On July 29, 2013, the Department of Education published in the Federal Register a 110-page Notice of Proposed Rulemaking (NPRM) on changes to the Student Assistance General Provisions, Federal Perkins Loans, Federal Family Education Loans, and Federal Direct Loans to reflect changes made to the Higher Education Act (HEA) by the Student Aid and Fiscal Responsibility (SAFRA) included in the Health Care and Education Reconciliation Act of 2010 as well as update and clarify various areas of the regulations. Comments are due on or before August 28, 2013.
The following summary reflects a description of the current regulations and proposed regulations that impact educational institutions. Not included are those regulations that impact lenders or guaranty agencies. The summary provides an overview and does not constitute legal advice or substitute for a review of the actual NPRM. You can jump to a section of the summary using the list below:
Three-Year Cohort Default Rate Participation Rate Index Challenges and Appeals
(34 CFR 668.204 and 668.214)
The proposed rule permits an institution with slightly higher Direct Loan participation rates to file a participation rate challenge with respect to a single three-year cohort default rate over 40%. For purposes of challenges to and appeals from sanctions, the proposed regulations would raise the participation rate index ceiling applicable to institutions with a single three-year cohort default rate of over 40% from 0.06015 to 0.0832.
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Satisfactory Repayment Arrangements
(34 CFR 674.2(b), 674.9(k), 682.200(b), 685.102(b), and 685.200)
The satisfactory repayment arrangement rules for FFEL and Direct Loans specify that if a defaulted borrower makes 6 consecutive monthly payments on the defaulted loan, he or she will regain eligibility for Title IV. The FFEL and Direct Loan Program regulations state that voluntary payments are payments made directly by the borrower and do not include payments obtained by income tax offset, garnishment, or income or asset execution. These limitations are not found in the Perkins Loan program regulations.
In addition, the impacts of rehabilitating a loan are described differently in the various loan program regulations. The FFEL and Direct Loan regulations specify that a borrower may only obtain the benefit of regaining Title IV eligibility once. The Perkins regulations state that a borrower may only obtain the benefit by making satisfactory repayment arrangements on a defaulted loan once.
The proposed regulations would eliminate these differences by stating that a borrower may only receive the benefit of regaining Title IV eligibility by a satisfactory repayment arrangement once.
The proposed regulations also specify that a borrower who makes 6 monthly qualifying rehabilitation payments without receiving additional Title IV aid and then re-defaults, would not lose the option to regain Title IV eligibility by making satisfactory repayment arrangements. [A borrower does not lose his one-time opportunity to regain eligibility if he does not request additional Title IV aid.] For purposes of consistency, the definition of on-time payments will be changed from 15 to 20 days.
Closed School Discharge (34 CFR 674.33(g), 682.402(d), and 685.214)
The proposed regulations would revise these regulations to specify that a borrower who withdraws from a school prior to the school’s closure may qualify for a discharge if the borrower withdraws not more than 120 days before the date the school closes without exceptional circumstances, instead of the previous standard of 90 days. The proposed regulations would also add examples of the types of exceptional circumstances (i.e., loss of accreditation, the school’s discontinuation of the majority of its programs, action by the State, or a finding by a State or Federal government agency that the school violated State or Federal law) under which the Department may allow borrowers who withdraw from a school more than 120 days prior to the school’s closure date to qualify for a loan discharge.
The Department explained that the term “school” means a main campus or any location or branch of the main campus and a school is considered closed as of the date that the school ceases to provide education in all programs. The Department also noted that distance education programs are not locations of a school for Title IV purposes because a location is a physical site.
School Enrollment Status Reporting Requirements
(34 CFR 674.61, 682.605, 682.610, and 685.309)
The proposed changes would reflect the current terminology and reporting recently announced by the Department as part of the new NSLDS enrollment reporting process. The term “student status confirmation report” found in the FFEL and the Direct Loan regulations would be replaced with the “Enrollment reporting process.” Under current regulations, there is no enrollment reporting requirement for Perkins, but under the proposed rules, institutions would have to provide enrollment information to the Secretary for Perkins Loan borrowers. After much discussion during negotiations, the Department agreed to retain the 30-day deadline for reporting changes in student status.
Forbearance for Post-270 Day Defaulted Loan Borrowers Prior to Lender Claim Payment or Transfer to ED Default Collections
(34 CFR 682.211(d) and 685.205)
Current regulations require a defaulted FFEL borrower to provide a signed agreement to repay the outstanding loan debt in addition to the forbearance request, while under the Direct Loan program, a borrower may verbally agree to both the forbearance and the agreement to repay the debt. The proposed regulations would provide borrowers under both programs with the same tools to avoid default by providing borrowers the option of a written or verbal agreement to repay the debt. If the forbearance is obtained verbally, it cannot exceed 120 days and would require subsequent written notification to the borrower of the agreement. The limitation was in response to the negotiators representing States Attorneys General who were concerned about the possible misuse of oral forbearance requests and affirmations by institutions that might try to manipulate their default rates.
Forbearance Provisions for Borrowers Receiving Department of Defense Student Loan Repayment Benefits
(34 CFR 682.211(h) and 685.205)
Current regulations require a lender to grant forbearance to a borrower who is performing service that qualifies the borrower for a partial loan repayment under certain loan repayment plans administered by the Department of Defense. The proposed regulations would broaden the ability to cover borrowers who are performing service that qualifies them for any loan repayment plan under any other student loan programs administered by the Department of Defense. A comparable forbearance provision would be added to the Direct Loan program regulations.
Borrowers Who are Delinquent When an Authorized Forbearance is Granted
(34 CFR 682.211(f) and 34 CFR 685.205)
The proposed regulation would allow a lender to grant administrative forbearance to a borrower to reduce or eliminate a delinquency that exists at the beginning of an authorized deferment or an authorized forbearance period. A comparable forbearance provision would be added to the Direct Loan program regulations.
Loan Rehabilitation Agreement: Reasonable and Affordable Payment Standard
(34 CFR 682.405(b) and 685.211(f))
When a borrower rehabilitates a defaulted FFEL loan or Direct Loan, borrowers must make at least 9 on-time payments on the loan. [Note: Loan Rehabilitation requires at least 9 consecutive payments and brings the student out of default and clears their credit. Satisfactory Repayment Arrangements require at least 6 on-time payments but while the student regains eligibility for Title IV funds, it is still a defaulted loan.]The payment is determined on an amount that is “reasonable and affordable” based on the borrower’s financial circumstances. The proposed regulations for both FFEL and Direct Loans would provide that the reasonable and affordable payment be based on the borrower’s and, if applicable, the spouse’s current disposable income, including public assistance payments and other income received by the borrower and the spouse, such as welfare benefits, Social Security benefits, Supplemental security Income benefits, and workers’ compensation benefits. Considerations would be made for family size. The proposed regulations would also provide for proposed expenses that would be reasonable and necessary. If a borrower objects to the monthly payment amount contained in the written repayment agreement, the Secretary or the guaranty agency would obtain from the borrower the documentation needed under the IBR formula. If the recalculated amount is less than $5, the monthly rehabilitation payment would be $5. The proposal provides the flexibility for the Secretary and the guaranty agencies, yet provides borrowers with an alternative payment amount.
Loan Rehabilitation Agreement: Treatment of Borrowers Subject to Administrative Wage Garnishment
(34 CFR 682.405(a) and 685.211(f))
The current FFEL and Direct Loan regulations do not address payments collected by Administrative Wage Garnishment (AWG) while the borrower is making voluntary payments under a loan rehabilitation agreement (i.e., the voluntary payments must be over and above the payments secured through the AWG process). The proposed changes would allow the Secretary or the guaranty agency to suspend collection on a defaulted loan through AWG after the borrower makes 5 qualifying payments under a loan rehabilitation agreement (i.e., 5 payments are slightly more than half of the number of payments needed to rehabilitate a defaulted FFEL or Direct Loan). A borrower may only successfully rehabilitate a loan once, but there is no limit to the number of times a borrower may attempt to rehabilitate a loan. The guaranty agencies expressed concern during the negotiations that a borrower could interfere with their ability to collect on a loan through AWG by requesting loan rehabilitation over and over again.
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Federal Perkins Loan Graduate Fellowship Deferment Eligibility
(34 CFR 674.34(b)(1) and (f))
The proposed regulations would modify the Perkins Loan regulations to mirror those found in the FFEL and Direct Loan programs regarding an “eligible graduate fellowship program” in terms of the definition and the criteria for eligibility.
Federal Perkins Loan Economic Hardship Deferment Debt-to-Income Ratio Provision
(34 CFR 674.34(e)(4))
The proposed regulations would remove the debt-to-income economic hardship deferment category to reflect the statutory change made to the definition in HEA section 435(o) and to make the Perkins Loans provisions comparable to the FFEL and Direct Loans.
Federal Perkins Loan Standard for On-Time Loan Rehabilitation Payment
(34 CFR 674.39(a)(2))
Under current regulations, a defaulted Perkins Loan is rehabilitated if the borrower makes an on-time, monthly payment, as determined by the institution, each month for 9 consecutive months. The term “on-time” is not defined. For the purposes of defining the term, on-time will now be defined as within 20 days of the due date, which is comparable to the FFEL and Direct Loan rules.
Social Security Number Requirement (SSN) for Assignment of Defaulted Federal Perkins Loans to the United States
(34 CR 674.50(e)(1))
The proposed regulations would allow the assignment of Perkins Loans without the borrower’s SSN if the loan was made before September 13, 1982, which was the date the Department began requiring institutions to collect the borrower’s SSN on the Perkins Loan Program promissory notes.
Federal Perkins Loan Break in Cancellation Service Due to a Condition Covered Under the Family and Medical Leave Act
(34 CFR 674.52(b)(2))
In the FFEL and Direct Loan programs, if the borrower is unable to complete the second half of an academic year of teaching due to a condition covered under the Family and Medical Leave Act (FMLA), the teaching service for loan cancellation purposes in those programs may still count as a year of eligible teaching service if the borrower’s employer considers the borrower to have fulfilled the teacher contract requirements for the academic year. The proposed rules would allow a Perkins Loan borrower who is unable to complete the second half of the academic year of teaching due to a condition covered under the FMLA to still count that year as eligible teaching service if the borrower’s employer considers the borrower to have fulfilled the teach contract requirements for that academic year.
Federal Perkins Loan Cancellation Rate Progression
(34 CFR 674.52(g), 674.53(d), 674.56(h), 674.57(c)(2), 674.59(c)(2) and 674.60(b))
The cancellation progression rate represents the rate of principal cancellation for Perkins Loan borrowers who work in qualified public service jobs (i.e., teaching, military service in areas of hostility, law enforcement, nursing, and firefighting, and others), although the statute describes different cancellation rate progressions for different categories of public service jobs. The proposed regulations would not change the current cancellation categories and the percentage of original principal cancelled would remain the same and any interest on the unpaid balance that accrues during any year of qualifying service would continue to be cancelled. However, if the borrower switches his or her position that qualifies the borrower for cancellation under a different cancellation category, the borrower’s cancellation rate progression continues from the last year the borrower received a cancelation under the former cancellation category. For example, under current regulations, if a borrower switches to a position that qualifies the borrower for cancellation under a different cancellation category (i.e., from a qualified public service position to an early childhood education program), then the borrower would have to restart the cancellation rate progression from the beginning under the different category. However, under the proposed regulations, the borrower who switches would not have to restart a cancellation rate progression. Instead, the borrower who switches would continue from the last year of the progression rate the borrower received a cancellation under the former cancellation category.
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These provisions pertain to FFEL Lender Servicing and are not summarized here, but are listed as additional information. These provisions include the following:
- FFEL Lender Repayment Disclosures for Borrowers Who Are 60 Days Delinquent (34 CFR 682.205(c));
- FFEL Lender Repayment Disclosures to Borrowers Who Are Having Difficulty Making Payments (34 CFR 682.205(c));
- Administrative Wage Garnishment of the Disposable Pay of Defaulted FFEL Program Borrowers (34 CFR 682.410(b)) and Borrower Hearing Opportunities on the Enforceability of the Debt and a Borrower’s Claim of Financial Hardship (34 CFR 682.410(b)(9)(i));
- Use of Third-Party Contractors in AWG Hearings (34 CFR 682.410(b)(9));
- Amount or Rate of Wage Withholding (34 CFR 682.410(b)(9));
- Borrower Hearing Requests (34 CFR 682.410(b)(9)); and
- Other Provisions Related to AWG (34 CFR 682.410(b)(9)).
Modifications of the FFEL Program Regulations
(34 CFR Part 682)
SAFRA ended the making of new FFEL Program loans as of July 1, 2010. The current FFEL program regulations contain provisions that no longer apply, such as FFEL loan application process and use of the master promissory note, interest rates for loans originated after July 1, 2010, lender loan origination, refinancing, and disbursements requirements, fees for refinanced loans, lender disclosures for newly originated loans, school loan delivery and entrance counseling requirements for first-time borrowers, and school and school-affiliated organization lender requirements. There are also certain provisions that are unnecessary or obsolete, such as lender-of-last resort services for borrowers, the Federal Insured Student Loan (FISL) Program, a program where no new loans have been made since 1983, and the guarantee loans up to specified annual and aggregate limits.
The current FFEL regulations also contain provisions that need to be retained, such as the FFEL Program definitions, the provision and sections of the regulations that govern servicing and collection of FFEL loans, the guaranty agency requirements that are still applicable, and the lender participation requirements. Also, the Department is proposing some technical changes which are fully described in Appendix A at the end of the NPRM.
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Minimum Loan Period for Transfer Students in Non-Term and Certain Non-Standard Term Programs (34 CFR 685.301)
The HEA does not specify the minimum period for which a school may originate a Direct Loan for a student who transfers into a non-term or non-standard term program at another school. Under current regulations, for a school that measures academic progress in credit hours and uses a semester, trimester, or quarter system, or that has terms substantially equal in length, with no term less than nine weeks in length, the minimum period for which the school may originate a Direct Loan is a single academic term (e.g., a semester or quarter).
Under current rules, a school that measures academic progress in clock hours, or measures academic progress in credit hours but does not use a semester, trimester , or quarter system and does not have terms that are substantially equal in length with no term less than nine weeks in length, the minimum period for which a school may originate a Direct Loan is the lesser of (1) the length of the student’s program (or the remaining portion of the program), or (2) the academic year as defined by the school. Current rules provide an exception to this requirement in the case of a student who transfers in and the loan period at the prior school overlaps the loan period at the new school. In this circumstance, the new school may originate a loan for the remaining balance of the program or the academic year that started at the prior school in an amount up to the remaining balance of the borrower’s annual loan limit after subtracting the amount borrowed for attendance at the prior school. After the balance of the initial overlapping loan period, the student could receive a new loan for a new academic year or, if there is less than an academic year remaining, for the remainder of the program. After this initial loan period, the student becomes eligible for a new annual loan limit, with a new loan period corresponding to the lesser of the program (or the remaining portion of the program) or academic year at the new school. If the new school does not accept transfer credits from the prior school, the exception does not apply and the transfer student is limited to receiving no more than the remaining balance under the applicable annual loan limit for the entire program or academic year at the new school, whichever is less.
The proposed regulation would modify the exception by removing the provision that limits the exception to situations where the school accepts credit hours or clock hours from the prior school.
Modification of the Direct Loan Program Regulations (34 CFR Part 685)
The current Direct Loan Program regulations include cross-references to the FFEL Program regulations for provisions that apply to both loan programs, such as definitions of term and eligibility requirements. Some of the rules are outdated. The proposed changes add provisions to the Direct Loan Program that are currently in the FFEL Program regulations, remove obsolete rules, and make technical changes to the Direct Loan regulations. A summary of the technical changes are found in Appendix B of the NPRM.
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