Common Manual Updates

 

LOUISIANA STUDENT FINANCIAL ASSISTANCE COMMISSION
OFFICE OF STUDENT FINANCIAL ASSISTANCE

LOAN PROGRAM MEMORANDUM

LPM NO.: L98-3 Effective Date: As Indicated
Pub. Date: April 27, 1998 Distribution: Lenders and Schools
Topic: Common Manual Updates

 

To assure that your Common Manual remains current, please record this document on your LPM/LPB index, and retain it in Appendix E of your manual.

 

State Tuition Recovery Funds

The Common Manual currently states that a school need not provide a letter of credit if it can demonstrate that the school is licensed to operate in a state that has a Department-approved tuition recovery fund to which the school contributes and the fund is adequate to ensure that the school is able to pay all required refunds.

Section 4.3 of the Common Manual will be revised to coordinate with the new detailed requirements of the Financial Responsibility regulations published in the Federal Register on November 24, 1997. Language that defines a state tuition recovery fund will be removed and a reference to §668.173(d) will be added to specify the new location of the defining criteria.

This change is effective for guarantor review of a school’s compliance with financial responsibility standards on or after July 1, 1998.

 

Department Makes Final Decision Regarding Financial Responsibility Standards

Current Common Manual language is being revised to clarify that, for purposes of determining school financial responsibility, the Department of Education makes the final decision regarding whether a school has satisfactorily resolved any compliance problems identified in a program review or audit.

Common Manual section 4.3. will be updated to reflect this correction, which is effective retroactive to the effective date of the Common Manual.

 

New Interest Rate Formulas for Stafford and PLUS Loans

The Common Manual currently does not include the new formulas for calculating the variable interest rates applicable to Stafford and PLUS loans first disbursed on or after July 1, 1998. The manual language and corresponding tables in subsections 6.1.D. and 6.1.F. will be revised to incorporate the statutory requirements of Section 427A(h)(1) and (2) of the HEA, as follows:

•A Stafford loan first disbursed on or after July 1, 1998, has a variable interest rate, not to exceed 8.25%, regardless of the period of enrollment or the interest rate on the borrower’s previous loans. The interest rate is adjusted annually on July 1, and that rate remains in effect through June 30 of the following year. The rate is calculated by adding 1.0% to the bond equivalent

rate of securities with a comparable maturity as established by the Department.

•A PLUS loan first disbursed on or after July 1, 1998, has a variable interest rate, not to exceed 9%. The interest rate is adjusted annually on July 1. The variable rate for each July 1 to June 30 period is calculated by adding 2.1% to the bond equivalent rate of securities with a comparable maturity as established by the Department.

These changes are effective for Stafford and PLUS loans first disbursed on or after July 1, 1998.

Note: As of the publication deadline for the July 1998 update of the Common Manual, the Department had yet to publish its determination concerning the securities that are the basis for the calculation of interest rates on Stafford and PLUS loans first disbursed on or after July 1, 1998. The Common Manual will be revised upon the Department’s official announcement.

 

The Emergency Student Loan Consolidation Act of 1997 Changes Consolidation Loan Policy

On November 13, 1997, PL 105-78, the Emergency Student Loan Consolidation Act of 1997 (ESLCA) was enacted to revise certain provisions of Federal Consolidation loan policy. The following describes policy changes that are being implemented to comply with the ESLCA. The Common Manual will be updated to reflect these changes.

The following provisions of the ESLCA are effective for Consolidation loan applications received by the consolidating lender between November 13, 1997 and September 30, 1998, inclusive:

Withdrawal of Direct Consolidation Loan Application

The Common Manual currently states that the borrower must certify that he or she does not have another Consolidation loan application pending to be eligible for a Federal Consolidation loan. Section 9.2. of the Common Manual will be revised to reflect the provision of the ESLCA which states a pending application for a Direct Consolidation loan does not affect the borrower’s eligibility, provided that application is canceled by the borrower prior to the date the Federal Consolidation loan is made. The lender may rely on the borrower’s statement that any pending Direct Consolidation loan application has been or will be canceled.

Direct Loans Eligible for Federal Consolidation

Section 9.2 of the Common Manual will be updated to reflect that Direct loans may be included in a Federal Consolidation loan.

Interest Rate on Loans Added after Consolidation

Current Common Manual policy states that the interest rate and repayment terms on a Consolidation loan may be affected if loans are added after the original Consolidation loan is made. Section 9.2 of the Common Manual will be revised to state that a Consolidation loan made from an application received by the lender between November 13, 1997 and September 30, 1998, inclusive, retains a variable interest rate, not to exceed 8.25%, regardless of any new loans added after the original Consolidation loan is made. For portions of the Consolidation loan attributable to HEAL loans, the variable interest rate is based on the average of the 91-day Treasury bill rate plus 3%, with no cap.

Calculating the Consolidation Loan Interest Rate

Subsection 9.4.D. of the Common Manual will be revised to state that for Federal Consolidation loan applications received by the consolidating lender between November 13, 1997, and September 30, 1998, inclusive, the interest rate is a variable rate that is adjusted annually on July 1. The variable rate is calculated as follows:

•For portions of the Consolidation loan attributable to FFELP, FDLP, FISL, Perkins, HPSL, or NSL loans, the variable rate is based on the 91-day Treasury bill rate plus 3.1%, not to exceed 8.25%. For purposes of calculating this rate, the Treasury bill utilized is the bond equivalent rate of 91-day Treasury bills auctioned at the final auction held prior to the preceding June 1.

•For portions of the Consolidation loan attributable to HEAL loans, the variable rate is based on the 91-day Treasury bill rate plus 3.0%, with no cap. For purposes of calculating this rate, the Treasury bill utilized is the average of the bond equivalent rates of the 91-day Treasury bills auctioned for the quarter ending June 30th.

Lenders initially may calculate the interest rate on these loans using the weighted average interest rate method described in subsection 9.4.D. of the Common Manual, but must have, no later than April 1, 1998, recalculated the loans at the variable rate retroactively to the date the loans were disbursed and applied any credits to the borrower’s account.

For all Consolidation loans made on or after July 1, 1994, whose applications are received by the lender before November 13, 1997, or received after September 30, 1998, the interest rate is the weighted average of the underlying loans, rounded up to the nearest whole percent.

Interest Benefits and Special Allowance Eligibility for Consolidated Loans Clarified

Current Common Manual policy states that a Consolidation loan is eligible for interest subsidy during periods of deferment only if the loan was made between January 1, 1993, and August 9, 1993, inclusive, or if all of the underlying loans included in the Consolidation loan were subsidized Stafford loans.

Section 9.7 of the Common Manual will be revised to include new subsidy eligibility provisions established by the ESLCA. According to the ESLCA, a Federal Consolidation loan made from an application received by the lender between November 13, 1997, and September 30, 1998, inclusive, is eligible for interest subsidy during eligible periods of deferment on any portion of the Consolidation loan that paid a subsidized Federal Stafford loan or a subsidized Direct Stafford loan. The borrower is responsible for interest payment during periods of authorized deferment on any Consolidation loan, or any portion of a Consolidation loan, that paid an unsubsidized Title IV loan.

The nondiscrimination provisions of the ESLCA do not expire, and are effective for all Consolidation loan applications received by the consolidating lender on or after November 13, 1997—not just those Consolidation loan applications received between November 13, 1997 and September 30, 1998, inclusive.

Nondiscrimination in Consolidation Loans

The Common Manual currently provides a list of the terms and conditions with which a Federal Consolidation loan lender must comply. Subsection 9.1.A. of the Common Manual is being revised to add the nondiscrimination provisions of the ESLCA. Federal Consolidation loan lenders must make Consolidation loans without discriminating against an applicant based on any of the following criteria:

Special Allowance Eligibility for Consolidation Loans

The Common Manual will be corrected to state that when billing for special allowance, the lender must consider in its calculations any Consolidation loans containing balances derived from the Nursing Student Loan Program (NSL). The portion of a Consolidation loan attributable to a Health Education Assistance Loan (HEAL) is not eligible for special allowance. This correction to section 9.7 is effective retroactive to the effective date of the Common Manual.

 

New Formula for Calculating Special Allowance Rates Added

Common Manual policy has been revised to incorporate the statutory requirements of (438(b)(2)(F) of the HEA which will change the formula used to calculate the special allowance rate for Stafford and PLUS loans first disbursed on or after July 1, 1998.

The amount of special allowance that is payable on an eligible loan is determined by multiplying the unpaid principal and capitalized interest on the loan by the applicable special allowance rate. Special allowance rates are calculated and published quarterly by the Department. The formulas used to calculate these rates are exhibited in a table found in appendix A, subsection A.2.A. The following factors are considered in the calculation of special allowance rates for a loan:

If a special allowance rate calculation results in a negative number, special allowance will not be paid for that loan type for that quarter.

The special allowance rate for Stafford and PLUS loans first disbursed on or after July 1, 1998, is calculated using the following new formula:

(Bond Equivalent Rate of Securities with a Comparable Maturity
as Established by the Department + 1.0% Applicable Interest Rate of the Loan) ÷ 4

The "Special Allowance Formulas" table and the accompanying examples in subsection A.2.A. of appendix A of the Common Manual will be revised to incorporate these changes.

Note: As of the publication deadline for the July 1998 update of the Common Manual, the Department had yet to publish its determination concerning the securities that are the basis for the calculation of special allowance rates on Stafford and PLUS loans first disbursed on or after July 1, 1998. The Common Manual will be revised upon the Department’s official announcement.

 

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