Maintained for Historical Purposes

This resource is being maintained for historical purposes only and is not currently applicable.

(98-L-202) On September 30, 1997, the United States Court of Appeals for the District of Columbia Circuit affirmed a District Court decision concluding that the Department?s interpretation of §427A(i)(7) of the Higher Education Act of 1965, as amended (

DCLPublicationDate: 3/1/98
DCLID: 98-L-202
AwardYear:
Summary: On September 30, 1997, the United States Court of Appeals for the District of Columbia Circuit affirmed a District Court decision concluding that the Department’s interpretation of §427A(i)(7) of the Higher Education Act of 1965, as amended (HEA), 20 U.S.C. §1077a(i)(7) was incorrect. See Bank of America N.T. & S.A. v. Riley, 1997 U.S. App. LEXIS 28483 (D.C. Cir. 1997), aff’g 940 F.Supp. 348 (D.D.C. 1996). As a result of this decision, lenders participating in the Federal Family Education Loan Program (FFELP) may choose to recalculate special allowance billings for all or part of the period from July 23, 1992 to December 31, 1994. This recalculation may result in additional special allowance payments being owed to lenders.


March 1998

98-L-202


Dear Colleague:

On September 30, 1997, the United States Court of Appeals for the District of Columbia Circuit affirmed a District Court decision concluding that the Department’s interpretation of §427A(i)(7) of the Higher Education Act of 1965, as amended (HEA), 20 U.S.C. §1077a(i)(7) was incorrect. See Bank of America N.T. & S.A. v. Riley, 1997 U.S. App. LEXIS 28483 (D.C. Cir. 1997), aff’g 940 F.Supp. 348 (D.D.C. 1996). As a result of this decision, lenders participating in the Federal Family Education Loan Program (FFELP) may choose to recalculate special allowance billings for all or part of the period from July 23, 1992 to December 31, 1994. This recalculation may result in additional special allowance payments being owed to lenders.

I. Background

In 1986 and 1992, Congress amended the HEA to require lenders to pay interest rebates to certain borrowers of Stafford loans. See §427A(i)(1)-(6), 20 U.S.C. §1077a(i)(1)-(6). The rebates were provided to borrowers in two categories: (1) those who received loans with an interest rate of 8 percent for the first 4 years of repayment and 10 percent thereafter; and (2) those borrowers who received a Stafford Loan made on or after July 23, 1992 with a fixed interest rate (7, 8, 9 or 8/10 percent) and with an outstanding FFELP debt at the time they received the loan.

Under those provisions, the first rebates were due to borrowers after the end of 1993. The Department described the requirements of these laws in Dear Colleague Letter 93-L-160, dated September 1993.

Some lenders paid those rebates in accordance with the statutory requirements. Many other lenders, however, asserted that their computer systems could not be adapted to do the necessary calculations and did not pay the rebates.

In light of the failure of some lenders to make the interest rebate payments to borrowers, Congress attempted to address the technical issues identified by the lenders as part of the Higher Education Technical Amendments of 1993, Pub.L. 103-208. In that law, Congress adopted a two-step approach to address the problems caused by the lenders’ failure to pay rebates. First, under §427A(i)(7)(A) of the HEA, Congress required lenders to convert the fixed interest rate loans subject to the rebate to variable interest rates by January 1, 1995. Second, for the period prior to the conversion, Congress required the lenders to reset the interest rates on a quarterly basis using a formula in §427A(i)(7)(B). Then, using this reset quarterly interest rate, the lenders were required to calculate the amount of excess interest that had to be rebated by the lender to the borrower or the Department, depending on who paid the interest during that quarter. The Department described the conversion steps required of lenders in a March 30, 1994 letter to Guaranty Agency Directors and in Dear Colleague Letter 94-L-171, dated October 1994. In the Department’s view, the retroactive conversion of the interest rate was intended only to calculate the amount of the rebate to be provided to the borrower or the Department. However, in Bank of America v. Riley, the court concluded that the retroactively converted interest rate could be used by lenders to claim special allowance payments. This decision applies only to the lenders who filed suit; however, the Department believes that the decision logically applies to all lenders who held loans which were subject to the retroactive conversion of interest rates. Accordingly, all lenders may submit a request for additional special allowance payments for the retroactive period as described in this letter.

II. Process and formulas for filing for additional special allowance payments

A lender who believes it is owed additional special allowance payments for the retroactive period should submit a separate ED Form 799 (Lender’s Interest and Special Allowance Request and Report) to the Department. This form should request the additional special allowance payments that the lender believes are due for all the quarters. In completing the form, you must comply with the following instructions:

- In Part I, the lender should fill out all applicable lines with "1998" in the year field "1" in the quarter field.

- The lender should write "Supplemental ED Form 799 - BOA v. Riley" at the top of the form.

- In Part IV of the Form, all relevant information should be entered as prior quarter adjustments. The lender must report ending and average daily balance information.

- Parts II, III, V and VI of the Form 799 should be left blank.

- The completed form must be signed and dated.

- The form should be mailed to:

U.S. Department of Education
Student Loan Processing Center
P.O. Box 4134
Greenville, TX 75403-4134

Any questions regarding submittal of the Form 799 for these payments should be directed to Angela Baker at (202)-401-3255.

In calculating the additional special allowance benefits, the lender should use the quarterly interest rates listed in the following tables. The interest rate calculations are different for the two groups of affected borrowers. Table I applies to loans made to borrowers who were entitled to rebates under the original 1986 legislation. These borrowers are those who received Stafford Loans with the 8/10 percent interest rate prior to July 23, 1992, and borrowers who received Stafford Loans with the 8/10 percent interest rate between July 23, 1992 and September 30, 1992 and had no outstanding FFELP debt on the date they signed the promissory note. Those borrowers were entitled to the rebate only when the interest rate on the loan became 10 percent. To calculate any special allowance that may be due on loans made to borrowers who became subject to the rebate when the interest rate on their loan increased to 10 percent, the lender should use the interest rates listed in Table I below.

The quarterly interest rate used for calculating special allowance payments for loans made to these borrowers is determined by adding 3.25 percent to the average 91-day Treasury bill auctioned for the preceding 3-month period.

TABLE I

QUARTER ENDING INTEREST RATE


9/30/92 7.03
12/31/92 6.39
3/31/93 6.42
6/30/93 6.30
9/30/93 6.30
12/31/93 6.33
3/31/94 6.39
6/30/94 6.59
9/30/94 7.40
12/31/94 7.88


Table II lists the quarterly interest rates to be used to calculate special allowance payments on the second group of affected loans. These are fixed interest rate Stafford loans (including loans made at 7, 8, 9, and 8/10 percent) made on or after July 23, 1992, to borrowers with an outstanding FFELP debt on the date the borrower signed the promissory note. The quarterly interest rate used for calculating special allowance payments for loans made to these borrowers is determined by adding 3.10 percent to the average 91-day Treasury bill auctioned for the preceding 3-month period.


TABLE II

9/30/92 6.88
12/31/92 6.24
3/31/93 6.27
6/30/93 6.15
9/30/93 6.15
12/31/93 6.18
3/31/94 6.24
6/30/94 6.44
9/30/94 7.25
12/31/94 7.73

The lender may only claim additional special allowance under this court decision until the date the loan was permanently converted to a variable interest rate under §427A(i)(7) of the HEA. This conversion had to be done by January 1, 1995. After the conversion, the lender would use the new variable interest rate to claim special allowance and the retroactive interest rates required for purposes of the interest rebate calculation are no longer relevant.

The Department notes that lenders who complied with the requirement to pay rebates to borrowers during the time those requirements were in place and who did not reverse those rebates as permitted by Dear Colleague Letter 94-L-171 are not entitled to receive additional special allowance payments under the guidance in this letter.

III. Penalty Interest

The Department has decided that it will pay "penalty interest" on the special allowance payments made pursuant to the guidance in this Dear Colleague Letter. Any lender who submits a timely and complete claim for the additional special allowance payments permitted by this letter may also be entitled to receive penalty interest. As suggested by the Consumer Bankers Association, the Department will pay penalty interest dating from 31 days after the day the lender submitted a bill for interest benefits and special allowances for the first quarter of calendar year 1995. Penalty interest will stop accruing upon the earlier of the following dates: (1) the date the Secretary authorizes the Department of the Treasury to pay the penalty interest to the lender; (2) the date the Secretary returns the lender’s billing for the additional special allowance payments as incomplete or inaccurate; or (3) 30 days from the date of this letter if the lender does not submit a bill for the additional special allowance payments within that time. The Department will not pay penalty interest during any period in which the lender’s actions contributed to the delay. In addition, any lender who did not calculate and pay the rebate for the period prior to the conversion to a variable interest rate within the time frames outlined by the Department is not eligible for penalty interest until the date those rebates were paid. The penalty interest payment will be made separately from the payment of the additional special allowance payments. The penalty interest calculation uses a complex formula and requires the Department to manually calculate the amount due. The Department intends to make any penalty interest payment that is due as soon as possible once the additional special allowance payment is issued but it may take up to six months after the additional special allowance payment is made for a lender to receive the penalty interest.

IV. Deadline for Submittal

Any lender who wants to claim the additional special allowance payments for the retroactive period must submit an accurate, complete and timely ED Form 799 as described in Section II above. The lender’s request will not be considered accurate and complete unless it complies with the requirements in Section II of this letter. To be considered timely, the lender’s Form 799 must be received by the Department within 90 days of the date of this letter.

If you have any questions regarding the issues discussed in this letter please contact Angela Baker from our Accounting and Financial Management Service. Angela can be reached at (202) 401-3255.

Sincerely,


Diane E. Rogers
Acting Deputy Assistant Secretary
Student Financial Assistance Programs

Last Modified: 10/12/1998