ED Issues Guidance, Responds to NASFAA Letter on Wind-Down of Perkins Loan Program

By Jill Desjean, Policy and Federal Relations Staff

On Friday, the Department of Education (ED) released both guidance on the Sept. 30, 2017 expiration of school authority to make new Perkins loans, as well as a response to a June letter from NASFAA requesting an orderly and equitable wind-down of the Perkins Loan program in the event that Congress did not take action to extend the program beyond its expiration.

The guidance reiterated the provisions of the Perkins Loan Program Extension Act of 2015 (Extension Act) which prohibited the making of new loans to graduate students after Sept. 30, 2016, and to undergraduate students after Sept. 30, 2017, but permitted subsequent disbursements until June 30, 2018 for undergraduates (2017 for graduate students) who received a first disbursement prior to Oct. 1, 2017 (2016 for graduate students). Friday’s guidance stressed that “(n)o Perkins Loan disbursements are permitted after June 30, 2018, under any circumstances.” The guidance also indicated that ED will not begin collecting the federal share of institutional revolving funds until after submission of the 2019-20 Fiscal Operations and Application to Participate (FISAP), which is due Oct. 1, 2018.

In its letter, NASFAA requested that schools receive reimbursement for borrower service cancellations granted since fiscal year (FY) 2009, when the federal government ceased reimbursing institutions. ED indicated in Friday’s Dear Colleague Letter (DCL) that institutions will not receive reimbursement for post-FY 2009 service cancellations, citing a prohibition in the Higher Education Act (HEA) section 465(b) on use of FCC funds from being used for that purpose.

Central to many of NASFAA’s concerns in its June letter to ED was the argument that the expiration of authority to lend under the Perkins loan program effectively forces institutions to exit the program involuntarily. Because the program is ending, standard rules that apply when a school voluntarily leaves the program are not necessarily applicable, NASFAA asserted. ED disagreed on this point, pointing out that schools may opt to continue to service their outstanding Perkins loans, and contending that institutions that choose to assign all outstanding loans to ED are, in fact, voluntarily leaving the program. Friday’s guidance reflects this belief, with closeout audit requirements remaining unchanged. NASFAA had requested an extension to the 45-day deadline for institutions to submit a letter of audit engagement, but ED indicated it does not anticipate a need for extension of the 45-day deadline since not all schools will leave the program simultaneously.

For institutions assigning outstanding loans to ED, NASFAA asked that they retain their right to their institutional contributions and a share of collections by ED but the department, in keeping with their contention that institutions choosing to assign loans are voluntarily exiting the program, stated that those institutions, in accordance with 34 CFR 674.50(f), “lose all rights and title to the loan without recompense.”

ED also did not accept NASFAA’s request that institutions choosing to continue servicing their outstanding loans be allowed to subtract collection and administrative costs from the federal share remitted to ED, except for certain collection costs permitted under 34 CFR 674.47(e).

NASFAA also requested that ED distribute Perkins fund assets between institutions and the federal government equitably, taking into account not only net Institutional Capital Contributions (ICC) but also any short-term, no-interest loans institutions may have made to the fund, lent out to students, and subsequently repaid itself. Because those short-term loans represent risk assumed by the institution, NASFAA argued, institutions should be entitled to 100 percent of the interest earned on those funds. ED responded that schools will receive only a proportional share of earned interest on short-term loans to the fund as part of the asset distribution process.

Finally, the guidance advises that institutions may continue to assign both defaulted and non-defaulted individual loans to ED at any time. ED indicated that further guidance on the distribution of revolving fund assets will be provided prior to Oct. 1, 2018. NASFAA does not believe the latest guidance from the ED represents an equitable or fair closeout of the program and will work with ED and with Congress to explore flexibility within existing law, as well as new legislative solutions to ensure that institutions receive proper compensation for their capital contributions, interest, and unreimbursed cancellations.

 

Publication Date: 10/10/2017


Peter G | 10/10/2017 2:7:10 PM

I didn't see it addressed anywhere in this response or in the DCL, but hopefully someone from NASFAA is in communication with the Department about the excess liquid capital formula.

The logic of it as written in 2015 makes sense for schools that are still making loans but it falls apart quickly when new loans cease since the formula essentially double counts prior year collections.

[(cash on hand + 75% of prior year collections) - (2 years lending + ACA)]

Your cash on hand as of June 30 is composed significantly, if not entirely by year 2, of funds collected in the prior year.

This was already well under way when I came to the institution, but I couldn't find any way out of it and the Department held firm on following the math, even though the math is nonsensical when issuance of new loans ceases.

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