CUNA Regulatory Comment Call


August 17, 1999

Proposed Amendments to Federal Student Loan Programs

The Department of Education (DOE) requests comments on a notice of proposed rulemaking to revise its regulations governing the Federal Family Education Loan (FFEL) Program regulation and the William D. Ford Federal Direct Loan (Direct Loan) Program Regulations. These revisions would implement recently enacted changes to the Higher Education Act of 1965 made by the Higher Education Amendments of 1998. The proposed regulation deals with provisions that affect FFEL borrowers, schools, lenders, and guaranty agencies and Direct Loan borrowers and schools. DOE must receive, written comments on or before September 15, 1999. Please submit your comments to CUNA by September 1, 1999, by fax at 202/371-8240 or by e-mail to CUNA's Assistant General Counsel Michelle Profit at mprofit@cuna.com.

BRIEF BACKGROUIND

On October 7, 1998, the Higher Education Amendments of 1998, became law and amended the Higher Education Act of 1965 (HEA). The proposed regulations address changes that are specific to the FFEL Program and changes that are common to both the FFEL and Direct Loan programs. The following discussion of the proposed regulations begins with changes that affect only the FFEL Program, followed by changes that affect both the FFEL and Direct Loan programs.

The proposed rule was discussed among members of a committee that included the DOE and other institutions. Changes made by committee and not the 1998 amendment are stated as such.

CHANGES TO THE FFEL PROGRAM ONLY

Section 682.102-Obtaining and Repaying a Loan

The proposed rule requires the use of the Free Application for Federal Student Aid as the application for FFEL Stafford loans, subsidized or not, starting in 1999-2000 and creates a Master Promissory Note (MPN) to allow borrowers to receive an initial loan and additional loans for the same or subsequent periods. Also, the regulatory changes would allow a borrower with multiple FFEL holders to secure an FFEL Consolidation loan from any eligible FFEL lender.

Section 682.200-Definitions

The proposed rule would liberalize the general prohibition on inducements that a lender may provide to a school. Lenders still may not provide services, at less than market value, to a school in order to secure applications, and DOE believes that it is not necessary for the lender to specifically tie the goods and services to loan application for certain activities to be considered improper inducements. A lender may provide the following assistance to schools: student initial, exit, and debt counseling; development, production and distribution of counseling materials; development and provision of electronic products and services for counseling; and participation in counseling sessions with school staff present. A lender may support schools in outreach efforts to inform the public of student aid. A lender may provide computer support, but not computer hardware, for administration of the FFEL Programs. A lender may provide training to schools in support of the FFEL Programs in person, off campus, or though technology, but no additional services or goods.

Section 682.201-Eligible Borrowers

A borrower with a judgment or garnishment on an educational loan may receive an FFEL Consolidation loan, but may not include those loans subject to litigation or administrative garnishment. These loans will be eligible for consolidation after the order or administrative garnishment have been vacated or lifted. Another revision would expand the universe of loans that may be included in an FFEL Consolidation loan. Loans received prior to the borrower's receipt of an FFEL Consolidation loan may be added to the FFEL Consolidation loans. Loans received by the borrower during the 180-day period following the making of the FFEL Consolidation loan may also be added during that period. Finally, loans received prior to the date of a borrower's first FFEL Consolidation loans may be added to any subsequent FFEL Consolidation loan the borrowers obtains. However, a FFEL Consolidation loan may not be reconsolidated without the borrower having another eligible loan to consolidate. The proposed regulations would also permit a borrower who has multiple FFEL Program holders to apply to any eligible FFEL lender for an FFEL Consolidation loan.

Section 682.202-Permissible Charges by Lenders to Borrowers Capitalization of Interest

The interest rate on Stafford loans during the repayment period is calculated based on the bond equivalent rate of the 91-day Treasury bills auctioned at the final auction prior to the June 1 immediately preceding the July 1-June 30 period plus 2.3 percent and during the in-school and grace periods as the 91-day Treasury bills plus 1.7 percent, with a cap during these periods of 8.25 percent. The formula for PLUS loan interest rates is the 91-day Treasury bills plus 3.1 percent not to exceed 9 percent. In addition, the proposed regulations reflect the statutory formula for the interest rate on FFEL Consolidation loans for which the application is received by the lender on or after October 1, 1998, as the lesser of the weighted average of the interest rates on the loans consolidated rounded upward to the nearest one-eighth of one percent, or 8.25 percent.

Under these new rules, a lender would be able to add accrued interest to the principal only when the loan enters repayment, at the expiration of a period of authorized deferment, at the expiration of a period of authorized forbearance, and when the borrower defaults. These new capitalization rules cover loans and affect the period of forbearance on all Stafford loans first disbursed on or after July 1, 2000. Further, the committee agreed to propose that the capitalization could take place at the expiration of each covered period rather than at the end of a series of consecutive covered periods. For unsubsidized Stafford loans disbursed on or after the date of enactment the lender must capitalize pursuant to HEA.

The 1998 Amendments require any lender who charges student borrowers an origination fee to charge the same fee to all student borrowers. The law also permits a lender to assess a lower origination fee to a borrower demonstrating "greater financial need," as determined by the borrower's adjusted gross income. The lower fee becomes a term of the loan. A lender could consider a borrower as demonstrating greater financial need if the borrower's Expected Family Contribution (EFC) used to determine eligibility for the loan is equal to or less than the maximum qualifying EFC for a Federal Pell Grant at the time the loan is certified or the borrower qualifies for a subsidized Stafford loan.

Lenders that charge a lower origination fee on the borrower's unsubsidized Stafford loan must charge the same lower fee on the subsidized Stafford loan. All lenders under common ownership are considered one lender for purposes of this section. Also, indirect lenders are considered to be lenders.

Section 682.207-Due Diligence in Disbursing a Loan

A new provision would require lenders to disburse loans in a single installment if an eligible school should ask for this. The exemption applies to two groups of schools: (1) Those certifying loans for a single term, with FFEL cohort default rates, Direct Loan Program cohort rates, or weighted average cohort rates of less than ten percent for each of the three most recent years for which rates have been calculated and; (2) those certifying loans for students in study abroad programs when the school certifying the loan has an FFEL cohort default rate, Direct Loan Program cohort rate, or weighted average cohort rate of less than five percent for the most recent year for which rates have been calculated.

Section 682.209-Repayment of a Loan

The proposed rule would require a lender to offer FFEL borrowers, including FFEL Consolidation loan borrowers, an extended repayment plan with fixed or graduated repayment amounts to be paid over a period not to exceed 25 years. The extended repayment plan is available to a new borrower whose total outstanding FFEL loans exceed $30,000. The proposal would also allow borrowers to change repayment plans annually.

Sections 682.300-301 Payments of Interest Benefits on Stafford and Consolidation Loans

This provision extends the authority for payment of an interest subsidy. An interest subsidiary may be provided for the part of a consolidated loan that consisted of a subsidized FFEL loan or Direct loan program loan during an authorized deferment period

Section 682.402

The proposed rule would eliminate the seven-year repayment provision for discharge of FFEL Program loans for bankruptcy petitions filed on or after October 8, 1998. The Bankruptcy Code now permits discharge of an FFEL Program loan after that date only on the grounds of undue hardship. Furthermore, the proposed rule would provide that a lack of evidence of a borrower's confirmation for subsequent loans made under an MPN will not lead to a denial of claim payment to the lender unless the loan is found to be unenforceable. However, if a court rules that the loan is not enforceable solely because of the lack of evidence of the confirmation process or processes, the lender and the guaranty agency must repay any insurance and reinsurance payments received on the loan.

Section 682.406 - Conditions of Reinsurance Coverage

The proposed rule includes technical changes necessary to implement and use the MPN.

Section 682.409 -Mandatory Assignment by Guaranty Agencies of Defaulted Loans to the Secretary

The proposed rule clarifies that mandatory assignment of one loan made under an MPN does not constitute assignment of all loans made under the MPN.

Section 682.414 - Records, Reports, and Inspection Requirements for Guaranty Agency Programs

The proposed rule would require lenders to maintain documentation of the confirmation processes the lender and the school used for subsequent loans under an MPN and specify that a lender or guaranty agency may retain a true and exact copy of the promissory note rather than the original note.

Section 682.603-Certification by a Participating School in Connection with a Loan Application

The proposed rule would require the school to certify only the loan amount for which the borrower is eligible and to provide a disbursement schedule. The proposed regulations would require the school to maintain documentation of the determination of the borrower's need. The proposed rule would specify that schools that qualify for exemption from the multiple disbursement requirement or the requirement for delayed delivery of loans funds for first-time borrower- due to their low FFEL cohort default rates, Direct Loan Program cohort rates or weighted average cohort rates-must cease certifying loans based on these criteria no later than 30 days after they are notified that they no longer qualify.

FFEL and DIRECT LOAN PROGRAM CHANGES

The following changes would affect both programs.

Sections 682.102 and 685.201-Master Promissory Note

The proposed rule would make changes to implement the MPN, which is discussed in more detail above.

The length of time a borrower is delinquent before a default occurs on an FFEL or Direct Loan program loan is extended from 180 days to 270 days on loans repayable in monthly installments. The default time is extended from 240 days to 330 days for FFEL Program loans repayable less frequently than monthly installments.

In addition, the proposed rule no longer requires schools to include the specified veteran' educational benefits paid in the calculation of estimated financial assistance when determining eligibility for subsidized FFEL and Direct Loan program loans. The rule requires schools to include national service education awards of post-service benefits under Americorp as estimated financial assistance for the purpose of determining a borrower's eligibility for unsubsidized FFEL and Direct Loan program loans. However, schools are not required to include these benefits when determining a borrower's eligibility for subsidized FFEL and Direct Loan program loans.

The proposed rules adds the term "Master Promissory Note" to the rule and explains that beginning not later than July 1, 2000, MPNs are required.

Section 682.204 and 685.203-Loan Limits

The proposed rule would modify the method for calculating the reduced annual loan limits that apply to FFEL and Direct Loan borrowers enrolled in programs of study or remaining balances of programs of study that are less than an academic year in length. The proposed rule provides that the maximum amount that a borrower enrolled in a program of undergraduate education that is less than one academic year may receive is prorated. It is prorated so that the borrower may receive the portion of the statutory maximum ($2,625 for subsidized and unsubsidized and $4,000 for additional unsubsidized) that is the same as the proportion of the length of study is to one year.

The committee agreed that students enrolled in a program that does not meet one or both of the statutory minimum standards for an academic year not receive the maximum annual loan. The committee also agreed that the draft rule should propose that the calculation of the proportional loan amount for a program of study that is less than a full academic year should use the ratio that is the lesser of the ratio of academic credit or number of weeks to the academic year. For prorating loan limits for remaining balances of programs that are equal to or greater than an academic year, the ratios of the academic credit to the academic year could be used. This is allowed because these programs already meet the two standards (instructional weeks or academic credit) for an academic year.

The proposed rule provides that the maximum loan amount that such a borrower may receive for coursework necessary for admission into an undergraduate program is $2,625 in unsubsidized and subsidized loans, and for certain dependent students and independent students, an additional $4,000 in unsubsidized loans. In the case of a borrower who has obtained a baccalaureate degree, the maximum amount a borrower may receive for coursework necessary for admission into a graduate or professional program is $5,500 subsidized and unsubsidized amount loans and $10,500 (less any subsidized amount borrowed) in additional unsubsidized loans.

The maximum that a borrower may receive for enrollment in postbaccalaureate coursework necessary for a professional credential or teacher certification by a State for teaching in elementary or secondary schools is $5,500 in subsidized and unsubsidized loans and $5,000 in additional unsubsidized loan for such coursework.

Multiple Disbursement Exception

Loans may be disbursed to the borrower in one installment if- the loan period is equal to or shorter than one semester, one trimester, or one quarter, or four months; and the school has an FFEL cohort default rate, Direct Loan Program cohort rate, or weighted average cohort rate of less than 10 percent for each of the three most recent fiscal years for which data are available. Loan proceeds to study abroad also may be disbursed in one installment if the school has an FFEL cohort default rate, Direct Loan Program cohort rate, or weighted average cohort rate of less than five percent for the single most recent fiscal year for which data are available.

Delayed Delivery Exception

Under the proposed rule, an FFEL or Direct Loan program school may deliver or disburse loan proceeds to first-year, first-time borrowers without the 30-day delay if the school: 1) has an FFEL cohort default rate, Direct Loan Program cohort rate, or weighted average cohort rate of less than 10 percent for each of the three most recent fiscal years for which data are available or 2) is an eligible postsecondary home school certifying or originating a loan to cover the cost of attendance in a study abroad program; and 3) has an FFEL cohort default rate, Direct Loan Program cohort rate, or weighted average cohort rate of less than five percent for the single most recent fiscal year for which data are available.

Section 682.209 and 685.207-Grace Period for Military Services'

The proposed rule would exclude certain periods of service in the Armed Forces from the six-month grace period for FFEL and Direct Loan program borrowers. To qualify a member must be a member of a reserve component of the Armed Force; called or ordered to active duty for a period of more than 30 days. For a qualified borrower the following periods would be excluded from the six-month grace period for the borrower's subsidized and unsubsidized student loans: periods during which a borrower serves in the Armed Forces; and the period necessary for a borrower to resume enrollment at the next available regular enrollment period when the borrower returns from service. Each period that the borrower serves is subject to the three-year limit.

The committee agreed that the proposed regulation should require that all borrowers must re-enroll within 12 months of their return from active duty service. The rule would provide that borrowers who were in their grace period when called or ordered to active duty receive a full-six-month grace period when they return.

The proposed rule would provide that FFEL borrowers enrolled at least half time at an eligible school may qualify for an in-school deferment when the borrower submits a request for deferment along with documentation verifying the borrower's eligibility to the borrower's FFEL lender or the Secretary for a Direct Loan; the borrower's FFEL lender or the Secretary for a Direct Loan receives either a newly completed loan application or, as part of the MPN process, information from the borrower's school indicating that the borrower is eligible to receive a new loan; or the borrower's FFEL lender, or the Secretary for a Direct Loan, receives student status information from the borrower's school, either directly or indirectly, indicating that the borrower is enrolled on at least a half-time basis. The statute requires an FFEL lender or the Secretary for a Direct Loan to notify a borrower when granting an in-school deferment based on new loan eligibility or student status information. The proposed rule would provide that this notice must inform the borrower of the option to make interest payments on an unsubsidized loan during the deferment period and of the opportunity to cancel the deferment and continue paying on the loan. The proposed rule also provides that, when a borrower chooses to cancel the deferment and continue paying on the loan, the borrower may exercise his or her option to avoid capitalization of unpaid interest by making the principal and interest payments that were deferred.

The proposed rule permits borrowers who are eligible for unemployment insurance benefits to submit evidence of their eligibility to the FFEL lender or the Secretary for a Direct Loan to qualify for initial and subsequent periods of an unemployment deferment. Borrowers not eligible for unemployment insurance benefits may still send written certifications to their FFEL lender or the Secretary. Those who are eligible for unemployment insurance do not have to take it to be eligible for deferment.

Section 682.211 and 685.205-Forbearance

The proposed rule eliminated the requirement that forbearance requests be in writing and adds a new basis for granting forbearance. An FFEL lender and the Secretary may grant forbearance to a borrower for a period not to exceed 60 days after the borrower requests a deferment, forbearance, a change in repayment plan, or a consolidation loan. Lender and the Secretary may not capitalize interest that accrues during this forbearance period.

Section 682.401 and 685.402-MultiYear Use of the Master Promissory Note

Under the proposed rule, a school would have to be authorized by the Secretary to use a single MPN as the basis for multiple loans obtained by a particular borrower. A borrower attending a school that is not authorized by the Secretary for multi-year use of the MPN would have to obtain a new MPN for each subsequent loan. To be eligible for multi-year use of the MPN, a school would have to be a four-year or graduate/professional school, or meet criteria or be so designated at the Secretary's discretion. The school would also have to be unencumbered by an emergency action or termination under the HEA. The Secretary will publish criteria for eligibility of a multi-year MPN by schools other than four-year graduate/professional schools. The proposed rule would require schools that are authorized for multi-year use of the MPN to develop and document a confirmation process or processes along with the FFEL lender, or the Secretary for Direct Loans, to ensure that the borrower wants subsequent loans.

Sections 682.402, 685212, and 685.215-Unpaid Refund Discharge

The loan discharge would be available to any borrower whose school failed to refund loan proceeds to an FFEL lender or the Secretary on behalf or a borrower who was entitled to a refund. The rule requires borrowers to submit a complete application for an unpaid refund discharge. However, the committee agreed that an application should not be required in all cases. The proposed rule would allow the Secretary or the guaranty agency, with the approval of the Secretary, to discharge a loan based on information in his/its possession that shows that the borrower is eligible for a discharge. Under the proposed regulations, collection efforts on the loan would cease from the time the borrower submits the application until such time as a determination in made as to the borrower's eligibility for the discharge. Under the proposed regulation, the borrower would have to agree to provide, upon request, any additional documentation reasonably available to the borrower but not submitted with the application, to demonstrate that the borrower meets the qualifications for the discharge. Unpaid refund discharge requests will involve both schools that have closed any schools that are open. Accordingly, the proposed regulations provide different procedures for closed and open school situations.

If the school has closed, the guaranty agency or the Secretary would discharge the amount of the loan equal to the unpaid refund and any associated accrued interest and other charges based on a complete borrower application or information otherwise available to these entities.

If the school is open, the guaranty agency or the Secretary would discharge the amount of the loan equal to the unpaid refund and any associated accrued interest and other charges if: 1) the borrower no longer attends the school that owes the refund; 2) the borrower has been unable to resolve the unpaid refund with the school; and 3) the guaranty agency or the Secretary has been unable to resolve the unpaid refund with the school within 120 days from the date the borrower submits a complete application for the unpaid refund discharge. Under the rule, the school would receive notification of receipt of an unpaid refund discharge application and within 60 days the school would have to respond.

To determine unpaid refund discharges for borrowers, who fail to attend, withdraw or are terminated before October 7, 2000. The amount of institution charges unearned equal - (time remaining in loan period after student's last day of attendance) divided by the (actual length of loan period) multiplied by the institution charges for the loan period.

To determine unpaid refund discharges for borrowers for student who fail to attend, withdraw, or are terminated on or after October 7, 2000 a guaranty agency or the Secretary would calculate and discharge the loan amount unearned by the school. The loan amount unearned equal- (Time remaining in loan period after student's last day of attendance) divided by (actual length of loan period) multiplied by (Title IV Grants/loans student received or loan amount). The refund may not exceed the loan amount, including accrued interest and other charges.

Sections 682.604 and 685.304-Counseling Borrowers

The proposed rule would clarify that schools must provide initial and exit counseling to FFEL and Direct Stafford loan borrowers- in person; by audiovisual presentation; or by interactive electronic means. Interactive means that the school ensures that the student receive, participates in, and completes counseling. Simply ensuring that the student received and opened an electronic counseling message is not enough. The rule requires schools to include counseling information about two new statutory initiatives - the MPN and the availability of the Department's Student Loan Ombudsman's office. The school must make a person knowledgeable about Title IV available after counseling.

If a student withdraws without the school's knowledge or without completing the exit counseling, then a school must provide exit counseling through interactive electronic means or by mailing written counseling materials to the borrower within 30 days after the school learns that the borrower has withdrawn from school or failed to complete the exit counseling as required.

Section 685.300-Choice of Loans Programs

A school may choose to participate in either the subsidized or the unsubsidized Stafford loan programs, or both. A school also has the option to choose whether or not to participate in the PLUS loan program. FFEL schools also have the option to decide in which FFEL loans programs they wish to participate. The committee decided a student attending a school that chose not to participate in the PLUS loan program would not be automatically eligible to borrow additional unsubsidized FFEL or Direct Loan program funds.

QUESTIONS REGARDING THE PROPOSAL

Most of the proposed rule is mandated by statute. The questions below reflect the part of the rule that is not.

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