Higher education negotiators and the Department of Education last week wrapped up the first round of negotiated rulemaking on student loan issues. Negotiators took less than two days to discuss more than 23 separate issues. The Department is reviewing the content of the discussions of proposed regulations from this round and will offer draft regulations before the next round of negotiated rulemaking in late January or early February.
Besides topics suggested by the Department, in response to comments received at regional meetings and the recent Federal Student Aid conferences, the negotiators - by common consent - added additional items. (Note: While each agenda item is discussed below, not all agenda items are specifically listed. Some discussions addressed more than one agenda item and for ease of reading this summary is organized topically.)
Preferred lender lists and lender inducements were discussed in a prior Today's News article.
Department Agenda Items
Items Added By Common Consent
NASFAA has summarized the issues most pertinent to financial aid administrators below.
Entrance Counseling and Grace Periods for Graduate PLUS Borrowers
The Higher Education Reconciliation Act (HERA) made graduate and professional students eligible for PLUS loans under the same terms and conditions as parent PLUS borrowers. The effect is two federal loan programs that require borrowers to enter repayment at different times. If a student borrower has both Stafford and PLUS loans, the borrower will enter repayment on the PLUS loans immediately after graduating, withdrawing, or falling below half-time status, but will receive a six-month grace period on the Stafford Loans.
Some participants suggested a six-month automatic forbearance could be given to Grad PLUS borrowers, noting that a provision could easily be added to CFR §682.211(f) which already lists six provisions that allow lenders to offer forbearance.
Additional concerns were raised about the lack of mandatory entrance counseling for a Grad PLUS loan. Negotiators representing schools voiced concern about lenders that "push" borrowers into Grad PLUS, without mentioning Stafford Loans. Dear Colleague Letter FP-06-05 requires schools to offer students Stafford loans prior to the Grad PLUS. Students are under no obligation to take those Stafford Loan funds prior to accepting the Grad PLUS and students who only accepted Grad PLUS loans would miss entrance counseling offered to students taking out Stafford Loans.
Most agreed that entrance counseling is beneficial to a student borrower and Department negotiators stated that they would consider such a change in the language for proposed regulation.
Identity Theft Discharge
Regulations published in response to HERA authorize a discharge of a FFEL or Direct Loan if a Federal, State, or local court determines that identity theft had occurred. The Department has interpreted this to mean that a determination by a court must precede any discharge of a FFEL or Direct Loan.
Many negotiators expressed concern about the judicial review currently required by Department regulation.
"Lack of judicial review does not mean a crime hasn't taken place," said Scott Giles, vice president of the Vermont Student Assistance Corporation.
He asked the Department to reconsider making a borrower with defaulted student loans due to identity theft wait for judicial review before being eligible for Title IV assistance.
"Putting a student in limbo for any reason puts the student at risk," added Pam Fowler, director of financial aid at the University of Michigan.
Negotiators requested that the Department alter its approach to this issue, perhaps allowing victims to self-certify the discharge with the consequence of perjury, which is currently required under the Fair Credit Reporting Act (FACT Act).
Lenders complained that the current regulation is not a "borrower-centric" approach given that the FACT Act and the Federal Trade Commission have standard language that allows a consumer to take care of any fraudulent activity with a standard set of documents.
Lender representatives argued that borrowers generally have several products and accounts with a lender. When a borrower is dealing with identity theft, the lender expects to hand over one set of documents - required by the FACT Act - to take care of all of the resulting issues. As it stands now, borrowers would have to produce one set of documents for all of their debts within the lending and credit industries, and then an entirely different set of documents specifically for their student loans.
"This creates an undue burden on the borrower," said one lender representative.
Participants suggested that the Department adopt regulatory language that allows a universal set of documents, as outlined by the FACT Act.
Economic Hardships
A coordinated effort to have dozens of students vocalize support for new "income based deferment" or "partial economic hardship" at regional Department meetings had a big impact at the negotiated rulemaking table.
Bob Shireman, president of The Institute for College Access and Success (TICAS) and executive director for the Project on Student Debt was called by common consent as an expert to discuss the proposal that his organization has already drafted into regulatory language. The proposal calls for an expansion of the income contingent repayment plan to FFEL Program borrowers and to create a new "income-based deferment" which would guarantee a Stafford loan repayment:
- Not to exceed 15 percent of one's discretionary income (with 150 percent of the poverty line used as the baseline)
- With consideration given to the borrower's family size
- Renewable beyond the current three year limitation on deferments
Shireman's proposal received wide support from all negotiators, but the proposal did spark some questions. There was some confusion whether a person's past or present income should be considered and if the proposal was even cost feasible. Shireman argued that the proposal would prevent enough defaults to more than cover the cost of the new entitlement. The proposal would also provide the same option to borrowers in default and use any payments made under the income-based deferment towards rehabilitation.
Lenders questioned if payments under the proposal would, at times, yield a negative amortization, meaning that the borrower's payments would not even be enough to cover the accruing interest on the loan. Shireman acknowledged that this could occur, but pointed out that his proposal would have all payments count towards a payment number cap - much like the 25-year limit on loan repayment currently stipulated under the income contingent plan.
No cost figures or projected numbers of students were offered, but the Department plans to review the proposal again before the next round of negotiated rulemaking.
Retention of Disbursement Records
Master Promissory Notes (MPNs) are used in all Title IV loan programs. Because MPNs can be used for a 10-year period, no loan amount or loan period is recorded on the face of the note. When the Department seeks payment through legal action on a defaulted account (including accounts subrogated to the Department by guarantors which are unable to collect), it must be able to provide evidence to the court that the student benefited from the proceeds of the loan.
The Department contends that the yearly reconciliation process takes care of this issue on Direct Loans but no such mechanism is in place for FFEL Program loans. Schools hold this information, but currently schools do not have retain such information beyond three years. The Department asked what mechanisms could be put in place to archive that information for the Department's use when collecting on assigned loans.
Lenders and schools felt that regulations requiring some sort of reconciliation with multiple lenders would be overly burdensome. One participant suggested that a mechanism could be put in place to document that a borrower actually received their funds through NSLDS, or another report that schools are already doing. Another negotiator asked why language on a loan disclaimer (e.g., "By receipt of this disclaimer you acknowledge your acceptance and benefit of these loan funds") couldn't take care of the problem.
The Department indicated it would consider the matter further prior to proposing regulations early next year, not giving any indication of which way it was leaning.
Death Certification Discharge
Current regulations require parents who borrowed on behalf of a deceased dependent to produce an original or certified exact copy of a death certificate before processing a Death Discharge. However, lenders have been expressing increasing difficulty in obtaining these documents given increased privacy laws and security issues raised since Sept. 11.
Lender negotiators asked the Department to consider alternate documents, such as certified notification from a funeral director, to satisfy the necessary requirements. Lenders also asked the Department to consider the determination by one lender or guarantor, and as shown on NSLDS, as enough proof to discharge all loans held by other lenders and guarantors.
The Department concluded that it would take into account all suggestions and would investigate what other agencies are doing to prove death.
Retroactivity of Permanent and Total Disability
Current regulation stipulates that borrowers who seek loan discharge through total and permanent disability (TPD) must go through a three-year conditional period wherein they are not allowed to take out another loan (except for a consolidation loan) or receive annual income earnings that exceed 100 percent of the poverty line for a family of two from the date the borrower became totally and permanently disabled as certified by a doctor.
The legal aid community raised concerns that some borrowers were finding themselves disabled, applying for a TPD three or more years down the road, and then being denied because they had taken loans or worked in a period of time when - unbeknownst to them - they were in a conditional discharge period. Deanne Loonin, from the National Consumer Law Center, asked that more disclosure be given to borrowers informing them of this issue.
Because borrowers that wait to file TPD until three years have passed are receiving immediate final TPD discharges (the three year conditional discharge period having already passed), the Department is advocating for a more up-to-date date that would ensure that a borrower's conditional period is in the future, not the past.
Lender Reporting Requirements to NSLDS
Schools and guarantors have regulatory requirements that specify their reporting requirements to NSLDS, but there is no such regulation for lenders. The Department asked if regulatory language should be drafted that would require lenders to report information within a certain time-frame.
"Given that schools aren't given 60 days to report anything, why can't lenders do it in 30?" asked Pam Fowler.
Delayed reporting can result is several problems for a borrower, specifically when the borrower has taken funds at one school, only to take the same amount of funds at another during the same award year, resulting in an overaward.
Lender negotiators responded that most lenders are already reporting within 30 days to guarantors with their loan updates and wondered if a problem existed that would require more regulation. The Department offered no such examples.
Assignment and Reasonable Collection Costs of Defaulted Perkins Loans
Mandatory assignment to the Department of a defaulted Perkins Loan is required by HEA only if the school holding the loan has knowingly failed to maintain an acceptable collection record with respect to the loan. The Department claims that this limiting regulation will not allow them to step in and reclaim loans that it feels it could do a better job collecting than the school because the Department has tools not available to schools. The Department says that Perkins Loans that have been outstanding without payment for more than five years shows a failure of due diligence and that mandatory assignment of those loans may be required.
"Lack of receipt of payment is not indicative of failure of due diligence," said Alisa Abadinsky, President of Coalition of Higher Education Assistance Organizations. Abadinsky stated that some outstanding loans are still being pursued by the schools. Abadinsky also asked the Department to consider a regulatory provision that would return collected monies on an assigned Perkins loan to the originating institution to fund other Perkins Loan recipients. Currently, funds that the Department collects on assigned loans goes to the Treasury Department to reduce the deficit.
The Department also raised concerns about the high collection costs assessed on defaulted Perkins Loans which can sometimes be as high as 30 or 40 percent. Program regulations stipulate "reasonable" collection costs are applicable to defaulted Perkins Loans, but the term "reasonable" is not defined in regulation. The Department proposed that negotiators consider a definition for "reasonable" which is inline with the formula for CFE §30.60 or an amount equal to what the Department would charge - which is currently around 16 percent.
"The costs recovering $1 are the same as $10,000," said Abadinsky, summarizing the problem. With the average defaulted Perkins loan amount around $1,200, higher collection costs are needed to generate real dollars to offset the actual costs of collecting funds. Abadinsky argued that insufficient collection fees on defaulted Perkins Loans depletes the Perkins Loan funds for future Perkins borrowers.
The Department concluded by saying it would consider the comments received, including consideration of returning funds to the school on assigned loans, prior to impending regulatory language.
Eligible Lender Trustee Relationships
The most recent HEA Extension Act eliminated the ability of a FFEL lender to enter into an eligible lender trustee (ELT) relationship with a school or "school-affiliated organization." The negotiated rulemaking conversation revolved around the regulatory definition of a "school-affiliated organization."
Some noted that some organizations are amorphous, claiming to be school-affiliated when it serves their purpose and not affiliated when it doesn't serve their purpose. For example, alumni associations sometimes claim to be school-affiliated and at other times claim complete independence from the institution. Some questioned if a lender could use an organization like an alumni association to setup an ELT. Other cited athletic associations and boosters as another possible candidate for future ELTs. Most thought it would be good to better define parameters to comply with the intent of the law, but many questioned how regulation could be drafted to effectively address the issue.
Single Lender Determination of a Borrower's Eligibility for Deferment
Under current regulations borrowers seeking a deferment (other than an in-school deferment) must contact each one of their loan holders and supply each with justifiable deferment documentation. Dick George, President and CEO of Great Lakes Higher Education Guaranty Corporation, proposed a regulatory change to simplify the process for borrowers to obtain deferments by allowing a loan holder to grant any type of deferment to a qualified borrower who has another loan deferred for the same timeframe and the same reason by another holder.
Using NSLDS technology, borrowers would only need to apply for a deferment with one lender or servicer, which would then update the information on a national database that other lenders could then use to apply to a borrower's loans at their own institution. This would assist borrower with multiple lenders, who sometimes forget that obtaining a deferment with one lender does not mean that their loans with other lenders will automatically go into deferment.
The Department raised concerns about each lender having responsibility to make sure that a borrower is eligible for a deferment, but would nevertheless consider the proposal before publishing the next proposed rules in January.
Standard Policy for Hardship Appeal
Currently, defaulted borrowers who are subject to wage garnishment may request a reduced income percentage payment because of "economic hardship." However, guaranty agencies apply this regulation differently. A proposal was set forth for regulatory language that would standardize a reduction in payment for borrowers subject to wage garnishment seeking shelter under an economic hardship. Without much discussion, the Department committed to reviewing the suggestion prior to its release of the next proposed rules.
Reasonable Payments for Default Rehabilitation
While federal regulations call for "reasonable payments" of borrowers in a default rehabilitation program, currently none of the regulations provide a consistent definition across all programs of "reasonable payments." Along the lines of calling for a unifying definition of "reasonable payments," one proposal offered by the negotiators asked for the same provisions found in the income contingent repayment (ICR) plan offered in Direct Lending, to apply to borrowers in a default rehabilitation program.
Giles pointed out that some borrowers who have reduced payments while in the rehabilitation program are shocked once they reenter repayment because the monthly payment amount jumps considerably. FFEL Program participants cannot offer ICR, but they are able to provide forbearance. Giles pointed out that if a borrower asks for help, the loan holder can provide them a forbearance up to five years. By stretching out a borrower's repayment schedule through forbearance, a borrower could have reduced payments that could ease the burden of a borrower leaving a rehabilitation program and entering repayment. Giles asked the Department to consider a point of clarification that would allow loan holders to offer this option to borrowers immediately after leaving repayment so lenders wouldn't have to wait for borrowers to ask for assistance.
Negotiators also asked for regulatory assistance for borrowers in an active rehabilitation plan to be protected from additional collection notices, which create confusion for borrowers and may result in them making additional payments outside of the rehabilitation program. Once a borrower enters into default, several - sometimes aggressive - attempts are made to collect on the outstanding money. Many felt that once a borrower has entered into a loan rehabilitation program, or any other agreement with a guarantor, that regulation should protect borrowers from any other collection attempts.
The Department declined to give any definitive answer but said that it would consider all suggestions prior to the next proposed regulations.
Additional Disclosure of Repayment Information
One negotiator asked that consideration be given to new regulations that would require lenders to update borrowers of their repayment options throughout the life of their loan. The assumption is that many borrowers are unaware that they have several repayment options and can change their repayment plan throughout the life of their loan.
Lenders wondered if such regulation was necessary given the amount of information that is already given to borrower via mail and the Internet. Phil Van Horn, CEO of the Wyoming Student Loan Corporation, stated that he didn't think that a lack of information was the problem.
"If there is one message I would get out to all students," said Van Horn, "it would be; when you're in trouble, call your lender." Van Horn maintained that lenders will give a borrower every option available if they are in trouble.
Luke Swarthout, from the State Public Interest Research Group on Higher Education, disagreed. He argued that students don't have enough information about all of their options.
Lenders questioned whether additional disclosures would really help since borrowers already receive multiple disclosures. Others asked if the burden to inform students of their repayment plans should rest instead on schools or the Department. However, given that the proposal was to inform borrowers already in repayment, who are in good standing, of their additional repayment options, it is unclear how a school would be able to play any effective role.
The Department will consider all points and determine if additional regulation should be constructed.
Frequency of Capitalization for Consolidation Borrowers with an In-School Deferment
Jennifer Pae, from the U.S. Students Association, proposed regulation requiring capitalization on consolidation loans for student with an in-school deferment to occur at the same rate as Stafford and PLUS Loans. Current Stafford and PLUS Loans capitalize interest when a student experiences a status change (i.e., withdraws, graduates, drops below half-time). Current regulations state that capitalization for consolidation loans occur "no less often than quarterly."
Given the high number of borrowers who consolidated their loans while in school in the last few years, this legislation will protect them from excessive interest charges said Pae. This would also assist borrowers with consolidation loans that return to school after periods of hiatus. Most negotiators supported the proposal and the Department stated that it would consider the proposal.
By Justin Draeger
NASFAA Assistant Director for Communications
Posted 12/19/06 to www.NASFAA.org. Redistribution to non-NASFAA institutions is prohibited. Please submit Web Site questions or comments to Web@NASFAA.org.
