The Higher Education Reconciliation Act of 2005

Prepared by the NCHELP Program Regulations Committee
This presentation provides a summary of the changes contained in the Higher Education Reconciliation Act of 2005. Readers should refer to the detail of the law and sub-regulatory guidance from the U.S. Department of Education in determining all relevant issues. This training module has been updated with the final rules issued in the Federal Register dated 11/1/06. 1

Reconciliation Versus Reauthorization
2

Reconciliation versus Reauthorization
• The Higher Education Act should have been reauthorized in 2003. • With no Congressional action, the automatic oneyear extension kicked in. • Since then, other short-term extensions have been passed.

3

Reconciliation versus Reauthorization
• Since the Higher Education Act should have been reauthorized, the Federal government has run huge budget deficits:
– 2003 = $377.6 billion – 2004 = $412.1 billion – 2005 = $318 billion.

• Pressure to reduce Federal spending increased with each deficit.
4

Reconciliation versus Reauthorization
• April 28, 2005 – Congress passed a 5-year budget reconciliation bill. • This bill required spending cuts of $34.7 billion over 5 years. • Each Congressional committee was given instructions on how much spending to cut.

5

Reconciliation versus Reauthorization
• The committees overseeing higher education were instructed to cut:
– House - $12.7 billion – Senate - $13.7 billion

• When Hurricane Katrina hit, the committees were asked to cut even more. • At the same time, the House and Senate Education committees were considering bills to reauthorize the HEA.
6

Reconciliation versus Reauthorization
• The end result was S. 1932, the Deficit Reduction Act of 2005. • The section of the law dealing with higher education is the Higher Education Reconciliation Act of 2005 (HERA). • Many of the provisions of the House and Senate HEA reauthorization bills were included in this bill. • Legislative history – 12/21/2005 – Senate passed 51-50 – 02/01/2006 – House passed 216-214 – 02/08/2006 – President signed bill into law
7

Reconciliation versus Reauthorization
• The validity of this law has been called into question.
– A single provision relating to Medicare differed between the House and Senate versions of the bills. – At least two lawsuits have been filed to invalidate the law.

• Sen. Judd Gregg, 02/28/2006:
"It happens all the time around here; if we're going to start holding ourselves to that standard, the government wouldn't function at all.“

• Bottom line – assume the law will stand
8

Reconciliation versus Reauthorization
• So is reauthorization still needed?
– S. 1932 reauthorized the FFEL program through September 30, 2012. [424(a), 428(a)(5), 428C(e)] – The rest of the Higher Education Act expires on June 30, 2007.

9

Effective Dates and “Triggers”

10

Effective Dates and “Triggers”
• In general, the changes made by HERA have an effective date of July 1, 2006. [S. 1932, Section 8001(c)] • However, certain changes have different effective dates. • Some of the changes are effective in the future. • At least two of the changes are retroactive.
11

Effective Dates and “Triggers”
• Knowing an effective date is not enough in many cases. • To properly implement a change, you also need to know the “trigger event.” • Dear Colleague Letter GEN-06-02 establishes trigger events for loan program changes.

12

Need Analysis Changes

13

Need Analysis Changes
• The changes to need analysis have two different effective dates:
– July 1, 2006 – For “…determinations of need for periods of enrollment beginning on or after July 1, 2007.”

• The 2007 changes do not present any significant issues:
– The trigger date is very clear – The implementation date is far enough out to allow for orderly change.
14

Need Analysis Changes
• HERA changed the definition of independent student. • Previously, the student had to be a veteran of the Armed Forces to be independent. • This definition has been expanded to include students who are currently serving on active duty in the Armed Forces for other than training purposes. [480(d)(3)] • The definition of currently serving on active duty is found in 481(d)(1)-(5).
15

Need Analysis Changes
• Eligibility for the Simplified Needs Test and Automatic Zero EFC has been changed by HERA. • The receipt of benefits under a means-tested Federal benefit program in the past 12 months qualifies a student or family for simplified needs testing and automatic zero. • HERA provides examples of means-tested Federal benefit programs, and allows ED to identify others.
16

Need Analysis Changes
• Means-tested benefits programs specifically mentioned in HERA are:
– – – – – Supplemental Social Security Income, Food stamps, Free and reduced price school lunch program, Temporary Assistance for Needy Families, and WIC nutrition program. [479(d)]

17

Need Analysis Changes
• For a dependent student, if the student or student’s parents received benefits at some time during the previous 12-month period under such a program:
– the family qualifies for the simplified needs test [479(b)(1)(A)], and – if the parents’ adjusted gross income is $20,000 or less, also qualifies for automatic zero EFC. [479(c)(1)(B)]

18

Need Analysis Changes
• For an independent student, if the student AND spouse (if any) received benefits at some time during the previous 12-month period under such a program, they qualify for the simplified needs test. [479(b)(1)(B)]

19

Need Analysis Changes
• An independent student with dependents other than a spouse qualifies for the simplified needs test and automatic zero EFC if the student and spouse (if any):
– Received benefits at some time during the previous 12month period under such a program, and – Adjusted gross income is $20,000 or less. [479(c)(2)]

20

Need Analysis Changes
• Before HERA:
– The treatment of 529 education savings plans and Coverdell education savings accounts were not addressed, and – 529 prepaid tuition plans were defined as being part of “other financial assistance” (EFA)

• After HERA:
– All of these plans fall under the definition of qualified education benefits and are considered assets. [480(f)(1)] – HERA also stipulates that a qualified education benefit cannot be considered an asset of a dependent student. [480(f)(3)]

21

Need Analysis Changes
• HERA also changed other definitions effective July 1, 2006. • The definition of asset was changed to exclude the net value of a small business if:
– The business has 100 or less full-time or FTE employees, and – The business (or any part of it) is owned and controlled by the family. [480(f)(2)(C)]

22

Need Analysis Changes
• The definition of Estimated Financial Assistance now excludes non-Title IV State assistance designated to offset a specific component of COA. [480(j)(3)]
– An example might be payments from a Department of Rehabilitative Services.

• Some changes were made to the components of the employment expense allowance for clarifying purposes. [478(h)]
23

Need Analysis Changes
• HERA makes several changes for 2007 that will have the effect of lowering Estimated Family Contribution:
– Income protection allowances will be increased by 5% in 2007. – ED has new authority to increase these allowances annually based on:
• The percentage increase in the Consumer Price Index • Rounding to the nearest $10. [478(b)(2)]

24

Need Analysis Changes
• For dependent students, the student income protection allowance will increase from $2,200 to $3,000. [475(g)(2)(D)] • For independent students without dependents other than a spouse, the allowances increase from:
– $5,000 to $6,050 for a single student – $5,000 to $6,050 for married students where both are enrolled – $8,000 to $9,700 for married students where one is enrolled. [476(b)(1)(A)(iv)]
25

Need Analysis Changes
• Assets will also be treated differently in 2007:
– For dependent students, the student contribution is being reduced from 35% to 20% [475(h)] – For independent students without dependents other than a spouse, the asset conversion rate will drop from 35% to 20% [476(c)(4)] – For independent students with dependents, the asset conversion rate drops from 12% to 7%. [477(c)(4)]

26

Cost of Attendance (COA)
• HERA makes two changes to the law regarding Cost Of Attendance (COA). • Before HERA
– COA for less than half-time students was limited to:
• Tuition and fees • Allowance for books, supplies and transportation • Allowance for dependent care. [472(4)]

27

Cost of Attendance (COA)
• After HERA
– Room and board is now included for less than half-time students, but with conditions:
• These costs are limited to a maximum of 3 semesters or the equivalent, and • No more than 2 semesters or the equivalent can be consecutive.

– A new allowable component of COA was added for students in programs requiring professional licensure or certification. [472(13)]
• The one-time cost of obtaining the “first professional credentials” can be added to COA at the school’s option. • The school determines the amount of this allowance.
28

Student, Borrower and Program Eligibility
29

Student & Borrower Eligibility
• Eligibility for students convicted of drug offenses has been liberalized by HERA. • Before HERA, the student lost eligibility for a specified period of time regardless of:
– When the offense occurred, and – Whether the student was receiving Title IV aid at the time.

30

Student & Borrower Eligibility
• After HERA
– The conduct leading to the conviction has to occur during a period of enrollment for which the student was receiving Title IV:
• Grants • Loans • Work assistance. [484(r)(1)]

– If the conduct leading to the conviction does not occur while the student is receiving Title IV aid, a conviction has no effect on the student’s future eligibility for aid.
31

Student & Borrower Eligibility
• HERA adds a new eligibility condition concerning fraud in obtaining funds under Title IV. • Students obtaining Title IV funds through fraud are ineligible for aid if they have:
– Been convicted; – Pled nolo contendere (no contest); or – Pled guilty. [484(a)(6)]

32

Student & Borrower Eligibility
• This provision was also added for parents or graduate or professional students under the PLUS program. [424B(a)(1)(B)] • Students and parents regain eligibility when they have completed repayment to ED or another holder of the loan.

33

Program Eligibility
• Before HERA, the academic year for clock hour programs was:
– A minimum of 30 weeks – During which the student was expected to complete 900 clock hours.

• This meant that students typically could not earn more than 30 clock hours in a given week. • Schools wishing to run clock hour programs like a typical 40-hour workweek were effectively prevented from doing so by this rule.
34

Program Eligibility
• After HERA
– reduces the minimum number of weeks of instruction to 26 for clock hour programs to address this issue. [481(a)(2)(A)(ii)]

• This change is effective July 1, 2006.

35

Student-Program Eligibility
• Before HERA
– Students were generally prohibited from receiving grants, loans or work assistance for correspondence courses. – The exception was if the course led to associate, bachelor or graduate degree. – This limited the growth of distance education by treating correspondence and telecommunications courses as the same thing. – Students were ineligible for aid under previous law if the school offered more than 50% of its total courses via telecommunications and correspondence or if 50% or more of its students were enrolled in correspondence courses.
36

Student-Program Eligibility
• After HERA
– Eliminated the 50% rule, making more students eligible for aid, thus allowing for greater use of distance education. [102(a)(3), 484(l)(1)] – A related change allows students to receive aid for certificate programs of less than one year that are offered by telecommunications. [481(b), 484(l)(1)(A)] – The 50% rule continues to apply to correspondence courses and students.

37

Program Eligibility
• A corresponding change was made to the definition of “institution of higher education.” • Before HERA
– This definition excluded a school that offered more than 50% of the school’s courses by correspondence.

• After HERA
– Changes this definition to exclude telecommunications courses from the 50% limit. [102(a)(3)(A)]
38

Program Eligibility
• A program can be offered in whole or in part through telecommunications if it meets the following criteria:
– It is “otherwise eligible” – It is offered by a U.S. school (foreign schools are specifically excluded) – The school’s accrediting agency determines the school has the capability to effectively deliver distance education programs – The evaluation of distance education is in the accrediting agency’s scope of review – The accrediting agency is approved by ED. [481(b)(3)]
39

Academic Competitiveness Grant and National SMART Grant
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Academic Competitiveness Grant and National SMART Grant Program
• HERA created two new forms of grant aid:
– Academic Competitiveness Grant for the first and second year of a program of undergraduate education – National Science and Mathematics Access to Retain Talent Grant or National SMART Grant for the third and fourth year of a program of undergraduate education.

41

Academic Competitiveness Grant and National SMART Grant Program
• The grants are limited to:
– 1 academic year for the first academic year of a program of undergraduate education – 1 academic year for the second academic year of a program of undergraduate education – 2 academic years for a borrower who is in his/her third or fourth year of a program of undergraduate education

• The Academic Competitiveness Grant and National SMART Grant expire at the end of academic year 2010-2011.
42

Academic Competitiveness Grant and National SMART Grant Program
• ED has been authorized to spend a certain amount of money on these grants each year:
– – – – – $790,000,000 for fiscal year 2006 $850,000,000 for fiscal year 2007 $920,000,000 for fiscal year 2008 $960,000,000 for fiscal year 2009 $1,010,000,000 for fiscal year 2010

• As a result, if there are more eligible students than there is money, the grant amounts could change.
43

Academic Competitiveness Grant and National SMART Grant Program
• If the amount made available each year is less than the amount required to provide grants to all eligible students, the amount of each grant to each eligible student shall be ratably reduced. • If additional amounts are appropriated for any such fiscal year, such reduced amounts shall be increased on the same basis as they were reduced. • At the end of a fiscal year, all excess funds shall remain available for awarding grants during the subsequent fiscal year.
44

Academic Competitiveness and National SMART Grant Program
• Grade level is also a determining factor in the grant amount:
– $750 for the first academic year – $1,300 for the second academic year – $4,000 for the third or fourth academic year

• The amount, in combination with the Federal Pell Grant and other financial assistance, cannot exceed the COA.
45

Academic Competitiveness and National SMART Grant Program
• General Program Requirements
– Eligibility for these grants also varies by grade level, but at all grade levels the student must be:
• • • • Attending a 2- or 4-year degree granting school A U.S. citizen A full-time student Pell eligible

46

Academic Competitiveness Grants
• Academic Competitiveness Grant Requirements
– In the case of a student enrolled or accepted for enrollment in the first academic year:
• Has successfully completed, after January 1, 2006, a rigorous secondary school program of study established by a State or local educational agency and recognized as such by the Secretary, and • Has not been previously enrolled in a program of undergraduate education.

47

Academic Competitiveness Grants
• Academic Competitiveness Grant Requirements
– In the case of a student enrolled or accepted for enrollment in the second academic year:
• Has successfully completed, after January 1, 2005, a rigorous secondary school program of study established by a State or local educational agency and recognized as such by the Secretary and • Has obtained a cumulative grade point average of at least 3.0 at the end of the first academic year of such program of undergraduate education

48

National SMART Grant
• National SMART Grant Requirements
– In the case of a student enrolled or accepted for enrollment in the third or fourth academic year:
• Is pursing a major in the physical, life, or computer sciences, mathematics, technology, or engineering (as determined by the Secretary pursuant to regulations) or • Is pursing a major in a foreign language that the Secretary, in consultation with the Director of National Intelligence, determines is critical to national security of the U.S., and • Has obtained a cumulative grade point average of at least 3.0 in the coursework required for the major.

49

Academic Competitiveness Grants and National SMART Grant Program

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Interest Rate Changes

51

Interest Rates - Stafford
• HERA allows for changes in interest rates • The Higher Education Act already called for Stafford loan rate to change [427A(l)(1)]
– Applies to Stafford loans (sub and unsub) with a first disbursement on or after July 1, 2006 – Rate is fixed at 6.8% – Result – borrowers may have both variable and fixed rate loans

52

Interest Rates - PLUS
• Before HERA, the PLUS rate was scheduled to change to a 7.9% fixed rate • HERA changed this for FFELP borrowers [427A(l)(2)]
– Trigger event is loans with a first disbursement on or after July 1, 2006 – Rate is fixed at 8.5% – Result – borrowers may have both variable and fixed rate loans

• This will also be the rate for FFELP Grad PLUS borrowers
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Interest Rates - PLUS
• HERA did NOT make a corresponding change to the Direct Loan PLUS rate. • This was a drafting error and was unintentional. • The DL PLUS rate will be 7.9% unless Congress takes additional action.

54

Interest Rates - Consolidation
• Consolidation rate did not change
– Fixed rate based on the weighted average of the loans being consolidated – Cap is 8.25%

• FFELP PLUS borrowers will be paying more (8.5%) than the Consolidation cap (8.25%) • Unless Congress acts, FFELP PLUS borrowers could consolidate to obtain a lower rate
55

Interest Rate Disclosures
• The Stafford and PLUS MPN’s have identical interest rate language.
Interest Unless my lender notifies me in writing of a lower rate(s), the rate(s) of interest for my loan(s) is that specified in the Act. Interest rate information is presented in the Borrower’s Rights and Responsibilities Statement accompanying this MPN. The interest rate is presented in a disclosure that is issued to me.
56

Interest Rate Disclosures
• The current Borrower Rights and Responsibilities statements reference variable rates. • Stafford:
13. Interest Rates – The interest rate on a Federal Subsidized Stafford Loan and a Federal Unsubsidized Stafford Loan is a variable rate that is based on a formula established in the Act. The interest rate may be adjusted each year on July. As a result, my interest rate may change annually, but it will never exceed 8.25 percent. After reviewing the actual interest rate, I may cancel or reduce any loan obtained under this MPN in accordance with the “Loan Cancellation” section that follows.
57

Interest Rate Disclosures
• PLUS:
9. Interest Rates – For Federal PLUS loans first disbursed on or after July 1, 1998, the interest rate will be a variable rate, adjusted annually each July 1, not to exceed 9%. The actual interest rate applicable to each of my loans will be disclosed to me. After reviewing the actual interest rate, I may cancel or reduce any loan obtained under this MPN in accordance with the provisions of Item 11, Loan cancellation.

58

Interest Rate Disclosures
• At this time Stafford and PLUS interest rates and other program changes are being disclosed to the borrowers in two ways:
– New borrowers
• The addenda would be integrated into the existing e-sign processes or they are given in hard copy to borrower’s using a paper MPN.

– Serial borrowers
• The Plain Language Disclosure is provided to all borrowers obtaining new loans under an existing MPN.

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Loan Fees

60

Origination Fees
• One of the best provisions of HERA is the gradual elimination (for FFELP) and reduction (for DL) of origination fees. • Since the DL program does not have a guarantee fee, the DL origination fee is 1% higher under both previous and current law.

61

Origination Fees
• The origination fee reductions apply to Stafford loans only – not PLUS. • The fee reductions are based on the first disbursement date, so schools will have some degree of control over the fee a student pays.

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Origination Fees
• The following chart shows the schedule for reducing the origination fees:

[438(c)(2)(B) and 455(c)(2)]
63

Origination Fees
• Before HERA
– The Secretary had the authority to reduce interest rates for DL borrowers “to encourage on-time repayment” if the reductions were:
• Cost neutral, and • In the best financial interest of the Federal Government.

• After HERA
– Allows the Secretary to reduce the Direct Loan origination fee. [455(b)(8)(A)] – The cost neutrality and “best financial interest” standards also apply to any potential reduction in the Direct Loan origination fee.
64

Federal Default Fee
• Until July 1, 2006 guarantors have the authority to charge a guarantee fee not to exceed 1%. • HERA eliminates this fee – but substitutes a very different 1% fee. • For loans guaranteed on or after July 1, 2006 guarantors must pay a 1% Federal default fee into their Federal Reserve Funds. [428(b)(1)(H)(ii), 428H(h)] • This applies to Stafford and PLUS loans only.
65

Federal Default Fee
• This applies to all guarantors, including those operating under a VFA. [428A(a)(1)(C)] • The Federal Default fee may be:
– Deducted from the borrower’s proceeds, or – Paid from “other non-Federal sources.”
• Other non-Federal sources would probably mean the guarantor’s Operating Fund.

– The Guaranty Agency may choose to pay all or any portion of the fee on the borrower’s behalf. – Lender’s may also choose to pay all or any portion of the fee on the borrower’s behalf if the Guaranty Agency doesn’t.
66

Federal Default Fee
• The guarantee fee and Federal Default fee have some obvious similarities:
– Both are 1% – Both can be deducted from loan proceeds.

• However, if a guarantor chooses not to charge the borrower, the fees are very different:
– For the guarantee fee, it represents revenue not received – For the Federal Default fee, it represents an expense to the agency’s Operating Fund.

67

Federal Default Fee
• Guarantors use their Operating Funds to pay for most of their activities including:
– – – – Training Publications Default prevention activities Sponsorships.

• To the extent that the guarantor pays the Federal default fee on the borrower’s behalf, this is less money the guarantor can spend on these activities.
68

Federal Default Fee
• There is one operational note schools need to keep in mind based on the effective date of the fee. • Because the fee is based on the date of guarantee, schools may not know whether a fee was imposed until after the loan is guaranteed. • Another operational issue is that disbursement amounts could vary by guarantor for the same gross loan amount. • The default fee is to be deducted proportionately from each disbursement prior to disbursing to the borrower.
69

Graduate and Professional PLUS Loans (Grad PLUS)
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Grad PLUS Loans
• HERA amends Section 428B of the HEA to make graduate and professional students eligible for PLUS loans. • Dear Colleague Letter GEN-06-02 establishes the trigger date for these loans. • For FFELP, the trigger is loans certified on or after July 1, 2006. • For DL, the trigger is loans originated on or after July 1, 2006.
71

Grad PLUS Loans
• HERA simply added the phrase “graduate or professional student” before each instance of the word “parent”. • This means that all eligibility and qualifying conditions that previously applied only to parents will also apply to graduate and professional students, notably:
– – – – No adverse credit history Determining maximum loan amount – COA less EFA Interest rate Repayment requirements.
72

Grad PLUS Loans
• Dear Colleague Letter GEN-06-02 adds two requirements for Grad PLUS loans:
– Students are required to complete the FAFSA and – Students must first apply for their maximum annual Stafford eligibility, both subsidized and unsubsidized.

• Borrowers under the Grad PLUS program may decline the Stafford loan.

73

Grad PLUS Loans
• Every graduate or professional student obtaining a PLUS loan will have to complete and sign the PLUS MPN. • The student must complete both the parent and student sections of the application until a new form is published.

74

Grad PLUS Loans
• Law and regulations require PLUS repayment to begin within 60 days of final disbursement. • Grad PLUS borrowers are not exempt from this requirement. • Grad PLUS borrowers are eligible for a deferment or forbearance while in school.

75

Grad PLUS Loans
• For new borrowers on or after July 1, 1993 the regulations say: (2) In-school deferment. An eligible borrower is entitled to a deferment based on the borrower’s at least half-time study in accordance with the rules prescribes in §682.210(c), except that the borrower is not required to obtain a Stafford or SLS loan for the period of enrollment covered by the deferment.

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Grad PLUS Loans
• The Grad PLUS borrower does not have to file a deferment form:
(c) In-school deferment. (1) Except as provided in paragraph (c)(5) of this section the lender processes a deferment for full-time study or half-time study at a school when – (i) The borrower submits a request and supporting documentation for a deferment; (ii) The lender receives information from the borrower’s school about the borrower’s eligibility in connection with a new loan; or (iii) The lender receives student status information from the borrower’s school, either directly or indirectly. 77

Grad PLUS Loans
• Electronic processing will require Commonline and CRC changes. • NCHELP Electronic Standards Committee is evaluating adding new codes:
– Loan type for CL4 and CL5 – Form Type for CL4, CL5 and CRC – Award Type for CLC.

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Loan Limits

79

Loan Limit Increases
• HERA increases the annual loan limits for certain borrowers • 34 CFR 682.204 • Aggregate undergraduate loan limits did not increase. • The Final Regulations published on November 1, 2006 changed the trigger event from “for a loan certified” to “for a loan disbursed" on or after July 1, 2007.
80

Loan Limit Increases
• The annual Stafford loan limit for students who have not completed the first year of a program of undergraduate study is increased from $2,625 to $3,500. [428(b)(1)(A)(i)(I)] • For second year undergraduates, the annual Stafford loan limit is increased from $3,500 to $4,500. [428(b)(1)(A)(ii)(I)]

81

Loan Limit Increases
Federal Stafford Annual Loan Maximums
DEPENDENT UNDERGRADUATES First Year Second Year Third Year and Beyond Subsidized Total (subsidized and unsubsidized) $2,625  $3,500 $3,500  $4,500 $5,500

$2,625  $3,500 $3,500  $4,500 $5,500

Federal Stafford Aggregate Loan Maximums
DEPENDENT UNDERGRADUATES $23,000 $23,000

82

Loan Limit Increases
• One limit did not change - $4,000 for preparatory coursework necessary for enrollment in an undergraduate degree or certificate program. • HERA raises the unsubsidized Stafford loan limits for preparatory coursework and teacher certification programs for students who have already earned their Baccalaureates.

83

Loan Limit Increases
• The annual unsubsidized Stafford loan limit is raised from $5,000 to $7,000 for:
– Preparatory coursework necessary for enrollment in a graduate or professional program, [428H(d)(2)(D)(i)] and – Teacher certification programs. [428H(d)(2)(D)(ii)]

• The Final Regulations published on November 1, 2006 changed the trigger event from “for a loan certified” to “for a loan disbursed" on or after July 1, 2007.
84

Loan Limit Increases
• The annual unsubsidized loan limit for graduate and professional students will rise from $10,000 to $12,000. [428H(d)(2)(C)] • The Final Regulations published on November 1, 2006 changed the trigger event from “for a loan certified” to “for a loan disbursed" on or after July 1, 2007.

85

Loan Limit Increases
Federal Stafford Annual Loan Maximums
INDEPENDENT Subsidized UNDERGRADUATES First Year Second Year Third Year and Beyond B.A./B.S. in degreegranting or prof. B.A./B.S. in teacher certification GRADUATE and PROFESSIONAL $2,625  $3,500 $3,500  $4,500 $5,500 $5,500 $5,500 $8,500 Unsubsidized $4,000 $4,000 $5,000 $5,000  $7,000 $5,000  $7,000 $10,000  $12,000 Total Subsidized & Unsubsidized $6,625  $7,500 $7,500  $8,500 $10,500 $10,500  $12,500 $10,500  $12,500 $18,500  $20,500
86

Loan Limit Increases
• The combined aggregate limit for graduate and professional students of $138,500 is not found in law – only in regulation. [682.204(e)(2)] • Because of the change in law, the Secretary may have to increase the aggregate limit found in regulation. [428H(d)(3)]

87

Loan Limit Increases
Federal PLUS Annual Loan Maximums
Grad PLUS borrowers Parent borrowers COA minus other financial aid COA minus other financial aid

Federal PLUS Aggregate Loan Maximums
Grad PLUS borrowers Parent borrowers None None

88

Disbursement Rule Changes

89

Disbursement Rule Changes
• HERA restores two popular disbursement rules that expired on October 1, 2002:
– Qualifying schools do not have to make multiple disbursements for single-term (one semester, one trimester, one quarter or 4 months) loans [428G(a)(3)] – Qualifying schools do not have to wait 30 days to deliver loan funds to first-year, first-time borrowers [428G(b)(1)]

90

Disbursement Rule Changes
• To qualify, schools must have a cohort default rate of less than 10% for each of the most recent 3 years for which data are available. • This change took effect on the date of enactment February 8, 2006. • The trigger is any disbursement made on or after February 8, 2006.

91

Disbursement Rule Changes
• HERA also modified disbursement rules for students studying abroad. [428(b)(1)(N)(2)] • Before HERA
– Disbursements were made directly to the student upon the student’s request if:
• Student was enrolled in a U.S. school in a study abroad program, or • Student was enrolled in a foreign school

92

Disbursement Rule Changes
• After HERA
– Students studying abroad:
• Student can still receive a direct disbursement upon request, however • Disbursement cannot be made until the enrollment is verified by the lender or guarantor.

– Students enrolled in an eligible foreign institution:
• The request for disbursement directly to the student must be made by the foreign institution, and • Disbursement cannot be made until the enrollment is verified by the lender or guarantor.

• The trigger is for loans first disbursed on or after July 1, 2006.
93

Disbursement Rule Changes
• Foreign schools are no longer exempt from multiple disbursement requirements and must delay delivery of the first disbursement to a first-time undergraduate for 30 days. • The trigger is for loans with loan periods on or after July 1, 2006.

94

Disbursement Rule Changes
• ED already had rules in place requiring verification of enrollment for students enrolled in a foreign school. [DCL G-03-348] • Lenders and guarantors will have to determine method for verifying enrollment for students in study abroad programs.

95

Disbursement Rule Changes
• School responsibilities for late disbursements are changed by HERA. • Once a school has determined a borrower’s eligibility for a late disbursement or postwithdrawal disbursement, the school must:
– Contact the borrower – Explain to the borrower the obligation to repay the loan funds following such a disbursement

• The Federal Register published November 1, 2006 clarifies that this provision only applies to postwithdrawal disbursements for withdrawn students.
96

Disbursement Rule Changes
• The school must then:
– Obtain the borrower’s confirmation that the loan funds are still required – Document the borrower’s file with “the result of such contact and the final determination made concerning such disbursement.” [484B(a)(4)(A)]

97

Disbursement Rule Changes
• HERA made some other minor disbursement rule changes. • Law previously allowed lenders to fund disbursements through escrow accounts up to 21 days before disbursement. Maximum is now 10 days. [428(i)(1)] • Limits the interest lenders can receive on loans disbursed through an escrow agent to no more than 3 days before the first disbursement. [428(a)(3)(A)(v)]
98

Direct Loan Repayment Plans

99

Direct Loan Repayment Plans
• HERA requires that the repayment plans offered in the Direct Loan Program must generally be the same as those offered in the FFEL program under section 428(b)(9). This applies to standard, graduated and extended repayment plans. • Except: Direct Loan will continue to offer the Income Contingent Repayment Plan and FFEL will continue to offer the Income-Sensitive Plan.
100

Direct Loan Repayment Plans
• Before HERA
– The Direct Loan graduated plan allowed terms from 12 to 30 years based upon the balance.

• After HERA
– Standard and Graduated repayment plan must be paid over a fixed period not to exceed 10 years, regardless of amount

• Effective for Direct loan borrowers who enter repayment on their loans after July 1, 2006
101

Direct Loan Repayment Plans
• Before HERA
– Direct Loan’s extended plan also allowed terms from 12 to 30 years based upon the balance.

• After HERA
– Applies to new borrowers on/after October 7, 1998 – Must have more than $30,000 in loans after October 7, 1998 – Repayment cannot exceed 25 years – Effective for Direct Loan borrowers entering repayment on or after July 1, 2006
102

Direct Loan Repayment Plans
• Direct Loan Consolidation Borrowers repayment plan changes options that are offered to borrowers.
– Standard or graduated – 10-year maximum term – Extended – 25-year maximum for new borrowers on/after 10/7/1998 with $30,000+ debt – For borrowers with $30,000+ debt: • $30,001 through $39,999 – 20-year maximum term • $40,000 through $59,999 – 25-year maximum term • $60,000 and above – 30-year maximum term
103

Consolidation Loans

104

Consolidation Loans
• In some respects, HERA is as important for what it did not change about Consolidation as for what it did:
– The interest rate is unchanged.

• The changes that were made:
– Add parity between Direct and FFELP Consolidation loans – Generally put more restrictions on Consolidation loans regardless of the program.
105

Consolidation Loans
• Two sections of the Higher Education Act regarding Direct Consolidation loans were changed. • Before HERA, the HEA required “parallel terms, conditions, benefits, and amounts” for FFELP and Direct Stafford and PLUS loans – but not Consolidation. • Direct Consolidation loans were added to this requirement. [455(a)(1)] • The trigger event for this provision is applications received by Direct Loans on or after July 1, 2006.
106

Consolidation Loans
• Additional language was added to this section requiring:
– DL Consolidation borrowers to meet the same eligibility requirements as FFELP Consolidation borrowers – The Secretary has to comply with the same requirements as a FFELP Consolidation lender.

107

Consolidation Loans
• HERA explicitly eliminates in-school consolidation in both the Direct Lending and FFEL programs. • This change in the law eliminates the ability of a borrower to request to enter repayment before the end of the grace period. [428(b)(7)] • Trigger event – borrower requests received by lenders on or after July 1, 2006 will be denied.
108

Consolidation Loans
• The law requires Consolidation borrowers to be in grace or a repayment status, so this new provision effectively eliminates in-school consolidation. [428C(a)(3)] • This also eliminates in-school consolidation in DL due to the requirement for “parallel terms.”

109

Consolidation Loans
• HERA also eliminates spousal consolidation. [Deletes 428C (a)(3)(C)] • This applies to both FFEL and Direct Loans. • The trigger is Consolidation applications received on or after July 1, 2006.

110

Consolidation Loans
• HERA eliminates the ability of a borrower to reconsolidate a consolidation loan between the FFEL and DL programs. [428C(a)(3)(B)(i)] • There is an exception to this if:
– A FFELP Consolidation borrower seeks a DL Consolidation to obtain an income-contingent repayment plan, and – The FFELP Consolidation loan has been submitted to the guarantor for default aversion assistance. [428C(a)(3)(B)(v)]

• The trigger event is consolidation applications received on or after July 1, 2006.

111

Deferment & Forbearance Changes

112

Deferment and Forbearance
• A new deferment for military service was added to the Higher Education Act
– Section 428(b)(1)(M) adds a new deferment for military service for FFELP borrowers – Direct Loan borrowers get the same benefit [455(f)(2)(C)] – Perkins borrowers were also included in this change [464(c)(2)(A)]

• Effective date is for loans with the first disbursement on or after July 1, 2001.
113

Deferment and Forbearance
• Consolidation loans also qualify for this deferment, but...
– All of the borrower’s Title IV loans being consolidated must have a first disbursement on or after July 1, 2001.

114

Deferment and Forbearance
• The effective date creates some issues:
– Deferments have typically been borrower-based, NOT loan-based – Creates situation where a borrower may have some loans in deferment but others in repayment – Because the effective date is retroactive, borrower could have made payments on loans that could have been in deferment
• Nothing in the amendments made by this section shall be construed to authorize any refunding of any repayment of a loan.
115

Deferment and Forbearance
• Deferment is limited to not in excess of 3 years… • To qualify the borrower must be:
– serving on active duty during a war or other military operation or national emergency; or – performing qualifying National Guard duty during a war or other military operation or national emergency;

• This wording requires that the law contain some definitions.

116

Deferment and Forbearance
• Active Duty
– The term `active duty' has the meaning given such term in section 101(d)(1) of title 10, United States Code, except that such term does not include active duty for training or attendance at a service school. – Section 101(d)(1) of title 10, USC – The term “active duty” means full-time duty in the active military service of the United States. Such term includes fulltime training duty, annual training duty, and attendance, while in the active military service, at a school designated as a service school by law or by the Secretary of the military department concerned. Such term does not include full-time National Guard duty.
117

Deferment and Forbearance
• Military Operation
– A contingency operation as such term is defined in section 101(a)(13) of title 10, United States Code. – Section 101(a)(13) of title 10, USC – The term “contingency operation” means a military operation that—
• (A) is designated by the Secretary of Defense as an operation in which members of the armed forces are or may become involved in military actions, operations, or hostilities against an enemy of the United States or against an opposing military force; or • (B) results in the call or order to, or retention on, active duty of members of the uniformed services under section 688, 12301 (a), 12302, 12304, 12305, or 12406 of this title, chapter 15 of this title, or any other provision of law during a war or during a national emergency declared by the President or Congress.”
118

Deferment and Forbearance
• National Emergency
– The national emergency by reason of certain terrorist attacks declared by the President on September 14, 2001, or subsequent national emergencies declared by the President by reason of terrorist attacks.

119

Deferment and Forbearance
• Serving on active duty during a war or other military operation or national emergency means service by an individual who is:
– A Reserve of an Armed Force ordered to active duty under section 12301(a), 12301(g), 12302, 12304, or 12306 of title 10, United States Code, or any retired member of an Armed Force ordered to active duty under section 688 of such title, for service in connection with a war or other military operation or national emergency, regardless of the location at which such active duty service is performed; and – Any other member of an Armed Force on active duty in connection with such emergency or subsequent actions or conditions who has been assigned to a duty station at a location other than the location at which such member is normally assigned.
120

Deferment and Forbearance
• Qualifying National Guard Duty
– Service as a member of the National Guard on full-time National Guard duty (as defined in section 101(d)(5) of title 10, United States Code) under a call to active service authorized by the President or the Secretary of Defense for a period of more than 30 consecutive days under section 502(f) of title 32, United States Code, in connection with a war, other military operation, or a national emergency declared by the President and supported by Federal funds. – Section 101(d)(5) of title 10, USC – The term “full-time National Guard duty” means training or other duty, other than inactive duty, performed by a member of the Army National Guard of the United States or the Air National Guard of the United States in the member’s status as a member of the National Guard of a State or territory, the Commonwealth of Puerto Rico, or the District of Columbia under section 316, 502, 503, 504, or 505 of title 32 for which the member is entitled to pay from the United States or for which the member has waived pay from the United States.
121

Deferment and Forbearance
• This has required the creation of a new form and is currently waiting approval from OMB. • DCL GEN-06-02 lists the documentation requirements:
– Copy of the borrower’s military orders, or – Statement from the borrower’s commanding or personnel officer indicating the borrower is serving in a capacity that meets the terms of this deferment

122

Deferment and Forbearance
• HERA makes it easier for borrowers to obtain forbearance.
– It eliminates the requirement that forbearance be “in writing”, a provision originally included in the Fed Up legislation. [428(c)(3)] – This applies to all types of forbearance but still requires documentation where applicable.

• The trigger is agreements entered into or renegotiated with a borrower on or after July 1, 2006.
123

Deferment and Forbearance
• To document the forbearance, the lender must:
– confirm the agreement of the borrower by notice to the borrower from the lender and – recording the terms in the borrower’s file. [428(c)(10)]

• DCL GEN-06-02 indicates these additional steps apply to non-written forbearance.

124

School as Lender

125

School as Lender
• HERA contains two new lender eligibility requirements:
– The school must have met the requirements to be an eligible lender as of February 7, 2006 and – The school must have made a loan on or before April 1, 2006. [435(d)(2)(A)(ix)]

• There are no provisions for approving new school as lender applications after April 1, 2006. • Schools that are lenders may continue to make loans, but with some new conditions.
126

School as Lender
• Under HERA, as of July 1, 2006, school lenders:
– – – – – Cannot make loans to undergraduate students Cannot make PLUS loans to parents or graduate/professional students Cannot make a loan to a borrower not enrolled at that school Can make both subsidized and unsubsidized Stafford loans to graduate or professional students Must offer a lower origination fee and/or interest rate than the maximum allowed by law for any loans first disbursed on or after July 1, 2006. [435(d)(2)(A)] 127

School as Lender
• New restrictions on school lenders:
– Cannot have a cohort default rate greater than 10% (previously 15%) – Must use a competitive basis for awarding a contract for financing, servicing or administering loans – Must submit an annual lender compliance audit to ED

128

School as Lender
• New restrictions on school lenders:
– Earnings from any special allowance payments, interest payments from borrowers, interest subsidy from ED, and any other proceeds from the sale or other disposition of loans must be used for need-based grant aid and must supplement, not supplant non-federal funds that would otherwise go toward grant aid. [435(d)(2)(A) & (C)]

129

School as Lender
• Administrative Expenses:
– School may use special allowance interest payments and interest subsidy payments, and any proceeds from the sale or other disposition of loans for reasonable and direct administrative expenses. [435(d)(2)(B)]

130

Miscellaneous Part B Changes
131

Miscellaneous Part B Changes
• There are a few other changes to Part B of the HEA worth mentioning:
– ED now has the authority to standardize forms and procedures regarding the anticipated graduation date. [432(l)(1)(H)] – ED funding in Section 458 of the HEA is no longer mandatory. It is now subject to the annual appropriations process. [458] – Requires guarantors to file for reinsurance within 30 days rather than 45 days. [428(c)(1)(A)]

132

Reductions in Lender Income

133

Reductions in Lender Income
• Some of the ways lender income will be reduced are:
– For loans with a first disbursement on or after July 1, 2006, default claims will be paid at 97% instead of 98% [428(b)(1(G)(ii)] – Lenders designated as exceptional performers, or a lender contracting with a servicer designated as an exceptional performer, will be paid 99% instead of 100% on default claims submitted to the guarantor on or after July 1, 2006. [428I(b)(1)]
134

Reductions in Lender Income
• Elimination of the 9.5% minimum yield on loans made or purchased with pre-October 1, 1993, taxexempt funding when such tax-exempt funding is refunded on or after September 30, 2004, including when such loans are no longer held in minimum yield eligible tax-exempt funds on or after September 300, 2004. [438(b)(2)(B)(iv) & (v)]

135

Reductions in Lender Income
• Elimination of “recycling” for loans made or purchased on or after February 8, 2006, and for loans held by the lender that are not receiving the minimum yield for eligible tax-exempt funding as of February 8, 2006. [438(b)(2)(B)(vi) & (vii)]

136

Reductions in Lender Income
• Permitted exceptions until December 31, 2010, in the case of a holder that is, on February 8, 2006, and during the applicable quarter for which special allowance is paid:
– A unit of State or local government or a nonprofit private entity; – Not owned or controlled by, or under the common ownership or control with, a for-profit entity; and – Held, directly or through any subsidiary, affiliate, or trustee, a total unpaid balance of principal equal to or less than $100,000,000 on loans for which special allowances were paid at 9.5% in the most recent quarterly payment prior to September 30, 2005.
137

Reductions in Lender Income
• For loans first disbursed on or after April 1, 2006, lenders are required to remit “excess interest” back to ED when the special allowance calculation for a given quarter is at a rate that is less than the applicable interest rate. [438(b)(2)(I)(v)] • ED intends to collect the excess interest from lenders quarterly

138

Special Allowance Payments

139

Special Allowance Payments
• HERA corrects the “SAP Gap.” • This eliminates the restriction placed on the amount of special allowance that may be paid on PLUS and Consolidation loan payments made on or after April 1, 2006. [438(b)(2)(I)(iii) & (iv)]

140

Teacher Loan Forgiveness

141

Teacher Loan Forgiveness
• HERA makes permanent the loan forgiveness provisions in the Taxpayer-Teacher Protection Act of 2004. • The Taxpayer-Teacher Protection Act provides for increased loan forgiveness of up to $17,500 for Stafford borrowers meeting certain teaching requirements.

142

Teacher Loan Forgiveness
• The Taxpayer-Teacher Protection Act took effect October 30, 2004. • The Teacher-Taxpayer Act was passed as a budget bill, as a result, it expired at the end of the 2005 Federal fiscal year – September 30, 2005. • HERA retroactively eliminated the ending date for this program ensuring no break in benefits under this program.
143

Teacher Loan Forgiveness
• The Taxpayer-Teacher Protection Act defines an eligible borrower as one:
– Who has taught at least 5 years in an eligible lowincome (Title I) school and is a • Secondary school math or science teacher, or • Special education teacher, and

– Who is “highly qualified” as defined in No Child Left Behind (NCLB).

144

Teacher Loan Forgiveness
• HERA allows teachers in private schools, not subject to state certification, to qualify for forgiveness if they pass grade level and subject matter competency tests. Competency tests must be accepted by at least 5 States. • Score must meet or exceed the average passing score. [428J(g)(3) and 460(g)(3)] • Effective for Teacher Loan Forgiveness discharge applications received on or after July 1, 2006.
145

Teacher Loan Forgiveness
• The teacher loan forgiveness program now has qualifications that apply to all borrowers and other qualifications that apply to certain borrowers • Standard qualifications for all borrowers:
– New borrower on or after October 1, 1998 – Employed full time for at least 5 complete years at an eligible low-income school (Title 1) – Is highly qualified – Is not in default on loan seeking forgiveness or has made payment arrangements to regain Title IV eligibility.
146

Teacher Loan Forgiveness
• To qualify for up to $5,000 in forgiveness, the teacher must meet the standard qualifications. • To qualify for up to $17,500 in forgiveness, the teacher must meet the standard qualifications as well as being:
– A full-time secondary school math or science teacher, or – A special education teacher whose primary responsibility is to teach children with disabilities, and – “Highly qualified” as defined by NCLB.
147

Teacher Loan Forgiveness
• If the teaching service began before October 30, 2004, the teacher must:
– Be a full-time elementary teacher with demonstrated knowledge and teaching skills in reading, writing, math and other areas of elementary school curriculum, – Be a full-time secondary school teacher in a subject relevant to the teacher’s academic major, or – Have taught full-time in an elementary or secondary school, and was a highly qualified elementary or secondary teacher.

148

Teacher Loan Forgiveness
• After October 30, 2004, the teacher must be a fulltime elementary or secondary school teacher and be “highly qualified” as defined by NCLB.

149

Institutional Refunds

150

Institutional Refunds
• Before HERA
– Students could only have one leave per 180 days in any 12 month period

• After HERA
– Students may have multiple leaves of absences that total no more than 180 days in any 12 month period [484B(a)(2)(A)] – Institutions have 45 days from the day of determining the student has withdrawn to return any unearned funds.
• Increase from 30 days

– Clock hour schools may now use scheduled hours to determine whether the student has completed at least 60% of the loan period and therefore is eligible for 100% of their aid.

151

Institutional Refunds Institutional Refunds
• Late disbursements:
– Schools must contact the borrower and obtain confirmation that the borrower still requires the funds before delivering funds to withdrawn students. – School must include borrower’s obligation to repay said funds in communication – Borrower’s decision must be documented in file

152

Institutional Refunds
• HERA allows schools more time to return Title IV funds. • The law did not previously set a time limit for the return of funds. • Regulations required that funds be returned within 30 days of determining that the student withdrew. [See 668.22(j)(1)] • The law now requires schools to return Title IV funds not later than 45 days from the determination of withdrawal. [484B(b)(1)]
153

Institutional Refunds
• HERA also changes the rules regarding grant overpayments. • Previously, the law stated that students did not have to return 50% of the grant funds that were overpaid. • Now students will only be required to return:
– The amount that exceeds 50% of the total grant assistance, or – Nothing if the amount is $50 or less. [484B(b)(2)(C)]
154

False Certification

155

False Certification
• A new condition for discharge was added to the HEA – false certification as a result of a crime of identity theft. [437(c)(1)] • This applies to student borrowers and students on whose behalf a parent borrowed. • DCL GEN-06-02 indicates that regulations will be developed for this new discharge option.

156

False Certification
• In the interim, if the borrower presents reasonably persuasive evidence of identity theft on or after July 1, 2006:
– Lenders may provide administrative forbearance – Guarantors may suspend default collection activities.

157

Defaulted Loans

158

Defaulted Loans
• Provides incentives for rehabilitation of defaulted borrowers. • Provides disincentives for bringing borrowers out of default through consolidation.

159

Defaulted Loans
• Before HERA
– The law required defaulted borrowers to make payments for 12 consecutive months to rehabilitate their loans.

• After HERA
– – – – Requires only 9 payments [428F(a)(1)(A)] Must be made within 20 days of the due date Must be made during 10 consecutive months Effectively allows one skipped payment without having to start the rehabilitation process over
160

Defaulted Loans
• After HERA
– Guarantors can charge and retain no more than 18.5% in collection costs when the rehabilitated loan is sold to a lender [428F(a)(1)(C)]

161

Defaulted Loans
• There are effectively two trigger dates:
– July 1, 2006 for all new rehab agreements – For rehab agreements beginning before July 1, 2006, the guarantor has the option to apply the new standard if at least one payment is made on or after July 1, 2006 – All borrowers in the same situation must be treated the same [DCL GEN-06-02]

162

Defaulted Loans
• Several new provisions discourage guarantors from recovery of defaulted loans through consolidation. • Effective July 1, 2006, HERA requires guaranty agency agreement with ED to contain procedures to preclude consolidation lending from being an excessive proportion of guaranty agency recoveries. [428(c)(2)(A)(ii)]

163

Defaulted Loans
• Collection costs are effectively limited to 10%, effective on or after October 1, 2006 [428(c)(6)(B)]
– Guarantors cannot charge more than 18.5% in collection costs on consolidation of defaulted loans (same as rehabs), but – Must remit 8.5% to ED

164

Defaulted Loans
• On or after October 1, 2009:
– Guaranty agency recoveries through consolidation greater than 45% of total collections on defaulted loans are considered excess consolidation proceeds. – Guaranty agencies must remit all collection costs to ED on each defaulted loan paid off with excess proceeds. [428(c)(6)(B) and (C)]

165

Defaulted Loans
• HERA also provides an incentive for defaulted borrowers to choose rehabilitation or consolidation • Guaranty agencies will be able to garnish up to 15% of defaulter’s disposable pay, up from 10% [488A(a)(1)], effective July 1, 2006 • Brings HEA into line with garnishment rates for other types of debts owed to the Federal government
166

Defaulted Loans
• Guaranty agencies will be able to garnish up to 15% of defaulter’s disposable pay, up from 10%, effective July 1, 2006 [488A(a)(1)] • Brings HEA into line with garnishment rates for other types of debts owed to the Federal government

167

Defaulted Loans
• DCL GEN-06-02 clarifies that guaranty agencies can increase the withholding rate for borrowers currently in Administrative Wage Garnishment (AWG) who are being garnished at pre-July 1, 2006 rates • Guaranty agency must notify pre-July 1, 2006 borrowers that:
– They can obtain a hearing upon request on the basis of undue hardship; and – They may request a reconsideration of the existence or amount of the debt if new information is available that was not presented at the initial AWG hearing
168

College Access Initiative

169

College Access Initiative
• HERA added a completely new section to the HEA called “College Access Initiative.” [485D] • This section formalizes the role of guarantors in promoting college access. • Guarantors have two main responsibilities:
– Information collection – Promotion of college access.

170

College Access Initiative
• Guarantors are required to develop a “comprehensive listing of the postsecondary education opportunities, programs, publications, Internet web sites and other services available in the States for which such agency serves as the designated guarantor.” • This information will be provided to ED for the development of a web site.

171

College Access Initiative
• NCHELP has formed a committee to coordinate guaranty agency compliance with this requirement. • Guarantors are working with Mapping Your Future to provide this information to the public.

172

College Access Initiative
• Guarantors are also required to promote postsecondary access by providing information on:
– College planning – Career preparation – Paying for college

• This effort must be coordinated with other entities in the State that provide or distribute similar information.
173

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