The Higher Education Reconciliation Act of 2005

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The Higher Education Reconciliation Act of 2005
2006 NCHELP FALL TRAINING CONFERENCE

• Playing the Early Rounds

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PRESENTERS

• Wanda Hall
• VP/Director, Compliance
• Edfinancial Services
• Eric Lee
• Senior Policy Analyst
• Nelnet

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• Disclaimer
• This presentation provides a summary of
  the changes contained in the Higher Education
  Reconciliation Act of 2005. Readers should refer
  to the detail of the law, regulatory and
  sub-regulatory guidance from the U.S. Department
  of Education in determining all relevant issues.
  This presentation was last updated on November 9,
  2006.

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• Loan Fees

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Origination Fees

• One of the best provisions of HERA is the gradual
  elimination
• The origination fee reductions apply to Stafford
  loans only not PLUS.
• The fee reductions were based on the first
  disbursement date, so schools had some degree of
  control over the fee a student pays.

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Origination Fees

• The following chart shows the schedule for
  reducing the origination fees
• 438(c)(2)(B) and 682.202(c)

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Federal Default Fee

• Until July 1, 2006, guarantors had the authority
  to charge a guarantee fee not to exceed 1.
• HERA eliminated this fee but substitutes a very
  different 1 fee.
• For loans guaranteed on or after July 1, 2006
  guarantors must pay a 1 Federal default fee into
  their Federal Reserve Funds 428(b)(1)(H)(ii),
  428H(h), 682.401(b)(10)(B).
• This applies to Stafford and PLUS loans.

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Federal Default Fee

• This applies to all guarantors, including those
  operating under a VFA 428A(a)(1)(C).
• The Federal default fee may be
• Deducted from the borrowers proceeds, or
• Paid from other non-Federal sources.
• Other non-Federal sources could mean from the
  guarantors Operating Fund or paid by another
  party, e.g., lender

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Federal Default Fee

• The guarantee fee and Federal default fee have
  some obvious similarities
• Both are 1
• Both can be deducted from loan proceeds
• However, if a guarantor chooses not to charge the
  borrower, the fees are very different
• For the guarantee fee, it represents revenue not
  received
• For the Federal default fee, it represents an
  expense to the agencys Operating Fund.

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Federal Default Fee

• Guarantors use their Operating Fund to pay for
  activities such as
• Training
• Publications
• Default prevention activities
• Sponsorships
• To the extent that the guarantor pays the Federal
  default fee on the borrowers behalf, this is
  less money the guarantor can spend on these
  activities.

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Federal Default Fee

• Some guarantors announced they will deduct the
  fee from the borrowers proceeds.
• Lenders may choose to pay this fee on the
  borrowers behalf.

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Federal Default Fee

• Based on Date of Guarantee, July 1, 2006
• The default fee is to be deducted proportionately
  from each disbursement prior to disbursing to the
  borrower.
• Disbursement amounts could vary by guarantor for
  the same gross loan amount.

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• Loan Limits

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Loan Limit Increases

• HERA increases loan limits
• The Federal Register dated November 1, 2006 sets
  the trigger event as loans disbursed on or after
  July 1, 2007.
• DOE Staff have verbally confirmed at recent
  conferences first disbursed is the trigger
• A technical correction will be submitted to
  clarify

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Loan Limit Increases

• The annual Stafford loan limit for students who
  have not completed the first year of a program of
  undergraduate study is increasing from 2,625 to
  3,500 428(b)(1)(A)(i)(I), 682.204.
• For second year undergraduates, the annual
  Stafford loan limit is increasing from 3,500 to
  4,500. 428(b)(1)(A)(ii)(I), 682.204
• The aggregate undergraduate loan limit has not
  increased.

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Loan Limit Increases
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Loan Limit Increases

• One limit did not change - 4,000 for preparatory
  coursework necessary for enrollment in an
  undergraduate degree or certificate program.
• HERA is increasing the unsubsidized Stafford loan
  limits for preparatory coursework and teacher
  certification programs for students who have
  already earned a baccalaureate degree.

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Loan Limit Increases

• The annual unsubsidized Stafford loan limit will
  increase from 5,000 to 7,000 for
• Preparatory coursework necessary for enrollment
  in a graduate or professional program,
  428H(d)(2)(D)(i) and
• Teacher certification programs 428H(d)(2)(D)(ii)
  .

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Loan Limit Increases

• The annual unsubsidized loan limit for graduate
  and professional students will increase from
  10,000 to 12,000 428H(d)(2)(C), 682.204.
• The trigger event is loans first disbursed on or
  after July 1, 2007.

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Loan Limit Increases
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Loan Limit Increases
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Loan Limit Increases

• PLUS loan limits have not changed they are still
  cost of attendance less other financial aid.
• There are no aggregate loan limits for PLUS
  loans.

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Loan Limit Increases

• Graduate and professional students can now apply
  for PLUS loans to finance their own educations.
• Graduate and professional students are still
  subject to the applicable annual and aggregate
  loan limits for any Stafford loans borrowed.
• Annual and aggregate loan limits DO NOT apply to
  Grad PLUS loan borrowing

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• Interest Rate Changes

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Interest Rates Stafford PLUS

• Stafford
• Fixed rate of 6.8 (already in law)
• Applies only to new loans first disbursed
  on/after July 1,2006
• PLUS
• Fixed rate of 8.5 for FFELP
• Applies only to new loans first disbursed
  on/after July 1, 2006
• Applies to both parent graduate/professional
  borrowers

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Interest Rates Direct PLUS

• HERA did not make a corresponding change to the
  Direct PLUS interest rate
• The Direct PLUS interest rate is 7.9, unless
  Congress takes additional action

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Interest Rates - Consolidation

• Consolidation rate did not change
• Fixed rate based on the weighted average of the
  loans being consolidated rounded up to the
  nearest 1/8th
• 8.25 cap
• FFELP PLUS borrowers will be paying more (8.5)
  than the Consolidation cap (8.25)
• FFELP PLUS borrowers may consolidate to obtain a
  lower rate

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Interest Rate Disclosures - Addenda

• ED approved addenda for Stafford PLUS MPNs
• Borrowers Rights and Responsibilities Statement
  Item 13, Interest Rates. Effective for loans
  first disbursed on or after July 1, 2006, a
  Federal Stafford Loan has a fixed interest rate.
• Borrowers Rights and Responsibilities Statement
  Item 9, Interest Rates. Effective for loans first
  disbursed on or after July 1, 2006, a Federal
  PLUS Loan has a fixed interest rate.

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Interest Rate Disclosures - PLD

• ED approved revised Stafford PLUS Plain
  Language Disclosures (PLD)
• 9. Interest - Loans with a first disbursement on
  or after July 1, 2006, have a fixed interest
  rate of 6.8. Loans made prior to that date have
  a variable interest rate that may change each
  year on July 1 and that will never be more than
  8.25.
• 9. Interest - Loans with a first disbursement on
  or after July 1, 2006, have a fixed interest
  rate of 8.5. Loans made prior to that date have
  a variable interest rate that may change each
  year on July 1 and that will never be more than
  9.

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Interest Rate Disclosures

• The addenda must be
• Integrated into existing e-sign processes
• Provided in hard copy to borrowers using a paper
  MPN
• The PLD must be provided to all borrowers
  obtaining new loans under an existing MPN

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• Graduate and Professional PLUS Loans

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Graduate PLUS Loans

• Graduate and professional students are eligible
  for PLUS loans
• For FFELP, the trigger is loans certified on or
  after July 1, 2006
• For Direct Loans, the trigger is loans originated
  on or after July 1, 2006

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Graduate PLUS Loans

• All eligibility and qualifying conditions that
  previously applied only to parents, now also
  apply to graduate and professional students
• No adverse credit history
• Maximum loan amount COA less EFA
• Co-payable disbursement checks to student
  school
• Interest rate
• Repayment parameters

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Graduate PLUS Loans

• Dear Colleague Letter GEN-06-02 added two
  requirements for Grad PLUS loans
• Students are required to complete the FAFSA
• Students must first apply for their maximum
  annual subsidized and unsubsidized Stafford
  eligibility

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Graduate PLUS Loans

• Every graduate or professional student obtaining
  a PLUS loan will have to complete and sign the
  PLUS MPN
• PLUS addendum accommodates for PLUS loans made to
  graduate or professional students
• Student must complete both the parent and student
  sections
• PLUS MPN being revised to accommodate both parent
  and graduate/professional student borrowers

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Graduate PLUS Loans

• Law regulations require PLUS repayment to begin
  within 60 days of final disbursement
• Grad PLUS borrowers are not exempt from this
  requirement
• Grad PLUS borrowers are eligible for in-school
  deferment while enrolled at least half-time

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• Direct Loan Repayment Plans

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Direct Loan Repayment Plans

• HERA requires that the repayment plans offered in
  the Direct Loan Program must generally be the
  same as those offered in the FFEL program
• Standard
• Graduated
• Extended
• Except Direct Loans will continue to offer the
  alternative income contingent repayment plans

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Direct Loan Repayment Plans

• Before HERA, the Direct Loan graduated plan
  allowed for maximum terms from 12 to 30 years
  based upon the total loan balance
• Requires the Direct Loan graduated plan to be
  aligned with FFEL
• Graduated repayment plans must be paid over a
  period not to exceed 10 years, regardless of the
  loan balance
• Effective for Direct Loan borrowers who enter
  repayment on their loans on/after July 1, 2006

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Direct Loan Repayment Plans

• Direct Loan extended plan also allowed maximum
  terms from 12 to 30 years based upon the total
  loan balance
• Direct Loan extended plan now mirrors FFEL
• Applies to new Direct Loan borrowers on/after
  October 7, 1998
• Must have outstanding Direct Loans totaling more
  than 30,000
• Choose a standard or graduated plan
• Maximum repayment term cannot exceed 25 years
• Effective for Direct Loan borrowers entering
  repayment on/after July 1, 2006

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Direct Loan Repayment Plans

• Maximum consolidation term the same as FFEL for
  borrowers entering repayment on/after July 1,
  2006
• Less than 7,500 ? 10 years
• 7, 500 but less than 10,000 ? 12 years
• 10,000 but less than 20,000 ? 15 years
• 20,000 but less than 40,000 ? 20 years
• 40,000 but less than 60,000 ? 25 years
• 60,000 or more ? 30 years

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• Deferment, Forbearance Enrollment Reporting

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Military Deferment

• Deferment available to borrowers on active duty
  during a war, national emergency, or military
  operation HEA 428(b)(1)(M(iii) 481(d),
  682.210(t)
• Includes National Guard duty under the same
  circumstances
• Applicable to loans first disbursed on/after
  July 1, 2001
• Three-year limit per loan
• Payments received are not refundable

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Military Deferment

• Consolidation loans eligible only if all of the
  Title IV loans included in the consolidation were
  first disbursement on or after July 1, 2001

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Military Deferment

• Points to ponder
• Cumulative limit has typically been at the
  borrower level, not the loan level
• Borrower may have some loans disbursed before
  July 1, 2001, which do not qualify for the
  military deferment
• Due to the retroactive effective date, the
  borrower may have made payments on a loan now
  eligible for deferment

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Military Deferment - Definitions

• Active duty full-time duty in the active
  military service of the U.S., but does not
  include training or attendance at a service
  school.
• Military operation a contingency operation (1)
  in which a member of the armed forces is or may
  become involved in military actions, operations,
  or hostilities against an enemy of the U.S. or
  against an opposing military force, or (2) which
  results in the call or order to, or retention on,
  active duty of members of the uniformed services
  under section 688, 12301(a), 12302, 12304, 12305,
  or 12406 of Title 10 of U.S. Code, chapter 15 of
  Title 10, or any other provision of law during a
  war or during a national emergency declared by
  the President or Congress.

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Military Deferment - Definitions

• National emergency the national emergency by
  reason of certain terrorist attacks declared by
  the President on September 14, 2001, or
  subsequent national emergencies declared by the
  President by reason of terrorist attacks.
• Qualifying National Guard duty training or other
  duty, other than inactive duty, performed by a
  member of the U.S. Army National Guard or the Air
  National Guard on full-time National Guard duty
  as called to active service authorized by the
  President or the Secretary of Defense. The
  training or other duty must be performed for more
  than 30 consecutive days in connection with a
  war, other military operation, or a national
  emergency as declared by the President and
  supported by Federal funds.

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Military Deferment - Definitions

• Serving on active duty service by an individual
  who is a Reserve of an Armed Force ordered to
  active duty under section 12301(a), 12301(g),
  12302, 12304, or 12306 of Title 10 of U.S. Code,
  or any retired member of an Armed Force ordered
  to active duty under section 688 of Title 10, for
  service in connection with a war, other military
  operation, or national emergency, regardless of
  the location which the active duty service is
  performed. This also includes any other member of
  an Armed Force on active duty in connection with
  an emergency or subsequent actions or conditions
  who has been assigned to a duty station at a
  location other than where the member is normally
  assigned.

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Military Deferment

• Draft version of a new common deferment form
  submitted to ED
• DCL GEN-06-02 lists the documentation
  requirements
• Copy of the borrowers military orders, or
• Written statement from the borrowers commanding
  or personnel officer indicating the borrower is
  serving in a capacity that meets the terms of
  this deferment

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Forbearance

• Stipulates a notice confirming the terms of a
  forbearance must be sent to the borrower or
  endorser within 30 days
• The terms of the forbearance must be recorded in
  the borrowers file
• Effective for forbearance agreements entered into
  or renegotiated with a borrower on or after July
  1, 2006
• HEA 428(c)(3)(A)(i) (c)(10), 682.211(h)(3)

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Enrollment Reporting

• ED to consult with FFELP community in developing
  standardized procedures for reporting anticipated
  graduation dates
• Potential negotiated rulemaking topic
• HEA 432(l)(1)(H)

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• School as Lender

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School as Lender

• New school-as-lender (SAL) eligibility
  requirements
• The school must have met the SAL requirements in
  effect as of February 7, 2006, and
• The school must have made a FFELP loan under
  those requirements on or before April 1, 2006.
• Note Schools which did not meet the above two
  criteria cannot become SALs.
• HEA 435(d)(2), 682.601
• Must have cohort default rate 10 for two most
  recent fiscal years (unless waived by ED)

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School as Lender

• SALs may continue to make loans, but with some
  new conditions
• Cannot make loans to undergraduate students
• Cannot make PLUS loans to parents or
  graduate/professional students
• Cannot make loans to a borrower not enrolled at
  that school
• Can make both subsidized and unsubsidized
  Stafford loans to graduate or professional
  students

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School as Lender

• SALs may continue to make loans, but with some
  new conditions (continued)
• Must offer a lower origination fee and/or
  interest rate than the maximum allowed by law.
• Interest benefits and loan sale proceeds must be
  used for need-based grant programs
• A portion of total proceeds may be used for
  reasonable direct administrative expenses

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School as Lender

• SALs may continue to make loans, but with some
  new conditions (continued)
• All other proceeds must be used to supplement,
  not supplant, non-federal funds that would
  otherwise be used for need-based grant programs
• Must award any contract for financing, servicing,
  or administration of the loans on a competitive
  basis
• Must submit an annual compliance audit to ED,
  regardless of loan volume

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School as Lender

• Third HEA Extension Act signed September 30,
  2006
• Modified SAL trustee provisions
• Trustees are only allowed to make or hold FFELP
  loans under a trustee relationship with a school,
  or an organization affiliated with a school, if
  the contract being operated under was originally
  entered into before September 30, 2006, and is in
  effect or renewed after that date

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School as Lender

• For trustee contracts meeting the September 30th
  date, the new requirements are applicable to
  loans disbursed on/after January 1, 2007
• Specifies which SAL requirements must be
  performed by the school or, if applicable, an
  organization affiliated with the school

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School as Lender

• Affiliated is not defined in the law
• In any case, the trustee, the school, and the
  affiliated organization (if applicable) are all
  responsible for ensuring the annual compliance
  audit is performed and submitted to ED

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