The Higher Education Reconciliation Act of 2005

1

• The Higher Education Reconciliation Act of 2005
• Prepared by the NCHELP
• Program Regulations Committee
• This presentation provides a summary of
  the changes contained in the Higher Education
  Reconciliation Act of 2005. Readers should refer
  to the detail of the law and sub-regulatory
  guidance from the U.S. Department of Education in
  determining all relevant issues. This training
  module has been updated with the final rules
  issued in the Federal Register dated 11/1/06.

2

• Reconciliation
• Versus
• Reauthorization

3
Reconciliation versus Reauthorization

• The Higher Education Act should have been
  reauthorized in 2003.
• With no Congressional action, the automatic
  one-year extension kicked in.
• Since then, other short-term extensions have been
  passed.

4
Reconciliation versus Reauthorization

• Since the Higher Education Act should have been
  reauthorized, the Federal government has run huge
  budget deficits
• 2003 377.6 billion
• 2004 412.1 billion
• 2005 318 billion.
• Pressure to reduce Federal spending increased
  with each deficit.

5
Reconciliation versus Reauthorization

• April 28, 2005 Congress passed a 5-year budget
  reconciliation bill.
• This bill required spending cuts of 34.7 billion
  over 5 years.
• Each Congressional committee was given
  instructions on how much spending to cut.

6
Reconciliation versus Reauthorization

• The committees overseeing higher education were
  instructed to cut
• House - 12.7 billion
• Senate - 13.7 billion
• When Hurricane Katrina hit, the committees were
  asked to cut even more.
• At the same time, the House and Senate Education
  committees were considering bills to reauthorize
  the HEA.

7
Reconciliation versus Reauthorization

• The end result was S. 1932, the Deficit Reduction
  Act of 2005.
• The section of the law dealing with higher
  education is the Higher Education Reconciliation
  Act of 2005 (HERA).
• Many of the provisions of the House and Senate
  HEA reauthorization bills were included in this
  bill.
• Legislative history
• 12/21/2005 Senate passed 51-50
• 02/01/2006 House passed 216-214
• 02/08/2006 President signed bill into law

8
Reconciliation versus Reauthorization

• The validity of this law has been called into
  question.
• A single provision relating to Medicare differed
  between the House and Senate versions of the
  bills.
• At least two lawsuits have been filed to
  invalidate the law.
• Sen. Judd Gregg, 02/28/2006
• "It happens all the time around here if we're
  going to start holding ourselves to that
  standard, the government wouldn't function at
  all.
• Bottom line assume the law will stand

9
Reconciliation versus Reauthorization

• So is reauthorization still needed?
• S. 1932 reauthorized the FFEL program through
  September 30, 2012. 424(a), 428(a)(5), 428C(e)
• The rest of the Higher Education Act expires on
  June 30, 2007.

10

• Effective Dates and Triggers

11
Effective Dates and Triggers

• In general, the changes made by HERA have an
  effective date of July 1, 2006. S. 1932, Section
  8001(c)
• However, certain changes have different effective
  dates.
• Some of the changes are effective in the future.
• At least two of the changes are retroactive.

12
Effective Dates and Triggers

• Knowing an effective date is not enough in many
  cases.
• To properly implement a change, you also need to
  know the trigger event.
• Dear Colleague Letter GEN-06-02 establishes
  trigger events for loan program changes.

13

• Need Analysis Changes

14
Need Analysis Changes

• The changes to need analysis have two different
  effective dates
• July 1, 2006
• For determinations of need for periods of
  enrollment beginning on or after July 1, 2007.
• The 2007 changes do not present any significant
  issues
• The trigger date is very clear
• The implementation date is far enough out to
  allow for orderly change.

15
Need Analysis Changes

• HERA changed the definition of independent
  student.
• Previously, the student had to be a veteran of
  the Armed Forces to be independent.
• This definition has been expanded to include
  students who are currently serving on active duty
  in the Armed Forces for other than training
  purposes. 480(d)(3)
• The definition of currently serving on active
  duty is found in 481(d)(1)-(5).

16
Need Analysis Changes

• Eligibility for the Simplified Needs Test and
  Automatic Zero EFC has been changed by HERA.
• The receipt of benefits under a means-tested
  Federal benefit program in the past 12 months
  qualifies a student or family for simplified
  needs testing and automatic zero.
• HERA provides examples of means-tested Federal
  benefit programs, and allows ED to identify
  others.

17
Need Analysis Changes

• Means-tested benefits programs specifically
  mentioned in HERA are
• Supplemental Social Security Income,
• Food stamps,
• Free and reduced price school lunch program,
• Temporary Assistance for Needy Families, and
• WIC nutrition program. 479(d)

18
Need Analysis Changes

• For a dependent student, if the student or
  students parents received benefits at some time
  during the previous 12-month period under such a
  program
• the family qualifies for the simplified needs
  test 479(b)(1)(A), and
• if the parents adjusted gross income is 20,000
  or less, also qualifies for automatic zero EFC.
  479(c)(1)(B)

19
Need Analysis Changes

• For an independent student, if the student AND
  spouse (if any) received benefits at some time
  during the previous 12-month period under such a
  program, they qualify for the simplified needs
  test. 479(b)(1)(B)

20
Need Analysis Changes

• An independent student with dependents other than
  a spouse qualifies for the simplified needs test
  and automatic zero EFC if the student and spouse
  (if any)
• Received benefits at some time during the
  previous 12-month period under such a program,
  and
• Adjusted gross income is 20,000 or less.
  479(c)(2)

21
Need Analysis Changes

• Before HERA
• The treatment of 529 education savings plans and
  Coverdell education savings accounts were not
  addressed, and
• 529 prepaid tuition plans were defined as being
  part of other financial assistance (EFA)
• After HERA
• All of these plans fall under the definition of
  qualified education benefits and are considered
  assets. 480(f)(1)
• HERA also stipulates that a qualified education
  benefit cannot be considered an asset of a
  dependent student. 480(f)(3)

22
Need Analysis Changes

• HERA also changed other definitions effective
  July 1, 2006.
• The definition of asset was changed to exclude
  the net value of a small business if
• The business has 100 or less full-time or FTE
  employees, and
• The business (or any part of it) is owned and
  controlled by the family. 480(f)(2)(C)

23
Need Analysis Changes

• The definition of Estimated Financial Assistance
  now excludes non-Title IV State assistance
  designated to offset a specific component of COA.
  480(j)(3)
• An example might be payments from a Department of
  Rehabilitative Services.
• Some changes were made to the components of the
  employment expense allowance for clarifying
  purposes. 478(h)

24
Need Analysis Changes

• HERA makes several changes for 2007 that will
  have the effect of lowering Estimated Family
  Contribution
• Income protection allowances will be increased by
  5 in 2007.
• ED has new authority to increase these allowances
  annually based on
• The percentage increase in the Consumer Price
  Index
• Rounding to the nearest 10. 478(b)(2)

25
Need Analysis Changes

• For dependent students, the student income
  protection allowance will increase from 2,200 to
  3,000. 475(g)(2)(D)
• For independent students without dependents other
  than a spouse, the allowances increase from
• 5,000 to 6,050 for a single student
• 5,000 to 6,050 for married students where both
  are enrolled
• 8,000 to 9,700 for married students where one
  is enrolled. 476(b)(1)(A)(iv)

26
Need Analysis Changes

• Assets will also be treated differently in 2007
• For dependent students, the student contribution
  is being reduced from 35 to 20 475(h)
• For independent students without dependents other
  than a spouse, the asset conversion rate will
  drop from 35 to 20 476(c)(4)
• For independent students with dependents, the
  asset conversion rate drops from 12 to 7.
  477(c)(4)

27
Cost of Attendance (COA)

• HERA makes two changes to the law regarding Cost
  Of Attendance (COA).
• Before HERA
• COA for less than half-time students was limited
  to
• Tuition and fees
• Allowance for books, supplies and transportation
• Allowance for dependent care. 472(4)

28
Cost of Attendance (COA)

• After HERA
• Room and board is now included for less than
  half-time students, but with conditions
• These costs are limited to a maximum of 3
  semesters or the equivalent, and
• No more than 2 semesters or the equivalent can be
  consecutive.
• A new allowable component of COA was added for
  students in programs requiring professional
  licensure or certification. 472(13)
• The one-time cost of obtaining the first
  professional credentials can be added to COA at
  the schools option.
• The school determines the amount of this
  allowance.

29

• Student, Borrower and Program Eligibility

30
Student Borrower Eligibility

• Eligibility for students convicted of drug
  offenses has been liberalized by HERA.
• Before HERA, the student lost eligibility for a
  specified period of time regardless of
• When the offense occurred, and
• Whether the student was receiving Title IV aid at
  the time.

31
Student Borrower Eligibility

• After HERA
• The conduct leading to the conviction has to
  occur during a period of enrollment for which the
  student was receiving Title IV
• Grants
• Loans
• Work assistance. 484(r)(1)
• If the conduct leading to the conviction does not
  occur while the student is receiving Title IV
  aid, a conviction has no effect on the students
  future eligibility for aid.

32
Student Borrower Eligibility

• HERA adds a new eligibility condition concerning
  fraud in obtaining funds under Title IV.
• Students obtaining Title IV funds through fraud
  are ineligible for aid if they have
• Been convicted
• Pled nolo contendere (no contest) or
• Pled guilty. 484(a)(6)

33
Student Borrower Eligibility

• This provision was also added for parents or
  graduate or professional students under the PLUS
  program. 424B(a)(1)(B)
• Students and parents regain eligibility when they
  have completed repayment to ED or another holder
  of the loan.

34
Program Eligibility

• Before HERA, the academic year for clock hour
  programs was
• A minimum of 30 weeks
• During which the student was expected to complete
  900 clock hours.
• This meant that students typically could not earn
  more than 30 clock hours in a given week.
• Schools wishing to run clock hour programs like a
  typical 40-hour workweek were effectively
  prevented from doing so by this rule.

35
Program Eligibility

• After HERA
• reduces the minimum number of weeks of
  instruction to 26 for clock hour programs to
  address this issue. 481(a)(2)(A)(ii)
• This change is effective July 1, 2006.

36
Student-Program Eligibility

• Before HERA
• Students were generally prohibited from receiving
  grants, loans or work assistance for
  correspondence courses.
• The exception was if the course led to associate,
  bachelor or graduate degree.
• This limited the growth of distance education by
  treating correspondence and telecommunications
  courses as the same thing.
• Students were ineligible for aid under previous
  law if the school offered more than 50 of its
  total courses via telecommunications and
  correspondence or if 50 or more of its students
  were enrolled in correspondence courses.

37
Student-Program Eligibility

• After HERA
• Eliminated the 50 rule, making more students
  eligible for aid, thus allowing for greater use
  of distance education. 102(a)(3), 484(l)(1)
• A related change allows students to receive aid
  for certificate programs of less than one year
  that are offered by telecommunications. 481(b),
  484(l)(1)(A)
• The 50 rule continues to apply to correspondence
  courses and students.

38
Program Eligibility

• A corresponding change was made to the definition
  of institution of higher education.
• Before HERA
• This definition excluded a school that offered
  more than 50 of the schools courses by
  correspondence.
• After HERA
• Changes this definition to exclude
  telecommunications courses from the 50 limit.
  102(a)(3)(A)

39
Program Eligibility

• A program can be offered in whole or in part
  through telecommunications if it meets the
  following criteria
• It is otherwise eligible
• It is offered by a U.S. school (foreign schools
  are specifically excluded)
• The schools accrediting agency determines the
  school has the capability to effectively deliver
  distance education programs
• The evaluation of distance education is in the
  accrediting agencys scope of review
• The accrediting agency is approved by ED.
  481(b)(3)

40

• Academic Competitiveness Grant and National SMART
  Grant

41
Academic Competitiveness Grant and National
SMART Grant Program

• HERA created two new forms of grant aid
• Academic Competitiveness Grant for the first and
  second year of a program of undergraduate
  education
• National Science and Mathematics Access to Retain
  Talent Grant or National SMART Grant for the
  third and fourth year of a program of
  undergraduate education.

42
Academic Competitiveness Grant and National
SMART Grant Program

• The grants are limited to
• 1 academic year for the first academic year of a
  program of undergraduate education
• 1 academic year for the second academic year of a
  program of undergraduate education
• 2 academic years for a borrower who is in his/her
  third or fourth year of a program of
  undergraduate education
• The Academic Competitiveness Grant and National
  SMART Grant expire at the end of academic year
  2010-2011.

43
Academic Competitiveness Grant and National
SMART Grant Program

• ED has been authorized to spend a certain amount
  of money on these grants each year
• 790,000,000 for fiscal year 2006
• 850,000,000 for fiscal year 2007
• 920,000,000 for fiscal year 2008
• 960,000,000 for fiscal year 2009
• 1,010,000,000 for fiscal year 2010
• As a result, if there are more eligible students
  than there is money, the grant amounts could
  change.

44
Academic Competitiveness Grant and National
SMART Grant Program

• If the amount made available each year is less
  than the amount required to provide grants to all
  eligible students, the amount of each grant to
  each eligible student shall be ratably reduced.
• If additional amounts are appropriated for any
  such fiscal year, such reduced amounts shall be
  increased on the same basis as they were reduced.
• At the end of a fiscal year, all excess funds
  shall remain available for awarding grants during
  the subsequent fiscal year.

45
Academic Competitiveness and National SMART
Grant Program

• Grade level is also a determining factor in the
  grant amount
• 750 for the first academic year
• 1,300 for the second academic year
• 4,000 for the third or fourth academic year
• The amount, in combination with the Federal Pell
  Grant and other financial assistance, cannot
  exceed the COA.

46
Academic Competitiveness and National SMART
Grant Program

• General Program Requirements
• Eligibility for these grants also varies by grade
  level, but at all grade levels the student must
  be
• Attending a 2- or 4-year degree granting school
• A U.S. citizen
• A full-time student
• Pell eligible

47
Academic Competitiveness Grants

• Academic Competitiveness Grant Requirements
• In the case of a student enrolled or accepted for
  enrollment in the first academic year
• Has successfully completed, after January 1,
  2006, a rigorous secondary school program of
  study established by a State or local educational
  agency and recognized as such by the Secretary,
  and
• Has not been previously enrolled in a program of
  undergraduate education.

48
Academic Competitiveness Grants

• Academic Competitiveness Grant Requirements
• In the case of a student enrolled or accepted for
  enrollment in the second academic year
• Has successfully completed, after January 1,
  2005, a rigorous secondary school program of
  study established by a State or local educational
  agency and recognized as such by the Secretary
  and
• Has obtained a cumulative grade point average of
  at least 3.0 at the end of the first academic
  year of such program of undergraduate education

49
National SMART Grant

• National SMART Grant Requirements
• In the case of a student enrolled or accepted for
  enrollment in the third or fourth academic year
• Is pursing a major in the physical, life, or
  computer sciences, mathematics, technology, or
  engineering (as determined by the Secretary
  pursuant to regulations) or
• Is pursing a major in a foreign language that the
  Secretary, in consultation with the Director of
  National Intelligence, determines is critical to
  national security of the U.S., and
• Has obtained a cumulative grade point average of
  at least 3.0 in the coursework required for the
  major.

50
Academic Competitiveness Grants and National
SMART Grant Program
51

• Interest Rate Changes

52
Interest Rates - Stafford

• HERA allows for changes in interest rates
• The Higher Education Act already called for
  Stafford loan rate to change 427A(l)(1)
• Applies to Stafford loans (sub and unsub) with a
  first disbursement on or after July 1, 2006
• Rate is fixed at 6.8
• Result borrowers may have both variable and
  fixed rate loans

53
Interest Rates - PLUS

• Before HERA, the PLUS rate was scheduled to
  change to a 7.9 fixed rate
• HERA changed this for FFELP borrowers
  427A(l)(2)
• Trigger event is loans with a first disbursement
  on or after July 1, 2006
• Rate is fixed at 8.5
• Result borrowers may have both variable and
  fixed rate loans
• This will also be the rate for FFELP Grad PLUS
  borrowers

54
Interest Rates - PLUS

• HERA did NOT make a corresponding change to the
  Direct Loan PLUS rate.
• This was a drafting error and was unintentional.
• The DL PLUS rate will be 7.9 unless Congress
  takes additional action.

55
Interest Rates - Consolidation

• Consolidation rate did not change
• Fixed rate based on the weighted average of the
  loans being consolidated
• Cap is 8.25
• FFELP PLUS borrowers will be paying more (8.5)
  than the Consolidation cap (8.25)
• Unless Congress acts, FFELP PLUS borrowers could
  consolidate to obtain a lower rate

56
Interest Rate Disclosures

• The Stafford and PLUS MPNs have identical
  interest rate language.
• Interest
• Unless my lender notifies me in writing of a
  lower rate(s), the rate(s) of interest for my
  loan(s) is that specified in the Act. Interest
  rate information is presented in the Borrowers
  Rights and Responsibilities Statement
  accompanying this MPN. The interest rate is
  presented in a disclosure that is issued to me.

57
Interest Rate Disclosures

• The current Borrower Rights and Responsibilities
  statements reference variable rates.
• Stafford
• 13. Interest Rates The interest rate on a
  Federal Subsidized Stafford Loan and a Federal
  Unsubsidized Stafford Loan is a variable rate
  that is based on a formula established in the
  Act. The interest rate may be adjusted each year
  on July. As a result, my interest rate may
  change annually, but it will never exceed 8.25
  percent. After reviewing the actual interest
  rate, I may cancel or reduce any loan obtained
  under this MPN in accordance with the Loan
  Cancellation section that follows.

58
Interest Rate Disclosures

• PLUS
• 9. Interest Rates For Federal PLUS loans
  first disbursed on or after July 1, 1998, the
  interest rate will be a variable rate, adjusted
  annually each July 1, not to exceed 9. The
  actual interest rate applicable to each of my
  loans will be disclosed to me. After reviewing
  the actual interest rate, I may cancel or reduce
  any loan obtained under this MPN in accordance
  with the provisions of Item 11, Loan
  cancellation.

59
Interest Rate Disclosures

• At this time Stafford and PLUS interest rates and
  other program changes are being disclosed to the
  borrowers in two ways
• New borrowers
• The addenda would be integrated into the existing
  e-sign processes or they are given in hard copy
  to borrowers using a paper MPN.
• Serial borrowers
• The Plain Language Disclosure is provided to all
  borrowers obtaining new loans under an existing
  MPN.

60

• Loan Fees

61
Origination Fees

• One of the best provisions of HERA is the gradual
  elimination (for FFELP) and reduction (for DL) of
  origination fees.
• Since the DL program does not have a guarantee
  fee, the DL origination fee is 1 higher under
  both previous and current law.

62
Origination Fees

• The origination fee reductions apply to Stafford
  loans only not PLUS.
• The fee reductions are based on the first
  disbursement date, so schools will have some
  degree of control over the fee a student pays.

63
Origination Fees

• The following chart shows the schedule for
  reducing the origination fees
• 438(c)(2)(B) and 455(c)(2)

64
Origination Fees

• Before HERA
• The Secretary had the authority to reduce
  interest rates for DL borrowers to encourage
  on-time repayment if the reductions were
• Cost neutral, and
• In the best financial interest of the Federal
  Government.
• After HERA
• Allows the Secretary to reduce the Direct Loan
  origination fee. 455(b)(8)(A)
• The cost neutrality and best financial interest
  standards also apply to any potential reduction
  in the Direct Loan origination fee.

65
Federal Default Fee

• Until July 1, 2006 guarantors have the authority
  to charge a guarantee fee not to exceed 1.
• HERA eliminates this fee but substitutes a very
  different 1 fee.
• For loans guaranteed on or after July 1, 2006
  guarantors must pay a 1 Federal default fee into
  their Federal Reserve Funds. 428(b)(1)(H)(ii),
  428H(h)
• This applies to Stafford and PLUS loans only.

66
Federal Default Fee

• This applies to all guarantors, including those
  operating under a VFA. 428A(a)(1)(C)
• The Federal Default fee may be
• Deducted from the borrowers proceeds, or
• Paid from other non-Federal sources.
• Other non-Federal sources would probably mean the
  guarantors Operating Fund.
• The Guaranty Agency may choose to pay all or any
  portion of the fee on the borrowers behalf.
• Lenders may also choose to pay all or any
  portion of the fee on the borrowers behalf if
  the Guaranty Agency doesnt.

67
Federal Default Fee

• The guarantee fee and Federal Default fee have
  some obvious similarities
• Both are 1
• Both can be deducted from loan proceeds.
• However, if a guarantor chooses not to charge the
  borrower, the fees are very different
• For the guarantee fee, it represents revenue not
  received
• For the Federal Default fee, it represents an
  expense to the agencys Operating Fund.

68
Federal Default Fee

• Guarantors use their Operating Funds to pay for
  most of their activities including
• Training
• Publications
• Default prevention activities
• Sponsorships.
• To the extent that the guarantor pays the Federal
  default fee on the borrowers behalf, this is
  less money the guarantor can spend on these
  activities.

69
Federal Default Fee

• There is one operational note schools need to
  keep in mind based on the effective date of the
  fee.
• Because the fee is based on the date of
  guarantee, schools may not know whether a fee was
  imposed until after the loan is guaranteed.
• Another operational issue is that disbursement
  amounts could vary by guarantor for the same
  gross loan amount.
• The default fee is to be deducted proportionately
  from each disbursement prior to disbursing to the
  borrower.

70

• Graduate and Professional PLUS Loans (Grad PLUS)

71
Grad PLUS Loans

• HERA amends Section 428B of the HEA to make
  graduate and professional students eligible for
  PLUS loans.
• Dear Colleague Letter GEN-06-02 establishes the
  trigger date for these loans.
• For FFELP, the trigger is loans certified on or
  after July 1, 2006.
• For DL, the trigger is loans originated on or
  after July 1, 2006.

72
Grad PLUS Loans

• HERA simply added the phrase graduate or
  professional student before each instance of the
  word parent.
• This means that all eligibility and qualifying
  conditions that previously applied only to
  parents will also apply to graduate and
  professional students, notably
• No adverse credit history
• Determining maximum loan amount COA less EFA
• Interest rate
• Repayment requirements.

73
Grad PLUS Loans

• Dear Colleague Letter GEN-06-02 adds two
  requirements for Grad PLUS loans
• Students are required to complete the FAFSA and
• Students must first apply for their maximum
  annual Stafford eligibility, both subsidized and
  unsubsidized.
• Borrowers under the Grad PLUS program may decline
  the Stafford loan.

74
Grad PLUS Loans

• Every graduate or professional student obtaining
  a PLUS loan will have to complete and sign the
  PLUS MPN.
• The student must complete both the parent and
  student sections of the application until a new
  form is published.

75
Grad PLUS Loans

• Law and regulations require PLUS repayment to
  begin within 60 days of final disbursement.
• Grad PLUS borrowers are not exempt from this
  requirement.
• Grad PLUS borrowers are eligible for a deferment
  or forbearance while in school.

76
Grad PLUS Loans

• For new borrowers on or after July 1, 1993 the
  regulations say
• (2) In-school deferment. An eligible borrower
  is entitled to a deferment based on the
  borrowers at least half-time study in accordance
  with the rules prescribes in 682.210(c), except
  that the borrower is not required to obtain a
  Stafford or SLS loan for the period of enrollment
  covered by the deferment.

77
Grad PLUS Loans

• The Grad PLUS borrower does not have to file a
  deferment form
• (c) In-school deferment. (1) Except as provided
  in paragraph (c)(5) of this section the lender
  processes a deferment for full-time study or
  half-time study at a school when
• (i) The borrower submits a request and
  supporting documentation for a deferment
• (ii) The lender receives information from the
  borrowers school about the borrowers
  eligibility in connection with a new loan or
• (iii) The lender receives student status
  information from the borrowers school, either
  directly or indirectly.

78
Grad PLUS Loans

• Electronic processing will require Commonline and
  CRC changes.
• NCHELP Electronic Standards Committee is
  evaluating adding new codes
• Loan type for CL4 and CL5
• Form Type for CL4, CL5 and CRC
• Award Type for CLC.

79

• Loan Limits

80
Loan Limit Increases

• HERA increases the annual loan limits for certain
  borrowers
• 34 CFR 682.204
• Aggregate undergraduate loan limits did not
  increase.
• The Final Regulations published on November 1,
  2006 changed the trigger event from for a loan
  certified to for a loan disbursed" on or after
  July 1, 2007.

81
Loan Limit Increases

• The annual Stafford loan limit for students who
  have not completed the first year of a program of
  undergraduate study is increased from 2,625 to
  3,500. 428(b)(1)(A)(i)(I)
• For second year undergraduates, the annual
  Stafford loan limit is increased from 3,500 to
  4,500. 428(b)(1)(A)(ii)(I)

82
Loan Limit Increases
83
Loan Limit Increases

• One limit did not change - 4,000 for preparatory
  coursework necessary for enrollment in an
  undergraduate degree or certificate program.
• HERA raises the unsubsidized Stafford loan limits
  for preparatory coursework and teacher
  certification programs for students who have
  already earned their Baccalaureates.

84
Loan Limit Increases

• The annual unsubsidized Stafford loan limit is
  raised from 5,000 to 7,000 for
• Preparatory coursework necessary for enrollment
  in a graduate or professional program,
  428H(d)(2)(D)(i) and
• Teacher certification programs.
  428H(d)(2)(D)(ii)
• The Final Regulations published on November 1,
  2006 changed the trigger event from for a loan
  certified to for a loan disbursed" on or after
  July 1, 2007.

85
Loan Limit Increases

• The annual unsubsidized loan limit for graduate
  and professional students will rise from 10,000
  to 12,000. 428H(d)(2)(C)
• The Final Regulations published on November 1,
  2006 changed the trigger event from for a loan
  certified to for a loan disbursed" on or after
  July 1, 2007.

86
Loan Limit Increases
87
Loan Limit Increases

• The combined aggregate limit for graduate and
  professional students of 138,500 is not found in
  law only in regulation. 682.204(e)(2)
• Because of the change in law, the Secretary may
  have to increase the aggregate limit found in
  regulation. 428H(d)(3)

88
Loan Limit Increases
89

• Disbursement Rule Changes

90
Disbursement Rule Changes

• HERA restores two popular disbursement rules that
  expired on October 1, 2002
• Qualifying schools do not have to make multiple
  disbursements for single-term (one semester, one
  trimester, one quarter or 4 months) loans
  428G(a)(3)
• Qualifying schools do not have to wait 30 days to
  deliver loan funds to first-year, first-time
  borrowers 428G(b)(1)

91
Disbursement Rule Changes

• To qualify, schools must have a cohort default
  rate of less than 10 for each of the most recent
  3 years for which data are available.
• This change took effect on the date of enactment
  - February 8, 2006.
• The trigger is any disbursement made on or after
  February 8, 2006.

92
Disbursement Rule Changes

• HERA also modified disbursement rules for
  students studying abroad. 428(b)(1)(N)(2)
• Before HERA
• Disbursements were made directly to the student
  upon the students request if
• Student was enrolled in a U.S. school in a study
  abroad program, or
• Student was enrolled in a foreign school

93
Disbursement Rule Changes

• After HERA
• Students studying abroad
• Student can still receive a direct disbursement
  upon request, however
• Disbursement cannot be made until the enrollment
  is verified by the lender or guarantor.
• Students enrolled in an eligible foreign
  institution
• The request for disbursement directly to the
  student must be made by the foreign institution,
  and
• Disbursement cannot be made until the enrollment
  is verified by the lender or guarantor.
• The trigger is for loans first disbursed on or
  after July 1, 2006.

94
Disbursement Rule Changes

• Foreign schools are no longer exempt from
  multiple disbursement requirements and must delay
  delivery of the first disbursement to a
  first-time undergraduate for 30 days.
• The trigger is for loans with loan periods on or
  after July 1, 2006.

95
Disbursement Rule Changes

• ED already had rules in place requiring
  verification of enrollment for students enrolled
  in a foreign school. DCL G-03-348
• Lenders and guarantors will have to determine
  method for verifying enrollment for students in
  study abroad programs.

96
Disbursement Rule Changes

• School responsibilities for late disbursements
  are changed by HERA.
• Once a school has determined a borrowers
  eligibility for a late disbursement or
  post-withdrawal disbursement, the school must
• Contact the borrower
• Explain to the borrower the obligation to repay
  the loan funds following such a disbursement
• The Federal Register published November 1, 2006
  clarifies that this provision only applies to
  post-withdrawal disbursements for withdrawn
  students.

97
Disbursement Rule Changes

• The school must then
• Obtain the borrowers confirmation that the loan
  funds are still required
• Document the borrowers file with the result of
  such contact and the final determination made
  concerning such disbursement. 484B(a)(4)(A)

98
Disbursement Rule Changes

• HERA made some other minor disbursement rule
  changes.
• Law previously allowed lenders to fund
  disbursements through escrow accounts up to 21
  days before disbursement. Maximum is now 10 days.
  428(i)(1)
• Limits the interest lenders can receive on loans
  disbursed through an escrow agent to no more than
  3 days before the first disbursement.
  428(a)(3)(A)(v)

99

• Direct Loan Repayment Plans

100
Direct Loan Repayment Plans

• 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). This applies to standard,
  graduated and extended repayment plans.
• Except Direct Loan will continue to offer the
  Income Contingent Repayment Plan and FFEL will
  continue to offer the Income-Sensitive Plan.

101
Direct Loan Repayment Plans

• Before HERA
• The Direct Loan graduated plan allowed terms
  from 12 to 30 years based upon the balance.
• After HERA
• Standard and Graduated repayment plan must be
  paid over a fixed period not to exceed 10 years,
  regardless of amount
• Effective for Direct loan borrowers who enter
  repayment on their loans after July 1, 2006

102
Direct Loan Repayment Plans

• Before HERA
• Direct Loans extended plan also allowed terms
  from 12 to 30 years based upon the balance.
• After HERA
• Applies to new borrowers on/after October 7, 1998
• Must have more than 30,000 in loans after
  October 7, 1998
• Repayment cannot exceed 25 years
• Effective for Direct Loan borrowers entering
  repayment on or after July 1, 2006

103
Direct Loan Repayment Plans

• Direct Loan Consolidation Borrowers repayment
  plan changes options that are offered to
  borrowers.
• Standard or graduated 10-year maximum term
• Extended 25-year maximum for new borrowers
  on/after 10/7/1998 with 30,000 debt
• For borrowers with 30,000 debt
• 30,001 through 39,999 20-year maximum term
• 40,000 through 59,999 25-year maximum term
• 60,000 and above 30-year maximum term

104

• Consolidation Loans

105
Consolidation Loans

• In some respects, HERA is as important for what
  it did not change about Consolidation as for what
  it did
• The interest rate is unchanged.
• The changes that were made
• Add parity between Direct and FFELP Consolidation
  loans
• Generally put more restrictions on Consolidation
  loans regardless of the program.

106
Consolidation Loans

• Two sections of the Higher Education Act
  regarding Direct Consolidation loans were
  changed.
• Before HERA, the HEA required parallel terms,
  conditions, benefits, and amounts for FFELP and
  Direct Stafford and PLUS loans but not
  Consolidation.
• Direct Consolidation loans were added to this
  requirement. 455(a)(1)
• The trigger event for this provision is
  applications received by Direct Loans on or after
  July 1, 2006.

107
Consolidation Loans

• Additional language was added to this section
  requiring
• DL Consolidation borrowers to meet the same
  eligibility requirements as FFELP Consolidation
  borrowers
• The Secretary has to comply with the same
  requirements as a FFELP Consolidation lender.

108
Consolidation Loans

• HERA explicitly eliminates in-school
  consolidation in both the Direct Lending and FFEL
  programs.
• This change in the law eliminates the ability of
  a borrower to request to enter repayment before
  the end of the grace period. 428(b)(7)
• Trigger event borrower requests received by
  lenders on or after July 1, 2006 will be denied.

109
Consolidation Loans

• The law requires Consolidation borrowers to be in
  grace or a repayment status, so this new
  provision effectively eliminates in-school
  consolidation. 428C(a)(3)
• This also eliminates in-school consolidation in
  DL due to the requirement for parallel terms.

110
Consolidation Loans

• HERA also eliminates spousal consolidation.
  Deletes 428C (a)(3)(C)
• This applies to both FFEL and Direct Loans.
• The trigger is Consolidation applications
  received on or after July 1, 2006.

111
Consolidation Loans

• HERA eliminates the ability of a borrower to
  reconsolidate a consolidation loan between the
  FFEL and DL programs. 428C(a)(3)(B)(i)
• There is an exception to this if
• A FFELP Consolidation borrower seeks a DL
  Consolidation to obtain an income-contingent
  repayment plan, and
• The FFELP Consolidation loan has been submitted
  to the guarantor for default aversion assistance.
  428C(a)(3)(B)(v)
• The trigger event is consolidation applications
  received on or after July 1, 2006.

112

• Deferment Forbearance Changes

113
Deferment and Forbearance

• A new deferment for military service was added to
  the Higher Education Act
• Section 428(b)(1)(M) adds a new deferment for
  military service for FFELP borrowers
• Direct Loan borrowers get the same benefit
  455(f)(2)(C)
• Perkins borrowers were also included in this
  change 464(c)(2)(A)
• Effective date is for loans with the first
  disbursement on or after July 1, 2001.

114
Deferment and Forbearance

• Consolidation loans also qualify for this
  deferment, but...
• All of the borrowers Title IV loans being
  consolidated must have a first disbursement on or
  after July 1, 2001.

115
Deferment and Forbearance

• The effective date creates some issues
• Deferments have typically been borrower-based,
  NOT loan-based
• Creates situation where a borrower may have some
  loans in deferment but others in repayment
• Because the effective date is retroactive,
  borrower could have made payments on loans that
  could have been in deferment
• Nothing in the amendments made by this section
  shall be construed to authorize any refunding of
  any repayment of a loan.

116
Deferment and Forbearance

• Deferment is limited to not in excess of 3 years
• To qualify the borrower must be
• 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
• This wording requires that the law contain some
  definitions.

117
Deferment and Forbearance

• Active Duty
• The term active duty' has the meaning given such
  term in section 101(d)(1) of title 10, United
  States Code, except that such term does not
  include active duty for training or attendance at
  a service school.
• Section 101(d)(1) of title 10, USC The term
  active duty means full-time duty in the active
  military service of the United States. Such term
  includes full-time training duty, annual training
  duty, and attendance, while in the active
  military service, at a school designated as a
  service school by law or by the Secretary of the
  military department concerned. Such term does not
  include full-time National Guard duty.

118
Deferment and Forbearance

• Military Operation
• A contingency operation as such term is defined
  in section 101(a)(13) of title 10, United States
  Code.
• Section 101(a)(13) of title 10, USC The term
  contingency operation means a military
  operation that
• (A) is designated by the Secretary of Defense as
  an operation in which members of the armed forces
  are or may become involved in military actions,
  operations, or hostilities against an enemy of
  the United States or against an opposing military
  force or
• (B) results in the call or order to, or retention
  on, active duty of members of the uniformed
  services under section 688, 12301 (a), 12302,
  12304, 12305, or 12406 of this title, chapter 15
  of this title, or any other provision of law
  during a war or during a national emergency
  declared by the President or Congress.

119
Deferment and Forbearance

• National Emergency
• 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.

120
Deferment and Forbearance

• 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 and
• 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.

121
Deferment and Forbearance

• Qualifying National Guard Duty
• 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.
• Section 101(d)(5) of title 10, USC The term
  full-time National Guard duty means training or
  other duty, other than inactive duty, performed
  by a member of the Army National Guard of the
  United States or the Air National Guard of the
  United States in the members status as a member
  of the National Guard of a State or territory,
  the Commonwealth of Puerto Rico, or the District
  of Columbia under section 316, 502, 503, 504, or
  505 of title 32 for which the member is entitled
  to pay from the United States or for which the
  member has waived pay from the United States.

122
Deferment and Forbearance

• This has required the creation of a new form and
  is currently waiting approval from OMB.
• DCL GEN-06-02 lists the documentation
  requirements
• Copy of the borrowers military orders, or
• Statement from the borrowers commanding or
  personnel officer indicating the borrower is
  serving in a capacity that meets the terms of
  this deferment

123
Deferment and Forbearance

• HERA makes it easier for borrowers to obtain
  forbearance.
• It eliminates the requirement that forbearance be
  in writing, a provision originally included in
  the Fed Up legislation. 428(c)(3)
• This applies to all types of forbearance but
  still requires documentation where applicable.
• The trigger is agreements entered into or
  renegotiated with a borrower on or after
  July 1, 2006.

124
Deferment and Forbearance

• To document the forbearance, the lender must
• confirm the agreement of the borrower by notice
  to the borrower from the lender and
• recording the terms in the borrowers file.
  428(c)(10)
• DCL GEN-06-02 indicates these additional steps
  apply to non-written forbearance.

125

• School as Lender

126
School as Lender

• HERA contains two new lender eligibility
  requirements
• The school must have met the requirements to be
  an eligible lender as of February 7, 2006 and
• The school must have made a loan on or before
  April 1, 2006. 435(d)(2)(A)(ix)
• There are no provisions for approving new school
  as lender applications after April 1, 2006.
• Schools that are lenders may continue to make
  loans, but with some new conditions.

127
School as Lender

• Under HERA, as of July 1, 2006, school lenders
• Cannot make loans to undergraduate students
• Cannot make PLUS loans to parents or
  graduate/professional students
• Cannot make a loan to a borrower not enrolled at
  that school
• Can make both subsidized and unsubsidized
  Stafford loans to graduate or professional
  students
• Must offer a lower origination fee and/or
  interest rate than the maximum allowed by law for
  any loans first disbursed on or after July 1,
  2006.
• 435(d)(2)(A)

128
School as Lender

• New restrictions on school lenders
• Cannot have a cohort default rate greater than
  10 (previously 15)
• Must use a competitive basis for awarding a
  contract for financing, servicing or
  administering loans
• Must submit an annual lender compliance audit to
  ED

129
School as Lender

• New restrictions on school lenders
• Earnings from any special allowance payments,
  interest payments from borrowers, interest
  subsidy from ED, and any other proceeds from the
  sale or other disposition of loans must be used
  for need-based grant aid and must supplement, not
  supplant non-federal funds that would otherwise
  go toward grant aid. 435(d)(2)(A) (C)

130
School as Lender

• Administrative Expenses
• School may use special allowance interest
  payments and interest subsidy payments, and any
  proceeds from the sale or other disposition of
  loans for reasonable and direct administrative
  expenses.
• 435(d)(2)(B)

131

• Miscellaneous
• Part B Changes

132
Miscellaneous Part B Changes

• There are a few other changes to Part B of the
  HEA worth mentioning
• ED now has the authority to standardize forms and
  procedures regarding the anticipated graduation
  date. 432(l)(1)(H)
• ED funding in Section 458 of the HEA is no longer
  mandatory. It is now subject to the annual
  appropriations process. 458
• Requires guarantors to file for reinsurance
  within 30 days rather than 45 days. 428(c)(1)(A)

133

• Reductions in Lender Income

134
Reductions in Lender Income

• Some of the ways lender income will be reduced
  are
• For loans with a first disbursement on or after
  July 1, 2006, default claims will be paid at 97
  instead of 98 428(b)(1(G)(ii)
• Lenders designated as exceptional performers, or
  a lender contracting with a servicer designated
  as an exceptional performer, will be paid 99
  instead of 100 on default claims submitted to
  the guarantor on or after July 1, 2006.
  428I(b)(1)

135
Reductions in Lender Income

• Elimination of the 9.5 minimum yield on loans
  made or purchased with pre-October 1, 1993,
  tax-exempt funding when such tax-exempt funding
  is refunded on or after September 30, 2004,
  including when such loans are no longer held in
  minimum yield eligible tax-exempt funds on or
  after September 300, 2004.
  438(b)(2)(B)(iv) (v)

136
Reductions in Lender Income

• Elimination of recycling for loans made or
  purchased on or after February 8, 2006, and for
  loans held by the lender that are not receiving
  the minimum yield for eligible tax-exempt funding
  as of February 8, 2006.
  438(b)(2)(B)(vi) (vii)

137
Reductions in Lender Income

• Permitted exceptions until December 31, 2010, in
  the case of a holder that is, on February 8,
  2006, and during the applicable quarter for which
  special allowance is paid
• A unit of State or local government or a
  nonprofit private entity
• Not owned or controlled by, or under the 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 100,000,000 on
  loans for which special allowances were paid at
  9.5 in the most recent quarterly payment prior
  to September 30, 2005.

138
Reductions in Lender Income

• For loans first disbursed on or after April 1,
  2006, lenders are required to remit excess
  interest back to ED when the special allowance
  calculation for a given quarter is at a rate that
  is less than the applicable interest rate.
  438(b)(2)(I)(v)
• ED intends to collect the excess interest from
  lenders quarterly

139

• Special Allowance Payments

140
Special Allowance Payments

• HERA corrects the SAP Gap.
• This eliminates the restriction placed on the
  amount of special allowance that may be paid on
  PLUS and Consolidation loan payments made on or
  after April 1, 2006. 438(b)(2)(I)(iii) (iv)

141

• Teacher Loan Forgiveness

142
Teacher Loan Forgiveness

• HERA makes permanent the loan forgiveness
  provisions in the Taxpayer-Teacher Protection Act
  of 2004.
• The Taxpayer-Teacher Protection Act provides for
  increased loan forgiveness of up to 17,500 for
  Stafford borrowers meeting certain teaching
  requirements.

143
Teacher Loan Forgiveness

• The Taxpayer-Teacher Protection Act took effect
  October 30, 2004.
• The Teacher-Taxpayer Act was passed as a budget
  bill, as a result, it expired at the end of the
  2005 Federal fiscal year September 30, 2005.
• HERA retroactively eliminated the ending date for
  this program ensuring no break in benefits under
  this program.

144
Teacher Loan Forgiveness

• The Taxpayer-Teacher Protection Act defines an
  eligible borrower as one
• Who has taught at least 5 years in an eligible
  low-income (Title I) school and is a -
• Secondary school math or science teacher, or
• Special education teacher, and
• Who is highly qualified as defined in No Child
  Left Behind (NCLB).

145
Teacher Loan Forgiveness

• HERA allows teachers in private schools, not
  subject to state certification, to qualify for