Team II concluded the final round of negotiated rulemaking on May 8 by reaching agreement on all issues. This article summarizes the major issues negotiated during the final round of negotiations for which tentative agreement was not reached during the prior session. An earlier article summarizes the issues for which tentative agreement was reached during the second session.
The Department will now take all of the draft proposed regulations and issue a Notice of Proposed Rulemaking (NPRM), which is expected to be released in the Federal Register in early July. According to federal negotiators, members will only have 30 days to comment on the proposed rules before the Department reviews comments and issues final rules by November 1 that will then take effect July 1, 2010.
Private Education Loans and Preferred Lender Arrangement
A major obstacle in achieving consensus during previous rounds of negotiated rulemaking focused on how institutional loans and institutional payment plans would be considered in regards to preferred lender arrangements. Since institutional loans are considered "private education loans," schools that offered them would be considered to have had a preferred lender arrangement.
Nonfederal negotiators argued that these loans and payment plans should not be considered as constituting a preferred lender arrangement. Without such an exclusion, they would be difficult - and in some instances impossible - to administer. For example, under revenue sharing restrictions, employees administering the institutional loan program or payment plan could not be paid by the institution nor could an institution's name appear on the institutional loan promissory note or payment plan agreement.
Although the Department of Education would not change the definition of private education loan, it agreed to carve out an exception to the definition of a preferred lender arrangement to exclude institutional loans, loans made under Titles VII or VIII of the Public Service Health Act, and institutional payment plans. To qualify for the exception, an institutional loan must be funded by the school's own funds or by donor-directed contributions. These institutional loan criteria underscore the Department's strong concerns about the transparency of the funding process and back end funding arrangements between schools and lenders.
Recourse Loans
In previous rounds of negotiations, 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.
The Department said that it would not be a violation of the code of conduct for a school to offer recourse loans as long as there is no quid pro quo with a lender. Schools may not request or accept any offer of funds from a lender, including funds for an opportunity pool loan, to students in exchange for the institution providing any promises regarding any federal or private loan volume.
Required Lender Arrangement Disclosures
Institutions and institution-affiliated organizations are required to provide certain disclosures regarding each type of education loan that is offered pursuant to a preferred lender arrangement. These disclosures are required whenever the institution or institution-affiliated organization describes or discusses financial aid opportunities available at an institution of higher education. Given the amount of information that must be disclosed, the Department agreed that providing students a URL link where the information can be found on the institution's Web site, along with contact information to the financial aid office, would satisfy the requirement. However, the school would be required to provide a hard copy of the disclosures if requested.
Cohort Default Rate Calculations and Institutional Eligibility
The Department provided new language clarifying that sanctions for a cohort default rate that is 30 percent or above would not be imposed before 2014. Prior to that date, any cohort default sanctions would be based on a cohort default rate that is 25 percent or above.
In addition, new language would require the Department to electronically correct a school's most recently published rate if the school requested an uncorrected data or a new data adjustment. The Department also would be required to electronically correct a school's published cohort default rate based on the results of a successful appeal for improper loan servicing or collection.
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