Publication Date: January 2005
DCL ID: FP-05-01
Statutory Changes to Special Allowance Payment Calculations
Posted on 01-06-2005
January 2005
FP-05-01
Subject: Statutory Changes
to Special Allowance Payment Calculations
Summary: This letter
provides a brief description of the recent changes made by the "Taxpayer-Teacher
Protection Act of 2004" to the calculation of special allowance payments
for loans made (directly or indirectly) with the proceeds of tax-exempt obligations.
Dear Colleague:
On October 30, 2004, President Bush signed the "Taxpayer-Teacher Protection
Act of 2004" (P. L. 108-409) that, among other things, changes Section
438(b)(2)(B) of the Higher Education Act of 1965, as amended (HEA). In particular,
P. L. 108-409 changes the rules for calculating the special allowance rates
for certain Federal Family Education Loan Program (FFEL) loans made or purchased
with tax-exempt funds. The new law also authorizes up to $17,500 in loan forgiveness
for new Federal Stafford Loan borrowers under the FFEL Program and Federal Direct
Loan Program who meet certain criteria. The teacher loan forgiveness changes
were discussed in Dear Colleague Letter GEN-04-14.
Under the HEA as it existed
prior to the passage of P. L. 108-409, loans that were financed with funds obtained
by the holder from the issuance of tax-exempt obligations originally issued
prior to October 1, 1993 received a special allowance at a rate that was generally
one-half of the rate established for other loans. However, that rate would not
be less than 9.5 percent minus the applicable interest rate on such loans. With
the enactment of P. L. 108-409, the special allowance paid on some loans that
would have been subject to this treatment will revert to the usual rates paid
on other loans as specified in subparagraphs (A), (E), (F), (G), (H), or (I)
of section 438(b)(2).
Specifically, the loans
for which the special allowance reverts to those usual rates are those that
are:
- Financed by a tax exempt
obligation that, after September 30, 2004, and before January 1, 2006, has
matured or been retired or defeased;
- Refinanced after September
30, 2004, and before January 1, 2006, with funds obtained from a source other
than funds described in section 438(b)(2)(B)(v)(I) of the HEA; or
- Sold or transferred
to any other holder after September 30, 2004, and before January 1, 2006.
Loans that are made or
purchased with funds obtained by the holder from collections or default reimbursements
on, or interest or other income pertaining to, eligible loans made or purchased
with funds from the original pre-October 1993 tax-exempt obligations or from
income on the investment of such funds would still receive a special allowance
of not less than 9.5 percent minus the applicable interest rate on such loans.
The term "holder",
as used in the preceding paragraphs, has the meaning specified in section 435(i)
of the HEA, which defines a holder as an eligible lender who owns a loan.
We have attached a copy
of section 438(b)(2)(B) of the HEA showing the changes made by P. L. 108-409.
We do not believe
that any changes are necessary to the Lender Reporting System-LaRS (formerly
ED Form 799) in order to account for the changes made by P. L. 108-409. We expect
that loan holders will make whatever adjustments are necessary when making LaRS
submissions to assure that special allowance payments are made at the correct
rate. Lenders impacted by this statutory change should ensure that future independent
audits include a review of all special allowance calculations and billings to
assure that the lender has properly identified the various categories of loans
included in its LaRS submission.
If you have questions concerning
the recent statutory changes, please contact Pam Moran at 202-502-7732 or George
Harris at (202) 502-7521. If you have questions concerning LaRS reporting please
contact Matteo Fontana at 202-377-3005.
Sincerely,
Sally L. Stroup
Assistant Secretary for
Postsecondary Education
Statutory
Changes to Special Allowance Payment Calculations
P. L. 108-409 made the
following changes (shown in bold type) to section 438(b)(2)(B) of the
HEA:
(B)(i)
The quarterly rate of the special allowance for holders of loans which were
made or purchased with funds obtained by the holder from the issuance of obligations,
the income from which is exempt from taxation under the Internal Revenue Code
of 1954 shall be one-half the quarterly rate of the special allowance established
under subparagraph (A), except that, in determining the rate for the purpose
of this division clause, subparagraph
(A)(iii) shall be applied by substituting ''3.5 percent'' for ''3.10 percent''
. Such rate shall also apply to holders of loans which were made or purchased
with funds obtained by the holder from collections or default reimbursements
on, or interests or other income pertaining to, eligible loans made or purchased
with funds described in the preceding sentence of this subparagraph or from
income on the investment of such funds. This subparagraph shall not apply to
loans which were made or insured prior to October 1, 1980.
(ii) The quarterly
rate of the special allowance set under clause
division (i) of this subparagraph shall not be less than 9.5 percent
minus the applicable interest rate on such loans, divided by 4.
(iii) No special
allowance may be paid under this subparagraph unless the issuer of such obligations
complies with subsection (d) of this section.
(iv) Notwithstanding
clauses (i) and (ii), the quarterly rate of the special allowance for holders
of loans which are financed with funds obtained by the holder from the issuance
of obligations originally issued on or after October 1, 1993, or
refunded after September 30, 2004, and before January 1, 2006, the
income from which is excluded from gross income under the Internal Revenue Code
of 1986, shall be the quarterly rate of the special allowance established under
subparagraph (A), (E), (F), (G), (H), or (I) as the case may be. Such rate shall
also apply to holders of loans which were made or purchased with funds obtained
by the holder from collections or default reimbursements on, or interest or
other income pertaining to, eligible loans made or purchased with funds described
in the preceding sentence of this subparagraph or from income on the investment
of such funds.
(v)
Notwithstanding clauses (i) and (ii), the quarterly rate of the special allowance
shall be the rate determined under subparagraph (A), (E), (F), (G), (H), or
(I) of this paragraph, or paragraph (4), as the case may be, for a holder of
loans that--
(I) were made or
purchased with funds--
(aa) obtained from
the issuance of obligations the income from which is excluded from gross income
under the Internal Revenue Code of 1986 and which obligations were originally
issued before October 1, 1993; or
(bb) obtained from
collections or default reimbursements on, or interest or other income pertaining
to, eligible loans made or purchased with funds described in division (aa),
or from income on the investment of such funds; and
(II) are--
(aa) financed by
such an obligation that, after September 30, 2004, and before January 1, 2006,
has matured or been retired or defeased;
(bb) refinanced
after September 30, 2004, and before January 1, 2006, with funds obtained from
a source other than funds described in subclause (I) of this clause; or
(cc) sold or transferred
to any other holder after September 30, 2004, and before January 1, 2006.
Attachments/Enclosures:
FP-05-01:
Statutory Changes to Special Allowance Payment Calculations in PDF Format, 170KB,
3 pages
