Publication Date: August 8, 2014

Posted Date: August 8, 2014

Subject: PLUS Loan NPRM

FR Type: Notice of Proposed Rulemaking (NPRM)


ThisFederal Register is in PDF Format 

[Federal Register Volume 79, Number 153 (Friday, August 8, 2014)]
[Proposed Rules]
[Pages 46639-46658]
From the Federal Register Online via the Government Printing 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

[[Page 46640]]

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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: Brian.Smith@ed.gov or 
Pamela.Moran@ed.gov.
    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

[[Page 46642]]

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

[[Page 46643]]

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\
---------------------------------------------------------------------------

    \1\ All of the charts provided to the negotiators are available 
at: http://www2.ed.gov/policy/highered/reg/hearulemaking/2012/programintegrity.html#2.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \2\ This data is available at: http://www2.ed.gov/policy/highered/reg/hearulemaking/2012/programintegrity.html#2.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \3\ These charts are available at: http://www2.ed.gov/policy/highered/reg/hearulemaking/2012/programintegrity.html#3.
---------------------------------------------------------------------------

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

[[Page 46645]]

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.

[[Page 46646]]

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.
[FR Doc. 2014-18673 Filed 8-7-14; 8:45 am]
BILLING CODE 4000-01-P
 

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