The School-based Loan Issues Team concluded the second round of negotiated rulemaking on April 4 after coming to tentative agreement on nine of the eleven issues under consideration. For the most part, the draft proposed rules incorporate statutory language, which the Department is reluctant to change. This article highlights aspects of each of the issues discussed.

Many of the Issue 1 provisions are interconnected with proposed Truth in Lending Act (TILA) regulatory package published March 24, in the Federal Register. TILA proposed rules would implement changes made to TILA by the Higher Education Opportunity Act (HEOA) and include the definition of private education loan, preferred lender arrangements, and related institutional disclosure requirements and responsibilities. Members are encouraged to review the March 24 Issue 1: Required Disclosures for Covered Entities

Issue 2: Program Participation Agreement (PPA): Code of Conduct

Issue 3: Disclosures of Reimbursements for Service on Advisory Boards

Issue 4: PPA: Private Education Loan Certification

Issue 5: Information and Dissemination Activities

Issue 6: Exit Counseling

Issue 7: PPA: Preferred Lender Lists

Issue 8: Cohort Default Rate Calculation, Institutional Eligibility, and Default Prevention Plans

Issue 9: Entrance Counseling

Issue 10: Direct Loan Borrower Disclosures and Issue 11: Mandatory Assignment of Defaulted Loans

Issue 12: Expansion of TEACH, Head Start, and Law Enforcement Cancellation Categories

Issue 13: Addition of New Public Service Cancellation Categories

Issue 14: Military Service Cancellation

Tentative agreement was not reached on these draft proposed rules. Disagreement centers on what is considered a preferred lender arrangement as that term relates to the use of a preferred lender list. Current Department of Education (ED) guidance on preferred lender lists is contained in GEN-08-06/FP-08-06.

Institutions would not be considered in a preferred lender arrangement if they simply offer a comprehensive list of lenders that have made or are willing to make loans to its students and families, do not list any additional lender information (other than contact information) and clearly state that the borrower may choose any lender regardless of whether the lender is listed. 

Some nonfederal negotiators argued that institutions should be able to include comparative information, neutrally stated, about borrower benefits and lender experiences without the institution being considered to have a preferred lender. ED officials disagreed with nonfederal negotiators and the issues remained open.

Despite this lack of agreement, negotiators were able to agree on many of the other Issue 1 provisions. These include new institutional requirements related to preferred lender arrangements, private education loan and Title IV loan disclosures, private education loan self-certification, co-branding, code of conduct, and reporting. A new Part 601 - Institution and Lender Requirements Relating to Education Loans will house the new provisions within the Institutional Eligibility regulations and would apply to covered institutions and institution-affiliate organizations.
 
Definitions. The proposed rules would define certain terms used in the regulations. A covered institution would be an institution of higher education (as defined in Part 600 of the Institutional Eligibility regulations) that receives any federal funding or assistance. An institution-affiliate organization would be an organization, directly or indirectly related to a covered institution, that is engaged in the practice of recommending, promoting, or endorsing education loans for the institution's students or their' families. An institution-affiliate organization may include an alumni or athletic organization; a foundation; or a social, academic, or professional organization of a covered institution. An agent would be an officer or employee of a covered institution or institution-affiliate organization.

An education loan would be a FFEL, Direct Loan, or private education loan. A preferred lender arrangement would be an arrangement or agreement, between a lender and a covered institution or an institution-affiliated organization of the covered institution, (1) under which a lender provides education loans to students or families of students attending the covered institution, and (2) that relates to the covered institution or the institution-affiliated organization recommending, promoting, or endorsing the education loan products of the lender. The proposed rules would exclude arrangements or agreements related to the Direct Loan Program or the PLUS Loan auction pilot.

Preferred Lender Arrangement Disclosures. A covered institution or institution-affiliate organization that has a preferred lender arrangement would be required to disclose to current and prospective students and their families:

·         The maximum amount of Title IV grant and loan assistance available;

·         Information on the model education loan disclosure form (to be develop by ED and the Federal Reserve) for each type of education loan offered pursuant to a preferred lender arrangement; and

·         The institution must process a FFEL application from any eligible lender the student selects.

Additional disclosures would have to be included as part of an institution's   preferred lender list. These include: information on the ED/Federal Reserve model education loan disclosure form; specific information regarding why each lender listed was chosen; details regarding any affiliation between lenders listed; and a statement that borrowers do not have to choose any of the lenders listed.

The regulations also would specify the minimum number of unaffiliated lenders that must be included on a FFEL and on a private education loan preferred lender list. Institutions would be required to compile their list without prejudice and for the sole benefit of students and their families. Institutions also would be prohibited from impeding borrower choice or causing unnecessary delay in certifying loans if a borrower chose a lender not on the institution's preferred lender list.

Private Education Loan Disclosures and Self-Certification Form. A covered institution or institution-affiliate organization that provides private education loan information would be required to provide certain disclosures regardless of whether it has a preferred lender arrangement. These would include the disclosures required under the proposed Truth and Lending Act (TILA) regulations, the borrower may qualify for Title IV loans and other assistance, and Title IV loan terms and conditions may be more favorable than those of private education loans.

Borrowers would be required to obtain an electronic or paper self-certification form from institutions before consummating a private education loan. Institutions would be required to complete the form and return it to the student who would submit it to the lender. The proposed regulations would require institutions to provide the form upon the borrower's request. Nonfederal negotiators had several concerns regarding the private lender disclosures and self-certification form and specifically how self-certification would work with their current certification operating procedures.

A primary concern centers on institutions that offer institutional loans to their students either as part of an award package or on an emergency or other basis. Under TILA and the proposed rules, closed-ended institutional loans would be considered private educational loans. Nonfederal negotiators argued that institutional loans should be excluded from the definition of private education loan, and questioned the necessity (and redundancy) of completing a self-certification form for institutional loans. Compliance with the proposed private loan disclosure and processing requirements would unnecessarily delay delivery of the loan proceeds. Federal Reserve attorneys, who briefed negotiators about the TILA NPRM, seemed  open to considering the exclusion of institutional loans from the definition of private education loan.

Nonfederal negotiators also requested that the requirement to provide the self-certification form apply only if the student were admitted to or enrolled at the institution. Otherwise, there are privacy issues in ascertaining the identity of the individual requesting the form as well as the fear of individuals trying to scam the system. The federal negotiator agreed to the change.

Additional Disclosure Requirements. A covered institution or institution-affiliate organization would be required to disclose to current students or, as applicable, their families information include in the ED/Federal Reserve model education loan disclosure form for each educational loan offered pursuant to a preferred lender arrangement. In addition, a covered institution would be required to disclose information required under section 128(e)(11) of TILA, and an institution-affiliate organization would be required to disclose information required under TILA section 128(e)(1). The disclosures would be required at least annually and in a manner that would allow students or their families to take the information into account before selecting a lender or applying for an education loan.

Co-branding Lender Products. If a covered institution or institution-affiliated organization has a preferred lender arrangement regarding private education loans, the proposed rules would prohibit lenders and schools from co-branding those loans to students. There should be no implication that the loans are offered or made by the institution or organization when they are made from a private lender. The institution or organization also must ensure the lender's name is displayed in all private education loan materials.

Nonfederal negotiators pointed out problems these provisions would create related to institutional loans, and reiterated their request for the exclusion of institutional loans from the definition of private education loans. Failing to obtain a change in the proposed regulatory language, some nonfederal negotiators also requested that the preamble clarify the extent to which institutions and organizations would be expected to ensure a lender's compliance with the requirement to display its name on private education loan materials.

Annual Report. If a covered institution or institution-affiliate organization has a preferred lender arrangement, it must submit an annual report to ED about each for which it has a preferred lender arrangement. The report must provide a detailed explanation of the reason(s) the institution entered into the arrangement, including why each loan offered under the arrangement is beneficial to the borrower. For each loan offered under a preferred lender arrangement, the institution's report would information it must disclose under section 128(e)(11) of the Truth in Lending Act (TILA), and an institution-affiliate organization's report would include information it must disclose under TILA section 128(e)(1). Institutions would be required to make the report available to the public and to provide it to current and prospective students and their families.

Since there may be changes to an institution's preferred lender list during the year, nonfederal negotiators requested clarification of which lenders would be included in the report. The nonfederal negotiator stated the report should reflect what transpired during the year covered by the report and suggested the report be prospective in nature.

Code of Conduct. If a covered institution has a preferred lender arrangement for Title IV loans or private education loans, the institution must develop a code of conduct with respect to Title IV loans and publish the code prominently on its Web site. The code of conduct would apply to the institution's officers, employees, and agents; and the institution would be required to inform these individuals of the code's provisions. An institution-affiliate organization of the covered institution also would be required to comply with the code, publish the code on its Web site, and annually inform all of its agents, who have responsibilities with respect to education loans, of the code's provisions.

The code of conduct would prohibit a conflict of interest with the responsibilities of an institutional officer, employee, or agent with respect to Title IV loans. In general, the code also would prohibit:

·         Revenue-sharing arrangements with a lender;

·         Financial aid office employees from receiving any gifts from a lender, guarantor, or loan servicer;

·         The acceptance of any fee, payment, or other financial benefit as compensation for any type of consulting arrangement or other contract to provide services to or on behalf of a lender relating to education loans;

·         Directing borrowers to particular lenders or delaying loan certifications;

·         Requests or acceptance of funds from any lender for use in making private education loans (this includes funds for an opportunity pool fund to students in exchange for concessions or promises for a specified number of Title IV loans, specific loan volume, or a preferred lender arrangement);

·         Requests or acceptance of lender assistance with call center or financial aid office staffing;

·         The receipt of anything of value from a lender, guarantor as compensation for service on an advisory board (reimbursement for reasonable expenses would be permitted).

Nonfederal negotiator asked whether recourse loans would be considered an opportunity pool. Many foreign students currently are having difficulty in obtaining private loans and some schools are agreeing to cover all or part of their foreign students' loan should the student default. These institutional agreements of ensuring loan repayment in the event of default are referred to as recourse loans. ED will look at whether such an agreement would be considered a code of conduct violation.

The draft proposed rules would make the requirement to develop, publish, and enforce the code of conduct (required under proposed Part 601) a part of an institution's Program Participation Agreement. Negotiators reached tentative agreement on this issue.

The draft proposed rules would amend the administrative capability standards to require institutions to report to ED detailed information regarding any reasonable reimbursement paid or provided by a lender or group of lenders related to serving on an advisory board or commission. Reporting would be required annually and would apply to reimbursements received by financial aid office and other institutional employees who have responsibilities with respect to education loans or other institutional financial aid. Expenses would be considered reasonable if they are paid in accordance with applicable institutional policy, or in the absence of such policy, federal cost principles.

Federal cost principles refer to federal standards in OMB Circulars called the 'prudent man rule.' The federal negotiator indicated that there would be a lengthy discussion in the NPRM preamble about what would be considered reasonable reimbursements.

Negotiators reached tentative agreement on this issue.

The draft proposed rules would make the requirement to provide the self-certification form to an admitted or enrolled private education loan applicant a part of an institution's Program Participation Agreement. An institution would be required to complete the form to the extent that it has the requested information. In addition, institutions would be required to discuss the availability of federal, state, and institutional aid if requested by the applicant.

Nonfederal negotiators asked whether institutions would be required to update information reported on the form if any information changes. No updating would be required.

Nonfederal negotiators also were concerned about the way in which statute describes how the student's EFC, COA, and EFA must be reported. They fear the information may incorrectly indicate the applicant has a higher need or eligibility for the private education, and thus, this lead to an overaward of Title IV funds. The federal negotiator stated that proposed regulatory language was the same as the statutory language, and no change could be made. However, ED would try to address the negotiators' concern in the development of the form.

Negotiators reached tentative agreement on this issue.

The draft proposed rules would amend the Title IV student consumer information regulations to require institutions to provide students with information describing the terms and conditions of any Federal Perkins Loan and FFEL or Direct Loan the student will receive. Negotiators reached tentative agreement on this issue.

Issue 6: Exit Counseling
 
The draft proposed rules would amend the exit interview provisions for Federal Perkins Loan, Stafford Loan, and graduate PLUS borrowers.

For Federal Perkins Loan borrowers, changes to what institutions must provide during exit counseling would include:

·         An explanation of the borrower's option to prepay a loan or pay on a shorter schedule;

·         Specific information regarding the consequences of loan consolidation;

·         An explanation of the use of the Master Promissory Note (MPN);

·         A description of delinquent debt collection procedures under federal law as part of the information regarding the likely consequences of default;

·         The borrower's obligation to repay the loan even though the borrower has not completed his or her program within the regular time for completion;

·         A general description of the terms and conditions under which a borrower may obtain loan forgiveness or cancellation, deferment, an extension of the repayment period, and forbearance;

·         A paper or electronic copy of the information ED makes available to eligible institutions, eligible lenders, and secondary schools pursuant to section 485(d) regarding the federal student assistance programs;

·         An explanation of how the borrower can use NSLDS to obtain Title IV loan status information; and

·         A general description of the types of tax benefits available to borrowers.

For Stafford Loan and graduate PLUS borrowers, changes to what institutions must provide during exit counseling would include:

·         A description of the different features of each repayment plan and sample information showing the average anticipated monthly payments, and the difference in interest paid and total repayments under each plan;

·         An explanation of the borrower's option to prepay, to pay on a shorter schedule, and to change repayment plans;

·         Specific information regarding the consequences of loan consolidation;

·         A description of the likely consequences of default, including adverse credit reports, delinquent debt collection procedures under federal law, and litigation;

·         A general description of the terms and conditions under which a borrower may obtain loan forgiveness, deferment, an extension of the repayment period, and forbearance;

·         A paper or electronic copy of the information ED makes available to eligible institutions, eligible lenders, and secondary schools pursuant to section 485(d) regarding the federal student assistance programs;

·         An explanation of how the borrower can use NSLDS to obtain Title IV loan status information; and

·         A general description of the types of tax benefits available to borrowers.

In response to a nonfederal negotiator's concern, the federal negotiator pointed out that institutions would not be required to describe the delinquent debt collection procedures under federal law. Instead institutions would merely need to state that implementation of such debt collection procedures could be a likely consequence if a borrower defaults. Also, information from IRS Publication 970 would satisfy the requirement to provide a description of tax benefits available to borrowers.

Negotiators reached tentative agreement on this issue.

The draft proposed rules would amend Program Participation Agreement regulations to require an institution to compile and maintain a preferred lender list for any year in which the institution has a preferred lender arrangement. The institution would be required to make the list available, in print or other medium, to enrolled students and their families. In addition, the institution would be required to comply with the prohibited transactions provisions in 682.212(h) and 601.10.

Given the outstanding issues associated with Issue 1 related to preferred lender lists, tentative agreement was not sought for this issue.

Under the draft proposed rules, ED would create a new Subpart N to the Student Assistance General Provisions regulations to house the new three-year cohort default rate provisions that go into effect beginning with fiscal year 2009. Most of the provisions in Subpart N would mirror Subpart M, except that the rates calculated under Subpart N would be three-year rates instead of two-year rates.

Subpart M would be amended to include the provisions governing the period during which a two-year and a three-year rate will be calculated. Other changes to Subpart M would reflect current operational procedures. For fiscal years 2009 through 2011, institutions would receive two sets of cohort default rates—one calculated under Subpart M and the other calculated under Subpart N. During the three-year transition period, institutions would be subject to the provisions in both subparts M and N.

Subpart N would include provisions requiring an institution to implement a default prevention plan if its cohort default rate is 30 percent or above for the first year. If the institution's cohort default rate remains at 30 percent or above for two consecutive fiscal years, the institution would be required to revise its plan.

Under both Subparts M and N, ED would publish an institution's life of cohort default rates, including rates for the second and third year after which students enter repayment. (The proposed language does not clearly indicate whether the life of cohort default rate would be based on draft data. If draft data are used, the proposed language would stay.)

The proposed rules also would amend the standards of administrative capability provisions to reflect penalties ED would impose for high cohort default rates calculated under Subpart N rate.

Responding to issues raised during the first round of negotiations, the federal negotiator stated there would no changes to mitigating circumstances provisions since other avenues are available for borrowers to seek relief and avoid default. For schools with low participation rates, the federal negotiator indicated there may be operational remedies instead of a change in the appeal provisions.

Nonfederal negotiators are concerned about the calculation of an institution's life of cohort rate. If the rate is calculated using draft data and is published before the institution has a chance to correct any erroneous data used, publication of the rate is damaging to the institution's reputation. Thus, nonfederal negotiators requested that the rate not be based on draft data. Some nonfederal negotiators also requested an extension of the timelines for submitting challenges, adjustments, and appeals.

Tentative agreement was not reached on this issue.

The draft proposed rules would amend FFEL and Direct Loan entrance counseling provisions by extending the requirements to graduate PLUS borrowers and incorporating other statutory changes in how the counseling may be performed and the information that must be provided.

If the counseling is conducted on-line or by interactive electronic means, the borrower would be required to acknowledge receipt of the information. Changes to what institutions must provide both Stafford Loan and graduate PLUS borrowers during entrance counseling would include:

·         A description of delinquent debt collection procedures under federal law as part of the information regarding the likely consequences of default;

·         The borrower's obligation to fully repay the loan even though the borrower has not completed his or her program within the regular time for completion;

·         An explanation of accepting the loan on the borrower's eligibility for other forms of assistance;

·         An explanation of how interest accrues and is capitalized during period when interest is not paid by ED or the borrower;

·         Information on the borrower's option to pay interest on an unsubsidized Stafford Loan while he or she is enrolled;

·         An explanation of the institution's definition of half-time enrollment and the consequences of not maintaining at least half-time enrollment;

·         An explanation of the importance of informing an appropriate institutional office if the borrower withdraws before completing his or her program so that the institution can provide exit counseling;

·         Information on NSLDS and how the borrower can access his or her records; and

·         Contact information of an individual the borrower may contact if the borrower has any questions regarding his or her rights and responsibilities or the loan's terms and conditions.

In addition, changes to what institutions must provide graduate PLUS borrowers during entrance counseling include:

·         Sample monthly repayment amounts based on:

·  A range of student levels of indebtedness of graduate PLUS borrowers or borrowers of Stafford Loans and graduate PLUS, depending on the types of loan the borrower has obtained; or

·  The average indebtedness of other borrowers in the same program at the institution as the borrower

·         Information regarding the borrower's option to pay interest on a PLUS while enrolled.

Tentative agreement was reached on this issue.

The draft proposed rules would expand the Federal Perkins Loan teacher cancellation provisions to include:

·         Teaching service performed on or after August 14, 2008, in an education service agency; and

·         Service on or after August 14, 2008, as a full-time special education teacher of infants, toddlers, children, or youths with disabilities in an education service agency.

An education service agency would be a regional public multi-service agency authorized by state law to develop, manage, and provide services or programs to local education agencies as defined in section 9101 of the Elementary and Secondary Education Act (ESEA).

Head Start cancellation provisions would fall under an expanded cancellation category for service in an early childhood programs. Up to 100 percent of a borrower's outstanding loan balance would be cancelled for services performed on or after August 14, 2008, as a full-time staff member of a pre-kindergarten or childcare program licensed or regulated by the state. The same salary provisions currently applicable to Head Start employees would apply. A pre-kindergarten program would be a state-funded program that serves children from birth through age six and addresses the children's cognitive, social, emotional, and physical development. A child care program would be a program that is licensed and regulated by the state and provides child care services for fewer than 24 hours per day per child, unless care in excess of 24 consecutive hours is needed due to the nature of the parents' work.

Up to 100 percent of a borrower's loan would be cancelled for service performed on or after August 14, 2008, as a full-time attorney employed in Federal Public Defender Organizations or Community Defender Organizations, established in accordance with section 3006A(g)(2) of Title 18, U.S.C. Information and guidance regarding this loan cancellation provision would be published in the NPRM preamble and in the FSA Handbook.

Tentative agreement was reached on this issue.

The draft proposed rules would amend Federal Perkins Loan Program regulations to include new cancellation provisions for full-time faculty members at a Tribal College or University and for employment on or after August 14, 2009, as a:

·         Firefighter with a local, state, or federal fire department or fire district;

·         Librarian with a master's degree in library science who is employed in an elementary school or secondary eligible for assistance under Part A of Title I of ESEA; or by a public library that serves geographic area (i.e., local school district) containing at least one school eligible for assistance under Part A of Title I of ESEA;

·         Speech pathologist with a master's degree and working exclusively with Title I schools.

The regulations would define firefighter, librarian, and speech pathologist. A firefighter would be an individual who is employed by a federal, state, or local firefighting agency. A librarian would be an information professional trained in library or information science. A speech pathologist would be an individual who evaluates or treats disorders that affect a person's speech, language, cognition, voice, swallowing and the rehabilitative or corrective treatment of physical or cognitive deficits/disorders resulting in difficulty with communication, swallowing, or both.

Tentative agreement was reached on this issue.

The draft proposed rules would amend the Federal Perkins Loan cancellation provisions for a member of the U.S. Army, Navy, Air Force, Marine Corps, or Coast Guard in an area of hostilities that qualifies for special pay under section 310 of title 37 of the U.S. Code. For service that ended before August 14, 2008, the maximum amount loan that could be cancelled is capped at 50 percent of the borrower's outstanding loan balance. For service that includes or begins after August 14, 2008, up to 100 percent of the borrower's outstanding loan balance would be cancelled.

Tentative agreement was reached on this issue.

Posted 04/08/09 to www.NASFAA.org. Redistribution to non-NASFAA institutions is prohibited. Please submit Web site questions or comments to Web@NASFAA.org.