1 The Inside Track on Federal Loan Programs ILASFAA Conference April 16, 2008 Vicki Shipley National Council of Higher Education Loan Programs (NCHELP)

2 Agenda What was CCRAA HERA What is HEA Reauthorization Regulations – Neg Reg 2008 and 7/1/08 new regulations Financial Market Turmoil What will be – Presidential Elections

3 Growth of Stafford, PLUS, and Nonfederal Loan Dollars in Constant (2006) Dollars (in Billions), to Source: Trends in Student Aid, College Board, 2007.

4 What Was Higher Education Reconciliation Act (HERA) Cut $18 billion from FFELP Increased annual loan limits for first and second year undergrads Reduced origination fees Made provisions of the Taxpayer Teacher Protection Act permanent Reduced Lender insurance from 98% to 97%

5 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

6 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

7 Big Cuts to Lenders & Guarantors - CCRAA ProgramSavings 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

8 Big Cost Items - CCRAA ProgramCost 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

College Cost Reduction and Access Act Legislative Provisions Increased Pell Grant Maximum to $5,400 over five years Interest rate reduction for undergrad subsidized 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

10 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

11 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

12 Additional Uncertainties Parent PLUS Loan Auctions Slated to begin in 2009 Two 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?

13 What Is Reauthorization Senate reauthorization: S (passed 95-0 on July 24, 2007) The Higher Education Amendments of 2007 House reauthorization: H.R (passed 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

14 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

15 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

16 House vs. Senate on Select Issues H.R Pell: increases authorization to $9,000 beginning through 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 Pell: increases authorization $5, $5, $6, $6, 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

17 House vs. Senate on Select Issues H.R 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 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)

18 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

19 Reauthorization Conference Committee College Cost Provisions – reporting vs. “Watch List” State Maintenance of Effort Requirement Sunshine Act – Code of Conduct - Inducements FAFSA Simplification

20 What Is Negotiated Rulemaking (Neg Reg) New regulations effective 7/1/08 from 2007 Neg Reg – inducements, preferred lender lists etc 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 , 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!

21 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)

22 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

23 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

24 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

25 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

26 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

27 What Is Market Issues Subprime mortgage issues creep into student loans Congress taking notice Treasury and the Fed Chairman taking notice We must keep conversation alive to avoid major disruptions for students

28 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?

29 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

30 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)

31 Kennedy/Miller Bills S and H.R – 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 would increase the maximum Pell Grant for students with a negative EFC by up to $750

32 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

33 What will be – the Presidential Election Senator Barack Obama (D-IL) Supports increasing Pell Supports increasing Pell Supports elimination of FFELP Supports elimination of FFELP Simplify FAFSA Simplify FAFSA Senator Hillary Clinton (D-NY) Increase Hope tax credit Increase Hope tax credit Adjust Pell annually to take into account increased college costs Adjust Pell annually to take into account increased college costs Supports elimination of FFELP Supports elimination of FFELP

34 Presidential Election Senator John McCain (R-AZ) Wants more disclosure of academic earmarks Expand education benefits for military veterans

35 Thank You!

36 Questions/Comments?