Answers to Your Questions:
Student-Aid Provisions of the Deficit Reduction Act of 2005
Submitted by Arnold Trejo, Sandy Holt & John Bautista

USA Funds®’ Vice President - Policy and Compliance, Greg Ayers, answers key questions about the student-aid provisions of the Deficit Reduction Act of 2005. Note that the following answers reflect USA Funds’ current understanding of the provisions contained in the Deficit Reduction Act of 2005. The information is subject to change based on anticipated guidance from the U.S. Department of Education and future final regulations.

Consolidation Loans

Q: Can a borrower with a defaulted Federal Family Education Loan Program loan consolidate into the William D. Ford Direct Loan Program?
A: Yes. The Deficit Reduction Act of 2005 provides two possible scenarios under which a borrower with a FFELP consolidation loan is eligible to reconsolidate the loan into the FDLP:

1. The borrower is past due on payments to the lender, and the lender has filed a default-aversion-assistance request with the guarantor. The borrower indicates that he or she wishes to repay the loan under the income-contingent-repayment component of the FDLP.
2. The borrower’s FFELP consolidation loan already is in default, and the borrower wants to reconsolidate into the FDLP.

Correspondence Courses and Distance Education

Q: Is the required evaluation of distance-education programs separate from an institution’s accreditation process?
A: The legislation does not stipulate whether the evaluation that is necessary for schools providing courses through correspondence and telecommunications can be completed through the normal accreditation process. The legislation states only that the school must be evaluated and determined to have the capability to effectively deliver distance-education programs by an accrediting agency or association that meets both of the following conditions:

1. Is recognized by the U.S. secretary of education.
2. Has evaluation of distance-education programs within the scope of its recognition by the education secretary. The Department of Education still must address the procedural issues identified in this question.

Disbursement-Requirement Waivers

Q: What is the effective date of the two waivers for low-default-rate schools regarding single disbursements for single terms and the 30-day delayed-delivery requirement?
A: The waivers for low-cohort-default rate schools regarding single disbursements for single terms and the 30-day delayed-delivery requirement were effective Feb. 8, 2006, the date of enactment of the Deficit Reduction Act of 2005. The legislation does not specify a particular triggering event. The Department of Education will have to provide further guidance on the implementation of this provision.

Fees

Q: What is the effective date for the Federal Default Fee provision?
A: The Federal Default Fee is effective for loans guaranteed on or after July 1, 2006.

Q: Can the 1-percent Federal Default Fee on FFELP loans be paid on behalf of the borrower? Is there any information about whether this might be happening? Can or will some guarantors pay this? Will lenders?
A: The legislation permits the 1-percent Federal Default Fee to be paid by either the borrower or by other nonfederal funds. The legislation does not identify or limit the sources of those other nonfederal funds. Individual guarantors and lenders will have to determine whether they will pay the fees on behalf of the borrowers.

Q: What is the effective date of the origination-fee reductions?
A: The origination-fee reduction from 3 percent to 2 percent is effective for FFELP Stafford loans first disbursed on or after July 1, 2006.

Q: Do the origination fee and Federal Default Fee changes apply to PLUS loans? If so, does that mean that PLUS borrowers will pay 4 percent in fees?
A: The origination-fee reductions do not apply to PLUS loans. The Federal Default Fee requirement does apply to PLUS loans. As a result, for PLUS loans disbursed on or after July 1, 2006, the borrower will be assessed a 3-percent origination fee, which the lender may choose to pay on behalf of the borrower. In addition, the borrower is subject to a 1-percent Federal Default Fee, which may be paid on behalf of the borrower through nonfederal sources. If the fees are not paid by other sources, the PLUS borrower would be required to pay 4 percent in fees.

Interest Rates

Q: When are the new interest-rate provisions effective?
A: Effective for Stafford loans first disbursed on or after July 1, 2006, the interest rate will be fixed at 6.8 percent. Similarly, for FFELP PLUS loans first disbursed on or after July 1, 2006, the interest rate will be fixed at 8.5 percent.

Q: What interest rates apply to a borrower who has an existing Master Promissory Note with a loan first disbursed before July 1, 2006, and who then obtains a serial loan that is disbursed on or after July 1, 2006?
A: The loan first disbursed prior to July 1, 2006, will continue to carry a variable rate adjusted annually as of July 1 of each year. The loan first disbursed on or after July 1, 2006, will have a fixed interest rate of 6.8 percent.

Q: What is the interest-rate calculation for Stafford loans disbursed prior to July 1, 2006?
A: The interest rate for Stafford loans disbursed prior to July 1, 2006, will continue to be a variable rate adjusted annually as of July 1. The rate will be based on the 91-day Treasury bill rate as of the last auction prior to June 1 of each year.

Q: Do the new interest rates apply to the in-school, grace, deferment and repayment periods?
A: A Stafford or PLUS loan subject to the new fixed interest rate will carry that same rate throughout the life of the loan.

Loan Limits

Q: When do the changes to the Stafford-loan limits take effect?
A: The effective date for the changes in Stafford-loan limits is July 1, 2007. The legislation does not specify a particular triggering event. The Department of Education must provide further guidance on the implementation of this provision.

Q: Did the legislation also change the aggregate loan limits?
A: The legislation does not contain any language expressly changing aggregate loan limits. Questions have surfaced in the student-loan community as to whether the aggregate loan limits have changed as a result of various cross-references between the new provisions and other existing language in the Higher Education Act. We anticipate that the Department of Education will address this issue in the near future.

Military Deferment

Q: Where can I find details about the new military deferment?
A: The military deferment is discussed in section 8007(a) of the Deficit Reduction Act of 2005.

Need Analysis

Q: The legislation refers to small businesses that do not have more than 100 employees. Can you elaborate on that provision?
A: For determinations of need under the Title-IV programs, except for LEAP, family “assets” do not include the net value of a small business with 100 or fewer full-time or full-time equivalent employees or any part of such a business that is owned and controlled by the family.

Q: What is the effective date for the new Academic Competitiveness Grants and National SMART Grants?
A: These new categories of Pell Grants will be effective July 1, 2006. Other specific dates affecting student eligibility for these grants include:

• Students enrolled or accepted for enrollment in the first academic year of a qualifying postsecondary program must have successfully completed a rigorous secondary-school program of study after Jan. 1, 2006.
• Students enrolled in the second academic year of a qualifying postsecondary program must have successfully completed a rigorous secondary-school program of study after Jan. 1, 2005.

Q: Will the Academic Competitiveness Grants and the National SMART Grants be awarded in addition to traditional Pell Grants, or are these intended to be in place of traditional Pell Grants?
A: These new categories of Pell Grants are available in addition to traditional Pell Grants. The legislation stipulates that the combined amount of an Academic Competitiveness Grant, National SMART Grant, traditional Pell Grant, and other student financial assistance available to the student cannot exceed the student’s cost of attendance.

Q: If a student meets the requirements for the Academic Competitiveness Grant or National SMART Grant, will the student automatically receive one? Or is it competitive?
A: The availability of the these new categories of Pell Grants are based on eligibility criteria contained within the new legislation, including, but not limited to, such factors as high-school coursework, high-school grade-point average, previous postsecondary GPA, and cost of attendance. The legislation does not identify any type of competitive process for awarding the grants.

Q: Who is determining what constitutes a rigorous high-school curriculum with respect to qualifying for an Academic Competitiveness Grant?
A: The curriculum must be established by a state or local educational agency and must be recognized as such by the U.S. secretary of education.

Q: Who is defining “critical foreign languages” for purposes of determining if a student is pursuing that course of study and thereby qualifying for an Academic Competency Grant or a National SMART Grant?
A: The U.S. secretary of education, in consultation with the U.S. director of national intelligence, will determine whether a particular foreign language is critical to the national security of the United States.

Q: Is the Academic Competitiveness Grant available only for community-college students who came out of high school with the right coursework? Will students who attend a two-year school and later transfer to a four-year school with the appropriate GPA and major be eligible without consideration of their high-school work?
A: The Academic Competitiveness Grants will be available to students enrolled or accepted for enrollment in first- and second-year academic programs. Therefore, the eligibility criteria include consideration of the students’ high-school coursework and GPA. The National SMART Grants will be available to students enrolled or accepted for enrollment in third- and fourth-year academic programs. The eligibility criteria for these students do not include consideration of prior high-school curriculum or GPAs. Instead, eligibility will be determined by the type of postsecondary programs in which the students are enrolled, and the students’ GPA in their prior postsecondary-education coursework required for the qualifying program of study.

Q: How will a school know if a particular borrower qualifies for one of the two new categories of Pell Grants?
A: The Department of Education will have to assist in identifying the process by which students apply for these grants.

PLUS Loans for Graduate and Professional Students

Q: When does the provision allowing professional and graduate students to obtain PLUS loans take effect?
A: The legislation indicates that professional and graduate students are eligible to obtain PLUS loans as of July 1, 2006. The legislation does not specify a particular triggering event. The Department of Education will have to provide further guidance on the implementation of this provision.

Q: Has anything been said about parents’ being able to borrow PLUS loans for independent undergraduate students?
A: The current Higher Education Act allows parents to borrow PLUS loans only for dependent students. The Deficit Reduction Act of 2005 did not extend that provision to include parents’ obtaining PLUS loans for independent students.

Q: Can professional, nongraduate students obtain PLUS loans under the new law?
A: The legislation does not identify “nongraduate students” as being eligible for PLUS loans. Under current federal requirements, a “graduate or professional student” is an individual who meets all of the following criteria:

1. Is enrolled in either a program of study above the baccalaureate level or a program leading to a first professional degree.
2. Has completed the equivalent of at least three academic years of full-time postsecondary study.
3. Is not receiving aid under Title IV as an undergraduate student for the same period of enrollment.

We anticipate that this same criteria will be applied to the new provision regarding the availability of PLUS loans to graduate and professional students.

Q: Can graduate/professional schools offer PLUS loans to their own students? Does a graduate school have to be approved by the Department of Education to process PLUS loans?
A: To participate in any of the federal financial-aid programs, schools must obtain approval from the U.S. Department of Education. The Department provides that approval on a program-by-program basis. If a school has not previously received approval from the Department specifically for its participation in the PLUS-loan program, the school will have to pursue that approval prior to certifying PLUS loans for its students.

Q: Will graduate and professional students that obtain PLUS loans be eligible for in-school deferments?
A: The legislation does not provide any new deferment eligibility for graduate and professional students who obtain PLUS loans. Under current federal requirements, PLUS loans made on or after July 1, 1993, are not eligible for in-school deferments based on the in-school status of the students for whom the loans were made.

Q: Do the amounts borrowed by a graduate or professional student under the PLUS program count toward the aggregate loan amount borrowed by the student?
A: The new legislation does not address the impact of PLUS loans obtained by graduate and professional students on the aggregate loan limits. We anticipate that the Department of Education will address this issue in future guidance.

School as Lender

Q: In light of the new provision that states that a school as lender cannot make loans to students who are not attending that institution, can two schools operating under a multi-campus system use a single lender code for all of their students?
A: If the school previously received approval from the Department of Education to use a single lender code in processing applications for students attending both schools, the school may continue to use that same single lender code under the new provisions.

Other

Q: How do the lawsuits challenging the legality of the legislation affect all of this?
A: Although Congressional leadership is committed to resolving this issue, because of the legal nature of the debate, it is impossible to predict the ultimate outcome.