ED Proposes Changes to Loan Programs, Part 2
July 29, 2009
The Department of Education proposed additional regulatory changes related to the Title IV loan programs on July 28, focusing on rules pertaining to participating institutions. Topics covered include preferred lender arrangements for Federal Family Education Loans (FFEL) and private loans, consumer disclosures, institutional codes of conduct, entrance and exit counseling, and cohort default rates. The proposed rules would implement provisions in the Higher Education Opportunity Act of 2008 (HEOA), enacted last August. An earlier notice focused primarily on lender and guaranty agency issues.
Comments on the proposed rules are due August 27. Members are urged to review the notice and submit comments with questions or concerns to ED. (Please also share your comments with NACUBO). The time period is very short because ED is required to publish final rules by November 1 in order for them to take effect on July 1, 2010, the start of the next federal award year.
This package of proposed regulations was drafted through the negotiated rulemaking process. NACUBO was represented on the committee by Virginia Layton, Miami University, Beth Stack, University of Pittsburgh, and Anne Gross, NACUBO's vice president, regulatory affairs. Because the negotiated rulemaking team came to consensus on the proposed rules, NACUBO does not plan to submit comments unless questions arise that need clarification.
Part 601-Institution and Lender Requirements Relating to Education Loans
The HEOA, which incorporated the earlier Student Loan Sunshine Act, added a number of new provisions intended to ensure the integrity of student lending activities and guarantee that students and their families receive thorough and complete information about their borrowing options. For the first time, ED regulations will address private education loans: these proposed rules go hand-in-hand with rules proposed in April by the Federal Reserve Board under the Truth-in-Lending Act (TILA). In reviewing the proposed regulations, it is important to keep in mind that, under the current definition, institutional loans to students are considered private education loans, and institutions come under the definition of a lender. Note also that certain organizations affiliated with an institution may be subject to these regulations if they recommend, promote, or endorse education loans for students attending the institution.
Private Education Loans. Private education loans are defined in the HEOA as any loan provided to a borrower expressly for postsecondary education expenses, except for Title IV loans, open-ended consumer credit, or loans secured by real property. The definition of a private education loan would be drawn from the regulations issued by the Federal Reserve implementing TILA. NACUBO and several other associations suggested modifications to this definition in comments on the proposed TILA rules.
Preferred Lender Arrangements and Lists. One of the key definitions in these proposed rules is the preferred lender arrangement, because such an arrangement triggers additional requirements for the institution. The bar is quite low for determining whether an institution has entered into a preferred lender arrangement with either FFEL or private lenders. According to ED, if a lender offers education loans to an institution's students, or their families, and the institution or an institution-affiliated organization "recommends, promotes, or endorses" the lender's education loans, then a preferred lender arrangement exists. Building on its explanation of preferred lender lists, provided in an earlier Dear Colleague letter (GEN-08-06), ED explains that if an institution provides a preferred lender list to students that does not include all lenders which have provided loans to its students over a set time period, it would be considered to be recommending and endorsing the lenders on its list-creating a preferred lender arrangement with each one. This means that an institution which provides, for instance, a list of the twenty most popular lenders used by its students would be deemed to have a preferred lender arrangement with each of those lenders. New information disclosure and reporting requirements would then be quite onerous for the institution.
Most of the definitions for terms used in this new section of the regulations are taken straight from the statutory language. ED was convinced during the negotiated rulemaking process, however, to expand upon the definition of preferred lender arrangement to exclude institutional loans if the loans are:
- made with the institution's own funds
- funded by donor-directed contributions
- made under Title VII or VIII of the Public Service Health Act
- tuition payment plans
This is important due to the number of other requirements that stem from preferred lender arrangements, many of which would make little sense if the institution itself was the lender.
Consumer Disclosures. Any institution (or institution-affiliated organization) that is party to a preferred lender arrangement would be required to make certain disclosures on its Web site and in any publications, mailings, e-mails, or materials that are distributed to prospective or current students or their families and describe or discuss financial aid. In addition to general information about availability of federal loans, this would include specific information on each type of education loan offered pursuant to a preferred lender arrangement under the FFEL program. ED is charged with developing a model form for such disclosures by the HEOA. Similar information (interest rates, terms, charges, etc.) would have to be provided for each type of private education loan offered by lenders under a preferred lender arrangement, as specified in TILA. Negotiators persuaded ED that such detailed information could not reasonably be provided in print and that allowing institutions to instead supply a link to a Web site containing the required information would suffice. Institutions that have preferred lender arrangements must also provide the detailed disclosures about the terms of loans to current students, or their families, annually.
The rules also propose certain standards for preferred lender lists. Such lists must include:
- the information on the model disclosure form for each type of loan offered
- why the institution participates in a preferred lender arrangement with each lender, particularly with respect to the terms and conditions of the loan
- a statement that students do not have to use a lender from the list
- disclosures about affiliations among lenders on the list (at least three unaffiliated lenders must be on the list)
- the methodology used to select the lenders on the list
Much of the same information, including the detailed disclosures on each type of loan offered through a preferred lender arrangement, must also be submitted to ED annually.
Private Education Loans. Even if an institution does not have a preferred lender arrangement, if it provides information about private education loans to prospective borrowers, the institution must ensure that the student receives the disclosures required under TILA. TILA also requires that a borrower obtain, from the institution, a self-certification form and certain information about cost of attendance and financial aid from the institution. The proposed rules require the institution to provide the form and information to an enrolled or admitted student upon request. Unless the Federal Reserve makes changes to its proposed rules implementing the new TILA provisions on private education loans when it publishes final rules (which it is required to do by August 14), it is important to remember that:
- Under the current definition, institutional loans and non-Title IV federal loans provided through the institution are considered private education loans and are subject to these requirements.
- Automated certification processes between lenders and schools will not obviate the need for student borrowers to obtain the self-certification form from their institution.
Code of Conduct. An institution that has entered into any preferred lender arrangement must develop a code of conduct that prohibits a conflict of interest for an agent of the institution with respect to FFEL or private education loans. An agent is defined as an officer or employee of the institution. The proposed regulations provide a list of specific prohibitions that must be included in the code of conduct, many of which are similar to provisions in current regulations. The institution must post its code of conduct prominently on its Web site, and must administer and enforce it by, at a minimum, annually informing its agents with responsibilities in this area of its provisions.
Institution-affiliated organizations that have preferred lender arrangements are required to comply with the code of conduct developed by the institution, publish it on their Web site (if one exists), and annually inform their agents of its provisions.
Direct Loan Disclosures. Institutions that participate in the Federal Direct Loan program must make a model disclosure form that will be provided by ED (or a substitute form) available to prospective and current students and their families.
Part 668-Student Assistance General Provisions
Cohort Default Rates. HEOA changed the calculation of cohort default rates to include an additional year to the time period considered. The new cohort default rate will measure the percentage of borrowers who default on their FFEL or Direct loans before the end of the second fiscal year (rather than the first) after the year in which they enter repayment. This will mean that virtually every institution's cohort default rate will increase, so the thresholds for sanctions and waivers based on an institution's cohort default rate have also been increased. While this change takes effect beginning with FY2009, there is a transition period for three years during which the existing two-year rate thresholds will still be used. During the transition period, institutions will receive two sets of rates from ED each year. The proposed regulations set out details on the calculation process, challenges, rate appeals, and default prevention plans.
Parts 674, 682, and 685-Perkins, FFEL, and Direct Loan Programs
Entrance Counseling. HEOA codified many of the requirements in ED's current regulations for entrance or initial counseling for first-time FFEL and Direct Loan borrowers, adding some new items that must be included.
Exit Counseling. Changes are proposed for the exit counseling for all three loan programs to incorporate additional items required by HEOA, such as information on prepayment options and a general explanation of tax benefits that may be available to borrowers.
Perkins Cancellations. The proposed regulations would provide several new definitions and modify provisions for several loan cancellations available to Perkins Loan borrowers, including:
- Early-intervention services
- Faculty at tribal colleges
- Law enforcement and corrections officers
- Early childhood education
- Military service
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