Formerly the National Council of Higher Education Loan Programs, Inc. August 2, 2013 Via email to HEA.Reauth@mail.house.gov The Honorable John Kline Chairman Committee on Education and the Workforce The Honorable George Miller Senior Democratic Member Committee on Education and the Workforce The Honorable Virginia Foxx Chairwoman Subcommittee on Higher Education And Workforce Training The Honorable Ruben Hinojosa Ranking Member Subcommittee on Higher Education and Workforce Training This is in response to your April 25 request asking for our ideas and suggestions relating to your work to reauthorize the Higher Education Act (HEA). The National Council of Higher Education Resources (NCHER) is a trade association that represents a nationwide network of guaranty agencies, secondary markets, lenders, loan servicers, private collection agencies, schools and others that administer education loan programs that make loan assistance available to students and parents to pay for the costs of postsecondary education, including the Federal Family Education Loan (FFEL) Program and private education loans. Many of our members, including state agencies and state-designated authorities, also provide higher education access, outreach, and financial literacy programs. Some of our members currently service Federal Direct Loans. As an initial matter, we want to highlight several points. First, there is great concern about the current status of the Not-for-Profit servicer program authorized by the 2010 amendments to the HEA included in the Health Care and Education Reconciliation Act of 2010 (HCERA). Despite the fact that eligible Not-for-Profit servicers (NFPs) are entitled to participate in the program, the Department of Education has frozen the implementation of the program, leaving a number of NFPs who have made significant investments in qualifying for the program without any servicing volume. Others have been left with loan allocations that are uneconomic to service. We also should not lose sight of the benefits borrowers receive from the NFP servicers. The NFPs are committed to excellent, borrower-centric customer service, financial literacy and default prevention. A solution to this state of affairs cannot wait until HEA reauthorization; already some NFPs have decided to change the nature of their participation. We would be remiss, however, in not bringing it to your attention in this response. The NFP Servicer Program needs to be implemented as contemplated in the HCERA: all eligible NFPs should be given 1100 Connecticut Ave NW, Suite 1200, Washington, DC 20036-4110 Tel: (202) 822-2106 Fax: (202) 822-2142 Web Site: www.ncher.us
initial loan allocations for servicing and those currently participating should be granted additional allocations as the statute contemplates, assuming their performance warrants doing so. Second, NCHER recommends that the HEA include a statutory foundation which would allow the collective expertise of our membership to be employed to assist students and families in navigating their higher education and student loan journeys more effectively. Our members are dedicated to helping students better understand their financing and repayment options on both the front end and back end of their postsecondary education, as well as enhancing their ability to make wise financial decisions during the in-school period. If there s one theme around which there seems to be a broad consensus, it s the need for more effective financial literacy and debt management counseling services our members are well positioned to continue to provide across the federal student loan programs. Your request indicates that the Committee is interested in ways to improve access to higher education and empower consumers. Our members can help. NCHER is currently exploring various options for reform and we anticipate submitting a proposal along these lines as reauthorization proceeds. Third, as more fully set forth in the recommendations below, there is a need to remove barriers to contacting student loan borrowers on the wireless devices they prefer. In each of its last two budgets, the Administration has recommended the removal of these barriers impacting federal loans. While we recognize that this is not directly a statutory HEA issue, it is a matter that affects the effective delinquency prevention and default collection efforts undertaken in support of the HEA loan programs. For that reason, we recommend that the Committee work with the Administration and other appropriate Committees to remove the restrictions which increasingly are preventing loan participants from helping borrowers. Set forth below, in no particular order, are our initial recommendations. As we review suggestions from others and continue our internal brainstorming process, we may have additional thoughts. We hope you will consider these even though they may be submitted after August 2. Military Deferment Simplification - We need to make it easier for eligible servicemembers to receive a military deferment as well as the interest rate cap provided for in the Servicemembers Civil Relief Act (SCRA). Also, the same definitions of active duty should apply for both HEA and SCRA purposes. The HEA definitions should be aligned with the SCRA. Extended Repayment Plan Eliminate the $30,000 by loan program requirement so more borrowers have access to the Plan (especially those not eligible for the income-driven repayment plans). This would make the Plan available to borrowers who have $30,000 combined in both FFELP and Direct Loans. A New Flexible Income-Triggered Repayment Plan (FlexIT) The Income-Sensitive repayment plan currently available in the FFELP is under-utilized and not as helpful to borrowers as it could be. A new repayment plan should be developed as another repayment option to help borrowers successfully repay. FlexIT would be based on some of the components (such as income and ability to repay) of the current Income-Sensitive plan to help all borrowers (both for FFELP and the Direct Loan Program) but especially Parent PLUS borrowers who do not have the option to request IBR, ICR or Pay As You Earn repayment plans. Key components of this new repayment plan would include a 25-year term along with elimination of the 3 times rule that precludes any payment from exceeding three times the amount of the lowest payment while still continuing with the current prohibition on negative amortization. There would be no loan forgiveness component to this plan. Grad PLUS and Parent PLUS should be separate and distinct programs due to the significant difference in the borrowers served by these loan programs. This would facilitate consideration of Page 2 of 5
different terms for the different loan types (such as credit criteria, lower interest rate and origination fee). The Department Should Publish Performance Data for Grad PLUS and Parent PLUS The Department does not disclose default information on Grad PLUS and Parent PLUS loans. Given concerns with over borrowing, particularly by graduate and professional students, and with more and more parent borrowers having difficulty making payments on their federal loans, more transparency on the performance of these loan programs is needed. While cohort default rate information on Stafford loans is published annually, no data is available on PLUS loans. Teacher Loan Forgiveness (TLF) Borrowers seeking TLF must teach for five consecutive years with breaks in service permitted in very limited situations such as family and medical leave (FMLA) or military service. If a teacher is laid off for lack of funding, he or she must start the five year clock again, upon re-employment. Breaks in teacher employment that result solely from funding-related layoffs should not be counted as breaking the teacher-borrower s consecutive annual year service requirement, similar to the case of FMLA or military mobilization. Private Education Loans Under the Higher Education Opportunity Act (HEOA) enacted in 2008, schools choosing to recommend private lenders to families or students, or that maintain a list of preferred lenders for private education loans, must comply with a set of complicated disclosures and reporting. The result has been that schools have shied away from having preferred lending lists. The unintended consequence is that students and parents do not receive the helpful counseling they need. Given other HEOA reforms (such as gifting prohibitions), the preferred lender list restrictions are unnecessary. The preferred lender list restrictions should be removed to allow schools to counsel their students on sources of financial aid, including private education loans. At a minimum, there should be a carve out or exemption for private loan programs that offer rates and fees that are comparable to or better than those offered in the PLUS program. In these instances in particular, current law could well result in students and parents not learning about loan programs that might be better for them. Also, we are aware of the concern that some borrowers may be borrowing more than they need. It is for this reason that we have recommended to the Consumer Financial Protection Bureau that school certification of private education loans become the standard. As is true for some of our other recommendations, we recognize that this issue may not directly be an HEA issue, but suggest the Committee work with the appropriate authorizing committees on this matter. Default Aversion Fee (DAF) The HEA authorizes guaranty agencies to be paid (via a transfer from the agency s Federal Student Loan Reserve Fund) a default aversion fee equal to one percent of the outstanding principal and interest of a loan that is presented to it by a lender for default aversion assistance no sooner than the 60 th day of delinquency. The agency is paid DAF if a default claim has not been paid on the loan by the 300 th day of delinquency. The agency can be paid a second or subsequent time on the same loan, as long as 1) at least 18 months have elapsed between the time the loan in question was brought current and the lender files a subsequent default aversion request, and 2) during the period between such dates the loan was not more than 30 days past due. However, unlike the statute, Department of Education regulations only allow the fee to be paid once on any loan, regardless of the length of time between lender requests for assistance, and Page 3 of 5
require the fee to be refunded to the agency s Federal Student Loan Reserve Fund if the loan ever defaults. With the FFELP currently in a wind-down mode, guaranty agencies no longer receive adequate funding for default prevention based solely on fees received for first-time default aversion requests. Given that a significant percentage of borrowers are becoming delinquent more than once in the current economic climate, and to ensure that borrowers receive the necessary assistance to avoid default, we recommend that the true intent of the statutory language be implemented so that agencies are paid for services rendered. This will provide adequate funding to the guaranty agencies to help borrowers avoid default. Further, due to the wind-down, Default Aversion Fees should be paid to agencies directly from the Department of Education instead of through a transfer from the Federal Fund to avoid the unnecessary draw-down of that Fund, which is no longer replenished through new loan insurance fees. Prompt Payment of Federal Reinsurance With the cessation of new FFELP guarantees as of July 1, 2010, guaranty agencies have not received insurance premiums for deposit into their Federal Reserve Funds (FRF) in over three years. Other sources of revenue for the FRF are very limited. Guaranty agencies pay lender default claims from their FRF. However, reinsurance reimbursements from the Department to the FRF can take up to 25 days. This lag puts unnecessary pressure on the FRF cash flow. It should be noted that the ability of an agency to meet required reserve levels is not affected, as accrued but unpaid reinsurance is counted as an asset. Under the Voluntary Flexible Agreement program, default claims were estimated on a weekly basis for the following week s claim payments and then were then paid to the agency on a just-in-time basis. The Department should be directed to utilize this payment method on a uniform basis across all guaranty agencies. This change would ensure that all agencies have adequate funding to pay lender claims on a timely basis during the wind-down of the FFELP. School Reviews Guaranty agencies currently conduct mandated program reviews at certain schools which participated in the FFEL program. Guarantors may also perform non-mandated reviews. The Department of Education acknowledges the expertise of guarantors in performing these reviews, along with the success of the Common Review Initiative (CRI). With all new loans made through the Direct Loan Program, and limited Federal staffing and resources available for performance of these reviews, guaranty agencies should be given expanded responsibilities, with appropriate compensation, to perform compliance reviews of schools on behalf of the Department. Telephone Consumer Protection Act (TCPA) Given the growing percentage of households that are 100% wireless, particularly among the age groups most likely to have student loans, TCPA rules need to be updated to reflect the new realities and technologies of the 21st Century. Congress should provide statutory authority for the U.S. Department of Education and its partners to use predictive dialer and voice messaging technology in servicing federally owned or guaranteed loans, without the need for express prior consent. This proposal was included in each of the last two budgets proposed by the Administration, and will assist borrowers avoid unnecessary defaults, improve post-default recoveries and help borrowers resolve their defaulted loans. The Department of Education and others argue that if they can just talk to a distressed borrower they can almost always find a solution that helps the borrower. However, the TCPA restrictions are a barrier to contacting the borrower. Tax-exempt Financing Many nonprofit and state agency lenders provide education loan programs within their state, often financed by tax exempt student loan revenue bonds. The Page 4 of 5
interest on these bonds is subject to the alternative minimum tax (AMT). This tax raises the funding costs of these organizations. Excluding the interest from the AMT would lower funding costs. Due to arbitrage restrictions, the reduced funding costs would be passed through to student loan borrowers in the form of lower interest rates. In addition, certain nonprofit lenders that issued student loan revenue bonds to finance their FFELP loans are prevented under section 150(d) of the Internal Revenue Code from issuing tax exempt debt to finance their private education loans. These organizations, referred to in the Code as qualified scholarship funding corporations, should be permitted to offer private education loan programs. As in the case of elimination of the AMT, tax rules ensure that the reduced funding costs would flow through for the benefit of student borrowers. Section 150(d) should also be amended to permit these qualified scholarship funding corporations to participate in the Not-for-Profit Servicing Program administered by the Department of Education under Section 456(a)(4) of the HEA, as intended by the Congress when this Program was created in 2010. Tax Consequence of Certain Federal Student Loan Discharge Programs The U.S. Department of Education should be required to work with the U.S. Department of Treasury to ensure that the discharge of federal student loans due to the death or total and permanent disability of the borrower is not treated as a taxable event. Fair Value Scoring We note that the Congressional Budget Office and other budget experts argue fair value scoring is a more comprehensive way to estimate the cost of the federal student loan programs, as contrasted with the rules in the Federal Credit Reform Act which understate federal costs. In our view, any changes to the HEA loan programs should be scored using this accounting method, and we encourage the Committee to work with the Budget Committee to advance this change. We stand ready to further explain any of these suggestions, and hope the Committee takes us up on this offer. Please contact me at 202-822-2106 or srepp@ncher.us. Sincerely, Sheldon Repp President Page 5 of 5