the Secretary was too short. One commenter
recommended a 10-business day standard only if the request relates to
pending litigation and an alternative, 30-day standard if the request
is not related to litigation. One commenter recommended delaying
implementation of the 10-business day deadline by one year to give
institutions the opportunity to put in place the systems, policies, and
capability to comply and produce the requested documentation. One
commenter suggested adopting a 15-business day deadline with an option
to appeal if the institution faces a special situation. Another
commenter suggested a 25-business day deadline. One commenter requested
that the Secretary withdraw this proposal completely.
Discussion: The Department does not believe that a 10-business day
deadline to respond to requests from the Secretary for evidence needed
to resolve a dispute involving an electronically-signed loan that has
been assigned to the Secretary is burdensome. The Department believes
that 10 business days provides sufficient time for loan holders. The
Secretary believes that a timely response to a request for information
is essential to proper enforcement of a promissory note, especially
when a borrower is contesting the validity of an electronic signature
and that challenge involves court proceedings or court-imposed
deadlines. Finally, we believe that delaying implementation of this
deadline or not imposing any deadline would threaten the integrity of
the FFEL and Perkins Loan Programs.
Changes: None.
Comment: Several commenters expressed concern regarding the
provision in proposed Sec. 674.50(c)(12)(i)(B), under which the
Department would require a Perkins Loan holder to provide testimony to
ensure the admission of electronic records in a legal proceeding. These
commenters requested that the Department clarify that the institution
will not be responsible for any expenses related to this requirement.
Discussion: Section 489 of the HEA and 34 CFR Sec. 673.7 of the
General Provisions regulations for the Federal Perkins Loan, Federal
Work Study, and Federal Supplemental Educational Opportunity Grant
Programs provide for an administrative cost allowance that an
institution may use to offset its cost of administering the campus-
based programs, including the costs related to the provision of
testimony.
Changes: None.
Comment: One commenter requested that the Department revise Sec.
682.409(c)(4)(viii), which would require a guaranty agency to provide
the Secretary with the name and location of the entity in possession of
an original, electronically signed MPN that has been assigned to the
Department. The commenter asked that we change this provision to give
guaranty agencies the option of providing the Secretary the name and
location of the entity that created the original MPN or promissory note
in response to the Secretary's request. The commenter believed this
approach would provide flexibility for loan holders to continue to
track the entity that created the original electronically signed MPN,
while providing flexibility for new technological changes that may
allow subsequent holders to obtain possession of an original electronic
MPN record. This commenter also recommended a change in Sec.
682.414(a)(6)(i) to allow the ``entity'' that created or the ``entity
in possession'' of an original electronically signed promissory note
respond to a request for information from the Secretary rather than the
guaranty agency or lender that created the note for the same reason.
Discussion: We disagree with the commenter that allowing a guaranty
agency the option of providing the Secretary with the name and location
of the entity that created the original MPN or promissory note meets
the Department's needs. We also disagree that the ``entity'' that
created or that is in possession of the original electronically signed
promissory note would be the more appropriate party to respond to a
request for information from the Department. If the Department needs
the original, electronically signed MPN, it should be a simple matter
for a guaranty agency to provide the name and location of the entity
that possesses the document. Moreover, the lender and guaranty agency
are the program participants that have the legal obligation to maintain
program records and cooperate with the Secretary to enforce loan
obligations.
Changes: None.
Comment: One commenter supported the provisions in Sec. Sec.
674.19(e)(4)(ii) and 682.414(a)(5)(iv) requiring loan holders to retain
an original of an electronically-signed MPN for three years until all
the loans on the MPN are satisfied but requested clarification in the
regulations as to the meaning of the term ``satisfied.''
Discussion: The FFEL, Perkins and Direct Loan Program regulations
already define when a loan is ``satisfied.'' In all three programs, a
loan is ``satisfied'' if the loan has been canceled, repaid in full or
discharged in full. In the Perkins Loan Program, a loan is also
considered ``satisfied'' if the loan has been repaid in full in
accordance with an institution's authority to compromise on the
repayment of a defaulted loan in accordance with Sec. 674.33(e) or the
institution writes off the loan in accordance with Sec. 674.47(h).
Accordingly, we do not believe any further clarification in the
regulations is needed.
Changes: None.
Comment: One commenter stated that the proposed regulations
requiring a FFEL Program loan holder to retain an original of an
electronically-signed MPN for three years after all the loans are
satisfied is unmanageable. This commenter recommended that FFEL Program
lenders be required to submit
[[Page 61969]]
electronic signature certifications and authentication records to the
guarantor at the time a claim is submitted. The commenter believed that
this approach would ensure that certification and authentication
records are available and submitted consistently and promptly with each
loan the guarantor assigns to the Department.
Discussion: The Department carefully considered this approach
during negotiated rulemaking, but after considering comments made
during that process, we determined that, at this time, it would not be
necessary to require FFEL Program lenders to submit electronic
signature certifications and authentication records to the guarantor at
the time a claim is submitted. Instead, consistent with our
understanding of how paper notes are being handled in the student loan
industry, we have adopted the framework contained in these final
regulations, which puts the responsibility for managing the electronic
promissory notes and ensuring their continued enforceability on the
lenders and guaranty agencies that created them.
Changes: None.
Comment: One commenter recommended that the Department adopt the
accessibility standards of section 101(d) of the E-Sign Act, which
requires that electronic records ``remain accessible to all persons who
are entitled to access * * * in a form that is capable of being
accurately reproduced for later reference'' rather than the standard in
proposed Sec. 682.414(a)(6)(iv), which requires a guaranty agency to
provide the Secretary with ``full and complete access'' to electronic
loan records. The commenter believed that the standard as currently
proposed is burdensome and ambiguous. The commenter also requested a
change in terminology in Sec. 682.414(a)(6)(iv) that would require the
``entity in possession'' of the original electronically signed
promissory note rather than the holder be responsible for ensuring
access to electronic loan records.
Discussion: The Department disagrees that using the accessibility
standards of section 101(d) of the E-Sign Act rather than the standard
in proposed Sec. 682.414(a)(6)(iv) is appropriate and believes that
the term ``full and complete access'' is clear and straight forward.
The Department also does not agree with the suggestion that we
substitute the term ``entity in possession'' of the original
electronically signed for ``holder'' in Sec. 682.414(a)(6)(iv). We
believe the term ``entity'' is too vague for the purposes of these
regulations.
Changes: None.
Comment: Several commenters suggested that the Department modify
the regulations to include a provision that would end the requirement
for certification of electronic signatures on MPNs after five years to
evaluate the impact of the provisions on schools that participate in
the Perkins Loan Program.
Discussion: The Department does not believe it is necessary or
advisable to ``sunset'' the provisions requiring the certification of
electronic signature on MPNs after five years. These requirements are
essential to the integrity of the Title IV loan programs and the
Department's ability to enforce electronically-signed, assigned
promissory notes. Additionally, the Department can evaluate the impact
of these regulations without establishing a sunset date for these
provisions.
Changes: None.
Comment: Several commenters requested that we establish a
prospective effective date for the provisions requiring the
certification of electronically-signed notes that includes only
promissory notes signed on or after the effective date of the final
regulations to allow program participants sufficient lead time to
implement the changes.
Discussion: The Department does not agree that these requirements
should only apply to electronically-signed promissory notes made on or
after July 1, 2008. As stated above in response to another comment, in
July of 2001, the Department published Standards to facilitate the
development of electronic processes under the E-Sign Act. We assume
that FFEL Loan and Perkins Loan holders are complying with those
standards and, therefore, should be ready to comply with these new
requirements on July 1, 2008.
Changes: None.
Record Retention Requirements on Master Promissory Notes (MPNs)
Assigned to the Department (Sec. Sec. 674.19, 674.50, 682.406, and
682.409)
Comment: One commenter suggested that the Department collect the
Perkins Loan Program MPN and the records showing the date and amount of
each disbursement of Perkins Loan Program funds at the time the loan is
assigned to the Department and require an institution to respond to
requests for information on an assigned loan for three years following
assignment, rather than require the institution to retain the MPNs and
disbursement records. The commenter believed that this approach would
reduce burden and prevent data corruption or archiving problems for
Perkins Loan Program institutions and would allow the Department
immediate access to MPNs and disbursement records if the records were
needed to enforce the loan.
Discussion: The current Perkins Loan Program assignment procedures
outlined in Dear Colleague Letter CB-06-12 (August 1, 2006) require a
school to submit the original or a certified true copy of the
promissory note upon assignment of the loan to the Department. The
requirement in Sec. 674.19(e)(4)(ii) that an institution retain an
original electronically signed MPN for three years after all the loans
made on the MPN are satisfied applies to loans that have not been
assigned to the Department. The regulations in Sec. 674.50(c)(11)
allow the Secretary to request a record of disbursements for each loan
made to a borrower on an MPN that shows the date and amount of each
disbursement on a Perkins Loan that has been assigned to the
Department. If a school wishes to submit the disbursement records to
the Department when assigning a Perkins Loan, the school may do so.
Changes: None.
Comment: Several commenters asked that the Department implement a
process to notify a Perkins Loan Program school when an assigned loan
has been satisfied so that the school does not incur additional cost
and burden when determining when it can destroy documentation
supporting its electronic authentication and signature process and
disbursement records.
One commenter suggested that the Department provide schools the
option to retain documentation supporting the school's electronic
signature process and disbursement records for at least three years
after the loan is assigned to the Secretary, rather than when the loan
is satisfied, so that schools would know exactly when the three-year
period begins and ends.
Discussion: The Department believes that implementing a process to
notify a school participating in the Perkins Loan Program that an
assigned loan has been satisfied has merit and will explore the
possibility for implementing such a process. Such a process, however,
does not need to be reflected in the regulations.
The Department continues to believe that it is vital for a school
to retain disbursement records and documentation supporting its
authentication and electronic signature process for at least three
years from the date the loan is canceled, repaid or otherwise satisfied
so that the Department has access to the documents if needed to enforce
an assigned loan and to ensure the continued integrity of the Perkins
Loan Program.
[[Page 61970]]
Changes: None.
Comment: Several commenters stated that the new record retention
provisions requiring schools participating in the Perkins Loan Program
to retain disbursement and electronic authentication and signature
records for each loan made using an MPN for at least three years from
the date the loan is canceled, repaid or otherwise satisfied were
unduly burdensome.
The commenters requested that instead of retaining a copy of each
screen shot as it would have appeared to the borrower, the Department
should require institutions to retain a ``description'' of each screen
shot. The commenter also stated that requiring schools to retain ``all
other documentary and technical evidence supporting the validity and
authenticity of an electronically-signed note'' was so open-ended that
schools would be forced to retain all material on the chance that the
Department might request it at some future date.
Discussion: As discussed earlier in this section, the Department
believes that the retention of records will make it easier for the
Department or the school to prove that a borrower benefited from the
proceeds of a loan and will preserve program integrity. Moreover, we do
not believe this requirement is overly burdensome or costly because it
is consistent with the Department's current requirements and record
storage experience. When the MPN was implemented in the Perkins Loan
Program, schools were advised in Dear Colleague Letter CB-03-14 to
retain documentation to support a borrower's loan transactions should
the school need to enforce a loan made under a Perkins MPN. When the
Perkins Loan Program MPN was updated and reissued in June of 2006,
schools were specifically directed in Dear Colleague Letter CB-06-10 to
retain disbursement records to support a borrower's loan transactions.
This guidance, together with the record retention provisions in 34 CFR
668.24 that require a school to retain disbursement records for three
years after the disbursement is made, ensures that schools should be in
possession of the required records already. Further, existing
Assignment Procedures in Dear Colleague Letter CB-06-12 specifically
require schools to retain disbursement records on assigned loans made
under an MPN until the loan is paid-in-full or otherwise satisfied and
submit those records if requested to do so by the Department. As we
stated in response to an earlier comment, screen shots are part of the
loan making process and also provide evidence that a borrower who
signed an MPN or promissory note electronically was aware that he or
she was receiving a loan. It is the Department's experience that
electronic storage of records supporting Title IV loans transactions
are generally cost efficient.
Changes: None.
Comment: One commenter requested that the Department confirm that
an institution is only required to retain the documentation and
templates that apply to electronically-signed MPNs signed for a
specified time period during which the institution's process remained
unchanged, and that it will not be necessary for institutions to retain
this documentation on a loan-by-loan basis.
Discussion: The commenter is correct that an institution is
required to retain the documentation and templates that apply to all of
an institution's electronically-signed MPNs for discrete periods of
time. We wish to emphasize that should any aspect of an institution's
electronic signature process change, the institution must document the
new process in the affidavit or certification required by Sec.
674.50(c)(12).
Changes: None.
Comment: One commenter requested that we clarify what would
constitute an ``original'' electronically-signed MPN under the proposed
Perkins Loan record retention requirements. The commenter stated that
if an ``original'' electronically-signed MPN means that a school can
print a copy of the signed MPN, the Department should not use the word
``original.'' However, if the Department's intent is to require a
school to produce something more than a paper copy of the MPN, the
commenter requested that the Secretary provide schools and servicers
additional time to ensure their ability to meet the new requirements
before the regulations take effect.
Discussion: An institution or its servicers should have a system
designed so that the signed electronic record is designated as the
``authoritative'' copy of the promissory note and must be able to
reproduce an electronically signed promissory note, when printed or
viewed, as accurately as if it were a paper record. The institution or
its servicer should enable the viewing or printing of electronic
records using commonly available operating systems and hardware.
Designation of the electronic note created by the institution as the
``original'' is a useful means for designating the electronic note that
the institution must retain under these regulations.
Changes: None.
Comment: One commenter asked that we clarify whether the
requirement to retain documentation of the ``date and amount of each
disbursement'' of Perkins Loan Program funds referred to records
reflecting the date the money was applied to a borrower's account or to
records showing the date the funds were awarded. Another commenter
requested clarification on the timeframe under which an institution
would be required to submit Perkins Loan disbursement records.
Discussion: The requirement to retain documentation of the ``date
and amount of each disbursement'' of loan funds refers to the amount
and date that Perkins Loan Program funds were applied to a borrower's
account. An institution may, but is not required to, submit
disbursement records to the Department when it assigns a Perkins Loan.
If an institution does not submit the disbursement records to the
Secretary when assigning a Perkins Loan, it must retain the records for
three years from the date the loan is canceled, repaid, or otherwise
satisfied in case the Secretary needs the records to enforce the loan.
Changes: None.
Comment: Several commenters stated that guarantors are not
currently required to collect the record of the lender's disbursement
of Stafford and PLUS loan funds to a school for delivery to the
borrower as part of the claims process nor are they required to submit
loan disbursement data under the current process for assigning loans to
the Secretary. For these reasons, the commenters stated that
disbursement records may not be readily available for submission in the
FFEL mandatory assignment process as required by proposed Sec.
682.409(c)(4)(vii). The commenters requested that the Department
implement any new guaranty agency reporting obligation prospectively
for new Stafford and PLUS loans made under an MPN on and after July 1,
2008 to give sufficient lead time to guarantors and lenders to
establish the processes to support this new requirement. Another
commenter, again citing the lack of availability of disbursement
records through the claims process, recommended that the Secretary
require the submission of the record reflecting the date of guarantee
instead and only for loans that are under investigation by the
Secretary.
Discussion: The Department's longstanding regulations in Sec.
682.414(a)(4)(ii)(D) have directed guaranty agencies to require a
participating lender to maintain current, complete, and accurate
records of each loan that it holds, including but not limited to, a
copy of a record of each disbursement of loan proceeds. Although these
records are not collected
[[Page 61971]]
as part of the claims process, these records must be retained in
accordance with Sec. 682.414(a)(4)(ii)(D). For this reason, the
Department sees no reason to implement these new regulations
prospectively and is confident that guaranty agencies and lenders can
implement a process that provides for the submission of disbursement
records as part of the mandatory assignment process before the
regulations become effective on July 1, 2008.
Changes: None.
Comment: Several commenters suggested that we revise the provision
in Sec. 682.414(a)(5)(iv) requiring a lender to retain an original
electronically signed Stafford or PLUS MPN for three years after all
loans made under the MPN are satisfied to require the ``entity in
possession'' of the original electronically signed MPN, rather than the
``holder,'' to retain the note for a period ending on the earlier of 20
years from the date of signature or the date all the loans on the MPN
have been satisfied. The commenters stated that this change would
address cases when a loan is assigned to another party, such as the
guarantor or Secretary, and the lender has no way of knowing when all
the loans under the MPN are satisfied. The commenter stated that this
change would also address the fact that the life span of record
retention technology has a practical limit.
Discussion: As stated in response to comments discussed earlier,
the Department believes using the term ``entity'' in the context of
Sec. 682.414 is too vague. The intent of the regulations is to create
a legal obligation on the lender and guaranty agency that created the
promissory note to cooperate with the Secretary.
Changes: None.
Loan Counseling for Graduate or Professional Student PLUS Loan
Borrowers (Sec. Sec. 682.603, 682.604, 685.301, and 685.304)
Comments: Overall, commenters were supportive of the proposed
changes to the loan counseling regulations, but some commenters had
questions or concerns regarding the proposed changes.
One commenter asked if the notification requirements specified in
Sec. 682.603(d) would be met if the information listed were provided
to borrowers through the school's financial aid award letter process.
Several commenters noted that the proposed regulations would
require schools to provide one set of initial counseling materials to
student PLUS borrowers who have received prior Stafford Loans and
another set of initial counseling materials to student PLUS borrowers
who have not received prior Stafford Loans. The commenters acknowledged
that establishing less comprehensive initial counseling requirements
for student PLUS borrowers who have already received Stafford Loan
initial counseling was intended to minimize burden on schools. However,
these commenters stated that separate initial counseling requirements
would actually be more burdensome. For some schools, separating student
PLUS borrowers into different categories for initial counseling
purposes would be more cumbersome than providing the same initial
counseling to all student PLUS borrowers.
Several commenters noted that proposed Sec. 682.604(f) is
disjointed and hard to follow. These commenters recommended
restructuring Sec. 682.604(f).
Discussion: The regulations do not specify a method a school must
use to notify a student PLUS Loan borrower of the student's eligibility
for a Stafford Loan, the different terms and conditions of PLUS and
Stafford loans, and the opportunity to request a Stafford Loan instead
of a PLUS Loan. The regulations only specify that this information must
be provided to the student before the loan is certified, in the case of
a FFEL Loan (see Sec. 682.603(d)), or before the loan is originated,
in the case of a Direct Loan (see Sec. 685.301(a)(3)). If the
financial aid award letter includes the required information, and is
provided to the student before the loan is certified or originated, it
would meet the requirements of Sec. 682.603(d) or Sec. 685.301(a)(3),
as the case may be.
Many schools no longer provide in-person loan counseling, and
instead use electronic, interactive counseling programs. Often these
electronic, interactive counseling programs are developed by guaranty
agencies and provided to schools. We believe that the benefits of a
more informed borrower, particularly for graduate and professional PLUS
borrowers who have access to significantly increased loan amounts,
outweigh the costs of providing the additional loan counseling. In
addition, schools are not required to provide separate counseling for
student PLUS borrowers. Schools are not required to develop separate
initial counseling materials for student PLUS borrowers with prior
Stafford Loans and student PLUS borrowers without prior Stafford Loans.
The regulations only specify minimum initial counseling requirements.
Schools must provide certain information to PLUS borrowers who have
received prior Stafford loans, and must provide certain information to
PLUS borrowers who have not received prior Stafford Loans. The
regulations do not prohibit schools from exceeding the minimum initial
counseling requirements. If a school finds that providing comprehensive
initial counseling to all student PLUS borrowers is more cost effective
than providing the limited counseling required by the regulations, a
school may provide the comprehensive counseling to all student PLUS
borrowers.
We agree with the commenters' recommendations regarding the
restructuring of Sec. 682.604(f).
Changes: We have restructured Sec. 682.604(f). Revised Sec.
682.402(f) begins with a discussion of initial counseling requirements
for Stafford Loan borrowers, then discusses initial counseling
requirements for student PLUS Loan borrowers, and ends with a
discussion of general initial counseling requirements.
Maximum Length of Loan Period (Sec. Sec. 682.401, 682.603, and
685.301)
Comment: Commenters were in unanimous support of the Secretary's
proposal to eliminate the maximum 12-month loan period for annual loan
limits in the FFEL and Direct Loan programs and the 12-month period of
loan guarantee in the FFEL Programs. One commenter noted that the
regulatory change would require loan origination systems changes.
Another commenter noted that the change would require the removal of a
system edit used by some guaranty agencies to monitor school loan
certification. This commenter asked the Secretary to confirm that this
regulatory change would have no impact on a school's reporting to
NSLDS.
One commenter asked the Secretary to further clarify in the
preamble to these final regulations the relationship of the longer loan
period to loan limits and the definition of academic year. Another
commenter asked that we clarify in the preamble that the intent of the
regulations is to avoid potential misunderstandings among schools that
might lead to the application of a single Stafford annual loan limit
for a period spanning multiple academic years.
Discussion: The Secretary appreciates the commenters' support. The
Secretary understands that this regulatory change may require lenders
and guaranty agencies to make changes in their loan origination
systems. The Secretary believes that the effective date of the
regulations under the master calendar provisions of the HEA provides
sufficient time for these changes to be made.
[[Page 61972]]
The intent of the regulations generally is not to allow schools to
certify a single Stafford annual loan limit for a period spanning
multiple years, although borrowers attending non-term and certain
nonstandard term programs on a less-than-full-time basis may have loan
periods that span more than the period associated with an academic year
for a full-time student. Schools are still expected to monitor annual
loan limit progression by the school's academic year, which must meet
at least the minimum standards defined in 34 CFR 668.3. Annual loan
limits continue to apply to the academic year or the period of time
necessary for a student to progress to the next grade level as
referenced in Sec. 682.401(b)(2)(ii). Unless a school uses standard
terms and is authorized to certify loans by the term, most loan
certifications will also continue to be for the academic year according
to the school's defined Title IV academic year.
The proposed changes to Sec. Sec. 682.401, 682.603, and 685.301
are intended to allow a school to certify a single loan for students in
shorter, non-term or nonstandard term programs (for example, a 15 month
program when the school's Title IV academic year encompasses 10
months). The change will also provide greater flexibility in
rescheduling loan disbursements for students in non-term and certain
nonstandard term programs who are progressing academically in their
programs more slowly than anticipated, or who drop out and return
within the permitted 180-day period to retain Title IV disbursements.
The Secretary clarifies that this change has no impact on school
reporting to the Department's NSLDS.
Change: None.
Mandatory Assignment of Defaulted Perkins Loans (Sec. Sec. 674.8 and
674.50)
Justification for Mandatory Assignment
Comments: A large number of schools commented on this proposal,
challenging the Department's justification for requiring mandatory
assignment of defaulted Perkins Loans. These schools acknowledged that
the Department has collection methods unavailable to the schools, but
noted that schools have collection methods, such as withholding
transcripts and placing administrative holds on services, that the
Department does not have.
Many of these schools identified the amount of outstanding Perkins
Loan balances they would lose upon implementation of these regulations.
These schools argued that the loss of potential collections on these
loans removes an income source for their Perkins Loan Fund, and reduces
the number of Perkins Loans available to future borrowers. These
commenters pointed out that there has been no Federal Capital
Contribution (FCC) in the Perkins Loan Program in recent years, and
asserted that the mandatory assignment proposal would further deplete a
school's Perkins Loan Fund.
These schools also identified their recovery rates on Perkins Loans
they hold that are in default for seven or more years. They based their
calculations on the outstanding amounts on these loans, and the amounts
collected in the preceding three years. Recovery rates reported by the
commenters ranged from a low of seven percent to a high of 79 percent.
The schools argued that the Department has not demonstrated that it has
a higher recovery rate on defaulted Perkins Loans than the schools.
Discussion: The Department acknowledges that schools have
collection tools that are unavailable to the Department. However, the
low recovery rates reported by many schools indicate that these tools
are not generally effective. The mandatory assignment requirements will
have little impact on schools that do use these tools effectively to
collect on defaulted loans. If even one payment is received on a
defaulted loan in the year prior to the Department requiring
assignment, the loan would not be eligible for mandatory assignment. In
addition, it is our experience that many schools maintain holds on
transcripts and other administrative services after they assign Perkins
Loans to the Department. We expect that schools will continue this
practice for mandatorily assigned loans. The Department's estimated
savings resulting from mandatory assignment are provided in the
Accounting Statement in Table 1 of the Regulatory Impact Analysis.
The Department is aware of the large amount of aged, defaulted
Perkins Loans held by schools with little or no collection activity. As
noted in the preamble to the NPRM, our records show that schools are
holding more than $400,000,000 in such loans. The commenters'
submissions identifying the amounts of Perkins Loan funds schools may
lose under the regulations illustrate the magnitude of the problem. The
data showing large amounts of old defaulted Perkins Loans which schools
have been unable to collect supports requiring mandatory assignment.
With respect to the Department's recovery rates, defaulted Perkins
Loans that are assigned to the Department under the current voluntary
assignment procedures are assigned for such reasons as hardship,
incarceration, refusal to pay, and the school's inability to locate the
borrower. Schools are required to undertake first-year and second-year
collection efforts before assigning Perkins Loans to the Department,
although schools may dispense with the second-year collection efforts
and assign a loan to the Department after the first year collection
efforts have failed. Thus, the defaulted Perkins Loans that are
assigned to the Department through voluntary assignment are loans that
schools consider uncollectible.
The Department's analysis of its recovery rate on these defaulted
Perkins Loans shows that, as of August 30, 2007, the Department's
recovery rate is:
53.90 percent for loans assigned to us in 2002.
45.90 percent for loans assigned to us in 2003.
36.02 percent for loans assigned to us in 2004.
The recovery rates show increased collections on defaulted Perkins
Loans the longer the Department holds the loans. We believe the
Department's recovery rate on defaulted Perkins Loans compares
favorably to the schools' self-reported recovery rates. Therefore, we
strongly believe that requiring assignment of these loans to the
Department, as described in these regulations, is in the best interests
of the taxpayers and the government.
Changes: None.
Alternatives to Mandatory Assignment
Comments: Several commenters suggested alternatives to the
mandatory assignment proposal. Some commenters suggested that the
Secretary re-institute a version of the referral program that existed
in the 1980s. Under a referral program, schools could voluntarily
assign loans to the Department; the Department would collect on the
loans, and would return a portion of the collections to the school that
assigned the loan. Other commenters suggested a variation of the
referral program under which the Department would return funds not to
individual schools, but to the Perkins Loan Program generally. Under
this proposal, the amounts the Department collects on assigned loans
would be re-allocated to schools participating in the Perkins Loan
Program, using the standard allocation formula.
Commenters recommended streamlining the voluntary assignment
process, improving the Default Reduction Assistance Program (DRAP), and
re-instituting the IRS Skiptracing
[[Page 61973]]
Service, as alternatives to mandatory assignment.
Discussion: As discussed in the preamble to the NPRM, the referral
program the Department administered in the 1980s was not a success. We
continue to believe, and the commenters did not provide us with any
basis for modifying our position, that a revival of that program would
not be in the Federal fiscal interest.
With regard to the proposals for a streamlined voluntary assignment
process and for re-instituting the IRS Skiptracing Service, we note
that the Department has already streamlined the voluntary assignment
process significantly. We have reduced the supporting documentation
required for assignment, simplified the assignment form, and
implemented a process allowing for the submission of assignment
packages in groups. However, these changes have not significantly
increased the number of voluntarily assigned Perkins Loans.
The commenter requesting that we improve DRAP did not indicate what
the perceived deficiencies of that program are, or make any specific
recommendations for improvements. DRAP is intended as a final effort to
prevent a loan that is about to go into default from going into
default. Any improvements to DRAP would have little impact on loans
that have been in default for seven or more years.
The Department is renewing its computer-matching agreement with the
Internal Revenue Service to re-institute the IRS Skiptracing Service.
Schools and guaranty agencies that have an approved Safeguard Report
will be able to access the Student Aid Internet Gateway (SAIG) to
request and receive data through their mailboxes. The Department is
currently working to make this service available to guaranty agencies
and schools. Announcements on the availability of the IRS Skiptracing
Service will be posted to the Department's Information for Financial
Aid Professionals (IFAP) Web site. To the extent that the IRS
Skiptracing Service is helpful to schools in locating borrowers of
defaulted Perkins Loans, it should reduce the number of loans that will
meet the criteria for mandatory assignment. We will also consider
improving the DRAP program in the future.
Changes: None.
Criteria for Mandatory Assignment
Comments: Many commenters suggested that if the Department requires
mandatory assignment of Perkins Loans, it should modify the criteria
for mandatory assignment. Generally, commenters recommended increasing
the outstanding loan balance and the number of years in default that
would trigger assignment from $100 to $1,000 and from seven years to
ten years, respectively. Commenters argued that a ten-year period of
default made sense, because the maximum repayment period for a Perkins
Loan is ten years. One commenter claimed that many defaulted borrowers
are willing and able to repay their defaulted loans after five to ten
years in default. The commenter asserted that a borrower who has been
in default for this length of time is often in a position to take out a
mortgage on a home or to obtain a loan for some other large purchase.
Such a borrower would seek to repay defaulted Perkins Loans to improve
his or her credit report. Another commenter stated that this often
occurs after 15 years in default.
Several commenters recommended that we exempt schools with low
default rates from the mandatory assignment requirements. Commenters
also recommended that accounts on which the schools have acquired a
judgment against the borrower be exempted. The commenters noted that
schools spend a significant amount of time and effort securing
judgments on loans and stated that it was not fair to require schools
to assign judgment accounts. One school noted that a judgment may
include both private loans and Perkins Loans, making it difficult for
the school to separate the Perkins Loan from the private debt for
assignment purposes.
Finally, a large number of commenters noted that if the Department
required assignment of all loans that meet the criteria for assignment
in the proposed regulations, it would result in a huge inventory of
assignments. The Department would have difficulty absorbing such a
large influx of assigned loans. These commenters recommended that the
Department begin mandatory assignment with loans that are 15 years past
due, and gradually move towards loans that are seven years past due.
Discussion: In the preamble to the NPRM, we discussed in
considerable detail different alternatives for requiring the assignment
of defaulted Perkins Loans to the Department.
Rather than attempting to pinpoint a specific time when borrowers
tend to be motivated to pay off their defaulted loans, the Department
proposed to model the Perkins Loan mandatory assignment requirements on
the mandatory assignment requirements in the FFEL Program. Under the
mandatory assignment process in the FFEL Program, a FFEL Loan is in
default for a little over six years before it is assigned to the
Department. Based on that precedent, in these final regulations, the
Department has adopted a standard of seven years for Perkins Loans.
Similarly, the standard of a balance of $100 or more on a loan
before mandatory assignment will be required is consistent with the
requirement for mandatory assignment of FFEL loans. We continue to
believe that these standards are reasonable.
We do not agree with the proposal to exempt schools with low cohort
default rates from the mandatory assignment requirement. Cohort default
rates are based on collections in the first three years after a loan
enters repayment status. Cohort default rates do not measure a school's
success at collecting on loans that have been in default for several
years and are not relevant to the loans that will be subject to
mandatory assignment. While it may be correct that schools with low
cohort default rates have fewer loans in default for seven years or
more than schools with higher cohort default rates, this fact does not
support a conclusion that the schools with low cohort default rates are
successful at collecting on loans that have been default for seven
years or more.
The Department also disagrees with the recommendation that loans on
which the school has secured a judgment be exempted from mandatory
assignment. Securing a judgment on an account is a helpful collection
tool, but it does not ensure that the borrower will make payments on
the debt. We acknowledge that Perkins Loans that have been merged into
judgments may need to be handled differently than regular Perkins Loans
for purposes of mandatory assignment. The Department will develop
procedures for the assignment of judgment accounts as the Department
operationalizes the mandatory assignment process.
We agree with the recommendation by many commenters that we phase-
in mandatory assignment. The regulations establish the minimum criteria
for mandatory assignment. The regulations do not preclude the
Department from phasing-in mandatory assignment by starting the process
with loans that have been in default for more than the seven-year
minimum. Phasing-in mandatory assignment will ease disruption to both
the schools and the Department.
Changes: None.
Legal Basis for Mandatory Assignment in the Perkins Loan Program
Comments: Some commenters questioned the Department's legal
[[Page 61974]]
authority to require the assignment of Perkins Loans, arguing that
section 463(a)(4)(A) of the HEA provides for mandatory assignment in
certain limited circumstances and precludes the Secretary from
requiring mandatory assignment in other circumstances.
Discussion: Section 463(a)(9) of the HEA authorizes the Secretary
to add provisions to the program participation agreement for schools
where the Secretary has determined that the provision is necessary to
protect the United States from unreasonable risk of loss. For the
reasons discussed in the NPRM and these final regulations, the
Secretary has determined that the mandatory assignment regulations as
proposed, which will allow the Secretary to require participating
schools to assign defaulted loans that meet the criteria in the
regulations, are necessary to protect the United States from
unreasonable risk of loss. The sections of the HEA cited by the
commenters do not prevent the Secretary from exercising her authority
under section 463(a)(9) of the HEA.
Changes: None.
Reasonable Collection Costs (Sec. 674.45)
Collection Cost Caps
Comments: Several commenters stated that the proposed caps on the
collection costs that may be charged to borrowers in the Perkins Loan
Program are too high, and should be reduced. Generally, these
commenters recommended reducing the cap to 24 percent, which would be
consistent with the cap on collection costs in the FFEL Program.
One commenter stated that the proposed regulations would not
sufficiently limit collection costs. This commenter noted that the
Perkins Loan Program is intended to benefit needy students. The
commenter argued that it is reasonable to expect that a portion of low-
income borrowers receiving Perkins Loans would have difficulty repaying
these loans. These borrowers are often the ones least likely to be
aware of their repayment options, and most likely to get caught in a
spiral of increasing collection costs. As collection costs are added to
the loan, the outstanding balance increases so rapidly that the ability
to pay off the loan becomes further and further out of reach.
This commenter also challenged the fee-on-fee method of assessing
collection costs. Under the fee-on-fee method, collection agencies that
charge contingency fees charge a ``make whole rate'' to borrowers. The
commenter asserted that many States prohibit or limit the use of make
whole rates for other types of consumer debt, and the Department should
do likewise for Perkins Loans.
Other commenters, who believed the collection cost caps are too
low, supported the use of a make whole rate, and asked the Department
not to abandon this approach for the Perkins Loan Program.
Several commenters recommended increasing the collection cost caps.
Generally, these commenters recommended increasing the collection cost
caps to:
33 percent for first collection efforts.
40 percent for second collection efforts.
50 percent for collection efforts arising out of
litigation.
50 percent for collection efforts against borrowers living
abroad.
Several commenters who recommended increasing or eliminating the
collection cost caps argued that the proposed caps will make it
financially difficult for schools to collect on defaulted Perkins
Loans. These commenters said that schools will have to pay more for
collections than they can charge to the students. As a result, schools
would charge the difference to the Perkins Loan Fund, thus depleting
the Fund. The amount of funds that could then be lent out to future
students would be reduced. In response to these comments, other
commenters noted that the purpose of assessing collection costs against
a borrower is not to create an income stream for schools' Perkins Loan
Funds.
Several commenters also argued that the quality of collection
efforts will suffer under the proposed collection cost caps.
Discussion: The Department declines to adopt the commenters'
recommendation to reduce the collection cost caps to the same level as
those in the FFEL Program. Perkins Loans are low-balance loans compared
to FFEL loans, but the cost of collection is about the same. Because
the return on collecting Perkins Loans is smaller than the return on
collecting FFEL loans, we believe that higher collection cost caps are
warranted in the Perkins Loan Program. The Department also disagrees
with the commenters' recommendations for increasing the collection cost
caps. We believe that the caps as proposed strike a fair balance
between the concerns of borrowers and the concerns of the Perkins Loan
Program schools and collection agencies.
With regard to contingency fees, the Department is not abandoning
the make whole rate for Perkins Loan collections. The Department does
not regulate the establishment of fees in a contract between a Perkins
Loan Program school and a collection agency. However, institutional
contracts must provide for the recovery to the Perkins Loan Fund of the
outstanding balance of the loan. Since a collection agency incurs
additional expenses associated with collecting these amounts, the
school may authorize the collection agency to also recover these
expenses from the borrower.
Collection agencies frequently charge contingency fees to
borrowers. The Department's rule on assessing collection costs on a
contingency fee basis to an individual who owes a debt to the
Department is in 34 CFR 30.60 and is commonly referred to as the fee-
on-fee method. While this method of assessing collection costs is not
required in the Perkins Loan Program, many schools and servicers use it
because it makes the Fund whole. The make whole rate is the amount by
which the borrower's debt is multiplied to determine the amount that
the collection agency needs to collect to recover 100 percent of the
outstanding balance.
Thus, a collection cost cap of 30 percent means that, for loans
collected on a contingency fee basis, the actual collection costs
charged to the borrower must be less than 30 percent.
We expect that when these regulations take effect, collection
agencies that collect on Perkins Loans will adjust their contingency
fees to comply with the new regulatory requirements. Collection
agencies that charge a make whole rate to borrowers will have to take
that into account when adjusting their contingency fees.
Some schools argue that they have little choice but to agree to
high contingency fees when they negotiate contracts with collection
agencies. Given the inability of many schools to secure favorable terms
with collection agencies collecting on Perkins Loans, the Department
believes that the most effective way to reduce these collection costs
in the Perkins Loan Program is to mandate collection cost limits.
We agree with the commenters who argued that the purpose of
assessing collection costs is not to create an income stream for a
school's Perkins Loan Fund. Additionally, Sec. 674.47(e)(3) and (4)
limits the amount of unpaid collection costs that a school may charge
to the Fund to 30 percent for first collection efforts, and 40 percent
for second collection efforts. These limits match the limits on
collection costs that may be charged to borrowers established in the
final regulations.
Changes: None.
[[Page 61975]]
Additional Concerns
Comments: Several commenters raised additional concerns with regard
to the proposed caps, or recommended modifications to the proposed
regulations. One commenter recommended restricting the amount of
collection charges that may be charged to a borrower from average costs
to actual costs. This commenter stated that allowing agencies to assess
average costs against a borrower is unfair, since the actual collection
cost incurred with respect to a particular borrower may be lower than
the average costs that the borrower is charged.
Some commenters recommended applying the caps only to collection
costs incurred by collection agencies on a contingency fee basis, not
on the costs incurred by schools for their own internal collection
efforts. These commenters argued that the unreasonably high collection
costs seen in the Perkins Loan Program are due to collection agency
contingency fees, not collection activities carried out by Perkins Loan
Program schools.
Other commenters recommended that the cap on litigated loans be
removed, and be replaced by an amount defined by the court.
Another commenter argued that informing borrowers of the new
collection cost caps would be administratively burdensome.
Another commenter said the regulations would be inconsistent with
Sec. 674.45(e), which requires schools to assess all reasonable
collection costs to borrowers.
Discussion: Allowing schools to charge only actual costs to the
borrower is unworkable and inconsistent with standard collection
practices on student loans and other debts. Requiring lenders to
identify specific actual costs for every borrower that the lender
collects on would be administratively burdensome and not cost
effective.
We do not see any justification for applying the caps only to
collection costs incurred by collection agencies. From a borrower's
perspective, collection costs are collection costs. It makes little
difference whether the costs were incurred by a collection agency or by
the school.
With regard to litigated loans, a court may remove all collection
charges from a loan as part of a judgment. The regulations establishing
collection cost caps on loans that are litigated do not preclude a
court from lowering the collection charges or eliminating the
collection charges altogether when the court issues a judgment.
The regulations do not impose a requirement that schools notify
borrowers of the collection cost caps. Collection costs also are not
among the items that a school must discuss during its exit interviews
with borrowers.
Finally, the regulations do not conflict with the reasonable
collection costs provisions in the existing regulations. As amended by
these final regulations, Sec. 674.45 defines ``reasonable collection
costs'' chargeable to the borrower as costs within the proposed caps.
Changes: None.
Child or Family Service Cancellation (Sec. 674.56)
Comment: Commenters were overwhelmingly supportive of the proposed
clarifications to Sec. 674.56, regarding cancellation of loans for
individuals working in the child or family service areas. However, two
commenters had questions about this provision.
To qualify for a child or family service cancellation, among other
requirements, an otherwise eligible borrower must be employed full-time
by a child or family service agency. One commenter asked if employment
by a child or family service agency would disqualify an attorney for
the cancellation, because the agency, rather than the children the
agency serves, is considered to be the attorney's client.
A second commenter noted that the child or family service
cancellation would be one of the hardest cancellations in the Perkins
Loan Program to qualify for, and asked if that was the intent of
Congress when the law was passed.
Discussion: An attorney who is an employee of a child or family
service agency must meet the same eligibility requirements as any other
non-supervisory employee of a child or family service agency to qualify
for the loan cancellation. The attorney must provide services directly
and exclusively to high-risk children from low-income communities.
The determination of whether a borrower qualifies for a discharge
is made on a case-by-case basis and would require consideration of the
attorney's specific responsibilities. However, in general, if the
attorney represents the agency in court, the attorney is not providing
services directly to the child.
If the attorney represents children in court such as in the role of
a guardian ad litem, the attorney would be considered to be providing
services directly to the child. If the other eligibility criteria for
the cancellation are met, the attorney would qualify for a child or
family service cancellation.
With respect to the comment about the difficulty of qualifying for
this cancellation, section 465(a)(2)(I) of the HEA, which establishes
the child or family service cancellation, is very narrowly written. The
statute requires employment at a certain type of agency and the
provision of services to a specific population. The borrower must
provide services to children who are both ``high-risk'' and come from
``low-income communities.'' Section 469(a) and (b) of the HEA defines
both of these terms. The final regulations are consistent with the
statutory language.
Changes: None.
Prohibited Inducements (Sec. Sec. 682.200 and 682.401)
Comment: Many commenters endorsed the Secretary's efforts to
clarify the regulations on improper inducements and improve enforcement
of the law, but disagreed with various aspects of the proposed
regulations. Several commenters thought the proposed regulations were
not sufficiently strict. Several U.S. Senators commended the Secretary
on the proposed regulations, particularly the use of the rebuttable
presumption to more effectively enforce the anti-inducement
requirements. Several commenters thought that the Department's lack of
oversight and enforcement of current requirements was a bigger problem
than the content of the regulations. One association representing
school business officers cautioned against the unintended consequences
of the proposed regulations and expressed concern that the regulations
could affect the wide range of relationships between colleges and
universities and financial institutions. That commenter also noted that
financial institutions were very heavily engaged in philanthropic
endeavors in higher education and expressed concern that any perceived
risk to the lender could result in those needed dollars being invested
elsewhere.
One commenter saw no basis for having different rules for lenders
and guaranty agencies in regard to prohibited inducements.
Discussion: The Secretary thanks the commenters for their support
and comments on this very complex and urgent issue affecting the FFEL
Program. The Secretary believes that this regulatory effort will result
in clearer regulatory guidelines for schools, lenders, and guaranty
agencies participating in the FFEL program. The detailed provisions in
the form of permissible and impermissible activities that govern the
interaction between lenders, guaranty agencies, and schools will assist
these parties in avoiding
[[Page 61976]]
violations of the law. The increased regulatory clarity and specificity
will also improve the Secretary's ability to enforce the law in this
area. Student and parents served by the program, and the taxpayers that
support it, will have renewed trust in the integrity and transparency
of the loan process. Students and parents will clearly understand that
they have a choice of lender and can exercise that choice. Absent
questionable payments and activities between schools and lenders,
students and parents will view a school's financial aid office once
again as an unbiased source of information on the FFEL loan process and
on the factors a prospective borrower should consider in selecting a
lender. Borrowers will be more likely to receive clear comparisons
between the benefits offered under the Federal student loan programs
and under private education loan programs without concern that
prohibited payments or other forms of assistance by a lender to a
school will influence a school's counseling such that a borrower
receives a loan with less favorable terms and conditions.
The Secretary understands commenters' concerns about unintended
consequences for other contractual services performed for schools by
financial institutions and their affiliates, and on philanthropic
giving to higher education. However, she believes that contracted
services between financial institutions and schools in non-student aid
related areas will not be affected by these regulations as long as the
arrangements are negotiated in good faith and are not undertaken to
secure FFEL loan applications or limit a borrower's choice of lender.
Likewise, the Secretary believes that financial institutions will
continue to provide philanthropic support to institutions. These
philanthropic relationships need not change as long as they have not
been undertaken to secure FFEL loan applications or limit a borrower's
choice of lender. She feels confident that schools and financial
institutions will take all the prudent steps necessary to ensure that
there are no conflicts of interest between the financial institution's
role as a FFEL lender and its philanthropic support of higher
education.
Finally, the Department believes that the regulations properly
treat guaranty agencies and lenders differently for purposes of
improper inducements. Guaranty agencies are responsible for lender and
school oversight and training, default prevention, outreach and
financial literacy, and lender claim review and payment and the
regulations need to recognize the important roles these agencies play
in these areas. In contrast, under the HEA, the lender's roles are to
provide loans for eligible borrowers and collect those loans in
accordance with the Secretary's regulations.
Changes: None.
Comment: Some commenters recommended that the Department clarify in
the final regulations that State laws relating to the inducement
practices of lenders, schools and loan guarantors within the FFEL
Program are preempted.
Discussion: The Department appreciates the commenters' concerns
about potential State law conflicts with the Department's inducement-
related regulations. It is well settled that any State law that
conflicts with or ``stands as an obstacle to the accomplishment and
execution of the full purposes and objectives'' of a Federal law is
preempted. Hillsborough County, Fla. v. Automated Med. Laboratories,
Inc., 471 U.S. 707, 713 (1985). Moreover, ``[f]ederal regulations have
no less pre-emptive effect than federal statutes.'' Fid. Fed. Sav. &
Loan Ass'n v. de la Cuesta, 458 U.S. 141, 153 (1982). Accordingly,
State statutes, regulations, or rules that conflict with or hinder the
accomplishment and execution of the Department's rulemaking relating to
inducement practices are preempted. We anticipate future negotiated
rulemaking to implement the CCRAA and expect to include this issue
among those considered for rulemaking at that time.
Changes: None.
Use of a Rebuttable Presumption (Sec. Sec. 682.413, 682.705(c), and
682.706(d))
Comment: A number of commenters representing students and other
members of the public supported the proposal to strengthen the
Secretary's enforcement of the prohibition on improper inducements in
the FFEL Program.
Many commenters representing various FFEL Program participants
objected to the Secretary's proposal to adopt a rebuttable presumption
in administrative actions against lenders or guaranty agencies
involving violations of the prohibited inducement provisions. One of
these commenters argued that the use of a rebuttable presumption was
inconsistent with the statutory requirement that the Secretary
determine that an inducement was offered in order to secure loan
applications. The commenter argued that the HEA includes a broad
definition of a prohibited inducement and, as a result, a number of
activities would automatically be presumed by the Department to be a
violation under the rebuttable presumption approach.
Other loan industry commenters stated that the adoption of a
rebuttable presumption was unnecessary given the Department's existing
authority to gather information through reviews and audits conducted by
the Office of Federal Student Aid and the Office of Inspector General.
These commenters claimed that the use of a rebuttable presumption is
inconsistent with procedural due process rights and urged that the
proposal be withdrawn. These commenters argued that, if the presumption
is retained, the regulations must require the Department to have a
factual basis supporting the finding of an improper inducement before
commencing any proceeding that could result in the lender's limitation,
suspension, or termination from the FFEL Program. The commenters also
urged that if retained in the regulations, the presumption be applied
only with respect to activities occurring prospectively from the
general effective date of the regulations.
Discussion: The Secretary thanks the commenters who supported the
proposed regulations.
The Secretary has carefully considered the legal arguments
presented by the lenders, guaranty agencies and their supporters.
However, contrary to those arguments, it is well established that the
Secretary has broad authority to establish appropriate regulations and
procedures for resolving administrative cases under the HEA, including
rules for consideration of evidence and determining the burden of
proof. 20 U.S.C. 1082(a)(1); USA Group Services v. Riley, 82 F.3d 708
(7th Cir. 1996); Career College Ass'n. v. Riley, 74 F.3d 1265 (D.C.
Cir. 1996). The establishment of a rebuttable presumption is within
that legal authority. Moreover, the commenters have misinterpreted the
effect of a rebuttable presumption. The rebuttable presumption does not
eliminate the Secretary's obligation to make a finding that an
inducement was provided in exchange for loan applications. Instead,
under these procedures, once the Department establishes that a lender
or guaranty agency engaged in one of the activities established in
these regulations as creating an improper inducement, the lender or
guaranty agency then has the opportunity and obligation to show that
its purpose for engaging in the activity was unrelated to securing loan
applications. The Secretary is still required to make the ultimate
finding that the lender or guaranty agency offered an improper
[[Page 61977]]
inducement and