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(GEN-08-05) FFEL Lender-of-Last-Resort Loan Program

Publication Date: May 6, 2008

DCL ID: GEN-08-05

Subject: FFEL Lender-of-Last-Resort Loan Program

Summary: On March 26, 2008, the Department issued “Dear Colleague” Letter GEN-08-03, FP 08-03, requesting guaranty agencies to update lender-of-last-resort (LLR) rules and operating procedures. This letter provides further information and guidance to guaranty agencies to ensure consistent borrower access to FFEL Program loans through the efficient and effective implementation of the LLR program.

Posted on 05-06-2008

Dear Guaranty Agency Director:

As you know, the Department of Education (the Department) has been working with guarantor members of the National Council of Higher Education Loan Programs (NCHELP) in an effort to develop processes for the implementation of the FFEL LLR program. Through our collaborative efforts with the guaranty agencies, we want to utilize the strengths and abilities of each in a flexible manner to ensure that all otherwise eligible students (and parents) have access to FFEL Program loans for the upcoming academic year. We have also worked to ensure that the original intent of the LLR program is preserved, ensuring that these LLR loans are provided only as a true last resort. Finally, as we review, evaluate, and eventually approve each of the guaranty agency’s updated plans, we are committed to improved consistency and the overall integrity of the program for the coming academic year and well into the future.

The FFEL LLR Program is authorized by section 428(j) of the Higher Education Act (HEA) and the 34 CFR 682.401(c) implementing regulations. Under these provisions, a guaranty agency may approve a FFEL lender to make LLR loans or the guaranty agency may make LLR loans itself. The law permits a guaranty agency to request an advance of federal funds from the Secretary if it is unable to itself fund LLR loans.

The information included in this letter provides guaranty agencies and other interested parties with important information on the implementation of an LLR plan for the FFEL Program. In addition, we have attached a set of Questions and Answers (Q&A) that provide more details about the LLR process. Many of the Q&A respond to questions specifically submitted by NCHELP, individual guaranty agencies, and others.

LLR Implementation Details

  • Status of LLR Loans – An LLR loan, regardless of the lender or the funding source, has all of the characteristics of a conventional FFEL Program loan except as discussed below and in the attachment to this letter.

  • Identification of the Need for LLR Loans – The starting point for determining that an LLR loan is needed is the inability of a student (or his or her parent) to obtain a conventional FFEL loan. Generally, this determination is made on a student-by-student basis. However, to ensure that LLR services are provided in a timely manner, the Department will develop criteria and implement a process for institutional eligibility to make LLR loans. To determine eligibility, an institution working with the guaranty agency will provide, at a minimum, –

    • The number and percentage of the institution’s FFEL loan applicants who are expected to be unable to obtain a conventional FFEL loan;

    • The names of the FFEL lender or lenders that provided FFEL loans in the past to students attending the institution (or their parents) which, based on available information, have indicated that they will no longer provide conventional FFEL loans to these individuals. And for each such lender, an estimate of the number of students who will be impacted by the lender’s decision; and

    • The names of other FFEL lenders that the institution or the guarantor contacted to request FFEL loan access for students at the institution for the 2008-2009 academic year.

  • LLR Sequence – When a student (or group of students) is unable to obtain a conventional FFEL loan, pursuant to section 428(j) and 34 CFR 682.401(c), the state designated guaranty agency is statutorily responsible for students attending the institutions in, and those students who are residents of, their designated state(s). Therefore, the designated guaranty agency for a state may make (regardless of funding source), or arrange for an eligible lender to make, LLR loans only to students attending an institution located in that state or to a resident of that state attending an institution in another state. Additionally, while an institution may request any guaranty agency to assist in the identification of FFEL lenders who will make conventional loans to the institution’s students, any institution-wide certification of the need for LLR loans must be made by the guaranty agency designated for the state where the school is located. When so notified –

    • The designated guaranty agency must attempt to identify FFEL lenders that will make conventional FFEL loans.

    • If no lenders are identified, the designated guarantor will seek FFEL lenders that will make LLR loans.

    • If no FFEL lender will make LLR loans, the designated guaranty agency itself will, to the extent practicable, make LLR loans using available unrestricted net assets, after taking into consideration other anticipated programmatic uses of the assets.

    • Finally, if the guaranty agency can demonstrate that it lacks the financial capacity to make LLR loans with its own funds, it may request federal Advances from the Secretary to make LLR loans.

  • Borrower Rights and Responsibilities – An LLR loan made by a FFEL program lender, a guaranty agency using its own funds, or a guaranty agency using federal Advances provides the borrower the same rights, benefits, and obligations that apply to a conventional FFEL loan (e.g., discharges and cancellations, loan consolidation, etc.).

  • Lender and Loan Holder Rights, Benefits, and Obligations – When an LLR loan is made by a traditional FFEL lender, or by a guaranty agency using funds other than federal Advances, all of the rights, obligations, benefits, and requirements that apply to conventional FFEL loans apply to the lender (including the guaranty agency acting as an LLR lender) and to any subsequent holders, except that the LLR loan carries a default insurance (and reinsurance rate) of 100 percent.

  • Guaranty Agency Obligations – A guaranty agency that makes an LLR loan is responsible for complying with all the requirements applicable to a FFEL lender under the Higher Education Act (HEA).

  • Agency Requests for Advance Funds –A guaranty agency seeking federal Advances to provide LLR loans to students attending schools in the agency’s designated state(s) or to students who are residents of the designated state(s) attending school in another state must submit a written request to the Secretary. To provide federal Advances to a guaranty agency, the Secretary must determine that –

    • Eligible borrowers are seeking and unable to obtain loans in the designated guaranty agency’s state(s);

    • The designated guaranty agency for that state has the capability to provide LLR loans in a timely manner, but the agency cannot provide such loans without Advances from the Secretary; and

    • Making Advances for LLR loans would be cost-effective.

    The Department will finalize the criteria and documentation needed to provide federal Advances to agencies and will be prepared to receive written requests for federal Advances by June 1, 2008.

  • Guaranty Agency LLR Fee – The Department will determine the process for establishing the fee it will pay to a guaranty agency for originating and servicing LLR loans made with Advances and will communicate that structure within 10 days of the date of this letter. The process for establishing the amount of the fee that will be paid to a guaranty agency by the Secretary for making LLR loans with federal Advances will be set using a market-based methodology and will ensure broad national coverage for all potential LLR loans.

  • Advances Agreement for Federal Funds – The Secretary will have the funds available to provide federal Advances for the purpose of making LLR loans, if needed. Specific terms and conditions governing federal Advances to a guaranty agency will be included in an Advances Agreement that will be executed between the Secretary and the guaranty agency. The Agreement will include, among other things, the following –

    • The specific processes for the transfer of Advances to the guaranty agency accounts;

    • The requirement that advance funds be maintained in a restricted subsidiary account of the agency’s Federal Fund;

    • A provision describing the status of loans made with federal Advances, including the requirement that the agency may not sell, securitize, or pledge loans.

    • The duration of the Agreement covering Advances that will be needed by the guaranty agency, and any reporting and reconciliation requirements;

    • The LLR loan volume that the guaranty agency commits to provide under the Agreement;

    • The state or states in which the guaranty agency will provide LLR loans;

    • The types of FFEL program loans to be made by the guaranty agency under the LLR Agreement; and

    • Details regarding the LLR fee that the Secretary will pay to the guaranty agency.

  • Assignment of LLR Loans Made with Federal Advances – If needed, federal funds issued for the purpose of making LLR loans will be deposited into a special reserve account of the agency’s Federal Fund. The federal government will be the beneficial owner of the loans made with these funds, and the agency must hold and treat the loan as a federal asset. The guaranty agency must assign these loans to the Department upon demand by the Secretary. Assignment of an LLR loan, in this context, is the transfer of title to the loan.

As noted, the information above is supplemented by the attached Q&A document. The Congress has passed H.R. 5715, the Ensuring Continued Access to Student Loans Act, which might impact the information in this letter and its attachment. Specifically, the bill provides temporary authority for institution-wide designation status in the LLR program. The Department will publish additional guidance to reflect this and any other changes resulting from the legislation.

In the letter of March 26, 2008, the Department indicated that the guaranty agencies had 30 days to submit updated rules and operating procedures for implementing their LLR programs. Given the on-going dialogue, we are extending that submission date to May 16, 2008.

We are, of course, committed to the continuation of our ongoing discussions with the FFEL community on issues related to the LLR Program. I wish to thank all interested parties for their efforts to ensure that eligible borrowers have access to federal student loans to pursue their educational goals.

If you have any questions on the information provided in this letter, you may contact Robert Moran of my staff at


Sara Martinez Tucker
Under Secretary
U.S. Department of Education

Last Modified: 05/05/2008