US Code: Title 20, Section 1078-3US Code as of 01/23/00

US Code : Title 20, Section 1078-3US Code as of: 01/23/00
Sec. 1078-3. Federal consolidation loans
(a) Agreements with eligible lenders
(1) Agreement required for insurance coverage
For the purpose of providing loans to eligible borrowers for
consolidation of their obligations with respect to eligible
student loans, the Secretary or a guaranty agency shall enter
into agreements in accordance with subsection (b) of this section
with the following eligible lenders:
(A) the Student Loan Marketing Association or the Holding
Company of the Student Loan Marketing Association, including
any subsidiary of the Holding Company, created pursuant to
section 1087-3 of this title;
(B) State agencies described in subparagraphs (D) and (F) of
section 1085(d)(1) of this title; and
(C) other eligible lenders described in subparagraphs (A),
() State agencies described in subparagraphs (D) and (F) of
(2) Insurance coverage of consolidation loans
Except as provided in section 1079(e) of this title, no
contract of insurance under this part shall apply to a
consolidation loan unless such loan is made under an agreement
pursuant to this section and is covered by a certificate issued
in accordance with subsection (b)(2) of this section. Loans
covered by such a certificate that is issued by a guaranty agency
shall be considered to be insured loans for the purposes of
reimbursements under section 1078(c) of this title, but no
payment shall be made with respect to such loans under section
1078(f) of this title to any such agency.
(3) Definition of eligible borrower
(A) For the purpose of this section, the term ''eligible
borrower'' means a borrower who -
(i) is not subject to a judgment secured through litigation
with respect to a loan under this subchapter and part C of
subchapter I of chapter 34 of title 42 or to an order for wage
garnishment under section 1095a of this title; and
(ii) at the time of application for a consolidation loan -
(I) is in repayment status;
(II) is in a grace period preceding repayment; or
(III) is a defaulted borrower who has made arrangements to
repay the obligation on the defaulted loans satisfactory to
the holders of the defaulted loans.
(B)
(i) [1] An individual's status as an eligible
borrower under this section terminates upon receipt of a
consolidation loan under this section, except that -
[1] So in original. No cl. (ii) has been enacted.
(I) an individual who receives eligible student loans after
the date of receipt of the consolidation loan may receive a
subsequent consolidation loan;
(II) loans received prior to the date of the consolidation
loan may be added during the 180-day period following the
making of the consolidation loan;
(III) loans received following the making of the
consolidation loan may be added during the 180-day period
following the making of the consolidation loan; and
(IV) loans received prior to the date of the first
consolidation loan may be added to a subsequent consolidation
loan.
(C)
(i) A married couple, each of whom has eligible student
loans, may be treated as if such couple were an individual
borrowing under subparagraphs (A) and (B) if such couple agrees
to be held jointly and severally liable for the repayment of a
consolidation loan, without regard to the amounts of the
respective loan obligations that are to be consolidated, and
without regard to any subsequent change that may occur in such
couple's marital status.
(ii) Only one spouse in a married couple applying for a
consolidation loan under this subparagraph need meet any of the
requirements of subsection (b) of this section, except that each
spouse shall -
(I) individually make the initial certification that no other
application is pending in accordance with subsection (b)(1)(A)
of this section; and
(II) agree to notify the holder concerning any change of
address in accordance with subsection (b)(4) of this section.
(4) ''Eligible student loans'' defined
For the purpose of paragraph (1), the term ''eligible student
loans'' means loans -
(A) made, insured, or guaranteed under this part, including
loans on which the borrower has defaulted (but has made
arrangements to repay the obligation on the defaulted loans
satisfactory to the Secretary or guaranty agency, whichever
insured the loans);
(B) made under part D of this subchapter;
(C) made under part C of this subchapter;
(D) made under subpart II of part A of title VII of the
Public Health Service Act (42 U.S.C. 292q et seq.); or
(E) made under subpart II of part B of title VIII of the
Public Health Service Act (42 U.S.C. 297a et seq.).
(b) Contents of agreements, certificates of insurance, and loan
notes
(1) Agreements with lenders
Any lender described in subparagraph (A), (B), or (C) of
subsection (a)(1) of this section who wishes to make
consolidation loans under this section shall enter into an
agreement with the Secretary or a guaranty agency which provides
-
(A) that, in the case of all lenders described in subsection
(a)(1) of this section, the lender will make a consolidation
loan to an eligible borrower (on request of that borrower) only
if the borrower certifies that the borrower has no other
application pending for a loan under this section and (i) the
lender holds an outstanding loan of that borrower which is
selected by the borrower for consolidation under this section,
except that this clause shall not apply in the case of a
borrower with multiple holders of loans under this part, or
(ii) the borrower certifies that the borrower has sought and
has been unable to obtain a consolidation loan with
income-sensitive repayment terms from the holders of the
outstanding loans of that borrower (which are so selected for
consolidation);
(B) that each consolidation loan made by the lender will bear
interest, and be subject to repayment, in accordance with
subsection (c) of this section;
(C) that each consolidation loan will be made,
notwithstanding any other provision of this part limiting the
annual or aggregate principal amount for all insured loans made
to a borrower, in an amount (i) which is not less than the
minimum amount required for eligibility of the borrower under
subsection (a)(3) of this section, and (ii) which is equal to
the sum of the unpaid principal and accrued unpaid interest and
late charges of all eligible student loans received by the
eligible borrower which are selected by the borrower for
consolidation;
(D) that the proceeds of each consolidation loan will be paid
by the lender to the holder or holders of the loans so selected
to discharge the liability on such loans;
(E) that the lender shall offer an income-sensitive repayment
schedule, established by the lender in accordance with the
regulations promulgated by the Secretary, to the borrower of
any consolidation loan made by the lender on or after July 1,
1994; and
(F) such other terms and conditions as the Secretary or the
guaranty agency may specifically require of the lender to carry
out this section.
(2) Issuance of certificate of comprehensive insurance coverage
The Secretary shall issue a certificate of comprehensive
insurance coverage under section 1079(b) of this title to a
lender which has entered into an agreement with the Secretary
under paragraph (1) of this subsection. The guaranty agency may
issue a certificate of comprehensive insurance coverage to a
lender with which it has an agreement under such paragraph. The
Secretary shall not issue a certificate to a lender described in
subparagraph (B) or (C) of subsection (a)(1) of this section
unless the Secretary determines that such lender has first
applied to, and has been denied a certificate of insurance by,
the guaranty agency which insures the preponderance of its loans
(by value).
(3) Contents of certificate
A certificate issued under paragraph (2) shall, at a minimum,
provide -
(A) that all consolidation loans made by such lender in
conformity with the requirements of this section will be
insured by the Secretary or the guaranty agency (whichever is
applicable) against loss of principal and interest;
(B) that a consolidation loan will not be insured unless the
lender has determined to its satisfaction, in accordance with
reasonable and prudent business practices, for each loan being
consolidated -
(i) that the loan is a legal, valid, and binding obligation
of the borrower;
(ii) that each such loan was made and serviced in
compliance with applicable laws and regulations; and
(iii) in the case of loans under this part, that the
insurance on such loan is in full force and effect;
(C) the effective date and expiration date of the
certificate;
(D) the aggregate amount to which the certificate applies;
(E) the reporting requirements of the Secretary on the lender
and an identification of the office of the Department of
Education or of the guaranty agency which will process claims
and perform other related administrative functions;
(F) the alternative repayment terms which will be offered to
borrowers by the lender;
(G) that, if the lender prior to the expiration of the
certificate no longer proposes to make consolidation loans, the
lender will so notify the issuer of the certificate in order
that the certificate may be terminated (without affecting the
insurance on any consolidation loan made prior to such
termination); and
(H) the terms upon which the issuer of the certificate may
limit, suspend, or terminate the lender's authority to make
consolidation loans under the certificate (without affecting
the insurance on any consolidation loan made prior to such
limitation, suspension, or termination).
(4) Terms and conditions of loans
A consolidation loan made pursuant to this section shall be
insurable by the Secretary or a guaranty agency pursuant to
paragraph (2) only if the loan is made to an eligible borrower
who has agreed to notify the holder of the loan promptly
concerning any change of address and the loan is evidenced by a
note or other written agreement which -
(A) is made without security and without endorsement, except
that if the borrower is a minor and such note or other written
agreement executed by him or her would not, under applicable
law, create a binding obligation, endorsement may be required;
(B) provides for the payment of interest and the repayment of
principal in accordance with subsection (c) of this section;
(C)
(i) provides that periodic installments of principal need
not be paid, but interest shall accrue and be paid in
accordance with clause (ii), during any period for which the
borrower would be eligible for a deferral under section
1078(b)(1)(M) of this title, and that any such period shall not
be included in determining the repayment schedule pursuant to
subsection (c)(2) of this section; and
(ii) provides that interest shall accrue and be paid during
any such period -
(I) by the Secretary, in the case of a consolidation loan
for which the application is received by an eligible lender
before November 13, 1997, that consolidated only Federal
Stafford Loans for which the student borrower received an
interest subsidy under section 1078 of this title;
(II) by the Secretary, in the case of a consolidation loan
for which the application is received by an eligible lender
on or after November 13, 1997, except that the Secretary
shall pay such interest only on that portion of the loan that
repays Federal Stafford Loans for which the student borrower
received an interest subsidy under section 1078 of this title
or Federal Direct Stafford Loans for which the borrower
received an interest subsidy under section 1087e of this
title; or
(III) by the borrower, or capitalized, in the case of a
consolidation loan other than a loan described in subclause
(I) or (II);
(D) entitles the borrower to accelerate without penalty
repayment of the whole or any part of the loan; and
(E)(i) contains a notice of the system of disclosure
concerning such loan to credit bureau organizations under
section 1080a of this title, and (ii) provides that the lender
on request of the borrower will provide information on the
repayment status of the note to such organizations.
(5) Direct loans
In the event that a borrower is unable to obtain a
consolidation loan from a lender with an agreement under
subsection (a)(1) of this section, or is unable to obtain a
consolidation loan with income-sensitive repayment terms
acceptable to the borrower from such a lender, the Secretary
shall offer any such borrower who applies for it, a direct
consolidation loan. Such direct consolidation loan shall, as
requested by the borrower, be repaid either pursuant to income
contingent repayment under part C of this subchapter or pursuant
to any other repayment provision under this section. The
Secretary shall not offer such loans if, in the Secretary's
judgment, the Department of Education does not have the necessary
origination and servicing arrangements in place for such loans.
(6) Nondiscrimination in loan consolidation
An eligible lender that makes consolidation loans under this
section shall not discriminate against any borrower seeking such
a loan -
(A) based on the number or type of eligible student loans the
borrower seeks to consolidate, except that a lender is not
required to consolidate loans described in subparagraph (D) or
(E) of subsection (a)(4) of this section or subsection
(d)(1)(C)(ii) of this section;
(B) based on the type or category of institution of higher
education that the borrower attended;
(C) based on the interest rate to be charged to the borrower
with respect to the consolidation loan; or
(D) with respect to the types of repayment schedules offered
to such borrower.
(c) Payment of principal and interest
(1) Interest rate
(A) Notwithstanding subparagraphs (B) and (C), with respect to
any loan made under this section for which the application is
received by an eligible lender on or after October 1, 1998, and
before July 1, 2003, the applicable interest rate shall be
determined under section 1077a(k)(4) of this title.
(B) A consolidation loan made before July 1, 1994, shall bear
interest at an annual rate on the unpaid principal balance of the
loan that is equal to the greater of -
(i) the weighted average of the interest rates on the loans
consolidated, rounded to the nearest whole percent; or
(ii) 9 percent.
(C) A consolidation loan made on or after July 1, 1994, shall
bear interest at an annual rate on the unpaid principal balance
of the loan that is equal to the weighted average of the interest
rates on the loans consolidated, rounded upward to the nearest
whole percent.
(D) A consolidation loan for which the application is received
by an eligible lender on or after November 13, 1997, and before
October 1, 1998, shall bear interest at an annual rate on the
unpaid principal balance of the loan that is equal to the rate
specified in section 1077a(f) of this title, except that the
eligible lender may continue to calculate interest on such a loan
at the rate previously in effect and defer, until not later than
April 1, 1998, the recalculation of the interest on such a loan
at the rate required by this subparagraph if the recalculation is
applied retroactively to the date on which the loan is made.
(2) Repayment schedules
(A) Notwithstanding any other provision of this part, to the
extent authorized by its certificate of insurance under
subsection (b)(2)(F) of this section and approved by the issuer
of such certificate, the lender of a consolidation loan shall
establish repayment terms as will promote the objectives of this
section, which shall include the establishment of graduated or
income-sensitive repayment schedules, established by the lender
in accordance with the regulations of the Secretary. Except as
required by such income-sensitive repayment schedules, or by the
terms of repayment pursuant to income contingent repayment
offered by the Secretary under subsection (b)(5) of this section,
such repayment terms shall require that if the sum of the
consolidation loan and the amount outstanding on other student
loans to the individual -
(i) is less than $7,500, then such consolidation loan shall
be repaid in not more than 10 years;
(ii) is equal to or greater than $7,500 but less than
$10,000, then such consolidation loan shall be repaid in not
more than 12 years;
(iii) is equal to or greater than $10,000 but less than
$20,000, then such consolidation loan shall be repaid in not
more than 15 years;
(iv) is equal to or greater than $20,000 but less than
$40,000, then such consolidation loan shall be repaid in not
more than 20 years;
(v) is equal to or greater than $40,000 but less than
$60,000, then such consolidation loan shall be repaid in not
more than 25 years; or
(vi) is equal to or greater than $60,000, then such
consolidation loan shall be repaid in not more than 30 years.
(B) The amount outstanding on other student loans which may be
counted for the purpose of subparagraph (A) may not exceed the
amount of the consolidation loan.
(3) Additional repayment requirements
Notwithstanding paragraph (2) -
(A) a repayment schedule established with respect to a
consolidation loan shall require that the minimum installment
payment be an amount equal to not less than the accrued unpaid
interest; and
(B) except as required by the terms of repayment pursuant to
income contingent repayment offered by the Secretary under
subsection (b)(5) of this section, the lender of a
consolidation loan may, with respect to repayment on the loan,
when the amount of a monthly or other similar payment on the
loan is not a multiple of $5, round the payment to the next
highest whole dollar amount that is a multiple of $5.
(4) Commencement of repayment
Repayment of a consolidation loan shall commence within 60 days
after all holders have, pursuant to subsection (b)(1)(D) of this
section, discharged the liability of the borrower on the loans
selected for consolidation.
(5) Insurance premiums prohibited
No insurance premium shall be charged to the borrower on any
consolidation loan, and no insurance premium shall be payable by
the lender to the Secretary with respect to any such loan, but a
fee may be payable by the lender to the guaranty agency to cover
the costs of increased or extended liability with respect to such
loan.
(d) Special program authorized
(1) General rule and definition of eligible student loan
(A) In general
Subject to the provisions of this subsection, the Secretary
or a guaranty agency shall enter into agreements with eligible
lenders described in subparagraphs (A), (B), and (C) of
subsection (a)(1) of this section for the consolidation of
eligible student loans.
(B) Applicability rule
Unless otherwise provided in this subsection, the agreements
entered into under subparagraph (A) and the loans made under
such agreements for the consolidation of eligible student loans
under this subsection shall have the same terms, conditions,
and benefits as all other agreements and loans made under this
section.
(C) ''Eligible student loans'' defined
For the purpose of this subsection, the term ''eligible
student loans'' means loans -
(i) of the type described in subparagraphs (A), (B), and
(C) of subsection (a)(4) of this section; and
(ii) made under subpart I of part A of title VII of the
Public Health Service Act (42 U.S.C. 292 et seq.).
(2) Interest rate rule
(A) In general
The portion of each consolidated loan that is attributable to
an eligible student loan described in paragraph (1)(C)(ii)
shall bear interest at a rate not to exceed the rate determined
under subparagraph (B).
(B) Determination of the maximum interest rate
For the 12-month period beginning after July 1, 1992, and for
each 12-month period thereafter, beginning on July 1 and ending
on June 30, the interest rate applicable under subparagraph (A)
shall be equal to the average of the bond equivalent rates of
the 91-day Treasury bills auctioned for the quarter prior to
July 1, for each 12-month period for which the determination is
made, plus 3 percent.
(C) Publication of maximum interest rate
The Secretary shall determine the applicable rate of interest
under subparagraph (B) after consultation with the Secretary of
the Treasury and shall publish such rate in the Federal
Register as soon as practicable after the date of such
determination.
(3) Special rules
(A) No special allowance rule
No special allowance under section 1087-1 of this title shall
be paid with respect to the portion of any consolidated loan
under this subsection that is attributable to any loan
described in paragraph (1)(C)(ii).
(B) No interest subsidy rule
No interest subsidy under section 1078(a) of this title shall
be paid on behalf of any eligible borrower for any portion of a
consolidated loan under this subsection that is attributable to
any loan described in paragraph (1)(C)(ii).
(C) Additional reserve rule
Notwithstanding any other provision of this chapter,
additional reserves shall not be required for any guaranty
agency with respect to a loan made under this subsection.
(D) Insurance rule
Any insurance premium paid by the borrower under subpart I of
part A of title VII of the Public Health Service Act (42 U.S.C.
292 et seq.) with respect to a loan made under that subpart and
consolidated under this subsection shall be retained by the
student loan insurance fund established under section 710 of
the Public Health Service Act (42 U.S.C. 292i).
(4) Regulations
The Secretary is authorized to promulgate such regulations as
may be necessary to facilitate carrying out the provisions of
this subsection.
(e) Termination of authority
The authority to make loans under this section expires at the close of
September 30, 2004. Nothing in this section shall be construed to authorize
the Secretary to promulgate rules or regulations governing the terms or
conditions of the agreements and certificates under subsection (b) of this
section. Loans made under this section which are insured by the Secretary
shall be considered to be new loans made to students for the purpose of
section 1074(a) of this title.
(f) Interest payment rebate fee
(1) In general -For any month beginning on or after October 1, 1993, each
holder of a consolidation loan under this section for which the
first disbursement was made on or after October 1, 1993, shall
pay to the Secretary, on a monthly basis and in such manner as
the Secretary shall prescribe, a rebate fee calculated on an
annual basis equal to 1.05 percent of the principal plus accrued
unpaid interest on such loan.
(2) Special rule -For consolidation loans based on applications received during the period from October 1, 1998 through January 31, 1999,
inclusive, the rebate described in paragraph (1) shall be equal
to 0.62 percent of the principal plus accrued unpaid interest on
such loan.
(3) Deposit -The Secretary shall deposit all fees collected pursuant to
subsection (a) of this section into the insurance fund established in section 1081 of this title.