Winter 2008 Online Publication    




The Regulatory Jungle
By Deborah Whitis, Manager of Loan Originations, Brazos Higher Education Service Corporation

The Department of Education published their final rules on Student Loan issues and General Provision on November 1, 2007. These regulations have an implementation date of 07/1/08 but the Secretary has provided that these rules can be implemented on or after 11/01/07 at the discretion of Schools, Lenders, Guarantee Agencies and Servicers.

If you are like me, you are feeling a little overwhelmed by the copious amount of information regarding all the new regulations. Below is a list of sites you may find helpful in understanding the plethora of information published on these new provisions.

In addition to the above, there are many sites that succinctly summarize the information, but I thought I’d provide some information that I found to be rather helpful. You can find it at www.hesc.com. Select the link to “College Administrators” and then “Highlights of Student Loan and General Provision Final Rules” from the toolbar on the right side of the page.

  1. Student Loan Issues Final Rules
    The following loan provisions may be implemented on or after November 1, 2007:

     Simplification of Deferment Process - §682.210
    • Allows lenders to grant deferments for graduate fellowship, rehabilitation training, unemployment and economic hardship based on information from another lender or the department (via NSLDS) that supports eligibility for the deferment for the same reason and the same time period.
    • A borrower’s representative (i.e. a member of the borrower’s family, or another reliable source) may now apply for a Military Service deferment or an Armed Forces Deferment on the borrower’s behalf.
    Accurate and Complete Copy of a Death Certificate - §682.402(b)
    • Discharge due to death may now be based on an accurate and complete photocopy of the original or certified copy of the borrower’s death certificate. (Previously, only original copies could be submitted.)
    Loan Counseling for Grad/Professional student PLUS Loan borrowers- §682.603& 682.604
    Regulations will now require schools to conduct entrance and exit counseling for Grad/Professional student PLUS borrowers
    • Entrance Counseling is now required for Grad/Professional student PLUS borrowers prior to the release of the first disbursement. If the student already has a Stafford loan, the school has the option to minimize the entrance counseling requirements.
    • During the entrance counseling, a school must notify the Grad/Professional student PLUS loan applicant of their eligibility for a Stafford loan, along with a comparison of the terms and conditions of the two programs.
    • During the exit counseling, if the borrower has a combination of Stafford and Grad/Professional PLUS loans, the school must provide average anticipated monthly repayment amount information based on the combination of the different loan types the borrower received.
    Frequency of Capitalization - § 682.202(b)(5)
    • For Consolidation loans, a lender may capitalize unpaid interest as frequently as every quarter, except that a lender may only capitalize unpaid interest that accrues during an in-school deferment at the expiration of the deferment.
    Loan Discharge for False Certification as a Result of Identity Theft - §682.208, 682.211, 682.300, 682.302 & 682.411
    • Upon receipt of a valid identity theft report or notification from a credit bureau, a lender will be able to: 1) suspend credit bureau reporting on a loan for 120 days while investigating the claim; and 2) grant a 120-day administrative forbearance to a borrower upon the lenders receipt of a valid identity theft report.
    • If a lender determines that the loan is unenforceable, it can no longer collect interest and special allowance payments on the loan.
    • Allows lenders a three-year period to file for insurance in the event the adjudication standard is met after the 120-day suspension.

    THE FOLLOWING LOAN PROVISIONS WILL GO INTO EFFECT AS OF JULY 1, 2008:

    Total and Permanent (T&P) Disability Discharge - §682.402 (c)
    The procedures were modified to assist borrowers with the lengthy discharge application procedures.
    • Requires the borrower submit a discharge application to the holder within 90 days of the date the physician certifies the borrower’s condition ( the Secretary reserves the right to require additional medical evidence , as well an additional review of the borrower’s condition by an independent physician at the Secretary’s expense).
    • Defines the date of the disability as the date the physician certifies the discharge application.
    • The three year conditional discharge period to discharge the loan begins on the date the physician certifies the discharge application (vs. the date the Secretary determines that the borrower is totally and permanently disabled).
    • Allows borrowers who inadvertently borrowed a federal loan, (after being certified as totally and permanently disabled) to return the loan funds so that the borrower will retain the option to apply for the T&P disability discharge.
    • Any payments made after the date that the physician certified the borrower’s application will be sent to the person who made the payment after the final discharge is issued.
    Record Requirements for Electronically Signed Master Promissory Notes (MPN’s) - §682.414
    • The holder of a FFEL loan will be required to retain an original of an electronically signed FFEL Program MPN for 3 years, after all loans on the MPN are satisfied (previously, no timeframe for retention was established for electronically signed MPN’s).
    Maximum Length of Loan Period - §682.401& 682.603
    The maximum 12- month loan period for loan guarantee and annual loan limits is eliminated. However, schools are still expected to monitor annual loan limit progression by the school’s academic year.
    • This will allow schools to certify a single loan for students in shorter non-term or nonstandard term programs. It will also provide greater flexibility in rescheduling disbursements for students who drop out and return within the permitted 180-day period.
    Prohibited Inducements - §682.200, 682.209, 682.401 & 682.406
    Clarifies the regulations on improper inducements and strengthens the Department’s authority to enforce the rules related to improper inducements.
    • Prohibits lenders from soliciting school employees to serve on a lender’s advisory board and paying costs related to this service.
    • Allows lenders to provide schools, school-affiliated organizations, and borrowers items of nominal value that constitute a form of generalized marketing or are interceded to create good will.
    • Prohibits lenders and guarantors from conducting in-person, school-required entrance and exit counseling.
    • Permits lenders to provide short-term staffing to a school on an emergency basis (State or Federally-declared national disaster, and other localized disasters and emergencies identified by the Secretary).
    • Revises the definition of lender by allowing the Secretary to make future changes of the term “prohibited inducements” through a public announcement.
    Preferred Lender Lists (PLL) - §682.212 & 682.401
    Schools are under no obligation to provide a preferred lender list. However, if they opt to use preferred lenders, they must follow these rules:
    • Schools will be required to list at least three lenders that are not affiliated with each other.
    • Prohibits the use of a preferred lender list to deny or otherwise impede the borrower’s choice of lender.
    • Schools using a PLL must provide numerous disclosures, including: 1) the method and criteria used by the school to select those lenders; 2) comparative information about the interest rates and other benefits offered by those lenders, and 3) a prominent statement informing borrowers that they are not required to use any of the lenders on the preferred lender list. Also, the school is required to update the PLL and all of the accompanying information at least annually to ensure that the information is current.
    • Prohibits lenders to be listed on a school’s PLL if the lender had offered the school any benefits in exchange for being on the list.
    • Prohibits schools from assigning, through award packaging or other methods, a lender to first-time borrowers.
    • Prohibits schools from delaying certification of a borrower’s loan eligibility to a lender because that particular lender is not on the school’s PLL.

  2. CCRAA Changes
    The loan issues final rules package also incorporates certain statutory changes made to the HEA by the CCRAA. The Department has determined that it is unnecessary to conduct negotiated rulemaking or notice-and-comment rulemaking on these regulations pertaining to the CCRAA because they “simply modify the Department’s regulations to reflect statutory changes made by the CCRAA, and these statutory changes are either already effective or will be effective within a short period of time.

     The following rules codify the following CCRAA changes: Effective as of October 1, 2007

    Deferments - §682.210

    Military Deferment
    • Extends the military deferment to all Title IV borrowers regardless of when their loans were disbursed.
    • Eliminates the 3-year limit on the military deferment.
    • Adds a 180-day period of deferment following the borrower’s demobilization.
    • Authorizes a 13-month deferment following the conclusion of their military service for certain members of the Armed Forces who were enrolled in a program of instruction at an eligible institution at the time, or within 6 months prior to the time the borrower was called to active duty.
    Economic Hardship Deferment
    • Revises the definition of “economic hardship” to allow a borrower to qualify for this deferment if they earn 150 percent of the poverty line applicable to the borrower’s family size.
    Reduces Special Allowance Rates Paid to Lenders - §682.302
    • Applies to loans first disbursed on or after October 1, 2007. Establishes different rates paid to eligible not-for-profit lenders, and other lenders.
    Lender Fees - §682.305
    • Increases the loan origination fee a lender must pay to the Secretary from 0.50 to 1.0 percent of the principal amount of the loan for loans first disbursed on or after October 1, 2007.
    Exceptional Performer Status - §682.415
    • As of October 1, 2007, the “exceptional performer” status for lenders and guaranty agencies was eliminated.
    Undergraduate Subsidized Stafford Loan Interest Rates - §682.202
    The following schedule shows the annual decreases in interest rates (for loans first disbursed on July 1, 2008)
    • 6.0% for loans first disbursed between 7/1/08 - 6/30/09
    • 5.6% for loans first disbursed between 7/1/09 - 6/30/10
    • 4.5% for loans first disbursed between 7/1/10 – 6/30/11
    • 3.4% for loans first disbursed between 7/1/11 – 6/30/12

  3. General Provisions Final Rules
    The effective date is July 1, 2008. However, the Secretary of Education provides all Title IV participants with the option to implement these regulations as of 11/1/07.

    4. General Definitions - §668.2(b)
    • Adds definition of first professional degree as a degree received after completing the academic requirements to begin practice in a profession and a skill level beyond that required for a bachelor’s degree. A professional license is also normally required.
    • Consolidates the definitions for full time student, graduate or professional student, half time student, three quarter time student and undergraduate student by moving these definitions from each individual Title IV regulatory section into the General Provisions regulatory section (§668).
    Payment Periods - §668.4, 668.22, 668.164, 682.200, & 682.604
    • Aligns disbursements, with a few exceptions, for all Title IV grant and loan programs on a payment period basis.
    • Modifies the timing of second disbursements for credit-hour non-standard term programs with terms that are not substantially equal in length. The timing of the second disbursement is changed from the later of the calendar mid-point or the time at which the student successfully completes half the coursework, to the successful completion of half the weeks of instructional time and the time at which the student successfully completes half the coursework.
    • Modifies the 180-day rule for students transferring programs within the same institution. These students may remain in the same payment period as long as the student is continuously enrolled, the coursework is similar between programs, the credits from the payment period the student is transferring out of must be accepted toward the new program, the payment periods are substantially equal in length of weeks of instructional time and hours, and there are little or no changes in the institutional charges associated with the payment period for the student.
    Treatment of Loan Funds For a Student Who Does Not Begin Attendance - §668.21& 682.604
    • Consolidates all requirements addressing the treatment of Title IV funds (except Federal Work Study) when a student does not begin attendance in a payment period or period of enrollment to §668.21.
    • Instructs schools to return all loan funds disbursed for that period that were credited to the student’s school account along with any funds paid by or on behalf of the student for that period. The school would not be responsible for returning loan funds that are disbursed directly to the student by the lender for a study-abroad program or for a student enrolled in a foreign school. A final demand letter must be issued to students for these funds.
    • Requires schools to return funds within 30 days after learning that the student will not begin or has not begun the period of enrollment.
    Cash Management - §668.164 & 668.165
    • Extends the late disbursement time frame from 120 to 180 days. Eliminates the institution’s ability to appeal any late disbursement request after the 180 day period expires.
    • Establishes timeframes for returning Title IV, program funds that an institution attempts to disburse directly to a student or parent, but the student or parent does not receive or negotiate those funds.
    • Increases the maximum amount of minor prior year charges that may be paid with current-year funds from $100 - $200 if this payment will not prevent the student from paying current educational costs. The exception that allowed an institution to pay for more prior-year charges under certain circumstances has been removed.
    • Modifies the provisions for an institution issuing a check to a student and adds new provisions expanding the use of electronic funds transfers (EFTs) to bank accounts that underlie stored value cards and other transaction devices.
    Loan Cancellation Notices for EFT Disbursements - §668.165
    • Requires institutions to notify borrowers of their option to cancel an EFT disbursement. School must either obtain affirmative confirmation (either in electronic form or paper) from a student prior to disbursing a loan or notify a student no earlier than 30 days before, but no later than seven days after crediting a student’s account with loan proceeds, and give students 30 days to cancel all or a portion of a loan.