Yesterday the Department released an electronic announcement clarifying the effect on FFEL borrower benefit programs on loans that are to be sold to the Department. The Ensuring Continued Access to Student Loans Act of 2008 (H.R. 5715) gives the Department temporary authority to purchase student loans when there is inadequate capital to meet borrower demand. The announcement confirms a NASFAA article - Are There Borrower Benefits Under H.R. 5715? - which was released last week and speculated on the future of borrower benefits on loans made under H.R. 5715.

According to the announcement, the Department will not assume any commitments made to borrowers by lenders except in two circumstances.

1. Up-front Benefits

   Lenders and guarantors that provide up-front benefits such as reduced origination or default fees may continue to do so since those borrower benefits would be paid before the loan is sold to the Department, according to the electronic announcement. But lenders are unlikely to offer reductions in origination fees for loans that could be sold to the Department because they wouldn't be able to recoup those losses without retaining the loans during repayment.

2. Interest Rate Reductions for Automatic Payments

   The Department also said that it is likely to offer a reduction of .25 percent for borrowers who elect an automatic debit payment process. Lenders that advertise and make loans with a .25 percent interest rate reduction for automatic payment may still sell their loans to the Department.

Back-end Benefits Not Permitted

Interest rate reductions, loan forgiveness provisions after so many on-time payments, and other back-end benefits are not likely to be offered by the Department after it purchases a loan. The Department speculates that one of the provisions in the Federal Register will be that no loans sold to the Secretary may carry committed or implied borrower benefits other than front-end benefits or the .25 percent ACH interest rate reduction.

H.R. 5715 stipulates that the Secretary details specific terms and conditions explaining how lenders may sell loans to the Department in the Federal Register. Despite the electronic announcement, nothing is final until the Department releases those terms in the Federal Register, which may not come until the end of June.

By Justin Draeger
NASFAA Associate Director for Communications

Posted 06/13/08 to www.NASFAA.org. Redistribution to non-NASFAA institutions is prohibited. Please submit Web Site questions or comments to Web@NASFAA.org.