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The Inside Track on Federal Loan ProgramsILASFAA ConferenceApril 16, 2008 Vicki ShipleyNational Council of Higher Education Loan Programs (NCHELP)

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Agenda

What was CCRAA - 2007 HERA - 2006

What is HEA Reauthorization Regulations – Neg Reg 2008 and 7/1/08 new

regulations Financial Market Turmoil

What will be – Presidential Elections

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Growth of Stafford, PLUS, and Nonfederal Loan Dollars in Constant (2006) Dollars (in Billions), 1996-97 to 2006-07

Source: Trends in Student Aid, College Board, 2007.

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What Was

Higher Education Reconciliation Act (HERA)

Cut $18 billion from FFELPIncreased annual loan limits for first and

second year undergradsReduced origination feesMade provisions of the Taxpayer Teacher

Protection Act permanentReduced Lender insurance from 98% to

97%

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What Was

College Cost Reduction and Access Act (CCRAA) Cut almost $20 billion from FFELP (lenders & GA’s) Reduced SAP on all new loans disbursed on or after

10/1/07 Increased Lender paid origination fee Decreased interest rates on new undergrad

subsidized Stafford loans for five years Eliminated Exceptional Performer Instituted an auction plan for Parent PLUS loans College Access Challenge Grants

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College Cost Reduction and Access Act Pell Grant Funding Not Guaranteed

Depends on Appropriations And on demand

Interest Rate Reduction is Temporary and for New Loans, Only Applies only to Undergraduate Subsidized Stafford Loans Phases in beginning 7/1/08 Ends 6/30/12

Parent PLUS Loan Auction Begins 7/1/09 Two lenders per State Auction winners get right of first refusal for Consol. of PLUS Loans

Economic Hardship Deferment & Repayment Expanded Military Deferment Public Service Loan Forgiveness

FFEL Borrowers can benefit via consolidation into FDLP

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Big Cuts to Lenders & Guarantors - CCRAA

Program Savings

40 basis point SAP cut for non-profit lenders &55 basis point SAP cut for for-profit lenders

$12.4 B

97% insurance for lenders until 2012,

then insurance cut to 95% and

and exceptional performer status eliminated

$1.1 B

Senate PLUS auction proposal $2 B

Lender origination fee increase from 0.5% to 1.0%

$2.2 B

Guarantor retention cut from 23% to 16% $1.9 B

Guarantor Administrative Maintenance Fee cut $2.6 B

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Big Cost Items - CCRAA

Program Cost

Interest rate reduction for undergrad subsidized Stafford loans from 6.8% to 3.4% over 4 years with sunset after the 4th year

$6.1 B

Increase Pell grant maximum to $5,400 over five years

$11.3 B

Income-based repayment option which caps payment amount at 15% of income for

borrowers who meet economic hardship definition

$1 B

Funding for “quasi-mandatory programs” (Upward Bound, Minority Serving

Institutions, and TEACH)

$1 B

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2007 College Cost Reductionand Access Act

Legislative Provisions

Increased Pell Grant Maximum to $5,400over five years

Interest rate reduction for undergradsubsidized Stafford loans from 6.8% to 3.4% over four years

Income-based repayment option—caps payments at 15% of income for borrowers who meet economic hardship requirements

Elimination of 20/220 Pathway Deferment

Apparent Results

Increasing Pell grants

Four years of decreasing Stafford loan interest rates

Greater flexibility for students with lower income

Consequences

Lack of permanent funding when demand is increasing and will continue to increase

Largest impact on neediest students (loss of borrower benefits, return of origination fees)

More direct to consumer marketing

More government between students and schools

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Student Loan Investigations

Targets of the Investigation

Financial incentives to schools

Financial incentives to school employees

Direct-to-Consumer marketing practices

Apparent Results

Creation of “Code of Conduct” for Lenders and Financial Aid Offices

Additional state and federal legislation

Funds pledged for consumer education

Consequences

Erosion of trust in school financial aid offices and lenders

Small, local lenders abandoning student loan programs

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Legislative “Sunshine” Provisions (HR 890, S 486, S 1642)

Legislative Provisions

Schools required to develop and enforce code of conduct

Department to develop model disclosures for lenders & schools

Preferred lender lists trigger reporting requirements for lenders and schools

Apparent Results

Codes of Conduct created to protect students

Increased communications to students regarding loan options, eligibility, terms and disclosures

Consequences

Increased reporting requirements for lenders and schools

Increased legal exposure

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Additional Uncertainties

Parent PLUS Loan Auctions Slated to begin in 2009Two lenders from each state will win

rights to offer PLUS loans for two years

Leads to great instability in the marketplace

What about competition and choice?

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What Is

Reauthorization Senate reauthorization: S. 1642 (passed

95-0 on July 24, 2007) The Higher Education Amendments of 2007

House reauthorization: H.R. 4137 (passed 354-58 on February 7, 2008) The College Opportunity and Affordability Act

Conference going on now at the staff level HEA extended until April 30, 2008 Student loans “reauthorized” via HERA and

CCRAA

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HEA Reauthorization

Both the House and the Senate reauthorization bills address:

Student Loan Sunshine provisions Preferred lender lists Increase Pell Grant authorization levels Address other discretionary grant programs Authorize the Perkins Program Needs Analysis FAFSA Simplification Institutional PPA Many new extra disclosures

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HEA Reauthorization

• Issues include• Financial literacy• Student loan information – disclosure to 3rd

parties• Additional auction study• Code of conduct• Private loan issues• Multiple disclosures • Entrance and exit counseling• Service on Boards of Directors and on Advisory

Councils• Guarantor/DL audit requirements

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House vs. Senate on Select Issues H.R. 4137 Pell: increases authorization

to $9,000 beginning 2009-2010 through 2013-2014

Preferred Lender Lists: Requires not less than

three unaffiliated lenders College Costs

Creates a Higher Education Price Increase Watch List

Disclosures by lenders Model form to be

developed by Secretary

S. 1642 Pell: increases authorization

$5,400 2008-2009 $5,700 2009-2010 $6,000 2010-2011 $6,300 2011- 2012

Preferred Lender Lists: Requires not less than

three unaffiliated lenders College Costs

Creates a Higher Education Price Increase Watch List

Disclosures by lenders Model form to be

developed by Secretary

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House vs. Senate on Select IssuesH.R. 4137 Model form to include:

Interest Rate or potential range of rates

Any fees associated with the loan

Repayment terms Opportunity for deferment or

forbearance An example of the total cost of

the loan over its life Consequences of Default Contact info for lender Any philanthropic contributions

made by the lender to the institutions

Entrance and Exit Counseling Permitted as long as the

institution remains in control and lender does not promote products or services

S. 1642 Model form to include:

Interest rates on the loan Same educational loan costs Repayment plans available,

when interest will be capitalized All borrower benefits and the

percentage of all borrowers qualifying and percentage of borrowers who received the benefits the previous year

Entrance and Exit Counseling Prohibits Lenders and

Guarantors from performing any function on behalf on the institution that is required to be performed by institutions

(11/1/07 regs specifically prohibit guarantors and lenders from performing in-person entrance/exit counseling)

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Private Student Loans

Congressional Issues: Federal borrowing first Full disclosure of loan terms & additional

new disclosures Assurance of no conflicts of interest between

lenders and schools• Co-branding• Revenue sharing

Bankruptcy exceptions House Rolls Up Into HEA Reauthorization

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Reauthorization Conference Committee

College Cost Provisions – reporting vs. “Watch List”

State Maintenance of Effort Requirement

Sunshine Act – Code of Conduct - Inducements

FAFSA Simplification

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What Is

Negotiated Rulemaking (Neg Reg) New regulations effective 7/1/08 from 2007 Neg Reg

– inducements, preferred lender lists etc. 2008 neg reg topics:

• Direct Loan Public Service Loan Forgiveness• Income Based Repayment (IBR)• Conforming Economic Hardship Deferment with IBR• Definition of Not-For-Profit Loan Holder• Harmonizing HEROES Waivers with other Benefits

Provided to Returning and Active Duty Military Final Loans Team Meeting: April 14 - 15, 2008 Regulations will be effective July 1, 2009 and must be

published in final form by November 1, 2008 Don’t forget to read the preamble!

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Income-Based Repayment

New repayment option available 7/1/2009 for borrowers experiencing “partial financial hardship”

Eligibility and minimum monthly payment is re-evaluated annually

Government pays the interest on qualifying subsidized Stafford loans for not more than 3 years (not counting periods of Economic Hardship deferment)

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Income-Based Repayment

The repayment period can extend beyond 10 years regardless of the amount of the eligible debt but not beyond 25 years

Includes a loan forgiveness provision after experiencing a partial financial hardship and 25 years of eligible payments

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Income-Based Repayment

The repayment period can extend beyond 10 years regardless of the amount of the eligible debt but not beyond 25 years

Includes a loan forgiveness provision after experiencing a partial financial hardship and 25 years of eligible payments

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Income-Based Repayment

Any loan amount that is cancelled may be taxable in the calendar year it is cancelled

IBR may not always be the best/lowest repayment option for a borrower – should consider impact of eligibility for an Economic Hardship deferment

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Public Service Loan Forgiveness New loan cancellation provision for Direct

Loan borrowers not in default who: Have made 120 monthly payments on an

eligible loan starting after 10/1/2007 Must have been “directly and full-time”

employed in public service during the entire repayment period

FFEL borrowers may consolidate into DL to get this benefit but ALL payments must have been in DL

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Economic Hardship Deferment POSSIBLE Change to the HRD Elimination of the debt-to-income ratio calculation for

purposes of determining eligibility as of 7/1/09 Currently borrowers are eligible for this deferment if

their total debt is more than 20% of their income and if their income minus their loan payments leaves them with no more than 220% of the income considered poverty level in the U.S.

“Big Cost” Item—ED estimated the 10-year cost of maintaining this provision at $1.1 billion

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What Is

Market IssuesSubprime mortgage issues creep into

student loansCongress taking noticeTreasury and the Fed Chairman

taking noticeWe must keep conversation alive to

avoid major disruptions for students

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Financial Market Turmoil & Instability For student loans it’s a liquidity problem and

not a credit problem Lenders are dropping out of the FFEL

program ED projects $60 billion in new FFELP loans

will be needed for 6.7 million borrowers for academic year 2008/09

FFELP lenders have financed more than $350 billion in student loans the last 35 years without any disruption – will this be the case for 2008/09?

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Student Loan Financing

Top 100 originating lenders – banks originate 55% and non banks 44%

Holder status – 76% of the outstanding student loan volume is with non banks and 24% with banks

Banks depend on secondary markets – allows them to “recycle” funds used to make new loans

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Options???

Lender of Last Resort (LLR) Direct Lending The FFELP community wants federal

intervention to provide liquidity in the financing markets (i.e. the Federal Reserve System should work to provide liquidity to all types of student loan originators in order to restore a smooth functioning of this market sector and to avoid negative economic outcomes)

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Kennedy/Miller Bills

S. 2815 and H.R. 5715 – bills to prevent potential disruptions in federal student loans caused by the volatility in the capital markets

Increased annual and aggregate unsubsidized Stafford loan limits

Delay PLUS loan repayment Delinquent mortgage payments considered

“extenuating circumstances” for exception to the PLUS adverse credit determination

Changes to LLR (from borrower to school-based) and ED to be a temporary secondary market

S. 2815 would increase the maximum Pell Grant for students with a negative EFC by up to $750

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Kanjorski/Kerry Bills

Designed to pump money temporarily into the student loan market

Permits the 12 regional banks that make up the Federal Home Loan Bank system to invest their surplus funds into securities backed by student loans and accept such securities as collateral

The banks would also be able to make money available to the banks and thrifts in their regions for student loans

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What will be – the Presidential Election

Senator Barack Obama (D-IL)Senator Barack Obama (D-IL)

Supports increasing PellSupports increasing Pell Supports elimination of FFELPSupports elimination of FFELP Simplify FAFSASimplify FAFSA

Senator Hillary Clinton (D-NY)Senator Hillary Clinton (D-NY)

Increase Hope tax creditIncrease Hope tax credit Adjust Pell annually to take into Adjust Pell annually to take into

account increased college costsaccount increased college costs Supports elimination of FFELPSupports elimination of FFELP

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Presidential Election

Senator John McCain (R-AZ)

Wants more disclosure of academic earmarks

Expand education benefits for military veterans

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Thank You!

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Questions/Comments?