NASFAA Issues Summary and Analysis on School-Based Loan NPRM

On Tuesday, the Federal Register posted proposed rules on school-based loan provisions of the Higher Education Act, as amended by the Higher Education Opportunity Act (HEOA) passed in August 2008.

These rules were developed through the negotiated rulemaking (negreg) process. NASFAA representatives did participate on Team II (the team that tackled these issues) and since negotiators did reach consensus on the proposed rules, NASFAA is prohibited from commenting negatively on the NPRM. However, NASFAA members are free to raise issues as they see fit. Members may use "How to Respond to a Notice of Proposed Rulemaking" for guidance in developing their comments.

Comments on the NPRM must be received by the Department by August 29 and may be submitted through the Federal eRulemaking Portal Web site or via postal mail, commercial delivery, or hand delivery. All comments must be submitted using the appropriate Docket ID: ED-2009-OPE-0003.

The Department will consider all comments and issue final rules before Nov. 1 (to conform with Master Calendar requirements) before they become effective on July 1, 2010.

Throughout the negreg process, NASFAA had provided several summaries of the discussions that provide background and context for these proposed rules. Those articles include:

NASFAA also provided a "Negotiated Rulemaking - Report to the Membership" on June 2 that discussed all of the Title IV negotiations in detail.

NASFAA has provided the following summary of the proposed regulations for easier consumption and analysis by members. Questions or concerns about any specific aspect of these provisions may be sent to policy@nasfaa.org.

Part 601--Institution and Lender Requirements Relating to Education Loans

The proposed rules would add a new part 601 to the regulations to implement Sections 151-155 of the HEA.

Definitions (Sec. 601.2)

Covered Institution is defined as an institution of higher education, as defined in section 102 of the HEA, that receives any Federal funding or assistance and includes any institution of higher education that receives any type of Federal funding or assistance, not just Title IV assistance.
Institution-Affiliated Organization is defined as any organization directly or indirectly related to a covered institution, including alumni organizations, foundations, or social organizations, that recommends, promotes, or endorses education loans for students attending the covered institution.
Education Loan is defined as a FFEL Loan, a Direct Loan, or a private education loan.
Private Education Loan is defined in accordance with Section 151(9) of the HEA and 140 of the Truth in Lending Act (TILA) as a non-Title IV loan provided by a private educational lender to a borrower expressly for postsecondary educational expenses, and that is not an extension of credit under an open-end consumer credit plan, or secured by real property or a dwelling. (Note - Final rules from the Federal Reserve Board on the exact definition of a private education loan have not yet been issued.)
Agent is defined as an officer or employee of a covered institution or an institution-affiliated organization.
Officer is defined as a director or trustee of a covered institution or institution-affiliated organization, if such individual is treated as an employee of the covered institution or the institution-affiliated organization.
Preferred Lender Arrangement is defined as an arrangement or agreement between a lender and a covered institution or an institution-affiliated organization, under which the lender provides or otherwise issues education loans to the covered institution's students or their families, and that relates to the covered institution or institution-affiliated organization recommending, promoting, or endorsing the lender's education loan products.
By the Department's interpretation, only two conditions must be met in order for a preferred lender arrangement to exist.
1. A lender must provide or issue education loans to students attending a covered institution.
2. The covered institution, or an institution-affiliated organization, must recommend, promote, or endorse the education loan products of the lender.
No written or verbal agreement need exist for the existence of a preferred lender arrangement, according to the Department. During negotiations, the Department referred negotiators to Dear Colleague Letter Gen-08-06 for additional guidance on what does and doesn't constituted a preferred lender arrangement.
The term preferred lender arrangement does not include arrangements or agreements with respect to Direct Loan Program loans or loans that originate through the PLUS Loan auction pilot program, authorized under section 499(b) of the HEA. A preferred lender arrangement also does not include institutional private loans that it makes to its own students as long as the loan is funded by its own funds or donor-directed contributions. Funds provided to an institution by a lender, which are then disbursed by the school and immediately sold back to the lender would not be considered as part of a school's "own funds" and would be considered as a preferred lender arrangement.
Institutional payment plans as well as federal loans made under Title VII or Title VIII of the Public Service Health Act would also be exempt from the definition of a proffered lender arrangement.

Preferred Lender Arrangement Disclosures [Sec. 601.10(a)(1)]

A covered institution, or an institution-affiliated organization of a covered institution, that participates in a preferred lender arrangement would be required to disclose to students:

The maximum amount of Federal grant and loan aid available under Title IV of the HEA;
The information identified on the model disclosure form developed by the Secretary for each type of education loan that is offered pursuant to a preferred lender arrangement; and
A statement that the institution is required to process the documents required to obtain a loan under the FFEL Program from any eligible lender the student selects.

These disclosures would need to be provided on the institution's Web site and in all information materials that describe financial aid and that are distributed to prospective or current students. On printed materials, schools could simply provide a Web link to these disclosures as long the school also provides contact information where the borrower can receive all of this information in printed format.

Schools will be required to meet statutory requirements to list at least three unaffiliated FFELP lenders and two unaffiliated private education lenders on their preferred lender list and disclose any affiliations that do exist to students. In addition, covered institutions would need to clearly and fully disclose on their preferred lender list:

At least the information required to be disclosed under Section 153(a)(2)(A) of the HEA;
Why the institution participates in a preferred lender arrangement with each lender on the preferred lender list, particularly with respect to terms and conditions or provisions favorable to the borrower; and
That the students attending the institution, or the families of such students, do not have to borrow from a lender on the preferred lender list.

Private Education Loan Disclosures and Self-Certification Form (Sec. 601.11)

Regardless of whether a school participates in a preferred lender arrangement, the proposed rules would require an institution that provides information regarding a private education loan from a lender to a prospective borrower must provide prospective borrowers with information identified by the Federal Reserve Board in their final rules (not yet released) that are based on Sec. 128(e)(1) of TILA. Schools would also be required to inform prospective borrowers that:

They may qualify for loans or other assistance under title IV of the HEA
The terms and conditions of Title IV, HEA program loans may be more favorable than the provisions of private education loans.

Schools would be required to ensure that information regarding private education loans is presented in such a manner as to be distinct from information regarding Title IV, HEA program loans.

In addition, the proposed rules would require a school to provide enrolled or admitted students - upon their request - a private education loan self-certification form that will be developed by the Secretary of Education. This form would also be required for institutional loans, unless otherwise deemed unnecessary by final rules that will be issued by the Federal Reserve Board. That form may be provided in written or electronic format and would need to list all of the data elements required by statute. In July, the president signed H.R. 1777, a technical amendments bill that revised the data elements that would be required on the self-certification form. Those data elements now include:

Cost of attendance
Estimated financial assistance, including amounts used to replace EFC (e.g., unsubsidized Stafford loans, PLUS loans, etc.)
Remaining need as calculated by subtracting COA - EFA

The Department has stated that schools should supply the form and information available to the institution at the time of the request and that there would be no requirement to update it in the future in response to a subsequent application.

Use of Institution and Lender Name (Sec. 601.12)

Under the proposed rules, schools that participate in a preferred lender arrangement on private education loans would be prohibited from allowing lenders to use the school's name, emblem, mascot, or logo of the institution or organization, or other words, pictures, or symbols readily identified with the institution or organization, in marketing the private loans. While schools cannot directly prohibit a lender from misusing its name, the Department feels that schools can use its "leverage" to require a lender to comply.

This prohibition would not apply to credit unions that use their own name even though a portion of their name matches an institution's name.

The proposed rules would also require covered institutions that participate in preferred lender arrangements on private education loans to ensure that the name of the lender is displayed in all information and documentation related to the private education loans.

Annual Report (Sec. 601.20)

The proposed rules would require a covered institution and an institution-affiliated organization that participates in a preferred lender arrangement to prepare and submit to the Secretary an annual report, by a date determined by the Secretary. The annual report would also need to be made available to the public and provided to students attending or planning to attend the school. The annual report would only need to provide a snapshot of a school's preferred lender list, and would not have to be updated throughout the year as lenders are added or fall off the list.

The annual report would include a detailed explanation of why the covered institution or institution-affiliated organization participates in a preferred lender arrangement with the lender. This explanation would need to include the terms, conditions, and provisions of each type of education loan provided to students.

Code of Conduct (Sec. 601.21)

Under the proposed rules, schools that participate in a preferred lender arrangement would be required to comply with a code of conduct that would be published on the school's Web site. Institution-affiliated organizations of a covered institution that participates in a preferred lender arrangement would need to comply with the code of conduct developed and published by the school.

The code of conduct would prohibit:

Revenue-sharing arrangements with any lender;
Soliciting or accepting gifts from a lender, guarantor, or servicer;
Accepting any fee, payment, or other financial benefit as compensation for any type of consulting or any contractual relationship with a lender;
Assigning a first-time borrower's loan to a particular lender or refusing to certify, or delaying certification of, any loan based on a borrower's selection of a particular lender;
Requesting or accepting offers of funds for private education loans, including opportunity pool loans, from a lender in exchange for providing the lender with a specified number or loan volume of FFEL Program loans or private education loans or a preferred lender arrangement;
Requesting or accepting staffing assistance from a lender; and
Receipt of compensation for serving on an advisory board, commission, or group established by a lender, guarantor, or group of lenders or guarantors.

Section 601.21(c) would also include several definitions pertinent to the code of conduct including:

Revenue Sharing Arrangement - An arrangement between a covered institution and FFEL lender or a private education loan lender in which the lender pays a fee or provides material benefits in exchange for the covered institution recommending the lender or its loan products to students attending the institution or to the families of such students (Sec. 487(e)(1)(B)of the HEA).
Gift - Any gratuity, favor, discount, entertainment, hospitality, loan or other item with a monetary value of more than a de minimus amount, including gifts of services, transportation, lodging or meals (Sec. 487(e)(2)(B) of the HEA). A gift would not include:
Standard material, activities, or programs on issues related to a loan, default aversion, default prevention, or financial literacy, such as a brochure, a workshop, or training;
Food, refreshments, training, or informational material furnished to an agent as an integral part of a training session that is designed to improve the service of a lender, guarantor, or servicer of FFEL Program loans or private education loans to the institution, if such training contributes to the professional development of the agent;
Favorable terms, conditions, and borrower benefits on a FFEL Program loan or private education loan provided to a student employed by the institution if such terms, conditions, or benefits are comparable to those provided to all students of the institution;
Entrance and exit counseling services provided to borrowers to meet the institution's responsibilities for entrance and exit counseling as required by Sec. Sec. 682.604(f) and 682.604(g), as long as the institution's staff are in control of the counseling (whether in person or via electronic capabilities) and such counseling does not promote the products or services of any specific lender;
Philanthropic contributions to an institution from a lender, servicer, or guarantor of FFEL Program loans or private education loans that are unrelated to FFEL Program loans or private education loans or any contribution from any lender, servicer, or guarantor, that is not made in exchange for any advantage related to FFEL Program loans or private education loans; or
State education grants, scholarships, or financial aid funds administered by or on behalf of a State.
Opportunity Pool Loan - A private education loan made by a lender to a student, or a family member of a student, attending the institution that involves a payment, directly or indirectly, by the institution of points, premiums, additional interest, or financial support to the lender for the purpose of the lender extending credit to the student or the student's family (Sec. 487(e)(5)(B) of the HEA).
The Department of Education would consider recourse loans - arrangements between schools and lenders where the school provides funds to a lender to offset the risk of the lending providing loans to students at the school who have a high risk of default - would also be considered opportunity loans and prohibited under the code of conduct. However, nothing would prohibit opportunity loans or recourse loans as long as they are not provided in exchange for concessions or promises regarding providing the lender with a specified number or loan volume of FFEL or private education loans.

Duties of Institutions Participating in the William D. Ford Direct Loan Program (Sec. 601.30)

Under the proposed rules, Direct Loan schools would be required to make certain information available to current and prospective students on a model disclosure form developed by the Secretary. Direct Loan schools that provide information on private student loans would be required to meet all disclosure requirements that pertain to schools that offer information on private education loans.

FFEL Lenders [Sec. 601.40(a)]

Proposed rules would require FFEL lenders to:

Provide FFEL borrowers the disclosures required under Sec. 682.205(a) and (b).
Comply with the disclosures required under section 128(e) of TILA for each type of private loan.
Annually provide a detailed report to the Secretary regarding any reasonable expenses paid or provided to any agent of a covered institution who is employed in the financial aid office or has responsibilities with respect to education loans or other financial aid of the institution for service by the employee on an advisory board, commission or group established by a lender or a group of lenders. Likewise, the report should provide information on any reasonable expense paid or provided to any agent of an institution-affiliated organization involved in recommending, promoting or endorsing education loans.
Annually certify to the Secretary its compliance with the HEA if they are in a preferred lender arrangement with any school.
Annually provide to the institution, institution-affiliated organization, and the Secretary information regarding the FFEL loans the lender will provide to students and families pursuant to the preferred lender arrangement for the next award year.

Given the two-step process described by the Department for there to exist a preferred lender arrangement, it is unclear whether a lender would always know that it was in a preferred lender arrangement.

Conforming Changes

Section 668.14 governing program participation agreements (PPAs) would be changed in several ways. First, PPAs would reflect the statutory requirement that schools must agree to develop, publish, administer, and enforce a code of conduct with respect to loans, made, insured, or guaranteed under Title IV loan programs. In addition, schools would agree in their PPA to provide, upon request, an enrolled or admitted student a self-certification form for a private education loan. Finally, schools would agree in their PPA to discuss with a private education loan applicant the availability of federal, state, and institutional aid for which an applicant may be eligible.

Standards of Administrative Capability (Sec. 668.16)

Under the proposed rules, section 668.16 would be amended to require schools to report annually to the Secretary any reasonable expenses paid or provided to any employee of the financial aid office, or any employee who otherwise has responsibilities with respect to education loans or other financial aid at the institution, for service on an advisory board, commission, or group established by a private educational lender or group of lenders. Schools would be required to provide:

The amount for each specific instance of reasonable expenses paid or provided;
The name of the individual to whom the expenses were paid or provided;
The dates of the activity for which the expenses were paid or provided; and
A brief description of the activity for which the expenses were paid or provided.

Expenses would be considered reasonable if the expenses meet the standards of and are paid in accordance with an applicable State government reimbursement policy or, if no applicable State policy exists, in accordance with applicable Federal cost principles.

Additional conforming changes to the current regulations would eliminate certain provisions in other parts of the regulations relating to preferred lender arrangements and instead would cross reference those sections the preferred lender arrangement requirements in Part 601.

Major Changes to Part 668

Financial Assistance Information (Sec. 668.42)

Currently, regulations require schools to describe all of the student financial assistance programs available to prospective and enrolled students. The proposed rules would require schools to also provide to prospective and enrolled students the terms and conditions of loans made under each of the FFEL, Direct Loan, and Perkins Loan programs.

Cohort Default Rates

The proposed rules would implement changes made by the Higher Education Opportunity Act (HEOA) to institutional cohort default rate (CDR) calculations and sanctions. The HEOA replaces a two-year CDR with three-year CDR. Because the changes will be implemented over a three-year period, during which ED will calculate both two-year CDRs and three-year CDRs, ED is adding a new subpart N to house the rules governing three-year CDRs. In general, subpart N parallels subpart M, which governs the rules governing two-year CDRs. ED also is amending Subpart M to clarify that this subpart applies only to CDRs for fiscal years through 2011 as well as to codify electronic procedural changes.

During the transition period, institutions will receive two sets of CDRs. Each set will consist of a draft CDR and an official CDR. One set will be two-year CDRs and the other three-year CDRs. Although no sanction related to an institution's three-year CDRs will be imposed until ED has calculated the institution's three-year CDR for three consecutive years (i.e., for FY 2009, FY 2010, and FY 2011), institutions may challenge the calculation and appeal the consequence of their three-year CDRs during the transition period.

After the transition period, the following provisions would apply to three-year CDRs:

An institution would lose its eligibility to participate in the Title IV programs if its most recent CDR is 40 percent or higher; the institution would be able to appeal its loss of eligibility if its participation index is equal to or less than .06015.
An institution would lose its eligibility to participate in the FFEL, Direct Loan, and Federal Pell Grant programs if each of its 3 most recent CDRs was 30 percent or higher; the institution would be able to appeal its loss of eligibility if its participation index is equal to or less than .06025 for any of the 3 CDRs.
An institution would not be considered administratively capable and, would face provisional certification under 668.16(m) if 2 out of its 3 most recent CDRs were 30 percent or higher. An institution would not be provisionally certified, based solely on its CDRs, if:
- The institution's second CDR that is 30 percent or higher is reduced to below 30 based on a loan servicing appeal or an uncorrected or new data adjustment, or the institution's adjustment request or appeal of that rate is pending;
- Two successive CDRs are 30 percent or higher and the institution economically disadvantage appeal of the second of those CDRs is pending or successful;
- The institution's appeal of its CDR based on a participation rate index is pending or successful (i.e., an index equal to or less than .6025 for either of the 2 CDRs that is 30 percent or higher);
- Each of the 3 CDRs has fewer than 30 borrowers; or
- A three-year rate was calculated as an average rate.
If an institution's CDR is 30 percent or higher, it must establish a default management task force to develop, following the guidance in Appendix A of subpart N, a default management default plan for submission to ED.

Conforming FFEL and Direct Loan Changes

The proposed rules also would amend the FFEL and Direct Loan delayed delivery/disbursement and multiple disbursement provisions. Effect with loans first disbursed on or after October 1, 2012, if an institution's CDR, as calculated under subpart M or N, for each of the three most recent fiscal years is less than 15 percent, the institution is exempt from:

The 30-day delayed delivery/disbursement provisions; and
The multiple disbursement provisions for short loan periods (i.e., loan periods longer than one standard term or, if a nonterm or a nonstandard term program, 4 months).

Title IV Loan Counseling Changes [Secs. 674.42(b); 682.604(f),(g); 685.304(a),(b)]

Prior to the enactment of the HEOA, entrance counseling requirements for graduate PLUS borrowers were regulatory only. The proposed rules would restructure current FFEL and Direct Loan entrance counseling regulations as well as the current Federal Perkins Loan, FFEL, and Direct Loan exit counseling requirements to include provisions that mirror statutory requirements in Sec. 485(l) of the HEA (entrance counseling) and Sec. 485(b)(1)(A) (exit counseling).

Federal Perkins Loan Cancellation Provisions

The proposed rules would amend the Federal Perkins Loan cancellation provisions to implement the changes made by the HEOA. The teacher, Head Start, and law enforcement Perkins Loan cancellation categories would be expanded. Loan cancellation would be extended, under certain conditions, for public service as a faculty member at a Tribal college or university, a fire fighter, a librarian, or a speech-language pathologist. In addition, the proposed rules would modify the cancellation provisions for military service.

By Justin Draeger, Vice President of Public Policy, Advocacy, and Research, and Eileen F. Welsh, NASFAA Assistant Director for Professional Assessment, Training, and Regulatory Assistance

Posted 07/30/09 to www.NASFAA.org. Redistribution to non-NASFAA institutions is prohibited. Please submit Web site questions or comments to Web@NASFAA.org.