Looking at the Deficit Reduction Act from a School Perspective
Submitted by Steve Greenough, American Student Assistance

We all know that the student loan industry is forever changing and that trying to keep up with all that’s new can seem daunting to even the most seasoned professional.

And now, with the passing of the Deficit Reduction Act and all the new regulations that go in to effect this year and beyond, the industry, and schools in particular, are facing some complicated questions.

Here are some helpful hints about the latest regulations:

Graduate PLUS Loans

• If your school currently processes PLUS, then you do not need additional approval for Graduate PLUS Loans. (Please note that if the main branch of your school is approved for and processes PLUS loans, all satellite branches are eligible to process Graduate PLUS Loans as well).
  If your school currently processes Stafford loans only, you will need to be approved for PLUS by the Department of Education (ED). The procedures and approval process are the same as similar Federal Student Aid program participation agreement updates.
  To update your school’s Program Participation Agreement, the school should contact their local Department of Education case team. A list of the different case teams and their contact information can be found at www.eligcert.ed.gov.
• A graduate student borrower must apply for the maximum Stafford eligibility prior to applying for the Graduate PLUS Loan.
• A graduate student is required to complete the FAFSA in order to be eligible to apply for a Graduate PLUS Loan.
• The credit criteria for a Graduate PLUS Loan will be exactly the same as an Undergraduate PLUS Loan. A credit check will be performed and the loan will be denied if the borrower has an adverse credit history according to lender and regulatory criteria.
• For students who are denied a Graduate PLUS Loan, the same appeal and endorser options that are available on the Undergraduate PLUS Loan will be available.
• There are no annual limits for the Graduate PLUS Loan. The loans may be certified up to the total cost of attendance, less any other financial aid. Any loans disbursed on or after July 1, 2006, will have a fixed interest rate of 8.5%.
• Graduate PLUS Loan borrowers may receive in-school deferments as long as they maintain at least half-time enrollment status. Borrowers should be encouraged to contact their loan holders to ensure any necessary deferment paperwork is completed in a timely manner to prevent loan delinquency.
• A new Master Promissory Note (MPN) will not be available for this processing season. Graduate students will need to complete the existing PLUS MPN using their information in both the borrower and student sections. An addendum will be sent with all new MPNs for all FFELP loans. In addition, disclosure statements are being updated to include required language regarding the recent changes.

School as Lender

• Schools must have been approved to participate in the School as Lender program and have made and disbursed loans as a lender in the program prior to April 1, 2006.
• Beginning July 1, 2006, a School as Lender may not make PLUS Loans to parents or graduate/professional students.

Stafford Loans
The increased loan limits, indicated below, apply to any loans certified (FFELP) or originated (DL) on or after July 1, 2007, as follows:

• Aggregate loan limits will remain the same.
• Stafford Loans first disbursed on or after July 1, 2006, will be assigned a fixed interest rate of 6.8%.
• Stafford Loans first disbursed prior to July 1, 2006, will continue to have a variable interest rate with a cap of 8.25%.

Federal Default Aversion Fee

• For loans guaranteed on or after July 1, 2006, a federal default fee equal to 1% of principal shall be deducted proportionately from each disbursement prior to disbursing to the borrower or should be paid using non-federal sources. The fee must be deposited into the Federal Student Loan Reserve Fund and the proceeds must not be used for incentive payments to lenders.

Origination Fees

• Loans first disbursed on or after July 1, 2006 will have a fee of 2%
• Loans first disbursed on or after July 1, 2007 will have a fee of 1.5%
• Loans first disbursed on or after July 1, 2008 will have a fee of 1%
• Loans first disbursed on or after July 1, 2009 will have a fee of .5%
• Loans first disbursed on or after July 1, 2010 will have a fee of 0%

Loan Consolidation

• FFELP borrowers will no longer be able to request to be removed from an in-school status in order to apply for a consolidation loan.
  The definition of repayment has been clarified as not beginning until six months and one day after the date the student ceases to be considered in at least a half-time enrollment status in a degree, certificate, or diploma program.
  On or after July 1, 2006, Direct Loan borrowers will no longer be able to consolidate while they are in an in-school status.
• If the borrower is the same on both their Stafford and Graduate PLUS Loans, the borrower would be able to consolidate the loans together. However, a borrower who obtained Stafford Loans would not be able to consolidate them with the PLUS Loans that their parents borrowed on their behalf.
• Spousal consolidation will no longer be allowed in either the FFELP or the Direct Loan program after July 1, 2006.

Disbursement Rule Exceptions

• A school that carries a cohort default rate of 10% or less for the last three consecutive fiscal years may choose to be exempt from the delayed disbursement and multiple disbursement requirements. This change is effective for disbursements made on or after February 8, 2006.
• Two disbursement exemptions have been reinstated:

Multiple Disbursements: Eligible schools as defined above may receive a single installment for loans that are made for a single semester, trimester or quarter. Eligible non-term schools may receive a single installment for loans that are made for a period of no more than four months.

Delayed Delivery: Eligible schools are no longer required to delay the delivery of the first disbursement for first-time, first-year undergraduate borrowers for 30 days.

Forbearance

• For forbearances processed or requested on or after July 1, 2006, the requests for mandatory forbearances may be verbal. However, further documentation may be requested later by the servicer.

For more information and the latest updates on the Deficit Reduction Act, visit www.amsa.com.