[Code of Federal Regulations]
[Title 34, Volume 3]
[Revised as of July 1, 2003]
From the U.S. Government Printing Office via GPO Access
[CITE: 34CFR685.211]

[Page 852-853]
 
                           TITLE 34--EDUCATION
 
                         DEPARTMENT OF EDUCATION
 
PART 685--WILLIAM D. FORD FEDERAL DIRECT LOAN PROGRAM--Table of Contents
 
                     Subpart B--Borrower Provisions
 
Sec. 685.211  Miscellaneous repayment provisions.

    (a) Payment application and prepayment. (1) The Secretary applies 
any payment first to any accrued charges and collection costs, then to 
any outstanding interest, and then to outstanding principal.
    (2) A borrower may prepay all or part of a loan at any time without 
penalty. If a borrower pays any amount in excess of the amount due, the 
excess amount is a prepayment.
    (3) If a prepayment equals or exceeds the monthly repayment amount 
under the borrower's repayment plan, the Secretary--
    (i) Applies the prepaid amount according to paragraph (a)(1) of this 
section;
    (ii) Advances the due date of the next payment unless the borrower 
requests otherwise; and
    (iii) Notifies the borrower of any revised due date for the next 
payment.
    (4) If a prepayment is less than the monthly repayment amount, the 
Secretary applies the prepayment according to paragraph (a)(1) of this 
section.
    (b) Repayment incentives. To encourage on-time repayment, the 
Secretary may reduce the interest rate for a borrower who repays a loan 
under a system or on a schedule that meets requirements specified by the 
Secretary.
    (c) Refunds and returns of title IV, HEA program funds from schools. 
The Secretary applies any refund or return of title IV, HEA program 
funds that the Secretary receives from a school under Sec. 668.22 
against the borrower's outstanding principal and notifies the borrower 
of the refund or return.
    (d) Default. (1) Acceleration. If a borrower defaults on a Direct 
Loan, the entire unpaid balance and accrued interest are immediately due 
and payable.
    (2) Collection charges. If a borrower defaults on a Direct Loan, the 
Secretary assesses collection charges in accordance with 
Sec. 685.202(e).
    (3) Collection of a defaulted loan. (i) The Secretary may take any 
action authorized by law to collect a defaulted Direct Loan including, 
but not limited to, filing a lawsuit against the borrower, reporting the 
default to national credit bureaus, requesting the Internal Revenue 
Service to offset the borrower's Federal income tax refund, and 
garnishing the borrower's wages.
    (ii) If a borrower defaults on a Direct Subsidized Loan, a Direct 
Unsubsidized Loan, a Direct Unsubsidized Consolidation Loan or a Direct 
Subsidized Consolidation Loan, the Secretary may designate the income 
contingent repayment plan for the borrower.
    (e) Ineligible borrowers. (1) The Secretary determines that a 
borrower is ineligible if, at the time the loan was made and without the 
school's or the Secretary's knowledge, the borrower (or the student on 
whose behalf a parent borrowed) provided false or erroneous information 
or took actions that caused the borrower or student--
    (i) To receive a loan for which the borrower is wholly or partially 
ineligible;
    (ii) To receive interest benefits for which the borrower was 
ineligible; or
    (iii) To receive loan proceeds for a period of enrollment for which 
the borrower was not eligible.
    (2) If the Secretary makes the determination described in paragraph 
(e)(1) of this section, the Secretary sends an ineligible borrower a 
demand letter that requires the borrower to repay some or all of a loan, 
as appropriate. The demand letter requires that within 30 days from the 
date the letter is mailed, the borrower repay any principal amount for 
which the borrower is ineligible and any accrued interest, including 
interest subsidized by the Secretary, through the previous quarter.

[[Page 853]]

    (3) If a borrower fails to comply with the demand letter described 
in paragraph (e)(2) of this section, the borrower is in default on the 
entire loan.
    (4) A borrower may not consolidate a loan under Sec. 685.220 for 
which the borrower is wholly or partially ineligible.
    (f) Rehabilitation of defaulted loans. (1) A defaulted Direct Loan, 
except for a loan on which a judgment has been obtained, is 
rehabilitated if the borrower makes 12 consecutive, on-time, reasonable, 
and affordable monthly payments. The amount of such a payment is 
determined on the basis of the borrower's total financial circumstances. 
If a defaulted loan is rehabilitated, the Secretary instructs any credit 
bureau to which the default was reported to remove the default from the 
borrower's credit history.
    (2) A defaulted Direct Loan on which a judgment has been obtained 
may not be rehabilitated.

(Authority: 20 U.S.C. 1087a et seq.)

[59 FR 61690, Dec. 1, 1994, as amended at 64 FR 57961, Oct. 27, 1999; 64 
FR 59043, Nov. 1, 1999; 65 FR 65629, Nov. 1, 2000; 66 FR 34765, June 29, 
2001; 67 FR 67081, Nov. 1, 2002]