Reminder: Student-Loan-Program Changes Take Effect July 1

Several key changes to the terms of the Federal Family Education Loan Program enacted as part the Higher Education Reconciliation Act of 2005 take effect July 1, 2006. As a reminder, USA Funds^® highlights the following loan-program changes that are effective July 1.

Consolidation loans. In-school consolidation and spousal consolidation no longer are permitted.

Defaulted loans. Borrowers in default on their loans may rehabilitate their loans by making nine on-time payments during a 10-month period, rather than the previous requirement of 12 consecutive on-time monthly payments.

Deferment. Borrowers whose military-deferment requests are received on or after July 1, 2006, may qualify for deferment on loans first disbursed on or after July 1, 2001, if they are serving in the military on active duty during a war, other military operation or national emergency or performing qualifying National Guard duty.

False certification. Loans now may qualify for discharge under a new category of false certification related to identity theft.

Fees. The maximum origination fee that may be assessed on a Federal Stafford loan is 2 percent. Additionally, effective for loans guaranteed beginning July 1, the law requires collection of a 1-percent federal default fee, although the fee may be paid by the lender or subsidized by the guarantor from nonfederal funds. USA Funds will collect a 1-percent federal default fee on Federal Stafford and PLUS loans that it guarantees beginning July 1. For lenders that subsidize the federal default fee on all Stafford loans guaranteed by USA Funds, USA Funds will pay the federal default fee on behalf of that lender’s PLUS-loan borrowers on USA Funds-guaranteed loans from July 1, 2006, through June 30, 2007. 

Insurance. Lender insurance for default claims falls to 99 percent from 100 percent for “exceptional performers” and to 97 percent from 98 percent for lenders not designated as exceptional performers.

Interest rates. Interest rates on Federal Stafford loans first disbursed on or after July 1 are fixed at 6.8 percent, based on legislation enacted in 2002. Rates on Federal PLUS loans first disbursed on or after July 1 are fixed at 8.5 percent based on the HERA.

Mandatory Forbearance. Mandatory-forbearance agreements no longer need to be approved in writing by the borrower. A notice confirming the terms of the mandatory forbearance must be sent to the borrower.  

PLUS loans. Effective July 1, schools may certify PLUS loans for graduate and professional students in addition to PLUS loans for parents of dependent undergraduate students.

For complete details of these and other provisions of HERA, visit the Reauthorization section of the USA Funds Web site for financial-aid professionals and lenders.