Compliance Focus: An Update on Sequestration and Title IV Programs

by DLA Piper
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On August 2, 2011, Congress passed the Budget Control Act (“BCA”) of 2011, which put into place an automatic process of “across-the-board” Federal budget cuts, known as the sequester, to take effect if Congress failed to enact legislation to reduce the Federal deficit. Congress failed to act by March 1, 2013, and the budget cuts went into effect.

On March 1, 2013, David A. Bergeron, Acting Assistant Secretary published an Electronic Announcement outlining the impact of sequestration on the Title IV Student Financial Assistance Programs. The Electronic Announcement provided the financial aid community with general information on how the sequester will impact Title IV programs.

On March 13, 2013, a second Electronic Announcement provided an update on the impact of sequestration on the Title IV programs.

The Federal Pell Grant Program is exempt from the effects of the sequester. Therefore, there will be no changes for the current Award Year and the 2013-2014 Award Year Pell Grant Payment Schedule that was released on January 30, 2013 in “Dear Colleague Letter” GEN 13-06 will be unchanged under the sequester.

Federal Work Study (“FWS”) and Federal Supplemental Educational Opportunity Grant (“FSEOG”) Programs for the 2012-2013 award year are unaffected by the sequester.

However, under the sequester, Award Year 2013-2014 funding for FWS and FSEOG would be reduced by approximately $86M. Final FWS and FSEOG institutional allocations are expected to be released later this spring. You should not rely on any estimates of allocation amounts until official amounts are released by the Department.

The sequester does not change the annual or aggregate loan limits for Federal Direct Loans, or student’s (or parent’s) eligibility. However, certain loan fees paid by borrowers will be increased during the time the sequester is in effect.

  • The loan fee for Direct Subsidized and Unsubsidized Loans is increased from 1.0 percent to 1.051 percent. For example, the fee on a $5,500 loan will increase by $2.80 from $55.00 to $57.80.
  • The loan fee for Direct PLUS Loans (for both parent borrowers and graduate and professional student borrowers) is increased from 4.0 percent to 4.204 percent. For example, the fee on a $10,000 PLUS Loan will increase by $20.40 from $400.00 to $420.40.

The Department began sending email (and where necessary, paper) notifications on March 9, 2013 to student and parent borrowers who, based on origination records submitted by institutions to the Common Origination and Disbursement (“COD”) System, have a Direct Loan with a first disbursement after March 1, 2013. The text of the notifications for borrowers was provided in attachments to the March 13th Electronic Announcement.

However, on April 5, 2013, the Department published additional updates in an Electronic Announcement that informed the financial aid community that the increased loan fee percentages would be applied Direct loans where the first disbursement will be made on or after July 1, 2013, not March 1, 2013 as originally reported. This includes loans that will be made for the remainder of the 2012-2013 academic year, loans that will be made for summer 2013, and loans that will be made for the 2013-2014 academic year and forward. The Department is still in the process of determining when institutions must begin using the increased loan fee amounts, and has promised to provide us with sufficient lead time to make these changes. You are advised to continue to award and disburse Direct Loans using the pre-sequester loan fee amounts. When the increased fees go into effect on July 1, 2013, we anticipate that students will cover this nominal loss of loan proceeds with other resources. Nevertheless, be sure you comply with the loan cancellation requirements at 34 CFR §668.165 (a)(4) if a student or parent does request that all or a portion of a loan be cancelled.

The Iraq – Afghanistan Service Grant (“IASG”) Program is also subject to the across-the-board budget cuts under the sequester law.  Under sequestration any reduction in the amount of an IASG award would only apply to awards where the first disbursement was made during the time the sequester is in effect. Second or subsequent disbursements of an IASG award for which the first disbursement was made on or before March 1, 2013 are not subject to the sequester required reduction.

However, IASG awards that are subject to the sequester require reductions of 37.8 percent from the award amount for which the student would otherwise have been eligible, not from the Scheduled Award amount of $5,550.

The Teacher Education Assistance for College and Higher Education  (“TEACH”) Grant program is also subject to the across-the-board budget cuts under the sequester law.

The reductions only apply when the first disbursement is made after March 1, 2013. Second or subsequent disbursements where the first disbursement was made on or before March 1, 2013 are not subject to the sequester reduction.

TEACH Grant awards that are subject to the sequester require reductions of 12.6 percent from the award amount for which the student would otherwise have been eligible, not from the Scheduled Award amount of $4,000.

We will provide additional updates as more information becomes available.


 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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