Source: https://www.federalregister.gov/documents/2014/08/08/2014-18673/william-d-ford-federal-direct-loan-program
Timestamp: 2019-10-20 11:12:37
Document Index: 762247194

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A Proposed Rule by the Education Department on 08/08/2014
We must receive your comments on or before September 8, 2014.
79 FR 46639
46639-46658 (20 pages)
1840-AD17
2014-18673
ED-2014-OPE-0082
Summary of Relevant Data
PLUS Loan Data
The Session 2 Data
The Session 3 Data
Student PLUS Borrower (34 CFR 685.200(b))
Parent PLUS Borrower: Definitions (34 CFR 685.200(c)(1))
Parent PLUS Borrower: Adverse Credit History (34 CFR 685.200(c)(2))
Component 1—Outstanding Balance Greater than $2,085
Component 2—Adjustment Over Time
Component 3—Debts 90 or More Days Delinquent
Component 4—In Collection or Charged Off
Extenuating Circumstances (34 CFR 685.200(c)(2))
Validity of Credit Checks for 90 Days
Enhancing PLUS Borrower Consumer Information
Description of the Reasons That Action by the Agency Is Being Considered
Succinct Statement of the Objectives of, and Legal Basis for, the Regulations
Description of and, Where Feasible, an Estimate of the Number of Small Entities To Which the Regulations Will Apply
Description of the Projected Reporting, Recordkeeping, and Other Compliance Requirements of the Regulations, Including an Estimate of the Classes of Small Entities That Will Be Subject to the Requirements and the Type of Professional Skills Necessary for Preparation of the Report or Record
Identification, to the Extent Practicable, of all Relevant Federal Regulations That May Duplicate, Overlap or Conflict With the Proposed Regulations
Section 685.200 Borrower Eligibility
List of Subjects in 34 CFR Part 685
https://www.federalregister.gov/d/2014-18673 https://www.federalregister.gov/d/2014-18673
Brian Smith or Pamela Moran at (202) 502-7551 or (202) 502-7732 or by email at: Brian.Smith@ed.gov or Pamela.Moran@ed.gov.
Purpose of This Regulatory Action: These proposed regulations would update the standard for determining if a potential parent or student borrower has an adverse credit history for purposes of eligibility for a Direct PLUS Loan (PLUS loan). Specifically, the proposed regulations would amend the definition of “adverse credit history” and require PLUS loan counseling for a parent or student with an adverse credit history who is approved for a PLUS loan as a result of the Secretary's determination that extenuating circumstances exist. The current regulations governing adverse credit history determinations have not been updated since the Direct Loan Program was established in 1994. The proposed regulations would amend the current regulations to reflect programmatic and economic changes that have occurred since 1994.
Summary of the Major Provisions of This Regulatory Action: The proposed regulations would—
Revise the student PLUS loan borrower eligibility criteria to state more clearly that the PLUS loan adverse credit history requirements apply to student as well as parent PLUS loan borrowers.
Specify that an applicant for a PLUS loan who is determined to have an adverse credit history but who documents to the Secretary's satisfaction that extenuating circumstances exist must complete PLUS loan counseling offered by the Secretary before receiving the PLUS loan.
Please refer to the Summary of Proposed Changes section of this notice of proposed rulemaking (NPRM) for more details on the major provisions contained in this NPRM.
Certain operational changes made by the Department in November 2011 resulted in an increase in the number of PLUS loan applicants who were determined to have an adverse credit history, potentially limiting the financial options and resources available to those applicants. The modifications made in the proposed regulations will increase the number of PLUS loan applicants who pass the adverse credit history check and will not have to request reconsideration of an initial denial under the Department's process for determining whether extenuating circumstances for the adverse credit history condition exist. Start Printed Page 46641We estimate an increase of approximately 370,000 PLUS loan applicants who will pass the adverse credit history check under the proposed regulations.
To ensure that your comments have maximum effect in developing the final regulations, we urge you to identify clearly the specific section or sections of the proposed regulations that each of your comments addresses, and provide relevant information and data whenever possible, even when there is no specific solicitation of data and other supporting materials in the request for comment. We also urge you to arrange your comments in the same order as the proposed regulations. Please do not submit comments that are outside the scope of the specific proposals in this notice of proposed rulemaking, as we are not required to respond to comments that are outside of the scope of the proposed rule. See the ADDRESSES section of this document for instructions on how to submit comments.
During and after the comment period, you may inspect all public comments about the proposed regulations by accessing Regulations.gov. You may also inspect the comments in person in room 8055, 1990 K Street NW., Washington, DC, between 8:30 a.m. and 4:00 p.m., Washington, DC time, Monday through Friday of each week except Federal holidays. If you want to schedule time to inspect comments, please contact one of the persons listed under FOR FURTHER INFORMATION CONTACT.
Assistance to Individuals with Disabilities in Reviewing the Rulemaking Record: On request, we will provide an appropriate accommodation or auxiliary aid to an individual with a disability who needs assistance to review the comments or other documents in the public rulemaking record for the proposed regulations. If you want to schedule an appointment for this type of accommodation or auxiliary aid, please contact one of the persons listed under FOR FURTHER INFORMATION CONTACT.
Section 428B(a)(1)(A) of the HEA provides that to be eligible to receive a Federal PLUS Loan under the Federal Family Education Loan (FFEL) Program, the applicant must not have an adverse credit history, as determined pursuant to regulations promulgated by the Secretary. This same eligibility requirement applies to applicants for PLUS loans under the Direct Loan Program. See section 455(a)(1) of the HEA. The definition of “adverse credit history” in the current Direct Loan Program regulations is effectively the same as the regulatory definition of “adverse credit history” in the FFEL Program. The Department conducts a credit check on each applicant for a PLUS loan under the Direct Loan Program to determine whether he or she has an adverse credit history.
In 2010, Congress amended the HEA to end the making of new loans under the FFEL Program effective July 1, 2010. Since that date, all new subsidized and unsubsidized Stafford Loans, PLUS Loans, and Consolidation Loans have been originated in the Direct Loan Program. In implementing this change, the Department found that the operational criteria being used in the Direct Loan Program to determine whether an applicant for a PLUS loan has an adverse credit history were not consistent with the definition of “adverse credit history” in the Direct Loan Program regulations or with the regulations for the FFEL Program. Specifically, the Department determined that PLUS loan applicants who had debts that were in collection or charged off were passing the adverse credit history check even though these applicants were 90 or more days delinquent on a debt, which constitutes an adverse credit history under the Department's regulations. Once the inconsistency was identified, the Department modified its procedures in November 2011 so that borrowers with debts in collection or which were charged off would be considered to have an adverse credit history. This change increased the number of parent and graduate and professional student PLUS loan applicants who were determined to have an adverse credit history and thus, were originally ineligible for a PLUS loan. As a result of the increased initial denial rate, the Department determined that it would be appropriate to review the adverse credit history standards that were originally established in 1994. To reflect programmatic and economic changes that have occurred since 1994, the Department proposes to amend § 685.200(b) and (c) to update the regulatory requirements governing PLUS loan adverse credit history determinations.
On April 16, 2013, we published a document in the Federal Register (78 FR 22467) announcing topics for consideration for action by a negotiated rulemaking committee. A correction to this document was published in the Federal Register on April 30, 2013 (78 FR 25235). The topics for consideration listed in these documents were: Cash management of funds provided under the title IV Federal Student Aid programs; State authorization for programs offered through distance education or correspondence education; State authorization for foreign locations of institutions located in a State; clock to credit hour conversion; gainful employment; changes to the campus safety and security reporting requirements in the Jeanne Clery Disclosure of Campus Security Policy and Campus Crime Statistics Act made by the Violence Against Women Reauthorization Act of 2013; and the definition of “adverse credit history” for borrowers in the Federal Direct PLUS Loan Program. In the April 16, 2013, document, we announced three public hearings at which interested parties could comment on the negotiated rulemaking topics suggested by the Department and could suggest additional topics for consideration for action by a negotiated rulemaking committee. On May 13, 2013, we published in the Federal Register (78 FR 27880) a document announcing the Start Printed Page 46642addition of a fourth hearing. The hearings were held on—
We also invited parties unable to attend a public hearing to submit written comments on the additional topics and to submit other topics for consideration. Transcripts from the public hearings are available at http://www2.ed.gov/​policy/​highered/​reg/​hearulemaking/​2012/​index.html.
Written comments submitted in response to the April 16, 2013, Federal Register document may be viewed through the Federal eRulemaking Portal at www.regulations.gov, within docket ID ED-2012-OPE-0008. You can link to the ED-2012-OPE-0008 docket as a related docket inside the ED-2014-OPE-0082 docket associated with this notice of proposed rulemaking. Alternatively, individuals can enter the docket ID ED-2012-OPE-0008 in the search box to locate the appropriate docket. Instructions for finding comments are also available on the site under “How to Use Regulations.gov” in the Help section.
Section 492 of the HEA requires the Secretary to obtain public involvement in the development of proposed regulations affecting programs authorized by title IV of the HEA. After obtaining extensive input and recommendations from the public, including individuals and representatives of groups involved in the title IV, HEA programs, the Secretary must subject the proposed regulations to a negotiated rulemaking process. If negotiators reach consensus on the proposed regulations, the Department agrees to publish without alteration a defined group of regulations on which the negotiators reached consensus unless the Secretary reopens the process or provides a written explanation to the participants stating why the Secretary has decided to depart from the agreement reached during negotiations. Further information on the negotiated rulemaking process can be found at: http://www2.ed.gov/​policy/​highered/​reg/​hearulemaking/​hea08/​neg-reg-faq.html.
On November 20, 2013, the Department published a document in the Federal Register (78 FR 69612) announcing its intention to establish a negotiated rulemaking committee to prepare proposed regulations to address program integrity and improvement issues for the Federal Student Aid programs authorized under title IV of the HEA. The document set forth a schedule for the committee meetings and requested nominations for individual negotiators to serve on the negotiating committee.
The negotiated rulemaking committee met to develop proposed regulations on Start Printed Page 46643February 19-21, 2014, March 26-28, 2014, and April 23-25, 2014. In response to requests from members of the negotiating committee, the Department provided extensive PLUS loan data to the committee prior to the March session. During the March session, the Department proposed adding an additional negotiated rulemaking session to the schedule to give the negotiators sufficient time to consider the PLUS loan data. The negotiators agreed to add a fourth and final session held on May 19-20, 2014.
During committee meetings, the committee reviewed and discussed the Department's drafts of regulatory language and the committee members' alternative language and suggestions. At the final meeting on May 20, 2014, the committee did not reach consensus on the Department's proposed regulations. For this reason, and according to the committee's protocols, all parties who participated or were represented in the negotiated rulemaking, in addition to all members of the public, may comment freely on the proposed regulations. For more information on the negotiated rulemaking sessions, please visit: http://www2.ed.gov/​policy/​highered/​reg/​hearulemaking/​2012/​programintegrity.html#info.
At the first negotiating session, the non-Federal negotiators asked the Department to provide certain data about the PLUS loan program to the negotiating committee. The non-Federal negotiators asked if the Department could calculate PLUS loan cohort default rates. They also asked for information on PLUS loan volume—both numbers of borrowers and amounts borrowed. Non-Federal negotiators asked to see rates of PLUS loan denials due to an adverse credit history, broken out by school sector. In addition, they asked for data on the frequency of different adverse credit conditions that result in denial of a PLUS loan.
The Department agreed to provide PLUS loan data for the PLUS loan adverse credit history discussion at the second negotiated rulemaking session.
Prior to the second negotiated rulemaking session, the Department provided the non-Federal negotiators with charts containing the following data:
Debt of PLUS, Parent PLUS, and Grad PLUS Borrowers;
AY 2012-13 Credit Check Approval and Denials.[1]
In addition, during the second session, the Department provided the negotiators with data breaking out PLUS loan disbursements under the Direct Loan and FFEL programs from 2006 to 2010.[2]
The non-Federal negotiators expressed appreciation to the Department for providing the requested data about PLUS loans. The non-Federal negotiators also asked for additional data in connection with the charts showing PLUS loan remediation rates (the rates at which applicants who were initially denied PLUS loans due to an adverse credit history were able to obtain PLUS loans; or, if the parent did not obtain PLUS loans, the rates at which the parent's dependent children were able to receive additional unsubsidized loans) and PLUS loan cohort default rates. The Department agreed to provide this additional data for the third negotiated rulemaking session.
Prior to the third negotiated rulemaking session, in response to the requests made during the second session, the Department provided the non-Federal negotiators with amended versions of the following charts:
PLUS Credit Check Denial Remediation Rates by Sector and by Program Offering (two versions reflecting breakout of remediation by obtaining an endorser, submitting documentation of extenuating circumstances, or the dependent student's receipt of additional unsubsidized loans); and
PLUS Borrower Three-Year Cohort Default Rates (broken out by the FFEL and Direct Loan programs).[3]
The proposed regulations would—
Revise the student PLUS loan borrower eligibility criteria to state more clearly that the PLUS loan adverse credit history requirements apply to graduate or professional student PLUS loan borrowers.
Add definitions of the terms “charged off” and “in collection” for Start Printed Page 46644purposes of determining whether an applicant for a PLUS loan has an adverse credit history.
Specify that an applicant for a PLUS loan who is determined to have an adverse credit history but who documents to the Secretary's satisfaction that extenuating circumstances exist must complete PLUS loan counseling offered by the Secretary before receiving the loan.
Statute: Section 428B(a)(1)(A) of the HEA specifies that a graduate or professional student with an adverse credit history is not eligible to borrow a PLUS loan.
Current Regulations: Current § 685.200(b)(5) specifies that a student must meet the requirements of § 685.200(c)(1)(vii) to qualify for a PLUS loan. Current § 685.200(c)(1)(vii) includes the adverse credit history requirements for parent PLUS loan borrowers.
Proposed Regulations: Proposed § 685.200(b)(5) specifies that a graduate or professional student must meet the requirements “that apply to a parent” under § 685.200(c)(2)(viii)(A) through (c)(2)(viii)(D) to qualify for a PLUS loan. Proposed § 685.200(c)(2)(viii)(A) through (c)(2)(viii)(D) would include the adverse credit history requirements for parent PLUS borrowers.
Reasons: The proposed regulations would revise § 685.200(c). Due to the revision to § 685.200(c), we would also need to revise the cross-reference in § 685.200(b)(5). New § 685.200(c)(1)(viii)(B) refers to a parent with an adverse credit history, rather than an applicant with an adverse credit history. Therefore, a conforming change, adding a reference to the “parent”, would be required in § 685.200(b)(5). In addition, proposed § 685.200(b)(5) would clarify that the adverse credit history requirements that apply to parent PLUS borrowers under § 685.200(c)(2)(viii)(A) through (c)(2)(viii)(D) also apply to all student PLUS borrowers.
We did not agree with the suggestion to have different standards for parent and student PLUS loan applicants. We noted that, pursuant to the HEA, there is a single PLUS loan program that provides loans for both graduate and professional students and parents of dependent students. The statutory requirement that a PLUS loan applicant not have an adverse credit history applies equally to student and parent applicants. We see no basis under the HEA for establishing different regulatory definitions of “adverse credit history” for graduate and professional student applicants and parent PLUS applicants.
Proposed Regulations: The proposed regulations would define the terms “charged off” and “in collection” for purposes of adverse credit history determinations. Proposed § 685.200(c)(1)(i) would define the term “charged off” to mean a debt that a creditor has written off as a loss, but that is still subject to collection action. Proposed § 685.200(c)(1)(ii) would define the term “in collection” to mean a debt that has been placed with a collection agency by a creditor, or that is subject to more intensive efforts by a creditor to recover amounts owed from a borrower who has not responded satisfactorily to the demands routinely made as part of the creditor's billing procedures.
Reasons: Under the current regulations, an applicant who has debts that are in collection or that has been charged off will be determined to have an adverse credit history, but the regulations do not define these terms. The proposed definitions for these terms are commonly understood definitions in the collections industry. Although some of the non-Federal negotiators did not agree that these conditions should constitute adverse credit, they agreed that if the Department is going to consider debts that are in collection or that have been charged off as indicators that a borrower has an adverse credit history, the terms should be defined in the regulations.
Statute: Section 428B(a)(1)(A) of the HEA provides that a parent of a dependent student is not eligible to borrow a PLUS loan if the parent has an adverse credit history.
Current Regulations: Current regulations under § 685.200(c)(1)(vii)(B) establish the conditions under which a PLUS loan applicant will be considered to have an adverse credit history. Under § 685.200(c)(1)(vii)(B), an adverse credit history means that, as of the date of the credit report, the applicant: (1) Is 90 or more days delinquent on any debt; or (2) has been the subject of a default determination, bankruptcy discharge, foreclosure, repossession, tax lien, wage garnishment, or write-off of a debt under title IV of the HEA during the five years preceding the date of the credit report.
Proposed Regulations: Under proposed § 685.200(c)(2)(viii)(B)(1), an adverse credit history would mean that a parent (or, by cross-reference, a student) has one or more debts with a total combined outstanding balance greater than $2,085, that are 90 or more days delinquent as of the date of the credit report, or that have been charged off or placed in collection during the two years preceding the date of the credit report. Proposed § 685.200(c)(2)(viii)(B)(1) would provide that the $2,085 threshold amount may be adjusted over time on a basis determined by the Secretary. In proposed § 685.200(c)(2)(viii)(B)(2) the Department would retain the current provision that provides that a parent or student has an adverse credit history if the parent or student has been the subject of a default determination, bankruptcy discharge, foreclosure, repossession, tax lien, wage garnishment, or write-off of a debt under Start Printed Page 46645title IV of the HEA during the five years preceding the date of the credit report.
The proposed definition of “adverse credit history” has several components. Each component is discussed separately in the following sections.
Current Regulations: Current § 685.200(c)(1)(vii)(D) specifies that, for purposes of documenting extenuating circumstances, the Secretary may rely on a satisfactory statement from the applicant explaining any delinquency with an outstanding balance greater than $500.
Reasons: After the November 2011 operational change to the Department's implementation of the adverse credit history definition, the Department adjusted the $500 amount, referred to as “the threshold amount,” to $780 to account for inflation since 1994. Later, the Department increased the threshold amount from $780 to $2,085. The Department selected this level to reflect the estimated median debt level for all debts with a status of in collection, charged off, or 90 or more days delinquent, from all parent PLUS loan denials resulting from all credit checks conducted between the spring of 2012 and the spring of 2013. The Department now proposes to use the $2,085 threshold amount in the initial determination of whether an applicant has an adverse credit history to reflect current operational practice in our reconsideration process.Start Printed Page 46646
The Department is open to adjusting the $2,085 amount. Therefore, we are proposing in the regulations that the Secretary may adjust the amount over time, on a basis determined by the Secretary. Any adjustments that the Secretary makes to the $2,085 amount would be announced through a Notice in the Federal Register. We invite comment on this provision, and welcome recommendations on an appropriate measure of inflation to use in adjusting this amount, or whether another measure of growth or decline in consumer debt due to economic conditions may be a more appropriate measure.
As discussed in the “Operational Issues” section of this preamble, the Department intends to collect, and where appropriate publish, information about the performance of parent and graduate/professional student PLUS loans, including default rate information based on credit history characteristics of Plus loan applicants and individual institutional default rates.
Current Regulations: Current § 685.200(c)(1)(vii)(B)(1) specifies that a PLUS loan applicant who is 90 or more days delinquent on any debt has an adverse credit history.
With regard to errors on credit reports, a PLUS loan applicant would have the opportunity during the process for determining whether extenuating circumstances for the adverse credit history condition exist to show that the determination of an adverse credit history was based on an error in the credit report by providing an updated credit report or information from the creditor.
Based on these considerations, we believe that the proposed two-year look-back period for debts that are in collection or have been charged off is appropriate. A one-year look-back period is too short to measure a PLUS loan applicant's history and a five-year Start Printed Page 46647period is more closely associated with the major, long-term items indicating an adverse credit history in proposed § 685.200(c)(2)(viii)(B)(2).
Proposed Regulations: Proposed § 685.200(c)(2)(viii)(A)(3) states that, in addition to providing documentation to the Secretary demonstrating that extenuating circumstances exist, a parent or student with an adverse credit history would be required to complete PLUS loan counseling offered by the Secretary to become eligible for a PLUS loan.
Proposed § 685.200(c)(2)(viii)(D)(2) would eliminate from the list of possible extenuating circumstances a statement from an applicant explaining any delinquencies with an outstanding balance of less than $500.
The proposed regulations do not apply the loan counseling requirement to a PLUS loan applicant who has an adverse credit history but is eligible to receive a PLUS loan by obtaining an endorser who does not have an adverse credit history. A PLUS loan applicant who obtains an endorser is still primarily responsible for repaying the PLUS loan. The Department believes that these applicants, like PLUS loan applicants who qualify due to extenuating circumstances, would benefit from PLUS loan counseling. Therefore, the Secretary is requesting comment on whether the loan counseling requirement for applicants who qualify due to extenuating circumstances should also apply to applicants who obtain an endorser.
As explained in the “Background” section of this preamble, the Department conducts a credit check on each applicant for a PLUS loan to determine whether he or she has an adverse credit history. A credit check is conducted when a school submits a PLUS loan origination record to the Department's Common Origination and Disbursement (COD) System, or when an applicant for a PLUS loan completes the optional Direct PLUS Loan Request for Supplemental Information (Direct PLUS Loan Request) on the Department's StudentLoans.gov Web site. Alternatively, a school may submit a credit check request for a PLUS loan applicant to the COD System Web site.
Similarly, an individual who received a PLUS loan based on the results of a credit check may later request additional loan funds by submitting another Direct PLUS Loan Request and indicating that he or she wants to increase the amount of an existing PLUS loan. If the borrower submits the Direct PLUS Loan Request more than 90 days after the date of the prior credit check, another credit check will be conducted. In both instances, the subsequent credit check may potentially result in a determination that the borrower now has an adverse credit history (if the applicant's financial circumstances have changed since the date of the prior credit check), and therefore is ineligible for a PLUS loan or for an increased loan amount, even though the borrower was Start Printed Page 46648previously approved based on the results of an earlier credit check.
Although the Department agreed with the non-Federal negotiators that it would be appropriate to extend the period of time during which an approved credit check is valid, the Department also reminded the negotiators that under current procedures it is possible for a school to process a borrower's request for an increase in the amount of an existing PLUS loan without subjecting the borrower to a second credit check. In such cases, a school may simply submit an upward adjustment to the amount of an existing PLUS loan to the COD system, without submitting a new PLUS loan origination record. The submission of an upward adjustment will not trigger a new credit check, regardless of the date of the most recent credit check for the borrower. Also, it is not mandatory for borrowers to request an increase in the amount of an existing loan by submitting a Direct PLUS Loan Request, which may trigger a second credit check. A school may obtain a borrower's request for a loan amount increase by other means.
As discussed under the “Extenuating Circumstances” section of this preamble, the negotiating committee discussed methods for improving access to consumer information for PLUS loan applicants. In particular, many non-Federal negotiators believed that there is currently a lack of sufficient consumer information specifically targeted at parent PLUS loan applicants.
We invite suggestions for the specific types of enhanced consumer information that the Department should develop for PLUS applicants, particularly parent PLUS applicants who may be planning to borrow for more than one dependent over multiple academic years. We also invite comments on what other types of information about Parent PLUS loans would be helpful for institutions and consumers, and we invite suggestions on the most effective way for the Department to communicate with parent PLUS borrowers.
The Department makes Direct PLUS Loans to graduate or professional students and to parents of dependent undergraduate students to help pay for education expenses not covered by other financial aid. According to data from the Department's Federal Student Aid (FSA) office, approximately 3.9 million borrowers owe a balance of $100 billion in total Direct PLUS loans. The Department is proposing these regulations to update the standard for determining if a potential borrower has an adverse credit history for purposes of eligibility for a Direct PLUS loan.
(1) Propose or adopt regulations only upon a reasoned determination that Start Printed Page 46649their benefits justify their costs (recognizing that some benefits and costs are difficult to quantify);
In “Alternatives Considered,” we describe other approaches we considered for key provisions of the proposed regulations, including different definitions for adverse credit history for parents and graduate students, criteria regarding the borrower's ability to repay as part of the adverse credit history definition, indexing the $2,085 threshold amount to the rate of inflation, increasing the delinquency period of 90 or more days past due, and increasing the length of time for the look-back period for debts that are in collection or charged off.
Congress amended the HEA in 2010 to end the origination of new loans under the FFEL Program. All new subsidized and unsubsidized Stafford Loans, PLUS Loans, and Consolidation Loans are made under the Direct Loan Program. To be eligible for a Federal Direct PLUS loan, under the statute, an applicant must not have an adverse credit history. To determine if an applicant has an adverse credit history the Department conducts a credit check on the applicant. A PLUS loan applicant is considered to have an adverse credit history if the credit report shows the applicant is 90 days delinquent on any debt, or has been the subject of a default determination, bankruptcy discharge, foreclosure, repossession, tax lien, wage garnishment, or write-off of a title IV, HEA program debt in the five years preceding the date of the credit report.
The proposed regulations would update the standard for determining if a potential borrower has an adverse credit history and more specifically would amend the definition of “adverse credit history” and require PLUS loan counseling for a parent or student with an adverse credit history who is approved for a PLUS loan as a result of the Secretary's determination that extenuating circumstances exist.
The proposed regulations would update the eligibility requirements for a PLUS loan. Specifically, the proposed regulations would state more clearly that the PLUS loan adverse credit history requirements apply to graduate student PLUS loan borrowers, as well as parent PLUS borrowers. In addition, the proposed regulations would define the terms “in collection” and “charged off” for purposes of determining whether an applicant for a PLUS loan has an adverse credit history. They would also specify that a PLUS loan applicant has an adverse credit history if the applicant has one or more debts with a total combined outstanding balance greater than $2,085 that are 90 or more days delinquent as of the date of the credit report, or that have been placed in collection or charged off during the two years preceding the date of the credit report. The proposed regulations would provide that the debt threshold of a combined outstanding balance greater than $2,085 may be adjusted over time Start Printed Page 46650on a basis determined by the Secretary. The proposed regulations would also revise the provision that specifies the types of documentation the Secretary may accept as a basis for determining that extenuating circumstances exist for a PLUS loan applicant who is determined to have an adverse credit history. Finally, the regulations would specify that an applicant for a PLUS loan who is determined to have an adverse credit history, but who documents to the Secretary's satisfaction that extenuating circumstances exist, must complete PLUS loan counseling offered by the Secretary before receiving the PLUS loan.
Under the proposed regulations, the Department expects that the number of approved applications for parent and graduate and professional student PLUS loans will increase from 2012-2013 levels, and that this will result in a series of costs, benefits, and transfers. The most significant factor leading to this increase is expected to be the establishment of a new standard for the determination that an applicant has an adverse credit history. In particular, under the proposed regulations, an adverse credit history means that the applicant has one or more debts with a total combined outstanding balance greater than $2,085 that are 90 or more days delinquent as of the date of the credit report, or that have been placed in collection or charged off during the two years preceding the date of the credit report.
Reason for credit check denial
Academic year 2011-2012 (percent)
Academic year 2012-2013 (percent)
Academic year 2013-2014 (through February 2014) (percent)
ACCOUNT IN COLLECTION 40.9 46 46
CHARGE OFF 21.3 24 24
PRESENTLY 90 OR MORE DAYS DELINQUENT 11.1 14 13
CHAPTER 7, 11, OR 12 BANKRUPTCY 7.9 5 6
COUNTY/STATE/FEDERAL GOVERNMENT TAX LIEN WITHIN LAST 5 YEARS 6.4 3 3
OTHER REASONS 12.3 9 9
AY 2012-13 PLUS
Number and percentage of denied applications in AY 2012-2013 that would be approved under the proposed regulations
All Credit Checks (Original Decision) 1,123,617 1,300,986 2,424,603 371,508 33
We also believe that the proposed regulations would clarify the process by which applicants request reconsideration, and possibly increase the percentage of denied loan applicants who eventually qualify for PLUS loans after requesting reconsideration or obtaining an endorser who does not have an adverse credit history.
Parent PLUS loan applicants and their dependent students would be affected by the proposed regulations. Under the proposed regulations, a larger number of parent PLUS loan applicants would be approved for PLUS loans on behalf of their dependent students. As a result, some families could accrue higher loan debt amounts.
In the 2011-2012 award year, the median total PLUS loan debt for a parent who borrowed a PLUS loan at any point for a dependent undergraduate student ages 18 to 24 in the student's fourth (senior) year or above was $27,700.[4] If the dependent student had borrowed the maximum amount of his or her Direct Loans, the total debt shared by the parent and student would be equal to $58,700, $1,300 more than the aggregate limits for an independent student.
In the example that follows, the Department compares two sample borrowers to show the potential impact of borrowing under the parent PLUS Loan Program compared to borrowing up to the annual Direct Loan limits for independent students. Student A's parent applied for a parent PLUS loan; however, Student A's parent was not approved for parent PLUS loans in any of the four years. Therefore, Student A was eligible to borrow Unsubsidized Stafford loans up to the independent borrower limits. Students B's parent was approved for parent PLUS loans for all four years to help pay for Student B's college education. The total amount borrowed by each of the families in this example is equal. The example also assumes that both borrowers took out loans every year of college, the student graduated in four years, and repayment began following graduation. Student A deferred all payments on the Start Printed Page 46651Unsubsidized Stafford loans and Student B's parent deferred payments on their PLUS loans until six months after graduation. The example also uses the current interest rates and origination fees (as of July 1, 2014) and assumes they remain unchanged through the two students' matriculation (this is only an example; although interest rates are fixed over the life of the individual loan, those rates are updated annually and origination fees can be changed.)
Months until repayment
Amount owed upon entering repayment
Student A: Dependent student whose parents were denied a parent PLUS loan
1st Year Fall $ 1750 $ 3,000 0.0466 50 $ 5,424
1st Year Spring 1,750 3,000 0.0466 45 5,365
2nd Year Fall 2,250 3,000 0.0466 38 5,791
2nd Year Spring 2,250 3,000 0.0466 33 5,731
3rd Year Fall 2,750 3,500 0.0466 26 6,717
3rd Year Spring 2,750 3,500 0.0466 21 6,648
4th Year Fall 2,750 3,500 0.0466 14 6,551
4th Year Spring 2,750 3,500 0.0466 9 6,482
Total Due 48,709
Student B: Dependent student with parents approved for PLUS loans
1st Year Fall $ 1,750 $ 1,000 0.0466 $ 2,995 2000 0.0721 50 $ 2,712
1st Year Spring 1,750 1,000 0.0466 2,975 2000 0.0721 45 2,650
2nd Year Fall 2,250 1,000 0.0466 3,456 2000 0.0721 38 2,562
2nd Year Spring 2,250 1,000 0.0466 3,436 2000 0.0721 33 2,499
3rd Year Fall 2,750 1,000 0.0466 3,917 2500 0.0721 26 3,014
3rd Year Spring 2,750 1,000 0.0466 3,897 2500 0.0721 21 2,936
4th Year Fall 2,750 1,000 0.0466 3,870 2500 0.0721 14 2,827
4th Year Spring 2,750 1,000 0.0466 3,850 2500 0.0721 9 2,748
Total 28,397 Total 21,949
Total due at the beginning of repayment—combined 50,345
As this example demonstrates, at the identical school, the combined parent-student debt upon entering repayment would be higher for the family of Student B than the total debt of Student A because of the higher interest rates (currently 7.21 percent for Direct PLUS loans and 4.66 percent for Direct Subsidized and Unsubsidized loans) and origination fees (currently 4.28 percent for Direct PLUS loans [5] and 1.72 percent for Direct Subsidized and Unsubsidized loans [6] ). This example is only meant to show the potential difference between two students using a combination of Direct Subsidized, Direct Unsubsidized, and Direct PLUS loans to fund their education. The example does not address choices individual borrowers may make to manage their student loan debt or the benefits of increased access to PLUS loans, as discussed below. These tables also do not account for a family choosing a less expensive school to account for the lack of access to PLUS loans. These examples also only apply to Parent PLUS loans.
PLUS loans are generally a better option for students than private student loans. PLUS loans have fixed interest rates and offer more flexibility in respect to repayment plans (such as extended and graduated repayment plans). PLUS loans also offer important consumer protections such as deferments for unemployment, active Start Printed Page 46652duty military service, and economic hardship; and cancellation for occurrences such as death, total and permanent disability or school closure. Private loans, in contrast, are not required to provide such borrower benefits and protections. Private loans also typically have variable interest rates that cost most for those who can least afford them.”
Applicants with an adverse credit history who qualify for a PLUS Loan by demonstrating extenuating circumstances will be required to participate in loan counseling provided by the Department. This requirement could help PLUS loan applicants to make informed decisions and to avoid over-borrowing for their own or their child's education.
The proposed regulations are not estimated to have a significant net budget impact over the loan cohorts from 2014 to 2024. Consistent with the requirements of the Credit Reform Act of 1990, budget cost estimates for the student loan programs reflect the estimated net present value of all future non-administrative Federal costs associated with a cohort of loans. (A cohort reflects all loans originated in a given fiscal year.)
However, loans made to borrowers who would have been considered to have an adverse credit history before the changes in the proposed regulations could have a higher incidence of default or could be difficult for borrowers to repay. If that were the case, potential savings from any increased PLUS loan volume resulting from the proposed regulations would be reduced or even reversed. The Department does not have data to determine if borrowers who would have been considered to have an adverse credit history in the absence of the proposed regulations have a greater incidence of default or repayment difficulty, but, if a subsidy rate were available for this subgroup of PLUS borrowers, it would likely differ from the overall PLUS subsidy rate. The budget baseline already reflects the $2,085 threshold amount as currently used in the Department's process for considering requests for reconsideration and most of the charged-off accounts or accounts in collection that would result in an adverse credit determination fall within the two-year period that would still be in effect under the proposed regulations. These factors could limit the increase in PLUS loan volume associated with the changes in the proposed regulations. Therefore, the Department has not estimated significant savings from the proposed regulations.
In developing these estimates, a wide range of data sources were used, including data from the National Student Loan Data System; operational and financial data from Department of Education systems, including the Fiscal Operations Report and Application to Participate (FISAP) from institutions; and data from a range of surveys conducted by the National Center for Education Statistics such as the 2011-2012 National Postsecondary Student Aid Survey and the 2004/09 Beginning Postsecondary Student Survey. Data from other sources, such as the U.S. Census Bureau, were also used.
As required by OMB Circular A-4 (available at www.whitehouse.gov/​sites/​default/​files/​omb/​assets/​omb/​circulars/​a004/​a-4.pdf), in Table 3, we have prepared an accounting statement showing the classification of the expenditures associated with the proposed regulations. Expenditures are classified as transfers from the Federal Government to student loan borrowers.
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Improved clarity in process for adverse credit determinations for PLUS loans Not quantified
Costs of compliance with paperwork requirements $4.40 $4.43
The Department considered various alternatives in developing these proposed regulations, including different definitions of adverse credit history for parents and graduate students, criteria regarding the borrower's ability to repay as part of the adverse credit history definition, indexing the $2,085 amount to the rate of inflation, increasing the delinquency period of 90 or more days past due, and increasing the length of time for the look-back period for debts that are in collection or charged off.
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The Department's adverse credit history evaluation of 90-day debt delinquencies, including charge-offs and collections, is based upon an account's current status, but it does not take into account whether the debts have been delinquent for a long period of time or entered collections or were charged off years ago. Several other State student lenders, Federal agencies, and some other lenders take into account the age of the delinquent debt in question when underwriting. For example, the Maine Loan, a product offered by the Maine Educational Loan Authority, requires that applicants have no record of a paid or unpaid charge-off in the last two years.[7] Connecticut Higher Education Supplemental Loan Authority (CHESLA) loans contain a similar two-year look back for debts over 90 days delinquent as well as for charge-offs and collections.[8] At the Federal level, Department of Agriculture farm loans for operation and ownership employ a three-year look back standard.[9] Presumably, these lenders do not find that older delinquent debts impact the borrower's ability or willingness to repay a new loan.
The proposed regulations will affect institutions that participate in the title IV, HEA programs, including alternative certification programs not housed at institutions, and individual borrowers. The U.S. Small Business Administration (SBA) Size Standards define for-profit institutions as “small businesses” if they are independently owned and operated and not dominant in their field of operation, with total annual revenue below $7,000,000. The SBA Size Standards define nonprofit institutions as “small organizations” if they are independently owned and operated and not dominant in their field of operation, or as “small entities” if they are institutions controlled by governmental entities with populations below 50,000. The number of title IV, HEA-eligible institutions that are small entities would be limited because of the revenues involved in the sector that would be affected by the proposed regulations and the concentration of ownership of institutions by private owners or public systems. However, the definition of “small organization” does not factor in revenue. Accordingly, several of the entities subject to the proposed regulations are “small entities,” and we have prepared this Initial Regulatory Flexibility Analysis.
The proposed regulations would update the standards for determining whether a parent or student has an adverse credit history for purposes of eligibility for a Direct PLUS Loan. The proposed regulations would require PLUS loan counseling for a parent or student with an adverse credit history who obtains a PLUS loan as a result of the Secretary's determination that extenuating circumstances exist.
Current Direct Loan regulations (34 CFR 685.200(b) and (c)) specify that graduate and professional students, and parents borrowing on behalf of their dependent children, may borrow PLUS loans. PLUS loan borrowers must meet applicable eligibility requirements.
The proposed regulations would affect the approximately 7,500 institutions that participate in the title IV, HEA loan programs, as the amount and composition of title IV, HEA program aid that is available to students affects students' enrollment decisions and institutional choice. Approximately 60 percent of institutions of higher education qualify as small entities. Using data from the Integrated Postsecondary Education Data System, we estimate that 4,365 institutions qualify as small entities—1,891 are nonprofit institutions, 2,196 are for-profit institutions with programs of two years or less, and 278 are for-profit institutions with four-year programs.
The proposed regulations would not change the reporting requirements related to PLUS loans for institutions. Accordingly, the Department does not expect a change in institutional burden from the proposed regulations. However, PLUS loan borrowers with an adverse credit history who request reconsideration based on extenuating circumstances must provide satisfactory documentation that extenuating circumstances exist, and would be required to complete loan counseling offered by the Secretary.Start Printed Page 46655
The proposed regulations are unlikely to conflict with or duplicate existing Federal regulations.
As described above, the Department conducted a negotiated rulemaking process to develop the proposed regulations and considered a number of options for some of the provisions. No alternatives were aimed specifically at small entities.
As part of its continuing effort to reduce paperwork and respondent burden, the Department provides the general public and Federal agencies with an opportunity to comment on proposed and continuing collections of information in accordance with the Paperwork Reduction Act of 1995 (PRA) (44 U.S.C. 3506(c)(2)(A)). This helps ensure that: The public understands the Department's collection instructions, respondents can provide the requested data in the desired format, reporting burden (time and financial resources) is minimized, collection instruments are clearly understood, and the Department can properly assess the impact of collection requirements on respondents. The table at the end of this section summarizes the estimated burden on small entities, primarily institutions and applicants, arising from the paperwork associated with the proposed regulations.
The current regulations allow PLUS loan applicants who have been denied a PLUS loan due to an adverse credit history determination to submit documentation of extenuating circumstances to the Secretary and request reconsideration of the loan application. The proposed regulations would require that a PLUS loan applicant who is determined to be eligible for a PLUS loan after reconsideration complete loan counseling offered by the Secretary.
Requirements: Under proposed regulations in § 685.200(b)(5) and (c)(2)(viii)(A)(3), we have proposed that, in addition to providing documentation to the Secretary demonstrating that extenuating circumstances exist, an applicant who is determined to have an adverse credit history would also have to complete PLUS loan counseling to receive the PLUS loan. We believe loan counseling would help these PLUS loan applicants to understand the ramifications of incurring this additional debt.
The total increase in burden for § 685.200(b)(5) would be 47,984 hours under OMB Control Number 1845-NEW1.
Our 2013-14 data show that there were 210 requests from parents of students at foreign institutions for reconsideration based on extenuating circumstances; therefore, we estimate the burden would increase by 210 hours Start Printed Page 46656(189 approved requests for reconsideration, divided by 90 percent, multiplied by 1 hour per request) under OMB Control Number 1845-NEW1.
The total increase in burden for § 685.200(c)(2)(viii)(A)(3) would be 115,794 hours under OMB Control Number 1845-NEW1.
We estimate the burden associated with the loan counseling requirement under proposed § 685.200(c)(2)(viii)(A)(3). All graduate and professional students are currently required to undergo PLUS loan entrance counseling. We estimate that the additional loan counseling requirements for graduate and professional students who qualify for PLUS loans under extenuating circumstances would, on average, increase loan counseling by 0.17 hours (10 minutes) for each graduate or professional PLUS loan applicant who qualifies for a PLUS loan due to extenuating circumstances.
Under proposed § 685.200(b)(5), our 2013-14 data show that there were 21,424 approved requests for reconsideration based on extenuating circumstances from graduate or professional students at private nonprofit institutions; therefore, we estimate the burden would increase by 3,642 hours (21,424 approved requests for reconsideration multiplied by 0.17 hours per additional counseling components) under OMB Control Number 1845-NEW1.
The total increase in burden for § 685.200(b)(5) would be 7,342 hours under OMB Control Number 1845-NEW1.
The total increase in burden for § 685.200(c)(2)(viii)(A)(3) would be 78,161 hours under OMB Control Number 1845-NEW1.
Consistent with the discussion above, the following chart describes the sections of the proposed regulations involving information collections, the information being collected, and the collections that the Department will submit to OMB for approval and public comment under the PRA, and the estimated costs associated with the information collections. The monetized net costs of the increased burden on applicants and borrowers, using wage data developed using BLS data, available at www.bls.gov/​ncs/​ect/​sp/​ecsuphst.pdf, is $4,063,280, as shown in the chart below. This cost was based on an hourly rate of $16.30 for applicants and borrowers.
OMB control number and estimated burden [change in burden]
§ 685.200 (b)(5) and 685.200 (c)(1) (viii)(A)(3) Borrower Eligibility Revises language requiring documentation for extenuating circumstances and augments PLUS loan counseling for graduate and professional students to increase student financial literacy. The proposed regulations also require parent PLUS loan counseling OMB 1845-NEW1. We estimate that the burden would increase by 249,281 hours $4,063,280
If you want to comment on the proposed information collection requirements, please send your comments to the Office of Information and Regulatory Affairs, OMB, Attention: Desk Officer for U.S. Department of Start Printed Page 46657Education, by fax to (202) 395-6974 or send your comments by email to OIRA_DOCKET@omb.eop.gov. You may also send a copy of these comments to the Department contact named in the ADDRESSES section of this preamble.
OMB is required to make a decision concerning the collection of information contained in these proposed regulations between 30 and 60 days after publication of this document in the Federal Register. Therefore, to ensure that OMB gives your comments full consideration, it is important that OMB receives your comments by September 8, 2014. This does not affect the deadline for your comments to us on the proposed regulations.
These programs are not subject to Executive Order 12372 and the regulations in 34 CFR part 79.
In accordance with section 411 of the General Education Provisions Act, 20 U.S.C. 1221e-4, the Secretary particularly requests 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.
Accessible Format: Individuals with disabilities can obtain this document in an accessible format (e.g., braille, large print, audiotape, or compact disc) on request to one of the persons listed under FOR FURTHER INFORMATION CONTACT.
Electronic Access to This Document: The official version of this document is the document published in the Federal Register. Free Internet access to the official edition of the Federal Register and the Code of Federal Regulations is available via the Federal Digital System at: www.gpo.gov/​fdsys. At this site you can view this document, as well as all other documents of the Department published in the Federal Register, in text or Adobe Portable Document Format (PDF). To use PDF you must have Adobe Acrobat Reader, which is available free at the site.
For the reasons discussed in the preamble, the Secretary of Education proposes to amend part 685 of title 34 of the Code of Federal Regulations as follows:
Authority: 20 U.S.C. 1070g, 1087a, et seq., unless otherwise noted.
(1) Has one or more debts with a total combined outstanding balance greater than $2,085, as may be adjusted over time on a basis determined by the Secretary, that are 90 or more days delinquent as of the date of the credit report, or that have been placed in Start Printed Page 46658collection or charged off, as defined in paragraph (c)(1) of this section, during the two years preceding the date of the credit report; or
1. All of the charts provided to the negotiators are available at: http://www2.ed.gov/​policy/​highered/​reg/​hearulemaking/​2012/​programintegrity.html#2.
2. This data is available at: http://www2.ed.gov/​policy/​highered/​reg/​hearulemaking/​2012/​programintegrity.html#2.
3. These charts are available at: http://www2.ed.gov/​policy/​highered/​reg/​hearulemaking/​2012/​programintegrity.html#3.
4. http://nces.ed.gov/​programs/​digest/​d13/​tables/​dt13_​331.95.asp
5. Origination fees for Direct PLUS loans will increase to 4.292 percent on October 1, 2014.
6. Origination fees for Direct Subsidized and Unsubsidized loans will increase to 1.073 percent on October 1, 2014.
7. http://www.mela.net/​maine-loan.php.
8. http://www.chesla.org/​Customer-Content/​WWW/​CMS/​files/​071137_​2011_​annualreport.pdf.
9. http://www.rurdev.usda.gov/​SupportDocuments/​CA-SFH-GRHUnderwritingGuide.pdf.
[FR Doc. 2014-18673 Filed 8-7-14; 8:45 am]