Having passed the effective date, July 1, 2006, for many changes brought about by the Higher Education Reconciliation Act of 2005 (HERA), we present the following highlights and have identified some additional resources to help you stay current on the topic.
This summary represents some of the major school and borrower provisions.
Annual Stafford Loan Limits
- The Department of Education changed the trigger event on loan limits from:
- Loans certified (FFEL) or originated (DL) on or after July 1, 2007, to
- Loans disbursed on or after July 1, 2007.
- Federal Register Vol. 71, No. 211 published on November 1, 2006 provided regulations for the HERA changes and gave the updated trigger event for the loan limits.
- Because the trigger event is loans that are disbursed, schools will be able to certify loans according to the increased limits earlier than July 1, 2007, but Stafford loans for these limits cannot be disbursed until on or after July 1, 2007.
- Effective for loans certified on or after July 1, 2006, the PLUS loan program has expanded to allow graduate and professional students to borrow a PLUS loan. These loans will be made under the same terms and conditions that apply to parents in the existing PLUS program.
- PLUS graduate/professional borrowers must complete the Free Application for Federal Student Aid (FAFSA), and schools must certify the maximum amount for which the student is eligible in Stafford loans. However, the borrower need not apply for, and the school must not require the student receive, any Stafford loan in order to be eligible for the PLUS loan.
- The HERA refrained from interfering with the scheduled switch to fixed rates for both Stafford and PLUS loans (6.8% and 7.9%, respectively); however, HERA increased the fixed PLUS loan interest rate to 8.5% for FFELP PLUS loans. Interest rate provisions are effective for all new Stafford and PLUS loans disbursed on or after July 1, 2006.
Federal Default Fee
- Effective for loans guaranteed on or after July 1, 2006, guarantors are required to deposit a 1% Federal Default Fee (previously Guarantee Fee), which may be deducted from the loan proceeds or paid by non-federal sources (e.g., lenders).
Borrower Origination Fee
- Beginning with loans first disbursed on or after July 1, 2006, the maximum origination fee dropped from 3% to 2%. Each year thereafter, the maximum percentage declines until the origination fee is eliminated in 2010.
- PLUS borrowers (parents and graduate/professional students) must still be charged a 3% origination fee.
School as Lender (SAL)
- Effective July 1, 2006, SAL provisions changed as follows:
- Cohort Default Rate cannot exceed 10% (used to be 15%).
- Schools must submit an annual SAL compliance audit.
- All earnings, including those from special allowance, interest payments, and any proceeds from the sale of loans – except for reasonable reimbursement of direct administrative expenses – must be used for need-based grant programs.
- Note: A Federal Register published November 1, 2006, contains a full page of commentary by the Department which outlines expectations. Reference page 64390 of the November 1, 2006 Federal Register document.
- SALs can only make subsidized and unsubsidized Stafford loans to graduate or professional students enrolled at the school (i.e., no PLUS loans or loans to undergraduates).
- The SAL must offer loans with origination fees, interest rates, or both that are lower than those authorized to be charged under the Higher Education Act.
- SALs must award contracts for financing, servicing, or administration on a competitive basis.
- Effective for any disbursement made on or after February 8, 2006, waivers of the multiple disbursement requirement and the 30-day delayed delivery requirement for first-time, first-year students are available to schools with a cohort default rate of less than 10% for the three most recent fiscal years.
- Foreign schools must have low cohort default rates to qualify for the waivers, effective for loans with loan periods beginning on or after July 1, 2006.
Other Useful Resources