made under this part for not less than five years from the date on which the entire amount of the loan has been repaid, cancelled, or assigned in accordance with this part.

(4) Microfilm copies. Recipients may substitute microfilm copies in lieu of original records in meeting the requirements of this section.

(5) Audit questions. The records involved in any claim or expenditure which has been questioned by Federal audit shall be further retained until resolution of any such audit question; provided, however, that records need not be retained if they relate to a payment with respect to which actions by the United States to recover for diversion of Federal funds are barred by the statute of limitation in 28 U.S.C. 2415(b).

(6) Audit and examination. The Secretary and the Comptroller General of the United States, or any of their duly authorized representatives, shall have access, for the purpose of audit and examination, to the records specified in paragraphs (c) (1) and (3) of this section and to any other pertinent books, documents, papers, and records of the recipient.

(d) An institution need not maintain separate records for National Defense Student loans as opposed to National Direct Student loans except with respect to loan cancellation.

(e) Audits-non-Federal. All of an institution's transactions involving the assets of its Fund shall be audited by the institution or at the institution's direction to determine, at a minimum, the fiscal integrity of financial transactions and reports, and whether such transactions are in compliance with applicable laws and regulations. Such audits shall be performed in accordance with the Department of Health, Education, and Welfare "Audit Guide" for student financial aid programs. The frequency of such audits shall depend on the size and complexity of the activity of the Fund except that such audits shall be carried out at least once every two years.

(f) Such audit reports shall be submitted to the HEW Audit Agency at the regional office of the Department of Health, Education, and Welfare serving the region in which the insti

(a) Funds received by an institution pursuant to this part, excluding funds authorized for administrative expenses, are to be held in trust for the intended student beneficiary. Such funds may be used only for the purposes for which they were allocated and may not be pledged or hypothecated for any other purpose.

(b)(1) If an institution responsible for the maintenance of a Loan Fund established pursuant to § 144.8, including the collection of outstanding loans, ceases operation or is no longer willing to participate in the program, the Commissioner will take such steps as are necessary to protect the Federal interest in that Loan Fund and in those outstanding loans. Such steps may include (i) the undertaking of a capital distribution of the liquid assets of the Fund in accordance with § 466(c) of the Act, (ii) the transfer of the outstanding loans of the Funds to another institution in the same State, or (iii) the transfer of the outstanding loans to the Office of Education if no institution in that State wishes to receive such loans.

(2) The cost of collecting the transferred loans described in paragraph (b)(1) of this section shall be deemed to equal the institutional share of such loans.

(3) If the loans described in paragraph (b)(1) of this section are transferred to another institution in the same State, the transferee institution may deposit all the funds it collects on such loans in its own Loan Fund established pursuant to § 144.8 and the transferror institution's share of such collections shall be deemed the trans

(4) If the loans described in paragraph (b)(1) of this section are transferred to the Office of Education, the Commissioner may use the institutional share of the funds he collects to pay for the costs of collecting such loans.

(c) If more than one institution in that State offers to undertake the collection of the outstanding loans referred to in paragraph (b) of this section, the Commissioner will select the transferee institution primarily on the basis of the institution's demonstrated capability in the area of loan collection and secondarily on the basis of the number of students of the transferror institution expected to enroll in the transferee institution.

(d) If a transfer of a Fund is made pursuant to paragraph (b)(1)(ii) of this section, no audit exceptions will be taken against the transferee institution on account of actions or omissions of the transferror institution in the administration of its Fund prior to such transfer. Such a transferred Fund shall be maintained by the transferee institution as a segregated account until an audit satisfactory to the Commissioner has been performed on the operation of the program at the transferror institution.

(20 U.S.C. 1087aa-ff; 1087cc(a)(5))

§ 144.20 Termination and suspension.

(a) If the Commissioner finds that any of the assurances or representations made by an institution in connection with the administration and operation of the National Direct Student Loan Program is incomplete or inaccurate in any material respect, or that there has been a failure to comply with any of the provisions of this part, or that there has been a failure to carry out any of the provisions agreed to by the institution pursuant to § 144.8, he may, after giving the institution notice and an opportunity for a hearing, terminate the agreement entered into pursuant to § 144.8 or take such other actions as may be necessary and appropriate to protect the interest of the United States. The termination of the institution from the program shall not affect the obligations

under that agreement or this part.

(b) Notice of termination. Proceedings with respect to the termination of the program shall be initiated by the mailing of a notice to the institution setting forth the basis of the proposed termination and the procedures available to the recipient under this section.

(c) Suspension of assistance. Subject to paragraph (e) of this section, assistance may be suspended while a termination proceeding initiated pursuant to this section is pending.

(d) Notice of suspension. If the Commissioner determines that it is necessary to suspend assistance while a termination proceeding is pending, notice of the suspension shall be mailed to the recipient (which may be included in the notice of termination). The notice of suspension shall: (1) inform the recipient of that determination; (2) advise the recipient of the effective date of the suspension; and (3) offer the recipient an opportunity to show cause why such action should not be taken.

(e) Opportunity to show cause. If the recipient requests an opportunity to show cause why a suspension of assistance should not be continued or imposed, the Commissioner will, within 7 days after receiving such request, hold an informal meeting for that purpose.

(20 U.S.C. 1087aa-ff)

§ 144.21 [Reserved]

Subpart B-Terms of Loans

§ 144.31 Limitations governing aggregate amount of loans.

(a) The aggregate of the loans for all years made by institutions of higher education from Loan Funds established pursuant to agreements under this part may not exceed:

(1) $10,000 in the case of any graduate or professional student, including any loans from such Funds made to such person before he became a graduate or professional student;

(2) $5,000 in the case of a student who has successfully completed two academic years of a program of education leading to a bachelor's degree, but

(a) Evidence of indebtedness. A loan shall be evidenced by a promissory note executed by the student borrower. A promissory note acceptable to the Commissioner is set forth in Appendix B. Except for optional provisions permitted under this section, any substantive deviation from the provisions of this promissory note form must be approved by the Commissioner prior to the making of any loans to be evidenced thereby. A copy of the executed note shall be supplied to the borrower.

(b) Rate of interest. The note evidencing a loan shall provide that the loan shall bear interest on the unpaid balance at the rate of three percent per annum, except that no interest shall accrue prior to the date of commencement of repayment as specified in paragraph (c) of this section or during any period in which repayment is deferred in accordance with § 144.34(a).

(c) Repayment. (1) Except as provided in paragraph (c)(2) and paragraph (e) of this section (minimum repayments), and in § 144.34 (deferments), the note evidencing a loan shall provide for repayment of the principal amount, together with interest thereon, in equal installments (or, if the borrower so requests, in graduated periodic installments determined in accordance with such schedules as may be approved by the Commissioner) payable quarterly, bimonthly, or monthly, at the option of the institution, or a period beginning nine months after the date on which the borrower ceases to carry, at an institution of higher education or at a comparable institution outside the United States approved for this purpose by

the Commissioner, at least one-half the normal full-time academic work load (half-time work load), except that such period may begin earlier at the request of the borrower, and ending 10 years and nine months after the date on which the borrower ceases to carry a half-time work load. Selection of a repayment plan shall be made prior to the date on which the student ceases to be enrolled on at least a half-time basis at the lending institution. A copy of the repayment plan, when established, must be attached to the promissory note and a copy shall also be supplied to the student borrower.

(2) If the applicable repayment plan results in a final payment of not more than $2, the institution may increase the next-to-last payment of the repayment plan to include that amount.

(3) Any loan repayment made by a borrower shall first be applied against any interest due on the loan with the remainder of that repayment against principal.

(d) Accelerated repayment. (1) The note evidencing a loan shall provide that a borrower may, at his option and without penalty, accelerate repayment of the whole or any part of the loan at any time except that any refund attributable to a loan made under this part and any repayment made by the student during the academic year for which the loan was made shall be treated as a reduction in the original amount of the loan and not as a repayment.

(2) Unless the borrower indicates otherwise, any amount paid by the borrower which exceeds the amount due for that period or any previous period shall be considered as a repayment of principal rather than an advance payment on any subsequent installment.

(e) Minimum rates of repayment. (1) Defense Loans. (i) If monthly repayment amounts of principal and interest which would otherwise be required pursuant to paragraph (c) of this section on a Defense Loan are less than $15 a month (or the equivalent amount for loans repaid on a bimonthly or quarterly basis), the institution may at its option and if it has so provided in the note evidencing the loan, require a student borrower to

make such payments of principal and interest at a monthly rate of not more than $15.

(ii) If a borrower has obtained Defense Loans from more than one institution and if the monthly repayment amounts of principal and interest are less than the equivalent of $15 per month, and only one institution exercises the $15 minimum monthly repayment option, the institution which exercises the option shall receive the difference between $15 and the monthly repayment rate of principal and interest owed to the other institution.

(iii) If a borrower has obtained Defense Loans from more than one institution and if the monthly repayment amounts of principal and interest are less than the equivalent of $15 per month and each of the institutions exercises the $15 minimum monthly repayment option, such $15 minimum repayment shall be divided among such institutions in proportion to the total amount of principal advanced by each of the institutions.

(2) Direct Loans. (i) If monthly repayment amounts of principal and interest which would otherwise be required pursuant to paragraph (c) of this section on a Direct Loan are less than $30 a month (or the equivalent amount for loans repaid on a bimonthly or quarterly basis), the institution may at its option and if it has so provided in the note evidencing the loan, require a student borrower to make such payments of principal and interest at a monthly rate of not more than $30.

(ii) If a borrower has obtained Direct Loans from more than one institution and if the monthly repayment amounts of principal and interest are less than the equivalent of $30 per month, and only one institution exercises the $30 minimum monthly repayment option, the institution which exercises the option shall receive the difference between $30 and the monthly repayment rate of principal and interest owed to the other institution.

(iii) If a borrower has obtained Direct Loans from more than one institution and if the monthly repayment amounts of principal and interest are less than the equivalent of $30 per month and each of the institutions

exercises the $30 minimum monthly repayment option, such $30 minimum repayment shall be divided among such institutions in proportion to the total amount of principal advanced by each of the institutions.

(f) Penalty charges. An institution may provide in the note evidencing a loan for the assessment of a charge for the failure of the borrower to pay all or any part of an installment when due, or to file timely and satisfactory evidence of an entitlement to deferment benefits under § 144.34 or cancellation benefits under subpart D of this part. The amount of any such charge may not exceed:

(1) In the case of a loan which is repayable in monthly installments, $1 for the first month or part thereof by which each such installment or evidence is late and $2 for each such month or part thereof thereafter; or

(2) In the case of a loan which is repayable in bimonthly or quarterly installments $3 and $6 respectively for each such interval or part thereof by which each such installment or evidence is late and for each such bimonthly or quarterly period or part thereafter.

The institution may elect to add the amount of any such charge to the principal amount of the loan as of the first day after the day on which such installment or evidence was due, or to make the amount of the charge payable to the institution not later than the due date of the next installment after receipt by the borrower of notice of the assessment of the charge.

(g) Security and endorsement. The note evidencing a loan shall provide that the loan shall be made without security and without endorsement, except that security or endorsement may be required if the borrower is a minor and if under applicable State law a note executed by him would not create a binding obligation.

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

(h) Assignment of notes. The note evidencing a loan shall provide that the note may not be assigned except to the United States (or to a party specifically approved by the Commissioner), or to another institution to which the borrower transfers which is par

ticipating in the program, or if not so participating, is eligible to do so and is approved by the Commissioner for receipt of the assignment of such notes. (20 U.S.C. 1087cc-dd)

(i) Acceleration. The note evidencing a loan shall provide that in the event of a failure by the borrower to make a scheduled repayment of any of the installments due on the note, the entire unpaid indebtedness, including interest due and accrued thereon and any penalty charges assessed pursuant to paragraph (f) of this section shall, at the option of the institution, become immediately due and payable.

(j) Costs of collection. The note evidencing a loan may, at the option of the institution, provide that the borrower shall be liable for all attorneys' fees and other costs and charges necessary for the collection of any repayment installment not paid when due. (20 U.S.C. 425 and 1087dd)

§ 144.33 Minimum rate of repayment if the borrower received both Defense and Direct Loans.

(a) The provisions of this section shall apply to the repayment of loans by a borrower who has received both Defense and Direct Loans.

(b) If the sum of the monthly repayment amounts of principal and interest that a borrower would otherwise be required to repay on his Defense and Direct Loans pursuant to § 144.32(c) is at least $30 (or the equivalent amount for loans repaid on a bimonthly or quarterly basis), the institution may not exercise the option provided in either promissory note to increase the minimum monthly repayment amount even though the amount to be repaid by the borrower on his Defense Loans is less than the equivalent of $15 per month or the amount to be repaid on his Direct Loans is less than the equivalent of $30 per month.

(c) If the sum of the monthly repayment amounts of principal and interest that a borrower would otherwise be required to repay on his Defense and Direct Loans pursuant to § 144.32(c) is less than $30 (or the equivalent amount for loans repaid on a bi-monthly or quarterly basis), the institution may not exercise the

option provided in either promissory note to increase the minimum monthly repayment amount of principal and interest in such a fashion as to require a monthly repayment greater than $30 (or the equivalent amount for loans paid on a bi-monthly or quarterly basis).

(d) If (1) the sum of the monthly repayment amounts of principal and interest that a borrower would otherwise be required to repay on his Defense and Direct Loans pursuant to § 144.32(c) is less than $30 (or the equivalent amount for loans repaid on a bi-monthly or quarterly basis). (2) the amount otherwise required to be repaid on the Defense Loan pursuant to § 144.32(c) is less than $15 per month (or the equivalent amount for loans repaid on a bi-monthly or quarterly basis), and (3) the institution exercises its option for a minimum monthly repayment as provided in § 144.32(e) under one or both loans, no more than $15 (or the equivalent amount for loans paid on a bi-monthly or quarterly basis) may be attributed to the Defense Loan and that $15 may be attributed to the Defense Loan only if the institution exercises its minimum repayment option on the Defense Loan.

(20 U.S.C. 425 and 1087dd; Section 137d of Pub. L. 92-318)

§ 144.34 Deferment of repayment.

(a) The note evidencing a loan shall provide that installments of principal need not be paid and interest shall not accrue on the loan during any period (1) in which the borrower is carrying at an institution of higher education or at a comparable institution outside the United States approved for this purpose by the Commissioner, at least one-half the normal full-time academic work load as determined by the institution; (2) not in excess of three years during which the borrower is a member of the Armed Forces of the United States; (3) not in excess of three years during which the borrower is in service as a volunteer under the Peace Corps Act; or (4) not in excess of three years during which the borrower is a VISTA volunteer under Title I-Part A of the Domestic Service Act of 1973 Pub. L. 93-113, (former