Department Announces Final Rules on School-Based Loan Issues

On Oct. 28 the U.S. Department of Education issued final rules regarding school-based loan issues.

The announcement is one of several recently issued regarding final rules — related primarily to statutory changes of the Higher Education Opportunity Act and the discussions of those statutory changes that were part of negotiated rulemaking in the spring and summer

Many of the provisions linked to HEOA were effective Aug. 14, 2008, the date of its enactment. New provisions are effective July 1, 2010, although schools, lenders and guarantors may implement some of the provisions earlier than that date. The following are the areas of new school-based loan issues provisions that entities may implement prior to July 1:

• Private education loan disclosures.
• Use of institution and lender name.
• Code of conduct content.
• Institutional requirement to report reimbursements for service on advisory boards.
• Institutional requirement to provide loan terms and conditions to prospective and enrolled students.
• Entrance and exit counseling modifications.

USA Funds^® notes the following regulatory highlights related to school-based loan issues:

Preferred lender arrangement. Private education loans made by an institution do not fall under the preferred lender arrangement provisions if made from the institution's or institution's affiliated organization's own funds, including the following:

• Tuition and fee revenue.
• Investment income.
• Endowment funds, including those from a foundation of the institution.
• Funds from donor-directed contributions. Funds made under Title VII or Title VIII or the Public Services Health Act.
• Funds made from state-funded financial aid programs.

Funds that an institution borrows from a lender or obtains through a line of credit from a lender and subsequently lends to a student will not be considered private education loan funds for this purpose — provided the loan to the student has a term of 90 days or less, or the loan has a term up to one year, and the school does not charge interest on that loan.

Preferred lender arrangement disclosures. When disclosing information about the types of aid that it offers to students, an institution must address only the types of aid it offers its students, which may not be all types of Title IV aid.

Additionally, an institution may be required to provide preferred lender arrangement disclosures even if it does not provide its students and families with a preferred lender list, if the institution participates in a preferred lender arrangement by otherwise promoting, endorsing or recommending an education loan product of a lender.

Preferred lender arrangements — lender lists. Guidance provided in Dear Colleague Letter GEN-08-06 regarding a school's use of a "neutral, comprehensive" list of lenders that previously have made loans to the institution's students and families also is applicable to private education loan lenders.

Preferred lender arrangements — lender lists provided by third party. The Department does not consider an institution to be a participant in a preferred lender arrangement if the school directs its students and their families to a Web site developed by a third-party entity that contains a neutral, comprehensive list of participating lenders. In this case the school must not otherwise endorse or recommend the lenders, and the listed lenders must not pay the third party for placement on the list or for any loan volume generated by placement on the list.

If an institution retains a third party to compile and publish a customized list for its students, it is considered a participant in a preferred lender arrangement.

Private loan disclosures — self-certification form. Upon request, a school must provide a private loan applicant who is enrolled or admitted to that institution a self-certification form and the applicable information the applicant needs to complete the form, including the following:

• Cost of attendance.
• Estimated financial assistance, including any amounts used to replace the family's Expected Family Contribution.
• The difference between COA and EFC.

Loan counseling. A lender or guarantor may provide both entrance and exit counseling services to a school's students, provided the institution remains in control of the counseling. The Department has defined "in control" as the school's review and approval of the content of the counseling and oversight of the counseling.

Code of conduct — staffing assistance. A school may not request or accept staffing assistance from a lender except on a short-term nonrecurring basis during a state- or federally declared natural disaster or other local disaster or emergency identified by the Department. A lender may provide this assistance only if it is not in return for loan applications or volume.