Federal Student Aid - IFAP
   
DCLPublicationDate: 1/1/99
DCLID: 99-G-316
AwardYear:
Summary: Provisions of the Higher Education Amendments of 1998 (Pub. L. 105-244) that relate to the Federal Fund and Operating Fund used by guaranty agencies in the Federal Family Education Loan Program.


January 27, 1999

99-G-316


SUBJECT: Provisions of the Higher Education Amendments of 1998 (Pub. L. 105-244) that relate to the Federal Fund and Operating Fund used by guaranty agencies in the Federal Family Education Loan Program.


Dear Guaranty Agency Director:

This letter provides the Secretary’s initial guidance concerning the two new funds each guaranty agency is required to establish under the Higher Education Amendments of 1998 – the “Federal Fund” and the “Operating Fund.” The Secretary has asked that I share this guidance with you. A separate letter is being prepared about the other provisions of the 1998 Amendments that primarily affect guaranty agencies and lenders, for example, voluntary flexible agreements, prohibited inducements, and blanket certificates of guaranty. The Secretary invites your views on those other provisions, which will be helpful as the next letter is prepared.

We welcome your comments concerning this initial guidance about the Federal and Operating Funds. If you have questions about this new legislation, or the guidance in this letter, please call my staff at (202) 708-8242.

Sincerely,



Greg Woods
Chief Operating Officer
Office of Student Financial Assistance Programs



THE FEDERAL FUND

Establishing the Federal Fund

Under §422A of the Higher Education Act of 1965, as amended (the “HEA”) each guaranty agency is required to establish a Federal Student Loan Reserve Fund (the “Federal Fund”), within 60 days of enactment of Pub. L. 105-244. The date of enactment of Pub. L. 105-244 was October 7, 1998, the date it was signed by the President. Guaranty agencies were informed during subsequent discussions that the two new funds must be established by December 6, 1998.

The Secretary has decided that all of the funds, securities, and other liquid assets in the agency’s reserve fund as of September 30, 1998, as described in 34 CFR 682.410(a), must be deposited into the Federal Fund when it is established. The new legislation specifies that the Federal Fund shall be located in a type of account selected by the agency, with the approval of the Secretary. The new Federal Fund must be a separate account that contains only funds belonging to the Federal Fund. A guaranty agency may use its existing Federal reserve fund account established pursuant to 34 CFR 682.410(a) that satisfies the above requirement as the new Federal Fund simply by notifying the Secretary in writing. If a different account is desired, the agency must provide a description of the proposed account and promptly request the Secretary’s approval.


Ownership of the Federal Fund

The statute stipulates that the Federal Fund, and nonliquid assets (such as buildings or equipment) developed or purchased by an agency in whole or in part with Federal reserve funds, regardless of who holds or controls the Federal reserve funds or assets, are the property of the United States. The ownership of assets will be prorated based on the percentage of the asset developed or purchased with Federal reserve funds.

Section 422A(d) of the HEA allows the Federal Fund to be used only to pay lender claims and to pay default aversion fees into the agency’s Operating Fund. Under the statute, these same restrictions apply to nonliquid assets. The statute also authorizes the Secretary to restrict or regulate the use of such assets to the extent necessary to reasonably protect the Secretary’s prorated share of the value of such assets. A strict application of this restriction would prohibit an agency from using nonliquid assets developed or purchased with Federal Funds for any other purpose and would unnecessarily burden the agency’s performance of its other responsibilities in the Federal Family Education Loan Program. The Secretary recognizes that Federal regulations in effect prior to the amendments authorized guaranty agencies to use the Federal portion of nonliquid assets for other allowable purposes and wishes to continue that policy. Accordingly, the Secretary hereby authorizes guaranty agencies to use the Federal portion of nonliquid assets for activities necessary and appropriate to fulfill the agencies’ guaranty responsibilities as provided in 34 CFR 682.410. In addition, the Federal portion of nonliquid assets may also be used for activities other than those described in 34 CFR 682.410, subject to the conditions described in 34 CFR 682.410(a)(6)(i).
Deposits into the Federal Fund
The statute requires an agency to deposit into the Federal Fund:
1. Default reinsurance payments received from the Secretary, and payments made to the agency by
the Secretary on death, disability, bankruptcy and loan cancellation and discharge claims;

2. A percentage of collections equal to the complement of the reinsurance percentage paid on a
defaulted loan, and 100 percent of payments obtained with respect to a loan that the Secretary has repaid or discharged under §437 of the HEA;

3. Insurance premiums collected from borrowers pursuant to §428(b)(1)(H) and §428H(h) of the
HEA;

4. All amounts received from the Secretary as payment for supplemental preclaims activity
performed on or before September 30, 1998;

5. 70 percent of amounts received on or after October 1, 1998, as payment for administrative cost
allowances for loans upon which insurance was issued on or before September 30, 1998; and

6. Other receipts as specified in the Department’s regulations.

Investments of the Federal Fund
The Federal Fund (and amounts in the Operating Fund that are borrowed from the Federal Fund) shall be invested in securities issued or guaranteed by the United States or a State, or with the approval of the Secretary, in other similarly low-risk securities selected by the guaranty agency. Guaranty agencies that have invested the Federal reserve funds in “pooled” investments as part of a state investment program may continue using that investment vehicle for the new Federal Fund without requesting specific approval from the Secretary. Earnings on the investment of the Federal Fund are the sole property of the Federal Government. Guaranty agencies shall exercise the level of care required of a fiduciary charged with the duty of investing the money of others. Accordingly, a guaranty agency may not prepay obligations of the Federal Fund unless it demonstrates, to the satisfaction of the Secretary, that the prepayment is in the best interests of the United States.

THE OPERATING FUND


Establishing the Operating Fund

Each guaranty agency must establish a fund designated as the “Operating Fund” by December 6, 1998 (within 60 days after the enactment of Pub. L. 105-244.) The Operating Fund must be in an account that is separate from the Federal Fund. The statute requires an agency to deposit into the Operating Fund:

1. Loan processing and issuance fees;

[Note: Under §428(f) of the HEA, each guaranty agency will be paid a processing and issuance fee equal to 0.65 percent of the total principal amount of loans originated during fiscal years 1999 through 2003 on which such agency issued insurance (beginning with fiscal year 2004, the fee drops to 0.40 percent of the principal amount of the loans). No payment may be made for loans for which the disbursement checks have not been cashed or for which electronic funds transfers have not been completed. The fee will be paid quarterly. The Secretary has decided to calculate the amount of the fee based on aggregates of each guaranty agency’s data reported to the National Student Loan Data System.]
2. 30 percent of administrative cost allowances received after October 1, 1998, for loans upon which
insurance was issued before October 1, 1998;

3. Account maintenance fees;

[Note: Under §458 of the HEA, each guaranty agency will receive an account maintenance fee in an amount equal to 0.12 percent of the original principal balance of guaranteed loans outstanding during fiscal years 1999 and 2000. During fiscal years 2001 through 2003 the fee shall be 0.10 percent of the original principal balance of guaranteed loans outstanding during the year. The fee will be paid quarterly.

The Secretary has decided to calculate the amount of the fee by using the guaranty agency’s data reported to the National Student Loan Data System. In order to pay promptly following the end of each quarter, the amounts of the first three quarterly payments for each fiscal year will be 0.12 percent of the original principal balance of loans outstanding at the beginning of the fiscal year, divided by four. The fourth quarter payment will be calculated by obtaining the sum of the original principal balance of loans outstanding at the beginning and end of the fiscal year, dividing by two, multiplying the result by 0.12 percent, and subtracting the amounts of the first three quarterly payments.]
4. Default aversion fees;

[Note: Pub. L. 105-244 added a new default aversion fee in §428(l) of the HEA to replace the supplemental preclaims assistance payment made under prior law. Upon receipt of a completed request for assistance from a lender not earlier than the 60th day of delinquency, a guaranty agency must engage in default aversion activities designed to prevent a default by the borrower. For any loan on which a default claim is not paid by the guaranty agency as a result of the loan being brought into current repayment status by the guaranty agency on or before the 360th day of delinquency, the guaranty agency shall be paid a default aversion fee. For the purpose of earning the default aversion fee, the term “current repayment status” means that the borrower is no longer delinquent as a result of paying all principal and interest on the loan for which a payment due date has passed. The fee shall be equal to 1 percent of the total unpaid principal and accrued interest on the loan at the time the request for assistance is submitted by the lender.
The default aversion fees earned may be transferred by the guaranty agency to its Operating Fund from the Federal Fund no more frequently than monthly. The statute stipulates that the fee may not be paid more than once on any loan, unless (1) at least 18 months have elapsed between the date the borrower entered current repayment status and the date the lender filed a subsequent default aversion assistance request; and (2) the borrower was not more than 30 days past due on any payment of principal and interest during such period.]

5. Amounts remaining from collections of defaulted loans after payment of the Secretary’s equitable
share and depositing the complement of the reinsurance percentage into the Federal Fund;

[Note: The statute authorizes guaranty agencies to deposit an amount equal to 24 percent of the payments made by or on behalf of a defaulted borrower into its Operating Fund. Beginning October 1, 2003, the amount of collections an agency may deposit into its Operating Fund is reduced to 23 percent.]
6. Amounts borrowed from the Federal Fund; and

7. Other receipts as specified in the Department’s regulations.

Borrowing from the Federal Fund
Under §422A(f) of the HEA, in addition to using the Federal Fund for the purposes described earlier, a guaranty agency may borrow a limited amount of funds from the Federal Fund to establish the Operating Fund. Upon receiving the Secretary’s approval, an agency may borrow from the Federal Fund an amount up to the equivalent of 180 days of cash expenses (not including claim payments) for normal operating expenses for deposit into the agency’s Operating Fund. The amount borrowed and outstanding during the first 3 years after establishing the Operating Fund may not at any time exceed the lesser of 180 days cash expenses (not including claim payments), or 45 percent of the balance in the Federal reserve fund as of September 30, 1998.
The statute requires a guaranty agency that wishes to borrow principal or interest from the Federal Fund to provide the Secretary with a repayment schedule and evidence that it can meet the schedule. Therefore, prior to borrowing from the Federal Fund, a guaranty agency shall provide the Secretary with the following:
1. A request for the loan that identifies the desired amount and the desired terms of repayment;

2. A projected revenue and expense statement (that must be updated annually during the repayment period), that demonstrates that the agency will be able to repay the loan within the repayment period requested;

3. A certification that sufficient funds will remain in the Federal Fund to pay lender claims within the required time periods, to meet the reserve recall requirements of §422 of the HEA, and to satisfy the statutory minimum reserve level of 0.25 percent, as mandated by §428(c)(9) of the HEA; and

4. A certification that there are no legal prohibitions to the agency obtaining or repaying the loan.

Borrowing of interest
Section 422A(f)(2) authorizes the Secretary to permit a limited number of agencies to borrow an amount greater than 180 days of operating expenses (not including claim payments) in certain limited cases. Specifically, an agency may be authorized to exceed the 180-day limit by the amount of interest income earned on the Federal Fund during the 3-year period following the date of enactment. To be allowed to borrow the interest income, in addition to items 1-4 above, the agency must demonstrate to the Secretary that the cash flow in the Operating Fund will be negative without the transfer of such interest, and the transfer will substantially improve the financial circumstances of the guaranty agency.
The Secretary will respond to a guaranty agency’s request to borrow from the Federal Fund within two weeks after receiving the items described above. All correspondence should be addressed to: Mr. Larry Oxendine, Director, Guarantor and Lender Oversight Service, U.S. Department of Education, Washington, DC 20202. Guaranty agencies may call Mr. Oxendine’s staff at (202) 401-2280 for information concerning their requests.

Ownership and control of the Operating Fund
Except for funds an agency borrows from the Federal Fund under §422A(f) of the HEA, the Operating Fund shall be considered the property of the guaranty agency. The statute authorizes the Secretary to regulate the uses or expenditure of the Operating Fund during any period in which funds are owed to the Federal Fund as a result of borrowing under §422A(f) of the HEA. Accordingly, the Secretary has decided that, during any period in which the guaranty agency has an outstanding balance owed to the Federal Fund, 34 CFR 682.410(a)(2) and 682.418 shall apply to the use of money in the Operating Fund.

General usage rule
The statute specifies that the Operating Fund shall be used by the guaranty agency to fulfill its responsibilities under the HEA. In addition to repaying money borrowed from the Federal Fund, permissible uses include application processing, loan disbursement, enrollment and repayment status management, default aversion, collection activities, school and lender training, financial aid awareness and outreach activities, compliance monitoring, and other student financial aid related activities, as selected by the guaranty agency.

Repayment of loans borrowed from the Federal Fund
Except as specified in the special rule discussed below for repaying interest borrowed from the Federal Fund, the statute requires an agency to begin repayment of money borrowed from the Federal Fund not later than the start of the 4th year after the establishment of the Operating Fund. All amounts borrowed shall be repaid not later than 5 years after the date the Operating Fund is established.
Repayment of interest
The statute authorizes the Secretary to extend the period for repayment of interest borrowed under §422A(f)(2) of the HEA, from 2 years to 5 years if the Secretary determines that the cash flow of the Operating Fund will be negative if the borrowed interest had to be repaid earlier, or the repayment of the interest would substantially diminish the financial circumstances of the agency. To receive an extension, the agency must demonstrate that it will be able to repay all borrowed funds by the end of the 8th year following the date of establishment of the Operating Fund, and that the agency will be financially sound upon the completion of repayment. Repayment of amounts borrowed from the Federal Fund pursuant to §422A(f)(2) of the HEA that are repaid during the 6th, 7th, and 8th years following the establishment of the Operating Fund shall include the amount borrowed, plus any income earned after the 5th year from the investment of the borrowed amount. In determining the amount of income earned on the borrowed amount, the Secretary will use the average investment income earned on all the agency’s investments.
If an agency fails to make a scheduled repayment to the Federal Fund, the agency may not receive any other federal funds until the agency becomes current in making all scheduled payments, unless the Secretary waives this restriction.