CUNA Regulatory Comment Call


August 11, 1999

Perkins Student Loan Program

The Department of Education (DOE) is requesting comments on a proposed rule to amend the Perkins Student Loan Program (PSLP) regulations. Comments are due by September 15. Please submit your comments to CUNA by September 8. Please feel free to fax your responses to CUNA at 202-371-8240; e-mail them to CUNA's Assistant General Counsel Jeffrey Bloch; or mail them to Jeffrey in c/o CUNA's Regulatory Advocacy Department, 805 15th Street, NW, Suite 300, Washington, DC 20005. You may also contact us if you have questions or would like a copy of the rule. The rule is also available on the Internet.

DOE is requesting that commenters identify the specific sections of the proposed rule that each comment addresses and to arrange these comments in the same order as they appear in the rule.

BRIEF BACKGROUND

The proposed rule is required in order to implement certain changes to the Higher Education Act of 1965 (HEA) resulting from the Higher Education Amendments of 1998. The proposed rule will expand borrower benefits under the PSLP by: 1) increasing loan limits, 2) expanding borrower eligibility for deferments and cancellations: 3) establishing a loan rehabilitation program for borrowers in default; 4) establishing an incentive repayment program; and 5) providing a closed school discharge.

DESCRIPTION OF THE PROPOSED RULE

Section 674.2 - Definitions

The term "satisfactory repayment arrangements," for purposes of regaining eligibility for assistance under Title IV of the HEA, will be defined as the making by the borrower of six on-time, consecutive, monthly payments on the loan. The borrower can only receive this benefit once on a defaulted loan.

Section 674.5 – Federal Perkins Loan Program Default Rate and Penalties

Effective with the 2000-2001 "award year," institutions will no longer be required to file a default reduction plan if the institution's "cohort default rate" equals or exceeds 15%. An "award year" runs from July 1 until June 30 of the following year, and the "cohort default rate" is generally defined as the percentage of students who begin repaying a loan at the beginning of an award year and then default by the end of the following award year. Also, there will no longer be a series of graduated default penalties based on the institution's cohort default rate. The proposed rule will replace these graduated penalties with a requirement that an institution's Federal Capital Contribution will be reduced to zero if the cohort default rate equals or exceeds 25%.

The proposed rule will terminate an institution's eligibility in PSLP if the cohort default rate equals or exceeds 50% for the three most recent years for which such data is available. The ineligibility will remain in effect for three award years. This penalty will become effective with the cohort default rates calculated as of June 30, 1999, 2000, and 2001.

An institution can appeal a determination of ineligibility, within 30 days after receiving notice by the Secretary of DOE, if the appeal is based on an inaccurate calculation or if, on average, 10 or fewer borrowers begin repaying the loans during the three most recent award years. The Secretary of DOE has 45 days to issue a decision on the appeal, during which time the institution may continue to participate in the loan program.

Certain loans will be excluded from the cohort default rate. These include loans on which the borrower has voluntarily made six consecutive payments, voluntarily made all payments currently due, repaid the loan in full, received a deferment or forbearance based on a condition that predates a 240- or 270-day past due status, or rehabilitates the loan after becoming 240- or 270-days past due. However, the institution will no longer be able to exclude improperly serviced loans. "Voluntary" payments do not include payments obtained by income tax offset, wage garnishment, income or asset execution, or pursuant to a judgment.

The proposed rule will also allow an institution to remove a loan from the cohort default rate calculation if it is canceled due to death or permanent and total disability, discharged in bankruptcy, forgiven due to a closed school situation, or repaid in full under a compromise repayment provision.

Section 674.7 – Expanded Lending Option

The proposed rule will eliminate the Expanded Lending Option, which allows institutions to lend at higher limits after depositing additional capital into their Perkins Loan Revolving Fund.

Section 674.9 – Student Eligibility

The proposed rule will allow borrowers to re-establish eligibility for additional Perkins Loans if they meet the same criteria described above in Section 674.5 with regard to the removal of borrowers from an institution's cohort default rate. Under this section, payments made over and above those required on a judgment will be considered "voluntary."

Section 674.12 – Loan Maximums

Loan limits for borrowers will be increased. The annual limits will be $4,000 for undergraduate students and $6,000 for graduate students. The aggregate limits will be $40,000 for graduate and professional students, $20,000 for undergraduate students who have completed two years of study, and $8,000 for students who have not completed two years of study. The proposed rule will change the definition of aggregate loan limits to include only the unpaid principal.

Section 674.16 – Making and Disbursing Loans

The proposed rule will require institutions to report to at least one national credit bureau information concerning the repayment and collection of the loan until the loan is paid in full. Institutions will be required to report promptly any changes to information previously reported to a credit bureau.

Section 674.31 – Promissory Note

The borrower's initial grace period will not include periods where a borrower is on active duty as a member of the Armed Forces reserves. The period of active duty must be more than 30 days and the extension of the grace period cannot exceed three years. The excluded period must also include time necessary to resume enrollment. If the borrower is in a grace period when ordered to active duty, he or she will be entitled to another full six or nine-month grace period upon completion of service.

This section will also require an institution to disclose to at least one national credit bureau the amount of the loan made to the borrower, along with other relevant information. This will permit an institution to report to more than one credit bureau if it chooses to do so.

Section 674.33 – Repayment

The proposed rule will allow an institution to offer a reduction of up to one percent of the interest rate on a loan if the borrower makes 48 consecutive, monthly payments. A discount of up to five percent of the balance owed on the loan can be offered if the borrower pays in full prior to the end of the repayment period. Other incentives may be offered if the institution determines that they will reduce defaults and if approved by the Secretary of DOE. Neither federal funds nor funds from the Perkins Loan Revolving Fund may be used to pay for these incentives.

The proposed rule will allow the holder of the loan to discharge a borrower if the borrower is unable to complete the program of study due to the closing of the institution. This will apply to loans made on or after January 1, 1986. The borrower will be entitled to reimbursement for amounts paid on a discharged loan. A borrower who defaults on such a loan would no longer be considered in default and would be entitled to additional student loan assistance. The holder of the loan will be required to report the discharge to all credit bureaus that previously received information about the loan. These provisions regarding discharge will not apply if the loan was obtained through fraud.

Section 674.34 – Deferment of Repayment – Federal Perkins Loans, Direct Loans and Defense Loans.

Currently, the rules regarding certain deferments for repayment of a Perkins Loan or a Direct Loan, which are certain loans that do not meet the definition of a Perkins Loan, only apply to loans made on or after July 1, 1993. The proposed rule will extend these deferment provisions to loans made prior to July 1, 1993.

Section 674.39 – Loan Rehabilitation

The proposed rule will require institutions to establish a loan rehabilitation program for all defaulted Perkins Loan borrowers. Rehabilitation is defined as the making of twelve on-time monthly payments. The institution will have to provide information about rehabilitation to a defaulted borrower. This will include notifying the borrower that upon rehabilitation, the borrower will be returned to regular repayment status, the first of the twelve monthly payments will be treated as the first payment in a new ten-year repayment period, and the credit bureaus must be instructed to remove the default from the borrowers credit history. Upon rehabilitation, the borrower would be entitled to the same benefits and privileges as they applied prior to default and institutions may also offer flexible repayment options after the borrower returns to regular repayment status. A borrower may rehabilitate a loan only once.

Collection costs on a rehabilitated loan will be limited to 24 percent of the unpaid principal and accrued interest. Until July 1, 2002, institutions may impose costs in excess of 24 percent, which are to be charged to the Perkins Loan Revolving Fund.

Section 674.41 – Due Diligence – General Requirements

The 1998 Amendments established a Student Loan Ombudsman's office to provide timely assistance to borrowers. The proposed rule requires institutions to provide borrowers with information about the Student Loan Ombudsman's office if the borrower disputes the terms of the loan in writing and if the institution does not resolve the dispute.

Section 674.42 – Contact with the Borrower

The current rules require an exit interview at the time the borrower leaves the institution. The proposed rule will modify these rules to allow institutions to use electronic means to provide exit counseling. During this process, the institution must provide information about the Student Loan Ombudsman's Office. If using electronic means, the institution must take steps to ensure that the borrower received the information. A return receipt would be one example. To facilitate electronic means, the proposed rule will eliminate the requirement that a borrower sign a copy of the repayment schedule and receive a copy of that signed schedule.

Otherwise, the current disclosure requirements will remain the same. However, instead of being made during the exit interview, the disclosure may also be made either shortly before the borrower ceases to be at least a half-time student or immediately afterwards, if the borrower enters repayment without the institution's knowledge.

Section 674.45 – Collection Procedures

Currently, an institution must report changes on a defaulted loan to the same credit bureau to which it originally reported the default. The proposed rule will require institutions to report this information to any national credit bureau to which it reported the default. In accordance with the Fair Credit Reporting Act, an institution must resolve, within 30 days upon receipt, any inquiry from a credit bureau that disputes the information reported on the loan. As part of its collection activities, an institution must provide information about the Student Loan Ombudsman's office to the borrower.

Section 674.49 – Bankruptcy of Borrower

The proposed rule reflects changes to the U.S. Bankruptcy Code by eliminating a borrower's ability to have a student loan automatically discharged in bankruptcy if the loan has been in repayment for seven years or more. Institutions will also be required to assert any available defense in order to avoid a discharge of a Perkins Loan in a bankruptcy proceeding.

Section 674.52 – Cancellation Procedures

The current regulation erroneously states that borrowers whose defaulted loans have not been accelerated may only qualify for teaching, volunteer, or military service cancellations. The proposed rule will allow such borrowers to qualify for any cancellation benefits as provided in the PSLP.

Section 674.53 – Teacher Cancellation

Under current rules, borrowers may be entitled to cancel some or all of their student loans if they teach full-time in a low-income school, in a special education setting, or if they teach a subject matter where there is a shortage of qualified teachers. The amount of the loan that may be cancelled is related to length of service. However, certain of these cancellation benefits only apply for loans made on or after July 23, 1992. The proposed rule will extend this to loans made prior to July 23, 1992, for teaching services performed on or after October 7, 1998, and will include Defense Loans, which are loans made under the National Defense Education Act of 1958.

Section 674.56 – Employment Cancellation

Under current rules, borrowers may be entitled to cancel some or all of their student loans if they are employed full-time as a nurse or medical technician, in a nonprofit child or family service agency, or as a qualified provider of early intervention services. However, these cancellation benefits only apply for loans made on or after July 23, 1992. The proposed rule will extend these benefits to loans made prior to July 23, 1992, for those employed on or after October 7, 1998, and will include Defense Loans.

Section 674.57 – Cancellation for Law Enforcement or Corrections Officer Service

Under current rules, borrowers may be entitled to cancel some or all of their student loans if they are employed as a full-time law enforcement or corrections officer. However, these cancellation benefits only apply for loans made on or after November 29, 1990. The proposed rule will extend these benefits to loans made prior to November 29, 1990, for those employed on or after October 7, 1998, and will include Defense Loans.

Section 674.58 – Cancellation for Service in a Head Start Program

Under current rules, borrowers may be entitled to cancel some or all of their student loans if they are employed full-time as a staff member in a Head Start program. The proposed rule will expand these benefits for those with Defense Loans, for employment on or after October 7, 1998.

Section 674.60 – Cancellation for Volunteer Service

Under current rules, borrowers may be entitled to cancel up to 70% of their Perkins Loans if they are Peace Corp or ACTION volunteers. The proposed rule will extend these benefits to Direct Loans and Defense loans, for service on or after October 7, 1998.

QUESTIONS TO CONSIDER REGARDING THE PERKINS STUDENT LOAN PROPOSED RULE

(Note: Most of the substantive provisions are required by statute under the 1998 amendments.)

Leagues and credit unions should feel free to fax their responses to CUNA at 202-371-8240; e-mail them to Jeffrey Bloch at jbloch@cuna.com or mail them to CUNA's Regulatory Advocacy Department, Suite 300, 805 15th Street, NW, Washington, DC 20005. Thank you!!

Eric Richard • General Counsel • (202) 508-6742 • erichard@cuna.com
Mary Mitchell Dunn • SVP & Associate General Counsel • (202) 508-6736 • mdunn@cuna.com
Jeffrey Bloch • Assistant General Counsel • (202) 508-6732 • jbloch@cuna.com
Catherine Orr • Senior Regulatory Counsel • (202) 508-6743 • corr@cuna.com