Law reduces overall Stafford-loan fees while requiring collection of Federal Default Fee
New federal law prompts change in USA Funds’ loan-fee policy
INDIANAPOLIS — USA Funds®, the nation’s leading education-loan guarantor, has announced that a new federal law will prompt changes in USA Funds’ loan-fee policy effective July 1. President Bush has signed into law the Deficit Reduction Act of 2005, which, among other provisions, makes changes in the fees that may be assessed borrowers of federal education loans.
The new legislation reduces the maximum upfront fees that may be charged Stafford-loan borrowers in the Federal Family Education Loan Program to 3 percent from the current 4 percent beginning July 1, and further reduces Stafford-loan fees to a maximum 1 percent by 2010.
“As a result of the new law, many borrowers ultimately will pay lower fees on their loans,” said Carl C. Dalstrom, USA Funds president and CEO.
In conjunction with the overall fee reduction, the new law requires that student-loan guarantors like USA Funds collect and deposit a 1-percent Federal Default Fee into their federally owned reserve funds. This fee is part of the maximum 3-percent fee that may be assessed Stafford-loan borrowers beginning July 1, and will represent the sole component of upfront Stafford-loan fees by 2010.
“Notably, the federal budget savings provided through the collection of this Federal Default Fee help offset some of the federal costs that make possible the enhanced student benefits contained in the legislation, including the overall reduction of Stafford-loan fees,” Dalstrom said.
In addition, the new law does not permit federal resources to be used to pay the Federal Default Fee on behalf of borrowers.
“To date, USA Funds — and many other guarantors — have been able to waive loan fees for borrowers by spending down their federal reserve funds,” Dalstrom said. “During the past year, USA Funds saved borrowers nearly $100 million by waiving the guarantee fee. Under the new law, however, this practice no longer will be possible.”
As a result of these changes, USA Funds will collect a 1-percent Federal Default Fee on all Federal Stafford and PLUS loans that it guarantees beginning July 1.
Although the law permits nonfederal resources to be used to pay the Federal Default Fee, USA Funds’ action ensures the resources necessary to provide postsecondary institutions, education lenders, students and parents with premier debt-management and default-prevention services, as well as nationally renowned training programs; to continue to research and develop new and enhanced loan products and services; and to support scholarship and outreach programs to promote higher-education access.
“Federal budget officials have concluded that mandating the deposit of a Federal Default Fee into the Federal Reserve Fund is necessary to maintain the solvency of those funds and ultimately to preserve the stability of the FFELP, the largest federal student-aid program,” Dalstrom said.