**Enactment of the Higher Education Reconciliation Act of 2005**

######### Loan Issues

## **(Enclosure to DCL GEN-06-02 and FP-06-01)**

## 

## 

## **TABLE OF CONTENTS**

#### Topics primarily affecting institutions and borrowers Page 

> Consolidation loans 2
>
> Direct Loan repayment plans 4
>
> Disbursement of loans 4
>
> False certification discharges 6
>
> Interest rates 6
>
> Loan limits 6
>
> Military deferment 7
>
> PLUS loans for graduate or professional students 9
>
> Rehabilitation of defaulted loans 9
>
> School Lenders in the FFEL Program 9
>
> Teacher loan forgiveness 11

**Topics primarily affecting lenders and guaranty agencies** **Page**

> Account maintenance fees 11
>
> Administrative wage garnishment 11
>
> College Access Initiative 12
>
> Default collections 13

##### Escrow agents 13

> Federal default fee 13
>
> Forbearance agreements 14
>
> Interest repayment from lenders 14
>
> Lender insurance percentages 15
>
> Origination fees 15
>
> Reinsurance claims from guaranty agencies 16
>
> Special allowance payments on tax-exempt loans 16

#### TOPICS PRIMARILY AFFECTING INSTITUTIONS 

#### AND BORROWERS

**[Consolidation loans]{.underline}** **§428(b)(7)(A)**

> **§428C(a)(3) and (b)(5)**

**§455(a), (d), and (g)**

# **In-school and early conversion to repayment consolidation** 

The HERA eliminated the provision in section 428(b)(7)(A) that allowed a
FFEL borrower who is enrolled in school on at least a half-time basis to
request to enter repayment early on his or her Stafford Loans if the
lender approves. Repayment is now defined as not beginning until 6
months and one day after the date the student ceases to carry at least
one-half the normal full-time academic workload, as determined by the
school. A change to section 428C(a)(3) clarifies that repayment status
for FFEL Consolidation Loan eligibility incorporates this revised
definition of the repayment period. Therefore, a FFEL borrower who is
still enrolled in school at least half-time may no longer request to
enter repayment early to apply for a FFEL or Direct Loan Consolidation
Loan.

The HERA also amended section 455(a) to provide that Direct
Consolidation Loans shall have the same terms, conditions, and benefits
as FFEL Consolidation Loans, except as otherwise provided in the HEA. In
addition, section 455(g) was amended to define an eligible borrower for
a Direct Consolidation Loan as one who meets the definition of that term
in the FFEL Consolidation Loan program. These changes eliminate Direct
Loan In-School Consolidation.

The changes to section 428(b)(7)(A) apply to borrower requests received
by FFEL lenders on or after July 1, 2006. The changes made to section
455(a), apply to Consolidation Loan applications received by the Direct
Loan Program on or after July 1, 2006. The changes clarifying the
definition of repayment for FFEL Consolidation Loans in section
428C(a)(3) and defining eligible borrower for Direct Consolidation Loans
in section 455(g) are effective for Consolidation Loan applications
received on or after July 1, 2006.

**Direct Consolidation Loan repayment plans**

## The HERA requires that the repayment plans offered in the Direct Loan program must generally be the same as those offered in the FFEL program under section 428(b)(9). The Direct Loan Program, however, will still offer income contingent repayment plans, which are not the same as the income-sensitive repayment plans offered in the FFEL Program. This change also applies to Direct Consolidation Loans. As a result, the following changes are made to the repayment plans offered to Direct Consolidation Loan borrowers, effective for Direct Consolidation Loan applications received on or after July 1, 2006:

1.  A graduated repayment plan must be paid over a fixed period, not to
    exceed 10 years, regardless of the loan amount, and

2.  An extended repayment plan is available only to a borrower with a
    total outstanding balance being consolidated of more than \$30,000,
    who borrowed for the first time on or after October 7, 1998, and may
    not exceed 25 years of fixed annual or graduated repayment amounts.

Section 455(d)(1) authorizes the Secretary to offer Direct Loan program
borrowers a variety of repayment plans under criteria established by the
Secretary. Under this authority, the Department will also allow Direct
Consolidation Loan borrowers who consolidate loans in excess of \$30,000
to elect a repayment schedule consistent with that offered to FFEL
Consolidation borrowers under section 428C(c)(2). *This option is
available for borrowers whose Direct Consolidation Loan applications are
received on or after July 1, 2006.*

# **Termination of eligibility for FFEL and Direct Consolidation Loans** 

# The changes made to section 428C(a)(3)(B) by the HERA provide that a Consolidation Loan borrower loses eligibility to borrow a FFEL or Direct Consolidation Loan after receiving a consolidation loan, except that:

1.  A borrower who receives additional eligible loans after the receipt
    of the consolidation loan may receive a subsequent consolidation
    loan;

2.  Eligible loans received before or after the consolidation loan was
    received may be added to the existing consolidation loan during the
    180-day period following receipt of that consolidation loan;

3.  Eligible loans received prior to the date of the first consolidation
    loan may be added to a subsequent consolidation loan; and

4.  A FFEL Consolidation Loan borrower may obtain a subsequent
    consolidation loan under the Direct Consolidation Loan program for
    the purpose of securing an income-contingent repayment schedule if
    the FFEL lender has requested default aversion assistance from the
    guaranty agency.

*These changes are effective for Consolidation Loan applications
received on or after July 1, 2006.*

# **Joint Consolidation Loans** 

The changes made to section 428C(a)(3)(C) by the HERA eliminate the
ability of a married couple to consolidate their eligible student loans
in a joint FFEL or Direct Consolidation Loan. *This change is effective
for Consolidation Loan applications received on or after July 1, 2006.*

# **FFEL borrower access to the Direct Consolidation Program** 

The changes made to section 428C(b)(5) by the HERA permit FFEL borrowers
who do not also have Direct Loans to apply for a Direct Consolidation
Loan only if a FFEL Consolidation lender denies the eligible borrower's
FFEL Consolidation Loan application or denies an application for a
consolidation loan requesting income-sensitive repayment terms, or if
the borrower has defaulted and the Consolidation Loan will resolve the
default. *This change is effective for Direct Consolidation Loan
applications received on or after July 1, 2006.*

###### Direct Loan repayment plans §455(d)(1)

The HERA requires that the repayment schedules offered in the Direct
Loan program must generally be the same as those offered in the FFEL
program under section 428(b)(9). However, the Direct Loan program will
continue to offer income contingent repayment plans, and the FFEL
program will offer different income-sensitive repayment plans. In
addition to an income contingent repayment plan, *the following
repayment plans will be available to Direct Loan borrowers who enter
repayment on their loans on or after July 1, 2006:*

-   A standard repayment plan, with a fixed annual repayment amount paid
    over a fixed period of time, not to exceed 10 years;

-   A graduated repayment plan paid over a fixed period of time, not to
    exceed 10 years; and

-   For new borrowers on or after October 7, 1998, with \$30,000 in
    outstanding loans accumulated on or after that date, an extended
    repayment plan, with a fixed annual or graduated repayment amount
    paid over a period not to exceed 25 years.

The Secretary also is authorized by section 455(d)(4) to provide, on a
case-by-case basis, alternative repayment plans to a borrower who
demonstrates that other available repayment plans are not adequate to
accommodate the borrower's exceptional circumstances.

# **Disbursement of loans** **§428(b)(1)(N)**

**§428G(e)**

## **Eligible foreign institutions** 

The HERA amended section 428(b)(1)(N) to provide that for students
studying outside the United States in a program of study at an eligible
foreign institution, loans may be disbursed directly to the borrower
only if the institution requests this method. The HERA further specifies
that a lender or guaranty agency may honor the institution's request for
a direct disbursement to the borrower only after verifying the
borrower's enrollment at the institution, which is consistent with
current guaranty agency program requirements discussed in DCL G-03-348,
August 2003. "Enrollment" for this purpose means admission to the
eligible foreign institution for new students, or a status that meets
the definition of "enrolled" in 34 CFR 668.2 for continuing students.
Without a request from the institution, lenders must disburse loans
directly to an office of the foreign institution designated by the
institution to receive them*. This change is effective for loans first
disbursed on or after July 1, 2006*.

Eligible foreign institutions are also no longer exempt from the
multiple disbursement requirements of section 428G. These requirements
include providing the lender with a disbursement schedule that provides
for disbursement of the loan in multiple, substantially equal
installments and delaying delivery of the first disbursement of a loan
to a first-time, undergraduate borrower until the borrower completes 30
days of the program of study. *This change is effective for loans with
loan periods beginning on or after July 1, 2006.* Eligible foreign
institutions are eligible for the low cohort default rate exemptions.

**Study-Abroad Programs** **§428(b)(1)(N)**

A student enrolled in a study-abroad program that is approved for credit
by the student's home institution may request direct disbursement of his
or her loan by the lender. Unlike the requirements governing direct
disbursements to borrowers for attendance at eligible foreign
institutions, the home institution is not required to request or approve
the direct disbursement. However, as a result of the HERA, the lender or
guaranty agency must verify a student's enrollment in the study-abroad
program, as described for students attending eligible foreign
institutions, before making a direct disbursement to the borrower.
Direct Loan funds are disbursed to the borrower directly by the
institution. Therefore, these provisions do not apply to the Direct Loan
program. *This provision is effective for loans first disbursed on or
after July 1, 2006.*

**Low cohort default rate exemptions** **§428G(a)(3) and (b)(1)**

The exemption of institutions with low cohort default rates from certain
multiple disbursement requirements has been reinstated in the law. An
institution with a cohort default rate of less than 10 percent for each
of the three most recent fiscal years for which data are available,
including an eligible foreign institution, may once again disburse, in a
single installment, loans that are made for one semester, one trimester,
one quarter, or a four-month period. Such an institution is also no
longer required to delay the delivery or disbursement of the first
disbursement of a loan for 30 days for first-time, first-year
undergraduate borrowers. *These changes are effective for any
disbursement made on or after February 8, 2006.*

**[False certification discharges]{.underline}** **§437(c)(1)**

*Effective July 1, 2006*, a new type of false certification discharge
has been created by the HERA, authorizing a discharge if the borrower's
loan was falsely certified as a result of a crime of identity theft.
Until the discharge regulations can be developed, lenders may provide
administrative forbearance, and guaranty agencies may suspend default
collections, if a borrower presents evidence, on or after July 1, 2006,
that the lender or guaranty agency believes to be reasonably persuasive,
showing that the borrower's loan may have been falsely certified as a
result of a crime of identity theft.

# **Interest rates** **§427A(l)(2)** 

The interest rate scheduled to take effect for Federal PLUS loans made
under the FFEL Program increases from 7.9 percent to 8.5 percent on
loans *for which the first disbursement is made on or after*
*July 1, 2006*. The HERA did not make changes to the fixed 7.9 percent
interest rate scheduled to take effect for Federal Direct PLUS loans
first disbursed on or after July 1, 2006.

The HERA also did not change the provision in section 427A(l) that
requires a 6.8 percent fixed interest rate *for all Stafford loans first
disbursed on or after July 1, 2006 in both the FFEL and Direct Loan
Programs.* This change from a variable to a fixed interest rate for
Stafford Loans was enacted as part of earlier legislation, and does not
affect a borrower's variable interest rate on loans made before
July 1, 2006.

**[Loan limits]{.underline}** **§425(a)(1)(A)**

> **§428(b)(1)(A)**
>
> **§428H(d)**

Some (but not all) of the annual loan limits in the Stafford Loan
Program have been increased, as shown in the chart below, *effective
July 1, 2007*. Increases for first and second year undergraduate
students were also made to section 425(a)(1)(A) for the inactive Federal
Insured Student Loan (FISL) Program.

For undergraduate students, the first year subsidized/unsubsidized
combined annual loan limit has been increased from \$2,625 to \$3,500,
and the second year subsidized/unsubsidized combined annual loan limit
has been increased from \$3,500 to \$4,500. The combined annual loan
limits were not increased for borrowers beyond the first two years of
undergraduate study. For graduate or professional students, the
additional unsubsidized annual loan limit has been increased from
\$10,000 to \$12,000.

For students who have obtained a baccalaureate degree and are enrolled
in coursework necessary for enrollment in a graduate or professional
program, the additional unsubsidized loan limit has been increased from
\$5,000 to \$7,000. The subsidized/unsubsidized combined loan limit has
not been increased for these students.

The subsidized/unsubsidized combined loan limit and the additional
unsubsidized loan limit for a student, who is enrolled in coursework
necessary for enrollment in an undergraduate program, have not been
increased, and remain at \$2,625 and \$4,000.

For students who have obtained a baccalaureate degree, and are enrolled
in coursework necessary for a professional credential or certification
from a state required for employment as a teacher in an elementary or
secondary school, the additional unsubsidized loan limit has been
increased from \$5,000 to \$7,000. The subsidized/unsubsidized combined
loan limit has not been increased for these students.

*Effective date:* The increased loan limits resulting from the HERA are
shown below in bold italics and are effective for any loan certified or
originated on or after July 1, 2007:

  ----------------------- ----------------------- -----------------------
                          Base Sub/Unsub          Additional Unsub

  1st year undergraduate  ***\$3,500***           \$4,000

  2nd year undergraduate  ***\$4,500***           \$4,000

  3rd year & beyond       \$5,500                 \$10,500
  undergraduate                                   

  Graduate/professional   \$8,500                 ***\$12,000***

                                                  

  Preparatory coursework  \$2,625                 \$6,625
  (for enrollment in an                           
  undergraduate program)                          

  Preparatory coursework  \$5,500                 ***\$7,000***
  (for enrollment in a                            
  graduate or                                     
  professional program)                           

                                                  

  Teacher certification   \$5,500                 ***\$7,000***
  ----------------------- ----------------------- -----------------------

# **Military deferment** **§428(b)(1)(M)**

#  **§455(f)(2)(C)**

#  **§464(c)(2)(A)**

**§481(d)**

*Effective July 1, 2006*, for all three loan programs (FFEL, Direct
Loans, Perkins Loans), a new military deferment has been created,
effective for loans for which the first disbursement is made on or after
*July 1, 2001*. On or after July 1, 2006, a qualified borrower may
receive a deferment for a period in which he or she meets the
qualifications after July 1, 2001. The deferment shall not exceed a
total of three years, and applies only to periods during which borrowers
are serving on active duty during a war or other military operation, or
national emergency, or performing qualifying National Guard duty during
a war or other military operation or national emergency. As a result,
not all active duty military personnel are eligible for this new
deferment. The HERA does not authorize the refunding of any loan
repayment already made by a borrower at the time the deferment is
granted.

In some cases, a borrower may be eligible for a military deferment on
loans first disbursed on or after July 1, 2001, but ineligible for the
deferment on older loans. A borrower consolidating loans first disbursed
on or after July 1, 2001, is eligible for the new deferment on the
entire Consolidation Loan, but only if all of the borrower's Title IV
loans included in the Consolidation Loan were first disbursed on or
after July 1, 2001.

For purposes of this new deferment, the following terms are defined in
new section 481(d):

-   *Active duty* has the meaning for that term included in section
    101(d)(1) of title 10, United States Code, but does not include
    active duty for training or attendance at a service school.

-   *Military operation* means a contingency operation as defined in
    section 101(a)(13) of title 10, United States Code.

-   *National emergency* means the national emergency by reason of
    certain terrorist attacks declared by the President on September 14,
    2001, or subsequent national emergencies declared by the President
    by reason of terrorist attacks.

-   *Serving on active duty during a war or other military operation or
    national emergency* means service by an individual who is a Reserve
    of an Armed Force ordered to active duty under section 12301(a),
    12301(g), 12302, 12304, or 12306 of title 10, United States Code, or
    any retired member of an Armed Force ordered to active duty under
    section 688 of such title, for service in connection with a war or
    other military operation or national emergency, regardless of the
    location at which such active duty service is performed. This term
    also includes any other member of an Armed Force on active duty in
    connection with such emergency or subsequent actions or conditions
    who has been assigned to a duty station at a location other than the
    location at which such member is normally assigned.

-   *Qualifying National Guard duty during a war or other military
    operation or national emergency* means service as a member of the
    National Guard on full-time National Guard duty (as defined in
    section 101(d)(5) of title 10, United States Code) under a call to
    active service authorized by the President or the Secretary of
    Defense for a period of more than 30 consecutive days under section
    502(f) of title 32, United States Code, in connection with a war,
    other military operation, or a national emergency declared by the
    President and supported by Federal funds.

Documentation establishing eligible active duty service for the new
deferment may include a copy of the borrower's military orders, or a
written statement from the borrower's commanding officer or personnel
officer that the borrower is serving on active duty during a war or
other military operation, or national emergency, or performing
qualifying National Guard duty during a war or other military operation
or national emergency, as those terms are defined above.

**[PLUS loans for graduate or professional students]{.underline}**
**§428B**

As a result of the HERA, graduate or professional students are now
eligible to borrow under the PLUS Loan Program up to their cost of
attendance minus other estimated financial assistance in both the FFEL
and Direct Loan programs. The terms and conditions applicable to Parent
PLUS Loans also apply to Graduate/Professional PLUS loans. These
requirements include a determination that the applicant does not have an
adverse credit history, repayment beginning on the date of the last
disbursement of the loan, and a fixed interest rate of 8.5 percent in
the FFEL program and 7.9 percent in the Direct Loan program. Applicants
for these loans are required to complete the Free Application for
Federal Student Aid (FAFSA). They also must have applied for their
annual loan maximum eligibility under the Federal Subsidized and
Unsubsidized Stafford Loan Program before applying for a
Graduate/Professional PLUS loan. *This program will be in effect for
graduate or professional students for loans certified in the FFEL
program or originated in the Direct Loan program on or after
July 1, 2006*.

**[Rehabilitation of defaulted loans]{.underline}** **§428F(a)**

Currently, a borrower who wants to rehabilitate a defaulted loan is
required to make 12 consecutive monthly payments on the loan. That
requirement has been changed by the HERA*, effective on July 1, 2006*,
to 9 payments made within 20 days of the due date during a period of 10
consecutive months, as established under a guaranty agency's loan
rehabilitation agreement with the borrower. *All loan rehabilitation
agreements beginning on or after July 1, 2006, must incorporate the 9
payments in 10 months standard.* (These changes do not apply to
rehabilitation of defaulted Federal Perkins Loans.)

For a loan rehabilitation agreement that began prior to July 1, 2006, a
guaranty agency will have the option of considering the borrower to have
met the new rehabilitation standard if at least one of the borrower's
payments is made (within 20 days of the due date) on or after
July 1, 2006. However, the guaranty agency must treat all borrowers in
this situation the same.

The HERA also specified that a guaranty agency may charge the borrower
and retain collection costs in an amount not to exceed 18.5 percent of
the outstanding principal and interest at the time of sale of the
rehabilitated loan.

**[School lenders in the FFEL Program]{.underline}** **§435(d)(2)**

*Effective April 1, 2006*, the HERA limits the ability of schools to be
lenders in the FFEL Program. As of that date, only a school that would
have met the school lender eligibility requirements as they existed in
section 435(d)(2)(A)-(F) on the day before the date of enactment of the
HERA (*i.e*., February 7, 2006) can be a school lender, and only if the
school made FFEL loans as a lender on or before April 1, 2006.

As of February 7, 2006, a school lender \--

1.  Had to employ at least one person whose full-time responsibilities
    was limited to the administration of programs of financial aid for
    students attending that school;

2.  Could not be a home study school;

3.  Could not make loans to more than 50 percent of the undergraduate
    students at the school;

4.  Could not make a loan, other than a loan to a graduate or
    professional student, unless the borrower had previously received a
    loan from the school or had been denied a loan by another eligible
    lender;

5.  Could not have a cohort default rate greater than 15 percent; and

6.  Had to use the proceeds from any special allowance payments received
    from the Department and interest payments from borrowers for
    need-based grant programs, except for reasonable reimbursement for
    direct administrative expenses.

*Effective July 1, 2006*, items 1 and 2 on the above list remain in
effect, but item 3 has been eliminated, and items 4, 5, and 6 have been
modified. *On or after July 1, 2006*, as a result of the changes made by
the HERA, a school lender may make [only]{.underline} subsidized or
unsubsidized Stafford Loans under sections 428 and 428H to graduate or
professional students enrolled at the school. *Beginning on July 1,
2006,* *a school lender may not make PLUS loans to parents or to
graduate or professional students, or make Consolidation Loans.*

*Effective July 1, 2006,* *a school lender must also comply with the
following additional requirements:*

1.  Award any contract for financing, servicing, or administration of
    FFEL loans on a competitive basis;

2.  Offer loans with an origination fee and/or interest rate that is
    less than the applicable statutory fee or rate *for any loan first
    disbursed* *on or after July 1, 2006;*

3.  Maintain a cohort default rate that is not greater than 10 percent;

4.  Submit an annual lender compliance audit, as described in
    34 CFR 682.305(c), to the Department for any year in which the
    school engages in activities as an eligible lender; and

5.  Use any special allowance payments, interest payments from
    borrowers, interest subsidy payments from the Department, and any
    proceeds from the sale or other disposition of loans for need-based
    grants. (School lenders are still authorized to use a portion of
    these payments or proceeds for reasonable and direct administrative
    expenses. Funds used for need-based grants must supplement, not
    supplant, non-federal funds the school would otherwise use for
    need-based grants.)

The compliance audit requirement contained in the HERA applies to all
school lenders and does not include an exception based on the amount of
the lender's loan volume each fiscal year, as is currently the case in
34 CFR 682.305(c) for other eligible FFEL lenders.

**[Teacher loan forgiveness]{.underline}** **§428J**

**§460**

The HERA has eliminated the previous termination date of October 1,
2005, for the increased Teacher Loan Forgiveness (TLF) amounts of up to
\$17,500 for teachers in certain specialties and other eligibility
criteria provided under the Taxpayer-Teacher Protection Act (TTPA) of
2004. The end date of October 1, 2005 for the increased loan forgiveness
amounts and new eligibility requirements has been eliminated from the
HEA and the changes made by the TTPA have been made permanent.

The HERA also amended the HEA in both the FFEL and Direct Loan programs
to modify the rules for the eligibility of nonprofit private school
teachers as highly qualified teachers who may qualify for the loan
forgiveness. A teacher who is employed in a nonprofit private school and
is exempt from state certification requirements may have such employment
qualify for the loan forgiveness program if the teacher can demonstrate
rigorous subject knowledge and skills by taking competency tests in the
applicable grade levels and subject areas. The HERA requires that the
competency tests be recognized by five or more states for the purpose of
fulfilling the highly qualified teacher requirements under the No Child
Left Behind Act of 2001 ("NCLB"), and that the score achieved by a
teacher on each test equal or exceed the average passing score of those
five states. The HERA makes no change for nonprofit private school
teachers who are subject to state certification and who meet the highly
qualified teacher definition under NCLB; they will continue to qualify
for student loan forgiveness to the extent they meet the eligibility
requirements. *This new provision is effective for applications received
on or after July 1, 2006.*

For further information on the changes made by the TTPA, please review
DCL

GEN-04-14, December 2004: http://ifap.ed.gov/dpcletters/GEN0414.html.

> **TOPICS PRIMARILY AFFECTING LENDERS AND GUARANTY AGENCIES**

**[Account maintenance fees]{.underline}** **§458**

For each of the fiscal years 2007 through 2011, account maintenance fees
shall be paid quarterly and deposited in the guaranty agency's Operating
Fund established under section 422B, and shall not exceed 0.10 percent
of the original principal amount of outstanding loans on which insurance
was issued under the FFEL Program.

**[Administrative wage garnishment]{.underline}** **§488A(a)(1)**

*Effective July 1, 2006,* the limitation in section 488A(a)(1) on the
amount of a borrower's disposable pay that can be garnished has been
increased from 10 percent to 15 percent. If a guaranty agency decides to
increase the withholding rate with respect to borrowers already being
garnished at a lesser rate based on a garnishment proceeding pre-dating
July 1, 2006, the agency must notify such borrowers that: (1) they can
obtain a hearing upon request if they object to the increased
withholding amount on the basis of undue hardship; and (2) a borrower
who has new information not presented at the initial garnishment hearing
may request a reconsideration of the existence or amount of the debt.

In general, a guaranty agency must follow the procedures described in 34
CFR 682.410(b)(9) for sending the notices to borrowers and employers and
for scheduling a hearing for a borrower who chooses to have one.

**[College Access Initiative]{.underline}** **§485D**

*Effective July 1, 2006*, the HERA requires the Secretary to direct each
guaranty agency to provide to the Secretary the information necessary
for the development of Internet web links and access for students and
families to a comprehensive listing of the postsecondary education
opportunities, programs, publications, Internet web sites, and other
services available in the states for which such agency serves as the
designated guarantor. Each guaranty agency must develop and implement a
plan to gather this information and to make the information available to
the public and to the Secretary in a form and manner as prescribed by
the Secretary.

Each guaranty agency must undertake the activities necessary to promote
access to postsecondary education for students through providing
information on college planning, career preparation, and paying for
college. A guaranty agency shall publicize the information and
coordinate with other entities that either provide or distribute such
information in the states for which the guaranty agency serves as the
designated guarantor. These activities may be funded from the guaranty
agency\'s Operating Fund under section 422B and, to the extent funds
remain, from earnings on the restricted account established pursuant to
section 422(h)(4). A guaranty agency is not required to duplicate any
efforts under way on the date of enactment of the HERA that meet the
requirements specified in the HERA.

The Secretary will ensure that the information provided by guaranty
agencies is made available to students, parents, and other interested
individuals, through Internet web links or other methods prescribed by
the Secretary. Guaranty agencies must ensure that College Access
Initiative information is available without charge in printed format for
students and parents requesting such information.

Not later than 270 days (*i.e*., by November 5, 2006) after the date of
enactment of the HERA, the Secretary and guaranty agencies shall
publicize the availability of the College Access Initiative information,
with special emphasis on ensuring that populations that are
traditionally underrepresented in postsecondary education are made aware
of the availability of such information.

**[Default collections]{.underline}** **§428(c)**

The HERA requires that, *on or after October 1, 2006*, a guaranty agency
may not charge a borrower collection costs in an amount in excess of
18.5 percent of the outstanding principal and interest of a defaulted
loan that is paid off through consolidation by the borrower, and shall
remit directly to the Secretary that portion of the collection charge
equal to 8.5 percent of the outstanding principal and interest of such
defaulted loan. *On and after October 1, 2009*, a guaranty agency must
remit directly to the Secretary the entire amount of the collection
charge with respect to each defaulted loan that is paid off with excess
consolidation proceeds.

The term "excess consolidation proceeds" is defined by the HERA to mean,
with respect to any guaranty agency for any federal fiscal year
beginning on or after October 1, 2009, the proceeds of consolidation
loans received to pay defaulted Title IV loans for that agency that
exceed 45 percent of the agency\'s total collections on defaulted loans
in such federal fiscal year.

*Effective July 1, 2006*, the HERA requires that procedures be
established to preclude consolidation payments from being an excessive
proportion of a guaranty agency's recoveries on defaulted FFEL loans.

**[Escrow agent]{.underline}** **§428(a)(3)(A)(v) and §428(i)(1)**

# **Interest subsidy payments on loans disbursed by an escrow agent**

Under the HERA, a lender may first receive interest subsidy payments on
loans disbursed on behalf of the lender by an escrow agent on the date
that is three days before the first disbursement of the loan. For this
purpose, the Department interprets the word "disbursement" to mean
disbursement to the institution or direct disbursement to the borrower.
*This change is effective for all loan proceeds paid by a lender to an
escrow agent on or after July 1, 2006.*

# **Lender payment of funds to an escrow agent**

The HERA has reduced the time period prior to disbursement to the
borrower that a lender may transfer loan funds to an escrow agent. A
lender may now make payments of funds to the escrow agent no more than
10 days prior to the date the funds are disbursed to the borrower. *This
change is effective for all loan proceeds paid by a lender to an escrow
agent on or after July 1, 2006.*

**[Federal default fee]{.underline}** **§428(b)(1)(H)**

*Effective for loans for which the date of guarantee of principal is on
or after* *July 1, 2006*, the HERA eliminates the optional 1 percent
insurance premium fee that guaranty agencies could charge and
establishes a Federal default fee equal to 1 percent of the principal
amount of the loan. The default fee must be deposited into the Federal
Fund held by a guaranty agency under section 422A. The default fee shall
be deducted and collected from the proceeds of the loan or by payment
from other non-federal sources. If the borrower is charged the fee, it
must be deducted proportionally from the loan proceeds.

A guaranty agency must ensure that the proceeds of the federal default
fee will not be used for incentive payments to lenders. The Secretary is
prohibited from waiving these provisions for guaranty agencies that have
Voluntary Flexible Agreements under section 428A.

**[Forbearance agreements]{.underline}** **§428(c)(3)**

*Effective for agreements entered into or renegotiated with a borrower
on or after July 1, 2006*, forbearance agreements no longer need to be
approved in writing by the borrower. However, the lender must confirm
any non-written agreement by sending a notice to the borrower and by
recording the terms of the agreement in the borrower\'s file. The
Department's regulations generally permitted this practice even before
the HERA.

**[Interest repayment from lenders]{.underline}** **§438(b)(2)(C)(v)**

The HERA requires the repayment by a lender of excess interest paid by
the Department when the applicable interest rate on a loan for any
quarter exceeds the special allowance support level for the loan. The
Department intends to collect the excess interest from lenders
quarterly. *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 before April 1, 2006.*

Excess interest is calculated each quarter by subtracting the "special
allowance support level" from the applicable interest rate, multiplying
the result by the average daily principal balance of the loan (not
including unearned interest added to principal) during the quarter, and
dividing by four. For example, if the average daily principal balance of
a loan was \$1,000, and the applicable interest rate and special
allowance support level were 6.8 percent and 5.8 percent, respectively,
the excess interest to be rebated would be: \$1,000 *x* 1.0 percent */*
4 = \$2.50.

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, and deferment periods; or

-   2.64 percent for PLUS and Consolidation loans.

**[Lender insurance percentages]{.underline}** **§428(b)(1)(G)**

> **§428(I)**

*Beginning with loans for which the first disbursement of principal is
made on or after* *July 1, 2006*, a guaranty agency must insure
97 percent (a decrease from the current 98 percent) of the loan's unpaid
principal. However, a guaranty agency will continue to be required to
insure 100 percent of the unpaid principal of loans made under a
lender-of-last-resort program under section 428(j) or 439(q).

The insurance percentage applicable to lenders or lender servicers
designated as exceptional performers under section 428I decreases from
100 percent to 99 percent for *any default claim submitted by the
exceptional performer* *on or after* *July 1, 2006.*

# **Origination fees** **§438(c)(2)**

**§455(b)(8)(A)**

The HERA made changes to the HEA to reduce and eventually eliminate the
origination fee that FFEL lenders are currently authorized to charge
Stafford loan borrowers (Consolidation Loan borrowers are not charged
this fee). The mandatory 3 percent origination fee will continue to be
charged to PLUS loan borrowers.

Under current law, FFEL lenders are authorized to charge an origination
fee of up to 3 percent of the amount of a Stafford loan. *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 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.

The HERA made similar reductions in the loan fee charged to Stafford
borrowers in the Direct Loan Program. Stafford borrowers in the Direct
Loan Program are subject to a 4 percent origination fee, which was
comparable to the combined 3 percent origination fee + 1 percent
insurance premium (now the Federal default fee) that may be charged to
Stafford borrowers in the FFEL Program. Beginning with loans for which
the first disbursement of principal is made on or after February 8,
2006, and before July 1, 2007, the origination fee charged to Direct
Stafford loan borrowers is 3 percent. (The Department has been providing
this one percentage point origination fee reduction administratively.)
This fee drops to 2.5 percent on July 1, 2007, 2.0 percent on July 1,
2008, 1.5 percent on July 1, 2009, and 1.0 percent on July 1, 2010.
(NOTE: The Department will continue the existing \"up front\" interest
rebate repayment incentive program for Direct Loan borrowers.)

**[Reinsurance claims from guaranty agencies]{.underline}**
**§428(c)(1)**

######## Filing reinsurance claims

*Effective for reinsurance requests filed on or after July 1, 2006*, the
amount of time a guaranty agency is allowed for filing a reinsurance
claim to the Department has been reduced from 45 days to 30 days
following the date the guaranty agency pays the lender's claim on the
loan.

######## Exempt claims

*For loans for which the first disbursement of principal is made on or
after* *July 1, 2006*, a guaranty agency will receive 100 percent
reinsurance from the Department for exempt claims that it pays under new
section 428(c)(1)(G). The term "exempt claims" is defined in section
428(c)(1)(G)(ii) to mean claims with respect to loans for which it is
determined that the borrower (or the student on whose behalf a parent
has borrowed), without the lender\'s or the institution\'s knowledge at
the time the loan was made, provided false or erroneous information or
took actions that caused the borrower or the student to be ineligible
for all or a portion of the loan or for interest benefits on the loan.

**[Special allowance payments on tax-exempt loans]{.underline}**
**§438(b)(2)(B)**

*Effective on 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) if
certain actions occurred after September 30, 2004, and before January 1,
2006. The HERA removes that January 1, 2006 ending date. The removal of
that date from §438(b)(2)(B) now 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
and minimum special allowance rates 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 the date of enactment of the
    HERA.

## ***Exception for certain holders***

The HERA created an exception to the new 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 state or local government or a
    nonprofit private entity;

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

-   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.