Publication Date: June 12, 2008
Summary: Effect of FFEL Borrower Benefits on the Eligibility of Loans to be Sold to the Department
Posted on 06-12-2008
The purpose of this announcement is to clarify the effect on FFEL borrower benefit programs of the Department's offer to purchase certain FFEL loans. In a May 21, 2008, letter to FFEL lenders, the Secretary announced that the Department would offer to purchase certain FFEL Program loans, as well as participation interests in certain FFEL Program loans, consistent with provisions of the recently enacted Ensuring Continued Access to Student Loans Act (Pub. L. 110-227), made for the 2008-09 academic year. Since publication of that letter there has been uncertainty within the lender and postsecondary education communities regarding the impact such loan purchases would have on certain benefits that, in the past, have been offered by FFEL lenders to student and parent borrowers.
Some borrower benefit programs offered by FFEL lenders do not impact the eligibility of a loan to be sold to the Department. Conversely, there are some borrower benefit programs that, if offered, would impact this eligibility.
The principle under which the following guidance is based is that the Department will not, except as provided below, assume a commitment made to a borrower by another entity. Thus loans with such commitments cannot be included in the purchase program.
Payment of Upfront Fees -
Since the one percent borrower origination fee and the one percent default fee, that are in effect for loans made on or after July 1, 2008, would have been paid prior to the sale of the loan, the payment by FFEL lenders of all or part of these two upfront fees does not impact the eligibility of a loan to be sold to the Department. Thus, FFEL lenders (or any other entity) may, if they choose, continue to pay these fees on the borrower's behalf without impacting the possible sale of the loan to the Department.
Interest Rate Reductions for Electronic Payments -
The Department has determined that it likely will, for any 2008-09 loan that it purchases, offer the borrower a reduction of one-quarter of one percent in the loan's interest rate if the borrower elects to have his or her monthly payments paid automatically through an electronic debit process. Thus, a FFEL lender offering a borrower an interest rate reduction of one-quarter of one percent under the same conditions would not be jeopardizing the eligibility of the loan to be sold to the Department or the borrower's right to such an interest rate reduction.
Other Borrower Benefits -
Most other borrower benefit programs provide their benefits later in the loan's lifecycle, after the loan may have been purchased by the Department. Unlike the electronic repayment interest rate reduction discussed above, these benefits are not likely to be offered by the Department upon purchase of the loan. Thus, the Federal Register Notice referred to in the Secretary's May 21 letter will likely provide that one of the eligibility requirements for a loan to be purchased by the Department, or placed in a participation agreement as described in the Secretary's letter, will be that the loan carry no committed or implied borrower benefit other than the two benefit programs noted above or those which are expressly provided for in the statute or in the promissory note.
It is important to note in the context of these loan purchase initiatives that the guidance provided in this announcement does not mean that FFEL lenders must offer loans with terms and conditions identical to those offered by the Secretary in the Direct Loan Program. Nor does it mean that the Secretary will offer benefits ordinarily provided to Direct Loan borrowers on a FFEL loan that it purchased from a FFEL lender.
Further details on loan purchases will be provided in the Federal Register. It is possible, but unlikely, that the Federal Register notice will further limit the purchase of loans on the basis of the benefits offered to borrowers.