‘‘(iii) FIXED RATE.—Except as pro-
vided in clause (iv), the rate determined 
under this clause shall be determined for 
the duration of the term of the loan on the 
July 1 that is or precedes the date on 
which the application is received by the 
Secretary, and shall be, for such duration, 
equal to— 
‘‘(I) the bond equivalent rate of 
91-day Treasury bills auctioned at the 
final auction held prior to the June 1 
immediately preceding such July 1; 
plus 
‘‘(II) 3.3 percent, 
except that such rate shall not exceed 8.25 
percent. 
‘‘(iv) 
CONSOLIDATION
OF
PLUS 
LOANS.—In the case of any such Federal 
Direct Consolidation Loan that is used to 
repay loans each of which was made under 
section 428B or was a Federal Direct 
PLUS Loan (or both), the rates deter-
mined under clauses (ii) and (iii) shall be 
determined—
‘‘(I) by substituting ‘3.1 percent’ 
for ‘2.3 percent’; 
‘‘(II) by substituting ‘4.1 per-
cent’ for ‘3.3 percent’; and 
‘‘(III) by substituting ‘9.0 per-
cent’ for ‘8.25 percent’.’’. 
(d) CONSOLIDATION LOAN CONFORMING AMEND-
MENT.—Section 428C(c)(1)(A)(ii) (20 U.S.C. 1078– 
3(c)(1)(A)(ii)) 
is 
amended 
by 
striking 
‘‘section 
427A(l)(3)’’ and inserting ‘‘section 427A(k)(5)’’. 
(e) CONFORMING AMENDMENTS FOR SPECIAL AL-
LOWANCES.— 
(1) AMENDMENT.—Subparagraph (I) of section 
438(b)(2) (20 U.S.C. 1087–1(b)(2)) is amended— 
(A) by striking clause (ii) and inserting the 
following: 
‘‘(ii) IN
SCHOOL
AND
GRACE
PE-
RIOD.—In the case of any loan for which 
the first disbursement is made on or after 
January 1, 2000, and for which the appli-
cable interest rate is described in section 
427A(k)(2), clause (i)(III) of this subpara-
graph shall be applied by substituting 
‘1.74 percent’ for ‘2.34 percent’.’’; 
(B) in clause (iii),
(i) by striking ‘‘or (l)(2)’’; and 
(ii) by striking ‘‘, subject to clause (v) 
of this subparagraph’’; 
(C) in clause (iv)— 
(i) by striking ‘‘or (l)(3)’’ and insert-
ing ‘‘or (k)(5)’’; and 
(ii) by striking ‘‘, subject to clause 
(vi) of this subparagraph’’; and 
(D) by striking clauses (v), (vi), and (vii) 
and inserting the following: 
‘‘(v) RECAPTURE OF EXCESS INTER-
EST.— 
‘‘(I) EXCESS
CREDITED.—With 
respect to a loan on which the applica-
ble interest rate is determined under 
section 427A(k) and for which the 
first disbursement of principal is 
made on or after July 1, 2006, if the 
applicable interest rate for any 3- 
month period exceeds the special al-
lowance support level applicable to 
such loan under this subparagraph for 
such period, then an adjustment shall 
be made by calculating the excess in-
terest in the amount computed under
100 
subclause (II) of this clause, and by 
crediting the excess interest to the 
Government not less often than annu-
ally. 
‘‘(II) 
CALCULATION
OF
EX-
CESS.—The amount of any adjust-
ment of interest on a loan to be made 
under this subsection for any quarter 
shall be equal to— 
‘‘(aa) the applicable interest 
rate minus the special allowance 
support level determined under 
this subparagraph; multiplied by 
‘‘(bb) the average daily prin-
cipal balance of the loan (not in-
cluding unearned interest added 
to principal) during such cal-
endar quarter; divided by 
‘‘(cc) four. 
‘‘(III) SPECIAL ALLOWANCE SUP-
PORT LEVEL.—For purposes of this 
clause, the term ‘special allowance 
support level’ means, for any loan, a 
number expressed as a percentage 
equal to the sum of the rates deter-
101 
mined under subclauses (I) and (III) 
of clause (i), and applying any substi-
tution rules applicable to such loan 
under clauses (ii), (iii), and (iv) in de-
termining such sum.’’. 
(2) EFFECTIVE DATE.—The amendments made 
by this subsection shall not apply with respect to 
any special allowance payment made under section 
438 of the Higher Education Act of 1965 (20 U.S.C 
1087–1) before July 1, 2006. 
SEC. 2116. ADDITIONAL LOAN TERMS AND CONDITIONS. 
(a) FEDERAL DEFAULT FEES.— 
(1) IN GENERAL.—Subparagraph (H) of section 
428(b)(1) (20 U.S.C. 1078(b)(1)(H)) is amended to 
read as follows: 
‘‘(H) provides— 
‘‘(i) for loans for which the first dis-
bursement of principal is made before 
July, 1, 2006, for the collection of a single 
insurance premium equal to not more than 
1.0 percent of the principal amount of the 
loan, by deduction proportionately from 
each installment payment of the proceeds 
of the loan to the borrower, and ensures 
that the proceeds of the premium will not
102 
be used for incentive payments to lenders; 
or 
‘‘(ii) for loans for which the first dis-
bursement of principal is made on or after 
July 1, 2006, for the collection and deposit 
into the Federal Student Loan Reserve 
Fund under section 422A of a Federal de-
fault fee of 1.0 percent of the principal 
amount of such loan, which shall be de-
ducted proportionately from each install-
ment payment of the proceeds of the loan 
to the borrower prior to payment to the 
borrower, and ensures that the proceeds of 
the Federal default fee will not be used for 
incentive payments to lenders;’’. 
(2) UNSUBSIDIZED
LOANS.—Section 428H(h) 
(20 U.S.C. 1078–8(h)) is amended by adding at the 
end the following new sentence: ‘‘Effective for loans 
for which the first disbursement of principal is made 
on or after July 1, 2006, in lieu of the insurance 
premium authorized under the preceding sentence, 
each State or nonprofit private institution or organi-
zation having an agreement with the Secretary 
under section 428(b)(1) shall collect and deposit into 
the Federal Student Loan Reserve Fund under sec-
103 
tion 422A a Federal default fee of 1.0 percent of the 
principal amount of the loan, obtained by deduction 
proportionately from each installment payment of 
the proceeds of the loan to the borrower. The Fed-
eral default fee shall not be used for incentive pay-
ments to lenders.’’. 
(3) VOLUNTARY FLEXIBLE AGREEMENTS.—Sec-
tion 428A(a)(1) (20 U.S.C. 1078–1(a)(1)) is amend-
ed— 
(A) by striking ‘‘or’’ at the end of subpara-
graph (A); 
(B) by striking the period at the end of 
subparagraph (B) and inserting ‘‘; or’’; and 
(C) by adding at the end the following new 
subparagraph: 
‘‘(C) the Federal default fee required by 
section 428(b)(1)(H) and the second sentence 
of section 428H(h).’’. 
(b) DISBURSEMENT.—Section 428(b)(1)(N) (20 
U.S.C. 1078(b)(1)(N)) is amended— 
(1) in clause (i), by inserting ‘‘(including an eli-
gible foreign institution, except as provided in clause 
(ii))’’ after ‘‘institution’’; and 
(2) in clause (ii), by striking ‘‘or at an eligible 
foreign institution’’.
104 
(c) REPAYMENT PLANS.— 
(1) FFEL LOANS.—Section 428(b)(9)(A) (20 
U.S.C. 1078(b)(9)(A)) is amended— 
(A) by inserting before the semicolon at 
the end of clause (ii) the following: ‘‘, and the 
Secretary may not restrict the proportions or 
ratios by which such payments may be grad-
uated with the informed agreement of the bor-
rower’’; 
(B) by striking ‘‘and’’ at the end of clause 
(iii); 
(C) by redesignating clause (iv) as clause 
(v); and 
(D) by inserting after clause (iii) the fol-
lowing new clause: 
‘‘(iv) a delayed repayment plan under 
which the borrower makes scheduled pay-
ments for not more than 2 years that are 
annually not less than the amount of inter-
est due or $600, whichever is greater, and 
then makes payments in accordance with 
clause (i), (ii), or (iii); and’’. 
(2) DIRECT
LOANS.—Section 455(d)(1) (20 
U.S.C. 1087e(d)(1)) is amended—
105 
(A) by redesignating subparagraph (D) as 
subparagraph (E); and 
(B) by striking subparagraphs (A), (B), 
and (C) and inserting the following: 
‘‘(A) a standard repayment plan, con-
sistent with subsection (a)(1) of this section 
and with section 428(b)(9)(A)(i); 
‘‘(B) a graduated repayment plan, con-
sistent with section 428(b)(9)(A)(ii); 
‘‘(C) an extended repayment plan, con-
sistent with section 428(b)(9)(A)(v), except that 
the borrower shall annually repay a minimum 
amount determined by the Secretary in accord-
ance with section 428(b)(1)(L); 
‘‘(D) a delayed repayment plan under 
which the borrower makes scheduled payments 
for not more than 2 years that are annually not 
less than the amount of interest due or $600, 
whichever is greater, and then makes payments 
in accordance with subparagraph (A), (B), or 
(C); and’’. 
(d) ORIGINATION FEES.— 
(1) FFEL PROGRAM.—Paragraph (2) of section 
438(c) (20 U.S.C. 1087–1(c)) is amended—
106 
(A) by striking the designation and head-
ing of such paragraph and inserting the fol-
lowing: 
‘‘(2) AMOUNT OF ORIGINATION FEES.— 
‘‘(A) IN GENERAL.—’’; and 
(B) by adding at the end the following new 
subparagraph: 
‘‘(B) SUBSEQUENT
REDUCTIONS.—Sub-
paragraph (A) shall be applied to loans made 
under this part (other than loans made under 
sections 428C and 439(o))— 
‘‘(i) by substituting ‘2.0 percent’ for 
‘3.0 percent’ with respect to loans for 
which the first disbursement of principal is 
made on or after July 1, 2006, and before 
July 1, 2007; 
‘‘(ii) by substituting ‘1.5 percent’ for 
‘3.0 percent’ with respect to loans for 
which the first disbursement of principal is 
made on or after July 1, 2007, and before 
July 1, 2008; 
‘‘(iii) by substituting ‘1.0 percent’ for 
‘3.0 percent’ with respect to loans for 
which the first disbursement of principal is