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Proposed Rule

Federal Perkins Loan Program

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Office of Postsecondary Education, Education.


Notice of proposed rulemaking.


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


We must receive your comments by September 11, 2000.


Address all comments concerning these proposed regulations to Ms. Vanessa Freeman, U.S. Department of Education, P.O. Box 23272, Washington, DC 20026-3272. If you prefer to send your comments through the Internet, use the following address:

If you want to comment on the information collection requirements you must send your comments to the Office of Management and Budget at the address listed in the Paperwork Reduction Act section of this preamble. You may also send a copy of these comments to the Department representative named in this section.

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Ms. Vanessa Freeman, Program Analyst, U.S. Department of Education, 400 Maryland Avenue, SW., Room 3045, Regional Office Building #3, Washington, DC 20202-5346. Telephone: (202) 708-8242. If you use a telecommunications device for the deaf (TDD), you may call the Federal Information Relay Service (FIRS) at 1-800-877-8339.

Individuals with disabilities may obtain this document in an alternate format (e.g., Braille, large print, audiotape, or computer diskette) on request to the contact person listed in the preceding paragraph.

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Invitation To Comment

We invite you to submit comments regarding these proposed regulations. To ensure that your comments have maximum effect in developing the final regulations, we urge you to identify clearly the specific section or sections of the proposed regulations that each of your comments addresses and to arrange your comments in the same order as the proposed regulations.

We invite you to assist us in complying with the specific requirements of Executive Order 12866 and its overall requirement of reducing regulatory burden that might result from these proposed regulations. Please let us know of any further opportunities we should take to reduce potential costs or increase potential benefits while preserving the effective and efficient administration of the program.

During and after the comment period, you may inspect all public comments about these proposed regulations at the following address: U.S. Department of Education, 7th and D Sts. SW., ROB #3, Rm 3045, Washington, DC 20026-3272, between the hours of 8:30 a.m. and 4 p.m., Eastern time, Monday through Friday, of each week except Federal holidays.

Assistance to Individuals With Disabilities in Reviewing the Rulemaking Record

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

Negotiated Rulemaking

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

To obtain public involvement in the development of the proposed regulations, we held listening sessions Start Printed Page 46128in Washington, DC, Atlanta, Chicago, and San Francisco. Four half-day sessions were held on September 13 and 14, 1999, in Washington, DC. In addition, we held three regional sessions in Atlanta on September 17, in Chicago on September 24, and in San Francisco on September 27, 1999. The Office of Student Financial Assistance's Customer Service Task Force also conducted listening sessions to obtain public involvement in the development of our regulations.

We then published a notice in the Federal Register (64 FR 73458, December 30, 1999) to announce our intention to establish two negotiated rulemaking committees to draft proposed regulations affecting Title IV of the HEA. The notice requested nominations for participants from anyone who believed that his or her organization or group should participate in this negotiated rulemaking process. The notice announced that we would select participants for the process from the nominees of those organizations or groups. The notice also announced a tentative list of issues that each committee would negotiate.

Once the two committees were established, they met to develop proposed regulations over the course of several months, beginning in February. The proposed regulations contained in this NPRM reflect the final consensus of Negotiating Committee I (committee), which was made up of the following members:

American Association of Collegiate Registrars and Admissions Officers

American Association of Cosmetology Schools

American Association of State Colleges and Universities (in coalition with American Association of Community Colleges)

American Council on Education

Career College Association

Coalition of Higher Education Assistance Organizations

Consumer Bankers Association

Education Finance Council

Education Loan Management Resources

Legal Services

National Association of College and University Business Officers

National Association of Independent Colleges and Universities

National Association of State Universities and Land-Grant Colleges

National Association of Student Financial Aid Administrators

National Association of Student Loan Administrators

National Council of Higher Education Loan Programs

National Direct Student Loan Coalition

Sallie Mae, Inc.

Student Loan Servicing Alliance

The College Fund/United Negro College Fund

United States Department of Education

United States Student Association

US Public Interest Research Group

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

Significant Proposed Regulations

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

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

Current regulations: Section 674.13 of the current regulations requires an institution to reimburse its Federal Perkins Loan Fund (Institution's Fund) for the amount of defaulted loans, including administrative cost allowances previously claimed, for which the institution failed to retain required documentation (e.g., the promissory note and a record of advances) or failed to undertake due diligence in collections. Section 674.50(c) of the current regulations identifies the documentation required to be submitted by an institution to assign a loan to the Secretary. Our rejection of an assignment submission for incorrect or incomplete documentation or for an evidenced lack of due diligence in collection of the loan may result in a request that the institution reimburse its Institution's Fund.

Proposed regulations: We propose to amend these sections of the regulations to encourage institutions to assign defaulted loans to us by providing the Secretary discretion to accept defaulted loans for assignment even if not all the documentation specified in 674.50(c) is available or reveals imperfect collection. We also propose to provide the Secretary with discretion to determine the circumstances under which we will require reimbursement by the institution to its Institution's Fund.

Reasons: The proposed change to these sections of the current regulations from absolute requirements to Secretarial discretion represents a compromise with the non-federal negotiators regarding assignment of certain defaulted loans by institutions.

Our initial proposal to require loan assignment reflected our concern over the approximately $350 million in defaulted Perkins loans that are held by participating institutions and have been in default for five or more years as reported by schools on their annual Fiscal Operations Report. Our proposal would have required schools whose Perkins Loan portfolio included a significant percentage of loans in default for five or more years to assign to the Secretary those aged loans with no recent payment activity.

We believe that, without additional significant efforts, this national portfolio of aging defaulted loans will continue to grow and may become less collectible over time. Left unaddressed, this situation reduces funds available for future students and may undermine public support for the Federal Perkins Loan Program. Institutions may have exhausted available collection efforts and ceased collection on an unknown number of these accounts. Because we have collection tools, such as administrative wage garnishment, federal offset, and litigation by the Department of Justice in federal court, that are not available to institutions, we want to have these aged accounts assigned to the Secretary for collection.

The non-federal negotiators representing institutions' interests strenuously rejected the contention that all loans in default for five or more years were inactive accounts and that collection efforts were not continuing on those accounts. Although they agreed that we have collection tools that are not available to institutions, they expressed the belief that we should make these tools more accessible by simplifying the existing voluntary assignment process or introducing a referral process into the regulations rather than imposing mandatory assignment. They indicated that the current voluntary assignment process was underused because it was administratively burdensome and put institutions at risk of reimbursing their Institution's Fund for all loans not accepted for assignment. During the negotiations, there was much discussion and review of a proposal submitted by the non-federal negotiators for use of a referral and voluntary assignment process.

After carefully considering the proposal for a voluntary referral process we declined to consider such an approach. Our experience with similar Perkins Loan referral plans in the past convinced us that such plans are administratively unworkable. They are difficult to manage, hard to explain to borrowers, and present fiscal and legal obstacles with regard to the return of payments received to the referring institution.

Instead we proposed changes to the current voluntary assignment regulations that would allow us to have Start Printed Page 46129the opportunity to work with interested institutions and organizations to develop a less burdensome and more flexible process before turning to a mandatory assignment approach. Thus, these proposed regulations give the Secretary discretion in the two areas (required reimbursement and documentation requirements) that were problematic to some negotiators.

We intend to develop, with the cooperation of participating Perkins institutions, a simplified voluntary assignment process for aging defaulted accounts. We will also monitor the use of this new process over the reporting cycle following implementation of the regulations. We expect institutions to actively review their portfolios and use the new process to assign aged, nonpaying accounts to us and we anticipate a significant reduction in the number and dollar value of these accounts as a result. Should the streamlined voluntary assignment process prove unsuccessful in reducing the number of these accounts, we will consider alternatives, including reintroducing our original regulatory proposal for mandatory assignment.

Section 674.39 Loan Rehabilitation

Current Regulations: Section 674.39(c) of the current regulations specifies that if collection costs are assessed on a rehabilitated defaulted Perkins loan, those collections costs may not exceed 24 percent of the unpaid principal and accrued interest on the loan as of the date following application of the twelfth payment required to rehabilitate the loan.

Proposed Regulations: We propose to amend this section of the regulations by adding a provision that clarifies that the 24 percent cap on collection costs that may be charged on a rehabilitated loan does not apply if the borrower defaults again on the rehabilitated loan.

Reasons: The cap of 24 percent on collection costs for borrowers who successfully rehabilitate a defaulted Perkins loan is a benefit to those borrowers, who in many cases were subject to a higher percentage of collection costs prior to the rehabilitation. That benefit should no longer apply on the loan, however, should the borrower once again default on its repayment.

Section 674.49 Bankruptcy of Borrower

Current Regulations: Section 674.49(b) of the regulations currently requires institutions to file a proof of claim in a bankruptcy proceeding under Chapter 7 of the Bankruptcy Code unless the borrower has no assets.

Proposed Regulations: We propose to amend this provision of the regulations to allow an institution that is determined to be an agency of a State to invoke in bankruptcy proceedings its right of sovereign immunity under the 11th amendment to the Constitution of the United States.

Reasons: We are amending the regulations to codify the recognized right of States and their agents to invoke their rights under the 11th amendment to the Constitution and eliminate any conflict in existing regulations that would suggest that a proof of claim must be filed in all cases where this right might otherwise be invoked.

Executive Order 12866

1. Potential Costs and Benefits

Under Executive Order 12866, we have assessed the potential costs and benefits of this regulatory action.

The potential costs associated with the proposed regulations are those resulting from statutory requirements and those we have determined as necessary for administering this program effectively and efficiently.

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

2. Clarity of the Regulations

Executive Order 12866 and the President's Memorandum of June 1, 1998 on “Plain Language in Government Writing” require each agency to write regulations that are easy to understand.

The Secretary invites comments on how to make these proposed regulations easier to understand, including answers to questions such as the following:

  • Are the requirements in the proposed regulations clearly stated?
  • Do the proposed regulations contain technical terms or other wording that interferes with their clarity?
  • Does the format of the proposed regulations (grouping and order of sections, use of headings, paragraphing etc.) aid or reduce their clarity?
  • Would the proposed regulations be easier to understand if we divided them into more (but shorter) sections? (A “section” is preceded by the symbol “§ ” and a numbered heading; for example, § 674.39 Loan Rehabilitation.)
  • Could the description of the proposed regulations in the “Supplementary Information” section of this preamble be more helpful in making the proposed regulations easier to understand? If so, how?
  • What else could we do to make the proposed regulations easier to understand?

Send any comments that concern how the Department could make these proposed regulations easier to understand to the person listed in the ADDRESSES section of the preamble.

Regulatory Flexibility Act Certification

The Secretary certifies that these proposed regulations would not have a significant economic impact on a substantial number of small entities. These proposed regulations would affect institutions of higher education that participate in title IV, HEA programs. The U.S. Small Business Administration (SBA) Size Standards define institutions as “small entities” if they are for-profit or nonprofit institutions with total annual revenue below $5,000,000 or if they are institutions controlled by governmental entities with populations below 50,000.

The parties affected by these proposed regulations are institutions of higher education that participate in the Perkins Loan Program, and individual Perkins Loan borrowers. Perkins Loan borrowers are not considered small entities under the Regulatory and Flexibility Act. A small percentage of the approximately 2,000 institutions participating in the Perkins Loan program would meet the SBA definition of “small entities.”

These proposed regulations would expand borrower benefits and provide additional flexibility in the administration of the Perkins Loan program to both large and small institutions without requiring significant changes to institutional systems or operations. These proposed regulations would not impose a significant economic impact on a substantial number of small entities.

Paperwork Reduction Act of 1995

Sections 674.13, 674.39, 674.49, and 674.50 of these regulations contain information collection requirements. Under the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)), the Department of Education has submitted Start Printed Page 46130a copy of these sections to the Office of Management and Budget (OMB) for its review.

Collection of Information: Federal Perkins Loan Program

Section 674.13 Reimbursement to the Fund. The Department currently has these regulations approved under OMB control number 1845-0019. This provision allows institutions more flexibility in what the Department requires when reimbursing their funds for defaulted student loans and does not increase the burden hours for schools.

Section 674.39 Loan Rehabilitation. We are adding a provision to include collection costs that may be charged in excess of 24 percent to a rehabilitated loan in the event the rehabilitated loan defaults. There are no burden hours associated with this proposed regulation.

Section 674.50 Assignment of defaulted loans to the United States. This proposed regulation relaxes some of the documentation requirements for institutions that assign defaulted student loans to the Department of Education for collection. This proposed regulation does not increase the burden hours for schools.

Section 674.49 Bankruptcy of borrower. The Department currently has this section approved under OMB control number 1845-0023. This regulation allows state institutions that participate in the Federal Perkins Loans Program the authority to invoke sovereign immunity in Bankruptcy proceedings under Chapter 7 or 13 of the Bankruptcy Code. This proposed regulation resolves any ambiguity surrounding an institution's authority to invoke its rights under the 11th Amendment. This proposed regulation does not change information collection contained in this section.

If you want to comment on the information collection requirements, please send your comments to the Office of Information and Regulatory Affairs, OMB, room 10235, New Executive Office Building, Washington, DC 20503; Attention: Desk Officer for U.S. Department of Education. You may also send a copy of these comments to the Department representative named in the ADDRESSES section of this preamble.

We consider your comments on these proposed collections of information in—

  • Deciding whether the proposed collections are necessary for the proper performance of our functions, including whether the information will have practical use;
  • Evaluating the accuracy of our estimate of the burden of the proposed collections, including the validity of our methodology and assumptions;
  • Enhancing the quality, usefulness, and clarity of the information we collect; and
  • Minimizing the burden on those who must respond. This includes exploring the use of appropriate automated, electronic, mechanical, or other technological collection techniques or other forms of information technology; e.g., permitting electronic submission of responses.

OMB is required to make a decision concerning the collections of information contained in these proposed regulations between 30 and 60 days after publication of this document in the Federal Register. Therefore, to ensure that OMB gives your comments full consideration, it is important that OMB receives the comments within 30 days of publication. This does not affect the deadline for your comments to us on the proposed regulations.

Intergovernmental Review

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

Assessment of Educational Impact

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


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

Electronic Access to This Document

You may view this document in text or Adobe Portable Document Format (PDF) on the Internet at the following sites:​fedreg.htm​csb_​html/​fedlreg.htm

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


The official version of this document is the document published in the Federal Register. Free Internet access to the official edition of the Federal Register and the Code of Federal Regulations is available on GPO Access at:​nara/​index.html.

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

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List of Subjects in 34 CFR Part 674

  • Loan programs—education
  • Student aid
  • Reporting and recordkeeping requirements
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Dated: July 19, 2000.

Richard W. Riley,

Secretary of Education.

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

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

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

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

Reimbursement to the Fund.

(a) The Secretary may require an institution to reimburse its Fund in an amount equal to that portion of the outstanding balance of—

* * * * *

3. Section 674.39 is amended by revising paragraph (c) to read as follows:

Loan rehabilitation.
* * * * *

(c) Collection costs on a rehabilitated loan—

(1) If charged to the borrower, may not exceed 24 percent of the unpaid principal and accrued interest as of the date following application of the twelfth payment;

(2) That exceed the amounts specified in paragraph (c)(1) of this section, may be charged to an institution's Fund until July 1, 2002 in accordance with § 674.47(e)(5); and

(3) Are not restricted to 24 percent in the event the rehabilitated loan defaults.

* * * * *

4. Section 674.49 is amended by revising paragraph (b) to read as follows:

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Bankruptcy of borrower.
* * * * *

(b) Proof of claim. The institution must file a proof of claim in the bankruptcy proceeding unless—

(1) In the case of a proceeding under chapter 7 of the Bankruptcy Code, the notice of meeting of creditors states that the borrower has no assets, or

(2) In the case of a bankruptcy proceeding under either Chapter 7 or Chapter 13 of the Bankruptcy Code in which the repayment plan proposes that the borrower repay less than the full amount owed on the loan, the institution has an authoritative determination by an appropriate State official that in the opinion of the state official, the institution is an agency of the State and is, on that basis, under applicable State law, immune from suit.

* * * * *

5. Section 674.50 is amended by revising paragraph (c) introductory text to read as follows:

Assignment of defaulted loans to the United States.
* * * * *

(c) The Secretary may require an institution to submit the following documents for any loan it proposes to assign—

* * * * *
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[FR Doc. 00-18952 Filed 7-26-00; 8:45 am]