repayment date and the amount due. (see § 674.44(a)(1).)

(2) For loans made on or after October 1, 1980, an institution must contact a borrower at least 2 times before the first repayment is due as follows:

(i) 90 days into the grace period, the institution must send to the borrower the information in paragraph (b) plus other information necessary to satisfy Truth in Lending Act regulations.

(ii) Approximately 30 days before the first repayment is due, the institution must notify the borrower of that repayment date and the amount due. (see § 674.44(a)(1).)

(d) Address search. If an institution discovers that a borrower's address has changed, it must conduct the search required under § 674.44(a)(6) to find the correct address.

(20 U.S.C. 425 and 1087cc)

§ 674.44 Billing procedures.

(a) An institution must establish and maintain the following billing and follow-up procedures until all loans are repaid:

(1) Unless a coupon system is established, the institution must send to each borrower

(i) A letter of notice and a statement of account at least 30 days before the first payment is due; and

(ii) A statement of account 10 days before the due date of each repayment after the first.

(2) An institution must contact a borrower and demand repayment if it has not received from the borrower within 15 days of a due date

(i) A repayment;

(ii) A request for a deferment; or (iii) A cancellation request form. (3) An institution must demand repayment as follows:

(i) Within 15 days of a missed due date, the institution must contact the borrower by telephone or in writing to demand repayment (first overdue notice).

(ii) Within 30 days of the first overdue notice, it must contact the borrower again, by telephone or in writing, if there is no satisfactory response to the first notice (second overdue notice).

(iii) Within 15 days of the second overdue notice, if there is no satisfac

tory response, it must contact the borrower again—

(A) By telephone; or

(B) By mailgram or similar written communication that demonstrates a response rate higher than that for routine mail (third overdue notice).

(iv) Within 15 days of the third overdue notice, it must send the borrower the final demand letter if there is no satisfactory response to the third overdue notice. In this letter the institution must inform the borrower that the loan will be referred for collection or litigation if repayment, or a proper form, is not received within 30 days of the letter's date.

(v) If an institution accelerates a loan (makes the entire unpaid amount, including accrued interest and penalty charges, payable immediately), it must give the borrower advance, written notice. The notice may be given separately or in the final demand letter.

(4) An institution may omit any or all the overdue notices before the final demand letter if

(i) The borrower's repayment history has been unsatisfactory, e.g., the borrower has often failed to repay or file proper forms on time or has previously received a final demand letter;

or

(ii) The institution believes the borrower does not intend to repay the loan or file the proper form.

(5) The institution must maintain a list of borrowers with overdue payments, updated monthly.

(6) If mail is returned, an institution must conduct a thorough search to locate the borrower's address, including

(i) Checking records in all appropriate institutional offices;

(ii) Checking telephone directories or information operators in the location of the borrower's last known address;

(iii) Telephoning the borrower if a number is found; and

(iv) Using the Department of Education's free skip-tracing service.

(b)(1) The Secretary considers billing and follow-up collection procedure costs (as required in paragraph (a)) to be routine administrative expenses that are NOT chargeable to the Fund.

(2) However, the costs of phone calls to the borrower are considered other collection costs that MAY be charged to the Fund.

(20 U.S.C. 424 and 1087cc)

§ 674.45 Address searches.

(a) An institution, unable to locate a borrower in spite of its efforts under § 674.44(a)(6), must either

(1) Hire a commercial skip-tracing organization; or

(2) Attempt to locate the borrower with its own personnel.

(b) If the institution locates the borrower, it must first try to collect the overdue amount before referring the loan for collection or litigation.

(20 U.S.C. 424 and 1087cc)

§ 674.46 Collection and litigation procedures.

(a) If an institution is still unable to collect a payment after following the procedures under §§ 674.44 and 674.45, it must telephone or personally contact the borrower to determine why the borrower has not paid. If this final contact fails to obtain payment, the institution must

(1) Hire a collection agency;
(2) Sue the borrower; or

(3) Use its own personnel to collect the amount due.

(b) If the institution uses a collection agency, the agency must

(1) Be bonded in an amount covering the part of the Fund under its control at any particular time; or

(2) Deposit the collection funds, immediately upon receipt, in a bank account in the institution's name-a "lock-box" deposit.

(c) If the institution is unable to collect a payment after following the pro.cedures in §§ 674.42-674.45 and paragraphs (a) and (b) of this section, it may refer the NDSL to the Secretary for collection.

(d) (1) An institution must sue a borrower or any proper endorser if collection efforts have failed and it determines that the borrower or endorser(i) Has assets that may cover all or most of the outstanding debts;

(ii) Has no known defense;

(iii) Can be located and easily served; and

(iv) Owes more than $500.

(2) The institution may sue the borrower even if the conditions of paragraph (c)(1) are not met.

(e) If the principal and interest outstanding on a loan are $10 or less, an institution may write it off.

(20 U.S.C. 424, 1087cc and 1087gg)

§ 674.47 Other collection and litigation costs.

(a) The Secretary considers the reasonable costs of carrying out §§ 674.45(a) and 674.46 and telephone costs in §§ 674.44(a), 674.45(b), and 674.48(b) to be "other collection costs" chargeable to the Fund. Collection costs paid by the borrower are NOT chargeable to the Fund.

(b)(1) For audit purposes, an institution must support "other collection costs" with financial statements, e.g., phone and collection agency bills.

(2) A collection agency's statement must list specific amounts collected and the amount it retains.

(c)(1) If an institution performs its own collections, the Secretary considers the institution's actual collection costs, including salaries of its personnel, to be "other collection costs";

(2) However, these costs may not exceed the costs that would be permitted if the institution used a collection agency.

(d) An institution's reasonable litigation costs, incurred in carrying out this subpart, may be charged to the Fund.

(20 U.S.C. 424 and 1087cc)

§ 674.48 Use of fiscal agent.

(a)(1) An institution is responsible for all decisions in administering an NDSL program, e.g., decisions about collecting, cancelling, or deferring loans.

(2) A fiscal agent may perform only ministerial acts.

(b) A billing service used by an institution to carry out billing procedures under § 674.44—

(1) May not deduct its fees from the amount it receives from borrowers;

(2) May telephone and perform skiptracing activities to prevent a borrower from defaulting on a loan; and

(3) Must provide the institution with at least a monthly documentation of its charges for skip-tracing activities and telephone calls.

(20 U.S.C. 424 and 1087cc)

§ 674.49 Commonly owned billing service and collection agency.

If an institution uses a billing service to carry out § 674.44 (billing procedures), it may not use a collection agency that—

(a) Owns or controls the billing service;

(b) Is owned or controlled by the billing service; or

(c) Is owned or controlled by the same corporation, partnership, association, or individual that owns or controls the billing service.

(20 U.S.C. 1087cc)

§ 674.50 Bankruptcy of borrower.

(a) An institution must refrain from carrying out this subpart on a loan which has been discharged in bankruptcy.

(b) An institution may not write off a loan until it has received an official notice of the bankruptcy discharge and must keep the notice in the borrower's file to support its writeoff entry.

(c) If an institution receives a repayment from a borrower after a loan has been discharged, it must deposit that payment in its Fund.

(20 U.S.C. 424 and 1087cc)

Subpart D-Loan Cancellation

§ 674.51 Special definitions.

(a) Academic year or its equivalent for elementary and secondary schools and special education: One complete school year or two half years from different school years excluding summer sessions that are complete and consecutive and that generally fall within a 12-month period.

(b) Academic year or its equivalent for institutions of higher education: A period of time in which a full-time student is expected to complete

(1) The equivalent of 2 semesters, 2 trimesters, or 3 quarters at an institution using credit hours; or

(2) At least 900 clock hours of training for each program at an institution using clock hours.

(c) Elementary school: A school that provides elementary education, including education below grade 1, as determined by

(1) State law; or

(2) The Secretary, if the school is not in a State.

(d) Handicapped children: Children who require special education and related services because they are

(1) Mentally retarded;
(2) Hard of hearing;
(3) Deaf;

(4) Speech impaired;

(5) Visually handicapped;

(6) Seriously emotionally disturbed; (7) Orthopedically impaired;

(8) Specific learning disabled; or (9) Otherwise health impaired.

(e) Local educational agency: An agency defined in section 1201(g) of the Act.

(f) Secondary school: (1) A school that provides secondary education, as determined by

(i) State law; or

(ii) The Secretary, if the school is not in a State.

(2) However, State laws notwithstanding, secondary education does not include any education beyond grade 12.

(g) State education agency: (1) The State board of education; or

(2) An agency or official designated by the Governor or by State law as being primarily responsible for the State supervision of public elementary and secondary schools.

(h) Teacher: (1) A professional who provides direct and personal services to students for their educational development through

(i) Direct classroom teaching; or

(ii) Non-teaching positions of an educational nature such as a librarian and a guidance counselor.

(2) A supervisor, administrator, researcher, or curriculum specialist is not a teacher unless he or she primarily provides direct and personal services to students.

(3) A teacher in an institution of higher education does not include a person teaching elementary or secondary education unless that person

teaches a remedial education program specifically designed to prepare high school graduates for postsecondary education.

(i) Title I children: Persons of age 5 through 17 counted under section 111(c) of the Elementary and Secondary Education Act of 1965.

(20 U.S.C. 425, 1087ee, and 1141)

§ 674.52 Cancellation procedures.

(a) Application for cancellation: (1) To apply for cancellation, a borrower must complete and file a form, obtained from the lending institution, by the date the institution establishes.

(2) If a borrower fails to file the form on time, the institution must follow the billing procedures in § 674.44 for contacting the borrower.

(3) If the borrower still fails to file the form, the institution may determine that the loan is in default and require immediate repayment of the unpaid balance, accrued interest, and penalty charges.

(b) The institution that makes the loan decides whether a borrower is entitled to cancellation.

(c)(1) An institution may refuse cancellation for simultaneous teaching in two or more schools or institutions if it cannot easily determine that the teaching was full-time.

(2) However, cancellation must be granted if one school official certifies that a teacher worked full-time for a full academic year under his or her supervision.

The following rules apply to Defense loan borrowers:

(a) Cancellation. Ten percent rate. (1) An institution must cancel up to 50 percent of a borrower's Defense loan, plus the interest on the unpaid balance, for full-time teaching in

(i) A public or other nonprofit elementary or secondary school;

(ii) An institution of higher education; or

(iii) An overseas Department of Defense elementary or secondary school.

(2) The cancellation rate is 10 percent of the original loan principal,

plus the interest on the unpaid balance, for each complete year, or its equivalent, of teaching.

(b) Cancellation for full-time teaching in an elementary or secondary school serving low-income students. (1) The institution must cancel the borrower's entire Defense loan, plus interest on the unpaid balance, for fulltime teaching in a public or other nonprofit elementary or secondary school that

(i) Is in a school district that qualifies for funds in that year under Title I of the Elementary and Secondary Education Act of 1965; and

(ii) The Secretary selects, after determining it to be a school with a high concentration of students from lowincome families.

(2) (i) The Secretary will not select more than 25% of the eligible schools in a State for any year unless at least 50% of the enrollment of each school selected is made up of Title I children.

(ii) However, in making this calculation for Defense loans, the Secretary will use a low-income factor of $3,000.

(3) (i) The Secretary selects schools under subparagraph (1) based on a ranking by the State Education Agency.

(ii) The State Education Agency must base its ranking of the schools on objective standards and methods approved by the Secretary. These standards take into account the numbers and percentages of Title I children attending those schools.

(iii) For each academic year, the Secretary will notify participating institutions of the schools selected under this paragraph.

(4) The cancellation rate is 15 percent of the original loan principal, plus the interest on the unpaid balance, for each complete academic year, or its equivalent, of full-time teaching.

(5) Cancellation for full-time teaching under this paragraph is available only for teaching beginning with academic year 1966-67.

(c) Cancellation for full-time teaching of the handicapped. (1) The institution must cancel the borrower's entire Defense loan, plus interest, for full-time teaching of handicapped children in a public or other nonprofit elementary or secondary school system.

The following rules apply to Direct loan borrowers:

(a) Cancellation for full-time teaching in an elementary or secondary school serving low-income students. (1) The institution must cancel the borrower's entire Direct loan, plus the interest on the loan, for full-time teaching in a public or other nonprofit elementary or secondary school that

(i) Is in a school district that qualifies for funds, in that year, under Title I of the Elementary and Secondary Education Act of 1965; and

(ii) The Secretary selects after determining it to be a school in which at least 30 percent of the school's total enrollment is made up of Title I children.

(2) However, the Secretary will not select more than 50 percent of the schools in that State receiving Title I assistance.

(3) (i) The Secretary selects schools under subparagraph (1) based on a ranking by the State Education Agency.

(ii) The State Education Agency must base its ranking of the schools on objective standards and methods approved by the Secretary. These standards take into account the numbers and percentages of Title I children attending those schools.

(iii) For each academic year, the Secretary will notify participating institutions of the schools selected under this paragraph.

(b) Cancellation for full-time teaching of the handicapped. (1) The institution must cancel the borrower's entire Direct loan, plus the interest on the loan, for full-time teaching of handicapped children in a public or other nonprofit elementary or secondary school system.

(c) Cancellation rates. (1) To qualify for cancellation under paragraph (a) or (b) (low-income or handicapped), a borrower must teach full-time for a complete academic year, or its equivalent.

(2) Cancellation rates are

(i) 15 percent of the original loan principal, plus the interest on the unpaid balance, for the first and second years of full-time teaching;

(ii) 20 percent of the original loan principal, plus the interest on the unpaid balance, for the third and fourth years of full-time teaching; and

(iii) 30 percent of the original loan principal, plus the interest on the unpaid balance, for the fifth year of full-time teaching.

(20 U.S.C. 1087ee)

§ 674.55 Cancellation for service in a Head Start program.

(a) An institution must cancel a borrower's entire Direct loan, plus the interest on the unpaid balance, for service as a full-time staff member in a "Head Start" program if—

(1) The program operates for a complete academic year, or its equivalent; and

(2) The borrower's salary does not exceed the salary of a comparable employee working in the local school district.

(b) The cancellation rate is 15 percent of the original loan principal, plus the interest on the unpaid balance, for each complete academic year, or its equivalent, of full-time teaching service.

(c) (1) "Head Start" is a preschool program carried out under section 222(a)(1) of the Economic Opportunity Act of 1964.

(2) "Full-time staff member" is a person regularly employed in a fulltime professional capacity to carry out the educational part of a Head Start program.

(20 U.S.C. 1087ee)

§ 674.56 Cancellation for military service.

(a) Cancellation on a Defense loan. (1) An institution must cancel up to 50 percent of a Defense loan made after April 13, 1970, for the borrower's full