[Federal Register: July 27, 2000 (Volume 65, Number 145)]
[Proposed Rules]               
[Page 46127-46131]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]



34 CFR Part 674

RIN 1845-AA15

Federal Perkins Loan Program

AGENCY: Office of Postsecondary Education, Education.

ACTION: Notice of proposed rulemaking.


SUMMARY: The Secretary proposes to amend the Federal Perkins Loan 
(Perkins Loan) Program regulations. These proposed regulations are 
intended to improve collections in the Perkins Loan program by 
providing greater flexibility in the process of assigning defaulted 
Perkins loans to the Secretary for collection. They allow State 
institutions participating in the Perkins program to invoke their right 
to sovereign immunity in bankruptcy proceedings. In addition, these 
proposed regulations clarify the maximum collection costs that may be 
assessed a borrower who defaults on a rehabilitated defaulted loan.

DATES: We must receive your comments by September 11, 2000.

ADDRESSES: Address all comments concerning these proposed regulations 
to Ms. Vanessa Freeman, U.S. Department of Education, P.O. Box 23272, 
Washington, DC 20026-3272. If you prefer to send your comments through 
the Internet, use the following address: perkinsnprm@ed.gov.
    If you want to comment on the information collection requirements 
you must send your comments to the Office of Management and Budget at 
the address listed in the Paperwork Reduction Act section of this 
preamble. You may also send a copy of these comments to the Department 
representative named in this section.

FOR FURTHER INFORMATION CONTACT: Ms. Vanessa Freeman, Program Analyst, 
U.S. Department of Education, 400 Maryland Avenue, SW., Room 3045, 
Regional Office Building #3, Washington, DC 20202-5346. Telephone: 
(202) 708-8242. If you use a telecommunications device for the deaf 
(TDD), you may call the Federal Information Relay Service (FIRS) at 1-
    Individuals with disabilities may obtain this document in an 
alternate format (e.g., Braille, large print, audiotape, or computer 
diskette) on request to the contact person listed in the preceding 


Invitation To Comment

    We invite you to submit comments regarding these 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 to arrange your comments in the same order 
as the proposed regulations.
    We invite you to assist us in complying with the specific 
requirements of Executive Order 12866 and its overall requirement of 
reducing regulatory burden that might result from these proposed 
regulations. Please let us know of any further opportunities we should 
take to reduce potential costs or increase potential benefits while 
preserving the effective and efficient administration of the program.
    During and after the comment period, you may inspect all public 
comments about these proposed regulations at the following address: 
U.S. Department of Education, 7th and D Sts. SW., ROB #3, Rm 3045, 
Washington, DC 20026-3272, between the hours of 8:30 a.m. and 4 p.m., 
Eastern time, Monday through Friday, of each week except Federal 

Assistance to Individuals With Disabilities in Reviewing the 
Rulemaking Record

    On request, we will supply an appropriate aid, such as a reader or 
print magnifier, to an individual with a disability who needs 
assistance to review the comments or other documents in the public 
rulemaking docket for these proposed regulations. If you want to 
schedule an appointment for this type of aid, you may call (202) 205-
8113 or (202) 260-9895. If you use a TDD, you may call the Federal 
Information Relay Service at 1-800-877-8339.

Negotiated Rulemaking

    Section 492 of the HEA requires that, before publishing any 
proposed regulations for programs under Title IV of the HEA, the 
Secretary obtain public involvement in the development of the proposed 
regulations. After obtaining advice and recommendations, the Secretary 
must conduct a negotiated rulemaking process to develop the proposed 
regulations. All published proposed regulations must conform to 
agreements resulting from the negotiated rulemaking process unless the 
Secretary reopens the negotiated rulemaking process or provides a 
written explanation to the participants in that process why the 
Secretary has decided to depart from the agreements.
    To obtain public involvement in the development of the proposed 
regulations, we held listening sessions

[[Page 46128]]

in Washington, DC, Atlanta, Chicago, and San Francisco. Four half-day 
sessions were held on September 13 and 14, 1999, in Washington, DC. In 
addition, we held three regional sessions in Atlanta on September 17, 
in Chicago on September 24, and in San Francisco on September 27, 1999. 
The Office of Student Financial Assistance's Customer Service Task 
Force also conducted listening sessions to obtain public involvement in 
the development of our regulations.
    We then published a notice in the Federal Register (64 FR 73458, 
December 30, 1999) to announce our intention to establish two 
negotiated rulemaking committees to draft proposed regulations 
affecting Title IV of the HEA. The notice requested nominations for 
participants from anyone who believed that his or her organization or 
group should participate in this negotiated rulemaking process. The 
notice announced that we would select participants for the process from 
the nominees of those organizations or groups. The notice also 
announced a tentative list of issues that each committee would 
    Once the two committees were established, they met to develop 
proposed regulations over the course of several months, beginning in 
February. The proposed regulations contained in this NPRM reflect the 
final consensus of Negotiating Committee I (committee), which was made 
up of the following members:

American Association of Collegiate Registrars and Admissions 
American Association of Cosmetology Schools
American Association of State Colleges and Universities (in 
coalition with American Association of Community Colleges)
American Council on Education
Career College Association
Coalition of Higher Education Assistance Organizations
Consumer Bankers Association
Education Finance Council
Education Loan Management Resources
Legal Services
National Association of College and University Business Officers
National Association of Independent Colleges and Universities
National Association of State Universities and Land-Grant Colleges
National Association of Student Financial Aid Administrators
National Association of Student Loan Administrators
National Council of Higher Education Loan Programs
National Direct Student Loan Coalition
Sallie Mae, Inc.
Student Loan Servicing Alliance
The College Fund/United Negro College Fund
United States Department of Education
United States Student Association
US Public Interest Research Group

    As stated in the committee protocols, consensus means that there 
must be no dissent by any member in order for the committee to be 
considered to have reached agreement. Consensus was reached on all of 
the proposed regulations in this document.

Significant Proposed Regulations

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

Sections 674.13  Reimbursement to the Fund and 674.50  Assignment of 
defaulted loans to the United States

    Current regulations: Section 674.13 of the current regulations 
requires an institution to reimburse its Federal Perkins Loan Fund 
(Institution's Fund) for the amount of defaulted loans, including 
administrative cost allowances previously claimed, for which the 
institution failed to retain required documentation (e.g., the 
promissory note and a record of advances) or failed to undertake due 
diligence in collections. Section 674.50(c) of the current regulations 
identifies the documentation required to be submitted by an institution 
to assign a loan to the Secretary. Our rejection of an assignment 
submission for incorrect or incomplete documentation or for an 
evidenced lack of due diligence in collection of the loan may result in 
a request that the institution reimburse its Institution's Fund.
    Proposed regulations: We propose to amend these sections of the 
regulations to encourage institutions to assign defaulted loans to us 
by providing the Secretary discretion to accept defaulted loans for 
assignment even if not all the documentation specified in 674.50(c) is 
available or reveals imperfect collection. We also propose to provide 
the Secretary with discretion to determine the circumstances under 
which we will require reimbursement by the institution to its 
Institution's Fund.
    Reasons: The proposed change to these sections of the current 
regulations from absolute requirements to Secretarial discretion 
represents a compromise with the non-federal negotiators regarding 
assignment of certain defaulted loans by institutions.
    Our initial proposal to require loan assignment reflected our 
concern over the approximately $350 million in defaulted Perkins loans 
that are held by participating institutions and have been in default 
for five or more years as reported by schools on their annual Fiscal 
Operations Report. Our proposal would have required schools whose 
Perkins Loan portfolio included a significant percentage of loans in 
default for five or more years to assign to the Secretary those aged 
loans with no recent payment activity.
    We believe that, without additional significant efforts, this 
national portfolio of aging defaulted loans will continue to grow and 
may become less collectible over time. Left unaddressed, this situation 
reduces funds available for future students and may undermine public 
support for the Federal Perkins Loan Program. Institutions may have 
exhausted available collection efforts and ceased collection on an 
unknown number of these accounts. Because we have collection tools, 
such as administrative wage garnishment, federal offset, and litigation 
by the Department of Justice in federal court, that are not available 
to institutions, we want to have these aged accounts assigned to the 
Secretary for collection.
    The non-federal negotiators representing institutions' interests 
strenuously rejected the contention that all loans in default for five 
or more years were inactive accounts and that collection efforts were 
not continuing on those accounts. Although they agreed that we have 
collection tools that are not available to institutions, they expressed 
the belief that we should make these tools more accessible by 
simplifying the existing voluntary assignment process or introducing a 
referral process into the regulations rather than imposing mandatory 
assignment. They indicated that the current voluntary assignment 
process was underused because it was administratively burdensome and 
put institutions at risk of reimbursing their Institution's Fund for 
all loans not accepted for assignment. During the negotiations, there 
was much discussion and review of a proposal submitted by the non-
federal negotiators for use of a referral and voluntary assignment 
    After carefully considering the proposal for a voluntary referral 
process we declined to consider such an approach. Our experience with 
similar Perkins Loan referral plans in the past convinced us that such 
plans are administratively unworkable. They are difficult to manage, 
hard to explain to borrowers, and present fiscal and legal obstacles 
with regard to the return of payments received to the referring 
    Instead we proposed changes to the current voluntary assignment 
regulations that would allow us to have

[[Page 46129]]

the opportunity to work with interested institutions and organizations 
to develop a less burdensome and more flexible process before turning 
to a mandatory assignment approach. Thus, these proposed regulations 
give the Secretary discretion in the two areas (required reimbursement 
and documentation requirements) that were problematic to some 
    We intend to develop, with the cooperation of participating Perkins 
institutions, a simplified voluntary assignment process for aging 
defaulted accounts. We will also monitor the use of this new process 
over the reporting cycle following implementation of the regulations. 
We expect institutions to actively review their portfolios and use the 
new process to assign aged, nonpaying accounts to us and we anticipate 
a significant reduction in the number and dollar value of these 
accounts as a result. Should the streamlined voluntary assignment 
process prove unsuccessful in reducing the number of these accounts, we 
will consider alternatives, including reintroducing our original 
regulatory proposal for mandatory assignment.

Section 674.39  Loan Rehabilitation

    Current Regulations: Section 674.39(c) of the current regulations 
specifies that if collection costs are assessed on a rehabilitated 
defaulted Perkins loan, those collections costs may not exceed 24 
percent of the unpaid principal and accrued interest on the loan as of 
the date following application of the twelfth payment required to 
rehabilitate the loan.
    Proposed Regulations: We propose to amend this section of the 
regulations by adding a provision that clarifies that the 24 percent 
cap on collection costs that may be charged on a rehabilitated loan 
does not apply if the borrower defaults again on the rehabilitated 
    Reasons: The cap of 24 percent on collection costs for borrowers 
who successfully rehabilitate a defaulted Perkins loan is a benefit to 
those borrowers, who in many cases were subject to a higher percentage 
of collection costs prior to the rehabilitation. That benefit should no 
longer apply on the loan, however, should the borrower once again 
default on its repayment.

Section 674.49  Bankruptcy of Borrower

    Current Regulations: Section 674.49(b) of the regulations currently 
requires institutions to file a proof of claim in a bankruptcy 
proceeding under Chapter 7 of the Bankruptcy Code unless the borrower 
has no assets.
    Proposed Regulations: We propose to amend this provision of the 
regulations to allow an institution that is determined to be an agency 
of a State to invoke in bankruptcy proceedings its right of sovereign 
immunity under the 11th amendment to the Constitution of the United 
    Reasons: We are amending the regulations to codify the recognized 
right of States and their agents to invoke their rights under the 11th 
amendment to the Constitution and eliminate any conflict in existing 
regulations that would suggest that a proof of claim must be filed in 
all cases where this right might otherwise be invoked.

Executive Order 12866

1. Potential Costs and Benefits

    Under Executive Order 12866, we have assessed the potential costs 
and benefits of this regulatory action.
    The potential costs associated with the proposed regulations are 
those resulting from statutory requirements and those we have 
determined as necessary for administering this program effectively and 
    The proposed regulations would expand borrower benefits by fixing 
collection costs on rehabilitated loans not in default at 24 percent. 
The proposed regulations provide additional flexibility in the 
administration of the Perkins Loan Program by relaxing both the 
documentation requirements for defaulted loans assigned to the 
Secretary, and provisions regarding the institutional reimbursement to 
their Fund for the costs of defaulted loans. The proposed regulations 
also modify current regulations regarding the determination of 
bankruptcy to make Federal requirements consistent with the States' 
constitutional rights under the 11th Amendment. In assessing the 
potential costs and benefits--both quantitative and qualitative--of 
this regulatory action, we have determined that the benefits would 
justify the costs.

2. Clarity of the Regulations

    Executive Order 12866 and the President's Memorandum of June 1, 
1998 on ``Plain Language in Government Writing'' require each agency to 
write regulations that are easy to understand.
    The Secretary invites comments on how to make these proposed 
regulations easier to understand, including answers to questions such 
as the following:
    * Are the requirements in the proposed regulations clearly 
    * Do the proposed regulations contain technical terms or 
other wording that interferes with their clarity?
    * Does the format of the proposed regulations (grouping and 
order of sections, use of headings, paragraphing etc.) aid or reduce 
their clarity?
    * Would the proposed regulations be easier to understand if 
we divided them into more (but shorter) sections? (A ``section'' is 
preceded by the symbol ``Sec. '' and a numbered heading; for example, 
Sec. 674.39 Loan Rehabilitation.)
    * Could the description of the proposed regulations in the 
``Supplementary Information'' section of this preamble be more helpful 
in making the proposed regulations easier to understand? If so, how?
    * What else could we do to make the proposed regulations 
easier to understand?
    Send any comments that concern how the Department could make these 
proposed regulations easier to understand to the person listed in the 
ADDRESSES section of the preamble.

Regulatory Flexibility Act Certification

    The Secretary certifies that these proposed regulations would not 
have a significant economic impact on a substantial number of small 
entities. These proposed regulations would affect institutions of 
higher education that participate in title IV, HEA programs. The U.S. 
Small Business Administration (SBA) Size Standards define institutions 
as ``small entities'' if they are for-profit or nonprofit institutions 
with total annual revenue below $5,000,000 or if they are institutions 
controlled by governmental entities with populations below 50,000.
    The parties affected by these proposed regulations are institutions 
of higher education that participate in the Perkins Loan Program, and 
individual Perkins Loan borrowers. Perkins Loan borrowers are not 
considered small entities under the Regulatory and Flexibility Act. A 
small percentage of the approximately 2,000 institutions participating 
in the Perkins Loan program would meet the SBA definition of ``small 
    These proposed regulations would expand borrower benefits and 
provide additional flexibility in the administration of the Perkins 
Loan program to both large and small institutions without requiring 
significant changes to institutional systems or operations. These 
proposed regulations would not impose a significant economic impact on 
a substantial number of small entities.

Paperwork Reduction Act of 1995

    Sections 674.13, 674.39, 674.49, and 674.50 of these regulations 
contain information collection requirements. Under the Paperwork 
Reduction Act of 1995 (44 U.S.C. 3507(d)), the Department of Education 
has submitted

[[Page 46130]]

a copy of these sections to the Office of Management and Budget (OMB) 
for its review.

Collection of Information: Federal Perkins Loan Program

    Section 674.13  Reimbursement to the Fund. The Department currently 
has these regulations approved under OMB control number 1845-0019. This 
provision allows institutions more flexibility in what the Department 
requires when reimbursing their funds for defaulted student loans and 
does not increase the burden hours for schools.
    Section 674.39  Loan Rehabilitation. We are adding a provision to 
include collection costs that may be charged in excess of 24 percent to 
a rehabilitated loan in the event the rehabilitated loan defaults. 
There are no burden hours associated with this proposed regulation.
    Section 674.50  Assignment of defaulted loans to the United States. 
This proposed regulation relaxes some of the documentation requirements 
for institutions that assign defaulted student loans to the Department 
of Education for collection. This proposed regulation does not increase 
the burden hours for schools.
    Section 674.49  Bankruptcy of borrower. The Department currently 
has this section approved under OMB control number 1845-0023. This 
regulation allows state institutions that participate in the Federal 
Perkins Loans Program the authority to invoke sovereign immunity in 
Bankruptcy proceedings under Chapter 7 or 13 of the Bankruptcy Code. 
This proposed regulation resolves any ambiguity surrounding an 
institution's authority to invoke its rights under the 11th Amendment. 
This proposed regulation does not change information collection 
contained in this section.
    If you want to comment on the information collection requirements, 
please send your comments to the Office of Information and Regulatory 
Affairs, OMB, room 10235, New Executive Office Building, Washington, DC 
20503; Attention: Desk Officer for U.S. Department of Education. You 
may also send a copy of these comments to the Department representative 
named in the ADDRESSES section of this preamble.
    We consider your comments on these proposed collections of 
information in--
    * Deciding whether the proposed collections are necessary 
for the proper performance of our functions, including whether the 
information will have practical use;
    * Evaluating the accuracy of our estimate of the burden of 
the proposed collections, including the validity of our methodology and 
    * Enhancing the quality, usefulness, and clarity of the 
information we collect; and
    * Minimizing the burden on those who must respond. This 
includes exploring the use of appropriate automated, electronic, 
mechanical, or other technological collection techniques or other forms 
of information technology; e.g., permitting electronic submission of 
    OMB is required to make a decision concerning the collections 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 the comments within 30 days of 
publication. This does not affect the deadline for your comments to us 
on the proposed regulations.

Intergovernmental Review

    This program is not subject to Executive Order 12372 and the 
regulations in 34 CFR part 79.

Assessment of Educational Impact

    The Secretary particularly requests comments on whether these 
proposed regulations would require transmission of information that any 
other agency or authority of the United States gathers or makes 


    Executive Order 13132 requires us to ensure meaningful and timely 
input by State and local elected officials in the development of 
regulatory policies that have federalism implications. ``Federalism 
implications'' means substantial direct effects on the States, on the 
relationship between the national government and the States, or on the 
distribution of power and responsibilities among various levels of 
government. The proposed regulations in Section 674.49 may have 
federalism implications, as defined in Executive Order 13132. We 
encourage State and local elected officials to review and provide 
comments on these proposed regulations.

Electronic Access to This Document

    You may view this document in text or Adobe Portable Document 
Format (PDF) on the Internet at the following sites:


    To use the PDF you must have the Adobe Acrobat Reader Program with 
Search, which is available free at the previous sites. If you have 
questions about using the PDF, call the U.S. Government Printing Office 
(GPO), toll free, at 1-888-293-6498; or in the Washington, D.C., area 
at (202) 512-1530.

    Note: 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 on GPO Access at: http://

(Catalog of Federal Domestic Assistance Number: 84.037 Federal 
Perkins Loan Program)

List of Subjects in 34 CFR Part 674

    Loan programs--education, Student aid, Reporting and recordkeeping 

    Dated: July 19, 2000.
Richard W. Riley,
Secretary of Education.

    For the reasons discussed in the preamble, the Secretary proposes 
to amend part 674 of title 34 of the Code of Federal Regulations as 


    1. The authority citation for part 674 continues to read as 

    Authority: 20 U.S.C. 1087aa-1087ii and 20 U.S.C. 421-429, unless 
otherwise noted.

    2. Section 674.13 is amended by revising paragraph (a) introductory 
text to read as follows:

Sec. 674.13  Reimbursement to the Fund.

    (a) The Secretary may require an institution to reimburse its Fund 
in an amount equal to that portion of the outstanding balance of--
* * * * *
    3. Section 674.39 is amended by revising paragraph (c) to read as 

Sec. 674.39  Loan rehabilitation.

* * * * *
    (c) Collection costs on a rehabilitated loan--
    (1) If charged to the borrower, may not exceed 24 percent of the 
unpaid principal and accrued interest as of the date following 
application of the twelfth payment;
    (2) That exceed the amounts specified in paragraph (c)(1) of this 
section, may be charged to an institution's Fund until July 1, 2002 in 
accordance with Sec. 674.47(e)(5); and
    (3) Are not restricted to 24 percent in the event the rehabilitated 
loan defaults.
* * * * *
    4. Section 674.49 is amended by revising paragraph (b) to read as 

[[Page 46131]]

Sec. 674.49  Bankruptcy of borrower.

* * * * *
    (b) Proof of claim. The institution must file a proof of claim in 
the bankruptcy proceeding unless--
    (1) In the case of a proceeding under chapter 7 of the Bankruptcy 
Code, the notice of meeting of creditors states that the borrower has 
no assets, or
    (2) In the case of a bankruptcy proceeding under either Chapter 7 
or Chapter 13 of the Bankruptcy Code in which the repayment plan 
proposes that the borrower repay less than the full amount owed on the 
loan, the institution has an authoritative determination by an 
appropriate State official that in the opinion of the state official, 
the institution is an agency of the State and is, on that basis, under 
applicable State law, immune from suit.
* * * * *
    5. Section 674.50 is amended by revising paragraph (c) introductory 
text to read as follows:

Sec. 674.50  Assignment of defaulted loans to the United States.

* * * * *
    (c) The Secretary may require an institution to submit the 
following documents for any loan it proposes to assign--
* * * * *
[FR Doc. 00-18952 Filed 7-26-00; 8:45 am]