There is some confusion in the student aid community about whether FFELP loans made under the Ensuring Continued Access to Student Loans Act of 2008 (H.R. 5715) would retain any borrower benefits. The Act gives the Department temporary authority to purchase student loans when there is inadequate capital to meet borrower demand. The bill also makes changes to lender of last resort (LLR) provisions, which will also have an effect on borrower benefits made in the FFEL program.
Trying to determine whether borrowers will have any benefits is dicey because the Department has yet to issue final terms and conditions on providing liquidity to lenders. Many in the community are expecting the Department to release "term sheets" that specify those terms and conditions by the end of this week. But nothing is final until the Department releases the terms in the Federal Register, which may not come until the end of June. However, if the Department holds to the terms and conditions it outlined in a Dear Colleague Letter released last month, it is possible to speculate on the probable future of borrower benefits under H.R. 5715.
Whether a loan is sold to the Department or originated under LLR, it is unlikely borrowers will see any front-end (reductions in origination fees) or back-end (reductions or benefits offered during repayment) benefits. Still, some borrowers may continue to receive a few borrower benefits.
No Borrower Benefits Under LLR
The law specifically prohibits lenders and guarantors from offering any borrower benefits for FFELP loans originated under LLR. Lenders and guarantors are prohibited from offering reduced interest rates, origination fees, or default fees, or any other terms or conditions that are more favorable to a borrower than the rates, fees, and conditions outlined in the HEA. If a loan is made under LLR, it cannot have any added borrower benefits attached to it.
Borrower Benefits Unlikely for Loans Purchased by Department
H.R. 5715 temporarily authorizes the Secretary of Education to purchase, or promise to purchase, FFELP loans from lenders if it is determined that there is not enough money in the marketplace to meet borrower demand. In a Dear Colleague Letter issued last month, the Department announced that it would carry out this provision in two ways: by purchasing the loans outright or by lending money to loan providers to make student loans. These plans are subject to change since the final terms and conditions have yet to be published in the Federal Register.
Department Purchases FFELP Loans
The Department plans to purchase eligible FFELP loans for the 2008-09 academic year from lenders who need to liquidate their assets to continue making loans. Loans that are purchased outright by the Department will be owned by the Department and will be subject to the Department’s repayment terms and conditions.
The Department may take over the servicing for such loans, may allow the original lender to continue servicing those loans, or contract with another servicer completely. No matter who is servicing the loan, it is very unlikely that the Department would honor any back-end benefits offered by an originating lender since those same benefits aren’t offered to Direct Loan participants. It is possible the Department would still give a .25 percent interest rate reduction on loans where the borrower has signed up for automatic payments, since the same benefit is offered to borrowers in the DL program. But that is only speculation; the Department has not given any official indication that it would offer those borrowers any discount.
Front-end benefits on loans being sold to the Department are also unlikely. Lenders won’t offer front-end benefits on loans that they’re planning on selling because they wouldn’t be able to recoup those losses without retaining the loans during repayment. The only way that lenders are likely to offer front-end benefits is if the Department compensated them for it when they purchase the loans.
Department Lends Money to Make Loans
The Department has also stated that they will - in effect - lend money to loan providers, which would allow these lenders to continue making loans by using their own loan portfolios as collateral. Under plans released by the Department, student loan providers would have until September 2009 to either pay off the Department’s loan and retain the student loan asset or allow the Department to take possession of it entirely.
In either case, it is very unlikely that a lender would offer any borrower benefits on loans that could potentially be taken out of their portfolio. It is equally unlikely that the Department would honor any borrower benefits except for the .25 percent interest rate reduction for automatic payments.
Even though nothing in statute prohibits lenders from offering borrower benefits on loans that could be sold to the Department, it is not likely that any lender will do so.
Who Might Receive Borrower Benefits?
Borrowers with loans that lenders view as profitable (high-volume loans with a low chance of default) may still see some borrower benefits as lenders continue to compete for their loan volume. Medical students, law students, or students attending schools where loan amounts are typically high and default rates are very low may continue to see some borrower benefits.
Some guarantors have also indicated that they will continue to pay the 1 percent default fee on behalf of their borrowers irrespective of whether the loans will be sold to the Department. Given the speculative nature of how loans will operate this coming academic year, many in the higher education community are anxious for the Department to release additional, formalized guidance on provisions in H.R. 5715.
In a letter to Secretary of Education Margaret Spellings last month, NASFAA President and CEO Dr. Phil Day urged the Department to implement provisions in H.R. 5715 as soon as possible.
"Considering what happened in the sub-prime mortgage market, NASFAA is determined to ensure that a healthy and accessible loan program remains a top priority," Day wrote. "This is not about liquidity for lenders; it is about access, success, and choice for students!"
By Justin Draeger
NASFAA Associate Director for Communications
Posted 06/05/08 to www.NASFAA.org. Redistribution to non-NASFAA institutions is prohibited. Please submit Web Site questions or comments to Web@NASFAA.org.
