61960 Federal Register / Vol. 72, No. 211 / Thursday, November 1, 2007 / Rules and Regulations 

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. 

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 §§ 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 §§ 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 §§ 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 §§ 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 §§ 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 §§ 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 §§ 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 §§ 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 electronicallysigned 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 §§ 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 § 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 §§ 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 §§ 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 §§ 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 

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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 § 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 § 674.56 to clarify the 

eligibility requirements for a Perkins 

Loan borrower to qualify for a child or 

family service cancellation. 

• Amending §§ 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 §§ 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 § 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 §§ 682.208, 682.211, 

682.300, 682.302, and 682.411 regarding 

loan discharge for false certification as 

a result of identity theft. 

• Amending §§ 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 §§ 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 §§ 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 §§ 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 §§ 682.202 and 685.202 

to reduce interest rates on subsidized 

Stafford loans made to undergraduate 

students as of July 1, 2008. 

• Amending § 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 § 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 § 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 § 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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61962 Federal Register / Vol. 72, No. 211 / Thursday, November 1, 2007 / Rules and Regulations 

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 

(§ 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 (§§ 674.61, 682.402 and 

685.212) 

Comments: Many commenters 

supported the proposed changes in 

§§ 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 §§ 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 nonFederal 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 (§§ 674.61, 682.402, and 

685.213) 

Comment: Many commenters 

supported our proposals to restructure 

the regulations in §§ 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 threeyear 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 § 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 

§§ 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 §§ 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. 

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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 § 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, 

§ 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 §§ 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 

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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 

§§ 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 §§ 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 § 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 

§§ 674.61(b)(3)(i), 682.402(c)(3)(i), and 

685.213(c)(2) to provide that the threeyear conditional discharge period begins 

on the date the physician certifies the 

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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 

§§ 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 

§§ 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 § 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 

§ 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 (§§ 674.16, 682.208, 

682.401, and 682.414) 

Comment: Many commenters did not 

agree with proposed § 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 

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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 

§ 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 § 682.401(b)(20) 

to 35 days. 

Certification of Electronic Signatures on 

Master Promissory Notes (MPNs) 

Assigned to the Department (§§ 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 § 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 § 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 § 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 § 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 § 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 § 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 § 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 

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§ 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 § 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 §§ 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 electronicallysigned 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 

§ 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 § 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 

§ 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 § 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 §§ 674.19(e)(4)(ii) and 

682.414(a)(5)(iv) requiring loan holders 

to retain an original of an electronicallysigned 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 § 674.33(e) or the 

institution writes off the loan in 

accordance with § 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 

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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 

§ 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 

§ 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 

§ 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 

§ 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 (§§ 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 

§ 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 

§ 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. 

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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 openended 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 § 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 § 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 

§ 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 

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as part of the claims process, these 

records must be retained in accordance 

with § 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 § 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 § 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 (§§ 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 

§ 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 § 682.604(f) is disjointed and 

hard to follow. These commenters 

recommended restructuring § 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 § 682.603(d)), or before the 

loan is originated, in the case of a Direct 

Loan (see § 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 § 682.603(d) or 

§ 685.301(a)(3), as the case may be. 

Many schools no longer provide inperson 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 § 682.604(f). 

Changes: We have restructured 

§ 682.604(f). Revised § 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 

(§§ 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. 

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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 § 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 §§ 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 (§§ 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 

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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 sevenyear 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 

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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 (§ 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 feeon-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, § 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. 

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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 

§ 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, 

§ 674.45 defines ‘‘reasonable collection 

costs’’ chargeable to the borrower as 

costs within the proposed caps. 

Changes: None. 

Child or Family Service Cancellation 

(§ 674.56) 

Comment: Commenters were 

overwhelmingly supportive of the 

proposed clarifications to § 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 nonsupervisory 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 ‘‘lowincome 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 (§§ 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 antiinducement 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 

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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 preemptive 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 

(§§ 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 

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inducement and that the inducement 

was provided to secure loan 

applications. 

The Secretary’s list of improper 

inducements included in § 682.401(d) 

that are presumed to be offered to secure 

loan applications is based on our 

experience in administering the FFEL 

Program since the publication of Dear 

Colleague Letter 89–L–129 in February 

1989, which addressed improper 

inducements. Moreover, recent reviews, 

investigations and reports by the 

Department’s Office of Inspector 

General, the Comptroller General, 

Congress and various State Attorneys 

General have consistently shown that 

lenders undertake the activities listed in 

the regulations to secure FFEL Program 

loan applications. For example, a recent 

Congressional report documented how a 

lender that wanted to make loans to 

students at schools where the lender 

had not previously made loans began 

providing services and benefits to the 

schools. The report quotes directly from 

internal lender and school documents 

clearly indicating that the lender 

performed these activities for the 

purpose of gaining more loan volume at 

the schools, and in fact, the lender was 

successful. In contrast, none of the 

recent public reports, investigations, 

testimony and settlement agreements or 

any of the comments on the proposed 

regulations suggest that lenders 

provided services and benefits to 

schools for any purpose other than to 

secure loan applicants. 

With this background, it is 

appropriate for the Secretary to place 

the burden on the lender or guaranty 

agency to explain its purpose in 

providing benefits or services to 

schools. Moreover, in the great majority 

of cases, the evidence of intent will be 

directly and solely under the control of 

the lender or guaranty agency. 

Accordingly, the Secretary has 

determined that it is appropriate and 

consistent with due process to require 

the lender or guaranty to have the 

obligation to present that evidence and 

explain its purpose. 

Some of the commenters asked the 

Secretary to exempt from the improper 

inducement provisions the situation in 

which a State guaranty agency or an 

affiliated lender is performing services 

for small institutions in accordance with 

its responsibilities under State law. The 

Secretary notes that, as described by 

these commenters, the provision of 

these services may have a purpose 

(compliance with State law) other than 

securing loan applications. This 

example shows the appropriateness of 

placing the burden of explanation on 

the party most likely to have evidence 

of that purpose. 

The Secretary also notes that the 

rebuttable presumption will only be 

applied after the Department has 

previously gathered information from 

the lender and the lender has had an 

opportunity to provide an alternative 

explanation for its actions. The 

Secretary intends to apply the rebuttable 

presumption only in those situations 

where there is significant evidence that 

the lender or guaranty agency offered or 

provided the payments or activities to 

secure FFEL loan applications or FFEL 

loan volume. Since the rebuttable 

presumption is a rule of procedure and 

does not affect any substantive rights or 

obligations, there is no basis for the 

delayed effective date suggested by 

some commenters. 

Changes: None. 

Application of the Federal Trade 

Commission (FTC) Holder Rule 

(§ 682.209(k)) 

Comment: Several commenters 

representing FFEL Program loan 

industry participants opposed our 

proposal to apply the principles of the 

Federal Trade Commission’s (FTC’s) 

Holder Rule to all FFEL Program loans. 

These commenters argued that 

implementation of this proposal will 

result in significant costs and 

administrative burden to FFEL Program 

participants who will be required to 

defend meritless legal claims brought by 

borrowers challenging their student loan 

debts. The commenters urged the 

Secretary to withdraw the proposal and 

conduct further studies to identify a 

sufficient factual basis identifying harm 

to the FFEL Program that necessitates a 

regulatory solution of this nature. The 

commenters believe that any harm 

intended to be addressed by the 

proposal is far outweighed by the costs 

of the proposal. The commenters also 

believe that the proposal effectively 

creates a private right of action for 

borrowers in clear disregard of case law 

that holds that there is no private right 

of action under the HEA. The 

commenters noted that the application 

of this rule could leave a State court in 

a position to interpret the Federal 

inducement regulations to determine 

whether the Department’s version of the 

FTC Holder Rule applies. The 

commenters indicated that if the 

Secretary adopts this proposal the 

regulations should provide that the 

claims and defenses that a borrower 

may assert against a lender are limited 

to claims or defenses that the borrower 

could assert against the school, and that 

the borrower’s recovery may not exceed 

the amount paid on the loan. The 

commenters indicated that the Secretary 

should also clarify that the mere 

existence of a preferred or 

recommended lender relationship with 

a school does not trigger application of 

this Rule. 

Other commenters representing 

consumer and student organizations, 

and the office of a State attorney general 

agreed with the Secretary’s proposal to 

adopt and apply the principles of the 

FTC Holder Rule to the FFEL Program. 

The commenters argued, however, that 

our proposed regulations should mirror 

the FTC Holder Rule in two important 

areas. The commenters recommended 

that the regulations be modified to 

provide that all subsequent holders of a 

FFEL loan, not just the immediate 

holder of the loan, are subject to 

potential claims, and that the full range 

of FTC claims and defenses apply, not 

just those related to the loan. 

Discussion: We thank those 

commenters who supported the 

proposal to incorporate the principles of 

the FTC Holder Rule into the 

regulations of the FFEL Program. 

However, we do not agree with the 

suggestion from many of those 

commenters that the Department adopt 

the specific language of the FTC’s own 

rule. When the Department first 

incorporated the terms of the FTC 

Holder Rule into the FFEL Program 

promissory notes, we made necessary 

and appropriate modifications to the 

language of the FTC Holder Rule to 

correspond to the requirements and 

regulations of the FFEL Program. The 

Secretary is incorporating that existing 

language into these regulations to 

ensure that they apply to all borrowers 

in the FFEL Program, no matter what 

type of school the borrower attends. 

Accordingly, the Secretary does not 

believe that a direct incorporation of the 

FTC Holder Rule into the FFEL Program 

regulations is appropriate. 

The Secretary does not agree with 

those commenters who generally 

opposed the inclusion of the principles 

of the FTC Holder Rule into the FFEL 

Program regulations. The Secretary 

believes that this change will eliminate 

the current difference in legal rights 

between borrowers attending for-profit 

institutions (who are covered by the 

FTC Holder Rule under the FTC’s own 

authority and the FFEL Program 

promissory note) and those attending 

non-profit institutions. That distinction 

arose not because of any educationbased policy distinction, but solely 

because the FTC Holder Rule governed 

only for-profit institutions with 

specified lender relationships. 

Moreover, this change is consistent with 

a long line of court decisions that found 

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that the HEA does not preempt State 

laws that allow borrowers to raise State 

law claims as a defense against 

collection of a FFEL Program loan 

unless particular State laws actually 

conflict with the objectives of the HEA. 

Armstrong v. Accrediting Council for 

Continuing Educ. & Training, Inc., 168 

F.3d 1362 (D.C. Cir. 1999), cert. denied, 

528 U.S. 1173 (2000). Courts have also 

concluded that the lack of a private right 

of action does not preclude the use of 

violations of the HEA as evidence of the 

violation of State laws. College Loan 

Corp. v. SLM Corp., 396 F.3d 588, 598–

599 (4th Cir. 2005); Cliff v. Payco 

American Credit, Inc., 365 F.3d 1113, 

1127–1130 (11th Cir. 2004). Lastly, 

contrary to the commenters’ claims, we 

do not anticipate a significant increase 

in risk or costs to lenders. The 

principles of the FTC Holder Rule have 

been in the FFEL Program promissory 

note and applied to loans for attendance 

at for-profit schools since 1994. The 

Secretary is not aware of any significant 

litigation based on this language since 

that time and the commenters did not 

present any facts supporting their 

claims. 

Given that the FTC Holder Rule has 

applied to some student loan borrowers 

for more than a decade and that the 

commenters did not present any support 

based on that experience for their claim 

that including this provision will 

increase costs, we do not accept the 

recommendation for further studies. 

We do not believe it is necessary to 

clarify the effect that a preferred or 

recommended lender relationship 

would have on application of the 

regulation. The regulation is consistent 

with the language that has been in the 

FFEL Program promissory notes and the 

FTC Holder Rule itself in providing that 

the borrower may assert the actions of 

the school as a defense against the 

lender if the school refers borrowers to 

the lender. 

Changes: None. 

Exhaustive List of Permissible Activities 

(§§ 682.200(b) and 682.401(e)(2)) 

Comment: Many loan industry 

commenters objected to the inclusion in 

the regulations of an ‘‘exhaustive’’ list of 

permissible inducement activities for 

lenders and guaranty agencies, while 

including a non-exhaustive, illustrative 

list of prohibited inducement activities. 

The commenters requested that both 

lists be illustrative in nature. The 

commenters stated that the exhaustive 

nature of the list of permissible 

activities fails to recognize the dynamic 

nature of the marketplace and the 

continual innovation in product 

delivery and services that result from 

private sector competition. The 

commenters believe that it is impossible 

to prescribe a finite list of permissible 

activities today that will provide 

effective guidance for activities 

developed in the future. The 

commenters noted that the Secretary 

declined for this same reason to provide 

a definitive list of types of assistance to 

schools that is comparable to the 

assistance that the Department provides 

to schools that participate in the Direct 

Loan Program and in which lenders and 

guaranty agencies may engage without 

providing an improper inducement. 

These commenters recommended that 

the Secretary follow that same approach 

with the proposed list of inducementrelated permissible activities. 

Discussion: The Secretary disagrees 

with the commenters. She believes that 

greater clarity is achieved for program 

participants if a clear and definitive list 

of permissible activities is provided. 

She also believes that this approach 

enhances the Department’s ability to 

enforce the restrictions on improper 

inducements. The permissible activities 

listed represent the only ones the 

Secretary has approved at the current 

time. The Secretary understands, 

however, that both statutory changes 

and the evolution of business practices 

may require consideration of additional 

permissible activities in the future. 

Therefore, similar to the approach for 

notifying lenders and guaranty agencies 

of approved activities that are 

comparable to those provided by the 

Secretary under the Direct Loan 

Program, the Secretary will notify 

lenders and guaranty agencies, through 

a public announcement, such as a notice 

in the Federal Register, of any 

additional permissible activities that 

lenders and guaranty agencies may be 

authorized to undertake. 

Changes: We have revised the 

definition of lender in § 682.200(b) and 

revised § 682.401(e)(2) to provide for the 

identification and approval by the 

Secretary of other permissible services 

through a public announcement, such as 

a notice published in the Federal 

Register. 

Payments to Individuals and Lender 

Referral and Processing Fees 

(§ 682.200(b)) 

Comment: Several loan industry 

commenters claimed that the preamble 

of the NPRM was incorrect in stating 

that ‘‘Compensation or fees based on the 

numbers of applications or the volume 

of loans made or disbursed are 

improper, regardless of label, under the 

Department’s current and prior policy 

and would continue to be improper 

under these proposed regulations.’’ The 

commenters stated that the Department 

had previously allowed lenders to pay 

marketing compensation based on the 

number of applications received, but not 

based on the number of applications 

that resulted in funded loans. The 

commenters asked that the Secretary 

clarify that this interpretation continues 

to apply until the effective date of the 

final regulations, and that any change in 

policy be applicable to activities 

occurring on or after July 1, 2008. 

The commenters also requested that 

the reference in the regulation to 

prohibited payments to ‘‘any 

individual’’ in paragraph (5)(i)(A)(2) of 

the definition of lender in § 682.200(b) 

be removed and replaced with ‘‘any 

employee of a school or school-affiliated 

organization’’ to clarify the group to 

which the prohibitions apply. The 

commenters further requested that the 

reference to ‘‘processing’’ fees be 

removed in paragraph (5)(i)(A)(5) of the 

definition of lender in § 682.200(b) 

because use of this term could be 

interpreted as prohibiting longstanding 

commercial contractual relationships 

with third-party servicers and other 

parties that provide anti-money 

laundering and PATRIOT Act screening, 

electronic signature processing, loan 

origination services, loan disbursement 

services, and escrow agent services to 

lenders and guaranty agencies. 

The loan industry commenters also 

argued that the regulations would 

effectively prevent some small nonparticipating lenders from meeting their 

Community Reinvestment Act 

requirements through the student loan 

program. 

Discussion: The commenters did not 

correctly describe the Department’s 

prior policy guidance regarding 

application referral programs between 

lenders and marketing arrangements 

between lenders and other parties. The 

Department’s policy on marketing and 

referral fees was specified in Dear 

Colleague Letter 89–L–129 (February 

1989). The Dear Colleague Letter stated 

that any fee paid for loan applications 

under a lender referral program or 

marketing arrangement would be 

considered a prohibited inducement if 

the amount exceeded reasonable 

compensation for the referring lender’s 

or party’s processing of loan 

applications and advertising. Under this 

policy, the Department approved or did 

not object if the compensation paid was 

reasonable compensation for processing 

of loan applications and advertising. 

The permitted reasonable compensation 

could be based on applications referred 

but not on loans funded or disbursed. 

This policy statement remains in effect 

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until the effective date of these 

regulations. 

The Secretary disagrees that reference 

to ‘‘individuals’’ should be struck from 

paragraph (5)(i)(A)(2) of the definition of 

lender in § 682.200(b). Section 435(d)(5) 

of the HEA effectively defines an 

improper inducement as a payment or 

other inducements ‘‘to any educational 

institution or individual’’ to secure loan 

applications. The Secretary has never 

interpreted the reference to 

‘‘individuals’’ as limited to employees 

of a school or a school-affiliated 

organization. 

The Secretary notes that the reference 

to ‘‘processing’’ in paragraph (5)(i)(A)(5) 

of the definition of lender in 

§ 682.200(b) was intended to convey, 

consistent with the Department’s 

longstanding guidance, that the referring 

party was being compensated for some 

level of administrative work in 

processing the application, not just for 

forwarding the application to the 

originating lender. However, the 

Department understands that the term 

‘‘processing’’ may be confusing and has 

clarified the language for purposes of 

the provision. 

The Secretary believes that the 

payment of these referral fees should be 

treated as an improper inducement for 

several reasons. The growth of national 

lenders and banking means that the 

payment of referral fees paid to nonparticipating lenders is no longer 

necessary to ensure nationwide 

borrower access to the FFEL Program. 

Moreover, most referral fee 

arrangements identified by the 

Department do not involve small local 

lending institutions, but involve 

payments by large lenders to schoolrelated organizations. Finally, we note 

that with the adoption of the MPN and 

expanded eligibility standards, there is 

no longer any distinction between 

applications received and loans made, 

so there is no reason for distinguishing 

between them based on these different 

standards. 

The Secretary further believes that 

payment of referral fees has eroded the 

integrity of the FFEL Program. Many of 

these fees are being paid to schoolaffiliated organizations that have access 

to certain personal information of 

students and alumni and are held in a 

certain level of esteem by students, 

alumni, and their parents. We believe 

that these arrangements and payments 

represent a conflict of interest for the 

organization and the school with which 

it is affiliated because the arrangement 

is interpreted as an endorsement of the 

lender by the organization and the 

school. Additionally, these fees do not 

appear to be paid to compensate the 

referring party for any administrative 

work done in processing the 

application, thus making them a 

prohibited inducement under the 

Department’s standing interpretive 

guidance. The Department is also aware 

that such fees are being paid to 

individuals and organizations that are 

not under contract to any lender or its 

affiliate in an eligible lender trustee 

arrangement, and that operate as 

independent brokers collecting FFEL 

applications and marketing them to 

various FFEL lenders for the highest fee 

per application. 

Finally, in response to the comments 

about small lenders who have referred 

borrowers in exchange for fees to satisfy 

other legal obligations, we note that the 

purpose of the FFEL Program is to 

provide loans for student and parent 

borrowers, not to provide an 

opportunity for lenders who do not 

participate in the program to meet other 

legal requirements. We expect that these 

lenders will find other appropriate ways 

to meet those requirements. 

Changes: Paragraph (5)(i)(A)(5) of the 

definition of lender in § 682.200(b) has 

been modified to clarify that prohibited 

‘‘processing’’ fees do not include fees 

paid to meet the requirements of other 

Federal or State laws. 

Definition of School-Affiliated 

Organization (§ 682.200) 

Comment: Many commenters objected 

to the proposed definition of a schoolaffiliated organization, which applies to 

lender and guaranty agency prohibited 

inducement activities outlined in 

§§ 682.200(b) and 682.401(e). The 

commenters indicated that the 

definition was overly broad and 

unworkable. One commenter from a 

school was concerned that the 

regulatory changes would restrict these 

organizations from promoting special 

arrangements and that it will limit 

student services through these 

organizations. The commenters also 

indicated that the broad definition 

could include national membership 

organizations, school trade 

organizations and other associations 

that have no ability to establish and 

administer school policies or control 

school activities. The commenters also 

believe that the definition is so broad 

that it could be applied to cover school 

credit unions or bookstores that are 

privately owned but located on or near 

a campus, or that include a reference to 

the school in their name. The 

commenters recommended that the 

definition be limited to only include 

those organizations that are part of the 

school structure even if they are 

separate legal entities. The commenters 

believe that those organizations that 

have a de minimus or peripheral 

connection to the school, and whose 

activities are organized and conducted 

separate and distinct from the school, 

should not be covered by the definition. 

Discussion: The Secretary believes 

that special FFEL student loan 

marketing or other student loan 

arrangements with organizations that 

are affiliated with a school undermine 

program integrity, and have been used 

to limit borrowers’ choice of FFEL 

lenders. The Department believes that 

the definition of school-affiliated 

organization needs to be broad to 

protect borrowers and the program 

generally. The definition is intended to 

include both organizations that exist 

only by virtue of the school’s existence, 

whether inside or outside of the school’s 

structure and control, and other 

organizations not dependent upon the 

school’s existence, which provide 

financial and vocational services to the 

school’s students, employees, or alumni. 

However, we stress that payments or 

inducements provided to schoolaffiliated organizations are only 

improper if they are undertaken to 

secure loan applications or loan volume. 

This regulation does not affect 

contractual arrangements between the 

school-affiliated organizations and 

financial institutions to provide other 

non-student loan related services. The 

Secretary fails to see a basis for the 

organizations identified by the 

commenters to be engaged in the 

marketing or making of FFEL Program 

loans. 

Changes: None. 

Loan Forgiveness Benefits (§§ 682.200(b) 

and 682.401(e)) 

Comment: Many commenters from 

schools, lenders, guaranty agencies, and 

State-designated secondary markets 

objected to the proposal to treat a 

lender’s or guaranty agency’s loan 

forgiveness programs as an improper 

inducement unless loan forgiveness is 

provided under a repayment incentive 

program that requires satisfactory 

payment performance by the borrower 

to receive or retain the benefit. Some 

loan industry commenters stated that 

this limitation on guaranty agencies and 

private lenders was contrary to the HEA. 

They requested that the Department 

clarify that borrower benefit programs or 

other loan forgiveness or assistance 

programs for students for service, 

academic achievement, disaster 

assistance, or other targeted activities 

continue to be allowed. Several 

commenters representing not-for-profit 

State and State-affiliated guarantors and 

secondary markets noted that existing 

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State targeted and administered loan 

forgiveness programs for teachers, 

nurses, and members of the armed 

forces could be considered prohibited 

inducements. The commenters believe 

such a result impinges on State 

sovereignty and is contrary to the 

Department’s regulatory view that 

guaranty agencies have responsibility 

for outreach to students and parents. 

The commenters noted that these public 

service loan forgiveness programs are 

not part of guaranty agency marketing 

campaigns for applications and request 

that they be considered a permissible 

activity by a guaranty agency or State 

secondary market. 

Discussion: The Secretary 

acknowledges that FFEL Program 

lenders are authorized under statute to 

offer borrowers reduced fees and 

interest rates. The regulations 

specifically acknowledge that these 

benefits are not considered improper 

inducements under § 682.200(b)(5)(ii). 

The Secretary also acknowledges that 

the HEA specifically provides for loan 

discharges for certain targeted forms of 

employment and public service. 

With this provision, however, the 

Secretary is attempting to distinguish 

appropriate forms of repayment 

assistance that may be provided to 

borrowers by lenders and guaranty 

agencies that would not be considered 

an improper inducement from those that 

are clearly provided in order for the 

lender to secure loan applications. The 

regulation incorporates the standard for 

incentive and reward programs for 

successful borrower repayment that the 

Secretary has previously applied. In this 

regard, the Secretary has previously 

found that repayment incentive 

programs do not provide an improper 

inducement if they provide up-front 

rebates that are applied to the 

borrower’s account at or shortly after 

loan disbursement and that the 

borrower retains if he or she establishes 

a satisfactory repayment pattern, or 

provide a similar reduction in loan 

principal earned on the same basis after 

the borrower enters repayment. These 

programs do not involve cash payments 

to borrowers. These regulations are 

consistent with this standard. 

The Secretary thanks the commenters 

for informing her of the many public 

service oriented loan forgiveness 

programs that have been initiated, some 

of which are State-mandated or Stateapproved. The Secretary is convinced 

that these programs are not used 

generally for marketing purposes and 

agrees that these programs should not be 

considered an improper inducement as 

long as they are not marketed to secure 

loan applications or loan guarantees. 

Changes: We have revised the 

definition of lender in § 682.200(b) and 

revised § 682.401(e)(2) to include as 

permissible activities loan forgiveness 

programs for public service and other 

targeted purposes approved by the 

Secretary, provided the benefits are not 

marketed to secure loan applications or 

loan guarantees. 

Service on Lender and Guaranty Agency 

Advisory Boards and Payment of 

Related Costs (§§ 682.200(b) and 

682.401(e)(2)(v)) 

Comment: Several commenters 

objected to our proposal to treat as an 

improper inducement, arrangements in 

which employees of school and schoolaffiliated organizations serve on lender 

advisory committees, while allowing 

these employees to serve on a guaranty 

agency’s governing board or official 

advisory board. The commenters stated 

that the lender advisory committee 

meetings provide meaningful 

opportunities for lenders and schools to 

exchange information that benefit 

borrowers. The commenters argued that 

uncompensated service of this nature 

should be permissible, but that 

reasonable travel costs should be 

covered to be consistent with the 

treatment of guaranty agencies. Another 

commenter representing a lender noted 

that the regulations did not contain any 

explicit prohibition on school 

employees serving on a lender advisory 

board, or of paid consulting 

arrangements between lenders and 

school employees, and that this 

represented a loophole in the 

regulations. This commenter also said 

the Department should not allow 

school-affiliated organization employees 

to serve on guaranty agency advisory 

boards, or allow agencies to pay for 

travel and lodging costs to facilitate 

school staff service on an advisory 

board, attendance at training sessions, 

or tours of the guaranty agency’s service 

facility. The commenter believes this 

treatment creates an avenue for guaranty 

agencies to provide these benefits on 

behalf of their lender partners and that 

a guaranty agency’s financial support 

should be limited to meals and 

refreshments at training conferences. 

Discussion: The Secretary notes that 

the absence of a specific provision 

permitting school and school-affiliated 

organization employee service on lender 

advisory boards, comparable to what is 

provided for service on guaranty agency 

advisory boards, means that any 

compensation for this service is 

considered to be an improper 

inducement if provided to secure loan 

applications. The Secretary disagrees 

with the commenters who 

recommended that school and schoolaffiliated organization employees be 

permitted to continue service on lender 

advisory boards, on a paid or unpaid 

basis, and with travel and lodging 

expenses paid by the lender. Recent 

investigations have shown that many of 

these meetings have largely been 

designed as expense-paid vacations for 

the school employees in support of 

continued or increased loan volume for 

that FFEL lender from the school. The 

Secretary believes that these board 

meetings are not necessary to the proper 

administration of the FFEL Program. 

Unlike lenders, guaranty agencies are 

responsible for lender and school 

oversight, school and lender training, 

default aversion services, lender claim 

review and approval, and outreach 

services to students, parents, and 

schools in their respective areas of 

service. The Secretary believes that 

school employee service on a guaranty 

agency’s board, if used effectively, can 

be important for those aspects of FFEL 

program administration for which the 

agency is responsible. In addition, in its 

role in providing training on the Title IV 

student aid programs, the agency is in 

a good position to identify the training 

needs of staff at schools that may not 

have sufficient resources to provide or 

pay for needed training, regardless of 

whether the school participates in the 

FFEL Program. Moreover, under 

§ 682.423, a guaranty agency is 

authorized to use its Operating Fund for 

school and lender training. The 

Secretary believes, therefore, that it is 

appropriate for a guaranty agency to 

cover the travel and lodging costs of 

school staff if the agency identifies, on 

a limited, case-by case basis, that those 

individuals would otherwise be unable 

to attend needed training, provide 

needed service on the agency’s 

governing or advisory board, or on 

another of the agency’s formal working 

committees. 

Changes: For purposes of clarity, we 

have modified paragraph (5)(i)(A)(6) of 

the definition of lender to specifically 

prohibit a lender from soliciting school 

employees to serve on a lender’s 

advisory board and paying costs related 

to this service. 

Lender and Guaranty Agency Sponsored 

Meals, Refreshments, and Receptions at 

Meetings and Conferences 

(§§ 682.200(b) and 682.401(e)(2)(iii)) 

Comment: One commenter 

representing a lender objected to our 

proposal to allow lenders and guaranty 

agencies to continue to sponsor meals, 

refreshments, and receptions that are 

reasonable in cost for school officials or 

employees in connection with meetings 

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and conferences. The commenter 

believes that permitting these activities 

will allow abuses that have received 

negative media attention to continue 

because there are no defined parameters 

provided in the regulations about what 

is ‘‘reasonable’’ or what constitutes a 

‘‘reception.’’ The commenter 

recommended that these activities be 

prohibited. 

Discussion: The Secretary believes 

that sponsorship by a lender or guaranty 

agency of meals, refreshments, and 

receptions at conferences and other 

training meetings that are open to all 

attendees at a conference or meeting do 

not represent an inducement of the 

individual attendees or their schools to 

secure loan applications or loan 

guarantees for the sponsoring lender or 

guarantor. This form of sponsorship is a 

form of generalized marketing that is not 

prohibited under the law. These 

arrangements also assist in reducing the 

cost of needed training conferences and 

meetings for individual attendees. In 

using the term ‘‘reception,’’ the 

Secretary does not envision private 

parties of lender-selected groups of 

conference attendees, or of school or 

school-affiliated organization 

employees. Instead, the Secretary 

expects that the receptions permitted 

under the regulations will be general 

gatherings that are open to all 

conference or meeting attendees, are 

held in conjunction with the conference 

or meeting, and are generally held at the 

conference site. The Secretary believes 

this kind of reception provides 

attendees with an appropriate 

opportunity for information sharing on 

the training being conducted. 

By ‘‘reasonable cost,’’ the Secretary 

anticipates that conference managers 

and sponsoring lenders and guaranty 

agencies will adhere to the ‘‘prudent 

person test’’ under which the cost per 

person for the sponsored event does not 

exceed the cost that would be incurred 

by a prudent person under the 

circumstances at the time the decision 

was made to incur the cost. The burden 

of proof will be on conference managers 

and sponsors to show that the costs are 

consistent with the normal per person 

cost of such events. 

The Secretary also notes that she 

neglected to specify in § 682.401(e)(2)(v) 

that such meals, refreshments, and 

receptions sponsored by a guaranty 

agency must be ‘‘reasonable in cost,’’

and has added that condition to the 

regulations. 

Changes: Section 682.401(e)(2)(iv) has 

been modified to require that guaranty 

agency-sponsored meals, refreshments, 

and receptions be ‘‘reasonable in cost.’’

Lender and Guaranty Agency 

Performance of School-Based Functions 

as a Contractual Third-Party Servicer, 

With Appropriate Compensation, and to 

Participating Foreign Schools 

(§§ 682.200(b) and 682.401(e)(1)(i)(F)) 

Comment: Many commenters 

representing lenders, lender servicers, 

and guaranty agencies objected to the 

provision in the proposed regulations 

that would prohibit a lender or guaranty 

agency from performing functions on 

behalf of a school except on a shortterm, non-recurring, emergency basis. 

The commenters noted that this 

provision represents a change from 

longstanding Department policy that 

allowed a guaranty agency or lender to 

perform functions on behalf of a school 

as long as the services were performed 

with appropriate compensation. The 

commenters also note that regulations 

governing third-party servicers in 34 

CFR § 668.2 do not include these same 

restrictions and permit any individual 

or organization to enter into a contract 

with a school to administer any aspect 

of the school’s Title IV programs. The 

commenters indicated implementing 

this regulation would force FFEL 

Program participants to immediately 

cease performing certain activities that 

benefit schools and their borrowers. 

Several commenters from small schools 

claimed that if they could not contract 

with their State guaranty agency as a 

third-party servicer to administer 

certain aspects of the FFEL Program, 

they would be forced to procure services 

from less well-informed, less reliable, 

and more costly third-party servicers. 

Some lender and guaranty agency 

commenters noted that the limitation on 

lenders and guaranty agencies providing 

staffing services to schools will result in 

the elimination of previously 

Department-sanctioned and directed 

eligibility determination services 

provided to eligible foreign schools at 

the school’s request. The commenters 

recommended that the Secretary 

provide an exception in the regulations 

to allow these services to continue. 

A national association stated that the 

proposed regulations did not explicitly 

allow lenders and guaranty agencies to 

perform student loan entrance and exit 

counseling activities, and expressed 

concern that the Department would be 

effectively prohibiting lenders, guaranty 

agencies, and secondary market lenders 

from supporting or participating in 

educational outreach and financial 

literacy efforts. Another national 

organization asked that the regulations 

explicitly permit lenders and guaranty 

agencies to provide staff training, 

computer support, and printing and 

distribution of financial aid-related 

information, and to perform other 

school functions with appropriate 

compensation. 

A commenter representing a national 

consumer organization and national 

student associations recommended that 

the Department impose a blanket 

prohibition on lenders providing 

assistance to schools to perform schoolbased financial aid duties, noting that 

many schools had already agreed to this 

restriction under voluntary agreements 

with state attorney generals. Several 

U.S. Senators strongly urged the 

Secretary to prohibit all lender or 

guaranty agency performance of school 

financial aid-related functions, even on 

an emergency basis, because these 

activities promoted particular lenders 

and created a serious loophole in the 

regulations. 

Discussion: The Secretary 

understands these regulations represent 

a change from prior Department policy. 

As the commenters noted, under the 

Department’s prior policy guidance, 

lenders and guaranty agencies would 

not be considered to be providing an 

improper inducement if they performed 

or assisted a school with certain Title IV 

student aid functions, particularly FFEL 

Program loan functions, as long as they 

were appropriately compensated for 

their services or they performed them 

under contract as a school third-party 

servicer. Recent investigations have 

shown, however, that lenders and 

guaranty agencies generally provided 

staff or services to schools almost 

exclusively to maintain or increase loan 

volume from the schools. In some cases, 

staff paid by a lender essentially took 

over a school’s responsibility for 

advising students and parents without 

disclosing to the students and parents 

that the staff members worked for the 

lender, not the school. The Secretary 

believes that lender and guaranty 

agency staffing for schools has created a 

serious conflict of interest for schools in 

their critical counseling role with 

students and parents, and has 

significantly contributed to limiting a 

borrower’s choice of lender at some 

schools. The limitations imposed by the 

new regulations include restrictions on 

lender and guaranty agency conduct of 

or participation in required in-person, 

school-based initial and exit counseling 

with FFEL borrowers. It does not, 

however, limit a lender’s support of or 

participation in a school’s or a guaranty 

agency’s student aid and financial 

literacy-related outreach activities, as 

that is permitted under paragraph 

(5)(ii)(B) of the definition of lender in 

§ 682.200(b). Similarly, the final 

regulations are being modified to clarify 

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that a guaranty agency can continue its 

student aid and financial literacyrelated outreach activities. 

The Secretary agrees that, under the 

proposed regulations, a guaranty agency 

or lender would be unable to continue 

to provide loan eligibility and 

certification services for participating 

foreign schools at the school’s request. 

The Secretary has previously directed 

guaranty agencies to provide these 

services to ensure that eligible 

borrowers can successfully secure FFEL 

loans to attend certain eligible foreign 

schools. The Secretary did not intend to 

interfere with this activity and has 

modified the regulations accordingly. 

The Secretary disagrees with the 

suggestion that we define all forms of 

lender or guaranty agency staffing to 

perform school-based student loan 

functions as an improper inducement. 

The Secretary believes that these 

services should be allowed in limited 

situations as described in the 

regulations. 

Changes: We have modified the 

definition of lender in § 682.200(b) and 

have modified § 682.401(e) to allow 

lenders and guaranty agencies to 

perform, as a Secretary-delegated 

function, eligibility and loan 

certification functions if requested by a 

participating foreign school. We have 

modified § 682.200 to exclude inperson, school-required initial and exit 

counseling from those student aid and 

financial-literacy related outreach 

activities that a lender can participate in 

and support. Section 682.401(e)(2) of 

the regulations has also been modified 

to clarify that a guaranty agency can 

continue its student aid and financial 

literacy-related outreach activities with 

schools, students, and parents, 

excluding in-person, school-required 

initial and exit counseling. 

Services to Schools and Students Under 

Other State or Federal Education 

Programs or by a State Agency FFEL 

Lender (§§ 682.200(b) and 682.401(e)) 

Comment: One commenter from a 

non-profit agency that serves as a 

guaranty agency and lender in the FFEL 

Program, and also participates in and 

administers other Federal and State 

education programs, asked the Secretary 

to clearly state that guaranty agencies 

and lenders are not prohibited from 

continuing to meet their obligations 

under other Federal and State education 

laws as long as the activities under 

those programs are not tied to 

expectations regarding loan applications 

or loan volume. The commenter stated 

that many of these other Federal and 

State programs encourage or direct 

agencies or lenders to partner with 

students and schools. Another 

commenter from an agency that serves 

as a State lender expressed concern that 

the proposed regulations would 

adversely impact the agency’s ability to 

provide the full array of services it is 

mandated to carry out under State law. 

The commenter believes that the agency 

will no longer be able to develop and 

produce publications that promote 

higher education in the State and 

provide financial literacy training or to 

be actively engaged with the State 

university in early outreach and 

awareness programs. The commenter 

predicts the regulations will have a 

chilling effect on school participation in 

State grant and loan programs by 

prohibiting the inclusion of State grants 

and loans in eligible students’ financial 

aid packages. The commenter believes 

the rationale for the new regulations is 

not applicable to a State agency lender 

that is controlled by the State and 

governed by State ethics laws. The 

commenter asked that the regulations be 

modified to recognize differences 

between State programs that are funded 

and delivered within a branch of State 

government and other programs. 

Discussion: The Secretary agrees with 

the first commenter. The Secretary is 

aware that some State agencies and 

higher education commissions act as 

guaranty agencies and secondary 

markets and also administer other 

Federal and State education programs 

that are not related to FFEL Program 

loans. Some of the other programs in 

which these agencies are involved 

include State grant, scholarship and 

loan forgiveness programs and the 

Federal GEAR–UP and Talent Search 

Programs. The Secretary strongly 

supports the work of these agencies in 

administering these other Federal and 

State programs and clarifies that such an 

agency may continue to meets its 

obligations under other Federal and 

State education laws provided the 

agency does not use its role in these 

programs to secure loan applications or 

loan volume for a lender or guaranty 

agency. 

In response to the other commenter, 

the Secretary reiterates that section 

435(d)(5) of the HEA governing 

prohibited inducements by lenders does 

not make any distinction between 

various types of FFEL lenders. Therefore 

we are unable to provide for the 

distinctions requested by the 

commenter in these regulations. The 

regulatory restrictions on improper 

inducements apply equally to for-profit 

and State-designated FFEL lenders. The 

Secretary notes, however, that the 

provisions in paragraph (5)(ii)(B) of the 

definition of lender in § 682.200(b) 

provide that a lender’s support of and 

participation in a school’s student aid 

and financial literacy-related outreach 

activities are permissible, as long as the 

name of the entity that developed and 

paid for the materials is provided to the 

participants and the lender does not 

promote its student loan or other 

products. 

Changes: None. 

Definition of ‘‘Emergency Basis’’ for 

Lender and Guaranty Agency ShortTerm, Non-Recurring, Emergency 

Staffing Services to FFEL Schools 

(§§ 682.200(b) and 682.401(e)(3)) 

Comment: In response to the 

Secretary’s specific solicitation of 

comments on whether an emergency 

should be limited to State- or Federallydeclared national or natural disasters, 

some commenters agreed with this 

limitation. One commenter indicated 

that the emergency should be limited to 

a declared natural disaster because that 

was clearly a circumstance outside the 

school’s control. The commenter 

believes that a school should be 

prepared to deal with worker 

absenteeism and seasonal application 

volume. Many other commenters 

believe that there may be more localized 

disasters creating emergencies for a 

specific school (for instance, a building 

on campus may burn or hazardous 

materials may be discovered, resulting 

in the closure of the financial aid office) 

than those that are declared by a state 

or federal official. The commenters also 

stated that an office or campus might be 

suddenly limited by illness, death, 

accidents, sudden employment changes, 

system conversions or technical failures, 

and other unforeseen circumstances that 

would result in a potential breakdown 

of financial aid services to students and 

their parents. The commenters 

recommended that broader, nonrecurring unforeseen conditions or 

events be encompassed by an 

emergency, either in the regulations or 

in the preamble. 

Discussion: The Secretary thanks the 

commenters for their suggestions. The 

Secretary agrees that defining 

emergency basis to include only a 

Federally-declared national disaster or a 

State- or Federally-declared natural 

disaster may not address more localized 

disasters or emergencies that may affect 

a specific school and interrupt the flow 

of FFEL loan services to students and 

parents on that campus. The Secretary 

does not agree, however, that an 

emergency should include staff 

absenteeism or employment changes, 

fluctuations in seasonal loan volume, 

planned systems conversions, or other 

similar circumstances. The Secretary 

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expects schools to be ready to handle 

such circumstances as part of being 

administratively capable of participating 

in the Federal student financial aid 

programs. 

Change: Paragraph (b)(5)(iii) of the 

definition of lender in §§ 682.200 and 

the provisions in § 682.401(e)(3) have 

been modified to include a definition of 

emergency basis. For the purpose of a 

lender or guaranty agency providing 

short-term, non-recurring emergency 

staffing services to a school, this term 

means a State-or Federally-declared 

natural disaster, a Federally-declared 

national disaster, and other localized 

disasters and emergencies identified by 

the Secretary. 

Definition of ‘‘Other Benefits’’ for 

Purposes of Prohibited Points, 

Premiums, Payments, and Other 

Inducements to Any School or Other 

Party (§§ 682.200(b) and 

682.401(e)(3)(iii)) 

Comment: Several commenters 

objected to the proposal to define ‘‘other 

benefits’’ to include as an improper 

inducement ‘‘preferential rates for or 

access to the lender’s other financial 

products.’’ The commenters claim that 

this will deter lenders from providing 

competitive rates and fees to borrowers 

on private education loans. The 

commenters note that under the 

preferred lender list provisions in 

§ 682.212(h) of the proposed 

regulations, schools are not prohibited 

from negotiating with lenders to secure 

the best borrower benefits on FFEL 

loans in identifying lenders for the 

school’s preferred lender list. The 

commenters believe that a school 

should also be able to negotiate for the 

most beneficial private education loan 

benefits for its students from a lender 

that offers both private education and 

FFEL loans without the lender risking 

sanctions by the Department. 

Discussion: The Secretary disagrees 

with the commenters. In many cases, a 

lender’s placement on a school’s FFEL 

preferred lender list or its promotion as 

the school’s recommended FFEL lender 

was based on an agreement to provide 

the school access to the lender’s private 

education loan program or to provide 

more beneficial loan terms on those 

private education loans. A lender who 

provides private education loans to a 

school’s students at competitive rates 

may do so as long as the lender does not 

offer or provide those benefits in 

exchange for FFEL loan applications, 

FFEL application referrals, a specified 

volume or dollar amount of FFEL loans, 

or placement on the school’s list of 

recommended or suggested lenders. 

Changes: None. 

Benefits Based on Participation in a 

Guaranty Agency’s Program 

(§ 682.401(e)(1)(i)(B), 682.401(e)(1)(ii), 

and 682.401(e)(1)(iii)) 

Comment: Some guaranty agency 

commenters expressed concern about 

the language in § 682.401(e)(1)(ii), 

which prohibits a guaranty agency from 

assessing additional costs or denying 

benefits to schools and lenders based on 

the school’s or lender’s decision not to 

participate in the agency’s loan guaranty 

program or failure to provide a specified 

volume of FFEL Program loans to the 

agency, or a school’s failure to place a 

lender that uses the agency’s loan 

guarantee on the school’s preferred 

lender list. The commenters believe this 

provision was intended to align with the 

requirements of § 682.401(e)(1)(i)(B), 

which prohibit a guaranty agency from 

making payments to a school based on 

the school’s voluntary or coerced 

agreement to participate in the agency’s 

program. The commenters believe, 

however, that the requirements of 

proposed § 682.401(e)(1)(ii) are overly 

broad and will prevent a guaranty 

agency from limiting its services to 

FFEL Program participants. The 

commenters stated that the regulations 

appear to require a guaranty agency to 

provide benefits, products, and services 

to all schools and lenders even if they 

do not participate in the agency’s loan 

guaranty program. The commenters also 

asked the Secretary to clarify in the 

preamble to the regulations that 

§ 682.401(e)(1)(iii) does not prohibit the 

continuation of cooperative 

arrangements between guaranty 

agencies, such as the Common Manual, 

Mapping Your Future, and the Common 

Review Initiative that create economies 

of scale or greater efficiencies for 

schools or lenders with which those 

guarantors participate. 

Discussion: The commenters are 

correct that the requirements of 

§ 682.401(e)(1)(i)(B) and 682.401(e)(1)(ii) 

were intended to complement each 

other. Section 682.401(e)(1)(i)(B) and 

682.401(e)(1)(iii), addresses prohibited 

incentive payments by guaranty 

agencies to schools and lenders to 

secure loan volume. Section 

682.401(e)(1)(ii) addresses the practice 

in which guaranty agencies denied 

schools and lenders benefits or assessed 

schools and lenders additional costs if 

they failed, among other things, to 

participate in the agency’s program or 

provide a specified volume of loan 

applications or loan volume. The 

Department has become increasingly 

aware of these types of activities over 

the last several years, and the Secretary 

believes that if these activities were 

undertaken by a guaranty agency to 

secure loan volume, the activities would 

properly be considered a prohibited 

inducement. In one case, a guaranty 

agency that had previously provided 

certain funds to support student aid 

administration to all schools in its State, 

including non-FFEL participating 

schools, announced that it would stop 

paying those funds to schools that did 

not agree to participate in the agency’s 

FFEL loan guaranty program. In another 

instance, a guaranty agency was 

directed to change its policy and charge 

costs related to the administration of a 

State program to those schools that did 

not participate with the guaranty agency 

and generate loan volume for that 

agency after previously not charging 

costs to any schools. In another case, 

scholarship funds from the guaranty 

agency’s Operating Fund were to be 

provided only to schools that 

participated in the agency’s FFEL 

Program and provided a certain FFEL 

loan volume to the guaranty agency. 

Finally, in another situation, a lender 

was notified by a guaranty agency that 

certain costs for guaranty agencyprovided services to the agency’s 

lenders would be based on the lender’s 

success or failure in delivering a certain 

volume of loan guarantees to the 

guaranty agency. The Secretary believes 

that under certain circumstances, the 

denial of benefits or the assessment of 

additional costs based on participation 

in a guaranty agency’s program, or loan 

volume provided to the agency, could 

represent a prohibited inducement. The 

Secretary believes that this provision 

accurately reflects the scope of possible 

guaranty agency activities that should 

be viewed as improper inducements. 

The Secretary clarifies that 

§ 682.401(e)(1)(iii) does not require 

guaranty agencies to discontinue the 

cited cooperative arrangements they 

have undertaken with each other, some 

with the express approval of the 

Secretary. Other cooperative activities 

that the guaranty agencies wish to 

undertake to achieve economies of scale 

or that they believe will generate cost 

efficiencies should be discussed with 

the Department before being 

undertaken. 

Changes: None. 

Prohibited Inducements and Lender 

Claim Payments (§ 682.406) 

Comment: Several lender, lender 

servicer, and guaranty agency 

commenters indicated that proposed 

§ 682.406(d), which would prohibit a 

guaranty agency from paying a lender’s 

claim or receiving Federal reinsurance 

on a loan for which a lender offered or 

provided an improper inducement, 

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appeared to impose a duty on the 

guarantor to determine whether such 

improper activity took place as part of 

normal claim review and processing 

prior to claim payment. The 

commenters agree that if there was proof 

of this type of violation, the claim 

should not be honored, but believe the 

regulation, as proposed, would be 

unmanageable. The commenters believe 

that if a guarantor took such action, it 

would effectively be denying the lender 

payment of Federal benefits without 

procedural due process protections that 

would allow the lender to show that the 

challenged activity did not occur or was 

permissible. The commenters 

recommended that the regulations be 

revised to provide that the guaranty 

agency should deny claim payment only 

when it was notified by the Secretary of 

the lender’s violation of the prohibited 

inducement provisions and of the 

population of affected loans. 

Discussion: The Secretary agrees that, 

generally, a guaranty agency will not be 

expected to deny a claim payment to a 

lender unless the Secretary has notified 

the guaranty agency that the lender has 

provided improper inducements. 

However, the Secretary expects guaranty 

agencies to include improper 

inducements as a subject in their 

oversight of lenders and to deny claims 

if the agency determines that the lender 

has provided improper inducements. 

Changes: The regulations in 

§ 682.406(d) have been modified to 

reflect that a guaranty agency may not 

deny a claim payment unless the agency 

determines or is notified by the 

Secretary that the lender offered or 

provided an improper inducement. 

Eligible Lender Trustees (ELTs) 

(§§ 682.200 and 682.602) 

Comment: Several commenters 

supported the proposed changes 

implementing The Third Higher 

Education Extension Act of 2006 (HEA 

Extension Act) (Pub. L. 109–292) that: 

Prohibit new ELT relationships between 

lenders and schools or school-affiliated 

organizations; restrict existing ELT 

relationships; and define the term 

school-affiliated organization. 

Discussion: The Secretary appreciates 

the commenters’ support. 

Changes: None. 

Comment: Several commenters stated 

that the definition of school-affiliated 

organization in § 682.200, in particular 

the inclusion of the words ‘‘directly or 

indirectly related to a school,’’ was 

overly broad and would inappropriately 

include organizations that are not part 

of the school’s organizational structure 

and over which the school has no 

control. The commenters urged the 

Secretary to revise the definition to 

exclude organizations such as 

foundations, membership associations, 

and financial institutions. 

Discussion: We continue to believe 

that many organizations, such as 

foundations and alumni and social 

organizations, are clearly schoolaffiliated even if the organization is not 

under a school’s ownership or control. 

The intent of the HEA Extension Act 

was to eliminate or significantly restrict 

ELT relationships between a lender and 

a school or a school-affiliated 

organization. The proposed definition of 

school-affiliated organization is 

consistent with this goal. 

Changes: None. 

Comment: One commenter stated that 

the effective date of the proposed 

regulations should be no earlier than 

July 1, 2008, the effective date of the 

final regulations, rather than the 

effective dates in the HEA Extension 

Act. The commenter indicated that 

holding schools accountable for their 

actions retroactive to the effective dates 

in the HEA Extension Act, when those 

dates were not yet reflected in the FFEL 

Program regulations, was unfair. 

Discussion: The effective dates in the 

HEA Extension Act with respect to ELT 

relationships are statutory and the 

Secretary does not have the authority to 

change those dates. 

Changes: None. 

Comment: Several commenters 

believed the inclusion of the crossreference to § 682.601(a)(3) in 

§ 682.602(b)(1) was incorrect and asked 

the Secretary to remove it. 

Discussion: The commenters are 

correct that the cross-reference to 

§ 682.601(a)(3) in this section was 

included in error. 

Changes: Section 682.602(b)(1) has 

been revised to remove the crossreference to ‘‘(a)(3).’’

Frequency of Capitalization (§ 682.202) 

Comments: All of the commenters 

agreed with the Secretary’s proposal to 

allow capitalization of unpaid interest 

that accrues during an in-school 

deferment only at the expiration of the 

deferment. Several commenters stated 

that this regulation would level the 

playing field between the FFEL and 

Direct Loan programs. One commenter 

requested that the Department consider 

establishing a prospective effective date 

and a triggering date for deferments 

granted on or after July 1, 2008. The 

commenter believed that many servicers 

and loan holders might have difficulty 

implementing the systems changes 

necessary to implement the new 

capitalization rules in the middle of a 

deferment. 

Discussion: The Secretary appreciates 

the commenters’ support. The Secretary 

does not believe that a prospective 

effective date is needed to implement 

the capitalization rules. The Secretary 

recognizes that systems changes will be 

necessary to implement this change in 

the capitalization rules, but we believe 

that servicers and loan holders have 

ample time to make these changes 

before the effective date of July 1, 2008. 

Changes: None. 

Loan Discharge for False Certification as 

a Result of Identity Theft (§§ 682.208, 

682.211, 682.300, 682.302 and 682.411) 

Comment: Many commenters 

supported the proposed regulatory 

changes to allow a lender to suspend 

credit bureau reporting for 120 days and 

to grant a 120-day administrative 

forbearance to a borrower while 

investigating an alleged identity theft 

upon receipt of a valid identity theft 

report (as defined under the Fair Credit 

Reporting Act (15 U.S.C. 1681a)) from a 

borrower or notification from a credit 

bureau. However, many commenters did 

not believe that the proposed changes 

provided meaningful relief to the 

victims of identity theft or lenders 

because the Department did not propose 

changes to the requirement that an 

individual must obtain a local, State or 

Federal judicial determination that 

conclusively determines that the 

individual who is the named borrower 

of the loan was the victim of the 

‘‘crime’’ of identity theft. Unless this 

requirement is met, a FFEL or Direct 

Loan Program loan cannot be discharged 

as falsely certified due to the crime of 

identity theft. The commenters 

suggested that we change the 

interpretation of section 437(c) of the 

HEA and allow a discharge of a loan 

falsely certified due to the crime of 

identity theft based on the requirements 

contained in the Fair and Accurate 

Credit Transactions Act (FACT Act). 

Other commenters believed that the 

Department is properly interpreting 

section 437(c) of the HEA and that the 

statutory language authorizing a loan 

discharge for a false certification arising 

from the crime of identity theft needs to 

be changed. 

Discussion: During the negotiated 

rulemaking process, the Department 

carefully considered whether there was 

any basis for adopting a different 

standard on which to grant a discharge 

based on the crime of identity theft but 

we determined that current regulations 

properly reflect section 437(c) of the 

HEA by protecting both victims of the 

crime of identity theft and the Federal 

fiscal interest. Further, we believe that 

the changes to the regulations in 

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§§ 682.208 and 682.211 that will allow 

for the suspension of credit bureau 

reporting and collection activity provide 

relief to borrowers while allowing 

lenders to comply with the Fair Credit 

Reporting Act without violating the 

FFEL Program regulations. We wish to 

emphasize that the individual who is 

the named borrower on a FFEL or Direct 

Loan that was falsely certified as a result 

of the crime of identity theft is not liable 

for a loan that borrower did not execute 

or authorize another to execute on the 

borrower’s behalf, whether or not the 

loan is discharged based on a crime of 

identity theft. An individual who can 

demonstrate that his or her signature 

was forged on a FFEL or Direct Loan 

note is relieved of the debt under 

common law and State laws against 

forgery. 

Changes: None. 

Comment: One commenter requested 

that the Department retroactively apply 

the proposed changes to §§ 682.208 and 

682.211 that allow for the suspension of 

credit bureau reporting and collection 

activity to July 1, 2006, the effective 

date of the identity theft discharge 

authorized by the Higher Education 

Reconciliation Act of 2005 (Pub. L. 109–

171). The commenter stated that lenders 

may have already ceased credit bureau 

reporting and due diligence on loans to 

meet FACT Act requirements prior to 

the publication of the regulations, and 

subsequently determined that the loan 

remains enforceable against the 

borrower. According to the commenter, 

a retroactive application of these 

provisions would provide a safe harbor 

for such lenders. 

Discussion: While we do not believe 

retroactive implementation of the 

provisions allowing for the suspension 

of credit bureau reporting and collection 

activity is necessary, we will take into 

consideration any due diligence 

conflicts created by the different 

requirements in the HEA and the FACT 

Act in enforcement actions related to 

the treatment of borrowers who may 

have been victims of the crime of 

identity theft. 

Changes: None. 

Comment: Several commenters 

objected to the requirement in the 

current regulations in 

§ 682.402(e)(3)(v)(C) that a person 

claiming a discharge must produce a 

judicial determination that conclusively 

determines that a FFEL or Direct Loan 

was falsely certified due to the crime of 

identity theft committed by a specific 

individual named in the determination. 

These commenters viewed this 

requirement as imposing an 

unnecessary burden for victims of 

identity theft. These commenters urged 

the Department to change the 

requirement that discharge relief be 

provided only if a judgment or verdict 

has been entered because, in their view, 

that requirement prevents individuals 

who have been victimized by identity 

theft from obtaining relief. Other 

commenters urged the Department to 

adopt the definition of identity theft in 

the FACT Act, and conform discharge 

relief to the procedures and standards 

adopted in that law. 

Another commenter noted the 

difficulty in pursuing the perpetrator of 

the crime in instances in which the 

judicial determination does not identify 

that individual. The commenter cited a 

recently-filed claim based on a suit filed 

by the lender against a putative 

borrower, who denied executing the 

loan documents. The court issued a 

decision in which it found that the 

putative borrower had not applied for 

the loan and was not obligated to repay 

it. However, the court further opined 

that the putative borrower was the 

victim of the crime of identity theft, 

committed by unnamed individuals. 

The commenter noted that it was unable 

to comply with regulatory requirements 

to pursue collection action against the 

perpetrator if the judicial determination 

on which the claim rests does not 

identify the perpetrator. Some 

commenters suggested that we change 

the regulations to permit discharge relief 

in instances in which the court does not 

find that an identified individual was 

the perpetrator of the identity theft. 

Discussion: FFEL Program regulations 

in §§ 682.206(d), 682.300(b)(2)(vii), 

682.402(a)(4), and 682.406(a)(1) and 

(a)(10) provide that—with very limited 

exceptions—FFEL Program benefits are 

payable only if the holder has a legallyenforceable promissory note to evidence 

the loan. Because a forged promissory 

note is ordinarily not an enforceable 

obligation of the putative borrower, a 

party holding a forged note cannot claim 

FFEL Program benefits on that loan. The 

view that the discharge relief option 

should be extended to lenders for 

legally unenforceable loans ignores the 

basic requirement that the lender must 

hold a legally-enforceable loan. The 

supposition that victims of identity theft 

face continued enforcement by lenders 

assumes that lenders ignore credible 

proof that individuals did not obtain the 

debts in dispute. The Department does 

not consider that supposition to be wellfounded, and the commenter’s view that 

lowering the standards for discharge 

relief is needed to relieve victims of the 

burden of loans they did not receive is 

groundless. 

As explained in the preamble to the 

interim final regulations issued by the 

Department on August 9, 2006, 71 FR 

45666, 45676–45677, long before either 

the FACT Act or the identity theft 

discharge amendment to the HEA, 

common law that applied to all loan 

transactions made clear that individuals 

who neither executed loan agreements 

nor accepted the benefits of the loan 

were not liable for the loan. Putative 

borrowers therefore faced continued 

enforcement action only if the holders 

of the loans either disbelieved the 

individuals, or disregarded wellestablished law. Statutory relief was not 

needed to protect from liability those 

individuals who made persuasive 

claims that they neither signed the note 

nor accepted the loan benefits. Statutory 

relief was not appropriate for 

individuals who did not persuasively 

demonstrate that they had neither 

signed the loan agreement nor accepted 

benefits of the loan. The regulation rests 

on these premises. 

The FACT Act addresses different 

concerns than does the discharge 

provision in these regulations. 

Specifically, the FACT Act seeks to 

provide protections for borrowers after 

the crime of identity theft has already 

been perpetrated. More specifically, 

although a victim of identity theft is not 

liable for the loan, an impersonator 

could attempt to obtain more credit 

from other lenders in the name of the 

victimized individual. Individuals 

whose identification credentials have 

been used by an impersonator face 

substantial difficulty in preventing the 

impersonator from continuing to obtain 

credit in the name of the individual. 

The FACT Act does not direct creditors 

to cease attempts to collect loans that 

the lenders determined to be 

unenforceable under generally 

applicable common law, as suggested by 

the commenter. Rather, the FACT Act 

allows the complaining individual to 

alert potential lenders—through the 

credit bureaus—to the identity theft, 

and requires lenders to investigate 

disputes raised by the consumer either 

directly with the creditor or through the 

credit bureau, to report the results of 

that investigation to the bureau in a 

timely manner, and to correct, if 

necessary, information the lender had 

previously furnished to the bureau. 

There is no reason for the Department 

to adopt in our discharge regulations 

FACT Act procedures that are designed 

not to determine whether the crime of 

identity theft occurred, but to prevent 

future thefts and restore a credit history 

damaged by recognized past thefts. 

Section 682.402(e)(3)(v)(C) of the 

FFEL Program regulations requires the 

applicant for relief to base the claim on 

a judicial decision that ‘‘conclusively 

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1The Department recognized that the elements of 

the crime of identity theft might be proven in a civil 

proceeding, such as a divorce proceeding, but to a 

lesser standard of proof than required for a criminal 

conviction. 

determines’’ that the crime of identity 

theft caused the loan to be made. As 

stated in the preamble to the interim 

final regulations published on August 9, 

2006, determining that a crime has been 

committed necessarily requires 

discerning the identity of the 

perpetrator and determining the state of 

mind of that person in the conduct at 

issue. (71 FR at 45685) Therefore, 

approval of an identity theft discharge 

claim must necessarily rest on a judicial 

determination that a named individual 

committed the crime of identity theft. 

(71 FR at 45676) 

The comment is well taken that a 

judicial ruling specifying that a crime 

has been committed by an unnamed 

perpetrator makes this objective 

impossible. In the case cited by the 

commenter, a court concluded that the 

putative borrower did not in fact sign, 

and did not authorize any other person 

to sign, the promissory note. The court 

logically concluded that the putative 

borrower was not liable for the loan. 

However, the court then opined that this 

unauthorized signature constituted a 

crime of identity theft by an 

unidentified individual. This ruling 

cannot support a discharge claim 

because the ruling in fact did not 

conclusively determine that a crime 

occurred. To determine that a crime has 

been committed, a court must conclude 

that the elements of a crime have been 

proven—either beyond a reasonable 

doubt, in a criminal proceeding, or by 

a preponderance of the evidence, in a 

civil suit.1 A ruling that an unidentified 

individual not only lacked authority to 

sign the note, but also did so with the 

state of mind required to commit a 

crime, is nothing more than speculation. 

The regulations require that the judicial 

ruling on which the claim rests be one 

that conclusively determines that a 

crime was committed in order to ensure 

that relief is provided to the lender only 

where the ruling identifies the 

perpetrator so that this individual can 

be held accountable and required to 

repay. A ruling that an unnamed 

individual perpetrated the crime gives 

the guarantor or the Department no 

basis on which to pursue the individual 

responsible for the identity theft. 

Changes: The Department has 

modified § 682.402(e)(3)(iv)(C) to clarify 

that, for purposes of the discharge, a 

local, State or Federal judicial 

determination is one that conclusively 

determines that a FFEL or Direct Loan 

was falsely certified due to the crime of 

identity theft only if the decision 

identifies the perpetrator of the crime. 

Comment: One commenter suggested 

that we change the regulations to 

require a lender to cease collection 

activity and refund interest and special 

allowance payments received on a loan 

determined to be unenforceable after the 

investigation of an alleged identity theft 

even in cases where the individual 

named as the borrower did not submit 

a valid identity theft report as defined 

under the Fair Credit Reporting Act (15 

U.S.C. 1681a). 

Discussion: If a lender determines that 

a loan is unenforceable after the 

investigation of an alleged identity theft, 

even in cases where the individual 

named as the borrower did not submit 

a valid identity theft report, a lender is 

already required to refund interest and 

special allowance payments received on 

a loan under § 682.406(a)(1). 

Changes: None. 

Comment: One commenter 

recommended that we modify the 

regulations to provide that, if a lender’s 

investigation of the borrower’s claim of 

a false certification of a loan due to the 

crime of identity theft yields evidence 

that the loan is enforceable and the 

borrower later defaults, the lender must 

provide the evidence upon which the 

lender relied to determine that the loan 

was the legal obligation of the named 

borrower. 

Discussion: The Department believes 

that, in cases where a lender’s 

investigation of an alleged identity theft 

yields evidence that a loan is 

enforceable against the named borrower 

who subsequently defaults, a lender is 

already required to provide the evidence 

used to make that enforceability 

determination under § 682.406(a)(3). 

This provision requires that a lender 

provide an accurate collection history 

and an accurate payment history to the 

guaranty agency with the default claim 

filed on the loan showing that the 

lender exercised due diligence in 

collecting the loan. 

Changes: None. 

Preferred Lender Lists (§§ 682.212 and 

682.401) 

General 

Comment: Several commenters 

supported the Secretary’s efforts to 

ensure the integrity of the student loan 

programs and the transparency in the 

loan process so that borrowers are 

assured of their choice of lender. 

Several U.S. Senators commended the 

Secretary for including clear and 

detailed provisions on prohibited 

inducements and preferred lender lists 

in the regulations. On the other hand, 

several commenters representing 

schools, lenders, guaranty agencies, 

student loan servicers, and associations 

urged the Secretary to withhold 

publication of final regulations 

governing preferred lender lists and 

prohibited inducements in light of the 

possibility that Congress may pass 

legislation in these areas. These 

commenters believe that, if the 

legislation is enacted, the final 

regulations might be out of date before 

they can become effective and, as a 

result, program participants may be 

confused. 

Discussion: The Secretary takes the 

oversight of the Title IV student loan 

programs very seriously and continues 

to believe, as she did when she began 

the negotiated rulemaking process in 

2006, that these are urgent issues that 

require aggressive action to expedite 

reform in advance of any Congressional 

action. Recent investigations and reports 

show that problems with preferred 

lender lists are serious and continuing 

and need to be addressed. These 

regulations will help end unethical or 

questionable practices in the student 

loan programs and help maintain trust 

and integrity in the process. 

The Secretary understands that for 

schools that opt to continue to use 

preferred lender lists there will be some 

additional administrative burden 

associated with providing additional 

disclosures on the method and criteria 

used by the school to select its preferred 

lenders, compiling and disclosing 

comparative information on the lenders’

borrower benefits, and updating the 

preferred lender list. She believes that 

the benefits to prospective borrowers in 

regulating the use of preferred lender 

lists to ensure that borrowers are aware 

they have a choice of lender and can 

exercise that choice, and that they are 

provided with adequate consumer 

information to make informed decisions 

on a choice of FFEL lender, outweigh 

the burden on schools associated with 

regulating this process. 

The Secretary is committed to 

working closely with participants in the 

student financial aid programs to 

implement the regulations and provide 

any clarifying guidance that may be 

necessitated by future legislation in 

these areas. 

Changes: None. 

Preferred Lender Lists (§ 682.212) 

Use of Preferred Lender Lists 

Comment: One commenter 

representing a school stated that the use 

of preferred lender lists represented the 

wave of the future, but stated that 

lenders should be required to 

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standardize the presentation of details 

of their loans to permit comparison of 

loans by borrowers and families. 

Another school commenter suggested 

that all schools should be required to 

have a lender list, including schools 

participating in the Direct Loan 

Program. One commenter representing a 

lender recommended that the use of 

preferred lender lists be banned because 

such lists are the foundation of the 

conflicts of interest in the student loan 

programs and undermine program 

integrity. This commenter stated that 

school influence over a student’s choice 

of lender limits borrower choice and 

competition for more beneficial loan 

terms while creating a flow of easy loan 

volume for a lender. This commenter 

believes that as long as preferred lender 

lists exist, lenders will exploit every 

regulatory regime that the Department 

devises for placement on a school’s list. 

Another commenter representing a 

lender stated that the Department 

should not formally authorize preferred 

lender lists in regulations when they are 

not authorized in statute and conflict 

with the statutory provision supporting 

a borrower’s choice of lender. 

Discussion: The Secretary continues 

to believe that a school’s use of a 

preferred lender list that is based on the 

school’s unbiased research to identify 

the lenders providing the best 

combination of services and benefits to 

borrowers at that school may help 

students and their parents in navigating 

the increasingly complex FFEL Program. 

There is no statutory prohibition against 

the use of such lists, as long as the 

school does not use the list to limit the 

borrower’s choice of lender. 

Many schools began using preferred 

lender lists because of their concern 

about student loan defaults and the 

negative consequences for the borrowers 

and the school. Many schools continue 

to use preferred lender lists to identify 

lenders that provide high-quality 

customer service and loan servicing to 

prevent delinquency and default. We 

also believe that students and parents 

increasingly rely upon financial aid 

offices for information and assistance in 

dealing with the number of FFEL 

lenders and the proliferation of 

marketing of student loan borrower 

benefits. Preferred lender lists and other 

consumer information on the student 

loan process can play a useful role in 

assisting financial aid officers in dealing 

with the large volume of requests for 

information and assistance, and in 

informing borrower choice. As long as 

preferred lender lists are properly 

researched and constructed in 

compliance with the regulations, we 

believe such lists can serve as a source 

of unbiased information that facilitates 

rather than limits informed borrower 

choice. 

The Secretary does not agree that 

schools participating in the Direct Loan 

Program should be required to use 

preferred lender lists. A school 

participating in the Direct Loan Program 

is authorized under the HEA to 

participate exclusively in that program 

and is therefore not subject to the 

requirements of section 432(m) of the 

HEA that require a FFEL borrower be 

provided with his or her choice of FFEL 

lender. 

Changes: None. 

Number of Preferred Lenders 

(§ 682.212(h)(1)) 

Comment: Several commenters 

representing schools and associations 

objected to the proposed requirement 

that a preferred lender list include at 

least three lenders. Some of these 

commenters found the required 

minimum number of three arbitrary and 

capricious. These commenters argued 

that this requirement may prevent some 

schools with low FFEL volume, or 

tribally-controlled or historically black 

institutions and other schools with little 

choice in lenders for their students, 

from using a preferred lender list. One 

of these commenters stated that it would 

be better to simply establish preferred 

lender criteria and ensure that all 

lenders selected, regardless of number, 

met the established criteria. Another 

commenter recommended an exemption 

for a school if fewer than 150 borrowers 

entered repayment based on the school’s 

most recent cohort default rate data. A 

few commenters argued that a school 

should be given a chance to justify its 

use of a list of one or two preferred or 

recommended FFEL lender(s). One large 

university requested an exemption from 

the three-lender requirement based on 

the use of an open-bid or similar process 

if the school demonstrates that the 

arrangement provides the best benefits 

for the school’s students. This school 

argued that strict adherence to the three 

lender requirement should not result in 

the school being forced to include 

lenders on its list that offer mediocre 

benefits. 

Commenters representing lenders 

stated that a minimum of three lenders 

was too few. One of these commenters 

stated that, with more than 3,000 

lenders in the FFEL Program, three 

lenders did not offer adequate choices to 

borrowers and suggested that the 

Department should require 10 to 12 

lenders. The commenter also suggested 

that all lenders meeting the school’s 

established criteria, which must be 

developed and disclosed, should be 

included on the list. Another 

commenter recommended that any 

institution wishing to provide student 

loan information to its students should 

be required to provide an annual listing 

of all lenders willing to make loans to 

the school’s students along with their 

loan terms. Another commenter 

requested that the regulations specify 

that the requirement for a minimum 

number of required lenders be applied 

to each preferred lender list maintained 

by a school because many schools 

maintain more than one preferred 

lender list (i.e., separate undergraduate, 

graduate/professional, medical school, 

law school, private loan listings). 

Discussion: A school is not required 

to develop or use a list of preferred or 

recommended lenders. The regulations 

establish minimum standards to 

preserve borrower choice for those 

schools that choose to develop and use 

such a list. The Secretary continues to 

believe that three, unaffiliated lenders is 

the appropriate minimum number of 

lenders necessary to preserve borrower 

choice. We also encourage schools to 

consider including all lenders that meet 

the school’s selection criteria on a 

preferred lender list. A school that 

chooses not to recommend lenders, or 

that has not been able to identify more 

than one lender to make loans to its 

students or parents, is not prohibited 

from providing, upon the student’s or 

parent’s request, the name of lenders 

that have made loans to the school’s 

students and parents in the past as long 

as a lender has not provided prohibited 

inducements to the school to secure 

those loans. In providing this 

information, the school must make it 

clear that it is not endorsing that lender 

and that the borrower can choose to use 

any FFEL lender that will make loans to 

the borrower for attendance at that 

school. 

Finally, the Secretary believes that it 

is sufficiently clear in the regulations 

that the requirements for use of a 

preferred lender list apply to any such 

list a school develops and maintains if 

the school uses multiple preferred 

lender lists of FFEL lenders. 

Changes: None. 

Updating Preferred Lender Lists 

Comment: A couple of commenters 

noted that the proposed regulations did 

not include a requirement that a school 

update its preferred lender list and the 

required disclosure information with 

any particular frequency. One of the 

commenters recommended that the 

regulations specify that a school must 

update its list at least annually. 

Discussion: The Secretary agrees with 

the commenters that the list and its 

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accompanying disclosures are only 

useful to borrowers if the information is 

current and that the regulations should 

require updates on a regular basis. 

Changes: The regulations in 

§ 682.212(h)(2) have been modified to 

require that a school must update its 

preferred lender list and the 

accompanying information at least 

annually. 

Lenders Selected by Schools 

(§ 682.212(h)(1)) 

Borrower Benefits Offered 

Comment: One commenter 

representing a lender noted that the 

proposed regulations would not require 

that the lenders selected by the school 

for its preferred lender list offer the best 

loan terms for the borrower and 

recommended that this requirement be 

explicit in the regulations. Another 

commenter representing a school noted 

that the regulations allow a school to 

negotiate with a lender for the best 

benefits for the school’s borrowers, but 

expressed concern that the negotiated 

benefits will be unfair and inequitable 

from a national perspective because the 

best benefits will go to borrowers at 

large schools with large enrollments. 

Discussion: Although the Secretary 

anticipates that financial benefits 

offered by a lender to the school’s 

student and parent borrowers will be a 

key factor in a school’s evaluation of 

lenders for its preferred lender list, she 

does not believe it should be the only 

factor that the school can consider. It is 

appropriate for a school to consider the 

quality of a lender’s customer service in 

loan origination and loan servicing, its 

effectiveness in providing consumer 

information, counseling and debt 

management services, and its 

delinquency and default prevention 

efforts. Schools may face sanctions if 

their cohort default rates exceed certain 

levels, so a lender’s effectiveness in 

working with borrowers to ensure that 

loans are repaid may be a legitimate 

consideration for some schools. The 

Secretary does not intend to dictate the 

method or criteria a school may use in 

selecting lenders for its list beyond the 

regulatory limits. She believes that the 

requirement that the school disclose the 

method and criteria used for lender 

selection will allow students and their 

families to evaluate the school’s basis 

for recommending a lender and to make 

an informed decision as to the 

advisability of using one of the school’s 

preferred lenders or choosing another 

FFEL lender. 

The Secretary understands the 

commenter’s concern about inequitable 

benefits in the FFEL Program. However, 

except with respect to loan origination 

fees, the HEA does not specify the 

manner in which lenders may offer 

lower costs and benefits to students 

provided the lenders do not 

discriminate on a legally prohibited 

basis. Additionally, the manner in 

which some State-designated and 

affiliated lenders provide borrower 

benefits is limited under State law. 

Changes: None. 

Affiliated Lenders (§ 682.212(h)(1)(ii) 

and (h)(3)) 

Comment: A commenter representing 

a lender stated that requiring lenders to 

simply certify to a school that they are 

not affiliated with other lenders on the 

school’s list is meaningless unless there 

is a penalty for an incorrect 

certification. The commenter 

recommended that the regulations 

provide for a monetary penalty for a 

lender’s misrepresentation of its 

affiliations. The same commenter stated 

that lenders, in addition to certifying 

their affiliations, should be required to 

disclose to borrowers whether they sell 

their loans. The commenter believes 

that this additional disclosure would 

more fully inform the borrower’s choice 

of lender. 

Several commenters representing 

lenders, guaranty agencies, and loan 

servicers indicated that the definition of 

‘‘affiliated lender’’ should not include a 

reference to eligible lender trustees. The 

commenters argued that a lender’s 

actions as an originating lender are 

unrelated to its actions as a lender 

trustee. They noted that the lender’s 

own lending program and the lending 

program operated under the trust 

agreement are separately administered 

and controlled and generally involve 

different loan delivery services, pricing 

discounts, and borrower benefits. The 

commenters believe that the 

Department’s goals of encouraging 

consumer choice and competition will 

be undercut if an originating lender is 

considered an affiliate of another 

originating lender or party on the basis 

of the third-party trust arrangement. 

Many commenters representing 

schools, school-based associations, 

lenders, guaranty agencies, and loan 

servicers recommended that ‘‘affiliated 

lenders’’ for the purpose of preferred 

lender lists be defined as lenders that 

are under common ownership and 

control. Some of these commenters 

noted that this approach would be 

consistent with legislation pending in 

Congress. Many of these commenters 

also expressed concern about the scope 

of the Department’s definition of an 

affiliated lender. The commenters 

wanted assurance that the Department 

would not define the term ‘‘affiliate’’ to 

include parties engaged in postdisbursement forward purchase 

agreements, loan portfolio sales, postdisbursement loan servicing, and 

secondary market activity. A consumer 

advocate argued that the definition 

should not include relationships that 

involve only post-disbursement 

servicing or secondary market activity 

because this would create a burden on 

schools because they could not be 

expected to know about or monitor 

arrangements like forward purchase 

agreements. 

Discussion: The Secretary disagrees 

that it is necessary or appropriate to 

include specific monetary penalties in 

the regulations related to a lender’s 

certification of its affiliates to schools. 

This section of the regulations governs 

school, not lender, activities, in the 

development of a school’s preferred 

lender list. Further, the Secretary has 

sufficient existing statutory and 

regulatory authority to sanction a lender 

for any misrepresentations to the school. 

The Secretary agrees with the 

commenters that a lender’s function and 

responsibilities as a trustee in a thirdparty trustee relationship are separate 

and distinct from its function as an 

originating lender. We believe, 

therefore, that ensuring a borrower’s 

choice among lenders will be protected 

if ‘‘affiliation’’ for purposes of a 

preferred lender list is limited to 

affiliates that are under common 

ownership and control. The Secretary 

also wishes to clarify that the 

Department does not interpret the 

lender affiliation provision to include 

entities that are involved in postdisbursement activities, which a school 

has no ability to monitor or control. 

Changes: The regulations have been 

modified to delete § 682.212(h)(3)(iv) 

and the reference to lenders serving as 

trustees. 

School Solicitations and Lender Status 

(§ 682.212(h)(1)(iii)) 

Comment: Some commenters 

representing lenders requested that the 

Secretary clarify in the regulations that 

a school’s solicitation of an improper 

benefit from a lender that is not acted 

upon by the lender would not disqualify 

the lender for inclusion on the school’s 

preferred lender list. 

The commenters also requested that 

the regulations directly reference the 

prohibited inducements listed in 

§ 682.200 to prevent a lender from being 

publicly accused of an impropriety 

when it is no more than an 

unsubstantiated accusation or 

perception. 

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Discussion: This provision of the 

regulations governs schools’ actions in 

developing and using a preferred lender 

list. The focus is on a school’s improper 

solicitation of certain benefits and a 

school’s acceptance of a lender’s 

improper offer and the relationship of 

those school actions to the school’s 

preferred lender list. As a result, the 

Secretary does not believe it is 

necessary to include any specific 

reference to the prohibited inducement 

provisions that govern lender and 

guaranty agency activities in this section 

of the regulations. The Secretary 

reiterates that a lender that does not act 

upon a school’s solicitation is not 

disqualified from being included on a 

school’s preferred lender list and agrees 

that this should be more clearly stated 

in the regulations. 

Changes: Section 682.212(h)(1)(iii) 

has been modified to clarify that a 

preferred lender list developed for use 

by a school must ‘‘not include lenders 

that have offered, or have offered in 

response to a solicitation by the school’’

financial and other benefits to the 

school in exchange for inclusion on the 

school’s preferred lender list. 

Financial and Other Benefits Offered for 

Preferred Lender Status 

(§ 682.212(h)(1)(iii)) 

Comment: One commenter 

representing a lender asked that we 

clarify the provision that prohibits a 

lender from being included on a 

school’s preferred lender list if the 

lender has offered ‘‘financial or other 

benefits’’ to the school in exchange for 

placement on the school’s preferred 

lender list or loan volume for the lender. 

The commenter suggested that we 

modify this provision to exempt those 

benefits to a school that would be 

permitted under paragraph (5)(ii) of the 

definition of lender in § 682.200(b) of 

the regulations. Another commenter 

representing a school-based association 

argued that the phrase ‘‘other benefits’’

was vague. 

Discussion: The Secretary agrees that 

under paragraph (5)(ii) of the definition 

of lender in § 682.200(b) of the 

regulations, lenders will be permitted to 

engage in certain activities that will 

provide benefits to a school and its 

students without violating the 

prohibition on improper inducements. 

The Secretary believes, however, that 

those activities and benefits, though 

permissible, should never be a factor in 

a school’s decision to place a lender on 

the school’s preferred lender list. We 

believe that inserting the exemption 

clause recommended by the commenter 

into this provision would improperly 

suggest that these activities, rather than 

the best borrower benefits, can be a 

factor in the school’s selection of its 

preferred lenders. We do not agree that 

the term ‘‘other benefits’’ is vague. The 

definition of this term in the regulations 

provides sufficient detail about the 

types of benefits that are covered by this 

regulation. 

Changes: None. 

List Requirements (§ 682.212(h)(2)) 

Method and Criteria (§ 682.212(h)(2)(i)) 

Comment: Many commenters agreed 

with the Secretary’s proposal that 

schools electing to use a preferred 

lender list be required to disclose the 

method and criteria used to select the 

lenders on the list. The commenters 

believe that this information will result 

in a transparent process that prospective 

borrowers can trust and provide them 

with the necessary information to make 

an informed decision about which 

lender to use. 

Discussion: The Secretary thanks the 

commenters for their support of the 

requirement that schools participating 

in the FFEL Program disclose the 

method and criteria for developing their 

preferred lender lists. 

Changes: None. 

Required Comparative Information 

(§ 682.212(h)(2)(ii)) 

Comment: Several commenters 

objected to the requirement that a 

school provide comparative information 

about the loans offered by lenders on 

the preferred lender list on the grounds 

that it would be too administratively 

burdensome, particularly if it included 

information on private education loans. 

Some commenters expressed concern 

that the requirements would be so 

burdensome and fraught with 

controversy that schools would stop 

providing such lists, which they believe 

are useful for borrowers. An association 

representing financial aid 

administrators expressed appreciation 

for the Department’s plan to develop a 

model format to help schools collect 

information from lenders to help 

develop the school’s lender list. They 

suggested that lenders be required to 

disclose the percentage of borrowers 

who actually receive lender-provided 

borrower benefits. One school 

commenter stated that the Secretary 

should develop and endorse tools to 

help institutions compare and evaluate 

education loan programs. Another 

school commenter recommended that 

the Secretary establish a clearinghouse 

of information on all lenders and their 

loan offerings. One commenter 

recommended that the school only be 

required to maintain lender contact 

information to enable borrowers to 

contact lenders directly for information. 

Another commenter stated that the 

regulations lacked specifics about what 

information must be provided, how it 

was to be made available, and whether 

it was to be provided to all applicants 

for admission, whether accepted or not, 

and recommended that the requirement 

be deleted or limited to a specific 

number of national or competitive 

lenders. 

Discussion: The Secretary thanks 

those commenters who expressed 

support for the Secretary’s plans to 

develop a suggested model format for 

schools to use to collect and distribute 

required comparative lender benefit 

information. She believes that the 

requirement that schools choosing to 

develop and maintain preferred lender 

lists provide comparative lender 

information coupled with the 

requirement that a school disclose its 

method and criteria for lender selection 

is the only way to restore trust and 

integrity to the process and to retain the 

use of preferred lender lists in the FFEL 

Program. If adopted by all schools using 

preferred lender lists, the model format 

will provide a standardized format for 

collecting and presenting lender 

information. The form will be subject to 

public comment under the Paperwork 

Reduction Act of 1995, and the 

Secretary will invite comments on the 

proposed contents, format, and use of 

the form as part of that public comment 

period. 

Because schools are able to negotiate 

with lenders for the best loan terms for 

their students, and FFEL lenders are free 

to offer different benefits by school, and 

even by program of study, the Secretary 

believes it would be infeasible for the 

Department to develop the kind of 

clearinghouse one commenter 

suggested. 

Changes: None. 

Same Borrower Benefits for All 

Borrowers at the School 

(§ 682.212(h)(2)(iii)) 

Comment: Many commenters 

representing schools, school 

associations, lenders and State 

secondary markets, and guaranty 

agencies strongly recommended that the 

Secretary reconsider the proposed 

requirement that a school ensure than 

any lender included on its preferred 

lender list offer the same benefits to all 

borrowers at the school. Many of the 

commenters stated that benefit programs 

are often tailored to different groups of 

students in particular programs of study 

with different debt levels and believe 

that the flexibility to offer differing 

program benefits to assist borrowers in 

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managing debt levels should be 

preserved. Some of these commenters 

believe that this requirement conflicts 

with a lender’s statutory authority to 

offer reduced interest rates and fees. 

They also believe that this provision 

goes beyond the statutory scope of the 

non-discrimination provisions in 

sections 421(a)(2) and 438(c) of the 

HEA. Several commenters representing 

guaranty agencies and State-designated 

and State-affiliated lenders, some using 

tax exempt financing, noted that they 

were restricted by law to providing 

benefits only to residents of the States 

they serve. These commenters believe 

that the implementation of a blanket 

requirement would result in increased 

costs to borrowers. The commenters 

requested that the Secretary consider, at 

a minimum, exempting non-profit, 

State-affiliated lenders from this 

requirement. 

Discussion: The Secretary disagrees 

that the proposed requirement exceeds 

her statutory authority. She appreciates, 

however, that the unintended 

consequence of such a requirement 

could be a loss of borrower benefits for 

some borrowers. She agrees that this 

result would be inconsistent with 

allowing a school using a preferred 

lender list to negotiate with lenders to 

ensure the best borrower benefits for its 

students. The Secretary expects that a 

lender making loans at a school for 

which it provides different benefits by 

program, debt level, State restriction, 

etc., will provide this information to the 

school for the school’s use in providing 

comparative information to borrowers. 

Changes: The regulations have been 

modified to remove paragraph (iii) from 

§ 682.212(h)(2). 

School Loan Certification and 

Unnecessary Delays 

(§§ 682.212(h)(2)(vi) and 682.603(f)) 

Comment: Commenters strongly 

supported the requirement that a 

borrower’s choice of lender not be 

effectively denied by a school’s delay in 

completing the borrower’s loan 

eligibility certification. One commenter 

representing a lender requested that the 

Secretary clarify the meaning of 

unnecessary delay by specifying that a 

refusal to process, or an intentional 

delay in processing, a certification 

because a lender does not participate in 

the electronic processing system that the 

school uses is impermissible. A school 

commenter asked that the regulations 

provide schools some flexibility without 

viewing it as a delay. The commenter 

asked the Secretary to recognize that a 

school’s certification processing times 

may differ if the borrower chooses a 

lender that does not participate in the 

school’s electronic processes without 

the school being considered to have 

purposely impeded a borrower’s choice 

of lender. 

Discussion: First, we believe it is 

necessary to clarify that the 

requirements of revised § 682.603(f) 

apply to all FFEL participating schools 

even if the school does not use a 

preferred lender list. The HEA provides 

for a borrower’s choice of FFEL lender. 

A school cannot abridge that choice 

through its administrative processes or 

its designation of preferred lenders and 

guaranty agencies. 

Second, a school may not decline to 

provide a loan certification, or 

significantly delay a loan certification, 

because the lender does not use the 

electronic process or platform the 

school uses. The Secretary understands 

however, that, under those 

circumstances, a school may have to 

complete a manual certification that 

may require more processing time than 

would an electronic certification. 

However, the borrower’s request must 

be honored by the school as 

expeditiously as possible without 

imposing unnecessary administrative 

hurdles on the borrower or the lender. 

Schools are reminded that their 

administrative practices in loan 

certification are subject to review and 

audit. The Secretary encourages schools 

and lenders to work together on behalf 

of borrowers to expand their electronic 

capabilities and platforms to maximize 

borrower choice and minimize loan 

certification processing times. If a 

school is aware that the lender the 

borrower has selected has elected not to 

make loans to the school’s students in 

the past, the school is free to advise the 

borrower of that fact and encourage the 

borrower to confirm with the lender 

whether it will make a loan to the 

borrower so that the borrower will not 

be delayed in securing loan funds. 

Changes: None. 

Executive Order 12866 

Regulatory Impact Analysis 

Under Executive Order 12866, the 

Secretary must determine whether the 

regulatory action is ‘‘significant’’ and 

therefore subject to the requirements of 

the Executive Order and subject to 

review by OMB. Section 3(f) of 

Executive Order 12866 defines a 

‘‘significant regulatory action’’ as an 

action likely to result in a rule that may 

(1) have an annual effect on the 

economy of $100 million or more, or 

adversely affect a sector of the economy, 

productivity, competition, jobs, the 

environment, public health or safety, or 

State, local or tribal governments or 

communities in a material way (also 

referred to as an ‘‘economically 

significant’’ rule); (2) create serious 

inconsistency or otherwise interfere 

with an action taken or planned by 

another agency; (3) materially alter the 

budgetary impacts of entitlement grants, 

user fees, or loan programs or the rights 

and obligations of recipients thereof; or 

(4) raise novel legal or policy issues 

arising out of legal mandates, the 

President’s priorities, or the principles 

set forth in the Executive order. 

Pursuant to the terms of the Executive 

order, it has been determined this final 

regulatory action will have an annual 

effect on the economy of more than 

$100 million. Therefore, this action is 

‘‘economically significant’’ and subject 

to OMB review under section 3(f)(1) of 

Executive Order 12866. In accordance 

with the Executive order, the Secretary 

has assessed the potential costs and 

benefits of this regulatory action and has 

determined that the benefits justify the 

costs. (Absent the provisions required to 

implement the CCRAA, these 

regulations would not be considered 

‘‘economically significant.’’) 

Need for Federal Regulatory Action 

These regulations address a broad 

range of issues affecting students, 

borrowers, schools, lenders, guaranty 

agencies, secondary markets and thirdparty servicers participating in the 

FFEL, Direct Loan, and Perkins Loan 

programs. Prior to the start of negotiated 

rulemaking, through a notice in the 

Federal Register and four regional 

hearings, the Department solicited 

testimony and written comments from 

interested parties to identify those areas 

of the Title IV regulations that they felt 

needed to be revised. Areas identified 

during this process that are addressed 

by these final regulations include: 

• Duplication of effort for loan 

holders and borrowers in the deferment 

granting process. The final regulations 

allow Title IV loan holders to grant a 

deferment under a simplified process. 

• Difficulty experienced by members 

of the armed forces when applying for 

a Title IV loan deferment. The final 

regulations allow a borrower’s 

representative to apply for an armed 

forces or military service deferment on 

behalf of the borrower. 

• Confusion regarding the eligibility 

requirements that a Title IV loan 

borrower must meet to qualify for a total 

and permanent disability loan 

discharge. The final regulations clarify 

these requirements. 

• Lack of entrance and exit 

counseling for graduate and professional 

PLUS Loan borrowers. The final 

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regulations require entrance counseling 

and modified exit counseling. 

• Costs associated with capitalization 

on Federal Consolidation Loans for 

borrowers who consolidated while in an 

in-school status. The final regulations 

limit the frequency of capitalization on 

such loans. 

Based on its experience in 

administering the HEA, Title IV loan 

programs, staff with the Department also 

identified several issues for discussion 

and negotiation, including: 

• Risk to the Federal fiscal interest 

associated with the total and permanent 

disability discharge on a Title IV loan. 

The final regulations require a 

prospective three-year conditional 

discharge so that the applicant’s 

condition can be monitored before the 

borrower receives a Federal benefit. 

• Enforcement issues and risk to the 

Federal fiscal interest associated with 

electronically-signed MPNs that have 

been assigned to the Department. The 

final regulations require loan holders to 

maintain a certification regarding the 

creation and maintenance of any 

electronically-signed promissory notes 

and require loan holders to provide 

disbursement records should the 

Secretary need the records to enforce an 

assigned Title IV loan. 

• Excessive collection costs charged 

to defaulted Perkins Loan borrowers. 

The final regulations cap collection 

costs in the Perkins Loan Program. 

• Unreasonable risk of loss to the 

United States associated with the more 

than $400 million in uncollected 

Perkins Loans that have been in default 

for a significant number of years. The 

final regulations provide for mandatory 

assignment of older, defaulted Perkins 

loans at the request of the Secretary. 

• Program integrity issues associated 

with prohibited incentive payments and 

other inducements by lenders and 

guaranty agencies. The final regulations 

explicitly identify prohibited 

inducements and allowable activities. 

• Abuse associated with the use of 

lists of preferred or recommended 

lenders. The final regulations ensure 

such lists are a source of useful, 

unbiased consumer information that can 

assist students and their parents in 

choosing a FFEL lender. 

Lastly, regulations were required to 

implement The HEA Extension Act and 

the CCRAA. 

Regulatory Alternatives Considered 

A broad range of alternatives to the 

regulations was considered as part of 

the negotiated rulemaking process. 

These alternatives were reviewed in 

detail in the preamble to the NPRM 

under the Reasons sections 

accompanying the discussion of each 

proposed regulatory provision. To the 

extent they were addressed in response 

to comments received on the NPRM, 

alternatives are also considered 

elsewhere in the preamble to these final 

regulations under the Discussion 

sections related to each provision. No 

alternatives were considered for the 

provisions related to the 

implementation of the CCRAA, as these 

were limited to areas where the statute 

set out explicit parameters that are not 

subject to regulatory discretion. 

Benefits 

As discussed in more detail in the 

preamble to the NPRM, many of the 

regulations not related to the CCRAA 

codify existing sub-regulatory guidance 

or make relatively minor changes 

intended to establish consistent 

definitions or streamline program 

operations across the three Federal 

student loan programs. The Department 

believes the additional clarity and 

enhanced efficiency resulting from these 

changes represent benefits with little or 

no countervailing costs or additional 

burden. 

Benefits provided in these nonCCRAA regulations include: the 

clarification of rules on preferred lender 

lists and prohibited inducements; 

simplification of the process for granting 

deferments; changes to the process of 

granting loan discharges that reduce 

burden for loan holders, and protection 

of borrowers from unnecessary 

collection activities. Other changes 

include simplification of the deferment 

application process; limits on the 

frequency with which FFEL lenders can 

capitalize interest on Consolidation 

Loans; limits on the amount of 

collection costs charged to defaulted 

Perkins Loan borrowers; and the 

mandatory assignment to the 

Department of longstanding defaulted 

Perkins Loans with limited recent 

collection activity. 

Of the proposed provisions not 

related to the CCRAA, only the 

mandatory assignment of defaulted 

Perkins Loans has a substantial 

economic impact, although the singleyear impact is less than the $100 million 

threshold. Two commenters questioned 

the assertion that the economic impact 

of this provision is below the threshold, 

noting ‘‘the Department believes that 

there are $400 million in Perkins Loans 

that have been in default more than five 

years. Although the proposed regulation 

would impose mandatory assignment on 

loans in default more than seven years, 

not five, it seems clear that the $100 

million threshold will be breached.’’

The $400 million figure cited by the 

commenters was included in the NPRM 

to give a sense of the scale of the overall 

portfolio of defaulted Perkins Loans. As 

noted elsewhere in the NPRM, the 

Department estimated the amount of 

outstanding loans currently subject to 

the proposed provision, those in default 

for at least seven years and for which 

the outstanding balance has not 

decreased in at least 12 months, at $23 

million, substantially below the $100 

million threshold. 72 FR 32429. 

Department estimates for subsequent 

years indicate this amount would grow 

by approximately $1 million annually 

under current regulations, again well 

below the threshold. 

Many of the regulatory provisions 

related to the implementation of the 

CCRAA result in significantly lower 

Federal costs through a reduction in net 

payments to lenders and guaranty 

agencies participating in the FFEL 

Program. The Department estimates that 

these provisions will reduce Federal 

costs by $23.3 billion over fiscal years 

2007–2012. Student lenders compete 

vigorously for loan volume by offering 

borrowers reduced interest rates and 

fees while at the same time earning rates 

of return significantly above the 

consumer lending industry average. The 

CCRAA-related changes in these 

regulations may lead some lenders to 

reconfigure their marketing, servicing, 

and profit expectations to accommodate 

lower Federal subsidies. The 

Department’s preliminary analysis 

indicates both large and small lenders 

will still be able to structure their 

operations to generate a reasonable rate 

of return. 

The CCRAA reduced special 

allowance payments for loans first 

disbursed on or after October 1, 2007 

and established different rates for 

eligible not-for-profit lenders and other 

lenders. The Department estimates these 

changes will reduce Federal costs by 

$14.7 billion over 2007–2012. Over this 

period, the Department estimates 

lenders will originate 83.7 million loans 

for a total of $625.6 billion. In general, 

the Department does not collect data on 

the for-profit status of participating 

lenders. Under current law, not-forprofit lenders qualify for a special 

allowance differential for loans financed 

through tax-exempt securities. The 

Department assumes the 39 lenders 

qualifying for tax-exempt special 

allowance reflect the universe of not-forprofit lenders in the FFEL program. The 

total outstanding portfolio for these 

lenders at the end of 2006 was $40 

billion, or 12.41 percent of the total 

outstanding portfolio of $325 billion. 

This rate has been relatively constant 

over time and across loan types; it is 

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assumed to remain stable throughout 

the forecasted period. Recent analysis 

by Fitch Ratings, An Education in 

Student Lending, reports the student 

loan yield for three large lenders, 

representing 50 percent of the market in 

2006, as between 7.16 percent and 7.99 

percent, with a net student loan spread 

between 1.64 percent and 1.84 percent. 

This is significantly above the 

comparable spread for consumer loans. 

The reduced special allowance 

payments under the CCRAA will reduce 

these yields but are not anticipated to 

have a significant adverse effect on large 

or small lenders. 

The CCRAA reduced the rate guaranty 

agencies may retain on most default 

collections from 23 percent to 16 

percent on collections after October 1, 

2007. The Department estimates this 

change will reduce Federal costs by $2.2 

billion over 2007–2012, half of which is 

at the time of enactment as adjustments 

to loans currently outstanding. Guaranty 

agencies use different tools to collect 

defaulted loans; each approach has its 

own retention rate. The three main rates 

are: The new 16 percent rate reflected in 

this regulation for regular default 

collections; 10 percent on specialized 

collections, such as the pay-off of 

defaulted balances through the 

origination of a new consolidation loan; 

and 0 percent on loans collected 

through the offset of tax returns by the 

Internal Revenue Service and similar 

activities. The collection categories 

affected by the CCRAA represent less 

than a quarter of default collections by 

guaranty agencies. For 2008, the 

Department projects it will retain 94.82 

percent of all default collections made 

by guaranty agencies, an increase from 

92.17 percent in 2007. 

The CCRAA decreases account 

maintenance fees paid to guaranty 

agencies from 0.10 percent to 0.06 

percent of original principal balance 

outstanding on which guarantees were 

issued, effective October 1, 2007. The 

Department estimates that this change 

will reduce Federal costs by $2.6 billion 

over 2007–2012, $1 billion of which is 

at the time of enactment as adjustments 

to loans currently outstanding. 

The CCRAA eliminated, effective 

October 1, 2007, the ‘‘exceptional 

performer’’ designation under which 

lenders and loan servicers qualified for 

higher than standard insurance against 

loan default. The Department estimates 

this change, which applies to any 

invoice the Department receives after 

October 1, 2007, will reduce Federal 

costs by $1.2 billion over 2007–2012. In 

2007, 90 percent of loans were serviced 

by a servicer receiving the higher 

insurance rate. As with the other 

changes reducing payments to lenders, 

the Department expects some lenders 

may reconfigure their marketing, 

servicing, and profit expectations to 

accommodate lower Federal subsidies. 

The CCRAA increased 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. 

The Department estimates this change 

will reduce Federal costs by $2.6 billion 

over 2007–2012. The fee is payable on 

all new loan originations except PLUS 

loans originated through the auction 

mechanism created by the CCRAA. 

Student lenders compete vigorously for 

loan volume by offering borrowers 

reduced interest rates and fees while at 

the same time earning rates of return 

significantly above the consumer 

lending industry average. The increased 

fee, whether alone or in tandem with 

other changes in the CCRAA, may lead 

some lenders to reconfigure their 

marketing, servicing, and profit 

expectations to accommodate lower 

Federal subsidies. The Department’s 

preliminary analysis indicates both 

large and small lenders will still be able 

to structure their operations to generate 

a reasonable rate of return. 

Costs 

Because entities affected by these 

regulations already participate in the 

Title IV, HEA programs, these lenders, 

guaranty agencies, and schools must 

already have systems and procedures in 

place to meet program eligibility 

requirements. The non-CCRAA 

regulations in this package generally 

would require discrete changes in 

specific parameters associated with 

existing guidance, such as the provision 

of entrance counseling, the retention of 

records, or the submission of data to 

NSLDS, rather than wholly new 

requirements. Accordingly, entities 

wishing to continue to participate in the 

student aid programs have already 

absorbed most of the administrative 

costs related to implementing these 

regulations. Marginal costs over this 

baseline are primarily related to onetime system changes, which in some 

cases could be significant. In assessing 

the potential impact of the proposed 

non-CCRAA regulations, the 

Department recognizes that certain 

provisions, primarily those requiring the 

assignment of Perkins Loans and 

entrance counseling for graduate and 

professional PLUS Loan borrowers, will 

result in additional workload for staff at 

some institutions of higher education. 

(This additional workload is discussed 

in more detail under the Paperwork 

Reduction Act of 1995 section of the 

NPRM.) Additional workload would 

normally be expected to result in 

estimated costs associated with either 

the hiring of additional employees or 

opportunity costs related to the 

reassignment of existing staff from other 

activities. As noted in the NPRM, 

however, in this case, these costs would 

be offset by other provisions in the 

regulations, primarily those involving 

changes to the maximum length of loan 

period, which result in workload 

reductions that greatly outweigh the 

estimated additional burden. 

In weighing the costs and benefits of 

these regulations, the Department 

considered a range of possible 

outcomes, many of which were raised 

during the negotiated rulemaking 

discussions. (The following summarizes 

these considerations for a number of 

provisions; a more complete discussion 

for all provisions is available in the 

Reasons sections of the NPRM.) For 

prohibited inducements, for example, 

several negotiators expressed concern 

that the proposed regulations might 

have a negative impact on the numerous 

business arrangements between schools 

and financial institutions or reduce 

philanthropic giving to institutions of 

higher education; others suggested the 

regulations could have a ‘‘chilling 

effect’’ on school and lender 

relationships. Conversely, other 

negotiators expressed the view that 

eliminating improper inducements 

would end the practice of schools 

actively ‘‘steering’’ borrowers to 

particular lenders and limit the 

appearance of ‘‘redlining’’ by lenders 

targeting benefits on certain classes of 

borrowers, greatly enhancing the 

credibility of the loan process. 

On balance, the Department believes 

that these regulations adequately 

implement the statutory requirements in 

the HEA’s prohibited inducement 

provisions and does not believe it will 

affect unrelated contracts or agreements 

between postsecondary institutions and 

financial institutions or general 

philanthropic giving by financial 

institutions. Some negotiators believed 

that borrowers are being inappropriately 

steered to various lenders through the 

use of inducements provided by lenders 

to schools and that these activities, if 

left unchecked, deny borrowers their 

choice of lender and undermine the 

credibility of the FFEL Program. The 

Secretary, through these regulations, is 

enhancing the borrower’s choice of 

lender and providing for the disclosure 

of appropriate information. 

In the area of preferred lender lists, 

some negotiators questioned the need to 

regulate in this area, fearing that the 

provisions would be administratively 

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burdensome and could result in schools 

discontinuing the use of such lists. The 

non-Federal negotiators expressed 

concern that if schools discontinued 

using a preferred lender list, students 

would be subject to increased direct 

marketing from student loan lenders, 

which they viewed as 

counterproductive to the goal of 

educating students and parents about 

the student loan process. At the same 

time, some raised the possibility that 

school workload would increase in the 

absence of preferred lender lists, as 

students and parents would seek more 

information directly from the school 

about choosing a lender. Non-Federal 

negotiators also objected to our proposal 

that schools choosing to continue use of 

preferred lender lists be required to not 

only disclose the method and criteria 

used by the school to choose the lenders 

on the school’s preferred lender list, but 

also provide comparative information 

on the interest rates and other borrower 

benefits offered by those lenders. The 

non-Federal negotiators believed that 

this would represent a significant 

administrative burden and that schools 

could not ensure the accuracy of the 

information on borrower-benefit 

offerings. 

The Department believes the 

disclosure of supporting information 

and data with the list of preferred 

lenders is the most efficient and 

effective method to ensure that 

borrowers make informed consumer 

decisions. The Department understands 

that providing comparative interest rate 

and benefit information, in addition to 

describing the method and criteria used 

to select lenders for the list, will involve 

additional efforts for schools in 

preparing and providing a preferred 

lender list. To assist schools with this 

effort, the Department is developing a 

model format that a school may use to 

present this information. 

In general, the Department believes 

these provisions will produce the 

general benefits of greater borrower 

choice and information and enhanced 

faith in the integrity and transparency of 

the loan program. While it is possible 

that some institutions will incur 

significant costs, we believe we have 

provided opportunities, such as the 

model form, to minimize these costs and 

that, on balance, the costs are 

outweighed by the likely benefits. 

The Department also agrees that 

schools should not be discouraged from 

negotiating with lenders for the best 

possible interest rates and borrower 

benefits for their borrowers. As a result, 

the regulations, while continuing to 

prohibit a school’s solicitation of 

payments and other benefits from a 

lender for the school or its employees in 

exchange for the lender’s placement on 

the school’s list, do not prohibit a 

school from soliciting lenders for 

borrower benefits in exchange for 

placement on the school’s list. 

The regulatory provisions related to 

the CCRAA expand benefits to 

borrowers in a number of areas—

primarily through the reduction of 

interest rates on Stafford Loans—that 

significantly increase Federal costs. The 

Department estimates that these 

provisions will increase Federal costs by 

$5.9 billion over fiscal years 2007–2012. 

These provisions will either reduce 

costs for student loan borrowers or offer 

new or extended benefits during periods 

of military service or economic hardship 

for over 25 million loans and as many 

as 22 million borrowers over fiscal years 

2007–2012. 

The CCRAA reduced interest rates on 

subsidized Stafford loans made to 

undergraduate students effective July 1, 

2008. Rates are reduced from 6.8 

percent to 6.0 percent for loans 

originated between July 1, 2008, and 

June 30, 2009; to 5.6 percent for the year 

beginning July 1, 2009; to 4.5 percent for 

the year beginning July 1, 2010; and to 

3.4 percent for the year beginning July 

1, 2011. (The rate returns to 6.8 percent 

for subsequent years.) The Department 

estimates that this change will increase 

Federal costs by $5.9 billion over 2007–

2012. On the average Stafford Loan of 

$3,180, a borrower would repay $4,391 

over a 10-year repayment period at a 6.8 

percent annual rate. Under the CCRAA, 

borrowers will save $155 over 10 years 

($1.29 per monthly payment) for loans 

originated in award year 2008–2009, 

rising to a $608 savings over 10 years 

($5.07 per payment) for loans originated 

in award year 2011. Total savings for a 

borrower taking out an average loan in 

each year would be $1,393 over 10 years 

on borrowing of $12,733, or roughly 1 

percent a year. The average student 

borrows roughly $9,000 in Stafford 

Loans over their time in school; their 

savings would be less. 

The CCRAA revised the definition of 

economic hardship for the purpose of 

qualifying for a student loan deferment. 

The Department estimates that this 

change will have minimal effect on 

Federal costs. Previously, borrowers 

were eligible for a loan deferment if they 

earned 100 percent of the poverty line 

for a family of two or if their Federal 

educational debt burden exceeded 20 

percent of adjusted gross income if the 

difference between the adjusted gross 

income minus the debt burden is less 

than 220 percent of the poverty line for 

a family of two. Effective October 1, 

2007, the CCRAA eliminates the debt 

burden provision for all borrowers and 

ties the income criteria to 150 percent 

of the poverty line applicable to the 

borrower’s family size. Removing the 

debt burden test restricts eligibility for 

the economic hardship deferment while 

relaxing the family income criteria 

increases eligibility. The Department 

only collects income data on borrowers 

choosing the income-contingent 

repayment option, who represent 

roughly 15 percent of the outstanding 

portfolio. Using this group as a proxy for 

the total population in repayment, the 

Department estimates the changes in the 

CCRAA counteract one another, 

resulting in roughly one-third of 

borrowers meeting the eligibility 

requirements before and after the 

statutory change. A substantial portion 

of borrowers who qualify for economic 

hardship never apply for the deferment. 

The CCRAA extends the military 

deferment to all Title IV borrowers 

regardless of when their loans were 

made, eliminates the 3-year limit on the 

military deferment and adds a 180-day 

period of deferment following the 

borrower’s demobilization effective 

October 1, 2007. The law also authorizes 

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 effective October 1, 2007. Using 

figures provided by the Congressional 

Budget Office, the Department of 

Defense, and the Department’s National 

Postsecondary Student Aid Survey, the 

Department estimates there will be 

12,000 active duty military personnel 

with outstanding loans out of a total of 

216,000 deployed in 2007, decreasing to 

3,100 out of 55,000 in 2011. These 

borrowers have outstanding debt of $49 

million in 2007. Assuming 15 months of 

deployment and the appropriate new 

additional new post-deployment 

deferments, the Department estimates 

the interest subsidy provided to these 

borrowers would be $17 million over 

2007–2012. 

Assumptions, Limitations, and Data 

Sources 

Estimates provided above reflect a 

baseline in which the changes 

implemented in these regulations do not 

exist. As part of the regulatory impact 

analysis included in the NPRM, the 

Department requested comments or 

information from the public for 

consideration in assessing its 

preliminary estimates. No such 

comments or information related to data 

used in the preliminary estimates were 

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received during the comment period. In 

the absence of such information, and 

given that internal reviews have 

revealed no problems or significant new 

information, the estimates included in 

the NPRM should be considered final. 

In developing these estimates, a wide 

range of data sources were used, 

including NSLDS data, operational and 

financial data from Department of 

Education systems, and data from a 

range of surveys conducted by the 

National Center for Education Statistics, 

such as the 2004 National 

Postsecondary Student Aid Survey, the 

1994 National Education Longitudinal 

Study, and the 1996 Beginning 

Postsecondary Student Survey. 

Elsewhere in this SUPPLEMENTARY

INFORMATION section we identify and 

explain burdens specifically associated 

with information collection 

requirements. See the heading 

Paperwork Reduction Act of 1995. 

Accounting Statement 

As required by OMB Circular A–4 

(available at http:// 

www.Whitehouse.gov/omb/Circulars/ 

a004/a-4.pdf), in Table 1 below, we 

have prepared an accounting statement 

showing the classification of the 

expenditures associated with the 

provisions of these regulations. This 

table provides our best estimate of 

transfers related to changes in Federal 

student aid payments as a result of these 

final regulations. Estimated transfers of 

¥$2,914 million reflect annualized 

savings, discounted at 7 percent, related 

to ¥$13,889 million in net savings as 

estimated using traditional credit reform 

scoring conventions. Alternatively, if 

transfers are discounted at 3 percent, 

annualized transfers would equal 

¥$2,906 million in estimated net 

savings of ¥$15,743 million. 

Expenditures are classified as transfers 

to postsecondary students; savings are 

classified as transfers from program 

participants (lenders, guaranty 

agencies). 

TABLE 1.—ACCOUNTING STATEMENT: CLASSIFICATION OF ESTIMATED SAVINGS

[In millions] 

Category Transfers 

Annualized Monetized Transfers .............................................................. ¥$2,914 

From Whom To Whom? ........................................................................... Federal Government To Postsecondary Students; Student Aid Program 

Participants to Federal Government. 

Regulatory Flexibility Act Certification 

The Secretary certifies that these 

regulations will not have a significant 

economic impact on a substantial 

number of small entities. These 

regulations affect institutions of higher 

education, lenders, and guaranty 

agencies that participate in Title IV, 

HEA programs and individual students 

and loan borrowers. The U.S. Small 

Business Administration Size Standards 

define these institutions as ‘‘small 

entities’’ if they are for-profit or 

nonprofit institutions with total annual 

revenue below $5,000,000 or if they are 

institutions controlled by governmental 

entities with populations below 50,000. 

Guaranty agencies are State and private 

nonprofit entities that act as agents of 

the Federal government, and as such are 

not considered ‘‘small entities’’ under 

the Regulatory Flexibility Act. 

Individuals are also not defined as 

‘‘small entities’’ under the Regulatory 

Flexibility Act. 

A significant percentage of the lenders 

and schools participating in the Federal 

student loan programs meet the 

definition of ‘‘small entities.’’ While 

these lenders and schools fall within the 

SBA size guidelines, the non-CCRAA 

regulations do not impose significant 

new costs on these entities. The 

CCRAA-related provisions do not affect 

schools, but would have an impact on 

small lenders. As noted above in the 

Regulatory Impact Analysis, while these 

regulations may lead some small lenders 

to reconfigure their marketing, 

servicing, and profit expectations to 

accommodate lower Federal subsidies, 

the Department’s preliminary analysis 

indicates these lenders will still be able 

to structure their operations to generate 

a reasonable rate of return. 

In the NPRM the Secretary invited 

comments from small institutions and 

lenders as to whether they believe the 

proposed changes would have a 

significant economic impact on them 

and, if so, requested evidence to support 

that belief. Other than the comments 

discussed in the Analysis of Comments 

and Changes section regarding the 

mandatory assignment of Perkins Loans, 

we did not receive comments or 

evidence on this subject. 

In addition to the provisions 

contained in the NPRM, these 

regulations contain provisions 

implementing non-discretionary 

provisions of the CCRAA. As discussed 

elsewhere in the preamble under the 

section entitled Waiver of Proposed 

Rulemaking—Regulations Implementing 

the CCRAA, the Secretary has 

determined for good cause shown that it 

is unnecessary to conduct notice-andcomment rulemaking pursuant to the 

APA on the regulations implementing 

the changes to these regulations 

resulting from the CCRAA. Specifically, 

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 the discretion 

in whether or how to implement these 

changes. Accordingly, given that noticeand-comment rulemaking under the 

APA is not necessary for the regulations 

implementing the CCRAA, the 

provisions of the Regulatory Flexibility 

Act do not apply to those regulations. 

Paperwork Reduction Act of 1995 

These regulations contain information 

collection requirements that were 

reviewed in connection with the NPRM. 

The Department received no comments 

on the Paperwork Reduction Act portion 

of the NPRM. However, we are 

requesting further comment on 

information collection, OMB Control 

Number 1845–0019, consistent with an 

increase in burden related to the 

provisions in § 674.16(j). 

Section 674.16(j) requires institutions 

that participate in the Perkins Loan 

Program to report enrollment and loan 

status information, or any Title IV 

related information required by the 

Secretary, to the Secretary by the 

deadline date established by the 

Secretary. As we mentioned in the 

preamble to the NPRM, the Department 

regularly discusses issues relating to 

NSLDS reporting of Title IV, HEA 

program participants through 

established workgroups and conference 

calls with Title IV, HEA program 

participants. These workgroups 

provided advice on the changes that 

have been made to the form requiring 

schools to report Perkins Loan data to 

NSLDS in a manner that is consistent 

with the way data on FFEL Loans and 

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Federal Register / Vol. 72, No. 211 / Thursday, November 1, 2007 / Rules and Regulations 61995 

Direct Loans are reported. These 

reporting changes will increase burden 

for Perkins Loan Program schools and 

will be associated with § 674.16(j) in the 

resubmission of OMB Control Number 

1845–0019. 

Additionally, the Department has 

determined that consistent with the 

provisions of § 682.604(c)(1), the 

requirement that guaranty agencies 

provide the name and location of the 

entity in possession of the original 

electronic Master Promissory Note 

(MPN) will entail a one-time increase in 

burden to make the appropriate software 

changes that will collect these data. The 

guaranty agencies are affected by these 

changes and their estimated burden will 

increase by 1,260 hours as reflected in 

OMB Control Number 1845–0020. 

The Department has determined that, 

consistent with the provisions of 

§ 674.16(j), the reporting of the 

borrower’s academic year level for each 

Perkins borrower will increase the total 

burden by 11,340 total hours. Of that 

total burden hour increase, the 

following affected entities are estimated 

to have: 4,309 additional hours 

attributable to public institutions; 6,010 

additional hours attributable to private 

institutions; and 1,021 additional hours 

attributable to for-profit institutions. 

In regard to other information 

collection requirements described in the 

NPRM, the Paperwork Reduction Act of 

1995 does not require a response to a 

collection of information unless it 

displays a valid OMB control number. 

We display the valid OMB control 

numbers assigned to the collections of 

information in these final regulations at 

the end of the affected sections of the 

regulations. 

These final regulations also 

incorporate statutory changes made to 

the HEA by the CCRAA (Pub. L. 110–

84). As discussed below, final 

regulations in §§ 674.34, 682.210, 

682.305, 682.404, 682.415, and 685.204 

contain information collection 

requirements. Under the Paperwork 

Reduction Act of 1995, the Department 

is requesting further comment on 

information collections, OMB Control 

Number 1845–0019, 1845–0020, and 

1845–0021 consistent with the burden 

associated with the addition of these 

provisions in the final regulations. 

Collection of Information: Perkins 

Loan Program, FFEL Program, and 

Direct Loan Program. 

Sections 674.34, 682.210, and 685.204 

(Deferment) 

The final regulations in §§ 674.34, 

682.210, and 685.204 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 effective 

October 1, 2007. The changes made by 

the final regulations will allow more 

borrowers to establish eligibility for a 

military deferment and therefore 

represents an increase in burden for 

loan holders and borrowers. We 

estimate the changes will increase 

burden for borrowers and loan holders 

(and their servicers) by 1,000 hours and 

500 hours, respectively. Thus we 

estimate a total burden increase of 1,500 

hours in OMB Control Number 1845–

0080. 

The final regulations in §§ 674.34, 

682.210, and 685.204 also provide for a 

13-month deferment following deactivation of certain members of the 

Armed Forces who were enrolled, or 

enrolled within 6 months of being 

called to active duty effective July 1, 

2008. The changes authorize a new 

deferment and therefore an increase in 

burden. We estimate that the changes 

will increase burden for borrowers and 

loan holders (and their servicers) by 650 

hours and 350 hours, respectively. 

Thus, we estimate a total burden 

increase of 1,000 hours, and which will 

be reflected in a new OMB Collection 

under a newly designated OMB Control 

Number. A revised Military Deferment 

Request Form associated with these 

OMB Control Numbers will be 

submitted for OMB review by January 

30, 2008. 

Lastly, the final regulations in 

§ 674.34 and § 682.210 revise the 

definition of economic hardship to 

increase allowable income for a 

borrower to establish eligibility for the 

economic hardship to 150 percent of the 

poverty line applicable to the borrower’s 

family size. This change in eligibility 

requirements will allow more borrowers 

to establish eligibility for an economic 

hardship deferment and represents an 

increase in burden. We estimate that the 

changes will increase burden for 

borrowers and loan holders (and their 

servicers) by 650 hours and 350 hours, 

respectively. Thus, we estimate a total 

burden increase of 1,000 hours in OMB 

Control Numbers 1845–0005 and 1845–

0011. A revised Deferment Request 

Form associated with these OMB 

Control Numbers will be submitted for 

OMB review by December 10, 2007. 

Section 682.305 (Procedures for 

Payment of Interest Benefits and Special 

Allowance and Collection of Origination 

and Loan Fees) 

Final regulations in § 682.305 increase 

the loan fee a lender must pay to the 

Secretary from .50 to 1.0 percent of the 

principal amount of the loan for loans 

first disbursed on or after October 1, 

2007. The changes do not represent a 

change in burden. Collection practices 

and procedures would not change; only 

the amount the lender must pay would 

change. Therefore, there is no additional 

burden associated with this provision. 

Section 682.404 (Federal Reinsurance 

Agreement) 

Final regulations in § 682.404 reduce 

the percentage of collections that a 

guaranty agency may retain from 23 to 

16 percent and decrease account 

maintenance fees paid to guaranty 

agencies from 0.10 to 0.06 percent 

effective October 1, 2007. The changes 

do not represent a change in burden. 

Collection practices and fee payment 

procedures will not change; only the 

percentage of collections retained and 

the amount of fees paid would change. 

Therefore, there is no additional burden 

associated with this provision. 

Section 682.415 (Special Insurance and 

Reinsurance Rules) 

The final regulations eliminate the 

‘‘exceptional performer’’ status and 

application procedures in § 682.415. 

This change represents a decrease in 

burden. We estimate that the changes 

will decrease burden for lenders (and 

their servicers) by 2,880 hours in OMB 

Control Number 1845–0020. 

Assessment of Educational Impact 

In the NPRM, we requested comments 

on whether the proposed regulations 

would require transmission of 

information that any other agency or 

authority of the United States gathers or 

makes available. 

Based on the response to the NPRM 

and on our review, we have determined 

that these final regulations do not 

require transmission of information that 

any other agency or authority of the 

United States gathers or makes 

available. 

Electronic Access to This Document 

You may view this document, as well 

as all other Department of Education 

documents published in the Federal 

Register, in text or Adobe Portable 

Document Format (PDF) on the Internet 

at the following site: http://www.ed.gov/ 

news/FedRegister. 

To use PDF you must have Adobe 

Acrobat Reader, which is available free 

at this site. If you have questions about 

using PDF, call the U.S. Government 

Printing Office (GPO), toll free, at 1–

888–293–6498; or in the Washington, 

DC, area at (202) 512–1530. 

Note: The official version of this document 

is the document published in the Federal 

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61996 Federal Register / Vol. 72, No. 211 / Thursday, November 1, 2007 / Rules and Regulations 

Register. Free Internet access to the official 

edition of the Federal Register and the Code 

of Federal Regulations is available on GPO 

Access at: http://www.access.gpo.gov/nara/ 

index.html. 

(Catalog of Federal Domestic Assistance 

Number: 84.032 Federal Family Education 

Loan Program; 84.037 Federal Perkins Loan 

Program; and 84.268 William D. Ford Federal 

Direct Loan Program) 

List of Subjects in 34 CFR Parts 674, 

682 and 685 

Administrative practice and 

procedure, Colleges and universities, 

Education, Loan programs—education, 

Reporting and recordkeeping 

requirements, Student aid, and 

Vocational education. 

Dated: October 23, 2007. 

Margaret Spellings, 

Secretary of Education. 

■ For the reasons discussed in the 

preamble, the Secretary amends parts 

674, 682, and 685 of title 34 of the Code 

of Federal Regulations as follows: 

PART 674—FEDERAL PERKINS LOAN 

PROGRAM 

■ 1. The authority citation for part 674 

continues to read as follows: 

Authority: 20 U.S.C. 1087aa–1087hh and 

20 U.S.C. 421–429, unless otherwise noted. 

■ 2. Section 674.8 is amended by: 

■ A. In paragraph (d)(1), removing the 

words ‘‘; or’’ and adding in their place 

the punctuation ‘‘.’’. 

■ B. Adding a new paragraph (d)(3). 

The addition reads as follows: 

§ 674.8 Program participation agreement. 

* * * * * 

(d) * * * 

(3) The institution shall, at the request 

of the Secretary, assign its rights to a 

loan to the United States without 

recompense if—

(i) The amount of outstanding 

principal is $100.00 or more; 

(ii) The loan has been in default, as 

defined in § 674.5(c)(1), for seven or 

more years; and 

(iii) A payment has not been received 

on the loan in the preceding twelve 

months, unless payments were not due 

because the loan was in a period of 

authorized forbearance or deferment. 

* * * * * 

■ 3. Section 674.16 is amended by 

adding new paragraph (j) to read as 

follows: 

§ 674.16 Making and disbursing loans. 

* * * * * 

(j) The institution must report 

enrollment and loan status information, 

or any Title IV loan-related information 

required by the Secretary, to the 

Secretary by the deadline date 

established by the Secretary. 

* * * * * 

■ 4. Section 674.19 is amended by: 

■ A. Redesignating paragraph (e)(2)(i) as 

paragraph (e)(2)(iii). 

■ B. Adding new paragraph (e)(2)(i). 

■ C. Revising paragraph (e)(2)(ii). 

■ D. Revising paragraph (e)(3). 

■ E. In paragraph (e)(4)(i), removing the 

words ‘‘Master Promissory Note (MPN)’’

and adding, in their place, the word 

‘‘MPN’’. 

■ F. Revising paragraph (e)(4)(ii). 

The addition and revisions read as 

follows: 

§ 674.19 Fiscal procedures and records. 

* * * * * 

(e) * * * 

(2) * * * 

(i) An institution shall retain a record 

of disbursements for each loan made to 

a borrower on a Master Promissory Note 

(MPN). This record must show the date 

and amount of each disbursement. 

(ii) For any loan signed electronically, 

an institution must maintain an affidavit 

or certification regarding the creation 

and maintenance of the institution’s 

electronic MPN or promissory note, 

including the institution’s 

authentication and signature process in 

accordance with the requirements of 

§ 674.50(c)(12). 

* * * * * 

(3) Period of retention of 

disbursement records, electronic 

authentication and signature records, 

and repayment records. 

(i) An institution shall 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. 

(ii) An institution shall retain 

repayment records, including 

cancellation and deferment requests for 

at least three years from the date on 

which a loan is assigned to the 

Secretary, canceled or repaid. 

(4) * * * 

(ii) If a promissory note was signed 

electronically, the institution must store 

it electronically and the promissory note 

must be retrievable in a coherent format. 

An original electronically signed MPN 

must be retained by the institution for 

3 years after all the loans made on the 

MPN are satisfied. 

* * * * * 

■ 5.Section 674.34 is amended by: 

■ A. Revising paragraph (e)(3)(ii). 

■ B. In paragraph (h)(1), adding the 

words ‘‘, an NDSL, or a Defense Loan’’

after the words ‘‘a Federal Perkins 

Loan’’, removing the words ‘‘made on or 

after July 1, 2001’’, and removing the 

words ‘‘not to exceed 3 years’’. 

■ C. Adding a new paragraph (h)(6). 

■ D. Redesignating paragraphs (i) and (j) 

as paragraphs (j) and (k), respectively. 

■ E. Adding a new paragraph (i). 

■ F. In newly redesignated paragraph (j), 

removing the words ‘‘and (h)’’, and 

adding in their place, the words ‘‘(h) 

and (i)’’. 

The additions and revision read as 

follows: 

§ 674.34 Deferment of repayment—Federal 

Perkins loans, NDSLs and Defense loans. 

(e) * * * 

(3) * * * 

(ii) An amount equal to 150 percent 

of the poverty line applicable to the 

borrower’s family size, as determined in 

accordance with section 673(2) of the 

Community Service Block Grant Act. 

* * * * * 

(h) * * * 

(6) The deferment period ends 180 

days after the demobilization date for 

the service described in paragraphs 

(h)(1)(i) and (h)(1)(ii) of this section. 

* * * * * 

(i)(1) A borrower of a Federal Perkins 

loan, an NDSL, or a Defense loan who 

is called to active duty military service 

need not pay principal and interest does 

not accrue for up to 13 months 

following the conclusion of the 

borrower’s active duty military service 

if—

(i) The borrower is a member of the 

National Guard or other reserve 

component of the Armed Forces of the 

United States or a member of such 

forces in retired status; and 

(ii) The borrower was enrolled in a 

program of instruction at an eligible 

institution at the time, or within six 

months prior to the time, the borrower 

was called to active duty. 

(2) As used in paragraph (i)(1) of this 

section, ‘‘Active duty’’ means active 

duty as defined in section 101(d)(1) of 

title 10, United States Code, except—

(i) Active duty includes active State 

duty for members of the National Guard; 

and 

(ii) Active duty does not include 

active duty for training or attendance at 

a service school. 

(3) If the borrower returns to enrolled 

student status during the 13-month 

deferment period, the deferment expires 

at the time the borrower returns to 

enrolled student status. 

* * * * * 

■ 6. Section 674.38 is amended by: 

■ A. In paragraph (a)(1), removing the 

words ‘‘(a)(2)’’ and adding, in their 

place, the words ‘‘(a)(5)’’. 

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■ B. Redesignating paragraphs (a)(2) and 

(a)(3) as paragraphs (a)(5) and (a)(7), 

respectively. 

■ C. Adding new paragraphs (a)(2), 

(a)(3), (a)(4), and (a)(6). 

The additions read as follows: 

§ 674.38 Deferment procedures. 

* * * * * 

(a) * * * 

(2) After receiving a borrower’s 

written or verbal request, an institution 

may grant a deferment under 

§§ 674.34(b)(1)(ii), 674.34(b)(1)(iii), 

674.34(b)(1)(iv), 674.34(d), 674.34(e), 

674.34(h), and 674.34(i) if the 

institution is able to confirm that the 

borrower has received a deferment on 

another Perkins Loan, a FFEL Loan, or 

a Direct Loan for the same reason and 

the same time period. The institution 

may grant the deferment based on 

information from the other Perkins Loan 

holder, the FFEL Loan holder or the 

Secretary or from an authoritative 

electronic database maintained or 

authorized by the Secretary that 

supports eligibility for the deferment for 

the same reason and the same time 

period. 

(3) An institution may rely in good 

faith on the information it receives 

under paragraph (a)(2) of this section 

when determining a borrower’s 

eligibility for a deferment unless the 

institution, as of the date of the 

determination, has information 

indicating that the borrower does not 

qualify for the deferment. An institution 

must resolve any discrepant information 

before granting a deferment under 

paragraph (a)(2) of this section. 

(4) An institution that grants a 

deferment under paragraph (a)(2) of this 

section must notify the borrower that 

the deferment has been granted and that 

the borrower has the option to cancel 

the deferment and continue to make 

payments on the loan. 

* * * * * 

(6) In the case of a military service 

deferment under §§ 674.34(h) and 

674.35(c)(1), a borrower’s representative 

may request the deferment on behalf of 

the borrower. An institution that grants 

a military service deferment based on a 

request from a borrower’s representative 

must notify the borrower that the 

deferment has been granted and that the 

borrower has the option to cancel the 

deferment and continue to make 

payments on the loan. The institution 

may also notify the borrower’s 

representative of the outcome of the 

deferment request. 

* * * * * 

■ 7. Section 674.45 is amended by: 

■ A. Redesignating paragraph (e)(3) as 

paragraph (e)(4). 

■ B. Adding new paragraph (e)(3). 

The addition reads as follows: 

§ 674.45 Collection procedures. 

* * * * * 

(e) * * * 

(3) For loans placed with a collection 

firm on or after July 1, 2008, reasonable 

collection costs charged to the borrower 

may not exceed—

(i) For first collection efforts, 30 

percent of the amount of principal, 

interest, and late charges collected; 

(ii) For second and subsequent 

collection efforts, 40 percent of the 

amount of principal, interest, and late 

charges collected; and 

(iii) For collection efforts resulting 

from litigation, 40 percent of the amount 

of principal, interest, and late charges 

collected plus court costs. 

* * * * * 

■ 8. Section 674.50 is amended by: 

■ A. Adding new paragraphs (c)(11) and 

(12). 

■ B. In paragraph (e)(1), adding the 

words ‘‘, unless the loan is submitted for 

assignment under 674.8(d)(3)’’

immediately after the word ‘‘borrower’’. 

The additions read as follows: 

§ 674.50 Assignment of defaulted loans to 

the United States. 

* * * * * 

(c) * * * 

(11) A record of disbursements for 

each loan made to a borrower on an 

MPN that shows the date and amount of 

each disbursement. 

(12)(i) Upon the Secretary’s request 

with respect to a particular loan or loans 

assigned to the Secretary and evidenced 

by an electronically signed promissory 

note, the institution that created the 

original electronically signed 

promissory note must cooperate with 

the Secretary in all activities necessary 

to enforce the loan or loans. Such 

institution must provide—

(A) An affidavit or certification 

regarding the creation and maintenance 

of the electronic records of the loan or 

loans in a form appropriate to ensure 

admissibility of the loan records in a 

legal proceeding. This affidavit or 

certification may be executed in a single 

record for multiple loans provided that 

this record is reliably associated with 

the specific loans to which it pertains; 

and 

(B) Testimony by an authorized 

official or employee of the institution, if 

necessary, to ensure admission of the 

electronic records of the loan or loans in 

the litigation or legal proceeding to 

enforce the loan or loans. 

(ii) The affidavit or certification in 

paragraph (c)(12)(i)(A) of this section 

must include, if requested by the 

Secretary—

(A) A description of the steps 

followed by a borrower to execute the 

promissory note (such as a flowchart); 

(B) A copy of each screen as it would 

have appeared to the borrower of the 

loan or loans the Secretary is enforcing 

when the borrower signed the note 

electronically; 

(C) A description of the field edits and 

other security measures used to ensure 

integrity of the data submitted to the 

originator electronically; 

(D) A description of how the executed 

promissory note has been preserved to 

ensure that it has not been altered after 

it was executed; 

(E) Documentation supporting the 

institution’s authentication and 

electronic signature process; and 

(F) All other documentary and 

technical evidence requested by the 

Secretary to support the validity or the 

authenticity of the electronically signed 

promissory note. 

(iii) The Secretary may request a 

record, affidavit, certification or 

evidence under paragraph (a)(6) of this 

section as needed to resolve any factual 

dispute involving a loan that has been 

assigned to the Secretary including, but 

not limited to, a factual dispute raised 

in connection with litigation or any 

other legal proceeding, or as needed in 

connection with loans assigned to the 

Secretary that are included in a Title IV 

program audit sample, or for other 

similar purposes. The institution must 

respond to any request from the 

Secretary within 10 business days. 

(iv) As long as any loan made to a 

borrower under a MPN created by an 

institution is not satisfied, the 

institution is responsible for ensuring 

that all parties entitled to access to the 

electronic loan record, including the 

Secretary, have full and complete access 

to the electronic loan record. 

* * * * * 

■ 9. Section 674.56 is amended by 

revising paragraph (b)(1) to read as 

follows: 

§ 674.56 Employment cancellation—

Federal Perkins loan, NDSL, and Defense 

loan. 

* * * * * 

(b) Cancellation for full-time 

employment in a public or private 

nonprofit child or family service agency. 

(1) An institution must cancel up to 100 

percent of the outstanding balance on a 

borrower’s Federal Perkins loan or 

NDSL made on or after July 23, 1992, for 

service as a full-time employee in a 

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61998 Federal Register / Vol. 72, No. 211 / Thursday, November 1, 2007 / Rules and Regulations 

public or private nonprofit child or 

family service agency who is providing 

services directly and exclusively to 

high-risk children who are from lowincome communities and the families of 

these children, or who is supervising 

the provision of services to high-risk 

children who are from low-income 

communities and the families of these 

children. To qualify for a child or family 

service cancellation, a non-supervisory 

employee of a child or family service 

agency must be providing services only 

to high-risk children from low-income 

communities and the families of these 

children. The employee must work 

directly with the high-risk children from 

low-income communities, and the 

services provided to the children’s 

families must be secondary to the 

services provided to the children. 

* * * * * 

■ 10. Section 674.61 is amended by: 

■ A. Revising the second sentence in 

paragraph (a). 

■ B. Revising paragraphs (b), (c), and 

(d). 

The revisions read as follows: 

§ 674.61 Discharge for death or disability. 

(a) * * * The institution must 

discharge the loan on the basis of an 

original or certified copy of the death 

certificate, or an accurate and complete 

photocopy of the original or certified 

copy of the death certificate. * * * 

(b) Total and permanent disability—

(1) General. A borrower’s Defense, 

NDSL, or Perkins loan is discharged if 

the borrower becomes totally and 

permanently disabled, as defined in 

§ 674.51(s), and satisfies the additional 

eligibility requirements contained in 

this section. 

(2) Discharge application process. (i) 

To qualify for discharge of a Defense, 

NDSL, or Perkins loan based on a total 

and permanent disability, a borrower 

must submit a discharge application 

approved by the Secretary to the 

institution that holds the loan. 

(ii) The application must contain a 

certification by a physician, who is a 

doctor of medicine or osteopathy legally 

authorized to practice in a State, that the 

borrower is totally and permanently 

disabled as defined in § 674.51(s). 

(iii) The borrower must submit the 

application to the institution within 90 

days of the date the physician certifies 

the application. 

(iv) Upon receiving the borrower’s 

complete application, the institution 

must suspend collection activity on the 

loan and inform the borrower that—

(A) The institution will review the 

application and assign the loan to the 

Secretary for an eligibility 

determination if the institution 

determines that the certification 

supports the conclusion that the 

borrower is totally and permanently 

disabled, as defined in § 674.51(s); 

(B) The institution will resume 

collection on the loan if the institution 

determines that the certification does 

not support the conclusion that the 

borrower is not totally and permanently 

disabled; and 

(C) If the institution concludes that 

the certification and other evidence 

submitted by the borrower supports the 

borrower’s eligibility for a total and 

permanent disability discharge, to 

remain eligible for the final discharge, 

the borrower must, from the date the 

physician completes and certifies the 

borrower’s total and permanent 

disability on the application until the 

date the borrower receives a final 

disability discharge—

(1) Not receive annual earnings from 

employment that exceed 100 percent of 

the poverty line for a family of two, as 

determined in accordance with the 

Community Service Block Grant Act; 

(2) Not receive a new loan under the 

Perkins, FFEL, or Direct Loan programs, 

except for a FFEL or Direct 

Consolidation Loan that does not 

include any loans on which the 

borrower is seeking a discharge; and 

(3) Must ensure that the full amount 

of any Title IV loan disbursement made 

to the borrower on or after the date the 

physician completed and certified the 

application is returned to the holder 

within 120 days of the disbursement 

date. 

(v) If, after reviewing the borrower’s 

application, the institution determines 

that the application is complete and 

supports the conclusion that the 

borrower is totally and permanently 

disabled, the institution must assign the 

loan to the Secretary. 

(vi) At the time the loan is assigned 

to the Secretary, the institution must 

notify the borrower that the loan has 

been assigned to the Secretary for 

determination of eligibility for a total 

and permanent disability discharge and 

that no payments are due on the loan. 

(3) Secretary’s initial eligibility 

determination. (i) If the Secretary 

determines that the borrower is totally 

and permanently disabled as defined in 

§ 674.51(s), the Secretary notifies the 

borrower that the loan will be in a 

conditional discharge status for a period 

of up to three years, beginning on the 

date the physician certified the 

borrower’s total and permanent 

disability on the discharge application. 

The notification to the borrower 

identifies the conditions of the 

conditional discharge period specified 

in paragraph (b)(2)(iv)(C) of this section. 

(ii) If the Secretary determines that 

the certification provided by the 

borrower does not support the 

conclusion that the borrower meets the 

criteria for a total and permanent 

disability discharge in paragraph 

(c)(4)(i) of this section, the Secretary 

notifies the borrower that the 

application for a disability discharge has 

been denied, and that the loan is due 

and payable to the Secretary under the 

terms of the promissory note. 

(4) Eligibility requirements for a total 

and permanent disability discharge. (i) 

A borrower meets the eligibility criteria 

for a discharge of a loan based on a total 

and permanent disability if, from the 

date the physician certifies the 

borrower’s discharge application, 

through the end of the three-year 

conditional discharge period—

(A) The borrower’s annual earnings 

from employment do not exceed 100 

percent of the poverty line for a family 

of two, as determined in accordance 

with the Community Service Block 

Grant Act; 

(B) The borrower does not receive a 

new loan under the Perkins, FFEL or 

Direct Loan programs, except for a FFEL 

or Direct Consolidation Loan that does 

not include any loans that are in a 

conditional discharge status; and 

(C) The borrower ensures that the full 

amount of any title IV loan 

disbursement received after the date the 

physician completed and certified the 

application is returned to the holder 

within 120 days of the disbursement 

date. 

(ii) During the conditional discharge 

period, the borrower or, if applicable, 

the borrower’s representative—

(A) Is not required to make any 

payments on the loan; 

(B) Is not considered past due or in 

default on the loan, unless the loan was 

past due or in default at the time the 

conditional discharge was granted; 

(C) Must promptly notify the 

Secretary of any changes in address or 

phone number; 

(D) Must promptly notify the 

Secretary if the borrower’s annual 

earnings from employment exceed the 

amount specified in paragraph 

(b)(2)(ii)(C)(1) of this section; and 

(E) Must provide the Secretary, upon 

request, with additional documentation 

or information related to the borrower’s 

eligibility for a discharge under this 

section. 

(iii) If, at any time during or at the end 

of the three-year conditional discharge 

period, the Secretary determines that 

the borrower does not continue to meet 

the eligibility criteria for a total and 

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permanent disability discharge, the 

Secretary ends the conditional discharge 

period and resumes collection activity 

on the loan. The Secretary does not 

require the borrower to pay any interest 

that accrued on the loan from the date 

of the Secretary’s initial eligibility 

determination described in paragraph 

(b)(3) of this section through the end of 

the conditional discharge period. 

(iv) The Secretary reserves the right to 

require the 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, or at any time during the 

application process or during or at the 

end of the conditional discharge period, 

the Secretary may arrange for an 

additional review of the borrower’s 

condition by an independent physician 

at no expense to the applicant. 

(5) Payments received after the 

physician’s certification of total and 

permanent disability. (i) If, after the date 

the physician completes and certifies 

the borrower’s loan discharge 

application, the institution receives any 

payments from or on behalf of the 

borrower on or attributable to a loan that 

was assigned to the Secretary for 

determination of eligibility for a total 

and permanent disability discharge, the 

institution must forward those 

payments to the Secretary for crediting 

to the borrower’s account. 

(ii) At the same time that the 

institution forwards the payment, it 

must notify the borrower that there is no 

obligation to make payments on the loan 

while it is conditionally discharged 

prior to a final determination of 

eligibility for a total and permanent 

disability discharge, unless the 

Secretary directs the borrower 

otherwise. 

(iii) When the Secretary makes a final 

determination to discharge the loan, the 

Secretary returns any payments received 

on the loan after the date the physician 

completed and certified the borrower’s 

loan discharge application to the person 

who made the payments on the loan. 

(c) No Federal reimbursement. No 

Federal reimbursement is made to an 

institution for cancellation of loans due 

to death or disability. 

(d) Retroactive. Discharge for death 

applies retroactively to all Defense, 

NDSL, and Perkins loans. 

* * * * * 

PART 682—FEDERAL FAMILY 

EDUCATION LOAN (FFEL) PROGRAM 

■ 11. The authority citation for part 682 

continues to read as follows: 

Authority: 20 U.S.C. 1071 to 1087–2 unless 

otherwise noted. 

■ 12. Section 682.200(b) is amended by: 

■ A. Revising paragraph (5) of the 

definition of Lender. 

■ B. Adding new paragraphs (7) and (8) 

to the definition of Lender. 

■ C. Adding a definition of Schoolaffiliated organization. 

The revisions and additions read as 

follows: 

§ 682.200 Definitions. 

(b) * * * 

Lender. (1) * * * 

(5)(i) The term eligible lender does not 

include any lender that the Secretary 

determines, after notice and opportunity 

for a hearing before a designated 

Department official, has, directly or 

through an agent or contractor—

(A) Except as provided in paragraph 

(5)(ii) of this definition, offered, directly 

or indirectly, points, premiums, 

payments, or other inducements to any 

school or other party to secure 

applications for FFEL loans or to secure 

FFEL loan volume. This includes but is 

not limited to—

(1) Payments or offerings of other 

benefits, including prizes or additional 

financial aid funds, to a prospective 

borrower in exchange for applying for or 

accepting a FFEL loan from the lender; 

(2) Payments or other benefits to a 

school, any school-affiliated 

organization or to any individual in 

exchange for FFEL loan applications, 

application referrals, or a specified 

volume or dollar amount of loans made, 

or placement on a school’s list of 

recommended or suggested lenders; 

(3) Payments or other benefits 

provided to a student at a school who 

acts as the lender’s representative to 

secure FFEL loan applications from 

individual prospective borrowers; 

(4) Payments or other benefits to a 

loan solicitor or sales representative of 

a lender who visits schools to solicit 

individual prospective borrowers to 

apply for FFEL loans from the lender; 

(5) Payment to another lender or any 

other party of referral fees or processing 

fees, except those processing fees 

necessary to comply with Federal or 

State law; 

(6) Solicitation of an employee of a 

school or school-affiliated organization 

to serve on a lender’s advisory board or 

committee and/or payment of costs 

incurred on behalf of an employee of a 

school or school-affiliated organization 

to serve on a lender’s advisory board or 

committee; 

(7) Payment of conference or training 

registration, transportation, and lodging 

costs for an employee of a school or 

school-affiliated organization; 

(8) Payment of entertainment 

expenses, including expenses for private 

hospitality suites, tickets to shows or 

sporting events, meals, alcoholic 

beverages, and any lodging, rental, 

transportation, and other gratuities 

related to lender-sponsored activities for 

employees of a school or a schoolaffiliated organization; 

(9) Philanthropic activities, including 

providing scholarships, grants, 

restricted gifts, or financial 

contributions in exchange for FFEL loan 

applications or application referrals, or 

a specified volume or dollar amount of 

FFEL loans made, or placement on a 

school’s list of recommended or 

suggested lenders; and 

(10) Staffing services to a school, 

except for services provided to 

participating foreign schools at the 

direction of the Secretary, as a thirdparty servicer or otherwise on more than 

a short-term, emergency basis, and 

which is non-recurring, to assist a 

school with financial aid-related 

functions. 

(B) Conducted unsolicited mailings to 

a student or a student’s parents of FFEL 

loan application forms, except to a 

student who previously has received a 

FFEL loan from the lender or to a 

student’s parent who previously has 

received a FFEL loan from the lender; 

(C) Offered, directly or indirectly, a 

FFEL loan to a prospective borrower to 

induce the purchase of a policy of 

insurance or other product or service by 

the borrower or other person; or 

(D) Engaged in fraudulent or 

misleading advertising with respect to 

its FFEL loan activities. 

(ii) Notwithstanding paragraph (5)(i) 

of this definition, a lender, in carrying 

out its role in the FFEL program and in 

attempting to provide better service, 

may provide—

(A) Assistance to a school that is 

comparable to the kinds of assistance 

provided to a school by the Secretary 

under the Direct Loan program, as 

identified by the Secretary in a public 

announcement, such as a notice in the 

Federal Register; 

(B) Support of and participation in a 

school’s or a guaranty agency’s student 

aid and financial literacy-related 

outreach activities, excluding in-person 

school-required initial or exit 

counseling, as long as the name of the 

entity that developed and paid for any 

materials is provided to the participants 

and the lender does not promote its 

student loan or other products; 

(C) Meals, refreshments, and 

receptions that are reasonable in cost 

and scheduled in conjunction with 

training, meeting, or conference events 

if those meals, refreshments, or 

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62000 Federal Register / Vol. 72, No. 211 / Thursday, November 1, 2007 / Rules and Regulations 

receptions are open to all training, 

meeting, or conference attendees; 

(D) Toll-free telephone numbers for 

use by schools or others to obtain 

information about FFEL loans and free 

data transmission service for use by 

schools to electronically submit 

applicant loan processing information 

or student status confirmation data; 

(E) A reduced origination fee in 

accordance with § 682.202(c); 

(F) A reduced interest rate as 

provided under the Act; 

(G) Payment of Federal default fees in 

accordance with the Act; 

(H) Purchase of a loan made by 

another lender at a premium; 

(I) Other benefits to a borrower under 

a repayment incentive program that 

requires, at a minimum, one or more 

scheduled payments to receive or retain 

the benefit or under a loan forgiveness 

program for public service or other 

targeted purposes approved by the 

Secretary, provided these benefits are 

not marketed to secure loan applications 

or loan guarantees; 

(J) Items of nominal value to schools, 

school-affiliated organizations, and 

borrowers that are offered as a form of 

generalized marketing or advertising, or 

to create good will; and 

(K) Other services as identified and 

approved by the Secretary through a 

public announcement, such as a notice 

in the Federal Register. 

(iii) For the purposes of paragraph (5) 

of this definition—

(A) The term ‘‘school-affiliated 

organization’’ is defined in § 682.200. 

(B) The term ‘‘applications’’ includes 

the Free Application for Federal Student 

Aid (FAFSA), FFEL loan master 

promissory notes, and FFEL 

consolidation loan application and 

promissory notes. 

(C) The term ‘‘other benefits’’

includes, but is not limited to, 

preferential rates for or access to the 

lender’s other financial products, 

computer hardware or non-loan 

processing or non-financial aid-related 

computer software at below market 

rental or purchase cost, and printing 

and distribution of college catalogs and 

other materials at reduced or no cost. 

(D) The term ‘‘emergency basis’’ for 

the purpose of staffing services to a 

school under paragraph (i)(A)(10) of this 

section means a state- or Federallydeclared natural disaster, a Federallydeclared national disaster, and other 

localized disasters and emergencies 

identified by the Secretary. 

* * * * * 

(7) An eligible lender may not make 

or hold a loan as trustee for a school, or 

for a school-affiliated organization as 

defined in this section, unless on or 

before September 30, 2006—

(i) The eligible lender was serving as 

trustee for the school or school-affiliated 

organization under a contract entered 

into and continuing in effect as of that 

date; and 

(ii) The eligible lender held at least 

one loan in trust on behalf of the school 

or school-affiliated organization on that 

date. 

(8) As of January 1, 2007, and for 

loans first disbursed on or after that date 

under a trustee arrangement, an eligible 

lender operating as a trustee under a 

contract entered into on or before 

September 30, 2006, and which 

continues in effect with a school or a 

school-affiliated organization, must 

comply with the requirements of 

§ 682.601(a)(3), (a)(5), and (a)(7). 

* * * * * 

School-affiliated organization. A 

school-affiliated organization is any 

organization that is directly or indirectly 

related to a school and includes, but is 

not limited to, alumni organizations, 

foundations, athletic organizations, and 

social, academic, and professional 

organizations. 

* * * * * 

■ 13. Section 682.202 is amended by: 

■ A. Adding new paragraph (a)(1)(x). 

■ B. In paragraph (b)(2), adding the 

words, ‘‘and (b)(5)’’ immediately after 

the words ‘‘(b)(4)’’. 

■ C. Redesignating paragraph (b)(5) as 

paragraph (b)(6). 

■ D. Adding a new paragraph (b)(5). 

The addition reads as follows: 

§ 682.202 Permissible charges by lenders 

to borrowers. 

* * * * * 

(a) * * * 

(1) * * * 

(x) For a subsidized Stafford loan 

made to an undergraduate student for 

which the first disbursement is made on 

or after: 

(A) July 1, 2006 and before July 1, 

2008, the interest rate is 6.8 percent on 

the unpaid principal balance of the 

loan. 

(B) July 1, 2008 and before July 1, 

2009, the interest rate is 6 percent on 

the unpaid principal balance of the 

loan. 

(C) July 1, 2009 and before July 1, 

2010, the interest rate is 5.6 percent on 

the unpaid principal balance of the 

loan. 

(D) July 1, 2010 and before July 1, 

2011, the interest rate is 4.5 percent on 

the unpaid principal balance of the 

loan. 

(E) July 1, 2011 and before July 2012, 

the interest rate is 3.4 percent on the 

unpaid balance of the loan. 

* * * * * 

(b) * * * 

(5) For Consolidation loans, the 

lender may capitalize interest as 

provided in paragraphs (b)(2) and (b)(3) 

of this section, except that the lender 

may capitalize the unpaid interest for a 

period of authorized in-school 

deferment only at the expiration of the 

deferment. 

* * * * * 

■ 14. Section 682.208 is amended by: 

■ A. Revising paragraph (a). 

■ B. Adding new paragraphs (b)(3) and 

(b)(4). 

■ C. Adding a new paragraph (i). 

The revisions and addition read as 

follows: 

§ 682.208 Due diligence in servicing a 

loan. 

(a) The loan servicing process 

includes reporting to national credit 

bureaus, responding to borrower 

inquiries, establishing the terms of 

repayment, and reporting a borrower’s 

enrollment and loan status information. 

(b) * * * 

(3) Upon receipt of a valid identity 

theft report as defined in section 

603(q)(4) of the Fair Credit Reporting 

Act (15 U.S.C. 1681a) or notification 

from a credit bureau that information 

furnished by the lender is a result of an 

alleged identity theft as defined in 

§ 682.402(e)(14), an eligible lender shall 

suspend credit bureau reporting for a 

period not to exceed 120 days while the 

lender determines the enforceability of 

a loan. 

(i) If the lender determines that a loan 

does not qualify for a discharge under 

§ 682.402(e)(1)(i)(C), but is nonetheless 

unenforceable, the lender must—

(A) Notify the credit bureau of its 

determination; and 

(B) Comply with §§ 682.300(b)(2)(ix) 

and 682.302(d)(1)(viii). 

(ii) [Reserved] 

(4) If, within 3 years of the lender’s 

receipt of an identity theft report, the 

lender receives from the borrower 

evidence specified in § 682.402(e)(3)(v), 

the lender may submit a claim and 

receive interest subsidy and special 

allowance payments that would have 

accrued on the loan. 

* * * * * 

(i) A lender shall report enrollment 

and loan status information, or any Title 

IV loan-related data required by the 

Secretary, to the guaranty agency or to 

the Secretary, as applicable, by the 

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deadline date established by the 

Secretary. 

* * * * * 

■ 15. Section 682.209 is amended by 

adding new paragraph (k) to read as 

follows: 

§ 682.209 Repayment of a loan. 

* * * * * 

(k) Any lender holding a loan is 

subject to all claims and defenses that 

the borrower could assert against the 

school with respect to that loan if—

(1) The loan was made by the school 

or a school-affiliated organization; 

(2) The lender who made the loan 

provided an improper inducement, as 

described in paragraph (5)(i) of the 

definition of Lender in § 682.200(b), to 

the school or any other party in 

connection with the making of the loan; 

(3) The school refers borrowers to the 

lender; or 

(4) The school is affiliated with the 

lender by common control, contract, or 

business arrangement. 

* * * * * 

■ 16. Section 682.210 is amended by: 

■ A. In paragraph (i)(1), adding the 

words, ‘‘or a borrower’s representative’’

immediately following the words ‘‘a 

borrower’’. 

■ B. Adding new paragraph (i)(5). 

■ C. In paragraph (s), adding, 

immediately following the words ‘‘(1) 

General.’’, the paragraph designation 

‘‘(i)’’. 

■ D. Adding new paragraphs (s)(1)(ii), 

(s)(1)(iii), (s)(1)(iv), and (s)(1)(v). 

■ E. Revising paragraph (s)(6)(iii)(B). 

■ F. In paragraph (t), removing from the 

heading the words ‘‘for loans for which 

the first disbursement is made on or 

after July 1, 2001’’. 

■ G. In paragraph (t)(1), removing the 

words ‘‘first disbursed on or after July 

1, 2001’’, and removing the words ‘‘not 

to exceed 3 years’’. 

■ H. Removing paragraph (t)(5). 

■ I. Redesignating paragraphs (t)(2), 

(t)(3), and (t)(4), as paragraphs (t)(3), 

(t)(4), and (t)(5), respectively. 

■ J. Adding new paragraphs (t)(2), (t)(7), 

and (t)(8). 

■ K. Adding new paragraph (u). 

■ L. Adding a new parenthetical phrase 

after new paragraph (u). 

The additions read as follows: 

§ 682.210 Deferment. 

* * * * * 

(i) * * * 

(5) A lender that grants a military 

service deferment based on a request 

from a borrower’s representative must 

notify the borrower that the deferment 

has been granted and that the borrower 

has the option to cancel the deferment 

and continue to make payments on the 

loan. The lender may also notify the 

borrower’s representative of the 

outcome of the deferment request. 

* * * * * 

(s) * * * 

(1) * * * 

(ii) As a condition for receiving a 

deferment, except for purposes of 

paragraph (s)(2) of this section, the 

borrower must request the deferment 

and provide the lender with all 

information and documents required to 

establish eligibility for the deferment. 

(iii) After receiving a borrower’s 

written or verbal request, a lender may 

grant a deferment under paragraphs 

(s)(3) through (s)(6) of this section if the 

lender is able to confirm that the 

borrower has received a deferment on 

another FFEL loan or on a Direct Loan 

for the same reason and the same time 

period. The lender may grant the 

deferment based on information from 

the other FFEL loan holder or the 

Secretary or from an authoritative 

electronic database maintained or 

authorized by the Secretary that 

supports eligibility for the deferment for 

the same reason and the same time 

period. 

(iv) A lender may rely in good faith 

on the information it receives under 

paragraph (s)(1)(iii) of this section when 

determining a borrower’s eligibility for 

a deferment unless the lender, as of the 

date of the determination, has 

information indicating that the borrower 

does not qualify for the deferment. A 

lender must resolve any discrepant 

information before granting a deferment 

under paragraph (s)(1)(iii) of this 

section. 

(v) A lender that grants a deferment 

under paragraph (s)(1)(iii) of this section 

must notify the borrower that the 

deferment has been granted and that the 

borrower has the option to pay interest 

that accrues on an unsubsidized FFEL 

loan or to cancel the deferment and 

continue to make payments on the loan. 

* * * * * 

(6) * * * 

(iii) * * * 

(B) An amount equal to 150 percent 

of the poverty line applicable to the 

borrower’s family size, as determined in 

accordance with section 673(2) of the 

Community Service Block Grant Act. 

(t) * * * 

(2) The deferment period ends 180 

days after the demobilization date for 

the service described in paragraph 

(t)(1)(i) and (t)(1)(ii) of this section. 

* * * * * 

(7) To receive a military service 

deferment, the borrower, or the 

borrower’s representative, must request 

the deferment and provide the lender 

with all information and documents 

required to establish eligibility for the 

deferment, except that a lender may 

grant a borrower a military service 

deferment under the procedures 

specified in paragraphs (s)(1)(iii) 

through (s)(1)(v) of this section. 

(8) A lender that grants a military 

service deferment based on a request 

from a borrower’s representative must 

notify the borrower that the deferment 

has been granted and that the borrower 

has the option to cancel the deferment 

and continue to make payments on the 

loan. The lender may also notify the 

borrower’s representative of the 

outcome of the deferment request. 

(u) Military active duty student 

deferment. (1) A borrower who receives 

an FFEL Program loan is entitled to 

receive a military active duty student 

deferment for 13 months following the 

conclusion of the borrower’s active duty 

military service if—

(i) The borrower is a member of the 

National Guard or other reserve 

component of the Armed Forces of the 

United States or a member of such 

forces in retired status; and 

(ii) The borrower was enrolled in a 

program of instruction at an eligible 

institution at the time, or within six 

months prior to the time, the borrower 

was called to active duty. 

(2) As used in paragraph (u)(1) of this 

section, ‘‘Active duty’’ means active 

duty as defined in section 101(d)(1) of 

title 10, United States Code, except—

(i) Active duty includes active State 

duty for members of the National Guard; 

and 

(ii) Active duty does not include 

active duty for training or attendance at 

a service school. 

(3) If the borrower returns to enrolled 

student status during the 13-month 

deferment period, the deferment expires 

at the time the borrower returns to 

enrolled student status. 

(4) To receive a military active duty 

student deferment, the borrower must 

request the deferment and provide the 

lender with all information and 

documents required to establish 

eligibility for the deferment, except that 

a lender may grant a borrower a military 

active duty student deferment under the 

procedures specified in paragraphs 

(s)(1)(iii) through (s)(1)(v) of this 

section. (Approved by the Office of 

Management and Budget under control 

number 1845–0020) 

* * * * * 

■ 17. Section 682.211 is amended by: 

■ A. Redesignating paragraphs (f)(6), 

(f)(7), (f)(8), (f)(9), (f)(10), and (f)(11) as 

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paragraphs (f)(7), (f)(8), (f)(9), (f)(10), 

(f)(11), and (f)(12), respectively. 

■ B. Adding new paragraph (f)(6). 

The addition reads as follows: 

§ 682.211 Forbearance. 

* * * * * 

(f) * * * 

(6) Upon receipt of a valid identity 

theft report as defined in section 

603(q)(4) of the Fair Credit Reporting 

Act (15 U.S.C. 1681a) or notification 

from a credit bureau that information 

furnished by the lender is a result of an 

alleged identity theft as defined in 

§ 682.402(e)(14), for a period not to 

exceed 120 days necessary for the 

lender to determine the enforceability of 

the loan. If the lender determines that 

the loan does not qualify for discharge 

under § 682.402(e)(1)(i)(C), but is 

nonetheless unenforceable, the lender 

must comply with §§ 682.300(b)(2)(ix) 

and 682.302(d)(1)(viii). 

* * * * * 

■ 18. Section 682.212 is amended by: 

■ A. In paragraph (c), removing the 

words ‘‘the Student Loan Marketing 

Association,’’. 

■ B. In paragraph (d), removing the 

words ‘‘the Student Loan Marketing 

Association or’’. 

■ C. Adding new paragraph (h). 

■ D. Adding a parenthetical phrase after 

paragraph (h). 

The addition reads as follows: 

§ 682.212 Prohibited transactions. 

* * * * * 

(h)(1) A school may, at its option, 

make available a list of recommended or 

suggested lenders, in print or any other 

medium or form, for use by the school’s 

students or their parents, provided such 

list—

(i) Is not used to deny or otherwise 

impede a borrower’s choice of lender; 

(ii) Does not contain fewer than three 

lenders that are not affiliated with each 

other and that will make loans to 

borrowers or students attending the 

school; and 

(iii) Does not include lenders that 

have offered, or have offered in response 

to a solicitation by the school, financial 

or other benefits to the school in 

exchange for inclusion on the list or any 

promise that a certain number of loan 

applications will be sent to the lender 

by the school or its students. 

(2) A school that provides or makes 

available a list of recommended or 

suggested lenders must—

(i) Disclose to prospective borrowers, 

as part of the list, the method and 

criteria used by the school in selecting 

any lender that it recommends or 

suggests; 

(ii) Provide comparative information 

to prospective borrowers about interest 

rates and other benefits offered by the 

lenders; 

(iii) Include a prominent statement in 

any information related to its list of 

lenders, advising prospective borrowers 

that they are not required to use one of 

the school’s recommended or suggested 

lenders; 

(iv) For first-time borrowers, not 

assign, through award packaging or 

other methods, a borrower’s loan to a 

particular lender; 

(v) Not cause unnecessary 

certification delays for borrowers who 

use a lender that has not been 

recommended or suggested by the 

school; and 

(vi) Update any list of recommended 

or suggested lenders and any 

information accompanying such a list 

no less often than annually. 

(3) For the purposes of paragraph (h) 

of this section, a lender is affiliated with 

another lender if—

(i) The lenders are under the 

ownership or control of the same entity 

or individuals; 

(ii) The lenders are wholly or partly 

owned subsidiaries of the same parent 

company; or 

(iii) The directors, trustees, or general 

partners (or individuals exercising 

similar functions) of one of the lenders 

constitute a majority of the persons 

holding similar positions with the other 

lender. (Approved by the Office of 

Management and Budget under control 

number 1845–0020) 

* * * * * 

■ 19. Section 682.300 is amended by: 

■ A. In paragraph (b)(2)(vii), removing 

the word ‘‘or’’ at the end of the 

paragraph. 

■ B. In paragraph (b)(2)(viii), removing 

the punctuation ‘‘.’’ at the end of the 

paragraph and adding, in its place, ‘‘; 

or’’. 

■ C. Adding new paragraph (b)(2)(ix). 

The addition reads as follows: 

§ 682.300 Payment of interest benefits on 

Stafford and Consolidation loans. 

* * * * * 

(b) * * * 

(2) * * * 

(ix) The date on which the lender 

determines the loan is legally 

unenforceable based on the receipt of an 

identity theft report under 

§ 682.208(b)(3). 

* * * * * 

■ 20. Section 682.302 is amended by: 

■ A. In paragraph (d)(1)(vi)(B), removing 

the word ‘‘or’’ at the end of the 

paragraph. 

■ B. In paragraph (d)(1)(vii), by 

removing the punctuation ‘‘.’’ and 

adding, in its place, ‘‘; or’’. 

■ C. Adding new paragraph (d)(1)(viii). 

■ D. Redesignating paragraph (f) as 

paragraph (g). 

■ E. Adding new paragraph (f). 

The addition reads as follows: 

§ 682.302 Payment of special allowance on 

FFEL loans. 

* * * * * 

(d) * * * 

(1) * * * 

(viii) The date on which the lender 

determines the loan is legally 

unenforceable based on the receipt of an 

identity theft report under 

§ 682.208(b)(3). 

* * * * * 

(f) Special allowance rates for loans 

made on or after October 1, 2007. With 

respect to any loan for which the first 

disbursement of principal is made on or 

after October 1, 2007, the special 

allowance rate for an eligible loan 

during a 3-month period is calculated 

according to the formulas described in 

paragraphs (f)(1) and (f)(2) of this 

section. 

(1) Except as provided in paragraph 

(f)(2) of this section, the special 

allowance formula shall be computed 

by—

(i) Determining the average of the 

bond equivalent rates of the quotes of 

the 3-month commercial paper 

(financial) rates in effect for each of the 

days in such quarter as reported by the 

Federal Reserve in Publication H–15 (or 

its successor) for such 3-month period; 

(ii) Subtracting the applicable interest 

rate for that loan; 

(iii) Adding—

(A) 1.79 percent to the resulting 

percentage for a Federal Stafford loan; 

(B) 1.19 percent to the resulting 

percentage for a Federal Stafford Loan 

during the borrower’s in-school period, 

grace period and authorized period of 

deferment; 

(C) 1.79 percent to the resulting 

percentage for a Federal PLUS loan; and 

(D) 2.09 percent to the resulting 

percentage for a Federal Consolidation 

loan; and 

(iv) Dividing the resulting percentage 

by 4. 

(2) For loans held by an eligible notfor-profit holder as defined in paragraph 

(f)(3) of this section, the special 

allowance formula shall be computed 

by—

(i) Determining the average of the 

bond equivalent rates of the quotes of 

the 3-month commercial paper 

(financial) rates in effect for each of the 

days in such quarter as reported by the 

Federal Reserve in Publication H–15 (or 

its successor) for such 3-month period; 

(ii) Subtracting the applicable interest 

rate for that loan; 

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(iii) Adding—

(A) 1.94 percent to the resulting 

percentage for a Federal Stafford loan; 

(B) 1.34 percent to the resulting 

percentage for a Federal Stafford Loan 

during the borrower’s in-school period, 

grace period and authorized period of 

deferment; 

(C) 1.94 percent to the resulting 

percentage for a Federal PLUS loan; and 

(D) 2.24 percent to the resulting 

percentage for a Federal Consolidation 

loan; and 

(iv) Dividing the resulting percentage 

by 4. 

(3)(i) For purposes of this section, the 

term ‘‘eligible not-for-profit holder’’

means an eligible lender under section 

435(d) of the Act (except for a school) 

that is—

(A) A State, or a political subdivision, 

authority, agency, or other 

instrumentality thereof, including such 

entities that are eligible to issue bonds 

described in 26 CFR 1.103–1, or section 

144(b) of the Internal Revenue Code of 

1986; 

(B) An entity described in section 

150(d)(2) of the Internal Revenue Code 

of 1986 that has not made the election 

described in section 150(d)(3) of that 

Code; 

(C) An entity described in section 

501(c)(3) of the Internal Revenue Code 

of 1986; or 

(D) A trustee acting as an eligible 

lender on behalf of a State, political 

subdivision, authority, agency, 

instrumentality, or other entity 

described in subparagraph (f)(3)(i)(A), 

(B), or (C) of this section. 

(ii) An entity that otherwise qualifies 

under paragraph (f)(3) of this section 

shall not be considered an eligible notfor-profit holder unless such lender—

(A) Was, on the date of the enactment 

of the College Cost Reduction and 

Access Act, acting as an eligible lender; 

or 

(B) Is a trustee acting as an eligible 

lender on behalf of an entity described 

in paragraph (f)(3)(ii)(A) of this section. 

(iii) No political subdivision, 

authority, agency, instrumentality, or 

other entity described in paragraph 

(f)(3)(i)(A), (B), or (C) of this section 

shall be an eligible not-for-profit holder 

if the entity is owned or controlled, in 

whole or in part, by a for-profit entity. 

(iv) No State, political subdivision, 

authority, agency, instrumentality, or 

other entity described in paragraph 

(f)(3)(i)(A), (B), or (C) of this section 

shall be an eligible not-for-profit holder 

with respect to any loan, or income from 

any loan, unless the State, political 

subdivision, authority, agency, 

instrumentality, or other entity 

described in paragraph (f)(3)(i)(A), (B), 

or (C) of this section is the sole owner 

of the beneficial interest in such loan 

and the income from such loan. 

(v) A trustee described in paragraph 

(f)(3)(i)(D) of this section shall not 

receive compensation as consideration 

for acting as an eligible lender on behalf 

of an entity described in paragraph 

(f)(3)(i)(A), (B), or (C) of this section in 

excess of reasonable and customary fees. 

(vi) For purposes of this paragraph, an 

otherwise eligible not-for-profit holder 

shall not—

(A) Be deemed to be owned or 

controlled, in whole or in part, by a forprofit entity; or 

(B) Lose its status as the sole owner 

of a beneficial interest in a loan and the 

income from a loan by granting a 

security interest in, or otherwise 

pledging as collateral, such loan, or the 

income from such loan, to secure a debt 

obligation in the operation of an 

arrangement described in paragraph 

(f)(3)(i)(D) of this section. 

(4) In the case of a loan for which the 

special allowance payment is calculated 

under paragraph (f)(2) of this section 

and that is sold by the eligible not-forprofit holder holding the loan to an 

entity that is not an eligible not-forprofit holder, the special allowance 

payment for such loan shall, beginning 

on the date of the sale, no longer be 

calculated under paragraph (f)(2) and 

shall be calculated under paragraph 

(f)(1) of this section instead. 

* * * * * 

■ 21. Section 682.305 is amended by: 

■ A. Redesignating paragraph (a)(3)(ii) 

as paragraph (a)(3)(ii)(A). 

■ B. Adding new paragraph (a)(3)(ii)(B). 

The addition reads as follows: 

§ 682.305 Procedures for payment of 

interest benefits and special allowance and 

collection of origination and loan fees. 

(a) * * * 

(3) * * * 

(ii) * * * 

(B) For any FFEL loan made on or 

after October 1, 2007, a lender shall pay 

the Secretary a loan fee equal to 1.0 

percent of the principal amount of the 

loan. 

* * * * * 

■ 22. Section 682.401 is amended by: 

■ A. In paragraph (b)(2)(ii)(A), removing 

the punctuation ‘‘;’’ at the end of the 

paragraph and adding, in its place, the 

words ‘‘, as defined in 34 CFR 668.3; 

or’’. 

■ B. Revising paragraph (b)(2)(ii)(B). 

■ C. Removing paragraph (b)(2)(ii)(C). 

■ D. In paragraph (b)(20), removing the 

number ‘‘60’’ and adding, in its place, 

the number ‘‘35’’. 

■ E. Revising paragraph (e). 

The revisions read as follows: 

§ 682.401 Basic program agreement. 

* * * * * 

(b) * * * 

(2) * * * 

(ii) * * * 

(B) A period attributable to the 

academic year that is not less than the 

period specified in paragraph 

(b)(2)(ii)(A) of this section, in which the 

student earns the amount of credit in 

the student’s program of study required 

by the student’s school as the amount 

necessary for the student to advance in 

academic standing as normally 

measured on an academic year basis (for 

example, from freshman to sophomore 

or, in the case of schools using clock 

hours, completion of at least 900 clock 

hours). 

* * * * * 

(e) Prohibited activities. (1) A 

guaranty agency may not, directly or 

through an agent or contractor—

(i) Except as provided in paragraph 

(e)(2) of this section, offer directly or 

indirectly from any fund or assets 

available to the guaranty agency, any 

premium, payment, or other 

inducement to any prospective borrower 

of an FFEL loan, or to a school or 

school-affiliated organization or an 

employee of a school or school-affiliated 

organization, to secure applications for 

FFEL loans. This includes, but is not 

limited to—

(A) Payments or offerings of other 

benefits, including prizes or additional 

financial aid funds, to a prospective 

borrower in exchange for processing a 

loan using the agency’s loan guarantee; 

(B) Payments or other benefits, 

including prizes or additional financial 

aid funds under any Title IV or State or 

private program, to a school or schoolaffiliated organization based on the 

school’s or organization’s voluntary or 

coerced agreement to use the guaranty 

agency for processing loans, or to 

provide a specified volume of loans 

using the agency’s loan guarantee; 

(C) Payments or other benefits to a 

school or any school-affiliated 

organization, or to any individual in 

exchange for FFEL loan applications or 

application referrals, a specified volume 

or dollar amount of FFEL loans using 

the agency’s loan guarantee, or the 

placement of a lender that uses the 

agency’s loan guarantee on a school’s 

list of recommended or suggested 

lenders; 

(D) Payment of entertainment 

expenses, including expenses for private 

hospitality suites, tickets to shows or 

sporting events, meals, alcoholic 

beverages, and any lodging, rental, 

transportation or other gratuities related 

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62004 Federal Register / Vol. 72, No. 211 / Thursday, November 1, 2007 / Rules and Regulations 

to any activity sponsored by the 

guaranty agency or a lender 

participating in the agency’s program, 

for school employees or employees of 

school-affiliated organizations; 

(E) Philanthropic activities, including 

providing scholarships, grants, 

restricted gifts, or financial 

contributions in exchange for FFEL loan 

applications or application referrals, a 

specified volume or dollar amount of 

FFEL loans using the agency’s loan 

guarantee, or the placement of a lender 

that uses the agency’s loan guarantee on 

a school’s list of recommended or 

suggested lenders; and 

(F) Staffing services to a school, 

except for services provided to 

participating foreign schools at the 

direction of the Secretary, as a thirdparty servicer or otherwise on more than 

a short-term, emergency basis, which is 

non-recurring, to assist the institution 

with financial aid-related functions. 

(ii) Assess additional costs or deny 

benefits otherwise provided to schools 

and lenders participating in the agency’s 

program on the basis of the lender’s or 

school’s failure to agree to participate in 

the agency’s program, or to provide a 

specified volume of loan applications or 

loan volume to the agency’s program or 

to place a lender that uses the agency’s 

loan guarantee on a school’s list of 

recommended or suggested lenders. 

(iii) Offer, directly or indirectly, any 

premium, incentive payment, or other 

inducement to any lender, or any person 

acting as an agent, employee, or 

independent contractor of any lender or 

other guaranty agency to administer or 

market FFEL loans, other than 

unsubsidized Stafford loans or 

subsidized Stafford loans made under a 

guaranty agency’s lender-of-last-resort 

program, in an effort to secure the 

guaranty agency as an insurer of FFEL 

loans. Examples of prohibited 

inducements include, but are not 

limited to—

(A) Compensating lenders or their 

representatives for the purpose of 

securing loan applications for guarantee; 

(B) Performing functions normally 

performed by lenders without 

appropriate compensation; 

(C) Providing equipment or supplies 

to lenders at below market cost or 

rental; and 

(D) Offering to pay a lender that does 

not hold loans guaranteed by the agency 

a fee for each application forwarded for 

the agency’s guarantee. 

(iv) Mail or otherwise distribute 

unsolicited loan applications to 

students enrolled in a secondary school 

or a postsecondary institution, or to 

parents of those students, unless the 

potential borrower has previously 

received loans insured by the guaranty 

agency. 

(v) Conduct fraudulent or misleading 

advertising concerning loan availability. 

(2) Notwithstanding paragraph 

(e)(1)(i), (ii), and (iii) of this section, a 

guaranty agency is not prohibited from 

providing—

(i) Assistance to a school that is 

comparable to that provided by the 

Secretary to a school under the Direct 

Loan Program, as identified by the 

Secretary in a public announcement, 

such as a notice in the Federal Register; 

(ii) Default aversion activities 

approved by the Secretary under section 

422(h)(4)(B) of the Act; 

(iii) Student aid and financial-literacy 

related outreach activities, excluding inperson school-required initial and exit 

counseling, as long as the name of the 

entity that developed and paid for any 

materials is provided to participants and 

the guaranty agency does not promote 

its student loan or other products; but 

a guaranty agency may promote benefits 

provided under other Federal or State 

programs administered by the guaranty 

agency; 

(iv) Meals and refreshments that are 

reasonable in cost and provided in 

connection with guaranty agency 

provided training of program 

participants and elementary, secondary, 

and postsecondary school personnel 

and with workshops and forums 

customarily used by the agency to fulfill 

its responsibilities under the Act; 

(v) Meals, refreshments and 

receptions that are reasonable in cost 

and scheduled in conjunction with 

training, meeting, or conference events 

if those meals, refreshments, or 

receptions are open to all training, 

meeting, or conference attendees; 

(vi) Travel and lodging costs that are 

reasonable as to cost, location, and 

duration to facilitate the attendance of 

school staff in training or service facility 

tours that they would otherwise not be 

able to undertake, or to participate in 

the activities of an agency’s governing 

board, a standing official advisory 

committee, or in support of other 

official activities of the agency; 

(vii) Toll-free telephone numbers for 

use by schools or others to obtain 

information about FFEL loans and free 

data transmission services for use by 

schools to electronically submit 

applicant loan processing information 

or student status confirmation data; 

(viii) Payment of Federal default fees 

in accordance with the Act; 

(ix) Items of nominal value to schools, 

school-affiliated organizations, and 

borrowers that are offered as a form of 

generalized marketing or advertising, or 

to create good will; 

(x) Loan forgiveness programs for 

public service and other targeted 

purposes approved by the Secretary, 

provided the programs are not marketed 

to secure loan applications or loan 

guarantees; and 

(xi) Other services as identified and 

approved by the Secretary through a 

public announcement, such as a notice 

in the Federal Register. 

(3) For the purposes of this section—

(i) The term ‘‘school-affiliated 

organization’’ is defined in § 682.200. 

(ii) The term ‘‘applications’’ includes 

the FAFSA, FFEL loan master 

promissory notes, and FFEL 

consolidation loan application and 

promissory notes. 

(iii) The terms ‘‘other benefits’’

includes, but is not limited to, 

preferential rates for or access to a 

guaranty agency’s products and 

services, computer hardware or nonloan processing or non-financial aid 

related computer software at below 

market rental or purchase cost, and the 

printing and distribution of college 

catalogs and other non-counseling or 

non-student financial aid-related 

materials at reduced or not costs. 

(iv) The terms ‘‘premium,’’ ‘‘incentive 

payment,’’ and ‘‘other inducement’’ do 

not include services directly related to 

the enhancement of the administration 

of the FFEL Program that the guaranty 

agency generally provides to lenders 

that participate in its program. However, 

the terms ‘‘premium,’’ ‘‘incentive 

payment,’’ and ‘‘inducement’’ do apply 

to other activities specifically intended 

to secure a lender’s participation in the 

agency’s program. 

(v) The term ‘‘emergency basis’’ for 

the purpose of staffing services to a 

school under paragraph (e)(1)(i)(F) of 

this section means a State- or Federallydeclared natural disaster, a Federallydeclared national disaster, and other 

localized disasters and emergencies 

identified by the Secretary. 

* * * * * 

■ 23. Section 682.402 is amended by: 

■ A. Revising the first sentence in 

paragraph (b)(2). 

■ B. Revising the third sentence in 

paragraph (b)(3). 

■ C. Revising paragraph (c). 

■ D. In paragraph (e)(2)(iv), adding the 

words ‘‘or inaccurate’’ immediately after 

the word ‘‘adverse’’. 

■ E. In paragraph (e)(3)(v)(C), adding the 

words ‘‘by a perpetrator named in the 

verdict or judgment’’ at the end of the 

paragraph. 

The revisions read as follows: 

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Federal Register / Vol. 72, No. 211 / Thursday, November 1, 2007 / Rules and Regulations 62005 

§ 682.402 Death, disability, closed school, 

false certification, unpaid refunds, and 

bankruptcy payments. 

* * * * * 

(b) * * * 

(2) A discharge of a loan based on the 

death of the borrower (or student in the 

case of a PLUS loan) must be based on 

an original or certified copy of the death 

certificate, or an accurate and complete 

photocopy of the original or certified 

copy of the death certificate. * * * 

(3) * * * If the lender is not able to 

obtain an original or certified copy of 

the death certificate, or an accurate and 

complete photocopy of the original or 

certified copy of the death certificate or 

other documentation acceptable to the 

guaranty agency, under the provisions 

of paragraph (b)(2) of this section, 

during the period of suspension, the 

lender must resume collection activity 

from the point that it had been 

discontinued. * * * 

(c)(1) Total and permanent disability. 

A borrower’s loan is discharged if the 

borrower becomes totally and 

permanently disabled, as defined in 

§ 682.200(b), and satisfies the additional 

eligibility requirements contained in 

this section. 

(2) Discharge application process. 

After being notified by the borrower or 

the borrower’s representative that the 

borrower claims to be totally and 

permanently disabled, the lender 

promptly requests that the borrower or 

the borrower’s representative submit a 

discharge application to the lender, on 

a form approved by the Secretary. The 

application must contain a certification 

by a physician, who is a doctor of 

medicine or osteopathy legally 

authorized to practice in a State, that the 

borrower is totally and permanently 

disabled as defined in § 682.200(b). The 

borrower must submit the application to 

the lender within 90 days of the date the 

physician certifies the application. If the 

lender and guaranty agency approve the 

discharge claim, under the procedures 

in paragraph (c)(5) of this section, the 

guaranty agency must assign the loan to 

the Secretary. 

(3) Secretary’s initial eligibility 

determination. (i) If, after reviewing the 

borrower’s application, the Secretary 

determines that the certification 

provided by the borrower supports the 

conclusion that the borrower meets the 

criteria for a total and permanent 

disability discharge, as defined in 

§ 682.200(b), the borrower is considered 

totally and permanently disabled as of 

the date the physician completes and 

certifies the borrower’s application. 

(ii) Upon making an initial 

determination that the borrower is 

totally and permanently disabled as 

defined in § 682.200(b), the Secretary 

notifies the borrower that the loan will 

be in a conditional discharge status for 

a period of up to three years and that no 

payments are due on the loan. The 

notification to the borrower identifies 

the conditions of the conditional 

discharge specified in paragraph (c)(4)(i) 

of this section. The conditional 

discharge period begins on the date the 

physician certified on the application 

that the borrower is totally and 

permanently disabled, as defined in 

§ 682.200(b). 

(iii) If the Secretary determines that 

the certification provided by the 

borrower does not support the 

conclusion that the borrower meets the 

criteria for a total and permanent 

disability discharge in paragraph 

(c)(4)(i) of this section, the Secretary 

notifies the borrower that the 

application for a disability discharge has 

been denied, and that the loan is due 

and payable to the Secretary under the 

terms of the promissory note. 

(4) Eligibility requirements for total 

and permanent disability discharge. (i) 

A borrower meets the eligibility criteria 

for a discharge of a loan based on total 

and permanent disability if, from the 

date the physician certifies the 

borrower’s application, through the end 

of the three-year conditional discharge 

period—

(A) The borrower’s annual earnings 

from employment do not exceed 100 

percent of the poverty line for a family 

of two, as determined in accordance 

with the Community Service Block 

Grant Act; 

(B) The borrower does not receive a 

new loan under the Perkins, FFEL, or 

Direct Loan programs, except for a FFEL 

or Direct Consolidation Loan that does 

not include any loans that are in a 

conditional discharge status; and 

(C) The borrower ensures that the full 

amount of any title IV loan 

disbursement on any loan received prior 

to the date the physician completed and 

certified the application is returned to 

the holder within 120 days of the 

disbursement date. 

(ii) During the conditional discharge 

period, the borrower or, if applicable, 

the borrower’s representative—

(A) Is not required to make any 

payments on the loan; 

(B) Is not considered delinquent or in 

default on the loan, unless the loan was 

past due or in default at the time the 

conditional discharge was granted; 

(C) Must promptly notify the 

Secretary of any changes in address or 

phone number; 

(D) Must promptly notify the 

Secretary if the borrower’s annual 

earnings from employment exceed the 

amount specified in paragraph 

(c)(4)(i)(A) of this section; and 

(E) Must provide the Secretary, upon 

request, with additional documentation 

or information related to the borrower’s 

eligibility for a discharge under this 

section. 

(iii) If the borrower satisfies the 

criteria for a total and permanent 

disability discharge during and at the 

end of the conditional discharge period, 

the balance of the loan is discharged at 

the end of the conditional discharge 

period and any payments received after 

the physician completed and certified 

the borrower’s loan discharge 

application are returned to the person 

who made the payments on the loan. 

(iv) If, at any time during or at the end 

of the three-year conditional discharge 

period, the Secretary determines that 

the borrower does not continue to meet 

the eligibility criteria for a total and 

permanent disability discharge, the 

Secretary ends the conditional discharge 

period and resumes collection activity 

on the loan. The Secretary does not 

require the borrower to pay any interest 

that accrued on the loan from the date 

of the Secretary’s initial eligibility 

determination described in paragraph 

(c)(3)(i) of this section through the end 

of the conditional discharge period. 

(v) The Secretary reserves the right to 

require the 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 or at any time during the 

application process or during or at the 

end of the conditional discharge period, 

the Secretary may arrange for an 

additional review of the borrower’s 

condition by an independent physician 

at no expense to the applicant. 

(5) Lender and guaranty agency 

responsibilities. (i) After being notified 

by a borrower or a borrower’s 

representative that the borrower claims 

to be totally and permanently disabled, 

the lender must continue collection 

activities until it receives either the 

certification of total and permanent 

disability from a physician or a letter 

from a physician stating that the 

certification has been requested and that 

additional time is needed to determine 

if the borrower is totally and 

permanently disabled, as defined in 

§ 682.200(b). Except as provided in 

paragraph (c)(5)(iii) of this section, after 

receiving the physician’s certification or 

letter the lender may not attempt to 

collect from the borrower or any 

endorser. 

(ii) The lender must submit a 

disability claim to the guaranty agency 

if the borrower submits a certification 

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62006 Federal Register / Vol. 72, No. 211 / Thursday, November 1, 2007 / Rules and Regulations 

by a physician and the lender makes a 

determination that the certification 

supports the conclusion that the 

borrower meets the criteria for a total 

and permanent disability discharge, as 

specified in paragraph (c)(4)(i) of this 

section. 

(iii) If the lender determines that a 

borrower who claims to be totally and 

permanently disabled is not totally and 

permanently disabled, as defined in 

§ 682.200(b), or 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, as 

described in paragraph (c)(5)(i) of this 

section, the lender must resume 

collection and is deemed to have 

exercised forbearance of payment of 

both principal and interest from the date 

collection activity was suspended. The 

lender may capitalize, in accordance 

with § 682.202(b), any interest accrued 

and not paid during that period. 

(iv) The guaranty agency must pay a 

claim submitted by the lender if the 

guaranty agency has reviewed the 

application and determined that it is 

complete and that it supports the 

conclusion that the borrower meets the 

criteria for a total and permanent 

disability discharge, as specified in 

paragraph (c)(4)(i) of this section. 

(v) If the guaranty agency does not 

pay the disability claim, the guaranty 

agency must return the claim to the 

lender with an explanation of the basis 

for the agency’s denial of the claim. 

Upon receipt of the returned claim, the 

lender must notify the borrower that the 

application for a disability discharge has 

been denied, provide the basis for the 

denial, and inform the borrower that the 

lender will resume collection on the 

loan. The lender is deemed to have 

exercised forbearance of both principal 

and interest from the date collection 

activity was suspended until the first 

payment due date. The lender may 

capitalize, in accordance with 

§ 682.202(b), any interest accrued and 

not paid during that period. 

(vi) If the guaranty agency pays the 

disability claim, the lender must notify 

the borrower that—

(A) The loan will be assigned to the 

Secretary for determination of eligibility 

for a total and permanent disability 

discharge and that no payments are due 

on the loan; and 

(B) To remain eligible for the 

discharge from the date the physician 

completes and certifies the borrower’s 

total and permanent disability on the 

application until the borrower receives 

a final disability discharge, the 

borrower—

(1) Cannot have annual earnings from 

employment that exceed 100 percent of 

the poverty line for a family of two, as 

determined in accordance with the 

Community Services Block Grant; 

(2) Cannot receive any new Title IV 

loans except for a FFEL or Direct 

Consolidation Loan that does not 

include any loans on which the 

borrower is seeking a discharge; and 

(3) Must ensure that the full amount 

of any Title IV loan disbursement made 

to the borrower on or after the date the 

physician completed and certified the 

application is returned to the holder 

within 120 days of the disbursement 

date. 

(vii) After receiving a claim payment 

from the guaranty agency, the lender 

must forward to the guaranty agency 

any payments subsequently received 

from or on behalf of the borrower. 

(viii) The Secretary reimburses the 

guaranty agency for a disability claim 

paid to the lender after the agency pays 

the claim to the lender. 

(ix) The guaranty agency must assign 

the loan to the Secretary after the 

guaranty agency pays the disability 

claim. 

* * * * * 

■ 24. Section 682.404 is amended by: 

■ A. Adding new paragraph (g)(1)(ii)(E). 

■ B. Revising paragraph (i). 

The addition and revision read as 

follows: 

§ 682.404 Federal reinsurance agreement. 

* * * * * 

(g) * * * 

(1) * * * 

(ii) * * * 

(E) 16 percent of borrower payments 

received on or after October 1, 2007. 

* * * * * 

(i) Account Maintenance Fee. A 

guaranty agency is paid an account 

maintenance fee based on the original 

principal amount of outstanding FFEL 

Program loans insured by the agency. 

For fiscal years 1999 and 2000, the fee 

is 0.12 percent of the original principal 

amount of outstanding loans. For fiscal 

years 2000 through 2007, the fee is 0.10 

percent of the original principal amount 

of outstanding loans. After fiscal year 

2007, the fee is 0.06 percent of the 

original principal amount of 

outstanding loans. 

* * * * * 

■ 25. Section 682.406 is amended by 

adding new paragraph (d) to read as 

follows: 

§ 682.406 Conditions for claim payments 

from the Federal Fund and for reinsurance 

coverage. 

* * * * * 

(d) A guaranty agency may not make 

a claim payment from the Federal Fund 

or receive a reinsurance payment on a 

loan if the agency determines or is 

notified by the Secretary that the lender 

offered or provided an improper 

inducement as described in paragraph 

(5)(i) of the definition of lender in 

§ 682.200(b). 

* * * * * 

■ 26. Section 682.409 is amended by 

adding new paragraphs (c)(4)(vii) and 

(c)(4)(viii) to read as follows: 

§ 682.409 Mandatory assignment by 

guaranty agencies of defaulted loans to the 

Secretary. 

* * * * * 

(c)* * * 

(4)* * * 

(vii) The record of the lender’s 

disbursement of Stafford and PLUS loan 

funds to the school for delivery to the 

borrower. 

(viii) If the MPN or promissory note 

was signed electronically, the name and 

location of the entity in possession of 

the original electronic MPN or 

promissory note. 

* * * * * 

■ 27. Section 682.411 is amended by 

revising paragraph (o) as follows: 

§ 682.411 Lender due diligence in 

collecting guaranty agency loans. 

* * * * * 

(o) Preemption. The provisions of this 

section—

(1) Preempt any State law, including 

State statutes, regulations, or rules, that 

would conflict with or hinder 

satisfaction of the requirements or 

frustrate the purposes of this section; 

and 

(2) Do not preempt provisions of the 

Fair Credit Reporting Act that provide 

relief to a borrower while the lender 

determines the legal enforceability of a 

loan when the lender receives a valid 

identity theft report or notification from 

a credit bureau that information 

furnished is a result of an alleged 

identity theft as defined in 

§ 682.402(e)(14). 

* * * * * 

■ 28. Section 682.413 is amended by: 

■ A. Adding new paragraph (h). 

■ B. In the Note at the end of the 

section, removing the word ‘‘Note’’ and 

adding, in its place, the words ‘‘Note to 

Section 682.413’’. 

The addition reads as follows: 

§ 682.413 Remedial actions. 

* * * * * 

(h) In any action to require repayment 

of funds or to withhold funds from a 

guaranty agency, or to limit, suspend, or 

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terminate a guaranty agency based on a 

violation of § 682.401(e), if the Secretary 

finds that the guaranty agency provided 

or offered the payments or activities 

listed in § 682.401(e)(1), the Secretary 

applies a rebuttable presumption that 

the payments or activities were offered 

or provided to secure applications for 

FFEL loans or to secure FFEL loan 

volume. To reverse the presumption, the 

guaranty agency must present evidence 

that the activities or payments were 

provided for a reason unrelated to 

securing applications for FFEL loans or 

securing FFEL loan volume. 

* * * * * 

■ 29. Section 682.414 is amended by: 

■ A. Adding new paragraph (a)(5)(iv). 

■ B. Adding new paragraph (a)(6). 

■ C. Revising paragraph (b)(4). 

The additions and revisions read as 

follows: 

§ 682.414 Records, reports, and inspection 

requirements for guaranty agency 

programs. 

(a)* * * 

(5)* * * 

(iv) If a lender made a loan based on 

an electronically signed MPN, the 

holder of the original electronically 

signed MPN must retain that original 

MPN for at least 3 years after all the 

loans made on the MPN have been 

satisfied. 

(6)(i) Upon the Secretary’s request 

with respect to a particular loan or loans 

assigned to the Secretary and evidenced 

by an electronically signed promissory 

note, the guaranty agency and the lender 

that created the original electronically 

signed promissory note must cooperate 

with the Secretary in all activities 

necessary to enforce the loan or loans. 

The guaranty agency or lender must 

provide—

(A) An affidavit or certification 

regarding the creation and maintenance 

of the electronic records of the loan or 

loans in a form appropriate to ensure 

admissibility of the loan records in a 

legal proceeding. This affidavit or 

certification may be executed in a single 

record for multiple loans provided that 

this record is reliably associated with 

the specific loans to which it pertains; 

and 

(B) Testimony by an authorized 

official or employee of the guaranty 

agency or lender, if necessary to ensure 

admission of the electronic records of 

the loan or loans in the litigation or 

legal proceeding to enforce the loan or 

loans. 

(ii) The affidavit or certification 

described in paragraph (a)(6)(i)(A) of 

this section must include, if requested 

by the Secretary—

(A) A description of the steps 

followed by a borrower to execute the 

promissory note (such as a flow chart); 

(B) A copy of each screen as it would 

have appeared to the borrower of the 

loan or loans the Secretary is enforcing 

when the borrower signed the note 

electronically; 

(C) A description of the field edits and 

other security measures used to ensure 

integrity of the data submitted to the 

originator electronically; 

(D) A description of how the executed 

promissory note has been preserved to 

ensure that is has not been altered after 

it was executed; 

(E) Documentation supporting the 

lender’s authentication and electronic 

signature process; and 

(F) All other documentary and 

technical evidence requested by the 

Secretary to support the validity or the 

authenticity of the electronically signed 

promissory note. 

(iii) The Secretary may request a 

record, affidavit, certification or 

evidence under paragraph (a)(6) of this 

section as needed to resolve any factual 

dispute involving a loan that has been 

assigned to the Secretary including, but 

not limited to, a factual dispute raised 

in connection with litigation or any 

other legal proceeding, or as needed in 

connection with loans assigned to the 

Secretary that are included in a Title IV 

program audit sample, or for other 

similar purposes. The guaranty agency 

must respond to any request from the 

Secretary within 10 business days. 

(iv) As long as any loan made to a 

borrower under a MPN created by the 

lender is not satisfied, the holder of the 

original electronically signed 

promissory note is responsible for 

ensuring that all parties entitled to 

access to the electronic loan record, 

including the guaranty agency and the 

Secretary, have full and complete access 

to the electronic record. 

(b) * * * 

(4) A report to the Secretary of the 

borrower’s enrollment and loan status 

information, or any Title IV loan-related 

data required by the Secretary, by the 

deadline date established by the 

Secretary. 

* * * * * 

§ 682.415 [Removed and Reserved] 

■ 30. Section 682.415 is removed and 

reserved. 

■ 31. Section 682.602 is added to read 

as follows: 

§ 682.602 Rules for a school or schoolaffiliated organization that makes or 

originates loans through an eligible lender 

trustee. 

(a) A school or school-affiliated 

organization may not contract with an 

eligible lender to serve as trustee for the 

school or school-affiliated organization 

unless—

(1) The school or school-affiliated 

organization originated and continues or 

renews a contract made on or before 

September 30, 2006 with the eligible 

lender; and 

(2) The eligible lender held at least 

one loan in trust on behalf of the school 

or school-affiliated organization on 

September 30, 2006. 

(b) As of January 1, 2007, and for 

loans first disbursed on or after that date 

under a lender trustee arrangement that 

continues in effect after September 30, 

2006—

(1) A school in a trustee arrangement 

or affiliated with an organization 

involved in a trustee arrangement to 

originate loans must comply with the 

requirements of § 682.601(a), except for 

paragraphs (a)(4), (a)(7), and (a)(9) of 

that section; and 

(2) A school-affiliated organization 

involved in a trustee arrangement to 

make loans must comply with the 

requirements of § 682.601(a) except for 

paragraphs (a)(1), (a)(2), (a)(3), (a)(4), 

(a)(6), (a)(7), and (a)(9) of that section. 

(Approved by the Office of Management and 

Budget under control number 1845–0020) 

(Authority: 20 U.S.C. 1082, 1085) 

■ 32. Section 682.603 is amended by: 

■ A. In paragraph (a), at the end of the 

last sentence, removing the words ‘‘on 

the application by the student’’ and 

adding, in their place, the words ‘‘by the 

borrower and, in the case of a parent 

borrower of a PLUS loan, the student 

and the parent borrower’’. 

■ B. In paragraph (b), removing the 

words ‘‘making application for the 

loan’’. 

■ C. Redesignating paragraphs (d), (e), 

(f), (g), (h), and (i) as paragraphs (e), (f), 

(g), (h), (i), and (j), respectively. 

■ D. Adding a new paragraph (d). 

■ E. In the introductory language in 

newly redesignated paragraph (e), 

removing the words ‘‘application, or 

combination of loan applications,’’ and 

adding, in their place, the words ‘‘, or 

a combination of loans,’’. 

■ F. In newly redesignated paragraph 

(e)(2), adding the words ‘‘for the period 

of enrollment’’ after the word 

‘‘attendance’’. 

■ G. In newly redesignated paragraph 

(e)(2)(ii), adding the word ‘‘Subsidized’’

immediately before the word ‘‘Stafford’’

and removing the words ‘‘that is eligible 

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for interest benefits’’ immediately after 

the word ‘‘loan’’. 

■ H. Revising newly redesignated 

paragraph (f). 

■ I. In newly redesignated paragraph 

(g)(2)(i), removing the words ‘‘,not to 

exceed 12 months,’’. 

The addition and revision read as 

follows: 

§ 682.603 Certification by a participating 

school in connection with a loan 

application. 

* * * * * 

(d) Before certifying a PLUS loan 

application for a graduate or 

professional student borrower, the 

school must determine the borrower’s 

eligibility for a Stafford loan. If the 

borrower is eligible for a Stafford loan 

but has not requested the maximum 

Stafford loan amount for which the 

borrower is eligible, the school must—

(1) Notify the graduate or professional 

student borrower of the maximum 

Stafford loan amount that he or she is 

eligible to receive and provide the 

borrower with a comparison of—

(i) The maximum interest rate for a 

Stafford loan and the maximum interest 

rate for a PLUS loan; 

(ii) Periods when interest accrues on 

a Stafford loan and periods when 

interest accrues on a PLUS loan; and 

(iii) The point at which a Stafford 

loan enters repayment and the point at 

which a PLUS loan enters repayment; 

and 

(2) Give the graduate or professional 

student borrower the opportunity to 

request the maximum Stafford loan 

amount for which the borrower is 

eligible. 

* * * * * 

(f) In certifying loans, a school—

(1) May not refuse to certify, or delay 

certification, of a Stafford or PLUS loan 

based on the borrower’s selection of a 

particular lender or guaranty agency; 

(2) May not, for first-time borrowers, 

assign through award packaging or other 

methods, a borrower’s loan to a 

particular lender; 

(3) May refuse to certify a Stafford or 

PLUS loan or may reduce the borrower’s 

determination of need for the loan if the 

reason for that action is documented 

and provided to the borrower in writing, 

provided that—

(i) The determination is made on a 

case-by-case basis; and 

(ii) The documentation supporting the 

determination is retained in the 

student’s file; and 

(4) May not, under paragraph (f)(1), 

(2), and (3) of this section, engage in any 

pattern or practice that results in a 

denial of a borrower’s access to FFEL 

loans because of the borrower’s race, 

sex, color, religion, national origin, age, 

handicapped status, income, or 

selection of a particular lender or 

guaranty agency. 

* * * * * 

■ 33. Section 682.604 is amended by: 

■ A. Revising paragraph (f)(1). 

■ B. Redesignating paragraphs (f)(2), 

(f)(3), and (f)(4) as paragraphs (f)(5), 

(f)(6), and (f)(7), respectively. 

■ C. Adding new paragraphs (f)(2), 

(f)(3), and (f)(4). 

■ D. In newly redesignated paragraph 

(f)(5), removing the words ‘‘The initial 

counseling must’’ and adding, in their 

place, the words ‘‘Initial counseling for 

Stafford Loan borrowers must’’. 

■ E. In newly redesignated paragraph 

(f)(5)(iv), removing the words, ‘‘of a 

Stafford loan’’. 

■ F. In newly redesignated paragraph 

(f)(5)(v), adding the words ‘‘,or student 

borrowers with Stafford and PLUS 

loans, depending on the types of loans 

the borrower has obtained,’’

immediately after the words ‘‘Stafford 

loan borrowers’’. 

■ G. In paragraph (g)(2)(i), removing the 

words ‘‘Stafford or SLS loans’’ and 

adding, in their place, ‘‘Stafford loans, 

or student borrowers who have obtained 

Stafford and PLUS loans, depending on 

the types of loans the student borrower 

has obtained,’’. 

The revision and additions read as 

follows: 

§ 682.604 Processing the borrower’s loan 

proceeds and counseling borrowers. 

* * * * * 

(f) Initial counseling. (1) A school 

must ensure that initial counseling is 

conducted with each Stafford loan 

borrower prior to its release of the first 

disbursement, unless the student 

borrower has received a prior Federal 

Stafford, Federal SLS, or Direct 

subsidized or unsubsidized loan. The 

initial counseling must—

(i) Explain the use of a Master 

Promissory Note; 

(ii) Emphasize to the student borrower 

the seriousness and importance of the 

repayment obligation the student 

borrower is assuming; 

(iii) Describe the likely consequences 

of default, including adverse credit 

reports, Federal offset, and litigation; 

(iv) In the case of a student borrower 

(other than a borrower of a loan made 

or originated by the school), emphasize 

that the student borrower is obligated to 

repay the full amount of the loan even 

if the student borrower does not 

complete the program, is unable to 

obtain employment upon completion of 

the program, or is otherwise dissatisfied 

with or does not receive the educational 

or other services that the student 

borrower purchased from the school; 

and 

(v) Inform the student borrower of 

sample monthly repayment amounts 

based on a range of student levels of 

indebtedness or on the average 

indebtedness of Stafford loan borrowers, 

or student borrowers with Stafford and 

PLUS loans, depending on the types of 

loans the borrower has obtained at the 

same school or in the same program of 

study at the same school. 

(2) A school must ensure that initial 

counseling is conducted with each 

graduate or professional student PLUS 

loan borrower prior to its release of the 

first disbursement, unless the student 

has received a prior Federal PLUS loan 

or Direct PLUS loan. The initial 

counseling must—

(i) Inform the student borrower of 

sample monthly repayment amounts 

based on a range of student levels of 

indebtedness or on the average 

indebtedness of graduate or professional 

student PLUS loan borrowers, or 

student borrowers with Stafford and 

PLUS loans, depending on the types of 

loans the borrower has obtained, at the 

same school or in the same program of 

study at the same school; 

(ii) For a graduate or professional 

student who has received a prior 

Federal Stafford, or Direct subsidized or 

unsubsidized loan, provide the 

information specified in 

§ 682.603(d)(1)(i) through 

§ 682.603(d)(1)(iii); and 

(iii) For a graduate or professional 

student who has not received a prior 

Federal Stafford, or Direct subsidized or 

unsubsidized loan, provide the 

information specified in paragraph 

(f)(1)(i) through (f)(1)(iv) of this section. 

(3) Initial counseling must be 

conducted either in person, by 

audiovisual presentation, or by 

interactive electronic means. If initial 

counseling is conducted through 

interactive electronic means, the school 

must take reasonable steps to ensure 

that each student borrower receives the 

counseling materials, and participates in 

and completes the initial counseling. 

(4) A school must ensure that an 

individual with expertise in the title IV 

programs is reasonably available shortly 

after the counseling to answer the 

student borrower’s questions regarding 

those programs. As an alternative, prior 

to releasing the proceeds of a loan in the 

case of a student borrower enrolled in 

a correspondence program or a student 

borrower enrolled in a study-abroad 

program that the home institution 

approves for credit, the counseling may 

be provided through written materials. 

(5) A school must maintain 

documentation substantiating the 

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school’s compliance with this section 

for each student borrower. 

* * * * * 

■ 34. Section 682.705 is amended by 

adding new paragraph (c) to read as 

follows: 

§ 682.705 Suspension proceedings. 

* * * * * 

(c) In any action to suspend a lender 

based on a violation of the prohibitions 

in section 435(d)(5) of the Act, if the 

Secretary, the designated Department 

official, or hearing official finds that the 

lender provided or offered the payments 

or activities listed in paragraph (5)(i) of 

the definition of lender in § 682.200(b), 

the Secretary or the official applies a 

rebuttable presumption that the 

payments or activities were offered or 

provided to secure applications for 

FFEL loans or to secure FFEL loan 

volume. To reverse the presumption, the 

lender must present evidence that the 

activities or payments were provided for 

a reason unrelated to securing 

applications for FFEL loans or securing 

FFEL loan volume. 

* * * * * 

■ 35. Section 682.706 is amended by 

adding new paragraph (d) to read as 

follows: 

§ 682.706 Limitation or termination 

proceedings. 

* * * * * 

(d) In any action to limit or terminate 

a lender’s eligibility based on a violation 

of the prohibitions in section 435(d)(5) 

of the Act, if the Secretary, the 

designated Department official or 

hearing official finds that the lender 

provided or offered the payments or 

activities described in paragraph (5)(i) of 

the definition of lender in § 682.200(b), 

the Secretary or the official applies a 

rebuttable presumption that the 

payments or activities were offered or 

provided to secure applications for 

FFEL loans. To reverse the presumption, 

the lender must present evidence that 

the activities or payments were 

provided for a reason unrelated to 

securing applications for FFEL loans or 

securing FFEL loan volume. 

* * * * * 

PART 685—WILLIAM D. FORD 

FEDERAL DIRECT LOAN PROGRAM 

■ 36. The authority citation for part 685 

continues to read as follows: 

Authority: 20 U.S.C. 1087a et seq., unless 

otherwise noted. 

■ 37. Section 685.202 is amended by 

adding new paragraph (a)(1)(v) to read 

as follows: 

§ 685.202 Charges for which Direct Loan 

Program borrowers are responsible. 

(a) * * * 

(1) * * * 

(v) For a subsidized Stafford loan 

made to an undergraduate student for 

which the first disbursement is made on 

or after: 

(A) July 1, 2006 and before July 1, 

2008, the interest rate is 6.8 percent on 

the unpaid principal balance of the 

loan. 

(B) July 1, 2008 and before July 1, 

2009, the interest rate is 6 percent on 

the unpaid principal balance of the 

loan. 

(C) July 1, 2009 and before July 1, 

2010, the interest rate is 5.6 percent on 

the unpaid principal balance of the 

loan. 

(D) July 1, 2010 and before July 1, 

2011, the interest rate is 4.5 percent on 

the unpaid principal balance of the 

loan. 

(E) July 1, 2011 and before July 2012, 

the interest rate is 3.4 percent on the 

unpaid balance of the loan. 

* * * * * 

■ 38. Section 685.204 is amended by: 

■ A. In paragraph (b), removing the 

parenthetical ‘‘(f)’’, and adding in its 

place, the parenthetical ‘‘(g)’’. 

■ B. In paragraph (b)(1)(iii)(A), 

removing the words ‘‘(b)(1)(i)’’ and 

adding, in their place, the words 

‘‘(b)(1)(i)(A)’’. 

■ C. In paragraph (d)(1), removing the 

word ‘‘the’’ and adding, in its place, the 

word ‘‘The’’. 

■ D. In paragraph (d)(2), removing the 

word ‘‘the’’ and adding, in its place, the 

word ‘‘The’’. 

■ E. In paragraph (e)(1), removing the 

words ‘‘first disbursed on or after July 

1, 2001’’ and removing the words ‘‘not 

to exceed 3 years’’. 

■ F. Removing paragraph (e)(5). 

■ G. Redesignating paragraphs (e)(2), 

(e)(3), and (e)(4), as paragraphs (e)(3), 

(e)(4), and (e)(5), respectively. 

■ H. Adding a new paragraph (e)(2). 

■ I. Redesignating paragraph (f) as 

paragraph (g). 

■ J. Adding new paragraph (f). 

■ K. Adding new paragraph (h). 

The additions read as follows: 

§ 685.204 Deferments. 

* * * * * 

(e) * * * 

(2) The deferment period ends 180 

days after the demobilization date for 

the service described in paragraphs 

(e)(1)(i) and (e)(1)(ii) of this section. 

* * * * * 

(f)(1) A borrower who receives a 

Direct Loan Program loan is entitled to 

receive a military active duty student 

deferment for 13 months following the 

conclusion of the borrower’s active duty 

military service if—

(i) The borrower is a member of the 

National Guard or other reserve 

component of the Armed Forces of the 

United States or a member of such 

forces in retired status; and 

(ii) The borrower was enrolled in a 

program of instruction at an eligible 

institution at the time, or within six 

months prior to the time, the borrower 

was called to active duty. 

(2) As used in paragraph (f)(1) of this 

section, ‘‘Active duty’’ means active 

duty as defined in section 101(d)(1) of 

title 10, United States Code, except—

(i) Active duty includes active State 

duty for members of the National Guard; 

and 

(ii) Active duty does not include 

active duty for training or attendance at 

a service school. 

(3) If the borrower returns to enrolled 

student status during the 13-month 

deferment period, the deferment expires 

at the time the borrower returns to 

enrolled student status. 

* * * * * 

(h)(1) To receive a deferment, except 

as provided under paragraph (b)(1)(i)(A) 

of this section, the borrower must 

request the deferment and provide the 

Secretary with all information and 

documents required to establish 

eligibility for the deferment. In the case 

of a deferment granted under paragraph 

(e)(1) of this section, a borrower’s 

representative may request the 

deferment and provide the required 

information and documents on behalf of 

the borrower. 

(2) After receiving a borrower’s 

written or verbal request, the Secretary 

may grant a deferment under paragraphs 

(b)(1)(i)(B), (b)(1)(i)(C), (b)(2)(i), (b)(3)(i), 

(e)(1), and (f)(1) of this section if the 

Secretary confirms that the borrower has 

received a deferment on a Perkins or 

FFEL Loan for the same reason and the 

same time period. 

(3) The Secretary relies in good faith 

on the information obtained under 

paragraph (h)(2) of this section when 

determining a borrower’s eligibility for 

a deferment, unless the Secretary, as of 

the date of the determination, has 

information indicating that the borrower 

does not qualify for the deferment. The 

Secretary resolves any discrepant 

information before granting a deferment 

under paragraph (h)(2) of this section. 

(4) If the Secretary grants a deferment 

under paragraph (h)(2) of this section, 

the Secretary notifies the borrower that 

the deferment has been granted and that 

the borrower has the option to cancel 

the deferment and continue to make 

payments on the loan. 

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(5) If the Secretary grants a military 

service deferment based on a request 

from a borrower’s representative, the 

Secretary notifies the borrower that the 

deferment has been granted and that the 

borrower has the option to cancel the 

deferment and continue to make 

payments on the loan. The Secretary 

may also notify the borrower’s 

representative of the outcome of the 

deferment request. 

* * * * * 

■ 39. Section 685.212 is amended by 

revising paragraph (a)(1) and (2) to read 

as follows: 

§ 685.212 Discharge of a loan obligation. 

(a) Death. (1) If a borrower (or a 

student on whose behalf a parent 

borrowed a Direct PLUS Loan) dies, the 

Secretary discharges the obligation of 

the borrower and any endorser to make 

any further payments on the loan based 

on an original or certified copy of the 

borrower’s (or student’s in the case of a 

Direct PLUS loan obtained by a parent 

borrower) death certificate, or an 

accurate and complete photocopy of the 

original or certified copy of the 

borrower’s (or student’s in the case of a 

Direct PLUS loan obtained by a parent 

borrower) death certificate. 

(2) If an original or certified copy of 

the death certificate or an accurate and 

complete photocopy of the original or 

certified copy of the death certificate is 

not available, the Secretary discharges 

the loan only if other reliable 

documentation establishes, to the 

Secretary’s satisfaction, that the 

borrower (or student) has died. The 

Secretary discharges a loan based on 

documentation other than an original or 

certified copy of the death certificate, or 

an accurate and complete photocopy of 

the original or certified copy of the 

death certificate only under exceptional 

circumstances and on a case-by-case 

basis. 

* * * * * 

■ 40. Section 685.213 is revised to read 

as follows: 

§ 685.213 Total and permanent disability. 

(a) General. A borrower’s Direct Loan 

is discharged if the borrower becomes 

totally and permanently disabled, as 

defined in § 682.200(b), and satisfies the 

additional eligibility requirements 

contained in this section. 

(b) Discharge application process. (1) 

To qualify for a discharge of a Direct 

Loan based on a total and permanent 

disability, a borrower must submit a 

discharge application to the Secretary 

on a form approved by the Secretary. 

The application must contain a 

certification by a physician, who is a 

doctor of medicine or osteopathy legally 

authorized to practice in a State, that the 

borrower is totally and permanently 

disabled as defined in § 682.200(b). The 

borrower must submit the application to 

the Secretary within 90 days of the date 

the physician certifies the application. 

(2) Upon receipt of the borrower’s 

application, the Secretary notifies the 

borrower that—

(i) No payments are due on the loan; 

and 

(ii) The borrower, in order to remain 

eligible for the discharge from the date 

the physician completes and certifies 

the borrower’s total and permanent 

disability on the application until the 

date the borrower receives a final 

disability discharge—

(A) Not receive annual earnings from 

employment that exceed 100 percent of 

the poverty line for a family of two, as 

determined in accordance with the 

Community Service Block Grant Act; 

(B) Not receive a new loan under the 

Perkins, FFEL, or Direct Loan programs, 

except for a FFEL or Direct 

Consolidation Loan that does not 

include any loans on which the 

borrower is seeking a discharge; and 

(C) Must ensure that the full amount 

of any Title IV loan disbursement on 

any loan received prior to the date the 

physician completed and certified the 

application is returned to the holder 

within 120 days of the disbursement 

date. 

(c) Initial determination of eligibility. 

(1) If, after reviewing the borrower’s 

application, the Secretary determines 

that the certification provided by the 

borrower supports the conclusion that 

the borrower meets the criteria for a 

total and permanent disability 

discharge, as defined in § 682.200(b), 

the borrower is considered totally and 

permanently disabled as of the date the 

physician completes and certifies the 

borrower’s application. 

(2) Upon making an initial 

determination that the borrower is 

totally and permanently disabled, as 

defined in § 682.200(b), the Secretary 

notifies the borrower that the loan will 

be in a conditional discharge status for 

a period of up to three years and that no 

payments are due on the loan. The 

notification to the borrower identifies 

the conditions of the conditional 

discharge period specified in paragraph 

(d)(1) of this section. The conditional 

discharge period begins on the date the 

physician certifies on the application 

that the borrower is totally and 

permanently disabled, as defined in 

§ 682.200(b). 

(3) If the Secretary determines that the 

certification provided by the borrower 

does not support the conclusion that the 

borrower meets the criteria for a total 

and permanent disability discharge in 

paragraph (d)(1) of this section, the 

Secretary notifies the borrower that the 

application for a disability discharge has 

been denied, and that the loan is due 

and payable to the Secretary under the 

terms of the promissory note. 

(d) Eligibility requirements for a total 

and permanent disability discharge. (1) 

A borrower meets the eligibility 

requirements for a discharge of a loan 

based on total and permanent disability 

if, from the date the physician certified 

the borrower’s discharge application, 

through the end of the three-year 

conditional discharge period—

(i) The borrower’s annual earnings 

from employment do not exceed 100 

percent of the poverty line for a family 

of two, as determined in accordance 

with the Community Service Block 

Grant Act; 

(ii) The borrower does not receive a 

new loan under the Perkins, FFEL or 

Direct Loan programs, except for a FFEL 

or Direct Consolidation Loan that does 

not include any loans that are in a 

conditional discharge status; and 

(iii) The borrower ensures that the full 

amount of any Title IV loan 

disbursement on any loan received prior 

to the date the physician completed and 

certified the application is returned to 

the holder within 120 days of the 

disbursement date. 

(2) During the conditional discharge 

period, the borrower or, if applicable, 

the borrower’s representative—

(i) Is not required to make any 

payments on the loan; 

(ii) Is not considered delinquent or in 

default on the loan, unless the loan was 

past due or in default at the time the 

conditional discharge was granted; 

(iii) Must promptly notify the 

Secretary of any changes in address or 

phone number; 

(iv) Must promptly notify the 

Secretary if the borrower’s annual 

earnings from employment exceed the 

amount specified in paragraph (d)(1)(i) 

of this section; and 

(v) Must provide the Secretary, upon 

request, with additional documentation 

or information related to the borrower’s 

eligibility for a discharge under this 

section. 

(3) If the borrower satisfies the criteria 

for a total and permanent disability 

discharge during and at the end of the 

three-year conditional discharge period, 

the Secretary—

(i) Discharges the obligation of the 

borrower and any endorser to make any 

further payments on the loan at the end 

of that period; and 

(ii) Returns any payments received 

after the date the physician completed 

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Federal Register / Vol. 72, No. 211 / Thursday, November 1, 2007 / Rules and Regulations 62011 

and certified the borrower’s loan 

discharge application to the person who 

made the payments on the loan. 

(4) If, at any time during or at the end 

of the three-year conditional discharge 

period, the Secretary determines that 

the borrower does not continue to meet 

the eligibility criteria for a total and 

permanent disability discharge, the 

Secretary ends the conditional discharge 

period and resumes collection activity 

on the loan. The Secretary does not 

require the borrower to pay any interest 

that accrued on the loan from the date 

of the Secretary’s initial eligibility 

determination described in paragraph 

(c)(2) of this section through the end of 

the conditional discharge period. 

(5) The Secretary reserves the right to 

require the 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 or at any time during the 

application process or during or at the 

end of the conditional discharge period, 

the Secretary may arrange for an 

additional review of the borrower’s 

condition by an independent physician 

at no expense to the applicant. 

(Approved by the Office of Management 

and Budget under control number 1845–

0021) 

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

* * * * * 

■ 41. Section 685.301 is amended by: 

■ A. In paragraph (a)(1), removing the 

words ‘‘in the application by the 

student’’ and adding, in their place, the 

words, ‘‘by the borrower and, in the case 

of a parent PLUS loan borrower, the 

student and the parent borrower.’’

■ B. Redesignating paragraphs (a)(3), 

(a)(4), (a)(5), (a)(6), (a)(7), (a)(8), and 

(a)(9) as (a)(4), (a)(5), (a)(6), (a)(7), (a)(8), 

(a)(9), and (a)(10), respectively. 

■ C. Adding new paragraph (a)(3). 

■ D. Revising newly redesignated 

paragraph (a)(10)(ii)(A). 

The addition and revisions read as 

follows: 

§ 685.301 Determining eligibility and loan 

amount. 

(a) * * * 

(3) Before originating a Direct PLUS 

Loan for a graduate or professional 

student borrower, the school must 

determine the borrower’s eligibility for 

a Direct Subsidized and a Direct 

Unsubsidized Loan. If the borrower is 

eligible for a Direct Subsidized or Direct 

Unsubsidized Loan, but has not 

requested the maximum Direct 

Subsidized or Direct Unsubsidized Loan 

amount for which the borrower is 

eligible, the school must—

(i) Notify the graduate or professional 

student borrower of the maximum 

Direct Subsidized or Direct 

Unsubsidized Loan amount that he or 

she is eligible to receive and provide the 

borrower with a comparison of—

(A) The maximum interest rate for a 

Direct Subsidized Loan and a Direct 

Unsubsidized Loan and the maximum 

interest rate for a Direct PLUS Loan; 

(B) Periods when interest accrues on 

a Direct Subsidized Loan and a Direct 

Unsubsidized Loan, and periods when 

interest accrues on a Direct PLUS Loan; 

and 

(C) The point at which a Direct 

Subsidized Loan and a Direct 

Unsubsidized Loan enters repayment, 

and the point at which a Direct PLUS 

Loan enters repayment; and 

(ii) Give the graduate or professional 

student borrower the opportunity to 

request the maximum Direct Subsidized 

or Direct Unsubsidized Loan amount for 

which the borrower is eligible. 

* * * * * 

(10) * * * 

(ii) * * * 

(A) Generally an academic year, as 

defined by the school in accordance 

with 34 CFR 668.3, except that the 

school may use a longer period of time 

corresponding to the period to which 

the school applies the annual loan 

limits under § 685.203; or 

* * * * * 

■ 42. Section 685.304 is amended by: 

■ A. In paragraph (a)(1) removing the 

words ‘‘(a)(4)’’ and adding, in their 

place, the words ‘‘(a)(5)’’. 

■ B. Redesignating paragraphs (a)(2), 

(a)(3), (a)(4), (a)(5), and (a)(6) as 

paragraphs (a)(3), (a)(4), (a)(5), (a)(6), 

and (a)(7), respectively. 

■ C. Adding a new paragraph (a)(2). 

■ D. In newly redesignated paragraph 

(a)(4) removing the words ‘‘The initial 

counseling must’’ and adding, in their 

place, the words ‘‘Initial counseling for 

Direct Subsidized Loan and Direct 

Unsubsidized Loan borrowers must’’. 

■ E. In newly redesignated paragraph 

(a)(4)(iv) removing the words ‘‘Direct 

Unsubsidized Loan borrowers’’ and 

adding, in their place, the words ‘‘Direct 

Unsubsidized Loan borrowers, or 

student borrowers with Direct 

Subsidized, Direct Unsubsidized, and 

Direct PLUS Loans, depending on the 

types of loans the borrower has 

obtained,’’. 

■ F. In newly redesignated paragraph 

(a)(5), removing the words ‘‘(a)(1)–(3)’’

and adding, in their place, the words 

‘‘(a)(1)–(4)’’. 

■ G. In newly redesignated paragraph 

(a)(5)(i), removing the words ‘‘(a)(1)’’

and adding, in their place, the words 

‘‘(a)(1) or (a)(2)’’, and removing the 

words ‘‘(a)(3)’’ and adding in their place 

the words ‘‘(a)(4)’’. 

■ H. In paragraph (b)(4)(i), removing the 

words ‘‘Direct Subsidized Loan and 

Direct Unsubsidized Loan borrowers’’

and adding, in their place, the words 

‘‘student borrowers who have obtained 

Direct Subsidized Loans and Direct 

Unsubsidized Loans, or student 

borrowers who have obtained Direct 

Subsidized, Direct Unsubsidized, and 

Direct PLUS Loans, depending on the 

types of loans the student borrower has 

obtained, for attendance’’. 

The addition reads as follows: 

§ 685.304 Counseling borrowers. 

(a) * * * 

(2) Except as provided in paragraph 

(a)(5) of this section, a school must 

ensure that initial counseling is 

conducted with each graduate or 

professional student Direct PLUS Loan 

borrower prior to making the first 

disbursement of the loan unless the 

student borrower has received a prior 

Direct PLUS Loan or Federal PLUS 

Loan. The initial counseling must—

(i) Inform the student borrower of 

sample monthly repayment amounts 

based on a range of student levels or 

indebtedness or on the average 

indebtedness of graduate or professional 

student PLUS loan borrowers, or 

student borrowers with Direct PLUS 

Loans and Direct Subsidized Loans or 

Direct Unsubsidized Loans, depending 

on the types of loans the borrower has 

obtained, at the same school or in the 

same program of study at the same 

school; 

(ii) For a graduate or professional 

student who has received a prior 

Federal Stafford, or Direct Subsidized or 

Unsubsidized Loan provide the 

information specified in 

§ 685.301(a)(3)(i)(A) through 

§ 685.301(a)(3)(i)(C); and 

(iii) For a graduate or professional 

student who has not received a prior 

Federal Stafford, or Direct Subsidized or 

Direct Unsubsidized Loan, provide the 

information specified in paragraph 

(a)(4)(i) through (a)(4)(iii) and paragraph 

(a)(4)(v) of this section. 

* * * * * 

[FR Doc. 07–5332 Filed 10–31–07; 8:45 am] 

BILLING CODE 4000–01–P 

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