On August 14, 2008, former President Bush signed into law the Higher Education Opportunity Act (HEOA), which completed reauthorization of the Higher Education Act of 1965, as amended (HEA). The U.S. Department of Education (ED) recently concluded negotiated rulemaking to implement various HEOA provisions and has published proposed rules that reflect consensus reached by two negotiated rulemaking teams. See 74 Fed. Reg. 36,556 (July 23, 2009); 74 Fed. Reg. 37,432 (July 28, 2009). The comment period for the proposed rules has closed, and final rules must be published by November 1, 2009 to become effective July 1, 2010. This Update addresses proposed rules related to HEOA provisions pertinent to federal education loans.
All proposed provisions discussed in this Update apply to federal education loans. Some proposed provisions also apply to private education loans. The Obama Administration has proposed, and Congress is considering, legislation to abolish the Federal Family Education Loan Program (FFELP). The Federal Direct Loan Program would remain as the primary federal student loan program. Many of the proposed provisions addressed in this Update do not apply to Direct Loans and would thus become irrelevant with respect to federal loans if FFELP is eliminated.
ED established five committees to negotiate HEOA regulations. See S. Gold, “Education Department Continues HEOA Rulemaking Process and Publishes HEOA Summary,” Education Investors Update (February 2009). Two negotiated rulemaking committees, Team I and Team II, addressed HEOA issues related to federal education loans. Team I addressed lender-based issues, including required disclosures by lenders and prohibited inducements by lenders and guaranty agencies. Team II addressed institution-based issues, such as disclosures by colleges and universities, “preferred lender arrangements,” and prohibited conduct. Both teams reached consensus on all issues. Selected provisions of the proposed rules developed by Teams I and II are summarized below.
- Direct Loan issues
Disclosures by colleges and universities. HEOA requires institutions that participate in the Direct Loan Program to provide certain information regarding Direct Loan Program loans to students and prospective students and their families, and to include such information if and when the institution provides private education loan information to a prospective borrower. The Direct Loan information required to be disclosed will be identified on a model disclosure form that ED will develop. It will include, at a minimum, the information that the Federal Reserve Board requires private education lenders to provide in their applications and solicitations, adapted as necessary to apply to federal education loans. Institutions will be permitted to use a “comparable form designed by the institution” in lieu of ED’s model disclosure form in communicating required information. The proposed rules generally track the statutory requirements on Direct Loan disclosures by colleges and universities.
- FFELP issues
- Issues for colleges and universities
Preferred lender arrangements. HEOA requires institutions that enter into preferred lender arrangements with FFELP lenders (as well as private education lenders) to comply with certain requirements. HEOA’s preferred lender provisions do not apply to arrangements or agreements related to Direct Loans.
The proposed rules that address preferred lender arrangements involving FFELP loans largely track HEOA’s language. An institution with a preferred lender must submit annual reports to ED to explain, among other matters, why the institution has a preferred lender arrangement. The institution must also make certain disclosures - based on information provided annually by the lender to the institution - for each type of loan offered under a preferred lender arrangement. In addition, the institution must make available a preferred lender list that includes specified information, such as a statement that students or their families are not required to borrow from a preferred lender, and must satisfy certain related requirements, such as prominently disclosing the institution’s method and criteria for selecting preferred lenders. The institution’s preferred lender list must address its preferred lender arrangements related to FFELP and private loans.
The preamble to the proposed rules notes that negotiators discussed at length the meaning of the term preferred lender arrangement. HEOA defines a preferred lender arrangement as an “agreement or arrangement” between a lender and a covered institution (a) under which the lender “provides or otherwise issues education loans to students attending such covered institution or the families of such students” and (b) that relates to such covered institution “recommending, promoting, or endorsing the education loan products of the lender.” HEOA Sec. 120. The proposed rules track this language, without defining the terms “recommending, promoting, or endorsing.” In the preamble, ED states that it declined to adopt a proposed definition that would have deemed a preferred lender arrangement to exist “only if there is a written or verbal agreement” between a lender and institution or if a “course of conduct” shows “intention by the parties to create” a preferred lender arrangement. 74 Fed. Reg. 37,432, 37,436.
In the context of considering the definition of a preferred lender arrangement, negotiators discussed the circumstances under which an institution is considered to have created a “preferred lender list.” The preamble explains that a “neutral, comprehensive list of lenders that have provided loans to students at a covered institution is not a preferred lender list.” 74 Fed. Reg. 37,432, 37,439. It states that if an institution includes certain lenders and omits others, ED views the institution as “recommending, promoting, or endorsing the lenders on the list” and considers the institution to have established a preferred lender list. 74 Fed. Reg. 37,432, 37,437. The preamble notes that ED referred non-federal negotiators to its 2008 Dear Colleague letter (GEN-08-06), for guidance on what constitutes a preferred lender list.
With respect to the disclosures that institutions with preferred lenders must make as to each type of loan offered under a preferred lender arrangement, the proposed rules specify that the required disclosures must be provided annually. The preamble states that institutions may provide in their printed publications the URL of the website where disclosure information is posted, so long as such printed publications identify a point of contact at the institution where potential borrowers may obtain hard copies of disclosure information.
Prohibited conduct. Under HEOA, institutions that participate in federal student loan programs (or enter into preferred lender arrangements with FFELP or private lenders) must adopt a code of conduct. HEOA requires the institution to post the code “prominently on its Web site” and ensure that its officers, employees, and agents who have financial aid responsibilities are informed annually of the code’s provisions.
The proposed rules would implement HEOA code of conduct requirements by forbidding, with limited exceptions, gifts, consulting arrangements with lenders, and advisory board compensation other than reasonable expense reimbursement for financial aid office or other employees who have responsibility related to federal (or private) education loans. The proposed rules provide that expenses are “reasonable” if they “[m]eet the standards of and are paid in accordance with a State government reimbursement policy applicable to the entity” or, in the absence of a State policy that applies to the entity, “the applicable Federal cost principles for reimbursement.” 74 Fed. Reg. 37,432, 37,474-37,475. In addition, the proposed rules would ban revenue-sharing arrangements between institutions and lenders as well as “opportunity pool loans” - which are defined as private education loans - that lenders offer in exchange for promises by the institution to provide the lender a specified number or volume of federal or private loans or a preferred lender arrangement for such loans.
- Lender/guarantor issues
Prohibited inducements by lenders and guaranty agencies. HEA prohibits lenders and guaranty agencies from providing certain benefits to borrowers and institutions to secure applications for FFELP loans or to sell other products. In 2007, ED promulgated rules listing specific prohibited and allowable benefits under HEA with respect to lenders and guaranty agencies. See 34 C.F.R. § 682.200(b) (lender prohibited inducements), § 682.401(e) (guaranty agency prohibited inducements). HEOA amended HEA to identify several specific activities that lenders may and may not provide to institutions and others. Several of these activities expanded on or are different from the prohibitions in ED’s 2007 rules.
The proposed rules incorporate all of the new prohibited and permitted activities for lenders and guaranty agencies specified in HEOA. See 74 Fed. Reg. 36,556, 36,569. Team I resolved conflicts between ED’s 2007 rules and HEOA in favor of the statutory language. For example, consistent with HEOA, the proposed rules would prohibit lenders from offering “[c]ompensation to an employee of a school’s financial aid office or other employee who has responsibilities with respect to student loans or other financial aid provided by the school or compensation to a schoolaffiliated organization or its employees, to serve on a lender’s advisory board, commission or other group established by the lender,” but would allow the lender to “reimburse the employee for reasonable expenses incurred in providing the service.” 74 Fed. Reg. 36,556, 36,588. Current regulations prohibit advisory board membership. See 34 C.F.R. § 682.200(b)(5)(i)(A)(6).
Similarly, consistent with HEOA, the proposed rules would prohibit guaranty agencies from paying travel or entertainment expenses to institutions or lenders. 74 Fed. Reg. 36,566, 36,594. Current regulations permit such payments if they are reasonable and related to training activities. See 34 C.F.R. § 682.401(e).
The preamble to the proposed rules notes that non-federal negotiators expressed concern during the rulemaking process about the breadth and clarity of some of HEOA’s prohibited inducements. For example, a Team I non-federal negotiator raised concerns about the meaning of “reasonable costs in association with lenders and guaranty agencies paying for items such as meals or refreshments.” Id. at 36,570. ED did not define “reasonable” in the proposed rules, but suggests that FFEL lenders determine the reasonableness of such costs in light of the “prudent person test.” Id. at 36,570.
Disclosures by lenders. HEOA requires FFELP lenders to provide borrowers with certain disclosures regarding terms and conditions of a loan. The disclosures must be made at different points throughout the life of the loan, including at the time the loan is approved, at or prior to disbursement, at or prior to the start of repayment, and during repayment. The proposed rules amend and reorganize the current regulations, which require disclosures only at or before the time of loan disbursement and at or prior to repayment, to reflect the new statutory requirements. Id. at 36,571.
HEOA also requires FFELP lenders to provide information to borrowers when the transfer, sale, or assignment of a loan results in the change of identity of the party to which payments must be sent. Lenders must disclose the effective date of the transfer, sale, or assignment, the date upon which the original servicer will no longer accept payments, and the date upon which the new loan servicer will begin accepting payments. Current regulations are less restrictive, generally requiring certain disclosures by the assignor and assignee within 45 days from the date that the assignee acquires a legally enforceable interest in the loan. The proposed rules amend the current regulations to incorporate HEOA requirements. Id. at 36,572.
- Direct Lending and FFELP issues
- Cohort default rate calculations
HEOA and the proposed rules lengthen the time period used to calculate institutions’ FFELP/Direct Loan cohort default rates from two to three years. Beginning with federal fiscal year 2009, an institution’s cohort default rate is calculated by determining the rate at which borrowers who become subject to their repayment obligation in the relevant fiscal year default by the end of the second (rather than the following) federal fiscal year. HEOA and the proposed rules provide for a three-year transition period during which cohort default rates will be calculated under both the current (two-year) and the new (three-year) method. The current two-year method will be used to determine institutional eligibility through fiscal year 2011.
- Educational materials and programs
Implementing a new HEOA requirement, the proposed rules would require each FFELP guaranty agency to “work with schools that participate in its program to develop and make available highquality educational materials and programs that provide training to students and their families in budgeting and financial management, including debt management and other aspects of financial literacy . . .” 74 Fed. Reg. 36,556, 36,594. They would permit guaranty agencies to “provide similar programs and materials” to institutions that participate only in the Direct Loan Program and also allow lenders and loan servicers to provide such “outreach and financial literacy information” to institutions. Id. at 36,595.
- Entrance and exit counseling
HEOA incorporated into the HEA and augmented current ED rules regarding entrance counseling that institutions must provide for Direct Loan and FFELP borrowers and exit counseling that institutions must provide for Direct Loan, FFELP, and Perkins Loan borrowers. The proposed rules generally align current entrance and exit counseling requirements with HEOA. They also include a non-HEOA change that would require institutions to explain the use of a Master Promissory Note as part of Perkins Loan exit counseling, as is currently required for Direct Loan and FFELP exit counseling.