Reauthorization of the Higher Education Act
Each guaranty agency would be required, within 45 days of the date of enactment of this provision, to transfer an amount of reserve funds that represents the guaranty agency's proportionate share of $2,100,000,000, as determined by the Secretary, to a restricted account and invest those funds in United States Government securities specified by the Secretary. The guaranty agency could not use any restricted account funds for any purpose without the express permission of the Secretary, but may use the earnings from its restricted account for each of the fiscal years 1998 through 2003 to assist in meeting its operational expenses.
The Secretary would permit the use of up to $300,000,000 in the aggregate of reserve funds, that guaranty agencies hold outside of the restricted accounts, for working capital to assist with guaranty agency operating expenses. A guaranty agency's share of working capital would be based on its proportionate share of all borrower accounts outstanding on September 30, 1996. Working capital provided to the guaranty agency would continue to be part of the reserve funds held by the guaranty agency and the property of the United States.
Next, the provisions from current section 422(h) of the Act regarding the Secretary's authority in the event of a shortage in the restricted accounts, or a failure by the guaranty agency to transfer reserve funds to the restricted accounts, would be included in proposed new section 422(h) of the Act.
Finally, new subsection 422(h) would specify that non-liquid reserve fund assets, such as buildings and equipment purchased or developed by the guaranty agency with reserve funds, as well as any reserve funds held by a guaranty agency after the recalls, would remain the property of the United States, could only be used for purposes that the Secretary determines are appropriate, and would be subject to recall by the Secretary no later than the date on which the guaranty agency's agreement under section 428(c) ends.
The proposed recall of reserves is consistent with the legal status of those reserves as Federal property, as well as the current role of the guaranty agency in the Federal Family Education Loan (FFEL) program, as well as the changes proposed in section 226 of the bill, described below. Section 432(o) of the Act, which was added by the Higher Education Amendments of 1992 (P.L. 102-325), clarified that the Secretary is the ultimate insurer of all FFEL guarantees. Thus, guaranty agencies function more like loan servicers than guarantors, and their need for reserve funds is currently limited to their 2 percent risk-sharing requirement, which also comes from Federal funds. The changes proposed in section 426 of the bill would eliminate any need for a guaranty agency to hold capital in excess of their working capital requirements.
Section 422. Section 422 of the bill would amend sections 425(a), 428(b), and 428H(d)(2) to simplify proration requirements by limiting the proration of loan limits to programs of two academic years or less, and requiring that proration be done proportionally for all types of loans affected. (As in current law, no proration would be required for PLUS loans or loans to graduate and professional students.) Currently, a school must calculate loan proration under two formulas. The formula that is used depends on the program length, type of loan, and whether the borrower is in a final period of enrollment in his or her academic program. The current proration requirements are difficult for schools to understand and administer. Requiring proportional proration for all loans will be more beneficial and equitable to students and may reduce "course stretching" by institutions.
This amendment would also require proration for only programs of not more than two academic years in length, in cases where either the program, or the remaining portion of the program, is less than a full academic year. Proration requirements for programs of study greater than two academic years in length would be eliminated. The amendment would retain proration for short-term programs that have a higher risk of default and closure, while reducing burden for institutions with longer-term programs that have a lower risk of default and closure.
Section 423. Section 423 of the bill would amend sections 427, 428(b), and 428C of the Act to provide FFEL borrowers with the extended and graduated repayment options currently available only to Direct Loan borrowers. In addition, a new income-sensitive repayment plan of up to 25 years would be available to FFEL borrowers (the current version can only extend up to 10 years). These new options would be in addition to the standard repayment plan currently available to FFEL borrowers (a more limited form of graduated repayment is also currently available to FFEL borrowers), and would provide far greater flexibility to FFEL borrowers in managing their loan obligations, and therefore may avoid defaults. As with Direct Loan repayment, a FFEL borrower would also have the ability to change repayment plans. The Secretary would also be required to ensure that, to the extent practicable and not otherwise provided in statute, the repayment plans offered to FFEL borrowers are comparable to Direct Loan repayment plans. A similar amendment to section 455(d) of the Act is proposed in section 455 of the bill.
Section 423A. Section 423A of the bill would amend section 427A of the Act to modify the interest rates currently scheduled to go into effect on July 1, 1998 for subsidized, unsubsidized and PLUS loans in the FFEL program by changing the instrument to be used for setting the interest rate back to the 91-day Treasury bill, and by changing the percentage added to that instrument to 1.7 percent during in-school and grace periods and 2.3 percent in repayment for subsidized and unsubsidized FFELs, and to 3.2 percent for PLUS loans. Conforming amendments are also proposed for Direct Loan interest rates to ensure that the interest rate calculations for the two programs remain parallel.
These changes would continue to provide students and parents with the interest rate reduction scheduled to take effect on July 1, 1998 under current law, as enacted in the Omnibus Budget Reconciliation Act of 1993 (P.L. 103-66). However, the proposed changes to the way in which the interest rate is calculated would more closely track lenders' own financing practices and thus would help make these loans sufficiently profitable so that lenders would be able to continue to make FFEL loans to students and their families. Moreover, the 91-day T-bill has been the instrument used to set the FFEL interest rates since 1992, so the use of this T-bill is familiar to lenders and is consistent with longstanding program practices.
Section 424. Section 424 of the bill would amend sections 428(a)(3)(v), 428B(d)(1), and 428H(e)(1) of the Act to provide that a lender may not charge interest to the Federal Government or to the borrower any earlier than a 3 or 10-day period (depending on whether the loan is disbursed by electronic funds transfer or by check) before the institution credits the student's account with any disbursement of the loan funds. Current law prohibits lenders from billing the Federal Government for interest prior to that time with respect to the first disbursement of subsidized Stafford loans. On unsubsidized loans, lenders are free to bill students and parents for interest on all disbursements prior to that time. These amendments would provide for comparable treatment between subsidized and unsubsidized Stafford loans, as well as for PLUS loans, and would ensure that borrowers are not required to pay interest on an unsubsidized loan until they have effective use of the funds.
Section 425. Section 425 of the bill would amend sections 428(b)(1)(H), 428H(h), and 438(c) of the Act to eliminate the one percent insurance premium that may be charged to a FFEL borrower at the time his or her loan is originated, and to phase out FFEL origination fees on subsidized FFELs by July 1, 2003. A similar provision in section 452 of the bill would reduce comparably the loan fee charged on Direct Loans.
These reductions in fees will provide significant benefits to all students, and will provide additional funds to borrowers up front, at the time that the loan funds are needed to pay for costs of attendance. The proposed changes would also assist in standardizing borrower benefits within the FFEL program as well as between the FFEL and Direct Loan programs, because lenders and guaranty agencies will no longer be able to selectively reduce costs for certain FFEL borrowers by waiving or paying the insurance premium on the borrower's behalf. The Secretary is not currently authorized to waive or lower loan fees under the Direct Loan program.
Section 426. Section 426 of the bill would substantially revise section 428 of the Act to reflect more accurately the current role of the guaranty agency in the FFEL program, and to affirmatively recognize that the Secretary is the sole guarantor of FFELs. Section 432(o) of the Act, which was added by the Higher Education Amendments of 1992 (P.L. 102-325), clarified that the Secretary is the ultimate insurer of all FFEL guarantees. Thus, in practice, guaranty agencies actually function more like loan servicers than guarantors. The changes proposed in section 426 of the bill would treat guaranty agencies in a manner more consistent with their current program functions.
Subsections (a) and (b) of section 428 would be modified and reorganized to reflect the substantive changes proposed primarily to section 428(c) of the Act. Under these changes, the Secretary would be authorized to enter into an agreement with a guaranty agency, under which the Secretary would insure loans with the guaranty agency acting on behalf of the Secretary. The proposed new language would also clarify that a guaranty agency would not be considered to be an agent of the Secretary or of the United States Government for any purpose, such as the Federal Tort Claims Act, other than the purposes of the FFEL program. A guaranty agency would not, however, be relieved of any liability that may arise as a result of the guaranty agency's failure to carry out its responsibilities under this part. Any guaranty agency that had an agreement with the Secretary under section 428(b) on the day before the date of enactment of this bill could enter into an initial agreement with the Secretary, and all existing guaranty agency agreements would expire within 180 days of the date of enactment. Outstanding loan insurance issued by the guaranty agency would be replaced by loan insurance issued by the Secretary, and the guaranty agency would, in general, be relieved of any further liability on the loans. To help ensure a smooth transition, for the first year after the date of enactment the Secretary could specify interim administrative measures necessary for the efficient transfer of the loan insurance function.
The new guaranty agreements would be for five years, renewable by the Secretary for successive five-year periods, although the Secretary could terminate the agreements prior to expiration in certain circumstances. After the initial agreement with a guaranty agency entered into after the date of enactment has ended (through its expiration, the termination of the guaranty agency agreement by the Secretary, or the resignation of the guaranty agency), the Secretary, in his discretion, may enter into another agreement with that guaranty agency, an alternate agreement under with a different guaranty agency, or one or more contracts under section 428E (as added by section 432 of the bill) under which contractors would carry out one or more of the functions formerly performed by the guaranty agency.
The agreement between the Secretary and a guaranty agency would specify the responsibilities of the guaranty agency, if any, for: administering the issuance of insurance on FFELs on behalf of the Secretary; monitoring insurance commitments made under this section; default prevention activities; review of default claims made by lenders; payment of default claims; collection of defaulted loans; adoption of internal systems of accounting and auditing that are acceptable to the Secretary; reporting requirements; and monitoring of participating institutions and lenders. The Secretary could also permit the guaranty agency, on a case-by-case basis, to engage in such other businesses, previously purchased or developed with reserve funds, that relate to the FFEL program.
Under the agreement, guaranty agencies would receive the following fees and revenues: a one-time issuance fee for each new FFEL insured by the Secretary through the guaranty agency; an annual maintenance fee for each active borrower account; a default prevention fee, paid by lenders, of not to exceed $100 per borrower account if the guaranty agency succeeds in bringing a loan into current repayment status; a collection retention allowance of not to exceed 18.5 percent, which may be reduced on the basis of the Secretary's review of payments for similar services in a competitive environment;
the interest earned on funds in the restricted account; the interest earned on reserves that the Secretary permits the guaranty agency to use as working capital provide under proposed new section 422(h) (as amended by section 421 of the bill); and revenues derived from other FFEL-related businesses in which the Secretary permits the guaranty agency to engage. The amount of the issuance fee and maintenance fee that a guaranty agency shall receive shall be at least $23.80 and $5.00, respectively, for fiscal year 1999, and may be adjusted by the Secretary in future fiscal years after consultation with guaranty agencies, and consideration of their necessary expenses in carrying out their program responsibilities as well as their alternate sources of revenue. In the aggregate, guaranty agencies would be paid the greater of the calculated fee amounts or the amount of interest earnings on the restricted accounts, as described in proposed new section 422(h)(2)(B), plus $170,000,000 for fiscal year 1999 and $150,000,000 for each of the fiscal years 2000, 2001, and 2002. For fiscal year 2003, guaranty agencies would receive in the aggregate the amount of the calculated fees reduced by the interest earnings on the restricted accounts.
In addition to restructuring guaranty agency agreements, the changes proposed in section 426 of the bill would provide guaranty agencies with an incentive to improve their efficiency by permitting them to retain a share of their net revenues for activities, approved by the Secretary, in support of postsecondary education. The share that guaranty agencies may retain and use for this purpose would be calculated by the Secretary after determining an adequate level of economic incentive for guaranty agencies to maximize their efficiency, in an amount not to exceed 50 percent of guaranty agency net revenues.
A guaranty agency would be required to carry out its responsibilities under the agreement in accordance with performance standards specified by the Secretary, which would be uniformly applied to all guaranty agencies. The Secretary would compare the performance of the guaranty agencies with one another, and publicly disseminate the comparison. A guaranty agency that fails to achieve a specified level of performance on one or more performance standards could be fined, and if its failure resulted in a financial loss to the United States, the guaranty agency would be required to indemnify the Secretary for that loss.
A guaranty agency's agreement could be ended in advance of its expiration date, either because its agreement becomes automatically void under certain circumstances, or because the Secretary, after notice and opportunity for a hearing, terminates the guaranty agency for substantially failing to achieve an acceptable level of performance under its agreement.
Finally, while most of the changes proposed in this section of the bill pertain to guaranty agencies and their functions, section 426(a)(2)(E) of the bill would require only eligible lenders that originate or hold more than $5,000,000 in FFELs during an annual audit period to submit to the Secretary a compliance audit for that audit period. This change is similar to exemptions provided in recent Appropriation Acts, and would alleviate the burden and disproportionate expense that annual compliance audits impose on lenders with small FFEL portfolios.
Section 427. Section 427 of the bill would eliminate section 428(e) of the Act, which provides payments to guaranty agencies for referring students to lenders. This provision has never been implemented, and is unnecessary, as guaranty agencies are already required to serve as lenders of last resort, or to find other lenders to act in that capacity.
Section 428. Section 428 of the bill would make a series of changes to section 428(j) of the Act designed to strengthen the current system for ensuring loan access, which uses a combination of private lenders, the FFEL lender-of-last-resort (LLR) program under sections 428(j) and 439(q) of the Act, and the potential availability of Direct Loans for institutions that cannot obtain service under the FFEL program. In addition, secondary markets using tax exempt financing are currently required by section 438(e)(2) of the Act to deal with all eligible lenders in their service areas on the same terms and conditions. Within the limits of their capital, they are also required to purchase all eligible loans involving students or schools within those areas.
Section 428(1) of the bill would amend section 428(j)(1) of the Act to make LLR provisions applicable to unsubsidized as well as subsidized loans. Section 428(2) of the bill would add a new subparagraph (C) to section 428(j)(3) of the Act that would authorize the Secretary to make advances directly to lenders for LLR loans. Section 428(j)(3) of the Act currently requires that guaranty agencies be used as intermediaries for LLR loans, an unnecessary additional complexity. Finally, a new paragraph (4) would be added to section 428(j) of the Act to provide that, if the Secretary determines that a significant number of students attending an eligible institution do not have adequate access to loans under the FFEL program, the Secretary may deem the institution eligible to participate in the Direct Loan program. The institution would be able to participate in both the FFEL and Direct Loan programs at the same time, or, if the Secretary and the institution agree, to participate only in the Direct Loan program. In order to ensure that there are no gaps in loan access for students at the institution, the institution would be able to begin participating in the Direct Loan program at any time during the academic year.
Section 429. Section 429 of the bill would repeal section 428(n) of the Act, which requires a State to pay to the Secretary an annual amount that represents the State's share of risk for high default rates at institutions within the State. This provision has never been implemented.
Section 430. Section 430 of the bill would amend section 428B of the Act to require the same systematic verifications of immigration status or social security numbers for PLUS loan applicants as currently apply to the student loan programs. This would greatly improve the monitoring of PLUS borrower eligibility
Section 431. Section 435 of the bill would make a number of changes to section 428C of the Act pertaining to FFEL consolidation loans that would make the terms of these loans more comparable to Direct consolidation loans. (Changes to repayment terms for FFEL consolidation loans are proposed in section 423 of the bill.) Section 431 of the bill would permit borrowers to obtain a FFEL consolidation loan while they are in "in-school" status, and to consolidate FFEL consolidation loans into new FFEL consolidation loans.
Section 431(a)(1)(C) of the bill would also add a new subparagraph (D) to section 428C(a)(3) of the Act to provide that a FFEL borrower may consolidate his or her FFELs only under the terms and conditions established by the Secretary in regulation. The Secretary currently has the authority in the Direct Loan program to prohibit the consolidation of loans in particular circumstances; there is no parallel authority in the FFEL program. The Secretary is planning to prohibit consolidation of loans in the Direct Loan program for which the borrower has exhibited an unwillingness to pay and the Federal Government has had to expend time and resources in order to secure a judgment or place the borrower under wage garnishment. This change would allow the Secretary to do the same in the FFEL program.
Under the amendments proposed by section 431 of the bill, borrowers would also retain the interest subsidy on the portion of a FFEL consolidation loan that repays subsidized loans, and the interest rate on FFEL consolidation loans would be changed to a variable rate comparable to the rate applicable to Direct consolidation loans. By extending favorable terms currently available only to borrowers of Direct consolidation loans to borrowers of FFEL consolidation loans, these amendments would reduce costs for, and provide greater flexibility to, these FFEL borrowers, particularly those FFEL borrowers with loans from multiple lenders who have not consolidated these loans because they would lose the benefits associated with the separate loans.
Section 432. Section 432 of the bill would add a new section 428E to part B of Title IV of the Act that would authorize the Secretary to enter into one or more contracts to carry out any of the functions that otherwise would be carried out by a guaranty agency. This amendment is consistent with the changes to guaranty agency functions that are proposed in section 426 of the bill.
Section 433. Section 433(a)(1) of the bill would amend sections 428H(e)(2)of the Act to require FFEL lenders to capitalize interest no more frequently than when unsubsidized loans enter repayment, at the expiration of a grace period (if any), at the expiration of a deferment or forbearance period, or when a borrower defaults. This would be a major benefit to FFEL borrowers, and would make statutory what is already available to Direct Loan borrowers in regulation, ensuring consistency across programs. In addition, the statute would be clarified as to when interest may be capitalized on subsidized FFELs, PLUS Loans, and Consolidation Loans.
Section 433(a)(3) of the bill would add a new paragraph (7) to section 428H(e) of the Act that would require the Secretary to pay the interest that accrues on an unsubsidized loan while the borrower is receiving an economic hardship deferment on the loan and performing community service. This proposal is part of the President's call to action to all Americans to serve their communities, and would allow individuals with student loans who qualify for economic hardship deferments to take up to three years to serve their communities without accruing additional interest on their loans.
Many people performing community service qualify for deferments of their loans under the economic hardship deferment in section 428(b)(1)(M)(iii) of the Act. "Economic hardship" is defined in section 435(o) of the Act on the basis of income and debt to income ratio. During periods of economic hardship, interest is not paid by the borrower on subsidized loans, but interest continues to accrue on unsubsidized loans. This amendment would provide similar treatment of subsidized and unsubsidized loans, in only these limited circumstances, in order to remove this financial obstacle to community service for borrowers who already satisfy economic hardship criteria.
To be performing "community service", the borrower must be working in a position that is carried out by a state, a subdivision of a state, a local government, an Indian tribe, a public or private nonprofit organization, or a federal agency. That service must also address a human, educational, environmental, or public safety need and primarily benefit the community at large (and not the membership of a particular organization, such as a labor, fraternal, or religious organization). Examples of service which would be eligible include such fields as health care, child care, literacy training, education, welfare, social services, transportation, housing and neighborhood improvement, public safety, crime prevention and control, recreation, rural development, and community improvements. Participants receiving tuition assistance or loan forgiveness under the National and Community Services Act of 1990 are eligible for this deferment, as are VISTA volunteers under Title 1 of the Domestic Volunteer Service Act of 1973 and volunteers under the Peace Corps Act. A similar change is proposed for Direct Loans in section 456 of the bill.
Section 434. Section 434 of the bill would amend the Secretary's powers under section 432 of the Act. First, section 435(1) of the bill would amend section 432(g) to provide the Secretary with the ability to impose fines on program participants that is more comparable to the Secretary's ability to fine institutions of higher education. Under current law, the Secretary may impose a penalty of up to $25,000 on a lender or guaranty agency, but all violations relating to the same practice or policy must be treated as a single violation. Additionally, the Secretary is required to show that the violation is material, and that the lender or guaranty agency knew or should have known that it was violating the law. Finally, no fine may be imposed under current law if the lender or guaranty agency corrects the violation prior to receiving notice from the Department that it intends to levy a civil penalty, even if the correction occurs only after knowledge that the Department is preparing an action against the lender or guaranty agency.
The current limitations on the Secretary's authority to impose civil penalties unduly hinder the exercise of the Secretary's ability to administer the FFEL program. For example, because all violations relating to the same practice or policy must be treated as a single violation, the Secretary is limited to a $25,000 fine even though millions of dollars and a large number of borrowers are involved. This provides no disincentive for lenders and guaranty agencies to engage in prohibited practices.
Under the proposed amendment, these limitations would be removed, and the Secretary, in determining the amount of a penalty would consider the appropriateness of the penalty to the resources of the lender or guaranty agency to be penalized; the gravity of the violation, failure, or misrepresentation; the frequency and persistence of the violation, failure, or misrepresentation; and the amount of any losses resulting from the violation, failure, or misrepresentation. The amount of such penalty, when finally determined, or the amount agreed upon in compromise, may be deducted from any sums owing by the United States to the lender or guaranty agency charged.
Next, section 434(2) of the bill would add a new subsection (q) to section 432 of the Act that would explicitly authorize the Secretary to review all program-related activities of lenders, guaranty agencies, eligible institutions, and third-party servicers for substantive, as well as technical, compliance with the purposes and requirements of part B of title IV of the Act, and to take actions that the Secretary determines to be necessary to ensure substantive compliance. Although the Secretary already has implicit authority to evaluate transactions and arrangements on the basis of their substance, an explicit statement of this authority in the statute would reduce time-consuming legal challenges to the Secretary's ability to examine the substance of lender and guaranty agency transactions and arrangements rather than their form. The purposes of the FFEL program would be better served if these transactions and arrangements could be more readily examined to ensure that they do not merely pay "lip service" to program requirements.
Section 435. Section 435 of the bill would amend the definitions in section 435 of the Act. First, section 435(1)(A)(i) of the bill would amend section 435(a)(2)(A) of the Act to require institutions that unsuccessfully appeal high cohort default rates and that choose to receive loans during the appeal process to be held liable for loans made during the appeal process and to post surety in an amount sufficient to cover these costs.
Resolution of cohort default rate appeals has required substantial Departmental resources. Consideration of appeals requires a detailed review of school, guaranty agency, and loan servicing records. Schools often have an incentive to file default rate appeals because they generally remain eligible during the appeal process and consideration of those appeals is a timeconsuming process during which the schools continue to receive loan proceeds. A surety requirement would reduce the number of frivolous appeals and eliminate the current incentive that schools have to file appeals even if there is no reasonable basis for the appeal. Frequently, schools that lose appeals close soon after the decision and their students' loans are discharged under the closed school discharge provision in section 437(c) of the Act. A letter of credit would at least partially protect the government from the costs that result. The General Accounting Office recommended this type of amendment in a report to Congress in June, 1995.
Next section 435(1)(A)(ii) of the bill would amend section 435(a)(2)(C) of the Act to extend the exemption from the elimination on the basis of high default rates for Historically Black Colleges and Universities, Tribally Controlled Community Colleges, and Navajo Community Colleges. This institutional exemption, which is currently due to expire on July 1, 1998, was intended to recognize the particular challenges of enrolling high risk students at institutions of higher education which have limited administrative resources. The bill would modify this exemption so that if such an institution exceeded the default threshold for two consecutive years, the institution would be required to submit a default management plan to the Secretary that contains criteria designed to demonstrate continuous improvement in the institution's cohort default rate. As a practical matter, the year following the two year period described above would not affect the institution's eligibility, since it would have had insufficient time under the default management plan to demonstrate continuous improvement. However, if the institution failed to submit an acceptable plan, or to satisfy the criteria in its plan, the institution would be subject to a possible loss of eligibility under these provisions, except as the Secretary may otherwise specify in regulations. The Department is committed to ensuring access for all disadvantaged students, but an institution should not be allowed to avoid penalties from high default rates simply because it enrolls a high percentage of those students. This amendment would not penalize these institutions for high cohort default rates if they are working to make them lower and can demonstrate progress.
Section 435(1)(A)(iii) of the bill would amend section 435(a)(2) of the Act to add a new subparagraph (D) that would eliminate a foreign institution from participating in the FFEL program for the fiscal year for which the determination is made, and for the two succeeding fiscal years, if its cohort default rate is five percent or more. While the overall default rate for all foreign institutions is consistently quite low (between five and six percent), the administrative, diplomatic, and logistical difficulties inherent in monitoring these institutions dictate a more stringent approach in dealing with default rates at these institutions. Approximately 140 foreign institutions could have their eligibility eliminated under this amendment.
Section 435(1)(B) of the bill would amend section 435(a)(3) of the Act to clarify that the records to which an institution appealing its loss of participation in the FFEL program on the basis of allegation of improper loan servicing may have access are those records on which the guaranty agency decided whether the lender satisfied the loan servicing requirements for payment of a default claim on the loan. Some institutions have claimed that they need access to loan servicer records that were not submitted to the guaranty agency to determine if the loan servicer properly performed collection activities. However, the only loans included as defaulted loans in the cohort default rate are those on which the guaranty agency has paid a claim, and the specific loan servicing requirements that are reviewed as part of a loan servicing appeal are reflected in the records received by the guaranty agency in deciding whether to pay that claim. Records maintained by loan servicers may provide additional detail regarding the collection activities on the loan, but are not relevant to a determination of whether the loan servicing activities relevant to the cohort default rate appeal process were performed. This amendment would reduce confusion in, and eliminate some means for protracting, the appeal process.
Section 435(2)(B) of the bill would add a new paragraph (7) to the definition of an eligible lender in section 435(d) of the Act to authorize the Secretary to prescribe in regulation additional requirements applicable to FFEL lenders, as may be appropriate for different kinds of lenders, as the Secretary determines necessary to oversee adequately the program activities of lenders, safeguard student borrowers, and carry out the purposes of the FFEL program.
Section 435(3) of the bill would amend section 435(m)(1)(B) of the Act to specifically provide that improperly serviced loans will be eliminated entirely from the calculation of the school's cohort default rate. The cohort default rate is the percentage of an institution's borrowers who enter repayment in one fiscal year and default on their loan on or before the end of the next fiscal year. It is generally expressed as a fraction with the number of defaulters as the numerator and the number of borrowers as the denominator. Section 435(m)(1)(B) of the Act provides that, in considering cohort default rate appeals, the Department shall exclude from the calculation of the rate any loans on which the institution can show there was improper loan servicing. The Department interprets the statute to mean that the improperly serviced loans are eliminated from both the numerator and denominator of the calculation. A number of schools and school organizations have argued that improperly serviced loans should be eliminated only from the numerator of the calculation. The purpose of the loan servicing appeal is to ensure that schools are not harmed by loan servicing that does not meet certain standards and that could result in an incomplete or inaccurate calculation of the cohort default rate. Elimination of improperly serviced loans from both aspects of the cohort default rate calculation serves that purpose; elimination of improperly serviced loans from the numerator but not the denominator of the calculation would allow schools to benefit from improper servicing by artificially reducing the rate. The proposed change would clarify Congressional intent.
Section 436. Section 436 of the bill would repeal section 436 of the Act, which authorizes the establishment of a guaranty agency for the District of Columbia. A guaranty agency for the District of Columbia does not currently exist and is unnecessary, because FFEL loans in the District of Columbia are guaranteed by the Massachusetts guaranty agency.
In its place, section 436 of the bill would add a new section 436 of the Act that would specify that an eligible lender or guaranty agency that contracts with another entity to perform any of its FFEL functions, or otherwise delegates the performance of such functions to another entity shall not be relieved of its duty to comply with the requirements of this title, and would also be required to monitor the activities of the other entity for compliance with program requirements. In addition, proposed new section 436 would specify that a lender that holds FFELs in its capacity as a trustee assumes responsibility for complying with all statutory and regulatory requirements imposed on any other holder of a FFEL. This proposed new section of the Act would expand on requirements, currently found at 34 CFR 682.203(a), by requiring that eligible program participants monitor the activities of their contractors or delegees. Lenders and guaranty agencies frequently delegate some or all of their functions to third parties. Some lenders and guaranty agencies have delegated all or substantially all of the functions inherent in their participation in FFEL, which is inconsistent with the establishment of eligibility qualifications in the HEA. Although 34 CFR 682.203(a) states that delegation does not relieve the eligible participant from its compliance responsibilities under the statute and regulations, at present delegating parties rarely monitor their activities. Proposed new section 436 would ensure that the Department has adequate redress against eligible participants for all activities relating to the FFEL program, and would encourage that all eligible participants become actively involved in monitoring their contractors or delegees.
Section 437. Section 437 of the bill would amend section 437(b) of the Act to eliminate the bankruptcy discharge for loans certified on or after July 1, 1999. Section 437(b) of the Act currently provides that under certain circumstances, borrowers may have their loans discharged when they file for bankruptcy. However, in recent years this discharge has been rendered unnecessary by the greatly increased availability of income contingent and income-sensitive repayment plans, deferments, and forbearances that allow borrowers to make affordable payments, or to make no payments, when they are experiencing financial problems. Furthermore, the 1991 elimination of the statute of limitations on the collection of student loan debts also argues against the continued availability of the bankruptcy discharge. Elimination of the discharge will save Departmental resources and equalize treatment of borrowers.
Section 438. Section 438 of the bill would amend section 438 of the Act to provide for the computation of special allowance rates at the same time and in the same manner as student loan interest rates (annually rather than quarterly), to eliminate the potential for special allowance payments merely because the rates are calculated on a different cycle. In addition, this section of the bill would make minor conforming changes to reflect the amendments to the interest rate calculations proposed in section 423A of the bill.
Section 438(a)(2) of the bill would also amend section 438(b) of the Act to partially restore the special allowance treatment for lenders using tax-exempt financing that was in effect prior to 1993. The special allowance rate for loans financed on or after October 1, 1999 with tax-exempt funds (regardless of when the obligations generating the tax-exempt funds were originally issued) would be one-half of the rate used for other loans. There would be no floor on the reduced payment, which was the feature in the earlier version of this provision that resulted in increased program costs. Lenders using tax-exempt financing have a substantially lower cost of obtaining funds than other lenders, and should be compensated accordingly.
Section 438(a)(3) of the bill would amend section 438(d)(1) of the Act to provide the Secretary with discretion to collect lender fees directly or through reduction of interest and special allowance owed to the lender. Current law requires the Secretary to deduct lender fees from payments of interest and special allowance from the Department to the lender and prohibits the direct collection of these fees. There is no reason to relieve lenders of the obligation to pay lender fees (or postpone that obligation) on highly subsidized FFEL loans simply because there are no Federal funds coming in to the lender for the Secretary to offset, whether because there is no special allowance paid for that period or because the lender does not have a sufficient number of borrowers still in school or in a grace period. This amendment would enable the Secretary to collect fees from these lenders directly and would allow the Secretary to develop a system in the future that would ensure that fees are collected in the quarter in which they are incurred.
Finally, sections 438(a)(4) and (b) of the bill would amend section 438(e) of the Act, and make a conforming amendment to section 432(f)(1)(D) of the Act, that would eliminate the requirement that a secondary market prepare a plan for doing business. The substantive requirements applicable to secondary markets through the current assurances would be retained. Apart from these assurances, the plans contain little useful information, and the review of these plans is not an efficient use of the Department's limited resources.
Section 439. Section 439 of the bill would repeal 428I and 428J of the Act. Section 428I allows for 100 percent insurance for lenders and servicers whose compliance performance rate exceeds 97 percent. This provision has never been implemented, and other incentives are sufficient to encourage high compliance and performance. Section 428J provides loan forgiveness for teachers, individuals performing national community service, and nurses, but has never been funded.
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