Tag: Student Loans

Employer Student Loan Debt Benefits Following SECURE 2.0

In December 2022, Congress enacted groundbreaking legislation as part of the SECURE 2.0 Act (SECURE 2.0) codifying an opportunity for employers to provide matching contributions within a tax-qualified retirement plan based on their employees’ qualified student loan payments outside the plan. The SECURE 2.0 student loan payment match is the latest vehicle for employers to aid employees to help relieve the financial burden of student loan debt.

This On the Subject discusses the SECURE 2.0 student loan benefit and other employer options for providing tax-advantaged benefits to employees based on student loan payments. It also examines the open questions and current implementation challenges for sponsors of 401(k) and 403(b) plans hoping to implement the student loan benefit.

IN DEPTH

THE STUDENT LOAN DEBT PROBLEM AND EMPLOYER RESPONSE

Over the last two decades, the amount of outstanding student loan debt in the United States has grown exponentially. Studies suggest there are currently around 43 million Americans with student loan debt of more than $1.6 trillion. Paying off student loan debt has become a hot-button political issue, including with presidential candidates and members of Congress. Earlier this summer, the US Supreme Court’s decision in Biden v. Nebraska rejected the Biden administration’s plans for student loan debt relief. The Supreme Court held that the Higher Education Relief Opportunities for Students Act of 2003 did not authorize the secretary of education to cancel approximately $430 billion in federal student loan principal. This decision comes as the statutory pause on student loan repayments ended on September 1, 2023, a moratorium enacted in response to the COVID-19 pandemic and lasting over three years.

Managing student loan debt has become an increasingly significant issue for many workers. As a result, student loan debt presents a significant opportunity for employers. Student loan repayment programs can be a key factor in attracting and retaining talent. In a 2019 survey conducted by Gradifi, a student loan benefits provider, 70% of employees said they were likely to stay at their current jobs because a student loan paydown plan was available. Ninety-seven percent of employees reported being happier in their place of employment because of a student loan repayment program. Ninety-two percent of employees reported feeling an improvement in their stress because of their employer’s student loan repayment program. As a result, many employers are investigating new options to stay competitive and help their employees tackle student loan debt.

OPTIONS FOR EMPLOYERS TO PROVIDE TAX-ADVANTAGED STUDENT LOAN DEBT BENEFITS

Unfortunately, there are limited ways for employers to structure a program to provide student loan debt assistance that is not subject to immediate income tax. The current vehicles for providing student loan debt benefits on a tax-advantaged basis are:

Educational Assistance Programs

As part of the Coronavirus Aid, Relief, and Economic Security Act of 2020 (CARES Act), Congress amended Section 127 of the Internal Revenue Code (Code) to permit employers to pay up to $5,250 per year to employees for student loan repayments as part of an educational assistance program. Many employers utilize such plans to provide tuition reimbursement for college or advanced degrees. Under the CARES Act, employers may also utilize these plans to provide student loan debt assistance.

To do so, employers must comply with the requirements of Section 127 of the Code, including:

  • The employer must have a written plan document that lays out the terms of the program;
  • The program must benefit employees or certain former employees who qualify under rules set up so that the program does not favor highly compensated employees;
  • The program must not provide more than 5% of its benefits during any year for shareholders or owners (or their spouses or dependents) who own more than 5% of the stock or of the capital or profits interest of the business;
  • The program must not allow employees to choose to receive cash or other benefits that would be included in gross income instead of educational assistance; and
  • Eligible employees must be given reasonable notice of the program.

An educational assistance program provides a direct ability to pay off student loan debt through a basic but effective tax structure. Employers can make payments either to employees or directly to lenders. Many employers who offer student loan repayment benefits work with a third-party vendor because the employer does not want to be in the position of asking employees for sensitive financial information regarding student loan debt. Vendors often work with lenders either to pay off student loan debt directly or, if the employer provides direct payment to employees, to track or verify student loan debt payments so that the employer can be certain the payments are being used to pay off student loan debt.

The $5,250 limit is the combined limit for all educational assistance, including both expenses related to tuition reimbursement and student loan debt payments. Under current law, the ability for employers to pay up to $5,250 per year to employees for student loan debt payments as part of an educational assistance program expires on December 31, 2025. However, it is often the case that employee benefit options enacted through the Code which are originally scheduled to sunset are extended indefinitely or made permanent. There is no guarantee, but it would not be surprising if the student loan debt payment benefit is extended or made permanent, particularly in the current environment where student loan debt receives significant media attention.

Contributions to Tax-Qualified Retirement Plans

In 2018, the Internal Revenue Service (IRS) released a groundbreaking private letter ruling (PLR) that helped to clear the way for employers to begin providing student loan repayment benefits as part of their 401(k) plans. The PLR confirmed that, under certain circumstances, 401(k) plan sponsors may link the amount of employer contributions made on an employee’s behalf to the amount of student loan debt payments made by the employee outside the plan. However, the PLR only applied to the specific plan sponsor requesting the ruling and did not address the effect on many other plan qualification requirements, such as the Code Section 401(a)(4) nondiscrimination requirement.

SECURE 2.0 codified the ability for certain defined contribution plan sponsors to provide employer-matching contributions based on employee payment of student loan debt. Effective for plan years after December 31, 2023, 401(k) and 403(b) plan sponsors can provide employer-matching contributions based on an employee’s “qualified student loan payments” made outside of the plan. A qualified student loan payment includes any payment made by an employee in repayment of a qualified higher education loan. The loan must be for the cost of attendance at an eligible educational institution.

SECURE 2.0 provided a helpful statutory framework for plan sponsors to provide matching contributions on student loan payments. Some of the most significant features are:

  • “Qualified student loan payments” can include payments made by an employee for student loans made on behalf of the employee, the employee’s spouse or dependent;
  • Plan sponsors are permitted to rely on an employee’s self-certification of qualified student loan payments, which certification must be made on an annual basis;
  • Matching contributions on student loan payments must be treated the same as matching contributions made on elective deferrals concerning the match percentage, eligibility and the same vesting rules (though match frequency can differ);
  • Plan sponsors may make the student loan match more frequently than annually (e.g., on a payroll period basis), but employees must have at least three months after the close of the plan year to claim the match;
  • Qualified student loan payments are treated as available to all participants for purposes of the Code Section 401(a)(4) nondiscrimination testing requirements;
  • Student loan payments can be treated as elective deferrals for safe harbor plan rules; and
  • For purposes of the Actual Deferral Percentage (ADP) test, plan sponsors may separately test participants who receive matching contributions on account of qualified student loan payments.

OUTSTANDING QUESTIONS REGARDING SECURE 2.0 STUDENT LOAN EMPLOYER MATCHING CONTRIBUTIONS

While SECURE 2.0 provided the framework for the implementation of the student loan match, many open questions remain, and the US Department of the Treasury (Treasury) and IRS need to provide more guidance to fully implement this feature. Some specific areas where guidance would be helpful include:

  • More guidance on what constitutes a qualified student loan payment. It seems clear that payment made by an employee toward a loan taken by an employee, employee’s spouse or dependent qualifies, but when is this determined? What if the employee’s spouse or dependent was a spouse or dependent when the loan was taken, but not when the loan payments are made (or vice versa)?
  • What is required for a plan sponsor to establish reasonable procedures regarding annual self-certification? Separately, are there any limits on how much substantiation a plan sponsor can require if it wants to?
  • If the match is allocated after the end of the year, can it be limited to active employees? Would this apply to safe harbor plans (which generally are not permitted to require service as of the last day of the plan year for employees to receive contributions) as well?
  • How does the ability of employees to claim the match within three months after the end of the plan year affect the general requirement for non-safe harbor plans to correct ADP and Actual Contribution Percentage testing failures within two-and-a-half months after the end of a plan year to avoid an excise tax?
  • How do the vesting requirements work? The student loan match must vest “in the same manner” as a regular match. How does this work if the plan has a fully vested safe harbor match plus a discretionary match subject to a vesting schedule?

SECURE 2.0 directs the Treasury to issue regulations to address these and other questions and establish reasonable procedures and deadlines for employees to take advantage of the student loan match benefit.

PLAN SPONSOR CHALLENGES IMPLEMENTING SECURE 2.0 STUDENT LOAN DEBT BENEFITS

In addition to the open legal questions, numerous other challenges exist for plan sponsors seeking to implement the SECURE 2.0 student loan matching contribution. Most significantly, plan sponsors need to assess their ability to implement a student loan benefit within the context of their existing 401(k) or 403(b) plan platform. The plan’s recordkeeper and third-party administrator must have systems set up to administer the student loan debt benefit. Due in part to the ongoing questions and lack of guidance, many recordkeepers have delayed the development of the systems set up to administer student loan debt benefits on a large scale beginning in 2024. Some have set up pilot programs to test the option for a handful of plans. Many recordkeepers and administrators are just starting to “pilot” their process and systems for 2024 before making the offering available more widely, which may be in 2025 or 2026.

Employers pondering a SECURE 2.0 student loan benefit should consider the following:

  • Is the benefit right for your employee population? For some employers the answer is obvious: They either have a significant number of employees with college or advanced degrees for whom this issue is a high priority, or they do not. For others, it can be useful to assess the employee demographics to estimate the proportion of employees who may be interested in a student loan match. Some 401(k) recordkeepers are developing data and programs to help their clients make this determination. Some employers have utilized polls or surveys to try to determine employee interest.
  • What is the potential cost? Employers can model cost projections based on expected participation rates. Some recordkeepers are developing data and programs to help their clients make this determination.
  • Are there other, more effective ways to provide student loan debt benefits? For example, the CARES Act educational assistance program benefit discussed above is a relatively straightforward way to provide direct student loan debt benefits.

Although challenges remain, plan sponsors should keep in mind that plan design features are constantly evolving, and implementation issues always take time. Many retirement plan practitioners believe that it is only a matter of time before the student loan employer matching contribution becomes a commonplace feature within most employers’ 401(k) or 403(b) retirement plans.

Article by Jeffrey M. Holdvogt , Brian J. Tiemann , Teal N. Trujillo of McDermott Will & Emery

For more news on education, visit the NLR Public Education and Services page.

© 2023 McDermott Will & Emery

CFPB to Examine College Lending Practices

On January 20, the CFPB announced that it would begin examining the operations of post-secondary schools that offer private loans directly to students and update its exam procedures to include a new section on institutional student loans.  The CFPB highlights its concern about the student borrower experience in light of alleged past abuses at schools that were previously sued by the CFPB for unfair and abusive practices in connection with their in-house private loan programs.

When examining institutions offering private education loans, in addition to looking at general lending issues, CFPB examiners will be looking at the following areas:

  • Placing enrollment or attendance restrictions on students with loan delinquencies;
  • Withholding transcripts;
  • Accelerating payments;
  • Failing to issue refunds; and
  • Maintaining improper lending relationships

This announcement was accompanied by a brief remark from CFPB Director Chopra:  “Schools that offer students loans to attend their classes have a lot of power over their students’ education and financial future.  It’s time to open up the books on institutional student lending to ensure all students with private student loans are not harmed by illegal practices.”

Putting it Into Practice:  The CFPB’s concern with the experience of student borrowers is in line with a number of enforcement actions pursued by the Bureau against post-secondary schools.  The education loan exam procedures manual is intended for use by Bureau examiners, and is available as a resource to those subject to its exams. These procedures will be incorporated into the Bureau’s general supervision and examination manual.

Article By Moorari Shah, A.J. S. Dhaliwal, and Pouneh Almasi of Sheppard, Mullin, Richter & Hampton LLP

For more financial legal news, click here to visit the National Law Review.

Copyright © 2022, Sheppard Mullin Richter & Hampton LLP.

CFPB Suit Against Student Loan Trusts Dismissed

On March 26, 2021, Judge Maryellen Noreika of the U.S. District Court for the District of Delaware dismissed a lawsuit brought by the Consumer Financial Protection Bureau (“CFPB”) in Consumer Financial Protection Bureau v. The National Collegiate Master Student Loan Trusts,1 finding, inter alia, that the CFPB’s suit was constitutionally defective due to the CFPB’s untimely attempt to ratify the prosecution of the litigation in the wake of the Supreme Court’s decision in Seila Law LLC v. Consumer Financial Protection Bureau.  This case has been closely watched by many participants in the structured finance industry, because the litigants had disputed over the question of whether the trusts at issue in the litigation are “covered persons” liable under the Consumer Financial Protection Act despite their status as passive securitization trust entities—a question that has important and wide-reaching implications for the structured finance markets.

Background

The National Collegiate Student Loan Trusts (the “Trusts”) hold more than 800,000 private student loans through 15 different Delaware statutory trusts created between 2001 and 2007, totaling approximately $12 billion.  The loans originally were made to students by private banks.  The Trusts provided financing for the student loans by selling notes to investors in securitization transactions.  The Trusts also provided for the servicing of and collection on those student loans by engaging third-party servicers.  However, the Trusts themselves are passive special purpose entities lacking employees or internal management; instead, to operate, the Trusts relied on various interlocking trust-related agreements with multiple third-party service providers to—among other things—administer each of the Trusts, determine the relative priority of economic interests in the Trusts, and service the Trusts’ loans.

On September 4, 2014, the CPFB issued a civil investigative demand (“CID”) to each of the Trusts for information concerning thousands of allegedly illegal student loan debt collection lawsuits used to collect on defaulted loans held by the Trusts.  On May 9, 2016, the CFPB alerted the Trusts to the fact that the CFPB was considering initiating enforcement proceedings against the Trusts based on the collection lawsuits through a Notice and Opportunity to Respond and Advice (“NORA”).  A few weeks later, the law firm McCarter & English, LLP (“McCarter”), purporting to represent the Trusts, submitted a NORA response to the CFPB.  McCarter and the CFPB then proceeded to negotiate a Proposed Consent Judgment to resolve the CFPB’s investigation of the Trusts.

The Litigation

On September 18, 2017, the CFPB filed suit against the Trusts in Delaware federal court (the “Court”), alleging that the Trusts had violated the Consumer Financial Protection Act of 2010 (the “CFPA”) by engaging in unfair and deceptive practices in connection with their servicing and collection of student loans.  Although the CFPB acknowledged that the Trusts had no employees and that the alleged misconduct resulted from actions taken by the Trusts’ servicers and sub-servicers in the course of their debt collection activities—rather than any actions taken by the Trusts themselves—the CFPB nonetheless named only  the Trusts as defendants.  On the same day, the CFPB also filed a motion to approve the Proposed Consent Judgment negotiated with McCarter.

However, within days of the CFPB’s initiation of the lawsuit, multiple parties associated with the Trusts intervened in the litigation to argue against the entry of the Proposed Consent Judgment.  The intervenors expressed concern that the entry of the Proposed Consent Judgment would impermissibly impair or rewrite their respective contractual obligations as set forth in the agreements underlying the Trusts.  After discovery, on May 31, 2020, the Court denied the CFPB’s motion to approve the Proposed Consent Judgement, holding that McCarter lacked authority to execute the Proposed Consent Judgment pursuant to terms of the agreements governing the Trusts and Delaware law.

On June 29, 2020, in another lawsuit involving the CFPB, the United States Supreme Court held in Seila Law LLC v. Consumer Financial Protection Bureau that the CFPB’s structure violated the Constitution’s separation of powers.2  Specifically, the Supreme Court held that “an independent agency led by a single Director and vested with significant executive power” has “no basis in history and no place in our constitutional structure,”3 and that the statutory restriction on the President’s authority to remove the CFPB’s Director only for “inefficiency, neglect, or malfeasance” violated the separation of powers.4  The Supreme Court then concluded that the proper remedy was to sever the removal restriction, and ultimately allowed the CFPB to stand.  The Supreme Court also noted that an enforcement action that the CFPB had filed to enforce a CID while its structure was unconstitutional may nonetheless be enforceable if it was later successfully ratified by an acting director of the CFPB who was removable at will by the President.  If not so ratified, however, the enforcement action must be dismissed.

Around the time the Supreme Court issued its decision in Seila Law, various intervenors were briefing multiple motions to dismiss the CFPB’s complaint against the Trusts.  One subset of intervenors—Ambac Assurance Corporation, the Pennsylvania Higher Education Assistance Agency, and the Wilmington Trust Company5 (collectively, “Ambac”)—argued, inter alia, that: (i) the Supreme Court’s decision in Seila Law required dismissal of the CFPB’s complaint because the CFPB’s ratification of the litigation against the Trusts was untimely, and (ii) the Court lacked subject matter jurisdiction over its asserted claims because the Trusts are not “covered persons” as required under the CFPA.  Another intervenor, Transworld Systems, Inc.6 (“TSI”) also argued that the CFPB’s complaint merited dismissal for lack of subject matter jurisdiction as well.

The Court’s Holding

Subject Matter Jurisdiction

The Court held that it possessed the requisite subject matter jurisdiction to decide the CFPB’s claims, and rejected the contention that a showing of whether the Trusts are “covered persons” is a jurisdictional requirement under the CFPA.  To determine whether a restriction—such as the term “covered persons”—is jurisdictional, the Court looked to “whether Congress has clearly stated that the rule is jurisdictional.”7  “[A]bsent such a clear statement,” courts “should treat the restriction as nonjurisdictional.”8

The Court then examined the CFPA, observing that there is no clear statement in the CFPA’s jurisdictional grant that “covered persons” is required.  The Court noted that only one section of the CFPA addresses the issue of subject matter jurisdiction, and that section granted jurisdiction over “an action or adjudication proceeding brought under Federal consumer law” with no mention of “covered persons” whatsoever.9

While the Court agreed that the term “covered persons” appeared multiple times throughout the CFPA, it pointed out that none of the sections where “covered persons” appeared mentioned jurisdiction.

Enforcement Authority

In light of the Supreme Court’s holding in Seila Law, the Court granted Ambac’s motion to dismiss the CFPB’s complaint due to the CFPB’s lack of enforcement authority as a result of its untimely ratification of the litigation.

As an initial matter, the Court observed that there was no question that the CFPB initiated the enforcement action against the Trusts at a time when its structure violated the constitutional separation of powers.  The task facing the Court, then, would be to determine (i) whether that constitutional defect has been cured by ratification, or (ii) whether dismissal of the suit is required.  Under the applicable Third Circuit precedent, there are three general requirements for ratification of previously-unauthorized action by an agency: (1) “the ratifier must, at the time of ratification, still have the authority to take the action to be ratified”; (2) “the ratifier must have full knowledge of the decision to be ratified”; and (3) “the ratifier must make a detached and considered affirmation of the earlier decision.”10  Here, the parties’ dispute centered around the first requirement.

Under the first requirement, the Court noted that “it is essential that the party ratifying should be able not merely to do the act ratified at the time the act was done, but also at the time the ratification was made.”11  On July 9, 2020, the CFPB’s then-Director, Kathy Kraninger, had ratified the decision to initiate the CFPB’s litigation against the Trusts a few weeks after the Supreme Court’s decision in Seila Law.  The Court held that Director Kraninger’s ratification was ineffective, because (i) an enforcement action arising from alleged CFPA violations must be brought no later than three years after the date of discovery of the violation to which the action relates,12 (ii) ratification is ineffective when it takes place after the relevant statute of limitations has expired, and (iii) the CFPB clearly had discovery of the Trusts’ alleged CFPA violations more than three years before the ratification date, i.e., before July 9, 2017.  Thus, Director Kraninger’s ratification of the CFPB’s decision to file suit against the Trusts failed to cure the constitutional defects raised by Seila Law, and the CFPB’s complaint—initially filed by a CFPB director unconstitutionally insulated from removal—could not be enforced.

In so holding, the Court rejected the CFPB’s argument that the timeliness requirements for ratification were satisfied because the CFPB had brought the original suit within the applicable limitations period.  The Court likewise rejected the CFPB’s request to equitably toll the statute of limitations for ratification, because the CFPB “could not identify a single act that it took to preserve its rights in this case in anticipation of the constitutional challenges that could have reasonably ended with an unfavorable ruling from the Supreme Court.”13

Key Takeaways

The securitization industry has operated for decades on the premise that agreements governing securitization transactions provide that transaction parties are responsible for their own malfeasance and, barring special circumstances, will not be held accountable for the misconduct of other parties to the transaction.  A decision holding that passive securitization entities like the Trusts are “covered persons” under the CFPA—and thus potentially responsible for the actions of their third-party service providers—would undermine the certainty of contract terms that undergirds the success of the structured finance industry, with grave implications for the heathy functioning of the industry.  While the substantive question of whether passive securitization entities like the Trusts could indeed be “covered persons” and held accountable for the actions of their third-party service providers remains to be answered for another day, the Court did observe that it “harbor[ed] some doubt” that the plain language of the CFPA extended to passive statutory trusts,14 and expressed skepticism as to whether the CFPB could successfully replead in a manner that would successfully cure the deficiencies in its original complaint.

1   2021 WL 1169029, at *3 (D. Del. Mar. 26, 2021).

2   140 S.Ct. 2183, 2197 (June 29, 2020).  For a detailed discussion on Seila Law, please see our July 2, 2020 Clients & Friends Memo, “Seila Law LLC v. Consumer Financial Protection Bureau: Has the Supreme Court Tamed or Empowered the CFPB?”, available at https://www.cadwalader.com/resources/clients-friends-memos/seila-law-llc-v-consumer-financial-protection-bureau-has-the-supreme-court-tamed-or-empowered-the-cfpb.

3   Id. at 2201.

4   Id. at 2197.

5   Ambac Assurance Corporation provided financial guarantee insurance with respect to securities in over half of the Trusts.  The Pennsylvania Higher Education Assistance Agency is the Primary Servicer for the Trusts, while the Wilmington Trust Company is the Trusts’ Owner Trustee.

6   TSI is a sub-servicer responsible for the collection of the Trusts’ delinquent loans.

7   Nat’l Collegiate Master Student Loan Tr. at *3 (citing Sebelius v. Auburn Reg’l Med. Ctr., 568 U.S. 145, 153 (2013)).

8   Id.

9   See 12 U.S.C. § 5565(a)(1).

10  Nat’l Collegiate Master Student Loan Tr. at *4 (quoting Advanced Disposal Serv. E., Inc. v. Nat’l Labor Relations Bd., 820 F.3d 592, 602 (3d Cir. 2016)).

11  Id. (quoting Advanced Disposal, 820 F.3d at 603) (emphasis in original).

12  12 U.S.C. § 5564(g)(1).

13  Nat’l Collegiate Master Student Loan Tr. at 7.

14  Id. at 3.

© Copyright 2020 Cadwalader, Wickersham & Taft LLP

ARTICLE BY Ellen Holloman,  Neil J. Weidner,  Cheryl D. Barnes
Rachel Rodman, Scott A. Cammarn and Ailsa Chau of
Cadwalader, Wickersham & Taft LLP

For more articles on the CFPB, visit the NLR Financial Institutions & Banking section.

U.S. Department of Education Delays Certain Gainful Employment Disclosure Requirements

In its latest action regarding the “Gainful Employment” regulations promulgated under the Obama administration, late on June 30, 2017, the U.S. Department of Education (“the Department”) announced a delay in certain disclosure requirements that were to have taken effect on July 1, 2017. This announcement occurred through Electronic Announcement #106, a pre-publication draft Federal Register notice (which will appear in the Federal Register on July 5, 2017) and an official press release.

The Gainful Employment regulations require all education programs offered by proprietary institutions of higher education, and non-degree programs offered by public and private nonprofit institutions, to meet specific debt-to-earnings measures in order to remain eligible for federal student financial aid. Additionally, the regulations require institutions to provide extensive informational disclosures to students regarding their Gainful Employment programs, and to issue warnings to students when a program is in danger of losing its eligibility for federal student financial aid. As described in a previous alert, the Department announced on June 16, 2017, that it will establish a negotiated rulemaking committee to develop proposed revisions to the Gainful Employment regulations; however, that prior announcement did not alter the effectiveness of the current regulations.

Through this latest announcement, the Department has now delayed until July 1, 2018, the requirements for institutions to include a link to the required Gainful Employment program disclosure template in all promotional materials, to provide a copy of the required template to all students on an individual basis, and to receive acknowledgements from individual students that they received the template. Importantly, institutions are still required as of July 1, 2017, to incorporate the new Gainful Employment program disclosure template into their website descriptions of educational programs offered.

Please also note that unless an institution submitted a timely notice of intent to appeal its programs’ Gainful Employment measures to the Department in late January, this latest action does not affect the regulatory requirement to issue student warnings for programs in danger of losing federal student financial aid eligibility because of those measures.

This post was written by John R. Przypyszny and Jonathan D. Tarnow of Drinker Biddle & Reath LLP.

Regulators Release Guidance on Private Student Loans With Graduated Repayment Terms at Origination

Katten Muchin Rosenman LLP

On January 29, the federal financial regulatory agencies, in partnership with the State Liaison Committee of the Federal Financial Institutions Examination Council, issued guidance for financial institutions on private student loans with graduated repayment terms at origination. This guidance provides principles that financial institutions should consider in their policies and procedures for originating private student loans with graduated repayment terms. The principles, in brief, enunciated in the release issued by the Federal Deposit Insurance Corporation, are as follows:

  • Ensure orderly repayment. Private student loans should have defined repayment periods and promote orderly repayment over the life of the loans. Graduated repayment terms should ensure timely loan repayment and be appropriately calibrated according to reasonable industry and market standards based on the amount of debt outstanding. Graduated repayment terms should avoid negative amortization or balloon payments.

  • Avoid payment shock. Graduated repayment terms should result in monthly payments that a borrower can meet in a sustained manner over the life of the loan. Graduated increases in a borrower’s monthly payment should begin early in the repayment period and phase in the amortization of the principal balance to limit payment shock to the borrower.

  • Align payment terms with the borrower’s income. Graduated repayment terms should be based on reasonable assumptions about the ability to repay of the borrower and cosigner, if any. Lender underwriting should include an assessment of a borrower’s (and, if applicable, a cosigner’s) ability to repay the highest amortizing payment over the term of the loan.

  • Provide borrowers with clear disclosures. Financial institutions that offer private student loans with graduated repayment terms should provide borrowers with disclosures in compliance with all applicable laws and regulations.

  • Comply with all applicable federal and state consumer laws and regulations and reporting standards. Private student loans with graduated repayment terms must comply with all applicable consumer protection laws. These include, but are not limited to, the Electronic Fund Transfer Act, the Equal Credit Opportunity Act, federal and state prohibitions against unfair, deceptive, or abusive acts or practices, and the Truth in Lending Act.

  • Contact borrowers before reset dates. Before originating private student loans with graduated repayment terms, financial institutions should develop processes for contacting borrowers before the start of the repayment period and before each payment reset date.

The guidance has been criticized by industry representatives as both overly restrictive and opaque. Some representatives questioned the notion of gauging the ability of an 18-year-old college freshman to repay.

Read the press release here.

ARTICLE BY

Jeffrey M. Werthan
OF
Katten Muchin Rosenman LLP