Summary: Provisions of Public Law 105-78 affecting the consolidation of student loans in the Federal Family Education Loan Program.
SUBJECT: Provisions of Public Law 105-78 affecting the consolidation of student loans in the Federal Family Education Loan Program.
REFERENCE: Section 428C of the HEA.
On November 13, 1997, President Clinton signed Pub. L. 105-78, the Departments of Labor, Health and Human Services, and Education, and Related Agencies Appropriations Act of 1998. Section 609 of that Appropriations Act made changes to the Federal Family Education Loan consolidation provisions contained in section 428C of the Higher Education Act of 1965 ("HEA"). [NOTE: Pub. L. 105-78 refers to section 609 as the "Emergency Student Loan Consolidation Act of 1997."]
This letter describes the changes made to section 428C of the HEA by the new law, and provides guidance (in the form of responses to questions from student loan program participants) about how these changes should be implemented. It also contains information about how the Department is processing Consolidation Loan verification certificates received from FFEL lenders, and copies of the forms used in that process. If you have questions about the requirements of this new legislation, please contact the Policy Development Division at (202) 708-8242.
Acting Deputy Assistant Secretary
Student Financial Assistance Programs
*[[Consolidation Loan verification certificates and Notice of accounts Sample forms" are currently unavailable for viewing. Please reference your paper documents for additional information.]]
Section 609 (known as the "Emergency Student Loan Consolidation Act of 1997") of the Departments of Labor, Health and Human Services, and Education, and Related Agencies Appropriations Act of 1998 (Pub. L. 105-78) made several changes to the Federal Family Education Loan ("FFEL") Consolidation Loan Program. Many of these changes are authorized only during the period that began November 13, 1997 and ends September 30, 1998.
For borrowers whose consolidation applications are received by the lender on or after November 13, 1997 and before October 1, 1998:
FFEL lenders are authorized to consolidate Federal Direct Loans.
During a period of authorized deferment, the Secretary of Education will pay the interest subsidies on the borrower's behalf on the portion of the Consolidation Loan that repays a subsidized FFEL or Federal Direct Loan.
An annual variable interest rate (with a cap of 8.25 percent) is charged on the loan. A lender is allowed a transition period to change its system from one that calculates a fixed interest rate based on the weighted average interest rate of the loans being consolidated to one that uses an annual variable rate. During his transition period, which ends on March 31, 1998, a lender may continue to calculate interest for borrowers at the fixed (weighted average) rate. Not later than April 1, 1998, the lender must (1) convert the borrower's fixed rate to a variable rate; (2) recalculate the interest that would have been owed by the borrower (retroactive to the date the Consolidation Loan was made) as if the variable rate had been in effect when the loan was made; and (3) apply any credits to the borrower's account.
A borrower with a pending application for a Federal Direct Consolidation Loan may apply for a Consolidation Loan through an FFEL lender. However, the borrower must cancel the Direct Loan application prior to the receipt of the FFEL Consolidation Loan.
In addition, Pub. L. 105-78 made the following permanent change to section 428C:
Lenders are prohibited from discriminating against borrowers seeking a Consolidation Loan based on (1) the number or type of eligible student loans the borrower seeks to consolidate; (2) the type or category of school the borrower attended; (3) the interest rate that would be charged on the borrower's consolidation Loan; and (4) the types of repayment schedules offered to the borrower.
Questions from FFEL participants
1. Do the new nondiscrimination provisions continue to apply after September 30, 1998?
Yes. The provisions of section 428C(b)(6), which apply exclusively to the Consolidation Loan Program, were permanently added to the HEA. [Note: The general nondiscrimination provisions of section 421 of the HEA (race, national origin, religion, sex, marital status, age, handicapped status) continue to apply to all loans made under the FFEL Program.]
2. The new law prohibits a lender from discriminating against a Consolidation Loan applicant based on the "type or category" of school the applicant attended. What's the difference between "type" of school and "category" of school?
The words "type" and "category" generally refer to a group that shares common traits or characteristics. There are many types (i.e., "categories") of schools. A few examples are: proprietary institutions of higher education, postsecondary vocational institutions, nonprofit, private, public, 4-year schools, graduate schools, high-default rate schools, medical schools, community colleges, tribally controlled schools, etc.
The Department believes that Congress included both terms in section 428C(b)(6) to emphasize that a lender may not discriminate against a borrower based on the particular characteristics of the school the borrower attended. Under the new law, a lender may not have a policy to refuse to consolidate loans made for attendance at a certain type/category of school, regardless of how the lender chooses to define the group of schools. Thus, for example, a lender that has a policy of refusing to consolidate loans made for attendance at a community college would be in violation of section 428C(d)(6)(B) of the HEA.
3. Does the new prohibition against a lender discriminating against an FFEL Consolidation Loan applicant based on the types of repayment schedules offered to the applicant mean that the lender must offer an Income Contingent Repayment schedule?
No. Under the HEA and 34 CFR 682.209(a)(6)(iii), lenders must offer new Consolidation Loan borrowers a choice of a standard, graduated, or income-sensitive repayment schedule. The income contingent repayment plan is available only in the Federal Direct Loan Program. In the Department's view, the new law reinforces the existing statutory and regulatory requirements that apply to an FFEL borrower's choice of repayment schedule.
4. May a lender refuse to consolidate certain types of loans, such as HEAL or Direct Loans?
No. Section 428C(b)(6) of the HEA states: "An eligible lender that makes Consolidation Loans ...shall not discriminate against any borrower seeking such a loan . . .based on the number or type of eligible student loans the borrower seeks to consolidate." [emphasis added.] A HEAL or a Direct Loan is a type of loan. A lender may, however, continue to counsel borrowers on the consequences of consolidating certain types of loans (e.g., Perkins Loans) without violating the nondiscrimination provisions.
5. Can a lender decline to consolidate defaulted loans?
Section 428C(b)(6) of the HEA does not require a lender to consolidate defaulted loans. However, the Secretary notes that defaulted loans are eligible for consolidation under the HEA and encourages lenders to make Consolidation Loans that repay defaulted loans. Lenders are authorized to consolidate defaulted FFEL or Direct Loans if the borrower has made a satisfactory arrangement, with either the Department or a guaranty agency, to repay the defaulted loan, or if the borrower agrees to repay the loan under an income-sensitive repayment plan. The Department believes that loan consolidation is a useful and appropriate repayment option for many borrowers with defaulted loans.
6. Can a lender decline to offer consolidation to a married couple that wishes to consolidate the loans of both spouses into one loan?
There is no specific provision in the HEA that requires a lender to make a single Consolidation Loan to a married couple. However, §421(a)(2) of the HEA prohibits lenders from discriminating against eligible borrowers or applicants based on marital status. Accordingly a lender with a policy of declining to offer Consolidation Loans to married couples must ensure that this policy does not result in prohibited discrimination. For example, the lender could permit both spouses (assuming they are otherwise eligible) to consolidate their loans separately.
7. May a lender have a minimum balance requirement that applies before the lender will make a Consolidation Loan?
The HEA does not prohibit a lender from maintaining a policy of not making Consolidation Loans below some minimum amount. However, the Department is concerned that minimum loan balance requirements may, in effect, discriminate based on the number of loans. The Department intends to carefully monitor the implementation of policies in this area to ensure that they do not have the effect of discriminating against borrowers based on a prohibited reason.
8. If a lender or guaranty agency's existing Consolidation Loan policy conflicts with a new provision of the law, is the lender/agency required to change that policy?
Of course, if such a conflict exists. However, many existing lender/agency policies do not pose such a conflict. For example, a lender may continue to require credit checks of applicants or require the applicant to have at least one loan currently held by the lender. Also, a lender could decline to make a Consolidation Loan if it was unable to obtain a guarantee. A guaranty agency could decline to insure a Consolidation Loan unless the applicant has at least one loan currently guaranteed by the agency. Although the nondiscrimination provisions in section 428C(b)(6) of the HEA are specifically directed at lenders, guaranty agencies may not impose lender requirements that effectively would compel the lender to violate the HEA.
Application and loan-making process
9. If a borrower's total debt consists only of Federal Direct Loans, is the borrower eligible to consolidate those loans under the FFEL Program?
Yes, if the Consolidation Loan application is received by the lender on or after November 13, 1997 and before October 1, 1998.
10. Does a Direct Loan borrower have to continue to make payments on a Direct Loan he or she wishes to consolidate while an application for an FFEL Consolidation Loan is pending?
Yes, unless the borrower requests, and is eligible for, a deferment or forbearance during the application period.
11. Can a lender consolidate an applicant's loans that are in an in-school status?
No. Pub. L. 105-78 made no changes to §428C(a)(3)(A) of the HEA, which continues to define an "eligible borrower" (for purposes of a Consolidation Loan) as an individual who, at the time of application for a Consolidation Loan, is either in repayment status, grace period, or in default, but who has made satisfactory arrangements to repay the defaulted loan.
12. Will lenders have additional disclosure obligations based on the new law?
A revised addendum to the Consolidation Loan application and promissory note has been approved by the Secretary, and is available from FFEL guaranty agencies or the National Council of Higher Education Loan Programs, Inc. at www.nchelp.org . The approved addendum must be provided to all applicants whose applications are received on or after November 13, 1997 and before October 1, 1998.
13. Will the Department provide an addendum for use with loans made jointly to a married couple or the language that must be used on the addendum?
The addendum previously approved by the Secretary continues to be valid, but in addition, each borrower must receive the revised disclosure addendum discussed in question #12 above.
14. How does the new law apply if a Consolidation Loan was made before November 13, 1997, and within 180 days of the date the loan was made, the borrower wants to add additional loans?
All of the nondiscrimination provisions discussed in question #1 apply. However, the variable interest rates provided in section 428C(e) of the HEA do not apply to Consolidation Loans made before November 13, 1997, or to loans added to those Consolidation Loans during the period of November 13, 1997 to October 1, 1998.
15. What is the maximum interest rate on an FFEL Consolidation Loan made on or after November 13, 1997 and before October 1, 1998?
Except for the HEAL portion of the FFEL Consolidation Loan, it is an annual variable rate adjusted each July 1 based on the bond equivalent rate of the 91-day T-bill auctioned at the final auction held prior to June 1, plus 3.10 percent, with a cap of 8.25 percent. The current rate (through June 30, 1998) is 8.25 percent. This is the same annual variable rate currently used in the Stafford Loan Program. The interest rate for the PLUS Loan portion of the Consolidation Loan is the same as for Stafford Loans. Please note that the method for determining the annual variable interest rate on an FFEL Consolidation Loan under section 428C(c)(1)(D) of the HEA is different from the formula that will be used for determining the interest rate for new Stafford Loans made on or after July 1, 1998.
For the portion of the Consolidation Loan represented by a HEAL, a different variable interest rate applies. The rate on the HEAL portion is also adjusted on July 1, but is the sum of the average of the 91-day T-bill rates auctioned for the quarter ending June 30, plus 3.0 percent. In addition, the HEAL portion of a Consolidation Loan has no interest cap. The current HEAL rate (through June 30, 1998) is 8.21 percent. [Note: regardless of the date the application is received by the lender, section 428C(d)(3)(A) of the HEA specifies that the HEAL portion of the Consolidation Loan is ineligible for special allowance payments.]
16. Do Consolidation Loans made based on applications received on or after October 1, 1998 have a variable interest rate?
No. The variable interest rate provisions of section 428C(e) apply only if the borrower's application is received by the lender on or after November 13, 1997 and before October 1, 1998.
Processing loan verification certificates and payoff amounts
The following questions and answers provide information about the current procedures being used to process the verification certificate requests that have been received by the Department from FFEL lenders. However, the Department is continuing to receive input from the FFEL industry, and these procedures may change.
17. How does a lender obtain a verification certificate for Direct Loans?
The lender must send the Department a verification certificate (VC) request for the borrower. A lender can submit verification requests on its own VC. However, the Direct Loan Servicing Center (DLSC) will respond using the Direct Loan Consolidation Certification form (a copy is attached). The Direct Loan VC will be attached to the original VC submitted by the lender. All VC's will be returned to the lender within 10 business days. The VC must include the borrower's authorization. If it does not have the borrower's authorization, the VC request will be returned to the lender unprocessed.
18. Where does a lender send a verification certificate request?
The verification certificate request may be mailed or faxed. VC requests by mail should be sent to the following address: U.S. Department of Education, Direct Loan Certification Services, PO Box 4610, Utica, NY 13504. VC requests via fax should be sent to 1-800-738-6643. Remember, faxing documents to the Department is acceptable only for VC requests.
19. What information will be on the VC?
The VC will list all of the Direct Loans for the specific borrower, and will indicate a payoff amount as of the date the VC is certified by the Department and a per diem interest accrual rate (see attached Direct Loan Consolidation Certification form).
20. What is the purpose of the per diem interest accrual rate?
The per diem interest accrual rate will allow the lender to calculate the total payoff amount from the date following the certification date to the day that the payoff is posted. In calculating the total payoff amount for a Direct Loan, the lender should include the number of days needed to process and mail a payoff check.
21. Where are the loan payoffs to be sent?
All loan payoffs are to be sent to the following address: U.S. Department of Education, Direct Loan Certification Services, PO Box 4610, Utica, NY 13504.
22. When will the payoff be posted to a borrower's account?
The payoff amount will be posted to the borrower's account the next business day after it is received by Direct Loan Certification Services in Utica, New York.
23. Does the lender need to provide any information with the check?
Yes. The payoff check must have the standard bank check information: lender's name, address, and telephone. Also, the payoff check must be accompanied by the Lender Identification Number and the borrower's name and social security number.
24. What will happen if the payoff amount is not accurate?
Once a payoff has been received and has been posted to the borrower's account (on the next business day), the Department will determine if the payoff amount results in an underpayment or overpayment. The Department will send an Underpayment Report (see attached copy) to lenders weekly. Overpayment refund checks will be processed on an as-needed basis.
25. How will the Department process underpayments?
The Department will apply the amount of the payment to the borrower's account. If an underpayment occurs, the Department will prepare an Underpayment Report. The Underpayment Report will include the loan identification number, the borrower's social security number, and the amount of the underpayment. The Department will send the Underpayment Report to the lender. The lender is required to promptly return the additional payment. The borrower will not receive a bill when an underpayment occurs.
26. How will the Department process overpayments?
A refund request for the overpayment amount will be sent to the U.S. Department of Treasury. The Treasury Department will send a refund check directly to the new loan holder. The new loan holder will receive a United States Treasury check for each borrower for which an overpayment has occurred.
27. What number should a lender or servicer call if they have questions?
For questions concerning the processing of a VC or loan payoff, a lender or servicer may call Direct Loan Certification Services at 1-800-738-8035, Monday through Friday, 8:00 a.m. to 5:30 p.m., Eastern Standard Time. This number is for lender or servicer inquiries only.
28. What number should borrowers call if they have questions?
Borrowers may call Borrower Services at 1-800-848-0979, Monday through Friday, 8:00 a.m. to 8:30 p.m., Eastern Standard Time.
29. How does a borrower withdraw an application for a Direct Consolidation Loan?
To cancel an application for Direct Loan Consolidation, the borrower may call the Direct Student Loan Consolidation Service at 1-800-557-7392, Monday through Friday, 7:00 a.m. to 7:00 p.m., Eastern Standard Time. Further, the borrower must withdraw the Direct Loan application prior to the time the FFEL Consolidation Loan is made. The FFEL lender may rely on the borrower's statement that there are no pending applications for a Consolidation Loan.