Late in March, a task force of 17 NASFAA members forwarded to NASFAA’s Board of Directors an initial list of 61 recommendations for changes to the Higher Education Act via the upcoming reauthorization. The Board accepted most of those recommendations, although it was requested that some be further developed. NASFAA members are encouraged to suggest additional areas where legislative change is needed. This article is the first of two on the Direct Loan Program. For comprehensive coverage of all reauthorization topics, please refer to NASFAA’s HEA Reauthorization Web Center.
NASFAA’s Reauthorization Task Force (RTF) recommends that Congress establish a separate loan program for graduate borrowers which mirrors the current Grad PLUS program but identifies this program specifically as a loan for graduate/professional students. Adverse credit rules would be retained, but the RTF recommends that the credit check be conducted only for first-time borrowers at the school.
This recommendation will be merged with a similar recommendation from NASFAA’s Indebtedness Task Force (ITF), which also recommended separate programs based on borrower type. (The ITF recommendations were accepted by the Board prior to the RTF proposals; RTF is in the process of incorporating many of the ITF proposals.)
Establishing separate programs for graduate students and for parents of dependent students would facilitate the establishment of different terms and conditions appropriate to the type of borrower. For example, distinctions could be made in the determination of credit worthiness, perhaps by expanding parent eligibility credit criteria to include a debt-to-income measure. Other differences in terms could include lower interest rates for students than for parents, or the establishment of loan limits for either or both types of borrowers.
The RTF would allow unequal disbursements to accommodate unequal costs or resources and to facilitate disbursement by term in nonstandard term programs. This is a perennial recommendation which would allow disbursements to occur at the same time across all Title IV programs.
The RTF believes that schools should be able to originate loans up to 30 days after the student's last date of enrollment or change to an ineligible enrollment status. This recommendation would allow schools to deal with students who were unable to complete the loan application process prior to ceasing enrollment or who anticipated resources that did not materialize.
Currently loans may not be originated once the enrollment period has ended, the student withdraws, or the student’s enrollment status drops to less than half time. The proposed option may reduce the use of less beneficial private education loans, and provide the late-applying student access to federal Direct Loans to resolve institutional debt so that the student can reenroll and go on to successfully complete his or her program. This recommendation would not change the current prohibition against late disbursement of second or subsequent installments.
The RTF recommends reinstatement of the Department of Education’s (ED) authority to offer repayment incentives, if there is evidence of effectiveness and cost neutrality.
The Budget Control Act of 2011 prohibited ED from authorizing or providing repayment incentives on new loans disbursed on or after July 1, 2012, except that an interest rate reduction may be provided to a borrower who agrees to automatically debit electronic payments.
Proration of Annual Loan Limits
Congress should eliminate loan proration for programs that are at least a year in length.
Proration for students in a final period of enrollment penalizes students who are about to complete their program of study and may drive students to borrow from a private lender. Proration of loan limits would be retained for programs that are less than an academic year in length.
School Authority to Reduce Loan Amounts
The RTF believes that schools should be allowed to set lower loan limits for specific populations, academic programs, credential levels, or other categories established by the school. Professional judgment could be used by aid administrators to increase a particular student’s loan from the school’s imposed limit up to the regular applicable statutory limit on a case-by-case basis. Schools should retain the authority to deny loans on a case-by-case basis.
This recommendation essentially reverses current policy, which allows reduction of loans only on a case-by-case basis. With the authority to set limits by program, dependency status, living arrangement, enrollment status, or other parameters, schools could notify students earlier of the reduced loan amount and of the school’s process for exceptions, if any, to the policy. Many NASFAA members have requested this authority for some time, as a tool to avoid incurring unnecessary indebtedness, reaching aggregate loan limits before the program of study is completed, and losing the interest subsidy before completing the program of study.
The ITF made a similar recommendation.
Annual and Aggregate Loan Limits
If schools are not granted the authority to reduce loan limits based on categories, the RTF believes that other measures would be needed to control or redirect borrowing. These measures could include reduction of annual loan limits based on enrollment status.
The RTF would also eliminate differences in annual loan limits based on year in school, and would step aggregate limits so that a lower aggregate limit applies to undergraduate students who have not yet successfully completed the second year of an undergraduate program.
The subsidized/unsubsidized structure of loan limits needs to be simplified: the current structure of base limits divided between subsidized and unsubsidized amounts plus additional unsubsidized amounts, all of which vary by year in school, reflects piecemeal changes to the loan programs and is difficult to explain. Full-time limits need to be structured to account for inflation (for example, keyed to the Consumer Price Index) to avoid loss of buying power and to reflect realistic expenses.
The next article in this series will describe the remaining Direct Loan recommendations.
Publication Date: 5/15/2013