NASFAA is asking the membership to comment on a proposed policy change that will be presented next week to the Board of Directors for their consideration. The new policy would put the association on record advocating changes in the way private educational loans are coordinated with Federal student aid and other assistance.

In order to complete staff work prior to the Board of Directors conference call, we are asking members to submit your comments and suggestions by Close of Business Tuesday December 4th. Please email your responses to govtaffairs@nasfaa.org.

Executive Summary

Increasingly individuals and families are borrowing private educational loans, many of which are marketed directly to consumers and are known in the trade as Direct-To-Consumer (DTC) loans. DTC loans bypass any school involvement, even though they are defined by Federal regulation as estimated financial aid. Under current practice, there is no uniform method by which aid administrators even learn about private loans borrowed after the fact. Depending on when the school learns about the loan and the amount of the loan, an overaward situation can be triggered, leaving borrowers subject to the possible loss of eligibility for campus-based, ACG, SMART, and/or federal student loan funds.

The recently-reported House of Representatives Higher Education Act Reauthorization bill, H.R. 4137 the College Opportunity and Affordability Act of 2007, adds new provisions that will affect borrowers of all private educational loans, including DTC loans, and the schools they attend. A provision of H.R. 4137 mandates that private educational loan lenders notify schools, in writing, before a loan of $1,000 or greater is made; the lender must inform the school of the loan request and the amount of the loan.

NASFAA believes that the new credit notification provision will change the current operational problem - resulting in the loss of aid to a modest number of Title IV recipients - into an across-the-board administrative action on individual awards for many borrowers of private educational loans who also receive Title IV aid. We believe that all private loans must be certified by the financial aid office. The notification requirement in H.R. 4137 in and of itself is not sufficient to facilitate this process.

Proposed Solution

To modify H.R. 4137's credit notification requirement, we propose the following:

1. The institution will certify each private loan by:
   1. Confirming that the student is enrolled or scheduled to enroll at the institution;

   2. Advising non-FAFSA filers that they may qualify for Federal financial assistance through a Title IV program;

   3. Recommending a loan amount not to exceed the school's cost of attendance minus the student's estimated financial assistance.

2. An institution may only refuse to certify the loan if it exceeds the amount determined by the calculation in 1c, and must preserve the borrower's right to select a lender.
3. A lender may not make a loan that is greater than the amount certified or make a loan prior to receiving the institution's certification; however, a lender may reduce the amount requested by a borrower if warranted even if a higher amount was certified by the institution.
4. The lender of a private educational loan must disburse loan proceeds directly to the school or electronically transfer funds directly to the institution or generate a loan check co-payable to the borrower and the institution.
5. The Secretary shall prepare easy-to-understand materials explaining the benefits of, Federal aid vs. private educational loans. Institutions may provide these materials to their students and families.

NASFAA's proposal accomplishes several important goals. It protects the interest of the Federal government and Title IV eligible students and private loan borrowers by helping ensure that they receive the maximum amount of federal student aid for which they are eligible. It replicates current private educational loan school certification procedures performed routinely by many financial aid offices. It guarantees that no such loan will be made beyond the borrower's cost of attendance. It assists in reducing the potential of borrowing beyond what is necessary to finance an education and limiting the impact of less-than-accurate marketing campaigns used by some in the lending industry.

The NASFAA proposal also addresses what we believe could be a growing problem of "overawards" triggered by unrestrained private educational loan borrowing, especially in the area of unregulated DTC loans as a result of the House bill's notification requirement.

NASFAA's proposal helps ensure that Title IV eligible students and private loan borrowers receive the maximum amount of federal student aid for which they are eligible. Requiring schools to certify loans using a process already in place helps make certain borrowers are counseled regarding their possible Title IV eligibility, eliminates borrowing beyond cost of attendance, and reduces potential overaward problems. It preserves the borrower's right to choose a lender. It makes certain all private educational lenders are treated equally in terms of administrative processes and in their interactions with borrowers and their schools. It adds clarity and substance to the notification provision in H.R. 4137.

Background

The document provides the reasons and the rationale for the policy change in great detail. It was initially developed by staff. The NASFAA Federal Issues Committee reviewed the draft proposal and made numerous suggestions for change and improvements.

Again, we ask for your comments by Close Of Business Tuesday December 4th emailed to govtaffairs@nasfaa.org.

Posted 11/30/07 to www.NASFAA.org. Redistribution to non-NASFAA institutions is prohibited. Please submit Web Site questions or comments to Web@NASFAA.org.