March 16, 1999
Volume 99 - Issue 16

As you are aware, the Common Manual Governing Board periodically approves modifications to the Common Manual. Recently, several policies were approved to modify the Common Manual. These changes will be incorporated into the Common Manual when the next annual update is published.

Attached are interim updates to the Common Manual which address additional Common Manual policy revisions approved on February 18, 1999. Pay particular attention to the effective dates for these interim policy updates.

Any questions related to the attached Common Manual interim policy updates should be directed to the Policy and Training Department at (801) 321-7166.

Attach.

Chapter 3 - Lender Participation

3.1. ELIGIBLE LENDER

New Lender Eligibility Provisions
The Higher Education Amendments of 1998 make two changes to the statutory definition of "eligible lender." In addition to the criteria that have existed for some years, lenders meeting either of the following criteria are eligible to participate in the FFELP:
 

A bank (as defined in section 3(a)(1) of the Federal Deposit Insurance Act) that is a wholly-owned subsidiary of a tax-exempt, nonprofit foundation (as described in section 501(c)(3) of IRS Code of 1986, and exempt from taxation under section 501(1) of the Code), for purposes of making FFELP loans only to undergraduate students aged 22 or younger, provided the bank's FFELP portfolio does not exceed $5 million.

A consumer finance company subsidiary of a national bank that, on October 7, 1998, acted as a small business lending company (as defined in regulations prescribed by the Small Business Administration) through one or more subsidiaries. The bank's direct and indirect subsidiaries together must not have as their primary consumer function the making or holding of education loans.

These changes have been added to section 3.1 of the Common Manual, and are effective retroactively to October 1, 1998, for banks that are wholly-owned subsidiaries of tax- exempt, nonprofit foundations, and to October 7, 1998, for consumer finance company subsidiaries as described above. The provisions are enforceable by the Department of Education, and as such, the trigger event will be determined by the Department.

3.3. APPROVAL FOR PARTICIPATION

Transfer of Loan Guarantee
Previously, guarantors had various policies regarding the criteria for the transfer of a loan's guarantee from one guarantor to another. Although federal regulations specify two key criteria, policies were not consistent regarding the other parameters for the loan to remain insured with the new guarantor. The Common Manual guarantors have identified two general categories of guarantee transfers. In some cases, a borrower requests that a loan's guarantee be transferred from one guarantor to another in order to have all of his or her loans administered under a single guarantor. In other cases, lenders may request the change of guarantee based on changes in servicer or guarantor relationships.

In the case of a borrower-requested guarantee transfer, the transfer may occur only if the borrower's request is obtained in writing, and the holder and both guarantors agree to the transfer. In the case of a loan made to two borrowers as comakers, both borrowers must request the transfer in writing.

A guarantor will not accept a borrower-requested transfer of guarantee on any loan for which any one of the following conditions exist:

The loan reflects or should reflect a stay of collection activities based on the borrower's filing of a bankruptcy action.

The loan is 30 or more days delinquent.

The loan is currently filed as a claim with the transferring guarantor.

The lender does not know the current address of the borrower.

The lender must certify in writing to the guarantor accepting the transfer that, according to its records at the time of transfer, none of these conditions exist for the loan being transferred.

A guarantee may be transferred without the borrower's request only with the prior approval of the Department, the loan's holder, and both guarantors.

Prior to any guarantee transfer, the lender of the loan must have an active agreement with the guarantor accepting the transfer. The lender also must obtain in writing the borrower's request or the Department's approval, as applicable, and supply the guarantor accepting the transfer with copies of those documents, if required by that guarantor. Guarantee fees paid on the loan will not be transferred.

This policy is effective for guarantee transfer requests submitted by lenders on or after July 1, 1999, unless implemented earlier by the guarantor. Subsections now under section 3.3 are being renumbered, and this new policy is being added as a new subsection, 3.3.D., of the Common Manual.

3.3.D. BORROWER DEFENSES

Transfer of Loan Guarantee
For changes to Section 3.3.D., please see Section 3.3.

Chapter 5 - Borrower Eligibility and Loan Certification

5.3 ELIGIBILITY REQUIREMENTS SPECIFIC TO STAFFORD LOANS

Effect of Plus Eligibility on Unsubsidized Stafford Loan Eligibility
Current Common Manual policy states that a school may certify a dependent student for additional unsubsidized Stafford loan funds if one of the student's parents is unable to obtain a PLUS loan.

However, if either parent later becomes eligible for a PLUS loan, current policy requires the school to request the cancellation of any future disbursements of additional unsubsidized Stafford loan funds.

Revised Common Manual policy has now been expanded to also state that the school must return to the lender any additional unsubsidized Stafford loan funds received by the school but not yet delivered to the student for that loan period.

Section 5.3 of the Common Manual has been updated to reflect this policy change, which is effective for loans certified by the school on or after July 1, 1999, unless implemented earlier by the guarantor.

Chapter 6 - Guarantee, Disbursement, and Delivery

6.1.D. STAFFORD LOAN INTEREST RATES

Revised Interest Rate Formulas for Stafford and PLUS Loans
Revised Common Manual policy incorporates the current variable interest rate formulas for both Stafford and PLUS loans first disbursed on or after July 1, 1998. The formulas were initially implemented by the Temporary Student Loan Provisions of the Transportation Equity Act for the 21st Century and were carried forward without change by the provisions of the Higher Education Amendments of 1998.

Subsections 6.1.D. and 6.1.F. have been revised to include the following information:

A Stafford loan first disbursed on or after July 1, 1998, has a variable interest rate not to exceed 8.25%, regardless of the period of enrollment or the interest rate on the borrower's previous loans. The interest rate is adjusted annually on July 1, and that rate remains in effect through June 30 of the following year. During periods when the loan is in an in-school, grace, or authorized deferment status, the interest rate is calculated by adding 1.7% to the bond equivalent rate of the 91-day Treasury bill auctioned at the final auction before the preceding June 1.  During periods when the loan is in repayment or forbearance status, the interest rate is calculated by adding 2.3% to the 91-day Treasury bill rate.

A PLUS loan first disbursed on or after July 1, 1998, has a variable interest rate not to exceed 9%.  The interest rate is adjusted annually on July 1. The variable rate for each July 1 to June 30 period is calculated by adding 3.1% to the bond equivalent rate of the 91-day Treasury bill auctioned at the final auction before the preceding June 1.

These changes are effective for Stafford and PLUS loans first disbursed on or after July 1, 1998.

6.1.F. PLUS LOAN AND SLS LOAN INTEREST RATES

Revised Interest Rate Formulas for Stafford and PLUS Loans
For changes to Section 6.1.F., please see Section 6.1.D.

Chapter 8 - Delinquency, Default, and Claims

8.2.D. BANKRUPTCY CLAIMS

Elimination of Bankruptcy Discharge for Loans in Repayment More Than 7 Years
Current Common Manual policy states that if a borrower files a Chapter 7 or Chapter 11 bankruptcy on a loan that has been in repayment for more than 7 years, the lender must file a bankruptcy claim.  Subsections 8.2.D. and CCI8.2.D. have been revised to reflect a change in title 11 of the U.S.C. (the bankruptcy code), which eliminates bankruptcy discharge on chapter 7, 11, 12 and 13 bankruptcies for FFELP borrowers after they have been in repayment for 7 years. The bankruptcy code continues to allow discharge for undue hardship.

A lender must file a bankruptcy claim with the guarantor if either of the following conditions exist:

A borrower files for bankruptcy under Chapter 12 or 13.

A borrower files a petition for undue hardship (adversary complaint) under a Chapter 7 or 11 bankruptcy.

Based on the changes to title 11, the definition of "Undue Hardship (Adversary) Petition" also has been revised to state "A motion to have a loan discharged in a bankruptcy case on the grounds of undue hardship."

These changes reflect the provisions of the Higher Education Amendments enacted on October 7, 1998. The changes are effective for loans on which a borrower files for bankruptcy on or after October 8, 1998.

Chapter 8 - Delinquency, Default, and Claims --CCI

CCI 8.2.D. BANKRUPTCY CLAIMS

Elimination of Bankruptcy Discharge for Loans in Repayment More Than 7 Years
For changes to Section CCI 8.2.D., please see Section 8.2.D.

Chapter 9 - Federal Consolidation Loans

9.1.A. AGREEMENT TO GUARANTEE FEDERAL CONSOLIDATION LOANS

Consolidation Loan Nondiscrimination
Subsection 9.1.A. of the Common Manual has been revised to state that a Consolidation loan lender may decline to consolidate Health Professions Student Loans (HPSL), including Loans for Disadvantaged Students (LDS), Nursing Student Loans (NSL), and Health Education Assistance Loans (HEAL) loans.

9.2. BORROWER ELIGIBILITY

Loans That May Be Consolidated
Another revision to section 9.2 of the Common Manual  removes the restricted time period during which the borrower may include an FDLP loan among loans that may be included in a Federal Consolidation loan, and updates information on adding loans after consolidation.

A borrower who currently has a Federal Consolidation loan is eligible for another Federal Consolidation loan if the borrower has obtained a new eligible loan after the date the original Consolidation loan was made. Any or all outstanding eligible loans may be consolidated, including loans made prior to any previous Consolidation loan.

Federal education loans that may be consolidated include:  Federal and Direct Stafford, PLUS, SLS, and Consolidation loans, FISL, Perkins, Health Professions Student Loans (HPSL), including Loans for Disadvantaged Students (LDS), Nursing Student Loans (NSL), and Health Education Assistance Loans (HEAL).

If a borrower with a Federal Consolidation loan chooses to consolidate again and meets the eligibility requirements, the borrower can include any combination of the following into the new Consolidation loan: (1) any loans made prior to the original Consolidation loan and not included in that consolidation, (2) the original Consolidation loan, and (3) any new loans obtained after the original Consolidation loan. However, the borrower is not required to include the new loans made after the original Consolidation loan even though it was those loans that qualified him or her for the subsequent consolidation.

A Consolidation loan may be consolidated only if the borrower, or either spouse in a couple that jointly consolidated, obtained a new eligible loan after the date the original Consolidation loan was made.

A borrower may add to any outstanding Consolidation loan any eligible loans received before or after the date of the consolidation, provided the borrower, or either spouse in a couple that jointly consolidated, makes a request within 180 days of the date the Consolidation loan is made. After the 180-day period, the borrower may not include additional loans into the outstanding Consolidation loan.

Consolidation Eligibility and Underlying Loan Requirements

Section 9.2 of the Common Manual has been revised to include current Consolidation loan borrower eligibility provisions. The new policy removes the reference to temporary provisions concerning cancellation of a Direct Consolidation loan application through September 30, 1998.  Section 9.3 has been removed and reserved, because it contained information that has now been moved into section 9.2.

A borrower must not be subject to a judgment secured through litigation or an order of administrative wage garnishment on a Title IV loan.  If  the judgment has been released or the wage garnishment order has been rescinded, the borrower may be eligible to consolidate the loans.

A borrower or married couple with FFELP loans held by multiple lenders may request consolidation from any participating consolidation lender, regardless of whether the consolidating lender is a holder of any of the borrowers' loans.

In the case of a married couple seeking a joint Consolidation loan in which all of the loans to be consolidated are held by a single lender, only one of the borrowers must contact the lender and only one of the applicants is required to make the certification that they unsuccessfully attempted to obtain consolidation from the holder of their loans, or that the holder of their loans does not offer an income-sensitive repayment schedule.

9.3 LENDER ELIGIBILITY

Consolidation Eligibility and Underlying Loan Requirements
For changes to Section 9.3, please see Section 9.2.

9.4.D CALCULATING THE INTEREST RATE

Consolidation Loan Interest Rate
Subsection 9.4.D. of the Common Manual has been revised to incorporate the following interest rate table and to reflect the Consolidation loan interest rate effective for loan applications received by the lender on or after October 1, 1998.

Chart may be obtained by contacting Lynda Reid at (801) 321-7166.

Calculating the Weighted-Average Interest Rate

With the exception of any outstanding balance representing a HEAL loan, the outstanding balance of all eligible loans to be consolidated are included in the weighted-average interest rate calculation. A weighted-average interest rate is calculated as follows:

The following exemplifies a weighted-average interest rate calculation for a loan application received by the lender on or after October 1, 1998:

Step 1
Multiply the outstanding balance of each loan to be consolidated by that loans current interest rate. A variable rate loan should be included in the calculation at the rate at which it is currently accruing.

Example:  Outstanding loan balances are $3,500, $3,200, and  $5,500, respectively--for a total of $12,200. The current interest rates for the loans are 7%, 5%, and 9% respectively.

$3,500 X .07 = $245
$3,200 X .05 = $160
$5,500 X .09 = $495

Step 2
Add the results of all calculations made under Step 1. Then divide this sum by the outstanding balance of all loans being consolidated.

Example:  $245 + $160 + $495 = $900

$900 / $12,200 = .07377 or 7.377%

Step 3
Round the result of Step 2 up to the nearest one-eighth of one percent, not to exceed 8.25%:

Example:  7.377% is rounded up to 7.50%

A lender may charge the borrower a rate that is less than the statutory maximum. If a lower rate is charged, the lender must ensure that reports issued to the Department (such as the ED Form 799) are adjusted. See appendix A for more information on ED Form 799 reporting.

A lender must notify a borrower, at the time a lower interest rate is offered, that the lower-rate interest ends on the date a default or ineligible borrower claim is purchased by the guarantor. The lender may provide this information in any format.  Documentation of the notice must be maintained in the borrower's file. A lender is encouraged to include the documentation (showing that the borrower was informed that the lower interest rate expires upon claim purchase) with default and ineligible borrower claim files. The lender will be required to provide this documentation if a borrower challenges the guarantor or the Department for charging the applicable statutory maximum interest rate during postclaim interest accrual. If the issue goes to court and the decision is in favor of the borrower such that the loan is unenforceable at the statutory maximum interest rate, the lender will be required to repurchase the loan and the guarantee will be withdrawn permanently. The lender may be required to reimburse the guarantor for any court costs or court-imposed fines or penalties.

9.7 INTEREST BENEFITS AND SPECIAL ALLOWANCE

Interest Benefits on Consolidation Loans
Sections 9.7 and A.1 have been revised to reflect new provisions regarding interest benefits for Consolidation loans.

A Federal Consolidation loan made from an application received by the lender on or after November 13, 1997, is eligible for interest subsidy during authorized periods of deferment on any portion of the Consolidation loan that paid an underlying subsidized Federal Stafford loan or an underlying subsidized Direct Stafford loan.  The borrower is responsible for interest payment during periods of authorized deferment on any Consolidation loan, or any portion of a Consolidation loan, that paid any loan type other than a subsidized Federal Stafford loan or a subsidized Direct Stafford loan.

Appendix A - Interest Benefits and Special Allowance

A.1. FEDERAL INTEREST BENEFITS

Interest Benefits on Consolidation Loans
For changes to Section A.1., please see Section 9.7.

Appendix G - Interest Benefits and Special Allowance

DEFINITION OF ELIGIBLE LENDER
For changes to Appendix G, please see Section 3.1.