Federal Student Aid Programs, 45666-45717 [06-6696]

Agencies

• DEPARTMENT OF EDUCATION

[Federal Register Volume 71, Number 153 (Wednesday, August 9, 2006)]
[Rules and Regulations]
[Pages 45666-45717]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 06-6696]



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Part III





Department of Education





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



Federal Student Aid Programs; Final Rule

Federal Register / Vol. 71, No. 153 / Wednesday, August 9, 2006 / 
Rules and Regulations

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DEPARTMENT OF EDUCATION

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

RIN 1840-AC87


Federal Student Aid Programs

AGENCY: Office of Postsecondary Education, Department of Education.

ACTION: Interim final regulations; request for comments.

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

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

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

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

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

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

Significant Regulations

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

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

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

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

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

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

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

Academic Year (Sec.  668.3)

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

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

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

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

[[Page 45671]]

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

[[Page 45672]]

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

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

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

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

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

[[Page 45673]]

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

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

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

[[Page 45674]]

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

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

FFEL and Direct Loan Program Changes

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

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

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

    Statute: Section 8009 of the HERA amended section 428C(a)(3)(C) of 
the HEA by eliminating the ability of a married couple to jointly 
consolidate their eligible student loans.
    Current Regulations: Current regulations permit a married couple to 
consolidate their eligible student loans into a j