The HERA also modified several Title IV, HEA provisions that are not addressed in these interim final regulations. The HERA made changes to the rules governing Cost of Attendance calculations, the determination of an applicant's dependency status, and the calculation of an applicant's expected family contribution. In accordance with section 478(a) of the HEA, the Secretary does not issue regulations in this area.

The HERA also modified and made permanent the provisions of the TaxpayerTeacher Protection Act of 2004 (Pub. L. 108409) which (1) changed the calculation of special allowance payments for certain FFEL Program loans made with proceeds of taxexempt obligations and (2) increased teacher loan forgiveness amounts for FFEL and Direct Loan borrowers teaching in certain areas.

In addition to the changes mandated by the HERA, these interim final regulations also incorporate the provisions of Pub. L. 107139, which changed the formula for calculating special allowance payments in the FFEL Program for loans made on or after July 1, 2000 and set interest rates for FFEL and Direct Loans first disbursed on or after July 1, 2006 at fixed interest rates.

These interim final regulations also incorporate the statutory changes made to the HEA by the Pell Grant Hurricane and Disaster Relief Act (Pub. L. 10966) and the Student Grant Hurricane and Disaster Relief Act (Pub. L. 10967). These laws authorize the Secretary to waive the requirement that a student repay a Title IV, HEA grant if the student withdrew from an institution because of a major disaster. The Secretary initially exercised this waiver authority through publication of Dear Colleague Letter GEN0517 on November 9, 2005.

These interim final regulations also incorporate the statutory changes made to the HEA by The Emergency Supplemental Appropriations Act for Defense, the Global War on Terror, and Hurricane Recovery, 2006 (Pub. L. 109234). The Emergency Supplemental Appropriations Act amended section 428C(b)(1)(A) of the HEA by repealing the single holder rule with respect to
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any FFEL Consolidation loan for which an application is received by an eligible lender on or after June 15, 2006. This law also repealed section 8009(a)(2) of the HERA and reinstated the current statutory provisions under which a borrower may consolidate outstanding FFEL Program loans into the Federal Direct Consolidation Loan Program. Significant Regulations

We discuss substantive issues under the sections of the regulations to which they pertain. Generally, we do not address regulatory changes that are technical or otherwise minor in effect.
Distance Education (Sec. Sec. 600.2, 600.7, 600.51, 668.8 and 668.38)

Statute: Section 8020 of the HERA modified the institutional eligibility requirements in section 102(a)(3) of the HEA that generally make institutions offering more than 50 percent of their courses by correspondence, or a combination of correspondence and
telecommunications, or enrolling 50 percent or more of their students in correspondence courses, ineligible for Title IV, HEA program assistance. The HERA also modified the student eligibility requirements of section 484(l)(1) of the HEA, by removing telecommunications courses from being considered as correspondence courses. Under the amended HEA, courses offered by telecommunications that meet certain conditions are no longer considered correspondence courses, and students enrolled in telecommunications courses are no longer considered to be

correspondence students.

The HERA also modified section 481(b) of the HEA to reflect certain restrictions on the eligibility of programs that are offered by telecommunications. Consistent with prior law, the institution, including its distance education programs, must hold current accreditation from an accrediting agency recognized by the Secretary that has the evaluation of distance education in its scope of recognition. However, under the HERA, programs offered by foreign institutions that include instruction delivered by telecommunication are not eligible.

Current Regulations: The current regulations reflect the previous statutory limitations on institutional and student eligibility based on the percentage of correspondence courses offered by the institution and the percentage of students enrolled in correspondence courses, and the relation of telecommunications courses to correspondence courses.

New Regulations: We have amended the regulations in Sec. 600.2 by removing from the definition of correspondence course the paragraph that describes the conditions under which a telecommunications course is considered a correspondence course and by revising the definition of telecommunications course. The definition of telecommunications course now specifies that a telecommunications course is one that uses one or a combination of technologies to deliver instruction to students who are separated from the instructor and to support regular and substantive interaction between these students and the instructor, either synchronously or asynchronously. We have amended the regulations relating to institutional ineligibility in Sec. 600.7 to delete the references to telecommunications courses from the provisions relating to calculation of the percentage of correspondence courses offered by an institution. We also amended student eligibility regulations in Sec. 668.38 to provide that students who are enrolled in certificate programs offered through telecommunications are no longer considered to be correspondence students. This change applies to institutions regardless of the percentage of degree programs offered by the institution.

We have amended the eligible program regulations in Sec. 668.8 to include programs that are offered in whole or in part through telecommunications by domestic institutions and that are accredited by an accrediting agency recognized by the Secretary for accreditation of distance education. As in the past, the accrediting agency's scope of recognition must include the accreditation of distance education. Interpreting the HEA as amended by the HERA, we have also amended Sec. 668.8 and the regulations related to the eligibility of foreign schools in Sec. 600.51 to specify that programs offered by foreign schools through telecommunications or correspondence are not eligible programs. Recognizing, however, that telecommunications technologies are frequently used in conjunction with classroom instruction, we have included a provision acknowledging that participating foreign schools are free to use telecommunications technologies to supplement and support instruction offered in the foreign classroom.

Reasons: The interim final regulations in Sec. 600.7 will now reflect the statutory changes modifying the current institutional eligibility requirements which provide that institutions offering more than 50 percent of their courses via correspondence, or a combination of correspondence and telecommunications, or enrolling 50 percent or more of their students in correspondence courses are ineligible to participate in Title IV, HEA programs. Under the HERA, courses offered by telecommunications are no longer considered correspondence courses, and students enrolled in telecommunications courses are no longer considered to be correspondence students. As a result, otherwise eligible institutions that offer over 50 percent of their courses by telecommunications, or have 50 percent or more of their regular students enrolled in telecommunications courses, are now eligible to participate in the Title IV, HEA programs. The 50 percent limitations continue to apply to correspondence courses and students.

Because of the different statutory treatment of telecommunications and correspondence, we are changing the definition of
telecommunications course. We believe that it is critical to differentiate between the two delivery modes. A definition of telecommunications course that focused exclusively on technologies could be erroneously interpreted to allow an institution to qualify for full participation in Title IV, HEA programs upon introduction of minor email contact between students and a grader or instructional assistant (who may or may not have subject matter expertise) into what is essentially a correspondence course. Similarly, a course outline or course notes posted to an Internet Web site might also meet the current definition of a telecommunications course. Quality standards for electronicallydelivered education emphasize the importance of interaction between the instructor and student. The amended definition of a telecommunications course acknowledges the importance of interactivity in electronicallydelivered instruction and clearly distinguishes telecommunications from correspondence.

The interim final regulations in Sec. 668.8 also reflect the statutory changes to the requirements for an eligible program to include programs offered in whole or in part through telecommunications by domestic institutions with appropriate accreditation. Because the HEA provides that telecommunications programs offered by foreign schools are not eligible programs, and the HEA provides that foreign schools are schools ``outside the United States,'' and since Congress has not lifted the limitations
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on the eligibility of foreign institutions that offer correspondence study, we believe that Congress did not intend for correspondence programs offered by foreign schools to be eligible programs. The purpose of eligibility for foreign schools, which is to permit students from the United States to experience life and education in foreign countries, is not served through correspondence study.
Direct Assessment Programs (Sec. Sec. 600.2, 600.10, 600.21, 600.51, 668.8, and 668.10)

Statute: Section 8020 of the HERA adds a new type of eligible program to section 481(b) of the HEAan instructional program that uses direct assessment of student learning, or recognizes the direct assessment of student learning by others, in lieu of measuring student learning in credit hours or clock hours. The assessment must be consistent with the institution's or program's accreditation. The HERA also provides that the Secretary will determine initially whether each program for which an institution proposes to use direct assessment is an eligible program.

Current Regulations: There are no current regulations that reflect the use of direct assessment instead of credit hours or clock hours as a measure of student learning.

New Regulations: We have amended the regulations in Sec. 600.2 to include in the definition of educational program the statutory language describing direct assessment programs.

In addition, we have amended the definition to provide that merely giving credit for direct assessments does not constitute instruction. We have also amended Sec. 668.8 to indicate that a direct assessment program approved by the Secretary is considered an eligible program as defined in Sec. 668.8.

These interim final regulations also include a new Sec. 668.10, that provides a definition of the term direct assessment programs and discusses how key Title IV, HEA program requirements apply to direct assessment programs. The section also includes the information that an institution must submit for the Secretary to make an eligibility determination of a direct assessment program.

We have amended the regulations related to the eligibility of foreign schools in Sec. 600.51 to specify that direct assessment programs offered by foreign schools are not eligible programs. In addition, we have amended Sec. Sec. 600.10(c)(2) and 600.21(a)(4) to require that an institution must apply to the Secretary for approval whenever it adds a direct assessment program.

Reasons: In amending the HEA to provide for the Title IV eligibility of programs using direct assessment, Congress specifically used the term ``instructional program'' to clarify what types of programs would be eligible. Thus, the statute requires that the program include ``instruction,'' as well as ``assessment.'' To meet this requirement, programs that measure student learning by direct assessment must provide some means for students to supplement their existing knowledge to pass the assessments. An institution that is merely conducting direct assessments of a student's knowledge and skills, without providing any resources to fill those gaps, is not providing instruction.

In new Sec. 668.10, we have adopted a definition of direct assessment program that reflects common usage by assessment experts and the accreditation community. In developing this definition, we recognized that many of the key requirements of the Title IV, HEA programs rely on both credit and clock hour measurements. By definition, direct assessment programs do not use credit or clock hours as a measure of student learning, but nothing in the HEA, as amended by the HERA, exempts direct assessment programs from the other credit and clock hour requirements. To apply the Title IV requirements to direct assessment programs, it is necessary to determine the equivalent number of credit or clock hours to the amount of student learning being directly assessed.

Because many of the statutory requirements for Title IV, HEA program eligibility are stated in terms of time and/or credit or clock hours, we determined that the timebased requirements can and must be applied to direct assessment programs to ensure that students receive comparable amounts of Title IV, HEA program assistance for comparable work. This approach ensures that while one student in a direct assessment program may acquire the knowledge and skills necessary to pass assessments more quickly than does another student, and, as a result, may progress more quickly through the program, both students would receive the same amount of Title IV, HEA program assistance for the same payment period. However, the student who remained in attendance for more payment periods to complete the program because he or she entered the program with less knowledge or learned at a slower rate, might receive more Title IV, HEA program assistance based on the additional payment periods he or she attended. Likewise, students in direct assessment programs should receive no more Title IV, HEA program assistance in an academic year than would students in credit and clock hour programs that are comparable in terms of student learning. We applied this approach throughout these interim final regulations.

The statute requires an institution to apply to the Secretary to have a direct assessment program determined to be an eligible program. Section 668.10(b) specifies the information an institution must provide in its application. We recognize that there is no single model for direct assessment programs and therefore have provided that institutions must provide detailed information about the approach they are using. In addition, institutions must indicate equivalencies to credit or clock hours in terms of instructional time, and to provide a factual basis for the claim of equivalence. These equivalencies are essential because, as mentioned previously, many applicable Title IV, HEA program requirements use time and/or credit or clock hours.

We also considered that some students would have acquired skills and knowledge prior to their enrollment in the direct assessment program. Title IV, HEA program funds are provided to help cover the student's cost of obtaining an education. Accordingly, Title IV, HEA program funds should be used only for learning that occurs after a student has enrolled in an educational program. Therefore, we have amended the regulations to require institutions to provide information in the application for approval of a direct assessment program about how they assess a student's knowledge upon entering the program.

We recognized that institutions offering direct assessment programs might use courses or learning materials developed by other entities, such as training and professional development organizations and other educational institutions, to assist students in preparing for the assessments. We considered whether the use of outside resources could be considered contracting out a portion of an educational program and determined that it could be. Therefore, we included in the direct assessment regulations a provision that exempts direct assessment programs from the limitations of contracting for part of an educational program.

We considered whether remedial courses using direct assessment of student learning in lieu of credit or clock hours could be supported with Title IV, HEA program funds.

We determined that remedial courses taken in preparation for enrollment in a
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direct assessment program could be paid for with Title IV, HEA program funds only if they were offered in credit or clock hours. Our conclusion is based on the fact that the HERA modified the definition of eligible program to include direct assessment programs, but did not change the fact that remedial coursework is not itself a program or part of a program. We applied similar reasoning to instruction needed for a professional credential or certification from a State that is required for employment as a teacher in an elementary or secondary school.

The HERA specifies that the assessment an institution uses in its direct assessment program must be consistent with the accreditation of the institution or program. Foreign schools are not accredited by nationally recognized accrediting agencies recognized by the Department and accordingly cannot meet this program eligibility requirement. In the future, the Secretary may consider developing eligibility criteria that are comparable to the accreditation requirement to permit direct assessment programs offered by foreign schools to qualify for Title IV, HEA program eligibility.

The discussion of regulatory alternatives considered in the Regulatory Impact Analysis provides additional details on the factors the Secretary considered in developing the direct assessment regulations.

Academic Year (Sec. 668.3)

Statute: Section 8020 of the HERA amended the definition of academic year in section 481(a) of the HEA. The revised definition requires a minimum of 30 weeks of instructional time for a program that measures its program length in credit hours or a minimum of 26 weeks of instructional time for a program that measures its program length in clock hours, rather than a minimum length of 30 weeks of instructional time for both credit hour and clockhour programs.

Current Regulations: The current regulations reflect the previous statutory definition of an academic year requiring a minimum of 30 weeks of instructional time for all programs regardless of the way in which the program was measured.

New Regulations: Section 668.3(a) of the regulations has been amended to reflect the change in the statutory definition of an academic year. In addition, we have modified the definition so that academic year is no longer defined as a period beginning on the first day and ending on the last day of classes.

Reasons: The regulations are modified to reflect the change made by the HERA to the definition of an academic year. Because all programs must define an academic year that conforms to the minimum requirements even if the program itself is shorter than those minimum requirements, we modified the definition so that an academic year is no longer defined as a period of time that begins on the first day of classes and ends on the last day of classes or examinations.
Treatment of Title IV Funds When a Student Withdraws (Sec. Sec. 668.22, 668.35, and 668.173)

Program Applicability

Statute: Section 8022 of the HERA amended section 484B(a)(3)(C)(i) of the HEA to change the applicability of section 484B of the HEA (commonly referred to as the Return of Title IV Funds requirements). Under prior law, the Return of Title IV Funds rules applied to all Title IV, HEA grant and loan assistance other than Federal Work Study (FWS) funds. Under the HERA, the rules will now apply only to funds from the Pell Grant, Federal Supplemental Educational Opportunity Grant (FSEOG), FFEL, Direct Loan, and Perkins Loan programs, and to the new Academic Competitiveness Grant (ACG) and National Science and Mathematics Access to Retain Talent (SMART) Grant programs.

Current Regulations: Section 668.22(a)(1) provides that the Return of Title IV Funds requirements apply to all Title IV, HEA grant and loan assistance disbursed or that could have been disbursed to a withdrawn student, not including FWS or the nonFederal share of FSEOG awards if an institution meets its FSEOG matching share by the individual recipient method or the aggregate method.

New Regulations: We have revised Sec. 668.22(a)(2) to reflect the more limited applicability of the Return of Title IV Funds rules as provided in the HERA. Under the revised regulations, an institution must perform a Return of Title IV Funds calculation when a student who withdraws was disbursed, or could have been disbursed, funds from the following programs: Pell Grant, FSEOG, FFEL, Direct Loan, Perkins Loan, ACG, or SMART Grant. The Return of Title IV Funds requirements do not apply to funds from the Gaining Early Awareness and Readiness for Undergraduate Program (GEAR UP), Student Support Services (SSS) or Leveraging Educational Assistance Partnerships (LEAP) Programs. In addition, the interim final regulations retain the exemption from the Return of Title IV Funds rules for the nonFederal share of FSEOG awards if an institution meets its FSEOG matching share by the individual recipient method or the aggregate method.

Reasons: These changes are made to implement the provisions of the HERA. The current regulatory exemption from the Return of Title IV Funds requirements of the nonFederal share of FSEOG awards is retained as these funds are not considered Federal funds and, therefore, are not subject to the Federal Return of Title IV Funds requirements. PostWithdrawal Disbursement Counseling

Statute: Section 8022 of the HERA amended section 484B(a)(4) of the HEA to require an institution to contact a borrower before making a late disbursement or postwithdrawal disbursement of Title IV loan funds. During this contact, the institution must confirm with the borrower that the loan funds are still required by the student, or parent in the case of a parent PLUS loan, and explain to the borrower his or her obligation to repay the funds if disbursed. An institution must document in the student's file the result of the contact and the final determination made concerning the disbursement.

Current Regulations: Current Sec. 668.22(a)(4)(i)(B) requires an institution to provide a student, or parent in the case of a parent PLUS loan, an opportunity to cancel some or all of a loan disbursement credited to the student's account by providing notice to the student or parent when the institution credits the account with Direct Loan, FFEL, or Federal Perkins Loan program funds. In addition, Sec.
668.22(a)(4)(ii) provides that an institution must offer any amount of a postwithdrawal disbursement (loan and grant) that is not credited to the student's account to the student, or parent in the case of a parent PLUS loan, as a direct disbursement.

Current regulations do not require institutions to explain to students, or parents for a parent PLUS loan, the obligation to repay disbursed loan funds, nor do they specify the documentation an institution must keep.

New Regulations: The existing regulations, as redesignated in Sec. 668.22(a)(5), have been modified as a result of the changes made by the HERA.

While current regulations already require an institution to obtain confirmation from a student, or parent
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for a parent PLUS loan, before making a direct disbursement of loan or grant funds from a postwithdrawal disbursement, the regulations have been revised to make clear that an institution must now obtain this confirmation before crediting a student's account with loan funds. As in the past, an institution may credit a student's account with any postwithdrawal disbursement of grant funds without confirmation from the student.

Thus, the interim final regulations require an institution to include in the written notification it must provide to a student, or parent for a parent PLUS loan, notice of any postwithdrawal disbursement of loan funds that it wishes to credit to the student's account. As currently required for direct disbursements of a post withdrawal disbursement, the notice must identify the type and amount of the loan funds the institution wishes to credit to the student's account, and explain that a student, or parent for a parent PLUS loan, may accept or decline all or a portion of the funds. The notice must also make clear that a student, or parent for a parent PLUS loan, may not receive as a direct disbursement loan funds that the institution wishes to credit to the student's account unless the institution agrees to do so. If the student, or parent for a parent PLUS loan, does not wish to accept some or all of the loan funds that the institution wishes to credit to the student's account, the institution must not disburse those funds. As required by the HERA, institutions are now required to explain to the student, or parent for a parent PLUS loan, the obligation to repay any loan funds accepted as a postwithdrawal disbursement.

The 14day deadline (from the date the institution sent the notification) for a student, or parent for a parent PLUS loan, to accept some or all of a direct disbursement of a postwithdrawal disbursement, now applies to confirmation of loan disbursements that an institution wishes to credit to a student's account. The interim final regulations permit an institution to establish a later deadline, provided the later deadline applies to both confirmation of loan disbursements to the student's account and to direct disbursements of a postwithdrawal disbursement. In accordance with current regulations, the institution's notice to the student, or parent for a parent PLUS loan, must advise the student or parent of this deadline, making clear that a late response to the notice is honored only at the institution's discretion. Under the interim final regulations, an institution that chooses to honor a late response must disburse all the funds accepted by the student, or parent for a parent PLUS loan; for example, it cannot credit loan funds to the student's account in accordance with the student's request, but decline to disburse directly postwithdrawal funds accepted by the student. As currently required when an institution declines to honor a late response for direct disbursements of a postwithdrawal disbursement, the interim final regulations require an institution that declines to honor a late response accepting loan funds to be credited to the student's account to inform the student, or parent for a parent PLUS loan, in writing that it will not be honoring the late response.

As with current regulatory requirements for making a direct disbursement of a postwithdrawal disbursement, an institution must make a disbursement by crediting a student's account with a post withdrawal disbursement of loan funds within 120 days of the date of the institution's determination that the student withdrew, as that term is defined in Sec. 668.22(l)(3).

Finally, new paragraph Sec. 668.22(a)(5)(iv) has been added to codify the HERA requirement that an institution document in the student's file the result of the contact and the final determination made concerning a postwithdrawal disbursement of loan funds.

Reasons: These changes are made to implement the provisions of the HERA. We have modified the current regulations that require confirmation of any postwithdrawal disbursements made as a direct disbursement to reflect the new statutory requirements.

A new regulatory provision requires the institution to make clear in the written notice that a student, or parent for a parent PLUS loan, may not receive as a direct disbursement loan funds that the institution wishes to credit to the student's account, unless the institution concurs. This reflects current requirements that permit an institution to credit Title IV funds to a student's account before disbursing any remaining amount to the student, or parent for a parent PLUS loan.

The Secretary has made other changes to the regulations with the goal of easing implementation of the new requirements. The Secretary believes it should not be the institution's decision to determine that it is acceptable for a student to incur debt and/or use up Title IV, HEA program eligibility to cover a debt to the institution, but not to cover noninstitutional educational expenses. That decision must be left to the student, or parent for a parent PLUS loan. Thus, institutions are required to use the same deadline for responses for both types of confirmations and, if the institution acts on a late response, it must honor all the confirmations in the response.

In addition, the Secretary now permits an institution to establish a deadline for confirmation responses beyond the 14day minimum in current regulations to ease institutional administrative burden. Some institutions may desire to give all students and parents more time to respond now that confirmation of disbursement is needed for crediting the student's account with loan funds. Also, a later deadline may be beneficial as a late confirmation response can now result in a student owing a debt to the institution for unpaid charges on his or her account.

Withdrawals From Clock Hour Programs

Statute: The HERA changed section 484B(d)(2) of the HEA, to provide that only scheduled hours, not completed hours, will be used to determine the percentage of the payment period or period of enrollment completed by a student withdrawing from a clock hour program. Prior to this change, the law provided that scheduled hours, rather than completed hours, were used only if the hours completed by the student were equal to a percentage, determined by the Secretary in regulations, of the hours scheduled to be completed when the student withdrew.

The HERA made a conforming change to section 484B(a)(3)(B)(ii) to make clear that a student withdrawing from a clock hour program earns 100 percent of his or her aid if the student's withdrawal date occurs after the point when he or she was scheduled to complete 60 percent of the scheduled hours in the payment period or period of enrollment.

Current Regulations: The current regulations in Sec. 668.22(f)(1)(ii) use actual hours to determine the percentage of the period completed by a student withdrawing from a clock hour program, unless the student's actual hours of attendance were at least 70 percent of the hours the student was scheduled to have completed at the time they withdrew. If so, scheduled hours are used.

Section 668.22(e)(2)(ii)(B) of the current regulations provides that a student earns 100 percent of his or her aid only if he or she actually completed 60 percent or more of the hours in the payment period or period of enrollment scheduled to be completed when he or she withdrew.

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New Regulations: Section 668.22(f)(1)(ii) has been amended to reflect the statutory change to section 484B(d)(2) requiring the use of scheduled clock hours in all calculations of earned Title IV, HEA program funds for students who withdraw from clockhour programs. That is, for a student withdrawing from a clockhour program, the ``percentage of the payment period or period of enrollment completed'' is determined by dividing the total number of clock hours comprising the period into the number of clock hours scheduled to be completed as of the student's withdrawal date. In addition, the regulations have been amended to require that the scheduled clock hours used for a student must be those established by the institution prior to the student's beginning class date for the payment period or period of enrollment, and must have been established in accordance with any requirements of the State or the institution's accrediting agency. These hours must be consistent with the published materials describing the institution's programs. However, if an institution modified the scheduled hours in a student's program prior to his or her withdrawal, and in accordance with any State or accrediting agency requirements, the new scheduled hours must be used.

New Sec. 668.22(e)(2)(ii)(B) implements the statutory change in section 484B(a)(3)(B)(ii) by clarifying that a student withdrawing from a clockhour program earns 100 percent of his or her aid if the student's withdrawal date is after the point when he or she was scheduled to complete 60 percent of the scheduled hours in the payment period or period of enrollment.

Reasons: These changes are made to implement the provisions of the HERA. To limit the possibility of abuse of this rule, the regulations provide that the scheduled hours used must be those that are part of a schedule that was established prior to a student's withdrawal, and must meet any applicable State or accrediting agency standards.

Grant Overpayment Requirements

Statute: Section 8022 of the HERA amended section 484B(b)(2)(C) of the HEA to change the amount of a grant overpayment that must be repaid by a student who withdraws from school. The amount of a grant overpayment due from a student is limited to the amount by which the original overpayment amount exceeds 50 percent of the total grant funds received by the student for the payment period or period of enrollment. In addition, the HERA amended the HEA to specify that a student does not have to repay a grant overpayment of $50 or less for grant overpayments resulting from the student's withdrawal.

Current Regulations: The current regulations in Sec. 668.22(h)(3)(ii) provide that a student is not required to repay 50 percent of the withdrawn student's original grant overpayment amount.

Under Sec. 668.35(e)(3), an otherwise eligible student maintains eligibility and does not have to repay a Perkins Loan, FSEOG, or Pell Grant overpayment of less than $25resulting from withdrawal or otherwise provided that the overpayment amount is not a remaining balance nor a result of applying the overaward threshold for the campusbased programs.

New Regulations: Revised Sec. 668.22(h)(3) reflects the new statutory limitation on the amount of a grant overpayment that a student is required to return. To illustrate the effect of the new law, we provide the following example: A student who received $2,000 in Title IV, HEA grant funds for a payment period withdraws from school. The institution uses the Return of Title IV Funds calculation and determines that the student has an original grant overpayment of $1,200. Under current regulations, the student would owe $600 (50 percent of the original overpayment amount of $1,200). Under the interim final regulations, the student owes $200 (the amount by which the original overpayment amount ($1,200) exceeds half of the total grant funds received, ($1,000) or $1,200$1,000. In this same scenario, if the student's grant overpayment was originally $800, under current regulations the student owes $400 (50 percent of $800). Under the interim final regulations, the student owes nothing because the overpayment amount ($800) is less than half of the total grant funds received ($1,000).

Section 668.22(h)(3) also reflects the statutory provision that a student is not obligated to return a grant overpayment of $50 or less. As a result, a grant overpayment of $50 or less will not make the student ineligible to receive Title IV, HEA program assistance should the student return to school. An institution is not required to attempt recovery of that overpayment, report it to the Department's National Student Loan Data System (NSLDS), or refer it to the Secretary. Consistent with Sec. 668.35(e)(3), this new standard does not apply to remaining grant overpayment balances; that is, a student must repay a grant overpayment that has been reduced to $50 or less because of payments made.

A conforming change is also being made to Sec. 668.35(e) to make it clear that the overpayment threshold and eligibility requirements of Sec. 668.35(e) do not apply to an overpayment resulting from the application of the Return of Title IV Funds requirements. The less than$25 threshold and eligibility requirements specified in Sec. 668.35(e)(3) continue to apply to all other overpayments.

Reasons: These changes are made to implement the provisions of the HERA.
Waiver of Grant Overpayment for Students Affected by a Disaster

Statute: The Pell Grant Hurricane and Disaster Relief Act (Pub. L. 10966) and the Student Grant Hurricane and Disaster Relief Act (Pub. L. 10967) amended section 484B(b)(2) of the HEA to permit the Secretary to waive a student's Title IV grant repayment if the student withdrew from an institution because of a major disaster.

Current Regulations: Current regulations do not address this issue.

New Regulations: New Sec. 668.22(h)(5) incorporates the statutory changes. The interim final regulations provide that the Secretary may waive grant overpayment amounts for individuals whose withdrawal ended within the award year during which the designation of a major disaster area occurred, or the subsequent award year. On November 9, 2005, the Secretary exercised this waiver authority through publication of Dear Colleague Letter GEN0517. It is important to note that this waiver authority applies to a grant overpayment due from a student and not to the required return of unearned funds to a grant program by an institution.

Reasons: These changes are made to implement the provisions of the Pell Grant Hurricane and Disaster Relief Act and the Student Grant Hurricane and Disaster Relief Act. The interim final regulations apply the waivers on an award year basis to reflect the fact that Pell and FSEOG Grants are awarded on an award year basis.

Order of Return of Grant Funds

Statute: Section 484B(b)(3)(B) of the HEA requires that unearned Title IV, HEA grant funds be returned to awards under subpart 1 of part A of the HEA (for the Pell Grant Program) before they are returned to awards under subpart 3 of part A of the HEA (for the FSEOG Program). Under prior law, the Pell Grant program was the only program in subpart 1 of part A of the HEA. The HERA has added the ACG and the
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National SMART Grant programs to subpart 1 of part A of the HEA. As a result, unearned funds must be returned to the Pell Grant, ACG and National SMART Grant programs before they are returned to the FSEOG program. The statute does not require that unearned funds be returned to one subpart 1 program before another.

Also, as noted previously, the HERA limited the application of the Return of Title IV funds requirements to funds from the Pell Grant, FSEOG, FFEL, Direct Loan, and Perkins Loan programs, as well as the new ACG and National SMART Grant programs.

Current Regulations: Section 668.22(i)(2) currently requires an institution or student to return unearned funds to the grant programs in the following order: (1) The Federal Pell Grant Program; (2) the FSEOG Program; (3) other Title IV, HEA grant or loan assistance programs.

New Regulations: New Sec. 668.22(i)(2) reflects the addition of the new ACG and National SMART Grant programs and requires that unearned funds be returned to those programs before unearned funds are returned to the FSEOG program. The interim final regulations also specify an order of return for the three grant programs in subpart 1 of part A of the HEA, requiring an institution or student to return unearned funds to the subpart 1 grant programs in the following order: (1) The Pell Grant Program; (2) the ACG Program, and (3) the National SMART Grant Program. The interim final regulations no longer require an institution to return funds to ``other Title IV, HEA grant or loan assistance programs.''

Reasons: These changes are made to implement the provisions of the HERA. The interim final regulations specify that an institution or student return unearned funds to the Pell Grant Program before they are returned to the ACG or National SMART Grant programs because this approach is the most beneficial for students. Returning funds to the Pell Grant Program ensures that the student's eligibility for a Pell Grant is maintained, which is beneficial should the student return to school within the same award year and again seek an ACG or National SMART Grant.

Return of Funds Within 45 Days

Statute: Section 8022 of the HERA amended section 484B(b)(1) of the HEA to add the requirement that an institution return unearned funds for which it is responsible no later than 45 days from the determination of a student's withdrawal.

Current Regulations: Section 668.22(j) of the current regulations requires an institution to return the unearned funds for which it is responsible as soon as possible, but no later than 30 days after the date of the institution's determination that the student withdrew.

Section 668.173(b) establishes the specific criteria an institution must meet to be in compliance with the 30day deadline in Sec. 668.22(j).

New Regulations: The interim final regulations in Sec. 668.22(j) incorporate the HERA provision by changing the maximum amount of time an institution has to return the unearned funds for which it is responsible from 30 days to 45 days. The interim final regulations continue to specify that an institution must return those funds as soon as possible.

We are also making conforming changes to Sec. 668.173(b) to extend the deadlines specified in that regulation by 15 days. An institution will be considered to have returned funds timely if the institution does one of the following no later than 45 days (rather than the current 30 days) after the date it determines that the student withdrew: (1) Deposits or transfers the funds into the bank account it is required to maintain; (2) initiates an electronic funds transfer (EFT); (3) initiates an electronic transaction that informs the FFEL lender to adjust the borrower's loan account for the amount returned; or (4) issues a check. The institution is considered to have issued a check timely if the institution's records show that the check was issued no more than 45 days after the date the institution determined that the student withdrew, or the date on the cancelled check shows that the bank endorsed that check no more than 60 days (instead of the current 45 days) after the date the institution determined that the student withdrew.

Reasons: These changes are made to implement the provisions of the HERA. The interim final regulations retain the requirement that an institution return funds for which it is responsible as soon as possible. The return of funds by an institution may result in a decrease in the amount of a Title IV loan that the student must repay and reduces that interest that accrues on the loan. In addition, the sooner funds are returned, the sooner an otherwise eligible student may regain eligibility for those funds should the student return to school within the same academic period.
Student EligibilityGeneral and Student Debts Under the HEA and to the U.S. (Sec. Sec. 668.32, 668.35, 674.39, 682.405, and 685.211)

Statute: Section 8021(a) of the HERA amended section 484(a) of the HEA by adding a new student eligibility requirement. The new requirement provides that students who have been convicted of, or have pled nolo contendere or guilty to a crime involving fraud in obtaining Title IV, HEA program assistance are not eligible for additional Title IV assistance unless they have repaid the fraudulently obtained Title IV, HEA program assistance funds to the Secretary or to the holder of a loan made under the Title IV, HEA programs.

Current Regulations: Current regulations do not address the Title IV eligibility of students who have obtained Title IV, HEA Program assistance through fraud.

New Regulations: Sections 668.32 and 668.35 have been amended by adding new paragraphs (m) and (i), respectively, to provide that a student who has been convicted of or has pled nolo contendere or guilty to a crime involving fraud in obtaining Title IV, HEA program assistance is ineligible for additional assistance unless he or she has repaid the fraudulently obtained Title IV, HEA program assistance funds to the Secretary or to the holder of a loan made under the Title IV, HEA programs. In addition, Sec. 682.401(b)(4) has been amended to crossreference the new Sec. 668.35(i).

Sections 674.39(a), 682.405(a)(1), and 685.211(f) have been amended to specify that a Perkins, FFEL, or Direct Loan Program loan that was fraudulently obtained, and for which the borrower has been convicted of, or has pled nolo contendere or guilty to, a crime involving fraudulently obtained Title IV, HEA program assistance, is not eligible for rehabilitation.

Reasons: These regulations have been amended to reflect the changes made by the HERA.
Conviction for Possession or Sale of Illegal Drugs (Sec. 668.40)

Statute: Section 8021(c) of the HERA amended section 484(r) of the HEA to modify the requirements regarding the suspension of eligibility for students convicted of drugrelated offenses. As amended, the HEA now provides that a student becomes ineligible for Title IV, HEA program assistance only if the conviction for a Federal or State offense involving the possession or sale of a controlled substance is for conduct that occurred during a period of enrollment
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for which the student was receiving Title IV, HEA program assistance. The period of ineligibility and provisions for regaining eligibility were not changed by the HERA.

Current Regulations: The current regulations reflect the previous statutory requirements that provided that a student became ineligible to receive Title IV, HEA program assistance if the student was convicted of an offense involving the possession or sale of illegal drugs without regard to when the offense occurred.

New Regulations: Section 668.40(a)(1) has been revised to reflect the statutory change to section 484(r) of the HEA that limits the loss of student eligibility to students convicted of drugrelated offenses to offenses that occurred during a period of enrollment for which the student was receiving Title IV, HEA program assistance.

The revised student eligibility criterion applies to the 20062007 award year for the Pell Grant, ACG, National SMART Grant, and campus based programs and for periods of enrollment beginning on or after July 1, 2006 for the FFEL and Direct Loan Programs.

The period of ineligibility remains unchanged and is triggered by the date of the conviction. The provisions for regaining eligibility also remain unchanged.

Reasons: These regulations have been changed to reflect the changes to the HEA made by the HERA.
Estimated Financial Assistance (Sec. Sec. 673.5, 673.6, 674.16, 675.26, 682.200 and 685.102)

Statute: Section 8019 of the HERA added two new grant programs by creating a new HEA section 401A and modified the definition of Other Financial Assistance in HEA section 480(j). The two new grant programs are considered other financial assistance under section 480(j) of the HEA. In changing the definition of Other Financial Assistance, the HERA added a new section to the definition that states, ``Notwithstanding paragraph (1) and section 472, assistance not received under this title may be excluded from both estimated financial assistance and cost of attendance, if that assistance is provided by a State and is designated by such State to offset a specific component of the cost of attendance. If that assistance is excluded from either estimated financial assistance or cost of attendance, it shall be excluded from both.''

The Ronald W. Reagan National Defense Authorization Act for Fiscal Year 2005 (Pub. L. 108375) amended Title 10 of the United States Code to add a new veterans' education benefit in chapter 1607. Veterans' education benefits are considered other financial assistance under section 480(j) of the HEA. These chapter 1607 benefits, which are known as the Reserve Educational Assistance Program, benefit military reservists called to active duty after September 11, 2001 and are designated to pay for postsecondary education expenses.

Current Regulations: The current regulations do not include the two new grant programs, the change in the definition of Other Financial Assistance, or the added veterans' educational benefit in the regulatory definitions of resources and estimated financial assistance.

New Regulations: We have amended Sec. Sec. 673.5, 682.200 and 685.102 to reflect the creation of the two new grant programs and the new veterans' education benefit, as well as the modification of the statutory definition of Other Financial Assistance. In addition, we have made technical changes to clarify the existing regulatory language, to standardize the definitions of resources and estimated financial assistance used in Sec. Sec. 673.5(c), 673.6(a), 674.16(c), 675.26(a), 682.200(b) and 685.102(b), to adopt a single regulatory term to describe other financial assistance, and to make conforming changes.

Historically, the campusbased General Provisions have used the term resources rather than estimated financial assistance in reference to the same components. However, the statute repeatedly uses the term estimated financial assistance, and we believe it is necessary to use this term in the interim final regulations. Accordingly, the interim final regulations in Sec. Sec. 673.6(a)(1), 674.16(c), 675.26(a)(4) and 676.16(b) have been amended to change the defined term resources to the defined term estimated financial assistance.

We have also made some technical changes to the regulations. We have modified the regulations to provide for the consistent use of names for the different loan types for each of the loan programs. We also clarified that the loans that can be used to replace the expected family contribution (EFC) include nonfederal, nonneedbased loans that come from private, state, or institutional sources. We have revised the definition of estimated financial assistance in Sec. Sec. 682.200 and 685.102 of the FFEL and Direct Loan programs, respectively, to reflect our longstanding policy that estimated financial assistance includes ``Any educational benefits paid because of enrollment in a postsecondary education institution, or to cover postsecondary education expenses'' and by adding the same language to Sec. 673.5(c) for the campusbased programs.

We added nonneedbased employment as an exclusion to the definition of estimated financial assistance in Sec. Sec. 682.200 and 685.102 of the FFEL and Direct Loan program regulations, respectively.

In Sec. 673.5 of the campusbased General Provisions, we made a technical correction to clarify that fellowships and assistantships must be counted as estimated financial assistance, except those portions that are nonneedbased employment. The current regulation states that nonneedbased employment is not considered estimated financial assistance, but fellowships and assistantships may include portions that are nonneedbased employment, but are not labeled separately as such. We made a technical change to Sec. 673.5 to clarify the rules for the consideration of these fellowships and assistantships.

We added to the definition of estimated financial assistance in Sec. Sec. 682.200(b) and 685.102(b) two items that are in the same definition under Sec. 673.5(c). Those two items are insurance programs for the student's education and fellowships and assistantships, except nonneedbased employment portions of such awards. This inclusion ensures the three sections have similar language.

Another technical change made for consistency was made in Sec. Sec. 682.200(b) and 685.102(b) in which the word ``AmeriCorps'' was added parenthetically following each instance of national service education awards or postservice benefits paid under title I of the National and Community Service Act of 1990 because that is the term used in Sec. 673.5(c).

Reasons: The regulations need to be changed to reflect the new grant programs and the new veterans' educational benefits under 10 U.S.C. Chapter 1607. As a technical change, we have parenthetically inserted the names of each of the chapters of eligible veterans' education benefits listed to make it easier for the public to identify these benefits. We also deleted the entries for programs that are obsolete and updated the names of programs that have been changed. We have also made technical changes to clarify the existing language and standardize the definitions among the regulatory sections referencing the definition of estimated financial assistance.
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Military Deferment (Sec. Sec. 674.34, 682.210, and 685.204)

Statute: Section 8007 of the HERA amended sections 428, 455, 464 and 481 of the HEA to create a new deferment for borrowers who are serving on active duty in the U.S. Armed Forces, or who are performing qualifying National Guard duty, during a war or other military operation or national emergency. The deferment is effective July 1, 2006, for loans for which the first disbursement is made on or after July 1, 2001.

Current Regulations: The current deferment regulations do not reflect this new deferment for military service. This new deferment is different from the military service deferment available to Perkins Loan, FFEL and Direct Loan Program borrowers who took out loans prior to July 1, 1993.

New Regulations: Section 674.34 of the Perkins regulations, Sec. 682.210 of the FFEL regulations, and Sec. 685.204 of the Direct Loan regulations have been amended to reflect the new military service deferment created by the HERA. The interim final regulations specify the types of active duty service and National Guard service that qualifies a borrower for the deferment, and define active duty, military operation, and national emergency for purposes of a military deferment. The types of qualifying service and the definitions are provided in the HERA.

A borrower may qualify for the military deferment if the first disbursement of the borrower's Perkins, FFEL, or Direct Loan was made on or after July 1, 2001. If the borrower has some loans disbursed before July 1, 2001 and some loans disbursed on or after July 1, 2001, the borrower may receive a military deferment for the loans disbursed on or after July 1, 2001, but may not receive a military deferment on the loans disbursed before July 1, 2001. The period of eligible military service must have occurred after the borrower received the loan. A borrower consolidating loans first disbursed on or after July 1, 2001, is eligible for the new deferment on the entire Consolidation Loan only if all of the borrower's Title IV loans included in the Consolidation Loan were first disbursed on or after July 1, 2001. The HERA does not authorize a loan holder to refund payments made during a period covered by a retroactive deferment.

Reasons: The regulations are amended to reflect changes made by the HERA.
FFEL and Direct Loan Program Changes
Graduate and Professional Student Eligibility for PLUS Loans (Sec. Sec. 668.2, 682.102, 682.201, 685.102, 685.200, and 685.201)

Statute: Section 8005 of the HERA amended section 428B of the HEA, to provide that graduate and professional students are eligible for PLUS Loans. In addition, section 8014 of the HERA added a new eligibility requirement for PLUS Loan borrowers. Under this requirement, a PLUS Loan borrower who has been convicted of, or pled nolo contendere or guilty to, a crime involving fraud in obtaining Title IV, HEA program funds must complete repayment of the fraudulently obtained funds to be eligible to receive a PLUS loan.

Current Regulations: Under the current regulations, only parents of eligible students are eligible for PLUS Loans.

New Regulations: The terms Federal Direct PLUS Program and Federal PLUS Program are defined in Sec. Sec. 668.2 and 685.102 to include graduate and professional students as eligible borrowers. Section 682.102 of the FFEL Program regulations and Sec. 685.201 of the Direct Loan Program regulations have been amended to describe the application process for graduate or professional students to obtain a PLUS loan. Sections 682.201 of the FFEL Program regulations and 685.200 of the Direct Loan Program regulations have been amended to specify that a graduate or professional student PLUS borrower must meet the same eligibility criteria as a student Stafford borrower. This includes the new requirement in Sec. 668.32 that a student convicted of fraud in obtaining Title IV, HEA program funds, or who has pled nolo contendere or guilty to such a crime, must complete repayment of the fraudulently obtained funds. In addition, the student PLUS borrower must have received a determination of his or her annual loan maximum eligibility under the Subsidized and Unsubsidized Stafford Loan program. A student PLUS borrower, like a parent PLUS borrower, must not have an adverse credit history to be eligible for a PLUS Loan.

We have also amended Sec. 682.201(c) to reflect that a parent borrower convicted of fraud in obtaining Title IV, HEA program funds, or who has pled nolo contendere or guilty to such a crime, must complete repayment of the fraudulently obtained funds in order to be eligible for a PLUS loan.

Reasons: The regulations are amended to reflect changes made by the HERA.
Joint Consolidation Loans (Sec. Sec. 682.102, 682.201, and 685.220)

Statute: Section 8009 of the HERA amended section 428C(a)(3)(C) of the HEA by eliminating the ability of a married couple to jointly consolidate their eligible student loans.

Current Regulations: Current regulations permit a married couple to consolidate their eligible student loans into a joint FFEL or Direct Consolidation Loan.

New Regulations: Sections 682.102(d), 682.201(c)(2), 682.201(e), and 685.220(d)(2) have been modified to eliminate the possibility of joint consolidation of loans by a married couple for applications received on or after July 1, 2006.

Reasons: These regulations are amended to reflect changes made by the HERA.

Interest Rates (Sec. Sec. 682.202 and 685.202)

Statute: Public Law 107139 amended section 427A of the HEA to establish fixed interest rates for FFEL and Direct Stafford and PLUS loans first disbursed on or after July 1, 2006, at 6.8 percent for Stafford loans and 7.9 percent for PLUS loans. The HERA did not change these interest rates for Stafford loans or Direct PLUS loans but did increase the interest rate for PLUS loans made under the FFEL Program to 8.5 percent. For FFEL and Direct Consolidation loans, the interest rate remains a fixed rate, calculated at the time the consolidation loan is made, as the weighted average of interest rates on the loans consolidated, rounded up to the nearest higher \1/8\th of 1 percent, not to exceed 8.5 percent.

Current regulations: Current regulations do not reflect the changed interest rates on Stafford and PLUS loans made under the FFEL and Direct Loan programs. Interest rates on FFEL and Direct Consolidation loans are correctly reflected in the current regulations.

New regulations: Sections 682.202 and 685.202 of the FFEL and Direct Loan program regulations, respectively, have been amended to reflect a fixed interest rate of 6.8 percent for Stafford Loans first disbursed on or after July 1, 2006. The regulations have also been amended to reflect a fixed interest rate of 8.5 and 7.9 percent, respectively, for FFEL and Direct PLUS loans first disbursed on or after July 1, 2006.

Reasons: The regulations are amended to reflect changes made by Public Law 107139 and the HERA.

Origination Fees (Sec. Sec. 682.202 and 685.202)

Statute: Section 8008(c) of the HERA amended section 438(c)(2) of the HEA to
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reduce and eventually eliminate the 3 percent origination fee that is paid by FFEL Program lenders and that the lenders may charge to FFEL Stafford Loan borrowers. Section 8008(c) of the HERA also amended section 455(b)(8)(A) of the HEA to reduce the 4 percent origination fee that may be charged to Stafford Loan borrowers in the Direct Loan Program. The 4 percent Direct Stafford Loan origination fee is equivalent to the combined 3 percent FFEL Stafford Loan origination fee plus the 1 percent insurance premium (now the Federal default fee) that is authorized in the FFEL Program. Origination fees currently charged to FFEL and Direct PLUS loan borrowers are not changed by the HERA. FFEL and Direct Consolidation Loan borrowers are also not charged origination fees.

Current Regulations: The current regulations authorize lenders in the FFEL Program to charge borrowers an origination fee of up to 3 percent of the amount of a Stafford Loan and the Secretary to charge a fee of up to 4 percent of the amount of a Direct Stafford Loan. Lenders in the FFEL Program are required to pay the full amount of the origination fee to the Secretary whether or not they charge the fee to the borrower.

New regulations: The FFEL Program regulations have been amended in Sec. 682.202(c) to reduce origination fees as follows: Beginning with loans for which the first disbursement of principal is made on or after July 1, 2006, and before July 1, 2007, the maximum origination fee that a lender may charge a borrower will be 2 percent. The maximum origination fee that may be charged to an FFEL Stafford loan borrower drops to 1.5 percent on July 1, 2007, 1.0 percent on July 1, 2008, and 0.5 percent on July 1, 2009. The lender must pay the specified maximum fee for each period to the Secretary whether or not it is charged to the borrower. The fee will be eliminated as of July 1, 2010.

Section 685.202(c) of the Direct Loan Program regulations has been amended to reduce origination fees as follows: Beginning with loans for which the first disbursement of principal is made on or after February 8, 2006, and before July 1, 2007, the maximum origination fee that may be charged to Direct Stafford Loan borrowers is 3 percent. The maximum origination fee that may be charged drops to 2.

FOR FURTHER INFORMATION CONTACT

Ms. Gail McLarnon, U.S. Department of Education, 1990 K Street, NW., 8th Floor, Washington, DC 20006. Telephone: (202) 2197048 or via the Internet at: Gail.McLarnon@ed.gov.

If you use a telecommunications device for the deaf (TDD), you may call the Federal Relay Service (FRS) at 18008778339.

Individuals with disabilities may obtain this document in an alternative format (e.g., Braille, large print, audiotape, or computer diskette) on request to the contact person listed under FOR FURTHER INFORMATION CONTACT.