FP-06-04

Subject: Reporting Changes for Lenders

Summary: This letter provides guidance to FFEL lenders on reporting
changes to the quarterly Lender's Interest and Special Allowance Request
and Report (LaRS) as a result of the Higher Education Reconciliation Act
of 2005.

Dear Colleague:

On February 8, 2006, President Bush signed the Higher Education
Reconciliation Act of 2005

(HERA), Pub. L. 109-171, which made significant changes to the Higher
Education Act of 1965, as amended ( HEA), and reauthorized the Federal
Family Education Loan (FFEL) Program. Some of these changes affect the
way FFEL lenders report quarterly to the Department of Education (the
Department) on the Lender's Interest and Special Allowance Request and
Report (LaRS). The purpose of this letter is to provide guidance on
those reporting changes.

# Reduction of Origination Fees

The amount of origination fees that lenders are currently authorized to
charge Stafford Loan borrowers is being reduced and eventually
eliminated under the changes made by the HERA to the HEA. PLUS Loan
borrowers will continue to be charged the current mandatory 3 percent
origination fee. This PLUS requirement also applies to loans made to
graduate and professional students, as authorized by HERA. Consolidation
Loan borrowers are not charged a fee, and therefore are not affected.

Beginning with loans for which the first disbursement of principal is
made on or after July 1, 2006, and before July 1, 2007, the maximum
origination fee that can be charged to Stafford Loan borrowers will be 2
percent. The maximum fee drops to 1.5 percent on July 1, 2007, 1.0
percent on July 1, 2008, and 0.5 percent on July 1, 2009. The fee will
be eliminated as of July 1, 2010.

Accordingly, in Part I of the Lender's Interest and Special Allowance
Request and Report (LaRS) the edits for Column C, Fee Percent have been
changed to reflect the new fee structure. If you are completing the form
online, you will see the new percentages when you select this column.
All percentage changes will be enabled during the reporting period in
which they take effect.

# Page 2 -- Reporting Changes for Lenders

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# 

# New Interest Rates for FFEL PLUS and Stafford Loans

For FFEL PLUS loans for which the first disbursement is made on or after
July 1, 2006, the interest rate scheduled to take effect has been
increased from a fixed rate of 7.9 percent to a fixed rate of **8.5
percent**.

For FFEL Stafford loans for which the first disbursement is made on or
after July 1, 2006, the fixed rate of **6.8 percent** previously
provided for in section 427A(l) of the HEA will be effective.

As a result, LaRS edits for Part I, Column D, Part II, Column B, and
Part III, Column F have been changed to reflect the new interest rates.
If you are completing the form online, you will see the new interest
rates in the drop-down boxes beginning with the quarter ending September
30, 2006.

# Changes to Special Allowance

The HERA requires the repayment by a lender of excess interest when the
applicable interest rate on a loan for any quarter exceeds the "special
allowance support level." This requirement applies to loans for which
the first disbursement of principal is made on or after April 1, 2006,
but does not apply with respect to any special allowance payment made
under section 438 of the HEA before April 1, 2006.

The HERA defines the term "special allowance support level" as a number
expressed as a percentage equal to the sum of:

-   The average of the bond equivalent rates of the quotes of the
    3-month commercial paper (financial) rates in effect for each of the
    days in such quarter as reported by the Federal Reserve in
    Publication H-15 (or its successor) for such 3-month period, plus

-   2.34 percent for Stafford loans in repayment, or 1.74 percent during
    the in-school, grace or deferment periods; or

-   2.64 percent for PLUS and Consolidation loans.

The excess interest will be calculated each quarter by subtracting the
"special allowance support level" from the applicable interest rate,
multiplying the result by the average daily principal balance as
reported to LaRS, and dividing by four. This is the same special
allowance calculation presently in effect. The difference is that the
Department will now deduct any negative result from the total of any
payments that it would otherwise owe the lender. In the event that the
net result of these calculations is that the lender owes funds, the
Department will collect from the lender using normal billing processes.

*This provision requires new special allowance categories. For loans
first disbursed on or after April 1, 2006 the new special allowance
categories will be:*

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-   ***CE** -- For all Stafford Loans during an in-school, grace or
    deferment period,*

-   ***CF** -- For all Stafford Loans in repayment,*

-   ***CG** -- For Consolidation Loans, and*

-   ***CH** -- For PLUS loans, including PLUS loans made to graduate and
    professional students, as authorized by HERA.*

# Special Allowance Payments on Tax-Exempt Loans

*Effective February 8, 2006, with the enactment of the HERA*, certain
special allowance payment provisions of the Taxpayer-Teacher Protection
Act of 2004 have been made permanent.

Under the HEA, as it existed prior to the passage of the HERA, loans
that were financed with funds obtained by the holder from the issuance
of tax-exempt obligations originally issued prior to October 1, 1993
would be paid at the usual rates paid on other loans as specified in
subparagraphs (A), (E), (F), (G), (H), or (I) of section 438(b)(2) of
the HEA if certain actions occurred after September 30, 2004, and before
January 1, 2006. The HERA removed the January 1, 2006 ending date. The
removal of that date from §438(b)(2)(B) means that the special allowance
rates on tax-exempt loans that were covered under §438(b)(2)(B) revert
to the usual rates if those loans are:

1.  Financed by a tax-exempt obligation described in section
    438(b)(2)(B)(v)(I)(aa) that, after September 30, 2004, has matured
    or been refunded, retired, or defeased;

2.  Refinanced after September 30, 2004, with funds obtained from a
    source other than funds described in section 438(b)(2)(B)(v)(I); or

3.  Sold or transferred to any other holder after September 30, 2004.

In addition to these restrictions, the HERA added two additional
provisions that prohibit a loan from being eligible for the 9.5 percent
minimum special allowance rate under section 438(b)(2)(B) if the loan
was:

4.  Made or purchased on or after the date of enactment of the HERA; or

5.  Not earning a quarterly rate of special allowance determined under
    section 438(b)(2)(B)(i) or (ii) as of February 8, 2006, the date of
    enactment of the HERA.

Exception for certain holders:

The HERA created an exception to the restrictions in 4 and 5 above (but
not to the first three restrictions) by substituting "December 31,
2010," for the "date of enactment" if the holder:

-   Was, as of February 8, 2006, and during the quarter for which the
    special allowance is paid, a unit of the state or local government
    or a nonprofit private entity;

-   Was, as of February 8, 2006, and during the quarter, not owned or
    controlled by, or under the common ownership or control with, a
    for-profit entity; and

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-   Held, directly or through any subsidiary, affiliate, or trustee, a
    total unpaid balance of principal equal to or less than \$100
    million on loans for which special allowances were paid under
    section 438(b)(2)(B) in the most recent quarterly payment prior to
    September 30, 2005.

Accordingly, the Department has created new tax-exempt special allowance
categories for loans disbursed on or after April 1, 2006, for those
lenders eligible under the special exceptions noted above. The new codes
are effective April 1 in order to comply with the provision to recapture
excess interest. The new codes are:

-   ***XM** -- For all Stafford Loans in an in-school, grace or
    deferment period,*

-   ***XN** -- For all Stafford Loans in repayment,*

-   ***XO** -- For Consolidation Loans, and*

-   ***XP** -- For PLUS Loans, including PLUS Loans made to graduate and
    professional students, as authorized by HERA.*

# Restriction of Special Allowance on PLUS Loans

Prior to the HERA, special allowance payments would not be made on PLUS
loans disbursed on or after July 1, 2006 during any 12-month period
beginning July 1 and ending June 30 unless the average of the bond
equivalent rates of the quotes of the 3-month commercial paper
(financial), for the last calendar week ending on or before such July 1,
plus 2.64 percent, exceeded 9.0 percent.

This provision of the HEA has been eliminated by the HERA. Accordingly,
beginning with the quarter ending September 30, 2006, PLUS loans first
disbursed on or after July 1, 2006 will be eligible for special
allowance.

[ADDITIONAL TOPICS OF INTEREST]{.underline}

In addition to the LaRS reporting changes, we are including several
topics of general interest that we feel are important to share at this
time.

# Lender Identification Number Assignment

We would like to reiterate our existing policy regarding the assignment
of lender identification numbers (LIDs) to entities wishing to
participate in the FFEL program. LIDs are assigned solely for the
purpose of identifying a particular entity and tracking that lender's
activities in the FFEL program.

For example, data associated with an LID is monitored to ensure that the
lender does not exceed the loan volume restrictions in the definition of
"lender" in 34 CFR 682.200. Requests for LIDs to accommodate a lender's
business needs (e.g. a contractual arrangement that a lender has with
its servicer) are not consistent with the purpose of the LID and will be
denied.

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# Consolidation Loan Rebate Fees

An issue has been raised concerning the amounts reported on Lines 7 and
11 ("EOM Accrued Unpaid Interest Balance") of the FFEL Consolidation
Loan Rebate Fee Report and Remittance Form. Specifically, some servicers
and/or lenders may be reporting only the "borrower's interest" and not
the "government interest" on Lines 7 and 11. This is incorrect.

*All accrued unpaid interest is subject to the Consolidation Loan Rebate
Fee, regardless of whether that interest will be paid by the Department
or paid by the borrower*.

# In addition, when submitting fees, lenders should refrain from sending sensitive documents such as borrower rosters with names and social security numbers. These documents are not needed for fee processing and are shredded upon receipt by ED.

# Lender Profile Updates

Lenders are reminded that it is their responsibility to inform the
Department of any acquisitions, mergers, or name changes. Ideally these
changes should be reported prior to the change, as soon as the lender is
aware that the change will happen. In any event, we expect such changes
to be reported no later than 30 days after they occur. These changes can
be reported via email to <FSA_LR@ed.gov>.

In addition, changes in payment instructions, i.e. ACH routing or
account numbers, should be reported promptly to the FMS Operations Help
Desk at 1-800-433-7327, Option 3, to reduce the possibility that your
payment will be returned to the Department for invalid information.

# OPA Renewal Deadline

The current Organizational Participation Agreements (OPA's) are due to
expire on September 30, 2006. Please watch for further information in
May 2006 regarding the renewal of this form.

[Treasury Offset Program (TOP)]{.underline}

The Department of Treasury (Treasury) is now matching Department
payments against outstanding government debts, based on the Tax ID
number on our lender profile. Unfortunately, the Department receives no
information from Treasury to indicate an offset has occurred. *If you
receive an email payment notice for one amount, and your actual receipt
is for another amount, your payment may have been offset.*

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You can determine if an offset has occurred by looking at your incoming
ACH transmission. Normally, the transmission will say it is coming from
"EPGA TREAS 303." However, if an offset has occurred the transmission
will say it is coming from "TCS TREAS 449." If this is your situation,
please call Lender Reporting at 202-377-3324 or 202-377-3322 so we can
verify the Tax ID number as reported to Treasury and provide further
guidance.

If you have any questions on the information provided in this letter,
please send all inquiries to <FSA_LR@ed.gov>.

Sincerely,

Matteo Fontana

General Manager, FSA Financial Partners Services