Archived Information

Reauthorization of the Higher Education Act


Part B--Federal Family Education Loans

MANAGEMENT AND RECOVERY OF RESERVES
SEC. 421. (a) Section 422 of the Act is amended--
(1) by amending subsection (g)(1) to read as follows:
"(1) MANAGEMENT AND RECOVERY OF RESERVES.--(A) Notwithstanding any other provision of law, the reserve funds of the guaranty agencies, and any assets purchased or developed with such reserve funds, regardless of who holds or controls the reserves or assets, are, and shall remain, the property of the United States.
"(B) The Secretary may direct a guaranty agency to require the return, to the guaranty agency or to the Secretary, of any reserve funds or assets held by, or under the control of, any other entity, that the Secretary determines are required--
"(i) to pay the program expenses and contingent liabilities of the guaranty agency;
"(ii) to satisfy the guaranty agency's requirements under subsection (h); or
"(iii) for the orderly termination of the guaranty agency's operations and the liquidation of its assets.
"(C) The Secretary may direct a guaranty agency, or such agency's officers or directors, to cease any activity involving expenditure, use, or transfer of the guaranty agency's reserve funds or assets that the Secretary determines is a misapplication, misuse, or improper expenditure of such funds or assets.";
(2) by amending subsection (h) to read as follows:--
"(h) RECALL OF RESERVES IN FISCAL YEARS 2000 THROUGH 2003.--(1)(A) Notwithstanding any other provision of law, the Secretary shall, except as otherwise provided in this subsection, recall from the reserve funds held by guaranty agencies (which for purposes of this subsection shall include any reserve funds held by, or under the control of, any other entity) not less than--
"(i) $275,000,000 in each of the fiscal years 2000 and 2001;
"(ii) $1,275,000,000 in fiscal year 2002; and
"(iii) $275,000,000 in fiscal year 2003.
"(B) Funds returned to the Secretary under this subsection shall be deposited in the Treasury.
"(C) The Secretary shall require each guaranty agency to return reserve funds under subparagraph (A) based on its proportionate share, as determined by the Secretary, of all reserve funds held by guaranty agencies as of September 30, 1996.
"(2)(A) Within 45 days of enactment of this subsection, reserve funds held by a guaranty agency in an amount that represents the guaranty agency's proportionate share of $2,100,000,000, as determined by the Secretary in accordance with paragraph (1)(C), shall be transferred by the guaranty agency to a restricted account (of a type specified by the Secretary) established by the guaranty agency, and be invested in United States Government securities specified by the Secretary. Amounts transferred by a guaranty agency to a restricted account under paragraph (4) of this subsection as in effect as of the day before the date of enactment of the [insert name of Act] Act of 1998 shall be included in determining the amount of reserve funds to be transferred by the guaranty agency under this subparagraph. The manner and timeframe in which reserve funds so invested are recalled shall be specified by the Secretary, consistent with the requirements of this subsection.
"(B) The guaranty agency shall not use the reserve funds in the restricted account, other than the earnings thereon, for any purpose without the express permission of the Secretary. The guaranty agency may use the earnings from its restricted account for each of the fiscal years 1998 through 2003 to assist in meeting its operational expenses for each such year.
"(3) In order to assist guaranty agencies in meeting program expenses, the Secretary shall permit the use of not more than an aggregate of $300,000,000 of the reserve funds, not included in the restricted accounts described in paragraph (2)(A), that are held by guaranty agencies with agreements under section 428(c), as working capital to be used for such purposes as the Secretary may specify. The Secretary shall specify the amount of reserve funds held by each guaranty agency that may be used as working capital, based on the guaranty agency's proportionate share of all borrower accounts outstanding on September 30, 1996. The amounts used as working capital shall remain reserve funds that are the property of the United States.
"(4) If, 30 days before the beginning of a fiscal year in which reserves are to be recalled under paragraph (1)(A), the total amount in the restricted accounts described in paragraph (2) is less than the amount the Secretary is required to recall under that paragraph in that fiscal year, the Secretary shall require the return of the amount of the shortage from other reserve funds held by guaranty agencies under procedures established by the Secretary. The Secretary shall first attempt to obtain the amount of such shortage from each guaranty agency that failed to transfer the agency's required share to the agency's restricted account in accordance with paragraph (2).
"(5)(A) The Secretary may take such reasonable measures, and require such information, as may be necessary to ensure that guaranty agencies comply with the requirements of this subsection.
"(B) If the Secretary determines that a guaranty agency has failed to transfer to a restricted account any portion of the agency's required share under this subsection, the agency may not receive any other funds under this part until the Secretary determines that the agency has so transferred the agency's required share.
"(C) The Secretary may waive the requirements of subparagraph (B) if the Secretary determines that there are extenuating circumstances beyond the control of the guaranty agency that justify such waiver.
"(6) Non-liquid reserve fund assets, such as buildings and equipment purchased or developed by the guaranty agency with reserve funds, and any reserve funds that continue to be held by a guaranty agency after the recalls in paragraph (1)(A), shall--
"(A) remain the property of the United States;
"(B) be used only for such purposes as the Secretary determines are appropriate; and
"(C) be subject to recall by the Secretary when such agency's agreement under section 428(c) ends (through resignation, expiration, or termination, as the case may be).".
PRORATION OF LOAN AMOUNTS
SEC. 422. (a) Section 425(a)(1)(A) of the Act is amended--
(1) in clause (i)--
(A) in subclause (I), by adding "or" at the end thereof;

(B) by striking out subclauses (II) and (III); and

(C) by adding at the end thereof the following new subclauses:
"(II) if such student is enrolled in a program of undergraduate education that is less than one academic year in length, the maximum annual loan amount that such student may receive may not exceed the amount that bears the same ratio to the amount specified in subclause (I) as such program length, or remainder, as the case may be, measured in semester, trimester, quarter, or clock hours bears to one academic year; or
"(III) if such student is enrolled in the remainder of a program of undergraduate education that is one academic year in length, and that remainder is less than one academic year in length, the maximum annual loan amount that such student may receive may not exceed the amount that bears the same ratio to the amount specified in subclause (I) as such program length, or remainder, as the case may be, measured in semester, trimester, quarter, or clock hours bears to one academic year;";
(2) in clause (ii)(II), by striking out "education," and inserting in lieu thereof "education that is not more than two academic years in length,"; and
(3) by amending clause (iii) to read as follows:
"(iii) $5,500, in the case of a student at an eligible institution who has successfully completed the first and second years of a program of undergraduate education but has not successfully completed the remainder of such program; and".
(b) Section 428(b)(1)(A) of the Act is amended--
(1) in clause (i)--
(A) in subclause (I), by adding "or" at the end thereof;
(B) by striking out subclauses (II) and (III); and
(C) by adding at the end thereof the following new subclauses:
"(II) if such student is enrolled in a program of undergraduate education that is less than one academic year in length, the maximum annual loan amount that such student may receive may not exceed the amount that bears the same ratio to the amount specified in subclause (I) as such program length measured in semester, trimester, quarter, or clock hours bears to one academic year; or
"(III) if such student is enrolled in the remainder of a program of undergraduate education that is one academic year in length, and that remainder is less than one academic year in length, the maximum annual loan amount that such student may receive may not exceed the amount that bears the same ratio to the amount specified in subclause (I) as such remainder measured in semester, trimester, quarter, or clock hours bears to one academic year;";
(2) in clause (ii)(II), by striking out "education," and inserting in lieu thereof "education that is not more than two years in length," and
(3) by amending clause (iii) to read as follows:
"(iii) $5,500, in the case of a student at an eligible institution who has successfully completed the first and second years of a program of undergraduate education but has not successfully completed the remainder of such program; and";
(3) by striking out clause (iv);
(4) by redesignating clause (v) as clause (iv); and
(5) by amending the flush left language at the end thereof to read as follows:

"except that the annual insurable limit per student shall not be deemed to be exceeded by a line of credit under which actual payments by the lender to the borrower will not be made in any years in excess of the annual limit, and that, in the case of a student who has received an associate or baccalaureate degree and is enrolled in an eligible program for which the institution requires such degree for admission, the number of years that a student has completed in a program of undergraduate education shall, for the purposes of clauses (ii) and (iii), include any prior enrollment in the eligible program of undergraduate education for which the student was awarded such degree;".

(c) Section 428H(d)(2) of the Act is amended--(1) in subparagraph (A)--
(A) in clause (i), by adding "and" at the end thereof;
(B) by striking out clauses (ii) and (iii); and
(C) by adding at the end thereof the following new clause:
"(ii) if such student is enrolled in a program of undergraduate education that is less than one academic year in length, or enrolled in a program of undergraduate education the remainder of which is less than one academic year in length, the maximum annual loan amount that such student may receive may not exceed the amount that bears the same ratio to the amount specified in clause (i) as such program length, or remainder, as the case may be, measured in semester, trimester, quarter, or clock hours bears to one academic year;";
(2) by amending subparagraph (B) to read as follows:
"(B) $5,000, in the case of a student at an eligible institution who has successfully completed such first and second years but has not successfully completed the remainder of a program of undergraduate education; and"; and
(3) by striking out the flush left language at the end thereof.
REPAYMENT TERMS
SEC. 423. (a) Section 427 of the Act is amended--
(1) in subsection (a)(2)--
(A) in subparagraph (B), in the matter preceding clause (i), by striking out "over a period" through "nor more than 10 years" and inserting in lieu thereof "in accordance with the repayment plan selected under subsection (d),";
(B) in subparagraph (C), at the end of the subparagraph, by striking out "the 10-year period described in subparagraph (B);" and inserting in lieu thereof "the length of the repayment period under a repayment plan described in subsection (d);";
(C) by striking out subparagraph (F);
(D) by redesignating subparagraphs (G), (H), and (I) as subparagraphs (F), (G), and (H), respectively; and
(E) in subparagraph (G) (as redesignated by subparagraph (D)), by striking out "the option" through the end of the subparagraph and inserting in lieu thereof "the repayment options described in subsection (d); and";
(2) in subsection (c), by striking out "in subsection (a)(2)(H)," and inserting in lieu thereof "by a repayment plan selected by the borrower under subparagraph (C) or (D) of subsection (d)(1),"; and
(3) by adding after subsection (c) the following new subsection:
"(d) REPAYMENT PLANS.--(1) DESIGN AND SELECTION.--In accordance with regulations of the Secretary, the lender shall offer a borrower of a loan made under this part the plans described in this subsection for repayment of such loan, including principal and interest thereon. Except as provided in subsection (c), no plan may require a borrower to repay a loan in less than five years. The borrower may choose from--
"(A) a standard repayment plan, with a fixed annual repayment amount paid over a fixed period of time, not to exceed ten years;
"(B) an extended repayment plan, with a fixed annual repayment amount paid over an extended period of time, not to exceed 30 years, except that the borrower shall repay annually a minimum amount determined in accordance with subsection (c);
"(C) a graduated repayment plan, with annual repayment amounts established at 2 or more graduated levels and paid over an extended period of time, not to exceed 30 years, except that the borrower's scheduled payments shall not be less than 50 percent, nor more than 150 percent, of what the amortized payment on the amount owed would be if the loan were repaid under the standard repayment plan; and
"(D) an income-sensitive repayment plan, with income-sensitive repayment amounts paid over a fixed period of time, not to exceed 25 years, except that the borrower's scheduled payments shall not be less than the amount of interest due, and there shall be no forgiveness of any balance remaining at the end of the income-sensitive repayment period.
"(2) LENDER SELECTION OF OPTION IF BORROWER DOES NOT SELECT.--If a borrower of a loan made under this part does not select a repayment plan described in paragraph (1), the lender shall provide the borrower with a repayment plan described in paragraph (1)(A).
"(3) CHANGES IN SELECTIONS.--The borrower of a loan made under this part may change the borrower's selection of a repayment plan under paragraph (1), or the lender's selection of a plan for the borrower under paragraph (2), as the case may be, under such conditions as may be prescribed by the Secretary in regulation.
"(4) ACCELERATION PERMITTED.--Under any of the plans described in this subsection, the borrower shall be entitled to accelerate, without penalty, repayment on the borrower's loans under this part.".
(b) Section 428(b) of the Act is amended--
(1) in paragraph (1)--
(A) in subparagraph (D), by striking the clause designation "(i)" and all that follows through the clause designation "(iii)";
(B) in subparagraph (E)--
(i) in clause (i)--
(I) by striking "or section 428A," and inserting "or section 428H,"; and
(II) by striking "the option" through the end of the clause and inserting "the repayment options described in paragraph (9); and"; and
(ii) in clause (ii)--
(I) by striking "over a period" through "nor more than 10 years" and inserting "in accordance with the repayment plan selected under paragraph (9), and"; and
(II) by striking "of this subsection;" at the end of clause (ii) and inserting a semicolon; and
(C) in subparagraph (L)(i), by inserting after the clause designation the following: "except as otherwise provided by a repayment plan selected by the borrower under paragraph (9)(A)(iii) or (iv),"; and
(2) by adding after paragraph (8) the following new paragraph:
"(9) REPAYMENT PLANS.--(A) DESIGN AND SELECTION.--In accordance with regulations of the Secretary, the lender shall offer a borrower of a loan made under this part the plans described in this subparagraph for repayment of such loan, including principal and interest thereon. Except as provided in paragraph (1)(L)(i), no plan may require a borrower to repay a loan in less than five years. The borrower may choose from--
"(i) a standard repayment plan, with a fixed annual repayment amount paid over a fixed period of time, not to exceed ten years;
"(ii) an extended repayment plan, with a fixed annual repayment amount paid over an extended period of time, not to exceed 30 years, except that the borrower shall repay annually a minimum amount determined in accordance with paragraph (2)(L);
"(iii) a graduated repayment plan, with annual repayment amounts established at 2 or more graduated levels and paid over an extended period of time, not to exceed 30 years, except that the borrower's scheduled payments shall not be less than 50 percent, nor more than 150 percent, of what the amortized payment on the amount owed would be if the loan were repaid under the standard repayment plan; and
"(iv) an income-sensitive repayment plan, with income-sensitive repayment amounts paid over a fixed period of time, not to exceed 25 years, except that the borrower's scheduled payments shall not be less than the amount of interest due, and there shall be no forgiveness of any balance remaining at the end of the income-sensitive repayment period.
"(B) LENDER SELECTION OF OPTION IF BORROWER DOES NOT SELECT.--If a borrower of a loan made under this part does not select a repayment plan described in subparagraph (A), the lender shall provide the borrower with a repayment plan described in subparagraph (A)(i).
"(C) CHANGES IN SELECTIONS.--The borrower of a loan made under this part may change the borrower's selection of a repayment plan under subparagraph (A), or the lender's selection of a plan for the borrower under subparagraph (B), as the case may be, under such conditions as may be prescribed by the Secretary in regulation.
"(D) ACCELERATION PERMITTED.--Under any of the plans described in this paragraph, the borrower shall be entitled to accelerate, without penalty, repayment on the borrower's loans under this part.
"(E) COMPARABLE FFEL AND DIRECT LOAN REPAYMENT PLANS.--The Secretary shall ensure that the repayment plans offered to borrowers under this part are comparable, to the extent practicable and not otherwise provided in statute, to the repayment plans offered under part D.".
(c) Section 428C of the Act is amended--
(1) in subsection (b)(3)(F), by striking "alternative"; and
(2) in subsection (c)--
(A) by amending paragraph (2) to read as follows:
"(2) REPAYMENT PLANS.--(A) DESIGN AND SELECTION.--In accordance with regulations of the Secretary, the lender shall offer a borrower of a loan made under this section the plans described in this subparagraph for repayment of such loan, including principal and interest thereon. Except as provided in section 428(b)(1)(L)(i) and paragraph (3), No plan may require a borrower to repay a loan in less than five years. The borrower may choose from--
"(i) a standard repayment plan, with a fixed annual repayment amount paid over a fixed period of time, not to exceed ten years;
"(ii) an extended repayment plan, with a fixed annual repayment amount paid over an extended period of time, not to exceed 30 years, except that the borrower shall repay annually a minimum amount determined in accordance with paragraph (3);
"(iii) a graduated repayment plan, with annual repayment amounts established at 2 or more graduated levels and paid over an extended period of time, not to exceed 30 years, except that the borrower's scheduled payments shall not be less than 50 percent, nor more than 150 percent, of what the amortized payment on the amount owed would be if the loan were repaid under the standard repayment plan; and
"(iv) an income-sensitive repayment plan, with income-sensitive repayment amounts paid over a fixed period of time, not to exceed 25 years, except that the borrower's scheduled payments shall not be less than the amount of interest due, and there shall be no forgiveness of any balance remaining at the end of the income-sensitive repayment period.
"(B) LENDER SELECTION OF OPTION IF BORROWER DOES NOT SELECT.--If a borrower of a loan made under this section does not select a repayment plan described in subparagraph (A), the lender shall provide the borrower with a repayment plan described in subparagraph (A)(i).
"(C) CHANGES IN SELECTIONS.--The borrower of a loan made under this section may change the borrower's selection of a repayment plan under subparagraph (A), or the lender's selection of a plan for the borrower under subparagraph (B), as the case may be, under such conditions as may be prescribed by the Secretary in regulation.".
INTEREST RATES
SEC. 423A. Section 427A of the Act is amended--
(1) in subsection (g)--
(A) in paragraph (1), in the matter preceding subparagraph (A), by striking out "but subject to subsection (h),"; and
(B) in paragraph (2), by amending subparagraph (2)(B) to read as follows:
"(B)(i) 2.5 percent, in the case of a loan for which the first disbursement is made on or after July 1, 1995 and before July 1, 1998; or
"(ii) 1.7 percent, in the case of a loan for which the first disbursement is made on or after July 1, 1998;"; and
(2) in subsection (h)--
(A) in paragraph (1)--
(i) in the matter preceding subparagraph (A), by striking out "(f), and (g) of this section," and inserting in lieu thereof "and (f),"; and
(ii) by amending subparagraphs (A) and (B) to read as follows:
"(A) the bond equivalent rate of 91-day Treasury bills auctioned at the final auction held prior to such June 1; plus
"(B) 2.3 percent;"; and (B) in paragraph (2)(A), by striking out "'2.1 percent'" and "'1.0 percent'" and inserting in lieu thereof "'3.2 percent'" and "'2.3 percent'", respectively.
TIMING OF INTEREST CHARGES
SEC. 424. (a) Section 428(a)(3)(A)(v) of the Act is amended to read as follows:
"(v) A lender may not receive interest on a loan, or any portion thereof, for any period that precedes the date that is--
"(I) in the case of a loan, or any portion thereof, disbursed by check, 10 days before the disbursement by the institution of the loan or that portion thereof, as the case may be; or
"(II) in the case of a loan, or any portion thereof, disbursed by electronic funds transfer, 3 days before the disbursement by the institution of the loan or that portion thereof, as the case may be.".
(b) Section 428B(d)(1) of the Act is amended--
(1) by inserting the subparagraph designation "(A)" immediately after the paragraph designation; and
(2) by adding at the end thereof the following new subparagraph:
"(B) COMMENCEMENT OF INTEREST CHARGES.--A lender may not receive interest on a loan made under this section, or any portion thereof, for any period that precedes the date that is--
"(i) in the case of a loan, or any portion thereof, disbursed by check, 10 days before the disbursement of the loan or that portion thereof, as the case may be; or
"(ii) in the case of a loan, or any portion thereof, disbursed by electronic funds transfer, 3 days before the disbursement of the loan or that portion thereof, as the case may be.".
(c) Section 428H(e)(1) of the Act is amended--
(1) by inserting the subparagraph designation "(A)" immediately after the paragraph designation; and
(2) by adding at the end thereof the following new subparagraph:
"(B) COMMENCEMENT OF INTEREST CHARGES.--A lender may not receive interest on a loan made under this section, or any portion thereof, for any period that precedes the date that is--
"(i) in the case of a loan, or any portion thereof, disbursed by check, 10 days before the disbursement of the loan or that portion thereof, as the case may be; or
"(ii) in the case of a loan, or any portion thereof, disbursed by electronic funds transfer, 3 days before the disbursement of the loan or that portion thereof, as the case may be.".
FEES AND INSURANCE PREMIUMS
SEC. 425. (a) Section 428(b)(1)(H) of the Act is amended--
(1) by inserting the clause designation "(i)" following the subparagraph designation;
(2) by striking "the loan," and inserting "any loan made under section 428 or 428B before July 1, 1999,"; and
(3) after clause (i) (as redesignated by paragraph (1)), by adding "and" and the following new clause:
"(ii) provides that no insurance premiums shall be charged to the borrower of any loan made under section 428 or 428B on or after July 1, 1999;".
(b) Section 428H(h) of the Act is amended--
(1) by inserting the paragraph designation "(1)" following the subsection heading;
(2) by striking "under this section" and inserting "of a loan made under this section made before July 1, 1999"; and
(3) by adding at the end of paragraph (1) (as redesignated by paragraph (1)) the following new paragraph:
"(2) No insurance premium may be charged to the borrower on any loan made under this section made on or after July 1, 1999.".
(d) Section 438(c) of the Act is amended--
(1) in paragraph (2), by striking "paragraph (6)" and inserting "paragraphs (6) and (8)"; and
(2) by adding after paragraph (7) the following new paragraph:
"(8) PHASE OUT OF ORIGINATION FEES ON SUBSIDIZED LOANS.--In the case of any loan made or insured under section 428--
"(A) on or after July 1, 2001, paragraph (2) shall be applied by substituting '2.0 percent' for '3.0 percent';
"(B) on or after July 1, 2002, paragraph (2) shall be applied by substituting '1.0 percent' for '3.0 percent'; or
"(C) on or after July 1, 2003, no borrower shall be charged an origination fee on such loan.".
FUNCTIONS OF GUARANTY AGENCIES
SEC. 426. (a) Section 428 of the Act is further amended--
(1) in subsection (a)--
(A) in paragraph (1)(B)--
(i) in the matter preceding clause (i), by striking out "which is insured" and inserting in lieu thereof "which, before July 1, 1999, is insured"; and
(ii) in clause (ii), by inserting "as in effect the day before the day of enactment of this section," immediately after "subsection (b),"; and
(B) in paragraph (3)--
(i) by striking subparagraph (B); and
(ii) in subparagraph (A)--
(I) in clause (ii), by striking out "under any" through the end of the clause and inserting a period;
(II) by striking out the subparagraph designation "(A)";
(III) by redesignating clauses (i), (ii), (iii), (iv), and (v) as subparagraphs (A), (B), (C), (D), and (E), respectively;
(IV) by redesignating subclauses (I) and (II) of subparagraph (A) (as redesignated by subclause (III)) as clauses (i) and (ii) of such subparagraph, respectively; and
(V) by redesignating subclauses (I) and (II) of subparagraph (E) (as redesignated by subclause (III)) as clauses (i) and (ii) of such subparagraph, respectively;
(2) in subsection (b)--
(A) by amending the heading to read as follows: "REQUIREMENTS TO QUALIFY LOANS FOR INSURANCE AND INTEREST SUBSIDIES.--";
(B) in paragraph (1)--
(i) by amending the heading to read as follows: "REQUIREMENTS.--";
(ii) by amending the matter preceding subparagraph (A) to read as follows: "A loan by an eligible lender shall be insurable by the Secretary, and students who receive such loans shall be entitled to have made on their behalf the payments provided for in subsection (a), under a program of student loan insurance that--";
(iii) by amending subparagraph (K) to read as follows:
"(K) provides that the holder of any such loan will be required to submit to the Secretary, at such time or times and in such manner as the Secretary may prescribe, statements containing such information as may be required by regulation for the purpose of enabling the Secretary to determine the amount of the payment which must be made with respect to that loan;";
(iv) by amending subparagraph (O) to read as follows:
"(O) provides that, if the sale, assignment, or other transfer of a loan made under this part to another holder will result in a change in the identity of the party to whom a borrower who is in the grace period described in section 427(a)(2)(B) or 428(b)(7), or who is in repayment, must send subsequent payments or direct any communications concerning the loans, then--
"(i) the transferor and the transferee shall, not later than 45 days from the date the transferee acquires a legally enforceable right to receive payment from the borrower on such loan, either jointly or separately provide a notice to the borrower of--
"(I) the sale, assignment, or other transfer;
"(II) the identity of the transferee;
"(III) the name and address of the party to whom subsequent payments or communications must be sent; and
"(IV) the telephone numbers of both the transferor and the transferee; and
"(ii) the transferee shall notify the Secretary, and, upon the request of an institution of higher education, the Secretary shall notify the last such institution the student attended prior to the beginning of the repayment period of any loan made under this part, of--
"(I) any sale, assignment, or other transfer of the loan; and
"(II) the address and telephone number by which contact may be made with the new holder concerning repayment of the loan;";
(v) in subparagraph (Q), by striking "guarantee" and "428A" and inserting "insurance" and "428H", respectively;
(vi) by amending subparagraph (R) to read as follows:
"(R) provides for the making of such reports, in such form and containing such information, including financial information, as the Secretary may reasonably require to carry out the Secretary's functions under this part and protect the financial interest of the United States, and for keeping such records and for affording such access thereto as the Secretary may find necessary to ensure the correctness and verification of such reports;";
(vii) by amending subparagraph (S) to read as follows:
"(S) provides that a lender shall pay a default prevention fee in accordance with subsection (g);";
(viii) in subparagraph (T)--
(I) in clause (i), by inserting a comma and "by the guaranty agency, in accordance with regulations prescribed by the Secretary," immediately after "limitation";
(II) in clause (ii)--
(aa) in the matter preceding subclause (I), by inserting a comma and "in accordance with regulations prescribed by the Secretary," immediately after "institution";
(bb) by striking out subclauses (I) and (II); and
(cc) by redesignating subclauses (III), (IV), and (V) as subclauses (I), (II), and (III), respectively; and
(III) by adding "and" at the end thereof;
(ix) by amending subparagraph (U) to read as follows:
"(U) provides--
"(i) for such additional criteria concerning the eligibility of lenders described in section 435(d)(1) as may be permitted by the Secretary; and
"(ii) an assurance that the guaranty agency will report to the Secretary concerning changes in criteria under clause (i), including any procedures in effect under such program to take emergency action, limit, suspend, or terminate lenders."; and
(x) by striking subparagraphs (V), (W), and (X);
(C) by amending paragraph (2) to read as follows:
"(2) SKIP-TRACING REQUIREMENT.--In the case of a default claim based on an inability to locate the borrower, a lender shall certify to the Secretary, at the time of submission of the default claim, that diligent attempts have been made to locate the borrower through the use of reasonable skip­tracing techniques in accordance with regulations prescribed by the Secretary.";
(D) in paragraph (3)(B), by striking out the parenthetical through the end of the subparagraph and inserting in lieu thereof a semicolon; and
(E) by striking out paragraph (5) and inserting in lieu thereof the following new paragraph:
"(5) COMPLIANCE AUDITS.--(A) Except as provided in subparagraph (B) or by the Single Audit Act Amendments of 1996, an eligible lender that originates or holds more than $5,000,000 in loans made under this title during a fiscal year shall submit to the Secretary a compliance audit for that fiscal year that is conducted by a qualified, independent organization or person in accordance with the Government Auditing Standards issued by the Comptroller General, and the regulations of the Secretary.
"(B) The Secretary may permit a lender to submit the results of an audit conducted for other purposes if the Secretary determines that such other audit results provide the same information as required under subparagraph (A).";
(3) in subsection (c)--
(A) by amending the heading to read as follows: "AGREEMENTS WITH GUARANTY AGENCIES.--";
(B) in paragraph (3)--
(i) in the matter preceding subparagraph (A), by striking out "A guaranty agreement" and inserting in lieu thereof "An agreement between the Secretary and a guaranty agency";
(ii) in the flush left language at the end of the paragraph, by striking out "Guaranty agencies" and inserting in lieu thereof "The Secretary"; and
(iii) by redesignating paragraph (3) as paragraph (11);
(C) by striking out paragraphs (1), (2), (4), and (5);
(D) by inserting after the subsection heading the following new paragraphs:
"(1) AUTHORITY TO ENTER INTO AGREEMENTS.--(A)(i) The Secretary may enter into an agreement with a guaranty agency, under which the Secretary shall insure loans made under this section through the guaranty agency on behalf of the Secretary. Other than for the purposes of this part, a guaranty agency shall not be considered to be an agent of the Secretary or the United States for any purpose, and shall not be considered to be an agency, employee, or other establishment of the United States for purposes of the Federal Tort Claims Act. The preceding sentence shall not be construed to limit or relieve a guaranty agency's liability that may arise as a result of the guaranty agency's failure to carry out its responsibilities under this part.
"(ii) Any guaranty agency that had an agreement with the Secretary under section 428(b) as of the day before the date of enactment of the [insert name of Act] Act of 1998 may enter into an initial agreement with the Secretary under this subsection.
"(iii) An agreement under this subsection shall be five years in duration, and may be renewed by the Secretary for successive five-year periods.
"(iii) The Secretary may terminate the agreement prior to its expiration in accordance with paragraph (9).
"(2) EFFECT ON PRIOR GUARANTY AGREEMENTS AND LOAN INSURANCE BY GUARANTY AGENCIES.--(A) All guaranty agreements made under this subsection as it was in effect on the day before the date of enactment of the [insert name of Act] Act of 1998 shall terminate not later than 180 days after the date of enactment of that Act.
"(B) Notwithstanding any other provision of law-- "(i) to the extent that a guaranty agency had insured loans under this part, loan insurance by such guaranty agency that is outstanding as of the date of the termination under subparagraph (A) shall be replaced on such date by loan insurance issued by the Secretary, and the guaranty agency shall be relieved of any further liability thereon;
"(ii) the Secretary's liability for any outstanding liabilities of a guaranty agency (other than outstanding loan insurance under this part), shall not exceed the fair market value of the unrestricted funds of the guaranty agency, which shall consist of--
"(I) all accumulated earnings not otherwise placed in a restricted account in accordance with section 422(h)(2)(A); and
"(II) any reserves that may be used as working capital under section 422(h)(2)(B); and
"(iii) for the first year after the date of enactment of the [insert name] Act of 1998, the Secretary may specify such interim administrative measures as the Secretary determines to be necessary for the efficient transfer of the loan insurance function, and to carry out the purposes of this part.
"(3) TERMS OF AGREEMENT.--The agreement between the Secretary and a guaranty agency shall include, but not be limited to--
"(A) provisions regarding the responsibilities of the guaranty agency for--
"(i) administering the issuance of insurance on loans made under this section on behalf of the Secretary;
"(ii) monitoring insurance commitments made under this section;
"(iii) default prevention activities;
"(iv) review of default claims made by lenders;
"(v) payment of default claims;
"(vi) collection of defaulted loans;
"(vii) adoption of internal systems of accounting and auditing that are acceptable to the Secretary, and reporting the result thereof to the Secretary on a timely, accurate, and auditable basis;
"(viii) timely and accurate collection and reporting of such other data as the Secretary may require to carry out the purposes of the programs under this title;
"(ix) monitoring of institutions and lenders participating in the program under this part; and
"(x) such other program functions as the Secretary may require of the guaranty agency;
"(B) provisions regarding the fees the Secretary shall pay to the guaranty agency under the agreement, and other revenues that the guaranty agency may receive thereunder, as described in paragraphs (4) and (6);
"(C) provisions requiring the guaranty agency to carry out its responsibilities under the agreement in accordance with paragraph (5);
"(D) provisions regarding the use, in accordance with paragraph (10), of net revenues in excess of the guaranty agency's need for working capital, as determined after compliance with section 422(h), for such other activities in support of postsecondary education as may be agreed to by the Secretary and the guaranty agency;
"(E) provisions regarding such other businesses, previously purchased or developed with reserve funds, that relate to the program under this part and in which the Secretary permits the guaranty agency to engage (as determined on a case-by-case basis);
"(F) provisions setting forth such administrative and fiscal procedures as may be necessary to protect the United States from the risk of unreasonable loss thereunder, and to ensure proper and efficient administration of the loan insurance program;
"(G) provisions regarding the submission of the results of audits of the guaranty agency that are conducted--
"(i) at least annually;
"(ii) by a qualified, independent organization or person in accordance with the standards established by the Comptroller General for the audit of governmental organizations, programs, and functions; and
"(iii) in accordance with the regulations of the Secretary;
"(H) provisions requiring the making of such reports, in such form and containing such information, including financial information, as the Secretary may reasonably require to carry out the Secretary's functions under this part and to protect the Federal fiscal interest, and for keeping such records and for affording such access thereto as the Secretary may find necessary or appropriate to ensure the correctness and verification of such reports;
"(I) adequate assurances that the guaranty agency will not engage in any pattern or practice which may result in a denial of a borrower's access to loans under this part because of the borrower's race, sex, color, religion, national origin, age, handicapped status, income, attendance at a particular eligible institution, length of the borrower's educational program, or the borrower's academic year in school;
"(J) assurances that--
"(i) upon the request of an eligible institution, the guaranty agency shall, subject to clauses (ii) and (iii), furnish to the institution information with respect to students (including the names and addresses of such students) who received loans made or insured under this part for attendance at the eligible institution and for whom preclaims assistance activities have been requested under subsection (l);
"(ii) the guaranty agency shall require the payment by the institution of a reasonable fee (as determined in accordance with regulations prescribed by the Secretary) for such information; and
"(iii) the institution may use such information only to remind students of their obligation to repay student loans and may not disseminate the information for any other purpose; and
"(K) such other provisions as the Secretary may determine to be necessary to protect the United States from the risk of unreasonable loss and to promote the purposes of this part.
"(4) FEES AND OTHER REVENUES.--(A)(i) The Secretary shall pay to a guaranty agency with an agreement under this subsection the following uniform fees:
"(I) a one-time issuance fee for each new loan made under this part that is insured by the Secretary through the guaranty agency; and
"(II) an annual maintenance fee for each active borrower account.
"(ii) The fees described in clause (i)--
"(I) shall be paid on a quarterly basis;
"(II) for fiscal year 1999, shall be a one-time issuance fee of not less than $23.80 per loan and an annual maintenance fee of not less than $5.00 per active borrower account, which may be adjusted by Secretary for succeeding fiscal years after consultation with guaranty agencies with agreements under this subsection and consideration of the guaranty agencies' necessary expenses in carrying out their responsibilities under this part and alternate sources of revenue for the guaranty agencies;
"(III) notwithstanding subclause (II), the aggregate amount of issuance and maintenance fees for all guaranty agencies shall be not less than $170,000,000 for fiscal year 1999, and not less than $150,000,000 for each of the fiscal years 2000, 2001, and 2002, plus the amount of interest earned on the restricted accounts described in section 422(h)(2)(B) for each such year; and
"(IV) notwithstanding subclause (II), the amount of the issuance and maintenance fees paid to a guaranty agency for fiscal year 2003 shall be reduced by the amount of interest earned by the guaranty agency on the restricted account described in section 422(h)(2)(B) for such year.
"(B) A guaranty agency with an agreement under this subsection also may receive revenues derived from--
"(i) a default prevention fee paid by lenders in accordance with subsection (g);
"(ii) the collection retention allowance under paragraph (6);
"(iii) the interest earned on funds in the restricted account established under section 422(h);
"(iv) the interest earned on reserves that the Secretary permits the guaranty agency to use as temporary working capital under section 422(h);
"(iv) such other businesses, previously purchased or developed with reserve funds, that relate to the program under this part and in which the Secretary permits the guaranty agency to engage (as determined on a case-by-case basis); and
"(v) such other fees as may be authorized under this part.
"(5) PERFORMANCE REQUIREMENTS.--(A) A guaranty agency with an agreement under this subsection shall carry out its responsibilities thereunder in accordance with such measurable performance-based standards as the Secretary may specify, and shall submit such timely and accurate data to the Secretary in support of its performance, as the Secretary may require.
"(B) The Secretary shall apply the performance standards uniformly to guaranty agencies with agreements under this subsection.
"(C) The Secretary shall assess the performance of each guaranty agency on the basis of the audits required under paragraph (3)(G), and shall compare such guaranty agency's performance against the performance of other such guaranty agencies and publicly disseminate such comparison.
"(D) The Secretary may impose a fine, in accordance with the terms of the agreement, on a guaranty agency that fails to achieve a specified level of performance on one or more performance standards. If the guaranty agency's failure to achieve such performance level results in a financial loss to the United States, the guaranty agency shall indemnify the Secretary for such loss.";
(E) by amending paragraph (6) to read as follows:
"(6) COLLECTION RETENTION ALLOWANCE.--(A) If, after the Secretary has paid a claim on a loan made under this title, any payments are made in discharge of the obligation incurred by the borrower with respect to such loan (including any payments of interest accruing on such loan after the payment of the default claim by the Secretary), the guaranty agency shall pay to the Secretary that portion of the payments remaining after the guaranty agency with which the Secretary has an agreement under this subsection has deducted from such payments an amount for costs related to the student loan insurance program that shall not exceed 18.5 percent of such payments, except that the Secretary shall reduce such amount to a lower payment that is consistent with future improved efficiencies and cost reductions in debt collection practices, if the Secretary determines that it is cost effective and in the best interest of the Federal Government to lower such payment.
"(B) If the liability on a loan made under this title is discharged by payment of the proceeds of a consolidation loan under this part or under part D after the Secretary has paid a claim on the loan discharged, the guaranty agency may not deduct the amount specified in subparagraph (A), but may charge the borrower an amount specified by the Secretary and not to exceed 18.5% of the principal amount of the defaulted loan at the time of consolidation, to defray the guaranty agency's collection costs on the defaulted loan to be consolidated.";
(F) by amending paragraph (7) to read as follows:
"(7) SECRETARY AUTHORIZED TO RENEW OR MAKE ALTERNATE AGREEMENTS.--Notwithstanding any other provision of law, once the initial agreement with a guaranty agency entered into after the date of enactment of the [insert name] Act of 1998 has ended (through its expiration, the termination of the guaranty agency agreement by the Secretary in accordance with paragraph (9), or the resignation of the guaranty agency, as the case may be), the Secretary, in his discretion, may enter into--
"(A) another agreement with the guaranty agency;
"(B) an alternate agreement under which the functions previously performed by the guaranty agency shall be performed by another State or private nonprofit agency with which the Secretary has an agreement under this subsection; or
"(C) a contract under section 428E.";
(G) by amending paragraph (9) to read as follows:
"(9) TERMINATION OF GUARANTY AGENCY AGREEMENTS.--(A) A guaranty agency's agreement under this subsection may be ended in advance of its expiration date in accordance with subparagraph (B) or (C). If its agreement is so ended, the guaranty agency shall immediately--
"(i) cease to be an agent of the Secretary for purposes of the program under this part; and
"(ii) surrender all remaining liquid and non-liquid reserve funds, and assets purchased or developed with reserve funds, still held by the guaranty agency (including reserves held by, or under the control of, any other entity) to the Secretary or the Secretary's designated agent.
"(B) A guaranty agency's agreement under this subsection shall be void, and the Secretary shall immediately so notify such guaranty agency, if--
"(i) the guaranty agency fails to comply in a timely manner with the recall of reserve requirements of section 422(h);
"(ii) the guaranty agency fails to increase the amount of funds in its unrestricted account (as measured by comparing the amount of funds in such account at the beginning and end of a year) for each of two years (that may or may not be consecutive) in the five year period of the agreement under this subsection;
"(iii) any other agreement that the guaranty agency has with the Secretary is terminated;
"(iv) the guaranty agency becomes insolvent or declares bankruptcy; or
"(v) there is any legal impediment to the guaranty agency substantially performing its responsibilities under the agreement.
"(C) The Secretary shall, after notice and opportunity for a hearing, terminate a guaranty agency that has substantially failed to achieve an acceptable level of performance under its agreement with the Secretary. A substantial performance failure under this subparagraph may include the existence of material internal control weaknesses relating to data quality in the guaranty agency's audits for each of two years (that may or may not be consecutive) in the five year period of the agreement under this subsection.
"(D) Notwithstanding any other provision of Federal or State law, if the Secretary has terminated or is seeking to terminate a guaranty agency's agreement in advance of its expiration date--
"(i) no State court may issue any order affecting the Secretary's actions with respect to such guaranty agency;
"(ii) any contract with respect to the administration of reserve funds held by a guaranty agency, or the administration of any assets purchased or developed with the reserve funds of the guaranty agency, that is entered into, or extended, by the guaranty agency, or any other party on behalf of, or with the concurrence of, the guaranty agency, after the date of enactment of the [insert name] Act of 1998 shall provide that the contract is terminable by the Secretary upon 30 days notice to the contracting parties if the Secretary determines that such contract includes an impermissible transfer of the reserve funds or assets, or is otherwise inconsistent with the terms or purposes of this section; and
"(iii) no provision of State law shall apply to the actions of the Secretary in terminating the operations of a guaranty agency."; and
(H) by adding after paragraph (9) the following new paragraph:
"(10) USE OF SURPLUS FUNDS.--(A) A guaranty agency with an agreement under this subsection may retain the amount determined in accordance with subparagraph (B) for activities in support of postsecondary education that are approved by the Secretary. "(B)(i) A guaranty agency may retain 50 percent of its net revenues for fiscal year 1999 in excess of the guaranty agency's need for working capital for such year, as determined after compliance with section 422(h), for approved activities.
"(ii) A guaranty agency may retain for approved activities for fiscal year 1999 and succeeding fiscal years the lesser of--
"(I) 50 percent of its net revenues for such year in excess of its need for working capital, as determined after compliance with section 422(h); or
"(II) the amount of its net revenues for such year in excess of its need for working capital, as determined after compliance with section 422(h), that is equal to a uniform percentage, established annually by the Secretary, of federal revenues received by the guaranty agency for the preceding year. In determining such percentage, the Secretary shall take into account all guaranty agencies' revenues and costs for the preceding year to determine an adequate level of economic incentive for guaranty agencies to maximize their efficiency.";
(4) by amending subsection (g) to read as follows:
"(g) DEFAULT PREVENTION FEE PAID BY LENDERS.--(1) An eligible lender shall pay a guaranty agency, to which such lender referred a delinquent loan, a default prevention fee set by the Secretary, but not to exceed $100 per borrower account, if the guaranty agency succeeds in bringing such loan into current repayment status.
"(2) The Secretary shall prescribe in regulations the circumstances in which a lender may obtain a refund of a default prevention fee if the borrower of a loan on which such fee was paid subsequently defaults on such loan."; and
"(5) in subsection (l)--
(A) in paragraph (1), by striking out the paragraph designation and the paragraph heading; and
(B) by striking out paragraph (2).
(b) Section 432 of the Act is amended--
(1) in subsection (e), by striking out "having a guaranty agreement under section 428(c)(1)," and inserting in lieu thereof a comma; and
(2) in subsection (f)(1), by amending subparagraph (A) to read as follows:
"(A) any guaranty agency, as defined in section 435(j);".
(c) Section 435(j) of the Act is amended by striking out "section 428(b)." and inserting in lieu thereof "section 428(c).".
LENDER REFERRAL SERVICES
SEC. 427. Section 428 of the Act is further amended by striking out subsection (e).
LENDER OF LAST RESORT; LOAN ACCESS
SEC. 428. Section 428(j) of the Act is amended--
(1) in paragraph (1), in the first sentence therein, by striking out "eligible to receive interest benefits paid on their behalf under subsection (a) of this section" and inserting in lieu thereof "eligible to borrow a loan made under section 427, 428, or 428H,";
(2) in paragraph (3), by adding at the end thereof the following new subparagraph:
"(C) Notwithstanding any other provision of law, the Secretary may provide advance funds under this subsection directly to an eligible lender serving as a lender-of-last-resort, and the requirements of subparagraphs (A) and (B) applicable to a guaranty agency shall apply to such lender."; and
(3) by adding at the end thereof the following new paragraph:
"(4) ACCESS TO DIRECT LOANS.--If the Secretary determines that a significant number of students attending an eligible institution do not have adequate access to loans under this part, the Secretary may deem such institution eligible to participate in the direct student loan program under part D. If the Secretary makes such a determination, the institution shall be eligible to participate in the programs under this part and under part D at the same time, or, if the Secretary and the institution agree, to participate only in the program under part D, and may begin its participation in the program under part D at any time during the academic year.".
REPEAL OF STATE SHARE OF DEFAULT COSTS
SEC. 429. Section 428 of the Act is further amended by striking out subsection (n).
PLUS LOAN DATA VERIFICATION
SEC. 430. Section 428B is further amended by adding after subsection (e) the following new subsection:
"(f) VERIFICATION OF IMMIGRATION STATUS AND SOCIAL SECURITY NUMBER.--Notwithstanding any other provision of law, a parent who borrows funds under this section shall be subject to verification of his or her--
"(1) immigration status in accordance with the requirements of section 484(g); and
"(2) social security number in accordance with the requirements of section 484(n).".
CONSOLIDATION LOANS
SEC. 431. (a) Section 428C of the Act is further amended--
(1) in subsection (a)(3)--
(A) in subparagraph (A), by inserting "in an in-school period," after "for a consolidation loan is";
(B) in subparagraph (B), by amending clause (i) to read as follows:
"(i) Eligible student loans received by the eligible borrower may be added to a consolidation loan during the 180­day period following the making of such consolidation loan."; and
(C) by adding at the end thereof the following new subparagraph:
"(D) A borrower of a loan made under this part may consolidate such loan under this section only under such terms and conditions as the Secretary shall establish in regulation.".
(2) in subsection (b)(4)(C), by amending clause (ii) to read as follows:
"(ii) provides that interest shall accrue and be paid--
"(I) by the Secretary, in the case of a consolidation loan made before July 1, 1999 that consolidated only Federal Stafford Loans for which the student borrower received an interest subsidy under section 428;
"(II) by the Secretary, in the case of a consolidation loan made on or after July 1, 1999, except that the Secretary shall pay such interest only on that portion of the loan that repays Federal Stafford Loans for which the student borrower received an interest subsidy under section 428; and
"(III) by the borrower, or capitalized, in the case of a consolidation loan, or portion thereof, other than one described in subclause (I) or (II);"; and
(3) in subsection (c)--
(A) in paragraph (1)--
(i) in subparagraph (A), by striking out "subparagraph (B) or (C)." and inserting in lieu thereof "subparagraph (B), (C), (D), or (E), and subject to subparagraph (F).";
(ii) in subparagraph (C), by striking out "after July 1, 1994," and inserting in lieu thereof "after July 1, 1994 and before July 1, 1999,"; and
(iii) by adding after subparagraph (C) the following new subparagraphs:
"(D) A consolidation loan made on or after July 1, 1999, that repays loans made under section 428 or 428H, or a combination thereof, shall bear interest at an annual rate on the unpaid principal balance of the loan that is equal to--
"(i) the rate specified in section 427A(g), in the case of a borrower in an in-school or grace period; or
"(ii) the rate specified in section 427A(h)(1) in all other cases.
"(E) A consolidation loan made on or after July 1, 1999, that repays loans made under section 428B shall bear interest at an annual rate on the unpaid principal balance of the loan that is equal to the rate specified in section 427A(h)(2).
"(F) Notwithstanding any other provision of this section, the Secretary may prescribe in regulation such procedures as may be necessary to ensure that--
"(i) a borrower of a consolidation loan that repays a combination of loans eligible to be consolidated under this section, shall continue to receive, after consolidation, any interest subsidy benefits associated with a particular loan, without extending such benefits to any other loans consolidated that do not have interest subsidy benefits;
"(ii) in the case of a consolidation loan that repays a combination of loans described in subparagraphs (D) and (E), the interest rate on such consolidation loan shall be calculated in a manner that reflects the interest rate applicable to loans made under each such subparagraph; and
"(iii) in the case of a consolidation loan that repays a loan eligible to be consolidated under this section other than those described in subparagraphs (D) and (E), the interest rate applicable to such other loan shall be the interest rate described in subparagraph (D) if such other loan is considered by the Secretary to be subsidized, and the interest rate described in subparagraph (E) if such other loan is considered by the Secretary to be unsubsidized."; and
(B) in paragraph (4)--
(i) by striking out "Repayment" and inserting in lieu thereof "(A) Except as provided in subparagraph (B), repayment"; and
(ii) by adding after subparagraph (A) (as designated by clause (i)) the following new subparagraph:
"(B) In the case of a consolidation loan that repays a loan made under this part for which the borrower is in an in-school period at the time the consolidation application is received, the repayment period for such consolidation loan shall commence after the completion of a grace period, as described in section 428(b)(7)(i).".
CONTRACTS WITH OTHER ENTITIES
SEC. 432. Part B of title IV of the Act is amended by inserting after section 428D the following new section:
"CONTRACT AUTHORITY
"SEC. 428E. The Secretary may enter into one or more contracts to carry out any of the functions that otherwise would be carried out by a guaranty agency with an agreement under section 428(c).".
CAPITALIZATION OF INTEREST;
PAYMENT OF INTEREST FOR COMMUNITY SERVICE
SEC. 433. (a) Section 428H(e) of the Act is amended--
(1) by amending paragraph (2) to read as follows:
"(2) CAPITALIZATION OF INTEREST.--Except as provided in paragraph (7), interest on a loan made under this section for which payments of principal are not required during the in-school and grace periods, or for which payments are deferred under section 427(a)(2)(C) and 428(b)(1)(M), shall, as agreed upon by the borrower and the lender--
"(A) be paid monthly or quarterly; or
"(B) be added to the principal amount of the loan only--
"(i) when the loan enters repayment;
"(ii) at the expiration of a grace period, in the case of a loan that qualifies for a grace period;
"(ii) at the expiration of a period of deferment or forbearance on the loan; and
"(iii) when the borrower defaults on the loan.";
(2) in paragraph (3), by striking out "No" and inserting in lieu thereof "Except as provided in paragraph (7), no"; and
(3) by adding at the end thereof the following new paragraph:
"(7) PAYMENT OF INTEREST FOR COMMUNITY SERVICE.--(A) The Secretary shall assume the responsibility to pay, and shall pay, the interest on a loan made under this section that accrues while the borrower is receiving a deferment under section 428(b)(1)(m)(iii) for such loan while performing community service.
"(B) A borrower is performing community service for purposes of subparagraph (A) if--
"(i) the borrower is employed by--
"(I) a State or a subdivision thereof;
"(II) a local government;
"(III) an Indian tribe;
"(IV) a public or private nonprofit organization; or
"(V) a Federal agency; and
"(ii) the employment consists of providing services that address human, educational, environmental or public safety needs and primarily benefit the community at large (and not the membership of a particular organization, such as a labor, fraternal, or religious organization).".
(b) Section 427(a)(1)(E) of the Act is amended to read as follows:
"(E) provides that the lender--
"(i) will not collect, or attempt to collect, from the borrower any portion of the interest on the note which is payable by the Secretary under this part;
"(ii) may add unpaid accrued interest to the borrower's unpaid principal balance only--
"(I) upon the expiration of a period of forbearance; and
"(II) when the borrower defaults on the loan; and
"(iii) will enter into such agreements with the Secretary as may be necessary for the purpose of section 437;".
(c) Section 428(b)(1)(F) of the Act is amended­­
(1) by inserting the clause designation "(i)" immediately following "authorizes"; and
(2) by adding at the end thereof "and" and the following new clause:
"(ii) the addition of unpaid accrued interest to the borrower's unpaid principal balance only­­
"(I) upon the expiration of a period of forbearance; or
"(II) when the borrower defaults on the loan;".
(d) Section 428B(d)(2) of the Act is amended to read as follows:
"(2) CAPITALIZATION OF INTEREST.--(A) Interest on loans made under this section for which payments of principal are deferred pursuant to paragraph (1) shall, as agreed upon by the borrower and the lender--
"(i) be paid monthly or quarterly; or
"(ii) be added to the principal amount of the loan only--
"(I) when the borrower enters repayment;
"(II) at the expiration of a period of deferment or forbearance on the loan; or
"(II) when the borrower defaults on the loan.".
"(B) Capitalization of interest under this paragraph shall not be deemed to exceed the annual insurable limit on account of the borrower.".
(c) Section 428C(c)(1) of the Act is amended by ending at the end thereof the following new paragraph:
"(D) CAPITALIZATION OF INTEREST.­­A lender may add unpaid accrued interest to the borrower's unpaid principal balance only­­
"(i) when the borrower enters repayment;
"(i) at the expiration of a grace period, in the case of a loan that qualifies for a grace period;
"(iii) upon the expiration of a period of forbearance or deferment; or
"(iv) when the borrower defaults on the loan.".
FINES; AUTHORITY OF THE SECRETARY TO EVALUATE TRANSACTIONS
SEC. 434. Section 432 of the Act is further amended--
(1) in subsection (g)--
(A) in paragraph (1), in the flush left language after subparagraph (B), by striking out "of not to exceed $25,000";
(B) by striking out paragraphs (2), (3), (4), (5), and (6); and
(C) by adding at the end thereof the following new paragraph:
"(2) AMOUNT OF PENALTY; COMPROMISE.--In determining the amount of a civil penaty under this subsection, the Secretary shall consider the appropriateness of the penalty to the resources of the lender or guaranty agency subject to the determination; the gravity of the violation, failure, or misrepresentation; the frequency and persistence of the violation, failure, or misrepresentation; and the amount of any losses resulting from the violation, failure, or misrepresentation. Any civil penalty under this subsection may be compromised by the Secretary, and the Secretary shall consider the appropriateness of the amount that is to be agreed upon in compromise in relation to the factors described in the preceding sentence. The amount of such penalty, when finally determined, or the amount agreed upon in compromise, may be deducted from any sums owing by the United States to the lender or guaranty agency charged."; and
(2) by adding at the end thereof the following new subsection:
"(q) REVIEW OF SUBSTANCE OF TRANSACTIONS.--Notwithstanding any other provision of law, the Secretary is authorized to review all program-related activities of lenders, guaranty agencies, eligible institutions, and third-party servicers for substantive, as well as technical, compliance with the purposes and requirements of this part, and to take such action as the Secretary determines to be necessary to ensure such substantive compliance.".
DEFINITIONS
SEC. 435. Section 435 of the Act is amended--
(1) in subsection (a)--
(A) in paragraph (2)--
(i) in subparagraph (A), by adding at the end thereof the following: "If an institution continues to participate in a program under this part, and its appeal of the loss of eligibility is unsuccessful, the institution shall be required to pay to the Secretary an amount equal to the amount of interest, special allowance, reinsurance, and any related payments made by the Secretary (or which the Secretary is obligated to make) with respect to loans made under this part to students attending, or planning to attend, that institution during the pendency of such appeal. In order to continue to participate during an appeal under this paragraph, the institution shall provide a letter of credit in favor of the Secretary or other third­party financial guarantees satisfactory to the Secretary in an amount determined by the Secretary to be sufficient to satisfy the institution's potential liability on such loans under the preceding sentence.";
(ii) by amending subparagraph (C) to read as follows:
"(C)(i) This paragraph shall not apply to any institution described in clause (ii), provided that any such institution that exceeds the threshold percentage in subparagraph (A)(ii) for two consecutive years shall submit to the Secretary a default management plan satisfactory to the Secretary and containing criteria designed, in accordance with the regulations of the Secretary, to demonstrate continuous improvement by the institution in its cohort default rate. If the institution fails submit the required plan, or to satisfy the criteria in the plan, the institution shall be subject to a loss of eligibility in accordance with this paragraph, except as the Secretary may otherwise specify in regulations.
"(ii) An institution is subject to clause (i) if it is--
"(I) a part B institution within the meaning of section 322(2) of this Act;
"(II) a tribally controlled community college within the meaning of section 2(a)(4) of the Tribally Controlled Community College Assistance Act of 1978; or
"(III) a Navajo Community College under the Navajo Community College Act."; and
(iii) by adding at the end thereof the following new subparagraph:
"(D) Notwithstanding any other provision of law, if an institution outside of the United States that meets the requirements of section 481(a)(1)(B)(ii), has a cohort default rate for the three most recent years for which data are available that equals or exceeds five percent, such institution shall not be eligible to participate in a program under this part for the fiscal year for which the determination is made and for the two succeeding fiscal years.";
(B) in paragraph (3), in the flush left language following subparagraph (C), by striking out "of the affected guaranty agencies and loan servicers" and inserting in lieu thereof "used by a guaranty agency in determining to pay a claim on a defaulted loan,";
(2) in subsection (d)--
(A) in paragraph (1), in the matter preceding subparagraph (A), by striking out "paragraphs (2) through (6)," and inserting in lieu thereof "paragraphs (2) through (7),"; and
(B) by adding at the end thereof the following new paragraph:
"(7) ADDITIONAL REQUIREMENTS.--The Secretary may prescribe in regulation such additional requirements on the entities described in paragraph (1) as the Secretary determines necessary to--
"(A) oversee adequately the program activities of such entities;
"(B) safeguard student borrowers seeking loans from such entities; and
"(C) carry out the purposes of this part.".
(3) in subsection (m)(1), by amending subsection (B) to read as follows:
"(B)(i) In determining the number of students who default before the end of such fiscal year, the Secretary shall include only loans for which the Secretary or a guaranty agency has paid claims for insurance.
"(ii) In considering appeals with respect to cohort default rates pursuant to subsection (a)(3), the Secretary shall exclude, from the calculation of the number of students who entered repayment and the calculation of the number of students who default, any loans which, due to improper servicing or collection, would, as demonstrated by the evidence submitted in support of the institution's timely appeal to the Secretary, result in an inaccurate or incomplete calculation of such cohort default rate.".
REPEAL; DELEGATION OF FUNCTIONS
SEC. 436. (a) Section 436 of the Act is repealed.
(b) Part B of title IV of the Act is further amended by inserting immediately after section 435 the following new section:
"DELEGATION OF FUNCTIONS
"SEC. 436. (a) An eligible lender or guaranty agency that contracts with another entity to perform any of its functions under this title, or otherwise delegates the performance of such functions to such other entity--
"(1) shall not be relieved of its duty to comply with the requirements of this title; and
"(2) shall monitor the activities of such other entity for compliance with such requirements.
"(b) A lender that holds a loan made under part B in its capacity as a trustee assumes responsibility for complying with all statutory and regulatory requirements imposed on any other holder of a loan made under this part.".
BANKRUPTCY
SEC. 437. Section 437(b) of the Act is amended--
(1) in the matter preceding paragraph (1), by inserting immediately after "a loan" the following: "made before July 1, 1999 and";
(2) by redesignating paragraphs (1), (2), and (3) as subparagraphs (A), (B), and (C), respectively;
(3) by inserting immediately following the subsection heading the paragraph designation "(1)"; and
(4) by adding at the end thereof the following new paragraph:
"(2) Notwithstanding any other provision of law, no loan made, insured or guaranteed under title IV of the Higher Education Act of 1965 on or after July 1, 1999 shall be released by a discharge in bankruptcy under any chapter of Title 11, United States Code.".
SPECIAL ALLOWANCE
SEC. 438. (a) Section 438 of the Act is amended--
(1) in subsection (a)(3), by striking out "quarterly rate"" each place it appears and inserting in lieu thereof "rate"; and
(2) in subsection (b)--
(A) in paragraph (2)--
(i) in subparagraph (A), by striking out "subparagraphs (B), (C), (D), (E), and (F)" and "section 427A(f)." and inserting in lieu thereof "subparagraphs (B), (C), (D), (E), (F), and (G)" and "section 427A(i).", respectively;
(ii) in subparagraph (B), by adding at the end thereof the following new clause:
"(v) Notwithstanding clauses (ii) and (iv), the rate of the special allowance for holders of loans that are financed on or after October 1, 1999, with funds obtained by the holder from the issuance of obligations, regardless of when originally issued, the income from which is excluded from gross income under the Internal Revenue Code of 1986, shall be one half of the rate of the special allowance established under subparagraph (G). Such rate shall also apply to holders of loans which were made or purchased on or after October 1, 1999 with funds obtained by the holder from collections, or default reimbursements, on, or interest or other income pertaining to, eligible loans made or purchased with funds described in the preceding sentence of this subparagraph or from income on the investment of such funds.";
"(iii) in subparagraph (E), by inserting a comma and "or '1.7 percent', as the case may be," immediately after "'2.5 percent'";
"(iv) by amending subparagraph (F) to read as follows:
"(F) The special allowance paid pursuant to this subsection on loans for which the applicable rate of interest is determined under section 427A(h) shall be computed by--
"(i) subtracting the applicable interest rate on such loans from the applicable bond equivalent rate determined under such section;
"(ii) adding 1.0 percent to the remainder; and
"(iii) dividing such resultant percentage by 4; "except that if such computation produces a number that is less than zero, such loans shall be subject to section 427A(i)."; and
(v) by adding after subparagraph (F) the following new subparagraph:
"(G)(i) Notwithstanding any other provision of this section, in the case of loans made or insured under this part for which the first disbursement is made on or after July 1, 1999, the special allowance paid pursuant to this subsection shall be computed for any 12-month period beginning on July 1 and ending on June 30 by--
"(I) determining, on the preceding June 1,[ the bond equivalent rate of 91-day Treasury bills auctioned at the final auction held prior to such June 1; and
"(II) subtracting the applicable interest rate on such loans from such amount.
"(ii) The amount of special allowance computed under clause (i) shall be paid in quarterly increments for the 3-month periods described in paragraph (1)."; and
(B) in paragraph (3), in the second sentence, by striking out "determined for any such 3-month period shall be paid promptly after the close of such period," and inserting in lieu thereof "calculated under this subsection shall be paid promptly after the close of the 3-month period for which such special allowance payment is due,";
(3) in subsection (d), by amending paragraph (1) to read as follows:
"(1) DIRECT COLLECTION OF LOAN FEES OR DEDUCTION FROM INTEREST AND SPECIAL ALLOWANCE SUBSIDIES.--(A) Notwithstanding subsection (b), the Secretary shall collect a loan fee in an amount determined in accordance with paragraph (2)--
"(i) directly from the holder of a loan; or
"(ii) by reducing the total amount of interest and special allowance payable under section 428(a)(3)(A) and subsection (b) of this section, respectively, to any holder of a loan.
"(B) If the Secretary chooses to collect the loan fee under this subsection through the reduction of interest and special allowance, and the total amount of interest and special allowance payable under section 428(a)(3)(A) and subsection (b) of this section, respectively, is less than the amount of such loan fee, the Secretary shall deduct from the amount of interest and special allowance that would otherwise be payable in subsequent quarterly increments until the total amount has been deducted."; and
(4) in subsection (e)--
(A) by striking out paragraph (1);
(B) in paragraph (2)--
(i) by amending the heading to read as follows: "ELIGIBILITY FOR SPECIAL ALLOWANCES.--"; and
(ii) by amending the matter preceding subparagraph (A) to read as follows: "A holder of loans, any portion of which were made or purchased with funds obtained by the holder from an Authority issuing obligations, the income from which is exempt from taxation under the Internal Revenue Code of 1986, shall be eligible to receive a special allowance under subsection (b)(2) if--"; and
(C) by redesignating paragraphs (2), (3), and (4) as paragraphs (1), (2), and (3), respectively.
(b) Section 432(f)(1)(D) of the Act is amended by striking out "required" through the end thereof and inserting in lieu thereof "that meets the requirements of section 438(e).".
REPEALS
SEC. 439. Part B of the Act is further amended by repealing sections 428I and 428J.

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