USA Funds® has announced that, effective for Federal Stafford and Grad PLUS loans guaranteed on or after Feb. 1, 2008, USA Funds will subsidize from its non-federal resources, one-half of the 1-percent federal default fee, when the originating lender buys down the other half of the fee for borrowers attending the following schools:
- All schools located in USA Funds’ designated and key
states of Arizona, California, Florida, Hawaii, Indiana, Kansas, Maryland,
Mississippi, Nevada and Wyoming.
- All other schools with final 2005 cohort-default rates of less than 7 percent.
At any individual school, USA Funds reserves the right to limit the total volume of loan dollars covered by its buydown of the federal default fee.
USA Funds will not buy down any portion of the federal default fee on parent PLUS loans, although lenders still have the option of subsidizing those fees.
This fee policy will be in effect until further notice.
What is the federal default fee?
What is the reason for the new fee policy?
Why is the policy limited to schools in certain states and those with lower default rates?
Do schools as FFELP lenders qualify for the buydown?
What do schools need to do to accommodate the new fee policy?
What can lenders do if they wish to participate in USA Funds’ fee buydown?
What is the federal default fee?
A federal law, the Higher Education Reconciliation Act of 2005, has required, since July 1, 2006, “the collection, and the deposit into the Federal Student Loan Reserve Fund . . . of a Federal Default Fee of an amount equal to 1.0 percent of the principal amount of the loan.” The reserve funds are federally owned assets managed by student-loan guarantors and may be used only to pay lenders in the event of student-loan default or other specified circumstances and to pay for successful guarantor default-prevention activities. Guarantors may pay on behalf of the borrower all or a portion of this fee from the guarantor’s non-federal assets, and lenders also may subsidize all or a portion of the fee.
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What is USA Funds' current federal-default-fee policy?
Since July 1, 2007, USA Funds has paid the 1-percent federal default fee on Grad PLUS loans, if the lender pays the 1-percent federal default fee on all of the lender's Stafford loans guaranteed by USA Funds.
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What is the reason for the new fee policy?
The College Cost Reduction and Access Act, signed into law in late September, makes more than $20 billion in cuts in federal funding to Federal Family Education Loan Program lenders and guarantors during the next five years. These cuts come on top of more than $15 billion in FFELP cuts enacted in previous budget-reconciliation legislation signed into law less than two years ago. These cuts adversely affect the ability of lenders and guarantors to afford loan-fee buydowns.
In the face of these severe cuts, USA Funds continues to support the lowest-cost financing for college, consistent with being good stewards of USA Funds’ financial resources and complying with minimum federal reserve-ratio requirements. USA Funds simply cannot afford to subsidize from its non-federal resources the entire 1-percent federal default fee across all of the student-loan volume that it guarantees. USA Funds can, however, subsidize a portion of the fee and thereby encourage lenders to subsidize the remaining portion of the fee. As a result, a significant population of students may continue to benefit from zero- or reduced-fee loans.
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Why is the policy limited to schools in certain states and those with lower default rates?
USA Funds has special responsibilities for supporting financial access to higher education in the states where it is designated by the U.S. Secretary of Education as the guarantor of FFELP loans. USA Funds also has extended that special support for higher-education access to two additional states – California and Florida – where USA Funds guarantees a significant percentage of all FFELP loans.
USA Funds offers the fee buydown only to lower-default-rate schools outside its designated and key states because those schools place less financial pressure on USA Funds’ federal reserve fund than do higher default-rate schools. As a result, lower-default-rate schools contribute to USA Funds’ ability to support a buydown of the federal default fee, which is a key source of revenue for the federal reserve fund. Schools that do not qualify for the fee buydown due to default rates of 7 percent or higher will continue to be offered USA Funds debt-management services to help them lower their default rates.
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Do schools as FFELP lenders qualify for the buydown?
If a school meets the eligibility criteria specified in the policy and, acting as a lender, pays one-half of the federal default fee on USA Funds-guaranteed Federal Stafford loans for its borrowers, USA Funds will subsidize from its non-federal resources the other half of the fee.
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What do schools need to do to accommodate the new fee policy?
USA Funds will provide in its weekly online newsletter, USA
Funds Education Access Report, regular updates on its new federal-default-fee policy. If you don’t currently receive the newsletter, we invite you to subscribe.
For additional information, contact your USA
Funds Services representative.
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What can lenders do if they wish to participate in USA Funds’ fee buydown?
Review Steps to Take to Pay the Federal Default Fee.
In addition, USA Funds will provide in its weekly online newsletter, USA Funds Education Access Report, updates to assist lenders that wish to participate in the buydown of the federal default fee for their borrowers. If you don’t currently receive the newsletter, we invite you to subscribe.
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