[Federal Register Volume 79, Number 153 (Friday, August 8, 2014)]
[Proposed Rules]
[Pages 46640-46658]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-18673]
[[Page 46639]]
Vol. 79
Friday,
No. 153
August 8, 2014
Part VI
Department of Education
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34 CFR Part 685
William D. Ford Federal Direct Loan Program; Proposed Rule
Federal Register / Vol. 79 , No. 153 / Friday, August 8, 2014 /
Proposed Rules
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DEPARTMENT OF EDUCATION
34 CFR Part 685
[Docket ID ED-2014-OPE-0082]
RIN 1840-AD17
William D. Ford Federal Direct Loan Program
AGENCY: Office of Postsecondary Education, Department of Education.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Secretary proposes to amend the regulations governing the
William D. Ford Federal Direct Loan (Direct Loan) Program. The
Secretary is proposing to amend these regulations to strengthen and
improve the administration of the Federal Direct PLUS Loan Program
authorized under title IV of the Higher Education Act of 1965, as
amended (HEA).
DATES: We must receive your comments on or before September 8, 2014.
ADDRESSES: Submit your comments through the Federal eRulemaking Portal
or via postal mail, commercial delivery, or hand delivery. We will not
accept comments submitted by fax or by email or those submitted after
the comment period. To ensure that we do not receive duplicate copies,
please submit your comments only once. In addition, please include the
Docket ID at the top of your comments.
If you are submitting comments electronically, we strongly
encourage you to submit any comments or attachments in Microsoft Word
format. If you must submit a comment in Adobe Portable Document Format
(PDF), we strongly encourage you to convert the PDF to print-to-PDF
format or to use some other commonly used searchable text format.
Please do not submit the PDF in a scanned format. Using a print-to-PDF
format allows the U.S. Department of Education (the Department) to
electronically search and copy certain portions of your submissions.
Federal eRulemaking Portal: Go to www.regulations.gov to
submit your comments electronically. Information on using
Regulations.gov, including instructions for accessing agency documents,
submitting comments, and viewing the docket, is available on the site
under ``Are you new to the site?''
Postal Mail, Commercial Delivery, or Hand Delivery: The
Department strongly encourages commenters to submit their comments
electronically. However, if you mail or deliver your comments about the
proposed regulations, address them to Jean-Didier Gaina, U.S.
Department of Education, 1990 K Street NW., Room 8055, Washington, DC
20006-8502.
Privacy Note: The Department's policy is to make all comments
received from members of the public available for public viewing in
their entirety on the Federal eRulemaking Portal at
www.regulations.gov. Therefore, commenters should be careful to
include in their comments only information that they wish to make
publicly available.
FOR FURTHER INFORMATION CONTACT: Brian Smith or Pamela Moran at (202)
502-7551 or (202) 502-7732 or by email at: [email protected] or
[email protected].
If you use a telecommunications device for the deaf (TDD) or a text
telephone (TTY), call the Federal Relay Service (FRS), toll free, at 1-
800-877-8339.
SUPPLEMENTARY INFORMATION:
Executive Summary:
Purpose of This Regulatory Action: These proposed regulations would
update the standard for determining if a potential parent or student
borrower has an adverse credit history for purposes of eligibility for
a Direct PLUS Loan (PLUS loan). Specifically, the proposed regulations
would amend the definition of ``adverse credit history'' and require
PLUS loan counseling for a parent or student with an adverse credit
history who is approved for a PLUS loan as a result of the Secretary's
determination that extenuating circumstances exist. The current
regulations governing adverse credit history determinations have not
been updated since the Direct Loan Program was established in 1994. The
proposed regulations would amend the current regulations to reflect
programmatic and economic changes that have occurred since 1994.
Summary of the Major Provisions of This Regulatory Action: The
proposed regulations would--
Revise the student PLUS loan borrower eligibility criteria
to state more clearly that the PLUS loan adverse credit history
requirements apply to student as well as parent PLUS loan borrowers.
Add definitions of the terms ``charged off'' and ``in
collection'' for purposes of determining whether an applicant for a
PLUS loan has an adverse credit history.
Specify that a PLUS loan applicant has an adverse credit
history if the applicant has one or more debts with a total combined
outstanding balance greater than $2,085 that are 90 or more days
delinquent as of the date of the credit report, or that have been
placed in collection or charged off during the two years preceding the
date of the credit report.
Provide that the combined outstanding balance threshold of
$2,085 may be adjusted over time on a basis determined by the
Secretary.
Revise the provision that specifies the types of
documentation the Secretary may accept as a basis for determining that
extenuating circumstances exist for a PLUS loan applicant who is
determined to have an adverse credit history.
Specify that an applicant for a PLUS loan who is
determined to have an adverse credit history but who documents to the
Secretary's satisfaction that extenuating circumstances exist must
complete PLUS loan counseling offered by the Secretary before receiving
the PLUS loan.
Please refer to the Summary of Proposed Changes section of this
notice of proposed rulemaking (NPRM) for more details on the major
provisions contained in this NPRM.
Costs and Benefits: As further detailed in the Regulatory Impact
Analysis section of this document, the proposed regulations would
affect applicants for parent and student PLUS loans by modifying the
standard for a determination of an adverse credit history. In
particular, a student or parent would be considered to have an adverse
credit history if the student or parent has one or more debts with a
combined outstanding balance greater than $2,085 that are 90 or more
days delinquent as of the date of the credit report, or that have been
placed in collection or charged off during the two years preceding the
date of the credit report.
The proposed regulations would also require that an applicant for a
PLUS loan who is determined to have an adverse credit history but who
documents to the satisfaction of the Secretary that extenuating
circumstances exist must complete PLUS loan counseling offered by the
Secretary prior to receiving the loan.
Certain operational changes made by the Department in November 2011
resulted in an increase in the number of PLUS loan applicants who were
determined to have an adverse credit history, potentially limiting the
financial options and resources available to those applicants. The
modifications made in the proposed regulations will increase the number
of PLUS loan applicants who pass the adverse credit history check and
will not have to request reconsideration of an initial denial under the
Department's process for determining whether extenuating circumstances
for the adverse credit history condition exist.
[[Page 46641]]
We estimate an increase of approximately 370,000 PLUS loan applicants
who will pass the adverse credit history check under the proposed
regulations.
Under the proposed regulations, applicants would not need to apply
for reconsideration of an initial PLUS loan denial due to an adverse
credit history, saving them time and effort. Additionally, because the
proposed regulations strike a balance between increased availability of
PLUS loan funds to improve student access to postsecondary education
and helping to limit overborrowing through improved financial literacy,
we believe that there will be benefits for both borrowers and the
Department.
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 provide relevant information and data whenever possible,
even when there is no specific solicitation of data and other
supporting materials in the request for comment. We also urge you to
arrange your comments in the same order as the proposed regulations.
Please do not submit comments that are outside the scope of the
specific proposals in this notice of proposed rulemaking, as we are not
required to respond to comments that are outside of the scope of the
proposed rule. See the ADDRESSES section of this document for
instructions on how to submit comments.
We invite you to assist us in complying with the specific
requirements of Executive Orders 12866 and 13563 and their overall
requirement of reducing regulatory burden that might result from these
proposed regulations. Please let us know of any further ways we could
reduce potential costs or increase potential benefits while preserving
the effective and efficient administration of the Department's programs
and activities.
During and after the comment period, you may inspect all public
comments about the proposed regulations by accessing Regulations.gov.
You may also inspect the comments in person in room 8055, 1990 K Street
NW., Washington, DC, between 8:30 a.m. and 4:00 p.m., Washington, DC
time, Monday through Friday of each week except Federal holidays. If
you want to schedule time to inspect comments, please contact one of
the persons listed under FOR FURTHER INFORMATION CONTACT.
Assistance to Individuals with Disabilities in Reviewing the
Rulemaking Record: On request, we will provide an appropriate
accommodation or auxiliary aid to an individual with a disability who
needs assistance to review the comments or other documents in the
public rulemaking record for the proposed regulations. If you want to
schedule an appointment for this type of accommodation or auxiliary
aid, please contact one of the persons listed under FOR FURTHER
INFORMATION CONTACT.
Background
Section 428B(a)(1)(A) of the HEA provides that to be eligible to
receive a Federal PLUS Loan under the Federal Family Education Loan
(FFEL) Program, the applicant must not have an adverse credit history,
as determined pursuant to regulations promulgated by the Secretary.
This same eligibility requirement applies to applicants for PLUS loans
under the Direct Loan Program. See section 455(a)(1) of the HEA. The
definition of ``adverse credit history'' in the current Direct Loan
Program regulations is effectively the same as the regulatory
definition of ``adverse credit history'' in the FFEL Program. The
Department conducts a credit check on each applicant for a PLUS loan
under the Direct Loan Program to determine whether he or she has an
adverse credit history.
Section 685.200(b) and (c) of the Direct Loan Program regulations
specifies that graduate and professional students, and parents
borrowing on behalf of their dependent children, may borrow PLUS loans
if they meet applicable eligibility requirements and do not have an
adverse credit history. The regulations that specify what is considered
to be an adverse credit history have not been updated since the Direct
Loan Program was established in 1994.
In 2010, Congress amended the HEA to end the making of new loans
under the FFEL Program effective July 1, 2010. Since that date, all new
subsidized and unsubsidized Stafford Loans, PLUS Loans, and
Consolidation Loans have been originated in the Direct Loan Program. In
implementing this change, the Department found that the operational
criteria being used in the Direct Loan Program to determine whether an
applicant for a PLUS loan has an adverse credit history were not
consistent with the definition of ``adverse credit history'' in the
Direct Loan Program regulations or with the regulations for the FFEL
Program. Specifically, the Department determined that PLUS loan
applicants who had debts that were in collection or charged off were
passing the adverse credit history check even though these applicants
were 90 or more days delinquent on a debt, which constitutes an adverse
credit history under the Department's regulations. Once the
inconsistency was identified, the Department modified its procedures in
November 2011 so that borrowers with debts in collection or which were
charged off would be considered to have an adverse credit history. This
change increased the number of parent and graduate and professional
student PLUS loan applicants who were determined to have an adverse
credit history and thus, were originally ineligible for a PLUS loan. As
a result of the increased initial denial rate, the Department
determined that it would be appropriate to review the adverse credit
history standards that were originally established in 1994. To reflect
programmatic and economic changes that have occurred since 1994, the
Department proposes to amend Sec. 685.200(b) and (c) to update the
regulatory requirements governing PLUS loan adverse credit history
determinations.
Public Participation
On April 16, 2013, we published a document in the Federal Register
(78 FR 22467) announcing topics for consideration for action by a
negotiated rulemaking committee. A correction to this document was
published in the Federal Register on April 30, 2013 (78 FR 25235). The
topics for consideration listed in these documents were: Cash
management of funds provided under the title IV Federal Student Aid
programs; State authorization for programs offered through distance
education or correspondence education; State authorization for foreign
locations of institutions located in a State; clock to credit hour
conversion; gainful employment; changes to the campus safety and
security reporting requirements in the Jeanne Clery Disclosure of
Campus Security Policy and Campus Crime Statistics Act made by the
Violence Against Women Reauthorization Act of 2013; and the definition
of ``adverse credit history'' for borrowers in the Federal Direct PLUS
Loan Program. In the April 16, 2013, document, we announced three
public hearings at which interested parties could comment on the
negotiated rulemaking topics suggested by the Department and could
suggest additional topics for consideration for action by a negotiated
rulemaking committee. On May 13, 2013, we published in the Federal
Register (78 FR 27880) a document announcing the
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addition of a fourth hearing. The hearings were held on--
May 21, 2013, in Washington, DC;
May 23, 2013, in Minneapolis, Minnesota;
May 30, 2013, in San Francisco, California; and
June 4, 2013, in Atlanta, Georgia.
We also invited parties unable to attend a public hearing to submit
written comments on the additional topics and to submit other topics
for consideration. Transcripts from the public hearings are available
at http://www2.ed.gov/policy/highered/reg/hearulemaking/2012/index.html.
Written comments submitted in response to the April 16, 2013,
Federal Register document may be viewed through the Federal eRulemaking
Portal at www.regulations.gov, within docket ID ED-2012-OPE-0008. You
can link to the ED-2012-OPE-0008 docket as a related docket inside the
ED-2014-OPE-0082 docket associated with this notice of proposed
rulemaking. Alternatively, individuals can enter the docket ID ED-2012-
OPE-0008 in the search box to locate the appropriate docket.
Instructions for finding comments are also available on the site under
``How to Use Regulations.gov'' in the Help section.
Negotiated Rulemaking
Section 492 of the HEA requires the Secretary to obtain public
involvement in the development of proposed regulations affecting
programs authorized by title IV of the HEA. After obtaining extensive
input and recommendations from the public, including individuals and
representatives of groups involved in the title IV, HEA programs, the
Secretary must subject the proposed regulations to a negotiated
rulemaking process. If negotiators reach consensus on the proposed
regulations, the Department agrees to publish without alteration a
defined group of regulations on which the negotiators reached consensus
unless the Secretary reopens the process or provides a written
explanation to the participants stating why the Secretary has decided
to depart from the agreement reached during negotiations. Further
information on the negotiated rulemaking process can be found at:
http://www2.ed.gov/policy/highered/reg/hearulemaking/hea08/neg-reg-faq.html.
On November 20, 2013, the Department published a document in the
Federal Register (78 FR 69612) announcing its intention to establish a
negotiated rulemaking committee to prepare proposed regulations to
address program integrity and improvement issues for the Federal
Student Aid programs authorized under title IV of the HEA. The document
set forth a schedule for the committee meetings and requested
nominations for individual negotiators to serve on the negotiating
committee.
The Department sought negotiators to represent the following
groups: Students; legal assistance organizations that represent
students; consumer advocacy organizations; State higher education
executive officers; State Attorneys General and other appropriate State
officials; business and industry; institutions of higher education
eligible to receive Federal assistance under title III, parts A, B, and
F and title V of the HEA, which include Historically Black Colleges and
Universities, Hispanic-Serving Institutions, American Indian Tribally
Controlled Colleges and Universities, Alaska Native and Native
Hawaiian-Serving Institutions, Predominantly Black Institutions, and
other institutions with a substantial enrollment of needy students as
defined in title III of the HEA; two-year public institutions of higher
education; four-year public institutions of higher education; private,
non-profit institutions of higher education; private, for-profit
institutions of higher education; regional accrediting agencies;
national accrediting agencies; specialized accrediting agencies;
financial aid administrators at postsecondary institutions; business
officers and bursars at postsecondary institutions; admissions officers
at postsecondary institutions; institutional third-party servicers who
perform functions related to the title IV Federal Student Aid programs
(including collection agencies); State approval agencies; and lenders,
community banks, and credit unions. The Department considered the
nominations submitted by the public and chose negotiators who would
represent the various constituencies.
The negotiating committee included the following members:
Chris Lindstrom, U.S. Public Interest Research Group, and Maxwell
John Love (alternate), United States Student Association, representing
students.
Whitney Barkley, Mississippi Center for Justice, and Toby Merrill
(alternate), Project on Predatory Student Lending, The Legal Services
Center, Harvard Law School, representing legal assistance organizations
that represent students.
Suzanne Martindale, Consumers Union, representing consumer advocacy
organizations.
Carolyn Fast, Consumer Frauds and Protection Bureau, New York
Attorney General's Office, and Jenny Wojewoda (alternate),
Massachusetts Attorney General's Office, representing State attorneys
general and other appropriate State officials.
David Sheridan, School of International & Public Affairs, Columbia
University in the City of New York, and Paula Luff (alternate), DePaul
University, representing financial aid administrators.
Gloria Kobus, Youngstown State University, and Joan Piscitello
(alternate), Iowa State University, representing business officers and
bursars at postsecondary institutions.
David Swinton, Benedict College, and George French (alternate),
Miles College, representing minority serving institutions.
Brad Hardison, Santa Barbara City College, and Melissa Gregory
(alternate), Montgomery College, representing two-year public
institutions.
Chuck Knepfle, Clemson University, and J. Goodlett McDaniel
(alternate), George Mason University, representing four-year public
institutions.
Elizabeth Hicks, Massachusetts Institute of Technology, and Joe
Weglarz (alternate), Marist College, representing private, non-profit
institutions.
Deborah Bushway, Capella University, and Valerie Mendelsohn
(alternate), American Career College, representing private, for-profit
institutions.
Casey McGuane, Higher One, and Bill Norwood (alternate), Heartland
Payment Systems, representing institutional third-party servicers.
Russ Poulin, WICHE Cooperative for Educational Technologies, and
Marshall Hill (alternate), National Council for State Authorization
Reciprocity Agreements, representing distance education providers.
Dan Toughey, TouchNet, and Michael Gradisher (alternate), Pearson
Embanet, representing business and industry.
Paul Kundert, University of Wisconsin Credit Union, and Tom
Levandowski (alternate), Wells Fargo Bank Law Department, Consumer
Lending & Corporate Regulatory Division, representing lenders,
community banks, and credit unions.
Leah Matthews, Distance Education and Training Council, and
Elizabeth Sibolski (alternate), Middle States Commission on Higher
Education, representing accrediting agencies.
Carney McCullough, U.S. Department of Education, representing the
Department.
Pamela Moran, U.S. Department of Education, representing the
Department.
The negotiated rulemaking committee met to develop proposed
regulations on
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February 19-21, 2014, March 26-28, 2014, and April 23-25, 2014. In
response to requests from members of the negotiating committee, the
Department provided extensive PLUS loan data to the committee prior to
the March session. During the March session, the Department proposed
adding an additional negotiated rulemaking session to the schedule to
give the negotiators sufficient time to consider the PLUS loan data.
The negotiators agreed to add a fourth and final session held on May
19-20, 2014.
At its first meeting, the negotiating committee reached agreement
on its protocols and proposed agenda. These protocols provided, among
other things, that the committee would operate by consensus. Consensus
means that there must be no dissent by any member in order for the
committee to have reached agreement. Under the protocols, if the
committee reached a final consensus on all issues, the Department would
use the consensus-based language in its proposed regulations.
Furthermore, the Department would not alter the consensus-based
language of its proposed regulations unless the Department reopened the
negotiated rulemaking process or provided a written explanation to the
committee members regarding why it decided to depart from that
language.
During the first meeting, the negotiating committee agreed to
negotiate an agenda of six issues related to student financial aid.
These six issues were: Clock to credit hour conversion; State
authorization of distance education; State authorization of foreign
locations of domestic institutions; cash management; retaking
coursework; and PLUS loan adverse credit history. Under the protocols,
a final consensus would have to include consensus on all six issues.
During the meeting, the Department explained that it planned to
include the proposed regulations that would be published after
completion of the negotiated rulemaking process in two separate NPRMs.
One NPRM would contain the proposed PLUS loan adverse credit history
regulations. The second NPRM would contain all the remaining proposed
regulations on the negotiating agenda. This is consistent with past
practice for publishing NPRMs, as the Department generally publishes
proposed loan program regulatory changes separately from proposed
regulations for the Student Assistance General Provisions regulations
in 34 CFR Part 668 or other title IV, HEA program regulations when
there are no shared cross-programmatic or other conforming changes
involved.
Non-Federal negotiators encouraged the Department to take action
quickly with respect to the PLUS loan adverse credit history
regulations. The Department said it would consider designating final
regulations resulting from this NPRM for early implementation under
section 484(c)(2) of the HEA.
During committee meetings, the committee reviewed and discussed the
Department's drafts of regulatory language and the committee members'
alternative language and suggestions. At the final meeting on May 20,
2014, the committee did not reach consensus on the Department's
proposed regulations. For this reason, and according to the committee's
protocols, all parties who participated or were represented in the
negotiated rulemaking, in addition to all members of the public, may
comment freely on the proposed regulations. For more information on the
negotiated rulemaking sessions, please visit: http://www2.ed.gov/policy/highered/reg/hearulemaking/2012/programintegrity.html#info.
Summary of Relevant Data
PLUS Loan Data
At the first negotiating session, the non-Federal negotiators asked
the Department to provide certain data about the PLUS loan program to
the negotiating committee. The non-Federal negotiators asked if the
Department could calculate PLUS loan cohort default rates. They also
asked for information on PLUS loan volume--both numbers of borrowers
and amounts borrowed. Non-Federal negotiators asked to see rates of
PLUS loan denials due to an adverse credit history, broken out by
school sector. In addition, they asked for data on the frequency of
different adverse credit conditions that result in denial of a PLUS
loan.
The Department agreed to provide PLUS loan data for the PLUS loan
adverse credit history discussion at the second negotiated rulemaking
session.
The Session 2 Data
Prior to the second negotiated rulemaking session, the Department
provided the non-Federal negotiators with charts containing the
following data:
Debt of PLUS, Parent PLUS, and Grad PLUS Borrowers;
PLUS Credit Check Denial and Remediation Rates by Sector
and by Program Offering;
Credit Check Declination Rate by Sector by Year;
Top Five Credit Check Declination Reasons by Sector by
Year;
PLUS Borrower 3-Year Cohort Default Rate; and
AY 2012-13 Credit Check Approval and Denials.\1\
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\1\ All of the charts provided to the negotiators are available
at: http://www2.ed.gov/policy/highered/reg/hearulemaking/2012/programintegrity.html#2.
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In addition, during the second session, the Department provided the
negotiators with data breaking out PLUS loan disbursements under the
Direct Loan and FFEL programs from 2006 to 2010.\2\
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\2\ This data is available at: http://www2.ed.gov/policy/highered/reg/hearulemaking/2012/programintegrity.html#2.
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The non-Federal negotiators expressed appreciation to the
Department for providing the requested data about PLUS loans. The non-
Federal negotiators also asked for additional data in connection with
the charts showing PLUS loan remediation rates (the rates at which
applicants who were initially denied PLUS loans due to an adverse
credit history were able to obtain PLUS loans; or, if the parent did
not obtain PLUS loans, the rates at which the parent's dependent
children were able to receive additional unsubsidized loans) and PLUS
loan cohort default rates. The Department agreed to provide this
additional data for the third negotiated rulemaking session.
The Session 3 Data
Prior to the third negotiated rulemaking session, in response to
the requests made during the second session, the Department provided
the non-Federal negotiators with amended versions of the following
charts:
PLUS Credit Check Denial Remediation Rates by Sector and
by Program Offering (two versions reflecting breakout of remediation by
obtaining an endorser, submitting documentation of extenuating
circumstances, or the dependent student's receipt of additional
unsubsidized loans); and
PLUS Borrower Three-Year Cohort Default Rates (broken out
by the FFEL and Direct Loan programs).\3\
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\3\ These charts are available at: http://www2.ed.gov/policy/highered/reg/hearulemaking/2012/programintegrity.html#3.
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Summary of Proposed Changes
The proposed regulations would--
Revise the student PLUS loan borrower eligibility criteria
to state more clearly that the PLUS loan adverse credit history
requirements apply to graduate or professional student PLUS loan
borrowers.
Add definitions of the terms ``charged off'' and ``in
collection'' for
[[Page 46644]]
purposes of determining whether an applicant for a PLUS loan has an
adverse credit history.
Specify that a PLUS loan applicant has an adverse credit
history if the applicant has one or more debts with a total combined
outstanding balance greater than $2,085 that are 90 or more days
delinquent as of the date of the credit report, or that have been
placed in collection or charged off during the two years preceding the
date of the credit report.
Provide that the combined outstanding balance threshold of
$2,085 may be adjusted over time on a basis determined by the
Secretary.
Revise the provision that specifies the types of
documentation the Secretary may accept as a basis for determining that
extenuating circumstance exist for a PLUS loan applicant who is
determined to have an adverse credit history.
Specify that an applicant for a PLUS loan who is
determined to have an adverse credit history but who documents to the
Secretary's satisfaction that extenuating circumstances exist must
complete PLUS loan counseling offered by the Secretary before receiving
the loan.
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.
Student PLUS Borrower (34 CFR 685.200(b))
Statute: Section 428B(a)(1)(A) of the HEA specifies that a graduate
or professional student with an adverse credit history is not eligible
to borrow a PLUS loan.
Current Regulations: Current Sec. 685.200(b)(5) specifies that a
student must meet the requirements of Sec. 685.200(c)(1)(vii) to
qualify for a PLUS loan. Current Sec. 685.200(c)(1)(vii) includes the
adverse credit history requirements for parent PLUS loan borrowers.
Proposed Regulations: Proposed Sec. 685.200(b)(5) specifies that a
graduate or professional student must meet the requirements ``that
apply to a parent'' under Sec. 685.200(c)(2)(viii)(A) through
(c)(2)(viii)(D) to qualify for a PLUS loan. Proposed Sec.
685.200(c)(2)(viii)(A) through (c)(2)(viii)(D) would include the
adverse credit history requirements for parent PLUS borrowers.
Reasons: The proposed regulations would revise Sec. 685.200(c).
Due to the revision to Sec. 685.200(c), we would also need to revise
the cross-reference in Sec. 685.200(b)(5). New Sec.
685.200(c)(1)(viii)(B) refers to a parent with an adverse credit
history, rather than an applicant with an adverse credit history.
Therefore, a conforming change, adding a reference to the ``parent'',
would be required in Sec. 685.200(b)(5). In addition, proposed Sec.
685.200(b)(5) would clarify that the adverse credit history
requirements that apply to parent PLUS borrowers under Sec.
685.200(c)(2)(viii)(A) through (c)(2)(viii)(D) also apply to all
student PLUS borrowers.
Some of the non-Federal negotiators contended that there should be
different eligibility standards for parent PLUS loan borrowers and
graduate and professional student PLUS loans borrowers. These
negotiators argued that graduate and professional students should be
eligible for PLUS loans without application of the adverse credit
history criteria. Alternatively, one non-Federal negotiator requested
that the Department consider defining ``adverse credit history''
differently for graduate and professional student PLUS loan borrowers
than for parent PLUS loan borrowers.
We did not agree with the suggestion to have different standards
for parent and student PLUS loan applicants. We noted that, pursuant to
the HEA, there is a single PLUS loan program that provides loans for
both graduate and professional students and parents of dependent
students. The statutory requirement that a PLUS loan applicant not have
an adverse credit history applies equally to student and parent
applicants. We see no basis under the HEA for establishing different
regulatory definitions of ``adverse credit history'' for graduate and
professional student applicants and parent PLUS applicants.
Parent PLUS Borrower: Definitions (34 CFR 685.200(c)(1))
Statute: None.
Current Regulations: None.
Proposed Regulations: The proposed regulations would define the
terms ``charged off'' and ``in collection'' for purposes of adverse
credit history determinations. Proposed Sec. 685.200(c)(1)(i) would
define the term ``charged off'' to mean a debt that a creditor has
written off as a loss, but that is still subject to collection action.
Proposed Sec. 685.200(c)(1)(ii) would define the term ``in
collection'' to mean a debt that has been placed with a collection
agency by a creditor, or that is subject to more intensive efforts by a
creditor to recover amounts owed from a borrower who has not responded
satisfactorily to the demands routinely made as part of the creditor's
billing procedures.
Reasons: Under the current regulations, an applicant who has debts
that are in collection or that has been charged off will be determined
to have an adverse credit history, but the regulations do not define
these terms. The proposed definitions for these terms are commonly
understood definitions in the collections industry. Although some of
the non-Federal negotiators did not agree that these conditions should
constitute adverse credit, they agreed that if the Department is going
to consider debts that are in collection or that have been charged off
as indicators that a borrower has an adverse credit history, the terms
should be defined in the regulations.
Parent PLUS Borrower: Adverse Credit History (34 CFR 685.200(c)(2))
Statute: Section 428B(a)(1)(A) of the HEA provides that a parent of
a dependent student is not eligible to borrow a PLUS loan if the parent
has an adverse credit history.
Current Regulations: Current regulations under Sec.
685.200(c)(1)(vii)(B) establish the conditions under which a PLUS loan
applicant will be considered to have an adverse credit history. Under
Sec. 685.200(c)(1)(vii)(B), an adverse credit history means that, as
of the date of the credit report, the applicant: (1) Is 90 or more days
delinquent on any debt; or (2) has been the subject of a default
determination, bankruptcy discharge, foreclosure, repossession, tax
lien, wage garnishment, or write-off of a debt under title IV of the
HEA during the five years preceding the date of the credit report.
Proposed Regulations: Under proposed Sec.
685.200(c)(2)(viii)(B)(1), an adverse credit history would mean that a
parent (or, by cross-reference, a student) has one or more debts with a
total combined outstanding balance greater than $2,085, that are 90 or
more days delinquent as of the date of the credit report, or that have
been charged off or placed in collection during the two years preceding
the date of the credit report. Proposed Sec. 685.200(c)(2)(viii)(B)(1)
would provide that the $2,085 threshold amount may be adjusted over
time on a basis determined by the Secretary. In proposed Sec.
685.200(c)(2)(viii)(B)(2) the Department would retain the current
provision that provides that a parent or student has an adverse credit
history if the parent or student has been the subject of a default
determination, bankruptcy discharge, foreclosure, repossession, tax
lien, wage garnishment, or write-off of a debt under
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title IV of the HEA during the five years preceding the date of the
credit report.
Reasons: After the Department corrected its implementation of the
adverse credit history standards in November 2011, some borrowers who
had qualified for PLUS loans in earlier years were determined to have
an adverse credit history when they applied for subsequent PLUS loans
even though their credit history had not substantially changed. In many
cases, these applicants requested reconsideration on the basis of
extenuating circumstances as permitted under the regulations.
Based on its experience in handling PLUS loan applicant requests
for reconsideration on the basis of extenuating circumstances, the
Department concluded that it was appropriate to update the standards
for determining that an applicant has an adverse credit history to
reflect programmatic and economic changes since the standards were
established in 1994.
We believe that the proposed changes to the PLUS loan adverse
credit history regulations will improve the adverse credit history
determination process by incorporating some of the circumstances that
the Department considers during the reconsideration process into the
standards for initial determinations of an adverse credit history. We
expect that making these changes to the definition of ``adverse credit
history'' will reduce the number of applicants who, under the current
regulations, are initially denied PLUS loans due to an adverse credit
history, but upon further review, the Department determines have
extenuating circumstances. During the negotiated rulemaking sessions,
the committee members discussed how the proposed changes would serve
three public interests: (1) Ensuring greater access to higher education
for all students and families; (2) ensuring that borrowers do not take
out loans that they will be unable to repay without hardship; and (3)
protecting the Federal fiscal interest by ensuring that borrowers repay
their student loans. Some of the non-Federal negotiators expressed the
view that the primary focus of the title IV, HEA programs, including
the PLUS loan program, should be increasing access to higher education.
These negotiators argued that the lending standards that apply to
commercial loans should not be applied to PLUS loans, which serve a
compelling public interest. The negotiators expressed the view that it
is a parent's (or graduate or professional student's) decision as to
whether to borrow a PLUS loan, and in what amount, even if the
applicant's financial circumstances or history may indicate that the
applicant could experience difficulty in paying it back. One non-
Federal negotiator strongly recommended that the Department return to
the adverse credit history standard as it had been implemented in the
Direct Loan program prior to the changes made in November 2011, under
which debts in collection or that were charged off did not constitute
adverse credit.
Other non-Federal negotiators argued that the Department should
take action to prevent overborrowing by parents and students. These
negotiators argued that a return to the standard in the Direct Loan
program used prior to November 2011 would encourage both student and
parent borrowers to take out greater, perhaps unaffordable, amounts of
PLUS loan debt regardless of the financial circumstances or history of
the applicant. They also argued that, in addition to ensuring access to
higher education, the Department should consider whether or not
borrowers could repay these loans.
In expressing their concerns about overborrowing and the potential
for high debt loads, some non-Federal negotiators noted that, unlike
Direct Subsidized and Direct Unsubsidized loans, there are no annual or
aggregate loan limits for PLUS loans and a PLUS loan can be taken out
in an amount up to the student's cost of attendance. They further noted
that parent PLUS loan borrowers are not eligible for income-driven
repayment plans and it is very difficult to qualify for a bankruptcy
discharge of a student or parent loan. To that end, some non-Federal
negotiators recommended establishing annual and aggregate loan limits
for PLUS loan borrowers. We noted that loan limits in the title IV, HEA
programs, including the PLUS loan program, are based on the relevant
statute, and may not be established through regulation.
Some non-Federal negotiators recommended considering the
applicant's ability to repay in an adverse credit history determination
in order to prevent overborrowing of PLUS loans. We noted that the HEA
would need to be amended to allow consideration of the applicant's
ability to repay. Rather, adverse credit history is a measure of an
individual's history of repaying existing debt. It does not measure
whether the individual has the financial ability to repay a specific
level of debt, but whether that individual has repaid debt in the past.
In developing the proposed regulations, we attempted to strike a
balance between the public policy interests of ensuring access to
higher education while helping to ensure that borrowers do not take out
loans that their past financial credit history indicates they will not
repay. Based on our experience in evaluating requests for
reconsideration based on extenuating circumstances, we expect that more
borrowers would qualify for PLUS loans under the adverse credit history
standard in the proposed regulations without the need to demonstrate
extenuating circumstances.
The proposed definition of ``adverse credit history'' has several
components. Each component is discussed separately in the following
sections.
Component 1--Outstanding Balance Greater than $2,085
Statute: None.
Current Regulations: Current Sec. 685.200(c)(1)(vii)(D) specifies
that, for purposes of documenting extenuating circumstances, the
Secretary may rely on a satisfactory statement from the applicant
explaining any delinquency with an outstanding balance greater than
$500.
Proposed Regulations: Under the proposed regulations, the amount of
the applicant's debt would be taken into account during the initial
determination of whether the applicant has an adverse credit history,
rather than as part of the process for documenting extenuating
circumstances following denial of a PLUS loan. In addition, the
proposed regulations would establish a standard that an applicant is
not considered to have an adverse credit history unless the applicant's
debts have a total combined outstanding balance greater than $2,085.
Reasons: After the November 2011 operational change to the
Department's implementation of the adverse credit history definition,
the Department adjusted the $500 amount, referred to as ``the threshold
amount,'' to $780 to account for inflation since 1994. Later, the
Department increased the threshold amount from $780 to $2,085. The
Department selected this level to reflect the estimated median debt
level for all debts with a status of in collection, charged off, or 90
or more days delinquent, from all parent PLUS loan denials resulting
from all credit checks conducted between the spring of 2012 and the
spring of 2013. The Department now proposes to use the $2,085 threshold
amount in the initial determination of whether an applicant has an
adverse credit history to reflect current operational practice in our
reconsideration process.
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Component 2--Adjustment Over Time
Statute: None.
Current Regulations: None.
Proposed Regulations: Under the proposed regulations, the $2,085
amount may be adjusted over time on a basis determined by the
Secretary.
Reasons: Several of the non-Federal negotiators recommended that
the Department index the $2,085 amount to the rate of inflation. The
negotiators argued that by indexing the amount to an accepted measure
of inflation, increases could be calculated and implemented without the
necessity of amending the regulations.
Most of these negotiators recommended indexing the $2,085 amount to
the Consumer Price Index (CPI), a measure of inflation determined by
the Bureau of Labor Statistics (BLS). However, BLS calculates several
different CPI rates on a monthly basis. The CPI rate most commonly used
as a measure of inflation is the Consumer Price Index for All Urban
Consumers (CPI-U). The Department considered using the CPI-U as the
basis for indexing, but decided to invite comment on which index would
be most appropriate in this context, and whether to base the adjustment
of the $2,085 amount on a measure other than inflation.
One non-Federal negotiator suggested that the Department should
adjust the amount of debt annually. This negotiator argued that, while
small, short-term changes would have little impact in one year, over a
period of time they could have a significant impact. Another non-
Federal negotiator suggested using the CPI, but averaging the rate over
time. This negotiator noted that averaging the rate over time would
smooth out abrupt and relatively short-term changes in CPI and thus
reduce volatility.
The Department is open to adjusting the $2,085 amount. Therefore,
we are proposing in the regulations that the Secretary may adjust the
amount over time, on a basis determined by the Secretary. Any
adjustments that the Secretary makes to the $2,085 amount would be
announced through a Notice in the Federal Register. We invite comment
on this provision, and welcome recommendations on an appropriate
measure of inflation to use in adjusting this amount, or whether
another measure of growth or decline in consumer debt due to economic
conditions may be a more appropriate measure.
As discussed in the ``Operational Issues'' section of this
preamble, the Department intends to collect, and where appropriate
publish, information about the performance of parent and graduate/
professional student PLUS loans, including default rate information
based on credit history characteristics of Plus loan applicants and
individual institutional default rates.
Component 3--Debts 90 or More Days Delinquent
Statute: None.
Current Regulations: Current Sec. 685.200(c)(1)(vii)(B)(1)
specifies that a PLUS loan applicant who is 90 or more days delinquent
on any debt has an adverse credit history.
Proposed Regulations: The proposed regulations would maintain the
90 or more days delinquent standard.
Reasons: Some of the non-Federal negotiators argued that the
current delinquency standard of 90 or more days past due is too short
for adverse credit history determinations. These negotiators
recommended extending the past due period to 120 days or 180 days. They
asserted that credit reports often have errors that may not be
corrected during a 90-day timeframe.
In the absence of a consistent industry-wide standard, we decided
to maintain the standard of 90 or more days delinquent in the proposed
regulations. We rely on credit reports to determine whether an
applicant is delinquent on a debt, as the number of days a debt is past
due is included on an individual's credit report until an account is
placed in collection. Based on our experience, most creditors send
accounts to collection once they are 90 days' delinquent. Once an
account is placed in collection, the number of days past due is
generally not reflected on the credit report. Therefore, a standard
beyond the current 90-day standard would be more difficult to track.
With regard to errors on credit reports, a PLUS loan applicant
would have the opportunity during the process for determining whether
extenuating circumstances for the adverse credit history condition
exist to show that the determination of an adverse credit history was
based on an error in the credit report by providing an updated credit
report or information from the creditor.
Component 4--In Collection or Charged Off
Statute: None.
Current Regulations: None.
Proposed Regulations: Under the proposed regulations, an applicant
with debts in collection or debts that have been charged off during the
two years preceding the date of the credit report would have an adverse
credit history.
Reasons: Under current operational practice, a borrower with debts
in collection or debts that have been charged off in the preceding five
years is considered to have an adverse credit history. One non-Federal
negotiator recommended that the Department return to the operational
standard used prior to November 2011, when the Department did not
consider these circumstances to constitute an adverse credit history.
We do not agree that the earlier operational practice met the
purposes of the statute in determining an adverse credit history. We
believe it would create an inconsistency in the regulations to not
consider as an adverse credit history accounts in collection or debts
that have been charged off, while including accounts that are 90 or
more days delinquent. Generally, accounts in collection or accounts
that have been charged off are well past the 90-day delinquency stage.
Although we do not propose to change the treatment of collection
accounts and charged-off accounts in the determination of an adverse
credit history, we did agree to propose to reduce the period of time
for which such accounts would be considered as an adverse credit
history. The proposed regulations would reduce the current look-back
period of five years to two years preceding the date of the credit
report. We believe that this standard would screen out most anomalous
conditions, such as a single bad debt on an otherwise clean credit
report.
Non-Federal negotiators made varying proposals for the look-back
period for debts that are in collection or charged off. Some
negotiators recommended a one-year look-back period. We do not believe,
however, that one year is sufficient, particularly when the past due
status of the account might be reduced through a series of payments,
but not eliminated, and then increase again.
Other non-Federal negotiators recommended a three-year look-back
period. They argued that, in many States, debts have a statute of
limitations of three years. However, because the statute of limitations
on debts varies from State to State, we do not think that it is a
useful standard in determining the length of the look-back period for
collections and charge-offs in the PLUS loan program.
Based on these considerations, we believe that the proposed two-
year look-back period for debts that are in collection or have been
charged off is appropriate. A one-year look-back period is too short to
measure a PLUS loan applicant's history and a five-year
[[Page 46647]]
period is more closely associated with the major, long-term items
indicating an adverse credit history in proposed Sec.
685.200(c)(2)(viii)(B)(2).
Extenuating Circumstances (34 CFR 685.200(c)(2))
Statute: None.
Current Regulations: Section 685.200(c)(1)(vii)(A)(3) specifies
that a parent who has an adverse credit history, but who documents to
the satisfaction of the Secretary that extenuating circumstances exist,
may be eligible for a PLUS loan. Section 685.200(c)(1)(vii)(D) of the
current regulations (as amended by final regulations published on
November 1, 2013) provides that the Secretary may determine that
extenuating circumstances exist based on documentation that includes,
but is not limited to, an updated credit report, a statement from the
creditor that the borrower has made satisfactory arrangements to repay
the debt, or a satisfactory statement from a borrower explaining any
delinquencies with an outstanding balance of less than $500.
Proposed Regulations: Proposed Sec. 685.200(c)(2)(viii)(A)(3)
states that, in addition to providing documentation to the Secretary
demonstrating that extenuating circumstances exist, a parent or student
with an adverse credit history would be required to complete PLUS loan
counseling offered by the Secretary to become eligible for a PLUS loan.
Proposed Sec. 685.200(c)(2)(viii)(D)(2) would eliminate from the
list of possible extenuating circumstances a statement from an
applicant explaining any delinquencies with an outstanding balance of
less than $500.
Reasons: During the negotiations there was a significant amount of
discussion about methods for improving financial literacy for PLUS loan
applicants. Many non-Federal negotiators recommended that all parent
PLUS loan applicants be required to complete loan counseling before
receiving a PLUS loan, much as first-time student borrowers are
required to complete entrance counseling before receiving Direct
Subsidized Loans, Direct Unsubsidized Loans, or student Direct PLUS
loans. The Department explained, however, that, while loan counseling
is a statutory requirement for student borrowers, the HEA does not
require parent PLUS applicants to receive loan counseling prior to
receiving a PLUS loan. Therefore, the Department does not have the
legal authority to extend this requirement to all PLUS loan applicants.
However, the Department is proposing through these regulations that
a PLUS loan applicant who is ineligible for a PLUS loan due to an
adverse credit history, but who documents to the satisfaction of the
Secretary that extenuating circumstances exist, would be required to
complete loan counseling as an additional condition for receiving the
PLUS loan. The Department also plans to offer enhanced PLUS loan
consumer information, as discussed under ``Operational Issues.''
The proposed regulations do not apply the loan counseling
requirement to a PLUS loan applicant who has an adverse credit history
but is eligible to receive a PLUS loan by obtaining an endorser who
does not have an adverse credit history. A PLUS loan applicant who
obtains an endorser is still primarily responsible for repaying the
PLUS loan. The Department believes that these applicants, like PLUS
loan applicants who qualify due to extenuating circumstances, would
benefit from PLUS loan counseling. Therefore, the Secretary is
requesting comment on whether the loan counseling requirement for
applicants who qualify due to extenuating circumstances should also
apply to applicants who obtain an endorser.
Operational Issues
Validity of Credit Checks for 90 Days
As explained in the ``Background'' section of this preamble, the
Department conducts a credit check on each applicant for a PLUS loan to
determine whether he or she has an adverse credit history. A credit
check is conducted when a school submits a PLUS loan origination record
to the Department's Common Origination and Disbursement (COD) System,
or when an applicant for a PLUS loan completes the optional Direct PLUS
Loan Request for Supplemental Information (Direct PLUS Loan Request) on
the Department's StudentLoans.gov Web site. Alternatively, a school may
submit a credit check request for a PLUS loan applicant to the COD
System Web site.
Under the Department's current procedures, an approved credit check
remains valid for purposes of determining an applicant's eligibility to
receive a PLUS loan for 90 days from the date on which the credit check
was performed. That is, any action that would normally trigger a credit
check (for example, the submission of a Direct PLUS Loan Request or a
PLUS loan origination record) will not do so if a prior credit check on
the applicant was conducted within the past 90 days. This 90-day window
reflects the Department's long-standing practice in the Direct Loan
Program and is consistent with the standard previously used by most
FFEL Program lenders when conducting credit checks on applicants for
Federal PLUS Loans. The 90-day window is not in the Direct Loan Program
regulations, but it was adopted by the Department as a reasonable
standard for ensuring that a credit check is conducted within a
timeframe that will result in an accurate representation of a PLUS loan
applicant's current credit history prior to the receipt of PLUS loan
funds.
During the negotiations, many of the non-Federal negotiators
expressed concern that the current 90-day period is not a long enough
period of validity for the credit check when disbursing PLUS loans.
They noted that, in certain situations, the requirement that a new
credit check be conducted (if the most recent credit check was more
than 90 days in the past) can mean that a PLUS loan applicant who was
initially approved for a PLUS loan for the purpose of a school's
financial aid award packaging for the upcoming academic year may later
be denied the loan if an event that triggers another credit check
occurs more than 90 days after the date of the prior credit check, and
if the subsequent credit check determines that the borrower has an
adverse credit history. For example, if a student or parent was
approved for a PLUS loan for the purpose of a school's financial aid
award packaging for the upcoming academic year based on the results of
a credit check that was completed when the applicant submitted a Direct
PLUS Loan Request, but the school is not able to submit the PLUS loan
origination record within 90 days of the date of that credit check, a
second credit check will be conducted when the loan origination record
is submitted.
Similarly, an individual who received a PLUS loan based on the
results of a credit check may later request additional loan funds by
submitting another Direct PLUS Loan Request and indicating that he or
she wants to increase the amount of an existing PLUS loan. If the
borrower submits the Direct PLUS Loan Request more than 90 days after
the date of the prior credit check, another credit check will be
conducted. In both instances, the subsequent credit check may
potentially result in a determination that the borrower now has an
adverse credit history (if the applicant's financial circumstances have
changed since the date of the prior credit check), and therefore is
ineligible for a PLUS loan or for an increased loan amount, even though
the borrower was
[[Page 46648]]
previously approved based on the results of an earlier credit check.
Many of the non-Federal negotiators stated that applicants who are
determined to be eligible to receive a PLUS loan based on the results
of a credit check should be able to rely on that approval if they later
need to request an increase in the amount of an existing loan.
Accordingly, some of these negotiators suggested that the Department
should consider changing its procedures so that the results of a credit
check would remain valid for a full year after the date of the credit
check. Other negotiators proposed that the Department go even further
and make a credit check valid for the purpose of a parent's or
student's eligibility to receive PLUS loans for the duration of a
student's program of study if the borrower was not determined to have
an adverse credit history.
After considering the concerns expressed by some of the non-Federal
negotiators, the Department has decided to modify its procedures so
that a credit check that indicates that the applicant does not have an
adverse credit history would remain valid for 180 days. We believe that
extending the window for an even longer period of time would result in
borrowers receiving PLUS loan funds based on credit checks that do not
reasonably reflect the applicant's most current financial
circumstances. However, extending the window from the current 90 days
to 180 days should satisfactorily address the concerns raised by some
of the negotiators.
Although the Department agreed with the non-Federal negotiators
that it would be appropriate to extend the period of time during which
an approved credit check is valid, the Department also reminded the
negotiators that under current procedures it is possible for a school
to process a borrower's request for an increase in the amount of an
existing PLUS loan without subjecting the borrower to a second credit
check. In such cases, a school may simply submit an upward adjustment
to the amount of an existing PLUS loan to the COD system, without
submitting a new PLUS loan origination record. The submission of an
upward adjustment will not trigger a new credit check, regardless of
the date of the most recent credit check for the borrower. Also, it is
not mandatory for borrowers to request an increase in the amount of an
existing loan by submitting a Direct PLUS Loan Request, which may
trigger a second credit check. A school may obtain a borrower's request
for a loan amount increase by other means.
Enhancing PLUS Borrower Consumer Information
As discussed under the ``Extenuating Circumstances'' section of
this preamble, the negotiating committee discussed methods for
improving access to consumer information for PLUS loan applicants. In
particular, many non-Federal negotiators believed that there is
currently a lack of sufficient consumer information specifically
targeted at parent PLUS loan applicants.
The Department agrees with the concerns expressed by the
negotiators and will develop enhanced consumer information and
resources for parent PLUS applicants that could be incorporated within
the existing PLUS loan application process or made available to parents
through links to information on other Department Web sites. At a
minimum, the Department will offer voluntary entrance counseling to all
parent PLUS applicants which would provide clear information on the
monthly payment that would be required for the loan the applicant is
requesting as well as what the total monthly payment would be if the
applicant borrows the same amount for each year of a dependent
student's four-year or six-year undergraduate program. In addition, the
Department will expand its current online financial tools to include a
PLUS-specific loan calculator that would allow parents to evaluate
their future ability to repay PLUS loans based on their individual
economic circumstances.
The Department intends to collect, and where appropriate publish,
information about the performance of parent and graduate/professional
student PLUS loans, including default rate information based on credit
history characteristics of PLUS loan applicants and individual
institutional default rates. Providing more detailed information about
the PLUS loan program will assist the Department in evaluating the
definition of adverse credit history in the future and will allow
institutions to understand the impact of PLUS loan borrowing on
students and parents in order to help them better support their parent
and student PLUS borrowers.
We invite suggestions for the specific types of enhanced consumer
information that the Department should develop for PLUS applicants,
particularly parent PLUS applicants who may be planning to borrow for
more than one dependent over multiple academic years. We also invite
comments on what other types of information about Parent PLUS loans
would be helpful for institutions and consumers, and we invite
suggestions on the most effective way for the Department to communicate
with parent PLUS borrowers.
Executive Orders 12866 and 13563
Regulatory Impact Analysis
Introduction
The Department makes Direct PLUS Loans to graduate or professional
students and to parents of dependent undergraduate students to help pay
for education expenses not covered by other financial aid. According to
data from the Department's Federal Student Aid (FSA) office,
approximately 3.9 million borrowers owe a balance of $100 billion in
total Direct PLUS loans. The Department is proposing these regulations
to update the standard for determining if a potential borrower has an
adverse credit history for purposes of eligibility for a Direct PLUS
loan.
Under Executive Order 12866, the Secretary must determine whether
this regulatory action is ``significant'' and, therefore, subject to
the requirements of the Executive order and subject to review by the
Office of Management and Budget (OMB). Section 3(f) of Executive Order
12866 defines a ``significant regulatory action'' as an action likely
to result in a rule that may--
(1) Have an annual effect on the economy of $100 million or more,
or adversely affect a sector of the economy, productivity, competition,
jobs, the environment, public health or safety, or State, local, or
tribal governments or communities in a material way (also referred to
as an ``economically significant'' rule);
(2) Create serious inconsistency or otherwise interfere with an
action taken or planned by another agency;
(3) Materially alter the budgetary impacts of entitlement grants,
user fees, or loan programs or the rights and obligations of recipients
thereof; or
(4) Raise novel legal or policy issues arising out of legal
mandates, the President's priorities, or the principles stated in the
Executive order.
This proposed regulatory action is a significant regulatory action
subject to review by OMB under section 3(f) of Executive Order 12866.
We have also reviewed these regulations under Executive Order
13563, which supplements and explicitly reaffirms the principles,
structures, and definitions governing regulatory review established in
Executive Order 12866. To the extent permitted by law, Executive Order
13563 requires that an agency--
(1) Propose or adopt regulations only upon a reasoned determination
that
[[Page 46649]]
their benefits justify their costs (recognizing that some benefits and
costs are difficult to quantify);
(2) Tailor its regulations to impose the least burden on society,
consistent with obtaining regulatory objectives and taking into
account--among other things and to the extent practicable--the costs of
cumulative regulations;
(3) In choosing among alternative regulatory approaches, select
those approaches that maximize net benefits (including potential
economic, environmental, public health and safety, and other
advantages; distributive impacts; and equity);
(4) To the extent feasible, specify performance objectives, rather
than the behavior or manner of compliance a regulated entity must
adopt; and
(5) Identify and assess available alternatives to direct
regulation, including economic incentives--such as user fees or
marketable permits--to encourage the desired behavior, or provide
information that enables the public to make choices.
Executive Order 13563 also requires an agency ``to use the best
available techniques to quantify anticipated present and future
benefits and costs as accurately as possible.'' The Office of
Information and Regulatory Affairs of OMB has emphasized that these
techniques may include ``identifying changing future compliance costs
that might result from technological innovation or anticipated
behavioral changes.''
We are issuing these proposed regulations only on a reasoned
determination that their benefits would justify their costs. In
choosing among alternative regulatory approaches, we selected those
approaches that maximize net benefits to borrowers and institutions.
Based on the analysis that follows, the Department believes that these
proposed regulations are consistent with the principles in Executive
Order 13563.
In accordance with both Executive orders, the Department has
assessed the potential costs and benefits, both quantitative and
qualitative, of this regulatory action. The potential costs associated
with this regulatory action are those resulting from statutory
requirements and those we have determined as necessary for
administering the Department's programs and activities.
This Regulatory Impact Analysis is divided into five sections. The
``Need for Regulatory Action'' section discusses why updating the
regulatory requirements governing PLUS loan adverse credit history
determinations is necessary.
The ``Summary of Proposed Regulations'' section briefly highlights
the updates, revisions, and new requirements for PLUS loan applicants
that are included in the proposed regulations.
The ``Costs, Benefits, and Transfers'' section discusses the impact
of the proposed regulations on institutions of higher education,
students, and parents. We anticipate that the proposed regulations
would result in a lower denial rate for PLUS loan applicants. For some
parents and graduate and professional students who would be denied PLUS
loans under the current standards, the proposed regulations would allow
them to borrow a PLUS loan in an amount up to the cost of attendance.
Under ``Net Budget Impacts,'' we present our estimate that the
proposed regulations would not have a significant net budget impact on
the Federal government.
In ``Alternatives Considered,'' we describe other approaches we
considered for key provisions of the proposed regulations, including
different definitions for adverse credit history for parents and
graduate students, criteria regarding the borrower's ability to repay
as part of the adverse credit history definition, indexing the $2,085
threshold amount to the rate of inflation, increasing the delinquency
period of 90 or more days past due, and increasing the length of time
for the look-back period for debts that are in collection or charged
off.
Need for Regulatory Action
Congress amended the HEA in 2010 to end the origination of new
loans under the FFEL Program. All new subsidized and unsubsidized
Stafford Loans, PLUS Loans, and Consolidation Loans are made under the
Direct Loan Program. To be eligible for a Federal Direct PLUS loan,
under the statute, an applicant must not have an adverse credit
history. To determine if an applicant has an adverse credit history the
Department conducts a credit check on the applicant. A PLUS loan
applicant is considered to have an adverse credit history if the credit
report shows the applicant is 90 days delinquent on any debt, or has
been the subject of a default determination, bankruptcy discharge,
foreclosure, repossession, tax lien, wage garnishment, or write-off of
a title IV, HEA program debt in the five years preceding the date of
the credit report.
Since 2011, we have made operational changes to improve compliance
with the regulations and the practices of the FFEL program.
Specifically, the Department applied operational standards that were
similar to those in the FFEL program where an applicant with debts in
collection or charged off is considered to have an adverse credit
history because the applicant is 90 or more days delinquent on a debt.
Based on these standards, more PLUS loan applicants were determined to
have an adverse credit history and had to request reconsideration of
the PLUS loan denial through the Department's process for determining
whether extenuating circumstances for an adverse credit history
condition exist. After these changes resulted in an increase in PLUS
loan denials, the Department made operational changes to balance making
the Direct Loan PLUS program consistent with the old FFEL regulations
and the public policy goal of maintaining access to higher education.
In the interest of providing transparency to institutions and families,
we concluded that the operational changes that the Department
instituted in its operating procedures should be updated in the
regulatory requirements governing PLUS loan adverse credit history
determinations, which were originally established in 1994.
The proposed regulations would update the standard for determining
if a potential borrower has an adverse credit history and more
specifically would amend the definition of ``adverse credit history''
and require PLUS loan counseling for a parent or student with an
adverse credit history who is approved for a PLUS loan as a result of
the Secretary's determination that extenuating circumstances exist.
Summary of Proposed Regulations
The proposed regulations would update the eligibility requirements
for a PLUS loan. Specifically, the proposed regulations would state
more clearly that the PLUS loan adverse credit history requirements
apply to graduate student PLUS loan borrowers, as well as parent PLUS
borrowers. In addition, the proposed regulations would define the terms
``in collection'' and ``charged off'' for purposes of determining
whether an applicant for a PLUS loan has an adverse credit history.
They would also specify that a PLUS loan applicant has an adverse
credit history if the applicant has one or more debts with a total
combined outstanding balance greater than $2,085 that are 90 or more
days delinquent as of the date of the credit report, or that have been
placed in collection or charged off during the two years preceding the
date of the credit report. The proposed regulations would provide that
the debt threshold of a combined outstanding balance greater than
$2,085 may be adjusted over time
[[Page 46650]]
on a basis determined by the Secretary. The proposed regulations would
also revise the provision that specifies the types of documentation the
Secretary may accept as a basis for determining that extenuating
circumstances exist for a PLUS loan applicant who is determined to have
an adverse credit history. Finally, the regulations would specify that
an applicant for a PLUS loan who is determined to have an adverse
credit history, but who documents to the Secretary's satisfaction that
extenuating circumstances exist, must complete PLUS loan counseling
offered by the Secretary before receiving the PLUS loan.
Costs, Benefits, and Transfers
Under the proposed regulations, the Department expects that the
number of approved applications for parent and graduate and
professional student PLUS loans will increase from 2012-2013 levels,
and that this will result in a series of costs, benefits, and
transfers. The most significant factor leading to this increase is
expected to be the establishment of a new standard for the
determination that an applicant has an adverse credit history. In
particular, under the proposed regulations, an adverse credit history
means that the applicant has one or more debts with a total combined
outstanding balance greater than $2,085 that are 90 or more days
delinquent as of the date of the credit report, or that have been
placed in collection or charged off during the two years preceding the
date of the credit report.
Over 70 percent of the PLUS loan application denials in the past
three academic years have been a result of delinquent debt that was
held by the original creditor, charged off, or was in collection
status.
----------------------------------------------------------------------------------------------------------------
Academic year
Academic year Academic year 2013-2014
Reason for credit check denial 2011-2012 2012-2013 (through
(percent) (percent) February 2014)
(percent)
----------------------------------------------------------------------------------------------------------------
ACCOUNT IN COLLECTION..................................... 40.9 46 46
CHARGE OFF................................................ 21.3 24 24
PRESENTLY 90 OR MORE DAYS DELINQUENT...................... 11.1 14 13
CHAPTER 7, 11, OR 12 BANKRUPTCY........................... 7.9 5 6
COUNTY/STATE/FEDERAL GOVERNMENT TAX LIEN WITHIN LAST 5 6.4 3 3
YEARS....................................................
OTHER REASONS............................................. 12.3 9 9
----------------------------------------------------------------------------------------------------------------
We estimate that, under the proposed regulations, approximately 33
percent of the applicants who were initially denied PLUS loans in the
2012-2013 award year would have been approved in the initial process.
--------------------------------------------------------------------------------------------------------------------------------------------------------
AY 2012-13 PLUS Number and percentage of denied
--------------------------------------------------------- applications in AY 2012-2013 that
would be approved under the
proposed regulations
Number denied Number approved Total -------------------------------------
Number Percentage
--------------------------------------------------------------------------------------------------------------------------------------------------------
All Credit Checks (Original Decision).................... 1,123,617 1,300,986 2,424,603 371,508 33
--------------------------------------------------------------------------------------------------------------------------------------------------------
We also believe that the proposed regulations would clarify the
process by which applicants request reconsideration, and possibly
increase the percentage of denied loan applicants who eventually
qualify for PLUS loans after requesting reconsideration or obtaining an
endorser who does not have an adverse credit history.
Students/Parents
Parent PLUS loan applicants and their dependent students would be
affected by the proposed regulations. Under the proposed regulations, a
larger number of parent PLUS loan applicants would be approved for PLUS
loans on behalf of their dependent students. As a result, some families
could accrue higher loan debt amounts.
Unlike Direct Subsidized and Unsubsidized loans, PLUS loans do not
have annual or lifetime aggregate limits. PLUS loans can be borrowed in
any amount up to and including the full cost of attendance, which is an
amount that is determined by individual institutions and is beyond the
control of the Department.
In the 2011-2012 award year, the median total PLUS loan debt for a
parent who borrowed a PLUS loan at any point for a dependent
undergraduate student ages 18 to 24 in the student's fourth (senior)
year or above was $27,700.\4\ If the dependent student had borrowed the
maximum amount of his or her Direct Loans, the total debt shared by the
parent and student would be equal to $58,700, $1,300 more than the
aggregate limits for an independent student.
---------------------------------------------------------------------------
\4\ http://nces.ed.gov/programs/digest/d13/tables/dt13_331.95.asp
---------------------------------------------------------------------------
Parents who take out PLUS loans on behalf of their dependent
children are acquiring some of the debt burden associated with their
child's education. Parent PLUS loans have higher interest rates and
origination fees than Direct Subsidized and Direct Unsubsidized loans.
In the example that follows, the Department compares two sample
borrowers to show the potential impact of borrowing under the parent
PLUS Loan Program compared to borrowing up to the annual Direct Loan
limits for independent students. Student A's parent applied for a
parent PLUS loan; however, Student A's parent was not approved for
parent PLUS loans in any of the four years. Therefore, Student A was
eligible to borrow Unsubsidized Stafford loans up to the independent
borrower limits. Students B's parent was approved for parent PLUS loans
for all four years to help pay for Student B's college education. The
total amount borrowed by each of the families in this example is equal.
The example also assumes that both borrowers took out loans every year
of college, the student graduated in four years, and repayment began
following graduation. Student A deferred all payments on the
[[Page 46651]]
Unsubsidized Stafford loans and Student B's parent deferred payments on
their PLUS loans until six months after graduation. The example also
uses the current interest rates and origination fees (as of July 1,
2014) and assumes they remain unchanged through the two students'
matriculation (this is only an example; although interest rates are
fixed over the life of the individual loan, those rates are updated
annually and origination fees can be changed.)
----------------------------------------------------------------------------------------------------------------
Amount owed
Direct Direct Interest rate Months until upon entering
subsidized unsubsidized repayment repayment
----------------------------------------------------------------------------------------------------------------
Student A: Dependent student whose parents were denied a parent PLUS loan
----------------------------------------------------------------------------------------------------------------
1st Year Fall................... $ 1750 $ 3,000 0.0466 50 $ 5,424
1st Year Spring................. 1,750 3,000 0.0466 45 5,365
2nd Year Fall................... 2,250 3,000 0.0466 38 5,791
2nd Year Spring................. 2,250 3,000 0.0466 33 5,731
3rd Year Fall................... 2,750 3,500 0.0466 26 6,717
3rd Year Spring................. 2,750 3,500 0.0466 21 6,648
4th Year Fall................... 2,750 3,500 0.0466 14 6,551
4th Year Spring................. 2,750 3,500 0.0466 9 6,482
---------------
.............. .............. .............. Total Due 48,709
----------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------------------------------
Amount owed Months Amount owed
Direct Direct Interest upon entering Parent PLUS Interest until upon entering
subsidized unsubsidized rate repayment rate repayment repayment
--------------------------------------------------------------------------------------------------------------------------------------------------------
Student B: Dependent student with parents approved for PLUS loans
--------------------------------------------------------------------------------------------------------------------------------------------------------
1st Year Fall.......................... $ 1,750 $ 1,000 0.0466 $ 2,995 2000 0.0721 50 $ 2,712
1st Year Spring........................ 1,750 1,000 0.0466 2,975 2000 0.0721 45 2,650
2nd Year Fall.......................... 2,250 1,000 0.0466 3,456 2000 0.0721 38 2,562
2nd Year Spring........................ 2,250 1,000 0.0466 3,436 2000 0.0721 33 2,499
3rd Year Fall.......................... 2,750 1,000 0.0466 3,917 2500 0.0721 26 3,014
3rd Year Spring........................ 2,750 1,000 0.0466 3,897 2500 0.0721 21 2,936
4th Year Fall.......................... 2,750 1,000 0.0466 3,870 2500 0.0721 14 2,827
4th Year Spring........................ 2,750 1,000 0.0466 3,850 2500 0.0721 9 2,748
--------------------------------------------------------------------------------------------------------------------------------------------------------
........... .............. Total 28,397 ........... ........... Total 21,949
--------------------------------------------------------------------------------------------------------------------------------------------------------
........... .............. ........... Total due at the beginning of repayment--combined 50,345
--------------------------------------------------------------------------------------------------------------------------------------------------------
As this example demonstrates, at the identical school, the combined
parent-student debt upon entering repayment would be higher for the
family of Student B than the total debt of Student A because of the
higher interest rates (currently 7.21 percent for Direct PLUS loans and
4.66 percent for Direct Subsidized and Unsubsidized loans) and
origination fees (currently 4.28 percent for Direct PLUS loans \5\ and
1.72 percent for Direct Subsidized and Unsubsidized loans \6\). This
example is only meant to show the potential difference between two
students using a combination of Direct Subsidized, Direct Unsubsidized,
and Direct PLUS loans to fund their education. The example does not
address choices individual borrowers may make to manage their student
loan debt or the benefits of increased access to PLUS loans, as
discussed below. These tables also do not account for a family choosing
a less expensive school to account for the lack of access to PLUS
loans. These examples also only apply to Parent PLUS loans.
---------------------------------------------------------------------------
\5\ Origination fees for Direct PLUS loans will increase to
4.292 percent on October 1, 2014.
\6\ Origination fees for Direct Subsidized and Unsubsidized
loans will increase to 1.073 percent on October 1, 2014.
---------------------------------------------------------------------------
Borrowers may choose to make payments on their loans while in
school to decrease the accumulation of interest and decrease the amount
of loan debt owed after leaving school. Furthermore, loan disbursement
dates and amounts vary by campus. Individual debt loads for borrowers
under any loan program will be impacted by borrower behavior.
As borrowers enter into repayment, their loan payments and
principal balance amounts will also be impacted by borrower behavior.
Benefits such as loan consolidation, forbearance, deferment, and loan
forgiveness can have an impact on their overall loan payments.
Increased access to PLUS loans may allow some students to continue
their attendance in programs that they otherwise would not be able to
afford. While some applicants may use additional Direct Unsubsidized
loans to cover their educational expenses after their applicant parents
have been denied PLUS loans, others may be unable to make up the
difference because of annual or lifetime aggregate limits on Stafford
loans. This could result in a student having to withdraw from a
particular education program, transfer to another program or
institution, or find additional means of financing his or her
education, such as private student loans. Since PLUS loans can be
borrowed up to the cost of attendance, they may be used to more fully
cover funding gaps for dependent students who have exhausted their
annual or lifetime aggregate limits for Direct Subsidized and
Unsubsidized loans or allow students to attend a more expensive
institution. PLUS loans often help lower-income students who may lack
the personal or family resources to pay for college.
PLUS loans are generally a better option for students than private
student loans. PLUS loans have fixed interest rates and offer more
flexibility in respect to repayment plans (such as extended and
graduated repayment plans). PLUS loans also offer important consumer
protections such as deferments for unemployment, active
[[Page 46652]]
duty military service, and economic hardship; and cancellation for
occurrences such as death, total and permanent disability or school
closure. Private loans, in contrast, are not required to provide such
borrower benefits and protections. Private loans also typically have
variable interest rates that cost most for those who can least afford
them.''
Applicants with an adverse credit history who qualify for a PLUS
Loan by demonstrating extenuating circumstances will be required to
participate in loan counseling provided by the Department. This
requirement could help PLUS loan applicants to make informed decisions
and to avoid over-borrowing for their own or their child's education.
Net Budget Impacts
The proposed regulations are not estimated to have a significant
net budget impact over the loan cohorts from 2014 to 2024. Consistent
with the requirements of the Credit Reform Act of 1990, budget cost
estimates for the student loan programs reflect the estimated net
present value of all future non-administrative Federal costs associated
with a cohort of loans. (A cohort reflects all loans originated in a
given fiscal year.)
In general, student loan cost estimates are developed using OMB's
Credit Subsidy Calculator. The OMB calculator takes projected future
cash flows from the Department's student loan cost estimation model and
produces discounted subsidy rates reflecting the net present value of
all future Federal costs associated with awards made in a given fiscal
year. Values are calculated using a ``basket of zeros'' methodology
under which each cash flow is discounted using the interest rate of a
zero-coupon Treasury bond with the same maturity as that cash flow. To
ensure comparability across programs, this methodology is incorporated
into the calculator and used government-wide to develop estimates of
the Federal cost-of-credit programs. Accordingly, we believe that it is
the appropriate methodology to use in developing estimates for the
proposed regulations. That said, in developing the following Accounting
Statement, the Department consulted with OMB on how to integrate our
discounting methodology with the discounting methodology traditionally
used in developing regulatory impact analyses.
The operational changes to adverse credit history determinations
made in 2011 have already been incorporated into the Department's
budget baseline. The changes in the proposed regulations, including (1)
using $2,085 as an upfront threshold amount in the determination of an
adverse credit history, and (2) the reduced look-back period of two
years for accounts in collection and accounts that have been charged
off to trigger a determination of adverse credit, would likely decrease
the number of PLUS loan applicants denied loans based on an adverse
credit history determination. This could increase PLUS loan volumes,
and decrease the amount of additional Direct Unsubsidized loans taken
out by student borrowers whose parents cannot obtain PLUS loans because
of adverse credit determinations. Generally, an increase in PLUS loan
volume results in net budget savings because of the negative subsidy
rate on the overall PLUS loan portfolio.
However, loans made to borrowers who would have been considered to
have an adverse credit history before the changes in the proposed
regulations could have a higher incidence of default or could be
difficult for borrowers to repay. If that were the case, potential
savings from any increased PLUS loan volume resulting from the proposed
regulations would be reduced or even reversed. The Department does not
have data to determine if borrowers who would have been considered to
have an adverse credit history in the absence of the proposed
regulations have a greater incidence of default or repayment
difficulty, but, if a subsidy rate were available for this subgroup of
PLUS borrowers, it would likely differ from the overall PLUS subsidy
rate. The budget baseline already reflects the $2,085 threshold amount
as currently used in the Department's process for considering requests
for reconsideration and most of the charged-off accounts or accounts in
collection that would result in an adverse credit determination fall
within the two-year period that would still be in effect under the
proposed regulations. These factors could limit the increase in PLUS
loan volume associated with the changes in the proposed regulations.
Therefore, the Department has not estimated significant savings from
the proposed regulations.
Assumptions, Limitations, and Data Sources
In developing these estimates, a wide range of data sources were
used, including data from the National Student Loan Data System;
operational and financial data from Department of Education systems,
including the Fiscal Operations Report and Application to Participate
(FISAP) from institutions; and data from a range of surveys conducted
by the National Center for Education Statistics such as the 2011-2012
National Postsecondary Student Aid Survey and the 2004/09 Beginning
Postsecondary Student Survey. Data from other sources, such as the U.S.
Census Bureau, were also used.
Accounting Statement
As required by OMB Circular A-4 (available at www.whitehouse.gov/sites/default/files/omb/assets/omb/circulars/a004/a-4.pdf), in Table 3,
we have prepared an accounting statement showing the classification of
the expenditures associated with the proposed regulations. Expenditures
are classified as transfers from the Federal Government to student loan
borrowers.
[[Page 46653]]
Table 3--Accounting Statement: Classification of Estimated Expenditures
($ in Millions, 7% and 3% Discount Rates)
------------------------------------------------------------------------
------------------------------------------------------------------------
Category Benefits
------------------------------------------------------------------------
Improved clarity in process for
adverse credit determinations
for PLUS loans................. Not quantified
------------------------------------------------------------------------
Category Costs
------------------------------------------------------------------------
7% 3%
------------------------------------------------------------------------
Costs of compliance with $4.40 $4.43
paperwork requirements.........
------------------------------------------------------------------------
Alternatives Considered
The Department considered various alternatives in developing these
proposed regulations, including different definitions of adverse credit
history for parents and graduate students, criteria regarding the
borrower's ability to repay as part of the adverse credit history
definition, indexing the $2,085 amount to the rate of inflation,
increasing the delinquency period of 90 or more days past due, and
increasing the length of time for the look-back period for debts that
are in collection or charged off.
Some of the non-Federal negotiators contended that there should be
different eligibility standards for PLUS loans for parents and
students. These negotiators argued that graduate and professional
students should be eligible for PLUS loans without application of the
adverse credit history criteria.
Alternatively, one non-Federal negotiator requested that the
Department consider defining ``adverse credit history'' differently for
graduate and professional student PLUS loan borrowers than for parent
PLUS loan borrowers.
We considered these proposals but concluded that the statutory
requirement that a PLUS loan borrower not have an adverse credit
history applies equally to student and parent borrowers.
Some non-Federal negotiators recommended including criteria
regarding the borrower's ability to repay in the ``adverse credit
history'' definition, to prevent overborrowing of PLUS loans. However,
the Department determined that the HEA does not currently authorize
consideration of the borrower's ability to repay in the determination
of an adverse credit history.
Several of the non-Federal negotiators recommended that the
Department index the $2,085 debt threshold amount to the rate of
inflation. The majority of these negotiators suggested that the
Department use the CPI, a measure of inflation determined by the Bureau
of Labor Statistics, as the basis for the indexing.
The Department considered using the CPI-U as the basis to index,
but ultimately decided not to include this in the proposed regulations.
Instead, the Department invites public comment on what an appropriate
adjustment would be to take into account the effects of inflation, as
well as suggestions for other bases for adjusting the $2,085 threshold
amount over time, including measures of growth or decline in other
types of consumer debt.
Some of the non-Federal negotiators argued that the proposed
delinquency period of 90 or more days past due is too short for adverse
credit history determinations. These negotiators recommended extending
the period to 120 days or 180 days past due. They asserted that credit
reports often have errors that may not be corrected during a 90-day
timeframe.
In the absence of a consistent industry-wide standard, we decided
to maintain the standard of 90 or more days delinquent in the proposed
regulations. We rely on credit reports to determine whether an
applicant is delinquent on a debt, as the number of days a debt is past
due is included on an individual's credit report until an account is
placed in collection. Based on our experience, most creditors send
accounts to collection once they are 90 days' delinquent. Once an
account is placed in collection, the number of days past due is
generally not reflected on the credit report. Therefore, a standard
beyond the current 90-day standard would be more difficult to track.
And a borrower with a longer delinquency would still be able to request
reconsideration of the PLUS loan denial under the process for
determining if extenuating circumstances exist, which would allow the
borrower the opportunity to explain the individual circumstances raised
by the negotiators.
Non-Federal negotiators made varying proposals regarding the look-
back period for debts that are in collection or charged off. Some
negotiators recommended a one-year look-back period while other
negotiators suggested a three-year look-back period. The Department
considered these proposals but determined that it was appropriate to
propose a two-year look-back period. Based on the Department's review
of consumer credit standards, the age of a consumer's delinquent or
defaulted debt bears significantly on a consumer's credit history.
While varying substantially based on the type of credit infraction,
typically most negative items have little impact after two years.
Furthermore, as the chart from VantageScore shows below, a decline in a
consumer's credit score from a substantially severe infraction such as
a default can be remediated within about 18 months.
[[Page 46654]]
[GRAPHIC] [TIFF OMITTED] TP08AU14.017
The Department's adverse credit history evaluation of 90-day debt
delinquencies, including charge-offs and collections, is based upon an
account's current status, but it does not take into account whether the
debts have been delinquent for a long period of time or entered
collections or were charged off years ago. Several other State student
lenders, Federal agencies, and some other lenders take into account the
age of the delinquent debt in question when underwriting. For example,
the Maine Loan, a product offered by the Maine Educational Loan
Authority, requires that applicants have no record of a paid or unpaid
charge-off in the last two years.\7\ Connecticut Higher Education
Supplemental Loan Authority (CHESLA) loans contain a similar two-year
look back for debts over 90 days delinquent as well as for charge-offs
and collections.\8\ At the Federal level, Department of Agriculture
farm loans for operation and ownership employ a three-year look back
standard.\9\ Presumably, these lenders do not find that older
delinquent debts impact the borrower's ability or willingness to repay
a new loan.
---------------------------------------------------------------------------
\7\ http://www.mela.net/maine-loan.php.
\8\ http://www.chesla.org/Customer-Content/WWW/CMS/files/071137_2011_annualreport.pdf.
\9\ http://www.rurdev.usda.gov/SupportDocuments/CA-SFH-GRHUnderwritingGuide.pdf.
---------------------------------------------------------------------------
Initial Regulatory Flexibility Analysis
The proposed regulations will affect institutions that participate
in the title IV, HEA programs, including alternative certification
programs not housed at institutions, and individual borrowers. The U.S.
Small Business Administration (SBA) Size Standards define for-profit
institutions as ``small businesses'' if they are independently owned
and operated and not dominant in their field of operation, with total
annual revenue below $7,000,000. The SBA Size Standards define
nonprofit institutions as ``small organizations'' if they are
independently owned and operated and not dominant in their field of
operation, or as ``small entities'' if they are institutions controlled
by governmental entities with populations below 50,000. The number of
title IV, HEA-eligible institutions that are small entities would be
limited because of the revenues involved in the sector that would be
affected by the proposed regulations and the concentration of ownership
of institutions by private owners or public systems. However, the
definition of ``small organization'' does not factor in revenue.
Accordingly, several of the entities subject to the proposed
regulations are ``small entities,'' and we have prepared this Initial
Regulatory Flexibility Analysis.
Description of the Reasons That Action by the Agency Is Being
Considered
The proposed regulations would update the standards for determining
whether a parent or student has an adverse credit history for purposes
of eligibility for a Direct PLUS Loan. The proposed regulations would
require PLUS loan counseling for a parent or student with an adverse
credit history who obtains a PLUS loan as a result of the Secretary's
determination that extenuating circumstances exist.
Succinct Statement of the Objectives of, and Legal Basis for, the
Regulations
Current Direct Loan regulations (34 CFR 685.200(b) and (c)) specify
that graduate and professional students, and parents borrowing on
behalf of their dependent children, may borrow PLUS loans. PLUS loan
borrowers must meet applicable eligibility requirements.
Description of and, Where Feasible, an Estimate of the Number of Small
Entities To Which the Regulations Will Apply
The proposed regulations would affect the approximately 7,500
institutions that participate in the title IV, HEA loan programs, as
the amount and composition of title IV, HEA program aid that is
available to students affects students' enrollment decisions and
institutional choice. Approximately 60 percent of institutions of
higher education qualify as small entities. Using data from the
Integrated Postsecondary Education Data System, we estimate that 4,365
institutions qualify as small entities--1,891 are nonprofit
institutions, 2,196 are for-profit institutions with programs of two
years or less, and 278 are for-profit institutions with four-year
programs.
Description of the Projected Reporting, Recordkeeping, and Other
Compliance Requirements of the Regulations, Including an Estimate of
the Classes of Small Entities That Will Be Subject to the Requirements
and the Type of Professional Skills Necessary for Preparation of the
Report or Record
The proposed regulations would not change the reporting
requirements related to PLUS loans for institutions. Accordingly, the
Department does not expect a change in institutional burden from the
proposed regulations. However, PLUS loan borrowers with an adverse
credit history who request reconsideration based on extenuating
circumstances must provide satisfactory documentation that extenuating
circumstances exist, and would be required to complete loan counseling
offered by the Secretary.
[[Page 46655]]
Identification, to the Extent Practicable, of all Relevant Federal
Regulations That May Duplicate, Overlap or Conflict With the Proposed
Regulations
The proposed regulations are unlikely to conflict with or duplicate
existing Federal regulations.
Alternatives Considered
As described above, the Department conducted a negotiated
rulemaking process to develop the proposed regulations and considered a
number of options for some of the provisions. No alternatives were
aimed specifically at small entities.
Paperwork Reduction Act of 1995
As part of its continuing effort to reduce paperwork and respondent
burden, the Department provides the general public and Federal agencies
with an opportunity to comment on proposed and continuing collections
of information in accordance with the Paperwork Reduction Act of 1995
(PRA) (44 U.S.C. 3506(c)(2)(A)). This helps ensure that: The public
understands the Department's collection instructions, respondents can
provide the requested data in the desired format, reporting burden
(time and financial resources) is minimized, collection instruments are
clearly understood, and the Department can properly assess the impact
of collection requirements on respondents. The table at the end of this
section summarizes the estimated burden on small entities, primarily
institutions and applicants, arising from the paperwork associated with
the proposed regulations.
Section 685.200 contains information collection requirements. Under
the PRA, the Department has submitted a copy of the section, and will
submit the Information Collections Request (ICR) to OMB for its review.
A Federal agency may not conduct or sponsor a collection of
information unless OMB approves the collection under the PRA and the
corresponding information collection instrument displays a currently
valid OMB control number. Notwithstanding any other provision of law,
no person is required to comply with, or is subject to penalty for
failure to comply with, a collection of information if the collection
instrument does not display a currently valid OMB control number.
In the final regulations, we will display the control numbers
assigned by OMB to any information collection requirements proposed in
this NPRM and adopted in the final regulations. The burden associated
with the new regulatory provisions would be accounted for in a new
information collection.
The current regulations allow PLUS loan applicants who have been
denied a PLUS loan due to an adverse credit history determination to
submit documentation of extenuating circumstances to the Secretary and
request reconsideration of the loan application. The proposed
regulations would require that a PLUS loan applicant who is determined
to be eligible for a PLUS loan after reconsideration complete loan
counseling offered by the Secretary.
Section 685.200 Borrower Eligibility
Requirements: Under proposed regulations in Sec. 685.200(b)(5) and
(c)(2)(viii)(A)(3), we have proposed that, in addition to providing
documentation to the Secretary demonstrating that extenuating
circumstances exist, an applicant who is determined to have an adverse
credit history would also have to complete PLUS loan counseling to
receive the PLUS loan. We believe loan counseling would help these PLUS
loan applicants to understand the ramifications of incurring this
additional debt.
Burden Calculation: We estimate that during the 2013-14 award year
there were 785,734 PLUS loan denials. Our records indicate that, of
those PLUS loan denials, 147,400 PLUS loans were approved after
reconsideration based on extenuating circumstances. While the total
number of requests for reconsideration (whether approved or
disapproved) is not available at this time, we estimate that the total
number of approved requests, divided by 90 percent, approximates the
total number. We estimate that, on average, each borrower's submission
of documentation for the Secretary's consideration would take 1 hour
per submission.
Our 2013-14 data show that there were 8,452 requests from graduate
or professional students at private for-profit institutions for
reconsideration of a PLUS loan application based on extenuating
circumstances; therefore, we estimate the burden would increase by
8,452 hours (7,607 approved reconsideration requests, divided by 90
percent, multiplied by 1 hour per request) under OMB Control Number
1845-NEW1.
Our 2013-14 data show that there were 23,804 requests from graduate
or professional students at private nonprofit institutions for
reconsideration of a PLUS loan application based on extenuating
circumstances; therefore, we estimate the burden would increase by
23,804 hours (21,424 approved requests for reconsideration, divided by
90 percent, multiplied by 1 hour per request) under OMB Control Number
1845-NEW1.
Our 2013-14 data show that there were 14,056 requests from graduate
or professional students for reconsideration of a PLUS loan application
based on extenuating circumstances; therefore, we estimate the burden
would increase by 14,056 hours (12,650 approved requests for
reconsideration, divided by 90 percent, multiplied by 1 hour per
request) under OMB Control Number 1845-NEW1.
Our 2013-14 data show that there were 1,672 requests from graduate
or professional students at foreign institutions for reconsideration of
a PLUS loan application based on extenuating circumstances; therefore,
we estimate the burden would increase by 1,672 hours (1,505 approved
requests for reconsideration, divided by 90 percent, multiplied by 1
hour per request) under OMB Control Number 1845-NEW1.
The total increase in burden for Sec. 685.200(b)(5) would be
47,984 hours under OMB Control Number 1845-NEW1.
Our 2013-14 data show that there were 8,458 submissions from
parents of students at private for-profit institutions for
reconsideration of a PLUS loan application based on extenuating
circumstances; therefore, we estimate the burden would increase by
8,458 hours (7,612 approved requests for reconsideration, divided by 90
percent, multiplied by 1 hour per request) under OMB Control Number
1845-NEW1.
Our 2013-14 data show that there were 43,008 submissions from the
parents of students at private nonprofit institutions for
reconsideration based on extenuating circumstances; therefore, we
estimate the burden would increase by 43,008 hours (38,707 approved
requests for reconsideration, divided by 90 percent, multiplied by 1
hour per request) under OMB Control Number 1845-NEW1.
Our 2013-14 data show that there were 64,118 requests from parents
of students at public institutions for reconsideration based on
extenuating circumstances; therefore, we estimate the burden would
increase by 64,118 hours (57,706 approved requests for reconsideration,
divided by 90 percent, multiplied by 1 hour per request) under OMB
Control Number 1845-NEW1.
Our 2013-14 data show that there were 210 requests from parents of
students at foreign institutions for reconsideration based on
extenuating circumstances; therefore, we estimate the burden would
increase by 210 hours
[[Page 46656]]
(189 approved requests for reconsideration, divided by 90 percent,
multiplied by 1 hour per request) under OMB Control Number 1845-NEW1.
The total increase in burden for Sec. 685.200(c)(2)(viii)(A)(3)
would be 115,794 hours under OMB Control Number 1845-NEW1.
We estimate the burden associated with the loan counseling
requirement under proposed Sec. 685.200(c)(2)(viii)(A)(3). All
graduate and professional students are currently required to undergo
PLUS loan entrance counseling. We estimate that the additional loan
counseling requirements for graduate and professional students who
qualify for PLUS loans under extenuating circumstances would, on
average, increase loan counseling by 0.17 hours (10 minutes) for each
graduate or professional PLUS loan applicant who qualifies for a PLUS
loan due to extenuating circumstances.
Our 2013-14 data show that there were 7,607 approved requests for
reconsideration based on extenuating circumstances from graduate or
professional students at private for-profit institutions; therefore, we
estimate the burden would increase by 1,293 hours (7,607 approved
requests for reconsideration multiplied by 0.17 hours per additional
counseling components) under OMB Control Number 1845-NEW1.
Under proposed Sec. 685.200(b)(5), our 2013-14 data show that
there were 21,424 approved requests for reconsideration based on
extenuating circumstances from graduate or professional students at
private nonprofit institutions; therefore, we estimate the burden would
increase by 3,642 hours (21,424 approved requests for reconsideration
multiplied by 0.17 hours per additional counseling components) under
OMB Control Number 1845-NEW1.
Our 2013-14 data show that there were 12,650 approved requests for
reconsideration based on extenuating circumstances from graduate or
professional students at public institutions; therefore, we estimate
the burden would increase by 2,151 hours (12,650 approved requests for
reconsideration multiplied by 0.17 hours per additional counseling
components) under OMB Control Number 1845-NEW1.
Our 2013-14 data show that there were 1,505 approved requests for
reconsideration based on extenuating circumstances from graduate or
professional students at foreign institutions; therefore, we estimate
the burden would increase by 256 hours (1,505 approved requests for
reconsideration multiplied by 0.17 hours per additional counseling
components) under OMB Control Number 1845-NEW1.
The total increase in burden for Sec. 685.200(b)(5) would be 7,342
hours under OMB Control Number 1845-NEW1.
Under the proposed regulations, there would be a new requirement
that a parent PLUS loan applicant who is determined to be eligible for
a loan based on extenuating circumstances would need to participate in
loan counseling before receiving a loan. Therefore, we estimate that,
on average, each parent PLUS loan borrower who is determined to be
eligible on the basis of extenuating circumstances would take 45
minutes to complete a PLUS loan counseling session.
Our 2013-14 data show that there were 7,612 approved requests for
reconsideration from parents of students at private for-profit
institutions based on extenuating circumstances; therefore, we estimate
the burden would increase by 5,709 hours (7,612 approved requests for
reconsideration multiplied by 0.75 hours per PLUS loan counseling
session) under OMB Control Number 1845-NEW1.
Our 2013-14 data show that there were 38,707 approved requests for
reconsideration from the parents of students at private nonprofit
institutions based on extenuating circumstances; therefore, we estimate
the burden would increase by 29,030 hours (38,707 approved requests for
reconsideration times 0.75 hours per PLUS loan counseling session)
under OMB Control Number 1845-NEW1.
Our 2013-14 data show that there were 57,706 approved requests for
reconsideration from parents of students at public institutions based
on extenuating circumstances; therefore, we estimate the burden would
increase by 43,280 hours (57,706 approved requests for reconsideration
multiplied by 0.75 hours per PLUS loan counseling session) under OMB
Control Number 1845-NEW1.
Our 2013-14 data show that there were 189 approved requests for
reconsideration from parents of students at foreign institutions based
on extenuating circumstances; therefore, we estimate the burden would
increase by 142 hours (189 approved requests for reconsideration
multiplied by 0.75 hours per PLUS loan counseling session) under OMB
Control Number 1845-NEW1.
The total increase in burden for Sec. 685.200(c)(2)(viii)(A)(3)
would be 78,161 hours under OMB Control Number 1845-NEW1.
Overall, burden would increase by 249,281 hours under OMB Control
Number 1845-NEW1.
Consistent with the discussion above, the following chart describes
the sections of the proposed regulations involving information
collections, the information being collected, and the collections that
the Department will submit to OMB for approval and public comment under
the PRA, and the estimated costs associated with the information
collections. The monetized net costs of the increased burden on
applicants and borrowers, using wage data developed using BLS data,
available at www.bls.gov/ncs/ect/sp/ecsuphst.pdf, is $4,063,280, as
shown in the chart below. This cost was based on an hourly rate of
$16.30 for applicants and borrowers.
Collection of Information
----------------------------------------------------------------------------------------------------------------
OMB control number and
Regulatory section Information collection estimated burden Estimated
[change in burden] costs
----------------------------------------------------------------------------------------------------------------
Sec. 685.200 (b)(5) and Revises language requiring documentation OMB 1845-NEW1. We $4,063,280
685.200 (c)(1) (viii)(A)(3) for extenuating circumstances and estimate that the
Borrower Eligibility. augments PLUS loan counseling for burden would increase
graduate and professional students to by 249,281 hours.
increase student financial literacy. The
proposed regulations also require parent
PLUS loan counseling.
----------------------------------------------------------------------------------------------------------------
If you want to comment on the proposed information collection
requirements, please send your comments to the Office of Information
and Regulatory Affairs, OMB, Attention: Desk Officer for U.S.
Department of
[[Page 46657]]
Education, by fax to (202) 395-6974 or send your comments by email to
[email protected]. You may also send a copy of these comments to
the Department contact named in the ADDRESSES section of this preamble.
We have prepared an Information Collection Request (ICR) for this
collection. In preparing your comments you may want to review the ICR,
which is available at www.reginfo.gov. On www.reginfo.gov, click on
``Information Collection Review.'' This proposed collection is
identified as proposed collection 1845-NEW1.
We consider your comments on this proposed collection of
information in--
Deciding whether the proposed collection is 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 collection, 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.
OMB is required to make a decision concerning the collection 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 your comments by September 8, 2014.
This does not affect the deadline for your comments to us on the
proposed regulations.
Intergovernmental Review
These programs are not subject to Executive Order 12372 and the
regulations in 34 CFR part 79.
Assessment of Educational Impact
In accordance with section 411 of the General Education Provisions
Act, 20 U.S.C. 1221e-4, the Secretary particularly requests comments on
whether the proposed regulations would require transmission of
information that any other agency or authority of the United States
gathers or makes available.
Accessible Format: Individuals with disabilities can obtain this
document in an accessible format (e.g., braille, large print,
audiotape, or compact disc) on request to one of the persons listed
under FOR FURTHER INFORMATION CONTACT.
Electronic Access to This Document: 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 via the Federal Digital System
at: www.gpo.gov/fdsys. At this site you can view this document, as well
as all other documents of the Department published in the Federal
Register, in text or Adobe Portable Document Format (PDF). To use PDF
you must have Adobe Acrobat Reader, which is available free at the
site.
You may also access documents of the Department published in the
Federal Register by using the article search feature at:
www.federalregister.gov. Specifically, through the advanced search
feature at this site, you can limit your search to documents published
by the Department.
(Catalog of Federal Domestic Assistance Number: 84.268 William D.
Ford Federal Direct Loan Program)
List of Subjects in 34 CFR Part 685
Administrative practice and procedure, Colleges and universities,
Consumer protection, Grant programs--education, Loan programs--
education, Reporting and recordkeeping requirements, Student aid,
Vocational education.
Dated: August 4, 2014.
Arne Duncan
Secretary of Education.
For the reasons discussed in the preamble, the Secretary of
Education proposes to amend part 685 of title 34 of the Code of Federal
Regulations as follows:
PART 685--WILLIAM D. FORD FEDERAL DIRECT LOAN PROGRAM
0
1. The authority citation for part 685 continues to read as follows:
Authority: 20 U.S.C. 1070g, 1087a, et seq., unless otherwise
noted.
0
2. Section 685.200 is amended by:
0
a. In paragraph (b)(5), removing the words ``of paragraph (c)(1)(vii)''
and adding, in their place, the words ``that apply to a parent under
paragraphs (c)(2)(viii)(A) through (D)''; and
0
b. Revising paragraph (c) to read as follows:
Sec. 685.200 Borrower eligibility.
* * * * *
(c) Parent PLUS borrower--(1) Definitions. The following
definitions apply to this paragraph (c):
(i) Charged off means a debt that a creditor has written off as a
loss, but that is still subject to collection action.
(ii) In collection means a debt that has been placed with a
collection agency by a creditor or that is subject to more intensive
efforts by a creditor to recover amounts owed from a borrower who has
not responded satisfactorily to the demands routinely made as part of
the creditor's billing procedures.
(2) Eligibility. A parent is eligible to receive a Direct PLUS Loan
if the parent meets the following requirements:
(i) The parent is borrowing to pay for the educational costs of a
dependent undergraduate student who meets the requirements for an
eligible student under 34 CFR part 668.
(ii) The parent provides his or her and the student's social
security number.
(iii) The parent meets the requirements pertaining to citizenship
and residency that apply to the student under 34 CFR 668.33.
(iv) The parent meets the requirements concerning defaults and
overpayments that apply to the student in 34 CFR 668.32(g).
(v) The parent complies with the requirements for submission of a
Statement of Educational Purpose that apply to the student under 34 CFR
part 668, except for the completion of a Statement of Selective Service
Registration Status.
(vi) The parent meets the requirements that apply to a student
under paragraph (a)(1)(iv) of this section.
(vii) The parent has completed repayment of any title IV, HEA
program assistance obtained by fraud, if the parent has been convicted
of, or has pled nolo contendere or guilty to, a crime involving fraud
in obtaining title IV, HEA program assistance.
(viii)(A) The parent--
(1) Does not have an adverse credit history;
(2) Has an adverse credit history but has obtained an endorser who
does not have an adverse credit history; or
(3) Has an adverse credit history but documents to the satisfaction
of the Secretary that extenuating circumstances exist and completes
PLUS loan counseling offered by the Secretary.
(B) For purposes of this paragraph (c), an adverse credit history
means that the parent--
(1) Has one or more debts with a total combined outstanding balance
greater than $2,085, as may be adjusted over time on a basis determined
by the Secretary, that are 90 or more days delinquent as of the date of
the credit report, or that have been placed in
[[Page 46658]]
collection or charged off, as defined in paragraph (c)(1) of this
section, during the two years preceding the date of the credit report;
or
(2) Has been the subject of a default determination, bankruptcy
discharge, foreclosure, repossession, tax lien, wage garnishment, or
write-off of a debt under title IV of the Act during the five years
preceding the date of the credit report.
(C) For purposes of this paragraph (c), the Secretary does not
consider the absence of a credit history as an adverse credit history
and does not deny a Direct PLUS loan on that basis.
(D) For purposes of this paragraph (c), the Secretary may determine
that extenuating circumstances exist based on documentation that may
include, but is not limited to--
(1) An updated credit report for the parent; or
(2) A statement from the creditor that the parent has repaid or
made satisfactory arrangements to repay a debt that was considered in
determining that the parent has an adverse credit history.
(3) For purposes of paragraph (c)(2) of this section, a ``parent''
includes the individuals described in the definition of ``parent'' in
34 CFR 668.2 and the spouse of a parent who remarried, if that spouse's
income and assets would have been taken into account when calculating a
dependent student's expected family contribution.
[FR Doc. 2014-18673 Filed 8-7-14; 8:45 am]
BILLING CODE 4000-01-P