United States Department of Education

Student Financial Assistance
Regulatory Review

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Index

1. Introduction
2. Recent History of Regulatory Improvement

1. Negotiated Rulemaking
2. Other Regulatory Improvements

3. Regulatory Review Activities
4. Issues and Ideas from the Regulatory Review Effort

1. Technological Advances
2. Other Changes
3. Regulatory Flexibility
4. Overhaul Old Regulatory Provisions that Need to be Clarified
5. Uniform Interpretation and Enforcement of Regulations
6. New Regulatory Provisions
7. Miscellaneous Regulatory Provisions

5. Conclusion - Future Action

1. Negotiated Rulemaking 2000
2. Regulatory Track to the 21^st Century

6. Appendices
   1. Required Review of Regulations--Excerpt from the Higher Education Amendments of 1998

   2. Federal Register: Outreach to customers and partners for advice and recommendations on regulatory review for Title IV of the Higher Education Act of 1965, as amended [OPE]

   3. Federal Register: Notice of intention to establish negotiated rulemaking committees on issues under Title IV of the Higher Education Act of 1965, as amended [OPE]

Student Financial Assistance Regulatory Review:
A Report to
the Committee on Labor and Human Resources
of the U.S. Senate and
the Committee on Education and the Workforce
of the U.S. House of Representatives

I. Introduction

Section 498B of the Higher Education Act of 1965, as amended (HEA), requires that the Department of Education (Department) review its regulations in consultation with participants in the student financial assistance programs and to consider regulatory improvements^[1]. This requirement is consistent with the Department's own efforts to work with the higher education community to enhance the student financial assistance programs. In the past several years, the Department has continuously worked with students, parents, schools, taxpayers, financial institutions, states, accrediting agencies, and the U.S. Congress to build a cooperative regulatory environment that emphasizes effectiveness and responsibility.

This report will describe some of the Department's prior efforts to work with the higher education community to improve the regulatory environment. These successes provide the background from which the Department has implemented the most recent Congressional requirement to consult with the higher education community and to consider regulatory reform. In this report, we identify steps taken as part of the current effort and the suggestions that we heard while talking to representatives of the higher education community at several listening sessions about regulatory reform. This is not, however, the end of the process. The report identifies the continuing efforts the Department will take to review and improve its regulations, including this year's round of negotiated rulemaking. We also set forth our plans to continue to work with the community to identify how our regulations can be improved to reflect new opportunities created by technology, a changing postsecondary education landscape, and the modernization of the Department's student aid systems. This effort must include a thoughtful consideration of how postsecondary education and student aid have changed, how they will continue to change over the next several years, and how our regulations can therefore be revised or improved.

II. Recent History of Regulatory Improvement

In the last several years, demand for student financial assistance has skyrocketed, the Federal Direct Loan Program has been more fully implemented, and technology has changed the student financial assistance landscape. In light of these developments, the Department of Education has been sensitive to the need to simplify the student aid regulations, allow for more flexibility in administering the student aid programs, and reduce burden on all student aid participants, while simultaneously protecting the interests of students and taxpayers. This effort is an ongoing process, but it is important to note that the Department has succeeded in implementing many regulatory reforms in recent years. Since these recent accomplishments form the basis on which the current regulatory effort will build, it is useful to look at the impact of these successes.

A. Negotiated Rulemaking

In January 1999, the Department began negotiating regulations with its customers and partners to implement the Higher Education Amendments of 1998. The negotiations were very successful. The Department and the higher education community reached consensus on all issues before the four negotiating committees, with the exception of one issue in each of two committees. We believe that the rigor of the negotiations, involving dozens of representatives from the higher education community, resulted in well-reasoned regulations.

As stated in a letter to Acting Deputy Secretary Marshall Smith from Stanley Ikenberry, President of the American Council on Education:

[We] wish to congratulate the Department on the success of the [negotiated rulemaking] effort. All who participated in the negotiations agree that the Department succeeded in achieving an extraordinary degree of collaboration and concurrence with the non-Federal negotiators.

This sentiment was echoed in remarks by Dallas Martin, President of the National Association of Student Financial Aid Administrators:

We, too, commend the Department on how it conducted the most recent series of Title IV negotiated rulemaking sessions. . . . [P]articipants I have spoken to indicated that the negotiations were conducted in an atmosphere that fostered trust, respect for differences, and a willingness to reach accommodation and consensus.

Because of the large number of changes to the HEA as the result of reauthorization, the Department, in consultation with the higher education community, established four separate negotiating committees. The committees addressed issues in the following categories:

• Guarantor and lender issues;
• Loan issues;
• Program and student eligibility issues; and
• Institutional eligibility issues.

In addition to negotiating the regulations required to implement the 1998 amendments, the Department engaged the higher education community in negotiated rulemaking in two additional areas: reworking all of the accreditation regulations and revising certain aspects of the Federal Family Education Loan (FFEL) program.

• Accreditation - The regulations that govern the Secretary's recognition of accrediting agencies were completely rewritten to achieve greater clarity and simplicity. Based on comments from the negotiators and the response to the June 25, 1999, Notice of Proposed Rulemaking, these changes have been very well received.
• The new regulations avoid the use of frequently misunderstood terms such as "valid" and "reliable" in the criteria for the recognition of accrediting agencies. Instead, the new regulations use standards that are easy to understand and apply. An accrediting agency must now ensure that its program of review (1) is comprehensive, (2) occurs at regular intervals or on an ongoing basis, (3) examines each accrediting standard, (4) involves all of the relevant stakeholders in the review, and (5) affords those stakeholders a meaningful opportunity to provide input into the review. Agencies must demonstrate through their programs of review that their accrediting standards are adequate to evaluate the quality of education provided and relevant to the needs of students.
• The new regulations also tie regulatory requirements to risk. For example, instead of requiring accrediting agencies to make site visits to every new campus, the regulations establish clear, specific parameters that allow for selective visits, based on potential risks.
• The new regulations eliminate needless burden for agencies that are simply seeking renewal of recognition previously granted by dispensing with the requirement that they demonstrate accrediting experience.
• Federal Family Education Loan Program - The negotiating committees also formulated other regulatory improvements that were not required as a result of the HEA amendments, but reduced the burdens on all program participants. Enhancements agreed to by the negotiating committee and implemented by the Department in final regulations include the following:
• Prior to the new regulations, a borrower who realized that he or she did not need the first disbursement of a loan was required to reapply later in the year to obtain subsequent disbursements. Under the new regulations, future disbursements can be made even if the student decides not to take the first disbursement.
• The new regulations reduce the length of time a lender must retain required loan records for loans paid in full by the borrower from five years to three years. This change is consistent with the document retention periods for institutions under the General Education Provisions Act.

B. Other Regulatory Improvements

In addition to negotiated rulemaking, the Department has worked with the higher education community throughout the last several years to improve the regulatory environment. We have asked our customers and partners what can be improved, and we have provided them with opportunities to try new and improved approaches.

• Customer Service Task Force - Throughout 1999, the Office of Student Financial Assistance (OSFA) asked our partners and customers how to improve student financial assistance. OSFA's Customer Service Task Force conducted over 200 face-to-face listening sessions around the country, collecting nearly 8,000 ideas about what works well and what doesn't. In the area of student aid regulations, a central theme emerged: concentrate more on results and less on specific procedures. Most of the rule changes requested require the participation of all stakeholders and a new round of negotiated rulemaking. The Department has begun its review of the regulatory revisions suggested by our customers, partners, and employees, and will complete this review in connection with the 2000 negotiated rulemaking process and the broader regulatory review effort detailed below.
• Quality Assurance Program - The Quality Assurance Program was designed by the Department to help schools improve the management and delivery of student financial assistance and provide better service to students. The program encourages schools to develop creative and more efficient approaches to administering the student aid program without the constraints of certain process-oriented regulatory requirements. Success is defined by measurable results (e.g., award accuracy) and continuous improvement. Schools gain flexibility to manage, but maintain, and even increase, accountability. Almost 150 schools participated in the program in the 1998-99 academic year.
• Experimental Sites - The Experimental Sites Initiative began as an effort by Congress and the Department to provide statutory and regulatory relief for institutions to test innovative ways of administering student financial aid and to provide data to support broader policy initiatives. For academic year 1997-98, 164 institutions were approved to participate in one or more of 13 experiments. In all cases, institutions agreed to conduct an experiment, involving a different method of administration and report to the Department the effects of the experiment. The experiments have provided two major benefits: better service to students and reduced administrative burden for institutions. Institutions most frequently reported administrative relief in the form of less time and fewer staff involved in the administration of student financial assistance. A report of the experimental sites was prepared and submitted to the Congress in March, 1999.

III. Regulatory Review Activities

In carrying out the regulatory review process described in Section 498B of the HEA, the Department has consulted with students, schools, lenders, guaranty agencies, and other program participants.

• Web Site - First, the Department established a regulatory review Web site^[2]. Through a Federal Register notice, postings on the Department's Information for Financial Aid Professionals (IFAP) Web site, Finaid-L and other related e-mail lists, and direct contact with the organizations involved in the recent round of negotiated rulemaking, we invited interested parties to visit the regulatory review Web site to find out about the regulatory review effort, to monitor the progress of the effort and to provide comments to the Department through our electronic mail address at ODS_regs@ed.gov. On the Web site, as suggested in Section 498B of the HEA, we asked the community for input related to the following questions:

1. Are there any regulations that are duplicative or no longer necessary?
2. Are there any regulations that are not being interpreted and applied uniformly?
3. Are unnecessary burdens being placed on schools through the eligibility and compliance process? For example, is there a need to consider eligibility and compliance issues simultaneously?
4. Are unnecessary costs imposed on institutions of higher education by regulations that were designed to apply primarily to industrial and commercial enterprises?
5. Are there any regulations affecting public and private colleges and universities and proprietary schools that receive less than $200,000 in Title IV funds each year that could have been improved, streamlined, or eliminated?
• Listening Sessions - Next, we conducted seven listening sessions in Washington, D.C., Atlanta, Chicago, and San Francisco so we could hear directly from our customers and partners^[3]. Four half-day sessions were held on September 13 and 14, 1999, in Washington, D.C. Each session focused on one of the four topic areas addressed by the four negotiated rulemaking committees:
• Guarantor and lender issues;
• Loan issues;
• Program and student eligibility issues; and
• Institutional eligibility issues.

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.

While we continued to pose the questions mentioned by the HEA amendments, we opened up the sessions for a broader discussion to include other issues important to our customers and partners. We also wanted to hear about how technology has changed and will continue to change the delivery of student financial assistance. Finally, we posed the question: how broad should this regulatory review be?

At the listening sessions, we learned that our stakeholders were pleased with the successes of the past but, like the Department, wanted to build on the successes to create the best regulatory environment possible. Each session was marked by a dialogue with the participants in which the Department posed questions and asked for elaboration, but allowed the participants to set the agenda and direct the conversation. Many interesting ideas were generated at the listening sessions. This report provides an opportunity to disseminate these ideas from the listening sessions to a larger audience for comment and consideration.

IV. Issues and Ideas from the Regulatory Review Effort

Numerous suggestions for regulatory reform were made during the course of the Department's meetings with our customers and partners. Some suggestions included specific regulatory changes to address rather specific concerns; other suggestions focused on broad regulatory themes; and still others focused on the process that we should implement to further the effort of regulatory reform^[4].

During the listening sessions, we heard from the higher education community that negotiated rulemaking and the attendant responsibilities had precluded them from taking the time necessary to address all of the specific proposals for this regulatory reform process. Indeed, the community representatives asked the Department not to make specific recommendations for regulatory reform until both the Department and the higher education community could undertake a more complete and thoughtful review of the regulations. Based upon that request and the workload constraints created by regulatory negotiations, resulting in the Notices of Proposed Rulemaking and final regulations that were published in the Fall of last year, the Department intends to continue working with our stakeholders to develop specific regulatory and statutory recommendations.

We have identified some regulatory issues that are important to everyone in the community and that are simple enough to address quickly. These issues are part of the next round of negotiated rulemaking, which in now underway. The issues were selected based upon three basic criteria:

• Did the higher education community (including the Department) identify the regulatory change as important for the continued smooth operation of the student financial assistance programs?
• Is the issue capable of being resolved within the four month window of time provided for negotiated rulemaking?
• Would another form of dialogue—not burdened by negotiations posturing—provide a better initial forum to develop possible alternatives?

A proposed agenda of issues for the next round of negotiated rulemaking was published in the Federal Register on December 30, 1999. (A copy of the notice is attached as Appendix C).

In addition to the issues to be addressed through negotiated rulemaking, we received numerous comments and suggestions from the community. We have attempted to lay out in this report some of the themes that emerged from these sessions.

A. Technological Advances

The largest number of suggestions appeared to revolve around issues of technology and its use in the delivery of student financial assistance. Indeed, several participants suggested that recent and rapid changes in information technology require an extensive review of the Department's regulatory provisions. Suggestions that grow out of changing technology are varied and range from issues such as distance learning via the Web to student access to data on the National Student Loan Data System (NSLDS).

• Distance Education ? A fundamental change that is occurring as a result of the Internet is the increasing use of distance education. In this area, several participants believe that the standards for measuring academic progress and the length of a "standard term" must be revised. According to these participants, the current definitions and standards are based upon traditional classroom instruction, but do not take into account the way that instruction is now being provided and how it will change in the next several years. As a result, several participants believe the Department needs to revise the regulatory standards and definitions. The purpose of the Distance Education Demonstration Program, authorized by Congress in the 1998 Higher Education Amendments, is to test the quality and viability of expanded distance education programs and to determine what revisions to the statute and regulations would allow distance education students to receive student financial assistance. The 15 schools, consortia, and systems participating in the Program were selected last Spring; the Program was implemented on July 1, 1999.
• Consortium and Contractual Agreements ? As technology has advanced and the desire for foreign study has increased, the use of consortia and contractual agreements have become more common. Institutions recognize that they can now provide services for each other or as a group in new ways. Several institutions have suggested that the regulations related to consortium and contractual agreements should be reviewed in light of the more frequent use of these tools.
• Cash Management ? Several participants raised the issue of the Department's interest in refining the cash management provisions. These provisions govern the timing of Title IV fund disbursements. The Department is exploring the use of electronic cash transfers that would permit "just-in-time" delivery of funds to students and schools. This would reduce the interest cost to the Federal government for the time period in which the funds are disbursed earlier than necessary. Some participants believed that the Department should set some time tolerances for this process, and others advocated establishing a procedure for corrections so that an institution's mistakes could be corrected and liabilities could be avoided. Some participants believed that large institutions could avoid liabilities by disbursing their own funds and making corrections before seeking reimbursement from the Title IV programs, but small schools could not afford such a safeguard. This approach will require further discussion.
• Student Accounts ? There were also suggestions to provide some administrative relief to schools by relying on the Department's National Student Loan Data System (NSLDS) to provide information directly to students over the Web. The Department is already pursuing efforts to make information available to students through NSLDS and Access America for Students. As the Department considers technological advances that will allow students to access this data, we will also consider institutional reporting requirements and changes that might be appropriate given student access to data. Some schools believe that recent innovations in information technology could reduce or eliminate some administrative procedures that are now required by regulation. We will continue to work with our customers and partners to explore these possibilities.
• Electronic Signatures ? An issue frequently raised at the listening sessions by both Title IV participants and the Department is the use of electronic signatures to conduct student financial assistance transactions. Everyone agreed that care must be taken in this area to proceed at a pace that will protect students and other program participants from both security and privacy standpoints. Nonetheless, many people noted that student financial assistance transactions will increasingly be conducted through electronic means, such as the use of PIN numbers or any other number of new technologies that are now available or being developed. Participants and the Department are excited about the advantages that electronic transactions will bring, but want to make sure that they are pursued in a responsible fashion that protects students.

• Automated Cohort Default Rate Appeals ? In the past, some schools have complained that the cohort default rate appeals process requires too much staff time because of the burden of wading through page after page of student information. The Department has already begun developing an automated cohort default rate appeal system to relieve the schools of manual processing. The regulatory review process may provide an opportunity to consider some key issues related to this move toward automated appeal submissions and processing. First, what role will our partners, the guaranty agencies, play in the automated process? Since much of the cohort default rate data is provided to the Department by or through the guaranty agencies, they will be critical in this process. Second, how can institutions be encouraged to take advantage of this cost-saving approach?
• Exit Counseling ? As part of the recent negotiated rulemaking, the Department set parameters for the use of electronic exit counseling. Schools, lenders, and guarantors wanted to take advantage of electronic media to provide this service to students faster, cheaper, and, hopefully, more effectively. Some participants have now suggested that exit counseling be enhanced even further through the use of electronic information. Currently, as part of exit counseling, schools must provide information related to the average indebtedness and monthly payments of its former students. Given the improved access to data created by technological advancements, some participants would like schools to include actual indebtedness and monthly payment figures for students so that the student receives information that applies specifically to that individual. The Department?s regulations were revised in 1999 to permit institutions to provide actual or average indebtedness information.

B. Other Changes

In addition to technology, other aspects of student financial assistance have changed recently. Some program participants would like the regulatory review process to consider the impact these changes have had on the Title IV programs and what regulatory changes might be necessary to deal with these changes.

• Alternative Loans ? Many participants expressed concerns that the financial lending community is more aggressively marketing alternative loans for financing higher education than ever before. These alternative loans are standard commercial loans that lack the benefits and protections of other sources of financial assistance, like grants, direct loans or guaranteed student loans. Schools often are uncertain about how to package the alternative loans as part of students? total financial assistance. More importantly, schools are concerned that students may be overlooking other more beneficial forms of financial assistance. Some participants have suggested that this regulatory review effort should consider how these loans fit into student financial assistance and what standards and processes should be used for these loans.
• Incentive Compensation ? To avoid inappropriate marketing of educational opportunities to students, the HEA prohibits the use of commissioned sales representatives in the financial aid process. Now that more and more proprietary institutions are becoming publicly traded companies, those schools believe that the issue of executive compensation for financial aid officers who may receive stock bonuses must be addressed. Any regulatory change must ensure that institutions enroll only students that have an ability to benefit from the program and that students are provided accurate and unbiased information regarding the program including costs, benefits, and financial aid alternatives.
• Master Promissory Note ? A Master Promissory Note (MPN) has been developed by the Department in close consultation with the higher education community. The regulations developed during the last round of negotiated rulemaking set the parameters for the use of this new tool. However, two issues remain for further consideration.

First, criteria must be developed to enable additional students to use the multi-year feature of the MPN. The multi-year feature allows borrowers to obtain more than one loan using the same promissory note. Currently only borrowers at four-year and graduate/professional schools may use the multi-year feature. As the Department and program participants gain experience using the multi-year feature of the master promissory note, it is our intention to establish and announce criteria and a process that we will use to approve additional schools.

Second, the confirmation process for loans made under a single master promissory note requires further consideration. With respect to the confirmation process, it is the Secretary's goal to maintain and enhance a borrower's control over the lending process in the MPN environment. To achieve this goal, it is our intention to work with students, schools, lenders, guaranty agencies, and other interested parties to develop and implement confirmation processes that make use of the best available technology in order to maintain and enhance borrower control over the lending process, at the same time minimizing burden to schools and lenders.

C. Regulatory Flexibility

A number of participants favored more flexible regulations. Many expressed frustration that the same regulations and reporting requirements were required for all participants regardless of their past performance and experience in administering student aid programs. The suggestions related to both the Department?s overall regulatory approach and specific regulatory provisions that participants believe should be considered for additional flexibility.

While there was significant interest in granting more administrative discretion to schools, lenders and guaranty agencies, a number of participants also recognized the need for imposing limits on such discretion, and to providing more discretion to participants whose past performance supported such discretion and less, or no discretion, to those whose past performance did not merit discretion. One participant expressed an interest in finding a "middle ground" between the need for specific guidance on each and every issue and allowing total discretion.

These issues must be addressed in more detail as this regulatory review progresses over the next year. Although many of these suggestions could potentially reduce the cost and burden for some of the participants that administer the Title IV programs, each proposal must also be evaluated in terms of additional costs to students, costs to our partners — schools, lenders, states, accrediting agencies, and guaranty agencies — and to the Federal government and the taxpayers.

1. General Regulatory Approaches

Because experience shows us that most of the Title IV participants generally play by the rules, in dealing with this majority who want to do the right thing, the Department will explore expanding partnerships like the Quality Assurance Program and the Experimental Sites Initiative to provide opportunities for a more flexible regulatory approach while maintaining accountability. Because fraud will always remain a possibility, however, our regulatory approach will still reserve every penalty that the law provides. Indeed, because the time and effort of the Department's enforcement staff will no longer be wasted on those who want to comply, we can focus even more attention on those who do not.

• Performance-Based Differentiated Regulations - The use of performance-based regulations — differentiated regulations based upon past performance in administering programs — was suggested as an alternative to the current regulatory approach of one size fits all. This alternative, which relies heavily on past performance and economic incentives instead of the traditional regulatory approach, had an appeal to some participants, but others believed that implementing specific, verifiable standards would be difficult. It is likely, however, that broad regulatory reform will be difficult to achieve without a differentiated approach since the Department must ensure that students' and taxpayers' dollars are well protected.
• Regulations Focused on Improvement - Some participants suggested that the Department?s regulatory approach should focus on improvement at schools rather than specific standards. This approach, however, does not appear to address the issue of equal treatment for students. This is a critical issue that would need to be fully reviewed before an approach like this could be pursued.
• General Regulatory Restructuring - Some participants asked that the Department completely restructure its student financial assistance regulations. The participants argued that the regulations have been developed piecemeal over the years and now do not represent a coherent set of regulations. The Department is concerned that we develop coherent and easily understood regulations as part of this process. However, any restructuring presumably should also address fundamental questions like: how will student financial assistance change over the next several years; what increasing role will technology play; and how will the delivery of postsecondary education evolve?

2. Flexibility for Specific Regulatory Issues

During the course of our listening sessions, we heard about numerous areas in which participants would like more flexibility. A few examples of the suggestions that generally sought more discretion and fewer documentation requirements include:

• Due Diligence in Servicing Loans - Several guarantors and lenders suggested that the Department reduce the specific requirements for contacting borrowers and permit the use of sampling techniques or the use of risk models that call for intensive collection measures for some borrowers and fewer contacts for borrowers that are more likely to repay their loans. The guaranty agencies and lenders said that similar approaches are now widely used for collection of other types of consumer debt. Some believe that greater contact with all borrowers may be appropriate in student lending, however, because the borrowers are often novices in the world of consumer debt. Some suggested that participants assume additional economic risks in exchange for greater discretion in administering the Title IV programs. Any approach that gives participants more administrative flexibility must also ensure that all student borrowers receive sufficient information to allow them to avoid the substantial adverse impacts of default.
• Reduce Documentation Requirements for Deferments - Some participants requested the authority to grant deferments based upon written notations of telephone requests from borrowers instead of requiring student signatures to reduce administrative burdens and loan defaults. Other participants expressed concerns that notes of a telephone conversation may not provide an objective record of the conversation. Additionally, or in the alternative, some participants suggested that deferment renewals should not require the same level of documentation.
• More Flexibility in Granting Forbearances and Deferments - Some participants suggested reducing restrictions on granting administrative forbearances and allowing more flexibility in determining deferment start dates. In short, participants were requesting more discretion, particularly for economic hardship deferments, which they currently find complex. Deferments represent a cost, however, so any change in this area must still protect Federal funds from misuse.

D. Overhaul Old Regulatory Provisions That Need to Be Clarified

• Cohort Default Rates - Several participants recommended that the regulatory provisions for cohort default rates be reworked. Over time, these provisions have been amended in increments in order to address various issues, but there is now a need to develop a more comprehensive and integrated set of regulations that will be easier to follow and apply. The Department would also like to significantly revise or remove Appendix D to the cohort default rate regulations. Appendix D provides standards for a minimally acceptable cohort default rate plan. The appendix, however, is now in need of revisions to provide the most up-to-date elements of successful cohort default rate plans.
• Perkins End of Participation - The Department's regulations set forth several requirements for a school to follow when it ceases to participate in the Perkins Loan Program. See 34 C.F.R. ? 674.17. Several participants expressed a desire to revise and clarify this regulation.

E. Uniform Interpretation and Enforcement of Regulations

Some participants believe that regulatory interpretations by the Department are not always applied consistently across every region of the country and suggested that internal communications within the Department could be improved. The Department has, in the last several years, created case teams to manage its oversight functions. The team approach is one step toward more uniform application of the regulations. Other suggestions at the listening sessions included:

• Coordinated Reviews - Currently several different entities are responsible for various oversight issues including the Department, guaranty agencies, states, and accrediting agencies. Some participants suggested that the Department increase its efforts to coordinate the work of these various oversight entities. In particular some participants suggested that multiple on site reviews by the different oversight bodies should be avoided.
• Joint Training - Some participants thought that training for staff of the oversight entities should be conducted jointly, arguing that joint training would lead to more uniform application of regulations. The Department and others also suggested consideration of joint training by the guaranty agencies and the Department for the schools.
• Policy Advice - Another participant suggested that a more formal process for regulatory interpretations should be implemented, such as the procedure for private letter rulings used by the Internal Revenue Service.

F. New Regulatory Provisions

The 1998 HEA Amendments provided for the forgiveness of student loan debt after five years of teaching in certain under served areas. With the advent of this new opportunity, many participants have requested regulations to define certain aspects of the program and how it will be implemented. This issue was on the agenda of one of the negotiating committees during the last round of negotiated rulemaking, but the committee removed this item when it became clear that other priorities would consume the committee's time. This issue is on the agenda for the current round of negotiated rulemaking.

G. Miscellaneous Regulatory Provisions

1. Default Prevention - Default prevention is a high priority for the Department and participants in the student loan programs. During the last decade, the Department has succeeded in significantly reducing the cohort default rate. Several participants suggested that an effort should be made to make even more progress toward reducing defaults, including the following:
• To encourage the repayment of defaulted loans, consider paid-in-full loans as rehabilitated.
• Provide deferments at the loan level rather than at the borrower level so that an individual holder can counsel a borrower on how to protect loans from default.
• Borrowers become eligible for deferments on certain dates (e.g. entry into military service). Often, however, the borrower is not aware of the right to a deferment and does not seek the deferment until after the loan has already gone into default. Some participants suggested that lenders should be able to set the deferment "begin date" on the date that the borrower became eligible regardless of when the borrower requests the deferment.
2. Work-Study - Currently, a student working as a reading tutor for preschool and elementary school children, who otherwise qualifies, can be paid in full from Federal funds through the Work-Study Program. A waiver of the ordinary 25% local match is also available for tutoring parents of preschool and elementary school children if the parent and child are enrolled in a family literacy program. Numerous schools argued that tutoring for readers of all ages should always qualify for a waiver of the traditional 25% local match. Any movement in this direction must account for the acute need for a heavy focus on reading problems for young children.

V. Conclusion - Future Action

Moving forward, a two-pronged approach will allow us to meet the current need for regulatory improvement, as well as to address the desire for a more comprehensive review of our regulations. The current round of negotiated rulemaking is addressing those regulatory reforms that are most critical to our customers and partners, and that can be addressed relatively quickly. For those issues that require more in-depth analysis, we will initiate a dialogue with the higher education community to design a regulatory track to the 21^st century.

A. Negotiated Rulemaking 2000

In accordance with the master calendar and negotiated rulemaking requirements, the Department convened two negotiated rulemaking committees early this year to deal with those issues that the community and the Department believe to be the highest priorities. The negotiated rulemaking environment will allow us to deal with this first set of issues in fairly short order and in consultation with our stakeholders.

The Department has distilled all of the issues that we heard at the listening sessions — as well as issues identified by the Department and our customers and partners in other contexts — and has identified those issues appropriate for immediate negotiation. A proposed agenda of issues was published in the Federal Register on December 30, 1999. (A copy of the notice is attached as Appendix C).

These negotiated rulemaking committees have now been formed and the discussions are underway.

B. Regulatory Track to the 21^st Century

Negotiated rulemaking in 2000 is only part of our effort to improve our regulations. We will also continue our discussions with customers and partners to review our regulations in a comprehensive fashion, with an eye toward developing regulations that will support the delivery of student financial aid in the 21^st century.

During the listening sessions we heard several recommendations regarding a process for conducting a comprehensive review of our regulations. The recommendations are varied, from work groups to studies and from focused reviews of particular regulatory sections to a complete review of all regulations. Each of the recommendations has some useful aspects, which we will attempt to integrate into our eventual process.

Part of this broader dialogue will include discussions regarding regulatory approach. Some members of the community have become accustomed to the current regulations and would like to keep the current regulatory structure, but would like to review each regulation within that structure to make sure it is the best approach. Others would like to consider more fundamental changes to the Department's regulatory approach. One regulatory approach that has received considerable attention lately is performance-based, or differentiated, regulation. A variation on this approach has also been suggested, whereby individual participants in the Title IV programs would establish approved plans and oversight actions would be based upon the individualized plan, not a generic set of regulations. This plan-based regulatory approach would constitute a fundamental shift in how the Department approaches its regulatory and oversight functions. Any regulatory changes must be administratively feasible and protect the interests of students and taxpayers from abuse.

The Department agrees that a more comprehensive review is valuable at this time. The Office of Student Financial Assistance (OSFA) has completed its First Year edition of the Modernization Blueprint. The Blueprint spells out in great detail the steps that OSFA will be taking over the next three years to modernize and integrate its systems. Implementation of the Modernization Blueprint will result in improvements and changes to the way student financial assistance is delivered. As these technological and related business process changes occur, it is appropriate to review and modify our regulations to stay one step ahead of technology. We cannot allow improvements in the delivery of student financial assistance to be delayed while the regulatory structure plays catch up.

Regardless of the regulatory reform approach that is ultimately chosen, the review must address the following questions:

1. How have postsecondary education and student aid changed over the past decade and how will they change over the next one?
2. How will OSFA modernization and other technological advances change student aid over the next several years?
3. How should the Title IV regulations be revised or improved to account for these changes?

The Department will continue its discussions with our customers and partners, and all other interested parties, to develop a specific structure to address these issues. We look forward to reporting to you the results of negotiated rulemaking 2000 and the recommendations that result from our track to 21^st century regulations.

⁴ Many of the suggestions at the listening sessions were not regulatory in nature. Instead, many of the suggestions focused on operational changes. The Department will review these comments carefully. However, operational suggestions are beyond the scope of this report.

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