Loan Provisions Permeate Higher Education Opportunity Act
September 10, 2008
The Higher Education Opportunity Act (HEOA) does not make major changes to the substance or operation of the federal loan programs, but does include numerous provisions addressing the controversies and perceived abuses that were the focus of so much attention last year. Education loans, and relationships between lenders and institutions, are covered below in our second installment on the reauthorization of the Higher Education Act (HEA). Many of the provisions stem from the Student Loan Sunshine Act passed by the House last year and are similar to requirements in Department of Education regulations that took effect July 1. Notably, colleges and universities that participate in the federal student loan programs will be required to adopt a code of conduct that meets specific requirements spelled out in the law. And, for the first time, some of the new HEOA provisions address private or alternative education loans, not just federally guaranteed student loans.
Loans and lending relationships are addressed in three different titles of the law (with much cross-referencing).
- Title I addresses disclosure requirements.
- Title IV covers provisions specific to federal loan programs, and additional requirements for institutions including a new required code of conduct.
- Title X amends the Truth in Lending Act to address private loans.
TITLE I--GENERAL PROVISIONS
Sec. 120, Institution and Lender Reporting and Disclosure Requirements
Section 120 of the HEOA adds a new Part E, Lender and Institution Requirements Relating to Education Loans, to the end of Title I of the HEA to address disclosure requirements concerning student lending. These provisions are closely tied to ones appearing in Title IV and Title X.
Section 151 (HEA), Definitions
Several definitions are important to note in order to understand the impact of the subsequent requirements.
Education loan. An education loan includes loans made under the Federal Family Education Loan (FFEL) program, the Federal Direct Loan program, or a private education loan. A private education loan is further defined, in amendments to the Truth in Lending Act enacted in Title X of HEOA, as a loan issued by a private educational lender that is not federally guaranteed and is issued expressly for postsecondary education expenses regardless of whether the loan is provided through an educational institution or directly to a borrower. Extensions of credit secured by real property are excluded.
Institution-affiliated organization. An organization that is directly or indirectly related to a covered institution (one that receives federal funding) and is "engaged in the practice of recommending, promoting, or endorsing education loans for students attending such institution or the families of such students" is an institution-affiliated organization. Examples include foundations or alumni, social, academic, athletic, or professional organizations.
Officer. An officer includes a director or trustee if the individual is treated as an employee of the covered institution or institution-affiliated organization.
Preferred lender arrangement. A preferred lender arrangement refers to an agreement between a lender and a covered institution or institution-affiliated organization under which a lender provides loans to students attending the institution (or their families) and the institution or affiliated organization recommends, promotes, or endorses the lender’s loan products. Direct Loans and loans through the auction pilot program authorized in Title IV of HEAO do not count.
Section 152 (HEA), Responsibilities of Covered Institutions, Institution-Affiliated Organizations, and Lenders
Disclosures by Covered Institutions. In addition to numerous disclosures required in Title IV, an institution (or any affiliated organizations) that participates in a preferred lender arrangement must disclose the following on its web site and in all materials discussing education loans:
- The maximum amount of federal grant and loan aid available to students.
- Certain information about the loans, such as interest rate, terms and conditions, charges, limits, average amounts borrowed by students in the previous year, repayment amounts, comparisons to repayment amounts under different loan programs, etc. The Secretary of Education is charged with coordinating with the Federal Reserve Board to consult various stakeholders--including business officers--on the final formulation of this disclosure within 18 months of enactment.
- A statement that the institution is required to process FFEL loans through any lender selected by the student.
- Where private education loans are discussed, information required under the Truth in Lending Act for each type of private education loan offered pursuant to a preferred lender arrangement.
In addition, an institution or affiliated organization which provides information about a private educational loan to a prospective borrower must also provide details as required under the Truth in Lending Act and inform the borrower about the availability and potential advantages of loans and other assistance under Title IV. Institutions must also ensure that loan information clearly distinguishes between private and federal loans.
An institution that enters into a preferred lender arrangement may not allow a lender to use the institution’s name, logo, or other symbols identified with the institution in the marketing of private loans. Conversely, the institution must ensure that the name of the lender is displayed in all information related to such loans.
Disclosures by Lenders. Before any FFEL or Direct Loan is disbursed, lenders must provide a variety of disclosures as required in Title IV. For private educational loans, lenders must provide information required by the Truth in Lending Act.
In addition, FFEL lenders must provide a report to ED annually on "reasonable expenses" paid to employees of a financial aid office (or other employees with loan responsibilities) of a covered institution or an agent of an institution-affiliated organization, as allowed under Title IV provisions noted below.
Section 153 (HEA), Loan Information to Be Disclosed and Model Disclosure Form (Preferred Lender Arrangements)
As mentioned above, the Secretary of Education is charged with working with the Federal Reserve Board, representatives of stakeholders including students, families, institutions, secondary schools, and others to design a model loan disclosure form. The statute lists a number of possible items that should be considered.
Annual Report. In addition to providing the required information to students and families, institutions and affiliated organizations with preferred lender arrangements will have to submit an annual report to the Secretary that details the information provided. The report must also include an explanation of why the institution entered into the preferred lender arrangement and why the terms are beneficial for students. The annual report also must be provided to students and made publicly available.
Code of Conduct. Each institution and affiliated organization must comply with the code of conduct provisions found in Section 487(a)(25). Affiliated organizations must comply with the institution’s code of conduct, publish it on their web sites, and enforce its provisions. See below for discussion of the parameters for the code of conduct.
Section 154 (HEA), Loan Information to Be Disclosed and Model Disclosure Form (Direct Loans)
Within 180 days after the model disclosure form is developed, the Secretary will provide a completed model form to institutions participating in the Direct Loan program. Institutions will be required to provide the information to students and families.
Section 155 (HEA), Self-Certification Form for Private Education Loans
The section is added by Title X of HEOA, requiring a model form to be developed for students to give to their private lenders. See below under the discussion of Title X.
TITLE IV--STUDENT ASSISTANCE
Part B, Federal Family Education Loan Program
Many of the changes to the FFEL program affect the responsibilities of guaranty agencies and lenders, rather than institutions. For instance, Section 422 imposes additional restrictions on inducements, payments, and advertising by guaranty agencies to encourage institutions of higher education to secure borrowers or lenders to influence their selection of guaranty agency. Both lenders and guaranty agencies are required to provide additional notices and disclosures to borrowers, on topics such as income-based repayment plans, forbearance, default, consolidation. Among other notable changes to the FFEL program under HEOA are the following. Note that provisions in Part B pertaining to terms and conditions for FFEL loans apply to loans under the Federal Direct Loan program as well.
PLUS Loans. Allows for the deferral of repayment of a PLUS loan until six months after the student, or parent borrower, ceases to be enrolled at least half-time, in certain circumstances, with deferred interest to be paid periodically or capitalized. (Section 424(a))
Disbursement Waivers. The exemption from requirements for multiple disbursement of loans for a single semester and delayed disbursement for first-time borrowers is extended to institutions with default rates of 15 percent or less for the previous three years (up from 10 percent) beginning in 2011. (Section 427)
Loan Forgiveness. Loan forgiveness provisions are extended to workers in areas of national need such as nurses, child care providers, teachers, and for legal aid attorneys. (Section 430 and 431)
Financial Literacy. Guaranty agencies are required to work with institutions of higher education to develop educational programs for students and families on budgeting, financial management, and financial literacy. (Section 435)
Cohort Default Rate. The cohort default rate threshold is increased from 25 percent to 30 percent in 2012. Institutions that exceed the threshold in any given year must convene a task force and submit a default prevention plan to the ED secretary, effective 2011. This goes along with a change in the calculation of the cohort default rate to take into account two years of repayment, rather than just the first year. New procedures are provided for appealing for regulatory relief by demonstrating exceptional mitigating circumstances. (Section 436)
Disqualification for Use of Incentives. The list of activities that render a lender not eligible has been beefed up, but is very similar to those in the regulations that took effect July 1. These include offering any kind of payments or gifts to an institution or employee to secure loan applicants, mailing unsolicited loan applications to students, and providing staffing services to institutions. The prohibitions largely parallel the requirements for institutional codes of conduct discussed below. (Section 436)
Disability Discharge. Borrowers may now be eligible for loan discharge in the borrower is "unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can reasonably be expected to result in death, has lasted for a continuous period of not less than 60 months, or can be expected to last for a continuous period of not less than 60 months." In addition, a borrower who is determined by the Secretary of Veterans Affairs to be unemployable due to a service-connected disability will be automatically eligible for loan discharge. (Section 437)
Part E, Federal Perkins Loans
The Perkins Loan program has been under fire in recent years as the administration has proposed its elimination in its budget, only to see Congress refuse to kill the program (although Congress has failed to appropriate funds for additional federal capital contributions for several years). Congress included in HEOA a statement expressing continued support for Perkins:
It is the sense of Congress that the Federal Perkins Loan Program, which provides low-interest loans to help needy students finance the costs of postsecondary education, is an important part of Federal student aid, and should remain a campus-based aid program at colleges and universities. (Section 466)
Assignments. Changes to the provisions on assignment of loans to the Department of Education would countermand ED regulations that took effect July 1 requiring institutions to assign loans that had been in default for seven years to ED. New statutory language makes it clear that, except when the institution has not followed due diligence requirements, referral of loans to ED for collection is at the institution’s option. Further, ED is required to pass back to the institution any amounts subsequently collected on assigned loans, less 30 percent to cover collection costs. (Section 463)
Loan Limits. The maximum amounts that students may borrow under the Perkins Loan program are increased from $4,000 to $5,500 for undergraduates, and from $6,000 to $8,000 for graduate/professional students. Cumulative maximums are now $11,500 for students who have not completed at least two years of undergraduate work, $27,500 for undergraduates, and $60,000 for graduate/professional students. (Section 464)
Disability. The broadening of the definition of a disability noted above for FFEL and Direct loans also applies to Perkins loans. (Section 464)
Rehabilitation. The number of on-time payments that a borrower must make to rehabilitate a defaulted Perkins loan is decreased from 12 to 9. (Section 464)
Public Service Cancellations. Several new categories are added to professions that can earn a borrower loan cancellations if they work in certain high need areas or type of institution including preschool teachers, fire fighters, librarians, and speech pathologists. (Section 465)
Part G, General Provisions Relating to Student Assistance
Note that only provisions relating to the federal loan programs and the relationships with lenders will be discussed here; a subsequent report will cover other subjects in Part G.
Section 488 (HEA Section 485), Institutional and Financial Assistance Information for Students
Federal Loans and Graduation Rates. The requirement to provide students and prospective students with information about FFEL and Direct loans is expanded to include Perkins loans as well. In addition, institutions are required to breakdown graduation rate data (which has been reported for a number of years) by various subsets of students, including Pell Grant recipients, students who received subsidized FFEL or Direct loans, and those who didn’t receive such aid. Two-year institutions will have until 2011 to comply with the new graduation rate reporting, and the secretary of education is directed to convene an advisory panel to work through issues surrounding accurate reporting of this information by community colleges.
Exit and Entrance Counseling. The requirements for exit and entrance counseling of student borrowers have been beefed up, with lists of required information provided. Institutions are encouraged to use interactive programs that test the students’ knowledge.
Advisory Board Reimbursements. Title X of HEOA adds another new reporting requirement to Section 485 requiring institutions to report any reimbursement for service on advisory board received by an employee from a private educational lender (see below).
Section 493, Program Participation Agreements
Code of Conduct. Institutions that participate in any of the Title IV loan programs will be required, for the first time, to adopt a code of conduct which prohibits a conflict of interest with the responsibilities of an officer, employee, or agent of the institution with respect to such loans. The institution must publish the code of conduct "prominently" on the institution’s web site, and must administer and enforce it. At a minimum, affected personnel should be informed of the provisions of the code at least annually.
A new subparagraph (e) goes into considerable detail on requirements for an institution’s code of conduct. The subject of the code of conduct requirements is generally an "officer or employee of the institution who is employed in the financial aid office of the institution or who otherwise has responsibilities with respect to education loans, or agent who has responsibilities with respect to education loans." The code must include the following:
- a ban on revenue-sharing arrangements
- a ban on gifts from a lender, guarantor, or servicer of loans to any officer, employee in the financial aid office, or agent with responsibility for loans, except for
- material or programs related to loans, default aversion, etc.
- food, refreshments, training, or informational material furnished as an integral part of a training program
- favorable terms, conditions on a loan provided to a student-employee, if the benefits are comparable to those provided to all students
- entrance and exit counseling services, as long as institutional staff maintain control and the products and services of any lender are not promoted
- philanthropic contributions to an institution that are unrelated to education loans and not made in exchange for any advantage related to education loans
- a prohibition on contracting or consulting arrangements except that
- an employee or officer who is not employed in the financial aid office and does not have responsibilities for loans may perform paid or unpaid service on a board of directors of a lender, guarantor or servicer
- an employee or officer who is not employed in the financial aid office but does have responsibilities for loans may perform paid or unpaid service on a board of directors of a lender, guarantor or servicer if the institution has a conflict of interest policy that requires them to recuse themselves from decisions regarding the institution
- an officer or employee of a lender, guarantor, or servicer may serve on a board of directors of an institution if the institution’s conflict of interest policy requires them to recuse themselves from decisions regarding student lending
- ensure that the institution does not assign a first-time borrower’s loan to a particular lender, or refuse to certify, or delay certification of any loan based on the borrower’s selection of a lender
- prohibition on asking for or accepting any offer of funds to be used for private educational loans or opportunity pool loans in exchange for providing a lender with loan volume or a preferred lender arrangement
- a ban on requesting or accepting staffing assistance from a lender, except for
- professional development training
- educational counseling, financial literacy, or debt management materials
- short-term staffing assistance to help the institution during emergencies
- a prohibition on payment, except for reimbursement for reasonable expenses, by lenders or guarantors to financial aid office employees or others with responsibilities for education loans
Preferred Lender Arrangements. Institutions that have entered into preferred lender arrangements are required to compile, maintain, and make available to students and their families, a list of the lenders for loans made, insured, or guaranteed under Title IV or private education loans that the institution recommends under such arrangement. The list must be compiled at least annually and must adhere to the following requirements detailed in subparagraph (h):
- include all of the information required to be reported to the Secretary under Section 153 (see above), including why the institution entered into each preferred lender arrangement
- ensure that there are not less than three unaffiliated lenders on the list for FFEL loans, and not less than two unaffiliated lenders if private lenders are recommended
- specifically discloses any affiliations between lenders on the list
- discloses the method and criteria used in selecting lenders for the list to ensure that lenders are chosen based on the best interest of borrowers including
- payment of origination fees
- competitive interest rates, or other terms
- high-quality servicing
- additional benefits
- adhere to a duty of care and loyalty to compile the list for the sole benefit of students
- not deny or impede a borrowers chose of lender.
Private Loans. The institution is required, if requested by a student applying for a private education loan, a copy of the form required under the Truth in Lending Act (see below) and the information required to complete the form, to the extent the institution has the necessary information.
TITLE X--PRIVATE STUDENT LOAN IMPROVEMENT
Title X of the HEOA primarily amends the Truth in Lending Act (TILA), rather than the Higher Education Act, and represents the first time the federal government has directly sought to regulate private education loans.
Section 1011 (Section 140 (TILA)), Preventing Unfair and Deceptive Private Educational Lending Practices and Eliminating Conflicts of Interest
In order to understand this new section that has been added to the TILA, some definitions are needed:
Covered educational institution. Any postsecondary educational institution, and officers, employees, or agents of an institution, are included in the definition of a covered educational institution.
Gift. The definition of gift is quite broad, encompassing any "gratuity, favor, discount, entertainment, hospitality, loan, or other item having more than a de minimis monetary value, including services, transportation, lodging, or meals, whether provided in kind, by purchase of a ticket, payment in advance, or reimbursement after the expense has been incurred." Gifts to family members are also included if there is reason to believe it is provided because of the position of the relative. The list of things that are not included is very similar to the one laid out for codes of conduct above.
Private education loan. If a loan provided by a lender that is not made under Title IV of the HEA and is issued expressly for postsecondary educational expenses, regardless of whether the loan is provided through the institution or provided directly to the borrower. Extensions of credit that are secured by real property, or open-ended extensions of consumer credit are not included.
Revenue sharing. Revenue sharing is an arrangement between an institution and a private lender under which the lender pays a fee or provides other material benefits such as profit sharing to the institution in connection with loans provided to its students.
Prohibitions. Private educational lenders are prohibited from:
- offering or providing any gift to a covered institution in exchange for any advantage related to its lending activities
- co-branding, i.e., using the name, logo, mascot, or other words or symbols readily identified with an educational institution, in marketing educational loans. This provision does not take effect until the earlier of 18 months after enactment or when regulations are issued.
- paying compensation to a person employed in an institution’s financial aid office or who has responsibilities with respect to private loans for service on an advisory board, although reasonable expenses may be reimbursed. Under an additional change to Section 485 of the HEA tucked into Title X, institutions must file an annual report with the Secretary of Education disclosing any reimbursements for service on advisory boards received by its employees.
- charging prepayment or repayment fees or penalties on a borrower for early repayment of an educational loan.
Section 1012 (Section 128 (TILA)), Terms and Disclosures with Respect to Private Education Loans
The changes to Section 128 of TILA generally take effect when regulations are issued by the Federal Reserve Board or eighteen months after enactment, whichever comes first.
Disclosures. The law stipulates long lists of information that must be disclosed by lenders to borrowers at every step along the loan process, starting with applications and solicitations, at loan approval, and at consummation of the loan. As mentioned above under the discussion of Title I, within two years the Federal Reserve Board and the Secretary of Education are charged with developing model forms that may be used to provide the disclosures. Private lenders are required to provide information necessary to complete the model form to the institution.
Self-Certification of Information. Although some in the educational community had asked Congress to require institutional certification of enrollment for private loans, HEOA only requires the student to fill out a standard form to be developed by the Secretary of Education in consultation with the Federal Reserve Board. The lender must obtain from the applicant a this form, signed by the applicant, that contains a number of disclosures noting the availability of other assistance, encouraging the applicant to discuss options with the institution’s financial aid office, and noting that the information the student needs to fill in on the form may be obtained at the financial aid office. The form will include space for the following information to be filled out:
- cost of attendance
- expected family contribution, for students who have completed a FAFSA
- estimated financial assistance
- the difference between cost of attendance and estimated financial assistance, as applicable
- the sum of expected family contribution and the gap amount
The form is to be made available to the student by the institution.
Cancellation Rights. A borrower may cancel an education loan at any time within three business days of the date of consummation. No funds may be disbursed by the lender until after the cancellation period.
NACUBO Contact: Anne C. Gross, vice president, regulatory affairs, 202.861.2544
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